[GRAPHIC OMITTED]
STEPSTONE FUNDS LOGO
STEPSTONE FUNDS(R)
ANNUAL FINANCIAL
REPORT
-----------------
JANUARY 31, 1996
<PAGE>
STEPSTONE FUNDS(R)
ANNUAL REPORT
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DEAR SHAREHOLDER:
1995 proved to be one of the most prosperous years ever for investors. The year
ended with stocks climbing to historic highs, bond yields declining dramatically
and the dollar strengthening. Agreement that the Federal Reserve has succeeded
in engineering its "soft landing" (slow economic growth with moderate
inflation), and the ongoing discussions in Washington to cut the future rate of
government spending and balance the budget buoyed the markets.
The combination of slowing economic growth and low inflation is often the ideal
scenario for a reduction in interest rates and that is exactly what the Federal
Reserve did in the fourth quarter of 1995. On December 19, 1995 The Federal Open
Market Committee voted to cut its target for the Federal Funds rate--for the
second time in six months--by 25 basis points to 5.5% citing better than
expected inflation and falling inflationary expectations as its justification.
Prior to this action the REAL Fed Funds rate--the current rate minus the
inflation rate--was near a level generally indicative of a restrictive monetary
policy and considered inappropriate for an economy experiencing decelerating
growth. By year-end the real rate stood at 2.5% (5.5% minus 3% inflation),
higher than the 10 year average of 2.25% which is considered to be the
equilibrium Fed Funds rate--the rate that is consistent with sustained
noninflationary growth. Union Capital Advisors believes pressures for lower
short term rates should continue and that a 1996 year end Fed Funds target of
4.5 - 5% now seems likely.
Declining interest rates and optimism caused the bond market to soar and deliver
stock-like returns during 1995. The Lehman Brothers long term U.S. Treasury bond
index soared 31%. Long term rates dropped from 7.9% in January of 1995 to finish
the year at 5.9%, while the intermediate 5 year U.S. Treasury note declined from
7.8% to 5.4%. The December cut in short term interest rates caused the short end
of the yield curve to flatten out after remaining inverted for months. The other
side of this was the increase in bond prices, providing some very attractive
capital gains opportunities.
The municipal bond market lagged the treasury market rally in 1995 due to
worries about a possible change to a flat tax system that would eliminate
municipal bond's tax advantage. Consequently, municipal bond returns were below
those of taxable bonds in 1995. Yields on municipal bonds were high relative to
those offered by Treasuries with yields on some longer term munis close to 90%
of those on Treasuries. That translated to after tax yields on munis that were
as much as 30% higher than yields on taxable issues.
Fueled by declining interest rates, low inflation, sustained economic growth,
rising corporate profits and a record flow of money into domestic stock mutual
funds, the U.S. stock market reached record levels producing its best returns in
decades. The Dow Jones Industrial Average finished up 33.45% for the year. The
S&P 500 and the Nasdaq Composite were up 34.11% and 39.2% respectively. One
prevalent feature of the bull market was the increasingly frequent sector
rotation within the market which carried various groups into and out of favor
quite rapidly yet left the major market averages virtually untouched. Technology
and banking stocks were two of the biggest sector winners of the year as the
revolution in home and business computers continued and falling interest rates
boosted bank earnings. However, by year end investors concerned that slowing
economic activity would cause corporate profits to decelerate, began to rotate
into the defensive consumer staples like drugs and food-groups. These sectors
tend to generate steady earnings regardless of the economic outlook. The other
big winners of the year were biotechnology, oil drillers, aerospace and defense,
and airlines, while the big losers were trucking, steel, transportation,
equipment and specialty retailers.
A well managed portfolio of stocks, bonds, and cash, tailored to your risk
tolerance, liquidity needs, tax situation, and financial goals is still the most
advantageous way to achieve superior investment returns over a long term
horizon. A disciplined approach to asset allocation and diversification will
help you maintain confidence that your portfolio will meet, or exceed your
objectives. With our variety of funds and Asset Allocation programs, the
Stepstone Funds continue to offer excellent investment opportunity at reasonable
risk.
As always we appreciate the confidence you have placed in us.
Sincerely,
/s/Clark Gates
Clark Gates
President, Union Capital Advisors
<PAGE>
STEPSTONE FUNDS(R) TABLE OF CONTENTS
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Managers' Discussion and Analysis of Fund Performance ..................... 1
Statement of Net Assets ................................................... 13
Statement of Operations ................................................... 53
Statement of Changes in Net Assets ........................................ 56
Financial Highlights ...................................................... 60
Notes to Financial Statements ............................................. 66
Auditor's Report .......................................................... 71
<PAGE>
STEPSTONE FUNDS -- INTERMEDIATE-TERM BOND FUND
For the twelve months ended January 31, 1996 the Intermediate-Term Bond Fund had
a total return of 16.58%. This was achieved in an environment where longer term
interest rates declined two full percentages points (200 basis points). All
sectors of the investment grade bond market rose in market value by amounts that
were much greater than the decline in coupon income experienced along the way.
The substantial decline in interest rates was occasioned by a sharply reduced
rate of economic growth and a continuation of subdued rates of inflation. This
reality was ratified by the Federal Reserve Board as they initiated a series of
reductions in the Federal Funds rate last July. That rate is now 5 1/4 % having
been 6% on February 1, 1995. During the year the average weighted maturity of
your Fund ranged between eight and nine years. The Fund was invested in
governments, corporates and mortgage pass-through securities commensurate with
it's benchmark Salomon Broad Investment Grade Bond Index. The returns from those
segments of the index were: governments (17.5%); corporates (19.98%) and
mortgages (15.09%). The total return of the Index was 16.94%. During the year,
the Fund was overweighted in corporates and underweighted in mortgages which
proved beneficial.
When compared with all other funds of like description in the Lipper Universe of
Intermediate Investment Grade Bond Funds, the Fund's total return exceeded the
average of the Lipper Funds by 141 basis points (16.58% vs. 15.46%).
Comparison of Change in the Value of a $10,000
Investment in the Stepstone Intermediate-Term
Bond Fund, Institutional Class, versus the
Salomon Broad Investment Grade Bond Index
[Graph Omitted]
A line graph depicting the growth of a $10,000 investment in the Stepstone
Intermediate-Term Bond Fund (Institutional) from February 28, 1991 through
January 31, 1996, compared to the Salomon Broad Investment Grade Bond Index.
Plot Points
Stepstone Salomon
2/28/91 10,000 10,000
Jan 92 11,288 11,237
Jan 93 12,470 12,493
Jan 94 13,621 13,639
Jan 95 13,061 13,344
Jan 96 15,226 15,605
Average Annual Total Return
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Annualized Anualized
One Year 3-Year Inception
Return Return to Date
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Intermediate-Term Bond Fund (Institutional) 16.58% 6.88% 9.00%
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For the period ended January 31, 1996. Past performance is
not predictive of future performance.
Comparison of Change in the Value of a $10,000
Investment in the Stepstone Intermediate-Term
Bond Fund, Investment Class, versus the
Salomon Broad Investment Grade Bond Index
[Graph Omitted]
A line graph depicting the growth of a $10,000 investment in the Stepstone
Intermediate-Term Bond Fund (Investment) from February 29, 1992 through January
31, 1996, compared to the Salomon Broad Investment Grade Bond Index.
Plot Points
Stepstone Salomon
2/29/92 9,700 10,000
Jan 93 10,686 11,047
Jan 94 11,672 12,060
Jan 95 11,192 11,799
Jan 96 13,037 13,798
Average Annual Total Return
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Annualized Anualized
One Year 3-Year Inception
Return Return to Date
- --------------------------------------------------------------------------------
Intermediate-Term Bond Fund (Investment) 16.48% 6.85% 7.76%
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With Load 12.97% 5.76% 6.95%
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For the period ended January 31, 1996. Past performance is not
predictive of future performance. The performance of the Investment
Class Shares with load reflects the maximum sales charge of 3.0%.
1
<PAGE>
STEPSTONE FUNDS -- LIMITED MATURITY GOVERNMENT FUND
The fund entered 1995 defensively structured, with the expectation of further
increases in short term interest rates. The fund's duration is normally targeted
between the 1 year treasury (currently .92 years) and the Merrill Lynch 1-3 year
treasury (currently 1.77 years) indices, with the latter being the assigned
performance benchmark. In rising interest rate environments the portfolio's
duration is structured to match the lower 1 year treasury index. This results in
greater principal preservation. Our defensive positioning in early 1995 caused a
lag in performance for the first 6 months of the period as interest rates
declined over 150 basis points in the 1-3 year maturity sector of the yield
curve. In response to this sharp reversal in the trend of interest rates, we
extended the fund's duration to more closely match the Merrill Lynch 1-3 year
treasury. The return to shareholders for 1995 was 8.34%, performing between the
Merrill Lynch's 1-3 year treasury return of 10.39% and the 1 year treasury
return of 7.53%.
Duration adjustment is an important technique in managing the portfolio.
Extending the duration was beneficial in the second half of 1995, as interest
rates declined an additional 75-100 basis points. As of mid February 1996, the
yield curve is inverted from overnight to 5 years and investors expect the
domestic U.S. economy to continue to provide weak economic growth combined with
anemic inflation. These economic influences have fueled considerable demand for
short term securities in expectation of further aggressive Federal Reserve
easing. Policymakers have rewarded the market with three rate cuts in July 1995,
December 1995, and January 1996. Although we expect the Fed to gradually
continue this easing process, we believe current short term yields may have
overexaggerated the degree and timing of forthcoming monetary easing. We have
positioned the fund to take advantage of a more stable yield curve environment
in the upcoming 6 months by allocating approximately 50% of the portfolio to
agency pass through securities. The higher yields associated with this sector
should provide greater coupon return as we do not foresee an opportunity for
substantial price appreciation for short term government securities.
Comparison of Change in the Value of a $10,000
Investment in the Stepstone Limited Maturity
Government Fund, Institutional Class, versus the
Merrill Lynch 1-3 Year Short-Term Treasury Index,
and the Merrill Lynch Treasury Bill Index
[Graph Omitted]
A line graph depicting the growth of a $10,000 investment in the Stepstone
Limited Maturity Government Fund (Institutional) from May 31,1993 through
January 31, 1996, compared to the Merrill Lynch 1-3 Year Short-Term Treasury
Index and the Merrill Lynch 1-Year Treasury Bill Index.
Plot Points
Stepstone Merrill Lynch 1-3 yr Merrill Lynch 1-yr
8/31/93 10,000 10,000 10,000
Jan 94 10,313 10,346 10,264
Jan 95 10,238 10,482 10,581
Jan 96 11,091 11,572 11,378
Average Annual Total Return
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Annualized
One Year Inception
Return to Date
- --------------------------------------------------------------------------------
Limited Maturity Government Fund (Institutional) 8.34% 3.68%
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For the period ended January 31, 1996. Past performance isnot
predictive of future performance.
Comparison of Change in the Value of a $10,000
Investment in the Stepstone Limited Maturity
Government Fund, Investment Class, versus the
Merrill Lynch 1-3 Year Short-Term Treasury Index,
and the Merrill Lynch Treasury Bill Index
[Graph Omitted]
A line graph depicting the growth of a $10,000 investment in the Stepstone
Limited Maturity Government Fund (Investment) from May 31,1993 through
January 31, 1996, compared to the Merrill Lynch 1-3 Year Short-Term Treasury
Index and the Merrill Lynch 1-Year Treasury Bill Index.
Plot Points
Stepstone Merrill Lynch 1-3 yr Merrill Lynch 1-yr
5/31/93 10,000 10,000 10,000
Jan 94 10,143 10,158 10,143
Jan 95 10,068 10,292 10,456
Jan 96 10,906 11,361 11,244
Average Annual Total Return
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Annualized
One Year Inception
Return to Date
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Limited Maturity Government Fund (Investment) 8.33% 3.76%
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For the period ended January 31, 1996. Past performance is not
predictive of future performance.
2
<PAGE>
STEPSTONE FUNDS -- CALIFORNIA TAX-FREE BOND FUND
1995 was a stellar year for the bond market, with the Stepstone California
Tax-Free Bond Fund fully participating in the rally. According to the Bond Buyer
20 bond index, rates began the year at 6.49% and ended in January 1996 at 5.46%,
a difference of 103 basis points. The NAV of the Fund increased over this period
from $8.96 to $9.86 at year end, January 31, 1996. An improvment of 10.04%. The
Fund posted a total return for the 12 months ended January 31, 1996 of 15.83% as
compared to its peer group, the Lipper California Municipal Intermediate Fund
Group average of 14.82%. The Fund outperformed its benchmark, The Lehman
Brothers 7 Year General Obligation Bond Index (13.64%) by over 200 basis points.
The Fund changed its benchmark last year from the Lehman 10 Year G.O. Bond Index
to the Lehman 7 Year G.O. Bond Index, as the latter is more representative of
the objectives of the Fund.
Comparison of Change in the Value of a $10,000 Investment in the Stepstone
California Tax-Free Income Fund, Class A versus the Stepstone California
Tax-Free Income Fund, Class B, the Lehman Brothers 10-Year G.O. Index
and the Lehman Brothers 7-Year G.O. Index
[Graph Omitted]
A line graph depicting the growth of a $10,000 investment in the Stepstone
California Tax-Free Bond Fund (Class A and Class B) from October 31, 1993
through January 31, 1996, compared to the Lehman Brothers 10-Year G.O. Index and
the Lehman Brothers 7-Year G.O. Index.
Plot Points
Stepstone Cl A Stepstone Cl B Lehman 10-Year Lehman 7-Year
10/31/93 10,000 9,700 10,000 10,000
Jan 94 10,237 9,920 10,266 10,229
Jan 95 9,590 9,292 9,862 9,975
Jan 96 11,108 10,764 11,399 11,335
Average Annual Total Return
- --------------------------------------------------------------------------------
Annualized Cumulative
One Year Inception Inception
Return to Date to Date
- --------------------------------------------------------------------------------
Cal. Tax-Free Bond Class A 15.83% 4.28% 10.10%
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Cal. Tax-Free Bond Class B 15.84% 4.24% 10.00%
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Class B With Load 12.33% 2.86% 6.70%
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For the period ended January 31, 1996. Past performance is not
predictive of future performance. The performance of the Investment
Class Shares with load reflects the maximum sales
charge of 3.0%.
3
<PAGE>
STEPSTONE FUNDS -- CONVERTIBLE SECURITIES FUND
After a very difficult environment for convertible securities in 1994, 1995 was
ideal for convertible investors. The Lipper Convertible Securities Index
returned 24.48% and the Merrill Lynch Investment Grade Convertible Securities
Index returned 27.59% for the 12 month period ending January 31, 1996. The fund
trailed its benchmark for the period as it was invested in traditional
convertible securities while the unmanaged index was not. In periods of strong
equity performance, convertibles which outperform are equity sensitive while
traditional convertibles tend to lag, but offer better risk/reward
characteristics.
Declining interest rates and strong equity market performance justified by low
inflation and corporate profits fueled convertible returns over the past year.
The strength in the fixed income and equity market improved convertible
securities valuations in that both the equity and yield components of these
hybrid securities became more attractive. Convertibles participated in only some
of the general equity market because their exposure to mid and small
capitalization companies limited returns while blue chip stocks outperformed the
mid and small cap markets. However, convertibles participated in about
two-thirds of the equity market performance while having much lower volatility.
Convertible funds outperformed fixed income funds, as expected, in this type of
environment. The strongest sectors in the convertible market were banking,
financial services and health care.
Our outlook for 1996 remains positive for the financial markets given
expectations of moderate-to-slow GDP growth, low inflation, and an accommodative
monetary policy as dictated by the Federal Reserve. Returns in 1996 are expected
to be more in line with the historic norms. Although absolute returns are not
expected to match 1995's, relative performance for convertibles versus equity
and fixed income should be favorable. Modest equity returns combined with stable
to declining interest rates is the best environment for relative convertible
securities market performance.
Comparison of Change in the Value of a $10,000
Investment in the Stepstone Convertible Securities
Fund, Institutional Class, versus the Merrill Lynch Investment Grade
Convertible Securities Index
[Graph Omitted]
A line graph depicting the growth of a $10,000 investment in the Stepstone
Convertible Securities Fund (Institutional) from February 28, 1994 through
January 31, 1996, compared to the Merrill Lynch Investment Grade Convertible
Securities Index.
Plot Points
Stepstone Merrill Lynch
2/28/94 10,000 10,000
Jan 95 9,514 9,433
Jan 96 11,386 12,036
Average Annual Total Return
- --------------------------------------------------------------------------------
Annualized
One Year Inception
Return to Date
- --------------------------------------------------------------------------------
Convertible Securities Fund (Institutional) 19.67% 6.18%
- --------------------------------------------------------------------------------
For the period ended January 31, 1996. Past performance is not
predictive of future performance.
4
<PAGE>
STEPSTONE FUNDS -- GOVERNMENT SECURITIES FUND
1995 was a strong year for bond markets as most of the bond indices posted
near-record returns. It was a year in which interest rates declined about two
and one quarter percentage points. A catalyst for the large decline involved an
end to the Federal Reserve's tight monetary policy. On July 6, 1995 the Federal
Open Market Committee voted to lower the Fed Funds rate by one quarter of one
percent to 5.75% from 6.00%. This action taken by the Fed was monumental for
most investors as it represented a change in the direction of monetary policy
and the market began to "price-in" additional eases by the Federal Reserve.
The Stepstone Government Securities Fund's performance was impressive, returning
16.16% for the twelve month period ending January 31, 1996. During the first
five months of the investment period, the duration strategy was slightly
bearish. By mid-year, the duration strategy became bullish with portfolio
duration approximately fifteen percent greater than the benchmark. This longer
relative duration accounted for the higher than market price returns that were
generated by the portfolio during the second half of the investment period.
The Funds' net return was competitive with the benchmark index return of 16.89%.
However, when compared to similarly managed funds, represented by the median
return for the Lipper U.S. Government Bond universe, the Fund outperformed by 83
basis points, with returns of 15.33% and 16.16%, respectively.
Comparison of Change in the Value of a $10,000
Investment in the Stepstone Government Securities
Fund, Institutional Class, versus the
Lehman Brothers Government Bond Index
[Graph Omitted]
A line graph depicting the growth of a $10,000 investment in the Stepstone
Government Securities Fund (Institutional) from February 28, 1994 through
January 31, 1996, compared to the Lehman Brothers Government Bond Index.
Plot Points
Stepstone Lehman
2/28/94 10,000 10,000
Jan 95 9,814 9,920
Jan 96 11,400 11,594
Average Annual Total Return
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Annualized
One Year Inception
Return to Date
- --------------------------------------------------------------------------------
Government Securities Fund (Institutional) 16.16% 5.35%
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For the period ended January 31, 1996. Past performance is not
predictive of future performance.
5
<PAGE>
STEPSTONE FUNDS -- BALANCED FUND
For the twelve month period ending January 31, 1996, the Balanced Fund
(Institutional Class) produced a total return of 28.93%. The return includes
income from dividends and interest and an increase in the value of the bonds and
stocks held within the Fund. Falling interest rates helped the performance of
the fixed income segment of the Fund. Weak economic growth and signs that the
rate of inflation would continue to be modest provided the justification the
Federal Reserve needed to begin to lower short term interest rates. During the
last twelve months we have added to our fixed income investments and lengthened
the average maturity of this portion of the Fund. The cash position of the Fund
was reduced to 4.7% from approximately 10% at the beginning of this period. The
interest rate sensitivity of the fixed income portion of the Fund is now
approximately 107% of the Salomon Broad investment Grade Bond Index which we use
as a benchmark.
The equity portion of the Fund performed well during the last twelve months.
Good industrial sector weights and very good stock selection helped this segment
of the Fund to make a significant contribution to the total return on the Fund.
Over this period, the allocation to equities rose from 60% to 63%. The equity
portfolio is made up of common stocks which possess either growth or value
characteristics. Approximately 63% of the equity portion of the portfolio is
invested in value stocks with the remainder being growth stocks. This reflects
an increase in value stocks over this period.
The aggregate net performance of the Fund was better than its peer group as
measured by the Lipper Balanced Averages. The Lipper Average total return for
the twelve month period ended January 31, 1996 was 25.96% or 2.97% less than the
Balanced Fund. This places the Fund in the top 25% of all balanced mutual funds
for the last twelve months ending January 31, 1996. Over the same twelve month
period, the total rate of return on the Salomon Broad Investment Grade Bond
Index was 16.94% and the Standard & Poor's 500 was 38.66%. The 28.93% return on
the Fund was consistent with a well diversified portfolio made up of stocks and
bonds. Our focus continues to be on structuring the asset allocation of the Fund
to take advantage of short and long-term opportunities in the financial markets.
At present our asset allocation is 4.7% in cash and equivalents, 31.3% in fixed
income securities, and 63.3% in equities.
Comparison of Change in the Value of a $10,000
Investment in the Stepstone Balanced Fund,
Institutional Class, versus the Salomon Broad
Investment Grade Bond Index, and the
Standard & Poor's 500 Composite Index
[Graph Omitted]
A line graph depicting the growth of a $10,000 investment in the Stepstone
Balanced Fund (Institutional) from February 28, 1991 through January 31, 1996,
compared to the Salomon Broad Investment Bond Index and the Standard & Poors 500
Composite Index.
Plot Points
Stepstone Salomon S&P 500
2/28/91 10,000 10,000 10,000
Jan 92 11,324 11,237 11,452
Jan 93 12,315 12,493 12,663
Jan 94 13,779 13,639 14,295
Jan 95 13,372 13,344 14,367
Jan 96 17,241 15,605 19,922
Average Annual Total Return
- --------------------------------------------------------------------------------
Annualized Annualized
One Year Inception Inception
Return to Date to Date
- --------------------------------------------------------------------------------
Balanced Fund (Institutional) 28.93% 11.87% 12.37%
- --------------------------------------------------------------------------------
For the period ended January 31, 1996. Past performance is not
predictive of future performance.
Comparison of Change in the Value of a $10,000
Investment in the Stepstone Balanced Fund,
Investment Class, versus the Salomon Broad
Investment Grade Bond Index, and the
Standard & Poor's 500 Composite Index
[Graph Omitted]
A line graph depicting the growth of a $10,000 investment in the Stepstone
Balanced Fund (Investment) from November 30, 1992 through January 31, 1996,
compared to the Salomon Broad Investment Bond Index and the Standard & Poors 500
Composite Index.
Plot Points
Stepstone Salomon S&P 500
11/30/92 9,550 10,000 10,000
Jan 93 9,908 10,361 10,208
Jan 94 11,076 11,311 11,523
Jan 95 10,749 11,067 11,582
Jan 96 13,837 12,942 16,059
Average Annual Total Return
- --------------------------------------------------------------------------------
Annualized Annualized
One Year Inception Inception
Return to Date to Date
- --------------------------------------------------------------------------------
Balanced Fund (Investment) 28.73% 11.78% 12.46%
- --------------------------------------------------------------------------------
With Load 22.93% 10.08% 10.87%
- --------------------------------------------------------------------------------
For the period ended January 31, 1996. Past performance is
not predictive of future performance. The performance of
the Investment Class Shares with load reflects the
maximum sales charge of 4.5%
6
<PAGE>
STEPSTONE FUNDS -- GROWTH EQUITY FUND
For the one year period ending January 31, 1996, the Growth Equity Fund
(Institutional Class) produced a total return of 32.93% as compared to the
Lipper Growth Fund average of 32.65% and the Lipper Capital Appreciation Fund
average of 31.84%. Both groups under performed the S&P 500 return of 38.66% for
the second year in a row.
The Stepstone Growth Equity Fund and Lipper Growth Fund average both
outperformed the S&P 500 and the Russell 1000 through October. From October
through mid January of 1996 the S&P 500 and Russell 1000 continued to advance
driven by a narrow group of stocks best described as large-cap large dividend or
value stocks. The differential was an abnormally large swing. We believe that
this shift has or nearly has completed itself and the market will focus itself
for the rest of 1996 on the companies that will show positive earnings growth in
an environment with low inflation, low interest rate, and a slowing economy.
The Growth Equity Fund has focused its investments in stocks that provide or
utilize the rapidly changing technologies that either enhance productivity or
outright change the way business is done. The Capital Goods sector is
overweighted with the emphasis on companies that will provide equipment for
upgrading of the world's telecommunication and computing systems. The Financial
sector is also over weighted again with an emphasis on companies that have
utilized technologies to enhance productivity and profitability. Healthcare and
select retailing make up the majority of the commitment to the under weighted
Consumer Sector.
Comparison of Change in the Value of a $10,000
Investment in the Stepstone Growth Equity Fund,
Institutional Class, versus the
Frank Russell 1000 Growth Index
[Graph Omitted]
A line graph depicting the growth of a $10,000 investment in the Stepstone
Growth Equity Fund (Institutional) from February 28, 1991 through January 31,
1996, compared to the Frank Russell 1000 Growth Index.
Plot Points
Stepstone Frank Russell
2/28/91 10,000 10,000
Jan 92 11,668 12,139
Jan 93 12,780 12,912
Jan 94 14,109 13,752
Jan 95 13,406 14,093
Jan 96 17,821 19,563
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Annualized Annualized
One Year 3-Year Inception
Return Return to Date
- --------------------------------------------------------------------------------
Growth Equity Fund (Institutional) 32.93% 11.72% 14.39%
- --------------------------------------------------------------------------------
For the period ended January 31, 1996. Past performance is
not predictive of future performance.
Comparison of Change in the Value of a $10,000
Investment in the Stepstone Growth Equity Fund,
Investment Class, versus the
Frank Russell 1000 Growth Index
[Graph Omitted]
A line graph depicting the growth of a $10,000 investment in the Stepstone
Growth Equity Fund (Investment) fromNovember 30, 1991 through January 31, 1996,
compared to the Frank Russell 1000 Growth Index.
Plot Points
Stepstone Frank Russel
11/30/91 9,550 10,000
Jan 92 11,026 11,137
Jan 93 12,077 11,846
Jan 94 13,358 12,616
Jan 95 12,668 12,929
Jan 96 16,822 17,948
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Annualized Annualized
One Year 3-Year Inception
Return Return to Date
- --------------------------------------------------------------------------------
Growth Equity Fund (Investment) 32.79% 11.68% 12.64%
- --------------------------------------------------------------------------------
with Load 26.78% 9.98% 11.43%
- --------------------------------------------------------------------------------
For the period ended January 31, 1996. Past performance is not
predictive of future performance. The performance of the Investment
Class Shares with load reflects the maximum sales charge of 4.5%.
7
<PAGE>
STEPSTONE FUNDS -- VALUE MOMENTUM FUND
The most recent quarter ended with a political battle over the balanced budget
effort, which subsequently led to a minor government shut down. Without
government economic statistics, there was more than the usual uncertainty about
the level and direction of the economy. Moreover, several companies
pre-announced weaker than expected fourth quarter earnings. However, rapidly
declining bond yields and continued strong flow of money into equity mutual
funds provided the fuel for a year end rally, which carried over into January
1996. The S&P 500 completed an extraordinary year in which total return reached
38.66% through January 31, 1996.
Value Momentum likewise experienced strong results, returning 40.88% for the
fiscal year ending January 31, 1996. Annualized return for the past three years
was 15.92% and from inception date, 16.04%
A fairly significant shift in market leadership began to occur toward year end.
Technology areas, which had gained 50-80% through the first nine months,
experienced profit taking. Semiconductors were the most prevalent example. Some
other areas, already strong, continued apace. These included aerospace, drug,
restaurants, homebuilding, electrical equipment and most all areas of energy and
utilities. Among the earlier trailers, however, very few showed signs of life.
The only exceptions were steel and leisure.
Value Momentum remains highly diversified. Overweighted positions, relative to
the S&P 500 continue in capital goods. The Fund yielded 22%, 14% and 18% in
capital goods, raw materials and financial services versus the S&P 500 returns
of 19%, 6% and 13%, respectively. Continued underweightings in consumer staples
are predicated upon difficult employment conditions and an aging population,
leading to more cautious spending patterns. Utilities are also underweighted as
the majority of the bond rally now appears behind us, and regulatory activity is
creating a more difficult environment.
With over 100 issues, company diversification is also significant. With no
individual company weighted over 3% of the portfolios, largest individual
holdings are Kimberly Clark, Hewlett Packard, FNMA, Intel and W.R. Grace.
Relevant characteristics indicated that the portfolio is structured
conservatively versus the S&P 500. P-E on trailing earnings is 18.0x versus
19.5x for the S&P. Dividend yield is 2.5% versus 2.3% while price to book value
is at 339%
Comparison of Change in the Value of a $10,000
Investment in the Stepstone Value Momentum
Fund, Institutional Class, versus the
Standard & Poor's 500 Composite Index
[Graph Omitted]
A line graph depicting the growth of a $10,000 investment in the Stepstone Value
Momentum Fund (Institutional) from February 28, 1991 through January 31, 1996,
compared to the Standard & Poors 500 Composite Index.
Plot Points
Stepstone Institu. S&P 500
2/28/91 10,000 10,000
Jan 92 11,334 11,452
Jan 93 12,727 12,663
Jan 94 14,581 14,295
Jan 95 14,073 14,367
Jan 96 19,826 19,922
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Annualized Annualized
One Year 3-Year Inception
Return Return to Date
- --------------------------------------------------------------------------------
Value Momentum Fund (Institutional) 40.88% 15.92% 16.04%
- --------------------------------------------------------------------------------
For the period ended January 31, 1996. Past performance is
not predictive of future performance.
Comparison of Change in the Value of a $10,000
Investment in the Stepstone Value Momentum
Fund, Investment Class, versus the
Standard & Poor's 500 Composite Index
[Graph Omitted]
A line graph depicting the growth of a $10,000 investment in the Stepstone Value
Momentum Fund (Investment) from April 30, 1992 through January 31, 1996,
compared to the Standard & Poors 500 Composite Index.
Plot Points
Stepstone Invest. S&P 500
4/30/92 9,550 10,000
Jan 93 10,465 10,816
Jan 94 11,998 12,209
Jan 95 11,580 12,271
Jan 96 16,301 17,015
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Annualized Annualized
One Year 3-Year Inception
Return Return to Date
- --------------------------------------------------------------------------------
Value Momentum Fund (Investment) 40.77% 15.92% 15.96%
- --------------------------------------------------------------------------------
With Load 34.44% 14.16% 14.58%
- --------------------------------------------------------------------------------
For the period ended January 31, 1996. Past performance is not
predictive of future performance. The performance of the Investment
Class Shares with load reflects the maximum sales charge of 4.5%.
8
<PAGE>
STEPSTONE FUNDS -- BLUE CHIP GROWTH FUND
Investing in the U.S. equity markets during 1995 proved to be one of the most
rewarding periods in more than 30 years. Not since 1958 when the S&P 500
increased by more than 40% has the index provided more than the 38.66% total
return for the fiscal year ended January 31, 1996. The equity market rally was
broad based with the NASDAQ Composite, Dow Jones and Standard & Poor's 500
indices providing the highest returns (+39.92% +33.45% and +34.1% price only),
and the Russell 2000 and Value Line Indices achieving the lowest returns (+26.21
and +19.29% respectively). The environment for these spectacular results was
created by a period of positive GDP growth, increasing corporate profits, low
inflation and falling interest rates. In fact, yields on 10 to 30 year U.S.
Treasury issues declined by 200 to 250 basis points during the year. Although
our financial market outlook for 1995 called for the conditions described above
even we were surprised by the magnitude of 1995's returns.
From an operating standpoint the companies owned by the Blue Chip Growth Fund
continued to perform as one would expect high quality, growth stocks to perform
(i.e., grow their revenues and earnings at superior rates). Earnings of
companies held in the Fund as of year-end 1995 increased by an average of 39%
compared with those of the S&P 500 which increased 21% and whose five year
average is less than 5%. In part because of their operating consistency, market
liquidity and the relative attractive value that their stocks represent in a
period of declining interest rates, growth stocks provided the highest returns
of any classification within the S&P 500. From an Economic Sector standpoint the
market was led by Consumer Staples, Technology and Financial stocks, all of
which were highly represented in the Blue Chip Growth Fund.
Our outlook for the economic/financial markets in 1996 remains optimistic. From
a macro viewpoint we expect moderate-to-slow GDP growth, low inflation, modestly
declining interest rates and an accommodative monetary policy. While these are
the same conditions that existed during 1995 and which "sowed the seeds" for the
year's spectacular returns we do not expect a repeat of 1995's market results
this year. After five years of almost uninterrupted growth and valuations, which
by some measures are at historically high levels, the stock market exhibits
signs of fragility and investors should be somewhat more cautious. However, the
positive environment of increasing liquidity, strong cash flows into financial
instruments, an improved U.S. financial condition (improving budget deficit) and
growing corporate profits leads us to the conclusion to expect positive market
returns.
Comparison of Change in the Value of a $10,000
Investment in the Stepstone Blue Chip
Growth Fund, Institutional Class, versus
the S&P 500 Composite Index
[Graph Omitted}
A line graph depicting the growth of a $10,000 investment in the Stepstone Blue
Chip Growth Fund (Institutional) from February 28, 1994 through January 31,
1996, compared to the Standard & Poors 500 Composite Index.
Plot Points
Stepstone S&P 500
2/28/94 10,000 10,000
Jan 95 9,890 10,331
Jan 96 13,544 14,325
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Annualized
One Year Inception
Return to Date
- --------------------------------------------------------------------------------
Blue Chip Growth Fund (Institutional) 36.95% 15.22%
- --------------------------------------------------------------------------------
For the period ended January 31, 1996. Past performance is
not predictive of future performance.
9
<PAGE>
STEPSTONE FUNDS -- EMERGING GROWTH FUND
The U. S. equity markets fared extremely well over the past twelve months as
inflationary fears eased and the Federal Reserve cut rates three times. Lower
interest rates, modest inflation plus strong corporate profits fueled the equity
markets to record levels. For the year ending January 31, 1996, the Stepstone
Emerging Growth Fund (Institutional Class) had a total return of 30.24%, while
the benchmark Standard and Poor's Small Cap 600 returned 30.76%.
We will be changing our benchmark to the Standard and Poor's Small Cap 600
Index. The S&P 600 is a relatively new benchmark that is dynamically updated and
more closely compares to the Emerging Growth Fund.
As we have discussed previously, falling interest rates positively impact
small-cap growth issues as price earnings multiples expand in this environment.
Since the average small-cap issue trades at a 25-50 percent premium to the
broader market (the S&P 500 Composite Index) they tend to be more vulnerable to
interest rates changes. We were quite aware of this factor and increased our
equity exposure as interest rates fell.
On an operating basis our universe did exceptionally well as revenues rose at a
double digit pace, margins generally improved and earnings increased.
For the year, most sectors exhibited positive returns. The largest gains were in
the Healthcare and Interest Sensitive sector. The Healthcare sector was up over
57%. The Transportation sector exhibited the most disappointing performance
falling 3%.
As we begin our third year, we remain quite bullish. First and most important,
we believe that inflation and interest rates will remain low and overall
economic growth will be slow and stable. Second, we expect investors to shift
their focus from large cap stocks to small-cap stocks. As earnings growth of the
S&P 500 companies slows, the faster growth of small-cap earnings and their
attractive valuation levels should propel these issues further.
Comparison of Change in the Value of a $10,000
Investment in the Stepstone Emerging Growth Fund,
Institutional Class, versus the Frank Russell 2000
Growth Index, and the S&P 600 Small Cap Index
[GRAPH OMITTED}
A Line Graph Depicting The Growth Of A $10,000 Investment In The
Stepstone Emerging Growth Fund (Institutional) From February 28, 1994 Through
January 31, 1996, Compared To The Frank Russell 2000 Growth Index And The
Standard & Poors 600 Small Cap Index.
PLOT POINTS
STEPSTONE FRANK RUSSELL S&P 600
2/28/94 10,000 10,000 10,000
JAN 95 9,922 9,353 9,180
JAN 96 12,662 12,406 12,128
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------------------------------------
ANNUALIZED
ONE YEAR INCEPTION
RETURN TO DATE
- --------------------------------------------------------------------------------
EMERGING GROWTH FUND (INSTITUTIONAL) 30.24% 11.56%
- --------------------------------------------------------------------------------
For the period ended January 31, 1996. Past performance is
not predictive of future performance.
10
<PAGE>
STEPSTONE FUNDS -- INTERNATIONAL EQUITY FUND
Stepstone International Equity Fund closed out the year on an improved note,
returning 5.91% in the January quarter, versus 7.44 % for the EAFE Index. The
EAFE Index returned 16.40% for the full year ended January, while the
International Fund returned 13.56% from inception, which was one day short of a
full year. A substantial part of the underperformance was related to
underweighted exposure in the Japanese market which performed particularly well.
The big surprise for the year was the strong recovery in the Japanese market.
This results from a policy change which led to a significant weakening of the
yen vs the dollar and a sharp reduction in interest rates. The official
overnight interest rate (ODR) fell to 0.5%.
The fund's largest positions are held in Japan 33.1%, UK 15.2%, Germany 8.8%,
France 9.0%, Switzerland 7.9%, and Netherlands 7.7%. Exposure to Southeast Asia
is also maintained. Hong Kong represents 3.3% of the fund, with Singapore at
3.8%, and Malaysia at 3.1%. A modest 1.3% is held in Latin America. A brief
review of the outlook for each follows.
JAPAN
A combination of generous monetary policy and expanding fiscal policy will boost
the economy in 1996, however, the pace of recovery will be modest due to
structural problems. Bank of Japan will keep short-term interest rates low in
order to support the economy and fragile financial system. Earnings momentum is
upward. The EPS growth for 1996 would be revised up if the yen/dollar goes down,
as we forecast. Thanks to the restructuring efforts of corporations, double
digit EPS growth is estimated, which should sustain investor interest. Thanks to
the record low level of interest rates, equities look attractive in terms of
valuation. The dividend yield is well above a rate of one year time deposit.
UNITED KINGDOM
With a benign interest rate background and satisfactory rate of inflation, the
way ahead for the corporate sector seems encouraging for 1996. The recovery in
the value of the U.S. dollar has been a positive factor for the market, and the
Chancellor clearly anticipates his measures will stimulate a recovery in the
fortunes of the beleaguered consumer, conspicuous by his lengthy absence from
the engine of the economy. On a valuation basis, the Financial Times Stock
Exchange Index has been trading at an all-time high. Strong cash flow, however,
and a high level of takeover activity may take the market even higher. On a
comparable evaluation, the bond yield ratio has now drifted back to the point
where they yield 2.1 times the dividend ratio, lending clear support to
equities. It may be appropriate, however, to temper enthusiasm with the reminder
that the political outlook will hold increasing importance during 1996.
FRANCE
The current international perception of France doesn't tend to concentrate on
matters relating to the Bourse; rather more attention is being accorded to the
scenes of public unrest on the streets of Paris. This civil unrest comes about
following the proposals made in the recent budget with regard to changes in the
structure of domestic social security arrangements. The need for structural
change is necessitated by the requirements of complying with the rigours of
monetary union within Europe in 1997.
Following the strong rise in the French index during the first quarter of 1995,
the market has suffered in investor perception and has been amongst the laggards
over the second half. We anticipate the cyclical recovery will continue to
assist corporate profits growth, although the outlook for the consumer remains
uncomfortable. Confidence on the market remains fragile. Valuations levels on an
absolute and relative basis appear attractive, but confidence and support are
weak.
11
<PAGE>
STEPSTONE FUNDS -- INTERNATIONAL EQUITY FUND (CONTINUED)
GERMANY
The outlook for the German market has been dictated over the course of the past
few months by speculation relating to the future course of interest rates.
Output figures, levels of consumer spending, and confidence factors have all
pointed towards a sluggish economy and the anticipation of an easing in both the
Lombard and official discount rate. Prospects for 1996 are encouraging in terms
of sustainable levels of growth but forecasts now veer significantly towards
modesty.
The multiple normally applied to German earnings has traditionally been at the
upper end of European ranges, and this remains the case. Stock supply through
rights issues and placings are expected to continue at a modest pace and the
level of institutional cash flow remains reasonably healthy. The course of the
German market remains at the whim of the Bundesbank and its interest rate
policy; the prospects of a relatively stronger U.S. dollar will be greeted
enthusiastically by German corporations and sentiment will be governed largely
by this factor.
OTHER EUROPE
On an individual market basis, both Netherlands and Switzerland have performed
well over the second half of 1995 as investor enthusiasm has overcome currency
strength and sluggish domestic environments. On a valuation basis, these markets
may well now be venturing into overbought territory, although individual sector
and company ratings do not always appear excessive.
Comparison of Change in the Value of a $10,000
Investment in the Stepstone International
Equity Fund, Institutional Class, versus the
Morgan Stanley MSCI EAFE Index
[Graph Omitted]
A line graph depicting the growth of a $10,000 investment in the Stepstone
International Equity Fund (Institutional) from February 28, 1995 through January
31, 1996, compared to the Morgan Stanley MSCI EAFE Index.
Plot Points
Stepstone Morgan Stanley
2/28/95 10,000 10,000
Jan. 96 11,476 11,640
Average Annual Total Return
- --------------------------------------------------------------------------------
Annualized Cumulative
Inception Inception
to Date to Date
- --------------------------------------------------------------------------------
International Equity Fund (Institutional) 13.60% 13.56%
- --------------------------------------------------------------------------------
For the period ended January 31, 1996. Past performance is not predictive of
future performance.
12
<PAGE>
STATEMENT OF NET ASSETS JANUARY 31, 1996
- --------------------------------------------------------------------------------
STEPSTONE TREASURY MONEY MARKET FUND
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
--------------------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS (34.0%)
U.S. Treasury Bills
5.480%, 02/01/96 ........................ $ 5,000 $ 5,000
5.420%, 02/08/96 ........................ 5,000 4,995
5.290%, 02/29/96 ........................ 5,000 4,979
5.280%, 03/07/96 ........................ 5,000 4,974
5.300%, 04/04/96 ........................ 5,000 4,954
5.510%, 05/02/96 ........................ 15,000 14,801
5.220%, 05/16/96 ........................ 5,000 4,924
4.980%, 05/23/96 ........................ 15,000 14,771
4.990%, 06/20/96 ........................ 5,000 4,903
5.010%, 07/25/96 ........................ 5,000 4,878
5.330%, 08/22/96 ........................ 5,000 4,850
5.010%, 10/17/96 ........................ 5,000 4,820
U.S. Treasury Notes
7.875%, 02/15/96 ........................ 16,435 16,450
5.500%, 04/30/96 ........................ 5,000 4,997
5.880%, 05/31/96 ........................ 10,000 10,009
6.130%, 07/31/96 ........................ 10,000 10,019
6.500%, 09/30/96 ........................ 10,000 10,052
7.250%, 11/15/96 ........................ 5,000 5,080
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $135,456,447) ................................... 135,456
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (69.9%)
SBC Capital Markets 5.88%, dated 01/31/96,
matures 02/01/96, repurchase price
$17,669,843 (collateralized by U.S.
Treasury Bond, par value $12,910,000,
10.375%, matures 11/15/12: market
value $18,057,115)......................................... 17,667
Deutsche Morgan Grenfell/C.J.
Lawrence 5.88%, dated 01/31/96, matures
02/01/96, repurchase price $91,268,889
(collateralized by various U.S. Treasury
Notes, total par value $89,014,000,
5.125%-7.50%, 08/31/96-03/31/00: total
market value $93,079,931).................................. 91,254
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
--------
<S> <C>
Barclays De Zoete Wedd Securities
5.88%, dated 01/31/96, matures, 02/01/96,
repurchase price $15,015,956
(collateralized by various U.S. Treasury
STRIPS, total par value $33,926,000,
02/15/98-08/15/09: total
market value $15,313,823).................................. $15,014
Morgan Stanley & Companies 5.88%, dated
01/31/96, matures 02/01/96, repurchase
price $15,065,513 (collateralized by U.S.
Treasury Note, par value $14,990,000,
5.50%, matures 09/30/97: market value
$15,378,411)............................................... 15,063
UBS Securities,
5.88%, dated 01/31/96, matures
02/01/96, repurchase price
$90,037,921 (collateralized by various
U.S. Treasury Notes, total par
value $89,029,000, 5.00%-9.125%,
11/30/98-07/31/99: total
market value $91,828,617).................................. 90,023
J P Morgan Securities 5.88%, dated 01/31/96,
matures 02/01/96, repurchase price
$15,020,641 (collateralized by various
U.S. Treasury Investment Growth Receipts,
total par value $1,684,375, 02/15/98-
05/15/04: U.S. Treasury STRIPS, par value
$31,280,000, matures 05/15/09: total
market value $15,320,396).................................. 15,018
Merrill Lynch Government Securities 5.88%,
dated 01/31/96, matures 02/01/96,
repurchase price $16,264,495
(collateralized by U.S. Treasury
Non-callable STRIPS, par value $21,360,000,
8.50%, matures 11/15/00: market
value $16,587,321)......................................... 16,262
</TABLE>
13
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
TREASURY MONEY MARKET FUND (CONT'D)
<TABLE>
<CAPTION>
VALUE
(000)
--------
<S> <C>
REPURCHASE AGREEMENTS (CONTINUED)
Nomura Securities International 5.88%,
dated 01/31/96, matures 02/01/96,
repurchase price $17,804,732
(collateralized by various U.S.
Treasury Notes, total par value
$17,534,000, 4.75%-7.25%, 02/15/98-
11/30/00: total market value
$18,158,645)............................................... $ 17,802
- --------------------------------------------------------------------------------
Total Repurchase Agreements
(Cost $278,102,568).................................... 278,103
- --------------------------------------------------------------------------------
Total Investments (103.9%)
(Cost $413,559,015).................................... 413,559
- --------------------------------------------------------------------------------
Other Assets and Liabilities (-3.9%).......................... (15,553)
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
--------
<S> <C>
Net Assets:
Fund shares of Institutional Class (unlimited
authorization--no par value) based on 182,267,812
outstanding shares of beneficial interest................ $182,267
Fund shares of Investment Class
(unlimited authorization--no par
value) based on 215,740,733
outstanding shares of beneficial
interest................................................. 215,741
Accumulated Net Realized Loss
on Investments........................................... (2)
- --------------------------------------------------------------------------------
Total Net Assets: (100.0%).................................... $398,006
- --------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS........................................ $1.00
- --------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INVESTMENT CLASS .......................................... $1.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<FN>
STRIPS--SEPARATE TRADING OF REGISTERED INTEREST AND PRINCIPAL OF SECURITIES
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
14
<PAGE>
STATEMENT OF NET ASSETS JANUARY 31, 1996
- --------------------------------------------------------------------------------
STEPSTONE MONEY MARKET FUND
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
----------------------
<S> <C> <C>
CERTIFICATES OF DEPOSIT -- YANKEE (14.5%)
Banque Nationale de Paris, New York
5.820%, 02/14/96 .................................. $ 20,000 $ 20,000
Bayerische Hypotheken Und Wechsel
5.650%, 06/27/96 .................................. 10,000 9,995
Lloyds Bank PLC
5.220%, 07/24/96 .................................. 30,000 30,000
Royal Bank of Canada, New York
5.500%, 06/17/96 .................................. 25,000 25,000
Swiss Bank Corp, New York
5.670%, 03/25/96 .................................. 25,000 24,998
- --------------------------------------------------------------------------------
Total Certificates of Deposit -- Yankee
(Cost $109,982,237) ........................................ 109,993
- --------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT -- EURO (12.1%)
Abbey National Bank, London
5.710%, 03/11/96 .................................. 32,000 31,999
Deutsche Bank AG, London
5.730%, 02/20/96 .................................. 30,000 29,999
Toronto Dominion Bank
5.430%, 04/09/96 .................................. 30,000 30,002
- --------------------------------------------------------------------------------
Total Certificates of Deposit -- Euro
(Cost $91,996,869) ......................................... 92,000
- --------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT -- DOMESTIC (3.9%)
Wachovia Bank of Georgia, N.A
5.420%, 02/27/96 .................................. 30,000 30,000
- --------------------------------------------------------------------------------
Total Certificates of Deposit -- Domestic
(Cost $39,987,732) ......................................... 30,000
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (41.8%)
AT&T
5.640%, 02/22/96 .................................. 30,000 29,901
Ciesco
5.650%, 02/08/96 .................................. 20,000 19,978
5.390%, 03/18/96 .................................. 14,600 14,499
Commonwealth Bank of Australia
5.250%, 04/12/96 .................................. 25,000 24,741
Ford Motor Credit
5.650%, 02/05/96 .................................. 30,000 29,981
General Electric
5.400%, 03/11/96 .................................. 15,985 15,891
Goldman Sachs
5.650%, 02/01/96 .................................. 25,000 25,000
Merrill Lynch
5.400%, 03/15/96 .................................. 30,000 29,807
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
----------------------
<S> <C> <C>
Morgan Stanley Group
5.700%, 02/12/96 .............................. $ 30,000 $ 29,948
NationsBank
5.670%, 02/02/96 .............................. 25,000 24,996
Societe Generale North America
5.270%, 04/23/96 .............................. 30,000 29,640
Westpac Capital
5.510%, 04/08/96 .............................. 25,000 24,744
WMX Technologies
5.500%, 03/08/96 .............................. 20,000 19,890
- --------------------------------------------------------------------------------
Total Commercial Paper
(Cost $319,016,402) ...................................... 319,016
- --------------------------------------------------------------------------------
CORPORATE OBLIGATIONS (11.8%)
Bank of America, Illinois
5.730%, 03/05/96 .............................. 10,000 10,000
5.360%, 04/18/96 .............................. 20,000 20,000
Bank of Hawaii, Honolulu
5.500%, 01/03/97 .............................. 10,000 10,004
Bear Stearns Floating Rate Note
5.730%, 05/15/96 (A) .......................... 20,000 20,000
First of America Bank Michigan, N.A ..............
6.450%, 06/04/96 .............................. 10,000 10,017
5.600%, 02/23/96 .............................. 20,000 20,001
- --------------------------------------------------------------------------------
Total Corporate Obligations
(Cost $80,048,171) ....................................... 90,022
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS (5.2%)
U.S. Treasury Notes
5.500%, 04/30/96 .............................. 10,000 9,993
5.880%, 05/31/96 .............................. 5,000 5,001
4.380%, 08/15/96 .............................. 15,000 14,887
6.500%, 09/30/96 .............................. 10,000 10,051
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $39,931,624) ....................................... 39,932
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
OBLIGATIONS (1.2%)
FNMA
5.680%, 10/07/96 .............................. 9,200 9,209
- --------------------------------------------------------------------------------
Total U.S. Government Agency
Mortgage-Backed Obligations
(Cost $9,208,951) ........................................ 9,209
- --------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
MONEY MARKET FUND (CONT'D)
<TABLE>
<CAPTION>
VALUE
(000)
--------
<S> <C>
REPURCHASE AGREEMENTS (9.5%)
Deutsche Morgan Grenfell/
C.J. Lawrence,
5.95%, dated 01/31/96, matures
02/01/96, repurchase price
$72,250,917 (collateralized by various
FHLMC obligations total par value
$180,156,295, 0.00%-7.50%,
02/01/96-02/15/24: FNMA
obligations total par value
$41,435,979, 0.00%-7.48%,
07/25/17-10/25/23: FHLB
obligation, par value $2,000,000,
8.10%, 03/25/96: U.S. Treasury
Bond, par value $3,000,000,
7.625%, 11/15/22: U.S. Treasury
Notes total par value $13,097,000,
7.25%-7.625%, 04/30/96-02/15/98:
total market value $73,684,413................................ $ 72,239
- --------------------------------------------------------------------------------
Total Repurchase Agreements
(Cost $72,238,978)........................................ 72,239
- --------------------------------------------------------------------------------
Total Investments (100.0%)
(Cost $762,410,964)....................................... 762,411
- --------------------------------------------------------------------------------
Other Assets and Liabilities (0.0%).............................. 277
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
--------
<S> <C>
NET ASSETS:
Fund shares of Institutional Class (unlimited
authorization--no par value) based on 504,073,683
outstanding shares of beneficial interest................... $504,073
Fund shares of Investment Class
(unlimited authorization--no
par value) based on 259,783,048
outstanding shares of beneficial
interest.................................................... 259,782
Undistributed Net Investment Income........................... 1
Accumulated Net Realized Loss
on Investments.............................................. (1,168)
- --------------------------------------------------------------------------------
Total Net Assets: (100.0%)....................................... $762,688
- --------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS........................................... $1.00
- --------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INVESTMENT CLASS.............................................. $1.00
- --------------------------------------------------------------------------------
<FN>
(A) FLOATING RATE SECURITY--THE RATE REFLECTED ON THE STATEMENT OF NET ASSETS IS
THE RATE IN EFFECT ON JANUARY 31, 1996.
FHLB--FEDERAL HOME LOAN BANK
FHLMC--FEDERAL HOME LOAN MORTGAGE ASSOCIATION
FNMA--FEDERAL NATIONAL MORTGAGE ASSOCIATION
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
16
<PAGE>
STATEMENT OF NET ASSETS JANUARY 31, 1996
- --------------------------------------------------------------------------------
STEPSTONE CALIFORNIA TAX-FREE MONEY MARKET FUND
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
---------------------
<S> <C> <C>
CALIFORNIA MUNICIPAL BONDS (98.8%)
Alameda County, Multi-Family
Housing, VRDN, RB (A) (B) (C)
2.950%, 02/07/96 .................................. $ 900 $ 900
California Department of Water
Resources, Central Valley Project,
Ser N, VRDN, RB, CGIC Insured
(A) (B)
3.100%, 02/07/96 .................................. 3,000 3,000
California Education Facilities,
Carnegie, TECP
3.100%, 05/03/96 .................................. 1,000 1,000
California Health Facilities Financing
Authority, Kaiser Permanente,
Ser A, RB (A) (B)
6.500%, 10/01/96 .................................. 500 510
California Health Facilities Financing
Authority, Catholic Health Care,
Ser A, VRDN, RB, MBIA Insured
(A) (B)
2.850%, 02/07/96 .................................. 1,000 1,000
California Health Facilities Financing
Authority, Ser B, VRDN, RB, FGIC
Insured (A) (B)
2.900%, 02/07/96 .................................. 500 500
California Health Facilities Financing
Authority, Santa Barbara, VRDN,
RB (A) (B) (C)
2.800%, 02/07/96 .................................. 2,900 2,900
California Health Facilities Financing
Authority, Sutter Community
Hospital, Ser A, VRDN, RB (A) (B)
3.300%, 02/07/96 .................................. 400 400
California Health Facilities Financing
Authority, Adventist Health Systems,
VRDN, RB (A) (B) (C)
2.800%, 02/07/96 .................................. 1,500 1,500
California Health Facilities Financing
Authority, Children's Hospital,
VRDN, RB, MBIA Insured
2.900%, 02/07/96 .................................. 900 900
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
---------------------
<S> <C> <C>
California Health Facilities Financing
Authority, Memorial Health
Services, VRDN, RB (A) (B)
2.800%, 02/07/96 .................................. $5,040 $5,040
California Health Facilities Financing
Authority, Kaiser Permanente,
Ser A, VRDN, RB (A) (B)
2.800%, 02/07/96 .................................. 5,000 5,000
California Health Facilities Financing
Authority, St. Joseph's Hospital,
VRDN, RB (A) (B)
3.250%, 02/07/96 .................................. 600 600
California Pollution Control Finance
Authority, Pac-88c, TECP
3.350%, 02/07/96 .................................. 1,000 1,000
California Pollution Control Finance
Authority, TECP (C)
3.150%, 05/10/96 .................................. 1,000 1,000
California Pollution Control Finance
Authority, Minnesota Mining &
Manufacturing Project, VRDN,
RB (A) (B)
3.050%, 11/01/96 .................................. 400 400
California Pollution Control Finance
Authority, Shell Oil, Ser A, VRDN,
RB (A) (B)
3.250%, 02/07/96 .................................. 2,400 2,400
California Pollution Control Finance
Authority, Shell Oil, VRDN,
RB (A) (B)
3.250%, 02/07/96 .................................. 1,400 1,400
California Pollution Control Finance
Authority, Southern California
Edison, Ser A, VRDN, RB (A) (B)
3.700%, 02/07/96 .................................. 1,600 1,600
California Pollution Control Finance
Authority, Southern California
Edison, Ser D, VRDN, RB (A) (B)
3.700%, 02/07/96 .................................. 400 400
California Pollution Control Finance
Authority, Southern California
Edison, Ser B, VRDN, RB (A) (B)
3.700%, 02/07/96 .................................. 600 600
</TABLE>
17
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
CALIFORNIA TAX-FREE MONEY MARKET FUND (CONT'D)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
---------------------
<S> <C> <C>
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
California Pollution Control Finance
Authority, Southern California
Edison, Ser C, VRDN, RB (A) (B)
3.700%, 02/07/96 ................................ $3,200 $3,200
California Pollution Control Finance
Authority, Shell Oil, Ser A, VRDN,
RB, MBIA Insured (A) (B)
3.250%, 02/07/96 ................................ 200 200
California Pollution Control Finance
Authority, Exxon Project, VRDN,
RB (A) (B) (C)
3.500%, 02/07/96 ................................ 5,000 5,000
California Revenue Anticipation
Warrants, FGIC Insured
5.750%, 04/25/96 ................................ 470 472
California Statewide Community
Development Authority, St. Joseph
Health System, VRDN, RB (A) (B)
2.800%, 02/07/96 ................................ 1,600 1,600
3.200%, 02/07/96 ................................ 3,700 3,700
California Statewide Community
Development Authority, Sutter
Health Group, VRDN, RB,
AMBAC Insured
3.300%, 02/07/96 ................................ 1,100 1,100
City of San Diego Multi-Family
Housing, University Apartments,
VRDN, RB (A) (B)
2.950%, 02/07/96 ................................ 1,500 1,500
Contra Costa Transportation Authority,
Sales Tax Revenue, Ser A, VRDN,
RB, FGIC Insured (A) (B)
2.900%, 02/07/96 ................................ 3,500 3,500
County of San Diego
Teeter Obligation, TECP (C)
3.300%, 04/04/96 ................................ 1,000 1,000
Del Mar Race Track Authority
TECP (C)
3.650%, 02/22/96 ................................ 1,000 1,000
Eastern Municipal Water District,
COP, Ser B, VRDN, RB, FGIC
Insured (A) (B)
2.900%, 02/07/96 ................................ 100 100
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
---------------------
<S> <C> <C>
Escondido Unified School District,
Ser A, GO, FGIC Insured
3.400%, 09/01/96 .............................. $1,000 $1,000
Golden Empire School Finance
Authority, Kern High School,
VRDN, RB (A) (B) (C)
2.950%, 02/07/96 .............................. 600 600
Healdsburg Community
Redevelopment Agency, VRDN,
RB (A) (B) (C)
3.500%, 02/07/96 .............................. 3,760 3,760
Huntington Park Redevelopment
Agency, VRDN, RB (A) (B) (C)
3.550%, 02/07/96 .............................. 1,170 1,170
Irvine Ranch Water District,
VRDN, GO (A) (B) (C)
4.150%, 02/07/96 .............................. 2,700 2,700
Irvine Ranch Water District,
Capital Improvement Project,
COP, VRDN, RB (A) (B)
3.800%, 02/07/96 .............................. 500 500
Long Beach Harbor Revenue, RB
6.500%, 05/15/96 .............................. 1,200 1,209
Los Angeles County Transportation
Commission, Sales Tax Revenue,
RB, Pre-Refunded 07/01/96 @ 102
7.600%, 07/01/06 .............................. 1,355 1,403
Los Angeles Metro Transportation
Authority, TECP (C)
3.150%, 02/01/96 .............................. 2,000 2,000
Los Angeles Waste Water, TECP (C)
3.650%, 02/16/96 .............................. 3,000 3,000
Los Angeles Department of
Water & Power, TECP
3.650%, 02/08/96 .............................. 3,000 3,000
Modesto, COP, High School & City
School District, VRDN, RB
(A) (B) (C)
3.050%, 02/07/96 .............................. 1,400 1,400
Riverside County Transportation
Commission, TECP (C)
3.900%, 02/08/96 .............................. 1,000 1,000
</TABLE>
18
<PAGE>
STEPSTONE FUNDS(R) JANUARY 31, 1996
- --------------------------------------------------------------------------------
CALIFORNIA TAX-FREE MONEY MARKET FUND (CONT'D)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
---------------------
<S> <C> <C>
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
Sacramento County Multi-Family
Housing, VRDN, RB (A) (B) (C)
3.400%, 02/07/96 ................................ $2,800 $2,800
San Bernadino Transportation
Authority, Sales Tax Revenue,
VRDN, RB (A) (B) (C)
3.150%, 02/07/96 ................................ 3,500 3,500
San Bernadino County Housing
Authority, Victoria Terrace,
Project A, VRDN, RB (A) (B) (C)
3.000%, 02/07/96 ................................ 5,000 5,000
San Bernardino Multi-Family Housing,
Western #3 Project,
VRDN, RB (A) (B) (C)
3.000%, 02/07/96 ................................ 2,500 2,500
San Bernardino Multi-Family Housing,
Western #4 Project,
VRDN, RB (A) (B) (C)
3.000%, 02/07/96 ................................ 2,500 2,500
San Diego Transportation Authority,
TECP (C)
3.250%, 02/07/96 ................................ 2,500 2,500
3.050%, 03/06/96 ................................ 1,600 1,600
San Diego Water Authority, TECP
3.200%, 04/12/96 ................................ 1,000 1,000
San Jose Unified School District,
County of Santa Clara, TRAN
4.750%, 09/19/96 ................................ 2,000 2,008
San Mateo, TRAN
4.500%, 07/01/96 ................................ 2,000 2,004
Santa Clara Transport Authority,
VRDN, RB (A) (B) (C)
3.650%, 02/07/96 ................................ 1,000 1,000
Santa Clara Water District, RB,
Pre-Refunded 06/01/96 @ 100
5.750%, 06/01/96 ................................ 1,400 1,410
Santa Cruz County, TRAN
4.500%, 07/11/96 ................................ 2,000 2,004
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
--------------------------
<S> <C> <C>
Solano County, TRAN
4.500%, 11/01/96 ........................... $2,500 $2,512
Southern California Metro Water,
TECP (C)
3.650%, 02/22/96 ........................... 1,000 1,000
Tracy Sycamore Multi-Family Housing,
VRDN, RB (A) (B) (C)
3.200%, 02/07/96 ........................... 2,300 2,300
Tri City Hospital District, Imperial
Municipal Services Group, RB,
Pre-Refunded 02/01/96 @ 100
9.875%, 02/01/09 ........................... 1,900 1,900
Vallejo Housing Authority, Multi-
Family Revenue, VRDN, RB,
FNMA Insured (A) (B)
2.950%, 02/07/96 ........................... 900 900
Vallejo Housing Authority, Multi-
Family Revenue, VRDN, RB
(A) (B) (C)
3.200%, 02/07/96 ........................... 5,000 5,000
West Covina Redevelopment Agency,
Lakes Public Parking Project,
VRDN, RB (A) (B) (C)
3.650%, 02/07/96 ........................... 2,025 2,025
- --------------------------------------------------------------------------------
Total California Municipal Bonds
(Cost $122,626,892) .................................... 122,627
- --------------------------------------------------------------------------------
CASH EQUIVALENT (2.2%)
SEI California Tax Free Money
Market Portfolio (A)
3.180%..................................................... 2,713
- --------------------------------------------------------------------------------
Total Cash Equivalent
(Cost $2,712,612) ...................................... 2,713
- --------------------------------------------------------------------------------
Total Investments (101.0%)
(Cost $125,339,504) .................................... 125,340
- --------------------------------------------------------------------------------
Other Assets and Liabilities (-1.0%) .......................... (1,240)
- --------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
CALIFORNIA TAX-FREE MONEY MARKET FUND (CONT'D)
<TABLE>
<CAPTION>
VALUE
(000)
---------
<S> <C>
NET ASSETS:
Fund shares of Institutional Class (unlimited authorization--
no par value) based on 42,920,481 outstanding shares of
beneficial interest ........................................ $ 42,920
Fund shares of Investment Class unlimited authorization--no
par value) based on 81,181,155 outstanding shares of
beneficial interest ........................................ 81,182
Accumulated Net Realized
Loss on Investments ........................................ (2)
- --------------------------------------------------------------------------------
Total Net Assets: (100.0%) ...................................... $124,100
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
---------
<S> <C>
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS .......................................... $1.00
- --------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE--
INVESTMENT CLASS ............................................. $1.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<FN>
(A) FLOATING RATE SECURITY--THE RATE REFLECTED ON THE STATEMENT OF NET ASSETS IS
THE RATE IN EFFECT ON JANUARY 31, 1996.
(B) PUT AND DEMAND FEATURE--THE DATE REPORTED IS THE LESSER OF THE MATURITY OR
THE PUT DATE.
(C) SECURITIES ARE HELD IN CONJUNCTION WITH A LETTER OF CREDIT BY A MAJOR
COMMERCIAL BANK OR FINANCIAL INSTITUTION.
AMBAC--AMERICAN MUNICIPAL BOND ASSURANCE COMPANY
COP--CERTIFICATE OF PARTICIPATION
CGIC--CALIFORNIA GUARANTY INSURANCE COMPANY
FGIC--FINANCIAL GUARANTY INSURANCE COMPANY
FNMA--FEDERAL NATIONAL MORTGAGE ASSOCIATION
GO--GENERAL OBLIGATION
MBIA--MUNICIPAL BOND INVESTORS ASSURANCE
RB--REVENUE BOND
SER--SERIES
TECP--TAX EXEMPT COMMERCIAL PAPER
TRAN--TAX AND REVENUE ANTICIPATION NOTE
VRDN--VARIABLE RATE DEMAND NOTE
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
20
<PAGE>
STATEMENT OF NET ASSETS JANUARY 31, 1996
- --------------------------------------------------------------------------------
STEPSTONE INTERMEDIATE-TERM BOND FUND
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------------------------
<S> <C> <C>
CORPORATE OBLIGATIONS (38.2%)
American Telephone & Telegraph
7.500%, 06/01/06 ............................ $ 3,000 $ 3,330
Arkansas Electric Cooperative
7.330%, 06/30/08 ............................ 2,492 2,701
Avco Financial Services
7.375%, 08/15/01 ............................ 3,500 3,745
Bankers Trust, NY
7.250%, 01/15/03 ............................ 3,500 3,679
7.500%, 11/15/15 ............................ 1,500 1,552
Banponce
6.750%, 12/15/05 ............................ 2,000 2,022
Ford Motor Credit
8.200%, 02/15/02 ............................ 4,000 4,450
Province of British Columbia
6.500%, 01/15/26 ............................ 5,000 4,956
Province of Manitoba
6.125%, 01/19/04 ............................ 3,000 3,015
Province of Ontario
7.380%, 01/27/03 ............................ 4,000 4,315
Pacific Gas & Electric
8.750%, 01/01/01 ............................ 780 872
6.250%, 08/01/03 ............................ 2,000 2,010
Panhandle Eastern
7.880%, 08/15/04 ............................ 3,000 3,308
Pepsico
5.880%, 06/01/00 ............................ 3,500 3,531
Ralston Purina
7.750%, 10/01/15 ............................ 1,000 1,072
Salomon Brothers
7.750%, 05/15/00 ............................ 2,000 2,100
Southern California Edison First
Mortgage
5.630%, 10/01/02 ............................ 4,000 3,915
Union Electric
6.880%, 08/01/04 ............................ 2,500 2,647
- --------------------------------------------------------------------------------
Total Corporate Obligations
(Cost $50,713,720) ...................................... 53,220
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
---------------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS (42.0%)
United States Treasury Bonds
7.130%, 02/15/23 .............................. $ 3,900 $ 4,418
6.880%, 08/15/25 .............................. 2,500 2,788
United States Treasury Notes
6.380%, 07/15/99 .............................. 1,000 1,039
6.250%, 05/31/00 .............................. 7,000 7,274
6.130%, 07/31/00 .............................. 13,100 13,556
6.130%, 09/30/00 .............................. 9,000 9,319
5.880%, 02/15/04 .............................. 12,000 12,258
7.250%, 08/15/04 .............................. 3,500 3,893
6.250%, 08/15/23 .............................. 4,000 4,072
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $56,820,022) ....................................... 58,617
- --------------------------------------------------------------------------------
ASSET BACKED SECURITIES (5.8%)
American Express Master Trust
7.150%, 08/15/99 .............................. 4,000 4,181
Bridgestone Firestone Master Trust
6.250%, 12/01/99 .............................. 1,000 1,001
J.C. Penney Master Credit Card Trust
9.630%, 06/15/00 .............................. 2,500 2,877
- --------------------------------------------------------------------------------
Total Asset Backed Securities
(Cost $7,538,833) ........................................ 8,059
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (12.6%)
Deutsche Morgan Grenfell/
C.J. Lawrence,
5.95%, dated 01/31/96, matures
02/01/96, repurchase price
$17,548,455 (collateralized by U.S.
Treasury Notes, total par value
$17,129,000, 5.875%--8.00%,
10/15/96--06/30/00: total market
value $17,897,140) ........................................... 17,546
- --------------------------------------------------------------------------------
Total Repurchase Agreements
(Cost $17,545,555) ....................................... 17,546
- --------------------------------------------------------------------------------
Total Investments (98.6%)
(Cost $132,618,130) ...................................... 137,442
- --------------------------------------------------------------------------------
Other Assets and Liabilities (1.4%) ............................. 1,917
- --------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
INTERMEDIATE-TERM BOND FUND (CONT'D)
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
---------
<S> <C>
NET ASSETS:
Fund shares of Institutional Class (unlimited authorization--
no par value) based on 12,516,925 outstanding shares of
beneficial interest ........................................ $129,017
Fund shares of Investment Class (unlimited authorization--no
par value) based on 604,695 outstanding shares of beneficial
interest ................................................... 6,793
Undistributed Net Investment Income .......................... 137
Accumulated Net Realized Loss on Investments ................. (1,412)
Net Unrealized Appreciation on Investments ................... 4,824
- --------------------------------------------------------------------------------
Total Net Assets: (100.0%) ...................................... $139,359
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
---------
<S> <C>
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS ........................................... $10.62
- --------------------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE--INVESTMENT CLASS.. $10.61
- --------------------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE--INVESTMENT CLASS ($10.61/97%)... $10.94
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
22
<PAGE>
STATEMENT OF NET ASSETS JANUARY 31, 1996
- --------------------------------------------------------------------------------
STEPSTONE LIMITED MATURITY GOVERNMENT FUND
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
---------------------
<S> <C> <C>
U.S. Government Agency Obligations (27.9%)
FFCB
6.640%, 05/18/96 (A) ............................ $ 1,750 $ 1,756
FHLB
5.420%, 11/20/96 ................................ 600 601
8.260%, 12/31/96 (A) ............................ 2,000 2,043
6.180%, 11/20/97 (A) ............................ 1,400 1,420
5.625%, 12/15/00 ................................ 750 755
FHLMC
6.210%, 05/13/96 ................................ 2,500 2,507
5.570%, 08/20/97 ................................ 1,000 1,007
- --------------------------------------------------------------------------------
Total U.S. Government Agency
Obligations (Cost $10,003,111) ............................ 10,089
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS (19.5%)
United States Treasury Bond
5.500%, 12/31/00 ................................ 900 909
United States Treasury Notes
5.880%, 05/31/96 ................................ 1,000 1,002
4.380%, 08/15/96 ................................ 1,000 996
5.880%, 08/15/98 ................................ 1,000 1,020
7.130%, 09/30/99 ................................ 1,000 1,065
6.130%, 07/31/00 ................................ 2,000 2,070
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $6,876,047) ......................................... 7,062
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED OBLIGATIONS (40.7%)
FHLMC, Gold 5 Year Balloon Program
6.000%, 03/01/98 ................................ 1,273 1,284
6.000%, 04/01/99 ................................ 863 871
7.500%, 10/01/99 ................................ 2,137 2,215
8.000%, 01/01/00 ................................ 1,611 1,670
8.000%, 03/01/00 ................................ 1,743 1,808
GNMA
8.500%, 12/15/01 ................................ 40 43
8.000%, 04/15/02 ................................ 537 563
8.000%, 05/15/02 ................................ 100 105
8.000%, 07/15/02 ................................ 487 510
7.500%, 06/15/07 ................................ 95 99
7.500%, 05/15/08 ................................ 185 192
7.500%, 06/15/08 ................................ 161 167
7.500%, 02/15/09 ................................ 192 199
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
---------------------
<S> <C> <C>
7.500%, 03/15/09 .............................. $ 585 $ 607
7.500%, 06/15/09 .............................. 682 707
8.500%, 07/15/09 .............................. 118 125
7.500%, 10/15/09 .............................. 234 244
8.000%, 11/15/09 .............................. 346 363
7.500%, 01/15/10 .............................. 675 700
8.500%, 03/15/10 .............................. 778 819
8.000%, 04/15/10 .............................. 601 630
7.500%, 07/15/10 .............................. 767 796
- --------------------------------------------------------------------------------
Total U.S. Government Agency
Mortgage-Backed Obligations
(Cost $14,437,452) ....................................... 14,717
- --------------------------------------------------------------------------------
BANKERS ACCEPTANCE (3.8%)
Chemical Bank, New York
5.640%, 02/29/96 .............................. 1,106 1,102
NationsBank N.A
5.730%, 04/02/96 .............................. 142 141
5.730%, 04/08/96 .............................. 111 111
- --------------------------------------------------------------------------------
Total Bankers Acceptance
(Cost $1,353,588) ........................................ 1,354
- --------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT (2.9%)
Northern Trust, Chicago
9.010%, 02/03/97 .............................. 1,000 1,036
- --------------------------------------------------------------------------------
Total Certificates of Deposit
(Cost $1,033,382) ........................................ 1,036
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT (4.5%)
Morgan Stanley & Company, Incorporated
5.82% dated 01/31/96, matures 02/01/96,
repurchase price $1,633,142 (collateralized
by FNMA, par value $1,650,000, 6.68%, matures
01/01/11: total market value $1,673,882) ..................... 1,633
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $1,632,877) ........................................ 1,633
- --------------------------------------------------------------------------------
Total Investments (99.3%)
(Cost $35,336,457) ....................................... 35,891
- --------------------------------------------------------------------------------
Other Assets and Liabilities (0.7%) ............................. 255
- --------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
LIMITED MATURITY GOVERNMENT FUND (CONT'D)
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
---------
<S> <C>
NET ASSETS:
Fund shares of Institutional Class (unlimited authorization --
no par value) based on 3,661,323 outstanding shares of
beneficial interest ........................................ $36,625
Fund shares of Investment Class (unlimited authorization - no
par value) based on 64,695 outstanding shares of beneficial
interest .................................................. 739
Overdistributed Net Investment Income ........................ (6)
Accumulated Net Realized Loss on Investments ................. (1,767)
Net Unrealized Appreciation on Investments ................... 555
- --------------------------------------------------------------------------------
Total Net Assets: (100.0%) ...................................... $36,146
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
---------
<S> <C>
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS .......................................... $9.70
- --------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE--
INVESTMENT CLASS ............................................. $9.71
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<FN>
(A) THE DATES REPORTED ARE THE LESSER OF THE MATURITY DATE OR THE CALL DATE.
FFCB-FEDERAL FARM CREDIT BANK
FHLB-FEDERAL HOME LOAN BANK
FHLMC-FEDERAL HOME LOAN MORTGAGE CORPORATION
GNMA-GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
24
<PAGE>
STATEMENT OF NET ASSETS JANUARY 31, 1996
- --------------------------------------------------------------------------------
STEPSTONE CALIFORNIA TAX-FREE BOND FUND
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
-----------------
<S> <C> <C>
CALIFORNIA MUNICIPAL BONDS (94.4%)
Alameda County, Santa Rita Jail
Project, COP, MBIA Insured
5.250%, 12/01/04 ...................................... $500 $524
Anaheim Public Financing Authority,
Electric Utililty Projects, RB, Callable
04/01/05 @ 100, MBIA Insured
5.500%, 10/01/10 ...................................... 250 254
Antioch Public Finance Authority,
Police Facilities Project, Lease RB,
MBIA Insured
4.550%, 01/01/03 ...................................... 500 502
Berkeley Unified School District,
GO, Ser D
8.250%, 08/01/05 ...................................... 345 437
California Educational Faciltities,
Pepperdine University, RB,
Callable 01/15/97 @ 102
6.750%, 01/15/06 ...................................... 500 522
California State, GO
4.200%, 09/01/02 ...................................... 250 243
Contra Costa Transportation
Authority, Sales Tax RB, SER A,
Escrowed to Maturity
6.300%, 03/01/00 ...................................... 250 270
Cupertino, COP, Callable
01/01/03 @ 102
5.500%, 01/01/05 ...................................... 500 515
Gilroy Unified School District, COP,
Measure J Capital Projects
5.750%, 09/01/05 ...................................... 235 251
Los Angeles Department of Airports,
RB, SER B, FGIC Insured
6.500%, 05/15/04 ...................................... 500 568
Los Angeles, GO, Callable
09/01/03 @ 101
5.400%, 09/01/06 ...................................... 300 314
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
---------------------
<S> <C> <C>
Los Angeles, Wastewater System RB,
SER B, Callable 06/01/03 @ 102,
MBIA Insured
5.400%, 06/01/08 .................................. $300 $309
Moulton-Niguel Water District, COP,
Callable 09/01/03 @ 102,
AMBAC Insured
4.750%, 09/01/04 .................................. 300 303
M-S-R Public Power Agency, San Juan
Project, RB, SER F, Callable
07/01/03 @ 102, Callable
07/01/05 @ 100
6.000%, 07/01/08 .................................. 230 248
Sacramento Municipal Utility
District, Electric Revenue,
SER C, FGIC Insured
5.750%, 11/15/08 .................................. 550 580
San Diego County Water Authority,
COP, SER A, Callable 05/01/03
@ 100, Callable 05/01/01 @ 102
6.250%, 05/01/04 .................................. 480 528
San Francisco City & County, GO,
Utility Public Safety Improvement
Project, SER F, FGIC Insured
6.500%, 06/15/08 .................................. 350 380
San Francisco Building Authority,
Department General Services,
Lease RB, SER A
4.500%, 10/01/00 .................................. 300 300
Santa Clara, COP, AMBAC Insured
6.000%, 05/15/12 .................................. 400 419
Santa Cruz County, Public Facilities
Financing Authority, Tax Allocation,
Callable 09/01/03 @ 102, MBIA
Insured
5.100%, 09/01/05 .................................. 500 519
- --------------------------------------------------------------------------------
Total California Municipal Bonds
(Cost $7,773,603) .......................................... 7,986
- --------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
CALIFORNIA TAX-FREE BOND FUND (CONT'D)
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
--------
<S> <C>
CASH EQUIVALENT (3.4%)
Provident California Tax Free
Money Market (A)
2.990%, 02/07/96 .......................................... $ 147
SEI California Tax Free Money
Market Portfolio (A)
3.180%, 02/07/96 .......................................... 145
- -------------------------------------------------------------------------------
Total Cash Equivalent
(Cost $292,366) ....................................... 292
- -------------------------------------------------------------------------------
Total Investments (97.8%)
(Cost $8,065,969) ..................................... 8,278
- -------------------------------------------------------------------------------
Other Assets and Liabilities (2.2%) .......................... 184
- -------------------------------------------------------------------------------
NET ASSETS:
FUND SHARES OF INSTITUTIONAL CLASS
(UNLIMITED AUTHORIZATION--NO PAR
VALUE) BASED ON 425,808 OUTSTANDING
SHARES OF BENEFICIAL INTEREST ........................... 5,235
Fund shares of Investment Class
(unlimited authorization--no par
value) based on 433,486 outstanding
shares of beneficial interest ........................... 4,310
Undistributed Net Investment Income ....................... 13
Accumulated Net Realized
Loss on Investments ..................................... (1,308)
Net Unrealized Appreciation
on Investments .......................................... 212
- -------------------------------------------------------------------------------
Total Net Assets: (100.0%) ................................... $ 8,462
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
--------
<S> <C>
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS ........................................ $ 9.85
- --------------------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION
PRICE PER SHARE--INVESTMENT CLASS .......................... $ 9.84
- --------------------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE--
INVESTMENT CLASS ($9.84/97%) ............................... $ 10.14
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<FN>
(A) FLOATING RATE SECURITY-THE RATE REFLECTED ON THE STATEMENT OF NET ASSETS IS
THE RATE IN EFFECT ON JANUARY 31, 1996.
AMBAC--AMERICAN MUNICIPAL BOND ASSURANCE COMPANY
COP--CERTIFICATES OF PARTICIPATION
FGIC--FINANCIAL GUARANTY INSURANCE CORPORATION
GO--GENERAL OBLIGATION
MBIA--MUNICIPAL BOND INVESTORS ASSURANCE
RB--REVENUE BOND
SER--SERIES
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
26
<PAGE>
STATEMENT OF NET ASSETS JANUARY 31, 1996
- --------------------------------------------------------------------------------
STEPSTONE CONVERTIBLE SECURITIES FUND
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
-----------------------
<S> <C> <C>
CONVERTIBLE BONDS (61.9%)
AMR
6.130%, 11/01/24 ............................ $ 300 $ 309
Airborne Freight
6.750%, 08/15/01 ............................ 150 152
Alza
0.000%, 07/14/14 ............................ 700 304
Automatic Data Processing
0.000%, 02/20/12 ............................ 500 263
Bay Networks (144A)
5.250%, 05/15/03 ............................ 175 198
Boston Chicken
0.000%, 06/01/15 ............................ 1,200 358
Browning Ferris Industries
6.250%, 08/15/12 ............................ 200 201
Chiron
5.250%, 05/21/02 ............................ 225 235
Chubb Capital
6.000%, 05/15/98 ............................ 200 238
Columbia HCA Healthcare
6.750%, 10/01/06 ............................ 150 151
Comcast
1.130%, 04/15/07 ............................ 425 218
Conner Peripherals
6.750%, 03/01/01 ............................ 300 315
Consolidated Natural Gas
7.250%, 12/15/15 ............................ 250 260
Cooper Industries
7.050%, 01/01/15 ............................ 113 117
Federated Department Stores
5.000%, 10/01/03 ............................ 400 398
Fifth Third Bank
4.250%, 01/15/98 ............................ 250 282
First Data
5.000%, 12/15/99 ............................ 240 408
General Instruments
5.000%, 06/15/00 ............................ 225 246
Horace Mann Educators
6.500%, 12/01/99 ............................ 250 256
Inco Limited
7.750%, 03/15/16 ............................ 150 160
Integrated Health Services
5.750%, 01/01/01 ............................ 300 301
Legg Mason
5.250%, 05/01/03 ............................ 100 119
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------------------------
<S> <C> <C>
Liberty Property Trust
8.000%, 07/01/01 ............................ $ 300 $ 330
Lowe's
3.000%, 07/22/03 ............................ 150 184
Magna International
5.000%, 10/15/02 ............................ 250 250
Motorola
0.000%, 09/27/13 ............................ 475 354
Noble Affiliates
4.250%, 11/01/03 ............................ 175 175
Olsten
4.880%, 05/15/03 ............................ 250 296
Seagate Technology
6.750%, 05/01/12 ............................ 150 209
Softkey International (144A)
5.500%, 11/01/00 ............................ 325 231
Sports and Recreation
4.250%, 11/01/00 ............................ 200 119
Staples
4.500%, 10/01/00 ............................ 325 327
Texas Instrument
2.750%, 09/29/02 ............................ 100 115
3Com (144A)
10.250%, 11/01/01 ........................... 200 314
Thermo Electron (144A)
4.250%, 01/01/03 ............................ 375 430
Time Warner
0.000%, 06/22/13 ............................ 500 208
8.750%, 01/10/15 ............................ 82 85
U.S. Cellular
0.000%, 06/15/15 ............................ 675 242
U.S. Filter (144A)
6.000%, 09/15/05 ............................ 250 284
WMX Technologies
2.000%, 01/24/05 ............................ 300 263
Whirlpool
0.000%, 05/14/11 ............................ 500 197
Worldcom
5.000%, 08/15/03 ............................ 200 214
- --------------------------------------------------------------------------------
Total Convertible Bonds
(Cost $9,722,218) ....................................... 10,316
- --------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
CONVERTIBLE SECURITIES FUND (CONT'D)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
---------------------
<S> <C> <C>
COMMON STOCKS (12.9%)
AUTOMOTIVE (6.2%)
Chrysler ......................................... 12,778 $ 738
Ford Motor ....................................... 9,796 290
- --------------------------------------------------------------------------------
1,028
- --------------------------------------------------------------------------------
BANKS (1.5%)
Barnett Banks of Florida ......................... 4,430 259
- --------------------------------------------------------------------------------
259
- --------------------------------------------------------------------------------
Communications Equipment (1.3%)
Motorola ......................................... 4,000 215
- --------------------------------------------------------------------------------
215
- --------------------------------------------------------------------------------
FOOD, BEVERAGE & TOBACCO (1.4%)
ConAgra .......................................... 5,343 245
- --------------------------------------------------------------------------------
245
- --------------------------------------------------------------------------------
PAPER & PAPER PRODUCTS (0.9%)
International Paper .............................. 3,000 145
- --------------------------------------------------------------------------------
145
- --------------------------------------------------------------------------------
RAILROADS (1.6%)
Burlington Northern Santa Fe ..................... 3,191 261
- --------------------------------------------------------------------------------
261
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total Common Stocks
(Cost $2,007,587) ........................................ 2,153
- --------------------------------------------------------------------------------
PREFERRED STOCKS (17.6%)
COMPUTER SOFTWARE/SERVICES (4.7%)
General Motors Electronics
$3.25, Cl E ................................... 10,100 789
- --------------------------------------------------------------------------------
789
- --------------------------------------------------------------------------------
BANKS (3.6%)
Banc One $3.50, Ser C ............................ 3,000 198
Citicorp $5.375, Ser B .......................... 2,000 403
- --------------------------------------------------------------------------------
601
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES (1.3%)
SCI Finance LLC 3.125% ........................... 3,000 228
- --------------------------------------------------------------------------------
228
- --------------------------------------------------------------------------------
FINANCIAL SERVICES (2.6%)
Conseco * 7.00% .................................. 6,500 430
- --------------------------------------------------------------------------------
430
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHARES/
FACE MARKET
AMOUNT VALUE
(000) (000)
---------------------
<S> <C> <C>
REAL ESTATE (1.8%)
Merry Land & Investment $2.15,
Ser C ............................................ 10,000 $ 299
- --------------------------------------------------------------------------------
299
- --------------------------------------------------------------------------------
RETAIL (1.0%)
Best Buy Capital 6.50% .............................. 5,000 163
- --------------------------------------------------------------------------------
163
- --------------------------------------------------------------------------------
STEEL & STEEL WORKS (1.0%)
WHX $3.75 Ser B ..................................... 3,500 168
- --------------------------------------------------------------------------------
168
- --------------------------------------------------------------------------------
WHOLESALE (1.6%)
Alco Standard $2.375, Ser AA ........................ 3,000 261
- --------------------------------------------------------------------------------
261
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total Preferred Stocks
(Cost $2,569,207) ......................................... 2,939
- --------------------------------------------------------------------------------
Time Deposits (7.3%)
Sanwa Bank Limited
5.750%, 02/01/96 ................................. $ 1,208 1,208
- --------------------------------------------------------------------------------
Total Time Deposits
(Cost $1,208,119) ......................................... 1,208
- --------------------------------------------------------------------------------
Total Investments (99.7%)
(Cost $15,507,131) ........................................ 16,616
- --------------------------------------------------------------------------------
Other Assets and Liabilities (0.3%) .............................. 52
- --------------------------------------------------------------------------------
NET ASSETS:
Fund shares of Institutional Class
(unlimited authorization--no par value)
based on 1,597,511 outstanding shares
of beneficial interest ...................................... 15,594
Undistributed Net Investment
Income ...................................................... 22
Accumulated Net Realized Loss on
Investments ................................................. (57)
Net Unrealized Appreciation
on Investments .............................................. 1,109
- --------------------------------------------------------------------------------
Total Net Assets: (100.0%) ....................................... $ 16,668
- --------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS ........................................... $ 10.43
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<FN>
* NON-INCOME PRODUCING SECURITY
CL--CLASS
SER--SERIES
(144A)--PRIVATE PLACEMENT SECURITY
</FN>
</TABLE>
28
<PAGE>
STATEMENT OF NET ASSETS JANUARY 31, 1996
- --------------------------------------------------------------------------------
STEPSTONE GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
---------------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS (76.3%)
United States Treasury Bonds
5.500%, 12/31/00 ................................ $ 1,000 $ 1,010
7.630%, 02/15/25 ................................ 100 121
6.880%, 08/15/25 ................................ 9,500 10,595
United States Treasury Notes
5.630%, 06/30/97 ................................ 3,750 3,785
7.380%, 11/15/97 ................................ 2,000 2,081
6.000%, 11/30/97 ................................ 750 764
5.380%, 11/30/97 ................................ 500 504
5.880%, 08/15/98 ................................ 1,000 1,020
5.500%, 11/15/98 ................................ 5,750 5,816
7.000%, 04/15/99 ................................ 1,500 1,583
6.880%, 08/31/99 ................................ 250 264
7.750%, 01/31/00 ................................ 1,500 1,637
7.500%, 11/15/01 ................................ 500 553
6.380%, 08/15/02 ................................ 3,000 3,157
7.880%, 11/15/04 ................................ 1,500 1,734
6.500%, 05/15/05 ................................ 500 531
5.880%, 11/15/05 ................................ 500 511
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $34,788,128) ........................................ 35,666
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS (11.0%)
Aid-Israel
7.125%, 08/15/99 ................................ 2,000 2,103
FNMA
5.880%, 02/02/06 ................................ 2,000 2,003
Tennessee Valley Authority
6.380%, 06/15/05 ................................ 1,000 1,036
- --------------------------------------------------------------------------------
Total U.S. Government Agency
Obligations (Cost $4,984,197) ............................. 5,142
- --------------------------------------------------------------------------------
CORPORATE OBLIGATIONS (10.3%)
Chrysler Financial
5.880%, 02/07/01 ................................ 1,500 1,500
Ford Motor Credit
5.750%, 01/25/01 ................................ 1,000 999
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
---------------------
<S> <C> <C>
Meditrust
7.250%, 08/16/99 ................................. $ 1,250 $ 1,309
Salomon Brothers
7.970%, 03/10/97 ................................. 1,000 1,021
- --------------------------------------------------------------------------------
Total Corporate Obligations
(Cost $4,739,030) .......................................... 4,829
- --------------------------------------------------------------------------------
TIME DEPOSITS (5.0%)
Sanwa Bank Limited
5.750%, 02/01/96 ................................. 2,324 2,324
- --------------------------------------------------------------------------------
Total Time Deposits
(Cost $2,323,878) .......................................... 2,324
- --------------------------------------------------------------------------------
Total Investments (102.6%)
(Cost $46,835,233) ......................................... 47,961
- --------------------------------------------------------------------------------
Other Assets and Liabilities (-2.6%) .............................. (1,236)
- --------------------------------------------------------------------------------
NET ASSETS:
Fund shares of Institutional Class
(unlimited authorization--no par value)
based on 4,700,940 outstanding shares
of beneficial interest ....................................... 45,904
Undistributed Net Investment
Income ....................................................... 78
Accumulated Net Realized Loss
on Investments ............................................... (383)
Net Unrealized Appreciation
on Investments ............................................... 1,126
- --------------------------------------------------------------------------------
Total Net Assets: (100.0%) ........................................ $ 46,725
- --------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS ............................................ $ 9.94
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<FN>
FNMA--FEDERAL NATIONAL MORTGAGE ASSOCIATION
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
29
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
BALANCED FUND
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
------------------------
<S> <C> <C>
COMMON STOCKS (63.3%)
AEROSPACE & DEFENSE (1.2%)
Litton Industries* ........................... 30,000 $ 1,477
Loral ........................................ 10,000 463
Watkins Johnson .............................. 21,600 832
- --------------------------------------------------------------------------------
2,772
- --------------------------------------------------------------------------------
AIR TRANSPORTATION (0.4%)
KLM Royal Dutch Air* ........................ 35,000 1,085
- --------------------------------------------------------------------------------
1,085
- --------------------------------------------------------------------------------
AIRCRAFT (2.5%)
Lockheed Martin .............................. 30,000 2,261
Textron ...................................... 20,000 1,573
United Technologies .......................... 22,000 2,258
- --------------------------------------------------------------------------------
6,092
- --------------------------------------------------------------------------------
APPAREL/TEXTILES (0.3%)
Springs Industries, Cl A ..................... 20,000 800
- --------------------------------------------------------------------------------
800
- --------------------------------------------------------------------------------
AUTOMOTIVE (0.5%)
Chrysler ..................................... 22,805 1,317
- --------------------------------------------------------------------------------
1,317
- --------------------------------------------------------------------------------
BANKS (1.7%)
Bank of New York ............................. 24,000 1,230
Bank of Boston ............................... 25,000 1,144
First Union .................................. 10,000 579
J.P. Morgan .................................. 13,000 1,056
- --------------------------------------------------------------------------------
4,009
- --------------------------------------------------------------------------------
CHEMICALS (4.3%)
Cabot ........................................ 33,000 1,897
Dow Chemical ................................. 13,900 1,036
E.I. Du Pont De Nemours ...................... 17,500 1,345
First Mississippi ............................ 40,000 985
Georgia Gulf ................................. 28,400 905
Monsanto ..................................... 10,000 1,303
Morton International ......................... 25,000 925
W.R. Grace ................................... 20,000 1,233
Wellman ...................................... 33,400 668
- --------------------------------------------------------------------------------
10,297
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------------------
<S> <C> <C>
COMMUNICATIONS EQUIPMENT (2.1%)
Harris ............................................. 17,600 $1,102
ITT Industries ..................................... 15,000 390
ITT* ............................................... 15,000 832
Motorola ........................................... 24,000 1,290
Nimbus CD International* ........................... 25,000 191
Sprint ............................................. 27,100 1,169
- --------------------------------------------------------------------------------
4,974
- --------------------------------------------------------------------------------
COMPUTERS & SOFTWARE SERVICES (3.3%)
Compaq Computer * .................................. 32,500 1,532
Computer Associates International .................. 40,750 2,786
Hewlett Packard .................................... 18,000 1,525
IBM ................................................ 15,000 1,631
Tandem Computers* .................................. 75,000 703
- --------------------------------------------------------------------------------
8,177
- --------------------------------------------------------------------------------
CONCRETE & MINERAL PRODUCTS (0.5%)
Hanson PLC, ADR .................................... 85,000 1,318
- --------------------------------------------------------------------------------
1,318
- --------------------------------------------------------------------------------
DRUGS (4.1%)
American Home Products ............................. 20,000 2,040
Baxter International ............................... 26,200 1,192
Bristol-Myers Squibb ............................... 15,000 1,328
Mallinckrodt Group ................................. 35,000 1,404
Merck .............................................. 15,000 1,054
SmithKline Beecham ................................. 23,000 1,294
Warner Lambert ..................................... 15,000 1,406
- --------------------------------------------------------------------------------
9,718
- --------------------------------------------------------------------------------
ELECTRICAL UTILITIES (0.9%)
General Public Utilities ........................... 22,800 775
Nipsco Industries .................................. 15,000 572
Ohio Edison ........................................ 37,500 895
- --------------------------------------------------------------------------------
2,242
- --------------------------------------------------------------------------------
ENTERTAINMENT (0.7%)
Walt Disney ........................................ 25,000 1,606
- --------------------------------------------------------------------------------
1,606
- --------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
STEPSTONE FUNDS(R) JANUARY 31, 1996
- --------------------------------------------------------------------------------
BALANCED FUND (CONT'D)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
---------------------
<S> <C> <C>
FINANCIAL SERVICES (3.5%)
Allstate ........................................... 15,759 $ 687
American Express ................................... 25,000 1,150
Bear Stearns ....................................... 15,000 345
BRE Properties, Cl A .............................. 26,800 995
CBL and Associates Properties ...................... 25,000 513
Donaldson, Lufkin, & Jenrette ...................... 15,000 459
FNMA ............................................... 60,000 2,070
ITT Hartford Group* ................................ 15,000 752
Travelers .......................................... 24,733 1,626
- --------------------------------------------------------------------------------
8,597
- --------------------------------------------------------------------------------
FOOD, BEVERAGE & TOBACCO (3.3%)
Archer-Daniels-Midland ............................. 67,250 1,278
Hudson Foods, Cl A ................................. 50,300 836
IBP ................................................ 60,000 1,598
Pepsico ............................................ 22,400 1,336
Philip Morris ...................................... 14,400 1,339
Sara Lee ........................................... 15,000 506
Universal Foods .................................... 26,000 1,004
- --------------------------------------------------------------------------------
7,897
- --------------------------------------------------------------------------------
FORESTRY (0.4%)
Rayonier ........................................... 25,000 906
- --------------------------------------------------------------------------------
906
- --------------------------------------------------------------------------------
GAS/NATURAL GAS (1.4%)
Coastal ............................................ 15,000 568
Questar ............................................ 18,000 587
Westcoast Energy ................................... 30,400 475
Williams ........................................... 38,800 1,829
- --------------------------------------------------------------------------------
3,459
- --------------------------------------------------------------------------------
HOTELS & LODGING (0.5%)
Hilton Hotels ...................................... 15,000 1,166
- --------------------------------------------------------------------------------
1,166
- --------------------------------------------------------------------------------
HOUSEHOLD FURNITURE & FIXTURES (0.2%)
Leggett & Platt .................................... 21,200 509
- --------------------------------------------------------------------------------
509
- --------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS (0.6%)
Sunbeam Oster ...................................... 50,000 800
Whirlpool .......................................... 14,100 767
- --------------------------------------------------------------------------------
1,567
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------------------
<S> <C> <C>
INSURANCE (2.8%)
AFLAC ............................................ 20,000 $ 953
AMBAC ............................................ 11,700 560
Equifax .......................................... 40,000 745
Lincoln National ................................. 30,000 1,586
Progressive of Ohio .............................. 23,800 1,205
Providian ........................................ 15,800 693
USF&G ............................................ 60,000 960
- --------------------------------------------------------------------------------
6,702
- --------------------------------------------------------------------------------
LEASING & RENTING (0.6%)
Comdisco ......................................... 42,750 914
Xtra ............................................. 15,000 639
- --------------------------------------------------------------------------------
1,553
- --------------------------------------------------------------------------------
LUMBER & WOOD PRODUCTS (0.3%)
Louisiana-Pacific ................................ 32,800 836
- --------------------------------------------------------------------------------
836
- --------------------------------------------------------------------------------
MACHINERY (3.9%)
Briggs & Stratton ................................ 20,000 878
Commercial Intertech ............................. 50,000 925
Cummins Engine ................................... 25,000 966
Deere ............................................ 37,500 1,406
Dresser Industries ............................... 50,000 1,300
General Electric ................................. 16,600 1,274
Global Industries Technologies * ................. 31,000 705
JLG Industries ................................... 44,800 1,193
Parker-Hannifin .................................. 15,000 512
- --------------------------------------------------------------------------------
9,159
- --------------------------------------------------------------------------------
MEDICAL PRODUCTS & SERVICES (1.1%)
Bausch & Lomb .................................... 40,000 1,555
Columbia/HCA Healthcare .......................... 10,000 557
Tenet Healthcare* ................................ 30,000 641
- --------------------------------------------------------------------------------
2,753
- --------------------------------------------------------------------------------
PAPER & PAPER PRODUCTS (2.0%)
Avery Dennison ................................... 20,000 1,068
Kimberly-Clark ................................... 10,000 806
Mead ............................................. 19,000 1,050
Weyerhaeuser ..................................... 20,000 922
Willamette Industries ............................ 19,000 1,059
- --------------------------------------------------------------------------------
4,905
- --------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
BALANCED FUND (CONT'D)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
---------------------
<S> <C> <C>
PETROLEUM & FUEL PRODUCTS (0.9%)
Occidental Petroleum ................................. 50,000 $1,075
Union Pacific Resources Group ........................ 38,400 998
- --------------------------------------------------------------------------------
2,073
- --------------------------------------------------------------------------------
PETROLEUM REFINING (4.1%)
Ashland .............................................. 29,000 1,066
Chevron .............................................. 28,000 1,453
Diamond Shamrock R&M ................................. 35,000 997
Imperial Oil ......................................... 36,300 1,316
Mobil ................................................ 15,000 1,661
Royal Dutch Petroleum, ADR ........................... 9,800 1,362
USX-Marathon Group ................................... 62,000 1,163
Unocal ............................................... 30,000 896
- --------------------------------------------------------------------------------
9,914
- --------------------------------------------------------------------------------
PHOTOGRAPHIC EQUIPMENT & SUPPLIES (0.9%)
Eastman Kodak ........................................ 15,000 1,101
Xerox ................................................ 8,000 989
- --------------------------------------------------------------------------------
2,090
- --------------------------------------------------------------------------------
PRECIOUS METALS (0.9%)
Barrick Gold ......................................... 48,636 1,429
Firstmiss Gold* ...................................... 28,338 765
- --------------------------------------------------------------------------------
2,194
- --------------------------------------------------------------------------------
PRINTING & PUBLISHING (1.3%)
Belo, Cl A ........................................... 28,400 1,015
Houghton Mifflin ..................................... 25,000 1,041
Media General ........................................ 30,000 1,001
- --------------------------------------------------------------------------------
3,057
- --------------------------------------------------------------------------------
RAILROADS (1.7%)
Burlington Northern Santa Fe ......................... 25,000 2,047
Conrail Holding ..................................... 16,400 1,160
Union Pacific ........................................ 15,000 1,000
- --------------------------------------------------------------------------------
4,207
- --------------------------------------------------------------------------------
REAL ESTATE (0.8%)
First Industrial Realty Trust ........................ 35,000 805
JP Realty ............................................ 52,000 1,040
- --------------------------------------------------------------------------------
1,845
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
---------------------
<S> <C> <C>
REPAIR SERVICES (0.8%)
PHH ................................................ 21,000 $1,082
Rollins Truck Leasing .............................. 92,800 974
- --------------------------------------------------------------------------------
2,056
- --------------------------------------------------------------------------------
RETAIL (2.8%)
American Stores .................................... 33,000 858
Heilig-Meyers ...................................... 22,500 349
J.C. Penney ........................................ 25,000 1,225
Kroger* ............................................ 25,000 869
May Department Stores .............................. 28,000 1,246
Morrison Restaurants ............................... 59,100 945
Sears Roebuck ...................................... 17,000 705
Waban* ............................................. 32,400 624
- --------------------------------------------------------------------------------
6,821
- --------------------------------------------------------------------------------
RUBBER & PLASTIC (0.8%)
Mark IV Industries ................................. 38,640 807
Premark International .............................. 20,000 1,035
- --------------------------------------------------------------------------------
1,842
- --------------------------------------------------------------------------------
SEMI-CONDUCTORS/INSTRUMENTS (1.1%)
Intel .............................................. 30,000 1,657
National Semiconductor * ........................... 60,000 1,035
- --------------------------------------------------------------------------------
2,692
- --------------------------------------------------------------------------------
STEEL & STEEL WORKS (0.2%)
Texas Industries ................................... 9,600 539
- --------------------------------------------------------------------------------
539
- --------------------------------------------------------------------------------
TELEPHONES & TELECOMMUNICATION (2.9%)
A T & T ............................................ 12,271 821
Airtouch Communications* ........................... 40,000 1,130
Bell Atlantic ...................................... 20,000 1,377
Comsat ............................................. 20,000 375
Frontier ........................................... 33,400 994
GTE ................................................ 25,000 1,150
NYNEX .............................................. 20,000 1,072
- --------------------------------------------------------------------------------
6,919
- --------------------------------------------------------------------------------
TRANSPORTATION SERVICES (0.4%)
GATX ............................................... 23,400 1,082
- --------------------------------------------------------------------------------
1,082
- --------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
STEPSTONE FUNDS(R) JANUARY 31, 1996
- --------------------------------------------------------------------------------
BALANCED FUND (CONT'D)
<TABLE>
<CAPTION>
SHARES/
FACE MARKET
AMOUNT VALUE
(000) (000)
---------------------
<S> <C> <C>
TRUCKING (0.1%)
Wabash National .................................. 15,000 $ 311
- --------------------------------------------------------------------------------
311
- --------------------------------------------------------------------------------
WHOLESALE (0.5%)
Arrow Electronics* ............................... 23,000 989
Hughes Supply .................................... 10,100 290
- --------------------------------------------------------------------------------
1,279
- --------------------------------------------------------------------------------
Total Common Stocks
(Cost $112,461,794) ...................................... 153,337
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS (13.9%)
U.S. Treasury Notes
7.500%, 01/31/97 .............................. $ 1,000 1,025
5.750%, 09/30/97 .............................. 1,500 1,519
7.000%, 04/15/99 .............................. 1,000 1,055
6.380%, 07/15/99 .............................. 1,000 1,039
7.130%, 09/30/99 .............................. 1,500 1,597
7.500%, 10/31/99 .............................. 1,000 1,078
7.750%, 11/30/99 .............................. 1,000 1,088
7.130%, 02/29/00 .............................. 1,500 1,604
5.500%, 04/15/00 .............................. 2,000 2,027
6.130%, 09/30/00 .............................. 1,500 1,553
5.750%, 10/31/00 .............................. 700 714
7.500%, 11/15/01 .............................. 6,000 6,640
6.380%, 08/15/02 .............................. 2,000 2,105
6.250%, 02/15/03 .............................. 1,000 1,046
6.500%, 05/15/05 .............................. 4,500 4,784
6.500%, 08/15/05 .............................. 4,500 4,790
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $31,963,015) ....................................... 33,664
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED BONDS (4.2%)
FNMA
7.500%, 08/01/01 .............................. 3,357 3,453
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
----------------------
<S> <C> <C>
GNMA
6.500%, 09/15/08 ............................ $ 4,106 $ 4,157
6.000%, 11/15/08 ............................ 2,537 2,525
- --------------------------------------------------------------------------------
Total U.S. Government Agency
Mortgage-Backed Bonds
(Cost $10,093,688) ...................................... 10,135
- --------------------------------------------------------------------------------
CORPORATE OBLIGATIONS (11.2%)
American Telephone & Telegraph
7.500%, 06/01/06 ............................ 2,000 2,220
Associates
7.880%, 09/30/01 ............................ 2,000 2,198
Avco Financial Services
7.380%, 08/15/01 ............................ 2,000 2,140
Bankers Trust NY
7.500%, 11/15/15 ............................ 2,000 2,070
Chemical Banking
6.700%, 08/15/08 ............................ 1,500 1,536
Chesapeake & Potomac Telephone
of Maryland
6.000%, 05/01/03 ............................ 1,500 1,498
First National Bank of Boston
8.000%, 09/15/04 ............................ 2,000 2,210
General Motors Acceptance
8.000%, 10/01/96 ............................ 1,000 1,016
Joseph E. Seagram and Sons
7.000%, 04/15/08 ............................ 1,500 1,573
Metropolitan of Tokyo
7.500%, 03/18/97 ............................ 1,300 1,332
Mobil
7.250%, 03/15/99 ............................ 1,000 1,050
Panhandle Eastern
7.880%, 08/15/04 ............................ 1,000 1,103
Province of British Columbia
7.000%, 01/15/03 ............................ 1,500 1,603
Ralston Purina
7.750%, 10/01/15 ............................ 2,000 2,145
Royal Bank of Scotland
6.380%, 02/01/11 ............................ 1,500 1,485
</TABLE>
33
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
STEPSTONE BALANCED FUND
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------------------------
<S> <C> <C>
CORPORATE OBLIGATIONS (CONTINUED)
Texaco Capital
9.000%, 11/15/96 ............................. $ 1,000 $ 1,029
Waste Management
6.380%, 07/01/97 ............................. 1,000 1,015
- --------------------------------------------------------------------------------
Total Corporate Obligations
(Cost $25,668,433) ...................................... 27,223
- --------------------------------------------------------------------------------
ASSET BACKED SECURITIES (2.0%)
American Express 1994-1A
7.150%, 08/15/99 ............................. 1,500 1,568
Banc One Credit Card Master Trust,
Ser 1994-A, Cl A
7.150%, 11/15/96 ............................. 2,000 2,030
J.C.Penney's Master Credit Card Trust,
Ser C, Cl A
9.630%, 06/15/00 ............................. 1,000 1,151
- --------------------------------------------------------------------------------
Total Asset Backed Securities
(Cost $4,486,259) ....................................... 4,749
- --------------------------------------------------------------------------------
EQUITY OPTIONS (-0.0%)
Computer Associates
February 65 Calls* 02/17/96 ................................. (44)
Loral February 45 Calls* 02/17/96 .............................. (14)
- --------------------------------------------------------------------------------
Total Equity Options
(Cost $(35,279)) ........................................ (58)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (4.7%)
Deutsche Morgan Grenfell/
C.J. Lawrence
5.95%, dated 01/31/96, matures
02/01/96, repurchase price
$11,431,154 (collateralized by U.S.
Treasury Bond, par value $368,000,
9.25%, matures 02/15/16: U.S.
Treasury Notes, total par value
$10,815,000, 5.125%-7.875%,
03/31/96-10/15/98: total market
value $11,658,037) .......................................... 11,429
- --------------------------------------------------------------------------------
Total Repurchase Agreements
(Cost $11,429,265) ...................................... 11,429
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
--------
<S> <C>
Total Investments (99.3%)
(Cost $196,067,175) ..................................... $240,479
- --------------------------------------------------------------------------------
Other Assets and Liabilities (0.7%) ............................ 1,821
- --------------------------------------------------------------------------------
Net Assets:
Fund shares of Institutional Class (unlimited
authorization--no par value) based on
16,804,563 outstanding shares of beneficial
interest .................................................. 189,220
Fund shares of Investment Class
(unlimited authorization--no par
value) based on 605,309 outstanding
shares of beneficial interest ............................. 7,223
Undistributed Net
Investment Income ......................................... 351
Accumulated Net Realized Gain
on Investments ............................................ 1,095
Net Unrealized Appreciation
on Investments ............................................ 44,411
- --------------------------------------------------------------------------------
Total Net Assets: (100.0%) ................................ $242,300
- --------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS ......................................... $ 13.92
- --------------------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION
PRICE PER SHARE--INVESTMENT CLASS ........................... $ 13.91
MAXIMUM OFFERING PRICE PER SHARE--
INVESTMENT CLASS ($13.91/95.5%) ............................. $ 14.57
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<FN>
* NON-INCOME PRODUCING SECURITY
ADR--AMERICAN DEPOSITORY RECEIPT
CL--CLASS
FNMA--FEDERAL NATIONAL MORTGAGE ASSOCIATION
GNMA--GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
SER--SERIES
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
34
<PAGE>
STATEMENT OF NET ASSETS JANUARY 31, 1996
- --------------------------------------------------------------------------------
STEPSTONE GROWTH EQUITY FUND
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
-------------------
<S> <C> <C>
COMMON STOCK (94.0%)
AEROSPACE & DEFENSE (0.3%)
Watkins Johnson ...................................... 6,000 $ 616
- --------------------------------------------------------------------------------
616
- --------------------------------------------------------------------------------
AUTOMOTIVE (1.4%)
Chrysler ............................................. 24,894 1,438
Magna International, Cl A ............................ 27,000 1,117
- --------------------------------------------------------------------------------
2,555
- --------------------------------------------------------------------------------
BANKS (2.7%)
Banc One ............................................. 33,000 1,250
Fleet Financial Group ................................ 16,000 640
U.S. Bancorp ......................................... 90,780 2,984
- --------------------------------------------------------------------------------
4,874
- --------------------------------------------------------------------------------
BEAUTY PRODUCTS (0.9%)
International Flavors & Fragrances ................... 34,000 1,704
- --------------------------------------------------------------------------------
1,704
- --------------------------------------------------------------------------------
BROADCASTING, NEWSPAPERS & ADVERTISING (0.9%)
Capital Cities/ABC ................................... 12,000 1,544
- --------------------------------------------------------------------------------
1,544
- --------------------------------------------------------------------------------
CHEMICALS (4.2%)
Georgia Gulf ......................................... 24,000 765
Great Lakes Chemical ................................. 37,800 2,821
IMC Fertilizer Group ................................. 60,500 2,269
Lilly (Eli) .......................................... 8,000 460
W.R. Grace ........................................... 20,000 1,232
- --------------------------------------------------------------------------------
7,547
- --------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT (1.7%)
ADC Telecommunications* .............................. 8,000 309
DSC Communications* .................................. 47,000 1,369
Motorola ............................................. 20,000 1,075
Nimbus CD International* ............................. 20,000 152
- --------------------------------------------------------------------------------
2,905
- --------------------------------------------------------------------------------
COMPUTERS & SOFTWARE SERVICES (20.5%)
Cisco Systems* ....................................... 84,600 7,043
Compaq Computer* ..................................... 32,000 1,508
CUC International* ................................... 181,655 6,699
Computer Associates International .................... 36,000 2,461
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
-----------------------
<S> <C> <C>
Compuware* ..................................... 48,700 $ 889
First Data ..................................... 75,683 5,355
Fiserv* ........................................ 41,000 1,107
Hewlett Packard ................................ 40,800 3,458
Microsoft* ..................................... 35,000 3,237
Olsten ......................................... 40,000 1,590
Silicon Graphics* .............................. 109,200 3,071
Wonderware* .................................... 40,000 640
- --------------------------------------------------------------------------------
37,058
- --------------------------------------------------------------------------------
CONTAINERS & PACKAGING (0.1%)
Brockway Standard Holdings* .................... 18,400 239
- --------------------------------------------------------------------------------
239
- --------------------------------------------------------------------------------
DRUGS (3.4%)
Alza * ......................................... 16,000 452
Mallinckrodt Group ............................. 45,700 1,834
Schering Plough ................................ 71,200 3,853
- --------------------------------------------------------------------------------
6,139
- --------------------------------------------------------------------------------
ELECTRICAL UTILITIES (1.5%)
Illinova ....................................... 25,000 747
Ohio Edison .................................... 16,000 382
Pinnacle West Capital .......................... 56,500 1,667
- --------------------------------------------------------------------------------
2,796
- --------------------------------------------------------------------------------
ENTERTAINMENT (1.2%)
Ambassador International* ...................... 72,000 684
Walt Disney .................................... 24,000 1,542
- --------------------------------------------------------------------------------
2,226
- --------------------------------------------------------------------------------
FINANCIAL SERVICES (5.0%)
FNMA ........................................... 136,800 4,720
MBNA ........................................... 108,300 4,413
- --------------------------------------------------------------------------------
9,133
- --------------------------------------------------------------------------------
FOOD, BEVERAGE & TOBACCO (2.1%)
IBP ............................................ 16,000 426
PepsiCo ........................................ 29,800 1,777
Philip Morris .................................. 17,700 1,646
- --------------------------------------------------------------------------------
3,849
- --------------------------------------------------------------------------------
GAS/NATURAL GAS (1.7%)
Coastal ........................................ 40,000 1,515
Williams ....................................... 32,000 1,508
- --------------------------------------------------------------------------------
3,023
- --------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
GROWTH EQUITY FUND (CONT'D)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
--------------------
<S> <C> <C>
COMMON STOCK (CONTINUED)
HOUSEHOLD FURNITURE & FIXTURES (0.5%)
Leggett & Platt .................................... 40,000 $ 960
- --------------------------------------------------------------------------------
960
- --------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS (0.6%)
Danaher ............................................ 31,200 995
- --------------------------------------------------------------------------------
995
- --------------------------------------------------------------------------------
INSURANCE (9.8%)
AFLAC .............................................. 32,000 1,524
AMBAC .............................................. 64,200 3,073
Healthcare Compare* ................................ 56,000 2,716
MBIA ............................................... 26,600 1,962
Oxford Health Plan* ................................ 36,000 2,484
Progressive of Ohio ............................... 17,000 861
U.S. Healthcare .................................... 102,900 4,991
- --------------------------------------------------------------------------------
17,611
- --------------------------------------------------------------------------------
LEISURE PRODUCTS (1.1%)
Mattel ............................................. 62,500 2,016
- --------------------------------------------------------------------------------
2,016
- --------------------------------------------------------------------------------
MACHINERY (2.1%)
General Electric ................................... 35,100 2,694
Varity* ............................................ 28,000 1,036
- --------------------------------------------------------------------------------
3,730
- --------------------------------------------------------------------------------
MANUFACTURING (0.6%)
West Marine* ....................................... 34,000 1,165
- --------------------------------------------------------------------------------
1,165
- --------------------------------------------------------------------------------
MARINE TRANSPORTATION (1.8%)
Carnival, Cl A ..................................... 121,000 3,267
- --------------------------------------------------------------------------------
3,267
- --------------------------------------------------------------------------------
MEDICAL PRODUCTS & SERVICES (2.0%)
Nellcor* ........................................... 32,800 2,034
Vivra* ............................................. 63,225 1,596
- --------------------------------------------------------------------------------
3,630
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------------------
<S> <C> <C>
PAPER & PAPER PRODUCTS (0.6%)
Willamette Industries .......................... 20,000 $ 1,115
- --------------------------------------------------------------------------------
1,115
- --------------------------------------------------------------------------------
PETROLEUM & FUEL PRODUCTS (0.3%)
Schlumberger ................................... 8,000 561
- --------------------------------------------------------------------------------
561
- --------------------------------------------------------------------------------
PETROLEUM REFINING (3.6%)
Amoco .......................................... 16,000 1,126
Ashland ........................................ 12,900 474
British Petroleum PLC, ADR .................... 28,300 2,763
Chevron ........................................ 24,000 1,245
Exxon .......................................... 8,400 674
- --------------------------------------------------------------------------------
6,282
- --------------------------------------------------------------------------------
PROFESSIONAL SERVICES (2.2%)
Medaphis* ...................................... 65,800 2,632
U.S. Delivery Systems* ......................... 42,100 1,289
- --------------------------------------------------------------------------------
3,921
- --------------------------------------------------------------------------------
RAILROADS (2.6%)
Burlington Northern Santa Fe ................... 28,000 2,292
Kansas City Southern Industries ................ 53,400 2,430
- --------------------------------------------------------------------------------
4,722
- --------------------------------------------------------------------------------
REAL ESTATE (0.3%)
Innkeepers USA Trust ........................... 64,000 600
- --------------------------------------------------------------------------------
600
- --------------------------------------------------------------------------------
RETAIL (7.6%)
Corporate Express* ............................. 61,000 1,609
Kohls* ......................................... 49,600 2,796
Landry's Seafood Restaurants* .................. 48,300 718
McDonald's ..................................... 58,600 2,945
Papa John's International* ..................... 41,000 1,712
Pep Boys-Manny, Moe & Jack ..................... 88,500 2,566
Toys R Us* ..................................... 39,400 872
Wal-Mart Stores ................................ 29,800 607
- --------------------------------------------------------------------------------
13,825
- --------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
STEPSTONE FUNDS(R) JANUARY 31, 1996
- --------------------------------------------------------------------------------
GROWTH EQUITY FUND (CONT'D)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
-----------------------
<S> <C> <C>
COMMON STOCK (CONTINUED)
RUBBER & PLASTIC (1.1%)
Goodyear Tire & Rubber ......................... 24,000 $ 1,149
Mark IV Industries ............................. 44,100 921
- --------------------------------------------------------------------------------
2,070
- --------------------------------------------------------------------------------
SEMI-CONDUCTORS/INSTRUMENTS (4.9%)
Applied Materials* ............................. 32,000 1,184
Aavid Thermal Technologies* .................... 24,000 240
Integrated Device Technology* .................. 127,400 1,672
Intel .......................................... 70,200 3,877
National Semiconductor* ........................ 49,000 845
Recoton* ....................................... 60,000 1,035
- --------------------------------------------------------------------------------
8,853
- --------------------------------------------------------------------------------
TELEPHONES & TELECOMMUNICATION (3.8%)
Cincinnati Bell ................................ 65,000 2,112
MCI Communications ............................. 78,800 2,256
SBC Communications ............................. 43,200 2,446
- --------------------------------------------------------------------------------
6,814
- --------------------------------------------------------------------------------
TRUCKING (1.0%)
Wabash National ................................ 83,125 1,725
- --------------------------------------------------------------------------------
1,725
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total Common Stock
(Cost $101,921,272) ..................................... 170,070
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (6.0%)
Deutsche Morgan Grenfell/C.J. Lawrence
5.950%, dated 01/31/96, matures
02/01/96, repurchase price $10,793,191
(collateralized by various U.S. Treasury
Notes, total par value $9,523,000,
5.750%--6.125%, 05/15/98--10/31/00:
U.S. Treasury Bond par value $759,000,
12.750%, 11/15/10: total market value $11,008,112) .......... 10,791
- --------------------------------------------------------------------------------
Total Repurchase Agreements
(Cost $10,791,408) ...................................... 10,791
- --------------------------------------------------------------------------------
Total Investments (100.0%)
(Cost $112,712,680) ..................................... 180,861
- --------------------------------------------------------------------------------
Other Assets and Liabilities (0.0%) ....................... 74
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
---------
<S> <C>
NET ASSETS:
Fund shares of Institutional Class (unlimited
authorization--no par value) based on
10,136,971 outstanding shares of beneficial
interest .................................................. $110,100
Fund shares of Investment Class
(unlimited authorization--no par
value) based on 133,148 outstanding
shares of beneficial interest ............................. 1,932
Undistributed Net Investment Income ......................... 228
Accumulated Net Realized Gain
on Investments ............................................ 527
Net Unrealized Appreciation
on Investments ............................................ 68,148
- --------------------------------------------------------------------------------
Total Net Assets: (100.0%) ..................................... $180,935
- --------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS ......................................... $ 17.62
- --------------------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION
PRICE PER SHARE--INVESTMENT CLASS ........................... $ 17.61
- --------------------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE--
INVESTMENT CLASS ($17.61/95.5%) ............................. $ 18.44
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<FN>
* NON-INCOME PRODUCING SECURITY
ADR--AMERICAN DEPOSITORY RECEIPT
CL--CLASS
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
37
<PAGE>
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
STEPSTONE VALUE MOMENTUM FUND
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
-----------------------
<S> <C> <C>
COMMON STOCKS (91.7%)
AEROSPACE & DEFENSE (2.3%)
Loral .......................................... 67,200 $ 3,108
Rockwell International ......................... 40,000 2,345
- --------------------------------------------------------------------------------
5,453
- --------------------------------------------------------------------------------
AIRCRAFT (1.1%)
Textron ........................................ 33,000 2,595
- --------------------------------------------------------------------------------
2,595
- --------------------------------------------------------------------------------
APPAREL/TEXTILES (0.5%)
Springs Industries, Cl A ....................... 30,000 1,200
- --------------------------------------------------------------------------------
1,200
- --------------------------------------------------------------------------------
AUTOMOTIVE (2.4%)
Arvin Industries ............................... 40,000 785
Fleetwood Enterprises .......................... 40,000 1,020
Ford Motor ..................................... 45,000 1,333
General Motors, Cl E ........................... 17,000 944
TRW ............................................ 14,000 1,183
- --------------------------------------------------------------------------------
5,265
- --------------------------------------------------------------------------------
BANKS (3.4%)
BankAmerica .................................... 30,000 2,021
Bankers Trust New York ......................... 20,000 1,298
First Union .................................... 45,000 2,604
J.P. Morgan .................................... 25,000 2,031
- --------------------------------------------------------------------------------
7,954
- --------------------------------------------------------------------------------
CHEMICALS (5.6%)
Cabot .......................................... 53,000 3,047
Du Pont (E.I.) de Nemours ...................... 40,000 3,075
Eastman Chemical ............................... 5,500 364
Monsanto ....................................... 12,000 1,563
W.R. Grace ..................................... 64,000 3,944
Wellman ........................................ 60,000 1,200
- --------------------------------------------------------------------------------
13,193
- --------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT (1.9%)
CTS ............................................ 55,800 2,148
Harris ......................................... 35,000 2,192
- --------------------------------------------------------------------------------
4,340
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
-----------------------
<S> <C> <C>
COMPUTERS & SERVICES (3.9%)
Cisco Systems* ................................. 30,000 $ 2,497
Hewlett Packard ................................ 50,000 4,237
International Business Machines ................ 22,000 2,393
- --------------------------------------------------------------------------------
9,127
- --------------------------------------------------------------------------------
DRUGS (4.7%)
American Home Products ......................... 15,000 1,530
Bristol Myers Squibb ........................... 13,000 1,150
Mallinckrodt Group ............................. 65,000 2,608
Merck .......................................... 45,000 3,161
SmithKline Beecham, ADR ........................ 47,000 2,644
- --------------------------------------------------------------------------------
11,093
- --------------------------------------------------------------------------------
ELECTRICAL UTILITIES (1.1%)
General Public Utilities ....................... 75,000 2,550
- --------------------------------------------------------------------------------
2,550
- --------------------------------------------------------------------------------
FINANCIAL SERVICES (7.3%)
Allstate ....................................... 39,467 1,722
BRE Properties, Cl A .......................... 60,000 2,227
Bear Stearns ................................... 86,150 1,981
CBL Associates Properties ...................... 59,800 1,226
Dean Witter Discover ........................... 45,000 2,436
Federal National Mortgage
Association ................................. 120,000 4,140
Real Estate Investment Trust
of California ............................... 28,300 580
Travelers ...................................... 40,001 2,630
- --------------------------------------------------------------------------------
16,942
- --------------------------------------------------------------------------------
FOOD, BEVERAGE & TOBACCO (6.2%)
American Brands ................................ 29,000 1,323
IBP ............................................ 130,000 3,461
Philip Morris .................................. 35,000 3,255
Sara Lee ....................................... 60,000 2,025
Schweitzer-Manduit
International* .............................. 1,000 25
Unilever NV, ADR ............................... 9,000 1,304
Universal Foods ................................ 75,000 2,897
- --------------------------------------------------------------------------------
14,290
- --------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
STEPSTONE FUNDS(R) JANUARY 31, 1996
- --------------------------------------------------------------------------------
VALUE MOMENTUM FUND (CONT'D)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
---------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
GAS/NATURAL GAS (4.3%)
Coastal ............................................ 45,000 $ 1,704
MCN ................................................ 75,000 1,847
Questar ............................................ 42,000 1,370
Sonat .............................................. 40,000 1,380
Westcoast Energy ................................... 70,000 1,094
Williams ........................................... 55,000 2,592
- --------------------------------------------------------------------------------
9,987
- --------------------------------------------------------------------------------
GLASS PRODUCTS (0.5%)
PPG Industries ..................................... 27,000 1,262
- --------------------------------------------------------------------------------
1,262
- --------------------------------------------------------------------------------
HOTELS & LODGING (0.7%)
Hilton Hotels ...................................... 20,000 1,555
- --------------------------------------------------------------------------------
1,555
- --------------------------------------------------------------------------------
HOUSEHOLD FURNITURE & FIXTURES (0.6%)
Leggett & Platt .................................... 61,000 1,464
- --------------------------------------------------------------------------------
1,464
- --------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS (0.7%)
Whirlpool .......................................... 30,000 1,631
- --------------------------------------------------------------------------------
1,631
- --------------------------------------------------------------------------------
INSURANCE (3.9%)
Chubb .............................................. 15,000 1,556
Equifax ............................................ 100,000 1,863
Lincoln National ................................... 40,000 2,115
Providian .......................................... 50,000 2,194
Torchmark .......................................... 30,000 1,421
- --------------------------------------------------------------------------------
9,149
- --------------------------------------------------------------------------------
LEASING & RENTING (2.1%)
Comdisco ........................................... 135,000 2,886
Xtra ............................................... 45,000 1,918
- --------------------------------------------------------------------------------
4,804
- --------------------------------------------------------------------------------
MACHINERY (3.6%)
Deere .............................................. 69,000 2,587
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
---------------------
<S> <C> <C>
Dresser Industries ................................. 90,000 $ 2,340
General Electric ................................... 45,000 3,454
- --------------------------------------------------------------------------------
8,381
- --------------------------------------------------------------------------------
MEASURING DEVICES (0.7%)
Perkin Elmer ....................................... 35,000 1,654
- --------------------------------------------------------------------------------
1,654
- --------------------------------------------------------------------------------
MEDICAL PRODUCTS & SERVICES (0.9%)
Becton, Dickinson .................................. 25,000 2,159
- --------------------------------------------------------------------------------
2,159
- --------------------------------------------------------------------------------
MEDICAL PRODUCTS & SERVICES (0.5%)
Novacare* .......................................... 50,000 300
Tenet Healthcare* .................................. 36,000 769
- --------------------------------------------------------------------------------
1,069
- --------------------------------------------------------------------------------
MISCELLANEOUS CONSUMER SERVICES (0.2%)
CPI ................................................ 30,000 443
- --------------------------------------------------------------------------------
443
- --------------------------------------------------------------------------------
MISCELLANEOUS TRANSPORTATION (0.8%)
Harsco ............................................. 30,000 1,856
- --------------------------------------------------------------------------------
1,856
- --------------------------------------------------------------------------------
PAPER & PAPER PRODUCTS (4.7%)
Avery Dennison ..................................... 52,000 2,776
Kimberly-Clark ..................................... 58,360 4,705
Weyerhaeuser ....................................... 50,000 2,306
Willamette Industries .............................. 22,000 1,227
- --------------------------------------------------------------------------------
11,014
- --------------------------------------------------------------------------------
PETROLEUM & FUEL PRODUCTS (0.3%)
Union Pacific Resources ............................ 30,000 780
- --------------------------------------------------------------------------------
780
- --------------------------------------------------------------------------------
PETROLEUM REFINING (4.7%)
Ashland ............................................ 30,000 1,103
Chevron ............................................ 30,000 1,556
Imperial Oil ....................................... 30,000 1,087
</TABLE>
39
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
VALUE MOMENTUM FUND (CONT'D)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
---------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
PETROLEUM REFINING (CONTINUED)
Mobil .............................................. 28,000 $ 3,101
Royal Dutch Petroleum, ADR ......................... 13,000 1,807
Unocal ............................................. 48,000 1,434
Valero Energy ...................................... 40,000 990
- --------------------------------------------------------------------------------
11,078
- --------------------------------------------------------------------------------
PHOTOGRAPHIC EQUIPMENT & SUPPLIES (1.8%)
Eastman Kodak ...................................... 35,000 2,568
Xerox .............................................. 13,000 1,607
- --------------------------------------------------------------------------------
4,175
- --------------------------------------------------------------------------------
PRINTING & PUBLISHING (2.1%)
Houghton Mifflin ................................... 40,000 1,665
Wallace Computer Services .......................... 60,000 3,323
- --------------------------------------------------------------------------------
4,988
- --------------------------------------------------------------------------------
RAILROADS (1.6%)
Burlington Northern Santa Fe ....................... 22,000 1,801
Union Pacific ...................................... 30,000 1,999
- --------------------------------------------------------------------------------
3,800
- --------------------------------------------------------------------------------
REAL ESTATE (2.0%)
First Industrial Realty Trust ...................... 110,000 2,530
JP Realty .......................................... 108,000 2,160
- --------------------------------------------------------------------------------
4,690
- --------------------------------------------------------------------------------
REPAIR SERVICES (2.1%)
PHH ................................................ 65,000 3,348
Rollins Truck Leasing .............................. 160,000 1,680
- --------------------------------------------------------------------------------
5,028
- --------------------------------------------------------------------------------
RETAIL (2.8%)
Dayton-Hudson ...................................... 18,000 1,346
Kroger* ............................................ 55,000 1,911
May Department Stores .............................. 55,000 2,447
Sears Roebuck ...................................... 21,000 872
- --------------------------------------------------------------------------------
6,576
- --------------------------------------------------------------------------------
SEMI-CONDUCTORS/INSTRUMENTS (2.2%)
Intel .............................................. 70,000 3,866
National Semiconductor * ........................... 75,000 1,294
- --------------------------------------------------------------------------------
5,160
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
-----------------------
<S> <C> <C>
STEEL & STEEL WORKS (1.1%)
Aluminum Company of America .................... 20,000 $ 1,110
Engelhard ...................................... 67,500 1,561
- --------------------------------------------------------------------------------
2,671
- --------------------------------------------------------------------------------
TELEPHONES & TELECOMMUNICATION (4.3%)
A T & T ........................................ 18,449 1,234
Airtouch Communications* ....................... 16,000 452
Comsat ......................................... 70,000 1,313
Century Telephone Enterprises .................. 50,000 1,694
Frontier ....................................... 90,000 2,677
GTE ............................................ 60,000 2,760
- --------------------------------------------------------------------------------
10,130
- --------------------------------------------------------------------------------
TRANSPORTATION SERVICES (1.0%)
GATX ........................................... 51,000 2,359
- --------------------------------------------------------------------------------
2,359
- --------------------------------------------------------------------------------
WHOLESALE (1.1%)
Avnet .......................................... 40,000 1,715
Universal ...................................... 40,000 935
- --------------------------------------------------------------------------------
2,650
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total Common Stocks
(Cost $145,722,213) ..................................... 214,515
- --------------------------------------------------------------------------------
WARRANTS (0.0%)
Chase Manhattan Warrants* ...................... 125 4
- --------------------------------------------------------------------------------
4
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT (7.8%)
Deutsche Morgan Grenfell/C.J. Lawrence
5.950%, dated 01/31/96, matures
02/01/96, repurchase price
$18,216,550 (collateralized by various
FHLMC obligations, total par value
$2,560,000, 0%--6.445%, 02/01/96--
10/21/02: U.S. Treasury Notes, total
par value $15,415,000, 5.50%--6.875%,
02/28/97--04/15/00, total market value $18,578,180) .......... 18,214
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $18,213,541) ....................................... 18,214
- --------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
STEPSTONE FUNDS(R) JANUARY 31, 1996
- --------------------------------------------------------------------------------
VALUE MOMENTUM FUND (CONT'D)
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
--------
<S> <C>
Total Investments (99.5%)
(Cost $163,935,754) ..................................... $232,733
- --------------------------------------------------------------------------------
Other Assets and Liabilities (0.5%) ............................ 1,133
- --------------------------------------------------------------------------------
NET ASSETS:
Fund shares of Institutional Class (unlimited
authorization--no par value) based on
12,303,530 outstanding shares of beneficial
interest .................................................. 151,322
Fund shares of Investment Class
(unlimited authorization--no par
value) based on 653,860 outstanding
shares of beneficial interest ............................. 8,425
Undistributed Net Investment Income ......................... 210
Accumulated Net Realized Gain
on Investments ............................................ 5,111
Net Unrealized Appreciation
on Investments ............................................ 68,798
- --------------------------------------------------------------------------------
Total Net Assets: (100.0%) ..................................... $233,866
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
---------
<S> <C>
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS ........................................ $ 18.05
- --------------------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION
PRICE PER SHARE--INVESTMENT CLASS .......................... $ 18.05
- --------------------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE--
INVESTMENT CLASS ($18.05/95.5%) ............................ $ 18.90
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<FN>
* NON-INCOME PRODUCING SECURITY
ADR--AMERICAN DEPOSITORY RECEIPT
CL--CLASS
FHLMC--FEDERAL HOME LOAN MORTGAGE CORPORATION
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
41
<PAGE>
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
STEPSTONE BLUE CHIP GROWTH FUND
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
-------------------
<S> <C> <C>
COMMON STOCKS (95.6%)
AIR TRANSPORTATION (2.5%)
AMR * .................................................. 11,000 $ 836
Federal Express * ...................................... 10,000 761
- --------------------------------------------------------------------------------
1,597
- --------------------------------------------------------------------------------
AUTOMOTIVE (1.8%)
Chrysler ............................................... 10,000 578
Eaton .................................................. 5,400 313
General Motors, Cl E ................................... 5,000 278
- --------------------------------------------------------------------------------
1,169
- --------------------------------------------------------------------------------
BANKS (6.6%)
Bank of Boston ......................................... 14,400 659
Citicorp ............................................... 10,500 775
CoreStates Finance ..................................... 15,000 600
Fifth Third Bancorp .................................... 12,000 568
PNC Bank ............................................... 20,000 600
Republic New York ...................................... 5,000 291
Wells Fargo ............................................ 3,000 704
- --------------------------------------------------------------------------------
4,197
- --------------------------------------------------------------------------------
BEAUTY PRODUCTS (0.9%)
Proctor & Gamble ....................................... 7,000 587
- --------------------------------------------------------------------------------
587
- --------------------------------------------------------------------------------
BROADCASTING, NEWSPAPERS & ADVERTISING (1.2%)
Capital Citites/ABC .................................... 3,500 450
Viacom, Cl B* ......................................... 8,000 324
- --------------------------------------------------------------------------------
774
- --------------------------------------------------------------------------------
CHEMICALS (4.6%)
Dow Chemical ........................................... 7,500 559
Du Pont (E.I.) de Nemours .............................. 8,200 630
Eastman Chemical ....................................... 3,500 231
IMC Fertilizer Group ................................... 15,000 563
Lilly (Eli) ............................................ 9,426 542
Union Carbide Holding .................................. 10,000 421
- --------------------------------------------------------------------------------
2,946
- --------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT (1.5%)
ITT Industries ......................................... 5,000 130
ITT* ................................................... 5,000 277
Motorola ............................................... 6,000 323
Picturetel * ........................................... 5,000 196
- --------------------------------------------------------------------------------
926
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
-------------------
<S> <C> <C>
COMPUTERS & SOFTWARE SERVICES (8.8%)
3Com* .............................................. 10,000 $ 459
Automatic Data Processing .......................... 10,000 399
Cisco Systems* ..................................... 4,000 333
Compaq Computer * .................................. 4,000 189
Computer Associates International .................. 9,500 649
Dell Computer ...................................... 8,000 219
Gateway 2000 Incorporated* ......................... 20,000 518
Hewlett Packard .................................... 7,000 593
International Business Machines .................... 7,000 761
Microsoft* ......................................... 8,000 740
Oracle Systems ..................................... 5,000 239
Sun Microsystems* .................................. 11,000 506
- --------------------------------------------------------------------------------
5,605
- --------------------------------------------------------------------------------
CONCRETE & MINERAL PRODUCTS (0.9%)
Minnesota Mining & Manufacturing ................... 9,000 581
- --------------------------------------------------------------------------------
581
- --------------------------------------------------------------------------------
DRUGS (7.5%)
Abbott Labs ........................................ 8,000 338
Amgen* ............................................. 18,000 1,082
Bristol-Myers Squibb ............................... 7,000 620
Johnson & Johnson .................................. 13,000 1,248
Merck .............................................. 13,000 913
Schering Plough .................................... 10,000 541
- --------------------------------------------------------------------------------
4,742
- --------------------------------------------------------------------------------
ELECTRICAL SERVICES (5.7%)
American Electric Power ............................ 10,000 443
Baltimore Gas & Electric ........................... 20,000 575
Dominion Resources ................................. 20,000 857
Duke Power ......................................... 13,200 657
Houston Industries ................................. 20,000 480
Texas Utilities .................................... 15,000 613
- --------------------------------------------------------------------------------
3,625
- --------------------------------------------------------------------------------
ELECTRICAL TECHNOLOGY (0.5%)
Komag * ............................................ 10,000 291
- --------------------------------------------------------------------------------
291
- --------------------------------------------------------------------------------
ENTERTAINMENT (0.8%)
Walt Disney ........................................ 8,000 514
- --------------------------------------------------------------------------------
514
- --------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
STEPSTONE FUNDS(R) JANUARY 31, 1996
- --------------------------------------------------------------------------------
BLUE CHIP GROWTH FUND (CONT'D)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FINANCIAL SERVICES (4.0%)
American Express ................................. 8,000 $ 368
Bear Stearns ..................................... 25,000 575
Charles Schwab ................................... 10,000 250
ITT Hartford Group* .............................. 15,000 752
Merrill Lynch .................................... 10,000 569
- --------------------------------------------------------------------------------
2,514
- --------------------------------------------------------------------------------
FOOD, BEVERAGE & TOBACCO (7.4%)
Coca Cola ........................................ 11,000 829
IBP .............................................. 22,000 586
Kellogg .......................................... 2,700 207
PepsiCo .......................................... 10,000 596
Philip Morris .................................... 15,000 1,395
Tootsie Roll Industries .......................... 15,000 585
Wm. Wrigley, Jr .................................. 8,000 476
- --------------------------------------------------------------------------------
4,674
- --------------------------------------------------------------------------------
GLASS PRODUCTS (0.5%)
PPG Industries ................................... 7,000 327
- --------------------------------------------------------------------------------
327
- --------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS (0.8%)
Gillette ......................................... 10,000 536
- --------------------------------------------------------------------------------
536
- --------------------------------------------------------------------------------
INSURANCE (3.5%)
American International Group ..................... 5,000 484
Pacificare Health Systems, Cl A* ................ 8,000 724
Pacificare Health Systems, Cl B* ................ 4,000 369
United Healthcare ................................ 10,000 629
- --------------------------------------------------------------------------------
2,206
- --------------------------------------------------------------------------------
LUMBER & WOOD PRODUCTS (0.4%)
Georgia-Pacific .................................. 3,200 235
- --------------------------------------------------------------------------------
235
- --------------------------------------------------------------------------------
MACHINERY (6.2%)
Black & Decker ................................... 6,000 203
Caterpillar ...................................... 12,100 779
Case ............................................. 12,000 568
Deere ............................................ 18,000 675
General Electric ................................. 22,000 1,689
- --------------------------------------------------------------------------------
3,914
- --------------------------------------------------------------------------------
MARINE TRANSPORTATION (0.3%)
Royal Caribbean Cruises .......................... 10,000 221
- --------------------------------------------------------------------------------
221
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------------------
<S> <C> <C>
MEDICAL PRODUCTS & SERVICES (3.7%)
Guidant .......................................... 8,330 $ 382
Medtronic ........................................ 13,000 743
St. Jude Medical ................................. 9,000 397
Varian Associates ................................ 6,000 289
Columbia HCA Healthcare .......................... 10,000 556
- --------------------------------------------------------------------------------
2,367
- --------------------------------------------------------------------------------
PAPER & PAPER PRODUCTS (0.4%)
International Paper .............................. 5,800 237
- --------------------------------------------------------------------------------
237
- --------------------------------------------------------------------------------
PETROLEUM & FUEL PRODUCTS (0.3%)
Schlumberger ..................................... 3,000 210
- --------------------------------------------------------------------------------
210
- --------------------------------------------------------------------------------
PETROLEUM REFINING (7.4%)
Amoco ............................................ 10,000 704
Exxon ............................................ 15,400 1,236
Mobil ............................................ 11,100 1,229
Phillips Petroleum ............................... 7,500 244
Royal Dutch Petroleum, ADR ....................... 8,000 1,112
Texaco ........................................... 2,000 162
- --------------------------------------------------------------------------------
4,687
- --------------------------------------------------------------------------------
PROFESSIONAL SERVICES (0.7%)
Dun & Bradstreet ................................. 6,000 390
- --------------------------------------------------------------------------------
390
- --------------------------------------------------------------------------------
RAILROADS (0.6%)
Burlington Northern Santa Fe ..................... 5,000 409
- --------------------------------------------------------------------------------
409
- --------------------------------------------------------------------------------
RETAIL (4.1%)
Alberto Culver, Cl A ............................. 20,000 670
Borders Group* ................................... 10,000 211
Home Depot ....................................... 8,000 368
McDonald's ....................................... 15,000 754
Pep Boys-Manny, Moe & Jack ....................... 13,000 377
Wal-Mart Stores .................................. 10,000 204
- --------------------------------------------------------------------------------
2,584
- --------------------------------------------------------------------------------
RUBBER & PLASTIC (1.1%)
Agrium ........................................... 24,000 330
Goodyear Tire & Rubber ........................... 8,000 383
- --------------------------------------------------------------------------------
713
- --------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
BLUE CHIP GROWTH FUND (CONT'D)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
SEMI-CONDUCTORS/INSTRUMENTS (1.8%)
AMP ............................................... 5,200 $ 203
Applied Materials * ............................... 5,000 185
Intel ............................................. 10,000 552
Micron Technology ................................. 5,000 171
- --------------------------------------------------------------------------------
1,111
- --------------------------------------------------------------------------------
SPECIALTY MACHINERY (0.4%)
U.S. Filter * ..................................... 10,000 258
- --------------------------------------------------------------------------------
258
- --------------------------------------------------------------------------------
STEEL & STEEL WORKS (0.7%)
Aluminum Company of America ....................... 8,400 466
- --------------------------------------------------------------------------------
466
- --------------------------------------------------------------------------------
TELEPHONES & TELECOMMUNICATION (7.1%)
A T & T ........................................... 22,000 1,471
Ameritech ......................................... 15,200 914
Ascend Communications* ............................ 6,000 233
Bellsouth ......................................... 10,000 429
Cascade Communications* ........................... 4,000 313
GTE ............................................... 9,000 414
US West ........................................... 15,000 527
Vodafone Group PLC, ADR* .......................... 5,000 179
- --------------------------------------------------------------------------------
4,480
- --------------------------------------------------------------------------------
WHOLESALE (0.9%)
Cordis* ........................................... 5,000 539
- --------------------------------------------------------------------------------
539
- --------------------------------------------------------------------------------
Total Common Stocks
(Cost $48,977,502) ....................................... 60,632
- --------------------------------------------------------------------------------
PERFERRED STOCKS (0.4%)
AUTOMOTIVE (0.4%)
General Motors Cl E ............................... 3,000 234
- --------------------------------------------------------------------------------
Total Preferred Stocks
(Cost $169,680) .......................................... 234
- --------------------------------------------------------------------------------
EQUITY OPTIONS (-0.2%)
Ascend Communications
February 35 Calls* 02/17/96 .................................. (15)
Ascend Communications
February 37.5 Calls* 02/17/96 ................................ (10)
Caterpillar February 65 Calls* 02/17/96 ......................... (5)
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
---------
<S> <C>
Komag March
30 Calls* 03/16/96 ........................................... $ (21)
Pacificare, Cl B February
95 Calls* 02/17/96 ........................................... (10)
Picturetel February
40 Calls* 02/17/96 ........................................... (10)
St Jude Medical February
45 Calls* 02/17/96 ........................................... (8)
Sun Microsystems February
45 Calls* 02/17/96 ........................................... (7)
Sun Microsystems March
45 Calls* 03/16/96 ......................... .................. (21)
- -------------------------------------------------------------------------------
Total Equity Options
(Cost $(136,248)) ........................................ (107)
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (6.8%)
Morgan Stanley & Company 5.82%, dated 01/31/96,
matures 02/01/96, repurchase price $4,301,642
(collateralized by various FNMA obligations,
total par value $4,398,274, 6.00%--7.50%,
03/01/01--01/01/03: total market value $4,410,079) ........... 4,301
- -------------------------------------------------------------------------------
Total Repurchase Agreements
(Cost $4,300,946) ........................................ 4,301
- -------------------------------------------------------------------------------
Total Investments (102.6%)
(Cost $53,311,880) ....................................... 65,060
- -------------------------------------------------------------------------------
Other Assets and Liabilities (-2.6%) ............................ (1,650)
- -------------------------------------------------------------------------------
NET ASSETS:
Fund shares of Institutional Class (unlimited
authorization--no par value) based
on 5,019,548 outstanding shares of
beneficial interest .......................................... 51,155
Undistributed Net Investment Income ............................. 16
Accumulated Net Realized Gain
on Investments ............................................... 491
Net Unrealized Appreciation
on Investments ............................................... 11,748
- -------------------------------------------------------------------------------
Total Net Assets: (100.0%) ................................. $ 63,410
- -------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS .......................................... $ 12.63
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<FN>
* NON-INCOME PRODUCING SECURITY
ADR--AMERICAN DEPOSITORY RECIEPT
CL--CLASS
FNMA--FEDERAL NATIONAL MORTGAGE ASSOCIATION
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
44
<PAGE>
STATEMENT OF NET ASSETS JANUARY 31, 1996
- --------------------------------------------------------------------------------
STEPSTONE EMERGING GROWTH FUND
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
--------------------
<S> <C> <C>
COMMON STOCKS (84.7%)
AGRICULTURE (0.4%)
Veterinary Centers of America* ......................... 10,000 $ 154
- --------------------------------------------------------------------------------
154
- --------------------------------------------------------------------------------
AIR TRANSPORTATION (0.7%)
Atlantic Southeast Airlines ............................ 9,000 166
Comair Holdings ........................................ 1,500 37
Vanguard Airlines* ..................................... 15,000 90
- --------------------------------------------------------------------------------
293
- --------------------------------------------------------------------------------
BANKS (5.7%)
Amsouth Bancorp ........................................ 5,000 198
Astoria Financial ...................................... 5,000 246
Crestar Financial ...................................... 5,000 289
Cullen/Frost Bankers ................................... 3,700 180
Dauphin Deposit Bank & Trust ........................... 1,400 39
Deposit Guaranty ....................................... 3,500 151
First Security ......................................... 2,500 92
First Virginia Banks ................................... 3,500 135
Hibernia, Cl A ......................................... 12,500 134
Merchantile Bancorp .................................... 5,000 218
Old Kent Financial ..................................... 3,675 147
Roosevelt Financial Group .............................. 10,000 174
Union Planters ......................................... 8,000 244
United Jersey Bank Financial ........................... 3,500 125
- --------------------------------------------------------------------------------
2,372
- --------------------------------------------------------------------------------
BEAUTY PRODUCTS (0.3%)
Alberto Culver, Cl A ................................... 4,000 134
- --------------------------------------------------------------------------------
134
- --------------------------------------------------------------------------------
BROADCASTING, NEWSPAPERS & ADVERTISING (1.4%)
Citicaster* ............................................ 7,500 183
Infinity Broadcasting * ................................ 7,500 298
Young Broadcasting, Cl A* .............................. 3,500 98
- --------------------------------------------------------------------------------
579
- --------------------------------------------------------------------------------
BUILDING & CONSTRUCTION (0.2%)
Southern Energy Homes* ................................. 6,250 103
- --------------------------------------------------------------------------------
103
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------------------
<S> <C> <C>
CHEMICALS (0.6%)
Cytec Industries* .................................. 3,500 $ 267
- --------------------------------------------------------------------------------
267
- --------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT (2.3%)
ADC Telecommunications* ............................ 2,800 108
Intervoice* ........................................ 8,000 175
Network Express* ................................... 9,000 35
Octel Communications * ............................. 3,000 110
Picturetel * ....................................... 5,000 196
Tellabs* ........................................... 2,500 110
Teltrend* .......................................... 6,000 238
- --------------------------------------------------------------------------------
972
- --------------------------------------------------------------------------------
COMPUTER & SOFTWARE SERVICES (18.2%)
3Com* .............................................. 23,415 1,074
Adobe Systems ...................................... 4,160 141
Alternative Resources* ............................. 2,500 72
Baan NV* ........................................... 5,000 217
Brooktrout Tech* ................................... 8,000 250
Cadence Design Systems* ............................ 10,000 391
Castelle* .......................................... 10,000 83
Ciber* ............................................. 8,000 168
Cisco Systems* ..................................... 10,000 833
CUC International* ................................. 18,250 673
Datalogix International* ........................... 5,000 59
Dataware Technologies* ............................. 2,500 18
Eagle Point Software* .............................. 10,000 165
Electroglas* ....................................... 2,500 52
Electronic Arts* ................................... 5,000 120
HBO ................................................ 5,000 420
Mentor Graphics* ................................... 6,500 92
Micros Systems* .................................... 2,500 122
Norrell ............................................ 5,000 139
Oracle Systems ..................................... 11,500 549
Physician Computer Networks* ....................... 10,000 109
Pinnacle Micro* .................................... 11,250 167
Proxim* ............................................ 15,000 285
Quarterdeck Office Systems* ........................ 10,000 160
Sierra On-Line* .................................... 7,500 187
Softkey International* ............................. 8,000 111
Spectrum Holobyte* ................................. 7,500 43
Sterling Software .................................. 5,000 296
</TABLE>
45
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
EMERGING GROWTH FUND (CONT'D)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
COMPUTER & SOFTWARE SERVICES (CONTINUED)
Sun Microsystems* .................................... 5,000 $ 230
S3* .................................................. 3,000 36
Symantec * ........................................... 7,100 84
Sync Research* ....................................... 2,000 56
TCSI Corp* ........................................... 7,500 139
Unisys * ............................................. 10,000 75
- --------------------------------------------------------------------------------
7,616
- --------------------------------------------------------------------------------
CONSUMER PRODUCTS (0.6%)
Wolverine World Wide ................................. 9,750 247
- --------------------------------------------------------------------------------
247
- --------------------------------------------------------------------------------
DRUGS (3.1%)
Autoimmune* .......................................... 5,000 67
Boston Scientific * .................................. 6,200 318
IDEC Pharmaceuticals Corp* ........................... 10,000 215
Interneuron Pharmeceutical* .......................... 6,500 195
Liposome * ........................................... 16,500 396
Sybron International* ................................ 4,500 109
- --------------------------------------------------------------------------------
1,300
- --------------------------------------------------------------------------------
ELECTRICAL UTILITIES (0.1%)
Accom* ............................................... 7,400 49
- --------------------------------------------------------------------------------
49
- --------------------------------------------------------------------------------
ELECTRICAL TECHNOLOGY (0.7%)
Komag* ............................................... 10,000 291
- --------------------------------------------------------------------------------
291
- --------------------------------------------------------------------------------
ENTERTAINMENT (0.5%)
Mirage Resorts * ..................................... 5,500 215
- --------------------------------------------------------------------------------
215
- --------------------------------------------------------------------------------
ENVIRONMENTAL SERVICES (0.7%)
Sanifill* ............................................ 4,000 145
USA Waste Services* .................................. 7,500 156
- --------------------------------------------------------------------------------
301
- --------------------------------------------------------------------------------
FINANCIAL SERVICES (3.6%)
CWM Mortgage Holdings ................................ 10,000 173
Credit Acceptance * .................................. 15,000 313
Finova Group ......................................... 5,000 252
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------------------
<S> <C> <C>
First American, Tennessee ........................ 5,000 $ 239
Mercer International* ............................ 3,500 67
Mercury Finance .................................. 10,500 134
Stormedia * ...................................... 3,500 102
Waterhouse Investor Services ..................... 10,000 236
- --------------------------------------------------------------------------------
1,516
- --------------------------------------------------------------------------------
FOOD, BEVERAGE & TOBACCO (1.5%)
Canandaigua Wine, Cl A* .......................... 15,500 577
Pete's Brewing Company* .......................... 2,500 46
- --------------------------------------------------------------------------------
623
- --------------------------------------------------------------------------------
HOTELS & LODGING (1.0%)
HFS* ............................................. 5,000 415
- --------------------------------------------------------------------------------
415
- --------------------------------------------------------------------------------
INSURANCE (1.4%)
Healthcare Compare* .............................. 2,500 121
Penncorp Financial Group ......................... 6,000 180
United Healthcare ................................ 4,500 283
- --------------------------------------------------------------------------------
584
- --------------------------------------------------------------------------------
LEASING & RENTING (0.5%)
Kinetic Concepts ................................. 15,000 186
- --------------------------------------------------------------------------------
186
- --------------------------------------------------------------------------------
LUMBER & WOOD PRODUCTS (0.5%)
Cavalier Homes ................................... 10,000 200
- --------------------------------------------------------------------------------
200
- --------------------------------------------------------------------------------
MACHINERY (0.2%)
General Instrument * ............................. 3,650 83
- --------------------------------------------------------------------------------
83
- --------------------------------------------------------------------------------
MEASURING DEVICES (1.6%)
Advanced Energy Industries* ...................... 10,000 88
Epic Design Technology* .......................... 8,000 240
Input/Output ..................................... 8,000 194
LTX * ............................................ 7,000 60
Thermedics* ...................................... 4,000 103
- --------------------------------------------------------------------------------
685
- --------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
STEPSTONE FUNDS(R) JANUARY 31, 1996
- --------------------------------------------------------------------------------
EMERGING GROWTH FUND (CONT'D)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MEDICAL PRODUCTS & SERVICES (4.9%)
Biochem Pharma* .................................... 11,000 $ 484
Biomet* ............................................ 3,000 56
Datascope* ......................................... 9,000 223
Endosonics* ........................................ 15,000 206
Gulf South Medical Supply* ......................... 9,000 266
Heartstream* ....................................... 2,000 26
Stryker ............................................ 6,000 335
St. Jude Medical ................................... 10,200 450
- --------------------------------------------------------------------------------
2,046
- --------------------------------------------------------------------------------
MEDICAL PRODUCTS & SERVICES (4.5%)
Columbia HCA Healthcare ............................ 9,032 502
Community Health Systems* .......................... 2,500 96
Concord EFS* ....................................... 18,562 473
FHP International * ................................ 10,000 289
Renal Treatment Centers* ........................... 8,500 389
Rotech Medical* .................................... 4,500 136
- --------------------------------------------------------------------------------
1,885
- --------------------------------------------------------------------------------
MISCELLANEOUS CONSUMER SERVICES (1.8%)
Corestaff* ......................................... 7,000 262
Jenny Craig* ....................................... 10,000 98
Service International .............................. 9,000 390
- --------------------------------------------------------------------------------
750
- --------------------------------------------------------------------------------
MISCELLANEOUS MANUFACTURING (0.9%)
Department 56* ..................................... 9,000 357
- --------------------------------------------------------------------------------
357
- --------------------------------------------------------------------------------
PETROLEUM & FUEL PRODUCTS (0.6%)
Pride Petroleum Services* .......................... 10,000 91
Reading & Bates * .................................. 9,000 153
- --------------------------------------------------------------------------------
244
- --------------------------------------------------------------------------------
PRINTING & PUBLISHING (1.1%)
Books-A-Million * .................................. 5,000 41
Cadmus Communications .............................. 5,000 143
Gartner Group, Cl A* ............................... 5,000 276
- --------------------------------------------------------------------------------
460
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------------------
<S> <C> <C>
PROFESSIONAL SERVICES (0.5%)
Medaphis* ............................................ 5,000 $ 200
- --------------------------------------------------------------------------------
200
- --------------------------------------------------------------------------------
RAILROADS (0.4%)
Wisconsin Central Transportation * ................... 2,000 150
- --------------------------------------------------------------------------------
150
- --------------------------------------------------------------------------------
RETAIL (8.9%)
Apple South .......................................... 3,000 53
Boston Chicken* ...................................... 10,500 357
Corporate Express* ................................... 4,500 119
Daka International* .................................. 5,000 114
Gadzooks* ............................................ 6,000 149
Garden Ridge* ........................................ 10,000 330
Lone Star Steakhouse & Saloon* ....................... 15,000 489
Omnicare ............................................. 15,000 698
Staples .............................................. 10,000 246
Sunglass Hut International* .......................... 13,800 384
Viking Office Products* .............................. 11,000 561
Whole Foods Market* .................................. 5,000 74
Williams Sonoma* ..................................... 10,000 153
- --------------------------------------------------------------------------------
3,727
- --------------------------------------------------------------------------------
RUBBER & PLASTIC (0.5%)
Lernout & Hauspie Speech* ............................ 7,500 208
- --------------------------------------------------------------------------------
208
- --------------------------------------------------------------------------------
SEMI-CONDUCTORS/INSTRUMENTS (4.4%)
Altera * ............................................. 3,500 231
Applied Magnetics * .................................. 10,000 145
Arc Capital, Cl A* ................................... 10,000 16
Atmel* ............................................... 10,000 285
Oak Technology* ...................................... 13,000 650
Read-Rite* ........................................... 5,100 92
Recoton * ............................................ 10,000 172
Vitesse Semiconductor* ............................... 20,000 252
- --------------------------------------------------------------------------------
1,843
- --------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
EMERGING GROWTH FUND (CONT'D)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
SPECIALTY MACHINERY (0.8%)
Standex International ............................. 2,500 $ 74
U.S. Filter* ...................................... 10,000 258
- --------------------------------------------------------------------------------
332
- --------------------------------------------------------------------------------
STEEL & STEEL WORKS (0.2%)
Align-Rite International* ......................... 7,500 83
- --------------------------------------------------------------------------------
83
- --------------------------------------------------------------------------------
TELEPHONES & TELECOMMUNICATION (3.6%)
Aspect Telecommunications* ........................ 4,000 148
Cascade Communications* ........................... 3,500 274
Cidco* ............................................ 1,500 45
Mitel* ............................................ 10,000 57
Qualcomm* ......................................... 5,000 224
Worldcom* ......................................... 20,390 747
- --------------------------------------------------------------------------------
1,495
- --------------------------------------------------------------------------------
TESTING LABORATORIES (0.6%)
Martek Biosciences* ............................... 2,500 88
Primark * ......................................... 4,500 150
- --------------------------------------------------------------------------------
238
- --------------------------------------------------------------------------------
WHOLESALE (5.2%)
Cardinal Health ................................... 13,000 775
Chronimed* ........................................ 2,000 38
Citrix Systems* ................................... 6,500 206
Cordis* ........................................... 5,000 539
Ha Lo Industries* ................................. 5,000 130
Hughes Supply ..................................... 10,000 287
Silicon Storage Technology* ....................... 7,000 77
Secure Computing* ................................. 3,000 117
- --------------------------------------------------------------------------------
2,169
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total Common Stocks
(Cost $29,308,084) ....................................... 35,372
- --------------------------------------------------------------------------------
EQUITY OPTIONS (-0.1%)
Cisco Systems February 75 Calls* 02/17/96 ....................... (14)
Cisco Systems April 75 Calls* 04/20/96 .......................... (20)
Cisco Systems February 65 Puts* 02/17/96 ........................ --
Cisco Systems April 65 Puts* 04/20/96 ........................... 2
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
---------
<S> <C>
Picturetel February 40 Calls* 02/17/96 ......................... $ (10)
Qualcomm February 45 Calls* 02/17/96 ........................... (4)
Qualcom February 35 Puts* 02/17/96 ............................. 1
Read-Rite February 25 Puts* 02/17/96 .......................... 13
Sun Microsystems March 45 Calls* 03/16/96 ...................... (21)
- -------------------------------------------------------------------------------
Total Equity Options
(Cost ($20,655)) ........................................ (53)
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (15.5%)
Morgan Stanley & Company 5.82%, dated 01/31/96,
matures 02/01/96, repurchase price $6,481,911
(collaterized by various FNMA , par value
$15,788,629, 6.50%--9.50%, 08/01/97-- 01/01/16:
total market value $6,631,179) .............................. 6,481
- -------------------------------------------------------------------------------
Total Repurchase Agreements
(Cost $6,480,863) ....................................... 6,481
- -------------------------------------------------------------------------------
Total Investments (100.1%)
(Cost $35,768,292) ...................................... 41,800
- -------------------------------------------------------------------------------
Other Assets and Liabilities (-0.1%) ........................... (30)
- -------------------------------------------------------------------------------
NET ASSETS:
Fund shares of Institutional Class (unlimited
authorization--no par value) based on 3,497,444
outstanding shares of beneficial interest ................. 35,266
Overdistributed Net Investment Income ....................... (2)
Accumulated Net Realized Gain
on Investments ............................................ 474
Net Unrealized Appreciation
on Investments ............................................ 6,032
- -------------------------------------------------------------------------------
Total Net Assets: (100.0%) ..................................... $ 41,770
- -------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS ......................................... $ 11.94
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<FN>
* NON-INCOME PRODUCING SECURITY
CL-CLASS
FNMA-FEDERAL NATIONAL MORTGAGE ASSOCIATION
</FN>
</TABLE>
48
<PAGE>
STATEMENT OF NET ASSETS January 31, 1996
- --------------------------------------------------------------------------------
STEPSTONE INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------------------
<S> <C> <C>
FOREIGN COMMON STOCKS (93.6%)
FRANCE (9.0%)
Accor .......................................... 1,755 $ 229
Alcatel Alsthom ................................ 2,594 237
Banque Nationale Paris ......................... 3,854 163
Carnaud Metal Box .............................. 4,800 205
Carrefour ...................................... 450 289
Castorama ...................................... 2,090 367
Chargeurs ...................................... 770 177
Eaux Generale .................................. 1,500 159
Danone ......................................... 1,500 238
Essilor International .......................... 750 159
GAN* ........................................... 5,800 184
Lafarge ........................................ 2,830 191
LVMH Moet Hennesey ............................. 1,800 401
Peugeot ........................................ 1,400 204
Schneider ...................................... 5,000 204
Societe Generale ............................... 1,754 206
Elf Aquitaine .................................. 2,385 178
Valeo .......................................... 3,500 177
- --------------------------------------------------------------------------------
3,968
- --------------------------------------------------------------------------------
GERMANY (8.8%)
Allianz ........................................ 214 417
BASF ........................................... 800 191
BMW ............................................ 400 227
Bayer .......................................... 950 283
Bankgesellschaft Berlin ........................ 650 166
Daimler-Benz ................................... 400 220
Degussa ........................................ 500 183
Deutsche Bank .................................. 4,000 200
Gehe ........................................... 625 314
Karstadt ....................................... 550 219
Preussag ....................................... 700 207
RWE ............................................ 750 294
Siemens ........................................ 700 398
Schering ....................................... 3,100 224
Veba ........................................... 8,000 356
- --------------------------------------------------------------------------------
3,899
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
------------------------
<S> <C> <C>
HONG KONG (3.3%)
China Light & Power ............................ 30,000 $ 145
Hong Kong Telecommunications ................... 100,000 190
HSBC Holdings .................................. 15,195 252
Hutchison Whampoa .............................. 50,000 325
New World Development .......................... 60,000 303
Swire Pacific .................................. 30,000 262
- --------------------------------------------------------------------------------
1,477
- --------------------------------------------------------------------------------
JAPAN (33.2%)
Amada Metrecs .................................. 27,000 430
Asahi Breweries ................................ 36,000 415
Best Denki ..................................... 29,000 413
Daiwa Securities ............................... 28,000 419
Fuji Bank ...................................... 21,000 478
Fuji Photo Film ................................ 14,000 396
Fujisawa Pharmaceutical ........................ 43,000 388
Hitachi Cable .................................. 57,000 427
Japan Synthetic Rubber ......................... 70,000 442
Kaneka ......................................... 62,000 403
Kansai Electric Power .......................... 16,700 392
Katokichi ...................................... 20,000 431
Komatsu ........................................ 51,000 431
Long Term Credit Bank Japan .................... 54,000 395
Maeda .......................................... 41,000 422
Matsushita Electric Works ...................... 40,000 423
Mitsubishi Heavy Industries .................... 49,000 389
Mitsui Marine & Fire ........................... 59,000 435
Mitsui Trust & Banking ......................... 38,000 413
Nintendo ....................................... 5,000 367
Nomura Securities .............................. 21,000 456
Olympus Optical ................................ 44,000 445
Onward Kashiyama ............................... 28,000 417
Ryobi Limited .................................. 78,000 408
Sanden ......................................... 64,000 418
Sanyo Electric ................................. 71,000 419
Shinmaywa Industries ........................... 48,000 437
Sumitomo Bank .................................. 20,000 384
Takara Standard ................................ 37,000 395
Tokio Marine & Fire ............................ 34,000 427
</TABLE>
49
<PAGE>
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND (CONT'D)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
-----------------------
<S> <C> <C>
FOREIGN COMMON STOCK (CONTINUED)
JAPAN (CONTINUED)
Tokyo Electric Power ........................... 15,900 $ 405
Toppan Printing ................................ 31,000 415
Toshiba ........................................ 58,000 452
Toyo Ink ....................................... 78,000 422
Yamato Transportation .......................... 39,000 449
- --------------------------------------------------------------------------------
14,658
- --------------------------------------------------------------------------------
MALAYSIA (3.1%)
AMMB Holdings .................................. 20,000 227
Hume Industries ................................ 40,000 189
Malayan Banking ................................ 20,000 179
Petronas Gas ................................... 60,000 225
Sime Darby ..................................... 100,000 268
Telekom Malaysia* .............................. 20,000 166
United Engineers ............................... 20,000 130
- --------------------------------------------------------------------------------
1,384
- --------------------------------------------------------------------------------
NETHERLANDS (7.7%)
Aegon .......................................... 5,052 207
Akzo ........................................... 3,000 319
Ahold .......................................... 5,151 212
Elsevier ....................................... 25,000 348
IHC Caland .................................... 10,000 356
KPN ............................................ 4,062 156
OCE-Vander Grinten ............................. 4,000 274
Phillips Electronics* .......................... 5,000 199
Royal Dutch Petroleum .......................... 2,000 277
Unilever ....................................... 2,000 288
VNU ............................................ 2,500 370
Wolters Kluwer ................................. 4,044 397
- --------------------------------------------------------------------------------
3,403
- --------------------------------------------------------------------------------
SINGAPORE (3.8%)
Cerebos Pacific ................................ 20,000 166
City Developments .............................. 35,000 284
Development Bank of Singapore* ................. 18,000 255
Keppel ......................................... 15,000 141
Natsteel ....................................... 50,000 102
Singapore Airlines ............................. 25,000 263
United Overseas Bank ........................... 42,000 453
- --------------------------------------------------------------------------------
1,664
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
-----------------------
<S> <C> <C>
SWEDEN (0.2%)
Astra* ....................................... 2,500 $ 102
- --------------------------------------------------------------------------------
102
- --------------------------------------------------------------------------------
SWITZERLAND (7.9%)
Alusuisse Lonza .............................. 250 195
BBC Brown Boveri ............................. 300 346
Ciba Geigy ................................... 400 333
CS Holdings .................................. 4,000 375
Nestle ....................................... 400 421
Roche Holdings ............................... 90 658
SMH PC ....................................... 600 344
Schweiz Bankverein ........................... 500 180
Union Bank of Switzerland* ................... 250 260
Sulzer Gerbruder ............................. 220 131
Zurich Versicherungs ......................... 950 258
- --------------------------------------------------------------------------------
3,501
- --------------------------------------------------------------------------------
UNITED KINGDOM (15.3%)
Assocociated British Ports ................... 50,000 218
British Airport Authority .................... 60,000 440
BTR .......................................... 100,000 501
Rexam ........................................ 50,000 287
Cable & Wireless ............................. 60,000 403
Enterprise Oil ............................... 50,000 278
General Accident ............................. 60,000 588
Hanson ....................................... 75,000 230
Hardy Oil & Gas .............................. 40,000 120
Hays PLC .................................... 50,000 277
Johnson Matthey .............................. 45,000 368
Marks & Spencer .............................. 75,000 492
National Grid Group* ......................... 33,000 100
National Power ............................... 50,000 329
Prudential* .................................. 50,000 325
RTZ .......................................... 30,269 419
Reuters Holdings ............................. 25,000 234
Lloyd's TSB Group* .......................... 111,648 545
Southern Electric ............................ 46,500 582
Whitbread .................................... 1,286 14
- --------------------------------------------------------------------------------
6,750
- --------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
STEPSTONE FUNDS(R) January 31, 1996
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND (CONT'D)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------------------
<S> <C> <C>
FOREIGN COMMON STOCK (CONTINUED)
OTHER (1.3%)
Latin America Equity Fund ............................ 35,000 $ 564
- --------------------------------------------------------------------------------
564
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total Foreign Common Stocks
(Cost $37,033,875) ......................................... 41,370
- --------------------------------------------------------------------------------
FOREIGN PREFERRED STOCK (0.3%)
GERMANY (0.3%)
Jungheinrich ......................................... 700 116
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total Foreign Preferred Stocks
(Cost $164,208) ............................................ 116
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT (5.7%)
J.P. Morgan Securities, 5.80%, dated
01/31/96, matures 02/01/96,
repurchase price $2,539,137
(collateralized by U.S. Treasury
Note, total par value $2,520,000, 5.50%,
02/28/99, market value $2,603,077) ............................. 2,538
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $2,538,336) .......................................... 2,538
- --------------------------------------------------------------------------------
Total Investments (99.6%)
(Cost $39,736,419) ......................................... 44,024
- --------------------------------------------------------------------------------
Other Assets and Liabilities, Net (0.4%) .......................... 164
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
----------
<S> <C>
NET ASSETS:
Fund Shares of Institutional Class (unlimited
authorization--no par value) based on 1,178,705
outstanding shares of beneficial interest ................... $39,586
Accumulated net realized gain
on investments .............................................. 45
Accumulated net realized
gain on foreign currency
transactions ................................................ 179
Undistributed net
investment income ........................................... 2
Net unrealized appreciation on
foreign currency and translation
of other assets and liabilities
in foreign currency ......................................... 89
Net unrealized appreciation
on investments .............................................. 4,287
- --------------------------------------------------------------------------------
Total Net Assets: (100.0%) ....................................... $44,188
- --------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE--
INSTITUTIONAL CLASS ........................................... $ 37.49
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<FN>
* NON-INCOME PRODUCING SECURITIES.
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
51
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
52
<PAGE>
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 1996
- -------------------------------------------------------------------------------
STEPSTONE FUNDS
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------------------------------------------------
TREASURY CALIFORNIA TAX-FREE
MONEY MARKET MONEY MARKET MONEY MARKET
FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income................................................. $18,032 $39,551 $4,339
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Administrative Fee........................................... 415 895 157
Investment Adviser Fee....................................... 930 2,002 351
Investment Adviser Fee Waiver................................ (155) -- (241)
Custodian/Wire Agent Fee..................................... 33 79 11
Professional Fees............................................ 57 122 14
Registration Fees............................................ 55 71 14
Distribution Fee (1)......................................... 572 720 285
Distribution Fee Waiver...................................... (214) (270) (49)
Insurance Expenses........................................... 3 7 1
Trustees Fees................................................ 6 20 2
Printing Expenses............................................ 20 75 11
Miscellaneous Expenses....................................... 25 46 1
Amortization of Deferred Organizational Costs................ 6 6 6
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES......................................... 1,753 3,773 563
Net Investment Income........................................ 16,279 35,778 3,776
- ---------------------------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) on Investments......................... 5 (13) --
- ---------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets Resulting from Operations................ $16,284 $35,765 $3,776
===========================================================================================================================
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
(1) ALL DISTRIBUTION FEES ARE INCURRED IN THE INVESTMENT CLASS
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
53
<PAGE>
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
STEPSTONE FUNDS
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------------------------------------------
LIMITED CALIFORNIA
INTERMEDIATE- MATURITY TAX-FREE CONVERTIBLE
TERM BOND GOVERNMENT BOND SECURITIES
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
Interest Income............................................ $ 8,623 $2,231 $ 670 $ 460
Dividend Income............................................ -- -- -- 181
Less: Foreign Taxes withheld, net of reclaims.............. -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total Investment Income......................... 8,623 2,231 670 641
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Administrative Fee...................................... 174 47 17 17
Investment Adviser Fee.................................. 648 106 64 77
Investment Adviser Fee Waiver........................... -- -- (61) --
Custodian/Wire Agent Fee................................ 14 6 2 2
Professional Fees....................................... 20 8 2 3
Registration Fees....................................... 9 3 3 2
Distribution Fee (1).................................... 26 3 18 --
Distribution Fee Waiver................................. (26) (3) (18) --
Insurance Fees.......................................... 1 1 -- --
Trustees Fees........................................... 2 1 1 1
Printing Fees........................................... 10 5 1 2
Miscellaneous Fees...................................... 1 8 1 1
Amortization of Deferred Organizational Costs........... 6 1 -- 4
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES.................................. 885 186 30 109
- ---------------------------------------------------------------------------------------------------------------------------
Net Investment Income................................... 7,738 2,045 640 532
- ---------------------------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) on Investments.................... 3,766 (119) (598) (14)
- ---------------------------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) on Option Contracts............... -- -- -- 1
- ---------------------------------------------------------------------------------------------------------------------------
Net Realized Gain on Foreign Currency Transactions......... -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
on Investments.......................................... 8,187 905 2,004 1,682
- ---------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation on Foreign Currency...... -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain on
Investments............................................. 11,953 786 1,406 1,669
- ---------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets Resulting from
Operations.............................................. $19,691 $2,831 $2,046 $2,201
===========================================================================================================================
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
(1) ALL DISTRIBUTION FEES ARE INCURRED IN THE INVESTMENT CLASS.
(2) COMMENCED OPERATIONS FEBRUARY 1, 1995.
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
54
<PAGE>
- -------------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT GROWTH VALUE BLUE CHIP EMERGING INTERNATIONAL
SECURITIES BALANCED EQUITY MOMENTUM GROWTH GROWTH EQUITY
FUND FUND FUND FUND FUND FUND FUND(2)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income........................... $2,467 $ 5,238 $ 620 $ 676 $ 172 $ 307 $ 235
Dividend Income........................... -- 3,024 1,786 4,912 970 98 841
Less: Foreign Taxes withheld,
net of reclaims........................ -- -- -- -- -- -- (96)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investment Income........ 2,467 8,262 2,406 5,588 1,142 405 980
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Administrative Fee..................... 50 277 218 261 65 43 54
Investment Adviser Fee................. 186 1,239 973 1,169 289 255 376
Investment Adviser Fee Waiver.......... -- -- -- -- -- -- (77)
Custodian/Wire Agent Fee............... 7 25 20 24 8 7 61
Professional Fees...................... 11 38 30 36 13 10 8
Registration Fees...................... 6 23 16 18 8 6 17
Distribution Fee (1)................... -- 30 7 42 -- -- --
Distribution Fee Waiver................ -- (23) (6) (32) -- -- --
Insurance Fees......................... 1 2 2 2 -- -- --
Trustees Fees.......................... 1 6 5 6 1 1 1
Printing Fees.......................... 7 24 20 23 7 7 4
Miscellaneous Fees..................... 6 11 8 14 4 2 12
Amortization of Deferred
Organizational Costs................ 4 6 6 6 4 4 5
- -----------------------------------------------------------------------------------------------------------------------------------
Total Expenses................. 279 1,658 1,299 1,569 399 335 461
- -----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income.................. 2,188 6,604 1,107 4,019 743 70 519
- -----------------------------------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) on Investments... 1,661 6,254 11,047 9,006 3,514 1020 167
- -----------------------------------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) on Option
Contracts.............................. -- 104 182 -- (379) (107) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Realized Gain on Foreign
Currency Transactions.................. -- -- -- -- -- -- 179
- -----------------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
on Investments......................... 1,677 38,493 32,685 52,751 10,866 7,122 4,287
- -----------------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation on
Foreign Currency....................... -- -- -- -- -- -- 89
- -----------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain on
Investments............................ 3,338 44,851 43,914 61,757 14,001 8,035 4,722
- -----------------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets Resulting from
Operations............................. $5,526 $51,455 $45,021 $65,776 $14,744 $8,105 $5,241
===================================================================================================================================
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
(1) ALL DISTRIBUTION FEES ARE INCURRED IN THE INVESTMENT CLASS.
(2) COMMENCED OPERATIONS FEBRUARY 1, 1995.
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
55
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
STEPSTONE FUNDS
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------------------------------------------------------------------------
TREASURY CALIFORNIA TAX-FREE
MONEY MARKET MONEY MARKET MONEY MARKET
FUND FUND FUND
------------------------ ------------------------ ------------------------
02/01/95 02/01/94 02/01/95 02/01/94 02/01/95 02/01/94
TO 01/31/96 TO 01/31/95 TO 01/31/96 TO 01/31/95 TO 01/31/96 TO 01/31/95
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Activities:
Net Investment Income.......................... $ 16,279 $ 7,672 $ 35,778 $ 23,714 $ 3,776 $ 3,080
Net Realized Gain (Loss) on Investments........ 5 (3) (13) (1,770) -- (2)
- -----------------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets Resulting
From Operations.............................. 16,284 7,669 35,765 21,944 3,776 3,078
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Investment Income:
Institutional Class.......................... (8,954) (5,797) (26,497) (20,599) (1,571) (1,684)
Investment Class............................. (7,325) (1,875) (9,276) (3,119) (2,205) (1,396)
Capital Gains:
Institutional Class.......................... -- -- -- -- -- --
Investment Class............................. -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions........................ (16,279) (7,672) (35,773) (23,718) (3,776) (3,080)
- -----------------------------------------------------------------------------------------------------------------------------------
Change in Net Assets.............................. 5 (3) (8) (1,774) 0 (2)
- -----------------------------------------------------------------------------------------------------------------------------------
Share Transactions (All at $1.00 Per Share):
Institutional Class:
Shares Issued................................ 1,141,639 1,154,823 3,642,987 4,039,913 307,913 428,596
Shares Issued in Lieu of Cash Distributions.. 2,164 132 12,994 2,932 632 --
Shares Redeemed.............................. (1,104,578) (1,182,795) (3,689,649) (4,003,889) (317,672) (429,526)
---------- ---------- ---------- ---------- -------- --------
Total Institutional Share Transactions..... 39,225 (27,840) (33,668) 38,956 (9,127) (930)
Investment Class:
Shares Issued................................ 467,443 259,095 420,652 245,168 143,423 114,291
Shares Issued in Lieu of Cash Distributions.. 6,283 1,483 8,172 2,916 1,956 1,342
Shares Redeemed.............................. (387,009) (160,743) (280,481) (222,938) (113,696) (118,359)
---------- ---------- ---------- ---------- -------- --------
Total Investment Share Transactions........ 86,717 99,835 148,343 25,146 31,683 (2,726)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets From
Share Transactions............................. 125,942 71,995 114,675 64,102 22,556 (3,656)
- -----------------------------------------------------------------------------------------------------------------------------------
Direct Contribution of Capital (1)................ -- -- -- 607 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets.... 125,947 71,992 114,667 62,935 22,556 (3,658)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period............................ 272,059 200,067 648,021 585,086 101,544 105,202
- -----------------------------------------------------------------------------------------------------------------------------------
End of Period.................................. $ 398,006 $ 272,059 $ 762,688 $ 648,021 $ 124,100 $ 101,544
===================================================================================================================================
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
(1) SEE NOTE 3 OF THE FINANCIAL STATEMENTS.
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
56
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
STEPSTONE FUNDS
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------------------------------------------------------------------------
INTERMEDIATE- LIMITED MATURITY CALIFORNIA
TERM BOND GOVERNMENT TAX-FREE BOND
FUND FUND FUND
------------------------ ------------------------ ------------------------
02/01/95 02/01/94 02/01/95 02/01/94 02/01/95 02/01/94
TO 01/31/96 TO 01/31/95 TO 01/31/96 TO 01/31/95 TO 01/31/96 TO 01/31/95
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Activities:
Net Investment Income............................ $ 7,738 $ 7,277 $ 2,045 $ 1,685 $ 640 $ 1,079
Net Realized Gain (Loss) on Investments.......... 3,766 (5,179) (119) (1,639) (598) (711)
Change in Unrealized Appreciation (Depreciation)
on Investments................................. 8,187 (7,862) 905 (384) 2,004 (2,030)
Change in Unrealized Appreciation on
Foreign Currency............................... -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets Resulting
From Operations................................ 19,691 (5,764) 2,831 (338) 2,046 (1,662)
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Investment Income:
Institutional Class............................ (7,330) (6,835) (2,021) (1,580) (429) (835)
Investment Class............................... (383) (477) (42) (83) (224) (247)
Capital Gains:
Institutional Class............................ -- (168) -- -- -- --
Investment Class............................... -- (11) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions......................... (7,713) (7,491) (2,063) (1,663) (653) (1,082)
- -----------------------------------------------------------------------------------------------------------------------------------
Change in Net Assets............................... 11,978 (13,255) 768 (2,001) 1,393 (2,744)
- -----------------------------------------------------------------------------------------------------------------------------------
Share Transactions:
Institutional Class:
Shares Issued.................................. 42,987 17,791 4,715 10,856 1,685 1,005
Shares Issued in Lieu of Cash Distributions.... 7,227 6,843 2,005 1,550 18 17
Shares Redeemed................................ (38,490) (32,744) (5,203) (11,266) (11,244) (8,205)
-------- -------- -------- -------- -------- -------
Total Institutional Share Transactions...... 11,724 (8,110) 1,517 1,140 (9,541) (7,183)
Investment Class:
Shares Issued.................................. 78 1,196 41 416 337 3,502
Shares Issued in Lieu of Cash Distributions.... 383 488 42 82 224 247
Shares Redeemed................................ (1,297) (3,442) (222) (2,767) (1,626) (1,174)
-------- -------- -------- -------- -------- -------
Total Investment Share Transactions......... (836) (1,758) (139) (2,269) (1,065) 2,575
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets From
Share Transactions............................. 10,888 (9,868) 1,378 (1,129) (10,606) (4,608)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets..... 22,866 (23,123) 2,146 (3,130) (9,213) (7,352)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period............................. 116,493 139,616 34,000 37,130 17,675 25,027
- -----------------------------------------------------------------------------------------------------------------------------------
End of Period................................... $139,359 $116,493 $36,146 $34,000 $ 8,462 $17,675
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Issued and Redeemed:
Institutional Shares:
Issued......................................... 4,225 1,775 491 1,108 178 109
Issued in Lieu of Cash Distributions........... 710 692 209 161 2 2
Redeemed....................................... (3,773) (3,269) (542) (1,165) (1,183) (894)
-------- -------- -------- -------- -------- -------
Total Institutional Share Transactions...... 1,162 (802) 158 104 (1,003) (783)
Investment Shares:
Issued......................................... 7 117 4 41 35 368
Issued in Lieu of Cash Distributions........... 38 49 4 9 24 27
Redeemed....................................... (128) (347) (23) (285) (171) (131)
-------- -------- -------- -------- -------- -------
Total Investment Share Transactions......... (83) (181) (15) (253) (112) 264
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Share Transactions...... 1,079 (983) 143 (131) (1,115) (519)
===================================================================================================================================
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
57
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
STEPSTONE FUNDS
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------------------------------------------------------------------------
CONVERTIBLE SECURITIES GOVERNMENT SECURITIES BALANCED
FUND FUND FUND
------------------------ ------------------------ ------------------------
02/01/95 02/01/94 02/01/95 02/01/94 02/01/95 02/01/94
TO 01/31/96 TO 01/31/95 TO 01/31/96 TO 01/31/95 TO 01/31/96 TO 01/31/95
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Activities:
Net Investment Income............................ $ 532 $ 287 $ 2,188 $ 1,592 $ 6,604 $ 5,777
Net Realized Gain (Loss) on Investments.......... (14) (44) 1,661 (2,044) 6,254 569
Net Realized Gain (Loss ) on Option Contracts.... 1 -- -- -- 104 --
Net Realized Gain on Foreign Currency
Transactions................................... -- -- -- -- -- --
Change in Unrealized Appreciation (Depreciation)
on Investments................................. 1,682 (573) 1,677 (551) 38,493 (10,690)
Change in Unrealized Appreciation on Foreign
Currency....................................... -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets Resulting
From Operations................................ 2,201 (330) 5,526 (1,003) 51,455 (4,344)
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Investment Income:
Institutional Class............................ (522) (275) (2,167) (1,535) (6,372) (5,505)
Investment Class............................... -- -- -- -- (235) (259)
Capital Gains:
Institutional Class............................ -- -- -- -- (5,794) (49)
Investment Class............................... -- -- -- -- (213) (2)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions.......................... (522) (275) (2,167) (1,535) (12,614) (5,815)
- -----------------------------------------------------------------------------------------------------------------------------------
Change in Net Assets............................... 1,679 (605) 3,359 (2,538) 38,841 (10,159)
- -----------------------------------------------------------------------------------------------------------------------------------
Share Transactions:
Institutional Class:
Shares Issued.................................. 7,325 12,990 26,500 41,604 66,771 60,233
Shares Issued in Lieu of Cash Distributions.... 522 275 2,167 1,535 12,136 5,545
Shares Redeemed................................ (3,155) (2,363) (17,479) (8,423) (49,861) (40,859)
-------- -------- -------- -------- -------- --------
Total Institutional Share Transactions....... 4,692 10,902 11,188 34,716 29,046 24,919
Investment Class:
Shares Issued.................................. -- -- -- -- 495 1,527
Shares Issued in Lieu of Cash Distributions.... -- -- -- -- 448 262
Shares Redeemed................................ -- -- -- -- (1,092) (1,468)
-------- -------- -------- -------- -------- --------
Total Investment Share Transactions.......... -- -- -- -- (149) 321
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets From
Share Transactions............................. 4,692 10,902 11,188 34,716 28,897 25,240
- -----------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets...... 6,371 10,297 14,547 32,178 67,738 15,081
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period.............................. 10,297 -- 32,178 -- 174,562 159,481
- -----------------------------------------------------------------------------------------------------------------------------------
End of Period.................................... $16,668 $10,297 $46,725 $32,178 $242,300 $174,562
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Issued and Redeemed:
Institutional Shares:
Issued......................................... 728 1,358 2,753 4,306 5,157 5,240
Issued in Lieu of Cash Distributions........... 53 29 228 168 921 483
Redeemed....................................... (317) (254) (1,829) (925) (3,894) (3,564)
-------- -------- -------- -------- -------- --------
Total Institutional Share Transactions....... 464 1,133 1,152 3,549 2,184 2,159
Investment Shares:
Issued......................................... -- -- -- -- 37 131
Issued in Lieu of Cash Distributions........... -- -- -- -- 34 23
Redeemed....................................... -- -- -- -- (88) (128)
-------- -------- -------- -------- -------- --------
Total Investment Share Transactions.......... -- -- -- -- (17) 26
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase in Share Transactions................. 464 1,133 1,152 3,549 2,167 2,185
===================================================================================================================================
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
(1) COMMENCED OPERATIONS ON FEBRUARY 1, 1995.
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
58
<PAGE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
------------------------------------------------------
GROWTH EQUITY VALUE MOMENTUM
FUND FUND
------------------------ ------------------------
02/01/95 02/01/94 02/01/95 02/01/94
TO 01/31/96 TO 01/31/95 TO 01/31/96 TO 01/31/95
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Activities:
Net Investment Income........................................... $ 1,107 $ 957 $ 4,019 $ 3,633
Net Realized Gain (Loss) on Investments......................... 11,047 (1,230) 9,006 1,742
Net Realized Gain (Loss) on Option Contracts.................... 182 23 -- --
Net Realized Gain on Foreign Currency Transactions.............. -- -- -- --
Change in Unrealized Appreciation (Depreciation) on Investments. 32,685 (7,247) 52,751 (10,607)
Change in Unrealized Appreciation on Foreign Currency........... -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets Resulting From Operations....... 45,021 (7,497) 65,776 (5,232)
- -------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Investment Income:
Institutional Class........................................... (1,121) (901) (3,872) (3,373)
Investment Class.............................................. (11) (9) (209) (231)
Capital Gains:
Institutional Class........................................... (9,394) (1,753) (4,808) (584)
Investment Class.............................................. (102) (19) (258) (39)
- -------------------------------------------------------------------------------------------------------------------------
Total Distributions......................................... (10,628) (2,682) (9,147) (4,227)
- -------------------------------------------------------------------------------------------------------------------------
Change in Net Assets.............................................. 34,393 (10,179) 56,629 (9,459)
- -------------------------------------------------------------------------------------------------------------------------
Share Transactions:
Institutional Class:
Shares Issued................................................. 33,917 32,462 44,290 37,157
Shares Issued in Lieu of Cash Distributions................... 10,453 2,638 8,517 3,881
Shares Redeemed............................................... (36,487) (31,007) (34,471) (22,646)
-------- -------- -------- --------
Total Institutional Share Transactions...................... 7,883 4,093 18,336 18,392
Investment Class:
Shares Issued................................................. 683 410 875 2,309
Shares Issued in Lieu of Cash Distributions................... 113 28 467 270
Shares Redeemed............................................... (227) (166) (2,356) (1,552)
-------- -------- -------- --------
Total Investment Share Transactions......................... 569 272 (1,014) 1,027
- -------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets From Share Transactions................ 8,452 4,365 17,322 19,419
- -------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets..................... 42,845 (5,814) 73,951 9,960
- -------------------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period............................................. 138,090 143,904 159,915 149,955
- -------------------------------------------------------------------------------------------------------------------------
End of Period................................................... $180,935 $138,090 $233,866 $159,915
- -------------------------------------------------------------------------------------------------------------------------
Shares Issued and Redeemed:
Institutional Shares:
Issued........................................................ 2,017 2,284 2,744 2,746
Issued in Lieu of Cash Distributions.......................... 617 187 515 289
Redeemed...................................................... (2,167) (2,212) (2,161) (1,683)
-------- -------- -------- --------
Total Institutional Share Transactions...................... 467 259 1,098 1,352
Investment Shares:
Issued........................................................ 39 28 53 170
Issued in Lieu of Cash Distributions.......................... 7 2 28 20
Redeemed...................................................... (13) (11) (157) (115)
-------- -------- -------- --------
Total Investment Share Transactions..................... 33 19 (76) 75
- -------------------------------------------------------------------------------------------------------------------------
Net Increase in Share Transactions................................ 500 278 1,022 1,427
=========================================================================================================================
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
(1) COMMENCED OPERATIONS ON FEBRUARY 1, 1995.
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL
BLUE CHIP GROWTH EMERGING GROWTH EQUITY
FUND FUND FUND
------------------------ ------------------------ ------------
02/01/95 02/01/94 02/01/95 02/01/94 02/01/95(1)
TO 01/31/96 TO 01/31/95 TO 01/31/96 TO 01/31/95 TO 01/31/96
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment Activities:
Net Investment Income........................................... $ 743 $ 561 $ 70 $ 164 $ 519
Net Realized Gain (Loss) on Investments......................... 3,514 (1,859) 1020 469 167
Net Realized Gain (Loss) on Option Contracts.................... (379) 140 (107) 67 --
Net Realized Gain on Foreign Currency Transactions.............. -- -- -- -- 179
Change in Unrealized Appreciation (Depreciation) on Investments. 10,866 882 7,122 (1,091) 4,287
Change in Unrealized Appreciation on Foreign Currency........... -- -- -- -- 89
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets Resulting From Operations....... 14,744 (276) 8,105 (391) 5,241
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Investment Income:
Institutional Class........................................... (762) (526) (88) (147) (517)
Investment Class.............................................. -- -- -- -- --
Capital Gains:
Institutional Class........................................... (925) -- (867) (108) (122)
Investment Class.............................................. -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions......................................... (1,687) (526) (955) (255) (639)
- -----------------------------------------------------------------------------------------------------------------------------------
Change in Net Assets.............................................. 13,057 (802) 7,150 (646) 4,602
- -----------------------------------------------------------------------------------------------------------------------------------
Share Transactions:
Institutional Class:
Shares Issued................................................. 20,422 44,610 17,160 28,965 44,605
Shares Issued in Lieu of Cash Distributions................... 1,687 526 955 255 639
Shares Redeemed............................................... (10,075) (6,015) (7,423) (4,646) (5,658)
------- -------- ------- ------- -------
Total Institutional Share Transactions...................... 12,034 39,121 10,692 24,574 39,586
Investment Class:
Shares Issued................................................. -- -- -- -- --
Shares Issued in Lieu of Cash Distributions................... -- -- -- -- --
Shares Redeemed............................................... -- -- -- -- --
------- -------- ------- ------- -------
Total Investment Share Transactions......................... -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets From Share Transactions................ 12,034 39,121 10,692 24,574 39,586
- -----------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets..................... 25,091 38,319 17,842 23,928 44,188
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period............................................. 38,319 -- 23,928 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
End of Period................................................... $63,410 $38,319 $41,770 $23,928 $44,188
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Issued and Redeemed:
Institutional Shares:
Issued........................................................ 1,769 4,605 1,579 3,007 1,320
Issued in Lieu of Cash Distributions.......................... 145 56 84 27 18
Redeemed...................................................... (917) (639) (704) (495) (159)
------- -------- ------- ------- -------
Total Institutional Share Transactions...................... 997 4,022 959 2,539 1,179
Investment Shares:
Issued........................................................ -- -- -- -- --
Issued in Lieu of Cash Distributions.......................... -- -- -- -- --
Redeemed...................................................... -- -- -- -- --
------- -------- ------- ------- -------
Total Investment Share Transactions..................... -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase in Share Transactions................................ 997 4,022 959 2,539 1,179
===================================================================================================================================
</TABLE>
59
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
STEPSTONE FUNDS
For a Share Outstanding Throughout the Period or Year
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES DISTRIBUTIONS
NET -------------------------- ------------------- NET
ASSET NET REALIZED ASSET
VALUE, NET AND UNREALIZED NET CONTRIBUTION VALUE,
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL OF END OF
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS CAPITAL PERIOD
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------
TREASURY MONEY MARKET FUND
- --------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 1.00 0.054 -- (0.054) -- -- 1.00
1995 1.00 0.039 -- (0.039) -- -- 1.00
1994 1.00 0.027 -- (0.027) -- -- 1.00
1993 (1) 1.00 0.005 -- (0.005) -- -- 1.00
INVESTMENT CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 1.00 0.051 -- (0.051) -- -- 1.00
1995 1.00 0.036 -- (0.036) -- -- 1.00
1994 (2) 1.00 0.022 -- (0.022) -- -- 1.00
- -----------------
MONEY MARKET FUND
- -----------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 1.00 0.054 -- (0.054) -- -- 1.00
1995 1.00 0.039 (0.001) (0.039) -- 0.001 1.00
1994 1.00 0.029 -- (0.029) -- -- 1.00
1993 1.00 0.035 -- (0.035) -- -- 1.00
1992 (3) 1.00 0.057 -- (0.057) -- -- 1.00
INVESTMENT CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 1.00 0.052 -- (0.052) -- -- 1.00
1995 1.00 0.037 -- (0.037) -- -- 1.00
1994 1.00 0.027 -- (0.027) -- -- 1.00
1993 1.00 0.033 -- (0.033) -- -- 1.00
1992 (4) 1.00 0.036 -- (0.036) -- -- 1.00
</TABLE>
<TABLE>
<CAPTION>
RATIO OF
RATIO NET INVESTMENT
NET OF EXPENSES RATIO OF INCOME TO
ASSETS, RATIO OF TO AVERAGE NET INVESTMENT AVERAGE
END OF EXPENSES NET ASSETS INCOME NET ASSETS
TOTAL PERIOD TO AVERAGE EXCLUDING TO AVERAGE EXCLUDING
RETURN (000) NET ASSETS FEE WAIVERS NET ASSETS FEE WAIVERS
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- --------------------------
TREASURY MONEY MARKET FUND
- --------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 5.52% 182,286 0.45% 0.50% 5.37% 5.32%
1995 3.97% 143,035 0.44% 0.51% 3.85% 3.78%
1994 2.75% 170,879 0.45% 0.55% 2.72% 2.62%
1993 (1) 2.90%* 125,673 0.45%* 0.55%* 2.81%* 2.71%*
INVESTMENT CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 5.26% 215,720 0.70% 0.90% 5.10% 4.90%
1995 3.71% 129,024 0.69% 0.90% 4.04% 3.83%
1994 (2) 2.51%* 29,188 0.71%* 0.96%* 2.45%* 2.20%*
- -----------------
MONEY MARKET FUND
- -----------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 5.57% 503,080 0.50% 0.50% 5.43% 5.43%
1995 3.99% 536,754 0.50% 0.50% 3.93% 3.93%
1994 2.99% 498,795 0.49% 0.49% 2.93% 2.93%
1993 3.61% 521,664 0.46% 0.46% 3.47% 3.47%
1992 (3) 5.86% 240,341 0.48% 0.51% 5.68% 5.65%
INVESTMENT CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 5.31% 259,608 0.75% 0.90% 5.16% 5.01%
1995 3.78% 111,267 0.70% 0.90% 3.79% 3.59%
1994 2.77% 86,291 0.70% 0.89% 2.71% 2.52%
1993 3.36% 79,253 0.69% 0.86% 3.41% 3.24%
1992 (4) 4.74%* 144,086 0.67%* 0.70%* 4.95%* 4.92%*
<FN>
* ANNUALIZED.
(1) COMMENCED OPERATIONS ON DECEMBER 1, 1992.
(2) COMMENCED OPERATIONS ON MARCH 5, 1993.
(3) COMMENCED OPERATIONS ON FEBRUARY 1, 1991.
(4) COMMENCED OPERATIONS ON MAY 28, 1991.
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
60
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES DISTRIBUTIONS
--------------------- -------------------
NET
REALIZED
NET AND NET
ASSET UNREALIZED ASSET
VALUE, NET GAIN NET VALUE,
BEGINNING INVESTMENT (LOSS) ON INVESTMENT CAPITAL END OF TOTAL
OF PERIOD INCOME INVESTMENTS INCOME GAINS PERIOD RETURN
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------
CALIFORNIA TAX-FREE MONEY MARKET FUND
- -------------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 1.00 0.034 -- (0.034) -- 1.00 3.48%
1995 1.00 0.026 -- (0.026) -- 1.00 2.67%
1994 1.00 0.021 -- (0.021) -- 1.00 2.13%
1993 1.00 0.025 -- (0.025) -- 1.00 2.61%
1992 (5) 1.00 0.025 -- (0.025) -- 1.00 3.75%*
INVESTMENT CLASS(**)
FOR THE YEARS ENDED JANUARY 31,:
1996 1.00 0.031 -- (0.031) -- 1.00 3.14%
1995 1.00 0.023 -- (0.023) -- 1.00 2.33%
1994 1.00 0.018 -- (0.018) -- 1.00 1.80%
1993 1.00 0.022 -- (0.022) -- 1.00 2.27%
1992 (6) 1.00 0.021 -- (0.021) -- 1.00 3.24%*
- ---------------------------
INTERMEDIATE-TERM BOND FUND
- ---------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 9.67 0.609 0.951 (0.609) -- 10.62 16.58%
1995 10.72 0.589 (1.034) (0.590) (0.015) 9.67 (4.11%)
1994 10.57 0.598 0.352 (0.595) (0.205) 10.72 9.22%
1993 10.49 0.650 0.409 (0.636) (0.343) 10.57 10.47%
1992 (3) 10.00 0.750 0.603 (0.745) (0.118) 10.49 14.05%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 9.67 0.609 0.940 (0.609) -- 10.61 16.48%
1995 10.72 0.589 (1.034) (0.590) (0.015) 9.67 (4.11%)
1994 10.57 0.615 0.335 (0.595) (0.205) 10.72 9.23%
1993 (11) 10.49 0.609 0.450 (0.636) (0.343) 10.57 10.59%*
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
RATIO
OF NET
INVESTMENT
RATIO INCOME TO
RATIO OF RATIO OF NET AVERAGE
NET EXPENSES OF EXPENSES INVESTMENT NET
ASSETS, TO TO AVERAGE INCOME TO ASSETS
END OF AVERAGE NET ASSETS AVERAGE EXCLUDING PORTFOLIO
PERIOD NET EXCLUDING NET FEE TURNOVER
(000) ASSETS FEE WAIVERS ASSETS WAIVERS RATE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------
CALIFORNIA TAX-FREE MONEY MARKET FUND
- -------------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 42,923 0.28% 0.49% 3.43% 3.22% --
1995 52,050 0.29% 0.50% 2.66% 2.45% --
1994 52,982 0.30% 0.54% 2.09% 1.85% --
1993 45,521 0.30% 0.54% 2.53% 2.29% --
1992 (5) 30,567 0.30%* 0.57%* 3.82%* 3.55%* --
INVESTMENT CLASS(**)
FOR THE YEARS ENDED JANUARY 31,:
1996 81,177 0.61% 0.88% 3.09% 2.82% --
1995 49,494 0.62% 0.90% 2.33% 2.05% --
1994 52,220 0.63% 0.94% 1.76% 1.45% --
1993 8,542 0.63% 0.94% 2.21% 1.90% --
1992 (6) 8,246 0.61%* 0.88%* 3.44%* 3.17%* --
- ---------------------------
INTERMEDIATE-TERM BOND FUND
- ---------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 132,942 0.68% 0.68% 5.97% 5.97% 147%
1995 109,848 0.71% 0.71% 5.89% 5.89% 95%
1994 130,308 0.69% 0.69% 5.56% 5.56% 72%
1993 112,806 0.67% 0.67% 6.16% 6.16% 88%
1992 (3) 76,779 0.72% 0.75% 7.37% 7.34% 126%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 6,417 0.68% 1.09% 5.99% 5.58% 147%
1995 6,645 0.71% 1.11% 5.87% 5.47% 95%
1994 9,308 0.69% 1.09% 5.51% 5.11% 72%
1993 (11) 2,897 0.65%* 1.05%* 6.01%* 5.61%* 88%
<FN>
* ANNUALIZED.
** TOTAL RETURN DOES NOT REFLECT THE SALES CHARGE.
(3) COMMENCED OPERATIONS ON FEBRUARY 1, 1991.
(5) COMMENCED OPERATIONS ON JUNE 10, 1991.
(6) COMMENCED OPERATIONS ON JUNE 25, 1991.
(11) COMMENCED OPERATIONS ON FEBRUARY 3, 1992.
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
61
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
STEPSTONE FUNDS
For a Share Outstanding Throughout the Period or Year
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES DISTRIBUTIONS
--------------------- -------------------
NET
REALIZED
NET AND NET
ASSET UNREALIZED ASSET
VALUE, NET GAIN NET VALUE,
BEGINNING INVESTMENT (LOSS) ON INVESTMENT CAPITAL END OF TOTAL
OF PERIOD INCOME INVESTMENTS INCOME GAINS PERIOD RETURN
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------
LIMITED MATURITY GOVERNMENT FUND
- --------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 9.49 0.556 0.216 (0.561) -- 9.70 8.34%
1995 10.00 0.441 (0.517) (0.434) -- 9.49 (0.73%)
1994 (12) 10.00 0.253 0.004 (0.257) -- 10.00 3.56%*
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 9.50 0.562 0.208 (0.561) -- 9.71 8.33%
1995 10.01 0.454 (0.530) (0.434) -- 9.50 (0.73%)
1994 (13) 9.98 0.163 0.018 (0.151) -- 10.01 4.04%*
- -----------------------------
CALIFORNIA TAX-FREE BOND FUND
- -----------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 8.95 0.518 0.873 (0.487) -- 9.85 15.83%
1995 10.04 0.460 (1.098) (0.452) -- 8.95 (6.33%)
1994 (14) 10.00 0.117 0.028 (0.105) -- 10.04 5.01%*
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 8.94 0.470 0.918 (0.487) -- 9.84 15.84%
1995 10.03 0.439 (1.077) (0.452) -- 8.94 (6.33%)
1994 (14) 10.00 0.115 0.020 (0.105) -- 10.03 4.67%*
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
RATIO
OF NET
INVESTMENT
RATIO INCOME TO
RATIO OF RATIO OF NET AVERAGE
NET EXPENSES OF EXPENSES INVESTMENT NET
ASSETS, TO TO AVERAGE INCOME TO ASSETS
END OF AVERAGE NET ASSETS AVERAGE EXCLUDING PORTFOLIO
PERIOD NET EXCLUDING NET FEE TURNOVER
(000) ASSETS FEE WAIVERS ASSETS WAIVERS RATE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------
LIMITED MATURITY GOVERNMENT FUND
- --------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 35,518 0.53% 0.53% 5.80% 5.80% 186%
1995 33,249 0.55% 0.55% 4.54% 4.54% 166%
1994 (12) 33,982 0.58%* 0.58%* 3.49%* 3.49%* 77%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 628 0.53% 0.93% 5.80% 5.40% 186%
1995 751 0.51% 0.91% 4.36% 3.96% 166%
1994 (13) 3,148 0.75%* 1.15%* 3.41%* 3.01%* 77%
- -----------------------------
CALIFORNIA TAX-FREE BOND FUND
- -----------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 4,196 0.24% 0.71% 4.97% 4.50% 30%
1995 12,793 0.50% 0.72% 4.84% 4.62% 22%
1994 (14) 22,197 0.50%* 0.73%* 4.31%* 4.08% 19%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 4,266 0.23% 1.12% 4.93% 4.04% 30%
1995 4,882 0.50% 1.12% 4.92% 4.30% 22%
1994 (14) 2,830 0.50%* 1.13%* 4.26%* 3.63%* 19%
<FN>
* ANNUALIZED.
** TOTAL RETURN DOES NOT REFLECT THE SALES CHARGE.
(12) COMMENCED OPERATIONS ON MAY 7, 1993.
(13) COMMENCED OPERATIONS ON AUGUST 18, 1993.
(14) COMMENCED OPERATIONS ON OCTOBER 15, 1993.
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
62
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES DISTRIBUTIONS
--------------------- -------------------
NET
REALIZED
NET AND NET
ASSET UNREALIZED ASSET
VALUE, NET GAIN NET VALUE,
BEGINNING INVESTMENT (LOSS) ON INVESTMENT CAPITAL END OF TOTAL
OF PERIOD INCOME INVESTMENTS INCOME GAINS PERIOD RETURN
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------
CONVERTIBLE SECURITIES FUND
- ---------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 9.08 0.407 1.350 (0.404) -- 10.43 19.67%
1995 (9) 10.00 0.354 (0.930) (0.343) -- 9.08 (5.83%)
- --------------------------
GOVERNMENT SECURITIES FUND
- --------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 9.07 0.556 0.870 (0.556) -- 9.94 16.16%
1995 (9) 10.00 0.491 (0.950) (0.475) -- 9.07 (4.49%)
- -------------
BALANCED FUND
- -------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 11.45 0.415 2.831 (0.417) (0.362) 13.92 28.93%
1995 12.21 0.390 (0.756) (0.391) (0.003) 11.45 (2.95%)
1994 11.50 0.394 0.928 (0.391) (0.221) 12.21 11.79%
1993 11.15 0.413 0.543 (0.408) (0.198) 11.50 8.86%
1992 (3) 10.00 0.471 1.250 (0.465) (0.106) 11.15 17.69%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 11.45 0.406 2.825 (0.406) (0.362) 13.91 28.73%
1995 12.21 0.393 (0.758) (0.392) (0.003) 11.45 (2.95%)
1994 11.50 0.397 0.925 (0.391) (0.221) 12.21 11.79%
1993 (10) 11.30 0.092 0.404 (0.098) (0.198) 11.50 4.45%*
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
RATIO
OF NET
INVESTMENT
RATIO INCOME TO
RATIO OF RATIO OF NET AVERAGE
NET EXPENSES OF EXPENSES INVESTMENT NET
ASSETS, TO TO AVERAGE INCOME TO ASSETS
END OF AVERAGE NET ASSETS AVERAGE EXCLUDING PORTFOLIO
PERIOD NET EXCLUDING NET FEE TURNOVER
(000) ASSETS FEE WAIVERS ASSETS WAIVERS RATE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------
CONVERTIBLE SECURITIES FUND
- ---------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 16,668 0.85% 0.85% 4.14% 4.14% 46%
1995 (9) 10,297 0.85% 0.85% 3.87% 3.87% 36%
- --------------------------
GOVERNMENT SECURITIES FUND
- --------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 46,725 0.75% 0.75% 5.89% 5.89% 239%
1995 (9) 32,178 0.75% 0.75% 5.46% 5.46% 184%
- -------------
BALANCED FUND
- -------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 233,878 0.80% 0.80% 3.20% 3.20% 26%
1995 167,434 0.80% 0.80% 3.41% 3.41% 48%
1994 152,189 0.69% 0.79% 3.35% 3.25% 49%
1993 100,474 0.69% 0.79% 3.72% 3.62% 68%
1992 (3) 67,098 0.78% 0.91% 4.44% 4.31% 56%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 8,422 0.89% 1.20% 3.12% 2.81% 26%
1995 7,128 0.79% 1.19% 3.41% 3.01% 48%
1994 7,292 0.69% 1.19% 3.26% 2.76% 49%
1993 (10) 425 0.60%* 1.10%* 3.20%* 2.70%* 68%
<FN>
* ANNUALIZED.
** TOTAL RETURN DOES NOT REFLECT THE SALES CHARGE.
(3) COMMENCED OPERATIONS ON FEBRUARY 1, 1991.
(9) COMMENCED OPERATIONS ON FEBRUARY 1, 1994.
(10) COMMENCED OPERATIONS ON NOVEMBER 13, 1992.
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
63
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
STEPSTONE FUNDS
For a Share Outstanding Throughout the Period or Year
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES DISTRIBUTIONS
--------------------- -------------------
NET
REALIZED
NET AND NET
ASSET UNREALIZED ASSET
VALUE, NET GAIN NET VALUE,
BEGINNING INVESTMENT (LOSS) ON INVESTMENT CAPITAL END OF TOTAL
OF PERIOD INCOME INVESTMENTS INCOME GAINS PERIOD RETURN
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------
GROWTH EQUITY FUND
- ------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 14.13 0.115 4.483 (0.118) (0.993) 17.62 32.93%
1995 15.16 0.097 (0.854) (0.092) (0.181) 14.13 (4.98%)
1994 13.79 0.066 1.370 (0.066) -- 15.16 10.48%
1993 12.69 0.091 1.101 (0.092) -- 13.79 9.48%
1992 (3) 10.00 0.103 2.703 (0.102) (0.014) 12.69 28.28%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 14.13 0.101 4.480 (0.109) (0.993) 17.61 32.79%
1995 15.19 0.097 (0.884) (0.092) (0.181) 14.13 (5.17%)
1994 13.80 0.064 1.392 (0.066) -- 15.19 10.61%
1993 12.69 0.099 1.103 (0.092) -- 13.80 9.56%
1992 (7) 11.76 0.019 0.948 (0.023) (0.014) 12.69 39.11%*
- -------------------
VALUE MOMENTUM FUND
- -------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 13.40 0.331 5.063 (0.337) (0.408) 18.05 40.88%
1995 14.27 0.318 (0.817) (0.317) (0.054) 13.40 (3.48%)
1994 12.76 0.292 1.538 (0.290) (0.030) 14.27 14.56%
1993 11.68 0.310 1.103 (0.311) (0.022) 12.76 12.33%
1992 (3) 10.00 0.312 1.694 (0.302) (0.024) 11.68 20.27%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 13.40 0.320 5.060 (0.323) (0.408) 18.05 40.77%
1995 14.27 0.321 (0.820) (0.317) (0.054) 13.40 (3.48%)
1994 12.75 0.297 1.543 (0.290) (0.030) 14.27 14.65%
1993 (8) 11.52 0.246 1.257 (0.251) (0.022) 12.75 15.97%*
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
RATIO
OF NET
INVESTMENT
RATIO INCOME TO
RATIO OF RATIO OF NET AVERAGE
NET EXPENSES OF EXPENSES INVESTMENT NET
ASSETS, TO TO AVERAGE INCOME TO ASSETS
END OF AVERAGE NET ASSETS AVERAGE EXCLUDING PORTFOLIO
PERIOD NET EXCLUDING NET FEE TURNOVER
(000) ASSETS FEE WAIVERS ASSETS WAIVERS RATE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ------------------
GROWTH EQUITY FUND
- ------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 178,590 0.80% 0.80% 0.68% 0.68% 24%
1995 136,668 0.78% 0.78% 0.69% 0.69% 22%
1994 142,661 0.77% 0.79% 0.48% 0.46% 45%
1993 122,529 0.68% 0.78% 0.74% 0.64% 23%
1992 (3) 93,260 0.72% 0.85% 0.90% 0.77% 26%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 2,345 0.89% 1.19% 0.60% 0.30% 24%
1995 1,422 0.78% 1.17% 0.69% 0.30% 22%
1994 1,243 0.77% 1.18% 0.48% 0.07% 45%
1993 43 0.67% 1.17% 0.69% 0.19% 23%
1992 (7) 13 0.83%* 0.96%* 0.79%* 0.66%* 26%
- -------------------
VALUE MOMENTUM FUND
- -------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 222,065 0.80% 0.80% 2.07% 2.07% 20%
1995 150,138 0.81% 0.81% 2.36% 2.36% 6%
1994 140,609 0.77% 0.79% 2.19% 2.17% 5%
1993 92,636 0.68% 0.78% 2.59% 2.49% 3%
1992 (3) 51,682 0.78% 0.91% 2.88% 2.75% 5%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1996 11,801 0.89% 1.20% 2.00% 1.69% 20%
1995 9,777 0.81% 1.21% 2.37% 1.97% 6%
1994 9,346 0.77% 1.20% 2.12% 1.69% 5%
1993 (8) 3,162 0.65%* 1.15%* 2.53%* 2.03%* 3%
<FN>
* ANNUALIZED.
** TOTAL RETURN DOES NOT REFLECT THE SALES CHARGE.
(3) COMMENCED OPERATIONS ON FEBRUARY 1, 1991.
(7) COMMENCED OPERATIONS ON NOVEMBER 14, 1991.
(8) COMMENCED OPERATIONS ON APRIL 2, 1992.
</FN>
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
64
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES DISTRIBUTIONS
--------------------- -------------------
NET
REALIZED
NET AND NET
ASSET UNREALIZED ASSET
VALUE, NET GAIN NET VALUE,
BEGINNING INVESTMENT (LOSS) ON INVESTMENT CAPITAL END OF TOTAL
OF PERIOD INCOME INVESTMENTS INCOME GAINS PERIOD RETURN
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------
BLUE CHIP GROWTH FUND
- ---------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 9.53 0.174 3.311 (0.180) (0.203) 12.63 36.95%
1995 (9) 10.00 0.167 (0.479) (0.158) -- 9.53 (3.10%)
- --------------------
EMERGING GROWTH FUND
- --------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 9.42 0.026 2.807 (0.033) (0.277) 11.94 30.24%
1995 (9) 10.00 0.086 (0.535) (0.080) (0.051) 9.42 (4.48%)
- -------------------------
INTERNATIONAL EQUITY FUND
- -------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 (15) 33.51 0.447 4.084 (0.446) (0.105) 37.49 13.56%
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
RATIO
OF NET
INVESTMENT
RATIO INCOME TO
RATIO OF RATIO OF NET AVERAGE
NET EXPENSES OF EXPENSES INVESTMENT NET
ASSETS, TO TO AVERAGE INCOME TO ASSETS
END OF AVERAGE NET ASSETS AVERAGE EXCLUDING PORTFOLIO
PERIOD NET EXCLUDING NET FEE TURNOVER
(000) ASSETS FEE WAIVERS ASSETS WAIVERS RATE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ---------------------
BLUE CHIP GROWTH FUND
- ---------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 63,410 0.83% 0.83% 1.54% 1.54% 69%
1995 (9) 39,319 0.85% 0.85% 1.84% 1.84% 89%
- --------------------
EMERGING GROWTH FUND
- --------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 41,770 1.05% 1.05% 0.22% 0.22% 131%
1995 (9) 23,928 1.05% 1.05% 1.01% 1.01% 123%
- -------------------------
INTERNATIONAL EQUITY FUND
- -------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1996 (15) 44,188 1.16% 1.36% 1.31% 1.11% 21%
<FN>
(9) Commenced operations on February 1, 1994.
(15) Commenced operations on February 1, 1995.
</FN>
</TABLE>
65
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
STEPSTONE FUNDS
1. Organization
Stepstone Funds (the "Trust" or the "Fund") was organized as a Massachusetts
business trust under a Declaration of Trust dated October 16, 1990.
The Trust is registered under the Investment Company Act of 1940, as amended,
as a diversified open-end investment company with fourteen funds: the Treasury
Money Market Fund, the Money Market Fund and the California Tax-Free Money
Market Fund (the "Money Market Funds") and the Intermediate-Term Bond Fund, the
Limited Maturity Government Fund, the California Tax-Free Bond Fund, the
Convertible Securities Fund, the Government Securities Fund, the Balanced Fund,
the Growth Equity Fund, the Value Momentum Fund, the Blue Chip Growth Fund, the
Emerging Growth Fund, and the International Equity Fund (the "Non-Money Market
Funds"). The Trust is registered to offer two classes of shares, Institutional
and Investment. The Funds' prospectus provides a description of each fund's
investment objectives, policies and strategies.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the
Trust.
SECURITY VALUATION -- Investment securities held by the Money Market Funds
are stated at amortized cost, which approximates market value. Under this
valuation method, purchase discounts and premiums are accreted and
amortized ratably to maturity and are included in interest income.
Investments in equity securities held by the Non-Money Market Funds which
are traded on a national securities exchange (or reported on the NASDAQ
national market system) are stated at the last quoted sales price if
readily available for such equity securities on each business day; other
equity securities traded in the over-the-counter market and listed equity
securities for which no sale was reported on that date are stated at the
last quoted bid price. Option contracts are valued at the last quoted bid
price as quoted on the primary exchange or board of trade which such option
contracts are traded. Debt obligations exceeding sixty days to maturity for
which market quotations are readily available are valued at the most
recently quoted bid price. Debt obligations with sixty days or less
remaining until maturity may be valued at their amortized cost. Restricted
securities for which quotations are not readily available are valued at
fair value using methods determined in good faith under general Trustee
supervision.
FOREIGN CURRENCY TRANSLATION -- The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into
U.S. dollars on the following basis: (I) market value of investment
securities, other assets and liabilities at the current rate of exchange;
and (II) purchases and sales of investment securities, income and
expenses at the relevant rates of exchange prevailing on the respective
dates of such transactions.
The Fund does not isolate that portion of gains and losses on investments
in securities which is due to changes in the foreign exchange rates from
that which is due to changes in market prices of such securities.
The Fund reports gains and losses on foreign currency related transactions
as realized and unrealized gains and losses for financial reporting
purposes, whereas such gains and losses are treated as ordinary income or
loss for U.S. Federal income tax purposes.
FEDERAL INCOME TAXES -- It is each Fund's intention to continue to qualify
as a regulated investment company for Federal income tax purposes and
distribute all of its taxable income and net capital gains. Accordingly,
no provision for Federal income taxes is required.
The International Equity Fund may be subject to taxes imposed by countries
in which it invests with respect to its investments in issuers existing or
operating in such countries. Such taxes are generally based on either
income earned or repatriated. The International Equity Fund accrues such
taxes when the related income is earned.
66
<PAGE>
JANUARY 31, 1996
- -------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE -- The net asset value per share is calculated on
each business day for each Fund. In general, it is computed by dividing the
assets of each Fund, less its liabilities, by the number of outstanding
shares of each Fund.
DISCOUNTS AND PREMIUMS -- Discounts and premiums are accreted or amortized
over the life of each security and are recorded as interest income for
each of the Funds using a method which approximates the effective interest
method.
CLASSES -- Class specific expenses are borne by that class. Income,
non-class specific expenses and realized/unrealized gains and losses are
allocated to the respective classes on the basis of the relative daily net
assets.
REPURCHASE AGREEMENTS -- Securities pledged as collateral for Repurchase
Agreements are held by the custodian bank until the respective agreements
mature. Provisions of repurchase agreements and procedures adopted by the
Adviser ensure that the market value of the collateral is sufficient in
the event of default by the counterparty. If the counterparty defaults and
the value of the collateral declines or if the counterparty enters an
insolvency proceeding, realization of the collateral by the fund may be
delayed or limited.
OPTIONS TRANSACTIONS -- In order to produce incremental earnings, protect
gains, and facilitate buying and selling of securities for investment
purposes, the Growth Equity Fund, the Value Momentum Fund, the Blue Chip
Growth Fund, the Emerging Growth Fund, the Balanced and International
Equity Fund may write covered call options. A risk in writing a call
option is that the fund gives up the opportunity of profit if the market
price of the underlying security increases.
The Fund realizes a gain upon the expiration of a written call option.
When a written call option is closed prior to expiration by being
exercised, the proceeds on the sale are increased by the amount of original
premium received.
The Blue Chip Growth Fund, Emerging Growth Fund, the Balanced Fund and
International Equity may purchase options with respect to securities that
are permitted investments. The risk in purchasing options is limited to
the premium paid.
The Fund recognizes a gain when the underlying securities' market price
rises (in case of a call) or falls (in case of a put) to the extent
sufficient to cover the option premium and transaction costs.
SECURITY TRANSACTIONS AND INVESTMENT INCOME -- Security transactions are
accounted for on the date the security is purchased or sold (trade date).
Costs used in determining realized gains and losses on the sale of
investment securities are those of the specific securities sold adjusted
for the accretion and amortization of purchase discounts and premiums
during the respective holding periods. Interest income is recorded on the
accrual basis; dividend income is recorded on the ex-dividend date.
DISTRIBUTIONS TO SHAREHOLDERS -- Dividends from net investment income for
the money market funds and the Limited Maturity Government Fund are
declared daily and paid monthly. Each of the non-money market funds except
the Limited Maturity Government Fund declare and pay dividends from net
investment income monthly. Any net realized capital gains will be
distributed at least annually for all Funds.
RECLASSIFICATION ON COMPONENTS OF NET ASSETS -- In accordance with
Statement of Position 93-2, "Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distribution by Investment Companies", $201,146, $134,711, $178,166 and
$111,110 relating to differences attributable to the classification of
short-term capital gains and net investment income for tax distribution
purposes of the Growth Equity, Value Momentum, Balanced and Intermediate-
Term Bond Funds, respectively, as of January 31, 1996 have been
reclassified between the Fund's accumulated net realized gains/losses and
undistributed net income accounts, as appropriate. These reclassifications
had no effect on net asset value.
67
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
STEPSTONE FUNDS
3. Transactions with Affiliates and Organization Costs
The Trust and SEI Financial Management Corporation (the "Administrator") are
parties to an Administration Agreement (the "Agreement") dated January 30, 1991,
under which the Administrator provides the Trust with management, administrative
and shareholder services for an annual fee of .15% on the first $1 billion of
aggregate net assets, .12% on the aggregate net assets from $1 billion to $2
billion, and .10% on the aggregate net assets in excess of $2 billion. The
Administrator's fee is allocated to the funds based on the percentage of each
fund's average net assets to the total average net assets of the Trust.
SEI Financial Services Company (the "Distributor") and the Trust are parties to
a distribution agreement dated January 30, 1991. No compensation is paid to the
Distributor for services rendered to the Institutional Class under this
agreement. The Trust has adopted a Distribution Plan (the "Plan") on behalf of
the Investment Class shares pursuant to Rule 12b-1 under the Investment Company
Act of 1940. This Plan provides that the Investment Class will bear the cost of
its distribution expenses. The Plan also provides for additional payments to the
Distributor of up to an annual rate of .40% of the Fund's Investment Class daily
net assets.
Certain officers and/or Trustees of the Trust are also officers and/or Directors
of the Administrator. The Trust pays each unaffiliated Trustee an annual fee for
attendance at quarterly, interim and committee meetings. Compensation of
officers and affiliated Trustees is paid by the Administrator. The aggregate
amount of fees paid to unaffiliated Trustees during the year was approximately
$54,000.
Organizational costs incurred by the Trust have been capitalized by the Trust
and are being amortized over sixty months commencing with operations. In the
event any of the initial shares of the Trust are redeemed by thereof during the
period that the Trust is amortizing its organizational costs, the redemption
proceeds payable to the holder thereof by the Trust will be reduced by the
unamortized organizational costs in the same ratio as the number of initial
shares being redeemed bears to the number of initial shares outstanding at the
time of redemption. Such costs include legal fees for organizational work
performed by a law firm of which an officer of the Fund is a partner.
During the period ended January 31, 1995, Union Bank, an affiliate of the
Advisor, purchased securities from the Money Market Fund for $19,912,500 which
represented the amortized cost and carrying value of the securities. The
securities aggregate market value was $19,305,900 at the time of purchase. This
transaction has been recorded on the books as a realized capital loss of
$606,600 on investment in the statement of operations, and as a contribution of
capital on the books for $606,600. The transactions did not change the net asset
value of the Fund.
4. Investment Advisory Agreement
The Trust and Union Capital Advisors, a division of Union Bank, (the "Advisor")
are parties to an Advisory Agreement. For its services, the Advisor is entitled
to receive a fee, which is calculated daily and paid monthly, at an annual rate
of .30% of the average daily net assets of the Treasury Money Market Fund, the
Money Market Fund, the California Tax-Free Money Market Fund and the Limited
Maturity Government Fund, .60% of the Growth Equity Fund, the Value Momentum
Fund, the Blue Chip Growth Fund, the Balanced Fund and the Convertible
Securities Fund, .50% of the Intermediate-Term Bond Fund, the Government
Securities Fund and the California Tax-Free Bond Fund, .80% of the Emerging
Growth Fund and .95% of the International Equity Fund. The Advisor has
voluntarily agreed, for an indefinite period of time to waive all or a portion
of
68
<PAGE>
JANUARY 31, 1996
- -------------------------------------------------------------------------------
its fee in the Treasury Money Market Fund, the California Tax-Free Money Market
Fund, the International Equity Fund, and the California Tax-Free Bond Fund in
order to limit the operating expenses of the Funds.
The Advisor and The Bank of Tokyo Trust Company are parties to a Sub-Advisory
Agreement on the Blue Chip Growth Fund, the Emerging Growth Fund, the
Convertible Securities Fund and the Government Securities Fund. The Bank of
Tokyo Trust Company is entitled to a fee which is calculated daily and paid
monthly by the Advisor.
The Advisor and The Bank of Tokyo Asset Management (U.K.) Limited are parties to
a Sub-Advisory Agreement on the International Equity Fund. The Bank of Tokyo
Asset Management (U.K.) Limited is entitled to a fee which is calculated daily
and paid monthly by the Advisor.
During the fiscal year ended January 31, 1996, Union Bank agreed to merge with
the Bank of California, N.A., effective on or about April 1, 1996. After the
merger, the resulting Bank will change its name to Union Bank of California,
N.A. Union Capital Advisors will be combined with Merus Capital Management and
re-named Merus-UCA Capital Management. Merus-UCA will operate as a separate
division of the Union Bank of California, N.A. The subadvisor, the Bank of Tokyo
Trust Company, will change its name to Bank of Tokyo-Mitsubishi Trust Company
upon the merger of the Bank of Tokyo Trust Company and Mitsubishi Bank Trust
Company of New York on or about April 1, 1996. These transactions will result in
the termination of the Stepstone Funds' investment advisory and subadvisory
agreements. The Funds have called a shareholder meeting to approve new
investment advisory and subadvisory contracts with Union Bank of California,
N.A. and Bank of Tokyo-Mitsubishi Trust Company, respectively. The advisory fees
will not be affected by these changes.
5. Investment Transactions
The purchases and sales of investment securities and United States Government
Obligations (other than short-term securities) were as follows:
<TABLE>
<CAPTION>
INVESTMENT U.S. GOVERNMENT
SECURITIES SECURITIES
------------------- ----------------------
PURCHASES SALES PURCHASES SALES
(000'S) (000'S) (000'S) (000'S)
--------- ------- --------- --------
<S> <C> <C> <C> <C>
Int.-Term Bond............... $53,374 $67,771 $123,299 $105,852
Limited Maturity Govt........ 1,038 159 52,382 38,371
California Tax-Free Bond..... 3,709 14,150 -- --
Convertible Securities...... 11,375 5,294 -- --
Government Securities....... 20,702 18,081 76,536 65,515
Balanced.................... 55,247 46,110 18,516 2,555
Growth Equity............... 36,113 39,851 -- --
Value Momentum.............. 42,995 36,545 -- --
Blue Chip Growth............ 47,725 31,408 -- --
Emerging Growth............. 46,462 35,295 -- --
International Equity........ 44,352 7,765 -- --
</TABLE>
At January 31, 1996 the total cost of securities and net realized gains or
losses on securities sold for Federal income tax purposes was not materially
different from amounts reported for financial reporting purposes. The aggregate
gross unrealized appreciation and depreciation at January 31, 1996 for each
portfolio is as follows:
<TABLE>
<CAPTION>
APPRECIATION DEPRECIATION TOTAL
(000'S) (000'S) (000'S)
------------ ------------ -------
<S> <C> <C> <C>
Int.-Term Bond............... $ 4,867 $ (43) $ 4,824
Limited Maturity Govt........ 555 -- 555
California Tax-Free Bond..... 215 (3) 212
Convertible Securities....... 1,560 (451) 1,109
Government Securities........ 1,140 (14) 1,126
Balanced..................... 46,268 (1,857) 44,411
Growth Equity................ 70,366 (2,218) 68,148
Value Momentum............... 71,181 (2,383) 68,798
Blue Chip Growth............. 12,382 (634) 11,748
Emerging Growth.............. 7,689 (1,657) 6,032
International Equity......... 4,997 (710) 4,287
</TABLE>
69
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
STEPSTONE FUNDS
Subsequent to October 31, 1995, the Funds recognized net capital losses for tax
purposes that have been deferred to 1996 and can be used to offset future
capital gains at January 31, 1996. The funds also had capital loss carryforwards
at January 31, 1996, to the extent provided in the regulations for federal
income tax as follows:
<TABLE>
<CAPTION>
CAPITAL LOSS
CARRYOVER EXPIRES EXPIRES EXPIRES
1/31/96 2002 2003 2004
------------ ------- ------- --------
<S> <C> <C> <C> <C>
Treasury MM............... $ 2,187 $ -- $ 2,187 $ --
Money Market.............. 1,163,215 -- 1,163,215 --
Cal T/F MM................ 1,863 -- 1,863 --
Int.-Term Bond............ 1,412,177 -- 1,412,177 --
Limited Maturity Govt..... 1,766,916 3,154 873,702 890,060
Cal. Tax-Free Bond........ 1,309,688 -- 588,397 721,291
Convertible Securities.... 57,122 -- 39,362 17,760
Government Securities..... 362,601 -- 362,601 --
</TABLE>
The Growth Equity and Blue Chip Funds utilized their entire capital loss
carryforward balance of $1,206,611 and $617,659, respectively, which was carried
over from the previous year. The Intermediate-Term Bond and Government
Securities Funds used $2,740,091 and $1,465,927, respectively, of its capital
loss carryforward from the previous year.
6. Concentration of Credit Risk
The California Tax-Free Money Market Fund and the California Tax-Free Bond Fund
invest in debt securities in the State of California. The ability of the issuers
of the securities held by the Funds to meet their obligations may be affected by
economic developments in that state.
The International Equity Fund invests in securities of foreign issuers in
various countries. These investments may involve certain considerations and
risks not typically associated with investments in the United States, as a
result of, among other factors, the possibility of future political and economic
developments and the level of governmental supervision and regulation of
securities markets in the respective countries.
70
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
- -------------------------------------------------------------------------------
STEPSTONE FUNDS
7. Option Contracts
Transactions in covered call options and purchased put options during the period
ended January 31, 1996 are summarized as follows:
GROWTH EQUITY
-------------------------
NUMBER OF
WRITTEN OPTION TRANSACTION CONTRACTS PREMIUM
- ----------------------------------------- --------- ----------
Option written and outstanding at
beginning of period.................... -- $ --
Call option written during period........ 1,669 592,787
Call option exercised during period...... (639) (201,573)
Call option expired during period........ (553) (217,375)
Call option closed during period......... (477) (173,839)
--------- -----------
Option written and outstanding at end of
period................................. -- --
========= =========
BLUE CHIP GROWTH
-------------------------
NUMBER OF
WRITTEN OPTION TRANSACTION CONTRACTS PREMIUM
- ----------------------------------------- --------- ----------
Option written and outstanding at
beginning of period.................... 392 $ 62,027
Call option written during period........ 7,439 2,271,388
Call option exercised during period...... (1,023) (198,890)
Call option expired during period........ (1,630) (381,581)
Call option closed during period......... (4,718) (1,616,696)
--------- -----------
Option written and outstanding at end of
period................................. 460 136,248
========= =========
EMERGING GROWTH
------------------------
NUMBER OF
WRITTEN OPTION TRANSACTION CONTRACTS PREMIUM
- ----------------------------------------- --------- ----------
Option written and outstanding at
beginning of period.................... 188 $ 35,793
Call option written during period........ 3,765 1,525,251
Call option exercised during period...... (528) (145,844)
Call option expired during period........ (808) (190,597)
Call option closed during period......... (2,467) (1,179,711)
--------- -----------
Option written and outstanding at end of
period................................. 150 44,892
========= =========
BALANCED
------------------------
NUMBER OF
WRITTEN OPTION TRANSACTION CONTRACTS PREMIUM
- ----------------------------------------- --------- ----------
Option written and outstanding at
beginning of period.................... -- $ --
Call option written during period........ 921 93,380
Call option exercised during period...... (81) (19,778)
Call option expired during period........ (620) (104,191)
Call option closed during period......... (20) (4,690)
--------- -----------
Option written and outstanding at end of
period................................. 200 35,279
========= =========
CONVERTIBLE SECURITIES
-------------------------
NUMBER OF
WRITTEN OPTION TRANSACTION CONTRACTS PREMIUM
- ------------------------------------------ --------- ----------
Option written and outstanding at
beginning of period..................... -- $ --
Call option written during period......... 10 1,529
Call option exercised during period....... -- --
Call option expired during period......... -- --
Call option closed during period.......... (10) (1,529)
--------- -----------
Option written and outstanding at end of
period.................................. -- --
========= =========
BLUE CHIP GROWTH
-------------------------
NUMBER OF
PURCHASE OPTION TRANSACTION CONTRACTS PREMIUM
- ----------------------------------------- --------- ----------
Purchased put option outstanding at
beginning of period.................... -- $ --
Put option purchased during period....... 912 162,650
Put option sold during period............ (650) (118,256)
Put option expired during period......... (97) (12,867)
Put option exercised during period....... (165) (31,527)
--------- -----------
Purchased put option outstanding at end
of period.............................. -- --
========= =========
EMERGING GROWTH
-------------------------
NUMBER OF
PURCHASE OPTION TRANSACTION CONTRACTS PREMIUM
- ----------------------------------------- --------- ----------
Purchase call option outstanding at
beginning of period.................... -- $ --
Call option purchased during period...... 881 168,903
Call option sold during period........... (230) (51,315)
Call option expired during period........ (336) (47,344)
Call option exercised during period...... (215) (46,007)
--------- -----------
Purchased call option outstanding at end
of period.............................. 100 24,237
========= =========
71
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Shareholders and Trustees of the
Stepstone Funds:
We have audited the accompanying statements of net assets of the Treasury Money
Market, Money Market, California Tax-Free Money Market, Intermediate-Term
Bond,Limited Maturity Government, California Tax-Free Bond, Convertible
Securities, Government Securities, Balanced, Growth Equity, Value Momentum, Blue
Chip Growth, Emerging Growth, and International Equity Funds (fourteen of the
Funds constituting Stepstone Funds) as of January 31, 1996, and the related
statements of operations, statements of changes in net assets and financial
highlights for the periods presented. These financial statements and financial
highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
January 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Treasury Money Market, Money Market, California Tax-Free Money Market,
Intermediate-Term Bond,Limited Maturity Government, California Tax-Free Bond,
Convertible Securities, Government Securities, Balanced, Growth Equity, Value
Momentum, Blue Chip Growth, Emerging Growth, and International Equity Funds of
Stepstone Funds as of January 31, 1996, the results of their operations, changes
in their net assets and financial highlights for the periods presented, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
March 21, 1996
72
<PAGE>
NOTICE TO SHAREHOLDERS OF THE STEPSTONE FUNDS (UNAUDITED)
- -------------------------------------------------------------------------------
For shareholders that do not have a January 31, 1996 tax year end, this notice
is for informational purposes only. For shareholders with a January 31, 1996 tax
year end, please consult your tax advisor as to the pertinence of this notice.
For the fiscal year ended January 31, 1996, each fund is designated the
following items with regard to distributions paid during the year.
<TABLE>
<CAPTION>
(A) (B) (C)
LONG TERM ORDINARY (A+B)
CAPITAL GAINS INCOME TOTAL
DISTRIBUTIONS DISTRIBUTIONS DISTRIBUTIONS
FUND (TAX BASIS) (TAX BASIS) (TAX BASIS)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Treasury Money Market........................................... 0% 100% 100%
Money Market.................................................... 0% 100% 100%
California Tax-Free Money Market................................ 0% 100% 100%
Intermediate-Term Bond.......................................... 0% 100% 100%
Limited Maturity................................................ 0% 100% 100%
California Tax-Free Bond........................................ 0% 100% 100%
Convertible Securities.......................................... 0% 100% 100%
Government Securities........................................... 0% 100% 100%
Balanced........................................................ 36% 64% 100%
Growth Equity................................................... 89% 11% 100%
Value Momentum.................................................. 51% 49% 100%
Blue Chip Growth................................................ 55% 45% 100%
Emerging Growth................................................. 0% 100% 100%
International Equity ........................................... 0% 100% 100%
</TABLE>
<TABLE>
<CAPTION>
(D) (E) (F)
QUALIFYING TAX EXEMPT FOREIGN
FUND DIVIDENDS(1) INTEREST TAX CREDIT
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Treasury Money Market........................................... 0% 0% 0%
Money Market.................................................... 0% 0% 0%
California Tax-Free Money Market................................ 0% 100% 0%
Intermediate-Term Bond.......................................... 0% 0% 0%
Limited Maturity................................................ 0% 0% 0%
California Tax-Free Bond........................................ 0% 100% 0%
Convertible Securities.......................................... 25% 0% 0%
Government Securities........................................... 0% 0% 0%
Balanced ....................................................... 34% 0% 0%
Growth Equity................................................... 100% 0% 0%
Value Momentum.................................................. 100% 0% 0%
Blue Chip Growth................................................ 100% 0% 0%
Emerging Growth................................................. 8% 0% 0%
International Equity............................................ 0% 0% 0%
<FN>
- -------------------
(1)Qualifying dividends Represent dividends which qualify for the corporate dividends received deduction.
* Items (A) and (B) are based on a percentage of each fund's total distributions.
** Items (D) and (E) are based on a percentage of ordinary income distributions of each fund.
</FN>
</TABLE>
73
<PAGE>
INVESTMENT ADVISOR:
Union Capital Advisors(R)
a division of Union Bank
SUB ADVISORS:
THE BANK OF TOKYO TRUST COMPANY
Government Securities Fund
Emerging Growth Fund
Convertible Securities Fund
Blue Chip Growth Fund
BANK OF TOKYO ASSET MANAGEMENT (U.K.) LTD.
International Equity Fund
DISTRIBUTOR:
SEI Financial Services Company
This information must be preceded or accompanied by a current prospectus for
each Fund described.
