INVESTMENT ADVISOR:
Pacific Alliance Capital Management
a division of Union Bank of California, N.A.
SUB ADVISORS:
Bank of Tokyo--Mitsubishi Trust Company
Government Securities Fund
Emerging Growth Fund
Convertible Securities Fund
Blue Chip Growth Fund
Tokyo--Mitsubishi 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.
STS-F-001-01
<PAGE>
[GRAPHIC]
STEPSTONE FUNDS(R)
ANNUAL FINANCIAL
REPORT
JANUARY 31, 1997
----------------
NOT FDIC INSURED
<PAGE>
STEPSTONE FUNDS(R)
ANNUAL REPORT -- CHAIRMAN'S LETTER
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
We are pleased to report another strong period for the Stepstone Funds for the
year ended January 31, 1997. The period was characterized by a surging stock
market but modest returns for bonds. The Stepstone Funds performed well against
their peer groups and versus the standard benchmarks of investment performance.
We are keenly aware that we are in the midst of one of the longest bull markets
in history, with the Dow Jones Industrial Average closing above 7000 on February
13, 1997. It is clearly a time for caution, as the current economic expansion
reaches seven years. As a means of controlling risk, mutual funds such as the
Stepstone Funds offer professional management as well as broad diversification
by investing in a wide array of securities in a variety of industry groups.
MUTUAL FUND FAMILIES MERGE
On April 1, 1996, Union Bank, N.A. and The Bank of California merged to become
Union Bank of California, N.A. Each of the former banks had its own proprietary
mutual fund family. The Fund families--the Stepstone Funds (Union Bank) and The
HighMark Group (The Bank of California) are similar in many ways. As a result,
the Boards of Trustees of both the Stepstone and HighMark Funds believe it is in
the best interest of shareholders that the two fund families merge, and recently
voted in favor of combining the funds.
The merger of the two fund groups is scheduled to begin on April 25, 1997,
subject to the required approvals. The combined fund family, to be called
HighMark Funds, will create a $5 billion fund family with a stronger lineup of
funds and expanded array of investment options. Pacific Alliance Capital
Management will continue as the investment advisor for the funds.
A COMMITMENT TO SERVICE
This annual report includes interviews with portfolio managers followed by a
Statement of Net Assets, which provides a list of each fund's holdings. We urge
you to read the entire report closely to help you monitor the progress of your
investment in the Stepstone Funds.
If you have any questions about your investment in the Stepstone Funds, or
would like a prospectus or other information about any of our funds, please
call your investment representative or the Stepstone Funds at 1-800-734-2922.
As always, we thank you for the confidence you have placed in us as manager of
your assets and look forward to serving your investment needs in the future.
Sincerely,
William R. Howell
Chairman
Stepstone Funds
February 14, 1997
<PAGE>
STEPSTONE FUNDS(R) TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Message from the Investment Advisor ................... 1
Managers' Discussion and Analysis of Fund Performance . 2
Statement of Net Assets ............................... 18
Statement of Operations ............................... 59
Statement of Changes in Net Assets .................... 62
Financial Highlights .................................. 66
Notes to Financial Statements ......................... 72
Report of Independent Public Accountants .............. 80
Notice to Shareholders ................................ 81
<PAGE>
MESSAGE FROM THE INVESTMENT ADVISOR
DEAR SHAREHOLDER:
The twelve-month period ending January 31, 1997 was an extremely strong period
for stocks, with the Standard & Poors 500 Stock Index up 26.33%. This surge came
after a brief correction which took place early in the summer. Meanwhile, the
bond market produced modest returns during the past six months, as long-term
interest rates tracked a volatile range from a peak of 7.20% to a trough of
about 6.35%.
STOCKS: YET ANOTHER PLEASANT SURPRISE
The stock market continues to surprise investors. In late 1996, we forecasted
corporate profit growth for 1997 in the 8-10% range, and we projected that the
stock market would rise by a similar amount. However, by mid-February of 1997,
the market had already risen 9% for the year. Corporate profits continue to come
in stronger than expected, and that may likely translate into higher gains for
the stock market in the months ahead. However, we are finding it increasingly
difficult to identify stocks that represent good value. As the market continues
to exceed all expectations, a true 10% correction has not yet taken place.
Instead, we often see a few down days but then the market resumes its advance.
After rising 60% during the past two years, we don't expect 1997 to continue at
the same pace. However, we have been pleasantly surprised many times in the past
few years.
INFLATION REMAINS CALM
One reason that the Dow Jones Industrial Average reached 7000 -- it was 4000
just two years ago -- is that inflation and interest rates remain subdued.
Indeed, the Federal Reserve Board has suggested that inflation may actually be
lower than reported. The markets are behaving as if inflation is more like 2%
rather than 3%, as reported by the Consumer Price Index. However, adjusting the
CPI to reflect a more realistic portrait of inflation is a very contentious
political issue, because entitlement payments are based on it.
A TRADING RANGE FOR INTEREST RATES
Because of modest inflation, we expect long-term interest rates to remain in a
trading range over the next six months. That suggests a modestly positive bond
market, in which investors earn a stream of current income plus modest capital
gains. The Federal Reserve Board has kept short-term interest rates at the same
level -- 5.25% -- for more than a year. Moderate economic growth and subdued
inflation suggests a neutral Fed policy over the next several months.
A STRONG DOLLAR: THE U.S. ECONOMY GETS RESPECT
The U.S. economy continues to grow at a moderate rate with low inflation. In
contrast, Japan's economy is struggling. Europe's economy is sluggish as
governments cut spending to prepare for a unified currency. In Germany,
unemployment is running at a double-digit rate, as the country continues to face
difficulty in absorbing the former Eastern Germany. Throughout the world,
investors have looked to the U.S. for the most stable economy, a strong
currency, and the best performing equity market in recent years.
LOOKING AHEAD
The S&P 500 Index is trading at 21 times trailing earnings and at 19 times
projected 1997 earnings. Dividend yields are below 2%, an all-time low. We
recognize that the stock market has come a long way very quickly. However, there
is some historical precedence for these high valuation levels. In the 1960s,
when economic growth was moderate and inflation was low, price/earnings
multiples also reached into the low 20s. Indeed, excluding the Great Depression
of the 1920s and the energy crises of the 1970s, the current valuation may be
the norm rather than the exception. Nevertheless, the market remains extremely
volatile, as investors overreact to every economic report. We remain optimistic
but cautious on stocks in 1997, as they continue to move into uncharted
territory.
Sincerely,
/S/SIGNATURE
Clark R. Gates
President
Pacific Alliance Capital Management
1
<PAGE>
STEPSTONE FUNDS -- TREASURY MONEY MARKET FUND
MONEY MARKET FUND
CALIFORNIA TAX-FREE MONEY MARKET FUND
For the year ended January 31, 1997, the Stepstone Treasury Money Market Fund
(Institutional Class) produced a total return of 4.99%. The Stepstone Money
Market Fund (Institutional Class) produced a total return of 5.03%. The
Stepstone California Tax-Free Money Market Fund (Institutional Class) produced a
total return of 3.12%.
The Stepstone Treasury Money Market Fund and the Stepstone Money Market Fund are
both managed by Kirk Lynch, who has 7 years of experience in the investment
field. Mr. Lynch holds an MBA from the University of San Francisco and a
bachelor's degree from Colorado State University. He is a Chartered Financial
Analyst (CFA).
STEPSTONE TREASURY MONEY MARKET FUND
The Fund invests in U.S. Treasury securities and repurchase agreements backed by
U.S. Treasury securities. As of January 31, 1997, the Fund's seven-day
compounded yield was 5.09%.
Despite intermittent fears about the U.S. economy's ability to maintain forward
momentum without igniting price pressures, the Federal Reserve held short-term
interest rates steady during the Fund's fiscal year. During periods in which
short-term rates rose due to market forces, our strategy was to moderately
extend the Fund's average maturity to lock in higher yields. The Fund began the
period with an average maturity of 35 days. It was extended to 53 days last
spring as yields rose in response to reports of stronger economic growth. As of
January 31, 1997, the Fund's maturity was 41 days.
STEPSTONE MONEY MARKET FUND
The Fund invests in a mixture of commercial paper, certificates of deposit, U.S.
Treasury securities and repurchase agreements backed by U.S. government
obligations. As of January 31, 1997, the Fund's seven-day compounded yield was
5.16%.
During the year, we have generally kept the Fund's maturity shorter than
our benchmark given the uncertainty in the economic outlook. As was the case
with the Treasury Fund, this Fund's average maturity was periodically extended
to capitalize on opportunities to secure higher yields. Our 1997 forecast is for
continued slow growth and low inflation. Therefore, we believe the Federal
Reserve Board will not feel the need to act for awhile.
STEPSTONE CALIFORNIA TAX-FREE MONEY MARKET FUND
The Stepstone California Tax-Free Money Market Fund is managed by Raymond Mow,
who has 7 years of experience in the investment field. Mr. Mow holds a
bachelor's degree in finance from the University of Hawaii.
The Fund's maturity began the year at 29 days and ended the year at 24 days. We
kept the maturity shorter than average because there wasn't much value to be
earned by extending it. Because of volatility in the interest rate market,
variable rate products -- whose rates reset daily or weekly -- performed better
than fixed rate products such as notes and fixed rate bonds. As of January 31,
1997, the Fund's seven-day compounded yield was 3.18%.
The California economy continues to improve, led by a diverse expansion in the
high technology, entertainment and retail sectors. The credit rating of the
State was upgraded to "A+" from "A" by the S&P and Fitch rating agencies. All
investment decisions shall meet appropriate credit and liquidity requirements
and have a competitive yield.
2
<PAGE>
STEPSTONE FUNDS -- INTERMEDIATE-TERM BOND FUND
For the year ended January 31, 1997, the Stepstone Intermediate-Term Bond Fund
had a total return of 1.43% (Institutional Class). In contrast, the unmanaged
Salomon Brothers Broad Investment Grade Index reflected a return of 3.31%.
The Intermediate-Term Bond Fund strategy team is led by James Atkinson, who has
more than 30 years of experience in the investment field. Mr. Atkinson holds a
bachelor's degree in economics from Boston College.
WHAT FACTORS AFFECTED THE FUND'S PERFORMANCE?
Because we expected lower interest rates during early 1996, the duration
(sensitivity to interest rates) of the Fund was longer than average during the
first half of the year. However, interest rates rose significantly in early
1996. In a period of rising interest rates, a Fund with longer duration falls
further in value. In addition, because the Fund was positioned for lower rates
earlier in the year, it did not have a mortgage component. Mortgages comprise
30% of the Salomon Brothers index, and tend to do better on a total return basis
in a rising interest rate market than do corporates or governments.
HOW WOULD YOU DESCRIBE THE FUND'S CURRENT COMPOSITION?
We began to use mortgage-backed securities in May, increasing that percentage to
26% of the portfolio by January 31, 1997. Corporate bonds, which have
outperformed government bonds for most of the year, remain over-weighted as of
year end. In the corporate sector, the strongest performers were in the
lower-rated credits. The best performing bonds in the portfolio were in the
brokerage industry, specifically Salomon Brothers and Lehman Brothers
obligations. However, reflecting a conservative strategy, most of our corporate
bonds are rated at least A. The average credit quality of the portfolio is AA-.
WHAT IS YOUR OUTLOOK?
As we move through 1997, it appears that economic growth may be stronger than
anticipated one month ago. Nevertheless, we believe that inflationary pressures
will continue to be moderate. Although we believe that growth may accelerate, it
will remain within the "speed limits" favorable to securities markets. As such,
we see a stable period for interest rates, with a bias towards lower rates by
the end of the first calendar quarter. As a result, the Fund is currently at a
similar duration to the market as measured by the Salomon Brothers Broad Index.
[LINEGRAPH]
A line graph depicting the 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
<TABLE>
<CAPTION>
2/28/91 1/31/92 1/31/93 1/31/94 1/31/95 1/31/96 1/31/97
<S> <C> <C> <C> <C> <C> <C> <C>
Stepstone Intermediate-Term Bond Fund, Institutional Class $10,000 $11,288 $12,470 $13,621 $13,061 $15,226 $15,444
Salomon Broad Investment Grade Bond Index $10,000 $11,237 $12,493 $13,639 $13,344 $15,605 $16,122
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
One Year Annualized Annualized Annualized
Return 3-Year 5-Year Inception
Return Return to Date
<S> <C> <C> <C> <C>
Intermediate-Term Bond 1.43% 4.28% 6.48% 7.70%
Fund (Institutional)
</TABLE>
For the period ended January 31, 1997. Past performance is not predictive of
future performance.
[LINEGRAPH]
A line graph depicting the comparison of change in the value of a $10,000
investment in the Stepstone Intermediate-Term Bond, Investment Class, versus the
Salomon Broad Investment Grade Bond Index
<TABLE>
<CAPTION>
2/29/92 1/31/93 1/31/94 1/31/95 1/31/96 1/31/97
<S> <C> <C> <C> <C> <C> <C>
Stepstone Intermediate-Term Bond Fund, Investment Class $ 9,700 $10,686 $11,672 $11,192 $13,037 $13,237
Salomon Broad Investment Grade Bond Index $10,000 $11,047 $12,060 $11,799 $13,798 $14,255
</TABLE>
Average Annual Total Return
One Year Annualized Annualized
Return 3-Year Inception
Return to Date
Intermediate-Term
Bond (Investment) -1.54% 4.28% 6.48%
with Load -1.53% 3.23% 5.85%
For the period ended January 31, 1997. 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 -- LIMITED MATURITY GOVERNMENT FUND
For the year ended January 31, 1997, the Stepstone Limited Maturity Government
Fund produced a total return of 4.20% (Institutional Class). In contrast, the
unmanaged Merrill Lynch 1-3 Year Short-Term Treasury Index reflected a return of
4.58%.
The Limited Maturity Government Fund strategy team is led by Martin Standish,
who has 10 years of experience in the investment field. Mr. Standish holds an
MBA from the University of Texas and a bachelor's degree in business
administration from Colorado State University.
WHAT FACTORS AFFECTED THE FUND'S PERFORMANCE?
The Fund's duration (sensitivity to interest rates) was somewhat longer at the
beginning of the year which hurt performance. A longer than average duration
means that bond prices fall faster in a period of rising interest rates. During
the second quarter, we became more neutral in relation to the benchmark. By the
third quarter, we were more bullish on the market and extended durations. Due to
the bond market rally in the third and fourth calendar quarters, we picked up
some performance that was lost in the first half of the year.
WHAT WOULD BE AN EXAMPLE OF THE FUND'S STRATEGY DURING THE PAST YEAR?
In the latter part of the year, we invested in Treasury "Strips," which
perform very well in a declining interest rate environment. They are a form of
zero coupon bond, offering no interest but issued at a deep discount. When
interest rates are declining, it is advantageous not to have to reinvest coupon
income. During the year, the Fund's duration was within 20% of the Merrill Lynch
index.
WHAT IS YOUR OUTLOOK?
As we move through 1997, it appears that economic growth may be stronger than
anticipated one month ago. Nevertheless, we do not see signs of inflation at
this time. Although we believe that growth may accelerate, it will remain within
the "speed limits" favorable to securities markets. As such, we see a stable
period for interest rates, with a bias towards lower rates by the end of the
first calendar quarter. As a result, the Fund is currently longer in duration
than the market as measured by the Merrill Lynch index. (See Note 7)
[LINEGRAPH]
A line graph depicting the 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 1-Year Treasury Bill Index
<TABLE>
<CAPTION>
5/31/93 1/31/94 1/31/95 1/31/96 1/31/97
<S> <C> <C> <C> <C> <C>
Stepstone Limited Maturity Government Fund, Institutional Class $10,000 $10,313 $10,238 $11,091 $11,557
Merrill Lynch 1-3 Year Short-Term Treasury Index $10,000 $10,345 $10,481 $11,570 $12,100
Merrill Lynch 1 Year Treasury Bill Index $10,000 $10,264 $10,581 $11,378 $11,987
</TABLE>
Average Annual Total Return
One Year Annualized Annualized
Return 3-Year Inception
Return to Date
Limited Maturity Government 4.20% 3.87% 3.82%
Fund (Institutional)
For the period ended January 31, 1997. Past performance is not predictive of
future performance.
A line graph depicting the 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 1-Year Treasury Bill Index
[LINEGRAPH]
<TABLE>
<CAPTION>
8/31/93 1/31/94 1/31/95 1/31/96 1/31/97
<S> <C> <C> <C> <C> <C>
Stepstone Limited Maturity Government Fund, Investment Class $10,000 $10,143 $10,068 $10,906 $11,363
Merrill Lynch 1-3 Year Short-Term Treasury Index $10,000 $10,157 $10,291 $11,360 $11,880
Merrill Lynch 1-Year Treasury Bill Index $10,000 $10,143 $10,456 $11,244 $11,845
</TABLE>
Average Annual Total Return
One Year Annualized Annualized
Return 3-Year Inception
Return to Date
Limited Maturity Government
Funds (Investment) 4.19% 3.86% 3.89
For the period ended January 31, 1997. 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%.
4
<PAGE>
STEPSTONE FUNDS -- CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
For the year ended January 31, 1997, the Stepstone California Intermediate
Tax-Free Bond Fund produced a total return of 3.72% (Institutional Class). In
contrast, the unmanaged Lehman Brothers 7 Year General Obligation Index
reflected a return of 3.85%.
The California Intermediate Tax-Free Bond Fund strategy team is led by Robert L.
Bigelow, who has more than 10 years of experience in the investment field. Mr.
Bigelow holds an MBA and a bachelor's degree from Pepperdine University.
WHAT FACTORS AFFECTED THE FUND'S PERFORMANCE?
Municipal bonds as a group outperformed U.S. Treasury securities in 1996. Early
in the year, presidential politics adversely affected municipals because of the
debate over tax legislation that would have limited the relative tax advantage
of these securities. By mid-year, discussions regarding tax legislation ended,
and munis rebounded as compared to Treasuries. Another factor positively
affecting this portfolio was the improving California economy, led by such
industries as technology and entertainment.
WHAT IS YOUR CURRENT STRATEGY?
We have and continue to focus on higher quality bonds, many of which are
insured. This represents our shareholders' desires as well as the declining
relative value of lower quality bonds. Over the past few months, we have kept a
duration somewhat neutral to the benchmark, while purchasing bonds with full
coupons to protect against a rise in rates.
WHAT IS YOUR OUTLOOK?
We believe that the market will remain strong as inflation remains at benign
levels. In addition, supply will be limited due to political constraints. In
November, voters approved Proposition 218 which requires voter approval for
certain tax increases. This continues to reduce the financial flexibility of
municipal entities, making it more difficult to raise money in the bond market.
Though the State's rating was upgraded from A to A+, cities such as San Diego
and Los Angeles received downgrades based on this reduced flexibility. However,
California municipal bonds continue to offer attractive after-tax yields to
investors, especially for high income tax brackets.
[LINEGRAPH]
A line graph depicting comparison of change in the value of a $10,000 investment
in the Stepstone California Intermediate Tax-Free Bond Fund, Institutional
Class, versus the Stepstone California Tax-Free Income Fund, Investment Class,
the Lehman Brothers 10-Year G.O. Index, and the Lehman Brothers 7-Year G.O.
Index
<TABLE>
<CAPTION>
10/31/93 1/31/94 1/31/95 1/31/96 1/31/97
<S> <C> <C> <C> <C> <C>
Stepstone California Tax-Free Income Fund, Institutional Class $10,000 $10,237 $9,590 $11,108 $11,521
Stepstone California Tax-Free Income Fund, Investment Class $ 9,700 $9,920 $9,292 $10,764 $11,153
Lehman Brothers 10-Year G.O. Index $10,000 $10,266 $9,862 $11,399 $11,847
Lehman Brothers 7-Year G.O. Index $10,000 $10,229 $9,975 $11,335 $11,772
</TABLE>
Average Annual Total Return
One Year Annualized Annualized
Return 3-Year Inception
Return to Date
California Intermediate
Tax-Free Bond Fund
(Institutional) 3.72% 4.02% 4.11%
California Intermediate
Tax-Free Bond Fund
(Investment) 3.62% 3.99% 4.05%
Investment Class With Load 0.55% 2.94% 3.09%
For the period ended January 31, 1997. 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%.
5
<PAGE>
STEPSTONE FUNDS -- CONVERTIBLE SECURITIES FUND
For the year ended January 31, 1997, the Stepstone Convertible Securities Fund
produced a total return of 17.72% (Institutional Class). In contrast, the
unmanaged Merrill Lynch Investment Grade Convertible Securities Index reflected
a return of 13.47%.
The Convertible Securities Fund strategy team is led by Robert Freund, who has 5
years of experience working with convertible securities. Mr. Freund holds a
bachelor's degree in economics from Boston College.
WHAT IS YOUR STRATEGY WITH THIS PORTFOLIO?
Convertible securities are hybrids between stocks and bonds. They're issued in
the form of a fixed income instrument but have the option to convert into an
underlying equity. If the price of the stock should appreciate, then that option
becomes more valuable, and therefore drives the price of the convertible
security higher. Our goal in investing in convertible securities is to capture
most of the upside in the equity market, while limiting our downside exposure.
Convertibles come in all sorts of forms. Some forms are more skewed towards the
performance of the underlying equity, while others trade more like fixed income
instruments. We tend to buy convertibles that trade more like equities.
WHAT SECURITIES PERFORMED PARTICULARLY WELL DURING THE YEAR?
One of the Fund's larger holdings is Conseco (4.0% of the portfolio), an
insurance company that sells many different types of insurance products such as
life, health and annuities. Conseco's primary focus is on selling supplemental
health insurance to the senior market. This focus takes advantage of the aging
trend and growing consumer concern over cuts in Medicare/Medicaid. Conseco has
been acquiring small insurance companies and consolidating the back office while
expanding their distribution and sales force channel. Another consolidation
player is U.S. Filter (3.8%), the nation's leading water purification company.
The industry is extremely fragmented and U.S. Filter is leveraging its dominant
position acquiring weaker rivals, cutting redundant costs and rapidly expanding
earnings. The number of potential acquisition targets are numerous and this will
fuel earnings growth for many more years. At the same time, the demand for
purified water is increasing dramatically, not only for drinking, but for high
technology manufacturing such as computer chips where clean water is essential.
HFS (3.1%) is a franchiser with rights to names such as Days Inn, Ramada, Howard
Johnson, Avis and Century 21. The long-term goal of HFS is to promote their well
recognized brand names and create cross-selling synergies with these services.
HFS is an aggressive acquirer of synergistic businesses that are non-dilutive.
In addition, HFS has very little capital expenditure requirements and generates
huge sums of free cash flow. The common thread among these three companies is
excellent management teams that are disciplined, experienced and shareholder
oriented. All of the management teams own large percentages of their respective
companies.
WHAT IS YOUR OUTLOOK?
Since convertibles offer a 4 percentage-point yield advantage over stocks, and
because the Dow Jones Industrial Average at 7000 is richly valued, we believe
that convertibles will perform very well relative to stocks in 1997.
[LINEGRAPH]
A line graph depicting the comparison of change in the value of a $10,000
investment in the Stepstone Convertible Securities Fund, Institutional Class,
versus the Merrill Investment Grade Convertible Securities Index
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
2/28/94 1/31/95 1/31/96 1/31/97
Stepstone Convertible Securities Fund, Institutional Class $10,000 $9,514 $11,386 $13,403
Merrill Investment Grade Convertible Securities Index $10,000 $9,433 $12,036 $13,657
</TABLE>
Average Annual Total Return
One Year Annualized
Return Inception
Return
Convertible Securities Fund
(Institutional) 17.72% 9.90%
For the period ended January 31, 1997. Past performance is not predictive of
future performance.
6
<PAGE>
STEPSTONE FUNDS -- GOVERNMENT SECURITIES FUND
For the year ended January 31, 1997, the Stepstone Government Securities Fund
produced a total return of 0.34% (Institutional Class). In contrast, the
unmanaged Lehman Brothers Government Bond Index reflected a return of 2.26%.
The Government Securities Fund is managed by Steven Blocklin, who has 15 years
of experience in the investment field. Mr. Blocklin holds an MBA from George
Washington University and a bachelor's degree in economics from Miami
University.
WHAT FACTORS AFFECTED YOUR PERFORMANCE?
Our view going into 1996 was that the economy was entering a recession as soon
as March. During a recession, the Federal Reserve tries to stimulate the economy
by lowering interest rates to increase economic activity, causing bond prices to
rise. However, just the opposite occurred as second quarter GDP measured 4.7%
causing heightened inflation worries and higher rates. So the portfolio was
designed to take advantage of falling rates with its duration (sensitivity to
interest rates) set close to 20% longer than the market benchmark. This in fact
explains most of the underperformance which occurred in the first half of the
year. In hindsight, it would have been better to have held more mortgages in the
portfolio, since mortgages were the top performing sector for the year.
WHAT IS YOUR CURRENT STRATEGY?
The portfolio continues to be duration-neutral. We do not think it is prudent to
make a large duration "play" at this time. Instead, we are adding value by using
corporate bonds for extra yield. If interest rates continue to fall, we will add
mortgage-backed securities, which outperform when interest rates are rising.
WHAT IS YOUR OUTLOOK?
We think interest rates will be "range bound" with the 30 year Treasury trading
between 6.25% and 7.25%. One event that could prompt the Fed to tighten is if
payroll gains an average of more than 220,000 per month for three months
running. We would anticipate higher rates and a reversal in monetary policy
(tightening) if this occurs.
[LINEGRAPH]
A line graph depicting the comparison of change in the value of a $10,000
investment in the Stepstone Government Securities Fund, Institutional Class,
versus the Lehman Government Bond Index
<TABLE>
<CAPTION>
2/28/94 1/31/95 1/31/96 1/31/97
<S> <C> <C> <C> <C>
Stepstone Government Securities Fund, Institutional Class $10,000 $9,814 $11,400 $11,439
Lehman Government Bond Index $10,000 $9,920 $11,594 $11,856
</TABLE>
Average Annual Total Return
One Year Annualized
Return Inception
Return
Government Securities Fund
(Institutional) 0.34% 3.65%
For the period ended January 31, 1997. Past performance is not predictive of
future performance.
7
<PAGE>
STEPSTONE FUNDS -- BALANCED FUND
For the year ended January 31, 1997, the Stepstone Balanced Fund produced a
total return of 16.30% (Institutional Class). In contrast, the unmanaged Salomon
Brothers Broad Investment Grade Bond Index reflected a return of 3.31% and the
Standard & Poors 500 Composite Index was up 26.33%. Our performance placed us in
the top quartile of all balanced funds for 1996 as measured by Lipper Analytical
Services.
The Balanced Fund strategy team is led by Carl Colombo, who has 23 years of
experience in the investment field. Mr. Colombo holds an MBA from San Diego
State University and a bachelor's degree in business administration from Florida
State University. Mr. Colombo is also a Chartered Financial Analyst (CFA).
HOW DID YOUR ALLOCATION BETWEEN STOCKS, BONDS AND CASH CHANGE DURING THE PERIOD?
Between February 1, 1996 and January 31, 1997, we increased our allocation to
bonds from 31.3% to 36.0% while the allocation to stocks declined from 63.3% to
59.4%. The shift had to do with one fundamental change that occurred: interest
rates rose in 1996, making bonds appear more attractive. At the same time, stock
prices rose, making them somewhat less attractive. Despite the run-up in stocks,
we didn't make a dramatic shift out of stocks because there were a number of
things happening that suggested that stocks could continue to do pretty well.
One of those fundamental factors had to do with the amount of new cash coming
into the equity market by way of mutual fund purchases. A second factor was the
amount of share repurchases by Corporate America with excess cash. This
indicates a commitment to shareholder value. A third factor in favor of stocks
was that the Federal Reserve Board was staying on the sidelines and not acting
in a way that would hurt the stock market. Fourth, corporate earnings came
through strongly last year, and finally, merger & acquisition activity was
strong in 1996, with a number of companies within the portfolio the subject of
takeovers.
WHAT STOCKS PERFORMED WELL DURING THE YEAR?
The equity portion is divided into two investment styles -- 60% in value and 40%
in growth. In terms of a good growth stock, Compaq Computer reflects a company
with extraordinary management, very good profitability and a very well-defined
strategic direction. On the value side, PHH Corp. is a company in many different
service activities such as financial services and relocation services. The
company had a very attractive valuation, and now it is being acquired. It is a
good example of one of the outcomes that you can get when you own value stocks
where the market perception is less than what buyers are willing to pay for a
company. Conrail is another example where there is an intrinsic value in the
unique assets that this organization has that makes other companies willing to
bid significant premiums to acquire its assets.
HOW DID THE BOND PORTION OF THE FUND CHANGE DURING THE YEAR?
The fixed income portfolio is a mixture of maturities and sectors including U.S.
Treasuries, corporate bonds, mortgage-backed securities and asset-backed
securities. In 1996, we did increase the proportion of mortgages. Given the
uncertainties about the direction of interest rates, we felt that the
incremental yield that we could get from mortgages was worth the prepayment risk
inherent in mortgages when interest rates fall.
8
<PAGE>
STEPSTONE FUNDS -- BALANCED FUND (CONTINUED)
WHAT IS YOUR OUTLOOK?
Over the long term, the equity portion of the portfolio is going to average 60%.
It will not go below 50% or above 70%. We think that the stock market as a whole
looks fully valued. However, we see the stock market as a heterogeneous market
where we continue to think there are good investments in individual securities
and industries. On the other hand, all bonds are going to move with interest
rates, so we're remaining close to our benchmark in terms of interest rate
sensitivity.
[LINEGRAPH]
A line graph depicting the 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
<TABLE>
<CAPTION>
2/28/91 1/31/92 1/31/93 1/31/94 1/31/95 1/31/96 1/31/97
<S> <C> <C> <C> <C> <C> <C> <C>
Stepstone Balanced Fund, Institutional Class $10,000 $11,324 $12,315 $13,779 $13,372 $17,241 $20,051
Salomon Broad Investment Grade Bond Index $10,000 $11,237 $12,493 $13,639 $13,344 $15,605 $16,122
Standard & Poor's 500 Composite Index $10,000 $11,453 $12,664 $14,251 $14,326 $19,859 $25,088
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
One Year Annualized Annualized Annualized
Return 3-Year 5-Year Inception
Return Return to Date
<S> <C> <C> <C> <C>
Balanced Fund 16.30% 13.32% 12.11% 13.02%
(Institutional)
</TABLE>
For the period ended January 31, 1997. Past performance is not predictive of
future performance.
[LINEGRAPH]
A line graph depicting the 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
<TABLE>
<CAPTION>
11/30/92 1/31/93 1/31/94 1/31/95 1/31/96 1/31/97
<S> <C> <C> <C> <C> <C> <C>
Stepstone Balanced Fund, Investment Class $ 9,550 $ 9,908 $11,076 $10,749 $13,837 $16,057
Salomon Broad Investment Grade Bond Index $10,000 $10,361 $11,311 $11,067 $12,942 $13,370
Standard & Poor's 500 Composite Index $10,000 $10,208 $11,487 $11,548 $16,008 $20,223
</TABLE>
Average Annual Total Return
One Year Annualized Annualized
Return 3-Year Inception
Return to Date
Balanced Fund 16.04% 13.18% 13.30%
(Investment)
With Load 22.93% 10.08% 10.87%
For the period ended January 31, 1997. 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%.
9
<PAGE>
STEPSTONE FUNDS -- GROWTH EQUITY FUND
For the year ended January 31, 1997, the Stepstone Growth Equity Fund produced a
total return of 26.31% (Institutional Class). In contrast, the unmanaged Russell
1000 Growth Index reflected a return of 27.49% and the Standard & Poors 500
Composite Index was up 26.33%. The average growth fund as measured by Lipper
Analytical Services was up 20.72% for the period.
The Growth Equity Fund strategy team is led by Scott Chapman, who has 17 years
of experience in the investment field. Mr. Chapman holds an MBA from Golden Gate
University and a bachelor's degree in accounting from Santa Clara University.
Mr. Chapman is also a Chartered Financial Analyst (CFA).
WHAT FACTORS CONTRIBUTED TO YOUR PERFORMANCE?
The Stepstone Growth Equity Fund had very large weightings in top-performing
securities such as Intel (4.6% of the portfolio), Cisco Systems (3.1%) and
Microsoft (3.4%). Aside from technology, other industries heavily represented
in the portfolio include financial services, pharmaceuticals, personal care
products and oil & gas.
WHAT INDIVIDUAL STOCKS PERFORMED PARTICULARLY WELL?
Intel, our largest holding, historically traded at a discount to the overall
market's price/earnings ratio due to its cyclical earnings. However, Intel now
commands 90% of the market for microprocessors installed in personal computers.
Even though the stock has tripled over the last year, it is now just selling at
an average market multiple. Another successful company is Travelers (0.6%),
which was up 61% during the year. Travelers is a diversified financial services
company, including the Smith Barney brokerage firm as well as property &
casualty insurance. Travelers has a very predictable earnings stream with a
diverse product line. The lines of distinction between financial services firms
are blurring, and the successful companies will take advantage of cross-selling
opportunities to encircle the aging baby boomer who needs broad portfolio
advice. Schering Plough (2.1%), which was up 41% for the year, manufactures a
very successful antihistamine which treats allergies. Recently, Schering Plough
received news that one of its competitors' products was taken off the market,
and that has contributed to its excellent earnings growth.
10
<PAGE>
STEPSTONE FUNDS -- GROWTH EQUITY FUND (CONTINUED)
WHAT IS YOUR OUTLOOK?
Since the U.S. has been through six years of an economic expansion, it wouldn't
be surprising to see an economic slowdown, which is typically when growth stocks
shine. In the early stages of an economic recovery, cyclical companies report
huge earnings increases because they're compared to low bases. Growth becomes a
commodity. But in an economic slowdown, cars, office equipment and other big
ticket products start showing deteriorating performance. The companies with
consistent earnings are valued at a premium. If we do enter a period of economic
slowdown, then that should be a positive for the financial companies in our
portfolio since interest rates would typically decline. We're also over-weighted
in companies such as Disney (1.9%) and Fannie Mae (2.6%) that will continue to
report earnings growth despite a slowing economy.
[LINEGRAPH]
A line graph depicting 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
<TABLE>
<CAPTION>
2/28/91 1/31/92 1/31/93 1/31/94 1/31/95 1/31/96 1/31/97
<S> <C> <C> <C> <C> <C> <C> <C>
Stepstone Growth Equity Fund, Institutional Class $10,000 $11,668 $12,780 $14,109 $13,406 $17,821 $22,510
Frank Russell 1000 Growth Index $10,000 $12,139 $12,912 $13,752 $14,093 $19,563 $24,941
</TABLE>
[LINEGRAPH]
<TABLE>
<CAPTION>
Average Annual Total Return
One Year Annualized Annualized Annualized
Return 3-Year 5-Year Inception
Return Return to Date
<S> <C> <C> <C> <C>
Growth Equity 26.31% 16.85% 14.05% 16.31%
Fund (Institutional)
</TABLE>
For the period ended January 31, 1997. Past performance is not predictive of
future performance.
[LINEGRAPH]
A line graph depicting the 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
<TABLE>
<CAPTION>
2/28/91 1/31/92 1/31/93 1/31/94 1/31/95 1/31/96 1/31/97
<S> <C> <C> <C> <C> <C> <C> <C>
Stepstone Growth Equity Fund,
Investment Class $ 9,550 $11,026 $12,080 $13,362 $12,671 $16,826 $21,201
Frank Russell Growth Index $10,000 $11,137 $11,846 $12,616 $12,929 $17,948 $22,882
</TABLE>
[LINEGRAPH]
<TABLE>
<CAPTION>
Average Annual Total Return
One Year Annualized Annualized Annualized
Return 3-Year 5-Year Inception
Return Return to Date
<S> <C> <C> <C> <C>
Growth Equity 26.00% 16.64% 13.97% 15.10%
Fund (Investment)
with Load 20.33% 14.85% 12.92% 14.09%
</TABLE>
For the period ended January 31, 1997. 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%.
11
<PAGE>
STEPSTONE FUNDS -- VALUE MOMENTUM FUND
For the year ended January 31, 1997, the Stepstone Value Momentum Fund produced
a total return of 27.33% (Institutional Class). In contrast, the Standard &
Poors 500 Composite Index was up 26.33%.
The Stepstone Value Momentum Fund strategy team is led by Richard Earnest, who
has more than 30 years of experience in the investment field. Mr. Earnest holds
an MBA in finance and a bachelor's degree in economics from Stanford University.
HOW WOULD YOU DESCRIBE THE VALUE MOMENTUM APPROACH?
We're seeking value but we're also trying to outperform the market over each
cycle. When the market is rising, we want stocks that can rise as least as well
as the market. When the market is declining, we hope that the slightly lower
price/earnings ratio and higher dividend yield of our stocks will give us some
protection so we won't fall as much as the market. We use quantitative screens
and qualitative judgment based on many years of experience in the selection of
companies that we think are priced at less than what they're worth. Momentum's
role is to aid in avoiding the two problems that value investors face -- buying
and selling too soon. By applying some momentum overlays, we are trying to defer
buying where we think a company might still be deteriorating. We also try to
stay with some stocks that have risen out of our value range, but still have
upward momentum.
WHAT IS A GOOD EXAMPLE OF A STOCK THAT HAS PERFORMED WELL USING THIS APPROACH?
For example, Monsanto (0.7% of the portfolio) was bought about six years ago at
a price/earnings multiple of 10. It was a chemical company that had been a poor
performer in an industry that hadn't done all that well. But the stock was
cheap, and the company had been commencing efforts in biotechnology. Ultimately,
the biotech division became very profitable in the agricultural field, and
Monsanto had the distribution network in place to sell these new products. At
the same time, the company began selling off some of the more lackluster parts
of their chemical business, realizing cash and using that cash to buy back stock
and pay down debt. Now, Monsanto is regarded by Wall Street as a high growth
company, and it sells at more than 20 times earnings. Three years ago, it passed
out of the value range where we bought it, but the momentum in terms of relative
price strength and earnings progress has been so strong that we have stayed with
the stock.
WHY HAVE YOU EMPHASIZED REITS INSTEAD OF UTILITIES DURING THE PAST YEAR?
We made a decision that electric utilities and the regional Bell Telephone
companies were going to face a series of regulatory issues that would keep a
cloud on them for some time to come. Typically these companies offer yield and
stability in a value fund. We decided that the risks were greater than the
possible rewards so we wanted to reduce our exposure and did so by putting the
money into real estate investment trusts. REITs were yielding about 8% when we
bought them -- and we thought the dividends on those would rise at a 5-8% rate
while the dividends on the Bells and utilities would rise at just a 2-3% rate.
That happened and the REITs expanded in price by 20-40%.
12
<PAGE>
STEPSTONE FUNDS -- VALUE MOMENTUM FUND (CONTINUED)
WHAT IS YOUR OUTLOOK?
Although the stock market is at record levels, we believe that it is not
substantially overvalued. In 1996, earnings for a broad range of companies came
in well above expectations. A continuing issue is merger and acquisition
activity. Companies are generating excess cash flow, but it becomes difficult to
generate sales growth when the U.S. economy is only growing at a 2-3% rate.
Acquiring companies with expertise is a good way to grow. It also raises the
benchmark level of corporate valuations. In 1996, the market was driven by
better than expected earnings growth, M&A activity and relatively low interest
rates. We have a good chance to repeat that in 1997.
[LINEGRAPH]
A line graph depicting the comparison of change in the value of a $10,000
investment in the Stepstone Growth Value Momentum Fund, Institutional Class,
versus the Standard and Poor's 500 Composite Index
<TABLE>
<CAPTION>
2/28/91 1/31/92 1/31/93 1/31/94 1/31/95 1/31/96 1/31/97
<S> <C> <C> <C> <C> <C> <C> <C>
Stepstone Value Momentum Fund, Institutional Class $10,000 $11,334 $12,727 $14,581 $14,073 $19,826 $25,245
Standard & Poor's 500 Composite Index $10,000 $11,453 $12,664 $14,289 $14,364 $19,912 $25,155
</TABLE>
[LINEGRAPH]
<TABLE>
<CAPTION>
Average Annual Total Return
One Year Annualized Annualized Annualized
Return 3-Year 5-Year Inception
Return Return to Date
<S> <C> <C> <C> <C>
Value Momentum 27.33% 20.08% 17.38% 17.86%
Fund (Institutional)
</TABLE>
For the period ended January 31, 1997. Past performance is not predictive of
future performance.
[LINEGRAPH]
A line graph depicting the comparison of change in the value of a $10,000
investment in the Stepstone Growth Value Momentum Fund, Investment Class, versus
the Standard and Poor's 500 Composite Index
<TABLE>
<CAPTION>
4/30/92 1/31/93 1/31/94 1/31/95 1/31/96 1/31/97
<S> <C> <C> <C> <C> <C> <C>
Stepstone Value Momentum Fund,
Investment Class $ 9,550 $10,464 $11,997 $11,580 $16,301 $20,709
Standard & Poor's 500 Composite Index $10,000 $10,816 $12,203 $12,268 $17,006 $21,483
</TABLE>
[LINEGRAPH]
<TABLE>
<CAPTION>
Average Annual Total Return
One Year Annualized Annualized
Return 3-Year Inception
Return to Date
<S> <C> <C> <C>
Growth Equity 27.04% 19.96% 18.17%
Fund (Investment)
with Load 21.33% 18.14% 17.05%
</TABLE>
For the period ended January 31, 1997. 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%.
13
<PAGE>
STEPSTONE FUNDS -- BLUE CHIP GROWTH FUND
For the year ended January 31, 1997, the Stepstone Blue Chip Growth Fund
produced a total return of 21.11% (Institutional Class). In contrast, the
Standard & Poors 500 Composite Index was up 26.33%. The average growth fund as
measured by Lipper Analytical Services was up 20.72%.
The Stepstone Blue Chip Growth Fund is managed by Edmond Chin, who has 14 years
of experience in the investment field. Mr. Chin graduated from Cornell
University with a bachelor's degree in biology and is a Chartered Financial
Analyst.
WHAT IS MEANT BY "BLUE CHIP GROWTH?"
For this Fund, blue chip means large capitalization stocks issued by companies
with long-term track records of consistent earnings fueled by revenue growth. As
a whole, companies in the portfolio should generate earnings growth in excess of
the market as a whole. We do not make large sector bets. Instead, we're looking
for the best companies using a bottom-up approach.
WHAT FACTORS AFFECTED YOUR PERFORMANCE?
The stock selection in technology and financial services was a strong positive
for the Fund. In particular, Intel (2.0% of the portfolio) shares tripled during
the fiscal year. Intel is the dominant producer of microprocessors for personal
computers. It has little competition and a great deal of pricing flexibility. We
also held large positions in Citicorp (1.9%) and a basket of regional bank
stocks. Citicorp's earnings were very strong in 1996, a year in which interest
rates, though volatile, stayed relatively low. For the regional banks, the
consolidation trend of the early to mid-1990s began to produce benefits to
earnings. On the downside, retailing stocks were weak. In the latter half of
1996, there were concerns that the economy was slowing, and retail sales were
mixed.
WHAT IS YOUR OUTLOOK?
We continue to believe that corporate earnings will be positive and
that cash inflows into the market will remain strong. Although we look for the
stock market to record gains in 1997, we believe that returns will be more
modest than the past two years because of concerns about high stock prices as
well as potential inflation pressures.
[LINE GRAPH]
A line graph depicting the comparison of change in the value of a $10,000
investment in the Stepstone Blue Chip Growth Fund, Institutional Class,
versus the Standard and Poor's 500 Composite Index
[LINEGRAPH]
A line graph depicting the comparison of change in the value of a $10,000
investment in the Stepstone Blue Chip Growth Fund, Institutional Class, versus
the Frank Russell 2000 Growth Index, and the Standard and Poor's 600 Small Cap
Index
[LINEGRAPH]
[/TABLE]
For the period ended January 31, 1997. Past performance is not predictive of
future performance.
<TABLE>
<CAPTION>
2/28/94 1/31/95 1/31/96 1/31/97
<S> <C> <C> <C> <C>
Stepstone Blue Chip Growth Fund, Institutional Class $10,000 $9,890 $13,544 $16,403
Standard & Poor's 500 Composite Index $10,000 $10,332 $14,323 $18,094
</TABLE>
[LINEGRAPH]
<TABLE>
<CAPTION>
Average Annual Total Return
One Year Annualized
Return Inception
to Date
<S> <C> <C>
Blue Chip Growth 21.11% 17.15%
Fund (Institutional)
</TABLE>
For the period ended January 31, 1997. Past performance is not predictive of
future performance.
14
<PAGE>
STEPSTONE FUNDS -- EMERGING GROWTH FUND
For the year ended January 31, 1997, the Stepstone Emerging Growth Fund produced
a total return of 21.79% (Institutional Class). In contrast, the Standard &
Poors 600 Small Cap Index was up 23.17% while the Russell 2000 Index was up
14.91%. The Standard & Poors 500 Composite Index was up 26.33%.
The Stepstone Emerging Growth Fund is managed by Seth Shalov, who has 13 years
of experience in the investment field. Mr. Shalov holds an MBA and a bachelor's
degree in finance from Rutgers University.
HOW DO YOU DEFINE "EMERGING GROWTH?"
We look for companies with strong revenue growth and improving margins that have
a minimum market capitalization of $50 million. The largest market
capitalization for new stocks is $750 million, but we are not compelled to sell
the stock when it rises above that level. The Fund includes more than 150
companies because we don't want a particular company to have a material negative
impact on the portfolio. We feel very confident that our research, screening and
maintenance capabilities can handle 150-200 names.
WHAT AREAS OF THE MARKET APPEAR ATTRACTIVE?
We like biotechnology. One of the themes that we have been playing is stocks
involved with AIDS research. Two companies in that category are Agouron
Pharmaceutical (0.6% of the portfolio) and Biochem Pharma (1.6%). Also, pure
technology has been a theme. We like companies that enhance productivity through
some innovation. For instance, Speedfam International has developed a chemical
mechanical polishing process used to fabricate thin film memory disks,
semiconductor wafers and semiconductor components. The company is ramping up
sales, increasing earnings and has a solid balance sheet.
WHAT IS YOUR OUTLOOK?
My outlook for this portfolio is more positive than it is for large
capitalization stocks. Over the past few years, the small caps have
under-performed large caps. The reason: the money that has flowed into the
market has gone into larger stocks with better liquidity. However, if you look
at the fundamentals, small cap stocks have better earnings growth potential and
are trading at very attractive price/earnings multiples. In addition, the
stronger dollar bodes well for small cap stocks because they have less exposure
to overseas sales than some of the larger companies.
[LINEGRAPH]
A line graph depicting the 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 Standard and Poor's 600 Small Cap
Index
<TABLE>
<CAPTION>
4/30/94 1/31/95 1/31/96 1/31/97
<S> <C> <C> <C> <C>
Stepstone Emerging Growth Fund,
Investment Class $10,000 $9,722 $12,662 $15,421
Frank Russell 2000 Growth Index $10,000 $9,353 $12,406 $14,256
Standard & Poor's 600 Small Cap Index $10,000 $9,193 $12,142 $14,955
</TABLE>
[LINEGRAPH]
<TABLE>
<CAPTION>
Average Annual Total Return
One Year Annualized
Return Inception
to Date
<S> <C> <C>
Emerging Growth 21.79% 14.88%
Fund (Insitutional)
</TABLE>
For the period ended January 31, 1997. Past performance is not predictive of
future performance.
15
<PAGE>
STEPSTONE FUNDS -- INTERNATIONAL EQUITY FUND
For the year ended January 31, 1997, the Stepstone International Equity Fund
(Institutional Class) produced a total return of (2.14%), compared with the
Morgan Stanley EAFE Index return of 1.93% during the period.
The Stepstone International Equity Fund is managed by Andrew Richmond, who has
over 20 years of experience in equity management; he holds a Law degree from
Glasgow University and qualified as a Scottish Chartered Accountant.
HOW WOULD YOU ASSESS YOUR PERFORMANCE?
It was a story of two very different halves; in the first half of the period,
our investment strategy, stock selection and currency overlay all contributed to
a good performance relative to the EAFE Index. The second half, however, did not
quite go in our favor. We held a double-weighted exposure to the Pacific region,
neutral against the benchmark in Japan and thus underweighted in Europe.
However, Europe performed strongly during the second half of the year, while
Japan was down sharply. At the stock selection level, performance returns
against the local index remained reassuringly positive, particularly in the
European markets.
WHY DOES JAPAN CONTINUE TO STRUGGLE?
The Japanese economy and stock market continue to suffer from deflation in real
estate prices, which has exerted tremendous pressure on the banking and
financial services sector. The level of consumer confidence remains very low and
the economy's sluggishness persists despite government efforts to stimulate
growth through low interest rates. In addition, labor costs have risen sharply
in Japan over the past decades and the country faces increasing competition from
the skilled and available workforce elsewhere in the Pacific region; such
competition makes it increasingly problematic for Japanese companies to prosper.
We anticipate economic growth in Japan to exceed 1.5% in 1997, which by historic
Japanese standards, does not inspire. On a more positive track, the weakness in
the yen is helpful to exporters such as Sony and Canon, which should benefit
from the global economic expansion.
[LINE GRAPH]
[LINEGRAPH]
A line graph depicting the 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
<TABLE>
<CAPTION>
2/28/95 1/31/96 1/31/97
<S> <C> <C> <C>
Stepstone International Equity
Fund, Institutional Class $10,000 $11,476 $11,231
Morgan Stanley MSCI EAFE Index $10,000 $11,646 $11,871
</TABLE>
[LINEGRAPH]
<TABLE>
<CAPTION>
Average Annual Total Return
One Year Annualized
Return Inception
to Date
<S> <C> <C>
International Equity -2.14% 5.42%
Fund (Insitutional)
</TABLE>
For the period ended January 31, 1997. Past performance is not predictive of
future performance.
16
<PAGE>
STEPSTONE FUNDS -- INTERNATIONAL EQUITY FUND (CONTINUED)
HOW WOULD YOU ASSESS EUROPE'S PROSPECTS?
The majority of European equity markets have fared well over recent months.
Economic growth prospects for 1997 appear reasonably encouraging; the interest
rate environment remains relatively benign, as does the inflationary background.
We forecast Continental European economic growth in 1997 rising to 2.5%, with
momentum increasing as the year progresses. The effect on corporate profits,
earnings and dividends will be very healthy towards investor sentiment and goes
some way to justify the current high equity valuation levels. Within individual
markets, we currently remain optimistic for the outlook for the financial and
pharmaceutical sectors in the U.K. while in Germany, the auto and chemical
sectors may well continue to forge ahead in performance terms, where our
holdings in Bayer (0.8%), BASF (0.9%) and Daimler Benz (0.6%) should prove
beneficial.
WHAT IS THE OUTLOOK FOR 1997?
In the short term, we do not envision a speedy solution to Japan's current
economic problems and anticipate that market sentiment may well remain fragile
over the course of the next few months. On Europe, we believe further progress
will be made and corporate growth expectations more than justify current
valuation levels; domestic demand for equities should continue to grow. Pacific
Basin markets are expected to remain volatile and the forthcoming transfer of
Hong Kong from British sovereignty may well create uncertainty. Looking ahead,
however, the region continues to offer superior economic growth opportunities,
which we believe will ultimately be reflected in stock prices. Our enthusiasm
for the region remains intact.
17
<PAGE>
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
Stepstone Treasury Money Market Fund
FACE
AMOUNT VALUE
(000) (000)
-----------------
U.S. TREASURY OBLIGATIONS (31.1%) (A)
U.S. Treasury Bills
5.120%, 05/01/97 $ 20,000 $ 19,747
5.060%, 05/08/97 10,000 9,865
5.040%, 05/22/97 10,000 9,846
5.220%, 05/29/97 15,000 14,745
5.200%, 08/21/97 20,000 19,424
U.S. Treasury Notes
6.750%, 02/28/97 10,000 10,010
6.875%, 02/28/97 5,000 5,006
6.625%, 03/31/97 15,000 15,028
8.500%, 04/15/97 5,000 5,026
6.500%, 04/30/97 15,000 15,034
6.500%, 05/15/97 8,000 8,014
5.625%, 06/30/97 15,000 15,017
8.500%, 07/15/97 15,000 15,207
5.875%, 07/31/97 5,000 5,001
6.500%, 08/15/97 5,000 5,019
5.750%, 10/31/97 15,000 15,030
- -------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $187,019) 187,019
- -------------------------------------------------------
REPURCHASE AGREEMENTS (71.5%)
BZW Securities, Inc.
5.47%, dated 01/31/97, matures, 02/03/97,
repurchase price $25,018,921
(collateralized by various U.S.
Treasury Notes, total par value
$24,998,000, 5.625%-8.875%,
06/30/97-11/30/97: total market
value $25,508,251) (B) 25,008 25,008
Deutsche Morgan Grenfell/C.J. Lawrence, Inc.
5.50%, dated 01/31/97, matures
02/03/97, repurchase price $129,466,410
(collateralized by various U.S. Treasury
Notes, total par value $57,905,000,
6.25%-8.50%, 04/15/97-11/15/04:
various U.S. Treasury Bonds, total par
value $51,258,000, 6.75%-14.00%,
08/15/04-08/15/26: U.S. Treasury
STRIPS, total par value $10,225,000,
05/15/19: total market value
$131,996,020) (B) 129,407 129,407
FACE
AMOUNT VALUE
(000) (000)
-----------------
JP Morgan Securities, Inc.
5.50%, dated 01/31/97, matures
02/03/97, repurchase price
$27,026,776 (collateralized by various
U.S. Treasury Notes, total par value
$25,303,000, 6.50%-8.875%,
11/15/97-5/31/01: U.S Treasury
Bond, total par value $1,295,000,
11.125%, 08/15/03: total market
value $27,555,330) (B) $ 27,014 $ 27,014
Merrill Lynch Government Securities, Inc.
5.45%, dated 01/31/97, matures
02/03/97, repurchase price $27,928,113
(collateralized by various U.S.
Treasury STRIPS, total par value
$111,452,000, 7.25%-10.625%,
08/15/15-05/15/17: total market
value $28,474,813) (B) 27,915 27,915
Morgan Stanley & Company, Inc.
5.48%, dated 01/31/97, matures
02/03/97, repurchase price $28,978,658
(collateralized by U.S. Treasury Note,
par value $29,635,000, 4.75%, matures
09/30/98: total market value
$29,578,125) (B) 28,965 28,965
Nomura Securities International, Inc.
5.51%, dated 01/31/97, matures
02/03/97, repurchase price $24,074,951
(collateralized by U.S. Treasury STRIPS,
total par value $104,137,000, matures
08/15/17: market value
$24,545,403) (B) 24,064 24,064
SBC Warburg, Inc.
5.48%, dated 01/31/97, matures
02/03/97, repurchase price $41,324,446
(collateralized by various U.S. Treasury
Notes, total par value $41,881,000,
5.875%-7.125%, 11/15/99-02/29/00:
total market value $42,136,255) (B) 41,306 41,306
UBS Securities, LLC
5.50%, dated 01/31/97, matures
02/03/97, repurchase price $125,741,734
(collateralized by various U.S. Treasury
STRIPS, total par value $160,740,000
02/15/00-05/15/03; total market
value $128,200,185) (B) 125,684 125,684
18
<PAGE>
STEPSTONE FUNDS(R) January 31, 1997
- --------------------------------------------------------------------------------
TREASURY MONEY MARKET FUND (CONT'D)
VALUE
(000)
--------
REPURCHASE AGREEMENTS (CONTINUED)
- --------------------------------------------------------
Total Repurchase Agreements
(Cost $429,363) $429,363
- -------------------------------------------------------
Total Investments (102.6%)
(Cost $616,382) 616,382
- -------------------------------------------------------
Other Assets and Liabilities,
Net (-2.6%) (15,575)
- -------------------------------------------------------
NET ASSETS:
Fund Shares of Institutional Class (unlimited
authorization -- no par value)
based on 170,970,864 outstanding
shares of beneficial interest 170,971
Fund Shares of Investment Class (unlimited
authorization -- no par value) based
on 429,829,780 outstanding shares of
beneficial interest $429,830
Accumulated net realized gain
on investments 6
- -------------------------------------------------------
Total Net Assets: (100.0%) $600,807
- -------------------------------------------------------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE --
INSTITUTIONAL CLASS $1.00
- -------------------------------------------------------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE --
INVESTMENT CLASS $1.00
- -------------------------------------------------------
(A) THE RATE REFLECTED ON THE STATEMENT OF NET ASSETS REPRESENTS THE SECURITY'S
EFFECTIVE YIELD.
(B) TRI-PARTY REPURCHASE AGREEMENT
STRIPS -- SEPARATE TRADING OF REGISTERED INTEREST AND PRINCIPAL OF SECURITIES
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
19
<PAGE>
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
Stepstone Money Market Fund
FACE
AMOUNT VALUE
(000) (000)
----------------
CERTIFICATES OF DEPOSIT--YANKEE (18.9%)
Bank of Nova Scotia, Portland
5.400%, 03/31/97 $45,000 $ 45,001
Dai-Ichi Kangyo Bank Ltd., New York
5.620%, 03/19/97 20,000 20,000
Deutsche Bank AG, New York
5.530%, 04/02/97 10,000 9,997
Dresdner Bank AG, New York
5.010%, 02/26/97 13,000 12,996
Industrial Bank of Japan Ltd.,
New York
5.560%, 04/07/97 50,000 50,002
Royal Bank of Canada, New York
5.580%, 12/11/97 30,000 29,995
Societe Generale, New York
5.720%, 04/14/97 5,000 4,999
Sumitomo Bank Ltd, Los Angeles
5.750%, 02/19/97 25,000 25,000
Swiss Bank Corporation, New York
5.960%, 06/03/97 10,000 10,002
- -------------------------------------------------------
Total Certificates of Deposit --
Yankee (Cost $207,992) 207,992
- -------------------------------------------------------
CERTIFICATES OF DEPOSIT--EURO (5.5%)
ABN AMRO Bank, London
5.480%, 04/08/97 35,000 35,004
Australia & New Zealand Banking
Group, London
5.520%, 04/15/97 25,000 25,002
- -------------------------------------------------------
Total Certificates of Deposit --
Euro (Cost $60,006) 60,006
- -------------------------------------------------------
BANK NOTES (0.5%)
NBD Bank, N.A., Detroit
6.500%, 06/02/97 5,000 5,009
- -------------------------------------------------------
Total Bank Notes
(Cost $5,009) 5,009
- -------------------------------------------------------
COMMERCIAL PAPER (39.3%) (B)
Finance--Auto (2.7%)
Ford Motor Credit Company
5.270%, 02/11/97 30,000 29,956
- -------------------------------------------------------
29,956
- -------------------------------------------------------
FACE
AMOUNT VALUE
(000) (000)
-----------------
FINANCE--INVESTMENT BANKS/BROKERAGE (7.7%)
Goldman Sachs Group, LP
5.280%, 02/06/97 $ 25,000 $24,982
Merrill Lynch & Company, Inc.
5.270%, 02/04/97 30,000 29,987
Morgan Stanley Group, Inc.
5.340%, 04/14/97 30,000 29,680
- -------------------------------------------------------
84,649
- -------------------------------------------------------
FINANCE--OTHER (13.1%)
American Express Credit
5.270%, 02/19/97 25,000 24,934
Asset Securitization Cooperative Corp.
5.340%, 05/01/97 30,000 29,604
Ciesco, LP
5.300%, 02/03/97 30,000 29,991
Falcon Asset Securitization
5.320%, 02/21/97 30,000 29,911
International Lease Finance
5.280%, 03/13/97 30,000 29,824
- -------------------------------------------------------
144,264
- -------------------------------------------------------
FOREIGN BANKS (10.4%)
Abbey National North America Inc. (B)
5.310%, 03/03/97 30,000 29,867
Commonwealth Bank of Australia
5.330%, 04/10/97 30,000 29,698
Toronto-Dominion Holdings (USA) Inc.
5.290%, 03/10/97 30,000 29,837
Westpac Capital
5.270%, 05/27/97 25,000 24,579
- -------------------------------------------------------
113,981
- -------------------------------------------------------
INDUSTRIAL (5.4%)
Lucent Technologies
5.340%, 03/17/97 30,000 29,804
Philip Morris Companies, Inc.
5.280%, 02/24/97 30,000 29,899
- -------------------------------------------------------
59,703
- -------------------------------------------------------
Total Commercial Paper
(Cost $432,553) 432,553
- -------------------------------------------------------
20
<PAGE>
STEPSTONE FUNDS(R) January 31, 1997
- --------------------------------------------------------------------------------
Money Market Fund (cont'd)
FACE
AMOUNT VALUE
(000) (000)
-----------------
CORPORATE OBLIGATIONS (4.1%)
Bear Stearns Companies, Inc. (A)
5.495%, 05/20/97 $30,000 $ 30,000
Norwest Financial, Inc.
6.500%, 05/15/97 10,000 10,020
Wal-Mart Stores Inc.
5.500%, 09/15/97 5,000 4,996
- -------------------------------------------------------
Total Corporate Obligations
(Cost $45,016) 45,016
- -------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS (1.8%)
FHLB
5.035%, 03/06/97 20,000 19,997
- -------------------------------------------------------
Total U.S. Government Agency Obligations
(Cost $19,997) 19,997
- -------------------------------------------------------
REPURCHASE AGREEMENTS (30.0%)
BZW Securities, Inc.
5.55%, dated 01/31/97,
matures 02/03/97, repurchase
price $39,148,734 (collateralized
by various U.S. Treasury Bills,
par value $19,674,000, 05/29/97-
07/17/97: U.S Treasury Note,
par value $5,380,000, 7.75%,
12/31/99: U.S. Treasury Bond,
par value $9,959,000 11.25%,
02/15/15 total market value
$39,913,712) (C) 39,131 39,131
Deutsche Morgan Grenfell/
C.J. Lawrence, Inc.
5.55%, dated 01/31/97, matures
02/03/97, repurchase price
$240,534,356 (collateralized by
various FHLMC obligations,
total par value $261,986,555,
5.98%-8.75%, 09/01/01-01/01/27:
various FNMA obligations,
total par value $141,314,588,
0.00%-7.477%, 11/01/24-08/01/34;
total market value
$245,231,624) (C) 240,423 240,423
Nomura Securites International, Inc.
5.58%, dated 01/31/97, matures
02/03/97, repurchase price
$31,532,754 (collateralized by
GNMA, total par value $32,475,000,
6.00%, 01/20/27: total market
value $32,159,245) (C) 31,518 31,518
FACE
AMOUNT VALUE
(000) (000)
-----------------
JP Morgan Securities, Inc.
5.55%, dated 01/31/97,
matures 02/03/97, repurchase
price $19,078,111 (collateralized
by GNMA, par value $19,325,000,
6.50%, 01/20/27: market value
$19,468,017) (C) $19,069 $ 19,069
- -------------------------------------------------------
Total Repurchase Agreements
(Cost $330,141) 330,141
- -------------------------------------------------------
Total Investments (100.1%)
(Cost $1,100,714) 1,100,714
- -------------------------------------------------------
Other Assets and Liabilities,
Net (-0.1%) (577)
- -------------------------------------------------------
NET ASSETS:
Fund Shares of Institutional Class
(unlimited authorization --
no par value) based on 524,518,400
outstanding shares of beneficial
interest 524,518
Fund Shares of Investment Class
(unlimited authorization --
no par value) based on 576,704,461
outstanding shares of beneficial
interest 576,705
Undistributed net investment income 5
Accumulated net realized loss
on investments (1,091)
- -------------------------------------------------------
Total Net Assets: (100.0%) $1,100,137
- -------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- INSTITUTIONAL CLASS $1.00
- -------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE-- INVESTMENT CLASS $1.00
=======================================================
(A) FLOATING RATE SECURITY -- THE RATE REFLECTED ON THE STATEMENT OF NET ASSETS
IS THE RATE IN EFFECT ON JANUARY 31, 1997.
(B) THE RATE REFLECTED ON THE STATEMENT OF NET ASSETS REPRESENTS THE SECURITY'S
DISCOUNT YIELD.
(C) TRI-PARTY REPURCHASE AGREEMENT
FHLB -- FEDERAL HOME LOAN BANK
FHLMC -- FEDERAL HOME LOAN MORTGAGE CORPORATION
GNMA -- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
FNMA -- FEDERAL NATIONAL MORTGAGE ASSOCIATION
21
<PAGE>
- -
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
Stepstone California Tax-Free Money Market Fund
FACE
AMOUNT VALUE
(000) (000)
-----------------
CALIFORNIA MUNICIPAL BONDS (92.4%)
Alameda County, Multi-Family Housing,
VRDN, RB (A) (B) (C)
3.450%, 02/07/97 $ 900 $ 900
Anaheim Public Improvement Corporation,
1995 Police Facilities Refinancing
Project, COP, AMBAC Insured (A)
3.400%, 02/07/97 2,400 2,400
California Education Facilities
Authority Carnegie Institute, TECP
3.450%, 02/07/97 2,000 2,000
3.450%, 03/05/97 1,000 1,000
3.450%, 05/02/97 2,000 2,000
California Education Facilities
Authority Stanford University,
Ser M, RB
5.000%, 12/01/97 1,035 1,047
California Education Facilities
Authority, Stanford University,
Ser L, VRDN, RB (A) (B)
3.400%, 02/07/97 4,000 4,000
California Health Facilities Finance
Authority St. Francis Medical,
Ser F, RB, MBIA Insured (A) (B)
3.400%, 02/07/97 3,000 3,000
California Health Facilities Finance
Authority, Saint Joseph Health
System, Ser B, VRDN, RB (A) (B)
3.600%, 02/01/97 1,895 1,895
California Health Facilities Financing
Authority, Adventist Health Systems,
VRDN, RB (A) (B) (C)
3.500%, 02/07/97 1,500 1,500
California Health Facilities Financing
Authority, Catholic Health Care,
Ser A, VRDN, RB, MBIA Insured
(A) (B) 3.450%, 02/07/97 1,000 1,000
California Health Facilities Financing
Authority, Kaiser Permanente,
Ser A, 1993, VRDN, RB (A) (B)
3.450%, 02/07/97 5,000 5,000
Face
Amount Value
(000) (000)
-----------------
California Health Facilities
Financing Authority, Memorial
Health Services, VRDN, RB (A) (B)
3.450%, 02/07/97 $5,040 $ 5,040
California Health Facilities Financing
Authority, Pooled Loan Program,
Ser B, VRDN, RB, FGIC Insured (A) (B)
3.400%, 02/07/97 500 500
California Health Facilities Financing
Authority, Santa Barbara Cottage
Hospital, VRDN, RB (A) (B) (C)
3.500%, 02/07/97 2,900 2,900
California Health Facilities Financing
Authority, Sutter Health, Ser A,
VRDN, RB (A) (B)
3.600%, 02/01/97 1,000 1,000
California Health Facilities Financing
Authority, St. Joseph's Hospital,
VRDN, RB (A) (B)
3.550%, 02/01/97 3,080 3,080
California Pollution Control Finance
Authority Chevron U.S.A. Inc. Project,
3.700%, 02/01/97 1,460 1,460
California Pollution Control Finance
Authority, Exxon Project, VRDN,
RB (A) (B) (C)
3.600%, 02/01/97 5,000 5,000
California Pollution Control Finance
Authority, Ser A, Shell Oil,
VRDN, RB (A) (B)
3.550%, 02/01/97 4,400 4,400
California Pollution Control Finance
Authority, Ser B, Shell Oil
VRDN, RB (A) (B)
3.550%, 02/01/97 1,750 1,750
California Pollution Control Finance
Authority, Ser C, Shell Oil
VRDN, RB, (A) (B)
3.550%, 02/01/97 100 100
22
<PAGE>
STEPSTONE FUNDS(R) January 31, 1997
- --------------------------------------------------------------------------------
California Tax-Free Money Market Fund (cont'd)
FACE
AMOUNT VALUE
(000) (000)
-----------------
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
California Pollution Control Finance
Authority, Southern California
Edison, Ser A, VRDN, RB (A) (B)
3.700%, 02/01/97 $ 500 $ 500
California Pollution Control Finance
Authority, Southern California
Edison, Ser B, VRDN, RB (A) (B)
3.700%, 02/01/97 500 500
California Pollution Control Finance
Authority, Southern California
Edison, Ser D, VRDN, RB (A) (B)
3.700%, 02/01/97 3,000 3,000
California Pollution Control Finance,
GO, Authority, Southern California
Edison, Ser C, VRDN, RB (A) (B)
3.700%, 02/01/97 1,900 1,900
California Pollution Control Finance
Authority, Pacific Gas and Electric,
VRDN, RB (A) (B)(C)
3.650%, 02/01/97 5,000 5,000
California State, TECP (C)
3.350%, 03/07/97 2,000 2,000
California Statewide Communities
Development Authority, North
California Retirement, VRDN,
RB, (A) (B) (C)
3.600%, 02/01/97 5,500 5,500
California Statewide Communities
Development Authority, Ser A,
GO, FSA Insured
4.750%, 06/30/97 1,000 1,003
California Statewide Communities
Development Authority, St. Joseph
Health System, COP, VRDN, RB (A) (B)
3.450%,02/07/97 1,600 1,600
California Statewide Communities
Development Authority, Sutter
Health Group, VRDN, RB, (A)(B)
AMBAC Insured
3.600%, 02/01/97 300 300
Downey Civic Center Project COP,
MBIA Insured
4.000%, 02/01/97 500 500
FACE
AMOUNT VALUE
(000) (000)
-----------------
East Bay, Municipal Utility District,
Wastewater, TECP
3.400%, 03/20/97 $2,400 $ 2,400
3.450%, 04/02/97 1,300 1,300
East Bay, Municipal Utility District,
Water System Revenue AMBAC
Insured, Escrowed To Maturity
8.875%, 06/01/97 500 508
Eastern Municipal Water District,
COP, Ser B, VRDN, RB,
FGIC Insured (A) (B)
3.450%, 02/07/97 500 500
Healdsburg Community Redevelopment
Agency, VRDN, RB (A) (B) (C)
3.600%, 02/07/97 3,735 3,735
Huntington Park Redevelopment
Agency, Huntington Park Personal
Storage I Project, VRDN,
RB (A) (B) (C)
3.700%, 02/07/97 1,065 1,065
Irvine Ranch Water District,
Ser - A (A) (B)(C)
3.550%, 02/01/97 1,300 1,300
Irvine Ranch Water District,
Consolidated Ser 1989,
VRDN, GO (A) (B) (C)
3.550%, 02/01/97 3,100 3,100
Irvine Ranch Water District,
Ser B, VRDN, RB (A) (B) (C)
3.550%, 02/01/97 2,400 2,400
Irvine Ranch Water District, VRDN,
RB (A) (B) (C)
3.550%, 02/01/97 3,600 3,600
Irvine Ranch Water District,
Waterworks Bond, Improvement
District #182, Ser A, VRDN,
RB (A) (B) (C) 3.550%, 02/01/97 1,600 1,600
Irvine Ranch, Water Improvement
District #282, Ser A, VRDN
RB (A) (B) (C) 3.550%, 02/10/97 200 200
Kern County, California Public
Facilities Proj, Ser B, COP,
VRDN (A) (B) (C) 3.450%, 02/07/97 1,700 1,700
Long Beach, California TRAN,
4.750%, 10/09/97 2,000 2,010
23
<PAGE>
STEPSTONE FUNDS(R) January 31, 1997
- --------------------------------------------------------------------------------
California Tax-Free Money Market Fund (cont'd)
FACE
AMOUNT VALUE
(000) (000)
-----------------
California Municipal Bonds (CONTINUED)
Los Angeles, California Department of
Water & Power, TECP
3.500%, 05/15/97 $3,000 $ 3,000
Los Angeles Community Redevelopment
Agency, Multi-Family Housing Revenue,
Skyline at South Park Phase II, VRDN,
RB (A) (B) (C)
3.650%, 02/07/97 800 800
Los Angeles County Pension Obligation,
Ser B, VRDN, GO (A) (B)(C)
3.400%, 02/07/97 2,000 2,000
Los Angeles County Pension Obligation,
Ser C, VRDN, RB, AMBAC Insured
(A) (B)(C)
3.400%, 02/07/97 2,000 2,000
Los Angeles County, Metropolitan
Transportation Authority, Sales Tax
Revenue, Ser A, VRDN, MBIA (A) (B)
3.450%, 02/07/97 9,000 9,000
Los Angeles, California Department of
Water & Power, TECP
3.450%, 02/20/97 2,000 2,000
Sacramento County Multi-Family
Housing, Riveroaks Apartments,
VRDN, RB (A) (B) (C)
3.700%, 02/07/97 5,000 5,000
San Bernadino County Housing Authority,
Victoria Terrace, Project A, VRDN,
RB (A) (B) (C)
3.550%, 02/07/97 2,450 2,450
San Bernadino Multi-Family Housing,
Western #3 Project, VRDN,
RB (A) (B) (C) 3.300%, 02/07/97 2,500 2,500
San Bernadino Multi-Family Housing,
Western #4 Project, VRDN,
RB (A) (B) (C) 3.300%, 02/07/97 2,500 2,500
San Diego County, Regional
Transportation Authority,
Sales Tax Revenue, TECP (C)
3.450%, 05/09/97 4,600 4,600
San Diego Multi-Family Housing,
University Town Center Apartments,
1993 Issued, VRDN, RB (A) (B) (C)
3.250%, 02/07/97 2,000 2,000
FACE
AMOUNT VALUE
(000) (000)
-----------------
San Diego, California Housing
Authority, Multi Family Housing
VRDN (A) (B) (C)
3.500%, 02/07/97 $2,005 $ 2,005
San Jose Unified School District,
Santa Clara County, TRAN
4.500%, 08/05/97 2,000 2,005
San Mateo County, TRAN
4.500%, 07/01/97 3,000 3,007
San Mateo Union High School
District, TRAN
4.250%, 07/10/97 1,000 1,001
Santa Clara Transport Authority,
VRDN, RB (A) (B) (C)
3.700%, 02/01/97 1,000 1,000
Southern California Metro Water,
TECP (C) 3.400%, 02/13/97 1,000 1,000
Southern California Metro Water
District, Water Revenue VRDN,
Ser 1996-A, RB, AMBAC Insured
(A) (B) 3.450%, 02/07/97 4,400 4,400
Southern California Metro Water
District, Ser B, TECP (C)
3.300%, 03/14/97 2,300 2,300
Southern California Public Power
Authority, VRDN (A) (B) (C)
3.450%, 02/07/97 5,000 5,000
Tracy Multi-Family Housing Refunding,
Sycamore Village Apartments,
VRDN, RB (A) (B) (C)
3.300%, 02/07/97 2,300 2,300
Turlock Irrigation District
Transmission Projects, COP,
Ser A (A) (B) (C) 3.500%, 02/07/97 985 985
Tustin, California Improvement Board
Act 1915, VRDN (A) (B) (C)
3.600%, 02/01/97 1,500 1,500
University of California
Board of Regents, TECP (C)
3.500%, 02/14/97 1,000 1,000
3.450%, 04/10/97 1,000 1,000
24
<PAGE>
STEPSTONE FUNDS(R) January 31, 1997
- --------------------------------------------------------------------------------
California Tax-Free Money Market Fund (cont'd)
Face
Amount Value
(000) (000)
-----------------
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
Vallejo Housing Authority,
Multi-Family Revenue, Crow Western
Project Phase II,
VRDN, RB (A) (B) (C)
3.550%, 02/07/97 $5,200 $ 5,200
Vallejo Housing Authority, Multi-
Family Revenue, Fountain Plaza
Hills Apartments, 1992 A, VRDN, RB,
FNMA Insured (A) (B)
3.450%, 02/07/97 900 900
West Covina Redevelopment Agency,
Lakes Public Parking Project,
VRDN, RB (A) (B) (C)
3.500%, 02/07/97 2,000 2,000
- -------------------------------------------------------
Total California Municipal Bonds
(Cost $172,646) 172,646
- -------------------------------------------------------
Cash Equivalents (8.0%)
Provident California Tax Free
Money Market 8,000 8,000
SEI California Tax Free Money
Market Portfolio 7,063 7,063
- -------------------------------------------------------
Total Cash Equivalents
(Cost $15,063) 15,063
- -------------------------------------------------------
Total Investments (100.4%)
(Cost $187,709) 187,709
- -------------------------------------------------------
Other Assets and Liabilities,
Net (-0.4%) (814)
- -------------------------------------------------------
Value
(000)
-------
NET ASSETS:
Fund Shares of Institutional Class
(unlimited authorization --
no par value) based on 36,205,114
outstanding shares of beneficial
interest $ 36,205
Fund Shares of Investment Class
(unlimited authorization --
no par value) based on 150,691,369
outstanding shares of beneficial interest 150,691
Accumulated net realized loss
on investments (1)
- -------------------------------------------------------
Total Net Assets: (100.0%) $186,895
- -------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- INSTITUTIONAL CLASS $1.00
- -------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE-- INVESTMENT CLASS $1.00
=======================================================
(A) FLOATING RATE SECURITY--THE RATE REFLECTED ON THE
STATEMENT OF NET ASSETS IS THE RATE IN EFFECT ON
JANUARY 31, 1997.
(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 CORPORATION
COP -- CERTIFICATE OF PARTICIPATION
FGIC -- FEDERAL GUARANTY INSURANCE COMPANY
FNMA -- FEDERAL NATIONAL MORTGAGE ASSOCIATION
FSA -- FINANCIAL SECURITY ASSURANCE
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
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
Stepstone Intermediate-Term Bond Fund
FACE
AMOUNT VALUE
(000) (000)
-----------------
CORPORATE OBLIGATIONS (39.7%)
BANKING & FINANCIAL SERVICES (20.0%)
Avco Financial Services
7.375%, 08/15/01 $ 3,500 $ 3,601
Bankers Trust
7.250%, 01/15/03 3,500 3,557
7.500%, 11/15/15 1,500 1,483
Banponce
6.750%, 12/15/05 2,000 1,933
Commercial Credit
6.200%, 11/15/01 3,500 3,434
Fleet Financial
7.125%, 04/15/06 2,000 1,993
Ford Motor Credit
8.200%, 02/15/02 4,000 4,240
Household Finance
6.875%, 03/01/03 2,500 2,516
Lehman Brothers Holdings
8.750%, 05/15/02 4,000 4,303
Salomon Brothers
7.750%, 05/15/00 2,000 2,068
Travelers/Aetna
6.750%, 04/15/01 2,000 2,008
- -------------------------------------------------------
31,136
- -------------------------------------------------------
FOREIGN GOVERNMENTS (4.5%)
Province of Manitoba
6.125%, 01/19/04 3,000 2,895
Province of Ontario
7.375%, 01/27/03 4,000 4,130
- -------------------------------------------------------
7,025
- -------------------------------------------------------
INDUSTRIAL (8.2%)
Bristol-Myers Squibb
6.800%, 11/15/26 5,000 4,738
Lockheed Martin
7.450%, 06/15/04 3,500 3,609
McDonnell Douglas
6.875%, 11/01/06 1,000 990
Pepsico
5.875%, 06/01/00 3,500 3,448
- -------------------------------------------------------
12,785
- -------------------------------------------------------
UTILITIES (7.0%)
Arkansas Electric Cooperative
7.330%, 06/30/08 $ 2,403 $ 2,428
Hydro-Quebec
7.500%, 04/01/16 2,500 2,494
Pacific Gas & Electric
8.750%, 01/01/01 780 839
6.250%, 08/01/03 2,000 1,948
Panhandle Eastern
7.875%, 08/15/04 3,000 3,139
- -------------------------------------------------------
10,848
- -------------------------------------------------------
Total Corporate Obligations
(Cost $61,437) 61,794
- -------------------------------------------------------
U.S. TREASURY OBLIGATIONS (22.2%)
U.S. Treasury Notes
6.125%, 03/31/98 2,000 2,009
6.375%, 05/15/99 3,000 3,025
6.375%, 07/15/99 1,000 1,009
6.250%, 05/31/00 7,000 7,020
6.125%, 09/30/00 9,000 8,980
6.250%, 02/15/03 2,000 1,991
6.500%, 05/15/05 2,000 2,001
6.500%, 08/15/05 3,300 3,300
U.S. Treasury Bond
7.250%, 08/15/22 5,000 5,199
- -------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $34,494) 34,534
- -------------------------------------------------------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED OBLIGATIONS (25.6%)
FHLMC
7.000%, 09/01/01 9,777 9,881
FNMA
7.000%, 02/01/04 8,000 8,041
8.000%, 09/01/11 9,524 9,816
8.000%, 08/01/24 11,854 12,118
- -------------------------------------------------------
Total U.S. Government Agency
Mortgage-Backed Obligations
(Cost $39,543) 39,856
- -------------------------------------------------------
26
<PAGE>
STEPSTONE FUNDS(R) January 31, 1997
- --------------------------------------------------------------------------------
Intermediate-Term Bond Fund (cont'd)
FACE
AMOUNT VALUE
(000) (000)
-----------------
ASSET BACKED SECURITIES (7.2%)
American Express Master Trust
7.150%, 08/15/99 $ 4,000 $ 4,056
Chase Manhattan Auto Grantor Trust
6.610%, 09/15/02 4,437 4,470
J.C. Penney Master Credit Card Trust
9.625%, 06/15/00 2,500 2,729
- -------------------------------------------------------
Total Asset Backed Securities
(Cost $10,969) 11,255
- -------------------------------------------------------
REPURCHASE AGREEMENT (6.7%)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc.
5.55%, dated 01/31/97, matures
02/03/97, repurchase price $10,456,390
(collateralized by various FHLMC
obligations, total par value $5,766,797,
5.668%-7.00%, 09/01/13-01/01/27:
FNMA obligation, total par value
$5,421,476, 7.50%, 11/01/11: total
market value $10,660,588) (A) 10,452 10,452
- -------------------------------------------------------
Total Repurchase Agreement
(Cost $10,452) 10,452
=======================================================
Total Investments (101.4%)
(Cost $156,895) 157,891
- -------------------------------------------------------
Other Assets and Liabilities,
Net (-1.4%) (2,267)
- -------------------------------------------------------
VALUE
(000)
-------
NET ASSETS:
Fund Shares of Institutional Class
(unlimited authorization --
no par value) based on 14,797,604
outstanding shares of beneficial
interest $152,099
Fund Shares of Investment Class (unlimited
authorization -- no par value) based
on 513,329 outstanding shares of
beneficial interest 5,863
Undistributed net investment income 231
Accumulated net realized loss
on investments (3,565)
Net unrealized appreciation
on investments 996
- -------------------------------------------------------
Total Net Assets: (100.0%) $155,624
- -------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- INSTITUTIONAL CLASS $10.16
- -------------------------------------------------------
NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE -- INVESTMENT CLASS $10.16
- -------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE --
INVESTMENT CLASS ($10.16/97%) $10.47
=======================================================
(A) TRI-PARTY REPURCHASE AGREEMENT
FHLMC -- FEDERAL HOME LOAN MORTGAGE CORPORATION
FNMA -- FEDERAL NATIONAL MORTGAGE ASSOCIATION
27
<PAGE>
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
STEPSTONE LIMITED MATURITY GOVERNMENT FUND
FACE MARKET
AMOUNT VALUE
(000) (000)
-----------------
U.S. TREASURY OBLIGATIONS (48.9%)
U.S. Treasury Notes
5.875%, 04/30/98 $1,000 $1,002
4.750%, 10/31/98 500 491
5.000%, 02/15/99 1,300 1,277
6.375%, 05/15/99 1,000 1,008
7.125%, 09/30/99 1,000 1,026
5.625%, 02/28/01 1,000 978
U.S. Treasury Bond
6.000%, 08/15/99 500 500
U.S. Treasury STRIPS
0.000%, 02/15/01 2,000 1,565
0.000%, 08/15/01 1,500 1,137
- -------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $8,939) 8,984
- -------------------------------------------------------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED OBLIGATIONS (9.2%)
GNMA
8.500%, 12/15/01 29 30
8.500%, 07/15/09 102 108
8.000%, 11/15/09 291 302
8.500%, 03/15/10 655 685
8.000%, 04/15/10 549 570
- -------------------------------------------------------
Total U.S. Government Agency
Mortgage-Backed Obligations
(Cost $1,668) 1,695
- -------------------------------------------------------
BANKERS ACCEPTANCE (5.4%)
Chase Manhattan
5.400%, 03/18/97 1,000 993
- -------------------------------------------------------
Total Bankers Acceptance
(Cost $993) 993
- -------------------------------------------------------
CERTIFICATES OF DEPOSIT (5.5%)
Northern Trust, Chicago
9.010%, 02/03/97 1,000 1,000
- -------------------------------------------------------
Total Certificates of Deposit
(Cost $1,000) 1,000
- -------------------------------------------------------
U.S. GOVERNMENT AGENCY
OBLIGATIONS (2.8%)
Tennessee Valley Authority
6.500%, 08/20/01 $ 500 $ 501
- -------------------------------------------------------
Total U.S. Government Agency
Obligations (Cost $505) 501
- -------------------------------------------------------
REPURCHASE AGREEMENT (29.3%)
Morgan Stanley & Company, Inc.
5.52% dated 01/31/97, matures
02/03/97, repurchase price
$5,388,777 (collateralized by
FNMA obligation, total par value
$5,623,000, 7.00%, 01/01/27: total
market value $5,515,225) (A) 5,386 5,386
- -------------------------------------------------------
Total Repurchase Agreement
(Cost $5,386) 5,386
- -------------------------------------------------------
Total Investments (101.1%)
(Cost $18,491) 18,559
- -------------------------------------------------------
Other Assets and Liabilities,
Net (-1.1%) (197)
- -------------------------------------------------------
NET ASSETS:
Fund Shares of Institutional Class
(unlimited authorization --
no par value) based on 1,866,805
outstanding shares of beneficial
interest 19,514
Fund Shares of Investment Class (unlimited
authorization -- no par value) based
on 53,555 outstanding shares of
beneficial interest 638
Accumulated net realized loss
on investments (1,858)
Net unrealized appreciation
on investments 68
- -------------------------------------------------------
Total Net Assets: (100.0%) $18,362
- -------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- INSTITUTIONAL CLASS $9.56
- -------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- INVESTMENT CLASS $9.57
- -------------------------------------------------------
(A)TRI-PARTY REPURCHASE AGREEMENT
FNMA -- FEDERAL NATIONAL MORTGAGE ASSOCIATION
GNMA -- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
STRIPS -- SEPARATE TRADING OF REGISTERED INTEREST
AND PRINCIPAL OF SECURITIES
28
<PAGE>
STATEMENT OF NET ASSETS JANUARY 31, 1997
- --------------------------------------------------------------------------------
STEPSTONE CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
FACE MARKET
AMOUNT VALUE
(000) (000)
-----------------
CALIFORNIA MUNICIPAL BONDS (93.3%)
Alameda County, Santa Rita Jail Project,
COP, MBIA Insured
5.250%, 12/01/04 $ 500 $ 517
Anaheim Public Financing Authority,
Electric Utililty Projects, RB,
Callable 04/01/05 @ 100,
MBIA Insured 5.500%, 10/01/10 250 252
Antioch Public Finance Authority,
Police Facilities Project,
Lease RB, MBIA Insured
4.550%, 01/01/03 500 498
Atascadero Unified School District,
COP, Measure B, Capital Projects
Ser 1996 A, MBIA Insured,
5.100%, 08/01/07 415 418
Berkeley Unified School District, GO,
Ser D, FGIC Insured
8.250%, 08/01/05 345 426
California Educational Facilities
Authority, Santa Clara University,
RB, MBIA Insured,
Callable 09/01/06 @ 102
5.000%, 09/01/07 400 400
California Educational Facilities,
Pepperdine University, RB,
Pre-refunded 03/17/97 @ 102
6.750%, 01/15/06 500 512
California Pollution Control Finance
Authority, Shell Oil, VRDN, RB
(A) (B) 3.550%, 02/01/97 400 400
California State, GO
4.200%, 09/01/02 250 243
Capistrano, Unified Public Financing
Authority, Special Tax RB, First Lien,
Ser A, AMBAC Insured
4.500%, 09/01/01 300 300
Contra Costa Transportation Authority,
Sales Tax RB, Ser A,
Escrowed to Maturity 6.300%, 03/01/00 250 264
Cupertino, COP, Callable 01/01/03 @ 102
5.500%, 01/01/05 500 510
East Bay Municipal Utility District
Water System, RB, FGIC Insured
6.000%, 06/01/01 250 266
FACE MARKET
AMOUNT VALUE
(000) (000)
-----------------
Gilroy Unified School District, COP,
Measure J Capital Projects,
FSA Insured
5.750%, 09/01/05 $ 235 $ 248
Los Angeles County Transportation
Commision, Sales Tax RB, Ser A,
FGIC Insured, Pre-Refunded
07/01/01 @ 102
6.750%, 07/01/18 250 278
Los Angeles Department of Airports, RB,
Ser B, FGIC Insured
6.500%, 05/15/04 500 558
Los Angeles, GO, FGIC Insured
Callable 09/01/03 @ 101
5.400%, 09/01/06 300 310
Los Angeles, Wastewater System RB,
Ser B, Callable 06/01/03 @ 102,
MBIA Insured
5.400%, 06/01/08 300 305
M-S-R Public Power Agency, San Juan
Project, RB, Ser F, AMBAC Insured,
Callable 07/01/03 @ 102,
Callable 07/01/05 @ 100
6.000%, 07/01/08 230 245
Midpeninsula Regional Open Space
District Finance Authority, RB,
AMBAC Insured
4.900%, 09/01/02 250 255
Moulton-Niguel Water District, COP,
Callable 09/01/03 @ 102,
AMBAC Insured
4.750%, 09/01/04 300 300
Orange County, Local Transportation
Authority, Sales Tax Revenue,
Measure M, RB
6.000%, 02/15/07 380 408
Sacramento Municipal Utility District,
Electric Revenue, Ser C, FGIC Insured
5.750%, 11/15/08 550 572
San Bernadino County Transportation
Authority, Sales Tax Revenue,
RB, MBIA Insured
6.000%, 03/01/06 415 451
San Diego County Regional
Transportation Commission,
Sales Tax RB, Ser A, FGIC Insured
5.250%, 04/01/06 400 410
29
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
California Intermediate Tax-Free Bond Fund (cont'd)
FACE MARKET
AMOUNT VALUE
(000) (000)
-----------------
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
San Diego County Water Authority,
COP, Ser A, Callable 05/01/03 @ 100,
Callable 05/01/01 @ 102
6.250%, 05/01/04 $ 480 $ 514
San Francisco Building Authority,
Department General Services,
Lease RB, Ser A
4.500%, 10/01/00 300 298
San Francisco City & County, GO,
Utility Public Safety Improvement
Project, Ser F, Callable
06/15/01 @ 100 FGIC Insured
6.500%, 06/15/08 350 371
San Jose Redevelopment Agency, Tax
Allocation, Merged Area Redevelopment
Project, RB, MBIA Insured
6.000%, 08/01/08 450 487
Santa Clara, COP, AMBAC Insured
6.000%, 05/15/12 400 412
Santa Cruz County, Public Facilities
Financing Authority, Tax Allocation,
Callable 09/01/03 @ 102, MBIA Insured
5.100%, 09/01/05 500 512
Tulare County Capital Improvement
Program, COP, Ser A, MBIA Insured
4.700%, 02/15/00 200 202
United Water Conservation District,
Water Systems Project, RB, FSA Insured
4.300%, 03/01/03 200 196
- -------------------------------------------------------
Total California Municipal Bonds
(Cost $12,191) 12,338
- -------------------------------------------------------
CASH EQUIVALENTS (5.5%)
Provident California Tax Free
Money Market 321 321
SEI California Tax Free Money
Market Portfolio 405 405
- -------------------------------------------------------
Total Cash Equivalent
(Cost $726) 726
- -------------------------------------------------------
Total Investments (98.8%)
(Cost $12,917) 13,064
- -------------------------------------------------------
Other Assets and Liabilities,
Net (1.2%) $ 162
- -------------------------------------------------------
NET ASSETS:
Fund Shares of Institutional Class
(unlimited authorization --
no par value) based on 761,820
outstanding shares of beneficial
interest 8,482
Fund Shares of Investment Class
(unlimited authorization --
no par value) based
on 594,284 outstanding shares of
beneficial interest 5,877
Undistributed net investment income 27
Accumulated net realized loss
on investments (1,308)
Net unrealized appreciation on investments 148
- -------------------------------------------------------
Total Net Assets: (100.0%) $13,226
- -------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- INSTITUTIONAL CLASS $9.76
- -------------------------------------------------------
NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE -- INVESTMENT CLASS $9.74
- -------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE --
INVESTMENT CLASS ($9.74/97%) $10.04
=======================================================
(A) FLOATING RATE SECURITY--THE RATE
REFLECTED ON THE STATEMENT OF NET ASSETS IS
THE RATE IN EFFECT ON JANUARY 31, 1997.
(B) PUT AND DEMAND FEATURE -- THE DATE REPORTED
IS THE LESSER OF THE MATURITY OR THE PUT DATE.
AMBAC -- AMERICAN MUNICIPAL BOND ASSURANCE COMPANY
COP -- CERTIFICATES OF PARTICIPATION
FGIC -- FINANCIAL GUARANTY INSURANCE CORPORATION
FSA -- FINANCIAL SECURITY ASSURANCE
GO -- GENERAL OBLIGATION
MBIA -- MUNICIPAL BOND INVESTORS ASSURANCE
RB -- REVENUE BOND
SER -- SERIES
VRDN -- VARIABLE RATE DEMAND NOTE
30
<PAGE>
STATEMENT OF NET ASSETS JANUARY 31, 1997
- --------------------------------------------------------------------------------
STEPSTONE CONVERTIBLE SECURITIES FUND
FACE MARKET
AMOUNT VALUE
(000) (000)
-----------------
CONVERTIBLE BONDS (64.1%)
AIR TRANSPORTATION (2.1%)
Alaska Air Group
6.500%, 06/15/05 $ 400 $ 454
- -------------------------------------------------------
454
- -------------------------------------------------------
AUTOMOTIVE (2.2%)
Magna International, Inc.
5.000%, 10/15/02 400 462
- -------------------------------------------------------
462
- -------------------------------------------------------
COMMUNICATIONS EQUIPMENT (2.9%)
Motorola, Inc.
0.000%, 09/27/13 475 390
U.S. Cellular Corp.
0.000%, 06/15/15 675 224
- -------------------------------------------------------
614
- -------------------------------------------------------
COMPUTERS & SOFTWARE SERVICES (5.9%)
3Com Corp.
10.250%, 11/01/01 200 401
The Learning Company, Inc.
5.500%, 11/01/00 425 350
Solectron Corp.
6.000%, 03/01/06 450 504
- -------------------------------------------------------
1,255
- -------------------------------------------------------
DRUGS (1.0%)
Chiron Corp.
5.250%, 05/21/02 225 215
- -------------------------------------------------------
215
- -------------------------------------------------------
ENTERTAINMENT (1.0%)
Time Warner, Inc.
0.000%, 06/22/13 500 218
- -------------------------------------------------------
218
- -------------------------------------------------------
ENVIRONMENTAL SERVICES (5.2%)
U.S. Filter Corp.
4.500%, 12/15/01 725 798
WMX Technologies
2.000%, 01/24/05 300 295
- -------------------------------------------------------
1,093
- -------------------------------------------------------
FACE MARKET
AMOUNT VALUE
(000) (000)
-----------------
FINANCIAL SERVICES (2.8%)
Rac Financial Group
7.250%, 08/15/03 $ 275 $ 584
- -------------------------------------------------------
584
- -------------------------------------------------------
GAS/NATURAL GAS (1.3%)
Consolidated Natural Gas
7.250%, 12/15/15 250 276
- -------------------------------------------------------
276
- -------------------------------------------------------
HOTELS & LODGING (5.4%) HFS, Inc.
4.750%, 03/01/03 525 648
Hilton Hotels
5.000%, 05/15/06 450 481
- -------------------------------------------------------
1,129
- -------------------------------------------------------
INSURANCE (2.7%)
Penn Treaty American
6.250%, 12/01/03 500 574
- -------------------------------------------------------
574
- -------------------------------------------------------
MACHINERY (1.9%)
Thermo Electron
4.250%, 01/01/03 375 404
- -------------------------------------------------------
404
- -------------------------------------------------------
MANUFACTURING (2.3%)
Hexcel Corp.
7.000%, 08/01/03 350 480
- -------------------------------------------------------
480
- -------------------------------------------------------
MARINE TRANSPORTATION (2.3%)
Seacor Holdings
5.375%, 11/15/06 425 474
- -------------------------------------------------------
474
- -------------------------------------------------------
MEDICAL CARE (0.8%)
Columbia HCA Healthcare
6.750%, 10/01/06 150 151
- -------------------------------------------------------
151
- -------------------------------------------------------
31
<PAGE>
STEPSTONE FUNDS(R)
- -------------------------------------------------------
CONVERTIBLE SECURITIES FUND (CONT'D)
Face
Amount Value
(000) (000)
----------------
CONVERTIBLE BONDS (CONTINUED)
MEDICAL PRODUCTS & SERVICES (7.4%)
Alza Corp.
5.000%, 05/01/06 $ 500 $ 499
Integrated Health Services
5.750%, 01/01/01 300 303
Olsten Corp.
4.750%, 10/01/00 475 433
Vencor, Inc.
6.000%, 12/01/05 325 336
- -------------------------------------------------------
1,571
- -------------------------------------------------------
METALS (0.8%)
Inco Limited
7.750%, 03/15/16 150 160
- -------------------------------------------------------
160
- -------------------------------------------------------
MISCELLANEOUS BUSINESS SERVICES (2.8%)
First Financial Management
5.000%, 12/15/99 350 596
- -------------------------------------------------------
596
- -------------------------------------------------------
PETROLEUM & FUEL PRODUCTS (1.2%)
Diamond Offshore
3.750%, 02/15/07 250 261
- -------------------------------------------------------
261
- -------------------------------------------------------
REAL ESTATE (1.8%)
Liberty Property Trust
8.000%, 07/01/01 300 388
- -------------------------------------------------------
388
- -------------------------------------------------------
RETAIL (8.8%)
Federated Department Stores
5.000%, 10/01/03 400 447
Home Depot, Inc.
3.250%, 10/01/01 475 464
Nine West Group
5.500%, 07/15/03 450 475
Staples, Inc.
4.500%, 10/01/00 425 481
- -------------------------------------------------------
1,867
- -------------------------------------------------------
Face
Amount Value
(000)/Shares (000)
--------------------
TELEPHONES & TELECOMMUNICATIONS (1.5%)
Tele Communications International
4.500%, 02/15/06 $ 400 $ 319
- -------------------------------------------------------
319
- -------------------------------------------------------
Total Convertible Bonds
(Cost $12,277) 13,545
- -------------------------------------------------------
COMMON STOCKS (12.7%)
AIR TRANSPORTATION (1.4%)
AMR Corp.* 3,797 306
- -------------------------------------------------------
306
- -------------------------------------------------------
AUTOMOTIVE (2.3%)
Chrysler Corp. 14,000 488
- -------------------------------------------------------
488
- -------------------------------------------------------
BANKS (1.7%)
Citicorp 3,000 349
- -------------------------------------------------------
349
- -------------------------------------------------------
COMPUTERS & SERVICES (3.5%)
Seagate Technology, Inc.* 14,500 747
- -------------------------------------------------------
747
- -------------------------------------------------------
MISCELLANEOUS BUSINESS SERVICES (2.5%)
Electronic Data Systems 11,500 529
- -------------------------------------------------------
529
- -------------------------------------------------------
TELEPHONES & TELECOMMUNICATION (1.3%)
Worldcom, Inc.* 10,581 266
- -------------------------------------------------------
266
- -------------------------------------------------------
Total Common Stocks (Cost $1,899) 2,685
- -------------------------------------------------------
PREFERRED STOCKS (16.6%)
BANKS (1.2%)
Banc One Corp. 3,000 263
- -------------------------------------------------------
263
- -------------------------------------------------------
FINANCIAL SERVICES (7.6%)
Conseco, Inc. 6,500 846
The Money Store, Inc. 18,000 461
SCI Finance LLC 3,000 293
- -------------------------------------------------------
1,600
- -------------------------------------------------------
32
<PAGE>
STEPSTONE FUNDS(R) JANUARY 31, 1997
- --------------------------------------------------------------------------------
CONVERTIBLE SECURITIES FUND (CONT'D)
Shares/Face Market
Amount Value
(000) (000)
------------------
PREFERRED STOCKS (CONTINUED)
INSURANCE (2.7%)
SunAmerica, Inc. 13,000 $ 561
- -------------------------------------------------------
561
- -------------------------------------------------------
PAPER & PAPER PRODUCTS (1.4%)
International Paper 6,500 300
- -------------------------------------------------------
300
- -------------------------------------------------------
PRINTING & PUBLISHING (2.1%)
Hollinger International 40,000 450
- -------------------------------------------------------
450
- -------------------------------------------------------
TELEPHONES & TELECOMMUNICATION (1.1%)
World Com, Inc. 2,500 229
- -------------------------------------------------------
229
- -------------------------------------------------------
WHOLESALE (0.5%)
IKON Office Products 1,000 100
- -------------------------------------------------------
100
- -------------------------------------------------------
Total Preferred Stocks
(Cost $2,768) 3,503
- -------------------------------------------------------
TIME DEPOSIT (4.7%)
Sanwa Bank Limited
5.469%, 02/03/97 $ 989 989
- -------------------------------------------------------
Total Time Deposit
(Cost $989) 989
- -------------------------------------------------------
Total Investments (98.1%)
(Cost $17,933) 20,722
- -------------------------------------------------------
Market
Value
(000)
-------
Other Assets and Liabilities,
Net (1.9%) $ 407
- -------------------------------------------------------
NET ASSETS:
Fund Shares of Institutional Class
(unlimited authorization --
no par value) based on 1,824,449
outstanding shares of beneficial
interest 18,096
Undistributed net investment income 22
Accumulated net realized gain
on investments 222
Net unrealized appreciation
on investments 2,789
- -------------------------------------------------------
Total Net Assets: (100.0%) $21,129
- -------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- INSTITUTIONAL CLASS $11.58
=======================================================
*NON INCOME PRODUCING SECURITY
The accompanying notes are an integral part of the financial statements.
33
<PAGE>
STATEMENT OF NET ASSETS
- ---------------------------------------------------------
STEPSTONE GOVERNMENT SECURITIES FUND
FACE MARKET
AMOUNT VALUE
(000) (000)
-----------------
U.S. TREASURY OBLIGATIONS (73.9%)
U.S. Treasury Notes
5.250%, 12/31/97 $2,300 $ 2,294
5.125%, 02/28/98 1,000 994
6.000%, 05/31/98 5,250 5,266
6.125%, 08/31/98 2,000 2,009
6.500%, 04/30/99 6,750 6,825
7.750%, 01/31/00 1,500 1,567
6.750%, 04/30/00 1,000 1,017
6.375%, 09/30/01 2,000 2,008
7.500%, 11/15/01 2,000 2,099
7.500%, 05/15/02 1,100 1,159
7.250%, 05/15/04 2,180 2,282
7.250%, 08/15/04 200 209
6.875%, 05/15/06 300 307
7.000%, 07/15/06 250 258
6.750%, 08/15/26 8,650 8,557
U.S. Treasury Bond
8.125%, 08/15/19 1,000 1,138
- -------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $37,840) 37,989
- -------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS (6.2%)
Aid-Israel
7.125%, 08/15/99 2,000 2,033
FHLMC
7.000%, 02/15/08 1,135 1,128
- -------------------------------------------------------
Total U.S. Government Agency
Obligations (Cost $3,128) 3,161
- -------------------------------------------------------
CORPORATE OBLIGATIONS (16.7%)
BANKS (4.9%)
Capital One
7.200%, 07/19/99 1,500 1,521
First USA
7.000%, 08/20/01 1,000 1,006
- -------------------------------------------------------
2,527
- -------------------------------------------------------
FINANCE--REAL ESTATE (5.7%)
Meditrust
7.250%, 08/16/99 1,250 1,264
Simon Debartolo
6.875%, 11/15/06 1,700 1,643
- -------------------------------------------------------
2,907
- -------------------------------------------------------
FACE MARKET
AMOUNT VALUE
(000) (000)
-----------------
FINANCIAL SERVICES (6.1%)
Phoenix Home Life
6.950%, 12/01/06 $1,000 $ 973
Salomon Brothers
9.250%, 05/01/01 2,000 2,168
- -------------------------------------------------------
3,141
- -------------------------------------------------------
Total Corporate Obligations
(Cost $8,604) 8,575
- -------------------------------------------------------
TIME DEPOSIT (1.5%)
Sanwa Bank Limited
5.469%, 02/03/97 769 769
- -------------------------------------------------------
Total Time Deposit
(Cost $769) 769
- -------------------------------------------------------
Total Investments (98.3%)
(Cost $50,341) 50,494
- -------------------------------------------------------
Other Assets and Liabilities,
Net (1.7%) 888
- -------------------------------------------------------
NET ASSETS:
Fund Shares of Institutional Class
(unlimited authorization --
no par value) based on 5,443,449
outstanding shares of beneficial
interest 52,912
Undistributed net investment income 111
Accumulated net realized loss
on investments (1,793)
Net unrealized appreciation
on investments 152
- -------------------------------------------------------
Total Net Assets: (100.0%) $51,382
- -------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- INSTITUTIONAL CLASS $9.44
=======================================================
FHLMC -- FEDERAL HOME LOAN MORTGAGE CORPORATION
34
<PAGE>
STATEMENT OF NET ASSETS JANUARY 31, 1997
- --------------------------------------------------------------------------------
STEPSTONE BALANCED FUND
MARKET
VALUE
SHARES (000)
----------------
COMMON STOCKS (59.4%)
AEROSPACE & DEFENSE (0.5%)
Litton Industries* 20,000 $ 883
Watkins Johnson 30,000 803
- -------------------------------------------------------
1,686
- -------------------------------------------------------
AGRICULTURE (0.2%)
Dole Food 20,000 745
- -------------------------------------------------------
745
- -------------------------------------------------------
AIR TRANSPORTATION (0.3%)
KLM Royal Dutch Air* 36,250 1,088
- -------------------------------------------------------
1,088
- -------------------------------------------------------
AIRCRAFT (1.3%)
Lockheed Martin 25,000 2,300
Textron 20,000 1,948
- -------------------------------------------------------
4,248
- -------------------------------------------------------
APPAREL/TEXTILES (0.6%)
Donna Karan International* 80,000 1,040
Springs Industries, Cl A 20,000 845
- -------------------------------------------------------
1,885
- -------------------------------------------------------
AUTOMOTIVE (0.5%)
Chrysler 45,610 1,591
- -------------------------------------------------------
1,591
- -------------------------------------------------------
AUTO RENTAL AND LEASING (1.0%)
PHH 42,000 2,021
Rollins Truck Leasing 92,800 1,148
- -------------------------------------------------------
3,169
- -------------------------------------------------------
BANKS (2.5%)
Bank of Boston 25,000 1,781
Bank of New York 48,000 1,758
Bank United, Cl A* 30,000 814
First Union 10,000 836
J.P. Morgan 13,000 1,339
Norwest 10,000 476
Wilmington Trust 19,000 784
- -------------------------------------------------------
7,788
- -------------------------------------------------------
MARKET
VALUE
SHARES (000)
-----------------
CHEMICALS (4.2%)
Agrium 90,000 $ 1,361
Avery Dennison 40,000 1,465
Cabot 66,000 1,576
E.I. du Pont de Nemours 17,500 1,918
Engelhard 39,200 779
Georgia Gulf 53,100 1,480
Monsanto 50,000 1,894
Morton International 25,000 1,016
W.R. Grace 20,000 995
Wellman 43,400 765
- -------------------------------------------------------
13,249
- -------------------------------------------------------
COMMUNICATIONS EQUIPMENT (0.9%)
Harris 17,600 1,340
Motorola 24,000 1,638
- -------------------------------------------------------
2,978
- -------------------------------------------------------
COMPUTERS & SOFTWARE SERVICES (2.5%)
Compaq Computer* 22,500 1,955
Computer Associates International 31,125 1,412
Hewlett Packard 36,000 1,895
IBM 15,000 2,359
Network Equipment Technologies* 18,300 380
- -------------------------------------------------------
8,001
- -------------------------------------------------------
CONSTRUCTION MATERIALS (0.4%)
Lafarge 55,000 1,176
- -------------------------------------------------------
1,176
- -------------------------------------------------------
DRUGS (4.1%)
American Home Products 30,000 1,901
Astra, Cl A, ADR* 30,000 1,436
Bristol-Myers Squibb 15,000 1,905
Merck 20,000 1,815
Pharmacia & Upjohn 40,000 1,490
SmithKline Beecham 28,000 2,023
Warner Lambert 30,000 2,415
- -------------------------------------------------------
12,985
- -------------------------------------------------------
ELECTRICAL UTILITIES (0.7%)
Illinova 40,400 1,066
Ohio Edison 50,700 1,172
- -------------------------------------------------------
2,238
- -------------------------------------------------------
35
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------
Balanced Fund (cont'd)
Market
Value
Shares (000)
-----------------
ENTERTAINMENT (0.7%)
Walt Disney 30,000 $ 2,198
- -------------------------------------------------------
2,198
- -------------------------------------------------------
ENVIRONMENTAL SERVICES (0.1%)
Cuno* 20,000 338
- -------------------------------------------------------
338
- -------------------------------------------------------
FINANCIAL SERVICES (3.0%)
Aames Financial 30,000 1,290
American Express 30,000 1,871
Donaldson, Lufkin, & Jenrette 35,000 1,326
FNMA 60,000 2,370
Travelers 49,465 2,591
- -------------------------------------------------------
9,448
- -------------------------------------------------------
FOOD, BEVERAGE & TOBACCO (1.9%)
Archer-Daniels-Midland 70,612 1,395
IBP 60,000 1,380
Pepsico 40,000 1,395
Sara Lee 25,000 988
Universal Foods 26,000 923
- -------------------------------------------------------
6,081
- -------------------------------------------------------
FORESTRY (0.3%)
Rayonier 25,000 934
- -------------------------------------------------------
934
- -------------------------------------------------------
GAS/NATURAL GAS (1.3%)
Coastal 35,000 1,693
Williams 58,200 2,335
- -------------------------------------------------------
4,028
- -------------------------------------------------------
HOTELS & LODGING (0.8%)
Hilton Hotels 40,000 1,140
TT* 25,000 1,428
- -------------------------------------------------------
2,568
- -------------------------------------------------------
HOUSEHOLD FURNITURE & FIXTURES (0.3%)
Leggett & Platt 31,200 1,002
- -------------------------------------------------------
1,002
- -------------------------------------------------------
Market
Value
Shares (000)
-----------------
INSURANCE (3.3%)
AFLAC 37,500 $ 1,495
Allstate 25,759 1,694
Equitable 60,000 1,658
ITT Hartford Group 25,000 1,834
Lincoln National 30,000 1,609
Loew's 10,000 989
USF&G 60,000 1,268
- -------------------------------------------------------
10,547
- -------------------------------------------------------
LEASING & RENTING (0.6%)
Comdisco 42,250 1,304
Xtra 15,000 636
- -------------------------------------------------------
1,940
- -------------------------------------------------------
MACHINERY (4.0%)
Applied Materials* 40,000 1,975
Briggs & Stratton 20,000 903
Commercial Intertech 45,100 558
Deere 37,500 1,603
Dresser Industries 60,000 2,033
General Electric 16,600 1,710
Global Industries Technologies* 60,000 1,095
Parker-Hannifin 35,000 1,509
Toro 40,000 1,405
- -------------------------------------------------------
12,791
- -------------------------------------------------------
MEASURING DEVICES (0.8%)
Mallinckrodt 35,000 1,435
Tektronix 20,000 993
- -------------------------------------------------------
2,428
- -------------------------------------------------------
MEDICAL PRODUCTS & SERVICES (2.5%)
Bausch & Lomb 30,000 1,016
Baxter International 35,000 1,614
Columbia/HCA Healthcare 37,500 1,481
Fresenius National Medical Care, ADR* 20,981 624
Tenet Healthcare* 60,000 1,620
Vencor* 50,000 1,531
- -------------------------------------------------------
7,886
- -------------------------------------------------------
36
<PAGE>
STEPSTONE FUNDS(R)
- -------------------------------------------------------
Balanced Fund (cont'd)
Market
Value
Shares (000)
----------------
MISCELLANEOUS BUSINESS SERVICES (0.8%)
Electronic Data Systems 25,000 $ 1,150
Equifax 40,000 1,260
- -------------------------------------------------------
2,410
- -------------------------------------------------------
MISCELLANEOUS TRANSPORTATION (0.1%)
Fleetwood Enterprises 10,000 268
- -------------------------------------------------------
268
- -------------------------------------------------------
PAPER & PAPER PRODUCTS (1.3%)
Kimberly-Clark 10,000 975
Mead 19,000 1,069
Weyerhaeuser 20,000 910
Willamette Industries 19,000 1,195
- -------------------------------------------------------
4,149
- -------------------------------------------------------
PETROLEUM & FUEL PRODUCTS (1.1%)
Occidental Petroleum 78,200 1,994
Union Pacific Resources Group 51,104 1,450
Union Texas Petroleum 10,000 213
- -------------------------------------------------------
3,657
- -------------------------------------------------------
PETROLEUM REFINING (3.5%)
Ashland 27,700 1,195
Chevron 28,000 1,859
Mobil 15,000 1,969
Royal Dutch Petroleum, ADR 9,800 1,700
Ultramar Diamond Shamrock* 45,700 1,342
Unocal 30,000 1,264
USX-Marathon Group 62,000 1,651
- -------------------------------------------------------
10,980
- -------------------------------------------------------
PHOTOGRAPHIC EQUIPMENT & SUPPLIES (0.4%)
Eastman Kodak 15,000 1,301
- -------------------------------------------------------
1,301
- -------------------------------------------------------
PRECIOUS METALS (0.6%)
Barrick Gold 68,636 1,845
- -------------------------------------------------------
1,845
- -------------------------------------------------------
Market
Value
Shares (000)
-----------------
PRINTING & PUBLISHING (2.4%)
Belo, Cl A 28,400 $ 1,083
Houghton Mifflin 25,000 1,353
Media General 50,000 1,575
Time Warner 50,000 1,925
Viacom, Cl B* 50,000 1,713
- -------------------------------------------------------
7,649
- -------------------------------------------------------
RAILROADS (1.0%)
Burlington Northern Santa Fe 20,000 1,750
Conrail Holding 12,554 1,346
- -------------------------------------------------------
3,096
- -------------------------------------------------------
REAL ESTATE (1.9%)
BRE Properties, Cl A 53,600 1,327
CBL & Associates Properties 48,900 1,253
First Industrial Realty Trust 35,000 1,015
JP Realty 52,000 1,398
Post Properties 21,900 909
- -------------------------------------------------------
5,902
- -------------------------------------------------------
RETAIL (1.4%)
American Stores 33,000 1,386
Price/Costco* 45,000 1,198
Sears Roebuck 37,000 1,776
- -------------------------------------------------------
4,360
- -------------------------------------------------------
RUBBER & PLASTIC (0.6%)
Mark IV Industries 40,572 959
Tupperware 20,000 938
- -------------------------------------------------------
1,897
- -------------------------------------------------------
SEMI-CONDUCTORS/INSTRUMENTS (1.8%)
AMP 30,000 1,223
Intel 15,000 2,434
National Semiconductor* 70,000 1,943
- -------------------------------------------------------
5,600
- -------------------------------------------------------
STEEL & STEEL WORKS (0.2%)
Texas Industries 9,600 530
- -------------------------------------------------------
530
- -------------------------------------------------------
37
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------
Balanced Fund (cont'd)
Shares/
Face Market
Amount Value
(000) (000)
-----------------
TELEPHONES & TELECOMMUNICATION (2.0%)
AT&T 17,271 $ 680
Airtouch Communications* 40,000 1,035
Bell Atlantic 20,000 1,345
Century Telephone Enterprises 30,000 941
Frontier 43,400 949
NYNEX 25,000 1,266
- -------------------------------------------------------
6,216
- -------------------------------------------------------
TRANSPORTATION SERVICES (0.4%)
GATX 23,400 1,144
- -------------------------------------------------------
1,144
- -------------------------------------------------------
WHOLESALE (0.6%)
Arrow Electronics* 28,000 1,572
Hughes Supply 10,100 350
- -------------------------------------------------------
1,922
- -------------------------------------------------------
Total Common Stocks
(Cost $125,544) 187,942
- -------------------------------------------------------
PREFERRED STOCK (0.0%)
Fresenius National Medical Care* 20,000 2
- -------------------------------------------------------
Total Preferred Stock
(Cost $0) 2
- -------------------------------------------------------
U.S. TREASURY OBLIGATIONS (17.5%)
U.S. Treasury Notes
6.000%, 05/31/98 $1,300 1,304
5.000%, 02/15/99 1,000 982
7.000%, 04/15/99 1,000 1,021
6.375%, 05/15/99 1,000 1,008
6.375%, 07/15/99 1,000 1,009
7.125%, 09/30/99 1,500 1,539
7.500%, 10/31/99 1,000 1,036
7.750%, 11/30/99 1,000 1,043
7.125%, 02/29/00 1,500 1,542
5.500%, 04/15/00 2,000 1,966
6.125%, 09/30/00 1,500 1,497
5.750%, 10/31/00 700 690
5.625%, 02/28/01 3,000 2,935
6.250%, 04/30/01 1,000 1,000
6.500%, 05/31/01 2,000 2,018
6.625%, 06/30/01 1,000 1,014
Face Market
Amount Value
(000) (000)
-----------------
6.500%, 08/31/01 $3,000 $ 3,026
7.500%, 11/15/01 6,000 6,296
5.875%, 11/30/01 2,000 1,966
6.250%, 01/31/02 2,000 1,998
6.375%, 08/15/02 2,000 2,007
6.250%, 02/15/03 1,000 995
6.500%, 05/15/05 4,500 4,502
6.500%, 08/15/05 4,500 4,500
6.875%, 05/15/06 1,000 1,024
7.000%, 07/15/06 2,500 2,580
6.500%, 10/15/06 2,000 1,997
U.S. Treasury Bond
5.625%, 02/15/06 3,000 2,821
- -------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $55,080) 55,316
- -------------------------------------------------------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED BONDS (8.0%)
FNMA
7.500%, 08/01/01 2,819 2,872
8.000%, 08/01/24 949 971
8.000%, 05/01/25 4,346 4,443
7.000%, 12/01/26 1,986 1,946
GNMA
6.500%, 09/15/08 3,608 3,563
6.000%, 11/15/08 2,337 2,260
7.500%, 09/15/25 993 996
7.000%, 08/15/26 2,491 2,442
7.500%, 09/15/26 3,460 3,473
7.500%, 01/15/27 2,475 2,481
- -------------------------------------------------------
Total U.S. Government Agency
Mortgage-Backed Bonds
(Cost $25,372) 25,447
- -------------------------------------------------------
CORPORATE OBLIGATIONS (9.7%)
American General
6.750%, 06/15/05 2,000 1,960
American Telephone & Telegraph
7.500%, 06/01/06 2,000 2,075
Associates of North America
7.875%, 09/30/01 2,000 2,098
Avco Financial Services
7.375%, 08/15/01 2,000 2,058
38
<PAGE>
STEPSTONE FUNDS(R) JANUARY 31, 1997
- --------------------------------------------------------------------------------
Balanced Fund (cont'd)
Face Market
Amount Value
(000) (000)
-----------------
CORPORATE OBLIGATIONS (CONTINUED)
Bankers Trust NY
7.500%, 11/15/15 $2,000 $ 1,978
Chemical Banking
6.700%, 08/15/08 1,500 1,444
Chesapeake & Potomac Telephone
of Maryland
6.000%, 05/01/03 1,500 1,444
First National Bank of Boston
8.000%, 09/15/04 2,000 2,093
Joseph E. Seagram & Sons
7.000%, 04/15/08 1,500 1,479
Lehman Brothers Holding
8.500%, 05/01/07 2,000 2,143
Lockheed Martin
7.700%, 06/15/08 2,000 2,083
Mobil
7.250%, 03/15/99 1,000 1,019
Panhandle Eastern
7.875%, 08/15/04 1,000 1,046
Province of British Columbia
7.000%, 01/15/03 1,500 1,526
Ralston Purina
7.750%, 10/01/15 2,000 2,028
Royal Bank of Scotland
6.375%, 02/01/11 2,500 2,281
Wal-Mart Stores
5.875%, 10/15/05 2,000 1,865
- -------------------------------------------------------
Total Corporate Obligations
(Cost $30,231) 30,620
- -------------------------------------------------------
ASSET BACKED SECURITIES (0.8%)
American Express 1994-1A
7.150%, 08/15/99 1,500 1,521
J.C. Penney's Master Credit Card Trust,
Ser C, Cl A
9.625%, 06/15/00 1,000 1,092
- -------------------------------------------------------
Total Asset Backed Securities
(Cost $2,490) 2,613
- -------------------------------------------------------
EQUITY OPTION (0.0%)
Harris February 70 Calls* 3/24/97 (176) (110)
- -------------------------------------------------------
Total Equity Option
(Cost ($35)) (110)
- -------------------------------------------------------
Face Market
Amount Value
(000) (000)
-----------------
REPURCHASE AGREEMENT (4.2%)
Deutsche Morgan Grenfell/
C.J. Lawrence, Inc.
5.55%, dated 01/31/97,
matures 02/03/97,
repurchase price $13,155,241
(collateralized by various
FHLMC obligations, par value
$43,813,789, 6.00%-6.75%, 02/01/02-
01/01/04: total market value
$13,412,143) (A) $13,149 $ 13,149
- -------------------------------------------------------
Total Repurchase Agreement
(Cost $13,149) 13,149
- -------------------------------------------------------
Total Investments (99.6%)
(Cost $251,831) 314,979
- -------------------------------------------------------
Other Assets and Liabilities,
Net (0.4%) 1,385
- -------------------------------------------------------
NET ASSETS:
Fund Shares of Institutional Class
(unlimited authorization --
no par value) based on 20,453,169
outstanding shares of beneficial
interest 242,155
Fund Shares of Investment Class
(unlimited authorization --
no par value) based on 587,688
outstanding shares of beneficial
interest 6,989
Undistributed net investment income 477
Accumulated net realized gain
on investments 3,595
Net unrealized appreciation
on investments 63,148
- -------------------------------------------------------
Total Net Assets: (100.0%) $316,364
- -------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- INSTITUTIONAL CLASS $15.04
- -------------------------------------------------------
NET ASSET VALUE AND REDEMPTION
PRICE PER SHARE -- INVESTMENT CLASS $15.03
- -------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE --
INVESTMENT CLASS ($15.03/95.5%) $15.74
=======================================================
(A) TRI-PARTY REPURCHASE AGREEMENT
* NON-INCOME PRODUCING SECURITY
ADR -- AMERICAN DEPOSITORY RECEIPT
CL -- CLASS
FHLMC -- FEDERAL HOME LOAN MORTGAGE CORPORATION
FNMA -- FEDERAL NATIONAL MORTGAGE ASSOCIATION
GNMA -- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
SER -- SERIES
39
<PAGE>
STATEMENT OF NET ASSETS
- ---------------------------------------------------------
STEPSTONE GROWTH EQUITY FUND
MARKET
VALUE
SHARES (000)
-----------------
COMMON STOCKS (96.5%)
APPAREL/TEXTILES (0.5%)
Cintas 17,000 $ 968
- -------------------------------------------------------
968
- -------------------------------------------------------
AUTOMOTIVE (1.5%)
Chrysler 49,788 1,736
Magna International, Cl A 27,000 1,502
- -------------------------------------------------------
3,238
- -------------------------------------------------------
BANKS (3.9%)
Banc One 36,300 1,647
Chase Manhattan Bank 16,500 1,526
Fleet Financial Group 16,000 864
U.S. Bancorp 90,780 4,136
- -------------------------------------------------------
8,173
- -------------------------------------------------------
CHEMICALS (2.6%)
IMC Fertilizer Group 60,500 2,307
Monsanto 57,000 2,159
W.R. Grace & Company 20,000 995
- -------------------------------------------------------
5,461
- -------------------------------------------------------
COMMUNICATIONS EQUIPMENT (2.3%)
ADC Telecommunications* 98,000 3,516
Motorola 20,000 1,365
- -------------------------------------------------------
4,881
- -------------------------------------------------------
COMPUTERS & SOFTWARE SERVICES (14.9%)
Cisco Systems* 92,200 6,431
Compaq Computer* 32,000 2,780
Computer Associates International 54,000 2,450
Compuware* 48,700 3,324
CUC International* 242,482 6,001
Hewlett Packard 59,600 3,136
Microsoft* 70,000 7,140
- -------------------------------------------------------
31,262
- -------------------------------------------------------
MARKET
VALUE
SHARES (000)
-----------------
DRUGS (5.3%)
Alza* 61,000 $ 1,761
Eli Lilly 8,000 697
Johnson & Johnson 24,000 1,383
Merck 15,000 1,361
Pfizer 16,300 1,514
Schering Plough 58,200 4,401
- -------------------------------------------------------
11,117
- -------------------------------------------------------
ELECTRICAL UTILITIES (1.3%)
Illinova 25,000 659
Ohio Edison 16,000 370
Pinnacle West Capital 56,500 1,787
- -------------------------------------------------------
2,816
- -------------------------------------------------------
ENTERTAINMENT (2.2%)
Regal Cinemas* 24,000 642
Walt Disney 53,091 3,889
- -------------------------------------------------------
4,531
- -------------------------------------------------------
FINANCIAL SERVICES (6.0%)
FNMA 136,800 5,404
MBNA 211,675 7,303
- -------------------------------------------------------
12,707
- -------------------------------------------------------
FOOD, BEVERAGE & TOBACCO (1.0%)
PepsiCo 59,600 2,079
- -------------------------------------------------------
2,079
- -------------------------------------------------------
GAS/NATURAL GAS (1.7%)
Coastal 32,000 1,548
Williams 48,000 1,926
- -------------------------------------------------------
3,474
- -------------------------------------------------------
HOUSEHOLD FURNITURE & FIXTURES (0.6%)
Leggett & Platt 40,000 1,285
- -------------------------------------------------------
1,285
- -------------------------------------------------------
HOUSEHOLD PRODUCTS (1.3%)
Danaher 31,200 1,560
Gillette 14,916 1,216
- -------------------------------------------------------
2,776
- -------------------------------------------------------
40
<PAGE>
STEPSTONE FUNDS(R) JANUARY 31, 1997
- --------------------------------------------------------------------------------
GROWTH EQUITY FUND (CONT'D)
MARKET
VALUE
SHARES (000)
-----------------
INSURANCE (9.2%)
Aetna 23,111 $ 1,826
AFLAC 48,000 1,914
AMBAC 60,200 4,033
CRA Managed Care* 16,000 780
Healthcare Compare* 56,000 2,387
MBIA 26,600 2,557
Oxford Health Plan* 67,000 3,643
Progressive of Ohio 17,000 1,128
Travelers 22,666 1,187
- -------------------------------------------------------
19,455
- -------------------------------------------------------
LEISURE PRODUCTS (1.0%)
Mattel 78,125 2,197
- -------------------------------------------------------
2,197
- -------------------------------------------------------
MACHINERY (3.1%)
Applied Materials* 32,000 1,580
General Electric 35,100 3,615
Illinois Tool Works 16,000 1,306
- -------------------------------------------------------
6,501
- -------------------------------------------------------
MARINE TRANSPORTATION (2.1%)
Carnival, Cl A 121,000 4,447
- -------------------------------------------------------
4,447
- -------------------------------------------------------
MEASURING DEVICES (0.9%)
Mallinckrodt 45,700 1,874
- -------------------------------------------------------
1,874
- -------------------------------------------------------
MEDICAL PRODUCTS & SERVICES (2.0%)
Fresenius National Medical
Care, ADR* 20,981 624
Nellcor* 99,600 1,693
Vivra* 63,225 1,928
- -------------------------------------------------------
4,245
- -------------------------------------------------------
MISCELLANEOUS BUSINESS SERVICES (4.6%)
Electronic Data Systems 32,750 1,507
First Data 119,366 4,297
Fiserv* 47,500 1,588
Shared Medical Systems 46,500 2,194
- -------------------------------------------------------
9,586
- -------------------------------------------------------
MARKET
VALUE
SHARES (000)
-----------------
MISCELLANEOUS CONSUMER SERVICES (0.7%)
Robert Half International* 32,000 $ 1,376
- -------------------------------------------------------
1,376
- -------------------------------------------------------
PAPER & PAPER PRODUCTS (0.6%)
Willamette Industries 20,000 1,258
- -------------------------------------------------------
1,258
- -------------------------------------------------------
PETROLEUM & SERVICES (1.5%)
Halliburton 32,000 2,316
Schlumberger 8,000 889
- -------------------------------------------------------
3,205
- -------------------------------------------------------
PETROLEUM REFINING (2.6%)
Amoco 16,000 1,392
Ashland 12,900 556
British Petroleum, ADR 18,561 2,629
Exxon 8,400 870
- -------------------------------------------------------
5,447
- -------------------------------------------------------
RAILROADS (1.7%)
Burlington Northern Santa Fe 12,000 1,050
Kansas City Southern Industries 53,400 2,623
- -------------------------------------------------------
3,673
- -------------------------------------------------------
RETAIL (8.8%)
Applebee's International 32,000 864
Corporate Express* 134,120 4,527
Home Depot 17,000 842
Kohls* 76,000 2,955
Landry's Seafood Restaurants* 51,800 1,055
McDonald's 51,600 2,348
OfficeMax* 24,000 288
Papa John's International* 42,650 1,237
Pep Boys-Manny, Moe & Jack 80,500 2,556
Tech Data* 16,000 408
Toys "R" Us* 39,400 985
Wal-Mart Stores 21,800 518
- -------------------------------------------------------
18,583
- -------------------------------------------------------
41
<PAGE>
STEPSTONE FUNDS(R)
- -------------------------------------------------------
Growth Equity Fund (cont'd)
MARKET
VALUE
SHARES (000)
-----------------
RUBBER & PLASTIC (0.5%)
Mark IV Industries 46,305 $ 1,094
- -------------------------------------------------------
1,094
- -------------------------------------------------------
SEMI-CONDUCTORS/INSTRUMENTS (7.1%)
Integrated Device Technology* 87,400 918
Intel 59,700 9,686
National Semiconductor* 33,000 916
Parametric Technology* 16,000 924
Xilinx* 53,000 2,412
- -------------------------------------------------------
14,856
- -------------------------------------------------------
TELEPHONES & TELECOMMUNICATION (4.1%)
Cincinnati Bell 57,000 3,527
MCI Communications 78,800 2,768
SBC Communications 43,200 2,371
- -------------------------------------------------------
8,666
- -------------------------------------------------------
TESTING LABORATORIES (0.3%)
Chiron* 33,000 615
- -------------------------------------------------------
615
- -------------------------------------------------------
TRUCKING (0.6%)
Wabash National 73,725 1,327
- -------------------------------------------------------
1,327
- -------------------------------------------------------
Total Common Stocks
(Cost $106,082) 203,173
- -------------------------------------------------------
PREFERRED STOCKS (0.3%)
Aetna 7,707 603
Fresenius National Medical Care* 20,000 2
- -------------------------------------------------------
Total Preferred Stocks
(Cost $377) 605
- -------------------------------------------------------
FACE MARKET
AMOUNT VALUE
(000) (000)
-----------------
REPURCHASE AGREEMENT (3.2%)
Deutsche Morgan Grenfell/
C.J. Lawrence, Inc.
5.550%, dated 01/31/97,
matures 02/03/97, repurchase
price $6,697,059 collateralized
by FHLMC, total par value
$3,377,279, 5.668%, 09/01/13:
FNMA, total par value $4,958,123,
7.00%, 12/01/11: total market
value $6,827,842) (A) $6,694 $6,694
- -------------------------------------------------------
Total Repurchase Agreement
(Cost $6,694) 6,694
- -------------------------------------------------------
Total Investments (100.0%)
(Cost $113,153) 210,472
- -------------------------------------------------------
Other Assets and Liabilities,
Net (0.0%) (28)
- -------------------------------------------------------
NET ASSETS:
Fund Shares of Institutional Class
(unlimited authorization --
no par value) based on 10,080,249
outstanding shares of beneficial
interest 109,229
Fund Shares of Investment Class
(unlimited authorization --
no par value) based
on 187,962 outstanding shares of
beneficial interest 2,920
Undistributed net investment income 219
Accumulated net realized gain
on investments 758
Net unrealized appreciation on investments 97,318
- -------------------------------------------------------
Total Net Assets: (100.0%) $210,444
- -------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- INSTITUTIONAL CLASS $20.50
- -------------------------------------------------------
NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE -- INVESTMENT CLASS $20.48
- -------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE --
INVESTMENT CLASS ($20.48/95.5%) $21.45
=======================================================
(A) TRI-PARTY REPURCHASE AGREEMENT
* NON-INCOME PRODUCING SECURITY
ADR -- AMERICAN DEPOSITORY RECEIPT
CL -- CLASS
FHLMC -- FEDERAL HOME LOAN MORTGAGE CORPORATION
FNMA -- FEDERAL NATIONAL MORTGAGE ASSOCIATION
42
<PAGE>
STATEMENT OF NET ASSETS JANUARY 31, 1997
- --------------------------------------------------------------------------------
STEPSTONE VALUE MOMENTUM FUND
MARKET
VALUE
SHARES (000)
-----------------
COMMON STOCKS (94.7%)
AGRICULTURE (1.1%)
Dole Food 100,000 $ 3,712
- -------------------------------------------------------
3,712
- -------------------------------------------------------
AIRCRAFT (1.5%)
Boeing 1,260 135
Rockwell International* 30,000 1,973
Textron 30,000 2,921
- -------------------------------------------------------
5,029
- -------------------------------------------------------
APPAREL/TEXTILES (0.3%)
Springs Industries, Cl A 20,000 845
- -------------------------------------------------------
845
- -------------------------------------------------------
AUTOMOTIVE (2.1%)
Arvin Industries 100,000 2,413
Fleetwood Enterprises 70,000 1,873
Ford Motor 50,000 1,606
TRW 20,000 1,015
- -------------------------------------------------------
6,907
- -------------------------------------------------------
AUTO REPAIR & LEASING (0.8%)
Rollins Truck Leasing 215,000 2,661
- -------------------------------------------------------
2,661
- -------------------------------------------------------
BANKS (4.7%)
Bank United, Cl A* 120,000 3,255
BankAmerica 35,000 3,907
First Union 45,000 3,763
J.P. Morgan 25,000 2,575
Wilmington Trust 50,000 2,063
- -------------------------------------------------------
15,563
- -------------------------------------------------------
CHEMICALS (4.9%)
Avery Dennison 114,000 4,175
Cabot 106,000 2,531
E.I. du Pont de Nemours 28,000 3,070
Monsanto 60,000 2,273
W.R. Grace 64,000 3,184
Wellman 60,000 1,058
- -------------------------------------------------------
16,291
- -------------------------------------------------------
MARKET
VALUE
SHARES (000)
-----------------
COMMUNICATIONS EQUIPMENT (1.8%)
CTS 75,000 $ 3,488
Harris 35,000 2,664
- -------------------------------------------------------
6,152
- -------------------------------------------------------
COMPUTERS & SERVICES (3.9%)
Cisco Systems* 60,000 4,185
Hewlett Packard 95,000 4,999
IBM 24,000 3,774
- -------------------------------------------------------
12,958
- -------------------------------------------------------
DRUGS (4.4%)
Allegiance 6,000 154
American Home Products 30,000 1,901
Astra AB-A, ADR* 50,000 2,394
Bristol Myers Squibb 13,000 1,651
Merck 50,000 4,538
SmithKline Beecham, ADR 57,000 4,118
- -------------------------------------------------------
14,756
- -------------------------------------------------------
ELECTRICAL UTILITIES (0.8%)
General Public Utilities 75,000 2,513
- -------------------------------------------------------
2,513
- -------------------------------------------------------
FINANCIAL SERVICES (5.9%)
Aames Financial 70,000 3,010
Bear Stearns 110,957 3,329
Dean Witter Discover 90,000 3,431
FNMA 120,000 4,740
Travelers 100,001 5,238
- -------------------------------------------------------
19,748
- -------------------------------------------------------
FOOD, BEVERAGE & TOBACCO (4.2%)
American Brands 20,000 1,020
IBP 130,000 2,990
Philip Morris 35,000 4,161
Sara Lee 80,000 3,160
Universal Foods 75,000 2,663
- -------------------------------------------------------
13,994
- -------------------------------------------------------
43
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------
Value Momentum Fund (cont'd)
MARKET
VALUE
SHARES (000)
-----------------
GAS/NATURAL GAS (4.0%)
Coastal 45,000 $ 2,177
MCN 75,000 2,428
Questar 42,000 1,643
Sonat 40,000 2,130
Westcoast Energy 70,000 1,225
Williams 90,000 3,611
- -------------------------------------------------------
13,214
- -------------------------------------------------------
GLASS PRODUCTS (0.4%)
PPG Industries 27,000 1,445
- -------------------------------------------------------
1,445
- -------------------------------------------------------
HOTELS & LODGING (0.5%)
Hilton Hotels 60,000 1,710
- -------------------------------------------------------
1,710
- -------------------------------------------------------
HOUSEHOLD FURNITURE & FIXTURES (0.8%)
Leggett & Platt 85,000 2,731
- -------------------------------------------------------
2,731
- -------------------------------------------------------
INSURANCE (4.4%)
Allstate 39,467 2,595
Chubb 45,000 2,453
Equifax 100,000 3,150
Lincoln National 40,000 2,145
Providian 50,000 2,694
Torchmark 30,000 1,553
- -------------------------------------------------------
14,590
- -------------------------------------------------------
LEASING & RENTING (1.8%)
Comdisco 135,000 4,168
Xtra 45,000 1,907
- -------------------------------------------------------
6,075
- -------------------------------------------------------
MACHINERY (5.1%)
Applied Materials* 15,000 741
Caterpillar 33,000 2,562
Deere 70,000 2,993
Dresser Industries 95,000 3,218
General Electric 45,000 4,635
Toro 85,500 3,003
- -------------------------------------------------------
17,152
- -------------------------------------------------------
MARKET
VALUE
SHARES (000)
-----------------
MEASURING DEVICES (1.4%)
Mallinckrodt 65,000 $ 2,665
Perkin Elmer 30,000 2,096
- -------------------------------------------------------
4,761
- -------------------------------------------------------
MEDICAL PRODUCTS & SERVICES (2.4%)
Baxter International 30,000 1,384
Becton, Dickinson 40,000 1,970
Fresenius National Medical
Care, ADR* 67,141 1,997
Novacare* 50,000 531
Tenet Healthcare* 76,000 2,052
- -------------------------------------------------------
7,934
- -------------------------------------------------------
MISCELLANEOUS BUSINESS SERVICES (0.4%)
Electronic Data Systems 25,000 1,150
NCR* 1,465 56
- -------------------------------------------------------
1,206
- -------------------------------------------------------
MISCELLANEOUS TRANSPORTATION (0.6%)
Harsco 30,000 2,104
- -------------------------------------------------------
2,104
- -------------------------------------------------------
OFFICE FURNITURE & FIXTURES (0.3%)
Hon Industries 32,500 1,162
- -------------------------------------------------------
1,162
- -------------------------------------------------------
PAPER & PAPER PRODUCTS (2.8%)
Kimberly-Clark 58,360 5,690
Weyerhaeuser 45,000 2,048
Willamette Industries 27,000 1,698
- -------------------------------------------------------
9,436
- -------------------------------------------------------
PETROLEUM & FUEL PRODUCTS (2.1%)
Occidental Petroleum 135,000 3,443
Union Pacific Resources 55,408 1,572
Union Texas Petroleum 90,000 1,913
- -------------------------------------------------------
6,928
- -------------------------------------------------------
44
<PAGE>
STEPSTONE FUNDS(R) JANUARY 31, 1997
- --------------------------------------------------------------------------------
VALUE MOMENTUM FUND (CONT'D)
MARKET
VALUE
SHARES (000)
-----------------
PETROLEUM REFINING (3.2%)
Ashland 30,000 $ 1,294
Chevron 25,000 1,659
Mobil 28,000 3,675
Royal Dutch Petroleum, ADR 13,000 2,256
Valero Energy 50,000 1,688
- -------------------------------------------------------
10,572
- -------------------------------------------------------
PHOTOGRAPHIC EQUIPMENT & SUPPLIES (1.5%)
Eastman Kodak 30,000 2,603
Xerox 39,000 2,286
- -------------------------------------------------------
4,889
- -------------------------------------------------------
PRINTING & PUBLISHING (3.8%)
Houghton Mifflin 40,000 2,165
Lafarge 140,000 2,993
McGraw-Hill 75,000 3,731
Wallace Computer Services 110,000 3,685
- -------------------------------------------------------
12,574
- -------------------------------------------------------
RAILROADS (1.6%)
Burlington Northern Santa Fe 22,000 1,925
Florida East Coast Railway 35,000 3,303
- -------------------------------------------------------
5,228
- -------------------------------------------------------
REAL ESTATE (5.3%)
BRE Properties, Cl A 152,262 3,768
CBL Associates Properties 85,000 2,178
First Industrial Realty Trust 135,000 3,915
JP Realty 123,000 3,306
Post Properties 65,000 2,698
Price Real Estate Investment Trust 20,000 735
Santa Anita Real Estate
Investment Trust 30,700 902
- -------------------------------------------------------
17,502
- -------------------------------------------------------
REPAIR SERVICES (1.9%)
PHH 130,000 6,256
- -------------------------------------------------------
6,256
- -------------------------------------------------------
MARKET
VALUE
SHARES (000)
-----------------
RETAIL (2.4%)
Dayton-Hudson 54,000 $ 2,032
Kroger* 50,000 2,388
May Department Stores 50,000 2,225
Sears Roebuck 31,000 1,488
- -------------------------------------------------------
8,133
- -------------------------------------------------------
RUBBER & PLASTIC (0.6%)
Hanna 90,000 1,935
- -------------------------------------------------------
1,935
- -------------------------------------------------------
SEMI-CONDUCTORS/INSTRUMENTS (3.5%)
Intel 60,000 9,735
National Semiconductor* 75,000 2,081
- -------------------------------------------------------
11,816
- -------------------------------------------------------
STEEL & STEEL WORKS (0.8%)
Aluminum Company of America 20,000 1,380
Engelhard 67,500 1,342
- -------------------------------------------------------
2,722
- -------------------------------------------------------
TELEPHONES & TELECOMMUNICATION (4.4%)
AT&T 23,449 923
Airtouch Communications* 16,000 414
Century Telephone Enterprises 90,000 2,824
Comsat 50,000 1,350
Frontier 100,000 2,188
GTE 60,000 2,820
Lucent Technologies 22,840 1,239
SBC Communications 55,000 3,018
- -------------------------------------------------------
14,776
- -------------------------------------------------------
TRANSPORTATION SERVICES (0.7%)
GATX 51,000 2,493
- -------------------------------------------------------
2,493
- -------------------------------------------------------
WHOLESALE (1.6%)
Avnet 50,000 3,094
Universal 70,000 2,170
- -------------------------------------------------------
5,264
- -------------------------------------------------------
Total Common Stocks
(Cost $193,935) 315,737
- -------------------------------------------------------
45
<PAGE>
STEPSTONE FUNDS(R)
- ---------------------------------------------------------
VALUE MOMENTUM FUND (CONT'D)
SHARES/FACE MARKET
AMOUNT VALUE
(000) (000)
-----------------
PREFERRED STOCK (0.0%)
Fresenius National Medical Care* 64,000 $ 6
- -------------------------------------------------------
Total Preferred Stock (Cost $0) 6
- -------------------------------------------------------
REPURCHASE AGREEMENT (5.9%)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc.
5.550%, dated 01/31/97, matures 02/03/97,
repurchase price $19,663,913 (collateralized
by various FHLMC obligations, total par
value $14,838,634, 5.668%-7.50%,
12/01/03-01/01/27: FNMA obligation,
total par value $6,000,000, 6.723%,
02/01/26: total market
value $20,047,920) (A) $19,655 19,655
- -------------------------------------------------------
Total Repurchase Agreement
(Cost $19,655) 19,655
- -------------------------------------------------------
Total Investments (100.6%)
(Cost $213,590) 335,398
- -------------------------------------------------------
Other Assets and Liabilities,
Net (-0.6%) (1,953)
- -------------------------------------------------------
MARKET
VALUE
(000)
--------
NET ASSETS:
Fund Shares of Institutional Class
(unlimited authorization -- no par value)
based on 14,717,403 outstanding shares of
beneficial interest $200,105
Fund Shares of Investment Class
(unlimited authorization --
no par value) based on 740,181
outstanding shares of beneficial interest 10,133
Undistributed net investment income 1,032
Accumulated net realized gain
on investments 368
Net unrealized appreciation
on investments 121,807
- -------------------------------------------------------
Total Net Assets: (100.0%) $333,445
- -------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- INSTITUTIONAL CLASS $21.57
- -------------------------------------------------------
NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE -- INVESTMENT CLASS $21.57
- -------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE --
INVESTMENT CLASS ($21.57/95.5%) $22.59
=======================================================
(A) TRI-PARTY REPURCHASE AGREEMENT
* NON-INCOME PRODUCING SECURITY
ADR -- AMERICAN DEPOSITORY RECEIPT
CL -- CLASS
FHLMC -- FEDERAL HOME LOAN MORTGAGE CORPORATION
FNMA -- FEDERAL NATIONAL MORTGAGE ASSOCIATION
46
<PAGE>
STATEMENT OF NET ASSETS JANUARY 31, 1997
- --------------------------------------------------------------------------------
STEPSTONE BLUE CHIP GROWTH FUND
MARKET
VALUE
SHARES (000)
-----------------
COMMON STOCKS (91.2%)
AIR TRANSPORTATION (1.1%)
AMR* 11,000 $ 879
- -------------------------------------------------------
879
- -------------------------------------------------------
AIRCRAFT (1.3%)
Allied Signal 6,000 422
Boeing 6,000 643
- -------------------------------------------------------
1,065
- -------------------------------------------------------
AUTOMOTIVE (1.9%)
Chrysler 20,000 698
General Motors 15,000 885
- -------------------------------------------------------
1,583
- -------------------------------------------------------
BANKS (10.1%)
Bank of Boston 14,400 1,026
Bankers Trust 5,000 425
Chase Manhattan Bank 5,000 463
Citicorp 13,500 1,571
Comerica 5,000 286
CoreStates Finance 15,000 746
First Union 11,000 920
J.P. Morgan 15,000 1,545
Merchantile Bancorp 15,000 799
NationsBank 3,262 352
- -------------------------------------------------------
8,133
- -------------------------------------------------------
BEAUTY PRODUCTS (1.0%)
Proctor & Gamble 7,000 809
- -------------------------------------------------------
809
- -------------------------------------------------------
CHEMICALS (3.0%)
E.I. du Pont de Nemours 15,000 1,644
Morton International 10,000 406
Olin 10,000 366
Primex Technologies* 1,000 19
- -------------------------------------------------------
2,435
- -------------------------------------------------------
COMMUNICATIONS EQUIPMENT (0.5%)
Motorola 6,000 410
- -------------------------------------------------------
410
- -------------------------------------------------------
MARKET
VALUE
SHARES (000)
-----------------
COMPUTERS & SERVICES (2.9%)
EMC* 15,000 $ 568
Gateway 2000* 15,000 917
Hewlett Packard 10,000 526
Western Digital* 5,000 363
- -------------------------------------------------------
2,374
- -------------------------------------------------------
CONCRETE & MINERAL PRODUCTS (1.6%)
Minnesota Mining & Manufacturing 15,000 1,279
- -------------------------------------------------------
1,279
- -------------------------------------------------------
DRUGS (5.7%)
American Home Products 10,000 634
Amgen* 10,000 564
Biogen* 5,000 234
Eli Lilly 9,426 821
Johnson & Johnson 13,000 749
Merck 9,000 817
Schering Plough 10,000 756
- -------------------------------------------------------
4,575
- -------------------------------------------------------
ELECTRICAL EQUIPMENT (0.3%)
Solectron* 3,750 226
- -------------------------------------------------------
226
- -------------------------------------------------------
ELECTRICAL UTILITIES (1.1%)
Duke Power 10,000 469
Texas Utilities 10,000 405
- -------------------------------------------------------
874
- -------------------------------------------------------
ENTERTAINMENT (1.0%)
Walt Disney 11,500 842
- -------------------------------------------------------
842
- -------------------------------------------------------
FINANCIAL SERVICES (3.2%)
American Express 5,000 312
Bear Stearns 26,250 788
Franklin Resources 15,000 818
Household International 2,500 248
Merrill Lynch 5,000 421
- -------------------------------------------------------
2,587
- -------------------------------------------------------
47
<PAGE>
STEPSTONE FUNDS(R)
- ---------------------------------------------------------
BLUE CHIP GROWTH FUND (CONT'D)
MARKET
VALUE
SHARES (000)
-----------------
COMMON STOCKS (CONTINUED)
FOOD, BEVERAGE & TOBACCO (5.9%)
Coca Cola Company 32,000 $ 1,852
Coca-Cola Enterprises 8,000 455
PepsiCo 20,000 698
Philip Morris 15,000 1,783
- -------------------------------------------------------
4,788
- -------------------------------------------------------
FOOTWEAR (0.8%)
Nike 9,700 658
- -------------------------------------------------------
658
- -------------------------------------------------------
GAS/NATURAL GAS (0.7%)
El Paso Natural Gas 6,000 323
Noram Energy 15,000 234
- -------------------------------------------------------
557
- -------------------------------------------------------
HOTELS & LODGING (0.9%)
HFS* 10,000 700
- -------------------------------------------------------
700
- -------------------------------------------------------
HOUSEHOLD PRODUCTS (1.6%)
Clorox 3,750 445
Gillette 10,000 815
- -------------------------------------------------------
1,260
- -------------------------------------------------------
INSURANCE (2.8%)
American International Group 5,000 606
ITT Hartford Group 8,000 587
Pacificare Health Systems, Cl A* 4,000 302
Pacificare Health Systems, Cl B* 4,000 321
SunAmerica 10,000 461
- -------------------------------------------------------
2,277
- -------------------------------------------------------
LEISURE PRODUCTS (0.4%)
Mattel 12,500 352
- -------------------------------------------------------
352
- -------------------------------------------------------
MACHINERY (5.1%)
Case 12,000 636
Caterpillar 12,100 939
Deere 18,000 770
General Electric 17,500 1,803
- -------------------------------------------------------
4,148
- -------------------------------------------------------
MARKET
VALUE
SHARES (000)
-----------------
MEDICAL PRODUCTS & SERVICES (3.5%)
Boston Scientific* 5,000 $ 341
Columbia HCA Healthcare 15,000 593
Guidant 16,000 892
Healthsouth Rehabilitation* 7,500 327
Medtronic 10,000 685
- -------------------------------------------------------
2,838
- -------------------------------------------------------
MISCELLANEOUS BUSINESS SERVICES (8.3%)
3Com* 10,000 671
Adaptec* 5,000 219
Cisco Systems* 8,000 558
Computer Associates International 32,550 1,477
Electronic Data Systems 9,223 424
Microsoft* 16,000 1,632
NCR* 937 36
Oracle Systems* 5,000 194
Peoplesoft* 15,000 818
Sun Microsystems* 20,000 635
- -------------------------------------------------------
6,664
- -------------------------------------------------------
PAPER & PAPER PRODUCTS (0.8%)
International Paper 15,000 613
- -------------------------------------------------------
613
- -------------------------------------------------------
PETROLEUM & FUEL PRODUCTS (2.0%)
Burlington Resources 5,000 249
Halliburton 10,000 724
Schlumberger 3,000 333
Tidewater 7,000 329
- -------------------------------------------------------
1,635
- -------------------------------------------------------
PETROLEUM REFINING (8.1%)
British Petroleum, ADR 74 10
Chevron 15,000 996
Exxon 15,000 1,554
Mobil 7,900 1,037
Royal Dutch Petroleum, ADR 8,000 1,388
Texaco 15,000 1,588
- -------------------------------------------------------
6,573
- -------------------------------------------------------
PRINTING & PUBLISHING (0.5%)
Time Warner 10,000 385
- -------------------------------------------------------
385
- -------------------------------------------------------
48
<PAGE>
STEPSTONE FUNDS(R) JANUARY 31, 1997
- --------------------------------------------------------------------------------
Blue Chip Growth Fund (cont'd)
MARKET
VALUE
SHARES (000)
-----------------
PROFESSIONAL SERVICES (0.5%)
Paychex 7,500 $ 364
- -------------------------------------------------------
364
- -------------------------------------------------------
RETAIL (6.2%)
Alberto Culver, Cl A 20,000 893
Borders Group* 10,000 446
Dayton-Hudson 10,000 376
Home Depot 18,000 891
Kmart* 20,000 223
Price/Costco* 14,500 386
Revco Drug Stores* 7,500 281
Safeway* 10,000 478
Sears Roebuck 5,000 240
Staples* 20,000 410
TJX 9,000 358
- -------------------------------------------------------
4,982
- -------------------------------------------------------
RUBBER & PLASTIC (1.3%)
Dow Chemical 7,500 578
Goodyear Tire & Rubber 8,000 436
- -------------------------------------------------------
1,014
- -------------------------------------------------------
SEMI-CONDUCTORS/INSTRUMENTS (2.0%)
Intel 10,000 1,623
- -------------------------------------------------------
1,623
- -------------------------------------------------------
SPECIALTY MACHINERY (0.7%)
U.S. Filter* 15,000 576
- -------------------------------------------------------
576
- -------------------------------------------------------
STEEL & STEEL WORKS (1.0%)
Aluminum Company of America 8,400 580
Bethlehem Steel* 25,000 213
- -------------------------------------------------------
793
- -------------------------------------------------------
SHARES/FACE MARKET
AMOUNT VALUE
(000) (000)
-----------------
TELEPHONES & TELECOMMUNICATION (3.1%)
Ameritech 15,200 $ 908
AT&T 15,000 591
Lucent Technologies 6,805 369
Teleport Communications Group* 7,500 233
Worldcom* 15,000 377
- -------------------------------------------------------
2,478
- -------------------------------------------------------
WHOLESALE (0.3%)
Omnicare 10,000 276
- -------------------------------------------------------
276
- -------------------------------------------------------
Total Common Stocks
(Cost $53,806) 73,625
- -------------------------------------------------------
CONVERTIBLE BOND (0.3%)
Tele Communications International
4.500%, 02/15/06 $ 300 239
- -------------------------------------------------------
Total Convertible Bond
(Cost $310) 239
- -------------------------------------------------------
FINANCIAL OPTION (1.0%)
S&P 500 Depositary Receipt 10,000 785
- -------------------------------------------------------
Total Financial Option
(Cost $675) 785
- -------------------------------------------------------
EQUITY OPTIONS (0.0%)
3Com February 65 Puts* 02/24/97 50 8
3Com March 75 Calls* 03/24/97 (100) (18)
Gateway 2000 March 60 Puts* 03/24/97 100 45
Gateway 2000 March 70 Calls* 03/24/97 (100) (24)
Microsoft February 100 Calls* 02/24/97 (25) (11)
Microsoft February 105 Calls* 02/24/97 (25) (5)
Nike Inc-B February 65 Calls* 02/24/97 (62) (23)
Wetern Digital February 75 Calls* 02/24/97(50) (11)
- -------------------------------------------------------
Total Equity Options (Cost $(36)) (39)
- -------------------------------------------------------
49
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
BLUE CHIP GROWTH FUND (CONT'D)
FACE MARKET
AMOUNT VALUE
(000) (000)
-----------------
TIME DEPOSIT (7.2%)
Sanwa Bank Limited
5.469%, 02/03/97 $5,843 $ 5,843
- -------------------------------------------------------
Total Time Deposit
(Cost $5,843) 5,843
- -------------------------------------------------------
Total Investments (99.7%)
(Cost $60,598) 80,453
- -------------------------------------------------------
Other Assets and Liabilities,
Net (0.3%) 229
- -------------------------------------------------------
MARKET
VALUE
(000)
-------
NET ASSETS:
Fund Shares of Institutional Class
(unlimited authorization -- no par value)
based on 5,562,903 outstanding shares
of beneficial interest $58,220
Undistributed net investment income 6
Accumulated net realized gain
on investments 2,601
Net unrealized appreciation
on investments 19,855
- -------------------------------------------------------
Total Net Assets: (100.0%) $80,682
- -------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- INSTITUTIONAL CLASS $14.50
=======================================================
* NON-INCOME PRODUCING SECURITY
ADR -- AMERICAN DEPOSITORY RECEIPT
CL -- CLASS
<PAGE>
STATEMENT OF NET ASSETS JANUARY 31, 1997
- --------------------------------------------------------------------------------
STEPSTONE EMERGING GROWTH FUND
MARKET
VALUE
SHARES (000)
-----------------
COMMON STOCKS (88.9%)
AEROSPACE & DEFENSE (0.8%)
Sci Systems* 7,500 $ 437
- -------------------------------------------------------
437
- -------------------------------------------------------
AIR TRANSPORTATION (0.3%)
Comair Holdings 2,250 46
Mesaba Holdings* 10,000 137
- -------------------------------------------------------
183
- -------------------------------------------------------
APPAREL/TEXTILES (1.1%)
Jones Apparel Group* 10,000 342
Mohawk Industries* 10,000 257
- -------------------------------------------------------
599
- -------------------------------------------------------
BANKS (5.6%)
Astoria Financial 10,000 390
California Federal Bank, SCLRPI* 300 5
Cullen/Frost Bankers 7,400 259
Dauphin Deposit Bank & Trust 5,000 207
Deposit Guaranty 7,000 220
First Security 3,750 128
Hibernia, Cl A 12,500 166
Imperial Bancorp* 7,500 186
Merchantile Bancorp 10,000 532
Old Kent Financial 3,858 187
Roosevelt Financial Group 10,000 215
Roslyn Bancorp* 10,000 159
Signet Banking 7,500 224
Union Planters 8,000 329
- -------------------------------------------------------
3,207
- -------------------------------------------------------
BROADCASTING, NEWSPAPERS & ADVERTISING (0.9%)
CKS Group* 4,000 124
Evergreen Media, Cl A* 5,000 155
SFX Broadcasting, Cl A* 7,500 251
- -------------------------------------------------------
530
- -------------------------------------------------------
BUILDING & CONSTRUCTION (0.1%)
Southern Energy Homes* 6,000 78
- -------------------------------------------------------
78
- -------------------------------------------------------
MARKET
VALUE
SHARES (000)
-----------------
CHEMICALS (0.9%)
Cytec Industries* 10,500 $ 419
McWhorter Technologies* 5,000 113
- -------------------------------------------------------
532
- -------------------------------------------------------
COMMUNICATIONS EQUIPMENT (4.0%)
ADC Telecommunications* 5,600 201
Ascend Communications* 3,500 244
Aseco* 7,500 80
Aspect Telecommunications* 7,000 217
Dionex* 5,000 202
DSP Communications* 2,500 56
ECI Telecom 11,000 264
Pairgain Technologies* 10,000 409
Tellabs* 15,000 618
- -------------------------------------------------------
2,291
- -------------------------------------------------------
COMPUTERS & SERVICES (0.9%)
Network Appliance* 5,000 256
Printronix* 5,000 79
Verifone* 5,000 181
- -------------------------------------------------------
516
- -------------------------------------------------------
COMPUTERS & SOFTWARE SERVICES (10.3%)
3Com* 5,000 336
Baan NV* 10,000 454
Cadence Design Systems* 12,500 478
Cisco Systems* 12,500 872
CUC International* 30,000 742
Digex* 5,000 60
Gasonics International* 7,500 134
HBO 10,000 626
Hyperion Software* 5,000 119
JDA Software Group* 5,000 150
Netscape Communications* 5,000 189
Physician Computer Networks* 15,000 126
Proxim* 9,000 189
Quarterdeck Office Systems* 10,000 51
Rational Software* 5,000 127
Saville Systems Ireland, ADR* 14,000 588
Sun Microsystems* 3,000 95
Symantec* 7,100 114
51
<PAGE>
STEPSTONE FUNDS(R)
- -------------------------------------------------------
EMERGING GROWTH FUND (CONT'D)
MARKET
VALUE
SHARES (000)
-----------------
COMPUTERS & SOFTWARE SERVICES (CONTINUED)
Sync Research* 15,000 $ 208
Verilink* 5,750 145
Westell Technologies* 5,000 73
- -------------------------------------------------------
5,876
- -------------------------------------------------------
CONSUMER PRODUCTS (1.5%)
USA Detergents* 5,500 201
Vans* 15,000 208
Wolverine World Wide 14,625 452
- -------------------------------------------------------
861
- -------------------------------------------------------
DRUGS (6.3%)
Advanced Paradigm* 2,500 47
Agouron Pharmecutical* 4,000 343
Alkermes* 10,000 232
Arqule* 7,500 167
Autoimmune* 5,000 85
Axogen Limited Units* 2,500 69
Bio-Technology General* 10,000 169
Boston Scientific* 3,200 218
Cell Genesys* 15,000 112
Creative Biomolecules* 5,000 52
Cypros Pharmaceutical* 12,500 70
Depotech* 9,500 171
Dura Pharmaceuticals* 7,000 294
Geltex Pharmaceuticals* 7,500 184
Guilford Pharmaceuticals* 6,000 147
IDEC Pharmaceuticals Corp* 10,000 232
Jones Medical 5,000 190
Liposome* 24,000 549
Magainin Pharmaceuticals* 10,000 80
North American Vaccine* 4,000 98
Royce Labs* 10,000 70
- -------------------------------------------------------
3,579
- -------------------------------------------------------
ELECTRICAL INSTRUMENTS (0.3%)
Belden 5,000 191
- -------------------------------------------------------
191
- -------------------------------------------------------
ENERGY (0.7%)
Barrett Resources* 9,500 367
- -------------------------------------------------------
367
- -------------------------------------------------------
MARKET
VALUE
SHARES (000)
-----------------
ENTERTAINMENT (1.2%)
Carmike Cinemas, Cl A* 5,000 $ 119
Mirage Resorts* 16,000 402
Regal Cinemas* 5,000 134
- -------------------------------------------------------
655
- -------------------------------------------------------
ENVIRONMENTAL SERVICES (0.9%)
International Technology* 6,250 52
USA Waste Services* 12,800 467
- -------------------------------------------------------
519
- -------------------------------------------------------
FINANCIAL SERVICES (1.5%)
Finova Group 5,000 360
First American, Tennessee 5,000 306
JSB Financial 6,000 220
- -------------------------------------------------------
886
- -------------------------------------------------------
HEALTHCARE (0.4%)
National Surgery Centers* 7,500 256
- -------------------------------------------------------
256
- -------------------------------------------------------
HOTELS & LODGING (1.4%)
HFS* 10,000 700
Prime Hospitality* 6,000 103
- -------------------------------------------------------
803
- -------------------------------------------------------
HOUSEHOLD PRODUCTS (0.3%)
Helen of Troy Limited* 7,500 178
- -------------------------------------------------------
178
- -------------------------------------------------------
INSURANCE (2.1%)
Conseco 5,000 367
Fremont General 7,500 225
Penncorp Financial Group 6,000 220
Provident 7,500 368
- -------------------------------------------------------
1,180
- -------------------------------------------------------
MACHINERY (0.8%)
Camco International 10,000 479
- -------------------------------------------------------
479
- -------------------------------------------------------
52
<PAGE>
STEPSTONE FUNDS(R) JANUARY 31, 1997
- --------------------------------------------------------------------------------
EMERGING GROWTH FUND (CONT'D)
MARKET
VALUE
SHARES (000)
-----------------
MEASURING DEVICES (0.9%)
Epic Design Technology* 3,400 $ 109
Genrad* 5,000 107
Laser Technology* 23,000 95
Thermoquest* 15,000 219
- -------------------------------------------------------
530
- -------------------------------------------------------
MEDICAL PRODUCTS & SERVICES (9.3%)
Adac Laboratories 6,000 149
Arrow International 5,000 160
Biochem Pharma* 16,000 898
Biofield* 4,000 48
Cardiothoracic Systems* 12,500 317
Coherent* 3,500 169
Conceptus* 7,500 98
Concord EFS* 17,843 357
Endosonics* 5,000 64
ESC Medical Systems* 10,000 325
Express Scripts* 5,000 170
Fresenius National Medical
Care ADR* 25,000 744
Genesis Health Ventures* 6,000 187
Heartstream* 2,000 22
Hologic* 6,000 178
Medquist* 3,750 93
Molecular Devices* 5,000 77
Renal Treatment Centers* 15,000 422
Safeskin* 7,500 180
Spectranetics* 15,000 73
Staar Surgical* 15,000 202
Theragenics* 11,500 303
Veterinary Centers of America* 10,000 102
- -------------------------------------------------------
5,338
- -------------------------------------------------------
METALS & MINING (0.3%)
Amcol International 10,000 179
- -------------------------------------------------------
179
- -------------------------------------------------------
MISCELLANEOUS BUSINESS SERVICES (5.9%)
Administaff 5,000 109
Amisys Managed Care Systems* 10,000 152
Clarify* 2,500 90
Cognos* 5,000 148
Computer Management Sciences* 4,500 100
- -------------------------------------------------------
MARKET
VALUE
SHARES (000)
-----------------
Cyberguard Corp* 5,000 $ 52
Cybermedia* 7,500 142
Digital Solutions* 35,000 113
Fiserv* 5,000 167
Fore Systems* 7,500 218
Geoworks* 11,000 275
GTech* 5,000 174
Imnet Systems* 5,000 148
Logicon 3,500 121
Macromedia* 7,500 83
McAfee Associates* 3,000 175
Meta Group* 3,750 93
Midway Games* 5,000 99
Nova* 3,000 63
Object Design* 3,750 31
Pixar* 2,000 27
Procom Technology* 7,500 116
Source Services* 5,000 99
Sterling Commerce* 7,963 270
Systemsoft Corp* 9,000 124
Vantive* 5,000 154
Visigenic Software* 2,500 37
- -------------------------------------------------------
3,380
- -------------------------------------------------------
MISCELLANEOUS CONSUMER SERVICES (1.8%)
Corestaff* 5,000 115
K-III Communications* 10,000 106
Norrell 10,000 279
Service International 18,000 522
- -------------------------------------------------------
1,022
- -------------------------------------------------------
MISCELLANEOUS MANUFACTURING (0.4%)
Mueller Industries* 5,000 209
- -------------------------------------------------------
209
- -------------------------------------------------------
PETROLEUM & FUEL PRODUCTS (2.5%)
Apache 10,000 384
Benton Oil & Gas* 5,000 98
Cabot Oil & Gas, Cl A 10,000 182
Global Industustries* 2,000 42
Pride Petroleum Services* 10,000 226
Reading & Bates* 9,000 262
Union Texas Petroleum 10,000 212
- -------------------------------------------------------
1,406
- -------------------------------------------------------
53
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
EMERGING GROWTH FUND (CONT'D)
MARKET
VALUE
SHARES (000)
-----------------
PETROLEUM REFINING (0.4%)
Valero Energy 7,500 $ 253
- -------------------------------------------------------
253
- -------------------------------------------------------
PRINTING & PUBLISHING (0.9%)
Digital Generations Systems* 12,000 82
Gartner Group, Cl A* 12,000 411
- -------------------------------------------------------
493
- -------------------------------------------------------
PROFESSIONAL SERVICES (1.8%)
Apollo Group, Cl A* 10,000 333
Childrens Comprehensive* 7,500 98
Medaphis* 7,000 94
Paychex 7,500 364
Uol Publishing* 10,000 153
- -------------------------------------------------------
1,042
- -------------------------------------------------------
RAILROADS (0.4%)
Coach USA* 3,000 88
Hub Group* 5,000 135
- -------------------------------------------------------
223
- -------------------------------------------------------
REAL ESTATE (0.4%)
CWM Mortgage Holdings 10,000 217
- -------------------------------------------------------
217
- -------------------------------------------------------
RETAIL (6.0%)
Boston Chicken* 10,500 364
CKE Restaurants 10,500 219
CML Group 27,500 89
Corporate Express* 5,000 169
Cost Plus* 5,000 86
Delia's* 5,000 93
Family Dollar Stores 10,000 210
Gadzooks* 9,000 253
Omnicare 34,000 939
Papa John's International* 5,000 145
Rare Hospitality International* 5,000 76
Staples* 30,000 615
Starbucks* 5,000 171
- -------------------------------------------------------
3,429
- -------------------------------------------------------
MARKET
VALUE
SHARES (000)
-----------------
RUBBER & PLASTIC (1.0%)
Carlisle 12,000 $ 353
Sealed Air* 5,000 214
- -------------------------------------------------------
567
- -------------------------------------------------------
SEMI-CONDUCTORS/INSTRUMENTS (4.9%)
Atmel* 7,500 348
BMC Industries 13,500 442
Hadco* 4,000 217
Integrated Device Technology* 10,000 105
Lernout & Hauspie Speech* 6,500 153
Microchip Technology* 7,500 286
Read-Rite* 7,500 248
Sanmina* 5,000 298
Speedfam International* 7,500 262
Tencor Instruments* 5,000 204
Vitesse Semiconductor* 4,500 247
- -------------------------------------------------------
2,810
- -------------------------------------------------------
SPECIALTY MACHINERY (1.0%)
U.S. Filter* 15,000 576
- -------------------------------------------------------
576
- -------------------------------------------------------
TELEPHONES & TELECOMMUNICATION (3.1%)
Cascade Communications* 8,000 318
GST Telecommunications* 10,000 95
Pacific Gateway Exchange* 7,500 223
Premiere Technologies* 3,750 97
Worldcom* 40,780 1,025
- -------------------------------------------------------
1,758
- -------------------------------------------------------
TESTING LABORATORIES (1.1%)
Cellpro* 5,000 54
Curative Technologies* 5,000 162
Martek Biosciences* 7,500 184
Primark* 7,500 210
- -------------------------------------------------------
610
- -------------------------------------------------------
TRANSPORTATION SERVICES (0.3%)
Sabre Group Holdings* 7,000 188
- -------------------------------------------------------
188
- -------------------------------------------------------
54
<PAGE>
STEPSTONE FUNDS(R) JANUARY 31, 1997
- --------------------------------------------------------------------------------
EMERGING GROWTH FUND (CONT'D)
MARKET
VALUE
SHARES (000)
-----------------
WHOLESALE (4.2%)
Cardinal Health 27,000 1,691
Central Garden & Pet* 7,500 203
Chronimed* 7,000 88
Ha Lo Industries* 1,875 47
Physician Sales & Services* 11,000 209
Pomeroy Computer Resources* 5,000 158
- -------------------------------------------------------
2,396
- -------------------------------------------------------
Total Common Stocks
(Cost $40,534) 50,829
- -------------------------------------------------------
EQUITY OPTIONS (0.3%)
3Com February 65 Puts* 02/24/97 50 8
3Com March 75 Calls* 03/24/97 (50) (9)
Alkermes February
22.5 Puts* 02/24/97 100 12
Alkermes February 30 Calls* 02/24/97 (100) (1)
Biochem Pharmaceuticals February
50 Puts* 02/24/97 75 5
Cascade Communications February
50 Puts* 02/24/97 35 35
Concord EFS March
30 Calls* 03/24/97 (175) (4)
Concord EFS February
25 Puts* 02/24/97 175 90
DSP Communications February
22.5 Puts* 02/24/97 25 4
DSP Communications February
27.5 Calls* 02/24/97 (25)
Hologic March 25 Puts* 03/24/97 60 3
Hologic March 35 Calls* 03/24/97 (60) (4)
Rational Software April
45 Calls* 04/21/97 (50) (1)
Rational Software February
35 Puts* 02/24/97 50 48
Sanmina February 50 Puts* 02/24/97 50 1
Sanmina February 60 Calls* 02/24/97 (50) (14)
- -------------------------------------------------------
Total Equity Options
(Cost $79) 173
- -------------------------------------------------------
FACE MARKET
AMOUNT VALUE
(000) (000)
-----------------
TIME DEPOSIT (11.6%)
Sanwa Bank Limited
5.469%, 02/03/97 $ 6,628 $ 6,628
- -------------------------------------------------------
Total Time Deposit
(Cost $6,628) 6,628
- -------------------------------------------------------
Total Investments (100.8%)
(Cost $47,241) 57,630
- -------------------------------------------------------
Other Assets and Liabilities,
Net (-0.8%) (474)
- -------------------------------------------------------
NET ASSETS:
Fund Shares of Institutional Class
(unlimited authorization -- no par value)
based on 4,232,593 outstanding shares
of beneficial interest 44,949
Accumulated net realized gain
on investments 1,818
Net unrealized appreciation on investments 10,389
- -------------------------------------------------------
Total Total Net Assets: (100.0%) $57,156
- -------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- INSTITUTIONAL CLASS $13.50
=======================================================
* NON-INCOME PRODUCING SECURITY
ADR --AMERICAN DEPOSITORY RECEIPT
CL -- CLASS
SCLRPI -- SECONDARY CONTINGENT LITIGATION RECOVERY PARTICIPATION INTERESTS
55
<PAGE>
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
STEPSTONE INTERNATIONAL EQUITY FUND
MARKET
VALUE
SHARES (000)
-----------------
FOREIGN COMMON STOCKS (99.7%)
FINLAND (0.4%)
Nokia, Cl A 3,000 $ 194
- -------------------------------------------------------
194
- -------------------------------------------------------
FRANCE (8.7%)
Accor 1,802 242
Alcatel Alsthom 2,636 262
Banque Nationale Paris 3,854 155
Carrefour 675 406
Castorama 2,118 349
Chargeurs International 770 42
Danone 2,000 310
Elf Aquitaine 2,385 232
Essilor International 750 223
GAN* 5,800 118
Lafarge 2,927 177
LVMH Moet Hennesey 1,800 456
Pathe* 770 196
Peugeot 1,400 150
Schneider 5,079 257
Societe Generale 1,809 208
Valeo 3,536 233
- -------------------------------------------------------
4,016
- -------------------------------------------------------
GERMANY (8.9%)
Allianz 214 396
BASF 12,000 434
Bayer 9,500 360
BMW 400 257
Daimler-Benz* 4,000 281
Degussa 500 213
Deutsche Bank 4,000 200
Gehe 6,250 415
Karstadt 550 168
Preussag 700 167
RWE 7,500 318
Siemens 9,500 467
Veba 8,000 443
- -------------------------------------------------------
4,119
- -------------------------------------------------------
MARKET
VALUE
SHARES (000)
-----------------
HONG KONG (7.0%)
Amoy Properties 200,000 $ 254
Cheung Kong Holdings 60,000 559
Hong Kong & China Gas 150,000 283
Hong Kong Telecommunications 104,030 180
HSBC Holdings 36,816 853
Hutchison Whampoa 60,000 453
New World Development 60,000 370
Swire Pacific, Ser A 30,000 276
- -------------------------------------------------------
3,228
- -------------------------------------------------------
JAPAN (33.6%)
Amada 47,000 314
Amada Metrecs 30,000 250
Asahi Breweries 39,000 367
Asahi Organic Chemical 63,000 328
Best Denki 33,000 351
Chugai Pharmaceutical 49,000 380
Chugoku Elec Power 17,000 300
Cmk 28,000 351
CSK 14,000 333
Daiwa Securities 36,000 279
Fuji Bank 21,000 220
Fujisawa Pharmaceutical 48,000 373
Gun-ei Chemicals 96,000 299
Hitachi Cable 54,000 330
Industrial Bank of Japan 19,760 249
Japan Synthetic Rubber 56,000 381
Kamigumi 52,000 279
Kansai Electric Power 16,700 310
Katokichi 20,000 302
Kuraray 40,000 337
Long Term Credit Bank Japan 61,000 226
Maeda 46,000 325
Makita 30,000 401
Matsushita Electric Works 40,000 337
Meiji Seika 69,000 347
Mitsui Marine & Fire 53,000 285
Mitsui Trust & Banking 38,000 243
NGK Insulators 37,000 324
Nomura Securities 21,000 269
Olympus Optical 44,000 367
Organo 44,000 295
56
<PAGE>
STEPSTONE FUNDS(R) JANUARY 31, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND (CONT'D)
MARKET
VALUE
SHARES (000)
-----------------
Ryobi Limited 78,000 $ 270
Sanyo Electric 90,000 379
Seven Eleven 7,000 397
Shinmaywa Industries 48,000 316
Shizuoka Bank 37,000 342
Sumitomo Bank 23,000 249
Sumitomo Trust & Banking 34,000 266
Taisei 69,000 312
Takara Standard 43,000 341
Tokio Marine & Fire 34,000 309
Tokyo Gas 112,000 283
Tokyo Style 25,000 305
Tomen 120,000 330
Toppan Printing 31,000 368
Toshiba 65,000 378
Toyo Ink 78,000 296
Toyo Tire & Rubber 100,000 318
Yamato Transportation 39,000 360
- -------------------------------------------------------
15,571
- -------------------------------------------------------
MALAYSIA (4.2%)
AMMB Holdings 40,000 354
Edaran Otomobil 20,000 198
Hicom Holdings 50,000 125
Malayan Banking 12,000 133
Petronas Gas 60,000 217
Rothmans of Pall Mall 20,000 215
Sime Darby 60,000 223
Telekom Malaysia 20,000 157
United Engineers 20,000 179
YTL 30,000 159
- -------------------------------------------------------
1,960
- -------------------------------------------------------
NETHERLANDS (5.5%)
Aegon 5,052 310
Ahold 5,306 328
Akzo 2,000 281
Elsevier NV 15,000 231
IHC Caland 4,000 235
Phillips Electronics 5,000 201
Royal Dutch Petroleum 1,500 263
Unilever 2,000 332
Wolters Kluwer 3,000 371
- -------------------------------------------------------
2,552
- -------------------------------------------------------
MARKET
VALUE
SHARES (000)
-----------------
PHILIPPINES (1.2%)
Ayala Land 78,000 $ 95
Ayala 37,500 43
DMCI Holdings 60,000 47
JG Summit Holdings 127,000 39
Manila Electric, Cl B 9,000 76
Metro Bank & Trust 3,750 103
Petron 112,000 51
Philippine Long Distance Telephone 1,000 61
SM Prime Holdings 185,000 56
- -------------------------------------------------------
571
- -------------------------------------------------------
SINGAPORE (6.9%)
Cerebos Pacific 20,000 148
DBS Land 150,000 618
Development Bank of Singapore 45,000 624
Keppel 30,000 243
Singapore Airlines 55,000 516
Singapore Tech Industrial 120,000 310
Singapore Telecommunications 100,000 236
United Overseas Bank 42,000 489
- -------------------------------------------------------
3,184
- -------------------------------------------------------
SWEDEN (0.8%)
Astra 2,500 119
Ericsson 5,000 168
Pharmacia 2,000 74
- -------------------------------------------------------
361
- -------------------------------------------------------
SWITZERLAND (6.0%)
ABB AG 300 384
Alusuisse Lonza 250 203
CS Holdings 3,000 309
Nestle 300 326
Novartis AG 320 367
Roche Holdings 50 440
SMH PC 400 272
Union Bank of Switzerland 250 208
Zurich Versicherung 950 268
- -------------------------------------------------------
2,777
- -------------------------------------------------------
57
<PAGE>
STEPSTONE FUNDS(R)
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND (CONT'D)
MARKET
VALUE
SHARES (000)
-----------------
THAILAND (0.8%)
Advanced Info Service 4,700 $ 46
Bangkok Bank 8,700 75
Electric Generating 26,000 63
PTT Exploration 5,200 75
Siam Commercial Bank 20,000 131
- -------------------------------------------------------
390
- -------------------------------------------------------
UNITED KINGDOM (13.9%)
Assocociated British Ports 50,000 241
British Airport Authority 21,239 181
BTR 75,000 311
Cable & Wireless 20,959 156
General Accident 40,000 516
Glaxo Wellcome 35,000 560
Hardy Oil & Gas 40,000 202
Hays PLC 50,000 451
Marks & Spencer 60,410 479
National Grid Group 33,000 110
Prudential 51,875 448
Reuters Holdings 25,000 263
Rexam 50,000 263
RTZ 20,000 292
Shell Transportation & Trading 35,000 603
Southern Electric 30,000 385
TSB Lloyds Group 55,000 423
Zeneca Group 20,000 578
- -------------------------------------------------------
6,462
- -------------------------------------------------------
UNITED STATES (1.8%)
Latin America Equity Fund 55,000 853
- -------------------------------------------------------
853
- -------------------------------------------------------
Total Foreign Common Stocks
(Cost $45,970) 46,238
- -------------------------------------------------------
FOREIGN PREFERRED STOCK (0.2%)
GERMANY (0.2%)
Jungheinrich 700 77
- -------------------------------------------------------
Total Foreign Preferred Stocks
(Cost $164) 77
- -------------------------------------------------------
MARKET
VALUE
(000)
-------
Total Investments (99.9%)
(Cost $46,134) $46,315
- -------------------------------------------------------
Other Assets and Liabilities,
Net (0.1%) 58
- -------------------------------------------------------
NET ASSETS:
Fund Shares of Institutional Class
(unlimited authorization -- no par value)
based on 1,343,530 outstanding
shares of beneficial interest 45,914
Distributions in excess of net
investment income (190)
Accumulated net realized gain
on investments 482
Net unrealized depreciation on
foreign currency contracts and
translation of other assets and
liabilities denominated in
foreign currency (14)
Net unrealized appreciation
on investments 181
- -------------------------------------------------------
Total Net Assets: (100.0%) $46,373
- -------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE -- INSTITUTIONAL CLASS $34.52
=======================================================
* NON-INCOME PRODUCING SECURITY.
CL -- CLASS
SER -- SERIES
58
<PAGE>
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 1997
- --------------------------------------------------------------------------------
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 $26,110 $50,071 $4,362
- --------------------------------------------------------------------------------------------------------------------
Expenses:
Administrative Fee 616 1,163 164
Investment Adviser Fee 1,470 2,773 391
Investment Adviser Fee Waiver (245) -- (265)
Custodian/Wire Agent Fee 43 75 21
Professional Fees 79 179 12
Registration Fees 86 163 27
Distribution Fee (1) 1,263 1,539 364
Distribution Fee Waiver (474) (577) (64)
Insurance Expenses 7 7 1
Trustees Fees 15 20 3
Printing Expenses 37 73 11
Miscellaneous Expenses 69 43 2
Amortization of Deferred Organizational Costs 10 -- --
- --------------------------------------------------------------------------------------------------------------------
Total Expenses 2,976 5,458 667
Reduction of Expenses (2) (15) (15) (15)
- --------------------------------------------------------------------------------------------------------------------
Total Net Expenses 2,961 5,443 652
- --------------------------------------------------------------------------------------------------------------------
Net Investment Income 23,149 44,628 3,710
- --------------------------------------------------------------------------------------------------------------------
Net Realized Gain on Investments 9 85 1
- --------------------------------------------------------------------------------------------------------------------
Increase in Net Assets Resulting from Operations $23,158 $44,713 $3,711
====================================================================================================================
</TABLE>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
(1) ALL DISTRIBUTION FEES ARE INCURRED IN THE INVESTMENT CLASS
(2) SEE NOTE 3
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
59
<PAGE>
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 1997
- --------------------------------------------------------------------------------
STEPSTONE FUNDS
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------------------------------------------
CALIFORNIA
LIMITED INTERMEDIATE
INTERMEDIATE- MATURITY TAX-FREE CONVERTIBLE
TERM BOND GOVERNMENT BOND SECURITIES
FUND FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income $9,390 $2,053 $487 $ 647
Dividend Income -- -- -- 190
Less: Foreign Taxes withheld, net of reclaims -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total Investment Income 9,390 2,053 487 837
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Administrative Fee 179 43 13 24
Investment Adviser Fee 711 101 50 116
Investment Adviser Fee Waiver -- -- (49) --
Custodian/Wire Agent Fee 27 17 17 7
Professional Fees 8 4 2 3
Registration Fees 19 (1) (2) 1
Distribution Fee (1) 22 2 19 --
Distribution Fee Waiver (22) (2) (19) --
Insurance Fees 1 -- -- --
Trustees Fees 2 1 -- 1
Printing Fees 14 1 2 1
Miscellaneous Fees 9 19 2 1
Amortization of Deferred Organizational Costs -- 2 -- 11
- ---------------------------------------------------------------------------------------------------------------------------
Total Expenses 970 187 35 165
Reduction of Expenses (2) (15) (15) (15) --
- ---------------------------------------------------------------------------------------------------------------------------
Total Net Expenses 955 172 20 165
- ---------------------------------------------------------------------------------------------------------------------------
Net Investment Income 8,435 1,881 467 672
- ---------------------------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) on Investments (2,153) (92) -- 812
- ---------------------------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) on Option Contracts -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net Realized Gain on Foreign Currency Transactions -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation)
on Investments (3,828) (487) (65) 1,680
- ---------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation on Foreign Currency -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on
Investments (5,981) (579) (65) 2,492
- ---------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets Resulting from
Operations $2,454 $1,302 $402 $3,164
===========================================================================================================================
</TABLE>
<TABLE>
GOVERNMENT GROWTH VALUE BLUE CHIP EMERGING INTERNATIONAL
SECURITIES BALANCED EQUITY MOMENTUM GROWTH GROWTH EQUITY
FUND FUND FUND FUND FUND FUND FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $3,071 $ 7,141 $ 643 $ 820 $ 256 $ 430 $ 94
Dividend Income -- 4,439 1,961 7,308 1,236 158 855
Less: Foreign Taxes
withheld, net of reclaims -- -- -- -- -- -- (84)
- --------------------------------------------------------------------------------------------------------------------------------
Total Investment Income 3,071 11,580 2,604 8,128 1,492 588 865
- --------------------------------------------------------------------------------------------------------------------------------
Expenses:
Administrative Fee 61 342 246 336 92 67 60
Investment Adviser Fee 243 1,630 1,171 1,599 437 428 462
Investment Adviser Fee Waiver -- -- -- -- -- -- (49)
Custodian/Wire Agent Fee 13 36 32 36 19 9 62
Professional Fees 13 53 32 52 22 15 5
Registration Fees 3 29 24 33 13 9 4
Distribution Fee (1) -- 34 13 54 -- -- --
Distribution Fee Waiver -- (13) (5) (20) -- -- --
Insurance Fees 1 2 2 2 1 1 --
Trustees Fees 1 8 5 5 2 1 1
Printing Fees 4 37 26 29 10 6 5
Miscellaneous Fees 8 20 18 23 1 7 14
Amortization of Deferred
Organizational Costs 11 -- -- -- 11 11 10
- --------------------------------------------------------------------------------------------------------------------------------
Total Expenses 358 2,178 1,564 2,149 608 554 574
Reduction of Expenses (2) -- (15) (15) (15) -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total Net Expenses 358 2,163 1,549 2,134 608 554 574
- --------------------------------------------------------------------------------------------------------------------------------
Net Investment Income 2,713 9,417 1,055 5,994 884 34 291
- --------------------------------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) on Investments (1,410) 14,191 15,766 7,874 5,193 5,733 2,351
- --------------------------------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) on
Option Contracts -- 87 126 -- 256 (43) --
- --------------------------------------------------------------------------------------------------------------------------------
Net Realized Gain on Foreign
Currency Transactions -- -- -- -- -- -- 425
- --------------------------------------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation (Depreciation)
on Investments (974) 18,736 29,170 53,010 8,107 4,357 (4,106)
- --------------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
on Foreign Currency -- -- -- -- -- -- (103)
- --------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized
Gain (Loss) on Investments (2,384) 33,014 45,062 60,884 13,556 10,047 (1,433)
- --------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net
Assets Resulting from Operations $ 329 $42,431 $46,117 $66,878 $14,440 $10,081 $(1,142)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
(1) ALL DISTRIBUTION FEES ARE INCURRED IN THE INVESTMENT CLASS.
(2) SEE NOTE 3.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
60 & 61
<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
------------------------- ------------------------- -------------------------
02/01/96 02/01/95 02/01/96 02/01/95 02/01/96 02/01/95
TO 01/31/97 TO 01/31/96 TO 01/31/97 TO 01/31/96 TO 01/31/97 TO 01/31/96
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Activities:
<S> <C> <C> <C> <C> <C> <C>
Net Investment Income $ 23,149 $ 16,279 $ 44,628 $ 35,778 $ 3,710 $ 3,776
Net Realized Gain (Loss) on Investments 9 5 85 (13) 1 --
- ----------------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets Resulting From Operations 23,158 16,284 44,713 35,765 3,711 3,776
Distributions to Shareholders:
Net Investment Income:
Institutional Class (8,504) (8,954) (26,589) (26,497) (1,211) (1,571)
Investment Class (14,646) (7,325) (18,042) (9,276) (2,500) (2,205)
Capital Gains:
Institutional Class -- -- -- -- -- --
Investment Class -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (23,150) (16,279) (44,631) (35,773) (3,711) (3,776)
- ----------------------------------------------------------------------------------------------------------------------------------
Change in Net Assets 8 5 82 (8) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Share Transactions (All at $1.00 Per Share):
Institutional Class:
Proceeds from Shares Issued 1,358,161 1,141,639 4,063,181 3,642,987 281,820 307,913
Reinvestment of Cash Distributions 155 2,164 6,239 12,994 -- 632
Cost of Shares Redeemed (1,369,613) (1,104,578) (4,048,975) (3,689,649) (288,535) (317,672)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Institutional Share Transactions (11,297) 39,225 20,445 (33,668) (6,715) (9,127)
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Class:
Proceeds from Shares Issued 791,385 467,443 1,097,689 420,652 237,667 143,423
Reinvestment of Cash Distributions 13,881 6,283 16,920 8,172 2,396 1,956
Cost of Shares Redeemed (591,176) (387,009) (797,687) (280,481) (170,553) (113,696)
-------- -------- -------- ------- -------- --------
Total Investment Share Transactions 214,090 86,717 316,922 148,343 69,510 31,683
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets From
Share Transactions 202,793 125,942 337,367 114,675 62,795 22,556
- ----------------------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 202,801 125,947 337,449 114,667 62,795 22,556
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period 398,006 272,059 762,688 648,021 124,100 101,544
- ----------------------------------------------------------------------------------------------------------------------------------
End of Period $ 600,807 $398,006 $1,100,137 $762,688 $186,895 $124,100
==================================================================================================================================
<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.
62
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
STEPSTONE FUNDS
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------------------------------------------------------
CALIFORNIA
INTERMEDIATE- LIMITED MATURITY INTERMEDIATE
TERM BOND GOVERNMENT TAX-FREE BOND
FUND FUND FUND
------------------------ ------------------------ ------------------------
02/01/96 02/01/95 02/01/96 02/01/95 02/01/96 02/01/95
TO 01/31/97 TO 01/31/96 TO 01/31/97 TO 01/31/96 TO 01/31/97 TO 01/31/96
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Activities:
Net Investment Income $ 8,435 $ 7,738 $ 1,881 $ 2,045 $ 467 $ 640
Net Realized Gain (Loss) on Investments (2,153) 3,766 (92) (119) -- (598)
Change in Unrealized Appreciation (Depreciation) on
Investments (3,828) 8,187 (487) 905 (65) 2,004
- ---------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets Resulting
From Operations 2,454 19,691 1,302 2,831 402 2,046
- ---------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Investment Income:
Institutional Class (8,016) (7,330) (1,841) (2,021) (235) (429)
Investment Class (326) (383) (33) (42) (217) (224)
Capital Gains:
Institutional Class -- -- -- -- -- --
Investment Class -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions (8,342) (7,713) (1,874) (2,063) (452) (653)
- ---------------------------------------------------------------------------------------------------------------------------
Change in Net Assets (5,888) 11,978 (572) 768 (50) 1,393
- ---------------------------------------------------------------------------------------------------------------------------
Share Transactions:
Institutional Class:
Proceeds from Shares Issued 42,015 42,987 8,544 4,715 5,838 1,685
Reinvestment of Cash Distributions 5,582 7,227 1,096 2,005 111 18
Cost of Shares Redeemed (24,514) (38,490) (26,750) (5,203) (2,702) (11,244)
-------- -------- -------- -------- -------- --------
Total Institutional Share Transactions 23,083 11,724 (17,110) 1,517 3,247 (9,541)
Investment Class:
Proceeds from Shares Issued 22 78 1,000 41 1,852 337
Reinvestment of Cash Distributions 326 383 33 42 217 224
Cost of Shares Redeemed (1,278) (1,297) (1,135) (222) (502) (1,626)
-------- -------- -------- -------- -------- --------
Total Investment Share Transactions (930) (836) (102) (139) 1,567 (1,065)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets From Share
Transactions 22,153 10,888 (17,212) 1,378 4,814 (10,606)
- ---------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 16,265 22,866 (17,784) 2,146 4,764 (9,213)
- ---------------------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period 139,359 116,493 36,146 34,000 8,462 17,675
- ---------------------------------------------------------------------------------------------------------------------------
End of Period $155,624 $139,359 $ 18,362 $36,146 $13,226 $ 8,462
Shares Issued and Redeemed:
Institutional Shares:
Issued 4,141 4,225 894 491 603 178
Issued in Lieu of Cash Distributions 550 710 115 209 11 2
Redeemed (2,410) (3,773) (2,804) (542) (278) (1,183)
-------- -------- -------- ------- -------- --------
Total Institutional Share Transactions 2,281 1,162 (1,795) 158 336 (1,003)
Investment Shares:
Issued 2 7 103 4 190 35
Issued in Lieu of Cash Distributions 32 38 4 4 23 24
Redeemed (125) (128) (118) (23) (52) (171)
-------- -------- -------- ------- -------- --------
Total Investment Share Transactions (91) (83) (11) (15) 161 (112)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Share Transactions 2,190 1,079 (1,806) 143 497 (1,115)
===========================================================================================================================
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
63
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
STEPSTONE FUNDS
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE SECURITIES GOVERNMENT SECURITIES BALANCED
FUND FUND FUND
---------------------- ------------------------ -----------------------
02/01/96 02/01/95 02/01/96 02/01/95 02/01/96 02/01/95
TO 01/31/97 TO 01/31/96 TO 01/31/97 TO 01/31/96 TO 01/31/97 TO 01/31/96
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Activities:
Net Investment Income $ 672 $ 532 $ 2,713 $ 2,188 $ 9,417 $ 6,604
Net Realized Gain (Loss) on Investments 812 (14) (1,410) 1,661 14,191 6,254
Net Realized Gain (Loss) on Option Contracts -- 1 -- -- 87 104
Net Realized Gain on Foreign Currency Transactions -- -- -- -- -- --
Change in Unrealized Appreciation (Depreciation)
on Investments 1,680 1,682 (974) 1,677 18,736 38,493
Change in Unrealized Appreciation on
Foreign Currency -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets Resulting
From Operations 3,164 2,201 329 5,526 42,431 51,455
- ---------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Investment Income:
Institutional Class (672) (522) (2,681) (2,167) (9,025) (6,372)
Investment Class -- -- -- -- (265) (235)
Gains:
Institutional Class (533) -- -- -- (11,438) (5,794)
Investment Class -- -- -- -- (339) (213)
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions (1,205) (522) (2,681) (2,167) (21,067) (12,614)
- ---------------------------------------------------------------------------------------------------------------------------
Change in Net Assets 1,959 1,679 (2,352) 3,359 21,364 38,841
- ---------------------------------------------------------------------------------------------------------------------------
Share Transactions:
Institutional Class:
Proceeds from Shares Issued 7,145 7,325 17,762 26,500 81,907 66,771
Reinvestment of Cash Distributions 1,205 522 2,681 2,167 19,069 12,136
Cost of Shares Redeemed (5,848) (3,155) (13,434) (17,479) (48,042) (49,861)
------ ------ ------- ------- ------- -------
Total Institutional Share Transactions 2,502 4,692 7,009 11,188 52,934 29,046
Investment Class:
Proceeds from Shares Issued -- -- -- -- 1,002 495
Reinvestment of Cash Distributions -- -- -- -- 604 448
Cost of Shares Redeemed -- -- -- -- (1,840) (1,092)
------ ------ ------- ------- ------- -------
Total Investment Share Transactions -- -- -- -- (234) (149)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets From Share Transactions 2,502 4,692 7,009 11,188 52,700 28,897
- ---------------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 4,461 6,371 4,657 14,547 74,064 67,738
- ---------------------------------------------------------------------------------------------------------------------------
Assets:
Beginning of Period 16,668 10,297 46,725 32,178 242,300 174,562
- ---------------------------------------------------------------------------------------------------------------------------
End of Period $21,129 $16,668 $51,382 $46,725 $316,364 $242,300
Shares Issued and Redeemed:
Institutional Shares:
Issued 651 728 1,878 2,753 5,687 5,157
Issued in Lieu of Cash Distributions 109 53 284 228 1,306 921
Redeemed (533) (317) (1,419) (1,829) (3,344) (3,894)
------ ------ ------- ------- ------- -------
Total Institutional Share Transactions 227 464 743 1,152 3,649 2,184
Investment Shares:
Issued -- -- -- -- 70 37
Issued in Lieu of Cash Distributions -- -- -- -- 41 34
Redeemed -- -- -- -- (129) (88)
------ ------ ------- ------- ------- -------
Total Investment Share Transactions -- -- -- -- (18) (17)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Share Transactions 227 464 743 1,152 3,631 2,167
===========================================================================================================================
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------------
GROWTH EQUITY VALUE MOMENTUM BLUE CHIP GROWTH
FUND FUND FUND
----------------------- ---------------------- -----------------------
02/01/96 02/01/95 02/01/96 02/01/95 02/01/96 02/01/95
TO 01/31/97 TO 01/31/96 TO 01/31/97 TO 01/31/96 TO 01/31/97 TO 01/31/96
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Activities:
Net Investment Income $ 1,055 $ 1,107 $ 5,994 $ 4,019 $ 884 $ 743
Net Realized Gain (Loss) on Investments 15,766 11,047 7,874 9,006 5,193 3,514
Net Realized Gain (Loss) on Option Contracts 126 182 -- -- 256 (379)
Net Realized Gain on Foreign Currency Transactions -- -- -- -- -- --
Change in Unrealized Appreciation (Depreciation)
on Investments 29,170 32,685 53,010 52,751 8,107 10,866
Change in Unrealized Appreciation on
Foreign Currency -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets Resulting
From Operations 46,117 45,021 66,878 65,776 14,440 14,744
- -----------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Investment Income:
Institutional Class (1,053) (1,121) (5,703) (3,872) (893) (762)
Investment Class (11) (11) (274) (209) -- --
Gains:
Institutional Class (15,384) (9,394) (11,218) (4,808) (3,340) (925)
Investment Class (277) (102) (595) (258) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (16,725) (10,628) (17,790) (9,147) (4,233) (1,687)
- -----------------------------------------------------------------------------------------------------------------------------
Change in Net Assets 29,392 34,393 49,088 56,629 10,207 13,057
- -----------------------------------------------------------------------------------------------------------------------------
Share Transactions:
Institutional Class:
Proceeds from Shares Issued 40,990 33,917 102,484 44,290 21,863 20,422
Reinvestment of Cash Distributions 9,445 10,453 10,755 8,517 4,233 1,687
Cost of Shares Redeemed (51,306) (36,487) (64,457) (34,471) (19,031) (10,075)
------- ------- ------- ------- ------- -------
Total Institutional Share Transactions (871) 7,883 48,782 18,336 7,065 12,034
Investment Class:
Proceeds from Shares Issued 1,335 683 2,798 870 -- --
Reinvestment of Cash Distributions 188 113 869 467 -- --
Cost of Shares Redeemed (535) (227) (1,958) (2,351) -- --
------- ------- ------- ------- ------- -------
Total Investment Share Transactions 988 569 1,709 (1,014) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets From Share Transactions 117 8,452 50,491 17,322 7,065 12,034
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 29,509 42,845 99,579 73,951 17,272 25,091
- -----------------------------------------------------------------------------------------------------------------------------
Assets:
Beginning of Period 180,935 138,090 233,866 159,915 63,410 38,319
- -----------------------------------------------------------------------------------------------------------------------------
End of Period $210,444 $180,935 $333,445 $233,866 $80,682 $63,410
Shares Issued and Redeemed:
Institutional Shares:
Issued 2,123 2,017 5,141 2,744 1,649 1,769
Issued in Lieu of Cash Distributions 482 617 536 515 310 145
Redeemed (2,662) (2,167) (3,263) (2,161) (1,416) (917)
------- ------- ------- ------- ------- -------
Total Institutional Share Transactions (57) 467 2,414 1,098 543 997
Investment Shares:
Issued 72 39 141 53 -- --
Issued in Lieu of Cash Distributions 10 7 43 28 -- --
Redeemed (27) (13) (98) (157) -- --
------- ------- ------- ------- ------- -------
Total Investment Share Transactions 55 33 86 (76) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Share Transactions (2) 500 2,500 1,022 543 997
=============================================================================================================================
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------
EMERGING GROWTH INTERNATIONAL EQUITY
FUND FUND
----------------------- -----------------------
02/01/96 02/01/95 02/01/96 02/01/95(1)
TO 01/31/97 TO 01/31/96 TO 01/31/97 TO 01/31/96
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Activities:
Net Investment Income $ 34 $ 70 $ 291 $ 519
Net Realized Gain (Loss) on Investments 5,733 1,020 2,351 167
Net Realized Gain (Loss) on Option Contracts (43) (107) -- --
Net Realized Gain on Foreign Currency Transactions -- -- 425 179
Change in Unrealized Appreciation (Depreciation)
on Investments 4,357 7,122 (4,106) 4,287
Change in Unrealized Appreciation on
Foreign Currency -- -- (103) 89
- -------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets Resulting
From Operations 10,081 8,105 (1,142) 5,241
- -------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Investment Income:
Institutional Class (41) (88) (1,087) (517)
Investment Class -- -- -- --
Gains:
Institutional Class (4,336) (867) (1,914) (122)
Investment Class -- -- -- --
- -------------------------------------------------------------------------------------------------
Total Distributions (4,377) (955) (3,001) (639)
- -------------------------------------------------------------------------------------------------
Change in Net Assets 5,704 7,150 (4,143) 4,602
- -------------------------------------------------------------------------------------------------
Share Transactions:
Institutional Class:
Proceeds from Shares Issued 28,704 17,160 10,986 44,605
Reinvestment of Cash Distributions 4,375 955 909 639
Cost of Shares Redeemed (23,397) (7,423) (5,567) (5,658)
------- ------ ------ ------
Total Institutional Share Transactions 9,682 10,692 6,328 39,586
Investment Class:
Proceeds from Shares Issued -- -- -- --
Reinvestment of Cash Distributions -- -- -- --
Cost of Shares Redeemed -- -- -- --
------- ------ ------ ------
Total Investment Share Transactions -- -- -- --
- -------------------------------------------------------------------------------------------------
Net Increase in Net Assets From Share Transactions 9,682 10,692 6,328 39,586
- -------------------------------------------------------------------------------------------------
Total Increase in Net Assets 15,386 17,842 2,185 44,188
- -------------------------------------------------------------------------------------------------
Assets:
Beginning of Period 41,770 23,928 44,188 --
- -------------------------------------------------------------------------------------------------
End of Period $57,156 $41,770 $46,373 $44,188
Shares Issued and Redeemed:
Institutional Shares:
Issued 2,159 1,579 288 1,320
Issued in Lieu of Cash Distributions 334 84 25 18
Redeemed (1,758) (704) (149) (159)
------- ------ ------ ------
Total Institutional Share Transactions 735 959 164 1,179
Investment Shares:
Issued -- -- -- --
Issued in Lieu of Cash Distributions -- -- -- --
Redeemed -- -- -- --
------- ------ ------ ------
Total Investment Share Transactions -- -- -- --
- -------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Share Transactions 735 959 164 1,179
=================================================================================================
<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.
64 & 65
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
STEPSTONE FUNDS
For a Share Outstanding Throughout the Period or Year
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES DISTRIBUTIONS RATIO
NET ------------------------- ------------------- NET NET OF EXPENSES
ASSET NET REALIZED ASSET ASSETS, RATIO TO AVERAGE
VALUE, NET AND UNREALIZED NET CONTRIBUTION VALUE, END OF EXPENSES NET ASSETS
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL OF END TOTAL OF PERIOD TO AVERAGE EXCLUDING
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS CAPITAL OF PERIOD RETURN (000) NET ASSETS FEE WAIVERS
- ------------------------------------------------------------------------------------------------------------------------------------
- --------------------------
TREASURY MONEY MARKET FUND
- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 1.00 0.049 -- (0.049) -- -- 1.00 4.99% 170,992 0.44% 0.50%
1996 1.00 0.054 -- (0.054) -- -- 1.00 5.52% 182,286 0.45% 0.50%
1995 1.00 0.039 -- (0.039) -- -- 1.00 3.97% 143,035 0.44% 0.51%
1994 1.00 0.027 -- (0.027) -- -- 1.00 2.75% 170,879 0.45% 0.55%
1993 (1) 1.00 0.005 -- (0.005) -- -- 1.00 2.90%* 125,673 0.45%* 0.55%*
INVESTMENT CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 1.00 0.046 -- (0.046) -- -- 1.00 4.73% 429,815 0.69% 0.90%
1996 1.00 0.051 -- (0.051) -- -- 1.00 5.26% 215,720 0.70% 0.90%
1995 1.00 0.036 -- (0.036) -- -- 1.00 3.71% 129,024 0.69% 0.90%
1994 (2) 1.00 0.022 -- (0.022) -- -- 1.00 2.51%* 29,188 0.71%* 0.96%*
- -----------------
MONEY MARKET FUND
- -----------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 1.00 0.049 -- (0.049) -- -- 1.00 5.03% 523,571 0.49% 0.49%
1996 1.00 0.054 -- (0.054) -- -- 1.00 5.57% 503,080 0.50% 0.50%
1995 1.00 0.039 (0.001) (0.039) -- 0.001 1.00 3.99% 536,754 0.50% 0.50%
1994 1.00 0.029 -- (0.029) -- -- 1.00 2.99% 498,795 0.49% 0.49%
1993 1.00 0.035 -- (0.035) -- -- 1.00 3.61% 521,664 0.46% 0.46%
1992 (3) 1.00 0.057 -- (0.057) -- -- 1.00 5.86% 240,341 0.48% 0.51%
INVESTMENT CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 1.00 0.047 -- (0.047) -- -- 1.00 4.78% 576,566 0.73% 0.88%
1996 1.00 0.052 -- (0.052) -- -- 1.00 5.31% 259,608 0.75% 0.90%
1995 1.00 0.037 -- (0.037) -- -- 1.00 3.78% 111,267 0.70% 0.90%
1994 1.00 0.027 -- (0.027) -- -- 1.00 2.77% 86,291 0.70% 0.89%
1993 1.00 0.033 -- (0.033) -- -- 1.00 3.36% 79,253 0.69% 0.86%
1992 (4) 1.00 0.036 -- (0.036) -- -- 1.00 4.74% 144,086 0.67%* 0.70%*
RATIO OF
NET INVESTMENT
RATIO OF INCOME TO
NET INVESTMENT AVERAGE
INCOME NET ASSETS
TO AVERAGE EXCLUDING
NET ASSETS FEE WAIVERS
- --------------------------------------------
- --------------------------
TREASURY MONEY MARKET FUND
- --------------------------
<S> <C> <C>
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 4.88% 4.82%
1996 5.37% 5.32%
1995 3.85% 3.78%
1994 2.72% 2.62%
1993 (1) 2.81%* 2.71%*
INVESTMENT CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 4.64% 4.43%
1996 5.10% 4.90%
1995 4.04% 3.83%
1994 (2) 2.45%* 2.20%*
- -----------------
MONEY MARKET FUND
- -----------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 4.93% 4.93%
1996 5.43% 5.43%
1995 3.93% 3.93%
1994 2.93% 2.93%
1993 3.47% 3.47%
1992 (3) 5.68% 5.65%
INVESTMENT CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 4.69% 4.54%
1996 5.16% 5.01%
1995 3.79% 3.59%
1994 2.71% 2.52%
1993 3.41% 3.24%
1992 (4) 4.95%* 4.92%*
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
* 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.
66
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES DISTRIBUTIONS RATIO
NET ------------------------- ------------------- NET NET OF EXPENSES
ASSET NET REALIZED ASSET ASSETS, RATIO TO AVERAGE
VALUE, NET AND UNREALIZED NET VALUE, END OF EXPENSES NET ASSETS
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL END TOTAL OF PERIOD TO AVERAGE EXCLUDING
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS OF PERIOD RETURN (000) NET ASSETS FEE WAIVERS
- ------------------------------------------------------------------------------------------------------------------------
- -------------------------------------
CALIFORNIA TAX-FREE MONEY MARKET FUND
- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 1.00 0.031 -- (0.031) -- 1.00 3.12% 36,207 0.27% 0.49%
1996 1.00 0.034 -- (0.034) -- 1.00 3.48% 42,923 0.28% 0.49%
1995 1.00 0.026 -- (0.026) -- 1.00 2.67% 52,050 0.29% 0.50%
1994 1.00 0.021 -- (0.021) -- 1.00 2.13% 52,982 0.30% 0.54%
1993 1.00 0.025 -- (0.025) -- 1.00 2.61% 45,521 0.30% 0.54%
1992 (5) 1.00 0.025 -- (0.025) -- 1.00 3.75%* 30,567 0.30%* 0.57%*
INVESTMENT CLASS(**)
FOR THE YEARS ENDED JANUARY 31,:
1997 1.00 0.027 -- (0.027) -- 1.00 2.78% 150,688 0.60% 0.88%
1996 1.00 0.031 -- (0.031) -- 1.00 3.14% 81,177 0.61% 0.88%
1995 1.00 0.023 -- (0.023) -- 1.00 2.33% 49,494 0.62% 0.90%
1994 1.00 0.018 -- (0.018) -- 1.00 1.80% 52,220 0.63% 0.94%
1993 1.00 0.022 -- (0.022) -- 1.00 2.27% 8,542 0.63% 0.94%
1992 (6) 1.00 0.021 -- (0.021) -- 1.00 3.24%* 8,246 0.61%* 0.88%*
- ---------------------------
INTERMEDIATE-TERM BOND FUND
- ---------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 10.62 0.599 (0.460) (0.595) -- 10.16 1.43% 150,411 0.67% 0.68%
1996 9.67 0.609 0.951 (0.609) -- 10.62 16.58% 132,942 0.68% 0.68%
1995 10.72 0.589 (1.034) (0.590) (0.015) 9.67 (4.11%) 109,848 0.71% 0.71%
1994 10.57 0.598 0.352 (0.595) (0.205) 10.72 9.22% 130,308 0.69% 0.69%
1993 10.49 0.650 0.409 (0.636) (0.343) 10.57 10.47% 112,806 0.67% 0.67%
1992 (3) 10.00 0.750 0.603 (0.745) (0.118) 10.49 14.05% 76,779 0.72% 0.75%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1997 10.61 0.602 (0.462) (0.595) -- 10.16 1.54% 5,213 0.67% 1.08%
1996 9.67 0.609 0.940 (0.609) -- 10.61 16.48% 6,417 0.68% 1.09%
1995 10.72 0.589 (1.034) (0.590) (0.015) 9.67 (4.11%) 6,645 0.71% 1.11%
1994 10.57 0.615 0.335 (0.595) (0.205) 10.72 9.23% 9,308 0.69% 1.09%
1993 (11) 10.49 0.609 0.450 (0.636) (0.343) 10.57 10.59%* 2,897 0.65%* 1.05%*
RATIO OF
NET INVESTMENT
RATIO OF INCOME TO
NET INVESTMENT AVERAGE
INCOME NET ASSETS PORTFOLIO
TO AVERAGE EXCLUDING TURNOVER
NET ASSETS FEE WAIVERS RATE
- -----------------------------------------------------
- -------------------------------------
CALIFORNIA TAX-FREE MONEY MARKET FUND
- -------------------------------------
<S> <C> <C>
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 3.08% 2.86% --
1996 3.43% 3.22% --
1995 2.66% 2.45% --
1994 2.09% 1.85% --
1993 2.53% 2.29% --
1992 (5) 3.82%* 3.55%* --
INVESTMENT CLASS(**)
FOR THE YEARS ENDED JANUARY 31,:
1997 2.75% 2.47% --
1996 3.09% 2.82% --
1995 2.33% 2.05% --
1994 1.76% 1.45% --
1993 2.21% 1.90% --
1992 (6) 3.44%* 3.17%* --
- ---------------------------
INTERMEDIATE-TERM BOND FUND
- ---------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 5.93% 5.92% 106%
1996 5.97% 5.97% 147%
1995 5.89% 5.89% 95%
1994 5.56% 5.56% 72%
1993 6.16% 6.16% 88%
1992 (3) 7.37% 7.34% 126%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1997 5.91% 5.50% 106%
1996 5.99% 5.58% 147%
1995 5.87% 5.47% 95%
1994 5.51% 5.11% 72%
1993 (11) 6.01%* 5.61%* 88%
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
* 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.
67
</FN>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
STEPSTONE FUNDS
For a Share Outstanding Throughout the Period or Year
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES DISTRIBUTIONS RATIO
NET ------------------------- ------------------- NET NET OF EXPENSES
ASSET NET REALIZED ASSET ASSETS, RATIO TO AVERAGE
VALUE, NET AND UNREALIZED NET VALUE, END OF EXPENSES NET ASSETS
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL END TOTAL OF PERIOD TO AVERAGE EXCLUDING
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS OF PERIOD RETURN (000) NET ASSETS FEE WAIVERS
- ------------------------------------------------------------------------------------------------------------------------
- --------------------------------
LIMITED MATURITY GOVERNMENT FUND
- --------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 9.70 0.532 (0.140) (0.531) -- 9.56 4.20% 17,849 0.51% 0.56%
1996 9.49 0.556 0.216 (0.561) -- 9.70 8.34% 35,518 0.53% 0.53%
1995 10.00 0.441 (0.517) (0.434) -- 9.49 (0.73%) 33,249 0.55% 0.55%
1994 (12) 10.00 0.253 0.004 (0.257) -- 10.00 3.56%* 33,982 0.58%* 0.58%*
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1997 9.71 0.543 (0.151) (0.531) -- 9.57 4.19% 513 0.51% 0.96%
1996 9.50 0.562 0.208 (0.561) -- 9.71 8.33% 628 0.53% 0.93%
1995 10.01 0.454 (0.530) (0.434) -- 9.50 (0.73%) 751 0.51% 0.91%
1994 (13) 9.98 0.163 0.018 (0.151) -- 10.01 4.04%* 3,148 0.75%* 1.15%*
- ------------------------------------------
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 9.85 0.430 (0.078) (0.442) -- 9.76 3.72% 7,435 0.20% 0.85%
1996 8.95 0.518 0.873 (0.487) -- 9.85 15.83% 4,196 0.24% 0.71%
1995 10.04 0.460 (1.098) (0.452) -- 8.95 (6.33%) 12,793 0.50% 0.72%
1994 (14) 10.00 0.117 0.028 (0.105) -- 10.04 5.01%* 22,197 0.50%* 0.73%*
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1997 9.84 0.458 (0.112) (0.442) -- 9.74 3.62% 5,791 0.20% 1.25%
1996 8.94 0.470 0.918 (0.487) -- 9.84 15.84% 4,266 0.23% 1.12%
1995 10.03 0.439 (1.077) (0.452) -- 8.94 (6.33%) 4,882 0.50% 1.12%
1994 (14) 10.00 0.115 0.020 (0.105) -- 10.03 4.67%* 2,830 0.50%* 1.13%*
RATIO OF
NET INVESTMENT
RATIO OF INCOME TO
NET INVESTMENT AVERAGE
INCOME NET ASSETS PORTFOLIO
TO AVERAGE EXCLUDING TURNOVER
NET ASSETS FEE WAIVERS RATE
- -------------------------------------------------------
- --------------------------------
LIMITED MATURITY GOVERNMENT FUND
- --------------------------------
<S> <C> <C> <C>
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 5.59% 5.54% 80%
1996 5.80% 5.80% 186%
1995 4.54% 4.54% 166%
1994 (12) 3.49%* 3.49%* 77%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1997 5.59% 5.14% 80%
1996 5.80% 5.40% 186%
1995 4.36% 3.96% 166%
1994 (13) 3.41%* 3.01%* 77%
- ------------------------------------------
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 4.69% 4.04% 6%
1996 4.97% 4.50% 30%
1995 4.84% 4.62% 22%
1994 (14) 4.31%* 4.08% 19%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1997 4.69% 3.64% 6%
1996 4.93% 4.04% 30%
1995 4.92% 4.30% 22%
1994 (14) 4.26%* 3.63%* 19%
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
* 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>
68
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES DISTRIBUTIONS RATIO
NET ------------------------- ------------------- NET NET OF EXPENSES
ASSET NET REALIZED ASSET ASSETS, RATIO TO AVERAGE
VALUE, NET AND UNREALIZED NET VALUE, END OF EXPENSES NET ASSETS
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL END TOTAL OF PERIOD TO AVERAGE EXCLUDING
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS OF PERIOD RETURN (000) NET ASSETS FEE WAIVERS
- ------------------------------------------------------------------------------------------------------------------------
- ---------------------------
CONVERTIBLE SECURITIES FUND
- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 10.43 0.376 1.423 (0.378) (0.270) 11.58 17.72% 21,129 0.85% 0.85%
1996 9.08 0.407 1.350 (0.404) -- 10.43 19.67% 16,668 0.85% 0.85%
1995 (9) 10.00 0.354 (0.930) (0.343) -- 9.08 (5.83%) 10,297 0.85% 0.85%
- --------------------------
GOVERNMENT SECURITIES FUND
- --------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 9.94 0.524 (0.505) (0.520) -- 9.44 0.34% 51,382 0.74% 0.74%
1996 9.07 0.556 0.870 (0.556) -- 9.94 16.16% 46,725 0.75% 0.75%
1995 (9) 10.00 0.491 (0.950) (0.475) -- 9.07 (4.49%) 32,178 0.75% 0.75%
- -------------
BALANCED FUND
- -------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 13.92 0.422 1.699 (0.409) (0.595) 15.04 16.30% 307,531 0.79% 0.79%
1996 11.45 0.415 2.831 (0.417) (0.362) 13.92 28.93% 233,878 0.80% 0.80%
1995 12.21 0.390 (0.756) (0.391) (0.003) 11.45 (2.95%)167,434 0.80% 0.80%
1994 11.50 0.394 0.928 (0.391) (0.221) 12.21 11.79% 152,189 0.69% 0.79%
1993 11.15 0.413 0.543 (0.408) (0.198) 11.50 8.86% 100,474 0.69% 0.79%
1992 (3) 10.00 0.471 1.250 (0.465) (0.106) 11.15 17.69% 67,098 0.78% 0.91%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1997 13.91 0.464 1.706 (0.455) (0.595) 15.03 16.04% 8,833 1.04% 1.19%
1996 11.45 0.406 2.825 (0.406) (0.362) 13.91 28.73% 8,422 0.89% 1.20%
1995 12.21 0.393 (0.758) (0.392) (0.003) 11.45 (2.95%) 7,128 0.79% 1.19%
1994 11.50 0.397 0.925 (0.391) (0.221) 12.21 11.79% 7,292 0.69% 1.19%
1993 (10) 11.30 0.092 0.404 (0.098) (0.198) 11.50 4.45%* 425 0.60%* 1.10%*
NET INVESTMENT
RATIO OF INCOME TO
NET INVESTMENT AVERAGE
INCOME NET ASSETS PORTFOLIO AVERAGE
TO AVERAGE EXCLUDING TURNOVER COMMISSION
NET ASSETS FEE WAIVERS RATE RATE(A)
- ---------------------------------------------------------------
- ---------------------------
CONVERTIBLE SECURITIES FUND
- ---------------------------
<S> <C> <C> <C> <C>
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 3.47% 3.47% 89% 0.0640
1996 4.14% 4.14% 46% n/a
1995 (9) 3.87% 3.87% 36% n/a
- --------------------------
GOVERNMENT SECURITIES FUND
- --------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 5.59% 5.59% 186% n/a
1996 5.89% 5.89% 239% n/a
1995 (9) 5.46% 5.46% 184% n/a
- -------------
BALANCED FUND
- -------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 3.48% 3.48% 27% 0.0604
1996 3.20% 3.20% 26% n/a
1995 3.41% 3.41% 48% n/a
1994 3.35% 3.25% 49% n/a
1993 3.72% 3.62% 68% n/a
1992 (3) 4.44% 4.31% 56% n/a
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1997 3.22% 3.07% 27% 0.0604
1996 3.12% 2.81% 26% n/a
1995 3.41% 3.01% 48% n/a
1994 3.26% 2.76% 49% n/a
1993 (10) 3.20%* 2.70%* 68% n/a
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
(A) AVERAGE COMMISSION RATE PAID PER SHARE FOR SECURITY PURCHASES AND SALES
DURING THE PERIOD. PRESENTATION OF THE RATE IS ONLY REQUIRED FOR FISCAL
YEARS BEGINNING AFTER SEPTEMBER 1, 1995.
* 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>
69
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
STEPSTONE FUNDS
For a Share Outstanding Throughout the Period or Year
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES DISTRIBUTIONS RATIO
NET ------------------------- ------------------- NET NET OF EXPENSES
ASSET NET REALIZED ASSET ASSETS, RATIO TO AVERAGE
VALUE, NET AND UNREALIZED NET VALUE, END OF EXPENSES NET ASSETS
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL END TOTAL OF PERIOD TO AVERAGE EXCLUDING
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS OF PERIOD RETURN (000) NET ASSETS FEE WAIVERS
- -----------------------------------------------------------------------------------------------------------------------
- ------------------
GROWTH EQUITY FUND
- ------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 17.62 0.105 4.437 (0.106) (1.561) 20.50 26.31% 206,595 0.79% 0.80%
1996 14.13 0.115 4.483 (0.118) (0.993) 17.62 32.93% 178,590 0.80% 0.80%
1995 15.16 0.097 (0.854) (0.092) (0.181) 14.13 (4.98%) 136,668 0.78% 0.78%
1994 13.79 0.066 1.370 (0.066) -- 15.16 10.48% 142,661 0.77% 0.79%
1993 12.69 0.091 1.101 (0.092) -- 13.79 9.48% 122,529 0.68% 0.78%
1992 (3) 10.00 0.103 2.703 (0.102) (0.014) 12.69 28.28% 93,260 0.72% 0.85%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1997 17.61 0.051 4.443 (0.065) (1.561) 20.48 26.00% 3,849 1.04% 1.20%
1996 14.13 0.101 4.480 (0.109) (0.993) 17.61 32.79% 2,345 0.89% 1.19%
1995 15.19 0.097 (0.884) (0.092) (0.181) 14.13 (5.17%) 1,422 0.78% 1.17%
1994 13.80 0.064 1.392 (0.066) -- 15.19 10.61% 1,243 0.77% 1.18%
1993 12.69 0.099 1.103 (0.092) -- 13.80 9.56% 43 0.67% 1.17%
1992 (7) 11.76 0.019 0.948 (0.023) (0.014) 12.69 39.11%* 13 0.83%* 0.96%*
- -------------------
VALUE MOMENTUM FUND
- -------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 18.05 0.436 4.371 (0.438) (0.848) 21.57 27.33% 317,482 0.79% 0.79%
1996 13.40 0.331 5.063 (0.337) (0.408) 18.05 40.88% 222,065 0.80% 0.80%
1995 14.27 0.318 (0.817) (0.317) (0.054) 13.40 (3.48%) 150,138 0.81% 0.81%
1994 12.76 0.292 1.538 (0.290) (0.030) 14.27 14.56% 140,609 0.77% 0.79%
1993 11.68 0.310 1.103 (0.311) (0.022) 12.76 12.33% 92,636 0.68% 0.78%
1992 (3) 10.00 0.312 1.694 (0.302) (0.024) 11.68 20.27% 51,682 0.78% 0.91%
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1997 18.05 0.389 4.368 (0.393) (0.848) 21.57 27.04% 15,963 1.04% 1.19%
1996 13.40 0.320 5.060 (0.323) (0.408) 18.05 40.77% 11,801 0.89% 1.20%
1995 14.27 0.321 (0.820) (0.317) (0.054) 13.40 (3.48%) 9,777 0.81% 1.21%
1994 12.75 0.297 1.543 (0.290) (0.030) 14.27 14.65% 9,346 0.77% 1.20%
1993 (8) 11.52 0.246 1.257 (0.251) (0.022) 12.75 15.97%* 3,162 0.65%* 1.15%*
NET INVESTMENT
RATIO OF INCOME TO
NET INVESTMENT AVERAGE
INCOME NET ASSETS PORTFOLIO AVERAGE
TO AVERAGE EXCLUDING TURNOVER COMMISSION
NET ASSETS FEE WAIVERS RATE RATE(A)
- ---------------------------------------------------------------
- ------------------
GROWTH EQUITY FUND
- ------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 0.55% 0.54% 21% 0.0618
1996 0.68% 0.68% 24% n/a
1995 0.69% 0.69% 22% n/a
1994 0.48% 0.46% 45% n/a
1993 0.74% 0.64% 23% n/a
1992 (3) 0.90% 0.77% 26% n/a
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1997 0.29% 0.13% 21% 0.0618
1996 0.60% 0.30% 24% n/a
1995 0.69% 0.30% 22% n/a
1994 0.48% 0.07% 45% n/a
1993 0.69% 0.19% 23% n/a
1992 (7) 0.79%* 0.66%* 26% n/a
- -------------------
VALUE MOMENTUM FUND
- -------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 2.26% 2.26% 9% 0.0590
1996 2.07% 2.07% 20% n/a
1995 2.36% 2.36% 6% n/a
1994 2.19% 2.17% 5% n/a
1993 2.59% 2.49% 3% n/a
1992 (3) 2.88% 2.75% 5% n/a
INVESTMENT CLASS (**)
FOR THE YEARS ENDED JANUARY 31,:
1997 2.01% 1.86% 9% 0.0590
1996 2.00% 1.69% 20% n/a
1995 2.37% 1.97% 6% n/a
1994 2.12% 1.69% 5% n/a
1993 (8) 2.53%* 2.03%* 3% n/a
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
(A) AVERAGE COMMISSION RATE PAID PER SHARE FOR SECURITY PURCHASES AND SALES
DURING THE PERIOD. PRESENTATION OF THE RATE IS ONLY REQUIRED FOR FISCAL
YEARS BEGINNING AFTER SEPTEMBER 1, 1995.
* 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.
70
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES DISTRIBUTIONS RATIO
NET ------------------------- ------------------- NET NET OF EXPENSES
ASSET NET REALIZED ASSET ASSETS, RATIO TO AVERAGE
VALUE, NET AND UNREALIZED NET VALUE, END OF EXPENSES NET ASSETS
BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT CAPITAL END TOTAL OF PERIOD TO AVERAGE EXCLUDING
OF PERIOD INCOME ON INVESTMENTS INCOME GAINS OF PERIOD RETURN (000) NET ASSETS FEE WAIVERS
- ------------------------------------------------------------------------------------------------------------------------
- ---------------------
BLUE CHIP GROWTH FUND
- ---------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 12.63 0.160 2.449 (0.162) (0.574) 14.50 21.11% 80,682 0.84% 0.84%
1996 9.53 0.174 3.311 (0.180) (0.203) 12.63 36.95% 63,410 0.83% 0.83%
1995 (9) 10.00 0.167 (0.479) (0.158) -- 9.53 (3.10%) 39,319 0.85% 0.85%
- ---------------------
EMERGING GROWTH FUND
- ---------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 11.94 0.008 2.556 (0.009) (0.991) 13.50 21.79% 57,156 1.04% 1.04%
1996 9.42 0.026 2.807 (0.033) (0.277) 11.94 30.24% 41,770 1.05% 1.05%
1995 (9) 10.00 0.086 (0.535) (0.080) (0.051) 9.42 (4.48%) 23,928 1.05% 1.05%
- --------------------------
INTERNATIONAL EQUITY FUND
- --------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 37.49 0.220 (0.965) (0.812) (1.416) 34.52 (2.14%) 46,373 1.18% 1.28%
1996 (15) 33.51 0.447 4.084 (0.446) (0.105) 37.49 13.56% 44,188 1.16% 1.36%
NET INVESTMENT
RATIO OF INCOME TO
NET INVESTMENT AVERAGE
INCOME NET ASSETS PORTFOLIO AVERAGE
TO AVERAGE EXCLUDING TURNOVER COMMISSION
NET ASSETS FEE WAIVERS RATE RATE(A)
- ----------------------------------------------------------------
- ---------------------
BLUE CHIP GROWTH FUND
- ---------------------
<S> <C> <C> <C> <C>
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 1.21% 1.21% 80% 0.0598
1996 1.54% 1.54% 69% n/a
1995 (9) 1.84% 1.84% 89% n/a
- ---------------------
EMERGING GROWTH FUND
- ---------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 0.06% 0.06% 134% 0.0583
1996 0.22% 0.22% 131% n/a
1995 (9) 1.01% 1.01% 123% n/a
- --------------------------
INTERNATIONAL EQUITY FUND
- --------------------------
INSTITUTIONAL CLASS
FOR THE YEARS ENDED JANUARY 31,:
1997 0.60% 0.50% 29% 0.0235
1996 (15) 1.31 1.11% 21% n/a
<FN>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
(A) AVERAGE COMMISSION RATE PAID PER SHARE FOR SECURITY PURCHASES AND SALES
DURING THE PERIOD. PRESENTATION OF THE RATE IS ONLY REQUIRED FOR FISCAL
YEARS BEGINNING AFTER SEPTEMBER 1, 1995.
* ANNUALIZED
(9) COMMENCED OPERATIONS ON FEBRUARY 1, 1994.
(15) COMMENCED OPERATIONS ON FEBRUARY 1, 1995.
</FN>
</TABLE>
<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 Intermediate 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.
At a meeting held on October 17, 1996, the Board of Trustees of the Stepstone
Funds unanimously approved an Agreement and Plan of Reorganization (the
"Reorganization Agreement") by and between Stepstone and the HighMark Funds
providing for the transfer of all assets and balance sheet liabilities of each
Stepstone Fund to its corresponding HighMark Fund in exchange for shares of
beneficial interest of such HighMark Fund and the assumption by such HighMark
Fund of all the liabilities of such Stepstone Fund. Pending Shareholder
approval, the reorganization is scheduled to begin on April 25, 1997. The
combined fund family, called the HighMark Funds, will have over $5 billion in
assets.
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
International Equity 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 International Equity Fund does not isolate the portion of gains
and losses on investments in securities that is due to changes in the
foreign exchange rates from that which is due to changes in market prices
of such securities.
The International Equity Fund reports gains and losses on foreign currency
related transactions
72
<PAGE>
JANUARY 31, 1997
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.
NET ASSET VALUE PER SHARE -- The net asset value per share is calculated 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 that 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 Fund 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
73
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
STEPSTONE FUNDS
Limited Maturity Government Fund and the International Equity Fund declare and
pay dividends from net investment income monthly. The International Equity Fund
declares and pays dividends from net investment income periodically. 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", $805,074 relating to differences attributable to the classification
of short-term capital gains and net investment income for tax distribution
purposes of the Value Momentum Fund, as of January 31, 1997 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.
3. Transactions with Affiliates and Organization Costs
SEI Fund Resources (the "Administrator"), a Delaware business trust, serves as
Administrator to the Company. SEI Financial Management Corporation, a
wholly-owned subsidiary of SEI Corporation, is the owner of all beneficial
interest in the Administrator. The Trust and 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.
The Administrator has agreed to absorb certain transfer agency related expenses
on behalf 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. The Distributor has voluntarily agreed to waive the entire fee of
0.40% for the Intermediate-Term Bond, Limited Maturity and California
Intermediate Tax- Free Bond Funds. In addition, the Distributor has voluntarily
agreed to waive 0.15% of these fees for the Treasury Money Market, Money Market,
Growth Equity, Value Momentum and Balanced Funds and 0.07% for the California
Tax-Free Money Market. The Distributor reserves the right to terminate this
waiver at any time in its sole discretion.
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 last twelve months was
approximately $71,500.
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 during the period that
the Trust is amortizing its organizational costs, the redemption proceeds
payable by the Trust to the holder thereof 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.
4. Investment Advisory Agreement
74
<PAGE>
JANUARY 31, 1997
The Trust and Pacific Alliance Capital Management, a division of Union Bank of
California, N.A., (the "Advisor") are parties to an Advisory Agreement. For its
services, the Advisor is entitled to receive a fee, that 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 Intermediate 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 its fee in the Treasury Money Market Fund, the California Tax-Free
Money Market Fund, the International Equity Fund, and the California
Intermediate Tax-Free Bond Fund in order to limit the operating expenses of the
Funds.
The Advisor and Bank of Tokyo-Mitsubishi Trust Company are parties to a
Sub-Advisory Agreement for the Blue Chip Growth Fund, the Emerging Growth Fund,
the Convertible Securities Fund and the Government Securities Fund.
Bank of Tokyo-Mitsubishi Trust Company is entitled to a fee that is calculated
daily and paid monthly by the Advisor.
The Advisor and Tokyo-Mitsubishi Asset Management (U.K.), Ltd. are parties to a
Sub-Advisory Agreement for the International Equity Fund. Tokyo-Mitsubishi Asset
Management (U.K.), Ltd. is entitled to a fee that is calculated daily and paid
monthly by the Advisor.
During the fiscal year ended January 31, 1997, Union Bank agreed to merge with
the Bank of California, N.A., effective on April 1, 1996. After the merger, the
resulting Bank changed its name to Union Bank of California, N.A. Union Capital
Advisors combined with Merus Capital Management and was re-named Pacific
Alliance Capital Management. Pacific Alliance Capital Management operates as a
separate division of the Union Bank of California, N.A. The subadvisors, the
Bank of Tokyo Trust Company, and the Bank of Tokyo Asset Management (U.K.),
Ltd., each changed its name to Bank of Tokyo-Mitsubishi Trust Company and
Tokyo-Mitsubishi Asset Management (U.K.), Ltd., respectively upon the merger of
the Bank of Tokyo Trust Company and Mitsubishi Bank Trust Company of New York on
April 1, 1996. These transactions resulted in the termination of the Stepstone
Funds' investment advisory and subadvisory agreements. Subsequently, the Funds'
shareholders approved new investment advisory and subadvisory contracts with
Union Bank of California, N.A., Bank of Tokyo-Mitsubishi Trust Company and
Tokyo-Mitsubishi Asset Management (U.K.), Ltd., respectively. The advisory fees
have not been 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:
INVESTMENT U.S. GOVERNMENT
SECURITIES SECURITIES
----------------- -----------------
PURCHASES SALES PURCHASES SALES
(000'S) (000'S) (000'S) (000'S)
--------- ------- --------- -------
Intermediate-Term Bond $42,589 $28,154 $130,467 $111,233
Limited Maturity Govt. -- -- 19,503 37,061
California Intermediate
Tax-Free Bond 4,654 600 -- --
Convertible Securities 17,292 15,701 -- --
Government Securities 15,310 11,338 78,821 76,294
Balanced 55,149 54,215 53,982 15,006
Growth Equity 37,774 48,875 -- --
Value Momentum 62,057 21,719 -- --
Blue Chip Growth 54,696 54,463 -- --
Emerging Growth 66,354 60,895 -- --
International Equity 20,054 13,361 -- --
At January 31, 1997 the total cost of securities and net realized gains or
losses on securities sold for Federal income tax purposes was not materially
75
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
STEPSTONE FUNDS
different from amounts reported for financial reporting purposes. The aggregate
gross unrealized appreciation and depreciation at January 31, 1997 for each
portfolio was as follows:
APPRECIATION DEPRECIATION TOTAL
(000'S) (000'S) (000'S)
-------------- ------------
Intermediate-Term Bond $ 1,758 $ (762) $ 996
Limited Maturity Govt. 96 (28) 68
California Intermediate
Tax-Free Bond 161 (13) 148
Convertible Securities 3,056 (267) 2,789
Government Securities 339 (187) 152
Balanced 65,687 (2,539) 63,148
Growth Equity 99,781 (2,463) 97,318
Value Momentum 123,433 (1,626) 121,807
Blue Chip Growth 20,418 (563) 19,855
Emerging Growth 12,261 (1,872) 10,389
International Equity 6,869 (6,688) 181
Subsequent to October 31, 1996, the Funds recognized net capital losses for tax
purposes that have been deferred to 1997 and can be used to offset future
capital gains at January 31, 1997. The Funds also had capital loss carryforwards
at January 31, 1997, to the extent provided in the regulations for federal
income tax as follows:
<TABLE>
<CAPTION>
CAPITAL LOSS
CARRYOVER EXPIRES EXPIRES EXPIRES EXPIRES
1/31/97 2002 2003 2004 2005
------------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Money Market $1,091,230 $ -- $1,078,029 $ 13,201 $ --
Cal Tax-Free MM 1,425 -- -- 1,425 --
Int.-Term Bond 3,376,083 1,412,177 -- -- 1,963,906
Limited Maturity Govt. 1,858,695 3,154 873,702 890,060 91,779
Cal. Int. Tax-Free Bond 1,309,541 -- 588,399 711,043 10,099
Government Securities 1,793,225 -- 372,601 -- 1,420,624
</TABLE>
The Treasury Money Market and Convertible Securities Funds utilized their entire
capital loss carryforward balance of $2,187 and $57,121, respectively, which was
carried over from the previous year. The Money Market and California Tax-Free
Money Market Funds used $85,187 and $525, respectively, of its capital loss
carryforward from the previous year.
The Blue Chip Growth and Emerging Growth Funds had wash sales in the fiscal year
ended January 31, 1997 amounting to $123,484 and $51,237, respectively. These
wash sale losses cannot be used currently for income tax purposes and are
deferred. In addition, the Intermediate-Term Bond Fund had a post 10/31 loss
deferral of $188,556.
6. Concentration of Credit Risk
The California Tax-Free Money Market Fund and the California Intermediate
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.
7. Subsequent Event
By unanimous consent of Trustees dated December 23, 1996, the Trustees of the
Stepstone Funds had determined, and approved, that it is in the best interests
of the Limited Maturity Government Fund ("the Fund") and its shareholders that
the Fund be liquidated. Accordingly, effective February 26, 1997, the Fund
liquidated and distributed the net liquidation proceeds to its shareholders.
76
<PAGE>
8. Option Contracts
Transactions in covered call options and purchased put options during the period
ended January 31, 1997 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 1,220 430,994
Call option exercised during period (100) (104,697)
Call option expired during period (700) (176,772)
Call option closed during period (420) (149,525)
----- --------
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 $ 35 $136,248
Call option written during period 1,947 396,965
Call option exercised during period -- --
Call option expired during period (635) (126,047)
Call option closed during period (985) (314,105)
------- -------
Option written and outstanding at end
of period 362 93,061
======= =======
EMERGING GROWTH
-------------------
NUMBER OF
WRITTEN OPTION TRANSACTION CONTRACTS PREMIUM
- ----------------------------------- ---------- -------
Option written and outstanding at
beginning of period $ 150 $ 44,892
Call option written during period 3,466 998,826
Call option exercised during period (375) (84,335)
Call option expired during period (1,601) (318,375)
Call option closed during period (2,150) (570,257)
------- -------
Option written and outstanding at end
of period (510) 70,751
======= =======
BALANCED
--------------------
NUMBER OF
WRITTEN OPTION TRANSACTION CONTRACTS PREMIUM
- ----------------------------------- ---------- -------
Option written and outstanding at
beginning of period $ -- $ --
Call option written during period 1,145 230,242
Call option exercised during period (296) (53,470)
Call option expired during period (358) (79,372)
Call option closed during period (315) (62,267)
------- -------
Option written and outstanding at end
of period 176 35,133
======= =======
BLUE CHIP GROWTH
--------------------
NUMBER OF
PURCHASE OPTION TRANSACTION CONTRACTS PREMIUM
- ----------------------------------- ---------- -------
Purchased put option outstanding at
beginning of period $ -- $ --
Put option purchased during period 485 114,392
Put option sold during period (125) (4,562)
Put option expired during period (210) (53,130)
Put option exercised during period -- --
------- -------
Purchased put option outstanding at end
of period 150 56,700
======= =======
EMERGING GROWTH
--------------------
NUMBER OF
PURCHASE OPTION TRANSACTION CONTRACTS PREMIUM
- ----------------------------------- ---------- -------
Purchase put option outstanding at
beginning of period $ 100 $ 24,237
Put option purchased during period 2,025 852,992
Put option sold during period (1,060) (353,455)
Put option expired during period (1,185) (255,801)
Put option exercised during period (500) (118,419)
------- --------
Purchased put option outstanding at end
of period (620) 149,554
======= ========
77
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
- --------------------------------------------------------------------------------
STEPSTONE FUNDS
9. Shareholder Voting Results (unaudited)
A special meeting of shareholders of the Trusts was held on March 7, 1996. At
the meeting shareholders voted on three proposals. Each proposal and the results
of the voting are set forth below:
PROPOSAL 1: To approve the selection of Union Bank of California, N.A. ("UBOC")
as investment adviser to each Fund, and to approve a new investment advisory
agreement between the Trust, on behalf of each Fund, and UBOC.
% OF % OF
QUORUM OUTSTANDING
-------- -----------
BALANCED FUND
For 12,847,156 99.71 74.40
Against 0 0.00 0.00
Abstain 37,120 0.29 0.21
BLUE CHIP GROWTH FUND
For 4,567,300 100.00 92.26
Against 0 0.00 0.00
Abstain 0 0.00 0.00
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
(FORMERLY CALIFORNIA TAX-FREE BOND FUND)
For 867,938 100.00 98.45
Against 0 0.00 0.00
Abstain 4 0.00 0.00
CALIFORNIA TAX-FREE MONEY MARKET FUND
For 105,223,318 98.59 90.41
Against 4,946 0.00 0.00
Abstain 1,503,898 1.41 1.29
CONVERTIBLES SECURITIES FUND
For 1,527,248 100.00 95.95
Against 0 0.00 0.00
Abstain 0 0.00 0.00
EMERGING GROWTH FUND
For 3,025,825 99.54 87.63
Against 14,039 0.46 0.41
Abstain 0 0.00 0.00
% OF % OF
QUORUM OUTSTANDING
-------- -----------
GOVERNMENT SECURITIES FUND
For 4,345,629 100.00 93.17
Against 0 0.00 0.00
Abstain 0 0.00 0.00
GROWTH EQUITY FUND
For 7,657,397 99.93 76.16
Against 682 0.01 0.01
Abstain 4,735 0.06 0.05
INTERMEDIATE-TERM BOND FUND
For 9,477,905 99.76 72.13
Against 17,671 0.18 0.13
Abstain 6,166 0.06 0.05
INTERNATIONAL EQUITY FUND
For 1,151,910 100.00 97.33
Against 0 0.00 0.00
Abstain 0 0.00 0.00
LIMITED MATURITY GOVERNMENT FUND
For 3,442,688 97.59 93.90
Against 0 0.00 0.00
Abstain 84,921 2.41 2.32
MONEY MARKET FUND
For 508,915,213 98.80 67.34
Against 503,640 0.10 0.07
Abstain 5,652,325 1.10 0.75
TREASURY MONEY MARKET FUND
For 296,824,594 96.77 74.82
Against 437,523 0.14 0.11
Abstain 9,482,693 3.09 2.39
VALUE MOMENTUM FUND
For 12,314,899 99.73 95.94
Against 10,671 0.09 0.08
Abstain 22,880 0.19 0.16
78
<PAGE>
PROPOSAL 2: To approve the selection of Bank of Tokyo-Mitsubishi Trust Company
or its successor as the sub-adviser to the Blue Chip Growth, Emerging Growth,
Government Securities and Convertible Securities Funds, to approve a new
sub-advisory agreement between Bank of Tokyo-Mitsubishi Trust Company (or its
successor) and UBOC relating to these Funds.
% OF % OF
QUORUM OUTSTANDING
-------- -----------
EMERGING GROWTH FUND
For 3,025,825 99.54 87.63
Against 14,039 0.46 0.41
Abstain 0 0.00 0.00
GOVERNMENT SECURITIES FUND
For 4,345,629 100.00 93.17
Against 0 0.00 0.00
Abstain 0 0.00 0.00
CONVERTIBLE SECURITIES FUND
For 1,527,248 100.00 95.95
Against 0 0.00 0.00
Abstain 0 0.00 0.00
BLUE CHIP GROWTH FUND
For 4,567,300 100.00 92.26
Against 0 0.00 0.00
Abstain 0 0.00 0.00
PROPOSAL 3: To approve the selection of Tokyo-Mitsubishi Asset Management
(U.K.), Ltd. or its successor as the sub-adviser to the International Equity
Fund, and to approve the sub-advisory agreement between Tokyo-Mitsubishi Asset
Management (U.K.), Ltd. (or its successor) and UBOC relating to the Fund.
% OF % OF
QUORUM OUTSTANDING
-------- -----------
INTERNATIONAL EQUITY FUND
For 1,151,910 100.00 97.33
Against 0 0.00 0.00
Abstain 0 0.00 0.00
79
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of
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 Intermediate Tax-Free Bond, Convertible
Securities, Government Securities, Balanced, Growth Equity, Value Momentum, Blue
Chip Growth, Emerging Growth, and International Equity Funds of Stepstone Funds
(the "Trust") as of January 31, 1997, 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 Trust'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, 1997, by correspondence with the custodians 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 Intermediate
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, 1997, 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 15, 1997
<PAGE>
NOTICE TO SHAREHOLDERS OF THE STEPSTONE FUNDS (UNAUDITED)
- -------------------------------------------------------------------------------
For shareholders that do not have a January 31, 1997 tax year end, this notice
is for informational purposes only. For shareholders with a January 31, 1997 tax
year end, please consult your tax advisor as to the pertinence of this notice.
For the fiscal year ended January 31, 1997, 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 Intermediate Tax-Free Bond 0% 100% 100%
Convertible Securities 25% 75% 100%
Government Securities 0% 100% 100%
Balanced 56% 44% 100%
Growth Equity 92% 8% 100%
Value Momentum 63% 37% 100%
Blue Chip Growth 68% 32% 100%
Emerging Growth 44% 56% 100%
International Equity 57% 43% 100%
(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 Intermediate Tax-Free Bond 0% 100% 0%
Convertible Securities 16% 0% 0%
Government Securities 0% 0% 0%
Balanced 34% 0% 0%
Growth Equity 100% 0% 0%
Value Momentum 84% 0% 0%
Blue Chip Growth 79% 0% 0%
Emerging Growth 6% 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>
