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THE
MILESTONE
FUNDS
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THE MILESTONE FUNDS
TREASURY OBLIGATIONS PORTFOLIO
ADVISER
Milestone Capital Management, L.P.
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DISTRIBUTOR
Midwest Group Financial Services, Inc.
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PRIMARY DEALER
Bear, Stearns & Co. Inc.
SEMI-ANNUAL REPORT
MAY 31, 1996
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THE
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TABLE OF CONTENTS
Letter to Our Shareholders.......................3
Statement of Investments.........................4
Statement of Assets and Liabilities..............5
Statement of Operations..........................6
Statement of Changes in Net Assets...............7
Financial Highlights.............................8
Notes to Financial Statements.................9-10
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THE
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TREASURY OBLIGATIONS PORTFOLIO
LETTER TO OUR SHAREHOLDERS
MAY 31, 1996
Dear Shareholder:
We are pleased to present you with this semi-annual report for the Treasury
Obligations Portfolio. In reviewing the very successful results of the first
half of our fiscal year, we would like to begin by thanking you for investing in
the Fund and for giving our team the opportunity to work in partnership with you
to meet your short-term investment objectives.
For the six months ended May 31, 1996, the Fund's assets grew to over $1
billion, representing investments from more than 200 shareholders. During this
time, the Fund maintained a constant net asset value of $1.00 per share and
consistently met the stringent requirements for AAA ratings from Moody's
Investors Service, Standard & Poor's, and Fitch Investors Service.
For the financial markets, the last six months was a period of transition. The
economy ended 1995 on a decidedly weak note. Annualized GDP was below 1% in the
4th quarter, compounded by the budget impasse, a government shutdown, and
extreme weather. This prompted the Federal Reserve to ease in both December and
January as an 'insurance policy,' bringing the Fed Funds rate to 5.25%.
Following these moves and improving weather conditions, consumer activity
rebounded to healthy levels. Retail sales, housing, employment and even
manufacturing all showed solid gains. Annualized GDP in the 1st quarter grew
above 2% and could increase to above 4% by the end of the 2nd quarter. While
growth is expected to slow in the second half of the year, the surprising
strength in the economy up to this point in 1996 could prompt the Federal
Reserve to raise interest rates prior to the fall elections. Throughout this
period of economic transition and market adjustments, the Fund generated
consistently competitive performance for our shareholders while achieving its
primary investment objectives of capital preservation and daily liquidity.
As the Fund continues to grow, providing shareholders with the highest quality
client service remains our top priority. To further enhance the specialized
services which the Fund provides in response to investors' needs, the Board of
Trustees approved the appointment of two new, highly qualified service
providers: The Bank of New York now serves as the Fund's Custodian,
Administrator, and Fund Accountant; Midwest Group Financial Services, Inc. is
the Fund's Transfer Agent & Statutory Underwriter. We welcome your feedback on
our new service providers, and we encourage you to call on our investment,
research, client service, technology and consulting professionals whenever we
can be of assistance.
Sincerely,
/s/ JANET TIEBOUT HANSON /s/ MARC H. PFEFFER
JANET TIEBOUT HANSON MARC H. PFEFFER
Chairman of the Board of Trustees Chief Investment Officer
The Milestone Funds Milestone Capital Management, L.P.
3
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TREASURY OBLIGATIONS PORTFOLIO
STATEMENT OF INVESTMENTS
MAY 31, 1996 (Unaudited)
($ in Thousands)
Value
Principal Amount Interest Rate Maturity Date (note 1)
U.S. TREASURY OBLIGATIONS - 12.6%
UNITED STATES TREASURY BILLS - 11.2%
$14,500 5.35%-5.53% 7/25/96 $14,380
7,500 5.22%-5.33% 8/22/96 7,409
20,000 4.82%-5.07% 10/17/96 19,620
20,000 4.82%-5.14% 11/14/96 19,543
20,000 5.14%-5.17% 1/09/97 19,366
15,000 5.12%-5.22% 2/06/97 14,462
30,000 5.10%-5.27% 3/06/97 28,802
123,582
UNITED STATES TREASURY NOTE - 1.4%
15,000 6.875% 2/28/97 15,140
TOTAL U.S. TREASURY OBLIGATIONS (AMORTIZED COST $138,722) 138,722
REPURCHASE AGREEMENTS - 87.7%
Barclays de Zoete Wedd Securities, Inc., dated 5/31/96, repurchase price $50,022
(U.S. Treasury Notes: $49,751, 5.625%-7.75%, 6/30/97-12/31/99; aggregate market
value $51,001)
50,000 5.31% 6/03/96 50,000
Bear, Stearns & Co. Inc., dated 5/31/96, repurchase price $50,022 (U.S. Treasury
Bills: $9,650 12/12/96-3/06/97; U.S. Treasury Bond: $790, 10.75%, 5/15/03; U.S.
Treasury Notes: $40,850, 5.00%-8.00%, 8/31/96-4/30/01; aggregate market value
$51,032)
50,000 5.32% 6/03/96 50,000
CS First Boston Corporation, dated 5/31/96, repurchase price $50,022 (U.S.
Treasury Bill: $52,025, 10/17/96; market value $51,004)
50,000 5.30% 6/03/96 50,000
Citicorp Securities, Inc., dated 5/31/96, repurchase price $50,022 (U.S.
Treasury Note: $48,930, 7.50%, 12/31/96; market value $51,010)
50,000 5.35% 6/03/96 50,000
Deutsche Morgan Grenfell/C.J. Lawrence, Inc., dated 5/31/96, repurchase price
$50,022 (U.S. Treasury Bills: $3,498, 7/05/96-12/12/96; U.S. Treasury Bonds:
$3,462, 7.625%-11.875%, 11/15/03-2/15/25; U.S. Treasury Notes: $42,151,
5.125%-8.875%, 10/15/96-11/15/05; aggregate market value $51,000)
50,000 5.30% 6/03/96 50,000
Donaldson, Lufkin & Jenrette Securities Corporation, dated 5/31/96, repurchase
price $43,719 (U.S. Treasury Note: $43,462, 6.50%, 8/15/97; market value
$44,574)
43,700 5.30% 6/03/96 43,700
HSBC Securities, Inc., dated 5/31/96, repurchase price $50,022 (U.S. Treasury
Bill: $53,950, 5/29/97; market value $51,004)
50,000 5.35% 6/03/96 50,000
J.P. Morgan Securities, Inc., dated 5/31/96, repurchase price $50,022 (U.S.
Treasury Note: $48,115, 8.50%, 7/15/97; market value $51,004)
50,000 5.32% 6/03/96 50,000
Nomura Securities International, Inc., dated 5/31/96, repurchase price $50,022
(U.S. Treasury Note: $51,405, 6.25%, 4/30/01; market value $51,001)
50,000 5.31% 6/03/96 50,000
SBC Warburg, Inc., dated 5/31/96, repurchase price $265,118 (U.S. Treasury Note:
$254,402, 7.75%, 1/31/00; market value $271,320)
265,000 5.33% 6/03/96 265,000
Smith Barney, Inc., dated 5/31/96, repurchase price $50,022 (U.S. Treasury Bill:
$50,000, 12/12/96; U.S. Treasury Note: $2,404, 6.00%, 5/31/98; aggregate market
value $51,000)
50,000 5.32% 6/03/96 50,000
UBS Securities, L.L.C., dated 5/31/96, repurchase price $205,091 (U.S. Treasury
Bills: $210,938, 6/06/96-9/19/96; aggregate market value $209,104)
205,000 5.31% 6/03/96 205,000
TOTAL REPURCHASE AGREEMENTS (AMORTIZED COST $963,700) 963,700
TOTAL INVESTMENTS (AMORTIZED COST $1,102,422)-100.3% 1,102,422
LIABILITIES IN EXCESS OF OTHER ASSETS - (0.3%) (3,370)
NET ASSETS - 100.0% $1,099,052
See notes to financial statements.
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TREASURY OBLIGATIONS PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1996 (Unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments, at value and cost (note 1) $ 138,721,958
Repurchase agreements, at value and cost (note 1) 963,700,000
Cash 45,551
Interest receivable 403,021
Deferred organization costs and prepaid expenses 224,852
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Total assets 1,103,095,382
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LIABILITIES:
Advisory fee payable 76,978
Shareholder Service fee payable-Investor Shares 16,846
Shareholder Service fee payable-Institutional Shares 19,404
Dividends payable 3,866,348
Accrued expenses 64,080
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Total liabilities 4,043,656
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NET ASSETS $1,099,051,726
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NET ASSETS BY CLASS OF SHARES:
Investor Shares $ 72,557,918
Institutional Shares 1,026,493,808
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NET ASSETS $1,099,051,726
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SHARES OUTSTANDING
Investor Shares 72,557,906
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Institutional Shares 1,026,493,643
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NET ASSET VALUE PER SHARE
Investor Shares $1.00
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Institutional Shares $1.00
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COMPOSITION OF NET ASSETS:
Shares of beneficial interest $1,099,051,549
Undistributed net realized gain 177
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NET ASSETS $1,099,051,726
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</TABLE>
See notes to financial statements.
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TREASURY OBLIGATIONS PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 1996 (UNAUDITED)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $17,273,949
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EXPENSES (note 2):
Advisory fees 317,109
Administration fees 63,970
Shareholder Service fees
Investor Shares 123,037
Institutional Shares 131,125
Cash management fees 6,498
Registration and filing fees 30,969
Transfer agent fees and expenses 30,947
Custodian fees and expenses 29,969
Accounting service fees 22,877
Amortization of organization costs 18,143
Legal fees 14,107
Reports to shareholders 8,994
Audit fees 8,030
Insurance expense 5,636
Trustees' fees 4,136
Other expenses 23,776
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Total expenses 839,323
Fees waived (note 2) (69,426)
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Net expenses 769,897
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NET INVESTMENT INCOME 16,504,052
NET REALIZED GAIN ON INVESTMENTS 177
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $16,504,229
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</TABLE>
See notes to financial statements.
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TREASURY OBLIGATIONS PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE PERIOD
ENDED DECEMBER 30, 1994*
MAY 31, 1996 THROUGH
(UNAUDITED) NOVEMBER 30, 1995
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<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 16,504,052 $ 12,211,882
Net realized gain on investments 177 3,391
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Net increase in net assets
resulting from operations 16,504,229 12,215,273
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DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income - Investor
Shares (2,740,695) (5,492,911)
Net investment income -
Institutional Shares (13,763,357) (6,718,971)
Net realized gain on investments
- Investor Shares 0 (677)
Net realized gain on investments
- Institutional Shares 0 (2,714)
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Total distributions to
shareholders (16,504,052) (12,215,273)
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TRANSACTIONS IN SHARES OF
BENEFICIAL INTEREST**:
Sale of shares - Investor Shares 601,467,255 1,191,429,951
Sale of shares - Institutional
Shares 2,623,873,267 1,520,992,027
Reinvested dividends - Investor
shares 2,474,912 4,238,692
Reinvested dividends -
Institutional Shares 6,157,237 4,032,896
Cost of shares repurchased -
Investor Shares (613,657,454) (1,113,495,449)
Cost of shares repurchased -
Institutional Shares (1,832,695,448) (1,295,866,337)
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Net increase in net assets
from shares of beneficial
interest 787,619,769 311,331,780
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Total Increase 787,619,946 311,331,780
NET ASSETS:
Beginning of period 311,431,780 100,000
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End of period $1,099,051,726 $ 311,431,780
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</TABLE>
* Commencement of investment operations.
** Share transactions at net asset value of $1.00 per share.
See notes to financial statements.
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TREASURY OBLIGATIONS PORTFOLIO
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
INSTITUTIONAL INVESTOR
SHARES SHARES
--------------------------------- ----------------------------------
SIX MONTHS SIX MONTHS
ENDED JUNE 20, 1995* ENDED DECEMBER 30, 1994*
MAY 31, 1996 THROUGH MAY 31, 1996 THROUGH
(UNAUDITED) NOVEMBER 30, 1995 (UNAUDITED) NOVEMBER 30, 1995
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<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE FOR A SHARE
OUTSTANDING THROUGHOUT
THE PERIOD
Beginning net asset value
per share $1.00 $1.00 $1.00 $1.00
------------ ----------------- ------------ ------------------
Net investment income 0.03 0.03 0.03 0.05
Dividends from net
investment income (0.03) (0.03) (0.03) (0.05)
------------ ----------------- ------------ ------------------
Ending net asset value
per share $1.00 $1.00 $1.00 $1.00
------------ ----------------- ------------ ------------------
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TOTAL RETURN(A) 5.35% 5.76% 5.10% 5.71%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets(a):
Expenses(b) 0.20% 0.20% 0.45% 0.38%
Net investment income 5.25% 5.69% 5.00% 5.63%
Net assets at the end of
period (000's omitted) $1,026,494 $229,159 $72,558 $82,273
</TABLE>
(a) Annualized
(b) Net of advisory, shareholder servicing, and administration fees waived and
expenses reimbursed of 0.02%, 0.17%, 0.01% and 0.14%, respectively.
* Commencement of investment operations.
See notes to financial statements.
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TREASURY OBLIGATIONS PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1996 (Unaudited)
NOTE 1. SUMMARY OF ORGANIZATION AND
SIGNIFICANT ACCOUNTING POLICIES
The Milestone Funds (the 'Trust') was formed as a Delaware business trust on
July 14, 1994. The Trust is registered as an open-end, management investment
company under the Investment Company Act of 1940. It currently has one
diversified investment portfolio, the Treasury Obligations Portfolio (the
'Portfolio') which is authorized to issue an unlimited number of shares of
beneficial interest without par value. The portfolio is currently authorized to
issue two classes of shares, Institutional Shares and Investor Shares. The Trust
commenced the offering of Investor Shares of the Portfolio on December 30, 1994
and the offering of Institutional Shares on June 20, 1995. The Trust's financial
statements are prepared in accordance with generally accepted accounting
principles.
VALUATION OF SECURITIES - Securities in which the Portfolio invests are valued
at amortized cost. Under the amortized cost method, a portfolio instrument is
valued at cost and any premium or discount is amortized on a constant basis to
maturity. Amortization of premium and accretion of market discount is charged to
income.
REPURCHASE AGREEMENTS - The Portfolio may purchase securities from financial
institutions subject to the seller's agreement to repurchase and the Portfolio's
agreement to resell the securities at par. The investment adviser only enters
into repurchase agreements with financial institutions that are primary dealers
and deemed to be creditworthy by the investment adviser in accordance with
procedures adopted by the Board of Trustees. Securities purchased subject to
repurchase agreements are maintained with a custodian of the Portfolio and must
have, at all times, an aggregate market value greater than or equal to the
repurchase price plus accrued interest. If the value of the underlying
securities falls below 102% of the value of the repurchase price plus accrued
interest, the Portfolio will require the seller to deposit additional collateral
by the next Portfolio business day. In the event that the seller under the
agreement defaults on its repurchase obligation or fails to deposit sufficient
collateral, the Portfolio has the contractual right, subject to the requirements
of applicable bankruptcy and insolvency laws, to sell the underlying securities
and may claim any resulting loss from the seller.
SECURITY TRANSACTIONS - Security transactions are recorded on the trade date.
Realized gain and losses are recorded on the identified cost basis. The cost of
investments for federal income tax purposes at May 31, 1996 is the same as shown
on the accompanying statement of investments.
CLASS SPECIFIC EXPENSES - Each share of both classes represents an undivided,
proportionate interest in the Portfolio. The Portfolio's class specific expenses
include Shareholder Service fees that are in accordance with procedures adopted
by the Board of Trustees regarding the offering of multiple classes of shares by
open-end, management investment companies. In addition, there are differences
between the classes of shares with respect to the minimum investment required
and voting rights affecting each class.
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TREASURY OBLIGATIONS PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONT'D)
MAY 31, 1996 (Unaudited)
INCOME TAXES - It is the Portfolio's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its investment company taxable income and net realized gains,
if applicable, to its shareholders. Therefore, no provision has been made for
federal income taxes.
INTEREST INCOME AND DIVIDENDS TO SHAREHOLDERS - Interest income is accrued as
earned. Dividends to shareholders from each class of the Portfolio's net
investment income are declared daily and distributed monthly. Net realized
capital gains, unless offset by any available capital loss carryforwards, are
distributed at least annually.
ORGANIZATION COSTS - Organization costs are being amortized on a straight line
basis over five years.
NOTE 2. INVESTMENT ADVISORY AND OTHER SERVICES
Milestone Capital Management, L.P. (the 'Adviser') serves as investment adviser
to the Portfolio pursuant to an investment advisory agreement with the Trust.
For its services, the Adviser receives a fee at an annual rate equal to 0.10% of
the average daily net assets of the Portfolio.
The Trust has adopted a Shareholder Service Plan providing that the Trust may
obtain the services of the Adviser and other qualified financial institutions to
act as shareholder servicing agents for their customers. Under this plan, the
Trust has authorized the Adviser to enter into agreements pursuant to which the
shareholder servicing agents perform certain shareholder services. For these
services, the Adviser receives from the Trust a fee of 0.05% and 0.25% of the
average daily net assets of the Institutional Shares and Investor Shares,
respectively. The Adviser pays the shareholder servicing agents up to these
amounts with respect to shares owned by investors for which the shareholder
servicing agents maintain a servicing relationship pursuant to the Shareholder
Servicing Agreement. For the six months ended May 31, 1996, the Adviser waived
$6,332 of its shareholder servicing fee for the Investor Shares and $63,094 for
the Institutional Shares.
MGF Service Corp. acts as the Trust's transfer agent and dividend disbursing
agent. Midwest Group Financial Services, Inc. (the 'Underwriter') serves as the
statutory underwriter of the Portfolio's shares pursuant to an Underwriting
Agreement with the Trust. The Underwriter is an affiliate of the Trust's
transfer agent. The Underwriter is reimbursed for all costs and expenses
incurred in this capacity but receives no further compensation for its services
under the Underwriting Agreement.
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Adviser
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Milestone Capital Management, L.P.
One Odell Plaza
Yonkers, NY 10701
Underwriter / Transfer Agent
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Midwest Group Financial Services, Inc. / MGF Service Corp.
P.O. Box 5354
Cincinnati, OH 45201-5354
800-363-7660
Primary Dealer
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Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Administrator / Custodian
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The Bank of New York
90 Washington Street
New York, NY 10286
Legal Counsel
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Kramer, Levin, Naftalis, Nessen, Kamin & Frankel
919 Third Avenue
New York, NY 10022
This report is authorized for distribution
only to current shareholders and to others
who have received a copy of The Milestone Funds prospectus.
The Milestone Funds
One Odell Plaza, Yonkers, New York 10701
800-941-MILE
