<PAGE>
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THE
MILESTONE
FUNDS
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THE MILESTONE FUNDS
TREASURY OBLIGATIONS PORTFOLIO
ADVISER
MILESTONE CAPITAL MANAGEMENT, L.P.
------------------
DISTRIBUTOR
MIDWEST GROUP FINANCIAL SERVICES, INC.
------------------
PRIMARY DEALER
BEAR, STEARNS & CO. INC.
ANNUAL REPORT
NOVEMBER 30, 1996
<PAGE>
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THE
MILESTONE
FUNDS
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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
Statements of Changes in Net Assets............... 7
Financial Highlights.............................. 8
Notes to Financial Statements..................... 9-10
Independent Auditor's Report...................... 11
2
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THE
MILESTONE
FUNDS
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TREASURY OBLIGATIONS PORTFOLIO
LETTER TO OUR SHAREHOLDERS
NOVEMBER 30, 1996
Dear Shareholder:
We are happy to report that 1996 was a very successful year. We would like to
thank both our on-going and new investors for the confidence shown in our team
this past year. We greatly appreciate your business, and we look forward to
working in partnership with you to achieve continued success in 1997.
The Fund's assets grew from approximately $300 million at the start of the
fiscal year to nearly $1 billion by November 30, 1996. During this period, the
Fund maintained a constant net asset value of $1.00 per share, met the daily
liquidity needs of a diverse and growing client base, and produced consistently
competitive performance results. The Fund continues to carry the highest money
market fund ratings from Standard & Poor's (AAAm), Moody's (Aaa), and Fitch
Investors Service (AAA).
At the outset of 1996 the economy was relatively weak, prompting the Federal
Reserve to respond with a rate cut in January. The economic improvement that
followed was led by consumer spending and a significant increase in investment
capital, which in turn sparked payroll growth--particularly in the service
sector. Current estimates of overall GDP growth for 1996 are nearly 3%. The
Treasury Obligations Portfolio was structured and managed to reflect the
economic transitions that took place during the year, resulting in very
competitive yields for our investors. The portfolio's average maturity was
shortened as the economy gained momentum, which allowed the Fund to purchase
longer dated Treasury securities when market rates moved higher. While economic
growth is generally expected to slow somewhat in 1997, a carry over of strong
data and a possible increase in inflation could prompt the Federal Reserve to
raise interest rates if necessary in the coming year. The portfolio will
continue to be actively managed to reflect changing market conditions and future
policy shifts. Our Portfolio Management & Research Team is available to you
daily to answer any questions you have or to discuss our market outlook and
investment strategy in further detail.
Looking ahead to 1997, we renew our commitment to you to provide the highest
value and standard of client service available to institutional fund investors.
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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THE
MILESTONE
FUNDS
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TREASURY OBLIGATIONS PORTFOLIO
STATEMENT OF INVESTMENTS
NOVEMBER 30, 1996
($ in Thousands)
- -------------------------------------------------------------------------------
Value
Principal Amount Interest Rate Maturity Date (note 1)
- -------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS - 19.9%
UNITED STATES TREASURY BILLS - 14.8%
$20,000 5.18%-5.31% 3/06/97 $19,724
5,000 5.42% 4/03/97 4,907
32,500 5.26%-5.52% 5/29/97 31,625
15,000 5.26%-5.47% 6/26/97 14,539
27,500 5.25%-5.50% 8/21/97 26,417
22,500 5.21%-5.37% 9/18/97 21,542
12,500 5.10%-5.14% 10/16/97 11,932
15,000 5.11%-5.12% 11/13/97 14,260
-------
144,946
-------
UNITED STATES TREASURY NOTES - 5.1%
40,000 6.875% 2/28/97 40,113
10,000 6.50% 4/30/97 10,037
-------
50,150
-------
- --------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS (AMORTIZED COST $195,096) 195,096
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS - 80.2%
Barclays de Zoete Wedd Securities, Inc., dated 11/29/96, repurchase price
$230,109 (U.S. Treasury Bill: $235,028, 12/12/96; market value $234,600)
230,000 5.70% 12/02/96 230,000
Bear, Stearns & Co. Inc., dated 11/29/96, repurchase price $40,019 (U.S.
Treasury Bills: $15,622, 12/19/96-1/09/97; U.S. Treasury Notes: $24,573,
5.50%-8.875%, 11/30/96-2/15/03; aggregate market value $40,838)
40,000 5.65% 12/02/96 40,000
Chase Securities, Inc., dated 11/29/96, repurchase price $45,022 (U.S. Treasury
Bill: $46,590, 3/13/97; market value $45,903)
45,000 5.80% 12/02/96 45,000
Donaldson, Lufkin & Jenrette Securities Corp., dated 11/29/96, repurchase price
$25,492 (U.S. Treasury Bill: $26,242, 2/06/97; market value $25,990)
25,480 5.65% 12/02/96 25,480
HSBC Securities, Inc., dated 11/29/96, repurchase price $45,021 (U.S. Treasury
Bill: $46,680, 3/27/97; market value $45,902)
45,000 5.65% 12/02/96 45,000
J.P. Morgan Securities, Inc., dated 11/29/96, repurchase price $40,019 (U.S.
Treasury Note: $39,993, 7.375%, 11/15/97; market value $40,803)
40,000 5.65% 12/02/96 40,000
Nomura Securities International, Inc., dated 11/29/96, repurchase price $45,021
(U.S. Treasury Bill: $3,932, 1/16/97; U.S. Treasury Notes: $40,461, 5.50%-8.50%,
4/15/97-7/31/01; aggregate market value $45,900)
45,000 5.68% 12/02/96 45,000
SBC Warburg, Inc., dated 11/29/96, repurchase price $230,109 (U.S. Treasury
Bills: $233,549, 2/27/97-11/13/97; U.S. Treasury Note: $10,295, 7.375%,
11/15/97; aggregate market value $234,712)
230,000 5.70% 12/02/96 230,000
Smith Barney, Inc., dated 11/29/96, repurchase price $40,019 (U.S. Treasury
Note: $39,465, 6.75%, 4/30/00; market value $40,801)
40,000 5.65% 12/02/96 40,000
UBS Securities, L.L.C., dated 11/29/96, repurchase price $45,021 (U.S. Treasury
Bills: $46,640, 2/06/97-4/24/97; aggregate market value $45,904)
45,000 5.68% 12/02/96 45,000
- --------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS (AMORTIZED COST $785,480) 785,480
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (AMORTIZED COST $980,576) - 100.1% 980,576
LIABILITIES IN EXCESS OF OTHER ASSETS - (0.1%) (488)
- --------------------------------------------------------------------------------
NET ASSETS - 100.0% $980,088
- --------------------------------------------------------------------------------
See notes to financial statements.
4
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THE
MILESTONE
FUNDS
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TREASURY OBLIGATIONS PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1996
ASSETS:
Investments, at value and cost (note 1) $195,095,530
Repurchase agreements, at value and cost (note 1) 785,480,000
Cash 1,179
Interest receivable 1,002,914
Deferred organization costs and prepaid expenses 113,193
------------
Total assets 981,692,816
------------
LIABILITIES:
Advisory fee payable 84,024
Shareholder Service fee payable-Investor Shares 15,580
Shareholder Service fee payable-Institutional Shares 23,752
Dividends payable 1,396,407
Accrued expenses 84,816
------------
Total liabilities 1,604,579
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NET ASSETS $980,088,237
------------
------------
NET ASSETS BY CLASS OF SHARES:
Investor Shares $ 82,915,094
Institutional Shares 897,173,143
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NET ASSETS $980,088,237
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------------
SHARES OUTSTANDING
Investor Shares 82,915,094
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------------
Institutional Shares 897,173,143
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NET ASSET VALUE PER SHARE
Investor Shares $1.00
------------
------------
Institutional Shares $1.00
------------
------------
COMPOSITION OF NET ASSETS:
Shares of beneficial interest $980,088,237
------------
------------
NET ASSETS $980,088,237
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------------
See notes to financial statements.
5
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THE
MILESTONE
FUNDS
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TREASURY OBLIGATIONS PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1996
INVESTMENT INCOME:
Interest $43,992,828
-------------
EXPENSES (note 2):
Advisory fees 812,214
Administration fees 116,674
Shareholder Service fees
Investor Shares 223,758
Institutional Shares 358,534
Custodian fees and expenses 79,039
Registration and filing fees 76,453
Publication expenses 71,943
Transfer agent fees and expenses 66,067
Accounting service fees 45,377
Legal fees 42,062
Amortization of organization costs 31,197
Reports to shareholders 27,513
Audit fees 18,056
Cash management fees 16,227
Insurance expense 12,942
Trustees' fees 12,188
Other expenses 12,581
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Total expenses 2,022,825
Fees waived (note 2) (162,614)
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Net expenses 1,860,211
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NET INVESTMENT INCOME 42,132,617
NET REALIZED GAIN ON INVESTMENTS 4,144
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 42,136,761
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-------------
See notes to financial statements.
6
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THE
MILESTONE
FUNDS
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TREASURY OBLIGATIONS PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD
FOR YEAR DECEMBER 30, 1994*
ENDED THROUGH
NOVEMBER 30, 1996 NOVEMBER 30, 1995
----------------- ------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 42,132,617 $ 12,211,882
Net realized gain on investments 4,144 3,391
----------------- ------------------
Net increase in net assets
resulting from operations 42,136,761 12,215,273
----------------- ------------------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income - Investor
Shares (4,744,317) (5,492,911)
Net investment income -
Institutional Shares (37,388,300) (6,718,971)
Net realized gain on investments
- Investor Shares (573) (677)
Net realized gain on investments
- Institutional Shares (3,571) (2,714)
----------------- ------------------
Total distributions to
shareholders (42,136,761) (12,215,273)
----------------- ------------------
TRANSACTIONS IN SHARES OF
BENEFICIAL INTEREST**:
Sale of shares - Investor Shares 1,119,656,967 1,191,429,951
Sale of shares - Institutional
Shares 6,057,708,590 1,520,992,027
Reinvested dividends - Investor
shares 4,490,794 4,238,692
Reinvested dividends -
Institutional Shares 23,817,018 4,032,896
Cost of shares repurchased -
Investor Shares (1,123,505,861) (1,113,495,449)
Cost of shares repurchased -
Institutional Shares (5,413,511,051) (1,295,866,337)
----------------- ------------------
Net increase in net assets
from shares of beneficial
interest 668,656,457 311,331,780
----------------- ------------------
Total Increase 668,656,457 311,331,780
NET ASSETS:
Beginning of period 311,431,780 100,000
----------------- ------------------
End of period $ 980,088,237 $ 311,431,780
----------------- ------------------
----------------- ------------------
* Commencement of investment operations.
** Share transactions at net asset value of $1.00 per share.
See notes to financial statements.
7
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THE
MILESTONE
FUNDS
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TREASURY OBLIGATIONS PORTFOLIO
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
INSTITUTIONAL INVESTOR
SHARES SHARES
-------------------------------------- ---------------------------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE YEAR JUNE 20, 1995* FOR THE YEAR DECEMBER 30, 1994*
ENDED THROUGH ENDED THROUGH
NOVEMBER 30, 1996 NOVEMBER 30, 1995 NOVEMBER 30, 1996 NOVEMBER 30, 1995
----------------- ----------------- ----------------- ------------------
<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 0.052 0.026 0.050 0.051
Dividends from net
investment income (0.052) (0.026) (0.050) (0.051)
----------------- ----------------- ----------------- ------------------
Ending net asset value
per share $1.00 $1.00 $1.00 $1.00
----------------- ----------------- ----------------- ------------------
----------------- ----------------- ----------------- ------------------
TOTAL RETURN 5.37% 5.76%(a) 5.11% 5.71%(a)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets:
Expenses(b) 0.20% 0.20%(a) 0.45% 0.38%(a)
Net investment income 5.21% 5.69%(a) 4.99% 5.63%(a)
Net assets at the end of
period (000's omitted) $897,173 $229,159 $82,915 $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 operations.
See notes to financial statements.
8
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THE
MILESTONE
FUNDS
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TREASURY OBLIGATIONS PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
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 November 30, 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 and certain registration 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.
9
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MILESTONE
FUNDS
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TREASURY OBLIGATIONS PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONT'D)
NOVEMBER 30, 1996
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.
ACCOUNTING ESTIMATES - The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
increases and decreases in net assets from operations during the reporting
period. Actual results could differ from those estimates.
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. Prior to March 1st the fee was 0.20% for the Investor Shares. 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 year ended November 30, 1996, the Adviser waived $6,507 of its shareholder
servicing fee for the Investor Shares and $156,107 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.
10
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THE
MILESTONE
FUNDS
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TREASURY OBLIGATIONS PORTFOLIO
INDEPENDENT AUDITOR'S REPORT
NOVEMBER 30, 1996
THE BOARD OF TRUSTEES AND SHAREHOLDERS
TREASURY OBLIGATIONS PORTFOLIO OF THE MILESTONE FUNDS
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of the Treasury Obligations Portfolio of The
Milestone Funds as of November 30, 1996, and the related statement of operations
for the year then ended, the statements of changes in net assets and the
financial highlights for the year then ended, and the period from December 30,
1994 (commencement of operations) to November 30, 1995. These financial
statements and financial highlights are the responsibility of the Fund'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
November 30, 1996, by correspondence with the custodian. 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 Obligations Portfolio of The Milestone Funds, as of November 30, 1996,
the results of its operations, the changes in its net assets and the financial
highlights for the periods indicated, in conformity with generally accepted
accounting principles.
McGladrey & Pullen, LLP
New York, New York
January 14, 1997
11
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THE
MILESTONE
FUNDS
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Adviser
- -------------------------------------------------------------------------------
Milestone Capital Management, L.P.
One Odell Plaza
Yonkers, NY 10701
Underwriter / Transfer Agent
- -------------------------------------------------------------------------------
Midwest Group Financial Services, Inc. / MGF Service Corp.
P.O. Box 5354
Cincinnati, OH 45201-5354
800-363-7660
Primary Dealer
- -------------------------------------------------------------------------------
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Administrator / Custodian
- -------------------------------------------------------------------------------
The Bank of New York
90 Washington Street
New York, NY 10286
Legal Counsel
- -------------------------------------------------------------------------------
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
