<PAGE>
As filed with the Securities and Exchange Commission on March 27, 1998
SECURITIES and EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Securities Act of 1933 File #333-01999
Investment Company Act of 1940 File #811-07577
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
-
Pre-Effective Amendment No.
--
Post-Effective Amendment No. 4
--
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
-
Amendment No. 6
--
WM Strategic Asset Management Portfolios (formerly Sierra Asset Management
--------------------------------------------------------------------------
Portfolios)
-----------
(Exact name of Registrant as specified in Charter)
601 West Main Avenue, Suite 300, Spokane, WA 99201
---------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (509) 353-3486
--------------
John T. West
------------
601 West Main Avenue, Suite 300, Spokane WA 99201
--------------------------------------------------
(Name and address of agent for service)
- --------------------
<PAGE>
Copies to:
Lawrence R. Small, Esq. Joseph B. Kittredge, Esq.
Paine, Hamblen, Coffin, Ropes & Gray
Brooke & Miller One International Place
717 West Sprague Avenue, Suite 1200 Boston, MA 02110
Spokane, WA 99201-3505
----------------
It is proposed that this filing will become effective:
xx immediately upon filing pursuant to paragraph (b) of Rule 485
- --
on (date) pursuant to paragraph (b) of Rule 485
- --
60 days after filing pursuant to paragraph (a)(i) of Rule 485
- --
75 days after filing pursuant to paragraph (a)(ii) of Rule 485
- --
on (date) pursuant to paragraph (a)(ii) of Rule 485
- --
this post-effective amendment designates a new effective date for a
- -- previously filed post-effective amendment.
----------------
-2-
<PAGE>
This Prospectus describes the Class A, Class B, Class I and Class S shares of
the WM Group of Funds listed to the right (each a "Fund" or a "Portfolio")
(except for the Target Maturity 2002 Fund, which offers only Class A shares,
and the Portfolios within WM Strategic Asset Management Portfolios, each of
which offers only Class A and Class B shares). Class A and Class B shares offer
investors alternative ways of paying sales charges and distribution costs.
Class I shares are not offered or sold directly to investors, and Class S
shares are sold exclusively to investors who open WM Strategic Asset Management
Accounts.
All of the Funds and Portfolios listed to the right are series of either WM
Trust I, WM Trust II or WM Strategic Asset Management Portfolios (collectively,
the "Trusts").
Please read this Prospectus before investing, and keep it for future reference.
It contains useful information that can help you decide whether the investment
goals of the Funds and Portfolios are right for you. A Statement of Additional
Information (the "SAI") about the Funds and Portfolios, dated March 23, 1998,
has been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated herein by reference. The SAI is available free upon request by
calling the Trusts at 800-222-5852.
THE INCOME, TAX-EXEMPT BOND, BOND & STOCK, GROWTH & INCOME, GROWTH AND EMERGING
GROWTH FUNDS MAY EACH INVEST UP TO 35% OF THEIR TOTAL ASSETS IN LOWER-RATED
(NON-INVESTMENT GRADE) BONDS, SOMETIMES REFERRED TO AS "JUNK BONDS." THE HIGH
YIELD FUND MAY INVEST ENTIRELY IN LOWER-RATED BONDS AND WILL GENERALLY INVEST
AT LEAST 65% OF ITS ASSETS IN SUCH BONDS. BONDS OF THIS TYPE ARE CONSIDERED TO
BE SPECULATIVE WITH REGARD TO THE PAYMENT OF INTEREST AND RETURN OF PRINCIPAL.
PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN
THESE FUNDS. SEE "COMMON INVESTMENT PRACTICES - LOWER-RATED SECURITIES."
INVESTMENTS IN THE FUNDS AND THE PORTFOLIOS ARE NOT GUARANTEED OR INSURED BY
THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT THE MONEY MARKET, TAX-EXEMPT
MONEY MARKET OR CALIFORNIA MONEY FUNDS WILL BE ABLE TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE. THE CALIFORNIA MONEY FUND MAY INVEST A
SIGNIFICANT PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER, AND INVESTING IN THAT
FUND MAY BE RISKIER THAN INVESTING IN OTHER TYPES OF MONEY MARKET FUNDS.
SHARES OF THE FUNDS AND PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND INVOLVE RISK, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
WM GROUP OF FUNDS
MONEY FUNDS
MONEY MARKET FUND
TAX-EXEMPT MONEY MARKET FUND
CALIFORNIA MONEY FUND
FIXED-INCOME FUNDS
SHORT TERM HIGH QUALITY BOND FUND
TARGET MATURITY 2002 FUND
U.S. GOVERNMENT SECURITIES FUND
INCOME FUND
HIGH YIELD FUND
MUNICIPAL FUNDS
TAX-EXEMPT BOND FUND
CALIFORNIA MUNICIPAL FUND
CALIFORNIA INSURED
INTERMEDIATE MUNICIPAL FUND
FLORIDA INSURED MUNICIPAL FUND
EQUITY FUNDS
BOND & STOCK FUND
GROWTH & INCOME FUND
GROWTH FUND
INTERNATIONAL GROWTH FUND
NORTHWEST FUND
EMERGING GROWTH FUND
STRATEGIC ASSET MANAGEMENT PORTFOLIOS
STRATEGIC GROWTH PORTFOLIO
CONSERVATIVE GROWTH PORTFOLIO
BALANCED PORTFOLIO
FLEXIBLE INCOME PORTFOLIO
INCOME PORTFOLIO
PROSPECTUS
MARCH 23, 1998
WM GROUP OF FUNDS
SUITE 300
601 WEST MAIN AVENUE
SPOKANE, WASHINGTON 99201-0613
800-222-5852
<PAGE>
CONTENTS PAGE
SCHEDULE OF FEES 5
FINANCIAL HIGHLIGHTS 12
THE FUNDS' INVESTMENTS AND RISK CONSIDERATIONS 40
MONEY FUNDS 40
FIXED-INCOME FUNDS 41
MUNICIPAL FUNDS 43
EQUITY FUNDS 45
WM STRATEGIC ASSET MANAGEMENT PORTFOLIOS 47
COMMON INVESTMENT PRACTICES 50
PERFORMANCE INFORMATION 59
YOUR ACCOUNT 61
BUYING CLASS A SHARES 64
BUYING CLASS B OR CLASS S SHARES 65
BUYING CLASS I SHARES 67
DISTRIBUTION OF INCOME AND CAPITAL GAINS 67
HOW TO SELL SHARES 67
EXCHANGE PRIVILEGE AND RESTRICTIONS 68
DIVIDENDS, CAPITAL GAINS AND TAXES 69
ORGANIZATION 71
<PAGE>
The following Funds and Portfolios are managed by WM Advisors, Inc. (the
"Advisor") and provide a diversified selection of investment objectives and
strategies:
MONEY FUNDS
MONEY MARKET FUND - seeks to provide maximum current income, while preserving
capital and maintaining liquidity. Investments are in high-quality money market
instruments.
TAX-EXEMPT MONEY MARKET FUND - seeks to provide maximum current income that is
exempt from federal tax, while preserving capital and maintaining liquidity.
Its primary investments are high-quality, short-term municipal obligations.
CALIFORNIA MONEY FUND - seeks to maximize current income that is excluded from
gross income for federal income tax purposes and exempt from California State
personal income taxation, consistent with safety of principal and maintenance
of liquidity. The Fund invests primarily in high-quality, short-term municipal
obligations that are exempt from California State personal income tax.
FIXED-INCOME FUNDS
SHORT TERM HIGH QUALITY BOND FUND - seeks to provide as high a level of current
income as is consistent with prudent investment management and stability of
principal. The Fund invests at least 65% of its assets in investment-grade
short-term bonds and other fixed-income securities.
TARGET MATURITY 2002 FUND - seeks to provide as high a level of return by
December 31, 2002 as is consistent with preservation of capital at the end of
the target maturity year and, thereafter, current income consistent with the
creditworthiness of U.S. Treasury securities.
U.S. GOVERNMENT SECURITIES FUND - seeks to provide a high level of current
income, consistent with safety and liquidity. The Fund invests primarily in
U.S. Government securities, including mortgage-backed securities.
INCOME FUND - seeks to provide a high level of current income that is
consistent with protection of shareholders' capital. It pursues this objective
through investment in a diversified pool of debt securities.
HIGH YIELD FUND - seeks to provide investors with high current income by
investing primarily in high-yielding, lower-rated fixed-income securities.
Under normal market conditions the Fund will invest at least 65% of its assets
in a diversified portfolio of such lower-rated fixed-income securities.
MUNICIPAL FUNDS
TAX-EXEMPT BOND FUND - seeks to provide a high level of income that is exempt
from federal taxes and to protect investors' capital. The Fund invests
primarily in fixed-income obligations issued by states, counties, cities and
other governmental bodies ("Municipal Obligations") that generate income exempt
from federal income tax.
CALIFORNIA MUNICIPAL FUND - seeks to provide investors with as high a level of
current income exempt from federal and California State income tax as is
consistent with prudent investment management and preservation of capital. The
Fund invests at least 80% of its assets in intermediate and long-term
California municipal obligations. Van Kampen American Capital Management Inc.
("Van Kampen") serves as sub-advisor to this Fund.
CALIFORNIA INSURED INTERMEDIATE MUNICIPAL FUND- seeks to provide investors with
as high a level of current income exempt from federal and California State
income tax as is consistent with prudent investment management and preservation
of capital. The Fund invests primarily in intermediate-term California
municipal obligations that are "insured obligations" and offer potential for a
high level of current income. Van Kampen serves as sub-advisor to this Fund.
FLORIDA INSURED MUNICIPAL FUND - seeks as high a level of current income exempt
from federal income tax as is consistent with prudent investment management and
preservation of capital, and seeks to offer shares the value of which is exempt
from Florida intangible personal property tax. The Fund invests at least 80% of
its assets in intermediate and long-term Florida municipal obligations that are
"insured obligations." Van Kampen serves as sub-advisor to this Fund.
3
<PAGE>
EQUITY FUNDS
BOND & STOCK FUND - established in 1939, seeks to provide continuity of income,
conservation of principal, and long-term growth of income and principal. The
Fund invests primarily in common stocks, preferred stocks, bonds and
convertible securities.
GROWTH & INCOME FUND - established in 1949, seeks long-term capital growth,
with current income as a secondary consideration. The Fund invests primarily in
common stocks. The Fund may also invest in fixed-income obligations and other
securities.
GROWTH FUND - seeks long-term capital appreciation. The Fund invests primarily
in common stocks that offer potential for growth. Janus Capital Corporation
("Janus") serves as sub-advisor to this Fund.
INTERNATIONAL GROWTH FUND - seeks long-term capital appreciation by investing
primarily in equity securities of foreign issuers. Warburg Pincus Asset
Management, Inc. ("Warburg Pincus") serves as sub-advisor to this Fund.
NORTHWEST FUND - seeks long-term growth of capital by investing primarily in
common stocks of companies doing business or located in Alaska, Idaho, Montana,
Oregon and Washington.
EMERGING GROWTH FUND - seeks long-term capital appreciation by investing
primarily in equity securities. The Fund invests primarily in common stocks of
small companies that are expected to achieve accelerated growth in earnings and
revenues and/or are believed to be undervalued in the market.
STRATEGIC ASSET MANAGEMENT PORTFOLIOS (THE "PORTFOLIOS")
Each of the Portfolios set forth below seeks to achieve its objective by
investing in certain of the Funds described above as well as the WM Prime
Income Fund, a non-diversified, closed-end management investment company.
STRATEGIC GROWTH PORTFOLIO (FORMERLY CAPITAL GROWTH PORTFOLIO) - seeks to
provide long-term capital appreciation. In general, relative to the other
Portfolios, the Strategic Growth Portfolio should offer investors the potential
for a higher level of capital growth while subjecting investors to
corresponding levels of principal risk.
CONSERVATIVE GROWTH PORTFOLIO (FORMERLY GROWTH PORTFOLIO) - seeks to provide
long-term capital appreciation. In general, relative to the other Portfolios,
the Conservative Growth Portfolio should offer investors the potential for a
low level of income and the potential for a medium to high level of capital
growth while subjecting investors to a medium level of principal risk.
BALANCED PORTFOLIO - seeks total return consisting of a combination of
reinvested income and capital appreciation, consistent with reasonable risk
through limited participation in domestic and international fixed-income and
equity markets. In general, relative to other Portfolios, the Balanced
Portfolio should offer investors the potential for a medium level of income and
the potential for a medium level of capital growth while subjecting investors
to a medium level of principal risk.
FLEXIBLE INCOME PORTFOLIO (FORMERLY VALUE PORTFOLIO) - seeks total return
consisting of reinvestment of income with some capital appreciation, primarily
through investments in domestic and international fixed-income markets with
limited participation in domestic and international equity markets. In general,
relative to the other Portfolios, the Flexible Income Portfolio should offer
investors the potential for a medium to high level of reinvestment income and
the potential for a low to medium level of capital growth, while subjecting
investors to a low to medium level of principal risk.
INCOME PORTFOLIO - seeks long-term total return through reinvestment of current
income consistent with preservation of capital, primarily through participation
in the domestic fixed income markets with limited participation in
international fixed-income markets. In general, relative to the other
Portfolios, the Income Portfolio should offer investors the potential for a
high level of income while maintaining principal and subjecting investors to a
low level of principal risk.
4
<PAGE>
SCHEDULE OF FEES
The table below shows the Funds' costs and expenses that an investor will bear
directly or indirectly and how they affect share ownership. Except as otherwise
noted and except for the High Yield Fund, expenses shown below are based upon
the most recent fiscal year as adjusted to reflect current fee levels. Expenses
shown below for the High Yield Fund are estimates for the Fund's first full
fiscal year. For further information on costs and expenses, please see
"Organization."
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
Class B and
Class A Shares Class S Shares Class I Shares
---------------------------------------------
<S> <C> <C> <C>
Maximum initial sales charge
imposed on purchases
(as a percentage of offering
price at time of purchase)
Equity Funds and Strategic
Growth, Conservative Growth and
Balanced Portfolios 5.50% 0.00% 0.00%
-------------------------------------------
Fixed-Income Funds, Municipal
Funds and Flexible Income and
Income Portfolios 4.50%* 0.00% 0.00%
-------------------------------------------
Money Market Funds 0.00%** 0.00% 0.00%
-------------------------------------------
Maximum sales charge imposed on
reinvested dividends 0.00% 0.00% 0.00%
-------------------------------------------
Maximum contingent deferred sales
charge ("CDSC")
(as a percentage of original
purchase price or redemption
proceeds, as applicable)+ 0.00%*** 5.00%**** 0.00%
-------------------------------------------
Exchange Fee 0.00% 0.00% 0.00%
</TABLE>
- --------------------------------------------------------------------------------
* 3.50% for Short Term High Quality Bond Fund and 2.00% for Target Maturity
2002 Fund.
** Regular sales charges apply when Class A shares of a Money Market Fund (on
which no sales charge was paid at time of purchase) are exchanged for
shares of any other Fund.
*** Certain investors who purchase Class A shares without paying an initial
sales charge may be subject to a CDSC of 1.00% on redemptions within the
first year or 0.50% on redemptions within the second year after purchase.
Class A shares are not otherwise subject to a CDSC.
**** The maximum CDSC is imposed on shares redeemed in the first year. For
shares held longer than one year, the CDSC declines according to the
schedules set forth under "Buying Class B or Class S Shares--Contingent
deferred sales charge" in this Prospectus. The maximum CDSC for Class B
shares of the Short Term High Quality Bond Fund is 4.00%.
+ A $10 fee will be charged for all redemptions made by wire transfer.
5
<PAGE>
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
Class A Shares
-----------------------------------------------------------------------
Total Fund
Operating
Management Fees/1/ 12b-1 Fees/2/ Other Expenses/1/ Expenses/1/
--------------------- --------------- ------------------ --------------
<S> <C> <C> <C> <C>
Money Market Fund 0.37%/3/ 0.00%/7/ 0.38% 0.75%/6/
---------- ---------- ---------- ----------
Tax-Exempt Money Market
Fund 0.36%/3/ 0.00%/7/ 0.19% 0.55%/6/
---------- ---------- ---------- ----------
California Money Fund 0.45% 0.00%/7/ 0.28% 0.73%
---------- ---------- ---------- ----------
Short Term High Quality
Bond Fund 0.09%/3/ 0.25% 0.48% 0.82%/6/
---------- ---------- ---------- ----------
Target Maturity 2002
Fund 0.00%/3/ 0.25% 0.39%/5/ 0.64%/6/
---------- ---------- ---------- ----------
U.S. Government
Securities Fund 0.50%/3/ 0.25%/4/ 0.17% 0.92%/6/
---------- ---------- ---------- ----------
Income Fund 0.63% 0.25%/4/ 0.20% 1.08%
---------- ---------- ---------- ----------
High Yield Fund 0.63% 0.25% 0.48% 1.36%
---------- ---------- ---------- ----------
Tax-Exempt Bond Fund 0.50% 0.25%/4/ 0.10% 0.85%
---------- ---------- ---------- ----------
California Municipal
Fund 0.55%/3/ 0.25% 0.17% 0.97%6
---------- ---------- ---------- ----------
California Insured
Intermediate Municipal
Fund 0.34%/3/ 0.25% 0.23% 0.82%/6/
---------- ---------- ---------- ----------
Florida Insured
Municipal Fund 0.21%/3/ 0.25% 0.36% 0.82%6
---------- ---------- ---------- ----------
Bond & Stock Fund 0.60% 0.25% 0.15% 1.00%
---------- ---------- ---------- ----------
Growth & Income Fund 0.61% 0.25%/4/ 0.19% 1.05%
---------- ---------- ---------- ----------
Growth Fund 1.07% 0.25% 0.34% 1.66%
---------- ---------- ---------- ----------
International Growth
Fund 0.97% 0.25% 0.37% 1.59%
---------- ---------- ---------- ----------
Northwest Fund 0.63% 0.25% 0.23% 1.11%
---------- ---------- ---------- ----------
Emerging Growth Fund 1.02% 0.25% 0.34% 1.61%
---------- ---------- ---------- ----------
Strategic Growth
Portfolio/8/ 0.15% 0.25% 0.55%5 0.95%/6/
---------- ---------- ---------- ----------
Conservative Growth
Portfolio/8/ 0.15% 0.25% 0.55%5 0.95%/6/
---------- ---------- ---------- ----------
Balanced Portfolio/8/ 0.15% 0.25% 0.55%5 0.95%/6/
---------- ---------- ---------- ----------
Flexible Income
Portfolio/8/ 0.15% 0.25% 0.55%5 0.95%/6/
---------- ---------- ---------- ----------
Income Portfolio/8/ 0.15% 0.25% 0.55%5 0.95%/6/
---------- ---------- ---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
/(1)/ After voluntary waiver reimbursement where indicated.
/(2)/ 12b-1 fees represent servicing fees which are paid to the Distributor. See
"Organization - Distributor."
/(3)/ The Advisor has voluntarily undertaken to waive a portion of its
management fee through at least December 31, 1998. Absent such waiver,
management fees would have been as follows: Money Market - 0.45%; Tax-
Exempt Money Market -0.45%; Short Term High Quality Bond - 0.50%; Target
Maturity 2002 - 0.85%; U.S. Government Securities - 0.63%; California
Municipal - 0.70%; California Insured Intermediate Municipal - 0.70%;
Florida Insured Municipal - 0.70%.
/(4)/ Restated to reflect the maximum fee payable under the Fund's Class A
Distribution Plan.
/(5)/ The Advisor and or the administrator has voluntarily undertaken to
reimburse certain expenses. Absent such voluntary reimbursement, "other
expenses" would have been: Target Maturity 2002 - 1.79%; Strategic Growth
Portfolio - 0.66%; Balanced Portfolio - 0.58%; Flexible Income Portfolio -
0.70%; Income Portfolio - 0.79%; Conservative Growth Portfolio - 0.57%.
/(6)/ Total fund operating expenses above are restated to reflect the effect of
voluntary expense waivers/reimbursements through December 31, 1998. Absent
such voluntary waivers/reimbursements, total fund operating expenses would
have been as follows: Money Market - 0.83%; Tax-Exempt Money Market -
0.64%; Short Term High Quality Bond - 1.23%; Target Maturity 2002 - 2.89%;
U.S. Government Securities - 1.05%; California Municipal - 1.12%;
California Insured Intermediate Municipal- 1.18%; Florida Insured
Municipal - 1.31%; Strategic Growth Portfolio - 1.06%; Balanced
Portfolio - 0.98%; Flexible Income Portfolio - 1.10%; Income Portfolio -
1.19%; Conservative Growth Portfolio - 0.97%.
/(7)/ The applicable Rule 12b-1 distribution plan provides for payments of up
to 0.25%. However, the Board of Trustees has not currently authorized
any payments under such plan.
/(8)/ Does not include underlying Fund expenses that the Portfolios bear
indirectly.
6
<PAGE>
EXAMPLES:
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption at the end of each period:
<TABLE>
<CAPTION>
Class A Shares
----------------------------------------
1 Year 3 Years 5 Years 10 Years
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Money Market Fund $ 8 $ 24 $ 42 $ 93
------- ------- ------- -------
Tax-Exempt Money Market Fund $ 6 $ 18 $ 31 $ 69
------- ------- ------- -------
California Money Fund $ 7 $ 23 $ 41 $ 91
------- ------- ------- --------
Short Term High Quality Bond Fund $43 $ 60 $ 79 $133
------- ------- ------- --------
Target Maturity 2002 Fund $26 $ 40 $ 55 $ 98
------- ------- ------- --------
U.S. Government Securities Fund $54 $ 73 $ 94 $153
------- ------- ------- --------
Income Fund $56 $ 78 $102 $171
------- ------- ------- --------
High Yield Fund $58 $ 86 N/A/1/ N/A/1/
------- ------- ------- --------
Tax-Exempt Bond Fund $53 $ 71 $ 90 $145
------- ------- ------- --------
California Municipal Fund $54 $ 75 $ 96 $159
------- ------- ------- --------
California Insured Intermediate Municipal
Fund $53 $ 70 $ 88 $142
------- ------- ------- --------
Florida Insured Municipal Fund $53 $ 70 $ 88 $142
------- ------- ------- --------
Bond & Stock Fund $65 $ 85 $107 $171
------- ------- ------- --------
Growth & Income Fund $65 $ 87 $110 $176
------- ------- ------- --------
Growth Fund $71 $104 $140 $241
------- ------- ------- --------
International Growth Fund $70 $102 $137 $234
------- ------- ------- --------
Northwest Fund $66 $ 88 $113 $183
------- ------- ------- --------
Emerging Growth Fund $70 $103 $138 $236
------- ------- ------- --------
Strategic Growth Portfolio $75 $116 $160 $281
------- ------- ------- --------
Conservative Growth Portfolio $74 $114 $156 $274
------- ------- ------- --------
Balanced Portfolio $72 $109 $148 $257
------- ------- ------- --------
Flexible Income Portfolio $61 $ 94 $129 $229
------- ------- ------- --------
Income Portfolio $61 $ 94 $130 $230
</TABLE>
- --------------------------------------------------------------------------------
/(1)/ The High Yield Fund has no previous operating history, and therefore the
expenses for the 5 year and 10 year periods are not applicable.
7
<PAGE>
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
Class B and Class S Shares/8/
--------------------------------------------------------------------------------
Total Fund
Operating
Management Fees/1/ 12b-1 Fees/2/ Other Expenses/1/ Expenses/1/
------------------- --------------- ------------------ -------------
<S> <C> <C> <C> <C>
Money Market Fund/7/ 0.37%/3/ 1.00% 0.13%5 1.50%/6/
----------- ----------- ----------- -----------
Tax-Exempt Money Market
Fund/7/ 0.36%3 1.00% 0.19% 1.55%/6/
----------- ----------- ----------- -----------
California Money Fund 0.45% 1.00% 0.15%5 1.60%/6/
----------- ----------- ----------- -----------
Short Term High Quality
Bond Fund 0.09%/3/ 1.00% 0.48%5 1.57%/6/
----------- ----------- ----------- -----------
U.S. Government
Securities Fund/7/ 0.50%/3/ 1.00%/4/ 0.17%5 1.67%
----------- ----------- ----------- -----------
Income Fund/7/ 0.63% 1.00%/4/ 0.20%5 1.83%
----------- ----------- ----------- -----------
High Yield Fund 0.63% 1.00% 0.51% 2.14%
----------- ----------- ----------- -----------
Tax-Exempt Bond Fund/7/ 0.50% 1.00%/4/ 0.10%5 1.60%
----------- ----------- ----------- -----------
California Municipal
Fund 0.55%/3/ 1.00% 0.17% 1.72%/6/
----------- ----------- ----------- -----------
California Insured
Intermediate Municipal
Fund 0.34%/3/ 1.00% 0.23% 1.57%6
----------- ----------- ----------- -----------
Florida Insured
Municipal Fund 0.21%/3/ 1.00% 0.36% 1.57%/6/
----------- ----------- ----------- -----------
Bond & Stock Fund/7/ 0.60% 1.00% 0.19% 1.79%
----------- ----------- ----------- -----------
Growth & Income Fund/7/ 0.61% 1.00%/4/ 0.27% 1.88%
----------- ----------- ----------- -----------
Growth Fund 1.07% 1.00% 0.43% 2.50%
----------- ----------- ----------- -----------
International Growth
Fund 0.97% 1.00% 0.50% 2.47%
----------- ----------- ----------- -----------
Northwest Fund/7/ 0.63% 1.00% 0.33% 1.96%
----------- ----------- ----------- -----------
Emerging Growth Fund 1.02% 1.00% 0.53% 2.55%
----------- ----------- ----------- -----------
Strategic Growth
Portfolio/9/ 0.15% 1.00% 0.55%5 1.70%/6/
----------- ----------- ----------- -----------
Conservative Growth
Portfolio/9/ 0.15% 1.00% 0.55%5 1.70%/6/
----------- ----------- ----------- -----------
Balanced Portfolio/9/ 0.15% 1.00% 0.55%5 1.70%/6/
----------- ----------- ----------- -----------
Flexible Income
Portfolio/9/ 0.15% 1.00% 0.55%5 1.70%/6/
----------- ----------- ----------- -----------
Income Portfolio/9/ 0.15% 1.00% 0.55%5 1.70%/6/
</TABLE>
- --------------------------------------------------------------------------------
/(1)/ After voluntary waiverreimbursement where indicated.
/(2)/ 0.25% of the 12b-1 fees shown represent servicing fees which are paid to
the Distributor. Long-term Class B or Class S shareholders may pay more
than the economic equivalent of the maximum front end sales charge
permitted by the National Association of Securities Dealers, Inc.
/(3)/ The Advisor has voluntarily undertaken to waive a portion of its
management fee through at least December 31, 1998. Absent such waiver,
management fees would have been as follows: Money Market - 0.45%; Tax-
Exempt Money Market -0.45%; Short Term High Quality Bond - 0.50%; U.S.
Government Securities -0.63%; California Municipal - 0.70%; California
Insured Intermediate Municipal - 0.70%; Florida Insured Municipal - 0.70%.
/(4)/ Restated to reflect the maximum fee payable under the Fund's Class B
Distribution Plan.
/(5)/ The Advisor and or the administrator has voluntarily undertaken to
reimburse certain expenses. Absent such voluntary reimbursement, "other
expenses" would have been: Money Market - 0.38%; California Money - 0.37%;
Short Term High Quality Bond - 0.51%; U.S. Government Securities - 0.21%;
Income - 0.23%; Tax-Exempt Bond - 0.14%; Strategic Growth Portfolio -
0.66%; Conservative Growth Portfolio - 0.57%; Balanced Portfolio - 0.58%;
Flexible Income Portfolio - 0.70%; Income Portfolio - 0.79%.
/(6)/ Total fund operating expenses above are restated to reflect the effect of
voluntary expense waivers/reimbursements through December 31, 1998. Absent
such voluntary waivers/reimbursements, total fund operating expenses would
have been: Money Market - 1.83%; Tax-Exempt Money Market - 1.64%;
California Money - 1.82%; Short Term High Quality Bond - 2.01%; U.S.
Government Securities - 1.84%; Income - 1.86%; Tax-Exempt Bond - 1.64%;
California Municipal- 1.87%; California Insured Intermediate Municipal -
1.93%; Florida Insured Municipal - 2.06%; Strategic Growth Portfolio -
1.81%; Balanced Portfolio - 1.73%; Flexible Income Portfolio - 1.85%;
Income Portfolio -1.94%; Conservative Growth Portfolio - 1.72%.
/(7)/ Class S shares recently introduced; expenses based on the corresponding
expenses for Class B shares.
/(8)/ The Portfolios offer only Class A and Class B shares.
/(9)/ Does not include underlying Fund expenses that the Portfolios bear
indirectly.
8
<PAGE>
EXAMPLES:
You would pay the following expenses on a $1,000 investment assuming a 5%
annual return and either (1) redemption at the end of each period or (2) no
redemption:
<TABLE>
<CAPTION>
CLASS B AND CLASS S SHARES/2/
Redemption At The End Of Each Period No Redemption
--------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
-------- -------- --------- ---------- -------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market Fund/1/ $65 $ 77 $ 92 $159 $15 $47 $ 82 $159
------ ------- ------- ------- ------ ------ ------ ------
Tax-Exempt Money Market
Fund/1/ $66 $ 79 $ 94 $158 $16 $49 $ 84 $158
------ ------- ------- ------- ------ ------ ------ ------
California Money Fund $66 $ 81 $ 97 $167 $16 $51 $ 87 $167
------ ------- ------- ------- ------ ------ ------ ------
Short Term High Quality
Bond Fund/4/ $66/4/ $ 80/4/ $ 96/4/ $167/4/ $16 $50 $ 86 $167
------ ------- ------- ------- ------ ------ ------ ------
U.S. Government
Securities Fund/1/ $67 $ 83 $101 $178 $17 $53 $ 91 $178
------ ------- ------- ------- ------ ------ ------ ------
Income Fund/1/ $69 $ 88 $109 $195 $19 $58 $ 99 $195
------ ------- ------- ------- ------ ------ ------ ------
High Yield Fund $72 $ 97 N/A/3/ N/A/3/ $22 $67 N/A/3/ N/A/3/
------ ------- ------- ------- ------ ------ ------ ------
Tax-Exempt Bond Fund/1/ $66 $ 81 $ 97 $170 $16 $51 $ 87 $170
------ ------- ------- ------- ------ ------ ------ ------
California Municipal
Fund $67 $ 84 $103 $183 $17 $54 $ 93 $183
------ ------- ------- ------- ------ ------ ------ ------
California Insured
Intermediate Municipal
Fund $66 $ 80 $ 96 $167 $16 $50 $ 86 $167
------ ------- ------- ------- ------ ------ ------ ------
Florida Insured
Municipal Fund $66 $ 80 $ 96 $167 $16 $50 $ 86 $167
------ ------- ------- ------- ------ ------ ------ ------
Bond & Stock Fund/1/ $68 $ 86 $107 $190 $18 $56 $ 97 $190
------ ------- ------- ------- ------ ------ ------ ------
Growth & Income Fund/1/ $69 $ 89 $112 $198 $19 $59 $102 $198
------ ------- ------- ------- ------ ------ ------ ------
Growth Fund $75 $108 $143 $263 $25 $78 $133 $263
------ ------- ------- ------- ------ ------ ------ ------
International Growth
Fund $75 $107 $142 $259 $25 $77 $132 $259
------ ------- ------- ------- ------ ------ ------ ------
Northwest Fund/1/ $70 $ 92 $116 $207 $20 $62 $106 $207
------ ------- ------- ------- ------ ------ ------ ------
Emerging Growth Fund $76 $109 $146 $266 $26 $79 $136 $266
------ ------- ------- ------- ------ ------ ------ ------
Strategic Growth
Portfolio $78 $117 $158 $296 $28 $87 $148 $296
------ ------- ------- ------- ------ ------ ------ ------
Conservative Growth
Portfolio $78 $115 $155 $289 $28 $85 $145 $289
------ ------- ------- ------- ------ ------ ------ ------
Balanced Portfolio $76 $110 $147 $272 $26 $80 $137 $272
------ ------- ------- ------- ------ ------ ------ ------
Flexible Income
Portfolio $74 $104 $137 $252 $24 $74 $127 $252
------ ------- ------- ------- ------ ------ ------ ------
Income Portfolio $74 $104 $137 $253 $24 $74 $127 $253
</TABLE>
- --------------------------------------------------------------------------------
/(1)/ Expenses shown for Class S shares are based on the corresponding expenses
for Class B shares.
/(2)/ The Portfolios offer only Class A and Class B shares.
/(3)/ The High Yield Fund has no previous operating history, and therefore the
expenses for the 5 year and 10 year periods are not applicable.
/(4)/ The Short Term High Quality Bond Fund expenses shown represent Class S
shares. Class B shares have a different CDSC schedule; the Class B
expenses for Short Term High Quality Bond for the 1, 3, 5 and 10 year
periods, assuming redemption at the end of each period, would be as
follows: $56, $70, $86 and $167.
9
<PAGE>
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
Class I Shares
------------------------------------------------------------------------------
Total Fund
Operating
Management Fee/1/ 12b-1 Fees Other Expenses/1/ Expenses/1/
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market Fund/5/ 0.37%/2/ 0.00% 0.13%3 0.50%/4/
----------- ----------- ----------- -----------
Tax-Exempt Money Market
Fund/5/ 0.36%/2/ 0.00% 0.19% 0.55%/4/
----------- ----------- ----------- -----------
California Money Fund 0.45% 0.00% 0.15%3 0.60%/4/
----------- ----------- ----------- -----------
Short Term High Quality
Bond Fund 0.09%/2/ 0.00% 0.48% 0.57%/4/
----------- ----------- ----------- -----------
U.S. Government
Securities Fund/5/ 0.50%/2/ 0.00% 0.17% 0.67%/4/
----------- ----------- ----------- -----------
Income Fund/5/ 0.63% 0.00% 0.20% 0.83%
----------- ----------- ----------- -----------
High Yield Fund 0.63% 0.00% 0.48% 1.11%
----------- ----------- ----------- -----------
Tax-Exempt Bond Fund/5/ 0.50% 0.00% 0.10% 0.60%
----------- ----------- ----------- -----------
California Municipal
Fund 0.55%/2/ 0.00% 0.17% 0.72%/4/
----------- ----------- ----------- -----------
California Insured
Intermediate Municipal
Fund 0.34%/2/ 0.00% 0.23% 0.57%/4/
----------- ----------- ----------- -----------
Florida Insured
Municipal Fund 0.21%/2/ 0.00% 0.36% 0.57%/4/
----------- ----------- ----------- -----------
Bond & Stock Fund/5/ 0.60% 0.00% 0.15% 0.75%
----------- ----------- ----------- -----------
Growth & Income Fund/5/ 0.61% 0.00% 0.19% 0.80%
----------- ----------- ----------- -----------
Growth Fund 1.07% 0.00% 0.34% 1.41%
----------- ----------- ----------- -----------
International Growth
Fund 0.97% 0.00% 0.37% 1.34%
----------- ----------- ----------- -----------
Northwest Fund/5/ 0.63% 0.00% 0.23% 0.86%
----------- ----------- ----------- -----------
Emerging Growth Fund 1.02% 0.00% 0.34% 1.36%
</TABLE>
- --------------------------------------------------------------------------------
/(1)/ After voluntary waiver reimbursement where indicated.
/(2)/ The Advisor has voluntarily undertaken to waive a portion of its
management fee through at least December 31, 1998. Absent such waiver,
management fees would have been as follows: Money Market - 0.45%; Tax-
Exempt Money Market -0.45%; Short Term High Quality Bond - 0.50%; U.S.
Government Securities -0.63%; California Municipal - 0.70%; California
Insured Intermediate Municipal - 0.70%; Florida Insured Municipal - 0.70%.
/(3) The Advisor has voluntarily undertaken to reimburse certain expenses.
Absent such voluntary reimbursement, "other expenses" would have been:
Money Market -0.38% and California Money - 0.28%.
/(4)/ Total fund operating expenses above are restated to reflect the effect of
voluntary expense waivers/reimbursements through December 31, 1998. Absent
such voluntary waivers/reimbursements, total fund operating expenses would
have been: Money Market - 0.83%; Tax-Exempt Money Market - 0.64%;
California Money - 0.73%; Short Term High Quality Bond - 0.98%; U.S.
Government Securities - 0.80%; California Municipal - 0.87%; California
Insured Intermediate Municipal - 0.93%; and Florida Insured Municipal -
1.06%.
/(5)/ Class I shares recently introduced; expenses shown for Class I shares are
based on the corresponding expenses for Class A shares.
10
<PAGE>
EXAMPLES:
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption at the end of each period:
<TABLE>
<CAPTION>
Class I Shares
1 Year 3 Years 5 Years 10 Years
---------------------------------------
<S> <C> <C> <C> <C>
Money Market Fund/1/ $ 5 $16 $ 28 $ 63
------ ------- ------- --------
Tax-Exempt Money Market Fund/1/ $ 6 $18 $ 31 $ 69
------ ------- ------- --------
California Money Fund $ 6 $19 $ 33 $ 75
------ ------- ------- --------
Short Term High Quality Bond Fund $ 6 $18 $ 32 $ 71
------ ------- ------- --------
U.S. Government Securities Fund/1/ $ 7 $21 $ 37 $ 83
------ ------- ------- --------
Income Fund/1/ $ 8 $26 $ 46 $ 103
------ ------- ------- --------
High Yield Fund $11 $35 N/A/2/ N/A/2/
------ ------- ------- --------
Tax-Exempt Bond Fund/1/ $ 6 $19 $ 33 $ 75
------ ------- ------- --------
California Municipal Fund $ 7 $23 $ 40 $ 89
------ ------- ------- --------
California Insured Intermediate Municipal Fund $ 6 $18 $ 32 $ 71
------ ------- ------- --------
Florida Insured Municipal Fund $ 6 $18 $ 32 $ 71
------ ------- ------- --------
Bond & Stock Fund/1/ $ 8 $24 $ 42 $ 93
------ ------- ------- --------
Growth & Income Fund/1/ $ 8 $26 $ 44 $ 99
------ ------- ------- --------
Growth Fund $14 $45 $ 77 $ 169
------ ------- ------- --------
International Growth Fund $14 $42 $ 73 $ 161
------ ------- ------- --------
Northwest Fund/1/ $ 9 $27 $ 48 $ 106
------ ------- ------- --------
Emerging Growth Fund $14 $43 $ 75 $ 164
</TABLE>
- --------------------------------------------------------------------------------
/(1)/ Expenses shown for Class I shares are based on the corresponding expenses
for Class A shares.
/(2)/ The High Yield Fund has no previous operating history, and therefore the
expenses for the 5 year and 10 year periods are not applicable.
As required by SEC regulations, the Examples assume 5% annual return and
constant expenses at the rates shown in the table. Actual performance and
expenses will vary. The expense examples for the Portfolios are based on the
direct expenses of each Portfolio plus a weighted average of the expense ratios
of the Funds based on current allocations. A person who purchases shares
through an account with a broker, dealer or investment advisor may be charged
separate fees by that institution in addition to those set forth above. The
Examples should not be considered a representation of past or future expenses
or performance.
Investors in the Portfolios should recognize that they may invest directly in
the Funds if they do not wish to participate in the Portfolios' asset
allocation strategies of investing in Funds. Through the Portfolios, investors
will bear not only their proportionate share of the expenses of the Portfolios
(including operating costs and investment advisory and administrative fees) but
will also indirectly bear similar expenses of Class I shares (Class A, in the
case of WM Prime Income Fund) of the Funds in which the Portfolios invest. See
"WM Strategic Asset Management Portfolios--A Note on The Prime Income Fund."
The WM Prime Income Fund (the "Prime Income Fund") is a non-diversified,
closed-end management investment company in which each of the Portfolios except
for the Strategic Growth Portfolio may invest. Class I shares of the Funds are
not subject to any sales load or distribution or shareholder service fees. The
sales load applicable to investments in the Class A shares of the Prime Income
Fund is waived in the case of purchases by the Portfolios.
11
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights set forth below and on the following pages present
certain information and ratios as well as performance information for each of
the Funds and Portfolios. Additional information about the performance of the
Funds and Portfolios is contained in the Funds' and Portfolios' Annual Reports
to Shareholders, which may be obtained by shareholders without charge from WM
Funds Distributor, Inc. (the "Distributor"). The information provided below for
each of the Funds within WM Trust I has been audited by LeMaster & Daniels
PLLC, whose report on such Funds' financial statements is incorporated by
reference into the SAI and may be obtained by shareholders by calling 800-222-
5852. Except as otherwise noted, the information provided below for each of the
Funds within WM Trust II and each of the Portfolios has been audited by Price
Waterhouse LLP, whose reports on such Funds' and Portfolios' financial
statements are incorporated by reference into the SAI and may be obtained by
shareholders by calling 800-222-5852.
The following schedules of financial highlights for each of the Funds and
Portfolios set forth below are for shares outstanding throughout the periods
listed.
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
-----------------------------------------------------------
Net Realized
Net Asset & Unrealized Dividends
Value, Net Gain/(Loss) Total From From Net
Beginning Investment on Investment Investment
FUND Of Period Income/(Loss) Investments Operations Income
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MONEY MARKET FUND
Class A Shares
Year ended
12/31/97 $1.0000 $0.0493 $ - $0.0493 $(0.0493)
Year ended
12/31/96 1.0000 0.0476 - 0.0476 (0.0476)
Year ended
12/31/95 1.0000 0.0519 - 0.0519 (0.0519)
Year ended
12/31/94 1.0000 0.0341 - 0.0341 (0.0341)
Year ended
12/31/93 1.0000 0.0238 - 0.0238 (0.0238)
Year ended
12/31/92 1.0000 0.0302 - 0.0302 (0.0302)
Year ended
12/31/91 1.0000 0.0526 - 0.0526 (0.0526)
Year ended
12/31/90 1.0000 0.0733 - 0.0733 (0.0733)
Year ended
12/31/89 1.0000 0.0826 - 0.0826 (0.0826)
Year ended
12/31/88 1.0000 0.0668 - 0.0668 (0.0668)
Class B Shares
Year ended
12/31/97 1.0000 0.0407 - 0.0407 (0.0407)
Year ended
12/31/96 1.0000 0.0384 - 0.0384 (0.0384)
Year ended
12/31/95 1.0000 0.0421 - 0.0421 (0.0421)
Period ended
12/31/94/1/ 1.0000 0.0184 - 0.0184 (0.0184)
TAX-EXEMPT
MONEY MARKET FUND
Class A Shares
Year ended
12/31/97 $1.0000 $0.0314 $ - $0.0314 $(0.0314)
Year ended
12/31/96 1.0000 0.0301 - 0.0301 (0.0301)
Year ended
12/31/95 1.0000 0.0339 0.0054 0.0393 (0.0339)
Year ended
12/31/94 1.0000 0.0235 - 0.0235 (0.0235)
Year ended
12/31/93 1.0000 0.0203 - 0.0203 (0.0203)
Year ended
12/31/92 1.0000 0.0238 - 0.0238 (0.0238)
Year ended
12/31/91 1.0000 0.0410 - 0.0410 (0.0410)
Year ended
12/31/90 1.0000 0.0561 - 0.0561 (0.0561)
Year ended
12/31/89 1.0000 0.0587 - 0.0587 (0.0587)
Period ended
12/31/88* 1.0000 0.0381 - 0.0381 (0.0381)
Class B Shares
Year ended
12/31/97 1.0000 0.0223 - 0.0223 (0.0223)
Year ended
12/31/96 1.0000 0.0199 - 0.0199 (0.0199)
Year ended
12/31/95 1.0000 0.0226 0.0054 0.0280 (0.0226)
Period ended
12/31/94/1/ 1.0000 0.0097 - 0.0097 (0.0097)
-----------------------------------------------------------
==============================================================================
</TABLE>
* The Fund commenced operations on January 28, 1988.
Footnotes appear on page 40.
12
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Ratio Ratio
Distributions Net Asset Net Assets of Expenses of Net Income
from Net Value End of to to
Realized Total End of Total Year Average Net Average Net
Gains Distributions Year Return (in thousands) Assets/4/ Assets
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ - $(0.0493) $1.0000 5.04% $260,877 0.75% 4.93%
- (0.0476) 1.0000 4.88 229,355 0.79 4.77
- (0.0519) 1.0000 5.33 171,225 0.92 5.19
- (0.0341) 1.0000 3.47 125,651 0.95 3.39
- (0.0238) 1.0000 2.41 135,187 0.97 2.38
- (0.0302) 1.0000 3.07 141,193 0.88 3.04
- (0.0526) 1.0000 5.41 178,741 0.93 5.33
- (0.0733) 1.0000 7.61 252,051 0.97 7.33
- (0.0826) 1.0000 8.60 256,017 1.06 8.26
- (0.0668) 1.0000 6.85 180,130 1.01 6.68
- (0.0407) 1.0000 4.15 471 1.59 4.15
- (0.0384) 1.0000 3.91 117 1.69 3.87
- (0.0421) 1.0000 4.30 74 1.94 4.19
- (0.0184) 1.0000 2.78/2/ 11 1.93/2/ 3.29/2/
$ - $ 0.0314 $1.0000 3.18% $ 32,134 0.57% 3.14%
- (0.0301) 1.0000 3.05 31,974 0.57 3.01
(0.0054) (0.0393) 1.0000 4.01 30,988 0.61 3.39
- (0.0235) 1.0000 2.37 33,612 0.60 2.33
- (0.0203) 1.0000 2.06 34,513 0.50 2.03
- (0.0238) 1.0000 2.41 32,425 0.57 2.36
- (0.0410) 1.0000 4.19 40,060 0.44 4.11
- (0.0561) 1.0000 5.77 43,379 0.24 5.60
- (0.0587) 1.0000 6.05 25,113 0.09 5.97
- (0.0381) 1.0000 4.10/2/ 8,031 0.75 3.81
- (0.0223) 1.0000 2.26 12 1.50 2.32
- (0.0199) 1.0000 2.01 2 1.53 1.99
(0.0054) (0.0280) 1.0000 2.83 1 1.73 2.12
- (0.0097) 1.0000 1.45/2/ 1 1.66/2/ 1.38/2/
- -----------------------------------------------------------------------------------------
=========================================================================================
</TABLE>
13
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Net Realized
& Distributions Distributions
Net Asset Unrealized Dividends In Excess Distributions In Excess
Value, Net Gain/(Loss) Total From From Net Of Net from Net Of Net
Beginning Investment on Investment Investment Investment Realized Realized
FUND Of Period Income/(Loss) Investments Operations Income Income Gains Gains
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CALIFORNIA MONEY FUND
Class A Shares
Six months ended
12/31/97 (Unaudited) $1.00 $0.014/7/ $ - $0.014 $(0.014) $ - $ - $ -
Year ended 6/30/97 1.00 0.028 - 0.028 (0.028) - - -
Year ended 6/30/96 1.00 0.029 - 0.029 (0.029) - - -
Year ended 6/30/95 1.00 0.028 - 0.028 (0.028) - - -
Year ended 6/30/94 1.00 0.018 - 0.018 (0.018) - - -
Year ended 6/30/93 1.00 0.021 - 0.021 (0.021) - - -
Year ended 6/30/92 1.00 0.033 - 0.033 (0.033) - - -
Year ended 6/30/91 1.00 0.044 - 0.044 (0.044) - - -
Period ended 6/30/90* 1.00 0.046 - 0.046 (0.046) - - -
Class B Shares
Six months ended
12/31/97 (Unaudited) 1.00 0.010/7/ - 0.010 (0.010) - - -
Year ended 6/30/97 1.00 0.020 - 0.020 (0.020) - - -
Year ended 6/30/96 1.00 0.022 - 0.022 (0.022) - - -
Year ended 6/30/95+ 1.00 0.020 - 0.020 (0.020) - - -
Class I Shares
Six months ended
12/31/97 (Unaudited) 1.00 0.015/7/ - 0.015 (0.015) - - -
Period ended 6/30/97+ 1.00 0.028 - 0.028 (0.028) - - -
Class S Shares
Six months ended
12/31/97 (Unaudited) 1.00 0.010/7/ - 0.010 (0.010) - - -
Year ended 6/30/97 1.00 0.020 - 0.020 (0.020) - - -
Year ended 6/30/96 1.00 0.022 - 0.022 (0.022) - - -
Year ended 6/30/95+ 1.00 0.020 - 0.020 (0.020) - - -
--------------------------------------------------------------------------------------------------
==========================================================================================================================
</TABLE>
* The Fund commenced operations on July 10, 1989.
Footnotes appear on page 40.
14
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Net Investment
Income/(Loss)
Per Share
Without
Fee Waivers,
Ratio of Expenses
Ratio of Net Absorbed
Net Asset Operating Investment and/or Credits
Distributions Value, Net Assets Expenses to Income to Portfolio Allowed
From Total End Total End Of Period Average Average Turnover by the
Capital Distributions of Period Return/5/ (in thousands) Net Assets Net Assets Rate Custodian
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ - $(0.014) $1.00 1.41% $ 40,570 0.85%/2/ 2.78%/2/ -% $0.013/7/,/8/
- (0.028) 1.00 2.81 42,923 0.85 2.75 - 0.025
- (0.029) 1.00 3.00 51,211 0.85 2.94 - 0.026
- (0.028) 1.00 2.79 48,836 0.85 2.73 - 0.025
- (0.018) 1.00 1.81 62,500 0.85 1.80 - 0.014
- (0.021) 1.00 2.07 68,404 0.85 2.06 - 0.016
- (0.033) 1.00 3.35 94,607 0.85 3.31 - 0.029
- (0.044) 1.00 4.52 113,392 0.83 4.48 - 0.037
- (0.046) 1.00 4.64 147,487 1.00/2/ 5.07/2/ - 0.040
- (0.010) 1.00 1.01 62 1.60/2/ 2.03/2/ - 0.009/7/,/8/
- (0.020) 1.00 2.03 68 1.60 2.00 - 0.017
- (0.022) 1.00 2.22 147 1.60 2.19 - 0.019
- (0.020) 1.00 2.04 79 1.60 1.98 - 0.017
- (0.015) 1.00 1.54 1 0.60/2/ 3.03/2/ - 0.014/7/,/8/
- (0.028) 1.00 2.89 1 0.60/2/ 3.00/2/ - 0.025
- (0.010) 1.00 1.01 1 1.60/2/ 2.03/2/ - 0.009/7/,/8/
- (0.020) 1.00 2.03 1 1.60 2.00 - 0.017
- (0.022) 1.00 2.22 10 1.60 2.19 - 0.019
- (0.020) 1.00 2.04 10 1.60 1.98 - 0.017
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Ratio of
Operating
Expenses
to Average
Ratio of Net Assets
Operating Without Fee
Expenses Waivers,
to Average Expenses
Net Assets Absorbed
Without and/or
Credits Credits
Allowed Allowed
by the by the
Custodian Custodian
- ---------------------------------
<S> <C>
0.85%/2/,/8/ 1.12%/2/,/8/
N/A 1.14
N/A 1.14
N/A 1.15
N/A 1.27
N/A 1.29
N/A 1.28
N/A 1.48
N/A 1.64/2/
1.60/2/,/8/ 1.87/2/,/8/
N/A 1.89
N/A 1.89
N/A 1.90
0.60/2/,/8/ 0.87/2/,/8/
N/A 0.89/2/
1.60/2/,/8/ 1.87/2/,/8/
N/A 1.89
N/A 1.89
N/A 1.90
- --------------------------------------------------------------------------------------------------------------------
====================================================================================================================
</TABLE>
15
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
-------------------------------------------------------
Net Realized
Net Asset & Unrealized
Value, Net Gain/(Loss) Total From
Beginning Investment on Investment
FUND Of Period Income/(Loss) Investments Operations
-------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME FUND
Class A Shares
Year ended 12/31/97 $9.15 $0.60 $ 0.33 $ 0.93
Year ended 12/31/96 9.44 0.59 (0.29) 0.30
Year ended 12/31/95 8.29 0.59 1.15 1.74
Year ended 12/31/94 9.33 0.60 (1.04) (0.44)
Year ended 12/31/93 8.99 0.61 0.34 0.95
Three months ended 12/31/92* 9.17 0.16 (0.18) (0.02)
Year ended 9/30/92 8.68 0.65 0.49 1.14
Year ended 9/30/91 8.12 0.68 0.56 1.24
Year ended 9/30/90 8.51 0.74 (0.39) 0.35
Year ended 9/30/89 8.87 0.91 (0.36) 0.55
Year ended 9/30/88 9.04 0.95 (0.17) 0.78
Class B Shares
Year ended 12/31/97 9.17 0.53 0.32 0.85
Year ended 12/31/96 9.46 0.52 (0.29) 0.23
Year ended 12/31/95 8.30 0.51 1.16 1.67
Period ended 12/31/94/2/ 8.85 0.40 (0.55) (0.15)
-------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
*Change in the Fund's fiscal year end.
Footnotes appear on page 40.
16
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Ratio Ratio
Dividends Net Asset Net Assets, of Expenses of Net Income
From Net Value End of to to Portfolio
Investment End of Total Period Average Net Average Net Turnover
Income Period Return/3/ (in thousands) Assets/4/ Assets Rate
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$(0.60) $9.48 10.51% $ 77,864 1.08% 6.47% 27%
(0.59) 9.15 3.46 86,657 1.03 6.52 42
(0.59) 9.44 21.58 97,534 1.08 6.59 43
(0.60) 8.29 (4.82) 88,102 1.04 6.83 26
(0.61) 9.33 10.82 104,876 1.08 6.58 51
(0.16) 8.99 (0.23) 86,425 0.95/2/ 6.94/2/ 87/2/
(0.65) 9.17 13.57 84,995 1.05 7.26 47
(0.68) 8.68 15.93 73,342 1.04 8.16 106
(0.74) 8.12 4.32 66,648 1.04 8.97 64
(0.91) 8.51 6.58 126,088 0.96 10.53 37
(0.95) 8.87 9.02 162,956 1.01 10.56 47
(0.53) 9.49 9.51 9,691 1.86 5.65 27
(0.52) 9.17 2.59 7,122 1.89 5.69 42
(0.51) 9.46 20.70 4,452 1.91 5.73 43
(0.40) 8.30 (1.67) 2,299 1.80/2/ 6.25/2/ 26
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
------------------------------------------------------------------------------------------------------------
<CAPTION>
Net Realized Distributions Distributions Distributions
Net Asset & Unrealized Dividends In Excess From In Excess
Value, Net Gain/(Loss) Total From From Net Of Net Net Of Net
Beginning Investment on Investment Investment Investment Realized Realized
FUND Of Period Income/(Loss) Investments Operations Income Income Gains Gains
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHORT TERM HIGH QUALITY
BOND FUND
Class A Shares
Six months ended
12/31/97 (Unaudited) $2.32 $0.07/7/ $ 0.00/6/ $ 0.07 $(0.07) $ - $ - $ -
Year ended 6/30/97 2.32 0.14 0.00/6/ 0.14 (0.14) - - -
Year ended 6/30/96 2.35 0.15/7/ (0.03) 0.12 (0.15) - - -
Year ended 6/30/95 2.39 0.08 0.02 0.10 (0.08) (0.06) - -
Period ended 6/30/94* 2.50 0.09 (0.11) (0.02) (0.09) - - -
Class B Shares
Six months ended
12/31/97 (Unaudited) 2.32 0.06/7/ 0.00/6/ 0.06 (0.06) - - -
Year ended 6/30/97 2.32 0.12 0.00/6/ 0.12 (0.12) - - -
Year ended 6/30/96 2.35 0.13/7/ (0.03) 0.10 (0.13) - - -
Year ended 6/30/95+ 2.39 0.06 0.02 0.08 (0.06) (0.06) - -
Class I Shares
Six months ended
12/31/97 (Unaudited) 2.32 0.08/7/ 0.00/6/ 0.08 (0.08) - - -
Period ended 6/30/97+ 2.32 0.14 0.00/6/ 0.14 (0.14) - - -
Class S Shares
Six months ended
12/31/97 (Unaudited) 2.32 0.06/7/ 0.00/6/ 0.06 (0.06) - - -
Year ended 6/30/97 2.32 0.12 0.00/6/ 0.12 (0.12) - - -
Year ended 6/30/96 2.35 0.13/7/ (0.03) 0.10 (0.13) - - -
Year ended 6/30/95+ 2.39 0.06 0.02 0.08 (0.06) (0.06) - -
------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*The Fund commenced operations on November 1, 1993.
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
--------------------------------------------------------------------------------------------------------
<CAPTION>
Net Realized
Net Asset & Unrealized Dividends Distributions Net Asset
Value, Net Gain/(Loss) Total From From Net from Net Value
Beginning Investment on Investment Investment Realized Total End of
FUND Of Period Income/(Loss) Investments Operations Income Gains Distributions Period
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TARGET MATURITY 2002
FUND
Class A Shares
Six months ended
12/31/97 (Unaudited) $10.69 $0.31/7/ $ 0.33 $0.64 $(0.73) $(0.11) $(0.84) $10.49
Year ended 6/30/97 10.72 0.62/7/ 0.11 0.73 (0.71) (0.05) (0.76) 10.69
Year ended 6/30/96 10.78 0.63 (0.30) 0.33 (0.39) - (0.39) 10.72
Period ended 6/30/95* 10.00 0.12 0.66 0.78 - - - 10.78
--------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Fund commenced operations on March 20, 1995.
Footnotes appear on page 40.
18
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Net Investment
Income/(Loss)
Per Share
Without
Fee Waivers,
Expenses
Ratio of Absorbed
Net Assets Ratio of Net and/or
Net Asset End Operating Investment Credits
Distributions Value, Of Expenses Income to Portfolio Allowed
From Total End Of Total Period to Average Average Turnover by the
Capital Distributions Period Return/5/ (in thousands) Net Assets Net Assets Rate Custodian
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Ratio of
Operating
Expenses
to Average
Ratio of Net Assets
Operating Without
Expenses Fee Waivers,
to Average Expenses
Net Assets Absorbed
Without and/or
Credit Credit
Distributions Allowed Allowed
From by the by the
Capital Custodian Custodian
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$ - $(0.07) $2.32 3.15% $ 9,436 0.90%/2/ 6.29%/2/ 19% 0.07/7/,/8/
$ - 0.90%/2/,/8/ 1.55%/2/,/8/
- (0.14) 2.32 6.15 13,685 0.82 6.50 51 0.13/8/
(0.00)/6/,/1//1/ (0.15) 2.32 5.05 32,440 0.75 6.22 225 0.13/7/,/8/
- 0.82/8/ 1.45/8/
(0.00)/6/,/1//1/ 0.75/8/ 1.42/8/
(0.00)/6/,/1//1/ (0.14) 2.35 4.42 43,811 0.75 6.10 137 0.07
- (0.09) 2.39 (0.73) 21,771 0.00/2/ 5.70/2/ 95 0.06
(0.00)/6/,/1//1/ N/A 1.39
- N/A 1.61/2/
- (0.06) 2.32 2.76 2,523 1.65/2/ 5.54/2/ 19 0.06/7/,/8/
- 1.65/2/,/8/ 2.30/2/,/8/
- (0.12) 2.32 5.37 2,994 1.57 5.75 51 0.11/8/
(0.00)/6/,/1//1/ (0.13) 2.32 4.27 3,437 1.50 5.47 225 0.11/7/,/8/
- 1.57/8/ 2.20/8/
(0.00)/6/,/1//1/ 1.50/8/ 2.17/8/
(0.00)/6/,/1//1/ (0.12) 2.35 3.64 3,015 1.50 5.35 137 0.05
(0.00)/6/,/1//1/ N/A 2.14
- (0.08) 2.32 3.28 2,330 0.65/2/ 6.54/2/ 19 0.08/7/,/8/
- 0.65/2/,/8/ 1.30/2/,/8/
- (0.14) 2.32 5.94 2,752 0.57/2/ 6.75/2/ 51 0.13/8/
- 0.57/8/ 1.20/8/
- (0.06) 2.32 2.76 399 1.65/2/ 5.54/2/ 19 0.06/7/,/8/
- 1.65/2/,/8/ 2.30/2/,/8/
- (0.12) 2.32 5.37 800 1.57 5.75 51 0.11/8/
(0.00)/6/,/1//1/ (0.13) 2.32 4.27 3,531 1.50 5.47 225 0.11/7/,/8/
- 1.57/8/ 2.20/8/
(0.00)/6/,/1//1/ 1.50/8/ 2.17/8/
(0.00)/6/,/1//1/ (0.12) 2.35 3.64 2,303 1.50 5.35 137 0.05
(0.00)/6/,/1//1/ N/A 2.14
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
Ratio of
Operating
Expenses Net
to Average Investment
Ratio of Net Assets Income Per
Operating Without Share Without
Expenses to Fee Waivers, Fee Waivers,
Average Net Expenses Expenses
Assets Absorbed Absorbed
Ratio of Ratio of Net Without and/or and/or
Net Assets, Operating Investment Credits Credits Credits
End Of Expenses to Income to Portfolio Allowed Allowed Allowed
Total Period Average Average Turnover by the by the by the
Return/5/ (in thousands) Net Assets Net Assets Rate Custodian Custodian Custodian
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
6.04% $2,655 0.62%/2/ 5.55%/2/ 0% 0.62%/2/,/8/ 2.73%/2/,/8/ $0.19/7/,/8/
6.95 2,816 0.64 5.80 0 0.72/8/ 2.89/8/ 0.39/7/,/8/
2.91 3,125 0.62 5.66 5 0.70/8/ 2.55/8/ 0.41/8/
7.80 2,626 0.74/2/ 5.22/2/ 0 N/A 4.71/2/ 0.03
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
------------------------------------------------------------
Net Asset Net Realized Dividends
Value, Net & Unrealized Total From From Net
Beginning Investment Gain/(Loss) Investment Investment
FUND Of Period Income/(Loss) on Investments Operations Income
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
SECURITIES FUND
Class A Shares
Year ended
12/31/97 $10.46 $0.62 $ 0.38 $ 1.00 $(0.62)
Year ended
12/31/96 10.84 0.63 (0.38) 0.25 (0.63)
Year ended
12/31/95 9.64 0.63 1.20 1.83 (0.63)
Year ended
12/31/94 10.79 0.63 (1.15) (0.52) (0.63)
Year ended
12/31/93 10.63 0.69 0.16 0.85 (0.69)
Ten months ended
12/31/92* 10.53 0.62 0.10 0.72 (0.62)
Year ended
2/29/92 10.17 0.79 0.36 1.15 (0.79)
Year ended
2/28/91 9.90 0.84 0.27 1.11 (0.84)
Year ended
2/28/90 9.63 0.88 0.27 1.15 (0.88)
Year ended
2/28/89 10.25 0.91 (0.62) 0.29 (0.91)
Year ended
2/29/88 10.61 0.91 (0.36) 0.55 (0.91)
Class B
Year ended
12/31/97 10.46 0.54 0.38 0.92 (0.54)
Year ended
12/31/96 10.84 0.54 (0.38) 0.16 (0.54)
Year ended
12/31/95 9.64 0.54 1.20 1.74 (0.54)
Period ended
12/31/94/1/ 10.24 0.41 (0.60) (0.19) (0.41)
-----------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
* Change in the Fund's fiscal year end.
Footnotes appear on page 40.
20
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Net Asset Net Assets Ratio of Ratio of
Value End of Expenses Net Income Portfolio
End of Total Period to Average to Average Turnover
Period Return/3/ (in thousands) Net Assets/4/ Net Assets Rate
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10.84 9.92% $107,054 1.05% 5.92% 6%
10.46 2.48 138,159 0.97 6.01 16
10.84 19.45 177,310 1.01 6.08 8
10.79 8.12 268,112 0.99 6.29 51
10.63 7.03 207,501 0.99/2/ 6.98 11
10.53 11.72 141,377 1.01 7.63 17
10.17 11.72 92,293 1.03 8.43 66
9.64 (4.91) 188,068 0.97 6.19 34
9.90 12.31 83,360 0.99 8.86 19
9.63 2.94 79,920 0.88 9.14 41
10.25 6.63 89,385 0.88 9.03 43
10.84 9.03 3,352 1.84 5.08 6
10.46 1.58 2,963 1.85 5.14 16
10.84 18.48 2,206 1.84 5.20 8
9.64 (1.86) 1,063 1.76/2/ 5.43/2/ 34
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
21
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
-----------------------------------------------------------------------
Net Realized
Net Asset & Unrealized Dividends Distribution
Value, Net Gain/(Loss) Total From From Net From
Beginning Investment on Investment Investment Capital
FUND Of Period Income/(Loss) Investments Operations Income Gains
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TAX-EXEMPT
BOND FUND
Class A
Shares
Year ended
12/31/97 $7.83 $0.38 $ 0.27 $ 0.65 $(0.38) $(0.01)
Year ended
12/31/96 8.02 0.38 (0.19) 0.19 (0.38) -
Year ended
12/31/95 7.13 0.38 0.89 1.27 (0.38) -
Year ended
12/31/94 8.04 0.39 (0.91) (0.52) (0.39) -
Year ended
12/31/93 7.58 0.40 0.54 0.94 (0.40) (0.08)
Year ended
12/31/92 7.42 0.42 0.23 0.65 (0.42) (0.07)
Year ended
12/31/91 7.16 0.45 0.34 0.79 (0.45) (0.08)
Year ended
12/31/90 7.17 0.47 (0.01) 0.46 (0.47) -
Year ended
12/31/89 7.20 0.50 0.07 0.57 (0.50) (0.10)
Year ended
12/31/88 7.02 0.52 0.20 0.72 (0.52) (0.02)
Class B
Shares
Year ended
12/31/97 7.83 0.32 0.27 0.59 (0.32) (0.01)
Year ended
12/31/96 8.02 0.31 (0.19) 0.12 (0.31) -
Year ended
12/31/95 7.13 0.32 0.89 1.21 (0.32) -
Period
ended
12/31/94/1/ 7.49 0.25 (0.36) (0.11) (0.25) -
---------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
Footnotes appear on page 40.
22
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Ratio of Ratio of Net
Net Asset Net Assets, Operating Investment
Value End of Expenses to Income to Portfolio
Total End Total Period Average Average Turnover
Distributions Of Period Return/3/ (in thousands) Net Assets/4/ Net Assets Rate
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$(0.39) $8.09 8.59% $188,021 0.80% 4.84% 21%
(0.38) 7.83 2.52 203,606 0.75 4.90 22
(0.38) 8.02 18.25 230,055 0.81 5.03 8
(0.39) 7.13 (6.53) 215,438 0.79 5.23 12
(0.48) 8.04 12.54 259,045 0.81 4.97 19
(0.49) 7.58 9.00 186,861 0.78 5.56 30
(0.53) 7.42 11.36 140,154 0.77 6.16 83
(0.47) 7.16 6.71 111,462 0.77 6.65 115
(0.60) 7.17 8.08 104,208 0.80 6.85 104
(0.54) 7.20 10.66 94,156 0.80 7.34 47
(0.33) 8.09 7.71 8,110 1.62 4.00 21
- 7.83 1.61 5,266 1.65 4.01 22
- 8.02 17.30 2,682 1.62 4.18 8
- 7.13 (1.46) 1,258 1.58/2/ 4.53/2/ 12
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
-------------------------------------------------------------------------------------------------------------------
Net Realized Distributions Distributions
Net Asset & Unrealized Dividends in Excess Distributions In Excess
Value, Net Gain/(Loss) Total From From Net Of Net from Net Of Net Distributions
Beginning Investment on Investment Investment Investment Realized Realized From
FUND Of Period Income/(Loss) Investments Operations Income Income Gains Gains Capital
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CALIFORNIA
MUNICIPAL FUND
Class A Shares
Six months
ended 12/31/97
(Unaudited) $10.92 $0.30/7/ $ 0.43 $ 0.73 $(0.30) $ - $ - $ - $ -
Class A Shares
Six months
ended 12/31/97
(Unaudited) $ -
Year ended
6/30/97 10.60 0.59 0.32 0.91 (0.59) - - - -
Year ended
6/30/96 10.53 0.60/7/ 0.07 0.67 (0.60) - - - -
Year ended
6/30/97 -
Year ended
6/30/96 -
Year ended
6/30/95 10.38 0.61 0.15 0.76 (0.61) - (0.00)/6/ - -
Year ended
6/30/94 11.22 0.61 (0.82) (0.21) (0.61) (0.00)/6/ - (0.02) -
Year ended
6/30/95 -
Year ended
6/30/94 -
Year ended
6/30/93 10.45 0.62 0.77 1.39 (0.62) - - - -
Year ended
6/30/92 10.07 0.65 0.38 1.03 (0.65) - - - -
Year ended
6/30/93 -
Year ended
6/30/92 -
Year ended
6/30/91 10.01 0.63 0.06 0.69 (0.63) - - - -
Period ended
6/30/90* 10.00 0.57 0.01 0.58 (0.57) - - - -
Year ended
6/30/91 -
Period ended
6/30/90* -
Class B Shares
Six months
ended 12/31/97
(Unaudited) 10.92 0.25/7/ 0.43 0.68 (0.25) - - - -
Class B Shares
Six months
ended 12/31/97
(Unaudited) -
Year ended
6/30/97 10.60 0.51 0.32 0.83 (0.51) - - - -
Year ended
6/30/96 10.53 0.51/7/ 0.07 0.58 (0.51) - - - -
Year ended
6/30/97 -
Year ended
6/30/96 -
Year ended
6/30/95+ 10.38 0.53 0.15 0.68 (0.53) - (0.00)/6/ - -
Year ended
6/30/95+ -
Class I Shares
Six months
ended 12/31/97
(Unaudited) 10.92 0.31/7/ 0.43 0.74 (0.31) - - - -
Class I Shares
Six months
ended 12/31/97
(Unaudited) -
Period ended
6/30/97+ 10.62 0.58 0.30 0.88 (0.58) - - - -
Period ended
6/30/97+ -
Class S Shares
Six months
ended 12/31/97
(Unaudited) 10.92 0.25/7/ 0.43 0.68 (0.25) - - - -
Class S Shares
Six months
ended 12/31/97
(Unaudited) -
Year ended
6/30/97 10.60 0.51 0.32 0.83 (0.51) - - - -
Year ended
6/30/96 10.53 0.51/7/ 0.07 0.58 (0.51) - - - -
Year ended
6/30/97 -
Year ended
6/30/96 -
Year ended
6/30/95+ 10.38 0.53 0.15 0.68 (0.53) - $(0.00)/6/ - -
- ----------------------------------------------------------------------------------------------------------------------------------
CALIFORNIA
INSURED
INTERMEDIATE
MUNICIPAL FUND
Class A Shares
Six months
ended 12/31/97
(Unaudited) $10.74 $0.25 $ 0.22 $ 0.47 $(0.25) $ - $(0.10) $ - $ -
Class A Shares
Six months
ended 12/31/97
(Unaudited) $ -
Year ended
6/30/97 10.56 0.49/7/ 0.23 0.72 (0.49) - (0.05) - -
Year ended
6/30/96 10.45 0.49 0.15 0.64 (0.49) - (0.04) - -
Year ended
6/30/97 -
Year ended
6/30/96 -
Year ended
6/30/95 10.10 0.50 0.35 0.85 (0.50) - - - -
Year ended
6/30/94** 10.00 0.11 0.11/9/ 0.22 (0.11) - (0.01) - -
Year ended
6/30/95 -
Year ended
6/30/94** -
Class B Shares
Six months
ended 12/31/97
(Unaudited) 10.74 0.20 0.22 0.42 (0.20) - (0.10) - -
Class B Shares
Six months
ended 12/31/97
(Unaudited) -
Year ended
6/30/97 10.56 0.41/7/ 0.23 0.64 (0.41) - (0.05) - -
Year ended
6/30/96 10.45 0.41 0.15 0.56 (0.41) - (0.04) - -
Year ended
6/30/97 -
Year ended
6/30/96 -
Year ended
6/30/95+ 10.10 0.43 0.35 0.78 (0.43) - - - -
Year ended
6/30/95+ -
Class I Shares
Six months
ended 12/31/98
(Unaudited) 10.74 0.26 0.22 0.48 (0.26) - (0.10) - -
Class I Shares
Six months
ended 12/31/98
(Unaudited) -
Period ended
6/30/97+ 10.58 0.49/7/ 0.21 0.70 (0.49) - (0.05) - -
Period ended
6/30/97+ -
Class S Shares
Six months
ended 12/31/98
(Unaudited) 10.74 0.20 0.22 0.42 (0.20) - (0.10) - -
Class S Shares
Six months
ended 12/31/98
(Unaudited) -
Year ended
6/30/97 10.56 0.41/7/ 0.23 0.64 (0.41) - (0.05) - -
Year ended
6/30/96 10.45 0.41 0.15 0.56 (0.41) - (0.04) - -
Year ended
6/30/97 -
Year ended
6/30/96 -
Year ended
6/30/95+ 10.10 0.43 0.35 0.78 (0.43) - - - -
-------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Fund commenced operations on July 25, 1989.
** The Fund commenced operations on April 4, 1994.
Footnotes appear on page 40.
24
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of
Net Operating
Investment Expenses
Income/(Loss) to Average
Per Share Ratio of Net Assets
Without Operating Without
Fee Waivers, Expenses Fee Waivers,
Expenses to Average Expenses
Absorbed Net Assets Absorbed
Ratio Of Ratio of Net and/or Without and/or
Net Asset Net Assets Operating Investment Credits Credits Credits
Value End Of Expenses to Income to Portfolio Allowed Allowed Allowed
Total End Of Total Period Average Average Turnover by the by the by the
Distributions Period Return/5/ (in thousands) Net Assets Net Assets Rate Custodian Custodian Custodian
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
$(0.30) $11.35 6.73% $315,550 1.00%/2/ 5.26%/2/ 29% $0.29/7/,/8/ 1.00%/2/,/8/ 1.24%/2/,/8/
(0.59) 10.92 8.83 318,251 0.97 5.51 36 0.56/8/ 0.97/8/ 1.26/8/
(0.60) 10.60 6.40 372,177 0.94 5.56 17 0.56/7/,/8/ 0.94/8/ 1.29/8/
(0.61) 10.53 7.57 405,967 0.85 5.89 22 0.56 N/A 1.29
(0.63) 10.38 (2.19) 509,223 0.79 5.45 50 0.54 N/A 1.39
(0.62) 11.22 13.84 511,364 0.80 5.74 41 0.56 N/A 1.41
(0.65) 10.45 10.56 309,146 0.94 6.08 29 0.60 N/A 1.40
(0.63) 10.07 7.16 202,595 1.05 6.30 16 0.58 N/A 1.60
(0.57) 10.01 5.99 92,972 1.01/2/ 6.26/2/ 38 0.49 N/A 1.84/2/
(0.25) 11.35 6.33 27,663 1.75/2/ 4.51/2/ 29 0.24/7/,/8/ 1.75/2/,/8/ 1.99/2/,/8/
(0.51) 10.92 8.02 25,219 1.72 4.76 36 0.48/8/ 1.72/8/ 2.01/8/
(0.51) 10.60 5.61 20,543 1.69 4.81 17 0.47/7/,/8/ 1.69/8/ 2.04/8/
(0.53) 10.53 6.78 7,230 1.60 5.14 22 0.48 N/A 2.04
(0.31) 11.35 6.86 1 0.75/2/ 5.51/2/ 29 0.30/7/,/8/ 0.75/2/,/8/ 0.99/2/,/8/
(0.58) 10.92 8.49 1 0.72/2/ 5.76/2/ 36 0.55/8/ 0.72/2/,/8/ 1.01/2/,/8/
(0.25) 11.35 6.33 7 1.75/2/ 4.51/2/ 29 0.24/7/,/8/ 1.75/2/,/8/ 1.99/2/,/8/
(0.51) 10.92 8.02 7 1.72 4.76 36 0.48/8/ 1.72/8/ 2.01/8/
(0.51) 10.60 5.61 11 1.69 4.81 17 0.47/8/ 1.69/8/ 2.04/8/
(0.53) 10.53 6.78 11 1.60 5.14 22 0.48 N/A 2.04
$(0.35) $10.86 4.41% $ 43,354 0.89%/2/ 4.48%/2/ 5% $0.23/8/ 0.89%/2/,/8/ 1.27%/2/,/8/
(0.54) 10.74 6.97 45,157 0.82 4.61 29 0.44/7/,/8/ 0.83/8/ 1.31/8/
(0.53) 10.56 6.25 54,518 0.73 4.62 27 0.42/8/ 0.75/8/ 1.39/8/
(0.50) 10.45 8.71 54,507 0.42 4.95 13 0.40 N/A 1.41
(0.12) 10.10 2.20 34,147 0.00/2/ 4.25/2/ 17 0.06 N/A 1.95/2/
(0.30) 10.86 4.02 21,383 1.64/2/ 3.73/2/ 5 0.18/8/ 1.64/2/,/8/ 2.02/2/,/8/
(0.46) 10.74 6.17 20,992 1.57 3.86 29 0.36/7/,/8/ 1.58/8/ 2.06/8/
(0.45) 10.56 5.46 20,948 1.48 3.87 27 0.34/8/ 1.50/8/ 2.14/8/
(0.43) 10.45 7.90 12,391 1.17 4.20 13 0.33 N/A 2.16
(0.36) 10.86 4.54 1 0.64/2/ 4.73/2/ 5 0.24/8/ 0.64/2/,/8/ 1.02/2/,/8/
(0.54) 10.74 6.70 1 0.57/2/ 4.86/2/ 29 0.44/7/,/8/ 0.58/2/,/8/ 1.06/1/,/8/
(0.30) 10.86 4.02 2 1.64/2/ 3.73/2/ 5 0.18/8/ 1.64/2/,/8/ 2.02/2/,/8/
(0.46) 10.74 6.17 2 1.57 3.86 29 0.36/7/,/8/ 1.58/8/ 2.06/8/
(0.45) 10.56 5.46 11 1.48 3.87 27 0.34/8/ 1.50/8/ 2.14/8/
(0.43) 10.45 7.90 11 1.17 4.20 13 0.33 N/A 2.16
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
-------------------------------------------------------------------------------------------------------
Net Realized Distributions Distributions
Net Asset & Unrealized Dividends in Excess Distributions In Excess
Value, Net Gain/(Loss) Total From From Net Of Net from Net Of Net
Beginning Investment on Investment Investment Investment Realized Realized
FUND Of Period Income/(Loss) Investments Operations Income Income Gains Gains
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FLORIDA INSURED MUNICIPAL
FUND
Class A Shares
Six months ended 12/31/97
(Unaudited) $ 9.93 $0.25/7/ $0.43 $0.68 $(0.25) $ - $ - $ -
Year ended 6/30/97 9.64 0.49/7/ 0.30 0.79 (0.50) (0.00)/6/ - -
Year ended 6/30/96 9.43 0.50 0.21 0.71 (0.50) - - -
Year ended 6/30/95 9.40 0.52 0.03/9/ 0.55 (0.52) - - -
Year ended 6/30/94 10.05 0.52 (0.65) (0.13) (0.52) (0.00)/6/ - (0.00)/6/
Period ended 6/30/93* 10.00 0.00/6/ 0.05 0.05 - - - -
Class B Shares
Six months ended 12/31/97
(Unaudited) 9.93 0.21/7/ 0.43 0.64 (0.21) - - -
Year ended 6/30/97 9.64 0.42/7/ 0.30 0.72 (0.43) (0.00)/6/ - -
Year ended 6/30/96 9.43 0.42 0.21 0.63 (0.42) - - -
Year ended 6/30/95+ 9.40 0.45 0.03/9/ 0.48 (0.45) - - -
Class I Shares
Six months ended 12/31/97
(Unaudited) 9.93 0.26/7/ 0.43 0.69 (0.26) - - -
Period ended 6/30/97+ 9.68 0.49/7/ 0.26 0.75 (0.50) (0.00)/6/ - -
Class S Shares
Six months ended 12/31/97
(Unaudited) 9.93 0.21/7/ 0.43 0.64 (0.21) - - -
Year ended 6/30/97 9.64 0.42/7/ 0.30 0.72 (0.43) (0.00)/6/ - -
Year ended 6/30/96 9.43 0.42 0.21 0.63 (0.42) - - -
Year ended 6/30/95+ 9.40 0.45 0.03/9/ 0.48 (0.45) - - -
-------------------------------------------------------------------------------------------------------
===================================================================================================================================
<CAPTION>
------------------
Distributions
From
FUND Capital
------------------
<S> <C>
FLORIDA INSURED MUNICIPAL
FUND
Class A Shares
Six months ended 12/31/97
(Unaudited) $ -
Year ended 6/30/97 -
Year ended 6/30/96 -
Year ended 6/30/95 -
Year ended 6/30/94 -
Period ended 6/30/93* -
Class B Shares
Six months ended 12/31/97
(Unaudited) -
Year ended 6/30/97 -
Year ended 6/30/96 -
Year ended 6/30/95+ -
Class I Shares
Six months ended 12/31/97
(Unaudited) -
Period ended 6/30/97+ -
Class S Shares
Six months ended 12/31/97
(Unaudited) -
Year ended 6/30/97 -
Year ended 6/30/96 -
Year ended 6/30/95+ -
------------------
==============================================
</TABLE>
* The Fund commenced operations on June 7, 1993.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Net Realized
Net Asset & Unrealized Dividends Distributions
Value, Net Gain/(Loss) Total From From Net From
Beginning Investment on Investment Investment Capital
FUND Of Period Income/(Loss) Investments Operations Income Gains
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BOND & STOCK FUND
Year ended 10/31/97 $14.71 $0.50 $ 2.37 $ 2.87 $(0.51) $(0.94)
Year ended 10/31/96 13.48 0.52 1.53 2.05 (0.50) (0.32)
Year ended 10/31/95 11.53 0.50 2.02 2.52 (0.49) (0.08)
Year ended 10/31/94 12.23 0.46 (0.57) (0.11) (0.44) (0.15)
Year ended 10/31/93 11.27 0.48 1.06 1.54 (0.46) (0.12)
Eleven months ended
10/31/92* 11.01 0.44 0.80 1.24 (0.53) (0.45)
Year ended 11/30/91 9.90 0.55 1.10 1.65 (0.54) -
Year ended 11/30/90 10.86 0.53 (0.78) (0.25) (0.61) (0.10)
Year ended 11/30/89 10.08 0.58 0.72 1.30 (0.52) -
Year ended 11/30/88 8.85 0.53 1.19 1.72 (0.44) (0.05)
Year ended 11/30/87 10.26 0.52 (1.23) (0.71) (0.53) (0.17)
Class B Shares
Year ended 10/31/97 14.69 0.39 2.36 2.75 (0.40) (0.94)
Year ended 10/31/96 13.47 0.41 1.53 1.94 (0.40) (0.32)
Year ended 10/31/95 11.51 0.39 2.03 2.42 (0.38) (0.08)
3/30/94 to 10/31/94/1/ 11.49 0.18 0.04 0.22 (0.20) -
- ------------------------------------------------------------------------------------------------------------------
==================================================================================================================
</TABLE>
*Change in the Fund's fiscal year end.
Footnotes appear on page 40.
26
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Net
Investment
Income/(Loss)
Per Share Ratio of
Without Operating
Fee Waivers, Expenses
Expenses to Average
Absorbed Net Assets
Ratio Of Ratio of Net and/or Without
Net Asset Net Assets Operating Investment Credits Credits
Value End Of Expenses to Income to Portfolio Allowed Allowed
Total End Of Total Period Average Average Turnover by the by the
Distributions Period Return/5/ (in thousands) Net Assets Net Assets Rate Custodian Custodian
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ (0.25) $10.36 6.87% $19,917 0.91%/2/ 4.78%/2/ 3% $ 0.22/7/,/8/ 0.91%/2/,/8/
(0.50) 9.93 8.43 22,761 0.82 5.01 53 0.43/7/,/8/ 0.84/8/
(0.50) 9.64 7.56 29,821 0.63 5.08 52 0.42/8/ 0.66/8/
(0.52) 9.43 6.01 33,714 0.39 5.53 44 0.42 N/A
(0.52) 9.40 (1.50) 38,541 0.00 5.09 83 0.36 N/A
- 10.05 0.50 4,837 0.00/2/ 0.48/2/ 0 (0.02) N/A
(0.21) 10.36 6.47 5,066 1.66/2/ 4.03/2/ 3 0.18/7/,/8/ 1.66/2/,/8/
(0.43) 9.93 7.63 5,067 1.57 4.26 53 0.36/7/,/8/ 1.59/8/
(0.42) 9.64 6.76 5,428 1.38 4.33 52 0.34/8/ 1.41/8/
(0.45) 9.43 5.23 3,330 1.14 4.78 44 0.35 N/A
(0.26) 10.36 7.00 1 0.66/2/ 5.03/2/ 3 0.23/7/,/8/ 0.66/2/,/8/
(0.50) 9.93 7.88 1 0.57/2/ 5.26/2/ 53 0.43/7/,/8/ 0.59/2/,/8/
(0.21) 10.36 6.47 2 1.66/2/ 4.03/2/ 3 0.18/7/,/8/ 1.66/2/,/8/
(0.43) 9.93 7.63 29 1.57 4.26 53 0.36/7/,/8/ 1.59/8/
(0.42) 9.64 6.76 11 1.38 4.33 52 0.34/8/ 1.41/8/
(0.45) 9.43 5.23 11 1.14 4.78 44 0.35 N/A
- -----------------------------------------------------------------------------------------------------------------------
=======================================================================================================================
</TABLE>
- --------------
Ratio of
Operating
Expenses
to Average
Net Assets
Without
Fee Waivers,
Expenses
Absorbed
and/or
Credits
Allowed
by the
Custodian
- --------------
1.41%/2/,/8/
1.46/8/
1.46/8/
1.51
1.55
5.59/2/
2.16/2/,/8/
2.21/8/
2.21/8/
2.26
1.16/2/,/8/
1.21/2/,/8/
2.16/2/,/8/
2.21/8/
2.21/8/
2.26
- --------------
==============
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Ratio of Ratio of Net
Net Asset Net Assets, Operating Investment
Value, End Of Expenses to Income to Portfolio Average
Total End of Total Period Average Average Turnover Commission
Distributions Period Return/3/ (in thousands) Net Assets/4/ Net Assets Rate Paid/1//0/
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(1.45) $16.13 20.81% $307,018 0.99% 3.31% 54% $0.0561
(0.82) 14.71 15.66 255,414 0.98 3.68 46 0.0632
(0.57) 13.48 22.55 208,592 1.02 3.98 32 -
(0.59) 11.53 (0.90) 191,615 1.06 3.97 25 -
(0.58) 12.23 13.99 180,281 1.13 4.01 19 -
(0.98) 11.27 11.92 102,523 1.13/2/ 4.30/2/ 15/2/ -
(0.54) 11.01 16.96 66,090 1.14 4.90 35 -
(0.71) 9.90 (2.29) 63,669 1.17 5.25 38 -
(0.52) 10.86 13.21 71,771 0.96 5.42 36 -
(0.49) 10.08 19.67 69,230 0.87 5.35 81 -
(0.70) 8.85 (7.53) 74,407 1.69 4.99 83 -
(1.34) 16.10 19.86 46,556 1.79 2.48 54 0.0561
(0.72) 14.69 14.73 22,243 1.86 2.80 46 0.0632
(0.46) 13.47 21.60 7,372 1.84 3.10 32 -
(0.20) 11.51 1.94 3,362 1.77/2/ 3.22/2/ 25 -
- --------------------------------------------------------------------------------------------------
==================================================================================================
</TABLE>
27
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Net Realized
Net Asset & Unrealized Dividends Distributions
Value, Net Gain/(Loss) Total From From Net From
Beginning Investment on Investment Investment Capital
FUND Of Period Income/(Loss) Investments Operations Income Gains
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GROWTH &
INCOME FUND
Class A
Shares
Year ended
10/31/97 $ 17.26 $0.12 $4.98 $ 5.10 $ (0.14) $(1.21)
Year ended
10/31/96 14.65 0.20 3.16 3.36 (0.21) (0.54)
Year ended
10/31/95 12.71 0.22 2.31 2.53 (0.19) (0.40)
Year ended
10/31/94 12.81 0.18 0.85 1.03 (0.18) (0.95)
Year ended
10/31/93 12.02 0.21 1.10 1.31 (0.21) (0.31)
Year ended
10/31/92 11.86 0.29 0.80 1.09 (0.34) (0.59)
Year ended
10/31/91 9.18 0.29 2.69 2.98 (0.30) -
Year ended
10/31/90 12.17 0.35 (2.19) (1.84) (0.50) (0.65)
Year ended
10/31/89 11.10 0.46 0.96 1.42 (0.35) -
Year ended
10/31/88 9.77 0.35 1.32 1.67 (0.29) (0.05)
Class B
Shares
Year ended
10/31/97 17.17 (0.02) 4.93 4.91 (0.02) (1.21)
Year ended
10/31/96 14.59 0.06 3.14 3.20 (0.08) (0.54)
Year ended
10/31/96 12.68 0.11 2.31 2.42 (0.11) (0.40)
3/30/94 -
10/31/94/1/ 12.00 0.05 0.69 0.74 (0.06) -
------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
Footnotes appear on page 40.
28
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Ratio of Ratio of Net
Net Asset Net Assets, Operating Investment
Value, End Of Expenses to Income to Portfolio Average
Total End of Total Period Average Average Turnover Commission
Distributions Period Return/3/ (in thousands) Net Assets/4/ Net Assets Rate Paid/1//0/
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(1.35) $21.01 31.24% $299,928 1.05% 0.66% 71% $0.0581
(0.75) 17.26 23.61 178,331 1.03 1.26 52 0.0654
(0.59) 14.65 20.87 130,630 1.07 1.62 39 -
(1.13) 12.71 8.55 102,837 1.10 1.45 34 -
(0.52) 12.81 11.06 95,229 1.17 1.67 54 -
(0.93) 12.02 9.94 81,102 1.10 2.37 18 -
(0.30) 11.86 32.69 69,365 1.12 2.73 26 -
(1.15) 9.18 (16.25) 68,297 1.17 3.33 37 -
(0.35) 12.17 13.00 72,642 1.06 3.88 37 -
(0.34) 11.10 17.36 69,117 0.89 3.33 45 -
(1.23) 20.85 30.20 49,994 1.88 (0.19) 71 0.0581
(0.62) 17.17 22.55 22,851 1.94 0.34 52 0.0654
(0.51) 14.59 19.95 8,871 1.91 0.69 39 -
(0.06) 12.68 6.14 2,082 1.85/2/ 0.65/2/ 34 -
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
Net Realized Distributions
Net Asset & Unrealized Dividends In Excess Distributions
Value, Net Gain/(Loss) Total From From Net Of Net from Net
Beginning Investment on Investment Investment Investment Realized
FUND Of Period Income/(Loss) Investments Operations Income Income Gains
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
GROWTH FUND
Class A Shares
Six months ended
12/31/97 (Unaudited) $14.90 $(0.07) $0.64 $0.57 $ - $ - $(1.28)
Year ended 6/30/97 15.69 (0.03)/7/ 1.58 1.55 - - (2.34)
Year ended 6/30/96 14.18 (0.07)/7/ 3.47 3.40 - - (1.89)
Year ended 6/30/95 10.73 0.05/7/ 3.42 3.47 (0.02) - (0.00)/6/
Year ended 6/30/94 10.72 (0.02) 0.03/9/ 0.01 - - -
Period ended 6/30/93* 10.00 0.00/6/ 0.72 0.72 - - -
Class B Shares
Six months ended
12/31/97 (Unaudited) 14.53 (0.12) 0.62 0.50 - - (1.28)
Year ended 6/30/97 15.47 (0.14)/7/ 1.54 1.40 - - (2.34)
Year ended 6/30/96 14.10 (0.19)/7/ 3.45 3.26 - - (1.89)
Year ended 6/30/95+ 10.73 (0.04)/7/ 3.42 3.38 (0.01) - (0.00)/6/
Class I Shares
Six months ended
12/31/97 (Unaudited) 14.94 (0.05) 0.65 0.60 - - (1.28)
Period ended 6/30/97+ 14.21 0.00/6,7/ 3.07 3.07 - - (2.34)
Class S Shares
Six months ended
12/31/97 (Unaudited) 14.54 (0.13) 0.63 0.50 - - (1.28)
Year ended 6/30/97 15.47 (0.14)/7/ 1.55 1.41 - - (2.34)
Year ended 6/30/96 14.11 (0.19)/7/ 3.44 3.25 - - (1.89)
Year ended 6/30/95+ 10.73 (0.04)/7/ 3.42 3.38 (0.00)/6/ - (0.00)/6/
---------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
-------------------------------
Distributions
In Excess
Of Net Distributions
Realized From
FUND Gains Capital
-------------------------------
<S> <C> <C>
GROWTH FUND
Class A Shares
Six months ended
12/31/97 (Unaudited) - -
Year ended 6/30/97 - -
Year ended 6/30/96 - -
Year ended 6/30/95 - -
Year ended 6/30/94 - -
Period ended 6/30/93* - -
Class B Shares
Six months ended
12/31/97 (Unaudited) - -
Year ended 6/30/97 - -
Year ended 6/30/96 - -
Year ended 6/30/95+ - -
Class I Shares
Six months ended
12/31/97 (Unaudited) - -
Period ended 6/30/97+ - -
Class S Shares
Six months ended
12/31/97 (Unaudited) - -
Year ended 6/30/97 - -
Year ended 6/30/96 - -
Year ended 6/30/95+ - -
- --------------------------------------------------------
</TABLE>
* The Fund commenced operations on April 5, 1993.
Footnotes appear on page 40.
30
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Net
Investment
Income (Loss)
Per Share
Without
Fee Waivers,
Expenses
Absorbed
Ratio of Ratio of Net and/or
Net Asset Net Assets, Operating Investment Credits
Value, End Of Expenses to Income to Average Portfolio Allowed
Total End of Total Period Average Average Commission Turnover by the
Distributions Period Return/5/ (in thousands) Net Assets Net Assets Rate Paid Rate Custodian
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$(1.28) $14.19 4.11% $104,654 1.70%/2/ (0.88)%/2/ $0.0041/1//0/ 77% $(0.07)/8/
(2.34) 14.90 10.88 111,187 1.70 (0.22) 0.0433/1//0/ 156 (0.03)/7/,/8/
(1.89) 15.69 25.44 179,720 1.70 (0.49) N/A 205 (0.07)/7/,/8/
(0.02) 14.18 32.33 154,763 1.76 0.28 N/A 233 0.05/7/
- 10.73 0.00 126,808 1.75 (0.35) N/A 227 (0.02)
- 10.72 7.30 23,323 1.44/2/ (0.63)/2/ N/A 13 (0.01)
(1.28) 13.75 3.72 29,233 2.45/2/ (1.63)/2/ 0.0041/1//0/ 77 (0.12)/8/
(2.34) 14.53 9.99 30,397 2.45 (0.97) 0.0433/1//0/ 156 (0.14)/7/,/8/
(1.89) 15.47 24.54 25,067 2.45 (1.24) N/A 205 (0.19)/7/,/8/
(0.01) 14.10 31.46 6,928 2.51 (0.47) N/A 233 N/A
(1.28) 14.26 4.30 135,599 1.45/2/ (0.63)/2/ 0.0041/1//0/ 77 (0.05)/8/
(2.34) 14.94 22.73 126,986 1.45/2/ 0.03/2/ 0.0433/1//0/ 156 0.00/6/,/7/,/8/
(1.28) 13.76 3.72 13,112 2.45/2/ (1.63)/2/ 0.0041/1//0/ 77 (0.13)/8/
(2.34) 14.54 10.06 14,038 2.45 (0.97) 0.0433/1//0/ 156 (0.14)/7/,/8/
(1.89) 15.47 24.54 45,652 2.45 (1.24) N/A 205 (0.19)/7/,/8/
(0.00) 14.11 31.44 18,730 2.51 (0.47) N/A 233 N/A
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Ratio of
Operating
Expenses
to Average
Ratio of Net Assets
Operating Without
Expenses Fee Waivers,
to Average Expenses
Net Assets Absorbed
Without and/or
Credits Credits
Allowed Allowed
Total by the by the
Distributions Custodian Custodian
- --------------------------------------------------
<S> <C> <C>
$(1.28) 1.70%/2/,/8/ 1.70%/2/,/8/
(2.34) 1.70/8/ 1.70/8/
(1.89) 1.71/8/ 1.71/8/
(0.02) N/A 1.76
- N/A 1.75
- N/A 2.52/2/
(1.28) 2.45/2/,/8/ 2.45/2/,/8/
(2.34) 2.45/8/ 2.45/8/
(1.89) 2.46/8/ 2.46/8/
(0.01) N/A 2.51
(1.28) 1.45/2/,/8/ 1.45/2/,/8/
(2.34) 1.45/2/,/8/ 1.45/2/,/8/
(1.28) 2.45/2/,/8/ 2.45/2/,/8/
(2.34) 2.45/8/ 2.45/8/
(1.89) 2.46/8/ 2.46/8/
(0.00) N/A 2.51
- --------------------------------------------------
- --------------------------------------------------
</TABLE>
31
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
--------------------------------------------------------------------------------------------------------------------
Net Realized Distributions Distributions
Net Asset & Unrealized Dividends In Excess Distributions In Excess
Value, Net Gain/(Loss) Total From From Net Of Net from Net Of Net Distributions
Beginning Investment on Investment Investment Investment Realized Realized From
FUND Of Period Income/(Loss) Investments Operations Income Income Gains Gains Capital
------------------------------- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTERNATIONAL
GROWTH FUND
Class A Shares
Six months ended
12/31/97 (Unaudited) $11.85 $ 0.00/7/ $(1.64) $(1.64) $(0.53) $ - $(0.50) $ - $ -
Class A Shares
Six months ended
12/31/97 (Unaudited) $ -
Year ended 6/30/97 10.49 0.04/7/ 1.55 1.59 (0.13) - (0.10) - -
Year ended 6/30/96 9.78 0.05/7/ 1.21 1.26 (0.05) (0.04) (0.46) - -
Year ended 6/30/97 -
Year ended 6/30/96 -
Year ended 6/30/95 10.74 (0.11)/7/ (0.31) (0.42) (0.04) - (0.44) (0.06) -
Year ended 6/30/94 9.80 0.06 1.15 1.21 (0.02) - (0.25) - -
Year ended 6/30/95 -
Year ended 6/30/94 -
Year ended 6/30/93 8.82 0.07 0.94 1.01 (0.03) - - - -
Year ended 6/30/92 8.27 0.05 0.55 0.60 (0.05) - - - -
Year ended 6/30/93 -
Year ended 6/30/92 -
Period ended 6/30/91* 10.00 0.02 (1.75) (1.73) - - - - -
Period ended 6/30/91* -
Class B Shares
Six months ended
12/31/97 (Unaudited) 11.70 (0.05)/7/ (1.60) (1.65) (0.45) - (0.50) - -
Class B Shares
Six months ended
12/31/97 (Unaudited) -
Year ended 6/30/97 10.39 (0.04)/7/ 1.53 1.49 (0.08) - (0.10) - -
Year ended 6/30/96 9.73 (0.03)/7/ 1.21 1.18 (0.02) (0.04) (0.46) - -
Year ended 6/30/97 -
Year ended 6/30/96 -
Year ended 6/30/95+ 10.74 (0.17)/7/ (0.31) (0.48) (0.03) - (0.44) (0.06) -
Year ended 6/30/95+ -
Class I Shares
Six months ended
12/31/97 (Unaudited) 11.82 0.01/7/ (1.63) (1.62) (0.56) - (0.50) - -
Class I Shares
Six months ended
12/31/97 (Unaudited) -
Period ended 6/30/97+ 9.88 0.06/7/ 2.15 2.21 (0.17) - (0.10) - -
Period ended 6/30/97+ -
Class S Shares
Six months ended
12/31/97 (Unaudited) 11.77 (0.05)/7/ (1.61) (1.66) (0.42) - (0.50) - -
Class S Shares
Six months ended
12/31/97 (Unaudited) -
Year ended 6/30/97 10.38 (0.04)/7/ 1.53 1.49 - - (0.10) - -
Year ended 6/30/96 9.73 (0.03)/7/ 1.20 1.17 (0.02) (0.04) (0.46) - -
Year ended 6/30/97 -
Year ended 6/30/96 -
Year ended 6/30/95+ 10.74 (0.17)/7/ (0.31) (0.48) (0.03) - (0.44) (0.06) -
--------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Fund commenced operations on July 18, 1990.
Footnotes appear on page 40.
32
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Net
Investment
Income (Loss)
Per Share
Without
Fee Waivers,
Expenses
Absorbed
Ratio of Ratio of Net and/or
Net Asset Net Assets, Operating Investment Credits
Value, End Of Expenses to Income to Average Portfolio Allowed
Total End of Total Period Average Average Commission Turnover by the
Distributions Period Return/5/ (in thousands) Net Assets Net Assets Rate Paid Rate Custodian
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$(1.03) $9.18 $(13.77)% $ 39,985 1.69%/2/ (0.09)%/2/ $0.0185/1//0/ 41% $(0.00)/7/,/8/
(0.23) 11.85 15.50 57,776 1.65 0.35 0.0057/1//0/ 67 0.04/7/,/8/
(0.55) 10.49 13.16 116,254 1.77 0.46 N/A 125 0.05/7/,/8/
(0.54) 9.78 (4.01) 91,763 1.69 0.62 N/A 81 (0.11)/7/
(0.27) 10.74 12.39 127,764 1.69 0.54 N/A 44 0.06
(0.03) 9.80 11.51 56,962 1.80 1.07 N/A 63 0.07
(0.05) 8.82 7.28 24,479 2.25 0.69 N/A 66 0.04
- 8.27 (17.30) 11,647 2.24/2/ 0.51/2/ N/A 45 0.01
(0.95) 9.10 (14.11) 4,201 2.44/2/ (0.84)/2/ 0.0185/1//0/ 41 (0.05)/7/,/8/
(0.18) 11.70 14.66 4,876 2.40 (0.40) 0.0057/1//0/ 67 (0.04)/7/,/8/
(0.52) 10.39 12.34 4,447 2.52 (0.29) N/A 125 (0.03)/7/,/8/
(0.53) 9.73 (4.61) 2,268 2.44 (0.13) N/A 81 N/A
(1.06) 9.14 (13.62) 68,336 1.44/2/ 0.16/2/ 0.0185/1//0/ 41 0.01/7/,/8/
(0.27) 11.82 22.76 95,512 1.40/2/ 0.60/2/ 0.0057/1//0/ 67 0.06/7/,/8/
(0.92) 9.19 (14.10) 8,010 2.44/2/ (0.84)/2/ 0.0185/1//0/ 41 (0.05)/7/,/8/
(0.10) 11.77 14.61 11.991 2.40 (0.40) 0.0057/1//0/ 67 (0.04)/7/,/8/
(0.52) 10.38 12.29 38,900 2.52 (0.29) N/A 125 (0.13)/7/,/8/
(0.52) 9.73 (4.61) 11,120 2.44 (0.13) N/A 81 N/A
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------
Ratio of
Operating
Expenses
to Average
Ratio of Net Assets
Operating Without
Expenses Fee Waivers,
to Average Expenses
Net Assets Absorbed
Without and/or
Credits Credits
Allowed Allowed
Total by the by the
Distributions Custodian Custodian
- ---------------------------------------------------
<S> <C> <C>
$(1.03) 1.69%/2/,/8/ 1.69%/2/,/8/
(0.23) 1.65/8/ 1.65/8/
(0.55) 1.77/8/ 1.77/8/
(0.54) N/A 1.69
(0.27) N/A 1.69
(0.03) N/A 1.80
(0.05) N/A 2.29
- N/A 2.47/2/
(0.95) 2.44/2/,/8/ 2.44/2/,/8/
(0.18) 2.40/8/ 2.40/8/
(0.52) 2.52/8/ 2.52/8/
(0.53) N/A 2.44
(1.06) 1.44/2/,/8/ 1.44/2/,/8/
(0.27) 1.40/2/,/8/ 1.40/2/,/8/
(0.92) 2.44/2/,/8/ 2.44/2/,/8/
(0.10) 2.40/8/ 2.40/8/
(0.52) 2.52/8/ 2.52/8/
(0.52) N/A 2.44
- ---------------------------------------------------
- ---------------------------------------------------
</TABLE>
33
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
----------------------------------------------------------------------
Net Realized
Net Asset & Unrealized Dividends Distributions
Value, Net Gain/(Loss) Total From From Net From
Beginning Investment on Investment Investment Capital
FUND Of Period Income/(Loss) Investments Operations Income Gains
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NORTHWEST
FUND
Class A
Shares
Year ended
10/31/97 $19.69 $(0.02) $ 8.13 $ 8.11 $ - $(1.88)
Year ended
10/31/96 17.40 0.03 2.47 2.50 (0.03) (0.18)
Year ended
10/31/95 14.30 0.07 3.10 3.17 (0.07) -
Year ended
10/31/94 14.50 0.08 0.35 0.43 (0.08) (0.55)
Year ended
10/31/93 14.04 0.07 0.46 0.53 (0.07) -
Year ended
10/31/92 13.45 0.08 0.69 0.77 (0.07) (0.11)
Year ended
10/31/91 8.43 0.07 5.03 5.10 (0.08) -
Year ended
10/31/90 10.18 0.08 (1.76) (1.68) (0.07) -
Year ended
10/31/89 7.55 0.08 2.63 2.71 (0.08) -
Year ended
10/31/88 6.02 0.06 1.52 1.58 (0.05) -
Class B
Shares
Year ended
10/31/97 19.45 (0.08) 7.85 7.77 - (1.88)
Year ended
10/31/96 17.31 (0.08) 2.40 2.32 - (0.18)
Year ended
10/31/95 14.28 (0.05) 3.08 3.03 - -
Period
ended
10/31/94/1/ 14.42 (0.02) (0.12) (0.14) - -
----------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
* The Fund commenced operations on November 24, 1986.
Footnotes appear on page 40.
34
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Ratio of Ratio of Net
Net Asset Net Assets, Operating Investment
Value, End of Expenses to Income to Portfolio Average
Total End Of Total Period Average Average Turnover Commission
Distributions Period Return/3/ (in thousands) Net Assets/4/ Net Assets Rate Paid/10/
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$(1.88) $25.92 44.47% $256,908 1.05% (0.08)% 37% $0.0557
(0.21) 19.69 14.54 176,706 1.08 0.16 42 0.0665
(0.07) 17.40 22.24 157,953 1.10 0.44 9 -
(0.63) 14.30 2.97 152,622 1.09 0.51 11 -
(0.07) 14.50 3.82 168,840 1.09 0.48 8 -
(0.18) 14.04 5.77 167,115 1.11 0.53 4 -
(0.08) 13.45 60.49 98,754 1.21 0.63 8 -
(0.07) 8.43 (16.68) 42,647 1.45 0.72 7 -
(0.08) 10.18 36.14 18,687 1.50 0.81 12 -
(0.05) 7.55 26.42 6,994 1.44 0.84 17 -
(1.88) 25.34 43.17 39,627 1.91 (0.96) 37 0.0557
(0.18) 19.45 13.54 14,653 1.98 (0.76) 42 0.0665
- 17.31 21.25 7,083 1.95 (0.45) 9 -
- 14.28 (0.97) 3.102 1.96/2/ (0.39)/2/ 11 -
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Net Realized Distributions Distributions
Net Asset & Unrealized Dividends In Excess Distributions In Excess
Value, Net Gain/(Loss) Total From From Net Of Net from Net Of Net
Beginning Investment on Investment Investment Investment Realized Realized
FUND Of Period Income/(Loss) Investments Operations Income Income Gains Gains
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EMERGING GROWTH FUND
Class A Shares
Six months ended
12/31/97 (Unaudited) $18.28 $(0.12)/7/ $1.76 $1.64 $ - $ - $(1.07) $ -
Year ended 6/30/97 20.17 (0.21)/7/ (0.18) (0.39) - - (1.50) -
Year ended 6/30/96 15.47 (0.19)/7/ 5.65 5.46 - - (0.76) -
Year ended 6/30/95 13.02 (0.00)/6/,/7/ 2.77 2.77 - - (0.32) -
Year ended 6/30/94 13.76 (0.09) 0.68 0.59 - - (1.33) -
Year ended 6/30/93 11.67 (0.02) 2.31 2.29 - - (0.20) -
Year ended 6/30/92 9.62 (0.01)/7/ 2.16 2.15 (0.01) - (0.08) -
Period ended 6/30/91* 10.00 0.09 (0.40) (0.31) (0.07) - - -
Class B Shares
Six months ended
12/31/97 (Unaudited) 17.85 (0.19)/7/ 1.72 1.53 - - (1.07) -
Year ended 6/30/97 19.88 (0.34)/7/ (0.19) (0.53) - - (1.50) -
Year ended 6/30/96 15.37 (0.32)/7/ 5.59 5.27 - - (0.76) -
Year ended 6/30/95+ 13.02 (0.10)/7/ 2.77 2.67 - - (0.32) -
Class I Shares
Six months ended
12/31/97 (Unaudited) 18.33 (0.10)/7/ 1.77 1.67 - - (1.07) -
Period ended 6/30/97+ 17.52 (0.16)/7/ 2.47/9/ 2.31 - - (1.50) -
Class S Shares
Six months ended
12/31/97 (Unaudited) 17.85 (0.19)/7/ 1.72 1.53 - - (1.07) -
Year ended 6/30/97 19.88 (0.34)/7/ (0.19) (0.53) - - (1.50) -
Year ended 6/30/96 15.37 (0.32)/7/ 5.59 5.27 - - (0.76) -
Year ended 6/30/95+ 13.02 (0.10)/7/ 2.77 2.67 - - (0.32) -
--------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------
Distributions
From
FUND Capital
-----------------
<S> <C>
EMERGING GROWTH FUND
Class A Shares
Six months ended
12/31/97 (Unaudited) $ -
Year ended 6/30/97 -
Year ended 6/30/96 -
Year ended 6/30/95 -
Year ended 6/30/94 -
Year ended 6/30/93 -
Year ended 6/30/92 (0.01)/1//1/
Period ended 6/30/91* -
Class B Shares
Six months ended
12/31/97 (Unaudited) -
Year ended 6/30/97 -
Year ended 6/30/96 -
Year ended 6/30/95+ -
Class I Shares
Six months ended
12/31/97 (Unaudited) -
Period ended 6/30/97+ -
Class S Shares
Six months ended
12/31/97 (Unaudited) -
Year ended 6/30/97 -
Year ended 6/30/96 -
Year ended 6/30/95+ -
-----------------
- -----------------------------------------
</TABLE>
* The Fund commenced operations on July 18, 1990.
Footnotes appear on page 40.
36
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Net
Investment
Income (Loss)
Per Share
Without
Fee Waivers,
Expenses
Absorbed
Ratio of Ratio of Net and/or
Net Asset Net Assets, Operating Investment Credits
Value, End Of Expenses to Income/Loss to Average Portfolio Allowed
Total End of Total Period Average Average Commission Turnover by the
Distributions Period Return/5/ (in thousands) Net Assets Net Assets Rate Paid Rate Custodian
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$(1.07) $18.85 9.24% $164,441 1.72%/2/ (1.24)%/2/ $ 0.0353/1//0/ 51% $(0.12)/7/,/8/
(1.50) 18.28 (1.50) 165,719 1.64 (1.17) 0.0330/1//0/ 81 (0.21)/7/,/8/
(0.76) 20.17 35.93 283,747 1.64 (1.02) N/A 131 (0.19)/7/,/8/
(0.32) 15.47 21.54 185,722 1.68 (0.31) N/A 181 (0.00)/6/,/7/
(1.33) 13.02 3.40 124,941 1.66 (0.68) N/A 224 (0.09)
(0.20) 13.76 19.75 96,646 1.59 (0.32) N/A 28 (0.02)
(0.10) 11.67 22.47 27,652 1.93 (0.04) N/A 60 (0.01)/7/
(0.07) 9.62 (2.95) 8,490 1.84/2/ 1.10/2/ N/A 17 0.07
(1.07) 18.31 8.84 29,516 2.47/2/ (1.99)/2/ 0.0353/1//0/ 51 (0.19)/7/,/8/
(1.50) 17.85 (2.26) 29,123 2.39 (1.92) 0.0330/1//0/ 81 (0.34)/7/,/8/
(0.76) 19.88 34.93 28,920 2.39 (1.77) N/A 131 (0.32)/7/,/8/
(0.32) 15.37 20.69 10,208 2.43 (1.06) N/A 181 N/A
(1.07) 18.93 9.38 34,757 1.47/2/ (0.99)/2/ 0.0353/1//0/ 51 (0.10)/7/,/8/
(1.50) 18.33 13.69 52,199 1.39/2/ (0.92)/2/ 0.0330/1//0/ 81 (0.16)/7/,/8/
(1.07) 18.31 8.84 6,693 2.47/2/ (1.99)/2/ 0.0353/1//0/ 51 (0.19)/7/,/8/
(1.50) 17.85 (2.26) 8,341 2.39 (1.92) 0.0330/1//0/ 81 (0.34)/7/,/8/
(0.76) 19.88 34.91 43,645 2.39 (1.77) N/A 131 (0.32)/7/,/8/
(0.32) 15.37 20.76 11,840 2.43 (1.06) N/A 181 N/A
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Ratio of
Operating
Expenses
to Average
Ratio of Net Assets
Operating Without
Expenses Fee Waivers,
to Average Expenses
Net Assets Absorbed
Without and/or
Credits Credits
Allowed Allowed
Total by the by the
Distributions Custodian Custodian
- ---------------------------------------------------
<S> <C> <C>
$(1.07) 1.72%/2/,/8/ 1.72%/2/,/8/
(1.50) 1.64/8/ 1.64/8/
(0.76) 1.65/8/ 1.65/8/
(0.32) N/A 1.68
(1.33) N/A 1.66
(0.20) N/A 1.59
(0.10) N/A 1.93
(0.07) N/A 2.11/2/
(1.07) 2.47/2/,/8/ 2.47%/2/,/8/
(1.50) 2.39/8/ 2.39/8/
(0.76) 2.40/8/ 2.40/8/
(0.32) N/A 2.43
(1.07) 1.47/2/,/8/ 1.47/2/,/8/
(1.50) 1.39/2/,/8/ 1.39/2/,/8/
(1.07) 2.47/2/,/8/ 2.47/2/,/8/
(1.50) 2.39/8/ 2.39/8/
(0.76) 2.40/8/ 2.40/8/
(0.32) N/A 2.43
- --------------------------------------------------
- --------------------------------------------------
</TABLE>
37
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
----------------------------------------------------------------------------------------------
Net Realized Distributions
Net Asset & Unrealized Dividends In Excess Distributions
Value, Net Gain/(Loss) Total From From Net Of Net from Net
Beginning Investment on Investment Investment Investment Realized
FUND Of Period Income/(Loss) Investments Operations Income Income Gains
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
STRATEGIC GROWTH
PORTFOLIO
Class A Shares
Six months ended
12/31/97
(Unaudited) $11.26 $ 0.04/7/ $0.34 $0.38 $ - $(0.68) $(0.04)
Period ended 6/30/97* 10.00 (0.02)/7/ 1.90 1.88 - (0.62) (0.00)/6/
Class B Shares
Six months ended
12/31/97
(Unaudited) 11.19 (0.01)/7/ 0.35 0.34 - (0.64) (0.04)
Period ended 6/30/97* 10.00 (0.10)/7/ 1.90 1.80 - (0.61) $(0.00)/6/
----------------------------------------------------------------------------------------------
CONSERVATIVE GROWTH
PORTFOLIO
Class A Shares
Six months ended
12/31/97
(Unaudited) $10.86 $ 0.11/7/ $0.07 $0.18 $(0.11) $(0.40) $(0.06)
Period ended 6/30/97* 10.00 0.08/7/ 1.32 1.40 (0.08) (0.46) -
Class B Shares
Six months ended
12/31/97
(Unaudited) 10.80 0.07/7/ 0.08 0.15 (0.07) (0.40) (0.06)
Period ended 6/30/97* 10.00 0.01/7/ 1.31 1.32 (0.01) (0.51) -
----------------------------------------------------------------------------------------------
BALANCED PORTFOLIO
Class A Shares
Six months ended
12/31/97
(Unaudited) $10.95 $ 0.17/7/ $0.13 $0.30 $(0.17) $(0.44) $(0.11)
Period ended 6/30/97* 10.00 0.20/7/ 1.27 1.47 (0.20) (0.32) (0.00)/6/
Class B Shares
Six months ended
12/31/97
(Unaudited) 10.95 0.12/7/ 0.14 0.26 (0.12) (0.45) (0.11)
Period ended 6/30/97* 10.00 0.14/7/ 1.25 1.39 (0.14) (0.30) (0.00)/6/
----------------------------------------------------------------------------------------------
FLEXIBLE INCOME
PORTFOLIO
Class A Shares
Six months ended
12/31/97
(Unaudited) $10.57 $ 0.23/7/ $0.36 $0.59 $(0.23) $(0.23) $(0.24)
Period ended 6/30/97* 10.00 0.43/7/ 0.70 1.13 (0.43) (0.13) (0.00)/6/
Class B Shares
Six months ended
12/31/97
(Unaudited) 10.57 0.18/7/ 0.37 0.55 (0.18) (0.24) (0.24)
Period ended 6/30/97* 10.00 0.38/7/ 0.68 1.06 (0.38) (0.11) (0.00)/6/
----------------------------------------------------------------------------------------------
INCOME PORTFOLIO
Class A Shares
Six months ended
12/31/97
(Unaudited) $10.13 $ 0.36/7/ $0.19 $0.55 $(0.38) $ - $ -
Period ended 6/30/97* 10.00 0.58/7/ 0.14/9/ 0.72 (0.58) (0.01) (0.00)/6/
Class B Shares
Six months ended
12/31/97
(Unaudited) 10.13 0.32/7/ 0.19 0.51 (0.34) - -
Period ended 6/30/97* 10.00 0.51/7/ 0.14/9/ 0.65 (0.51) (0.01) (0.00)/6/
----------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Portfolios commenced operations on July 25, 1996.
** The Portfolios will indirectly bear their pro rata share of the expenses of
the Funds which they purchase. Such underlying Fund expenses are not
included in table.
Footnotes appear on page 40.
38
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Net
Investment
Income (Loss)
Per Share Ratio of
Without Operating
Fee Waivers, Expenses
Expenses to Average
Absorbed Net Assets
Ratio of Ratio of Net and/or Without
Net Asset Net Assets, Operating Investment Credits Credits
Value End Of Expenses to Income/Loss to Average Portfolio Allowed Allowed
Total End Of Total Period Average Average Commission Turnover by the by the
Distributions Period Return/5/ (in thousands) Net Assets** Net Assets Rate Paid Rate Custodian Custodian**
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$(0.72) $10.92 3.60% $ 16,187 0.95%/2/ 0.62%/2/ $ - 9% $0.03/7/ 0.95%/2/
(0.62) 11.26 19.33 14,253 0.90/2/ (0.19)/2/ - 33 (0.07)/7/ 0.91/2/
(0.68) 10.85 3.25 43,056 1.70/2/ (0.13)/2/ - 9 (0.02)/7/ 1.70/2/
(0.61) 11.19 18.48 35,802 1.65/2/ (0.94)/2/ - 33 (0.15)/7/ 1.66/2/
- ----------------------------------------------------------------------------------------------------------------------------
$(0.57) $10.47 1.85% $124,070 0.95%/2/ 2.03%/2/ $ - 14% $0.11/7/ 0.95%/2/
(0.54) 10.86 14.39 136,141 0.92/2/ 0.81/2/ - 20 0.06/7/ 0.93/2/
(0.53) 10.42 1.57 159,800 1.70/2/ 1.28/2/ - 14 0.07/7/ 1.70/2/
(0.52) 10.80 13.59 158,697 1.67/2/ 0.06/2/ - 20 (0.01)/7/ 1.68/2/
- ----------------------------------------------------------------------------------------------------------------------------
$(0.72) $10.53 2.88% $102,260 0.95%/2/ 2.93%/2/ $ - 11% $0.16/7/ 0.95%/2/
(0.52) 10.95 15.02 109,421 0.92/2/ 2.48/2/ - 46 0.18/7/ 0.93/2/
(0.68) 10.53 2.49 107,898 1.70/2/ 2.18/2/ - 11 0.11/7/ 1.70/2/
(0.44) 10.95 14.23 99,821 1.67/2/ 1.73/2/ - 46 0.12/7/ 1.68/2/
- ----------------------------------------------------------------------------------------------------------------------------
$(0.70) $10.46 5.63% $ 10,144 0.95%/2/ 4.17%/2/ $ - 19% $0.23/7/ 0.95%/2/
(0.56) 10.57 11.58 12,613 0.92/2/ 4.95/2/ - 54 0.37/7/ 0.93/2/
(0.66) 10.46 5.23 7,766 1.70/2/ 3.42/2/ - 19 0.18/7/ 1.70/2/
(0.49) 10.57 10.80 7,385 1.67/2/ 4.20/2/ - 54 0.32/7/ 1.68/2/
- ----------------------------------------------------------------------------------------------------------------------------
$(0.38) $10.30 5.51% $ 10,658 0.95%/2/ 7.00%/2/ $ - 3% $0.35/7/ 0.95%/2/
(0.59) 10.13 7.38 13,410 0.93/2/ 6.09/2/ - 56 0.51/7/ 0.93/2/
(0.34) 10.30 5.11 4,688 1.70/2/ 6.25/2/ - 3 0.31/7/ 1.70/2/
(0.52) 10.13 6.63 4,537 1.68/2/ 5.34/2/ - 56 0.44/7/ 1.68/2/
- ----------------------------------------------------------------------------------------------------------------------------
============================================================================================================================
</TABLE>
- ---------------
Ratio of
Operating
Expenses
to Average
Net Assets
Without
Fee Waivers,
Expenses
Absorbed
and/or
Credits
Allowed
by the
Custodian**
- ---------------
1.06%/2/
1.45/2/
1.81/2/
2.20/2/
- ---------------
0.97/2/
1.17/2/
1.72/2/
1.92/2/
- ---------------
0.98%/2/
1.17/2/
1.73/2/
1.92/2/
- ---------------
1.10%/2/
1.67/2/
1.85/2/
2.42/2/
- ---------------
1.19%/2/
1.65/2/
- ---------------
1.94/2/
2.40/2/
- ---------------
===============
39
<PAGE>
FOOTNOTES TO FINANCIAL HIGHLIGHTS
(1) From the commencement of offering Class B shares.
(2) Annualized.
(3) Total returns do not reflect a sales charge and are not annualized.
(4) Ratio of expenses to average net assets includes expenses paid indirectly
beginning in fiscal 1995.
(5) Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charges. The total returns would
have been lower if certain fees had not been waived and/or expenses
absorbed by the investment advisor, administrator and/or distributor or
without credits allowed by the custodian.
(6) Amount represents less than $0.01 per share.
(7) Per share numbers have been calculated using the average shares method.
(8) The ratio and per share numbers include custodian fees before reduction by
credits allowed by the custodian as required by amended disclosure
requirements effective September 1, 1995.
(9) The amount shown may not accord with the change in aggregate gains and
losses of portfolio securities due to the timing of sales and redemptions
of Fund shares.
(10) Average commission rate paid per share of securities purchased and sold by
the Fund as required by amended disclosure requirements effective for
fiscal years beginning on or after September 1, 1995.
(11) Amounts distributed in excess of accumulated net investment income as
determined for financial statement purposes have been reported as
distributions from paid-in capital at the fiscal year end in which the
distribution was made. Certain of these distributions which are reported
as being from paid-in capital for financial statement purposes may be
reported to shareholders as taxable distributions due to differing tax and
accounting rules.
+ On July 1, 1994, the Funds commenced selling Class B and Class S shares in
addition to Class A shares. Those shares in existence prior to July 1, 1994
were designated Class A shares. On July 25, 1996, the Funds commenced
selling Class I shares.
THE FUNDS' INVESTMENTS AND RISK CONSIDERATIONS
The following section describes the investment objective and policies of each
Fund and Portfolio and some of the risk considerations of investing in the
Funds and Portfolios. The "Common Investment Practices" section that follows
provides more detailed information about the investment practices of the Funds.
Except for policies explicitly identified as "fundamental" in this Prospectus
or the SAI, the investment objectives of each Fund and Portfolio and the
investment policies set forth in this Prospectus and the SAI are not
fundamental and may be changed at any time without shareholder consent by vote
of the Board of Trustees of the Trusts, subject to applicable law. A list of
investment restrictions that identifies those restrictions that cannot be
changed without the approval of a majority of an affected Fund's or Portfolio's
outstanding shares is contained in the SAI.
MONEY FUNDS
The Money Funds invest only in U.S. dollar-denominated short-term, money market
securities. The Money Funds will not purchase a security other than obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
("U.S. Government Securities") unless the security or the issuer with respect
to a comparable security (i) is rated by at least two nationally recognized
statistical rating organizations ("NRSROs"), such as Standard & Poor's ("S&P")
or Moody's Investors Service, Inc. ("Moody's"), in one of the two highest
rating categories for short-term debt securities, (ii) is rated in one of the
two highest categories for short-term debt by the only NRSRO that has issued a
rating, or (iii) if not so rated, is determined to be of comparable quality. A
description of the rating systems of S&P and Moody's is contained in Appendix A
to this Prospectus and in the SAI. At the time of investment, no security
purchased by a Money Fund (except U.S. Government Securities subject to
repurchase agreements and variable rate demand notes) can have a maturity
exceeding 397 days, and each Money Fund's average portfolio maturity cannot
exceed 90 days. Although the Money Funds attempt to maintain a stable net asset
value ("NAV") of $1.00, there can be no assurances that any Money Fund will be
able to do so.
MONEY MARKET FUND. To accomplish its objective, the Money Market Fund invests
solely in money market instruments that are selected from the following five
general categories: (1) U.S. Government Securities; (2) short-term commercial
notes (including asset-backed securities) issued directly by U.S. and foreign
businesses, banking institutions, financial institutions (including brokerage,
finance and insurance companies) and state and local governments and
municipalities to finance short-term cash needs; (3) obligations of U.S. and
foreign banks with assets of more than $500 million; (4) securities issued by
foreign governments, their agencies or instrumentalities or by supranational
entities; (5) short-term corporate obligations rated in one of the two highest
rating categories by Moody's or S&P; and (6) repurchase agreements.
40
<PAGE>
TAX-EXEMPT MONEY MARKET FUND. To accomplish its objective, the Tax-Exempt Money
Market Fund invests primarily in a diversified selection of Municipal
Obligations, the income from which is exempt from federal income tax.
"Municipal Obligations" are debt obligations issued by states, territories and
possessions of the United States, the District of Columbia and their respective
authorities, agencies, instrumentalities and political subdivisions. Short-term
Municipal Obligations may include, but are not limited to, tax anticipation
notes (TANs), bond anticipation notes (BANs), revenue anticipation notes (RANs)
and project notes (PNs), or other forms of short-term municipal loans and
obligations. Under normal market conditions, the Fund will not invest more than
20% of its assets in obligations that pay interest subject to alternative
minimum tax ("AMT-Subject Bonds"). See "Common Investment Practices--Municipal
Obligations and AMT-Subject Bonds."
For temporary defensive purposes, the Tax-Exempt Money Market Fund may invest
more than 20% of its assets in instruments eligible for purchase by the Money
Market Fund, which may produce income that is not exempt from federal income
taxes.
The Fund may also invest in variable rate demand obligations, stand-by
commitments, when-issued securities and forward commitments. See "Common
Investment Practices--Floating Rate, Inverse Floating Rate and Variable Rate
Obligations," "--Stand-by Commitments" and "--When-Issued Securities Forward-
Commitment and Delayed-Delivery Transactions."
CALIFORNIA MONEY FUND. To accomplish its objective, the California Money Fund
invests in a portfolio of Municipal Obligations. It is a fundamental policy of
the Fund to invest, under normal market conditions, at least 80% of its total
assets in Municipal Obligations issued by the State of California and its
political subdivisions ("California Municipal Obligations") and certain other
governmental issuers such as the Commonwealth of Puerto Rico, and the Fund
invests at least 65% of its total assets in California Municipal Obligations,
which produce income that is exempt from California personal income tax. The
Fund may also invest in AMT-Subject Bonds. For a discussion of the tax
consequences of investing in AMT-Subject Bonds, see "Common Investment
Practices--Municipal Obligations and AMT-Subject Bonds" and "Dividends, Capital
Gains and Taxes."
The Fund may also invest in variable rate demand obligations, stand-by
commitments, when-issued securities and forward commitments. See "Common
Investment Practices--Floating Rate, Inverse Floating Rate and Variable Rate
Obligations," "--Stand-by Commitments" and "--When-Issued Securities Forward-
Commitment and Delayed-Delivery Transactions."
As a non-diversified investment company under the 1940 Act, the Fund may invest
a larger portion of its assets in the securities of a small number of issuers.
See "Common Investment Practices--Non-Diversified Status."
For temporary defensive purposes, the Fund may invest more than 20% of its
assets in instruments eligible for purchase by the Money Market Fund, which may
produce income that is not exempt from federal income taxes or California
personal income tax.
FIXED-INCOME FUNDS
SHORT TERM HIGH QUALITY BOND FUND. To accomplish its objective, the Short Term
High Quality Bond Fund invests primarily in short-term bonds and other debt
securities. Under normal market conditions the Fund maintains a dollar-weighted
average portfolio maturity of three years or less. The Fund may, however, hold
individual securities with remaining maturities of more than three years. For
purposes of the weighted average maturity calculation, a mortgage instrument's
average life will be considered to be its maturity, and the reset date of a
floating rate security will be used in place of its maturity date.
The Fund will invest substantially all of its assets in debt securities that,
at the time of purchase, are rated in one of the top four rating categories by
one or more NRSROs or, if unrated, are judged to be of comparable quality by
the Advisor ("investment grade" securities). All debt securities purchased by
the Fund will be investment grade at the time of purchase. Under normal market
conditions, the Fund will invest at least 65% of its total assets in U.S.
Government securities, corporate debt obligations or mortgage-related
securities rated in one of the two highest categories by an NRSRO or determined
by the Advisor to be of comparable quality.
The Fund may invest in obligations issued or guaranteed by domestic and foreign
governments and government agencies and instrumentalities and high-grade
corporate debt obligations, such as bonds, debentures, notes, equipment lease
and trust certificates, mortgage-backed securities, collateralized mortgage
obligations and asset-backed securities.
The Fund may invest up to 10% of its assets in foreign fixed-income securities,
primarily bonds of foreign
41
<PAGE>
governments or their political subdivisions, foreign companies and
supranational organizations, including non-U.S. dollar-denominated securities
and U.S. dollar-denominated debt securities issued by foreign issuers and
foreign branches of U.S. banks. Investment in foreign securities is subject to
special risks. The Fund may invest up to 5% of its assets in preferred stock.
The Fund may also invest in high-quality, short-term obligations (with
maturities of 12 months or less). The Fund may engage in certain options
transactions, enter into financial futures contracts and related options for
the purpose of portfolio hedging and enter into currency forwards or futures
contracts and related options for the purpose of currency hedging. The Fund may
invest in certain illiquid investments, such as privately placed obligations,
including restricted securities. The Fund may invest up to 10% of its assets in
securities of unaffiliated mutual funds. The Fund may borrow money or enter
into reverse repurchase agreements or dollar roll transactions in the aggregate
up to 33 1/3% of its total assets. The Fund may invest up to 25% of its total
assets in asset-backed securities, which represent a participation in, or are
secured by and payable from, a stream of payments generated by particular
assets, most often a pool of similar assets. See "Common Investment Practices--
Foreign Investments," "--Strategic Transactions," "--Holdings in Other
Investment Companies," "--Borrowings" and "--Mortgage-Backed and Asset-Backed
Securities."
TARGET MATURITY 2002 FUND. To accomplish its objective, the Target Maturity
2002 Fund will invest at least 90% of its net assets in zero-coupon U.S.
Treasury securities (each such security, a "Zero-Coupon Security") maturing
during 2002. Generally, the Fund will endeavor to purchase those Zero-Coupon
Securities that mature towards the end of 2002. Until December 31, 2002 (the
"Target Maturity Date"), the Fund may also invest up to 10% of its net assets
in coupon-bearing (income-producing) U.S. Treasury securities maturing on or
before the Target Maturity Date and money market instruments. If the Advisor
determines that the desired Zero-Coupon Securities are not otherwise readily
available for purchase, the Fund may invest in zero-coupon and income-producing
U.S. Government Securities maturing on or before the Target Maturity Date. The
Fund may also invest in cash and cash equivalents for temporary defensive
purposes.
The market value of fixed-income securities held by the Fund and, consequently,
the Fund's NAV, can be expected to vary inversely to changes in prevailing
interest rates. Consequently, redemptions made prior to the Target Maturity
Date may result in substantial capital gains or losses.
To the extent that the Fund holds Zero-Coupon Securities that mature prior to
the Target Maturity Date, the proceeds of such Zero-Coupon Securities at their
maturity will be reinvested in short term coupon-bearing U.S. Treasury
securities or money market instruments until the Target Maturity Date.
Therefore, towards the end of the target maturity year, 2002, the percentage of
the Fund's assets invested in coupon-bearing U.S. Treasury securities and money
market instruments may increase up to 100%. After the Target Maturity Date, the
Fund intends to remain open, with all its assets invested in money market
instruments and U.S. Treasury securities with maturities of up to three years,
and the Fund will be managed as a relatively short-term bond fund. After the
Target Maturity Date, the normal risks of a bond fund will apply.
The Fund pursues professional management of market risk. To approximate the
return an investor would receive if he or she purchased Zero-Coupon Securities
directly, the Advisor manages the Fund to track as closely as possible the
price behavior of Zero-Coupon Securities maturing towards the end of 2002. To
correct for factors such as shareholder purchase and redemption activity (and
related transaction costs) that differentiate investing in a portfolio of Zero-
Coupon Securities from investing directly in a Zero-Coupon Security, the
Advisor executes portfolio transactions necessary to accommodate net
shareholder activity each business day.
By adhering to these investment parameters, the Advisor expects that a
shareholder who holds his or her shares and does not effect any redemptions
until the Target Maturity Date, and who reinvests all dividends and capital
gain distributions, will realize a maturity value that does not differ
substantially from the anticipated value at maturity ("AVM"), as calculated on
the purchase date. There can be no assurance, however, that these objectives
will be achieved. Furthermore, if a shareholder does not reinvest all dividends
and capital gain distributions, then the AVM cannot be estimated accurately.
The Fund's AVM is calculated by the Advisor each day the Trusts are open for
business and it may vary from day-to-day, due to redemptions and distributions,
as well as transaction costs, interest rate changes, and the Advisor's efforts
to improve total return by taking advantage of market opportunities.
42
<PAGE>
There are relatively few mutual funds with investment objectives and policies
similar to those of the Fund that have reached their target maturity date.
Therefore, there is relatively little experience regarding the types of risk
involved in investing in the Fund.
U.S. GOVERNMENT SECURITIES FUND. To accomplish its objective, the U.S.
Government Securities Fund invests primarily in a selection of obligations of
the U.S. Government and its agencies. The Fund may also invest in
collateralized mortgage obligations or repurchase agreements which are secured
by those types of obligations. It is a fundamental policy of the Fund to invest
only in the following types of securities: (1) U.S. Government securities,
including mortgage-backed securities; (2) obligations secured by the full faith
and credit of the U.S. Government or its instrumentalities; and (3)
collateralized mortgage obligations and repurchase agreements which are secured
by obligations identified in (1) and (2) above. The Fund may borrow up to 5% of
its total net assets for emergency, non-investment purposes and may enter into
dollar roll transactions. See "Common Investment Practices--Borrowing," "--
Government Stripped Mortgage-Backed Securities" and "--U.S. Government
Securities."
INCOME FUND. To accomplish its objective, the Income Fund invests in debt
issues and obligations that offer high current yields and that are consistent
with a moderate degree of risk. Accordingly, the Fund invests most of its
assets in (1) debt and convertible debt securities; (2) U.S. Government
Securities, including mortgage-backed securities issued by the Government
National Mortgage Association ("GNMA"), Federal National Mortgage Association
("FNMA"), and Federal Home Loan Mortgage Corporation ("FHLMC") or similar
government agencies; (3) obligations of U.S. banks that belong to the Federal
Reserve System; (4) preferred stocks and convertible preferred stocks rated in
one of the four highest ratings of S&P or Moody's; (5) the highest grade
commercial paper as rated by S&P or Moody's; and (6) deposits in U.S. banks.
The Fund may also invest in securities denominated in foreign currencies and
likewise receive interest, dividends and sale proceeds in foreign currencies.
The Fund may engage in foreign currency exchange transactions for hedging
purposes in connection with the purchase and sale of foreign securities or to
protect against changes in the value of specific securities held by the Fund,
and may purchase and sell currencies on a spot (cash) basis, enter into forward
contracts to
purchase or sell foreign currencies at a future date, and buy and sell foreign
currency futures contracts. The Fund may also borrow up to 5% of its total net
assets for emergency, non-investment purposes, and may enter into dollar roll
transactions. The Fund may purchase securities of issuers which deal in real
estate or securities which are secured by interests in real estate, and it may
acquire and dispose of real estate or interests in real estate acquired through
the exercise of its rights as a holder of debt obligations secured by real
estate or interests therein. The Fund may also purchase and sell interest rate
futures and options. The Fund may invest up to 35% of its assets in lower-rated
fixed-income securities (sometimes called "junk bonds"). See "Common Investment
Practices --Foreign Currency Exchange Transactions and Currency Management,"
"--Lower-Rated Securities," "--Foreign Investments," "--Strategic
Transactions," "--Borrowing" and "--Real Estate Investment Trusts."
HIGH YIELD FUND. To accomplish its objective, the High Yield Fund invests,
under normal market conditions, at least 65% of its assets in a diversified
portfolio of fixed income securities (including debt securities, convertible
securities and preferred stocks) rated lower than BBB by S&P or Baa by Moody's
or of equivalent quality as determined by the Advisor. The remainder of the
Fund's assets may be invested in any other securities the Advisor believes are
consistent with the Fund's objective, including higher rated fixed-income
securities, common stocks and other equity securities. The Fund may invest in
securities of foreign issuers and engage in hedging strategies involving
options. See "Common Investment Practices--Lower Rated Securities," "--Fixed-
Income Obligations," "--Foreign Investments" and "--Strategic Transactions."
As of March 20, 1998, the Advisor and its affiliates was the sole shareholder
of the High Yield Fund and may be deemed to control the Fund.
MUNICIPAL FUNDS
Each of the Municipal Funds, as well as the California Money Fund, invests a
majority of their respective assets in Municipal Obligations. Current federal
income tax laws limit the types and volume of bonds qualifying for the federal
income tax exemption of interest, which may have an effect on the ability of
the Fund to purchase sufficient amounts of tax-exempt securities.
TAX-EXEMPT BOND FUND. To accomplish its objective, the Tax-Exempt Bond Fund
invests primarily in Municipal Obligations.
43
<PAGE>
Under normal market conditions, the Fund will invest at least 80% of its assets
in Municipal Obligations, including inverse floating rate obligations. The Fund
specifically limits these investments to: municipal bonds, municipal notes and
securities of unaffiliated tax-exempt mutual funds. Inverse floating
obligations will generally be more volatile than other types of Municipal
Obligations. The Fund may invest up to 35% of its assets in lower-rated
securities. See "Common Investment Practices--Floating Rate, Inverse Floating
Rate and Variable Rate Obligations" and "--Lower-Rated Securities."
In adverse markets, the Fund may seek to protect its investment position by
investing up to 50% of its portfolio in taxable short-term investments such as:
(1) U.S. Government Securities; (2) commercial paper rated in the highest grade
by either S&P or Moody's; (3) obligations of U.S. banks; (4) time or demand
deposits in U.S. banks; and (5) repurchase agreements relating to municipal
securities or any of the foregoing taxable instruments. Interest income from
these short-term investments, when it is distributed by the Fund, may result in
a tax liability to investors. The Fund may also purchase and sell interest rate
futures and options and AMT-Subject Bonds.
CALIFORNIA MUNICIPAL FUND. To accomplish its objective, the California
Municipal Fund invests primarily in intermediate- and long-term California
municipal securities ("California Municipal Obligations"). It is a fundamental
policy of the Fund that, under normal market conditions, at least 80% of the
Fund's total assets will be invested in California Municipal Obligations. The
Fund may invest in AMT-Subject Bonds, as described in "Common Investment
Practices--Municipal Obligations and AMT-Subject Bonds."
The Fund will primarily invest in investment grade Municipal Obligations. The
Fund may also invest in inverse floating obligations, which will generally be
more volatile than other types of Municipal Obligations.
The Fund may, under normal circumstances, invest up to 20% of its assets in (1)
Municipal Obligations that are not exempt from California personal income tax;
(2) short-term Municipal Obligations; (3) taxable cash equivalents, including
short-term U.S. Government Securities, certificates of deposit and bankers'
acceptances, commercial paper rated Prime-1 by Moody's or A-1+ or A-1 by S&P,
repurchase agreements (collectively "Short-Term Instruments"); and (4)
securities of money market mutual funds (subject to the limitations set forth
under "Common
Investment Practices"). The Fund may, for temporary defensive purposes, invest
in these securities without limitation. As a non-diversified investment company
under the 1940 Act, the Fund may invest a larger portion of its assets in the
securities of a small number of issuers. See "Common Investment Practices--Non-
Diversified Status."
CALIFORNIA INSURED INTERMEDIATE MUNICIPAL FUND. To accomplish its objective,
the California Insured Intermediate Municipal Fund will invest primarily in
insured intermediate-term California Municipal Obligations. It is a fundamental
policy of the Fund that it will invest at least 80% of the value of its total
assets in insured California Municipal Obligations (except when maintaining a
temporary defensive position). The weighted average effective maturity of the
securities in which the Fund invests will be ten years or less, and the maximum
effective maturity (the maturity date without regard to call provisions, except
that for pooled single family mortgage securities effective maturity is the
average life of the underlying mortgage obligations) of any Municipal
Obligations in which the Fund invests will be fifteen years. See "About Bond
Insurance" below.
All of the Municipal Obligations in which the Fund will invest, taking into
account any insurance, are investment grade securities. For more information,
see "Common Investment Practices--Fixed-Income Obligations."
The Fund may invest without limitation in AMT-Subject Bonds, as described in
"Common Investment Practices--Municipal Obligations and AMT-Subject Bonds."
The Fund under normal circumstances may invest up to 20% of its assets in (1)
uninsured Municipal Obligations; (2) Municipal Obligations that are not exempt
from California personal income tax; and (3) short-term Municipal Obligations
and taxable cash equivalents, including Short-Term Instruments and securities
of unaffiliated money market mutual funds (subject to the limitations set forth
under "Common Investment Practices") and may, for temporary defensive purposes,
invest in these securities without limitation. In addition, the Fund may invest
in inverse floating rate obligations. Inverse floating obligations will
generally be more volatile than other types of Municipal Obligations. See
"Common Investment Practices--Floating Rate, Inverse Floating Rate and Variable
Rate Obligations."
The Fund may engage in hedging transactions through the use of financial
futures and options thereon, purchase and sell securities on a when-issued or
44
<PAGE>
forward commitment basis, invest in mortgage-backed securities, enter into
repurchase agreements, invest in stand-by commitments and lend portfolio
securities. The Fund may invest in floating rate, inverse floating rate (in
which it has recently held up to 9.8% of its assets) and variable rate
obligations, including participation interests therein (referred to
collectively as "Hedging Transactions"). See "Common Investment Practices--
Strategic Transactions."
As a non-diversified investment company under the 1940 Act, the Fund may invest
a larger portion of its assets in the securities of a small number of issuers.
See "Common Investment Practices--Non-Diversified Status."
FLORIDA INSURED MUNICIPAL FUND. To accomplish its objective, the Florida
Insured Municipal Fund will invest primarily in insured, intermediate and long-
term Florida Municipal Obligations, which are Municipal Obligations issued by
the State of Florida and its political subdivisions. It is a fundamental policy
of the Fund that it will invest at least 80% of the value of its total assets
(except when maintaining a temporary defensive position) in insured Florida
Municipal Obligations. See "About Bond Insurance" below. The Fund may invest
without limitation in AMT-Subject Bonds, as described in "Common Investment
Practices--Municipal Obligations and AMT-Subject Bonds." The Fund may also
invest in inverse floating obligations, which will generally be more volatile
than other types of Municipal Obligations.
The Fund will invest primarily in investment-grade Municipal Obligations.
The Fund may invest up to 20% of its total assets in (1) uninsured Municipal
Obligations; (2) Municipal Obligations that are not exempt from Florida
intangible personal property tax; and (3) Short-Term Instruments and securities
of unaffiliated money market mutual funds and, for temporary defensive
purposes, invest in these securities without limitation.
As a non-diversified investment company under the 1940 Act, the Fund may invest
a larger portion of its assets in the securities of a small number of issuers.
See "Common Investment Practices--Non-Diversified Status."
Florida does not impose an income tax on individuals. Distributions of
investment income and capital gains by the Fund will be subject to Florida
corporate income taxes. Florida imposes a tax on intangible personal property
owned by Florida residents. Based on a ruling
the Fund has received from the Florida Department of Revenue, if the Fund's
assets consist, on the last business day of the calendar year, solely of assets
exempt from Florida intangible personal property tax, shares of the Fund owned
by Florida residents will be exempt from Florida intangible personal property
tax. Assets exempt from Florida intangible personal property tax include
Florida Municipal Obligations issued by the State of Florida and its political
subdivisions, municipalities, and public authorities; obligations of the U. S.
Government or its agencies; and cash.
About Bond Insurance. The insured Municipal Obligations in which the California
Insured Intermediate Municipal and Florida Insured Municipal Funds will invest
and the other Municipal Funds may invest are insured under insurance policies
that relate to the specific Municipal Obligation in question ("Specific Issue
Insurance") and that are issued by any insurer having a claims-paying ability
rated AAA by S&P or Aaa by Moody's. Specific Issue Insurance is generally non-
cancelable and will continue in force so long as the Municipal Obligations are
outstanding and the insurer remains in business.
The insured Municipal Obligations are insured as to the scheduled payment of
all installments of principal and interest as they fall due. Such insurance
does not insure against market risk and therefore does not guarantee the market
value of the obligations in a Fund's investment portfolio or a Fund's NAV. Such
market value and NAV will continue to fluctuate in response to fluctuations in
interest rates. A Fund's investment policy requiring investment in insured
Municipal Obligations will not affect the Fund's ability to hold its assets in
cash or to invest in escrow-secured and defeased bonds or in certain short-term
tax-exempt obligations as set forth herein, or affect its ability to invest in
uninsured taxable obligations for temporary or liquidity purposes or on a
defensive basis.
EQUITY FUNDS
BOND & STOCK FUND. To accomplish its objective, the Bond & Stock Fund invests
in common stocks, preferred stocks, bonds and convertible securities. Under
normal market conditions at least 25% of the Fund's assets will be invested in
fixed-income securities, including preferred stocks and that portion of the
value of convertible securities which is not attributable to a conversion
feature. The Fund may invest in money market instruments for temporary or
defensive purposes. The Fund may invest in fixed-income securities of any
maturity, including mortgage-
45
<PAGE>
backed and other asset backed securities, and may also invest up to 35% of its
assets, in below investment grade bonds (sometimes called junk bonds). The Fund
may purchase or sell U.S. Government Securities or collateralized mortgage
obligations on "when-issued" or "delayed-delivery" basis in an aggregate of up
to 20% of the market value of its total net assets. The Fund may invest up to
25% of its assets in real estate investment trusts, known as "REITs." The Fund
may write (sell) covered call options. A call option is covered if the Fund
owns the security underlying the option it has written or it maintains enough
cash, cash equivalents or liquid securities to purchase the underlying
security. The Fund may invest up to 25% of its assets in U.S. dollar-
denominated securities of foreign issuers. See "Common Investment Practices--
Real Estate Investment Trusts," "--Lower-Rated Securities," "--Mortgage-Backed
and Asset-Backed Securities" and "--Foreign Investments."
GROWTH & INCOME FUND. To accomplish its objective, the Growth & Income Fund
invests primarily in common stocks. The Fund may also invest in money market
instruments for temporary or defensive purposes. To limit risk, repurchase
agreements maturing more than seven days will not exceed 10% of the Fund's
total assets. The Fund may invest up to 25% of its assets in REITs. The Fund
may invest in fixed-income securities of any maturity, including mortgage-
backed securities, and may invest up to 35% of its assets in below investment
grade fixed-income securities.
The Fund may purchase or sell U.S. Government securities or collateralized
mortgage obligations on a "when-issued" or "delayed-delivery" basis in an
aggregate up to 20% of the market value of its total assets minus total
liabilities (except for the obligations created by these commitments). The Fund
may write (sell) covered call options. See "Common Investment Practices--Real
Estate Investment Trusts," "--Mortgage-Backed and Asset-Backed Securities," "--
Lower Rated Securities" and "--Foreign Investments."
GROWTH FUND. To accomplish its objective, the Growth Fund invests primarily in
common stocks believed to have significant appreciation potential. The Fund
also may invest in debt securities, bonds, convertible bonds, preferred stock
and convertible preferred stock, including up to 35% of its assets in non-
investment-grade debt securities. See "Common Investment Practices--Lower-Rated
Securities."
The Fund may invest up to 25% of its assets in foreign securities, usually
foreign common stocks, and up to
5% of its assets in securities of companies in (or governments of) developing
or emerging countries (sometimes referred to as "emerging markets"). See
"Common Investment Practices--Foreign Securities." The Fund may also engage in
certain options transactions, enter into financial futures contracts and
related options for the purpose of portfolio hedging and enter into currency
forwards or futures contracts and related options for the purpose of currency
hedging. See "Common Investment Practices--Strategic Transactions."
Pursuant to an exemptive order granted by the SEC, the Growth Fund (and other
mutual funds managed by Janus) may transfer daily uninvested cash balances into
one or more joint trading accounts. Assets in the joint trading accounts are
invested in money market instruments, and the proceeds are allocated to the
participating funds on a pro-rata basis.
INTERNATIONAL GROWTH FUND. To accomplish its objective, the International
Growth Fund invests primarily in equity securities of issuers located in
foreign countries that the Fund's sub-advisor believes present attractive
investment opportunities. Criteria for determining the appropriate distribution
of investments among various countries and regions include prospects for
relative economic growth, expected levels of inflation, government policies
influencing business conditions, the outlook for currency relationships and the
range of investment opportunities available to international investors. The
relative strength or weakness of a particular country's currency or economy may
dictate whether securities of issuers located in such country will be purchased
or sold. The Fund may invest without limit in the securities of issuers located
in any one country (except as provided below with respect to emerging markets
countries). The Fund will emphasize established companies, although it may
invest in companies of varying sizes as measured by assets, sales and
capitalization.
The Fund invests in common stock and may invest in other securities with equity
characteristics such as trust or limited partnership interests, preferred
stock, rights and warrants. The Fund may also invest in convertible securities.
The Fund invests in securities listed on foreign or domestic securities
exchanges and securities traded in foreign or domestic over-the-counter
markets, and may invest in restricted or unlisted securities.
The Fund intends to stay fully invested in the securities described above to
the extent practical. Fund assets may be invested in short-term debt
instruments to meet anticipated day-to-day operating expenses, and for
46
<PAGE>
temporary defensive purposes. In addition, when the Fund experiences large cash
inflows, the Fund may hold short-term investments pending availability of
desirable equity securities. These short-term instruments are generally rated A
or higher by Moody's or S&P, or, if unrated, of comparable quality in the
opinion of the Fund's sub-advisor.
The Fund may invest up to 30% of its assets in the securities of companies in
or governments of developing or emerging markets, provided that no more than 5%
of the Fund's total assets are invested in any one emerging markets country.
For temporary defensive purposes, the Fund may invest a major portion of its
assets in securities of U.S. issuers. Furthermore, the Fund may invest up to 5%
of its total assets in investment grade corporate debt securities having
maturities longer than one year, including Euro-currency instruments and
securities.
NORTHWEST FUND. To accomplish its objective, the Northwest Fund invests in
common stocks of companies located or doing business in the Northwest states of
Alaska, Idaho, Montana, Oregon and Washington. Under normal circumstances, at
least 65% of the Fund's total assets will be invested in companies whose
principal executive offices are located in the Northwest.
The Fund is permitted to invest in money market instruments for temporary or
defensive purposes. The Fund may invest up to 25% of its assets in REITs. The
Fund may write (sell) covered call options. See "Common Investment Practices--
Real Estate Investment Trusts" and "--Strategic Transactions."
Because the Fund concentrates its investments in companies located or doing
business in the Northwest, the Fund is not intended as a complete investment
program, and could be adversely impacted by economic trends within the five-
state area.
EMERGING GROWTH FUND. To accomplish its objective, the Emerging Growth Fund
invests primarily in equity securities of companies with market capitalization
of less than $1.4 billion at the time of purchase. In addition to common stock,
the Fund's equity securities may include convertible bonds, convertible
preferred stock and warrants to purchase common stock, as well as cash and cash
equivalents. The Fund may invest up to 25% of its assets in securities of
foreign issuers and up to 5% of its assets in securities in developing or
emerging countries. See "Common Investment Practices--Foreign Investments." The
Fund may invest up to 35% of its
assets in non-investment-grade debt securities if the Advisor believes that
doing so will be consistent with the goal of capital appreciation. See "Common
Investment Practices--Lower-Rated Securities."
Small capitalization companies typically are subject to a greater degree of
change in earnings and business prospects than larger, more established
companies. In addition, securities of small capitalization companies are
generally traded in lower volume than those issued by larger companies and may
be more volatile and less liquid, and consequently bear greater investment
risk, than those of larger companies. Small capitalization companies generally
are not as well known to the investing public and have less of an investor
following than larger companies. In selecting investments for the Fund, the
Advisor seeks small capitalization companies that it believes are undervalued
in the marketplace, or that the Advisor believes have earnings that it expects
to grow faster than the U.S. economy in general.
WM STRATEGIC ASSET MANAGEMENT PORTFOLIOS
The Portfolios offer investors the opportunity to pursue a variety of
specifically constructed asset allocation strategies that are implemented
through the Portfolios' investing in certain of the Funds and the Prime Income
Fund. The Portfolios are designed for long-term investors seeking total return
for tax-advantaged retirement and other long-term investment or savings
accounts.
In order to achieve its investment objective, each Portfolio typically
allocates its assets, within predetermined percentage ranges, among certain of
the Funds. Nonetheless, due primarily to market activity, the Portfolios may
temporarily exceed one or more of the applicable percentage limits for short
periods. The percentages reflect the extent to which each Portfolio will invest
in the particular market segment represented by each underlying Fund, and the
varying degrees of potential investment risk and reward represented by each
Portfolio's investments in those market segments and their corresponding Funds.
The Advisor may alter these percentage ranges when it deems appropriate. The
assets of each Portfolio will be allocated among the Funds in accordance with
its investment objective, the Advisor's outlook for the economy and the
financial markets, and the relative market valuations of the Funds.
In addition, in order to meet liquidity needs or for temporary defensive
purposes, each Portfolio may invest, without limit, its assets directly in
cash, stock or
47
<PAGE>
bond index futures and options thereon and the following short-term
instruments: (i) short-term obligations of the U.S. Government, its agencies,
instrumentalities, authorities or political subdivisions; (ii) other short-term
debt securities rated A or higher by Moody's or S&P, or if unrated, of
comparable quality in the opinion of the Advisor; (iii) commercial paper,
including master notes; (iv) bank obligations, including negotiable
certificates of deposit, time deposits and bankers' acceptances; and (v)
repurchase agreements. At the time a Portfolio invests in any commercial paper,
bank obligations or repurchase agreements, the issuer must have outstanding
debt rated A or higher by Moody's or S&P; the issuer's parent corporation, if
any, must have outstanding commercial paper rated Prime-1 by Moody's or A-1 by
S&P; or, if no such ratings are available, the investment must be of comparable
quality in the opinion of the Advisor. In addition to purchasing shares of the
Funds, a Portfolio may use futures contracts and options in order to remain
effectively fully invested in proportions consistent with the Advisor's current
asset allocation strategy for the Portfolio. Specifically, each Portfolio may
enter into futures contracts and options thereon provided that the aggregate
deposits required on these contracts do not exceed 5% of the Portfolio's total
assets. A Portfolio may also use futures contracts and options for bona fide
hedging transactions. Futures contracts and options may also be used to
reallocate the Portfolio's assets among asset categories while minimizing
transaction costs, to maintain cash reserves while simulating full investment,
to facilitate trading, to seek higher investment returns, or to simulate full
investment when a futures contract is priced attractively or is otherwise
considered more advantageous than the underlying security or index. As a
fundamental policy, which may not be changed without shareholder vote, each
Portfolio will concentrate its investments in shares of the Funds.
A NOTE ON THE PRIME INCOME FUND
Each of the Portfolios, except for the Strategic Growth Portfolio, may invest
in Class A Common Shares of the Prime Income Fund. The Prime Income Fund is a
non-diversified, closed-end management investment company, which seeks to
provide a high level of current income, consistent with preservation of
capital. The Prime Income Fund seeks to achieve its objective by investing
primarily in a portfolio of interests in floating or variable rate senior loans
("Senior Loans") made primarily to U.S. corporations, partnerships and other
entities ("Borrowers"). Senior Loans may take the form of syndicated loans
("Syndicated Loans") or of debt obligations of Borrowers issued directly to
investors in the form of debt securities ("Senior Notes"). Senior Loans in
which the Prime Income Fund will invest generally pay interest at rates which
are periodically redetermined by reference to a base lending rate plus a
premium. These base lending rates are generally the prime rate offered by one
or more major United States banks (the "Prime Rate"), the London InterBank
Offered Rate ("LIBOR"), the Certificate of Deposit ("CD") rate or other base
lending rates used by commercial lenders.
While the Prime Income Fund seeks relative share price (NAV) stability, its net
asset value may be affected by changes in the credit quality of Borrowers with
respect to Senior Loan interests in which the Prime Income Fund invests.
Under normal market conditions, at least 80% of the Prime Income Fund's total
assets will be invested in interests, participations and assignments of Senior
Loans. The remainder of the Prime Income Fund's assets may be invested in high
quality, short-term debt, money market instruments, warrants, equity securities
and junior debt securities acquired in connection with the Prime Income Fund's
investment in Senior Loans. There is no restriction or percentage limitation
with respect to the Prime Income Fund's investment in illiquid securities and
an investment in the Prime Income Fund should also be considered illiquid. The
Prime Income Fund is not subject to any restrictions with respect to the
maturity of Senior Loans held in its portfolio. It is currently anticipated
that the Prime Income Fund's assets invested in Senior Loans will consist of
Senior Loans with stated maturities of between three and seven years,
inclusive, and with rates of interest which are periodically reset with reset
periods typically ranging from 30 days to one year. Investment in Senior Loans
with longer interest rate redetermination periods may increase fluctuations in
the Prime Income Fund's NAV as a result of changes in interest rates.
48
<PAGE>
Set forth in the table below are the expenses associated with investment in
Class A Common Shares of the Prime Income Fund based on its most recent fiscal
year:
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES (AS A
PERCENTAGE OF NET ASSETS ATTRIBUTABLE
TO CLASS A COMMON SHARES)
-------------------------------------
<S> <C>
Management Fee........................... 0.00%*
Interest Payments on Borrowed Funds...... 0.00%
Other Expenses........................... 0.00%*
Total Annual Operating Expenses........ 0.00%*
</TABLE>
- --------
* Until December 31, 1998, the Advisor has agreed to voluntarily waive all fees
with respect to Class A Common Shares and reimburse the Prime Income Fund for
all of its operating expenses. Without this waiver and reimbursement, the
management fee would be 0.95% of net assets and other expenses with respect to
Class A Common Shares are estimated at 3.75%, based in part upon the
experience of the fiscal year ended September 30, 1997. Total operating
expenses with respect to Class A Common Shares without the fee waiver and
reimbursement of expenses are estimated at 4.70%.
STRATEGIC GROWTH PORTFOLIO. To accomplish its objective, the Strategic Growth
Portfolio invests in the following Funds up to the percentage limits set forth
below:
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT LIMIT
(PERCENT OF THE
STRATEGIC GROWTH PORTFOLIO'S
FUNDS TOTAL ASSETS)
----- ----------------------------
<S> <C>
Money Market Fund.................................. 25%
Short Term High Quality Bond Fund.................. 25%
High Yield Fund.................................... 25%
Growth & Income Fund............................... 50%
Growth Fund........................................ 50%
Northwest Fund..................................... 50%
Emerging Growth Fund............................... 50%
International Growth Fund.......................... 50%
</TABLE>
Except for defensive periods or liquidity needs, the Strategic Growth Portfolio
intends to invest at least 75% of its net assets available for investment in
the Equity Funds.
CONSERVATIVE GROWTH PORTFOLIO. The Conservative Growth Portfolio seeks to
achieve its objective by investing in the following Funds up to the percentage
limits set forth below:
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT LIMIT
(PERCENT OF THE
CONSERVATIVE
GROWTH PORTFOLIO'S
FUNDS TOTAL ASSETS)
----- --------------------------
<S> <C>
Money Market Fund.................................... 30%
Prime Income Fund.................................... 15%
Short Term High Quality Bond Fund.................... 30%
U.S. Government Securities Fund...................... 30%
Income Fund.......................................... 30%
High Yield Fund...................................... 30%
Growth & Income Fund................................. 40%
Growth Fund.......................................... 40%
Northwest Fund....................................... 40%
Emerging Growth Fund................................. 40%
International Growth Fund............................ 40%
</TABLE>
Except for defensive periods or liquidity needs, the Conservative Growth
Portfolio intends to invest at least 60% of its net assets available for
investment in Equity Funds. In addition, under normal market conditions the sum
of the Portfolio's investments in the High Yield and Prime Income Funds will
not exceed 30% of its net assets.
BALANCED PORTFOLIO. To accomplish its objective, the Balanced Portfolio invests
in the following Funds up to the percentage limits set forth below:
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT LIMIT
(PERCENT OF THE
BALANCED PORTFOLIO'S
FUNDS TOTAL ASSETS)
----- --------------------------
<S> <C>
Money Market Fund.................................... 40%
Prime Income Fund.................................... 15%
Short Term High Quality Bond Fund.................... 40%
U.S. Government Securities Fund...................... 40%
Income Fund.......................................... 40%
High Yield Fund...................................... 40%
Growth & Income Fund................................. 30%
Growth Fund.......................................... 30%
Northwest Fund....................................... 30%
Emerging Growth Fund................................. 30%
International Growth Fund............................ 30%
</TABLE>
Except for defensive periods or liquidity needs, the Balanced Portfolio intends
to invest no less than 30% and no more than 70% of its net assets available for
investment in the Fixed-Income Funds and the Prime Income Fund and no less than
30% and no more than 70% of its net assets available for investment in Equity
Funds. In addition, under normal market conditions the sum of the Portfolio's
investments in the High Yield and Prime Income Funds will not exceed 30% of its
net assets.
FLEXIBLE INCOME PORTFOLIO. To accomplish its objective, the Flexible Income
Portfolio invests in the following Funds up to the percentage limits set forth
below:
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT LIMIT
(PERCENT OF THE FLEXIBLE
INCOME PORTFOLIO'S
FUNDS TOTAL ASSETS)
----- --------------------------
<S> <C>
Money Market Fund.................................... 40%
Prime Income Fund.................................... 15%
Short Term High Quality Bond Fund.................... 40%
U.S. Government Securities Fund...................... 40%
Income Fund.......................................... 40%
High Yield Fund...................................... 40%
Growth & Income Fund................................. 30%
Growth Fund.......................................... 30%
Northwest Fund....................................... 30%
Emerging Growth Fund................................. 30%
</TABLE>
Except for defensive periods or liquidity needs, the Flexible Income Portfolio
intends to invest no more than 30% of its net assets available for investment
in Equity Funds. In addition, under normal market conditions the sum of the
Portfolio's investments in the
49
<PAGE>
High Yield and Prime Income Funds will not exceed 30% of its net assets.
INCOME PORTFOLIO. To accomplish its objective, the Income Portfolio invests in
the following Funds up to the percentage limits set forth below:
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT LIMIT
(PERCENT OF THE
INCOME PORTFOLIO'S
FUNDS TOTAL ASSETS)
----- --------------------------
<S> <C>
Money Market Fund.................................... 50%
Prime Income Fund.................................... 15%
Short Term High Quality Bond Fund.................... 50%
U.S. Government Securities Fund...................... 50%
Income Fund.......................................... 40%
High Yield Fund...................................... 40%
</TABLE>
Except for defensive periods or liquidity needs, the Income Portfolio intends
to invest 100% of its net assets available for investment in Fixed-Income
Funds. In addition, under normal market conditions the sum of the Portfolio's
investments in the High Yield and Prime Income Funds will not exceed 30% of its
net assets.
COMMON INVESTMENT PRACTICES
The presentation of the common investments practices as set forth below is
ordered alphabetically and not necessarily in order of importance.
The following pages contain more detailed information about types of securities
in which the Funds, the Portfolios and the Prime Income Fund may invest, and
strategies which the Advisor or the respective sub-advisor may employ in
pursuit of that Fund's investment objective and a summary of risks and
restrictions associated with these securities and investment practices. Each
Fund's NAV will fluctuate as the values of the securities it owns change. There
are many factors that influence fluctuations in the market value of securities
owned by the Funds. These include economic trends, government actions and
regulations and international monetary conditions. An individual security's
price can be affected by such factors as poor earnings reports by its issuer,
litigation, loss of major customers or changes particular to its industry. For
more information, see the SAI. As described below under "Risk Factors of the
Portfolios" and "Investment In Funds Through a WM Strategic Asset Management
("SAM") Account," the Funds may from time to time be adversely affected by
large purchases and redemptions of Fund shares resulting from reallocations and
rebalancings by the Portfolios and the SAM accounts. Except as otherwise
indicated, all policies and limitations are considered at the time of purchase;
the sale of securities is not required in the event of a subsequent change in
valuation or other circumstances.
AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS. The Equity
Funds, the Short Term High Quality Bond Fund and the Income Fund may invest in
securities of foreign issuers directly or in the form of American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary
Receipts ("GDRs") or other similar securities representing securities of
foreign issuers. These securities may not necessarily be denominated in the
same currency as the securities they represent. ADRs are receipts typically
issued by a United States bank or trust company evidencing ownership of the
underlying foreign securities. EDRs, which are sometimes referred to as
Continental Depositary Receipts ("CDRs"), are receipts issued by a European
financial institution evidencing a similar arrangement. Generally, ADRs, in
registered form, are designed for use in the United States securities markets,
and EDRs, in bearer form, are designed for use in European securities markets.
These securities generally involve the risks described under "Foreign
Investments" below.
BORROWING. The Funds may borrow money from banks solely for temporary or
emergency purposes, subject to various limitations. If a Fund borrows money,
its share price may be subject to greater fluctuation until the borrowing is
paid off. For the California Money, Short Term High Quality Bond, Target
Maturity 2002, California Municipal, California Insured Intermediate Municipal,
Florida Insured, Growth, International Growth and Emerging Growth Funds, and
for the Portfolios, such borrowings may not exceed 30% of total assets. The
Money Market, Tax-Exempt Money Market, Income, Tax-Exempt Bond, Bond & Stock,
Growth & Income and Northwest Funds may borrow up to 5% of total assets for
emergency purposes. In addition, the Money Market and Tax-Exempt Money Market
Funds may borrow up to 33 1/3% of total assets to meet redemption requests. The
Short Term High Quality Bond Fund is prohibited from borrowing money or
entering into reverse repurchase agreements or dollar roll transactions
(described below) in the aggregate in excess of 33 1/3% of the Fund's total
assets (after giving effect to such borrowings and transactions). If a Fund
makes additional investments while borrowings are outstanding, this will have
the effect of leveraging the Fund. The Portfolios may not purchase additional
securities when borrowing exceeds 5% of total assets. Leveraging will magnify
declines as well as increases in the NAV of a Fund's or Portfolio's shares and
in the yield on a Fund's or Portfolio's investments. Each of the foregoing
percentage limitations on borrowings is a fundamental policy of the respective
Funds and Portfolios.
50
<PAGE>
The Income, Short Term High Quality Bond and U.S. Government Securities Funds
may enter into DOLLAR ROLLS, subject to the percentage restrictions on
borrowing. A Fund enters into a DOLLAR ROLL by selling securities for delivery
in the current month and simultaneously contracts to repurchase, typically in
30 or 60 days, substantially similar (same type, coupon and maturity)
securities on a specified future date, which, under the Investment Company Act
of 1940, as amended (the "1940 Act") may be considered borrowings from the
counterparty and may produce similar leveraging effects. The proceeds of the
initial sale of securities in the dollar roll transactions, for example, may be
used to purchase long-term securities which will be held during the roll
period. To the extent that the proceeds of the initial sale of securities are
invested in bonds, the Fund will be subject to market risk on these bonds as
well as similar risk with respect to the securities the Fund is required to
repurchase. See "Fixed-Income Obligations" below.
Each of the Funds other than the Money Funds (the "Non-Money Funds") (with the
exception of the Target Maturity 2002 Fund) may engage in REVERSE REPURCHASE
AGREEMENTS, subject to the percentage restrictions on borrowing. Reverse
repurchase agreements involve the risk that the market value of the securities
sold by a Fund may decline below the repurchase price of the securities and, if
the proceeds from the reverse repurchase agreement are invested in securities,
that the market value of the securities bought may decline at the same time
there is decline in the securities sold (and required to be repurchased).
EXCHANGE RATE-RELATED SECURITIES. Each of the Non-Money Funds (with the
exception of the Target Maturity 2002 Fund) may invest in securities which are
indexed to certain specific foreign currency exchange rates. These securities
involve the possibility of significant changes in rates of exchange between the
U.S. dollar and any foreign currency to which an exchange rate-related security
is linked. In addition, there is no assurance that sufficient trading interest
to create a liquid secondary market will exist for a particular exchange rate-
related security due to conditions in the debt and foreign currency markets.
Illiquidity in the forward foreign exchange market and the high volatility of
the foreign exchange market may from time to time combine to make it difficult
to sell an exchange rate-related security prior to maturity without incurring a
significant loss.
FIXED-INCOME OBLIGATIONS. The market value of fixed-income securities held by a
Fund and, consequently, the value of the Fund's shares can be
expected to vary inversely to changes in prevailing interest rates. Investors
should also recognize that, in periods of declining interest rates, the yield
of the Fund will tend to be somewhat higher than prevailing market rates and,
in periods of rising interest rates, the Fund's yield will tend to be somewhat
lower. Also, when interest rates are falling, any net inflow of money to the
Fund will likely be invested in instruments producing lower yields than the
balance of its assets, thereby reducing current yield. In periods of rising
interest rates, the opposite can be expected to occur. The prices of longer
maturity securities are also subject to greater market fluctuations as a result
of changes in interest rates. In addition, obligations purchased by a Fund may
be subject to the risk of default. Fixed-Income obligations, including
Municipal Obligations, rated in the lower end of the investment-grade category
(Baa or BBB) may have speculative characteristics and may be more sensitive to
economic changes and changes in the financial condition of their issuers.
FLOATING RATE, INVERSE FLOATING RATE AND VARIABLE RATE OBLIGATIONS. The
Municipal Funds and the Fixed-Income Funds may purchase floating rate, inverse
floating rate and variable rate obligations, including participation interests
therein.
The Money Funds may purchase floating rate and variable rate obligations,
including participation interests therein.
The Fixed-Income Funds may purchase mortgage-backed securities that are
floating rate, inverse floating rate and variable rate obligations. Municipal
Obligations purchased by the Municipal Funds may include floating rate, inverse
floating rate and variable rate obligations, including variable rate demand
notes issued by industrial development authorities and other governmental
entities, as well as participation interests therein. Although variable rate
demand notes are frequently not rated by credit rating agencies, a Fund may
purchase unrated notes that are determined by the Advisor or the Fund's sub-
advisor to be of comparable quality at the time of purchase to rated
instruments that may be purchased by the Fund. The absence of an active
secondary market could make it difficult for a Fund to dispose of these
securities in the event the issuer of the note were to default on its payment
obligations, and the Fund could, for this or other reasons, suffer a loss as a
result of the default.
Each Fund may also invest in securities representing interests in tax-exempt
securities, known as inverse floating obligations or "residual interest bonds,"
which pay interest rates that vary inversely with changes in
51
<PAGE>
the interest rates of specified short-term tax-exempt securities or an index of
short-term tax-exempt securities. The interest rates on inverse floating
obligations or residual interest bonds will typically decline as short-term
market interest rates increase and increase as short-term market rates decline.
These securities have the effect of providing a degree of investment leverage.
They will generally respond to changes in market interest rates more rapidly
than fixed-rate long-term securities (typically twice as fast). As a result,
the market values of inverse floating obligations and residual interest bonds
will generally be more volatile than the market values of fixed-rate tax-exempt
securities.
FLORIDA MUNICIPAL OBLIGATIONS. The Florida Constitution and Statutes mandate
that the State budget as a whole, and each separate fund within the State
budget, be kept in balance from currently available revenues each fiscal year.
Florida's Constitution permits issuance of Florida Municipal Obligations
pledging the full faith and credit of the State, with a vote of the electors,
to finance or refinance fixed capital outlay projects authorized by the
Legislature provided that the outstanding principal does not exceed 50% of the
total tax revenues of the State for the two preceding years. Florida's
Constitution also provides that the Legislature shall appropriate monies
sufficient to pay debt service on State bonds pledging the full faith and
credit of the State as such debt service becomes due. All State tax revenues,
other than trust funds dedicated by Florida's Constitution for other purposes,
would be available for such an appropriation, if required.
An amendment to the State Constitution was approved by statewide ballot in the
November 8, 1994 general election which is commonly referred to as the
"Limitation on State Revenues Amendment." This amendment provides that State
revenues collected for any fiscal year shall be limited to State revenues
allowed under the amendment for the prior fiscal year plus an adjustment for
growth. Growth is defined as an amount equal to the average annual rate of
growth in State personal income over the most recent twenty quarters times the
State revenues allowed under the amendment for the prior fiscal year. State
revenues collected for any fiscal year in excess of this limitation are
required to be transferred to the budget stabilization fund until the fund
reaches the maximum balance specified in Section 19(g) of Article III of the
State Constitution, and thereafter is required to be refunded to taxpayers as
provided by general law. The limitation on State revenues imposed by the
amendment may be increased by the Legislature, by a two-thirds vote of each
house.
The term "State revenues," as used in the amendment, means taxes, fees,
licenses, and charges for services imposed by the Legislature on individuals,
businesses, or agencies outside State government. However, the term "State
revenues" does not include: (i) revenues that are necessary to meet the
requirements set forth in documents authorizing the issuance of bonds by the
State; (ii) revenues that are used to provide matching funds for the federal
Medicaid program with the exception of the revenues used to support the Public
Medical Assistance Trust Fund or its successor program and with the exception
of State matching funds used to fund elective expansions made after July 1,
1994; (iii) proceeds from the State lottery returned as prizes; (iv) receipts
of the Florida Hurricane Catastrophe Fund; (v) balances carried forward from
prior fiscal years; (vi) the proceeds from the sale of goods (e.g. land,
buildings); or (vii) revenue from taxes, licenses, fees and charges for
services required to be imposed by any amendment or revision to the State
Constitution after July 1, 1994. The amendment took effect on January 1, 1995
and is applicable to State fiscal year 1995-96.
It should be noted that many of the provisions of the amendment are ambiguous,
and likely will not be clarified until State courts have ruled on their
meanings. Furthermore, it is unclear how the Legislature will implement the
language of the amendment and whether such implementing legislation itself will
be the subject of further court interpretation.
The Fund cannot predict the impact of the amendment on State finances. To the
extent local governments traditionally receive revenues from the State which
are subject to, and limited by, the amendment, the future distribution of such
State revenues may be adversely affected by the amendment.
Revenue bonds may be issued by the State or its agencies without a vote of
Florida's electors only to finance or refinance the cost of State fixed capital
outlay projects which shall be payable solely from funds derived directly from
sources other than State tax revenues. Estimated fiscal year 1997-98 General
Revenue plus Working Capital and Budget Stabilization funds available total
$18,150.9 million, an increase of approximately 8.5% over comparable figures in
fiscal 1996-97. Total effective appropriations for the 1996-97 fiscal year were
$17,114.0 million, with unencumbered reserves at the end of 1996-97 estimated
at $1,036.9 million. Estimated fiscal year 1998-99 General Revenue plus Working
Capital and Budget Stabilization funds available total $18,644.0 million, an
increase of approximately 2.7% over comparable figures for fiscal
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year 1997-1998. Total effective appropriations for the 1998-99 fiscal year are
estimated to be $17,405.5 million, a 4.9% increase over the analogous figure in
1997-98.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS AND CURRENCY MANAGEMENT. The Equity
Funds and Fixed-Income Funds (other than the U.S. Government Securities Fund)
may engage in foreign currency exchange transactions. Funds that buy and sell
securities denominated in currencies other than the U.S. dollar, and receive
interest, dividends and sale proceeds in currencies other than the U.S. dollar,
may enter into foreign currency exchange transactions to convert to and from
different foreign currencies and to convert foreign currencies to and from the
U.S. dollar. The Fund either enters into these transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange
market, or uses forward contracts to purchase or sell foreign currencies.
These Funds may enter into foreign currency hedging transactions in an attempt
to protect against changes in foreign currency exchange rates between the trade
and settlement dates of specific securities transactions or changes in foreign
currency exchange rates that would adversely affect a portfolio position or an
anticipated portfolio position. These transactions tend to limit any potential
gain that might be realized should the value of the hedged currency increase.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
these securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward
contract is entered into and the date it matures. The projection of currency
market movements is extremely difficult, and the successful execution of a
hedging strategy is highly uncertain. In addition, when the Advisor or a Fund's
sub-advisor believes that the currency of a specific country may deteriorate
against another currency, it may enter into a forward contract to sell the less
attractive currency and buy the more attractive one. The amount in question
could be less than or equal to the value of the Fund's securities denominated
in the less attractive currency. The Fund may also enter into a forward
contract to sell a currency which is linked to a currency or currencies in
which some or all of the Fund's portfolio securities are or could be
denominated, and to buy U.S. dollars. These practices are referred to as "cross
hedging" and "proxy hedging."
Forward currency exchange contracts are agreements to exchange one currency for
another--for example, to
exchange a certain amount of U.S. dollars for a certain amount of Japanese
yen--at a future date and specified price. Because there is a risk of loss to
the Fund if the other party does not complete the transaction, the Advisor or
the Fund's sub-advisor will enter into forward currency exchange contracts only
with parties approved by the Trusts' Board of Trustees or persons acting
pursuant to their direction.
While the foregoing actions are intended to protect the Fund from adverse
currency movements, there is a risk that currency movements involved will not
be properly anticipated. Use of currency hedging techniques may also be limited
by the need to protect the status of the Fund as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the "Code").
FOREIGN INVESTMENTS. The Money Market, Bond & Stock, Growth & Income and
Northwest Funds may invest in securities of foreign issuers if such securities
are denominated in U.S. dollars. The High Yield, Income, Short Term High
Quality Bond, Emerging Growth, Growth and International Growth Funds may invest
in both U.S. dollar denominated and non-U.S. dollar denominated foreign
securities. There are certain risks involved in investing in foreign
securities, including those resulting from (i) fluctuations in currency
exchange rates, (ii) devaluation of currencies, (iii) future political or
economic developments and the possible imposition of currency exchange
blockages or other foreign governmental laws or restrictions, (iv) reduced
availability of public information concerning issuers, and (v) the fact that
foreign companies are not generally subject to uniform accounting, auditing and
financial reporting standards or to other regulatory practices and requirements
comparable to those applicable to domestic companies. Moreover, securities of
many foreign companies may be less liquid and their prices more volatile than
those of securities of comparable domestic companies. In addition, there is the
possibility of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of funds or other assets of the Funds,
including the withholding of dividends. The risks associated with foreign
securities are generally greater for securities of issuers in emerging markets.
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of the New York Stock Exchange (the "NYSE"). Accordingly, the Funds'
foreign investments may be less liquid and their prices may be more volatile
than
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comparable investments in securities of U.S. companies. Moreover, the
settlement periods for foreign securities, which are often longer than those
for securities of U.S. issuers, may affect portfolio liquidity. In buying and
selling securities on foreign exchanges, the Fund normally pays fixed
commissions that are generally higher than the negotiated commissions charged
in the United States. In addition, there is generally less governmental
supervision and regulation of securities exchanges, brokers and issuers in
foreign countries than in the United States. Foreign securities generally are
denominated and pay dividends or interest in foreign currencies, and the value
of the Funds' net assets as measured in U.S. dollars will be affected favorably
or unfavorably by changes in exchange rates.
GEOGRAPHICAL CONCENTRATION. Potential investors in the Northwest Fund and the
Municipal Funds (other than the Tax-Exempt Bond Fund) as well as the California
Money Fund should consider the possibly greater risk arising from the
geographic concentration of their investments, as well as the current and past
financial condition of California and Florida municipal issuers in the case of
the Municipal Funds. In addition to factors affecting the state or regional
economy, certain California and Florida constitutional amendments, legislative
measures, executive orders, administrative regulations, court decisions and
voter initiatives could result in certain adverse consequences affecting
California and Florida municipal obligations, respectively. See the SAI for a
more detailed description of these risks.
GOVERNMENT STRIPPED MORTGAGE-BACKED SECURITIES. The Income, Short Term High
Quality Bond and U.S. Government Securities Funds may invest in government
stripped mortgage-backed securities issued or guaranteed by GNMA, FNMA or
FHLMC. These securities represent beneficial ownership interests in either
periodic principal distributions (principal-only or "PO strips") or interest
distributions (interest-only or "IO strips") on mortgage-backed certificates
issued by GNMA, FNMA or FHLMC, as the case may be. The mortgages backing GNMA
certificates include conventional 30-year fixed-rate mortgages, 15-year fixed-
rate mortgages, graduated payment mortgages, and adjustable-rate mortgages. The
U.S. Government guarantees the timely payment of interest and principal for
these securities. However, the guarantees do not extend to the securities'
yield or value, which are likely to vary inversely with fluctuations in
interest rates, nor do the guarantees extend to the yield or value of the
Fund's shares. Investing in government stripped mortgage-
backed securities involves the risks normally associated with investing in
mortgage-backed securities issued by government or government-related entities.
See "Mortgage-Backed Securities" below. In addition, the yields on PO and IO
strips are extremely sensitive to prepayments on the underlying PO and IO
strips mortgage loans. If a decline in the level of prevailing interest rates
results in a higher than anticipated rate of principal prepayment,
distributions of principal will be accelerated, thereby reducing the yield to
maturity on IO strips and increasing the yield to maturity on PO strips.
Conversely, if an increase in the level of prevailing interest rates results in
a rate of principal prepayments lower than anticipated, distributions of
principal will be deferred, thereby increasing the yield to maturity on IO
strips and decreasing the yield to maturity on PO strips. Sufficiently high
prepayment rates could result in the Fund losing some or all of its initial
investment in an IO strip. The Funds will acquire government stripped mortgage-
backed securities only if a liquid secondary market for the securities exists
at the time of acquisition. However, there can be no assurance that the Funds
will be able to effect a trade of a government stripped mortgage-backed
security at a time when it wishes to do so.
HOLDINGS IN OTHER INVESTMENT COMPANIES. When the Advisor or a Fund's sub-
advisor believes that it would be beneficial to the Fund, each of the Tax-
Exempt Money Market, California Money, California Insured Intermediate
Municipal, California Municipal, Florida Insured Municipal, Short Term High
Quality Bond, Tax-Exempt Bond, Emerging Growth, Growth and International Growth
Funds may invest up to 10% of its assets in securities of mutual funds that are
not affiliated with the Advisor or the Fund's sub-advisor, if any. As a
shareholder in any such mutual fund, the Fund will bear its ratable share of
the mutual fund's expenses, including management fees, and will remain subject
to the Fund's advisory and administration fees with respect to the assets so
invested. In addition, the Growth Fund may invest Fund assets in money market
funds affiliated with Janus, provided that Janus remits to the Fund the amount
of any investment advisory and administrative services fees paid to Janus as
the investment manager of the money market fund.
ILLIQUID SECURITIES. Up to 15% of the net assets of each Non-Money Fund, and up
to 10% of the net assets of each Money Fund, may be invested in securities that
are not readily marketable. Such illiquid securities may include (1) repurchase
agreements with maturities greater than seven calendar days; (2) time deposits
maturing in more than seven calendar days; (3) to the
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extent a liquid secondary market does not exist for the instruments, futures
contracts and options thereon; (4) certain over-the-counter options, as
described in the SAI; (5) certain variable rate demand notes having a demand
period of more than seven days; and (6) securities the disposition of which is
restricted under federal securities laws (excluding certain Rule 144A
securities, as described below). The Funds will not include for purposes of the
restrictions on illiquid investments securities which may be resold pursuant to
Rule 144A under the Securities Act of 1933, as amended, so long as such
securities meet liquidity guidelines established by the Trusts' Board of
Trustees.
LENDING OF SECURITIES. The California Money, California Insured Intermediate
Municipal, Florida Insured Municipal, Short Term High Quality Bond, Emerging
Growth, Growth and International Growth Funds each may lend portfolio
securities up to 20% of total assets to brokers and other financial
organizations. The Bond & Stock, Growth & Income and Northwest Funds may lend
portfolio securities up to 33% of total assets. These transactions involve a
risk of loss to the Fund if the counterparty should fail to return such
securities to the Fund upon demand.
LOWER-RATED SECURITIES. The Income, Tax-Exempt Bond, Bond & Stock, Emerging
Growth, Growth & Income and Growth Funds may each invest up to 35% of the total
assets of the Fund in non-investment grade debt securities, sometimes referred
to as "junk bonds." The High Yield Fund may invest all of its assets in such
securities and will generally invest at least 65% of its assets in such
securities.
Non-investment grade securities usually entail greater risk (including the
possibility of default or bankruptcy of the issuers), generally involve greater
price volatility and risk of principal and income, and may be less liquid than
higher-rated securities. Both price volatility and illiquidity may make it
difficult for the Fund to value or to sell certain of these securities under
certain market conditions. Non-investment-grade debt securities are often
considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than higher-rated securities and may
decline significantly in periods of general economic difficulty, which may
follow periods of rising interest rates. For further information, see Appendix
A to this Prospectus.
The following table shows, for each indicated Fund, the average percentage of
its total assets that was invested during the past fiscal year in securities
assigned to the
various rating categories by S&P, or if unrated by S&P, assigned to comparable
rating categories by another NRSRO, and in unrated securities determined by the
Advisor to be of comparable quality:
<TABLE>
<CAPTION>
INCOME TAX-EXEMPT BOND & STOCK
S&P RATING FUND BOND FUND FUND
- ---------- ------ ---------- ------------
<S> <C> <C> <C>
AAA (or US Treasury) 40% 36% 24%
AA 2 46 0
A 13 9 1
BBB 22 4 6
BB 5 0 2
B 6 0 2
Not Rated 7 3 1
</TABLE>
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The California Insured
Intermediate Municipal, California Municipal, Florida Insured Municipal, Short
Term High Quality Bond, U.S. Government Securities, Emerging Growth and
International Growth Funds may invest in mortgage-backed U.S. Government
securities, which represent interests in a pool of mortgage loans. The Tax-
Exempt Money Market Fund may invest in asset-backed securities pursuant to its
authority to make money market investments. In addition, the Income, Bond &
Stock and Growth & Income Funds may invest in commercial mortgage-backed
securities, which are similar to the above mortgage-backed securities, except
they are not issued or guaranteed by governmental entities. Commercial
mortgage-backed securities include collateralized mortgage obligations and real
estate mortgage investment conduits ("REMICs"). While commercial mortgage-
backed securities are generally structured with one or more types of credit
enhancement, they typically lack a guarantee by an entity having the credit
status of a governmental agency or instrumentality.
To the extent that a Fund purchases mortgage-backed securities at a premium,
mortgage foreclosures and payments and prepayments of principal (which may be
made at any time without penalty) will tend to result in the loss of that
premium. The yield of the Fund may be affected by reinvestment of prepayments
at higher or lower rates than the original investment. In addition, like other
debt securities, the value of mortgage-related securities, including government
and government-related mortgage pools, will generally fluctuate in response to
market interest rates.
The Money Market, Short Term High Quality Bond, Emerging Growth and High Yield
Funds may purchase asset-backed securities. These Funds will not invest more
than 10% of their total assets in asset-backed securities, except that the
Short Term High Quality Bond Fund may invest up to 25% of its total assets in
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<PAGE>
such securities. Asset-backed securities are structured like mortgage-backed
securities, but instead of mortgage loans or interests in mortgage loans, the
underlying assets may include such items as motor vehicle installment sales or
installment loan contracts, leases of various types of real and personal
property, including home equity loans, and receivables from credit card
agreements. The ability of an issuer of asset-backed securities to enforce its
security interest in the underlying assets may be limited.
MUNICIPAL LEASES. The Tax-Exempt Money Market, California Money and California
Insured Intermediate Municipal Funds may acquire participations in lease
obligations or installment purchase contract obligations (collectively, "lease
obligations") of municipal authorities or entities. Lease obligations do not
constitute general obligations of the municipality for which the municipality's
taxing power is pledged. Certain of these lease obligations contain "non-
appropriation" clauses, which provide that the municipality has no obligation
to make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. In addition to the "non-
appropriation" risk, these securities represent a relatively new type of
financing that has not yet developed the depth of marketability associated with
more conventional bonds. In the case of a "non-appropriation" lease, the Fund's
ability to recover under the lease in the event of non-appropriation or default
will be limited solely to the repossession of the leased property, and in any
event foreclosure of that property might prove difficult.
MUNICIPAL OBLIGATIONS AND AMT-SUBJECT BONDS. The two principal classifications
of municipal bonds are "general obligation" and "revenue" bonds. General
obligation bonds are secured by the issuer's pledge of its full faith and
credit, with either limited or unlimited taxing power for the payment of
principal and interest. Revenue bonds are not supported by the issuer's full
taxing authority. Generally, they are payable only from the revenues of a
particular facility, a class of facilities, or the proceeds of another specific
revenue source.
"AMT-Subject Bonds" are Municipal Obligations issued to finance certain
"private activities," such as bonds used to finance airports, housing projects,
student loan programs and water and sewer projects. Interest on AMT-Subject
Bonds is a specific tax preference item for purposes of the federal individual
and corporate alternative minimum taxes. See "Dividends, Capital Gains and
Taxes" for a discussion of the tax consequences of investing in AMT-Subject
Bonds.
Current federal income tax laws limit the types and volume of bonds qualifying
for the federal income tax exemption of interest, which may have an effect upon
the ability of the Fund to purchase sufficient amounts of tax-exempt
securities.
NON-DIVERSIFIED STATUS. Each of the California Money, California Municipal,
Florida Insured Municipal and California Insured Intermediate Municipal Funds
is classified as "non-diversified" under the 1940 Act, which means that the
Fund is not limited by the 1940 Act in the proportion of its assets that may be
invested in the obligations of a single issuer. Each of these Funds must,
however, meet certain diversification standards to qualify as a regulated
investment company under the Code. See the "Taxes" section in the SAI. Each of
these Funds may assume large positions in the obligations of a small number of
issuers, which may subject the Fund to greater credit and other risks than a
more broadly diversified portfolio.
REAL ESTATE INVESTMENT TRUSTS. The Income, Bond & Stock, Growth & Income and
Northwest Funds may invest in real estate investment trusts, known as "REITs."
REITs involve certain unique risks in addition to those risks associated with
investing in the real estate industry in general (such as possible declines in
the value of real estate, lack of availability of mortgage funds or extended
vacancies of property). Equity REITs may be affected by changes in the value of
the underlying property owned by the REITs, while mortgage REITs may be
affected by the quality of any credit extended. REITs are dependent upon
management skills, are not diversified, are subject to heavy cash flow
dependency, risks of default by borrowers, and self-liquidation. REITs are also
subject to the possibilities of failing to qualify for tax-free pass-through of
income under the Code, and failing to maintain their exemptions from
registration under the 1940 Act.
Investment in REITs involves risks similar to those associated with investing
in small capitalization companies. REITs may have limited financial resources,
may trade less frequently and in a limited volume and may be subject to more
abrupt or erratic price movements than larger company securities.
REPURCHASE AGREEMENTS. All of the Funds may invest in repurchase agreements,
which are purchases of underlying debt obligations from financial institutions,
such as banks and broker-dealers, subject to the seller's agreement to
repurchase the obligations at an established time and price. Repurchase
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<PAGE>
agreements can be regarded as loans to the seller, collateralized by the
securities that are the subject of the agreement. Default by the seller would
expose the Fund to possible loss because of adverse market action or delay in
connection with the disposition of the underlying obligations. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the
obligations, the Fund may be delayed or limited in its ability to sell the
collateral. The Tax-Exempt Money Market and California Money Funds' investments
in repurchase agreements are limited by their restrictions on investment in
taxable instruments.
RESTRICTED SECURITIES. Each of the Funds may purchase restricted securities,
including securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933, as amended. Although recent and ongoing developments in
the securities markets have resulted in greater trading of restricted
securities, making restricted securities, in many instances, more liquid than
they once were considered to be, investing in restricted securities could have
the effect of increasing the level of illiquidity of the portfolio securities
of a Fund. While such conditions are in effect, it could be more difficult for
a Fund to fulfill shareholder redemption orders on a timely basis. If a Fund
were required to sell illiquid securities on short notice, it would generally
be unable to obtain fair market value.
STAND-BY COMMITMENTS. The California Money and Tax-Exempt Money Market Funds
and the Municipal Funds may acquire "stand-by commitments" with respect to
Municipal Obligations held in their portfolios. Under a stand-by commitment, a
dealer agrees to purchase, at a Fund's option, specified Municipal Obligations
at a specified price. A Fund may pay for stand-by commitments either separately
in cash or by paying a higher price for the securities acquired with the
commitment, thus increasing the cost of the securities and reducing the yield
otherwise available from them. The Funds will acquire stand-by commitments
solely to facilitate portfolio liquidity and do not intend to exercise their
rights thereunder for trading purposes.
STRATEGIC TRANSACTIONS. Subject to the investment limitations and restrictions
stated elsewhere in this Prospectus and the SAI, each of the Funds except the
Money Funds may utilize various investment strategies as described below to
hedge various market risks, to manage the effective maturity or duration of
fixed-income securities or for other bona fide hedging purposes. Utilizing
these investment strategies, the Fund may purchase and sell, to the extent not
otherwise
limited or restricted for such Fund, exchange-listed and over-the-counter put
and call options on securities, equity and fixed-income indices and other
financial instruments, purchase and sell financial futures contracts and
options thereon, enter into various interest rate transactions such as swaps,
caps, floors or collars, and enter into various currency transactions such as
currency forward contracts, currency futures contracts, currency swaps or
options on currencies or currency futures. The Funds may write (sell) covered
call options as well. A call option is "covered" if the Fund owns the security
underlying the option it has written or it maintains enough cash, cash
equivalents or liquid securities to purchase the underlying security. All the
above are collectively referred to as "Strategic Transactions."
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in, or to be purchased for, the
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Some Strategic Transactions
may also be used to seek potentially higher returns. Any or all of these
investment techniques may be used at any time, as the use of any Strategic
Transaction is a function of numerous variables including market conditions.
The use of Strategic Transactions involves special considerations and risks;
for example, (1) the ability of the Fund to utilize Strategic Transactions
successfully will depend on the ability of the Advisor or the sub-advisor to
predict pertinent market movements, and (2) there might be imperfect
correlation, or even no correlation, between price movements of Strategic
Transactions and price movements of the related portfolio positions. Strategic
Transactions can reduce risk of loss by wholly or partially offsetting the
negative effect of unfavorable price movements or of unfavorable currency
fluctuations in the related portfolio or currency positions, but can also
reduce opportunity for gain by offsetting the positive effect of favorable
price movements in positions. The Funds and Portfolios will comply with
applicable regulatory requirements when utilizing Strategic Transactions.
U.S. GOVERNMENT SECURITIES. All of the Funds may invest in U.S. Government
Securities, which include direct obligations of the U.S. Treasury (such as
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<PAGE>
U.S. Treasury bills, notes and bonds) and obligations issued or guaranteed by
U.S. Government agencies or instrumentalities. Some obligations issued or
guaranteed by agencies or instrumentalities of the U.S. Government are backed
by the full faith and credit of the U.S. Government (such as GNMA bonds),
others are backed only by the right of the issuer to borrow from the U.S.
Treasury (such as securities of Federal Home Loan Banks) and still others are
backed only by the credit of the instrumentality (such as FNMA and FHLMC
Bonds).
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED-DELIVERY
TRANSACTIONS. In order to secure yields or prices deemed advantageous at the
time, the Funds may purchase or sell securities on a when-issued or a delayed-
delivery basis. The Funds will enter into a when-issued transactions for the
purpose of acquiring portfolio securities. Due to fluctuations in the value of
securities purchased on a when-issued or a delayed-delivery basis, the yields
obtained on such securities may be higher or lower than the yields available in
the market on the dates when the securities are actually delivered to the Fund.
Similarly, the sale of securities for delayed-delivery can involve the risk
that the prices available in the market when delivery is made may actually be
higher than those obtained in the transaction itself. The California Money Fund
and the Municipal Funds may purchase Municipal Obligations offered on a
"forward commitment" basis.
When-issued Municipal Obligations may include bonds purchased on a "when, as
and if issued" basis, under which the issuance of the securities depends on the
occurrence of a subsequent event, such as approval of a proposed financing by
appropriate municipal authorities. No when-issued or forward commitments will
be made by the California Money Fund or any Municipal Fund if, as a result,
more than 20% of the value of the Fund's total assets would be committed to
such transactions. A significant commitment of a Fund's assets to the purchase
of securities on a "when, as and if issued" basis may increase the volatility
of the Fund's NAV.
YEAR 2000. Many computer software systems in use today cannot properly process
date-related information from and after January 1, 2000. Should any of the
computer systems employed by the Fund's or Portfolio's major service providers
fail to process this type of information properly, that could have a negative
impact on the Fund's or Portfolio's operations and the services that are
provided to the Fund's or Portfolio's shareholders. The Advisor and Shareholder
Services
have advised the Funds and Portfolios that they are reviewing all of their
computer systems with the goal of modifying or replacing such systems prior to
January 1, 2000 to the extent necessary to avoid any such negative impact. In
addition, the Advisor has been advised by the Custodian that it is also in the
process of reviewing its systems with the same goal. As of the date of this
prospectus, the Funds and Portfolios and the Advisor have no reason to believe
that these goals will not be achieved. Similarly, the values of certain of the
Funds' or Portfolio's assets may be adversely affected by the inability of
their issues or third parties to properly process date-related information from
and after January 1, 2000.
PORTFOLIO TRANSACTIONS AND TURNOVER. All orders for the purchase or sale of
securities on behalf of each Fund are placed by the Advisor or relevant sub-
advisor with broker-dealers that it selects. Broker-dealers are selected on the
basis of their ability to obtain best price and execution for a Fund's
transactions and recognizing brokerage, research and other services provided to
the Fund and to the Advisor or sub-advisor. Each Fund may, at the discretion of
the Advisor or sub-advisor, utilize authorized dealers or brokers affiliated
with the Advisor or sub-advisor in connection with a purchase or sale of
securities in accordance with rules adopted or exemptive orders issued by the
SEC and procedures adopted by the Trusts' trustees.
Each Fund's turnover rate varies from year to year, depending on market
conditions and investment strategies. High turnover rates increase transaction
costs, and may increase taxable capital gains. Historical portfolio turnover
rates for each Fund are shown under "Financial Highlights" above. The Advisor
and the sub-advisors will not consider portfolio turnover rate a limiting
factor in making investment decisions consistent with the Funds' investment
objectives and policies.
RISK FACTORS OF THE PORTFOLIOS
Like any investment in an investment company, investment in the Portfolios
involves risk. Prospective investors in the Portfolios should consider the
following factors:
. Investing in the underlying Funds through the Portfolios involves certain
additional expenses and tax results that would not be present in a direct
investment in the Funds. See "Dividends, Capital Gains and Taxes" for
additional information about tax implications of investing in the Portfolios.
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. Under certain circumstances, a Fund may determine to make payment of a
redemption request by a Portfolio wholly or partly by a distribution in kind
of securities from its portfolio, instead of cash, in accordance with
federal securities laws. In such cases, the Portfolios may hold securities
distributed by a Fund until the Advisor determines that it is appropriate to
dispose of such securities.
. Each of the Portfolios may indirectly invest in lower-rated bonds, commonly
referred to as "junk bonds." The Strategic Growth Portfolio, in particular,
can invest as much as 50% of its total assets in the Growth Fund, 25% of its
total assets in the High Yield Fund, and 50% of its total assets in the
Emerging Growth Fund, each of which may invest as much as 35% of its total
assets (in the case of the High Yield Fund, all of its assets) in lower-
rated bonds. As a result, the Portfolios will be subject to the risks
associated with investing in such lower-rated bonds. See "Common Investment
Practices--Lower-Rated Securities" for additional information about such
risks.
. If a Portfolio were to invest in the Prime Income Fund, such an investment
would be considered illiquid. No Portfolio is permitted to purchase shares
of the Prime Income Fund if such purchase would result in the Portfolio
having more than 15% of its net assets in the aggregate in the Prime Income
Fund and other illiquid securities. To the extent redemptions are made from
a Portfolio invested in the Prime Income Fund and such redemptions are
funded with redemptions from Funds other than the Prime Income Fund, the
Portfolio's remaining shareholders' will hold shares of a Portfolio with an
increased allocation to the Prime Income Fund.
. Certain Portfolios invest as much as 50% of their total assets in the Growth
Fund or Emerging Growth Fund, each of which may invest up to 25% of its
total assets in foreign equity securities and as much as 5% of its total
assets in securities in developing or emerging markets countries. Certain
Portfolios invest as much as 50% of their total assets in the International
Growth Fund, which invests primarily in foreign equity securities, and may
invest as much as 30% of its total assets in securities in developing or
emerging markets countries. These investments will subject such Portfolios
to risks associated with investing in foreign securities. See "Common
Investment Practices--Foreign Investments" for additional information.
. The officers, trustees, the Advisor, the Distributor and transfer agent of
the Portfolios serve in the same capacities for the Funds and the Prime
Income Fund. Conflicts may arise as these persons and companies seek to
fulfill their fiduciary responsibilities to the Portfolios, the Funds and
the Prime Income Fund.
. From time to time, one or more of the underlying Funds used for investment by
a Portfolio may experience relatively large investments or redemptions due to
reallocations or rebalancings by the Portfolios as recommended by the Advisor.
These transactions will affect such Funds, since the Funds that experience
redemptions as a result of reallocations or rebalancings may have to sell
portfolio securities and Funds that receive additional cash will have to
invest such cash. While it is impossible to predict the overall impact of
these transactions over time, there could be adverse effects on portfolio
management to the extent that the Funds may be required to sell securities or
invest cash at times when they would not otherwise do so. These transactions
could also have tax consequences if sales of securities resulted in gains and
could also increase transaction costs. The Advisor is committed to minimizing
such impact on the Funds to the extent it is consistent with pursuing the
investment objectives of the Portfolios. The Advisor may nevertheless face
conflicts in fulfilling its responsibilities. The Advisor will at all times
monitor the impact on the Funds of transactions by the Portfolios.
PERFORMANCE INFORMATION
YIELD
MONEY FUNDS. From time to time, advertisements or shareholder reports
concerning the Money Funds may describe yield and effective yield. The yield
of a Money Fund refers to the income generated by an investment in the Fund
over a 7-day period identified in the advertisement. This income is then
"annualized." That is, the amount of income generated by the
investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the
investment. Effective yield is calculated similarly but, when annualized, the
income earned by an investment in a Fund is assumed to be reinvested.
Effective yield will generally be slightly higher than the yield because of
the compounding effect of this assumed reinvestment.
59
<PAGE>
FIXED-INCOME AND MUNICIPAL FUNDS. From time to time, the Fixed-Income and
Municipal Funds and the Income, Flexible Income and Balanced Portfolios may
advertise 30-day yield. The 30-day yield of each of these Funds or Portfolios
refers to the income generated
by an investment in such Fund over the 30-day period identified in the
advertisement, and is computed by dividing the net investment income per share
earned by the Fund during the period by the maximum public offering price per
share on the last day of the 30-day period. This income is "annualized" by
assuming that the amount of income is generated each month over a one-year
period and is compounded semiannually. The annualized income is then shown as a
percentage of the maximum public offering price. In addition, these Funds and
Portfolios may advertise a similar 30-day yield computed in the same manner
except that the NAV per share is used in place of the public offering price per
share.
TAX-EQUIVALENT YIELD. The Municipal Funds, the California Money Fund and the
Tax-Exempt Money Market Fund may also quote tax-equivalent yield. Tax-
equivalent yield shows the taxable yields an investor would have to earn before
taxes to equal the Fund's tax-free yield. A tax-equivalent yield is calculated
by dividing a Fund's tax-exempt yield by the result of one minus the sum of a
stated federal and applicable state tax rate, based upon the highest marginal
tax rate and adjusted for the federal deduction of state taxes paid. To the
extent that a particular investor is not subject to the highest marginal tax
rate, the tax-equivalent yield experienced by the investor will be lower than
the tax-equivalent yield quoted by the Fund. If only a portion of a Fund's
income is tax-exempt, only that portion is adjusted in the calculation.
TOTAL RETURN
From time to time, a Fund may advertise its average annual total return over
various periods. Such total return figures reflect a deduction for any front
end sales charge or contingent deferred sales charge and show
the average percentage change in value of an investment in the Fund from the
beginning date of the
measuring period. These figures reflect changes in the price of the Fund's
shares and assume that any income dividends and/or capital gains distributions
made by the Fund during the period were reinvested. Figures will be given for
recent one-, five-and ten-year periods (or from commencement of the Fund's
operations) and may be given for other periods.
ADDITIONAL PERFORMANCE QUOTATIONS. Advertisements of total return may also show
total return without giving effect to sales charge. Similarly, a Fund may
provide yield quotations in investor communications based on the Fund's NAV
(rather than its public offering price) on the last day of the period covered
by the yield computation. Because these additional quotations will not reflect
the maximum sales charge payable, such performance quotations will be higher
than the performance quotations that include the maximum sales charge.
TOTAL RETURNS AND YIELDS ARE BASED ON PAST RESULTS AND ARE NOT A PREDICTION OF
FUTURE PERFORMANCE.
Performance information is computed separately for each class of shares.
Because Class B and Class S shares bear the expense of the higher distribution
and service fees, it is expected that performance for such shares will be lower
than that for a Fund's Class A or Class I shares. Because Class I shares do not
bear any distribution or service fees, performance for Class I shares will be
higher than that for a Fund's other classes of shares, except in the case of
the Class A shares of the Money Market, Tax-Exempt Money Market and California
Money Funds, which also do not bear any distribution or service fees.
OBTAINING PERFORMANCE INFORMATION
Each Fund's strategies, performance, and holdings are detailed twice a year in
Fund reports, which are sent to all shareholders. The SAI describes the methods
used to determine a Fund's performance. Shareholders may call 800-222-5852 for
performance information.
60
<PAGE>
YOUR ACCOUNT
- --------------------------------------------------------------------------------
WAYS TO SET UP YOUR ACCOUNT
- --------------------------------------------------------------------------------
INDIVIDUAL OR JOINT ACCOUNT
Individual accounts are owned by one person. Two types of joint accounts
(having two or more owners) can be opened:
(1) in a "joint tenancy" account, the surviving owner(s) automatically
receive(s) the shares of any owner(s) who die(s); and
(2) in a "tenants in common" account, the heir(s) of any deceased owner
receive(s) such owner's shares, rather than the surviving owners of the joint
account.
- --------------------------------------------------------------------------------
RETIREMENT
Retirement plans generally protect investment income and capital gains from
current taxes. Contributions to these accounts may be tax deductible.
Retirement accounts require special applications and typically have lower
minimums. Individual Retirement Accounts ("IRAs"), Roth IRAs, Rollover IRAs,
Simplified Employee Pension Plans ("SEP-IRAs") and 401k Plans are examples of
available retirement plans. See your accountant and financial advisor for
further details on any retirement plan.
- --------------------------------------------------------------------------------
GIFTS OR TRANSFERS TO A MINOR CHILD ("UGMA" OR "UTMA")
These gifts or transfers provide a way to give money to a child and obtain
certain tax benefits. A parent or grandparent can give up to $10,000 a year to
each child without paying federal gift tax. Depending on state laws, you can
set up a custodial account under the Uniform Gifts to Minors Act (UGMA) or the
Uniform Transfers to Minors Act (UTMA).
- --------------------------------------------------------------------------------
TRUST
Trusts can be used for many purposes, including charitable contributions and
providing a regular income for a child until a certain age. The trust must be
established before an account can be opened.
- --------------------------------------------------------------------------------
CORPORATION OR OTHER ORGANIZATION
Corporations, associations, partnerships, institutions, or other groups may
invest for many purposes.
- --------------------------------------------------------------------------------
61
<PAGE>
HOW TO INVEST IN THE FUNDS AND PORTFOLIOS
- --------------------------------------------------------------------------------
TO OPEN AN ACCOUNT: MINIMUM $1,000*
TO ADD TO AN ACCOUNT: MINIMUM
$50**
- --------------------------------------------------------------------------------
BY PHONE . Exchange from another Fund, . Exchange from another Fund,
800-222-5852 Portfolio or Prime Income Portfolio or Prime Income
Fund account with the same Fund account with the same
registration, including name, registration, including
address, and taxpayer ID name, address, and taxpayer
number (social security ID number.
number for an individual).
. Call WM Shareholder
. Call WM Shareholder Services Services at 800-222-5852
at 800-222- 5852. (5:00 a.m.
to 6:00 p.m., Pacific
Time/8:00 a.m. to 9:00 p.m.,
Eastern Time, Monday through
Friday and 6:00 a.m. to 3:00
p.m., Pacific Time/9:00 a.m.
to 6:00 p.m., Eastern Time,
on Saturdays)
- --------------------------------------------------------------------------------
BY MAIL . Complete and sign the . Make your check payable to
application. Make your check The WM Group of Funds.
or negotiable bank draft Indicate your account
payable to The WM Group of number on your check.
Funds. Third-party checks are Include the "next
not accepted. investment" stub from your
previous account statement.
. Mail the completed Mail the check and stub to
application form and check the address printed on your
to: account statement.
The WM Group of Funds
601 W. Main Ave. . Exchange by mail: call 800-
Suite 300 222-5852 for instructions
Spokane, WA 99201-0613
- --------------------------------------------------------------------------------
BY WIRE 1. Telephone WM Shareholder . Instruct your
Services for an application bank/financial institution
form and instructions. to wire Federal Funds as
described at left under
2. Instruct your bank to wire paragraph 2.
Federal Funds exactly as
follows: Boston Safe and
Deposit Trust Boston, MA
ABA# 011-001234
For credit to: The WM Group of
Funds
Account #167053
(Fund Name and Class of
Shares)
(Customer's Name)
(Customer's Social Security
Number)
3. Mail the completed
application form to:
The WM Group of Funds
601 W. Main Ave.
Suite 300
Spokane, WA 99201-0613
- --------------------------------------------------------------------------------
SYSTEMATIC 1. Obtain and complete an . Pre-authorized periodic
application form. investments will be
(Minimum New processed automatically.
Account amount 2. Attach a voided check or (Minimum Amount $25++)
$50+) deposit slip from the bank
account you would like the
investments transferred from
and indicate either the day
of the week or day(s) of the
month when the purchase
would occur.
3. Mail the application to the
address listed above.
- --------------------------------------------------------------------------------
* $10,000 for the Portfolios and $2,000 for IRA accounts investing in the
Portfolios.
** $100 for the Portfolios.
+ $1,000 for the Portfolios.
++ $100 for the Portfolios.
62
<PAGE>
INVESTMENT IN FUNDS THROUGH A WM STRATEGIC ASSET MANAGEMENT ("SAM") ACCOUNT. In
addition to the diversification among individual securities you receive by
investing in a particular Fund, you may be able to further diversify risk by
spreading your assets among several different of the WM Group of Funds that
each have different risk and return characteristics. SAM is an active
investment management service offered by the Advisor, which allocates your
investments across a combination of either Class A or Class S shares of certain
of the WM Group of Funds selected to meet long-term investment objectives as
well as, in certain circumstances, current income objectives.
The Advisor has developed investment strategies for SAM accounts to meet the
diverse financial needs of different investors. You can open a SAM account by
meeting with one of the investment professionals of an authorized dealer who
will review your situation and help you identify your long-term investment
objectives. After using SAM criteria to determine your long-term objectives,
you can choose one of several investment strategies. Based on your chosen
strategy, your initial investment will be allocated among a number of the WM
Group of Funds and the Class A or Class S shares of the WM Group of Funds.
Depending on market conditions, the Advisor from time to time (normally
quarterly) reallocates the combination of the WM Group of Funds or the amounts
invested in the respective Class A or Class S shares of each to implement your
WM Group of Funds investment strategy. In addition, your SAM account will be
periodically rebalanced to maintain your SAM strategy's current asset
allocation mix, if and when market conditions and/or Fund prices cause the
allocation mix to vary from the Advisor's desired current asset allocation mix.
You will pay the Advisor a fee for the SAM account service that is in addition
to and separate from the fees and expenses you will pay directly or indirectly
as an investor in the WM Group of Funds.
From time to time, one or more of the WM Group of Funds used for investment by
the SAM accounts may experience relatively large investments or redemptions due
to SAM account allocations or rebalancings recommended by the Advisor. These
transactions will affect the Funds, since Funds that experience redemptions as
a result of reallocations or rebalancings may have to sell portfolio securities
and Funds that receive additional cash will have to invest it. While it is
impossible to predict the overall impact of these transactions over time, there
could be adverse effects on portfolio management to the extent that Funds may
be required to sell securities or invest cash at times when they would not
otherwise do so. These transactions could also have tax consequences if sales
of securities resulted in gains and could also increase transaction costs. The
Advisor is committed to minimizing the impact of SAM account transactions on
the Funds to the extent it is consistent with pursuing the investment objective
of the SAM accounts. The Advisor will nevertheless face conflicts in fulfilling
its responsibilities because the Funds are affiliates and employ some of the
same professionals. The Advisor will monitor the impact of SAM account
transactions on the Funds.
63
<PAGE>
BUYING CLASS A SHARES
The offering price for Class A shares of the Non-Money Funds is the NAV next
calculated after receipt of a properly completed purchase order, plus an
initial sales charge as shown in the table below. Sales charges may be reduced
or waived as discussed following the table. The final column in each table
indicates what dealers receive for selling Class A shares.
<TABLE>
<CAPTION>
. FIXED-INCOME
FUNDS (other
than Short Term
High Quality
Bond and Target . EQUITY FUNDS
Maturity 2002 . STRATEGIC
Funds) GROWTH,
. MUNICIPAL FUNDS CONSERVATIVE
. INCOME AND GROWTH AND
FLEXIBLE INCOME BALANCED
PORTFOLIOS PORTFOLIOS
---------------------------- ----------------------------
Reallowed Reallowed
Sales charge to dealers Sales charge to dealers
----------------- ---------- ----------------- ----------
% of % of net % of % of % of net % of
Purchase of offering amount offering offering amount offering
Class A shares price invested price price invested price
-------------- -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Less than $50,000....... 4.50% 4.71% 4.00% 5.50% 5.82% 4.75%
$50,000 to $100,000..... 4.00 4.17 3.50 4.75 4.99 4.00
$100,000 to $250,000.... 3.50 3.63 3.00 3.75 3.90 3.00
$250,000 to $500,000.... 2.50 2.56 2.00 3.00 3.09 2.50
$500,000 to $1,000,000.. 2.00 2.04 1.75 2.00 2.04 1.75
$1,000,000 and above*... .00 .00 .00 .00 .00 .00
</TABLE>
<TABLE>
<CAPTION>
.SHORT TERM
HIGH QUALITY . TARGET MATURITY
BOND FUND 2002 FUND
---------------------------- ----------------------------
Reallowed Reallowed
Sales charge to dealers Sales charge to dealers
----------------- ---------- ----------------- ----------
% of % of net % of % of % of net % of
Purchase of offering amount offering offering amount offering
Class A shares price invested price price invested price
-------------- -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Less than $50,000....... 3.50% 3.63% 3.00% 2.00% 2.04% 1.75%
$50,000 to $100,000..... 3.00 3.09 2.50 1.50 1.52 1.25
$100,000 to $250,000.... 2.50 2.56 2.00 1.00 1.01 0.75
$250,000 to $500,000.... 2.25 2.30 2.00 1.00 1.01 0.75
$500,000 to $1,000,000.. 2.00 2.04 1.75 0.50 0.50 0.50
$1,000,000 and above*... .00 .00 .00 .00 .00 .00
</TABLE>
* See "net asset value purchases" below.
Example: An investor considers putting $1,000 into an Equity Fund's Class A
shares. Based on the first column in the above table, 5.50% of the $1,000 would
pay for a sales charge. The charge would be $55.00, which is 5.82% of the net
investment of $945.00, as the next column shows. The dealer selling the shares
would be paid $47.50 of the $55.00, which is 4.75% of $1,000, as the last
column shows.
64
<PAGE>
CUMULATIVE DISCOUNT. This allows current purchases to qualify for the foregoing
discounts by including the value of shares of the WM Group of Funds that were
purchased subject to an initial or contingent deferred sales charge. The
discount will be based on the higher of the current market value or the
original investment amount. Those eligible for a cumulative discount include
individuals, immediate family members or trustees purchasing for single
fiduciary accounts.
LETTER OF INTENT. This discount is for purchases made over an extended period.
It provides for a cumulative discount on the same basis as explained in the
previous paragraph if the following conditions are met: Purchases of Class A
shares must be made within a 13-month period that begins no earlier than 90
days before the submission of a letter of intent from the investor to the
Funds. For more information about this discount, please contact Shareholder
Services or your Investment Representative.
REINVESTMENT. Redemption proceeds of Class A shares that were subject to a
sales charge when first purchased may be reinvested in Class A shares within
120 days without incurring another initial sales charge.
NET ASSET VALUE PURCHASES. There is no initial sales charge on Class A
purchases of $1 million or more, but such purchases are generally subject to a
contingent deferred sales charge of 1.00% if redeemed during the first year
after purchase or .50% if redeemed during the second year after purchase.
Qualified employee benefit plans (including SEPs and SIMPLEs) that have more
than 100 participants or that have more than $500,000 invested in the WM Group
of Funds may purchase shares without an initial sales charge. However, a
contingent deferred sales charge of 1% may be imposed on the amount that was
invested through such a plan in Class A shares and that is redeemed (i) if,
within the first two years after the plan's initial investment in the WM Group
of Funds, the named fiduciary of the plan withdraws the plan from investing in
the WM Group of Funds in a manner that causes all shares held by the plan's
participants to be redeemed; or (ii) by a plan participant within two years of
the plan participant's purchase of such Class A shares. The contingent deferred
sales charge will be waived on redemptions in connection with certain
involuntary distributions, including distributions arising out of the death or
post purchase disability of a shareholder (including one who owns the shares as
joint tenant).
Class A shares may be purchased at net asset value, and in any amount, by
officers, directors and employees of the Advisor or its affiliates, or
companies which have entered into selling agreements with the Distributor, and
to certain family members of such individuals. The purchase must be for
investment purposes only and may not be resold other than through redemption by
the Fund or Portfolio. The Funds and Portfolios may also offer their shares at
net asset value to certain retirement plans; and to brokers, dealers or
registered investment advisors who have entered into arrangements with the
Distributor providing specifically for the shares to be used in particular
investment products made available to their clients for which they may charge a
separate fee. The Distributor will pay authorized dealers commissions on
certain net asset value purchases as described in the SAI.
EACH FUND AND PORTFOLIO RESERVES THE RIGHT TO SUSPEND THE OFFERING OF SHARES OF
ANY CLASS AT ANY TIME. Each Fund and Portfolio also reserves the right to
reject any specific purchase order, including certain purchases by exchange.
CONSULT AN INVESTMENT REPRESENTATIVE OR SEE THE SAI IF YOU THINK YOU MAY
QUALIFY FOR ANY OF THESE PURCHASE PLANS. YOU MUST NOTIFY THE FUND OR PORTFOLIO
AT THE TIME OF PURCHASE WHENEVER A REDUCED SALES CHARGE OR NET ASSET VALUE
PURCHASE APPLIES.
BUYING CLASS B OR CLASS S SHARES
Class B and Class S shares are offered at the NAV next calculated after receipt
of a properly completed purchase order, without an initial sales charge. The
entire amount of the purchase price is invested in the Fund selected. However,
Class B and Class S shares have higher distribution and service fees than Class
A shares for eight years. Also, if Class B or Class S shares are redeemed
within five years of purchase (four years in the case of Class B shares of the
Short Term High Quality Bond Fund), a contingent deferred sales charge
generally must be paid.
The proceeds from any contingent deferred sales charges are paid to the
Distributor to defray expenses for providing distribution services for Class B
or Class S shares. Examples of such expenses include compensation to
salespeople and selected dealers. The Distributor currently pays authorized
dealers commissions of 4.00% of the price of Class B and Class S shares sold by
them (3.00% for Class B shares of the Short Term High Quality Bond Fund).
65
<PAGE>
CONTINGENT DEFERRED SALES CHARGE. Class B and Class S shares redeemed within
five years of purchase are subject to a contingent deferred sales charge
according to the following schedule. Class B and Class S shares purchased by
exchange will be subject to a contingent deferred sales charge using the
schedule of the Fund originally purchased. Shares purchased through
reinvestment of dividends or capital gain distributions are not subject to a
contingent deferred sales charge.
Class B shares of all Funds (except for the Short Term High Quality Bond Fund),
Class B shares of all Portfolios and Class S shares of all Funds:
<TABLE>
<CAPTION>
YEAR OF
REDEMPTION CONTINGENT
ATER PURCHASEF DEFERRED SALES CHARGE
- -------------- ---------------------
<S> <C>
First.................................................... 5.00%
Second................................................... 4.00%
Third.................................................... 3.00%
Fourth................................................... 2.00%
Fifth.................................................... 1.00%
Sixth and following...................................... 0.00%
</TABLE>
Class B shares of the Short Term High Quality Bond Fund:
<TABLE>
<CAPTION>
YEAR OF
REDEMPTION CONTINGENT
ATER PURCHASEF DEFERRED SALES CHARGE
- -------------- ---------------------
<S> <C>
First.................................................... 4.00%
Second................................................... 3.00%
Third.................................................... 2.00%
Fourth................................................... 1.00%
Fifth and following...................................... 0%
</TABLE>
Class B and Class S shares of certain Funds purchased prior to March 20, 1998
may be subject to a different contingent deferred sales charge schedule, as
described in the SAI.
The contingent deferred sales charge is calculated by applying the above
percentages to the lesser of (i) the NAV of the redeemed shares at the time
they were purchased or (ii) the NAV of the redeemed shares at the time of
redemption. This means that no contingent deferred sales charge will be charged
on any NAV increases above the initial purchase price. Shares are redeemed in
the order that results in the lowest possible rate being charged. Accordingly,
they will be redeemed first from shares purchased through reinvested dividends
or capital gain distributions and then in the order of purchase.
Here is an example:
An investor purchases 100 Class B shares at $10 per share--for a total cost of
$1,000. In the second year after the purchase, the NAV has risen to $12 per
share, and the investor has acquired 10 more shares through dividend
reinvestment.
At that time, the investor decides to make the first redemption. The
transaction includes 50 shares at $12 per share--for a total of $600.
The first 10 shares to be redeemed will not be subject to any charge because of
the 10 shares received from dividend reinvestment.
As for the other 40 shares, the charge will be applied only to the original
cost of $10 per share. The NAV increase of $2 per share will not be considered.
As a result, $400 of the redemption proceeds (40 x $10) will be charged a rate
of 4%, which is the second-year rate shown in the table above. The resulting
sales charge will be 4% x $400, which will be $16.
The contingent deferred sales charge may be waived for redemptions of Class B
and Class S shares under these circumstances: (1) Following the death or post-
purchase disability of a shareholder, as defined in Section 72(m)(7) of the
Code; (2) In connection with certain distributions from an IRA or other
retirement plan, as described in the SAI, including certain IRA distributions
made to shareholders over age 59 1/2; (3) According to a systematic withdrawal
plan --but limited to 12% annually of the value of the account at the time the
plan is established; and (4) In connection with the liquidation by the Fund or
Portfolio of a shareholder's account as described under "How to Sell Shares."
YOU MUST NOTIFY THE FUND OR PORTFOLIO WHENEVER YOU ARE ENTITLED TO A WAIVER OR
REIMBURSEMENT OF CDSC.
CONVERSION FEATURE. Class B and Class S shares that remain outstanding for
eight years will convert to Class A shares of the same Fund or Portfolio based
on the relative NAVs at the time of conversion.
Some investors buy shares at several different times and reinvest dividends and
capital gains over an extended period. Each time a conversion takes place, a
pro-rata portion of shares of the same class acquired through the reinvestment
of dividends and capital gain distributions also will convert to Class A
shares.
The conversion of Class B and Class S shares to Class A shares is subject to a
favorable ruling from the Internal Revenue Service or a determination by the
66
<PAGE>
Board of Trustees, after consultation with legal counsel that such conversion
will not be subject to federal income taxes. There cannot be any assurance that
a ruling or determination will be available. If they should not be available,
the conversion of Class B shares to Class A shares would not occur and those
shares would continue to be subject to higher expenses than Class A shares for
an indefinite period. Class B shares of Funds of WM Trust I purchased prior to
March 20, 1998, will generally convert to Class A shares six years after they
were initially purchased. Please see the SAI for further information.
Class B shares of the Funds, other than Class B shares purchased by exchange of
Class B shares that, when originally purchased, were subject to a lower
contingent deferred sales charge than that applicable to Class B shares of the
Funds, may be exchanged for Class S shares of a Fund if the investor has an
existing SAM account or opens a SAM account and meets the investment minimum
for such SAM account.
BUYING CLASS I SHARES
Class I shares are sold exclusively to the various Portfolios and are not
available for purchase directly by investors. Class I shares are sold at the
net asset value next determined after receipt of a properly completed purchase
order, and are not subject to a contingent deferred sales charge.
DISTRIBUTION OF INCOME AND CAPITAL GAINS
The Funds and Portfolios distribute dividends from net investment income (which
is essentially interest and dividends from securities held), minus expenses.
They also make capital gain distributions if realized gains from the sale of
securities exceed realized losses. The amount of dividends of net investment
income and distributions of net realized long- and short-term capital gains
payable to shareholders will be determined separately for each Fund or
Portfolio. Dividends from the net investment income of the Money, Fixed-Income
and Municipal Funds and the Balanced, Flexible Income and Income Portfolios
will normally be declared daily and paid monthly. Dividends from the net
investment income of the Bond & Stock and Growth & Income Funds and the
Conservative Growth Portfolio will normally be declared and paid quarterly.
Dividends from the net investment income of the Growth Fund and the Strategic
Growth Portfolio will normally be declared and paid semiannually. Dividends
from the net investment income of the Northwest, Emerging Growth and
International Growth Funds will normally be declared and paid annually. Except
as otherwise specified, the Funds and Portfolios distribute capital gains, if
any, at least annually, normally in December.
You have three choices regarding what you do with dividends and capital gain
distributions. You can make your choice at the time of your initial purchase or
by contacting the Funds' offices or your investment representative. The options
include:
AUTOMATIC REINVESTMENT. This procedure is automatically effective unless you
choose another option. All dividends and capital gain distributions are
reinvested into additional shares of the Fund or Portfolio.
REINVEST DIVIDENDS IN ANOTHER FUND WITHIN THE WM GROUP OF FUNDS. Income
dividends may be automatically invested in the same class of shares of another
Fund or Portfolio, provided that Fund or Portfolio is available for sale in
your state of residence.
CASH PAYMENT OF ALL DISTRIBUTIONS. All dividends and capital gain distributions
are deposited to your pre-authorized bank account or paid by check.
Reinvestments of income dividends and capital gain distributions are made at
the closing NAV on the day dividends or distributions are deducted from the
Fund's assets.
If you've chosen to receive dividends or capital gain distributions in cash and
your check is returned as undeliverable, the Funds reserve the right (but are
not obligated) to reinvest your check at the then-current NAV and to
automatically reinvest subsequent dividends and capital gain distributions in
your account. The Funds may also automatically reinvest dividends or
distributions of $10 or less.
HOW TO SELL SHARES
You may redeem shares at any time. The price paid per share will be the next
NAV that is calculated (less any applicable CDSC).
TELEPHONE. You may authorize telephone transactions on your Fund account
application. Provided you have pre-authorized these transactions, you may
redeem or exchange shares by telephoning 800-222-5852. You may also request
these transactions through your investment representative. Proceeds may be
directed to a pre-authorized bank or broker account or to the address of record
for the account. Exchanges also may be made by telephone.
67
<PAGE>
It may be difficult to reach the Trusts' offices by telephone during periods of
unusual economic or market activity. Please be persistent if this occurs. The
Trusts' transfer agent is committed to extending its 5:00 a.m. to 6:00 p.m.
Pacific time business hours during such periods.
For your protection, all telephone instructions are verified by requesting
personal shareholder information, providing written confirmations of each
telephone transaction, and recording telephone instructions. WM Shareholder
Services, Inc. ("Shareholder Services" or the "Transfer Agent") may require a
Letter of Authorization, other documents, or authorization from your broker to
initiate telephone redemptions of $50,000 or more that are not directed to your
pre-authorized bank or broker account. If these or other reasonable procedures
are used, neither the Transfer Agent nor the Funds will be liable for following
telephone instructions which they reasonably believe to be genuine.
Shareholders assume the risk of any losses in such cases. However, the Transfer
Agent or the Trusts may be liable for any losses because of unauthorized or
fraudulent telephone instructions if they fail to follow reasonable procedures.
WRITTEN REQUEST. Redemptions also may be requested by writing the Trusts'
offices. Written requests may require a signature guarantee, as discussed
below, and the return of any outstanding share certificates. Changes in pre-
authorized redemption instructions or your account registration may also
require signature guarantees. For your protection, the signature(s) must be
guaranteed by an eligible guarantor institutions which includes banks, credit
unions, broker dealers, national securities exchanges, savings institutions as
well as medallion signature guarantee.
PROMPT PAYMENT. Payment normally will be made on the next business day after
redemption, but no later than seven days after the transaction, unless you
recently purchased Fund shares by check. In that case, redemption proceeds may
be delayed for up to 15 days, until the Transfer Agent verifies collection of
the check. Redemption proceeds will be sent by check or Automated Clearing
House transfer to your bank account without charge. Wire redemption proceeds
may be subject to a $10 fee. The receiving bank also may charge a fee.
SYSTEMATIC WITHDRAWAL PLAN. Shareholders may choose to receive specific cash
withdrawals on a periodic basis. A $5,000 minimum balance in the applicable
Fund or $10,000 in the applicable Portfolio is required to establish a
systematic withdrawal plan (the minimum balance requirement is waived for IRA
accounts). The minimum systematic withdrawal amount is $50 for the Funds and
$100 for the Portfolios. Shares of the Fund or Portfolio will be redeemed to
provide the requested payment. Naturally, withdrawals that continually exceed
dividend income and capital gains will eventually exhaust the account. Class B
and Class S shareholders may use a systematic withdrawal plan to redeem up to
12% of the beginning balance annually without incurring a contingent deferred
sales charge. The beginning balance is the account balance at the time the plan
is established.
OTHER CONSIDERATIONS. It is costly to maintain small accounts. Accordingly, an
account may be closed after 90 days' written notice if the total account value
falls below a minimum (currently $7,000 for the Portfolios and $700 for the
Funds or, in the case of an IRA account, $300 for the Funds and $500 for the
Portfolios) when any transfer or redemption is made. Shares will be redeemed at
the next calculated NAV, less any applicable CDSC, on the day the account is
closed. To prevent an account closure, investors may purchase shares to bring
their account balance above the minimum during the 90-day grace period.
IRAS AND OTHER TAX-SHELTERED RETIREMENT PLANS
Shares in the Funds may be appropriate for many retirement plans, including
IRAs. Retirement plan contributions are tax deductible in some cases, and
earnings compound on a tax-deferred basis until withdrawn.
Information about IRAs and other qualified retirement plans is available from
the Trusts' offices or your Investment Representative.
EXCHANGE PRIVILEGE AND RESTRICTIONS
You may exchange shares of any of the WM Group of Funds for shares of the same
class of any other of the WM Group of Funds, which includes the Portfolios.
Exchanges of shares are sales and may result in a gain or loss for income tax
purposes.
Exchanges are made at the relative NAVs of the shares being exchanged. No
additional sales charge will be incurred when exchanging shares from a Fund
which imposes an initial or contingent deferred sales charge. Any contingent
deferred sales charge on the subsequent sale of shares acquired by exchange
will be based on the contingent deferred sales charge schedule of the Fund from
which the shares were initially
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purchased. Shares exchanged from a Money Fund will be subject to the acquired
Fund's sales charge unless the shares given in exchange were previously
exchanged from a Fund that imposes an initial or contingent deferred sales
charge. Exchange for shares of the Prime Income Fund is subject to the
availability of shares of the Prime Income Fund for exchange purposes. Also,
although shares of the Prime Income Fund may be exchanged for shares of the
other Funds, such exchanges are permitted approximately once each calendar
quarter so long as the Prime Income Fund makes a repurchase offer for its
shares in such quarter and so long as the Prime Income Fund repurchase offer is
sufficiently large to include the Prime Income Fund shares tendered for
exchange.
All exchanges are subject to the minimum investment requirements of the Fund
being acquired and to its availability for sale in your state of residence. You
may arrange for automatic monthly exchanges. The Funds reserve the right to
refuse any order for the purchase of shares, including those by exchange. In
particular, a pattern of exchanges that coincides with a "market timing"
strategy may be disruptive to a Fund and, consequently, may be disallowed.
DIVIDENDS, CAPITAL GAINS AND TAXES
Each Fund and each Portfolio intends to qualify as a "regulated investment
company" for federal income tax purposes and to meet all other requirements
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. Each Fund and Portfolio will distribute
substantially all of its ordinary income and capital gain net income on a
current basis.
You are responsible for federal income tax (and state and local income taxes,
if applicable) on dividends and capital gain distributions. This is true
whether such dividends or distributions are paid in cash or reinvested in
additional shares. You will be advised annually as to the amount and tax status
of these dividends and distributions.
Generally, dividends paid by the Funds and Portfolios from interest, dividends
or net short-term capital gains will be taxed as ordinary income. Distributions
designated by the Fund or Portfolio as deriving from net gains on securities
held for more than one year but not more than 18 months ("28% Rate Gain"), and
from net gains on securities held for more than 18 months ("20% Rate Gain") are
taxable as such, regardless of how long you have held your shares.
Because of tax law requirements, you must provide the Trusts an accurate and
certified taxpayer identification number (for individuals, a Social Security
number) to avoid the 31% "back-up" withholding tax.
Early in each calendar year each Fund and Portfolio will notify you of the
amount and tax status of distributions paid to you for the preceding year.
ADDITIONAL CONSIDERATIONS FOR SHAREHOLDERS OF THE MUNICIPAL FUNDS, THE TAX-
EXEMPT MONEY MARKET FUND AND THE CALIFORNIA MONEY FUND. Dividends paid by any
of the Municipal Funds, the Tax-Exempt Money Market Fund or the California
Money Fund that are derived from interest earned on qualifying tax-exempt
obligations will be "exempt-interest" dividends that shareholders may exclude
from their gross income for federal income tax purposes, if at the close of
each quarter of that Fund's taxable year at least 50 percent of the Fund's
total assets consists of obligations the interest on which is excludable from
gross income for federal income tax purposes. To the extent that any of these
Funds invest in AMT-Subject Bonds, any exempt-interest dividends derived from
interest on such AMT-Subject Bonds are a specific preference item for purposes
of the federal alternative minimum tax for individuals and corporations. In any
event, all exempt-interest dividends will be a component of adjusted current
earnings for purposes of computing the federal corporate alternative minimum
tax.
Part or all of the interest on indebtedness incurred or continued by
shareholders to purchase or carry shares of the Municipal Funds, the Tax-Exempt
Money Market Fund and the California Money Fund is not deductible for federal
income tax purposes. The Municipal Funds, the Tax-Exempt Money Market Fund and
the California Money Fund may not be an appropriate investment for persons
(including corporations and other business entities) who are not currently
subject to federal income tax (such as certain qualified retirement accounts)
or who are "substantial users" (or who are related to substantial users) of
facilities financed by "private activity bonds" or certain industrial
development bonds. "Substantial user" is defined generally as including a "non-
exempt person" who regularly uses in a trade or business a part of a facility
financed from the proceeds of such bonds. Entities or persons who are
"substantial users" (or persons related to "substantial users") should consult
their tax advisors before purchasing shares of the Municipal Funds or the
California Money Fund.
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Shareholders who receive social security or railroad retirement benefits should
also consult their tax advisors to determine what effect, if any, an investment
in the Municipal Funds, the Tax-Exempt Money Market Fund or the California
Money Fund may have on the taxation of your benefits.
ADDITIONAL CONSIDERATIONS FOR SHAREHOLDERS OF THE FLORIDA INSURED MUNICIPAL
FUND. Florida does not impose an income tax on individuals. Accordingly,
dividends or distributions by the Florida Insured Municipal Fund to an
individual who is a Florida resident are not subject to state income tax in
Florida. Florida imposes an income tax on corporations. Corporate taxpayers
should consult their tax advisor concerning the Florida income tax treatment of
dividends or distributions. Florida imposes an intangible personal property tax
on shares of the Fund owned by a Florida resident on January 1 of each year
unless such shares qualify for an exemption from the tax.
The Fund has received a Technical Assistance Advisement from the State of
Florida, Department of Revenue, to the effect that Fund shares owned by a
Florida resident will be exempt from the intangible personal property tax so
long as the Fund's portfolio includes, on the last business day of the
preceding calendar year, only assets, such as notes, bonds, and other
obligations issued by the State of Florida or its municipalities, counties, and
other taxing districts, the United States Government, and its agencies, Puerto
Rico, Guam, and the U.S. Virgin Islands, which are exempt from that tax.
ADDITIONAL CONSIDERATIONS FOR SHAREHOLDERS OF THE CALIFORNIA MONEY FUND,
CALIFORNIA MUNICIPAL FUND AND CALIFORNIA INSURED INTERMEDIATE MUNICIPAL
FUND. If, at the close of each quarter of its taxable year, at least 50% of the
value of the total assets of each of the California Money Fund, California
Municipal Fund and California Insured Intermediate Municipal Fund (the
"California Funds") consist of obligations the interest on which would be
exempt from California personal income tax if the obligations were held by an
individual ("California Tax-Exempt Obligations"), and if each of the California
Funds continues to qualify as a regulated investment company for federal income
tax purposes, then each respective California Fund will be qualified to pay
dividends, subject to certain limitations, to its shareholders that are exempt
from California State personal income tax, but not from California State
franchise tax or California State corporate income tax ("California exempt-
interest dividends"). However, the total amount of California exempt-interest
dividends paid by each of the California Funds to each of the California Fund's
non-corporate shareholders with respect to any taxable year cannot exceed the
amount of interest received by such California Fund during such year on
California Tax-Exempt Obligations less any expenses and expenditures (including
any dividends paid to corporate shareholders) deemed to have been paid from
such interest. If the aggregate dividends exceed the amount that may be treated
as California exempt-interest dividends, only that percentage of each dividend
distribution equal to the ratio of aggregate California exempt-interest
dividends to aggregate dividends will be treated as a California exempt-
interest dividend. Dividend distributions that do not qualify for treatment as
California exempt-interest dividends will be taxable to shareholders at
ordinary tax rates for California personal income tax purposes. In addition,
shareholders who receive social security or railroad retirement benefits should
consult their tax advisors to determine what effect, if any, an investment in
one of these Funds may have on the taxation of these benefits.
ADDITIONAL CONSIDERATIONS FOR SHAREHOLDERS OF THE INTERNATIONAL GROWTH FUND. If
at the end of the International Growth Fund's fiscal year more than 50% of the
value of its total assets represents securities of foreign corporations, the
Fund intends to make an election permitted by the Code to treat any foreign
taxes paid by it on securities it has held for at least the minimum period
specified in the Code as having been paid directly by the Fund's shareholders
in connection with the Fund's dividends received by them. In this case,
shareholders generally will be required to include in U.S. taxable income their
pro rata share of such taxes, and those shareholders who are U.S. citizens,
U.S. corporations and, in some cases, U.S. residents will be entitled to deduct
their share of such taxes. Alternatively, such shareholders who hold Fund
shares (without protection from risk of loss) on the ex-dividend date and for
at least 15 other days during the 30-day period surrounding the ex-dividend
date will be entitled to claim a foreign tax credit for their share of these
taxes.
In addition, investment by a Fund in an entity that qualifies as a "passive
foreign investment company" under the Code could subject the Fund to a U.S.
federal income tax or other charge on certain "excess distributions" with
respect to the investment, and on the proceeds from disposition of the
investment. This tax or charge may be avoided, however, by making an
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election to mark such investments to market annually or to treat the passive
foreign investment company as a "qualified electing fund."
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT A COMPLETE DESCRIPTION OF
THE FEDERAL, STATE OR LOCAL TAX CONSEQUENCES OF INVESTING IN THE FUNDS OR
PORTFOLIOS. YOU SHOULD CONSULT YOUR TAX ADVISOR BEFORE INVESTING IN THE FUNDS
OR PORTFOLIOS.
ORGANIZATION
The Municipal Funds other than the Tax-Exempt Bond Fund and the California
Money, Short Term High Quality Bond, Target Maturity 2002, Growth,
International Growth and Emerging Growth Funds are series of WM Trust II, a
Massachusetts business trust organized on February 22, 1989. The Portfolios are
series of WM Strategic Asset Management Portfolios, a Massachusetts business
trust organized on March 26, 1996. The remaining Funds are series of WM Trust
I, a Massachusetts business trust organized on September 19, 1997. The Trusts
are governed by a common Board of Trustees, which oversees the Trusts'
activities and is responsible for protecting the interests of shareholders.
Each Trust is classified as an open end management investment company under the
1940 Act.
Although each Trust is offering only its own shares in this Prospectus, it is
possible that a Trust might become liable for any misstatement in the
prospectus about another of the Trusts. The Trustees of each Trust have
considered this factor in approving the use of a single prospectus.
Each of the Money Market, Tax-Exempt Money Market, Short Term High Quality
Bond, Target Maturity 2002, U.S. Government Securities, Income, High Yield,
Tax-Exempt Bond, Bond & Stock, Growth & Income, Growth, International Growth,
Northwest and Emerging Growth Funds and the Strategic Growth, Conservative
Growth, Balanced, Flexible Income and Income Portfolios is a diversified series
of the relevant Trust. Each of the California Money, California Municipal,
California Insured Intermediate Municipal and Florida Insured Municipal Funds
is a non-diversified series of WM Trust II. See "Common Investment Practices--
Non-Diversified Status."
Each share of the Funds and Portfolios has one vote, with fractional shares
voting proportionally.
HOW NAV IS DETERMINED
Portfolio securities and other assets are valued primarily on the basis of
market quotations or, if quotations are not readily available, by a method that
the Board of Trustees believes accurately reflects fair value. Foreign
securities are valued on the basis of quotations from the primary market in
which they are traded, and are translated from the local currency into U.S.
dollars using current exchange rates. The NAVs are determined at the end of
each business day of the New York Stock Exchange or at 1:00 p.m. Pacific time,
whichever is earlier.
ADVISOR AND SUB-ADVISORS
The Funds and Portfolios are managed by WM Advisors, Inc., which is referred to
as the Advisor in this Prospectus. The Advisor's address is 601 West Main
Avenue, Spokane, Washington 99201. The Advisor has delegated portfolio
management responsibilities in respect of the Growth, California Municipal,
Florida Insured Municipal, California Insured Intermediate Municipal and
International Growth Funds to a sub-advisor.
The Advisor has been in the business of investment management since 1944. Its
responsibilities include formulating each Fund's and Portfolio's investment
policies (subject to the terms of this Prospectus), analyzing economic trends,
directing and evaluating the investment services provided by the sub-advisors
and monitoring each Fund's or Portfolio's investment performance and reporting
to the Board of Trustees, as well as providing certain administrative services
to the Funds and Portfolios. In connection with its service as investment
advisor to each Fund and Portfolio, the Advisor may engage one or more sub-
advisors to provide investment advisory services to any of the Funds or
Portfolios and may change or eliminate any such sub-advisor if it deems such
action to be in the best interests of a Fund or Portfolio and its shareholders.
Where the Advisor has not delegated such duties to a sub-advisor, it is
responsible for managing the investment and reinvestment of the Fund's or
Portfolio's assets. In addition, the Trusts are seeking an order from the SEC
which would permit the Advisor and the Funds and Portfolios, subject to certain
conditions, to enter into subadvisory agreements with sub-advisors approved by
the Board of Trustees without shareholder approval. The exemptive request
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also seeks to permit, without shareholder approval, the terms of an existing
subadvisory agreement to be changed or the employment of an existing sub-
advisor to be continued after events that would otherwise cause an automatic
termination of a subadvisory agreement when such changes or continuation are
approved by the Board of Trustees. Shareholders would be notified of any sub-
advisor changes. The Advisor is an indirect wholly owned subsidiary of
Washington Mutual, Inc. ("Washington Mutual"), a publicly owned financial
services company.
Pursuant to an exemptive order granted by the SEC, all of the Funds and
Portfolios managed by the Advisor may transfer daily uninvested cash balances
into one or more joint trading accounts. Assets in the joint trading accounts
are invested in money market instruments and the proceeds are allocated to the
participating Funds and Portfolios on a pro-rata basis.
The following organizations, under the supervision of the Advisor, act as sub-
advisors to the Funds indicated below, and are responsible for continuously
reviewing, supervising and administering such Funds' respective investment
programs:
JANUS, 100 Fillmore Street, Denver, Colorado 80206, acts as sub-advisor to the
Growth Fund. Janus is an indirectly majority owned subsidiary of Kansas City
Southern Industries, Inc., a publicly traded holding company whose primary
subsidiaries are engaged in transportation, information processing and
financial services. Janus has been providing investment advice to mutual funds
or other large institutional clients since 1970. As of December 31, 1997,
Janus' assets under management were in excess of $68 billion.
VAN KAMPEN, One Parkview Plaza, Oakbrook, Illinois 60181, acts as sub-advisor
to the California Municipal, California Insured Intermediate Municipal and
Florida Insured Municipal Funds. Van Kampen is an indirect wholly owned
subsidiary of Morgan Stanley, Dean Witter, Discover & Co., a publicly held
global financial services company. Van Kampen provides investment advice to a
wide variety of individual, institutional and investment company clients and,
together with its affiliates, had aggregate assets under management or
supervision, as of November 30, 1997, of more than $68 billion.
WARBURG, 466 Lexington Avenue, New York, New York 10017, acts as sub-advisor to
the International Growth Fund. Warburg is a professional investment counseling
firm which provides investment services to investment companies, employee
benefit plans, endowment funds, foundations and other institutions and
individuals. As of January 31, 1998, Warburg managed approximately $21 billion
of assets. Incorporated in 1970, Warburg is indirectly controlled by Warburg,
Pincus & Co. ("WP & Co."), which has no business other than being a holding
company of Warburg and its affiliates. Lionel I. Pincus, the managing partner
of WP & Co., may be deemed to control both WP & Co. and Warburg.
INDIVIDUAL FUND MANAGERS
Gary J. Pokrzywinski, CFA, Vice President and Senior Portfolio Manager of the
Advisor, is primarily responsible for the day-to-day management of the High
Yield, Income, U.S. Government Securities, Short Term High Quality Bond and
Target Maturity 2002 Funds. He has managed such Funds since March 1998, 1992,
1992, January 1998 and January 1998, respectively, and has been employed by the
Advisor since 1992. Philip M. Foreman, CFA, Vice President and Senior Portfolio
Manager of the Advisor, is primarily responsible for the day-to-day management
of the Growth & Income Fund. He has managed the Fund since 1991 and has been
employed by the Advisor since 1991. Jeffrey D. Huffman, CFA, Vice President and
Senior Portfolio Manager of the Advisor, has had primary responsibility for the
day-to-day management of the Bond & Stock Fund since 1995. Prior to 1995, Mr.
Huffman was Vice President of Trust Investments for First Interstate Bank since
1996 and a portfolio manager at Safeco since 1992. David W. Simpson, CFA, Vice
President and Senior Portfolio Manager of the Advisor, has had primary
responsibility for the day-to-day management of the Northwest Fund since 1993
and he and Linda C. Walk, CFA, who is Vice President and Portfolio Manager of
the Advisor, have been co-managers of the Emerging Growth Fund since March
1998. Prior to 1993, Mr. Simpson was a senior consultant at Management Advising
Services since 1987. Prior to 1997, Ms. Walk was a portfolio manager at Laird
Norton Trust Company since 1996, a valuation consultant for Ernst & Young LLP
since 1994, and a valuation consultant for Management Advising Services since
1990. Brian Placzek, CFA, Vice President and Portfolio Manager of the Advisor,
has had primary responsibility for the day-to-day management of the Tax-Exempt
Bond Fund since 1995 and has been employed by the Advisor since 1990. Audrey S.
Quaye, CPA, Vice President and Portfolio Manager of the Advisor, is primarily
responsible for the day-to-day management of the Money Market Fund, the Tax-
Exempt Money Market Fund and the California Money
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Fund. She has managed such Funds since 1997, 1997, and March 1998,
respectively, and has been employed at the Advisor since 1996. Prior to 1996,
Ms. Quaye worked at the Benham Group as a municipal credit analyst.
Warren B. Lammert has had primary responsibility for the day-to-day management
of the Growth Fund since its inception. Mr. Lammert is a Vice President of
Janus. Mr. Lammert joined Janus in 1987, and his duties at Janus include the
management of separate equity accounts.
Since May 1992, Joseph A. Piraro, Vice President of Van Kampen, has had primary
responsibility for the day-to-day management of the California Municipal Fund.
Mr. Piraro has been employed by Van Kampen since June 1992. Mr. Piraro has also
had primary responsibility for the day-to-day management of the California
Insured Intermediate Municipal Fund since the Fund's inception. Since January
1997, Thomas M. Byron, Vice President of Van Kampen, has had primary
responsibility for the day-to-day management of the Florida Insured Municipal
Fund. Mr. Byron has been at Van Kampen for over 15 years and prior to taking
over responsibility for managing the Fund, Mr. Byron was Head Buyer and Manager
of Van Kampen's Unit Investment Trust desk.
The following people have been primarily responsible for the day-to-day
management of the International Growth Fund since April 1996: Richard H. King,
Senior Managing Director of Warburg, joined Warburg in 1989 to found the
international equity department and has 31 years of investment experience. P.
Nicholas Edwards, Managing Director of Warburg, has 12 years of investment
experience. Prior to 1995, Mr. Edwards was a director and senior analyst at
Jardine Fleming Investment Advisors in Tokyo. Harold W. Ehrlich, CFA, CIC,
Managing Director of Warburg, has 14 years of investment experience. Prior to
1998, Mr. Ehrlich was a senior vice president, portfolio manager and analyst at
Templeton Investment Counsel Inc. Vincent J. McBride, Senior Vice President of
Warburg, has 10 years of investment experience. Prior to 1994, Mr. McBride was
an international equity analyst at Smith Barney Inc.
TRANSFER AGENT AND CUSTODIANS
WM Shareholder Services, Inc., referred to as Shareholder Services in this
Prospectus, provides transfer agency and other shareholder services.
Shareholder Services is an indirect wholly owned subsidiary of Washington
Mutual, located at 601 West Main Avenue, Suite 300, Spokane, Washington 99201.
The Custodian for the Funds and the Portfolios is Boston Safe Deposit and Trust
Co., which is located at One Boston Place, Boston, Massachusetts 02108.
Shareholder Services may charge a fee for special services, such as providing
historical account documents, that are beyond the normal scope of its services.
DISTRIBUTOR
WM Funds Distributor, Inc., referred to as the Distributor in this Prospectus,
is the distributor of the Class A, Class B, Class I and Class S shares of the
Funds. The Distributor, located at 601 West Main Avenue, Suite 300, Spokane,
Washington 99201 is an indirect wholly owned subsidiary of Washington Mutual.
Each of the Funds (other than the Target Maturity 2002 Fund, which offers only
Class A shares) has adopted three distribution plans, pursuant to Rule 12b-1
under the 1940 Act, applicable to Class A, Class B and Class S shares of the
Fund (each, a "Rule 12b-1 Plan"), respectively. Each of the Portfolios has
adopted two 12b-1 Plans, applicable to Class A and Class B shares of the
Portfolio, respectively, and the Target Maturity 2002 Fund has adopted a 12b-1
Plan applicable to its Class A shares. There are no 12b-1 Plans applicable to
Class I shares of the Funds. Under the applicable Rule 12b-1 Plans, the
Distributor receives a service fee at an annual rate of 0.25% of the average
daily net assets of each class. In addition, the Distributor is paid a fee as
compensation in connection with the offering and sale of Class B and Class S
shares at an annual rate of 0.75% of the average daily net assets of such
shares. These fees may be used to cover the expenses of the Distributor
primarily intended to result in the sale of such shares, including payments to
the Distributor's representatives or others for selling shares. Because the
Distributor may retain any amount of its fee that is not so expended, the Rule
12b-1 Plans are characterized by the SEC as "compensation-type" plans.
In addition to providing for the expenses discussed above, each Rule 12b-1 Plan
also recognizes that the Advisor may use its investment advisory fees or other
resources to pay expenses associated with activities primarily intended to
result in the promotion and distribution of the Fund's or Portfolio's shares.
The Distributor may, from time to time, pay to other dealers, in connection
with retail sales or the distribution of shares of a Fund or Portfolio,
material compensation in the form of merchandise or trips. Salespersons,
including representatives of WM
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Financial Services, Inc. (a subsidiary of Washington Mutual), and any other
person entitled to receive any compensation for selling or servicing Fund or
Portfolio shares may receive different compensation with respect to one
particular class of shares over another, and may receive additional
compensation or other incentives for selling Fund or Portfolio shares.
MANAGEMENT FEES
Each Fund and each Portfolio pays a management fee to the Advisor. The
management fee is calculated and paid to the Advisor every month. The
management fee for each Fund and Portfolio is based upon a percentage of the
average net assets of such Fund or Portfolio. Absent fee waivers, the total
management fee for each Fund and Portfolio as provided in the investment
advisory agreement of the Fund or Portfolio is as follows:
The California Money Fund pays management fees at an annual rate of 0.45% of
its average daily net assets. Fees are reduced to 0.40% of average daily net
assets in excess of $500 million. The California Insured Intermediate Municipal
and California Municipal Funds pay management fees at an annual rate of 0.70%
of their respective average daily net assets. Fees are reduced to 0.55% of
average daily net assets in excess of $500 million. The Florida Insured
Municipal Fund pays management fees at an annual rate of 0.70% of its daily net
assets and fees are reduced to 0.55% of average daily net assets in excess of
$500 million.
The Short Term High Quality Bond Fund pays management fees at an annual rate of
0.50% of its daily net assets, and fees are reduced to 0.45% of average daily
net assets in excess of $200 million and to 0.40% of average daily net assets
in excess of $500 million. The Target Maturity 2002 Fund pays management fees
at an annual rate of 0.25% of its average daily net assets.
The Growth Fund pays management fees at an annual rate of 1.10% of its average
daily net assets, and fees are reduced to 1.05% of average daily net assets in
excess of $100 million and to 1.025% of average daily net assets in excess of
$200 million. The International Growth Fund pays management fees at an annual
rate of 1.10% of average daily net assets and fees are reduced to 1.00% of
average daily net assets in excess of $50 million and to 0.80% of average daily
net assets in excess of $125 million.
The Bond & Stock, Growth & Income and Northwest Funds pay management fees at an
annual rate of 0.625% of their respective average daily net assets. Fees are
reduced to 0.50% of average daily net assets in excess of $250 million for the
Bond & Stock and Growth & Income Funds. For the Northwest Fund, the rate is
reduced to 0.50% of its net assets over $500 million and up to $1 billion, and
to 0.375% of the excess of the net assets over $1 billion.
The U.S. Government Securities and Income Funds pay management fees at an
annual rate of 0.625% of the first $250 million of each Fund's respective
average daily net assets plus 0.50% on net assets in excess of $250 million.
The Tax-Exempt Bond Fund pays management fees equal to an annual rate of 0.50%
of the first $250 million of average daily net assets plus 0.40% on net assets
in excess of $250 million.
The Money Market and Tax-Exempt Money Market Funds pay a management fee at an
annual rate of 0.45% of the average daily net assets of each Fund. If the
average daily net assets grow to more than $1 billion in either Fund, the rate
will decrease to 0.40% on assets over $1 billion with respect to that Fund.
The Strategic Growth, Conservative Growth, Balanced, Flexible Income and Income
Portfolios each pay a management fee at an annual rate of 0.15% of the average
daily net assets of each Portfolio, as well as an administrative fee to
Shareholder Services at an annual rate of 0.50% of average daily net assets.
The Advisor has voluntarily undertaken, through December 31, 1998, to waive a
portion of its management fees up to 0.13%, 0.36% and 0.49% annually of the
Fund's net assets, respectively, for the California Municipal Fund, the Florida
Insured Municipal Fund and the California Insured Municipal Fund to the extent
that total Fund expenses would otherwise exceed the annual rates of 0.97%,
0.82% or 0.82%, respectively, for Class A shares. The Advisor has voluntarily
undertaken to waive, through December 31, 1998, a portion of its management
fees with respect to the California Money Fund, the Short-Term High Quality
Bond Fund and the Target Maturity 2002 Fund, if and to the extent that total
Fund expenses would otherwise exceed the annual rates of 0.85%, 0.82% and
0.64%, respectively, for Class A shares. (These amounts represent such Funds'
total expenses for the fiscal year ended June 30, 1997.) The Advisor has
voluntarily undertaken to waive, through December 31, 1998, its management fees
with respect to the U.S. Government Securities, Income, Money Market and Tax
Exempt Bond Funds to the extent necessary to prevent the overall expense ratios
of such Funds from exceeding the annual rates of 0.98%, 1.18%, 0.78%, 1.04%,
respectively, for Class A shares. (Except in the
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case of the Money Market Fund, these amounts represent the expense ratios for
the fiscal year ended June 30, 1997 for certain former series of WM Trust II,
then known as Sierra Trust Funds, which were merged into these Funds on March
20, 1998.)
SUB-ADVISORY FEES
The Advisor retains only the net amount of the management fees paid to it after
the sub-advisory fees described below are paid to the sub-advisors. The Advisor
pays to the sub-advisors for the Funds listed below a monthly fee at an annual
rate of the following percentages of the average net assets of each such Fund:
Pursuant to a sub-advisory agreement with Van Kampen, the Advisor pays sub-
advisory fees to Van Kampen at an annual rate of 0.20% of the average daily net
assets of the California Municipal Fund, and sub-advisory fees are reduced
0.15% of average daily net assets in excess of $150 million. For acting as sub-
advisor to each of the Florida Insured Municipal and California Insured
Intermediate Municipal Funds, Van Kampen is paid sub-advisory fees of 0.20% of
the average daily net assets of each Fund, and sub-advisory fees are reduced
for each Fund to 0.125% of the average daily net assets in excess of $75
million.
Janus serves as the sub-advisor for the Growth Fund and is paid sub-advisory
fees of 0.55% of such Fund's average daily net assets. The sub-advisory fee is
reduced to 0.50% of average daily net assets in excess of $100 million.
Warburg serves as the sub-advisor for the International Growth Fund and is paid
sub-advisory fees of 0.50% of average daily net assets.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE FUNDS'
AND PORTFOLIOS' OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFERING OF
THE FUNDS' AND PORTFOLIOS' SHARES, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUNDS OR PORTFOLIOS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER MAY NOT
LAWFULLY BE MADE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
75
<PAGE>
APPENDIX A
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. BOND RATINGS:
Aaa, Aa, A -- Bonds which are rated Aaa or Aa are judged to be of high quality
by all standards and are generally known as high grade bonds. Bonds rated Aa
are rated lower than Aaa securities because margins of protection may not be as
large as in the latter or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities. Bonds which are rated A possess
many favorable investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well secured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in
high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and can be
regarded as having extremely poor prospectus of ever attaining any real
investment standing.
DESCRIPTION OF STANDARD & POOR'S BOND RATINGS:
AAA, AA, A -- Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree. Bonds rated A
have a strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than bonds in high rated categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for bonds in higher rated categories.
BB-B-CCC-CC-C -- Bonds rated BB, B, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
CI -- The rating CI is reserved for income bonds on which no income is being
paid.
D -- Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
A-1
<PAGE>
WM GROUP OF FUNDS
SUITE 300
601 WEST MAIN AVENUE
SPOKANE, WASHINGTON 99201-0613
800-543-8072
STATEMENT OF ADDITIONAL INFORMATION
March 23, 1998
WM Group of Funds
<TABLE>
<S> <C>
MONEY FUNDS EQUITY FUNDS
- ----------- ------------
MONEY MARKET FUND BOND & STOCK FUND
TAX-EXEMPT MONEY MARKET FUND GROWTH & INCOME FUND
CALIFORNIA MONEY FUND GROWTH FUND
FIXED-INCOME FUNDS INTERNATIONAL GROWTH FUND
- ------------------ NORTHWEST FUND
SHORT TERM HIGH QUALITY BOND FUND EMERGING GROWTH FUND
TARGET MATURITY 2002 FUND STRATEGIC ASSET MANAGEMENT PORTFOLIOS
U.S. GOVERNMENT SECURITIES FUND -------------------------------------
INCOME FUND STRATEGIC GROWTH PORTFO
HIGH YIELD FUND CONSERVATIVE GROWTH PORTFOLIO
MUNICIPAL FUNDS BALANCED PORTFOLIO
- --------------- FLEXIBLE INCOME PORTFOLIO
TAX-EXEMPT BOND FUND INCOME PORTFOLIO
CALIFORNIA MUNICIPAL FUND
CALIFORNIA INSURED INTERMEDIATE MUNICIPAL FUND
FLORIDA INSURED MUNICIPAL FUND
</TABLE>
This Statement of Additional Information (the "SAI") supplements the
---
information contained in the current Prospectus of the WM Group of Funds listed
above dated March 23, 1998 (the "Prospectus"), and should be read in conjunction
----------
with such Prospectus.
The Money Market, Tax-Exempt Money Market, High Yield, Income, U.S.
Government Securities, Tax-Exempt Bond, Bond & Stock, Growth & Income and
Northwest Funds are series of WM Trust I, a Massachusetts business trust
organized on September 19, 1997. The California Money, Short Term High Quality
Bond, Target Maturity 2002, California Municipal, California Insured
Intermediate Municipal, Florida Insured Municipal, Growth, International Growth
and Emerging Growth Funds are series of WM Trust II, a Massachusetts business
trust organized on February 22, 1989. The series of WM Trust I and WM Trust II
are collectively referred to in this SAI as the "Funds." The Strategic Growth,
-----
Conservative Growth, Balanced, Flexible Income and Income Portfolios,
collectively referred to in this SAI as the "Portfolios," are series of WM
----------
Strategic Asset Management Portfolios, a Massachusetts business trust organized
on March 26, 1996. In this SAI WM Trust I, WM Trust II and WM Strategic Asset
Management Portfolios are referred to as the "Trusts."
------
The Prospectus may be obtained without charge by writing to WM Shareholders
Services, Inc. ("Shareholder Services") or by calling Shareholder Services at
--------------------
800-222-5852. This SAI provides information applicable to the Class A, Class B,
Class I and Class S shares of each
<PAGE>
of the Funds (except for the Target Maturity 2002 Fund, which offers only Class
A shares), and the Class A and Class B shares of each of the Portfolios. This
SAI, although not in itself a prospectus, is incorporated by reference into the
Prospectus in its entirety.
-2-
<PAGE>
CONTENTS
MANAGEMENT................................................... -4-
INVESTMENT OBJECTIVES AND POLICIES........................... -25-
INVESTMENT RESTRICTIONS...................................... -75-
PORTFOLIO TURNOVER........................................... -83-
PORTFOLIO TRANSACTIONS....................................... -84-
NET ASSET VALUE.............................................. -89-
HOW TO BUY AND REDEEM SHARES................................. -91-
HOW TO EXCHANGE SHARES....................................... -96-
DETERMINATION OF PERFORMANCE................................. -97-
TAXES........................................................-105-
DISTRIBUTOR..................................................-110-
APPENDIX.....................................................-115-
FINANCIAL STATEMENTS.........................................-121-
-3-
<PAGE>
MANAGEMENT
TRUSTEES AND OFFICERS
- ---------------------
The Trusts are governed by a common Board of Trustees which oversees the
Trusts' activities and is responsible for protecting the interests of
shareholders. The names, addresses and birthdates of the Trustees and executive
officers of the Trusts, together with information as to their principal business
occupations, are set forth below. The executive officers of the Trusts are
employees of organizations that provide services to the Funds and Portfolios
offered by the Trusts. Each Trustee who is an "interested person" of the
Trusts, as defined in the Investment Company Act of 1940, as amended (the "1940
----
Act"), is indicated by an asterisk.
- ---
TRUSTEES:
- --------
DAVID E. ANDERSON (11/17/26)
Trustee
17960 Seabreeze Drive
Pacific Palisades, California 90272
Retired in 1988 from GTE California, Inc. after 40 years of service. President
and CEO from 1979 to 1988. Director of Barclay's Bank of California until 1988.
Currently involved in the following charitable organizations as a director on
the following boards: Board chairman, Children's Bureau Foundation; Board
member, Upward Bound House of Santa Monica; Past campaign chairman of United
Way; Former chairman, Los Angeles Area Chamber of Commerce.
WAYNE L. ATTWOOD, MD (1/28/29)
Trustee
2931 S. Howard
Spokane, Washington 99203
Retired doctor of internal medicine and gastroenterology. Former president,
Medical Staff -- Sacred Heart Medical Center; former president of Spokane
Society of Internal Medicine; and former president of Spokane Physicians for
Social Responsibility.
ARTHUR H. BERNSTEIN, ESQ. (6/8/25)
Trustee
11661 San Vicente Blvd., Suite 701
Los Angeles, California 90049
President of Bancorp Capital Group, Inc. and Bancorp Venture Capital, Inc.
Previously served on the board of directors of Great Western Leasing
Corporation, subsidiary of Great Western Financial Corporation ("GWFC"), until
----
the subsidiary was sold in 1987. Director of Ryder
-4-
<PAGE>
System, Inc.; chairman of the board of trustees of the California Family Studies
Center and Phillips Graduate Institute since 1984.
KRISTIANNE BLAKE (1/22/54)
Trustee
705 W. 7th, Suite D
Spokane, Washington 99204
CPA specializing in personal financial and tax planning since 1975. Served as a
partner with the accounting firm of Deloitte, Haskins & Sells prior to starting
own firm in 1987. Community activities include: United Way of Spokane County -
board chair; YMCA of the Inland Northwest - treasurer; Junior League of Spokane
- - past president; Spokane Intercollegiate Research & Technology Institute
Foundation - board member; Spokane Joint Center for Higher Education - board
member; Spokane Area Chamber of Commerce - board member; and St. George's School
- - board member.
EDMOND R. DAVIS, ESQ. (9/24/28)
Trustee
550 South Hope Street, 21st Floor
Los Angeles, California 90071-2604
Joined the law firm of Brobeck, Phleger & Harrison as a partner in 1987,
responsible for estate planning, and trusts and estate matters in the Los
Angeles office. Prior to joining the firm, had a similar position for 20 years
with the law firm of Overton, Lyman & Prince in Los Angeles. His expertise has
been recognized in Who's Who in California, the Best Lawyers of America and
Who's Who in American Law.
JOHN W. ENGLISH (3/27/33)
Trustee
50 H New England Ave.
P.O. Box 640
Summit, New Jersey 07902-0640
Retired vice president and chief investment officer of the Ford Foundation (a
non-profit charitable organization). Chairman of the board and director, the
China Fund, Inc., (closed-end mutual fund). Director, Paribas Trust for
Institutions (an open-end mutual fund). Trustee, Retail Property Trust (a
company providing management services for a shopping center).
*ANNE V. FARRELL (7/17/35)
Trustee
425 Pike Street, Suite 510
Seattle, Washington 98101
-5-
<PAGE>
Joined the Seattle Foundation (a charitable foundation) in 1980 as executive
vice president. Became president in 1984. Also serves on the board of
Washington Mutual Bank and Blue Cross of Washington and Alaska. Listed in Who's
Who in America. Past President of the Nature Conservancy of Washington,
Lakeside School and Seattle Rotary Club. Currently a Regent at Seattle
University and president of the Rainier Club in Seattle.
*MICHAEL K. MURPHY (1/14/37)
Trustee
PO Box 3366
Spokane, Washington 99220-3366
Chairman and CEO of CPM Development Corporation (a holding company which
includes Central Pre-mix Concrete Company) and president of Inland Asphalt
Company. Member of the board of directors for Washington Mutual, Inc.
("Washington Mutual"), and Momentum, Inc. Former president and director of
- -------------------
Inland Empire Chapter - Associated General Contractors, and former director of
National Aggregates Associates.
ALFRED E. OSBORNE, JR. PH.D. (12/7/44)
Trustee
110 Westwood Plaza, Suite C305
Los Angeles, California 90095-1481
University professor, researcher and administrator at University of California
Los Angeles since 1972. Director, Times Mirror Company (newspaper publisher),
United States Filter Corporation, Nordstrom Inc. (clothing retailer) and
Greyhound Lines, Inc. (bus company). Independent general partner, Technology
Funding Venture Partners V, and former Governor of the National Association of
Securities Dealers, Inc.
*WILLIAM G. PAPESH (1/21/43)
President and Trustee
601 W. Main Avenue
Suite 300
Spokane, WA 99201
President and director of WM Advisors, Inc. (the "Advisor"), WM Shareholder
-------
Services, Inc. ("Shareholder Services"), WM Funds Distributor, Inc. (the
--------------------
"Distributor") and WM Services, Inc. (a registered investment adviser and
- ------------
broker/dealer).
-6-
<PAGE>
DANIEL L. PAVELICH (9/12/44)
Trustee
Two Prudential Plaza
180 North Stetson Avenue, Suite 4300
Chicago, Illinois 60601
Chairman and CEO of BDO Seidman, a leading national accounting and consulting
firm. Worked in Seidman's Spokane office for 27 years and is a former presiding
member of the firm's board of directors. A member of the American Institute of
CPAs and served as a vice president of the Washington Society of CPAs' board of
directors.
JAY ROCKEY (1/5/28)
Trustee
2121 Fifth Avenue
Seattle, Washington 98121
Founder and chairman of The Rockey Company, a public relations and marketing
communications consulting firm with headquarters in Seattle and offices in
Portland and Spokane. Founder and director of RXL Pulitzer, an international
multimedia company that is a joint venture with Pulitzer Publishing Co. of St.
Louis. History includes managing New York City public relations for Aluminum
Company of America, director of public relations for the Seattle World's Fair
and the presidency of the Public Relations Society of America.
RICHARD C. YANCEY (5/28/26)
Lead Trustee
535 Madison Avenue
New York, New York 10022
Investment Banker - Dillon, Read & Co., Inc., New York City, 1952 through 1992.
Served as vice president, managing director and director and senior advisor at
Dillon, Read & Co. Member of the boards of directors of AdMedia Partners, Inc.,
CapMAC Holdings Inc., Fiberite, Inc., The Scoreboard, Inc., and Czech and Slovak
American Enterprise Fund.
OFFICERS:
- ---------
GENE BRANSON (12/26/45)
Vice President
11th Floor
601 W. Main Street
Spokane, WA 99201
Senior Vice President and Director of the Distributor and Shareholder Services
and Vice President and Director of the Advisor.
-7-
<PAGE>
MONTE D. CALVIN, CPA (1/22/44)
Senior Vice President and Chief Financial Officer
601 W. Main Avenue
Suite 300
Spokane, WA 99201
Executive Vice President and Director of Shareholder Services; Director of the
Advisor and the Distributor.
SANDY CAVANAUGH (5/10/54)
Senior Vice President
1631 Broadway
Sacramento, CA 95818
First Vice President and Director of the Distributor since September 1997.
Director of Advisor and Shareholder Services. Prior to joining the Distributor,
Ms. Cavanaugh held senior level positions with AIM Funds Distributor, First
Interstate Investments and ASB Financial Services.
JEFFREY L. LUNZER, CPA (1/4/61)
Vice President and Treasurer
101 W. Main Avenue
Suite 300
Spokan, WA 99201
Vice President of Shareholder Services.
JOHN T. WEST, CPA (1/21/55)
Vice President, Secretary and Compliance Officer
601 W. Main Avenue
Suite 300
Spokane, WA 99201
Vice President of Shareholder Services.
Each of the Trustees and officers of the Trusts listed above holds the same
position(s) with all three Trusts and is also a trustee or officer of WM
Variable Trust (the "Variable Trust") and WM Prime Income Fund (the "Prime
-------------- -----
Income Fund"). Each of the Variable Trust and the Prime Income Fund is an
- -----------
investment company advised by the Advisor.
REMUNERATION. No Trustee who is a director, officer or employee of the
Advisor or its affiliates receives any compensation from the Trusts for serving
as Trustee of the Trusts. The Trusts, together with the Variable Trust and the
Prime Income Fund, pay each Trustee who is not a director, officer or employee
of the Advisor or its affiliates a fee of $18,000 per annum plus
-8-
<PAGE>
$3,000 per Board meeting attended in person and $1,000 per Board meeting
attended by telephone, and reimburses each such Trustee for travel and out-of-
pocket expenses. The Lead Trustee receives an additional fee of $500 per month.
The Chairman of each committee receives a fee of $500 per committee meeting.
Officers of the Trusts receive no direct remuneration in such capacity from the
Trusts. Officers and Trustees of the Trusts who are employees of the Advisor or
its affiliates may be considered to have received remuneration indirectly.
Wayne L. Attwood, M.D., Kristianne Blake, Anne V. Farrell, Michael K.
Murphy, William G. Papesh, Daniel L. Pavelich, Jay Rockey and Richard C. Yancey
became Trustees of WM Trust II and WM Strategic Asset Management Portfolios on
December 23, 1997. Arthur H. Bernstein, Esq., David E. Anderson, Edmond R.
Davis, Esq., John W. English and Alfred E. Osborne, Jr. Ph.D became trustees of
WM Trust I on December 23, 1997.
The Funds other than the High Yield Fund which are series of WM Trust I are
successors to the following Washington corporations, or series thereof, which
commenced operations in the years indicated, which made up the group of mutual
funds known as the "Composite Funds."
Composite U.S. Government Securities, Inc. (1982)
Composite Income Fund, Inc. (1975)
Composite Growth & Income Fund, a series of Composite Equity Series,
Inc. (1949)
Composite Money Market Portfolio, a series of Composite Cash Management
Company (predecessor of the Money Market Fund) (1979)
Composite Tax-Exempt Portfolio, a series of Composite Cash Management
Company (predecessor of the Tax-Exempt Money Market Fund) (1979)
Composite Tax-Exempt Bond Fund, Inc. (1976)
Composite Northwest Fund, Inc. (1986)
Composite Bond & Stock Fund, Inc. (1939)
Each of the Composite Funds was reorganized as a series of WM Trust I on
March 20, 1998. In connection with this reorganization, the Trust, whose name
was previously "The Composite Funds" and which conducted no operations prior to
that date, changed its name to its current name. The High Yield fund is newly-
organized as of the date of this SAI.
Prior to March 20, 1998, the name of WM Trust II was "Sierra Trust Funds"
and the name of WM Asset Management Portfolios was "Sierra Asset Management
Portfolios." These Trusts were part of a family of mutual funds known as the
"Sierra Funds."
The reorganizations and name changes described in the foregoing paragraphs
were part of an overall restructuring of the Composite Funds and the Sierra
Funds into a combined mutual fund family known as the WM Group of Funds. This
restructuring also consisted of the replacement of Sierra Investment Advisors
Corporation as investment advisor to the Sierra Funds with WM Advisors, Inc.
(formerly known as Composite Research & Management Co.), the advisor to the
Composite Funds, the election of the Directors of the Composite Funds as
Trustees
-9-
<PAGE>
of WM Trust I, WM Trust II and WM Asset Management Portfolios and the
election of the independent Trustees of WM Trust II and WM Asset Management
Portfolios as Trustees of WM Trust I.
The following table shows the aggregate compensation paid to each of
the Trusts' Trustees by the Trusts (or, in the case of WM Trust I, by the
predecessor Composite Funds) for the most recent fiscal year and by Trusts
together with the Variable Trust, the Prime Income Fund and Composite Deferred
Series, Inc., an investment company for which WM Advisors, Inc. was formerly the
advisor, for the year ended December 31, 1997.
-10-
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total Compensation
Aggregate Pension or From the Trusts, the
Compensation From Retirement Benefits Estimated Annual Variable Trust, the
Trustee the Trusts* for Accrued as Part Benefits Upon Prime Income Fund
fiscal year ended of Fund Expenses Retirement and
1997** Composite Deferred
Series, Inc.
for year ended
December 31, 1997
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David E. Anderson $19,000 $0 $0 $41,450
Wayne L. Attwood, M.D. 10,864 0 0 15,000
Arthur H. Bernstein, Esq. 24,438 0 0 59,889
Kristianne Blake 11,963 0 0 16,500
Edmond R. Davis, Esq. 19,000 0 0 41,450
John W. English 19,000 0 0 41,450
Alfred E. Osborne, Jr., Ph.D. 19,000 0 0 41,450
Daniel L. Pavelich 10,150 0 0 14,000
Jay Rockey 10,864 0 0 15,000
Richard C. Yancey 10,864 0 0 15,000
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
*In the case of WM Trust I, from predecessor Composite Funds
**Fiscal year for WM Trust II and WM Asset Management Portfolios ended June 30,
1997. Fiscal year for predecessors of Funds in WM Trust I ended December 31 or
October 31, 1997, depending on the Fund; data is shown for year ended December
31, 1997.
-11-
<PAGE>
During the fiscal year ended June 30, 1997, Sierra Investment Advisors
Corporation reimbursed WM Trust II and WM Asset Management Portfolios in the
amount of $80,500 for certain expenses associated with special meetings of the
Board, held with regard to the contemplation of the sale of Sierra Capital
Management Corporation and the merger of Great Western Financial Securities
Corporation and Washington Mutual, Inc. As of October 1, 1997, the Trustees and
officers of the Trusts owned, in the aggregate, 108,216 shares of the Balanced
Portfolio, and less than 1% of the outstanding shares of any of the other
Portfolios or the Funds in WM Trust II. As of December 31, 1997, the Trustees
and officers of the Trust owned, in the aggregate, less than 1% of the
outstanding shares of each Fund in WM Trust I. In addition, as of March 20,
1998, to the knowledge of the Trusts, the following shareholders owned of record
or beneficially 5% or more of the outstanding shares of the indicated classes of
the Funds in WM Trust I, and as of October 1, 1997, the following shareholders
owned of record or beneficially 5% or more of the outstnading shares of the
indicated classes of the Funds in WM Trust II and the Portfolios:
MONEY MARKET FUND - CLASS A: BHC Securities Omnibus Account, Attn: Cash
Sweeps Dept., 2005 Market St. 12th Flr., Philadelphia, PA 19103, 30.2%.
MONEY MARKET FUND - CLASS B: WA Mutual Bank Cust IRA Rlvr, Robert O. Wright,
7824 Harbor Blvd, Pasco, WA 99301, 6.3%.
Stanley E. Armstrong, 8512 NE 10th St., Vancouver, WA 98664, 11.1%.
George Priest TTEE Emily H. Priest Living Trust U/A DTD 2/8/90, 23131 SW
Starlight Dr., Sherwood, OR 97140, 13.4%.
Flossie Hasting & Milton Hasting JT TEN, 521 Field Rd., E. Spanaway, WA 98387,
6.4%.
WA Mutual Bank Cust. IRA, Mary K. Lutz, 3859 Glenwood LP SE, Salem, OR 97301,
5.7%.
BHC Securities, Inc., FBO #85674022 Attn: Mutual Funds Dept., One Commerce
Square, 2005 Market St., Suite 1200, Philadelphia, PA 19103, 23.3%.
TAX-EXEMPT MONEY MARKET FUND - CLASS A: BHC Securities Omnibus Account Attn:
Cash Sweeps Dept., 2005 Market 12th Floor, Philadelphia, PA 19103, 6.9%.
TAX-EXEMPT MONEY MARKET FUND - CLASS B: Genevieve Odegard, 5702 N 33rd St. St
#13D, Tacoma, WA 98407, 90.0%.
Corporate Actions Audit % Murphey Favre Sec. Services Attn: Tom Hunt, 601 W.
Main Ave. Ste 801, Spokane, WA 99201, 8.7%.
-12-
<PAGE>
CALIFORNIA MONEY FUND - CLASS A: Edward B. Baker Ttee FBO The Baker Family
Trust, DTD 7/10/94, 1650 16th Avenue, San Francisco, CA 94122, 18.28%.
CALIFORNIA MONEY FUND - CLASS B: Oscar L. Reheel Trustee, FBO: The Oscar L.
Roehl Trust UTA DTD 12/15/89, 1826 Harding Avenue, Redwood City, CA 94062,
81.27%.
Ella M. Brown, 29094 Cobblestone Street, Nuevo, CA 92567, 15.47%.
CALIFORNIA MONEY FUND - CLASS I: Sierra Fund Administration, 9301 Corbin
Avenue, Northridge, CA 91324, 100.00%.
SHORT TERM HIGH QUALITY BOND FUND- CLASS I: SAM Income Portfolio, C/O Sierra
Advisors, 9301 Corbin Avenue, Suite 333, Northridge, CA 91324, 66.00%.
SAM Value Portfolio, C/O Sierra Advisors, 9301 Corbin Avenue, Suite 333,
Northridge, CA 91324, 34.00%.
SHORT TERM HIGH QUALITY BOND FUND- CLASS S: KY Cabinet for Human Resources
Trustee for the Marian K. Burns Irrevocable Charitable Remainder Trust, 275 E.
Main Street, 6th Floor West, Frankfort, KY 40621, 11.81%.
Alec P. Morrison and Sandra K. Morrison JTWROS, 16975 Stag Thicket Lane,
Strongsville, OH 44136, 10.88%.
BSDT Ttee IRA R FBO Mauro Fardo, 143 Los Altos Ave., Walnut Creek, CA 94598,
7.20%.
Harold P. Jewell and Oveta B. Jewell JTWROS, 1001 Urell Place NE, Washington,
D.C. 20017, 5.01%.
INCOME FUND - CLASS A: Rainier Trust Co., 1201 3rd Ave. #2010, Seattle, WA
98101, 7.6%.
CALIFORNIA MUNICIPAL FUND- CLASS I: Sierra Fund Administration Corp., 9301
Corbin Avenue, Northridge, CA 91324, 100.00%.
CALIFORNIA MUNICIPAL FUND - CLASS S: Josefina F. Perungoa and Reynaldo Fernando
JTWROS, 5480 Avenida El Cid, Yorba Linda, CA 92686, 76.34%
Sierra Fund Administration Corp., 9301 Corbin Avenue, Northridge, CA 91324,
23.66%
CALIFORNIA INSURED INTERMEDIATE MUNICIPAL FUND - CLASS I: Sierra Fund
Administration Corp., 9301 Corbin Avenue, Northridge, CA 91324, 100.00%
-13-
<PAGE>
CALIFORNIA INSURED INTERMEDIATE MUNICIPAL FUND - CLASS S: Sierra Fund
Administration Corp., 9301 Corbin Avenue, Northridge, CA 91324, 100.00%.
FLORIDA INSURED MUNICIPAL FUND - CLASS B: Joseph R. Ott and Stella C. Ott
JTWROS, 5800 SW 99th Terrace, Miami, FL 33156, 7.55%.
FLORIDA INSURED MUNICIPAL FUND - CLASS S: Jill Kuharcik, 5696 High Flyer Road
South, Palm Beach Gardens, FL 33418, 94.54%.
Sierra Fund Administration Corp., 9301 Corbin Avenue, Northridge, CA 91324,
5.46%
BOND & STOCK FUND - CLASS A: Rainier Trust Co., 1201 3rd Ave. #2010, Seattle,
WA 98101, 6.7%.
GROWTH & INCOME FUND - CLASS A: Rainier Trust Co., 1201 3rd Ave. #2010,
Seattle, WA 98101, 24.3%.
GROWTH FUND - CLASS I: SAM Growth Portfolio, C/O Sierra Advisors, 9301 Corbin
Avenue, Suite 333, Northridge, CA 91324, 57.97%.
SAM Balanced Portfolio, C/O Sierra Advisors, 9301 Corbin Avenue, Suite 333,
Northridge, CA 91324, 26.84%.
SAM Capital Growth Portfolio, C/O Sierra Advisors, 9301 Corbin Avenue, Suite
333, Northridge, CA 91324, 15.18%.
INTERNATIONAL GROWTH FUND- CLASS I: SAM Growth Portfolio, C/O Sierra Advisors,
9301 Corbin Avenue, Suite 333, Northridge, CA 91324, 61.45%.
SAM Balanced Portfolio, C/O Sierra Advisors, 9301 Corbin Avenue, Suite 333,
Northridge, CA 91324, 32.66%.
SAM Capital Growth Portfolio, C/O Sierra Advisors, 9301 Corbin Avenue, Suite
333, Northridge, CA 91324, 5.89%.
NORTHWEST FUND - CLASS A: Rainier Trust Co., 1201 3rd Ave. #2010, Seattle, WA
98101, 8.3%.
EMERGING GROWTH FUND - CLASS A: Chase Manhattan Bank Ttee FBO: GWB ESIP Plan
Trust A/C #29000108, 7700 Broadway, 10th Floor, New York, NY 10003, 14.98%.
EMERGING GROWTH FUND- CLASS I: SAM Growth Portfolio, C/O Sierra Advisors, 9301
Corbin Avenue, Suite 333, Northridge, CA 91324, 89.02%.
-14-
<PAGE>
SAM Capital Growth Portfolio, C/O Sierra Advisors, 9301 Corbin Avenue, Suite
333, Northridge, CA 91324, 10.98%.
INCOME PORTFOLIO - CLASS A: Everen Clearing Corp. Cust., FBO: John H. Ormond
IRA, 133 Woodland Way, Piedmont, CA 94611, 7.16%.
INCOME PORTFOLIO - CLASS B: BSDT Cust Rollover IRA FBO: Octavio Gomez, 3606 La
Reforma Blvd., Baytown, TX 77521, 7.49%.
WM ADVISORS, INC., ITS AFFILIATES AND SERVICE PROVIDERS
- -------------------------------------------------------
ADVISOR
The Funds and Portfolios are managed by WM Advisors, Inc., which is
referred to as the Advisor in this SAI. The Advisor has delegated portfolio
management responsibilities in respect of the Growth, California Municipal,
Florida Insured Municipal, California Insured Intermediate Municipal and
International Growth Funds to a sub-advisor.
The Advisor has been in the business of investment management since 1944.
Its responsibilities include formulating each Fund's and Portfolio's investment
policies (subject to the terms of the Prospectus and this SAI), analyzing
economic trends, directing and evaluating the investment services provided by
the sub-advisors and monitoring each Fund's and Portfolio's investment
performance and reporting to the Board of Trustees, as well as providing certain
administrative services to the Funds and Portfolios. In connection with its
service as investment advisor to each Fund and Portfolio, the Advisor may engage
one or more sub-advisors to provide investment advisory services to any of the
Funds or Portfolios and may change or eliminate any such sub-advisor if it deems
such action to be in the best interests of a Fund or Portfolio and its
shareholders. Where the Advisor has not delegated such duties to a sub-advisor,
it is responsible for managing the investment and reinvestment of the Fund's or
Portfolio's assets. In addition, the Trusts are seeking an order from the
Securities and Exchange Commission which would permit the Funds and the
Portfolios, subject to certain conditions, to enter into sub-advisory agreements
with other sub-advisors approved by the Board of Trustees without shareholder
approval. The exemptive request also seeks to permit, without shareholder
approval, the terms of an existing sub-advisory agreement to be changed or the
employment of an existing sub-advisor to be continued after events that would
otherwise cause an automatic termination of a sub-advisory agreement when such
changes or continuation are approved by the Trusts' Board of Trustees.
Shareholders would be notified of any sub-advisor changes. The Advisor is an
indirect wholly owned subsidiary of Washington Mutual, a publicly owned
financial services company.
-15-
<PAGE>
The following organizations, under the supervision of the Advisor, act as
sub-advisors to the Funds indicated below, and are responsible for continuously
reviewing, supervising and administering such Funds' respective investment
programs:
JANUS CAPITAL CORPORATION ("JANUS"), 100 Fillmore Street, Denver, Colorado
-----
80206, acts as sub-advisor to the Growth Fund and has served in such capacity
since the Fund's inception. Janus is an indirectly majority owned subsidiary of
Kansas City Southern Industries, Inc., a publicly traded holding company whose
primary subsidiaries are engaged in transportation, information processing and
financial services. Janus has been providing investment advice to mutual funds
or other large institutional clients since 1970. As of December 31, 1997, Janus'
assets under management were in excess of $68 billion.
VAN KAMPEN AMERICAN CAPITAL MANAGEMENT INC. ("VAN KAMPEN"), One Parkview
----------
Plaza, Oakbrook, Illinois 60181, or its predecessors, has served as the sub-
advisor for the California Insured Intermediate Municipal and Florida Insured
Municipal Funds since each Fund's inception. Van Kampen is a wholly-owned
subsidiary of Van Kampen American Capital, Inc., which is a wholly-owned
subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is a wholly owned
subsidiary of MSAM Holdings II, Inc. which, in turn, is a wholly owned
subsidiary of Morgan Stanley, Dean Witter, Discover & Co., a publicly held
global financial services company.
Van Kampen provides investment advice to a wide variety of individual,
institutional and investment company clients and, together with its affiliates,
had aggregate assets under management or supervision, as of November 30, 1997,
of more than $68 billion.
WARBURG PINCUS ASSET MANAGEMENT, INC. ("WARBURG"), 466 Lexington Avenue,
-------
New York, New York 10017, acts as sub-advisor to the International Growth Fund.
Warburg is a professional investment counseling firm which provides investment
services to investment companies, employee benefit plans, endowment funds,
foundations and other institutions and individuals. As of January 31, 1998 ,
Warburg managed approximately $21 billion of assets. Incorporated in 1970,
Warburg is indirectly controlled by Warburg, Pincus & Co. ("WP & Co."), which
--------
has no business other than being a holding company of Warburg and its
affiliates. Lionel I. Pincus, the managing partner of WP & Co., may be deemed to
control both WP & Co. and Warburg.
TRANSFER AGENT AND CUSTODIAN
WM Shareholder Services, Inc., referred to as Shareholder Services in this
SAI and the Prospectus, provides transfer agency and other shareholder services.
Shareholder Services is an indirect wholly-owned subsidiary of Washington
Mutual, located at 601 West Main Avenue, Suite 300, Spokane, Washington 99201.
The Custodian for the Funds and the Portfolios is Boston Safe Deposit and Trust
Co. which is located at One Boston Place, Boston, Massachusetts
-16-
<PAGE>
02108. Shareholder Services may charge a fee for special services, such as
providing historical account documents, that are beyond the normal scope of its
services.
DISTRIBUTOR
WM Funds Distributor, Inc., referred to as the Distributor in this SAI and
the Prospectus, is the distributor of the Class A, Class B, Class I and Class S
shares of the Funds and Class A and Class B shares of the Portfolios. The
Distributor, located at 601 West Main Avenue, Suite 300, Spokane, Washington
99201, is an indirect wholly owned subsidiary of Washington Mutual.
MANAGEMENT FEES. For the most recent three fiscal years the Funds and the
Portfolios paid the Advisor or Sierra Investment Advisors Corporation (which was
prior to 1998 the advisor to the Portfolios and the Funds within WM Trust II),
as the case may be, the following management fees:
-17-
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Fiscal year ended 1997
- -------------------------------------------------------------------------------------------
Expenses
Fees Paid Fees Waived Reimbursed
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Money Market Fund* $1,148,906 $ 0 $198,432
- -------------------------------------------------------------------------------------------
Tax-Exempt Money Market Fund* $ 143,965 $ 0 $ 45,307
- -------------------------------------------------------------------------------------------
California Money Fund** $ 187,084 $ 135,495 $ 0
- -------------------------------------------------------------------------------------------
Short Term High Quality Bond Fund** $ 153,348 $ 153,348 $ 40,836
- -------------------------------------------------------------------------------------------
Target Maturity 2002 Fund** $ 7,756 $ 7,756 $ 59,718
- -------------------------------------------------------------------------------------------
U.S. Government Securities Fund* $ 769,591 $ 0 $ 0
- -------------------------------------------------------------------------------------------
Income Fund* $ 553,562 $ 0 $ 0
- -------------------------------------------------------------------------------------------
Tax-Exempt Bond Fund* $ 987,356 $ 0 $ 0
- -------------------------------------------------------------------------------------------
California Municipal Fund** $2,063,242 $1,080,813 $ 0
- -------------------------------------------------------------------------------------------
California Insured Intermediate Municipal Fund** $ 398,681 $ 350,384 $ 0
- -------------------------------------------------------------------------------------------
Florida Insured Municipal Fund** $ 173,618 $ 173,618 $ 22,193
- -------------------------------------------------------------------------------------------
Bond & Stock Fund*** $1,912,341 $ 0 $ 0
- -------------------------------------------------------------------------------------------
Growth & Income Fund*** $1,630,777 $ 0 $ 0
- -------------------------------------------------------------------------------------------
Growth Fund** $2,418,645 $ 0 $ 0
- -------------------------------------------------------------------------------------------
International Growth Fund** $1,444,004 $ 0 $ 0
- -------------------------------------------------------------------------------------------
Northwest Fund*** $1,538,183 $ 137,944 $ 0
- -------------------------------------------------------------------------------------------
Emerging Growth Fund** $2,600,399 $ 0 $ 0
- -------------------------------------------------------------------------------------------
Strategic Growth Portfolio** $ 36,642 $ 6,241 $ 41,371
- -------------------------------------------------------------------------------------------
Conservative Growth Portfolio** $ 260,044 $ 54,435 $ 98,600
- -------------------------------------------------------------------------------------------
Balanced Portfolio** $ 188,577 $ 40,744 $ 82,121
- -------------------------------------------------------------------------------------------
Flexible Income Portfolio** $ 19,886 $ 4,470 $ 34,312
- -------------------------------------------------------------------------------------------
Income Portfolio** $ 18,539 $ 4,476 $ 33,580
- -------------------------------------------------------------------------------------------
* Fiscal year ends 12/31
** Fiscal year ends 6/30
*** Fiscal year ends 10/31
<CAPTION>
- ----------------------------------------------------------------------------------------
Fiscal year ended 1996
- ----------------------------------------------------------------------------------------
Expenses
Fees Paid Fees Waived Reimbursed
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------
Money Market Fund* $ 916,867 $ 0 $202,612
- ----------------------------------------------------------------------------------------
Tax-Exempt Money Market Fund* $ 139,482 $ 0 $ 47,274
- ----------------------------------------------------------------------------------------
</TABLE>
-18-
<PAGE>
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
California Money Fund** $ 206,796 $ 148,062
- --------------------------------------------------------------------------------------
Short Term High Quality Bond Fund** $ 262,885 $ 262,885 $ 13,583
- --------------------------------------------------------------------------------------
Target Maturity 2002 Fund** $ 7,915 $ 7,915 $ 47,054
- --------------------------------------------------------------------------------------
U.S. Government Securities Fund* $ 984,485 $ 0 $ 0
- --------------------------------------------------------------------------------------
Income Fund* $ 599,008 $ 0 $ 0
- --------------------------------------------------------------------------------------
Tax-Exempt Bond Fund* $1,065,379 $ 0 $ 0
- --------------------------------------------------------------------------------------
California Municipal Fund** $2,233,979 $1,398,796 $ 0
- --------------------------------------------------------------------------------------
California Insured Intermediate Municipal $ 393,599 $ 393,599 $ 47,057
Fund**
- --------------------------------------------------------------------------------------
Florida Insured Municipal Fund** $ 201,769 $ 201,769 $ 74,295
- --------------------------------------------------------------------------------------
Bond & Stock Fund*** $1,555,733 $ 0 $ 0
- --------------------------------------------------------------------------------------
Growth & Income Fund*** $1,065,507 $ 0 $ 0
- --------------------------------------------------------------------------------------
Growth Fund** $2,023,665 $ 0 $ 0
- --------------------------------------------------------------------------------------
International Growth Fund** $1,062,220 $ 0 $ 0
- --------------------------------------------------------------------------------------
Northwest Fund*** $1,123,204 $ 166,941 $ 0
- --------------------------------------------------------------------------------------
Emerging Growth Fund** $2,464,903 $ 0 $ 0
- --------------------------------------------------------------------------------------
* Fiscal year ends 12/31
** Fiscal year ends 6/30
*** Fiscal year ends 10/31
<CAPTION>
- --------------------------------------------------------------------------------------
Fiscal year ended 1995
- --------------------------------------------------------------------------------------
Expenses
Fees Paid Fees Waived Reimbursed
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
Money Market Fund* $ 688,617 $ 0 $22,965
- --------------------------------------------------------------------------------------
Tax-Exempt Money Market Fund* $ 143,292 $ 0 $57,104
- --------------------------------------------------------------------------------------
California Money Fund** $ 215,043 $ 108,224 $ 0
- --------------------------------------------------------------------------------------
Short Term High Quality Bond Fund** $ 270,744 $ 228,615 $ 0
- --------------------------------------------------------------------------------------
Target Maturity 2002 Fund** $ 1,207 $ 1,207 $16,281
- --------------------------------------------------------------------------------------
U.S. Government Securities Fund* $1,156,052 $ 0 $ 0
- --------------------------------------------------------------------------------------
Income Fund* $ 598,377 $ 0 $ 0
- --------------------------------------------------------------------------------------
Tax-Exempt Bond Fund* $1,120,096 $ 0 $ 0
- --------------------------------------------------------------------------------------
California Municipal Fund** $2,419,708 $1,403,390 $ 0
- --------------------------------------------------------------------------------------
California Insured Intermediate Municipal $ 319,780 $ 319,780 $52,835
Fund**
- --------------------------------------------------------------------------------------
Florida Insured Municipal Fund** $ 200,364 $ 200,364 $80,852
- --------------------------------------------------------------------------------------
</TABLE>
-19-
<PAGE>
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------
Bond & Stock Fund*** $1,230,409 $ 0 $ 0
- ------------------------------------------------------------------------------------
Growth & Income Fund*** $ 738,064 $ 0 $ 0
- ------------------------------------------------------------------------------------
Growth Fund** $1,365,171 $ 0 $ 0
- ------------------------------------------------------------------------------------
International Growth Fund** $1,097,217 $ 0 $ 0
- ------------------------------------------------------------------------------------
Northwest Fund*** $ 973,877 $ 116,742 $ 0
- ------------------------------------------------------------------------------------
Emerging Growth Fund** $1,400,644 $ 0 $ 0
- ------------------------------------------------------------------------------------
* Fiscal year ends 12/31
** Fiscal year ends 6/30
*** Fiscal year ends 10/31
</TABLE>
Van Kampen, or its predecessors, has served as the sub-advisor for the
California Municipal, California Insured Intermediate Municipal and Florida
Insured Municipal Funds since each Fund's inception. Janus has served as the
sub-advisor to the Growth Fund since its inception. Capital Guardian Trust
Company ("Capital Trust"), was the sub-advisor to the Emerging Growth Fund at
-------------
its inception. Capital Trust was replaced as the sub-advisor to the Emerging
Growth Fund by Janus in September 1993. J.P. Morgan Investment Management Inc.
("J.P. Morgan") was sub-advisor to the International Growth Fund since its
-----------
inception. J.P. Morgan was replaced as the sub-advisor to the International
Growth Fund by Warburg on April 8, 1996. The subadvisory agreements for the
Growth Fund with Janus, for the International Growth Fund with Warburg, and for
the California Municipal Fund, the Florida Insured Municipal Fund and the
California Insured Intermediate Fund with Van Kampen each took effect on March
20, 1998.
Prior to March 20, 1998 Alliance Capital Management, L.P. served as sub-
advisor to the California Money Fund. Prior to March 20, 1998, Scudder, Stevens
& Clark, Inc. served as sub-advisor to the Short Term High Quality Bond Fund.
Prior to March 20, 1998, BlackRock Financial Management, Inc. served as the sub-
advisor to the Target Maturity 2002 Fund.
For the most recent fiscal year and for the 1996 and 1995 fiscal years, the
Advisor or Sierra Investment Advisors Corporation, as the case may be, paid the
sub-advisors the following sub-advisory fees:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
FEES PAID FEES PAID FEES PAID
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
1997 1996 1995
----------- ----------- -----------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
California Money Fund** $ 70,156 $ 77,549 $ 80,641
- --------------------------------------------------------------------------------------
Short Term High Quality Bond Fund** $ 46,004 $ 78,866 $ 81,222
- --------------------------------------------------------------------------------------
Target Maturity 2002 Fund+** $ 25,000 $ 25,000 $ 7,055
- --------------------------------------------------------------------------------------
</TABLE>
-20-
<PAGE>
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
California Municipal Fund** $ 637,702 $ 684,267 $667,343
- --------------------------------------------------------------------------------------
California Insured Intermediate Municipal $ 144,771 $ 143,109 $116,283
Fund**
- --------------------------------------------------------------------------------------
Florida Insured Municipal Fund** $ 63,134 $ 73,371 $ 72,860
- --------------------------------------------------------------------------------------
Growth Fund** $1,374,940 $1,149,390 $780,651
- --------------------------------------------------------------------------------------
International Growth Fund** $ 880,003 $ 640,950 $646,343
- --------------------------------------------------------------------------------------
Emerging Growth Fund** $1,550,235 $1,470,531 $844,497
- --------------------------------------------------------------------------------------
+ The Target Maturity 2002 Fund commenced operations on March 20, 1995.
* Fiscal year ends 12/31
** Fiscal year ends 6/30
*** Fiscal year ends 10/31
</TABLE>
For the most recent fiscal year and for the 1996 and 1995 fiscal years
Sierra Fund Administration Corporation ("Sierra Administration") served as the
---------------------
administrator to each of the Funds within WM Trust II and each of the Portfolios
and First Data Investor Services Group, Inc. ("First Data") served as the sub-
----------
administrator to each of the Funds and Portfolios within WM Trust II and WM
Strategic Asset Management Portfolios. For each of the Funds within WM Trust I,
Murphey Favre Securities Services, Inc. ("Murphey Favre") furnished necessary
-------------
personnel and other transfer agent services required by the Funds at the rates
of $1.35 per Class A account and $1.45 per Class B account for each of the U.S.
Government Securities, Income, Tax-Exempt Bond, Bond & Stock, Growth & Income
and Northwest Funds. Murphey Favre provided such services to the Money Market
and Tax-Exempt Money Market Funds at rates of $1.85 per account for the first
25,000 accounts, $1.55 per account thereafter for Class A accounts and $1.95 per
account for the first 25,000 Class B accounts and $1.65 per each Class B account
thereafter. Murphey Favre agreed to waive its fees for all Money Market and Tax-
Exempt Money Market Fund accounts with a balance of less than $1,000. WM
Shareholder Services, Inc. (formerly Murphey Favre) will provide transfer agency
and other shareholder services to each of the Funds and Portfolios as of March
20, 1998.
For the most recent fiscal year and for the 1996 and 1995 fiscal years, WM
Trust I, WM Trust II and WM Strategic Asset Management Portfolios paid Murphey
Favre or Sierra Administration, as the case may be, the following
administration fees:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Fiscal year ended 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
FEES FEES WAIVED FEES FEES WAIVED FEES FEES
PAID PAID PAID WAIVED
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund* $ 476,775 $141,274 $ 411,078 $137,904 $ 268,265 $ 0
- ------------------------------------------------------------------------------------------------------------------
Tax-Exempt Money Market Fund* $ 26,688 $ 1,293 $ 26,736 $ 1,628 $ 32,355 $ 0
- ------------------------------------------------------------------------------------------------------------------
California Money Fund** $ 140,313 $ 0 $ 155,097 $ 0 $ 161,282 $ 50,408
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
-21-
<PAGE>
<TABLE>
<CAPTION>
Fiscal year ended 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Short Term High Quality $ 107,344 $ 0 $ 809,686 $ 11,630 $ 189,519 $117,460
Bond Fund**
- ------------------------------------------------------------------------------------------------------------------
Target Maturity 2002 Fund+** $ 10,859 $ 0 $ 11,080 $ 3,805 $ 1,690 $ 1,690
- ------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund* $ 105,444 $ 0 $ 146,145 $ 0 $ 165,595 $ 0
- ------------------------------------------------------------------------------------------------------------------
Income Fund* $ 93,522 $ 0 $ 114,258 $ 0 $ 114,938 $ 0
- ------------------------------------------------------------------------------------------------------------------
Tax-Exempt Bond Fund* $ 84,547 $ 0 $ 102,716 $ 0 $ 107,114 $ 0
- ------------------------------------------------------------------------------------------------------------------
California Municipal Fund** $1,312,972 $ 0 $1,421,633 $ 0 $1,539,815 $511,663
- ------------------------------------------------------------------------------------------------------------------
California Insured Intermediate
Municipal Fund** $ 253,706 $ 0 $ 250,472 $ 14,288 $ 203,496 $203,496
- ------------------------------------------------------------------------------------------------------------------
Florida Insured Municipal Fund** $ 110,484 $ 0 $ 128,399 $ 20,472 $ 127,505 $127,505
- ------------------------------------------------------------------------------------------------------------------
Bond & Stock Fund*** $ 235,936 $ 0 $ 222,913 $ 0 $ 194,112 $ 0
- ------------------------------------------------------------------------------------------------------------------
Growth & Income Fund*** $ 245,357 $ 0 $ 193,784 $ 0 $ 142,648 $ 0
- ------------------------------------------------------------------------------------------------------------------
Growth Fund** $ 927,458 $ 0 $ 769,573 $ 0 $ 511,456 $ 0
- ------------------------------------------------------------------------------------------------------------------
International Growth Fund** $ 616,002 $ 0 $ 422,563 $ 0 $ 454,734 $ 0
- ------------------------------------------------------------------------------------------------------------------
Northwest Fund*** $ 347,561 $ 0 $ 320,799 $ 0 $ 292,144 $ 0
- ------------------------------------------------------------------------------------------------------------------
Emerging Growth Fund** $1,050,164 $ 0 $ 994,372 $ 0 $ 556,148 $ 0
- ------------------------------------------------------------------------------------------------------------------
Strategic Growth Portfolio++** $ 122,140 $ 83,235
- ------------------------------------------------------------------------------------------------------------------
Conservative Growth Portfolio++** $ 866,812 $259,689
- ------------------------------------------------------------------------------------------------------------------
Balanced Portfolio++** $ 628,588 $179,370
- ------------------------------------------------------------------------------------------------------------------
Flexible Income Portfolio++** $ 66,287 $ 58,740
- ------------------------------------------------------------------------------------------------------------------
Income Portfolio++** $ 61,795 $ 50,033
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
+ The Target Maturity 2002 Fund commenced operations on March 20, 1995.
++ The Portfolios commenced operations on July 25, 1996.
* Fiscal year ends 12/31
** Fiscal year ends 6/30
*** Fiscal year ends 10/31
Prior to March 20, 1998 the assets of each of the Funds within WM Trust II
and each of the Portfolios were held under bank custodianship in accordance with
the 1940 Act by Boston Safe Deposit and Trust Company ("Boston Safe"), which is
-----------
located at One Boston Place, Boston, Massachusetts 02108. Prior to March 20,
1998 the assets of each of the Funds within WM Trust I were held under bank
custodianship by Investors Fiduciary Trust Company ("IFTC"), which is located at
----
127 West 10th, Kansas City, Missouri 64105. IFTC is a wholly owned subsidiary
of
-22-
<PAGE>
State Street Bank and Trust Company. As of March 20, 1998 the assets of each
of the Funds and Portfolios within the WM Group of Funds will be held by Boston
Safe.
For the most recent fiscal year and for the 1996 and 1995 fiscal years
Sierra Administration paid First Data the following fees (which do not
include out-of-pocket expenses and certain transaction charges and net of
waivers of fees) for sub-administration and custody services provided to the
following Funds, and the Portfolios paid the following amounts to Boston Safe
for custody services provided to the Portfolios.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30:
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------
California Money Fund $ 37,649 $ 40,546 $ 84,360
- -------------------------------------------------------------------------------------
Short Term High Quality Bond Fund $ 24,633 $ 41,119 $152,405
- -------------------------------------------------------------------------------------
Target Maturity 2002 Fund+ $ 2,499 $ 2,485 $ 692
- -------------------------------------------------------------------------------------
California Municipal Fund $302,048 $318,453 $436,521
- -------------------------------------------------------------------------------------
California Insured Intermediate Municipal Fund $ 58,360 $ 56,128 $ 54,451
- -------------------------------------------------------------------------------------
Florida Insured Municipal Fund $ 25,408 $ 28,762 $ 37,321
- -------------------------------------------------------------------------------------
Growth Fund $213,556 $172,561 $312,093
- -------------------------------------------------------------------------------------
International Growth Fund** $141,808 $ 94,735 $263,659
- -------------------------------------------------------------------------------------
Emerging Growth Fund $241,257 $222,994 $380,867
- -------------------------------------------------------------------------------------
Strategic Growth Portfolio++ $ 1,128
- -------------------------------------------------------------------------------------
Conservative Growth Portfolio++ $ 1,164
- -------------------------------------------------------------------------------------
Balanced Portfolio++ $ 1,257
- -------------------------------------------------------------------------------------
Flexible Income Portfolio++ $ 1,533
- -------------------------------------------------------------------------------------
Income Portfolio++ $ 1,249
- ------------------------------------------------------------------------------------
</TABLE>
+ The Target Maturity 2002 Fund commenced operations on March 20, 1995.
++ The Portfolios commenced operations on July 25, 1996.
-23-
<PAGE>
COUNSEL AND INDEPENDENT ACCOUNTANTS
Ropes & Gray, located at One International Place, Boston, Massachusetts
02110, and Paine, Hamblen, Coffin, Brooke & Miller, located at 717 West Sprague
Avenue, Suite 1200, Spokane, Washington 99201, serve as co-counsel to the
Trusts.
Deloitte & Touche LLP, 50 Fremont Street, San Francisco, CA 94105, serve
as independent accountants to WM Trust I. Price Waterhouse LLP, 160 Federal
Street, Boston, Massachusetts 02110, serve as independent accountants to WM
Trust II and WM Strategic Asset Management Portfolios for their fiscal year
ending June 30, 1998, and served as such Trusts independent accountants for
prior fiscal years. Following June 30, 1998, Deloitte & Touche LLP will serve
as the independent accountants to WM Trust II and WM Strategic Asset Management
Portfolios. Prior to the current fiscal year of the Funds in WM Trust I,
LeMaster & Daniels PLLC, 601 West Riverside, Suite 700, Spokane, Washington
99201, served as independent accountants to WM Trust I. The financial
statements incorporated by reference into this SAI and the financial highlights
in the Prospectus have been audited by Price Waterhouse LLP or LeMaster &
Daniels PLLC, as the case may be, and have been so included in reliance on such
independent accountants' reports, given on the authority of such firms in
accounting and auditors.
ORGANIZATION OF THE TRUST
WM Trust I is an open-end management investment company, organized as a
Massachusetts business trust pursuant to a Master Trust Agreement dated
September 19, 1997, as amended from time to time (the "WM Trust I Agreement").
--------------------
WM Trust II is organized as a Massachusetts business trust pursuant to a Master
Trust Agreement dated February 22, 1989, as amended from time to time (the "WM
--
Trust II Agreement"). WM Strategic Asset Management Portfolios is an open-end
- ------------------
management investment company, organized as a Massachusetts business trust
pursuant to a Master Trust Agreement dated March 26, 1996, as amended from time
to time (the "WM Strategic Asset Management Portfolios Agreement" and
--------------------------------------------------
collectively, the "Trust Agreements"). In the interest of economy and
----------------
convenience, certificates representing shares in the Trusts are not physically
issued. Boston Safe, the Trusts' Custodian, and Shareholder Services, the
Trusts' Transfer Agent, maintain a record of each shareholder's ownership of
Trust shares. Shares do not have cumulative voting rights, which means that
holders of more than 50% of the shares voting for the election of Trustees can
elect all Trustees. Shares are transferable but have no preemptive, conversion
or subscription rights. Shareholders generally vote by Fund, Portfolio or
Class, except with respect to the election of Trustees and the selection of
independent accountants, for which shareholders of each Trust as a whole vote
together.
-24-
<PAGE>
Under normal circumstances, there will be no meetings of shareholders for
the purpose of electing Trustees unless and until such time as less than a
majority of the Trustees holding office have been elected by shareholders, at
which time the Trustees then in office promptly will call a shareholders'
meeting for the election of Trustees. Under the 1940 Act, shareholders of
record of no less than two-thirds of the outstanding shares of the Trust may
remove a Trustee through a declaration in writing or by vote cast in person or
by proxy at a meeting called for that purpose. Under the Trust Agreements, the
Trustees are required to call a meeting of shareholders for the purpose of
voting upon the question of removal of any such Trustee when requested in
writing to do so by the shareholders of record of not less than 10% of any of a
Trust's outstanding shares.
Massachusetts law provides that shareholders, under certain circumstances,
could be held personally liable for the obligations of a Trust. However, each
Trust Agreement disclaims shareholder liability for acts or obligations of the
Trusts and require that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or a Trustee.
Each Trust Agreement provides for indemnification from the Trust's property for
all losses and expenses of any shareholder held personally liable for the
obligations of the Trust. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Trust would be unable to meet its obligations, a possibility that the
Trusts' management believe is remote. Upon payment of any liability incurred by
a Trust, the shareholder paying the liability will be entitled to reimbursement
from the general assets of such Trust. The Trustees intend to conduct the
operations of each Trust in such a way so as to avoid, to the extent possible,
ultimate liability of the shareholders for liabilities of the Trust.
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus discusses the investment objective or objectives of each of
the Funds and Portfolios and the policies to be employed to achieve such
objectives. This section contains supplemental information concerning the types
of securities and other instruments in which the Funds and Portfolios may
invest, the investment policies and portfolio strategies that the Funds and
Portfolios may utilize and certain risks attendant to such investments, policies
and strategies.
STRATEGIES AVAILABLE TO ALL FUNDS
- ---------------------------------
RATINGS AS INVESTMENT CRITERIA. In general, the ratings of nationally
recognized statistical rating organization ("NRSROs"), such as Moody's Investors
------
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), and Duff and
------- ---
Fitch, represent the opinions of these agencies as to the quality of securities
which they rate. It should be emphasized, however, that such ratings are
relative and subjective and are not absolute standards of quality. These
ratings will be used by the Funds as initial criteria for the selection of
portfolio securities, but the Funds will also rely upon the independent advice
of the Advisor or their respective sub-advisors if such sub-advisor is employed
to evaluate potential investments. The Appendix to this SAI contains further
information concerning the ratings of these services and their significance.
-25-
<PAGE>
To the extent that the rating given by Moody's or S&P for securities may
change as a result of changes in such organizations or their rating systems,
each Fund will attempt to use comparable ratings as standards for its
investments in accordance with the investment policies contained in the
Prospectus and in this SAI.
U.S. GOVERNMENT SECURITIES. U.S. Government Securities include debt
obligations of varying maturities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities. U.S. Government Securities include direct
obligations of the U.S. Treasury, and securities issued or guaranteed by the
Federal Housing Administration, Farmers Home Administration, Export-Import Bank
of the United States, Small Business Administration, Government National
Mortgage Association ("GNMA"), General Services Administration, Central Bank for
----
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit Banks,
-----
Resolution Trust Corporation, Federal Land Banks, Federal National Mortgage
Association ("FNMA"), Maritime Administration, Tennessee Valley Authority,
----
District of Columbia Armory Board and Student Loan Marketing Association.
Direct obligations of the U.S. Treasury include a variety of securities that
differ in their interest rates, maturities and dates of issuance. Because the
U.S. Government is not obligated by law to provide support to an instrumentality
it sponsors, a Fund will invest in obligations issued by such an instrumentality
only if the Advisor or the Fund's sub-advisor determines that the credit risk
with respect to the instrumentality does not make its securities unsuitable for
investment by the Fund.
ILLIQUID INVESTMENTS. These securities generally cannot be sold or disposed
of in the ordinary course of business at approximately the value at which the
Fund has valued the investments within seven days. This may have an adverse
effect upon the Fund's ability to dispose of the particular securities at fair
market value and may limit the Fund's ability to obtain accurate market
quotations for purposes of valuing the securities and calculating the net asset
value of shares of the Fund. The Funds may also purchase securities that are
not registered under the Securities Act of 1933, as amended (the "Securities
----------
Act"), but that can be sold to qualified institutional buyers in accordance with
- ---
Rule 144A under that Act ("Rule 144A securities"). Rule 144A securities
--------------------
generally must be sold to other qualified institutional buyers. If a particular
investment in Rule 144A securities is not determined to be liquid, that
investment will be treated as an illiquid security.
COMBINED TRANSACTIONS. As permitted by each Fund's investment polices and
restrictions, the Funds may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple foreign currency
transactions (including forward foreign currency exchange contracts) and any
combination of futures, options and foreign currency transactions (each
separately, a "component" transaction), instead of a single transaction, as part
of a single hedging strategy when, in the opinion of the Advisor or the sub-
advisor, it is in the best interest of the Fund to do so. A combined
transaction, while part of a single hedging strategy, may contain elements of
risk that are present in each of its component transactions.
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<PAGE>
BANK OBLIGATIONS. Domestic commercial banks organized under federal law
are supervised and examined by the Comptroller of the Currency and are required
to be members of the Federal Reserve System and to be insured by the Federal
Deposit Insurance Corporation (the "FDIC"). Domestic banks organized under
----
state law are supervised and examined by state banking authorities but are
members of the Federal Reserve System only if they elect to join. Most state
banks are insured by the FDIC (although such insurance may not be of material
benefit to a Fund, depending upon the principal amount of certificates of
deposit ("CDs") of each state bank held by a Fund) and are subject to federal
---
examination and to a substantial body of federal law and regulation. As a
result of federal and state laws and regulations, domestic branches of domestic
banks are, among other things, generally required to maintain specific levels of
reserves, and are subject to other supervision and regulation designed to
promote financial soundness.
Obligations of foreign branches of U.S. banks and of foreign branches of
foreign banks, such as CDs and time deposits ("TDs"), may be general obligations
---
of the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and governmental regulation. Obligations of
foreign branches of U.S. banks and foreign banks are subject to the risks
associated with investing in foreign securities generally. Foreign branches of
U.S. banks and foreign branches of foreign banks are not necessarily subject to
the same or similar regulatory requirements that apply to U.S. banks, such as
mandatory reserve requirements, loan limitations, and accounting, auditing and
financial recordkeeping requirements. In addition, less information may be
publicly available about a foreign branch of a U.S. bank or about a foreign bank
than about a U.S. bank.
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by federal and state regulation as well as
governmental action in the country in which the foreign bank has its head
office. A U.S. branch of a foreign bank may or may not be subject to reserve
requirements imposed by the Federal Reserve System or by the state in which the
branch is located if the branch is licensed in that state. The deposits of
branches licensed by certain states may not necessarily be insured by the FDIC.
In addition, there may be less publicly available information about a U.S.
branch of a foreign bank than about a U.S. bank.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign banks and foreign branches of U.S. banks, the Advisor or
the Funds' respective sub-advisors will carefully evaluate such investments on a
case-by-case basis.
A Fund may purchase a CD, TD or bankers' acceptances issued by a bank,
savings and loan association or other banking institution with less than $1
billion in assets (a "Small Issuer Bank Obligation") only so long as the issuer
----------------------------
is a member of the FDIC or supervised by the Office of Thrift Supervision (the
"OTS") and so long as the principal amount of the Small Issuer Bank Obligation
- ----
is fully insured by the FDIC and is no more than $100,000. Each of the Funds
will at any one time hold only one Small Issuer Bank Obligation from any one
issuer.
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<PAGE>
Savings and loan associations whose CDs, TDs and bankers' acceptances may
be purchased by the Funds are supervised by the OTS and insured by the Savings
Association Insurance Fund, which is administered by the FDIC and is backed by
the full faith and credit of the United States Government. As a result, such
savings and loan associations are subject to regulation and examination.
MORTGAGE-BACKED SECURITIES. The mortgage-backed securities in which the
Funds may invest may be classified as governmental or government-related,
depending on the issuer or guarantor. Governmental mortgage-backed securities
are backed by the full faith and credit of the United States. GNMA, the
principal U.S. guarantor of such securities, is a wholly-owned U.S. Government
corporation within the Department of Housing and Urban Development. Government-
related mortgage-backed securities which are not backed by the full faith and
credit of the United States include those issued by FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders, which
is subject to general regulation by the Secretary of Housing and Urban
Development. Pass-through securities issued by FNMA are guaranteed as to timely
payment of principal and interest by FNMA. FHLMC is a corporate instrumentality
of the United States, the stock of which is owned by the Federal Home Loan
Banks. Participation certificates representing interests in mortgages from
FHLMC's national portfolio are guaranteed as to the timely payment of interest
and ultimate collection of principal by FHLMC. In addition, the Income, Bond &
Stock and Growth & Income Funds may invest in commercial mortgage-backed
securities. While these securities generally are structured with one or more
types of credit enhancement, they are issued by non-governmental entities and
are not guaranteed by a governmental agency or instrumentality.
Entities may create mortgage loan pools offering pass-through investments
in addition to those described above. The mortgages underlying these securities
may be alternative mortgage instruments, that is, mortgage instruments in which
principal or interest payments may vary or terms to maturity may be shorter than
previously customary. As new types of mortgage-backed securities are developed
and offered to investors, the Funds will, consistent with their respective
investment objectives and policies, consider making investments in such new
types of securities.
The average maturity of pass-through pools of mortgage-backed securities
varies with the maturities of the underlying mortgage instruments. In addition,
a pool's stated maturity may be shortened by unscheduled payments on the
underlying mortgages. Factors affecting mortgage prepayments include the level
of interest rates, general economic and social conditions, the location of the
mortgaged property and the age of the mortgage. Because prepayment rates of
individual mortgage pools vary widely, it is not possible to accurately predict
the average life of a particular pool. Common industry practice, for example,
is to assume that prepayments will result in a 7- to 9-year average life for
pools of fixed-rate 30-year mortgages. Pools of mortgages with other maturities
of different characteristics will have varying average life assumptions.
REPURCHASE AGREEMENTS. The California Money, Short Term High Quality Bond,
Target Maturity 2002, California Insured Intermediate Municipal, Florida Insured
Municipal
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<PAGE>
Growth and Emerging Growth Funds may invest in repurchase agreements without
limitation. The California Municipal Fund may invest no more than 20%, in the
aggregate, of its assets in repurchase agreements and certain other securities
or instruments, but this 20% limit does not apply to investments for temporary
defensive purposes. The Money Market, Tax-Exempt Money Market, U.S. Government
Securities, Income, Tax-Exempt Bond, Bond & Stock, Growth & Income and Northwest
Funds may enter into repurchase agreements with brokers, dealers and banks to
temporarily invest cash reserves provided that repurchase agreements maturing in
greater than 7 days cannot exceed 10% of each Fund's total assets.
STRATEGIES AVAILABLE TO ALL FUNDS EXCEPT THE MONEY FUNDS AND THE TARGET MATURITY
- --------------------------------------------------------------------------------
2002 FUND AND THE PORTFOLIOS WHERE NOTED
- ----------------------------------------
REVERSE REPURCHASE AGREEMENTS. Each of the Funds other than the Money
Funds (the "Non-Money Funds"), with the exception of the Target Maturity 2002
---------------
Fund, may engage in reverse repurchase agreements, subject to the percentage
restrictions on borrowing, as under the 1940 Act, reverse repurchase agreements
may be considered borrowings by the seller. Accordingly, the California Money,
Short Term High Quality Bond, Target Maturity 2002, California Municipal,
California Insured Intermediate Municipal, Florida Insured, Growth,
International Growth and Emerging Growth Funds and for the WM Strategic Asset
Management Portfolios, borrowing may not exceed 30% of total assets. In
addition, the WM Strategic Asset Management Portfolios may not purchase
additional securities when borrowing exceeds 5% of total assets. The Money
Market, Tax-Exempt Money Market, U. S. Government Securities, Income, Tax-Exempt
Bond, Bond & Stock, Growth & Income and Northwest Funds may borrow up to 5% of
total assets for emergency purposes. In addition, the Money Market and Tax-
Exempt Money Market Funds may borrow up to 33-1/3% of total assets to meet
redemption requests. The Short Term High Quality Bond Fund is prohibited from
borrowing money or entering into reverse repurchase agreements or dollar roll
transactions in the aggregate in excess of 33-1/3% of the Fund's total assets
(after giving effect to such borrowings). A Fund will not engage in reverse
repurchase transactions for the purpose of leverage.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS. In order to
secure yields or prices deemed advantageous at the time, the Tax-Exempt Money
Market Fund and each of the Non-Money Funds may purchase or sell securities on a
when-issued or a delayed-delivery basis. The Funds will enter into a when-issued
transactions for the purpose of acquiring portfolio securities and not for the
purpose of leverage. Due to fluctuations in the value of securities purchased
on a when-issued or a delayed-delivery basis, the yields obtained on such
securities may be higher or lower than the yields available in the market on the
dates when the securities are actually delivered to the Fund. Similarly, the
sale of securities for delayed delivery can involve the risk that the prices
available in the market when delivery is made may actually be higher than those
obtained in the transaction itself. The California Money Fund and the Municipal
Funds may purchase Municipal Obligations offered on a "forward commitment"
basis.
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<PAGE>
When-issued Municipal Obligations may include bonds purchased on a "when,
as and if issued" basis, under which the issuance of the securities depends on
the occurrence of a subsequent event, such as approval of a proposed financing
by appropriate municipal authorities. Any significant commitment of a Fund's
assets to the purchase of securities on a "when, as and if issued" basis may
increase the volatility of the Fund's NAV. No when-issued or forward commitments
will be made by the California Money Fund or a Municipal Fund if, as a result,
more than 20% of the value of the Fund's total assets would be committed to such
transactions.
A segregated account in the name of the Fund consisting of cash or other
liquid assets equal to the amount of when-issued or delayed-delivery commitments
will be established at Boston Safe, the Trusts' Custodians. For the purpose of
determining the adequacy of the securities in the accounts, the deposited
securities will be valued at market or fair value. If the market or fair value
of the securities declines, additional cash or securities will be placed in the
account daily so that the value of the account will equal the amount of such
commitments by the Fund. On the settlement date, the Fund will meet its
obligations from then-available cash flow, the sale of securities held in the
segregated account, the sale of other securities or, although it would not
normally expect to do so, from the sale of securities purchased on a when-issued
or delayed-delivery basis themselves (which may have a greater or lesser value
than the Fund's payment obligations).
STRATEGIC TRANSACTIONS. Subject to the investment limitations and
restrictions for each of the Funds stated elsewhere in this SAI and in the
Prospectus, each of the Funds and Portfolios, except for the Money Funds, may
utilize various other investment strategies as described below to hedge various
market risks, to manage the effective maturity or duration of fixed-income
securities or for other bona fide hedging purposes. No Fund or Portfolio
currently intends to enter into Strategic Transactions, excluding Strategic
Transactions that are "covered" or entered into for bona fide hedging purposes,
that are in the aggregate principal amount in excess of 15% of the Fund's net
assets.
Strategic Transactions have associated risks including possible default by
the other party to the transaction, illiquidity and, to the extent that the
Advisor or the sub-advisor's view as to certain market movements is incorrect,
losses greater than if they had not been used. Use of put and call options,
currency transactions or options and futures transactions entails certain risks
as described herein and the Prospectus in sections relating to such investment
or instruments. Losses resulting from the use of Strategic Transactions would
reduce net asset value, and possibly income, and such losses can be greater than
if the Strategic Transactions had not been utilized.
The Funds and Portfolios may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple foreign
currency transactions (including forward foreign currency exchange contracts)
and any combination of futures, options and foreign currency transactions (each
separately, a "component" transaction), instead of a single transaction, as part
of a single strategy when, in the opinion of the Advisor or the sub-advisor, it
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<PAGE>
is in the best interest of the Fund or Portfolio to do so. A combined
transaction may contain elements of risk that are present in each of its
component transactions.
The use of Strategic Transactions for asset management purposes involves
special considerations and risks. Additional risks pertaining to particular
strategies that make up Strategic Transactions are described in other sections
of this SAI. Successful use of most Strategic Transactions depends upon the
Advisor or the sub-advisor's ability to predict movements of the overall
securities and interest rate markets, which requires different skills than
predicting changes in the prices of individual securities. There can be no
assurance that any particular strategy adopted will succeed. There may be
imperfect correlation, or even no correlation, between price movements of
Strategic Transactions and price movements of the related portfolio or currency
positions. Such a lack of correlation might occur due to factors unrelated to
the value of the related portfolio or currency positions, such as speculative or
other pressures on the markets in which Strategic Transactions are traded.
Strategic Transactions, if successful, can reduce risk of loss or enhance
income, by wholly or partially offsetting the negative effect of, or accurately
predicting, unfavorable price movements or currency fluctuations in the related
portfolio or currency position. However, Strategic Transactions can also reduce
the opportunity for gain by offsetting the positive effect of favorable price
movements in the positions. In addition, a Fund or Portfolio might be required
to maintain assets as "cover," maintain segregated accounts or make margin
payments when it takes positions in Strategic Transactions involving obligations
to third parties (i.e., Strategic Transactions other than purchased options).
These requirements might impair the Fund's ability to sell a portfolio security
or currency position or make an investment at a time when it would otherwise be
favorable to do so, or require that the Fund sell a portfolio security or
currency position at a disadvantageous time.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which a Fund engaging in Strategic Transactions may enter, consistent with the
Fund's investment policies and restrictions, are interest rate, currency and
index swaps and the purchase or sale of related caps, floors and collars. A
Fund would enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio, to protect
against currency fluctuations, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. A Fund will use these transactions as hedges and not
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by a
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A currency swap is an agreement
to exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The
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<PAGE>
purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or value.
A Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Advisor
and the Trusts believe that such obligations do not constitute senior securities
under the 1940 Act and, accordingly, will not treat them as being subject to the
Fund's borrowing restrictions. If there is a default by the counterpart, a Fund
may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principles and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
FUTURES ACTIVITIES. Each of the Funds permitted to engage in Strategic
Transactions and each of the Portfolios may enter into futures contracts and
options on futures contracts that are traded on a U.S. exchange or board of
trade. These investments may be made by the Fund involved for the purpose of
hedging against changes in the value of its portfolio securities due to
anticipated changes in interest rates and market conditions, and for otherwise
permitted Strategic Transactions. In the case of the California Municipal, the
California Insured Intermediate Municipal and the Florida Insured Municipal
Funds, such investments will be made only in unusual circumstances, such as when
that Funds' sub-advisor anticipates an extreme change in interest rates or
market conditions. The ability of a Fund to trade in futures contracts and
options on futures contracts may be materially limited by the requirement of the
Internal Revenue Code of 1986, as amended (the "Code"), applicable to a
----
regulated investment company. See "Taxes" below. See "Strategic Transactions."
FUTURES CONTRACTS. An interest rate futures contract provides for the
future sale by one party and the purchase by the other party of a certain amount
of a specific financial instrument (debt security) at a specified price, date,
time and place. A bond index futures contract is an agreement pursuant to which
two parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index contract was originally
written. No physical delivery of the underlying securities in the index is
made.
The purpose of entering into a futures contract by a Fund is to protect the
Fund from fluctuations in the value of its securities caused by anticipated
changes in interest rates or market conditions without necessarily buying or
selling the securities. For example, if the California
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<PAGE>
Municipal Fund, the California Insured Intermediate Municipal Fund or the
Florida Insured Municipal Fund owns long-term bonds and tax-exempt rates are
expected to increase, these Funds might enter into futures contracts to sell a
municipal bond index. Such a transaction would have much the same effect as the
Fund's selling some of the long-term bonds in its portfolio. If tax-exempt rates
increase as anticipated, the value of certain long-term municipal securities in
the portfolio would decline, but the value of the Fund's futures contracts would
increase at approximately the same rate, thereby keeping the net asset value of
the Fund from declining as much as it otherwise would have. Because the value of
portfolio securities will far exceed the value of the futures contracts entered
into by a Fund, an increase in the value of the futures contract would only
mitigate -- but not totally offset -- the decline in the value of the portfolio.
No consideration is paid or received by a Fund upon entering into a futures
contract. Initially, a Fund would be required to deposit with the broker an
amount of cash or cash equivalents equal to approximately 1% to 10% of the
contract amount (this amount is subject to change by the board of trade on which
the contract is traded and members of such board of trade may charge a higher
amount). This amount is known as "initial margin" and is in its nature the
equivalent of a performance bond or good faith deposit on the contract, which is
returned to a Fund or Portfolio upon termination of the futures contract,
assuming all contractual obligations have been satisfied. Subsequent payments,
known as "variation margin," to and from the broker, will be made daily as the
price of the index or securities underlying the futures contract fluctuates,
making the long and short positions in the futures contract more or less
valuable, a process known as "marking-to-market." At any time prior to the
expiration of a futures contract, a Fund or Portfolio may elect to close the
position by taking an opposite position, which will operate to terminate the
Fund's or Portfolios existing position in the contract.
There are several risks in connection with the use of futures contracts as
a hedging device. Successful use of futures contracts by a Fund is subject to
the ability of the Advisor or the sub-advisor to correctly predict movements in
the direction of interest rates or changes in market conditions. These
predictions involve skills and techniques that may be different from those
involved in the management of the portfolio being hedged. In addition, there
can be no assurance that there will be a correlation between movements in the
price of the underlying index or securities and movements in the price of the
securities which are the subject of the hedge. A decision of whether, when and
how to hedge involves the exercise of skill and judgment, and even a well-
conceived hedge may be unsuccessful to some degree because of market behavior or
unexpected trends in interest rates.
Although the Funds and the Portfolios intend to enter into futures
contracts only if there is an active market for such contracts, there is no
assurance that an active market will exist for the contracts at any particular
time. Most U.S. futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit. It is possible that futures
contract prices would move to the daily limit for
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<PAGE>
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and subjecting some futures traders to
substantial losses. In such event, and in the event of adverse price movements,
a Fund or Portfolio would be required to make daily cash payments of variation
margin. In such circumstances, an increase in the value of the portion of the
portfolio being hedged, if any, may partially or completely offset losses on the
futures contract. However, as described above, there is no guarantee that the
price of the securities being hedged will, in fact, correlate with the price
movements in a futures contract and thus provide an offset to losses on the
futures contract.
To ensure that transactions constitute bona fide hedges in instances
involving the purchase or sale of a futures contract, the Funds or Portfolios
will be required to either (i) segregate sufficient cash or high-grade liquid
assets to cover the outstanding position or (ii) cover the futures contract by
either owning the instruments underlying the futures contract or by holding a
portfolio of securities with characteristics substantially similar to the
underlying index or stock index comprising the futures contract or by holding a
separate option permitting it to purchase or sell the same futures contract.
Because of the imperfect correlation between the movements in the price of
underlying indexes or stock indexes of various futures contracts and the
movement of the price of securities in the Funds' or Portfolio's assets, the
Funds and Portfolios will periodically make adjustments to its index futures
contracts positions to appropriately reflect the relationship between the
underlying portfolio and the indexes. The Funds and Portfolios will not
maintain short positions in index or stock index futures contracts, options
written on index or stock index futures contracts and options written on indexes
or stock indexes, if in the aggregate, the value of these positions exceeds the
current market value of its securities portfolio plus or minus the unrealized
gain or loss on those positions, adjusted for the historical volatility
relationship between the portfolio and the index contracts.
OPTIONS ON FUTURES CONTRACTS. An option on a futures contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in the futures
contract at a specified exercise price at any time prior to the expiration date
of the option. Upon exercise of an option, the delivery of the futures position
by the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account,
which represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract. The potential loss
related to the purchase of an option on futures contracts is limited to the
premium paid for the option (plus transaction costs). Because the price of the
option to the purchaser is fixed at the point of sale, there are no daily cash
payments to reflect changes in the value of the underlying contract. The value
of the option does however change daily and that change would be reflected in
the net asset value of the Fund or Portfolio holding the options.
When engaging in Strategic Transactions, the Funds and the Portfolios may
purchase and write put and call options on futures contracts that are traded on
a U.S. exchange or board of trade as a hedge against changes in the value of its
portfolio securities, and may enter into closing
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<PAGE>
transactions with respect to such options to terminate existing positions. There
is no guarantee that such closing transactions can be effected.
There are several risks relating to options on futures contracts. The
ability to establish and close out positions on such options will be subject to
the existence of a liquid market. In addition, the purchase of put or call
options will be based upon predictions as to anticipated interest rate and
market trends by the Advisor or the sub-advisors, which could prove to be
inaccurate. Even if the expectations of the Advisor or the sub-advisors are
correct, there may be an imperfect correlation between the change in the value
of the options and the portfolio securities hedged.
STRATEGIES AVAILABLE TO THE SHORT TERM HIGH QUALITY BOND, BOND & STOCK, GROWTH &
- --------------------------------------------------------------------------------
INCOME, GROWTH, INTERNATIONAL GROWTH, NORTHWEST AND EMERGING GROWTH FUNDS
- -------------------------------------------------------------------------
OPTIONS ON SECURITIES. The Funds referenced above may write covered put
options and covered call options on securities, purchase put and call options on
securities and enter into closing transactions.
Options written by a Fund will normally have expiration dates between one
and nine months from the date written. The exercise price of the options may be
below, equal to or above the market values of the underlying securities at the
times the options are written. In the case of call options, these exercise
prices are referred to as "in-the-money," "at-the-money" and "out-of-the-money,"
respectively. A Fund may write (1) in-the-money call options when the Advisor
or its sub-advisor expects that the price of the underlying security will remain
flat or decline moderately during the option period, (2) at-the-money call
options when the Advisor or its sub-advisor expects that the price of the
underlying security will remain flat or advance moderately during the option
period and (3) out-of-the-money call options when the Advisor or its sub-advisor
expects that the premiums received from writing the call option plus the
appreciation in the market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. In any of the preceding situations, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the-money, at-the-money and in-the-money put options (the
reverse of call options as to the relation of exercise price to market price)
may be utilized in the same market environments as such call options described
above.
So long as the obligation of the Fund as the writer of an option continues,
the Fund may be assigned an exercise notice by the broker-dealer through which
the option was sold, requiring the Fund to deliver, in the case of a call, or
take delivery of, in the case of a put, the underlying security against payment
of the exercise price. This obligation terminates when the option expires or
the Fund effects a closing purchase transaction. The Fund can no longer effect
a closing purchase transaction with respect to an option once it has been
assigned an exercise notice. To secure its obligation to deliver the underlying
security when it writes a call option, or
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to pay for the underlying security when it writes a put option, the Fund will be
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the Options Clearing Corporation (the "OCC") and of
---
the securities exchange on which the option is written.
An option may be closed out only when there exists a secondary market for
an option of the same series on a recognized securities exchange or in the over-
the-counter market. In light of this fact and current trading conditions, the
Fund expects to purchase or write call or put options issued by the OCC, except
that options on U.S. Government Securities may be purchased or written in the
over-the-counter market. Over-the-counter options can be closed out only by
agreement with the primary dealer in the transaction. National securities
exchanges on which options are traded are: The Chicago Board Options Exchange
(CBOE), The Board of Trade of the City of Chicago (CBT), American Stock Exchange
(AMEX), Philadelphia Stock Exchange (PHLX), Pacific Stock Exchange (PSE) and the
New York Stock Exchange (NYSE). Any over-the-counter option written by a Fund
will be with a qualified dealer pursuant to an agreement under which the Fund
may repurchase the option at a formula price at which the Fund would have the
absolute right to repurchase an over-the-counter option it has sold. Such
options will be considered illiquid in an amount equal to the formula price,
less the amount by which the option is "in-the-money." In the event of the
insolvency of the primary dealer, the Fund may not be able to liquidate its
position in over-the-counter options, and the ability of the Fund to enter into
closing purchase transactions on options written by the Fund may result in a
material loss to the Fund.
A Fund may realize a profit or loss upon entering into closing
transactions. In cases where the Fund has written an option, it will realize a
profit if the cost of the closing purchase transaction is less than the premium
received upon writing the original option, and will incur a loss if the cost of
the closing purchase transaction exceeds the premium received upon writing the
original option. Similarly, when the Fund has purchased an option and engages
in a closing sale transaction, the Fund will realize a profit or loss to the
extent that the amount received in the closing sale transaction is more or less
than the premium the Fund initially paid for the original option plus the
related transaction costs.
To facilitate closing transactions, a Fund will generally purchase or write
only those options for which the Advisor or its sub-advisor believes there is an
active secondary market although there is no assurance that sufficient trading
interest to create a liquid secondary market on a securities exchange will exist
for any particular option or at any particular time, and for some options no
such secondary market may exist. A liquid secondary market in an option may
cease to exist for a variety of reasons. In the past, for example, higher than
anticipated trading activity or order flow, or other unforeseen events, have at
times rendered certain of the facilities of the OCC and the securities exchanges
inadequate and resulted in the institution of special procedures, such as
trading rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
events, or events that may otherwise interfere with the timely execution of
customers' orders, will not recur. In such
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<PAGE>
events, it might not be possible to effect closing transactions in particular
options. If as a covered call option writer the Fund is unable to effect a
closing purchase transaction in a secondary market, it will not be able to sell
the underlying security until the option expires or it delivers the underlying
security upon exercise.
Securities exchanges have established limitations governing the maximum
number of calls and puts of each class which may be held or written, or
exercised within certain time periods, by an investor or group of investors
acting in concert (regardless of whether the options are written on the same or
different securities exchanges or are held, written or exercised in one or more
accounts or through one or more brokers). It is possible that the particular
Fund and other clients of the Advisor and its sub-advisors and certain of their
affiliates may be considered to be such a group. A securities exchange may
order the liquidation of positions found to be in violation of these limits and
it may impose certain other sanctions.
In the case of options written by a Fund that are deemed covered by virtue
of the Fund's holding convertible or exchangeable preferred stock or debt
securities, the time required to convert or exchange and obtain physical
delivery of the underlying security with respect to which the Fund has written
options may exceed the time within which the Fund must make delivery in
accordance with an exercise notice. In these instances, the Fund may purchase
or temporarily borrow the underlying securities for purposes of physical
delivery. By so doing, the Fund will not bear any market risk, since the Fund
will have the absolute right to receive from the issuer of the underlying
security an equal number of shares to replace the borrowed stock. The Fund may
however, incur additional transaction costs or interest expenses in connection
with any such purchase or borrowing.
Additional risks exist with respect to mortgage-backed U.S. Government
Securities for which the Fund may write covered call options. If a Fund writes
covered call options on a mortgage-backed security, the security that it holds
as cover may, because of scheduled amortization of unscheduled prepayments,
cease to be sufficient cover. In such an instance, the Fund will compensate by
purchasing an appropriate additional amount of mortgage-backed securities.
STRATEGIES AVAILABLE TO THE SHORT TERM HIGH QUALITY BOND, CALIFORNIA INSURED
- ----------------------------------------------------------------------------
INTERMEDIATE MUNICIPAL, GROWTH, INTERNATIONAL GROWTH AND EMERGING GROWTH FUNDS
- ------------------------------------------------------------------------------
OPTIONS ON SECURITIES INDEXES. The Funds set forth above may also purchase
and sell call and put options on securities indexes. Such options give the
holder the right to receive a cash settlement during the term of the option
based upon the difference between the exercise price and the value of the index.
Options on securities indexes entail risks in addition to the risks of
options on securities. Because exchange trading of options on securities indexes
is relatively new, the absence of a liquid secondary market to close out an
option position is more likely to occur, although the
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<PAGE>
Fund generally will purchase or write such an option only if the Advisor or its
sub-advisor believes the option can be closed out.
Use of options on securities indexes also entails the risk that trading in
such options may be interrupted if trading in certain securities included in the
index is interrupted. The Fund will not purchase such options unless the
Advisor or its sub-advisor believes the market is sufficiently developed for the
risk of trading in such options to be no greater than the risk of trading in
options on securities.
Price movements in the Fund's portfolio may not correlate precisely with
movements in the level of an index and, therefore, the use of options on
securities indexes cannot serve as a complete hedge. Because options on
securities indexes require settlement in cash, the Fund may be forced to
liquidate portfolio securities to meet settlement obligations.
STRATEGIES AVAILABLE TO THE SHORT TERM HIGH QUALITY BOND, INCOME, GROWTH,
- -------------------------------------------------------------------------
INTERNATIONAL GROWTH AND EMERGING GROWTH FUNDS
- ----------------------------------------------
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The Funds set forth above may
engage in currency exchange transactions to protect against uncertainty in the
level of future exchange rates. The Funds' dealings in forward currency
exchange contracts will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or
sale of forward foreign currency with respect to specific receivables or
payables of the Fund generally arising in connection with the purchase or sale
of its portfolio securities. Position hedging is the sale of forward foreign
currency with respect to portfolio security positions denominated or quoted in
such foreign currency. A Fund may not position hedge with respect to a
particular currency to an extent greater than the aggregate market value (at the
time of making such sale) of the securities held in its portfolio denominated or
quoted in or currently convertible into that particular currency.
If a Fund enters into a position hedging transaction, the Trusts' Custodian
will, except in circumstances where segregated accounts are not required by the
1940 Act and the rules adopted thereunder, place cash or other liquid assets in
a segregated account for the Fund in an amount at least equal to the value of
the Fund's total assets committed to the consummation of the forward contract.
For each forward foreign currency exchange contract that is used to hedge a
securities position denominated in a foreign currency, but for which the hedging
position no longer provides, in the opinion of the Advisor or the sub-advisor,
sufficient protection to consider the contract to be a hedge, the Fund maintains
with the Custodian a segregated account of cash or other liquid assets in an
amount at least equal to the portion of the contract that is no longer
sufficiently covered by such hedge. If the value of the securities placed in
the segregated account declines, additional cash or securities will be placed in
the account so that the value of the account will equal the amount of the Fund's
unhedged exposure (in the case of securities denominated in a foreign currency)
or commitment with respect to the contract. Hedging
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<PAGE>
transactions may be made from any foreign currency into U.S. dollars or into
other appropriate currencies.
At or before the maturity of a forward contract, a Fund may either sell a
portfolio security and make delivery of the currency, or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
amount of the currency that it is obligated to deliver. If the Fund retains the
portfolio security and engages in an offsetting transaction, the Fund, at the
time of execution of the offsetting transaction, will incur a gain or a loss to
the extent that movement has occurred in forward contract prices. Should forward
prices decline during the period between the Fund's entering into a forward
contract for the sale of currency and the date it enters into an offsetting
contract for the purchase of the currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The cost to a Fund of engaging in currency transactions with factors such
as, the currency involved, the length of the contract period and the prevailing
market conditions. Because transactions in currency exchange are usually
conducted on a principal basis, no fees or commissions are involved. The use of
forward currency contracts does not eliminate fluctuations in the underlying
prices of the securities, but it does establish a rate of exchange that can be
achieved in the future. In addition, forward currency contracts may limit the
risk of loss due to a decline in the value of the hedged currency increase.
If a devaluation of a currency is generally anticipated, a Fund may not be
able to contract to sell the currency at a price above the devaluation level it
anticipates.
The Funds, in addition, may combine forward currency exchange contracts
with investments in securities denominated in other currencies in an attempt to
create a combined investment position, the overall performance of which will be
similar to that of a security denominated in a Fund's underlying currency. For
instance, a Fund could purchase a U.S. dollar-denominated security and at the
same time enter into a forward currency exchange contract to exchange U.S.
dollars for its underlying currency at a future date. By matching the amount of
U.S. dollars to be exchanged with the anticipated value of the U.S. dollar-
denominated security, the Fund may be able to "lock in" the foreign currency
value of the security and adopt a synthetic investment position whereby the
Fund's overall investment return from the combined position is similar to the
return from purchasing a foreign currency-denominated instrument.
There is a risk in adopting a synthetic investment position. It is
impossible to forecast with absolute precision what the market value of a
particular security will be at any given time. If the value of a security
denominated in the U.S. dollar or other foreign currency is not exactly matched
with a Fund's obligation under a forward currency exchange contract on the date
of maturity, the Fund may be exposed to some risk of loss from fluctuations in
that currency.
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<PAGE>
Although the Advisor and each sub-advisor will attempt to hold such mismatching
to a minimum, there can be no assurance that the Advisor or the Fund's sub-
advisor will be able to do so.
Although the foreign currency market is not believed to be necessarily more
volatile than the market in other commodities, there is less protection against
defaults in the forward trading to currencies than there is in trading such
currencies on an exchange because such forward contracts are not guaranteed by
an exchange or clearing house. The Commodity Futures Trading Commission has
indicated that it may assert jurisdiction over forward contracts in foreign
currencies and attempt to prohibit certain entities from engaging in such
transactions. In the event that such prohibition included the Fund, it would
cease trading such contracts. Cessation of trading might adversely affect the
performance of a Fund.
STRATEGIES AVAILABLE TO SHORT TERM HIGH QUALITY BOND, CALIFORNIA INSURED
- ------------------------------------------------------------------------
INTERMEDIATE MUNICIPAL, GROWTH, INTERNATIONAL GROWTH AND EMERGING GROWTH FUNDS
- ------------------------------------------------------------------------------
OPTIONS ON FOREIGN CURRENCIES. The Funds set forth above may purchase and
write put and call options on foreign currencies for the purpose of hedging
against declines in the U.S. dollar value of foreign currency-denominated
portfolio securities and against increases in the U.S. dollar cost of such
securities to be acquired. Such hedging includes cross hedging and proxy
hedging where the options to buy or sell currencies involve other currencies
besides the U.S. dollar. As one example, a decline in the U.S. dollar value of
a foreign currency in which securities are denominated will reduce the U.S.
dollar value of the securities, even if their value in the foreign currency
remains constant. To protect against diminutions in the value of securities
held by a Fund in a particular foreign currency, the Fund may purchase put
options on the foreign currency. If the value of the currency does decline, the
Fund will have the right to sell the currency for a fixed amount in U.S. dollars
and will thereby offset, in whole or in part, the adverse effect on its
portfolio that otherwise would have resulted. When an increase in the U.S.
dollar value of a currency in which securities to be acquired are denominated is
projected, thereby increasing the cost of the securities, the Fund conversely
may purchase call options on the currency. The purchase of such options could
offset, at least partially, the effects of the adverse movements in exchange
rates. As in the case of other types of options, however, the benefit to the
Fund deriving from purchases of foreign currency options will be reduced by the
amount of the premium and related transaction costs. In addition, if currency
exchange rates do not move in the direction, or to the extent anticipated, the
Fund could sustain losses on transactions in foreign currency options that would
require it to forego a portion or all of the benefits of advantageous changes in
the rates.
The Funds may also write covered call options on foreign currencies for the
types of hedging purposes described above. As one example, when the Advisor or
Fund's sub-advisor anticipate a decline in the U.S. dollar value of foreign
currency-denominated securities due to adverse fluctuations in exchange rates it
could, instead of purchasing a put option, write a covered call option on the
relevant currency. If the expected decline occurs, the option will most
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<PAGE>
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received. As in the case of other
types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the Fund would be required to purchase or sell the underlying
currency at a loss that may not be offset-by the amount of the premium. Through
the writing of options on foreign currencies, the Fund may also be required to
forego all or a portion of the benefits that might otherwise have been obtained
from favorable movements in exchange rates.
A call option written on a foreign currency by a Fund is "covered" if the
Fund owns the underlying foreign currency covered by the call or has an absolute
and immediate right to acquire the foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by Boston Safe, the Fund's Custodian, upon conversion or exchange of other
foreign currency held by the Fund. A call option also is covered if the Fund
has a call on the same foreign currency and in the same principal amount as the
call written when the exercise price of the call held (1) is equal to or less
than the exercise price of the call written or (2) is greater than the exercise
price of the call written if the difference is maintained by the Fund in cash,
U.S. Government Securities and other high-grade liquid debt securities in a
segregated account with Boston Safe.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on those
exchanges. As a result, many of the projections provided to traders on
organized exchanges will be available with respect to those transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the OCC, thereby reducing the
risk of counterpart default. Further, a liquid secondary market in options
traded on a national securities exchange may exist, potentially permitting the
Fund to liquidate open positions at a profit prior to their exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options are
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exercise and settlement of exchange-traded
foreign currency options must be made exclusively through the OCC, which has
established banking relationships in applicable foreign countries for this
purpose. As a result, the OCC may, if it determines that foreign governmental
restrictions or taxes would prevent the orderly settlement of foreign currency
option exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as technical
changes in the mechanics of delivery of currency, the fixing of dollar
settlement prices or prohibitions on exercise.
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<PAGE>
SPECIAL CONSIDERATIONS RELATING TO THE BOND & STOCK, GROWTH, INTERNATIONAL
- --------------------------------------------------------------------------
GROWTH AND EMERGING GROWTH FUNDS
- ---------------------------------
SECURITIES IN DEVELOPING COUNTRIES. Although most of the investments of
the Bond & Stock, Growth, International Growth and Emerging Growth Funds are
made in securities of companies in (or governments of) developed countries, the
Funds set forth above may invest in securities of companies in (or governments
of) developing or emerging countries (sometimes referred to as "emerging
markets") as well. The Growth and Emerging Growth Funds may invest up to 5% of
their total assets in emerging markets and the International Growth Fund may
invest up to 5% of total assets in emerging markets and up to 5% of total assets
in any one country. A developing or emerging country is generally considered to
be a country that is in the initial stages of its industrialization cycle.
Investing in the equity and fixed-income markets of developing or emerging
countries involves exposure to economic structures that are generally less
diverse and mature, and to political systems that can be expected to have less
stability than those of developed countries. Historical experience indicates
that the markets of developing or emerging countries have been more volatile
than the markets of the more mature economies of developed countries; however,
such markets often have provided higher rates of return to investors.
Price movements in the Fund's portfolio may not correlate precisely with
movements in the level of an index and, therefore, the use of options on
securities indexes cannot serve as a complete hedge. Because options on
securities indexes require settlement in cash, the Fund may be forced to
liquidate portfolio securities to meet settlement obligations.
STRATEGY AVAILABLE TO THE CALIFORNIA MONEY, SHORT TERM HIGH QUALITY BOND,
- -------------------------------------------------------------------------
INCOME, CALIFORNIA INSURED INTERMEDIATE MUNICIPAL, GROWTH, INTERNATIONAL GROWTH
- -------------------------------------------------------------------------------
AND EMERGING GROWTH FUNDS
- -------------------------
LENDING OF PORTFOLIO SECURITIES. Each of the Funds will adhere to the
following conditions whenever its portfolio securities are loaned: (1) the Fund
must receive at least 100% cash collateral or equivalent securities from the
borrower; (2) the borrower must increase the collateral whenever the market
value of the securities rises above the level of the collateral; (3) the Fund
must be able to terminate the loan at any time; (4) the Fund must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions on the loaned securities and any increase in market value; (5) the
Fund may pay only reasonable custodian fees in connection with the loan; and (6)
voting rights on the loaned securities may pass to the borrower, provided that
if a material event adversely affecting the investment occurs, the Trusts' Board
of Trustees must terminate the loan and regain the right to vote the securities.
From time to time, the Funds may pay a part of the interest earned from the
investment of the collateral received for securities loaned to the borrower
and/or a third party that is unaffiliated with the Trust and that is acting as a
"finder". The Funds will not lend more than 20% of their respective total
assets.
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<PAGE>
STRATEGIES AVAILABLE TO THE TAX-EXEMPT MONEY MARKET, CALIFORNIA MONEY, TAX-
- --------------------------------------------------------------------------
EXEMPT BOND, CALIFORNIA MUNICIPAL, CALIFORNIA INSURED INTERMEDIATE MUNICIPAL AND
- --------------------------------------------------------------------------------
FLORIDA INSURED MUNICIPAL FUNDS
- -------------------------------
MUNICIPAL SECURITIES. Municipal Securities are securities, the interest on
which qualifies for exclusion from gross income for federal income tax purposes
in the opinion of bond counsel to the issuer. The three principal
classifications of Municipal Securities are Municipal Bonds, Municipal
Commercial Paper and Municipal Notes.
Municipal Bonds, which generally have a maturity of more than one year when
issued, have two principal classifications: General Obligation Bonds and
Revenue Bonds. An AMT-Subject Bond is a particular kind of Revenue Bond. The
classifications of Municipal Bonds and AMT-Subject Bonds are discussed below.
1. GENERAL OBLIGATION BONDS. The proceeds of these obligations are used to
finance a wide range of public projects, including construction or
improvement of schools, highways and roads, and water and sewer systems.
General Obligation Bonds are secured by the issuer's pledge of its faith,
credit and taxing power for the payment of principal and interest.
2. REVENUE BONDS. Revenue Bonds are issued to finance a wide variety of
capital projects, including; electric, gas, water and sewer systems;
highways, bridges and tunnels; port and airport facilities; colleges and
universities; and hospitals. The principal security for a Revenue Bond is
generally the net revenues derived from a particular facility, group of
facilities, or, in some cases, the proceeds of a special excise or other
specific revenue source. Although the principal security behind these
bonds may vary, many provide additional security in the form of a debt
service reserve fund which may be used to make principal and interest
payments on the issuer's obligations. Some authorities provide further
security in the form of a state's ability (without obligation) to make up
deficiencies in the debt service reserve fund.
3. AMT-SUBJECT BONDS. AMT-Subject Bonds are considered Municipal Bonds if
the interest paid on them is excluded from gross income for federal income
tax purposes and if they are issued by or on behalf of public authorities
to raise money to finance, for example, privately operated manufacturing or
housing facilities, publicly operated airport, dock, wharf, or mass-
commuting facilities. The payment of the principal and interest on these
bonds is dependent solely on the ability of the facility's user to meet its
financial obligations and the pledge, if any, of real and personal property
so financed as security for such payment.
California has a variety of Special Tax District debt obligations, such as
Act 1911 and 1915 Special Assessment Bonds, Mello-Roos Bonds and Tax Allocation
bonds, which are
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<PAGE>
defined as property-backed general obligation substitutes (because the
assessments for improvement do not require voter approval). The proceeds from
the issuance of these essential purpose Special Tax District Bonds are generally
used to develop raw land. As a result, these issues tend not to carry a credit
rating.
MUNICIPAL COMMERCIAL PAPER issues typically represent short-term,
unsecured, negotiable promissory notes. These obligations are issued by
agencies of state and local governments to finance seasonal working capital
needs of municipalities or to provide interim construction financing, and are
paid from general revenues of municipalities or are refinanced with long-term
debt. In most cases, Municipal Commercial Paper is backed by letters of credit,
lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or other institutions.
MUNICIPAL NOTES generally are used to provide for short-term capital needs
and generally have maturities of one year or less. Municipal Notes include:
1. TAX ANTICIPATION NOTES. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenues, such as income, sales, use
and business taxes and are payable from these specific future taxes.
2. REVENUE ANTICIPATION NOTES. Revenue Anticipation Notes are issued in
expectation of receipt of other kinds of revenue, such as federal revenues
available under the Federal Revenue Sharing Program.
3. BOND ANTICIPATION NOTES. Bond Anticipation Notes are issued to provide
interim financing until long-term financing can be arranged. In most
cases, the long-term bonds provide the money for the repayment of the
notes.
4. CONSTRUCTION LOAN NOTES. Construction Loan Notes are sold to provide
construction financing. Permanent financing, the proceeds of which are
applied to the payment of Construction Loan Notes, is sometimes provided by
a commitment by GNMA to purchase the loan, accompanied by a commitment by
the Federal Housing Administration to insure mortgage advances thereunder.
In other instances, permanent financing is provided by commitments of banks
to purchase the loan. A Municipal Fund will only purchase Construction
Loan Notes that are subject to GNMA or bank purchase commitments.
From time to time, proposals to restrict or eliminate the federal income
tax exemption for interest on Municipal Securities have been introduced before
Congress. Similar proposals may be introduced in the future. In addition, the
Code currently provides that small issue private activity bonds will not be tax-
exempt if the bonds are issued after December 31, 1986 and the proceeds are used
to finance projects other than manufacturing facilities. Interest on certain
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<PAGE>
small issue private activity bonds used to finance manufacturing facilities will
not be tax-exempt if such bonds are issued after December 31, 1989. If these
deadlines are not extended, or, if a proposal to restrict or eliminate the
federal tax exemption for interest on Municipal Securities were enacted, the
availability of Municipal Securities for investment by the Municipal Funds would
be adversely affected. In such event, the Municipal Funds would reevaluate
their respective investment objectives and policies and submit possible changes
in the structure of the Funds for the consideration of shareholders.
PARTICIPATION INTERESTS. The Municipal Funds may invest in participation
interests purchased from banks in floating rate or variable rate municipal
securities (such as AMT-Subject Bonds) owned by banks. A participation interest
gives the purchaser an undivided interest in the municipal security in the
proportion that the relevant Fund's participation interest bears to the total
principal amount of the municipal security and provides a demand repurchase
feature. Each participation is backed by an irrevocable letter of credit or
guarantee of a bank that meets the prescribed quality standards of the Fund. A
Fund has the right to sell the instrument back to the issuing bank or draw on
the letter of credit on demand for all or any part of the Fund's participation
interest in the municipal security, plus accrued interest. Banks will retain or
receive a service fee, letter of credit fee and a fee for issuing repurchase
commitments in an amount equal to the excess of the interest paid on the
municipal securities over the negotiated yield at which the instruments were
purchased by the Fund. Participation interests in the form to be purchased by
the Fund are new instruments, and no ruling of the Internal Revenue Service has
been secured relating to their tax-exempt status. The Funds intend to purchase
participation interests based upon opinions of counsel to the issuer to the
effect that income from them is tax-exempt to the Fund.
STAND-BY COMMITMENTS. The Municipal Funds may acquire stand-by commitments
with respect to municipal securities held in their respective portfolios. Under
a stand-by commitment, a broker-dealer, dealer or bank would agree to purchase,
at the relevant Funds' option, a specified municipal security at a specified
price. Thus, a stand-by commitment may be viewed as the equivalent of a "put"
option acquired by a Fund with respect to a particular municipal security held
in the Fund's portfolio.
The amount payable to a Fund upon its exercise of a stand-by commitment
normally would be (1) the acquisition cost of the municipal security (excluding
any accrued interest that the Fund paid on the acquisition), less any amortized
market premium or plus any amortized market or original issue discount during
the period the Fund owned the security, plus, (2) all interest accrued on the
security since the last interest payment date during the period the security was
owned by the Fund. Absent unusual circumstances, the Fund would value the
underlying municipal security at amortized cost. As a result, the amount
payable by the broker-dealer, dealer or bank during the time a stand-by
commitment is exercisable would be substantially the same as the value of the
underlying municipal security.
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<PAGE>
A Fund's right to exercise a stand-by commitment would be unconditional and
unqualified. Although a Fund could not transfer a stand-by commitment, it could
sell the underlying municipal security to a third party at any time. It is
expected that stand-by commitments generally will be available to the Funds
without the payment of any direct or indirect consideration. The Funds may,
however, pay for stand-by commitments if such action is deemed necessary. In
any event, the total amount paid for outstanding stand-by commitments held in a
Fund's portfolio would not exceed 1/2 of 1% of the value of a Fund's total
assets calculated immediately after each stand-by commitment is acquired.
The Funds intend to enter into stand-by commitments only with broker-
dealers, dealers or banks that the Advisor or their sub-advisor believes present
minimum credit risks. A Fund's ability to exercise a stand-by commitment will
depend upon the ability of the issuing institution to pay for the underlying
securities at the time the stand-by commitment is exercised. The credit of each
institution issuing a stand-by commitment to a Fund will be evaluated on an
ongoing basis by the Advisor or its sub-advisor in accordance with procedures
established by the Board of Trustees.
A Fund intends to acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its right thereunder for
trading purposes. The acquisition of a stand-by commitment would not affect the
valuation of the underlying municipal security. Each stand-by commitment will
be valued at zero in determining net asset value. Should a Fund pay directly or
indirectly for a stand-by commitment, its costs will be reflected in realized
gain or loss when the commitment is exercised or expires. The maturity of a
municipal security purchased by a Fund will not be considered shortened by any
stand-by commitment to which the obligation is subject. Thus, stand-by
commitments will not affect the dollar-weighted average maturity of a Fund's
portfolio.
STRATEGIES AVAILABLE TO PRIME INCOME FUND
- -----------------------------------------
As described in the Prospectus, each of the Conservative Growth, Balanced,
Flexible Income and Income Portfolios may invest in the Prime Income Fund as
well as the underlying Funds.
CERTAIN CHARACTERISTICS OF SENIOR LOAN INTERESTS. Senior Loans generally
are arranged through private negotiations between a Borrower and several
financial institutions ("Lenders") represented in each case by one or more such
-------
Lenders acting as agent ("Agent") of the several Lenders. On behalf of the
-----
several Lenders, the Agent, which is frequently the commercial bank or other
entity that originates the Senior Loan and the person that invites other parties
to join the lending syndicate, will be primarily responsible for negotiating the
loan agreement or agreements ("Loan Agreement") that establish the relative
--------------
terms, conditions and rights of the Borrower and the several Lenders.
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<PAGE>
The Prime Income Fund will invest in participations ("Participations") in
--------------
Senior Loans, will purchase assignments ("Assignments") of portions of Senior
-----------
Loans from third parties and may act as one of the group of Lenders originating
a Senior Loan (an "Original Lender").
---------------
It is anticipated that the proceeds of the Senior Loans in which the Prime
Income Fund will acquire interests primarily will be used to finance leveraged
buyouts, recapitalizations, mergers, acquisitions, stock repurchases, and, to a
lesser extent, to finance internal growth and for other corporate purposes of
Borrowers. The Prime Income Fund currently does not intend to acquire interests
in Senior Loans the proceeds of which would be used primarily to finance
construction or real estate development projects. Senior Loans have the most
senior position in a Borrower's capital structure, although some Senior Loans
may hold an equal ranking with other senior securities of the Borrower. The
capital structure of Borrowers may include Senior Loans, senior and junior
subordinated debt (which may include "junk bonds"), preferred stock and common
stock issued by the Borrower, typically in descending order of seniority with
respect to claims on the Borrower's assets. Senior Loans generally are secured
by specific collateral, which may include guarantees. In connection with the
acquisition of collateralized Senior Loans, the Prime Income Fund may invest up
to 5% of its total assets in Senior Loans which are not secured by any
collateral. Such unsecured Senior Loans would constitute an interim financing
intended to be refinanced through, in whole or in part, a collateralized Senior
Loan. In the event that the Prime Income Fund invests a portion of its assets
in Senior Loans that are not secured by specific collateral, the Prime Income
Fund will not enjoy the benefits associated with collateralization with respect
to such Senior Loans and such Senior Loans may pose a grater risk of nonpayment
of interest or loss of principal than do collateralized Senior Loans.
As discussed below, the Prime Income Fund may also acquire warrants and
equity securities issued by the Borrower or its affiliates as part of a package
of investments in the Borrower or its affiliates. Warrants and equity
securities will not be treated as Senior Loans and thus assets invested in such
securities will not count toward the 80% of the Prime Income Fund's total assets
that normally will be invested in Senior Loans. The Prime Income Fund will
acquire such interests in unsecured Senior Loans, warrants and equity securities
only as an incident to the intended purchase of interests in collateralized
Senior Loans. Loan Agreements may also include various restrictive covenants
designed to limit the activities of the Borrower in an effort to protect the
right of the Lenders to receive timely payments of interest on and repayment of
principal of the Senior Loans. In order to borrow money pursuant to
collateralized Senior Loans, a Borrower will frequently, for the term of the
Senior Loan, pledge as collateral assets, including but not limited to,
trademarks, accounts receivable, inventory, buildings, real estate, franchises,
and common and preferred stock in its subsidiaries. In addition, in the case of
some Senior Loans, there may be additional collateral pledged in the form of
guarantees by and/or securities of affiliates of the Borrowers. In certain
instances, a Senior Loan may be secured only by stock in the Borrower or its
subsidiaries. Such collateral may consist of assets that may not be readily
liquidated, and there is no assurance that the liquidation of such assets would
satisfy fully a Borrower's obligations under a Senior Loan.
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Restrictive covenants may include mandatory prepayment provisions arising
from excess cash flows and typically include restrictions on dividend payments,
specific mandatory minimum financial ratios, limits on total debt and other
financial tests. Breach of such covenants, if not waived by the Lenders, is
generally an event of default under the applicable Loan Agreement and may give
the Lenders the right to accelerate principal and interest payments. The
Advisor will consider the terms of such restrictive covenants in deciding
whether to invest in Senior Loans for the Prime Income Fund's portfolio. When
the Prime Income Fund holds a Participation in a Senior Loan it may not have the
right to vote to waive enforcement of any restrictive covenant breached by a
Borrower. Lenders voting in connection with a potential waiver of a restrictive
covenant may have interests different from those of the Prime Income Fund and
such Lenders may not consider the interests of the Prime Income Fund in
connection with their votes.
Senior Loans in which the Prime Income Fund will invest generally pay
interest at rates which are periodically redetermined by reference to a base
lending rate plus a premium. These base lending rates are generally the prime
rate offered by a Major United States Bank "Prime Rate", LIBOR, the CD rate or
other base lending rates used by commercial lenders. As a result Lenders will
pay more than the Prime Rate to the Prime Income Fund on their Senior Loans. The
Prime Rate quoted by a major U.S. bank is the interest rate at which such bank
is willing to lend U.S. dollars to its most creditworthy borrowers. LIBOR, as
provided for in Loan Agreements, is an average of the interest rates quoted by
several designated banks as the rates at which such banks would offer to pay
interest to major financial institutional depositors in the London interbank
market on U.S. dollar-denominated deposits for a specified period of time. The
CD rate, as generally provided for in Loan Agreements, is the average rate paid
on large certificates of deposit traded in the secondary market.
At least 80% of the Prime Income Fund's total assets normally will be
invested in Senior Loans. In normal market conditions, at least 65% of the
Prime Income Fund's assets will be invested in Senior Loans which, at the time
of the Prime Income Fund's initial investment in such Senior Loans, provide the
Prime Income Fund with a rate of return which was at least equal to the Prime
Rate existing on the date of such initial investments. The Prime Income Fund is
not subject to any restrictions with respect to the maturity of Senior Loans
held in its portfolio. It is currently anticipated that the Prime Income Fund's
assets invested in Senior Loans will consist of Senior Loans with stated
maturities of between three and seven years, inclusive, and with rates of
interest which are periodically reset with reset periods typically ranging from
30 days to one year. Investment in Senior Loans with longer interest rate
redetermination periods may increase fluctuations in the Prime Income Fund's net
asset value as a result of changes in interest rates. The Senior Loans in the
Prime Income Fund's portfolio will at all times have a dollar-weighted average
time until the next interest rate redetermination of 90 days or less. As a
result, as short-term interest rates increase, interest payable to the Prime
Income Fund from its investments in Senior Loans should increase, and as short-
term interest rates decrease, interest payable to the Prime Income Fund from its
investments in Senior Loans should decrease. The amount of time required to
pass before the Prime Income Fund will realize the effects of changing short-
term market interest rates on its portfolio will vary with the dollar-weighted
average time until the
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next interest rate redetermination on the Senior Loans in the Prime Income
Fund's portfolio. The Prime Income Fund may utilize certain investment practices
to, among other things, shorten the effective interest rate redetermination
period of Senior Loans in its portfolio. In such event, the Prime Income Fund
will consider such shortened period to be the interest rate redetermination
period of the Senior Loan; provided, however, that the Prime Income Fund will
not invest in Senior Loans which permit the Borrower to select an interest rate
redetermination period in excess of one year. Because most Senior Loans in the
Prime Income Fund's portfolio will be subject to mandatory and/or optional
prepayment and there may be significant economic incentives for a Borrower to
prepay its loans, prepayments of Senior Loans in the Prime Income Fund's
portfolio may occur. Accordingly, the actual remaining maturity of the Prime
Income Fund's portfolio invested in Senior Loans may vary substantially from the
average stated maturity of the Senior Loans held in the Prime Income Fund's
portfolio. As a result of expected prepayments from time to time of Senior Loans
in the Prime Income Fund's portfolio, the Prime Income Fund estimates that the
actual average maturity of the Senior Loans held in its portfolio will be
approximately 18-24 months.
When interest rates decline, the value of a portfolio invested in fixed-
rate obligations can be expected to rise. Conversely, when interest rates rise,
the value of a portfolio invested in fixed-rate obligations can be expected to
decline. Although the Prime Income Fund's net asset value will vary, the Prime
Income Fund's management expects the Prime Income Fund's policy of acquiring
interests in floating or variable rate Senior Loans to minimize fluctuations in
net asset value as a result of changes in interest rates. Accordingly, the
Prime Income Fund's management expects the value of the Prime Income Fund's
portfolio to fluctuate significantly less than a portfolio of fixed-rate, longer
term obligations as a result of interest rate changes. However, changes in
prevailing interest rates can be expected to cause some fluctuation in the Prime
Income Fund's net asset value. In addition to changes in interest rates,
changes in the credit quality of Borrowers will also affect the Prime Interest
Fund's net asset value. Further, a serious deterioration in the credit quality
of a Borrower could cause a prolonged or permanent decrease in the Prime Income
Fund's net asset value.
Senior Loans generally are not rated by nationally recognized statistical
rating organizations. Because of the collateralized and/or guaranteed nature of
most Senior Loans, the Prime Income Fund and the Advisor believe that ratings of
other securities issued by a Borrower do not necessarily reflect adequately the
relative quality of a Borrower's Senior Loans. Therefore, although the Advisor
may consider such ratings in determining whether to invest in a particular
Senior Loan, the Advisor is not required to consider such ratings and such
ratings will not be the determinative factor in the Advisor's analysis. The
Prime Income Fund may invest in Senior Loans, the Borrowers with respect to
which have outstanding debt securities which are rated below investment grade by
a nationally recognized statistical rating organization or are unrated but of
comparable quality to such securities. Such Borrowers are more likely to
experience difficulty in meeting payment obligations under such debt and other
subordinated obligations. These difficulties could detract from the Borrower's
perceived creditworthiness or its ability to obtain financing to cover short-
term cash flow needs and may force the Borrower
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into bankruptcy or other forms of credit restrictions. The Prime Income Fund
will invest only in those Senior Loans with respect to which the Borrower, in
the opinion of the Advisor, demonstrates certain of the following
characteristics: sufficient cash flow to service debt; adequate liquidity,
successful operating history; strong competitive position; experienced
management; and, with respect to collateralized Senior Loans, collateral;
coverage that equals or exceeds the outstanding principal amount of the Senior
Loan. In addition, the Advisor will consider, and may rely in part, on the
analyses performed by the Agent and other Lenders, including such persons'
determinations with respect to collateral securing a Senior Loan.
The Prime Income Fund may invest up to 100% of its assets in
Participations. The selling Lenders and other persons interpositioned between
such Lenders and the Prime Income Fund with respect to such Participations will
likely conduct their principal business activities in the banking, finance and
financial services industries. Although, as discussed below, the Prime Income
Fund has taken measures which it believes significantly reduce its exposure to
any risks incident to such policy, the Prime Income Fund may be more susceptible
than an investment company without such a policy to any single economic,
political or regulatory occurrence affecting such industries. Persons engaged
in such industries may be more susceptible than are persons engaged in some
other industry to, among other things, fluctuations in interest rates, changes
in the Federal Open Market Committee's monetary policy, governmental regulations
concerning such industries and concerning capital raising activities generally
and fluctuations in the financial markets generally.
Loan Agreements typically provide for the termination of the Agent's agency
status in the event that it fails to act as required under the relevant Loan
Agreement, becomes insolvent, enters FDIC receivership, or if not FDIC insured,
enters into bankruptcy. Should such an Agent, Lender or assignor with respect
to an Assignment interpositioned between the Prime Income Fund and the Borrower
become insolvent or enter FDIC receivership or bankruptcy, any interest in the
Senior Loan of such person and any loan payment held by such person for the
benefit of the Prime Income Fund should not be included in such person's estate.
If, however, any such amount were included in such person's estate, the Prime
Income Fund would incur certain costs and delays in realizing payment or could
suffer a loss of principal and/or interest. In such event, the Prime Income
Fund could experience a decrease in net asset value.
The Prime Income Fund may be required to pay and may receive various fees
and commissions in connection with purchasing, selling and holding interests in
Senior Loans. The fees normally paid by Borrowers may include three types:
facility fees, commitment fees and prepayment penalties. Facility fees are paid
to Lenders upon origination of a Senior Loan. Commitment fees are paid to
Lenders on an ongoing basis based upon the undrawn portion committed by the
Lenders of the underlying Senior Loan. Lenders may receive prepayment penalties
when a Borrower prepays all or part of a Senior Loan. The Prime Income Fund
will receive these fees directly from the Borrower if the Prime Income Fund is
an Original Lender, or, in the case of commitment fees and prepayment penalties,
if the Prime Income Fund acquires an interest in a Senior Loan by way of
Assignment. Whether or not the Prime Income Fund
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receives a facility fee from the Lender in the case of an Assignment, or any
fees in the case of a Participation, depends upon negotiations between the Prime
Income Fund and the Lender selling such interests. When the Prime Income Fund is
an assignee, it may be required to pay a fee, or forgo a portion of interest and
any fees payable to it, to the Lender selling the Assignment. Occasionally, the
assignor will pay a fee to the assignee based on the portion of the principal
amount of the Senior Loan which is being assigned. A Lender selling a
Participation to the Prime Income Fund may deduct a portion of the interest and
any fees payable to the Prime Income Fund as an administrative fee prior to
payment thereof to the Prime Income Fund. The Prime Income Fund may be required
to pay over or pass along to a purchaser of an interest in a Senior Loan from
the Prime Income Fund a portion of any fees that the Prime Income Fund would
otherwise be entitled to.
Pursuant to the relevant Loan Agreement, a Borrower may be required in
certain circumstances, and may have the option at any time, to prepay the
principal amount of a Senior Loan, often without incurring a prepayment penalty.
Because the interest rates on Senior Loans are periodically redetermined at
relatively short intervals, the Prime Income Fund and the Advisor believe that
the prepayment of, and subsequent reinvestment by the Prime Income Fund in,
Senior Loans will not have a materially adverse impact on the yield on the Prime
Income Fund's portfolio and may have a beneficial impact on income due to
receipt of prepayment penalties, if any, and any facility fees earned in
connection with reinvestment.
A Lender may have certain obligations pursuant to a Loan Agreement, which
may include the obligation to make additional loans in certain circumstances.
The Prime Income Fund currently intends to reserve against such contingent
obligations by segregating sufficient investments in high quality short-term,
liquid investments. The Prime Income Fund will not purchase interests in Senior
Loans that would require the Prime Income Fund to make any such additional loans
if such additional loan commitments would exceed 20% of the Prime Income Fund's
total assets or would cause the Prime Income Fund to fail to meet the
diversification requirements set forth under the heading "Investment
Restrictions."
During normal market conditions, the Prime Income Fund may invest up to 20%
of its total assets in (i) high quality, short-term debt securities with
remaining maturities of one year or less (including assets maintained by the
Prime Income Fund as a reserve against any additional loan commitments) and (ii)
warrants, equity securities and, in certain limited circumstances discussed
above, junior debt securities acquired in connection with the Prime Income
Fund's investments in Senior Loans. If the Advisor determines that market
conditions temporarily warrant a defensive investment policy, the Prime Income
Fund may invest, subject to its ability to liquidate its relatively illiquid
portfolio of Senior Loans, up to 100% of its assets in cash and such high
quality, short-term debt securities. The Prime Income Fund will acquire such
warrants and equity securities only as an incident to the purchase or intended
purchase of interests in collateralized Senior Loans. Warrants and equity
securities will not qualify as assets required to be maintained as a reserve
against additional loan commitments. Although the Prime Income Fund generally
will acquire interests in warrants and equity securities only when the Advisor
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believes that the relative value being given by the Prime Income Fund in
exchange for such interests is substantially outweighed by the potential value
of such instruments, investment in warrants and equity securities entail certain
risks in addition to those associated with investments in Senior Loans.
Warrants and equity securities have a subordinate claim on a Borrower's assets
as compared with debt securities, and junior debt securities have a subordinate
claim on such assets as compared with Senior Loans. As such, the values of
warrants and equity securities generally are more dependent on the financial
condition of the Borrower and less dependent on fluctuations in interest rates
than are the values of many debt securities. The values of warrants, equity
securities and junior debt securities may be more volatile than those of Senior
Loans and thus may have an adverse impact on the ability of the Prime Income
Fund to minimize fluctuations in its net asset value.
SPECIAL RISK CONSIDERATIONS. On behalf of the several Lenders, the Agent
generally will be required to administer and manage the Senior Loan and, with
respect to collateralized Senior Loans, to service or monitor the collateral.
In this connection, the valuation of assets pledged as collateral will reflect
market value and the Agent may rely on independent appraisals as to the value of
specific collateral. The Agent, however, may not obtain an independent
appraisal as to the value of assets pledged as collateral in all cases. The
Prime Income Fund normally will rely primarily on the Agent (where the Prime
Income Fund is an Original Lender or owns an Assignment) or the selling Lender
(where the Prime Income Fund owns a Participation) to collect principal of and
interest on a Senior Loan. Furthermore, the Prime Income Fund usually will rely
on the Agent (where the Prime Income Fund is an Original Lender or owns an
Assignment) or the selling Lender (where the Prime Income Fund owns a
Participation) to monitor compliance by the Borrower with the restrictive
covenants in the Loan Agreement and notify the Prime Income Fund of any adverse
change in the Borrower's financial condition or any declaration of insolvency.
Collateralized Senior Loans will frequently be secured by all assets of the
Borrower that qualify as collateral, which may include common stock of the
Borrower or its subsidiaries. Additionally, the terms of the Loan Agreement may
require the Borrower to pledge additional collateral to secure the Senior Loan,
and enable the Agent, upon proper authorization of the Lenders, to take
possession of and liquidate the collateral and to distribute the liquidation
proceeds pro rata among the Lenders. If the terms of a Senior Loan do not
require the Borrower to pledge additional collateral in the event of a decline
in the value of the original collateral, the Prime Income Fund will be exposed
to the risk that the value of the collateral will not at all times equal or
exceed the amount of the Borrower's obligations under the Senior Loan. Lenders
that have sold Participation interests in such Senior Loan will distribute
liquidation proceeds received by the Lenders pro rata among the holders of such
Participations. The Advisor will also monitor these aspects of the Prime Income
Fund's investments and, where the Prime Income Fund is an Original Lender or
owns an Assignment, will be directly involved with the Agent and the other
Lenders regarding the exercise of credit remedies. Senior Loans, like other
corporate debt obligations, are subject to the risk of non-payment of scheduled
interest or principal. Such non-payment would result in a reduction of income
to the Prime Income Fund, a reduction in the value of the Senior Loan
experiencing non-payment and a potential decrease in the net asset value of the
Prime Income Fund. Although, with respect to collateralized Senior Loans, the
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Prime Income Fund generally will invest only in Senior Loans that the Advisor
believes are secured by specific collateral which may include guarantees, the
value of which exceeds the principal amount of the Senior Loan at the time of
initial investment, there can be no assurance that the liquidation of any such
collateral would satisfy the Borrower's obligation in the event of non-payment
of scheduled interest or principal payments, or that such collateral could be
readily liquidated. In the event of bankruptcy of a Borrower, the Prime Income
Fund could experience delays or limitations with respect to its ability to
realize the benefits of the collateral securing a Senior Loan. To the extent
that a Senior Loan is collateralized by stock in the Borrower or its
subsidiaries, such stock may lose all or substantially all of its value in the
event of bankruptcy of the Borrower. The Agent generally is responsible for
determining that the Lenders have obtained a perfected security interest in the
collateral securing the Senior Loan. In the event that the Prime Income Fund
does not believe that a perfected security interest has been obtained with
respect to a collateralized Senior Loan, the Prime Income Fund will only obtain
an interest in such Senior Loan if the Agent is a Designated Custodian. Some
Senior Loans in which the Prime Income Fund may invest are subject to the risk
that a court, pursuant to fraudulent conveyance or other similar laws, could
subordinate such Senior Loans to presently existing or future indebtedness of
the Borrower or take other action detrimental to the holders of Senior Loans,
such as the Prime Income Fund, including, under certain circumstances,
invalidating such Senior Loans. Lenders commonly have certain obligations
pursuant to the Loan Agreement, which may include the obligation to make
additional loans or release collateral in certain circumstances.
Senior Loans in which the Prime Income Fund will invest generally will not
be rated by a nationally recognized statistical rating organization, will not be
registered with the SEC or any state securities commission and will not be
listed on any national securities exchange. Although the Prime Income Fund will
generally have access to financial and other information made available to the
Lenders in connection with Senior Loans, the amount of public information
available with respect to Senior Loans will generally be less extensive than
that available for rated, registered and/or exchange listing securities. As a
result, the performance of the Prime Income Fund and its ability to meet its
investment objective is more dependent on the analytical ability of the Advisor
than would be the case for an investment company that invests primarily in
rated, registered and/or exchange listed securities.
Senior Loans are, at present, not readily marketable and may be subject to
restrictions on resale. Interests in Senior Loans generally are not listed on
any national securities exchange or automated quotation system and no regular
market has developed for such interests. Any secondary market purchases and
sales of Senior Loans generally are conducted in private transactions between
buyers and sellers. Senior Loans are thus relatively illiquid, which
illiquidity may impair the Prime Income Fund's ability to realize the full value
of its assets in the event of a voluntary or involuntary liquidation of such
assets. Liquidity relates to the ability of the Prime Income Fund to sell an
investment in a timely manner. The market for relatively illiquid securities
tends to be more volatile than the market for more liquid securities. The Prime
Income Fund has no limitation on the amount of its assets which may be invested
in securities
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which are not readily marketable or are subject to restrictions on resale. The
substantial portion of the Prime Income Fund's assets invested in relatively
illiquid Senior Loan interests may restrict the ability of the Prime Income Fund
to dispose of its investments in Senior Loans in a timely fashion and at a fair
price, and could result in capital losses to the Prime Income Fund and holders
of Common Shares. However, many of the Senior Loans in which the Prime Income
Fund expects to purchase interests are of a relatively large principal amount
and are held by a relatively large number of owners which should, in the
Advisor's opinion, enhance the relative liquidity of such interests. The risks
associated with illiquidity are particularly acute in situations where the Prime
Income Fund's operations require cash, such as when the Prime Income Fund
tenders for its Common Shares, and may result in the Prime Income Fund borrowing
to meet short-term cash requirements.
To the extent that legislation or state or federal regulators that regulate
certain financial institutions impose additional requirements or restrictions
with respect to the ability of such institutions to make loans in connection
with highly leveraged transactions, the availability of Senior Loan interests
for investment by the Prime Income Fund may be adversely affected. In addition,
such requirements or restrictions may reduce or eliminate sources of financing
for certain Borrowers. Further, to the extent that legislation or federal or
state regulators that regulate certain financial institutions require such
institutions to dispose of Senior Loan interests relating to highly leveraged
transactions or subject such Senior Loan interests to increase regulatory
scrutiny, such financial institutions may determine to sell such Senior Loan
interests in a manner that results in a price which, in the opinion of the
Advisor, is not indicative of fair value. Were the Prime Income Fund to attempt
to sell a Senior Loan interest at a time when a financial institution was
engaging in such a sale with respect to such Senior Loan interest, the price at
which the Prime Income Fund could consummate such a sale might be adversely
affected.
The Prime Income Fund may use various investment practices that involve
special considerations including engaging in interest rate and other hedging
transactions, lending its portfolio securities, entering into when-issued and
delayed delivery transactions and entering into repurchase and reverse
repurchase agreements. For further discussion of these practices and associated
special considerations, see "Investment Practices and Special Risks" in the
Prospectus.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
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The ability of issuers to pay interest on, and repay principal of,
California municipal securities ("California Municipal Securities") may be
-------------------------------
affected by (1) amendments to the California Constitution and related statutes
that limit the taxing and spending authority of California government entities,
(2) voter initiatives, (3) a wide variety of California laws and regulations,
including laws related to the operation of health care institutions and laws
related to secured interests in real property and (4) the general financial
condition of the State of California. The following information constitutes only
a brief summary, and is not intended as a complete description. The information
has been drawn, in some cases by excerpt, from official statements
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relating to securities offerings of the State of California available as of the
date of this Statement of Additional Information. While the information has not
been independently verified by the California Money, California Municipal Fund,
or California Insured Intermediate Municipal Fund (the "California Fund"), the
---------------
California Fund has no reason to believe that such information is not correct in
all material respects.
AMENDMENTS TO THE CALIFORNIA CONSTITUTION AND RELATED STATUTES. Certain of
the California Municipal Securities may be obligations of issuers who rely in
whole or in part on ad valorem real property taxes as a source of revenue. On
June 6, 1978, California voters approved an amendment to the California
Constitution known as Proposition 13, which added Article XIIIA to the
California Constitution. The effect of Article XIIIA is to limit ad valorem
taxes on real property, and to restrict the ability of taxing entities to
increase real property tax revenues. On November 7, 1978, California voters
approved Proposition 8, on June 3, 1986, California voters approved Proposition
46, and on November 4, 1986, California voters approved Proposition 62, all of
which amended Article XIIIA.
Section 1 of Article XIIIA limits the maximum ad valorem tax on real
property to 1% of full cash value (as defined in Section 2), to be collected by
the counties and apportioned according to law; provided that the 1% limitation
does not apply to ad valorem taxes or special assessments to pay the interest
and redemption charges on (i) any indebtedness approved by the voters prior to
July 1, 1978, or (ii) any bonded indebtedness for the acquisition or improvement
of real property approved on or after July 1, 1978, by two-thirds of the votes
cast by the voters voting on the proposition. Section 2 of Article XIIIA
defines "full cash value" to mean "the County Assessor's valuation of real
property as shown on the 1975/76 tax bill under 'full cash value' or,
thereafter, the appraised value of real property when purchased, newly
constructed, or a change in ownership has occurred after the 1975 assessment."
The "full cash value" may be adjusted annually to reflect inflation at a rate
not to exceed 2% per year, or reduction in the consumer price index or
comparable local data, or reduced in the event of declining property value
caused by damage, destruction or other factors. The California State Board of
Equalization has adopted regulations, binding on county assessors, interpreting
the meanings of "change in ownership" and "new construction" for purposes of
determining full cash value of property under Article XIIIA.
Legislation enacted by the California Legislature to implement Article
XIIIA (Statutes of 1978, Chapter 292, as amended) provides that notwithstanding
any other law, local agencies may not levy any ad valorem property tax except to
pay debt service on indebtedness approved by the voters prior to July 1, 1978,
and that each county will levy the maximum tax permitted by Article XIIIA of
$4.00 per $100 assessed valuation (based on the former practice of using 25%,
instead of 100%, of full cash value as the assessed value for tax purposes).
The legislation further provided that, for the 1978/79 fiscal year only, the tax
levied by each county was to be apportioned among all taxing agencies within the
county in proportion to their average share of taxes levied in certain previous
years. The apportionment of property taxes in fiscal years after 1978/79 has
been revised pursuant to Statutes of 1979, Chapter 282, which provides relief
funds
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from State moneys beginning in fiscal year 1979/80 and is designed to
provide a permanent system for sharing State taxes and budget funds with local
agencies. Under Chapter 282, cities and counties receive more of the remaining
property tax revenues collected under Proposition 13 instead of direct State
aid. School districts receive a correspondingly reduced amount of property
taxes, but receive compensation directly from the State and are given additional
relief. Chapter 282 does not affect the derivation of the base levy ($4.00 per
$100 of assessed valuation) and the bonded debt tax rate.
On November 6, 1979, an initiative known as "Proposition 9" or the "Gann
Initiative" was approved by the California voters, which added Article XIIIB to
the California Constitution. In June 1990, Article XIIIB was amended by the
voters through their adoption of Proposition 111. Under Article XIIIB, State and
local governmental entities have an annual "appropriations limit" and are not
allowed to spend certain moneys called "appropriations subject to limitation" in
an amount higher than the "appropriations limit." Article XIIIB does not affect
the appropriation of moneys which are excluded from the definition of
"appropriations subject to limitation," including debt service on indebtedness
existing or authorized as of January 1, 1979, or bonded indebtedness
subsequently approved by the voters. Furthermore, in 1990, Article XIII B was
amended to exclude from the appropriations limit all "qualified outlay projects,
as defined by the Legislature," from proceeds of taxes. In general terms, the
"appropriations limit" is required to be based on certain 1978/79 expenditures,
and is to be tested over consecutive two-year periods to reflect changes in
consumer prices, population and certain services provided by these entities.
Article XIIIB also provides that if these entities' revenues in any year exceed
the amounts permitted to be spent, the excess is to be returned by revising the
tax rates or fee schedules over the subsequent two years.
Article XIIIB, like XIIIA, may require further interpretation by both the
Legislature and the courts to determine its applicability to specific situations
involving the State and local taxing authorities. Depending upon the
interpretation, Article XIIIB may limit significantly a governmental entity's
ability to budget sufficient funds to meet debt service on bonds and other
obligations.
On November 5, 1996, the voters of the State approved Proposition 218,
known as the "Right to Vote on Taxes Act." Proposition 218 adds Articles XIII C
and XIII D to the California Constitution and contains a number of interrelated
provisions affecting the ability of governmental entities to levy and collect
both existing and future taxes, assessments, fees and charges. Proposition 218
became effective on November 6, 1996. Senate Bill 919 was enacted to provide
implementation provisions for Proposition 218 and became effective on July 1,
1997. The interpretation and application of Proposition 218 will ultimately be
determined by the courts with respect to a number of the matters discussed
below, and it is not possible at this time to predict with certainty the outcome
of such determination.
Proposition 218 (Article XIII C) requires that all new local taxes be
submitted to the electorate before they become effective. Taxes for general
governmental purposes of cities and counties require a majority vote and taxes
for specific purposes, even if deposited in the governmental entity's general
fund, require a two-thirds vote. Further, any general purpose tax
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which the governmental entity imposed, extended or increased without voter
approval after December 31, 1994 may continue to be imposed only if approved by
a majority vote in an election which must be held within two years of November
5, 1996.
Proposition 218 (Article XIII D) also adds several provisions making it
generally more difficult for local agencies to levy and maintain fees, charges,
and assessments for municipal services and programs. These provisions include,
among other things, (i) a prohibition against assessments which exceed the
reasonable cost of the proportional special benefit conferred on a parcel, (ii)
a requirement that assessments must confer a "special benefit," as defined in
Article XIII D, over and above any general benefits conferred, (iii) a majority
protest procedure for assessments which involves the mailing of notice and a
ballot to the record owner of each affected parcel, a public hearing and the
tabulation of ballots weighted according to the proportional financial
obligation of the affected party, and (iv) a prohibition against fees and
charges which are used for general governmental services, including police, fire
or library services, where the service is available to the public at large in
substantially the same manner as it is to property owners.
Proposition 218 (Article XIII C) also removes limitations on the initiative
power in matters of reducing or repealing local taxes, assessments, fees or
charges.
VOTER INITIATIVES. On June 3, 1986, California voters approved Proposition
46, which added an additional exemption to the 1% tax limitation imposed by
Article XIII A. Under this amendment to Article XIII A, local governments and
school districts may increase the property tax rate above 1% for the period
necessary to retire new general obligation bonds, if two-thirds of those voting
in a local election approve the issuance of such bonds and the money raised
through the sale of the bonds is used exclusively to purchase or improve real
property.
On November 8, 1988, voters of the State approved Proposition 98, a
combined initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act." Proposition 98 changed State
funding of public education below the university level and the operation of the
State Appropriations Limit, primarily by guaranteeing K-14 schools a minimum
share of General Fund revenues. Under Proposition 98 (as modified by
Proposition 111, which was enacted on June 5, 1990), K-14 schools are guaranteed
the greater of (a) in general, a fixed percent of General Fund revenues ("Test
1"), (b) the amount appropriated to K-14 schools in the prior year, adjusted for
changes in the cost of living (measured as in Article XIII B by reference to
State per capita personal income) and enrollment ("Test 2"), or (c) a third
test, which would replace "Test 2" in any year when the percentage growth in per
capita General Fund revenues from the prior year plus one half of one percent is
less than the percentage growth in State per capita personal income ("Test 3").
Under "Test 3," schools would receive the amount appropriated in the prior year
adjusted for changes in enrollment and per capita General Fund revenues, plus an
additional small adjustment factor. If "Test 3" is used in any year, the
difference between "Test 3" and "Test 2" would become a "credit" to schools
which would be the basis of payments in future years when per capita General
Fund revenue growth
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exceeds per capita personal income growth. Legislation adopted prior to the end
of the 1988-89 Fiscal Year, implementing Proposition 98, determined the K-14
schools' funding guarantee under Test 1 to be 40.3 percent of the General Fund
Tax revenues, based on 1986-87 appropriations. However, that percent would be
adjusted to account for redirection of local property taxes, since such a
subsequent redirection directly affects the share of General Fund revenues to
schools.
Proposition 98 permits the Legislature by two-thirds vote of both houses,
with the Governor's concurrence, to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit to
K-14 schools.
During the recent recession, General Fund revenues for several years were
less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements, and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,220 from Fiscal Year 1991-
92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called California Teachers' Association v.
-----------------------------------
Gould, which challenged the validity of these off-budget loans. The oral
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settlement of this case, finalized in July 1996, provides that both the State
and K-14 schools share in the repayment of prior years' emergency loans to
schools. Of the total $1.76 billion in loans, the State will repay $935 million
by forgiveness of the amount owed, while schools will repay $825 million. The
State share of the repayment will be reflected as an appropriation above the
current Proposition 98 base calculation. The schools' share of the repayment
will count as appropriations that count toward satisfying the Proposition 98
guarantee, or from "below" the current base. Repayments are spread over the
eight-year period of 1994-95 through 2001-02 to mitigate any adverse fiscal
impact. Substantially increased State General Fund revenues, above initial
budget projections in the 1994-95 and thereafter have resulted or will result in
retroactive increases in Proposition 98 appropriations from subsequent fiscal
year's budgets. Because of the State's increasing revenues, per-pupil funding
at the K-12 level has increased by about 22% from the level in place from 1991-
92 through 1993-94, and is estimated at about $5,150 per ADA in 1997-98. A
significant amount of the "extra" Proposition 98 monies in the last few years
have been allocated to special programs, most particularly an initiative to
allow each classroom from grades K-3 to have no more than 20 pupils by the end
of the 1997-98 school year. There are also new initiatives for reading skills
and to upgrade technology in high schools.
On November 4, 1986, California voters approved an initiative statute known
as Proposition 62. This initiative (i) requires that any tax for general
governmental purposes imposed by local governments be approved by resolution or
ordinance adopted by a two-thirds
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vote of the governmental entity's legislative body and by a majority vote of the
electorate of the governmental entity, (ii) requires that any special tax
(defined as taxes levied for other than general governmental purposes) imposed
by a local governmental entity be approved by a two-thirds vote of the voters
within that jurisdiction, (iii) restricts the use of revenues from a special tax
to the purposes or for the service for which the special tax was imposed, (iv)
prohibits the imposition of ad valorem taxes on real property by local
governmental entities except as permitted by Article XIIIA, (v) prohibits the
imposition of transaction taxes and sales taxes on the sale of real property by
local governments, (vi) requires that any tax imposed by a local government on
or after August 1, 1985 be ratified by a majority vote of the electorate within
two years of the adoption of the initiative or be terminated by November 15,
1988, (vii) requires that, in the event a local government fails to comply with
the provisions of this measure, a reduction in the amount of property tax
revenue allocated to such local government occurs in an amount equal to the
revenues received by such entity attributable to the tax levied in violation of
the initiative, and (viii) permits these provisions to be amended exclusively by
the voters of the State of California.
On September 28, 1995, the California Supreme Court, in the case of Santa
Clara County Local Transportation Authority v. Guardino, upheld the
constitutionality of Proposition 62. In this case, the court held that a
county-wide sales tax of one-half of one percent was a special tax that, under
Section 53722 of the Government Code, required a two-thirds vote approval.
Because the tax received an affirmative vote of only 54.1%, this special tax was
found to be invalid.
On November 8, 1988, California voters approved Proposition 87.
Proposition 87 amended Article XVI, Section 16, of the California Constitution
by authorizing the California Legislature to prohibit redevelopment agencies
from receiving any of the property tax revenue raised by increased property tax
rates levied to repay bonded indebtedness of local governments which is approved
by voters on or after January 1, 1989. It is not possible to predict whether
the California Legislature will enact such a prohibition nor is it possible to
predict the impact of Proposition 87 on redevelopment agencies and their ability
to make payments on outstanding debt obligations.
OTHER RELEVANT CALIFORNIA LAWS. A wide variety of California laws and
regulations may affect, directly or indirectly, the payment of interest on, or
the repayment of the principal of, California Municipal Securities in which the
California Money, California Municipal and California Insured Intermediate
Municipal Funds may invest. The impact of such laws and regulations on
particular California Municipal Securities may vary depending upon numerous
factors including, among others, the particular type of Municipal Security
involved, the public purpose funded by the Municipal Security and the nature and
extent of insurance or other security for payment of principal and interest on
the Municipal Security. For example, California Municipal Securities which are
payable only from the revenues derived from a particular facility may be
adversely affected by California laws or regulations which make it more
difficult for the particular facility to generate revenues sufficient to pay
such interest and principal, including,
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among others, laws and regulations which limit the amount of fees, rates or
other charges which may be imposed for use of the facility or which increase
competition among facilities of that type or which limit or otherwise have the
effect of reducing the use of such facilities generally, thereby reducing the
revenues generated by the particular facility. California Municipal Securities,
the payment of interest and principal on which is insured in whole or in part by
a California governmentally created fund, may be adversely affected by
California laws or regulations which restrict the aggregate insurance proceeds
available for payment of principal and interest in the event of a default on
such Municipal Securities.
Certain California Municipal Securities in which the California Money,
California Municipal and California Insured Intermediate Funds may invest may be
obligations that are payable solely from the revenues of health care
institutions. Certain provisions under California law may adversely affect such
revenues and, consequently, payment on those California Municipal Securities.
The Federally sponsored Medicaid program for health care services to
eligible welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reductions or limitations may be
imposed in payment for services rendered to Medi-Cal beneficiaries in the
future.
Under this approach, in most geographical areas of California, only those
hospitals which enter into a Medi-Cal contract with the State of California will
be paid for non- emergency acute inpatient services rendered to Medi-Cal
beneficiaries. The State may also terminate these contracts without notice
under certain circumstances and is obligated to make contractual payments only
to the extent the California legislature appropriates adequate funding therefor.
In February 1987, the Governor of the State of California announced that
payments to Medi-Cal providers for certain services (not including hospital
acute inpatient services) would be decreased by ten percent through June 1987.
However, a federal district court issued a preliminary injunction preventing
application of any cuts until a trial on the merits can be held. If the
injunction is deemed to have been granted improperly, the State of California
would be entitled to recapture the payment differential for the intended
reduction period. It is not possible to predict at this time whether any
decreases will ultimately be implemented.
California enacted legislation in 1982 that authorizes private health plans
and insurers to contract directly with hospitals for services to beneficiaries
on negotiated terms. Some insurers
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have introduced plans known as "preferred provider organizations" ("PPOs"),
----
which offer financial incentives for subscribers who use only the hospitals
which contract with the plan. Under an exclusive provider plan, which includes
most health maintenance organizations "HMOs"), private payors limit coverage
----
to those services provided by select hospitals. Discounts offered to HMOs and
PPOs may result in payment to the contracting hospital of less than actual cost
and the volume of patients directed to a hospital under an HMO or PPO contract
may vary significantly from projections. Often, HMO or PPO contracts are
enforceable for a stated term, regardless of provider losses or of bankruptcy of
the respective HMO or PPO. It is expected that failure to execute and maintain
such PPO and HMO contracts would reduce a hospital's patient base or gross
revenues. Conversely, participation may maintain or increase the patient base,
but may result in reduced payment and lower net income to the contracting
hospitals.
These Debt Obligations may also be insured by the State of California
pursuant to an insurance program implemented by the Office of Statewide Health
Planning and Development for health facility construction loans. If a default
occurs on insured Debt Obligations, the State Treasurer will issue debentures
payable out of a reserve fund established under the insurance program or will
pay principal and interest on an unaccelerated basis from unappropriated State
funds. At the request of the Office of Statewide Health Planning and
Development, Arthur D. Little, Inc. prepared a study in December, 1983, to
evaluate the adequacy of the reserve fund established under the insurance
program and based on certain formulations and assumptions found the reserve fund
substantially underfunded. In September of 1986, Arthur D. Little, Inc.
prepared an update of the study and concluded that an additional 10% reserve be
established for "multi-level" facilities. For the balance of the reserve fund,
the update recommended maintaining the current reserve calculation method. In
March of 1990, Arthur D. Little, Inc. prepared a further review of the study and
recommended that separate reserves continue to be established for "multi-level"
facilities at a reserve level consistent with those that would be required by an
insurance company.
Certain California Municipal Securities in which the California Money,
California Municipal and California Insured Intermediate Municipal Funds may
invest may be obligations which are secured in whole or in part by a mortgage or
deed of trust on real property. California has five principal statutory
provisions which limit the remedies of a creditor secured by a mortgage or deed
of trust, two of which limit the creditor's right to obtain a deficiency
judgment. One of the limitations is based on the method of foreclosure and the
other on the type of debt secured. Under the former, a deficiency judgment is
barred when the foreclosure is accomplished by means of a nonjudicial trustee's
sale. Under the latter, a deficiency judgment is barred when the foreclosed
mortgage or deed of trust secures certain purchase money obligations. Another
California statute, commonly known as the "one form of action" rule, requires
the creditors secured by real property to exhaust their real property security
by foreclosure before bringing a personal action against the debtor. The fourth
statutory provision limits any deficiency judgment obtained by a creditor
secured by real property following a judicial sale of such property to the
excess of the outstanding debt over the fair value of the
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property at the time of the sale, thus preventing the creditor from obtaining a
large deficiency judgment against the debtor as the result of low bids at a
judicial sale. The fifth statutory provision gives the debtor the right to
redeem the real property from any judicial foreclosure sale as to which a
deficiency judgment may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect to California
real property, the creditor's nonjudicial foreclosure rights under the power of
sale contained in the mortgage or deed of trust are subject to the constraints
imposed by California law upon transfers of title to real property by private
power of sale. During the three-month period beginning with the filing of a
formal notice of default, the debtor is entitled to reinstate the mortgage by
making any overdue payments. Under standard loan servicing procedures, the
filing of the formal notice of default does not occur unless at least three full
monthly payments have become due and remain unpaid. The power of sale is
exercised by posting and publishing a notice of sale for at least 20 days after
expiration of the three-month reinstatement period. Therefore, the effective
minimum period for foreclosing on a home mortgage could be in excess of seven
months after the initial default. Such time delays in collections could disrupt
the flow of revenues available to an issuer for the payment of debt service on
the outstanding obligations if such defaults occur with respect to a substantial
number of mortgages or deeds of trust securing an issuer's obligations.
In addition, a court could find that there is sufficient involvement of the
issuer in the nonjudicial sale of property securing a mortgage for such private
sale to constitute "state action," and could hold that the private-right-of-sale
proceedings violate the due process requirements of the Federal or State
Constitutions, consequently preventing an issuer from using the nonjudicial
foreclosure remedy described above.
Certain California Municipal Securities in which the California Money,
California Municipal and California Insured Intermediate Municipal Funds may
invest may be obligations which finance the acquisition of single family home
mortgages for low and moderate income mortgagors. These obligations may be
payable solely from revenues derived from the home mortgages, and are subject to
the California statutory limitations described above applicable to obligations
secured by real property. Under California anti-deficiency legislation, there
is no personal recourse against a mortgagor of a single family residence
purchased with the loan secured by the mortgage, regardless of whether the
creditor chooses judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single family owner-
occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan, and cannot in
any event exceed six months' advance interest on the amount prepaid in any
twelve month period in excess of 20% of the original amount of the mortgage
loan. This limitation could affect the flow of revenues available to an issuer
for debt service on the outstanding debt obligations which financed such home
mortgages.
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Because of the diverse nature of such laws and regulations and the
impossibility of either predicting in which specific California Municipal
Securities the California Money, California Municipal and California Insured
Intermediate Municipal Funds will invest from time to time or predicting the
nature or extent of future changes in existing laws or regulations or the future
enactment or adoption of additional laws or regulations, it is not presently
possible to determine the impact of such laws and regulations on the Municipal
Securities in which the California Money, California Municipal and California
Insured Intermediate Municipal Funds may invest and, therefore, on the units of
the California Money, California Municipal or California Insured Intermediate
Municipal Funds.
THE GENERAL FINANCIAL CONDITION OF THE STATE OF CALIFORNIA.
Pressures on the State's budget in the late 1980's and early 1990's were
caused by a combination of external economic conditions (including a recession
which began in 1990) and growth of the largest General Fund Programs -K-14
education, health, welfare and corrections -at rates faster than the revenue
base. During this period, expenditures exceeded revenues in four out of six
years up to 1992-93, and the State accumulated and sustained a budget deficit
approaching $2.8 billion at its peak at June 30, 1993. Between the 1991-92 and
1994-95 Fiscal Years, each budget required multibillion dollar actions to bring
projected revenues and expenditures into balance, including significant cuts in
health and welfare program expenditures; transfers of program responsibilities
and funding from the State to local governments; transfer of about $3.6 billion
in annual local property tax revenues from other local governments to local
school districts, thereby reducing State funding for schools under Proposition
98; and revenue increases (particularly in the 1991-92 Fiscal Year budget), most
of which were for a short duration.
Despite these budget actions, as noted, the effects of the recession led to
large, unanticipated budget deficits. By the 1993-94 Fiscal Year, the
accumulated deficit was so large that it was impractical to budget to retire it
in one year, so a two-year program was implemented, using the issuance of
revenue anticipation warrants to carry a portion of the deficit over the end of
the fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, again using cross-fiscal year
revenue warrants to partly finance the deficit into the 1995-96 fiscal year.
Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts "borrowed" from
future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the state to
carry out its normal annual cash flow borrowing to replenish its cash reserves,
the State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July
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1 and September 4, 1992 the State Controller issued a total of approximately
$3.8 billion of registered warrants.
For several fiscal years during the recession, the State was forced to rely
on external debt markets to meet its cash needs, as a succession of notes and
warrants were issued in the period from June 1992 to July 1994, often needed to
pay previously maturing notes or warrants. These borrowings were used also in
part to spread out the repayment of the accumulated budget deficit over the end
of a fiscal year, as noted earlier. The last and largest of these borrowings
was $4.0 billion of revenue anticipation warrants, which were issued in July,
1994 and matured on April 25, 1996.
1995-96 AND 1996-97 FISCAL YEARS
The State's financial condition improved markedly during the 1995-96 and
1996-97 fiscal years, with a combination of better than expected revenues,
slowdown in growth of social welfare programs, and continued spending restraint
based on the actions taken in earlier years. The State's cash position also
improved, and no external deficit borrowing has occurred over the end of these
two fiscal years.
The economy grew strongly during these fiscal years, and as a result, the
General Fund took in substantially greater tax revenues (around $2.2 billion in
1995-96 and $1.6 billion in 1996-97) than were initially planned when the
budgets were enacted. These additional funds were largely directed to school
spending as mandated by Proposition 98, and to make up shortfalls from reduced
federal health and welfare aid. The accumulated budget deficit from the
recession years was finally eliminated. In the Governor's 1998-99 Budget
Proposal, released January 9, 1998, the Department of Finance reported that the
State's budget reserve (the SFEU) totaled $461 million as of June 30, 1997.
CURRENT STATE BUDGET
The discussion below of the 1997-98 Fiscal Year budget, the proposed 1998-
99 Fiscal Year budget below are based on estimates and projections of revenues
and expenditures for the current and upcoming fiscal year and must not be
construed as statements of fact. These estimates and projections are based upon
various assumptions as of January 1998 which may be affected by numerous
factors, including future economic conditions in the State and the nation, and
there can be no assurance that the estimates will be achieved.
Periodic reports on revenues and expenditures during the fiscal year are
issued by the Administration, the State Controller's Office and the Legislative
Analyst's Office. The Department of Finance issues a monthly Bulletin which
reports the most recent revenue receipts, comparing them to Budget projections,
and reports on other current developments affecting the Budget. The
Administration also formally updates its budget projections three times during
each fiscal year, generally in January, May and at budget enactment.
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1997-98 FISCAL YEAR
Background
On January 9, 1997, the Governor released his proposed budget for the 1997-
98 Fiscal Year (the "Proposed Budget"). The Proposed Budget estimated General
Fund revenues and transfers of about $50.7 billion, and proposed expenditures of
$50.3 billion. In May 1997, the Department of Finance increased its revenue
estimate for the upcoming fiscal year by $1.3 billion, in response to the
continued strong growth in the State's economy.
In May, 1997, action was taken by the California Supreme Court in an
ongoing lawsuit, PERS v. Wilson, which made final a judgment against the State
requiring an immediate payment from the General Fund to the Public Employees
Retirement Fund ("PERF") to make up certain deferrals in annual retirement fund
contributions which had been legislated in earlier years for budget savings, and
which the courts found to be unconstitutional. On July 30, 1997, following a
direction from the Governor, the Controller transferred $1.228 billion from the
General Fund to the PERF in satisfaction of the judgment, representing the
principal amount of the improperly deferred payments from 1995-96 and 1996-97.
In late 1997, the plaintiffs filed a claim with the State Board of Control
for payment of interest under the Court rulings in an amount of $308 million.
The Department of Finance has recommended approval of this claim. If approved
by the Board of Control, the claim would become part of a claims bill to be paid
in the 1998-99 Fiscal Year.
Fiscal Year 1997-98 Budget Act
Once the pension payment of $1.228 billion eliminated essentially all the
"increased" revenue in the budget, final agreement was reached within a few
weeks on a welfare reform package and the remainder of the budget. The
Legislature passed the Budget Bill on August 11, 1997, along with numerous
related bills to implement its provisions. On August 18, 1997, the Governor
signed the Budget Act, but vetoed approximately $314 million of specific
spending items, primarily in health and welfare and education areas from both
the General Fund and Special Funds. Most of this spending (approximately $200
million) was restored in later legislation passed before the end of the
Legislative Session.
The Budget Act anticipated General Fund revenues and transfers of $52.5
billion (a 6.8 percent increase of the final 1996-97 amount), and expenditures
of $52.5 billion (a 8.0 percent increase from the 1996-97 levels). The Budget
Act also included Special Fund expenditures of $14.4 billion (as against
estimated Special Fund revenues of $14.0 billion), and $2.1 billion of
expenditures from various Bond Funds. Following enactment of the Budget Act,
the State implemented its normal annual cash flow borrowing program, issuing
$3.0 billion of notes which mature on June 30, 1998.
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The following were major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contained a large increase in
funding for K-14 education under Proposition 98, reflecting strong revenues
which exceeded initial budgeted amounts. Part of the nearly $1.75 billion in
increased spending was allocated to prior fiscal years. Funds were provided to
fully pay for the cost-of-living-increase component of Proposition 98, and to
extend the class size reduction and reading initiatives.
2. The Budget Act reflected the $1.228 billion pension case judgement
payment, and brought funding of the State's pension contribution back to the
quarterly basis which existed prior to the deferral actions which were
invalidated by the courts.
3. Funding from the General Fund for the University of California and
California State University was increased by about 6 percent ($121 million and
$107 million, respectively), and there was no increase in student fees.
4. Because of the effect of the pension payment, most other State programs
were continued at 1996-97 levels, adjusted for caseload changes.
5. Health and welfare costs were contained, continuing generally the grant
levels from prior years, as part of the initial implementation of the new
CalWORKs program.
6. Unlike prior years, this Budget Act did not depend on uncertain federal
budget actions. About $300 million in federal funds, already included in the
federal FY 1997 and 1998 budgets, was included in the Budget Act, to offset
incarceration costs for illegal aliens.
7. The Budget Act contained no tax increases, and no tax reductions. The
Renters Tax Credit was suspended for another year, saving approximately $500
million.
At the end of the Legislative Session on September 13, 1997, the
Legislature passed and the Governor later signed several bills encompassing a
coordinated package of fiscal reforms, mostly to take effect after the 1997-98
Fiscal Year. Included in the package are a variety of phased-in tax cuts,
conformity with certain provisions of the federal tax reform law passed earlier
in the year, and reform of funding for county trial courts, with the State to
assume greater financial responsibility. The Department of Finance estimates
that the major impact of these fiscal reforms will occur in Fiscal Year 1998-99
and subsequent years.
The Department of Finance released updated estimates for the 1997-98 Fiscal
Year on January 9, 1998 as part of the Governor's 1998-99 Fiscal Year Budget
Proposal. Total revenues and transfers are projected at $52.9 billion, up
approximately $360 million from the Budget Act projection. Expenditures for the
fiscal year are expected to rise approximately $200 million above the original
Budget Act, to $53.0 billion. The balance in the budget reserve, the SFEU, is
projected to be $329 million at June 30, 1998, compared to $461 million at June
30, 1997.
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PROPOSED 1998-99 FISCAL YEAR BUDGET
On January 9, 1998, the Governor released his Budget Proposal for the 1998-
99 Fiscal Year (the "Governor's Budget"). The Governor's Budget projects total
General Fund revenues and transfers of $55.4 billion, a $2.5 billion increase
(4.7 percent) over revised 1997-98 revenues. This revenue increase takes into
account reduced revenues of approximately $600 million from the 1997 tax cut
package, but also assumes approximately $500 million additional revenues
primarily associated with capital gains realizations. The Governor's Budget
notes, however, that capital gains activity and the resultant revenues derived
from it are very hard to predict.
Total General Fund expenditures for 1998-99 are recommended at $55.4
billion an increase of $2.4 billion (4.5 percent) above the revised 1997-98
level. The Governor's Budget includes funds to pay the interest claim relating
to the court decision on pension fund payments, PERS v. Wilson (see "1997-98
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Fiscal Year" above). The Governor's Budget projects that the State will carry
out its normal intra-year cash flow external borrowing in 1998-99, in an
estimated amount of $3.0 billion. The Governor's Budget projects that the
budget reserve, the SFEU, will be $296 million at June 30, 1999, slightly lower
than the projected level at June 30, 1998 PERS liability.
The Governor's Budget projects Special Fund revenues of $14.7 billion, and
Special Fund expenditures of $15.2 billion, in the 1998-99 Fiscal Year. A total
of $3.2 billion of bond fund expenditures are also proposed.
ADDITIONAL CONSIDERATIONS. With respect to Municipal Securities issued by
the State of California and its political subdivisions, as well as certain other
governmental issuers such as the Commonwealth of Puerto Rico, the Trusts cannot
predict what legislation, if any, may be proposed in the California State
Legislature as regards the California State personal income tax status of
interest on such obligations, or which proposals, if any, might be enacted.
Such proposals, if enacted, might materially adversely affect the availability
of California Municipal Securities for investment by the California Money,
California Municipal and California Insured Intermediate Municipal Funds and the
value of the Fund's investments. In such event, the Trustees would reevaluate
the investment objective and policies of the California Money, California
Municipal and California Insured Intermediate Municipal Funds and consider
changes in its investments structure or possible dissolution.
SPECIAL CONSIDERATIONS RELATING TO FLORIDA MUNICIPAL SECURITIES
The following information constitutes only a brief summary, and does not
purport to be a complete description. The information in this section is
updated periodically. While the Fund has not independently verified such
information, it has no reason to believe that such information is not correct in
all material respects. The source of the 1994-95, 1995-96 and 1996-97 figures
set forth below is the Revenue and Economic Analysis Unit of the Executive
Office of the
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Governor of the State of Florida. Such figures are preliminary and subject to
change without notice.
POPULATION. In 1980, Florida was ranked seventh among the fifty states with
a population of 9.7 million people. The State has grown dramatically since then
and as of April 1, 1996 ranks fourth with an estimated population of 14.4
million. Since the beginning of the eighties, Florida has surpassed Ohio,
Illinois, and Pennsylvania in total population. Florida's attraction, as both a
growth and retirement state, has kept net migration at an average of 224,240 new
residents per year, from 1987 through 1996.
INCOME. Over the years, Florida's personal income has grown at a strong
pace and has generally outperformed both the U.S. as a whole and the southeast
in particular. The reasons for this are twofold: first, as mentioned above,
Florida's population has expanded at a very strong pace; and second, the State's
economy since the early seventies has diversified in such a way as to provide a
broader economic base. As a result, Florida's per capita personal income has
tracked closely with the national average. Furthermore, the State's per capita
personal income has historically tracked above the southeast. From 1985 through
1995, Florida's per capita income rose an average 5.0% per year, while national
per capita income increased an average 4.9%.
The structure of Florida's income differs from that of the nation and the
southeast. Because Florida has a proportionally greater retirement age
population, property income (dividends, interest, and rent) and transfer
payments (social security and pension benefits, among other sources of income)
are a relatively more important source of income. For example, Florida's
employment income in 1995 represented 60.6% of total personal income, while the
nation's share of total personal income in the form of wages and salaries and
other labor benefits was 70.8%. Florida's income is dependent upon transfer
payments controlled by the federal government.
EMPLOYMENT. Since 1987, the State's population has increased an estimated
20%. In the same period of time, Florida's total non-farm employment has
increased by over 27.5%. The average rate of unemployment for Florida since
1987 is 6.2% while the national average is also 6.2%. Though the State has
grown by an average of 274,830 people per year, the strength of the economy has
created an environment that has more than absorbed new residents seeking
employment. The job creation rate for the State of Florida is almost twice the
rate for the nation as a whole, since 1987.
CONSTRUCTION. Florida's dependency on the highly cyclical construction and
construction-related manufacturing sectors has declined. For example, total
contract construction employment as a share of total non-farm employment reached
a peak of over 10% in 1973. In 1980, the share was roughly 7.5%, and in 1996,
the share had edged downward to 5%. This trend is expected to continue as
Florida's economy continues to diversify. Florida, nevertheless, has a dynamic
construction industry, with single and multi-family housing starts accounting
for
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approximately 8.1% of total U.S. housing starts in 1996, while the State's
population is 5.5% of the nation's population. Since 1985, total housing starts
have averaged 148,000 per year.
A driving force behind Florida's construction industry is of course its
rapid growth in population. While annual growth in the State's population is
projected to slow somewhat, it is still expected to grow close to 230,000 new
residents per year throughout the 1990's.
TOURISM. Tourism is one of Florida's most important industries.
Approximately 42.9 million people visited the State in 1996, as reported by the
Florida Department of Commerce. As discussed below, tourism in Florida appears
to be recovering from the effects of negative publicity regarding crime.
OUTLOOK. The current Florida Economic Consensus Estimating Conference
forecast shows that the Florida economy is expected to grow at a moderate pace,
but will continue to outperform the U.S. as a whole as a result of relatively
rapid population growth. Single and multi-family housing starts are projected to
reach a combined level of nearly 118,500 in 1996 and 129,500 in 1997-98. Multi-
family starts have been slow to recover, but they are showing some strong growth
lately and should maintain a level of 38,200 in 1997-98 and 37,200 in 1998-99.
Single family starts are expected to exceed 91,300 this year and reach a level
of 94,100 next year. Total construction expenditures are forecasted to increase
13.2% this year and increase 6.5% next year.
Real personal income in Florida is estimated to increase 5.2% in 1997-98
and increase 3.7% in 1998-99 while real personal income per capita is projected
to grow at 3.2% in 1997-98 and 1.8% in 1998-99.
Florida tourism appears to be recovering from the effects of negative
publicity regarding crime against tourists in the state. Tourist arrivals are
expected to increase by 2.1% this fiscal year and 4.0% next year. Air tourists
are expected to increase by 1.6% this year and increase by 3.7% next year, while
auto tourists are expected to increase by 2.7% in 1997-98 and increase 4.2% in
1998-99. By the end of this fiscal year, 43.8 million domestic and
international tourists are expected to have visited the State. In 1998-99,
tourist arrivals should approximate 45.6 million.
REVENUES AND EXPENDITURES. Financial operations of the State of Florida
covering all receipts and expenditures are maintained through the use of four
fund types - the General Revenue Fund, Trust Funds, the Working Capital Fund and
beginning in fiscal year 1995-96, the Budget Stabilization Fund. The General
Revenue Fund receives the majority of State tax revenues. The Trust Funds
consist of monies received by the State which under law or trust agreement are
segregated for a purpose authorized by law. Revenues in the General Revenue
Fund which are in excess of the amount needed to meet appropriations may be
transferred to the Working Capital Fund. The Florida Constitution and Statutes
mandate that the State budget as a
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whole, and each separate fund within the State budget, be kept in balance from
currently available revenues each State fiscal year.
Estimated fiscal year 1997-98 General Revenue plus Working Capital and
Budget Stabilization funds available total $18,150.9 million, an 8.5% increase
over 1996-97. With combined General Revenue, Working Capital Fund and Budget
Stabilization Fund appropriations at $17,114.0 million, unencumbered reserves at
the end of 1997-98 are estimated at $1,036.9 million.
Estimated fiscal year 1998-99 General Revenue plus Working Capital and
Budget stabilization funds available total $18,644.0 million, a 2.7% increase
over 1997-98.
In fiscal year 1996-97, the State derived approximately 67% of its total
direct revenues to these funds from State taxes and fees. Federal funds and
other special revenues accounted for the remaining revenues. Major sources of
tax revenues to the General Revenue Fund are the sales and use tax, corporate
income tax, intangible personal property tax, beverage tax and estate tax, which
amounted to 68%, 8%, 4% and 3%, respectively, of total General Revenue Funds
available.
State expenditures are categorized for budget and appropriation purposes by
type of fund and spending unit, which are further subdivided by line item. In
fiscal year 1996-97, appropriations from the General Revenue Fund for education,
health and welfare, and public safety amounted to 53%, 26% and 14%,
respectively, of total General Revenue Funds available.
SALES AND USE TAX. The greatest single source of tax receipts in Florida
is the sales and use tax. The sales tax is 6% of the sales price of tangible
personal property sold at retail in the State. The use tax is 6% of the cost
price of tangible personal property when the same is not sold but is used, or
stored for use, in the State. The use tax also applies to the use in the State
of tangible personal property purchased outside Florida which would have been
subject to the sales tax if purchased from a Florida dealer. Slightly less than
10% of the sales tax is designated for local governments and is distributed to
the respective counties in which collected for use by such counties and
municipalities therein. In addition to this distribution, local governments may
(by referendum) assess a .5% or 1% discretionary sales surtax within their
county. Proceeds from this local option sales tax are earmarked for funding
local infrastructure programs and acquiring land for public recreation or
conservation or protection of natural resources. In addition, non-consolidated
counties with a population in excess of 800,000 may levy a local option sales
tax to fund indigent health care. The tax rate cannot exceed .5% and the
combined levy of this indigent health care surtax and the aforementioned
infrastructure surtax cannot exceed 1%. Furthermore, charter counties which
adopted a charter prior to June 1, 1976, and each county with a consolidated
county/municipal government, may (by referendum) assess up to a 1% discretionary
sales surtax within their county. Proceeds from this tax are earmarked for the
development, construction, maintenance and operation of a fixed guideway rapid
transit system or may be remitted to an expressway or transportation authority
for use on county roads and bridges, for a
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bus system, or to service bonds financing roads and bridges. The two taxes,
sales and use, stand as complements to each other, and taken together provide a
uniform tax upon either the sale at retail or the use of all tangible personal
property irrespective of where it may have been purchased. This tax also
includes a levy on the following: (i) rentals on tangible personal property and
transient lodging and non-residential real property; (ii) admissions to places
of amusements, most sports and recreation events; (iii) utilities (at a 7%
rate), except those used in homes; and (iv) restaurant meals. Exemptions
include: groceries; medicines; hospital rooms and meals; fuels used to produce
electrical energy used in manufacturing; purchases by religious, charitable and
educational nonprofit institutions; most professional, insurance and personal
service transactions; apartments used as permanent dwellings; the trade-in value
of motor vehicles; and residential utilities.
All receipts of the sales and use tax, with the exception of the tax on
gasoline and special fuels, are credited to either the General Revenue Fund,
the Solid Waste Management Trust Fund, or counties and cities. For the State
fiscal year which ended June 30, 1997, receipts from this source were $12,089
million, an increase of 5.5% over the prior fiscal year.
MOTOR FUEL TAX. The second largest source of State tax receipts is the tax
on motor fuels. Preliminary data show collections from this source in the State
fiscal year ended June 30, 1997, were $2,012 million. However, these revenues
are almost entirely dedicated trust funds for specific purposes and are not
included in the State's General Revenue Fund.
State and local taxes on motor fuels (gasoline and special fuel) include
several distinct fuel taxes: (i) the State sales tax on motor fuels, levied at
6% of the average retail price per gallon of fuel, not to fall below 6.9 cents
per gallon; (ii) the State excise tax of four cents per gallon of motor fuel,
proceeds distributed to local governments; (iii) the State Comprehensive
Enhanced Transportation System (SCETS) tax, which is levied at a rate in each
county equal to two-thirds of the sum of the county's local option motor fuel
taxes; (iv) aviation fuel, which depending on the air carrier's choice, can
either be taxed at 6.9 cents per gallon or eight percent of the retail price of
fuel, not to be less than 4.4 cents per gallon; and (v) local option motor fuel
taxes, which may range between one cent to twelve cents per gallon.
ALCOHOLIC BEVERAGE TAX. Florida's alcoholic beverage tax is an excise tax
on beer, wine, and liquor. This tax is one of the State's major tax sources,
with revenues totaling $447.2 million in the State fiscal year ended June 30,
1997, an increase of $5.7 million from the previous year's total. The revenues
collected from this tax are deposited into the State's General Revenue Fund.
The 1990 Legislature established a surcharge on alcoholic beverages. This
charge is levied on alcoholic beverages sold for consumption on premises. The
surcharge is ten cents per ounce of liquor, ten cents per four ounces of wine,
and four cents per twelve ounces of beer. Most of these proceeds are deposited
into the General Revenue Fund. In fiscal 1996-97, $106.6 million was collected.
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CORPORATE INCOME TAX. Pursuant to an amendment to the State Constitution,
the State Legislature adopted, effective January 1, 1972, the "Florida Income
Tax Code" imposing a tax upon the net income of corporations, organizations,
associations and other artificial entities for the privilege of conducting
business, deriving income or existing within the State. This tax does not apply
to natural persons who engage in a trade or business or profession under their
own or any fictitious name, whether individually as proprietorships or in
partnerships with others, estates of decedents or incompetents, or testamentary
trusts.
The tax is imposed in an amount equal to 5.5% of the taxpayer's net
corporate income for the taxable year, less a $5,000 exemption. Net income is
defined as that share of a taxpayer's adjusted federal income for such year
which is apportioned to the State of Florida. Apportionment is by weighted
factors of sales (50%), property (25%) and payroll (25%). All business income
is apportioned and non-business income is allocated to a single jurisdiction,
usually the state of commercial domicile.
All receipts of the corporate income tax are credited to the General
Revenue Fund. For the fiscal year ended June 30, 1997, receipts from this
source were $1,362.3 million, an increase of 17.2% from fiscal year 1995-96.
DOCUMENTARY STAMP TAX. Deeds and other documents relating to realty are
taxed at 70 cents per $100 of consideration, while corporate shares, bonds,
certificates of indebtedness, promissory notes, wage assignments and retail
charge accounts are taxed at 35 cents per $100 of face value, or actual value if
issued without face value. Documentary stamp tax collections totaled $844.2
million during fiscal year 1996-97, posting an 8.9% increase from the previous
fiscal year.
GROSS RECEIPTS TAX. A 2.5% tax is levied on the gross receipts of
electric, natural gas and telecommunications services. In fiscal year 1996-97,
gross receipts utilities tax collections totaled $575.7 million, an increase of
6.0% over the previous fiscal year. All gross receipts utility tax collections
are credited to the Public Education Capital Outlay and Debt Services Fund.
INTANGIBLE PERSONAL PROPERTY TAX. The intangible personal property tax is
levied on two distinct bases. First, stocks, bonds (including bonds secured by
liens on State realty), notes, governmental leaseholds, interests in limited
partnerships registered with the SEC, and other miscellaneous intangible
personal property not secured by liens on State realty are taxed annually at a
rate of 2 mills. Second, there is a non-recurring 2 mill tax on mortgages and
other obligations secured by liens on State realty. The Department of Revenue
uses part of the proceeds for administrative costs. Of the tax proceeds
remaining, 33.5% is distributed to the County Revenue Sharing Trust Fund and
66.5% is distributed to the General Revenue Fund. In fiscal year 1996-97, total
intangible personal property tax collections were $952.4 million, a 6.3%
increase from the previous fiscal year.
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SEVERANCE TAXES. The severance tax includes the taxation of oil, gas and
sulfur production and a tax on the severance of primarily phosphate rock and
other solid minerals. Total collections from severance taxes totaled $77.2
million during fiscal year 1995-96, up 26.1% from the previous year.
LOTTERY. The 1987 Legislature created the Department of the Lottery to
operate the State Lottery and set forth the allocation of the lottery revenues.
Of the revenues generated by the lottery, 50% is to be returned to the public as
prizes; at least 38% is to be deposited in the Educational Enhancement Trust
Fund (for public education); and no more than 12% can be spent on the
administrative cost of operating the lottery.
Fiscal year 1996-97 produced ticket sales of $2.09 billion of which
education received approximately $792.3 million.
MISCELLANEOUS. The State Constitution does not permit a state or local
personal income tax. An amendment to the State Constitution by the electors of
the State is required to impose a personal income tax in the State.
Property valuations for homestead property is subject to a growth cap.
Growth in the just (market) value of property qualifying for the homestead
exemption will be limited to 3% or the change in the Consumer Price Index,
whichever is less. If the property changes ownership or homestead status, it is
to be re-valued at full just value on the next tax roll. Although the impact of
the growth cap cannot be determined, it may have the effect of causing local
government units in the State to rely more on non-ad valorem revenues to meet
operating expenses and other requirements normally funded with ad valorem tax
revenues.
An amendment to the State Constitution was approved by statewide ballot in
the November 8, 1994 general election which is commonly referred to as the
"Limitation on State Revenues Amendment." This amendment provides that State
revenues collected for any fiscal year shall be limited to State revenues
allowed under the amendment for the prior fiscal year plus an adjustment for
growth. Growth is defined as an amount equal to the average annual rate of
growth in State personal income over the most recent twenty quarters times the
State revenues allowed under the amendment for the prior fiscal year. State
revenues collected for any fiscal year in excess of this limitation are required
to be transferred to the budget stabilization fund until the fund reaches the
maximum balance specified in Section 19(g) of Article III of the State
Constitution, and thereafter is required to be refunded to taxpayers as provided
by general law. The limitation on State revenues imposed by the amendment may be
increased by the Legislature, by a two-thirds vote of each house.
The term "State revenues," as used in the amendment, means taxes, fees,
licenses, and charges for services imposed by the Legislature on individuals,
businesses, or agencies outside State government. However, the term "State
revenues" does not include: (i) revenues that are necessary to meet the
requirements set forth in documents authorizing the issuance of bonds by
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the State; (ii) revenues that are used to provide matching funds for the federal
Medicaid program with the exception of the revenues used to support the Public
Medical Assistance Trust Fund or its successor program and with the exception of
State matching funds used to fund elective expansions made after July 1, 1994;
(iii) proceeds from the State lottery returned as prizes; (iv) receipts of the
Florida Hurricane Catastrophe Fund; (v) balances carried forward from prior
fiscal years; (vi) the proceeds from the sale of goods (e.g. land, buildings);
or (vii) revenue from taxes, licenses, fees and charges for services required to
be imposed by any amendment or revision to the State Constitution after July 1,
1994. The amendment took effect on January 1, 1995 and is applicable to State
fiscal year 1995-96.
It should be noted that many of the provisions of the amendment are
ambiguous, and likely will not be clarified until State courts have ruled on
their meanings. Further, it is unclear how the Legislature will implement the
language of the amendment and whether such implementing legislation itself will
be the subject of further court interpretation.
The Fund cannot predict the impact of the amendment on State finances. To
the extent local governments traditionally receive revenues from the State which
are subject to, and limited by, the amendment, the future distribution of such
State revenues may be adversely affected by the amendment.
Hurricanes continue to threaten Florida resulting in significant property
damages. The 1995 hurricane season was especially active. The Fund cannot
predict the impact on state finances resulting from repeated hurricane damage.
SPECIAL CONSIDERATIONS RELATING TO INCOME, HIGH YIELD, TAX-EXEMPT BOND, BOND &
- ------------------------------------------------------------------------------
STOCK, GROWTH & INCOME, GROWTH AND EMERGING GROWTH FUNDS
- --------------------------------------------------------
LOWER-RATED SECURITIES. The Income, Tax-Exempt Bond, Growth & Income,
Growth and Emerging Growth Funds may each invest up to 35% of their total
assets, respectively, in non-investment grade securities (rated Ba and lower by
Moody's and BB and lower by S&P or unrated securities determined to be of
comparable quality. The High Yield Fund may invest entirely in such securities
and will generally invest at least 65% of its assets in such securities. Such
securities carry a high degree of risk (including the possibility of default or
bankruptcy of the issuer of such securities), generally involve greater
volatility of price and risk of principal and income, and may be less liquid,
than securities in the higher rating categories and are considered speculative.
See the Appendix to this SAI for a more detailed description of the ratings
assigned by ratings organizations and their respective characteristics.
Historically, economic downturns have disrupted the high yield market and
impaired the ability of issuers to repay principal and interest. Also, an
increase in interest rates could adversely affect the value of such obligations
held by any of the Funds set forth above. Prices and yields of high yield
securities will fluctuate over time and may affect a Fund's net asset value. In
addition, investments in high yield zero coupon or pay-in-kind bonds, rather
than
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income-bearing high yield securities, may be more speculative and may be subject
to greater fluctuations in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent that
there is no established retail secondary market or because of a decline in the
value of such securities. A thin trading market may limit the ability of the
Trustees to accurately value high yield securities in the Fund's portfolio and
to dispose of those securities. Adverse publicity and investor perceptions may
decrease the value and liquidity of high yield securities. These securities may
also involve special registration responsibilities, liabilities and costs.
Credit quality in the high yield securities market can change suddenly and
unexpectedly, and even recently-issued credit ratings may not fully reflect the
actual risks posed by a particular high yield security. For these reasons, it
is the policy of the Advisor and the sub-advisor of each of the Funds not to
rely exclusively on ratings issued by established credit rating agencies, but to
supplement such ratings with its own independent and ongoing review of credit
quality. The achievement of a Fund's investment objectives by investment in
such securities may be more dependent on the Advisor or its sub-advisor's credit
analysis than is the case for higher quality bonds. Should the rating of a
portfolio security be downgraded the Advisor or the Fund's sub-advisor will
determine whether it is in the best interest of the Fund to retain or dispose of
the security.
Prices for below investment-grade securities may be affected by legislative
and regulatory developments. For example, new federal rules require savings and
loan institutions to gradually reduce their holdings of this type of security.
Also, Congress from time to time has considered legislation which would restrict
or eliminate the corporate tax deduction for interest payments on these
securities and would regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type.
INVESTMENT RESTRICTIONS
Certain of the Funds' and Portfolios' investment restrictions set forth
below are fundamental policies. A fundamental policy may not be changed without
the vote of a majority of the outstanding voting securities of the Fund or
Portfolio, as defined in the 1940 Act. Such a majority is defined in the 1940
Act as the lesser of (a) 67% or more of the shares present at a meeting of
shareholders of the Fund or Portfolio, if the holders of more than 50% of the
outstanding shares of the Fund or Portfolio are present or represented by proxy,
or (b) more than 50% of the outstanding shares of the Fund or Portfolio. A
fundamental policy affecting a particular Fund or Portfolio may not be changed
without the vote of a majority of the outstanding shares of the affected Fund or
Portfolio.
RESTRICTIONS APPLICATION TO THE CALIFORNIA MONEY, SHORT TERM HIGH QUALITY
BOND, TARGET MATURITY 2002, CALIFORNIA MUNICIPAL, CALIFORNIA INSURED
INTERMEDIATE MUNICIPAL, FLORIDA INSURED MUNICIPAL, GROWTH, INTERNATIONAL GROWTH
AND EMERGING GROWTH FUNDS:
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Restrictions 1 through 16 are fundamental policies of the Funds.
Investment restrictions 17 through 26 may be changed by the WM Trust II's Board
of Trustees at any time, without shareholder approval.
The above listed Funds are prohibited from:
1. Purchasing the securities of any issuer (other than U.S. Government
Securities) if as a result more than 5% of the value of the Fund's total
assets would be invested in the securities of the issuer (the "5%
--
Limitation"), except that up to 25% of the value of the Fund's total assets
----------
may be invested without regard to the 5% Limitation; provided that this
restriction shall not apply to the California Money, California Municipal,
California Insured Intermediate Municipal and Florida Insured Municipal
Funds.
2. Purchasing more than 10% of the securities of any class of any one issuer;
provided that this limitation shall not apply to investments in U.S.
Government Securities; provided further that this restriction shall not
apply to the California Money, California Municipal, California Insured
Intermediate Municipal, Florida Insured Municipal and Growth Funds; and
provided further that the Growth Fund may not own more than 10% of the
outstanding voting securities of a single issuer.
3. Purchasing securities on margin, except that a Fund may obtain any short-
term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with futures contracts or related
options will not be deemed to be a purchase of securities on margin.
4. Making short sales of securities or maintaining a short position; provided
that this restriction shall not apply to the Growth and International
Growth Funds.
5. Borrowing money, except that (a) the Funds may (i) enter into reverse
repurchase agreements or (ii) borrow from banks for temporary or emergency
(not leveraging) purposes including the meeting of redemption requests that
might otherwise require the untimely disposition of securities in an
aggregate amount not exceeding 30% of the value of a Fund's total assets
(including the amount borrowed) valued at market less liabilities (not
including the amount borrowed) at the time the borrowing is made, (b) the
Short Term High Quality Bond, California Municipal, California Insured
Intermediate Municipal, Florida Insured Municipal, Growth, International
Growth and Emerging Growth Fund may enter into futures contracts, and (c)
the Short Term High Quality Bond Fund may engage in dollar roll
transactions; provided that whenever borrowings pursuant to (a) above
(except that with respect to the Short Term High Quality Bond Fund,
whenever borrowings pursuant to (a)(ii) above) exceed 5% of the value of a
Fund's total assets, the Fund will not purchase any securities; and
provided further that the Short Term High Quality Bond Fund is prohibited
from borrowing money or entering into reverse
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repurchase agreements or dollar roll transactions in the aggregate in
excess of 33 1/3% of the Fund's total assets (after giving effect to any
such borrowing).
6. Pledging, hypothecating, mortgaging or otherwise encumbering more than 30%
of the value of the Fund's total assets. For purposes of this restriction,
(a) the deposit of assets in escrow in connection with the writing of
covered put or call options and the purchase of securities on a when-issued
or delayed-delivery basis and (b) collateral arrangements with respect to
(i) the purchase and sale of options on securities, options on indexes and
options on foreign currencies, and (ii) initial or variation margin for
futures contracts will not be deemed to be pledges of a Fund's assets.
7. Underwriting the securities of other issuers, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933, as amended,
by virtue of disposing of portfolio securities.
8. Purchasing or selling real estate or interests in real estate, except that
a Fund may purchase and sell securities that are secured, directly or
indirectly, by real estate and may purchase securities issued by companies
that invest or deal in real estate.
9. Investing in commodities, except that the Short Term High Quality Bond,
California Municipal, California Insured Intermediate Municipal, Florida
Insured Municipal, Growth, International Growth and Emerging Growth Funds
may invest in futures contracts and options on futures contracts. The
entry into forward foreign currency exchange contracts is not and shall not
be deemed to involve investing in commodities.
10. Investing in oil, gas or other mineral exploration or development programs.
11. Making loans, except through the purchase of qualified debt obligations,
loans of portfolio securities (except in the case of the California
Municipal and Florida Insured Municipal Funds) and the entry into
repurchase agreements.
12. Investing in securities of other investment companies registered or
required to be registered under the 1940 Act, except as they may be
acquired as part of a consolidation, reorganization, acquisition of assets
or an offer of exchange or as otherwise permitted by law, including the
1940 Act.
13. Purchasing any securities that would cause more than 25% of the value of
the Fund's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the
same industry provided that this limitation shall not apply to the purchase
of (a) U.S. Government Securities, (b) municipal securities issued by
governments or political subdivisions of governments or (c) with respect to
the California Money Fund, U.S. dollar-denominated bank instruments such as
certificates of deposit, time deposits, bankers' acceptances and letters of
credit that have been issued by U.S. banks.
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14. Purchasing, writing or selling puts, calls, straddles, spreads or
combinations thereof; provided that this restriction shall not apply to the
Short Term High Quality Bond, California Insured Intermediate Municipal and
Growth Funds; and provided further that (a) the International Growth and
Emerging Growth Funds may purchase, write and sell covered put and call
options on securities, (b) California Municipal, Florida Insured Municipal,
International Growth and Emerging Growth Funds may purchase, write and
sell futures contracts and options on futures contracts, (c) the California
Money, California Municipal and Florida Insured Municipal Funds may acquire
stand-by commitments, (d) the International Growth and Emerging Growth
Funds may purchase and write put and call options on stock indexes, and (e)
the International Growth Fund may purchase put and call options and write
covered call options on foreign currency contracts.
15. With respect to the Growth Fund, investing more than 35% of the fund's
assets in non-investment grade debt securities.
16. With respect to the Short Term High Quality Bond Fund, having a dollar-
weighted average portfolio maturity in excess of five years.
17. With respect to the Growth Fund, investing more than 25% of the Fund's
assets in securities of foreign issuers.
18. Purchasing securities that are not readily marketable if more than 10% of
the net of a Money Fund, or more than 15% of the net assets of a Non-Money
Fund, would be invested in such securities, including, but not limited to:
(1) repurchase agreements with maturities greater than seven calendar days;
(2) time deposits maturing in more than seven calendar days; (3) to the
extent a liquid secondary market does not exist for the instruments,
futures contracts and options thereon; (4) certain over-the-counter
options, as described in this SAI; (5) certain variable rate demand notes
having a demand period of more than seven days; and (6) certain Rule 144A
restricted securities that are deemed to be illiquid.
19. Investing more than 10% of its total assets in time deposits maturing in
more than seven calendar days; provided that this restriction shall not
apply to the Short Term High Quality Bond and Growth Funds.
20. Purchasing any security if as a result the Fund would then have more than
5% of its total assets invested in securities of companies (including
predecessors) that have been in continuous operation for less than three
years; provided that in the case of industrial revenue bonds purchased for
the Municipal Funds, this restriction shall apply to the entity supplying
the revenues from which the issue is to be paid.
-78-
<PAGE>
21. Making investments for the purpose of exercising control or management.
22. Purchasing or retaining securities of any company if, to the knowledge of
the Company, any of the Company's officers or directors or any officer or
director of the Advisor or a sub-advisor individually owns more than 1/2
of 1% of the outstanding securities of such company and together they own
beneficially more than 5% of the securities.
23. Investing in warrants, (other than warrants acquired by the Fund as part of
a unit or attached to securities at the time of purchase) if, as a result,
the investments (valued at the lower of cost or market) would exceed 5% of
the value of the Fund's net assets or if, as a result, more than 2% of the
Fund's net assets would be invested in warrants not listed on a recognized
United States or foreign stock exchange, to the extent permitted by
applicable state securities laws.
24. Purchasing or selling interests in real estate limited partnerships.
25. Investing in mineral leases.
26. Entering into Strategic Transactions otherwise prohibited by the Fund's
investment restrictions or in the aggregate in excess of 25% of the Fund's
net assets, for purposes other than bona fide hedging positions or that are
not "covered," subject to such greater percentage limitations as may be
imposed by the Advisor from time to time.
For purposes of the investment restrictions described above, the issuer of
a municipal security is deemed to be the entity (public or private) ultimately
responsible for the payment of the principal of and interest on the security.
For purposes of investment restriction Number 13 above, AMT-Subject Bonds and
Revenue Bonds, the payment of principal and interest on which is the ultimate
responsibility of companies within the same industry, are grouped together as an
"industry." The percentage limitations contained in the restrictions listed
above apply at the time of purchase of securities, and shall not be considered
violated unless an excess or deficiency occurs immediately after and as a result
of such purchase.
THE INVESTMENT RESTRICTIONS SET FORTH BELOW HAVE BEEN ADOPTED BY WM TRUST I
WITH RESPECT TO THE FUNDS WITHIN WM TRUST I AS FUNDAMENTAL POLICIES.
EACH OF THE MONEY MARKET AND TAX-EXEMPT MONEY MARKET FUNDS MAY NOT:
1. invest in common stocks or other equity securities;
2. borrow money for investment purposes, except that each Fund may borrow up
to 5% of its total assets in emergencies, and may borrow up to 33 1/3% of
such assets to meet redemption requests that would otherwise result in the
untimely liquidation of vital parts of its portfolio;
3. buy securities on margin, mortgage or pledge its securities, or engage in
"short" sales;
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<PAGE>
4. buy or sell options;
5. act as underwriter of securities issued by others;
6. buy securities restricted as to resale under federal securities laws (other
than securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933, as amended, and except in connection with
repurchase agreements);
7. buy or sell real estate, real estate investment trust securities,
commodities, or oil, gas and mineral interests;
8. lend money, except in connection with repurchase agreements and for
investments made in accordance with Fund policies discussed in the
Prospectus;
9. issue senior securities;
10. invest more than 5%* of its total assets in the securities of any single
issuer (except for the United States Government, its agencies or
instrumentalities);
11. invest more than 25%* of its total assets in securities of issuers in any
single industry;
12. invest more than 10%* of its net assets in illiquid securities;
13. invest in companies for the purpose of exercising control.
THE MONEY MARKET FUND MAY NOT:
1. invest in other investment companies (except as part of a merger).
THE TAX-EXEMPT MONEY MARKET FUND MAY NOT:
1. invest more than 20%* of its assets in obligations that pay interest
subject to federal alternative minimum tax.
* Percentage at the time the investment is made.
EACH OF THE INCOME, U.S. GOVERNMENT SECURITIES AND TAX-EXEMPT BOND FUNDS MAY
NOT:
1. invest more than 5%* of its total assets in any single issuer other than
U.S. Government Securities, except that up to 25% of a Fund's assets may be
invested without regard to this 5% limitation;
2. acquire more than 10%* of the voting securities of any one company;
3. invest in any company for the purpose of management or exercising control;
4. invest in real estate or commodities although the Income Fund may purchase
securities of issuers which deal in real estate, securities which are
secured by interests in real estate, and/or securities which represent
interests in real estate, and it may acquire and dispose of real estate or
interests in real estate acquired through the exercise of its rights as a
holder of debt obligations secured by real estate interests therein and the
Income and Tax-Exempt Bond Funds may purchase and sell interest rate
futures and options;
5. invest in oil, gas or other mineral leases;
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<PAGE>
6. invest in securities restricted under federal securities laws other than
securities eligible for resale pursuant to Rule 144A under the Securities
Act of 1933, as amended;
7. invest more than 20%* of its assets in forward commitments;
8. invest more than 25%* of its assets in any single industry;**
9. invest more than 15%* of its net assets in illiquid securities;
10. buy foreign securities not payable in U.S. dollars except that the Income
Fund may purchase securities denominated in currencies other than the U.S.
dollar and may also invest up to 10% of its assets in foreign currency
transactions, interest rate futures and real estate investment trusts;
11. buy securities on margin, mortgage or pledge its securities, or engage in
"short" sales;
12. invest more than 5%* of its net assets in warrants including not more than
2%* of such net assets in warrants that are not listed on either the New
York Stock Exchange or American Stock Exchange; however, warrants acquired
in units or attached to securities may be deemed to be without value for
the purpose of this restriction;
13. act as underwriter of securities issued by others;
14. borrow money for investment purposes, although it may borrow up to 5% of
its total net assets for emergency, non-investment purposes and except for
the Tax-Exempt Bond Fund may enter into transactions in which the Fund
sells securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar securities on a specified
future date;
15. lend money (except for the execution of repurchase agreements);
16. buy or sell put or call options;
17. issue senior securities.
In addition,
THE U.S. GOVERNMENT SECURITIES FUND MAY NOT:
1. invest less than 80%* of its assets in obligations guaranteed by the U.S.
Government, its agencies and instrumentalities or in repurchase agreements
or collateralized mortgage obligations secured by these obligations.
THE TAX-EXEMPT BOND FUND MAY NOT:
1. buy or hold securities which directors or officers of the Fund or the
Advisor hold more than .50% of the outstanding securities.
THE U.S. GOVERNMENT SECURITIES AND INCOME FUNDS MAY NOT:
1. invest in other investment companies (except as part of a merger).
THE U.S. GOVERNMENT SECURITIES AND TAX-EXEMPT BOND FUNDS MAY NOT:
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<PAGE>
1. buy common stocks or other equity securities except that Tax-Exempt Bond
Fund may invest in other investment companies.
* Percentage at the time the investment is made.
** It is a policy of the Income Fund to consider electric utilities, electric
and gas utilities, gas utilities, and telephone utilities to be separate
industries. The Fund also considers foreign issues to be a separate industry.
It is a policy of the Tax-Exempt Bond Fund to apply this restriction only to its
assets in non-municipal bond holdings, pollution control revenue bonds and
industrial development revenue bonds. These policies may result in increased
risk.
EACH OF THE BOND & STOCK, GROWTH & INCOME AND NORTHWEST FUNDS MAY NOT:
1. invest more than 5%* of its total assets in securities of any single issuer
other than U.S. Government Securities, except that up to 25% of a Fund's
assets may be invested without regard to this 5% limitation;
2. acquire more than 10%* of the voting securities of any one company;
3. invest in any company for the purpose of management or exercising control;
4. invest in real estate (except publicly traded real estate investment
trusts);
5. invest in commodities;
6. invest in oil, gas or other mineral leases;
7. invest in other investment companies (except as part of a merger);
8. invest more than 20%* of its total assets in forward commitments or
repurchase agreements;
9. invest more than 25%* of its total assets in any single industry;
10. act as underwriter of securities issued by others;
11. borrow money for investment purposes (it may borrow up to 5% of its total
net assets for emergency, non-investment purposes);
12. lend money (except for the execution of repurchase agreements);
13. issue senior securities;
14. buy or sell options, with the exception of covered call options which must
be limited to 20% of total assets;
15. buy or sell futures-related securities;
16. invest in securities restricted under federal securities laws (other than
securities eligible for resale under Rule 144A under the Securities Act of
1933, as amended);
17. invest more than 15%* of its net assets in illiquid securities;
18. buy securities on margin, mortgage or pledge its securities, or engage in
"short" sales;
19. invest more than 5%* of its net assets in warrants including not more than
2% of such net assets in warrants that are not listed on either New York
Stock Exchange or American Stock Exchange; however, warrants acquired in
units or attached to securities may be deemed to be without value for the
purpose of this restriction;
20. invest more than 25%* of its total assets in foreign securities and then
only in U.S. dollar-denominated foreign securities.
-82-
<PAGE>
* Percentage at the time the investment is made.
THE INVESTMENT RESTRICTIONS SET FORTH BELOW HAVE BEEN ADOPTED BY THE WM
STRATEGIC ASSET MANAGEMENT PORTFOLIOS WITH RESPECT TO THE PORTFOLIOS AS
FUNDAMENTAL POLICIES.
EACH OF THE STRATEGIC GROWTH, CONSERVATIVE GROWTH, BALANCED, FLEXIBLE
INCOME AND INCOME PORTFOLIOS WILL NOT
1. purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (except this shall not prevent
the Fund from purchasing or selling options or futures contracts or from
investing in securities or other instruments backed by physical
commodities);
2. purchase or sell real estate including limited partnership interests,
although it may purchase and sell securities of companies that deal in real
estate and may purchase and sell securities that are secured by interests
in real estate;
3. make loans to any person, except loans of portfolio securities to the
extent that no more than 33 1/3% of its total assets would be lent to other
parties, but this limitation does not apply to purchases of debt securities
or repurchase agreements;
4. (i) purchase more than 10% of any class of the outstanding voting
securities of any issuer (except other investment companies as defined in
the 1940 Act) and (ii) purchase securities of an issuer (except obligations
of the U.S. Government and its agencies and instrumentalities and
securities of other investment companies as defined in the 1940 Act) if as
a result, with respect to 75% of its total assets, more than 5% of the
Portfolio's total assets, at market value, would be invested in the
securities of such issuer.
5. issue senior securities (as defined in the 1940 Act) except as permitted by
rule, regulation or order of the Securities and Exchange Commission;
6. will not borrow, except from banks for temporary or emergency (not
leveraging) purposes including the meeting of redemption requests that
might otherwise require the untimely disposition of securities in an
aggregate amount not exceeding 30% of the value of the Portfolio's total
assets (including the amount borrowed) at the time the borrowing is made;
and whenever borrowings by a Portfolio, including reverse repurchase
agreements, exceed 5% of the value of a Portfolio's total assets, the
Portfolio will not purchase any securities;
7. underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the 1933
Act in the disposition of restricted securities; and
8. write or acquire options or interests in oil, gas or other mineral
exploration or development programs.
PORTFOLIO TURNOVER
-83-
<PAGE>
The Money Funds attempt to increase yields by trading to take advantage of
short-term market variations, which result in high portfolio turnover. Because
purchases and sales of money market instruments are usually effected as
principal transactions, this policy does not result in high brokerage
commissions to these Funds. The Short Term High Quality Bond, Target Maturity
2002, U.S. Government Securities, Income and High Yield Funds, the Tax-Exempt
Bond, California Municipal, California Insured Intermediate Municipal and
Florida Insured Municipal Funds and the Bond & Stock, Growth & Income, Growth,
International Growth, Northwest and Emerging Growth Funds do not intend to seek
profits through short-term trading. Nevertheless, the Funds will not consider
portfolio turnover rate a limiting factor in making investment decisions.
Under certain market conditions, the Short Term High Quality Bond,
California Insured Intermediate Municipal, Growth, International Growth or
Emerging Growth Funds may experience increased portfolio turnover as a result of
such Fund's options activities. It is anticipated that the portfolio turnover
rate for the Short Term High Quality Bond Fund will exceed 200%. For instance,
the exercise of a substantial number of options written by a Fund (due to
appreciation of the underlying security in the case of call options or
depreciation of the underlying security in the case of put options) could result
in a turnover rate in excess of 100%. A portfolio turnover rate of 100% would
occur if all of a Fund's securities that are included in the computation of
turnover were replaced once during a period of one year. The portfolio turnover
rate is calculated by dividing the lesser of purchases or sales of portfolio
securities for the year by the monthly average value of portfolio securities.
Securities with remaining maturities of one year or less at the date of
acquisition are excluded from the calculation. For the fiscal year ended
6/30/96 the Short Term High Quality Bond Fund experienced a portfolio turnover
rate of 225%, which decreased to 51% for the fiscal year ended 6/30/97. In
addition, the Northwest Fund experienced a significant increase in its portfolio
turnover rate for the fiscal year ended 10/31/97, when the Fund's portfolio
turnover rate increased to 42% versus the 9% it experienced for the fiscal year
ended 10/31/96.
Certain other practices that may be employed by the Funds could result in
high portfolio turnover. For example, portfolio securities may be sold in
anticipation of a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another of comparable quality purchased at
approximately the same time to take advantage of what the Advisor or a Fund's
sub-advisor believes to be a temporary disparity in the normal yield
relationship between the two securities. These yield disparities may occur for
reasons not directly related to the investment quality of particular issues or
the general movement of interest rates, such as changes in the overall demand
for, or supply of, various types of securities.
PORTFOLIO TRANSACTIONS
Most of the purchases and sales of securities for a Fund, whether
transacted on a securities exchange or over-the-counter, will be effected in the
primary trading market for the
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<PAGE>
securities. Decisions to buy and sell securities for a Fund are made by the
Advisor or the relevant sub-advisor, which also is responsible for placing these
transactions, subject to the overall review of the Trusts' Board of Trustees.
Although investment decisions for each Fund are made independently from those of
the other accounts managed by the Advisor or the sub-advisor, investments of the
type the Fund may make may also be made by those other accounts. When a Fund and
one or more other accounts managed by the Advisor or the sub-advisor are
prepared to invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner believed by
the Advisor or the sub-advisor to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by a Fund or the size
of the position obtained or disposed of by the Fund. In other cases, however, it
is believed that coordination and the ability to participate in volume
transactions will be to the benefit of the Fund.
Transactions on U.S. exchanges involve the payment of negotiated brokerage
commissions. With respect to exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. There is generally no
stated commission in the case of securities traded in the over-the-counter
markets, but the prices of those securities include undisclosed commissions or
concessions, and the prices at which securities are purchased from and sold to
dealers include a dealer's mark-up or mark-down. U.S. Government Securities may
be purchased directly from the U.S. Treasury or from the issuing agency or
instrumentality.
In selecting brokers or dealers to execute portfolio transactions on behalf
of a Fund, the Advisor or the Fund's sub-advisor seeks the best overall terms
available. In assessing the best overall terms available for any transaction,
the Advisor and each sub-advisor will consider the factors that the Advisor or
the sub-advisor deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer and the reasonableness of the commission, if
any, for the specific transaction and on a continuing basis. In addition, each
advisory agreement among the Trusts authorizes the Advisor, and a sub-advisory
agreement authorizes the sub-advisor, in selecting brokers or dealers to execute
a particular transaction and in evaluating the best overall terms available, to
consider the brokerage and research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934, as amended) provided to
the Trusts, the other Funds and/or other accounts over which the Advisor, the
sub-advisor or their affiliates exercise investment discretion. The fees under
the advisory agreements between the Trusts, the Advisor and the sub-advisors are
not reduced by reason of their receiving such brokerage and research services.
The Trusts' Board of Trustees will periodically review the commissions paid by
the Funds to determine if the commissions paid over representative periods of
time were reasonable in relation to the benefits received by the Trusts.
Consistent with applicable provisions of the 1940 Act, the rules and
exemptions adopted by the Commission thereunder, and relevant interpretive and
"no-action" positions taken by the Commission's staff, the Trusts' Board of
Trustees has adopted procedures pursuant to Rule 17e-1 under the 1940 Act to
ensure that all portfolio transactions with affiliates will be fair and
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<PAGE>
reasonable. Under the procedures adopted, portfolio transactions for a Fund may
be executed through any affiliated broker (other than affiliated persons of the
Trust solely because the broker is an affiliated person of a sub-advisor of
another Fund) if, subject to other conditions in the Rule 17e-1 procedures, in
the judgment of the Advisor or the Fund's sub-advisor, the use of an affiliated
broker is likely to result in price and execution at least as favorable as those
of other qualified broker-dealers, and if, in the transaction an affiliated
broker charges the Fund a rate consistent with those charged for comparable
transactions in comparable accounts of the broker's most favored unaffiliated
clients. Over-the-counter purchases and sales are transacted directly with
principal market makers except in those cases in which better prices and
executions may be obtained elsewhere. For the 1995, 1996 and 1997 fiscal years,
WM Trust II paid brokerage commissions of approximately $6,089, $23,059 and
$39,147, respectively, to a broker affiliated with J.P. Morgan, which was during
such years sub-advisor to a former series of WM Trust II which was merged into
the Growth & Income Fund on March 20, 1998. For the 1995, 1996 and 1997 fiscal
years, commissions paid to such broker represented approximately .25%, .76% and
1.61%, respectively, of the total amount of brokerage commissions paid in such
period and which were paid on transactions that represented .25%, .76% and
1.61%, respectively, of the aggregate dollar amount of transactions that
incurred commissions paid by WM Trust II during such period. For the 1995, 1996
and 1997 fiscal years, WM Trust II paid brokerage commissions of approximately
$21,155, $60,995 and $49,517, respectively, to Donaldson, Lufkin & Jenrette, an
affiliate of Janus, which is the sub-advisor to the Growth Fund and which during
such years was also sub-advisor to the Emerging Growth Fund. For the 1995, 1996
and 1997 fiscal years, commissions paid to Donaldson, Lufkin & Jenrette
represented approximately .88%, 2.02% and 2.03%, respectively, of the total
amount of brokerage commissions paid in such period and which were paid on
transactions that represented .88%, 2.02% and 2.03%, respectively, of the
aggregate dollar amount of transactions that incurred commissions paid by WM
Trust II during such period.
For the years set forth below, the Funds within WM Trust II paid the following
brokerage commissions:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
TOTAL BROKERAGE COMMISSIONS PAID
- -----------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal
Year ended Year ended Year ended
Fund 6/30/97 6/30/96 6/30/95
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
California Money Fund $ 0 $ 0 $ 0
- -----------------------------------------------------------------------------------------
Short Term High Quality Bond Fund $6,064 $20,378 $ 7,320
- -----------------------------------------------------------------------------------------
Target Maturity 2002 Fund $ 0 $ 0 $ 0
- -----------------------------------------------------------------------------------------
California Municipal Fund $ 0 $20,982 $ 0
- -----------------------------------------------------------------------------------------
California Insured Intermediate Municipal Fund $7,102 $ 0 $ 0
- -----------------------------------------------------------------------------------------
Florida Insured Municipal Fund $7,935 $ 0 $ 0
- -----------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Fund $616,898 $723,100 $635,228
- -----------------------------------------------------------------------------------------
International Growth Fund $696,191 $860,863 $583,298
- -----------------------------------------------------------------------------------------
Emerging Growth Fund $480,975 $849,149 $757,574
- -----------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------
TOTAL BROKERAGE COMMISSIONS PAID TO AFFILIATED PERSONS
- -----------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal
Fund Year ended Year ended Year ended
6/30/97 6/30/96 6/30/95
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
California Money Fund $0 $0 $0
- -----------------------------------------------------------------------------------------
Short Term High Quality Bond Fund $0 $0 $0
- -----------------------------------------------------------------------------------------
Target Maturity 2002 Fund $0 $0 $0
- -----------------------------------------------------------------------------------------
California Municipal Fund $0 $0 $0
- -----------------------------------------------------------------------------------------
California Insured Intermediate Municipal Fund $0 $0 $0
- -----------------------------------------------------------------------------------------
Florida Insured Municipal Fund $0 $0 $0
- -----------------------------------------------------------------------------------------
Growth Fund $0 $0 $0
- -----------------------------------------------------------------------------------------
International Growth Fund $0 $0 $0
- -----------------------------------------------------------------------------------------
Emerging Growth Fund $0 $0 $0
- -----------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------
TOTAL BROKERAGE COMMISSIONS PAID TO BROKERS THAT PROVIDED RESEARCH
- ---------------------------------------------------------------------------------
Fund Fiscal Year Fiscal Year
ended 6/30/97 ended 6/30/96
- ---------------------------------------------------------------------------------
<S> <C> <C>
California Money Fund $ 0 $ 0
- ---------------------------------------------------------------------------------
Short Term High Quality Bond Fund $ 0 $ 0
- ---------------------------------------------------------------------------------
Target Maturity 2002 Fund $ 0 $ 0
- ---------------------------------------------------------------------------------
California Municipal Fund $ 0 $ 0
- ---------------------------------------------------------------------------------
California Insured Intermediate Municipal Fund $ 0 $ 0
- ---------------------------------------------------------------------------------
Florida Insured Municipal Fund $ 0 $ 0
- ---------------------------------------------------------------------------------
Growth Fund $ 1,310 $ 936,110
- ---------------------------------------------------------------------------------
International Growth Fund* $65,416 $118,936,350
- ---------------------------------------------------------------------------------
Emerging Growth Fund $ 961 $ 676,876
- ---------------------------------------------------------------------------------
</TABLE>
*Represents figures for period from October 18, 1996 to June 30, 1997.
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<PAGE>
WM Trust II is required to identify any securities of its "regular brokers
or dealers" (as such term is defined in the 1940 Act) which WM Trust II has
acquired during its most recent fiscal year. As of June 30, 1997, none of the
Funds held any securities of any "regular broker or dealer" of the Trust.
For the fiscal years set forth below, the Funds within WM Trust I paid the
following brokerage commissions:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
TOTAL BROKERAGE COMMISSIONS PAID
- -----------------------------------------------------------------------------
Fund Fiscal year Fiscal year Fiscal year
---- ended 1997 ended 1996 ended 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund* $ 0 $ 0 $ 0
- -----------------------------------------------------------------------------
Tax-Exempt Money Market Fund* 0 0 0
- -----------------------------------------------------------------------------
U.S. Government Securities Fund* 0 0 0
- -----------------------------------------------------------------------------
Income Fund* 0 0 0
- -----------------------------------------------------------------------------
Tax-Exempt Bond Fund* 0 0 0
- -----------------------------------------------------------------------------
Bond & Stock Fund** 307,372 199,663 137,742
- -----------------------------------------------------------------------------
Growth & Income Fund** 502,688 292,486 163,180
- -----------------------------------------------------------------------------
Northwest Fund** 98,599 123,164 37,280
- -----------------------------------------------------------------------------
* Fiscal year ending 12/31
** Fiscal year ending 10/31
<CAPTION>
- -----------------------------------------------------------------------------
TOTAL BROKERAGE COMMISSIONS PAID TO AFFILIATED PERSONS
- -----------------------------------------------------------------------------
Fund Fiscal year Fiscal year Fiscal year
---- ended 1997 ended 1996 ended 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund* $0 $0 $0
- -----------------------------------------------------------------------------
Tax-Exempt Money Market Fund* 0 0 0
- -----------------------------------------------------------------------------
U.S. Government Securities Fund* 0 0 0
- -----------------------------------------------------------------------------
Income Fund* 0 0 0
- -----------------------------------------------------------------------------
Tax-Exempt Bond Fund* 0 0 0
- -----------------------------------------------------------------------------
Bond & Stock Fund* 0 0 0
- -----------------------------------------------------------------------------
Growth & Income Fund** 0 0 0
- -----------------------------------------------------------------------------
Northwest Fund** 0 0 0
- -----------------------------------------------------------------------------
</TABLE>
-88-
<PAGE>
* Fiscal year ending 12/31
** Fiscal year ending 10/31
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
TOTAL BROKERAGE COMMISSIONS PAID TO BROKERS THAT PROVIDED RESEARCH
- ---------------------------------------------------------------------
Fund 1997 1996 1995
----
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund* $ 0 $ 0 $ 0
- ---------------------------------------------------------------------
Tax-Exempt Money Market Fund* 0 0 0
- ---------------------------------------------------------------------
U.S. Government Securities Fund* 0 0 0
- ---------------------------------------------------------------------
Income Fund* 0 0 0
- ---------------------------------------------------------------------
Tax-Exempt Bond Fund* 0 0 0
- ---------------------------------------------------------------------
Bond & Stock Fund** 307,372 199,663 137,742
- ---------------------------------------------------------------------
Growth & Income Fund** 502,688 292,486 163,180
- ---------------------------------------------------------------------
Northwest Fund** 98,599 123,164 37,280
- ---------------------------------------------------------------------
</TABLE>
* Fiscal year ending 12/31
** Fiscal year ending 10/31
NET ASSET VALUE
The Trusts will calculate the net asset value of the Funds' Class A, Class
B, Class I and Class S Shares as of the close of regular trading of the New York
Stock Exchange (currently 4:00 p.m., New York time), Monday through Friday,
exclusive of national business holidays. The Trusts will be closed on the
following national holidays: New Year's Day, Martin Luther King Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas.
A security that is primarily traded on a U.S. exchange (including
securities traded through the NASDAQ National Market System) is valued at the
last sale price on that exchange or, if there were no sales during the day, at
the current quoted bid price. Over-the-counter securities that are not traded
through the NASDAQ National Market System are valued on the basis of the bid
price at the close of business on each day. An option is generally valued at
the last sale price or, in the absence of a last sale price, the last offer
price. Investments in U.S. Government Securities (other than short-term
securities) are valued at the average of the quoted bid and asked prices in the
over-the-counter market. Short term debt securities that mature in 60 days or
less are valued at amortized cost when the Board of Trustees determines that
this constitutes fair value; assets of the Money Funds are also valued at
amortized cost. The value of a foreign security is determined in its national
currency as of the close of trading on the foreign exchange on which it is
traded or as of 4:00 p.m. New York Time, if that is earlier, and that value is
then converted into its U.S. dollar equivalent at the foreign exchange rate in
effect at noon, New York time, on the day the value of the foreign security is
determined. The value of a futures contract
-89-
<PAGE>
equals the unrealized gain or loss on the contract, which is determined by
marking the contract to the current settlement price for a like contract
acquired on the day on which the futures contract is being valued. A settlement
price may not be used if the market makes a limit move with respect to the
security or index underlying the futures contract. In such event, the futures
contract will be valued at a fair market value to be determined by or under the
direction of the Board of Trustees.
Debt securities of U.S. issuers (other than U.S. Government Securities and
short-term investments), including Municipal Securities, are valued by one or
more independent pricing services ("Pricing Service") retained by the Trusts.
When, in the judgment of the Pricing Service, quoted bid prices for investments
of the Municipal Funds are readily available and are representative of the bid
side of the market, these investments are valued at the mean between the quoted
bid prices and asked prices. Investments of the Municipal Funds that are not
regularly quoted are carried at fair market value as determined by the Board of
Trustees, which may rely on the assistance of the Pricing Service. The
procedures of the Pricing Service are reviewed periodically by the officers of
the Trusts under the general supervision and responsibility of the Board of
Trustees.
VALUATION OF THE MONEY FUNDS. The valuation of the portfolio securities of
the Money Funds is based upon their amortized costs, which does not take into
account unrealized capital gains or losses. Amortized cost valuation involves
initially valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price a Fund
would receive if it sold the instrument.
The use by the Money Funds of the amortized cost method of valuing their
respective portfolio securities is permitted by a rule adopted by the SEC.
Under this rule, the Money Funds must maintain dollar-weighted average portfolio
maturities of 90 days or less, purchase only instruments having remaining
maturities of thirteen months or less and invest only in securities determined
by the Board of Trustees of the Trusts to present minimal credit risks.
Pursuant to the rule, the Board of Trustees also has established procedures
designed to stabilize, to the extent reasonably possible, the Funds' price per
share as computed for the purpose of sales and redemptions at $1.00. Such
procedures include review of the Funds' portfolio holdings by the Board of
Trustees, at such intervals as it may deem appropriate, to determine whether the
Funds' net asset values calculated by using available market quotations or
market equivalents deviates from $1.00 per share based on amortized cost.
The rule also provides that the extent of any deviation between the Funds'
net asset values based upon available market quotations or market equivalents
and the $1.00 per share net asset values based on amortized cost must be
examined by the Board of Trustees. In the event the Board of Trustees
determines that a deviation exists which may result in material dilution or
-90-
<PAGE>
other unfair results to investors or existing shareholders, pursuant to the rule
the Board of Trustees must cause the Trusts to take such corrective action as
the Board deems necessary and appropriate including: selling portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity; withholding dividends or paying distributions from
capital or capital gains; redeeming shares in kind; or establishing a net asset
value per share by using available market quotations.
HOW TO BUY AND REDEEM SHARES
Class A, Class B, Class I and Class S shares of the Funds may be purchased
and redeemed in the manner described in the Prospectus and in this SAl
Information. Class I shares are currently offered and sold only to the
Portfolios.
COMPUTATION OF PUBLIC OFFERING PRICES
The Funds offer their shares to the public on a continuous basis. The
public offering price per Class A share of the Funds is equal to the net asset
value next computed after receipt of a purchase order, plus the applicable
front-end sales charge, if any as set forth in the Prospectus. The public
offering price per Class B, Class I or Class S share of the Funds is equal to
the net asset value next computed after receipt of a purchase order.
An illustration of the computation of the public offering price per Class A
Share of the Short Term High Quality Bond, Target Maturity 2002, California
Municipal, California Insured Intermediate Municipal, Florida Insured Municipal,
Growth, International Growth and Emerging Growth Funds is provided in the table
below. The computation is based on the value of each Fund's net assets, the
number of Class A shares outstanding on June 30, 1997 and the application of the
maximum sales charge for the Funds, as set forth in the table below.
<TABLE>
<CAPTION>
California
Target Insured Florida
Short Term Maturity Intermediate California Insured International Emerging
High Quality 2002 Municipal Municipal Municipal Growth Growth
Class A Shares Bond Fund/3/ Fund/4/ Fund/1/ Fund/1/ Fund/1/ Growth Fund/1/ Fund/2/ Fund/3/
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Assets $13,685,006 $2,815,868 $45,156,682 $318,251,461 $22,761,049 $111,186,791 $57,776,390 $165,719,142
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding Shares 5,898,076 263,366 4,205,143 29,146,582 2,291,279 7,462,279 4,876,565 9,066,672
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value
Per Share $2.32 $10.69 $10.74 $10.92 $9.93 $14.90 $11.85 $18.28
- ----------------------------------------------------------------------------------------------------------------------------------
Sales Charge, as a
percentage of the
offering price 3.50% 2.00% 4.50% 4.50% 4.50% 5.50% 5.50% 5.50%
- ----------------------------------------------------------------------------------------------------------------------------------
Offering to Public $2.40 $10.91 $11.25 $11.43 $10.40 $15.77 $12.54 $19.34
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------
-91-
<PAGE>
1. The maximum sales charge for the California Municipal, California
Insured Intermediate Municipal and Florida Insured Municipal Funds
is 4.50%.
2. The maximum sales charge for the Growth, International Growth and
Emerging Growth Funds is 5.50%.
3. The maximum sales charge for the Short Term High Quality Bond
Funds is 3.5%.
4. The maximum sales charge for the Target Maturity 2002 Fund is
2.0%.
In addition to the purchases on which the sales charge is waived as listed
in the Prospectus, no sales charge will be assessed on a purchase by any other
investment company in connection with the combination of such company with the
Trust by merger, acquisition of assets or otherwise.
An illustration of the computation of the Public Offering Price per Class A
and Class B shares of the Money Market, Tax-Exempt Money Market, Income, U.S.
Government Securities, Bond & Stock, Growth & Income and Northwest Funds is set
forth below in the form of a Specimen Price Make-Up Sheet below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SPECIMEN PRICE MAKE-UP SHEET
- -----------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt U.S.
Money Market Money Market Government Income Tax-Exempt Bond & Stock Growth & Northwest
Fund** Fund** Securities Fund** Bond Fund* Income Fund* Fund*
Fund** Fund**
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets $264,491,582 $33,233,969 $141,639,195 $94,019,168 $212,991,303 $279,311,840 $203,202,475 $193,179,356
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities $ 3,143,472 $ 1,087,699 517,201 239,890 4,119,520 1,654,274 2,020,579 1,819,938
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets $261,348,110 $32,146,270 $141,121,994 $93,779,278 $208,871,783 $277,657,566 $201,181,896 $191,359,418
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets $260,877,498 $32,134,470 $138,159,478 $86,657,040 $203,606,240 $255,414,120 $178,330,523 $176,706,441
- -----------------------------------------------------------------------------------------------------------------------------------
Shares
Outstanding $260,877,498 $32,134,470 13,204,217 9,467,260 26,002,410 17,361,806 10,334,058 8,972,376
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset
Value Per Share $1.00 $1.00 $10.46 $9.15 $7.83 $14.71 $17.26 $19.69
- -----------------------------------------------------------------------------------------------------------------------------------
Maximum Offering
Price $1.00 $1.00 $10.90 $9.53 $15.40 $18.07 $20.62
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $ 8.16
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets $470,612 $11,800 $2,962,516 $7,122,238 $5,265,543 $22,243,446 $22,851,373 $14,652,997
- ----------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding $470,612 $11,800 283,151 776,973 672,375 1,514,671 1,331,165 753,528
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value
and Offering
Price Per Share $1.00 $1.00 $10.46 $9.17 $7.83 $14.69 $17.17 $19.45
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* As of October 31, 1997
** As of December 31, 1997
REDEMPTIONS
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<PAGE>
The procedures for redemption of Class A, Class B and Class S shares of
each Fund and Portfolio are summarized in the Prospectus under "How to Sell
Shares." The right of redemption of Class A, Class B and Class S shares of a
Fund Portfolio may be suspended or the date of payment postponed (1) for any
periods during which the New York Stock Exchange is closed (other than for
customary weekend and holiday closings), (2) when trading in the markets the
Fund normally utilizes is restricted, or an emergency, as defined by the rules
and regulations of the SEC, exists making disposal of a Fund's or Portfolio's
investments or determination of its net asset value not reasonably practicable
or (3) for such other periods as the SEC by order may permit for protection of
shareholders.
CERTAIN WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGES. Contingent
deferred sales charges (each, a "CDSC") imposed upon redemptions of Class A,
----
Class B and Class S shares will be waived in certain instances.
APPLICATION OF CLASS A SHARES CDSC. The Class A CDSC of 1.0% or 0.5% may
be imposed on certain redemptions within one or two years of purchase,
respectively, with respect to Class A shares (i) purchased at NAV without a
sales charge at time of purchase due to purchases of $1 million or more, or (ii)
acquired, including Class A Shares of a Money Fund acquired, through an exchange
for Class A Shares of a Non-Money Fund purchased at NAV without a sales charge
at time of purchase due to purchases of $1 million or more. The CDSCs for Class
A Shares are calculated on the lower of the shares' cost or current net asset
value, and in determining whether the CDSC is payable, the Funds will first
redeem shares not subject to any CDSC.
With respect to certain investors who purchase Class A shares through an
authorized dealer and who receive a waiver of the entire initial sales charge on
Class A Shares because the Class A Shares where purchased through a plan
qualified under Section 401(k) of the Code ("401(k) Plan") or through a plan
-----------
qualified under Section 403(b) of the Code ("403(b) Plan") or who hold Class A
-----------
Shares of a Money Fund that were acquired through an exchange for Non-Money Fund
Class A Shares that were purchased at NAV through one of such plans, a CDSC of
1% may be imposed on the amount that was invested through the plan in such Class
A Shares and that is redeemed (i) if, within the first two years after the
plan's initial investment in the Funds, the named fiduciary of the plan
withdraws the plan from investing in the Funds in a manner that causes all
shares held by the plan's participants to be redeemed; or (ii) by a plan
participant in a 403(b) Plan within two years of the plan participant's purchase
of such Class A Shares. This CDSC will be waived on redemptions in connection
with certain involuntary distributions, including distributions arising out of
the death or disability of a shareholder (including one who owns the shares as
joint tenant). See "How to Buy and Redeem Shares" in the SAI.
WAIVERS OF CLASS A SHARES CDSC. The Class A CDSC is waived for redemptions
of Class A Shares (i) that are part of exchanges for Class A Shares of other
Funds; (ii) for distributions to pay benefits to participants from a retirement
plan qualified under Section 401(a)
-93-
<PAGE>
or 401(k) of the Code, including distributions due to the death or disability of
the participant (including one who owns the shares as a joint tenant); (iii) for
distributions from a 403(b) Plan or an IRA due to death, disability, or
attainment of age 70 1/2, including certain involuntary distributions; (iv) for
tax-free returns of excess contributions to an IRA; (v) for distributions by
other employee benefit plans to pay benefits; (vi) in connection with certain
involuntary distributions; (vii) for systematic withdrawals in amounts of 1% or
less per month; and (viii) by a 401(k) Plan participant so long as the shares
were purchased through the 401(k) Plan and the 401(k) Plan continues in effect
with investments in Class A Shares of the Fund. See "How to Buy and Redeem
Shares" in the SAI.
For purposes of the waivers described in such section of the Prospectus, a
person will be deemed "disabled" only if the person is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or be of long-
continued and indefinite duration.
DEFERRED SALES CHARGE ALTERNATIVE: CLASS B SHARES. If you choose the
deferred sales charge alternative, you will purchase Class B Shares at their NAV
per share without the imposition of a sales charge at the time of purchase.
Class B Shares of the Short Term High Quality Bond Fund that are redeemed within
four years of purchase, and Class B Shares of the remaining Funds and Portfolios
that are redeemed within five years of purchase, however, will be subject to a
CDSC as described below. CDSC payments and distribution fees on Class B Shares
may be used to fund commissions payable to Authorized Dealers.
No charge will be imposed with respect to shares having a value equal to any net
increase in the value of shares purchased during the preceding four or five
years and shares acquired by reinvestment of net investment income and capital
gain distributions. The amount of the charge is determined as a percentage of
the lesser of (1) the NAV of the Class B Shares at the time of purchase or (2)
the NAV of the Class B Shares at the time of redemption. The percentage used to
calculate the CDSC will depend on the number of years since you invested the
dollar amount being redeemed, according to the following table:
<TABLE>
<CAPTION>
Class B shares of all Funds (except Class B shares of all Funds except
for the Short Term High Quality for the Short Term High Quality
Bond Fund), Portfolios Bond Fund) and Class S shares of all Class B shares of the Short
and Class S shares of all Funds. Funds purchased before March 23, 1998 Term High Quality Bond Fund
- -------------------------------------- -------------------------------------- -------------------------------
Contingent
Deferred Sales Charge --
Year of Contingent Year of Contingent Year of Class B shares of
Redemption Deferred Redemption Deferred Redemption Short Term High
After Purchase Sales Charge After Purchase Sales Charge After Purchase Quality Bond Fund
- --------------- ------------ -------------- ------------ -------------- -----------------
<S> <C> <C> <C> <C> <C>
First........................ 5.00% First......... 5.00% First............... 4.00%
Second....................... 4.00% Second........ 4.00% Second.............. 3.00%
Third........................ 3.00% Third......... 3.00% Third............... 2.00%
Fourth....................... 2.00% Fourth........ 3.00% Fourth.............. 1.00%
Fifth........................ 1.00% Fifth......... 2.00% Fifth and following. 0%
Sixth and following.......... 0.00% Sixth......... 1.00%
Seventh and following 0.00%
</TABLE>
-94-
<PAGE>
Class B shares of the U.S. Government Securities, Income and Tax-Exempt
Bond Funds purchased prior to January 15, 1996, and Class B shares of the Growth
& Income, Bond & Stock and Northwest Funds purchased prior to March 15, 1996,
are subject to a contingent deferred sales charge of 3% if redeemed the first or
second year after purchase, 2% in the third or fourth year, 1% in the fifth
year, and 0% in year six.
All purchases are considered made on the last day of the month of purchase.
To determine the CDSC payable on a redemption of Class B Shares, a Fund will
first redeem Class B Shares not subject to a CDSC. Thereafter, to determine the
applicability and rate of any CDSC, it will be assumed that shares representing
the reinvestment of dividends and capital gain distributions are redeemed first
and shares held for the longest period of time are redeemed next. Using this
method, your sales charge, if any, will be at the lowest possible CDSC rate.
The Trusts will adopt procedures to convert Class B Shares, without payment
of any sales charges, into Class A Shares, which have lower distribution fees,
after the passage of a number of years after purchase. Such conversion may occur
in approximately eight years.
WAIVERS OF CLASS B CDSCS. No CDSC charges will be assessed on redemptions
of Class B Shares in the case of systematic withdrawals in amounts of 1% or less
per month; death of the shareholder; and redemptions in connection with certain
involuntary distributions, including distributions arising out of the death or
disability of a shareholder or attainment of age 70 1/2, from IRAs. The
foregoing waivers may be changed at any time.
The CDSC applicable to the Class B Shares and the Class S Shares may be
waived as described in the sections of the Prospectus that describe waivers of
the sales charges for the various classes of the Funds. The CDSC applicable to
the Class B Shares is waived for withdrawals under the Systematic Withdrawal
Plan under certain circumstances as described in "Systematic Withdrawal Plan"
below.
DISTRIBUTIONS IN KIND. If the Board of Trustees determines that it would
be detrimental to the best interests of the remaining shareholders of a Fund to
make a redemption payment wholly in cash, the Trusts may pay, in accordance with
SEC rules, any portion of a redemption in excess of the lesser of $250,000 or 1%
of the Fund's net assets by distribution in kind of portfolio securities in lieu
of cash. Securities issued in a distribution in kind will be readily
marketable, although shareholders receiving distributions in kind may incur
brokerage commissions when subsequently redeeming shares of those securities.
SYSTEMATIC WITHDRAWAL PLAN. As described in the Prospectus, a Systematic
Withdrawal Plan may be established by a shareholder who owns either Class A or
Class B Shares of a Fund with a value exceeding $5,000 and who wishes to receive
specific amounts of cash periodically.
-95-
<PAGE>
Monthly, quarterly, semiannual or annual withdrawals in a minimum amount of $100
may be made under the Systematic Withdrawal Plan by redeeming as many shares of
the Fund or Portfolio as may be necessary to cover the stipulated withdrawal
payment. The CDSC on Class B Shares is waived for withdrawals under a Systematic
Withdrawal Plan that meets certain conditions as described in "Buying Class B or
Class S shares -Contingent deferred sales charge" in the Prospectus. To the
extent that withdrawals exceed dividends, distributions and appreciation of a
shareholder's investment in a Fund or Portfolio, there will be a reduction in
the value of the shareholder's investment in the relevant class of the Fund or
Portfolio and continued withdrawal payments may reduce the shareholder's
investment and ultimately exhaust it. Withdrawal payments should not be
considered as income from investment in a Fund or Portfolio. For additional
information regarding the Systematic Withdrawal Plan, write to the WM Group of
Funds at Suite 300, 601 West Main Avenue, Spokane, Washington 99201-0613 or by
calling the Trust at 800-222-5852.
CHECK REDEMPTION PRIVILEGE. Checkwriting is available for the Class A
Shares of the Money Funds only. Checks to redeem shares of any of the Money
Funds are drawn on the account of the Fund at Boston Safe and shareholders will
be subject to the same rules and regulations that Boston Safe applies to
checking accounts and, will have the same rights and duties with respect to stop
payment orders, "stale" checks, and unauthorized endorsements as bank checking
account customers do under Massachusetts Uniform Commercial Code. All notices
with regard to those rights and duties must be given to Boston Safe.
HOW TO EXCHANGE SHARES
You may exchange shares of any of the Funds or Portfolios for shares of the
same class of any other of the Funds or Portfolios. Exchanges of shares are
sales and may result in a gain or loss for income tax purposes.
Exchanges are made at the relative NAVs of the shares being exchanged. No
additional sales charge will be incurred when exchanging shares from a Fund
which imposes an initial or contingent deferred sales charge. Any contingent
deferred sales charge on the subsequent sale of shares acquired by exchange will
be based on the contingent deferred sales charge schedule of the Fund originally
purchased. Shares exchanged from Money Fund will be subject to the acquired
Fund's sales charge unless the shares given in exchange were previously
exchanged from a Fund that imposes an initial or contingent deferred sales
charge. Shares of the Funds may also be exchanged for shares of the Prime
Income Fund. Exchanges for shares is subject to the availability of shares of
the Prime Income Fund. Also, although shares of the WM Prime Income Fund may be
exchanged for shares of the Funds, such exchanges are permitted approximately
once each calendar quarter so long as the Prime Income Fund makes a repurchase
offer for its shares in such quarter and so long as the Prime Income Fund's
repurchase offer is sufficiently large to include Prime Income Fund shares
tendered for exchange. For more information about the Prime Income Fund, please
consult your investment representatives or call the Distributor.
-96-
<PAGE>
All exchanges are subject to the minimum investment requirements of the
Fund being acquired and to its availability for sale in your state of residence.
You may arrange for automatic monthly exchanges. The Funds or Portfolios reserve
the right to refuse any order for the purchase of shares, including those by
exchange. In particular, a pattern of exchanges that coincides with a "market
timing" strategy may be disruptive to a Fund or Portfolios and, consequently,
may be disallowed.
DETERMINATION OF PERFORMANCE
From time to time, the Trusts may quote the performance of a Fund's or
Portfolio's Class A, Class B and Class S Shares in terms of yield, actual
distributions, total return or capital appreciation in reports or other
communications to shareholders or in advertising material. The yield for the
Class A, Class B and Class S Shares of the Money Funds is computed by: (1)
determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account in each Fund having a balance of one share at
the beginning of a seven calendar day period for which yield is to be quoted,
(2) subtracting a hypothetical change reflecting deductions from shareholder
accounts, (3) dividing the net change by the value of the account at the
beginning of the period to obtain the base period return, and (4) annualizing
the results (i.e., multiplying the base period return by 365/7). The net change
----
in the value of the account reflects the value of additional shares purchased
with dividends declared on the original share and any such additional shares,
but does not include realized gains and losses or unrealized appreciation or
depreciation. In addition, the Money Funds may calculate a compounded effective
annualized yield by adding 1 to the base period return (calculated as described
above), raising the sum to a power equal to 365/7 and subtracting 1.
The current yield for the Money Funds and the Target Maturity 2002 Fund may
be obtained by calling 800-222-5852. For the seven-day period ended December 31,
1997, the yield for the outstanding shares of the California Money Fund that are
treated as Class A Shares was 3.03% and the effective yield of such shares of
that Fund for the same period was 3.07%. The California Money Fund may also
calculate its tax equivalent yield as described below.
The Municipal Funds and Fixed-Income Funds may quote a 30-day yield figure
(the "SEC Yield") which is calculated according to a formula prescribed by the
---------
SEC. The formula can be expressed as follows:
YIELD = 2[(a-b + 1)/6/ - 1]
---
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
-97-
<PAGE>
reimbursement).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the maximum offering price per share on the last
day of the period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by one of the Municipal and
Fixed-Income Funds at a discount or premium, the formula generally calls for
amortization of the discount or premium; the amortization schedule will be
adjusted monthly to reflect changes in the market values of the debt
obligations.
Based on the foregoing calculation, the SEC Yields relating to the
outstanding shares treated as Class A Shares for the 30-day period ended
12/31/97 are as follows:
<TABLE>
<CAPTION>
Fund Yield
---- -----
<S> <C>
Short Term High Quality Bond Fund................ 5.86%
Target Maturity 2002 Fund........................ 5.40
U.S. Government Securities Fund.................. 5.37
Income Fund...................................... 5.93
Tax-Exempt Bond Fund............................. 3.94
California Municipal Fund........................ 4.29
California Insured Intermediate Municipal Fund... 3.49
Florida Insured Municipal Fund................... 4.07
Income Portfolio................................. 5.51
Flexible Income Portfolio........................ 3.95
Balanced Portfolio............................... 1.41
</TABLE>
In addition, the Fund or Porfolio may quote a 30-day yield based on actual
distributions during a 30-day period that is computed by dividing the net
investment income per share earned by the Fund or Portfolio during the period by
the maximum Public Offering Price per share on the last day of the 30-day
period. This income is "annualized" by assuming that the amount of income is
generated each month over a one-year period and is compounded semiannually. The
annualized income is then shown as a percentage of the maximum Public Offering
Price. In addition, the Municipal Funds, the Fixed-Income Funds and the Income,
Flexible Income and Balanced Portfolios may advertise a similar 30-day yield
computed in the same manner except that the NAV per share is used in place of
the Public Offering Price per share. These 30-day average yields for the period
ended December 31, 1997 for the outstanding shares of the Tax-Exempt Bond,
California Municipal, California Insured Intermediate Municipal and Florida
-98-
<PAGE>
Insured Municipal Funds and the Income, Flexible Income and Balanced Portfolios
were 4.50%, 5.13%, 4.44%, 4.66%, 5.74%, 4.13%, and 1.51%, respectively.
The tax equivalent yield for the Tax-Exempt Money Market, California Money,
Tax-Exempt Bond, California Municipal, California Insured Intermediate Municipal
and Florida Insured Municipal Funds is computed by dividing that portion of the
Fund's yield which is tax-exempt by one minus a stated federal and/or state
income tax rate and adding the product to that portion, if any, of the Fund's
yield that is not tax-exempt. The tax-equivalent yields for the outstanding
shares of the Tax-Exempt Money Market and California Money Fund, that are
treated as Class A Shares, for the 7-day period ended December 31, 1997 were
5.62% and 5.93%, respectively. The tax equivalent SEC 30-day yields for the
period ended December 31, 1997 for the outstanding shares of the Tax-Exempt
Bond, California Municipal, California Insured Intermediate Municipal, and
Florida Insured Municipal Funds were 6.52%, 7.83%, 6.37% and 6.74%,
respectively. The tax equivalent yield based on the 30-day average yield for the
period ended December 31, 1997 for the outstanding shares of the Tax-Exempt
Bond, California Municipal, California Insured Intermediate Municipal and
Florida Insured Municipal Funds were 7.45%, 10.04%, 8.69% and 9.12%,
respectively. Tax-equivalent yields assume the payment of federal income taxes
at a rate of 39.6% and, if applicable, California state income taxes at a rate
of 9.3%.
Capital appreciation for Class A, Class B and Class S shares of the
Municipal, Fixed-Income and the Equity Funds and the Portfolios (Class A and
Class B shares) shows principal changes for the period shown, and total return
combines principal changes and dividend and interest income reinvested for the
periods shown. Principal changes are based on the difference between the
beginning and closing net asset values for the period. Actual distributions
include short-term capital gains derived from option writing or other sources.
The period selected for performance data will depend upon the purpose of
reporting the performance.
The total return of the Funds' and the Portfolios' (Class A and Class B
shares) Class A, Class B and Class S shares may be calculated on an "average
annual total return" basis, and may also be calculated on an "aggregate total
return" basis, for various periods. Average annual total return reflects the
average annual percentage change in the value of an investment in a Fund over
the particular measuring period. Aggregate total return reflects the cumulative
percentage change in value over the measuring period. Average annual total
return figures provided for Class A, Class B and Class S Shares of the Fixed-
Income and Equity Funds and the Portfolios (Class A and Class B shares) will be
computed according to a formula prescribed by the SEC. The formula can be
expressed as follows:
-99-
<PAGE>
P(1+T)/n/ = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return/aggregate total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
years (or other) periods or the life of the Fund
The formula for calculating aggregate total return can be expressed as
follows:
Aggregate Total Return = [ (ERV) - 1 ]
---
P
The calculation of average annual total return and aggregate total return
assumes reinvestment of all income dividends and capital gain distributions on
the reinvestment dates during the period and includes all recurring fees charged
to all shareholder accounts. In addition, with respect to Class A Shares, the
maximum sales charge is deducted from the initial $1,000 payment (variable "P"
in the formula).
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period and reflects deduction of all nonrecurring charges
at the end of the measuring period covered by the computation. A Fund's net
investment income changes in response to fluctuations in interest rates and the
expenses of the Fund.
The average annual rates of return (unless otherwise noted) for the Funds
for the one-year, five-year and ten-year periods and for the period since
inception , in each case ended December 31, 1997 (except in the case of the Bond
& Stock, Growth & Income and Northwest Funds, for which returns are given for
periods ended October 31, 1997) are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Aggregate
Fund and inception date Total Return for
Since Ten Year Period
Date or from Date of
of Inception, if
One Year Five Year Ten Year Inception shorter
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHORT TERM HIGH QUALITY BOND FUND
CLASS A SHARES 11/1/93
Adjusted for Maximum Sales Charge 5.77% N/A N/A 3.43%
Not Adjusted for Sales Charge 2.07% N/A N/A 4.32%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 1.00% N/A N/A 4.34%
Not Adjusted for Sales Charge 4.98% N/A N/A 4.59%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge (2.24%) N/A N/A 3.84%
Not Adjusted for Sales Charge 2.76% N/A N/A 4.59%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-100-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Aggregate
Fund and inception date Total Return for
Since Ten Year Period
Date or from Date of
of Inception, if
One Year Five Year Ten Year Inception shorter
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TARGET MATURITY 2002 FUND
CLASS A SHARES 3/20/95
Adjusted for Maximum Sales Charge 6.10% N/A N/A 8.61%
Not Adjusted for Sales Charge 8.27% N/A N/A 7.83%
- ---------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND
CLASS A SHARES
Adjusted for Maximum Sales Charge 5.48% 5.84% 7.96% 115.09%
Not Adjusted for Sales Charge 9.92% 6.70% 8.40% 119.89%
CLASS B SHARES 3/30/94
Adjusted for Maximum Sales Charge 6.03% N/A N/A 6.74% 27.76%
Not Adjusted for Sales Charge 9.03% N/A N/A 7.96% 29.76%
- ------------------------------------------------------------------------------------------------------------------
INCOME FUND
CLASS A SHARES
Adjusted for Maximum Sales Charge 6.10% 7.09% 8.16% 119.11%
Not Adjusted for Sales Charge 10.51% 7.95% 8.61% 124.07%
CLASS B SHARES 3/30/94
Adjusted for Maximum Sales Charge 6.51% N/A N/A 7.74% 32.32%
Not Adjusted for Sales Charge 9.51% N/A N/A 7.96% 39.32%
- ---------------------------------------------------------------------------------------------------------------------
TAX-EXEMPT BOND FUND
CLASS A SHARES
Adjusted for Maximum Sales Charge 4.20% 5.85% 7.50% N/A 106.10%
Not Adjusted for Sales Charge 8.59% 6.73% 7.93% N/A 110.52%
CLASS B SHARES 3/30/94
Adjusted for Maximum Sales Charge 4.71% N/A N/A 6.21% 25.39%
Not Adjusted for Sales Charge 7.71% N/A N/A 6.45% 27.39%
- ---------------------------------------------------------------------------------------------------------------------
CALIFORNIA MUNICIPAL FUND
CLASS A SHARES 7/25/89
Adjusted for Maximum Sales Charge 15.33% 6.17% N/A 7.04%
Not Adjusted for Sales Charge 10.30% 7.15% N/A 7.63%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 4.48% N/A N/A 6.95%
Not Adjusted for Sales Charge 9.48% N/A N/A 7.67%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge 4.48% N/A N/A 6.95%
Not Adjusted for Sales Charge 9.48% N/A N/A 7.67%
- ---------------------------------------------------------------------------------------------------------------------
CALIFORNIA INSURED INTERMEDIATE MUNICIPAL
FUND
CLASS A SHARES 4/4/94
Adjusted for Maximum Sales Charge 2.32% N/A N/A 6.37%
Not Adjusted for Sales Charge 7.14% N/A N/A 7.69%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 1.34% N/A N/A 6.01%
Not Adjusted for Sales Charge 6.34% N/A N/A 6.75%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge 1.34% N/A N/A 6.01%
Not Adjusted for Sales Charge 6.34% N/A N/A 6.75%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-101-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Aggregate
Fund and inception date Total Return for
Since Ten Year Period
Date or from Date of
of Inception, if
One Year Five Year Ten Year Inception shorter
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FLORIDA INSURED MUNICIPAL FUND
CLASS A SHARES 6/7/93
Adjusted for Maximum Sales Charge 5.06% N/A N/A 5.00%
Not Adjusted for Sales Charge 10.01% N/A N/A 6.06%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 4.19% N/A N/A 6.76%
Not Adjusted for Sales Charge 9.19% N/A N/A 7.48%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge 4.19% N/A N/A 6.76%
Not Adjusted for Sales Charge 9.19% N/A N/A 7.48%
- ---------------------------------------------------------------------------------------------------------------------
BOND & STOCK FUND
CLASS A SHARES
Adjusted for Maximum Sales Charge 15.37% 13.06% 11.99% 207.81%
Not Adjusted for Sales Charge 20.81% 14.10% 12.51% 216.60%
CLASS B SHARES 3/30/94
Adjusted for Maximum Sales Charge 16.86% N/A N/A 15.82% 69.70%
Not Adjusted for Sales Charge 19.86% N/A N/A 16.01% 71.70%
- ---------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUND
CLASS A SHARES
Adjusted for Maximum Sales Charge 25.34% 17.69% 13.85% 267.27%
Not Adjusted for Sales Charge 31.24% 18.77% 14.37% 273.58%
CLASS B SHARES 3/30/94
Adjusted for Maximum Sales Charge 27.20% N/A N/A 21.65% 102.76%
Not Adjusted for Sales Charge 30.20% N/A N/A 21.81% 104.76%
- ---------------------------------------------------------------------------------------------------------------------
GROWTH FUND
CLASS A SHARES 4/5/93
Adjusted for Maximum Sales Charge 3.47% N/A N/A 14.99%
Not Adjusted for Sales Charge 9.78% N/A N/A 16.44%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 3.93% N/A N/A 18.99%
Not Adjusted for Sales Charge 8.90% N/A N/A 19.55%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge 4.00% N/A N/A 19.01%
Not Adjusted for Sales Charge 8.97% N/A N/A 19.56%
- ---------------------------------------------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
CLASS A SHARES 7/18/90
Adjusted for Maximum Sales Charge (8.10)% 6.34% N/A 1.70%
Not Adjusted for Sales Charge (2.49)% 7.61% N/A 2.51%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge (7.57%) N/A N/A 0.85%
Not Adjusted for Sales Charge (3.19%) N/A N/A 1.55%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge (7.65%) N/A N/A 0.82%
Not Adjusted for Sales Charge (3.26%) N/A N/A 1.53%
- ---------------------------------------------------------------------------------------------------------------------
NORTHWEST FUND
CLASS A SHARES
Adjusted for Maximum Sales Charge 37.95% 15.60% 17.53% 402.71%
Not Adjusted for Sales Charge 44.47% 16.68% 18.07% 421.69%
CLASS B SHARES 3/30/94
Adjusted for Maximum Sales Charge 40.17% N/A N/A 20.29% 94.66%
Not Adjusted for Sales Charge 43.17% N/A N/A 20.47% 96.66%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
-102-
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Fund and inception date
Since
Date
of
One Year Five Year Ten Year Inception
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EMERGING GROWTH FUND
CLASS A SHARES 7/18/90
Adjusted for Maximum Sales Charge 6.15% 13.17% N/A 12.87%
Not Adjusted for Sales Charge 12.63% 14.52% N/A 13.77%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 6.78% N/A N/A 16.43%
Not Adjusted for Sales Charge 11.78% N/A N/A 17.01%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge 6.78% N/A N/A 16.43%
Not Adjusted for Sales Charge 11.78% N/A N/A 17.01%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each Portfolio is modeled after an investment strategy used by the Sierra
Asset Management ("SAM") program, an investment management service offered by
Sierra Investments Services Corp., the Portfolios' former investment adviser,
that allocates investments across a combination of the underlying Funds. Set
forth below is certain performance data for the Portfolios and, prior to the
Portfolios' inception, those strategies. Performance information for the
strategies is deemed relevant because each strategy was managed using virtually
the same investment objectives, policies and restrictions as those used by the
Portfolios. Nonetheless, the performance data is not necessarily indicative of
the future performance of the Portfolios.
Because of certain differences in the expenses applicable to the SAM
program and the Portfolios, the following performance information has been
adjusted by applying the current total expense ratios for the Class A Shares of
the Portfolios. The average annual total return of the following investment
strategies for the one-year period, the five-year period and the period from
inception of the strategy, in each case ended December 31, 1997, was as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Since
Date
of
Portfolio/strategy and inception date One Year Five Year Ten Year Inception
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STRATEGIC GROWTH PORTFOLIO
CLASS A SHARES 5/31/95
Adjusted for Maximum Sales Charge 5.71% N/A N/A 14.26%
Not Adjusted for Sales Charge 12.16% N/A N/A 16.91%
CLASS B SHARES 5/31/95
Adjusted for Maximum Sales Charge 6.31% N/A N/A 15.20%
Not Adjusted for Sales Charge 11.31% N/A N/A 16.12%
- -----------------------------------------------------------------------------------------------------------------------------
CONSERVATIVE GROWTH PORTFOLIO
CLASS A SHARES 9/30/90
Adjusted for Maximum Sales Charge 2.68% 9.90% N/A 11.30%
Not Adjusted for Sales Charge 8.65% 11.15% N/A 12.18%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 2.87% N/A N/A 11.09%
Not Adjusted for Sales Charge 7.87% N/A N/A 11.74%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
-103-
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCED PORTFOLIO
CLASS A SHARES 9/30/90
Adjusted for Maximum Sales Charge 4.43% 8.84% N/A 9.43%
Not Adjusted for Sales Charge 10.22% 10.02% N/A 10.25%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 4.40% N/A N/A 10.33%
Not Adjusted for Sales Charge 9.40% N/A N/A 11.00%
- ------------------------------------------------------------------------------------------
FLEXIBLE INCOME PORTFOLIO
CLASS A SHARES 3/31/93
Adjusted for Maximum Sales Charge 5.29% N/A N/A 6.59%
Not Adjusted for Sales Charge 10.25% N/A N/A 7.63%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 4.43% N/A N/A 9.35%
Not Adjusted for Sales Charge 9.43% N/A N/A 10.03%
- ------------------------------------------------------------------------------------------
INCOME PORTFOLIO
CLASS A SHARES 9/30/90
Adjusted for Maximum Sales Charge 3.41% 4.73% N/A 6.93%
Not Adjusted for Sales Charge 8.29% 5.70% N/A 7.62%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 2.48% N/A N/A 5.88%
Not Adjusted for Sales Charge 7.48% N/A N/A 6.61%
- ------------------------------------------------------------------------------------------
</TABLE>
The performance of a Fund's Class A, Class B and Class S Shares and the
Portfolio's Class A and Class B shares will vary from time to time depending
upon market conditions, the composition of the Fund's or Portfolio's portfolio
and the Fund's or Portfolio's operating expenses. Consequently, any given
performance quotation should not be considered representative of the Fund's or
Portfolio's performance for any specified period in the future. In addition,
because performance will fluctuate, it may not provide a basis for comparing an
investment in a Fund or Portfolio with certain bank deposits or other
investments that pay a fixed yield or return for a stated period of time.
Investors should recognize that, because the Funds other than the Equity
Funds and each of the Portfolios will have a high component of fixed-income
securities, in periods of declining interest rates the yields of the Funds will
tend to be somewhat higher than prevailing market rates, and in periods of
rising interest rates yields will tend to be somewhat lower. In addition, when
interest rates are falling, the inflow of net new money to the Funds and
Portfolios from the continuous sale of shares will likely be invested in
portfolio instruments producing lower yields than the balance of the Fund's or
Portfolio's securities, thereby reducing the current yields of the Funds. In
periods of rising interest rates, the opposite can be expected to occur.
Comparative performance information may be used from time to time in advertising
the Trusts' Class A, Class B and Class S Shares, including data from Lipper
Analytical Services, Inc., the S&P 500 Composite Stock Price Index, the Dow
Jones Industrial Average and other industry publications. The International
Growth Fund may compare its performance to other investments or relevant indexes
consisting of Morgan Stanley Capital International EAFE Index, the Standard &
Poor's 500 Index, the Lipper International Fund Index and The Financial Times
World Stock Index.
-104-
<PAGE>
TAXES
The following discussion of federal income tax consequences is based on the
Code and the regulations issued thereunder as in effect on the date of this
Statement of Additional Information and all references to the Funds in this
discussion includes the Portfolios. New legislation, as well as administrative
changes or court decisions, may significantly alter the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
Each Fund is treated as a separate entity for federal income tax purposes
and is not combined with the other Funds within a Trust. Each of the Funds
intends to continue qualifying as a "regulated investment company" ("RIC") as
---
defined under Subchapter M of the Code. A Fund that is a RIC and distributes to
its shareholders at least 90% of its taxable net investment income (including,
for this purpose, its net realized short-term capital gains) and 90% of its tax-
exempt interest income (reduced by certain expenses), will not be liable for
federal income taxes to the extent its taxable net investment income and its net
realized long-term and short-term capital gains, if any, are distributed to its
shareholders.
In order to qualify as a RIC under the Code, in addition to satisfying the
distribution requirement described above, each Fund must (a) derive at least 90%
of its gross income each taxable year from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock,
securities, or foreign currencies, and certain other related income, including,
generally, certain gains from options futures, and forward contracts; and (b)
diversify its holdings so that, at the end of each fiscal quarter of the Fund's
taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash and cash items, U.S. Government Securities, securities of
other RICs, and other securities, with such other securities limited, in respect
to any one issuer, to an amount that does not represent more than 10% of the
outstanding voting securities of such issuer or exceed 5% of the value of the
Fund's total assets and (ii) not more than 25% of the value of its assets is
invested in the securities (other than U.S. Government Securities and securities
of other RICs) of any one issuer or of two or more issuers which the Fund
controls and which are engaged in the same, similar, or related trades or
businesses.
If a Fund fails to qualify as a RIC for any year, all of its income will be
subject to tax at corporate rates, and its distributions (including capital
gains distributions) will in general be taxable as ordinary income dividends to
its shareholders, subject to the dividends received deduction for corporate
shareholders.
Notwithstanding the distribution requirement described above, which only
requires a Fund to distribute at least 90% of its annual investment company
taxable income and tax-exempt interest income and does not require any minimum
distribution of net capital gain (the excess of net long-term capital gain over
net short-term capital loss), a Fund will be subject to a nondeductible 4%
federal excise tax to the extent it fails to distribute by the end of any
calendar
-105-
<PAGE>
year at least 98% of its ordinary income for that year and at least 98% of its
capital gain net income (the excess of short- and long-term capital gains over
short- and long-term capital losses) for the one-year period ending on October
31 of that year, plus certain other amounts.
The Tax-Exempt Money Market, California Money, Tax-Exempt Bond, California
Municipal, California Insured Intermediate Municipal and Florida Insured
Municipal Funds will be qualified to pay exempt-interest dividends to their
shareholders only if, at the close of each quarter of a Fund's taxable year, at
least 50% of the total value of a Fund's assets consist of obligations the
interest on which is exempt from federal income tax. Part or all of the
interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of these funds will not be deductible for federal income tax
purposes or, in the case of the California and Florida Funds, for California and
Florida income tax purposes. Any loss on the sale or exchange of shares in
these Funds held for six months or less will be disallowed to the extent of any
exempt-interest dividend received by the shareholders with respect to such
shares. In addition, the Code may require a shareholder who receives exempt-
interest dividends to treat as taxable income a portion of certain otherwise
non-taxable social security and railroad retirement benefit payments. Municipal
funds may not be an appropriate investment for persons (including corporations
and other business entities) who are "substantial users" (or who are related to
substantial users) of facilities financed by "private activity bonds" or
"industrial development bonds." For these purposes, the term "substantial user"
is defined generally to include a "non-exempt person" who regularly uses in a
trade or business a part of a facility financed from the proceeds of such bonds.
Moreover, as noted in the Prospectus, some or all of these Funds' dividends may
be a specific preference item, or a component of an adjustment item, for
purposes of the federal individual and corporate alternative minimum taxes. In
addition, the receipt of dividends and distributions may affect a foreign
corporate shareholder's federal "branch profits" tax liability and a Subchapter
S corporate shareholder's federal "excess net passive income" tax liability.
Similar rules apply for California State personal income tax purposes.
Shareholders should consult their own tax advisers as to whether they are (1)
"substantial users" with respect to a facility or "related" to such users within
the meaning of the Code or (2) subject to federal alternative minimum tax, the
federal "branch profits" tax, or the federal "excess net passive income" tax.
Issuers of bonds purchased by the Municipal Funds (or the beneficiary of such
bonds) may have made certain representations or covenants in connection with the
issuance of such bonds to satisfy certain requirements of the Code that must be
satisfied subsequent to the issuance of such bonds. Shareholders should be
aware that exempt-interest dividends may become subject to federal income
taxation retroactively to the date of issuance of the bonds to which such
dividends are attributable if such representations are determined to have been
inaccurate or if the issuers (or the beneficiary) of the bonds fail to comply
with certain covenants made at that time.
Distributions made by the Fixed-Income Funds generally will not be eligible
for the dividends received deduction otherwise available to corporate taxpayers.
In addition, the dividends received deduction shall be disallowed with respect
to a dividend from any other Fund
-106-
<PAGE>
unless a corporate shareholder held its shares on the ex-dividend date and for
at least 45 more days during the 90-day period surrounding the ex-dividend date.
As described above and in the Prospectus, certain of the Funds may invest
in certain types of futures contracts and options. The Funds anticipate that
these investment activities will not prevent the Funds from qualifying as RICs.
As a general rule, these investment activities may increase or decrease the
amount of long-term and short-term capital gains or losses realized by a Fund
and, accordingly, will affect the amount of capital gains distributed to a
Fund's shareholders.
A Fund's transactions in foreign currencies, foreign currency-denominated
debt securities and certain foreign currency options, futures contracts and
forward contracts (and similar instruments) may give rise to ordinary income or
loss to the extent such income or loss results from fluctuations in the value of
the foreign currency concerned. In addition, if a Fund engages in hedging
transactions, including hedging transactions in options, futures contracts and
straddles (or other similar transactions), it will be subject to special tax
rules (including mark-to-market, straddle, wash sale, short sale and
constructive sale rules), the effect of which may be to accelerate income to a
Fund, defer losses to a Fund, cause adjustments in the holding periods of a
Fund's securities, or convert short-term capital losses into long-term capital
losses. These rules could therefore affect the amount, timing and character of
distributions to shareholders. Each Fund will endeavor to make any available
elections pertaining to such transactions in a manner believed to be in the best
interests of the Fund.
As a general rule, a Fund's gain or loss on a sale or exchange of an
investment will be a "20% Rate Gain" if the Fund has held the investment for
more than eighteen months, "28% Rate Gain" if it has held the investment for
more than twelve months but not more than eighteen months, and short-term
capital gain if it has held the investment for twelve months or less.
Furthermore, as a general rule, a shareholder's gain on a sale or redemption of
Fund shares will be "20% Rate Gain" if the shareholder has held the Fund shares
for more than eighteen months, "28% Rate Gain" if the shareholder has held the
investment for more than twelve months but not more than eighteen months, and
short-term capital gain if the shareholder has held the Fund shares for twelve
months or less.
While only the Equity Funds expect to realize a significant amount of net
long-term capital gains (i.e. 20% Rate Gain and 28% Rate Gain), any such
realized gains will be distributed as described in the Prospectus. Such
distributions ("capital gain dividends"), if any, will be taxable to
----------------------
shareholders as 20% Rate Gain or 28% Rate Gain, respectively, regardless of how
long a shareholder has held Fund shares, and will be designated as such in a
written notice mailed to the shareholder after the close of the Fund's taxable
year. Any loss on the sale or exchange of shares in a Fund that have been held
for six months or less will be treated as a long-term capital loss to the extent
of any capital gain dividend received by the shareholder with respect to such
shares. In addition, all or a portion of any loss realized upon a taxable
disposition of Fund shares will be disallowed if other shares of the same Fund
are purchased within 30 days
-107-
<PAGE>
before or after the disposition. In such a case, the basis of the newly
purchased shares will be adjusted to reflect the disallowed loss.
ADDITIONAL CONSIDERATIONS FOR SHAREHOLDERS OF THE INTERNATIONAL GROWTH FUND
If at the end of the International Growth Fund's fiscal year more than 50%
of the value of its total assets represents securities of foreign corporations,
the Fund intends to make an election permitted by the Code to treat any foreign
taxes paid by it on securities it has held for at least the minimum period
specified in the Code as having been paid directly by the Fund's shareholders in
connection with the Fund's dividends received by them. In this case,
shareholders generally will be required to include in U.S. taxable income their
pro rata share of such taxes, and those shareholders who are U.S. citizens, U.S.
corporations and, in some cases, U.S. residents will be entitled to deduct their
share of such taxes. Alternatively, such shareholders who hold Fund shares
(without protection from risk of loss) on the ex-dividend date and for at least
15 other days during the 30-day period surrounding the ex-dividend date will be
entitled to claim a foreign tax credit for their share of these taxes.
In addition, investment by a Fund in an entity that qualified as a "passive
foreign investment company" under the Code could subject the Fund to a U.S.
federal income tax or other charge on certain "excess distributions" with
respect to the investment, and on the proceeds from disposition of the
investment. This tax or charge may be avoided, however, by making an election
to mark such investments to market annually or to treat the passive foreign
investment company as a "qualified electing fund."
A "passive foreign investment company" is any foreign corporation: (i) 75
percent or more of the income of which for the taxable year is passive income,
or (ii) the average percentage of the assets of which (generally by value, but
by adjusted tax basis in certain cases) that produce or are held for the
production of passive income is at least 50 percent. Generally, passive income
for this purpose means dividends, interest (including income equivalent to
interest), royalties, rents, annuities, the excess of gains over losses from
certain property transactions and commodities transactions, and foreign currency
gains. Passive income for this purpose does not include rents and royalties
received by the foreign corporation from active business and certain income
received from related persons.
FLORIDA TAXES
Taxation of Fund Shares. Florida does not impose an income tax on
-----------------------
individuals. Thus, dividends and distributions paid by the Florida Insured
Municipal Fund to individuals who are residents of Florida are not taxable by
Florida. Florida imposes an income tax on corporations and similar entities at
a rate of 5.5%. Distributions of investment income and capital gains by the
Florida Insured Municipal Fund will be subject to Florida corporate income tax.
Accordingly, investors in the Florida Insured Municipal Fund, including, in
particular, investors that may be subject to the Florida corporate income tax,
should consult their tax advisors with respect to the
-108-
<PAGE>
application of the Florida corporate income tax to the receipt of Fund dividends
and distributions and to the investor's Florida tax situation in general.
Florida imposes a tax on intangible personal property owned by Florida
residents. Shares in the Florida Insured Municipal Fund constitute intangible
personal property for purposes of the Florida intangible personal property tax.
Thus, unless an exemption applies, shares in the Florida Insured Municipal Fund
will be subject to the Florida intangible personal property tax. Florida
provides an exemption for shares in an investment fund if the fund's portfolio
of assets consists solely of assets exempt from the Florida intangible personal
property tax. Assets exempt from Florida intangible personal property tax
include obligations issued by the State of Florida and its political
subdivisions, municipalities, and public authorities; obligations of the United
States Government or its agencies; and cash.
The Florida Insured Municipal Fund has received a ruling from the Florida
Department of Revenue that if, on the last business day of any calendar year,
the Insured Municipal Fund's assets consist solely of assets exempt from the
Florida intangible personal property tax, shares of the Florida Insured
Municipal Fund will be exempt from the Florida intangible personal property tax
in the following year. Based on the ruling, if the Insured Municipal Fund's
assets consist, on the last business day of the calendar year, solely of assets
exempt from the Florida intangible personal property tax, shares of the Florida
Insured Municipal Fund owned by Florida residents will be exempt from the
Florida intangible personal property tax. If shares of the Fund are subject to
the Florida intangible personal property tax because less than 100% of the
Fund's assets on the last business day of the calendar year consists of assets
exempt from the Florida intangible personal property tax, only the portion of
the net asset value of a share of the Florida Insured Municipal Fund that is
attributable to obligations of the United States Government will be exempt from
taxation.
Taxation of the Florida Insured Municipal Fund. If the Fund does not have
----------------------------------------------
a taxable nexus to Florida, such as through the location of the Florida Fund's
activities or those of its advisors within the state, under present Florida law,
the Fund is not subject to Florida corporate income taxation. Additionally, if
the Fund's assets do not have a taxable situs in Florida as of January 1 of each
calendar year, the Fund will not be subject to the Florida intangible personal
property tax. If the Fund has a taxable nexus to Florida or the Fund's assets
have a taxable situs in Florida, the Fund will be subject to Florida taxation.
The Florida Insured Municipal Fund intends to operate so as not to be subject to
Florida taxation.
SHAREHOLDER STATEMENTS
Each shareholder will receive after the close of the calendar year an
annual statement and such other written notices as are appropriate as to the
federal income and California State personal income tax status of the
shareholder's dividends and distributions received from the Fund for the prior
calendar year. These statements will also inform shareholders as to the amount
of exempt-interest dividends that is a specific preference item for purposes of
the federal
-109-
<PAGE>
individual and corporate alternative minimum taxes and as to the exempt portion,
if any, of the shareholder's shares of the Florida Insured Municipal Fund for
purposes of the Florida State intangible personal property tax for the current
tax year. Shareholders should consult their tax advisers as to any other state
and local taxes that may apply to these dividends and distributions. The dollar
amount of dividends excluded or exempt from federal income taxation or
California State personal income taxation and the dollar amount of dividends
subject to federal income taxation or California State personal income taxation,
if any, will vary for each shareholder depending upon the size and duration of
each shareholder's investment in a Fund. To the extent that the Tax-Exempt Money
Market, California Money, Tax-Exempt Bond, California Municipal, California
Insured Intermediate Municipal or Florida Insured Municipal Funds earns taxable
net investment income, it intends to designate as taxable dividends the same
percentage of each day's dividend (or of each day's taxable net investment
income) as its taxable net investment income bears to its total net investment
income earned on that day. Therefore, the percentage of each day's dividend
designated as taxable, if any, may vary from day to day.
If a shareholder fails to furnish a correct taxpayer identification number,
fails to report fully dividend or interest income, or fails to certify that the
taxpayer identification number is correct and that the shareholder is not
subject to "backup withholding," then the shareholder may be subject to a 31%
"backup withholding" tax with respect to (1) taxable dividends and distributions
and (2) the proceeds of any redemptions of Fund shares. An individual's
taxpayer identification number is his or her social security number. The 31%
"backup withholding" tax is not an additional tax and may be credited against a
taxpayer's regular federal income tax liability.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN TAX CONSIDERATIONS GENERALLY
AFFECTING A FUND AND ITS SHAREHOLDERS, AND IS NOT INTENDED AS A SUBSTITUTE FOR
CAREFUL TAX PLANNING. SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH
SPECIFIC REFERENCE TO THEIR OWN TAX SITUATIONS, INCLUDING THEIR STATE AND LOCAL
TAX LIABILITIES.
DISTRIBUTOR
WM Funds Distributor, Inc. (referred to as the Distributor in this SAI), is
the distributor of the Class A, Class B, Class I and Class S shares of the Funds
and Class A and Class B shares of the Portfolios. The Distributor, located at
1201 Third Avenue, Suite 780, Seattle, Washington 98101, is an indirect wholly
owned subsidiary of Washington Mutual.
Each of the Funds (other than the WM Strategic Asset Management Portfolios,
which have only Class A and Class B distribution plans and the Target Maturity
2002 Fund which has only a Class A distribution plan) has three distribution
plans, pursuant to Rule 12b-1 under the 1940 Act, applicable to Class A, Class B
and Class S shares of the Fund (each, a "Rule 12b-1 Plan"), respectively. Under
---------------
the applicable Rule 12b-1 Plans, the Distributor receives a service fee at an
annual rate of .25% of the average daily net assets of each class. In addition,
the Distributor is paid a fee as compensation in connection with the offering
and sale of Class B and Class S Shares of the Funds at an annual rate of .75% of
the average daily net assets of such
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shares. These fees may be used to cover the expenses of the Distributor
primarily intended to result in the sale of such shares of the Funds, including
payments to the Distributor's representatives or others for selling shares.
Because the Distributor may retain any amount of its fee that is not so
expended, the Rule 12b-1 Plans are characterized by the SEC as "compensation-
type" plans.
In addition to providing for the expenses discussed above, each Rule 12b-1
Plan also recognizes that the Advisor may use its investment advisory fees or
other resources to pay expenses associated with activities primarily intended to
result in the promotion and distribution of the Fund's shares. The Distributor
may, from time to time, pay to other dealers, in connection with retail sales or
the distribution of shares of a Fund, material compensation in the form of
merchandise or trips. Salespersons including representatives of WM Financial
Services, Inc. (a subsidiary of Washington Mutual) and any other person entitled
to receive any compensation for selling or servicing Fund shares may receive
different compensation with respect to one particular class of shares over
another, and may receive additional compensation or other incentives for selling
Fund shares.
Prior to March 20, 1998 WM Investment Services Corp. (formerly named Sierra
Investment Services Corp.) served as the distributor for WM Trust II. For the
fiscal years ended June 30, 1997, 1996 and 1995, WM Investment Services Corp.
(formerly Sierra Investment Services Corp.) received distribution fees totaling
(after waivers of fees) $5,278,281, $6,430,836 and $6,715,281, respectively, in
the aggregate, from the Funds under the Class A Plan. For the same periods, WM
Investment Services Corp. received $13,944, $0 and $58,212, respectively,
representing contingent deferred sales charges on redemptions of Class A Shares
of the Funds. In addition, for the fiscal years ended June 30, 1997, 1996 and
1995, WM Investment Services Corp. received $303,490, $637,291 and $7,099,863,
respectively, representing compensation from front-end sales charges on Fund
shares sold. For each fiscal year ended June 30, 1997, 1996 and 1995, WM
Investment Services Corp. voluntarily waived no distribution fees in the
aggregate. During the fiscal year ended June 30, 1997, WM Investment Services
Corp. incurred distribution and operating expenses with respect to Class A
Shares of the Funds totaling $6,079,202 consisting of $27,338 for advertising;
$30,593 for marketing promotion; $570,250 for preparation, printing and
distribution of sales literature and shareholders reports; $398,006 for
fulfillment; $88,956 for seminars; $390,128 for salaries to the personnel of WM
Investment Services Corp.; $777,480 in commissions and additional compensation
to the personnel of WM Investment Services Corp.; $136,410 for occupancy;
$105,953 for telephone; and $577,885 in administration expenses.
WM Investment Services Corp. also served as distributor of Class B and S
Shares of the WM Trust II. For the fiscal year ended June 30, 1997, WM
Investment Services Corp. received distribution fees from the Funds totaling
$666,137, in the aggregate under the Class B Distribution Plan and $474,374, in
the aggregate under the Class S Distribution Plan. For the same period, WM
Investment Services Corp. received $487,579, representing CDSC on redemptions of
Class B Shares of the Funds and $210,159, representing CDSC on redemptions of
Class S shares of the Funds. For the fiscal year ended June 30, 1997, WM
Investment
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Services Corp. did not waive any distribution fees. WM Investment Services Corp.
paid out all of the distribution related fees it received for each of the Class
B and Class S Shares to the financier of the sales commissions paid on sale of
Class B and S Shares, respectively.
Prior to December 20, 1995, Funds Distributor Inc. ("FDI") served as a co-
---
distributor of Class B and Class S Shares of the WM Trust II. For the fiscal
year ended June 30, 1997, FDI received distribution fees from the Funds totaling
$850,960, in the aggregate under the Class B Distribution Plan and $568,659, in
the aggregate under the Class S Distribution Plan. For the same period, FDI
received $593,638, representing CDSC on redemptions of Class B Shares of the
Funds and $317,053, representing CDSC on redemptions of Class S Shares of the
Funds. For the fiscal year ended June 30, 1997 FDI did not waive any
distribution fees. FDI paid out all of the distribution related fees it
received for each of the Class B and Class S Shares to the financier of the
sales commissions paid on sale of Class B Shares and Class S Shares,
respectively.
WM Funds Distributor, Inc. (formerly Composite Funds Distributor, Inc. and
referred to as the Distributor in this SAI) serves as the distributor for the
Funds within WM Trust I. The Money Market and Tax-Exempt Money Market Funds
reimbursed the Distributor $50,492 and $0, respectively, for distribution
expenses incurred during 1997. Of this amount, $28,559 was paid for printing
and $21,933 was for other distribution-related expenses. During 1996 the Money
Market and Tax-Exempt Money Market Funds reimbursed the Distributor $20,720 and
$0, respectively and in 1995 each reimbursed the Distributor $18,754 and $0,
respectively.
During 1997 the Money Market and Tax-Exempt Money Market Funds compensated
the Distributor $2,233 and $91, respectively, for the sale of Class B shares.
During 1996, the Money Market and Tax-Exempt Funds compensated the Distributor
$1,270 and $16, respectively, for the sale of Class B shares. During 1995, the
Money Market and Tax-Exempt Portfolios compensated the Distributor $702 and $11,
respectively, for the sale of Class B shares.
During the fiscal year ended December 31, 1997, the Distributor received
contingent deferred sales charge payments of $5,618 and $0 upon redemption of
Class B shares of the Money Market Fund and Tax-Exempt Fund, respectively. For
the fiscal year ended December 31, 1996, the Distributor received contingent
deferred sales charge payments of $5,275 and $0 upon redemption of Class B
shares of the Money Market Fund and Tax-Exempt Money Market Fund, respectively.
No brokerage fees were paid by the Fund to the Distributor during the year, but
the Distributor may act as broker on portfolio purchases and sales should it
become a member of a securities exchange.
The U.S. Government Securities, Income, and Tax-Exempt Bond Funds
reimbursed the Distributor in the amounts of $248,837, $169,132 and $407,707,
respectively, for distribution expenses incurred on behalf of Class A shares
during the year ended December 31, 1997. Of this amount, $119,084, $77,335 and
$200,406 was paid on behalf of the U.S. Government Securities, Income, and Tax-
Exempt Bond Funds, respectively, to selected dealers and registered
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representatives of the Distributor for their shareholder servicing activities,
and $129,748, $91,797 and $207,301, respectively, was paid for other
distribution related expenses.
During the fiscal years 1996 and 1995, the U.S. Government Securities Fund
reimbursed the Distributor $218,510 and $343,633, respectively; the Income Fund
reimbursed the Distributor $133,600 and $168,531, respectively; and the Tax-
Exempt Bond Fund reimbursed the Distributor $315,034 and $432,854, respectively,
for distribution expenses related to Class A shares.
During the fiscal years ended December 31, 1997 and 1996, respectively, the
U.S. Government Securities Fund compensated the Distributor in the amounts of
$29,872 and $26,484, respectively; the Income Fund compensated the Distributor
in the amounts of $78,016 and $57,828, respectively, and the Tax-Exempt Bond
Fund compensated the Distributor $66,282 and $40,939, respectively, for the sale
of Class B shares.
During the 1997, 1996 and 1995 fiscal years, the Distributor received
$55,967, $89,694 and $150,970, respectively, for the sale of U.S. Government
Securities Fund Class A shares; $102,701, $156,410 and $209,703, respectively,
for the sale of Income Fund Class A shares; and $195,489, $282,768 and $341,454,
respectively, for the sale of Tax-Exempt Bond Fund Class A shares.
During the fiscal year ended December 31, 1997, the Distributor received
contingent deferred sales charge payments of $8,623, $20,754 and $11,543 upon
redemption of Class B shares of the U.S. Government Securities, Income, and Tax-
Exempt Bond Funds, respectively. No brokerage fees were paid by the Funds to the
Distributor during the year, but the Distributor may act as a broker on
portfolio purchases and sales should it become a member of a securities
exchange.
The Bond & Stock, Growth & Income and Northwest Funds reimbursed the
Distributor in the amounts of $701,288, $563,809 and $537,269, respectively, for
distribution expenses incurred on behalf of Class A shares during fiscal 1997.
Of this amount, $271,656, $205,286 and $210,705 was paid on behalf of the Bond &
Stock, Growth & Income and Northwest Funds to sales personnel of the Distributor
and to selected dealers for their shareholder servicing activities; $30,762,
$57,056 and $46,096, respectively, was paid for printing; and $195,701, $167,292
and $257,705, respectively, was paid for other advertising expenses.
During fiscal years 1996 and 1995, the Bond & Stock Fund reimbursed the
Distributor $394,279 and $356,379, respectively; the Growth & Income Fund
reimbursed the Distributor $265,579 and $203,566, respectively; and Northwest
reimbursed the Distributor $360,642 and $279,851, respectively, for distribution
expenses related to Class A shares.
During fiscal years 1997, 1996 and 1995, the Bond & Stock Fund compensated
the Distributor in the amounts of $334,855, $148,688 and $46,435, respectively;
the Growth &
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Income Fund compensated the Distributor $365,290, $151,222 and $49,988,
respectively; and the Northwest Fund compensated the Distributor $247,630,
$106,606 and $49,126, respectively, for distribution expenses related to Class B
shares.
During the 1997, 1996 and 1995 fiscal years, the Distributor received
$885,598, $1,064,004 and $471,479, respectively, for the sale of Bond & Stock
Class A shares. The Distributor retained $710,403, $1,047,926 and $471,455,
respectively, for the same time periods, with the balance paid to dealers for
their sales of Bond & Stock Class A shares.
During the 1997, 1996 and 1995 fiscal years, the Distributor received
$825,142, $586,437 and $384,766, respectively, for the sale of Growth & Income
Class A shares. The Distributor retained $666,246, $563,398 and $384,647,
respectively, for the same time periods, with the balance paid to dealers for
their sales of Growth & Income Class A shares.
During the fiscal years 1997, 1996 and 1995 the Distributor received
$799,120, $517,022 and $348,729, respectively, for the sale of Northwest Class A
shares. The Distributor retained $551,530, $465,694 and $337,189, respectively,
for the same time periods, with the balance paid to dealers for their sales of
Northwest Class A shares.
During the fiscal year ended October 31, 1997, the Distributor received
contingent deferred sales charge payments of $63,218, $63,310 and $37,195 upon
redemption of Class B shares of Bond & Stock, Growth & Income, and Northwest,
respectively. No brokerage fees were paid by the Funds to the Distributor
during the year, but the Distributor may act as a broker on portfolio purchases
and sales should it become a member of a securities exchange.
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APPENDIX
DESCRIPTION OF BOND, NOTES AND COMMERCIAL PAPER RATINGS
DESCRIPTION OF S&P CORPORATE BOND RATINGS
AAA: Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A: Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as for Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the issue ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
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DESCRIPTION OF DUFF'S CORPORATE BOND RATINGS
Bonds rated AAA by Duff are judged by Duff to be of the highest credit
quality, with negligible risk factors being only slightly more than for risk-
free U.S. Treasury debt. Bonds rated AA by Duff are judged by Duff to be of
high credit quality with strong protection factors and risk that is modest but
that may vary slightly from time to time because of economic conditions. Bonds
rated A by Duff are judged by Duff to have average but adequate protection
factors. However, risk factors are more variable and greater in periods of
economic stress. Bonds rated BBB by Duff are judged by Duff as having below
average protection factors but still considered sufficient for prudent
investment, with considerable variability in risk during economic cycles.
DESCRIPTION OF FITCH'S CORPORATE BOND RATINGS
Bonds rated AAA by Fitch are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events. Bonds rated AA by Fitch are considered to be investment
grade and of very high credit quality. The obligor's ability to pay interest
and repay principal is very strong, although not quite as strong as bonds rated
AAA. Bonds rated A by Fitch are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings. Bonds
rated BBB by Fitch are considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
DESCRIPTION OF S&P MUNICIPAL BOND RATINGS
AAA - Prime - These bonds have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
General Obligation Bonds - In a period of economic stress, the issuers
will suffer the smallest declines in income and will be least susceptible to
autonomous decline. Debt burden is moderate. A strong revenue structure
appears more than adequate to meet future expenditure requirements. Quality of
management appears superior.
Revenue Bonds - Debt service coverage has been, and is expected to remain,
substantial. Stability of the pledged revenues is also exceptionally strong due
to the competitive position of the municipal enterprise or to the nature of the
revenues. Basic security provisions
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(including rate covenant, earnings test for issuance of additional bonds, debt
service reserve requirements) are rigorous. There is evidence of superior
management.
AA - High Grade - Bonds in this group have a very strong capacity to pay
interest and repay principal and differ from the highest rated debt only in
small degree.
A - Good Grade - Bonds in this category have a strong capacity to pay
interest and repay principal, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than bonds
in higher rated categories. Regarding municipal bonds, the rating differs from
the two higher ratings because:
General Obligation Bonds - There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and expenditures
or in quality of management. Under certain adverse circumstances, any one such
weakness might impair the ability of the issuer to meet debt obligations at some
future date.
Revenue Bonds - Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management performance
appears adequate.
BBB - Medium Grade - Bonds in this group are regarded as having an
adequate capacity to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for bonds in this category than for bonds in higher rated
categories.
General Obligation Bonds - Under certain adverse conditions, several of
the above factors could contribute to a lesser capacity for payment of debt
service. The difference between A and BBB ratings is that the latter shows more
than one fundamental weakness, or one very substantial fundamental weakness,
whereas the former shows only one deficiency among the factors considered.
Revenue Bonds - Debt coverage is only fair. Stability of the pledged
revenues could show substantial variations, with the revenue flow possibly being
subject to erosion over time. Basic security provisions are no more than
adequate. Management performance could be stronger.
BB, B, CCC, CC and C - Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the least degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
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characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions.
D - Bonds rated D are in default, or the obligor has filed for bankruptcy.
The D rating is issued when interest or principal payments are not made on the
date due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
S&P's letter ratings may be modified by the addition of a plus or a minus
sign, which is used to show relative standing within the major rating
categories, except in the AAA-Prime Grade category.
DESCRIPTION OF S&P MUNICIPAL NOTE RATINGS
Municipal notes with maturities of three years or less are usually given
note ratings (designated SP-1, -2 or -3) to distinguish more clearly the credit
quality of notes as compared to bonds. Notes rated SP-1 have a strong capacity
to pay principal and interest. Those issues determined to possess a very strong
capacity to pay debt service are given the designation of SP-1+. Notes rated
SP-2 have a satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear
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adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issuer ranks in the
lower end of its generic rating category.
DESCRIPTION OF MOODY'S MUNICIPAL NOTE RATINGS
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction recognizes the differences between short-term credit risk and long-
term risk. Loans bearing the designation MIG 1/VMIG 1 are of the best quality,
enjoying strong protection from established cash flows of funds for their
servicing, from superior liquidity support, or from established and broad-based
access to the market for refinancing, or both. Loans bearing the designation of
MIG 2/VMIG 2 are of high quality, with margins of protection ample, although not
as large as the preceding group. Loans bearing the designation MIG 3/VMIG 3 are
of favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow protection
may be narrow and market access for refinancing is likely to be less well
established. Loans bearing the designation MIG 4/VMIG 4 are of adequate
quality. Protection commonly regarded as required of an investment security is
present and although not distinctly or predominantly speculative, there is
specific risk.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payments is strong. Those issues determined to possess
extremely strong safety characteristics are denoted A-1+. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1.
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DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated Prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics of
issuers rated Prime-1 but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
DESCRIPTION OF DUFF'S COMMERCIAL PAPER RATINGS
Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by good fundamental
protection factors. Risk factors are minor. Ratings of Duff-1 are further
refined by the gradations of "1+" and "1-". Issues rated Duff-1+ have the
highest certainty of timely payment, outstanding short term liquidity, and
safety just below risk-free U.S. Treasury short-term obligations. Issues rated
Duff-1- have high certainty of timely payment, strong liquidity factors
supported by good fundamental protection factors, and small risk factors. Paper
rated Duff-2 is regarded as having good certainty of timely payment, good access
to capital markets and sound liquidity factors and company fundamentals. Risk
factors are small.
DESCRIPTION OF FITCH'S COMMERCIAL PAPER RATINGS
The rating F-1+ (Exceptionally Strong Credit Quality) is the highest
commercial rating assigned by Fitch and is assigned to issues regarded as having
the strongest degree of assurance for timely payment. Paper rated F-1 (Very
Strong Credit Quality) is regarded as having an assurance of timely payment only
slightly less in degree than issues rated F-1+. The rating F-2 (Good Credit
Quality) reflects an assurance of timely payment, but the margin of safety is
not as great as for issues assigned F-1+ or F-1 ratings.
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FINANCIAL STATEMENTS
--------------------
Incorporated herein by reference are the audited financial statements for
the fiscal year ended June 30, 1997 for each of the Funds within WM Trust II and
each of the Portfolios, together with the Report of Independent Accountants of
Price Waterhouse LLP thereon, and the unaudited financial statements for the six
months ended December 31, 1997 for such Funds and Portfolios. Also incorporated
herein by reference are the audited financial statements for the fiscal year
ended October 31, 1997 or December 31, 1997, as the case may be, for each of the
Funds within WM Trust I, together with the Report of Independent Accountants of
LeMaster & Daniels PLLC thereon.
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WM Strategic Asset Management Portfolios
FORM N-1A
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Index to Financial Statements and Supporting Schedules:
(1) Financial Statements:
Strategic Growth Portfolio
Conservative Growth Portfolio
Balanced Portfolio
Flexible Income Portfolio
Income Portfolio
Statement of assets and liabilities -- November 30, 1997 (a).
Statement of operations -- year ended November 30, 1997 (a).
Statement of changes in net assets -- years ended November 30,
1997 and November 30, 1996 (a).
Financial highlights (a) (b).
Notes to financial statements (a).
(2) Supporting Schedules:
Strategic Growth Portfolio
Conservative Growth Portfolio
Balanced Portfolio
Flexible Income Portfolio
Income Portfolio
<PAGE>
Schedule I -- Portfolio of investments owned -- November 30, 1997
(a).
Schedules II through IX omitted because the required matter is
not present.
(a). Incorporated by reference into Parts A and B.
(b). Included in Part A.
(b) Exhibits.
1(a) Agreement and Declaration of Trust dated March 26, 1996 is
incorporated by reference to the Registration Statement
filed with the SEC on March 27, 1996.
1(b) Agreement and Declaration of Trust dated March 26, 1996
Amended and Restated July 19, 1996 is incorporated by
reference to Pre-Effective Amendment No. 2 filed with the
SEC on July 22, 1996.
1(c) Amendment No.1 to Amended and Restated Agreement and
Declaration of Trust dated March 20, 1998.
2 By-laws of the Trust are incorporated by reference to the
Registration Statement as filed with the SEC on March 27,
1996.
3 Not applicable
4 Not applicable
5 Investment Management Agreement dated March 20, 1998.
6 Distribution Contract dated March 20, 1998.
7 Not applicable
8 Custody Agreement dated March 20, 1998.
9(a) Administration Agreement dated March 20, 1998.
9(b) Transfer Agency Agreement dated March 20, 1998.
10 Opinion and consent of counsel is incorporated by reference
to Pre-Effective Amendment No. 2 filed
with the SEC on July 22, 1996.
11 Consent of Accountant.
12 Not applicable
13 Purchase Agreement relating to the Income, Flexible Income,
Balanced, Conservative Growth, and Strategic Growth
Portfolios is incorporated by reference to Post-Effective
Amendment No. 1 filed with the SEC on January 6, 1997.
14 Not applicable
15(a) Class A Distribution Plan dated May 21, 1996 is
incorporated by reference to Post-Effective Amendment No. 2
filed with the SEC on August 29, 1997.
15(b) Class B Distribution Plan dated March 24, 1998.
16 Not applicable.
17 Financial Data Schedules.
18 Rule 18f-3 Multiple Class Plan is incorporated by reference
to Pre-Effective Amendment No. 1 filed with the SEC on June
21, 1996.
19 Powers of Attorney.
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Item 25. Persons Controlled by or Under Common Control with Registrant.
Not applicable.
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Number of Record Holders
Title of Series (as of February 28, 1998)
--------------- ------------------------
- -------------------------------------------------------------------
Class A Class B
Shares Shares
- -------------------------------------------------------------------
<S> <C> <C>
Strategic Growth Portfolio 699 1,712
- -------------------------------------------------------------------
Conservative Growth Portfolio 3,682 4,663
- -------------------------------------------------------------------
Balanced Portfolio 2,723 2,662
- -------------------------------------------------------------------
Flexible Income Portfolio 316 196
- -------------------------------------------------------------------
Income Portfolio 249 123
- -------------------------------------------------------------------
</TABLE>
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Item 27. Indemnification.
Under Section 8.1 of Registrant's Declaration of Trust ("Declaration of
Trust"), any past or present Trustee or officer of Registrant (including persons
who serve at Registrant's request as directors, officers or trustees of another
organization in which Registrant has any interest as a shareholder, creditor or
otherwise (hereinafter referred to as a "Covered Person"), is indemnified to the
fullest extent permitted by law against liability and all expenses reasonably
incurred by him in connection with any action, suit or proceeding to which he
may be a party or otherwise involved by reason of his being or having been a
Covered Person. This provision does not authorize indemnification when it is
determined, in the manner specified in the Declaration of Trust, that a Covered
Person has not acted in good faith in the reasonable belief that his actions
were in or not opposed to the best interests of Registrant. Moreover, this
provision does not authorize indemnification when it is determined, in the
manner specified in the Declaration of Trust, that the Covered Person would
otherwise be liable to Registrant or its shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of his duties.
Expenses may be paid by Registrant in advance of the final disposition of any
action, suit or proceeding upon receipt of an undertaking by a Covered Person to
repay those expenses to Registrant in the event that it is ultimately determined
that indemnification of the expenses is not authorized under the Declaration of
Trust and the Covered Person either provides security for such undertaking or
insures Registrant against losses from such advances or either of the
disinterested Trustees or independent legal counsel determines, in the manner
specified in the Declaration of Trust, that there is reason to believe the
Covered Person will be found to be entitled to indemnification.
Insofar as indemnification for liability arising under the Securities Act
of 1933, as amended (the "1933 Act"), may be permitted to Trustees, officers and
controlling persons of Registrant pursuant to the foregoing provisions, or
otherwise, Registrant has been advised that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person in
connection with the securities being registered, Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will by governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Advisor.
<TABLE>
<CAPTION>
DIRECTORS
- ---------
<S> <C>
Monte D. Calvin Past two fiscal years
First Vice President, Director WM Shareholder Services, Inc.
601 West Main Ave., Suite 300, Spokane, WA 98201
Treasurer, Director April 1997 - present
WM Advisors, Inc.
1201 Third Ave., Suite 1400, Seattle, WA 98101
Vice President, Treasurer, July 1997 - present
Director WM Funds Distributor Inc.
601 West Main Ave., Suite 300, Spokane, WA 98201
Craig S. Davis July 1997 - present
Director WM Funds Distributor Inc.
601 West Main Ave., Suite 300, Spokane, WA 98201
Director WM Shareholder Services, Inc.
601 West Main Ave., Suite 300, Spokane, WA 98201
Director April 1997 - present
WM Advisors, Inc.
1201 Third Ave., Suite 1400, Seattle, WA 98101
Executive Vice President December - present
Washington Mutual, Inc.
1201 Third Ave., Seattle, WA 98101
Chairman January 1996 - July 1997
ASB Financial Services, Irvine, CA
J. Pamela Dawson July 1997 - present
Director WM Funds Distributor, Inc.
601 West Main Ave., Suite 300, Spokane, WA 98201
Director WM Shareholder Services, Inc.
601 West Main Ave., Suite 300, Spokane, WA 98201
Director April 1997 - present
WM Advisors, Inc.
1201 Third Ave., Suite 1400, Seattle, WA 98101
President March 1997 - present
WM Financial Services
1201 Third Ave., 7th Floor, Seattle, WA 98101
President December 1996 - July 1997
ASB Financial Services, Irvine, CA
Senior Vice President/Regional November 1996 - December 1996
Manager Wells Fargo Securities/First Interstate, Houston, TX
Kerry K. Killinger Past two fiscal years
Director WM Advisors, Inc.
1201 Third Ave., Suite 1400, Seattle, WA 98101
CEO, Chairman, Director Washington Mutual Bank
1201 Third Avenue, Seattle, WA 98101
Director July 1997 - present
WM Funds Distributor, Inc.
601 West Main Ave., Suite 300, Spokane, WA 98201
Director WM Shareholder Services, Inc.
601 West Main Ave., Suite 300, Spokane, WA 98201
OFFICERS
- --------
Philip M. Foreman Past two fiscal years
Vice President WM Advisors, Inc.
1201 Third Ave., Suite 1400, Seattle, WA 98101
Sharon L. Howells Past two fiscal years
First Vice President, WM Advisors, Inc.
Corporate Secretary 1201 Third Ave., Suite 1400, Seattle, WA 98101
July 1997 - present
Vice President, WM Funds Distributor, Inc.
Corporate Secretary 601 West Main Ave., Suite 300, Spokane, WA 98201
WM Shareholder Services, Inc.
Corporate Secretary 601 West Main Ave., Suite 300, Spokane, WA 98201
Jeffrey D. Huffman Past two fiscal years
Vice President WM Advisors, Inc.
1201 Third Ave., Suite 1400, Seattle, WA 98101
B. Joel King March 1998 - present
Vice President WM Advisors, Inc.
1201 Third Ave., Suite 1400, Seattle, WA 98101
Vice President January 1996 - February 1998
Bennington Capital Management
1420 Fifth Ave., Seattle, WA 98101
William G. Papesh Past two fiscal years
President, Director WM Advisors, Inc.
1201 Third Ave., Suite 1400, Seattle, WA 98101
President, Director WM Shareholder Services, Inc.
601 West Main Ave., Suite 300, Spokane, WA 98201
Director WM Insurance Services
1201 Third Ave., Seattle, WA 98101
President, Director WM Group of Funds
601 West Main Ave., Suite 300, Spokane, WA 98201
President, Director July 1997 - present
WM Funds Distributor, Inc.
601 West Main Ave., Suite 300, Spokane, WA 98201
Brian L. Placzek Past two fiscal years
Vice President WM Advisors, Inc.
1201 Third Ave., Suite 1400, Seattle, WA 98101
Gary J. Pokrzywinski Past two fiscal years
Vice President WM Advisors, Inc.
1201 Third Ave., Suite 1400, Seattle, WA 98101
Audrey S. Quaye February 1996 - present
Vice President WM Advisors, Inc.
1201 Third Ave., Suite 1400, Seattle, WA 98101
Credit Analyst January 1996 - February 1996
Tandem Computers, Cupertino, CA
Stephen C. Scott March 1998 - present
Vice President WM Advisors, Inc.
1201 Third Ave., Suite 1400, Seattle, WA 98101
Senior Investment Advisor Sierra Investment Services Corporation
9301 Corbin Ave., Northridge, CA 91324
President Sierra Investment Advisors Corporation
9301 Corbin Ave., Northridge, CA 91324
David W. Simpson Past two fiscal years
Vice President WM Advisors, Inc.
1201 Third Ave., Suite 1400, Seattle, WA 98101
Linda C. Walk December 1997 - present
Vice President WM Advisors, Inc.
1201 Third Ave., Suite 1400, Seattle, WA 98101
November 1996 - November 1997
Laid Norton Trust Company
Norton Building, Suite 1600, Seattle, Wa 98104
January 1996 - July 1996
Ernst & Young LLP
2001 Market Street, 41st Floor, Philadelphia, PA 19103
</TABLE>
Item 29. Principal Underwriters.
(a) The principal underwriter for the Registrant is WM Funds Distributor, Inc.
which also serves in the same capacity for WM Trust II, WM Strategic Asset
Management Portfolios, WM Prime Income Fund and WM Variable Trust.
(b) The directors and officers of WM Funds Distributor, Inc., their positions
with WM Funds Distributor, Inc. and the WM Group of Funds are set forth in the
table below. The principal business address of WM Funds Distributor, Inc. and
each of its directors and officers is 601 West Main Avenue, Suite 300, Spokane,
Washington 99201.
Name And Position And Positions And
Principal Business Offices With Offices With
Address Underwriter Registrant
------- ----------- ----------
William G. Papesh President President
Sandra A. Cavanaugh First Vice Senior Vice President
President
Monte D. Calvin Vice President, Chief Financial Officer,
Treasurer Senior Vice President
Sharon L. Howells Vice President, Senior Vice President
Corporate Secretary
(c) Not applicable.
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules thereunder
will be maintained at the offices of the Registrant at 601 West Main Avenue,
Suite 300, Spokane, Washington 99201 and the offices of the Registrant's
custodian, Boston Safe Deposit and Trust Company, One Boston Place, Boston, MA
02108.
-5-
<PAGE>
Item 31. Management Services.
Registrant is not a party to any management related contract, other than as
set forth in the Prospectus.
Item 32. Undertakings.
(a) The Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
(b) The Registrant has undertaken to call a meeting of shareholders for
the purpose of voting upon the question of removal or a Trustees when requested
in writing to do so by the holders of at least 10% of the Registrant's
outstanding shares and in connection with such meetings to comply with the
provisions of Section 16(c) of the 1940 Act.
-6-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it meets all of the requirements for effectiveness of this
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized in the City of Spokane in the State
of Washington on the 27rd day of March, 1998.
WM Strategic Asset Management Portfolios
WILLIAM G. PAPESH*
----------------------------
William G. Papesh, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
WILLIAM G. PAPESH* President and March 27, 1998
- ----------------------- Trustee
William G. Papesh
MONTE D. CALVIN* Chief Financial
- ----------------------- Officer March 27, 1998
Monte D. Calvin
DAVID E. ANDERSON*
- ----------------------- Trustee March 27, 1998
David E. Anderson
WAYNE L. ATTWOOD, M.D.* Trustee March 27, 1998
- -----------------------
Wayne L. Attwood, M.D.
</TABLE>
-7-
<PAGE>
<TABLE>
<S> <C> <C>
ARTHUR H. BERNSTEIN*
- ------------------- Trustee March 27, 1998
Arthur H. Bernstein
KRISTIANNE BLAKE* Trustee March 27, 1998
- -------------------
Kristianne Blake
EDMOND R. DAVIS*
- ------------------- Trustee March 27, 1998
Edmond R. Davis
JOHN W. ENGLISH*
- ------------------- Trustee March 27, 1998
John W. English
ANNE V. FARRELL* Trustee March 27, 1998
- -------------------
Anne V. Farrell
MICHAEL K. MURPHY* Trustee March 27, 1998
- -------------------
Michael K. Murphy
ALFRED E. OSBORNE*
- ------------------- Trustee March 27, 1998
Alfred E. Osborne Jr.,
Ph.D.
DANIEL PAVELICH* Trustee March 27, 1998
- -------------------
Daniel Pavelich
JAY ROCKEY* Trustee March 27, 1998
- -------------------
Jay Rockey
RICHARD C. YANCEY* Trustee March 27, 1998
- -------------------
Richard C. Yancey
</TABLE>
*By: MONTE D. CALVIN
---------------------------------
Monte D. Calvin
Attorney-in-Fact
Pursuant to Powers of Attorney filed herewith.
-8-
<PAGE>
Exhibit Index
1 (c) Amendment No. 1 to Amended and Restated Agreement and Declaration of
Trust, dated March 20, 1998.
5 Investment Management Agreement, dated March 20, 1998.
6 Distribution Contract, dated March 20, 1998.
8 Custody Agreement, dated March 20, 1998.
9 (a) Administration Agreement, dated March 20, 1998.
9 (b) Transfer Agency Agreement, dated March 20, 1998.
11 Consent of Independent Accountants dated March 26, 1998.
15 (b) Class B Distribution Plan, dated March 24, 1998.
17 Financial Data Schedules.
19 Powers of Attorney.
<PAGE>
Exhibit 1(c)
SIERRA ASSET MANAGEMENT PORTFOLIOS
AMENDMENT NO. 1
TO AMENDED AND RESTATED
AGREEMENT AND DECLARATION OF TRUST
The undersigned, being a majority of the trustees of the Sierra Asset
Management Portfolios ("the Trust"), a Massachusetts business trust created and
existing under an Agreement and Declaration of Trust dated March 26, 1996 as
amended and restated July 19, 1996 ("the Declaration of Trust"), a copy of which
is on file in the office of the Secretary of The Commonwealth of Massachusetts,
having determined to change the name of the Trust from the Sierra Asset
Management Portfolios to WM Strategic Asset Management Portfolios, pursuant to
ARTICLE I, Section 1.1 and ARTICLE IX, Section 9.8 of said Declaration of Trust
do hereby amend the Declaration of Trust so that the Section 1.1 of ARTICLE I is
amended and restated as follows:
This Trust shall be known as "WM Strategic Asset Management
Portfolios" and the Trustees shall conduct the business of the Trust
under that name or any other name as they may from time to time
determine.
All other appropriate references in the Declaration of Trust are amended to
reflect the fact that the new name of the Trust is "WM Strategic Asset
Management Portfolios."
In addition, the undersigned, being a majority of the Trust, pursuant to
ARTICLE IV, Section 1 of the Declaration of Trust, hereby change the name of the
following series of Shares (as defined in the Declaration of Trust) (i) from
Capital Growth Portfolio to Strategic Growth Portfolio; (ii) from Growth
Portfolio to Conservative Growth Portfolio; and (iii) Value Portfolio to
Flexible Income Portfolio.
<PAGE>
This amendment will be effective as of the close of business on March 20,
1998.
This instrument may be executed in counterparts, which together shall
constitute a single instrument.
IN WITNESS WHEREOF, we have hereunto set our hands for ourselves and for
our successors and assigns this 20th day of March, 1998.
DAVID E. ANDERSON WAYNE L. ATTWOOD, M.D.
- ----------------- ----------------------
David E. Anderson Wayne L. Attwood, M.D.
ARTHUR H. BERNSTEIN, Esq. KRISTIANNE BLAKE
- ------------------------ ----------------
Arthur H. Bernstein, Esq. Kristianne Blake
EDMOND R. DAVIS, Esq. JOHN W. ENGLISH
- --------------------- ---------------
Edmond R. Davis, Esq John W. English
ANNE V. FARRELL MICHAEL K. MURPHY
- --------------- -----------------
Anne V. Farrell Michael K. Murphy
ALFRED E. OSBORNE, JR. Ph.D WILLIAM G. PAPESH
- --------------------------- -----------------
Alfred E. Osborne, Jr. Ph.D William G. Papesh
DANIEL L. PAVELICH JAY ROCKEY
- ------------------ ----------
Daniel L. Pavelich Jay Rockey
RICHARD C. YANCEY
- -----------------
Richard C. Yancey
-2-
<PAGE>
Exhibit 5
WM STRATEGIC ASSET MANAGEMENT PORTFOLIOS
INVESTMENT MANAGEMENT AGREEMENT
INVESTMENT MANAGEMENT AGREEMENT (this "Agreement"), dated March 20, 1998,
between the WM Strategic Asset Management Portfolios, a Massachusetts business
trust, (the "Trust"), on behalf of each of its investment portfolios which are
listed on the signature page of this Agreement (each referred to herein as a
"Portfolio" and, collectively, as the "Portfolios") and WM Advisors, Inc., a
Washington corporation (the "Manager").
W I T N E S S E T H
-------------------
WHEREAS, the Trust is an open-end management investment company, registered
under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Trust desires to retain the Manager to render investment
management services to each Portfolio, and the Manager is willing to render such
services;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereto agree as follows:
1. Appointment. The Trust hereby appoints the Manager to act as investment
manager to each Portfolio for the period and on the terms set forth in this
Agreement. The Manager accepts such appointment and agrees to render the
services herein described, for the compensation herein provided.
2. Management. Subject to the supervision of the Board of Trustees of the
Trust, the Manager shall manage the investment operations of each Portfolio and
the composition of each Portfolio's portfolio, including the purchase, retention
and disposition of securities therefor, in accordance with such Portfolio's
investment objectives, policies and restrictions as stated in the Prospectus and
Statement of Additional Information (as such terms are hereinafter defined) and
resolutions of the Trust's Board of Trustees and subject to the following
understandings:
(a) The Manager shall provide supervision of each Portfolio's
investments, furnish a continuous investment program for each
Portfolio's portfolio and determine from time to time what securities
will be purchased, retained, or sold by each Portfolio, and what
portion of the assets will be invested or held as cash.
(b) The Manager, in the performance of its duties and obligations
under this Agreement, shall act in conformity with the Agreement and
Declaration of Trust of the Trust and the investment policies of the
Portfolios as determined by the Board of Trustees of the Trust.
<PAGE>
(c) The Manager shall determine the securities to be purchased or sold
by each Portfolio and shall place orders for the purchase and sale of
portfolio securities pursuant to its determinations with brokers or
dealers selected by the Manager. In executing portfolio transactions
and selecting brokers or dealers, the Manager shall use its best
efforts to seek on behalf of each Portfolio the best overall terms
available. In assessing the best overall terms available for any
transaction, the Manager may consider all factors it deems relevant,
including the breadth of the market in the security, the price of the
security, the size of the transaction, the timing of the transaction,
the reputation, financial condition, experience, and execution
capability of a broker or dealer, the amount of commission, and the
value of any brokerage and research services (as those terms are
defined in Section 28(e) of the Securities Exchange Act of 1934, as
amended) provided by a broker or dealer. The Manager is authorized to
pay to a broker or dealer who provides such brokerage and research
services a commission for executing a portfolio transaction for a
Portfolio which is in excess of the amount of commission another
broker or dealer would have charged for effecting the transaction if
the Manager determines in good faith that such commission was
reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of that
particular transaction or in terms of the overall responsibilities of
the Manager to the Portfolio and/or other accounts over which the
Manager exercises investment discretion.
(d) On occasions when the Manager deems the purchase or sale of a
security to be in the best interest of a Portfolio as well as other
fiduciary accounts for which it has investment responsibility, the
Manager, to the extent permitted by applicable laws and regulations,
may aggregate the securities to be so sold or purchased in order to
obtain the best execution, most favorable net price or lower brokerage
commissions.
(e) Subject to the provisions of the Agreement and Declaration of
Trust of the Trust and the 1940 Act, the Manager, at its expense, may
select and contract with one or more investment advisers (the "Sub-
adviser") for a Portfolio to perform some or all of the services for
which it is responsible pursuant to this Section 2. The Manager shall
be solely responsible for the compensation of any Sub-adviser of a
Portfolio for its services to a Portfolio. The Manager may terminate
the services of any Sub-adviser at any time in its sole discretion,
and shall at such time assume the responsibilities of such Sub-adviser
unless and until a successor Sub-adviser is selected. To the extent
that more than one Sub-adviser is selected, the Manager shall, in its
sole discretion, determine the amount of a Portfolio's assets
allocated to each such Sub-adviser.
3. Services Not Exclusive. The investment management services rendered by the
Manager hereunder to each Portfolio are not to be deemed exclusive, and the
Manager
-2-
<PAGE>
shall have the right to render similar services to others, including, without
limitation, other investment companies.
4. Expenses. During the term of this Agreement, the Manager shall pay all
expenses incurred by it in connection with its activities under this Agreement
including the salaries and expenses of any of the officers or employees of the
Manager who act as officers, Trustees or employees of the Trust but excluding
the cost of securities purchased for a Portfolio and the amount of any brokerage
fees and commissions incurred in executing portfolio transactions for a
Portfolio, and shall provide the Portfolios with suitable office space. Other
expenses to be incurred in the operation of the Portfolios (other than those
borne by any third party), including without limitation, taxes, interest,
brokerage fees and commissions, fees of Trustees who are not officers,
directors, or employees of the Manager, federal registration fees and state Blue
Sky qualification fees, administration fees, bookkeeping, charges of custodians,
transfer and dividend disbursing agents' fees, certain insurance premiums,
industry association fees, outside auditing and legal expenses, costs of
maintaining the Fund's or the Trust's existence, costs of independent pricing
services, costs attributable to investor services (including, without
limitation, telephone and personnel expenses), costs of preparing, printing and
distributing prospectuses to existing shareholders, costs of stockholders'
reports and meetings of shareholders and Trustees, as applicable, and any
extraordinary expenses will be borne by the Portfolios.
5. Compensation. For the services provided pursuant to this Agreement, each
Portfolio shall pay to the Manager as full compensation therefor a monthly fee
computed on the average daily net assets at the annual rate for each Portfolio
as stated in Schedule A attached hereto. The Trust acknowledges that the
Manager, as agent for the Portfolios, will allocate a portion of the fee equal
to the sub-advisory fee payable to the sub-advisor, if any, under its sub-
advisory agreement to the sub-advisor for sub-advisory services. The Trust
acknowledges that the Manager, as agent for the Portfolios, may allocate a
portion of the fee to WM Shareholder Services, Inc. for administrative services,
portfolio accounting and regulatory compliance systems. The Manager also from
time to time and in such amounts as it shall determine in its sole discretion
may allocate a portion of the fee to WM Funds Distributor, Inc. for facilitating
distribution of the Portfolios. This payment would be made from revenue which
otherwise would be considered profit to the Manager for its services. This
disclosure is being made to the Trust solely for the purpose of conforming with
requirements of the Washington Department of Revenue for exclusion of revenue
from the Washington Business and Occupation Tax.
6. Limitation of Liability. The Manager shall not be liable for any error of
judgment or mistake of law or for any loss suffered by a Portfolio in connection
with the matters to which this Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its obligations
and duties under this Agreement.
-3-
<PAGE>
7. Delivery of Documents. The Trust has heretofore delivered to the Manager
true and complete copies of each of the following documents and shall promptly
deliver to it all future amendments and supplements thereto, if any:
(a) Agreement and Declaration of Trust (as presently in effect and as
amended from time to time);
(b) Bylaws of the Trust;
(c) Registration Statement under the Securities Act of 1933 and under
the 1940 Act of the Trust on Form N-1A, and all amendments thereto, as
filed with the Securities and Exchange Commission (the "Registration
Statement") relating to the Portfolios and the shares of the
Portfolios;
(d) Notification of Registration of the Trust under the 1940 Act on
Form N-8A;
(e) Prospectuses of the Portfolios (such prospectuses as presently in
effect and/or as amended or supplemented from time to time, the
"Prospectus"); and
(f) Statement of Additional Information of the Portfolios (such
statement as presently in effect and/or as amended or supplemented
from time to time, the "Statement of Additional Information").
8. Duration and Termination. This Agreement shall become effective as of the
date first above-written for an initial period of two years and shall continue
thereafter so long as such continuance is specifically approved at least
annually (a) by the vote of the Board of Trustees including a majority of those
members of the Trust's Board of Trustees who are not parties to this Agreement
or "interested persons" of any such party, cast in person at a meeting called
for that purpose, or by vote of a majority of the outstanding voting securities
of the Portfolios. Notwithstanding the foregoing, (a) this Agreement may be
terminated at any time, without the payment of any penalty, by either the Trust
(by vote of the Trust's Board of Trustees or by vote of a majority of the
outstanding voting securities of the Portfolios) or the Manager, on sixty (60)
days prior written notice to the other and (b) shall automatically terminate in
the event of its assignment. As used in this Agreement, the terms "majority of
the outstanding voting securities,@ "interested persons" and "assignment" shall
have the meanings assigned to such terms in the 1940 Act.
9. Amendments. No provision of this Agreement may be amended, modified,
waived or supplemented except by a written instrument signed by the party
against which enforcement is sought. No amendment of this Agreement shall be
effective until approved in accordance with any applicable provisions of the
1940 Act.
-4-
<PAGE>
10. Use of Name and Logo. The Trust agrees that it shall furnish to the
Manager, prior to any use or distribution thereof, copies of all prospectuses,
statements of additional information, proxy statements, reports to stockholders,
sales literature, advertisements, and other material prepared for distribution
to stockholders of the Trust or to the public, which in any way refer to or
describe the Manager or which include any trade names, trademarks or logos of
the Manager or of any affiliate of the Manager. The Trust further agrees that
it shall not use or distribute any such material if the Manager reasonably
objects in writing to such use or distribution within five (5) business days
after the date such material is furnished to the Manager.
The Manager and/or its affiliates own the names "WM," "WM Group of Funds"
and any other names which may be listed from time to time on a Schedule B to be
attached hereto that they may develop for use in connection with the Trust,
which names may be used by the Trust only with the consent of the Manager and/or
its affiliates. The Manager, on behalf of itself and/or its affiliates,
consents to the use by the Trust of such names or any other names embodying such
names, but only on condition and so long as (i) this Agreement shall remain in
full force, (ii) the Trust shall fully perform, fulfill and comply with all
provisions of this Agreement expressed herein to be performed, fulfilled or
complied with by it, and (iii) the Manager is the manager of each Portfolio of
the Trust. No such name shall be used by the Trust at any time or in any place
or for any purposes or under any conditions except as provided in this section.
The foregoing authorization by the Manager, on behalf of itself and/or its
affiliates, to the Trust to use such names as part of a business or name is not
exclusive of the right of the Manager and/or its affiliates themselves to use,
or to authorize others to use, the same; the Trust acknowledges and agrees that
as between the Manager and/or its affiliates and the Trust, the Manager and/or
its affiliates have the exclusive right so to use, or authorize others to use,
such names, and the Trust agrees to take such action as may reasonably be
requested by the Manager, on behalf of itself and/or its affiliates, to give
full effect to the provisions of this section (including, without limitation,
consenting to such use of such names). Without limiting the generality of the
foregoing, the Trust agrees that, upon (i) any violation of the provisions of
this Agreement by the Trust or (ii) any termination of this Agreement, by either
party or otherwise, the Trust will, at the request of the Manager, on behalf of
itself and/or its affiliates, made within six months after such violation or
termination, use its best efforts to change the name of the Trust and/or the
Portfolios so as to eliminate all reference, if any, to such names and will not
thereafter transact any business in a name containing such names in any form or
combination whatsoever, or designate itself as the same entity as or successor
to an entity of such names, or otherwise use such names or any other reference
to the Manager and/or its affiliates, except as may be required by law. Such
covenants on the part of the Trust shall be binding upon it, its Trustees,
officers, shareholders, creditors and all other persons claiming under or
through it.
The provisions of this section shall survive termination of this Agreement.
-5-
<PAGE>
11. Notices. Any notice or other communication required to be given pursuant
to this Agreement shall be deemed duly given if delivered or mailed by
registered mail, postage prepaid, if to the Trust: 601 W. Main Ave., Suite 300,
Spokane, Washington 99201; or if to the Manager: 1201 Third Avenue, Suite
1220, Seattle, Washington 98101; or to either party at such other address as
such party shall designate to the other by a notice given in accordance with the
provisions of this section.
12. Miscellaneous.
(a) Except as otherwise expressly provided herein or authorized by the
Board of Trustees of the Trust from time to time, the Manager for all
purposes herein shall be deemed to be an independent contractor and
shall have no authority to act for or represent the Trust or the
Portfolios in any way or otherwise be deemed an agent of the Trust or
the Portfolios.
(b) The Trust shall furnish or otherwise make available to the Manager
such information relating to the business affairs of the Portfolios as
the Manager at any time or from time to time reasonably requests in
order to discharge its obligations hereunder.
(c) This Agreement shall be governed by and construed in accordance
with the laws of The Commonwealth of Massachusetts and shall inure to
the benefit of the parties hereto and their respective successors.
(d) If any provision of this Agreement shall be held or made invalid
or by any court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
13. Declaration of Trust and Limitation of Liability. A copy of the Agreement
and Declaration of Trust of the Trust is on file with the Secretary of State of
The Commonwealth of Massachusetts, and notice is hereby given that this
Agreement is executed by an officer of the Trust on behalf of the Trustees of
the Trust, as trustees and not individually, on further behalf of each
Portfolio, and that the obligations of this Agreement with respect to a
Portfolio shall be binding upon the assets and properties of that Portfolio only
and shall not be binding upon the assets and properties of any other Portfolio
or series of the Trust or upon any of the Trustees, officers, employees, agents
or shareholders of the Portfolios or the Trust individually.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the date first above-written.
WM STRATEGIC ASSET MANAGEMENT PORTFOLIOS,
on behalf of its portfolios
INCOME PORTFOLIO,
FLEXIBLE INCOME PORTFOLIO,
BALANCED PORTFOLIO,
CONSERVATIVE GROWTH PORTFOLIO, and
STRATEGIC GROWTH PORTFOLIO
By: /s/ Keith B. Pipes
----------------------------------
Name: Keith B. Pipes
Title: President
Attest:
By: /s/ Darren Kishimoto
-----------------------------------
Name: Darren Kishimoto
Title: Assistant Secretary
WM ADVISORS, INC.
By: /s/ William G. Papesh
----------------------------------
William G. Papesh
President
Attest:
By: /s/ John T. West
-----------------------------------
Name: John T. West
Title: Secretary
-7-
<PAGE>
Schedule A
WM STRATEGIC ASSET MANAGEMENT PORTFOLIOS
The management fee to be charged for advisory services (including sub-
advisory fees, if any) for each Portfolio is based upon a percentage of the
average daily net assets of such Portfolio. The total management fee to be paid
monthly for each Portfolio is as follows:
<TABLE>
<CAPTION>
Annual Fee
----------
<S> <C>
Income Portfolio 0.15%
Flexible Income Portfolio 0.15%
Balanced Portfolio 0.15%
Conservative Growth Portfolio 0.15%
Strategic Growth Portfolio 0.15%
</TABLE>
-8-
<PAGE>
Exhibit 6
DISTRIBUTION CONTRACT
THIS DISTRIBUTION CONTRACT (this "Agreement"), dated this 20th day of
March, 1998, between the WM Strategic Asset Management Portfolios, a
Massachusetts business trust (the "Trust"), on behalf of each of its series
which are listed on the signature page of this Agreement (each a "Fund"), and WM
Funds Distributor, Inc., a Washington corporation doing business at Spokane,
Washington, herein sometimes referred to as the "Distributor."
RECITALS
--------
WHEREAS, the Trust is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act")
and the Funds are separate series of the Trust;
WHEREAS, each Fund and the Distributor desire to enter into an agreement
that sets forth standard terms and conditions for distribution and other
services for Class A and Class B shares of each Fund;
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration the receipt of which is hereby
acknowledged, the parties hereto agree as follows:
APPOINTMENT. The Trust hereby affirms the appointment of WM Funds
Distributor, Inc. as the agent for distribution of shares for each Fund and
grants Distributor the right to sell Class A and Class B shares on behalf of
each Fund and on terms set forth in this Agreement. The Distributor accepts
such appointment and agrees to render the services herein set forth for the
payments herein provided (including reimbursement of expenses).
DELIVERY OF DOCUMENTS. The Trust and/or each Fund has furnished the
Distributor with copies of:
Agreement and Declaration of Trust and all amendments thereto for
the Trust (as amended from time to time, the "Declaration of Trust");
Bylaws and all amendments thereto for the Trust (as amended from
time to time, the "Bylaws"); and
<PAGE>
Each Fund's registration statement, prospectus and statement of
additional information, then in effect (the "Registration Statement")
under the Securities Act of 1933, as amended (the "1933 Act") and the
1940 Act.
From time to time, each Fund will furnish the Distributor with current
copies of all amendments or supplements to the foregoing, if any, and all
documents, notices and reports filed with the Securities and Exchange
Commission (the "SEC") and will make available, upon request, evidence of
payment of registration fees imposed from time to time by the States in
which securities of each Fund are sold by the Distributor.
DUTIES OF THE DISTRIBUTOR. The Distributor shall provide each Fund
with the benefit of its best judgment, efforts and facilities in rendering
its services as Distributor. The Distributor will act as the exclusive
Distributor of the Class A and Class B shares of each Fund, subject to the
supervision of the Trust's Board of Trustees and the following
understandings: the Trust's Board of Trustees shall be responsible for and
control the conduct of each Fund's affairs; in all matters relating to the
performance of this Agreement, the Distributor will act in conformity with
the Declaration of Trust and Bylaws of the Trust and the Registration
Statement of each Fund and with the instructions and directions of the
Trust's Board of Trustees; the Distributor will conform to and comply with
applicable requirements of the 1940 Act, the 1933 Act and all other
applicable federal or state laws and regulations. In carrying out its
obligations hereunder, the Distributor shall:
Provide to the Trust's Board of Trustees, at least quarterly, a
written report of the amounts expended in connection with all
distribution services rendered pursuant to this Agreement, including
an explanation of the purposes for which such expenditures were made;
and
Take, on behalf of each Fund, all actions which appear to be
necessary to carry into effect the distribution of each Fund's shares
as provided in paragraph 4.
DISTRIBUTION OF SHARES. It is mutually understood and agreed that the
Distributor does not undertake to sell all or any specific portion of the
Class A or Class B shares of any Fund. Distributor shall have the right to
enter into sales agreements with dealers of its choice for the sale of the
Class A or Class B shares of each Fund to the public at the public offering
price. Distributor shall set forth in such agreements the portion of the
sales charge which may be retained by such dealers. If any Fund determines
that it is necessary to file the form of dealer agreement and amendments
thereto as an exhibit to its currently effective Registration Statement
under the 1933 Act, then the Distributor shall provide the Fund with
currently effective documents. A Fund shall not sell any of its Class A or
Class B shares
-2-
<PAGE>
except through the Distributor. Notwithstanding the provisions of the
foregoing sentence:
A Fund may issue its Class A or Class B shares at their net asset
value to any shareholder of the Fund purchasing such shares with
dividends or other cash distributions received from the Fund pursuant
to any special or continuing offer made to shareholders;
The Distributor may, and when requested by a Fund, shall, suspend
its efforts to effectuate sales of the Class A or Class B shares of a
Fund at any time when in the opinion of the Distributor or of the Fund
no sales should be made because of a need to revise a Registration
Statement, or because of market or other economic considerations or
abnormal circumstances of any kind. Either party in its sole
discretion may reject orders for the purchase of such shares;
A Fund may withdraw the offering of its Class A or Class B shares
at any time with the consent of the Distributor or without such
consent when so required by the provisions of any statute or of any
order, rule or regulation of any governmental body having
jurisdiction;
The price at which the Class A or Class B shares will be sold to
investors (the "offering price") shall be the net asset value per
share, determined in accordance with the provisions of the Fund's
current Registration Statement, plus a sales charge determined in the
amount and manner established from time to time by the Distributor and
set forth in a Fund's current prospectus. The Fund shall receive the
net asset value per share for the sale of its Class A or Class B
shares;
If a sales charge is in effect, the Distributor shall have the
right, subject to such rules or regulations of the Securities and
Exchange Commission as may then be in effect pursuant to Section 22 of
the 1940 Act, to pay a portion of the sales charge to dealers who have
sold Class A or Class B shares of the Fund in accordance with
provisions of dealer agreements; and
The Distributor is not authorized by any Fund to provide any
information or to make any representations other than those contained
in the appropriate Registration Statements, or contained in
shareholder reports or other material that may be prepared by or on
behalf of a Fund for Distributor's use. This shall not be construed to
prevent the Distributor from preparing and distributing sales
literature or other material as it may deem appropriate.
-3-
<PAGE>
COMPENSATION FOR SERVICING SHAREHOLDER ACCOUNTS. As compensation for
its services hereunder, the Distributor shall be entitled to receive all
front-end loads and contingent deferred sales charges as may be described
from time to time in the Registration Statement. The Fund also shall pay a
distribution fee to the Distributor at an annual rate as shall be authorized
by the shareholders and further set by the Board of Trustees pursuant to the
provisions of the Trust's Distribution Plans for Class A and Class B shares,
then in effect, in accordance with Rule 12b-1 under the 1940 Act (the
"Distribution Plans"). The Trust acknowledges that the Distributor and its
dealers may compensate their investment representatives for opening
accounts, processing investors' purchase and redemption orders, responding
to inquiries from Fund shareholders concerning the status of their accounts
and the operations of a Fund, and communicating with a Fund and its transfer
agent on behalf of Fund shareholders in such manner and amount as the
Distributor may deem appropriate.
EXPENSES. The expenses connected with distribution shall be allocable
between the Funds and the Distributor as follows:
The Distributor shall furnish the services of personnel to the
extent that such services are required to carry out its obligations
under this Agreement.
Each Fund assumes and shall pay or cause to be paid the following
expenses incurred on its behalf:
Registration of shares including the expense of printing and
distributing prospectuses to existing shareholders; expenses incurred
for maintaining the Trust's or Fund's existence, taxes and expenses
related to portfolio transactions; charges and expenses of any
registrar, custodian or depository for portfolio securities and other
property, and any stock transfer, dividend or account agent or agents;
all taxes, including securities issuance and transfer taxes, and fees
payable to federal, state or other governmental agencies; costs and
expenses in connection with the registration, maintenance of
registration and qualification for sale of a Fund and its shares with
the SEC and various states and other jurisdictions (including filing
fees, legal fees and disbursements of counsel); expenses of
shareholders' and directors' meetings and preparing, printing, and
mailing of proxy statements and reports to shareholders; fees and
travel expenses of directors who are not "interested persons" as that
term is defined in the 1940 Act; expenses incident to the payment of
any dividend, distribution, withdrawal or redemption, whether in
shares or in cash; charges and expenses of any outside service used
for pricing of a Fund's shares; fees and expenses of legal counsel and
of independent accountants; membership dues of industry associations;
postage
-4-
<PAGE>
(excluding postage for promotional and sales literature); insurance
premiums on property of personnel (including, but not limited to legal
claims and liabilities and litigation costs and any indemnification
related thereto); and all other charges and costs of a Fund's
operation unless otherwise explicitly provided herein.
The Distributor will bear all expenses incurred in connection
with its performance of the services described herein and the
incurring of distribution expenses under this Agreement. For purposes
of this Agreement, "distribution expenses" of the Distributor shall
mean all expenses borne by the Distributor which represent payment for
activities primarily intended to result in the sale of Class A or
Class B shares, including, but not limited to, the expenses of
distribution that are described in the Distribution Plans.
The Distributor will furnish the Board of Trustees statements of
distribution revenues and expenditures at least quarterly with respect
to the Class A and Class B shares of each Fund as required by the
Distribution Plans for each respective Class.
NON-EXCLUSIVITY. The services of the Distributor are not exclusive and
the Distributor shall be entitled to render distribution or other services
to others (including other investment companies) and to engage in other
activities. It is understood and agreed that officers of the Distributor may
serve as officers or trustees of the Trust, and that officers or trustees of
the Trust may serve as officers of the Distributor to the extent permitted
by law; and that officers of the Distributor are not prohibited from
engaging in any other business activity or from rendering services to any
other person, or from serving as partners, officers or directors of any
other firm or corporation, including other investment companies and
broker/dealers.
TERM AND APPROVAL. This Agreement shall become effective as of the
date first above written for an initial period of two years, and shall
continue in force and effect from year to year thereafter, provided that,
with respect to any Fund or Class, such continuance is specifically approved
at least annually:
By the Trust's Board of Trustees, including the affirmative vote
of a majority of the Board of Trustees of the Trust who are not (i)
parties to this Agreement, (ii) interested persons of any such party
(as defined in Section 2(a)(19) of the 1940 Act), or (iii) persons
having a direct or indirect financial interest in the operation of
this Agreement or any agreement related to this Agreement (the
"Qualified Trustees") by votes cast in person at a meeting called for
the purpose of voting on such approval, or
-5-
<PAGE>
By the vote of a majority of the outstanding voting securities of
the Fund (as defined in Section 2(a)(42) of the 1940 Act).
TERMINATION. This Agreement may be terminated, with respect to any
Fund or Class, at any time, without the payment of any penalty, on sixty
(60) days' written notice, by vote of the Board of Trustees of the Trust,
or by a vote of a majority of the Qualified Trustees, or by a vote of a
majority of the outstanding voting securities of the Fund (as defined in
Section 2(a)(42) of the 1940 Act), or by the Distributor on sixty (60)
days' written notice to the Fund. The notice provided for herein may be
waived by either party. This Agreement shall automatically terminate in the
event of its assignment, the term "assignment" for this purpose having the
meaning set forth in Section 2(a)(4) of the 1940 Act.
REPRESENTATIONS AND WARRANTIES. The Trust represents and warrants to
the Distributor that any registration statement, prospectus and statement
of additional information, when such Registration Statement becomes
effective, will include all statements required to be contained therein in
conformity with the 1933 Act, the 1940 Act and the rules and regulations of
the SEC; that all statements of fact contained in any registration
statement, prospectus or statement of additional information will be true
and correct when such Registration Statement becomes effective; and that
neither any registration statement nor any prospectus or statement of
additional information when such Registration Statement becomes effective
will include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading to a purchaser of shares. The Distributor
may, but shall not be obligated to, propose from time to time such
amendment or amendments to any registration statement and such supplement
or supplements to any prospectus or statement of additional information as,
in the light of future developments, may, in the opinion of the
Distributor's counsel, be necessary or advisable. If the Trust shall not
propose such amendment or amendments and/or supplement or supplements
within fifteen (15) days after receipt by the Trust of a written request
from the Distributor to do so, the Distributor may, at its option,
terminate this Agreement. The Trust shall not file any amendment to any
registration statement or supplement to any prospectus or statement of
additional information without giving the Distributor reasonable notice
thereof in advance; provided, however, that nothing contained in this
Agreement shall in any way limit the Trust's right to file at any time such
amendments to any registration statement and/or supplements to any
prospectus or statement of additional information, of whatever character,
as the Trust may deem advisable, such right being in all respects absolute
and unconditional.
AMENDMENTS. This Agreement may be amended, with respect to any Fund or
Class, by the parties hereto only if such amendment is specifically
approved by the Board of Trustees of the Trust or by the vote of majority
of
-6-
<PAGE>
outstanding voting securities of the Fund, and by a majority of the
Qualified Trustees, which vote must be cast in person at a meeting called
for the purpose of voting on such approval; provided, however, that any
such amendment that constitutes an amendment of the Distribution Plans for
any Class of shares of the Fund shall be approved by shareholders pursuant
to Rule 12b-1 to the extent required by applicable law.
INDEMNIFICATION.
12.1 The Trust authorizes the Distributor and any dealers with
whom Distributor has entered into dealer agreements to use any
prospectus or statement of additional information furnished by the
Trust from time to time, in connection with the sale of shares of each
Fund. The Trust agrees to indemnify, defend and hold Distributor, its
several officers and directors, and any person who controls
Distributor within the meaning of Section 15 of the 1933 Act, free and
harmless from and against any and all claims, demands, liabilities and
expenses (including the cost of investigating or defending such
claims, demands or liabilities and any counsel fees incurred in
connection therewith) which Distributor, its officers and directors,
or any such controlling person, may incur under the 1933 Act, the 1940
Act or common law or otherwise, arising out of or based upon any
untrue statement or alleged untrue statement of a material fact
contained in any registration statement, any prospectus or any
statement of additional information, or arising out of or based upon
any omission or alleged omission to state a material fact required to
be stated in any registration statement, any prospectus or any
statement of additional information, or necessary to make the
statements in any of them not misleading; provided, however, that the
Trust's agreement to indemnify the Distributor, its officers or
directors, and any such controlling person shall not be deemed to
cover any claims, demands, liabilities or expenses arising out of or
based upon any statements or representations made by Distributor or
its representatives or agents other than such statements and
representations as are contained in any registration statement,
prospectus or statement of additional information and in such
financial and other statements as are furnished to the Distributor
pursuant to paragraph 2 hereof; and further provided that the Trust's
agreement to indemnify the Distributor and the Trust's representations
and warranties shall not be deemed to cover any liability to the Trust
or its shareholders to which Distributor would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of Distributor' reckless
disregard of its obligations and duties under this Agreement. The
Trust's agreement to indemnify Distributor, its officers and
directors, and any such controlling person, as aforesaid, is expressly
conditioned upon the Trust's being notified of any action brought
against Distributor, its officers or directors, or any such
-7-
<PAGE>
controlling person, such notification to be given by letter or by
telegram addressed to the Trust at its principal office stated herein
and sent to the Trust by the person against whom such action is
brought, within ten (10) days after the summons or other first legal
process shall have been served. The failure so to notify the Trust of
any such action shall not relieve the Trust from any liability that
the Trust may have to the person against whom such action is brought
by reason of any such untrue or alleged untrue statement or omission
or alleged omission otherwise than on account of the Trust's indemnity
agreement contained in this paragraph 12.1. The Trust's
indemnification agreement contained in this paragraph 12.1 and the
Trust's representations and warranties in this Agreement shall remain
operative and in full force and effect regardless of any investigation
made by or on behalf of Distributor, its officers and directors, or
any controlling person, and shall survive the delivery of any shares.
This agreement of indemnity will inure exclusively to Distributor's
benefit, to the benefit of its several officers and directors and
their respective estates, and to the benefit of the controlling
persons and their successors. The Trust agrees to notify Distributor
promptly of the commencement of any litigation or proceedings against
the Trust or any of its officers or trustees in connection with the
issuance and sale of any shares.
12.2 Distributor agrees to indemnify, defend and hold the Trust,
its several officers and trustees, and any person who controls the
Trust within the meaning of Section 15 of the 1933 Act, free and
harmless from and against any and all claims, demands, liabilities and
expenses (including the costs of investigating or defending such
claims, demands or liabilities and any counsel fees incurred in
connection therewith) that the Trust, its officers or trustees or any
such controlling person may incur under the 1933 Act, the 1940 Act or
common law or otherwise, but only to the extent that such liability or
expense incurred by the Trust, its officers or trustees or such
controlling person resulting from such claims or demands shall arise
out of or be based upon (a) any unauthorized sales literature,
advertisements, information, statements or representations or (b) any
untrue or allegedly untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Trust and
used in the answers to any of the items of the Registration Statement
or in the corresponding statements made in the prospectus or statement
of additional information, or shall arise out of or be based upon any
omission or alleged omission to state a material fact in connection
with such information furnished in writing by Distributor to the Trust
and required to be stated in such answers or necessary to make such
information not misleading. Distributor's agreement to indemnify the
Trust, its officers and trustees, and any such controlling person, as
aforesaid, is expressly conditioned upon Distributor being notified of
any action brought against the Trust, its officers or trustees, or any
such controlling person, such
-8-
<PAGE>
notification to be given by letter or telegram addressed to
Distributor at its principal office as stated herein and sent to
Distributor by the person against whom such action is brought, within
ten days after the summons or other first legal process shall have
been served. The failure so to notify the Distributor of any such
action shall not relieve Distributor from any liability that the
Distributor may have to the Trust, its officers or trustees, or to
such controlling person by reason of any such untrue or alleged untrue
statement or omission or alleged omission otherwise than on account of
Distributor's indemnity agreement contained in this paragraph 12.2.
The Distributor agrees to notify the Trust promptly of the
commencement of any litigation or proceedings against Distributor or
any of its officers or directors in connection with the issuance and
sale of any shares.
12.3 In case any action shall be brought against any indemnified
party under paragraph 12.1 or 12.2, and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate in, and, to the extent that it shall
wish to do so, to assume the defense thereof with counsel satisfactory
to such indemnified party. If the indemnifying party opts to assume
the defense of such action, the indemnifying party will not be liable
to the indemnified party for any legal or other expenses subsequently
incurred by the indemnified party in connection with the defense
thereof other than (a) reasonable costs of investigation or the
furnishing of documents or witnesses and (b) all reasonable fees and
expenses of separate counsel to such indemnified party if (i) the
indemnifying party and the indemnified party shall have agreed to the
retention of such counsel or (ii) the indemnified party shall have
concluded reasonably that representation of the indemnifying party and
the indemnified party by the same counsel would be inappropriate due
to actual or potential differing interests between them in the conduct
of the defense of such action.
LIABILITY OF THE DISTRIBUTOR. In the performance of its duties
hereunder, the Distributor shall be obligated to exercise care and
diligence and to act in good faith and to use its best efforts within
reasonable limits to insure the accuracy of all services performed under
this Agreement, but the Distributor shall not be liable for any act or
omission which does not constitute willful misfeasance, bad faith or gross
negligence on the part of the Distributor or reckless disregard by the
Distributor of its duties under this Agreement.
NOTICES. Any notices under this Agreement shall be in writing,
addressed and delivered or mailed postage paid to the other party at such
address as such other party may designate for the receipt of such notice.
Until further notice to the other party, it is agreed that the address of
each Fund shall be 601 West Main
-9-
<PAGE>
Avenue, Spokane, WA 99201, and the address of the Distributor shall be 601
West Main Avenue, Spokane, WA 99201.
DECLARATION OF TRUST AND LIMITATION OF LIABILITY. A copy of the
Declaration of Trust of the Trust is on file with the Secretary of State of
The Commonwealth of Massachusetts, and notice is hereby given that this
Agreement is executed by an officer of the Trust on behalf of the trustees
of the Trust, as trustees and not individually, on further behalf of each
Fund, and that the obligations of this Agreement with respect to each Fund
shall be binding upon the assets and properties of the Fund only and shall
not be binding upon the assets and properties of any other Fund or series
of the Trust or upon any of the trustees, officers, employees, agents or
shareholders of the Fund or the Trust individually.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers on the day and year first
above written.
WM STRATEGIC ASSET MANAGEMENT
PORTFOLIOS, on behalf of its portfolios
INCOME PORTFOLIO,
FLEXIBLE INCOME PORTFOLIO,
BALANCED PORTFOLIO,
CONSERVATIVE GROWTH PORTFOLIO and
STRATEGIC GROWTH PORTFOLIO
By: /s/ Keith B. Pipes
--------------------
Keith B. Pipes
President
Attest:
By: /s/ John T. West
---------------------
John T. West
Secretary
WM FUNDS DISTRIBUTOR, INC.
By: /s/ William G. Papesh
---------------------
William G. Papesh
President
Attest:
By: /s/ Sharon L. Howells
----------------------
Sharon L. Howells
Secretary
-10-
<PAGE>
Exhibit 8
DELEGATION, CUSTODY AND INFORMATION SERVICES AGREEMENT
------------------------------------------------------
<PAGE>
DELEGATION, CUSTODY AND INFORMATION SERVICES AGREEMENT
------------------------------------------------------
AGREEMENT dated as of March , 1998, between WM Trust I, WM Trust II,
WM Strategic Asset Management Portfolios, WM Prime Income Fund and WM Variable
Trust, each a business trust organized under the laws of the Commonwealth of
Massachusetts having its principal office and place of business at 601 West Main
Avenue, Spokane, Washington 99201 (the "Funds"), and BOSTON SAFE DEPOSIT AND
TRUST COMPANY, a Massachusetts trust company with its principal place of
business at One Boston Place, Boston, Massachusetts 02108 (the "Custodian").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, The Board of Trustees of the Funds desires to delegate certain of
its responsibilities for performing the services set forth in paragraphs (c)(1),
(c)(2) and (c)(3) of Rule 17f-5 under the Investment Company Act of 1940, as
amended (the "1940 Act") to the Custodian;
WHEREAS, The Custodian agrees to accept such delegation with respect to
Assets held by Foreign Custodians in the jurisdictions listed on Appendix B as
----------
set forth in Article II;
WHEREAS, The Funds and the Custodian desire to restate the terms of any
existing custody agreement between various Funds and the Custodian to reflect
the changes made by the revised Rule 17f-5, and to set forth their agreement
with respect to the custody of the Fund's Securities and cash and the processing
of Securities transactions;
WHEREAS, The Funds desire to hire the Custodian as a vendor to provide
certain information available to the Custodian with respect to foreign
jurisdictions, Securities Depositories and Foreign Custodians not listed on
Appendix B for which the board or a delegatee other than the Custodian has the
- ----------
responsibilities described in paragraphs (c)(1), (c)(2) and (c)(3) of Rule 17f-
5; and
WHEREAS, The Custodian agrees to provide, as a vendor, the information
described in Article IV if, and when available in accordance with the terms and
conditions of Article IV.
NOW THEREFORE, in consideration of the mutual promises hereinafter set
forth, the Funds and the Custodian agree as follows:
2
<PAGE>
ARTICLE I
---------
DEFINITIONS
-----------
Whenever used in this Agreement or in any Appendices to this Agreement, the
following words and phrases, unless the context otherwise requires, shall have
the following meanings:
a. "Affiliated Person" shall have the meaning of the term within Section
2(a)(3) of the 1940 Act.
a)
b. "Agreement" shall mean this Delegation, Custody and Information
Services Agreement.
a)
c. "Assets" shall mean any of a Fund's investments (including foreign
currencies) for which the primary market is outside the United States, and
such cash and cash equivalents as are reasonably necessary to effect a
Fund's transactions in such investments.
a)
d. "Authorized Person" shall be deemed to include the Chairman of the Board
of Trustees, the President, and any Vice President, the Secretary, the
Treasurer or any other person, whether or not any such person is an
officer or employee of the Fund, duly authorized by the Board of Trustees
of the Fund to add or delete jurisdictions pursuant to Article II and to
give Oral Instructions and Written Instructions on behalf of the Funds and
listed in the certification annexed hereto as Appendix A or such other
----------
certification as may be received by the Custodian from time to time.
a)
e. "Board" shall mean the Board of Trustees of the Funds.
a)
f. "Book-Entry System" shall mean the Federal Reserve/Treasury book-entry
system for United States and federal agency Securities, its successor or
successors and its nominee or nominees.
a)
g. "Business Day" shall mean any day on which the Funds, the Custodian, the
Book-Entry System and appropriate clearing corporation(s) are open for
business.
a)
3
<PAGE>
h. "Certificate" shall mean any notice, instruction or other instrument in
writing, authorized or required by this Agreement to be given to the
Custodian, which is actually received by the Custodian and signed on
behalf of the Fund by any two Authorized Persons or any two officers
thereof.
a)
i. "Country Risk" means all factors reasonably related to the systematic
risk of holding assets in a particular country including, but not limited
to, such country's financial infrastructure (including any Securities
Depositories operating in such country), prevailing custody and settlement
practices and laws applicable to the safekeeping and recovery of Assets
held in custody.
a)
j. "Custodian" shall mean Boston Safe Deposit and Trust Company in its
capacity as delegate, custodian or information services provider as
required under the terms of each Article.
a)
k. "Custody Agreement" shall mean the provisions of Articles I, III and V
of this Agreement and any Appendices referenced therein and attached to
this Agreement.
l. "Information Services Agreement" shall mean the provisions of Articles
I and IV and V of this Agreement and any Appendices referenced therein and
attached to this Agreement.
a)
m. "Master Trust Agreement"] shall mean the Agreements and Declarations of
Trust of the Funds as the same may be amended from time to time.
a)
n. "Foreign Custodian" shall mean: (a) a banking institution or trust
company incorporated or organized under the laws of a country other than
the United States, that is regulated as such by the country's government
or an agency of the country's government; (b) a majority-owned direct or
indirect subsidiary of a U.S. Bank or bank-holding company; or (c) any
entity other than a Securities Depository with respect to which exemptive
or no-action relief has been granted by the Securities and Exchange
Commission. For the avoidance of doubt, the term "Foreign Custodian" shall
not include Euroclear, Cedel, First Chicago Clearing Centre or any other
transnational system for the central handling of securities or equivalent
book-entries regardless of whether or not such entities are acting in a
custodial capacity with respect to Assets, Securities or other property of
the Funds.
4
<PAGE>
a)
o. "Funds" shall mean WM Trust I, WM Trust II, WM Strategic Asset
-------------------------------------------------
Management Portfolios, WM Prime Income Fund and WM Variable Trust.
----------------------------------------------------------------------
a)
p. "Delegation Agreement" shall mean the provisions of Articles I, II and
V of this Agreement and any Appendices referenced therein and attached to
this Agreement.
a)
q. "Money Market Security" shall be deemed to include, without limitation,
debt obligations issued or guaranteed as to interest and principal by the
government of the United States or agencies or instrumentalities thereof
("U.S. government securities"), commercial paper, bank certificates of
deposit, bankers' acceptances and short-term corporate obligations, where
the purchase or sale of such securities normally requires settlement in
federal funds on the same day as such purchase or sale, and repurchase and
reverse repurchase agreements with respect to any of the foregoing types
of securities.
a)
r. "Oral Instructions" shall mean verbal Custodian from a person reasonably
believed by the instructions actually received by the Custodian to be an
Authorized Person.
a)
s. "Prospectus" shall mean a Fund's current prospectus and statement of
additional information relating to the registration of the Fund's Shares
under the Securities Act of 1933, as amended.
a)
t. "Rule 17f-5" shall mean Rule 17f-5 promulgated under Section 17(f)
of the 1940 Act as such rule (and any successor regulation) may be
amended from time to time.
a)
u. "Selected Countries" means the jurisdictions listed on Appendix B as
----------
such may be amended from time to time in accordance with Article II.
a)
v. "Shares" refers to shares of beneficial interest par value per share of
the Funds.
a)
5
<PAGE>
w. "Security" or "Securities" shall be deemed to include bonds, debentures,
notes, stocks, shares, evidences of indebtedness, and other securities,
commodities interests and investments from time to time owned by the Fund.
a)
x. "Securities Depository" shall mean any entity described in subparagraph
(a)(1)(ii) or paragraph (a)(6) of Rule 17f-5 or any other recognized
foreign or domestic clearing facility, book-entry system, centralized
custodial depository or similar organization. For the avoidance of doubt,
the term "Securities Depository" shall include Euroclear, Cedel, First
Chicago Clearing Centre or any other transnational system for the central
handling of securities or equivalent book-entries regardless of whether or
not such entities are acting in a custodial capacity with respect to
Assets, Securities or other property of the Fund.
a)
y. "Transfer Agent" shall mean the person which performs the transfer
agent, dividend disbursing agent and shareholder servicing agent functions
for the Fund.
a)
z. "Written Instructions" shall mean a written communication actually
received by the Custodian from a person reasonably believed by the
Custodian to be an Authorized Person by any system, including, without
limitation, electronic transmissions, facsimile and telex.
a)
aa. The "1940 Act" refers to the Investment Company Act of 1940, and the
Rules and Regulations thereunder, all as amended from time to time.
a)
bb. "Subcustodian" means a banking institution or any affiliate thereof
located in the United States.
ARTICLE II
----------
DELEGATION AGREEMENT
--------------------
1. REPRESENTATIONS.
---------------
(a) Status of Custodian. The Custodian represents that it is a U.S. Bank
-------------------
within the meaning of paragraph (a)(7) of Rule 17f-5.
6
<PAGE>
(b) Fund Determinations and Authorizations. The Funds represent that the
--------------------------------------
Board has determined that it is reasonable to rely on Custodian to perform
the responsibilities delegated pursuant to this Delegation Agreement and
that it has made the delegations set forth below, subject to the acceptance
of such delegation by the Custodian on the terms and conditions set forth
in this Delegation Agreement.
(c) Power and Authority; No Conflicts. Each party represents to the other
---------------------------------
that it has all necessary power and authority, and has obtained any consent
or approval necessary to permit it, to enter into and perform under this
Delegation Agreement and that this Delegation Agreement does not violate,
breach, give rise to a default or right of termination under or otherwise
conflict with any applicable law, regulation, ruling, decree or other
governmental authorization or any contract to which it is a party or by
which any of its assets is bound.
(d) Fund Responsibilities. The Funds acknowledge and agree that, except as
---------------------
expressly set forth in this Delegation Agreement, each Fund is solely
responsible to assure that the maintenance of the Fund's Securities and
cash (including Assets) hereunder complies with applicable laws and
regulations, including without limitation the 1940 Act and the rules and
regulations promulgated thereunder and applicable interpretations thereof
or exemptions therefrom.
2. DELEGATION AND CUSTODIAN'S SERVICES.
-----------------------------------
(a) Delegation. Subject to the provisions of this Delegation Agreement
----------
and the requirements of Rule 17f-5, the Board hereby delegates to, and the
Custodian hereby agrees to accept the responsibility for selecting,
contracting with and monitoring Foreign Custodians in Selected Countries in
accordance with paragraphs (c)(1), (c)(2) and (c)(3) of Rule 17f-5.
Pursuant to this delegation, the Board authorizes the Custodian to place
and maintain Assets in the care of any Foreign Custodian(s) in the
Selected Countries and to enter into, on behalf of the Fund, such written
contracts governing the Fund's foreign custody arrangements with such
Foreign Custodian(s) as the Custodian deems appropriate.
7
<PAGE>
(b) Scope of Delegation. The delegation contained in Section 2(a) applies
-------------------
only to the selection of, contracting with and monitoring of Foreign
Custodians located in Selected Countries and only with respect to Assets
held by such Foreign Custodians in Selected Countries. The Board and the
Custodian agree that nothing in this Delegation Agreement or this Agreement
as a whole shall cause or be deemed to cause any delegation to the
Custodian of any of the Board's responsibilities with respect to Assets,
Securities or other property held in Securities Depositories or Assets held
by Foreign Custodians in jurisdictions other than Selected Countries.
(c) Additions to Appendix B. Appendix B may be amended from time to time
----------------------- ----------
to add jurisdictions by an instrument in writing signed by an Authorized
Person of the Fund and the Custodian, provided that with respect to any
amendment that adds a jurisdiction to Appendix B, the Custodian's
----------
responsibility and authority with respect to any jurisdiction so added will
commence at the later of (i) the time that the Custodian and the Fund's
Authorized Person have both executed such amendment, or (ii) the time that
the Custodian receives a copy of such executed amendment.
(d) Deletions from Appendix B. The Board may withdraw its delegation with
-------------------------
respect to any jurisdiction upon written notice to the Custodian. The
Custodian shall withdraw its acceptance of delegated authority with respect
to any jurisdiction upon written notice to the Board. Upon receipt of such
notice by the party to whom such notice is given, the Custodian shall have
no further responsibilities under this Delegation Agreement with respect to
the selecting, contracting with, and monitoring of any Foreign Custodian
holding Assets in the removed jurisdiction.
(e) Reports to Board. Custodian shall provide written reports notifying
----------------
Board of the placement of Assets with a particular Foreign Custodian and of
any material change in Fund's foreign custody arrangements. Such reports
shall be provided to Board quarterly, except as otherwise agreed by the
Custodian and the Fund.
(f) Monitoring System. In each case in which the Custodian has exercised
-----------------
the authority delegated under this Article II, Section 2 to place Assets
with an Foreign
8
<PAGE>
Custodian, the Custodian is authorized to, and shall, on behalf of Funds,
establish a system to re-assess or re-evaluate, at least annually (i) the
appropriateness of maintaining Assets with such Foreign Custodian and (ii)
the contract governing the Fund's arrangements with such Foreign Custodian.
3. GUIDELINES AND PROCEDURES.
-------------------------
(a) Country Risk. In exercising its delegated authority under Article II,
------------
Section 2, the Custodian may assume, for all purposes, that the Board (or a
Fund's investment adviser, pursuant to authority delegated by the Board)
has considered, and, pursuant to its fiduciary duties to the Fund and the
Fund's shareholders, determined to accept, such Country Risk. In exercising
its delegated authority under Article II, Section 2, the Custodian may also
assume that the Board (or a Fund's investment adviser, pursuant to
authority delegated by the Board) has, and will continue to, monitor such
Country Risk to the extent the Board deems necessary or appropriate.
Nothing in this Delegation Agreement shall require the Custodian to make
any selection or to engage in any monitoring on behalf of the Fund (i) that
would entail consideration of Country Risk or (ii) otherwise in connection
with any Securities Depository or Foreign Custodians in jurisdictions other
than Selected Countries.
(b) Standard of Care for Selection of Eligible Foreign Custodians. In
-------------------------------------------------------------
exercising the authority delegated under Article II, Section 2, to place
Assets with any Foreign Custodian in a Selected Country, the Custodian
shall determine that Assets will be subject to reasonable care, based on
the standards applicable to custodians in the Selected Country in which the
Assets will be held, after considering all factors relevant to the
safekeeping of such assets, including the factors set forth in Rule 17f-
5(c)(1)(i)-(iv).
(c) Standard for Contracting with Eligible Foreign Custodians. In
---------------------------------------------------------
exercising the authority delegated under Article II, Section 2, to enter
into a written contract governing the Fund's foreign custody arrangements
with a Foreign Custodian in a Selected Country, the Custodian shall
determine that such contract provides reasonable care for Assets based on
the standards applicable to Foreign Custodians in the Selected Country. In
making this determination, the Custodian shall consider the provisions of
Rule 17f-5(c)(2).
9
<PAGE>
(d) Standard of Care for Delegated Authority. In exercising the authority
----------------------------------------
delegated under Article II, Section 2, the Custodian agrees to exercise
reasonable care, prudence and diligence such as a person having
responsibility for the safekeeping of the Assets would exercise in like
circumstances.
ARTICLE III
-----------
CUSTODY PROVISIONS
------------------
1. APPOINTMENT OF CUSTODIAN.
------------------------
(a) The Board hereby constitutes and appoints the Custodian as custodian
of all the Securities and monies at the time owned by or in the
possession of each Fund during the period of this Agreement.
(b) The Custodian hereby accepts appointment as such custodian and agrees
to perform the duties thereof as hereinafter set forth.
2. CUSTODY OF CASH AND SECURITIES.
------------------------------
(a) Receipt and Holding of Assets. Each Fund will deliver or cause to
-----------------------------
be delivered to the Custodian all Securities and monies owned by it at
any time during the period of this Custody Agreement. The Custodian will
not be responsible for such Securities and monies until actually
received by it. The Board hereby specifically authorizes the Custodian
to hold Securities, Assets or other property of each Fund with any
Subcustodian, Foreign Custodian or Securities Depository. Securities and
monies of each Fund deposited in a Securities Depository will be
represented in accounts which include only assets held by the Custodian
for customers, including but not limited to accounts for which the
Custodian acts in a fiduciary or representative capacity.
10
<PAGE>
(b) Accounts and Disbursements. The Custodian shall establish and
--------------------------
maintain a separate account for each Fund and shall credit to the
separate account all monies received by it for the account of each such
Fund and shall disburse the same only:
1. In payment for Securities purchased for the Fund;
2. In payment of dividends or distributions with respect to the
Shares;
3. In payment of original issue or other taxes with respect to the
Shares;
4. In payment for Shares which have been redeemed by the Fund;
5. Pursuant to Written Instructions setting forth the name and address
of the person to whom the payment is to be made, the amount to be paid
and the purpose for which payment is to be made, provided that in the
event of disbursements pursuant to this sub-section 2(b), the Fund shall
indemnify and hold the Custodian harmless from any claims or losses
arising out of such disbursements in reliance on such Written
Instructions which it, in good faith, believes to be received from duly
Authorized Persons; or
6. In payment of fees and in reimbursement of the expenses and
liabilities of the Custodian attributable to the Fund, as provided in
Article III, Section 9(I) and Article V, Section 1.___
(c) Confirmation and Statements. Promptly after the close of business
---------------------------
on each day, the Custodian shall furnish each Fund with confirmations
and a summary of all transfers to or from the account of the Fund during
said day. Where securities purchased by a Fund are in a fungible bulk of
securities registered in the name of the Custodian (or its nominee) or
shown on the Custodian's account on the books of a Securities
Depository, the Custodian shall by book-entry or otherwise identify the
quantity of those securities belonging to the Fund. At least monthly,
the Custodian shall furnish each Fund with a detailed statement of the
Securities and monies held for the Fund under this Custody Agreement.
(d) Registration of Securities and Physical Separation. The Custodian
--------------------------------------------------
is authorized to hold all Securities, Assets, or other property of each
Fund in nominee
11
<PAGE>
name, in bearer form or in book-entry form. The Custodian may register
any Securities, Assets or other property of a Fund in the name of the
Fund, in the name of the Custodian, any Subcustodian, or Foreign
Custodian, in the name of any duly appointed registered nominee of such
entity, or in the name of a Securities Depository or its successor or
successors, or its nominee or nominees. The Custodian is hereby
authorized to deposit with, and hold Securities, Assets or other
property of a Fund with any Securities Depository. Each Fund agrees to
furnish to the Custodian appropriate instruments to enable the Custodian
to hold or deliver in proper form for transfer, or to register in the
name of its registered nominee or in the name of a Securities
Depository, any Securities which it may hold for the account of the Fund
and which may from time to time be registered in the name of the Fund.
The Custodian shall hold all such Securities specifically allocated to a
Fund which are not held in a Securities Depository in a separate account
for the Fund in the name of the Fund physically segregated at all times
from those of any other person or persons.
(e) Segregated Accounts. Upon receipt of a Written Instruction, the
-------------------
Custodian will establish segregated accounts on behalf of each Fund to
hold liquid or other assets as it shall be directed by a Written
Instruction and shall increase or decrease the assets in such segregated
accounts only as it shall be directed by subsequent Written Instruction.
(f) Collection of Income and Other Matters Affecting Securities. Unless
-----------------------------------------------------------
otherwise instructed to the contrary by a Written Instruction, the
Custodian by itself, or through the use of a Securities Depository with
respect to Securities therein deposited, shall with respect to all
Securities held for a Fund in accordance with this Agreement:
1. Collect all income due or payable, provided that the Custodian
shall not be responsible for the failure to receive payment of (or late
payment of) distribution with respect to securities or other property
held in the account;
2. Present for payment and collect the amount payable upon all
Securities which may mature or be called, redeemed, retired or otherwise
become payable. Notwithstanding the foregoing, the Custodian shall have
no responsibility to the Fund for monitoring or ascertaining any call,
redemption or retirement dates
12
<PAGE>
with respect to put bonds which are owned by the Fund and held by the
Custodian or its nominees. Nor shall the Custodian have any
responsibility or liability to the Fund for any loss by the Fund for any
missed payments or other defaults resulting therefrom, unless the
Custodian received timely notification from the Fund specifying the
time, place and manner for the presentment of any such put bond owned by
the Fund and held by the Custodian or its nominee. The Custodian shall
not be responsible and assumes no liability for the accuracy or
completeness of any notification the Custodian may furnish to the Fund
with respect to put bonds;
3. Surrender Securities in temporary form for definitive Securities;
4. Execute any necessary declarations or certificates of ownership
under the Federal income tax laws or the laws or regulations of any
other taxing authority now or hereafter in effect; and
5. Hold directly, or through a Securities Depository with respect to
Securities therein deposited, for the account of the Fund all rights and
similar Securities issued with respect to any Securities held by the
Custodian hereunder for the Fund.
(g) Delivery of Securities and Evidence of Authority. Upon receipt of a
------------------------------------------------
Written Instruction and not otherwise, except for subparagraphs 5, 6, 7,
and 8 of this section 2(g) which may be effected by Oral or Written
Instructions, the Custodian, directly or through the use of a Securities
Depository, shall:
1. Execute and deliver or cause to be executed and delivered to such
persons as may be designated in such Written Instructions, proxies,
consents, authorizations, and any other instruments whereby the
authority of a Fund as owner of any Securities may be exercised;
2. Deliver or cause to be delivered any Securities held for a Fund in
exchange for other Securities or cash issued or paid in connection with
the liquidation, reorganization, refinancing, merger, consolidation or
recapitalization of any corporation, or the exercise of any conversion
privilege;
13
<PAGE>
3. Deliver or cause to be delivered any Securities held for a Fund to
any protective committee, reorganization committee or other person in
connection with the reorganization, refinancing, merger, consolidation
or recapitalization or sale of assets of any corporation, and receive
and hold under the terms of this Custody Agreement in the separate
account for the Fund such certificates of deposit, interim receipts or
other instruments or documents as may be issued to it to evidence such
delivery;
4. Make or cause to be made such transfers or exchanges of the assets
specifically allocated to the separate account of a Fund and take such
other steps as shall be stated in Written Instructions to be for the
purpose of effectuating any duly authorized plan of liquidation,
reorganization, merger, consolidation or recapitalization of the Fund;
5. Deliver Securities upon sale of such Securities for the account of
a Fund pursuant to Section 3;
6. Deliver Securities upon the receipt of payment in connection with
any repurchase agreement related to such Securities entered into by a
Fund;
7. Deliver Securities owned by a Fund to the issuer thereof or its
agent when such Securities are called, redeemed, retired or otherwise
become payable; provided, however, that in any such case the cash or
other consideration is to be delivered to the Custodian. Notwithstanding
the foregoing, the Custodian shall have no responsibility to the Fund
for monitoring or ascertaining any call, redemption or retirement dates
with respect to the put bonds which are owned by the Fund and held by
the Custodian or its nominee. Nor shall the Custodian have any
responsibility or liability to the Fund for any loss by the Fund for any
missed payment or other default resulting therefrom unless the Custodian
received timely notification from the Fund specifying the time, place
and manner for the presentment of any such put bond owned by the Fund
and held by the Custodian or its nominee. The Custodian shall not be
responsible and assumes no liability to the Fund for the accuracy or
completeness of any notification the Custodian may furnish to the Fund
with respect to put bonds;
14
<PAGE>
8. Deliver Securities for delivery in connection with any loans of
Securities made by a Fund but only against receipt of adequate
collateral as agreed upon from time to time by the Custodian and the
Fund which may be in the form of cash or U.S. government securities or a
letter of credit;
9. Deliver Securities for delivery as security in connection with any
borrowings by a Fund requiring a pledge of Fund assets, but only against
receipt of amounts borrowed;
10. Deliver Securities upon receipt of Written Instructions from a Fund
for delivery to the Transfer Agent or to the holders of Shares in
connection with distributions in kind, as may be described from time to
time in the Fund's Prospectus, in satisfaction of requests by holders of
Shares for repurchase or redemption;
11. Deliver Securities as collateral in connection with short sales by
a Fund of common stock for which the Fund owns the stock or owns
preferred stocks or debt securities convertible or exchangeable, without
payment or further consideration, into shares of the common stock sold
short;
12. Deliver Securities for any purpose expressly permitted by and in
accordance with procedures described in a Fund's Prospectus; and
13. Deliver Securities for any other proper business purpose, but only
upon receipt of, in addition to Written Instructions, a certified copy
of a resolution of the Board of Trustees signed by an Authorized Person
and certified by the Secretary of a Fund, specifying the Securities to
be delivered, setting forth the purpose for which such delivery is to be
made, declaring such purpose to be a proper business purpose, and naming
the person or persons to whom delivery of such Securities shall be made.
Notwithstanding anything in this Agreement to the contrary, the Custodian
shall not be liable for the acts or omissions of any agent appointed under
paragraph (f) of Section 9 pursuant to Oral or Written Instructions including,
buy not limited to, any broker-dealer or other entity designated by the Fund or
its investment advisor to hold any Securities or other property of the Fund as
collateral or otherwise pursuant to any investment strategy.
15
<PAGE>
(h) Endorsement and Collection of Checks, Etc. The Custodian is hereby
-----------------------------------------
authorized to endorse and collect all checks, drafts or other orders for
the payment of money received by the Custodian for the account of the
Fund.
3. SETTLEMENT OF FUND TRANSACTIONS.
-------------------------------
(a) Customary Practices. Notwithstanding anything to the contrary in
-------------------
this Agreement, the Custodian is authorized to settle transactions in
accordance with trading and processing practices customary in the
jurisdiction or market where the transaction occurs. Each Fund acknowledges
that this may, in certain circumstances, require the delivery of cash or
Securities (or other property) without the concurrent receipt of Securities
(or other property) or cash and, in such circumstances, the Fund shall have
responsibility for nondelivery of Securities or other property (or late
delivery) or nonreceipt of payments of monies (or late payment) by the
counterparty.
16
<PAGE>
(b) Contractual Income. The Custodian shall credit each Fund with
------------------
income and maturity proceeds on securities on contractual payment date net
of any taxes or upon actual receipt as agreed between the Custodian and the
Fund. To the extent a Fund and the Custodian have agreed to credit income
on contractual payment date, the Custodian may reverse such accounting
entries with back value to the contractual payment date if the Custodian
reasonably believes that it will not receive such amount.
(c) Contractual Settlement. The Custodian will attend to the
----------------------
settlement of securities transactions on the basis of either contractual
settlement date accounting or actual settlement date accounting as agreed
between a Fund and the Custodian. To the extent the Fund and the Custodian
have agreed to settle certain securities transactions on the basis of
contractual settlement date accounting, the Custodian may reverse with back
value to the contractual settlement date any entry relating to such
contractual settlement where the related transaction remains unsettled in
accordance with established procedures.
4. LENDING OF SECURITIES.
---------------------
The Custodian may lend the assets of each Fund in accordance with the terms
and conditions of a separate securities lending agreement.
5. PAYMENT OF DIVIDENDS OR DISTRIBUTIONS.
-------------------------------------
(a) Each Fund shall furnish to the Custodian the vote of the Board of
Trustees of the Fund certified by the Secretary (i) authorizing the
declaration of distributions on a specified periodic basis and authorizing
the Custodian to rely on Oral or Written Instructions specifying the date
of the declaration of such distribution, the date of payment thereof, the
record date as of which shareholders entitled to payment shall be
determined, the amount payable per share to the shareholders of record as
of the record date and the total amount payable to the Transfer Agent on
the payment date, or (ii) setting forth the date of declaration of any
distribution by the Fund, the date of payment thereof, the record date as
of which shareholders entitled to payment shall be determined, the amount
payable per share to the shareholders of record as of the record date and
the total amount payable to the Transfer Agent on the payment date.
17
<PAGE>
(b) Upon the payment date specified in such vote, Oral Instructions or
Written Instructions, as the case may be, the Custodian shall pay out the
total amount payable to the Transfer Agent of the Fund.
6. SALE AND REDEMPTION OF SHARES OF A FUND.
---------------------------------------
(a) Whenever a Fund shall sell any Shares, the Fund shall deliver or cause
to be delivered to the Custodian a Written Instruction duly specifying:
1. The number of Shares sold, trade date, and price; and
2. The amount of money to be received by the Custodian for the sale of
such Shares.
The Custodian understands and agrees that Written Instructions may be
furnished subsequent to the purchase of Shares and that the information
contained therein will be derived from the sales of Shares as reported to
the Fund by the Transfer Agent.
(b) Upon receipt of money from the Transfer Agent, the Custodian shall
credit such money to the separate account of the Fund.
(c) Upon issuance of any Shares in accordance with the foregoing
provisions of this Section 6, the Custodian shall pay all original issue
or other taxes required to be paid in connection with such issuance upon
the receipt of a Written Instruction specifying the amount to be paid.
(d) Except as provided hereafter, whenever any Shares are redeemed, the
Fund shall cause the Transfer Agent to promptly furnish to the Custodian
Written Instructions, specifying:
1. The number of Shares redeemed; and
2. The amount to be paid for the Shares redeemed.
18
<PAGE>
The Custodian further understands that the information contained in such
Written Instructions will be derived from the redemption of Shares as reported
to the Fund by the Transfer Agent.
(e) Upon receipt from the Transfer Agent of advice setting forth the
number of Shares received by the Transfer Agent for redemption and that
such Shares are valid and in good form for redemption, the Custodian shall
make payment to the Transfer Agent of the total amount specified in a
Written Instruction issued pursuant to paragraph (d) of this Section 6.
(f) Notwithstanding the above provisions regarding the redemption of
Shares, whenever such Shares are redeemed pursuant to any check redemption
privilege which may from time to time be offered by the Fund, the
Custodian, unless otherwise instructed by a Written Instruction shall,
upon receipt of advice from the Fund or its agent stating that the
redemption is in good form for redemption in accordance with the check
redemption procedure, honor the check presented as part of such check
redemption privilege out of the monies specifically allocated to the Fund
in such advice for such purpose.
7. INDEBTEDNESS.
------------
(a) Each Fund will cause to be delivered to the Custodian by any bank
(excluding the Custodian) from which the Fund borrows money for temporary
administrative or emergency purposes using Securities as collateral for
such borrowings, a notice or undertaking in the form currently employed by
any such bank setting forth the amount which such bank will loan to the
Fund against delivery of a stated amount of collateral. The Fund shall
promptly deliver to the Custodian Written Instructions stating with
respect to each such borrowing: (1) the name of the bank; (2) the amount
and terms of the borrowing, which may be set forth by incorporating by
reference an attached promissory note, duly endorsed by the Fund, or other
loan agreement; (3) the time and date, if known, on which the loan is to
be entered into (the "borrowing date"); (4) the date on which the loan
becomes due and payable; (5) the total amount payable to the Fund on the
borrowing date; (6) the market value of Securities to be delivered as
collateral for such loan, including the name of the issuer, the title and
the number of shares or the principal amount of any particular Securities;
(7) whether the Custodian is to deliver such collateral through a
Securities
19
<PAGE>
Depository; and (8) a statement that such loan is in conformance with the
1940 Act and the Fund's Prospectus.
(b) Upon receipt of the Written Instruction referred to in subparagraph
(a) above, the Custodian shall deliver on the borrowing date the specified
collateral and the executed promissory note, if any, against delivery by
the lending bank of the total amount of the loan payable, provided that
the same conforms to the total amount payable as set forth in the Written
Instruction. The Custodian may, at the option of the lending bank, keep
such collateral in its possession, but such collateral shall be subject to
all rights therein given the lending bank by virtue of any promissory note
or loan agreement. The Custodian shall deliver as additional collateral in
the manner directed by the Fund from time to time such Securities as may
be specified in Written Instruction to collateralize further any
transaction described in this Section 7. The Fund shall cause all
Securities released from collateral status to be returned directly to the
Custodian, and the Custodian shall receive from time to time such return
of collateral as may be tendered to it. In the event that the Fund fails
to specify in Written Instruction all of the information required by this
Section 7, the Custodian shall not be under any obligation to deliver any
Securities. Collateral returned to the Custodian shall be held hereunder
as it was prior to being used as collateral.
8. PERSONS HAVING ACCESS TO ASSETS OF THE FUND.
-------------------------------------------
(a) No trustee or agent of a Fund, and no officer, director, employee or
agent of a Fund's investment adviser, of any sub-investment adviser of a
Fund, or of the Fund's administrator, shall have physical access to the
assets of the Fund held by the Custodian or be authorized or permitted to
withdraw any investments of the Fund, nor shall the Custodian deliver any
assets of the Fund to any such person. No officer, director, employee or
agent of the Custodian who holds any similar position with the Fund's
investment adviser, with any sub-investment adviser of the Fund or with
the Fund's administrator shall have access to the assets of the Fund.
(b) Nothing in this Section 8 shall prohibit any duly authorized officer,
employee or agent of a Fund, or any duly authorized officer, director,
employee or agent of the investment adviser, of any sub-investment adviser
of a Fund or of a Fund's administrator, from giving Oral Instructions or
Written Instructions to the Custodian
20
<PAGE>
or executing a Certificate so long as it does not result in delivery of or
access to assets of the Fund prohibited by paragraph (a) of this Section
8.
9. CONCERNING THE CUSTODIAN.
------------------------
(a) Standard of Conduct. Notwithstanding any other provision of this
-------------------
Custody Agreement, the Custodian shall not be liable for any loss or
damage, including counsel fees, resulting from its action or omission to
act or otherwise, except for any such loss or damage arising out of the
negligence or willful misconduct of the Custodian. The Custodian may, with
respect to questions of law, apply for and obtain the advice and opinion
of counsel to the Funds or of its own counsel, at the expense of the
Funds, and shall be fully protected with respect to anything done or
omitted by it in good faith in conformity with such advice or opinion.
(b) Limit of Duties. Without limiting the generality of the foregoing,
---------------
the Custodian shall be under no duty or obligation to inquire into, and
shall not be liable for:
1. The validity of the issue of any Securities purchased by a Fund, the
legality of the purchase thereof, or the propriety of the amount paid
therefor;
2. The legality of the sale of any Securities by a Fund or the propriety
of the amount for which the same are sold;
3. The legality of the issue or sale of any Shares, or the sufficiency of
the amount to be received therefor;
4. The legality of the redemption of any Shares, or the propriety of the
amount to be paid therefor;
5. The legality of the declaration or payment of any distribution of a
Fund;
6. The legality of any borrowing for temporary administrative or
emergency purposes.
21
<PAGE>
(c) No Liability Until Receipt. The Custodian shall not be liable for, or
--------------------------
considered to be the Custodian of, any money, whether or not represented
by any check, draft, or other instrument for the payment of money,
received by it on behalf of a Fund until the Custodian actually receives
and collects such money.
(d) Amounts Due from Transfer Agent. The Custodian shall not be under
-------------------------------
any duty or obligation to take action to effect collection of any amount
due to a Fund from the Transfer Agent nor to take any action to effect
payment or distribution by the Transfer Agent of any amount paid by the
Custodian to the Transfer Agent in accordance with this Custody Agreement.
(e) Collection Where Payment Refused. The Custodian shall not be under
--------------------------------
any duty or obligation to take action to effect collection of any amount,
if the Securities upon which such amount is payable are in default, or if
payment is refused after due demand or presentation, unless and until (i)
it shall be directed to take such action by a Certificate and (ii) it
shall be assured to its satisfaction of reimbursement of its costs and
expenses in connection with any such action.
(f) Appointment of Subcustodians. (i) The Custodian is hereby
-----------------------------
authorized to appoint one or more Subcustodians to hold Securities and
monies at any time owned by a Fund. The Custodian is also hereby
authorized to place Assets with any Foreign Custodian located in a
jurisdiction which is not a Selected Country and with Euroclear, Cedel,
First Chicago Clearing Centre or any other transnational depository.
(g) No Duty to Ascertain Authority. The Custodian shall not be under any
------------------------------
duty or obligation to ascertain whether any Securities at any time
delivered to or held by it for a Fund are such as may properly be held by
the Fund under the provisions of the Agreement and Declaration of Trust
and the Prospectus.
(h) Reliance on Certificates and Instructions. The Custodian shall be
-----------------------------------------
entitled to rely upon any Certificate, notice or other instrument in
writing received by the Custodian and reasonably believed by the Custodian
to be genuine and to be signed by an officer or Authorized Person of a
Fund. The Custodian shall be entitled to rely upon any Written Instructions
or Oral Instructions actually received by the Custodian pursuant to the
applicable Sections of this Agreement and reasonably believed by the
22
<PAGE>
Custodian to be genuine and to be given by an Authorized Person. Each Fund
agrees to forward to the Custodian Written Instructions from an Authorized
Person confirming such Oral Instructions in such manner so that such
Written Instructions are received by the Custodian, whether by hand
delivery, telex or otherwise, by the close of business on the same day that
such Oral Instructions are given to the Custodian. Each Fund agrees that
the fact that such confirming instructions are not received by the
Custodian shall in no way affect the validity of the transactions or
enforceability of the transactions hereby authorized by the Fund. Each Fund
agrees that the Custodian shall incur no liability to the Fund in acting
upon Oral Instructions given to the Custodian hereunder concerning such
transactions provided such instructions reasonably appear to have been
received from a duly Authorized Person. The Custodian shall be under no
duty to question any direction of an Authorized Person with respect to the
portion of the account over which such Authorized Person has authority, to
review any property held in the account, to make any suggestions with
respect to the investment and reinvestment of the assets in the account, or
to evaluate or question the performance of any Authorized Person. The
Custodian shall not be responsible or liable for any diminution of value of
any securities or other property held by the Custodian.
(i) Overdraft Facility and Security for Payment. In the event that the
-------------------------------------------
Custodian is directed by Written Instruction (or Oral Instructions
confirmed in writing in accordance with Section 9(h) hereof) to make any
payment or transfer of monies on behalf of a Fund for which there would
be, at the close of business on the date of such payment or transfer,
insufficient monies held by the Custodian on behalf of the Fund, the
Custodian may, in its sole discretion, provide an overdraft (an
"Overdraft") to the Fund in an amount sufficient to allow the completion
of such payment or transfer. Any Overdraft provided hereunder: (a) shall
be payable on the next Business Day, unless otherwise agreed by the Fund
and the Custodian; and (b) shall accrue interest from the date of the
Overdraft to the date of payment in full by the Fund at a rate agreed upon
from time to time, by the Custodian and the Fund. The Custodian and the
Fund acknowledge that the purpose of such Overdraft is to temporarily
finance the purchase of Securities for prompt delivery in accordance with
the terms hereof, to meet unanticipated or unusual redemptions, to allow
the settlement of foreign exchange contracts or to meet other emergency
expenses not reasonably foreseeable by the Fund. The Custodian shall
promptly notify the Fund (an "Overdraft Notice") of any Overdraft by
facsimile transmission or in such other
23
<PAGE>
manner as the Fund and the Custodian may agree. To secure payment of any
Overdraft, the Fund hereby grants to the Custodian a continuing security
interest in and right of setoff against the Securities and cash in the
Fund's account from time to time in the full amount of such Overdraft.
Should the Fund fail to pay promptly any amounts owed hereunder, the
Custodian shall be entitled to use available cash in the Fund's account
and to liquidate Securities in the account as is necessary to meet the
Fund's obligations under the Overdraft. In any such case, and without
limiting the foregoing, the Custodian shall be entitled to take such other
actions(s) or exercise such other options, powers and rights as the
Custodian now or hereafter has as a secured creditor under the
Massachusetts Uniform Commercial Code or any other applicable law.
ARTICLE IV
----------
INFORMATION SERVICES AGREEMENT
------------------------------
The following sets forth our agreement with respect to the delivery of certain
information to the Board or its agents as requested by the Board from time to
time.
1. PROVISIONS OF INFORMATION
-------------------------
A)
B) In accordance with the provisions of this Information Services
Agreement, the Custodian agrees to provide to the Board, or at the direction of
the Board, to a Fund's investment advisors, the information set forth in Article
IV, Section 2 with respect to Foreign Custodians and Securities Depositories
which hold Securities, Assets, or other property of the Fund and the systems and
environment for securities processing in the jurisdiction in which such Foreign
Custodians or Securities Depositories are located. The Custodian shall provide
only that portion of such information as is reasonably available to it.
c)
2. INFORMATION TO BE PROVIDED
--------------------------
COUNTRY INFORMATION
* Settlement Environment
* Depository
* Settlement Period
* Trading
24
<PAGE>
* Security Registration
* Currency
* Foreign Investment Restrictions
* Entitlements
* Proxy Voting
* Foreign Taxation
x
25
<PAGE>
x Depository Information (if applicable to the Country)
* Name
* Information relative to Determining Compulsory or Voluntary Status of
the Facility
* Type of Entity
* Ownership Structure
* Operating History
* Eligible Instruments
* Security Form
* Financial Data
* Regulator
* External Auditor
x
x
x SUBCUSTODIAN INFORMATION
* Financial Information
* Regulator
* External Auditor
* How Securities are Held
* Operational Capabilities
* Insurance Coverage
x
x INFORMATION ON THE FOLLOWING LEGAL QUESTIONS
* Would the applicable foreign law restrict the access afforded the
independent public accountants of the Fund to books and records kept by a
foreign custodian?
x
* Would the applicable foreign law restrict the ability of the Fund
to recover its assets in the event of bankruptcy of the foreign custodian?
x
* Would the applicable foreign law restrict the ability of the Fund
to recover assets that are lost while under the control of the foreign
custodian?
x
* What are the foreseeable difficulties in converting the Fund's
cash into U.S. dollars?
26
<PAGE>
3. LIABILITY AND WARRANTIES
------------------------
The Custodian will take all reasonable precautions to ensure that the
information provided is accurate. However, due to the nature and source of this
information, and the necessity of relying on various information sources, most
of which are external to the Custodian, the Custodian shall have no liability
for direct or indirect use of such information. The Custodian makes no other
warranty or condition, either express or implied, as to the merchantability or
fitness for any particular purpose of the information provided under this
Article IV.
ARTICLE V
---------
ADDITIONAL PROVISIONS
---------------------
1. COMPENSATION.
------------
(a) The Custodian shall be entitled to receive, and each Fund agrees
to pay to the Custodian, such compensation as may be agreed upon from
time to time between the Custodian and the Fund. The Custodian may
charge against any monies held on behalf of the Fund pursuant to this
Agreement such compensation and any expenses incurred by the Custodian
in the performance of its duties pursuant to this Agreement. The
Custodian shall also be entitled to charge against any money held on
behalf of the Fund pursuant to this Agreement the amount of any loss,
damage, liability or expense incurred with respect to the Fund,
including counsel fees, for which it shall be entitled to
reimbursement under the provisions of this Agreement. The expenses
which the Custodian may charge against such account include, but are
not limited to, the expenses of Subcustodians and Foreign Custodians
incurred in settling transactions outside of Boston, Massachusetts or
New York City, New York involving the purchase and sale of Securities.
(b) Each Fund will compensate the Custodian for its services rendered
under this Agreement in accordance with the fees set forth in a
separate Fee Schedule which schedule may be modified by the Custodian
upon not less than thirty days prior written notice to the Fund.
27
<PAGE>
(c) Any compensation agreed to hereunder may be adjusted from time to
time by a revised Fee Schedule, dated and signed by an Authorized
Person or authorized representative of each party hereto.
(d) The Custodian will bill each Fund as soon as practicable after the
end of each calendar month. The Fund will promptly pay to the
Custodian the amount of such billing. In making payments to service
providers pursuant to Written Instructions, the Fund acknowledges that
the Custodian is acting as a paying agent and not as the payor, for
tax information reporting and withholding purposes.
2. INSOLVENCY OF ELIGIBLE FOREIGN CUSTODIANS.
-----------------------------------------
The Custodian shall not be responsible or liable for any losses or damages
suffered by a Fund arising as a result of the insolvency of any Foreign
Custodian except with respect to any Foreign Custodian in any Selected
Country which the Custodian appointed in accordance with the provisions of
Article II but only to the extent that the Custodian failed to comply with
the standard of care set forth in Article II with respect to the selection
and monitoring of such Foreign Custodian.
3. LIABILITY FOR DEPOSITORIES.
---------------------------
The Custodian shall not be responsible for any losses resulting from the
deposit or maintenance of Securities, Assets or other property of a Fund
with any Securities Depository.
4. DAMAGES.
--------
Under no circumstances shall the Custodian be liable for any indirect,
consequential or special damages with respect to its role as Delegate,
Custodian or information vendor.
5. LIMITATION OF LIABILITY.
------------------------
The Fund and the Custodian agree that the obligations of each Fund under
this Agreement shall not be binding upon any of the Trustees, shareholders,
nominees, officers, employees or agents, whether past, present or future,
of the Fund, individually, but are binding only upon the assets and
property of the Fund, as provided in the Agreement and Declaration of
28
<PAGE>
Trust. The execution and delivery of this Agreement have been authorized by
the Trustees of the Fund, and signed by an authorized officer of the Fund,
acting as such. Neither such authorization by such Trustees nor such
execution and delivery by such officer shall be deemed to have been made by
any of them or any shareholder of the Fund individually or to impose any
liability on any of them or any shareholder of the Fund personally, but
shall bind only the assets and property of the Fund as provided in the
Agreement and Declaration of Trust.
6. TERM AND TERMINATION.
---------------------
(a) This Agreement and any portion thereof shall become effective on
the date first set forth above (the "Effective Date") and shall
continue in effect thereafter until such time as this Agreement may be
terminated in accordance with the provisions hereof.
(b) Any of the parties hereto may terminate this Agreement as a whole
or may terminate either the Delegation Agreement or the Information
Services Agreement individually or the Delegation Agreement
collectively, or may terminate this Agreement as to such party, by
giving to the other parties a notice in writing specifying the date and
scope of such termination, which shall be not less than 60 days after
the date of receipt of such notice. In the event such notice is given
by a Fund, it shall be accompanied by a certified vote of the Board of
Trustees of the Fund, electing to terminate this Agreement or the
applicable portion thereof and designating a successor, which shall be
a person qualified to so act under the 1940 Act if necessary.
In the event such notice is given by the Custodian of any
termination which include the Custody Agreement, each Fund shall, on or
before the termination date, deliver to the Custodian a certified vote
of the Board of Trustees of the Fund, designating a successor custodian
or custodians. In the absence of such designation by the Fund, the
Custodian may designate a successor custodian, which shall be a person
qualified to so act under the 1940 Act. If a Fund fails to designate a
successor custodian, the Fund shall upon the date specified in the
notice of termination of this Agreement and upon the delivery by the
Custodian of all Securities and monies then owned by the Fund, be
deemed to be its own custodian and the Custodian shall thereby be
relieved of all duties and responsibilities pursuant to this Agreement
or
29
<PAGE>
the portion so terminated, other than the duty with respect to
Securities held in the Book-Entry System which cannot be delivered to
the Fund.
(c) Upon the date set forth in such notice under paragraph (b) of this
Section 6, this Agreement or portion thereof shall terminate to the
extent specified in such notice, and if the Custody Agreement is
terminated the Custodian shall upon receipt of a notice of acceptance
by the successor custodian on that date deliver directly to the
successor custodian all Securities and monies then held by the
Custodian on behalf of the Fund, after deducting all fees, expenses and
other amounts for the payment or reimbursement of which it shall then
be entitled.
7. FORCE MAJEURE.
--------------
Notwithstanding anything in this Agreement to the contrary, the
Custodian shall not be liable for any losses resulting from or caused by events
or circumstances beyond its reasonable control, including, but not limited to,
losses resulting from nationalization, strikes, expropriation, devaluation,
revaluation, confiscation, seizure, cancellation, destruction or similar action
by any governmental authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority of currency
restrictions, exchange controls, taxes, levies or other charges affecting a
Fund's property; or the breakdown, failure or malfunction of any utilities or
telecommunications systems; or any order or regulation of any banking or
securities industry including changes in market rules and market conditions
affecting the execution or settlement of transactions; or acts of war,
terrorism, insurrection or revolution; or any other similar or third-party
event. This Section shall survive the termination of this Agreement.
30
<PAGE>
8. INSPECTION OF BOOKS AND RECORDS.
-------------------------------
The books and records of the Custodian shall be open to inspection and
audit at reasonable times by officers and auditors employed by a Fund at
its own expense and with prior written notice to the Custodian, and by the
appropriate employees of the Securities and Exchange Commission.
9. MISCELLANEOUS.
--------------
(a) Annexed hereto as Appendix C is a certification signed by the
----------
Secretary of each Fund setting forth the names and the signatures of
the present Authorized Persons. Each Fund agrees to furnish to the
Custodian a new certification in similar form in the event that any
such present Authorized Person ceases to be such an Authorized Person
or in the event that other or additional Authorized Persons are elected
or appointed. Until such new certification shall be received, the
Custodian shall be fully protected in acting under the provisions of
this Agreement upon Oral Instructions or signatures of the present
Authorized Persons as set forth in the last delivered certification.
(b) Annexed hereto as Appendix A is a certification signed by the
-----------
Secretary of each Fund setting forth the names and the signatures of
the present officers of the Fund. Each Fund agrees to furnish to the
Custodian a new certification in similar form in the event any such
present officer ceases to be an officer of the Fund or in the event
that other or additional officers are elected or appointed. Until such
new certification shall be received, the Custodian shall be fully
protected in acting under the provisions of this Agreement upon the
signature of an officer as set forth in the last delivered
certification.
(c) Any notice or other instrument in writing, authorized or required
by this Agreement to be given to the Custodian, shall be sufficiently
given if addressed to the Custodian and mailed or delivered to it at
its offices at One Boston Place, Boston, Massachusetts 02108 or at such
other place as the Custodian may from time to time designate in
writing.
(d) Any notice or other instrument in writing, authorized or required
by this Agreement to be given to a Fund, shall be sufficiently given if
addressed to the Fund
31
<PAGE>
and mailed or delivered to it at its offices at 601 West Main Avenue,
Spokane, Washington 99201or at such other place as the Fund may from
time to time designate in writing.
(e) Except as provided in Article II, Section 2 this Agreement may not
be amended or modified with respect to a Fund in any manner except by a
written agreement executed by both the Fund and the Custodian with the
same formality as this Agreement (i) authorized, or ratified and
approved by a vote of the Board of Trustees of the Fund, including a
majority of the members of the Board of Trustees of the Fund who are
not "interested persons" of the Fund (as defined in the 1940 Act), or
(ii) authorized, or ratified and approved by such other procedures as
may be permitted or required by the 1940 Act.
(f) This Agreement shall extend to and shall be binding upon the
parties hereto, and their respective successors and assigns; provided,
however, that this Agreement shall not be assignable by a Fund without
the written consent of the Custodian, or by the Custodian without the
written consent of each Fund authorized or approved by a vote of the
Board of Trustees of the Fund provided, however, that the Custodian may
assign the Agreement to an Affiliated Person and any attempted
assignment without such written consent shall be null and void. Nothing
in this Agreement shall give or be construed to give or confer upon any
third party any rights hereunder.
(g) Each Fund represents that a copy of the Agreement and Declaration
of Trust is on file with the Secretary of the Commonwealth of
Massachusetts.
(h) This Agreement shall be construed in accordance with the laws of
The Commonwealth of Massachusetts.
(i) The captions of the Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions
hereof or otherwise affect their construction or effect.
(j) This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, but such counterparts
shall, together, constitute only one instrument.
32
<PAGE>
APPENDIX A
----------
I, John T. West, the Secretary of WM Trust I, WM Trust II, WM Strategic
Asset Management Portfolios, WM Prime Income Fund, and WM Variable Trust, a
business trust organized under the laws of the Commonwealth of Massachusetts
(the "Fund"), do hereby certify that:
The following individuals have been duly authorized as Authorized Persons to
give Oral Instructions and Written Instructions on behalf of the Fund and the
specimen signatures set forth opposite their respective names are their true and
correct signatures:
Name Signature
---- ---------
33
<PAGE>
WM Trust I, WM Trust II, WM Strategic Asset
Mgmt Portfolios, WM Prime Income, WM
Variable Trust
By:
Secretary
Dated:
34
<PAGE>
APPENDIX B
----------
Selected Countries
------------------
[List]
ARGENTINA
AUSTRALIA
AUSTRIA
BANGLADESH
BELGIUM
BERMUDA
BOTSWANA
BRAZIL
CANADA
CHILE
CHINA, PEOPLES' REPUBLIC OF
COLOMBIA
CYPRUS
THE CZECH REPUBLIC
DENMARK
EGYPT
FINLAND
FRANCE
GERMANY
GHANA
GREECE
HONG KONG
HUNGARY
INDIA
INDONESIA
IRELAND
ISRAEL
ITALY
JAPAN
KENYA
KOREA, REPUBLIC OF
LUXEMBOURG
MALAYSIA
MAURITIUS
MEXICO
NAMIBIA
THE NETHERLANDS
35
<PAGE>
NEW ZEALAND
NORWAY
PAKISTAN
PERU
THE PHILIPPINES
POLAND
PORTUGAL
SINGAPORE
SLOVAK REPUBLIC
SOUTH AFRICA
SPAIN
SRI LANKA
SWEDEN
SWITZERLAND
TAIWAN
THAILAND
TURKEY
UNITED KINGDOM
URUGUAY
VENEZUELA
ZAMBIA
ZIMBABWE
36
<PAGE>
APPENDIX C
- ----------
I, John T. West, the Secretary of WM Trust I, WM Trust
II, WM Strategic Asset Mgmt Portfolios, WM Prime Income Fund, and WM Variable
Trust, a [corporation/business trust] organized under the laws of the
Commonwealth of Massachusetts (the "Fund"), do hereby certify that:
The following individuals serve in the following
positions with the Fund and each individual has been duly elected or appointed
to each such position and qualified therefor in conformity with the Fund's
Agreement and Declaration of Trust and the specimen signatures set forth
opposite their respective names are their true and correct signatures:
Name Position Signature
- ---- -------- ---------
Chairman of the Board
President
Treasurer
Secretary
Vice President and
Investment Officer
Vice President and
Investment Officer
WM Trust I, WM Trust II, WM Strategic Asset Mgmt Portfolios, WM
Prime Income Fund, WM Variable Trust
37
<PAGE>
By:
Secretary
Dated:
38
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective representatives duly authorized as of the day and year first
above written.
WM Trust I, WM Trust II, WM Strategic Asset Mgmt
Portfolios, WM Prime Income Fund, WM Variable Trust
By:
Name:
Title:
BOSTON SAFE DEPOSIT AND TRUST COMPANY
By:
Name:
Title:
39
<PAGE>
Exhibit 9(a)
WM STRATEGIC ASSET MANAGEMENT PORTFOLIOS
ADMINISTRATION AGREEMENT
March 20, 1998
WM Shareholder Services, Inc.
601 W. Main Avenue, Suite 300
Spokane, WA 99201
Ladies and Gentlemen:
WM Strategic Asset Management Portfolios (the "Trust"), a business trust
organized under the laws of The Commonwealth of Massachusetts, confirms its
agreement with WM Shareholder Services, Inc. ("WMSS"), a corporation organized
under the laws of the State of Washington, regarding administration services to
be provided by WMSS in connection with each of the investment portfolios offered
from time to time by the Trust (individually, a "Portfolio" and together, the
"Portfolios"). WMSS agrees to provide services upon the following terms and
conditions:
1. Investment Description: Appointment
-----------------------------------
The Trust desires to employ the Trust's capital by investing and
reinvesting (a) in investments of the kind, and in accordance with the
limitations, specified in (i) the Trust's Agreement and Declaration of Trust
dated March 26, 1996, as amended (the "Trust Agreements"), and (ii) the
prospectus(es) (the "Prospectus") and statement(s) of additional information
(the "Statement") relating to the Portfolios contained in the Trust's
Registration Statement on Form N-1A filed with the Securities and Exchange
Commission (the "Registration Statement") and (b) in such manner and to such
extent as may from time to time be approved by the Trust's Board of Trustees.
Copies of the Prospectus, the Statement and the Trust Agreement have been
submitted to WMSS. The Trust desires to employ and hereby appoints WMSS to act
as the Portfolios' administrator. WMSS accepts this appointment and agrees to
furnish the services described herein for the compensation set forth below.
2. Services as Administrator
-------------------------
Subject to the supervision and direction of the Board of Trustees of the
Trust, WMSS is responsible for all administrative functions with respect to the
Trust and will (a) assist in supervising all aspects of the operations of the
Trust except those performed by the Trust's investment adviser under its
investment advisory agreement; (b) supply the Trust with office facilities
(which may be in WMSS's own offices), statistical and research data, data
processing services, clerical, accounting and bookkeeping services (including,
but not limited to, the calculation of (i) the net asset values of shares of the
Trust, and (ii) distribution fees), internal auditing and legal services,
internal executive and administrative services, and stationary and office (c)
prepare reports to the Trust's shareholders
<PAGE>
and materials for the Board of Trustees of the Trust; (d) prepare tax returns
and reports to and filings with the Securities and Exchange Commission and state
Blue Sky authorities; (e) cooperate with the Trust's transfer agent for the
purpose of establishing the implementing procedures to ensure that the Trust's
transfer agency and shareholder relations functions are efficiently carried out;
and (f) provide such other similar services as the Trust may reasonably request
to the extent permitted under application statutes, rules and regulations. The
services to be performed by WMSS hereunder may be delegated by it, in whole or
in part, to one or more sub-administrators provided that any delegation of
duties to a sub-administrator shall not relieve WMSS of its responsibilities
hereunder. Notwithstanding anything to the contrary in this Agreement, WMSS
shall not be responsible for the performance of any duties which are required to
be performed by the Trust's transfer agent.
3. Compensation
------------
a. In consideration of services rendered pursuant to this Agreement, the
Trust will pay WMSS on the first business day of each month a fee for the
previous month at an annual rate of 0.50% of the average daily net assets of
each Portfolio; out of which fee WMSS shall pay expenses as described in
Paragraph 4 including, without limitation, fees to any sub-administrator and the
Trust's custodian. The fee for the period from the date of this Agreement to the
end of the first calendar month of the term of this Agreement shall be prorated
according to the proportion that such period bears to the full monthly period.
b. Upon any termination of this Agreement before the end of any month,
the fee for such part of a month shall be prorated according to the proportion
which such period bears to the full monthly period and shall be payable upon the
date of termination of this Agreement. For the purpose of determining fees
payable to WMSS, the value of each Portfolio's net assets shall be computed at
the times and in the manner specified in the Prospectus and/or the Statement
relating to the Portfolio as from time to time in effect.
4. Expenses
--------
WMSS will bear all expenses in connection with the performance of its
services under this Agreement, including, without limitation, payment of the fee
to any sub-administrator and custodian described in Paragraph 2 above. The Trust
will bear certain other expenses to be incurred in its operation, including:
organizational expenses; taxes, interest, brokerage fees and commissions, if
any; fees of trustees of the Trust who are not officers, directors, or employees
of WM Advisors, Inc., each sub-administrator or any of their affiliates;
transfer agent fees; federal regulatory fees and state Blue Sky fees; out-of-
pocket expenses of custodians, transfer and dividend disbursing agents and the
Trust's sub-administrator and transaction charges of custodians; insurance
premiums; outside auditing and legal expenses; costs of maintenance of the
Trust's existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of shareholders' reports
and meetings of the shareholders of the Trust and of the officers Board of
Trustees of the Trust; and any extraordinary expenses. In
-2-
<PAGE>
addition, each Portfolio pays a distribution fee pursuant to terms of a
Distribution Plan adopted under Rule 12b-1 of the Investment Company Act of 1940
(the "1940 Act").
5. Standard of Care
----------------
WMSS shall exercise its best judgment in rendering the services listed in
Paragraph 2 above. WMSS shall not be liable for any error of judgment or mistake
of law or for any loss suffered by a Portfolio in connection with the matters to
which this Agreement relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on its part in the performance of its duties or
from reckless disregard by it of its obligations and duties under this
Agreement.
6. Term of Agreement
-----------------
This Agreement shall become effective as of the date set forth above and
shall continue for an initial two-year term and shall continue automatically
from year-to-year thereafter unless terminated in accordance with the following
sentence. This Agreement is terminable at any time, without penalty, on 60 days'
written notice by the Board of Trustees of the Trust, or upon 90 days' written
notice by WMSS.
7. Service to Other Companies or Accounts
--------------------------------------
The Trust understands that WMSS may act in the future as administrator to
other investment companies or series of investment companies, and the Trust has
no objection to WMSS's so acting in such capacity. The Trust understands that
the persons employed by WMSS to assist in the performance of WMSS's duties under
this Agreement will not devote their full time to such service and nothing
contained in this Agreement shall be deemed to limit or restrict the right of
WMSS or any affiliate of WMSS to engage in and devote time and attention to
other businesses or to render services of whatever kind or nature.
8. Representations of the Trust and WMSS
-------------------------------------
The Trust represents that (a) a copy of the Trust Agreement is on file in
the office of the Secretary of The Commonwealth of Massachusetts, (b) the
appointment of WMSS has been duly authorized and (c) it has acted and will
continue to act in conformity with the 1940 Act and other applicable laws WMSS
represents that it is authorized to perform the services described herein
9. Limitation of Liability
-----------------------
The copy of the Trust Agreement is on file with the Secretary of The
Commonwealth of Massachusetts, and notice is hereby given that this instrument
is executed on behalf of the Trustees of the Trust as Trustees and not
individually and that the obligations of this instrument are not binding upon
any of the Trustees, officers or shareholders individually but are binding only
upon the assets and property of the Trust.
-3-
<PAGE>
10. Entire Agreement
----------------
This Agreement constitutes the entire agreement between the parties hereto.
11. Governing Law
-------------
This Agreement shall be governed in accordance with the laws of the
Commonwealth of Massachusetts.
If the foregoing accurately sets forth our agreement, kindly indicate your
acceptance hereof by signing and returning the enclosed copy hereof.
Very truly yours,
WM STRATEGIC ASSET
MANAGEMENT PORTFOLIOS
By /s/ Keith B. Pipes
-----------------------------------------
Name: Keith B. Pipes
Title: President
Accepted:
WM SHAREHOLDER SERVICES, INC.
By /s/ William G. Papesh
-----------------------------------------
Name: William G. Papesh
Title: President
-4-
<PAGE>
Exhibit 9(b)
TRANSFER AGENT CONTRACT
TRANSFER AGENT CONTRACT (this "Agreement"), dated, March 20, 1998, between
the WM Trust II, WM Strategic Asset Management Portfolios, and WM Prime Income
Fund, each a Massachusetts business trust (the "Trusts"), and WM Shareholder
Services, Inc. (the "Transfer Agent"), a Washington corporation.
W I T N E S S E T H
-------------------
WHEREAS, the Trusts are management investment companies registered under the
Investment Company Act of 1940 (the "1940" Act); and
WHEREAS, the Trusts are authorized to issue shares in separate series with
each series representing a separate portfolio of securities and other assets
(each a "Fund");
WHEREAS, each Fund listed on the signature page attached to this Agreement
desires the Transfer Agent to perform the services set forth in Schedule A
attached hereto and incorporated herein by reference, and the Transfer Agent is
willing to perform such services;
NOW THEREFORE, in consideration of the premises and the mutual agreements
set forth herein, the parties hereto agree as follows:
1. The Transfer Agent shall perform for each Fund the services set forth
in Schedule A for a monthly fee as set forth in Schedule B attached hereto and
incorporated herein by reference.
2. Each Fund agrees to reimburse the Transfer Agent for postage, the
procurement and/or printing of statements, envelopes, checks, reports, tax
forms, proxies, or other forms of printed material required in the performance
of its services to the Fund under this Agreement.
3. Each Fund agrees to reimburse the Transfer Agent for all freight and
other delivery charges and insurance or bonding charges incurred by the Transfer
Agent in delivering materials to and from the Fund and its shareholders
("Shareholders").
4. Each Fund agrees to reimburse the Transfer Agent for all direct
telephone expenses incurred by the Fund in calling Shareholders regarding their
Fund transactions, accounts, and for any other Fund business.
5. Each Fund agrees that all computer programs and procedures developed to
perform services required under this Agreement are the property of the Transfer
Agent and the Transfer Agent agrees that all records and other data, except
computer programs
<PAGE>
and procedures, are the property of the Fund. The Transfer Agent agrees that it
will furnish all records and other data as may be requested to a Fund
immediately upon termination of this Agreement for any reason whatsoever.
6. The Transfer Agent agrees to treat all records and other information
relative to a Fund with utmost confidence and further agrees that all records
maintained by the Transfer Agent for the Fund shall be open to inspection and
audit at reasonable times by the officers, agents or auditors employed by the
Fund and that such records shall be preserved and retained by the Transfer Agent
so long as this agreement shall remain in effect.
7. The Transfer Agent shall not be liable for any damage, loss of data,
delay or any other loss caused by any such power failure or machine breakdown,
except that the Transfer Agent shall be liable for actual out-of-pocket costs
caused by any such power failure or machine breakdown, and the Transfer Agent
shall recover the data in process that is assumed lost during any power failure
or machine breakdown.
8. The Transfer Agent will maintain in force through the duration of this
Agreement a fidelity bond in a face amount not less than $1,000,000 written by a
reputable insurance company, covering theft, embezzlement, forgery and other
acts of malfeasance by the Transfer Agent, its employees, or agents in
connection with services performed for a Fund.
9. This agreement may be terminated without the payment of any penalty by
any party upon one hundred eighty (180) days written notice thereof given by a
Fund to the Transfer Agent and upon one hundred eighty (180) days written notice
thereof given by the Transfer Agent to a Fund.
10. Any notice shall be officially given when sent by registered or
certified mail by a party to the appropriate address listed in the Funds'
current registration statement, provided that each party may notify each other
by regular mail of any changed address to which such notices should be sent.
11. This Agreement constitutes the entire Agreement between the parties and
shall be governed by, and construed in accordance with, the laws of The
Commonwealth of Massachusetts and shall inure to the benefit of the parties
hereto and their respective successors.
12. A copy of the Declaration of Trust, or similar document, of each
Trust is on file with the Secretary of State of The Commonwealth of
Massachusetts, and notice is hereby given that this Agreement is executed by an
officer of each Trust on behalf of the trustees of that Trust, as trustees and
not individually, on further behalf of each Fund, and that the obligations of
this Agreement as they related to a single Fund shall be binding upon the assets
and properties of that Fund only and shall not be binding upon the assets
2
<PAGE>
and properties of any other Fund or upon any of the trustees, officers,
employees, agents or shareholders of a Fund or a Trust individually.
IN WITNESS WHEREOF, the parties hereto cause this Agreement to be
executed by their officers designated below as of the date first above-written.
WM TRUST II, on behalf of its series:
California Money Fund
Short Term High Quality Bond Fund
Target Maturity 2002 Fund
California Municipal Fund
Florida Insured Municipal Fund
California Insured Intermediate Municipal Fund
Growth Fund
Emerging Growth Fund
International Growth Fund
By: /s/ KEITH B. PIPES
------------------------------
Keith B. Pipes
President
WM STRATEGIC ASSET MANAGEMENT
PORTFOLIOS, on behalf of its series:
Strategic Growth Portfolio
Conservative Growth Portfolio
Balanced Portfolio
Flexible Income Portfolio
Income Portfolio
By: /s/ KEITH B. PIPES
-------------------------------
Keith B. Pipes
President
WM PRIME INCOME FUND
By: /s/ KEITH B. PIPES
-------------------------------
Keith B. Pipes
President
WM SHAREHOLDER SERVICES, INC.
By: /s/ WILLIAM G. PAPESH
-----------------------------
William G. Papesh
President
3
<PAGE>
SCHEDULE A
I. Shareholder Services
A. Maintain all Shareholder records on electronic data processing
equipment, including:
1. Share balances
2. Account transaction history
3. Names and addresses
4. Distribution records
5. Transfer records
6. Over-all control records
B. New Accounts
1. Deposit all monies received into a Fund custody account maintained
by the Fund's custodian.
2. Set up account according to Shareholders' instructions
3. Issue and mail shareholder confirmations
C. Additional Purchases
1. Deposit monies received into a Fund custody account maintained by
the Fund's custodian.
2. Issue Shareholder confirmations
D. Redemptions
1. Liquidate shares upon Shareholder request
2. Make payments of redemption proceeds in accordance with the Fund's
then current prospectus.
3. Issue and mail Shareholder confirmation
A-1
<PAGE>
E. Transfer shares as requested, including obtaining necessary papers and
documents to satisfy transfer requirements. On irregular transfers
requiring special legal opinions, such special legal fees, if any, are
to be paid for by the Fund.
F. Process changes, corrections of addresses and registrations
G. Maintain service with Shareholders as follows:
1. Activity required to receive, process and reply to Shareholders'
correspondence regarding account matters
2. Refer correspondence regarding investment matters to the Fund with
sufficient account data to answer
3. Contact Shareholders directly to settle problems and answer
questions
H. Compute distributions, dividends and capital gains
1. Make payment or reinvest in additional shares as directed by
shareholders according to provisions of the Fund's then current
prospectus
2. Advise each Shareholder of the amount of dividends received and
tax status annually
I. Produce transcripts of shareholder account history as required
J. Maintain the controls associated with the computer programs and manual
systems to arrive at the Fund's total shares outstanding
K. Receive mail and perform other administrative functions relating to
transfer agent work
II. Other Services
A. Mailing services to shareholders
B. Services in connection with any stock splits
C. Develop special reports for Fund officers regarding statistical and
accounting data pertaining to the Fund. Fund shall pay for out-of-
pocket expenses charged by vendors to develop such reports or portions
thereof
A-2
<PAGE>
D. Voice response unit
E. NSCC support
A-3
<PAGE>
SCHEDULE B: MONTHLY SHAREHOLDER SERVICING FEES
March 20, 1998
Fee Per Account Per Month
-------------------------
Class B
&
Class A Class S
------- -------
California Money Fund
First 25,000 accounts $1.85 $1.95
Each additional account $1.55 $1.65
- ----------------------------------------------------------------------
Emerging Growth Fund $1.25 $1.35
Growth Fund
International Growth Fund
Strategic Growth Portfolio
Conservative Growth Portfolio
- ----------------------------------------------------------------------
Short Term High Quality Bond Fund $1.45 $1.55
California Municipal Fund
Florida Insured Municipal Fund
California Insured Intermediate Municipal Fund
Target Maturity 2002 Fund
Balanced Portfolio
Flexible Income Portfolio
Income Portfolio
WM Prime Income Fund
- ----------------------------------------------------------------------
Fees Include
. Shareholder and Broker Servicing
. Transaction Processing, Correspondence, and Research
. Settlement and Reconciliation
. Corporate Actions
. Tax Reporting and Compliance
. NSCC Support
. Management Company and Broker/Dealer Support
. Asset Allocation Processing for all distribution channels
Additional charges will be made for out-of-pocket expenses according to Schedule
C.
B-1
<PAGE>
SCHEDULE C
OUT-OF-POCKET EXPENSES
The Funds shall reimburse the Transfer Agent monthly for applicable out-of-
pocket expenses, including, but not limited to the following items:
. NSCC charges
. Banking fees
. Voice response unit
. Microfiche/Microfilm/Image production
. Magnetic media tapes and freight
. Printing costs, including certificates, envelopes, checks and stationery
. Postage (bulk, pre-sort, ZIP+4, bar-coding, first class) direct pass through
to the Funds
. Due diligence mailings
. Telephone and telecommunication costs, including all lease, maintenance and
line costs
. Ad hoc reports
. Shareholder transcripts
. Proxy solicitations, mailings and tabulations
. Daily & Distribution advice mailings
. Shipping, Certified and Overnight mail and insurance
. Year-end form production and mailings
. Terminals, communication lines, printers and other equipment and any expenses
incurred in connection with such terminals and lines
. Duplicating services
. Courier services
. Incoming and outgoing wire charges
. Federal Reserve charges for check clearance
. Overtime, as approved by the Funds
. Temporary staff, as approved by the Funds
. Travel and entertainment, as approved by the Funds
. Record retention, retrieval and destruction costs, including, but not limited
to exit fees charged by third party record keeping vendors
. Third party audit reviews
. Ad hoc programming time
. Insurance
. Such other miscellaneous expenses reasonably incurred by the Transfer Agent in
performing its duties and responsibilities under this Agreement
C-1
<PAGE>
Exhibit 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and the
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 28 to the registration statement on Form N-1A (the "Registration
Statement") of our reports dated August 12, 1997, relating to the financial
statements and financial highlights appearing in the June 30, 1997 Annual
Reports to Shareholders of WM Trust II (formerly known as Sierra Trust Funds),
which financial statements and financial highlights are also incorporated by
reference into the Registration Statement. We also consent to the references to
us under the heading "Financial Highlights" in the Prospectus and under the
headings "Counsel and Independent Accountants" and "Financial Statements" in the
Statement of Additional Information.
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 26, 1998
<PAGE>
Exhibit 15(b)
WM GROUP OF FUNDS
CLASS B DISTRIBUTION PLAN
Dated March 24, 1998
This Class B Distribution Plan dated March 24, 1998 (the "Plan") is adopted
in accordance with Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "Act"), by WM Trust I, WM Trust II and WM Strategic Asset
Management Portfolios, each a business trust organized under the laws of the
Commonwealth of Massachusetts and registered with the Securities and Exchange
Commission under the Act as an open-end series management investment company
(the "Trust"), the Trustees of each respective Trust having concluded that there
is a reasonable likelihood that this Plan will benefit the Trust and the
shareholders of its Funds.
SECTION 1. DISTRIBUTION FEE.
(a) Payment. The Trust may pay to each person as may from time to time be
-------
engaged and appointed to act as the distributor of its Class B shares at such
point in time (any such person, a "Distributor," and such shares, "Shares") a
distribution fee for services rendered and expenses borne in connection with the
offering and sale of Shares of one or more series of the Trust (each such
series, a "Fund, and together, the "Funds"). The aggregate distribution fees in
respect of Shares of any Fund payable to all Distributors shall not be greater
than the annual rate of .75% of the average daily net assets attributable to the
Shares of such Fund. Each distribution agreement shall provide that the
Distributor that is a party to such agreement will receive its Allocable Portion
of the fee specified in such agreement. Each Distributor's "Allocable Portion"
of the total distribution fee payable in respect of Shares of any Fund during
any period shall be the portion of such distribution fees allocated to such
Distributor in accordance with the Distributor's Allocation Schedule. The
"Allocation Schedule" is, in respect of any Shares of any Fund, a schedule
assigning to each of the current and former Distributors of Shares of a Fund the
portion of the total distribution fees payable by the Trust in respect of all of
the Shares of such Fund which has been earned by such Distributor.
No amount shall be paid by the Trust in contravention of any applicable
exemptive order, rule or regulation issued by the Securities and Exchange
Commission.
(b) Receipt, Retention, Direction of Payment. Any Distributor (i) may
----------------------------------------
retain all or any part of the distribution fee payable to it as compensation for
distribution services it provides to the applicable Fund and/or as reimbursement
for expenses associated with such services; (ii) may use all or any part of such
fee to compensate or reimburse persons that provide distribution services to
such Fund; and (iii) may direct the Trust to pay any part or all of such fee
directly to persons providing funds to a Distributor to cover or otherwise
enable the incurring of expenses associated with such services.
The distribution fee shall be payable to the relevant Distributor or to
persons to whom such Distributor directs the Trust to make payments.
1
<PAGE>
SECTION 2. DISTRIBUTION SERVICES.
(a) Services. A Distributor will be deemed to have fully earned its
--------
Allocable Portion of the distribution fee payable in respect of Shares of a Fund
upon the sale of the Commission Shares of such Fund taken into account in
determining such Distributor's Allocable Portion of such distribution fees. For
this purpose, "Commission Share" of a Fund is each share of such Fund which is
issued under circumstances which normally create an obligation of the holder of
such Share to pay a contingent deferred sales charge upon redemption of such
Share (excluding any Shares of such Fund issued in connection with a permitted
free exchange) and any such Share shall not cease to be a Commission Share prior
to the redemption (including redemption in connection with a permitted free
exchange) or conversion, even though the obligation to pay the contingent
deferred sales charge shall have expired or conditions for waivers thereof shall
exist. Such distribution services may include any activities or expenses
primarily intended to result in the sale of Shares, including, but not limited
to: (i) payments made to, and expenses of, a Distributor's registered
representatives and other employees of a Distributor or other broker-dealers
that engage in the distribution of the Shares; (ii) payments made to, and
expenses of, persons who provide support services in connection with the sale of
the Shares, including, but not limited to, office space and equipment, telephone
facilities, answering routine inquiries regarding the Trust, processing
shareholder transactions and providing any other shareholder services not
otherwise provided by the Trust's transfer agent, sub-transfer agent or any
shareholder servicing agent; (iii) costs relating to the formulation and
implementation of marketing and promotional activities, including, but not
limited to, direct mail promotions and television, radio, newspaper, magazine
and other mass media advertising; (iv) costs of printing and distributing
prospectuses, statements of additional information and reports of the Trust to
prospective shareholders of the Trust; (v) costs involved in preparing, printing
and distributing advertising and sales literature pertaining to the Trust; (vi)
costs involved in obtaining whatever information, analyses and reports with
respect to marketing and promotional activities that the Trust may, from time to
time, deem advisable; and (vii) amounts payable by a Distributor under
arrangements entered into by such Distributor to raise funds to cover the
expenditures in clauses (i) through (vi) of this Section 2(a).
(b) Continuation. Notwithstanding Sections 5, 6 and 7 hereof, the Trust
------------
may agree with any Distributor that, so long as no Complete Termination (as
defined in Section 6(b) hereof) of this Plan has occurred and is continuing,
payments of such Distributor's Allocable Portion of the distribution fee will
continue to be made to or at the direction of such Distributor notwithstanding
either the termination of such agreement with such Distributor, the termination
of the role of such Distributor as Distributor hereunder or the termination of
this Plan.
(c) Financing. Any Manager for each of the Funds may use its investment
---------
advisory fee for purposes that may be deemed to be directly or indirectly
related to the distribution of Shares. To the extent that such uses might be
considered to constitute the direct or indirect financing of activities
primarily intended to result in the sale of Shares, such uses are expressly
authorized under the Plan.
(d) Recording of Payments. Each Fund will record all payments made under
---------------------
the Plan as expenses in the calculation of its net investment income. The
amount of distribution expenses
2
<PAGE>
incurred by the Distributor that may be paid pursuant to the Plan in future
periods will not be incurred as a liability, unless the standards for accrual of
a liability under generally accepted accounting principles have been satisfied.
Such distribution expenses will be recorded as an expense in future periods as
they are paid by a Fund.
SECTION 3. SHAREHOLDER SERVICES AND FEE.
(a) Shareholder Services Annual Fee. The Trust is authorized to pay to a
-------------------------------
Distributor a fee, calculated daily and paid monthly in arrears, for the
shareholder services that are described in paragraph (b) of this Section 3 and
that are provided by such Distributor to one or more of the Funds. The aggregate
fee paid to all Distributors under this Section 3 for shareholder services to
any Fund shall not be greater than the annual rate of .25% of the average daily
net assets attributable to the Shares of such Fund.
(b) Shareholder Services. In addition to the distribution services set
--------------------
forth in Section 2(a) above, a Distributor may provide shareholder services to
accounts of the Shares of one or more of the Funds, including but not limited to
the following: telephone service to shareholders, including the acceptance of
telephone inquiries and transaction requests; acceptance and processing of
written correspondence, new account applications and subsequent purchases by
check; mailing of confirmations, statements and tax forms directly to
shareholders; and acceptance of payment for trades by check, Federal Reserve
wire or Automated Clearing House payment. In addition, a Distributor may perform
or supervise the performance by others of other shareholder services in
connection with the operations of such Fund(s) with respect to its Shares, as
agreed from time to time.
SECTION 4. APPROVALS.
(a) Shareholder Approval. This Plan will not take effect, and no fee will
--------------------
be payable under any distribution agreement related to this Plan, with respect
to the Shares of a particular Fund until this Plan has been approved by a vote
of at least a majority of the outstanding Shares of that Fund. This Plan will be
deemed to have been approved with respect to the Shares of a Fund so long as a
majority of the outstanding Shares of that Fund votes for the approval of this
Plan, notwithstanding that: (i) the Plan has not been approved by a majority of
the outstanding voting securities of any other class of shares of that Fund or
any other Fund or (ii) the Plan has not been approved by a majority of the
outstanding voting securities of the Trust in the aggregate.
(b) Trustees' Approval. Neither this Plan nor any distribution agreement
------------------
related to this Plan will take effect with respect to the Shares of any Fund
until approved by a majority vote of both (i) the full Board of Trustees of the
Trust and (ii) those Trustees who are not interested persons of the Trust and
who have no direct or indirect financial interest in the operation of the Plan
or in any agreements related to it (the "Qualified Trustees"), cast in person at
a meeting called for the purposes of voting on the Plan or the related
agreements.
3
<PAGE>
SECTION 5. CONTINUANCE OF THE PLAN.
This Plan will continue in effect for so long as its continuance is
specifically approved at least annually by the Trust's Board of Trustees in the
manner described in Section 4 above.
SECTION 6. TERMINATION.
(a) Termination. This Plan may be terminated at any time with respect to
-----------
the Shares of any Fund by a majority vote of the Qualified Trustees or by vote
of a majority of the outstanding Shares of such Fund. This Plan may remain in
effect for the Shares of any particular Fund even if the Plan has been
terminated in accordance with this Section 6 for the Shares of one or more other
Funds.
(b) Complete Termination. A "Complete Termination" of this Plan for the
--------------------
Shares of a Fund shall occur only if and only so long as this Plan is terminated
for such Shares and following such termination, no distribution fees are imposed
either on such Shares of such Fund or on any "Similar Class" of shares of such
Fund. For purposes of determining whether any termination of this Plan for the
Shares of a Fund is a Complete Termination, a "Similar Class" is any class of
shares of such Fund that has a sales load structure substantially similar to
that of the class for which this Plan was terminated, taking into account the
total sales load borne directly or indirectly by holders of such class of shares
including commissions paid directly by such holders to brokers on issuance of
shares of such class, asset based sales charges paid by the Fund and allocated
to shares of such class, contingent deferred sales charges payable by holders of
shares of such class, installment or deferred sales charges payable by holders
of shares of such class, and similar charges borne directly or indirectly by
holders of shares of such class. A class of shares would not be considered
substantially similar to the Shares if (i) a front end sales charge is paid by
the purchaser; or (ii)(A) the shares are purchased at net asset value, (B) any
commission paid up front to any selling agent(s) does not exceed 1.0% of the
purchase amount, (C) the period during which any contingent deferred sales
charge applies does not exceed 12 months from the purchase date, and (D) there
is no other sales load feature borne directly or indirectly by holders of such
class of shares.
SECTION 7. AMENDMENTS.
The Plan may not be amended with respect to the Shares of a Fund so as to
increase materially the amount of the fees described herein with respect to the
Shares of such Fund, unless the amendment is approved by a vote of at least a
majority of the outstanding Shares of such Fund. No material amendment to this
Plan may be made unless approved by the Trust's Board of Trustees in the manner
described in Section 4(b) above.
SECTION 8. SELECTION OF CERTAIN TRUSTEES.
While the Plan is in effect, the selection and nomination of the Trust's
Trustees who are not interested persons of the Trust will be committed to the
discretion of the Trustees then in office who are not interested persons of the
Trust.
4
<PAGE>
SECTION 9. WRITTEN REPORTS.
In each year during which the Plan remains in effect, any person authorized
to direct the disposition of monies paid or payable by the Trust pursuant to the
Plan or any related agreement will prepare and furnish to the Trust's Board of
Trustees, and the Board will review, at least quarterly, written reports,
complying with the requirements of Rule 12b-1, which set out the amounts
expended under the Plan and the purposes for which those expenditures were made.
SECTION 10. PRESERVATION OF MATERIALS.
The Trust will preserve copies of the Plan, any agreement referring to the
Plan and any report made pursuant to Section 9 above, for a period of not less
than six years (the first two years in an easily accessible place) from the date
of the Plan, agreement or report.
SECTION 11. MEANINGS OF CERTAIN TERMS.
As used in the Plan, the terms (a) "interested persons" and (b) "majority
of the outstanding" voting securities or Shares will be deemed to have the same
meaning that those terms have under the Act and the rules and regulations under
the Act, subject to any exemption that may be granted to the Trust under the Act
by the Securities and Exchange Commission.
SECTION 12. LIMITATION OF LIABILITY.
The adoption of the Plan has been authorized by both the Trust's Board of
Trustees and the sole shareholder of the Shares of each Fund. As provided in the
Trust's Declaration of Trust as of September 19, 1997, as amended from time to
time (the "Trust Agreement"), in undertaking those actions, the Board of
Trustees and the sole shareholder have each acted on behalf of the Trust. In
addition, as provided in the Trust Agreement, the obligations imposed under the
Plan with respect to each Fund are binding only upon the assets and property
allocated to the Shares of such Fund of the Trust and are not binding upon the
Trust's Board of Trustees or officers or the holders of the Shares or other
classes of shares of the Funds. The Trust Agreement is on file with the
Secretary of the Commonwealth of Massachusetts.
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 051
<NAME> WM STRATEGIC ASSET MANAGEMENT STRATEGIC GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 62,093,568
<INVESTMENTS-AT-VALUE> 59,345,285
<RECEIVABLES> 142,652
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 32,939
<TOTAL-ASSETS> 59,520,876
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 278,169
<TOTAL-LIABILITIES> 278,169
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 15,886,412
<SHARES-COMMON-STOCK> 1,482,518
<SHARES-COMMON-PRIOR> 1,266,018
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (3,497,959)
<ACCUMULATED-NET-GAINS> 6,955,325
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,748,283)
<NET-ASSETS> 16,187,099
<DIVIDEND-INCOME> 426,028
<INTEREST-INCOME> 16,279
<OTHER-INCOME> 0
<EXPENSES-NET> 420,636
<NET-INVESTMENT-INCOME> 21,671
<REALIZED-GAINS-CURRENT> 6,832,897
<APPREC-INCREASE-CURRENT> (5,339,611)
<NET-CHANGE-FROM-OPS> 1,514,957
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (950,865)
<DISTRIBUTIONS-OF-GAINS> (53,136)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 349,189
<NUMBER-OF-SHARES-REDEEMED> (226,370)
<SHARES-REINVESTED> 93,681
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<PAGE>
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<NUMBER> 052
<NAME> WM STRATEGIC ASSET MANAGEMENT STRATEGIC GROWTH PORTFOLIO
<S> <C>
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<NUMBER-OF-SHARES-REDEEMED> (178,833)
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 041
<NAME> WM STRATEGIC ASSET MANAGEMENT CONSERVATIVE GROWTH
PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
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<PERIOD-END> DEC-31-1997
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<REALIZED-GAINS-CURRENT> 22,248,475
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<NUMBER-OF-SHARES-REDEEMED> (2,329,264)
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<NET-CHANGE-IN-ASSETS> (10,967,565)
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<PER-SHARE-NII> 0.11
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 042
<NAME> WM STRATEGIC ASSET MANAGEMENT CONSERVATIVE GROWTH
PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 031
<NAME> WM STRATEGIC ASSET MANAGEMENT BALANCED PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 032
<NAME> WM STRATEGIC ASSET MANAGEMENT BALANCED PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 021
<NAME> WM STRATEGIC ASSET MANAGEMENT FLEXIBLE INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
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<NUMBER-OF-SHARES-REDEEMED> (350,184)
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> WM STRATEGIC ASSET MANAGEMENT FLEXIBLE INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> WM STRATEGIC ASSET MANAGEMENT INCOME PORTFOLIO
<S> <C>
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> WM STRATEGIC ASSET MANAGEMENT INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 15,044,832
<INVESTMENTS-AT-VALUE> 15,262,953
<RECEIVABLES> 188,414
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 32,754
<TOTAL-ASSETS> 15,484,121
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 138,069
<TOTAL-LIABILITIES> 138,069
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,628,082
<SHARES-COMMON-STOCK> 455,255
<SHARES-COMMON-PRIOR> 447,709
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (1,507)
<ACCUMULATED-NET-GAINS> 18,615
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 218,121
<NET-ASSETS> 4,688,361
<DIVIDEND-INCOME> 667,259
<INTEREST-INCOME> 6,441
<OTHER-INCOME> 0
<EXPENSES-NET> 97,925
<NET-INVESTMENT-INCOME> 575,775
<REALIZED-GAINS-CURRENT> 43,649
<APPREC-INCREASE-CURRENT> 268,595
<NET-CHANGE-FROM-OPS> 888,019
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (153,538)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 51,343
<NUMBER-OF-SHARES-REDEEMED> (54,800)
<SHARES-REINVESTED> 11,003
<NET-CHANGE-IN-ASSETS> (2,600,393)
<ACCUMULATED-NII-PRIOR> 18,156
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (25,034)
<GROSS-ADVISORY-FEES> 12,708
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 118,164
<AVERAGE-NET-ASSETS> 4,578,899
<PER-SHARE-NAV-BEGIN> 10.13
<PER-SHARE-NII> 0.32
<PER-SHARE-GAIN-APPREC> 0.19
<PER-SHARE-DIVIDEND> (0.34)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.30
<EXPENSE-RATIO> 1.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
Exhibit 19
POWER OF ATTORNEY
-----------------
We, the undersigned Trustees of WM Trust I, WM Trust II, WM Variable
Trust, WM Prime Income Fund and WM Strategic Asset Management Portfolios
(collectively, the "Registrants") hereby constitute and appoint Monte D. Calvin,
Sandra A. Cavanaugh, William G. Papesh and John T. West, and each of them acting
alone, as his/her true and lawful attorney and agent, with power of substitution
or resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorney and agent may deem necessary or advisable or
which may be required to enable each of the Registrants to comply with the
Securities Act of 1933, as amended (the"1933 Act") and the Investment Company
Act of 1940, as amended (the "1940 Act"), and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with each Registrant's Registration Statement(s) on Form N-1A or N-2
pursuant to the 1933 Act and/or the 1940 Act, together with any and all
amendments thereto, including specifically, but without limiting the generality
of the foregoing, the power and authority to sign in the name and on behalf of
the undersigned as a trustee or director (as appropriate) of each Registrant
each such Registration Statement and any and all such amendments filed with the
Securities and Exchange Commission under the 1933 Act and/or the 1940 Act, and
any other instruments or documents related thereto, and the undersigned does
hereby ratify and confirm all that said attorney and agent shall do or cause to
be done by virtue hereof.
WITNESS my hand on the date set forth below.
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
DAVID E. ANDERSON Trustee March 24, 1998
- -----------------
David E. Anderson
WAYNE L. ATTWOOD, M.D. Trustee March 12, 1998
- ----------------------
Wayne L. Attwood, M.D.
ARTHUR H. BERNSTEIN, Esq. Trustee March 15, 1998
- -------------------------
Arthur H. Bernstein, Esq.
KRISTIANNE BLAKE Trustee March 10, 1998
- ----------------
Kristianne Blake
EDMOND R. DAVIS, Esq. Trustee March 11, 1998
- ---------------------
Edmond R. Davis, Esq
JOHN W. ENGLISH Trustee March 15, 1998
- ---------------
John W. English
ANNE V. FARRELL Trustee March 24, 1998
- ---------------
Anne V. Farrell
MICHAEL K. MURPHY Trustee March 10, 1998
- -----------------
Michael K. Murphy
ALFRED E. OSBORNE, JR. Ph.D Trustee March 13, 1998
- ---------------------------
Alfred E. Osborne, Jr. Ph.D
WILLIAM G. PAPESH Trustee March 11, 1998
- -----------------
William G. Papesh
DANIEL L. PAVELICH Trustee March 10, 1998
- ------------------
Daniel L. Pavelich
JAY ROCKEY Trustee March 10, 1998
- ----------
Jay Rockey
RICHARD C. YANCEY Trustee March 24, 1998
- -----------------
Richard C. Yancey
</TABLE>
