<PAGE> 1
1998 ANNUAL REPORTS
PACIFIC INNOVATIONS TRUST
SEPARATE ACCOUNT B OF
PACIFIC LIFE INSURANCE COMPANY
[PACIFIC LIFE LOGO]
Pacific Life Insurance Company
is the issuer of Pacific Innovations variable annuity
Not FDIC Insured
<PAGE> 2
SHAREHOLDER LETTER
Dear Shareholders:
We are pleased to share with you the annual report, dated December 31,
1998, for the Pacific Innovations Variable Annuity and Pacific Innovations Trust
(both "Pacific Innovations"). Issued by Pacific Life Insurance Company, Pacific
Innovations is a flexible premium deferred variable annuity contract.
In addition to a Fixed Investment Option, seven Variable Investment Options
are currently available, each one investing in shares of a corresponding Fund of
the Pacific Innovations Trust. Five of the Funds are advised by Bank of America:
Money Market Fund, Capital Income Fund, Blue Chip Fund, Mid-Cap Equity Fund and
Aggressive Growth Fund. Two other funds, the Managed Bond Fund and the
International Fund, are sub-advised by Scudder Kemper Investments, Inc. and
Wellington Management Company, LLP, respectively.
Thank you for your continued investment and support of Pacific Innovations.
Sincerely,
/s/ DR. CORNELIUS J. PINGS
Dr. Cornelius J. Pings
Chairman
<PAGE> 3
PACIFIC INNOVATIONS TRUST
1998 ANNUAL REPORT
<PAGE> 4
PACIFIC INNOVATIONS TRUST
MONEY MARKET FUND
Q.
HOW WOULD YOU DESCRIBE THE ECONOMIC ENVIRONMENT FOR THE 12-MONTH PERIOD
ENDED 12/31/98?
A.
The year opened with continued fallout from the Asian currency crisis.
Although the domestic economy was experiencing explosive,
non-inflationary growth, the troubles in the Far East preempted any movements by
the Federal Open Market Committee (FOMC) until the effects could be determined.
The Federal Reserve Board (the "Fed") met twice during the first quarter, both
times leaving short-term interest rates unchanged. As fears of future inflation
began to ease, the yield on short-term agency issues began to plummet and the
net effect was a dramatically lower shift of the yield curve. This made it
nearly impossible to find securities yielding in excess of the targeted Federal
Funds level.
The market maintained a tight trading range throughout the second quarter
as the opposing forces of a downward spiraling Asian economy and a robust
domestic economy continued to keep market participants on the sidelines awaiting
a clear picture of future interest rates. Although the Fed returned to a bias to
tighten at their March meeting, it became increasingly clear that the Fed would
not act to raise rates until the affects of the Asian currency crisis on U.S.
growth could be quantified. Investors continued to flock to the safe haven of
U.S. Treasuries, which only served to dampen yields of domestic securities on
the short end of the curve.
The lasting fallout from the Asian currency crises that had seeped into the
Japanese economy by the end of the second quarter spread to other emerging
markets by the third quarter. Specifically affected was Russia, with its
government unable to restructure its debt, causing the collapse of its financial
system. This caused an even more dramatic plunge in global stocks and bonds,
resulting in a continued flight to quality into U.S. Treasury and Agency
securities. In a much-awaited move, the FOMC cut interest rates by 25 basis
points (100 basis points equals 1%) at their scheduled meeting on September 29.
The FOMC continued to cut rates throughout the fourth quarter. The first
was a surprise inter-meeting rate cut of 25 basis points in October followed by
another 25 basis points of easing at their scheduled meeting in November,
leaving the Federal Funds rate to stand at 4.75%. In the brief commentary
following the action, the Fed stated that its cumulative 75 basis points of
easing since September "should be enough to sustain the economic expansion."
Q.
HOW DID THE FUND FARE IN THIS ENVIRONMENT?
A.
Although yields continued to decline over the course of the year, the
relatively small size of the Fund itself was advantageous to procuring
higher yielding securities. Dealers often price odd-lot securities cheaply in
order to move them off their books and the Fund was able to benefit from this
greatly. Thus, our strategy consisted of purchasing discount notes in the three
to twelve month maturity range and agency coupons whenever they out-yielded
discount notes. When tri-party repo levels were well above the targeted Fed
funds level, we increased our overnight cash position to take advantage of the
higher yields.
Q.
HOW IS THE FUND CURRENTLY STRUCTURED? (MATURITY SCHEDULE AS OF
12/31/98)*
A.
We are currently employing more of a barbell strategy with 65% of the
portfolio maturing within 30 days and 35% in longer maturities.
<TABLE>
<S> <C>
Overnight: 35%
2-7 days: 16%
8-30 days: 14%
31-90 days: 10%
91-180 days: 22%
181-397 days: 3%
---
100%
</TABLE>
Q.
WHAT IS YOUR 1999 ECONOMIC OUTLOOK?
A.
The Fed intervention experienced in the later half of 1998 appears to
have been sufficient for the market. Strong economic data coupled with
an exuberant equity market make the risk of a near term easing unlikely and the
lack of inflation data does not argue for a tightening of short term interest
rates. Prevailing conditions would certainly suggest that the Fed would be on
hold until negative affects on the current economic policy can be ascertained.
- ---------------
* Portfolio characteristics are subject to change and may not be representative
of current characteristics.
Past performance is no guarantee of future results.
A-1
<PAGE> 5
PACIFIC INNOVATIONS TRUST
MANAGED BOND FUND
Q.
WHAT WERE THE ECONOMIC AND MARKET CONDITIONS LIKE FOR THE TWELVE MONTHS
ENDED 12/31/98?
A.
1998 witnessed a broad array of unprecedented factors including a
Russian debt default, Asian currency and debt crises, deteriorating
conditions in Latin America, and massive Wall Street and hedge fund losses all
culminating in a global liquidity crisis. As a result, central banks around the
world cut interest rates numerous times during the fourth quarter to restore
liquidity and confidence around the world. In response to the financial turmoil,
investors abandoned all other fixed income sectors for the safety of U.S.
Treasury bonds. Additionally, Wall Street and hedge funds were forced to unwind
fixed income positions, putting further pressure on yield spreads for these
sectors. As a result, mortgage-backed securities, asset-backed securities, and
corporate issues underperformed U.S. Treasuries significantly for the year.
On the positive front, the U.S. economy continued to show robust
growth -- largely attributable to a strong stock market and a free spending
consumer. Additionally, the country posted a budget surplus and inflation
continued to be benign. The Federal Reserve Board lowered interest rates three
times, driving yields roughly 100 basis points (1%) lower over the course of the
year.
Q.
HOW DID THE FUND FARE IN THIS ENVIRONMENT?
A.
The Fund returned 6.89% to shareholders, underperforming its benchmark,
the Lehman Brothers Intermediate Government/Corporate Bond Index.*
Although the Fund maintained a neutral duration stance, it was overweighted in
"spread" sectors such as corporate bonds, mortgage-backed securities and
asset-backed securities. As mentioned above, these sectors underperformed
markedly due to a dearth of buyers and absence of liquidity traditionally
provided by Wall Street.
Q.
WHAT PARTICULAR SECTORS AND/OR SECURITIES IMPACTED PERFORMANCE?**
A.
Sector weightings (i.e. underweighting U.S. Treasuries) negatively
impacted performance during the year. However, security selection aided
performance, relative to the Index. Holdings in consumer non-durables, banks,
phones, and aerospace contributed positively to performance. Holdings in Green
Tree Financial Corp., a leading consumer lender suffering from liquidity woes,
experienced a turnaround in the second half of the year as a result of its
acquisition by insurance company Conseco Inc., contributing positively to
performance.
Q.
WHAT INVESTMENT OPPORTUNITIES DO YOU ANTICIPATE IN THE COMING YEAR AND
HOW ARE YOU POSITIONING THE FUND?
A.
Yield spreads for corporate bonds, mortgage-backed securities and
asset-backed securities are at historically wide levels given strong
fundamentals and an economy which continues to stubbornly grow. Thus, we are
maintaining our overweight position in these sectors and selectively adding to
issues we deem attractive. The Fund continues to have an attractive yield,
relative to its Index. We see less opportunity in interest rate "bets" and
expect to continue to maintain a duration relatively neutral to the Index.
- ---------------
* The Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged index used as a benchmark for intermediate-term investments and can
not be invested in directly.
** Portfolio characteristics are subject to change and may not be representative
of current characteristics.
Return figures for the Fund include change in share price, reinvestment of
dividends and capital gain distributions, if any. The performance data quoted
represents past performance and is not an indication of future results. The
investment return and net asset value will fluctuate so an investor's shares
when redeemed, may be worth more or less than their original cost.
A-2
<PAGE> 6
PACIFIC INNOVATIONS TRUST
CAPITAL INCOME FUND
Q.
WHAT WERE ECONOMIC AND MARKET CONDITIONS LIKE FOR THE 12 MONTHS ENDED
12/31/98?
A.
The continued underperformance of small capitalization companies, who
are the typical issuers of convertible bonds, meant that the
convertible bond market overall did not do as well as the broad market.
In the fall of 1998, yield spreads between Treasury bonds and "B" rated
corporate issues widened from 200 basis points to 400 basis points as fear of
the "Hedge Fund" fallout spread across the investment markets raising concerns
about liquidity and fear of a credit crunch. As prices fell in September and
October, convertibles bonds fell further than expected.
Q.
HOW DID THE FUND FARE IN THIS ENVIRONMENT?
A.
Early in the year we felt the market was becoming risky, so we spent
the spring and early summer upgrading the quality of the portfolio. We
did that because higher quality credits offer better downside protection when
yield spreads widen.
This defensiveness hurt the portfolio a little early in the year as it was
too conservatively positioned, but helped later in the fall when the market
declined. Overall, this strategy worked fairly well as the Fund had a return of
7.06% compared with a return of 6.55% for the benchmark index, the First Boston
Convertible Index.*
Q.
WHAT PARTICULAR SECTORS IMPACTED PERFORMANCE?**
A.
Being underweighted in technology early in the year helped the Fund. In
the fall, we increased the weighting to take advantage of opportunities
in the technology sector. We stayed underweighted in basics, and since the
economy continues to show little inflation, these issues continue to
underperform.
Q.
WHAT INVESTMENT OPPORTUNITIES DO YOU ANTICIPATE IN THE COMING YEAR AND
HOW ARE YOU POSITIONING THE FUND?
A.
The stock market by most indices is near it's all time high. This
should bring new convertible issues to the market. We will be looking
closely at all issues, while we try to maintain a higher than normal credit
rating.
- ---------------
* The First Boston Convertible Index is a widely-used, unmanaged index which
measures the performance of convertible securities and cannot be invested in
directly.
** Portfolio characteristics are subject to change and may not be representative
of current characteristics.
Return figures for the Fund include change in share price, reinvestment of
dividends and capital gain distributions, if any. The performance data quoted
represents past performance and is not an indication of future results. The
investment return and net asset value will fluctuate so an investor's shares
when redeemed, may be worth more or less than their original cost.
A-3
<PAGE> 7
PACIFIC INNOVATIONS TRUST
BLUE CHIP FUND
Q.
WHAT WERE THE ECONOMIC AND MARKET CONDITIONS LIKE FOR THE 12 MONTHS
ENDED 12/31/98?
A.
The first half of the year saw equities fairly strong, primarily as a
result of the economic and earnings recovery that started in 1997. The
third quarter was marked by increased levels of selling by global investors
because of Russia's devaluation and debt default, followed by hedge fund
collapses and worry over scandals plaguing President Clinton. The year ended on
a strong note as the Federal Reserve Board cut the Federal Funds' rate three
times in the fall which provided the boost the market needed as the Standard &
Poor's 500 Composite Stock Price Index (S&P 500 Index) completed its strongest
quarterly advance of the past 20 years.*
Q.
HOW DID THE FUND FARE IN THIS ENVIRONMENT?
A.
The Fund substantially outperformed its peer group, the Lipper Growth
Fund Average, posting a return of 27.20% versus 22.86% for the
average.** The Fund slightly underperformed the broad market, represented by the
S&P 500 which returned 28.58%.
Q.
WHAT PARTICULAR SECTORS IMPACTED PERFORMANCE?***
A.
The technology sector was the top-performing sector followed by
communication services, healthcare, consumer cyclicals and consumer
staples. The laggards were basic materials, transportation and energy.
Q.
WHAT INVESTMENT OPPORTUNITIES DO YOU ANTICIPATE IN THE COMING YEAR AND
HOW ARE YOU POSITIONING THE PORTFOLIO?
A.
We seek to identify individual stocks with the greatest potential for
long-term growth. We emphasize stocks with large market
capitalizations, future growth potential, and a reasonable price. For 1999, we
will add value by choosing stocks of companies that offer a combination of
growth, value, and earnings momentum. Our investment philosophy is to remain
market neutral in all areas of portfolio construction, except specific security
selection. We remain focused on meeting the goals of long-term investors while
attempting to outperform the S&P 500 Index on a consistent basis.
- ---------------
* The Standard & Poor's 500 Composite Stock Price Index is a
market-capitalization weighted index that measures the value of 400
industrial stocks, 60 transportation and utility company stocks and 40
financial issues. It is unmanaged and unavailable for investment.
** Lipper Inc., is an independent mutual fund performance monitor. Funds
included in the Lipper Growth Funds Average normally invest in companies
with long-term earnings expected to grow significantly faster than the
earnings of stocks represented in the major unmanaged stock indices.
*** Portfolio characteristics are subject to change and may not be
representative of current characteristics.
Return figures for the Fund include change in share price, reinvestment of
dividends and capital gain distributions, if any. The performance data quoted
represents past performance and is not an indication of future results. The
investment return and net asset value will fluctuate so an investor's shares
when redeemed, may be worth more or less than their original cost.
A-4
<PAGE> 8
PACIFIC INNOVATIONS TRUST
MID-CAP EQUITY FUND
Q.
WHAT WERE THE ECONOMIC AND MARKET CONDITIONS LIKE FOR THE 12 MONTHS
ENDED 12/31/98?
A.
The first half of the year saw equities fairly strong, primarily as a
result of the economic and earnings recovery that started in 1997. The
third quarter was marked by increased selling by global investors because of
Russia's devaluation and debt default, followed by hedge fund collapses and
worry over scandals plaguing President Clinton. The year-ended on a strong note
as the Federal Reserve Board cut the Federal Funds' rate three times in the fall
which provided the boost the market needed as the Standard & Poor's 500
Composite Stock Price Index completed its strongest quarterly advance of the
past 20 years.*
Q.
HOW DID THE FUND FARE IN THIS ENVIRONMENT?
A.
The portfolio posted a return of 17.18% outperforming its peer group,
the Lipper Mid-Cap Funds Average which returned 12.16%.** The Standard
& Poor's MidCap 400 Index (S&P MidCap 400 Index) returned 19.02%.**
Q.
WHAT PARTICULAR SECTORS IMPACTED PERFORMANCE?***
A.
The technology sector was the top performing sector followed by
healthcare and communication services. The laggards were basic
materials, consumer staples, capital goods and energy.
Q.
WHAT INVESTMENT OPPORTUNITIES DO YOU ANTICIPATE IN THE COMING YEAR AND
HOW ARE YOU POSITIONING THE FUND?
A.
We seek to identify individual stocks with the greatest potential for
long-term growth. We emphasize stocks with medium market
capitalizations, future growth potential, and a reasonable price.
For 1999, we will add value by choosing stocks of companies that offer
a combination of growth, value, and earnings momentum. Our investment philosophy
is to remain market neutral in all areas of portfolio construction, except
specific security selection. We remain focused on meeting the goals of long-term
investors while attempting to outperform the S&P MidCap 400 Index on a
consistent basis.
- ---------------
* The Standard & Poor's 500 Composite Stock Price Index is a
market-capitalization weighted index that measures the value of 400
industrial stocks, 60 transportation and utility company stocks and 40
financial issues. It is unmanaged and unavailable for investment.
** Lipper Inc., an independent mutual fund performance monitor. Funds included
in the Lipper Mid-Cap Average invest primarily in companies with market
capitalizations less than $5 billion at the time of purchase.
The Standard & Poor's MidCap 400 Index is a market value weighted index that
measures the market value of 400 domestic stocks chosen for market
capitalization, liquidity and industry group representation.
*** Portfolio characteristics are subject to change and may not be
representative of current characteristics.
Return figures for the Fund include change in share price, reinvestment
of dividends and capital gain distributions, if any. The performance data quoted
represents past performance and is not an indication of future results. The
investment return and net asset value will fluctuate so an investor's shares
when redeemed, may be worth more or less than their original cost.
A-5
<PAGE> 9
PACIFIC INNOVATIONS TRUST
AGGRESSIVE GROWTH FUND
Q.
WHAT WERE THE ECONOMIC AND MARKET CONDITIONS LIKE FOR THE 12 MONTHS
ENDED 12/31/98?
A.
The first half of the year saw equities fairly strong, primarily as a
result of the economic and earnings recovery that started in 1997. The
third quarter was marked by increased levels of selling by global investors
because of Russia's devaluation and debt default, followed by hedge fund
collapses and worry over scandals plaguing President Clinton. The year ended on
a strong note as the Federal Reserve Board cut the Federal Funds' rate three
times in the fall which provided the boost the market needed as the Standard &
Poor's 500 Composite Stock Price Index (S&P 500 Index) completed its strongest
quarterly advance of the past 20 years.*
Q.
HOW DID THE FUND FARE IN THIS ENVIRONMENT?
A.
The Fund posted a return of -1.77%, slightly underperforming the
benchmark index, the Standard & Poor's SmallCap 600 Index (S&P 600
Index), which returned -1.31%.**
Q.
WHAT PARTICULAR SECTORS IMPACTED PERFORMANCE?***
A.
The utilities sector was the top-performing sector followed by
transportation, technology and basic materials. The laggards were
energy, communications services, capital goods and consumer staples.
Q.
WHAT INVESTMENT OPPORTUNITIES DO YOU ANTICIPATE IN THE COMING YEAR AND
HOW ARE YOU POSITIONING THE PORTFOLIO?
A.
We seek to identify individual stocks with the greatest potential for
long-term growth. We emphasize stocks with small market
capitalizations, future growth potential, and a reasonable price. For 1999, we
will add value by choosing stocks of companies that offer a combination of
growth, value, and earnings momentum. Our investment philosophy is to remain
market neutral in all areas of portfolio construction, except specific security
selection. We remain focused on meeting the goals of long-term investors while
attempting to outperform the S&P 600 Index on a consistent basis.
- ---------------
* The Standard & Poor's 500 Composite Stock Price Index is a
market-capitalization weighted index that measures the value of 400
industrial stocks, 60 transportation and utility company stocks and 40
financial issues. It is unmanaged and unavailable for investment.
** The Standard & Poor's SmallCap 600 Index is a market-capitalization weighted
index consisting of 600 common stocks that capture the economic and industry
characteristics of small-company stock performance. It is unmanaged and
unavailable for investment.
*** Portfolio characteristics are subject to change and may not be
representative of current characteristics.
Return figures for the Fund include change in share price, reinvestment of
dividends and capital gain distributions, if any. The performance data quoted
represents past performance and is not an indication of future results. The
investment return and net asset value will fluctuate so an investor's shares
when redeemed, may be worth more or less than their original cost.
A-6
<PAGE> 10
PACIFIC INNOVATIONS TRUST
INTERNATIONAL FUND
Q.
WHAT WERE ECONOMIC AND MARKET CONDITIONS LIKE FOR THE 12 MONTHS ENDED
12/31/98?
A.
Economic and market conditions during 1998 were extremely challenging.
The developed countries of the world, with the exception of Japan,
demonstrated strong growth in the first half. Growth decelerated some in the
second half of the year. Japan and many emerging countries, especially in Asia,
experienced contractions in economic output. The primary reasons for the
contractions in Asia came from the continued fallout from 1997's financial and
economic crises and currency devaluations. This brought a spectacular end to a
prolonged economic upswing in which debt levels soared beyond economically
justifiable levels. Also a factor was the general economic malaise in Japan,
which is experiencing its deepest recession since World War II. The downward
pressure on global prices from the Asian crisis allowed interest rates to fall
in Europe and the U.S., resulting in strong rallies through mid-year. By late
summer, however, investors experienced a sharp change of heart and began to be
much more worried about the world economy. As news was released of the Russian
default, and the bailout of a prominent hedge fund, markets worldwide went into
a sharp decline. However, the markets' sharp decline began to reverse in
October. Central banks lowered interest rates substantially in a coordinated
global effort led by the U.S. Federal Reserve Board to head off a global credit
crunch, which in turn boosted market returns. Almost all markets, with the
notable exception of Japan, finished the year strongly as investors looked
toward 1999 and beyond with renewed enthusiasm.
Q.
HOW DID THE FUND FARE IN THIS ENVIRONMENT?*
A.
The Fund returned 11.63% for the 1998 calendar year, trailing the MSCI
All Country World Free ex-US Index return of 14.5%.** The Fund's
shortfall relative to the Index was primarily due to security selection in
Europe. Early in the year we took the position that cyclicals, such as materials
and industrial/commercial stocks, which had been unfairly penalized in late 1997
and early 1998 because of fears related to the Asian crises, were attractively
valued and should perform well. However, Asia has taken longer to recover than
we expected and global disinflation existed to a much greater extent than
expected. This resulted in particularly tough pricing in basic materials and
industrial products causing these stocks to perform poorly.
The crisis came to a head in the late summer. In anticipation of a period of
uncertainty and uneven stock market performance, we repositioned the Fund toward
defensive, stable growth stocks in healthcare and utilities. Although we
expected that central banks would eventually act to lower interest rates and
ease the growing credit crunch, we did not expect it to happen so quickly, nor
did we anticipate that the markets would respond with such enthusiasm. As a
result of our cautious outlook, we were underweight in sectors such as finance
and industrial & commercial, which faced the greatest risk from the
deteriorating economic fundamentals. These stocks' prices were the most
depressed in the late summer correction, but subsequently rebounded the highest
following the central banks' monetary easing.
On the positive side, the Fund's broad regional and country allocations
contributed significantly to performance. We are pleased to report that we
reduced the Fund's weighting in Asian stocks before the worst of the crisis hit
those markets. We correctly assessed that investors had not priced in the full
extent of the problems that were unfolding in that region. The Fund also
benefited from a below benchmark weighting in Latin America. Another positive
contributor was the Fund's significant underweighting in Japan, which we felt
faced significant financial, economic and structural problems and had made
little progress toward fixing any of them.
- ---------------
* Portfolio characteristics are subject to change and may not be
representative of current characteristics.
** The Morgan Stanley Capital International (MSCI) All Country World Free
ex-U.S. Index is an unmanaged index used as a performance benchmark for
international equity funds and can not be invested in directly.
INVESTING IN INTERNATIONAL INVESTMENTS MAY INVOLVE SPECIAL RISKS, INCLUDING
FOREIGN TAXATION, CURRENCY RISKS, RISKS ASSOCIATED WITH POSSIBLE DIFFERENCES IN
FINANCIAL STANDARDS, AND OTHER MONETARY AND POLITICAL RISKS ASSOCIATED WITH
FUTURE POLITICAL AND ECONOMIC DEVELOPMENTS.
Return figures for the Fund include change in share price, reinvestment of
dividends and capital gain distributions, if any. The performance data quoted
represents past performance and is not an indication of future results. The
investment return and net asset value will fluctuate so an investor's shares
when redeemed, may be worth more or less than their original cost.
A-7
<PAGE> 11
Q.
WHAT PARTICULAR COUNTRIES/REGIONS OR SECURITIES IMPACTED PERFORMANCE?
A.
As discussed above, the Fund benefited significantly from its regional
allocation decisions during the year. Overall, relative to the MSCI All
Country World Free ex-US Index, we maintained an overweight position in Europe,
which outperformed the overall index, and underweight positions in Japan and the
Emerging Markets, which both underperformed the Index.
On an individual stock basis, the best performing stock and the largest positive
contributor to the Fund's return was Nokia (+249%) the Finnish
telecommunications equipment maker. Nokia continued to show strong, consistent
growth in sales and earnings, and expanded market share in both its core mobile
phone products and in its communications infrastructure business. Mannesman
(+128%), the German company, was the next best performing stock in the Fund due
to impressive performance in its cellular communications business. We owned both
of these stocks throughout the year and view them as long term holdings. Toshiba
(+45%), a Japanese semiconductor and electronics company, is a stock we bought
with a shorter timeframe in anticipation of a turn in the semiconductor business
cycle. The semiconductor cycle bottomed mid-year and business, and the stocks,
rebounded in the latter part of the year, providing significant gains for the
Fund. Toshiba returned 35% from the time we established our position through the
end of the year.
The worst performing stock in the Fund was Alcatel, the French
telecommunications equipment maker, which returned -34% during the period the
Fund held it. The company surprised investors in the third quarter with a
negative earnings and revenue outlook, after having recently affirmed prior
forecasts of steady growth in both areas. The stock dropped precipitously on the
date of the announcement, following a pattern seen by many other stocks that
disappoint investors with profit shortfalls. We continue to hold the stock
because our analysis has reconfirmed both the quality of the management and the
strength of the underlying business.
Q.
WHAT INVESTMENT OPPORTUNITIES DO YOU ANTICIPATE IN THE COMING YEAR AND
HOW ARE YOU POSITIONING THE FUND?
A.
As we head into the New Year, the portfolio remains overweight in the
European markets. We believe the fundamental case for owning European
equities remains intact. On the Continent, the ongoing theme of corporate
restructuring and an increased focus on shareholder returns will only be
amplified by the advent of the Euro currency area. While we recognize that we
were early in getting into more defensive, stable growth names in the third
quarter of 1998, we feel that this is the appropriate positioning going forward
given our outlook of slower growth in the region in 1999. In the utility sector,
we added Suez Lyonnaise Eaux, a French utility which also provides a strong
restructuring story, and we participated in the privatization of Swisscom, a
Swiss telephone company. In the case of the U.K., we see ample room for cuts in
interest rates as the economy weakens faster than on the Continent. These
additional rate cuts, and the anticipated economic recovery, should provide a
catalyst for U.K. outperformance. Continuing the theme of positioning the
portfolio towards more stable growth names, in the U.K. we have been adding
Vodafone, a leading provider of cellular telephone services and Smithkline
Beecham, the pharmaceuticals company.
In Japan, we remain cautious and underweight. The fundamentals are still
deteriorating, and fiscal 1999 will be another significant down year for
corporate profits. While Japan continues to experience occasional stock market
"bounces", as positive economic policy initiatives are announced that we believe
will help avert an economic "melt-down", we do not see evidence of steps to
address the serious underlying structural problems that must be remedied before
a sustainable market recovery is possible. Although we have found some
opportunities in Japan, such as Toshiba, mentioned above, we are being highly
selective about the stocks we pick and are reducing our weighting in the
country.
With respect to Asia outside of Japan, we maintain an underweight position. The
concerted global monetary easing that is on its way will, at some point, help
restart global growth and the Asian markets, ex-Japan, typically do better in an
environment of lower rates and accelerating growth. However, while the
environment is improving somewhat relative to six months ago, we are still
relatively cautious. We do not believe the current yen strength can be
A-8
<PAGE> 12
sustained. However, another bout of yen weakness could pose a problem for the
region. Furthermore, we have yet to see significant corporate restructuring or
any of the major corporate (non-financial) defaults, steps we believe are
necessary in order to address the excess debt problem that contributed to the
regions crisis in the first place.
We also remain very cautious on Latin America, where profits and economic growth
rates are being squeezed, led by the International Monetary Fund's belt
tightening program in Brazil. Despite the fact that we are pessimistic about the
region overall, we maintain some exposure to the region as we believe that
valuations are very attractive providing attractive risk/reward characteristics
for limited and select holdings in the area.
A-9
<PAGE> 13
PACIFIC INNOVATIONS TRUST
MANAGED BOND FUND
(AS OF DECEMBER 31, 1998)
GROWTH OF A $10,000 INVESTMENT
(HYPOTHETICAL -- PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.)
[MANAGED BOND FUND PERFORMANCE CHART]
<TABLE>
<CAPTION>
LEHMAN BROTHERS INTERMEDIATE
MANAGED BOND FUND GOVERNMENT/CORPORATE BOND INDEX
----------------- -------------------------------
<S> <C> <C>
3/01/97 10000 10000
6/30/97 10196 10224
12/31/97 10659 10725
6/30/98 10985 11097
12/31/98 11394 11630
</TABLE>
HOW PERFORMANCE COMPARES
The chart compares the performance of the Pacific Innovations Trust Bond Fund to
the Lehman Brothers Intermediate Government/Corporate Bond Index, which is an
unmanaged index typically used as a performance benchmark for intermediate term
investments.
An initial $10,000 investment in the Fund made on March 1, 1997, would now be
worth $11,394. The same investment in the Lehman Brothers Intermediate
Government/Corporate Bond Index would now be worth $11,630.
<TABLE>
<CAPTION>
- -------------------------------------------------------
MANAGED BOND FUND
AGGREGATE TOTAL RETURN
- -------------------------------------------------------
<S> <C> <C>
1 year 6.89%
................................................
Since Inception 13.94%
(3/01/1997)
- -------------------------------------------------------
</TABLE>
Performance quoted is not annualized.
FEDERAL INCOME TAX STATUS OF DIVIDENDS
The Managed Bond Fund ("Fund") distributed a total Capital Gain Dividend of
$0.012084 during the fiscal year ending December 31, 1998. Of this total Capital
Gain Dividend amount, the Fund made a 20 Percent Rate Gain distribution of
$0.012084.
SEE INVESTMENT MANAGER INTERVIEW FOR FACTORS AFFECTING FUND PERFORMANCE.
Investment return and principal value are historical and will vary with market
conditions, so an investor's shares, when redeemed, may be worth more or less
than their original cost. The return for the Fund includes change in share
price, reinvestment of dividends, and capital gains distributions, if any. The
return does not include deductions at the separate account or contract level for
administrative fees and charges, premium tax charges, mortality and expense risk
charges, or other charges that may be incurred under a contract.
The Lehman Brothers Intermediate Government/Corporate Bond Index may not be
invested in directly. The hypothetical investment in the Lehman Brothers
Intermediate Government/Corporate Bond Index does not reflect any sales or
management fees that would be incurred if an investor were to actually purchase
individual securities or mutual funds, while the performance of the Fund
reflects all expenses and management fees and the effect of the maximum sales
charge.
A-10
<PAGE> 14
PACIFIC INNOVATIONS TRUST
CAPITAL INCOME FUND
(AS OF DECEMBER 31, 1998)
GROWTH OF A $10,000 INVESTMENT
(HYPOTHETICAL -- PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.)
[CAPITAL INCOME FUND PERFORMANCE CHART]
<TABLE>
<CAPTION>
FIRST BOSTON
CAPITAL INCOME FUND CONVERTIBLE INDEX
<S> <C> <C>
3/1/97 10000 10000
6/30/97 10850 10930
12/31/97 11475 11390
6/30/98 11994 12141
12/31/98 12285 12141
</TABLE>
HOW PERFORMANCE COMPARES
As the chart indicates, the Pacific Innovations Trust Capital Income Fund has
out-performed the market, as compared to the First Boston Convertible Index, a
widely-used, unmanaged index which measures the performance of convertible
securities. An initial $10,000 investment in the Fund made on March 1, 1997,
would now be worth $12,285. The same investment made in the First Boston
Convertible Index, would now be worth $12,141.
<TABLE>
<CAPTION>
- -------------------------------------------------------
CAPITAL INCOME FUND
AGGREGATE TOTAL RETURN
- -------------------------------------------------------
<S> <C> <C>
1 year 7.06%
................................................
Since Inception 22.85%
(3/01/97)
- -------------------------------------------------------
</TABLE>
Performance quoted is not annualized.
SEE INVESTMENT MANAGER INTERVIEW FOR FACTORS AFFECTING FUND PERFORMANCE.
Investment return and principal value are historical and will vary with market
conditions, so an investor's shares, when redeemed, may be worth more or less
than their original cost. The return for the Fund includes change in share
price, reinvestment or dividends, and capital gain distributions, if any. The
return does not include deductions at the separate account or contract level for
administrative fees and charges, premium tax charges, mortality and expense risk
charges, or other charges that may be incurred under a contract.
The First Boston Convertible Index may not be invested in directly. The
hypothetical investment in the First Boston Convertible Index does not reflect
any sales or management fees that would be incurred if an investor were to
actually purchase individual securities or mutual funds, while the performance
of the Fund reflects all expenses and management fees.
A-11
<PAGE> 15
PACIFIC INNOVATIONS TRUST
BLUE CHIP FUND
(AS OF DECEMBER 31, 1998)
GROWTH OF A $10,000 INVESTMENT
(HYPOTHETICAL -- PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.)
[BLUE CHIP FUND PERFORMANCE CHART]
<TABLE>
<CAPTION>
BLUE CHIP S & P 500 INDEX
<S> <C> <C>
3/1/97 10000 10000
6/30/97 11180 11263
12/31/97 12327 12455
6/30/98 14462 14661
12/31/98 15680 16014
</TABLE>
HOW PERFORMANCE COMPARES
The chart compares the performance of the Pacific Innovations Trust Blue Chip
Fund to the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index),
which is an unmanaged index typically used as a performance benchmark for equity
investments.
An initial $10,000 investment in the Fund made on March 1, 1997, would now be
worth $15,680. The same investment made in the S&P 500 Index would now be worth
$16,014.
<TABLE>
<CAPTION>
- -------------------------------------------------------
BLUE CHIP FUND
AGGREGATE TOTAL RETURN
- -------------------------------------------------------
<S> <C> <C>
1 year 27.20%
................................................
Since Inception 56.80%
(3/01/97)
- -------------------------------------------------------
</TABLE>
Performance quoted is not annualized.
FEDERAL INCOME TAX STATUS OF DIVIDENDS
The Blue Chip Fund ("Fund") distributed a total Capital Gain Dividend of
$0.134633 during the fiscal year ending December 31, 1998. Of this total Capital
Gain Dividend amount, the Fund made a 20 Percent Rate Gain distribution of
$0.134633.
SEE INVESTMENT MANAGER INTERVIEW FOR FACTORS AFFECTING FUND PERFORMANCE.
Investment return and principal value are historical and will vary with market
conditions, so an investor's shares, when redeemed, may be worth more or less
than their original cost. The return for the Fund includes change in share
price, reinvestment of dividends, and capital gain distributions, if any. The
return does not include deductions at the separate account or contract level for
administrative fees and charges, premium tax charges, mortality and expense risk
charges, or other charges that may be incurred under a contract.
The S&P 500 Index may not be invested in directly. The hypothetical investment
in the S&P 500 Index does not reflect any sales or management fees that would be
incurred if an investor were to actually purchase individual securities or
mutual funds, while the performance of the Fund reflects all expenses and
management fees.
A-12
<PAGE> 16
PACIFIC INNOVATIONS TRUST
MID-CAP EQUITY FUND
(AS OF DECEMBER 31, 1998)
GROWTH OF A $10,000 INVESTMENT
(HYPOTHETICAL -- PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.)
[MID CAP EQUITY FUND PERFORMANCE CHART]
<TABLE>
<CAPTION>
MID-CAP EQUITY FUND S&P MIDCAP 400 INDEX
------------------- --------------------
<S> <C> <C>
3/01/97 10000 10000
6/30/97 11040 10981
12/31/97 12780 12851
6/30/98 13689 13959
12/31/98 14975 15303
</TABLE>
HOW PERFORMANCE COMPARES
The chart compares the performance of the Pacific Innovations Trust Mid-Cap Fund
to the Standard & Poor's MidCap 400 Index (S&P MidCap 400 Index), which is an
unmanaged index typically used as a performance benchmark for equity
investments.
An initial $10,000 investment in the Fund made on March 1, 1997 would now be
worth $14,975. The same investment made in the S&P MidCap 400 Index, would now
be worth $15,303.
<TABLE>
<CAPTION>
- -------------------------------------------------------
MID-CAP EQUITY FUND
AGGREGATE TOTAL RETURN
- -------------------------------------------------------
<S> <C> <C>
1 year 17.18%
................................................
Since Inception 49.75%
(3/01/97)
- -------------------------------------------------------
</TABLE>
Performance quoted is not annualized.
FEDERAL INCOME TAX STATUS OF DIVIDENDS
The Mid-Cap Equity Fund ("Fund") distributed a total Capital Gain Dividend of
$0.077125 during the fiscal year ending December 31, 1998. Of this total Capital
Gain Dividend amount, the Fund made a 20 Percent Rate Gain distribution of
$0.077125.
SEE INVESTMENT MANAGER INTERVIEW FOR FACTORS AFFECTING FUND PERFORMANCE.
Investment return and principal value are historical and will vary with market
conditions, so an investor's shares, when redeemed, may be worth more or less
than their original cost. The return for the Fund includes change in share
price, reinvestment of dividends, and capital gain distributions, if any. The
return does not include deductions at the separate account or contract level for
administrative fees and charges, premium tax charges, mortality and expense risk
charges, or other charges that may be incurred under a contract.
The S&P MidCap 400 Index may not be invested in directly. The hypothetical
investment in the S&P MidCap 400 Index does not reflect any sales or management
fees that would be incurred if an investor were to actually purchase individual
securities or mutual funds, while the performance of the Fund reflects all
expenses and management fees and the effect of the maximum sales charge.
A-13
<PAGE> 17
PACIFIC INNOVATIONS TRUST
AGGRESSIVE GROWTH FUND
(AS OF DECEMBER 31, 1998)
GROWTH OF A $10,000 INVESTMENT
(HYPOTHETICAL -- PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.)
[AGGRESSIVE GROWTH FUND PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH RUSSELL 2000 GROWTH
FUND INDEX S&P 600 INDEX
----------------- ------------------- -------------
<S> <C> <C> <C>
3/01/97 10000 10000 10000
6/30/97 10870 10926 11205
12/31/97 11765 11728 12613
6/30/98 12699 12368 13385
12/31/98 11556 11872 12449
</TABLE>
HOW PERFORMANCE COMPARES
We have changed the Fund's benchmark index from the Russell 2000 Growth Index to
the Standard & Poor's SmallCap 600 Index (S&P 600 Index) which more closely
resembles the composition of the Fund and, we believe, is a more appropriate
benchmark for the Fund's holdings. In order to complete the transition to the
new benchmark we are a providing a hypothetical comparison of the Fund's
performance since inception through December 31, 1998 with both its former
benchmark and its new benchmark, the S&P 600 Index.
<TABLE>
<CAPTION>
- -------------------------------------------------------
AGGRESSIVE GROWTH FUND
AGGREGATE TOTAL RETURN
- -------------------------------------------------------
<S> <C> <C>
1 year (1.77%)
......................................................
Since Inception 15.56%
(3/01/97)
- -------------------------------------------------------
</TABLE>
Performance quoted is not annualized.
The chart compares the Pacific Innovations Trust Aggressive Growth Fund to the
S&P 600 Index, which is an unmanaged index typically used as a performance
benchmark for small-company stock performance.
An initial $10,000 investment made in the Fund on March 1, 1997, would now be
worth $11,556. The same investment made in the S&P 600 Index, would now be worth
$12,449.
SEE INVESTMENT MANAGER INTERVIEW FOR FACTORS AFFECTING FUND PERFORMANCE.
Investment return and principal value are historical and will vary with market
conditions, so an investor's shares, when redeemed, may be worth more or less
than their original cost. The return for the Fund includes change in share
price, reinvestment of dividends, and capital gains distributions, if any. The
return does not include deductions at the separate account or contract level for
administrative fees and charges, premium tax charges, mortality and expense risk
charges, or other charges that may be incurred under a contract.
The S&P 600 Index may not be invested in directly. The hypothetical investment
in the S&P 600 Index does not reflect any sales or management fees that would be
incurred if an investor were to actually purchase individual securities or
mutual funds, while the performance of the Fund reflects all expenses and
management fees.
A-14
<PAGE> 18
PACIFIC INNOVATIONS TRUST
INTERNATIONAL FUND
(AS OF DECEMBER 31, 1998)
GROWTH OF A $10,000 INVESTMENT
(HYPOTHETICAL -- PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.)
[INTERNATIONAL FUND PERFORMANCE CHART]
<TABLE>
<CAPTION>
MSCI ALL COUNTRY
WORLD FREE EX-U.S.
INTERNATIONAL FUND INDEX
<S> <C> <C>
3/1/97 10000 10000
6/30/97 10950 11274
12/31/97 10056 10207
6/30/98 11588 11430
12/31/98 11226 11684
</TABLE>
HOW PERFORMANCE COMPARES
The chart compares the Pacific Innovations Trust International Fund to the
Morgan Stanley Capital International (MSCI) All Country World Free ex-U.S.
Index, which is an unmanaged index typically used as a performance benchmark for
international equity investments.
An initial $10,000 investment in the Fund made on March 1, 1997 would now be
worth $11,226. The same investment made in the MSCI All Country World Free
ex-U.S. Index would now be worth $11,684.
<TABLE>
<CAPTION>
- -------------------------------------------------------
INTERNATIONAL FUND
AGGREGATE TOTAL RETURN
- -------------------------------------------------------
<S> <C> <C>
1 year 11.63%
......................................................
Since Inception 12.26%
(3/01/97)
- -------------------------------------------------------
</TABLE>
Performance quoted is not annualized.
SEE INVESTMENT MANAGER INTERVIEW FOR FACTORS AFFECTING FUND PERFORMANCE.
The investment return and principal value are historical and will vary with
market conditions, so an investor's shares, when redeemed, may be worth more or
less than their original cost. The return for the Fund includes change in share
price, reinvestment of dividends, and capital gains distributions, if any. The
return does not include deductions at the separate account or contract level for
administrative fees and charges, premium tax charges, mortality and expense risk
charges, or other charges that may be incurred under a contract.
The Morgan Stanley Capital International (MSCI) All Country World Free ex-U.S.
Index may not be invested in directly. The hypothetical investment in the Morgan
Stanley Capital International (MSCI) All Country World Free ex-U.S. Index does
not reflect any sales or management fees that would be incurred if an investor
were to actually purchase individual securities or mutual funds, while the
performance of the Fund reflects all expenses and management fees.
A-15
<PAGE> 19
PACIFIC INNOVATIONS TRUST
MANAGED BOND FUND
RESULTS (UNAUDITED) OF SPECIAL SHAREHOLDER MEETING HELD ON DECEMBER 29, 1998
On December 29, 1998, a special meeting of shareholders of the Pacific
Innovations Trust -- Managed Bond Fund was held in order to vote on the
following proposal:
(1) To consider the approval of a new sub-advisory agreement between Bank
of America NT&SA, the Managed Bond Fund's adviser, and Scudder Kemper
Investments, Inc.;
The voting results for the proposal are shown below:
<TABLE>
<CAPTION>
Shares
Outstanding and
Represented Abstained/
Proposal Vote Basis at the Meeting In Favor Opposed Withheld
- ---------- ------------ --------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
PROPOSAL 1 Managed Bond 1,746,723.42 1,473,397.31 39,605.59 233,720.53
Fund Only
</TABLE>
A-16
<PAGE> 20
MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MATURITY PAR
DATE (000) VALUE
---- ----- -----
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 68.2%
FANNIEMAE -- 11.5%
FannieMae Discount Note
4.800%...................... 01/04/99 $ 100 $ 99,960
FannieMae Discount Note
5.000%...................... 01/08/99 10 9,990
FannieMae Discount Note
5.040%...................... 02/19/99 100 99,314
FannieMae Discount Note
4.970%...................... 03/15/99 225 222,732
FannieMae
5.580%...................... 01/15/99 100 99,995
FannieMae
5.280%...................... 03/01/99 45 44,977
FannieMae
5.570%...................... 05/07/99 200 200,558
----------
TOTAL FANNIEMAE......................... 777,526
----------
FEDERAL FARM CREDIT BANK -- 9.3%
Federal Farm Credit Bank
Discount Note
5.100%...................... 01/07/99 100 99,915
Federal Farm Credit Bank
Discount Note
5.150%...................... 01/11/99 155 154,778
Federal Farm Credit Bank
Discount Note
4.840%...................... 04/09/99 80 78,946
Federal Farm Credit Bank
Discount Note
5.330%...................... 04/20/99 200 196,772
Federal Farm Credit Bank
Medium Term Note
6.720%...................... 06/22/99 100 100,818
----------
TOTAL FEDERAL FARM CREDIT BANK.......... 631,229
----------
FEDERAL HOME LOAN BANK -- 11.4%
Federal Home Loan Bank
Discount Note
5.010%...................... 01/22/99 130 129,620
Federal Home Loan Bank
Discount Note
4.870%...................... 04/12/99 105 103,565
Federal Home Loan Bank Note
5.350%...................... 01/04/99 50 49,998
Federal Home Loan Bank Note
9.300%...................... 01/25/99 125 125,279
Federal Home Loan Bank Note
5.925%...................... 02/01/99 15 15,002
Federal Home Loan Bank Note
6.310%...................... 03/26/99 200 200,445
</TABLE>
<TABLE>
<CAPTION>
MATURITY PAR
DATE (000) VALUE
---- ----- -----
<S> <C> <C> <C>
Federal Home Loan Bank Note
6.600%...................... 04/13/99 $ 25 $ 25,065
Federal Home Loan Bank Note
6.555%...................... 04/15/99 100 100,377
Federal Home Loan Bank Note
8.600%...................... 08/25/99 15 15,283
Federal Home Loan Bank Note
6.150%...................... 09/14/99 10 10,018
----------
TOTAL FEDERAL HOME LOAN BANK............ 774,652
----------
FEDERAL HOME LOAN MORTGAGE CORP. -- 28.6%
Federal Home Loan Mortgage
Corp. Discount Note
5.000-5.340%................ 01/06/99 96 95,933
Federal Home Loan Mortgage
Corp. Discount Note
5.150%...................... 01/12/99 310 309,512
Federal Home Loan Mortgage
Corp. Discount Note
4.800-5.090%................ 01/15/99 577 575,891
Federal Home Loan Mortgage
Corp. Discount Note
5.080%...................... 02/17/99 100 99,337
Federal Home Loan Mortgage
Corp. Discount Note
4.870%...................... 04/09/99 145 143,078
Federal Home Loan Mortgage
Corp. Discount Note
4.900%...................... 04/23/99 350 344,665
Federal Home Loan Mortgage
Corp. Note
6.550%...................... 04/19/99 10 10,026
Federal Home Loan Mortgage
Corp. Note
5.550%...................... 04/29/99 200 200,230
Federal Home Loan Mortgage
Corp. Note
7.125%...................... 07/21/99 160 161,899
----------
TOTAL FEDERAL HOME LOAN MORTGAGE
CORP.................................. 1,940,571
----------
STUDENT LOAN MARKETING ASSOCIATION -- 7.4%
Student Loan Marketing
Association VR Medium Term
Note
4.838%...................... 01/05/99 500 499,614
----------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $4,623,592)......................... 4,623,592
----------
</TABLE>
A-17
<PAGE> 21
MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MATURITY PAR
DATE (000) VALUE
---- ----- -----
<S> <C> <C> <C>
REPURCHASE AGREEMENTS -- 31.5%
Goldman Sachs & Co.,
5.000% dated 12/31/98,
repurchase price $300,167
(collateralized by $583,889
FannieMae, 5.50%-9.00%,
05/01/09-06/01/24,
market value $306,000)........ 01/04/99 $ 300 $ 300,000
HSBC Securities, Inc.
5.020% dates 12/31/98,
repurchase price $1,538,858
(collateralized by $2,143,000
Resolution Funding Strips,
0.00%, 01/15/99-04/15/12,
market value $1,570,627)...... 01/04/99 1,538 1,538,000
Lehman Brothers, Inc.
5.020% dated 12/31/98,
repurchase price $300,167
(collateralized by $400,000
FannieMae, 8.50%, 10/01/27,
market value $306,464)........ 01/04/99 300 300,000
----------
TOTAL REPURCHASE AGREEMENTS
(COST $2,138,000)......................... 2,138,000
----------
TOTAL INVESTMENTS -- 99.7%
(COST $6,761,592)......................... 6,761,592
OTHER ASSETS IN EXCESS OF
LIABILITIES -- 0.3%....................... 18,650
----------
NET ASSETS -- 100.0%........................ $6,780,242
==========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
A-18
<PAGE> 22
MANAGED BOND FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MATURITY PAR
DATE (000) VALUE
---- ----- -----
<S> <C> <C> <C>
ASSET BACKED SECURITIES -- 9.7%
Advanta, Series 1997-1
7.10%.................... 04/25/20 $ 212 $ 217,806
Carco Auto Loan Master
Trust, Series 1997-1
6.69%.................... 08/15/04 125 126,198
CIT RV Trust, Series 1996-A
5.40%.................... 12/15/11 30 29,644
Discover Card Master Trust
1, Series 1998-2, Class A
5.80%.................... 09/16/03 250 251,082
Green Tree Financial Corp.,
Series 1995-8
7.30%.................... 12/15/26 250 243,765
Green Tree Financial Corp.,
Series 1996-2
7.90%.................... 04/15/27 250 232,887
Green Tree Home Improvement
Loan Trust, Series 1997-A
6.75%.................... 08/15/23 67 67,052
The Money Store Home Equity
Trust, Series 1994-C
7.80%.................... 10/15/21 300 317,185
UCFC Home Equity Loan,
Series 1997-A1
6.98%.................... 04/15/16 150 153,235
Union Acceptance Corp.,
Series 1997-B
6.37%.................... 04/10/01 64 64,731
Western Financial, Series
1997-A
6.50%.................... 09/20/01 87 87,258
-----------
TOTAL ASSET BACKED SECURITIES
(COST $1,781,007)...................... 1,790,843
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 3.7%
Merrill Lynch Trust, Series
45
9.10%.................... 09/20/14 52 53,203
Nomura Asset Securities
Corp., Series 1994-1
6.63%.................... 01/25/09 199 200,352
PaineWebber Mortgage,
Series 1993-6
6.90%.................... 08/25/08 60 60,797
Residential Funding
Mortgage, Series 1996-S15
7.75%.................... 01/25/07 218 223,011
Residential Funding
Mortgage, Series 1997-S19
6.50%.................... 12/25/12 152 152,577
-----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(COST $681,561)........................ 689,940
-----------
CORPORATE OBLIGATIONS -- 33.2%
AEROSPACE -- 1.9%
Raytheon Co. Notes
6.15%.................... 11/01/08 350 354,375
-----------
BEVERAGES & FOOD -- 1.4%
Coca-Cola Enterprises Notes
6.38%.................... 08/01/01 250 256,250
-----------
</TABLE>
<TABLE>
<CAPTION>
MATURITY PAR
DATE (000) VALUE
---- ----- -----
<S> <C> <C> <C>
ENERGY -- 1.6%
Enterprise Oil Notes
6.50%.................... 05/01/05 $ 300 $ 301,125
-----------
ENVIRONMENTAL SERVICES -- 1.6%
USA Waste Services, Inc.
Notes
6.13%.................... 07/15/01 300 299,625
-----------
FINANCIAL -- BANK & TRUST -- 4.9%
Capital One Bank Notes
6.15%.................... 06/01/01 200 200,250
Royal Bank of Scotland
Notes
7.38%.................... 04/29/49 350 336,875
U.S. Bancorp Sub Notes
8.13%.................... 05/15/02 350 374,937
-----------
TOTAL FINANCIAL -- BANK & TRUST...... 912,062
-----------
FINANCIAL SERVICES -- 7.8%
Associates Corp. Sr. Notes
6.25%.................... 11/01/08 300 311,625
Countrywide Home Loan Notes
5.62%.................... 10/16/00 300 300,000
FINOVA Capital Corp. Notes
5.88%.................... 10/15/01 200 199,000
Ford Motor Credit Co. Notes
6.50%.................... 02/28/02 100 102,875
International Lease Finance
Corp. Notes
6.38%.................... 08/01/01 250 255,625
Lehman Brothers Holdings
Notes
6.63%.................... 12/27/02 175 175,437
Merrill Lynch & Co. Notes
6.47%.................... 06/27/00 100 101,731
-----------
TOTAL FINANCIAL SERVICES............. 1,446,293
-----------
MULTI-INDUSTRY -- 1.9%
Tyco International Group
Notes
6.38%.................... 06/15/05 350 355,687
-----------
REAL ESTATE -- 4.9%
American Health Properties
Notes
7.05%.................... 01/15/02 200 207,500
Equity Residential
Properties Notes
6.55%.................... 11/15/01 300 305,250
Simon Debartolo Group Notes
6.88%.................... 11/15/06 300 291,750
Spieker Properties Notes
7.13%.................... 12/01/06 100 101,125
-----------
TOTAL REAL ESTATE.................... 905,625
-----------
RESTAURANTS -- 1.7%
McDonald's Corp. Notes
5.90%.................... 05/11/01 300 304,695
-----------
RETAIL & MERCHANDISING -- 1.5%
Wal-Mart Stores, Inc. Notes
8.63%.................... 04/01/01 250 268,125
-----------
</TABLE>
A-19
<PAGE> 23
MANAGED BOND FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MATURITY PAR
DATE (000) VALUE
---- ----- -----
<S> <C> <C> <C>
TELECOMMUNICATIONS -- 4.0%
Comcast Cable
Communications Notes
6.20%.................... 11/15/08 $ 250 $ 254,063
US West Capital Funding,
Inc. Notes
6.13%.................... 07/15/02 300 306,750
Worldcom, Inc. Notes
6.13%.................... 08/15/01 165 167,475
-----------
TOTAL TELECOMMUNICATIONS............. 728,288
-----------
TOTAL CORPORATE OBLIGATIONS
(COST $6,084,887)...................... 6,132,150
-----------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 14.1%
FannieMae
5.75%.................... 04/15/03 1,300 1,337,043
Federal Home Loan Mortgage
Corp., Pool 200057
9.00%.................... 11/01/01 14 14,146
Federal Home Loan Mortgage
Corp., Pool 218960
9.00%.................... 10/01/02 28 29,174
Federal Home Loan Mortgage
Corp., Pool 380061
9.00%.................... 12/01/04 32 33,489
Government National
Mortgage Assoc. Pool
286324
9.00%.................... 02/15/20 252 270,992
Government National
Mortgage Assoc. Pool
286405
9.00%.................... 04/15/20 63 67,751
Government National
Mortgage Assoc. Pool
780011
10.00%................... 07/15/22 255 279,263
Government National
Mortgage Assoc. Pool
780081
10.00%................... 02/15/25 254 277,536
Government National
Mortgage Assoc. Pool
780657
8.00%.................... 12/15/23 279 289,760
-----------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $2,560,196)...................... 2,599,154
-----------
U.S. TREASURY OBLIGATIONS -- 31.1%
U.S. TREASURY BONDS -- 1.6%
U.S. Treasury Bond
6.63%.................... 02/15/27 50 59,016
U.S. Treasury Bond
6.38%.................... 08/15/27 200 229,395
-----------
TOTAL U.S. TREASURY BONDS............ 288,411
-----------
</TABLE>
<TABLE>
<CAPTION>
MATURITY PAR
DATE (000) VALUE
---- ----- -----
U.S. TREASURY NOTES -- 29.5%
U.S. Treasury Note
5.63%.................... 10/31/99 $ 250 $ 251,922
U.S. Treasury Note
5.38%.................... 06/30/00 200 202,062
U.S. Treasury Note
6.38%.................... 08/15/02 300 316,607
U.S. Treasury Note
6.25%.................... 08/31/02 750 788,795
U.S. Treasury Note
5.75%.................... 10/31/02 1,035 1,072,889
U.S. Treasury Note
5.63%.................... 12/31/02 175 180,825
U.S. Treasury Note
6.50%.................... 05/15/05 350 383,447
U.S. Treasury Note
6.50%.................... 08/15/05 1,485 1,632,649
U.S. Treasury Note
6.13%.................... 08/15/07 565 618,172
-----------
TOTAL U.S. TREASURY NOTES............ 5,447,368
-----------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $5,550,926)...................... 5,735,779
-----------
COMMERCIAL PAPER -- 4.1%
American Express Credit
Corp.
6.11% (Cost $750,000).... 01/05/99 750 750,000
-----------
SHARES
--------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS -- 2.8%
Temporary Investment Cash Fund....... 263,090 263,090
Temporary Investment Fund............ 263,089 263,089
-----------
TOTAL SHORT TERM INVESTMENTS
(COST $526,179)........................ 526,179
-----------
TOTAL INVESTMENTS -- 98.7%
(COST $17,934,756)..................... 18,224,045
OTHER ASSETS IN EXCESS OF
LIABILITIES -- 1.3%.................... 239,506
-----------
NET ASSETS -- 100.0%..................... $18,463,551
===========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
A-20
<PAGE> 24
CAPITAL INCOME FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MATURITY PAR
DATE (000) VALUE
---- ----- -----
<S> <C> <C> <C>
CONVERTIBLE BONDS -- 31.0%
BASICS -- 0.9%
Agnico Eagle Mines, Ltd.
3.50%.................... 01/27/04 $ 400 $ 236,000
-----------
CAPITAL GOODS -- 4.8%
Mark IV Industries
4.75%.................... 11/01/04 40 32,050
Mark IV Industries 144A
4.75%.................... 11/01/04 135 108,169
Thermo Electron Corp. 144A
4.25%.................... 01/01/03 200 179,500
U.S. Filter Corp.
4.50%.................... 12/15/01 305 287,081
Waste Management, Inc.
4.00%.................... 02/01/02 250 305,937
WMX Technologies, Inc.
2.00%.................... 01/24/05 360 351,000
-----------
TOTAL CAPITAL GOODS.................. 1,263,737
-----------
CONSUMER CYCLICALS -- 7.6%
Clear Channel
Communications, Inc.
2.63%.................... 04/01/03 295 318,969
Hilton Hotels Corp.
5.00%.................... 05/15/06 350 318,937
Home Depot, Inc.
3.25%.................... 10/01/01 115 302,162
Magna International, Inc.
4.88%.................... 02/15/05 50 51,062
Magna International, Inc. 144A
4.88%.................... 02/15/05 230 234,887
Omnicom Group, Inc.
2.25%.................... 01/06/13 20 26,850
Omnicom Group, Inc. 144A
2.25%.................... 01/06/13 180 241,650
Protection One Alarm Monitoring
6.75%.................... 09/15/03 100 103,625
Rite Aid Corp. 144A
5.25%.................... 09/15/02 190 275,737
Tower Automotive, Inc.
5.00%.................... 08/01/04 35 39,200
Tower Automotive, Inc. 144A
5.00%.................... 08/01/04 50 56,000
-----------
TOTAL CONSUMER CYCLICALS............. 1,969,079
-----------
ENERGY -- 3.0%
Loews Corp.
3.13%.................... 09/15/07 275 216,562
Pennzoil Co.
4.95%.................... 08/15/08 300 293,250
Seacor Holdings, Inc.
5.38%.................... 11/15/06 230 223,675
Seacor Holdings, Inc. 144A
5.38%.................... 11/15/06 50 48,625
-----------
TOTAL ENERGY......................... 782,112
-----------
</TABLE>
<TABLE>
<CAPTION>
MATURITY PAR
DATE (000) VALUE
---- ----- -----
<S> <C> <C> <C>
FINANCIAL SERVICES -- 3.4%
Bank Atlantic Bancorp, Inc.
5.63%.................... 12/01/07 $ 325 $ 276,250
Berkshire Hathaway, Inc.
1.00%.................... 12/02/01 130 198,575
Penn Treaty American Corp.
6.25%.................... 12/01/03 360 389,700
Penn Treaty American Corp.
6.25%.................... 12/01/03 15 16,256
-----------
TOTAL FINANCIAL SERVICES............. 880,781
-----------
HEALTH CARE -- 4.1%
Alza Corp.
5.00%.................... 05/01/06 180 258,750
Athena Neurosciences, Inc.
4.75%.................... 11/15/04 280 330,050
Healthsouth Corp.
3.25%.................... 04/01/03 50 42,437
Healthsouth Corp. 144A
3.25%.................... 04/01/03 150 127,312
Omnicare, Inc.
5.00%.................... 12/01/07 120 124,650
Omnicare, Inc. 144A
5.00%.................... 12/01/07 180 186,975
-----------
TOTAL HEALTH CARE.................... 1,070,174
-----------
TECHNOLOGY -- 4.8%
Atmel Corp. 144A,
3.25%; 8.25%, beginning
06/01/00++............... 06/01/02 350 283,500
Micron Technology, Inc.
7.00%.................... 07/01/04 100 107,875
Photronics, Inc.
6.00%.................... 06/01/04 300 307,875
Solectron Corp. 144A
6.00%.................... 03/01/06 125 341,406
Xilinx, Inc.
5.25%.................... 11/01/02 160 207,800
-----------
TOTAL TECHNOLOGY..................... 1,248,456
-----------
UTILITIES -- 2.4%
Bell Atlantic Financial
Services 144A
5.75%.................... 04/01/03 300 309,750
Bell Atlantic Financial
Services 144A
4.25%.................... 09/15/05 300 310,500
-----------
TOTAL UTILITIES...................... 620,250
-----------
TOTAL CONVERTIBLE BONDS (COST
$7,673,401)............................ 8,070,589
-----------
</TABLE>
A-21
<PAGE> 25
CAPITAL INCOME FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MATURITY PAR
DATE (000) VALUE
---- ----- -----
<S> <C> <C> <C>
CONVERTIBLE ZERO COUPON BONDS -- 7.8%
CONSUMER CYCLICALS -- 1.8%
Pep Boys, Inc.
4.44%+................... 09/20/11 $ 400 $ 207,000
Times Mirror Co.
4.34%+................... 04/15/17 600 267,000
-----------
TOTAL CONSUMER CYCLICALS............. 474,000
-----------
HEALTH CARE -- 3.0%
Elan International Finance 144A
3.25%+................... 12/14/18 600 339,000
Roche Holdings, Inc. 144A
5.71%+................... 04/20/10 390 249,112
Roche Holdings, Inc. 144A
5.11%+................... 05/06/12 390 204,750
-----------
TOTAL HEALTH CARE.................... 792,862
-----------
TECHNOLOGY -- 1.7%
Hewlett-Packard Co.
3.18%+................... 10/14/17 500 281,250
Motorola, Inc.
1.45%+................... 09/27/13 205 151,188
-----------
TOTAL TECHNOLOGY..................... 432,438
-----------
UTILITIES -- 1.3%
U.S. Cellular Corp. LYON
5.71%+................... 06/15/15 800 333,000
-----------
TOTAL CONVERTIBLE ZERO COUPON BONDS (COST
$1,973,797)............................ 2,032,300
-----------
SHARES
--------
COMMON STOCK -- 20.9%
CONSUMER CYCLICALS -- 1.1%
Nordstrom, Inc. ..................... 8,270 286,866
-----------
CONSUMER STAPLES -- 2.4%
McDonald's Corp. .................... 4,325 331,403
Procter & Gamble Co. ................ 3,300 301,331
-----------
TOTAL CONSUMER STAPLES............... 632,734
-----------
ENERGY -- 1.5%
Amoco Corp. ......................... 6,000 362,250
Seacor Holdings, Inc.*............... 300 14,831
-----------
TOTAL ENERGY......................... 377,081
-----------
FINANCIAL -- BANK & TRUST -- 3.9%
American Bankers Insurance Group,
Inc. .............................. 6,200 299,925
Fleet Financial Group, Inc. ......... 6,200 277,063
PNC Bank Corp. ...................... 4,000 216,500
Sovereign Bancorp, Inc. ............. 15,000 213,750
-----------
TOTAL FINANCIAL -- BANK & TRUST...... 1,007,238
-----------
HEALTH CARE -- 4.1%
American Home Products Corp. ........ 4,600 259,038
Lilly, (Eli) & Co. .................. 3,000 266,625
Pfizer, Inc. ........................ 2,200 275,963
Schering-Plough Corp. ............... 5,000 276,250
-----------
TOTAL HEALTH CARE.................... 1,077,876
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C> <C>
TECHNOLOGY -- 7.9%
Atmel Corp. ......................... 3,000 $ 45,938
Cisco Systems, Inc.*................. 4,500 417,656
EMC Corp. ........................... 2,000 170,000
Intel Corp. ......................... 3,950 468,322
Micron Technology, Inc.*............. 6,800 343,825
Motorola, Inc. ...................... 3,000 183,188
Xilinx, Inc.*........................ 6,700 436,338
-----------
TOTAL TECHNOLOGY..................... 2,065,267
-----------
TOTAL COMMON STOCK (COST $4,234,267)..... 5,447,062
-----------
CONVERTIBLE PREFERRED STOCK -- 38.5%
BASICS -- 1.1%
International Paper Co. ............. 6,000 290,250
-----------
CAPITAL GOODS -- 1.4%
Elsag Bailey Corp. .................. 6,100 371,338
-----------
CONSUMER CYCLICALS -- 10.7%
Fleetwood Capital Trust.............. 1,900 89,063
Fleetwood Capital Trust 144A......... 4,800 225,000
Houston Industries, Inc. ............ 3,100 329,763
Media One Group, Inc. ............... 4,800 319,200
Media One Group, Inc., Series D...... 3,700 351,500
Owens Corning Capital 144A........... 5,800 289,275
Owens-Illinois, Inc. ................ 6,500 276,250
Readers Digest Association........... 10,100 262,600
Sealed Air Corp., Series A........... 8,000 415,000
Wendy's Financing, Inc. ............. 4,500 234,000
-----------
TOTAL CONSUMER CYCLICALS............. 2,791,651
-----------
CONSUMER STAPLES -- 2.2%
Newell Financial Trust I............. 5,300 279,575
Ralston-Ralston Purina Co. .......... 5,500 287,375
-----------
TOTAL CONSUMER STAPLES............... 566,950
-----------
ENERGY -- 2.2%
El Paso Energy Capital Trust I....... 6,100 292,038
Unocal Corp. ........................ 5,460 266,858
-----------
TOTAL ENERGY......................... 558,896
-----------
FINANCIAL SERVICES -- 8.7%
Amerus Life Holdings, Inc. .......... 15,800 379,200
CNB Capital Trust I.................. 12,000 336,750
Frontier Insurance Group, Inc. ...... 10,400 443,300
Merrill Lynch & Co., Inc. ........... 12,000 285,000
Philadelphia Consolidated Holding
Corp. ............................. 30,000 300,000
Proctective Life Corp. .............. 5,000 326,250
St. Paul Capital Corp. .............. 2,800 180,600
-----------
TOTAL FINANCIAL SERVICES............. 2,251,100
-----------
HEALTH CARE -- 1.5%
Monsanto Co.*........................ 8,000 392,000
-----------
INSURANCE -- 1.2%
American Heritage Life Investment.... 4,800 319,800
-----------
TECHNOLOGY -- 1.1%
Microsoft Corp., Series A............ 3,000 293,250
-----------
</TABLE>
A-22
<PAGE> 26
CAPITAL INCOME FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C> <C>
TELECOMMUNICATIONS -- 1.3%
TCI Communications, Inc. ............ 3,000 $ 339,000
-----------
TRANSPORTATION -- 2.4%
CNF Transportation, Inc. ............ 5,800 329,875
Union Pacific Capital Trust.......... 1,100 51,150
Union Pacific Capital Trust 144A..... 5,500 255,750
-----------
TOTAL TRANSPORTATION................. 636,775
-----------
UTILITIES -- 4.7%
Calenergy Capital Trust II........... 4,700 236,175
Calenergy Capital Trust II 144A...... 2,500 125,625
Citizens Utilities Trust............. 6,600 281,325
Texas Utilities Co. ................. 5,000 281,875
Washington Water Power Co. .......... 15,000 290,625
-----------
TOTAL UTILITIES...................... 1,215,625
-----------
TOTAL CONVERTIBLE PREFERRED STOCK (COST
$9,741,128)............................ 10,026,635
-----------
SHORT TERM INVESTMENTS -- 1.4%
Temporary Investment Cash Fund....... 181,622 181,622
Temporary Investment Fund............ 181,621 181,621
-----------
TOTAL SHORT TERM INVESTMENTS (COST
$363,243).............................. 363,243
-----------
TOTAL INVESTMENTS -- 99.6% (COST
$23,985,836)........................... 25,939,829
OTHER ASSETS IN EXCESS OF
LIABILITIES -- 0.4%.................... 97,648
-----------
NET ASSETS -- 100.0%..................... $26,037,477
===========
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing security.
+ Rate shown is effective yield at purchase date.
++ Step-up Bond.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the period, these securities
amounted to 16.9% of net assets.
[LYON] -- Liquid Yield Option Note: Callable, zero coupon securities priced at a
deep discount from par. They include a "put" feature that enables
holders to redeem them at a specific date, at a specific price. Put
prices reflect fixed interest rates and therefore increase over time.
See Notes to Financial Statements.
A-23
<PAGE> 27
BLUE CHIP FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 97.5%
AEROSPACE/DEFENSE -- 1.5%
Goodrich (B.F.) Co. ................. 1,700 $ 60,987
United Technologies Corp. ........... 4,500 489,375
-----------
TOTAL AEROSPACE/DEFENSE.............. 550,362
-----------
AIRLINES -- 0.4%
AMR Corp.*........................... 2,000 118,750
UAL Corp.*........................... 800 47,750
-----------
TOTAL AIRLINES....................... 166,500
-----------
APPAREL/TEXTILE -- 0.3%
Tommy Hilfiger Corp.*................ 1,700 102,000
-----------
AUTOMOTIVE -- 1.6%
Dana Corp. .......................... 2,100 85,837
Ford Motor Co. ...................... 8,400 492,975
-----------
TOTAL AUTOMOTIVE..................... 578,812
-----------
BANKS/SAVINGS & LOANS -- 9.4%
Bank of New York Co., Inc. .......... 7,700 309,925
Banc One Corp. ...................... 7,100 362,544
BankBoston Corp. .................... 300 11,681
Chase Manhattan Corp. ............... 4,600 313,087
Citigroup, Inc. ..................... 4,050 200,475
First Union Corp. ................... 9,500 577,719
Fleet Financial Group, Inc. ......... 12,600 563,062
Mellon Bank Corp. ................... 5,000 343,750
National City Corp. ................. 3,300 239,250
Wells Fargo Co. ..................... 10,300 411,356
-----------
TOTAL BANKS/SAVINGS & LOANS.......... 3,332,849
-----------
BEVERAGES -- 2.6%
Anheuser-Busch Cos., Inc. ........... 4,500 295,312
Coca-Cola Co. ....................... 6,300 421,312
Coca-Cola Enterprises, Inc. ......... 2,400 85,800
PepsiCo, Inc. ....................... 2,900 118,719
-----------
TOTAL BEVERAGES...................... 921,143
-----------
BUILDING RELATED/APPLIANCE -- 0.4%
Centex Corp. ........................ 3,400 153,212
-----------
CHEMICALS -- 1.8%
Air Products & Chemicals, Inc. ...... 4,800 192,000
Dow Chemical Co. .................... 2,800 254,625
Dupont, (E.I.) de Nemours & Co. ..... 2,300 122,044
Praxair, Inc. ....................... 200 7,050
Solutia, Inc. ....................... 3,600 80,550
-----------
TOTAL CHEMICALS...................... 656,269
-----------
COMMERCIAL SERVICES -- 0.4%
Fluor Corp. ......................... 3,200 136,200
-----------
COMMUNICATIONS -- 3.9%
Cisco Systems, Inc.*................. 6,175 573,117
Lucent Technologies, Inc. ........... 5,500 605,000
Tellabs, Inc.*....................... 2,900 198,831
-----------
TOTAL COMMUNICATIONS................. 1,376,948
-----------
COMPUTER HARDWARE -- 6.1%
Dell Computer Corp.*................. 10,300 753,831
EMC Corp.*........................... 7,100 603,500
International Business Machines
Corp. ............................. 1,500 277,125
Solectron Corp.*..................... 1,800 167,287
Sun Microsystems, Inc.*.............. 4,000 342,500
Xerox Corp. ......................... 200 23,600
-----------
TOTAL COMPUTER HARDWARE.............. 2,167,843
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMPUTER SERVICES & SOFTWARE -- 5.0%
Computer Associates International,
Inc. .............................. 2,100 $ 89,512
Compuware Corp.*..................... 1,300 101,562
Microsoft Corp.*..................... 9,800 1,359,137
Oracle Systems Corp.*................ 5,200 224,250
-----------
TOTAL COMPUTER SERVICES & SOFTWARE... 1,774,461
-----------
COSMETICS & TOILETRIES -- 3.3%
Avon Products, Inc. ................. 4,400 194,700
Clorox Co. .......................... 1,700 198,581
Kimberly-Clark Corp. ................ 3,100 168,950
Procter & Gamble Co. ................ 6,700 611,794
-----------
TOTAL COSMETICS & TOILETRIES......... 1,174,025
-----------
ELECTRICAL EQUIPMENT -- 4.1%
General Electric Co. ................ 11,500 1,173,719
PECO Energy Co. ..................... 6,800 283,050
-----------
TOTAL ELECTRICAL EQUIPMENT........... 1,456,769
-----------
ENERGY RELATED -- 0.3%
Transocean Offshore, Inc. ........... 4,300 115,294
-----------
ENTERTAINMENT -- 2.5%
Carnival Corp. ...................... 5,900 283,200
King World Productions, Inc.*........ 2,300 67,706
Time Warner, Inc. ................... 8,800 546,150
-----------
TOTAL ENTERTAINMENT.................. 897,056
-----------
FINANCIAL SERVICES -- 2.5%
American Express Co. ................ 4,100 419,225
Lehman Brothers Holdings, Inc. ...... 200 8,812
Morgan Stanley Dean Witter
Discover & Co. .................... 4,100 291,100
Providian Financial Corp. ........... 2,400 180,000
-----------
TOTAL FINANCIAL SERVICES............. 899,137
-----------
FOODS -- 1.8%
Conagra, Inc. ....................... 5,400 170,100
Heinz (H.J.) Co. .................... 2,600 147,225
Pioneer Hi-Bred International,
Inc. .............................. 200 5,400
Quaker Oats Co. ..................... 4,100 243,950
SYSCO Corp. ......................... 2,600 71,337
-----------
TOTAL FOODS.......................... 638,012
-----------
HOSPITAL MANAGEMENT -- 0.4%
United Healthcare Corp. ............. 3,100 133,494
-----------
HOSPITAL SUPPLY -- 3.3%
Abbott Laboratories.................. 10,900 534,100
Biomet, Inc. ........................ 5,500 221,375
Guidant Corp. ....................... 2,500 275,625
Johnson & Johnson Co. ............... 1,800 150,975
-----------
TOTAL HOSPITAL SUPPLY................ 1,182,075
-----------
INSURANCE -- 3.3%
Allstate Corp. ...................... 7,300 281,962
American General Corp. .............. 4,000 312,000
Conseco, Inc. ....................... 8,000 244,500
Hartford Financial Services Group,
Inc. .............................. 5,800 318,275
-----------
TOTAL INSURANCE...................... 1,156,737
-----------
MACHINERY & EQUIPMENT -- 0.5%
Deere & Co. ......................... 200 6,625
Ingersoll Rand Co. .................. 3,400 159,587
-----------
TOTAL MACHINERY & EQUIPMENT.......... 166,212
-----------
</TABLE>
A-24
<PAGE> 28
BLUE CHIP FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
METALS & MINING -- 0.6%
Aluminum Company of America.......... 1,400 $ 104,388
USX-U.S. Steel Group, Inc. .......... 4,600 105,800
-----------
TOTAL METALS & MINING................ 210,188
-----------
MULTI-INDUSTRY -- 2.5%
AlliedSignal, Inc. .................. 3,100 137,369
Honeywell, Inc. ..................... 3,200 241,000
Tyco International Ltd. ............. 6,900 520,519
-----------
TOTAL MULTI-INDUSTRY................. 898,888
-----------
OIL (DOMESTIC) -- 1.2%
Phillips Petroleum Co. .............. 4,200 179,025
Sunoco, Inc. ........................ 2,400 86,550
USX-Marathon Group................... 5,900 177,738
-----------
TOTAL OIL (DOMESTIC)................. 443,313
-----------
OIL (INTERNATIONAL) -- 4.5%
Chevron Corp. ....................... 3,800 315,163
Exxon Corp. ......................... 11,500 840,938
Mobil Corp. ......................... 5,000 435,625
-----------
TOTAL OIL (INTERNATIONAL)............ 1,591,726
-----------
PAPER & FOREST PRODUCTS -- 0.6%
Fort James Corp. .................... 2,300 92,000
Owens-Illinois, Inc.*................ 4,400 134,750
-----------
TOTAL PAPER & FOREST PRODUCTS........ 226,750
-----------
PHARMACEUTICALS -- 8.5%
Biogen, Inc.*........................ 2,600 215,800
Bristol-Meyers Squibb Co. ........... 4,300 575,394
Lilly, (Eli) & Co. .................. 5,600 497,700
Merck & Co., Inc. ................... 1,700 251,069
Pfizer, Inc. ........................ 2,800 351,225
Schering-Plough Corp. ............... 14,200 784,550
Warner-Lambert Co. .................. 4,600 345,863
-----------
TOTAL PHARMACEUTICALS................ 3,021,601
-----------
PRINTING & PUBLISHING -- 1.7%
McGraw-Hill Cos., Inc. .............. 1,900 193,563
New York Times Co., Class A.......... 3,000 104,063
Viacom, Inc., Class B*............... 4,400 325,600
-----------
TOTAL PRINTING & PUBLISHING.......... 623,226
-----------
RESTAURANT/LODGING -- 0.4%
Mariott International Inc., Class
A.................................. 300 8,700
McDonald's Corp. .................... 1,700 130,263
-----------
TOTAL RESTAURANT/LODGING............. 138,963
-----------
RETAIL -- 5.5%
Gap, Inc. ........................... 6,450 362,813
Home Depot, Inc. .................... 4,600 281,463
Lowe's Cos., Inc. ................... 5,600 286,650
TJX Cos., Inc. ...................... 8,400 243,600
Wal-Mart Stores, Inc. ............... 9,600 781,800
-----------
TOTAL RETAIL......................... 1,956,326
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
RETAIL FOOD/DRUG -- 1.2%
Albertson's, Inc. ................... 2,400 $ 152,850
Safeway, Inc.*....................... 4,300 262,031
-----------
TOTAL RETAIL FOOD/DRUG............... 414,881
-----------
SEMI-CONDUCTORS/INSTRUMENTATION -- 3.1%
Harris Corp. ........................ 200 7,325
Intel Corp. ......................... 9,000 1,066,781
Maxim Integrated Products, Inc.*..... 400 17,475
-----------
TOTAL
SEMI-CONDUCTORS/INSTRUMENTATION.... 1,091,581
-----------
TOBACCO -- 1.5%
Philip Morris Cos., Inc. ............ 10,200 545,700
-----------
TRANSPORTATION -- 0.4%
Burlington Northern Santa Fe......... 3,900 131,625
-----------
UTILITIES -- ELECTRIC -- 1.7%
Edison International................. 5,800 161,675
FPL Group, Inc. ..................... 3,400 209,525
Houston Industries, Inc. ............ 6,800 218,450
-----------
TOTAL UTILITIES -- ELECTRIC.......... 589,650
-----------
UTILITIES -- GAS & PIPELINE -- 0.6%
Coastal Corp. ....................... 5,800 202,638
-----------
UTILITIES -- TELEPHONE -- 8.1%
Ameritech Corp. ..................... 7,500 475,313
AT&T Corp. .......................... 8,200 617,050
Bell Atlantic Corp. ................. 5,400 306,788
BellSouth Corp. ..................... 14,600 728,175
MCI Worldcom, Inc.*.................. 6,300 452,025
U.S. West, Inc. ..................... 4,700 303,738
-----------
TOTAL UTILITIES -- TELEPHONE......... 2,883,089
-----------
TOTAL COMMON STOCK (COST $26,757,118).... 34,705,555
-----------
SHORT TERM INVESTMENTS -- 4.7%
Temporary Investment Cash Fund....... 832,138 832,138
Temporary Investment Fund............ 832,137 832,137
-----------
TOTAL SHORT TERM INVESTMENTS (COST
$1,664,275)............................ 1,664,275
-----------
TOTAL INVESTMENTS -- 102.2% (COST
$28,421,393)........................... 36,369,830
LIABILITIES IN EXCESS OF OTHER
ASSETS -- 2.2%......................... (792,255)
-----------
NET ASSETS -- 100.0%..................... $35,577,575
===========
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing security.
See Notes to Financial Statements.
A-25
<PAGE> 29
MID-CAP EQUITY FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 91.2%
AEROSPACE/DEFENSE -- 1.3%
Cordant Technologies, Inc. .......... 2,300 $ 86,250
Sundstrand Corp. .................... 2,600 134,875
-----------
TOTAL AEROSPACE/DEFENSE.............. 221,125
-----------
AIRLINES -- 0.5%
Alaska Air Group, Inc.*.............. 1,800 79,650
-----------
APPAREL/TEXTILE -- 1.4%
Jones Apparel Group, Inc.*........... 5,700 125,756
Tommy Hilfiger Corp.*................ 1,700 102,000
-----------
TOTAL APPAREL/TEXTILE................ 227,756
-----------
AUTOMOTIVE -- 1.4%
Arvin Industries, Inc. .............. 2,900 120,894
Meritor Automotive, Inc. ............ 5,100 108,056
-----------
TOTAL AUTOMOTIVE..................... 228,950
-----------
BANKS/SAVINGS & LOANS -- 8.2%
AmSouth Bancorporation............... 5,400 246,375
Astoria Financial Corp. ............. 1,300 59,475
City National Corp. ................. 5,800 241,425
Dime Bancorp, Inc. .................. 7,500 198,281
North Fork Bancorporation, Inc. ..... 11,600 277,675
Old Kent Financial Corp. ............ 7,145 332,242
-----------
TOTAL BANKS/SAVINGS & LOANS.......... 1,355,473
-----------
BEVERAGES -- 0.4%
Coors, (Adolph) Co., Class B......... 1,300 73,369
-----------
BUILDING RELATED/APPLIANCE -- 3.5%
Miller (Herman), Inc. ............... 4,400 118,250
Mohawk Industries, Inc.*............. 2,600 109,362
Shaw Industries, Inc. ............... 5,300 128,525
Southdown, Inc. ..................... 2,400 142,050
USG Corp. ........................... 1,500 76,406
-----------
TOTAL BUILDING RELATED/APPLIANCE..... 574,593
-----------
CHEMICALS -- 2.3%
Crompton & Knowles Corp. ............ 4,900 101,369
Ecolab, Inc. ........................ 2,500 90,469
Schulman (A.), Inc. ................. 2,400 54,450
Solutia, Inc. ....................... 6,200 138,725
-----------
TOTAL CHEMICALS...................... 385,013
-----------
COMMERCIAL SERVICES -- 3.1%
ACNielsen Corp.*..................... 5,300 149,725
Galileo International, Inc. ......... 1,400 60,900
Omnicom Group, Inc. ................. 2,700 156,600
Robert Half International, Inc.*..... 3,300 147,469
-----------
TOTAL COMMERCIAL SERVICES............ 514,694
-----------
COMMUNICATIONS -- 1.4%
American Power Conversion Corp.*..... 4,900 237,344
-----------
COMPUTER HARDWARE -- 4.7%
Lexmark International Group, Inc.*... 3,500 351,750
NCR Corp.*........................... 3,200 133,600
Storage Technology Corp.*............ 2,500 88,906
Symbol Technologies, Inc. ........... 3,100 198,206
-----------
TOTAL COMPUTER HARDWARE.............. 772,462
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMPUTER SERVICES & SOFTWARE -- 7.5%
BMC Software, Inc.*.................. 2,000 $ 89,125
Citrix Systems, Inc.*................ 2,000 194,125
Compuware Corp.*..................... 3,300 257,812
Electronic Arts, Inc.*............... 1,800 101,025
HBO & Co. ........................... 5,400 154,912
Keane, Inc.*......................... 2,500 99,844
Network Associates, Inc.*............ 4,000 265,000
Rational Software Corp.*............. 2,700 71,550
-----------
TOTAL COMPUTER SERVICES & SOFTWARE... 1,233,393
-----------
COSMETICS & TOILETRIES -- 1.1%
Dial Corp. .......................... 6,200 179,025
-----------
ENERGY RELATED -- 1.3%
Allied Waste Industries, Inc.*....... 2,300 54,337
Tidewater, Inc. ..................... 2,900 67,244
Transocean Offshore, Inc. ........... 3,800 101,888
-----------
TOTAL ENERGY RELATED................. 223,469
-----------
ENTERTAINMENT -- 0.7%
GTECH Holdings Corp.*................ 2,800 71,750
King World Productions, Inc.*........ 1,500 44,156
-----------
TOTAL ENTERTAINMENT.................. 115,906
-----------
FINANCIAL SERVICES -- 1.9%
Countrywide Credit Industries,
Inc. .............................. 3,100 155,581
Edwards (A.G.), Inc. ................ 4,100 152,725
-----------
TOTAL FINANCIAL SERVICES............. 308,306
-----------
FOODS -- 2.9%
Earthgrains Co. ..................... 2,300 71,156
Flowers Industries, Inc. ............ 4,400 105,325
IBP, Inc. ........................... 4,700 136,887
Ralcorp Holdings, Inc.*.............. 5,100 93,075
Vlasic Foods International, Inc.*.... 3,000 71,437
-----------
TOTAL FOODS.......................... 477,880
-----------
HOSPITAL MANAGEMENT -- 2.4%
Health Management Associates, Inc.,
Class A*........................... 5,050 109,206
Lincare Holdings, Inc.*.............. 2,700 109,519
Omnicare, Inc. ...................... 2,000 69,500
Wellpoint Health Networks, Inc.*..... 1,200 104,400
-----------
TOTAL HOSPITAL MANAGEMENT............ 392,625
-----------
HOSPITAL SUPPLY -- 3.1%
Allegiance Corp. .................... 6,000 279,750
Biomet, Inc. ........................ 2,900 116,725
Hillenbrand Industries, Inc. ........ 2,100 119,437
-----------
TOTAL HOSPITAL SUPPLY................ 515,912
-----------
INSURANCE -- 3.2%
AFLAC, Inc. ......................... 6,100 268,400
AMBAC Financial Group................ 2,800 168,525
PMI Group, Inc. ..................... 1,700 83,937
-----------
TOTAL INSURANCE...................... 520,862
-----------
MACHINERY & EQUIPMENT -- 1.9%
Briggs & Stratton Corp. ............. 2,300 114,713
McDermott International, Inc. ....... 2,900 71,594
Tecumseh Products Co., Class A....... 100 4,663
Trinity Industries, Inc. ............ 3,300 127,050
-----------
TOTAL MACHINERY & EQUIPMENT.......... 318,020
-----------
</TABLE>
A-26
<PAGE> 30
MID-CAP EQUITY FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
METALS & MINING -- 1.4%
Martin Marietta Materials, Inc. ..... 3,600 $ 223,875
-----------
MULTI-INDUSTRY -- 1.4%
Crane Co. ........................... 3,900 117,731
Pentair, Inc. ....................... 2,700 107,494
-----------
TOTAL MULTI-INDUSTRY................. 225,225
-----------
OIL (DOMESTIC) -- 1.4%
Ashland, Inc. ....................... 2,900 140,288
Murphy Oil Corp. .................... 2,100 86,625
-----------
TOTAL OIL (DOMESTIC)................. 226,913
-----------
PAPER & FOREST PRODUCTS -- 2.2%
American Greetings Corp. ............ 3,300 135,506
Georgia Pacific Corp. ............... 4,500 107,156
Owens-Illinois, Inc.*................ 3,800 116,375
-----------
TOTAL PAPER & FOREST PRODUCTS........ 359,037
-----------
PHARMACEUTICALS -- 4.0%
Biogen, Inc.*........................ 2,900 240,338
Cardinal Health, Inc. ............... 1,200 91,050
Mylan Laboratories, Inc. ............ 4,200 132,300
Watson Pharmaceuticals Co.*.......... 3,200 201,200
-----------
TOTAL PHARMACEUTICALS................ 664,888
-----------
PRINTING & PUBLISHING -- 0.5%
Houghton Mifflin Co. ................ 1,800 85,050
-----------
RESTAURANT/LODGING -- 2.3%
Bob Evans Farms, Inc. ............... 4,100 106,856
Brinker International, Inc.*......... 4,300 124,163
CKE Restaurants, Inc. ............... 2,860 84,191
Promus Hotel Corp.*.................. 1,987 64,329
-----------
TOTAL RESTAURANT/LODGING............. 379,539
-----------
RETAIL -- 4.9%
Best Buy Co., Inc.*.................. 3,600 220,950
Hertz Corp. ......................... 1,500 68,438
OfficeMax, Inc.*..................... 11,100 134,588
Ross Stores, Inc. ................... 3,800 149,625
Staples, Inc.*....................... 2,200 96,113
TJX Cos., Inc.*...................... 4,600 133,400
-----------
TOTAL RETAIL......................... 803,114
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
SEMI-CONDUCTORS/INSTRUMENTATION -- 5.5%
Altera Corp.*........................ 3,100 $ 188,713
Comverse Technology, Inc.*........... 1,100 78,100
Maxim Integrated Products, Inc.*..... 6,100 266,494
Microchip Technology, Inc.*.......... 5,000 185,000
PMC-Sierra, Inc.*.................... 1,200 75,750
Xilinx, Inc.*........................ 1,700 110,713
-----------
TOTAL
SEMI-CONDUCTORS/INSTRUMENTATION.... 904,770
-----------
TRANSPORTATION -- 0.4%
CNF Transportation, Inc. ............ 1,800 67,613
-----------
UTILITIES -- ELECTRIC -- 8.9%
Allegheny Energy, Inc. .............. 7,000 241,500
BEC Energy........................... 3,400 140,038
CMS Energy Corp. .................... 4,200 203,437
Conectiv, Inc. ...................... 8,700 213,150
DQE, Inc. ........................... 3,500 153,781
Energy East Corp. ................... 4,100 231,650
FirstEnergy Corp. ................... 1,900 61,869
NIPSCO Industries, Inc. ............. 4,400 133,925
Public Service Co. of New Mexico..... 4,500 91,969
-----------
TOTAL UTILITIES -- ELECTRIC.......... 1,471,319
-----------
UTILITIES -- GAS & PIPELINE -- 2.1%
El Paso Energy Corp. ................ 6,100 212,356
NICOR, Inc. ......................... 3,000 126,750
-----------
TOTAL UTILITIES -- GAS & PIPELINE.... 339,106
-----------
UTILITIES -- TELEPHONE -- 2.0%
Century Telephone Enterprises,
Inc. .............................. 3,700 249,750
Cincinnati Bell, Inc. ............... 2,100 79,406
-----------
TOTAL UTILITIES -- TELEPHONE......... 329,156
-----------
TOTAL COMMON STOCK (COST $12,189,491).... 15,035,432
-----------
SHORT TERM INVESTMENTS -- 1.3%
Temporary Investment Cash Fund....... 105,408 105,408
Temporary Investment Fund............ 105,408 105,408
-----------
TOTAL SHORT TERM INVESTMENTS (COST
$210,816).............................. 210,816
-----------
TOTAL INVESTMENTS -- 92.5% (COST
$12,400,307)........................... 15,246,248
OTHER ASSETS IN EXCESS OF
LIABILITIES -- 7.5%.................... 1,243,466
-----------
NET ASSETS -- 100.0%..................... $16,489,714
===========
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing security.
See Notes to Financial Statements.
A-27
<PAGE> 31
AGGRESSIVE GROWTH FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 99.3%
AEROSPACE/DEFENSE -- 1.4%
Alliant Techsystems, Inc.*............ 1,800 $ 148,387
-----------
APPAREL/TEXTILE -- 1.3%
Burlington Industries, Inc.*.......... 7,300 80,300
Nautica Enterprises, Inc.*............ 4,400 66,000
-----------
TOTAL APPAREL/TEXTILE................. 146,300
-----------
AUTOMOTIVE -- 0.6%
Superior Industries International,
Inc. ............................... 2,400 66,750
-----------
BANKS/SAVINGS & LOANS -- 6.8%
Astoria Financial Corp. .............. 3,000 137,250
Commerce Bancorp, Inc. ............... 1,500 78,750
Cullen/Frost Bankers, Inc. ........... 2,500 137,187
Downey Financial Corp. ............... 4,300 109,381
FirstFed Financial Corp.*............. 5,500 98,312
HUBCO, Inc. .......................... 3,400 102,425
Trustmark Corp. ...................... 3,900 88,237
-----------
TOTAL BANKS/SAVINGS & LOANS........... 751,542
-----------
BEVERAGES -- 0.6%
Canandaigua Brands, Inc., Class A*.... 1,200 69,375
-----------
BUILDING RELATED/APPLIANCE -- 7.0%
AptarGroup, Inc. ..................... 4,700 131,894
Hughes Supply, Inc. .................. 2,200 64,350
Interface, Inc. ...................... 5,900 54,759
M.D.C. Holdings, Inc. ................ 5,900 126,112
Mohawk Industries, Inc.*.............. 4,800 201,900
Ryland Group, Inc. ................... 4,500 129,937
Southdown, Inc. ...................... 1,100 65,106
-----------
TOTAL BUILDING RELATED/APPLIANCE...... 774,058
-----------
CHEMICALS -- 2.0%
Gencorp, Inc. ........................ 4,300 107,231
Scotts Co. Class A*................... 2,900 111,469
-----------
TOTAL CHEMICALS....................... 218,700
-----------
COMMERCIAL SERVICES -- 5.7%
ADVO, Inc.*........................... 2,700 71,212
Interim Services, Inc.*............... 3,500 81,812
MedQuist, Inc.*....................... 3,500 138,250
Personnel Group of America, Inc.*..... 2,400 42,000
Renters Choice, Inc.*................. 2,600 82,550
Select Appointments Holdings Public
Limited Co. ........................ 4,100 88,150
Valassis Communications, Inc.*........ 2,500 129,062
-----------
TOTAL COMMERCIAL SERVICES............. 633,036
-----------
COMMUNICATIONS -- 2.5%
Inter-Tel, Inc. ...................... 1,800 42,075
Level One Communications, Inc.*....... 2,800 99,400
Xircom, Inc.*......................... 4,000 136,000
-----------
TOTAL COMMUNICATIONS.................. 277,475
-----------
COMPUTER HARDWARE -- 2.6%
Inacom Corp.*......................... 2,600 38,675
InterVoice, Inc.*..................... 2,600 89,700
Tech Data Corp.*...................... 2,100 84,525
Zebra Technologies Corp., Class A*.... 2,400 69,000
-----------
TOTAL COMPUTER HARDWARE............... 281,900
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMPUTER SERVICES & SOFTWARE -- 7.7%
Affiliated Computer Services, Inc.*... 2,400 $ 108,000
American Management Systems, Inc.*.... 3,000 120,000
CIBER, Inc.*.......................... 4,200 117,337
CPS, Inc.*............................ 2,800 2,275
Keane, Inc.*.......................... 2,800 111,825
Macromedia, Inc.*..................... 3,100 104,431
Mercury Interactive Corp.*............ 2,000 126,500
National Computer Systems, Inc. ...... 2,400 88,800
Sterling Software, Inc.*.............. 2,800 75,775
-----------
TOTAL COMPUTER SERVICES & SOFTWARE.... 854,943
-----------
ENTERTAINMENT -- 2.5%
Hollywood Entertainment Corp.*........ 4,400 119,900
Musicland Stores Corp.*............... 5,600 83,650
Polaris Industries, Inc. ............. 1,700 66,619
-----------
TOTAL ENTERTAINMENT................... 270,169
-----------
ENERGY RELATED -- 1.4%
Newfield Exploration Co.*............. 3,700 77,238
Offshore Logistics, Inc.*............. 6,200 73,625
-----------
TOTAL ENERGY RELATED.................. 150,863
-----------
FINANCIAL SERVICES -- 3.7%
AmeriCredit Corp.*.................... 2,100 29,006
CCB Financial Corp. .................. 1,100 62,700
CMAC Investment Corp. ................ 1,300 59,719
Delphi Financial Group, Inc. Class
A*.................................. 2,244 117,670
Legg Mason, Inc. ..................... 3,400 107,312
Willis Lease Finance Corp.*........... 2,200 34,650
-----------
TOTAL FINANCIAL SERVICES.............. 411,057
-----------
FOODS -- 1.5%
Earthgrains Co. ...................... 3,600 111,375
Ralcorp Holdings, Inc.*............... 3,200 58,400
-----------
TOTAL FOODS........................... 169,775
-----------
HOSPITAL MANAGEMENT -- 2.2%
Curative Health Services, Inc.*....... 1,800 60,300
Mariner Post Acute Network*........... 5,400 24,637
Universal Health Services, Inc. Class
B*.................................. 3,100 160,812
-----------
TOTAL HOSPITAL MANAGEMENT............. 245,749
-----------
HOSPITAL SUPPLY -- 5.0%
ADAC Laboratories*.................... 3,000 59,906
Bindley Western Industries, Inc. ..... 2,200 108,350
Integrated Health Services, Inc. ..... 3,700 52,262
Owens & Minor, Inc. .................. 5,000 78,750
Patterson Dental Co.*................. 1,600 69,600
Safeskin Corp.*....................... 1,700 41,013
VISX, Inc.*........................... 1,600 139,900
-----------
TOTAL HOSPITAL SUPPLY................. 549,781
-----------
INSURANCE -- 4.4%
Capital Re Corp. ..................... 4,100 82,256
Enhance Financial Services Group,
Inc. ............................... 1,500 45,000
Fidelity National Financial, Inc. .... 2,970 90,585
First American Financial Corp. ....... 5,100 163,837
Fremont General Corp. ................ 4,200 103,950
-----------
TOTAL INSURANCE....................... 485,628
-----------
</TABLE>
A-28
<PAGE> 32
AGGRESSIVE GROWTH FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
MACHINERY & EQUIPMENT -- 4.4%
Applied Power, Inc. .................. 2,800 $ 105,700
Graco, Inc. .......................... 1,400 41,300
JLG Industries, Inc. ................. 4,700 73,438
Manitowoc Co., Inc. .................. 3,300 146,438
Metrika Systems Corp.*................ 3,900 33,638
Terex Corp.*.......................... 3,100 88,544
-----------
TOTAL MACHINERY & EQUIPMENT........... 489,058
-----------
METALS & MINING -- 2.1%
Inland Steel Industries, Inc. ........ 3,400 57,375
Stillwater Mining Co.*................ 2,300 94,300
Texas Industries, Inc. ............... 3,000 80,813
-----------
TOTAL METALS & MINING................. 232,488
-----------
MULTI-INDUSTRY -- 0.6%
Mascotech, Inc. ...................... 4,100 70,213
-----------
OIL (DOMESTIC) -- 1.2%
Cabot Oil & Gas Corp. ................ 3,300 49,500
Devon Energy Corp. ................... 2,700 82,856
-----------
TOTAL OIL (DOMESTIC).................. 132,356
-----------
PHARMACEUTICALS -- 3.6%
Alpharma, Inc. Class A................ 4,100 144,781
MedImmune, Inc.*...................... 900 89,494
Roberts Pharmaceutical Corp.*......... 3,600 78,300
Watson Pharmaceuticals, Inc.*......... 1,300 81,738
-----------
TOTAL PHARMACEUTICALS................. 394,313
-----------
PRINTING & PUBLISHING -- 2.5%
Consolidated Graphics, Inc.*.......... 1,400 94,588
Metro Networks, Inc.*................. 1,700 72,463
World Color Press, Inc.*.............. 3,500 106,531
-----------
TOTAL PRINTING & PUBLISHING........... 273,582
-----------
RESTAURANTS/LODGING -- 3.0%
CEC Entertainment, Inc.*.............. 3,700 102,675
Ruby Tuesday, Inc. ................... 5,700 121,125
Ryan's Family Steak Houses, Inc.*..... 8,700 107,663
-----------
TOTAL RESTAURANTS/LODGING............. 331,463
-----------
RETAIL -- 5.5%
1-800-Contacts, Inc.*................. 4,300 77,400
Ann Taylor Stores Corp.*.............. 2,900 114,369
Cato Corp. Class A.................... 4,200 41,344
Linens 'n Things, Inc.*............... 2,200 87,175
Pillowtex Corp. ...................... 1,500 40,125
Ross Stores, Inc. .................... 3,200 126,000
United Stationers, Inc.*.............. 1,000 26,000
Zale Corp.*........................... 2,900 93,525
-----------
TOTAL RETAIL.......................... 605,938
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
RETAIL FOOD/DRUG -- 1.0%
Great Atlantic & Pacific Tea Co.,
Inc. ............................... 1,800 $ 53,325
Richfood Holdings, Inc. .............. 2,700 56,025
-----------
TOTAL RETAIL FOOD/DRUG................ 109,350
-----------
SEMI-CONDUCTORS/INSTRUMENTATION -- 8.0%
C-Cube Microsystems, Inc.*............ 4,400 119,350
Comverse Technology, Inc.*............ 1,200 85,200
Cylink Corp.*......................... 2,700 9,788
Hutchinson Technology, Inc.*.......... 2,500 89,063
Microchip Technology, Inc.*........... 2,400 88,800
Plexus Corp.*......................... 3,000 101,625
PMC-Sierra, Inc.*..................... 1,200 75,750
Sanmina Corp.*........................ 1,600 100,000
Vitesse Semiconductor Corp.*.......... 4,700 214,438
-----------
TOTAL
SEMI-CONDUCTORS/INSTRUMENTATION..... 884,014
-----------
TRANSPORTATION -- 3.8%
M.S. Carriers, Inc.*.................. 4,800 158,100
Rollins Truck Leasing................. 11,200 165,200
USFreightways Corp. .................. 3,300 96,113
-----------
TOTAL TRANSPORTATION.................. 419,413
-----------
UTILITIES -- ELECTRIC -- 2.5%
Calpine Corp.*........................ 2,500 63,125
TNP Enterprises, Inc. ................ 3,300 125,194
United Illuminating Co. .............. 1,700 87,550
-----------
TOTAL UTILITIES -- ELECTRIC........... 275,869
-----------
UTILITIES -- GAS & PIPELINE -- 2.2%
Energen Corp. ........................ 4,700 91,650
Piedmont Natural Gas Co., Inc. ....... 1,400 50,575
Southwest Gas Corp. .................. 3,800 102,125
-----------
TOTAL UTILITIES -- GAS & PIPELINE..... 244,350
-----------
TOTAL COMMON STOCK (COST $10,553,189)..... 10,967,895
-----------
SHORT TERM INVESTMENTS -- 0.6%
Temporary Investment Cash Fund........ 34,096 34,096
Temporary Investment Fund............. 34,095 34,095
-----------
TOTAL SHORT TERM INVESTMENTS (COST
$68,191)................................ 68,191
-----------
TOTAL INVESTMENTS -- 99.9%
(COST $10,621,380)...................... 11,036,086
OTHER ASSETS IN EXCESS OF
LIABILITIES -- 0.1%..................... 7,790
-----------
NET ASSETS -- 100.0%...................... $11,043,876
===========
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing security.
See Notes to Financial Statements.
A-29
<PAGE> 33
INTERNATIONAL FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 94.7%
AUSTRALIA -- 3.6%
AMP Ltd.*............................ 7,474 $ 94,780
Australia & New Zealand Banking Group
Ltd. .............................. 16,763 109,809
News Corp. Ltd. ..................... 4,654 30,772
Pasminco Ltd. ....................... 51,605 39,249
Rio Tinto Ltd. ...................... 2,940 34,903
Telstra Corp. Ltd. .................. 7,591 35,525
WMC Ltd. ............................ 19,168 57,844
-----------
TOTAL AUSTRALIA...................... 402,882
-----------
BRAZIL -- 0.5%
Embratel Participacoes SA ADR*....... 1,200 16,725
Telesp Celular Participacoes SA
ADR*............................... 700 12,250
Telesp Participacoes SA*............. 900,000 20,485
-----------
TOTAL BRAZIL......................... 49,460
-----------
CANADA -- 0.6%
Canadian National Railway Co. ....... 1,300 67,437
-----------
DENMARK -- 1.3%
Unidanmark A/S....................... 1,600 144,555
-----------
FINLAND -- 2.1%
Metsa Serla-B Shares................. 5,160 42,293
Nokia Oyj, A Shares.................. 1,570 192,247
-----------
TOTAL FINLAND........................ 234,540
-----------
FRANCE -- 14.4%
Alcatel.............................. 1,420 173,877
Assurances Generales de France....... 520 31,073
Axa-UAP.............................. 1,070 155,155
Banque Nationale de Paris............ 2,702 222,603
Compagnie de Saint Gobain............ 510 72,035
Compagnie Financiere de Paribas...... 1,520 132,163
Elf Aquitaine........................ 700 80,952
Etablissements Economiques du Casino
Guichard-Perrachon SA.............. 660 68,765
France Telecom SA.................... 740 58,818
Groupe Danone........................ 110 31,507
Renault SA........................... 720 32,352
Rhone-Poulenc........................ 721 37,121
Suez Lyonnaise des Eaux.............. 400 82,205
Total S.A.-B Shares.................. 1,450 146,921
Vivendi.............................. 1,050 272,556
-----------
TOTAL FRANCE......................... 1,598,103
-----------
GERMANY -- 6.1%
Bayer AG............................. 2,210 92,818
DaimlerChrysler AG*.................. 590 58,627
Hoechst AG........................... 4,040 167,129
Karstadt AG.......................... 200 105,553
Mannesmann AG........................ 1,180 136,561
Siemens AG........................... 1,780 117,027
-----------
TOTAL GERMANY........................ 677,715
-----------
GREECE -- 0.2%
Panafon Hellenic Telecom SA*......... 1,000 26,782
-----------
HONG KONG -- 1.4%
Cheung Kong Holdings Ltd. ........... 8,000 57,571
China Telecom (Hong Kong), Ltd. ..... 15,300 26,464
China Telecom (Hong Kong), Ltd. ADR.. 400 13,900
Sun Hung Kai Properties Ltd. ........ 7,000 51,052
-----------
TOTAL HONG KONG...................... 148,987
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
HUNGARY -- 0.1%
Magyar Tavkozlesi Rt ADR............. 200 $ 5,962
-----------
IRELAND -- 1.8%
Allied Irish Banks PLC............... 10,862 193,374
-----------
ITALY -- 3.9%
Banca Commerciale Italiana........... 19,100 132,052
Eni, SPA............................. 18,900 123,792
Telecom Italia SPA*.................. 20,200 172,734
-----------
TOTAL ITALY.......................... 428,578
-----------
JAPAN -- 13.7%
Advantest Corp. ..................... 600 38,086
Asahi Bank Ltd. ..................... 15,000 55,055
Bridgestone Corp. ................... 1,000 22,740
Daiwa Securities Co., Ltd. .......... 15,000 51,331
Eisai Co., Ltd. ..................... 3,000 58,512
Fuji Bank Ltd. ...................... 10,000 36,881
Fuji Machine Manufacturing Co. ...... 1,000 31,650
Fuji Photo Film Co. ................. 2,000 74,470
Fujisawa Pharmaceutical Co., Ltd. ... 5,000 70,924
Kao Corp. ........................... 1,000 22,607
Mabuchi Motor........................ 700 53,681
Matsumotokiyoshi..................... 2,300 89,107
Matsushita Communication Industrial
Co., Ltd. ......................... 600 28,352
NEC Corp. ........................... 5,000 46,101
Nichiei Co., Ltd. ................... 800 63,832
NTT Mobile Communication Network,
Inc. .............................. 2 82,449
Olympus Optical Co. Ltd. ............ 9,000 103,647
Rohm Co., Ltd. ...................... 1,000 91,226
Sakura Bank Ltd. .................... 18,000 41,331
Sony Corp. .......................... 1,600 116,741
Takeda Chemical Industries........... 1,000 38,565
Takefuji Corp. ...................... 500 36,570
Tokyo Style Co., Ltd. ............... 3,000 30,426
Toshiba Corp. ....................... 22,000 131,263
Uni-Charm Corp. ..................... 1,500 70,481
Yamanouchi Pharmaceutical Co.,
Ltd. .............................. 1,000 32,270
-----------
TOTAL JAPAN.......................... 1,518,298
-----------
KOREA -- 0.4%
Korea Telecom Corp. ................. 100 3,160
Pohang Iron & Steel Co., Ltd. ADR.... 1,540 25,988
SK Telecom Co., Ltd. ADR............. 1,607 16,369
-----------
TOTAL KOREA.......................... 45,517
-----------
MEXICO -- 0.3%
Telefonos de Mexico S.A. ADR......... 600 29,213
-----------
NETHERLANDS -- 7.2%
AEGON NV............................. 600 73,726
Gucci Group NV....................... 1,600 77,800
ING Groep NV......................... 1,538 93,837
Koninklijke (Royal) Philips
Electronics NV....................... 2,600 174,565
Koninklijke Ahold NV................. 1,200 44,376
Royal Dutch Petroleum Co. ........... 1,000 49,822
STMicroelectronics NV*............... 600 46,838
TNT Post Group NV.................... 3,011 97,068
Unilever NV.......................... 1,650 141,114
-----------
TOTAL NETHERLANDS.................... 799,146
-----------
</TABLE>
A-30
<PAGE> 34
INTERNATIONAL FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
SOUTH AFRICA -- 0.4%
De Beers Consolidated Mines Ltd. .... 600 $ 7,650
Liberty Life Association of Africa
Ltd. .............................. 1,308 18,010
South African Breweries Ltd. ........ 1,100 18,419
-----------
TOTAL SOUTH AFRICA................... 44,079
-----------
SPAIN -- 3.2%
Banco Santander*..................... 1,100 21,893
Endesa S.A........................... 7,500 199,024
Repsol S.A........................... 600 32,056
Telefonica S.A. ADR.................. 760 102,871
-----------
TOTAL SPAIN.......................... 355,844
-----------
SWEDEN -- 4.2%
Telefonaktiebolaget LM Ericsson - B
Shares............................. 1,860 44,288
Hennes & Mauritz AB - B Shares....... 660 53,904
Nordbanken Holding AB*............... 16,200 103,929
Pharmacia & Upjohn, Inc. ............ 4,720 264,372
-----------
TOTAL SWEDEN......................... 466,493
-----------
SWITZERLAND -- 4.1%
Holderbank Financiere Glarus AG...... 80 94,708
Nestle SA............................ 26 56,601
Novartis AG.......................... 40 78,632
Roche Holdings AG.................... 4 48,810
Swisscom AG*......................... 260 108,848
UBS AG............................... 220 67,595
-----------
TOTAL SWITZERLAND.................... 455,194
-----------
TAIWAN -- 0.6%
Taiwan Semiconductor Manufacturing
Co., Ltd.*......................... 4,640 65,830
-----------
UNITED KINGDOM -- 23.8%
Allied Domecq PLC.................... 5,800 53,510
Bank of Scotland..................... 7,000 83,507
Billiton PLC......................... 20,000 39,683
BOC Group PLC........................ 7,050 100,818
British American Tobacco PLC......... 14,750 129,700
British Petroleum Co. PLC............ 11,725 175,086
British Telecommunications PLC....... 6,400 96,421
Cable & Wireless Communications
PLC*............................... 4,400 40,228
Cadbury Schweppes PLC................ 4,900 83,565
Compass Group PLC.................... 15,400 176,412
Diageo PLC........................... 7,432 84,580
Glaxo Wellcome PLC................... 3,800 130,749
Granada Group PLC.................... 900 15,910
Great Universal Stores PLC........... 2,000 21,080
HSBC Holdings PLC.................... 1,900 51,528
Imperial Chemical Industries PLC..... 1,500 13,003
National Westminster Bank PLC........ 6,100 117,630
Next PLC............................. 14,100 $ 114,483
Orange PLC*.......................... 6,200 72,055
PowerGen PLC......................... 1,582 20,794
Rentokil Initial PLC................. 19,800 149,234
Scottish Power PLC................... 10,200 104,795
Siebe PLC............................ 29,300 115,537
Smithkline Beecham PLC............... 18,356 256,544
Standard Chartered PLC............... 8,600 99,661
Vodafone Group PLC................... 13,000 211,104
Zeneca Group PLC..................... 1,700 74,021
-----------
TOTAL UNITED KINGDOM..................... 2,631,638
-----------
UNITED STATES -- 0.8%
Schlumberger, Ltd. .................. 2,000 92,250
-----------
TOTAL COMMON STOCK (COST $9,313,929)..... 10,481,877
-----------
</TABLE>
<TABLE>
<CAPTION>
MATURITY PAR
DATE (000)
-------- -----
<S> <C> <C> <C>
REPURCHASE AGREEMENTS -- 4.8%
JP Morgan Securities, 4.70%
dated 12/31/98, repurchase
price $530,277
(collateralized by $524,000
U.S. Treasury Notes, 5.25%,
01/31/01, market value
$530,223) (Cost $530,000)... 01/04/99 $530 530,000
-----------
U.S. TREASURY OBLIGATIONS -- 0.3%
U.S. TREASURY BILLS+
4.16%......................... 01/28/99 20 19,939
4.30%......................... 01/28/99 20 19,939
-----------
TOTAL U.S. TREASURY OBLIGATIONS (COST
$39,874).................................. 39,878
-----------
TOTAL INVESTMENTS -- 99.8% (COST
$9,883,803)............................... 11,051,755
OTHER ASSETS IN EXCESS OF
LIABILITIES -- 0.2%....................... 21,264
-----------
NET ASSETS -- 100.0%........................ $11,073,019
===========
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1998:
<TABLE>
<CAPTION>
VALUE AT
FORWARD FOREIGN SETTLEMENT SETTLEMENT CURRENT UNREALIZED
CURRENCY CONTRACTS DATE DATE VALUE DEPRECIATION
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALE CONTRACTS:
Japanese Yen 01/13/99 $ 85,956 $ 87,101 $ (1,145)
Japanese Yen 01/13/99 48,943 49,971 (1,028)
Japanese Yen 01/13/99 138,202 147,978 (9,776)
-------- -------- --------
$273,101 $285,050 $(11,949)
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing security.
+ Segregated as collateral for futures contracts.
ADR -- American Depositary Receipt.
See Notes to Financial Statements.
A-31
<PAGE> 35
INTERNATIONAL FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
The following is a breakdown of the Fund by Industry Classifications as of
December 31, 1998:
<TABLE>
<S> <C>
INDUSTRY
Apparel & Textile................................... 0.3%
Automotive.......................................... 1.1%
Banks............................................... 15.5%
Business Services................................... 3.8%
Chemicals........................................... 1.1%
Communications...................................... 4.4%
Computers & Office Equipment........................ 1.3%
Construction & Housing.............................. 1.2%
Electrical & Electronics............................ 7.1%
Energy.............................................. 6.4%
Entertainment Products.............................. 1.8%
Financial Services.................................. 1.4%
Food/Beverage/Tobacco............................... 5.7%
Household Products.................................. 0.9%
Insurance........................................... 3.5%
Leisure & Tourism................................... 1.8%
Machinery & Manufacturing........................... 0.3%
Media............................................... 5.7%
Medical Products.................................... 1.0%
Metals & Mining..................................... 2.9%
Paper & Forest Products............................. 0.4%
Pharmaceuticals..................................... 12.9%
Retail.............................................. 5.5%
Transportation...................................... 0.6%
Utilities-Electric & Gas............................ 6.8%
Utilities-Telephone................................. 6.6%
-----
TOTAL COMMON STOCKS................................... 100.0%
=====
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
A-32
<PAGE> 36
(This page intentionally left blank)
A-33
<PAGE> 37
PACIFIC INNOVATIONS TRUST
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY MARKET MANAGED
FUND BOND FUND
-----------------------------
<S> <C> <C>
ASSETS
Investments in securities at value(a)..................... $4,623,592 $18,224,045
Repurchase agreements(b).................................. 2,138,000 --
Cash...................................................... 885 --
Receivable for:
Securities sold........................................ -- --
Dividends and interest................................. 27,797 232,388
Fund shares sold....................................... -- 32,158
Due from Pacific Life..................................... -- --
Prepaid expenses.......................................... 299 627
---------- -----------
Total Assets...................................... 6,790,573 18,489,218
---------- -----------
LIABILITIES
Cash overdraft............................................ -- 225
Payable for:
Securities purchased................................... -- --
Accrued investment advisory fees....................... 713 765
Accrued shareholder servicing and transfer agent
fees.................................................. 748 2,651
Accrued expenses....................................... 8,017 22,026
Accrued dividends...................................... 853 --
Fund shares redeemed................................... -- --
Variation margin payable on futures contracts.......... -- --
Unrealized depreciation on foreign currency exchange
contracts.............................................. -- --
---------- -----------
Total Liabilities................................. 10,331 25,667
---------- -----------
Net Assets.................................................. $6,780,242 $18,463,551
========== ===========
COMPONENTS OF NET ASSETS
Common stock (unlimited number of shares authorized, $.001
par value per share)...................................... $ 6,780 $ 1,799
Additional paid-in capital.................................. 6,773,462 18,175,088
Undistributed net investment income (loss).................. -- --
Accumulated net realized gain (loss) on investments,
futures, and foreign currency transactions................ -- (2,625)
Accumulated net unrealized appreciation on investments,
futures, foreign currency transactions, and forward
currency contracts........................................ -- 289,289
---------- -----------
Net Assets.................................................. $6,780,242 $18,463,551
========== ===========
Shares outstanding.......................................... 6,780,242 1,799,397
Net asset value, offering and redemption price per share.... $ 1.00 $ 10.26
========== ===========
(a) Cost:................................................... $4,623,592(1) $17,934,756(1)
========== ===========
(b) Cost:................................................... $2,138,000 $ --
========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(1) Amortized cost.
See Notes to Financial Statements.
A-34
<PAGE> 38
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CAPITAL
INCOME BLUE CHIP MID-CAP AGGRESSIVE INTERNATIONAL
FUND FUND EQUITY FUND GROWTH FUND FUND
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$25,939,829 $36,369,830 $15,246,248 $11,036,086 $10,521,755
-- -- -- -- 530,000
7,124 -- -- -- 742
-- -- 1,330,477 -- --
118,268 41,280 11,185 4,742 30,986
9,470 -- -- 28,304 26,042
-- -- -- -- 17,371
925 1,146 600 512 476
----------- ----------- ----------- ----------- -----------
26,075,616 36,412,256 16,588,510 11,069,644 11,127,372
----------- ----------- ----------- ----------- -----------
-- -- -- 609 --
-- 688,103 65,439 -- --
4,407 9,284 4,599 5,203 --
2,012 3,823 1,894 1,852 --
31,720 42,132 18,673 18,104 42,298
-- -- -- -- --
-- 91,339 8,191 -- --
-- -- -- -- 106
-- -- -- -- 11,949
----------- ----------- ----------- ----------- -----------
38,139 834,681 98,796 25,768 54,353
----------- ----------- ----------- ----------- -----------
$26,037,477 $35,577,575 $16,489,714 $11,043,876 $11,073,019
=========== =========== =========== =========== ===========
$ 2,262 $ 2,319 $ 1,122 $ 1,050 $ 1,023
24,911,359 27,587,348 12,675,141 11,086,880 10,601,902
-- 22,741 25 -- (5,488)
(830,137) 16,730 967,485 (458,760) (675,448)
1,953,993 7,948,437 2,845,941 414,706 1,151,030
----------- ----------- ----------- ----------- -----------
$26,037,477 $35,577,575 $16,489,714 $11,043,876 $11,073,019
=========== =========== =========== =========== ===========
2,262,191 2,319,321 1,122,446 1,049,892 1,023,455
$ 11.51 $ 15.34 $ 14.69 $ 10.52 $ 10.82
=========== =========== =========== =========== ===========
$23,985,836(1) $28,421,393 $12,400,307 $10,621,380 $ 9,353,803(1)
=========== =========== =========== =========== ===========
$ -- $ -- $ -- $ -- $ 530,000
=========== =========== =========== =========== ===========
</TABLE>
A-35
<PAGE> 39
PACIFIC INNOVATIONS TRUST
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY MARKET MANAGED
FUND BOND FUND
----------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................. $337,265 $ 969,558
Dividends................................................. -- --
Less Foreign withholding taxes......................... -- --
-------- ----------
Total Investment Income........................... 337,265 969,558
-------- ----------
EXPENSES
Investment advisory fees.................................. 13,367 57,215
Shareholder servicing fees................................ 9,722 24,742
Accounting fees........................................... 5,772 14,690
Custodian fees............................................ 27,385 14,360
Professional fees......................................... 13,001 36,171
Reports to shareholders................................... 1,217 8,414
Trustees' fees and expenses............................... 3,431 10,501
Insurance fees............................................ 2,307 3,894
Miscellaneous expenses.................................... 6,826 15,089
-------- ----------
Total Expenses.................................... 83,028 185,076
Less: Advisory fee waivers and expense
reimbursements................................... (46,572) (69,100)
-------- ----------
Net Expenses...................................... 36,456 115,976
-------- ----------
Net Investment Income (Loss)................................ 300,809 853,582
-------- ----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FUTURES, AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain (loss) on:
Investments, futures, and foreign currency
transactions.......................................... -- 43,500
Net change in unrealized appreciation (depreciation) on
investments, futures, foreign currency transactions,
and forward currency contracts......................... -- 130,906
-------- ----------
Net Realized and Unrealized Gain (Loss) on Investments,
Futures, and Foreign Currency Transactions................ -- 174,406
-------- ----------
Net Increase (Decrease) in Net Assets from
Operations............................................ $300,809 $1,027,988
======== ==========
</TABLE>
See Notes to Financial Statements.
A-36
<PAGE> 40
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CAPITAL
INCOME BLUE CHIP MID-CAP AGGRESSIVE INTERNATIONAL
FUND FUND EQUITY FUND GROWTH FUND FUND
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 473,502 $ 85,259 $ 25,119 $ 39,204 $ 54,468
444,232 371,577 150,610 31,150 184,040
-- -- -- (219) (11,651)
---------- ---------- ---------- --------- ----------
917,734 456,836 175,729 70,135 226,857
---------- ---------- ---------- --------- ----------
105,339 149,292 70,459 63,202 68,312
34,968 44,593 21,270 16,577 16,560
20,762 26,477 12,629 9,843 9,833
18,764 37,063 23,512 40,159 227,348
51,394 65,419 30,511 23,532 23,688
12,872 17,089 6,504 4,393 4,395
15,187 19,530 8,860 6,755 6,722
5,380 6,453 3,726 3,218 3,123
20,017 24,936 12,739 10,417 10,130
---------- ---------- ---------- --------- ----------
284,683 390,852 190,210 178,096 370,111
(94,544) (128,866) (65,246) (72,979) (241,768)
---------- ---------- ---------- --------- ----------
190,139 261,986 124,964 105,117 128,343
---------- ---------- ---------- --------- ----------
727,595 194,850 50,765 (34,982) 98,514
---------- ---------- ---------- --------- ----------
(682,329) 463,907 1,067,593 (354,218) (476,769)
1,472,926 6,076,911 1,223,129 143,259 1,392,491
---------- ---------- ---------- --------- ----------
790,597 6,540,818 2,290,722 (210,959) 915,722
---------- ---------- ---------- --------- ----------
$1,518,192 $6,735,668 $2,341,487 $(245,941) $1,014,236
========== ========== ========== ========= ==========
</TABLE>
A-37
<PAGE> 41
PACIFIC INNOVATIONS TRUST
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY MARKET FUND MANAGED BOND FUND CAPITAL INCOME FUND
----------------------------- ----------------------------- -----------------------------
FOR THE YEAR FOR THE PERIOD FOR THE YEAR FOR THE PERIOD FOR THE YEAR FOR THE PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997(1) 1998 1997(1) 1998 1997(1)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss).... $ 300,809 $ 242,852 $ 853,582 $ 375,805 $ 727,595 $ 269,863
Net realized gain (loss) on
investments, futures, and
foreign currency
transactions.................. -- -- 43,500 (53,341) (682,329) 201,215
Net change in unrealized
appreciation (depreciation) on
investments, futures, foreign
exchange transactions, and
forward currency contracts.... -- -- 130,906 158,383 1,472,926 481,067
----------- ----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) in Net
Assets from Operations...... 300,809 242,852 1,027,988 480,847 1,518,192 952,145
----------- ----------- ----------- ----------- ----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS
Distributions to shareholders
from net investment income.... (300,809) (242,852) (853,607) (375,805) (727,595) (269,863)
Distributions to shareholders
from net capital gains........ -- -- (21,490) -- -- (201,215)
Distributions to shareholders in
excess of net capital gains... -- -- -- -- -- (147,808)
----------- ----------- ----------- ----------- ----------- -----------
Total Dividends and
Distributions to
Shareholders................ (300,809) (242,852) (875,097) (375,805) (727,595) (618,886)
----------- ----------- ----------- ----------- ----------- -----------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold....... 4,092,858 8,826,079 6,609,441 11,287,631 8,036,993 16,728,404
Net asset value of shares issued
in reinvestment of dividends
and distributions............. 300,975 241,833 875,097 375,804 727,595 618,884
Cost of shares redeemed......... (4,312,128) (2,469,315) (932,270) (10,095) (1,188,322) (9,943)
----------- ----------- ----------- ----------- ----------- -----------
Increase in Net Assets from
Capital Share
Transactions................ 81,705 6,598,597 6,552,268 11,653,340 7,576,266 17,337,345
----------- ----------- ----------- ----------- ----------- -----------
Total Increase in Net
Assets................... 81,705 6,598,597 6,705,159 11,758,382 8,366,863 17,670,604
NET ASSETS
Beginning of Period............. 6,698,537 99,940 11,758,392 10 17,670,614 10
----------- ----------- ----------- ----------- ----------- -----------
End of Period(2)................ $ 6,780,242 $ 6,698,537 $18,463,551 $11,758,392 $26,037,477 $17,670,614
=========== =========== =========== =========== =========== ===========
SHARES ISSUED AND REDEEMED
Shares sold..................... 4,092,858 8,826,079 645,696 1,122,477 708,320 1,542,652
Shares issued in reinvestment of
dividends and distributions... 300,975 241,833 85,546 37,311 63,214 56,129
Shares redeemed................. (4,312,128) (2,469,315) (90,636) (998) (107,245) (880)
----------- ----------- ----------- ----------- ----------- -----------
Net Increase in Shares
Outstanding................. 81,705 6,598,597 640,606 1,158,790 664,289 1,597,901
=========== =========== =========== =========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
(1) Commenced operations on March 1, 1997.
(2) Includes undistributed net
investment income (loss) of: $ -- $ -- $ -- $ -- $ -- --
=========== =========== =========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
A-38
<PAGE> 42
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BLUE CHIP FUND MID-CAP EQUITY FUND AGGRESSIVE GROWTH FUND INTERNATIONAL FUND
----------------------------- ----------------------------- ----------------------------- -----------------------------
FOR THE YEAR FOR THE PERIOD FOR THE YEAR FOR THE PERIOD FOR THE YEAR FOR THE PERIOD FOR THE YEAR FOR THE PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997(1) 1998 1997(1) 1998 1997(1) 1998 1997(1)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 194,850 $ 89,822 $ 50,765 $ 41,537 $ (34,982) $ (30,687) $ 98,514 $ 79,329
463,907 (70,076) 1,067,593 52,690 (354,218) 713,648 (476,769) (54,792)
6,076,911 1,871,526 1,223,129 1,622,812 143,259 271,447 1,392,491 (241,461)
----------- ----------- ----------- ----------- ----------- ---------- ----------- ----------
6,735,668 1,891,272 2,341,487 1,717,039 (245,941) 954,408 1,014,236 (216,924)
----------- ----------- ----------- ----------- ----------- ---------- ----------- ----------
(194,641) (89,818) (50,746) (41,531) -- -- (98,849) (78,994)
(308,104) -- (85,942) (52,690) -- (713,648) -- --
-- (46,469) -- (14,166) -- (75,905) -- (164,754)
----------- ----------- ----------- ----------- ----------- ---------- ----------- ----------
(502,745) (136,287) (136,688) (108,387) -- (789,553) (98,849) (243,748)
----------- ----------- ----------- ----------- ----------- ---------- ----------- ----------
10,719,035 18,044,143 3,642,086 9,438,459 2,377,397 8,472,849 1,650,092 9,263,921
502,744 136,293 136,687 108,384 -- 789,552 98,849 243,745
(1,787,588) (24,970) (642,239) (7,124) (492,913) (21,933) (627,340) (10,973)
----------- ----------- ----------- ----------- ----------- ---------- ----------- ----------
9,434,191 18,155,466 3,136,534 9,539,719 1,884,484 9,240,468 1,121,601 9,496,693
----------- ----------- ----------- ----------- ----------- ---------- ----------- ----------
15,667,114 19,910,451 5,341,333 11,148,371 1,638,543 9,405,323 2,036,988 9,036,021
19,910,461 10 11,148,381 10 9,405,333 10 9,036,031 10
----------- ----------- ----------- ----------- ----------- ---------- ----------- ----------
$35,577,575 $19,910,461 $16,489,714 $11,148,381 $11,043,876 $9,405,333 $11,073,019 $9,036,031
=========== =========== =========== =========== =========== ========== =========== ==========
789,296 1,617,145 282,273 873,294 223,052 803,673 153,771 898,502
34,295 11,153 10,106 8,794 -- 76,507 9,135 25,045
(130,461) (2,108) (51,448) (574) (51,520) (1,821) (61,956) (1,043)
----------- ----------- ----------- ----------- ----------- ---------- ----------- ----------
693,130 1,626,190 240,931 881,514 171,532 878,359 100,950 922,504
=========== =========== =========== =========== =========== ========== =========== ==========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 22,741 $ 4 $ 25 $ 6 $ -- $ -- $ (5,488) $ 335
=========== =========== =========== =========== =========== ========== =========== ==========
</TABLE>
A-39
<PAGE> 43
PACIFIC INNOVATIONS TRUST
MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997(1)
--------------------------------
<S> <C> <C>
Net Asset Value, beginning of period........................ $ 1.00 $ 1.00
------ ------
Net investment income....................................... 0.05 0.04
Net realized and unrealized gain on investments............. -- --
------ ------
Total from investment operations............................ 0.05 0.04
------ ------
Dividends from net investment income........................ (0.05) (0.04)
------ ------
Net Asset Value, end of period.............................. $ 1.00 $ 1.00
====== ======
Total return................................................ 5.07% 4.22%**
====== ======
Net assets, end of period (in thousands).................... $6,780 $6,699
====== ======
Ratio of expenses to average net assets:
After fee waivers and reimbursements...................... 0.60% 0.60%*
====== ======
Before fee waivers and reimbursements..................... 1.37% 1.47%*
====== ======
Ratio of net investment income to average net assets:
After fee waivers and reimbursements...................... 4.95% 5.00%*
====== ======
Before fee waivers and reimbursements..................... 4.18% 4.13%*
====== ======
</TABLE>
- --------------------------------------------------------------------------------
(1) Commenced operations on March 1, 1997.
* Annualized.
** Not annualized.
See Notes to Financial Statements.
A-40
<PAGE> 44
PACIFIC INNOVATIONS TRUST
MANAGED BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997(1)
--------------------------------
<S> <C> <C>
Net Asset Value, beginning of period........................ $ 10.15 $ 10.00
------- --------
Net investment income....................................... 0.55 0.49
Net realized and unrealized gain on investments............. 0.12 0.15
------- --------
Total from investment operations............................ 0.67 0.64
------- --------
Dividends from net investment income........................ (0.55) (0.49)
Distributions from net capital gains........................ (0.01) --
------- --------
Total distributions......................................... (0.56) (0.49)
------- --------
Net Asset Value, end of period.............................. $ 10.26 $ 10.15
======= ========
Total return................................................ 6.89% 6.59%**
======= ========
Net assets, end of period (in thousands).................... $18,464 $ 11,758
======= ========
Ratio of expenses to average net assets:
After fee waivers and reimbursements...................... 0.75% 0.75%*
======= ========
Before fee waivers and reimbursements..................... 1.20% 1.39%*
======= ========
Ratio of net investment income to average net assets:
After fee waivers and reimbursements...................... 5.52% 6.12%*
======= ========
Before fee waivers and reimbursements..................... 5.07% 5.48%*
======= ========
Portfolio turnover rate..................................... 43.71% 104.36%
======= ========
</TABLE>
- --------------------------------------------------------------------------------
(1) Commenced operations on March 1, 1997.
* Annualized.
** Not annualized.
See Notes to Financial Statements.
A-41
<PAGE> 45
PACIFIC INNOVATIONS TRUST
CAPITAL INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997(1)
--------------------------------
<S> <C> <C>
Net Asset Value, beginning of period........................ $ 11.06 $ 10.00
------- -------
Net investment income....................................... 0.33 0.17
Net realized and unrealized gain on investments............. 0.45 1.30
------- -------
Total from investment operations............................ 0.78 1.47
------- -------
Dividends from net investment income........................ (0.33) (0.17)
Distributions from net capital gains........................ -- (0.14)
Distributions in excess of net capital gains................ -- (0.10)
------- -------
Total distributions......................................... (0.33) (0.41)
------- -------
Net Asset Value, end of period.............................. $ 11.51 $ 11.06
======= =======
Total return................................................ 7.06% 14.75%**
======= =======
Net assets, end of period (in thousands).................... $26,037 $17,671
======= =======
Ratio of expenses to average net assets:
After fee waivers and reimbursements...................... 0.87% 0.87%*
======= =======
Before fee waivers and reimbursements..................... 1.30% 1.52%*
======= =======
Ratio of net investment income to average net assets:
After fee waivers and reimbursements...................... 3.33% 3.24%*
======= =======
Before fee waivers and reimbursements..................... 2.90% 2.59%*
======= =======
Portfolio turnover rate..................................... 56.90% 44.98%
======= =======
</TABLE>
- --------------------------------------------------------------------------------
(1) Commenced operations on March 1, 1997.
* Annualized.
** Not annualized.
See Notes to Financial Statements.
A-42
<PAGE> 46
PACIFIC INNOVATIONS TRUST
BLUE CHIP FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997(1)
--------------------------------
<S> <C> <C>
Net Asset Value, beginning of period........................ $ 12.24 $ 10.00
------- -------
Net investment income....................................... 0.08 0.06
Net realized and unrealized gain on investments............. 3.23 2.27
------- -------
Total from investment operations............................ 3.31 2.33
------- -------
Dividends from net investment income........................ (0.08) (0.06)
Distributions from net capital gains........................ (0.13) --
Distributions in excess of net capital gains................ -- (0.03)
------- -------
Total distributions......................................... (0.21) (0.09)
------- -------
Net Asset Value, end of period.............................. $ 15.34 $ 12.24
======= =======
Total return................................................ 27.20% 23.27%**
======= =======
Net assets, end of period (in thousands).................... $35,578 $19,910
======= =======
Ratio of expenses to average net assets:
After fee waivers and reimbursements...................... 0.94% 0.94%*
======= =======
Before fee waivers and reimbursements..................... 1.40% 1.53%*
======= =======
Ratio of net investment income to average net assets:
After fee waivers and reimbursements...................... 0.70% 1.00%*
======= =======
Before fee waivers and reimbursements..................... 0.24% 0.41%*
======= =======
Portfolio turnover rate..................................... 57.70% 44.93%
======= =======
</TABLE>
- --------------------------------------------------------------------------------
(1) Commenced operations on March 1, 1997.
* Annualized.
** Not annualized.
See Notes to Financial Statements.
A-43
<PAGE> 47
PACIFIC INNOVATIONS TRUST
MID-CAP EQUITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997(1)
--------------------------------
<S> <C> <C>
Net Asset Value, beginning of period........................ $ 12.65 $ 10.00
------- -------
Net investment income....................................... 0.05 0.05
Net realized and unrealized gain on investments............. 2.12 2.73
------- -------
Total from investment operations............................ 2.17 2.78
------- -------
Dividends from net investment income........................ (0.05) (0.05)
Distributions from net capital gains........................ (0.08) (0.06)
Distributions in excess of net capital gains................ -- (0.02)
------- -------
Total distributions......................................... (0.13) (0.13)
------- -------
Net Asset Value, end of period.............................. $ 14.69 $ 12.65
======= =======
Total return................................................ 17.18% 27.80%**
======= =======
Net assets, end of period (in thousands).................... $16,490 $11,148
======= =======
Ratio of expenses to average net assets:
After fee waivers and reimbursements...................... 0.94% 0.94%*
======= =======
Before fee waivers and reimbursements..................... 1.43% 1.62%*
======= =======
Ratio of net investment income (loss) to average net assets:
After fee waivers and reimbursements...................... 0.38% 0.66%*
======= =======
Before fee waivers and reimbursements..................... (0.11%) (0.02%)*
======= =======
Portfolio turnover rate..................................... 95.07% 55.74%
======= =======
</TABLE>
- --------------------------------------------------------------------------------
(1) Commenced operations on March 1, 1997.
* Annualized.
** Not annualized.
See Notes to Financial Statements.
A-44
<PAGE> 48
PACIFIC INNOVATIONS TRUST
AGGRESSIVE GROWTH FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997(1)
--------------------------------
<S> <C> <C>
Net Asset Value, beginning of period........................ $ 10.71 $ 10.00
-------- -------
Net investment (loss)....................................... (0.03) (0.03)
Net realized and unrealized gain (loss) on investments...... (0.16) 1.76
-------- -------
Total from investment operations............................ (0.19) 1.73
-------- -------
Distributions from net capital gains........................ -- (0.92)
Distributions in excess of net capital gains................ -- (0.10)
-------- -------
Total distributions......................................... 0.00 (1.02)
======== =======
Net Asset Value, end of period.............................. $ 10.52 $ 10.71
======== =======
Total return................................................ (1.77%) 17.65%**
======== =======
Net assets, end of period (in thousands).................... $ 11,044 $ 9,405
======== =======
Ratio of expenses to average net assets:
After fee waivers and reimbursements...................... 1.02% 1.03%*
======== =======
Before fee waivers and reimbursements..................... 1.72% 1.73%*
======== =======
Ratio of net investment income (loss) to average net assets:
After fee waivers and reimbursements...................... (0.34%) (0.53%)*
======== =======
Before fee waivers and reimbursements..................... (1.04%) (1.20%)*
======== =======
Portfolio turnover rate..................................... 262.74% 99.05%
======== =======
</TABLE>
- --------------------------------------------------------------------------------
(1) Commenced operations on March 1, 1997.
* Annualized.
** Not annualized.
See Notes to Financial Statements.
A-45
<PAGE> 49
PACIFIC INNOVATIONS TRUST
INTERNATIONAL FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997(1)
--------------------------------
<S> <C> <C>
Net Asset Value, beginning of period........................ $ 9.80 $ 10.00
-------- -------
Net investment income....................................... 0.10 0.09
Net realized and unrealized gain (loss) on investments and
foreign currency transactions............................. 1.02 (0.01)
-------- -------
Total from investment operations............................ 1.12 0.08
-------- -------
Dividends from net investment income........................ (0.10) (0.09)
Distributions from net capital gains........................ -- --
Distributions in excess of net capital gains................ -- (0.19)
-------- -------
Total distributions......................................... (0.10) (0.28)
-------- -------
Net Asset Value, end of period.............................. $ 10.82 $ 9.80
======== =======
Total return................................................ 11.63% 0.56%**
======== =======
Net assets, end of period (in thousands).................... $ 11,073 $ 9,036
======== =======
Ratio of expenses to average net assets:
After fee waivers and reimbursements...................... 1.24% 1.24%*
======== =======
Before fee waivers and reimbursements..................... 3.57% 3.19%*
======== =======
Ratio of net investment income (loss) to average net assets:
After fee waivers and reimbursements...................... 0.95% 1.39%*
======== =======
Before fee waivers and reimbursements..................... (1.38%) (0.56%)*
======== =======
Portfolio turnover rate..................................... 151.18% 53.23%
======== =======
</TABLE>
- --------------------------------------------------------------------------------
(1) Commenced operations on March 1, 1997.
* Annualized.
** Not annualized.
See Notes to Financial Statements.
A-46
<PAGE> 50
PACIFIC INNOVATIONS TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Pacific Innovations Trust (the "Trust"), a Delaware Business Trust, was
organized under the laws of the State of Delaware on September 25, 1996, as a
"Delaware business trust". The Trust is registered under the Investment Company
Act of 1940, as amended, as an open-end management investment company. The Trust
commenced operations on March 1, 1997 and operates as a series company
comprising seven funds: the Money Market Fund, Managed Bond Fund, Capital Income
Fund, Blue Chip Fund, Mid-Cap Equity Fund, Aggressive Growth Fund and
International Fund, (collectively, the "Funds"; each a "Fund").
The Trust is the funding vehicle for variable annuity contracts issued by
Pacific Life Insurance Company (formerly named Pacific Mutual Life Insurance
Company). Bank of America National Trust and Savings Association, a subsidiary
of BankAmerica Corporation, serves as the Funds' Investment Advisor ("Manager")
and Administrator. Scudder Kemper Investments, Inc. and Wellington Management
Company, LLP serve as sub-advisors to the Managed Bond Fund and the
International Fund, respectively.
On October 1, 1998, BankAmerica Corporation, the Manager's and Administrator's
parent company, completed its merger with NationsBank Corporation. The combined
company operates under the name BankAmerica Corporation. Bank of America
National Trust and Savings Association continues to serve the Trust on
substantially identical terms as described in Note 2.
Pursuant to consent received from the Insurance Department of the State of
California, Pacific Mutual Life Insurance Company ("Pacific Mutual") implemented
a plan of conversion to form a mutual holding company structure (the
"Conversion") on September 1, 1997. The Conversion created Pacific LifeCorp, an
intermediate stock holding company and Pacific Mutual Holding Company ("PMHC"),
a mutual holding company. Pacific Mutual was converted to a stock life insurance
company and renamed Pacific Life Insurance Company ("Pacific Life"). Under their
respective charters, PMHC must always own at least 51% of the outstanding voting
stock of Pacific LifeCorp, and Pacific LifeCorp must always own 100% of the
voting stock of Pacific Life. PMHC's members, as defined in PMHC Bylaws, have
certain membership interests in PMHC, consisting principally of the right to
vote on the election of the Board of Directors of PMHC and on other matters, and
certain rights upon liquidation or dissolution of PMHC.
The following is a summary of the significant accounting policies followed by
the Funds in the preparation of their financial statements. The policies are in
conformity with generally accepted accounting principles.
Security Valuation
Portfolio securities listed on an exchange and over the counter securities
quoted on the NASDAQ system are valued at the close of regular trading on each
business day the New York Stock Exchange ("NYSE") is open. Securities are valued
at the last sale price on the securities exchange or securities market in which
such securities are primarily traded. Securities not listed on an exchange or
securities market, or securities for which there were no transactions, are
valued at the mean between the current bid and asked prices. Fixed income
securities are valued by using market quotations, or independent pricing
services, approved by the Board of Trustees. Such prices reflect market values
which may be established through the use of electronic data processing
techniques and matrix systems. Any securities or other assets for which recent
market quotations are not readily available are valued as determined in good
faith by or at the direction of the Board of Trustees.
Short term obligations which mature in sixty days or less are valued at
amortized cost. Short term obligations with more than sixty days to maturity are
valued at current market value until the sixtieth day prior to maturity, and
thereafter are valued on an amortized cost basis based on the value on such
date.
The Money Market Fund values investments utilizing the amortized cost valuation
technique permitted in accordance with Rule 2a-7 under the Investment Company
Act of 1940, which requires the Money Market Fund to comply with certain
conditions. This technique involves valuing a portfolio security initially at
its cost and thereafter assuming a constant amortization to maturity of any
discount or premium.
A-47
<PAGE> 51
- --------------------------------------------------------------------------------
Investment Transactions and Investment Income
Security transactions are accounted for on the trade date. Realized gains and
losses from security transactions are recognized on the specific identification
basis. Interest income is recorded on the accrual basis. Dividend income is
recorded on the ex-dividend date. Corporate actions, including dividends, on
foreign securities are recorded on the ex-dividend dates. All premium and
discount amortization/accretions are determined by the effective yield method.
Expenses:
The Trust accounts separately for the assets, liabilities and operations of each
fund. Direct expenses of a fund are charged to that fund while general Trust
expenses are allocated among the Trust's respective portfolios.
Foreign Currency Translation and Foreign Currency Exchange Contracts
The books and records of the Trust are maintained in U.S. dollars. All assets
and liabilities of a Fund that are initially expressed in foreign currencies are
translated into U.S. dollars each business day using the current exchange rates
determined prior to the close of the NYSE. Purchases and sales of foreign
securities and income and expenses relating to the foreign securities are
converted into U.S. dollars based upon currency exchange rates prevailing on the
respective date of such transactions. Gains and losses attributable to changes
in foreign currency exchange rates are included for financial statement purposes
in the net realized gains and losses on investments and foreign currency
transactions.
A forward foreign currency exchange contract ("forward contract") is a
commitment to purchase or sell a foreign currency at a future date, at a
negotiated rate. The International Fund generally enters into forward contracts
as a hedge, in connection with the purchase or sale of a security denominated in
a foreign currency. Forward contracts are valued daily based on the effective
exchange rate and unrealized appreciation or depreciation is recorded. The
International Fund will realize a gain or loss upon the closing or settlement of
the forward transaction. Risks of entering into forward contracts include the
potential inability of the counter party to meet the terms of the contract, and
the International Fund giving up opportunity for profit. A forward contract has
off balance sheet risk where the potential loss on a particular investment is
greater than the value of such investment, as reflected on the statement of
assets and liabilities.
There are certain additional risks involved when investing in foreign securities
that are not inherent in domestic securities. These risks involve foreign
currency exchange rate fluctuations, adverse political and economic
developments, and the imposition of unfavorable foreign governmental laws and
regulations.
Futures
A futures contract is an agreement to purchase or sell a specified quantity of
an underlying instrument at a specified future date, or to make or receive a
cash payment based on the value of a securities index. During the period the
futures contract is open, changes in the value of the contract are recognized as
unrealized gains or losses by "marking to market" such contract on a daily basis
to reflect the market value of the contract at the end of each day's trading.
Such unrealized gains and losses are included in the caption "Accumulated net
unrealized appreciation (depreciation) on investments, futures, foreign currency
transactions, and forward currency contracts" in the Statement of Assets and
Liabilities. When the futures contract is closed, a Fund records a realized gain
or loss equal to the difference between the proceeds from (or cost of) the
closing transaction and a Fund's basis in the contract. The International Fund
has entered into futures contracts to hedge a portion of its portfolio.
The use of futures contracts involves, to varying degrees, elements of market
risk. Risks arise from the possible imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets, and
the possible inability of counterparties to meet the terms of their contracts.
However, a Fund's activities in futures contracts are conducted through
regulated exchanges which minimize counterparty credit risks. A futures contract
has off balance sheet risk where the potential loss on a particular investment
is greater than the value of such investment, as reflected on the statement of
assets and liabilities.
A-48
<PAGE> 52
- --------------------------------------------------------------------------------
The International Fund had the following open futures contracts at December 31,
1998:
<TABLE>
<CAPTION>
NUMBER OF CONTRACT EXPIRATION UNREALIZED
CONTRACTS VALUE DATE DEPRECIATION
--------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Purchased:
TOPIX Index (Japan)......... 1 $94,884 03/27/99 (1,442)
</TABLE>
Dividends and Distributions to Shareholders
The Funds record dividends and distributions to shareholders on the ex-dividend
date. Each Fund, with the exception of the Money Market Fund and the Managed
Bond Fund declare and pay dividends arising from net investment income gains on
an annual basis. Dividends from net investment income are declared and paid
daily by the Money Market Fund, and declared and paid monthly by the Managed
Bond Fund. Distributions from net realized capital gains, if any, are declared
and paid on an annual basis, for each of the Funds.
The amount of distributions from net investment income and net realized capital
gains, if any, are determined in accordance with federal income tax regulations,
which may differ from generally accepted accounting principles. Key differences
include the treatment of short-term capital gains, the deferral of post October
losses, wash sales, and the treatment of foreign currencies. To the extent that
these differences are permanent in nature, such amounts are reclassified within
the capital accounts based on their federal tax-basis treatment. Distributions
which exceed net investment income and net realized capital gains for financial
reporting purposes but not for tax purposes are reported as distributions in
excess of net investment income or net realized capital gains. To the extent
they exceed net investment income and net realized capital gains for tax
purposes, they are reported as distributions of paid-in-capital. Permanent
differences in the Aggressive Growth Fund which amount to $34,982 were
reclassified from undistributed net income to additional paid-in capital in
accordance with these policies.
At December 31, 1998, the following reclassifications have been made to increase
(decrease) such accounts with offsetting adjustments made to paid-in-capital:
<TABLE>
<CAPTION>
ACCUMULATED UNDISTRIBUTED ACCUMULATED NET REALIZED
NET INVESTMENT INCOME GAIN/(LOSS) ON INVESTMENTS
------------------------- --------------------------
<S> <C> <C>
Managed Bond Fund....... $ 25 $ 28,706
Blue Chip Fund.......... 22,528 22,528
Aggressive Growth
Fund................... 34,982 (28,637)
International Fund...... (5,488) 20,867
</TABLE>
Federal Income Taxes
It is the Trust's policy to comply with the requirements of the Internal Revenue
Code pertaining to regulated investment companies and to distribute all of its
taxable income, as well as any net realized gains, to its shareholders.
Therefore, no federal income or excise tax provision has been made. Foreign
taxes have been provided for on dividend and interest income earned on foreign
investments in accordance with the applicable country's tax rates and, to the
extent unrecoverable, are recorded as a reduction of investment income.
At December 31, 1998, the Capital Income Fund, Aggressive Growth Fund and
International Fund had the following net capital loss carryovers:
<TABLE>
<CAPTION>
CAPITAL LOSS EXPIRATION
CARRYOVER DATE
------------ ----------
<S> <C> <C>
Capital Income Fund............................ 789,141 2006
Aggressive Growth Fund......................... 19,084 2006
International Fund............................. 561,784 2006
</TABLE>
To the extent that these loss carryovers are used to offset future capital
gains, it is probable that the gains so offset will not be distributed to
shareholders. During the year ended December 31, 1998, $53,341 of capital loss
carryovers expired for the Managed Bond Fund.
For the year ended December 31, 1998, Capital Income Fund, Aggressive Growth
Fund and International Fund intend to elect to defer to January 1, 1999,
post-October capital losses of $40,997, $383,499 and $57,778, respectively.
For the year ended December 31, 1998, the International Fund intends to elect to
defer to January 1, 1999, post-October foreign currency losses of $8,765.
A-49
<PAGE> 53
- --------------------------------------------------------------------------------
Repurchase Agreements
Under a repurchase agreement a Fund may acquire securities from financial
institutions, subject to the sellers agreement to repurchase such securities at
a mutually agreed upon time and price. The resale price is in excess of the
purchase price and reflects an agreed upon interest rate for the period of time
the agreement is outstanding. The Funds' custodian takes possession of the
collateral pledged for investments in repurchase agreements on behalf of the
Funds. It is the policy of the Funds to value the underlying collateral daily on
a mark to market basis to determine that the value, including accrued interest,
is at least equal to the repurchase price. If the counter party to the agreement
defaults, a Fund might incur a loss or delay in the realization of proceeds if
the value of the collateral securing the repurchase agreement declines or incur
disposition costs in liquidating the collateral.
Use of Estimates
Management of the Funds has made certain estimates and assumptions relating to
the reporting of assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from these estimates.
2. INVESTMENT MANAGEMENT AGREEMENTS, INVESTMENT SUB-ADVISORY AGREEMENTS
AND TRANSACTIONS WITH AFFILIATES
The Trust has entered into a Management Agreement with Bank of America National
Trust and Savings Association ("Manager") which provides that the Manager will
furnish each Fund with investment advisory and administrative services. The
Manager receives a fee computed daily and paid monthly based on annual rates of
0.22%, 0.37%, 0.48%, 0.53%, 0.53%, 0.61%, and 0.66% of the average daily net
assets of the Money Market Fund, Managed Bond Fund, Capital Income Fund, Blue
Chip Fund, Mid-Cap Equity Fund, Aggressive Growth Fund, and International Fund,
respectively. For the year ended December 31, 1998, the Manager waived
investment advisory fees of $10,422, $18,998, $63,547, $90,689, $44,848, $47,592
and $66,242 for the Money Market Fund, Managed Bond Fund, Capital Income Fund,
Blue Chip Fund, Mid-Cap Equity Fund, Aggressive Growth Fund and International
Fund, respectively.
The Manager has engaged Scudder Kemper Investments, Inc. and Wellington
Management Company, LLP to serve as sub-advisors for the Managed Bond Fund and
International Fund, respectively. The sub-advisors receive a fee from the
Manager computed daily and paid monthly based on an annual rate of 0.20% and
0.40% of the average daily net assets of the Managed Bond Fund and International
Fund, respectively. For the year ended December 31, 1998, Scudder Kemper
Investments, Inc. waived investment sub-advisory fees of $20,853 for the Managed
Bond Fund.
The Management Agreement provides that the Manager will reimburse each Fund to
prevent its expenses from exceeding a specific percentage limit. During the year
ended December 31, 1998, the Manager reimbursed all of the funds for expenses
pursuant to those provisions.
The Manager and Pacific Life have jointly agreed to waive fees and reimburse
Fund expenses, excluding interest, taxes, brokerage, and other portfolio
transactions costs, so that the expenses will not exceed 0.60%, 0.75%, 0.87%,
0.94%, 0.94%, 1.03%, and 1.24% of the average net assets based on annual basis
of the Money Market Fund, Managed Bond Fund, Capital Income Fund, Blue Chip
Fund, Mid-Cap Equity Fund, Aggressive Growth Fund, and International Fund,
respectively. For the year ended December 31, 1998, Pacific Life reimbursed
operating expenses of $25,207, $2,653, $1,986, $834, $1,931, $8,448, and
$153,791 of the Money Market Fund, Managed Bond Fund, Capital Income Fund, Blue
Chip Fund, Mid-Cap Equity Fund, Aggressive Growth Fund, and International Fund,
respectively. For the year ended December 31, 1998, Pacific Life waived transfer
agent and shareholder servicing fees of $10,943, $26,596, $29,011, $37,343,
$18,467, $16,939, and $21,735 for the Money Market Fund, Managed Bond Fund,
Capital Income Fund, Blue Chip Fund, Mid-Cap Equity Fund, Aggressive Growth
Fund, and International Fund, respectively.
PNC Bank, N.A. ("PNC Bank") serves as custodian for the Funds. As custodian of
the Trust's assets, PNC Bank performs a variety of custodial services including
maintaining a separate account for each Fund, holding and disbursing portfolio
securities, receiving and disbursing money, and collecting income and other pay-
A-50
<PAGE> 54
- --------------------------------------------------------------------------------
ments and distributions on account of the portfolio securities.
PFPC serves as accounting agent for the Trust. Under the Sub-Administration and
Accounting Services Agreement, PFPC has agreed to provide certain accounting,
bookkeeping, pricing, dividend distribution calculation, and disbursing services
with respect to the Trust. PNC Bank and PFPC are affiliates of PNC Bank Corp.
Pacific Life is the transfer agent for the Trust and also provides shareholder
support services. Pursuant to the terms of the Transfer Agency & Shareholder
Services Plan, Pacific Life is entitled to a fee, which is accrued daily and
payable monthly, at an annual rate of 0.05% and 0.16%, respectively, of the
Funds average daily net assets.
Certain officers and/or Trustees of the Trust are also officers and/or directors
of the sub-administrator and accounting agent. During the year ended December
31, 1998, the Trust made no direct payments to its officers or Trustees, who
were affiliates of the Manager.
3. PURCHASES AND SALES OF SECURITIES
The cost of securities purchased and proceeds from securities sold, excluding
short-term obligations, during the year ended December 31, 1998 were:
$13,257,124 and $6,384,985 for Managed Bond Fund; $22,378,577 and $11,162,805
for Capital Income Fund; $23,774,209 and $15,018,407 for Blue Chip Fund;
$13,793,776 and $12,156,586 for Mid-Cap Equity Fund; $27,185,004 and $24,919,379
for Aggressive Growth Fund; and $16,052,993 and $14,167,458 for International
Fund, respectively.
4. TAX MATTERS
Tax Cost of Investments
At December 31, 1998, the net unrealized appreciation or depreciation based on
the cost of investments for federal income tax purposes was as follows:
<TABLE>
<CAPTION>
TAX GROSS GROSS NET UNREALIZED
COST OF UNREALIZED UNREALIZED APPRECIATION
INVESTMENTS APPRECIATION DEPRECIATION (DEPRECIATION)
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Money Market Fund..... $ 6,761,592 $ 0 $ 0 $ 0
Managed Bond Fund..... 17,937,381 323,374 (36,710) 286,664
Capital Income Fund... 23,985,836 2,927,251 (973,258) 1,953,993
Blue Chip Fund........ 28,480,552 8,409,332 (520,054) 7,889,278
Mid-Cap Equity Fund... 12,416,113 3,158,088 (327,953) 2,830,135
Aggressive Growth
Fund................. 10,677,557 1,349,483 (990,954) 358,529
International Fund.... 9,948,461 1,386,977 (283,683) 1,103,294
</TABLE>
A-51
<PAGE> 55
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders
of Pacific Innovations Trust
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Money Market Fund, Managed Bond
Fund, Capital Income Fund, Blue Chip Fund, Mid-Cap Equity Fund, Aggressive
Growth Fund and International Fund (constituting Pacific Innovations Trust,
hereafter referred to as the "Trust") at December 31, 1998, and the results of
each of their operations, the changes in each of their net assets and financial
highlights for the year then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1998 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above. The
financial statements of Pacific Innovations Trust for the period ended December
31, 1997 were audited by other independent accountants whose report dated
February 6, 1998 expressed an unqualified opinion on those statements.
PRICEWATERHOUSECOOPERS, LLP
1177 Avenue of the Americas
New York, New York 10036
February 23, 1999
<PAGE> 56
Pacific Life Insurance Company ----------------
Variable Annuity Department BULK RATE
P.O. Box 7187 U.S. POSTAGE
Pasadena, California 91109-7187 PAID
PACIFIC LIFE
92799
----------------
1998 ANNUAL REPORTS
PACIFIC INNOVATIONS TRUST
SEPARATE ACCOUNT B OF
PACIFIC LIFE INSURANCE
COMPANY
