<PAGE>
Filed pursuant to Rule 497(e)
WM GROUP OF FUNDS
SUITE 300
601 WEST MAIN AVENUE
SPOKANE, WASHINGTON 99201-0613
800-543-8072
STATEMENT OF ADDITIONAL INFORMATION
March 23, 1998, as revised April 16, 1998
WM Group of Funds
MONEY FUNDS EQUITY FUNDS
- ----------- ------------
MONEY MARKET FUND BOND & STOCK FUND
TAX-EXEMPT MONEY MARKET FUND GROWTH & INCOME FUND
CALIFORNIA MONEY FUND GROWTH FUND
FIXED-INCOME FUNDS INTERNATIONAL GROWTH FUND
- ------------------ NORTHWEST FUND
SHORT TERM HIGH QUALITY BOND FUND EMERGING GROWTH FUND
TARGET MATURITY 2002 FUND STRATEGIC ASSET MANAGEMENT PORTFOLIOS
U.S. GOVERNMENT SECURITIES FUND -------------------------------------
INCOME FUND STRATEGIC GROWTH PORTFOLIO
HIGH YIELD FUND CONSERVATIVE GROWTH PORTFOLIO
MUNICIPAL FUNDS BALANCED PORTFOLIO
- --------------- FLEXIBLE INCOME PORTFOLIO
TAX-EXEMPT BOND FUND INCOME PORTFOLIO
CALIFORNIA MUNICIPAL FUND
CALIFORNIA INSURED INTERMEDIATE
MUNICIPAL FUND
FLORIDA INSURED MUNICIPAL FUND
This Statement of Additional Information (the "SAI") supplements the
information contained in the current Prospectus of the WM Group of Funds listed
above dated March 23, 1998 (the "Prospectus"), and should be read in conjunction
----------
with such Prospectus.
The Money Market, Tax-Exempt Money Market, High Yield, Income, U.S.
Government Securities, Tax-Exempt Bond, Bond & Stock, Growth & Income and
Northwest Funds are series of WM Trust I, a Massachusetts business trust
organized on September 19, 1997. The California Money, Short Term High Quality
Bond, Target Maturity 2002, California Municipal, California Insured
Intermediate Municipal, Florida Insured Municipal, Growth, International Growth
and Emerging Growth Funds are series of WM Trust II, a Massachusetts business
trust organized on February 22, 1989. The series of WM Trust I and WM Trust II
are collectively referred to in this SAI as the "Funds." The Strategic Growth,
-----
Conservative Growth, Balanced, Flexible Income and Income Portfolios,
collectively referred to in this SAI as the "Portfolios," are series of WM
Strategic Asset Management Portfolios, a Massachusetts business trust organized
on March 26, 1996. In this SAI WM Trust I, WM Trust II and WM Strategic Asset
Management Portfolios are referred to as the "Trusts."
------
The Prospectus may be obtained without charge by writing to WM Shareholders
Services, Inc. ("Shareholder Services") or by calling Shareholder Services at
--------------------
800-222-5852. This SAI provides information applicable to the Class A, Class B,
Class I and Class S shares of each of the
<PAGE>
Funds (except for the Target Maturity 2002 Fund, which offers only Class A
shares), and the Class A and Class B shares of each of the Portfolios. This SAI,
although not in itself a prospectus, is incorporated by reference into the
Prospectus in its entirety.
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<PAGE>
CONTENTS
MANAGEMENT................................................................ -4-
INVESTMENT OBJECTIVES AND POLICIES........................................ -25-
INVESTMENT RESTRICTIONS................................................... -75-
PORTFOLIO TURNOVER........................................................ -83-
PORTFOLIO TRANSACTIONS.................................................... -84-
NET ASSET VALUE........................................................... -89-
HOW TO BUY AND REDEEM SHARES.............................................. -91-
HOW TO EXCHANGE SHARES.................................................... -96-
DETERMINATION OF PERFORMANCE.............................................. -97-
TAXES..................................................................... -104-
DISTRIBUTOR............................................................... -110-
APPENDIX.................................................................. -115-
FINANCIAL STATEMENTS...................................................... -121-
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MANAGEMENT
TRUSTEES AND OFFICERS
- ---------------------
The Trusts are governed by a common Board of Trustees which oversees the
Trusts' activities and is responsible for protecting the interests of
shareholders. The names, addresses and birthdates of the Trustees and executive
officers of the Trusts, together with information as to their principal business
occupations, are set forth below. The executive officers of the Trusts are
employees of organizations that provide services to the Funds and Portfolios
offered by the Trusts. Each Trustee who is an "interested person" of the
Trusts, as defined in the Investment Company Act of 1940, as amended (the "1940
----
Act"), is indicated by an asterisk.
- ---
TRUSTEES:
- --------
DAVID E. ANDERSON (11/17/26)
Trustee
17960 Seabreeze Drive
Pacific Palisades, California 90272
Retired in 1988 from GTE California, Inc. after 40 years of service. President
and CEO from 1979 to 1988. Director of Barclay's Bank of California until 1988.
Currently involved in the following charitable organizations as a director on
the following boards: Board chairman, Children's Bureau Foundation; Board
member, Upward Bound House of Santa Monica; Past campaign chairman of United
Way; Former chairman, Los Angeles Area Chamber of Commerce.
WAYNE L. ATTWOOD, MD (1/28/29)
Trustee
2931 S. Howard
Spokane, Washington 99203
Retired doctor of internal medicine and gastroenterology. Former president,
Medical Staff -- Sacred Heart Medical Center; former president of Spokane
Society of Internal Medicine; and former president of Spokane Physicians for
Social Responsibility.
ARTHUR H. BERNSTEIN, ESQ. (6/8/25)
Trustee
11661 San Vicente Blvd., Suite 701
Los Angeles, California 90049
President of Bancorp Capital Group, Inc. and Bancorp Venture Capital, Inc.
Previously served on the board of directors of Great Western Leasing
Corporation, subsidiary of Great Western Financial Corporation ("GWFC"), until
----
the subsidiary was sold in 1987. Director of Ryder
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System, Inc.; chairman of the board of trustees of the California Family Studies
Center and Phillips Graduate Institute since 1984.
KRISTIANNE BLAKE (1/22/54)
Trustee
705 W. 7th, Suite D
Spokane, Washington 99204
CPA specializing in personal financial and tax planning since 1975. Served as a
partner with the accounting firm of Deloitte, Haskins & Sells prior to starting
own firm in 1987. Community activities include: United Way of Spokane County -
board chair; YMCA of the Inland Northwest - treasurer; Junior League of Spokane
- - past president; Spokane Intercollegiate Research & Technology Institute
Foundation - board member; Spokane Joint Center for Higher Education - board
member; Spokane Area Chamber of Commerce - board member; and St. George's School
- - board member.
EDMOND R. DAVIS, ESQ. (9/24/28)
Trustee
550 South Hope Street, 21st Floor
Los Angeles, California 90071-2604
Joined the law firm of Brobeck, Phleger & Harrison as a partner in 1987,
responsible for estate planning, and trusts and estate matters in the Los
Angeles office. Prior to joining the firm, had a similar position for 20 years
with the law firm of Overton, Lyman & Prince in Los Angeles. His expertise has
been recognized in Who's Who in California, the Best Lawyers of America and
Who's Who in American Law.
JOHN W. ENGLISH (3/27/33)
Trustee
50 H New England Ave.
P.O. Box 640
Summit, New Jersey 07902-0640
Retired vice president and chief investment officer of the Ford Foundation (a
non-profit charitable organization). Chairman of the board and director, the
China Fund, Inc., (closed-end mutual fund). Director, Paribas Trust for
Institutions (an open-end mutual fund). Trustee, Retail Property Trust (a
company providing management services for a shopping center).
*ANNE V. FARRELL (7/17/35)
Trustee
425 Pike Street, Suite 510
Seattle, Washington 98101
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Joined the Seattle Foundation (a charitable foundation) in 1980 as executive
vice president. Became president in 1984. Also serves on the board of
Washington Mutual Bank and Blue Cross of Washington and Alaska. Listed in Who's
Who in America. Past President of the Nature Conservancy of Washington,
Lakeside School and Seattle Rotary Club. Currently a Regent at Seattle
University and president of the Rainier Club in Seattle.
*MICHAEL K. MURPHY (1/14/37)
Trustee
PO Box 3366
Spokane, Washington 99220-3366
Chairman and CEO of CPM Development Corporation (a holding company which
includes Central Pre-mix Concrete Company) and president of Inland Asphalt
Company. Member of the board of directors for Washington Mutual, Inc.
("Washington Mutual"), and Momentum, Inc. Former president and director of
-----------------
Inland Empire Chapter - Associated General Contractors, and former director of
National Aggregates Associates.
ALFRED E. OSBORNE, JR. PH.D. (12/7/44)
Trustee
110 Westwood Plaza, Suite C305
Los Angeles, California 90095-1481
University professor, researcher and administrator at University of California
Los Angeles since 1972. Director, Times Mirror Company (newspaper publisher),
United States Filter Corporation, Nordstrom Inc. (clothing retailer) and
Greyhound Lines, Inc. (bus company). Independent general partner, Technology
Funding Venture Partners V, and former Governor of the National Association of
Securities Dealers, Inc.
*WILLIAM G. PAPESH (1/21/43)
President and Trustee
601 W. Main Avenue
Suite 300
Spokane, WA 99201
President and director of WM Advisors, Inc. (the "Advisor"), WM Shareholder
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Services, Inc. ("Shareholder Services"), WM Funds Distributor, Inc. (the
--------------------
"Distributor") and WM Services, Inc. (a registered investment adviser and
-----------
broker/dealer).
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DANIEL L. PAVELICH (9/12/44)
Trustee
Two Prudential Plaza
180 North Stetson Avenue, Suite 4300
Chicago, Illinois 60601
Chairman and CEO of BDO Seidman, a leading national accounting and consulting
firm. Worked in Seidman's Spokane office for 27 years and is a former presiding
member of the firm's board of directors. A member of the American Institute of
CPAs and served as a vice president of the Washington Society of CPAs' board of
directors.
JAY ROCKEY (1/5/28)
Trustee
2121 Fifth Avenue
Seattle, Washington 98121
Founder and chairman of The Rockey Company, a public relations and marketing
communications consulting firm with headquarters in Seattle and offices in
Portland and Spokane. Founder and director of RXL Pulitzer, an international
multimedia company that is a joint venture with Pulitzer Publishing Co. of St.
Louis. History includes managing New York City public relations for Aluminum
Company of America, director of public relations for the Seattle World's Fair
and the presidency of the Public Relations Society of America.
RICHARD C. YANCEY (5/28/26)
Lead Trustee
535 Madison Avenue
New York, New York 10022
Investment Banker - Dillon, Read & Co., Inc., New York City, 1952 through 1992.
Served as vice president, managing director and director and senior advisor at
Dillon, Read & Co. Member of the boards of directors of AdMedia Partners, Inc.,
CapMAC Holdings Inc., Fiberite, Inc., The Scoreboard, Inc., and Czech and Slovak
American Enterprise Fund.
OFFICERS:
- ---------
GENE BRANSON (12/26/45)
Vice President
11th Floor
601 W. Main Street
Spokane, WA 99201
Senior Vice President and Director of the Distributor and Shareholder Services
and Vice President and Director of the Advisor.
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MONTE D. CALVIN, CPA (1/22/44)
Senior Vice President and Chief Financial Officer
601 W. Main Avenue
Suite 300
Spokane, WA 99201
Executive Vice President and Director of Shareholder Services; Director of the
Advisor and the Distributor.
SANDY CAVANAUGH (5/10/54)
Senior Vice President
1631 Broadway
Sacramento, CA 95818
First Vice President and Director of the Distributor since September 1997.
Director of Advisor and Shareholder Services. Prior to joining the Distributor,
Ms. Cavanaugh held senior level positions with AIM Funds Distributor, First
Interstate Investments and ASB Financial Services.
JEFFREY L. LUNZER, CPA (1/4/61)
Vice President and Treasurer
101 W. Main Avenue
Suite 300
Spokane, WA 99201
Vice President of Shareholder Services.
JOHN T. WEST, CPA (1/21/55)
Vice President, Secretary and Compliance Officer
601 W. Main Avenue
Suite 300
Spokane, WA 99201
Vice President of Shareholder Services.
Each of the Trustees and officers of the Trusts listed above holds the same
position(s) with all three Trusts and is also a trustee or officer of WM
Variable Trust (the "Variable Trust") and WM Prime Income Fund (the "Prime
-------------- -----
Income Fund"). Each of the Variable Trust and the Prime Income Fund is an
- -----------
investment company advised by the Advisor.
REMUNERATION. No Trustee who is a director, officer or employee of the
Advisor or its affiliates receives any compensation from the Trusts for serving
as Trustee of the Trusts. The Trusts, together with the Variable Trust and the
Prime Income Fund, pay each Trustee who is not a director, officer or employee
of the Advisor or its affiliates a fee of $18,000 per annum plus
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<PAGE>
$3,000 per Board meeting attended in person and $1,000 per Board meeting
attended by telephone, and reimburses each such Trustee for travel and out-of-
pocket expenses. The Lead Trustee receives an additional fee of $500 per month.
The Chairman of each committee receives a fee of $500 per committee meeting.
Officers of the Trusts receive no direct remuneration in such capacity from the
Trusts. Officers and Trustees of the Trusts who are employees of the Advisor or
its affiliates may be considered to have received remuneration indirectly.
Wayne L. Attwood, M.D., Kristianne Blake, Anne V. Farrell, Michael K.
Murphy, William G. Papesh, Daniel L. Pavelich, Jay Rockey and Richard C. Yancey
became Trustees of WM Trust II and WM Strategic Asset Management Portfolios on
December 23, 1997. Arthur H. Bernstein, Esq., David E. Anderson, Edmond R.
Davis, Esq., John W. English and Alfred E. Osborne, Jr. Ph.D became trustees of
WM Trust I on December 23, 1997.
The Funds other than the High Yield Fund which are series of WM Trust I are
successors to the following Washington corporations, or series thereof, which
commenced operations in the years indicated, which made up the group of mutual
funds known as the "Composite Funds."
Composite U.S. Government Securities, Inc. (1982)
Composite Income Fund, Inc. (1975)
Composite Growth & Income Fund, a series of Composite Equity Series, Inc.
(1949)
Composite Money Market Portfolio, a series of Composite Cash Management
Company (predecessor of the Money Market Fund) (1979)
Composite Tax-Exempt Portfolio, a series of Composite Cash Management
Company
(predecessor of the Tax-Exempt Money Market Fund) (1979)
Composite Tax-Exempt Bond Fund, Inc. (1976)
Composite Northwest Fund, Inc. (1986)
Composite Bond & Stock Fund, Inc. (1939)
Each of the Composite Funds was reorganized as a series of WM Trust I on
March 20, 1998. In connection with this reorganization, the Trust, whose name
was previously "The Composite Funds" and which conducted no operations prior to
that date, changed its name to its current name. The High Yield fund is newly-
organized as of the date of this SAI.
Prior to March 20, 1998, the name of WM Trust II was "Sierra Trust Funds"
and the name of WM Asset Management Portfolios was "Sierra Asset Management
Portfolios." These Trusts were part of a family of mutual funds known as the
"Sierra Funds."
The reorganizations and name changes described in the foregoing paragraphs
were part of an overall restructuring of the Composite Funds and the Sierra
Funds into a combined mutual fund family known as the WM Group of Funds. This
restructuring also consisted of the replacement of Sierra Investment Advisors
Corporation as investment advisor to the Sierra Funds with WM Advisors, Inc.
(formerly known as Composite Research & Management Co.), the advisor to the
Composite Funds, the election of the Directors of the Composite Funds as
Trustees
-9-
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of WM Trust I, WM Trust II and WM Asset Management Portfolios and the election
of the independent Trustees of WM Trust II and WM Asset Management Portfolios as
Trustees of WM Trust I.
The following table shows the aggregate compensation paid to each of
the Trusts' Trustees by the Trusts (or, in the case of WM Trust I, by the
predecessor Composite Funds) for the most recent fiscal year and by Trusts
together with the Variable Trust, the Prime Income Fund and Composite Deferred
Series, Inc., an investment company for which WM Advisors, Inc. was formerly the
advisor, for the year ended December 31, 1997.
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<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Total Compensation
Aggregate Pension or From the Trusts, the
Compensation From Retirement Benefits Estimated Annual Variable Trust, the
Trustee the Trusts* for Accrued as Part Benefits Upon Prime Income Fund and
fiscal year ended of Fund Expenses Retirement Composite Deferred
1997** Series, Inc.
for year ended
December 31, 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David E. Anderson $19,000 $0 $0 $41,450
Wayne L. Attwood, M.D. 10,864 0 0 15,000
Arthur H. Bernstein, Esq. 24,438 0 0 59,889
Kristianne Blake 11,963 0 0 16,500
Edmond R. Davis, Esq. 19,000 0 0 41,450
John W. English 19,000 0 0 41,450
Alfred E. Osborne, Jr., Ph.D. 19,000 0 0 41,450
Daniel L. Pavelich 10,150 0 0 14,000
Jay Rockey 10,864 0 0 15,000
Richard C. Yancey 10,864 0 0 15,000
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*In the case of WM Trust I, from predecessor Composite Funds
**Fiscal year for WM Trust II and WM Asset Management Portfolios ended June 30,
1997. Fiscal year for predecessors of Funds in WM Trust I ended December 31 or
October 31, 1997, depending on the Fund; data is shown for year ended December
31, 1997.
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<PAGE>
During the fiscal year ended June 30, 1997, Sierra Investment Advisors
Corporation reimbursed WM Trust II and WM Asset Management Portfolios in the
amount of $80,500 for certain expenses associated with special meetings of the
Board, held with regard to the contemplation of the sale of Sierra Capital
Management Corporation and the merger of Great Western Financial Securities
Corporation and Washington Mutual, Inc. As of October 1, 1997, the Trustees and
officers of the Trusts owned, in the aggregate, 108,216 shares of the Balanced
Portfolio, and less than 1% of the outstanding shares of any of the other
Portfolios or the Funds in WM Trust II. As of December 31, 1997, the Trustees
and officers of the Trust owned, in the aggregate, less than 1% of the
outstanding shares of each Fund in WM Trust I. In addition, as of March 20,
1998, to the knowledge of the Trusts, the following shareholders owned of record
or beneficially 5% or more of the outstanding shares of the indicated classes of
the Funds in WM Trust I, and as of October 1, 1997, the following shareholders
owned of record or beneficially 5% or more of the outstanding shares of the
indicated classes of the Funds in WM Trust II and the Portfolios:
MONEY MARKET FUND - CLASS A: BHC Securities Omnibus Account, Attn: Cash
Sweeps Dept., 2005 Market St. 12th Flr., Philadelphia, PA 19103, 30.2%.
MONEY MARKET FUND - CLASS B: WA Mutual Bank Cust IRA Rlvr, Robert O. Wright,
7824 Harbor Blvd, Pasco, WA 99301, 6.3%.
Stanley E. Armstrong, 8512 NE 10th St., Vancouver, WA 98664, 11.1%.
George Priest TTEE Emily H. Priest Living Trust U/A DTD 2/8/90, 23131 SW
Starlight Dr., Sherwood, OR 97140, 13.4%.
Flossie Hasting & Milton Hasting JT TEN, 521 Field Rd., E. Spanaway, WA 98387,
6.4%.
WA Mutual Bank Cust. IRA, Mary K. Lutz, 3859 Glenwood LP SE, Salem, OR 97301,
5.7%.
BHC Securities, Inc., FBO #85674022 Attn: Mutual Funds Dept., One Commerce
Square, 2005 Market St., Suite 1200, Philadelphia, PA 19103, 23.3%.
TAX-EXEMPT MONEY MARKET FUND - CLASS A: BHC Securities Omnibus Account Attn:
Cash Sweeps Dept., 2005 Market 12th Floor, Philadelphia, PA 19103, 6.9%.
TAX-EXEMPT MONEY MARKET FUND - CLASS B: Genevieve Odegard, 5702 N 33rd St. St
#13D, Tacoma, WA 98407, 90.0%.
Corporate Actions Audit % Murphey Favre Sec. Services Attn: Tom Hunt, 601 W.
Main Ave. Ste 801, Spokane, WA 99201, 8.7%.
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<PAGE>
CALIFORNIA MONEY FUND - CLASS A: Edward B. Baker Ttee FBO The Baker Family
Trust, DTD 7/10/94, 1650 16th Avenue, San Francisco, CA 94122, 18.28%.
CALIFORNIA MONEY FUND - CLASS B: Oscar L. Reheel Trustee, FBO: The Oscar L.
Roehl Trust UTA DTD 12/15/89, 1826 Harding Avenue, Redwood City, CA 94062,
81.27%.
Ella M. Brown, 29094 Cobblestone Street, Nuevo, CA 92567, 15.47%.
CALIFORNIA MONEY FUND - CLASS I: Sierra Fund Administration, 9301 Corbin
Avenue, Northridge, CA 91324, 100.00%.
SHORT TERM HIGH QUALITY BOND FUND- CLASS I: SAM Income Portfolio, C/O Sierra
Advisors, 9301 Corbin Avenue, Suite 333, Northridge, CA 91324, 66.00%.
SAM Value Portfolio, C/O Sierra Advisors, 9301 Corbin Avenue, Suite 333,
Northridge, CA 91324, 34.00%.
SHORT TERM HIGH QUALITY BOND FUND- CLASS S: KY Cabinet for Human Resources
Trustee for the Marian K. Burns Irrevocable Charitable Remainder Trust, 275 E.
Main Street, 6th Floor West, Frankfort, KY 40621, 11.81%.
Alec P. Morrison and Sandra K. Morrison JTWROS, 16975 Stag Thicket Lane,
Strongsville, OH 44136, 10.88%.
BSDT Ttee IRA R FBO Mauro Fardo, 143 Los Altos Ave., Walnut Creek, CA 94598,
7.20%.
Harold P. Jewell and Oveta B. Jewell JTWROS, 1001 Urell Place NE, Washington,
D.C. 20017, 5.01%.
INCOME FUND - CLASS A: Rainier Trust Co., 1201 3rd Ave. #2010, Seattle, WA
98101, 7.6%.
CALIFORNIA MUNICIPAL FUND- CLASS I: Sierra Fund Administration Corp., 9301
Corbin Avenue, Northridge, CA 91324, 100.00%.
CALIFORNIA MUNICIPAL FUND - CLASS S: Josefina F. Perungoa and Reynaldo Fernando
JTWROS, 5480 Avenida El Cid, Yorba Linda, CA 92686, 76.34%
Sierra Fund Administration Corp., 9301 Corbin Avenue, Northridge, CA 91324,
23.66%
CALIFORNIA INSURED INTERMEDIATE MUNICIPAL FUND - CLASS I: Sierra Fund
Administration Corp., 9301 Corbin Avenue, Northridge, CA 91324, 100.00%
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<PAGE>
CALIFORNIA INSURED INTERMEDIATE MUNICIPAL FUND - CLASS S: Sierra Fund
Administration Corp., 9301 Corbin Avenue, Northridge, CA 91324, 100.00%.
FLORIDA INSURED MUNICIPAL FUND - CLASS B: Joseph R. Ott and Stella C. Ott
JTWROS, 5800 SW 99th Terrace, Miami, FL 33156, 7.55%.
FLORIDA INSURED MUNICIPAL FUND - CLASS S: Jill Kuharcik, 5696 High Flyer Road
South, Palm Beach Gardens, FL 33418, 94.54%.
Sierra Fund Administration Corp., 9301 Corbin Avenue, Northridge, CA 91324,
5.46%
BOND & STOCK FUND - CLASS A: Rainier Trust Co., 1201 3rd Ave. #2010, Seattle,
WA 98101, 6.7%.
GROWTH & INCOME FUND - CLASS A: Rainier Trust Co., 1201 3rd Ave. #2010,
Seattle, WA 98101, 24.3%.
GROWTH FUND - CLASS I: SAM Growth Portfolio, C/O Sierra Advisors, 9301 Corbin
Avenue, Suite 333, Northridge, CA 91324, 57.97%.
SAM Balanced Portfolio, C/O Sierra Advisors, 9301 Corbin Avenue, Suite 333,
Northridge, CA 91324, 26.84%.
SAM Capital Growth Portfolio, C/O Sierra Advisors, 9301 Corbin Avenue, Suite
333, Northridge, CA 91324, 15.18%.
INTERNATIONAL GROWTH FUND- CLASS I: SAM Growth Portfolio, C/O Sierra Advisors,
9301 Corbin Avenue, Suite 333, Northridge, CA 91324, 61.45%.
SAM Balanced Portfolio, C/O Sierra Advisors, 9301 Corbin Avenue, Suite 333,
Northridge, CA 91324, 32.66%.
SAM Capital Growth Portfolio, C/O Sierra Advisors, 9301 Corbin Avenue, Suite
333, Northridge, CA 91324, 5.89%.
NORTHWEST FUND - CLASS A: Rainier Trust Co., 1201 3rd Ave. #2010, Seattle, WA
98101, 8.3%.
EMERGING GROWTH FUND - CLASS A: Chase Manhattan Bank Ttee FBO: GWB ESIP Plan
Trust A/C #29000108, 7700 Broadway, 10th Floor, New York, NY 10003, 14.98%.
EMERGING GROWTH FUND- CLASS I: SAM Growth Portfolio, C/O Sierra Advisors, 9301
Corbin Avenue, Suite 333, Northridge, CA 91324, 89.02%.
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<PAGE>
SAM Capital Growth Portfolio, C/O Sierra Advisors, 9301 Corbin Avenue, Suite
333, Northridge, CA 91324, 10.98%.
INCOME PORTFOLIO - CLASS A: Everen Clearing Corp. Cust., FBO: John H. Ormond
IRA, 133 Woodland Way, Piedmont, CA 94611, 7.16%.
INCOME PORTFOLIO - CLASS B: BSDT Cust Rollover IRA FBO: Octavio Gomez, 3606 La
Reforma Blvd., Baytown, TX 77521, 7.49%.
WM ADVISORS, INC., ITS AFFILIATES AND SERVICE PROVIDERS
- -------------------------------------------------------
ADVISOR
The Funds and Portfolios are managed by WM Advisors, Inc., which is
referred to as the Advisor in this SAI. The Advisor has delegated portfolio
management responsibilities in respect of the Growth, California Municipal,
Florida Insured Municipal, California Insured Intermediate Municipal and
International Growth Funds to a sub-advisor.
The Advisor has been in the business of investment management since 1944.
Its responsibilities include formulating each Fund's and Portfolio's investment
policies (subject to the terms of the Prospectus and this SAI), analyzing
economic trends, directing and evaluating the investment services provided by
the sub-advisors and monitoring each Fund's and Portfolio's investment
performance and reporting to the Board of Trustees, as well as providing certain
administrative services to the Funds and Portfolios. In connection with its
service as investment advisor to each Fund and Portfolio, the Advisor may engage
one or more sub-advisors to provide investment advisory services to any of the
Funds or Portfolios and may change or eliminate any such sub-advisor if it deems
such action to be in the best interests of a Fund or Portfolio and its
shareholders. Where the Advisor has not delegated such duties to a sub-advisor,
it is responsible for managing the investment and reinvestment of the Fund's or
Portfolio's assets. In addition, the Trusts are seeking an order from the
Securities and Exchange Commission which would permit the Funds and the
Portfolios, subject to certain conditions, to enter into sub-advisory agreements
with other sub-advisors approved by the Board of Trustees without shareholder
approval. The exemptive request also seeks to permit, without shareholder
approval, the terms of an existing sub-advisory agreement to be changed or the
employment of an existing sub-advisor to be continued after events that would
otherwise cause an automatic termination of a sub-advisory agreement when such
changes or continuation are approved by the Trusts' Board of Trustees.
Shareholders would be notified of any sub-advisor changes. The Advisor is an
indirect wholly owned subsidiary of Washington Mutual, a publicly owned
financial services company.
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<PAGE>
The following organizations, under the supervision of the Advisor, act as
sub-advisors to the Funds indicated below, and are responsible for continuously
reviewing, supervising and administering such Funds' respective investment
programs:
JANUS CAPITAL CORPORATION ("JANUS"), 100 Fillmore Street, Denver, Colorado
-----
80206, acts as sub-advisor to the Growth Fund and has served in such capacity
since the Fund's inception. Janus is an indirectly majority owned subsidiary of
Kansas City Southern Industries, Inc., a publicly traded holding company whose
primary subsidiaries are engaged in transportation, information processing and
financial services. Janus has been providing investment advice to mutual funds
or other large institutional clients since 1970. As of December 31, 1997, Janus'
assets under management were in excess of $68 billion.
VAN KAMPEN AMERICAN CAPITAL MANAGEMENT INC. ("VAN KAMPEN"), One Parkview
----------
Plaza, Oakbrook, Illinois 60181, or its predecessors, has served as the sub-
advisor for the California Insured Intermediate Municipal and Florida Insured
Municipal Funds since each Fund's inception. Van Kampen is a wholly-owned
subsidiary of Van Kampen American Capital, Inc., which is a wholly-owned
subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is a wholly owned
subsidiary of MSAM Holdings II, Inc. which, in turn, is a wholly owned
subsidiary of Morgan Stanley, Dean Witter, Discover & Co., a publicly held
global financial services company.
Van Kampen provides investment advice to a wide variety of individual,
institutional and investment company clients and, together with its affiliates,
had aggregate assets under management or supervision, as of November 30, 1997,
of more than $68 billion.
WARBURG PINCUS ASSET MANAGEMENT, INC. ("WARBURG"), 466 Lexington Avenue,
-------
New York, New York 10017, acts as sub-advisor to the International Growth Fund.
Warburg is a professional investment counseling firm which provides investment
services to investment companies, employee benefit plans, endowment funds,
foundations and other institutions and individuals. As of January 31, 1998 ,
Warburg managed approximately $21 billion of assets. Incorporated in 1970,
Warburg is indirectly controlled by Warburg, Pincus & Co. ("WP & Co."), which
--------
has no business other than being a holding company of Warburg and its
affiliates. Lionel I. Pincus, the managing partner of WP & Co., may be deemed to
control both WP & Co. and Warburg.
TRANSFER AGENT AND CUSTODIAN
WM Shareholder Services, Inc., referred to as Shareholder Services in this
SAI and the Prospectus, provides transfer agency and other shareholder services.
Shareholder Services is an indirect wholly-owned subsidiary of Washington
Mutual, located at 601 West Main Avenue, Suite 300, Spokane, Washington 99201.
The Custodian for the Funds and the Portfolios is Boston Safe Deposit and Trust
Co. which is located at One Boston Place, Boston, Massachusetts
-16-
<PAGE>
02108. Shareholder Services may charge a fee for special services, such as
providing historical account documents, that are beyond the normal scope of its
services.
DISTRIBUTOR
WM Funds Distributor, Inc., referred to as the Distributor in this SAI and
the Prospectus, is the distributor of the Class A, Class B, Class I and Class S
shares of the Funds and Class A and Class B shares of the Portfolios. The
Distributor, located at 601 West Main Avenue, Suite 300, Spokane, Washington
99201, is an indirect wholly owned subsidiary of Washington Mutual.
MANAGEMENT FEES. For the most recent three fiscal years the Funds and the
Portfolios paid the Advisor or Sierra Investment Advisors Corporation (which was
prior to 1998 the advisor to the Portfolios and the Funds within WM Trust II),
as the case may be, the following management fees:
-17-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Fiscal year ended 1997
- ------------------------------------------------------------------------------------------------------------
Expenses
Fees Paid Fees Waived Reimbursed
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund* $1,148,906 $0 $198,432
- ------------------------------------------------------------------------------------------------------------
Tax-Exempt Money Market Fund* $143,965 $0 $45,307
- ------------------------------------------------------------------------------------------------------------
California Money Fund** $187,084 $135,495 $0
- ------------------------------------------------------------------------------------------------------------
Short Term High Quality Bond Fund** $153,348 $153,348 $40,836
- ------------------------------------------------------------------------------------------------------------
Target Maturity 2002 Fund** $7,756 $7,756 $59,718
- ------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund* $769,591 $0 $0
- ------------------------------------------------------------------------------------------------------------
Income Fund* $553,562 $0 $0
- ------------------------------------------------------------------------------------------------------------
Tax-Exempt Bond Fund* $987,356 $0 $0
- ------------------------------------------------------------------------------------------------------------
California Municipal Fund** $2,063,242 $1,080,813 $0
- ------------------------------------------------------------------------------------------------------------
California Insured Intermediate Municipal Fund** $398,681 $350,384 $0
- ------------------------------------------------------------------------------------------------------------
Florida Insured Municipal Fund** $173,618 $173,618 $22,193
- ------------------------------------------------------------------------------------------------------------
Bond & Stock Fund*** $1,912,341 $0 $0
- ------------------------------------------------------------------------------------------------------------
Growth & Income Fund*** $1,630,777 $0 $0
- ------------------------------------------------------------------------------------------------------------
Growth Fund** $2,418,645 $0 $0
- ------------------------------------------------------------------------------------------------------------
International Growth Fund** $1,444,004 $0 $0
- ------------------------------------------------------------------------------------------------------------
Northwest Fund*** $1,538,183 $137,944 $0
- ------------------------------------------------------------------------------------------------------------
Emerging Growth Fund** $2,600,399 $0 $0
- ------------------------------------------------------------------------------------------------------------
Strategic Growth Portfolio** $36,642 $6,241 $41,371
- ------------------------------------------------------------------------------------------------------------
Conservative Growth Portfolio** $260,044 $54,435 $98,600
- ------------------------------------------------------------------------------------------------------------
Balanced Portfolio** $188,577 $40,744 $82,121
- ------------------------------------------------------------------------------------------------------------
Flexible Income Portfolio** $19,886 $4,470 $34,312
- ------------------------------------------------------------------------------------------------------------
Income Portfolio** $18,539 $4,476 $33,580
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* Fiscal year ends 12/31
** Fiscal year ends 6/30
*** Fiscal year ends 10/31
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Fiscal year ended 1996
- ------------------------------------------------------------------------------------------------------------
Expenses
Fees Paid Fees Waived Reimbursed
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund* $916,867 $0 $202,612
- ------------------------------------------------------------------------------------------------------------
Tax-Exempt Money Market Fund* $139,482 $0 $47,274
- ------------------------------------------------------------------------------------------------------------
</TABLE>
-18-
<PAGE>
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
California Money Fund** $206,796 $148,062
- ------------------------------------------------------------------------------------------------------------
Short Term High Quality Bond Fund** $262,885 $262,885 $13,583
- ------------------------------------------------------------------------------------------------------------
Target Maturity 2002 Fund** $7,915 $7,915 $47,054
- ------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund* $984,485 $0 $0
- ------------------------------------------------------------------------------------------------------------
Income Fund* $599,008 $0 $0
- ------------------------------------------------------------------------------------------------------------
Tax-Exempt Bond Fund* $1,065,379 $0 $0
- ------------------------------------------------------------------------------------------------------------
California Municipal Fund** $2,233,979 $1,398,796 $0
- ------------------------------------------------------------------------------------------------------------
California Insured Intermediate Municipal Fund** $393,599 $393,599 $47,057
- ------------------------------------------------------------------------------------------------------------
Florida Insured Municipal Fund** $201,769 $201,769 $74,295
- ------------------------------------------------------------------------------------------------------------
Bond & Stock Fund*** $1,555,733 $0 $0
- ------------------------------------------------------------------------------------------------------------
Growth & Income Fund*** $1,065,507 $0 $0
- ------------------------------------------------------------------------------------------------------------
Growth Fund** $2,023,665 $0 $0
- ------------------------------------------------------------------------------------------------------------
International Growth Fund** $1,062,220 $0 $0
- ------------------------------------------------------------------------------------------------------------
Northwest Fund*** $1,123,204 $166,941 $0
- ------------------------------------------------------------------------------------------------------------
Emerging Growth Fund** $2,464,903 $0 $0
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* Fiscal year ends 12/31
** Fiscal year ends 6/30
*** Fiscal year ends 10/31
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Fiscal year ended 1995
- ------------------------------------------------------------------------------------------------------------
Expenses
Fees Paid Fees Waived Reimbursed
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund* $688,617 $0 $22,965
- ------------------------------------------------------------------------------------------------------------
Tax-Exempt Money Market Fund* $143,292 $0 $57,104
- ------------------------------------------------------------------------------------------------------------
California Money Fund** $215,043 $108,224 $0
- ------------------------------------------------------------------------------------------------------------
Short Term High Quality Bond Fund** $270,744 $228,615 $0
- ------------------------------------------------------------------------------------------------------------
Target Maturity 2002 Fund** $1,207 $1,207 $16,281
- ------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund* $1,156,052 $0 $0
- ------------------------------------------------------------------------------------------------------------
Income Fund* $598,377 $0 $0
- ------------------------------------------------------------------------------------------------------------
Tax-Exempt Bond Fund* $1,120,096 $0 $0
- ------------------------------------------------------------------------------------------------------------
California Municipal Fund** $2,419,708 $1,403,390 $0
- ------------------------------------------------------------------------------------------------------------
California Insured Intermediate Municipal Fund** $319,780 $319,780 $52,835
- ------------------------------------------------------------------------------------------------------------
Florida Insured Municipal Fund** $200,364 $200,364 $80,852
- ------------------------------------------------------------------------------------------------------------
</TABLE>
-19-
<PAGE>
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Bond & Stock Fund*** $1,230,409 $0 $0
- ------------------------------------------------------------------------------------------------------------
Growth & Income Fund*** $738,064 $0 $0
- ------------------------------------------------------------------------------------------------------------
Growth Fund** $1,365,171 $0 $0
- ------------------------------------------------------------------------------------------------------------
International Growth Fund** $1,097,217 $0 $0
- ------------------------------------------------------------------------------------------------------------
Northwest Fund*** $973,877 $116,742 $0
- ------------------------------------------------------------------------------------------------------------
Emerging Growth Fund** $1,400,644 $0 $0
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* Fiscal year ends 12/31
** Fiscal year ends 6/30
*** Fiscal year ends 10/31
Van Kampen, or its predecessors, has served as the sub-advisor for the
California Municipal, California Insured Intermediate Municipal and Florida
Insured Municipal Funds since each Fund's inception. Janus has served as the
sub-advisor to the Growth Fund since its inception. Capital Guardian Trust
Company ("Capital Trust"), was the sub-advisor to the Emerging Growth Fund at
-------------
its inception. Capital Trust was replaced as the sub-advisor to the Emerging
Growth Fund by Janus in September 1993. J.P. Morgan Investment Management Inc.
("J.P. Morgan") was sub-advisor to the International Growth Fund since its
-----------
inception. J.P. Morgan was replaced as the sub-advisor to the International
Growth Fund by Warburg on April 8, 1996. The subadvisory agreements for the
Growth Fund with Janus, for the International Growth Fund with Warburg, and for
the California Municipal Fund, the Florida Insured Municipal Fund and the
California Insured Intermediate Fund with Van Kampen each took effect on March
20, 1998.
Prior to March 20, 1998 Alliance Capital Management, L.P. served as sub-
advisor to the California Money Fund. Prior to March 20, 1998, Scudder, Stevens
& Clark, Inc. served as sub-advisor to the Short Term High Quality Bond Fund.
Prior to March 20, 1998, BlackRock Financial Management, Inc. served as the sub-
advisor to the Target Maturity 2002 Fund.
For the most recent fiscal year and for the 1996 and 1995 fiscal years, the
Advisor or Sierra Investment Advisors Corporation, as the case may be, paid the
sub-advisors the following sub-advisory fees:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
FEES PAID FEES PAID FEES PAID
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
1997 1996 1995
---- ---- ----
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California Money Fund** $70,156 $77,549 $80,641
- -----------------------------------------------------------------------------------------------------------
Short Term High Quality Bond Fund** $46,004 $78,866 $81,222
- -----------------------------------------------------------------------------------------------------------
Target Maturity 2002 Fund+** $25,000 $25,000 $7,055
- -----------------------------------------------------------------------------------------------------------
</TABLE>
-20-
<PAGE>
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
California Municipal Fund** $637,702 $684,267 $667,343
- -----------------------------------------------------------------------------------------------------------
California Insured Intermediate Municipal $144,771 $143,109 $116,283
Fund**
- -----------------------------------------------------------------------------------------------------------
Florida Insured Municipal Fund** $63,134 $73,371 $72,860
- -----------------------------------------------------------------------------------------------------------
Growth Fund** $1,374,940 $1,149,390 $780,651
- -----------------------------------------------------------------------------------------------------------
International Growth Fund** $880,003 $640,950 $646,343
- -----------------------------------------------------------------------------------------------------------
Emerging Growth Fund** $1,550,235 $1,470,531 $844,497
- -----------------------------------------------------------------------------------------------------------
</TABLE>
+ The Target Maturity 2002 Fund commenced operations on March 20, 1995.
* Fiscal year ends 12/31
** Fiscal year ends 6/30
*** Fiscal year ends 10/31
For the most recent fiscal year and for the 1996 and 1995 fiscal years
Sierra Fund Administration Corporation ("Sierra Administration") served as the
---------------------
administrator to each of the Funds within WM Trust II and each of the Portfolios
and First Data Investor Services Group, Inc. ("First Data") served as the sub-
----------
administrator to each of the Funds and Portfolios within WM Trust II and WM
Strategic Asset Management Portfolios. For each of the Funds within WM Trust I,
Murphey Favre Securities Services, Inc. ("Murphey Favre") furnished necessary
-------------
personnel and other transfer agent services required by the Funds at the rates
of $1.35 per Class A account and $1.45 per Class B account for each of the U.S.
Government Securities, Income, Tax-Exempt Bond, Bond & Stock, Growth & Income
and Northwest Funds. Murphey Favre provided such services to the Money Market
and Tax-Exempt Money Market Funds at rates of $1.85 per account for the first
25,000 accounts, $1.55 per account thereafter for Class A accounts and $1.95 per
account for the first 25,000 Class B accounts and $1.65 per each Class B account
thereafter. Murphey Favre agreed to waive its fees for all Money Market and
Tax-Exempt Money Market Fund accounts with a balance of less than $1,000. WM
Shareholder Services, Inc. (formerly Murphey Favre) will provide transfer agency
and other shareholder services to each of the Funds and Portfolios as of March
20, 1998.
For the most recent fiscal year and for the 1996 and 1995 fiscal years, WM
Trust I, WM Trust II and WM Strategic Asset Management Portfolios paid Murphey
Favre or Sierra Administration, as the case may be, the following administration
fees:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal year ended 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
FEES FEES FEES FEES
PAID FEES WAIVED PAID FEES WAIVED PAID WAIVED
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund* $476,775 $141,274 $411,078 $137,904 $268,265 $0
- ---------------------------------------------------------------------------------------------------------------------------
Tax-Exempt Money Market Fund* $26,688 $1,293 $26,736 $1,628 $32,355 $0
- ---------------------------------------------------------------------------------------------------------------------------
California Money Fund** $140,313 $0 $155,097 $0 $161,282 $50,408
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
-21-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal year ended 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
FEES FEES FEES FEES
PAID FEES WAIVED PAID FEES WAIVED PAID WAIVED
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$107,344 $0 $809,686 $11,630 $189,519 $117,460
Short Term High Quality
Bond Fund**
- ---------------------------------------------------------------------------------------------------------------------------
Target Maturity 2002 Fund+** $10,859 $0 $11,080 $3,805 $1,690 $1,690
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund* $105,444 $0 $146,145 $0 $165,595 $0
- ---------------------------------------------------------------------------------------------------------------------------
Income Fund* $93,522 $0 $114,258 $0 $114,938 $0
- ---------------------------------------------------------------------------------------------------------------------------
Tax-Exempt Bond Fund* $84,547 $0 $102,716 $0 $107,114 $0
- ---------------------------------------------------------------------------------------------------------------------------
California Municipal Fund** $1,312,972 $0 $1,421,633 $0 $1,539,815 $511,663
- ---------------------------------------------------------------------------------------------------------------------------
California Insured Intermediate
Municipal Fund** $253,706 $0 $250,472 $14,288 $203,496 $203,496
- ---------------------------------------------------------------------------------------------------------------------------
Florida Insured Municipal Fund** $110,484 $0 $128,399 $20,472 $127,505 $127,505
- ---------------------------------------------------------------------------------------------------------------------------
Bond & Stock Fund*** $235,936 $0 $222,913 $0 $194,112 $0
- ---------------------------------------------------------------------------------------------------------------------------
Growth & Income Fund*** $245,357 $0 $193,784 $0 $142,648 $0
- ---------------------------------------------------------------------------------------------------------------------------
Growth Fund** $927,458 $0 $769,573 $0 $511,456 $0
- ---------------------------------------------------------------------------------------------------------------------------
International Growth Fund** $616,002 $0 $422,563 $0 $454,734 $0
- ---------------------------------------------------------------------------------------------------------------------------
Northwest Fund*** $347,561 $0 $320,799 $0 $292,144 $0
- ---------------------------------------------------------------------------------------------------------------------------
Emerging Growth Fund** $1,050,164 $0 $994,372 $0 $556,148 $0
- ---------------------------------------------------------------------------------------------------------------------------
Strategic Growth Portfolio++** $122,140 $83,235
- ---------------------------------------------------------------------------------------------------------------------------
Conservative Growth Portfolio++** $866,812 $259,689
- ---------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio++** $628,588 $179,370
- ---------------------------------------------------------------------------------------------------------------------------
Flexible Income Portfolio++** $66,287 $58,740
- ---------------------------------------------------------------------------------------------------------------------------
Income Portfolio++** $61,795 $50,033
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ The Target Maturity 2002 Fund commenced operations on March 20, 1995.
++ The Portfolios commenced operations on July 25, 1996.
* Fiscal year ends 12/31
** Fiscal year ends 6/30
*** Fiscal year ends 10/31
Prior to March 20, 1998 the assets of each of the Funds within WM Trust II
and each of the Portfolios were held under bank custodianship in accordance with
the 1940 Act by Boston Safe Deposit and Trust Company ("Boston Safe"), which is
-----------
located at One Boston Place, Boston, Massachusetts 02108. Prior to March 20,
1998 the assets of each of the Funds within WM Trust I were held under bank
custodianship by Investors Fiduciary Trust Company ("IFTC"), which is located at
----
127 West 10th, Kansas City, Missouri 64105. IFTC is a wholly owned subsidiary
of
-22-
<PAGE>
State Street Bank and Trust Company. As of March 20, 1998 the assets of each of
the Funds and Portfolios within the WM Group of Funds will be held by Boston
Safe.
For the most recent fiscal year and for the 1996 and 1995 fiscal years
Sierra Administration paid First Data the following fees (which do not include
out-of-pocket expenses and certain transaction charges and net of waivers of
fees) for sub-administration and custody services provided to the following
Funds, and the Portfolios paid the following amounts to Boston Safe for custody
services provided to the Portfolios:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30:
1997 1996 1995
---- ---- ----
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California Money Fund $37,649 $40,546 $84,360
- ------------------------------------------------------------------------------------------------
Short Term High Quality Bond Fund $24,633 $41,119 $152,405
- ------------------------------------------------------------------------------------------------
Target Maturity 2002 Fund+ $2,499 $2,485 $692
- ------------------------------------------------------------------------------------------------
California Municipal Fund $302,048 $318,453 $436,521
- ------------------------------------------------------------------------------------------------
California Insured Intermediate Municipal Fund $58,360 $56,128 $54,451
- ------------------------------------------------------------------------------------------------
Florida Insured Municipal Fund $25,408 $28,762 $37,321
- ------------------------------------------------------------------------------------------------
Growth Fund $213,556 $172,561 $312,093
- ------------------------------------------------------------------------------------------------
International Growth Fund $141,808 $94,735 $263,659
- ------------------------------------------------------------------------------------------------
Emerging Growth Fund $241,257 $222,994 $380,867
- ------------------------------------------------------------------------------------------------
Strategic Growth Portfolio++ $1,128
- ------------------------------------------------------------------------------------------------
Conservative Growth Portfolio++ $1,164
- ------------------------------------------------------------------------------------------------
Balanced Portfolio++ $1,257
- ------------------------------------------------------------------------------------------------
Flexible Income Portfolio++ $1,533
- ------------------------------------------------------------------------------------------------
Income Portfolio++ $1,249
- ------------------------------------------------------------------------------------------------
</TABLE>
+ The Target Maturity 2002 Fund commenced operations on March 20, 1995.
++The Portfolios commenced operations on July 25, 1996.
-23-
<PAGE>
COUNSEL AND INDEPENDENT ACCOUNTANTS
Ropes & Gray, located at One International Place, Boston, Massachusetts
02110, and Paine, Hamblen, Coffin, Brooke & Miller, located at 717 West Sprague
Avenue, Suite 1200, Spokane, Washington 99201, serve as co-counsel to the
Trusts.
Deloitte & Touche LLP, 50 Fremont Street, San Francisco, CA 94105, serve
as independent accountants to WM Trust I. Price Waterhouse LLP, 160 Federal
Street, Boston, Massachusetts 02110, serve as independent accountants to WM
Trust II and WM Strategic Asset Management Portfolios for their fiscal year
ending June 30, 1998, and served as such Trusts independent accountants for
prior fiscal years. Following June 30, 1998, Deloitte & Touche LLP will serve
as the independent accountants to WM Trust II and WM Strategic Asset Management
Portfolios. Prior to the current fiscal year of the Funds in WM Trust I,
LeMaster & Daniels PLLC, 601 West Riverside, Suite 700, Spokane, Washington
99201, served as independent accountants to WM Trust I. The financial
statements incorporated by reference into this SAI and the financial highlights
in the Prospectus have been audited by Price Waterhouse LLP or LeMaster &
Daniels PLLC, as the case may be, and have been so included in reliance on such
independent accountants' reports, given on the authority of such firms in
accounting and auditors.
ORGANIZATION OF THE TRUST
WM Trust I is an open-end management investment company, organized as a
Massachusetts business trust pursuant to a Master Trust Agreement dated
September 19, 1997, as amended from time to time (the "WM Trust I Agreement").
--------------------
WM Trust II is organized as a Massachusetts business trust pursuant to a Master
Trust Agreement dated February 22, 1989, as amended from time to time (the "WM
--
Trust II Agreement"). WM Strategic Asset Management Portfolios is an open-end
- ------------------
management investment company, organized as a Massachusetts business trust
pursuant to a Master Trust Agreement dated March 26, 1996, as amended from time
to time (the "WM Strategic Asset Management Portfolios Agreement" and
--------------------------------------------------
collectively, the "Trust Agreements"). In the interest of economy and
----------------
convenience, certificates representing shares in the Trusts are not physically
issued. Boston Safe, the Trusts' Custodian, and Shareholder Services, the
Trusts' Transfer Agent, maintain a record of each shareholder's ownership of
Trust shares. Shares do not have cumulative voting rights, which means that
holders of more than 50% of the shares voting for the election of Trustees can
elect all Trustees. Shares are transferable but have no preemptive, conversion
or subscription rights. Shareholders generally vote by Fund, Portfolio or
Class, except with respect to the election of Trustees and the selection of
independent accountants, for which shareholders of each Trust as a whole vote
together.
-24-
<PAGE>
Under normal circumstances, there will be no meetings of shareholders for
the purpose of electing Trustees unless and until such time as less than a
majority of the Trustees holding office have been elected by shareholders, at
which time the Trustees then in office promptly will call a shareholders'
meeting for the election of Trustees. Under the 1940 Act, shareholders of
record of no less than two-thirds of the outstanding shares of the Trust may
remove a Trustee through a declaration in writing or by vote cast in person or
by proxy at a meeting called for that purpose. Under the Trust Agreements, the
Trustees are required to call a meeting of shareholders for the purpose of
voting upon the question of removal of any such Trustee when requested in
writing to do so by the shareholders of record of not less than 10% of any of a
Trust's outstanding shares.
Massachusetts law provides that shareholders, under certain circumstances,
could be held personally liable for the obligations of a Trust. However, each
Trust Agreement disclaims shareholder liability for acts or obligations of the
Trusts and require that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or a Trustee.
Each Trust Agreement provides for indemnification from the Trust's property for
all losses and expenses of any shareholder held personally liable for the
obligations of the Trust. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Trust would be unable to meet its obligations, a possibility that the
Trusts' management believe is remote. Upon payment of any liability incurred by
a Trust, the shareholder paying the liability will be entitled to reimbursement
from the general assets of such Trust. The Trustees intend to conduct the
operations of each Trust in such a way so as to avoid, to the extent possible,
ultimate liability of the shareholders for liabilities of the Trust.
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus discusses the investment objective or objectives of each of
the Funds and Portfolios and the policies to be employed to achieve such
objectives. This section contains supplemental information concerning the types
of securities and other instruments in which the Funds and Portfolios may
invest, the investment policies and portfolio strategies that the Funds and
Portfolios may utilize and certain risks attendant to such investments, policies
and strategies.
STRATEGIES AVAILABLE TO ALL FUNDS
- ---------------------------------
RATINGS AS INVESTMENT CRITERIA. In general, the ratings of nationally
recognized statistical rating organization ("NRSROs"), such as Moody's Investors
------
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), and Duff and
------- ---
Fitch, represent the opinions of these agencies as to the quality of securities
which they rate. It should be emphasized, however, that such ratings are
relative and subjective and are not absolute standards of quality. These
ratings will be used by the Funds as initial criteria for the selection of
portfolio securities, but the Funds will also rely upon the independent advice
of the Advisor or their respective sub-advisors if such sub-advisor is employed
to evaluate potential investments. The Appendix to this SAI contains further
information concerning the ratings of these services and their significance.
-25-
<PAGE>
To the extent that the rating given by Moody's or S&P for securities may
change as a result of changes in such organizations or their rating systems,
each Fund will attempt to use comparable ratings as standards for its
investments in accordance with the investment policies contained in the
Prospectus and in this SAI.
U.S. GOVERNMENT SECURITIES. U.S. Government Securities include debt
obligations of varying maturities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities. U.S. Government Securities include direct
obligations of the U.S. Treasury, and securities issued or guaranteed by the
Federal Housing Administration, Farmers Home Administration, Export-Import Bank
of the United States, Small Business Administration, Government National
Mortgage Association ("GNMA"), General Services Administration, Central Bank for
----
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit Banks,
-----
Resolution Trust Corporation, Federal Land Banks, Federal National Mortgage
Association ("FNMA"), Maritime Administration, Tennessee Valley Authority,
----
District of Columbia Armory Board and Student Loan Marketing Association.
Direct obligations of the U.S. Treasury include a variety of securities that
differ in their interest rates, maturities and dates of issuance. Because the
U.S. Government is not obligated by law to provide support to an instrumentality
it sponsors, a Fund will invest in obligations issued by such an instrumentality
only if the Advisor or the Fund's sub-advisor determines that the credit risk
with respect to the instrumentality does not make its securities unsuitable for
investment by the Fund.
ILLIQUID INVESTMENTS. These securities generally cannot be sold or disposed
of in the ordinary course of business at approximately the value at which the
Fund has valued the investments within seven days. This may have an adverse
effect upon the Fund's ability to dispose of the particular securities at fair
market value and may limit the Fund's ability to obtain accurate market
quotations for purposes of valuing the securities and calculating the net asset
value of shares of the Fund. The Funds may also purchase securities that are
not registered under the Securities Act of 1933, as amended (the "Securities
----------
Act"), but that can be sold to qualified institutional buyers in accordance with
Rule 144A under that Act ("Rule 144A securities"). Rule 144A securities
--------------------
generally must be sold to other qualified institutional buyers. If a particular
investment in Rule 144A securities is not determined to be liquid, that
investment will be treated as an illiquid security.
COMBINED TRANSACTIONS. As permitted by each Fund's investment polices and
restrictions, the Funds may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple foreign currency
transactions (including forward foreign currency exchange contracts) and any
combination of futures, options and foreign currency transactions (each
separately, a "component" transaction), instead of a single transaction, as part
of a single hedging strategy when, in the opinion of the Advisor or the sub-
advisor, it is in the best interest of the Fund to do so. A combined
transaction, while part of a single hedging strategy, may contain elements of
risk that are present in each of its component transactions.
-26-
<PAGE>
BANK OBLIGATIONS. Domestic commercial banks organized under federal law
are supervised and examined by the Comptroller of the Currency and are required
to be members of the Federal Reserve System and to be insured by the Federal
Deposit Insurance Corporation (the "FDIC"). Domestic banks organized under
----
state law are supervised and examined by state banking authorities but are
members of the Federal Reserve System only if they elect to join. Most state
banks are insured by the FDIC (although such insurance may not be of material
benefit to a Fund, depending upon the principal amount of certificates of
deposit ("CDS") of each state bank held by a Fund) and are subject to federal
---
examination and to a substantial body of federal law and regulation. As a
result of federal and state laws and regulations, domestic branches of domestic
banks are, among other things, generally required to maintain specific levels of
reserves, and are subject to other supervision and regulation designed to
promote financial soundness.
Obligations of foreign branches of U.S. banks and of foreign branches of
foreign banks, such as CDS and time deposits ("TDs"), may be general obligations
---
of the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and governmental regulation. Obligations of
foreign branches of U.S. banks and foreign banks are subject to the risks
associated with investing in foreign securities generally. Foreign branches of
U.S. banks and foreign branches of foreign banks are not necessarily subject to
the same or similar regulatory requirements that apply to U.S. banks, such as
mandatory reserve requirements, loan limitations, and accounting, auditing and
financial recordkeeping requirements. In addition, less information may be
publicly available about a foreign branch of a U.S. bank or about a foreign bank
than about a U.S. bank.
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by federal and state regulation as well as
governmental action in the country in which the foreign bank has its head
office. A U.S. branch of a foreign bank may or may not be subject to reserve
requirements imposed by the Federal Reserve System or by the state in which the
branch is located if the branch is licensed in that state. The deposits of
branches licensed by certain states may not necessarily be insured by the FDIC.
In addition, there may be less publicly available information about a U.S.
branch of a foreign bank than about a U.S. bank.
In view of the foregoing factors associated with the purchase of CDS and
TDs issued by foreign banks and foreign branches of U.S. banks, the Advisor or
the Funds' respective sub-advisors will carefully evaluate such investments on a
case-by-case basis.
A Fund may purchase a CD, TD or bankers' acceptances issued by a bank,
savings and loan association or other banking institution with less than $1
billion in assets (a "Small Issuer Bank Obligation") only so long as the issuer
----------------------------
is a member of the FDIC or supervised by the Office of Thrift Supervision (the
"OTS") and so long as the principal amount of the Small Issuer Bank Obligation
- ----
is fully insured by the FDIC and is no more than $100,000. Each of the Funds
will at any one time hold only one Small Issuer Bank Obligation from any one
issuer.
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<PAGE>
Savings and loan associations whose CDS, TDs and bankers' acceptances may
be purchased by the Funds are supervised by the OTS and insured by the Savings
Association Insurance Fund, which is administered by the FDIC and is backed by
the full faith and credit of the United States Government. As a result, such
savings and loan associations are subject to regulation and examination.
MORTGAGE-BACKED SECURITIES. The mortgage-backed securities in which the
Funds may invest may be classified as governmental or government-related,
depending on the issuer or guarantor. Governmental mortgage-backed securities
are backed by the full faith and credit of the United States. GNMA, the
principal U.S. guarantor of such securities, is a wholly-owned U.S. Government
corporation within the Department of Housing and Urban Development. Government-
related mortgage-backed securities which are not backed by the full faith and
credit of the United States include those issued by FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders, which
is subject to general regulation by the Secretary of Housing and Urban
Development. Pass-through securities issued by FNMA are guaranteed as to timely
payment of principal and interest by FNMA. FHLMC is a corporate instrumentality
of the United States, the stock of which is owned by the Federal Home Loan
Banks. Participation certificates representing interests in mortgages from
FHLMC's national portfolio are guaranteed as to the timely payment of interest
and ultimate collection of principal by FHLMC. In addition, the Income, Bond &
Stock and Growth & Income Funds may invest in commercial mortgage-backed
securities. While these securities generally are structured with one or more
types of credit enhancement, they are issued by non-governmental entities and
are not guaranteed by a governmental agency or instrumentality.
Entities may create mortgage loan pools offering pass-through investments
in addition to those described above. The mortgages underlying these securities
may be alternative mortgage instruments, that is, mortgage instruments in which
principal or interest payments may vary or terms to maturity may be shorter than
previously customary. As new types of mortgage-backed securities are developed
and offered to investors, the Funds will, consistent with their respective
investment objectives and policies, consider making investments in such new
types of securities.
The average maturity of pass-through pools of mortgage-backed securities
varies with the maturities of the underlying mortgage instruments. In addition,
a pool's stated maturity may be shortened by unscheduled payments on the
underlying mortgages. Factors affecting mortgage prepayments include the level
of interest rates, general economic and social conditions, the location of the
mortgaged property and the age of the mortgage. Because prepayment rates of
individual mortgage pools vary widely, it is not possible to accurately predict
the average life of a particular pool. Common industry practice, for example,
is to assume that prepayments will result in a 7- to 9-year average life for
pools of fixed-rate 30-year mortgages. Pools of mortgages with other maturities
of different characteristics will have varying average life assumptions.
REPURCHASE AGREEMENTS. The California Money, Short Term High Quality Bond,
Target Maturity 2002, California Insured Intermediate Municipal, Florida Insured
Municipal
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<PAGE>
Growth and Emerging Growth Funds may invest in repurchase agreements without
limitation. The California Municipal Fund may invest no more than 20%, in the
aggregate, of its assets in repurchase agreements and certain other securities
or instruments, but this 20% limit does not apply to investments for temporary
defensive purposes. The Money Market, Tax-Exempt Money Market, U.S. Government
Securities, Income, Tax-Exempt Bond, Bond & Stock, Growth & Income and Northwest
Funds may enter into repurchase agreements with brokers, dealers and banks to
temporarily invest cash reserves provided that repurchase agreements maturing in
greater than 7 days cannot exceed 10% of each Fund's total assets.
STRATEGIES AVAILABLE TO ALL FUNDS EXCEPT THE MONEY FUNDS AND THE TARGET MATURITY
- --------------------------------------------------------------------------------
2002 FUND AND THE PORTFOLIOS WHERE NOTED
- ----------------------------------------
REVERSE REPURCHASE AGREEMENTS. Each of the Funds other than the Money
Funds (the "Non-Money Funds"), with the exception of the Target Maturity 2002
---------------
Fund, may engage in reverse repurchase agreements, subject to the percentage
restrictions on borrowing, as under the 1940 Act, reverse repurchase agreements
may be considered borrowings by the seller. Accordingly, the California Money,
Short Term High Quality Bond, Target Maturity 2002, California Municipal,
California Insured Intermediate Municipal, Florida Insured, Growth,
International Growth and Emerging Growth Funds and for the WM Strategic Asset
Management Portfolios, borrowing may not exceed 30% of total assets. In
addition, the WM Strategic Asset Management Portfolios may not purchase
additional securities when borrowing exceeds 5% of total assets. The Money
Market, Tax-Exempt Money Market, U. S. Government Securities, Income, Tax-Exempt
Bond, Bond & Stock, Growth & Income and Northwest Funds may borrow up to 5% of
total assets for emergency purposes. In addition, the Money Market and Tax-
Exempt Money Market Funds may borrow up to 33-1/3% of total assets to meet
redemption requests. The Short Term High Quality Bond Fund is prohibited from
borrowing money or entering into reverse repurchase agreements or dollar roll
transactions in the aggregate in excess of 33-1/3% of the Fund's total assets
(after giving effect to such borrowings). A Fund will not engage in reverse
repurchase transactions for the purpose of leverage.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS. In order to
secure yields or prices deemed advantageous at the time, the Tax-Exempt Money
Market Fund and each of the Non-Money Funds may purchase or sell securities on a
when-issued or a delayed-delivery basis. The Funds will enter into a when-issued
transactions for the purpose of acquiring portfolio securities and not for the
purpose of leverage. Due to fluctuations in the value of securities purchased
on a when-issued or a delayed-delivery basis, the yields obtained on such
securities may be higher or lower than the yields available in the market on the
dates when the securities are actually delivered to the Fund. Similarly, the
sale of securities for delayed delivery can involve the risk that the prices
available in the market when delivery is made may actually be higher than those
obtained in the transaction itself. The California Money Fund and the Municipal
Funds may purchase Municipal Obligations offered on a "forward commitment"
basis.
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<PAGE>
When-issued Municipal Obligations may include bonds purchased on a "when,
as and if issued" basis, under which the issuance of the securities depends on
the occurrence of a subsequent event, such as approval of a proposed financing
by appropriate municipal authorities. Any significant commitment of a Fund's
assets to the purchase of securities on a "when, as and if issued" basis may
increase the volatility of the Fund's NAV. No when-issued or forward commitments
will be made by the California Money Fund or a Municipal Fund if, as a result,
more than 20% of the value of the Fund's total assets would be committed to such
transactions.
A segregated account in the name of the Fund consisting of cash or other
liquid assets equal to the amount of when-issued or delayed-delivery commitments
will be established at Boston Safe, the Trusts' Custodians. For the purpose of
determining the adequacy of the securities in the accounts, the deposited
securities will be valued at market or fair value. If the market or fair value
of the securities declines, additional cash or securities will be placed in the
account daily so that the value of the account will equal the amount of such
commitments by the Fund. On the settlement date, the Fund will meet its
obligations from then-available cash flow, the sale of securities held in the
segregated account, the sale of other securities or, although it would not
normally expect to do so, from the sale of securities purchased on a when-issued
or delayed-delivery basis themselves (which may have a greater or lesser value
than the Fund's payment obligations).
STRATEGIC TRANSACTIONS. Subject to the investment limitations and
restrictions for each of the Funds stated elsewhere in this SAI and in the
Prospectus, each of the Funds and Portfolios, except for the Money Funds, may
utilize various other investment strategies as described below to hedge various
market risks, to manage the effective maturity or duration of fixed-income
securities or for other bona fide hedging purposes. No Fund or Portfolio
currently intends to enter into Strategic Transactions, excluding Strategic
Transactions that are "covered" or entered into for bona fide hedging purposes,
that are in the aggregate principal amount in excess of 15% of the Fund's net
assets.
Strategic Transactions have associated risks including possible default by
the other party to the transaction, illiquidity and, to the extent that the
Advisor or the sub-advisor's view as to certain market movements is incorrect,
losses greater than if they had not been used. Use of put and call options,
currency transactions or options and futures transactions entails certain risks
as described herein and the Prospectus in sections relating to such investment
or instruments. Losses resulting from the use of Strategic Transactions would
reduce net asset value, and possibly income, and such losses can be greater than
if the Strategic Transactions had not been utilized.
The Funds and Portfolios may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple foreign
currency transactions (including forward foreign currency exchange contracts)
and any combination of futures, options and foreign currency transactions (each
separately, a "component" transaction), instead of a single transaction, as part
of a single strategy when, in the opinion of the Advisor or the sub-advisor, it
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<PAGE>
is in the best interest of the Fund or Portfolio to do so. A combined
transaction may contain elements of risk that are present in each of its
component transactions.
The use of Strategic Transactions for asset management purposes involves
special considerations and risks. Additional risks pertaining to particular
strategies that make up Strategic Transactions are described in other sections
of this SAI. Successful use of most Strategic Transactions depends upon the
Advisor or the sub-advisor's ability to predict movements of the overall
securities and interest rate markets, which requires different skills than
predicting changes in the prices of individual securities. There can be no
assurance that any particular strategy adopted will succeed. There may be
imperfect correlation, or even no correlation, between price movements of
Strategic Transactions and price movements of the related portfolio or currency
positions. Such a lack of correlation might occur due to factors unrelated to
the value of the related portfolio or currency positions, such as speculative or
other pressures on the markets in which Strategic Transactions are traded.
Strategic Transactions, if successful, can reduce risk of loss or enhance
income, by wholly or partially offsetting the negative effect of, or accurately
predicting, unfavorable price movements or currency fluctuations in the related
portfolio or currency position. However, Strategic Transactions can also reduce
the opportunity for gain by offsetting the positive effect of favorable price
movements in the positions. In addition, a Fund or Portfolio might be required
to maintain assets as "cover," maintain segregated accounts or make margin
payments when it takes positions in Strategic Transactions involving obligations
to third parties (i.e., Strategic Transactions other than purchased options).
These requirements might impair the Fund's ability to sell a portfolio security
or currency position or make an investment at a time when it would otherwise be
favorable to do so, or require that the Fund sell a portfolio security or
currency position at a disadvantageous time.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which a Fund engaging in Strategic Transactions may enter, consistent with the
Fund's investment policies and restrictions, are interest rate, currency and
index swaps and the purchase or sale of related caps, floors and collars. A
Fund would enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio, to protect
against currency fluctuations, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. A Fund will use these transactions as hedges and not
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by a
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A currency swap is an agreement
to exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The
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<PAGE>
purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or value.
A Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Advisor
and the Trusts believe that such obligations do not constitute senior securities
under the 1940 Act and, accordingly, will not treat them as being subject to the
Fund's borrowing restrictions. If there is a default by the counterpart, a Fund
may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principles and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
FUTURES ACTIVITIES. Each of the Funds permitted to engage in Strategic
Transactions and each of the Portfolios may enter into futures contracts and
options on futures contracts that are traded on a U.S. exchange or board of
trade. These investments may be made by the Fund involved for the purpose of
hedging against changes in the value of its portfolio securities due to
anticipated changes in interest rates and market conditions, and for otherwise
permitted Strategic Transactions. In the case of the California Municipal, the
California Insured Intermediate Municipal and the Florida Insured Municipal
Funds, such investments will be made only in unusual circumstances, such as when
that Funds' sub-advisor anticipates an extreme change in interest rates or
market conditions. The ability of a Fund to trade in futures contracts and
options on futures contracts may be materially limited by the requirement of the
Internal Revenue Code of 1986, as amended (the "Code"), applicable to a
----
regulated investment company. See "Taxes" below. See "Strategic Transactions."
FUTURES CONTRACTS. An interest rate futures contract provides for the
future sale by one party and the purchase by the other party of a certain amount
of a specific financial instrument (debt security) at a specified price, date,
time and place. A bond index futures contract is an agreement pursuant to which
two parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index contract was originally
written. No physical delivery of the underlying securities in the index is
made.
The purpose of entering into a futures contract by a Fund is to protect the
Fund from fluctuations in the value of its securities caused by anticipated
changes in interest rates or market conditions without necessarily buying or
selling the securities. For example, if the California
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<PAGE>
Municipal Fund, the California Insured Intermediate Municipal Fund or the
Florida Insured Municipal Fund owns long-term bonds and tax-exempt rates are
expected to increase, these Funds might enter into futures contracts to sell a
municipal bond index. Such a transaction would have much the same effect as the
Fund's selling some of the long-term bonds in its portfolio. If tax-exempt rates
increase as anticipated, the value of certain long-term municipal securities in
the portfolio would decline, but the value of the Fund's futures contracts would
increase at approximately the same rate, thereby keeping the net asset value of
the Fund from declining as much as it otherwise would have. Because the value of
portfolio securities will far exceed the value of the futures contracts entered
into by a Fund, an increase in the value of the futures contract would only
mitigate -- but not totally offset -- the decline in the value of the portfolio.
No consideration is paid or received by a Fund upon entering into a futures
contract. Initially, a Fund would be required to deposit with the broker an
amount of cash or cash equivalents equal to approximately 1% to 10% of the
contract amount (this amount is subject to change by the board of trade on which
the contract is traded and members of such board of trade may charge a higher
amount). This amount is known as "initial margin" and is in its nature the
equivalent of a performance bond or good faith deposit on the contract, which is
returned to a Fund or Portfolio upon termination of the futures contract,
assuming all contractual obligations have been satisfied. Subsequent payments,
known as "variation margin," to and from the broker, will be made daily as the
price of the index or securities underlying the futures contract fluctuates,
making the long and short positions in the futures contract more or less
valuable, a process known as "marking-to-market." At any time prior to the
expiration of a futures contract, a Fund or Portfolio may elect to close the
position by taking an opposite position, which will operate to terminate the
Fund's or Portfolios existing position in the contract.
There are several risks in connection with the use of futures contracts as
a hedging device. Successful use of futures contracts by a Fund is subject to
the ability of the Advisor or the sub-advisor to correctly predict movements in
the direction of interest rates or changes in market conditions. These
predictions involve skills and techniques that may be different from those
involved in the management of the portfolio being hedged. In addition, there
can be no assurance that there will be a correlation between movements in the
price of the underlying index or securities and movements in the price of the
securities which are the subject of the hedge. A decision of whether, when and
how to hedge involves the exercise of skill and judgment, and even a well-
conceived hedge may be unsuccessful to some degree because of market behavior or
unexpected trends in interest rates.
Although the Funds and the Portfolios intend to enter into futures
contracts only if there is an active market for such contracts, there is no
assurance that an active market will exist for the contracts at any particular
time. Most U.S. futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit. It is possible that futures
contract prices would move to the daily limit for
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<PAGE>
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and subjecting some futures traders to
substantial losses. In such event, and in the event of adverse price movements,
a Fund or Portfolio would be required to make daily cash payments of variation
margin. In such circumstances, an increase in the value of the portion of the
portfolio being hedged, if any, may partially or completely offset losses on the
futures contract. However, as described above, there is no guarantee that the
price of the securities being hedged will, in fact, correlate with the price
movements in a futures contract and thus provide an offset to losses on the
futures contract.
To ensure that transactions constitute bona fide hedges in instances
involving the purchase or sale of a futures contract, the Funds or Portfolios
will be required to either (i) segregate sufficient cash or high-grade liquid
assets to cover the outstanding position or (ii) cover the futures contract by
either owning the instruments underlying the futures contract or by holding a
portfolio of securities with characteristics substantially similar to the
underlying index or stock index comprising the futures contract or by holding a
separate option permitting it to purchase or sell the same futures contract.
Because of the imperfect correlation between the movements in the price of
underlying indexes or stock indexes of various futures contracts and the
movement of the price of securities in the Funds' or Portfolio's assets, the
Funds and Portfolios will periodically make adjustments to its index futures
contracts positions to appropriately reflect the relationship between the
underlying portfolio and the indexes. The Funds and Portfolios will not
maintain short positions in index or stock index futures contracts, options
written on index or stock index futures contracts and options written on indexes
or stock indexes, if in the aggregate, the value of these positions exceeds the
current market value of its securities portfolio plus or minus the unrealized
gain or loss on those positions, adjusted for the historical volatility
relationship between the portfolio and the index contracts.
OPTIONS ON FUTURES CONTRACTS. An option on a futures contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in the futures
contract at a specified exercise price at any time prior to the expiration date
of the option. Upon exercise of an option, the delivery of the futures position
by the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account,
which represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract. The potential loss
related to the purchase of an option on futures contracts is limited to the
premium paid for the option (plus transaction costs). Because the price of the
option to the purchaser is fixed at the point of sale, there are no daily cash
payments to reflect changes in the value of the underlying contract. The value
of the option does however change daily and that change would be reflected in
the net asset value of the Fund or Portfolio holding the options.
When engaging in Strategic Transactions, the Funds and the Portfolios may
purchase and write put and call options on futures contracts that are traded on
a U.S. exchange or board of trade as a hedge against changes in the value of its
portfolio securities, and may enter into closing
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transactions with respect to such options to terminate existing positions. There
is no guarantee that such closing transactions can be effected.
There are several risks relating to options on futures contracts. The
ability to establish and close out positions on such options will be subject to
the existence of a liquid market. In addition, the purchase of put or call
options will be based upon predictions as to anticipated interest rate and
market trends by the Advisor or the sub-advisors, which could prove to be
inaccurate. Even if the expectations of the Advisor or the sub-advisors are
correct, there may be an imperfect correlation between the change in the value
of the options and the portfolio securities hedged.
STRATEGIES AVAILABLE TO THE SHORT TERM HIGH QUALITY BOND, BOND & STOCK, GROWTH &
- --------------------------------------------------------------------------------
INCOME, GROWTH, INTERNATIONAL GROWTH, NORTHWEST AND EMERGING GROWTH FUNDS
- -------------------------------------------------------------------------
OPTIONS ON SECURITIES. The Funds referenced above may write covered put
options and covered call options on securities, purchase put and call options on
securities and enter into closing transactions.
Options written by a Fund will normally have expiration dates between one
and nine months from the date written. The exercise price of the options may be
below, equal to or above the market values of the underlying securities at the
times the options are written. In the case of call options, these exercise
prices are referred to as "in-the-money," "at-the-money" and "out-of-the-money,"
respectively. A Fund may write (1) in-the-money call options when the Advisor
or its sub-advisor expects that the price of the underlying security will remain
flat or decline moderately during the option period, (2) at-the-money call
options when the Advisor or its sub-advisor expects that the price of the
underlying security will remain flat or advance moderately during the option
period and (3) out-of-the-money call options when the Advisor or its sub-advisor
expects that the premiums received from writing the call option plus the
appreciation in the market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. In any of the preceding situations, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the-money, at-the-money and in-the-money put options (the
reverse of call options as to the relation of exercise price to market price)
may be utilized in the same market environments as such call options described
above.
So long as the obligation of the Fund as the writer of an option continues,
the Fund may be assigned an exercise notice by the broker-dealer through which
the option was sold, requiring the Fund to deliver, in the case of a call, or
take delivery of, in the case of a put, the underlying security against payment
of the exercise price. This obligation terminates when the option expires or
the Fund effects a closing purchase transaction. The Fund can no longer effect
a closing purchase transaction with respect to an option once it has been
assigned an exercise notice. To secure its obligation to deliver the underlying
security when it writes a call option, or
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to pay for the underlying security when it writes a put option, the Fund will be
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the Options Clearing Corporation (the "OCC") and of
---
the securities exchange on which the option is written.
An option may be closed out only when there exists a secondary market for
an option of the same series on a recognized securities exchange or in the over-
the-counter market. In light of this fact and current trading conditions, the
Fund expects to purchase or write call or put options issued by the OCC, except
that options on U.S. Government Securities may be purchased or written in the
over-the-counter market. Over-the-counter options can be closed out only by
agreement with the primary dealer in the transaction. National securities
exchanges on which options are traded are: The Chicago Board Options Exchange
(CBOE), The Board of Trade of the City of Chicago (CBT), American Stock Exchange
(AMEX), Philadelphia Stock Exchange (PHLX), Pacific Stock Exchange (PSE) and the
New York Stock Exchange (NYSE). Any over-the-counter option written by a Fund
will be with a qualified dealer pursuant to an agreement under which the Fund
may repurchase the option at a formula price at which the Fund would have the
absolute right to repurchase an over-the-counter option it has sold. Such
options will be considered illiquid in an amount equal to the formula price,
less the amount by which the option is "in-the-money." In the event of the
insolvency of the primary dealer, the Fund may not be able to liquidate its
position in over-the-counter options, and the ability of the Fund to enter into
closing purchase transactions on options written by the Fund may result in a
material loss to the Fund.
A Fund may realize a profit or loss upon entering into closing
transactions. In cases where the Fund has written an option, it will realize a
profit if the cost of the closing purchase transaction is less than the premium
received upon writing the original option, and will incur a loss if the cost of
the closing purchase transaction exceeds the premium received upon writing the
original option. Similarly, when the Fund has purchased an option and engages
in a closing sale transaction, the Fund will realize a profit or loss to the
extent that the amount received in the closing sale transaction is more or less
than the premium the Fund initially paid for the original option plus the
related transaction costs.
To facilitate closing transactions, a Fund will generally purchase or write
only those options for which the Advisor or its sub-advisor believes there is an
active secondary market although there is no assurance that sufficient trading
interest to create a liquid secondary market on a securities exchange will exist
for any particular option or at any particular time, and for some options no
such secondary market may exist. A liquid secondary market in an option may
cease to exist for a variety of reasons. In the past, for example, higher than
anticipated trading activity or order flow, or other unforeseen events, have at
times rendered certain of the facilities of the OCC and the securities exchanges
inadequate and resulted in the institution of special procedures, such as
trading rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
events, or events that may otherwise interfere with the timely execution of
customers' orders, will not recur. In such
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events, it might not be possible to effect closing transactions in particular
options. If as a covered call option writer the Fund is unable to effect a
closing purchase transaction in a secondary market, it will not be able to sell
the underlying security until the option expires or it delivers the underlying
security upon exercise.
Securities exchanges have established limitations governing the maximum
number of calls and puts of each class which may be held or written, or
exercised within certain time periods, by an investor or group of investors
acting in concert (regardless of whether the options are written on the same or
different securities exchanges or are held, written or exercised in one or more
accounts or through one or more brokers). It is possible that the particular
Fund and other clients of the Advisor and its sub-advisors and certain of their
affiliates may be considered to be such a group. A securities exchange may
order the liquidation of positions found to be in violation of these limits and
it may impose certain other sanctions.
In the case of options written by a Fund that are deemed covered by virtue
of the Fund's holding convertible or exchangeable preferred stock or debt
securities, the time required to convert or exchange and obtain physical
delivery of the underlying security with respect to which the Fund has written
options may exceed the time within which the Fund must make delivery in
accordance with an exercise notice. In these instances, the Fund may purchase
or temporarily borrow the underlying securities for purposes of physical
delivery. By so doing, the Fund will not bear any market risk, since the Fund
will have the absolute right to receive from the issuer of the underlying
security an equal number of shares to replace the borrowed stock. The Fund may
however, incur additional transaction costs or interest expenses in connection
with any such purchase or borrowing.
Additional risks exist with respect to mortgage-backed U.S. Government
Securities for which the Fund may write covered call options. If a Fund writes
covered call options on a mortgage-backed security, the security that it holds
as cover may, because of scheduled amortization of unscheduled prepayments,
cease to be sufficient cover. In such an instance, the Fund will compensate by
purchasing an appropriate additional amount of mortgage-backed securities.
STRATEGIES AVAILABLE TO THE SHORT TERM HIGH QUALITY BOND, CALIFORNIA INSURED
- ----------------------------------------------------------------------------
INTERMEDIATE MUNICIPAL, GROWTH, INTERNATIONAL GROWTH AND EMERGING GROWTH FUNDS
- ------------------------------------------------------------------------------
OPTIONS ON SECURITIES INDEXES. The Funds set forth above may also purchase
and sell call and put options on securities indexes. Such options give the
holder the right to receive a cash settlement during the term of the option
based upon the difference between the exercise price and the value of the index.
Options on securities indexes entail risks in addition to the risks of
options on securities. Because exchange trading of options on securities indexes
is relatively new, the absence of a liquid secondary market to close out an
option position is more likely to occur, although the
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<PAGE>
Fund generally will purchase or write such an option only if the Advisor or its
sub-advisor believes the option can be closed out.
Use of options on securities indexes also entails the risk that trading in
such options may be interrupted if trading in certain securities included in the
index is interrupted. The Fund will not purchase such options unless the
Advisor or its sub-advisor believes the market is sufficiently developed for the
risk of trading in such options to be no greater than the risk of trading in
options on securities.
Price movements in the Fund's portfolio may not correlate precisely with
movements in the level of an index and, therefore, the use of options on
securities indexes cannot serve as a complete hedge. Because options on
securities indexes require settlement in cash, the Fund may be forced to
liquidate portfolio securities to meet settlement obligations.
STRATEGIES AVAILABLE TO THE SHORT TERM HIGH QUALITY BOND, INCOME, GROWTH,
- -------------------------------------------------------------------------
INTERNATIONAL GROWTH AND EMERGING GROWTH FUNDS
- ----------------------------------------------
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The Funds set forth above may
engage in currency exchange transactions to protect against uncertainty in the
level of future exchange rates. The Funds' dealings in forward currency
exchange contracts will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or
sale of forward foreign currency with respect to specific receivables or
payables of the Fund generally arising in connection with the purchase or sale
of its portfolio securities. Position hedging is the sale of forward foreign
currency with respect to portfolio security positions denominated or quoted in
such foreign currency. A Fund may not position hedge with respect to a
particular currency to an extent greater than the aggregate market value (at the
time of making such sale) of the securities held in its portfolio denominated or
quoted in or currently convertible into that particular currency.
If a Fund enters into a position hedging transaction, the Trusts' Custodian
will, except in circumstances where segregated accounts are not required by the
1940 Act and the rules adopted thereunder, place cash or other liquid assets in
a segregated account for the Fund in an amount at least equal to the value of
the Fund's total assets committed to the consummation of the forward contract.
For each forward foreign currency exchange contract that is used to hedge a
securities position denominated in a foreign currency, but for which the hedging
position no longer provides, in the opinion of the Advisor or the sub-advisor,
sufficient protection to consider the contract to be a hedge, the Fund maintains
with the Custodian a segregated account of cash or other liquid assets in an
amount at least equal to the portion of the contract that is no longer
sufficiently covered by such hedge. If the value of the securities placed in
the segregated account declines, additional cash or securities will be placed in
the account so that the value of the account will equal the amount of the Fund's
unhedged exposure (in the case of securities denominated in a foreign currency)
or commitment with respect to the contract. Hedging
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<PAGE>
transactions may be made from any foreign currency into U.S. dollars or into
other appropriate currencies.
At or before the maturity of a forward contract, a Fund may either sell a
portfolio security and make delivery of the currency, or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
amount of the currency that it is obligated to deliver. If the Fund retains the
portfolio security and engages in an offsetting transaction, the Fund, at the
time of execution of the offsetting transaction, will incur a gain or a loss to
the extent that movement has occurred in forward contract prices. Should forward
prices decline during the period between the Fund's entering into a forward
contract for the sale of currency and the date it enters into an offsetting
contract for the purchase of the currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The cost to a Fund of engaging in currency transactions with factors such
as, the currency involved, the length of the contract period and the prevailing
market conditions. Because transactions in currency exchange are usually
conducted on a principal basis, no fees or commissions are involved. The use of
forward currency contracts does not eliminate fluctuations in the underlying
prices of the securities, but it does establish a rate of exchange that can be
achieved in the future. In addition, forward currency contracts may limit the
risk of loss due to a decline in the value of the hedged currency increase.
If a devaluation of a currency is generally anticipated, a Fund may not be
able to contract to sell the currency at a price above the devaluation level it
anticipates.
The Funds, in addition, may combine forward currency exchange contracts
with investments in securities denominated in other currencies in an attempt to
create a combined investment position, the overall performance of which will be
similar to that of a security denominated in a Fund's underlying currency. For
instance, a Fund could purchase a U.S. dollar-denominated security and at the
same time enter into a forward currency exchange contract to exchange U.S.
dollars for its underlying currency at a future date. By matching the amount of
U.S. dollars to be exchanged with the anticipated value of the U.S. dollar-
denominated security, the Fund may be able to "lock in" the foreign currency
value of the security and adopt a synthetic investment position whereby the
Fund's overall investment return from the combined position is similar to the
return from purchasing a foreign currency-denominated instrument.
There is a risk in adopting a synthetic investment position. It is
impossible to forecast with absolute precision what the market value of a
particular security will be at any given time. If the value of a security
denominated in the U.S. dollar or other foreign currency is not exactly matched
with a Fund's obligation under a forward currency exchange contract on the date
of maturity, the Fund may be exposed to some risk of loss from fluctuations in
that currency.
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<PAGE>
Although the Advisor and each sub-advisor will attempt to hold such mismatching
to a minimum, there can be no assurance that the Advisor or the Fund's sub-
advisor will be able to do so.
Although the foreign currency market is not believed to be necessarily more
volatile than the market in other commodities, there is less protection against
defaults in the forward trading to currencies than there is in trading such
currencies on an exchange because such forward contracts are not guaranteed by
an exchange or clearing house. The Commodity Futures Trading Commission has
indicated that it may assert jurisdiction over forward contracts in foreign
currencies and attempt to prohibit certain entities from engaging in such
transactions. In the event that such prohibition included the Fund, it would
cease trading such contracts. Cessation of trading might adversely affect the
performance of a Fund.
STRATEGIES AVAILABLE TO SHORT TERM HIGH QUALITY BOND, CALIFORNIA INSURED
- ------------------------------------------------------------------------
INTERMEDIATE MUNICIPAL, GROWTH, INTERNATIONAL GROWTH AND EMERGING GROWTH FUNDS
- ------------------------------------------------------------------------------
OPTIONS ON FOREIGN CURRENCIES. The Funds set forth above may purchase and
write put and call options on foreign currencies for the purpose of hedging
against declines in the U.S. dollar value of foreign currency-denominated
portfolio securities and against increases in the U.S. dollar cost of such
securities to be acquired. Such hedging includes cross hedging and proxy
hedging where the options to buy or sell currencies involve other currencies
besides the U.S. dollar. As one example, a decline in the U.S. dollar value of
a foreign currency in which securities are denominated will reduce the U.S.
dollar value of the securities, even if their value in the foreign currency
remains constant. To protect against diminutions in the value of securities
held by a Fund in a particular foreign currency, the Fund may purchase put
options on the foreign currency. If the value of the currency does decline, the
Fund will have the right to sell the currency for a fixed amount in U.S. dollars
and will thereby offset, in whole or in part, the adverse effect on its
portfolio that otherwise would have resulted. When an increase in the U.S.
dollar value of a currency in which securities to be acquired are denominated is
projected, thereby increasing the cost of the securities, the Fund conversely
may purchase call options on the currency. The purchase of such options could
offset, at least partially, the effects of the adverse movements in exchange
rates. As in the case of other types of options, however, the benefit to the
Fund deriving from purchases of foreign currency options will be reduced by the
amount of the premium and related transaction costs. In addition, if currency
exchange rates do not move in the direction, or to the extent anticipated, the
Fund could sustain losses on transactions in foreign currency options that would
require it to forego a portion or all of the benefits of advantageous changes in
the rates.
The Funds may also write covered call options on foreign currencies for the
types of hedging purposes described above. As one example, when the Advisor or
Fund's sub-advisor anticipate a decline in the U.S. dollar value of foreign
currency-denominated securities due to adverse fluctuations in exchange rates it
could, instead of purchasing a put option, write a covered call option on the
relevant currency. If the expected decline occurs, the option will most
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<PAGE>
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received. As in the case of other
types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the Fund would be required to purchase or sell the underlying
currency at a loss that may not be offset-by the amount of the premium. Through
the writing of options on foreign currencies, the Fund may also be required to
forego all or a portion of the benefits that might otherwise have been obtained
from favorable movements in exchange rates.
A call option written on a foreign currency by a Fund is "covered" if the
Fund owns the underlying foreign currency covered by the call or has an absolute
and immediate right to acquire the foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by Boston Safe, the Fund's Custodian, upon conversion or exchange of other
foreign currency held by the Fund. A call option also is covered if the Fund
has a call on the same foreign currency and in the same principal amount as the
call written when the exercise price of the call held (1) is equal to or less
than the exercise price of the call written or (2) is greater than the exercise
price of the call written if the difference is maintained by the Fund in cash,
U.S. Government Securities and other high-grade liquid debt securities in a
segregated account with Boston Safe.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on those
exchanges. As a result, many of the projections provided to traders on
organized exchanges will be available with respect to those transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the OCC, thereby reducing the
risk of counterpart default. Further, a liquid secondary market in options
traded on a national securities exchange may exist, potentially permitting the
Fund to liquidate open positions at a profit prior to their exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options are
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exercise and settlement of exchange-traded
foreign currency options must be made exclusively through the OCC, which has
established banking relationships in applicable foreign countries for this
purpose. As a result, the OCC may, if it determines that foreign governmental
restrictions or taxes would prevent the orderly settlement of foreign currency
option exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as technical
changes in the mechanics of delivery of currency, the fixing of dollar
settlement prices or prohibitions on exercise.
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<PAGE>
SPECIAL CONSIDERATIONS RELATING TO THE BOND & STOCK, GROWTH, INTERNATIONAL
- --------------------------------------------------------------------------
GROWTH AND EMERGING GROWTH FUNDS
- ---------------------------------
SECURITIES IN DEVELOPING COUNTRIES. Although most of the investments of
the Bond & Stock, Growth, International Growth and Emerging Growth Funds are
made in securities of companies in (or governments of) developed countries, the
Funds set forth above may invest in securities of companies in (or governments
of) developing or emerging countries (sometimes referred to as "emerging
markets") as well. The Growth and Emerging Growth Funds may invest up to 5% of
their total assets in emerging markets and the International Growth Fund may
invest up to 5% of total assets in emerging markets and up to 5% of total assets
in any one country. A developing or emerging country is generally considered to
be a country that is in the initial stages of its industrialization cycle.
Investing in the equity and fixed-income markets of developing or emerging
countries involves exposure to economic structures that are generally less
diverse and mature, and to political systems that can be expected to have less
stability than those of developed countries. Historical experience indicates
that the markets of developing or emerging countries have been more volatile
than the markets of the more mature economies of developed countries; however,
such markets often have provided higher rates of return to investors.
Price movements in the Fund's portfolio may not correlate precisely with
movements in the level of an index and, therefore, the use of options on
securities indexes cannot serve as a complete hedge. Because options on
securities indexes require settlement in cash, the Fund may be forced to
liquidate portfolio securities to meet settlement obligations.
STRATEGY AVAILABLE TO THE CALIFORNIA MONEY, SHORT TERM HIGH QUALITY BOND,
- -------------------------------------------------------------------------
INCOME, CALIFORNIA INSURED INTERMEDIATE MUNICIPAL, GROWTH, INTERNATIONAL GROWTH
- -------------------------------------------------------------------------------
AND EMERGING GROWTH FUNDS
- -------------------------
LENDING OF PORTFOLIO SECURITIES. Each of the Funds will adhere to the
following conditions whenever its portfolio securities are loaned: (1) the Fund
must receive at least 100% cash collateral or equivalent securities from the
borrower; (2) the borrower must increase the collateral whenever the market
value of the securities rises above the level of the collateral; (3) the Fund
must be able to terminate the loan at any time; (4) the Fund must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions on the loaned securities and any increase in market value; (5) the
Fund may pay only reasonable custodian fees in connection with the loan; and (6)
voting rights on the loaned securities may pass to the borrower, provided that
if a material event adversely affecting the investment occurs, the Trusts' Board
of Trustees must terminate the loan and regain the right to vote the securities.
From time to time, the Funds may pay a part of the interest earned from the
investment of the collateral received for securities loaned to the borrower
and/or a third party that is unaffiliated with the Trust and that is acting as a
"finder". The Funds will not lend more than 20% of their respective total
assets.
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<PAGE>
STRATEGIES AVAILABLE TO THE TAX-EXEMPT MONEY MARKET, CALIFORNIA MONEY, TAX-
- --------------------------------------------------------------------------
EXEMPT BOND, CALIFORNIA MUNICIPAL, CALIFORNIA INSURED INTERMEDIATE MUNICIPAL AND
- --------------------------------------------------------------------------------
FLORIDA INSURED MUNICIPAL FUNDS
- -------------------------------
MUNICIPAL SECURITIES. Municipal Securities are securities, the interest on
which qualifies for exclusion from gross income for federal income tax purposes
in the opinion of bond counsel to the issuer. The three principal
classifications of Municipal Securities are Municipal Bonds, Municipal
Commercial Paper and Municipal Notes.
Municipal Bonds, which generally have a maturity of more than one year when
issued, have two principal classifications: General Obligation Bonds and
Revenue Bonds. An AMT-Subject Bond is a particular kind of Revenue Bond. The
classifications of Municipal Bonds and AMT-Subject Bonds are discussed below.
1. GENERAL OBLIGATION BONDS. The proceeds of these obligations are used
to finance a wide range of public projects, including construction or
improvement of schools, highways and roads, and water and sewer
systems. General Obligation Bonds are secured by the issuer's pledge
of its faith, credit and taxing power for the payment of principal and
interest.
2. REVENUE BONDS. Revenue Bonds are issued to finance a wide variety of
capital projects, including; electric, gas, water and sewer systems;
highways, bridges and tunnels; port and airport facilities; colleges
and universities; and hospitals. The principal security for a Revenue
Bond is generally the net revenues derived from a particular facility,
group of facilities, or, in some cases, the proceeds of a special
excise or other specific revenue source. Although the principal
security behind these bonds may vary, many provide additional security
in the form of a debt service reserve fund which may be used to make
principal and interest payments on the issuer's obligations. Some
authorities provide further security in the form of a state's ability
(without obligation) to make up deficiencies in the debt service
reserve fund.
3. AMT-SUBJECT BONDS. AMT-Subject Bonds are considered Municipal Bonds if
the interest paid on them is excluded from gross income for federal
income tax purposes and if they are issued by or on behalf of public
authorities to raise money to finance, for example, privately operated
manufacturing or housing facilities, publicly operated airport, dock,
wharf, or mass-commuting facilities. The payment of the principal and
interest on these bonds is dependent solely on the ability of the
facility's user to meet its financial obligations and the pledge, if
any, of real and personal property so financed as security for such
payment.
California has a variety of Special Tax District debt obligations, such as
Act 1911 and 1915 Special Assessment Bonds, Mello-Roos Bonds and Tax Allocation
bonds, which are
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defined as property-backed general obligation substitutes (because the
assessments for improvement do not require voter approval). The proceeds from
the issuance of these essential purpose Special Tax District Bonds are generally
used to develop raw land. As a result, these issues tend not to carry a credit
rating.
MUNICIPAL COMMERCIAL PAPER issues typically represent short-term,
unsecured, negotiable promissory notes. These obligations are issued by
agencies of state and local governments to finance seasonal working capital
needs of municipalities or to provide interim construction financing, and are
paid from general revenues of municipalities or are refinanced with long-term
debt. In most cases, Municipal Commercial Paper is backed by letters of credit,
lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or other institutions.
MUNICIPAL NOTES generally are used to provide for short-term capital needs
and generally have maturities of one year or less. Municipal Notes include:
1. TAX ANTICIPATION NOTES. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenues, such as income, sales,
use and business taxes and are payable from these specific future
taxes.
2. REVENUE ANTICIPATION NOTES. Revenue Anticipation Notes are issued in
expectation of receipt of other kinds of revenue, such as federal
revenues available under the Federal Revenue Sharing Program.
3. BOND ANTICIPATION NOTES. Bond Anticipation Notes are issued to provide
interim financing until long-term financing can be arranged. In most
cases, the long-term bonds provide the money for the repayment of the
notes.
4. CONSTRUCTION LOAN NOTES. Construction Loan Notes are sold to provide
construction financing. Permanent financing, the proceeds of which are
applied to the payment of Construction Loan Notes, is sometimes
provided by a commitment by GNMA to purchase the loan, accompanied by
a commitment by the Federal Housing Administration to insure mortgage
advances thereunder. In other instances, permanent financing is
provided by commitments of banks to purchase the loan. A Municipal
Fund will only purchase Construction Loan Notes that are subject to
GNMA or bank purchase commitments.
From time to time, proposals to restrict or eliminate the federal income
tax exemption for interest on Municipal Securities have been introduced before
Congress. Similar proposals may be introduced in the future. In addition, the
Code currently provides that small issue private activity bonds will not be tax-
exempt if the bonds are issued after December 31, 1986 and the proceeds are used
to finance projects other than manufacturing facilities. Interest on certain
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<PAGE>
small issue private activity bonds used to finance manufacturing facilities will
not be tax-exempt if such bonds are issued after December 31, 1989. If these
deadlines are not extended, or, if a proposal to restrict or eliminate the
federal tax exemption for interest on Municipal Securities were enacted, the
availability of Municipal Securities for investment by the Municipal Funds would
be adversely affected. In such event, the Municipal Funds would reevaluate their
respective investment objectives and policies and submit possible changes in the
structure of the Funds for the consideration of shareholders.
PARTICIPATION INTERESTS. The Municipal Funds may invest in participation
interests purchased from banks in floating rate or variable rate municipal
securities (such as AMT-Subject Bonds) owned by banks. A participation interest
gives the purchaser an undivided interest in the municipal security in the
proportion that the relevant Fund's participation interest bears to the total
principal amount of the municipal security and provides a demand repurchase
feature. Each participation is backed by an irrevocable letter of credit or
guarantee of a bank that meets the prescribed quality standards of the Fund. A
Fund has the right to sell the instrument back to the issuing bank or draw on
the letter of credit on demand for all or any part of the Fund's participation
interest in the municipal security, plus accrued interest. Banks will retain or
receive a service fee, letter of credit fee and a fee for issuing repurchase
commitments in an amount equal to the excess of the interest paid on the
municipal securities over the negotiated yield at which the instruments were
purchased by the Fund. Participation interests in the form to be purchased by
the Fund are new instruments, and no ruling of the Internal Revenue Service has
been secured relating to their tax-exempt status. The Funds intend to purchase
participation interests based upon opinions of counsel to the issuer to the
effect that income from them is tax-exempt to the Fund.
STAND-BY COMMITMENTS. The Municipal Funds may acquire stand-by commitments
with respect to municipal securities held in their respective portfolios. Under
a stand-by commitment, a broker-dealer, dealer or bank would agree to purchase,
at the relevant Funds' option, a specified municipal security at a specified
price. Thus, a stand-by commitment may be viewed as the equivalent of a "put"
option acquired by a Fund with respect to a particular municipal security held
in the Fund's portfolio.
The amount payable to a Fund upon its exercise of a stand-by commitment
normally would be (1) the acquisition cost of the municipal security (excluding
any accrued interest that the Fund paid on the acquisition), less any amortized
market premium or plus any amortized market or original issue discount during
the period the Fund owned the security, plus, (2) all interest accrued on the
security since the last interest payment date during the period the security was
owned by the Fund. Absent unusual circumstances, the Fund would value the
underlying municipal security at amortized cost. As a result, the amount
payable by the broker-dealer, dealer or bank during the time a stand-by
commitment is exercisable would be substantially the same as the value of the
underlying municipal security.
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<PAGE>
A Fund's right to exercise a stand-by commitment would be unconditional and
unqualified. Although a Fund could not transfer a stand-by commitment, it could
sell the underlying municipal security to a third party at any time. It is
expected that stand-by commitments generally will be available to the Funds
without the payment of any direct or indirect consideration. The Funds may,
however, pay for stand-by commitments if such action is deemed necessary. In
any event, the total amount paid for outstanding stand-by commitments held in a
Fund's portfolio would not exceed 1/2 of 1% of the value of a Fund's total
assets calculated immediately after each stand-by commitment is acquired.
The Funds intend to enter into stand-by commitments only with broker-
dealers, dealers or banks that the Advisor or their sub-advisor believes present
minimum credit risks. A Fund's ability to exercise a stand-by commitment will
depend upon the ability of the issuing institution to pay for the underlying
securities at the time the stand-by commitment is exercised. The credit of each
institution issuing a stand-by commitment to a Fund will be evaluated on an
ongoing basis by the Advisor or its sub-advisor in accordance with procedures
established by the Board of Trustees.
A Fund intends to acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its right thereunder for
trading purposes. The acquisition of a stand-by commitment would not affect the
valuation of the underlying municipal security. Each stand-by commitment will
be valued at zero in determining net asset value. Should a Fund pay directly or
indirectly for a stand-by commitment, its costs will be reflected in realized
gain or loss when the commitment is exercised or expires. The maturity of a
municipal security purchased by a Fund will not be considered shortened by any
stand-by commitment to which the obligation is subject. Thus, stand-by
commitments will not affect the dollar-weighted average maturity of a Fund's
portfolio.
STRATEGIES AVAILABLE TO PRIME INCOME FUND
- -----------------------------------------
As described in the Prospectus, each of the Conservative Growth, Balanced,
Flexible Income and Income Portfolios may invest in the Prime Income Fund as
well as the underlying Funds.
CERTAIN CHARACTERISTICS OF SENIOR LOAN INTERESTS. Senior Loans generally
are arranged through private negotiations between a Borrower and several
financial institutions ("Lenders") represented in each case by one or more such
-------
Lenders acting as agent ("Agent") of the several Lenders. On behalf of the
-----
several Lenders, the Agent, which is frequently the commercial bank or other
entity that originates the Senior Loan and the person that invites other parties
to join the lending syndicate, will be primarily responsible for negotiating the
loan agreement or agreements ("Loan Agreement") that establish the relative
--------------
terms, conditions and rights of the Borrower and the several Lenders.
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<PAGE>
The Prime Income Fund will invest in participations ("Participations") in
--------------
Senior Loans, will purchase assignments ("Assignments") of portions of Senior
-----------
Loans from third parties and may act as one of the group of Lenders originating
a Senior Loan (an "Original Lender").
---------------
It is anticipated that the proceeds of the Senior Loans in which the Prime
Income Fund will acquire interests primarily will be used to finance leveraged
buyouts, recapitalizations, mergers, acquisitions, stock repurchases, and, to a
lesser extent, to finance internal growth and for other corporate purposes of
Borrowers. The Prime Income Fund currently does not intend to acquire interests
in Senior Loans the proceeds of which would be used primarily to finance
construction or real estate development projects. Senior Loans have the most
senior position in a Borrower's capital structure, although some Senior Loans
may hold an equal ranking with other senior securities of the Borrower. The
capital structure of Borrowers may include Senior Loans, senior and junior
subordinated debt (which may include "junk bonds"), preferred stock and common
stock issued by the Borrower, typically in descending order of seniority with
respect to claims on the Borrower's assets. Senior Loans generally are secured
by specific collateral, which may include guarantees. In connection with the
acquisition of collateralized Senior Loans, the Prime Income Fund may invest up
to 5% of its total assets in Senior Loans which are not secured by any
collateral. Such unsecured Senior Loans would constitute an interim financing
intended to be refinanced through, in whole or in part, a collateralized Senior
Loan. In the event that the Prime Income Fund invests a portion of its assets
in Senior Loans that are not secured by specific collateral, the Prime Income
Fund will not enjoy the benefits associated with collateralization with respect
to such Senior Loans and such Senior Loans may pose a grater risk of nonpayment
of interest or loss of principal than do collateralized Senior Loans.
As discussed below, the Prime Income Fund may also acquire warrants and
equity securities issued by the Borrower or its affiliates as part of a package
of investments in the Borrower or its affiliates. Warrants and equity
securities will not be treated as Senior Loans and thus assets invested in such
securities will not count toward the 80% of the Prime Income Fund's total assets
that normally will be invested in Senior Loans. The Prime Income Fund will
acquire such interests in unsecured Senior Loans, warrants and equity securities
only as an incident to the intended purchase of interests in collateralized
Senior Loans. Loan Agreements may also include various restrictive covenants
designed to limit the activities of the Borrower in an effort to protect the
right of the Lenders to receive timely payments of interest on and repayment of
principal of the Senior Loans. In order to borrow money pursuant to
collateralized Senior Loans, a Borrower will frequently, for the term of the
Senior Loan, pledge as collateral assets, including but not limited to,
trademarks, accounts receivable, inventory, buildings, real estate, franchises,
and common and preferred stock in its subsidiaries. In addition, in the case of
some Senior Loans, there may be additional collateral pledged in the form of
guarantees by and/or securities of affiliates of the Borrowers. In certain
instances, a Senior Loan may be secured only by stock in the Borrower or its
subsidiaries. Such collateral may consist of assets that may not be readily
liquidated, and there is no assurance that the liquidation of such assets would
satisfy fully a Borrower's obligations under a Senior Loan.
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<PAGE>
Restrictive covenants may include mandatory prepayment provisions arising
from excess cash flows and typically include restrictions on dividend payments,
specific mandatory minimum financial ratios, limits on total debt and other
financial tests. Breach of such covenants, if not waived by the Lenders, is
generally an event of default under the applicable Loan Agreement and may give
the Lenders the right to accelerate principal and interest payments. The
Advisor will consider the terms of such restrictive covenants in deciding
whether to invest in Senior Loans for the Prime Income Fund's portfolio. When
the Prime Income Fund holds a Participation in a Senior Loan it may not have the
right to vote to waive enforcement of any restrictive covenant breached by a
Borrower. Lenders voting in connection with a potential waiver of a restrictive
covenant may have interests different from those of the Prime Income Fund and
such Lenders may not consider the interests of the Prime Income Fund in
connection with their votes.
Senior Loans in which the Prime Income Fund will invest generally pay
interest at rates which are periodically redetermined by reference to a base
lending rate plus a premium. These base lending rates are generally the prime
rate offered by a Major United States Bank "Prime Rate", LIBOR, the CD rate or
other base lending rates used by commercial lenders. As a result Lenders will
pay more than the Prime Rate to the Prime Income Fund on their Senior Loans. The
Prime Rate quoted by a major U.S. bank is the interest rate at which such bank
is willing to lend U.S. dollars to its most creditworthy borrowers. LIBOR, as
provided for in Loan Agreements, is an average of the interest rates quoted by
several designated banks as the rates at which such banks would offer to pay
interest to major financial institutional depositors in the London interbank
market on U.S. dollar-denominated deposits for a specified period of time. The
CD rate, as generally provided for in Loan Agreements, is the average rate paid
on large certificates of deposit traded in the secondary market.
At least 80% of the Prime Income Fund's total assets normally will be
invested in Senior Loans. In normal market conditions, at least 65% of the
Prime Income Fund's assets will be invested in Senior Loans which, at the time
of the Prime Income Fund's initial investment in such Senior Loans, provide the
Prime Income Fund with a rate of return which was at least equal to the Prime
Rate existing on the date of such initial investments. The Prime Income Fund is
not subject to any restrictions with respect to the maturity of Senior Loans
held in its portfolio. It is currently anticipated that the Prime Income Fund's
assets invested in Senior Loans will consist of Senior Loans with stated
maturities of between three and seven years, inclusive, and with rates of
interest which are periodically reset with reset periods typically ranging from
30 days to one year. Investment in Senior Loans with longer interest rate
redetermination periods may increase fluctuations in the Prime Income Fund's net
asset value as a result of changes in interest rates. The Senior Loans in the
Prime Income Fund's portfolio will at all times have a dollar-weighted average
time until the next interest rate redetermination of 90 days or less. As a
result, as short-term interest rates increase, interest payable to the Prime
Income Fund from its investments in Senior Loans should increase, and as short-
term interest rates decrease, interest payable to the Prime Income Fund from its
investments in Senior Loans should decrease. The amount of time required to
pass before the Prime Income Fund will realize the effects of changing short-
term market interest rates on its portfolio will vary with the dollar-weighted
average time until the
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next interest rate redetermination on the Senior Loans in the Prime Income
Fund's portfolio. The Prime Income Fund may utilize certain investment practices
to, among other things, shorten the effective interest rate redetermination
period of Senior Loans in its portfolio. In such event, the Prime Income Fund
will consider such shortened period to be the interest rate redetermination
period of the Senior Loan; provided, however, that the Prime Income Fund will
not invest in Senior Loans which permit the Borrower to select an interest rate
redetermination period in excess of one year. Because most Senior Loans in the
Prime Income Fund's portfolio will be subject to mandatory and/or optional
prepayment and there may be significant economic incentives for a Borrower to
prepay its loans, prepayments of Senior Loans in the Prime Income Fund's
portfolio may occur. Accordingly, the actual remaining maturity of the Prime
Income Fund's portfolio invested in Senior Loans may vary substantially from the
average stated maturity of the Senior Loans held in the Prime Income Fund's
portfolio. As a result of expected prepayments from time to time of Senior Loans
in the Prime Income Fund's portfolio, the Prime Income Fund estimates that the
actual average maturity of the Senior Loans held in its portfolio will be
approximately 18-24 months.
When interest rates decline, the value of a portfolio invested in fixed-
rate obligations can be expected to rise. Conversely, when interest rates rise,
the value of a portfolio invested in fixed-rate obligations can be expected to
decline. Although the Prime Income Fund's net asset value will vary, the Prime
Income Fund's management expects the Prime Income Fund's policy of acquiring
interests in floating or variable rate Senior Loans to minimize fluctuations in
net asset value as a result of changes in interest rates. Accordingly, the
Prime Income Fund's management expects the value of the Prime Income Fund's
portfolio to fluctuate significantly less than a portfolio of fixed-rate, longer
term obligations as a result of interest rate changes. However, changes in
prevailing interest rates can be expected to cause some fluctuation in the Prime
Income Fund's net asset value. In addition to changes in interest rates,
changes in the credit quality of Borrowers will also affect the Prime Interest
Fund's net asset value. Further, a serious deterioration in the credit quality
of a Borrower could cause a prolonged or permanent decrease in the Prime Income
Fund's net asset value.
Senior Loans generally are not rated by nationally recognized statistical
rating organizations. Because of the collateralized and/or guaranteed nature of
most Senior Loans, the Prime Income Fund and the Advisor believe that ratings of
other securities issued by a Borrower do not necessarily reflect adequately the
relative quality of a Borrower's Senior Loans. Therefore, although the Advisor
may consider such ratings in determining whether to invest in a particular
Senior Loan, the Advisor is not required to consider such ratings and such
ratings will not be the determinative factor in the Advisor's analysis. The
Prime Income Fund may invest in Senior Loans, the Borrowers with respect to
which have outstanding debt securities which are rated below investment grade by
a nationally recognized statistical rating organization or are unrated but of
comparable quality to such securities. Such Borrowers are more likely to
experience difficulty in meeting payment obligations under such debt and other
subordinated obligations. These difficulties could detract from the Borrower's
perceived creditworthiness or its ability to obtain financing to cover short-
term cash flow needs and may force the Borrower
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into bankruptcy or other forms of credit restrictions. The Prime Income Fund
will invest only in those Senior Loans with respect to which the Borrower, in
the opinion of the Advisor, demonstrates certain of the following
characteristics: sufficient cash flow to service debt; adequate liquidity,
successful operating history; strong competitive position; experienced
management; and, with respect to collateralized Senior Loans, collateral;
coverage that equals or exceeds the outstanding principal amount of the Senior
Loan. In addition, the Advisor will consider, and may rely in part, on the
analyses performed by the Agent and other Lenders, including such persons'
determinations with respect to collateral securing a Senior Loan.
The Prime Income Fund may invest up to 100% of its assets in
Participations. The selling Lenders and other persons interpositioned between
such Lenders and the Prime Income Fund with respect to such Participations will
likely conduct their principal business activities in the banking, finance and
financial services industries. Although, as discussed below, the Prime Income
Fund has taken measures which it believes significantly reduce its exposure to
any risks incident to such policy, the Prime Income Fund may be more susceptible
than an investment company without such a policy to any single economic,
political or regulatory occurrence affecting such industries. Persons engaged
in such industries may be more susceptible than are persons engaged in some
other industry to, among other things, fluctuations in interest rates, changes
in the Federal Open Market Committee's monetary policy, governmental regulations
concerning such industries and concerning capital raising activities generally
and fluctuations in the financial markets generally.
Loan Agreements typically provide for the termination of the Agent's agency
status in the event that it fails to act as required under the relevant Loan
Agreement, becomes insolvent, enters FDIC receivership, or if not FDIC insured,
enters into bankruptcy. Should such an Agent, Lender or assignor with respect
to an Assignment interpositioned between the Prime Income Fund and the Borrower
become insolvent or enter FDIC receivership or bankruptcy, any interest in the
Senior Loan of such person and any loan payment held by such person for the
benefit of the Prime Income Fund should not be included in such person's estate.
If, however, any such amount were included in such person's estate, the Prime
Income Fund would incur certain costs and delays in realizing payment or could
suffer a loss of principal and/or interest. In such event, the Prime Income
Fund could experience a decrease in net asset value.
The Prime Income Fund may be required to pay and may receive various fees
and commissions in connection with purchasing, selling and holding interests in
Senior Loans. The fees normally paid by Borrowers may include three types:
facility fees, commitment fees and prepayment penalties. Facility fees are paid
to Lenders upon origination of a Senior Loan. Commitment fees are paid to
Lenders on an ongoing basis based upon the undrawn portion committed by the
Lenders of the underlying Senior Loan. Lenders may receive prepayment penalties
when a Borrower prepays all or part of a Senior Loan. The Prime Income Fund
will receive these fees directly from the Borrower if the Prime Income Fund is
an Original Lender, or, in the case of commitment fees and prepayment penalties,
if the Prime Income Fund acquires an interest in a Senior Loan by way of
Assignment. Whether or not the Prime Income Fund
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receives a facility fee from the Lender in the case of an Assignment, or any
fees in the case of a Participation, depends upon negotiations between the Prime
Income Fund and the Lender selling such interests. When the Prime Income Fund is
an assignee, it may be required to pay a fee, or forgo a portion of interest and
any fees payable to it, to the Lender selling the Assignment. Occasionally, the
assignor will pay a fee to the assignee based on the portion of the principal
amount of the Senior Loan which is being assigned. A Lender selling a
Participation to the Prime Income Fund may deduct a portion of the interest and
any fees payable to the Prime Income Fund as an administrative fee prior to
payment thereof to the Prime Income Fund. The Prime Income Fund may be required
to pay over or pass along to a purchaser of an interest in a Senior Loan from
the Prime Income Fund a portion of any fees that the Prime Income Fund would
otherwise be entitled to.
Pursuant to the relevant Loan Agreement, a Borrower may be required in
certain circumstances, and may have the option at any time, to prepay the
principal amount of a Senior Loan, often without incurring a prepayment penalty.
Because the interest rates on Senior Loans are periodically redetermined at
relatively short intervals, the Prime Income Fund and the Advisor believe that
the prepayment of, and subsequent reinvestment by the Prime Income Fund in,
Senior Loans will not have a materially adverse impact on the yield on the Prime
Income Fund's portfolio and may have a beneficial impact on income due to
receipt of prepayment penalties, if any, and any facility fees earned in
connection with reinvestment.
A Lender may have certain obligations pursuant to a Loan Agreement, which
may include the obligation to make additional loans in certain circumstances.
The Prime Income Fund currently intends to reserve against such contingent
obligations by segregating sufficient investments in high quality short-term,
liquid investments. The Prime Income Fund will not purchase interests in Senior
Loans that would require the Prime Income Fund to make any such additional loans
if such additional loan commitments would exceed 20% of the Prime Income Fund's
total assets or would cause the Prime Income Fund to fail to meet the
diversification requirements set forth under the heading "Investment
Restrictions."
During normal market conditions, the Prime Income Fund may invest up to 20%
of its total assets in (i) high quality, short-term debt securities with
remaining maturities of one year or less (including assets maintained by the
Prime Income Fund as a reserve against any additional loan commitments) and (ii)
warrants, equity securities and, in certain limited circumstances discussed
above, junior debt securities acquired in connection with the Prime Income
Fund's investments in Senior Loans. If the Advisor determines that market
conditions temporarily warrant a defensive investment policy, the Prime Income
Fund may invest, subject to its ability to liquidate its relatively illiquid
portfolio of Senior Loans, up to 100% of its assets in cash and such high
quality, short-term debt securities. The Prime Income Fund will acquire such
warrants and equity securities only as an incident to the purchase or intended
purchase of interests in collateralized Senior Loans. Warrants and equity
securities will not qualify as assets required to be maintained as a reserve
against additional loan commitments. Although the Prime Income Fund generally
will acquire interests in warrants and equity securities only when the Advisor
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believes that the relative value being given by the Prime Income Fund in
exchange for such interests is substantially outweighed by the potential value
of such instruments, investment in warrants and equity securities entail certain
risks in addition to those associated with investments in Senior Loans. Warrants
and equity securities have a subordinate claim on a Borrower's assets as
compared with debt securities, and junior debt securities have a subordinate
claim on such assets as compared with Senior Loans. As such, the values of
warrants and equity securities generally are more dependent on the financial
condition of the Borrower and less dependent on fluctuations in interest rates
than are the values of many debt securities. The values of warrants, equity
securities and junior debt securities may be more volatile than those of Senior
Loans and thus may have an adverse impact on the ability of the Prime Income
Fund to minimize fluctuations in its net asset value.
SPECIAL RISK CONSIDERATIONS. On behalf of the several Lenders, the Agent
generally will be required to administer and manage the Senior Loan and, with
respect to collateralized Senior Loans, to service or monitor the collateral.
In this connection, the valuation of assets pledged as collateral will reflect
market value and the Agent may rely on independent appraisals as to the value of
specific collateral. The Agent, however, may not obtain an independent
appraisal as to the value of assets pledged as collateral in all cases. The
Prime Income Fund normally will rely primarily on the Agent (where the Prime
Income Fund is an Original Lender or owns an Assignment) or the selling Lender
(where the Prime Income Fund owns a Participation) to collect principal of and
interest on a Senior Loan. Furthermore, the Prime Income Fund usually will rely
on the Agent (where the Prime Income Fund is an Original Lender or owns an
Assignment) or the selling Lender (where the Prime Income Fund owns a
Participation) to monitor compliance by the Borrower with the restrictive
covenants in the Loan Agreement and notify the Prime Income Fund of any adverse
change in the Borrower's financial condition or any declaration of insolvency.
Collateralized Senior Loans will frequently be secured by all assets of the
Borrower that qualify as collateral, which may include common stock of the
Borrower or its subsidiaries. Additionally, the terms of the Loan Agreement may
require the Borrower to pledge additional collateral to secure the Senior Loan,
and enable the Agent, upon proper authorization of the Lenders, to take
possession of and liquidate the collateral and to distribute the liquidation
proceeds pro rata among the Lenders. If the terms of a Senior Loan do not
require the Borrower to pledge additional collateral in the event of a decline
in the value of the original collateral, the Prime Income Fund will be exposed
to the risk that the value of the collateral will not at all times equal or
exceed the amount of the Borrower's obligations under the Senior Loan. Lenders
that have sold Participation interests in such Senior Loan will distribute
liquidation proceeds received by the Lenders pro rata among the holders of such
Participations. The Advisor will also monitor these aspects of the Prime Income
Fund's investments and, where the Prime Income Fund is an Original Lender or
owns an Assignment, will be directly involved with the Agent and the other
Lenders regarding the exercise of credit remedies. Senior Loans, like other
corporate debt obligations, are subject to the risk of non-payment of scheduled
interest or principal. Such non-payment would result in a reduction of income
to the Prime Income Fund, a reduction in the value of the Senior Loan
experiencing non-payment and a potential decrease in the net asset value of the
Prime Income Fund. Although, with respect to collateralized Senior Loans, the
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Prime Income Fund generally will invest only in Senior Loans that the Advisor
believes are secured by specific collateral which may include guarantees, the
value of which exceeds the principal amount of the Senior Loan at the time of
initial investment, there can be no assurance that the liquidation of any such
collateral would satisfy the Borrower's obligation in the event of non-payment
of scheduled interest or principal payments, or that such collateral could be
readily liquidated. In the event of bankruptcy of a Borrower, the Prime Income
Fund could experience delays or limitations with respect to its ability to
realize the benefits of the collateral securing a Senior Loan. To the extent
that a Senior Loan is collateralized by stock in the Borrower or its
subsidiaries, such stock may lose all or substantially all of its value in the
event of bankruptcy of the Borrower. The Agent generally is responsible for
determining that the Lenders have obtained a perfected security interest in the
collateral securing the Senior Loan. In the event that the Prime Income Fund
does not believe that a perfected security interest has been obtained with
respect to a collateralized Senior Loan, the Prime Income Fund will only obtain
an interest in such Senior Loan if the Agent is a Designated Custodian. Some
Senior Loans in which the Prime Income Fund may invest are subject to the risk
that a court, pursuant to fraudulent conveyance or other similar laws, could
subordinate such Senior Loans to presently existing or future indebtedness of
the Borrower or take other action detrimental to the holders of Senior Loans,
such as the Prime Income Fund, including, under certain circumstances,
invalidating such Senior Loans. Lenders commonly have certain obligations
pursuant to the Loan Agreement, which may include the obligation to make
additional loans or release collateral in certain circumstances.
Senior Loans in which the Prime Income Fund will invest generally will not
be rated by a nationally recognized statistical rating organization, will not be
registered with the SEC or any state securities commission and will not be
listed on any national securities exchange. Although the Prime Income Fund will
generally have access to financial and other information made available to the
Lenders in connection with Senior Loans, the amount of public information
available with respect to Senior Loans will generally be less extensive than
that available for rated, registered and/or exchange listing securities. As a
result, the performance of the Prime Income Fund and its ability to meet its
investment objective is more dependent on the analytical ability of the Advisor
than would be the case for an investment company that invests primarily in
rated, registered and/or exchange listed securities.
Senior Loans are, at present, not readily marketable and may be subject to
restrictions on resale. Interests in Senior Loans generally are not listed on
any national securities exchange or automated quotation system and no regular
market has developed for such interests. Any secondary market purchases and
sales of Senior Loans generally are conducted in private transactions between
buyers and sellers. Senior Loans are thus relatively illiquid, which
illiquidity may impair the Prime Income Fund's ability to realize the full value
of its assets in the event of a voluntary or involuntary liquidation of such
assets. Liquidity relates to the ability of the Prime Income Fund to sell an
investment in a timely manner. The market for relatively illiquid securities
tends to be more volatile than the market for more liquid securities. The Prime
Income Fund has no limitation on the amount of its assets which may be invested
in securities
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which are not readily marketable or are subject to restrictions on resale. The
substantial portion of the Prime Income Fund's assets invested in relatively
illiquid Senior Loan interests may restrict the ability of the Prime Income Fund
to dispose of its investments in Senior Loans in a timely fashion and at a fair
price, and could result in capital losses to the Prime Income Fund and holders
of Common Shares. However, many of the Senior Loans in which the Prime Income
Fund expects to purchase interests are of a relatively large principal amount
and are held by a relatively large number of owners which should, in the
Advisor's opinion, enhance the relative liquidity of such interests. The risks
associated with illiquidity are particularly acute in situations where the Prime
Income Fund's operations require cash, such as when the Prime Income Fund
tenders for its Common Shares, and may result in the Prime Income Fund borrowing
to meet short-term cash requirements.
To the extent that legislation or state or federal regulators that regulate
certain financial institutions impose additional requirements or restrictions
with respect to the ability of such institutions to make loans in connection
with highly leveraged transactions, the availability of Senior Loan interests
for investment by the Prime Income Fund may be adversely affected. In addition,
such requirements or restrictions may reduce or eliminate sources of financing
for certain Borrowers. Further, to the extent that legislation or federal or
state regulators that regulate certain financial institutions require such
institutions to dispose of Senior Loan interests relating to highly leveraged
transactions or subject such Senior Loan interests to increase regulatory
scrutiny, such financial institutions may determine to sell such Senior Loan
interests in a manner that results in a price which, in the opinion of the
Advisor, is not indicative of fair value. Were the Prime Income Fund to attempt
to sell a Senior Loan interest at a time when a financial institution was
engaging in such a sale with respect to such Senior Loan interest, the price at
which the Prime Income Fund could consummate such a sale might be adversely
affected.
The Prime Income Fund may use various investment practices that involve
special considerations including engaging in interest rate and other hedging
transactions, lending its portfolio securities, entering into when-issued and
delayed delivery transactions and entering into repurchase and reverse
repurchase agreements. For further discussion of these practices and associated
special considerations, see "Investment Practices and Special Risks" in the
Prospectus.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
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The ability of issuers to pay interest on, and repay principal of,
California municipal securities ("California Municipal Securities") may be
-------------------------------
affected by (1) amendments to the California Constitution and related statutes
that limit the taxing and spending authority of California government entities,
(2) voter initiatives, (3) a wide variety of California laws and regulations,
including laws related to the operation of health care institutions and laws
related to secured interests in real property and (4) the general financial
condition of the State of California. The following information constitutes only
a brief summary, and is not intended as a complete description. The information
has been drawn, in some cases by excerpt, from official statements
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relating to securities offerings of the State of California available as of the
date of this Statement of Additional Information. While the information has not
been independently verified by the California Money, California Municipal Fund,
or California Insured Intermediate Municipal Fund (the "California Fund"), the
---------------
California Fund has no reason to believe that such information is not correct in
all material respects.
AMENDMENTS TO THE CALIFORNIA CONSTITUTION AND RELATED STATUTES. Certain of
the California Municipal Securities may be obligations of issuers who rely in
whole or in part on ad valorem real property taxes as a source of revenue. On
June 6, 1978, California voters approved an amendment to the California
Constitution known as Proposition 13, which added Article XIIIA to the
California Constitution. The effect of Article XIIIA is to limit ad valorem
taxes on real property, and to restrict the ability of taxing entities to
increase real property tax revenues. On November 7, 1978, California voters
approved Proposition 8, on June 3, 1986, California voters approved Proposition
46, and on November 4, 1986, California voters approved Proposition 62, all of
which amended Article XIIIA.
Section 1 of Article XIIIA limits the maximum ad valorem tax on real
property to 1% of full cash value (as defined in Section 2), to be collected by
the counties and apportioned according to law; provided that the 1% limitation
does not apply to ad valorem taxes or special assessments to pay the interest
and redemption charges on (i) any indebtedness approved by the voters prior to
July 1, 1978, or (ii) any bonded indebtedness for the acquisition or improvement
of real property approved on or after July 1, 1978, by two-thirds of the votes
cast by the voters voting on the proposition. Section 2 of Article XIIIA
defines "full cash value" to mean "the County Assessor's valuation of real
property as shown on the 1975/76 tax bill under 'full cash value' or,
thereafter, the appraised value of real property when purchased, newly
constructed, or a change in ownership has occurred after the 1975 assessment."
The "full cash value" may be adjusted annually to reflect inflation at a rate
not to exceed 2% per year, or reduction in the consumer price index or
comparable local data, or reduced in the event of declining property value
caused by damage, destruction or other factors. The California State Board of
Equalization has adopted regulations, binding on county assessors, interpreting
the meanings of "change in ownership" and "new construction" for purposes of
determining full cash value of property under Article XIIIA.
Legislation enacted by the California Legislature to implement Article
XIIIA (Statutes of 1978, Chapter 292, as amended) provides that notwithstanding
any other law, local agencies may not levy any ad valorem property tax except to
pay debt service on indebtedness approved by the voters prior to July 1, 1978,
and that each county will levy the maximum tax permitted by Article XIIIA of
$4.00 per $100 assessed valuation (based on the former practice of using 25%,
instead of 100%, of full cash value as the assessed value for tax purposes).
The legislation further provided that, for the 1978/79 fiscal year only, the tax
levied by each county was to be apportioned among all taxing agencies within the
county in proportion to their average share of taxes levied in certain previous
years. The apportionment of property taxes in fiscal years after 1978/79 has
been revised pursuant to Statutes of 1979, Chapter 282, which provides relief
funds
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from State moneys beginning in fiscal year 1979/80 and is designed to provide a
permanent system for sharing State taxes and budget funds with local agencies.
Under Chapter 282, cities and counties receive more of the remaining property
tax revenues collected under Proposition 13 instead of direct State aid. School
districts receive a correspondingly reduced amount of property taxes, but
receive compensation directly from the State and are given additional relief.
Chapter 282 does not affect the derivation of the base levy ($4.00 per $100 of
assessed valuation) and the bonded debt tax rate.
On November 6, 1979, an initiative known as "Proposition 9" or the "Gann
Initiative" was approved by the California voters, which added Article XIIIB to
the California Constitution. In June 1990, Article XIIIB was amended by the
voters through their adoption of Proposition 111. Under Article XIIIB, State and
local governmental entities have an annual "appropriations limit" and are not
allowed to spend certain moneys called "appropriations subject to limitation" in
an amount higher than the "appropriations limit." Article XIIIB does not affect
the appropriation of moneys which are excluded from the definition of
"appropriations subject to limitation," including debt service on indebtedness
existing or authorized as of January 1, 1979, or bonded indebtedness
subsequently approved by the voters. Furthermore, in 1990, Article XIII B was
amended to exclude from the appropriations limit all "qualified outlay projects,
as defined by the Legislature," from proceeds of taxes. In general terms, the
"appropriations limit" is required to be based on certain 1978/79 expenditures,
and is to be tested over consecutive two-year periods to reflect changes in
consumer prices, population and certain services provided by these entities.
Article XIIIB also provides that if these entities' revenues in any year exceed
the amounts permitted to be spent, the excess is to be returned by revising the
tax rates or fee schedules over the subsequent two years.
Article XIIIB, like XIIIA, may require further interpretation by both the
Legislature and the courts to determine its applicability to specific situations
involving the State and local taxing authorities. Depending upon the
interpretation, Article XIIIB may limit significantly a governmental entity's
ability to budget sufficient funds to meet debt service on bonds and other
obligations.
On November 5, 1996, the voters of the State approved Proposition 218,
known as the "Right to Vote on Taxes Act." Proposition 218 adds Articles XIII C
and XIII D to the California Constitution and contains a number of interrelated
provisions affecting the ability of governmental entities to levy and collect
both existing and future taxes, assessments, fees and charges. Proposition 218
became effective on November 6, 1996. Senate Bill 919 was enacted to provide
implementation provisions for Proposition 218 and became effective on July 1,
1997. The interpretation and application of Proposition 218 will ultimately be
determined by the courts with respect to a number of the matters discussed
below, and it is not possible at this time to predict with certainty the outcome
of such determination.
Proposition 218 (Article XIII C) requires that all new local taxes be
submitted to the electorate before they become effective. Taxes for general
governmental purposes of cities and counties require a majority vote and taxes
for specific purposes, even if deposited in the governmental entity's general
fund, require a two-thirds vote. Further, any general purpose tax
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which the governmental entity imposed, extended or increased without voter
approval after December 31, 1994 may continue to be imposed only if approved by
a majority vote in an election which must be held within two years of November
5, 1996.
Proposition 218 (Article XIII D) also adds several provisions making it
generally more difficult for local agencies to levy and maintain fees, charges,
and assessments for municipal services and programs. These provisions include,
among other things, (i) a prohibition against assessments which exceed the
reasonable cost of the proportional special benefit conferred on a parcel, (ii)
a requirement that assessments must confer a "special benefit," as defined in
Article XIII D, over and above any general benefits conferred, (iii) a majority
protest procedure for assessments which involves the mailing of notice and a
ballot to the record owner of each affected parcel, a public hearing and the
tabulation of ballots weighted according to the proportional financial
obligation of the affected party, and (iv) a prohibition against fees and
charges which are used for general governmental services, including police, fire
or library services, where the service is available to the public at large in
substantially the same manner as it is to property owners.
Proposition 218 (Article XIII C) also removes limitations on the initiative
power in matters of reducing or repealing local taxes, assessments, fees or
charges.
VOTER INITIATIVES. On June 3, 1986, California voters approved Proposition
46, which added an additional exemption to the 1% tax limitation imposed by
Article XIII A. Under this amendment to Article XIII A, local governments and
school districts may increase the property tax rate above 1% for the period
necessary to retire new general obligation bonds, if two-thirds of those voting
in a local election approve the issuance of such bonds and the money raised
through the sale of the bonds is used exclusively to purchase or improve real
property.
On November 8, 1988, voters of the State approved Proposition 98, a
combined initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act." Proposition 98 changed State
funding of public education below the university level and the operation of the
State Appropriations Limit, primarily by guaranteeing K-14 schools a minimum
share of General Fund revenues. Under Proposition 98 (as modified by
Proposition 111, which was enacted on June 5, 1990), K-14 schools are guaranteed
the greater of (a) in general, a fixed percent of General Fund revenues ("Test
1"), (b) the amount appropriated to K-14 schools in the prior year, adjusted for
changes in the cost of living (measured as in Article XIII B by reference to
State per capita personal income) and enrollment ("Test 2"), or (c) a third
test, which would replace "Test 2" in any year when the percentage growth in per
capita General Fund revenues from the prior year plus one half of one percent is
less than the percentage growth in State per capita personal income ("Test 3").
Under "Test 3," schools would receive the amount appropriated in the prior year
adjusted for changes in enrollment and per capita General Fund revenues, plus an
additional small adjustment factor. If "Test 3" is used in any year, the
difference between "Test 3" and "Test 2" would become a "credit" to schools
which would be the basis of payments in future years when per capita General
Fund revenue growth
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exceeds per capita personal income growth. Legislation adopted prior to the end
of the 1988-89 Fiscal Year, implementing Proposition 98, determined the K-14
schools' funding guarantee under Test 1 to be 40.3 percent of the General Fund
Tax revenues, based on 1986-87 appropriations. However, that percent would be
adjusted to account for redirection of local property taxes, since such a
subsequent redirection directly affects the share of General Fund revenues to
schools.
Proposition 98 permits the Legislature by two-thirds vote of both houses,
with the Governor's concurrence, to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit to
K-14 schools.
During the recent recession, General Fund revenues for several years were
less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements, and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,220 from Fiscal Year 1991-
92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called California Teachers' Association v.
-----------------------------------
Gould, which challenged the validity of these off-budget loans. The oral
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settlement of this case, finalized in July 1996, provides that both the State
and K-14 schools share in the repayment of prior years' emergency loans to
schools. Of the total $1.76 billion in loans, the State will repay $935 million
by forgiveness of the amount owed, while schools will repay $825 million. The
State share of the repayment will be reflected as an appropriation above the
current Proposition 98 base calculation. The schools' share of the repayment
will count as appropriations that count toward satisfying the Proposition 98
guarantee, or from "below" the current base. Repayments are spread over the
eight-year period of 1994-95 through 2001-02 to mitigate any adverse fiscal
impact. Substantially increased State General Fund revenues, above initial
budget projections in the 1994-95 and thereafter have resulted or will result in
retroactive increases in Proposition 98 appropriations from subsequent fiscal
year's budgets. Because of the State's increasing revenues, per-pupil funding
at the K-12 level has increased by about 22% from the level in place from 1991-
92 through 1993-94, and is estimated at about $5,150 per ADA in 1997-98. A
significant amount of the "extra" Proposition 98 monies in the last few years
have been allocated to special programs, most particularly an initiative to
allow each classroom from grades K-3 to have no more than 20 pupils by the end
of the 1997-98 school year. There are also new initiatives for reading skills
and to upgrade technology in high schools.
On November 4, 1986, California voters approved an initiative statute known
as Proposition 62. This initiative (i) requires that any tax for general
governmental purposes imposed by local governments be approved by resolution or
ordinance adopted by a two-thirds
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vote of the governmental entity's legislative body and by a majority vote of the
electorate of the governmental entity, (ii) requires that any special tax
(defined as taxes levied for other than general governmental purposes) imposed
by a local governmental entity be approved by a two-thirds vote of the voters
within that jurisdiction, (iii) restricts the use of revenues from a special tax
to the purposes or for the service for which the special tax was imposed, (iv)
prohibits the imposition of ad valorem taxes on real property by local
governmental entities except as permitted by Article XIIIA, (v) prohibits the
imposition of transaction taxes and sales taxes on the sale of real property by
local governments, (vi) requires that any tax imposed by a local government on
or after August 1, 1985 be ratified by a majority vote of the electorate within
two years of the adoption of the initiative or be terminated by November 15,
1988, (vii) requires that, in the event a local government fails to comply with
the provisions of this measure, a reduction in the amount of property tax
revenue allocated to such local government occurs in an amount equal to the
revenues received by such entity attributable to the tax levied in violation of
the initiative, and (viii) permits these provisions to be amended exclusively by
the voters of the State of California.
On September 28, 1995, the California Supreme Court, in the case of Santa
Clara County Local Transportation Authority v. Guardino, upheld the
constitutionality of Proposition 62. In this case, the court held that a
county-wide sales tax of one-half of one percent was a special tax that, under
Section 53722 of the Government Code, required a two-thirds vote approval.
Because the tax received an affirmative vote of only 54.1%, this special tax was
found to be invalid.
On November 8, 1988, California voters approved Proposition 87.
Proposition 87 amended Article XVI, Section 16, of the California Constitution
by authorizing the California Legislature to prohibit redevelopment agencies
from receiving any of the property tax revenue raised by increased property tax
rates levied to repay bonded indebtedness of local governments which is approved
by voters on or after January 1, 1989. It is not possible to predict whether
the California Legislature will enact such a prohibition nor is it possible to
predict the impact of Proposition 87 on redevelopment agencies and their ability
to make payments on outstanding debt obligations.
OTHER RELEVANT CALIFORNIA LAWS. A wide variety of California laws and
regulations may affect, directly or indirectly, the payment of interest on, or
the repayment of the principal of, California Municipal Securities in which the
California Money, California Municipal and California Insured Intermediate
Municipal Funds may invest. The impact of such laws and regulations on
particular California Municipal Securities may vary depending upon numerous
factors including, among others, the particular type of Municipal Security
involved, the public purpose funded by the Municipal Security and the nature and
extent of insurance or other security for payment of principal and interest on
the Municipal Security. For example, California Municipal Securities which are
payable only from the revenues derived from a particular facility may be
adversely affected by California laws or regulations which make it more
difficult for the particular facility to generate revenues sufficient to pay
such interest and principal, including,
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among others, laws and regulations which limit the amount of fees, rates or
other charges which may be imposed for use of the facility or which increase
competition among facilities of that type or which limit or otherwise have the
effect of reducing the use of such facilities generally, thereby reducing the
revenues generated by the particular facility. California Municipal Securities,
the payment of interest and principal on which is insured in whole or in part by
a California governmentally created fund, may be adversely affected by
California laws or regulations which restrict the aggregate insurance proceeds
available for payment of principal and interest in the event of a default on
such Municipal Securities.
Certain California Municipal Securities in which the California Money,
California Municipal and California Insured Intermediate Funds may invest may be
obligations that are payable solely from the revenues of health care
institutions. Certain provisions under California law may adversely affect such
revenues and, consequently, payment on those California Municipal Securities.
The Federally sponsored Medicaid program for health care services to
eligible welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reductions or limitations may be
imposed in payment for services rendered to Medi-Cal beneficiaries in the
future.
Under this approach, in most geographical areas of California, only those
hospitals which enter into a Medi-Cal contract with the State of California will
be paid for non- emergency acute inpatient services rendered to Medi-Cal
beneficiaries. The State may also terminate these contracts without notice
under certain circumstances and is obligated to make contractual payments only
to the extent the California legislature appropriates adequate funding therefor.
In February 1987, the Governor of the State of California announced that
payments to Medi-Cal providers for certain services (not including hospital
acute inpatient services) would be decreased by ten percent through June 1987.
However, a federal district court issued a preliminary injunction preventing
application of any cuts until a trial on the merits can be held. If the
injunction is deemed to have been granted improperly, the State of California
would be entitled to recapture the payment differential for the intended
reduction period. It is not possible to predict at this time whether any
decreases will ultimately be implemented.
California enacted legislation in 1982 that authorizes private health plans
and insurers to contract directly with hospitals for services to beneficiaries
on negotiated terms. Some insurers
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have introduced plans known as "preferred provider organizations" ("PPOs"),
----
which offer financial incentives for subscribers who use only the hospitals
which contract with the plan. Under an exclusive provider plan, which includes
most health maintenance organizations ("HMOs"), private payors limit coverage to
----
those services provided by selected hospitals. Discounts offered to HMOs and
PPOs may result in payment to the contracting hospital of less than actual cost
and the volume of patients directed to a hospital under an HMO or PPO contract
may vary significantly from projections. Often, HMO or PPO contracts are
enforceable for a stated term, regardless of provider losses or of bankruptcy of
the respective HMO or PPO. It is expected that failure to execute and maintain
such PPO and HMO contracts would reduce a hospital's patient base or gross
revenues. Conversely, participation may maintain or increase the patient base,
but may result in reduced payment and lower net income to the contracting
hospitals.
These Debt Obligations may also be insured by the State of California
pursuant to an insurance program implemented by the Office of Statewide Health
Planning and Development for health facility construction loans. If a default
occurs on insured Debt Obligations, the State Treasurer will issue debentures
payable out of a reserve fund established under the insurance program or will
pay principal and interest on an unaccelerated basis from unappropriated State
funds. At the request of the Office of Statewide Health Planning and
Development, Arthur D. Little, Inc. prepared a study in December, 1983, to
evaluate the adequacy of the reserve fund established under the insurance
program and based on certain formulations and assumptions found the reserve fund
substantially underfunded. In September of 1986, Arthur D. Little, Inc.
prepared an update of the study and concluded that an additional 10% reserve be
established for "multi-level" facilities. For the balance of the reserve fund,
the update recommended maintaining the current reserve calculation method. In
March of 1990, Arthur D. Little, Inc. prepared a further review of the study and
recommended that separate reserves continue to be established for "multi-level"
facilities at a reserve level consistent with those that would be required by an
insurance company.
Certain California Municipal Securities in which the California Money,
California Municipal and California Insured Intermediate Municipal Funds may
invest may be obligations which are secured in whole or in part by a mortgage or
deed of trust on real property. California has five principal statutory
provisions which limit the remedies of a creditor secured by a mortgage or deed
of trust, two of which limit the creditor's right to obtain a deficiency
judgment. One of the limitations is based on the method of foreclosure and the
other on the type of debt secured. Under the former, a deficiency judgment is
barred when the foreclosure is accomplished by means of a nonjudicial trustee's
sale. Under the latter, a deficiency judgment is barred when the foreclosed
mortgage or deed of trust secures certain purchase money obligations. Another
California statute, commonly known as the "one form of action" rule, requires
the creditors secured by real property to exhaust their real property security
by foreclosure before bringing a personal action against the debtor. The fourth
statutory provision limits any deficiency judgment obtained by a creditor
secured by real property following a judicial sale of such property to the
excess of the outstanding debt over the fair value of the
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property at the time of the sale, thus preventing the creditor from obtaining a
large deficiency judgment against the debtor as the result of low bids at a
judicial sale. The fifth statutory provision gives the debtor the right to
redeem the real property from any judicial foreclosure sale as to which a
deficiency judgment may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect to California
real property, the creditor's nonjudicial foreclosure rights under the power of
sale contained in the mortgage or deed of trust are subject to the constraints
imposed by California law upon transfers of title to real property by private
power of sale. During the three-month period beginning with the filing of a
formal notice of default, the debtor is entitled to reinstate the mortgage by
making any overdue payments. Under standard loan servicing procedures, the
filing of the formal notice of default does not occur unless at least three full
monthly payments have become due and remain unpaid. The power of sale is
exercised by posting and publishing a notice of sale for at least 20 days after
expiration of the three-month reinstatement period. Therefore, the effective
minimum period for foreclosing on a home mortgage could be in excess of seven
months after the initial default. Such time delays in collections could disrupt
the flow of revenues available to an issuer for the payment of debt service on
the outstanding obligations if such defaults occur with respect to a substantial
number of mortgages or deeds of trust securing an issuer's obligations.
In addition, a court could find that there is sufficient involvement of the
issuer in the nonjudicial sale of property securing a mortgage for such private
sale to constitute "state action," and could hold that the private-right-of-sale
proceedings violate the due process requirements of the Federal or State
Constitutions, consequently preventing an issuer from using the nonjudicial
foreclosure remedy described above.
Certain California Municipal Securities in which the California Money,
California Municipal and California Insured Intermediate Municipal Funds may
invest may be obligations which finance the acquisition of single family home
mortgages for low and moderate income mortgagors. These obligations may be
payable solely from revenues derived from the home mortgages, and are subject to
the California statutory limitations described above applicable to obligations
secured by real property. Under California anti-deficiency legislation, there
is no personal recourse against a mortgagor of a single family residence
purchased with the loan secured by the mortgage, regardless of whether the
creditor chooses judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single family owner-
occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan, and cannot in
any event exceed six months' advance interest on the amount prepaid in any
twelve month period in excess of 20% of the original amount of the mortgage
loan. This limitation could affect the flow of revenues available to an issuer
for debt service on the outstanding debt obligations which financed such home
mortgages.
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Because of the diverse nature of such laws and regulations and the
impossibility of either predicting in which specific California Municipal
Securities the California Money, California Municipal and California Insured
Intermediate Municipal Funds will invest from time to time or predicting the
nature or extent of future changes in existing laws or regulations or the future
enactment or adoption of additional laws or regulations, it is not presently
possible to determine the impact of such laws and regulations on the Municipal
Securities in which the California Money, California Municipal and California
Insured Intermediate Municipal Funds may invest and, therefore, on the units of
the California Money, California Municipal or California Insured Intermediate
Municipal Funds.
THE GENERAL FINANCIAL CONDITION OF THE STATE OF CALIFORNIA.
Pressures on the State's budget in the late 1980's and early 1990's were
caused by a combination of external economic conditions (including a recession
which began in 1990) and growth of the largest General Fund Programs -K-14
education, health, welfare and corrections -at rates faster than the revenue
base. During this period, expenditures exceeded revenues in four out of six
years up to 1992-93, and the State accumulated and sustained a budget deficit
approaching $2.8 billion at its peak at June 30, 1993. Between the 1991-92 and
1994-95 Fiscal Years, each budget required multibillion dollar actions to bring
projected revenues and expenditures into balance, including significant cuts in
health and welfare program expenditures; transfers of program responsibilities
and funding from the State to local governments; transfer of about $3.6 billion
in annual local property tax revenues from other local governments to local
school districts, thereby reducing State funding for schools under Proposition
98; and revenue increases (particularly in the 1991-92 Fiscal Year budget), most
of which were for a short duration.
Despite these budget actions, as noted, the effects of the recession led to
large, unanticipated budget deficits. By the 1993-94 Fiscal Year, the
accumulated deficit was so large that it was impractical to budget to retire it
in one year, so a two-year program was implemented, using the issuance of
revenue anticipation warrants to carry a portion of the deficit over the end of
the fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, again using cross-fiscal year
revenue warrants to partly finance the deficit into the 1995-96 fiscal year.
Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts "borrowed" from
future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the state to
carry out its normal annual cash flow borrowing to replenish its cash reserves,
the State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July
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1 and September 4, 1992 the State Controller issued a total of approximately
$3.8 billion of registered warrants.
For several fiscal years during the recession, the State was forced to rely
on external debt markets to meet its cash needs, as a succession of notes and
warrants were issued in the period from June 1992 to July 1994, often needed to
pay previously maturing notes or warrants. These borrowings were used also in
part to spread out the repayment of the accumulated budget deficit over the end
of a fiscal year, as noted earlier. The last and largest of these borrowings
was $4.0 billion of revenue anticipation warrants, which were issued in July,
1994 and matured on April 25, 1996.
1995-96 AND 1996-97 FISCAL YEARS
The State's financial condition improved markedly during the 1995-96 and
1996-97 fiscal years, with a combination of better than expected revenues,
slowdown in growth of social welfare programs, and continued spending restraint
based on the actions taken in earlier years. The State's cash position also
improved, and no external deficit borrowing has occurred over the end of these
two fiscal years.
The economy grew strongly during these fiscal years, and as a result, the
General Fund took in substantially greater tax revenues (around $2.2 billion in
1995-96 and $1.6 billion in 1996-97) than were initially planned when the
budgets were enacted. These additional funds were largely directed to school
spending as mandated by Proposition 98, and to make up shortfalls from reduced
federal health and welfare aid. The accumulated budget deficit from the
recession years was finally eliminated. In the Governor's 1998-99 Budget
Proposal, released January 9, 1998, the Department of Finance reported that the
State's budget reserve (the SFEU) totaled $461 million as of June 30, 1997.
CURRENT STATE BUDGET
The discussion below of the 1997-98 Fiscal Year budget, the proposed 1998-
99 Fiscal Year budget below are based on estimates and projections of revenues
and expenditures for the current and upcoming fiscal year and must not be
construed as statements of fact. These estimates and projections are based upon
various assumptions as of January 1998 which may be affected by numerous
factors, including future economic conditions in the State and the nation, and
there can be no assurance that the estimates will be achieved.
Periodic reports on revenues and expenditures during the fiscal year are
issued by the Administration, the State Controller's Office and the Legislative
Analyst's Office. The Department of Finance issues a monthly Bulletin which
reports the most recent revenue receipts, comparing them to Budget projections,
and reports on other current developments affecting the Budget. The
Administration also formally updates its budget projections three times during
each fiscal year, generally in January, May and at budget enactment.
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1997-98 FISCAL YEAR
Background
On January 9, 1997, the Governor released his proposed budget for the 1997-
98 Fiscal Year (the "Proposed Budget"). The Proposed Budget estimated General
Fund revenues and transfers of about $50.7 billion, and proposed expenditures of
$50.3 billion. In May 1997, the Department of Finance increased its revenue
estimate for the upcoming fiscal year by $1.3 billion, in response to the
continued strong growth in the State's economy.
In May, 1997, action was taken by the California Supreme Court in an
ongoing lawsuit, PERS v. Wilson, which made final a judgment against the State
requiring an immediate payment from the General Fund to the Public Employees
Retirement Fund ("PERF") to make up certain deferrals in annual retirement fund
contributions which had been legislated in earlier years for budget savings, and
which the courts found to be unconstitutional. On July 30, 1997, following a
direction from the Governor, the Controller transferred $1.228 billion from the
General Fund to the PERF in satisfaction of the judgment, representing the
principal amount of the improperly deferred payments from 1995-96 and 1996-97.
In late 1997, the plaintiffs filed a claim with the State Board of Control
for payment of interest under the Court rulings in an amount of $308 million.
The Department of Finance has recommended approval of this claim. If approved
by the Board of Control, the claim would become part of a claims bill to be paid
in the 1998-99 Fiscal Year.
Fiscal Year 1997-98 Budget Act
Once the pension payment of $1.228 billion eliminated essentially all the
"increased" revenue in the budget, final agreement was reached within a few
weeks on a welfare reform package and the remainder of the budget. The
Legislature passed the Budget Bill on August 11, 1997, along with numerous
related bills to implement its provisions. On August 18, 1997, the Governor
signed the Budget Act, but vetoed approximately $314 million of specific
spending items, primarily in health and welfare and education areas from both
the General Fund and Special Funds. Most of this spending (approximately $200
million) was restored in later legislation passed before the end of the
Legislative Session.
The Budget Act anticipated General Fund revenues and transfers of $52.5
billion (a 6.8 percent increase of the final 1996-97 amount), and expenditures
of $52.5 billion (a 8.0 percent increase from the 1996-97 levels). The Budget
Act also included Special Fund expenditures of $14.4 billion (as against
estimated Special Fund revenues of $14.0 billion), and $2.1 billion of
expenditures from various Bond Funds. Following enactment of the Budget Act,
the State implemented its normal annual cash flow borrowing program, issuing
$3.0 billion of notes which mature on June 30, 1998.
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The following were major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contained a large increase in
funding for K-14 education under Proposition 98, reflecting strong revenues
which exceeded initial budgeted amounts. Part of the nearly $1.75 billion in
increased spending was allocated to prior fiscal years. Funds were provided to
fully pay for the cost-of-living-increase component of Proposition 98, and to
extend the class size reduction and reading initiatives.
2. The Budget Act reflected the $1.228 billion pension case judgement
payment, and brought funding of the State's pension contribution back to the
quarterly basis which existed prior to the deferral actions which were
invalidated by the courts.
3. Funding from the General Fund for the University of California and
California State University was increased by about 6 percent ($121 million and
$107 million, respectively), and there was no increase in student fees.
4. Because of the effect of the pension payment, most other State
programs were continued at 1996-97 levels, adjusted for caseload changes.
5. Health and welfare costs were contained, continuing generally the
grant levels from prior years, as part of the initial implementation of the new
CalWORKs program.
6. Unlike prior years, this Budget Act did not depend on uncertain
federal budget actions. About $300 million in federal funds, already included in
the federal FY 1997 and 1998 budgets, was included in the Budget Act, to offset
incarceration costs for illegal aliens.
7. The Budget Act contained no tax increases, and no tax reductions. The
Renters Tax Credit was suspended for another year, saving approximately $500
million.
At the end of the Legislative Session on September 13, 1997, the
Legislature passed and the Governor later signed several bills encompassing a
coordinated package of fiscal reforms, mostly to take effect after the 1997-98
Fiscal Year. Included in the package are a variety of phased-in tax cuts,
conformity with certain provisions of the federal tax reform law passed earlier
in the year, and reform of funding for county trial courts, with the State to
assume greater financial responsibility. The Department of Finance estimates
that the major impact of these fiscal reforms will occur in Fiscal Year 1998-99
and subsequent years.
The Department of Finance released updated estimates for the 1997-98 Fiscal
Year on January 9, 1998 as part of the Governor's 1998-99 Fiscal Year Budget
Proposal. Total revenues and transfers are projected at $52.9 billion, up
approximately $360 million from the Budget Act projection. Expenditures for the
fiscal year are expected to rise approximately $200 million above the original
Budget Act, to $53.0 billion. The balance in the budget reserve, the SFEU, is
projected to be $329 million at June 30, 1998, compared to $461 million at June
30, 1997.
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PROPOSED 1998-99 FISCAL YEAR BUDGET
On January 9, 1998, the Governor released his Budget Proposal for the 1998-
99 Fiscal Year (the "Governor's Budget"). The Governor's Budget projects total
General Fund revenues and transfers of $55.4 billion, a $2.5 billion increase
(4.7 percent) over revised 1997-98 revenues. This revenue increase takes into
account reduced revenues of approximately $600 million from the 1997 tax cut
package, but also assumes approximately $500 million additional revenues
primarily associated with capital gains realizations. The Governor's Budget
notes, however, that capital gains activity and the resultant revenues derived
from it are very hard to predict.
Total General Fund expenditures for 1998-99 are recommended at $55.4
billion an increase of $2.4 billion (4.5 percent) above the revised 1997-98
level. The Governor's Budget includes funds to pay the interest claim relating
to the court decision on pension fund payments, PERS v. Wilson (see "1997-98
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Fiscal Year" above). The Governor's Budget projects that the State will carry
out its normal intra-year cash flow external borrowing in 1998-99, in an
estimated amount of $3.0 billion. The Governor's Budget projects that the
budget reserve, the SFEU, will be $296 million at June 30, 1999, slightly lower
than the projected level at June 30, 1998 PERS liability.
The Governor's Budget projects Special Fund revenues of $14.7 billion, and
Special Fund expenditures of $15.2 billion, in the 1998-99 Fiscal Year. A total
of $3.2 billion of bond fund expenditures are also proposed.
ADDITIONAL CONSIDERATIONS. With respect to Municipal Securities issued by
the State of California and its political subdivisions, as well as certain other
governmental issuers such as the Commonwealth of Puerto Rico, the Trusts cannot
predict what legislation, if any, may be proposed in the California State
Legislature as regards the California State personal income tax status of
interest on such obligations, or which proposals, if any, might be enacted.
Such proposals, if enacted, might materially adversely affect the availability
of California Municipal Securities for investment by the California Money,
California Municipal and California Insured Intermediate Municipal Funds and the
value of the Fund's investments. In such event, the Trustees would reevaluate
the investment objective and policies of the California Money, California
Municipal and California Insured Intermediate Municipal Funds and consider
changes in its investments structure or possible dissolution.
SPECIAL CONSIDERATIONS RELATING TO FLORIDA MUNICIPAL SECURITIES
The following information constitutes only a brief summary, and does not
purport to be a complete description. The information in this section is
updated periodically. While the Fund has not independently verified such
information, it has no reason to believe that such information is not correct in
all material respects. The source of the 1994-95, 1995-96 and 1996-97 figures
set forth below is the Revenue and Economic Analysis Unit of the Executive
Office of the
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Governor of the State of Florida. Such figures are preliminary and subject to
change without notice.
POPULATION. In 1980, Florida was ranked seventh among the fifty states
with a population of 9.7 million people. The State has grown dramatically since
then and as of April 1, 1996 ranks fourth with an estimated population of 14.4
million. Since the beginning of the eighties, Florida has surpassed Ohio,
Illinois, and Pennsylvania in total population. Florida's attraction, as both a
growth and retirement state, has kept net migration at an average of 224,240 new
residents per year, from 1987 through 1996.
INCOME. Over the years, Florida's personal income has grown at a strong
pace and has generally outperformed both the U.S. as a whole and the southeast
in particular. The reasons for this are twofold: first, as mentioned above,
Florida's population has expanded at a very strong pace; and second, the State's
economy since the early seventies has diversified in such a way as to provide a
broader economic base. As a result, Florida's per capita personal income has
tracked closely with the national average. Furthermore, the State's per capita
personal income has historically tracked above the southeast. From 1985 through
1995, Florida's per capita income rose an average 5.0% per year, while national
per capita income increased an average 4.9%.
The structure of Florida's income differs from that of the nation and the
southeast. Because Florida has a proportionally greater retirement age
population, property income (dividends, interest, and rent) and transfer
payments (social security and pension benefits, among other sources of income)
are a relatively more important source of income. For example, Florida's
employment income in 1995 represented 60.6% of total personal income, while the
nation's share of total personal income in the form of wages and salaries and
other labor benefits was 70.8%. Florida's income is dependent upon transfer
payments controlled by the federal government.
EMPLOYMENT. Since 1987, the State's population has increased an estimated
20%. In the same period of time, Florida's total non-farm employment has
increased by over 27.5%. The average rate of unemployment for Florida since
1987 is 6.2% while the national average is also 6.2%. Though the State has
grown by an average of 274,830 people per year, the strength of the economy has
created an environment that has more than absorbed new residents seeking
employment. The job creation rate for the State of Florida is almost twice the
rate for the nation as a whole, since 1987.
CONSTRUCTION. Florida's dependency on the highly cyclical construction and
construction-related manufacturing sectors has declined. For example, total
contract construction employment as a share of total non-farm employment reached
a peak of over 10% in 1973. In 1980, the share was roughly 7.5%, and in 1996,
the share had edged downward to 5%. This trend is expected to continue as
Florida's economy continues to diversify. Florida, nevertheless, has a dynamic
construction industry, with single and multi-family housing starts accounting
for
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approximately 8.1% of total U.S. housing starts in 1996, while the State's
population is 5.5% of the nation's population. Since 1985, total housing starts
have averaged 148,000 per year.
A driving force behind Florida's construction industry is of course its
rapid growth in population. While annual growth in the State's population is
projected to slow somewhat, it is still expected to grow close to 230,000 new
residents per year throughout the 1990's.
TOURISM. Tourism is one of Florida's most important industries.
Approximately 42.9 million people visited the State in 1996, as reported by the
Florida Department of Commerce. As discussed below, tourism in Florida appears
to be recovering from the effects of negative publicity regarding crime.
OUTLOOK. The current Florida Economic Consensus Estimating Conference
forecast shows that the Florida economy is expected to grow at a moderate pace,
but will continue to outperform the U.S. as a whole as a result of relatively
rapid population growth. Single and multi-family housing starts are projected to
reach a combined level of nearly 118,500 in 1996 and 129,500 in 1997-98. Multi-
family starts have been slow to recover, but they are showing some strong growth
lately and should maintain a level of 38,200 in 1997-98 and 37,200 in 1998-99.
Single family starts are expected to exceed 91,300 this year and reach a level
of 94,100 next year. Total construction expenditures are forecasted to increase
13.2% this year and increase 6.5% next year.
Real personal income in Florida is estimated to increase 5.2% in 1997-98
and increase 3.7% in 1998-99 while real personal income per capita is projected
to grow at 3.2% in 1997-98 and 1.8% in 1998-99.
Florida tourism appears to be recovering from the effects of negative
publicity regarding crime against tourists in the state. Tourist arrivals are
expected to increase by 2.1% this fiscal year and 4.0% next year. Air tourists
are expected to increase by 1.6% this year and increase by 3.7% next year, while
auto tourists are expected to increase by 2.7% in 1997-98 and increase 4.2% in
1998-99. By the end of this fiscal year, 43.8 million domestic and
international tourists are expected to have visited the State. In 1998-99,
tourist arrivals should approximate 45.6 million.
REVENUES AND EXPENDITURES. Financial operations of the State of Florida
covering all receipts and expenditures are maintained through the use of four
fund types - the General Revenue Fund, Trust Funds, the Working Capital Fund and
beginning in fiscal year 1995-96, the Budget Stabilization Fund. The General
Revenue Fund receives the majority of State tax revenues. The Trust Funds
consist of monies received by the State which under law or trust agreement are
segregated for a purpose authorized by law. Revenues in the General Revenue
Fund which are in excess of the amount needed to meet appropriations may be
transferred to the Working Capital Fund. The Florida Constitution and Statutes
mandate that the State budget as a
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whole, and each separate fund within the State budget, be kept in balance from
currently available revenues each State fiscal year.
Estimated fiscal year 1997-98 General Revenue plus Working Capital and
Budget Stabilization funds available total $18,150.9 million, an 8.5% increase
over 1996-97. With combined General Revenue, Working Capital Fund and Budget
Stabilization Fund appropriations at $17,114.0 million, unencumbered reserves at
the end of 1997-98 are estimated at $1,036.9 million.
Estimated fiscal year 1998-99 General Revenue plus Working Capital and
Budget stabilization funds available total $18,644.0 million, a 2.7% increase
over 1997-98.
In fiscal year 1996-97, the State derived approximately 67% of its total
direct revenues to these funds from State taxes and fees. Federal funds and
other special revenues accounted for the remaining revenues. Major sources of
tax revenues to the General Revenue Fund are the sales and use tax, corporate
income tax, intangible personal property tax, beverage tax and estate tax, which
amounted to 68%, 8%, 4% and 3%, respectively, of total General Revenue Funds
available.
State expenditures are categorized for budget and appropriation purposes by
type of fund and spending unit, which are further subdivided by line item. In
fiscal year 1996-97, appropriations from the General Revenue Fund for education,
health and welfare, and public safety amounted to 53%, 26% and 14%,
respectively, of total General Revenue Funds available.
SALES AND USE TAX. The greatest single source of tax receipts in Florida
is the sales and use tax. The sales tax is 6% of the sales price of tangible
personal property sold at retail in the State. The use tax is 6% of the cost
price of tangible personal property when the same is not sold but is used, or
stored for use, in the State. The use tax also applies to the use in the State
of tangible personal property purchased outside Florida which would have been
subject to the sales tax if purchased from a Florida dealer. Slightly less than
10% of the sales tax is designated for local governments and is distributed to
the respective counties in which collected for use by such counties and
municipalities therein. In addition to this distribution, local governments may
(by referendum) assess a .5% or 1% discretionary sales surtax within their
county. Proceeds from this local option sales tax are earmarked for funding
local infrastructure programs and acquiring land for public recreation or
conservation or protection of natural resources. In addition, non-consolidated
counties with a population in excess of 800,000 may levy a local option sales
tax to fund indigent health care. The tax rate cannot exceed .5% and the
combined levy of this indigent health care surtax and the aforementioned
infrastructure surtax cannot exceed 1%. Furthermore, charter counties which
adopted a charter prior to June 1, 1976, and each county with a consolidated
county/municipal government, may (by referendum) assess up to a 1% discretionary
sales surtax within their county. Proceeds from this tax are earmarked for the
development, construction, maintenance and operation of a fixed guideway rapid
transit system or may be remitted to an expressway or transportation authority
for use on county roads and bridges, for a
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bus system, or to service bonds financing roads and bridges. The two taxes,
sales and use, stand as complements to each other, and taken together provide a
uniform tax upon either the sale at retail or the use of all tangible personal
property irrespective of where it may have been purchased. This tax also
includes a levy on the following: (i) rentals on tangible personal property and
transient lodging and non-residential real property; (ii) admissions to places
of amusements, most sports and recreation events; (iii) utilities (at a 7%
rate), except those used in homes; and (iv) restaurant meals. Exemptions
include: groceries; medicines; hospital rooms and meals; fuels used to produce
electrical energy used in manufacturing; purchases by religious, charitable and
educational nonprofit institutions; most professional, insurance and personal
service transactions; apartments used as permanent dwellings; the trade-in value
of motor vehicles; and residential utilities.
All receipts of the sales and use tax, with the exception of the tax on
gasoline and special fuels, are credited to either the General Revenue Fund,
the Solid Waste Management Trust Fund, or counties and cities. For the State
fiscal year which ended June 30, 1997, receipts from this source were $12,089
million, an increase of 5.5% over the prior fiscal year.
MOTOR FUEL TAX. The second largest source of State tax receipts is the tax
on motor fuels. Preliminary data show collections from this source in the State
fiscal year ended June 30, 1997, were $2,012 million. However, these revenues
are almost entirely dedicated trust funds for specific purposes and are not
included in the State's General Revenue Fund.
State and local taxes on motor fuels (gasoline and special fuel) include
several distinct fuel taxes: (i) the State sales tax on motor fuels, levied at
6% of the average retail price per gallon of fuel, not to fall below 6.9 cents
per gallon; (ii) the State excise tax of four cents per gallon of motor fuel,
proceeds distributed to local governments; (iii) the State Comprehensive
Enhanced Transportation System (SCETS) tax, which is levied at a rate in each
county equal to two-thirds of the sum of the county's local option motor fuel
taxes; (iv) aviation fuel, which depending on the air carrier's choice, can
either be taxed at 6.9 cents per gallon or eight percent of the retail price of
fuel, not to be less than 4.4 cents per gallon; and (v) local option motor fuel
taxes, which may range between one cent to twelve cents per gallon.
ALCOHOLIC BEVERAGE TAX. Florida's alcoholic beverage tax is an excise tax
on beer, wine, and liquor. This tax is one of the State's major tax sources,
with revenues totaling $447.2 million in the State fiscal year ended June 30,
1997, an increase of $5.7 million from the previous year's total. The revenues
collected from this tax are deposited into the State's General Revenue Fund.
The 1990 Legislature established a surcharge on alcoholic beverages. This
charge is levied on alcoholic beverages sold for consumption on premises. The
surcharge is ten cents per ounce of liquor, ten cents per four ounces of wine,
and four cents per twelve ounces of beer. Most of these proceeds are deposited
into the General Revenue Fund. In fiscal 1996-97, $106.6 million was collected.
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CORPORATE INCOME TAX. Pursuant to an amendment to the State Constitution,
the State Legislature adopted, effective January 1, 1972, the "Florida Income
Tax Code" imposing a tax upon the net income of corporations, organizations,
associations and other artificial entities for the privilege of conducting
business, deriving income or existing within the State. This tax does not apply
to natural persons who engage in a trade or business or profession under their
own or any fictitious name, whether individually as proprietorships or in
partnerships with others, estates of decedents or incompetents, or testamentary
trusts.
The tax is imposed in an amount equal to 5.5% of the taxpayer's net
corporate income for the taxable year, less a $5,000 exemption. Net income is
defined as that share of a taxpayer's adjusted federal income for such year
which is apportioned to the State of Florida. Apportionment is by weighted
factors of sales (50%), property (25%) and payroll (25%). All business income
is apportioned and non-business income is allocated to a single jurisdiction,
usually the state of commercial domicile.
All receipts of the corporate income tax are credited to the General
Revenue Fund. For the fiscal year ended June 30, 1997, receipts from this
source were $1,362.3 million, an increase of 17.2% from fiscal year 1995-96.
DOCUMENTARY STAMP TAX. Deeds and other documents relating to realty are
taxed at 70 cents per $100 of consideration, while corporate shares, bonds,
certificates of indebtedness, promissory notes, wage assignments and retail
charge accounts are taxed at 35 cents per $100 of face value, or actual value if
issued without face value. Documentary stamp tax collections totaled $844.2
million during fiscal year 1996-97, posting an 8.9% increase from the previous
fiscal year.
GROSS RECEIPTS TAX. A 2.5% tax is levied on the gross receipts of
electric, natural gas and telecommunications services. In fiscal year 1996-97,
gross receipts utilities tax collections totaled $575.7 million, an increase of
6.0% over the previous fiscal year. All gross receipts utility tax collections
are credited to the Public Education Capital Outlay and Debt Services Fund.
INTANGIBLE PERSONAL PROPERTY TAX. The intangible personal property tax is
levied on two distinct bases. First, stocks, bonds (including bonds secured by
liens on State realty), notes, governmental leaseholds, interests in limited
partnerships registered with the SEC, and other miscellaneous intangible
personal property not secured by liens on State realty are taxed annually at a
rate of 2 mills. Second, there is a non-recurring 2 mill tax on mortgages and
other obligations secured by liens on State realty. The Department of Revenue
uses part of the proceeds for administrative costs. Of the tax proceeds
remaining, 33.5% is distributed to the County Revenue Sharing Trust Fund and
66.5% is distributed to the General Revenue Fund. In fiscal year 1996-97, total
intangible personal property tax collections were $952.4 million, a 6.3%
increase from the previous fiscal year.
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SEVERANCE TAXES. The severance tax includes the taxation of oil, gas and
sulfur production and a tax on the severance of primarily phosphate rock and
other solid minerals. Total collections from severance taxes totaled $77.2
million during fiscal year 1995-96, up 26.1% from the previous year.
LOTTERY. The 1987 Legislature created the Department of the Lottery to
operate the State Lottery and set forth the allocation of the lottery revenues.
Of the revenues generated by the lottery, 50% is to be returned to the public as
prizes; at least 38% is to be deposited in the Educational Enhancement Trust
Fund (for public education); and no more than 12% can be spent on the
administrative cost of operating the lottery.
Fiscal year 1996-97 produced ticket sales of $2.09 billion of which
education received approximately $792.3 million.
MISCELLANEOUS. The State Constitution does not permit a state or local
personal income tax. An amendment to the State Constitution by the electors of
the State is required to impose a personal income tax in the State.
Property valuations for homestead property is subject to a growth cap.
Growth in the just (market) value of property qualifying for the homestead
exemption will be limited to 3% or the change in the Consumer Price Index,
whichever is less. If the property changes ownership or homestead status, it is
to be re-valued at full just value on the next tax roll. Although the impact of
the growth cap cannot be determined, it may have the effect of causing local
government units in the State to rely more on non-ad valorem revenues to meet
operating expenses and other requirements normally funded with ad valorem tax
revenues.
An amendment to the State Constitution was approved by statewide ballot in
the November 8, 1994 general election which is commonly referred to as the
"Limitation on State Revenues Amendment." This amendment provides that State
revenues collected for any fiscal year shall be limited to State revenues
allowed under the amendment for the prior fiscal year plus an adjustment for
growth. Growth is defined as an amount equal to the average annual rate of
growth in State personal income over the most recent twenty quarters times the
State revenues allowed under the amendment for the prior fiscal year. State
revenues collected for any fiscal year in excess of this limitation are required
to be transferred to the budget stabilization fund until the fund reaches the
maximum balance specified in Section 19(g) of Article III of the State
Constitution, and thereafter is required to be refunded to taxpayers as provided
by general law. The limitation on State revenues imposed by the amendment may be
increased by the Legislature, by a two-thirds vote of each house.
The term "State revenues," as used in the amendment, means taxes, fees,
licenses, and charges for services imposed by the Legislature on individuals,
businesses, or agencies outside State government. However, the term "State
revenues" does not include: (i) revenues that are necessary to meet the
requirements set forth in documents authorizing the issuance of bonds by
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the State; (ii) revenues that are used to provide matching funds for the federal
Medicaid program with the exception of the revenues used to support the Public
Medical Assistance Trust Fund or its successor program and with the exception of
State matching funds used to fund elective expansions made after July 1, 1994;
(iii) proceeds from the State lottery returned as prizes; (iv) receipts of the
Florida Hurricane Catastrophe Fund; (v) balances carried forward from prior
fiscal years; (vi) the proceeds from the sale of goods (e.g. land, buildings);
or (vii) revenue from taxes, licenses, fees and charges for services required to
be imposed by any amendment or revision to the State Constitution after July 1,
1994. The amendment took effect on January 1, 1995 and is applicable to State
fiscal year 1995-96.
It should be noted that many of the provisions of the amendment are
ambiguous, and likely will not be clarified until State courts have ruled on
their meanings. Further, it is unclear how the Legislature will implement the
language of the amendment and whether such implementing legislation itself will
be the subject of further court interpretation.
The Fund cannot predict the impact of the amendment on State finances. To
the extent local governments traditionally receive revenues from the State which
are subject to, and limited by, the amendment, the future distribution of such
State revenues may be adversely affected by the amendment.
Hurricanes continue to threaten Florida resulting in significant property
damages. The 1995 hurricane season was especially active. The Fund cannot
predict the impact on state finances resulting from repeated hurricane damage.
SPECIAL CONSIDERATIONS RELATING TO INCOME, HIGH YIELD, TAX-EXEMPT BOND, BOND &
- ------------------------------------------------------------------------------
STOCK, GROWTH & INCOME, GROWTH AND EMERGING GROWTH FUNDS
- --------------------------------------------------------
LOWER-RATED SECURITIES. The Income, Tax-Exempt Bond, Growth & Income,
Growth and Emerging Growth Funds may each invest up to 35% of their total
assets, respectively, in non-investment grade securities (rated Ba and lower by
Moody's and BB and lower by S&P or unrated securities determined to be of
comparable quality. The High Yield Fund may invest entirely in such securities
and will generally invest at least 65% of its assets in such securities. Such
securities carry a high degree of risk (including the possibility of default or
bankruptcy of the issuer of such securities), generally involve greater
volatility of price and risk of principal and income, and may be less liquid,
than securities in the higher rating categories and are considered speculative.
See the Appendix to this SAI for a more detailed description of the ratings
assigned by ratings organizations and their respective characteristics.
Historically, economic downturns have disrupted the high yield market and
impaired the ability of issuers to repay principal and interest. Also, an
increase in interest rates could adversely affect the value of such obligations
held by any of the Funds set forth above. Prices and yields of high yield
securities will fluctuate over time and may affect a Fund's net asset value. In
addition, investments in high yield zero coupon or pay-in-kind bonds, rather
than
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income-bearing high yield securities, may be more speculative and may be subject
to greater fluctuations in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent that
there is no established retail secondary market or because of a decline in the
value of such securities. A thin trading market may limit the ability of the
Trustees to accurately value high yield securities in the Fund's portfolio and
to dispose of those securities. Adverse publicity and investor perceptions may
decrease the value and liquidity of high yield securities. These securities may
also involve special registration responsibilities, liabilities and costs.
Credit quality in the high yield securities market can change suddenly and
unexpectedly, and even recently-issued credit ratings may not fully reflect the
actual risks posed by a particular high yield security. For these reasons, it
is the policy of the Advisor and the sub-advisor of each of the Funds not to
rely exclusively on ratings issued by established credit rating agencies, but to
supplement such ratings with its own independent and ongoing review of credit
quality. The achievement of a Fund's investment objectives by investment in
such securities may be more dependent on the Advisor or its sub-advisor's credit
analysis than is the case for higher quality bonds. Should the rating of a
portfolio security be downgraded the Advisor or the Fund's sub-advisor will
determine whether it is in the best interest of the Fund to retain or dispose of
the security.
Prices for below investment-grade securities may be affected by legislative
and regulatory developments. For example, new federal rules require savings and
loan institutions to gradually reduce their holdings of this type of security.
Also, Congress from time to time has considered legislation which would restrict
or eliminate the corporate tax deduction for interest payments on these
securities and would regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type.
INVESTMENT RESTRICTIONS
Certain of the Funds' and Portfolios' investment restrictions set forth
below are fundamental policies. A fundamental policy may not be changed without
the vote of a majority of the outstanding voting securities of the Fund or
Portfolio, as defined in the 1940 Act. Such a majority is defined in the 1940
Act as the lesser of (a) 67% or more of the shares present at a meeting of
shareholders of the Fund or Portfolio, if the holders of more than 50% of the
outstanding shares of the Fund or Portfolio are present or represented by proxy,
or (b) more than 50% of the outstanding shares of the Fund or Portfolio. A
fundamental policy affecting a particular Fund or Portfolio may not be changed
without the vote of a majority of the outstanding shares of the affected Fund or
Portfolio.
RESTRICTIONS APPLICABLE TO THE CALIFORNIA MONEY, SHORT TERM HIGH QUALITY
BOND, TARGET MATURITY 2002, CALIFORNIA MUNICIPAL, CALIFORNIA INSURED
INTERMEDIATE MUNICIPAL, FLORIDA INSURED MUNICIPAL, GROWTH, INTERNATIONAL GROWTH
AND EMERGING GROWTH FUNDS:
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Restrictions 1 through 16 are fundamental policies of the Funds.
Investment restrictions 17 through 26 may be changed by the WM Trust II's Board
of Trustees at any time, without shareholder approval.
The above listed Funds are prohibited from:
1. Purchasing the securities of any issuer (other than U.S. Government
Securities) if as a result more than 5% of the value of the Fund's total
assets would be invested in the securities of the issuer (the "5%
--
Limitation"), except that up to 25% of the value of the Fund's total assets
----------
may be invested without regard to the 5% Limitation; provided that this
restriction shall not apply to the California Money, California Municipal,
California Insured Intermediate Municipal and Florida Insured Municipal
Funds.
2. Purchasing more than 10% of the securities of any class of any one issuer;
provided that this limitation shall not apply to investments in U.S.
Government Securities; provided further that this restriction shall not
apply to the California Money, California Municipal, California Insured
Intermediate Municipal, Florida Insured Municipal and Growth Funds; and
provided further that the Growth Fund may not own more than 10% of the
outstanding voting securities of a single issuer.
3. Purchasing securities on margin, except that a Fund may obtain any short-
term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with futures contracts or related
options will not be deemed to be a purchase of securities on margin.
4. Making short sales of securities or maintaining a short position; provided
that this restriction shall not apply to the Growth and International
Growth Funds.
5. Borrowing money, except that (a) the Funds may (i) enter into reverse
repurchase agreements or (ii) borrow from banks for temporary or emergency
(not leveraging) purposes including the meeting of redemption requests that
might otherwise require the untimely disposition of securities in an
aggregate amount not exceeding 30% of the value of a Fund's total assets
(including the amount borrowed) valued at market less liabilities (not
including the amount borrowed) at the time the borrowing is made, (b) the
Short Term High Quality Bond, California Municipal, California Insured
Intermediate Municipal, Florida Insured Municipal, Growth, International
Growth and Emerging Growth Fund may enter into futures contracts, and (c)
the Short Term High Quality Bond Fund may engage in dollar roll
transactions; provided that whenever borrowings pursuant to (a) above
(except that with respect to the Short Term High Quality Bond Fund,
whenever borrowings pursuant to (a)(ii) above) exceed 5% of the value of a
Fund's total assets, the Fund will not purchase any securities; and
provided further that the Short Term High Quality Bond Fund is prohibited
from borrowing money or entering into reverse
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repurchase agreements or dollar roll transactions in the aggregate in
excess of 33 1/3% of the Fund's total assets (after giving effect to any
such borrowing).
6. Pledging, hypothecating, mortgaging or otherwise encumbering more than 30%
of the value of the Fund's total assets. For purposes of this restriction,
(a) the deposit of assets in escrow in connection with the writing of
covered put or call options and the purchase of securities on a when-issued
or delayed-delivery basis and (b) collateral arrangements with respect to
(i) the purchase and sale of options on securities, options on indexes and
options on foreign currencies, and (ii) initial or variation margin for
futures contracts will not be deemed to be pledges of a Fund's assets.
7. Underwriting the securities of other issuers, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933, as amended,
by virtue of disposing of portfolio securities.
8. Purchasing or selling real estate or interests in real estate, except that
a Fund may purchase and sell securities that are secured, directly or
indirectly, by real estate and may purchase securities issued by companies
that invest or deal in real estate.
9. Investing in commodities, except that the Short Term High Quality Bond,
California Municipal, California Insured Intermediate Municipal, Florida
Insured Municipal, Growth, International Growth and Emerging Growth Funds
may invest in futures contracts and options on futures contracts. The
entry into forward foreign currency exchange contracts is not and shall not
be deemed to involve investing in commodities.
10. Investing in oil, gas or other mineral exploration or development programs.
11. Making loans, except through the purchase of qualified debt obligations,
loans of portfolio securities (except in the case of the California
Municipal and Florida Insured Municipal Funds) and the entry into
repurchase agreements.
12. Investing in securities of other investment companies registered or
required to be registered under the 1940 Act, except as they may be
acquired as part of a consolidation, reorganization, acquisition of assets
or an offer of exchange or as otherwise permitted by law, including the
1940 Act.
13. Purchasing any securities that would cause more than 25% of the value of
the Fund's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the
same industry provided that this limitation shall not apply to the purchase
of (a) U.S. Government Securities, (b) municipal securities issued by
governments or political subdivisions of governments or (c) with respect to
the California Money Fund, U.S. dollar-denominated bank instruments such as
certificates of deposit, time deposits, bankers' acceptances and letters of
credit that have been issued by U.S. banks.
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14. Purchasing, writing or selling puts, calls, straddles, spreads or
combinations thereof; provided that this restriction shall not apply to the
Short Term High Quality Bond, California Insured Intermediate Municipal and
Growth Funds; and provided further that (a) the International Growth and
Emerging Growth Funds may purchase, write and sell covered put and call
options on securities, (b) California Municipal, Florida Insured Municipal,
International Growth and Emerging Growth Funds may purchase, write and
sell futures contracts and options on futures contracts, (c) the California
Money, California Municipal and Florida Insured Municipal Funds may acquire
stand-by commitments, (d) the International Growth and Emerging Growth
Funds may purchase and write put and call options on stock indexes, and (e)
the International Growth Fund may purchase put and call options and write
covered call options on foreign currency contracts.
15. With respect to the Growth Fund, investing more than 35% of the fund's
assets in non-investment grade debt securities.
16. With respect to the Short Term High Quality Bond Fund, having a dollar-
weighted average portfolio maturity in excess of five years.
17. With respect to the Growth Fund, investing more than 25% of the Fund's
assets in securities of foreign issuers.
18. Purchasing securities that are not readily marketable if more than 10% of
the net of a Money Fund, or more than 15% of the net assets of a Non-Money
Fund, would be invested in such securities, including, but not limited to:
(1) repurchase agreements with maturities greater than seven calendar days;
(2) time deposits maturing in more than seven calendar days; (3) to the
extent a liquid secondary market does not exist for the instruments,
futures contracts and options thereon; (4) certain over-the-counter
options, as described in this SAI; (5) certain variable rate demand notes
having a demand period of more than seven days; and (6) certain Rule 144A
restricted securities that are deemed to be illiquid.
19. Investing more than 10% of its total assets in time deposits maturing in
more than seven calendar days; provided that this restriction shall not
apply to the Short Term High Quality Bond and Growth Funds.
20. Purchasing any security if as a result the Fund would then have more than
5% of its total assets invested in securities of companies (including
predecessors) that have been in continuous operation for less than three
years; provided that in the case of industrial revenue bonds purchased for
the Municipal Funds, this restriction shall apply to the entity supplying
the revenues from which the issue is to be paid.
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21. Making investments for the purpose of exercising control or management.
22. Purchasing or retaining securities of any company if, to the knowledge of
the Company, any of the Company's officers or directors or any officer or
director of the Advisor or a sub-advisor individually owns more than 1/2
of 1% of the outstanding securities of such company and together they own
beneficially more than 5% of the securities.
23. Investing in warrants, (other than warrants acquired by the Fund as part of
a unit or attached to securities at the time of purchase) if, as a result,
the investments (valued at the lower of cost or market) would exceed 5% of
the value of the Fund's net assets or if, as a result, more than 2% of the
Fund's net assets would be invested in warrants not listed on a recognized
United States or foreign stock exchange, to the extent permitted by
applicable state securities laws.
24. Purchasing or selling interests in real estate limited partnerships.
25. Investing in mineral leases.
26. Entering into Strategic Transactions otherwise prohibited by the Fund's
investment restrictions or in the aggregate in excess of 25% of the Fund's
net assets, for purposes other than bona fide hedging positions or that are
not "covered," subject to such greater percentage limitations as may be
imposed by the Advisor from time to time.
For purposes of the investment restrictions described above, the issuer of
a municipal security is deemed to be the entity (public or private) ultimately
responsible for the payment of the principal of and interest on the security.
For purposes of investment restriction Number 13 above, AMT-Subject Bonds and
Revenue Bonds, the payment of principal and interest on which is the ultimate
responsibility of companies within the same industry, are grouped together as an
"industry." The percentage limitations contained in the restrictions listed
above apply at the time of purchase of securities, and shall not be considered
violated unless an excess or deficiency occurs immediately after and as a result
of such purchase.
THE INVESTMENT RESTRICTIONS SET FORTH BELOW HAVE BEEN ADOPTED BY WM TRUST I
WITH RESPECT TO THE FUNDS WITHIN WM TRUST I AS FUNDAMENTAL POLICIES.
EACH OF THE MONEY MARKET AND TAX-EXEMPT MONEY MARKET FUNDS MAY NOT:
1. invest in common stocks or other equity securities;
2. borrow money for investment purposes, except that each Fund may borrow up
to 5% of its total assets in emergencies, and may borrow up to 33 1/3% of
such assets to meet redemption requests that would otherwise result in the
untimely liquidation of vital parts of its portfolio;
3. buy securities on margin, mortgage or pledge its securities, or engage in
"short" sales;
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4. buy or sell options;
5. act as underwriter of securities issued by others;
6. buy securities restricted as to resale under federal securities laws (other
than securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933, as amended, and except in connection with
repurchase agreements);
7. buy or sell real estate, real estate investment trust securities,
commodities, or oil, gas and mineral interests;
8. lend money, except in connection with repurchase agreements and for
investments made in accordance with Fund policies discussed in the
Prospectus;
9. issue senior securities;
10. invest more than 5%* of its total assets in the securities of any single
issuer (except for the United States Government, its agencies or
instrumentalities);
11. invest more than 25%* of its total assets in securities of issuers in any
single industry;
12. invest more than 10%* of its net assets in illiquid securities;
13. invest in companies for the purpose of exercising control.
THE MONEY MARKET FUND MAY NOT:
1. invest in other investment companies (except as part of a merger).
THE TAX-EXEMPT MONEY MARKET FUND MAY NOT:
1. invest more than 20%* of its assets in obligations that pay interest
subject to federal alternative minimum tax.
* Percentage at the time the investment is made.
EACH OF THE INCOME, U.S. GOVERNMENT SECURITIES AND TAX-EXEMPT BOND FUNDS MAY
NOT:
1. invest more than 5%* of its total assets in any single issuer other than
U.S. Government Securities, except that up to 25% of a Fund's assets may be
invested without regard to this 5% limitation;
2. acquire more than 10%* of the voting securities of any one company;
3. invest in any company for the purpose of management or exercising control;
4. invest in real estate or commodities although the Income Fund may purchase
securities of issuers which deal in real estate, securities which are
secured by interests in real estate, and/or securities which represent
interests in real estate, and it may acquire and dispose of real estate or
interests in real estate acquired through the exercise of its rights as a
holder of debt obligations secured by real estate interests therein and the
Income and Tax-Exempt Bond Funds may purchase and sell interest rate
futures and options;
5. invest in oil, gas or other mineral leases;
-80-
<PAGE>
6. invest in securities restricted under federal securities laws other than
securities eligible for resale pursuant to Rule 144A under the Securities
Act of 1933, as amended;
7. invest more than 20%* of its assets in forward commitments;
8. invest more than 25%* of its assets in any single industry;**
9. invest more than 15%* of its net assets in illiquid securities;
10. buy foreign securities not payable in U.S. dollars except that the Income
Fund may purchase securities denominated in currencies other than the U.S.
dollar and may also invest up to 10% of its assets in foreign currency
transactions, interest rate futures and real estate investment trusts;
11. buy securities on margin, mortgage or pledge its securities, or engage in
"short" sales;
12. invest more than 5%* of its net assets in warrants including not more than
2%* of such net assets in warrants that are not listed on either the New
York Stock Exchange or American Stock Exchange; however, warrants acquired
in units or attached to securities may be deemed to be without value for
the purpose of this restriction;
13. act as underwriter of securities issued by others;
14. borrow money for investment purposes, although it may borrow up to 5% of
its total net assets for emergency, non-investment purposes and except for
the Tax-Exempt Bond Fund may enter into transactions in which the Fund
sells securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar securities on a specified
future date;
15. lend money (except for the execution of repurchase agreements);
16. buy or sell put or call options;
17. issue senior securities.
In addition,
THE U.S. GOVERNMENT SECURITIES FUND MAY NOT:
1. invest less than 80%* of its assets in obligations guaranteed by the U.S.
Government, its agencies and instrumentalities or in repurchase agreements
or collateralized mortgage obligations secured by these obligations.
THE TAX-EXEMPT BOND FUND MAY NOT:
1. buy or hold securities which directors or officers of the Fund or the
Advisor hold more than .50% of the outstanding securities.
THE U.S. GOVERNMENT SECURITIES AND INCOME FUNDS MAY NOT:
1. invest in other investment companies (except as part of a merger).
THE U.S. GOVERNMENT SECURITIES AND TAX-EXEMPT BOND FUNDS MAY NOT:
-81-
<PAGE>
1. buy common stocks or other equity securities except that Tax-Exempt Bond
Fund may invest in other investment companies.
* Percentage at the time the investment is made.
** It is a policy of the Income Fund to consider electric utilities, electric
and gas utilities, gas utilities, and telephone utilities to be separate
industries. The Fund also considers foreign issues to be a separate industry.
It is a policy of the Tax-Exempt Bond Fund to apply this restriction only to its
assets in non-municipal bond holdings, pollution control revenue bonds and
industrial development revenue bonds. These policies may result in increased
risk.
THE HIGH YIELD FUND MAY NOT:
1. invest more than 5% of its total assets in any single issuer other than
U.S. Government Securities, except that up to 25% of the Fund's assets may
be invested without regard to this 5% limitation;
2. acquire more than 10% of the voting securities of any one company;
3. invest in real estate or commodities;
4. invest in oil, gas or other mineral leases;
5. invest more than 25% or more of its assets in any single industry;*
6. buy securities on margin, mortgage or pledge its securities;
7. act as underwriter of securities issued by others;
8. borrow money for investment purposes (it may borrow up to 5% of its total
assets for emergency, non-investment purposes);
9. lend money (except for the execution of repurchase agreements);
10. issues senior securities.
* Percentage at the time the investment is made.
EACH OF THE BOND & STOCK, GROWTH & INCOME AND NORTHWEST FUNDS MAY NOT:
1. invest more than 5%* of its total assets in securities of any single issuer
other than U.S. Government Securities, except that up to 25% of a Fund's
assets may be invested without regard to this 5% limitation;
2. acquire more than 10%* of the voting securities of any one company;
3. invest in any company for the purpose of management or exercising control;
4. invest in real estate (except publicly traded real estate investment
trusts);
5. invest in commodities;
6. invest in oil, gas or other mineral leases;
7. invest in other investment companies (except as part of a merger);
8. invest more than 20%* of its total assets in forward commitments or
repurchase agreements;
9. invest more than 25%* of its total assets in any single industry;
10. act as underwriter of securities issued by others;
-82-
<PAGE>
11. borrow money for investment purposes (it may borrow up to 5% of its total
net assets for emergency, non-investment purposes);
12. lend money (except for the execution of repurchase agreements);
13. issue senior securities;
14. buy or sell options, with the exception of covered call options which must
be limited to 20% of total assets;
15. buy or sell futures-related securities;
16. invest in securities restricted under federal securities laws (other than
securities eligible for resale under Rule 144A under the Securities Act of
1933, as amended);
17. invest more than 15%* of its net assets in illiquid securities;
18. buy securities on margin, mortgage or pledge its securities, or engage in
"short" sales;
19. invest more than 5%* of its net assets in warrants including not more than
2% of such net assets in warrants that are not listed on either New York
Stock Exchange or American Stock Exchange; however, warrants acquired in
units or attached to securities may be deemed to be without value for the
purpose of this restriction;
20. invest more than 25%* of its total assets in foreign securities and then
only in U.S. dollar-denominated foreign securities.
* Percentage at the time the investment is made.
THE INVESTMENT RESTRICTIONS SET FORTH BELOW HAVE BEEN ADOPTED BY THE WM
STRATEGIC ASSET MANAGEMENT PORTFOLIOS WITH RESPECT TO THE PORTFOLIOS AS
FUNDAMENTAL POLICIES.
EACH OF THE STRATEGIC GROWTH, CONSERVATIVE GROWTH, BALANCED, FLEXIBLE
INCOME AND INCOME PORTFOLIOS WILL NOT
1. purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (except this shall not prevent
the Fund from purchasing or selling options or futures contracts or from
investing in securities or other instruments backed by physical
commodities);
2. purchase or sell real estate including limited partnership interests,
although it may purchase and sell securities of companies that deal in real
estate and may purchase and sell securities that are secured by interests
in real estate;
3. make loans to any person, except loans of portfolio securities to the
extent that no more than 33 1/3% of its total assets would be lent to other
parties, but this limitation does not apply to purchases of debt securities
or repurchase agreements;
4. (i) purchase more than 10% of any class of the outstanding voting
securities of any issuer (except other investment companies as defined in
the 1940 Act) and (ii) purchase securities of an issuer (except obligations
of the U.S. Government and its agencies and instrumentalities and
securities of other investment companies as defined in the 1940 Act) if as
a result, with respect to 75% of its total assets, more than 5% of the
Portfolio's total assets, at market value, would be invested in the
securities of such issuer.
-83-
<PAGE>
5. issue senior securities (as defined in the 1940 Act) except as permitted by
rule, regulation or order of the Securities and Exchange Commission;
6. will not borrow, except from banks for temporary or emergency (not
leveraging) purposes including the meeting of redemption requests that
might otherwise require the untimely disposition of securities in an
aggregate amount not exceeding 30% of the value of the Portfolio's total
assets (including the amount borrowed) at the time the borrowing is made;
and whenever borrowings by a Portfolio, including reverse repurchase
agreements, exceed 5% of the value of a Portfolio's total assets, the
Portfolio will not purchase any securities;
7. underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the 1933
Act in the disposition of restricted securities; and
8. write or acquire options or interests in oil, gas or other mineral
exploration or development programs.
PORTFOLIO TURNOVER
The Money Funds attempt to increase yields by trading to take advantage of
short-term market variations, which result in high portfolio turnover. Because
purchases and sales of money market instruments are usually effected as
principal transactions, this policy does not result in high brokerage
commissions to these Funds. The Short Term High Quality Bond, Target Maturity
2002, U.S. Government Securities, Income and High Yield Funds, the Tax-Exempt
Bond, California Municipal, California Insured Intermediate Municipal and
Florida Insured Municipal Funds and the Bond & Stock, Growth & Income, Growth,
International Growth, Northwest and Emerging Growth Funds do not intend to seek
profits through short-term trading. Nevertheless, the Funds will not consider
portfolio turnover rate a limiting factor in making investment decisions.
Under certain market conditions, the Short Term High Quality Bond,
California Insured Intermediate Municipal, Growth, International Growth or
Emerging Growth Funds may experience increased portfolio turnover as a result of
such Fund's options activities. It is anticipated that the portfolio turnover
rate for the Short Term High Quality Bond Fund will exceed 200%. For instance,
the exercise of a substantial number of options written by a Fund (due to
appreciation of the underlying security in the case of call options or
depreciation of the underlying security in the case of put options) could result
in a turnover rate in excess of 100%. A portfolio turnover rate of 100% would
occur if all of a Fund's securities that are included in the computation of
turnover were replaced once during a period of one year. The portfolio turnover
rate is calculated by dividing the lesser of purchases or sales of portfolio
securities for the year by the monthly average value of portfolio securities.
Securities with remaining maturities of one year or less at the date of
acquisition are excluded from the calculation. For the fiscal year ended
6/30/96 the Short Term High Quality Bond Fund experienced a portfolio turnover
rate of 225%, which decreased to 51% for the fiscal year ended 6/30/97. In
addition, the Northwest Fund experienced a significant increase in its portfolio
turnover rate for the fiscal year ended 10/31/97,
-84-
<PAGE>
when the Fund's portfolio turnover rate increased to 42% versus the 9% it
experienced for the fiscal year ended 10/31/96.
Certain other practices that may be employed by the Funds could result in
high portfolio turnover. For example, portfolio securities may be sold in
anticipation of a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another of comparable quality purchased at
approximately the same time to take advantage of what the Advisor or a Fund's
sub-advisor believes to be a temporary disparity in the normal yield
relationship between the two securities. These yield disparities may occur for
reasons not directly related to the investment quality of particular issues or
the general movement of interest rates, such as changes in the overall demand
for, or supply of, various types of securities.
PORTFOLIO TRANSACTIONS
Most of the purchases and sales of securities for a Fund, whether
transacted on a securities exchange or over-the-counter, will be effected in the
primary trading market for the securities. Decisions to buy and sell securities
for a Fund are made by the Advisor or the relevant sub-advisor, which also is
responsible for placing these transactions, subject to the overall review of the
Trusts' Board of Trustees. Although investment decisions for each Fund are made
independently from those of the other accounts managed by the Advisor or the
sub-advisor, investments of the type the Fund may make may also be made by those
other accounts. When a Fund and one or more other accounts managed by the
Advisor or the sub-advisor are prepared to invest in, or desire to dispose of,
the same security, available investments or opportunities for sales will be
allocated in a manner believed by the Advisor or the sub-advisor to be equitable
to each. In some cases, this procedure may adversely affect the price paid or
received by a Fund or the size of the position obtained or disposed of by the
Fund. In other cases, however, it is believed that coordination and the ability
to participate in volume transactions will be to the benefit of the Fund.
Transactions on U.S. exchanges involve the payment of negotiated brokerage
commissions. With respect to exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. There is generally no
stated commission in the case of securities traded in the over-the-counter
markets, but the prices of those securities include undisclosed commissions or
concessions, and the prices at which securities are purchased from and sold to
dealers include a dealer's mark-up or mark-down. U.S. Government Securities may
be purchased directly from the U.S. Treasury or from the issuing agency or
instrumentality.
In selecting brokers or dealers to execute portfolio transactions on behalf
of a Fund, the Advisor or the Fund's sub-advisor seeks the best overall terms
available. In assessing the best overall terms available for any transaction,
the Advisor and each sub-advisor will consider the factors that the Advisor or
the sub-advisor deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the
-85-
<PAGE>
broker or dealer and the reasonableness of the commission, if any, for the
specific transaction and on a continuing basis. In addition, each advisory
agreement among the Trusts authorizes the Advisor, and a sub-advisory agreement
authorizes the sub-advisor, in selecting brokers or dealers to execute a
particular transaction and in evaluating the best overall terms available, to
consider the brokerage and research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934, as amended) provided to
the Trusts, the other Funds and/or other accounts over which the Advisor, the
sub-advisor or their affiliates exercise investment discretion. The fees under
the advisory agreements between the Trusts, the Advisor and the sub-advisors are
not reduced by reason of their receiving such brokerage and research services.
The Trusts' Board of Trustees will periodically review the commissions paid by
the Funds to determine if the commissions paid over representative periods of
time were reasonable in relation to the benefits received by the Trusts.
Consistent with applicable provisions of the 1940 Act, the rules and
exemptions adopted by the Commission thereunder, and relevant interpretive and
"no-action" positions taken by the Commission's staff, the Trusts' Board of
Trustees has adopted procedures pursuant to Rule 17e-1 under the 1940 Act to
ensure that all portfolio transactions with affiliates will be fair and
reasonable. Under the procedures adopted, portfolio transactions for a Fund may
be executed through any affiliated broker (other than affiliated persons of the
Trust solely because the broker is an affiliated person of a sub-advisor of
another Fund) if, subject to other conditions in the Rule 17e-1 procedures, in
the judgment of the Advisor or the Fund's sub-advisor, the use of an affiliated
broker is likely to result in price and execution at least as favorable as those
of other qualified broker-dealers, and if, in the transaction an affiliated
broker charges the Fund a rate consistent with those charged for comparable
transactions in comparable accounts of the broker's most favored unaffiliated
clients. Over-the-counter purchases and sales are transacted directly with
principal market makers except in those cases in which better prices and
executions may be obtained elsewhere. For the 1995, 1996 and 1997 fiscal years,
WM Trust II paid brokerage commissions of approximately $6,089, $23,059 and
$39,147, respectively, to a broker affiliated with J.P. Morgan, which was during
such years sub-advisor to a former series of WM Trust II which was merged into
the Growth & Income Fund on March 20, 1998. For the 1995, 1996 and 1997 fiscal
years, commissions paid to such broker represented approximately .25%, .76% and
1.61%, respectively, of the total amount of brokerage commissions paid in such
period and which were paid on transactions that represented .25%, .76% and
1.61%, respectively, of the aggregate dollar amount of transactions that
incurred commissions paid by WM Trust II during such period. For the 1995, 1996
and 1997 fiscal years, WM Trust II paid brokerage commissions of approximately
$21,155, $60,995 and $49,517, respectively, to Donaldson, Lufkin & Jenrette, an
affiliate of Janus, which is the sub-advisor to the Growth Fund and which during
such years was also sub-advisor to the Emerging Growth Fund. For the 1995, 1996
and 1997 fiscal years, commissions paid to Donaldson, Lufkin & Jenrette
represented approximately .88%, 2.02% and 2.03%, respectively, of the total
amount of brokerage commissions paid in such period and which were paid on
transactions that represented .88%, 2.02% and 2.03%, respectively, of the
aggregate dollar amount of transactions that incurred commissions paid by WM
Trust II during such period.
-86-
<PAGE>
For the years set forth below, the Funds within WM Trust II paid the following
brokerage commissions:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
TOTAL BROKERAGE COMMISSIONS PAID
- -------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal
Year ended Year ended Year ended
Fund 6/30/97 6/30/96 6/30/95
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
California Money Fund $ 0 $ 0 $ 0
- -------------------------------------------------------------------------------------
Short Term High Quality Bond Fund $ 6,064 $ 20,378 $ 7,320
- -------------------------------------------------------------------------------------
Target Maturity 2002 Fund $ 0 $ 0 $ 0
- -------------------------------------------------------------------------------------
California Municipal Fund $ 0 $ 20,982 $ 0
- -------------------------------------------------------------------------------------
California Insured Intermediate Municipal Fund $ 7,102 $ 0 $ 0
- -------------------------------------------------------------------------------------
Florida Insured Municipal Fund $ 7,935 $ 0 $ 0
- -------------------------------------------------------------------------------------
Growth Fund $616,898 $723,100 $635,228
- -------------------------------------------------------------------------------------
International Growth Fund $696,191 $860,863 $583,298
- -------------------------------------------------------------------------------------
Emerging Growth Fund $480,975 $849,149 $757,574
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
TOTAL BROKERAGE COMMISSIONS PAID TO AFFILIATED PERSONS
- -------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal
Year ended Year ended Year ended
Fund 6/30/97 6/30/96 6/30/95
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
California Money Fund $ 0 $ 0 $ 0
- -------------------------------------------------------------------------------------
Short Term High Quality Bond Fund $ 0 $ 0 $ 0
- -------------------------------------------------------------------------------------
Target Maturity 2002 Fund $ 0 $ 0 $ 0
- -------------------------------------------------------------------------------------
California Municipal Fund $ 0 $ 0 $ 0
- -------------------------------------------------------------------------------------
California Insured Intermediate Municipal Fund $ 0 $ 0 $ 0
- -------------------------------------------------------------------------------------
Florida Insured Municipal Fund $ 0 $ 0 $ 0
- -------------------------------------------------------------------------------------
Growth Fund $ 0 $ 0 $ 0
- -------------------------------------------------------------------------------------
International Growth Fund $ 0 $ 0 $ 0
- -------------------------------------------------------------------------------------
Emerging Growth Fund $ 0 $ 0 $ 0
- -------------------------------------------------------------------------------------
</TABLE>
-87-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
TOTAL BROKERAGE COMMISSIONS TOTAL AMOUNT OF
PAID TO BROKERS THAT PROVIDED TRANSACTIONS WHERE
RESEARCH BROKERAGE COMMISSIONS
WERE PAID TO BROKERS THAT
PROVIDED RESEARCH
- ------------------------------------------------------------------------------------------------------------
Fund Fiscal Year Fiscal Year
ended 6/30/97 ended 6/30/97
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
California Money Fund $ 0 $ 0
- ------------------------------------------------------------------------------------------------------------
Short Term High Quality Bond Fund $ 0 $ 0
- ------------------------------------------------------------------------------------------------------------
Target Maturity 2002 Fund $ 0 $ 0
- ------------------------------------------------------------------------------------------------------------
California Municipal Fund $ 0 $ 0
- ------------------------------------------------------------------------------------------------------------
California Insured Intermediate Municipal Fund $ 0 $ 0
- ------------------------------------------------------------------------------------------------------------
Florida Insured Municipal Fund $ 0 $ 0
- ------------------------------------------------------------------------------------------------------------
Growth Fund $ 1,310 $ 936,110
- ------------------------------------------------------------------------------------------------------------
International Growth Fund* $65,416 $118,936,350
- ------------------------------------------------------------------------------------------------------------
Emerging Growth Fund $ 961 $ 676,876
- ------------------------------------------------------------------------------------------------------------
</TABLE>
*Represents figures for period from October 18, 1996 to June 30, 1997.
WM Trust II is required to identify any securities of its "regular brokers
or dealers" (as such term is defined in the 1940 Act) which WM Trust II has
acquired during its most recent fiscal year. As of June 30, 1997, none of the
Funds held any securities of any "regular broker or dealer" of the Trust.
For the fiscal years set forth below, the Funds within WM Trust I paid the
following brokerage commissions:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
TOTAL BROKERAGE COMMISSIONS PAID
- ---------------------------------------------------------------------------
Fund Fiscal year Fiscal year Fiscal year
---- ended 1997 ended 1996 ended 1995
---------- ---------- ----------
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund* $ 0 $ 0 $ 0
- ---------------------------------------------------------------------------
Tax-Exempt Money Market Fund* 0 0 0
- ---------------------------------------------------------------------------
U.S. Government Securities Fund* 0 0 0
- ---------------------------------------------------------------------------
Income Fund* 0 0 0
- ---------------------------------------------------------------------------
Tax-Exempt Bond Fund* 0 0 0
- ---------------------------------------------------------------------------
Bond & Stock Fund** 307,372 199,663 137,742
- ---------------------------------------------------------------------------
Growth & Income Fund** 502,688 292,486 163,180
- ---------------------------------------------------------------------------
Northwest Fund** 98,599 123,164 37,280
- ---------------------------------------------------------------------------
</TABLE>
-88-
<PAGE>
* Fiscal year ending 12/31
** Fiscal year ending 10/31
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
TOTAL BROKERAGE COMMISSIONS PAID TO AFFILIATED PERSONS
- -------------------------------------------------------------------------
Fund Fiscal year Fiscal year Fiscal year
ended 1997 ended 1996 ended 1995
----------- ----------- -----------
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund* $0 $0 $0
- -------------------------------------------------------------------------
Tax-Exempt Money Market Fund* 0 0 0
- -------------------------------------------------------------------------
U.S. Government Securities Fund* 0 0 0
- -------------------------------------------------------------------------
Income Fund* 0 0 0
- -------------------------------------------------------------------------
Tax-Exempt Bond Fund* 0 0 0
- -------------------------------------------------------------------------
Bond & Stock Fund* 0 0 0
- -------------------------------------------------------------------------
Growth & Income Fund** 0 0 0
- -------------------------------------------------------------------------
Northwest Fund** 0 0 0
- -------------------------------------------------------------------------
</TABLE>
* Fiscal year ending 12/31
** Fiscal year ending 10/31
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
TOTAL BROKERAGE COMMISSIONS PAID TO BROKERS THAT PROVIDED RESEARCH
- --------------------------------------------------------------------
Fund 1997 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund* $ 0 $ 0 $ 0
- --------------------------------------------------------------------
Tax-Exempt Money Market Fund* 0 0 0
- --------------------------------------------------------------------
U.S. Government Securities Fund* 0 0 0
- --------------------------------------------------------------------
Income Fund* 0 0 0
- --------------------------------------------------------------------
Tax-Exempt Bond Fund* 0 0 0
- --------------------------------------------------------------------
Bond & Stock Fund** 307,372 199,663 137,742
- --------------------------------------------------------------------
Growth & Income Fund** 502,688 292,486 163,180
- --------------------------------------------------------------------
Northwest Fund** 98,599 123,164 37,280
- --------------------------------------------------------------------
</TABLE>
* Fiscal year ending 12/31
** Fiscal year ending 10/31
NET ASSET VALUE
-89-
<PAGE>
The Trusts will calculate the net asset value of the Funds' Class A, Class
B, Class I and Class S Shares as of the close of regular trading of the New York
Stock Exchange (currently 4:00 p.m., New York time), Monday through Friday,
exclusive of national business holidays. The Trusts will be closed on the
following national holidays: New Year's Day, Martin Luther King Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas.
A security that is primarily traded on a U.S. exchange (including
securities traded through the NASDAQ National Market System) is valued at the
last sale price on that exchange or, if there were no sales during the day, at
the current quoted bid price. Over-the-counter securities that are not traded
through the NASDAQ National Market System are valued on the basis of the bid
price at the close of business on each day. An option is generally valued at
the last sale price or, in the absence of a last sale price, the last offer
price. Investments in U.S. Government Securities (other than short-term
securities) are valued at the average of the quoted bid and asked prices in the
over-the-counter market. Short term debt securities that mature in 60 days or
less are valued at amortized cost when the Board of Trustees determines that
this constitutes fair value; assets of the Money Funds are also valued at
amortized cost. The value of a foreign security is determined in its national
currency as of the close of trading on the foreign exchange on which it is
traded or as of 4:00 p.m. New York Time, if that is earlier, and that value is
then converted into its U.S. dollar equivalent at the foreign exchange rate in
effect at noon, New York time, on the day the value of the foreign security is
determined. The value of a futures contract equals the unrealized gain or loss
on the contract, which is determined by marking the contract to the current
settlement price for a like contract acquired on the day on which the futures
contract is being valued. A settlement price may not be used if the market
makes a limit move with respect to the security or index underlying the futures
contract. In such event, the futures contract will be valued at a fair market
value to be determined by or under the direction of the Board of Trustees.
Debt securities of U.S. issuers (other than U.S. Government Securities and
short-term investments), including Municipal Securities, are valued by one or
more independent pricing services ("Pricing Service") retained by the Trusts.
When, in the judgment of the Pricing Service, quoted bid prices for investments
of the Municipal Funds are readily available and are representative of the bid
side of the market, these investments are valued at the mean between the quoted
bid prices and asked prices. Investments of the Municipal Funds that are not
regularly quoted are carried at fair market value as determined by the Board of
Trustees, which may rely on the assistance of the Pricing Service. The
procedures of the Pricing Service are reviewed periodically by the officers of
the Trusts under the general supervision and responsibility of the Board of
Trustees.
VALUATION OF THE MONEY FUNDS. The valuation of the portfolio securities of
the Money Funds is based upon their amortized costs, which does not take into
account unrealized capital gains or losses. Amortized cost valuation involves
initially valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless
-90-
<PAGE>
of the impact of fluctuating interest rates on the market value of the
instrument. While this method provides certainty in valuation, it may result in
periods during which value, as determined by amortized cost, is higher or lower
than the price a Fund would receive if it sold the instrument.
The use by the Money Funds of the amortized cost method of valuing their
respective portfolio securities is permitted by a rule adopted by the SEC.
Under this rule, the Money Funds must maintain dollar-weighted average portfolio
maturities of 90 days or less, purchase only instruments having remaining
maturities of thirteen months or less and invest only in securities determined
by the Board of Trustees of the Trusts to present minimal credit risks.
Pursuant to the rule, the Board of Trustees also has established procedures
designed to stabilize, to the extent reasonably possible, the Funds' price per
share as computed for the purpose of sales and redemptions at $1.00. Such
procedures include review of the Funds' portfolio holdings by the Board of
Trustees, at such intervals as it may deem appropriate, to determine whether the
Funds' net asset values calculated by using available market quotations or
market equivalents deviates from $1.00 per share based on amortized cost.
The rule also provides that the extent of any deviation between the Funds'
net asset values based upon available market quotations or market equivalents
and the $1.00 per share net asset values based on amortized cost must be
examined by the Board of Trustees. In the event the Board of Trustees
determines that a deviation exists which may result in material dilution or
other unfair results to investors or existing shareholders, pursuant to the rule
the Board of Trustees must cause the Trusts to take such corrective action as
the Board deems necessary and appropriate including: selling portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity; withholding dividends or paying distributions from
capital or capital gains; redeeming shares in kind; or establishing a net asset
value per share by using available market quotations.
HOW TO BUY AND REDEEM SHARES
Class A, Class B, Class I and Class S shares of the Funds may be purchased
and redeemed in the manner described in the Prospectus and in this SAl
Information. Class I shares are currently offered and sold only to the
Portfolios.
COMPUTATION OF PUBLIC OFFERING PRICES
The Funds offer their shares to the public on a continuous basis. The
public offering price per Class A share of the Funds is equal to the net asset
value next computed after receipt of a purchase order, plus the applicable
front-end sales charge, if any as set forth in the Prospectus. The public
offering price per Class B, Class I or Class S share of the Funds is equal to
the net asset value next computed after receipt of a purchase order.
-91-
<PAGE>
An illustration of the computation of the public offering price per Class A
Share of the Short Term High Quality Bond, Target Maturity 2002, California
Municipal, California Insured Intermediate Municipal, Florida Insured Municipal,
Growth, International Growth and Emerging Growth Funds is provided in the table
below. The computation is based on the value of each Fund's net assets, the
number of Class A shares outstanding on June 30, 1997 and the application of the
maximum sales charge for the Funds, as set forth in the table below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
California
Short Term Target Insured Florida
High Maturity Intermediate California Insured
Quality 2002 Municipal Municipal Municipal Growth International
Class A Shares Bond Fund/3/ Fund/4/ Fund/1/ Fund/1/ Fund/1/ Fund/2/ Growth Fund/2/
--------------- ----------- -------- ------------ ---------- -------- ------- --------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Assets............. $13,685,006 $2,815,868 $45,156,682 $318,251,461 $22,761,049 $111,186,791 $57,776,390
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding Shares..... 5,898,076 263,366 4,205,143 29,146,582 2,291,279 7,462,279 4,876,565
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value
Per Share............. $ 2.32 $ 10.69 $ 10.74 $ 10.92 $ 9.93 $ 14.90 $ 11.85
- ----------------------------------------------------------------------------------------------------------------------------------
Sales Charge, as a
percentage of the
offering price........ 3.50% 2.00% 4.50% 4.50% 4.50% 5.50% 5.50%
- ----------------------------------------------------------------------------------------------------------------------------------
Offering to Public..... $ 2.40 $ 10.91 $ 11.25 $ 11.43 $ 10.40 $ 15.77 $ 12.54
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------
Emerging
Growth
Class A Shares Fund/2/
--------------- -------------
- ------------------------------------------------
<S> <C>
Net Assets............. $165,719,142
- ------------------------------------------------
Outstanding Shares..... 9,066,672
- ------------------------------------------------
Net Asset Value
Per Share............. $ 18.28
- ------------------------------------------------
Sales Charge, as a
percentage of the
offering price........ 5.50
- ------------------------------------------------
Offering to Public..... $ 19.34
- ------------------------------------------------
</TABLE>
_______________________
1. The maximum sales charge for the California Municipal, California
Insured Intermediate Municipal and Florida Insured Municipal Funds
is 4.50%.
2. The maximum sales charge for the Growth, International Growth and
Emerging Growth Funds is 5.50%.
3. The maximum sales charge for the Short Term High Quality Bond Funds
is 3.5%.
4. The maximum sales charge for the Target Maturity 2002 Fund is 2.0%.
In addition to the purchases on which the sales charge is waived as listed
in the Prospectus, no sales charge will be assessed on a purchase by any other
investment company in connection with the combination of such company with the
Trust by merger, acquisition of assets or otherwise.
An illustration of the computation of the Public Offering Price per Class A
and Class B shares of the Money Market, Tax-Exempt Money Market, Income, U.S.
Government Securities, Bond & Stock, Growth & Income and Northwest Funds is set
forth below in the form of a Specimen Price Make-Up Sheet below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
SPECIMEN PRICE MAKE-UP SHEET
- ----------------------------------------------------------------------------------------------------------------------------
Tax-Exempt U.S.
Money Money Government Tax-Exempt
Market Market Securities Income Bond Bond & Growth &
Fund** Fund** Fund** Fund** Fund** Stock Fund* Income Fund*
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets $264,491,582 $33,233,969 $141,639,195 $94,019,168 $212,991,303 $279,311,840 $203,202,475
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
-------------
Northwest
Fund*
- --------------------------------------
<S> <C>
Assets $193,179,356
- --------------------------------------
</TABLE>
-92-
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Liabilities $ 3,143,472 $ 1,087,699 517,201 239,890 4,119,520 1,654,274 2,020,579
- ----------------------------------------------------------------------------------------------------------------------------
Net Assets $261,348,110 $32,146,270 $141,121,994 $93,779,278 $208,871,783 $277,657,566 $201,181,896
- ----------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES
- ----------------------------------------------------------------------------------------------------------------------------
Net Assets $260,877,498 $32,134,470 $138,159,478 $86,657,040 $203,606,240 $255,414,120 $178,330,523
- ----------------------------------------------------------------------------------------------------------------------------
Shares Outstanding $260,877,498 $32,134,470 13,204,217 9,467,260 26,002,410 17,361,806 10,334,058
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value Per
Share $ 1.00 $ 1.00 $ 10.46 $ 9.15 $ 7.83 $ 14.71 $ 17.26
- ----------------------------------------------------------------------------------------------------------------------------
Maximum Offering Price $ 1.00 $ 1.00 $ 10.90 $ 9.53 $ 15.40 $ 18.07
- ----------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $ 8.16
- ----------------------------------------------------------------------------------------------------------------------------
Net Assets $ 470,612 $ 11,800 $ 2,962,516 $ 7,122,238 $ 5,265,543 $ 22,243,446 $ 22,851,373
- ----------------------------------------------------------------------------------------------------------------------------
Shares Outstanding $ 470,612 $ 11,800 283,151 776,973 672,375 1,514,671 1,331,165
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value and $ 1.00 $ 1.00 $ 10.46 $ 9.17 $ 7.83 $ 14.69 $ 17.17
Offering Price Per Share
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------
<S> <C>
Liabilities 1,819,938
- ----------------------------------------------------
Net Assets $191,359,418
- ----------------------------------------------------
CLASS A SHARES
- ----------------------------------------------------
Net Assets $176,706,441
- ----------------------------------------------------
Shares Outstanding 8,972,376
- ----------------------------------------------------
Net Asset Value Per
Share $ 19.69
- ----------------------------------------------------
Maximum Offering Price $ 20.62
- ----------------------------------------------------
CLASS B SHARES
- ----------------------------------------------------
Net Assets $ 14,652,997
- ----------------------------------------------------
Shares Outstanding 753,528
- ----------------------------------------------------
Net Asset Value and $ 19.45
Offering Price Per Share
- ----------------------------------------------------
</TABLE>
* As of October 31, 1997
** As of December 31, 1997
REDEMPTIONS
The procedures for redemption of Class A, Class B and Class S shares of
each Fund and Portfolio are summarized in the Prospectus under "How to Sell
Shares." The right of redemption of Class A, Class B and Class S shares of a
Fund and Class A and Class B of a Portfolio may be suspended or the date of
payment postponed (1) for any periods during which the New York Stock Exchange
is closed (other than for customary weekend and holiday closings), (2) when
trading in the markets the Fund normally utilizes is restricted, or an
emergency, as defined by the rules and regulations of the SEC, exists making
disposal of a Fund's or Portfolio's investments or determination of its net
asset value not reasonably practicable or (3) for such other periods as the SEC
by order may permit for protection of shareholders.
CERTAIN WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGES. Contingent
deferred sales charges (each, a "CDSC") imposed upon redemptions of Class A,
----
Class B and Class S shares will be waived in certain instances.
APPLICATION OF CLASS A SHARES CDSC. The Class A CDSC of 1.0% or 0.5% may
be imposed on certain redemptions within one or two years of purchase,
respectively, with respect to Class A shares (i) purchased at NAV without a
sales charge at time of purchase due to purchases of $1 million or more, or (ii)
acquired, including Class A Shares of a Money Fund acquired, through an exchange
for Class A Shares of a Non-Money Fund purchased at NAV without a sales charge
at time of purchase due to purchases of $1 million or more. The CDSCs for Class
A Shares are calculated on the lower of the shares' cost or current net asset
value, and in
-93-
<PAGE>
determining whether the CDSC is payable, the Funds will first redeem shares not
subject to any CDSC.
With respect to certain investors who purchase Class A shares through an
authorized dealer and who receive a waiver of the entire initial sales charge on
Class A Shares because the Class A Shares where purchased through a plan
qualified under Section 401(k) of the Code ("401(k) Plan") or through a plan
-----------
qualified under Section 403(b) of the Code ("403(b) Plan") or who hold Class A
-----------
Shares of a Money Fund that were acquired through an exchange for Non-Money Fund
Class A Shares that were purchased at NAV through one of such plans, a CDSC of
1% may be imposed on the amount that was invested through the plan in such Class
A Shares and that is redeemed (i) if, within the first two years after the
plan's initial investment in the Funds, the named fiduciary of the plan
withdraws the plan from investing in the Funds in a manner that causes all
shares held by the plan's participants to be redeemed; or (ii) by a plan
participant in a 403(b) Plan within two years of the plan participant's purchase
of such Class A Shares. This CDSC will be waived on redemptions in connection
with certain involuntary distributions, including distributions arising out of
the death or disability of a shareholder (including one who owns the shares as
joint tenant). See "How to Buy and Redeem Shares" in the SAI.
WAIVERS OF CLASS A SHARES CDSC. The Class A CDSC is waived for redemptions
of Class A Shares (i) that are part of exchanges for Class A Shares of other
Funds; (ii) for distributions to pay benefits to participants from a retirement
plan qualified under Section 401(a) or 401(k) of the Code, including
distributions due to the death or disability of the participant (including one
who owns the shares as a joint tenant); (iii) for distributions from a 403(b)
Plan or an IRA due to death, disability, or attainment of age 70 1/2, including
certain involuntary distributions; (iv) for tax-free returns of excess
contributions to an IRA; (v) for distributions by other employee benefit plans
to pay benefits; (vi) in connection with certain involuntary distributions;
(vii) for systematic withdrawals in amounts of 1% or less per month; and (viii)
by a 401(k) Plan participant so long as the shares were purchased through the
401(k) Plan and the 401(k) Plan continues in effect with investments in Class A
Shares of the Fund. See "How to Buy and Redeem Shares" in the SAI.
For purposes of the waivers described in such section of the Prospectus, a
person will be deemed "disabled" only if the person is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or be of long-
continued and indefinite duration.
DEFERRED SALES CHARGE ALTERNATIVE: CLASS B AND CLASS S SHARES. If you
choose the deferred sales charge alternative, you will purchase Class B Shares
at their NAV per share without the imposition of a sales charge at the time of
purchase. Class B Shares of the Short Term High Quality Bond Fund that are
redeemed within four years of purchase, and Class B Shares of the remaining
Funds and Portfolios that are redeemed within five years of purchase,
-94-
<PAGE>
however, will be subject to a CDSC as described below. CDSC payments and
distribution fees on Class B Shares may be used to fund commissions payable to
Authorized Dealers.
No charge will be imposed with respect to shares having a value equal to any net
increase in the value of shares purchased during the preceding four or five
years and shares acquired by reinvestment of net investment income and capital
gain distributions. The amount of the charge is determined as a percentage of
the lesser of (1) the NAV of the Class B Shares at the time of purchase or (2)
the NAV of the Class B Shares at the time of redemption. The percentage used to
calculate the CDSC will depend on the number of years since you invested the
dollar amount being redeemed, according to the following table:
<TABLE>
<CAPTION>
Class B shares of all Funds (except Class B shares of all Funds of WM Trust II Class B shares of all Funds of
for the Short Term High Quality (except for the Short Term High Quality WM Trust I purchased before
Bond Fund), Portfolios Bond Fund), Portfolios and Class S shares of March 20, 1998/*/ and the Short
and Class S shares of all Funds all Funds purchased before March 20, 1998 Term High Quality Bond Fund
- ------------------------------- ----------------------------------------- --------------------------------
Year of Contingent Year of Contingent Year of
Redemption Deferred Redemption Deferred Redemption Contingent
After Purchase Sales Charge After Purchase Sales Charge After Purchase Deferred Sales Charge
- ------------------ ------------ -------------- -------------- ----------------- ---------------------
<S> <C> <C> <C> <C> <C>
First................ 5.00% First......... 5.00% First............... 4.00%
Second............... 4.00% Second........ 4.00% Second.............. 3.00%
Third................ 3.00% Third......... 3.00% Third............... 2.00%
Fourth............... 2.00% Fourth........ 3.00% Fourth.............. 1.00%
Fifth................ 1.00% Fifth......... 2.00% Fifth and following. 0%
Sixth and following 0.00% Sixth......... 1.00%
Seventh and 0.00%
following
</TABLE>
All purchases are considered made on the last day of the month of purchase.
To determine the CDSC payable on a redemption of Class B Shares, a Fund will
first redeem Class B Shares not subject to a CDSC. Thereafter, to determine the
applicability and rate of any CDSC, it will be assumed that shares representing
the reinvestment of dividends and capital gain distributions are redeemed first
and shares held for the longest period of time are redeemed next. Using this
method, your sales charge, if any, will be at the lowest possible CDSC rate.
The Trusts will adopt procedures to convert Class B Shares, without payment
of any sales charges, into Class A Shares, which have lower distribution fees,
after the passage of a number of years after purchase. Such conversion may occur
in approximately eight years.
_______________________
* Class B shares of the U.S. Government Securities, Income and Tax-Exempt
Bond Funds purchased prior to March 15, 1996, and Class B shares of the Growth &
Income, Bond & Stock and Northwest Funds purchased prior to January 15, 1996,
are subject to a contingent deferred sales charge of 3% if redeemed the first or
second year after purchase, 2% in the third or fourth year, 1% in the fifth
year, and 0% in year six.
-95-
<PAGE>
WAIVERS OF CLASS B CDSCS. For each of the Funds within WM Trust II
purchased prior to March 20, 1998, no CDSC charges will be assessed on
redemptions of Class B Shares in the case of systematic withdrawals in amounts
of 1% or less per month; death of the shareholder; and redemptions in connection
with certain involuntary distributions, including distributions arising out of
the death or disability of a shareholder or attainment of age 70 1/2, from
IRAs. The foregoing waivers may be changed at any time. For waivers with
respect to each of the other Funds and Portfolios, or for shares of the Funds
within WM Trust II purchased on or after March 20, 1998, see the Prospectus.
DISTRIBUTIONS IN KIND. If the Board of Trustees determines that it would
be detrimental to the best interests of the remaining shareholders of a Fund to
make a redemption payment wholly in cash, the Trusts may pay, in accordance with
SEC rules, any portion of a redemption in excess of the lesser of $250,000 or 1%
of the Fund's net assets by distribution in kind of portfolio securities in lieu
of cash. Securities issued in a distribution in kind will be readily
marketable, although shareholders receiving distributions in kind may incur
brokerage commissions when subsequently redeeming shares of those securities.
SYSTEMATIC WITHDRAWAL PLAN. As described in the Prospectus, a Systematic
Withdrawal Plan may be established by a shareholder who owns either Class A or
Class B Shares of a Fund with a value exceeding $5,000 and who wishes to receive
specific amounts of cash periodically. Monthly, quarterly, semiannual or annual
withdrawals in a minimum amount of $100 may be made under the Systematic
Withdrawal Plan by redeeming as many shares of the Fund or Portfolio as may be
necessary to cover the stipulated withdrawal payment. The CDSC on Class B
Shares is waived for withdrawals under a Systematic Withdrawal Plan that meets
certain conditions as described in "Buying Class B or Class S shares -
Contingent deferred sales charge" in the Prospectus. To the extent that
withdrawals exceed dividends, distributions and appreciation of a shareholder's
investment in a Fund or Portfolio, there will be a reduction in the value of the
shareholder's investment in the relevant class of the Fund or Portfolio and
continued withdrawal payments may reduce the shareholder's investment and
ultimately exhaust it. Withdrawal payments should not be considered as income
from investment in a Fund or Portfolio. For additional information regarding
the Systematic Withdrawal Plan, write to the WM Group of Funds at Suite 300, 601
West Main Avenue, Spokane, Washington 99201-0613 or by calling the Trust at 800-
222-5852.
CHECK REDEMPTION PRIVILEGE. Checkwriting is available for the Class A
Shares of the Money Funds only. Checks to redeem shares of any of the Money
Funds are drawn on the account of the Fund at Boston Safe and shareholders will
be subject to the same rules and regulations that Boston Safe applies to
checking accounts and, will have the same rights and duties with respect to stop
payment orders, "stale" checks, and unauthorized endorsements as bank checking
account customers do under Massachusetts Uniform Commercial Code. All notices
with regard to those rights and duties must be given to Boston Safe.
HOW TO EXCHANGE SHARES
-96-
<PAGE>
You may exchange shares of any of the Funds or Portfolios for shares of the
same class of any other of the Funds or Portfolios. Exchanges of shares are
sales and may result in a gain or loss for income tax purposes.
Exchanges are made at the relative NAVs of the shares being exchanged. No
additional sales charge will be incurred when exchanging shares from a Fund
which imposes an initial or contingent deferred sales charge. Any contingent
deferred sales charge on the subsequent sale of shares acquired by exchange will
be based on the contingent deferred sales charge schedule of the Fund originally
purchased. Shares exchanged from Money Fund will be subject to the acquired
Fund's sales charge unless the shares given in exchange were previously
exchanged from a Fund that imposes an initial or contingent deferred sales
charge. Shares of the Funds may also be exchanged for shares of the Prime
Income Fund. Exchanges for shares is subject to the availability of shares of
the Prime Income Fund. Also, although shares of the WM Prime Income Fund may be
exchanged for shares of the Funds, such exchanges are permitted approximately
once each calendar quarter so long as the Prime Income Fund makes a repurchase
offer for its shares in such quarter and so long as the Prime Income Fund's
repurchase offer is sufficiently large to include Prime Income Fund shares
tendered for exchange. For more information about the Prime Income Fund, please
consult your investment representatives or call the Distributor.
All exchanges are subject to the minimum investment requirements of the
Fund being acquired and to its availability for sale in your state of residence.
You may arrange for automatic monthly exchanges. The Funds or Portfolios reserve
the right to refuse any order for the purchase of shares, including those by
exchange. In particular, a pattern of exchanges that coincides with a "market
timing" strategy may be disruptive to a Fund or Portfolios and, consequently,
may be disallowed.
DETERMINATION OF PERFORMANCE
From time to time, the Trusts may quote the performance of a Fund's or
Portfolio's Class A, Class B and Class S Shares in terms of yield, actual
distributions, total return or capital appreciation in reports or other
communications to shareholders or in advertising material. The yield for the
Class A, Class B and Class S Shares of the Money Funds is computed by: (1)
determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account in each Fund having a balance of one share at
the beginning of a seven calendar day period for which yield is to be quoted,
(2) subtracting a hypothetical change reflecting deductions from shareholder
accounts, (3) dividing the net change by the value of the account at the
beginning of the period to obtain the base period return, and (4) annualizing
the results (i.e., multiplying the base period return by 365/7). The net change
----
in the value of the account reflects the value of additional shares purchased
with dividends declared on the original share and any such additional shares,
but does not include realized gains and losses or unrealized appreciation or
depreciation. In addition, the Money Funds may calculate a compounded
-97-
<PAGE>
effective annualized yield by adding 1 to the base period return (calculated as
described above), raising the sum to a power equal to 365/7 and subtracting 1.
The current yield for the Money Funds and the Target Maturity 2002 Fund may
be obtained by calling 800-222-5852. For the seven-day period ended December
31, 1997, the yield for the outstanding shares of the California Money Fund that
are treated as Class A Shares was 3.03% and the effective yield of such shares
of that Fund for the same period was 3.07%. The California Money Fund may also
calculate its tax equivalent yield as described below.
The Municipal Funds and Fixed-Income Funds may quote a 30-day yield figure
(the "SEC Yield") which is calculated according to a formula prescribed by the
---------
SEC. The formula can be expressed as follows:
YIELD = 2[(a-b + 1)/6/ - 1]
---
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
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<PAGE>
reimbursement).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the maximum offering price per share on the last
day of the period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by one of the Municipal and
Fixed-Income Funds at a discount or premium, the formula generally calls for
amortization of the discount or premium; the amortization schedule will be
adjusted monthly to reflect changes in the market values of the debt
obligations.
Based on the foregoing calculation, the SEC Yields relating to the
outstanding shares treated as Class A Shares for the 30-day period ended
12/31/97 are as follows:
<TABLE>
<CAPTION>
Fund Yield
---- -----
<S> <C>
Short Term High Quality Bond Fund............... 5.86%
Target Maturity 2002 Fund....................... 5.40
U.S. Government Securities Fund................. 5.37
Income Fund..................................... 5.93
Tax-Exempt Bond Fund............................ 3.94
California Municipal Fund....................... 4.29
California Insured Intermediate Municipal Fund.. 3.49
Florida Insured Municipal Fund.................. 4.07
Income Portfolio................................ 5.51
Flexible Income Portfolio....................... 3.95
Balanced Portfolio.............................. 1.41
</TABLE>
In addition, the Fund or Portfolio may quote a 30-day yield based on actual
distributions during a 30-day period that is computed by dividing the net
investment income per share earned by the Fund or Portfolio during the period by
the maximum Public Offering Price per share on the last day of the 30-day
period. This income is "annualized" by assuming that the amount of income is
generated each month over a one-year period and is compounded semiannually. The
annualized income is then shown as a percentage of the maximum Public Offering
Price. In addition, the Municipal Funds, the Fixed-Income Funds and the Income,
Flexible Income and Balanced Portfolios may advertise a similar 30-day yield
computed in the same manner except that the NAV per share is used in place of
the Public Offering Price per share. These 30-day average yields for the period
ended December 31, 1997 for the outstanding shares of the Tax-Exempt Bond,
California Municipal, California Insured Intermediate Municipal and Florida
-99-
<PAGE>
Insured Municipal Funds and the Income, Flexible Income and Balanced Portfolios
were 4.50%, 5.13%, 4.44%, 4.66%, 5.74%, 4.13%, and 1.51%, respectively.
The tax equivalent yield for the Tax-Exempt Money Market, California Money,
Tax-Exempt Bond, California Municipal, California Insured Intermediate Municipal
and Florida Insured Municipal Funds is computed by dividing that portion of the
Fund's yield which is tax-exempt by one minus a stated federal and/or state
income tax rate and adding the product to that portion, if any, of the Fund's
yield that is not tax-exempt. The tax-equivalent yields for the outstanding
shares of the Tax-Exempt Money Market and California Money Fund, that are
treated as Class A Shares, for the 7-day period ended December 31, 1997 were
5.62% and 5.93%, respectively. The tax equivalent SEC 30-day yields for the
period ended December 31, 1997 for the outstanding shares of the Tax-Exempt
Bond, California Municipal, California Insured Intermediate Municipal, and
Florida Insured Municipal Funds were 6.52%, 7.83%, 6.37% and 6.74%,
respectively. The tax equivalent yield based on the 30-day average yield for
the period ended December 31, 1997 for the outstanding shares of the Tax-Exempt
Bond, California Municipal, California Insured Intermediate Municipal and
Florida Insured Municipal Funds were 7.45%, 10.04%, 8.69% and 9.12%,
respectively. Tax-equivalent yields assume the payment of federal income taxes
at a rate of 39.6% and, if applicable, California state income taxes at a rate
of 9.3%.
Capital appreciation for Class A, Class B and Class S shares of the
Municipal, Fixed-Income and the Equity Funds and the Portfolios (Class A and
Class B shares) shows principal changes for the period shown, and total return
combines principal changes and dividend and interest income reinvested for the
periods shown. Principal changes are based on the difference between the
beginning and closing net asset values for the period. Actual distributions
include short-term capital gains derived from option writing or other sources.
The period selected for performance data will depend upon the purpose of
reporting the performance.
The total return of the Funds' and the Portfolios' (Class A and Class B
shares) Class A, Class B and Class S shares may be calculated on an "average
annual total return" basis, and may also be calculated on an "aggregate total
return" basis, for various periods. Average annual total return reflects the
average annual percentage change in the value of an investment in a Fund over
the particular measuring period. Aggregate total return reflects the cumulative
percentage change in value over the measuring period. Average annual total
return figures provided for Class A, Class B and Class S Shares of the Fixed-
Income and Equity Funds and the Portfolios (Class A and Class B shares) will be
computed according to a formula prescribed by the SEC. The formula can be
expressed as follows:
-100-
<PAGE>
P(1+T)/n/ = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return/aggregate total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
years (or other) periods or the life of the Fund
The formula for calculating aggregate total return can be expressed as
follows:
Aggregate Total Return = [ (ERV) - 1 ]
---
P
The calculation of average annual total return and aggregate total return
assumes reinvestment of all income dividends and capital gain distributions on
the reinvestment dates during the period and includes all recurring fees charged
to all shareholder accounts. In addition, with respect to Class A Shares, the
maximum sales charge is deducted from the initial $1,000 payment (variable "P"
in the formula).
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period and reflects deduction of all nonrecurring charges
at the end of the measuring period covered by the computation. A Fund's net
investment income changes in response to fluctuations in interest rates and the
expenses of the Fund.
The average annual rates of return (unless otherwise noted) for the Funds
for the one-year, five-year and ten-year periods and for the period since
inception , in each case ended December 31, 1997 (except in the case of the Bond
& Stock, Growth & Income and Northwest Funds, for which returns are given for
periods ended October 31, 1997) are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Aggregate
Total Return for
Since Ten Year Period
Fund and inception date Date or from Date of
of Inception, if
One Year Five Year Ten Year Inception shorter
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHORT TERM HIGH QUALITY BOND FUND
CLASS A SHARES 11/1/93
Adjusted for Maximum Sales Charge 5.77% N/A N/A 3.43%
Not Adjusted for Sales Charge 2.07% N/A N/A 4.32%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 1.00% N/A N/A 4.34%
Not Adjusted for Sales Charge 4.98% N/A N/A 4.59%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge (2.24%) N/A N/A 3.84%
Not Adjusted for Sales Charge 2.76% N/A N/A 4.59%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
-101-
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------
Aggregate
Total Return for
Since Ten Year Period
Fund and inception date Date or from Date of
of Inception, if
One Year Five Year Ten Year Inception shorter
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TARGET MATURITY 2002 FUND
CLASS A SHARES 3/20/95
Adjusted for Maximum Sales Charge 6.10% N/A N/A 8.61%
Not Adjusted for Sales Charge 8.27% N/A N/A 7.83%
- -------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND
CLASS A SHARES
Adjusted for Maximum Sales Charge 5.48% 5.84% 7.96% 115.09%
Not Adjusted for Sales Charge 9.92% 6.70% 8.40% 119.89%
CLASS B SHARES 3/30/94
Adjusted for Maximum Sales Charge 6.03% N/A N/A 6.74% 27.76%
Not Adjusted for Sales Charge 9.03% N/A N/A 7.96% 29.76%
- -------------------------------------------------------------------------------------------------------------
INCOME FUND
CLASS A SHARES
Adjusted for Maximum Sales Charge 6.10% 7.09% 8.16% 119.11%
Not Adjusted for Sales Charge 10.51% 7.95% 8.61% 124.07%
CLASS B SHARES 3/30/94
Adjusted for Maximum Sales Charge 6.51% N/A N/A 7.74% 32.32%
Not Adjusted for Sales Charge 9.51% N/A N/A 7.96% 39.32%
- -------------------------------------------------------------------------------------------------------------
TAX-EXEMPT BOND FUND
CLASS A SHARES
Adjusted for Maximum Sales Charge 4.20% 5.85% 7.50% N/A 106.10%
Not Adjusted for Sales Charge 8.59% 6.73% 7.93% N/A 110.52%
CLASS B SHARES 3/30/94
Adjusted for Maximum Sales Charge 4.71% N/A N/A 6.21% 25.39%
Not Adjusted for Sales Charge 7.71% N/A N/A 6.45% 27.39%
- -------------------------------------------------------------------------------------------------------------
CALIFORNIA MUNICIPAL FUND
CLASS A SHARES 7/25/89
Adjusted for Maximum Sales Charge 15.33% 6.17% N/A 7.04%
Not Adjusted for Sales Charge 10.30% 7.15% N/A 7.63%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 4.48% N/A N/A 6.95%
Not Adjusted for Sales Charge 9.48% N/A N/A 7.67%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge 4.48% N/A N/A 6.95%
Not Adjusted for Sales Charge 9.48% N/A N/A 7.67%
- -------------------------------------------------------------------------------------------------------------
CALIFORNIA INSURED INTERMEDIATE MUNICIPAL
FUND
CLASS A SHARES 4/4/94
Adjusted for Maximum Sales Charge 2.32% N/A N/A 6.37%
Not Adjusted for Sales Charge 7.14% N/A N/A 7.69%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 1.34% N/A N/A 6.01%
Not Adjusted for Sales Charge 6.34% N/A N/A 6.75%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge 1.34% N/A N/A 6.01%
Not Adjusted for Sales Charge 6.34% N/A N/A 6.75%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
-102-
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------
Aggregate
Total Return for
Since Ten Year Period
Fund and inception date Date or from Date of
of Inception, if
One Year Five Year Ten Year Inception shorter
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FLORIDA INSURED MUNICIPAL FUND
CLASS A SHARES 6/7/93
Adjusted for Maximum Sales Charge 5.06% N/A N/A 5.00%
Not Adjusted for Sales Charge 10.01% N/A N/A 6.06%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 4.19% N/A N/A 6.76%
Not Adjusted for Sales Charge 9.19% N/A N/A 7.48%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge 4.19% N/A N/A 6.76%
Not Adjusted for Sales Charge 9.19% N/A N/A 7.48%
- -------------------------------------------------------------------------------------------------------------
BOND & STOCK FUND
CLASS A SHARES
Adjusted for Maximum Sales Charge 15.37% 13.06% 11.99% 207.81%
Not Adjusted for Sales Charge 20.81% 14.10% 12.51% 216.60%
CLASS B SHARES 3/30/94
Adjusted for Maximum Sales Charge 16.86% N/A N/A 15.82% 69.70%
Not Adjusted for Sales Charge 19.86% N/A N/A 16.01% 71.70%
- -------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUND
CLASS A SHARES
Adjusted for Maximum Sales Charge 25.34% 17.69% 13.85% 267.27%
Not Adjusted for Sales Charge 31.24% 18.77% 14.37% 273.58%
CLASS B SHARES 3/30/94
Adjusted for Maximum Sales Charge 27.20% N/A N/A 21.65% 102.76%
Not Adjusted for Sales Charge 30.20% N/A N/A 21.81% 104.76%
- -------------------------------------------------------------------------------------------------------------
GROWTH FUND
CLASS A SHARES 4/5/93
Adjusted for Maximum Sales Charge 3.74% N/A N/A 14.99%
Not Adjusted for Sales Charge 9.78% N/A N/A 16.44%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 3.93% N/A N/A 18.99%
Not Adjusted for Sales Charge 8.90% N/A N/A 19.55%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge 4.00% N/A N/A 19.01%
Not Adjusted for Sales Charge 8.97% N/A N/A 19.56%
- -------------------------------------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
CLASS A SHARES 7/18/90
Adjusted for Maximum Sales Charge (8.10%) 6.34% N/A 1.70%
Not Adjusted for Sales Charge (2.49%) 7.61% N/A 2.91%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge (7.57%) N/A N/A 0.85%
Not Adjusted for Sales Charge (3.19%) N/A N/A 1.55%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge (7.65%) N/A N/A 0.82%
Not Adjusted for Sales Charge (3.26%) N/A N/A 1.53%
- -------------------------------------------------------------------------------------------------------------
NORTHWEST FUND
CLASS A SHARES
Adjusted for Maximum Sales Charge 37.95% 15.60% 17.53% 402.71%
Not Adjusted for Sales Charge 44.47% 16.68% 18.07% 421.69%
CLASS B SHARES 3/30/94
Adjusted for Maximum Sales Charge 40.17% N/A N/A 20.29% 94.66%
Not Adjusted for Sales Charge 43.17% N/A N/A 20.47% 96.66%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
-103-
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------
Aggregate
Total Return for
Since Ten Year Period
Fund and inception date Date or from Date of
of Inception, if
One Year Five Year Ten Year Inception shorter
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EMERGING GROWTH FUND
CLASS A SHARES 7/18/90
Adjusted for Maximum Sales Charge 6.15% 13.17% N/A 12.87%
Not Adjusted for Sales Charge 12.63% 14.52% N/A 13.77%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 6.78% N/A N/A 16.43%
Not Adjusted for Sales Charge 11.78% N/A N/A 17.01%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge 6.78% N/A N/A 16.43%
Not Adjusted for Sales Charge 11.78% N/A N/A 17.01%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Each Portfolio is modeled after an investment strategy used by the Sierra
Asset Management ("SAM") program, an investment management service offered by
Sierra Investments Services Corp., the Portfolios' former investment adviser,
that allocates investments across a combination of the underlying Funds. Set
forth below is certain performance data for the Portfolios and, prior to the
Portfolios' inception, those strategies. Performance information for the
strategies is deemed relevant because each strategy was managed using virtually
the same investment objectives, policies and restrictions as those used by the
Portfolios. Nonetheless, the performance data is not necessarily indicative of
the future performance of the Portfolios.
Because of certain differences in the expenses applicable to the SAM
program and the Portfolios, the following performance information has been
adjusted by applying the current total expense ratios for the Class A Shares of
the Portfolios. The average annual total return of the following investment
strategies for the one-year period, the five-year period and the period from
inception of the strategy, in each case ended December 31, 1997, was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Since Date
of
Portfolio/strategy and inception date One Year Five Year Ten Year Inception
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STRATEGIC GROWTH PORTFOLIO
CLASS A SHARES 5/31/95
Adjusted for Maximum Sales Charge 5.71% N/A N/A 14.26%
Not Adjusted for Sales Charge 12.16% N/A N/A 16.91%
CLASS B SHARES 5/31/95
Adjusted for Maximum Sales Charge 6.31% N/A N/A 15.20%
Not Adjusted for Sales Charge 11.31% N/A N/A 16.12%
- --------------------------------------------------------------------------------------
CONSERVATIVE GROWTH PORTFOLIO
CLASS A SHARES 9/30/90
Adjusted for Maximum Sales Charge 2.68% 9.90% N/A 11.30%
Not Adjusted for Sales Charge 8.65% 11.15% N/A 12.18%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 2.87% N/A N/A 11.09%
Not Adjusted for Sales Charge 7.87% N/A N/A 11.74%
- --------------------------------------------------------------------------------------
</TABLE>
-104-
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCED PORTFOLIO
CLASS A SHARES 9/30/90
Adjusted for Maximum Sales Charge 4.43% 8.84% N/A 9.43%
Not Adjusted for Sales Charge 10.22% 10.02% N/A 10.25%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 4.40% N/A N/A 10.33%
Not Adjusted for Sales Charge 9.40% N/A N/A 11.00%
- --------------------------------------------------------------------------------------
FLEXIBLE INCOME PORTFOLIO
CLASS A SHARES 3/31/93
Adjusted for Maximum Sales Charge 5.29% N/A N/A 6.59%
Not Adjusted for Sales Charge 10.25% N/A N/A 7.63%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 4.43% N/A N/A 9.35%
Not Adjusted for Sales Charge 9.43% N/A N/A 10.03%
- --------------------------------------------------------------------------------------
INCOME PORTFOLIO
CLASS A SHARES 9/30/90
Adjusted for Maximum Sales Charge 3.41% 4.73% N/A 6.93%
Not Adjusted for Sales Charge 8.29% 5.70% N/A 7.62%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 2.48% N/A N/A 5.88%
Not Adjusted for Sales Charge 7.48% N/A N/A 6.61%
- --------------------------------------------------------------------------------------
</TABLE>
The performance of a Fund's Class A, Class B and Class S Shares and the
Portfolio's Class A and Class B shares will vary from time to time depending
upon market conditions, the composition of the Fund's or Portfolio's portfolio
and the Fund's or Portfolio's operating expenses. Consequently, any given
performance quotation should not be considered representative of the Fund's or
Portfolio's performance for any specified period in the future. In addition,
because performance will fluctuate, it may not provide a basis for comparing an
investment in a Fund or Portfolio with certain bank deposits or other
investments that pay a fixed yield or return for a stated period of time.
Investors should recognize that, because the Funds other than the Equity
Funds and each of the Portfolios will have a high component of fixed-income
securities, in periods of declining interest rates the yields of the Funds will
tend to be somewhat higher than prevailing market rates, and in periods of
rising interest rates yields will tend to be somewhat lower. In addition, when
interest rates are falling, the inflow of net new money to the Funds and
Portfolios from the continuous sale of shares will likely be invested in
portfolio instruments producing lower yields than the balance of the Fund's or
Portfolio's securities, thereby reducing the current yields of the Funds. In
periods of rising interest rates, the opposite can be expected to occur.
Comparative performance information may be used from time to time in advertising
the Trusts' Class A, Class B and Class S Shares, including data from Lipper
Analytical Services, Inc., the S&P 500 Composite Stock Price Index, the Dow
Jones Industrial Average and other industry publications. The International
Growth Fund may compare its performance to other investments or relevant indexes
consisting of Morgan Stanley Capital International EAFE Index, the Standard &
Poor's 500 Index, the Lipper International Fund Index and The Financial Times
World Stock Index.
-105-
<PAGE>
TAXES
The following discussion of federal income tax consequences is based on the
Code and the regulations issued thereunder as in effect on the date of this
Statement of Additional Information and all references to the Funds in this
discussion includes the Portfolios. New legislation, as well as administrative
changes or court decisions, may significantly alter the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
Each Fund is treated as a separate entity for federal income tax purposes
and is not combined with the other Funds within a Trust. Each of the Funds
intends to continue qualifying as a "regulated investment company" ("RIC") as
---
defined under Subchapter M of the Code. A Fund that is a RIC and distributes to
its shareholders at least 90% of its taxable net investment income (including,
for this purpose, its net realized short-term capital gains) and 90% of its tax-
exempt interest income (reduced by certain expenses), will not be liable for
federal income taxes to the extent its taxable net investment income and its net
realized long-term and short-term capital gains, if any, are distributed to its
shareholders.
In order to qualify as a RIC under the Code, in addition to satisfying the
distribution requirement described above, each Fund must (a) derive at least 90%
of its gross income each taxable year from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock,
securities, or foreign currencies, and certain other related income, including,
generally, certain gains from options futures, and forward contracts; and (b)
diversify its holdings so that, at the end of each fiscal quarter of the Fund's
taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash and cash items, U.S. Government Securities, securities of
other RICs, and other securities, with such other securities limited, in respect
to any one issuer, to an amount that does not represent more than 10% of the
outstanding voting securities of such issuer or exceed 5% of the value of the
Fund's total assets and (ii) not more than 25% of the value of its assets is
invested in the securities (other than U.S. Government Securities and securities
of other RICs) of any one issuer or of two or more issuers which the Fund
controls and which are engaged in the same, similar, or related trades or
businesses.
If a Fund fails to qualify as a RIC for any year, all of its income will be
subject to tax at corporate rates, and its distributions (including capital
gains distributions) will in general be taxable as ordinary income dividends to
its shareholders, subject to the dividends received deduction for corporate
shareholders.
Notwithstanding the distribution requirement described above, which only
requires a Fund to distribute at least 90% of its annual investment company
taxable income and tax-exempt interest income and does not require any minimum
distribution of net capital gain (the excess of net long-term capital gain over
net short-term capital loss), a Fund will be subject to a nondeductible 4%
federal excise tax to the extent it fails to distribute by the end of any
calendar
-106-
<PAGE>
year at least 98% of its ordinary income for that year and at least 98% of its
capital gain net income (the excess of short- and long-term capital gains over
short- and long-term capital losses) for the one-year period ending on October
31 of that year, plus certain other amounts.
The Tax-Exempt Money Market, California Money, Tax-Exempt Bond, California
Municipal, California Insured Intermediate Municipal and Florida Insured
Municipal Funds will be qualified to pay exempt-interest dividends to their
shareholders only if, at the close of each quarter of a Fund's taxable year, at
least 50% of the total value of a Fund's assets consist of obligations the
interest on which is exempt from federal income tax. Part or all of the
interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of these funds will not be deductible for federal income tax
purposes or, in the case of the California and Florida Funds, for California and
Florida income tax purposes. Any loss on the sale or exchange of shares in
these Funds held for six months or less will be disallowed to the extent of any
exempt-interest dividend received by the shareholders with respect to such
shares. In addition, the Code may require a shareholder who receives exempt-
interest dividends to treat as taxable income a portion of certain otherwise
non-taxable social security and railroad retirement benefit payments. Municipal
funds may not be an appropriate investment for persons (including corporations
and other business entities) who are "substantial users" (or who are related to
substantial users) of facilities financed by "private activity bonds" or
"industrial development bonds." For these purposes, the term "substantial user"
is defined generally to include a "non-exempt person" who regularly uses in a
trade or business a part of a facility financed from the proceeds of such bonds.
Moreover, as noted in the Prospectus, some or all of these Funds' dividends may
be a specific preference item, or a component of an adjustment item, for
purposes of the federal individual and corporate alternative minimum taxes. In
addition, the receipt of dividends and distributions may affect a foreign
corporate shareholder's federal "branch profits" tax liability and a Subchapter
S corporate shareholder's federal "excess net passive income" tax liability.
Similar rules apply for California State personal income tax purposes.
Shareholders should consult their own tax advisers as to whether they are (1)
"substantial users" with respect to a facility or "related" to such users within
the meaning of the Code or (2) subject to federal alternative minimum tax, the
federal "branch profits" tax, or the federal "excess net passive income" tax.
Issuers of bonds purchased by the Municipal Funds (or the beneficiary of such
bonds) may have made certain representations or covenants in connection with the
issuance of such bonds to satisfy certain requirements of the Code that must be
satisfied subsequent to the issuance of such bonds. Shareholders should be
aware that exempt-interest dividends may become subject to federal income
taxation retroactively to the date of issuance of the bonds to which such
dividends are attributable if such representations are determined to have been
inaccurate or if the issuers (or the beneficiary) of the bonds fail to comply
with certain covenants made at that time.
Distributions made by the Fixed-Income Funds generally will not be eligible
for the dividends received deduction otherwise available to corporate taxpayers.
In addition, the dividends received deduction shall be disallowed with respect
to a dividend from any other Fund
-107-
<PAGE>
unless a corporate shareholder held its shares on the ex-dividend date and for
at least 45 more days during the 90-day period surrounding the ex-dividend date.
As described above and in the Prospectus, certain of the Funds may invest
in certain types of futures contracts and options. The Funds anticipate that
these investment activities will not prevent the Funds from qualifying as RICs.
As a general rule, these investment activities may increase or decrease the
amount of long-term and short-term capital gains or losses realized by a Fund
and, accordingly, will affect the amount of capital gains distributed to a
Fund's shareholders.
A Fund's transactions in foreign currencies, foreign currency-denominated
debt securities and certain foreign currency options, futures contracts and
forward contracts (and similar instruments) may give rise to ordinary income or
loss to the extent such income or loss results from fluctuations in the value of
the foreign currency concerned. In addition, if a Fund engages in hedging
transactions, including hedging transactions in options, futures contracts and
straddles (or other similar transactions), it will be subject to special tax
rules (including mark-to-market, straddle, wash sale, short sale and
constructive sale rules), the effect of which may be to accelerate income to a
Fund, defer losses to a Fund, cause adjustments in the holding periods of a
Fund's securities, or convert short-term capital losses into long-term capital
losses. These rules could therefore affect the amount, timing and character of
distributions to shareholders. Each Fund will endeavor to make any available
elections pertaining to such transactions in a manner believed to be in the best
interests of the Fund.
As a general rule, a Fund's gain or loss on a sale or exchange of an
investment will be a "20% Rate Gain" if the Fund has held the investment for
more than eighteen months, "28% Rate Gain" if it has held the investment for
more than twelve months but not more than eighteen months, and short-term
capital gain if it has held the investment for twelve months or less.
Furthermore, as a general rule, a shareholder's gain on a sale or redemption of
Fund shares will be "20% Rate Gain" if the shareholder has held the Fund shares
for more than eighteen months, "28% Rate Gain" if the shareholder has held the
investment for more than twelve months but not more than eighteen months, and
short-term capital gain if the shareholder has held the Fund shares for twelve
months or less.
While only the Equity Funds expect to realize a significant amount of net
long-term capital gains (i.e. 20% Rate Gain and 28% Rate Gain), any such
realized gains will be distributed as described in the Prospectus. Such
distributions ("capital gain dividends"), if any, will be taxable to
----------------------
shareholders as 20% Rate Gain or 28% Rate Gain, respectively, regardless of how
long a shareholder has held Fund shares, and will be designated as such in a
written notice mailed to the shareholder after the close of the Fund's taxable
year. Any loss on the sale or exchange of shares in a Fund that have been held
for six months or less will be treated as a long-term capital loss to the extent
of any capital gain dividend received by the shareholder with respect to such
shares. In addition, all or a portion of any loss realized upon a taxable
disposition of Fund shares will be disallowed if other shares of the same Fund
are purchased within 30 days
-108-
<PAGE>
before or after the disposition. In such a case, the basis of the newly
purchased shares will be adjusted to reflect the disallowed loss.
ADDITIONAL CONSIDERATIONS FOR SHAREHOLDERS OF THE INTERNATIONAL GROWTH FUND
If at the end of the International Growth Fund's fiscal year more than 50%
of the value of its total assets represents securities of foreign corporations,
the Fund intends to make an election permitted by the Code to treat any foreign
taxes paid by it on securities it has held for at least the minimum period
specified in the Code as having been paid directly by the Fund's shareholders in
connection with the Fund's dividends received by them. In this case,
shareholders generally will be required to include in U.S. taxable income their
pro rata share of such taxes, and those shareholders who are U.S. citizens, U.S.
corporations and, in some cases, U.S. residents will be entitled to deduct their
share of such taxes. Alternatively, such shareholders who hold Fund shares
(without protection from risk of loss) on the ex-dividend date and for at least
15 other days during the 30-day period surrounding the ex-dividend date will be
entitled to claim a foreign tax credit for their share of these taxes.
In addition, investment by a Fund in an entity that qualified as a "passive
foreign investment company" under the Code could subject the Fund to a U.S.
federal income tax or other charge on certain "excess distributions" with
respect to the investment, and on the proceeds from disposition of the
investment. This tax or charge may be avoided, however, by making an election
to mark such investments to market annually or to treat the passive foreign
investment company as a "qualified electing fund."
A "passive foreign investment company" is any foreign corporation: (i) 75
percent or more of the income of which for the taxable year is passive income,
or (ii) the average percentage of the assets of which (generally by value, but
by adjusted tax basis in certain cases) that produce or are held for the
production of passive income is at least 50 percent. Generally, passive income
for this purpose means dividends, interest (including income equivalent to
interest), royalties, rents, annuities, the excess of gains over losses from
certain property transactions and commodities transactions, and foreign currency
gains. Passive income for this purpose does not include rents and royalties
received by the foreign corporation from active business and certain income
received from related persons.
FLORIDA TAXES
Taxation of Fund Shares. Florida does not impose an income tax on
-----------------------
individuals. Thus, dividends and distributions paid by the Florida Insured
Municipal Fund to individuals who are residents of Florida are not taxable by
Florida. Florida imposes an income tax on corporations and similar entities at
a rate of 5.5%. Distributions of investment income and capital gains by the
Florida Insured Municipal Fund will be subject to Florida corporate income tax.
Accordingly, investors in the Florida Insured Municipal Fund, including, in
particular, investors that may be subject to the Florida corporate income tax,
should consult their tax advisors with respect to the
-109-
<PAGE>
application of the Florida corporate income tax to the receipt of Fund dividends
and distributions and to the investor's Florida tax situation in general.
Florida imposes a tax on intangible personal property owned by Florida
residents. Shares in the Florida Insured Municipal Fund constitute intangible
personal property for purposes of the Florida intangible personal property tax.
Thus, unless an exemption applies, shares in the Florida Insured Municipal Fund
will be subject to the Florida intangible personal property tax. Florida
provides an exemption for shares in an investment fund if the fund's portfolio
of assets consists solely of assets exempt from the Florida intangible personal
property tax. Assets exempt from Florida intangible personal property tax
include obligations issued by the State of Florida and its political
subdivisions, municipalities, and public authorities; obligations of the United
States Government or its agencies; and cash.
The Florida Insured Municipal Fund has received a ruling from the Florida
Department of Revenue that if, on the last business day of any calendar year,
the Insured Municipal Fund's assets consist solely of assets exempt from the
Florida intangible personal property tax, shares of the Florida Insured
Municipal Fund will be exempt from the Florida intangible personal property tax
in the following year. Based on the ruling, if the Insured Municipal Fund's
assets consist, on the last business day of the calendar year, solely of assets
exempt from the Florida intangible personal property tax, shares of the Florida
Insured Municipal Fund owned by Florida residents will be exempt from the
Florida intangible personal property tax. If shares of the Fund are subject to
the Florida intangible personal property tax because less than 100% of the
Fund's assets on the last business day of the calendar year consists of assets
exempt from the Florida intangible personal property tax, only the portion of
the net asset value of a share of the Florida Insured Municipal Fund that is
attributable to obligations of the United States Government will be exempt from
taxation.
Taxation of the Florida Insured Municipal Fund. If the Fund does not have
----------------------------------------------
a taxable nexus to Florida, such as through the location of the Florida Fund's
activities or those of its advisors within the state, under present Florida law,
the Fund is not subject to Florida corporate income taxation. Additionally, if
the Fund's assets do not have a taxable situs in Florida as of January 1 of each
calendar year, the Fund will not be subject to the Florida intangible personal
property tax. If the Fund has a taxable nexus to Florida or the Fund's assets
have a taxable situs in Florida, the Fund will be subject to Florida taxation.
The Florida Insured Municipal Fund intends to operate so as not to be subject to
Florida taxation.
SHAREHOLDER STATEMENTS
Each shareholder will receive after the close of the calendar year an
annual statement and such other written notices as are appropriate as to the
federal income and California State personal income tax status of the
shareholder's dividends and distributions received from the Fund for the prior
calendar year. These statements will also inform shareholders as to the amount
of exempt-interest dividends that is a specific preference item for purposes of
the federal
-110-
<PAGE>
individual and corporate alternative minimum taxes and as to the exempt portion,
if any, of the shareholder's shares of the Florida Insured Municipal Fund for
purposes of the Florida State intangible personal property tax for the current
tax year. Shareholders should consult their tax advisers as to any other state
and local taxes that may apply to these dividends and distributions. The dollar
amount of dividends excluded or exempt from federal income taxation or
California State personal income taxation and the dollar amount of dividends
subject to federal income taxation or California State personal income taxation,
if any, will vary for each shareholder depending upon the size and duration of
each shareholder's investment in a Fund. To the extent that the Tax-Exempt Money
Market, California Money, Tax-Exempt Bond, California Municipal, California
Insured Intermediate Municipal or Florida Insured Municipal Funds earns taxable
net investment income, it intends to designate as taxable dividends the same
percentage of each day's dividend (or of each day's taxable net investment
income) as its taxable net investment income bears to its total net investment
income earned on that day. Therefore, the percentage of each day's dividend
designated as taxable, if any, may vary from day to day.
If a shareholder fails to furnish a correct taxpayer identification number,
fails to report fully dividend or interest income, or fails to certify that the
taxpayer identification number is correct and that the shareholder is not
subject to "backup withholding," then the shareholder may be subject to a 31%
"backup withholding" tax with respect to (1) taxable dividends and distributions
and (2) the proceeds of any redemptions of Fund shares. An individual's
taxpayer identification number is his or her social security number. The 31%
"backup withholding" tax is not an additional tax and may be credited against a
taxpayer's regular federal income tax liability.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN TAX CONSIDERATIONS GENERALLY
AFFECTING A FUND AND ITS SHAREHOLDERS, AND IS NOT INTENDED AS A SUBSTITUTE FOR
CAREFUL TAX PLANNING. SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH
SPECIFIC REFERENCE TO THEIR OWN TAX SITUATIONS, INCLUDING THEIR STATE AND LOCAL
TAX LIABILITIES.
DISTRIBUTOR
WM Funds Distributor, Inc. (referred to as the Distributor in this SAI), is
the distributor of the Class A, Class B, Class I and Class S shares of the Funds
and Class A and Class B shares of the Portfolios. The Distributor, located at
1201 Third Avenue, Suite 780, Seattle, Washington 98101, is an indirect wholly
owned subsidiary of Washington Mutual.
Each of the Funds (other than the WM Strategic Asset Management Portfolios,
which have only Class A and Class B distribution plans and the Target Maturity
2002 Fund which has only a Class A distribution plan) has three distribution
plans, pursuant to Rule 12b-1 under the 1940 Act, applicable to Class A, Class B
and Class S shares of the Fund (each, a "Rule 12b-1 Plan"), respectively. Under
---------------
the applicable Rule 12b-1 Plans, the Distributor receives a service fee at an
annual rate of .25% of the average daily net assets of each class. In addition,
the Distributor is paid a fee as compensation in connection with the offering
and sale of Class B and Class S Shares of the Funds at an annual rate of .75% of
the average daily net assets of such
-111-
<PAGE>
shares. These fees may be used to cover the expenses of the Distributor
primarily intended to result in the sale of such shares of the Funds, including
payments to the Distributor's representatives or others for selling shares.
Because the Distributor may retain any amount of its fee that is not so
expended, the Rule 12b-1 Plans are characterized by the SEC as "compensation-
type" plans.
In addition to providing for the expenses discussed above, each Rule 12b-1
Plan also recognizes that the Advisor may use its investment advisory fees or
other resources to pay expenses associated with activities primarily intended to
result in the promotion and distribution of the Fund's shares. The Distributor
may, from time to time, pay to other dealers, in connection with retail sales or
the distribution of shares of a Fund, material compensation in the form of
merchandise or trips. Salespersons including representatives of WM Financial
Services, Inc. (a subsidiary of Washington Mutual) and any other person entitled
to receive any compensation for selling or servicing Fund shares may receive
different compensation with respect to one particular class of shares over
another, and may receive additional compensation or other incentives for selling
Fund shares.
Prior to March 20, 1998 WM Investment Services Corp. (formerly named Sierra
Investment Services Corp.) served as the distributor for WM Trust II. For the
fiscal years ended June 30, 1997, 1996 and 1995, WM Investment Services Corp.
(formerly Sierra Investment Services Corp.) received distribution fees totaling
(after waivers of fees) $5,278,281, $6,430,836 and $6,715,281, respectively, in
the aggregate, from the Funds under the Class A Plan. For the same periods, WM
Investment Services Corp. received $13,944, $0 and $58,212, respectively,
representing contingent deferred sales charges on redemptions of Class A Shares
of the Funds. In addition, for the fiscal years ended June 30, 1997, 1996 and
1995, WM Investment Services Corp. received $303,490, $637,291 and $7,099,863,
respectively, representing compensation from front-end sales charges on Fund
shares sold. For each fiscal year ended June 30, 1997, 1996 and 1995, WM
Investment Services Corp. voluntarily waived no distribution fees in the
aggregate. During the fiscal year ended June 30, 1997, WM Investment Services
Corp. incurred distribution and operating expenses with respect to Class A
Shares of the Funds totaling $6,079,202 consisting of $27,338 for advertising;
$30,593 for marketing promotion; $570,250 for preparation, printing and
distribution of sales literature and shareholders reports; $398,006 for
fulfillment; $88,956 for seminars; $390,128 for salaries to the personnel of WM
Investment Services Corp.; $777,480 in commissions and additional compensation
to the personnel of WM Investment Services Corp.; $136,410 for occupancy;
$105,953 for telephone; and $577,885 in administration expenses.
WM Investment Services Corp. also served as distributor of Class B and S
Shares of the WM Trust II. For the fiscal year ended June 30, 1997, WM
Investment Services Corp. received distribution fees from the Funds totaling
$666,137, in the aggregate under the Class B Distribution Plan and $474,374, in
the aggregate under the Class S Distribution Plan. For the same period, WM
Investment Services Corp. received $487,579, representing CDSC on redemptions of
Class B Shares of the Funds and $210,159, representing CDSC on redemptions of
Class S shares of the Funds. For the fiscal year ended June 30, 1997, WM
Investment
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Services Corp. did not waive any distribution fees. WM Investment Services Corp.
paid out all of the distribution related fees it received for each of the Class
B and Class S Shares to the financier of the sales commissions paid on sale of
Class B and S Shares, respectively.
Prior to December 20, 1995, Funds Distributor Inc. ("FDI") served as a co-
---
distributor of Class B and Class S Shares of the WM Trust II. For the fiscal
year ended June 30, 1997, FDI received distribution fees from the Funds totaling
$850,960, in the aggregate under the Class B Distribution Plan and $568,659, in
the aggregate under the Class S Distribution Plan. For the same period, FDI
received $593,638, representing CDSC on redemptions of Class B Shares of the
Funds and $317,053, representing CDSC on redemptions of Class S Shares of the
Funds. For the fiscal year ended June 30, 1997 FDI did not waive any
distribution fees. FDI paid out all of the distribution related fees it
received for each of the Class B and Class S Shares to the financier of the
sales commissions paid on sale of Class B Shares and Class S Shares,
respectively.
WM Funds Distributor, Inc. (formerly Composite Funds Distributor, Inc. and
referred to as the Distributor in this SAI) serves as the distributor for the
Funds within WM Trust I. The Money Market and Tax-Exempt Money Market Funds
reimbursed the Distributor $50,492 and $0, respectively, for distribution
expenses incurred during 1997. Of this amount, $28,559 was paid for printing
and $21,933 was for other distribution-related expenses. During 1996 the Money
Market and Tax-Exempt Money Market Funds reimbursed the Distributor $20,720 and
$0, respectively and in 1995 each reimbursed the Distributor $18,754 and $0,
respectively.
During 1997 the Money Market and Tax-Exempt Money Market Funds compensated
the Distributor $2,233 and $91, respectively, for the sale of Class B shares.
During 1996, the Money Market and Tax-Exempt Funds compensated the Distributor
$1,270 and $16, respectively, for the sale of Class B shares. During 1995, the
Money Market and Tax-Exempt Portfolios compensated the Distributor $702 and $11,
respectively, for the sale of Class B shares.
During the fiscal year ended December 31, 1997, the Distributor received
contingent deferred sales charge payments of $5,618 and $0 upon redemption of
Class B shares of the Money Market Fund and Tax-Exempt Fund, respectively. For
the fiscal year ended December 31, 1996, the Distributor received contingent
deferred sales charge payments of $5,275 and $0 upon redemption of Class B
shares of the Money Market Fund and Tax-Exempt Money Market Fund, respectively.
No brokerage fees were paid by the Fund to the Distributor during the year, but
the Distributor may act as broker on portfolio purchases and sales should it
become a member of a securities exchange.
The U.S. Government Securities, Income, and Tax-Exempt Bond Funds
reimbursed the Distributor in the amounts of $248,837, $169,132 and $407,707,
respectively, for distribution expenses incurred on behalf of Class A shares
during the year ended December 31, 1997. Of this amount, $119,084, $77,335 and
$200,406 was paid on behalf of the U.S. Government Securities, Income, and Tax-
Exempt Bond Funds, respectively, to selected dealers and registered
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representatives of the Distributor for their shareholder servicing activities,
and $129,748, $91,797 and $207,301, respectively, was paid for other
distribution related expenses.
During the fiscal years 1996 and 1995, the U.S. Government Securities Fund
reimbursed the Distributor $218,510 and $343,633, respectively; the Income Fund
reimbursed the Distributor $133,600 and $168,531, respectively; and the Tax-
Exempt Bond Fund reimbursed the Distributor $315,034 and $432,854, respectively,
for distribution expenses related to Class A shares.
During the fiscal years ended December 31, 1997 and 1996, respectively, the
U.S. Government Securities Fund compensated the Distributor in the amounts of
$29,872 and $26,484, respectively; the Income Fund compensated the Distributor
in the amounts of $78,016 and $57,828, respectively, and the Tax-Exempt Bond
Fund compensated the Distributor $66,282 and $40,939, respectively, for the sale
of Class B shares.
During the 1997, 1996 and 1995 fiscal years, the Distributor received
$55,967, $89,694 and $150,970, respectively, for the sale of U.S. Government
Securities Fund Class A shares; $102,701, $156,410 and $209,703, respectively,
for the sale of Income Fund Class A shares; and $195,489, $282,768 and $341,454,
respectively, for the sale of Tax-Exempt Bond Fund Class A shares.
During the fiscal year ended December 31, 1997, the Distributor received
contingent deferred sales charge payments of $8,623, $20,754 and $11,543 upon
redemption of Class B shares of the U.S. Government Securities, Income, and Tax-
Exempt Bond Funds, respectively. No brokerage fees were paid by the Funds to the
Distributor during the year, but the Distributor may act as a broker on
portfolio purchases and sales should it become a member of a securities
exchange.
The Bond & Stock, Growth & Income and Northwest Funds reimbursed the
Distributor in the amounts of $701,288, $563,809 and $537,269, respectively, for
distribution expenses incurred on behalf of Class A shares during fiscal 1997.
Of this amount, $271,656, $205,286 and $210,705 was paid on behalf of the Bond &
Stock, Growth & Income and Northwest Funds to sales personnel of the Distributor
and to selected dealers for their shareholder servicing activities; $30,762,
$57,056 and $46,096, respectively, was paid for printing; and $195,701, $167,292
and $257,705, respectively, was paid for other advertising expenses.
During fiscal years 1996 and 1995, the Bond & Stock Fund reimbursed the
Distributor $394,279 and $356,379, respectively; the Growth & Income Fund
reimbursed the Distributor $265,579 and $203,566, respectively; and Northwest
reimbursed the Distributor $360,642 and $279,851, respectively, for distribution
expenses related to Class A shares.
During fiscal years 1997, 1996 and 1995, the Bond & Stock Fund compensated
the Distributor in the amounts of $334,855, $148,688 and $46,435, respectively;
the Growth &
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Income Fund compensated the Distributor $365,290, $151,222 and $49,988,
respectively; and the Northwest Fund compensated the Distributor $247,630,
$106,606 and $49,126, respectively, for distribution expenses related to Class B
shares.
During the 1997, 1996 and 1995 fiscal years, the Distributor received
$885,598, $1,064,004 and $471,479, respectively, for the sale of Bond & Stock
Class A shares. The Distributor retained $710,403, $1,047,926 and $471,455,
respectively, for the same time periods, with the balance paid to dealers for
their sales of Bond & Stock Class A shares.
During the 1997, 1996 and 1995 fiscal years, the Distributor received
$825,142, $586,437 and $384,766, respectively, for the sale of Growth & Income
Class A shares. The Distributor retained $666,246, $563,398 and $384,647,
respectively, for the same time periods, with the balance paid to dealers for
their sales of Growth & Income Class A shares.
During the fiscal years 1997, 1996 and 1995 the Distributor received
$799,120, $517,022 and $348,729, respectively, for the sale of Northwest Class A
shares. The Distributor retained $551,530, $465,694 and $337,189, respectively,
for the same time periods, with the balance paid to dealers for their sales of
Northwest Class A shares.
During the fiscal year ended October 31, 1997, the Distributor received
contingent deferred sales charge payments of $63,218, $63,310 and $37,195 upon
redemption of Class B shares of Bond & Stock, Growth & Income, and Northwest,
respectively. No brokerage fees were paid by the Funds to the Distributor
during the year, but the Distributor may act as a broker on portfolio purchases
and sales should it become a member of a securities exchange.
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APPENDIX
DESCRIPTION OF BOND, NOTES AND COMMERCIAL PAPER RATINGS
DESCRIPTION OF S&P CORPORATE BOND RATINGS
AAA: Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A: Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as for Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the issue ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
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DESCRIPTION OF DUFF'S CORPORATE BOND RATINGS
Bonds rated AAA by Duff are judged by Duff to be of the highest credit
quality, with negligible risk factors being only slightly more than for risk-
free U.S. Treasury debt. Bonds rated AA by Duff are judged by Duff to be of
high credit quality with strong protection factors and risk that is modest but
that may vary slightly from time to time because of economic conditions. Bonds
rated A by Duff are judged by Duff to have average but adequate protection
factors. However, risk factors are more variable and greater in periods of
economic stress. Bonds rated BBB by Duff are judged by Duff as having below
average protection factors but still considered sufficient for prudent
investment, with considerable variability in risk during economic cycles.
DESCRIPTION OF FITCH'S CORPORATE BOND RATINGS
Bonds rated AAA by Fitch are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events. Bonds rated AA by Fitch are considered to be investment
grade and of very high credit quality. The obligor's ability to pay interest
and repay principal is very strong, although not quite as strong as bonds rated
AAA. Bonds rated A by Fitch are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings. Bonds
rated BBB by Fitch are considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
DESCRIPTION OF S&P MUNICIPAL BOND RATINGS
AAA - Prime - These bonds have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
General Obligation Bonds - In a period of economic stress, the issuers
will suffer the smallest declines in income and will be least susceptible to
autonomous decline. Debt burden is moderate. A strong revenue structure
appears more than adequate to meet future expenditure requirements. Quality of
management appears superior.
Revenue Bonds - Debt service coverage has been, and is expected to remain,
substantial. Stability of the pledged revenues is also exceptionally strong due
to the competitive position of the municipal enterprise or to the nature of the
revenues. Basic security provisions
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(including rate covenant, earnings test for issuance of additional bonds, debt
service reserve requirements) are rigorous. There is evidence of superior
management.
AA - High Grade - Bonds in this group have a very strong capacity to pay
interest and repay principal and differ from the highest rated debt only in
small degree.
A - Good Grade - Bonds in this category have a strong capacity to pay
interest and repay principal, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than bonds
in higher rated categories. Regarding municipal bonds, the rating differs from
the two higher ratings because:
General Obligation Bonds - There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and expenditures
or in quality of management. Under certain adverse circumstances, any one such
weakness might impair the ability of the issuer to meet debt obligations at some
future date.
Revenue Bonds - Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management performance
appears adequate.
BBB - Medium Grade - Bonds in this group are regarded as having an
adequate capacity to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for bonds in this category than for bonds in higher rated
categories.
General Obligation Bonds - Under certain adverse conditions, several of
the above factors could contribute to a lesser capacity for payment of debt
service. The difference between A and BBB ratings is that the latter shows more
than one fundamental weakness, or one very substantial fundamental weakness,
whereas the former shows only one deficiency among the factors considered.
Revenue Bonds - Debt coverage is only fair. Stability of the pledged
revenues could show substantial variations, with the revenue flow possibly being
subject to erosion over time. Basic security provisions are no more than
adequate. Management performance could be stronger.
BB, B, CCC, CC and C - Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the least degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
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characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions.
D - Bonds rated D are in default, or the obligor has filed for bankruptcy.
The D rating is issued when interest or principal payments are not made on the
date due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
S&P's letter ratings may be modified by the addition of a plus or a minus
sign, which is used to show relative standing within the major rating
categories, except in the AAA-Prime Grade category.
DESCRIPTION OF S&P MUNICIPAL NOTE RATINGS
Municipal notes with maturities of three years or less are usually given
note ratings (designated SP-1, -2 or -3) to distinguish more clearly the credit
quality of notes as compared to bonds. Notes rated SP-1 have a strong capacity
to pay principal and interest. Those issues determined to possess a very strong
capacity to pay debt service are given the designation of SP-1+. Notes rated
SP-2 have a satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear
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adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issuer ranks in the
lower end of its generic rating category.
DESCRIPTION OF MOODY'S MUNICIPAL NOTE RATINGS
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction recognizes the differences between short-term credit risk and long-
term risk. Loans bearing the designation MIG 1/VMIG 1 are of the best quality,
enjoying strong protection from established cash flows of funds for their
servicing, from superior liquidity support, or from established and broad-based
access to the market for refinancing, or both. Loans bearing the designation of
MIG 2/VMIG 2 are of high quality, with margins of protection ample, although not
as large as the preceding group. Loans bearing the designation MIG 3/VMIG 3 are
of favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow protection
may be narrow and market access for refinancing is likely to be less well
established. Loans bearing the designation MIG 4/VMIG 4 are of adequate
quality. Protection commonly regarded as required of an investment security is
present and although not distinctly or predominantly speculative, there is
specific risk.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payments is strong. Those issues determined to possess
extremely strong safety characteristics are denoted A-1+. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1.
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DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated Prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics of
issuers rated Prime-1 but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
DESCRIPTION OF DUFF'S COMMERCIAL PAPER RATINGS
Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by good fundamental
protection factors. Risk factors are minor. Ratings of Duff-1 are further
refined by the gradations of "1+" and "1-". Issues rated Duff-1+ have the
highest certainty of timely payment, outstanding short term liquidity, and
safety just below risk-free U.S. Treasury short-term obligations. Issues rated
Duff-1- have high certainty of timely payment, strong liquidity factors
supported by good fundamental protection factors, and small risk factors. Paper
rated Duff-2 is regarded as having good certainty of timely payment, good access
to capital markets and sound liquidity factors and company fundamentals. Risk
factors are small.
DESCRIPTION OF FITCH'S COMMERCIAL PAPER RATINGS
The rating F-1+ (Exceptionally Strong Credit Quality) is the highest
commercial rating assigned by Fitch and is assigned to issues regarded as having
the strongest degree of assurance for timely payment. Paper rated F-1 (Very
Strong Credit Quality) is regarded as having an assurance of timely payment only
slightly less in degree than issues rated F-1+. The rating F-2 (Good Credit
Quality) reflects an assurance of timely payment, but the margin of safety is
not as great as for issues assigned F-1+ or F-1 ratings.
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FINANCIAL STATEMENTS
--------------------
Incorporated herein by reference are the audited financial statements for
the fiscal year ended June 30, 1997 for each of the Funds within WM Trust II and
each of the Portfolios, together with the Report of Independent Accountants of
Price Waterhouse LLP thereon, and the unaudited financial statements for the six
months ended December 31, 1997 for such Funds and Portfolios. Also incorporated
herein by reference are the audited financial statements for the fiscal year
ended October 31, 1997 or December 31, 1997, as the case may be, for each of the
Funds within WM Trust I, together with the Report of Independent Accountants of
LeMaster & Daniels PLLC thereon.
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