<PAGE> 1
WM GROUP OF FUNDS
1201 THIRD AVENUE, 22ND FLOOR
SEATTLE, WASHINGTON 98101
800-222-5852
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1999, as revised July 16, 1999
MONEY FUNDS EQUITY FUNDS
MONEY MARKET FUND BOND & STOCK FUND
TAX-EXEMPT MONEY MARKET FUND GROWTH & INCOME FUND
CALIFORNIA MONEY FUND NORTHWEST FUND
GROWTH FUND
EMERGING GROWTH FUND
FIXED-INCOME FUNDS INTERNATIONAL GROWTH FUND
SHORT TERM HIGH QUALITY BOND FUND
TARGET MATURITY 2002 FUND WM STRATEGIC ASSET MANAGEMENT
U.S. GOVERNMENT SECURITIES FUND PORTFOLIOS, LLC
INCOME FUND STRATEGIC GROWTH PORTFOLIO
HIGH YIELD FUND CONSERVATIVE GROWTH PORTFOLIO
BALANCED PORTFOLIO
MUNICIPAL FUNDS 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(es) of the WM Group of Funds
listed above dated March 1, 1999, as revised June 22, 1999 (collectively,
the "Prospectus"), and should be read in conjunction with such Prospectus.
The Annual Reports of the Funds and the Portfolios' predecessors for the
fiscal years ended December 31, 1997, June 30, 1998 and October 31, 1998,
respectively are incorporated by reference in this SAI. The Prospectus may be
obtained without charge by writing to WM Shareholder Services, Inc.
("Shareholder Services") or by calling Shareholder Services at 800-222-5852.
The Money Market, Tax-Exempt Money Market, U.S. Government Securities,
Income, High Yield, Tax-Exempt Bond, Bond & Stock, Growth & Income and
Northwest Funds are series of WM Trust I (the "WM Trust I Funds"), 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 (the "WM Trust II Funds"), a Massachusetts business trust
organized on February 22, 1989. The WM Trust I Funds and WM Trust II Funds
are collectively
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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, LLC, a Massachusetts limited liability company
organized on March 12, 1999. On July 16, 1999, each Portfolio succeeded to
a corresponding fund ("Predecessor Portfolio") of the same name that was a
series of WM Strategic Asset Management Portfolios, a Massachusetts business
trust, which commenced operations on July 26, 1996. Where appropriate, the
term "Portfolio" shall mean or include the Predecessor Portfolio. In this
SAI, WM Trust I, WM Trust II and WM Strategic Asset Management Portfolios,
LLC are referred to as the "Trusts."
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<PAGE> 3
CONTENTS
MANAGEMENT........................................... 4
INVESTMENT OBJECTIVES AND POLICIES................... 21
INVESTMENT RESTRICTIONS ............................. 45
PORTFOLIO TURNOVER .................................. 54
PORTFOLIO TRANSACTIONS .............................. 55
NET ASSET VALUE ..................................... 58
HOW TO BUY AND REDEEM SHARES ........................ 59
HOW TO EXCHANGE SHARES .............................. 64
DETERMINATION OF PERFORMANCE ........................ 64
TAXES ............................................... 75
DISTRIBUTOR ......................................... 81
APPENDIX ............................................ 86
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<PAGE> 4
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, AGE: 72
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, AGE: 70
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., AGE: 73
Trustee
11661 San Vicente Blvd., Suite 701
Los Angeles, California 90049
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<PAGE> 5
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 System, Inc.; chairman of the
board of trustees of the California Family Studies Center and Phillips Graduate
Institute since 1984.
KRISTIANNE BLAKE, AGE: 45
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., AGE: 70
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, AGE: 66
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, AGE: 63
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Trustee
425 Pike Street, Suite 510
Seattle, Washington 98101
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, Inc. ("Washington Mutual") 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.
CARROL R. MCGINNIS, AGE: 54
Trustee
9225 Katy Freeway, Suite 205
Houston, TX 77024
Founder, McGinnis Investments, since 1994. Prior thereto, served in various
positions with Transamerica Fund Management Company and its predecessor
companies from 1969-1993, including as president and chief operating officer.
*MICHAEL K. MURPHY, AGE: 62
Trustee
PO Box 3366
Spokane, Washington 99220-3366
President and CEO of CPM Development Corporation (a holding company which
includes Central Pre-mix Concrete Company Inland Asphalt Co., Central Pre-Mix
Prestress Co., and Interstate Concrete & Asphalt Co.). Member of the board of
directors for Washington Mutual. Former president and director of Inland
Empire Chapter - Associated General Contractors. Former director of National
Aggregates Associates.
ALFRED E. OSBORNE, JR. PH.D., AGE: 54
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).
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<PAGE> 7
Independent general partner, Technology Funding Venture Partners V, and former
Governor of the National Association of Securities Dealers, Inc.
*WILLIAM G. PAPESH, AGE: 56
President and Trustee
1201 Third Avenue
22nd Floor
Seattle, WA 98101
President and director of WM Advisors, Inc. (the "Advisor"), WM Shareholder
Services, Inc. ("Shareholder Services"), WM Funds Distributor, Inc. (the
"Distributor") and WM Fund Services, Inc. (a registered investment adviser and
broker/dealer).
DANIEL L. PAVELICH, AGE: 54
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, AGE: 71
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. He is vice
president of the Rainier Club and trustee of the Downtown Seattle Association.
MORTON O. SCHAPIRO, AGE: 45
Trustee
4535 Lenox Avenue
Sherman Oaks, CA 91423
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<PAGE> 8
Dean of the College of Letters, Arts and Sciences and Professor of Economics,
University of Southern California, since 1991. Prior thereto, Professor of
Economics, Williams College, 1980-1991.
RICHARD C. YANCEY, AGE: 72
Lead Trustee
535 Madison Avenue
New York, New York 10022
Investment Banker - Warburg Dillon Read LLC, New York City, 1952 through
1992. Served as vice president, managing director and director and senior
advisor at Warburg Dillon Read LLC, 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, AGE: 53
Vice President
11th Floor
601 W. Main Street
Spokane, WA 99201
Senior vice president and director of the Advisor and Shareholder Services.
MONTE D. CALVIN, CPA, AGE: 55
Senior Vice President and Chief Financial Officer
1201 Third Avenue
22nd Floor
Seattle, WA 98101
Executive vice president and director of Shareholder Services; Director of
the Advisor and the Distributor.
-8-
<PAGE> 9
SANDY CAVANAUGH, AGE: 44
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.
JOHN T. WEST, CPA, AGE: 44
Vice President, Secretary and Compliance Officer
1201 Third Avenue
22nd Floor
Seattle, WA 98101
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"). The Variable Trust 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, 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 $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 terms of Carrol R. McGinnis and Morton O.
Schapiro as trustees commenced on March 5, 1999. The WM Trust I Funds other than
the High Yield Fund are successors to the following
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<PAGE> 10
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 was
organized on March 23, 1998.
Prior to March 20, 1998, the name of WM Trust II was "Sierra Trust
Funds" and the name of the Predecessor 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 of WM Trust I, WM Trust II and the Predecessor Portfolios and the
election of the independent Trustees of WM Trust II and the Predecessor
Portfolios as Trustees of WM Trust I.
The following table shows the aggregate compensation paid to each of
the Trusts' Trustees by each Fund or Portfolio (or, in the case of the WM Trust
I Funds, by the predecessor Composite Funds, and in the case of the Portfolios,
by the Predecessor Portfolios) for the most recent fiscal year and by the "Fund
Complex" for calendar 1998. The Fund Complex consists of the Funds and
Portfolios, together with the Funds within the Variable Trust, WM Prime Income
Fund, a closed-end investment company that was liquidated in August, 1998 (the
"Prime Income Fund") and Composite Deferred Series, Inc., an investment company
for which WM Advisors, Inc. serves as advisor. None of the Trusts has any plan
which would pay pension or retirement benefits to any Trustee.
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<PAGE> 11
WM GROUP OF FUNDS
COMPENSATION TABLE
<TABLE>
<CAPTION>
TAX-
EXEMPT SHORTTERM TARGET U.S.
MONEY MONEY CALIFORNIA HIGH MATURITY GOVERNMENT
MARKET MARKET MONEY QUALITY 2002 SECURITIES INCOME
TRUSTEE FUND FUND FUND BOND FUND FUND FUND FUND
------- ---- ---- ---- --------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
David E. Anderson $4,094 $ 177 $ 345 $ 304 $ 22 $3,088 $2,217
Wayne L. Attwood, M.D $4,340 $ 235 $ 287 $ 299 $ 18 $2,747 $2,074
Arthur H. Bernstein,
Esq.+ $5,744 $ 246 $ 489 $ 426 $ 31 $4,373 $3,131
Kristianne Blake $5,088 $ 288 $ 323 $ 337 $ 21 $3,178 $2,404
Edmond R. Davis, Esq $4,726 $ 217 $ 370 $ 351 $ 24 $3,343 $2,452
John W. English $4,265 $ 195 $ 338 $ 317 $ 22 $3,044 $2,227
Anne V. Farrell $3,514 $ 172 $ 250 $ 261 $ 16 $2,281 $1,719
Michael K. Murphy $3,342 $ 163 $ 237 $ 248 $ 15 $2,168 $1,634
Alfred E. Osborne, Jr., $4,035 $ 183 $ 321 $ 300 $ 21 $2,895 $2,114
Ph.D
William G. Papesh $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Daniel L. Pavelich $4,705 $ 258 $ 307 $ 320 $ 20 $2,964 $2,240
Jay Rockey $4,109 $ 223 $ 270 $ 282 $ 17 $2,596 $1,961
Richard C. Yancey $5,262 $ 280 $ 352 $ 367 $ 23 $3,343 $2,525
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA
TAX- INSURED FLORIDA BOND
HIGH EXEMPT CALIFORNIA INTER-MEDIATE INSURED &
YIELD BOND MUNICIPAL MUNICIPAL MUNICIPAL STOCK
TRUSTEE FUND FUND FUND FUND FUND FUND
------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
David E. Anderson $ 37 $2,575 $3,048 $ 558 $ 206 $2,583
Wayne L. Attwood, M.D $ 39 $2,677 $2,593 $ 473 $ 168 $3,295
Arthur H. Bernstein, Esq.+ $ 39 $3,621 $4,316 $ 791 $ 293 $3,591
Kristianne Blake $ 40 $3,162 $2,927 $ 534 $ 190 $3,982
Edmond R. Davis, Esq $ 39 $2,933 $3,303 $ 604 $ 220 $3,162
John W. English $ 39 $2,653 $3,007 $ 550 $ 201 $2,834
Anne V. Farrell $ 36 $2,134 $2,260 $ 412 $ 147 $2,501
Michael K. Murphy $ 39 $2,029 $2,149 $ 392 $ 139 $2,378
Alfred E. Osborne, Jr., $ 32 $2,513 $2,859 $ 523 $ 191 $2,670
Ph.D
William G. Papesh $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Daniel L. Pavelich $ 39 $2,908 $2,778 $ 507 $ 180 $3,606
Jay Rockey $ 39 $2,537 $2,445 $ 446 $ 159 $3,131
Richard C. Yancey $ 48 $3,236 $3,186 $ 581 $ 207 $3,951
</TABLE>
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<TABLE>
<CAPTION>
GROWTH
& EMERGING STRATEGIC
INCOME GROWTH INTERNATIONAL NORTHWEST GROWTH GROWTH
TRUSTEE FUND FUND GROWTH FUND FUND FUND PORTFOLIO
------- ---- ---- ----------- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
David E. Anderson $6,457 $2,493 $1,292 $2,008 $1,407 $ 517
Wayne L. Attwood, M.D $6,705 $2,116 $1,074 $2,581 $ 977 $ 549
Arthur H. Bernstein, $9,066 $3,532 $1,831 $2,793 $2,014 $ 722
Esq.+
Kristianne Blake $7,831 $2,388 $1,212 $3,131 $1,103 $ 620
Edmond R. Davis, Esq $7,430 $2,702 $1,393 $2,459 $1,405 $ 628
John W. English $6,712 $2,460 $1,270 $2,204 $1,294 $ 565
Anne V. Farrell $5,474 $1,844 $ 936 $1,945 $ 852 $ 479
Michael K. Murphy $5,205 $1,753 $ 890 $1,849 $ 810 $ 455
Alfred E. Osborne, Jr., $6,353 $2,339 $1,209 $2,076 $1,238 $ 534
Ph.D
William G. Papesh $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Daniel L. Pavelich $7,260 $2,267 $1,151 $2,828 $1,047 $ 589
Jay Rockey $6,346 $1,995 $1,013 $2,454 $ 922 $ 518
Richard C. Yancey $8,141 $2,599 $1,320 $3,092 $1,201 $ 675
</TABLE>
<TABLE>
<CAPTION>
TOTAL COMPENSATION
TOTAL FROM THE FUND
CONSERVATIVE FLEXIBLE INCOME COMPENSATION COMPLEX*
GROWTH BALANCED INCOME PORT FOR FISCAL FOR CALENDAR
TRUSTEE PORTFOLIO PORTFOLIO PORTFOLIO FOLIO YEAR 1998 1998
------- --------- --------- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
David E. Anderson $ 1,889 $ 1,501 $ 152 $ 99 $37,069 $44,582
Wayne L. Attwood, M.D $ 1,961 $ 1,569 $ 161 $ 102 $37,039 $44,052
Arthur H. Bernstein, Esq.+ $ 2,640 $ 2,097 $ 212 $ 139 $52,136 $51,351
Kristianne Blake $ 2,213 $ 1,771 $ 181 $ 115 $43,039 $47,053
Edmond R. Davis, Esq $ 2,285 $ 1,818 $ 185 $ 120 $42,171 $45,617
John W. English $ 2,061 $ 1,639 $ 166 $ 108 $38,171 $37,617
Anne V. Farrell $ 1,709 $ 1,368 $ 140 $ 89 $30,536 $33,548
Michael K. Murphy $ 1,625 $ 1,300 $ 133 $ 85 $29,039 $36,052
Alfred E. Osborne, Jr., $ 1,949 $ 1,549 $ 157 $ 102 $36,163 $39,610
Ph.D
William G. Papesh $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
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<PAGE> 13
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Daniel L. Pavelich $ 2,101 $ 1,681 $ 172 $ 110 $40,039 $44,552
Jay Rockey $ 1,849 $ 1,480 $ 152 $ 96 $35,039 $36,052
Richard C. Yancey $ 2,410 $ 1,928 $ 197 $ 126 $45,048 $51,564
</TABLE>
+ Includes compensation deferred pursuant to a deferred compensation
plan. The total amount of deferred compensation payable to Mr.
Bernstein as of December 31, 1998 was $141,093.22 including income
earned on deferred amounts.
* IN THE CASE OF WM TRUST I, INCLUDES COMPENSATION FROM PREDECESSOR
COMPOSITE FUNDS.
During the fiscal year ended October 31, 1998, Sierra Investment
Advisors Corporation reimbursed WM Trust II and WM Strategic Asset Management
Portfolios for 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 December 31, 1998, except as noted below, to the knowledge of the
Trusts, no shareholders owned of record or beneficially 5% or more of the
outstanding shares of the indicated classes of the Funds or Portfolios:
MONEY MARKET FUND B CLASS A: BHC Securities, Omnibus Account, ATTN:
Cash Sweeps Dept., 2005 Market St. 12th Flr., Philadelphia, PA 19103-7042,
28.46%
Northwestern Trust & Investors Advisory Company, 1201 3rd Ave. Ste.
2010, Seattle, WA 98101-3026, 20.05%
MONEY MARKET FUND B CLASS I: SAM Balanced Portfolio, C/O WM Advisors,
5200 E. 2nd St., 2nd Floor, Long Beach, CA 90803, 44.51%
SAM Conservative Growth Portfolio, C/O WM Advisors, 5200 E. 2nd St.,
2nd Floor, Long Beach, CA 90803, 33.73%
WM Advisors Inc., 1201 Third Ave., 22nd Floor, Seattle, WA 98101, 6.43%
MONEY MARKET FUND B CLASS S: Smith Barney Inc. Cust, FBO William &
Tamara H. Pullman TTEE, The Pullman Trust U/A DTD 6/13/94, C/O Marie Ambrosino
Mgmt., 612 N. Sepulveda Blvd. #10, Los Angeles, CA 90049-2108
TAX-EXEMPT MONEY MARKET FUND B CLASS A: BHC Securities, Omnibus
Account, Cash Sweeps Dept., 2005 Market St. 12th Flr., Philadelphia, PA
19103-7042, 22.78%
TAX-EXEMPT MONEY MARKET FUND B CLASS B: Genevieve Odegard, 5702 N. 33rd
St. #13D, Tacoma, WA 98407-2513, 86.62%
Kay Richard Davidson GRDN FBO Roy C. Davidsen, P.O. Box 1494, Libby, MT
59923-1494, 13.38%
CALIFORNIA MONEY FUND B CLASS A: Edward B. Baker TTEE FBO The Baker
Family Trust DTD 7/10/94 1650 16th Ave., San Francisco, CA 94122, 14.39%
BHC Securities, Omnibus Account, Cash Sweeps Dept., 2005 Market St.
12th Flr, Philadelphia, PA 19103-7042, 6.91%
CALIFORNIA MONEY FUND B CLASS B: Oscar L Roehl TTEE, The Oscar L Roehl
Trust UTA DTD 12/15/89, 1826 Harding Ave., Redwood City, CA 94062, 78.53%
Ella M. Brown, 29094 Cobblestone St., Nuevo, CA 92567, 18.45%
CALIFORNIA MONEY FUND B CLASS S: WM Funds Administration, 1201 Third
Avenue, 22nd Floor, Seattle, WA 98101, 50.06%
WM Shareholder Services, 1201 Third Avenue, 22nd Floor, Seattle, WA
98101, 49.94%
CALIFORNIA MONEY FUND B CLASS I: WM Shareholder Services, 1201 Third
Avenue, 22nd Floor, Seattle, WA 98101, 100%
SHORT-TERM HIGH QUALITY BOND FUND B CLASS S: KY Cabinet for Human
Resources, TTEE FBO The Marian K. Buns Irrevocable Charitable Remainder Trust,
275 E. main St. 6th Floor West, Frankfort, KY 40621, 15.04%
Harold P. Jewell and Oveta B. Jewell JTWROS, 1001 Urell Place NE,
Washington DC 20017-2140, 6.53%
Carole Hurst & Judith Chinello & Stan R. Mandell TR, The Frederick S.
Tobias Non-Marital Trust U/A DTD 11/4/81, 111 E. Kilbourn Ave., Milwaukee, WI
53202, 5.84%
SHORT-TERM HIGH QUALITY BOND FUND B CLASS I: SAM Balanced Portfolio,
C/O WM Advisors, 5200 E. 2nd St., 2nd Floor, Long Beach, CA 90803, 61.08%
SAM Flexible Income Portfolio, C/O WM Advisors, 5200 E. 2nd St., 2nd
Floor, Long Beach, CA 90803, 16.98%
SAM Income Portfolio, C/O WM Advisors, 5200 E. 2nd St., 2nd Floor, Long
Beach, CA 90803, 10.98%
SAM Strategic Growth Portfolio, C/O WM Advisors, 5200 E. 2nd St., 2nd
Floor, Long Beach, CA 90803, 10.95%
INCOME FUND B CLASS A: Northwestern Trust & Investors Advisory Company,
1201 3rd Ave., Ste. 2010, Seattle, WA 98101-3026, 8.36%
INCOME FUND B CLASS S: KY Cabinet for Human Resources TTEE FBO the
Marian K. Burns Irrevocable Charitable Remainder Trust, 275 E. Main St. 6th
Floor West, Frankfort, KY 40621, 10.62%
INCOME FUND B CLASS I: SAM Flexible Income Portfolio, C/O WM Advisors,
5200 E. 2nd St., 2nd Floor, Long Beach, CA 90803, 50.73%
SAM Income Portfolio, C/O WM Advisors, 5200 E. 2nd St., 2nd Floor, Long
Beach, CA 90803, 49.27%
CALIFORNIA MUNICIPAL BOND FUND B CLASS S: Josefina F. Parungao and
Reynaldo Fernando, JTWROS, 5480 Avenida El Cid, Yorba Linda, CA 92686, 74.29%
WM Funds Administration, 1201 Third Avenue, 22nd Floor, Seattle, WA
98101, 12.96%
WM Shareholder Services, 1201 Third Avenue, 22nd Floor, Seattle, WA
98101, 12.75%
CALIFORNIA MUNICIPAL BOND FUND B CLASS I: WM Shareholder Services, 1201
Third Avenue, 22nd Floor, Seattle, WA 98101, 100%
CALIFORNIA INSURED INTERMEDIATE MUNICIPAL BOND FUND B CLASS A:
Consolacion Padama and Manuel Padama JTWROS, 2045 Demille Drive, Los Angeles, CA
90027, 5.93%
CALIFORNIA INSURED INTERMEDIATE MUNICIPAL BOND FUND B CLASS S: WM Funds
Administration, 1201 Third Avenue, 22nd Floor, Seattle, WA 98101, 50.38%
WM Shareholder Services, 1201 Third Avenue, 22nd Floor, Seattle, WA
98101, 49.62%
CALIFORNIA INSURED INTERMEDIATE MUNICIPAL BOND FUND B CLASS I: WM
Shareholder Services, 1201 Third Avenue, 22nd Floor, Seattle, WA 98101, 100%
FLORIDA INSURED MUNICIPAL BOND FUND B CLASS B: Joseph R. Ott and Stella
C. Ott JTWROS, 5800 SW 99th Terrace, Miami, FL 33156, 5.88%
BHC Securities, Inc., FAO 84814707, ATTN: Mutual Funds Dept., One
Commerce Square, 2005 Market Street, Suite 1200, Philadelphia, PA 19103, 5.58%
FLORIDA INSURED MUNICIPAL BOND FUND B CLASS S: WM Funds Administration,
1201 Third Avenue, 22nd Floor, Seattle, WA 98101, 50.38%
WM Shareholder Services, 1201 Third Avenue, 22nd Floor, Seattle, WA
98101, 49.62%
FLORIDA INSURED MUNICIPAL BOND FUND B CLASS I: WM Shareholder Services,
1201 Third Avenue, 22nd Floor, Seattle, WA 98101, 100%
BOND & STOCK FUND B CLASS A: Northwestern Trust & Investors Advisory
Company, 1201 3rd Ave., Ste. 2010, Seattle, WA 98101-3026, 17.06%
BOND & STOCK FUND B CLASS S: Everen Securities, Inc., A/C 1916-6877,
Randall E. Campbell, 111 East Kilbourn Avenue, Milwaukee, WI 53202, 67.53%
BSDT TTEE IRA R, William M. Cordova, 25036 Oxford Dr., Laguna Niguel,
CA 92677-8884, 26.85%
BSDT TTEE IRA R, Tessie Penafiel, 4593 Arizona St., San Diego, CA
92116, 5.61%
GROWTH & INCOME FUND B CLASS A: Northwestern Trust & Investors Advisory
Company, 1201 3rd Ave., Ste. 2010, Seattle, WA 98101-3026, 27.49%
GROWTH & INCOME FUND B CLASS I: SAM Conservative Growth Portfolio, C/O
WM Advisors, 5200 E. 2nd St., 2nd Floor, Long Beach, CA 90803, 49.92%
SAM Balanced Portfolio, C/O WM Advisors, 5200 E. 2nd St., 2nd Floor,
Long Beach, CA 90803, 29.45%
SAM Strategic Growth Portfolio, C/O WM Advisors, 5200 E. 2nd St., 2nd
Floor, Long Beach, CA 90803, 18.13%
GROWTH FUND B CLASS I: SAM Conservative Growth Portfolio, C/O WM
Advisors, 5200 E. 2nd St., 2nd Floor, Long Beach, CA 90803, 53.48%
SAM Balanced Portfolio, C/O WM Advisors, 5200 E. 2nd St., 2nd Floor,
Long Beach, CA 90803, 26.13%
SAM Strategic Growth Portfolio, C/O WM Advisors, 5200 E. 2nd St., 2nd
Floor, Long Beach, CA 90803, 19.40%
EMERGING GROWTH FUND B CLASS I: SAM Conservative Growth Portfolio, C/O
WM Advisors, 5200 E. 2nd St., 2nd Floor, Long Beach, CA 90803, 47.50%
SAM Balanced Portfolio, C/O WM Advisors, 5200 E. 2nd St., 2nd Floor,
Long Beach, CA 90803, 37.52%
SAM Strategic Growth Portfolio, C/O WM Advisors, 5200 E. 2nd St., 2nd
Floor, Long Beach, CA 90803, 14.98%
INTERNATIONAL GROWTH FUND B CLASS I: SAM Conservative Growth Portfolio,
C/O WM Advisors, 5200 E. 2nd St., 2nd Floor, Long Beach, CA 90803, 49.85%
SAM Balanced Portfolio, C/O WM Advisors, 5200 E. 2nd St., 2nd Floor,
Long Beach, CA 90803, 38.43%
SAM Strategic Growth Portfolio, C/O WM Advisors, 5200 E. 2nd St., 2nd
Floor, Long Beach, CA 90803, 11.72%
NORTHWEST FUND B CLASS A: Northwestern Trust & Investors Advisory
Company, 1201 3rd Ave., Ste. 2010, Seattle, WA 98101-3026, 18.19%
HIGH YIELD FUND B CLASS A: Washington Mutual Inc., Paul Bonde TAOS,
Mail Stop WMT0511, 1201 3rd Ave., Seattle, WA 98101, 74.28%
HIGH YIELD FUND B CLASS S: Alonzo G. Orr and Janet S. Richardson JTWROS
TOD Beatrice Orr, Rodney Orr, Diane Keane, 7483 Overlook Dr., Lake Worth, FL
33467, 65.95%
Harold P. Jewell and Oveta B. Jewell JTWROS, 1001 Urell Place NE,
Washington DC 20011-2140, 12.91%
John Yanok and Lucille Yanok JTWROS, 1365 SW Gastador Ave., Port ST
Lucie, FL 34953, 9.19%
Eliana J. Kross, 5221 Cribari Dale, San Jose, CA 95135-1315, 6.21%
Robert F. Burns and Elizabeth J. Burns JTWROS, Greenwood Rd.,
Wynantskill, NY 12198-0000, 5.73%
HIGH YIELD FUND B CLASS I: SAM Income Portfolio, C/O WM Advisors, 5200
E. 2nd St., 2nd Floor, Long Beach, CA 90803, 62.48%
SAM Flexible Income Portfolio, C/O WM Advisors, 5200 E. 2nd St., 2nd
Floor, Long Beach, CA 90803, 32.06%
TAX-EXEMPT BOND FUND B CLASS S: WM Funds Administration, 1201 Third
Avenue, 22nd Floor, Seattle, WA 98101, 50.52%
WM Shareholder Services, 1201 Third Avenue, 22nd Floor, Seattle, WA
98101, 49.48%
TAX-EXEMPT BOND FUND B CLASS I: WM Shareholder Services, 1201 Third
Avenue, 22nd Floor, Seattle, WA 98101, 100%
U.S. GOVERNMENT SECURITIES B CLASS S: KY Cabinet for Human Resources
TTEE FBO the Marian K. Burns Irrevocable Charitable Remainder Trust, 275 E. Main
St. 6th Floor West, Frankfort, KY 40621, 5.07%
U.S. GOVERNMENT SECURITIES B CLASS S: SAM Balanced Portfolio, C/O WM
Advisors, 5200 E. 2nd St., 2nd Floor, Long Beach, CA 90803, 61.79%
SAM Flexible Income Portfolio, C/O WM Advisors, 5200 E. 2nd St., 2nd
Floor, Long Beach, CA 90803, 20.53%
SAM Income Portfolio, C/O WM Advisors, 5200 E. 2nd St., 2nd Floor, Long
Beach, CA 90803, 17.68%
VARIABLE TRUST MONEY MARKET FUND: American General Life Insurance Co.,
Variable Products Department, 5-36, Deborah Kerai, P.O. Box 1591, Houston, TX
77251-1591, 88.76%
Variable Trust Balanced Portfolio, C/O WM Advisors, 5200 E. 2nd St.,
2nd Floor, Long Beach, CA 90803, 5.90%
VARIABLE TRUST U.S. GOVERNMENT SECURITIES FUND: American General Life
Insurance Co., Variable Products Department, Deborah Kerai, P.O Box 1591,
Houston, TX 77251-1591, 95.76%
VARIABLE TRUST INCOME FUND: American General Life Insurance Co.,
Variable Products Department, Deborah Kerai, P.O Box 1591, Houston, TX
77251-1591, 97.37%
VARIABLE TRUST INTERNATIONAL GROWTH FUND: American General Life
Insurance Co., Variable Products Department, Deborah Kerai, P.O Box 1591,
Houston, TX 77251-1591, 90.95%
VARIABLE TRUST GROWTH FUND: American General Life Insurance Co.,
Variable Products Department, Deborah Kerai, P.O Box 1591, Houston, TX
77251-1591, 94.58%
VARIABLE TRUST GROWTH & INCOME FUND: American General Life Insurance
Co., Variable Products Department, Deborah Kerai, P.O Box 1591, Houston, TX
77251-1591, 89.73%
VARIABLE TRUST EMERGING GROWTH FUND: American General Life Insurance
Co., Variable Products Department, Deborah Kerai, P.O Box 1591, Houston, TX
77251-1591, 96.09%
VARIABLE TRUST SHORT-TERM HIGH QUALITY BOND FUND: American General Life
Insurance Co., Variable Products Department, Deborah Kerai, P.O Box 1591,
Houston, TX 77251-1591, 93.30%
VARIABLE TRUST NORTHWEST FUND: WM Shareholder Services, 1201 Third
Avenue, 22nd Floor, Seattle, WA 98101, 43.39%
Variable Trust Strategic Growth Portfolio, C/O WM Advisors, 5200 E. 2nd
St., 2nd Floor, Long Beach, CA 90803, 20.46%
Variable Trust Growth Portfolio, C/O WM Advisors, 5200 E. 2nd St., 2nd
Floor, Long Beach, CA 90803, 19.01%
American General Life Insurance Co., Variable Products Department,
Deborah Kerai, P.O Box 1591, Houston, TX 77251-1591, 17.14%
VARIABLE TRUST BOND & STOCK FUND: American General Life Insurance Co.,
Variable Products Department, Deborah Kerai, P.O Box 1591, Houston, TX
77251-1591, 66.71%
WM Shareholder Services, 1201 Third Avenue, 22nd Floor, Seattle, WA
98101, 33.29%
VARIABLE TRUST INCOME PORTFOLIO: American General Life Insurance Co.,
Variable Products Department, Deborah Kerai, P.O Box 1591, Houston, TX
77251-1591, 100%
VARIABLE TRUST FLEXIBLE INCOME PORTFOLIO: American General Life
Insurance Co., Variable Products Department, Deborah Kerai, P.O Box 1591,
Houston, TX 77251-1591, 100%
VARIABLE TRUST BALANCED PORTFOLIO: American General Life Insurance Co.,
Variable Products Department, Deborah Kerai, P.O Box 1591, Houston, TX
77251-1591, 100%
VARIABLE TRUST CONSERVATIVE GROWTH PORTFOLIO: American General Life
Insurance Co., Variable Products Department, Deborah Kerai, P.O Box 1591,
Houston, TX 77251-1591, 100%
VARIABLE TRUST STRATEGIC GROWTH PORTFOLIO: American General Life
Insurance Co., Variable Products Department, Deborah Kerai, P.O Box 1591,
Houston, TX 77251-1591, 100%
THE FUNDS' SERVICE PROVIDERS
ADVISOR
The Funds and Portfolios are managed by the Advisor. The Advisor has
delegated portfolio management responsibilities in respect of the Tax-Exempt
Bond, California Municipal, California Insured Intermediate Municipal, Florida
Insured Municipal, Growth and International Growth Funds to sub-advisors.
MANAGEMENT FEES. Each Fund and each Portfolio pays a management fee to
the Advisor. The management fee is calculated and paid to the Advisor every
month. The management fee for each Fund and Portfolio is based upon a percentage
of the average net assets of such Fund or Portfolio. Absent fee waivers, the
total management fee for each Fund and Portfolio as provided in the investment
advisory agreement of the Fund or Portfolio is as follows:
<TABLE>
<CAPTION>
FUNDS FEES
----- ----
<S> <C>
Money Market and Tax-Exempt Money Market Funds.............. 0.45% of the first $1 billion,
0.40% thereafter
California Money Fund....................................... 0.45% of the first $500 million,
0.40% thereafter
Short Term High Quality Bond Fund........................... 0.50% of the first $200 million,
0.45% of the next $300 million,
0.40% thereafter
Target Maturity 2002 Fund................................... 0.25% of all assets
U.S. Government Securities and Income Funds................. 0.50% of all assets
High Yield, Bond & Stock and Growth & Income Funds.......... 0.625% of the first $250 million,
0.50% thereafter
Tax-Exempt Bond Fund........................................ 0.50% of the first $250 million,
0.40% thereafter
California Municipal, California Insured Intermediate
Municipal and Florida Insured Municipal Funds............. 0.50% of all assets
Northwest Fund.............................................. 0.625% of the first $500 million,
0.50% of the next $500 million,
0.375% thereafter
Growth Fund................................................. 0.85% of all assets
Emerging Growth Fund........................................ 1.05% of the first $100 million,
1.00% of the next $400 million,
0.90% thereafter
International Growth Fund................................... 1.10% of the first $50 million,
1.00% of the next $75 million,
0.80% thereafter
Each of the Portfolios...................................... 0.15% of all assets
</TABLE>
Each of the Portfolios, unlike the Funds, also pays an administrative fee
at the annual rate of 0.50% of the average net assets to the Transfer Agent.
-13-
<PAGE> 14
For the three most recent fiscal years the Funds and Portfolios paid the
Advisor or its affiliates the following management fees:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31, 1998
----------------------------------------------------
FEES BEFORE FEES WAIVED EXPENSES
WAIVER REIMBURSED
------------ ----------- ----------
<S> <C> <C> <C>
Money Market Fund $1,648,865 $ 0 $ 0
Tax-Exempt Money Market Fund $ 104,751 $ 37,019 $ 0
California Money Fund* $ 64,254 $ 18,193 $ 0
Short Term High Quality Bond Fund* $ 67,678 $ 67,678 $ 9,467
Target Maturity 2002 Fund* $ 2,065 $ 2,065 $ 4,769
U.S. Government Securities Fund $1,467,714 $ 202,160 $ 0
Income Fund $1,124,138 $ 0 $ 0
High Yield Fund** $ 42,864 $ 29,768 $ 0
Tax-Exempt Bond Fund $1,213,255 $ 0 $ 0
California Municipal Fund* $ 778,933 $ 76,222 $ 0
California Insured Intermediate Municipal Fund F * $ 142,361 $ 66,654 $ 0
Short Term High Quality Bond Fund* $ 67,678 $ 67,678 $ 9,467
Florida Insured Municipal Fund* $ 50,825 $ 41,923 $ 0
Bond & Stock Fund $2,190,790 $ 0 $ 0
Growth & Income Fund $3,575,552 $ 0 $ 0
Northwest Fund $1,920,011 $ 0 $ 0
Growth Fund* $ 955,950 $ 0 $ 0
Emerging Growth Fund* $ 493,746 $ 0 $ 0
International Growth Fund* $ 497,321 $ 0 $ 0
Strategic Growth Portfolio* $ 34,290 $ 34,290 $ 6,085
Conservative Growth Portfolio* $ 130,854 $ 66,873 $ 0
Balanced Portfolio* $ 102,838 $ 46,178 $ 0
Flexible Income Portfolio* $ 8,801 $ 24,570 $ 0
Income Portfolio* $ 6,074 $ 6,074 $ 17,261
</TABLE>
* Fiscal Period from June 30, 1998 through October 31, 1998.
** Commenced operations on April 8, 1998.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1998
-------------------------------------------------
FEES BEFORE FEES WAIVED EXPENSES
WAIVER REIMBURSED
------------ ----------
<S> <C> <C> <C>
California Money Fund $ 188,184 $ 70,002 $ 0
Short Term High Quality Bond Fund $ 145,180 $ 133,982 $ 0
Target Maturity 2002 Fund $ 6,596 $ 33,075 $ 17,651
California Municipal Fund $2,010,319 $ 656,426 $ 0
California Insured Intermediate Municipal Fund $ 380,528 $ 246,808 $ 0
Florida Insured Municipal Fund $ 146,555 $ 140,651 $ 396
</TABLE>
-14-
<PAGE> 15
<TABLE>
<S> <C> <C> <C>
Growth Fund $2,739,222 $ 0 $ 0
International Growth Fund $1,354,934 $ 0 $ 29,113
Emerging Growth Fund $2,214,151 $ 3,472 $ 0
Strategic Growth Portfolio $ 91,196 $ 86,276 $ 1,754
Conservative Growth Portfolio $ 438,904 $ 116,516 $ 19,099
Balanced Portfolio $ 323,735 $ 107,755 $ 11,970
Flexible Income Portfolio $ 26,686 $ 35,116 $ 13,939
Income Portfolio $ 22,941 $ 34,864 $ 11,403
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 1997
------------------------------------------------
EXPENSES
FEES PAID FEES WAIVED REIMBURSED
--------- ----------- ----------
<S> <C> <C> <C>
Money Market Fund* $1,148,906 $ 0 $ 98,432
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 ended 12/31
** Fiscal year ended 6/30
*** Fiscal year ended 10/31
-15-
<PAGE> 16
<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
California Money Fund** $ 206,796 $ 148,062 $ 0
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 ended 12/31
** Fiscal year ended 6/30
*** Fiscal year ended 10/31
-16-
<PAGE> 17
SUB-ADVISORY FEES
The Advisor retains only the net amount of the management fees paid to
it after the sub-advisory fees described below are paid to the sub-advisors. The
Advisor pays to the sub-advisors for the funds listed below a monthly fee at an
annual rate of the following percentages of the average net assets of each such
fund.
<TABLE>
<CAPTION>
SUBADVISOR/FUNDS FEES
- ---------------- ----
<S> <C>
VAN KAMPEN
California Municipal Fund .................................... 0.20% of the first $150 million
0.15% thereafter
Florida Insured Municipal Fund.................................. 0.20% of the first $75 million
0.125% thereafter
California Insured Intermediate Municipal Fund.................. 0.20% of the first $75 million
0.125% thereafter
Tax-Exempt Bond Fund............................................ 0.10% of average daily net assets
JANUS
Growth Fund..................................................... 0.55% of the first $100 million
0.50% thereafter
CAPITAL GUARDIAN
International Growth Fund............................................ 0.79% of the first $25 million
0.60% of the next $25 million
0.425% of the next $200 million
0.375% thereafter*
</TABLE>
* Subject to fee aggregation policies described below.
The sub-advisory agreement for the International Growth Fund with
Capital Guardian took effect on June 23, 1999. The subadvisory agreements for
the Growth Fund with Janus and for California Municipal Fund, the Florida
Insured Municipal Fund and the California Insured Intermediate Fund with Van
Kampen each took effect on March 20, 1998. The subadvisory agreement for the
Tax-Exempt Bond Fund with Van Kampen took effect on January 1, 1998.
FEE AGGREGATION POLICIES
Fee aggregation will apply to all accounts managed by Capital Group
companies, except for emerging markets equity investments and investments in
funds with internally charged fees ("Eligible Accounts"). In order to achieve
the benefit of fee aggregation, the combined actual fees must exceed the
combined total of the minimum fee applicable to each of the client's Eligible
Accounts.
For additional Eligible Accounts with the same investment objectives
and guidelines, all assets for these Eligible Accounts will be aggregated for
fee calculation purposes.
For additional Eligible Accounts with Different investment objectives
and guidelines:
1. Each account will be charged on the first $10 million at the
initial breakpoint rate for the appropriate mandate. Any incremental assets
over $10 million will be aggregated and charged at the incremental rate for
the appropriate mandate.
2. Assets invested in commingled funds will be aggregated and charged
at the incremental rate for the appropriate mandate.
3. The first additional account within a new country will be charged
on the first $15 million at the initial breakpoint rate for the appropriate
mandate. Any incremental assets over $15 million will be aggregated and
charged at the incremental rate for the appropriate mandate.
For fee aggregation purposes, Eligible Accounts will be aggregated in
the following order: balanced, equity-developed markets, convertible,
fixed-income -- high yield, fixed-income -- emerging markets, and fixed-income
- -- developed markets.
Unless otherwise requested, the benefit from fee aggregation for
clients with multiple accounts will be calculated by comparing total aggregated
fees to total unaggregated fees for all Eligible Accounts. The resulting
percentage discount will be applied to each Eligible Account's unaggregated
fees.
If all Eligible Accounts are not denominated in the same currency, the
local currency assets of each Eligible Account and the related fees calculated
on any unaggregated basis will be converted to a designated base currency using
the applicable foreign exchange rate. The total of such fees will be compared to
the Eligible Accounts' total aggregated fees. The resulting percentage discount
will then be applied to each Eligible Account's unaggregated fee as determined
in the applicable currency.
FEE DISCOUNTS AND ELIMINATION OF FEE BREAKPOINTS
The following Fee discount will be applied based upon the total
aggregated fees:
<TABLE>
<S> <C>
Clients between $1.25 million to $4 million................. 5% discount
Clients between $4 million to $8 million.................... 7.5% discount
Clients between $8 million to $12 million................... 10% discount
Clients over $12 million.................................... 12.5% discount
</TABLE>
For this purpose, aggregated fees will include all fees from separate
accounts, commingled funds, and funds internally charged fees managed by Capital
Group companies, except for investments in American-Funds' mutual funds. The
resulting fee discount percentage will be applied to each account's fees
(excluding fees related to investments in funds with internally charged fees).
For clients whose total aggregated fees (before discounts) exceed $3
million, fee breakpoints will be eliminated and each account will be charged at
the lowest marginal fee rate applicable to the account's fee schedule.
To determine the applicable fee discount level and breakpoint
elimination threshold, the total aggregated fees for the quarter will be
annualized. For this purpose, all local currency fees will be converted to a
designated base currency.
Fees related to investments in funds with internally charged fees will
be estimated by multiplying the quarter end value of the Investment (adjusted on
a prorated basis for any contributions or withdrawals during the quarter) by the
fund's effective fee. For this purpose, the effective fee will be based on the
value of the fund's quarter end assets and the fund's current fee schedule.
Applicable discount levels and the elimination of fee breakpoints will
be effective beginning the first quarter a discount threshold is exceeded and
will remain in effect unless the total fees fall below the discount threshold
due to a significant withdrawal of assets. A decline in the market alone will
not cause the reinstatement of a lower discount level or fee breakpoints.
For the three most recent fiscal years, the Advisor or its affiliates paid the
sub-advisors the following sub-advisory fees:
<TABLE>
<CAPTION>
FEES PAID FEES PAID FEES PAID FEES PAID
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED OCT. ENDED JUNE ENDED ENDED
1998* 1998 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
California Money Fund $ 0 $ 36,881 $ 70,156 $ 77,549
California Municipal Fund $ 192,188 $ 580,166 $ 637,702 $ 684,267
California Insured Intermediate Municipal Fund $ 40,648 $ 126,152 $ 144,771 $ 143,109
Florida Insured Municipal Fund $ 14,521 $ 49,884 $ 63,134 $ 73,371
Growth Fund $ 466,728 $1,473,318 $1,374,940 $1,149,390
</TABLE>
-17-
<PAGE> 18
<TABLE>
<S> <C> <C> <C> <C>
International Growth Fund** $ 247,641 $ 753,964 $ 880,003 $ 640,950
Emerging Growth Fund $ 0 $ 921,864 $1,550,235 $1,470,531
</TABLE>
* Fiscal period from June 30, 1998 through October 31, 1998.
** Fees shown are those paid to Warburg, which provided sub-advisory services to
the fund until June 23, 1999.
Until March 20, 1998, Sierra Fund Administration Corporation ("Sierra
Administration") served as the administrator, and First Data Investor Services
Group, Inc. ("First Data") served as the sub-administrator to each of the WM
Trust II Funds and each of the Portfolios. Shareholder Services had provided
transfer agency and other shareholder services to each of the WM Trust I Funds
prior to that date, and has provided transfer agency and other shareholder
services to each of the Funds and Portfolios since March 20, 1998.
For the three most recent fiscal years the Trusts paid Shareholder
Services and its affiliates the following administration and/or Transfer Agent
fees:
<TABLE>
<CAPTION>
OCT. 1998 JUNE 1998
--------------------- ----------------------
FEES FEES FEES FEES
PAID WAIVED PAID WAIVED
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Money Market Fund* $ 586,106 $ 0 n/a n/a
Tax-Exempt Money Market Fund* $ 16,010 $ 0 n/a n/a
California Money Fund** $ 13,361 $ 0 $ 73,762 $ 0
Short Term High Quality Bond Fund** $ 24,407 $ 0 $ 33,910 $ 0
Target Maturity 2002 Fund+** $ 1,489 $ 0 $ 5,515 $ 0
U.S. Government Securities Fund* $1,290,295 $ 0 n/a n/a
Income Fund* $ 195,913 $ 0 n/a n/a
High Yield Fund $ 2,519 $ 0 n/a n/a
Tax-Exempt Bond Fund* $ 98,013 $ 0 n/a n/a
California Municipal Fund** $ 41,000 $ 0 $ 860,498 $ 0
California Insured Intermediate Municipal Fund** $ 8,369 $ 0 $ 161,117 $ 0
Florida Insured Municipal Fund** $ 3,487 $ 0 $ 65,423 $ 0
Bond & Stock Fund $ 248,201 $ 0 n/a n/a
Growth Income Fund $ 482,655 $ 0 n/a n/a
Growth Fund** $ 106,901 $ 0 $ 723,887 $ 0
International Growth Fund** $ 46,783 $ 0 $ 370,136 $ 0
Northwest Fund*** $ 394,356 $ 0 n/a n/a
Emerging Growth Fund** $ 132,833 $ 0 $ 620,085 $ 0
Strategic Growth Portfolio++** $ 129,401 $ 0 $ 303,985 $ 0
Conservative Growth Portfolio++** $ 87,805 $ 0 $1,463,013 $ 0
Balanced Portfolio++** $ 374,761 $ 0 $1,079,118 $ 0
Flexible Income Portfolio++** $ 32,391 $ 0 $ 88,955 $ 0
Income Portfolio++** $ 22,302 $ 0 $ 76,470 $ 0
</TABLE>
<TABLE>
<CAPTION>
1997 1996
------------------------ -----------------------
FEES FEES FEES FEES
PAID WAIVED PAID WAIVED
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Money Market Fund* $ 476,775 $ 141,274 $ 411,274 $137,904
Tax-Exempt Money Market Fund* $ 26,688 $ 1,293 $ 26,736 $ 1,628
California Money Fund** $ 140,313 $ 0 $ 155,097 $ 0
Short Term High Quality Bond Fund** $ 107,344 $ 0 $ 809,686 $ 11,630
Target Maturity 2002 Fund+** $ 10,859 $ 0 $ 11,080 $ 3,805
U.S. Government Securities Fund* $ 105,444 $ 0 $ 146,145 $ 0
Income Fund* $ 93,522 $ 0 $ 114,258 $ 0
High Yield Fund n/a n/a n/a n/a
Tax-Exempt Bond Fund* $ 84,547 $ 0 $ 102,716 $ 0
California Municipal Fund** $1,312,972 $ 0 $ 14,216 $ 0
California Insured Intermediate Municipal Fund** $ 253,706 $ 0 $ 250,472 $ 14,288
Florida Insured Municipal Fund** $ 110,484 $ 0 $ 128,399 $ 20,472
Bond & Stock Fund $ 235,936 $ 0 $ 222,913 $ 0
Growth Income Fund $ 245,357 $ 0 $ 193,784 $ 0
Growth Fund** $ 927,458 $ 0 $ 769,573 $ 0
International Growth Fund** $ 616,002 $ 0 $ 422,563 $ 0
Northwest Fund*** $ 347,561 $ 0 $ 320,799 $ 0
Emerging Growth Fund** $1,050,164 $ 0 $ 994,372 $ 0
Strategic Growth Portfolio++** $ 122,140 $ 83,235 n/a n/a
Conservative Growth Portfolio++** $ 866,812 $ 259,689 n/a n/a
Balanced Portfolio++** $ 628,588 $ 179,370 n/a n/a
Flexible Income Portfolio++** $ 66,287 $ 58,740 n/a n/a
Income Portfolio++** $ 61,796 $ 50,033 n/a n/a
</TABLE>
+ The Target Maturity 2002 Fund commenced operations on March 20, 1995.
++ The Portfolios commenced operations on July 25, 1996.
* Fiscal year end changed from 12/31 to 10/31
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<PAGE> 19
** Fiscal year end changed from 6/30 to 10/31
For the three most recent fiscal years, Shareholder Services and its affiliates
paid the following amounts to First Data for sub-administrative services to the
Funds and Portfolios.
<TABLE>
<CAPTION>
OCTOBER 1998 JUNE 1998 1997 1996
------------ --------- -------- ----------
<S> <C> <C> <C> <C>
Money Market Fund* $134,737 n/a n/a n/a
Tax-Exempt Money Market Fund* $ 8,464 n/a n/a n/a
California Money Fund** $ 5,818 $ 37,008 $ 37,649 $ 40,546
Short Term High Quality Bond Fund** $ 6,151 $ 31,105 $ 24,633 $ 41,119
Target Maturity 2002 Fund** $ 315 $ 7,700 $ 2,499 $ 2,485
US Government Securities Fund* $ 98,252 n/a n/a n/a
Income Fund* $ 73,599 n/a n/a n/a
High Yield Fund $ 7,768 n/a n/a n/a
Tax-Exempt Bond Fund* $ 89,401 n/a n/a n/a
California Municipal Fund** $ 50,611 $243,920 $302,048 $ 318,453
California Insured Intermediate Municipal Fund** $ 3,302 $249,738 $ 58,360 $ 56,128
Florida Insured Municipal Fund** $ 84,519 $ 23,945 $ 25,408 $ 28,762
Bond & Stock Fund $212,391 n/a n/a n/a
Growth & Income Fund $ 67,046 n/a n/a n/a
Northwest Fund $ 40,745 n/a n/a n/a
Growth Fund* $ 22,493 $260,697 $213,556 $ 172,561
International Growth Fund** $ 21,615 $249,221 $141,808 $ 94,735
Emerging Growth Fund** $ 10,291 $193,279 $241,257 $ 222,994
Strategic Growth Portfolio+** $ 39,627 $ 32,694 $ 1,128 n/a
Conservative Growth Portfolio+** $ 31,153 $ 52,443 $ 1,164 n/a
Balanced Portfolio+** $ 2,670 $ 45,182 $ 1,257 n/a
Flexible Income Portfolio+** $ 1,842 $ 25,987 $ 1,533 n/a
Income Portfolio++** ?? $ 25,783 $ 1,249 n/a
</TABLE>
* Fiscal year end changed from 12/31 to 10/31.
** Fiscal year end changed from 6/30 to 10/31.
+ The Portfolios commenced operations on July 25, 1996.
TRANSFER AGENT AND CUSTODIAN
WM Shareholder Services, Inc., provides transfer agency and other shareholder
services. WM Shareholder Services, Inc. is an indirect wholly owned subsidiary
of Washington Mutual, located at 1201 Third Avenue, Suite 1400, Seattle,
Washington 98101. The Custodian for the Funds and Portfolios is Boston Safe
Deposit and Trust Co., which is located at One Boston Place, Boston,
Massachusetts 02108. WM Shareholder Services, Inc. may charge a fee for special
services, such as providing historical account documents, that are beyond the
normal scope of its services.
COUNSEL
Ropes & Gray, located at One International Place, Boston, Massachusetts
02110, serves as counsel to the Trusts.
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<PAGE> 20
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP, 50 Fremont Street, San Francisco, CA 94105,
serves as independent accountants to each of the Funds and Portfolios.
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
served as independent accountants to WM Trust II and the Predecessor Portfolios
for their fiscal year ending June 30, 1998 and for prior fiscal years. Prior to
the most recent fiscal year of the WM Trust I Funds, LeMaster & Daniels PLLC,
601 West Riverside, Suite 700, Spokane, Washington 99201, served as independent
accountants to WM Trust I. The financial statements, financial highlights and
Report of Independent Accountants of Deloitte & Touche LLP for each of the Funds
and Predecessor Portfolios contained in the Funds' and the Predecessor
Portfolios' Annual Report for the fiscal period ended October 31 ,1998 are
hereby incorporated by reference. The financial statements, financial highlights
and Report of Independent Accountants of PricewaterhouseCoopers LLP for each of
the WM Trust II Funds and each of the Predecessor Portfolios contained in such
Funds' and the Predecessor Portfolios' Annual Report to Shareholders for the
year ended June 30, 1998 are incorporated herein by reference. The financial
statements, financial highlights and Report of Independent Accountants of
LeMaster & Daniels PLLC for each of the WM Trust I Funds contained in such
Funds' Annual Reports to Shareholders for the fiscal years ended October 31,
1997 or December 31, 1997, as the case may be, are hereby incorporated by
reference. The financial statements incorporated by reference into this SAI and
the financial highlights in the Prospectus have been audited by Deloitte &
Touche LLP, PricewaterhouseCoopers 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 as experts in accounting and
auditing.
ORGANIZATION OF THE TRUST
WM Trust I is an open-end management investment company, organized as a
Massachusetts business trust pursuant to an Agreement and Declaration of Trust
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"). The WM Trust I Agreement and WM Trust II
Agreements are collectively referred to herein as the "Trust Agreements." WM
Strategic Asset Management Portfolios, LLC is an open-end management investment
company, organized as a Massachusetts limited liability company pursuant to a
Limited Liability Company Agreement dated March 12, 1999, as amended from time
to time (the "LLC Agreement"). In the interest of economy and convenience,
certificates representing shares in the Trusts are not physically issued. Boston
Safe Deposit and Trust Co. ("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
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<PAGE> 21
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.
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 and LLC
Agreement, 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
business trust, such as WM Trust I or WM Trust II. 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
believes is remote. 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 the liabilities of the Trust. Massachusetts law provides that
shareholders of limited liability companies, such as WM Strategic Asset
Management Portfolios, LLC, may not be held personally liable for the
obligations of the Portfolios.
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.
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 ("S&P"), Duff and Phelps, 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
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<PAGE> 22
respective sub-advisors. The Appendix to this SAI contains further information
concerning the ratings of these services and their significance.
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, but are
not necessarily limited to, 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. To the extent 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
-22-
<PAGE> 23
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.
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.
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<PAGE> 24
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.
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 include these classified as governmental or government-related.
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.
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 or
different characteristics will have varying average life assumptions.
-24-
<PAGE> 25
REPURCHASE AGREEMENTS. The California Money, Short Term High Quality
Bond, High Yield, Target Maturity 2002, California Insured Intermediate
Municipal, Florida Insured Municipal, Growth, International 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.
WHEN ISSUED SECURITIES AND DELAYED DELIVERY 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' Custodian. 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 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.
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 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 below.
Successful use of most Strategic Transactions depends upon the
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<PAGE> 26
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. 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 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
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<PAGE> 27
restrictions. If there is a default by the counterparty, a Fund may have
contractual remedies pursuant to the agreements related to the transaction.
Caps, floors and collars are relatively recent innovations for which
standardized documentation has not yet been fully developed and, accordingly,
they may be less liquid.
- FUTURES ACTIVITIES. Each of the Funds permitted to engage in
Strategic Transactions (other than the Target Maturity 2002 Fund or the WM Trust
I Funds 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.
- 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 or Portfolio
is to protect the Fund or Portfolio 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 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 a
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 obligations 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 or Portfolio 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
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<PAGE> 28
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 Portfolio's 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 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 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
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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 value of the option
can change daily and that change would be reflected in the net asset value of
the Fund or Portfolio holding the option.
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 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.
- OPTIONS ON SECURITIES. The Short Term High Quality Bond, Bond &
Stock, Growth & Income, Growth, International Growth, Northwest and Emerging
Growth Funds may buy and sell covered put (except for the Bond & Stock, Growth &
Income and Northwest Funds) and call options on securities.
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
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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 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. 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 generally 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
inability 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
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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 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.
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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.
- OPTIONS ON SECURITIES INDEXES. The Short Term High Quality Bond,
California Insured Intermediate Municipal, Growth, International Growth and
Emerging Growth Funds 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 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.
- FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The Short Term High Quality
Bond, Income, Growth, International Growth and Emerging Growth Funds 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.
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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 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.
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
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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. 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.
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.
- OPTIONS ON FOREIGN CURRENCIES. The Short Term High Quality Bond,
California Insured Intermediate Municipal, International Growth and Growth Funds
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 may 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.
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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 anticipates 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 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 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
counterparty 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
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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.
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 also invest in securities of companies in (or
governments of) developing or emerging countries (sometimes referred to as
"emerging markets"). The International Growth Fund may invest up to 30%, and
each of the other Funds may invest up to 5%, of its total assets in emerging
markets. 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.
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.
LENDING OF PORTFOLIO SECURITIES. Each of the California Money, Short
Term High Quality Bond, California Insured Intermediate Municipal, Growth, Bond
& Stock, Growth & Income, Northwest, International Growth and Emerging Growth
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.
MUNICIPAL OBLIGATIONS. Municipal Obligations 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 Obligations are Municipal Bonds, Municipal
Commercial Paper and Municipal Notes.
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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.
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:
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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. The Tax-Exempt
Money Market, California Money, Tax-Exempt Bond, California
Municipal, California Insured Intermediate Municipal and
Florida Insured Municipal Funds (the "Municipal Funds") 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 Obligations have been introduced
before Congress. Similar proposals may be introduced in the future. If a
proposal to restrict or eliminate the federal tax exemption for interest on
Municipal Obligations were enacted, the availability of Municipal Obligations
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 obligations (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 obligations over the negotiated
yield at which
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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 obligations 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 obligation.
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
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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.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL OBLIGATIONS
The ability of issuers to pay interest on, and repay principal of,
California municipal obligations ("California Municipal Obligations") 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 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. Since
1978 the California voters have voted to amend the California Constitution in a
number of ways which could affect a governmental entity's ability to budget or
raise sufficient funds to meet debt service on bonds and other obligations.
These amendments, among other things, provide maximum limits on ad
valorem taxes on real property, appropriation limits for state and local
governmental entities, require new local taxes to be submitted to the electorate
and make it generally more difficult for local agencies to levy and maintain
fees, charges and assessments for municipal services and programs. These
amendments may adversely affect the ability of issuers of California Municipal
Obligations to make timely payments of principal and interest, and may adversely
affect the supply of California Municipal 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 Obligations 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 Obligations 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
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security for payment of principal and interest on the Municipal Security. For
example, California Municipal Obligations 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, 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
Obligations, 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 Obligations.
Certain California Municipal Obligations 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 Obligations.
Certain California Municipal Obligations 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 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
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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 Obligations 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.
Because of the diverse nature of such laws and regulations and the
impossibility of either predicting in which specific California Municipal
Obligations 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
Obligations 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.
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ADDITIONAL CONSIDERATIONS. With respect to Municipal Obligations 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 Obligations 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 OBLIGATIONS
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 Governor of the State of Florida. Such figures are preliminary and
subject to change without notice.
An amendment to the State Constitution was approved by statewide ballot
in the November 8, 1994 general election which is commonly referred to as the
"Limitation on State Revenues Amendment." This amendment provides that State
revenues collected for any fiscal year shall be limited to State revenues
allowed under the amendment for the prior fiscal year plus an adjustment for
growth. Growth is defined as an amount equal to the average annual rate of
growth in State personal income over the most recent twenty quarters times the
State revenues allowed under the amendment for the prior fiscal year. State
revenues collected for any fiscal year in excess of this limitation are required
to be transferred to the budget stabilization fund until the fund reaches the
maximum balance specified in Section 19(g) of Article III of the State
Constitution, and thereafter is required to be refunded to taxpayers as provided
by general law. The limitation on State revenues imposed by the amendment may be
increased by the Legislature, by a two-thirds vote of each house.
The term "State revenues," as used in the amendment, means taxes, fees,
licenses, and charges for services imposed by the Legislature on individuals,
businesses, or agencies outside State government. However, the term "State
revenues" does not include: (i) revenues that are necessary to meet the
requirements set forth in documents authorizing the issuance of bonds by the
State; (ii) revenues that are used to provide matching funds for the federal
Medicaid program with the exception of the revenues used to support the Public
Medical Assistance Trust Fund or its successor program and with the exception of
State matching funds used to fund elective
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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.
LOWER-RATED SECURITIES. The Income, Tax-Exempt Bond, Bond & Stock,
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 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
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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:
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.
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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 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 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).
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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 obligations issued
by governments or political subdivisions of governments or (c)
with respect to the California Money Fund, U.S. dollar-
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denominated bank instruments such as certificates of deposit,
time deposits, bankers' acceptances and letters of credit that
have been issued by U.S. banks.
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) the 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 foreign securities.
18. Purchasing securities that are not readily marketable if more
than 10% of the net assets 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
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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.
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
Trustees 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:
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1. invest in common stocks or other equity securities(1)
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;
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;
- --------
(1) For purposes of determining compliance with this restriction, the
Tax-Exempt Money market Fund will not consider securities of other
Money market Funds to be "common stocks or other equities."
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<PAGE> 51
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;
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 (not applicable to
the Income Fund);
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.
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<PAGE> 52
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:
1. buy common stocks or other equity securities, except that the 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.
** This restriction will not prevent the Fund from purchasing and selling
securities that are secured, directly or indirectly, by real estate or
purchasing securities issued by companies that invest or deal in real
estate.
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;
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<PAGE> 53
4. invest in real estate (except publicly traded real estate investment
trusts);
5. invest in commodities;
6. invest in oil, gas or other mineral leases;
7. invest in other investment companies (except as part of a merger);
8. invest more than 20%* of its total assets in forward commitments or
repurchase agreements;
9. invest more than 25%* of its total assets in any single industry;
10. act as underwriter of securities issued by others;
11. borrow money for investment purposes (it may borrow up to 5% of its
total net assets for emergency, non-investment purposes);
12. lend money (except for the execution of repurchase agreements);
13. issue senior securities;
14. buy or sell options, with the exception of covered call options which
must be limited to 20% of total assets;
15. buy or sell futures-related securities;
16. invest in securities restricted under federal securities laws (other
than securities eligible for resale under Rule 144A under the
Securities Act of 1933, as amended);
17. invest more than 15%* of its net assets in illiquid securities;
18. buy securities on margin, mortgage or pledge its securities, or engage
in "short" sales;
19. invest more than 5%* of its net assets in warrants including not more
than 2% of such net assets in warrants that are not listed on either
New York Stock Exchange or American Stock Exchange; however, warrants
acquired in units or attached to securities may be deemed to be without
value for the purpose of this restriction;
20. invest more than 25%* of its total assets in foreign securities and
then only in U.S. dollar-denominated foreign securities.
* Percentage at the time the investment is made.
THE INVESTMENT RESTRICTIONS SET FORTH BELOW HAVE BEEN ADOPTED BY THE WM
STRATEGIC ASSET MANAGEMENT PORTFOLIOS, LLC 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;
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<PAGE> 54
3. make loans to any person, except loans of portfolio securities to the
extent that no more than 33 1/3% of its total assets would be lent to
other parties, but this limitation does not apply to purchases of debt
securities or repurchase agreements;
4. (i) purchase more than 10% of any class of the outstanding voting
securities of any issuer (except other investment companies as defined
in the 1940 Act) and (ii) purchase securities of an issuer (except
obligations of the U.S. Government and its agencies and
instrumentalities and securities of other investment companies as
defined in the 1940 Act) if as a result, with respect to 75% of its
total assets, more than 5% of the Portfolio's total assets, at market
value, would be invested in the securities of such issuer.
5. issue senior securities (as defined in the 1940 Act) except as
permitted by rule, regulation or order of the Securities and Exchange
Commission;
6. will not borrow, except from banks for temporary or emergency (not
leveraging) purposes including the meeting of redemption requests that
might otherwise require the untimely disposition of securities in an
aggregate amount not exceeding 30% of the value of the Portfolio's
total assets (including the amount borrowed) at the time the borrowing
is made; and whenever borrowings by a Portfolio, including reverse
repurchase agreements, exceed 5% of the value of a Portfolio's total
assets, the Portfolio will not purchase any securities;
7. underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the
1933 Act in the disposition of restricted securities; and
8. write or acquire options or interests in oil, gas or other mineral
exploration or development programs.
PORTFOLIO TURNOVER
The Money Funds attempt to increase yields by trading to take advantage
of short-term market variations, which result in high portfolio turnover and
high transactions costs. 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. 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
-54-
<PAGE> 55
value of portfolio securities. Securities with remaining maturities of one year
or less at the date of acquisition are excluded from the calculation. During
fiscal year 1998, each of the California Municipal, Emerging Growth and
International Growth Funds experienced a significant increase in portfolio
turnover rate from fiscal year 1997. The California Municipal Fund rose to 87%
from 36%, the Emerging Growth Fund rose to 112% from 87% and the International
Growth Fund rose to 118% from 67%. In addition, the Northwest Fund experienced a
significant increase in its portfolio turnover rate for the fiscal year ended
10/31/97, when the Fund's portfolio turnover rate increased to 42% versus the 9%
it experienced for the fiscal year ended 10/31/96.
Certain other practices that may be employed by the Funds could result
in high portfolio turnover. For example, portfolio securities may be sold in
anticipation of a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another of comparable quality purchased at
approximately the same time to take advantage of what the Advisor or a Fund's
sub-advisor believes to be a temporary disparity in the normal yield
relationship between the two securities. These yield disparities may occur for
reasons not directly related to the investment quality of particular issues or
the general movement of interest rates, such as changes in the overall demand
for, or supply of, various types of securities.
PORTFOLIO TRANSACTIONS
Most of the purchases and sales of securities for a Fund, whether
transacted on a securities exchange or over-the-counter, will be effected in the
primary trading market for the 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
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<PAGE> 56
overall terms available for any transaction, the Advisor and each sub-advisor
will consider the factors that the Advisor or the sub-advisor deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis. In addition, each advisory agreement among the Trusts
authorizes the Advisor, and a sub-advisory agreement authorizes the sub-advisor,
in selecting brokers or dealers to execute a particular transaction and in
evaluating the best overall terms available, to consider the brokerage and
research services (as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934, as amended) provided to the Trusts, the other Funds and/or
other accounts over which the Advisor, the sub-advisor or their affiliates
exercise investment discretion. The fees under the advisory agreements between
the Trusts, the Advisor and the sub-advisors are not reduced by reason of their
receiving such brokerage and research services. The Trusts' Board of Trustees
will periodically review the commissions paid by the Funds to determine if the
commissions paid over representative periods of time were reasonable in relation
to the benefits received by the Trusts.
Consistent with applicable provisions of the 1940 Act, the rules and
exemptions adopted by the Commission thereunder, and relevant interpretive and
"no-action" positions taken by the Commission's staff, the Trusts' Board of
Trustees has adopted procedures pursuant to Rule 17e-1 under the 1940 Act to
ensure that all portfolio transactions with affiliates will be fair and
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 years set forth below, the WM Trust I and WM Trust II Funds
paid the following brokerage commissions:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
TOTAL BROKERAGE COMMISSIONS PAID
- --------------------------------------------------------------------------------------------------------
FUND OCTOBER JUNE 1997 1996 1995
1998 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Money Market Fund* n/a n/a $0 $0 $0
- --------------------------------------------------------------------------------------------------------
Tax-Exempt Money Market n/a n/a 0 0 7,320
- --------------------------------------------------------------------------------------------------------
California Money Fund*** n/a $0 0 0 757,574
- --------------------------------------------------------------------------------------------------------
Short Term High Quality Bond Fund*** n/a 3,616 6,064 20,378 0
- --------------------------------------------------------------------------------------------------------
Target Maturity 2002 Fund*** n/a 0 0 0 0
- --------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund* n/a n/a 0 0 0
- --------------------------------------------------------------------------------------------------------
</TABLE>
-56-
<PAGE> 57
<TABLE>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Income Fund* n/a n/a 0 0 0
- --------------------------------------------------------------------------------------------------------
High Yield Fund 757 n/a n/a n/a n/a
- --------------------------------------------------------------------------------------------------------
Tax-Exempt Bond Fund* n/a n/a 0 0 0
- --------------------------------------------------------------------------------------------------------
California Municipal Fund*** n/a 0 0 20,982 0
- --------------------------------------------------------------------------------------------------------
California Insured Intermediate Municipal Fund n/a 4,277 7,102 0 0
- --------------------------------------------------------------------------------------------------------
Florida Insured Municipal Fund*** n/a 1,905 7,935 0 0
- --------------------------------------------------------------------------------------------------------
Bond & Stock Fund** 200,832 n/a 307,372 199,663 0
- --------------------------------------------------------------------------------------------------------
Growth & Income Fund** 643,715 n/a 502,372 292,486 635,228
- --------------------------------------------------------------------------------------------------------
Northwest Fund** 59,090 n/a 98,599 123,164 583,298
- --------------------------------------------------------------------------------------------------------
Growth Fund*** 63,900 208,497 616,898 723,100 0
- --------------------------------------------------------------------------------------------------------
Emerging Growth Fund*** 29,914 387,993 480,975 849,149 0
- --------------------------------------------------------------------------------------------------------
International Growth Fund*** 47,507 1,036,609 696,191 860,863 0
- --------------------------------------------------------------------------------------------------------
</TABLE>
* Fiscal year changed from 12/31 to 10/31 as of 10/31/98
** Fiscal year ended 10/31
*** Fiscal year changed from 6/30 to 10/31/98
<TABLE>
<CAPTION>
TOTAL AMOUNT OF
TOTAL BROKERAGE TRANSACTIONS WHERE
COMMISSIONS PAID BROKERAGE COMMISSIONS
TO BROKERS THAT WERE PAID TO BROKERS
PROVIDED RESEARCH THAT PROVIDED
FISCAL YEAR ENDED RESEARCH FISCAL YEAR
FUND 10/31/98 ENDED 10/31/98
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Money Market Fund $ 0 $ 0
- ---------------------------------------------------------------------------------------------------------
Tax-Exempt Money Market Fund 0 0
- ---------------------------------------------------------------------------------------------------------
California Money Fund 0 0
- ---------------------------------------------------------------------------------------------------------
Short Term High Quality Bond Fund 0 0
- ---------------------------------------------------------------------------------------------------------
Target Maturity 2002 Fund 0 0
- ---------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund 0 0
- ---------------------------------------------------------------------------------------------------------
Income Fund 0 0
- ---------------------------------------------------------------------------------------------------------
High Yield Fund 532 908,340
- --------------------------------------------------------------------------------------------------------
Tax-Exempt Bond Fund 0 0
- ---------------------------------------------------------------------------------------------------------
California Municipal Fund 0 0
- ---------------------------------------------------------------------------------------------------------
California Insured Intermediate Municipal Fund 0 0
- ---------------------------------------------------------------------------------------------------------
Florida Insured Municipal Fund 0 0
- ---------------------------------------------------------------------------------------------------------
Bond & Stock Fund 156,381 417,622,683
- ---------------------------------------------------------------------------------------------------------
Growth & Income Fund 535,202 273,339,011
- ---------------------------------------------------------------------------------------------------------
Northwest Fund 38,764 28,101,571
- ---------------------------------------------------------------------------------------------------------
Growth Fund 63,900 50,772,029
- ---------------------------------------------------------------------------------------------------------
Emerging Growth Fund 8,799 4,649,707
- ---------------------------------------------------------------------------------------------------------
International Growth Fund 47,507 463,901
- ---------------------------------------------------------------------------------------------------------
</TABLE>
-57-
<PAGE> 58
WM Trust I, WM Trust II and WM Strategic Asset Management Portfolios, LLC
are required to identify any securities of their "regular brokers or dealers"
(as such term is defined in the 1940 Act) which they have acquired during their
most recent fiscal years. As of December 31, 1998, none of the Funds held any
securities of any "regular broker or dealer" of the Trusts or Portfolios.
NET ASSET VALUE
The Trusts will calculate the net asset value of the Funds' Class A, Class
B, Class I and Class S shares as of the close of regular trading on 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 mean of
the current day's bid and asked prices. Over-the-counter securities that are not
traded through the NASDAQ National Market System and U.S. Government Securities
are valued at the mean of the current day's bid and asked prices. An option is
generally valued at the last sale price or, in the absence of a last sale price,
at the mean of the current day's bid and asked prices. Short term debt
securities that mature in 60 days or less are valued at amortized cost; 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. If the market
makes a limit move with respect to the security or index underlying the futures
contract, the futures contract will be valued at a fair market value as
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 Obligations, are valued by one or
more independent pricing services (each a "Pricing Service") retained by the
Trusts. When, in the judgment of a Pricing Service, market quotations for these
securities are readily available, they are valued at the mean between the quoted
bid prices and asked prices. Securities for which market quotations are not
readily available are valued at fair value as determined by, or under the
direction of, the Board of Trustees, which may rely on the assistance of one or
more Pricing Services. The
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<PAGE> 59
procedures of each 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 cost, which does not take into
account unrealized capital gains or losses. Amortized cost valuation involves
initially valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price a Fund
would receive if it sold the instrument.
The use by the Money Funds of the amortized cost method of valuing their
respective portfolio securities is permitted by a rule adopted by the SEC. Under
this rule, the Money Funds must maintain dollar-weighted average portfolio
maturities of 90 days or less, purchase only instruments having remaining
maturities of thirteen months or less and invest only in securities determined
by the Board of Trustees of the Trusts to present minimal credit risks. Pursuant
to the rule, the Board of Trustees also has established procedures designed to
stabilize, to the extent reasonably possible, the Funds' price per share as
computed for the purpose of sales and redemptions at $1.00. Such procedures
include review of the Funds' portfolio holdings by the Board of Trustees or its
delegate, at such intervals as the Board of Trustees 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.
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, the Board of Trustees will 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 SAI. Class I
shares are currently offered and sold only to the Portfolios.
As stated in the prospectus, each Fund and Portfolio may sell class A
shares at net asset value to brokers, dealers and registered investment advisers
who have entered into arrangements with the Distributor providing specifically
for the shares to be used in particular investment products or programs made
available to their clients for which they may charge a separate fee. This
includes investment products or programs that are available only with respect
to the proceeds of redemptions of shares of other mutual funds on which the
client had paid an initial or contingent deferred sales charge.
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
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<PAGE> 60
purchase order, plus the applicable front-end sales charge, if any, as set forth
in the Prospectus. The public offering price per Class B, Class I or Class S
share of the Funds is equal to the net asset value next computed after receipt
of a purchase order.
An illustration of the computation of the public offering price per share of
each Fund and Portfolio is contained in the financial statements incorporated
herein by reference.
COMMISSIONS ON NAV SALES. The Distributor pays authorized dealers commissions of
up to 1% on purchases of Class A shares at net asset value that are (i) part of
a purchase of $1 million or more or (ii) sold to qualified employee benefit
plans (including SEPs and SIMPLEs) that have more than 100 participants or that
have more than $500,000 invested in the WM Group of Funds.
PAYMENT IN SECURITIES
In addition to cash, the Funds and Portfolios may accept securities as
payment for Fund or Portfolio shares at the applicable net asset value.
Generally, the Funds and Portfolios will only consider accepting securities to
increase their holding in a portfolio security or if WM Advisors determines that
the offered securities are a suitable investment for the Fund or Portfolio and
in a sufficient amount for efficient management.
While no minimum has been established, the Funds and Portfolios may decide
not to accept securities as payment for shares at their discretion. The Funds
and Portfolios may reject in whole or in part any or all offers to pay for
purchasers of shares with securities, may require partial payment in cash for
such purchases to provide funds for applicable sales charges, and may
discontinue accepting securities as payment for shares at any time without
notice. The Funds and Portfolios will value accepted securities in the manner
described in the section "Net Asset Value" for valuing shares of the Funds and
Portfolios. The Funds and Portfolios will only accept securities which are
delivered in proper form. The acceptance of securities by certain of the Funds
or Portfolios in exchange for shares is subject to additional requirements. For
federal income tax purposes, a purchase of shares with securities will be
treated as a sale or exchange of such securities on which the investor will
generally realize a taxable gain or loss. The processing of a purchase of Fund
or Portfolio shares with securities involves certain delays while the fund
considers the suitability of such securities and while other requirements are
satisfied. For information regarding procedures for payment in securities,
contact WM Shareholder Services at 1-800-222-5852. Investors should not send
securities to the Funds and Portfolios except when authorized to do so and in
accordance with specific instructions received from WM Shareholder Services.
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 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)
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<PAGE> 61
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, 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
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is determined as a percentage of the lesser of (1) the NAV of the shares at the
time of purchase or (2) the NAV of the 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
tables:
<TABLE>
<S> <C> <C>
Class B shares of all Funds (except for Class B shares of all Funds of WM Class B shares of all Funds of WM Trust I
the Short Term High Quality Bond Trust II (except for the Short Term purchased before March 20, 1998(2) and
Fund and Portfolios and Class S High Quality Bond Fund), Portfolios the Short Term High Quality Bond Fund
shares of all Funds purchased after and Class S shares of all Funds
March 20, 1998 (other than shares of purchased before March 20, 1998,
the Funds received in connection with and shares of the Funds received in
the merger of other mutual funds into connection with the merger of other
certain Funds). mutual Funds into certain funds.
</TABLE>
<TABLE>
<CAPTION>
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
-------------- ------------ -------------- ------------ -------------- --------------
<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>
(2) 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.
For these purposes, 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.
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<PAGE> 63
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. Those shares of the former Griffin Funds
purchased prior to the merger with the WM Group of Funds may convert in
approximately six years.
The conversion of Class B shares to Class A shares is subject to a
favorable ruling from the Internal Revenue Service or a determination by the
Board of Trustees, after consultation with legal counsel, that such conversion
will not be subject to federal income tax. There can not be any assurance that a
ruling or determination will be available. If they should not be available, the
conversion of Class B shares to Class A shares would not occur and those shares
would continue to be subject to higher expenses than Class A shares for an
indefinite period.
WAIVERS OF CLASS B CDSCS. For each of the WM Trust II Funds purchased
prior to March 20, 1998, no CDSCs 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 WM Trust II Funds 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
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<PAGE> 64
investment in a Fund or Portfolio. For additional information regarding the
Systematic Withdrawal Plan, write to the WM Group of Funds at Suite 300, 1201
Third Avenue, Suite 1400, Seattle, Washington 98101 or call the Trust at
800-222-5852.
CHECK REDEMPTION PRIVILEGE. Checkwriting is available for the Class A
shares of the Money Funds only. Checks to redeem shares of any of the Money
Funds are drawn on the account of the Fund at Boston Safe and shareholders will
be subject to the same rules and regulations that Boston Safe applies to
checking accounts and, will have the same rights and duties with respect to stop
payment orders, "stale" checks, and unauthorized endorsements as bank checking
account customers do under Massachusetts Uniform Commercial Code. All notices
with regard to those rights and duties must be given to Boston Safe.
HOW TO EXCHANGE SHARES
You may exchange shares of any of the Funds or Portfolios for shares of
the same class of any other of the Funds or Portfolios. Exchanges of shares are
sales and may result in a gain or loss for income tax purposes.
Exchanges are made at the relative NAVs of the shares being exchanged.
No additional sales charge will be incurred when exchanging shares from a Fund
which imposes an initial or contingent deferred sales charge. Any contingent
deferred sales charge on the subsequent sale of shares acquired by exchange will
be based on the contingent deferred sales charge schedule of the Fund originally
purchased. Shares exchanged from Money Fund will be subject to the acquired
Fund's sales charge unless the shares given in exchange were previously
exchanged from a Fund that imposes an initial or contingent deferred sales
charge.
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.
PERFORMANCE INFORMATION
YIELD
MONEY FUNDS. From time to time, advertisements or shareholder reports
concerning the Money Funds may describe yield and effective yield. The yield of
a Money Fund refers to the income generated by an investment in the Fund over a
7-day period identified in the advertisement. This income is then "annualized."
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. Effective yield is calculated similarly but,
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when annualized, the income earned by an investment in a Fund is assumed to be
reinvested. Effective yield will generally be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
FIXED-INCOME AND MUNICIPAL FUNDS. From time to time, the Fixed-Income
and Municipal Funds may advertise 30-day yield. The 30-day yield of each of
these Funds refers to the income generated by an investment in such Fund over
the 30-day period identified in the advertisement, and is computed by dividing
the net investment income per share earned by the Fund during the period by the
maximum public offering price per share on the last day of the 30-day period.
This income is "annualized" by assuming that the amount of income is generated
each month over a one-year period and is compounded semiannually. The annualized
income is then shown as a percentage of the maximum public offering price. In
addition, these Funds 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.
STRATEGIC ASSET MANAGEMENT PORTFOLIOS
In the Risk/Return Summary of the Prospectus, each of the Portfolio's
performance is compared to a capital Mixed Benchmark. Each such benchmark is a
blended mix of component indices. Descriptions of each such component index are
as follows:
- - THE SALOMON BROTHERS U.S. 90-DAY T-BILL INDEX measures performance of
United States Treasury Bills with maturities of three months.
- - THE LEHMAN BROTHERS MUTUAL FUND (I-5) GOVERNMENT/CORPORATE INDEX represents by
all U.S. government agency and Treasury securities and all investment-grade
corporate debt securities with maturities of one to five years.
- - THE LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX includes 15- and
30-year fixed rate securities backed by mortgage pools of the Government
National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation
(FHLMC), and Federal National Mortgage Association (FNMA). Balloons are included
in the index; graduated payment mortgages (GPMs), buydowns, manufactured home
mortgages, and graduated equity mortgages (GEMs) are not.
- - THE LEHMAN BROTHERS EAA LONG-TERM CORPORATE BOND INDEX includes all
publicly issued, fixed rate, nonconvertible BAA rated, dollar-denominated,
SEC-registered corporate debt with maturities greater than ten years.
- - THE LEHMAN BROTHERS AGGREGATE INDEX is an all-inclusive bond index which
contains government, corporate, mortgage and asset-backed securities.
- - THE STANDARD & POOR'S 500 COMPOSITE INDEX is a capitalization-weighted
index of 500 stocks designed to measure performance of the broad domestic
economy and all economic sectors.
- - THE RUSSELL 2000 INDEX measures the performance of the 2,000 smallest
companies (approximately 10% of the total market capitalization) of the Russell
3000 Index.
- - THE RUSSELL 2000 GROWTH INDEX measures the performance of the companies
with higher price-to-book ratios and higher forecasted growth values within the
Russell 2000 Index.
- - THE RUSSELL 3000 INDEX is comprised of the 3,000 largest U.S. companies
based on total market capitalization, which represents approximately 98% of the
investable U.S. equity market.
- - THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EUROPE, AUSTRALASIA, AND
THE FAR EAST PLUS EMERGING MARKETS FREE INDEX is a market capitalization
weighted index composed of companies representative of the market structure of
48 developed and emerging market countries. The index is calculated with gross
dividends reinvested and in United States Dollars.
TAX-EQUIVALENT YIELD. The Municipal Funds, the California Money Fund
and the Tax-Exempt Money Market Fund may also quote tax-equivalent yield.
Tax-equivalent yield shows the taxable yields an investor would have to earn
before taxes to equal the Funds' tax-free yield. A tax-equivalent yield is
calculated by dividing a Fund's tax-exempt yield by the result of one minus the
sum of a stated federal and applicable state tax rate, based upon the highest
marginal tax rate and adjusted for the federal deduction of state taxes paid. To
the extent that particular investor is not subject to the highest marginal tax
rate, the tax-equivalent yield experienced by the investor will be lower than
the tax-equivalent yield quoted by the Fund. If only a portion of a Fund's
income is tax-exempt, only that portion is adjusted in the calculation.
TOTAL RETURN
From time to time, a Fund may advertise its average annual total return over
various periods. Such total return figures reflect a deduction or any front end
sales charge or contingent deferred sales charge and show the average percentage
change in value of an investment in the Fund from the beginning date of the
measuring period. These figures reflect changes in the price of the Fund's
shares and assume that any income dividends and/or capital gains distributions
made by the fund during the period were reinvested. Figures will be given for
recent one-, five-, and ten-year periods (or from commencement of the Fund's
operations) and may be given for other periods.
ADDITIONAL PERFORMANCE QUOTATIONS
Advertisements of total return may also show total return without giving effect
to sales charges. Similarly, a Fund may provide yield quotations in investor
communications based on the Fund's NAV (rather than its public offering price)
on the last day of the period covered by the yield computation. Because these
additional quotations will not reflect the maximum sales
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<PAGE> 66
charge payable, such performance quotations will be higher than the performance
quotations that include the maximum sales charge.
TOTAL RETURNS AND YIELDS ARE BASED ON PAST RESULTS AND ARE NOT A PREDICTION
OF FUTURE PERFORMANCE
Performance information is computed separately for each class of shares. Because
Class B shares bear the expense of the higher distribution and service fees, it
is expected that performance for such shares will be lower than that for a
Fund's Class A shares.
OBTAINING PERFORMANCE INFORMATION
Each Fund's strategies, performance, and holdings are detailed twice a year in
Fund reports, which are sent to all shareholders. The SAI describes the methods
used to determine a Fund's performance. Shareholders may call 800-222-5852 for
performance information.
DETERMINATION OF PERFORMANCE
From time to time, the Trusts may quote the performance of a Fund's or
Portfolio's Class A, Class B and Class S shares in terms of yield, actual
distributions, total return or capital appreciation in reports or other
communications to shareholders or in advertising material. The yield for the
Class A, Class B and Class S shares of the Money Funds is computed by: (1)
determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account in each Fund having a balance of one share at
the beginning of a seven calendar day period for which yield is to be quoted,
(2) subtracting a hypothetical change reflecting deductions from shareholder
accounts, (3) dividing the net change by the value of the account at the
beginning of the period to obtain the base period return, and (4) annualizing
the results (i.e., multiplying the base period return by 365/7). The net change
in the value of the account reflects the value of additional shares purchased
with dividends declared on the original share and any such additional shares,
but does not include realized gains and losses or unrealized appreciation or
depreciation. In addition, the Money Funds may calculate a compounded effective
annualized yield by adding 1 to the base period return (calculated as described
above), raising the sum to a power equal to 365/7 and subtracting 1.
The current yield for the Money Funds and the Target Maturity 2002 Fund may
be obtained by calling 800-222- 5852. For the seven-day period ended June 30,
1998, the yield for the outstanding shares of the California Money Fund that are
treated as Class A shares was 2.51% and the effective yield of such shares of
that Fund for the same period was 2.54%. The California Money and Tax-Exempt
Money Market Funds may also calculate their tax equivalent yields as described
below.
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<PAGE> 67
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:
[(a-b + 1) (6)-1]}
YIELD = 2 ------------------
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of 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
10/31/98 are as follows:
FUND YIELD
---- -----
Short Term High Quality Bond Fund.................................. 4.71%
Target Maturity 2002 Fund.......................................... 3.92%
U.S. Government Securities Fund.................................... 5.44%
Income Fund........................................................ 6.12%
High Yield Fund.................................................... 10.32%
Tax-Exempt Bond Fund............................................... 4.05%
California Municipal Fund.......................................... 3.97%
California Insured Intermediate Municipal Fund..................... 3.25%
Florida Insured Municipal Fund..................................... 3.90%
Income Portfolio................................................... 6.12%
Flexible Income Portfolio.......................................... 3.56%
Balanced Portfolio................................................. 1.31%
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
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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 October 31, 1998 for the Class A shares of the Tax-Exempt Bond,
California Municipal, California Insured Intermediate Municipal and Florida
Insured Municipal Funds and the Income, Flexible Income and Balanced Portfolios
were 5.22%,5.35%, 4.35%, 4.82%, 5.61%, 3.59%, and 0.64%, respectively. Yields
for the same period for the Short Term High Quality Bond, Target Maturity 2002,
U.S. Government Securities, Income and High Yield funds were 5.19%, n/a%, 5.81%,
6.66% and 10.77% 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 October 31, 1998 were
4.75% and 4.42%, respectively. The tax equivalent SEC 30-day yields for the
period ended October 31, 1997 for the outstanding shares of the Tax-Exempt Bond,
California Municipal, California Insured Intermediate Municipal, and Florida
Insured Municipal Funds were 6.71%, 6.79%, 6.36% and 6.46%, respectively. The
tax equivalent yield based on the 30-day average yield for the period ended
October 31, 1997 for the outstanding shares of the Tax-Exempt Bond, California
Municipal, California Insured Intermediate Municipal and Florida Insured
Municipal Funds were 8.64%, 10.47%, 8.92% and 6.71%, 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 9.30%.
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
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B shares) will be computed according to a formula prescribed by the SEC. The
formula can be expressed as follows:
P (1 + T) (n) = E R V
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:
(ERV)
Aggregate Total Return = ----- -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 October 31, 1998 are as follows:
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<PAGE> 70
<TABLE>
<CAPTION>
AGGREGATE
TOTAL RETURN
SINCE TEN YEAR
DATE OR FROM DATE OF
OF INCEPTION, IF
FUND AND INCEPTION DATE ONE YEAR FIVE TEN 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 3.09% 4.03% N/A 4.03% 26.22%
Not Adjusted for Sales Charge 6.63% 4.77% N/A 4.77% 21.85%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 1.84% N/A N/A 4.91% 23.13%
Not Adjusted for Sales Charge 5.84% N/A N/A 4.91% 23.13%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge 0.84% N/A N/A 4.72% 22.14%
Not Adjusted for Sales Charge 5.84% N/A N/A 4.91% 23.14%
- -------------------------------------------------------------------------------------------------------------
TARGET MATURITY 2002 FUND
CLASS A SHARES 3/20/95
Adjusted for Maximum Sales Charge 10.14% N/A N/A 9.12% 37.11%
Not Adjusted for Sales Charge 12.40% N/A N/A 9.72% 39.85%
- -------------------------------------------------------------------------------------------------------------
CALIFORNIA MONEY FUND
CLASS A SHARES 6/30/94
Not Adjusted for Maximum Sales Charge 0.49% 1.81% N/A 1.81% 32.87%
CLASS B SHARES --
Not Adjusted for Maximum Sales Charge 0.63% N/A N/A 2.04% 9.05%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge -3.20% N/A N/A 1.81% 8.08%
Not Adjusted for Sales Charge 0.66% N/A N/A 2.04% 9.08%
- -------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND .
CLASS A SHARES
Adjusted for Maximum Sales Charge 3.11% 5.28% 7.65% N/A 235.59%
Not Adjusted for Sales Charge 7.99% 6.26% 8.15% N/A 251.37%
CLASS B SHARES 3/30/94
Adjusted for Maximum Sales Charge 2.00% N/A N/A 0.07% 34.92%
Not Adjusted for Sales Charge 7.00% N/A N/A 6.92% 35.92%
CLASS S SHARES 3/23/98
Adjusted for Maximum Sales Charge N/A N/A N/A -0.65% -0.65%
Not Adjusted for Sales Charge N/A N/A N/A 4.35% 4.35%
- -------------------------------------------------------------------------------------------------------------
INCOME FUND
CLASS A SHARES
Adjusted for Maximum Sales Charge 1.21% 5.66% 7.88% N/A xxx.xx%
Not Adjusted for Sales Charge 6.00% 6.64% 8.38% N/A xxx.xx%
CLASS B SHARES 3/30/94
Adjusted for Maximum Sales Charge 0.20% N/A N/A 7.33% 38.37%
Not Adjusted for Sales Charge 5.17% N/A N/A 7.50% 39.37%
CLASS S SHARES 3/23/98
Adjusted for Maximum Sales Charge N/A N/A N/A -2.73% -2.73%
Not Adjusted for Sales Charge N/A N/A N/A 2.20% 2.20%
</TABLE>
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<TABLE>
<CAPTION>
AGGREGATE
TOTAL RETURN
SINCE TEN YEAR
DATE OR FROM DATE OF
OF INCEPTION, IF
FUND AND INCEPTION DATE ONE YEAR FIVE TEN INCEPTION SHORTER
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aggregate
TAX-EXEMPT BOND FUND
CLASS A SHARES
Adjusted for Maximum Sales Charge 2.16% 4.35% 6.90% N/A 267.00%
Not Adjusted for Sales Charge 7.03% 5.30% 7.39% N/A 284.50%
CLASS B SHARES 3/30/94
Adjusted for Maximum Sales Charge 1.17% N/A N/A 5.96% 30.41%
Not Adjusted for Sales Charge 6.17% N/A N/A 6.13% 31.41%
CLASS S SHARES 3/23/98
Adjusted for Maximum Sales Charge N/A N/A N/A -1.73% -1.73%
Not Adjusted for Sales Charge N/A N/A N/A 3.27% 3.27%
- -------------------------------------------------------------------------------------------------------------
CALIFORNIA MUNICIPAL FUND
CLASS A SHARES 7/25/89
Adjusted for Maximum Sales Charge 2.92% 4.70% N/A 6.98% 86.89%
Not Adjusted for Sales Charge 7.80% 5.67% N/A 7.51% 95.67%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 2.00% N/A N/A 7.07% 34.50%
Not Adjusted for Sales Charge 7.00% N/A N/A 7.26% 35.50%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge 2.00% N/A N/A 7.07% 30.70%
Not Adjusted for Sales Charge 7.00% N/A N/A 7.26% 36.84%
- -------------------------------------------------------------------------------------------------------------
CALIFORNIA INSURED INTERMEDIATE MUNICIPAL
FUND
CLASS A SHARES 4/4/94
Adjusted for Maximum Sales Charge 2.03% N/A N/A 5.24% 30.70%
Not Adjusted for Sales Charge 6.81% N/A N/A 6.14% 36.84%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 1.01% N/A N/A 6.33% 30.51%
Not Adjusted for Sales Charge 6.01% N/A N/A 6.52% 31.51%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge 1.01% N/A N/A 6.33% 30.51%
Not Adjusted for Sales Charge 6.01% N/A N/A 6.52% 31.51%
- -------------------------------------------------------------------------------------------------------------
FLORIDA INSURED MUNICIPAL FUND
CLASS A SHARES 6/7/93
Adjusted for Maximum Sales Charge 3.12% 4.55% N/A 5.24% 30.707%
Not Adjusted for Sales Charge 7.97% 5.52% N/A 6.14% 36.84%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 2.17% N/A N/A 6.97% 33.93%
Not Adjusted for Sales Charge 7.17% N/A N/A 7.15% 34.93%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge 2.17% N/A N/A 6.97% 33.93%
Not Adjusted for Sales Charge 7.17% N/A N/A 7.15% 34.93%
</TABLE>
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<TABLE>
<CAPTION>
AGGREGATE
TOTAL RETURN FOR
SINCE TEN YEAR PERIOD
DATE OR FROM DATE OF
ONE FIVE TEN OF INCEPTION, IF
FUND AND INCEPTION DATE YEAR YEAR YEAR INCEPTION SHORTER
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BOND & STOCK FUND
CLASS A SHARES
Adjusted for Maximum Sales Charge -1.70% 10.78% 10.50% N/A 152.71%
Not Adjusted for Sales Charge 4.03% 12.04% 11.12% N/A 161.68%
CLASS B SHARES 3/30/94
Adjusted for Maximum Sales Charge -1.22% N/A N/A 12.94% 74.81%
Not Adjusted for Sales Charge 3.12% N/A N/A 13.08% 75.81%
CLASS S SHARES 5/06/98
Adjusted for Maximum Sales Charge N/A N/A N/A -10.87% -10.87%
Not Adjusted for Sales Charge N/A N/A N/A -6.25% -6.25%
- ---------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUND
CLASS A SHARES
Adjusted for Maximum Sales Charge 1.48% 16.66% 12.27% N/A 143.22%
Not Adjusted for Sales Charge 7.38% 17.99% 13.37% N/A 151.67%
CLASS B SHARES 3/30/94
Adjusted for Maximum Sales Charge 1.86% N/A N/A 18.21% 115.36%
Not Adjusted for Sales Charge 6.50% N/A N/A 18.33% 116.36%
CLASS S SHARES 3/23/98
Adjusted for Maximum Sales Charge N/A N/A N/A -11.49% -11.49%
Not Adjusted for Sales Charge N/A N/A N/A -6.83% -6.83%
- ---------------------------------------------------------------------------------------------------------------------
GROWTH FUND
CLASS A SHARES 4/5/93
Adjusted for Maximum Sales Charge 15.68% 16.00% N/A 17.15% 141.57%
Not Adjusted for Sales Charge 22.43% 17.32% N/A 18.34% 155.58%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 16.56% N/A N/A 21.15% 129.81%
Not Adjusted for Sales Charge 21.57% N/A N/A 21.27% 130.81%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge 16.47% N/A N/A 21.14% 129.73%
Not Adjusted for Sales Charge 21.47% N/A N/A 21.26% 130.73%
- ---------------------------------------------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
CLASS A SHARES 7/18/90
Adjusted for Maximum Sales Charge -11.23% -0.17% N/A 1.13% 9.75%
Not Adjusted for Sales Charge -6.07% 0.97% N/A 1.82% 16.11%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge -11.09% N/A N/A 0.07% 0.32%
Not Adjusted for Sales Charge -6.88% N/A N/A 0.26% 1.13%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge -11.15% N/A N/A 0.04% 0.16%
Not Adjusted for Sales Charge -6.92% N/A N/A 0.23% 0.98%
- ---------------------------------------------------------------------------------------------------------------------
NORTHWEST FUND
CLASS A SHARES
Adjusted for Maximum Sales Charge -10.05% 13.39% 14.12% N/A 366.79%
</TABLE>
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<PAGE> 73
<TABLE>
<CAPTION>
AGGREGATE
TOTAL RETURN FOR
SINCE TEN YEAR PERIOD
DATE OR FROM DATE OF
ONE FIVE TEN OF INCEPTION, IF
FUND AND INCEPTION DATE YEAR YEAR YEAR INCEPTION SHORTER
ADJUSTED FOR MAXIMUM SALES CHARGE N/A N/A N/A -19.30% -19.30%
NOT ADJUSTED FOR SALES CHARGE N/A N/A N/A -15.05% -15.05%
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EMERGING GROWTH FUND
CLASS A SHARES 7/18/90
Adjusted for Maximum Sales Charge -16.31% 6.57% N/A 9.56% 113.12%
Not Adjusted for Sales Charge -11.45% 7.78% N/A 10.31% 125.48%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge -16.35% N/A N/A 9.35% 47.32%
Not Adjusted for Sales Charge -12.21% N/A N/A 9.52% 48.32%
CLASS S SHARES 6/30/94
Adjusted for Maximum Sales Charge -16.35% N/A N/A 9.34% 47.32%
Not Adjusted for Sales Charge -12.21% N/A N/A 9.52% 48.32%
</TABLE>
Each Portfolio is modeled after an investment strategy used by the WM
Strategic Asset Management ("SAM") program, an investment management service
offered by WM Fund Services Inc., an affiliate of the Portfolios' Advisor 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 October 31, 1998, was as follows:
<TABLE>
<CAPTION>
SINCE DATE
PORTFOLIO/STRATEGY AND INCEPTION DATE ONE YEAR FIVE TEN OF
YEAR YEAR INCEPTION
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STRATEGIC GROWTH PORTFOLIO
CLASS A SHARES 5/31/95
Adjusted for Maximum Sales Charge 1.65% N/A N/A 12.93%
Not Adjusted for Sales Charge 7.56% N/A N/A 14.82%
CLASS B SHARES 5/31/95
Adjusted for Maximum Sales Charge 1.77% N/A N/A 13.58%
Not Adjusted for Sales Charge 6.77% N/A N/A 14.01%
- ------------------------------------------------------------------------------------------------
CONSERVATIVE GROWTH PORTFOLIO
CLASS A SHARES 9/30/90
Adjusted for Maximum Sales Charge -0.71% 7.39% N/A 10.72%
Not Adjusted for Sales Charge 5.07% 8.61% N/A 11.50%
</TABLE>
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<PAGE> 74
<TABLE>
<S> <C> <C> <C>
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 0.64% N/A N/A 10.24%
Not Adjusted for Sales Charge 4.32% N/A N/A 10.41%
BALANCED PORTFOLIO
CLASS A SHARES 9/30/90
Adjusted for Maximum Sales Charge 0.74% 6.78% N/A 9.13%
Not Adjusted for Sales Charge 6.60% 7.99% N/A 9.90%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 0.85% N/A N/A 9.87%
Not Adjusted for Sales Charge 5.81% N/A N/A 10.04%
FLEXIBLE INCOME PORTFOLIO
CLASS A SHARES 3/31/93
Adjusted for Maximum Sales Charge 1.74% 5.89% N/A 6.49%
Not Adjusted for Sales Charge 6.53% 6.87% N/A 7.37%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge 0.83% N/A N/A 8.89%
Not Adjusted for Sales Charge 5.74% N/A N/A 9.06%
INCOME PORTFOLIO
CLASS A SHARES 9/30/90
Adjusted for Maximum Sales Charge 0.52% 3.35% N/A 6.72%
Not Adjusted for Sales Charge 5.25% 4.31% N/A 7.33%
CLASS B SHARES 6/30/94
Adjusted for Maximum Sales Charge -0.48% N/A N/A 5.93%
Not Adjusted for Sales Charge 4.47% N/A N/A 6.12%
</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
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<PAGE> 75
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.
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 on that part of its income distributed to its stockholders.
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.
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<PAGE> 76
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 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. Each Fund intends to make
distributions sufficient to avoid imposition of the 4% excise tax.
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
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<PAGE> 77
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 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, without protection from risk of loss.
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 accelerate, 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.
Distributions of net capital gains (i.e., the excess of net gains from
capital assets held for more than one year over net losses from capital assets
held for not more than one year) that are designated by a Fund as capital gain
dividends will generally be taxable to a shareholder receiving such
distributions as long-term capital gain (generally taxed at a 20% tax rate for
noncorporate shareholders) regardless of how long the shareholder has held Fund
shares. If a shareholder held shares six months or less and during that period
received a distribution of net capital gains, any loss realized on the sale of
such shares during such six-month period would be a long-term capital loss to
the extent of such distribution.
While only the Equity Funds expect to realize a significant amount of net
long-term capital gains, any such realized gains will be distributed as
described in the Prospectus and will be designated as such in a written notice
mailed to the shareholder after the close of the Fund's
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<PAGE> 78
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 before or after the disposition. In such
a case, the basis of the newly purchased shares will be adjusted to reflect the
disallowed loss.
Dividends and distributions on a Fund's shares are generally subject to
federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when a Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed. Such realized gains may be required to be
distributed, even when a Fund's net asset value also reflects unrealized losses.
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
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<PAGE> 79
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.
ADDITIONAL CONSIDERATIONS FOR SHAREHOLDERS OF THE CALIFORNIA MONEY FUND,
CALIFORNIA MUNICIPAL FUND AND CALIFORNIA INSURED INTERMEDIATE MUNICIPAL FUND.
If, at the close of each quarter of its taxable year, at least 50% of the value
of the total assets of each of the California Money Fund, California Municipal
Fund and California Insured Intermediate Municipal Fund (The "California Funds")
consist of obligations the interest on which would be exempt from California
personal income tax if the obligations were held by an individual ("California
Tax-Exempt Obligations"), and if each of the California Funds continues to
qualify as a regulated investment company for federal income tax purposes, then
each respective California Fund will be qualified to pay dividends, subject to
certain limitations, to its shareholders that are exempt from California State
personal income tax, but not from California State franchise tax or California
State corporate income tax ("California Exempt-Interest Dividends"). However,
the total amount of California Exempt-Interest Dividends paid by each of the
California Funds to each of the California Fund's non-corporate shareholders
with respect to any taxable year cannot exceed the amount of interest received
by such California Fund during such year on California Tax-Exempt Obligations
less any expenses and expenditures (including any dividends paid to corporate
shareholders) deemed to have been paid from such interest. If the aggregate
dividends exceed the amount that may be treated as California Exempt-Interest
Dividends, only that percentage of each dividend distribution equal to the ratio
of aggregate California Exempt-Interest Dividends to aggregate dividends will be
treated as a California Exempt-Interest Dividend. Dividend distributions that do
not qualify for treatment as California Exempt-Interest Dividends will be
taxable to shareholders at ordinary tax rates for California personal income tax
purposes. In addition, shareholders who receive social security or railroad
retirement benefits should consult their tax advisors to determine what effect,
if any, an investment in one of these Funds may have on the taxation of these
benefits.
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 application of the Florida
corporate income tax to the
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<PAGE> 80
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 individual and
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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
Prior to March 20, 1998, WM Financial Services Inc. (formerly named Sierra
Investment Services Inc.) served as the distributor for WM Trust II. For the
fiscal years ended June 30, 1998, 1997 and 1996, the Distributor and WM
Financial Services Inc. (formerly Sierra Investment Services Corp.) received
distribution fees totaling (after waivers of fees) $1,839,806, $5,278,281 and
$6,430,836, respectively, in the aggregate, from the WM Trust II Funds under the
Class A Plan. For the fiscal period ended October 31, 1998, the Distributor and
WM Financial Services Inc. received distribution fees totaling $4,490,369. For
the same periods, the Distributor and WM Financial Services Inc. received $0,
$13,944, $0 and $0, respectively, representing contingent deferred sales charges
on redemptions of Class A shares of the Funds. In addition, for the fiscal years
ended June 30, 1998, 1997 and 1996, the Distributor and WM Financial Services
Inc. received $180,165, $303,490 and $637,291, respectively, representing
compensation from front-end sales charges on Class A shares of such Funds sold.
For the fiscal period ended October 31, 1998, the Distributor
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and WM Financial Services Inc. received $3,010,621 in front-end sales charges on
Class A shares of such Funds sold. For each fiscal year ended June 30, 1998,
1997 and 1996, and the discount period ended October 31, 1998, the Distributor
and WM Financial Services Inc. voluntarily waived no distribution fees in the
aggregate. During the fiscal year ended June 30, 1998, the Distributor and WM
Financial Services Inc. incurred distribution and operating expenses with
respect to Class A shares of the Funds totaling $2,420,780 consisting of
$426,800 for advertising; $174,267 for marketing promotion; $58,383 for
fulfillment; $1,689,244 in commissions and additional compensation to the
personnel of WM Financial Services Inc. and $72,085 in other expenses. Those
expenses for the fiscal period ended October 31, 1998, amounted to $1,950,325
consisting of $196,493 for advertising; $300,290 for fulfillment; $1,208,942 in
commissions and additional compensation to the personnel of WM Fund Services
Inc. and $224,600 in other expenses.
WM Financial Services Inc. also served as distributor of Class B and S shares
of the WM Trust II Funds. For the fiscal year ended June 30, 1998, the
Distributor and WM Financial Services Inc. received distribution fees from the
Funds totaling $1,237,250, in the aggregate under the Class B Distribution Plan
and $312,288, in the aggregate under the Class S Distribution Plan. For the
same period, the Distributor and WM Financial Services Inc. received $653,684,
representing CDSCs on redemptions of Class B shares of the Funds and
$1,497,900, representing CDSCs on redemptions of Class S shares of the Funds.
For the fiscal period ended October 31, 1998, the Distributor and WM Financial
Services Inc. received distribution fees from the Funds totaling $3,013,027, in
the aggregate under the Class B Distribution Plan and $262,619, in the
aggregate under the Class S Distribution Plan. For the same period, the
Distributor and WM Financial Services Inc. received $1,183,085, representing
CDSCs on redemptions of Class B shares. For the fiscal year ended June 30, 1998
and the fiscal period ended October 31, 1998, WM Financial Services Inc. did
not waive any distribution fees. The Distributor and WM Financial Services
Inc. paid out all of the distribution related fees they 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.
The Distributor also serves as the distributor for the Portfolios. The
Distributor received $677,720 in total from the Portfolios in connection with
the sales of Class A shares in 1998. For the fiscal period from July 1, 1998
through October 31, 1998, the Distributor received $195,324 in total from the
Portfolios. Such payments totaled $446,143 in 1997.
During the fiscal year ended June 30, 1998, the Distributor incurred
distribution and operating expenses with respect to Class A shares of the
Portfolios totaling $988,175, consisting of $146,319 for advertising; $61,504
for marketing promotion; $6,801 for fulfillment; $742,109 in commissions and
additional compensation to personnel and $31,442 in other expenses. For the
fiscal period from July 1, 1998 through October 31, 1998, the Distributor
incurred distribution
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and operating expenses with respect to Class A shares of the Portfolios totaling
$325,310, consisting of $14,774 for advertising; $24,277 for fulfillment;
$266,538 in commissions and additional compensation to personnel and $19,721 in
other expenses.
For the same time periods, the Distributor and WM Fund Services, Inc.
received $687,805 in total for contingent deferred sales charge payments for
Class B shares from the Portfolios through June 30, 1998 and $1,128,985 in total
for the fiscal period ended October 31, 1998. The Distributor received $497,858
in total from these same Portfolios for 1997.
The Distributor received $3,312,208 in total from the Portfolios in 1998 in
connection with the sales of Class B shares. Such payments totaled $1,104,413
for the fiscal period ended October 31, 1998 and $1,706,671 in 1997.
WM Funds Distributor, Inc. (formerly Composite Funds Distributor, Inc. and
referred to as the Distributor in this SAI) serves as the distributor for the WM
Trust I Funds. 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
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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 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.
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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 & 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.
DESCRIPTION OF DUFF & PHELPS' CORPORATE BOND RATINGS
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Bonds rated AAA by Duff & Phelps are judged by Duff & Phelps 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 & Phelps are
judged by Duff & Phelps 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 & Phelps are judged by
Duff & Phelps 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 & Phelps are judged by Duff & Phelps 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 (including rate covenant, earnings test for
issuance of additional bonds, debt service reserve requirements) are rigorous.
There is evidence of superior management.
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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 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
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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 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
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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.
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-
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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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