<PAGE>
[ARTWORK]
FRANK RUSSELL INVESTMENT COMPANY
1997 ANNUAL REPORT
SPECIALTY FUNDS REAL ESTATE SECURITIES FUND
EMERGING MARKETS FUND
EQUITY FUND
LIMITED VOLATILITY TAX FREE FUND
MONEY MARKET FUND
U.S. GOVERNMENT MONEY MARKET FUND
TAX FREE MONEY MARKET FUND
December 31, 1997
[LOGO OF RUSSELL]
<PAGE>
Frank Russell Investment Company
Frank Russell Investment Company is a "series mutual fund" with 28 different
investment portfolios. These financial statements report on seven Funds, each of
which has distinct investment objectives and strategies.
Frank Russell Investment Management Company
Responsible for overall management and administration of the Funds.
Frank Russell Company
Consultant to Frank Russell Investment Management Company.
<PAGE>
Frank Russell Investment Company
Specialty Funds
Annual Report
December 31, 1997
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Letter to Our clients.................................................. 1
Real Estate Securities Fund............................................ 2
Emerging Markets Fund.................................................. 12
Equity T Fund.......................................................... 28
Limited Volatility Tax Free Fund....................................... 38
Money Market Fund...................................................... 52
U.S. Government Money Market Fund...................................... 60
Tax Free Money Market Fund............................................. 66
Notes to Financial Statements.......................................... 78
Report of Independent Accountants...................................... 86
Tax Information........................................................ 87
Manager, Money Managers and Service Providers.......................... 88
</TABLE>
Frank Russell Investment Company - Specialty Funds
Copyright (C) Frank Russell Company 1998. All rights reserved. This material is
proprietary and may not be reproduced, transferred, or distributed in any form
without prior written permission from Frank Russell Company. It is delivered on
an "as is" basis without warranty. The Russell logo is a trademark and service
mark of Frank Russell Company. Frank Russell Company and Standard & Poor's
Corporation are the owners of the trademarks, service marks, and copyrights
related to their respective indexes. This material must be accompanied or
preceded by a current Frank Russell Investment Company Prospectus containing
complete information concerning the investment objectives and operations of the
Company, charges, and expenses. The Prospectus should be read carefully before
an investment is made. The performance quoted represents past performance and,
except for a money market fund, the investment return and principal value of an
investment will fluctuate so that shares, when redeemed, may be worth more or
less than their original cost. An investment in a money market fund is neither
insured nor guaranteed by the US government. There can be no assurance that a
money market fund will be able to maintain a stable net asset value of $1.00 per
share. Investments in securities of non-US issuers and foreign currencies
involve investment risks different than those of US issuers; the Prospectus
contains further information and details regarding these risks. Income from
tax-free funds may be subject to an alternative minimum tax, or state and local
taxes. Russell Fund Distributors, Inc., is the distributor of Frank Russell
Investment Company.
<PAGE>
To Our Clients
Frank Russell Investment Company is pleased to present its 1997 Annual Report.
This report covers information on seven of the Funds and represents the Funds'
sixteenth year of operation.
During the past year we have continued our focus on the benefits of
multi-manager, multi-style diversification in structuring the Funds. We remain
committed to providing our clients with superior investment solutions across
each of our multiple manager and style Funds. These efforts proved worthwhile in
1997 as our Funds, in general, provided solid returns as compared to their
respective benchmarks and attracted many new investors, both creating
significant growth in assets.
Frank Russell Investment Management Company continuously evaluates the Funds we
offer our clients. Each of these Funds is carefully monitored by Russell's
investment professionals to ensure that the most appropriate investment advisors
and strategies are utilized within each Fund. The Advisors are monitored by the
Frank Russell Investment Management Company, using the expertise and advice of
the consulting group of Frank Russell Company.
During the past year, the Frank Russell Investment Company opened five new
LifePoints Funds; Equity Balanced Strategy Fund, Aggressive Strategy Fund,
Balanced Strategy Fund, Moderate Strategy Fund and Conservative Strategy Fund.
The LifePoints Funds diversify their assets by investing in shares of six to
eight Funds of the Frank Russell Investment Company, referred to as the
Underlying Funds. Each LifePoints Fund has a different investment objective
which it seeks to achieve by investing in different combinations of the
Underlying Funds. We are excited to offer these new products which we believe
will provide additional diversification and convenience through a built-in asset
allocation strategy.
We look forward to having the opportunity to work with you over the upcoming
year and continuing to earn your support by exceeding your expectations. Thank
you for your continued confidence and investment with Frank Russell Investment
Company.
Sincerely,
/s/ George F. Russell, Jr. /s/ Lynn L. Anderson
George F. Russell, Jr. Lynn L. Anderson
Chairman President and Chief Executive Officer
Frank Russell Company Frank Russell Investment Company
<PAGE>
Real Estate Securities Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To achieve a high level of total return generated through
above-average current income, while maintaining the potential for capital
appreciation.
Invests in: Equity securities of companies in the real estate industry.
Strategy: The Fund uses a multi-manager strategy intended to achieve higher
returns with moderate risk. The Fund employed the investment management services
of two managers with distinct approaches to investing in real estate equity
securities.
PERFORMANCE CHART
<TABLE>
<CAPTION>
Real Estate
Securities - NAREIT Equity Lipper (C)
Dates Class S REIT ** Real Estate +
----------- ------------ ------------- -------------
<S> <C> <C> <C>
Inception * $10,000 $10,000 $10,000
1989 $ 9,843 $ 9,690 $ 9,692
1990 $ 8,276 $ 8,203 $ 8,093
1991 $11,345 $11,118 $10,712
1992 $13,306 $12,733 $12,093
1993 $15,624 $15,237 $14,911
1994 $16,754 $15,721 $14,614
1995 $18,576 $18,119 $16,528
1996 $25,414 $24,507 $21,656
1997 $30,240 $29,480 $26,490
</TABLE>
<TABLE>
<CAPTION>
Real Estate Securities Fund - Class S NAREIT Equity REIT Index
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
----------------- ------------ ------------ ----------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1 Year $ 11,899 18.99% 1 Year $ 12,029 20.29%
5 Years $ 22,723 17.84%(S) 5 Years $ 23,153 18.28%(S)
Inception $ 30,240 14.03%(S) Inception $ 29,480 13.71%(S)
<CAPTION>
Real Estate Securities Fund - Class C *++ Lipper(C) Real Estate Benchmark
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
----------------- ------------ ------------ ----------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1 Year $ 11,820 18.20% 1 Year $ 12,232 22.32%
5 Years $ 22,543 17.65%(S) 5 Years $ 21,904 16.98%(S)
Inception $ 29,996 13.92%(S) Inception $ 26,490 12.53%(S)
</TABLE>
* Real Estate Securities Fund - Class S assumes initial investment on July 28,
1989. NAREIT Index comparison for the initial investment began August 1,
1989. Lipper index comparison for the initial investment began October 1,
1989.
** NAREIT Equity REIT Index is an index composed of all the data based on the
last closing price of the month for all tax-qualified REIT's listed on the
New York Stock Exchange, American Stock Exchange, and the NASDAQ National
Market System. The data is market value-weighted. The total-return
calculation is based upon whether it is 1-month, 3-months or 12-months. Only
those REITS listed for the entire period are used in the total return
calculation.
+ Lipper(C) Real Estate Benchmark is the average total return for the universe
of funds within the Real Estate Funds investment objective. The total return
for the funds reflects adjustments for income dividends and capital gains
distributions reinvested as of the ex-dividend dates.
++ Real Estate Securities Fund - Class C - For the period, November 4, 1996
(commencement of sales) to December 31, 1997, shareholder service and Rule
12b-1 distribution fees were charged. Total return would have been lower had
these fees been in effect during prior reporting periods. Class S
performance linked with Class C to provide historical perspective.
(S) Annualized.
2 Real Estate Securities Fund Specialty Funds
<PAGE>
Real Estate Securities Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year end December 31, 1997, the Real Estate Securities Fund Class S and
Class C shares reflected total returns of 19.0% and 18.2%, respectively, as
compared to the NAREIT Equity REIT Index which gained 20.3%. The Fund lagged the
Index primarily due to an underweighting in higher valued REITs, which appeared
to be favored by momentum-oriented investors.
Portfolio Highlights
1997 was another very good year for equity REIT investments. Continuing good
fundamentals for real estate in general and a very active merger and acquisition
market boosted REIT prices. Three securities dominated the market during the
year; Crescent, Vornado, and Starwood Lodging accounted for three percentage
points of the market's 20% rise. It was also a market undergoing significant
change. At year end, 50 REITs had capitalizations in excess of $1 billion -- a
reflection of a strong consolidation trend and two consecutive years of strong
price appreciation. There were also more REITs at year end than at the
beginning, ending a trend of shrinkage in the number of issues due to
consolidation. Many of the new REITs were quite interesting, including a prison
REIT, a used car lot REIT, and a theater REIT.
The Real Estate Securities Fund was underweighted in the market's strongest
performers during the year. The value orientation of the Fund's new manager,
AEW, limited their willingness to pay up for some of these issues. Cohen &
Steers produced good results again in 1997, but faced the daunting task of
managing an increasingly large asset base. Both managers did, however, add value
elsewhere, particularly in the fourth quarter as the market was attracted to the
higher yields and lower valuations on many REITs, as well as the REIT market's
isolation from problems in Asia.
- --------------------------------------------------------------------------------
Top Ten Equity Holdings
(as a percent of Total Investments) December 31, 1997
Vornado Realty Trust 4.2%
Rouse Co. (The) 3.5
Public Storage, Inc. 3.4
Mack-Cali Realty Corp. 3.0
Equity Office Properties Trust 2.9
Security Capital Industrial Trust 2.9
Highwoods Properties, Inc. 2.8
Starwood Lodging Trust 2.7
DeBartolo Realty Corp. 2.7
Spieker Properties, Inc. 2.7
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Characteristics
December 31, 1997
Current PIE Ratio 29.8x
Portfolio Price/Book Ratio 2.47x
Market Capitalization - $-Weighted Average 1.64 Bil
Number of Holdings 82
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Money Managers
AEW Capital Management, L.P.
Cohen & Steers Capital Management
- --------------------------------------------------------------------------------
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Specialty Funds Real Estate Securities Fund 3
<PAGE>
Real Estate Securities Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- ---------
<S> <C> <C>
Common Stocks (b) - 96.0%
Apartment - 16.2%
Ambassador Apartments, Inc. 63,400 $ 1,304
Apartment Investment & Management Co. 248,800 9,143
Avalon Properties, Inc. 342,500 10,596
Bay Apartment Communities, Inc. 104,300 4,068
Berkshire Realty Company, Inc. 115,000 1,380
BRE Properties, Inc. 86,700 2,438
Colonial Properties Trust 103,600 3,121
Equity Residential Properties Trust 104,500 5,284
Essex Property Trust Inc. 166,200 5,817
Irvine Apartment Communities, Inc. 175,500 5,583
Merry Land & Investment Company, Inc. 83,000 1,899
Mid-America Apartment Communities, Inc. 41,700 1,191
Oasis Residential, Inc. 255,500 5,701
Post Properties, Inc. 311,096 12,638
Security Capital Atlantic, Inc. 334,074 7,057
Security Capital Pacific Trust 189,700 4,600
Smith (Charles E.) Residential Realty, Inc. 279,300 9,915
Summit Properties, Inc. 251,800 5,319
United Dominion Realty Trust 214,638 2,992
---------
100,046
Health Care - 5.0%
Alternative Living Services, Inc. (a) 117,000 3,459
American Retirement Corp. (a) 152,700 3,054
Healthcare Realty Trust, Inc. 71,600 2,072
Meditrust Cos. 360,800 13,214
Sunrise Assisted Living, Inc. (a) 210,400 8,968
---------
30,767
---------
Hotels/Leisure - 5.3%
Boykin Lodging Company 78,600 2,078
Bristol Hotel Co. (a) 201,700 5,862
FelCor Suite Hotels, Inc. 115,700 4,107
Homestead Village Properties, Inc. (a) 14,499 218
RFS Hotel Investors, Inc. 177,400 3,537
Starwood Lodging Trust 288,700 16,709
---------
32,511
---------
Leasing - 0.7%
CCA Prison Realty Trust 37,000 1,651
Entertainment Properties Trust 78,000 1,511
Golf Trust of America, Inc. 32,600 946
---------
4,108
---------
Manufactured Homes - 0.9%
Sun Communities, Inc. 149,800 $ 5,383
---------
5,383
---------
Office/Industrial - 36.7%
AMB Property Corp. 146,500 3,681
Arden Realty Group, Inc. 359,200 11,045
Bedford Property Investors, Inc. 126,500 2,767
Brandywine Realty Trust 172,000 4,322
CarrAmerica Realty Corp. 278,650 8,830
Catellus Development Corp. (a) 541,200 10,824
CenterPoint Properties Corp. 171,800 6,034
Cousins Properties, Inc. 279,900 8,204
Crescent Operating, Inc. (a) 47,900 1,162
Crescent Real Estate Equities, Inc. 379,100 14,927
Duke Realty Investment, Inc. 4,000 97
Equity Office Properties Trust 555,949 17,547
First Industrial Realty Trust, Inc. 396,400 14,320
Highwoods Properties, Inc. 466,600 17,352
Kilroy Realty Corp. 247,700 7,121
Liberty Property Trust 186,400 5,324
Mack-Cali Realty Corp. 455,900 18,692
Meridian Industrial Trust, Inc. 213,900 5,454
Pacific Gulf Properties, Inc. 127,500 3,028
Prentiss Properties Trust 259,300 7,244
Reckson Associates Realty Corp. 440,200 11,170
Security Capital Group, Inc. (a) 146,600 4,765
Security Capital Group, Inc. 1998 Warrants (a) 66,050 347
Security Capital Industrial Trust 703,018 17,488
SL Green Realty Corp. 97,300 2,524
Spieker Properties, Inc. 380,800 16,327
Trizec Hahn Corp. 78,500 1,820
Weeks Corp. 120,900 3,869
--------
226,285
--------
Outlet Centers - 3.1%
Chelsea GCA Realty, Inc. 104,200 3,979
Prime Retail, Inc. 502,900 7,135
Tanger Factory Outlet Centers, Inc. 253,600 7,751
--------
18,865
--------
Regional Malls - 13.7%
CBL & Associates Properties, Inc. 200,000 4,938
General Growth Properties 408,100 14,743
</TABLE>
4 Real Estate Securities Fund Specialty Funds
<PAGE>
Real Estate Securities Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
---------- ---------
<S> <C> <C>
J.P. Realty, Inc. 226,400 $ 5,872
Macerich Co. (The) 331,300 9,442
Mills Corp. 82,300 2,016
Rouse Co. (The) 662,900 21,710
Simon DeBartolo Realty Corp. 505,300 16,517
Taubman Centers, Inc. 414,800 5,392
Urban Shopping Centers, Inc. 113,700 3,965
-------
84,595
-------
Self Storage - 4.1%
Public Storage, Inc. 716,000 21,033
Shurgard Storage Centers, Inc. 147,600 4,280
-------
25,313
-------
Shopping Center - 10.3%
Bradley Real Estate, Inc. 218,000 4,578
Developers Diversified Realty Corp. 279,200 10,679
Glimcher Realty Trust 348,800 7,870
Kimco Realty Corp. 276,100 9,733
Kranzco Realty Trust 180,000 3,454
Malan Realty Investors, Inc. 74,100 1,343
Vornado Realty Trust 550,200 25,825
-------
63,482
-------
Total Common Stocks
(cost $465,221) 591,355
-------
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- --------
<S> <C> <C>
Short-Term Investment - 3.5%
Frank Russell Investment Company
Money Market Fund,
due on demand (c) $ 21,550 $ 21,550
--------
Total Short-Term Investment
(cost $21,550) 21,550
--------
Total Investments
(identified cost $486,771)(d) - 99.5% 612,905
Other Assets And Liabilities,
Net-0.5% 2,966
--------
Net Assets-- 100.0% $615,871
========
</TABLE>
(a) Nonincome-producing security.
(b) All common stocks held are Real Estate Investment Trusts (REIT) with
the exception of the following:
Alternative Living Services, Inc.
American Retirement Corp.
Bristol Hotel Co.
Catellus Development Corp.
Crescent Operating, Inc.
Rouse Co. (The)
Sunrise Assisted Living, Inc.
Trizec Hahn Corp.
(c) At cost, which approximates market.
(d) See Note 2 for federal income tax information.
The accompanying notes are an integral part of the financial statements.
Specialty Funds Real Estate Securities Fund 5
<PAGE>
Real Estate Securities Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
Assets
Investments at market (identified cost $486,771)(Note 2)...................................................... $ 612,905
Cash.......................................................................................................... 196
Receivables:
Dividends................................................................................................. 2,936
Investments sold.......................................................................................... 4,625
Fund shares sold.......................................................................................... 3,487
--------------------
Total Assets........................................................................................... 624,149
Liabilities
Payables:
Investments purchased............................................................... $ 7,263
Fund shares redeemed................................................................ 397
Accrued fees to affiliates (Note 4)................................................. 521
Other accrued expenses.............................................................. 97
------------------
Total Liabilities...................................................................................... 8,278
--------------------
Net Assets.................................................................................................... $ 615,871
====================
Net Assets consist of:
Accumulated distributions in excess of net investment income.................................................. $ (9)
Accumulated net realized gain (loss).......................................................................... 8,305
Unrealized appreciation (depreciation) on investments......................................................... 126,134
Shares of beneficial interest................................................................................. 200
Additional paid-in capital.................................................................................... 481,241
--------------------
Net Assets.................................................................................................... $ 615,871
====================
Net Asset Value, offering and redemption price per share:
Class S ($615,482,560 divided by 19,942,784 shares of $.01 par value
shares of beneficial interest outstanding).............................................................. $ 30.86
====================
Class C ($388,555 divided by 12,525 shares of $.01 par value
shares of beneficial interest outstanding).............................................................. $ 31.02
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
6 Real Estate Securities Fund Specialty Funds
<PAGE>
Real Estate Securities Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
Investment Income:
Dividends................................................................................................. $ 27,472
Dividends from Money Market Fund (Note 5)................................................................. 1,704
--------------------
Total Investment Income................................................................................ 29,176
Expenses (Notes 1, 2 and 4):
Management fees..................................................................... $ 4,428
Custodian fees...................................................................... 209
Transfer agent fees................................................................. 526
Bookkeeping service fees............................................................ 9
Professional fees................................................................... 17
Registration fees - Class S......................................................... 75
Distribution fees - Class C......................................................... 1
Shareholder servicing fees - Class C................................................ 1
Trustees' fees...................................................................... 5
Miscellaneous fees.................................................................. 52
------------------
Total Expenses......................................................................................... 5,323
--------------------
Net investment income......................................................................................... 23,853
--------------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from investments..................................................................... 44,736
Net change in unrealized appreciation or depreciation of investments.......................................... 27,721
--------------------
Net gain (loss) on investments................................................................................ 72,457
--------------------
Net increase (decrease) in net assets resulting from operations............................................... $ 96,310
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Real Estate Securities Fund 7
<PAGE>
Real Estate Securities Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
------------------ -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income.................................................................... $ 23,853 $ 19,518
Net realized gain (loss)................................................................. 44,736 24,667
Net change in unrealized appreciation or depreciation.................................... 27,721 75,950
------------------ -----------------
Net increase (decrease) in net assets resulting from operations.................... 96,310 120,135
------------------ -----------------
From Distributions to Shareholders:
Net investment income
Class S................................................................................ (24,656) (18,705)
Class C................................................................................ (9) (1)
In excess of net investment income
Class S................................................................................ (9) --
Net realized gain on investments
Class S................................................................................ (40,156) (18,473)
Class C................................................................................ (25) (4)
------------------ -----------------
Total Distributions to Shareholders................................................ (64,855) (37,183)
------------------ -----------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6)............... 138,695 71,779
------------------ -----------------
Total Net Increase (Decrease) in Net Assets.................................................. 170,150 154,731
Net Assets
Beginning of period...................................................................... 445,721 290,990
------------------ -----------------
End of period (including accumulated distributions in excess of
net investment income of $9 and undistributed net investment income
of $812, respectively)................................................................. $ 615,871 $ 445,721
================== =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
8 Real Estate Securities Fund Specialty Funds
<PAGE>
Real Estate Securities Fund
Financial Highlights - Class S
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .................... $ 29.19 $ 23.51 $ 22.53 $ 22.76 $ 21.50
----------- ----------- --------- --------- ---------
Income From Investment Operations:
Net investment income ................................ 1.36 1.39 1.32 1.25 1.05
Net realized and unrealized gain (loss) on investments 3.93 6.89 1.03 .40 2.68
----------- ----------- --------- --------- ---------
Total Income From Investment Operations ........... 5.29 8.28 2.35 1.65 3.73
----------- ----------- --------- --------- ---------
Less Distributions:
Net investment income ................................ (1.41) (1.34) (1.35) (1.23) (1.04)
Net realized gain on investments ..................... (2.21) (1.26) -- (.45) (1.43)
In excess of net realized gain on investments ........ -- -- -- (.20) --
Tax return of capital ................................ -- -- (.02) -- --
----------- ----------- --------- --------- ---------
Total Distributions ............................... (3.62) (2.60) (1.37) (1.88) (2.47)
----------- ----------- --------- --------- ---------
Net Asset Value, End of Period .......................... $ 30.86 $ 29.19 $ 23.51 $ 22.53 $ 22.76
=========== =========== ========= ========= =========
Total Return (%) ........................................ 18.99 36.81 10.87 7.24 17.42
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) ............. 615,483 445,619 290,990 209,208 145,167
Ratios to average net assets (%):
Operating expenses ................................ 1.02 1.04 1.04 1.05 1.11
Net investment income ............................. 4.57 5.64 6.10 5.65 4.52
Portfolio turnover rate (%) .......................... 49.40 51.75 23.49 45.84 58.38
Average commission rate paid per share
of security ($ omitted) ............................ .0618 .0631 N/A N/A N/A
</TABLE>
Speciality Funds Real Estate Securities Fund 9
<PAGE>
Real Estate Securities Fund
Financial Highlights - Class C
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996*
--------------- -------------
<S> <C> <C>
Net Asset Value, Beginning of Period ............................................................ $ 29.18 $ 26.67
--------------- -------------
Income From Investment Operations:
Net investment income ....................................................................... 1.14 .24
Net realized and unrealized gain (loss) on investments ...................................... 3.95 3.85
--------------- -------------
Total Income From Investment Operations ................................................... 5.09 4.09
--------------- -------------
Less Distributions:
Net investment income ....................................................................... (1.04) (.32)
Net realized gain on investments ............................................................ (2.21) (1.26)
--------------- -------------
Total Distributions ....................................................................... (3.25) (1.58)
--------------- -------------
Net Asset Value, End of Period .................................................................. $ 31.02 $ 29.18
=============== =============
Total Return (%) ................................................................................ 18.20 15.75(a)
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) .................................................... 388 101
Ratios to average net assets (%)(b):
Operating expenses ........................................................................ 1.71 1.77
Net investment income ..................................................................... 3.94 5.31
Portfolio turnover rate (%)(b) .............................................................. 49.40 51.75
Average commission rate paid per share
of security ($ omitted) ................................................................... .0618 .0631
</TABLE>
* For the period November 4, 1996 (commencement of sale) to December 31, 1996.
(a) Total return represents performance for the period November 4, 1996 to
December 31, 1996.
(b) The ratios for the period ended December 31, 1996 are annualized.
10 Real Estate Securities Fund Specialty Funds
<PAGE>
Emerging Markets Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To provide high total return, primarily through capital appreciation,
by assuming the higher level of volatility typically expected from investment in
underdeveloped markets.
Invests in: Primarily emerging market equity securities.
Strategy: The Fund uses a multi-manager strategy intended to achieve higher
returns with moderate risk when compared to either single country or region
emerging markets investments. The Fund employed the investment management
services of three managers with three separate approaches to global emerging
markets investment.
PERFORMANCE CHART
<TABLE>
<CAPTION>
EMERGING EXTENDED IFC INVESTABLE
DATES MARKETS ++ BARINGS EM ++++ COMPOSITE **
----------- ---------- --------------- --------------
<S> <C> <C> <C>
Inception * $10,000 $10,000 $10,000
1993 $14,183 $17,628 $16,864
1994 $13,356 $16,793 $16,775
1995 $12,260 $15,956 $14,708
1996 $13,763 $17,288 $15,868
1997 $13,289 $15,672 $13,579
</TABLE>
Growth of a $10,000 Investment
<TABLE>
<CAPTION>
Emerging Markets Fund IFC Investable Composite Index
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
--------------- --------- -------- ---------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
1 Year $ 9,655 (3.45)% 1 Year $ 8,558 (14.42)%
Inception $ 13,289 5.95%(S) Inception $ 13,579 6.42%(S)
<CAPTION>
Extended Barings Emerging Markets Index
Periods Ended Growth of Total
12/31/97 $10,000 Return
---------------- -------------- -------------
1 Year $ 9,066 (9.34)%
Inception $ 15,672 9.57%(S)
</TABLE>
* Assumes initial investment on January 29, 1993. IFC Index and Barings Index
assumes initial investment on February 1, 1993.
** International Finance Corporation (IFC) Investable Composite Index is a
market capitalization-weighted index of the performance of securities
listed on the stock exchange(s) of the countries included in the index,
calculated on a total-return basis. The investable index reflects the
accessibility of markets and individual stocks to foreign investors.
++ Prior to April 1, 1995, fund performance results are reported gross of
investment management fees. For the period following April 1, 1995, fund
performance results are reported net of investment management fees but
gross of any investment services fees. Information concerning these fees
can be obtained from the fund's managers upon request.
++++ Extended Barings Emerging Markets Index is a market capitalization-weighted
index of companies' performance within 20 countries in Africa, Asia, Europe
and Latin America.
(S) Annualized.
12 Emerging Markets Fund Specialty Funds
<PAGE>
Emerging Markets Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997, the Emerging Markets Fund reflected a loss
of 3.5%, as compared to the Barings Extended Emerging Markets Index (BEMI),
which fell 9.3%. The Fund outperformed the BEMI primarily due to favorable
country allocation decisions, particularly an underweighting in several of the
poorest performing markets.
Portfolio Highlights
The performance of the emerging markets changed dramatically toward year end.
After currency speculators exposed weaknesses in the currencies of several
southeast Asian economies, stocks of emerging markets plunged steeply. The focus
of the selloff was in Asia, however, countries in regions around the globe
experienced similarly dramatic short-term selloffs as investors adopted a "shoot
first, ask questions later" attitude. Much like 1996, the first half of 1997 was
quite favorable. The Barings Extended Emerging Markets Index was up more than
19% at mid year. The second half of the year was a virtual freefall as markets
in the index dropped nearly 25%. Latin American markets were not immune to the
market's year end weakness, but posted good gains for the year. Several Asian
markets suffered dramatic losses, particularly Malaysia, Korea, and Thailand,
all of which plummeted over 60%. The Europe, Middle East, and African region
produced a moderate gain, led by Russian and Turkey, which rose nearly 100% in
1997.
The Emerging Markets Fund experienced a relatively good year given the
precarious investment landscape. All three of the Fund's managers exceeded the
benchmark return for the year, and as a result, the Fund's 3.5% loss was nearly
600 basis points better than the index. Good country selection accounted for
much of the Fund's added value as the fund avoided much of the huge losses in
Asia by being underweighted and by focusing investments on stocks less impacted
by the drop in share prices. The fund also benefited from overweighted holdings
in Russia and several Latin American markets.
- --------------------------------------------------------------------------------
Top Ten Issues
(as a percent of Total Investments) December 31, 1997
Telefonos de Mexico SA Series L (Mexico) 3.0%
Telecomunicacoes Brasileiras NPV (Brazil) 2.2
CIA Anon Nacional Telefonos (Venezuela) 2.0
YPF Sociedad Anonima Class D (Argentina) 1.8
Petroleo Brasileiro SA NPV - ADR (Brazil) 1.7
Telecomunicacoes Brasileiras ADR (Brazil) 1.3
Cimpor Cimentos (Portugal) 1.2
Tatneft ADR (Russia) 1.2
Yapi Kredi Bankasi (Turkey) 1.1
Genesis India Investment (India) 1.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Characteristics
December 31, 1997
Current P/E Ratio 16.7x
Portfolio Price/Book Ratio 1.68x
Market Capitalization - $ - Weighted Average 7.6 Bil
Number of Holdings 395
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Money Managers
Genesis Asset Managers, Ltd.
Montgomery Asset Management L.P.
J.P. Morgan Investment Management, Inc.
- --------------------------------------------------------------------------------
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Investments in securities of non-US issuers and foreign currencies involve
investment risks different from those of US issuers. The Prospectus contains
further information and details regarding these risks.
Specialty Funds Emerging Markets Fund 13
<PAGE>
Emerging Markets Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Common Stocks - 81.7%
Argentina - 4.9%
Banco de Galicia y Buenos Aires
Class B New - ADR 11,900 $ 306
Central Puerto SA Class B 120,000 336
Comercial de Plata 91,460 144
Corcemar SA Class B 99,462 481
Cresud SA (a) 281,400 563
Inversiones Y Representaciones 76,881 286
Inversiones Y Representaciones SA - GDR 10,372 390
Molinos Rio Plata 171,050 411
Naviera Perez Companc Class B 176,431 1,260
Perez Companc SA Class B - ADR 33,680 467
Siderar SA Series A 238,200 1,013
Telecom Argentina Class B 87,122 627
Telecom Argentina SA Class B - ADR 36,800 1,316
Telefonica de Argentina Class B 150,000 563
Telefonica de Argentina Class B - ADR 40,800 1,520
Transportadora de Gas del Sur SA Class B 280,000 636
YPF Sociedad Anonima Class D - ADR 176,600 6,038
--------
16,357
--------
Australia - 0.4%
Lihir Gold, Ltd. (a) 444,200 463
Orogen Minerals, Ltd. 480,000 939
---------
1,402
---------
Austria - 0.5%
Elektrim SA (a) 801 8
Tabak AS (a) 3,500 798
Zaklady Przemyslu Cukiemiczego
Jutrzenka SA (a) 25,900 474
Zywiec (a) 3,872 319
---------
1,599
---------
Bangladesh - 0.0%
Apex Tannery, Ltd. 4,600 41
Beximco Infusions 7,500 75
---------
116
---------
Bermuda - 0.4%
Central European Media Enterprises, Ltd.
Class A (a) 50,500 1,263
---------
1,263
---------
Brazil - 7.8%
Banco Bradesco SA NPV Rights (a) 15,332,293 55
Bompreco SA Supermercados do
Nordeste - GDR (Regd)(a) 28,500 526
Centrais Electricas de Santa 5,400 556
Centrais Electricas de Santa
Catarina SA - GDR (a) 700 74
Companhia Brasileira de Distribuicao
Grupo
Pao de Acucar (Regd) - GDR 2,500 49
Companhia Cervejaria Brahma - ADR 59,171 840
Companhia Energetica de Sao 16,300 660
Companhia Paranaense de
Energia-Copel - ADR 45,400 522
Copene Petroquirnica do Nordeste
SA - ADR 50,600 734
Eletrobras (centrais) NPV 28,310,000 1,408
Forca E Luz (Cia Paul) NPV 15,747,000 2,074
Light - Servicos de Eletricidade SA NPV 2,810,000 1,171
Makro Atacadista - GDS (a) 60,000 480
Makro Atacadista SA - GDR 60,800 486
Petroleo Brasileiro Petrobras SA - ADR 78,000 1,794
Rhodia Ster SA NPV (a) 129,820 14
Sabesp Cia Saneam 2,107,000 500
Souza Cruz NPV 48,620 392
Telecomunicacoes Brasileiras - ADR 36,708 4,274
Telecomunicacoes Brasileiras NPV 71,883,900 7,311
Telecomunicacoes Sao Paulo NPV (a) 19,113 4
Uniao de Bancos Brasileiros SA. -
GDR (a) 32,100 1,033
Votorantim Celulose e Papel SA - ADR 39,500 400
White Martins SA - NPV 374,738 547
---------
25,904
---------
Chile - 4.4%
Administradora de Fondos de Pensiones
Provida SA - ADR 27,870 476
Antofagasta Holdings PLC 283,636 1,514
Banco Santander Chile Series A - ADR 36,500 516
Banco Santiago - ADR (a) 20,000 445
Ohilgener SA - ADR 56,697 1,389
Compania de Telecomunicaciones de
Chile SA - ADR 54,893 1,640
Distribucion y Servicio D&S SA - ADR (a) 40,000 742
Embotelladora Andina SA - ADR Series A 53,300 1,109
Embotelladora Andina SA - ADR Series B 46,000 894
Enersis SA - ADR 70,755 2,052
Laboratorio Chile SA - ADR 30,000 668
Linea Aerea Nacional Chile SA - ADR (a) 51,400 700
</TABLE>
14 Emerging Markets Fund Specialty Funds
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
------- --------
<S> <C> <C>
Madeco SA-ADR 17,142 $ 261
Maderas Y Sinteticos Sociedad - ADR 25,400 241
Quinenco SA - ADR (a) 82,100 944
Sociedad Quimica Y Minera de
Chile SA - ADR 15,630 688
Supermercados Unimarc SA - ADR (a) 37,100 457
--------
14,736
--------
China - 0.7%
Anhui Conch Cement Co., Ltd. (a) 1,264,000 220
China Resources Beijing Land 41,000 20
China Telecom (Hong Kong), Ltd. - ADR (a) 30,000 1,007
Huaneng Power International, Inc.
Series N - ADR (a) 47,400 1,099
--------
2,346
--------
Colombia - 0.1%
Banco de Colombia New - GDR 17,300 99
Cementos Diamante SA Class B - ADR 31,200 359
--------
458
--------
Czech Republic - 1.3%
Ameriyah Cement Co. 46,100 1,077
Czechoslovakian Value Fund (Units)(a) 62,000 357
Elektramy Opatovice AS 2,200 255
Komercni Banka AS - GDR (a) 45,100 541
Komercni Banka AS - GDR (144A)(a) 17,000 204
Komercni Banka IF (a) 18,900 374
Privat Fonds (a) 53,400 645
Vseobecny Investment Fund (a) 119,775 295
Vynosovy Investment Fund (a) 55,500 300
Zivnostenska Banka 8,200 451
--------
4,499
--------
Ecuador - 0.3%
La Cement National - GDR (a) 3,700 751
La Cemento Nacional CA - GDR 700 142
--------
893
--------
Egypt - 0.8%
Al Ahram Beverage Co. S.A.E. (a) 8,700 496
Commercial International Bank (Regd) - GDR 43,250 895
Paints & Chemical Industry Co. - GDR (a) 57,600 601
Torah Portland Cement Co. 22,985 527
--------
2,519
--------
France - 0.0%
Elf Gabon 1,100 179
--------
179
--------
Germany - 0.4%
Al Ahram Beverage Co. - GDR 27,000 759
Al Ahram Beverage Co. - GDR (144A) 21,400 601
--------
1,360
--------
Greece - 1.1%
Athens Medical Center SA (Regd) 56,550 668
Ergo Bank (Regd) 18,400 951
Hellenic Bottling 22,000 510
Hellenic Telecommunication Organization SA 39,650 812
National Mortgage Bank 7,020 381
Silver & Baryte Ores Mining 23,360 424
--------
3,746
--------
Hong Kong - 2.6%
Chen Hsong Holding 1,900,000 576
China Everbright - IHD Pacific, Ltd. (a) 220,000 177
China Merchants Holdings
International Co. Ltd. 250,000 257
China National Aviation Co., Ltd. (a) 190,000 40
China Resources Enterprise, Ltd. 388,000 866
China Southern Airlines (a) 500,000 129
Citic Pacific, Ltd. 139,000 553
Goldlion Holdings, Ltd. 894,000 297
Guangdong Investment 1,138,000 756
Guangdong Kelon Electric Holdings 420,000 431
Jiangsu Expressway Co., Ltd. Class H (a) 4,590,000 948
New World Infrastructure, Ltd. (a) 498,300 1,122
Peregrine Investment Holdings, Ltd. -
Formosa Chemical (a) 12,950 15
Peregrine Investment Holdings, Ltd. -
Hung Sheng Construction (a) 28,600 46
Peregrine Investment Holdings, Ltd. -
Primax 2000 Warrants (a) 40,700 503
Shanghai Industrial Holdings, Ltd. 90,000 335
</TABLE>
Specialty Funds Emerging Markets Fund 15
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
--------- --------
<S> <C> <C>
Tingyi (Cayman Island) Holding Co. 3,683,000 $ 480
Yue Yuen Industrial Holdings 312,800 662
Zhejiang Expressway Co., Ltd.
Series H (a) 1,624,000 329
--------
8,522
--------
Hungary - 2.4%
BorsodChem - GDR 42,000 1,495
BorsodChem Rt. 36,500 1,316
Egis Gyogyszergyar 200 12
Magyar Tavkozlesi Rt (Regd)(a) 158,076 839
Mol Magyar Olay-Es Gazipari - GDS (a) 80,000 1,928
Richter Gedeon, Ltd. - GDR 13,831 1,580
Zalakeramia Reszvenytarsasag - GDR (a) 45,400 411
Zalakeramia Rt. 5,800 269
--------
7,850
--------
India - 3.8%
Bajaj Auto Ltd. - GDR (a) 35,050 701
Bajaj Auto, Ltd. - GDR (144A)(a) 27,300 546
EIH, Ltd. - GDR (a) 34,150 448
Genesis India Investment Co. (a) 430,000 3,569
Global Tele-Systems Group, Inc. (a) 525 10
I.T.C., Ltd.- GDR (a) 116,800 2,307
India Cements, Ltd. - GDS (a) 114,200 108
Indian Hotels Co., Ltd. - GDR 65,100 1,211
Indian Hotels Co., Ltd. - GDR (144A) 7,000 130
Indian Petrochemicals Corp., Ltd. - GDR 38,000 195
Larsen & Toubro, Ltd. - GDR 42,400 456
Mahanagar Telephone Nigam
2000 Warrants (a) 120,000 790
Raymond Woolen Mills, Ltd. - GDR (a) 5,100 13
Reliance Industries Ltd. - GDS (a) 134,300 1,155
Tata Engineering & Locomotive Co., Ltd. (a) 27,800 231
Videsh Sanchar Nigam, Ltd. (a) 60,000 822
--------
12,692
--------
Indonesia - 0.9%
Gulf Indonesia Resources, Ltd. (a) 59,850 1,317
Perusahan Perkibu 192,000 109
PT Bank Niaga Thk (Alien Market)(a) 131,200 11
PT Matahari Putra Prima Thk (a) 1,958,000 160
PT Modem Photo Film Co. Thk (a) 70,000 20
PT Ometraco Corp. 700,000 248
PT Ometraco Corp. 2000 Warrants (a) 75,000 20
PT Pakuwon Jati 402,000 33
PT Ramayana Lestari Sentosa 500,000 $ 470
PT Semen Cibinong TBk (a) 538,788 25
PT Tempo Scan Pacific 268,500 21
PT Unilever Indonesia 19,000 105
Semen Gresik 698,000 409
--------
2,948
--------
Israel - 0.5%
Bank Leumi Le-Israel 292,000 490
Elbit Medical Imaging, Ltd. (a) 200 1
Elbit Systems, Ltd. 200 3
Elbit, Ltd. 200 1
Supersol, Ltd. 198,000 561
Teva Pharmaceutical Industries, Ltd. 7,220 342
Teva Pharmaceutical Industries, Ltd. - ADR 4,900 232
--------
1,630
--------
Lebanon - 0.2%
Lebareuze Lo for Dev & Recon SA 55,000 707
--------
707
--------
Luxembourg - 1.3%
Genesis Smaller Companies (a) 115,971 1,571
Millicom International Cellular SA (a) 43,000 1,597
Tata Engineering & Locomotive Co. -
GDR(a) 140,700 1,171
--------
4,339
--------
Malaysia - 1.3%
Genting International (CLOB Line)(a) 162,000 19
Golden Hope Plantation 463,000 536
Kuala Lumpur Kepong 314,000 674
Lion Corp. Berhad 38,400 11
London & Pacific Insurance Co. Berhad 1,600 2
Malaysia Mining Corp. 494,800 195
Malaysian Airline System 23,000 18
Malaysian Assurance Alliance Berhad 173,137 199
Malaysian Pacific 241,000 579
Malaysian Tobacco 243,000 125
Nestle Berhad 55,000 255
Nylex Berhad 378,500 145
O.Y.L. Industries Berhad 119,000 278
Oriental Holdings Berhad 192,000 235
Perlis Plantations 160,000 226
Phileo Allied Berhad 412,500 179
Public Finance Berhad (Alien Market) 495,000 136
</TABLE>
16 Emerging Markets Fund Specialty Funds
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Renong Berhad (a) 109,000 $ 50
Shell Refining (Malaysia) 147,000 231
Telekom Malaysia 130,000 384
--------
4,477
--------
Mexico - 12.1%
Accel SA de CV Series B NPV (a) 1,503,000 395
Acer Computec Latino
America SA de CV NPV (a) 131,000 389
Alfa SA de CV Class A NPV 427,971 2,900
Cemex SA de CV Class B NPV (a) 151,400 809
Cemex SA de CV NPV (a) 301,640 1,366
Cifra SA de CV - ADR 24,000 576
Cifra SA de CV Class C NPV 97,960 220
Cifra SA de CV Series V NPV (a) 40,151 99
Compania Cervecerias Unidas SA - ADR 22,700 667
Corporacion Industrial
Sanluis SA de CV (Units) 180,000 1,479
Corporacion Interamericana de
Entretenimiento SA Series B NPV (a) 65,000 504
Cydsa SA Series A NPV 114,300 319
Desc SA de CV NPV 80,714 760
Desc Sociedad de Fomento
Industrial SA de CV Series B NPV 65,200 623
Empresa Nacional de Electric - ADR 57,600 1,019
Empresas ICA Sociedad - ADR 125,628 2,065
Empresas La Modema SA de CV - ADR (a) 24,386 529
Empresas La Modema SA de CV
Class A NPV (a) 59,000 321
Fomento Economico Mexicano SA de CV
Series B NPV 343,000 2,741
Grupo Carso Series A NPV 64,500 431
Grupo Casa Autrey SA de CV - ADR 11,000 225
Grupo Financiero Banamex AC
Series B NPV (a) 211,000 631
Grupo Financiero Banorte SA de CV
Series B NPV (a) 1,090,000 1,899
Grupo Industrial Maseca Series B NPV 380,000 393
Grupo Industrial SA de CV New - ADR 40,000 620
Grupo lusacell SA de CV - ADR Series L (a) 5,600 121
Grupo Modelo SA Series C 46,700 392
Grupo Radio Centro SA de CV - ADR 40,700 580
Herdez Class B NPV 300,000 253
Industrias Penoles NPV 18,000 81
Kimberly-Clark, Mexico Class A NPV 345,000 1,689
Panamerican Beverages, Inc. Class A 58,000 1,892
Ponderosa Industrial SA de CV
Series B NPV (a) 460,000 397
Seguros Comercial America Series B NPV (a) 87,000 356
Sigma Alimentos, SA Series B 34,000 516
Telefonos de Mexico SA Series L - ADR 174,750 9,797
Transportacion Maritima
Mexicana SA de CV Series A - ADR (a) 80,000 490
TV Azteca SA de CV - ADR (a) 85,000 1,918
--------
40,462
--------
Morocco - 0.7%
Banque Marocaine Du Commerce
Exterieur - GDR (a) 69,835 1,405
ONA SA 4,700 407
Wafabank 4,600 428
--------
2,240
--------
Netherlands - 0.3%
Ceteco Holding NV 25,827 1,159
--------
1,159
--------
Pakistan - 1.1%
Adarujee Insurance 6,562 13
Dandot Cement Co. (a) 3,937 1
Fauji Fertilizer 330,800 633
Hub Power Co. (a) 44,200 1,370
Pakistan State Oil 168,877 1,437
Pakistan Telecommunications Corp. (a) 160,000 121
--------
3,575
--------
Panama - 0.2%
Banco Latinoamericano de
Exportaciones SA Class E 14,000 579
--------
579
--------
Papua New Guinea - 0.4%
Oil Search, Ltd. (Australia Regd) 700,000 1,266
--------
1,266
--------
Peru - 1.6%
Cementos Norte Pacasmayo SA Class T 275,394 389
Compania de Minas Buenaventura
Series B - ADR 29,400 470
CPT Telefonica del Peru Class B 289,098 646
Credicorp, Ltd. 21,165 381
</TABLE>
Specialty Funds Emerging Markets Fund 17
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Enrique Ferreyros 148,701 $ 157
Ferreyros SA - ADR (a) 10,875 225
Telefonica Del Peru SA Class B - ADR 132,200 3,082
--------
5,350
--------
Philippines - 1.2%
Ayala Land, Inc. (a) 821,772 325
Bacnotan Consolidated 185,354 59
Belle Corporation (a) 1,600,000 62
Far East Bank & Trust Co. 65,792 80
First Philippine Holdings Class B 404,967 315
International Container (a) 311,500 38
Ionics Circuit, Inc. NPV 230,000 94
Manila Electric Co. Class B 233,847 774
Music Semiconductors Corp. (a) 671,000 240
PCI Leasing & Finance, Inc. (a) 477,000 10
Philippine Long Distance
Telephone Co. - ADR 76,627 1,724
Philippine National Bank (a) 70,212 154
Uniwide Holdings, Inc. (a) 2,304,000 34
--------
3,909
--------
Poland - 0.6%
Bank Handlowy W. Warszawie SA - GDR (a) 41,284 547
Bank Slaski SA 3,400 188
KGHM Polska Miedz SA - GDR (a) 77,000 558
Polish National Investment Fund (a) 8,000 284
Prokom Software SA - GDR (a) 28,000 315
WBK 50,600 259
--------
2,151
--------
Portugal - 3.6%
Banco Espir Santo (Regd) 29,900 890
Brisa-Auto Estradas de
Portugal SA (Regd)(a) 31,000 1,111
Capital Portugal (a) 1,307 203
Cimpor Cimentos de Portugal 154,000 4,036
Companhia de Seguros Tranquilidade 28,500 684
Electricidade de Portugal SA (a) 47,100 892
Portugal Telecom SA - ADR 31,000 1,457
Sonae Investimentos SA 68,500 2,771
--------
12,044
--------
Russia - 4.4%
Irkutshkenegro - Russian Depositary
Trust (a) 23 874
Lukoil - Russian Depositary Trust (a) 5 575
Lukoil OilCo. - ADR 32,900 3,010
Mosenergo - ADR (a) 30,200 1,114
SFMT, Inc. (a) 2,000 40
Surgutneftegaz - ADR 201,100 2,011
Tatneft - ADR 8,700 1,218
Tatneft - ADR (144A) 28,400 3,976
Trade House GUM - ADR 62,000 380
Ukraine Enterprise Corp. (a) 31,000 43
Unified Energy Systems - GDR (a) 22,500 675
Vimpel-Communications - ADR (a) 20,200 720
--------
14,636
--------
Singapore - 0.1%
Star Cruises PLC (a) 162,000 335
--------
335
--------
Slovakia - 0.1%
Slovakofama AS 2,200 288
--------
288
--------
South Africa - 5.4%
Amalgamated Banks of South Africa 183,900 1,058
Anglo America Coal 2,260 105
Anglo America Corp. SA 13,500 545
Anglo American Industrial Corp. 2,130 52
Barlow, Ltd. 82,900 704
Billiton PLC (a) 355,760 914
Consolidated African Mines, Ltd. (a) 2,174,500 626
De Beers Centenary AG 60,000 1,221
Del Monte Royal Food, Ltd. 732,100 481
Ellerine Holdings, Ltd. 19,502 126
Engen, Ltd. 108,591 552
Gencor, Ltd. - ADR 10,935 15
Highstone Property 630,000 194
Highveld Steel & Vanadium Corp., Ltd. 202,134 444
Impala Platinum Holdings, Ltd. 33,300 318
Investec Group, Ltd. 13,200 508
Iscor 2,150,191 636
JCI, Ltd. 156,487 699
JD Group, Ltd. 64,121 392
Kersaf Investments, Ltd. 76,600 401
</TABLE>
18 Emerging Markets Fund Specialty Funds
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Lonrho PLC 293,757 $ 447
Murray & Roberts Holdings, Ltd. 226,600 342
New Clicks Holdings, Ltd. 53,722 66
PepsiCo International, Inc. (a) 2,000 174
Plate Glass and Shatterprufe Industries, Ltd. 22,166 424
Rembrandt Group, Ltd. 145,752 1,063
Safmarine & Rennie Holdings, Ltd. 168,700 309
Sappi, Ltd. 124,500 627
Sasol NPV 285,494 2,992
South African Breweries 42,400 1,046
Trans Natal Coal Corp., Ltd. 115,600 419
-------
17,900
-------
South Korea - 1.1%
Dong-Ah Construction - EDR (a) 2,154 2
Hana Bank - GDR (a) 46,385 262
Hanwha Chemical Corp. (a) 61,591 61
Housing & Commercial Bank
Korea - GDR (144A)(a) 62,700 329
Housing & Commercial Bank, Korea 33,240 224
Hyundai Motor Co. - GDR (a) 41,100 64
Korea Electric Power Corp. 32,700 303
Korea Long-Term Credit Bank 24,500 150
Korea Mobile Telecommunications Corp. 123 32
Pohang Iron & Steel 5,400 146
Pohang Iron & Steel - ADR 11,700 204
Samsung Electronics Co. - GDR (a) 24,981 394
Samsung Electronics, Ltd. (a) 7,059 160
Samsung Electronics, Ltd. - GDR (a) 87,102 457
Shin Han Bank (a) 45,000 201
Ssangyong Cement Co., Ltd. 43,400 92
Ssangyong Oil Refining Co., Ltd. 62,620 265
Tae Young Corp. 16,000 250
-------
3,596
-------
Spain - 0.2%
Quilmes Industrial (Regd)(a) 55,000 591
-------
591
-------
Sri Lanka - 0.2%
Aitken Spence & Co. 8,700 20
Ceylon Theatre 13,660 44
Development Finance Corp. 83,333 324
Hayleys 18,240 63
John Keells Holdings, Ltd. 34,828 190
National Development Bank 9,800 36
-------
677
-------
Switzerland - 0.3%
Holderbank Financiere Glarus AG (BR) 1,392 1,136
-------
1,136
-------
Taiwan - 3.1%
Advanced Semiconductor
Engineering - GDR (a) 19,000 372
Asia Cement Corp. - GDR 72,059 839
China Steel Corp. - GDS (a) 56,712 837
Delta Electronic Industrial (a) 66,000 263
Evergreen Marine Corp. - GDR 70,486 775
Hocheng Group Corp. - GDR 126,566 949
Peregrine SEC -
Bharat Petroleum (a) 10,700 114
Peregrine Investment Holdings, Ltd. -
China Development 2000 Warrants (a) 263,000 750
President Enterprises - GDS (a) 73,200 860
ROC Taiwan Fund 76,500 622
Siliconware Precision Industries Co. - GDR (a) 76,000 958
Taiwan Fund, Inc. 52,600 868
Yageo Corp. - GDR (a) 110,416 1,242
Yang Ming Marine Transport - GDR (a) 101,600 792
-------
10,241
-------
Thailand - 1.0%
Advanced Information Services
(Alien Market) 96,600 461
Ban Pu Coal (Alien Market) 41,100 165
Bangkok Bank (Alien Market) 184,300 459
Central Pattana Public Co., Ltd.
(Alien Market) 124,700 39
Grammy Entertainment PLC (Alien Market) 42,000 174
Hemaraj Land and Developement PLC
(Alien Market) 105,000 111
Krung Thai Bank PLC (Alien Market) 56,500 12
Land & House (Alien Market) 29,842 6
Phatra Thanakit Co. (Alien Market) 58,300 32
Pizza Public Co., Ltd. (Alien Market) 97,000 171
Precious Shipping (Alien Market) 137,000 88
</TABLE>
Specialty Funds Emerging Markets Fund 19
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- ---------
<S> <C> <C>
PTT Exploration & Production PLC
(Alien Market) 100,000 $ 1,151
Regional Container Line (Alien Market) 66,900 51
Siam Cement Co. (Alien Market) 25,800 204
Swedish Motor Public Co., Ltd.
(Alien Market) 164,900 41
TelecomAsia (Alien Market)(a) 461,400 88
Thai Farmers Bank (Alien Market) 84,400 153
Thai Farmers Bank PLC 2002 Warrants
(Alien Market)(a) 4,875 1
Tipco Asphalt Public Co., Ltd. 11,000 8
--------
3,415
--------
Turkey - 3.3%
Akansa Cimento AS 7,148,000 1,000
Aksigorta AS 9,426,000 603
EGE Biracilik Ve Malt Sanayii 5,899,000 534
Erciyas Biracilik Ve Malt Sanayii 2,165,374 303
Ford Otomatio San 618,000 514
Kazkommertsbank Co. - GDR (a) 4,800 96
Koc Holding 4,953,000 1,159
Migros 771,750 698
Sarkuysan Elektrolitik Bakir 4,245,000 379
T Garanti Bankasi 7,882,221 390
T Sise Cam (a) 20,042,024 1,475
Yapi Kredi Bankasi 96,831,316 3,691
--------
10,842
--------
United Kingdom - 0.6%
Ashanti Goldfields, Ltd. - ADR 107,200 804
Billiton PLC - ADR (a) 54,678 130
Lonrho PLC 465,816 719
Pliva d.d. - GDR (a) 23,200 404
--------
2,057
--------
United States - 0.4%
Enron Corp. 32,161 1,337
--------
1,337
--------
Venezuela - 3.2%
CIA Anon Nacional Telefonos de
Venezuela - ADR 157,546 6,558
Electricidad de Caracas (Regd) 1,001,013 1,201
Mavesa SA - ADR 151,875 968
Siderurgica Venezolana Sivensa - ADR 395,000 1,561
Siderurgica Venezolana
Sivensa - GDR (144A)(a) 35,909 216
--------
10,504
--------
Zimbabwe - 0.4%
Delta Corp. 1,328,757 880
Reunion Mining PLC (a) 250,000 341
--------
1,221
--------
Total Common Stocks
(cost $281,428) 272,053
--------
Preferred Stocks - 11.7%
Argentina - 0.4%
Quilmes Industrial Quinsa Societe - ADR 92,950 1,272
--------
1,272
--------
Brazil - 10.1%
Banco Bradesco SA NPV 358,606,720 3,535
Banco Itau SA (Regd) 5,934,031 3,190
Brahma (cia Cervej) NPV 1,093,000 735
Brasmotor SA NPV 4,575,000 451
Cia Riograndense Telecom NPV (a) 751,000 925
Companhia Brasileira de Distribuicao
Grupo Pao de Acucar - NPV 9,500,000 174
Companhia Brasileira de Projetos e
Obras (Units)(a) 36,700,000 671
Companhia Energetica de Minas 50,879,399 3,247
Companhia Energetica de
Sao Paulo - ADR (Regd) 16,800 279
Companhia Energetica de Sao Paulo NPV 20,825,000 1,250
Companhia Paranaense de Energia - Copel 57,640,000 782
Companhia Paranaense de Energia
Copel Class B - ADR 15,800 216
Coteminas (Cia Tec) NPV 2,305,105 826
Duratex SA (BR) 3,364,000 133
Electrobras Series B NPV 6,210,000 317
Empresa Nacional de Comercio
Redito e Participacoes SA NPV (a) 2,305,105 2
Industrias Klabin de Papel e
Celulose SA NPV 1,214,928 555
Iochpe Maxion SA - ADR (a) 232,300 396
Itausa Investimentos Itau SA 1,100,000 857
Kepler Weber SA NPV (a) 3,200 13
</TABLE>
20 Emerging Markets Fund Specialty Funds
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
--------- --------
<S> <C> <C>
Lojas Arapua SA NPV 54,300,000 $ 195
Lojas Renner SA NPV 6,000,000 188
Marcopolo SA - NPV 2,760,000 326
Odebrecht SA - NPV 11,793,000 79
Perdigao SA NPV 225,200,000 295
Petro Ipiranga (cia) NPV 79,100,000 1,205
Petrobras Distribuidora NPV 19,872,500 347
Petroleo Brasileiro SA NPV 23,698,866 5,542
Telecomunicacoes - NPV 5,230,047 1,392
Telecomunicacoes Brasileiras - NPV 23,035,542 2,628
Telecomunicacoes de Minas Gerais
Class B NPV 9,292,000 1,174
Telecomunicacoes de Minas Gerais
Series B NPV (a) 33,489 4
Telecomunicacoes de Sao Paulo SA -
TELESP (a) 175,358 47
Telecomunicacoes do Rio de
Janeiro SA - Telerj NPV (a) 250,123 26
Telecomunicacoes do Rio de
Janeiro SA NPV 8,650,817 899
Votorantim Papale 20,700,000 399
Weg SA 630,000 384
-------
33,684
-------
Colombia - 0.0%
Gran Cadena de Almacenes Class B - ADR 23,920 179
-------
179
179
-------
Greece - 0.1%
Delta Dairy 25,520 229
-------
229
-------
Portugal - 0.2%
Filmes Lusomundo-SGPS SA 61,000 558
-------
558
-------
Russia - 0.9%
Fleming Russia Securities Fund (a) 53,458 1,096
Lukoil Holding Oil Co. - ADR 62,300 1,884
-------
2,980
-------
Total Preferred Stocks
(cost $33,335) 38,902
-------
Long-Term Investments - 0.7%
Brazil - 0.1%
Casa Anglo Series 2
1.000% due 11/01/99 (conv.) 3 214
--------
214
--------
Indonesia - 0.0%
Modemland Realty
6.000% due 01/04/03 (conv.) IDR 30 8
--------
8
--------
Malaysia - 0.0%
Phileo Allied Berhad
4.000% due 09/12/01 (conv.) 275 23
--------
23
--------
Poland - 0.1%
Elektrim Spolka Akcyjna SA
2.000% due 05/30/04 (conv.) 596 315
--------
315
--------
South Korea - 0.1%
Shinwon Corp.
0.500% due 12/31/08 (conv.) 520 489
--------
489
--------
Taiwan - 0.4%
Far Eastern Dept. Stores
3.000% due 07/06/01 (conv.) 981 863
United Microelectronics Corp., Ltd.
1.250% due 06/08/04 (conv.)(a) 215 570
--------
1,433
--------
Total Long-Term Investments
(cost $2,568) 2,482
--------
Short-Term Investments - 4.0%
United States - 4.0%
Frank Russell Investment Company
Money Market Fund, due on demand (b) 13,240 13,240
-------
Total Short-Term Investments
(cost $13,240) 13,240
-------
</TABLE>
Specialty Funds Emerging Markets Fund 21
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Market
Value
(000)
---------
<S> <C>
Total Investments
(identified cost $330,571)(c) - 98.1% $ 326,677
Other Assets and Liabilities,
Net-1.9% 6,375
---------
Net Assets - 100.0% $ 333,052
=========
</TABLE>
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) See Note 2 for federal income tax information.
Abbreviations:
ADR - American Depositary Receipt
EDR - European Depositary Receipt
GDR - Global Depositary Receipt
GDS - Global Depositary Share
NPV - No Par Value
NV - Nonvoting
PLC - Public Limited Company
SEC - Shareholders Equity Certificates
144A - Represents private placement security for qualified buyers according to
rule 144A of the Securities Act of 1933.
Foreign Currency Abbreviations:
ARS - Argentina peso
GRD - Greek drachma
IDR - Indonesian rupiah
THB - Thailand baht
TRL - Turkish lira
The accompanying notes are an integral part of the financial statements.
22 Emerging Markets Fund Specialty Funds
<PAGE>
Emerging Markets Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
% of Market
Net Value
Industry Diversification Assets (000)
- ------------------------------------ ---------- ---------
<S> <C> <C>
Auto & Transportation 3.1% $ 10,406
Consumer Discretionary 11.3 37,671
Consumer Staples 8.3 27,764
Financial Services 13.1 43,743
Health Care 0.6 1,895
Integrated Oils 8.4 27,857
Materials & Processing 14.3 47,554
Miscellaneous 6.7 22,322
Other Energy 3.4 11,366
Producer Durables 2.0 6,496
Technology 1.5 5,105
Utilities 20.7 68,776
Short-Term Investments 4.0 13,240
Long-Term Investments 0.7 2,482
---------- ---------
Total Investments 98.1 326,677
Other Assets and Liabilities, Net 1.9 6,375
---------- ---------
Net Assets 100.0% $ 333,052
========== =========
<CAPTION>
% of Market
Net Value
Geographic Diversification Assets (000)
- ------------------------------------ ---------- ---------
<S> <C> <C>
Latin America 45.2% $ 150,592
Europe 21.1 70,501
Pacific Basin 18.4 61,470
Africa 6.5 21,361
United Kingdom 0.6 2,057
United States 0.4 1,337
United States (Short-Term Investments) 4.0 13,240
Middle East 1.5 4,856
Bermuda 0.4 1,263
---------- ---------
Total Investments 98.1 326,677
Other Assets and Liabilities, Net 1.9 6,375
---------- ---------
Net Assets 100.0% $ 333,052
========== =========
</TABLE>
Foreign Currency Exchange Spot Contracts
(Note 2)
<TABLE>
<CAPTION>
Unrealized
Contracts to In Appreciation
Deliver Exchange For Settlement (Depreciation)
(000) (000) Date (000)
- ------------ ---------------- ---------- --------------
<S> <C> <C> <C>
USD 35 ARS 35 01/02/98 --
USD 9 GRD 2,375 01/05/98 --
USD 914 TRL 188,048,688 01/05/98 (7)
--------------
$ (7)
==============
</TABLE>
Forward Foreign Currency Exchange Contracts
(Note 2)
<TABLE>
<CAPTION>
Unrealized
Contracts to In Exchange Appreciation
Deliver For Settlement (Depreciation)
(000) (000) Date (000)
- ------------- ----------- ---------- --------------
<S> <C> <C> <C>
THB 71,145 USD 1,762 02/23/98 $ 258
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Emerging Markets Fund 23
<PAGE>
Emerging Markets Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
Assets
Investments at market (identified cost $330,571)(Note 2).................................................... $ 326,677
Foreign currency holdings (identified cost $4,219).......................................................... 3,903
Forward foreign currency exchange contracts (cost $1,762)(Note 2)........................................... 1,762
Foreign currency exchange spot contracts (cost $958)(Note 2)................................................ 951
Receivables:
Dividends and interest.................................................................................... 1,155
Investments sold.......................................................................................... 3,259
Fund shares sold.......................................................................................... 3,974
Foreign taxes recoverable................................................................................. 13
Deferred organization expenses (Note 2)..................................................................... 1
--------------------
Total Assets......................................................................................... 341,695
Liabilities
Payables:
Bank overdraft...................................................................... $ 491
Investments purchased............................................................... 4,413
Fund shares redeemed................................................................ 714
Accrued fees to affiliates (Note 4)................................................. 392
Other accrued expenses and payables................................................. 171
Forward foreign currency exchange contracts (cost $1,762)(Note 2)..................... 1,504
Foreign currency exchange spot contracts (cost $958)(Note 2).......................... 958
------------------
Total Liabilities....................................................................................... 8,643
--------------------
Net Assets.................................................................................................. $ 333,052
====================
Net Assets consist of:
Accumulated distributions in excess of net investment income................................................ $ (862)
Accumulated net realized gain (loss)........................................................................ (13,576)
Unrealized appreciation (depreciation) on:
Investments............................................................................................... (3,894)
Foreign currency-related transactions..................................................................... (46)
Shares of beneficial interest............................................................................... 283
Additional paid-in capital.................................................................................. 351,147
--------------------
Net Assets.................................................................................................. $ 333,052
====================
Net Asset Value, offering and redemption price per share:
($333,051,657 divided by 28,254,105 shares of $.01 par value
shares of beneficial interest outstanding).............................................................. $ 11.79
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
24 Emerging Markets Fund Specialty Funds
<PAGE>
Emerging Markets Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
Investment Income:
Dividends.......................................................................................... $ 7,455
Dividends from Money Market Fund (Note 5).......................................................... 1,657
Interest........................................................................................... 139
Less foreign taxes withheld........................................................................ (509)
--------------------
Total Investment Income....................................................................... 8,742
Expenses (Notes 2 and 4):
Management fees............................................................. $ 4,167
Custodian fees.............................................................. 894
Transfer agent fees......................................................... 447
Bookkeeping service fees.................................................... 36
Professional fees........................................................... 33
Registration fees........................................................... 77
Trustees' fees.............................................................. 4
Amortization of deferred organization expenses.............................. 7
Miscellaneous............................................................... 47
------------------
Total Expenses................................................................................ 5,712
--------------------
Net investment income................................................................................ 3,030
--------------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments................................................................. (4,274)
Foreign currency-related transactions....................................... (564) (4,838)
------------------
Net change in unrealized appreciation or depreciation of:
Investments................................................................. (18,113)
Foreign currency-related transactions....................................... (9) (18,122)
------------------ --------------------
Net gain (loss) on investments....................................................................... (22,960)
--------------------
Net increase (decrease) in net assets resulting from operations...................................... $ (19,930)
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Emerging Markets Fund 25
<PAGE>
Emerging Markets Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
------------------ -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income.............................................................. $ 3,030 $ 1,770
Net realized gain (loss)........................................................... (4,838) 831
Net change in unrealized appreciation or depreciation.............................. (18,122) 20,295
------------------ -----------------
Net increase (decrease) in net assets resulting from operations................. (19,930) 22,896
------------------ -----------------
From Distributions to Shareholders:
Net investment income.............................................................. (1,176) (1,543)
In excess of net investment income................................................. (2,439) (1,918)
------------------ -----------------
Total Distributions to Shareholders............................................. (3,615) (3,461)
------------------ -----------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6)........ 85,107 79,382
------------------ -----------------
Total Net Increase (Decrease) in Net Assets............................................ 61,562 98,817
Net Assets
Beginning of period................................................................ 271,490 172,673
------------------ -----------------
End of period (including accumulated distributions in excess of
net investment income of $862 and $1,854, respectively).......................... $ 333,052 $ 271,490
================== =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
26 Emerging Markets Fund Specialty Funds
<PAGE>
Emerging Markets Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993*
-------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........................................... $ 12.35 $ 11.16 $ 12.25 $ 13.90 $ 10.00
-------- ------- ------- ------- --------
Income From Investment Operations:
Net investment income...................................................... .14 .10 .11 .15 .07
Net realized and unrealized gain (loss) on investments..................... (.56) 1.26 (1.12) (1.24) 4.09
-------- -------- ------- ------ --------
Total Income From Investment Operations................................. (.42) 1.36 (1.01) (1.09) 4.16
-------- -------- ------- ------ --------
Less Distributions:
Net investment income...................................................... (.05) (.08) (.03) (.10) (.07)
In excess of net investment income......................................... (.09) (.09) (.02) (.10) (.01)
Net realized gain on investments........................................... -- -- -- (.31) (.18)
In excess of net realized gain on investments.............................. -- -- (.03) (.05) --
-------- -------- ------- ------ --------
Total Distributions..................................................... (.14) (.17) (.08) (.56) (.26)
-------- -------- ------- ------ --------
Net Asset Value, End of Period................................................. $ 11.79 $ 12.35 $ 11.16 $ 12.25 $ 13.90
======== ======== ======== ======= =======
Total Return (%)(a)(c)......................................................... (3.45) 12.26 (8.21) (5.83) 41.83
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) 333,052 271,490 172,673 127,271 65,457
Ratios to average net assets (%)(b)(c):
Operating expenses, net................................................. 1.64 1.71 1.75 .80 .80
Operating expenses, gross............................................... 1.64 1.72 1.80 .83 1.60
Net investment income................................................... .87 .77 .88 1.10 1.33
Portfolio turnover rate (%)(b)............................................. 50.60 34.62 71.16 57.47 89.99
Average commission rate paid per share
of security ($ omitted)(d)............................................... .0012 .0007 N/A N/A N/A
</TABLE>
* For the period January 29, 1993 (commencement of operations) to
December 31, 1993.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1993, are annualized.
(c) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees. See
Note 4.
(d) In certain foreign markets the relationship between the translated U.S.
dollar price per share and commission paid per share may vary from that of
domestic markets.
Specialty Funds Emerging Markets Fund 27
<PAGE>
Equity T Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To provide capital growth while minimizing the impact of taxes on
investment returns.
Invests in: U.S. Equity Securities.
Strategy: The Fund focuses on superior stock selection in a risk-controlled
portfolio while minimizing the impact of taxes by explicitly integrating the tax
implications of portfolio activities on after-tax returns.
<TABLE>
<CAPTION>
PERFORMANCE CHART
Dates Equity T S&P 500(R) **
----------- -------- -------------
<S> <C> <C>
Inception * $10,000 $10,000
1996 $10,642 $10,551
1997 $14,019 $14,073
</TABLE>
<TABLE>
<CAPTION>
Equity T Fund Standard & Poor's(R)500 Composite Stock Price Index
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
------------- --------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
1 Year $ 13,173 31.73% 1 Year $ 13,338 33.38%
Inception $ 14,088 31.31%(S) Inception $ 14,240 32.41%(S)
</TABLE>
* The Fund commenced operations on October 7, 1996. Index comparison began
November 1, 1996.
** The Standard & Poor's(R) 500 Composite stock Index is composed of 500
common stocks which are chosen by standard and Poor's Corporation to best
capture the price performance of a large cross--section of the US publicly
traded stock market. The Index is structured to approximate the general
distribution of industries in the US economy.
(S) Annualized.
28 Equity T. Fund Specialty Funds
<PAGE>
Equity T Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ending December 31, 1997, the Equity T Fund reflected a total
return of 31.7% as compared to the S&P 500 Index gain of 33.4%. The Fund trailed
the Index primarily due to the impact of several underperforming securities, as
well as general weakness among stocks of companies with less predictable
earnings. Taxable capital gains were negligible for the year relative to other
mutual funds.
Portfolio Highlights
For the third consecutive year, the stock market favored the large
capitalization stocks over midcap and small cap alternatives. The market also
proved to be dominated by more defensive sectors, such as consistent
growth-oriented shares of health care and consumer staples companies, and
interest-rate sensitive financial services and utilities companies.
While many growth and income funds trailed the index due to the market's
rotation to defensive sectors, Equity T's limited economic sector deviations
from the index helped limit the effects of performance disparities versus the
benchmark. However, the Fund's midcap exposure did have a negative impact, as
performance was also impacted by its overweightings in several underperforming
technology companies late in the year. Positions in Oracle and Intel were two of
the Fund's larger underperforming technology holdings, both victims of negative
earnings news. With a strong dollar and weakening markets in Asia, it appeared
to be a good decision to avoid large US multinationals. However, with the
exception of third quarter, multinational consumer products companies such as
Coca Cola, Proctor & Gamble, and GE, outperformed. Unfortunately, the Fund was
persistently underweighted in the sector.
Top Ten Equity Holdings
(as a percent of Total Investments) December 31, 1997
Philip Morris Cos., Inc. 2.7%
Exxon Corp. 2.4
Proctor & Gamble Co. 1.8
Bristol-Myers Squibb Co. 1.6
Intel Corp. 1.5
Royal Dutch Petroleum Co. 1.4
GTE Corp. 1.4
First Union Corp. 1.4
International Business Machines Corp. 1.3
General Electric Corp. 1.3
Portfolio Characteristics
December 31, 1997
Current P/E Ratio 21.9%
Portfolio Price/Book Ratio 3.88x
Market Capitalization - $-Weighted Average 47.88 Bil
Number of Holdings 239
Money Manager Style
J.P. Morgan Investment Management, Inc. Market-Oriented
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Specialty Funds Equity T. Fund 29
<PAGE>
Equity T Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
<S>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Common Stocks - 93.4%
Auto and Transportation - 3.3%
Burlington Northern, Inc. 1,900 $ 177
Chrysler Corp. 5,600 197
Consolidated Freightways Corp. (a) 250 3
CSX Corp. 5,500 297
Eaton Corp. 100 9
Ford Motor Co. 8,600 419
General Motors Corp. 800 49
Goodyear Tire & Rubber Co. 12,700 807
Norfolk Southern Corp. 21,600 666
Southwest Airlines Co. 8,850 218
Union Pacific Corp. 10,900 681
Wisconsin Central Transportation Corp. (a) 1,900 44
--------
3,567
--------
Consumer Discretionary - 7.8%
AutoZone Inc. (a) 4,200 122
Best Buy Co. (a) 4,100 151
Black & Decker Corp. 500 20
Choice Hotels International, Inc. (a) 300 5
Circuit City Stores, Inc. 10,600 377
Corporate Express, Inc. (a) 14,800 191
Dayton Hudson Corp. 6,900 466
Dillard's, Inc. Class A 9,700 342
Disney (Walt) Co. 900 89
Donnelley (R.R.) & Sons Co. 4,300 160
Extended Stay America, Inc. (a) 1,700 21
Federated Department Stores, Inc. (a) 9,700 418
Fruit of the Loom, Inc. Class A (a) 11,300 290
General Nutrition Companies, Inc. (a) 100 3
Harrah's Entertainment, Inc. (a) 13,900 262
Hasbro, Inc. 900 28
Hilton Hotels Corp. 1,100 33
Home Depot, Inc. (The) 500 29
International Game Technology 10,000 253
ITT Corp. (a) 800 66
JC Penney & Co., Inc. 800 48
Mattel, Inc. 7,700 287
McDonald's Corp. 500 24
Mirage Resorts, Inc. (a) 14,500 330
Nine West Group, Inc. (a) 5,400 140
Reebok International, Ltd. (a) 1,000 29
Sears Roebuck & Co. 16,100 729
Service Corp. International 12,800 473
Sunburst Hospitality Corp. (a) 100 1
Time Warner, Inc. 14,125 875
TJX Cos., Inc. 4,900 168
Toys "R" Us,Inc. (a) 11,700 368
Tricon Global Restaurants, Inc. (a) 2,140 62
Viacom, Inc. Class B (a) 3,800 157
Wal-Mart Stores, Inc. 22,100 871
Waste Management, Inc. 16,400 451
Whirlpool Corp. 4,300 237
--------
8,576
--------
Consumer Staples - 12.0%
Albertson's, Inc. 1,600 76
Anheuser-Busch Cos., Inc. 17,800 783
Campbell Soup Co. 300 17
Coca-Cola Co. (The) 21,700 1,446
Colgate-Palmolive Co. 400 29
CPC International, Inc. 1,000 108
General Mills, Inc. 4,600 329
Gillette Co. 11,300 1,135
Heinz (H.J.) Co. 1,400 72
Kellogg Co. 9,500 471
Kroger Co. (a) 13,000 480
PepsiCo. Inc. 31,800 1,159
Philip Morris Cos., Inc. 66,800 3,027
Procter & Gamble Co. 25,500 2,035
Ralston-Purina Group 5,600 520
Safeway, Inc. (a) 3,000 190
Sara Lee Corp. 1,800 102
Seagram Co., Ltd. 11,100 359
Unilever NV 13,600 849
--------
13,187
--------
Financial Services - 17.9%
AEGON NV 2,804 251
AMBAC, Inc. 2,600 120
American Express Co. 9,700 866
American General Corp. 200 11
American International Group, Inc. 10,800 1,175
Banc One Corp. 14,213 772
BankAmerica Corp. 2,500 183
Barnett Banks, Inc. 1,100 79
Bear Steams Cos., Inc. 1,770 84
Beneficial Corp. 5,100 424
Capital One Financial Corp. 300 16
Charter One Financial, Inc. 1,785 112
Chase Manhattan Corp. 13,300 1,456
Chubb Corp. (The) 200 15
CIGNA Corp. 5,800 1,004
Citicorp 3,200 405
ContiFinancial Corp. (a) 2,300 58
CoreStates Financial Corp. 900 72
</TABLE>
30 Equity T Fund Specialty Funds
<PAGE>
Equity T Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Crestar Financial Corp. 668 $ 38
Dime Bancorp, Inc. 2,600 78
Edwards (A.G.), Inc. 5,700 227
Federal Home Loan Mortgage Corp. 5,600 235
Federal National Mortgage Association 22,500 1,284
Financial Security Assurance Holdings, Ltd. 1,700 82
First Chicago NBD Corp. 8,300 693
First Data Corp. 2,000 59
First Union Corp. 31,260 1,602
Firstar Corp. 1,500 64
Fleet Financial Group, Inc. 4,800 360
Fremont General Corp. 2,200 120
General Re Corp. 200 42
Green Tree Financial Corp. 3,900 102
Hartford Financial Services Group, Inc. (The) 6,200 580
Household International Corp. 3,200 408
Lincoln National Corp. 500 39
Marsh & McLennan Cos., Inc. 9,800 731
MBIA, Inc. 4,400 294
Morgan Stanley, Dean Witter, Discover and Co. 9,740 576
NationsBank Corp. 11,732 713
Ocwen Financial Corp. (a) 5,100 130
Pacific Century Financial Corp. 7,000 173
PMI Group, Inc. (The) 2,500 181
Providian Financial Corp. 6,400 289
Republic New York Corp. 1,000 114
SouthTrust Corp. 5,200 329
TCF Financial Corp. 4,600 156
Transamerica Financial Corp. 2,800 298
Travelers, Inc. 21,817 1,175
UNUM Corp. 4,100 223
Washington Federal, Inc. 13,850 435
Washington Mutual, Inc. 8,530 544
Wells Fargo & Co. 600 204
--------
19,681
--------
Health Care - 9.6%
ALZA Corp. (a) 17,400 554
American Home Products Corp. 8,600 658
Bausch & Lomb, Inc. 7,300 289
Bristol-Myers Squibb Co. 19,100 1,807
Columbia/HCA Healthcare Corp. 600 18
Crescenco Pharmaceuticals Corp. Class A (a) 870 10
Forest Labs, Inc. (a) 11,700 577
Health Care & Retirement Corp. (a) 3,400 137
Humana, Inc. (a) 28,000 581
Johnson & Johnson 9,700 639
Lilly (Eli) & Co. 1,800 125
Merck & Co., Inc. 13,800 1,466
Pfizer, Inc. 15,300 1,141
Schering-Plough Corp. 10,100 627
Tenet Healthcare Corp. (a) 5,900 195
United Healthcare Corp. 7,900 394
Warner-Lambert Co. 10,600 1,314
--------
10,532
--------
Integrated Oils - 7.0%
Amoco Corp. 100 9
Ashland, Inc. 100 5
Atlantic Richfield Co. 10,400 833
Enron Corp. 20,500 852
Exxon Corp. 44,800 2,741
Mobil Corp. 11,500 830
Royal Dutch Petroleum Co. 30,400 1,647
Tenneco, Inc. 15,500 612
Texaco, Inc. 3,500 190
--------
7,719
--------
Materials and Processing - 5.9%
Albemarle Corp. 7,300 174
Allegheny Teldyne, Inc. 3,900 101
Aluminum Co. of America 2,300 162
Boise Cascade Corp. 6,200 188
Crompton & Knowles Corp. 8,300 220
Cytec Industries, Inc. (a) 5,700 268
Dow Chemical Co. 14,500 1,472
du Pont (E.I.) de Nemours & Co. 16,300 979
Kimberly-Clark Corp. 8,700 429
Mead Corp. 5,000 140
Oregon Metallurgical Corp. (a) 8,400 280
Owens-Corning Fiberglas Corp. 7,500 256
Solutia, Inc. 2,700 71
Temple-Inland, Inc. 7,500 392
Tyco International, Ltd. 17,508 789
Union Carbide Corp. 12,800 550
--------
6,471
--------
Other Energy - 2.1%
Baker Hughes, Inc. 3,300 144
Cooper Cameron Corp. (a) 4,600 281
Diamond Offshore Drilling, Inc. 6,200 298
El Paso Natural Gas Co. 5,100 339
</TABLE>
Specialty Funds Equity T Fund 31
<PAGE>
Equity T Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Number Market
of Value
Shares (000)
-------- --------
<S> <C> <C>
Falcon Drilling Co., Inc. (a) 3,600 $ 126
Noble Drilling Corp. (a) 500 15
Schlumberger, Ltd. 7,000 564
Smith International, Inc. (a) 200 12
Tosco Corp. 9,600 363
Valero Energy Corp. 5,000 157
--------
2,299
--------
Producer Durables - 6.6%
AlliedSignal, Inc. 20,400 794
Applied Materials, Inc. (a) 4,800 144
Boeing Co. 18,860 923
Boston Scientific Corp. (a) 1,000 46
Caterpillar, Inc. 200 10
Coltec Industries, Inc. (a) 5,500 128
Emerson Electric Co. 10,300 581
General Electric Co. 20,100 1,475
Grainger (W.W.), Inc. 5,900 573
ITT Industries, Inc. 8,500 267
Johnson Controls, Inc. 10,900 520
Lockheed Martin Corp. 1,000 99
Northrop Grumman Corp. 300 35
Perkin-Elmer Corp. 11,200 796
Raychem Corp. 2,000 85
Raytheon Co. Class A 51 3
Rockwell International Corp. 1,000 52
Xerox Corp. 10,200 753
--------
7,284
--------
Technology - 10.9%
Bay Networks, Inc. (a) 3,800 97
Cisco Systems, Inc. (a) 14,350 800
COMPAQ Computer Corp. 9,550 539
Computer Associates International, Inc. 2,700 143
Cooper Industries, Inc. 7,200 353
Dell Computer Corp. (a) 2,900 244
Electronic Data Systems Corp. 700 30
EMC Corp. (a) 24,600 675
General Dynamics Corp. 400 35
Harris Corp. 10,600 486
Hewlett-Packard Co. 400 25
Intel Corp. 23,700 1,663
International Business Machines Corp. 14,500 1,516
Lucent Technologies, Inc. 2,900 232
Microsoft Corp. (a) 8,800 1,137
Motorola, Inc. 11,500 656
National Semiconductor Corp. (a) 8,300 215
NCR Corp. (a) 62 2
Newport News Shipbuilding, Inc. 60 2
Oracle Systems Corp. (a) 59,700 1,328
Quantum Corp. (a) 13,200 265
Sun Microsystems, Inc. (a) 20,500 817
Symbol Technologies, Inc. 2,300 87
Texas Instruments, Inc. 13,700 617
--------
11,964
--------
Utilities - 10.3%
Airtouch Communications, Inc. (a) 1,400 58
AT&T Corp. 5,900 361
Bell Atlantic Corp. 6,232 567
BellSouth Corp. 200 11
Dominion Resources, Inc. 4,000 170
DTE Energy Co. 400 14
Duke Power Co. 7,506 416
Entergy Corp. 11,900 356
GTE Corp. 30,700 1,604
Illinova Corp. 7,200 194
MCI Communications Corp. 18,000 771
New England Electric System 500 21
Northern States Power Co. 3,700 216
PG&E Corp. 1,717 52
SBC Communications, Inc. 16,100 1,179
Southern Co. 41,900 1,084
Sprint Corp. 23,200 1,360
Tele-Communications, Inc. Class A (a) 19,086 532
Tele-Communications TCI Ventures Group
Series A New (a) 10,914 309
Texas Utilities Co. 1,600 68
U.S. West Media Group (a) 16,500 476
Unicom Corp. 4,800 148
Western Resources, Inc. 200 9
Wisconsin Energy Corp. 1,000 29
WorldCom, Inc. (a) 40,710 1,231
--------
11,236
--------
Total Common Stocks
(cost $88,255) 102,516
--------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount
(000)
---------
<S> <C> <C>
Short-Term Investments - 10.5%
Frank Russell Investment Company
Money Market Fund, due on demand (b) $ 11,377 11,377
</TABLE>
32 Equity T Fund Specialty Funds
<PAGE>
Equity T Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- --------
<S> <C> <C>
United States Treasury Notes
5.125% due 04/30/98 (c) $ 150 $ 150
--------
Total Short-Term Investments
(cost $11,527) 11,527
--------
Total Investments
(identified cost $99,782)(d) - 103.9% 114,043
Other Assets and Liabilities,
Net - (3.9%) (4,308)
--------
Net Assets - 100.0% $109,735
========
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Number Appreciation
of (Depreciation)
Contracts (000)
--------- --------------
<S> <C> <C>
Futures Contracts
(Notes 2 and 3)
S&P 500 Index Futures Contracts
expiration date 03/98 10 $ 31
--------------
Total Unrealized Appreciation
(Depreciation) on Open Futures
Contracts Purchased ((S)) $ 31
==============
</TABLE>
((S)) At December 31, 1997, United States Treasury Notes valued at $150 were
held as collateral by the custodian in connection with futures contracts
purchased by the Fund.
(a) Nonincome-producing security.
(b) At cost, which approximates market.
(c) Held as collateral by the custodian in connection with futures contracts
purchased.
(d) See Note 2 for federal income tax information.
Abbreviations:
NV - Nonvoting
The accompanying notes are an integral part of the financial statements.
Specialty Funds Equity T Fund 33
<PAGE>
Equity T Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
Assets
Investments at market (identified cost $99,782)(Note 2)....................................................... $ 114,043
Receivables:
Dividends and interest...................................................................................... 160
Fund shares sold............................................................................................ 441
Prepaid expenses.............................................................................................. 3
Deferred organization expenses (Note 2)....................................................................... 18
--------------------
Total Assets........................................................................................... 114,665
Liabilities
Payables:
Investments purchased............................................................... $ 4,818
Accrued fees to affiliates (Note 4)................................................. 69
Other accrued expenses.............................................................. 43
------------------
Total Liabilities...................................................................................... 4,930
--------------------
Net Assets.................................................................................................... $ 109,735
====================
Net Assets consist of:
Undistributed net investment income........................................................................... $ 20
Accumulated net realized gain (loss).......................................................................... 39
Unrealized appreciation (depreciation) on:
Investments................................................................................................. 14,261
Futures contracts........................................................................................... 31
Shares of beneficial interest................................................................................. 79
Additional paid-in capital.................................................................................... 95,305
--------------------
Net Assets.................................................................................................... $ 109,735
====================
Net Asset Value, offering and redemption price per share:
($109,735,041 divided by 7,896,943 shares of $.01 par value
shares of beneficial interest outstanding)................................................................ $ 13.90
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
34 Equity T Fund Specialty Funds
<PAGE>
Equity T Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
Investment Income:
Dividends............................................................................................... $ 897
Dividends from Money Market Fund (Note 5)............................................................... 173
Interest................................................................................................ 7
--------------------
Total Investment Income.............................................................................. 1,077
Expenses (Notes 2 and 4):
Management fees.................................................................. $ 421
Custodian fees................................................................... 70
Transfer agent fees.............................................................. 26
Bookkeeping service fees......................................................... 3
Professional fees................................................................ 12
Registration fees................................................................ 63
Trustees' fees................................................................... 4
Amortization of deferred organization expenses................................... 5
Miscellaneous.................................................................... 3
------------------
Expenses before reductions....................................................... 607
Expense reductions (Note 4)...................................................... (46)
------------------
Total Expenses....................................................................................... 561
--------------------
Net investment income....................................................................................... 516
--------------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from:
Investments...................................................................... (287)
Futures contracts................................................................ 352 65
------------------
Net change in unrealized appreciation or depreciation of:
Investments...................................................................... 13,563
Futures contracts................................................................ 31 13,594
------------------ --------------------
Net gain (loss) on investments.............................................................................. 13,659
--------------------
Net increase (decrease) in net assets resulting from operations............................................. $ 14,175
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Equity T Fund 35
<PAGE>
Equity T Fund
Statements of Changes in Net Assets
For the Year or Period Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996*
------------- ------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income ......................................................... $ 516 $ 46
Net realized gain (loss) ...................................................... 65 (26)
Net change in unrealized appreciation or depreciation ......................... 13,594 697
------------- ------------
Net increase (decrease) in net assets resulting from operations ............ 14,175 717
------------- ------------
From Distributions to Shareholders:
Net investment income ......................................................... (496) (46)
In excess of net investment income ............................................ -- (2)
------------- ------------
Total Distributions to Shareholders ........................................ (496) (48)
------------- ------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6) ... 76,125 19,262
------------- ------------
Total Net Increase (Decrease) in Net Assets ....................................... 89,804 19,931
------------- ------------
Net Assets
Beginning of period ........................................................... 19,931 --
------------- ------------
End of period (including undistributed net investment income of
$20 at December 31, 1997) .................................................. $ 109,735 $ 19,931
============= ============
</TABLE>
* For the period October 7, 1996 (commencement of operations) to December 31,
1996.
The accompanying notes are an integral part of the financial statements.
36 Equity T Fund Specialty Funds
<PAGE>
Equity T Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996*
-------------- --------------
<S> <C> <C>
Net Asset Value, Beginning of Period ............................................. $ 10.61 $ 10.00
-------------- --------------
Income From Investment Operations:
Net investment income .......................................................... .08 .03
Net realized and unrealized gain (loss) on investments.......................... 3.28 .61
-------------- --------------
Total Income From Investment Operations ...................................... 3.36 .64
-------------- --------------
Less Distributions:
Net investment income .......................................................... (.07) (.03)
-------------- --------------
Net Asset Value, End of Period ................................................... $ 13.90 $ 10.61
============== ==============
Total Return (%)(a)(c) ........................................................... 31.73 6.10
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) ....................................... 109,735 19,931
Ratios to average net assets (%)(b)(c):
Operating expenses, net ...................................................... 1.00 1.00
Operating expenses, gross .................................................... 1.08 2.83
Net investment income ........................................................ .92 1.62
Portfolio turnover rate (%)(b) ................................................. 39.23 8.86
Average commission rate paid per share
of security ($ omitted) ...................................................... .0271 .0301
</TABLE>
* For the period October 7, 1996 (commencement of operations) to
December 31, 1996.
(a) Periods less than one year are not annualized.
(b) The ratios for the period October 7, 1996 (commencement of operations) to
December 31, 1996 are annualized.
(c) Fund performance, operating expenses, and net investment income are reported
net of investment management fees paid to the Manager or money managers, but
gross of any investment services fees. See Note 4.
Specialty Funds Equity T. Fund 37
<PAGE>
Limited Volatility Tax Free Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To provide a high level of federal tax-exempt income consistent with
the preservation of capital.
Invests in: Municipal obligations maturing in seven years or less from the date
of acquisition.
Strategy: The Fund concentrates on investment opportunities in the tax-free,
investment grade municipal debt securities market.
[LINE GRAPH APPEARS HERE]
Growth of a $10,000 Investment
<TABLE>
<CAPTION>
Limited Volatility SB 3-Month T-Bill** Lipper(C) Short
Dates Tax Free Muni Debt++
- ----- ------------------ ------------------- ---------------
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1998 $10,523 $10,676 $10,599
1989 $11,254 $11,599 $11,349
1990 $11,943 $12,516 $12,074
1991 $12,856 $13,235 $13,050
1992 $13,608 $13,712 $13,886
1993 $14,502 $14,134 $14,746
1994 $14,425 $14,730 $14,716
1995 $15,552 $15,575 $15,798
1996 $16,029 $16,393 $16,387
1997 $16,818 $17,252 $17,145
</TABLE>
Limited Volatility Tax Free Fund
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
----------------- ------------- --------------
<S> <C> <C>
1 Year $ 10,492 4.92%
5 Years $ 12,360 4.33%(S)
10 Years $ 16,818 5.34%(S)
</TABLE>
Salomon Brothers 3-Month Treasury Bill Index
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
---------------- --------------- --------------
<S> <C> <C>
1 Year $ 10,524 5.24%
5 Years $ 12,581 4.69%(S)
10 Years $ 17,252 5.92%(S)
</TABLE>
Lipper(C) Short Municipal Debt Funds Average
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
---------------- --------------- --------------
<S> <C> <C>
1 Year $ 10,463 4.63%
5 Years $ 12,347 4.31%(S)
10 Years $ 17,145 5.54%(S)
</TABLE>
* Assumes initial investment on January 1, 1988.
** Salomon Brothers 3-Month Treasury Bill Index consists of equal dollar
amounts of three-month Treasury bills purchased at the beginning of each of
three consecutive months. As each bill matures, all proceeds are rolled over
or reinvested in a new three-month bill. The income used to calculate the
monthly return is derived by subtracting the original amount invested from
the maturity value.
++ Lipper(C) Short Municipal Debt Funds Average is the average total return for
the universe of funds within the Short Municipal Debt Funds investment
objective. The total return for the funds reflects adjustments for income
dividends and capital gains distributions reinvested as of the ex-dividend
dates.
(S) Annualized.
38 Limited Volatility Tax Free Fund Specialty Funds
<PAGE>
Limited Volatility Tax Free Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997 the Limited Volatility Tax Free Fund
reflected a total return of 4.9%, as compared to the Lipper Short Municipal Debt
Funds Benchmark results of 4.6%. The Fund outperformed the benchmark primarily
due to duration-related factors. Its longer-than-index duration during the year
boosted returns as interest rates fell.
Portfolio Highlights
Fixed income markets were extremely volatile again in 1997. Fed policy,
uncertain economic prospects for the US, especially following the crises in
Asia, made it difficult to find clear opportunities in the market. Rates fell as
economic growth continued to be strong, but surprisingly non-inflationary. The
credit quality of municipal bonds continued to improve in step with local
economies. Although discussions of tax reform continued to test investors, yield
spreads on municipal credits helped continue the trend of narrowing credit yield
spreads. However, a general trend of rising spreads relative to treasuries
reflected the market's preoccupation with risk of any kind.
Top Ten Issuing States
(as a percent of Total Investments) December 31, 1997
New York 12.3%
Texas 9.7
Washington 9.2
Illinois 7.1
Utah 5.5
California 4.2
Alaska 4.1
Hawaii 4.1
New Jersey 3.8
Ohio 3.2
Portfolio Characteristics
December 31, 1997
Weighted Average Quality Diversification AAA
Weighted Average Years-to-Maturity 3.6 Years
Weighted Average Duration 3.1 Years
Current Yield (SEC 30-day standardized) 3.5%
Number of Issues 123
Number of Issuers 96
Money Manager
MFS Asset Management, Inc.
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Specialty Funds Limited Volatility Tax Free Fund 39
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Principal Date Market
Amount of Value
(000) Coupon Maturity (000)
--------- ------ -------- --------
<S> <C> <C> <C> <C>
Municipal Bonds - 103.0%
Alabama - 1.0%
Huntsville, Alabama, Health Care Authority Revenue, Series A (a) $ 335 4.500% 06/01/01 $ 339
Jefferson County, Alabama Sewer Revenue, Series A (a) 500 5.000 02/01/05 521
--------
860
--------
Alaska - 4.2%
Alaska State Housing Finance Corp. Revenue, Series A-I (a) 650 4.550 12/01/02 655
North Slope Borough, Alaska, Zero Coupon, Series A, General Obligation (a) 500 0.000 06/30/99 470
North Slope Borough, Alaska, Zero Coupon, Series A, General Obligation (a) 1,385 0.000 06/30/00 1,246
North Slope Borough, Alaska, Zero Coupon, Series B, General Obligation (a) 375 0.000 06/30/99 352
North Slope Borough, Alaska, Zero Coupon, Series B, General Obligation (a) 900 0.000 01/01/01 791
--------
3,514
--------
Arizona - 1.9%
Arizona State Transportation Board, Series A, Special Obligations
Revenue (pre-refunded 07/01/01) 1,425 6.450 07/01/06 1,553
--------
1,553
--------
Arkansas - 0.3%
Arkansas State, Zero Coupon, Series B, General Obligation 300 0.000 06/01/03 236
--------
236
--------
California - 4.3%
California Pollution Control Financing Authority, Pollution Control Revenue,
Series A 100 4.900(b) 10/01/08 100
California State Public Works Board Lease Revenue, Series C 675 5.000 10/01/02 699
California, State of, General Obligation (a) 850 6.100 11/01/01 916
Los Angeles County, California, California Transportation
Participation Certificate, Series B, Tax Revenue 760 5.900 07/01/00 794
Sacramento, California, Municipal Utility District,
Series Z, Utility Revenue (a) 1,000 6.000 07/01/01 1,067
--------
3,576
--------
Connecticut - 2.8%
Bridgeport, Connecticut, Series A, General Obligation (a) 1,150 5.250 09/01/99 1,174
Connecticut State Unemployment, Series A, Compensation Revenue (a) 1,125 5.000 11/15/99 1,147
--------
2,321
--------
District of Columbia - 0.6%
District of Columbia, Series A, General Obligation (a)(d) 500 5.500 04/01/01 521
--------
521
--------
</TABLE>
40 Limited Volatility Tax Free Fund Specialty Funds
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date Market
Amount of Value
(000) Coupon Maturity (000)
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
Florida - 1.8%
Hillsborough County, Florida, Zero Coupon, Series A,
Utility Refunding Revenue (a) $ 1,000 0.000% 8/1/99 $ 940
Orange County, Florida, Series A, School Board Participation Certificate (a) 575 4.700 8/1/01 588
---------
1,528
---------
Georgia - 2.4%
Atlanta, Georgia, Airport Facilities Revenue (a) 500 5.500 01/01/01 521
Burke County, Georgia, Development Authority, Pollution Control Revenue,
Series 4 100 5.000 09/01/25 100
Chatham County, Georgia, Series A, Hospital Authority Revenue (a) 500 5.000 01/01/00 510
Georgia Municipal Electric Authority, General Resolution Revenue, Series A (a) 850 5.000 01/01/02 876
---------
2,007
---------
Hawaii - 4.2%
Hawaii State General Obligation, Series CP (a) 600 5.000 10/01/02 621
Hawaii State Housing Financial & Development Corp.,
Single Family Management Purchasing Revenue 1,000 4.450 07/01/03 1,016
Honolulu, Hawaii, City & County, Series A, General Obligation 650 5.000 11/01/02 673
Honolulu, Hawaii, City & County, Series B, General Obligation 1,150 5.000 10/01/02 1,190
---------
3,500
---------
Illinois - 7.4%
Bolingbrook, Illinois, Parks District, Zero Coupon, General Obligation (a) 1,230 0.000 01/01/05 891
Chicago, Illinois, Series C, General Obligation (a) 1,500 6.250 10/31/01 1,612
Illinois Health Facilities Authority Revenue (a) 500 5.000 08/01/03 517
Illinois Health Facilities Authority Revenue (a) 270 5.250 08/15/03 282
Illinois Health Facilities Authority Revenue (a) 500 5.000 08/15/04 516
Illinois Health Facilities Authority Revenue, Series A (a) 250 4.800 10/01/99 253
Illinois Health Facilities Authority Revenue, Series A (a) 500 5.000 10/01/00 511
Illinois Health Facilities Authority Revenue, Series A (a) 1,000 4.550 07/01/01 1,013
Illinois State, General Obligation (a) 500 5.375 05/01/01 521
---------
6,116
---------
Indiana - 1.2%
Indiana Health Facilities Financing Authority, Hospital Revenue, Series A (a) 500 5.000 11/01/02 516
Monroe County, Industrial Hospital Authority Revenue (a) 500 4.500 05/01/03 504
---------
1,020
---------
Kentucky - 1.3%
McCracken County, Kentucky, Hospital Revenue, Series A,
Health Care Revenue (a) 1,000 5.700 11/01/00 1,043
---------
1,043
---------
</TABLE>
Specialty Funds Limited Volatility Tax Free Fund 41
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date Market
Amount of Value
(000) Coupon Maturity (000)
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Louisiana - 2.1%
De Soto Parish, Louisiana, Pollution Control Revenue, Series A $ 650 5.050% 12/01/02 $ 679
Louisiana Public Facilities Authority Revenue, Health Care Revenue 500 5.500 10/15/99 513
Louisiana, State of, Series A, General Obligation (a) 500 6.000 08/01/00 524
--------
1,716
--------
Maryland - 1.9%
Maryland State & Local Facilities Loan, Series 3, General Obligation 500 5.000 10/15/02 520
Maryland State, Stadium Authority Lease Revenue Convention
Center Expansion (a) 1,000 5.375 12/15/00 1,039
--------
1,559
--------
Massachusetts - 1.7%
Massachusetts State Health & Educational Facilities Authority Revenue,
Series B 500 4.550 01/01/21 505
Massachusetts State Health & Educational Facilities Authority Revenue,
Series D (a) 900 5.000(b) 01/01/35 900
--------
1,405
--------
Michigan - 2.8%
Jackson County, Michigan, Hospital Financial Authority Revenue (a) 300 4.375 06/01/02 302
Michigan Municipal Bond Authority Revenue, Series B,
State and Local Appropriations (a) 550 6.900 05/01/99 571
Michigan State Building Authority Revenue, Series I 375 5.400 10/01/03 396
Michigan State Hospital Finance Authority Revenue, Series A 500 5.000 07/01/02 515
Michigan State Hospital Finance Authority Revenue, Series S 500 5.500 08/15/00 518
--------
2,302
--------
Minnesota - 1.5%
Minnesota State Revenue, Series A (a) 500 5.000 06/30/99 508
Minnesota, State of, General Obligation 700 5.600 10/01/99 720
--------
1,228
--------
Mississippi - 1.7%
Jackson County, Mississippi, Pollution Control Revenue 900 5.000(b) 06/01/23 900
Perry County, Mississippi, Pollution Control Revenue 500 5.000(b) 03/01/02 500
--------
1,400
--------
Missouri - 0.1%
Kansas City, Missouri, Industrial Development Authority Hospital Revenue (a) 100 5.000(b) 10/15/14 100
--------
100
--------
</TABLE>
42 Limited Volatility Tax Free Fund Specialty Funds
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date Market
Amount of Value
(000) Coupon Maturity (000)
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
Nebraska - 1.2%
Douglas County, Nebraska, Hospital Authority No. 001 Revenue (a) $ 1,000 4.350% 09/01/01 $ 1,009
--------
1,009
--------
New Jersey - 3.9%
New Jersey State, Series E, General Obligation 500 5.500 07/15/02 529
New Jersey State Transportation Corporation Capital Grant Anticipation Notes,
Series A 1,000 5.000 09/01/00 1,018
New Jersey State Transportation Corporation Capital Grant Anticipation Notes,
Series A 670 4.900 09/01/01 686
Ocean County, New Jersey, Utilities Authority Waste Water Revenue 1,000 5.000 01/01/01 1,028
--------
3,261
--------
New Mexico - 1.4%
New Mexico, Mortgage Finance Authority Revenue, Series Al 1,100 6.200 01/01/01 1,142
--------
1,142
--------
New York - 12.7%
Metropolitan Transportation Authority, New York, Transit Facilities Revenue,
Series R (d) 650 5.000 07/01/03 660
Municipal Assistance Corp. New York, New York Revenue, Series E 1,000 4.700 07/01/02 1,024
Municipal Assistance Corp. New York, New York Revenue, Series L 500 4.500 07/01/02 508
New York City, New York, Series H, General Obligation 750 5.250 08/01/03 776
New York State Dormitory Authority Revenue 500 4.900 05/15/00 509
New York State Dormitory Authority Revenue 500 5.000 07/01/00 510
New York State Dormitory Authority Revenue (d) 450 5.000 04/01/03 461
New York State Dormitory Authority Revenue, Series A 375 6.000 02/15/03 403
New York State Dormitory Authority Revenue, Series A 375 6.000 08/15/04 408
New York State Dormitory Authority Revenue, Series 1 500 5.000 07/01/03 513
New York State Urban Development Corp. Revenue, Series 7 125 5.500 01/01/01 129
New York State, General Obligation 765 4.500 10/15/01 777
New York, New York, Series A-1, General Obligation 550 5.500 08/01/01 571
New York, New York, Series A, General Obligation 500 5.700 08/01/02 526
New York, New York, Series C, General Obligation 500 6.125 08/01/01 529
New York, New York, Series D, General Obligation 250 6.000 02/01/99 255
New York, New York, Series E, General Obligation 500 5.300 08/01/03 519
New York, New York, Series F, General Obligation 500 5.300 08/01/03 519
New York, New York, Series L, General Obligation 150 5.000 08/01/01 153
United Nations Development Corp., New York Revenue, Series B 250 4.450 07/01/01 251
United Nations Development Corp., New York Revenue, Series B 250 4.600 07/01/02 251
Wallkill, New York, General Obligation (a) 300 4.500 03/01/01 303
--------
10,555
--------
North Carolina - 0.6%
North Carolina Municipal Power Agency No. 1, Catawba Electric Revenue, Series A (a) 500 5.000 01/01/01 513
--------
513
--------
</TABLE>
Specialty Funds Limited Volatility Tax Free Fund 43
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date Market
Amount of Value
(000) Coupon Maturity (000)
--------- ------ -------- --------
<S> <C> <C> <C> <C>
Ohio - 3.3%
Cleveland, Ohio, City School District Revenue Anticipation Notes (a) $ 555 5.000% 06/01/00 $ 568
Cuyahoga County, Ohio, Hospital Revenue (a) 1,000 5.000 02/15/00 1,020
Lorain County, Ohio, Hospital Revenue 500 4.750 09/01/00 509
Ohio State Building Authority Revenue, State Facilities,
Administration Building Fund, Series A 600 5.250 10/01/03 631
--------
2,728
--------
Oklahoma - 0.4%
Stiliwater, Oklahoma, Series A, Medical Center Authority Revenue 300 5.550 05/15/01 309
--------
309
--------
Pennsylvania - 2.5%
Harrisburg, Pennsylvania, Zero Coupon, Series D, General Obligation (a) 815 0.000 03/15/04 621
Pennsylvania, State of, General Obligation 500 5.300 07/01/99 510
Philadelphia, Pennsylvania, Hospitals & Higher Education Facilities
Authority Revenue, Series A 500 5.000 05/15/02 515
Philadelphia, Pennsylvania, Zero Coupon, Water & Sewer Revenue (a) 500 0.000 10/01/02 408
--------
2,054
--------
Puerto Rico - 0.6%
Commonwealth of Puerto Rico, General Obligation 500 5.500 07/01/01 522
--------
522
--------
Rhode Island - 1.3%
Rhode Island Housing & Mortgage Finance Authority,
Series A, Housing Revenue (a) 1,000 5.150 07/01/01 1,026
--------
1,026
--------
South Carolina - 0.6%
Spartanburg County, South Carolina, Social Health Services, Inc.
Hospital Revenue (a) 500 4.400 04/15/01 505
--------
505
--------
Tennessee - 1.3%
Metropolitan Government, Nashville & Davidson County, Tennessee,
Health & Education Revenue, Series A (d) 615 5.250 05/01/01 634
White House Utility District, Tennessee, Robertson & Sumner Countys,
Zero Coupon, Waterworks Revenue (a) 650 0.000 01/01/05 474
--------
1,108
--------
</TABLE>
44 Limited Volatility Tax Free Fund Specialty Funds
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date Market
Amount of Value
(000) Coupon Maturity (000)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Texas - 10.0%
Abilene, Texas, Health Facilities Development Corp., Medical Center A,
Health Care Revenue (a) $ 500 5.100% 09/01/99 $ 509
Arlington, Texas, Independent School District, General Obligation 600 5.150 02/15/99 609
Denison, Texas, Hospital Authority Revenue 500 5.250 08/15/01 515
Houston, Texas, Series A, General Obligation 650 5.000 03/01/02 671
Houston, Texas, Series C, General Obligation 1,000 5.900 03/01/03 1,064
Irving, Texas, Independent School District, Zero Coupon, General Obligation 650 0.000 02/15/03 519
Lubbock, Texas, Health Facilities Development Corp. Revenue 100 5.000 07/01/13 100
San Antonio, Texas, General Obligation (d) 1,000 5.000 08/01/00 1,016
Stephenville, Texas, Independent School District, Zero Coupon,
General Obligation 830 0.000 02/15/04 633
Tarrant County, Texas, Health Facilities Development Corp. Systems Revenue,
Series A (a) 500 5.000 02/15/01 513
Texas, State of, Series C, General Obligation 1,500 5.000 04/01/99 1,522
University of Texas, University Revenues, Series A 605 5.000 08/15/03 628
---------
8,299
---------
Utah - 5.6%
Intermountain Power Agency, Series B, Utilities Revenue (a) 500 5.250 07/01/99 509
Intermountain Power Agency, Series B, Utilities Revenue (a) 500 7.200 07/01/99 518
Intermountain Power Agency, Series C, Power Supply Revenue 1,000 4.700 07/01/02 1,019
Intermountain Power Agency, Series C, Utilities Revenue (a) 1,250 5.500 07/01/99 1,278
Intermountain Power Agency, Series E, Utilities Revenue 500 5.250 07/01/01 519
Utah State Board of Regents Revenue 300 5.000 08/01/02 310
Utah State, Building Ownership Authority, Series A, Lease Revenue 500 5.500 05/15/00 517
---------
4,670
---------
Virginia - 1.5%
Virginia Public Building Authority Revenue, Staff and Local Appropriation 500 5.100 08/01/99 509
Virginia, State of, General Obligation 740 5.375 06/01/99 756
---------
1,265
---------
Washington - 9.5%
CDP King County III, Washington, Lease Revenue (a) 1,000 4.600 06/01/03 1,016
Washington State Health Care Facilities Authority Revenue, Series A 250 4.300 08/15/01 251
Washington State Public Power Supply System,
Nuclear Project No. 1 Revenue, Series B 500 5.000 07/01/00 510
Washington State Public Power Supply System,
Nuclear Project No. 2 Revenue, Series A 280 5.000 07/01/00 286
Washington State Public Power Supply System,
Nuclear Project No. 2 Revenue, Series A 1,500 5.450 07/01/00 1,545
Washington State Public Power Supply System,
Nuclear Project No. 2 Revenue, Series C 650 7.200 07/01/99 680
Washington State Public Power Supply System,
Nuclear Project No. 3 Revenue, Series A (d) 1,000 5.000 07/01/04 1,028
Washington, State of, Series C, General Obligation 2,000 5.500 07/01/99 2,047
Washington, State of, Series R, General Obligaion 500 5.000 07/01/99 508
---------
7,871
---------
</TABLE>
Specialty Funds Limited Volatility Tax Free Fund 45
<PAGE>
Limited Volatility Tax Free Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date Market
Amount of Value
(000) Coupon Maturity (000)
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Wyoming - 1.4%
Lincoln County, Wyoming, Pollution Control Revenue, Project C $ 300 5.100%(b) 11/01/14 $ 300
Uinta County, Wyoming, Pollution Control Revenue 700 5.000(b) 12/01/22 700
Uinta County, Wyoming, Pollution Control Revenue 200 5.000(b) 08/15/20 200
-------
1,200
-------
Total Investments
(identified cost $84,144)(c) - 103.0% 85,542
Other Assets and Liabilities, Net - (3.0%) (2,466)
-------
Net Assets - 100.0% $83,076
=======
</TABLE>
(a) Bond is insured by AMBAC, FGIC, or MBIA.
(b) Adjustable or floating rate security.
(c) See Note 2 for federal income tax information.
(d) Forward commitment. See Note 2.
Abbreviations:
AMBAC - AMBAC Indemnity Corporation
FGIC - Financial Guaranty Insurance Company
MBIA - Municipal Bond Investors Assurance
Quality Ratings as a % of Market Value
<TABLE>
<S> <C>
AAA 55%
AA 28
A 7
BBB 10
----
100%
====
</TABLE>
Economic Sector Emphasis as a % of Market Value
<TABLE>
<S> <C>
General Obligation 38%
Utility Revenue 16
State and Community Lease 12
Health Care Revenue 18
Refunded 2
Housing Revenue 5
University Revenue 2
Other 7
----
100%
====
</TABLE>
The accompanying notes are an integral part of the financial statements.
46 Limited Volatility Tax Free Fund Specialty Funds
<PAGE>
Limited Volatility Tax Free Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
Assets
Investments at market (identified cost $84,144)(Note 2)................................................ $ 85,542
Receivables:
Interest........................................................................................... 1,327
Fund shares sold................................................................................... 643
--------------------
Total Assets.................................................................................... 87,512
Liabilities
Payables:
Investments purchased (delayed settlement)(Note 2).......................... $ 4,342
Fund shares redeemed........................................................ 20
Accrued fees to affiliates (Note 4)......................................... 40
Other accrued expenses...................................................... 34
------------------
Total Liabilities............................................................................... 4,436
--------------------
Net Assets............................................................................................. $ 83,076
====================
Net Assets consist of:
Accumulated distributions in excess of net investment income........................................... $ (24)
Accumulated net realized gain (loss)................................................................... (872)
Unrealized appreciation (depreciation) on investments.................................................. 1,398
Shares of beneficial interest.......................................................................... 39
Additional paid-in capital............................................................................. 82,535
--------------------
Net Assets............................................................................................. $ 83,076
====================
Net Asset Value, offering and redemption price per share:
($83,075,721 divided by 3,920,226 shares of $.01 par value
shares of beneficial interest outstanding)......................................................... $ 21.19
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Limited Volatility Tax Free Fund 47
<PAGE>
Limited Volatility Tax Free Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
Investment Income:
Interest .................................................................... $ 3,396
Expenses (Notes 2 and 4):
Management fees ........................................ $ 361
Custodian fees ......................................... 52
Transfer agent fees .................................... 45
Professional fees ...................................... 8
Registration fees ...................................... 22
Trustees' fees ......................................... 4
Miscellaneous .......................................... 19
--------
Total Expenses ........................................................... 511
---------
Net investment income ........................................................... 2,885
---------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from investments ....................................... 113
Net change in unrealized appreciation or depreciation of investments ............ 530
---------
Net gain (loss) on investments .................................................. 643
---------
Net increase (decrease) in net assets resulting from operations ................. $ 3,528
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
48 Limited Volatility Tax Free Fund Specialty Funds
<PAGE>
Limited Volatility Tax Free Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
-------- --------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income ......................................................... $ 2,885 $ 2,518
Net realized gain (loss) ...................................................... 113 (15)
Net change in unrealized appreciation or depreciation ......................... 530 (626)
-------- --------
Net increase (decrease) in net assets resulting from operations ............ 3,528 1,877
-------- --------
From Distributions to Shareholders:
Net investment income ......................................................... (2,885) (2,536)
In excess of net investment income ............................................ (24) (3)
-------- --------
Total Distributions to Shareholders ........................................ (2,909) (2,539)
-------- --------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6) ... 16,113 3,168
-------- --------
Total Net Increase (Decrease) in Net Assets ....................................... 16,732 2,506
Net Assets:
Beginning of period ........................................................... 66,344 63,838
-------- --------
End of period (including accumulated distributions in excess of
net investment income of $24 at December 31, 1997) .......................... $ 83,076 $ 66,344
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Limited Volatility Tax Free Fund 49
<PAGE>
Limited Volatility Tax Free Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........................ $ 21.02 $ 21.24 $ 20.48 $ 21.45 $ 21.03
-------- --------- --------- --------- ---------
Income From Investment Operations:
Net investment income .................................... .84 .85 .81 .86 .94
Net realized and unrealized gain (loss) on investments.... .18 (.21) .77 (.97) .42
-------- --------- --------- --------- ---------
Total Income From Investment Operations .............. 1.02 .64 1.58 (.11) 1.36
-------- --------- --------- --------- ---------
Less Distributions:
Net investment income .................................... (.84) (.86) (.82) (.86) (.94)
In excess of net investment income........................ (.01) -- -- -- --
-------- --------- --------- --------- ---------
Total Distributions .................................. (.85) (.86) (.82) (.86) (.94)
-------- --------- --------- --------- ---------
Net Asset Value, End of Period .............................. $ 21.19 $ 21.02 $ 21.24 $ 20.48 $ 21.45
======== ========= ========= ========= =========
Total Return (%) ............................................ 4.92 3.07 7.81 (0.54) 6.58
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)................. 83,076 66,344 63,838 48,975 51,211
Ratios to average net assets (%):
Operating expenses ................................... .71 .75 .74 .72 .75
Net investment income................................. 3.99 4.02 3.91 4.14 4.40
Portfolio turnover rate (%) ............................. 40.79 74.34 73.91 71.71 24.05
</TABLE>
50 Limited Volatility Tax Free Fund Specialty Funds
<PAGE>
Money Market Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
--------- ------ --------- ----------
<S> <C> <C> <C> <C>
Corporate Bonds and Notes - 20.9%
Alpha Finance Corp. (MTN) $ 10,000 5.850% 03/03/98 $ 10,000
BankAmerica Corp. (MTN)(a) 2,000 6.206 02/19/98 2,001
Beta Finance, Inc. (MTN) 5,000 5.930 03/16/98 5,000
Bravo Trust (a) 45,000 5.925 10/15/98 45,000
Carolina Medical Plan, Inc. (a) 20,000 5.710 06/01/22 20,000
Chrysler Financial Corp. (MTN) 10,000 7.480 03/09/98 10,025
First USA Bank (a) 5,000 5.902 04/29/98 5,002
Ford Motor Credit Co. 2,500 6.250 02/26/98 2,501
General Motors Acceptance Corp. (MTN)(a) 25,000 5.662 03/03/98 24,998
General Motors Acceptance Corp. (MTN)(a) 20,000 5.918 05/26/98 20,019
Merrill Lynch & Co., Inc. (a) 25,000 5.690 06/01/98 25,000
Merrill Lynch & Co., Inc. (MTN)(a) 14,000 5.874 10/14/98 13,999
Sigma Finance, Inc. (MTN) 10,000 5.870 01/20/98 9,999
----------
Total Corporate Bonds and Notes (cost $193,544) 193,544
----------
Domestic Certificates of Deposit - 8.0%
Corestates Bank NA (a) 20,000 5.670 08/27/98 20,000
First USA Bank (a) 17,400 5.950 01/13/98 17,401
First USA Bank (MTN)(a) 5,000 5.957 01/15/98 5,000
First USA Bank 2,000 6.298 10/01/98 2,004
Morgan Guaranty Trust Co. 5,000 5.600 01/29/98 4,999
PNC Bank NA 25,000 5.620 02/13/98 24,999
----------
Total Domestic Certificates of Deposit (cost $74,403) 74,403
----------
Eurodollar Certificates of Deposit - 1.1%
Commerzbank AG 10,000 5.890 03/06/98 9,999
----------
Total Eurodollar Certificates of Deposit (cost $9,999) 9,999
----------
Yankee Certificates of Deposit - 12.5%
Bank of Tokyo Mitsubishi, Ltd. 10,000 5.740 01/26/98 9,996
Bank of Tokyo Mitsubishi, Ltd. 5,000 6.000 03/04/98 5,000
Bank of Tokyo Mitsubishi, Ltd. 4,000 6.280 04/02/98 4,000
Barclays Bank PLC 15,000 5.805 02/09/98 15,000
Bayerische Landesbank 5,000 6.250 04/15/98 5,002
Canadian Imperial Bank 5,000 5.940 03/17/98 5,000
Fuji Bank, Ltd. (c) 20,000 6.190 02/17/98 20,004
Rabobank 10,000 6.200 04/09/98 9,997
Societe Generale (a) 25,000 6.160 07/01/98 24,991
Wells Fargo & Co. (a) 10,000 5.946 07/01/98 10,005
Westpac Banking Corp. 2,000 5.830 01/15/98 2,000
Westpac Banking Corp. 5,000 5.970 03/23/98 4,999
----------
Total Yankee Certificates of Deposit (cost $115,994) 115,994
----------
</TABLE>
52 Money Market Fund Specialty Funds
<PAGE>
Money Market Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
--------- ------ --------- --------
<S> <C> <C> <C> <C>
Domestic Commercial Paper - 39.6%
Bavaria TRR Corp. $ 24,274 5.680% 01/30/98 $ 24,163
Bavaria TRR Corp. 25,000 5.750 02/27/98 24,772
Centric Capital Corp. 5,000 5.650 01/29/98 4,978
Centric Capital Corp. 7,500 5.730 02/13/98 7,449
Centric Capital Corp. 15,000 5.730 02/17/98 14,888
Centric Capital Corp. 10,000 5.750 02/23/98 9,915
Centric Capital Corp. 2,000 5.750 02/24/98 1,983
Centric Capital Corp. 10,000 5.760 03/02/98 9,904
Certain Funding Corp. 5,300 5.740 02/09/98 5,267
Certain Funding Corp. 8,950 5.750 02/10/98 8,893
Certain Funding Corp. 22,425 5.740 02/19/98 22,250
Cooper River Funding, Inc. 25,000 5.790 02/05/98 24,859
Dixie Overseas, Ltd. 25,000 5.760 05/04/98 24,508
General Electric Capital Corp. 21,000 5.620 02/12/98 20,862
General Electric Capital Corp. 10,000 5.700 02/26/98 9,911
General Electric Capital Services 3,700 5.730 01/21/98 3,688
General Electric Capital Services 5,000 5.650 01/23/98 5,000
ING America Insurance Holding 10,000 5.720 02/19/98 9,922
ING America Insurance Holding 19,600 5.720 02/20/98 19,444
KZH-Soleil Corp. 1,183 5.916 03/03/98 1,171
KZH-Soleil Corp. 4,630 5.830 04/17/98 4,551
KZH-Soleil Corp. 5,935 5.830 04/20/98 5,830
KZH-Soleil Corp. 1,443 5.830 04/23/98 1,417
KZH-Soleil Corp. 1,890 5.860 04/30/98 1,853
KZH-Soleil Corp. 2,835 5.835 06/10/98 2,762
Sigma Finance, Inc. 10,000 5.710 02/12/98 9,933
Special Purpose Accounts Receivable Co. 20,000 5.750 02/25/98 19,824
Special Purpose Accounts Receivable Co. 24,000 5.750 02/26/98 23,785
TEB Funding Corp. 12,250 5.760 05/01/98 12,015
Variable Funding Capital Corp. 31,026 5.750 02/06/98 30,848
--------
Total Domestic Commercial Paper (cost $366,645) 366,645
--------
Yankee Commercial Paper - 7.6%
Banco BCN Barclays, Ltd. 10,000 5.800 01/23/98 9,965
Banco Del Istmo SA 10,000 5.750 02/19/98 9,922
Salts III Cayman Island Corp. 30,000 6.100 06/12/98 30,000
Tasmanian Public Finance Corp. 20,000 5.650 01/12/98 19,965
--------
Total Yankee Commercial Paper (cost $69,852) 69,852
--------
Eurodollar Time Deposits - 6.9%
Bank of Montreal 23,041 6.250 01/02/98 23,041
Bank of Tokyo Mitsubishi, Ltd. 14,000 5.750 01/06/98 14,000
Bank of Tokyo Mitsubishi, Ltd. 10,000 5.750 01/20/98 10,000
Tokai Bank, Grand Cayman (c) 17,000 6.250 02/18/98 17,004
--------
Total Eurodollar Time Deposits (cost $64,045) 64,045
--------
</TABLE>
Specialty Funds Money Market Fund 53
<PAGE>
Money Market Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
--------- -------- --------- ----------
<S> <C> <C> <C> <C>
United States Government Agencies - 3.2%
Aid to Chile Guaranteed Note (LIBOR Floater)(a) $ 12,348 6.187% 06/01/05 $ 12,359
Aid to INH Portugal Guaranteed Note (LIBOR Floater)(a) 12,500 6.254 12/01/17 12,713
Federal Home Loan Bank 5,000 5.875 02/26/98 5,000
----------
Total United States Government Agencies (cost $30,072) 30,072
----------
Total Investments (amortized cost $924,554)(b) - 99.8% 924,554
Other Assets and Liabilities, Net - 0.2% 1,729
----------
Net Assets - 100% $ 926,283
==========
</TABLE>
* The interest rate for all securities with a maturity greater than thirteen
months has an automatic reset feature resulting in an effective maturity of
thirteen months or less.
(a) Adjustable or floating rate security.
(b) The identified cost for federal income tax purposes is the same as shown
above.
(c) Insured by MBIA
Abbreviations:
LIBOR - London Interbank Offered Rate
MBIA - Municipal Bond Investors Assurance
MTN - Medium Term Note
The accompanying notes are an integral part of the financial statements.
54 Money Market Fund Specialty Funds
<PAGE>
Money Market Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
Assets
Investments at amortized cost which approximates market (Note 2) ... $ 924,554
Interest receivable ................................................ 6,663
---------------
Total Assets .................................................. 931,217
Liabilities
Payables:
Dividends ............................................ $ 4,706
Accrued fees to affiliates (Note 4) .................. 82
Other accrued expenses ............................... 146
---------
Total Liabilities ............................................. 4,934
---------------
Net Assets ......................................................... $ 926,283
===============
Net Assets consist of:
Shares of beneficial interest ...................................... $ 9,263
Additional paid-in capital ......................................... 917,020
---------------
Net Assets ......................................................... $ 926,283
===============
Net Asset Value, offering and redemption price per share:
($926,282,567 divided by 926,282,567 shares of $.0l par value
shares of beneficial interest outstanding) ......................... $ 1.00
===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Money Market Fund 55
<PAGE>
Money Market Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
Investment Income:
Interest ......................................................... $ 41,325
Expenses (Notes 2 and 4):
Management fees .............................. $ 1,805
Custodian fees ............................... 172
Professional fees ............................ 25
Registration fees ............................ 147
Trustees' fees ............................... 4
Miscellaneous ................................ 15
---------------
Expenses before reductions ................... 2,168
Expense reductions (Note 4) .................. (1,611)
---------------
Total Expenses ................................................ 557
------------------
Net investment income .............................................. 40,768
------------------
Net increase in net assets resulting from operations................ $ 40,768
==================
</TABLE>
The accompanying notes are an integral part of the financial statements.
56 Money Market Fund Specialty Funds
<PAGE>
Money Market Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
------------ ------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income ..................................................... $ 40,768 $ 31,584
From Distributions to Shareholders:
Net investment income ..................................................... (40,768) (31,584)
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6). 429,351 (36,711)
------------ ------------
Total Net Increase (Decrease) in Net Assets ................................. 429,351 (36,711)
Net Assets
Beginning of period ....................................................... 496,932 533,643
------------ ------------
End of period ............................................................. $ 926,283 $ 496,932
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Money Market Fund 57
<PAGE>
Money Market Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............ $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
-------- -------- -------- -------- --------
Income From Investment Operations:
Net investment income ......................... .0563 .0549 .0601 .0447 .0342
-------- -------- -------- -------- --------
Less Distributions:
Net investment income ......................... (.0563) (.0549) (.0601) (.0447) (.0342)
-------- -------- -------- -------- --------
Net Asset Value, End of Period .................. $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ======== ======== ========
Total Return (%)(a) ............................. 5.79 5.63 6.19 4.57 3.48
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)....... 926,283 496,932 533,643 502,302 415,998
Ratios to average net assets (%)(a):
Operating expenses, net (b) ................. .08 .05 .06 .05 .07
Operating expenses, gross (b) ............... .30 .30 .26 .05 .07
Net investment income ....................... 5.65 5.49 6.01 4.49 3.38
</TABLE>
(a) For periods prior to April 1, 1995, fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment advisory fees. See Note 4.
(b) See Note 4 for current period amounts.
58 Money Market Fund Specialty Funds
<PAGE>
U.S. Government Money Market Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
--------- -------- --------- --------
<S> <C> <C> <C> <C>
United States Government Agencies - 91.2%
Aid to Sri Lanka Guaranteed Note (LIBOR Floater)(a) $ 3,625 6.254% 06/15/12 $ 3,661
Aid to Chile Guaranteed Note (LIBOR Floater)(a) 5,802 6.187 06/01/05 5,807
Federal Farm Credit Bank Bonds 1,000 5.650 02/02/98 1,000
Federal Farm Credit Bank Bonds 2,500 5.540 03/02/98 2,499
Federal Farm Credit Bank (MTN)(a) 5,000 5.570 04/17/98 4,999
Federal Farm Credit Bank Discount Notes 3,385 5.420 01/12/98 3,379
Federal Home Loan Bank 1,050 5.135 01/12/98 1,050
Federal Home Loan Bank 1,000 5.610 01/26/98 1,000
Federal Home Loan Bank 5,000 5.420 02/06/98 4,997
Federal Home Loan Bank 10,000 4.500 02/25/98 9,980
Federal Home Loan Bank 1,000 4.980 02/26/98 999
Federal Home Loan Bank 4,000 5.135 03/04/98 3,995
Federal Home Loan Bank 4,000 5.670 03/05/98 3,998
Federal Home Loan Bank 6,241 5.122 04/13/98 6,227
Federal Home Loan Bank 1,000 5.260 04/27/98 997
Federal Home Loan Bank 1,000 6.200 05/06/98 1,000
Federal Home Loan Bank 2,000 6.010 07/29/98 2,000
Federal Home Loan Bank (MTN) 2,000 5.010 03/11/98 1,997
Federal Home Loan Mortgage Corp. 2,000 5.190 03/11/98 1,997
Federal Home Loan Mortgage Corp. 1,000 5.400 03/16/98 999
Federal Home Loan Mortgage Corp. 1,000 5.310 04/29/98 998
Federal Home Loan Mortgage Corp. Pool #M1-7487 1,321 6.000 03/01/98 1,320
Federal Home Loan Mortgage Discount Notes 2,000 5.950 01/07/98 1,998
Federal National Mortgage Association 2,500 6.050 01/12/98 2,500
Federal National Mortgage Association 2,000 5.375 01/13/98 2,000
Federal National Mortgage Association 5,000 8.650 02/10/98 5,015
Federal National Mortgage Association 2,100 8.200 03/10/98 2,109
Federal National Mortgage Association 2,000 5.350 03/10/98 1,998
Federal National Mortgage Association 2,840 5.250 03/25/98 2,835
Federal National Mortgage Association 3,000 5.730 04/13/98 2,997
Federal National Mortgage Association 1,000 6.000 04/17/98 1,000
Federal National Mortgage Association (MTN) 1,000 7.560 02/06/98 1,002
Federal National Mortgage Association (MTN) 1,000 4.600 02/25/98 998
Federal National Mortgage Association (MTN) 6,000 5.400 03/18/98 5,995
Federal National Mortgage Association (MTN) 2,150 5.710 03/18/98 2,150
Federal National Mortgage Association (MTN) 2,000 5.200 04/30/98 1,994
Federal National Mortgage Association (MTN)(a) 1,500 6.000 02/17/98 1,501
Federal National Mortgage Association (MTN)(a) 8,000 5.590 04/21/98 8,000
Federal National Mortgage Association (MTN)(a) 12,460 5.504 06/02/99 12,404
Federal National Mortgage Association Discount Notes 7,230 5.740 01/23/98 7,205
Nebraska Higher Education Loan (c) 1,007 5.850 01/26/98 1,003
New Hampshire Higher Education Loan Corp. (c) 5,000 5.720 02/17/98 4,963
Student Loan Marketing Association 3,000 7.000 03/03/98 3,006
Student Loan Marketing Association (a) 2,900 5.629 01/15/98 2,900
Student Loan Marketing Association (a) 2,600 5.619 08/20/98 2,597
Student Loan Marketing Association (a) 1,000 5.639 01/13/99 996
Student Loan Marketing Association (MTN) 5,000 5.700 03/17/98 4,998
</TABLE>
60 U.S. Government Money Market Fund Specialty Funds
<PAGE>
U.S. Government Money Market Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
---------- ------ --------- ---------
<S> <C> <C> <C> <C>
Student Loan Marketing Association (MTN)(a) $ 10,000 5.877% 10/06/98 $ 9,995
Student Loan Marketing Association (MTN)(a) 2,000 5.504 07/12/99 1,997
USA Group Secondary Market Savings (c) 5,000 5.730 01/26/98 4,980
USA Group Secondary Market Savings (c) 5,000 5.700 02/12/98 4,967
---------
Total United States Government Agencies 171,002
---------
Total Investments (amortized cost $171,002) - 91.2% 171,002
---------
Repurchase Agreements - 8.0%
Agreement with BZW Securities and the Bank of New York (Tri-Party) of $14,925
acquired December 31, 1997 at 6.60% to be repurchased at $14,930 on January 2, 1998, collateralized by:
$14,929 Federal Home Loan Bank, due 06/02/98, valued at $15,228 14,925
---------
Total Repurchase Agreements (identified cost $14,925) 14,925
---------
Total Investments and Repurchase Agreements (cost $185,927)(b) - 99.2% 185,927
Other Assets and Liabilities, Net - 0.8% 1,485
---------
Net Asset - 100.0% $ 187,412
===== =========
</TABLE>
* The interest rate for all securities with a maturity greater than thirteen
months has an automatic reset feature resulting in an effective maturity of
thirteen months or less.
(a) Adjustable or floating rate security.
(b) The identified cost for federal income tax purposes is the same as shown
above.
(c) Guaranteed by Student Loan Marketing Association.
Abbreviations:
LIBOR - London Interbank Offered Rate
MTN - Medium Term Note
The accompanying notes are an integral part of the financial statements.
Specialty Funds U.S. Government Money Market Fund 61
<PAGE>
U.S. Government Money Market Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
Assets
Investments at amortized cost which approximates market (Note 2) ............................................... $ 171,002
Repurchase agreements (identified cost $14,925)(Note 2) ........................................................ 14,925
Interest receivable ............................................................................................ 2,340
----------------
Total Assets ............................................................................................ 188,267
Liabilities
Payables:
Dividends ........................................................................... $ 815
Accrued fees to affiliates (Note 4) ................................................. 29
Other accrued expenses .............................................................. 11
----------------
Total Liabilities ....................................................................................... 855
----------------
Net Assets ..................................................................................................... $ 187,412
================
Net Assets consist of:
Shares of beneficial interest .................................................................................. $ 1,874
Additional paid-in capital ..................................................................................... 185,538
----------------
Net Assets ..................................................................................................... $ 187,412
================
Net Asset Value, offering and redemption price per share:
($187,412,297 divided by 187,412,297 shares of $.01 par value
shares of beneficial interest outstanding) ................................................................. $ 1.00
================
</TABLE>
The accompanying notes are an integral part of the financial statements.
62 U.S. Government Money Market Fund Specialty Funds
<PAGE>
U.S. Government Money Market Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
Investment Income:
Interest ................................................................................................ $ 12,212
Expenses (Notes 2 and 4):
Management fees ..................................................................... $ 542
Custodian fees ...................................................................... 67
Transfer agent fees ................................................................. 223
Professional fees ................................................................... 7
Registration fees ................................................................... 19
Trustees' fees ...................................................................... 4
Miscellaneous ....................................................................... 26
----------------
Expenses before reductions .......................................................... 888
Expense reductions (Note 4) ......................................................... (464)
----------------
Total Expenses .......................................................................................... 424
----------------
Net investment income .......................................................................................... 11,788
----------------
Net increase in net assets resulting from operations ........................................................... $ 11,788
================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds U.S. Government Money Market Fund 63
<PAGE>
U.S. Government Money Market Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
----------------- -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income ................................................................ $ 11,788 $ 10,145
From Distributions to Shareholders:
Net investment income ................................................................ (11,788) (10,145)
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6) .......... (52,313) 89,784
----------------- -----------------
Total Net Increase (Decrease) in Net Assets .............................................. (52,313) 89,784
Net Assets
Beginning of period .................................................................. 239,725 149,941
----------------- -----------------
End of period ........................................................................ $ 187,412 $ 239,725
================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
64 U.S. Government Money Market Fund Specialty Funds
<PAGE>
U.S. Government Money Market Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................................. $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
---------- ---------- ---------- ---------- ----------
Income From Investment Operations:
Net investment income .............................................. .0545 .0526 .0580 .0380 .0284
---------- ---------- ---------- ---------- ----------
Less Distributions:
Net investment income .............................................. (.0545) (.0526) (.0580) (.0380) (.0284)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period ....................................... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
========== ========== ========== ========== ==========
Total Return (%) ..................................................... 5.59 5.40 5.98 3.87 2.88
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted) ........................... 187,412 239,725 149,941 112,077 95,410
Ratios to average net assets (%):
Operating expenses, net(a)........................................ .20 .25 .32 .57 .49
Operating expenses, gross(a)...................................... .41 .50 .51 .57 .49
Net investment income ............................................ 5.44 5.27 5.82 3.91 2.85
</TABLE>
(a) See Note 4 for current period amounts.
Specialty Funds U.S. Government Money Market Fund 65
<PAGE>
Tax Free Money Market Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
--------- ------ --------- ---------
<S> <C> <C> <C> <C>
Alabama - 0.8%
McIntosh, Alabama Industrial Development Board Pollution
Control Revenue, daily demand $ 1,100 5.100%(1) 07/01/04 $ 1,100
---------
1,100
---------
Alaska - 0.3%
City and Borough of Juneau, Alaska General Obligation Bonds (a) 410 6.000 01/01/98 410
---------
410
---------
Arizona - 3.8%
Maricopa County, Arizona Industrial Development Authority Revenue,
weekly demand 700 4.450(2) 10/01/04 700
Maricopa County, Arizona Pollution Control Revenue, weekly demand 4,000 3.700(2) 08/01/15 4,000
Pinal County, Arizona Industrial Development Authority Pollution
Control Revenue, daily demand 300 4.950(1) 12/01/09 300
---------
5,000
---------
Colorado - 5.4%
Colorado Housing Financial Authority, weekly demand 1,150 4.250(2) 06/01/05 1,150
Colorado Multi-family Housing Financing Authority, Series A, weekly demand 175 4.275(2) 11/01/09 175
Moffat County, Colorado Pollution Control Revenue, daily demand (a) 1,500 5.100(1) 05/01/13 1,500
Smith Creek Metropolitan District, Colorado Revenue, weekly demand 4,200 4.200(2) 10/01/35 4,200
---------
7,025
---------
Delaware - 0.5%
Delaware Economic Development Authority Multi-family Revenue, weekly demand 650 3.900(2) 12/01/15 650
---------
650
---------
District of Columbia - 0.9%
District of Columbia General Obligation, Series B-3, daily demand 1,200 5.000(1) 06/01/03 1,200
---------
1,200
---------
Florida - 1.9%
Boca Raton, Florida Industrial Development Authority Revenue, weekly demand 425 4.525(2) 12/01/14 425
Lee County, Florida Industrial Development Authority Revenue, weekly demand 625 4.075(2) 04/01/10 625
Orange County, Florida Industrial Development Authority Revenue,
weekly demand 950 4.000(2) 01/01/11 950
Palm Beach County, Florida Revenue, weekly demand (a) 500 3.750(2) 03/01/27 500
---------
2,500
---------
</TABLE>
66 Tax Free Money Market Fund Specialty Funds
<PAGE>
Tax Free Money Market Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
--------- ------- -------- -------
<S> <C> <C> <C> <C>
Georgia - 3.1%
DeKalb County, Georgia Housing Authority Multi-family Home Revenue,
weekly demand $ 700 3.800%(2) 06/01/25 $ 700
Georgia State Hospital Financing Authority Revenue, daily demand 100 4.950(1) 03/01/01 100
Gwinnett County, Georgia Development Authority Revenue, weekly demand 1,000 4.200(2) 03/01/17 1,000
Residential Apartments I Portfolio CERT Trust, 1996 Series A, weekly demand (d) 720 4.300(2) 12/01/02 720
Thomasville, Georgia Hospital Authority Revenue, weekly demand 1,500 4.200(2) 11/01/17 1,500
-------
4,020
-------
Illinois - 11.3%
DeKalb, Illinois Industrial Development Revenue, weekly demand 500 3.900(2) 02/01/01 500
East Peoria, Illinois Multi-family Housing Revenue, weekly demand 1,920 4.400(2) 06/01/08 1,920
Illinois Development Finance Authority Revenue, quarterly demand 700 3.900(4) 08/01/25 700
Illinois Development Finance Authority Revenue, weekly demand 1,250 4.100(2) 09/01/26 1,250
Illinois Health Facilities Authority Revenue, quarterly demand 450 10.375 01/01/98 450
Illinois Health Facilities Authority Revenue, Series B, weekly demand 555 4.000(2) 10/01/15 555
Illinois Health Facilities Authority Revenue, Series B, weekly demand 800 3.800(2) 08/15/22 800
Illinois Health Facilities Authority Revenue, Series C, weekly demand 2,100 4.000(2) 10/01/15 2,100
McCook, Illinois Revenue St. Andrew Society Project, Series 96-A, weekly demand 4,800 4.100(2) 12/01/21 4,800
St. Clair County, Illinois Industrial Development Board Revenue, weekly demand 1,000 4.550(2) 10/01/15 1,000
Troy Grove, Illinois Revenue, weekly demand 750 4.867(2) 05/01/10 750
-------
14,825
-------
Indiana - 12.9%
Benton, Indiana Community School Corporation Tax Anticipation Warrants 1,000 4.250 12/31/98 1,002
Calumet Township Lake County, Indiana Advancement Fund Notes,
Series 1996-A, weekly demand 1,525 4.150 01/15/98 1,525
Fort Wayne, Indiana Economic Development Revenue, weekly demand 1,000 4.275(2) 12/01/03 1,000
Indiana Bond Bank Advance Funding Notes, quarterly demand 1,000 4.000 01/21/98 1,000
Indiana Bond Bank Advance Funding Notes 1,500 3.900 02/02/98 1,500
Indiana Health Facility Financing Authority Revenue, weekly demand 3,000 4.000(2) 08/15/27 3,000
Jasper County, Indiana Pollution Control Revenue, daily demand 1,500 5.100(1) 08/01/10 1,500
New Albany Floyd County, Indiana School Building Corporate Bond
Anticipation Notes, semiannual demand 1,000 3.950 09/01/98 1,000
Perry Township, Indiana Multi-School Building Corporation Revenue,
semiannual demand 1,250 4.000 06/25/98 1,250
Princeton, Indiana Pollution Control Revenue, daily demand 1,900 5.100(1) 03/01/19 1,900
Residential Apartments I Portfolio CERT Trust, 1996 Series A, weekly demand (d) 740 4.300(2) 12/01/02 740
Westfield-Washington, Indiana Schools Temporary Loan Warrants 1,500 4.100 12/31/98 1,501
-------
16,918
-------
Iowa - 0.4%
Residential Apartments I Portfolio CERT Trust, 1996 Series A, weekly demand (d) 540 4.300(2) 12/01/02 540
-------
540
-------
</TABLE>
Specialty Funds Tax Free Money Market Fund 67
<PAGE>
Tax Free Money Market Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
--------- ------- -------- -------
<S> <C> <C> <C> <C>
Kansas - 0.7%
Shawnee County, Kansas General Obligation, Series 1 $ 965 4.250% 02/01/98 $ 965
-------
965
-------
Kentucky - 4.2%
Calloway County, Kentucky Fire Protection Area Development District 2,
weekly demand 1,210 4.220(2) 12/01/31 1,210
Elsmere, Kentucky Industrial Building Revenue, quarterly demand 535 3.900(4) 02/01/06 535
Elva-New Harmony-Oak Level, Kentucky Fire Protection District Area Development,
Series A-1, weekly demand 3,710 4.220(2) 12/01/31 3,710
-------
5,455
-------
Maine - 1.7%
Maine Health & Higher Educational Facilities Authority Revenue
Series D, weekly demand (a) 2,180 3.700(2) 12/01/25 2,180
-------
2,180
-------
Maryland - 4.4%
Anne Arundel County, Maryland Industrial Development, weekly demand 2,260 3.900(2) 02/01/01 2,260
Maryland State Health & Higher Education Facility Authority Revenue,
weekly demand 2,700 3.950(2) 07/01/27 2,700
Montgomery County, Maryland Industrial Development Revenue, monthly demand (a) 800 3.950(3) 04/01/14 800
-------
5,760
-------
Massachusetts - 2.3%
Brockton, Massachusetts Revenue Anticipation Notes 1,000 4.500 06/30/98 1,002
Falls River, Massachusetts Bond Anticipation Notes, semiannual demand 1,000 4.250 06/15/98 1,001
New England Education Loan Marketing Corp., Series C, semiannual demand 1,000 4.750 07/01/98 1,003
-------
3,006
-------
Michigan - 5.4%
Lansing, Michigan Economic Development Corp., semiannual demand 2,000 3.850(5) 05/01/15 2,000
Livonia, Michigan Economic Development Corp., semiannual demand 270 3.850(5) 11/15/04 270
McDonald Tax Exempt Mortgage Bond Trust, thirteen month demand (c) 152 4.250(6) 01/15/09 152
Michigan State Job Development Authority Revenue, monthly demand 1,100 3.800(3) 11/01/14 1,100
Northville, Michigan Economic Development Corporation, Ltd. Obligation
Revenue, weekly demand 500 4.275(2) 05/01/14 500
University of Michigan, University Revenue, Series A, daily demand 3,100 5.100(1) 12/01/27 3,100
-------
7,122
-------
</TABLE>
68 Tax Free Money Market Fund Specialty Funds
<PAGE>
Tax Free Money Market Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Minnesota - 3.2%
Burnsville, Minnesota Industrial Development Revenue, Series C, weekly demand $ 350 3.900%(2) 02/01/01 $ 350
Mendota Heights, Minnesota Commercial Development, weekly demand 1,580 4.250(2) 12/01/15 1,580
Minneapolis, Minnesota General Obligation, Series A, weekly demand 800 4.140(2) 12/01/05 800
Moorehead, Minnesota Industrial Development Revenue, weekly demand 1,390 4.000(2) 11/01/09 1,390
--------
4,120
--------
Mississippi - 0.3%
DeSoto County, Mississippi Industrial Development Revenue, weekly demand 400 4.867(2) 12/01/08 400
--------
400
--------
Missouri - 0.9%
Jackson County, Missouri Industrial Development Authority Recreational
Facility Revenue, daily demand 200 5.400(1) 11/01/16 200
Kansas City, Missouri Industrial Development Authority Hospital Revenue,
weekly demand 260 4.000(2) 08/01/18 260
St. Louis, Missouri Industrial Development Authority Revenue, weekly demand 700 4.550(2) 08/30/99 700
--------
1,160
--------
Nevada - 0.1%
Henderson, Nevada Public Improvement Trust Housing Revenue, Series II-B,
weekly demand 125 4.350(2) 08/01/26 125
--------
125
--------
New York - 2.7%
Lindenhurst, New York University Free School District Tax Anticipation Notes 1,000 4.250 06/24/98 1,001
Nassau County, New York Revenue Anticipation Notes, Series A 1,000 4.250 03/10/98 1,001
North Hempstead, New York Bond Anticipation Notes, Series A 1,500 4.000 01/29/98 1,500
--------
3,502
--------
Ohio - 5.0%
Buckeye, Ohio Tax-Exempt Mortgage Bond Trust, quarterly demand 345 4.260(4) 02/01/05 345
Cincinnati & Hamilton County, Ohio Port Authority, quarterly demand 335 3.700(4) 09/01/99 335
Citizens Federal Tax-Exempt Mortgage Bond Trust, semiannual demand 55 3.600(5) 09/01/08 55
Clermont County, Ohio Economic Development Revenue, semiannual demand 405 3.800(5) 12/01/09 405
Clermont County, Ohio Economic Development Revenue, semiannual demand 210 3.800(5) 05/01/12 210
Cuyahoga County, Ohio Industrial Development Revenue, semiannual demand 160 3.850(5) 06/01/99 160
Franklin County, Ohio Industrial Development Revenue, semiannual demand 605 3.850(5) 04/01/15 605
Franklin County, Ohio Industrial Development Revenue, semiannual demand 150 3.880(5) 11/01/15 150
Mahoning County, Ohio Industrial Development Revenue, Series A, weekly demand 5 4.200(2) 10/01/00 5
Mahoning County, Ohio Industrial Development Revenue, Series B, weekly demand 45 4.200(2) 10/01/00 45
McDonald Tax Exempt Mortgage Bond Trust, thirteen month demand (c) 711 4.250(6) 01/15/09 711
</TABLE>
Specialty Funds Tax Free Money Market Fund 69
<PAGE>
Tax Free Money Market Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Ohio State Higher Educational Facilities Community College Revenue,
weekly demand $ 665 4.150%(2) 09/01/20 $ 665
Scioto County, Ohio Health Care Facilities, semiannual demand 690 3.850(5) 12/01/15 690
Stark County, Ohio Health Care Facilities, quarterly demand 1,640 3.800(4) 09/15/16 1,640
Trumbull County, Ohio Industrial Development Revenue, weekly demand 495 4.200(2) 04/01/04 495
-------
6,516
-------
Oklahoma - 1.8%
Muskogee, Oklahoma Industrial Development Revenue, weekly demand 1,090 4.200(2) 12/01/15 1,090
Tulsa County, Oklahoma Industrial Development Authority Revenue,
semiannual demand 1,250 3.900(5) 12/15/08 1,250
-------
2,340
-------
Oregon - 0.6%
Hillsboro, Oregon Graduate Institute Revenue, weekly demand 750 4.250(2) 08/01/11 750
-------
750
-------
Pennsylvania - 12.3%
Berks County, Pennsylvania Industrial Development Authority, weekly demand 1,050 4.275(2) 12/01/04 1,050
Commonwealth Tax-Exempt Mortgage Bond Trust, semiannual demand 585 4.050(5) 11/01/05 585
Delaware County, Pennsylvania Industrial Development Authority Solid
Waste Revenue, Series A, weekly demand 100 3.650(2) 12/01/18 100
Emmaus, Pennsylvania General Authority Revenue, weekly demand 300 4.000(2) 12/01/28 300
McDonald Tax Exempt Mortgage Bond Trust, thirteen month demand (c) 152 4.250(6) 01/15/09 152
Montgomery County, Pennsylvania Education & Health Authority Revenue,
weekly demand 4,700 4.000(2) 08/01/21 4,700
Montgomery County, Pennsylvania Industrial Development Authority Revenue,
weekly demand 500 4.250(2) 04/01/04 500
Norristown, Pennsylvania Tax & Revenue Anticipation Notes 1,000 4.050 12/31/98 1,000
Pennsylvania State Higher Educational Revenue, quarterly demand 1,500 3.800(4) 06/01/07 1,500
Philadelphia, Pennsylvania School District Tax & Revenue Anticipation Notes,
annual demand 1,250 4.500 06/30/98 1,253
Sayre, Pennsylvania Health Care Facilities Authority Revenue, Series A,
weekly demand (a) 200 3.650(2) 12/01/20 200
Schuylkill County, Pennsylvania Industrial Development Authority
Residential Recovery Revenue, weekly demand 4,000 3.700(2) 12/01/02 4,000
Westmoreland County, Pennsylvania Industrial Development Authority Revenue,
Series D, weekly demand 755 3.900(2) 10/01/00 755
-------
16,095
-------
</TABLE>
70 Tax Free Money Market Fund Specialty Funds
<PAGE>
Tax Free Money Market Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
---------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
South Carolina - 1.4%
Anderson County, South Carolina Industrial Revenue, weekly demand $ 830 4.250%(2) 07/01/04 $ 830
Richland County, South Carolina School District General Obligation,
quarterly demand 750 4.800 03/01/98 751
South Carolina State Public Service Authority Revenue, Series B, annual
demand (a) 205 5.000 01/01/99 207
--------
1,788
--------
South Dakota - 1.4%
Sioux Falls, South Dakota Industrial Development Revenue, weekly demand 1,775 4.250(2) 06/01/06 1,775
--------
1,775
--------
Tennessee - 1.8%
Franklin County, Tennessee Health & Educational Facilities Revenue,
monthly demand 1,300 3.800(3) 09/01/10 1,300
Tennessee State General Obligation, quarterly demand 300 5.000 03/01/98 301
Tennessee State General Obligation, quarterly demand 750 5.500 03/01/98 752
--------
2,353
--------
Virginia - 1.6%
Harrisonburg, Virginia Redevelopment & Housing Multi-family Housing
Revenue, quarterly demand 1,000 3.700(4) 02/01/26 1,000
Norfolk, Virginia Industrial Development Authority Revenue, weekly demand 1,075 4.275(2) 03/01/16 1,075
--------
2,075
--------
Washington - 8.0%
Washington State Housing Financial Community Nonprofit Housing
Revenue, daily demand 4,830 5.100(1) 07/01/11 4,830
Washington State Housing Financial Community Nonprofit Housing
Revenue, daily demand 1,300 5.100(1) 01/01/21 1,300
Washington State Housing Financial Community Nonprofit Housing
Revenue, daily demand 4,350 4.750(1) 01/01/27 4,350
--------
10,480
--------
West Virginia - 0.8%
Marshall County, West Virginia Pollution Control Revenue, weekly demand 1,000 3.950(2) 03/01/26 1,000
--------
1,000
--------
Wisconsin - 2.2%
Clinton, Wisconsin Community School District Tax & Revenue
Anticipation Notes, semiannual demand 775 4.240 08/31/98 775
Lodi, Wisconsin School District Tax & Revenue Anticipation Notes,
semiannual demand 1,000 3.990 10/15/98 1,000
Oregon, Wisconsin School District Tax & Revenue Anticipation Notes,
semiannual demand 1,100 4.220 09/16/98 1,101
--------
2,876
--------
</TABLE>
Specialty Funds Tax Free Money Market Fund 71
<PAGE>
Tax Free Money Market Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Date
Amount of Value
(000) Rate Maturity* (000)
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Wyoming - 1.3%
Lincoln County, Wyoming Pollution Control Revenue, daily demand (a) $ 1,700 4.900%(1) 11/01/24 $ 1,700
--------
1,700
--------
Total Investments (amortized cost $137,731)(b) - 105.4% 137,731
Other Assets and Liabilities, Net - (5.4)% (7,006)
--------
Net Assets - 100.0% $130,725
========
</TABLE>
(a) Bond is insured by AMBAC, FGIC, or MBIA.
(b) The cost for federal income tax purposes is the same as shown above.
(c) Multi-State bond issue including Michigan, Ohio, and Pennsylvania.
(d) Multi-State bond issue including Georgia, Indiana, and Iowa.
* All securities with a maturity date greater than thirteen months have a
demand feature, or an optional or mandatory put, or are pre-refunded
resulting in an effective maturity of thirteen months or less.
Variable Rate:
(1) Daily
(2) Weekly
(3) Monthly
(4) Quarterly
(5) Semiannual
(6) Thirteen-month
The accompanying notes are an integral part of the financial statements.
72 Tax Free Money Market Fund Specialty Funds
<PAGE>
Tax Free Money Market Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<S> <C>
Quality Ratings as a % of Market Value ++
VMIG1 or SP-1 91%
P1 8
VMIG2 1
-----
100%
=====
Economic Sector Emphasis as a % of Market Value
General Obligation 31%
Education Revenue 18
Industrial Revenue Bonds 18
Housing Revenue 15
Healthcare Revenue 9
Pollution Control Revenue 9
-----
100%
=====
</TABLE>
++ VMIG1: The highest short-term municipal note credit rating given by Moody's
Investors Services to notes with a demand feature which are of the
"best quality."
VMIG2: The highest short-term municipal note credit rating given by Moody's
Investors Services to notes with a demand feature which are of "high
quality."
SP-1: The highest short-term municipal note credit rating given by
Standard & Poor's Corporation to notes with a "very strong or strong
capacity to pay principal and interest."
P1: The highest tax-exempt commercial paper rating given by Moody's
Investors Services to commercial paper with a "superior capacity for
repayment."
The accompanying notes are an integral part of the financial statements.
Specialty Funds Tax Free Money Market Fund 73
<PAGE>
Tax Free Money Market Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
Assets
Investments at amortized cost which approximates market (Note 2) ............................................ $ 137,731
Receivables:
Interest ................................................................................................ 1,073
Investments sold ........................................................................................ 50
--------------------
Total Assets ......................................................................................... 138,854
Liabilities
Payables:
Dividends ......................................................................... $ 382
Investments purchased ............................................................. 7,703
Accrued fees to affiliates (Note 4) ............................................... 20
Other accrued expenses ............................................................ 24
------------------
Total Liabilities .................................................................................... 8,129
--------------------
Net Assets .................................................................................................. $ 130,725
====================
Net Assets consist of:
Shares of beneficial interest ............................................................................... $ 1,307
Additional paid-in capital .................................................................................. 129,418
--------------------
Net Assets .................................................................................................. $ 130,725
====================
Net Asset Value, offering and redemption price per share:
($130,724,586 divided by 130,724,586 shares of $.01 par value
shares of beneficial interest outstanding) .............................................................. $ 1.00
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
74 Tax Free Money Market Fund Specialty Funds
<PAGE>
Tax Free Money Market Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
Investment Income:
Interest............................................................................................... $ 4,092
Expenses (Notes 2 and 4):
Management fees.................................................................. $ 267
Custodian fees................................................................... 37
Transfer agent fees.............................................................. 47
Professional fees................................................................ 8
Registration fees................................................................ 23
Trustees' fees................................................................... 4
Miscellaneous.................................................................... 20
------------------
Expenses before reductions....................................................... 406
Expense reductions (Note 4)...................................................... (107)
------------------
Total Expenses....................................................................................... 299
--------------------
Net investment income....................................................................................... 3,793
--------------------
Net increase in net assets resulting from operations........................................................ $ 3,793
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Specialty Funds Tax Free Money Market Fund 75
<PAGE>
Tax Free Money Market Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
----------------- -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income................................................................. $ 3,793 $ 3,086
From Distributions to Shareholders:
Net investment income................................................................. (3,793) (3,086)
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6)........... 28,518 24,207
----------------- -----------------
Total Net Increase (Decrease) in Net Assets............................................... 28,518 24,207
Net Assets
Beginning of period................................................................... 102,207 78,000
----------------- -----------------
End of period......................................................................... $ 130,725 $ 102,207
================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
76 Tax Free Money Market Fund Specialty Funds
<PAGE>
Tax Free Money Market Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.............................. $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
--------- --------- --------- --------- ---------
Income From Investment Operations:
Net investment income......................................... .0355 .0329 .0370 .0279 .0251
--------- --------- --------- --------- ---------
Less Distributions:
Net investment income......................................... (.0355) (.0329) (.0370) (.0279) (.0251)
--------- --------- --------- --------- ---------
Net Asset Value, End of Period.................................... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
========= ========= ========= ========= =========
Total Return (%).................................................. 3.61 3.35 3.76 2.83 2.55
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)...................... 130,725 102,207 78,000 100,819 68,154
Ratios to average net assets (%):
Operating expenses, net(a)................................. .28 .42 .48 .40 .43
Operating expenses, gross(a)............................... .38 .42 .48 .40 .43
Net investment income...................................... 3.55 3.28 3.69 2.84 2.52
</TABLE>
(a) See Note 4 for current period amounts.
Specialty Funds Tax Free Money Market Fund 77
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements
December 31, 1997
1. Organization
Frank Russell Investment Company (the "Investment Company") is a series
mutual fund with 28 different investment portfolios, referred to as "Funds."
These financial statements report on seven Funds, each of which has distinct
investment objectives and strategies. The Investment Company is registered
under the Investment Company Act of 1940, as amended, as a diversified, open-
end management investment company. It is organized and operates as a
Massachusetts business trust under an amended master trust agreement dated
July 26, 1984. The Investment Company's master trust agreement permits the
Board of Trustees to issue an unlimited number of full and fractional shares
of beneficial interest at a $.01 par value. As of July 8, 1996, the Real
Estate Securities and Emerging Markets Funds have available Class S and Class
C shares. Each Class has equal rights as to assets and voting privileges.
Investment income, realized and unrealized gains and losses and fund level
expenses of a Fund are allocated on a pro rata basis to each Class, based on
relative net assets of each Class to the total net assets of a Fund. Certain
expenses may also be charged to an individual Class for services or fees that
relate specifically to that particular Class. Class C shares are charged a
12b-1 distribution fee and a shareholder servicing fee of 0.40% and 0.25% of
average daily net assets, respectively. Class S shares which are reported
herein are charged no such fees. Class C shares are not available for
purchase by new investors.
2. Significant Accounting Policies
The Funds' financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") which require the use of management
estimates. The following is a summary of the significant accounting policies
consistently followed by the Funds in the preparation of these financial
statements.
Security valuation: United States equity and fixed-income securities listed
and traded principally on any national securities exchange are valued on the
basis of the last sale price or, lacking any sale, at the closing bid price,
on the primary exchange on which the security is traded. United States over-
the-counter equity and fixed-income securities and options are valued on the
basis of the closing bid price. Futures contracts are valued on the basis of
the last sale price. Many fixed-income securities do not trade each day and,
thus, last sale or bid prices are frequently not available. Fixed-income
securities, therefore, may be valued using prices provided by a pricing
service when such prices are believed to reflect the fair market value of
such securities.
International equity and fixed-income securities traded on a national
securities exchange are valued on the basis of the last sale price.
International securities traded over the counter are valued on the basis of
the mean of bid prices. In the absence of a last sale or mean bid price,
respectively, such securities may be valued on the basis of prices provided
by a pricing service if those prices are believed to reflect the fair market
value of such securities.
The Money Market, U.S. Government Money Market and the Tax Free Money Market
Funds' portfolio investments are valued on the basis of "amortized cost," a
method by which each portfolio instrument is initially valued at cost, and
thereafter a constant accretion/amortization to maturity of any
discount/premium is assumed. All three Funds utilize the amortized cost
valuation method in accordance with Rule 2a-7 of the Investment Company Act
of 1940, as amended. Short-term investments maturing within 60 days of the
valuation date held by Funds other than the Money Market, U.S. Government
Money Market and Tax Free Money Market Funds are also valued at amortized
cost unless the Board of Trustees determines that amortized cost does not
represent fair value.
Municipal investments of the Limited Volatility Tax Free Fund are appraised
or priced by an independent pricing source, approved by the Board of
Trustees, which utilizes information with respect to bond transactions,
quotations from bond dealers, market transactions in comparable securities,
and various relationships between securities.
The Funds may value certain securities for which market quotations are not
readily available at "fair value," as determined in good faith pursuant to
procedures established by the Board of Trustees.
Investment transactions: Securities transactions are recorded on a trade date
basis. Realized gains and losses from securities transactions are recorded on
the basis of specific identified cost incurred by each money manager within a
particular fund. The Funds, except Limited Volatility Tax Free and Tax Free
Money Market Funds, may lend portfolio securities but have not done so during
the year ended December 31, 1997.
Investment income: Dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis. Distributions from Real
Estate Investment Trusts ("REITs") owned by the Real Estate Securities Fund
may have as their components dividend income, capital gains and/or returns of
capital. Distributions that are deemed to be capital gains or returns
78 Notes to Financial Statements Specialty Funds
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
of capital by the trusts are treated by the Fund, respectively, as an
adjustment to its realized capital gains or its cost of the investment. The
exact amount to be adjusted can be ascertained only at the end of each REIT's
fiscal year when finally determined and reported by the various trusts.
Amortization and accretion: Premiums and discounts for the Limited Volatility
Tax Free Fund, all zero-coupon bond discounts, and original issue discounts
are amortized/accreted for both tax and financial reporting purposes. All
short-term premiums/discounts are amortized/accreted for both tax and
financial reporting purposes.
Federal income taxes: As a Massachusetts business trust, each Fund is a
separate corporate taxpayer and determines its net investment income and
capital gains (or losses) and the amounts to be distributed to each Fund's
shareholders without regard to the income and capital gains (or losses) of
the other Funds.
It is each Fund's intention to qualify as a regulated investment company and
distribute all of its taxable income. Therefore, no federal income tax
provision was required for the Funds. From November 1, 1997 to December 31,
1997, the Emerging Markets Fund, U.S. Government Money Market Fund and Tax
Free Money Market Fund incurred net realized capital losses of $8,399,434,
$1,427 and $200, respectively. As permitted by tax regulations, the Emerging
Markets Fund, U.S. Government Money Market Fund and Tax Free Money Market
Fund intend to elect to defer this loss and treat it as arising in the year
ending December 31, 1998.
At December 31, 1997, certain Funds had net tax basis capital loss
carryforwards which may be applied against any realized net taxable gains in
each succeeding year or until their respective expiration dates, whichever
occurs first. Available capital loss carryforwards and expiration dates are
as follows:
<TABLE>
<CAPTION>
12/31/98 12/31/99 12/31/02 12/31/03 12/31/04 12/31/05 Totals
------------ ------------ ------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Emerging Markets $ -- $ -- $ -- $3,235,981 $ -- $ -- $3,235,981
Limited Volatility Tax Free 17,292 383,404 345,504 110,634 15,075 -- 871,909
Money Market -- -- -- 42,906 814 -- 43,720
U.S. Government Money Market -- -- 1,309 4,913 3,331 1,570 11,123
Tax Free Money Market -- -- -- -- -- 1,583 1,583
</TABLE>
The aggregate cost of investments and the composition of gross unrealized
appreciation and depreciation of investment securities for federal income tax
purposes for certain Funds as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Gross Gross Net
Federal Tax Unrealized Unrealized Appreciation
Cost Appreciation (Depreciation) (Depreciation)
---------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Real Estate Securities $ 486,894,747 $ 127,390,181 $ (1,379,746) $ 126,010,435
Emerging Markets 334,674,670 87,894,962 (95,982,863) (8,087,901)
Equity T 99,707,828 15,396,605 (1,061,219) 14,335,386
Limited Volatility Tax Free 84,143,698 1,398,324 (92) 1,398,232
</TABLE>
Redemption fees: In general, shares of the Equity T Fund may be redeemed at
net asset value. However, upon the redemption or exchange of shares held by
shareholders of the Fund, a redemption fee of 1% of the current net asset
value of the shares will be assessed and retained by the Fund for the benefit
of the remaining shareholders. The redemption fee is included in additional
paid-in capital in the accompanying Statement of Assets and Liabilities.
Dividends and distributions to shareholders: For all Funds, income dividends
and capital gain distributions, if any, are recorded on the ex-dividend date.
Dividends are generally declared and paid monthly for the Limited Volatility
Tax Free Fund; quarterly for the Real Estate Securities Fund and annually for
the Equity T and Emerging Markets Funds. The Money Market, U.S. Government
Money Market and Tax Free Money Market Funds declare and record dividends
daily and pay them monthly. Capital gain distributions are generally declared
and paid annually. An additional distribution may be paid by the Funds to
avoid imposition of federal income tax on any remaining undistributed capital
gains and net investment income.
Specialty Funds Notes to Financial Statements 79
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
The timing and characterization of certain income and capital gain
distributions are determined in accordance with federal tax regulations which
may differ from GAAP. As a result, net investment income and net realized
gain (or loss) on investment and foreign currency-related transactions for a
reporting period may differ significantly from distributions during such
period. The differences between tax regulations and GAAP primarily relate to
investments in options, futures, forward contracts, passive foreign
investment companies, foreign-denominated investments, mortgage-backed
securities, and certain securities sold at a loss. Accordingly, a Fund may
periodically make reclassifications among certain of its capital accounts
without impacting its net asset value.
The following reclassifications have been made to reflect activity for the
year ended December 31, 1997:
<TABLE>
<CAPTION>
Undistributed Accumulated
Net Investment Net Realized
Income Gain (Loss)
----------------- -----------------
<S> <C> <C>
Emerging Markets $ 1,576,364 $ (1,576,364)
Limited Volatility Tax Free 23,730 (23,730)
</TABLE>
Expenses: The Funds, and when appropriate each Class, will pay their own
expenses other than those expressly assumed by Frank Russell Investment
Management Company ("FRIMCo" or "Manager"). Most expenses can be directly
attributed to the individual Funds. Expenses which cannot be directly
attributed are allocated among all funds principally based on their relative
net assets. In addition, Class C shares will pay 12b-1 and shareholder
servicing fees along with other expenses that may be attributable to that
Class.
Deferred organization expenses: Organization and initial registration costs
of the Emerging Markets and Equity T Funds have been deferred and are being
amortized over 60 months on a straight-line basis.
Repurchase agreements: The Funds may engage in repurchase agreements with
several financial institutions whereby a Fund, through its custodian,
receives delivery of underlying securities as collateral. Each Fund's Money
Manager will monitor repurchase agreements daily to determine that the market
value (including accrued interest) of the underlying securities at Fedwire
closing time remains at least equal to 102% of the repurchase price. The
Money Manager will notify the Seller to immediately increase the collateral
on the repurchase agreement to 102% of the repurchase price if collateral
value falls below 102%.
Foreign currency translations: The books and records of the Emerging Markets
Fund are maintained in U.S. dollars. Foreign currency amounts and
transactions of the Fund are translated into U.S. dollars on the following
basis:
(a) Market value of investment securities, other assets and liabilities
at the closing rate of exchange on the valuation date.
(b) Outstanding purchases and sales of investment securities and income
at the closing rate of exchange prevailing on the respective trade
dates of such transactions.
Reported net realized gains or losses from foreign currency-related
transactions arise from sales and maturities of short-term securities; sales
of foreign currencies; currency gains or losses realized between the trade
and settlement dates on securities transactions; the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received
or paid. Net unrealized gains or losses from foreign currency-related
transactions arise from changes in the value of assets and liabilities, other
than investments in securities, at period-end, as a result of changes in the
exchange rates.
It is not practical to isolate that portion of the results of operations of
the Emerging Markets Fund that arises as a result of changes in exchange
rates from that portion that arises from changes in market prices of
investments during the year. Such fluctuations are included with the net
realized and unrealized gain or loss from investments. However, for federal
income tax purposes the Fund does isolate the effects of changes in foreign
exchange rates from the fluctuations arising from changes in market prices
for realized gain (or loss) on debt obligations.
Derivatives: To the extent permitted by the investment objectives,
restrictions and policies set forth in the Funds' Prospectus and Statement of
Additional Information, certain Funds may participate in various derivative-
based transactions. Derivative securities are instruments or agreements whose
value is derived from an underlying security or index. They include options,
80 Notes to Financial Statements Specialty Funds
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
futures, swaps, forwards, structured notes and stripped securities. These
instruments offer unique characteristics and risks that assist the Funds in
meeting their investment strategies.
Funds typically use derivatives in three ways: cash equitization, hedging,
and return enhancement. Cash equitization is a technique that may be used by
certain Funds through the use of options and futures to earn "market-like"
returns with their excess and liquidity reserve cash balances. Hedging is
used by some Funds to limit or control risks, such as adverse movements in
exchange rates and interest rates. Return enhancement can be accomplished
through the use of derivatives in a Fund. By purchasing certain instruments,
Funds may more effectively achieve the desired portfolio characteristics that
assist them in meeting their investment objectives. Depending on how the
derivatives are structured and utilized, the risks associated with them may
vary widely. These risks are generally categorized as market risk, liquidity
risk and counterparty or credit risk.
Foreign currency exchange contracts: In connection with portfolio purchases
and sales of securities denominated in a foreign currency, the Emerging
Markets Fund may enter into foreign currency exchange spot contracts and
forward foreign currency exchange contracts ("contracts"). Additionally, from
time to time the Emerging Markets Fund may enter into contracts to hedge
certain foreign currency-denominated assets. Contracts are recorded at market
value. Certain risks may arise upon entering into these contracts from the
potential inability of counterparties to meet the terms of its contracts and
are generally limited to the amount of unrealized gain on the contracts, if
any, that are recognized in the Statement of Assets and Liabilities. Realized
gains or losses arising from such transactions are included in net realized
gain (or loss) from foreign currency-related transactions. Open contracts at
December 31, 1997, are presented on the Statement of Net Assets for the Fund.
Investment in emerging markets: Investing in emerging markets may involve
special risks and considerations not typically associated with investing in
the United States markets. These risks include revaluation of currencies,
high rates of inflation, repatriation, restrictions on income and capital,
and future adverse political and economic developments. Moreover, securities
issued in these markets may be less liquid, subject to government ownership
controls, delayed settlements, and their prices more volatile than those of
comparable securities in the United States.
Futures Contracts: The Equity T Fund utilizes futures to equitize liquidity
reserve balances. The face or contract amounts of these instruments reflect
the extent of the Fund's exposure to off balance sheet risk. The primary
risks associated with the use of futures contracts are an imperfect
correlation between the change in market value of the securities held by the
Fund and the prices of futures contracts and the possibility of an illiquid
market. Changes in the initial settlement values of futures contracts are
accounted for as unrealized appreciation (depreciation) until the contracts
are terminated, at which time realized gains and losses are recognized.
3. Investment Transactions
Securities: During the year ended December 31, 1997, purchases and sales of
investment securities (excluding U.S. Government and Agency obligations,
short-term investments, options, futures and repurchase agreements) were as
follows:
<TABLE>
<CAPTION>
Purchases Sales
------------- -------------
<S> <C> <C>
Real Estate Securities $ 325,390,002 $ 243,461,211
Emerging Markets 240,855,988 156,399,882
<CAPTION>
Purchases Sales
------------- -------------
<S> <C> <C>
Equity T $ 92,490,574 $ 21,079,906
Limited Volatility 45,644,218 28,716,378
</TABLE>
Money Market purchases, sales and maturities of securities (excluding U.S.
Government and Agency obligations and repurchase agreements) were
$15,917,258,789, $127,997,923, and $15,309,791,630 respectively. Purchases,
sales and maturities of U.S. Government and Agency obligations (excluding
repurchase agreements) were $5,002,344, $11,123,599 and $53,900,000,
respectively.
U.S. Government Money Market purchases, sales and maturities of U.S.
Government and Agency obligations (excluding repurchase agreements) were
$955,120,727, $963,692 and $1,000,502,348, respectively.
Tax Free Money Market purchases, sales and maturities of short-term tax
exempt obligations were $424,913,501, $331,020,700 and $61,592,200,
respectively.
Specialty Funds Notes to Financial Statements 81
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
Futures Contracts: Fund transactions in futures contract purchases for the
year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Equity T Futures Contracts
---------------------------------
Aggregate
Number of Face Value of
Contracts Contracts (1)
------------- -----------------
<S> <C> <C>
Outstanding December 31, 1996 -- $ --
Opened 32 11,902,673
Closed (22) (9,485,923)
------------- -----------------
Outstanding December 31, 1997 10 $ 2,416,750
============= =================
</TABLE>
(1) The aggregate face value of contracts is computed on the date each
contract was opened.
4. Related Parties
Manager: FRIMCo operates and administers all of the Funds which comprise the
Investment Company, and manages the Money Market and the U.S. Government
Money Market Funds. FRIMCo is a wholly owned subsidiary of Frank Russell
Company, which researches and recommends to FRIMCo, and to the Investment
Company, one or more investment management organizations to manage the
portfolio of each Fund.
For the year ended December 31, 1997, the management fee paid to the FRIMCo,
for the Funds listed below, in accordance with the Investment Company's
Management Agreement with that firm, amounted to $11,961,647 before waivers.
Such fee is payable monthly and is equal to the annual rate, by Fund, shown
in the table below, of the average daily net assets of the applicable Fund.
<TABLE>
<CAPTION>
Annual Rate
-------------
<S> <C>
Real Estate Securities 0.85%
Emerging Markets 1.20
Equity T 0.75
Limited Volatility Tax Free 0.50
<CAPTION>
Annual Rate
-------------
<S> <C>
Money Market 0.25%
Tax Free Money Market 0.25
U.S. Government Money Market 0.25
</TABLE>
The management contract also provides that if any Fund's expenses (exclusive
of interest and taxes) exceed specified limits imposed by the Manager on an
annual basis, such excess will be paid by FRIMCo. The Manager has voluntarily
agreed to waive a portion of its 1.20% management fee for the Emerging
Markets Fund, to the extent total fund level expenses for the Fund exceed
1.95% of its average daily net assets on an annual basis. There were no
waivers by the Manager for the year ended December 31, 1997.
The Manager has voluntarily agreed to waive a portion of its 0.75% management
fee for the Equity T Fund, up to the full amount of that fee, equal to the
amount by which the Fund's total operating expenses exceed 1.00% of the
Fund's average daily net assets on an annual basis. In addition, the Manager
has voluntarily agreed to reimburse the Fund for any remaining Fund operating
expenses after the Manager waivers which exceed 1.00% of the Fund's average
daily net assets on an annual basis. The amount of such waiver for the year
ended December 31, 1997 was $45,669.
Effective January 1, 1997, the Manager has voluntarily agreed to waive 0.10%
management fee for the Tax Free Money Market Fund. The amount of such waiver
for the year ended December 31, 1997 was $106,776.
Effective September 1, 1997, the Manager has voluntarily agreed to waive
0.13% of its management fee for the U.S. Government Money Market Fund. Prior
to September 1, 1997, the Manager voluntarily agreed to waive .25% of its
management fee. The amount of such waivers for the year ended December 31,
1997 was $463,787.
Effective October 15, 1997, the Manager has voluntarily agreed to waive 0.15%
of its 0.25% management fee for the Money Market Fund. Prior to October 15,
1997, the Manager voluntarily agreed to waive its 0.25% management fee. The
amount of such waivers for the year ended December 31, 1997 was $1,661,140.
82 Notes to Financial Statements Specialty Funds
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
Effective October 15, 1997, FRIMCo began calculating its management fee based
on average daily net assets for each Fund less any management fee incurred on
assets invested in the Money Market Fund (see Note 5) thereby eliminating any
duplication at fees. Prior to October 15, 1997, FRIMCo calculated its
management fee based on average daily net assets for each Fund , which may
have included an investment in the Money Market Fund. Prior to October 15,
1997, the Money Market Fund waived all management fees.
Bookkeeping services: Fees for bookkeeping and analytics services provided to
the Funds are paid or accrued to Frank Russell Company, an affiliate of the
Investment Company. Frank Russell Company provides its Portfolio Verification
System ("PVS") and TruVP System to the Real Estate Securities, Emerging
Markets and Equity T Funds, pursuant to a written Service Agreement. The PVS
computerized database system records detailed transactions data for each of
the Funds necessary to prepare various financial and Internal Revenue Service
accounting reports, whereas the TruVP System provides analytics used by the
investment department. Total fees for the year ended December 31, 1997 for
the Real Estate Securities, Emerging Markets and Equity T Funds were $47,480.
The PVS system portion of the service agreement was terminated during 1997.
Transfer agent: The Funds have a contract with FRIMCo to provide transfer
agent services to the Investment Company. Total fees for the year ended
December 31, 1997 were $1,313,018.
Distributor and shareholder servicing: The Investment Company has adopted a
Distribution Plan pursuant to Rule 12b-1 (the "Plan") under the 1940 Act.
Under this Plan, the Investment Company is authorized to make payments to the
Distributor, or any Selling Agents, as defined in the Plan, an amount (the
"12b-1 Fee") for sales support services provided, and related expenses
incurred which are primarily intended to result in the sale of the Class C
Shares subject to the Distribution Plan.
The Investment Company has entered into a Distribution Agreement with Russell
Fund Distributors (the "Distributor") which is a wholly-owned subsidiary of
FRIMCo to promote and offer shares of Class S and Class C of the Investment
Company Funds. The Distributor may enter into sub-distribution agreements
with other non-affiliated parties (the "Selling/Servicing Agents"). The
amounts paid to the Distributor for distribution services relating to Class C
are included in the accompanying Statements of Operations. The Distributor
receives no compensation from the Investment Company for its services
relating to distributions of the Class S Shares.
In addition, the Investment Company has adopted a Shareholder Services Plan
(the "Services Plan") under which it may make payments to the Distributor or
any Servicing Agent for any activities or expenses primarily intended to
assist, support or service the Servicing Agents' clients who beneficially own
Class C Shares of the Funds. The amounts paid to the Distributor for
shareholder services relating to Class C are included in the accompanying
Statements of Operations.
The 12b-1 Fee payments shall not exceed .75% of the average daily net assets
of a Fund's Class C Shares on an annual basis. Currently the Board of
Trustees has determined to assess a 12b-1 Fee equal to .40% of the average
daily net assets. The shareholder servicing payments shall not exceed .25% of
the average daily net assets of a Fund's Class C Shares on an annual basis.
The Investment Company does not pay for unreimbursed expenses of the
Distributor including amounts expended by the Distributor in excess of
amounts received by it from the Investment Company interest, carrying or
other financing charges in connection with excess amounts expended, or the
Distributor's overhead expenses. However, the Distributor may be able to
recover such amount or more from future payments made by the Investment
Company under the Distribution plan.
Accrued fees payable to affiliates as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Shareholder
Servicing &
Management Bookkeeping Transfer Distribution
Fees Service Fees Agent Fees Fees Totals
-------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Real Estate Securities $ 429,980 $ 6,645 $ 83,509 $ 577 $ 520,711
Emerging Markets 335,317 14,274 42,272 -- 391,863
Equity T 62,439 2,929 3,789 -- 69,157
Limited Volatility Tax Free 34,392 -- 5,889 -- 40,281
Money Market 81,926 -- -- -- 81,926
U.S. Government Money Market 19,732 -- 9,448 -- 29,180
Tax Free Money Market 15,903 -- 4,453 -- 20,356
-------------- -------------- -------------- ------------- --------------
$ 979,689 $ 23,848 $ 149,360 $ 577 $ 1,153,474
============== ============== ============== ============= ==============
</TABLE>
Specialty Funds Notes to Financial Statements 83
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
Board of Trustees: The Investment Company pays each of its Trustees not
affiliated with FRIMCo a retainer of $20,000 per year plus out-of-pocket
expenses. Total Trustee expenses were $101,243 for the year ended December
31, 1997, and were allocated to each Fund and Class, where appropriate, on a
pro rata basis, including 21 other affiliated funds not presented herein.
5. Money Market Fund
The Real Estate Securities, Emerging Markets and Equity T Funds are permitted
to invest their cash reserves (i.e., monies awaiting investment in portfolio
securities suitable for the Funds' objectives) in the Frank Russell
Investment Company Money Market Fund. As of December 31, 1997, $46,167,000 of
the Money Market Fund's net assets represents investments by these Funds and
$661,765,000 represents the investments of other affiliated Funds not
presented herein.
6. Fund Share Transactions
Share transactions for each Class of shares for the years ended December 31,
were as follows:
<TABLE>
<CAPTION>
Shares Dollars
-------------------------------------- ---------------------------------------
1997 1996 1997 1996
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Real Estate Securities
Class S
Proceeds from shares sold 7,684,555 5,017,237 $ 230,371,098 $ 125,244,724
Proceeds from reinvestment
of distributions 1,795,828 1,176,858 53,609,700 30,943,033
Payments for shares redeemed (4,804,495) (3,303,765) (145,560,311) (84,501,911)
------------------ ----------------- ------------------ -----------------
Net increase (decrease) 4,675,888 2,890,330 138,420,487 71,685,846
------------------ ----------------- ------------------ -----------------
Class C*
Proceeds form shares sold 10,282 3,474 312,091 92,731
Proceeds from reinvestment
of distributions 2 1 56 16
Payments for shares redeemed (1,234) -- (38,088) --
------------------ ----------------- ------------------ -----------------
Net increase (decrease) 9,050 3,475 274,059 92,747
------------------ ----------------- ------------------ -----------------
Total net increase (decrease) 4,684,938 2,893,805 $ 138,694,546 $ 71,778,593
================== ================= ================== =================
Emerging Markets
Class S
Proceeds from shares sold 14,335,518 10,179,422 $ 190,158,016 $ 124,450,513
Proceeds from reinvestment
of distributions 247,790 256,419 3,101,136 3,073,769
Payments for shares redeemed (8,321,103) (3,913,806) (108,152,054) (48,141,914)
------------------ ----------------- ------------------ -----------------
Total net increase (decrease) 6,262,205 6,522,035 $ 85,107,098 $ 79,382,368
================== ================= ================== =================
Equity T
Proceeds from shares sold 6,151,525 1,875,109 $ 77,850,485 $ 19,221,884
Proceeds from reinvestment
of distributions 32,047 4,338 433,594 44,985
Payments for shares redeemed (165,627) (450) (2,158,852) (4,671)
------------------ ----------------- ------------------ -----------------
Total net increase (decrease) 6,017,945 1,878,997 $ 76,125,227 $ 19,262,198
================== ================= ================== =================
</TABLE>
* Share transactions for Class C for the period November 4, 1996 (commencement
of sale of shares) to December 31, 1996.
84 Notes to Financial Statements Specialty Funds
<PAGE>
Frank Russell Investment Company
Notes to Financial Statements, continued
<TABLE>
<CAPTION>
Shares Dollars
-------------------------------------- --------------------------------------
1997 1996 1997 1996
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Limited Volatility Tax Free
Proceeds from shares sold 2,531,242 1,424,169 $ 53,259,367 $ 30,027,835
Proceeds from reinvestment
of distributions 103,927 84,366 2,187,639 1,775,094
Payments for shares redeemed (1,870,802) (1,357,561) (39,334,693) (28,634,470)
------------------ ----------------- ------------------ -----------------
Total net increase (decrease) 764,367 150,974 $ 16,112,313 $ 3,168,459
================== ================= ================== =================
</TABLE>
<TABLE>
<CAPTION>
On a Constant Dollar Basis
1997 1996
------------------ -----------------
<S> <C> <C>
Money Market
Proceeds from shares sold 8,643,687,722 5,832,269,612
Proceeds from reinvestment
of distributions 1,300,153 90,874
Payments for shares redeemed (8,215,637,307) (5,869,071,366)
------------------ -----------------
Total net increase (decrease) 429,350,568 (36,710,880)
================== =================
U.S. Government Money Market
Proceeds from shares sold 667,733,205 695,162,232
Proceeds from reinvestment
of distributions 9,531,602 7,499,618
Payments for shares redeemed (729,577,537) (612,878,224)
------------------ -----------------
Total net increase (decrease) (52,312,730) 89,783,626
================== =================
Tax Free Money Market
Proceeds from shares sold 267,746,557 214,968,815
Proceeds from reinvestment
of distributions 1,922,212 1,064,604
Payments for shares redeemed (241,151,219) (191,826,042)
------------------ -----------------
Total net increase (decrease) 28,517,550 24,207,377
================== =================
</TABLE>
There was no activity for Class C shares for the Emerging Markets Fund.
7. Dividends
On February 2, 1998, the Board of Trustees declared the following dividend
from net investment income payable on February 10, 1998, to shareholders of
record on February 3, 1998:
Limited Volatility Tax Free $ 0.067
8. Beneficial Interest
The following Funds or Class of shares have one or more shareholders with an
interest greater than 10% of the total outstanding shares as of December 31,
1997: Money Market 18.2% and 14.4%, Emerging Markets 13.7%, Equity T 15.4%
and 13.9%, Tax Free Money Market 48.3%, Real Estate Securities - Class 5
11.5%, and Real Estate Securities - Class C 99.8%.
Specialty Funds Notes to Financial Statements 85
<PAGE>
Report of Independent Accountants
To the Shareholders and Board
of Trustees of Frank Russell Investment Company:
We have audited the accompanying statements of assets and liabilities and
statements of net assets of each of the series of Frank Russell Investment
Company (in this report comprised of Real Estate Securities, Emerging Markets,
Equity T, Limited Volatility Tax Free, Money Market, U.S. Government Money
Market, and Tax Free Money Market (the "Funds")), as of December 31, 1997, and
the related statements of operations, the statements of changes in net assets
and the financial highlights for each of the periods indicated therein. These
financial statements and financial highlights are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Funds enumerated above as of December 31, 1997, the results of their operations,
the changes in their net assets and the financial highlights for each of the
periods indicated therein in conformity with generally accepted accounting
principles.
Boston, Massachusetts
February 17, 1998
/s/ Coopers & Lybrand LLP
86 Report of Independent Accountants Specialty Funds
<PAGE>
Frank Russell Investment Company
Tax Information
December 31, 1997 (Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates the
following amount as long-term capital gain dividends for its taxable year ended
December 31, 1997:
<TABLE>
<CAPTION>
Total Long-Term 20%
Capital Gains Capital Gains
------------------ -----------------
<S> <C> <C>
Real Estate Securities $ 28,736,083 $ 11,407,632
</TABLE>
Specialty Funds Tax Information 87
<PAGE>
Frank Russell Investment Company
909 A Street, Tacoma, Washington 98402
(800) 832-6688
In Washington (253) 627--7001
Trustees
George F. Russell, Jr., Chairman
Lynn L. Anderson
Paul E. Anderson
Paul Anton, PhD
William E. Baxter
Lee C. Gingrich
Eleanor W. Palmer
Officers
Lynn L. Anderson, President and Chief Executive Officer
Peter Apanovitch, Manager of Short Term Investment Funds
George W. Weber, Treasurer and Chief Accounting Officer
Randall P. Lert, Director of Investments
Karl Ege, Secretary and General Counsel
Manager and Transfer Agent
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
Consultant
Frank Russell Company
909 A Street
Tacoma, WA 98402
Money Managers
Real Estate Securities
AEW Capital Management, L.P., Boston, MA
Cohen & Steers Capital Management, New York, NY
Emerging Markets
Genesis Asset Managers, Ltd., London, England
J.P. Morgan Investment Management, Inc., New York, NY
Montgomery Asset Management, L.P., San Francisco, CA
Equity T Fund
J.P. Morgan Investment Management, Inc., New York, NY
Limited Volatility Tax Free
MFS Institutional Advisors, Inc., Boston, MA
T. Rowe Price Associates, Inc., Baltimore, MD
Money Market
Frank Russell Investment Management Co., Tacoma, WA
U.S. Government Money Market
Frank Russell Investment Management Co., Tacoma, WA
Tax Free Money Market
Weiss, Peck & Greer, L.L.C., New York, NY
Custodian
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
Office of Shareholder Inquiries
909 A Street
Tacoma, WA 98402
(800) RUSSEL4
(800) 787-7354
Legal Counsel
Stradley, Ronon, Stevens & Young, LLP
2600 - One Commerce Square
Philadelphia, PA 19103--7098
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
Distributor
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
This report is prepared from the books and records of the Funds and is submitted
for the general information of shareholders and is not authorized for
distribution to prospective investors unless accompanied or preceded by an
effective Prospectus. Nothing herein contained is to be considered an offer of
sale or a solicitation of an offer to buy shares of Frank Russell Investment
Company. Such offering is made only by Prospectus, which includes details as to
offering price and other material information.
88 Manager, Money Managers and Service Providers Specialty Funds
<PAGE>
[LOGO OF RUSSELL]
FRANK RUSSELL INVESTMENT COMPANY
909 A Street
Tacoma, WA 98402
800-832-6688
IN13(198)SPEC
