PORTFOLIO
COMPOSITION........3
PORTFOLIO
HIGHLIGHTS.........4
PORTFOLIOS.........7
FINANCIAL
INFORMATION
INDEPENDENT
PUBLIC
ACCOUNTANTS'
REPORT..........18
FINANCIAL
STATEMENTS......19
FINANCIAL
HIGHLIGHTS......22
NOTES TO
FINANCIAL
STATEMENTS......25
IN COMPARISON WITH THE PAST YEAR,
MODERATED GROWTH IS EXPECTED FOR 1997
Looking back at 1996, it is easy to see that many equity investors were
celebrating a 15-year-long market that had only a single downturn - with that
coming in 1987.
On the fixed-income side, investors experienced more market volatility -
from early expectations of a recession - to robust mid-year growth - to almost
perfect conditions as the year ended.
Ahead, we expect the economy's upward movement will be moderated, when
compared to the past year, with inflation continuing at much the same low level.
Three portfolios comprise our offerings to Composite Variable Annuity
owners: Growth & Income and Northwest, both of which focus on stocks; and
Income, which is centered on fixed-income investments. Each allows you to invest
according to your investment objectives in a tax-deferred environment.
Performance and prospects for each are discussed in extensive detail on these
pages, following this introductory message.
Many economic conditions obviously will be felt by all types of investors.
Nevertheless, it may be useful to touch on a few key market elements and how we
expect they will influence investments in 1997 - a year which we believe will be
quite healthy.
First, on the equities side:
MANY FACTORS INFLUENCE THE STOCK MARKET
* Not surprising to us, the rate of savings in the United States has taken at
least a short-term upward turn. Money is going into investments and bank
accounts, it is paying down debt, and it is being used for other non-spending
purposes. The reasons for this, we believe, are concerns about retirement and
large amounts of credit-card debt.
* Interest rates are expected to remain near today's level.
* There will continue to be some investors who opt for favorable earnings in
the companies in which they invest. At the same time, it is likely they will
find such securities are selling at a premium.
* Another continuing trend we anticipate is the growth of good small-
and medium-cap companies, and accelerated acquisition of them as they mature,
by large companies. For the Portfolios we manage, it will be vital that we
recognize undervalued stocks, anticipate their growth, and take early action
to acquire them.
* On the government front, we applaud possible downsizing, recognizing that
such a move would make new dollars available to help boost the economy.
Similarly, we are pleased when we hear serious talk about dealing with the
federal debt, but we believe that the importance of entitlement programs such
as Social Security and Medicare cannot be ignored.
FIVE DRIVING FORCES ARE EXPECTED
Examining the economy from the perspective of a fixed-income investor leads
to some of the same conclusions expressed above, as well as to unique points of
view. The latter are considered below.
Our expectations are that there will be five driving forces that will have
a significant impact in the future. These factors should allow the current,
almost perfect conditions of modest growth and low inflation to persist. Steady
or lower interest rates will complement the situation.
These five factors are:
* Slow economic growth, in large part because U.S. consumers and our
federal government have spent and spent and driven debt levels up and
up. Neither consumers nor the government can take on much new
borrowing.
* High levels of debt and slow economic growth are not just an American
phenomena. Governments everywhere in the world face the same problems,
often to a much greater degree than our own.
* Many new producers and sellers are at work in the global marketplace,
particularly in the countries of the former Soviet Union, East Asia
and Latin America. This has helped curb inflation by allowing each
country, including ours, to provide the goods for which they are the
most efficient producer.
* The Federal Reserve recognizes the value of low inflation in fostering
efficient, stable growth and that understanding is reflected in our
nation's current monetary policy.
* As discussed earlier, the need to prepare for retirement appears to
be on the minds of many people. Saving more and buying less can be
expected to have a positive impact on financial markets.
Certainly, volatility also will continue to be a potentially powerful
influence, as it was in 1994, when interest rates rose, and in 1995, when rates
fell. However, we expect today's interest rates to be typical of the average
level of rates until 2000.
A GOOD GROUNDING IN FUNDAMENTALS ALWAYS HELPS
In view of the positive financial prognosis for the new year, it is worth
offering two basics of investing:
One: Risk, and all that it entails, still is a vital part of the investment
equation. There's a lot to be said for being prepared for market fluctuations,
both up and down, and for investing regularly over the long term.
Two: Portfolios such as the ones in which you invest provide all-important
diversification, something that, otherwise, is difficult to achieve effectively
without a personal portfolio of several hundred thousand dollars. And, of
course, diversification is really just another way to minimize risk while
seeking growth or income or both.
THANK YOU
Your purchase of a Composite Variable Annuity is important to us. We
greatly appreciate the confidence you've placed in us.
/s/
ROBERT W. ESCHRICH
PRESIDENT AND CEO
WM LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
FOOTNOTE TO INVESTMENT PERFORMANCE CHARTS ON PAGES 4, 5, AND 6.
INVESTMENT RETURNS AND PRINCIPAL VALUES OF PORTFOLIO SHARES WILL FLUCTUATE
SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST.
COMPARISONS TO PORTFOLIO PERFORMANCE ON THE FOLLOWING PAGES INCLUDE THE
CONSUMER PRICE INDEX (CPI), AS A MEASURE OF CHANGE IN CONSUMER PRICES AS
DETERMINED BY THE U.S. BUREAU OF LABOR STATISTICS, THE STANDARD & POOR'S 500
STOCK INDEX (S&P 500), WHICH IS CONSIDERED GENERALLY REPRESENTATIVE OF THE U.S.
STOCK MARKET, AND THE LEHMAN GOVERNMENT/CORPORATE BOND INDEX (LGCB), WHICH IS
CONSIDERED REPRESENTATIVE OF THE U.S. GOVERNMENT AND CORPORATE BOND MARKETS.
THESE INDICES ARE UNMANAGED AND DO NOT REFLECT ACTUAL INVESTMENT-RELATED
EXPENSES INCURRED BY THE PORTFOLIOS WITH WHICH THEY ARE COMPARED. AVERAGE ANNUAL
TOTAL RETURNS AND GRAPH VALUES INCLUDE CHANGES IN SHARE PRICE, AND REINVESTMENT
OF DIVIDENDS AND CAPITAL GAINS.
PERFORMANCE INFORMATION IS PRESENTED SINCE THE COMMENCEMENT OF OPERATIONS
OF EACH PORTFOLIO WHICH IS JUNE 1987 FOR THE GROWTH & INCOME AND INCOME
PORTFOLIOS, AND JANUARY 1993 FOR THE NORTHWEST PORTFOLIO.
<PAGE>
PORTFOLIO COMPOSITION
PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 1996
GROWTH & INCOME PORTFOLIO
TOP TEN HOLDINGS
Wells Fargo & Company - 2%
Federal Home Loan Mortgage Corporation - 2%
Microsoft Corporation - 2%
Johnson & Johnson - 2%
Lockheed/Martin - 2%
AT&T Corporation - 2%
Intel Corporation - 2%
Motorola, Inc. - 2%
Unilever NV - 2%
Raytheon Co. - 2%
[PIE CHART:]
INDUSTRY ALLOCATION
Technology and Electronics 15%
Banking and Financial 13%
Capital Goods and
Aerospace 12%
Health Care 12%
Consumer Staples 11%
Consumer Cyclicals 10%
Utilities and Real Estate
Investment Trusts 9%
Oils 7%
Basic Industry and Resources 6%
Cash and Other 5%
NORTHWEST PORTFOLIO
TOP TEN HOLDINGS
Microsoft Corporation - 6%
Boeing Company - 5%
U.S. Bancorp Oregon - 4%
Fred Meyer, Inc. - 4%
Expeditors International WA - 3%
Nike, Class B - 3%
Albertsons, Inc. - 3%
Price/Costco - 3%
Tektronix, Inc. - 3%
Mentor Graphics - 3%
[PIE CHART:]
INDUSTRY ALLOCATION
Electronics 15%
Computer Software and
Systems 13%
Banking and Financial 12%
Consumer Cyclicals 12%
Capital Goods and
Aerospace 10%
Basic Industry and
Resources 9%
Health Care 8%
Cash and Other 8%
Transportation 7%
Utilities and Real Estate Investment Trusts 6%
INCOME PORTFOLIO
TOP TEN ISSUERS
U.S. Treasury - 37%
Government National Mortgage Association - 8%
Federal National Mortgage Association - 2%
Weyerhaeuser - 2%
Burlington Northern - 2%
Continental Corporation - 2%
Loral Space & Communications - 2%
Franchise Finance Corporation - 2%
First Nationwide - 2%
Federal Home Loan Mortgage Corporation - 1%
[PIE CHART:]
ASSET ALLOCATION
Corporate 37%
Treasury Obligations 37%
Mortgages 15%
Cash and Other 11%
<PAGE>
PORTFOLIO HIGHLIGHTS
GROWTH & INCOME PORTFOLIO
KEY IMPACTS ON 1996 PERFORMANCE
The stock market performed well in 1996, driven higher by news of mergers
and acquisitions, low inflation, and solid corporate earnings. The Portfolio
benefited from this positive equity environment and posted excellent returns. In
particular, two holdings (FHP Corporation and Loral Space & Communications) were
taken over at prices substantially higher than their trading prices which helped
produce the positive 1996 performance.
WHAT'S AHEAD
We anticipate that mergers and acquisitions, along with the low-inflation
environment, are likely to continue. However, corporate earnings, especially in
the consumer sector, are unlikely to be as strong in 1997 as in 1996. Therefore,
we intend to take a cautious approach to investments in this area.
We also believe that a narrow group of stocks has been the primary force
driving the stock average. We are trying to take advantage of this by buying
desirable companies that have not participated in the market rise.
KEY INVESTMENT STRATEGIES
Our basic strategy, as always, is to buy stocks of good businesses when
they are at "sale prices." Good businesses generate a high return on investment,
have a competitive advantage and have barriers to entry.
We currently are finding good equities in the movie and content area.
Improved means of distributing their products, which include direct television,
Internet and cable modem transmissions, should provide increased revenue
opportunities for these companies.
The semiconductor group also is providing bargains, as we see oversupply
concerns coming to an end. The demand for semiconductors remains strong, fueled
by Pentium Pro and Window N.T. product cycles, as well as telecommunications
deregulation.
Finally, spinoff situations are offering excellent value in the
marketplace. Many former subsidiaries of larger companies are excellent
businesses where management owns considerable stock. We are finding that many of
these situations are undervalued.
INVESTMENT PERFORMANCE CHART:
PERFORMANCE INFORMATION * GROWTH & INCOME PORTFOLIO * PERIODS ENDED DECEMBER 31,
1996
ENDING VALUE OF $10,000 INVESTED SINCE INCEPTION ON 6/30/87
KEY: Growth & Income Portfolio $28,105
S&P 500 (Stocks) $32,553
CPI (Inflation) $13,974
PAST PERFORMANCE CANNOT PREDICT FUTURE RESULTS.
Box to the right of chart: THE CHART DEPICTS THE PORTFOLIO'S PERFORMANCE. AN
INVESTMENT IN THE PORTFOLIO THROUGH A COMPOSITE VARIABLE ANNUITY CONTRACT WOULD
HAVE RESULTED IN AVERAGE ANNUAL RETURNS OF 12.95%, 12.78% and 10.02% OVER ONE
YEAR, FIVE YEARS AND SINCE INCEPTION, RESPECTIVELY. ANNUITY RETURNS ARE AFTER
ALL FEES AND ASSUME PAYMENT OF THE CONTINGENT DEFERRED SALES CHARGE WHICH
DECLINES FROM 7% TO 0%. SEE FOOTNOTE ON PAGE 2.
COMPOSITE DEFERRED GROWTH STANDARD & POOR'S 500 INDEX CONSUMER PRICE INDEX
& INCOME
6/30/87 10,000 $10,000 $10,000
9/30/87 10,459 $10,658 $10,132
12/31/87 8,951 $8,263 $10,167
3/31/88 9,910 $8,735 $10,264
6/30/88 10,236 $9,312 $10,396
9/30/88 10,401 $9,344 $10,555
12/31/88 10,611 $9,631 $10,617
3/31/89 11,183 $10,317 $10,775
6/30/89 11,679 $11,220 $10,934
9/30/89 12,286 $12,418 $11,013
12/31/89 11,778 $12,675 $11,110
3/31/90 11,522 $12,303 $11,339
6/30/90 11,871 $13,068 $11,445
9/30/90 10,232 $11,283 $11,692
12/31/90 11,194 $12,288 $11,789
3/31/91 12,828 $14,073 $11,894
6/30/91 13,128 $14,041 $11,982
9/30/91 13,420 $14,792 $12,088
12/31/91 14,095 $16,032 $12,150
3/31/92 14,256 $15,627 $12,273
6/30/92 14,470 $15,924 $12,352
9/30/92 14,900 $16,426 $12,449
12/31/92 15,582 $17,253 $12,502
3/30/93 16,088 $18,007 $12,652
6/30/93 16,027 $18,094 $12,722
9/30/93 16,079 $18,562 $12,784
12/31/93 16,761 $18,992 $12,846
3/31/94 16,603 $18,272 $12,969
6/30/94 16,673 $18,349 $13,040
9/30/94 17,502 $19,246 $13,163
12/31/94 17,217 $19,243 $13,189
3/31/95 18,637 $21,117 $13,339
6/30/95 19,985 $23,133 $13,436
9/30/95 21,573 $24,971 $13,498
12/31/95 23,019 $26,474 $13,524
3/31/96 24,275 $27,895 $13,718
6/30/96 25,390 $29,147 $13,806
9/30/96 26,170 $30,048 $13,903
12/31/96 28,105 $32,553 $13,974
<PAGE>
PORTFOLIO HIGHLIGHTS
NORTHWEST PORTFOLIO
The past year was the first in which the Portfolio was fully managed
without any formal ties to the Northwest 50(R)Index. During the year, we added
24 new companies to our holdings and eliminated 11. In addition, we reduced our
concentration in some of our larger holdings, and the Portfolio is now fully
diversified.
KEY IMPACTS ON 1996 PERFORMANCE
Many of our major holdings had very strong performance during 1996, such as
Microsoft (up 88%), Boeing (up 36%) and Nike (up 72%). However, the Portfolio
had significant exposure to small-capitalization stocks, some of which
underperformed the market during the year. Among them were Redhook Ale Brewery
(down 63%), and Mentor Graphics (down 47%).
Of the companies added to our Portfolio, some performed well and some
lagged. Among those performing well since purchase were Red Lion Hotels (up
approximately 75% due to its acquisition by Doubletree Inns) and Intel (up 31%).
Those lagging our performance expectations since purchase included InFocus
Systems (down 40%) and Ostex (down 71%). We continue to like the fundamentals of
the small-capitalization stocks in the Portfolio and we anticipate stronger
performance from them in the future.
WHAT'S AHEAD
We believe the Pacific Northwest is extremely well positioned for future
growth, thanks in large part to the strength of the technology and aerospace
industries. The Puget Sound region, in particular, may be on the cusp of some of
the strongest growth it has seen in years. Also, the Portland-area technology
boom continues unabated. All of this bodes well for companies dependent on the
regional economy, notably retailers and banks. In addition, the strong
competitive positions of the more global companies in our Portfolio, such as
Microsoft, Boeing, and Nike, provide a diverse economic backbone.
Although the Portfolio is, by nature, volatile, we believe that
shareholders will be well rewarded over the long run.
KEY INVESTMENT STRATEGIES
The Portfolio seeks long-term capital appreciation by investing in the
stocks of companies headquartered or doing business in the Northwest. Quality
companies with strong growth characteristics, competitive advantages, and
reasonable valuations are key elements we look for when pursuing this goal.
INVESTMENT PERFORMANCE CHART:
PERFORMANCE INFORMATION * NORTHWEST PORTFOLIO * PERIODS ENDED DECEMBER 31, 1996
ENDING VALUE OF $10,000 INVESTED SINCE INCEPTION ON 1/4/93
KEY: Northwest Portfolio $15,679
S&P 500 (Stocks) $18,868
CPI (Inflation) $11,177
PAST PERFORMANCE CANNOT PREDICT FUTURE RESULTS
Box to the right of chart: THE CHART DEPICTS THE PORTFOLIO'S PERFORMANCE. AN
INVESTMENT IN THE PORTFOLIO THROUGH A COMPOSITE VARIABLE ANNUITY CONTRACT WOULD
HAVE RESULTED IN AVERAGE ANNUAL RETURNS OF 13.09% OVER ONE YEAR, AND 9.58% SINCE
INCEPTION, RESPECTIVELY. ANNUITY RETURNS ARE AFTER ALL FEES AND ASSUME PAYMENT
OF THE CONTINGENT DEFERRED SALES CHARGE WHICH DECLINES FROM 7% TO 0%.
SEE FOOTNOTE ON PAGE 2.
COMPOSITE DEFERRED NORTHWEST STANDARD & POOR'S 500 INDEX CONSUMER PRICE INDEX
1/4/93 $10,000 $10,000 $10,000
3/31/93 $10,105 $10,437 $10,120
6/30/93 $ 9,800 $10,487 $10,176
9/30/93 $ 9,611 $10,758 $10,226
12/31/93 $10,293 $11,008 $10,275
3/31/94 $10,369 $10,590 $10,374
6/30/94 $10,149 $10,635 $10,430
9/30/94 $10,356 $11,155 $10,529
12/31/94 $10,178 $11,153 $10,550
3/31/95 $10,824 $12,239 $10,669
6/30/95 $11,774 $13,408 $10,747
9/30/95 $12,824 $14,473 $10,796
12/31/95 $12,827 $15,344 $10,817
3/31/96 $13,379 $16,168 $10,973
6/30/96 $14,090 $16,894 $11,043
9/30/96 $14,360 $17,416 $11,121
12/31/96 $15,679 $18,868 $11,177
<PAGE>
PORTFOLIO HIGHLIGHTS
INCOME PORTFOLIO
KEY IMPACTS ON 1996 PERFORMANCE
Fixed-income returns, although modest in 1996, generally outpaced
inflation. Despite interest rates being low by recent historical standards,
inflation remained even lower. This translated into positive returns for
Portfolio holders.
As it became apparent that the economy was growing faster than expected,
interest rates rose for most of the year, limiting returns to investors in
fixed-income securities. For the year, rates on intermediate-maturity securities
rose 0.85%.
The Portfolio's mortgage-backed securities performed well in 1996. A
favorable prepayment environment - the result of relatively subdued interest
rate volatility - was the primary factor supporting this sector's strong
relative performance.
WHAT'S AHEAD
We believe interest rates at today's levels represent good value. As noted
in the introduction, the five structural forces that we feel will continue to
limit inflation growth for years to come are: excessive build-up of debt, fiscal
austerity worldwide, increased global competition, U.S. monetary policy focused
on low inflation, and changing demographics.
It is possible there will be short periods of rising inflation, but we see
little risk in a sustained, rising inflationary environment that would produce
significantly higher rates.
KEY INVESTMENT STRATEGIES
The Portfolio seeks to provide a high level of current income that is
consistent with the protection of capital. We attempt to accomplish this by
selecting investments with an intermediate-maturity profile and by investing in
a combination of corporate, mortgage-backed and treasury securities. By taking
advantage of changing fundamentals between market sectors and anticipating broad
changes in interest rates, we feel we can add incremental income to the
Portfolio while still focusing on the protection of capital.
INVESTMENT PERFORMANCE CHART:
PERFORMANCE INFORMATION * INCOME PORTFOLIO * PERIODS ENDED DECEMBER 31, 1996
ENDING VALUE OF $10,000 INVESTED SINCE INCEPTION ON 6/30/87
KEY: Income Portfolio $21,360
LGCB (Gov't./Corp. Bonds) $22,455
CPI (Inflation) $13,974
PAST PERFORMANCE CANNOT PREDICT FUTURE RESULTS
Box to the right of chart: THE CHART DEPICTS THE PORTFOLIO'S PERFORMANCE. AN
INVESTMENT IN THE PORTFOLIO THROUGH A COMPOSITE VARIABLE ANNUITY CONTRACT WOULD
HAVE RESULTED IN AVERAGE ANNUAL RETURNS OF -5.27%, 4.73% and 7.11% OVER ONE
YEAR, FIVE YEARS AND SINCE INCEPTION, RESPECTIVELY. ANNUITY RETURNS ARE AFTER
ALL FEES AND ASSUME PAYMENT OF THE CONTINGENT DEFERRED SALES CHARGE WHICH
DECLINES FROM 7% TO 0%. SEE FOOTNOTE ON PAGE 2.
COMPOSITE DEFERRED INCOME LEHMAN GOVT./CORP. BOND INDEX CONSUMER PRICE INDEX
6/30/87 $10,000 $10,000 $10,000
9/30/87 $10,025 $ 9,708 $10,132
12/31/87 $10,214 $10,274 $10,167
3/31/88 $10,689 $10,642 $10,264
6/30/88 $10,850 $10,747 $10,396
9/30/88 $11,036 $10,948 $10,555
12/31/88 $11,203 $11,053 $10,617
3/31/89 $11,372 $11,175 $10,775
6/30/89 $11,834 $12,073 $10,934
9/30/89 $12,107 $12,187 $11,013
12/31/89 $12,315 $12,627 $11,110
3/31/90 $12,341 $12,482 $11,339
6/30/90 $12,759 $12,932 $11,445
9/30/90 $12,782 $13,010 $11,692
12/31/90 $13,373 $13,673 $11,789
3/31/91 $13,764 $14,041 $11,894
6/30/91 $13,992 $14,253 $11,982
9/30/91 $14,722 $15,073 $12,088
12/31/91 $15,498 $15,877 $12,150
3/31/92 $15,317 $15,639 $12,273
6/30/92 $15,933 $16,273 $12,352
9/30/92 $16,615 $17,068 $12,449
12/31/92 $16,570 $17,081 $12,502
3/31/93 $17,324 $17,875 $12,652
6/30/93 $17,741 $18,412 $12,722
9/30/93 $18,255 $19,021 $12,784
12/31/93 $18,230 $18,966 $12,846
3/31/94 $17,559 $18,372 $12,969
6/30/94 $17,298 $18,143 $13,040
9/30/94 $17,373 $18,233 $13,163
12/31/94 $17,414 $18,300 $13,189
3/31/95 $18,272 $19,212 $13,339
6/30/95 $19,553 $20,459 $13,436
9/30/95 $19,905 $20,850 $13,498
12/31/95 $20,872 $21,821 $13,524
3/31/96 $20,304 $21,311 $13,718
6/30/96 $20,349 $21,411 $13,806
9/30/96 $20,704 $21,789 $13,903
12/31/96 $21,360 $22,455 $13,974
<PAGE>
COMPOSITE
DEFERRED
SERIES, INC.
PORTFOLIOS OF
INVESTMENTS
IN SECURITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
GROWTH & INCOME PORTFOLIO
PRINCIPAL MARKET
AMOUNT VALUE
------------- ------------
<S> <C> <C>
CONVERTIBLE CORPORATE BONDS-0.47%
$245,000 Michael Stores, 6.75%, due 01/15/2003 (cost $218,710)....... $ 192,938
------------
SHARES
-------------
COMMON STOCKS-96.41%
AEROSPACE/DEFENSE-5.00%
9,639 Lockheed Martin Corporation................................. 881,969
5,000 Northrop Grumman Corporation................................ 413,750
15,990 Raytheon Company............................................ 769,518
------------
2,065,237
------------
BANK/SAVINGS & LOAN-7.48%
12,500 Bank of New York Company, Inc. ............................. 421,875
5,107 Mellon Bank Corporation..................................... 362,597
12,980 Norwest Bancorp............................................. 564,630
11,000 Signet Banking Corporation.................................. 338,250
16,500 Washington Federal, Inc. ................................... 437,250
3,600 Wells Fargo & Company....................................... 971,100
-------------
3,095,702
-------------
BEVERAGES-2.06%
13,900 PepsiCo, Inc. .............................................. 406,575
11,500 Seagram Company, Ltd. ...................................... 445,625
-------------
852,200
-------------
CAPITAL GOODS-1.14%
14,100 Donaldson Company, Inc. .................................... 472,350
-------------
CHEMICALS-0.87%
20,257 Millenium Chemicals, Inc.*.................................. 359,562
-------------
COMPUTER SOFTWARE-4.85%
14,500 Autodesk, Inc. ............................................. 406,000
15,000 Barra, Inc.*................................................ 412,500
7,464 Electronic Data Systems Corporation......................... 322,818
10,500 Microsoft Corporation* **................................... 867,562
-------------
2,008,880
-------------
COMPUTER SYSTEMS-1.81%
12,000 Cabletron Systems*.......................................... 399,000
7,000 Hewlett-Packard Company..................................... 351,750
-------------
750,750
-------------
CONSUMER DURABLES-2.61%
27,300 Castle & Cooke, Inc.*....................................... 433,388
9,700 Mattel, Inc. ............................................... 269,175
32,000 Tyco Toys, Inc.*............................................ 376,000
-------------
1,078,563
-------------
ELECTRICAL EQUIPMENT-3.31%
6,300 Emerson Electric Company.................................... 609,525
7,700 General Electric Company.................................... 761,337
-------------
1,370,862
-------------
ELECTRONICS/GENERAL-2.94%
24,000 DSC Communications Corporation*............................. 429,000
25,500 Loral Space & Communications*............................... 468,563
32,900 Mentor Graphics*............................................ 320,775
-------------
1,218,338
-------------
ELECTRONICS-SEMICONDUCTORS/COMPONENTS-5.07%
6,500 Intel Corporation........................................... 851,094
12,900 Motorola, Inc. ............................................. 791,738
7,125 Texas Instruments, Inc. .................................... 454,218
-------------
2,097,050
-------------
FINANCIAL SERVICES-3.31%
8,750 Federal Home Loan Mortgage Corporation...................... 963,593
10,514 Legg Mason, Inc. ........................................... 404,789
-------------
1,368,382
-------------
FOOD & FOOD RETAILERS-2.79%
4,500 Campbell Soup Company....................................... 361,125
12,900 Dole Food Company........................................... 436,988
12,650 Supervalu, Inc. ............................................ 358,943
-------------
1,157,056
-------------
HEALTHCARE PRODUCTS-6.27%
15,000 Abbott Laboratories......................................... 761,250
11,650 Forest Laboratories, Inc.*.................................. 381,538
18,550 Johnson & Johnson........................................... 922,862
6,700 Merck & Company, Inc. ...................................... 530,975
-------------
2,596,625
-------------
HEALTHCARE SERVICES-5.32%
16,000 Cognizant Corporation....................................... 528,000
13,700 FHP International Corporation*.............................. 508,613
18,000 Manor Care, Inc. ........................................... 486,000
32,437 Medpartners, Inc.*.......................................... 681,177
-------------
2,203,790
-------------
HOUSEHOLD PRODUCTS-4.23%
10,300 Alberto Culver Company, Class A............................. 424,875
5,000 Proctor and Gamble Company.................................. 537,500
4,500 Unilever NV................................................. 788,625
-------------
1,751,000
-------------
INSURANCE-2.26%
4,250 American International Group, Inc........................... 460,063
10,500 Travelers Group, Inc. ...................................... 476,437
-------------
936,500
-------------
LODGING/RESTAURANTS-0.99%
23,150 Choice Hotels Holdings*..................................... 408,019
-------------
MACHINERY-2.67%
21,450 Crane Company............................................... 622,050
11,900 Deere & Company............................................. 483,437
-------------
1,105,487
-------------
MEDIA-4.37%
25,966 AC Nielson*................................................. 392,736
18,500 Dun & Bradstreet Corporation................................ 439,375
11,300 Time Warner, Inc. .......................................... 423,750
16,000 Viacom, Inc., Class A*...................................... 552,000
-------------
1,807,861
-------------
METALS & MINING-0.71%
16,300 Worthington Industries...................................... 295,437
-------------
OIL & GAS-7.15%
4,000 Exxon Corporation........................................... 392,000
5,175 Mobil Corporation........................................... 632,644
21,100 Occidental Petroleum Corporation............................ 493,212
6,050 Phillips Petroleum Company.................................. 267,713
3,600 Royal Dutch Petroleum Company............................... 614,700
2,500 Texaco, Inc. ............................................... 245,312
10,791 Union Pacific Resources Group............................... 315,637
------------
2,961,218
------------
PAPER & FOREST PRODUCTS-3.94%
15,200 Asia Pulp & Paper*.......................................... 172,900
16,300 Kimberly Clark Mexico - American Depository Receipt......... 631,625
12,200 Rayonier, Inc. ............................................. 468,175
7,600 Weyerhaeuser Company........................................ 360,050
------------
1,632,750
------------
REAL ESTATE INVESTMENT TRUSTS-3.15%
13,238 Bank of America Realty...................................... 327,640
6,800 Developers Diversified Realty............................... 252,450
10,200 Health Care Property Investors, Inc. ....................... 357,000
8,900 Hospitality Properties Trust................................ 258,100
3,700 Shurgard Storage Centers, Inc. ............................. 109,613
------------
1,304,803
------------
RETAIL SALES-1.98%
14,800 Fred Meyer, Inc., Class A*.................................. 525,400
4,850 Lowe's Companies............................................ 172,175
15,100 Rex Stores*................................................. 122,688
------------
820,263
------------
TOBACCO-1.46%
3,600 Philip Morris Companies, Inc. .............................. 405,450
5,800 RJR Nabisco Holding Corporation............................. 197,200
------------
602,650
------------
TRANSPORTATION SERVICES-2.94%
28,900 Expeditors International of Washington, Inc. ............... 664,700
9,200 Union Pacific Corporation................................... 553,150
------------
1,217,850
------------
UTILITIES - GAS & ELECTRIC-0.89%
12,800 MCN Corporation............................................ 369,600
------------
UTILITIES - TELECOMMUNICATIONS-4.84%
20,000 A T & T Corporation......................................... 870,000
23,000 Aliant Communications, Inc. ................................ 391,000
11,500 Frontier Corporation........................................ 260,188
10,650 GTE Corporation............................................. 484,575
------------
2,005,763
------------
TOTAL COMMON STOCKS (cost $31,613,936)...................... 39,914,548
------------
CONVERTIBLE PREFERRED STOCKS-3.57%
COMPUTER SOFTWARE-0.20%
1,000 Microsoft Preferred......................................... 80,125
------------
CAPITAL GOODS-1.04%
4,600 FHP International Corporation............................... 140,300
43,200 RJR Nabisco Holding Corporation............................. 291,600
------------
431,900
------------
INSURANCE-2.33%
6,250 Integon Corporation......................................... 335,937
7,500 Penncorp Financial Group.................................... 630,000
------------
965,937
------------
TOTAL CONVERTIBLE PREFERRED STOCK (cost $1,394,954)......... 1,477,962
------------
TOTAL INVESTMENTS (cost $33,227,600)........................ 41,585,448
Other assets ($275,483) less liabilities ($459,264)......... (183,781)
------------
NET ASSETS.................................................. $41,401,667
============
**Non-income producing security.
**The portfolio position subject to and the description and value of written covered call option outstanding at December 31, 1996,
were as follows:
OPTION
CONTRACTS SECURITY EXPIRATION MONTH EXERCISE PRICE VALUE OF CALL OPTIONS
- --------------------------------------------------------------------------------
10 Microsoft Corporation JAN/97 $80 $4,250
FEDERAL INCOME TAX INFORMATION:
Net unrealized appreciation of investments at December 31, 1996 of $8,357,848,
based on aggregate cost of $33,227,600, was composed of gross appreciation of
$9,017,740 for investments having an excess of value over cost and gross
depreciation of $659,892 for investments having an excess of cost over value.
OTHER INFORMATION:
Purchases and sales of investment securities, other than short-term investments,
aggregated $25,726,996 and $11,292,414, respectively, during the year ended
December 31, 1996, including purchases and sales of U.S. government securities
of $436,024 and 446,393, respectively.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NORTHWEST PORTFOLIO
MARKET
SHARES VALUE
----------- -----------
COMMON STOCKS-95.99%
AEROSPACE & DEFENSE-6.32%
<S> <C> <C>
5,950 Boeing Company.............................................. 632,931
3,500 Precision Castparts Corporation ............................ 173,687
-----------
806,618
-----------
APPAREL & SHOES-3.13%
6,700 Nike, Inc., Class B......................................... 400,325
-----------
BANK/SAVINGS & LOANS-10.18%
9,700 First Savings Bank of Washington Bancorp, Inc. ............. 178,237
126 Horizon Financial Corporation............................... 1,701
5,300 Interwest Bancorp, Inc. .................................... 170,925
6,500 Klamath First Bancorp, Inc. ................................ 102,375
6,100 Sterling Financial Corporation*............................. 86,162
12,518 US Bancorp Oregon........................................... 562,528
7,479 Washington Federal, Inc. ................................... 198,193
-----------
1,300,121
-----------
BEVERAGES-0.44%
5,800 Redhook Ale Brewery, Inc.*.................................. 55,825
-----------
CAPITAL GOODS-0.69%
1,290 PACCAR, Inc. ............................................... 87,720
-----------
COMPUTER SOFTWARE-8.11%
9,100 CFI Proservices, Inc.*...................................... 129,675
8,600 Microsoft Corporation*...................................... 710,575
12,900 Wall Data, Inc.*............................................ 195,112
-----------
1,035,362
-----------
COMPUTER SYSTEMS-5.36%
9,700 In Focus Systems, Inc.*..................................... 209,762
17,100 Sequent Computer Systems, Inc.*............................. 303,525
14,600 Planar Systems, Inc.*....................................... 171,550
-----------
684,837
-----------
ELECTRICAL EQUIPMENT-1.65%
3,200 Fluke Corporation........................................... 142,800
4,500 Merix Corporation*.......................................... 68,625
-----------
211,425
-----------
ELECTRONICS/GENERAL-10.06%
8,500 Electro Scientific Industries, Inc.*........................ 221,000
13,500 FEI Company*................................................ 126,562
8,400 Flir Systems, Inc.*......................................... 115,500
7,300 Itron, Inc.*................................................ 129,575
35,300 Mentor Graphics Corporation*................................ 344,175
6,800 Tektronix, Inc. ............................................ 348,500
-----------
1,285,312
-----------
ELECTRONICS - SEMICONDUCTORS/COMPONENTS-4.71%
1,700 Intel Corporation........................................... 222,594
4,700 Lattice Semiconductor Corporation*.......................... 216,200
900 Micron Technology, Inc. .................................... 26,212
5,200 Triquint Semiconductor, Inc.*............................... 137,150
-----------
602,156
-----------
FOODS AND FOOD RETAILERS-3.58%
10,400 Albertson's, Inc............................................ 370,500
2,590 Quality Food Centers, Inc.*................................. 87,412
-----------
457,912
-----------
HEALTHCARE PRODUCTS-6.12%
5,500 Advanced Technology Laboratories, Inc.*..................... 170,500
25,550 Icos Corporation*........................................... 194,819
11,100 Immunex Corporation*........................................ 216,450
19,500 Ostex International, Inc.*.................................. 107,250
3,200 Pathogenesis Corporation*................................... 69,600
1,100 Spacelabs Medical, Inc.*.................................... 22,550
-----------
781,169
-----------
HEALTHCARE SERVICES-1.87%
2,400 Foundation Health Corporation*.............................. 76,200
1,900 Pacificare Health Systems, Inc., Class B*................... 161,975
-----------
238,175
-----------
INSURANCE-2.22%
7,200 Safeco Corporation.......................................... 283,950
-----------
LODGING & RESTAURANTS-0.92%
4,100 Starbucks Corporation*...................................... 117,363
-----------
MACHINERY-1.13%
8,700 Flow International Corporation*............................. 79,388
6,300 Greenbrier Companies, Inc. ................................. 65,363
-----------
144,751
-----------
METALS & MINING-2.99%
4,100 Hecla Mining Company*....................................... 23,063
4,900 Oregon Metallurgical Corporation*........................... 158,025
1,700 Oregon Steel Mill, Inc. .................................... 28,475
6,700 Schnitzer Steel Inds., Inc. ................................ 171,688
-----------
381,251
-----------
PAPER & FOREST PRODUCTS-6.28%
1,700 Boise Cascade Corporation................................... 53,975
900 Georgia-Pacific Corporation................................. 64,800
1,900 Longview Fibre Company...................................... 34,913
6,100 Louisiana Pacific Corporation............................... 128,863
5,500 Weyerhaeuser Company........................................ 260,563
3,700 Willamette Industries, Inc. ................................ 258,538
-----------
801,652
-----------
REAL ESTATE INVESTMENT TRUSTS-3.41%
8,900 Pacific Gulf Properties, Inc. .............................. 173,550
4,000 Shurgard Storage Centers, Inc. ............................. 118,500
5,900 Wellsford Residential Property Trust........................ 143,075
-----------
435,125
-----------
RETAIL SALES-7.82%
13,900 BMC West Corporation*....................................... 170,275
13,000 Fred Meyer, Inc.*........................................... 461,500
14,600 Price/Costco, Inc.*......................................... 366,825
-----------
998,600
-----------
TRANSPORTATION SERVICES-6.90%
11,550 Airborne Freight Corporation................................ 269,981
9,800 Alaska Air Group, Inc.*..................................... 205,800
17,600 Expeditors International of Washington, Inc. ............... 404,800
-----------
880,581
-----------
UTILITIES - GAS & ELECTRIC-0.53%
1,600 Portland General Corporation ............................... 67,200
-----------
UTILITIES - TELECOMMUNICATIONS-1.57%
9,800 General Communication - Class A*............................ 79,625
8,700 Western Wireless Corporation - Class A*..................... 120,712
-----------
200,337
-----------
TOTAL COMMON STOCKS (cost $9,325,706)....................... 12,257,767
-----------
PRINCIPAL
AMOUNT
- -------------
REPURCHASE AGREEMENT-4.24%
$541,000 Repurchase agreement with Goldman Sachs, collateralized by a
U.S. Treasury Note, in a joint trading account at 6.15%, dated
12/31/1996, due 01/02/1997, with a maturity value of
$541,185 (cost $541,000)................................... 541,000
-----------
TOTAL INVESTMENTS (cost $9,866,706)......................... 12,798,767
Other assets ($34,363) less liabilities ($63,484)........... (29,121)
-----------
NET ASSETS.................................................. $12,769,646
===========
*Non-income producing security.
FEDERAL INCOME TAX INFORMATION:
Net unrealized appreciation of investments at December 31, 1996 of $2,932,061,
based on aggregate cost of $9,866,706, was composed of gross appreciation of
$3,420,159 for investments having an excess of value over cost and gross
depreciation of $488,098 for investments having an excess of cost over value.
OTHER INFORMATION:
Purchases and sales of investment securities, other than short-term investments,
aggregated $6,120,192 and $2,397,715, respectively, during the year ended
December 31, 1996.
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
INCOME PORTFOLIO
PRINCIPAL MARKET
AMOUNT VALUE
------------ -------------
U.S. TREASURY OBLIGATIONS-36.96%
<S> <C> <C>
200,000 U.S. Treasury Bond, 7.50%, due 11/15/2024................... $ 218,750
1,200,000 U.S. Treasury Bond, 6.25%, due 08/15/2023................... 1,125,001
1,200,000 U.S. Treasury Bond, 7.25%, due 08/15/2022................... 1,269,751
1,000,000 U.S. Treasury Bond, 7.25%, due 05/15/2016................... 1,056,251
1,250,000 U.S. Treasury Note, 5.875%, due 02/15/2004.................. 1,217,579
1,000,000 U.S. Treasury Note, 5.75%, due 08/15/2003................... 970,313
250,000 U.S. Treasury Note, 6.375%, due 08/15/2002.................. 251,719
200,000 U.S. Treasury Note, 7.875%, due 08/15/2001.................. 213,250
100,000 U.S. Treasury Note, 7.125%, due 02/29/2000.................. 102,969
-------------
TOTAL U.S. TREASURY OBLIGATIONS (cost $6,404,883)........... 6,425,583
-------------
MORTGAGE-BACKED SECURITIES-15.03%
GOVERNMENT AGENCY-10.21%
10,236 Federal National Mortgage Association, 9.00%, due 10/01/2004 10,726
411,156 Federal National Mortgage Association, 8.00%, due 12/01/2026 419,122
329,420 Government National Mortgage Association, 9.00%, due 05/15/2009 347,539
14,991 Government National Mortgage Association, 8.50%, due 03/15/2022 15,545
130,587 Government National Mortgage Association, 8.00%, due 06/15/2022 133,362
464,671 Government National Mortgage Association, 7.50%, due 06/15/2024 465,542
390,274 Government National Mortgage Association, 7.00%, due 07/15/2023 382,347
------------
1,774,183
------------
COLLATERALIZED MORTGAGE OBLIGATIONS -
GOVERNMENT AGENCY BACKED-3.82%
255,000 Federal Home Loan Mortgage Corporation, 7.50%, due 07/15/2020 258,830
392,885 Weyerhaeuser 1982-C FHA Putable, 7.43%, due 06/01/2022...... 403,789
------------
662,619
------------
COLLATERALIZED MORTGAGE OBLIGATIONS-1.01%
241,321 Resolution Trust Corporation - 1991-M2-A-2, 7.55%, due 09/25/2020 175,839
------------
TOTAL MORTGAGE-BACKED SECURITIES (cost $2,604,220).......... 2,612,641
------------
NON-CONVERTIBLE CORPORATE BONDS-34.44%
150,000 American Home Products, 7.25%, due 03/01/2023............... 150,459
250,000 American Medical International, zero coupon, due 08/12/1997. 235,965
200,000 Associates Corporation Senior Notes, 8.80%, due 08/01/1998.. 208,085
195,000 Bank of New York, 7.875%, due 11/15/2022.................... 205,878
175,000 Beneficial Corporation, 9.125%, due 02/15/1998.............. 180,733
300,000 Burlington Northern, 8.75%, due 02/25/2022.................. 338,218
200,000 Burlington Resources, 7.15%, due 05/01/1999................. 203,583
200,000 Caterpillar Corporation, 9.375%, due 07/15/2001............. 221,586
200,000 Coastal Corporation, 10.75%, due 10/01/2010................. 256,146
150,000 Commonwealth Edison, 9.375%, due 02/15/2000................. 160,963
150,000 Consumers Power, 8.75%, due 02/15/1998...................... 153,503
300,000 Continental Corporation, 8.25%, due 04/15/1999.............. 311,144
250,000 FHP International, 7.00%, due 09/15/2003.................... 248,813
250,000 First Nationwide, 10.00%, due 10/01/2006.................... 290,513
100,000 Franchise Finance Corporation, 7.00%, due 11/30/2000........ 100,112
200,000 Franchise Finance Corporation, 7.875%, due 11/30/2005....... 204,750
100,000 General Motors Acceptance Corporation, 7.75%, due 01/15/1999 102,839
200,000 Integon Corporation, 8.00%, due 08/15/1999.................. 202,456
200,000 Kemper Corporation, 6.875%, due 09/15/2003.................. 200,263
300,000 Loral Corporation, 7.625%, due 06/15/2025................... 307,853
200,000 Mercantile Bank, 7.625%, due 10/15/2002..................... 207,153
250,000 Morgan Stanley, 6.75%, due 03/04/2003....................... 248,620
150,000 Niagara Mohawk Power, 9.50%, due 06/01/2000................. 154,121
50,000 Niagara Mohawk Power, 8.77%, due 01/01/2018................. 48,922
150,000 Portland General Electric, 8.88%, due 08/12/1999............ 159,066
150,000 Public Service Electric & Gas, 8.875%, due 06/01/2003....... 164,541
150,000 Public Service Company of New Hampshire, 9.17%, due 05/15/1998 154,477
150,000 Texas Utilities Electric, 9.50%, due 08/01/1999............. 160,045
200,000 Time Warner, Inc., 9.15%, due 02/01/2023.................... 217,300
200,000 Westinghouse Corporation, 7.875%, due 09/01/2023............ 188,524
------------
TOTAL NON-CONVERTIBLE CORPORATE BONDS (cost $5,889,800)..... 5,986,631
------------
PRINCIPAL MARKET
AMOUNT VALUE
- ------------- ------------
CONVERTIBLE CORPORATE BOND-0.83%
$ 150,000 Costco Wholesale Corporation, 5.75%, due 05/15/2002
(cost $142,123) ...................................... $144,563
------------
U.S DOLLAR FOREIGN OBLIGATIONS-1.56%
150,000 Province of Alberta, 9.25%, due 04/01/2000.................. 163,415
100,000 Province of Manitoba, 9.625%, due 03/15/1999................ 107,013
------------
TOTAL U.S. DOLLAR FOREIGN OBLIGATIONS (cost $256,844)....... 270,428
------------
CONVERTIBLE PREFERRED STOCK-0.31%
1,000 Integon Corporation (cost $59,320).......................... 53,750
------------
REPURCHASE AGREEMENT-9.51%
$1,654,000 Repurchase agreement with Goldman Sachs, collateralized by a
U.S. Treasury Note in a joint trading account at 6.15%, dated
12/31/1996, due 01/02/1997, with a maturity value of $1,654,565
(cost $1,654,000).......................................... 1,654,000
-------------
TOTAL INVESTMENTS (cost $17,011,190)........................ 17,147,596
Other assets ($291,049) less liabilities ($54,141).......... 236,908
-------------
NET ASSETS.................................................. $17,384,504
=============
FEDERAL INCOME TAX INFORMATION:
Net unrealized appreciation of investments at December 31, 1996 of $136,406
based on aggregate cost of $17,011,190, was composed of gross appreciation of
$308,340 for investments having an excess of value over cost and gross
depreciation of $171,934 for investments having an excess of cost over value. As
of December 31, 1996, the fund had unused capital loss carryovers of $141,418
for federal tax purposes which may be applied against gains realized in future
years. If not applied, the carryovers will expire by 2004.
OTHER INFORMATION:
Purchases and sales of investment securities, other than short-term investments,
aggregated $3,746,306 and $1,519,053, respectively, during the year ended
December 31, 1996, including purchases and sales of U.S. government securities
of $1,903,891 and $650,000, respectively. Principal repayments of
mortgage-backed securities aggregated $288,068.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COMPOSITE
DEFERRED
SERIES, INC.
FINANCIAL
INFORMATION
DECEMBER 31,
1996
INDEPENDENT PUBLIC ACCOUNTANTS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
COMPOSITE DEFERRED SERIES, INC.
We have audited the accompanying statements of assets and liabilities,
including the investment portfolios, of Composite Deferred Series, Inc.
(comprising, respectively, the Growth & Income, Northwest, and Income
Portfolios) as of December 31, 1996, and the related statements of operations
for the year then ended and the statements of changes in net assets for the
years ended December 31, 1996 and 1995. For the Growth & Income and Income
Portfolios we have audited the financial highlights for each of the five years
in the period ended December 31, 1996. For the Northwest Portfolio, we have
audited the financial highlights for each of the four years in the period ended
December 31, 1996. 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 confirming securities owned as of December
31, 1996, by correspondence with the custodian. 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 our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting Composite Deferred
Series, Inc., as of December 31, 1996, and the results of their operations, the
changes in their net assets, and the financial highlights for the above stated
periods in conformity with generally accepted accounting principles.
LEMASTER & DANIELS PLLC
CERTIFIED PUBLIC ACCOUNTANTS
SPOKANE, WASHINGTON
JANUARY 24, 1997
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
GROWTH &
INCOME INCOME NORTHWEST
PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------ -------------
<S> <C> <C> <C>
ASSETS
Investments at market (identified cost $33,227,600,
$9,866,706 and $17,011,190, respectively).......................... $41,585,448 $12,798,767 $17,147,596
Cash................................................................. 22,340 12,670 -
Prepaid expenses..................................................... 2,071 744 1,211
Receivable for:
Interest........................................................... 5,376 92 289,838
Investment securities sold......................................... 191,035 - -
Dividends.......................................................... 46,461 15,657 -
Sale of Fund's shares.............................................. 8,200 5,200 -
----------- ------------ -------------
Total assets......................................................... 41,860,931 12,833,130 17,438,645
----------- ------------ -------------
LIABILITIES
Bank overdraft....................................................... - - 44,957
Covered call options written at market (premiums received - $1,982).. 4,250 - -
Payable for:
Investment securities purchased.................................... 438,266 54,111 -
Accrued expenses and other payables................................ 10,235 8,574 8,047
Repurchase of Fund's shares........................................ 6,513 799 1,137
----------- ------------ -------------
Total liabilities.................................................... 459,264 63,484 54,141
----------- ------------ -------------
NET ASSETS .......................................................... $41,401,667 $12,769,646 $17,384,504
=========== ============ =============
COMPOSITION OF NET ASSETS
Paid-in capital...................................................... $29,948,797 $ 9,505,659 $17,389,846
Undistributed net investment income.................................. 1,398 849 -
Accumulated net realized gain (loss)................................. 3,095,892 331,077 (141,748)
Net unrealized appreciation of investments........................... 8,355,580 2,932,061 136,406
----------- ------------ -------------
$41,401,667 $12,769,646 $17,384,504
NET ASSET VALUE =========== ============ =============
Net asset value per share for 1,702,382, 700,316,
and 1,438,611 shares outstanding, respectively...................... $24.32 $18.23 $12.08
=========== ============ =============
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
GROWTH &
INCOME NORTHWEST INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- -----------
<S> <C> <C> <C>
INVESTMENT INCOME
Income:
Interest............................................................ $ 64,599 $ 33,157 $1,152,458
Dividends........................................................... 645,607 95,566 -
----------- ----------- -----------
Total income.......................................................... 710,206 128,723 1,152,458
----------- ----------- -----------
Expenses:
Management fees .................................................... 162,589 49,023 80,985
Custodial fees...................................................... 17,896 9,635 7,876
Directors' fees..................................................... 7,474 7,474 7,390
Postage, printing and office expense................................ 5,832 3,750 7,810
Auditing and legal fees............................................. 2,344 5,054 3,178
Insurance........................................................... 1,043 356 608
----------- ----------- -----------
Total expenses........................................................ 197,178 75,292 107,847
Fees paid indirectly.................................................. (3,009) (1,501) (1,083)
----------- ----------- -----------
Net expenses.......................................................... 194,169 73,791 106,764
----------- ----------- -----------
Net investment income................................................. 516,037 54,932 1,045,694
----------- ----------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) from investment transactions..................... 3,102,735 467,828 (8,320)
Unrealized appreciation (depreciation) of investments during the year. 2,982,704 1,538,604 (609,407)
----------- ----------- -----------
Net realized and unrealized gain (loss) on investments................ 6,085,439 2,006,432 (617,727)
----------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ............................................ $6,601,476 $2,061,364 $ 427,967
========= =========== ===========
See accompanying notes to financial statements.
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
GROWTH & INCOME PORTFOLIO NORTHWEST PORTFOLIO INCOME PORTFOLIO
--------------------------- ------------------------- -------------------------
YEARS ENDED YEARS ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
--------------------------- ------------------------- -------------------------
1996 1995 1996 1995 1996 1995
----------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income........... $ 516,037 $ 362,736 $ 54,932 $ 40,252 $ 1,045,694 $ 856,335
Realized gain (loss) from
investment transactions......... 3,102,735 441,257 467,828 (8,707) (8,320) (49,342)
Unrealized appreciation
(depreciation) of investments
during the year............... 2,982,704 4,414,288 1,538,604 1,309,785 (609,407) 1,529,737
Net increase in net assets resulting
from operations ................ 6,601,476 5,218,281 2,061,364 1,341,330 427,967 2,336,730
DISTRIBUTIONS TO
SHAREHOLDERS
Dividends from net
investment income .............. (517,216) (360,327) (54,083) (41,043) (1,045,694) (856,335)
Distributions from net capital gains
from investment transactions ... - (448,100) - - - -
NET CAPITAL SHARE
TRANSACTIONS ................... 10,869,247 5,843,803 3,267,052 1,547,792 2,796,633 2,883,031
Total increase in net assets.... 16,953,507 10,253,657 5,274,333 2,848,079 2,178,906 4,363,426
NET ASSETS
Beginning of the year........... 24,448,160 14,194,503 7,495,313 4,647,234 15,205,598 10,842,172
End of the year................. $41,401,667 $24,448,160 $12,769,646 $7,495,313 $17,384,504 $15,205,598
UNDISTRIBUTED NET
INVESTMENT INCOME AT
END OF YEAR .................... $ 1,398 $ 2,577 $ 849 $ - $ - $ -
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
GROWTH & INCOME PORTFOLIO:
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR .................. $20.22 $15.70 $15.71 $15.26 $14.28
Income From Investment Operations
Net Investment Income ............................. 0.34 0.35 0.31 0.29 0.36
Net Gains or Losses on Securities
(both realized and unrealized).................... 4.10 4.90 0.12 0.84 1.13
Total From Investment Operations.................. 4.44 5.25 0.43 1.13 1.49
LESS DISTRIBUTIONS
Dividends (from net investment income)............. (0.34) (0.35) (0.31) (0.28) (0.36)
Distributions (from capital gains)................. 0.00 (0.38) (0.13) (0.40) (0.15)
Total Distributions............................... (0.34) (0.73) (0.44) (0.68) (0.51)
NET ASSET VALUE, END OF YEAR ........................ $24.32 $20.22 $15.70 $15.71 $15.26
TOTAL RETURN (1) .................................... 22.09% 33.70% 2.72% 7.58% 10.56%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year ($1,000's)................. $41,402 $24,448 $14,195 $11,239 $7,455
Ratio of Expenses to Average Net Assets (2) ...... 0.61% 0.70% 0.68% 0.76% 0.87%
Ratio of Net Income to Average Net Assets.......... 1.59% 2.01% 1.97% 1.96% 2.51%
Portfolio Turnover Rate ........................... 45% 36% 25% 38% 13%
Average Commission Paid (3) ....................... $0.0626
(1) Total returns do not reflect a sales charge.
(2) Ratio of expenses to average net assets includes expenses paid indirectly
beginning in fiscal 1995.
(3) Average commission paid disclosure is required beginning in fiscal year
1996.
</TABLE>
<TABLE>
<CAPTION>
JANUARY 4
YEARS ENDED DECEMBER 31, TO
---------------------------- DECEMBER 31,
NORTHWEST PORTFOLIO: 1996 1995 1994 1993 (3)
------- --------- ------- -------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ............... $14.99 $11.97 $12.19 $12.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............................. 0.09 0.09 0.08 0.16
Net Gains or Losses on Securities (both realized
and unrealized) 3.24 3.02 (0.21) 0.19
Total From Investment Operations.................. 3.33 3.11 (0.13) 0.35
LESS DISTRIBUTIONS
Dividends (from net investment income)............ (0.09) (0.09) (0.08) (0.16)
Distributions (from capital gains)................ 0.00 0.00 (0.01) 0.00
Total Distributions.............................. (0.09) (0.09) (0.09) (0.16)
NET ASSET VALUE, END OF PERIOD...................... $18.23 $14.99 $11.97 $12.19
TOTAL RETURN (1) .................................. 22.23% 26.03% -1.12% 2.95%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period ($1,000's).............. $12,770 $7,495 $4,647 $2,686
Ratio of Expenses to Average Net Assets(2) ...... 0.77% 0.90% 0.87% 0.00%
Ratio of Net Income to Average Net Assets......... 0.56% 0.67% 0.76% 1.61%(5)
Portfolio Turnover Rate (3) ...................... 31% 11% 17% 0%
Average Commission Paid (4) ...................... $0.0639
(1) Total return does not reflect a sales charge and are not annualized.
(2) Ratio of expenses to average net assets includes expenses paid
indirectly beginning in fiscal 1995. The ratio of expenses before
management fee waiver and expense reimbursements was 1.45% for fiscal
1993.
(3) From commencement of operations.
(4) Average commission paid disclosure is required beginning in fiscal
year 1996.
(5) Annualized.
</TABLE>
<TABLE>
<CAPTION>
INCOME PORTFOLIO:
Years ended December 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ...................... $12.59 $11.22 $12.57 $12.22 $12.27
---------- --------- --------- ---------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income.................................. 0.78 0.79 0.79 0.85 0.86
Net Gains or Losses on Securities (both realized
and unrealized) ....................................... (0.51) 1.37 (1.35) 0.35 (0.05)
---------- ---------- --------- ---------- ---------
Total From Investment Operations..................... 0.27 2.16 (0.56) 1.20 0.81
LESS DISTRIBUTIONS ---------- ---------- --------- ---------- ---------
Dividends (from net investment income)................. (0.78) (0.79) (0.79) (0.85) (0.86)
---------- ---------- --------- ---------- ---------
NET ASSET VALUE, END OF YEAR ............................ $12.08 $12.59 $11.22 $12.57 $12.22
========== ========== ========= ========== =========
TOTAL RETURN (1) ........................................ 2.34% 19.86% -4.48% 10.02% 6.91%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year ($1,000's)..................... $17,385 $15,206 $10,842 $9,113 $6,165
Ratio of Expenses to Average Net Assets(2) ........... 0.67% 0.76% 0.74% 0.86% 0.88%
Ratio of Net Income to Average Net Assets.............. 6.46% 6.62% 6.79% 6.75% 7.12%
Portfolio Turnover Rate................................ 11% 14% 15% 29% 37%
(1) Total return does not reflect a sales charge.
(2) Ratio of expenses to average net assets includes expenses paid indirectly
beginning in fiscal 1995.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
Composite Deferred Series, Inc. (the "Fund"), is registered under the
Investment Company Act of 1940, as amended, as an open-end diversified
management investment company. The Fund consists of three separate portfolios,
Growth & Income, Northwest, and Income portfolios, which are designed to meet a
variety of investment objectives.
WM Life Insurance Company ("Company"), is the sole shareholder of the Fund.
Shares are sold only to Composite Deferred Series variable accounts to fund the
benefits under certain flexible premium variable annuity contracts (the
"Contract") issued by the Company. Contract holders have the right to instruct
the Company how to vote Fund shares attributable to their contracts.
Following is a summary of significant accounting policies, in conformity
with generally accepted accounting principles, which are consistently followed
by the Fund in the preparation of its financial statements.
a. Investment securities are stated on the basis of valuations provided
by an independent pricing service, approved by the Board of Directors,
which uses information with respect to last reported sales price for
securities traded on a national securities exchange (or reported on
the National Association of Securities Dealers Automated Quotation
[NASDAQ] National Market System) or securities traded
over-the-counter, or valuations based upon transactions of a security,
quotations from dealers, market transactions in comparable securities,
and various relationships between securities, in determining value.
Investment securities with less than 60 days to maturity when
purchased are valued at amortized cost which approximates market
value. Investment securities not currently quoted as described above
will be priced at fair market value as determined in good faith in a
manner prescribed by the Board of Directors.
b. The Fund requires the custodian to take possession, to have legally
segregated in the Federal Reserve Book Entry System or to have
segregated within the custodian's vault, all securities held as
collateral for repurchase agreements. The market value of the
underlying securities is required to be at least 102% of the resale
price at the time of purchase. If the seller of the agreement defaults
and the value of the collateral declines, or if the seller enters an
insolvency proceeding, realization of the value of the collateral by
the Fund may be delayed or limited.
c. Interest income is earned from the settlement date on securities
purchased and is recorded on the accrual basis. Dividend income is
recorded on the ex-dividend date.
d. Dividends to the shareholders of the Growth & Income and Northwest
portfolios are calculated and paid quarterly. The Income Portfolio
accrues shareholder dividends daily and pays such dividends monthly.
Any capital gains are paid annually.
e. Security transactions are accounted for on the trade date (execution
date of the order to buy or sell). Realized gain or loss from security
transactions are determined on the basis of identified cost.
f. The Fund complies with requirements of the Internal Revenue Code
applicable to regulated investment companies and distributes its
taxable income so that no provision for federal income tax is
required. Income dividends and capital gain distributions are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. These differences are
primarily due to differing treatment for deferral of wash sales.
g. Custodial fees have been increased by $3,009, $1,501, and $1,083 for
the Growth & Income, Northwest, and Income portfolios, respectively,
as a result of "expense offset arrangements." The Funds could have
otherwise employed the assets to produce income if they had not
entered into such arrangements. In accordance with the regulations,
such amounts are added to net custodial fees and then reflected as a
deduction, "fees paid indirectly" to derive net expenses. There were
no "expense offset arrangements" other than custodial fees.
h. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statement and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
NOTE 2 - COVERED CALL OPTIONS WRITTEN
The Growth & Income and Northwest portfolios may write listed covered call
options in which premiums received are recorded as a liability, which is marked
to market to reflect the current value of options written. A covered call option
gives the holder the right to buy the underlying security, which the portfolio
owns, at any time during the option period at a predetermined exercise price.
When a portfolio writes a covered call option, it gains income from the premium
received. The risk in writing a covered call option is that the portfolio gives
up the opportunity to participate in any increase in the price of the underlying
security beyond the exercise price. Proceeds from the covered call options
exercised are increased by the amount of premium received. If an option expires
or is canceled in a closing transaction, the portfolio will realize a gain or
loss depending on whether the cost of the closing transaction, if any, is less
than or greater than the premium originally received. As of December 31, 1996,
portfolio securities valued at $82,625 were held in a segregated account by the
custodian in connection with covered call options written by the Growth & Income
Portfolio.
Transactions in written covered call options by the Growth & Income
Portfolio during the year ended December 31, 1996, were as follows:
NUMBER OF
CONTRACTS PREMIUMS
----------- ----------
OUTSTANDING AT
December 31, 1995......... 0 $ 0
Written..................... 55 13,481
Exercised................... (40) (10,516)
Expired..................... (5) (983)
----------- ----------
OUTSTANDING AT
DECEMBER 31, 1996 10 $ 1,982
=========== ==========
NOTE 3 - TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
The amounts of fees and expenses described below are shown on the Fund's
statement of operations. Composite Research & Management Co. ("Adviser"),
manages the Fund, and Murphey Favre, Inc., is the principal underwriter and
distributor of the Contracts. Both are affiliates of Washington Mutual Bank and
Washington Mutual fsb and subsidiaries of Washington Mutual, Inc. WM Life
Insurance Company is also a subsidiary of Washington Mutual, Inc.
Management fees were paid by the Fund to the Adviser. Fees are based upon
an annual rate of 0.50% on average daily net assets as computed daily.
Directors' fees and expenses were paid directly by the Fund to directors
having no affiliation with the Fund other than in their capacity as directors.
Other officers and directors received no compensation from the Fund.
NOTE 4 - CAPITAL STOCK
At December 31, 1996, there were 10 billion shares of no par value capital
stock authorized. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
GROWTH &
INCOME PORTFOLIO NORTHWEST PORTFOLIO INCOME PORTFOLIO
---------------------- ---------------------- ----------------------
YEARS ENDED YEARS ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
---------------------- ---------------------- ------------------------
1996 1995 1996 1995 1996 1995
----------- --------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
SHARES
Sold............................ 590,876 400,628 247,127 156,526 376,398 373,491
Issued for reinvestment of
dividends and capital gains... 22,757 41,600 3,182 2,896 86,907 71,224
----------- --------- ---------- ----------- ------------ -----------
613,633 442,228 250,309 159,422 474,305 444,715
Reacquired...................... (120,141) (137,392) (49,897) (47,873) (243,230) (203,756)
----------- --------- ---------- ----------- ------------ -----------
Net increase ................... 493,492 304,836 200,412 111,549 231,075 240,959
=========== ========= ========== =========== ============ ===========
AMOUNT
SOLD............................ $12,978,872 $ 7,442,085 $ 4,028,601 $ 2,152,588 $ 4,679,598 $ 4,456,949
Issued for reinvestment of
dividends and capital gains... 517,216 808,427 54,083 41,043 1,045,694 856,335
----------- --------- ---------- ----------- ----------- -----------
13,496,088 8,250,512 4,082,684 2,193,631 5,725,292 5,313,284
Reacquired...................... (2,626,841) (2,406,709) (815,632) (645,839) (2,928,659) (2,430,253)
----------- --------- ---------- ----------- ----------- -----------
Net increase ................... $10,869,247 $ 5,843,803 $ 3,267,052 $ 1,547,792 $ 2,796,633 $ 2,883,031
=========== ========= ========== =========== =========== ===========
</TABLE>
<PAGE>
FOR FURTHER INFORMATION, PLEASE CONTACT:
FUND OFFICES
Composite Group of Funds
601 W. Main Avenue, Suite 801
Spokane, WA 99201-0613
Phone: (509) 353-3550
Toll free: (800) 543-8072
ADVISER
Composite Research & Management Co.
1201 Third Avenue, Suite 1400 Seattle, WA 98101-3015
DISTRIBUTOR
Murphey Favre, Inc.
1201 Third Avenue, Suite 780 Seattle, WA 98101-3015
CUSTODIAN
Investors Fiduciary Trust Company
127 W. 10th Street Kansas City, MO 64105-1716
INDEPENDENT PUBLIC ACCOUNTANTS
LeMaster & Daniels PLLC
601 W. Riverside Avenue, Suite 800 Spokane, WA 99201-0614
COUNSEL
Paine, Hamblen, Coffin, Brooke & Miller LLP
717 W. Sprague Avenue, Suite 1200 Spokane, WA 99204-0464
OFFICERS
PRESIDENT
William G. Papesh
Executive Vice President
Kerry K. Killinger
VICE PRESIDENTS
Gene G. Branson
Douglas D. Springer
VICE PRESIDENT & TREASURER
Monte D. Calvin
SECRETARY
John T. West
BOARD OF DIRECTORS
MEMBERS
Wayne L. Attwood, M.D.
Kristianne Blake
Anne V. Farrell
Michael K. Murphy
William G. Papesh
Daniel L. Pavelich
Jay Rockey
Leland J. Sahlin
Richard C. Yancey
This report is submitted for the general information of
Composite Variable Annuity owners. For more detailed
information about the Fund, its officers and directors,
fees, expenses and other pertinent information, please see
the prospectus of the Fund. This report is not authorized
for distribution to prospective investors in the Fund unless
preceded or accompanied by an effective prospectus.
