<PAGE>
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COMPOSITE
DEFERRED SERIES,
INC.
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Semi-Annual Report for the six months ended June 30, 1999
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<PAGE>
DEAR contract owner:
[Photo of William G. Papesh]
We are pleased to provide you this COMPOSITE DEFERRED SERIES, INC. semi-annual
report for the period ended June 30, 1999.
As I review recent market activity, I am struck by certain similarities between
the current investment environment and that of the 1950s and '60s. As in that
period of American economic expansion, U.S. investors today are enjoying an
extended period of economic abundance, brought about by structural changes in
the global economy, as well as revolutionary technological advances.
Equity investors have benefited from exceptionally strong returns through much
of this decade. The S&P 500* rose nearly 23% in the past 12 months, bringing the
market's five-year cumulative gain through June 30, 1999, to over 240%.1 Since
1995, the U.S. stock market has created almost $7 trillion in wealth.2 On the
fixed-income side, the early 1990s brought bond investors significant
opportunities to benefit from declining interest rates. Internationally,
increased opportunities in emerging markets have offered aggressive growth
investors new venues in which to invest.
While this decade has been quite rewarding for many investors, there are aspects
of the economy and financial markets that warrant some caution. For example, the
domestic economy is expanding rapidly due primarily to strong consumer spending,
with GDP growing around 4% on an annualized basis. As a result, there is
increased fear among investors that higher inflation may lead to higher interest
rates. Also, while the Dow Jones Industrial Average continued to post record
highs, only recently has the stock market's strength broadened. Until the second
quarter of 1999, stocks of small- and medium-sized companies had not kept pace
with the mega-cap growth stocks, some of which are trading at more than 100
times earnings. There is also concern that rapid change in the Technology sector
has created a speculative environment, particularly with regard to some
Internet stocks.
DEVELOP A STRATEGY TO WEATHER MARKET CYCLES
While no one can precisely predict the future course of the stock market, the
economy and financial markets are often linked in more predictable ways.
Economic growth can fuel inflation and higher interest rates, typically
resulting in reduced consumer spending and slower corporate earnings growth. On
the other hand, when the economy slows, interest rates typically fall, which
helps to spur renewed investment. These cycles are an inherent part of
investing. Fortunately, there are a variety of strategies that individual
investors can employ to lessen the effects of market volatility on their
portfolios.
First and foremost, investors can seek to remain diversified by investing in a
mix of equity and fixed-income investments. Some investors may be tempted to
ignore this strategy when stocks are posting 20%+ returns per year. Yet, I would
caution investors to remember that these years have been marked by an
exceptionally strong stock market. Over an investment horizon of 10 or 20 years,
a diversified strategy can provide strong returns with less risk than a pure
equity portfolio.
Another strategy investors can use to help reduce risk in their investment
portfolios is known as dollar cost averaging (DCA). With this strategy, a set
amount or percentage is invested automatically from a fixed account or money
market, within the WM VARIABLE TRUST, to a WM FUND or PORTFOLIO on a monthly,
quarterly, semi-annual, or annual basis. The advantage of a DCA program is that
it allows you to take advantage of price fluctuation. For example, if you invest
$250 each month, more shares will be bought when prices are low and fewer shares
when prices are high. It is important to note that DCA does not guarantee a
profit or protect against a loss in declining markets. As DCA involves
continuous investing, you should consider your financial ability to continue
purchases through periods of low price levels. You may select either a six-month
or a 12-month program, both of which offer attractive rates.
YOUR INVESTMENT REPRESENTATIVE IS A VALUABLE RESOURCE
Whether you are investing for retirement, future college tuition costs, or
short-term goals, your ability to meet your financial goals will require a
well-defined investment strategy. Your Investment Representative can help you in
several ways. First, he or she has the tools and resources available to help you
clearly define your goals. Many individuals today who are saving for retirement,
for example, may be unsure about the amount they actually need to save. Your
Investment Representative can help you evaluate how the rising cost of living,
coupled with today's longer lifespans, will affect your retirement savings goal.
Secondly, your Investment Representative can assist you in determining which
types of investment vehicles are best suited for your goals and objectives.
Thank you for your continued trust in the COMPOSITE DEFERRED SERIES, INC. We
look forward to continuing to provide you with investment opportunities, today
and into the next century.
Sincerely,
/s/ William G. Papesh
William G. Papesh
President
1 Source: Business Week, June 15, 1998.
2 Source: YOUR MONEY, June/July 1999.
* Source: Standard & Poor's. The S&P 500 is an unmanaged index that is generally
considered representative of the U.S. stock market. The performance of any index
is not indicative of the performance of a particular investment and does not
take into account the effects of fees and expenses associated with purchasing
mutual fund shares. Individuals cannot invest directly in an index. Past
performance does not guarantee future results.
PRESIDENT'S LETTER
<PAGE>
INDIVIDUAL portfolio reviews
WM ADVISORS, INC. IS THE INVESTMENT ADVISOR TO COMPOSITE DEFERRED SERIES,
INC., AND HAS GENERAL OVERSIGHT RESPONSIBILITY FOR THE ADVISORY SERVICES
PROVIDED TO THE PORTFOLIOS. THESE SERVICES INCLUDE FORMULATING THE
PORTFOLIOS' INVESTMENT POLICIES, ANALYZING ECONOMIC TRENDS AFFECTING THE
PORTFOLIOS, AND DIRECTING AND EVALUATING THE INVESTMENT SERVICES PROVIDED
BY THE INDIVIDUAL PORTFOLIO MANAGERS OF EACH PORTFOLIO. WM ADVISORS
SUPERVISES THE INDIVIDUAL PORTFOLIO MANAGERS IN THEIR DAY-TO-DAY
MANAGEMENT OF THE PORTFOLIOS IN THE COMPOSITE DEFERRED SERIES, INC. FAMILY
TO ENSURE THAT POLICIES AND GUIDELINES ARE MET, AND TO DETERMINE
APPROPRIATE INVESTMENT PERFORMANCE MEASURES.
COMPOSITE DEFERRED SERIES
<PAGE>
INDIVIDUAL portfolio reviews
UNDERSTANDING THE ENCLOSED CHARTS
In order to help you understand each Composite Deferred Series, Inc. Portfolio's
investment performance, we have included the following discussions along with
graphs that compare the Portfolio's performance with certain market indices.
Descriptions of these indices are provided next to the individual graphs on the
following pages.
Generally, an index represents the market value of an unmanaged group of
securities, regarded by investors as representative of a particular market. An
index does not reflect any asset-based charges for investment management or
other expenses. Total return is used to measure a Portfolio's performance and
reflects both changes in the unit value of the Portfolio as well as any income
dividend and/or capital gain distributions made by the Portfolio during the
period. Past performance is not a guarantee of future results. A Portfolio's
unit value and investment return will vary with market conditions, and the
principal value of an investment when you redeem your units may be more or less
than the original cost.
Where applicable, the total returns of the Portfolios reflect the Advisors'
voluntary waiver of fees, reimbursement of certain expenses, and credits allowed
by the Custodian. Total returns would have been lower if these fees and expenses
had not been waived, reimbursed, or reduced by credits.
Both the Portfolios' performance results and the market indices reflect total
reinvestment of income, dividends, and capital gains. The unit values of these
variable options will fluctuate with market conditions.
THE YEAR 2000 PROBLEM
Many computer systems in use today cannot properly process date-related
information in relation to the year 2000. This issue originates in the practice
of abbreviating years to their last two digits. Computer systems may not be able
to decide correctly when a date entered with a year of "00" should be
interpreted as 1900 or 2000. At the turn of the new century, computer systems
may not function properly because they may not be able to recognize or interpret
the year 2000.
Should any of the computer systems employed by the Composite Deferred Series,
Inc. Portfolios' major service providers fail to process this type of
information properly, it could have a negative impact on Portfolio operations
and services that are provided to contract owners. Similarly, the values of
certain of the Composite Deferred Series, Inc. Portfolios' assets may be
adversely affected by the inability of their issues or third parties to properly
process date-related information.
The Advisor, Shareholder Servicing Agent and Administrator have advised the
Portfolios that they are reviewing all of their computer systems with the goal
of modifying or replacing such systems prior to January 1, 2000, to the extent
necessary to avoid any such negative impact. Furthermore, the Portfolios are
seeking assurances from each of their key service providers that similar
replacements or modifications will be completed to avoid any negative impact
from this issue.
As of this date, the Portfolios have received assurances from their key service
providers. However, there can be no guarantee that these assurances will
ultimately be successful. In the event a key service provider cannot provide
such assurances, the Portfolios may consider retaining an alternative service
provider.
In addition, the Advisor has been advised by the Custodian that it is also in
the process of reviewing its systems with the same goal. As of the date of this
report, the Portfolios and the Advisor have no reason to believe that these
goals will not be achieved.
COMPOSITE DEFERRED SERIES
<PAGE>
Composite Deferred Series, Inc.
GROWTH & INCOME portfolio
PORTFOLIO MANAGER
RANDALL L. YOAKUM
WM ADVISORS, INC.
The equity team led by Senior Portfolio Manager Randall Yoakum manages the
Growth & Income Portfolio. Mr. Yoakum has 16 years experience in investment
and financial analysis including seven years with WM Advisors, Inc. He holds
a BBA in Economics/Finance from Pacific Lutheran University, an MBA in
Finance/Economics from Arizona State University, and is a Chartered Financial
Analyst. Mr. Yoakum serves as chair of WM Advisors, Inc. Investment Committee.
PERFORMANCE REVIEW
The GROWTH & INCOME PORTFOLIO returned 13.86% for the six-month period ended
June 30, 1999, outperforming the S&P 500 Index's return of 12.38%. Long-term
results continue to be very favorable, as the Portfolio has averaged 22.56%4 for
the past five years.
WHAT WERE THE MOST SIGNIFICANT FACTORS CONTRIBUTING TO THE PORTFOLIO'S
PERFORMANCE OVER THE SIX-MONTH PERIOD ENDED JUNE 30, 1999, AND WHAT INVESTMENT
TECHNIQUES WERE USED TO ADDRESS THOSE CONDITIONS?
The six-month period ended June 30, 1999, was exceptional for equity
investments, as large-cap stocks advanced significantly. Strong economic
fundamentals and a resurgence of global stability supported strong market
performance. Most equity indices reached their all-time highs during the period,
as healthy consumer spending drove strong domestic economic growth. Corporate
profitability and earnings expanded and stocks responded by appreciating across
the board.
While earnings momentum, not value, continued to drive the overall markets
during the early months of 1999, renewed confidence in the strength of the U.S.
economy led to broader sector performance. For 1998, only one-third of industry
groups outperformed the S&P 500 Index. This represents very narrow performance,
as most sectors lagged the overall market, and the strong advance was limited to
the largest growth stocks in the Index. This trend shifted in 1999, as sectors
that had lagged began to lead the market. Broader participation is a positive
force for a well-diversified core portfolio such as the Growth & Income
Portfolio, because multiple holdings contribute to overall performance.
GROWTH OF A $10,000 INVESTMENT(2),(3)
Portfolio Standard
(not & Poor's
adjusted 500
for sales Composite Inflation
charge) Index(1) (CPI)(1)
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Jun 89 $10,000 $10,000 $10,000
10,482 10,898 10,323
10,650 11,108 10,340
10,521 11,065 10,373
10,251 10,807 10,423
10,066 11,032 10,448
Dec 89 10,086 11,292 10,464
9,647 10,535 10,572
9,726 10,671 10,622
9,866 10,951 10,680
9,519 10,681 10,697
10,245 11,722 10,722
Jun 90 10,165 11,640 10,780
10,054 11,603 10,821
9,170 10,555 10,920
8,762 10,036 11,012
8,737 9,999 11,078
9,300 10,642 11,103
Dec 90 9,585 10,934 11,103
10,072 11,417 11,169
10,794 12,235 11,186
10,984 12,526 11,203
11,156 12,561 11,220
11,523 13,099 11,253
Jun 91 11,241 12,500 11,286
11,413 13,085 11,303
11,537 13,393 11,336
11,492 13,173 11,385
11,442 13,349 11,403
11,078 12,810 11,436
Dec 91 12,069 14,274 11,444
12,145 14,009 11,461
12,314 14,188 11,502
12,207 13,910 11,561
12,556 14,315 11,577
12,598 14,392 11,593
Jun 92 12,390 14,183 11,635
12,801 14,755 11,659
12,544 14,457 11,692
12,759 14,623 11,725
12,518 14,676 11,766
13,008 15,171 11,782
Dec 92 13,343 15,369 11,774
13,430 15,481 11,932
13,430 15,690 11,873
13,776 16,028 11,915
13,538 15,635 11,948
13,784 16,057 11,965
Jun 93 13,724 16,110 11,981
13,644 16,035 11,981
13,971 16,645 12,015
13,768 16,522 12,040
13,901 16,858 12,090
13,830 16,699 12,098
Dec 93 14,352 16,905 12,098
15,001 17,471 12,131
14,754 16,999 12,172
14,217 16,260 12,213
14,364 16,471 12,230
14,547 16,740 12,239
Jun 94 14,276 16,326 12,281
14,728 16,867 12,314
15,337 17,553 12,363
14,986 17,130 12,396
15,144 17,522 12,405
14,699 16,879 12,421
Dec 94 14,743 17,126 12,421
14,987 17,571 12,471
15,503 18,253 12,521
15,958 18,793 12,562
16,354 19,340 12,603
16,788 20,104 12,629
Jun 95 17,113 20,576 12,654
17,739 21,261 12,654
17,890 21,319 12,687
18,472 22,212 12,712
18,348 22,134 12,754
19,119 23,108 12,745
Dec 95 19,711 23,536 12,736
20,286 24,345 12,811
20,578 24,579 12,852
20,786 24,815 12,919
21,246 25,780 12,970
21,715 25,829 12,994
Jun 96 21,741 25,935 13,002
20,670 24,781 13,027
21,250 25,306 13,052
22,409 26,729 13,093
22,626 27,461 13,135
24,293 29,545 13,160
Dec 96 24,065 28,966 13,160
25,213 30,765 13,202
25,371 31,014 13,243
24,437 29,724 13,276
25,364 31,499 13,292
27,059 33,433 13,284
Jun 97 28,380 34,924 13,300
30,476 37,697 13,316
29,182 35,601 13,342
30,794 37,552 13,375
29,766 36,297 13,408
30,698 37,978 13,400
Dec 97 31,204 38,631 13,412
30,656 39,060 13,438
32,943 41,876 13,463
34,347 44,020 13,489
34,114 44,465 13,513
32,807 43,700 13,538
Jun 98 33,722 45,474 13,554
31,689 44,992 13,570
26,372 38,486 13,586
28,802 40,953 13,603
31,229 44,283 13,635
33,081 46,966 13,635
Dec 98 34,669 49,672 13,652
35,307 51,749 13,685
34,545 50,141 13,702
35,526 52,147 13,743
38,048 54,166 13,843
37,607 52,888 13,843
Jun 99 39,476 55,823 13,894
(1) The Standard & Poor's 500 Composite Index (S&P 500) represents an unmanaged
weighted index of 500 industrial, transportation, utility and financial
companies widely regarded by investors as representative of the stock
market.
The Consumer Price Index is a measurement of inflation for all urban
consumers (CPI-U).
The indices assume reinvestment of all dividends/distributions and do not
reflect any asset-based charges for investment management or other expenses.
TOTAL AVERAGE RETURNS
AS OF 6/30/99(2), (3) SIX MONTH ONE YEAR FIVE YEAR(4) TEN YEAR(4)
Portfolio (not adjusted for
surrender charge) 13.86% 17.05% 22.56% 14.72%
Standard & Poor's 500
Composite Index(1) 12.38% 22.76% 27.88% 18.76%
(2) Past investment performance does not guarantee future performance, and
returns and values will fluctuate. The returns for the Portfolio assume
reinvestment of all dividends/distributions.
(3) The chart depicts the Portfolio's performance. An investment in the
Portfolio through a variable annuity contract will result in lower returns
because annuity returns are typically net of all fees and assume payment of
a contingent deferred sales charge.
(4) Annualized.
WERE THERE ANY SHIFTS IN THE PORTFOLIO`S HOLDINGS/SECTORS THAT HAVE HAD A
SIGNIFICANT IMPACT ON PERFORMANCE?
The Portfolio's outperformance reflects changes in the Portfolio that were
initiated in the stock market correction that began in August and continued into
October of 1998. As stock prices declined, we became more bullish on the overall
outlook for the market. That bullish outlook was the product of our belief that
the market had discounted a severe slowdown in global economic growth. We
believed that a diminished outlook for emerging markets had been fully
discounted and there was evidence to suggest that emerging markets would
stabilize. In addition, the Federal Reserve changed its policy stance from
restrictive to accommodative with three separate interest rate cuts. We saw the
potential for a quick recovery in stock prices and felt Financial and Consumer
Cyclical Stocks would likely lead the market advance. Consequently, we initiated
or added to our holdings in Chase Manhattan Bank Corp., Merrill Lynch & Co.
Inc., Price (T. Rowe) Associates, Inc., Dayton Hudson Corp., and Walt Disney Co.
These purchases have benefited Portfolio performance, as the stocks have proven
to be strong performers.
Strength in Cyclicals, Capital Goods and Technology contributed to the
outperformance. Cyclicals continued to benefit from surprisingly strong economic
fundamentals and a resurgence of global stability. Within the Portfolio,
Cyclicals advanced, led by Liberty Media Group, Federal-Mogul, and Sony Corp.
BMC Software, IBM, Adobe Systems, and Oracle contributed substantially to the
Portfolio's gains for the period. Boeing, Raytheon, and Donaldson, also up for
the period, led Capital Goods stocks within the Portfolio.
Health Care stocks within the Portfolio were a disappointment, particularly
companies such as Columbia/HCA, PacifiCare Health Systems and Medpartners, Inc.
Although not large positions, these stocks lagged the overall market, and the
industry continued to experience the pains of health care reform -- both real
and perceived. While comprising only a small percentage of the Portfolio, we
feel Health Care Services companies do offer compelling long-term value as a
result of turmoil within the industry. Overall, performance was very strong for
the period, especially in recent months, as our commitment to value has rewarded
shareholders.
Finance and Technology weightings are both very near long-term targets, while
Health Care exposure increased slightly. Because valuations remain excessive for
Health Care and Technology companies, we are averaging into these stocks on
price weakness. This has worked well within the Technology sector as evidenced
by timely purchases of Oracle, BMC Software and Micron Technology. Companies
with market capitalizations of less than $5 billion now comprise less than 15%
of the Portfolio's holdings.
WHAT IS THE OUTLOOK FOR BOTH THE PORTFOLIO AND THE OVERALL ECONOMY?
Going forward, we expect continued moderate growth in the domestic economy in
1999. In the equity markets, careful monitoring of expectations is warranted at
current valuation levels. Several of our long-term holdings in specific sectors,
such as Technology and Telecommunications, are meeting or exceeding our
valuation targets -- prompting us to take some profits. At the same time, we
continue to find stocks that meet our quality standards trading in the market at
very reasonable valuations. It is our intention to maintain our strict
investment discipline to stock selection in an attempt to meet the Portfolio's
objectives. We focus on owning quality businesses at attractive valuations, with
an emphasis on long-term research. We feel that this style will benefit
investors over the course of a long-term investment horizon.
COMPOSITE DEFERRED SERIES
<PAGE>
Composite Deferred Series, Inc.
NORTHWEST portfolio
PORTFOLIO MANAGER:
DAVID SIMPSON
WM ADVISORS, INC.
The equity team, led by David Simpson, Senior Portfolio Manager of WM Advisors,
Inc., has managed the Northwest Portfolio since its inception. Mr. Simpson is a
Chartered Financial Analyst, holds an MBA, and has over 11 years of continuous
investment experience.
Performance Review
For the six-month period ended June 30, 1999, the NORTHWEST PORTFOLIO returned
20.03%, far outpacing the performance of the S&P 500 Index (see chart below) for
the same period. The Portfolio has averaged 18.84%4 per year since its inception
in 1993.
WHAT WERE THE MOST SIGNIFICANT FACTORS CONTRIBUTING TO THE PORTFOLIO'S
PERFORMANCE OVER THE SIX-MONTH PERIOD ENDED JUNE 30, 1999, AND WHAT INVESTMENT
TECHNIQUES WERE USED TO ADDRESS THOSE CONDITIONS?
Economic strength and strong corporate earnings drove equity markets to new
highs during the first half of 1999. Market leadership shifted during the
period, with large-caps leading the way early in the year, then small-caps
rising to market leadership in the second quarter. Portfolio performance was
very strong in the second quarter, as its concentration in Technology stocks
helped drive performance far above the broad market. In general, market breadth
expanded during the period, as both value stocks and small-cap stocks surged,
reversing trends of recent periods. The Internet sector continued to show very
high valuations, but was also very volatile. We will maintain our focus on
fundamentally strong companies that we feel are attractively priced.
GROWTH OF A $10,000 INVESTMENT(2), (3)
Portfolio Standard
(not & Poor's
adjusted 500
for sales Composite Inflation
charge) Index(1) (CPI)(1)
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Inception 1/01/93 $10,000 $10,000 $10,000
10,058 10,073 10,049
9,708 10,209 10,084
10,105 10,428 10,119
9,854 10,173 10,148
10,063 10,448 10,162
Jun 93 9,800 10,482 10,176
9,456 10,433 10,176
9,850 10,830 10,205
9,611 10,750 10,226
9,965 10,968 10,268
10,200 10,865 10,275
Dec 93 10,293 10,999 10,275
10,631 11,367 10,303
10,758 11,061 10,338
10,369 10,579 10,373
10,318 10,717 10,388
10,470 10,892 10,395
Jun 94 10,149 10,623 10,430
10,208 10,974 10,458
10,766 11,421 10,500
10,356 11,146 10,529
10,280 11,401 10,536
10,110 10,982 10,550
Dec 94 10,178 11,143 10,550
10,118 11,432 10,592
10,475 11,876 10,634
10,824 12,228 10,669
11,139 12,583 10,705
11,139 13,080 10,726
Jun 95 11,774 13,388 10,747
12,175 13,834 10,747
12,363 13,871 10,775
12,824 14,452 10,797
12,534 14,402 10,833
12,705 15,035 10,825
Dec 95 12,827 15,313 10,817
12,784 15,840 10,881
13,084 15,992 10,916
13,379 16,146 10,973
14,330 16,383 11,016
14,706 16,806 11,037
Jun 96 14,090 16,875 11,043
13,173 16,124 11,064
13,970 16,466 11,085
14,360 17,391 11,121
14,343 17,868 11,156
15,314 19,224 11,177
Dec 96 15,679 18,847 11,177
16,659 20,017 11,213
16,625 20,179 11,248
15,987 19,340 11,276
16,553 20,495 11,290
18,293 21,753 11,283
Jun 97 19,128 22,723 11,296
20,428 24,527 11,310
20,154 23,164 11,331
21,825 24,433 11,360
20,684 23,617 11,388
21,214 24,710 11,381
Dec 97 20,841 25,135 11,392
20,894 25,414 11,413
22,761 27,247 11,435
23,098 28,642 11,457
23,222 28,931 11,477
21,964 28,433 11,498
Jun 98 21,521 29,588 11,512
20,023 29,274 11,526
15,978 25,041 11,539
17,584 26,646 11,553
19,617 28,813 11,581
22,576 30,559 11,581
Dec 98 25,588 32,319 11,595
26,318 33,670 11,623
24,599 32,624 11,637
25,290 33,929 11,673
26,838 35,243 11,758
28,129 34,411 11,758
Jun 99 30,717 36,321 11,800
(1) The Standard & Poor's 500 Composite Index (S&P 500) represents an unmanaged
weighted index of 500 industrial, transportation, utility and financial
companies widely regarded by investors as representative of the stock
market.
The Consumer Price Index is a measurement of inflation for all urban
consumers (CPI-U).
The indices assume reinvestment of all dividends/distributions and do not
reflect any asset-based charges for investment management or other expenses.
TOTAL AVERAGE RETURNS
AS OF 6/30/99(2), (3) SIX MONTH ONE YEAR FIVE YEAR(4) TEN YEAR(4)
Portfolio (not adjusted for
surrender charge) 20.03% 42.74% 24.79% 18.84%
Standard & Poor's 500
Composite Index(1) 12.38% 22.76% 27.88% 21.95%
(2) Past investment performance does not guarantee future performance, and
returns and values will fluctuate. The returns for the Portfolio assume
reinvestment of all dividends/distributions.
(3) The chart depicts the Portfolio's performance. An investment in the
Portfolio through a variable annuity contract will result in lower returns
because annuity returns are typically net of all fees and assume payment of
a contingent deferred sales charge.
(4) Annualized.
WERE THERE ANY SHIFTS IN THE PORTFOLIO'S HOLDINGS/SECTORS THAT HAVE HAD A
SIGNIFICANT IMPACT ON PERFORMANCE?
We slightly reduced our exposure to Technology during the period, although the
sector remains our largest allocation. We continue to have heavy exposure to
small-caps, as we see the most compelling values in smaller companies. This is
due to a protracted period of underperformance relative to market
capitalization. As these companies regain favor, we could see a period of strong
relative performance.
We did not make any major changes to the Portfolio or to our overall investment
strategy during the period. We built a slightly larger-than-typical cash
position at the end of 1998, and we put much of this to work during the first
quarter. We emphasized purchases of those companies which appeared to have the
best long-term opportunities and offered the most compelling valuations. In the
past, we have been rewarded for buying sectors that are out of favor, but
maintaining a long-term focus is very important. As is characteristic of the
industry, Biotechnology stocks were among our best and worst performers in the
period. Immunex rose 103% on enthusiasm for a new arthritis drug, and Corixa was
up 93%, while Pathogenesis lost 78% of its value. Pathogenesis pre-announced a
profound revenue and earnings shortfall. We were sufficiently discouraged by the
revenue issues that we chose to sell the stock. We had similar disparity of
performance in other sectors, with Technology being the most dramatic. Microsoft
was, not surprisingly, one of the largest contributors to the Portfolio's
performance in 1999, rising 30%, while another software company, Wall Data, lost
60%. With the huge growth potential of communications semiconductors, TriQuint
Semiconductor was up 195% for the period, with most of the gains in the second
quarter.
WHAT IS THE OUTLOOK FOR BOTH THE PORTFOLIO AND THE OVERALL ECONOMY?
Both the Northwest and national economies are proving to be more resilient than
we previously predicted. The U.S. consumer has shown an unusual willingness to
spend money, supporting a robust domestic economy, yet inflation has remained
tame. However, consumer spending tends to be a coincident indicator, not a
leading indicator, and some of the spending may be a wealth effect tied to the
stock market itself. The global economy is mixed, and corporate capital spending
may be slowing due to both weak export demand and concerns about Y2K. We
continue to believe that large-cap stocks are, in general, overvalued.
The Northwest economy continues its strength despite the slowdown as a result of
Asia and the Boeing layoffs -- Boeing is in the process of significantly
reducing employment in the Puget Sound region. The development of the Technology
sector in the Northwest should continue to drive capital investment into the
region and help maintain its growth. It is important to note that while the
Portfolio is concentrated in the Northwest, because of the global diversity of
many of its holdings, it is not solely linked to the region. Companies like
Boeing, Microsoft, and Intel, and even many of the smaller companies in the
Portfolio, generate revenues and earnings from business practices around the
globe. The Portfolio has done very well, but we are investing in some volatile
sectors and are cautious about valuations over the near term. The Portfolio has
a history of volatility, so new investors should be aware of the nature of the
Portfolio. We suggest that investors remain focused on long-term trends rather
than short-term volatility. Overall, we continue to find sound investments in
the Northwest region and maintain a very positive long-term outlook for the
companies in the Portfolio.
COMPOSITE DEFERRED SERIES
<PAGE>
Composite Deferred Series, Inc.
INCOME portfolio
PORTFOLIO MANAGER:
GARY POKRZYWINSKI
WM ADVISORS, INC.
The Income Portfolio is managed by a fixed-income team led by Senior Portfolio
Manager Gary Pokrzywinski, who has over 12 years of asset management experience
and has been with WM Advisors, Inc. for more than six years. Mr. Pokrzywinski is
a Chartered Financial Analyst and holds a Business Degree from the University of
Wisconsin.
PERFORMANCE REVIEW
The INCOME PORTFOLIO returned -2.69% during the period, as interest rates
increased throughout the first half of 1999. Long-term results are very
favorable and provide the potential for inflation protection, as the Portfolio
has averaged 7.80%4 for the past five years.
WHAT WERE THE MOST SIGNIFICANT FACTORS CONTRIBUTING TO THE PORTFOLIO'S
PERFORMANCE OVER THE SIX-MONTH PERIOD ENDED JUNE 30, 1999, AND WHAT INVESTMENT
TECHNIQUES WERE USED TO ADDRESS THOSE CONDITIONS?
Interest rates rose fairly significantly over the last six months, especially
for intermediate-term bonds. Stronger-than-expected economic growth instilled
new concerns over accelerating inflation. As a result, the yield of the ten-year
Treasury increased by 1.13% during the period. Although this negatively affected
the price of the Portfolio, the competitive levels of income offset some of the
negative performance. Over a long-term investment horizon, the majority of the
overall total return of the Portfolio will be derived from its yield.
GROWTH OF A $10,000 INVESTMENT(2), (3)
Portfolio Standard
(not & Poor's
adjusted 500
for sales Composite Inflation
charge) Index(1) (CPI)(1)
- -----------------------------------------------------------
Jun 89 $10,000 $10,000 $10,000
10,171 10,024 10,208
10,167 10,040 10,050
10,231 10,072 10,094
10,271 10,121 10,349
10,334 10,145 10,443
Dec 89 10,407 10,161 10,458
10,368 10,266 10,315
10,395 10,314 10,338
10,429 10,371 10,339
10,367 10,387 10,244
10,631 10,411 10,541
Jun 90 10,782 10,467 10,711
10,894 10,507 10,844
10,739 10,604 10,687
10,801 10,693 10,776
10,942 10,757 10,919
11,129 10,781 11,157
Dec 90 11,300 10,781 11,325
11,407 10,845 11,452
11,541 10,862 11,551
11,631 10,878 11,630
11,779 10,894 11,764
11,838 10,927 11,520
Jun 91 11,824 10,959 11,807
11,964 10,975 11,955
12,187 11,007 12,230
12,441 11,055 12,486
12,613 11,072 12,597
12,721 11,104 12,723
Dec 91 13,097 11,112 13,152
12,918 11,128 12,957
12,983 11,169 13,026
12,943 11,225 12,954
13,044 11,241 13,032
13,255 11,257 13,285
Jun 92 13,464 11,297 13,480
13,711 11,321 13,825
13,870 11,353 13,948
14,040 11,385 14,138
13,818 11,425 13,921
13,806 11,441 13,909
Dec 92 14,002 11,433 14,148
14,280 11,489 14,457
14,544 11,529 14,757
14,639 11,569 14,807
14,754 11,601 14,921
14,768 11,618 14,914
Jun 93 14,992 11,634 15,253
15,078 11,634 15,350
15,355 11,667 15,703
15,426 11,691 15,758
15,513 11,739 15,823
15,308 11,747 15,644
Dec 93 15,405 11,747 15,713
15,633 11,779 15,949
15,300 11,819 15,601
14,838 11,859 15,219
14,681 11,876 15,092
14,651 11,884 15,065
Jun 94 14,617 11,924 15,030
14,905 11,957 15,331
14,941 12,005 15,337
14,681 12,037 15,106
14,628 12,045 15,089
14,599 12,061 15,062
Dec 94 14,716 12,061 15,161
14,977 12,109 15,452
15,324 12,158 15,811
15,441 12,198 15,917
15,674 12,238 16,138
16,394 12,263 16,814
Jun 95 16,522 12,287 16,949
16,436 12,287 16,883
16,635 12,319 17,099
16,820 12,344 17,273
17,065 12,384 17,527
17,350 12,376 17,816
Dec 95 17,638 12,367 18,078
17,741 12,440 18,190
17,320 12,480 17,805
17,158 12,545 17,655
17,021 12,594 17,533
16,974 12,618 17,503
Jun 96 17,196 12,625 17,738
17,233 12,649 17,779
17,198 12,673 17,736
17,496 12,714 18,052
17,932 12,754 18,472
18,279 12,779 18,812
Dec 96 18,049 12,779 18,603
18,058 12,820 18,626
18,104 12,859 18,665
17,873 12,891 18,443
18,138 12,907 18,712
18,327 12,899 18,886
Jun 97 18,581 12,915 19,113
19,223 12,930 19,698
18,954 12,955 19,477
19,291 12,987 19,783
19,662 13,020 20,099
19,763 13,012 20,206
Dec 97 19,967 13,023 20,418
20,263 13,048 20,706
20,232 13,073 20,664
20,311 13,098 20,728
20,386 13,121 20,832
20,624 13,145 21,055
Jun 98 20,859 13,161 21,270
20,869 13,177 21,287
21,406 13,192 21,702
21,892 13,208 22,323
21,717 13,240 22,164
21,823 13,240 22,297
Dec 98 21,864 13,256 22,351
22,056 13,288 22,509
21,465 13,304 21,974
21,534 13,345 22,083
21,590 13,442 22,139
21,348 13,442 21,911
Jun 99 21,275 13,491 21,843
(1) The Lehman Brothers Government/Corporate Bond Index represents all
government and corporate bonds.
The Consumer Price Index is a measurement of inflation for all urban
consumers (CPI-U).
The indices assume reinvestment of all dividends/distributions and do not
reflect any asset-based charges for investment management or other expenses.
(2) Past investment performance does not guarantee future performance, and
returns and values will fluctuate. The returns for the Portfolio assume
reinvestment of all dividends/distributions.
TOTAL AVERAGE RETURNS
AS OF 6/30/99(2), (3) SIX MONTH ONE YEAR FIVE YEAR(4) TEN YEAR(4)
Portfolio (not adjusted for
surrender charge) -2.69% 1.92% 7.80% 7.84%
Standard & Poor's 500
Composite Index(1) 1.77% 2.51% 2.50% 3.04%
(3) The chart depicts the Portfolio's performance. An investment in the
Portfolio through a variable annuity contract will result in lower returns
because annuity returns are typically net of all fees and assume payment of
a contingent deferred sales charge.
(4) Annualized.
The performance over the six-month period was helped by a resurgence in the
corporate sector in the first quarter. As the flight-to-quality of last summer
moved past us, our dominant investment sector -- investment grade corporate
bonds -- outperformed much of the fixed-income market in early 1999. Economic
strength, a surging stock market, and good consumer sentiment supported this
sector. Corporate bonds then underperformed modestly during the second quarter
of 1999. Yield spreads widened slightly over the last three months relative to
Treasuries -- this meant the corporate yields increased more than Treasuries,
causing prices to decrease a bit more. Worries that the Fed will have to
continue to tighten to slow the economy caused the spreads to widen. So far,
this is only a minor worry to the market as evidenced by the modest
underperformance.
Mortgage spreads also widened during the second quarter even with the increase
in rates. This followed a very strong first quarter for mortgage-backed
securities. Normally, mortgages perform well when treasury rates increase, but
the large back up in rates over such a short time caused the duration (a measure
of price sensitivity to changes in interest rates) of mortgage securities to
extend dramatically. This significantly lowered demand for these securities. Our
investment in below-investment-grade corporate debt provided very strong
performance as the high-yield sector was one of the strongest performing areas
of the fixed-income market.
WERE THERE ANY SHIFTS IN THE PORTFOLIO'S HOLDINGS/SECTORS THAT HAVE HAD A
SIGNIFICANT IMPACT ON PERFORMANCE?
We increased our exposure to mortgage-backed securities, which generally provide
strong yields and relative performance during stable interest rate environments.
In addition, credit quality of the Portfolio remained strong, with an average
securities rating of A++. We have focused purchases on businesses in
non-cyclical industries that are less capital intensive, have more free cash
flow, and are less susceptible to changes in the business cycle. For example,
Cendant Corporation, a worldwide provider of consumer and business services, has
performed well. We continue to invest primarily in a diverse portfolio of
intermediate-maturity, investment-grade corporate bonds with some holdings in
mortgages and Treasury notes. These investments work together in an attempt to
produce the stated objectives of a high level of current income with
preservation of capital. Corporate bonds are the primary investment tools used
to accomplish the objectives of the Portfolio. We focus our efforts on a core
portfolio of liquid, recognizable issuers such as General Motors, United
Airlines, and Time Warner. A smaller percentage of the Portfolio is based on
bottom-up research, scouring the market to find issuers that we feel can achieve
a higher level of income and are priced attractively. The Portfolio moves within
sectors and industries based on the anticipation of the business cycle.
Currently, the Portfolio is focused on Health Care and Telecommunications. From
an interest rate perspective, the strategy is to skew Portfolio investments
based upon our secular outlook for interest rates.
WHAT IS THE OUTLOOK FOR BOTH THE PORTFOLIO AND THE OVERALL ECONOMY?
The economy has been growing above potential in recent periods, and if this
continues, the risk of an acceleration in inflation will become a concern. The
result of this growth has been higher interest rates -- this trend may continue
in the short term. Any rise in prices, however, should be rather short lived
because of the structural deflationary forces remaining in the world economy.
Forces, such as global competition, could offset current price pressures and
hold inflation back. Despite the possibility of higher near-term rates, we
forecast lower interest rates over the course of the next 12 months -- a
potentially positive sign for the Portfolio.
++ Bond ratings are of portfolio holdings and are provided by a combination of
both Moody's and Standard & Poor's. Past performance is not a guarantee of
future results.
COMPOSITE DEFERRED SERIES
<PAGE>
<TABLE>
STATEMENTS of ASSETS and LIABILITIES
COMPOSITE DEFERRED SERIES, INC.
JUNE 30, 1999 (UNAUDITED)
<CAPTION>
GROWTH &
INCOME NORTHWEST INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Investments, at value
(See portfolios of investments) (a) .............. $56,547,687 $22,683,617 $14,527,529
Cash ............................................... 2,053 590 364
Dividends and/or interest receivable ............... 46,642 9,347 258,100
Receivable for Portfolio shares sold ............... -- 200 78,890
Receivable for investment securities sold .......... -- 153,767 --
Prepaid expenses ................................... 4,383 1,559 1,553
----------- ----------- -----------
Total Assets ................................... 56,600,765 22,849,080 14,866,436
----------- ----------- -----------
LIABILITIES:
Payable for Portfolio shares redeemed .............. -- 2,179 --
Payable for investment securities purchased ........ 259,886 75,392 --
Dividends payable .................................. -- -- 78,890
Investment advisory fee payable .................... 22,544 8,879 6,059
Accrued legal and audit fees ....................... 6,829 7,439 8,194
Accrued expenses and other payables ................ 12,210 5,069 5,081
----------- ----------- -----------
Total Liabilities .............................. 301,469 98,958 98,224
----------- ----------- -----------
NET ASSETS ......................................... $56,299,296 $22,750,122 $14,768,212
=========== =========== ===========
NET ASSETS CONSIST OF:
Distributions in excess of net investment income ... $ (2,582) $ (4,964) $ (342)
Accumulated net realized gain/(loss) on
investments ...................................... 4,164,241 984,635 (32,926)
Net unrealized appreciation of investments ......... 18,905,516 9,203,198 305,952
Paid-in capital .................................... 33,232,121 12,567,253 14,495,528
----------- ----------- -----------
Total Net Assets ............................... $56,299,296 $22,750,122 $14,768,212
=========== =========== ===========
NET ASSETS VALUE, offering price and redemption
price per share of beneficial interest
outstanding ...................................... $ 30.43 $ 26.69 $ 12.17
=========== =========== ===========
Number of Portfolio shares outstanding ............. 1,850,313 852,294 1,213,575
=========== =========== ===========
- --------------
(a) Investments, at cost ........................... $37,642,171 $13,480,419 $14,221,577
=========== =========== ===========
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS of OPERATIONS
COMPOSITE DEFERRED SERIES, INC.
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<CAPTION>
GROWTH &
INCOME NORTHWEST INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- -----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends .......................................... $ 380,189 $ 75,999 $ 6,844
Interest ........................................... 29,235 18,548 538,122
----------- ----------- -----------
Total investment income ........................ 409,424 94,547 544,966
----------- ----------- -----------
EXPENSES:
Investment advisory fee ............................ 133,430 51,447 39,233
Accounting fee ..................................... 11,304 4,359 3,330
Legal and audit fees ............................... 13,508 14,431 14,161
Custodian fees ..................................... 4,380 1,418 30
Other .............................................. 7,220 2,423 941
----------- ----------- -----------
Total expenses ................................. 169,842 74,078 57,695
Fees reduced by credits allowed by the custodian ... (351) (18) (3)
----------- ----------- -----------
Net expenses ................................... 169,491 74,060 57,692
----------- ----------- -----------
NET INVESTMENT INCOME .............................. 239,933 20,487 487,274
----------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN/(LOSS)
ON INVESTMENTS:
Realized gain from security transactions ........... 4,166,615 1,261,497 32,282
Change in unrealized appreciation of investments
during the period ................................ 2,606,530 2,650,784 (967,428)
----------- ----------- -----------
Net realized and unrealized gain/(loss) on
investments ...................................... 6,773,145 3,912,281 (935,146)
----------- ----------- -----------
NET INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ......................... $ 7,013,078 $ 3,932,768 $ (447,872)
=========== =========== ===========
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS of CHANGES in NET assets
COMPOSITE DEFERRED SERIES, INC.
<CAPTION>
GROWTH & INCOME PORTFOLIO NORTHWEST PORTFOLIO INCOME PORTFOLIO
----------------------------- --------------------------- ---------------------------
SIX MONTHS SIX MONTHS SIX MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR
JUNE 30, ENDED JUNE 30, ENDED JUNE 30, ENDED
1999 DECEMBER 31, 1999 DECEMBER 31, 1999 DECEMBER 31,
(UNAUDITED) 1998 (UNAUDITED) 1998 (UNAUDITED) 1998
------------ ------------ ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net investment income ............. $ 239,933 $ 507,624 $ 20,487 $ 64,258 $ 487,274 $ 1,131,592
Realized gain from investment
transactions .................... 4,166,615 4,762,524 1,261,497 3,264,693 32,282 39,906
Change in unrealized
appreciation of investments
during the period ............... 2,606,530 242,333 2,650,784 504,331 (967,428) 503,998
------------ ------------ ---------- ---------- ---------- ------------
Net increase/(decrease) in net
assets resulting from
operations ...................... 7,013,078 5,512,481 3,932,768 3,833,282 (447,872) 1,675,496
Distributions to shareholders from:
Net investment income ........... (242,515) (507,624) (25,451) (64,258) (487,616) (1,131,592)
Net realized gain on
investments ................... (4,724,264) (4,800,946) (3,367,742) (1,560,748) -- --
Net increase/(decrease) in net
assets from Portfolio share
transactions .................... (197,695) (3,008,718) 1,217,466 (1,139,451) (2,855,910) (348,467)
------------ ------------ ---------- ---------- ---------- ------------
Total increase/(decrease) in net
assets .......................... 1,848,604 (2,804,807) 1,757,041 1,068,825 (3,791,398) 195,437
NET ASSETS:
Beginning of period ............... 54,450,692 57,255,499 20,993,081 19,924,256 18,559,610 18,364,173
------------ ------------ ---------- ---------- ---------- ------------
End of period ..................... $ 56,299,296 $ 54,450,692 $22,750,122 $20,993,081 $14,768,212 $ 18,559,610
============ ============ ========== ========== ========== ============
Distributions in excess of net
investment income at end of
period .......................... $ (2,582) $ -- $ (4,964) $ -- $ (342) $ --
============ ============ ========== ========== ========== ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS of CHANGES in NET assets -- CAPITAL stock ACTIVITY
COMPOSITE DEFERRED SERIES, INC.
<CAPTION>
GROWTH & INCOME PORTFOLIO NORTHWEST PORTFOLIO INCOME PORTFOLIO
----------------------------- --------------------------- ---------------------------
SIX MONTHS SIX MONTHS SIX MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR
JUNE 30, ENDED JUNE 30, ENDED JUNE 30, ENDED
1999 DECEMBER 31, 1999 DECEMBER 31, 1999 DECEMBER 31,
(UNAUDITED) 1998 (UNAUDITED) 1998 (UNAUDITED) 1998
------------ ------------ ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
SHARES:
Sold ............................ 27,744 31,924 12,797 11,707 11,152 109,080
Issued as reinvestment of
dividends and capital gains ... 180,473 181,368 154,252 67,169 38,633 88,761
Redeemed ........................ (202,531) (338,938) (98,602) (140,957) (274,281) (224,982)
------------ ------------ ---------- ---------- ---------- ------------
Net increase/(decrease) ......... 5,686 (125,646) 68,447 (62,081) (224,496) (27,141)
------------ ------------ ---------- ---------- ---------- ------------
AMOUNT:
Sold ............................ $ 812,514 $ 924,483 $ 329,645 $ 274,298 $ 155,564 $ 1,392,114
Issued as reinvestment of
dividends and capital gains ... 4,966,672 5,308,570 3,393,193 1,625,005 487,609 1,131,596
Redeemed ........................ (5,976,881) (9,241,771) (2,505,372) (3,038,754) (3,499,083) (2,872,177)
------------ ------------ ---------- ---------- ---------- ------------
Net increase/(decrease) ......... $ (197,695) $ (3,008,718) $1,217,466 $(1,139,451) $(2,855,910) $ (348,467)
============ ============ ========== ========== ========== ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL highlights
GROWTH & INCOME PORTFOLIO
For a Portfolio share outstanding throughout each period.
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1999 ------------------------------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ......................... $ 29.52 $ 29.06 $ 24.32 $ 20.22 $ 15.70 $ 15.71
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ........... 0.13 0.26 0.29 0.34 0.35 0.31
Net realized and unrealized
gain on investments ............ 3.66 2.92 6.49 4.10 4.90 0.12
------- ------- ------- ------- ------- -------
Total from investment
operations ..................... 3.79 3.18 6.78 4.44 5.25 0.43
------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment
income ......................... (0.14) (0.26) (0.29) (0.34) (0.35) (0.31)
Distributions from net
realized gains ................. (2.74) (2.46) (1.75) -- (0.38) (0.13)
------- ------- ------- ------- ------- -------
Total distributions ............. (2.88) (2.72) (2.04) (0.34) (0.73) (0.44)
------- ------- ------- ------- ------- -------
Net asset value, end of period .. $ 30.43 $ 29.52 $ 29.06 $ 24.32 $ 20.22 $ 15.70
======= ======= ======= ======= ======= =======
TOTAL RETURN+ ................... 13.86% 11.11% 29.66% 22.09% 33.70% 2.72%
======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in
000's) ......................... $56,299 $54,451 $57,255 $41,402 $24,448 $14,195
Ratio of operating expenses to
average net assets (a) ......... 0.64%* 0.60% 0.59% 0.61% 0.70% 0.68%
Ratio of net investment income
to average net assets .......... 0.90%* 0.92% 1.07% 1.59% 2.01% 1.97%
Portfolio turnover rate ......... 27% 32% 50% 45% 36% 25%
- ----------------
* Annualized.
+ Total return is not annualized for periods less than one year and does not reflect any applicable sales charges. The total
returns would have been lower if fees had not been reduced by credits allowed by the custodian.
(a) Ratio of operating expenses to average net assets includes expenses paid indirectly beginning in fiscal 1995.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL highlights
NORTHWEST PORTFOLIO
For a Portfolio share outstanding throughout each period.
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1999 ------------------------------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ......................... $ 26.78 $ 23.55 $ 18.23 $ 14.99 $ 11.97 $ 12.19
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ........... 0.03 0.08 0.07 0.09 0.09 0.08
Net realized and unrealized
gain/(loss) on investments ..... 4.36 5.07 5.80 3.24 3.02 (0.21)
------- ------- ------- ------- ------- -------
Total from investment
operations ..................... 4.39 5.15 5.87 3.33 3.11 (0.13)
------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment
income ......................... (0.03) (0.08) (0.07) (0.09) (0.09) (0.08)
Distributions from net
realized gains ................. (4.45) (1.84) (0.48) -- -- (0.01)
------- ------- ------- ------- ------- -------
Total distributions ............. (4.48) (1.92) (0.55) (0.09) (0.09) (0.09)
------- ------- ------- ------- ------- -------
Net asset value, end of period .. $ 26.69 $ 26.78 $ 23.55 $ 18.23 $ 14.99 $ 11.97
======= ======= ======= ======= ======= =======
TOTAL RETURN+ ................... 20.03% 22.78% 32.92% 22.23% 26.03% (1.12)%
======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in
000's) ......................... $22,750 $20,993 $19,924 $12,770 $ 7,495 $ 4,647
Ratio of operating expenses to
average net assets (a) ......... 0.72%* 0.66% 0.68% 0.77% 0.90% 0.87%
Ratio of net investment income
to average net assets .......... 0.20%* 0.34% 0.31% 0.56% 0.67% 0.76%
Portfolio turnover rate ......... 16% 38% 31% 31% 11% 17%
- ----------------
* Annualized.
+ Total return is not annualized for periods less than one year and does not reflect any applicable sales charges. The total
returns would have been lower if fees had not been reduced by credits allowed by the custodian.
(a) Ratio of operating expenses to average net assets includes expenses paid indirectly beginning in fiscal 1995.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL highlights
INCOME PORTFOLIO
For a Portfolio share outstanding throughout each period.
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1999 -----------------------------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ......................... $ 12.91 $ 12.53 $ 12.08 $ 12.59 $ 11.22 $ 12.57
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ........... 0.39 0.78 0.79 0.78 0.79 0.79
Net realized and unrealized
gain/(loss) on investments ..... (0.74) 0.38 0.45 (0.51) 1.37 (1.35)
------- ------- ------- ------- ------- -------
Total from investment
operations ..................... (0.35) 1.16 1.24 0.27 2.16 (0.56)
------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment
income ......................... (0.39) (0.78) (0.79) (0.78) (0.79) (0.79)
------- ------- ------- ------- ------- -------
Total distributions ............. (0.39) (0.78) (0.79) (0.78) (0.79) (0.79)
------- ------- ------- ------- ------- -------
Net asset value, end of period .. $ 12.17 $ 12.91 $ 12.53 $ 12.08 $ 12.59 $ 11.22
======= ======= ======= ======= ======= =======
TOTAL RETURN+ ................... (2.69)% 9.50% 10.62% 2.34% 19.86% (4.48)%
======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in
000's) ......................... $14,768 $18,560 $18,364 $17,385 $15,206 $10,842
Ratio of operating expenses to
average net assets (a) ......... 0.74%* 0.67% 0.70% 0.67% 0.76% 0.74%
Ratio of operating expenses to
average net assets without
fees reduced by credits allowed
by the custodian ............... 0.74%* 0.68% 0.70% 0.67% 0.76% 0.74%
Ratio of net investment income
to average net assets .......... 6.21%* 6.11% 6.48% 6.46% 6.62% 6.79%
Portfolio turnover rate ......... 0%# 6% 9% 11% 14% 15%
- ----------------
* Annualized.
+ Total return is not annualized for periods less than one year and does not reflect any applicable sales charges. The total
returns would have been lower if fees had not been reduced by credits allowed by the custodian.
# Amount represents less than 1%.
(a) Ratio of operating expenses to average net assets includes expenses paid indirectly beginning in fiscal 1995.
See Notes to Financial Statements.
</TABLE>
<PAGE>
PORTFOLIO of INVESTMENTS
GROWTH & INCOME PORTFOLIO
JUNE 30, 1999 (UNAUDITED)
SHARES VALUE
------ -----
COMMON STOCKS - 97.3%
COMPUTER SOFTWARE/SERVICES - 11.0%
11,300 Adobe Systems, Inc. ................................. $ 928,366
12,300 BARRA, Inc.+ ........................................ 310,575
17,000 BMC Software, Inc.+ ................................. 918,000
14,000 Computer Associates International, Inc. ............. 770,000
19,400 First Data Corporation .............................. 949,388
16,000 Microsoft Corporation+ .............................. 1,443,000
23,250 Oracle Corporation+ ................................. 863,156
-----------
6,182,485
-----------
BANKS/SAVINGS & LOANS - 10.1%
7,500 Bank of America Corporation ......................... 549,844
8,100 Bank of New York Company, Inc. ...................... 297,169
9,500 Chase Manhattan Corporation ......................... 822,937
24,750 Citigroup, Inc. ..................................... 1,175,625
14,000 First Union Corporation ............................. 658,000
21,428 Mellon Bank Corporation ............................. 779,444
15,000 Prime Bancshares, Inc. .............................. 268,125
6,000 U.S. Bancorp ........................................ 204,000
21,460 Wells Fargo & Company ............................... 917,415
-----------
5,672,559
-----------
CONSUMER STAPLES - 7.8%
10,000 Alberto-Culver Company, Class A ..................... 228,125
7,000 Campbell Soup Company ............................... 324,625
625 Estee Lauder Cosmetics .............................. 53,906
11,100 Kimberly-Clark Corporation .......................... 632,700
13,000 Kimberly-Clark de Mexico, ADR ....................... 267,303
10,000 Libbey, Inc. ........................................ 290,000
20,000 PepsiCo, Inc. ....................................... 773,750
7,800 Philip Morris Companies, Inc. ....................... 313,463
3,000 Procter & Gamble Company ............................ 267,750
10,500 Ralston-Ralston Purina Company ...................... 319,594
30,100 Sara Lee Corporation ................................ 682,894
3,125 Unilever NV ......................................... 217,969
-----------
4,372,079
-----------
HEALTH CARE PRODUCTS - 6.7%
15,000 Abbott Laboratories ................................. 682,500
10,000 Johnson & Johnson ................................... 980,000
10,300 Merck & Company, Inc. ............................... 762,200
24,000 Mylan Laboratories .................................. 636,000
2,000 Pfizer, Inc. ........................................ 219,500
7,200 Warner-Lambert Company .............................. 499,500
-----------
3,779,700
-----------
OIL & GAS - 6.4%
3,050 BP Amoco Plc, Sponsored ADR ......................... 330,925
5,800 Exxon Corporation ................................... 447,325
10,800 Halliburton Company ................................. 488,700
5,600 Mobil Corporation ................................... 554,400
14,800 Royal Dutch Petroleum ............................... 891,700
24,450 Tosco Corporation ................................... 634,172
6,700 Unocal Corporation .................................. 265,488
-----------
3,612,710
-----------
UTILITIES/TELECOMMUNICATIONS - 4.8%
16,000 AT&T Corporation .................................... 893,000
4,000 Comcast Corporation, Special Class A ................ 153,750
10,000 SBC Communications, Inc. ............................ 580,000
20,000 Sprint Corporation, PCS Group+ ...................... 1,056,250
-----------
2,683,000
-----------
CONSUMER DURABLES - 4.4%
19,000 Federal-Mogul Corporation ........................... 988,000
24,000 Mattel, Inc. ........................................ 634,500
33,760 U.S. Industries, Inc. ............................... 573,920
5,450 USG Corporation ..................................... 305,200
-----------
2,501,620
-----------
FINANCIAL SERVICES - 4.1%
18,300 Federal Home Loan Mortgage Corporation .............. 1,061,400
4,950 Heller Financial, Inc. .............................. 137,672
21,455 Liberty Financial Companies ......................... 624,878
3,800 Merrill Lynch & Company, Inc. ....................... 303,762
5,100 Price (T. Rowe) Associates, Inc. .................... 195,713
-----------
2,323,425
-----------
AEROSPACE/DEFENSE - 4.1%
6,250 AlliedSignal Inc. ................................... 393,749
14,500 Boeing Company ...................................... 640,719
16,000 Lockheed Martin Corporation ......................... 596,000
9,800 Raytheon Company, Class B ........................... 689,675
-----------
2,320,143
-----------
RETAIL SALES - 4.0%
5,000 Dayton Hudson Corporation ........................... 325,000
29,925 Intimate Brands, Inc. ............................... 1,417,696
9,000 May Department Stores Company ....................... 367,875
3,300 Ross Stores, Inc. ................................... 166,238
-----------
2,276,809
-----------
INSURANCE - 4.0%
15,000 Allstate Corporation ................................ 538,125
6,000 American International Group, Inc. .................. 702,375
27,495 Coseco, Inc. ........................................ 836,879
3,200 MGIC Investment Corporation ......................... 155,600
-----------
2,232,979
-----------
COMPUTER SYSTEMS - 3.8%
23,550 Compaq Computer Corporation ......................... 557,841
5,600 EMC Corporation+ .................................... 308,000
13,000 Hewlett-Packard Company ............................. 1,306,500
-----------
2,172,341
-----------
MEDIA - 3.5%
30,000 AT&T Corporation-Liberty Media Group, Class A+ ...... 1,102,500
12,700 Viacom, Inc., Class A+ .............................. 560,388
9,900 Walt Disney Company ................................. 305,044
-----------
1,967,932
-----------
HEALTH CARE SERVICES - 3.3%
5,000 Aetna, Inc. ......................................... 447,187
17,900 Columbia/HCA Healthcare Corporation ................. 408,344
10,600 IMS Health, Inc. .................................... 331,250
0.100 LifePoint Hospital, Inc.+ ........................... 1
9,006 PacifiCare Health Systems, Inc., Class A+ ........... 647,869
0.100 Triad Hospitals, Inc.+ .............................. 1
-----------
1,834,652
-----------
BUSINESS SERVICES - 3.2%
16,466 ACNielson Corporation+ .............................. 498,096
26,434 Cendant Corporation+ ................................ 541,897
21,000 Dun & Bradstreet Corporation ........................ 744,187
-----------
1,784,180
-----------
TRANSPORTATION - 2.7%
6,500 Airborne Freight Corporation ........................ 179,968
3,000 AMR Corporation+ .................................... 204,750
30,600 Expeditors International of Washington, Inc. ........ 833,850
5,500 Union Pacific Corporation ........................... 320,719
-----------
1,539,287
-----------
BASIC INDUSTRY - 2.5%
3,000 Nucor Corporation ................................... 142,313
23,172 Waste Management, Inc. .............................. 1,245,494
-----------
1,387,807
-----------
ELECTRONICS/SEMICONDUCTORS - 2.0%
13,900 Intel Corporation ................................... 827,050
8,000 Micron Technology, Inc.+ ............................ 322,500
-----------
1,149,550
-----------
ELECTRICAL EQUIPMENT - 2.0%
5,000 Emerson Electric Company ............................ 314,375
7,000 General Electric Company ............................ 791,000
-----------
1,105,375
-----------
CAPITAL GOODS - 1.8%
13,375 Crane Company ....................................... 420,476
25,000 Donaldson Company, Inc. ............................. 612,500
-----------
1,032,976
-----------
UTILITIES/GAS & ELECTRIC - 1.5%
10,000 Enron Corporation ................................... 817,500
-----------
CONSUMER CYCLICALS - 1.5%
7,400 Sony Corporation, ADR ............................... 816,775
-----------
REAL ESTATE INVESTMENT TRUSTS - 1.1%
10,000 Equity Office Properties Trust ...................... 256,250
8,400 Health Care Property Investors, Inc. ................ 242,550
12,750 Prison Realty Trust ................................. 125,108
-----------
623,908
-----------
LODGING & RESTAURANTS - 1.0%
52,505 Sunburst Hospitality Corporation+ ................... 308,467
5,000 Tricon Global Restaurants, Inc.+ .................... 270,625
-----------
579,092
-----------
Total Common Stocks
(Cost $36,144,398) ................................ 54,768,884
-----------
CONVERTIBLE PREFERRED STOCKS - 1.5%
2,730 Estee Lauder Aces Trust II, Conv. Pfd.,
6.250% due 02/23/2002 ............................. 257,303
5,000 Lehman Brothers Holdings, Series CSCO, Conv. Pfd.,
5.000% due 02/26/2001 ............................. 443,750
2,500 Loral Space & Communications, Ltd.,
Series C, Conv. Pfd.,
6.000% due 11/01/2006++ ........................... 126,875
-----------
Total Convertible Preferred Stocks
(Cost $727,082) ................................... 827,928
-----------
PRINCIPAL
AMOUNT
- ---------
CONVERTIBLE BOND - 0.5%
(Cost $197,077)
$370,000 At Home Corporation, Sub. Deb.,
0.525% due 12/28/2018++ ........................... 286,750
-----------
U.S. TREASURY OBLIGATION - 0.7%
(Cost $298,614)
400,000 U.S. Treasury Bond,
6.000% due 02/15/2026 ............................ 389,125
-----------
REPURCHASE AGREEMENT - 0.4%
(Cost $275,000)
275,000 Agreement with Credit Suisse First Boston
Corporation, 4.750% dated 06/30/1999, to be
repurchased at $275,036 on 07/01/1999,
collateralized by $274,068 U.S. Treasury
Note, 5.375% due 01/31/2000 (Market Value
$280,600) ......................................... 275,000
-----------
TOTAL INVESTMENTS (COST $37,642,171*).................. 100.4% 56,547,687
OTHER ASSETS AND LIABILITIES (NET) .................... (0.4) (248,391)
----- -----------
NET ASSETS ............................................ 100.0% $56,299,296
===== ===========
- ----------------
* Aggregate cost for federal tax purposes.
+ Non-income producing security.
++ Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
- -------------------------------------------------------------------------------
GLOSSARY OF TERMS
ADR - American Depositary Receipts
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
PORTFOLIO of INVESTMENTS
NORTHWEST PORTFOLIO
JUNE 30, 1999 (UNAUDITED)
SHARES VALUE
------ -----
COMMON STOCKS - 98.0%
COMPUTER SOFTWARE/SERVICES - 15.3%
6,645 Adobe Systems, Inc. ................................. $ 545,928
9,900 ARIS Corporation+ ................................... 82,294
7,165 Asymetrix Learning Systems, Inc.+ ................... 29,556
5,800 Check Point Software Technologies, Ltd.+ ............ 311,025
33,175 Mentor Graphics Corporation+ ........................ 425,055
9,685 Microsoft Corporation+ .............................. 873,466
24,410 Orcad, Inc.+ ........................................ 309,702
13,800 Summit Design, Inc.+ ................................ 41,400
18,140 Visio Corporation+ .................................. 690,455
19,080 Wall Data, Inc.+ .................................... 182,453
-----------
3,491,334
-----------
HEALTH CARE PRODUCTS - 10.9%
31,100 Corixa Corporation+ ................................. 553,969
16,630 ICOS Corporation+ ................................... 678,712
5,340 Immunex Corporation+ ................................ 680,516
33,000 NeoRx Corporation+ .................................. 50,531
30,806 SonoSite, Inc.+ ..................................... 523,702
-----------
2,487,430
-----------
ELECTRICAL EQUIPMENT - 8.9%
9,300 Electro Scientific Industries, Inc.+ ................ 388,565
36,665 FEI Company+ ........................................ 302,486
15,800 Flir Systems, Inc.+ ................................. 238,975
15,945 Microvision, Inc.+ .................................. 360,756
23,615 Tektronix, Inc. ..................................... 712,878
-----------
2,003,660
-----------
COMPUTER SYSTEMS - 8.8%
17,490 Apex Inc.+ .......................................... 358,545
43,660 In Focus Systems, Inc.+ ............................. 654,900
15,520 Radisys Corporation+ ................................ 603,340
21,770 Sequent Computer Systems, Inc.+ ..................... 386,417
-----------
2,003,202
-----------
ELECTRONICS/SEMICONDUCTORS - 7.0%
8,070 Credence Systems Corporation+ ....................... 299,599
3,310 Intel Corporation ................................... 196,945
8,105 Lattice Semiconductor Corporation+ .................. 504,536
6,450 Micrion Corporation+ ................................ 72,562
8,095 Micron Technology, Inc.+ ............................ 326,329
3,830 TriQuint Semiconductor, Inc.+ ....................... 194,867
-----------
1,594,838
-----------
BASIC INDUSTRY - 6.4%
3,000 Boise Cascade Corporation ........................... 128,625
14,170 Oregon Steel Mills, Inc. ............................ 188,638
24,035 Schnitzer Steel Industries, Inc., Class A ........... 539,285
4,350 Weyerhaeuser Company ................................ 299,063
6,750 Willamette Industries, Inc. ......................... 310,922
-----------
1,466,533
-----------
BANKS/SAVINGS & LOANS - 5.2%
9,650 First Washington Bancorp, Inc. ...................... 193,603
144 Horizon Financial Corporation ....................... 1,971
5,850 Interwest Bancorp, Inc. ............................. 146,250
5,300 KeyCorp ............................................. 170,263
8,970 Sterling Financial Corporation+ ..................... 123,898
9,181 U.S. Bancorp ........................................ 312,154
10,827 Washington Federal, Inc. ............................ 242,923
-----------
1,191,062
-----------
TRANSPORTATION - 4.8%
10,780 Airborne Freight Corporation ........................ 298,471
7,150 Alaska Air Group, Inc.+ ............................. 298,513
18,170 Expeditors International of Washington, Inc. ........ 495,132
-----------
1,092,116
-----------
CONSUMER CYCLICALS - 4.8%
38,695 Building Materials Holding Corporation+ ............. 444,993
9,050 Columbia Sportswear Company+ ........................ 139,144
5,700 Cutter & Buck Inc.+ ................................. 96,187
26,095 K2, Inc. ............................................ 233,224
2,620 Nike, Inc., Class B ................................. 165,879
-----------
1,079,427
-----------
AEROSPACE/DEFENSE - 3.3%
11,220 Boeing Company ...................................... 495,784
5,900 Precision Castparts Corporation ..................... 250,750
-----------
746,534
-----------
CONSUMER STAPLES - 3.2%
6,700 Albertson's Inc. .................................... 345,469
13,876 Kroger Company ...................................... 387,661
-----------
733,130
-----------
INSURANCE - 3.1%
9,805 SAFECO Corporation .................................. 432,645
9,135 StanCorp Financial Group, Inc.+ ..................... 274,050
-----------
706,695
-----------
LODGING & RESTAURANTS - 2.8%
35,855 Cavanaugh's Hospitality Corporation+ ................ 302,526
9,050 Starbucks Corporation+ .............................. 339,941
-----------
642,467
-----------
UTILITIES/TELECOMMUNICATIONS - 2.5%
11,400 General Communication, Inc.+ ........................ 77,484
1,615 GST Telecommunications, Inc.+ ....................... 21,298
34,430 Metro One Telecommunications, Inc.+ ................. 473,413
-----------
572,195
-----------
CONSUMER DURABLES - 2.4%
12,710 Monaco Coach Corporation+ ........................... 537,792
-----------
RETAIL SALES - 2.2%
5,200 Costco Companies, Inc.+ ............................. 416,325
9,210 Multiple Zones International, Inc.+ ................. 68,499
670 Nordstrom, Inc. ..................................... 22,445
-----------
507,269
-----------
CAPITAL GOODS - 2.2%
25,100 Greenbrier Companies, Inc. .......................... 263,550
4,230 PACCAR, Inc. ........................................ 225,776
-----------
489,326
-----------
REAL ESTATE INVESTMENT TRUSTS - 2.1%
13,650 Pacific Gulf Properties, Inc. ....................... 308,831
6,155 Shurgard Storage Centers, Inc., Class A ............. 166,954
-----------
475,785
-----------
HEALTH CARE SERVICES - 1.6%
14,330 Foundation Health Systems, Inc., Class A+ ........... 214,950
2,050 PacifiCare Health Systems, Inc., Class B+ ........... 147,472
-----------
362,422
-----------
BUSINESS SERVICES - 0.5%
14,400 Barrett Business Services, Inc.+ .................... 122,400
-----------
Total Common Stocks
(Cost $13,102,419) ................................ 22,305,617
-----------
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT - 1.7%
(Cost $378,000)
$378,000 Agreement with Credit Suisse First Boston
Corporation, 4.750% dated 06/30/1999, to be
repurchased at $378,050 on 07/01/1999,
collateralized by $376,719 U.S. Treasury Note,
5.375% due 01/31/2000 (Market Value $385,698) ..... 378,000
-----------
TOTAL INVESTMENTS (COST $13,480,419*) .................. 99.7% 22,683,617
OTHER ASSETS AND LIABILITIES (NET) ..................... 0.3 66,505
----- -----------
NET ASSETS ............................................. 100.0% $22,750,122
===== ===========
- ----------------
* Aggregate cost for federal tax purposes.
+ Non-income producing security.
See Notes to Financial Statements.
<PAGE>
PORTFOLIO of INVESTMENTS
INCOME PORTFOLIO
JUNE 30, 1999 (UNAUDITED)
PRINCIPAL
AMOUNT VALUE
------ -----
U.S. TREASURY OBLIGATIONS - 51.8%
U.S. TREASURY BONDS - 28.0%
$1,200,000 6.250% due 08/15/2023 ............................ $ 1,201,500
250,000 6.500% due 11/15/2026 ............................ 258,828
2,200,000 7.250% due 05/15/2016 - 08/15/2022 ............... 2,438,813
200,000 7.500% due 11/15/2024 ............................ 231,563
-----------
4,130,704
-----------
U.S. TREASURY NOTES - 23.8%
1,000,000 5.750% due 08/15/2003 ............................ 1,000,313
1,250,000 5.875% due 02/15/2004 ............................ 1,257,031
1,200,000 7.875% due 08/15/2001 ............................ 1,255,125
-----------
3,512,469
-----------
Total U.S. Treasury Obligations
(Cost $7,443,147) .............................. 7,643,173
-----------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES - 12.0%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) - 8.0%
412,611 6.500% due 07/15/2026 ............................ 400,371
273,793 7.000% due 07/15/2023 ............................ 270,896
277,239 7.500% due 06/15/2024 ............................ 280,680
80,013 8.000% due 06/15/2022 ............................ 82,345
1,865 8.500% due 03/15/2022 ............................ 1,956
134,912 9.000% due 05/15/2009 ............................ 143,357
-----------
Total GNMAs (Cost $1,166,205) .................... 1,179,605
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS (CMO) - 3.0%
80,216 Resolution Trust Corporation,1991-M2 A2,
7.376% due 09/25/2020 .......................... 75,942
367,299 Weyerhauser Mortgage Corporation,
1982-C, FHA Putable,
7.430% due 08/01/2022 .......................... 375,727
-----------
Total CMOs (Cost $427,155) ....................... 451,669
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) - 1.0%
139,661 8.000% due 12/01/2026 ............................ 143,496
4,512 9.000% due 10/01/2004 ............................ 4,746
-----------
Total FNMAs (Cost $148,242) ...................... 148,242
-----------
Total U.S. Government Agency
Mortgage-Backed Securities
(Cost $1,741,602) .............................. 1,779,516
-----------
CORPORATE BONDS AND NOTES - 29.9%
INDUSTRIAL - 15.1%
250,000 American Home Products Corporation, Deb.,
7.250% due 03/01/2023 ............................ 248,092
300,000 Burlington Northern, Santa Fe, Note,
8.750% due 02/25/2022 ............................ 333,860
200,000 Caterpillar Corporation, Deb.,
9.375% due 07/15/2001 ............................ 210,535
175,000 CII Financial, Inc., Conv., Note,
7.500% due 09/15/2001 ............................ 164,719
150,000 Columbia/HCA Healthcare Corporation, Sub. Deb.,
6.750% due 10/01/2006 ............................ 129,000
250,000 Conagra, Inc., Sr. Note,
6.700% due 08/01/2027 ............................ 244,028
300,000 Loral Corporation, Deb.,
7.625% due 06/15/2025 ............................ 301,514
50,000 Mariner Post-Acute Network, Sr. Sub. Note,
9.500% due 11/01/2007+ ........................... 9,500
250,000 PacifiCare Health Systems Inc., Sr. Note,
7.000% due 09/15/2003 ............................ 252,243
200,000 Time Warner, Inc., Deb.,
9.150% due 02/01/2023 ............................ 231,126
150,000 Veterinary Centers of America,
Conv. Sub. Deb.,
5.250% due 05/01/2006 ............................ 110,250
-----------
2,234,867
-----------
BANKS - 4.7%
195,000 Bank of New York, Sub. Note,
7.875% due 11/15/2002 ............................ 203,316
250,000 First Nationwide Bank, Sub. Deb.,
10.000% due 10/01/2006 ........................... 279,241
200,000 Mercantile Bank, Sub. Note,
7.625% due 10/15/2002 ............................ 205,584
-----------
688,141
-----------
UTILITIES - 4.5%
Niagara Mohawk Power Corporation, Deb.:
150,000 9.500% due 06/01/2000 ............................ 154,349
49,000 8.770% due 01/01/2018 ............................ 51,959
150,000 Portland General Electric Company,
First Mortgage,
8.880% due 08/12/1999 ............................ 150,483
150,000 Public Service Electric &
Gas Company, Mortgage,
8.875% due 06/01/2003 ............................ 160,798
150,000 Texas Utilities Electric Company,
First Mortgage,
9.500% due 08/01/1999 ............................ 150,214
-----------
667,803
-----------
FINANCIAL - 3.1%
200,000 Kemper Corporation, Note,
6.875% due 09/15/2003 ............................ 201,256
250,000 Morgan Stanley Group, Note,
6.750% due 03/04/2003 ............................ 251,814
-----------
453,070
-----------
REAL ESTATE INVESTMENT TRUSTS - 2.0%
Franchise Finance Corporation, Sr. Note:
100,000 7.000% due 11/30/2000 ............................... 99,635
200,000 7.875% due 11/30/2005 ............................... 197,132
-----------
296,767
-----------
FOREIGN (U.S. DOLLAR DENOMINATED) - 0.5%
100,000 @Entertainment Inc., Unit, Sr. Disc. Note,
Zero coupon to 07/15/2003;
14.500% due 02/01/2009+ .......................... 68,500
-----------
Total Corporate Bonds and Notes
(Cost $4,353,976) ................................ 4,409,148
-----------
FOREIGN GOVERNMENT BOND - 1.0%
(Cost $148,852)
150,000 Province of Alberta, Government Guaranty,
9.250% due 04/01/2000 ............................ 154,192
-----------
SHARES
------
PREFERRED STOCK - 1.1%
(Cost $150,000)
6,000 California Federal Savings Bank, Series A .......... 157,500
-----------
PRINCIPAL
AMOUNT
- ---------
REPURCHASE AGREEMENT - 2.6%
(Cost $384,000)
$384,000 Agreement with Credit Suisse First Boston
Corporation, 4.750% dated 06/30/1999, to be
repurchased at $384,051 on 07/01/1999,
collateralized by $382,698 U.S. Treasury Note,
5.375% due 01/31/2000 (Market Value $391,820) .... 384,000
-----------
TOTAL INVESTMENTS (COST $14,221,577*) .................... 98.4% 14,527,529
OTHER ASSETS AND LIABILITIES (NET) ....................... 1.6 240,683
----- -----------
NET ASSETS ............................................... 100.0% $14,768,212
===== ===========
- ----------------
* Aggregate cost for federal tax purposes.
+ Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
- -------------------------------------------------------------------------------
GLOSSARY OF TERMS
FHA - Federal Housing Authority
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
NOTES to FINANCIAL statements (unaudited)
COMPOSITE DEFERRED SERIES
1. ORGANIZATION AND BUSINESS
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:
the Growth & Income, Northwest, and Income Portfolios (each a "Portfolio").
Each Portfolio is designed to meet a variety of investment objectives.
SAFECO Life Insurance Company ( the "Company"), a subsidiary of SAFECO
Corporation, 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.
WM Advisors, Inc. (the "Advisor" or "WM Advisors"), a wholly-owned subsidiary
of Washington Mutual, Inc. ("Washington Mutual"), a publicly owned financial
services company, serves as investment advisor to the Fund.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates. The following is a summary
of significant accounting policies consistently followed by the Portfolios in
the preparation of their financial statements.
PORTFOLIO VALUATION:
A security that is primarily traded on a U.S. exchange (including securities
traded through the Nasdaq National Market System) is valued at the last sale
price on that exchange or, if there were no sales during the day, at the mean
of the current day's bid and asked prices. Securities traded only on over-the-
counter markets (other than the Nasdaq National Market System and U.S.
Government Securities) are valued at the closing over-the-counter bid prices,
or if no sale occurred on such day, at the mean of the current days bid and
asked prices. An option is generally valued at the last sale price or, in the
absence of a last sale price, at the mean of the current day's bid and asked
prices. Short-term debt securities that mature in 60 days or less are valued
at amortized cost. Debt securities, other than short-term securities, are
valued at prices supplied by the Fund's pricing agent.
REPURCHASE AGREEMENTS:
Each Portfolio may engage in repurchase agreement transactions. Under the
terms of a typical repurchase agreement, the Portfolio, through its custodian,
takes possession of an underlying debt obligation subject to an obligation of
the seller to repurchase. The Portfolio is then obligated to resell the
obligation at an agreed upon price and time, thereby determining the yield
during the Portfolio's holding period. The value of the collateral is at all
times at least equal to the total amount of the repurchase obligation,
including interest. In the event of counterparty default, the Portfolio would
seek to use the collateral to offset losses incurred. There is potential loss
to the Portfolio in the event the Portfolio is delayed or prevented from
exercising its right to dispose of the collateral securities, including the
risk of a possible decline in the value of the underlying securities during
the period while the Portfolio seeks to assert its rights. WM Advisors, acting
under the supervision of the Board of Directors, reviews the value of the
collateral and the creditworthiness of those banks and dealers with whom the
Funds and Portfolios enter into repurchase agreements.
COVERED CALL OPTIONS WRITTEN:
The Growth & Income Portfolio and the Northwest Portfolio may write listed
covered call options in which premiums received by the Portfolios are recorded
as a liability which is marked-to-market daily. 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 may
forego the opportunity to profit if the market price of the underlying
security increases and the option is exercised. Proceeds from the covered call
options exercised are increased by the amount of premium received. If an
option expires or is cancelled 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 or greater than the premium originally received.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date (the date the order
to buy or sell is executed). Realized gains and losses from securities sold
are recorded on the identified cost basis. Interest income is recorded on the
accrual basis and consists of interest accrued and, if applicable, discount
accreted less premiums amortized. Premiums on bonds can be amortized on the
basis of any of the following methods: yield-to-maturity, straight-line, or
yield-to-call. Discounts can be accreted using yield-to-maturity or straight-
line methods. Premiums and discount on mortgage-backed securities are
amortized or accreted using only the straight-line method. Dividend income is
recorded on the ex-dividend date, except that certain dividends from foreign
securities are recorded as soon as the Portfolios are informed of the ex-
dividend date.
The Growth & Income Portfolio and the Income Portfolio may purchase securities
on what is called a when-issued or delayed-delivery basis. Securities
purchased or sold on a when-issued or delayed-delivery basis may be settled a
month or more after the trade date; interest income is not accrued until
settlement date. Each Portfolio instructs the custodian to segregate assets of
the Portfolio with a current value at least equal to the amount of its when-
issued purchase commitments.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income of the Growth & Income Portfolio and the
Northwest Portfolio are declared and paid quarterly. Dividends from net
investment income of the Income Portfolio are calculated daily and paid
monthly. Distributions of any net long-term capital gains earned by a
Portfolio are made annually. Distributions of any net short-term capital gains
earned by a Portfolio are distributed no less frequently than annually at the
discretion of the Board of Directors. Additional distributions of net
investment income and capital gains for each Portfolio may be made at the
discretion of the Board of Directors in order to avoid the application of a 4%
non-deductible excise tax on certain undistributed amounts of ordinary income
and capital gains. Income distributions 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 treatments of income and gains on various investment securities
held by the Portfolios, organizational costs, dividends payable, redesignated
distributions and differing characterizations of distributions made by each
Portfolio as a whole.
FEDERAL INCOME TAXES:
It is each Portfolio's policy to qualify as a regulated investment company by
complying with the requirements of the Internal Revenue Code of 1986, as
amended, applicable to regulated investment companies by, among other things,
distributing substantially all of its taxable and tax-exempt earnings to its
shareholders. Therefore, no Federal income tax provision is required.
3. INVESTMENT ADVISORY AND OTHER TRANSACTIONS
WM Advisors serves as investment advisor to the Fund. For its services to the
Portfolios, WM Advisors is entitled to a monthly fee, at an annual rate of
0.50% of each Portfolio's average daily net assets. Advisory fees are
calculated daily and paid monthly.
Custodian fees for the Portfolios have been reduced by credits allowed by the
custodian for uninvested cash balances. These Portfolios could have invested
this cash in income producing securities. Fees reduced by credits allowed by
the custodian for the six months ended June 30, 1999 are shown separately in
the Statements of Operations.
4. DIRECTORS' FEES
No director, officer or employee of Washington Mutual or its subsidiaries
receives any compensation from the Fund for serving as an Officer or Director
of the Fund. 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.
5. PURCHASES AND SALES OF SECURITIES
The aggregate cost of purchases and proceeds from sales of securities,
excluding U.S. Government and short-term investments, for the six months ended
June 30, 1999 were as follows:
NAME OF PORTFOLIO PURCHASES SALES
- ----------------- --------- -----
Growth & Income Portfolio ..................... $14,195,644 $18,661,322
Northwest Portfolio ........................... 3,230,438 4,130,139
Income Portfolio .............................. 38,942 856,566
The aggregate cost of purchases and proceeds from sales of U.S. Government
securities, excluding short-term investments, for the six months ended June
30, 1999 were as follows:
NAME OF PORTFOLIO PURCHASES SALES
- ----------------- --------- -----
Income Portfolio .............................. $ -- $ 1,014,109
At June 30, 1999, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost and aggregate gross
unrealized depreciation for all securities in which there is an excess of tax
cost over value were as follows:
TAX BASIS TAX BASIS
UNREALIZED UNREALIZED
NAME OF PORTFOLIO APPRECIATION DEPRECIATION
- ----------------- ------------ ------------
Growth & Income Portfolio ..................... $20,479,855 $ 1,574,339
Northwest Portfolio ........................... 9,778,314 575,116
Income Portfolio .............................. 499,098 193,146
6. GEOGRAPHIC AND INDUSTRY CONCENTRATION AND RISK FACTORS
The Northwest Portfolio concentrates its investments in companies located or
doing business in the Northwest region of the United States. The Northwest
Portfolio is not intended as a complete investment program and could be
adversely impacted by economic trends within the region.
<PAGE>
This material is not an offer
to sell nor a solicitation to
buy shares of the Composite
Deferred Series, Inc. It is
not authorized for
distribution unless preceded
or accompanied by a current
prospectus(es) that includes
information regarding the risk
factors, expenses, policies
and objectives of the
Composite Deferred Series,
Inc. Shares of the Composite
Deferred Series, Inc. are not
insured by the FDIC. They are
not deposits or obligations
of, nor are they guaranteed
by, the depository institution
or any other agency. These
securities are subject to
investment risk, including
possible loss of principal
amount invested.
Distributed by WM
Funds Distributor, Inc.
Member NASD
CDSAR3M (8-30-99)
