<PAGE>
The Sierra
Variable Trust
Annual Report
For the Year Ended December 31, 1997
SIERRA
VARIABLE TRUST
A Family of Mutual Funds
<PAGE>
C o n t e n t s
1 Message From The President
2 The Year In Review &
Our Outlook For 1998
6 Individual Fund Reviews
28 Statements of Assets & Liabilities
30 Statements of Operations
32 Statements of Changes in Net Assets
34 Statements of Changes in Net Assets -
Capital Stock Activity
36 Statement of Cash Flows
37 Financial Highlights
51 Portfolio of Investments
71 Notes to Financial Statements
85 Report of Independent Accountants
86 Special Meeting of Shareholders
(unaudited)
<PAGE>
The Sierra Variable Trust
----------------------------------------------------------------------
Annual Report
Message From the President
Dear Contract Owner:
We are pleased to bring you The Sierra Variable Trust annual report for the year
ended December 31, 1997.
I would like to take this opportunity to thank you for your support and trust in
the momentous undertakings of the last six months. As you know, the merger of
Great Western Financial Corporation, Sierra's former parent company, and
Washington Mutual, Inc. on July 1, 1997, has provided opportunities to benefit
from increased assets under management while pursuing greater operating
efficiencies. I am confident that the results of these initiatives will begin to
be realized in the coming months.
This year has been momentous for the U.S. financial markets as well. Against a
backdrop of shrinking budget deficits, the lowest unemployment rate in a quarter
of a century, and continued moderate inflation, the U.S. stock market achieved
its third consecutive year of 20%+ returns.
------------------------------------------
Some market watchers suggest that the stock market's
record-setting returns may reflect a new reality in
economic and corporate efficiency
------------------------------------------
Some market watchers suggest that the stock market's record-setting returns may
reflect a new reality in economic and corporate efficiency. Nevertheless, we
believe that the 10% to 12% annual return that stocks have produced during
longer periods will remain the rule rather than the exception. Investors should
understand that average annual returns in excess of 20% are exceptional and
unlikely to continue indefinitely. Future short-term volatility could be sparked
by a wide range of developments, including uncertainty in foreign markets and
non-financial events such as worldwide weather patterns and the so-called Year
2000 problem (when computer programs could be thrown off by a technical glitch).
Market Highlights
Throughout 1997, the U.S. financial markets turned in some of the best
performance around the globe. Stocks rose to record highs while bond yields fell
and bond values rose. More people than ever are investing in mutual funds. New
investment inflows into stock mutual funds continued to climb in 1997. During
1990, net new cash flow into stock mutual funds was $12.8 billion, according to
The Investment Company Institute (ICI). In comparison, during 1996 net new
investment reached $221.60 billion, and totaled $176.85 billion through the
first nine months of 1997. Overall bond inflows have also risen, to $24.13
billion through the first nine months of 1997, compared with $9.38 billion for
the same time period during 1996, according to ICI.
Returns from foreign markets reflected difficult times in some regions, and
showed the path to recovery in others. With the Asian market volatility as a
backdrop, the average emerging market fund in the Morningstar universe dropped
17.8% during the fourth quarter, down 7.1% on the year. Diversified foreign
funds dropped an average of 4.4% during the quarter, but rose 3.3% for the year.
Funds that invest solely in Japan were off 18.7% in 1997, while funds dedicated
to the emerging and newly emergent markets of the Pacific Rim dropped 35.4%.+
Take A Look at Tax Relief
One of the major events of the year occurred in August, when President Clinton
signed The Taxpayer Relief Act of 1997. Among other things, this will reduced
the top long-term capital gains tax rate from 28% to 20%. Other provisions of
this important legislation introduced new IRA rules and several new types of
IRAs. One, called the Roth IRA, allows withdrawals of non-deductible
contributions and investment earnings tax and penalty free after five years.
The change in tax legislation may have a significant impact on your personal
financial plan and long-term strategy for achieving your financial goals. Your
investment professional can help you assess how the new capital gains rules may
affect your after-tax portfolio returns. He or she can also assist you in
evaluating new strategies for achieving long-term retirement and education-
related financial goals. Of course, should you have any questions about your
investments, particularly during periods of market volatility. I urge you to
speak with your investment professional before making changes to your portfolio.
We at The Sierra Variable Trust welcome the opportunity to continue to serve you
in the coming years -- years that we believe will present both challenges and
significant opportunities for wealth accumulation.
Sincerely,
/s/ Keith B. Pipes
Keith B. Pipes
President
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+ Source: Morningstar, Inc.
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The Sierra Variable Trust
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Annual Report
The Year In Review & Our
Outlook for 1998
----------------------
Yet Another
Banner Year for U.S.
Financial Markets
----------------------
U.S investors enjoyed another strong year. Solid economic growth and low
inflation helped give the blue-chip Dow Jones Industrial Average an
unprecedented third consecutive year of 20%(plus) returns, while the broader
Standard & Poor's Composite Index of 500 Stocks (S&P 500) posted a 33.36% total
return for the year*+. Meanwhile, government bond yields fell below 6%, pushing
bond prices higher.
Overshadowing these results was the well-watched "Asian contagion," a chaos of
falling currency values and stock prices throughout Asia, which sent the Dow
plummeting a record 554 points on October 27, 1997. The October decline marked
the first correction of more than 10% in the Dow Jones industrial average in
more than seven years. While the U.S. market quickly recovered, ongoing Asian
woes could mean investors face prospects for a more subdued 1998 - a year of
slower economic growth, lower investment returns, and higher market volatility.
--------------------
Large Cap Stocks Led
the Market
--------------------
Investors favored the largest, most stable companies and the strongest, most
diverse global economies in 1997, in part due to higher market volatility.
Financial services firms, broadcasting companies, and advertisers turned in the
best performances during the year, while houseware, semiconductor, and paper
product firms did the worst.
Smaller company stocks did well for the year, but they did not fare as well as
the broader market after the October 27 correction. The small-cap companies
lagged the S&P 500, with the Russell 2000 Index up 22.36%**+. Part of this
under-performance was due to investors fleeing smaller issues towards the end of
1997 for the perceived comfort of larger stocks as Asia's currency crisis
broadened. Sharp drops in technology stocks, which often dominate small-cap
growth portfolios, were also a factor. During the second week of December, the
Pacific Stock Exchange Technology Index+ dropped 9.8%, its second poorest
one-week performance on record.
In the year ahead, the tide could turn back to smaller stocks. Market analysts
note that these issues' underlying values have been growing faster than their
prices, while many larger companies have become overpriced relative to their
underlying values. Smaller companies may also have better earnings prospects.
The Wall Street Journal (Dec. 29, 1997) reported that earnings for companies in
the Russell 2000 index were expected to rise more than 31% in 1998, compared
with 14% for S&P 500 firms. Also, Asia-wary investors may begin to value the
reduced overseas exposure of smaller stocks - at 26% - compared with the average
44% overseas exposure of large-cap stocks.
Returns for Major Asset Classes
(One year ended December 31,1997)
[BAR GRAPH APPEARS HERE]
Large Co. Stocks 33.36%
Small Co. Stocks 22.36%
LT Bonds 14.52%
IT Bonds 7.87%
T-Bills (30-Day) 4.90%
Intl. Stocks 1.77%
Source: Ibbotson Associates. T-bills represent 30-day U.S. Treasury bills.
Intermediate-Term (IT) Bonds are represented by Lehman Brothers Intermediate-
Term Government and Corporate Bond Index. Long-Term (LT) Bonds are represented
by Lehman Brothers Long-Term Government and Corporate Bond Index. Large Company
Stocks are represented by S&P 500 Composite Index. Small Company Stocks are
represented by Russell 2000 Stock Index. International Stocks are represented by
MSCI EAFE Index. Indices represent unmanaged performance.
T-bills are generally considered the safest securities because they are short-
term and offer a fixed yield at maturity, which is guaranteed by the U.S.
Government. Government bonds are riskier than T-bills because of the longer
maturities, yet they are generally subject to less credit risk, because the
interest payments and return of principal are also backed by the U.S.
Government, if held to maturity. An investor would typically purchase stocks
for long-term growth of capital. However, stocks are often subject to
significant price fluctuations and therefore an investor may have a gain or loss
in principal when the shares are sold.
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The Sierra Variable Trust
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Annual Report
Interest Rate Fluctuations
30-Year U.S. Treasury Bond Yield
Jan 3, 1997 - Dec 31, 1997
[GRAPH APPEARS HERE]
Source: Bloomberg Business News High 7.17%
30-year Treasury Yields DJIA April 11, 1997
6.64% 6448
3-Jan-97 6.73% 6544 Low 5.90%
10-Jan-97 6.84% 6703 Dec. 26, 1997
17-Jan-97 6.82% 6833
24-Jan-97 6.89% 6696
31-Jan-97 6.79% 6813
7-Feb-97 6.70% 6855
14-Feb-97 6.52% 6988
21-Feb-97 6.64% 6931
28-Feb-97 6.80% 6877
7-Mar-97 6.81% 7000
14-Mar-97 6.94% 6935
21-Mar-97 6.97% 6804
28-Mar-97 7.09% 6740
4-Apr-97 7.12% 6526
11-Apr-97 7.17% 6391
18-Apr-97 7.05% 6703
25-Apr-97 7.14% 6738
2-May-97 6.87% 7071
9-May-97 6.89% 7169
16-May-97 6.90% 7194
23-May-97 6.99% 7345
30-May-97 6.91% 7331
6-Jun-97 6.77% 7435
13-Jun-97 6.72% 7782
20-Jun-97 6.66% 7796
27-Jun-97 6.74% 7687
4-Jul-97 6.63% 7895
11-Jul-97 6.53% 7921
18-Jul-97 6.53% 7890
25-Jul-97 6.45% 8113
1-Aug-97 6.45% 8194
8-Aug-97 6.63% 8031
15-Aug-97 6.55% 7694
22-Aug-97 6.65% 7887
29-Aug-97 6.61% 7622
5-Sep-97 6.64% 7822
12-Sep-97 6.59% 7742
19-Sep-97 6.38% 7917
26-Sep-97 6.37% 7922
3-Oct-97 6.29% 8038
10-Oct-97 6.43% 8045
17-Oct-97 6.44% 7847
24-Oct-97 6.27% 7715
31-Oct-97 6.15% 7442
7-Nov-97 6.16% 7581
14-Nov-97 6.11% 7572
21-Nov-97 6.03% 7881
28-Nov-97 6.05% 7823
5-Dec-97 6.08% 8149
12-Dec-97 5.92% 7838
19-Dec-97 5.92% 7755
26-Dec-97 5.90% 7679
31-Dec-97 5.92% 7908
Source: Bloomberg Business News
--------------------
Bond Markets Rallied
on Low Inflation
--------------------
The yield on the bellwether 30-year U.S. Treasury bond (a benchmark of the
broader bond market) fell to 5.92% as 1997 ended.* A continued absence of
inflation should keep bond yields and prices fairly steady in 1998. The Lehman
Brothers Aggregate Bond Index posted a total return of 9.68% for 1997, with much
of that return earned in the last six months of the year.*** Bond trading surged
during the October stock market correction as investors sought the relative
safety of fixed-income investments.
Long-term yields fell through the psychologically important 6% "floor" in
December, and some market watchers are wondering, "How much lower can they go?"
Some analysts regard the current stock bull market as a natural "catch-up"
phenomenon following the high-inflation days of the 1970s and early 1980s.
Likewise, some experts believe the bond market is undergoing a comeback from an
extended slump that spanned four decades and only ended in 1981, when yields
peaked at 15.78%. Since then, the so-called "equity premium" between stock and
bond returns has been relatively narrow. From 1982 through 1997 bonds had a real
(after inflation) return of 9.4% compared with a real return on stocks of 12.5%,
according to Business Week (1/19/98).
Among those buoying the U.S. bond market in 1997 have been Asia-wary investors
in stocks, high-yield, and emerging-market bonds, who have sought the relative
safety of government-backed U.S. Treasury securities in all maturities. In
addition, some investors who traditionally favor mortgage-backed securities have
shifted into Treasuries as concern builds that low rates will prompt an
increase in mortgage refinancings, potentially resulting in lower returns for
mortgage securities. The move to U.S. Treasury securities has contributed to a
flattening "yield curve," with little difference between short-and long-term
interest rates.
[GRAPH APPEARS HERE]
Highs and Lows for 25 years
Stocks 37.43% -26.47%
Diversified 31.23% -12.45%
Asset Class Returns
Large Co Stocks 33.36%
Small Co Stocks 22.36%
Int'l Stocks 1.77%
LT Bonds 14.52%
IT Bonds 7.87%
T-Bills (30-Day) 4.90%
Sources: S&P, Russell, MSCI, Lehman Bros
The Dow Jones Industrial Average
Positive Yet Volatile Performance
Source: Bloomberg Business News. The Dow Jones Industrial Average is an index of
30 stocks and is sometimes used to measure the overall U.S. equity market.+
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The Sierra Variable Trust
-----------------------------------------------
Annual Report
Municipal bond markets closely watched emerging tax legislation in 1997. The
passage of The Taxpayer Relief Act of 1997 in August contained few surprises and
further reduced investor's concerns about a possible "flat tax." The Lehman
Brothers Municipal Bond Index posted a 9.2% total return for the year.***
---------------------
International Markets
Post Mixed Results
---------------------
Globally, markets generally echoed similar bigger-is-better themes. In the
industrialized world, Germany's DAX index rose 47.1%, while in the United
Kingdom stocks gained 24.7%. Among the G-7 countries, only Japan's Nikkei index
dropped -- losing 21.19%.* ++++ The global weak spot in equity investing was the
smaller emerging markets of Asia. Morgan Stanley Capital International's EAFE
Index, a composite of 22 national markets, squeezed out a 1.78% total return for
1997, as losses during the second half of the year erased much of its earlier
gains.++ ++++
The currency turmoil in Asia may have more long-term effects on the world
economy and equity markets. The Organization for Economic Cooperation and
Development estimated that the situation in Asia will cause a reduction in
expected economic growth worldwide by nearly one-third in 1998.
-------------------------
Consider Asset Allocation
to Manage Risk
-------------------------
Maintaining a diversified, well-allocated portfolio of investment assets can
help investors weather periods of market turbulence.
Asset allocation refers to the way in which your portfolio is divided among
different asset categories, which may include money market, fixed income, and
stock investments. An effective asset allocation strategy reflects your personal
financial circumstances, such as your investment time horizon, need for current
income versus long-term growth, and your tolerance for short-term market
fluctuations. You can further diversify your portfolio by investing in a variety
of investment subcategories. For example, the stock portion of your portfolio
may be diversified among stocks of small, medium, and large companies.
The strong performance of the U.S. stock market since 1994 means that your
investment portfolio may have a higher allocation in stocks than you originally
intended. Fixed-income investments such as bonds and bond funds can help reduce
variability in portfolio returns. While stocks have historically provided higher
returns over time and therefore can add important growth potential to your
portfolio, bonds can provide steady income even as market values fluctuate. In
addition, bond prices can move independently from stock prices over time,
helping to reduce investment risk.
For example, the graph to the left compares the highest and lowest annual
returns for stocks and a diversified portfolio of stocks and bonds over the last
25 years. While the range of returns for a portfolio of 100% stocks varied from
37% to -26%, the variation was only 31% to -12% in a diversified portfolio. In
other words, during this period, a diversified portfolio captured much of the
upside potential of stocks, but with dramatically less downside risk. Of course,
past performance is not a guarantee of future results.
Diversification Can Help Reduce Downside Risk
Variability in Investment Returns
For the 25-year period ended 12/31/97
[BAR GRAPH APPEARS HERE]
Stocks Diversified Portfolio
Highest Annual Return 37.43% 31.23%
Lowest Annual Return -26.47% -12.45%
Source: Ibbotson Associates. Stocks are represented by the Standard & Poor's
Index of 500 Stocks (S&P 500). Diversified Portfolio represents a portfolio
consisting of 40% stocks (S&P 500), 40% long-term bonds (Lehman Brothers
Intermediate-Term Government and Corporate Bond Index), and 20% intermediate-
term bonds (Lehman Brothers Intermediate-Term Government and Corporate Bond
Index). Past performance is not a guarantee of future results. For a more
complete discussion about the risks associated with investing in stocks, bonds,
and other asset classes, please refer to the notes for the graph on page 2.
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The Sierra Variable Trust
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Annual Report
Including international investments can also help smooth out fluctuations in
portfolio returns, since domestic and international stock markets tend to move
out of sync over various periods. International securities can pose higher
currency and liquidity risks relative to domestic issues. However, higher risks
can produce higher returns. Over the 25 years ended December 31, 1997, a
portfolio allocated 80% to the S&P 500 and 20% to international stocks
represented by the EAFE index earned slightly higher returns with less
variability than a portfolio allocated 100% to the S&P 500. Of course, past
performance does not guarantee future results.
------------------
Outlook for a More
Sober Economy
------------------
The "Goldilocks economy" - not too swift to trigger inflation, but growing
enough to keep businesses happy - continued in 1997, with Gross Domestic Product
(GDP) growing at an estimated annualized rate of 3.7%.* However, projections are
for GDP to slow to the 2.1% - 2.4% range in 1998. Inflation (measured by the
consumer price index) could rise from its current 1.8% to an annual rate of 2.2%
to 2.5% by year-end 1998.
This slowdown in economic growth would likely stem from Asia's difficulties.
When a foreign currency drops in value in relation to the U.S. Dollar, it
becomes relatively more expensive for people in that country to buy American
goods. As a result, demand for imports in that area of the world is likely to
cool, trimming earnings among multinational U.S. firms that depend on these
countries for a solid portion of their business. At the same time, the strong
Dollar also makes exports from Asia cheaper for American consumers. That, in
turn, could threaten domestic sales of American companies who compete with
imports from abroad. Investors may react by driving down the stock prices of
those businesses. However, much of this may have been discounted during the
October plummet.
On the flip side, it is possible that the troubles in Asia may be insufficient
to prevent domestic demands from accelerating. Some U.S. companies report they
expect much of their loss of business will be made up through strong sales in
Europe and Latin America. Should this scenario occur, it is quite likely the
Fed would be forced to take action to try to orchestrate a "soft landing."
Investors should anticipate a less enthusiastic stock market in most areas.
Consensus projections for the broad market's year-end 1998 returns are in the 8%
to 12% range with higher volatility across all stock sectors.
-----------------------
Look to Your Investment
Professional for Help
-----------------------
Following last year's strong stock and bond market performances, now is a good
time to review your portfolio with your investment professional to make sure
that your portfolio remains on track toward your financial goals. Your
investment professional can assist you in evaluating whether your current asset
allocation is appropriate for your time frame and the current market
environment. An appropriate asset allocation strategy can help reduce the
negative impacts of market volatility on your overall investment returns.
The Sierra Variable Trust offers an array of professionally managed investments
that may be appropriate for your portfolio. Speak with your investment
professional about how long-term investing and The Sierra Variable Trust can
help you pursue your financial dreams.
*Source: The Wall Street Journal, January 2, 1998. The S&P 500 is an unmanaged
index that is generally considered representative of large-capitalization U.S.
stocks. Past performance does not guarantee future results.
**Source: The Frank Russell Company. The Russell 2000 Index is an unmanaged
index that is generally considered representative of small-capitalization U.S.
stocks. Past performance does not guarantee future results.
***Source: Lehman Brothers, Fixed Income Research.
+The performance of any index is not indicative of the performance of any
particular investment and does not take into account brokerage commissions or
other expenses associated with purchasing individual investments. Individuals
cannot invest directly in any index.
++++ Morgan Stanley Capital International, Global Investment Monitor.
++ Investors cannot invest directly in any index. Past performance does not
guarantee future results. Investments in international securities are sometimes
subject to somewhat higher taxation and higher currency risk, as well as less
liquidity, compared with investments in domestic securities.
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INDIVIDUAL FUND REVIEWS
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================================================================================
To Our Contract Owners:
We are pleased to provide you with an overview of the Funds and Portfolios in
The Sierra Variable Trust family (except the Global Money Fund) for the year
ended December 31, 1997. To help you better understand the high quality
investment management available to you as a Sierra Advantage and Sierra Asset
Manager (SAM) Contract Owner, we have also included biographies highlighting the
individuals managing the Funds.
================================================================================
The Funds of The Sierra Variable Trust may not be purchased directly but are
currently available only through the purchase of Sierra Advantage and Sierra
Asset Manager (SAM) tax-deferred variable annuities issued by American General
Life Insurance Company. Annuity contract owner values will depend not only on
the performance of the Funds, but also on the mortality and expense risk charges
and the administrative charges under the Sierra Advantage and Sierra Asset
Manager (SAM) variable annuity contracts.
6
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INDIVIDUAL FUND REVIEWS
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Sierra Investment Advisors Corporation
Sierra Investment Advisors Corporation ("Sierra Advisors"), a registered
investment advisor, is the investment advisor to The Sierra Variable Trust, and
has general oversight responsibility for the advisory services provided to the
Funds. These services include formulating the Funds' investment policies,
analyzing economic trends affecting the Funds, and directing and evaluating the
investment services provided by the Sub-Advisors and the individual Portfolio
Managers of each Fund. Sierra Advisors supervises the individual Portfolio
Manager's day-to-day management of the Funds in The Sierra Variable Trust Family
to ensure that the policies and guidelines are met, and to determine appropriate
investment performance measures.
Sierra Investment Services Corporation
Sierra Investment Services Corporation is the investment advisor of each of the
Sierra Asset Manager Portfolios. The Advisor provides its proprietary asset
allocation services to the Portfolios, formulates the Portfolios' investment
policies (subject to the terms of the Prospectus), analyzes economic and market
trends, exercises investment discretion over the assets of the Portfolios and
monitors the allocation of each Portfolio's assets and each Portfolio's
performance.
Stephen C. Scott
Portfolio Manager Sierra Investment Services Corporation
Mr. Scott received his B.A. and M.B.A. from California State University, Long
Beach. He is responsible for providing economic analysis, as well as conducting
investment analysis and management for the Sierra Asset Management (SAM) Program
and Sierra Asset Manager. Mr. Scott is also President and Chief Investment
Officer of Sierra Investment Advisors Corporation. Prior to joining Sierra
Advisors, Mr. Scott was President & Chairman of his own firm, SDS Investment
Advisors, after serving nine years as Senior Pension Investment Manager with the
Group Pension and Investment Division of The Equitable Life Assurance Society of
the United States.
Michael D. Goth
Chief Operating Officer Sierra Investment Advisors Corporation
Mr. Goth received his B.S. and M.S. degrees from Rensselaer Polytechnic
Institute of New York, and M.B.A. from Harvard Business School. He joined the
firm in 1991 and is responsible for the supervision of The Sierra Variable
Trust's Portfolio Managers. Previously, he served as Vice President of The
Boston Company Advisors, Inc. He also served as Executive Vice President of the
GIT Mutual Fund Group for over ten years.
Understanding the Enclosed Charts
In order to help you understand The Sierra Variable Trust's investment
performance, we have included the following discussions along with graphs that
compare the Funds' 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. The total returns shown for the Funds are not an estimate or
guarantee of future performance and do not take into account charges at the
annuity and separate account level.
The total returns of the Funds reflect Sierra Advisors' and Sierra Fund
Administration Corporation's ("Sierra Administration") voluntary waiver of fees,
Sierra Advisors' absorption of certain expenses, and credits allowed by the
Custodian. Total returns would have been lower if these fees and expenses had
not been waived, absorbed, or reduced by credits.
Both the Funds' 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.
Yield indicates the net investment income per share as a percentage of the
offering price, whereas total return includes both net investment income and
changes in the value of the shares as a percentage of the initial investment.
The 30-day SEC yield is the yield calculated pursuant to a standard formula
required by the Securities and Exchange Commission ("SEC") for performance
advertisement purposes, and does not imply any endorsement or recommendation by
the SEC.
7
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SHORT TERM HIGH QUALITY BOND FUND
- --------------------------------------------------------------------------------
Portfolio Manager:
Scudder, Stevens & Clark, Inc.
[PHOTO OF THOMAS M.POOR APPEARS HERE]
Thomas M. Poor
Mr. Poor, Managing Director of Scudder, is the portfolio manager for the Short
Term High Quality Bond Fund. He is a Chartered Financial Analyst and has been
with Scudder since 1970. Mr. Poor has had primary investment management
responsibility for the Fund since its inception.
Performance Review:
From the Fund's inception (January 12, 1994) through December 31, 1997, the
Short Term High Quality Bond Fund's average annual total return advanced 4.29%.
For the 12-month period ended December 31, 1997, the Fund's total return was
5.90%. The Fund's 30-day SEC yield as of December 31, 1997, was 6.05%. For
additional information, see the accompanying chart.
What were the most significant factors contributing to the Fund's performance
over the 12-month period ended December 31, 1997?
Interest rates during 1997 dropped dramatically, making it a strong year for
fixed income investments. Influenced by a steady flow of good news on the
inflation front, plus positive movements in unemployment, wages, and corporate
productivity, the bond market posted healthy gains during the period. The Fund
was impacted most significantly by the strong performance of the corporate bond
sector which despite a late-year sell-off that resulted from the Asian currency
crisis was still up nearly 10% for 1997. The Fund also benefited from its focus
on building a yield advantage over competitive funds in its peer group.
What market conditions affected the Fund's performance during the period, and
what investment techniques were used to address those conditions?
As interest rates fell, the yield of the 30-year U.S. Treasury Bond ended the
year with a flourish, at 5.92%, a drop of 72 basis points or 0.72% from December
31, 1996. While bonds with the longest maturities performed the best in this
declining interest rate environment, shorter-term issues also benefited. With
benign inflation, slow economic growth, and a potential budget surplus in the
foreseeable future, we continue to focus on developing an income advantage in
the Fund. We maintained duration, or the Fund's relationship to interest rates
changes, in a fairly tight range, while continuing to emphasize the corporate,
mortgage and asset-backed sectors, all of which contributed to the Fund's
positive performance over the 12 months ended December 31, 1997.
Growth of a $10,000 investment
[LINE GRAPH APPEARS HERE]
Inception* 10000 10000
Mar 9920 9785
Jun 9880 9770
Sep 9953 9887
Dec '94 9838 9864
Mar 9999 10291
Jun 10329 10750
Sep 10455 10942
Dec '95 10753 11288
Mar 10710 11279
Jun 10797 11384
Sep 10975 11596
Dec '96 11155 11865
Mar 11247 11901
Jun 11433 12227
Sep 11670 12532
Dec '97 11814 12724
The above line graph does not reflect administrative fees or other expenses
charged by American General Life Insurance Company Separate Account D through
which shares of the Fund are purchased.
*Index total returns were calculated from 1/31/94 to 12/31/97. The Lehman
Brothers Mutual Fund Short (1-5) Investment Grade Debt Index includes all
investment-grade corporate debt securities with maturities of one to five years,
assumes reinvestment of all dividends/distributions, and does not reflect any
asset-based charges for investment management or other expenses. Past investment
performance does not guarantee future performance. The returns for the Fund
assume reinvestment of all dividends/distributions by the shareholder.
During the period noted, the Advisor (Sierra Investment Advisors Corporation)
and Administrator (Sierra Fund Administration Corporation) waived a portion of
their management fees, and credits were allowed by the Custodian. In the absence
of the waivers or Custodian credits, yield and total return would have been
lower.
Average Annual Total Returns as of 12/31/97 6 Month 1 Year Since Inception
------- ------ ---------------
(January 12, 1994)
Fund 3.33% 5.90% 4.29%
Lehman Brothers Mutual Fund Short (1-5)
Investment Grade Debt Index* 4.06% 7.27% 6.34%
8
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SHORT TERM HIGH QUALITY BOND FUND
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Were there any shifts in the Fund's portfolio holdings/sectors that had a
significant impact on Fund performance?
We made slight shifts in the Fund's portfolio holdings in order to take
advantage of sectors that were performing well. These included mortgage- and
asset-backed securities, as well as corporate bonds. During 1997, we increased
the Fund's exposure to these sectors and decreased our commitment to U.S.
Treasury obligations, a strategy which was in line with our focus on building a
yield advantage.
What is our intermediate- and long-term outlook for the Fund?
Our intermediate and long-term outlook for interest rates is positive. The Fund
should benefit from stable to falling interest rates over the near term. From
an economic and market perspective, there is much to be optimistic about:
inflation remains low, corporate profit in major industries such as technology
continues to be strong, and excess capacity exists in virtually every industry.
On the shorter-term horizon, there is a possibility that the Pacific Rim
currency crisis may contribute to deflationary pressures in the U.S., a trend
that would help support the U.S. Treasury market.
However, some concerns still remain. On the risk side of the equation stands a
U.S. bond market that has rallied to new highs and is testing historic levels.
Wage pressure, an important component of inflation which has not been a factor
in the U.S. economy in recent years, will have a negative impact on the
financial markets when it does appear. Many economists have been confounded by
the absence of wage pressure this late in the economic cycle. Finally, and
perhaps most importantly, all the positive economic news that have surfaced
recently may result in strong Gross Domestic Product (GDP) growth. This could
add to inflationary forces and cause bond prices to drop.
- ------------------------------------
Broad Sector Diversification
- ------------------------------------
[PIE CHART APPEARS HERE]
A 3.47%
AAA 71.17%
BBB 25.36%
Note: Bond ratings provided by Standard & Poors.
Allocation percentages are based on total investment value of the portfolio as
of 12/31/97.
9
<PAGE>
- --------------------------------------------------------------------------------
SHORT TERM GLOBAL GOVERNMENT FUND
- --------------------------------------------------------------------------------
Portfolio Manager:
Scudder, Stevens & Clark, Inc.
[PHOTO OF ADAM M.GRESHIN APPEARS HERE]
Adam M. Greshin
Mr. Greshin is the lead portfolio manager for the Short Term Global Government
Fund. Mr. Greshin joined Scudder in 1986 as an international bond analyst.
Currently, he is Product Leader for Scudder's global and international fixed-
income investing. He was involved in the original design of the Fund and has
served as a member of the Fund's portfolio management team since 1993. Mr.
Greshin assumed responsibility for the Fund's day-to-day management and
investment strategies effective November 1995.
Performance Review:
From the Fund's inception (May 12, 1993) through December 31, 1997, the Short
Term Global Government Fund's average annual total return was 4.09%. For the 12-
month period ended December 31, 1997, the Fund's total return was 4.59%. The
Fund's 30-day SEC yield as of December 31, 1997, was 5.90%. For additional
information, see the accompanying chart.
What were the most significant factors contributing to
the Fund's performance over the 12-month period ended December 31, 1997?
The Fund benefited from a rally in the global bond markets which lasted through
most of 1997. By year-end, global bond yields were at or near their highs for
1997. High-yielding markets around the world were the destination of choice as
investors sought out yield. The primary beneficiaries of this trend were lower-
rated, higher-yield bonds issued in the United States, emerging markets, and
peripheral Europe. Remarkably, the U.S. is now considered a high-yield market
as interest rates in core Europe, Japan and Canada have dropped below comparable
rates in the U.S. While the robust U.S. economy has pushed the U.S. Dollar
higher, dampening global bond returns, returns for this asset class still ended
the year in positive territory.
What market conditions affected the Fund's performance during the period, and
what investment techniques were used to address those conditions?
After a shaky start, bond markets in the developed world gained ground during
1997 (as measured in local currency terms). The strongest performing markets
were in peripheral Europe where relatively high interest rates trended lower in
anticipation of European Monetary Union (EMU). The largest gains were achieved
in the United Kingdom, where talk of eventual British participation in EMU led
to a dramatic rally in longer-term bonds. Core Europe did not fare as well, as
investors responded negatively to the prospect of higher short-term interest
rates in Germany. Elsewhere, in Japan, news that second quarter Gross Domestic
Product (GDP) declined by 11% on an annualized basis, pushed Japanese bonds
higher.
In terms of currency valuations, the U.S. Dollar generally moved higher,
supported by a strong U.S. economy. In Europe, currencies were driven down by
the perception that the Euro would be
[LINE GRAPH APPEARS HERE]
Inception* 5/12/93 10000 10000
Sep 9932 9884
Dec '93 9932 10170
Mar 10052 10247
Jun 9972 10288
Sep 9972 10469
Dec '94 10013 10729
Mar 9767 10772
Jun 9893 11440
Sep 10143 11872
Dec '95 10435 12018
Mar 10645 12175
Jun 10856 12305
Sep 11116 12588
Dec '96 11515 12873
Mar 11562 12411
Jun 11753 12618
Sep 11898 12732
Dec '97 12043 12764
The above line graph does not reflect administrative fees or other expenses
charged by American General Life Insurance Company Separate Account D through
which shares of the Fund are purchased.
* Index total returns were calculated from 5/31/93 to 12/31/97. The Lehman
Brothers Mutual Fund Short World Multi-Market Index includes all debt
instruments of the United States and 12 Lehman major countries denominated in
dollars with maturities of one to five years, assumes reinvestment of all
dividends/distributions, and does not reflect any asset-based charges for
investment management or other expenses. Past investment performance does not
guarantee future performance. The returns for the Fund assume reinvestment of
all dividends/distributions by the shareholder.
During the period noted, the Advisor (Sierra Investment Advisors Corporation)
and Administrator (Sierra Fund Administration Corporation) waived a portion of
their management fees and the Advisor absorbed other expenses, and credits were
allowed by the Custodian. In the absence of the waivers and absorption of other
expenses or Custodian credits, yield and total return would have been lower.
<TABLE>
<CAPTION>
Average Annual Total Returns as of
12/31/97 6 Month 1 Year Since Inception
------- ------ ---------------
(May 12, 1993)
<S> <C> <C> <C>
Fund 2.48% 4.59% 4.09%
Lehman Brothers Mutual Fund Short World
Multi-Market Index* 1.16% -0.74% 5.47%
</TABLE>
10
<PAGE>
- -------------------------------------------------------------------------------
SHORT TERM HIGH QUALITY BOND FUND
- --------------------------------------------------------------------------------
weaker than anticipated to allow more countries to join the first round of
currency union. In August and September, European currencies gained some ground,
but still ended the year on a down note. Japan's economic troubles sent the yen
lower despite a good second quarter of 1997. The only pocket of currency
strength was in Sweden where a strong economy increased the probability of a
rate hike and helped the Swedish kroner appreciate against the U.S. Dollar.
In response to these market conditions, the Fund's duration - a measure of the
Fund's price fluctuations when interest rates change - was continually adjusted
to take advantage of economic and interest rate trends around the world. On the
currency front, we also continued to hedge the majority of the portfolio's
international exposure into U.S. Dollars, in an effort to provide stability for
the Fund's net asset value. This tactic helped the Fund take advantage of the
renewed strength of the U.S. Dollar and contributed to overall positive returns.
Were there any shifts in the Fund's portfolio holdings/sectors that had a
significant impact on Fund performance?
Generally, bond funds with longer duration and average maturity achieve greater
price appreciation when interest rates fall. To take advantage of the declining
interest rate environment, the Fund's duration was approximately 2.0 years for
most of 1997. In addition, we emphasized the Dollar-bloc markets of Canada,
Australia, and New Zealand during the period, which benefited from the currency
appreciation in this sector, while reducing exposure to Europe where interest
rates were trending higher. With our hedging strategy and focus on dollar-
denominated markets, the strength of the U.S. Dollar was a positive factor
contributing to the Fund's total return for the 12-month period ended December
31, 1997.
What is our intermediate- and long-term outlook for the Fund?
On December 23, 1997, shareholders of the Short Term Global Government Fund
approved the merger into the Short Term High Quality Bond Fund. While the
investment objectives of these funds are substantially similar, there are
certain differences in management style. The Short Term High Quality Bond Fund
invests in a diversified portfolio of investment-grade U.S. Government,
corporate debt, and mortgage-backed securities, with average maturities between
one and three years. These investments are used to seek a high level of current
income and a high degree of principal stability. The short maturity and high
quality bonds are intended to significantly reduce price volatility. The
domestic holdings avoid both the currency risks and political, economic, and
credit risks of foreign investing. Although some risks of foreign investing can
be averted by currency hedging, these techniques involve costs and may not
always produce sufficient net benefits for investors.
Because of the differences in the funds, there have been periods during which
the Short Term High Quality Bond Fund has both outperformed and underperformed
the Short Term Global Government Fund. We believe that, over time, the risks
associated with international investing outweigh any marginal gains in returns
generated by these investments. The risks associated with global investing have
been even more pronounced recently with the weakness of many currencies relative
to the U.S. Dollar.
We believe that the Short Term High Quality Bond Fund is an excellent fund for
shareholders seeking income with a high degree of principal stability from its
quality domestic holdings.
- ---------------------------------
Diversification by Region
- ---------------------------------
[PIE CHART APPEARS HERE]
Africa 0.80%
Americas 51.11%
Australia/New Zealand 8.21%
Europe 39.88%
Allocation percentages are based on total investment value of the portfolio as
of 12/31/97.
11
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
Portfolio Manager:
BlackRock Financial
Management, Inc.
[PHOTO OF KEITH ANDERSON APPEARS HERE]
Keith Anderson
[PHOTO OF ANDREW J. PHILLIPS APPEARS HERE]
Andrew J. Phillips
The day-to-day management of the U.S. Government Fund's portfolio is the
responsibility of a committee composed of individuals who are officers of
BlackRock. This committee has managed the Fund since December, 1994, and is
supervised by Keith Anderson and Andrew J. Phillips. Mr. Anderson, a Managing
Director of BlackRock, has been co-head of the Portfolio Management Group since
1988. Mr. Phillips has been a portfolio manager of BlackRock since 1991 and a
Principal of BlackRock since 1996.
Performance Review:
From the Fund's inception (May 6, 1993) through December 31, 1997, the U.S.
Government Fund's average annual total return was 5.83%. For the 12-month period
ended December 31, 1997, the Fund's total return was 9.42%. The Fund's 30-day
SEC yield as of December 31, 1997, was 5.94%. For additional information, see
the accompanying chart.
What were the most significant factors contributing to the Fund's performance
over the 12-month period ended December 31, 1997?
The Fund benefited from very strong economic conditions for the year ended
December 31, 1997. The U.S. economy exhibited steady growth and low inflation
during 1997, pushing bond yields below 6% for the first time since early 1996.
Fueled by increased consumer spending and low unemployment, growth was robust
while the primary inflation indicators, the Consumer and Producer Price Indices,
remained dormant throughout the period. After increasing interest rates to 5.50%
in March, the Federal Reserve left the rate unchanged for the remainder of the
year in recognition of the healthy economic environment. The positive momentum
has continued into the early days of 1998 based, in part, on the possibility of
a balanced budget and on comments by Federal Reserve Chairman Alan Greenspan
that deflation might be an issue. New home sales recently hit a cyclical peak,
the employment picture remains very strong, and consumer confidence and spending
are at recent highs. Despite the strong growth, inflation appears to be
remarkably controlled.
The market for mortgage-backed securities (MBS) outperformed U.S. Treasuries for
the 12 months ended December 31, 1997. For the period, the MBS market as
measured by the Lehman Brothers Mortgage Index posted a 9.49% total return
versus the 9.20% return of the Merrill Lynch 5-7 Year Treasury Index. However,
declining interest rates in the second half of 1997
Growth of a $10,000 investment
[LINE GRAPH APPEARS HERE]
Inception* 15/6/93 10000 10000 10000
Jun 10153 10284 10116
Sep 10305 10594 10202
Dec '93 10359 10662 10366
Mar 9829 10121 9952
Jun 9928 10270 10169
Sep 9803 10120 10051
Dec '94 10017 10316 10352
Mar 10460 10779 10781
Jun 10876 11182 11302
Sep 11031 11501 11418
Dec '95 11471 12027 11796
Mar 11333 11755 11743
Jun 11320 11810 11838
Sep 11486 12010 12080
Dec '96 11894 12360 12428
Mar 11834 12260 12443
Jun 12241 12685 12915
Sep 12632 13109 13262
Dec '97 13015 13545 13607
The above line graph does not reflect administrative fees or other expenses
charged by American General Life Insurance Company Separate Account D through
which shares of the Fund are purchased.
* Index total returns were calculated from 5/31/93 to 12/31/97. The Lehman
Brothers Mutual Fund U.S. General Government Index represents all U.S.
Government agency and Treasury securities. The Lehman Brothers Mutual Fund U.S.
Mortgage Index includes all agency mortgage-backed securities. The indices
assume reinvestment of all dividends/distributions and do not reflect any asset-
based charges for investment management or other expenses. Past investment
performance does not guarantee future performance. The returns for the Fund
assume reinvestment of all dividends/distributions by the shareholder.
During the period noted, the Advisor (Sierra Investment Advisors Corporation)
and Administrator (Sierra Fund Administration Corporation) waived a portion of
their management fees, the Advisor absorbed other expenses, and credits were
allowed by the Custodian. In the absence of the waivers and absorption of other
expenses or Custodian credits, yield and total return would have been lower.
<TABLE>
<CAPTION>
Average Annual Total Returns as of 12/31/97 6 Month 1 Year Since Inception
-------- ------- ---------------
(May 6, 1993)
<S> <C> <C> <C>
Fund 6.32% 9.42% 5.83%
Lehman Brothers U.S. Government Index* 6.78% 9.59% 6.84%
Lehman Brothers U.S. Mortgage Index* 5.36% 9.49% 6.95%
</TABLE>
12
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
have begun to ignite prepayment fears - worries that mortgage refinancings will
increase dramatically - and have caused mortgage yield spreads to widen at year-
end.
What market conditions affected the Fund's performance during the period, and
what investment techniques were used to address those conditions?
For the 12 months ended December 31, 1997, the Fund outperformed Treasuries, as
measured by the Merrill Lynch 5-7 Year Treasury Index, by 9.42% to 9.20%. This
was primarily achieved because the mortgage market was the best performing fixed
income sector for 1997, with agency MBS returning about 132 basis points (1.32%)
more than similar Treasuries. Duration, a measure of a bond fund's sensitivity
to interest rate changes, was also used to position the Fund to take advantage
of interest rate trends. As interest rates declined and the possibility of
corporate and homeowner refinancing increased in late 1997, we reduced duration
to a more neutral stance, relative to its benchmark, and shifted the Fund's
allocation from mortgage-backed securities to U.S. Treasuries.
Were there any shifts in the Fund's portfolio holdings/sectors that had a
significant impact on Fund performance?
Over the year, the Fund's overall allocation to the mortgage sector was reduced
in accordance with our outlook on that market. Of the mortgages the Fund does
hold, we have remained focused on seasoned issues that have weathered several
refinancing cycles. These are expected to provide more stable prepayment
characteristics than new mortgage issues.
What is our intermediate- and long-term outlook for the Fund?
Our short- and longer-term outlook for the Fund remains optimistic, based on the
positive economic backdrop of slower GDP growth, low inflation, and declining
Treasury borrowing. One risk factor we plan to monitor, however, is the extent
to which corporate and homeowner refinancing will stimulate growth and possibly
dampen the near-ideal conditions. Although domestic fundamentals are strong, we
expect that recessions in the emerging Asian economies and Japan will slow U.S.
growth in the first half of 1998. Inflation is expected to remain subdued over
the long term based on several factors: (1) there are signs of deflation in
commodity and import prices; and (2) lower demand for U.S. exports may cut into
corporate profitability next year forcing a reduction in new employment. This in
turn may relieve some of the current wage pressure in the labor markets.
Although "real" interest rates look high with inflation at such low levels, we
do not anticipate a change in monetary policy in the near future.
- --------------------------------------------------------------------------------
Portfolio Composition
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
U.S. Treasury Bond 13.65%
FHLMC 10.49%
GNMA 17.73%
Residential Funding Mortgage Security 1.43%
FNMA 1.44%
U.S. Treasury Notes 22.55%
CMO 32.71%
Allocation percentages are based on total investment value of the portfolio as
of 12/31/97.
13
<PAGE>
- --------------------------------------------------------------------------------
CORPORATE INCOME FUND
- --------------------------------------------------------------------------------
Portfolio Manager:
TCW Funds Management, Inc.
[PHOTO OF JAMES M. GOLDBERG APPEARS HERE]
James M. Goldberg
Mr. Goldberg, a Chartered Financial Analyst and Chartered Investment Counselor,
has been Managing Director of TCW Management since 1989 and Managing Director of
the Trust Company of the West, the parent corporation of TCW Management, since
1984. He has had primary portfolio management responsibility for the Corporate
Income Fund since its inception.
Performance Review:
From the Fund's inception (May 7, 1993) through December 31, 1997, the Corporate
Income Fund's average annual total return was 6.79%. For the 12-month period
ended December 31, 1997, the Fund advanced 11.35% on a total return basis. The
Corporate Income Fund's 30-day SEC yield as of December 31, 1997, was 5.93%. For
additional information, see the accompanying chart.
What were the most significant factors contributing to the Fund's performance
over the 12-month period ended December 31, 1997?
Duration and credit quality were the most significant factors affecting the
Fund's performance over the 12 months ended December 31, 1997. Duration measures
the sensitivity of bonds to changes in interest rates. When interest rates fall,
bond funds with longer duration generally perform better than those with shorter
duration. For the period, the Fund maintained a duration that was longer than
that of its benchmark index. This long duration helped the Fund's performance,
as interest rates fell steadily during the last year. In addition to its stance
on duration, the Fund also benefited from strong bond selection. Many of its
holdings received credit rating upgrades during the period.
What market conditions affected the Fund's performance during the period, and
what investment techniques were used to address those conditions?
Interest rates played an important role in the Fund's performance. The Fund
continued to adjust duration and average maturity to take advantage of interest
rate trends. Interest rates fell during 1997, pushing bond yields to one of
their lowest points in years. By the end of the year, 10-year Treasury note
interest rates were down 0.67%, ending the 12-month period at 5.74% versus 6.41%
on December 31, 1996. The bellwether 30-year U.S. Treasury bond fell 0.72%,
dropping to 5.92% on December 31, 1997. In light of the downward trend in
[LINE GRAPH APPEARS HERE]
Inception* 5/7/93 10000 10000
Sep 10284 10317
Dec '93 10661 10652
Mar 10766 10788
Jun 9844 10112
Sep 9999 10304
Dec '94 9693 10100
Mar 9917 10383
Jun 10414 10952
Sep 11006 11520
Dec '95 11671 11998
Mar 12127 12509
Jun 11559 12162
Sep 11739 12405
Dec '96 12190 12836
Mar 12016 12707
Jun 12522 13231
Sep 13075 13748
Dec '97 13573 14149
The above line graph does not reflect administrative fees or other expenses
charged by American General Life Insurance Company Separate Account D through
which shares of the Fund are purchased.
* Index total returns were calculated from 5/31/93 to 12/31/97. The Lehman
Brothers Mutual Fund Corporate Debt BBB-Rated Index represents all investment-
grade corporate debt securities, assumes reinvestment of all
dividends/distributions, and does not reflect any asset-based charges for
investment management or other expenses. Past investment performance does not
guarantee future performance. The returns for the Fund assume reinvestment of
all dividends/distributions by the shareholder.
During the period noted, the Advisor (Sierra Investment Advisors Corporation)
and Administrator (Sierra Fund Administration Corporation) waived a portion of
their management fees and the Advisor absorbed other expenses, and credits were
allowed by the Custodian. In the absence of the waivers and absorption of other
expenses or Custodian credits, yield and total return would have been lower.
Average Annual Total Returns as of 12/31/97 6 Month 1 Year Since Inception
-------- ------- ----------------
(May 7, 1993)
Fund 8.40% 11.35% 6.79%
Lehman Brothers Mutual Fund Corporate
Debt BBB-Rated Index* 6.94% 10.23% 7.87%
14
<PAGE>
- --------------------------------------------------------------------------------
CORPORATE INCOME FUND
- --------------------------------------------------------------------------------
interest rates and the long-term nature of the Fund's investment objectives, we
maintained maturity and duration near the high end of our peer group. We focused
our credit research on finding attractive corporate issues that are likely to
receive credit quality upgrades over the near and intermediate term. Protection
from early refunding was also stressed.
Were there any shifts in the Fund's portfolio holdings/sectors that had a
significant impact on Fund performance?
The Fund made several moves that affected performance from December 31, 1996
through December 31, 1997. The Fund reduced its allocation to industrial issues;
sales included Amax, Boise Cascade, Georgia Pacific, International Paper, Mead
and Tyco International. Meanwhile, the Fund purchased positions in Continental
Airlines, Enron Corp., and Norfolk Southern Corp. Exposure to financial issues
remained essentially unchanged, reflecting the purchases of Hartford Life and
the sale of Dean Witter Discover. Although the Fund's position in Circus Circus
Enterprises was sold during the period, service issues increased as a percentage
of the portfolio in 1997. Holdings in the utility and foreign sectors increased,
while U.S. Treasury and government agency issues were reduced over the past
year.
What is our intermediate- and long-term outlook for the Fund?
Our outlook for the Fund remains positive. We expect corporate profitability to
stay near current levels over the short and intermediate term and a benign
inflation environment to persist. Although yield spreads among corporate bonds
and comparable U.S. Treasuries are growing wider, demand for corporate issues
continues to be strong. New corporate issues are quickly being absorbed by the
market.
The Fund should also benefit from the slowing global economic environment -- a
trend that should keep interest rates stable and help support bond prices. In
1997, the Asian financial crisis caught many investors by surprise. What began
as a devaluation in Thailand, a country accounting for 0.5% of world output,
spread throughout Asia with ripple effects into Brazil and Russia. By the end of
the year, the International Monetary Fund, the U.S. Treasury, and leading
international banks were rushing to provide emergency loans to South Korea, the
world's 11th largest economy. Along the way, the Japanese economy, which makes
up about 20% of world output, also faltered, with a large bank and a major
brokerage firm going bankrupt. Considering these events, our 1998 forecast calls
for domestic real GDP growth to slow to 2.4%, compared to 3.8% in 1997.
Inflation, as measured by the Consumer Price Index, should also decline to 2.3%
owing to a combination of the aging business cycle and the continuing effects of
the Asian financial crisis. This should help keep downward pressure on interest
rates.
- ----------------------------------------------------
Broad Sector Diversification
- ----------------------------------------------------
[PIE CHART APPEARS HERE]
U.S. Government Mortgage Backed-Securities 2.45%
U.S. Treasury Bonds 7.06%
Energy 5.66%
Investment Company Security 1.66%
Manufacturing 13.27%
Industrial 6.37%
Yankee 10.82%
Gas 4.20%
Financial 14.15%
Transportation 18.12%
Electric 5.43%
Media 3.27%
Regional Banks 4.09%
Retail 3.45%
Allocation percentages are based on total investment value of the portfolio as
of 12/31/97.
15
<PAGE>
- --------------------------------------------------------------------------------
GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
Portfolio Manager:
J.P. Morgan Investment
Management Inc.
[PHOTO OF HENRY D. CAVANNA APPEARS HERE]
Henry D. Cavanna
Mr. Cavanna is a Senior Portfolio Manager in the J.P. Morgan Equity and Balanced
Accounts Group, and has been with J.P. Morgan since 1971.
[PHOTO OF WILLIAM M. RIEGEL APPEARS HERE]
William M. Riegel
Mr. Riegel is a Senior Equity Portfolio Manager in the Equity and Balanced
Accounts Group, and has been with J.P. Morgan since 1979. Mr. Cavanna and Mr.
Riegel have had primary portfolio management responsibility for the Growth and
Income Fund since January 1994.
Performance Review:
From the Fund's inception (January 12, 1994) through December 31, 1997, the
Growth and Income Fund advanced 19.64% on an average annual total return basis.
For the 12-month period ended December 31, 1997, the Fund's total return was
28.50%. For additional information, see the accompanying chart.
What were the most significant factors contributing to the Fund's performance
over the 12-month period ended December 31, 1997?
The stock market swelled from strong growth coupled with a low inflation
environment in the first half of 1997. This allowed the S&P 500 to gain over 20%
in the first six months of the year. The Fund benefited, largely due to the
strong holdings in the drug and basic industry sectors.
The Fund outperformed the S&P 500 in the third quarter with positive stock
selection, and despite negative sector allocation. During the period, the market
began to broaden, enabling U.S. stock mutual funds to outperform the S&P 500.
This trend reversed in the fourth quarter, as the largest 50 stocks in the S&P
500 beat the rest of the index by 2.58%. The narrow market environment made it
difficult to keep pace with the S&P 500.
Across the market, the service sector was the largest contributor to
performance. The telephone sector began as a negative contributor, but
dramatically reversed itself in the latter part of 1997. AT&T announced a
restructuring and their shares gained nearly 40% in the fourth quarter alone.
MCI and GTE also rose in response to the acquisition agreement reached by MCI
and Worldcom.
The technology sector was very volatile during the period. Technology stocks
fared well in the third quarter with a return of 18.74%, yet gave back much of
that gain in the fourth quarter. This had a drag effect on Fund performance at
the close of the year.
What market conditions affected the Fund's performance during the period, and
what investment techniques were used to address those conditions?
1997 had a volatile opening. In the first quarter, the S&P 500 index dropped
7.3% during a stretch from February to March. The net result of the volatility
eroded January's gains and provided a mild 2.64% rise for the quarter. We were
cautious of the possibility of higher interest rates in March, thus we
underweighted holdings in interest sensitive sectors. Drugs and basic industry
sectors were the largest positive contributors to performance, where Warner
Lambert increased nearly 16%.
[LINE GRAPH APPEARS HERE]
Inception* 1/12/94 10000 10000
Mar 9670 9305
Jun 9660 9344
Sep 10040 9799
Dec '94 9830 9798
Mar 10820 10751
Jun 11646 11778
Sep 12437 12592
Dec '95 13016 13477
Mar 13949 14200
Jun 14212 14836
Sep 14557 15295
Dec '96 15855 16568
Mar 16398 17014
Jun 18639 19982
Sep 20663 21486
Dec '97 20374 22103
The above line graph does not reflect administrative fees or other expenses
charged by American General Life Insurance Company Separate Account D through
which shares of the Fund are purchased.
* Index total returns were calculated from 1/31/94 to 12/31/97. The Standard &
Poor's Composite Index of 500 Stocks (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, assumes
reinvestment of all dividends/distributions, and does not reflect any asset-
based charges for investment management or other expenses. Past investment
performance does not guarantee future performance. The returns for the Fund
assume reinvestment of all dividends/distributions by the shareholder.
During the period noted, the Advisor (Sierra Investment Advisors Corporation)
and Administrator (Sierra Fund Administration Corporation) waived a portion of
their management fees, and credits were allowed by the Custodian. In the absence
of the waivers or Custodian credits, yield and total return would have been
lower.
<TABLE>
<CAPTION>
Average Annual Total Returns as of
12/31/97 6 Month 1 Year Since Inception
-------- ------- ----------------
(January 12, 1994)
<S> <C> <C> <C>
Fund 09.30% 28.50% 19.64%
Standard & Poor's Composite Index of 500
Stocks* 10.62% 33.36% 22.45%
</TABLE>
16
<PAGE>
- --------------------------------------------------------------------------------
GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
In the third quarter, the Fund benefited from our strategy of underweighting the
largest stocks, called the "nifty fifty," as these stocks underperformed the
small and mid caps by a wide margin for the first time in years. The strength of
the dollar may begin to have an impact on reported earnings for these large
multinationals as many derive a significant portion of their earnings from
overseas business. The trend favoring the largest stocks resumed in the fourth
quarter, as investors focused their holdings on safer investments.
This narrow market environment made it very difficult for the majority of active
managers to keep pace with the S&P 500. For the year 1997, the top 10 performing
S&P stocks accounted for 26% of the Index's advance. Two stocks, General
Electric and Microsoft, accounted for over 8% of the Index's gain. As we
continue to view these a number of the strongest performing "nifty fifty" stocks
as overvalued, we did not hold them in the Sierra Variable Trust Growth and
Income Fund. This contributed to our underperformance relative to the S&P 500.
However, given our philosophy of holding well diversified, fully invested
portfolios, our returns continued to outpace those of similar active equity
managers.
Were there any shifts in the Fund's portfolio holdings/sectors that had a
significant impact on Fund performance?
Our investment strategy for the past year involved: a maintenance of our sector
neutral approach, a continuation of our focus on individual stock selection, and
an emphasis on holding a highly diversified selection of value stocks. The first
quarter's strong performance was characterized by the drugs and basic industry
sectors, as Allegheny Teledyne appreciated 22%. The second quarter
underperformed overall against the S&P 500, yet outperformed in six of the
eighteen sectors. Stock selection was a positive contributor in the third
quarter. In addition, performance in the consumer staple sector was enhanced by
our position in Ralston Purina (+8.04%). Similarly, our large holdings in
Telecommunications Inc. (TCI) (+38%) in the service sector was the largest
positive contributor for the third quarter. The service industry bolstered Fund
performance in the fourth quarter as well. The Fund also gained ground with our
decision to underweight the energy stocks. This provided relative performance
strength due to weakening Asian energy demand, the El Nino winter, OPEC quota
increases, and the continuation of Iraqi oil sales.
What is our intermediate- and long-term outlook for the Fund?
We continue to maintain a Fund that is fully invested and largely sector
neutral. We will focus on investing in attractively valued stocks where we have
a high degree of confidence in our forecasts, where we can foresee events which
will offer value, and which will offer a compelling risk-reward profile. We are
able to identify stocks which are underpriced relative to their longer-term
ability to increase earnings and generate cash flow. The benefits of this
strategy are evidenced by the performance of such holdings at TCI, TCI Ventures
and Time Warner.
- --------------------------------------------------------------------------------
Sector Diversification
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
Energy 9.73%
Telecommunications 8.41%
Materials & Processing 8.43%
Consumer Discretionary 5.55%
Financial Services 12.49%
Other 8.11%
Consumer Staples 9.42%
Health Care 10.68%
Autos & Transportation 1.04%
Technology 13.58%
Computer Software & Services 2.83%
Producer Durables 2.94%
U.S. Treasury Bills 1.29%
Retail 9.50%
Allocation percentages are based on total investment value of the portfolio as
of 12/31/97.
17
<PAGE>
- --------------------------------------------------------------------------------
GROWTH FUND
- --------------------------------------------------------------------------------
Portfolio Manager:
Janus Capital Corporation
[PHOTO OF WARREN B. LAMMERT APPEARS HERE]
Warren B. Lammert
Mr. Lammert is a graduate of Yale University and the London School of Economics.
He first joined Janus in January 1987 and has been portfolio manager for the
Growth Fund since its inception. He is a Chartered Financial Analyst.
Performance Review:
From the Fund's inception (May 7, 1993) through December 31, 1997, the Growth
Fund advanced 16.57% on an average annual total return basis. For the 12-month
period ended December 31, 1997, the Fund's total return was 11.24%. For
additional information, see the accompanying chart.
What were the most significant factors contributing to the Fund's performance
over the 12-month period ended December 31, 1997?
For the year, the Fund gained 11.24% versus a gain of 33.36% for its benchmark,
the S&P 500 Index. During 1997, market crosscurrents hampered Fund performance,
and after starting the period slowly, we were unable to match the S&P 500 Index'
returns for the year.
What market conditions affected the Fund's performance during the period, and
what investment techniques were used to address those conditions?
Despite the market's strong advance this year, various dynamics created a
difficult environment for the Fund. During the first half of 1997, liquidity-
driven flows into the large, mega-caps of the S&P 500 Index pushed the market to
new highs. In this environment, small and midsize stocks severely underperformed
their larger counterparts.
In the second half of the year, as the market's advance became more broadly
based, the Fund regained momentum and began to close its performance gap with
the Index. However, global volatility and some mild individual disappointments
in the fourth quarter kept the Fund from ultimately closing this gap.
Were there any shifts in the Fund's portfolio holdings/sectors that had a
significant impact on Fund performance?
As the year began, the Fund had significant holdings in the business service
sector, particularly in credit card processors First Data, First USA Paymentech
and National Processing. First Data had been a longtime holding that has
performed very well, but increased competition brought lower pricing and
disappointing earnings for the entire group, and we sold the positions. Other
disappointments in this sector included Cincinnati Bell and Teletech.
[LINE GRAPH APPEARS HERE]
Inception* 5/7/93 10000 10000
Sep 10810 10290
Dec '93 11190 10528
Mar 11390 10129
Jun 10560 10171
Sep 11571 10667
Dec '94 11491 10665
Mar 12232 11704
Jun 13934 12821
Sep 15420 13707
Dec '95 15781 14665
Mar 16956 15451
Jun 17392 16144
Sep 18387 16643
Dec '96 18330 18032
Mar 17129 18514
Jun 19386 21743
Sep 21093 23379
Dec '97 20390 24052
The above line graph does not reflect administrative fees or other expenses
charged by American General Life Insurance Company Separate Account D through
which shares of the Fund are purchased.
* Index total returns were calculated from 5/31/93 to 12/31/97. The Standard &
Poor's Composite Index of 500 Stocks (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, assumes
reinvestment of all dividends/distributions, and does not reflect any asset-
based charges for investment management or other expenses. Past investment
performance does not guarantee future performance. The returns for the Fund
assume reinvestment of all dividends/distributions by the shareholder.
During the period noted, the Advisor (Sierra Investment Advisors Corporation)
and Administrator (Sierra Fund Administration Corporation) waived a portion of
their management fees and the Advisor absorbed other expenses, and credits were
allowed by the Custodian. In the absence of the waivers and absorption of other
expenses or Custodian credits, yield and total return would have been lower.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Returns as of
12/31/97 6 Month 1 Year Since Inception
-------- ------- ----------------
(May 7, 1993)
<S> <C> <C> <C>
Fund 05.19% 11.24% 16.57%
Standard & Poor's Composite Index of 500
Stocks* 10.62% 33.36% 21.10%
- --------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
- --------------------------------------------------------------------------------
GROWTH FUND
- --------------------------------------------------------------------------------
During the year, we added several positions in the oil and gas service industry.
Although oil and natural gas prices declined in 1997 from the 1996 highs,
production volumes continued to show robust growth. Against this backdrop, the
oil and gas service industry has enjoyed strong demand from the exploration and
production sector. Schlumberger, with its differentiated service portfolio, has
enabled its customers to meaningfully lower delivery costs while capturing a
fair share of its value added. In the drilling sector, we have focused on deep-
water drilling where economic returns have improved most meaningfully with the
use of the new technologies brought to bear by players like Schlumberger.
We also held an assortment of high-quality life sciences companies that
performed well, including Monsanto and Warner-Lambert. Monsanto is in the midst
of restructuring to refocus itself on higher-margin pharmaceuticals and agri-
biotech products. It has vastly increased its research and development budget,
which should help as they quickly launch several promising new products. Warner-
Lambert enjoyed a terrific year due to strong sales from its two new drugs:
Lipitor, for cholesterol reduction, and Rezulin, for diabetes. Towards year end,
Rezulin suffered a setback when the FDA mandated increased tests for the
elevation of liver enzymes. But the stock has bounced back because strong sales
indicate that Rezulin offers much higher quality of life benefits, which vastly
outweigh the negatives associated with increased enzyme testing.
In the technology area, longtime holding Parametric Technology was closely
watched. Despite posting a healthy increase in earnings, investors waited for
evidence that problems in its Japanese sales force could be resolved. Early
indications show that, notwithstanding a weak Japanese economy, sales are
picking up, while its U.S. and European geographies continue to perform well.
Although we still strongly believe in Parametric's long-term potential, we
trimmed the position because of the uncertainty present in Asia. In the fourth
quarter, our technology holdings, including Nokia and Philips, were broadly
impacted by heightened concerns over Southeast Asia.
What is our intermediate and long-term outlook for the Fund?
We believe the Fund is well positioned to take advantage of a number of very
compelling themes and individual stories. In the life sciences area, we believe
that Monsanto and Warner-Lambert are poised to recapture some of the performance
lost at the end of 1997, as the strength of their pipelines and new products
gains focus. With the very meaningful decline in interest rates seen into early
1998, we have added to our holdings in several other high-quality pharmaceutical
companies including Eli Lilly and Pfizer. In technology, we remain positive on
our holdings and feel a number of our positions may have overcompensated for the
likely slowing of demand from Asia. Finally, we have added several holdings in
the cable television industry, where improving cash flows and exciting new
service offerings of digital cable, internet over cable, and telephony, offer
better financial returns and an improving outlook for growth.
- --------------------------------------------------------------------------------
Sector Diversification
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
Commercial Paper 8.04%
Materials & Processing 7.79%
Cunsumer Discretionary 3.22%
Financial Services 14.10%
Consumer Staples 1.57%
Energy 7.75%
Telecommunications 4.50%
Health Care 12.32%
Technology 17.89%
Computer Software & Services 11.74%
Retail 1.18%
Other 9.90%
Allocation percentages are based on total investment value of the portfolio as
of 12/31/97.
19
<PAGE>
- --------------------------------------------------------------------------------
EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Portfolio Manager:
Janus Capital Corporation
[PHOTO OF JAMES P. GOFF APPEARS HERE]
Mr. Goff has a degree from Yale University, and is a Chartered Financial
Analyst. He has been with Janus since 1988, and has had primary portfolio
management responsibility for the Emerging Growth Fund since its inception.
Performance Review:
From the Fund's inception (January 12, 1994) through December 31, 1997, the
Emerging Growth Fund advanced 14.46% on an average annual total return basis.
For the 12-month period ended December 31, 1997, the Fund's total return was
12.59%. For additional information, see the accompanying chart.
What were the most significant factors contributing to the Fund's performance
over the 12-month period ended December 31, 1997?
The Fund gained 12.59% during 1997, while one benchmark, the S&P MidCap 400
Index, gained 32.25%. Despite significant efforts to improve performance, the
past twelve months proved to be a very difficult period for the Fund. Severe
market swings buffeted performance, and we were unable to close the performance
gap with the benchmark Index.
What market conditions affected the Fund's performance during the period, and
what investment techniques were used to address those conditions?
As the year began, small and midsize stocks came under tremendous pricing
pressure, especially smaller stocks with high growth rates. Investors became
infatuated with liquidity issues, which created a major performance gap between
large stocks and their smaller counterparts. In this environment, we lost ground
and finished the early part of the year much lower than the overall market. But
this fascination with the mega-caps eventually slowed, and investors once again
began to focus on small and midsize stocks. The S&P MidCap 400 Index posted
particularly impressive numbers mid-year; however, these returns were driven
mostly by technology and energy stocks, areas in which the Fund was
underweighted.
Growth of a $10,000 investment
[LINE GRAPH APPEARS HERE]
Inception* 1/12/94 10000 10000
Mar 9950 9305
Jun 9530 9344
Sep 10520 9801
Dec '94 10530 9799
Mar 10790 10752
Jun 11454 11777
Sep 13261 12712
Dec '95 13793 13477
Mar 15319 14200
Jun 15828 14836
Sep 15539 15295
Dec '96 15177 16569
Mar 13309 17014
Jun 15678 19982
Sep 16990 21486
Dec '97 17090 22103
The above line graph does not reflect administrative fees or other expenses
charged by American General Life Insurance Company Separate Account D through
which shares of the Fund are purchased.
Average Annual Total Returns as of 12/31/97
6 Month 1 Year Since Inception
------- ------ ---------------
(January 12, 1994)
Fund 9.00% 12.59% 14.46%
Standard & Poor's Composite Index
of 500 Stocks* 10.62% 33.36% 22.45%
* Index total returns were calculated from 1/31/94 to 12/31/97. The Standard &
Poor's Composite Index of 500 Stocks (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, assumes
reinvestment of all dividends/distributions, and does not reflect any asset-
based charges for investment management or other expenses. Past investment
performance does not guarantee future performance. The returns for the Fund
assume reinvestment of all dividends/distributions by the shareholder.
During the period noted, the Advisor (Sierra Investment Advisors Corporation)
and Administrator (Sierra Fund Administration Corporation) waived a portion of
their management fees, and credits were allowed by the Custodian. In the absence
of the waivers or Custodian credits, yield and total return would have been
lower.
20
<PAGE>
- --------------------------------------------------------------------------------
EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Meanwhile, our investments in wireless communication and restaurant stocks
underperformed, and several consumer discretionary holdings failed to post
substantial gains. This combination, coupled with the underweighting in key
performing sectors, proved to be a drag on performance for much of the year.
Were there any shifts in the Fund's portfolio holdings/sectors that had a
significant impact on Fund performance?
In addition to a conflicting equity environment, we also suffered some early
disappointments. Paging Network, Global DirectMail, and Viking Office Products
were all sold at a loss in early 1997. Although we were certainly disappointed,
the fundamentals had changed for each, which altered our investment thesis.
As the year progressed, however, a more difficult situation developed. Although
several top positions experienced impressive earnings growth, the stock prices
did not keep pace with the Index. Papa John's, Barnett, and Omnicare each met or
exceeded Wall Street's estimates for several quarters, only to receive a
lukewarm response. For the most recent reporting period, our top twenty
positions had earnings gains in excess of 35%. In a robust economic environment,
investors migrated toward more steady growth, especially following the S&P
MidCap's surge of nearly 22% in the third quarter. As a result, some of our
larger holdings did not significantly appreciate. This contributed to the drag
on Fund performance.
As the period ended, Fastenal, a longtime holding that distributes nuts and
bolts, gave back most of its earlier gains. The company's recent introduction of
several new products resulted in a dramatically larger sales force. Although
Fastenal met internal revenue expectations for the quarter, the higher costs
associated with its larger sales force caused the company to miss Wall Street's
earnings expectations, sending the stock price substantially lower.
What is our intermediate and long-term outlook for the Fund?
Although the last twelve months have been difficult, we remain positive on our
long-term outlook. The Fund is focused on companies that can deliver dramatic
earnings growth, regardless of the global economy. Going forward, we expect many
of our longtime holdings to provide this level of growth. These include numerous
domestic consumer discretionary stocks, some U.K.-based restaurant and pub
companies, and a number of media and entertainment positions. Similarly, our
recent additions in the technology sector, although small as a percentage of the
portfolio, have tremendous potential. As our holdings deliver robust earnings
well in excess of the market, investors should once again take notice and afford
these companies a premium, especially in an environment of slower corporate
growth. Consequently, we are positive on the earnings potential for our
securities in 1998.
- --------------------------------------------------------------------------------
Sector Diversification
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
Commercial Paper 15.20%
Materials & Processing 4.46%
Consumer Discretionary 14.82%
Financial Services 13.61%
Autos & Transportation 1.04%
Consumer Staples 1.85%
Energy 0.54%
Telecommunications 1.68%
Health Care 9.99%
Technology 3.42%
Computer Software & Services 2.50%
Retail 11.40%
Other 7.57%
Restaurants 11.21%
Warrant 0.71%
Allocation percentages are based on total investment value of the portfolio as
of 12/31/97.
21
<PAGE>
- --------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
- --------------------------------------------------------------------------------
Portfolio Manager:
Warburg, Pincus Asset Management, Inc.
The following people have been primarily responsible for managing the
International Growth Fund since April 8, 1996. Richard H. King, Senior Managing
Director, joined the firm to found the department and has 31 years of investment
experience. Prior to joining Warburg, Mr. King was chief investment officer and
a director of Fiduciary Trust Company International S.A. in London from 1984 to
1988. P. Nicholas Edwards, Senior Vice President, has 13 years of investment
experience. Prior to joining Warburg, Mr. Edwards was a director and senior
analyst at Jardine Fleming Investment Advisers in Tokyo from 1991 to 1995.
Harold W. Ehrlich, CFA, CIC, Senior Vice President, has 14 years of investment
experience. Prior to joining Warburg, Mr. Ehrlich was a senior vice president,
portfolio manager and analyst at Templeton Investment Counsel Inc. Vincent J.
McBride, Vice President, has 10 years of investment experience. Prior to joining
Warburg, Mr. McBride was an international equity analyst at Smith Barney Inc.
from 1993 to 1994. He was an international equity analyst at General Electric
Investments from 1992 to 1993 and a portfolio manager/analyst at United Jersey
Bank from 1989 to 1992.
Performance Review:
From the Fund's inception (May 7, 1993) through December 31, 1997, the
International Growth Fund's average annual total return was 5.88%. For the 12-
month period ended December 31, 1997, the Fund's total return was -2.64%. For
additional information, see the accompanying chart.
What were the most significant factors contributing to
the Fund's performance over the 12-month period ended December 31, 1997?
The first three months of 1997 saw mixed performance for non-U.S. stock markets.
Most of Europe advanced in local-currency terms, Japan's equity market
struggled, while Latin America (led by Brazil) prospered.
In the second quarter, strong gainers included Australia, European markets, and
Latin America. Asian-Pacific markets had varied results. The turnaround in
Japan's broad-market averages reflected renewed bullishness on the countries
economic prospects, as well as favorable reaction to the government's
deregulatory efforts.
The portfolio benefited from Europe's general strength during the third quarter
and from good stock selection. Particularly encouraging are the growing number
of positive earnings surprises coming from companies across Europe, signaling
both successful restructuring efforts and the continent's long-awaited economic
recovery.
In the fourth quarter, any and all Asian exposure proved a liability given the
plunge in the region's stock markets and currencies. While in most cases our
stock picks fared better than local-market indices, they still suffered
significant losses. The Fund's European holdings had a positive impact on its
performance, as these either rose or fell less than its holdings in Asia.
What market conditions affected the Fund's performance during the period, and
what investment techniques were used to address those conditions?
The best performer in the first quarter was Taiwan, while Asia's laggards during
the quarter included Thailand, South Korea and Singapore. In Latin America,
there remained an element of political risk, but the backdrop for Brazilian
stocks grew increasingly favorable.
The second quarter was a positive one for most foreign stock markets. By
Growth of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
Inception* 5/7/93 10000 10000
Sep 11080 10497
Dec '93 11310 10588
Mar 11470 11482
Jun 11784 11516
Sep 11864 11527
Dec '94 11523 11381
Mar 11142 11593
Jun 11392 11707
Sep 11868 12147
Dec '95 12284 12690
Mar 12771 13056
Jun 13044 13249
Sep 12913 13127
Dec '96 13394 13457
Mar 13426 13232
Jun 15169 14955
Sep 15052 14849
Dec '97 13042 13685
<TABLE>
<CAPTION>
Average Annual Total Returns as of 12/31/97 6 Month 1 Year Since Inception
-------- ------- ----------------
(May 7, 1993)
<S> <C> <C> <C>
Fund -14.03% -2.64% 5.88%
Morgan Stanley Capital International EAFE
Index* -08.49% -1.78% 7.09%
</TABLE>
The above line graph does not reflect administrative fees or other expenses
charged by American General Life Insurance Company Separate Account D through
which shares of the Fund are purchased.
* Index total returns were calculated from 5/31/93 to 12/31/97. The Morgan
Stanley Capital International EAFE Index ("EAFE") includes 1,050 companies
representing the stock markets of Europe, Australia, New Zealand and the Far
East weighted by capitalization. EAFE is a broad-based index of equity markets
representing 18 countries, assumes reinvestment of all dividends/distributions,
and does not reflect any asset-based charges for investment management or other
expenses. Past investment performance does not guarantee future performance. The
returns for the Fund assume reinvestment of all dividends/distributions by the
shareholder.
During the period noted, the Advisor (Sierra Investment Advisor Corporation) and
Administrator (Sierra Fund Administration Corporation) waived a portion of their
management fees and the Advisor absorbed other expenses, and credits were
allowed by the Custodian. In the absence of the waivers and absorption of other
expenses or Custodian credits, yield and total return would have been lower.
22
<PAGE>
- --------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
- --------------------------------------------------------------------------------
region, noteworthy performances came from Europe and Latin America. Japan staged
an impressive recovery after several disappointing quarters.
During the third quarter, we continued to trim the Fund's weighting in Spain,
selling stocks as they hit our price targets. In France, we were very encouraged
by the number of companies reporting earnings that surpassed expectations. After
rallying in the second quarter, Japan's equity market stumbled in the third
quarter, weighed down by signs of flagging economic growth. The market was also
hurt by concerns that Southeast Asia's currency turmoil would cut Japan's
exports into the region and by ongoing worries about the country's financial
sector. Virtually all Asian-Pacific markets suffered losses in the dollar terms
for the quarter, with the steepest declines obviously in Southeast Asia.
The fourth quarter saw declines in most foreign markets. The most severe
setbacks were in Asia, which continued to struggle. The region's crisis, which
previously had been confined largely to the relatively small economies of
Southeast Asia, took a decided turn for the worse during the quarter. South
Korea, one of the world's largest economies, fell victim to the contagion, and
its currency and stock market plunged. The situation worsened when Japan
stumbled, hurt by heightened concerns over its faltering economy and
deteriorating confidence in its financial system. As the quarter closed, the
still-evolving situation had yet to stabilize, despite pledges of substantial
monetary support from the International Monetary Fund and a Japanese
government-announced economic-stimulus and banking-sector-relief package. Not
surprisingly, Asia's ripples were felt across the world's stock markets.
Virtually all fell in sympathy, as investors grappled with a potentially
significant slowdown in what has long been the world's fastest-growing economic
region.
Were there any shifts in the Fund's portfolio holdings/sectors that had a
significant impact on Fund performance?
In the first quarter of 1997, we trimmed the Fund's weightings in the so-called
peripheral European markets, added several European financial stocks, increased
the Fund's weighting in the U.K., reduced the Fund's Japanese exposure, and
increased the Fund's weighting in Brazil.
In the second quarter, the Fund's largest weighting was the U.K., which
performed particularly well in dollar terms due to the strengthening pound. The
Fund's largest weighting in continental Europe during the quarter remained
France which saw good performance during the quarter.
We made few significant changes to the Fund's country allocations in Europe
during the three months of the 3rd quarter. We did establish a presence in Italy
and added two German stocks (Hoechst, and Siemens).
In Japan, we added two banking stocks, Sumitomo Bank and Fuji Bank. Both have
put their bad-debt problems behind them and are among the better-positioned to
benefit from financial-sector deregulation. Approximately 70% of the Fund's Yen
exposure was hedged, a defensive stance reflecting our view that the yen would
continue to weaken vs. the Dollar.
There were several noteworthy changes made to the portfolio during the 4th
quarter. We trimmed the Fund's Asian exposure, reallocating most of the proceeds
to Europe, where we continue to find good opportunity. We also reduced the
Fund's weighting in Japan. This reflects our growing concern over the lingering
weakness in the Japanese economy. In Europe, we significantly increased our
exposure to France and the United Kingdom.
What is our intermediate and long-term outlook for the Fund?
Japan's economy, particularly that portion represented by consumption, has
clearly slowed following the government's decision to raise taxes back in April.
But demand for certain goods remains strong, and the health of Japan's labor
market--both employment and incomes are rising--suggests the potential for a
significant upturn in consumption in the months ahead. In addition, the
prospects for Japan's housing market appear positive and while exports to
Southeast Asia will slow over the near to intermediate term, exports to other
countries (e.g., the U.S.) continue. In sum, there does exist grounds for
optimism regarding Japan's economy, despite its recent malaise.
We remain positive on the future prospects for Southeast Asia, given the
region's high savings and investment rates and long-term growth potential. But
currently, we are reluctant to increase our weightings. Sentiment remains
overwhelmingly bearish, and given the absence of currency stability, it seems
prudent to wait.
Outside Southeast Asia, we still find value in Australia and New Zealand.
Australia benefits from low inflation, falling interest rates and an improving
earnings picture. New Zealand's backdrop is similarly favorable, and valuations
remain attractive. European holdings also should provide stability and have the
opportunity for some strength in relative performance.
Diversification by Region
[PIE CHART APPEARS HERE]
Europe 58.68%
Middle East 2.84%
Asia 22.09%
Australia/New Zealand 5.36%
Americas 11.03%
Allocation percentages are based on total investment value of the portfolio as
of 12/31/97.
23
<PAGE>
- --------------------------------------------------------------------------------
CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
Portfolio Allocations/(2)/
[PIE CHART APPEARS HERE]
Global Money Fund 5%
Short Term High
Quality Bond Fund 5%
Growth & Income Fund 30%
Growth Fund 40%
Emerging Growth Fund 10%
International Growth Fund 10%
Portfolio Composition/(2)/
[PIE CHART APPEARS HERE]
Cash Equivalent 11.10%
U.S. Equity: Small Cap 6.60%
U.S. Equity: Mid Cap 24.60%
U.S Equity: Large Cap 35.80%
Foreign Stocks 16.70%
Short Term Bonds
(Domestic) 5.20%
Goal & Objective
The Capital Growth Portfolio ("Portfolio") is designed to help manage investment
risk and achieve its objective of long-term capital appreciation. The Portfolio
allocates its assets strategically among mutual fund subaccounts in The Sierra
Variable Trust family. The Portfolio is managed similarly to the Sierra Asset
Management (SAM) Program Aggressive Growth Strategy, whose goal is to produce an
average annual return that exceeds the S&P 500 over a period of six years or
longer. Over short-term periods, however, significant differences may exist
between the Portfolio and the S&P 500./(1)/
Current Allocation
The Capital Growth Portfolio is positioned to take advantage of the favorable
economic and market environments by remaining 84% invested in equities. The
Portfolio is well-diversified, holding four Sierra Variable Trust equity funds:
Growth and Income, Growth, Emerging Growth, International Growth. The positions
in cash equivalent and short-term bonds also aid in risk management. The six
funds represent six major asset classes. Allocations between these funds, and
therefore the different asset classes, allow the Portfolio to manage risk while
producing capital appreciation.
More specifically, the Portfolio's current investment strategy is to:
. Enhance prospects for capital appreciation by maintaining a broadly
diversified mix of equities favoring the core holdings found in The Sierra
Variable Trust Growth and Growth & Income Funds
. Lower overall risk of the Portfolio with lower exposure to both small-cap and
international stocks and by holding a small cash and a short-term bond
position
(1) The SAM Program is a discretionary asset allocation service (within the
Sierra Advantage Variable Annuity) that invests in certain funds within The
Sierra Variable Trust. The investment objectives may or may not be met. The
goals of the SAM Program are not intended to reflect past or future performance
of the SAM Program or The Sierra Variable Trust and are in no way a guarantee.
(2) Allocation percentages are based on total investment value of the
portfolio as of 12/31/97.
24
<PAGE>
- --------------------------------------------------------------------------------
GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
Goal & Objective
The Growth Portfolio ("Portfolio") is designed to help manage investment risk
and achieve its objective of long-term capital appreciation. The Portfolio
allocates its assets strategically among mutual fund subaccounts in The Sierra
Variable Trust family. The Portfolio is managed similarly to the Sierra Asset
Management (SAM) Program Growth Strategy, whose goal is to produce an average
annual return of 7% or more above the annual rate of inflation over a period of
six years or longer./(1)/
Current Allocation
The Growth Portfolio is well-diversified, its assets allocated among six mutual
funds representing seven major asset classes. By investing in these different
asset classes, the Portfolio works to reduce risk while producing capital
appreciation. The Portfolio's equity holdings are diversified among different
stock asset classes, such as small-, mid-, and large-cap stocks. These
investment subcategories may react differently to certain economic or market
conditions, helping to reduce the risk of market fluctuations. The addition of
bond asset classes, which produce current income for the Portfolio, also helps
to further decrease overall volatility.
More specifically, the Portfolio's current investment strategy is to:
. Enhance prospects for capital appreciation by maintaining a broadly
diversified mix of domestic and international stocks favoring the core
holdings of mid- and large- cap companies
. Maintain a 75% concentration in equities and 25% in short- to intermediate-
term fixed-income assets to enhance growth potential while reducing overall
levels of risk
Portfolio Allocations/(2)/
[PIE CHART APPEARS HERE]
Global Money Fund 10%
U.S. Government Funde 10%
Growth & Income Fund 30%
Growth Fund 25%
Emerging Growth Fund 10%
International Growth Fund 15%
Portfolio Composition/(2)/
[PIE CHART APPEARS HERE]
Cash Equivalent 14.50%
Mortgage-Backs 6.20%
U.S. Treasuries
Notes and Bonds 3.50%
U.S. Equity: Small Cap 6.00%
U.S. Equity: Mid Cap 21.00%
U.S Equity: Large Cap 29.40%
Foreign Stocks 19.40%
(1) The SAM Program is a discretionary asset allocation service (within the
Sierra Advantage Variable Annuity) that invests in certain funds within The
Sierra Variable Trust. The investment objectives may or may not be met. The
goals of the SAM Program are not intended to reflect past or future performance
of the SAM Program or The Sierra Variable Trust and are in no way a guarantee.
(2) Allocation percentages are based on total investment value of the
portfolio as of 12/31/97.
25
<PAGE>
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
Portfolio Allocations/(2)/
[PIE CHART APPEARS HERE]
Global Money Fund 20%
U.S. Government Fund 20%
Growth & Income Fund 29%
Growth Fund 21%
International Growth Fund 10%
Portfolio Composition/(2)/
[PIE CHART APPEARS HERE]
Cash Equivalent 22.20%
Mortgage-Backs 12.50%
U.S. Treasuries
Notes and Bonds 7.20%
U.S. Equity: Small Cap 1.90%
U.S. Equity: Mid Cap 16.20%
U.S Equity: Large Cap 27.10%
Foreign Stocks 12.90%
Goal & Objective
The Balanced Portfolio ("Portfolio") is designed to help manage investment risk
and achieve its objective of long-term growth of capital and income. The
Portfolio allocates its assets strategically among mutual fund subaccounts in
The Sierra Variable Trust family. The Portfolio is managed similarly to The
Sierra Asset Management (SAM) Program Balanced Strategy, whose goal is to
produce an average annual return of 5% or more above the annual rate of
inflation over a period of six years or longer./(1)/
Current Allocation
The Balanced Portfolio is diversified among five mutual funds. Since those funds
represent seven major asset classes of both bonds and stocks, a high degree of
asset diversification is provided to investors. Diversification of stock asset
classes can help to reduce the risk of market fluctuations. Holding diverse bond
asset classes may also work to reduce price volatility due to interest rate
fluctuations. The Portfolio is well positioned as currently low inflation is
beneficial for all financial assets.
More specifically, the current investment strategy for the Portfolio is to:
. Increase the levels of diversification and manage risk by investing 58% of
the Portfolio in equities and 42% in fixed income
. Emphasize mid- and large-cap equities while maintaining a foreign position
and weighting the fixed-income portion towards cash and mortgage-backed
securities
(1) The SAM Program is a discretionary asset allocation service (within the
Sierra Advantage Variable Annuity) that invests in certain funds within The
Sierra Variable Trust. The investment objectives may or may not be met. The
goals of the SAM Program are not intended to reflect past or future performance
of the SAM Program or The Sierra Variable Trust and are in no way a guarantee.
(2) Allocation percentages are based on total investment value of the
portfolio as of 12/31/97.
26
<PAGE>
- --------------------------------------------------------------------------------
VALUE PORTFOLIO
- --------------------------------------------------------------------------------
Goal & Objective
The Value Portfolio ("Portfolio") is designed to help manage investment risk and
achieve its objective of income with some added potential for capital
appreciation. The Portfolio allocates its assets strategically among mutual fund
subaccounts in The Sierra Variable Trust family. The Portfolio is managed
similarly to The Sierra Asset Management (SAM) Program Value Strategy, whose
goal is to produce an average annual return of 4% or more above the annual rate
of inflation over a period of six years or longer.(1)
Current Allocation
The Value Portfolio is diversified among six mutual funds, representing nine
major asset classes. This level of diversification can reduce potential risk, as
measured by volatility of returns, to levels below that of most single-fund
holdings. Just as diversification of stock asset classes reduces the risk of
market fluctuations, diversification of bond asset classes helps to reduce price
volatility due to interest rate fluctuations. Current low levels of inflation
provide a positive backdrop for both fixed-income and equity markets.
More specifically, the current investment strategy for the Portfolio is to:
. Provide investors with income and potential for capital appreciation with an
80% weight in bonds and a 20% weight in core domestic equities
. Maintain a competitive current yield by investing in corporate bonds and
mortgage-backed securities, which produce higher yields than like-maturity
Treasuries
Portfolio Allocations/(2)/
[PIE CHART APPEARS HERE]
Growth Fund 5%
Global Money Fund 25%
Short Term High Quality
Bond fund 10%
U.S. Government Fund 30%
Corporate Income Fund 15%
Growth & Income Fund 15%
Growth Fund 5%
Portfolio Composition/(2)/
[PIE CHART APPEARS HERE]
Cash Equivalent 27.00%
Mortgage-Backs 19.40%
U.S. Treasuries
Notes and Bonds 12.00%
Short Term Bonds 8.90%
Corporates 13.50%
U.S. Equity: Small Cap 0.50%
U.S. Equity: Mid Cap 6.70%
U.S Equity: Large Cap 11.10%
Foreign Stocks 0.90%
(1) The SAM Program is a discretionary asset allocation service (within the
Sierra Advantage Variable Annuity) that invests in certain funds within The
Sierra Variable Trust. The investment objectives may or may not be met. The
goals of the SAM Program are not intended to reflect past or future performance
of the SAM Program or The Sierra Variable Trust and are in no way a guarantee.
(2) Allocation percentages are based on total investment value of the
portfolio as of 12/31/97.
27
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
THE SIERRA VARIABLE TRUST
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHORT TERM SHORT TERM
GLOBAL HIGH GLOBAL U.S. CORPORATE GROWTH AND
MONEY QUALITY BOND GOVERNMENT GOVERNMENT INCOME INCOME
FUND FUND FUND FUND FUND FUND
----------- ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at value (Note
2)
See portfolios of
investments (a)........... $32,782,551 $11,885,725 $17,338,313 $71,277,688 $50,759,261 $101,932,686
Cash and/or foreign currency
(b)........................ 5,986 -- 110,773 52,818 769 164
Dividends and/or interest
receivable................. 134,151 93,278 396,535 522,794 983,668 113,057
Receivable for investment
securities sold............ -- 4,544 -- 10,288 -- 14,485
Receivable for Fund shares
sold....................... -- -- -- -- -- 15,648
Net unrealized appreciation
of forward foreign currency
contracts (Note 2)
See portfolios of
investments............... -- -- 273,927 -- -- --
Unamortized organization
costs and/or offering costs
(Note 7)................... 2,170 -- 2,203 2,102 2,119 --
Receivable from
administrator.............. -- -- -- -- -- --
Other assets................ 2,514 1,192 1,909 5,606 5,059 6,450
----------- ----------- ----------- ----------- ----------- ------------
Total Assets................ 32,927,372 11,984,739 18,123,660 71,871,296 51,750,876 102,082,490
----------- ----------- ----------- ----------- ----------- ------------
LIABILITIES:
Net unrealized depreciation
of forward foreign currency
contracts (Note 2)
See portfolios of
investments............... -- -- -- -- -- --
Payable for investment
securities purchased....... -- -- -- -- -- 151,361
Payable for dollar roll
transactions (Notes 2 and
5)......................... -- -- -- 7,239,952 -- --
Payable for Fund shares
redeemed................... 17,910 7,880 9,292 17,015 3,761 --
Due to Custodian............ -- 2,655 -- -- -- --
Investment advisory fee
payable (Note 3)........... 13,734 5,117 11,550 31,388 28,419 66,910
Administration fee payable
(Note 3)................... 4,941 1,830 2,772 9,416 7,870 15,055
Transfer agent fees payable
(Note 3)................... 398 398 398 398 398 398
Custodian fees payable (Note
3)......................... 1,247 954 2,207 719 1,049 2,473
Accrued Trustees' fees and
expenses (Note 4).......... 1,258 466 706 2,399 2,005 3,835
Reverse repurchase
agreements (Notes 2 and
5)......................... -- -- -- 2,831,625 -- --
Options written, at value (
Premium received of $11,605
for the Short Term Global
Government Fund) (Notes 2
and 5)
See portfolios of
investments............... -- -- 7,082 -- -- --
Variation margin (Note 2)... -- 1,063 -- 37,688 -- --
Organization and offering
cost payable............... -- -- -- -- -- --
Accrued expenses and other
payables................... 23,470 19,989 39,794 44,287 36,908 47,990
----------- ----------- ----------- ----------- ----------- ------------
Total Liabilities........... 62,958 40,352 73,801 10,214,887 80,410 288,022
----------- ----------- ----------- ----------- ----------- ------------
NET ASSETS.................. $32,864,414 $11,944,387 $18,049,859 $61,656,409 $51,670,466 $101,794,468
=========== =========== =========== =========== =========== ============
NET ASSETS CONSIST OF:
Undistributed net investment
income..................... $ 22,556 $ 14,926 $ 1,023,881 $ 72,796 $ 58,392 $ 440,157
Accumulated net realized
gain/(loss) from security
transactions, futures
contracts, forward foreign
currency contracts, foreign
currency transactions and
written options............ -- (473,795) (400,896) (2,197,110) (2,314,345) 17,309,397
Net unrealized
appreciation/(depreciation)
of securities, futures
contracts, forward foreign
currency contracts, foreign
currency, written options
and other assets and
liabilities................ -- 154,877 (307,787) 2,784,849 2,170,439 11,101,053
Paid-in capital............. 32,841,858 12,248,379 17,734,661 60,995,874 51,755,980 72,943,861
----------- ----------- ----------- ----------- ----------- ------------
Total Net Assets............ $32,864,414 $11,944,387 $18,049,859 $61,656,409 $51,670,466 $101,794,468
=========== =========== =========== =========== =========== ============
NET ASSET VALUE, offering
price and redemption price
per share of beneficial
interest outstanding....... $ 1.00 $ 2.43 $ 2.47 $ 10.04 $ 10.19 $ 16.92
=========== =========== =========== =========== =========== ============
Number of Fund /Portfolio
shares outstanding......... 32,857,151 4,918,644 7,298,974 6,143,984 5,070,611 6,014,699
=========== =========== =========== =========== =========== ============
- ------------
(a)INVESTMENTS, AT COST
(NOTE 2)................... $32,782,551 $11,724,348 $17,917,729 $68,398,203 $48,588,822 $ 90,831,633
(b)CASH AND/OR FOREIGN
CURRENCY, AT COST (NOTE
2)......................... $ 5,986 $ -- $ 111,040 $ 52,818 $ 769 $ 164
*REPRESENTS OFFERING PRICE.
</TABLE>
See Notes to Financial Statements.
28
<PAGE>
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL CAPITAL
GROWTH GROWTH GROWTH GROWTH GROWTH BALANCED VALUE INCOME
FUND FUND FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ----------- ------------- --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$125,629,198 $49,331,840 $48,386,747 $ 610,811 $1,227,605 $2,371,496 $116,031 $ --
36,896 87,991 417,349 1,000 3,495 2,022 406 5,791
29,843 11,291 59,339 120 567 1,780 118 --
1,914,645 -- 627,663 -- -- -- -- --
-- 42,727 -- -- 162,849 -- -- --
-- -- 503,560 -- -- -- -- --
2,119 -- 2,119 36,393 36,393 36,393 8,867 --
-- -- -- 3,443 4,437 6,187 2,105 --
10,145 4,466 5,525 -- -- 17 -- --
------------ ----------- ----------- --------- ---------- ---------- -------- ------
127,622,846 49,478,315 50,002,302 651,767 1,435,346 2,417,895 127,527 5,791
------------ ----------- ----------- --------- ---------- ---------- -------- ------
46,823 46,746 -- -- -- -- -- --
5,631,986 3,992,513 206,701 -- -- -- -- --
-- -- -- -- -- -- -- --
5,514 -- 51,609 -- -- -- -- --
-- -- -- -- -- -- -- --
89,533 34,292 41,697 47 112 183 8 --
18,091 7,037 7,931 -- -- -- -- 791
398 398 398 398 398 398 398 --
6,190 3,353 13,401 172 145 169 178 --
4,608 1,792 2,020 22 51 84 4 --
-- -- -- -- -- -- -- --
-- -- -- -- -- -- -- --
-- -- -- -- -- -- -- --
-- -- -- 41,200 41,200 41,200 9,500 --
54,069 30,557 42,563 18,545 19,778 21,882 17,086 5,000
------------ ----------- ----------- --------- ---------- ---------- -------- ------
5,857,212 4,116,688 366,320 60,384 61,684 63,916 27,174 5,791
------------ ----------- ----------- --------- ---------- ---------- -------- ------
$121,765,634 $45,361,627 $49,635,982 $ 591,383 $1,373,662 $2,353,979 $100,353 $ 0
============ =========== =========== ========= ========== ========== ======== ======
$ 593,054 $ 46,745 $ 2,359,423 $ 5,393 $ 9,484 $ 29,960 $ 416 $ --
11,547,691 5,838,488 (2,138,344) 1,039 (19,490) (12,453) 18 0
13,471,657 8,888,288 1,839,896 (8,082) (10,440) (6,491) 1 --
96,153,232 30,588,106 47,575,007 593,033 1,394,108 2,342,963 99,918 0
------------ ----------- ----------- --------- ---------- ---------- -------- ------
$121,765,634 $45,361,627 $49,635,982 $ 591,383 $1,373,662 $2,353,979 $100,353 $ 0
============ =========== =========== ========= ========== ========== ======== ======
$ 15.41 $ 15.63 $ 12.26 $ 10.70 $ 10.49 $ 10.47 $ 10.23 $10.00*
============ =========== =========== ========= ========== ========== ======== ======
7,903,699 2,902,621 4,049,108 55,292 130,946 224,852 9,807 --
============ =========== =========== ========= ========== ========== ======== ======
$112,121,892 $40,396,840 $47,028,402 $ 618,893 $1,238,045 $2,377,987 $116,030 $ --
$ 36,944 $ 87,991 $ 434,731 $ 1,000 $ 3,495 $ 2,022 $ 406 $5,791
</TABLE>
See Notes to Financial Statements.
29
<PAGE>
STATEMENTS OF OPERATIONS
THE SIERRA VARIABLE TRUST
FOR THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHORT TERM SHORT TERM
GLOBAL HIGH GLOBAL U.S. CORPORATE GROWTH AND
MONEY QUALITY BOND GOVERNMENT GOVERNMENT INCOME INCOME
FUND FUND FUND FUND FUND FUND
---------- ------------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................... $ -- $ -- $ -- $ -- $ -- $ 1,279,993
Foreign witholding tax on
dividend income............ -- -- -- -- -- --
Interest.................... 1,697,307 859,503 1,483,830 4,843,933 4,177,785 146,794
Foreign witholding tax on
interest income............ -- -- (2,393) -- -- --
Fee income (Note 5)......... -- -- -- 66,904 22,032 --
---------- -------- ----------- ---------- ---------- -----------
Total Investment Income.... 1,697,307 859,503 1,481,437 4,910,837 4,199,817 1,426,787
---------- -------- ----------- ---------- ---------- -----------
EXPENSES:
Investment advisory fee
(Note 3)................... 150,657 61,044 147,625 376,599 345,006 697,411
Administration fee (Note
3)......................... 54,236 21,976 35,430 112,980 95,540 156,925
Trustees' fees and expenses
(Note 4)................... 4,068 1,519 2,360 7,689 6,351 11,843
Legal and audit fees........ 17,802 14,832 36,474 23,337 23,382 26,420
Transfer agent fees (Note
3)......................... 4,510 4,510 4,510 4,510 4,510 4,510
Custodian fees (Note 3)..... 9,660 7,899 13,996 8,093 7,998 19,022
Amortization of organization
costs (Note 7)............. 6,137 -- 6,137 6,137 6,137 --
Other....................... 8,744 14,428 5,975 31,233 21,733 29,296
Interest expense (Note 5)... -- -- -- 400,422 -- --
Fees waived and/or expenses
absorbed by investment
advisor and administrator
(Note 3)................... (29,077) (3,755) -- -- -- --
---------- -------- ----------- ---------- ---------- -----------
Subtotal................... 226,737 122,453 252,507 971,000 510,657 945,427
Credits allowed by the
custodian (Note 3)......... (441) (426) (696) (3,098) (626) (1,415)
---------- -------- ----------- ---------- ---------- -----------
Net expenses............... 226,296 122,027 251,811 967,902 510,031 944,012
---------- -------- ----------- ---------- ---------- -----------
NET INVESTMENT
INCOME/(LOSS).............. 1,471,011 737,476 1,229,626 3,942,935 3,689,786 482,775
---------- -------- ----------- ---------- ---------- -----------
NET REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS
(NOTES 2 AND 5):
Realized gain/(loss) from:
Security transactions...... 3,305 (50,584) (1,084,453) 970,801 (82,245) 17,343,219
Forward foreign currency
contracts and foreign
currency transactions..... -- (3,142) 1,551,186 -- -- --
Futures contracts.......... -- (69,744) -- (853,008) -- --
Written options............ -- 6,383 217,640 -- -- --
Capital gain distributions
received.................. -- -- -- -- -- --
Net unrealized
appreciation/(depreciation)
of:
Securities................. -- 67,318 (1,024,901) 1,735,131 1,706,635 3,441,585
Forward foreign currency
contracts................. -- -- (57,032) -- -- --
Foreign currency, written
options, futures contracts
and other assets and
liabilities............... -- (6,948) 8,430 (307,222) -- --
---------- -------- ----------- ---------- ---------- -----------
Net Realized and Unrealized
Gain/(Loss) on
Investments................ 3,305 (56,717) (389,130) 1,545,702 1,624,390 20,784,804
---------- -------- ----------- ---------- ---------- -----------
NET INCREASE/(DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS................. $1,474,316 $680,759 $ 840,496 $5,488,637 $5,314,176 $21,267,579
========== ======== =========== ========== ========== ===========
</TABLE>
- ------------
* The Capital Growth, Growth and Balanced Portfolios commenced operations on
June 3, 1997.
+ The Value Portfolio commenced operations on September 9, 1997.
++ The Income Portfolio commenced operations on October 22, 1997.
See Notes to Financial Statements.
30
<PAGE>
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL CAPITAL
GROWTH GROWTH GROWTH GROWTH GROWTH BALANCED VALUE INCOME
FUND FUND FUND PORTFOLIO* PORTFOLIO* PORTFOLIO* PORTFOLIO+ PORTFOLIO++
------ -------- ------------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 720,504 $ 144,361 $ 1,037,966 $ 1,510 $ 6,953 $ 22,609 $ 1,253 $ --
(27,157) (8,023) (94,543) -- -- -- -- --
794,750 163,008 200,380 -- 85 201 -- --
-- -- (190) -- -- -- -- --
-- -- -- -- -- -- -- --
- ----------- ----------- ----------- -------- -------- -------- -------- -------
1,488,097 299,346 1,143,613 1,510 7,038 22,810 1,253 0
- ----------- ----------- ----------- -------- -------- -------- -------- -------
1,055,947 419,081 567,918 177 443 849 17 --
213,366 86,099 109,677 265 665 1,274 25 --
14,748 5,562 7,401 31 79 146 4 --
26,310 19,376 31,637 14,749 16,045 19,024 13,217 5,000
4,510 4,510 4,510 2,843 2,843 2,843 1,564 369
49,757 27,276 75,316 700 700 700 400 100
6,137 -- 6,137 4,807 4,807 4,807 633 --
37,680 16,761 23,512 3,912 3,978 4,058 3,869 --
-- -- -- -- -- -- -- --
-- -- -- (26,728) (27,781) (30,532) (19,645) (5,469)
- ----------- ----------- ----------- -------- -------- -------- -------- -------
1,408,455 578,665 826,108 756 1,779 3,169 84 0
(6,420) (3,184) (1,062) (144) (237) (224) (26) --
- ----------- ----------- ----------- -------- -------- -------- -------- -------
1,402,035 575,481 825,046 612 1,542 2,945 58 0
- ----------- ----------- ----------- -------- -------- -------- -------- -------
86,062 (276,135) 318,567 898 5,496 19,865 1,195 0
- ----------- ----------- ----------- -------- -------- -------- -------- -------
12,191,554 6,000,111 (1,942,647) (104) (20,465) (17,764) 18 23
543,983 (111,691) 2,333,309 -- -- -- -- --
(3,170) -- -- -- -- -- -- --
-- -- -- -- -- -- -- --
-- -- -- 3,302 2,627 13,070 -- --
(181,088) (1,086,421) (2,170,548) (8,082) (10,440) (6,491) 1 --
(45,743) 113,363 147,953 -- -- -- -- --
10,388 (1,657) (24,446) -- -- -- -- --
- ----------- ----------- ----------- -------- -------- -------- -------- -------
12,515,924 4,913,705 (1,656,379) (4,884) (28,278) (11,185) 19 23
- ----------- ----------- ----------- -------- -------- -------- -------- -------
$12,601,986 $ 4,637,570 $(1,337,812) $ (3,986) $(22,782) $ 8,680 $ 1,214 $ 23
=========== =========== =========== ======== ======== ======== ======== =======
</TABLE>
See Notes to Financial Statements.
31
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
THE SIERRA VARIABLE TRUST
FOR THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHORT TERM SHORT TERM
GLOBAL HIGH GLOBAL U.S. CORPORATE GROWTH AND
MONEY QUALITY BOND GOVERNMENT GOVERNMENT INCOME INCOME
FUND FUND FUND FUND FUND FUND
----------- ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net investment
income/(loss).............. $ 1,471,011 $ 737,476 $ 1,229,626 $ 3,942,935 $ 3,689,786 $ 482,775
Net realized gain/(loss)
from security transactions,
forward foreign currency
contracts, foreign currency
transactions, futures
contracts and written
options during the year.... 3,305 (117,087) 684,373 117,793 (82,245) 17,343,219
Capital gain distributions
received................... -- -- -- -- -- --
Net unrealized
appreciation/(depreciation)
of securities, forward
foreign currency contracts,
foreign currency, written
options, futures contracts
and other assets and
liabilities during the
year....................... -- 60,370 (1,073,503) 1,427,909 1,706,635 3,441,585
----------- ----------- ----------- ----------- ----------- ------------
Net increase/(decrease) in
net assets resulting from
operations................. 1,474,316 680,759 840,496 5,488,637 5,314,176 21,267,579
Distributions to
shareholders from:
Net investment income...... (1,467,623) (687,795) (903,638) (3,881,167) (3,679,274) (539,740)
Net realized gains on
investments............... (3,305) -- -- -- -- (6,617,216)
Net increase/(decrease) in
net assets from Fund share
transactions............... 9,595,509 (450,459) (3,797,384) (6,514,356) (9,847,636) 25,239,310
----------- ----------- ----------- ----------- ----------- ------------
Net increase/(decrease) in
net assets................. 9,598,897 (457,495) (3,860,526) (4,906,886) (8,212,734) 39,349,933
NET ASSETS:
Beginning of period......... 23,265,517 12,401,882 21,910,385 66,563,295 59,883,200 62,444,535
----------- ----------- ----------- ----------- ----------- ------------
End of period............... $32,864,414 $11,944,387 $18,049,859 $61,656,409 $51,670,466 $101,794,468
=========== =========== =========== =========== =========== ============
Undistributed net investment
income at end of period.... $ 22,556 $ 14,926 $ 1,023,881 $ 72,796 $ 58,392 $ 440,157
=========== =========== =========== =========== =========== ============
</TABLE>
- ------------
* The Capital Growth, Growth and Balanced Portfolios commenced operations on
June 3, 1997.
+ The Value Portfolio commenced operations on September 9, 1997.
++ The Income Portfolio commenced operations on October 22, 1997.
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SHORT TERM SHORT TERM
GLOBAL HIGH GLOBAL U.S. CORPORATE GROWTH AND
MONEY QUALITY BOND GOVERNMENT GOVERNMENT INCOME INCOME
FUND FUND FUND FUND FUND FUND
----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net investment
income/(loss).............. $ 990,628 $ 811,642 $ 1,258,830 $ 3,740,172 $ 4,065,324 $ 509,646
Net realized gain/(loss)
from security transactions,
forward foreign currency
contracts, foreign currency
transactions, futures
contracts and written
options during the year.... 544 (269,173) 280,399 (316,015) (162,462) 6,622,266
Net unrealized
appreciation/(depreciation)
of securities, forward
foreign currency contracts,
foreign currency, written
options, futures contracts
and other assets and
liabilities during the
year....................... -- (101,972) 297,489 (900,475) (3,654,948) 3,780,341
----------- ----------- ----------- ----------- ----------- -----------
Net increase in net assets
resulting from operations.. 991,172 440,497 1,836,718 2,523,682 247,914 10,912,253
Distributions to
shareholders from:
Net investment income...... (986,806) (798,432) (1,307,469) (3,671,725) (4,024,172) (449,287)
Distributions in excess of
net investment income..... -- -- (639,891) -- -- --
Net realized gains on
investments............... (3,822) -- -- -- -- (4,043,586)
Net increase/(decrease) in
net assets from Fund share
transactions............... 2,892,099 395,121 (1,783,567) 15,407,844 2,983,208 9,663,313
----------- ----------- ----------- ----------- ----------- -----------
Net increase/(decrease) in
net assets................. 2,892,643 37,186 (1,894,209) 14,259,801 (793,050) 16,082,693
NET ASSETS:
Beginning of year........... 20,372,874 12,364,696 23,804,594 52,303,494 60,676,250 46,361,842
----------- ----------- ----------- ----------- ----------- -----------
End of year................. $23,265,517 $12,401,882 $21,910,385 $66,563,295 $59,883,200 $62,444,535
=========== =========== =========== =========== =========== ===========
Undistributed net investment
income/(distributions in
excess of net investment
income) at end of year..... $ 15,877 $ 3,803 $ (208,526) $ 25,240 $ 55,812 $ 497,122
=========== =========== =========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
32
<PAGE>
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL CAPITAL
GROWTH GROWTH GROWTH GROWTH GROWTH BALANCED VALUE INCOME
FUND FUND FUND PORTFOLIO* PORTFOLIO* PORTFOLIO* PORTFOLIO+ PORTFOLIO++
- ------------ ------------ ------------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 86,062 $ (276,135) $ 318,567 $ 898 $ 5,496 $ 19,865 $ 1,195 $ 0
12,732,367 5,888,420 390,662 (104) (20,465) (17,764) 18 23
-- -- -- 3,302 2,627 13,070 -- --
(216,443) (974,715) (2,047,041) (8,082) (10,440) (6,491) 1 0
- ------------ ------------ ------------ -------- ---------- ---------- -------- ----
12,601,986 4,637,570 (1,337,812) (3,986) (22,782) 8,680 1,214 23
(138,925) -- (1,127,686) -- -- -- -- --
(15,601,296) (2,594,503) (1,036,604) -- -- -- -- --
8,840,085 (12,568,929) (9,216,432) 595,369 1,396,444 2,345,299 99,139 (23)
- ------------ ------------ ------------ -------- ---------- ---------- -------- ----
5,701,850 (10,525,862) (12,718,534) 591,383 1,373,662 2,353,979 100,353 0
116,063,784 55,887,489 62,354,516 0 0 0 0 0
- ------------ ------------ ------------ -------- ---------- ---------- -------- ----
$121,765,634 $ 45,361,627 $ 49,635,982 $591,383 $1,373,662 $2,353,979 $100,353 $ 0
============ ============ ============ ======== ========== ========== ======== ====
$ 593,054 $ 46,745 $ 2,359,423 $ 5,393 $ 9,484 $ 29,960 $ 416 $--
============ ============ ============ ======== ========== ========== ======== ====
</TABLE>
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL
GROWTH GROWTH GROWTH
FUND FUND FUND
- ------------ ----------- -------------
<S> <C> <C>
$ 11,750 $ (435,373) $ 315,138
15,391,961 3,240,181 1,963,901
124,075 1,812,579 2,364,693
- ------------ ----------- -----------
15,527,786 4,617,387 4,643,732
-- -- (741,545)
-- -- --
(13,385,659) (1,615,533) --
14,222,744 6,827,235 12,543,471
- ------------ ----------- -----------
16,364,871 9,829,089 16,445,658
99,698,913 46,058,400 45,908,858
- ------------ ----------- -----------
$116,063,784 $55,887,489 $62,354,516
============ =========== ===========
$ 145,343 $ 160,114 $ 619,142
============ =========== ===========
</TABLE>
See Notes to Financial Statements.
33
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS -- CAPITAL STOCK ACTIVITY
THE SIERRA VARIABLE TRUST
FOR THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHORT TERM SHORT TERM
GLOBAL HIGH GLOBAL U.S. CORPORATE GROWTH AND
MONEY QUALITY BOND GOVERNMENT GOVERNMENT INCOME INCOME
FUND FUND FUND FUND FUND FUND
----------- ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT
Sold................... $17,390,619 $ 988,207 $ 356,553 $ 2,062,800 $ 1,172,700 $24,113,296
Issued as reinvestment
of dividends.......... 1,470,928 687,795 903,638 3,881,167 3,679,274 7,156,956
Redeemed............... (9,266,038) (2,126,461) (5,057,575) (12,458,323) (14,699,610) (6,030,942)
----------- ----------- ----------- ------------ ------------ -----------
Net
increase/(decrease)... $ 9,595,509 $ (450,459) $(3,797,384) $ (6,514,356) $ (9,847,636) $25,239,310
=========== =========== =========== ============ ============ ===========
SHARES
Sold................... 17,390,619 406,817 144,377 207,040 116,943 1,556,541
Issued as reinvestment
of dividends.......... 1,470,928 283,631 373,404 396,141 374,460 460,254
Redeemed............... (9,266,038) (871,194) (2,062,005) (1,274,529) (1,516,352) (372,884)
----------- ----------- ----------- ------------ ------------ -----------
Net
increase/(decrease)... 9,595,509 (180,746) (1,544,224) (671,348) (1,024,949) 1,643,911
=========== =========== =========== ============ ============ ===========
</TABLE>
- ------------
*The Capital Growth, Growth and Balanced Portfolios commenced operations on
June 3, 1997.
+The Value Portfolio commenced operations on September 9, 1997.
++The Income Portfolio commenced operations on October 22, 1997.
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SHORT TERM SHORT TERM
GLOBAL HIGH GLOBAL U.S. CORPORATE GROWTH AND
MONEY QUALITY BOND GOVERNMENT GOVERNMENT INCOME INCOME
FUND FUND FUND FUND FUND FUND
------------ ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT
Sold................... $ 12,763,701 $ 6,588,666 $ 445,892 $15,386,265 $ 3,740,610 $12,265,763
Issued as reinvestment
of dividends.......... 990,628 798,432 1,947,360 3,671,725 4,024,172 4,492,873
Redeemed............... (10,862,230) (6,991,977) (4,176,819) (3,650,146) (4,781,574) (7,095,323)
------------ ----------- ----------- ----------- ----------- -----------
Net
increase/(decrease)... $ 2,892,099 $ 395,121 $(1,783,567) $15,407,844 $ 2,983,208 $ 9,663,313
============ =========== =========== =========== =========== ===========
SHARES
Sold................... 12,763,701 2,668,840 175,234 1,582,359 376,148 910,887
Issued as reinvestment
of dividends.......... 990,628 327,884 780,860 379,773 413,947 350,732
Redeemed............... (10,862,230) (2,854,666) (1,649,684) (376,308) (486,535) (503,372)
------------ ----------- ----------- ----------- ----------- -----------
Net
increase/(decrease)... 2,892,099 142,058 (693,590) 1,585,824 303,560 758,247
============ =========== =========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
34
<PAGE>
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL CAPITAL
GROWTH GROWTH GROWTH GROWTH GROWTH BALANCED VALUE INCOME
FUND FUND FUND PORTFOLIO* PORTFOLIO* PORTFOLIO* PORTFOLIO+ PORTFOLIO++
- ------------ ------------ ------------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 6,294,103 $ 1,446,618 $ 2,252,533 $614,521 $1,639,678 $2,461,288 $100,589 $ 2,910
15,740,221 2,594,503 2,164,290 -- -- -- -- --
(13,194,239) (16,610,050) (13,633,255) (19,152) (243,234) (115,989) (1,450) (2,933)
- ------------ ------------ ------------ -------- ---------- ---------- -------- -------
$ 8,840,085 $(12,568,929) $ (9,216,432) $595,369 $1,396,444 $2,345,299 $ 99,139 $ (23)
============ ============ ============ ======== ========== ========== ======== =======
412,682 98,128 166,404 57,065 154,598 235,893 9,950 291
1,081,802 182,070 150,927 -- -- -- -- --
(838,693) (1,178,715) (1,058,739) (1,773) (23,652) (11,041) (143) (291)
- ------------ ------------ ------------ -------- ---------- ---------- -------- -------
655,791 (898,517) (741,408) 55,292 130,946 224,852 9,807 0
============ ============ ============ ======== ========== ========== ======== =======
</TABLE>
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL
GROWTH GROWTH GROWTH
FUND FUND FUND
- ------------ ----------- -------------
<S> <C> <C>
$ 12,305,832 $13,195,027 $14,020,583
13,385,659 1,615,533 741,545
(11,468,747) (7,983,325) (2,218,657)
- ------------ ----------- -----------
$ 14,222,744 $ 6,827,235 $12,543,471
============ =========== ===========
740,880 893,632 1,119,133
881,215 105,384 58,435
(716,599) (548,857) (177,556)
- ------------ ----------- -----------
905,496 450,159 1,000,012
============ =========== ===========
</TABLE>
See Notes to Financial Statements.
35
<PAGE>
STATEMENT OF CASH FLOWS
U.S. GOVERNMENT FUND
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
CASH PROVIDED BY OPERATIONS:
Purchases of long-term portfolio securities....... $(136,977,373)
Net purchases of short-term investments........... (550,758)
Proceeds from sales of long-term portfolio
securities....................................... 149,898,698
Net payments for futures transactions............. (853,008)
Variation margin for futures transactions......... (128,284)
-------------
$11,389,275
-----------
CASH USED FOR FINANCING ACTIVITIES:
Proceeds from capital shares sold................. $ 2,064,940
Payments on capital shares redeemed............... (12,441,308)
-------------
Cash used for capital share transactions.......... (10,376,368)
Net proceeds on dollar roll transactions.......... (3,091,221)
Net payments for reverse repurchase agreements.... (2,255,625)
Interest paid on reverse repurchase agreements.... (400,422)
-------------
(16,123,636)
-----------
Net investment income............................. 3,942,935
Net change in receivables/payables related to
operations....................................... 342,620
-------------
4,285,555
-----------
Net decrease in cash............................... (448,806)
Cash at beginning of year.......................... 501,624
-----------
Cash at end of year................................ $ 52,818
===========
</TABLE>
See Notes to Financial Statements.
36
<PAGE>
FINANCIAL HIGHLIGHTS
GLOBAL MONEY FUND
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93*
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... 0.049 0.049 0.053 0.037 0.016
------- ------- ------- ------- -------
Total from investment
operations............. 0.049 0.049 0.053 0.037 0.016
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (0.049) (0.049) (0.053) (0.037) (0.016)
Distributions from net
realized capital
gains.................. -- (0.000)# -- -- --
------- ------- ------- ------- -------
Total distributions..... (0.049) (0.049) (0.053) (0.037) (0.016)
------- ------- ------- ------- -------
Net asset value, end of
year................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
TOTAL RETURN+ 4.99% 4.97% 5.46% 3.69% 1.59%
======= ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of year
(in 000's)............. $32,864 $23,266 $20,373 $ 6,159 $ 1,488
Ratio of operating
expenses to average net
assets................. 0.75% 0.58% 0.50% 0.49% 0.39%**
Ratio of net investment
income to average net
assets................. 4.88% 4.86% 5.30% 3.84% 2.54%**
Ratio of operating
expenses to average net
assets without credits
allowed by the
custodian.............. 0.75%(a) 0.58%(a) 0.51%(a) N/A N/A
Ratio of operating
expenses to average net
assets without fee
waivers, expenses
absorbed and/or credits
allowed by the
custodian.............. 0.85%(a) 0.88%(a) 1.01%(a) 1.25% 6.42%**
Net investment
income/(loss) per share
without fee waivers
and/or expenses
absorbed and/or credits
allowed by the
custodian.............. $ 0.048 (a) $ 0.046 (a) $ 0.048 (a) $ 0.030 $(0.022)
</TABLE>
- ------------
* The Fund commenced operations on May 10, 1993.
** Annualized.
+ Total return represents aggregate total return for the years indicated. The
total return would have been lower if certain fees had not been waived by the
investment advisor and administrator and if certain expenses had not been
absorbed by the investment advisor or without credits allowed by the
custodian.
# Amount represents less than $0.001 per share.
(a) The ratio and per share number includes custodian fees without credits
allowed by the custodian as required by amended disclosure requirement
effective September 1, 1995.
37
<PAGE>
FINANCIAL HIGHLIGHTS
SHORT TERM HIGH QUALITY BOND FUND
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/95 12/31/94*
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net asset value,
beginning of year...... $ 2.43 $ 2.49 $ 2.39 $ 2.50
------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... 0.14 0.15 0.12 0.08
Net realized and
unrealized gain/(loss)
on investments......... 0.00# (0.06) 0.10 (0.12)
------- ------- ------- -------
Total from investment
operations............. 0.14 0.09 0.22 (0.04)
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (0.14) (0.15) (0.12) (0.07)
------- ------- ------- -------
Total distributions..... (0.14) (0.15) (0.12) (0.07)
------- ------- ------- -------
Net asset value, end of
year................... $ 2.43 $ 2.43 $ 2.49 $ 2.39
======= ======= ======= =======
TOTAL RETURN+ 5.90% 3.74% 9.30% (1.62)%
======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of year
(in 000's)............. $11,944 $12,402 $12,365 $15,547
Ratio of operating
expenses to average net
assets................. 1.00% 0.98% 0.85% 0.77%**
Ratio of net investment
income to average net
assets................. 6.04% 6.08% 6.14% 5.63%**
Portfolio turnover
rate................... 43% 125% 188% 80%
Ratio of operating
expenses to average net
assets without credits
allowed by the
custodian.............. 1.00%(a) 0.98%(a) 0.87%(a) N/A
Ratio of operating
expenses to average net
assets without fee
waivers and/or credits
allowed by the
custodian.............. 1.03%(a) 1.06%(a) 1.01%(a) 1.10%**
Net investment income
per share without fee
waivers and/or credits
allowed by the
custodian.............. $ 0.14 (a) $ 0.15 (a) $ 0.11 (a) $ 0.07
</TABLE>
- ------------
* The Fund commenced operations on January 12, 1994.
** Annualized.
+ Total return represents aggregate total return for the years indicated. The
total return would have been lower if certain fees had not been waived by the
investment advisor and administrator or without credits allowed by the
custodian.
# Amount represents less than $0.01 per share.
(a) The ratio and per share number includes custodian fees without credits
allowed by the custodian as required by amended disclosure requirements
effective September 1, 1995.
38
<PAGE>
FINANCIAL HIGHLIGHTS
SHORT TERM GLOBAL GOVERNMENT FUND
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93*
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year...... $ 2.48 $ 2.50 $ 2.35 $ 2.49 $ 2.50
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... 0.27 0.14++ 0.07 0.05 0.01
Net realized and
unrealized gain/(loss)
on investments......... (0.17) 0.07 0.12 (0.10) (0.01)
------- ------- ------- ------- -------
Total from investment
operations............. 0.10 0.21 0.19 (0.05) 0.00
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (0.11) (0.15) (0.04) (0.05) (0.01)
Distributions in excess
of net investment
income................. -- (0.08) -- -- --
Distributions from
capital (Note 2)....... -- -- -- (0.04) --
------- ------- ------- ------- -------
Total distributions..... (0.11) (0.23) (0.04) (0.09) (0.01)
------- ------- ------- ------- -------
Net asset value, end of
year................... $ 2.47 $ 2.48 $ 2.50 $ 2.35 $ 2.49
======= ======= ======= ======= =======
TOTAL RETURN+ 4.59% 8.61% 8.09% (2.03)% 0.12%
======= ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of year
(in 000's)............. $18,050 $21,910 $23,805 $29,804 $19,147
Ratio of operating
expenses to average net
assets................. 1.28% 1.28% 1.25% 0.92% 0.52%**
Ratio of net investment
income to average net
assets................. 6.25% 5.67% 6.22% 5.84% 4.06%**
Portfolio turnover
rate................... 82% 77% 195% 286% 164%
Ratio of operating
expenses to average net
assets without credits
allowed by the
custodian.............. 1.28%(a) 1.28%(a) 1.25%(a) N/A N/A
Ratio of operating
expenses to average net
assets without fee
waivers, expenses
absorbed and/or credits
allowed by the
custodian.............. 1.28%(a) 1.28%(a) 1.26%(a) 1.28% 1.92%**
Net investment income
per share without fee
waivers and/or expenses
absorbed and/or credits
allowed by the
custodian.............. $ 0.27 (a) $ 0.14++(a) $ 0.07 (a) $ 0.05 $ 0.01
</TABLE>
- ------------
* The Fund commenced operations on May 12, 1993.
** Annualized.
+ Total return represents aggregate total return for the years indicated. The
total return would have been lower if certain fees had not been waived by the
investment advisor and administrator and if certain expenses had not been
absorbed by the investment advisor or without credits allowed by the
custodian.
++ Per share numbers have been calculated using the average shares method.
(a) The ratio and per share number includes custodian fees without credits
allowed by the custodian as required by amended disclosure requirements
effective September 1, 1995.
See Notes to Financial Statements.
39
<PAGE>
FINANCIAL HIGHLIGHTS
U.S. GOVERNMENT FUND
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93*
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year...... $ 9.77 $ 10.00 $ 9.13 $ 10.04 $ 10.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... 0.63 0.58 0.64 0.50 0.19
Net realized and
unrealized gain/(loss)
on investments......... 0.26 (0.23) 0.87## (0.90)## 0.04##
------- ------- ------- ------- -------
Total from investment
operations............. 0.89 0.35 1.51 (0.40) 0.23
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (0.62) (0.58) (0.64) (0.50) (0.19)
Distributions from net
realized gains......... -- -- -- (0.01) --
------- ------- ------- ------- -------
Total distributions..... (0.62) (0.58) (0.64) (0.51) (0.19)
------- ------- ------- ------- -------
Net asset value, end of
year................... $ 10.04 $ 9.77 $ 10.00 $ 9.13 $ 10.04
======= ======= ======= ======= =======
TOTAL RETURN+ 9.42% 3.69% 16.89% (4.04)% 2.27%
======= ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of year
(in 000's)............. $61,656 $66,563 $52,303 $43,582 $25,069
Ratio of operating
expenses to average net
assets................. 0.90% 0.94% 1.00% 0.85% 0.44%**
Ratio of net investment
income to average net
assets................. 6.28% 6.18% 6.68% 5.75% 5.37%**
Portfolio turnover
rate................... 194% 282% 273% 74% 131%
Ratio of operating
expenses to average net
assets without credits
allowed by the
custodian and/or
interest expense....... 0.91%(a) 0.94%(a) 1.02%(a) N/A N/A
Ratio of operating
expenses to average net
assets without fee
waivers, expenses
absorbed and/or credits
allowed by the
custodian.............. 0.91%(a) 0.94%(a) 1.03%(a) 1.02% 1.47%**
Ratio of operating
expenses to average net
assets including
interest expense....... 1.54% 1.08% 1.76% 0.86% 0.44%**
Net investment income
per share without fee
waivers and/or expenses
absorbed and/or credits
allowed by the
custodian.............. $ 0.63 (a) $ 0.58 (a) $ 0.63 (a) $ 0.49 $ 0.15
</TABLE>
- ------------
* The Fund commenced operations on May 6, 1993.
** Annualized.
+ Total return represents aggregate total return for the years indicated. The
total return would have been lower if certain fees had not been waived by the
investment advisor and administrator and if certain expenses had not been
absorbed by the investment advisor or without credits allowed by the
custodian.
## The amount shown may not accord with the change in the aggregate gains and
losses of portfolio securities due to timing of sales and redemptions of
Fund shares.
(a) The ratio and per share number includes custodian fees without credits
allowed by the custodian as required by amended disclosure requirements
effective September 1, 1995.
40
<PAGE>
FINANCIAL HIGHLIGHTS
CORPORATE INCOME FUND
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93*
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year...... $ 9.82 $ 10.48 $ 9.06 $ 10.34 $ 10.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... 0.70 0.68 0.70 0.47 0.23
Net realized and
unrealized gain/(loss)
on investments......... 0.37 (0.66) 1.50 (1.30) 0.33##
------- ------- ------- ------- -------
Total from investment
operations............. 1.07 0.02 2.20 (0.83) 0.56
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (0.70) (0.68) (0.78) (0.40) (0.22)
Distributions from net
realized gains......... -- -- -- (0.05) --
------- ------- ------- ------- -------
Total distributions..... (0.70) (0.68) (0.78) (0.45) (0.22)
------- ------- ------- ------- -------
Net asset value, end of
year................... $ 10.19 $ 9.82 $ 10.48 $ 9.06 $ 10.34
======= ======= ======= ======= =======
TOTAL RETURN+ 11.35% 0.43% 25.09% (8.13)% 5.62%
======= ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of year
(in 000's)............. $51,670 $59,883 $60,676 $54,705 $28,732
Ratio of operating
expenses to average net
assets................. 0.96% 0.98% 0.99% 0.93% 0.54%**
Ratio of net investment
income to average net
assets................. 6.95% 6.92% 7.00% 7.28% 6.37%**
Portfolio turnover
rate................... 36% 30% 42% 23% 26%
Ratio of operating
expenses to average net
assets without credits
allowed by the
custodian.............. 0.96%(a) 0.98%(a) 0.99%(a) N/A N/A
Ratio of operating
expenses to average net
assets without fee
waivers, expenses
absorbed and/or credits
allowed by the
custodian.............. 0.96%(a) 0.98%(a) 0.99%(a) 1.07% 1.50%**
Ratio of operating
expenses to average net
assets including
interest expense....... -- -- 0.99% -- --
Net investment income
per share without fee
waivers and/or expenses
absorbed and/or credits
allowed by the
custodian.............. $ 0.70 (a) $ 0.68 (a) $ 0.70 (a) $ 0.47 $ 0.19
</TABLE>
- ------------
* The Fund commenced operations on May 7, 1993.
** Annualized.
+ Total return represents aggregate total return for the years indicated. The
total return would have been lower if certain fees had not been waived by the
investment advisor and administrator and if certain expenses had not been
absorbed by the investment advisor or without credits allowed by the
custodian.
## The amount shown may not accord with the change in the aggregate gains and
losses of portfolio securities due to the timing of sales and redemptions of
Fund shares.
(a) The ratio and per share number includes custodian fees without credits
allowed by the custodian as required by amended disclosure requirements
effective September 1, 1995.
41
<PAGE>
FINANCIAL HIGHLIGHTS
GROWTH AND INCOME FUND
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/95 12/31/94*
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net asset value,
beginning of year...... $ 14.29 $ 12.83 $ 9.83 $ 10.00
-------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... 0.06 0.12++ 0.12 0.07
Net realized and
unrealized gain/(loss)
on investments......... 3.90 2.54 3.05 (0.24)
-------- ------- ------- -------
Total from investment
operations............. 3.96 2.66 3.17 (0.17)
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (0.10) (0.12) (0.07) --
Distributions from net
realized gains......... (1.23) (1.08) (0.10) --
-------- ------- ------- -------
Total distributions..... (1.33) (1.20) (0.17) --
-------- ------- ------- -------
Net asset value, end of
year................... $ 16.92 $ 14.29 $ 12.83 $ 9.83
======== ======= ======= =======
TOTAL RETURN+ 28.50% 21.81% 32.41% (1.70)%
======== ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of year
(in 000's)............. $101,794 $62,445 $46,362 $24,905
Ratio of operating
expenses to average net
assets................. 1.08% 1.13% 1.06% 1.20%**
Ratio of net investment
income to average net
assets................. 0.55% 0.93% 1.31% 1.63%**
Portfolio turnover
rate................... 109% 83% 70% 44%
Ratio of operating
expenses to average net
assets without credits
allowed by the
custodian.............. 1.08%(a) 1.13%(a) 1.06%(a) N/A
Ratio of operating
expenses to average net
assets without fee
waivers and/or credits
allowed by the
custodian.............. 1.08%(a) 1.13%(a) 1.16%(a) 1.55%**
Net investment income
per share without fee
waivers and/or credits
allowed by the
custodian.............. $ 0.06 (a) $ 0.12++(a) $ 0.11 (a) $ 0.05
Average commission rate
paid (b)............... $ 0.0460 $0.0533 N/A N/A
</TABLE>
- ------------
* The Fund commenced operations on January 12, 1994.
** Annualized.
+ Total return represents aggregate total return for the years indicated. The
total return would have been lower if certain fees had not been waived by the
investment advisor and administrator or without credits allowed by the
custodian.
++ Per share numbers have been calculated using the average shares method.
(a) The ratio and per share number includes custodian fees without credits
allowed by the custodian as required by amended disclosure requirements
effective September 1, 1995.
(b) Average commission rate paid per share of securities purchased and sold by
the Fund as required by amended disclosure requirements effective for
fiscal years beginning on or after September 1, 1995.
42
<PAGE>
FINANCIAL HIGHLIGHTS
GROWTH FUND
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
12/31//97 12/31/96 12/31/95 12/31/94 12/31/93*
--------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year...... $ 16.01 $ 15.72 $ 11.48 $ 11.19 $ 10.00
-------- -------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... 0.07 0.00++# 0.04++ 0.04 0.02
Net realized and
unrealized gain on
investments............ 1.60 2.42 4.24 0.26 1.17
-------- -------- ------- ------- -------
Total from investment
operations............. 1.67 2.42 4.28 0.30 1.19
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (0.02) -- (0.04) (0.01) --
Distributions from net
realized gains......... (2.25) (2.13) (0.00)# -- --
-------- -------- ------- ------- -------
Total distributions..... (2.27) (2.13) (0.04) (0.01) --
-------- -------- ------- ------- -------
Net asset value, end of
year................... $ 15.41 $ 16.01 $ 15.72 $ 11.48 $ 11.19
======== ======== ======= ======= =======
TOTAL RETURN+ 11.24% 16.15% 37.34% 2.69% 11.90%
======== ======== ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of year
(in 000's)............. $121,766 $116,064 $99,699 $62,763 $22,795
Ratio of operating
expenses to average net
assets................. 1.18% 1.22% 1.24% 1.26% 0.78%**
Ratio of net investment
income to average net
assets................. 0.07% 0.01% 0.29% 0.74% 0.70%**
Portfolio turnover
rate................... 158% 169% 187% 257% 86%
Ratio of operating
expenses to average net
assets without credits
allowed by the
custodian.............. 1.19%(a) 1.22%(a) 1.24%(a) N/A N/A
Ratio of operating
expenses to average net
assets without fee
waivers, expenses
absorbed and/or credits
allowed by the
custodian.............. 1.19%(a) 1.22%(a) 1.24%(a) 1.32% 1.92%**
Net investment
income/(loss) per share
without fee waivers
and/or expenses
absorbed and/or credits
allowed by the
custodian.............. $ 0.07 (a) $ 0.00++#(a) $ 0.04++(a) $ 0.04 $ (0.01)
Average commission rate
paid (b)............... $ 0.0070 $ 0.0460 N/A N/A N/A
</TABLE>
- ------------
* The Fund commenced operations on May 7, 1993.
** Annualized.
+ Total return represents aggregate total return for the years indicated. The
total return would have been lower if certain fees had not been waived by the
investment advisor and administrator and if certain expenses had not been
absorbed by the investment advisor or without credits allowed by the
custodian.
++ Per share numbers have been calculated using the average shares method.
# Amount represents less than $0.01 per share.
(a) The ratio and per share number includes custodian fees without credits
allowed by the custodian as required by amended disclosure requirements
effective September 1, 1995.
(b) Average commission rate paid per share of securities purchased and sold by
the Fund as required by amended disclosure requirements effective for
fiscal years beginning on or after September 1, 1995.
43
<PAGE>
FINANCIAL HIGHLIGHTS
EMERGING GROWTH FUND
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/95 12/31/94*
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net asset value,
beginning of year...... $ 14.70 $ 13.74 $ 10.53 $ 10.00
------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment
income/(loss).......... (0.03) (0.12)++ (0.01) 0.06
Net realized and
unrealized gain on
investments............ 1.80 1.52 3.26 0.47
------- ------- ------- -------
Total from investment
operations............. 1.77 1.40 3.25 0.53
LESS DISTRIBUTIONS:
Dividends from net
investment income...... -- -- (0.04) --
Distributions from net
realized gains......... (0.84) (0.44) (0.00)# --
------- ------- ------- -------
Total distributions..... (0.84) (0.44) (0.04) --
------- ------- ------- -------
Net asset value, end of
year................... $ 15.63 $ 14.70 $ 13.74 $ 10.53
======= ======= ======= =======
TOTAL RETURN+ 12.59% 10.04% 30.99% 5.30%
======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of year
(in 000's)............. $45,362 $55,887 $46,058 $19,885
Ratio of operating
expenses to average net
assets................. 1.20% 1.20% 1.20% 1.23%**
Ratio of net investment
income/(loss) to
average net assets..... (0.58)% (0.82)% (0.35)% 1.03%**
Portfolio turnover
rate................... 116% 97% 135% 192%
Ratio of operating
expenses to average net
assets without credits
allowed by the
custodian.............. 1.21%(a) 1.21%(a) 1.21%(a) N/A
Ratio of operating
expenses to average net
assets without fee
waivers and/or credits
allowed by the
custodian.............. 1.21%(a) 1.21%(a) 1.28%(a) 1.38%**
Net investment
income/(loss) per share
without fee waivers
and/or credits allowed
by the custodian....... $ (0.03) (a) $ (0.12)++(a) $ (0.01) (a) $ 0.05
Average commission rate
paid (b)............... $0.0200 $0.0319 N/A N/A
</TABLE>
- ------------
* The Fund commenced operations on January 12, 1994.
** Annualized.
+ Total return represents aggregate total return for the years indicated. The
total return would have been lower if certain fees had not been waived by the
investment advisor and administrator or without credits allowed by the
custodian.
++ Per share numbers have been calculated using the average shares method.
# Amount represents less than $0.01 per share.
(a) The ratio and per share number includes custodian fees without credits
allowed by the custodian as required by amended disclosure requirements
effective September 1, 1995.
(b) Average commission rate paid per share of securities purchased and sold by
the Fund as required by amended disclosure requirements effective for
fiscal years beginning on or after September 1, 1995.
44
<PAGE>
FINANCIAL HIGHLIGHTS
INTERNATIONAL GROWTH FUND
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93*
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year...... $ 13.02 $ 12.11 $ 11.47 $ 11.31 $ 10.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... 0.71 0.07++ 0.18 0.01 0.02
Net realized and
unrealized gain/(loss)
on investments......... (0.97) 1.01 0.58 0.19## 1.29
------- ------- ------- ------- -------
Total from investment
operations............. (0.26) 1.08 0.76 0.20 1.31
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (0.26) (0.17) (0.00)# (0.03) --
Distributions from net
realized gains......... (0.24) -- (0.12) (0.01) --
------- ------- ------- ------- -------
Total distributions..... (0.50) (0.17) (0.12) (0.04) --
------- ------- ------- ------- -------
Net asset value, end of
year................... $ 12.26 $ 13.02 $ 12.11 $ 11.47 $ 11.31
======= ======= ======= ======= =======
TOTAL RETURN+ (2.64)% 9.04% 6.61% 1.88% 13.10%
======= ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of year
(in 000's)............. $49,636 $62,355 $45,909 $46,529 $10,638
Ratio of operating
expenses to average net
assets................. 1.35% 1.39% 1.47% 1.34% 0.83%**
Ratio of net investment
income to average net
assets................. 0.52% 0.56% 0.91% 0.83% 0.61%**
Portfolio turnover
rate................... 84% 98% 72% 51% 24%
Ratio of operating
expenses to average net
assets without credits
allowed by the
custodian.............. 1.36%(a) 1.39%(a) 1.47%(a) N/A N/A
Ratio of operating
expenses to average net
assets without fee
waivers,expenses
absorbed and/or credits
allowed by the
custodian.............. 1.36%(a) 1.39%(a) 1.48%(a) 1.50% 2.85%**
Net investment
income/(loss) per share
without fee waivers
and/or expenses
absorbed and/or credits
allowed by the
custodian.............. $ 0.71 (a) $ 0.07++(a) $ 0.17 (a) $ 0.01 $ (0.06)
Average commission rate
paid (b)............... $0.0100 $0.0253 N/A N/A N/A
</TABLE>
- ------------
* The Fund commenced operations on May 7, 1993.
** Annualized.
+ Total return represents aggregate total return for the years indicated. The
total return would have been lower if certain fees had not been waived by the
investment advisor and administrator and if certain expenses had not been
absorbed by the investment advisor or without credits allowed by the
custodian.
++ Per share numbers have been calculated using the average shares method.
# Amount represents less than $0.01 per share.
## The amount shown may not accord with the change in the aggregate gains and
losses of portfolio securities due to timing of sales and redemptions of
Fund shares.
(a) The ratio and per share number includes custodian fees without credits
allowed by the custodian as required by amended disclosure requirements
effective September 1, 1995.
(b) Average commission rate paid per share of securities purchased and sold by
the Fund as required by amended disclosure requirements effective for
fiscal years beginning on or after September 1, 1995.
45
<PAGE>
FINANCIAL HIGHLIGHTS
CAPITAL GROWTH PORTFOLIO
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
12/31/97*
---------
<S> <C>
Net asset value, beginning of period............................... $10.00
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............................................. 0.10
Net realized and unrealized gain on investments.................... 0.60#
------
Total from investment operations................................... 0.70
LESS DISTRIBUTIONS:
Dividends from net investment income............................... --
Distributions from net realized gains.............................. --
------
Total distributions................................................ --
------
Net asset value, end of period..................................... $10.70
======
TOTAL RETURN+ 7.00%
======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............................... $ 591
Ratio of operating expenses to average net assets++................ 0.35%**
Ratio of net investment income to average net assets............... 0.51%**
Portfolio turnover rate............................................ 11%
Ratio of operating expenses to average net assets without credits
allowed by the custodian++........................................ 0.43%**
Ratio of operating expenses to average net assets without fee
waivers and credits allowed by the custodian++.................... 15.54%**
Net investment loss per share without fee waivers and credits
allowed by the custodian.......................................... $(2.82)
</TABLE>
- ------------
* The Portfolio commenced operations on June 3, 1997.
** Annualized.
+ Total return represents aggregate total return for the period indicated. The
total return would have been lower if certain fees had not been waived by the
administrator or without credits allowed by the custodian.
++ The Portfolio will indirectly bear its prorated share of expenses of the
Underlying Funds.
# The amount shown may not accord with the change in the aggregate gains and
losses of portfolio securities due to timing of sales and redemptions of Fund
shares.
46
<PAGE>
FINANCIAL HIGHLIGHTS
GROWTH PORTFOLIO
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
12/31/97*
---------
<S> <C>
Net asset value, beginning of period............................... $10.00
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............................................. 0.07
Net realized and unrealized gain on investments.................... 0.42#
------
Total from investment operations................................... 0.49
LESS DISTRIBUTIONS:
Dividends from net investment income............................... --
Distributions from net realized gains.............................. --
------
Total distributions................................................ --
------
Net asset value, end of period..................................... $10.49
======
TOTAL RETURN+ 4.90%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............................... $1,374
Ratio of operating expenses to average net assets++................ 0.35%**
Ratio of net investment income to average net assets............... 1.24%**
Portfolio turnover rate............................................ 42%
Ratio of operating expenses to average net assets without credits
allowed by the custodian++........................................ 0.40%**
Ratio of operating expenses to average net assets without fee
waivers and credits allowed by the custodian++.................... 6.67%**
Net investment income per share without fee waivers and credits
allowed by the custodian.......................................... $(0.30)
</TABLE>
- ------------
* The Portfolio commenced operations on June 3, 1997.
** Annualized.
+ Total return represents aggregate total return for the period indicated. The
total return would have been lower if certain fees had not been waived by the
administrator or without credits allowed by the custodian.
++ The Portfolio will indirectly bear its prorated share of expenses of the
Underlying Funds.
# The amount shown may not accord with the change in the aggregate gains and
losses of portfolio securities due to timing of sales and redemptions of Fund
shares.
47
<PAGE>
FINANCIAL HIGHLIGHTS
BALANCED PORTFOLIO
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
12/31/97*
---------
<S> <C>
Net asset value, beginning of period............................... $10.00
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............................................. 0.13
Net realized and unrealized gain on investments.................... 0.34#
------
Total from investment operations................................... 0.47
LESS DISTRIBUTIONS:
Dividends from net investment income............................... --
Distributions from net realized gains.............................. --
------
Total distributions................................................ --
------
Net asset value, end of period..................................... $10.47
======
TOTAL RETURN+ 4.70%
======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............................... $2,354
Ratio of operating expenses to average net assets++................ 0.35%**
Ratio of net investment income to average net assets............... 2.34%**
Portfolio turnover rate............................................ 15%
Ratio of operating expenses to average net assets without credits
allowed by the custodian++........................................ 0.37%**
Ratio of operating expenses to average net assets without fee
waivers and credits allowed by the custodian++.................... 3.97%**
Net investment income per share without fee waivers and credits
allowed by the custodian.......................................... $(0.07)
</TABLE>
- ------------
* The Portfolio commenced operations on June 3, 1997.
** Annualized.
+ Total return represents aggregate total return for the period indicated. The
total return would have been lower if certain fees had not been waived by the
administrator or without credits allowed by the custodian.
++ The Portfolio will indirectly bear its prorated share of expenses of the
Underlying Funds.
# The amount shown may not accord with the change in the aggregate gains and
losses of portfolio securities due to timing of sales and redemptions of Fund
shares.
48
<PAGE>
FINANCIAL HIGHLIGHTS
VALUE PORTFOLIO
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
12/31/97*
---------
<S> <C>
Net asset value, beginning of period.............................. $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................. 0.04
Net realized and unrealized gain on investments................... 0.19
-------
Total from investment operations.................................. 0.23
LESS DISTRIBUTIONS:
Dividends from net investment income.............................. --
Distributions from net realized gains............................. --
-------
Total distributions............................................... --
-------
Net asset value, end of period.................................... $ 10.23
=======
TOTAL RETURN+ 2.30%
=======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's).............................. $ 100
Ratio of operating expenses to average net assets++............... 0.34%**
Ratio of net investment income to average net assets.............. 7.04%**
Portfolio turnover rate........................................... 5%
Ratio of operating expenses to average net assets without credits
allowed by the custodian++....................................... 0.49%**
Ratio of operating expenses to average net assets without fee
waivers and credits allowed by the custodian++................... 116.19%**
Net investment loss per share without fee waivers and credits
allowed by the custodian......................................... $ (0.66)
</TABLE>
- ------------
* The Portfolio commenced operations on September 9, 1997.
** Annualized.
+ Total return represents aggregate total return for the period indicated. The
total return would have been lower if certain fees had not been waived by the
administrator or without credits allowed by the custodian.
++ The Portfolio will indirectly bear its prorated share of expenses of the
Underlying Funds.
49
<PAGE>
FINANCIAL HIGHLIGHTS
INCOME PORTFOLIO
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
12/31/97
---------
<S> <C>
Net Asset Value, beginning of period.............................. $ 10.00
---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................. 0.00
Net realized and unrealized gain/(loss) on investments............ 0.00
---------
Total from investment operations.................................. 0.00
LESS DISTRIBUTIONS:
Dividends from net investment income.............................. 0.00
Distributions in excess of net investment income.................. 0.00
Total distributions............................................... 0.00
---------
Net Asset Value, end of period.................................... $ 10.00(a)
=========
TOTAL RETURN+..................................................... 0.00%
=========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's).............................. $ 0
Ratio of operating expenses to average net assets................. 0.35%**
Ratio of net investment income to average net assets.............. 0.00%**
Portfolio turnover rate........................................... 99%
Ratio of operating expenses to average net assets without fees
reduced by credits allowed by the custodian++.................... 0.00%**
Ratio of operating expenses to average net assets without waivers,
expenses reimbursed and/or fees reduced by credits allowed by the
custodian++...................................................... 7,567.04%**
Net investment income per share without waivers, expenses
reimbursed and/or fees reduced by credits allowed by the
custodian........................................................ $ 0.00
</TABLE>
- ------------
* The Fund commenced operations on October 22, 1997.
** Annualized.
+ Total return represents aggregate total return for the period indicated. The
total return would have been lower if certain fees had not been waived by the
administrator or without credits allowed by the custodian.
++ The Portfolio will indirectly bear its prorated share of expenses of the
Underlying Funds.
(a) Represents offering share price.
50
<PAGE>
PORTFOLIO OF INVESTMENTS
GLOBAL MONEY FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 2)
--------- --------
<C> <S> <C>
U.S. GOVERNMENT AGENCY DISCOUNT NOTE -- 50.9%
(Cost $16,736,327)
$16,739,000 Federal Home Loan Bank (FHLB),
5.750% due 01/02/1998++............................. $16,736,327
-----------
MEDIUM-TERM NOTES -- 23.8%
1,000,000 Bank Boston,
6.140% due 10/06/1998+.............................. 999,591
1,000,000 Bayerische Landesbank,
5.870% due 06/26/1998+.............................. 999,625
1,000,000 CoreStates Bank,
6.009% due 03/16/1998+.............................. 1,000,000
850,000 Federal National Mortgage Association (FNMA),
5.480% due 01/02/1998............................... 849,997
1,000,000 KFW International Finance,
5.836% due 02/12/1998++............................. 993,350
1,000,000 Keybank,
6.120% due 07/31/1998+.............................. 999,605
1,000,000 Pfizer Inc.,
6.068% due 01/28/1998++............................. 995,538
1,000,000 Southern Company,
5.995% due 02/23/1998++............................. 991,608
-----------
Total Medium-Term Notes
(Cost $7,829,314)................................... 7,829,314
-----------
COMMERCIAL PAPER -- (DOMESTIC) -- 9.8%
1,000,000 Abbey National,
5.899% due 03/10/1998++............................. 989,167
1,250,000 Associates Corporation of North America,
5.883% due 07/15/1998++............................. 1,236,494
1,000,000 Bayer Company,
5.895% due 02/24/1998++............................. 991,375
-----------
Total Commercial Paper--(Domestic)
(Cost $3,217,036)................................... 3,217,036
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 2)
--------- --------
<C> <S> <C>
CERTIFICATES OF DEPOSIT -- (DOMESTIC) -- 7.7%
$ 1,000,000 Canadian Imperial Bank of Commerce,
5.800% due 03/18/1998............................... $ 1,000,000
500,000 Corestate Bank,
5.598% due 04/21/1998............................... 500,000
1,000,000 Westdeutsche Landesbank,
5.900% due 01/12/1998............................... 1,000,000
-----------
Total Certificates of Deposit--(Domestic)
(Cost $2,500,000)................................... 2,500,000
-----------
CERTIFICATES OF DEPOSIT -- (YANKEE) -- 7.6%
1,000,000 Bank of Tokyo,
6.500% due 03/04/1998............................... 1,000,000
500,000 Deutsche Bank,
5.700% due 02/06/1998............................... 499,981
1,000,000 Rabobank Nederland,
5.990% due 03/24/1998............................... 999,893
-----------
Total Certificates of Deposit--(Yankee)
(Cost $2,499,874)................................... 2,499,874
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (COST $32,782,551*)....................... 99.8% 32,782,551
OTHER ASSETS AND LIABILITIES (NET).......................... 0.2 81,863
----- -----------
NET ASSETS.................................................. 100.0% $32,864,414
===== ===========
</TABLE>
- ------------
* Aggregate cost for federal tax purposes.
+ Variable rate security. The interest rate shown reflects the rate currently
in effect.
++ Rate represents annualized yield at date of purchase.
See Notes to Financial Statements.
51
<PAGE>
PORTFOLIO OF INVESTMENTS
SHORT TERM HIGH QUALITY BOND FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 2)
--------- --------
<C> <S> <C>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES -- 30.4%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) --
16.5%
$ 90,466 #121425, Seasoned,
11.000% due 04/15/2015**............................ $ 103,003
92,334 #140834, Seasoned,
11.000% due 12/15/2015**............................ 105,348
39,884 #144538, Seasoned,
11.000% due 12/15/2015**............................ 45,506
101,037 #151670, Seasoned,
11.000% due 12/15/2015**............................ 115,039
36,610 #254937, Seasoned,
10.000% due 06/15/2019**............................ 40,654
86,529 #257814, Seasoned,
10.000% due 09/15/2018.............................. 96,282
81,563 #293511, Seasoned,
10.000% due 07/15/2020**............................ 90,950
306,049 #400224, Seasoned,
8.000% due 06/15/2009**............................. 317,620
353,151 #453963,
8.000% due 08/15/2012**............................. 366,062
205,099 #780081, Seasoned,
10.000% due 02/15/2025**............................ 228,083
52,492 #780121, Seasoned,
10.000% due 04/15/2025**............................ 58,594
49,752 #780141, Seasoned,
10.000% due 12/15/2020**............................ 55,422
323,895 #780317, Seasoned,
9.000% due 12/15/2020**............................. 351,727
-----------
Total GNMAs (Cost $1,930,790)........................ 1,974,290
-----------
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES (ARM) --
5.9%
125,498 Federal Home Loan Mortgage Corporation (FHLMC),
#845988,
7.897% due 11/01/2021+.............................. 131,400
Federal National Mortgage Association (FNMA):
229,827 #82247,
6.125% due 04/01/2019+.............................. 229,756
52,766 #124571,
7.641% due 11/01/2022+.............................. 54,341
65,945 #152205,
7.460% due 01/01/2019+.............................. 68,089
217,491 #313257,
6.174% due 11/01/2035+.............................. 217,424
-----------
Total ARMs (Cost $694,026)........................... 701,010
-----------
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) --
4.3%
261,164 5 Year Balloon, GOLD, #G50135,
5.500% due 03/01/1999............................... 259,856
234,145 #A01226, Seasoned,
9.500% due 08/01/2016............................... 253,479
-----------
Total FHLMCs (Cost $514,359)......................... 513,335
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 2)
--------- --------
<C> <S> <C>
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) --
3.7% (Cost $438,724)
$ 417,987 #313641, Seasoned, 8.500% due 11/01/2017........... $ 440,626
------------
Total U.S. Government Agency Mortgage-Backed
Securities (Cost $3,577,899)...................... 3,629,261
------------
CORPORATE NOTES -- 20.4%
100,000 Colonial Realty, Sr. Note,
7.500% due 07/15/2001............................. 103,500
100,000 ERP Operating LP,
8.500% due 05/15/1999++........................... 102,804
250,000 Federated Department Stores,
6.790% due 07/15/2027............................. 256,693
300,000 GMAC, Notes,
8.625% due 06/15/1999............................. 310,182
200,000 Lockheed Martin Corporation,
6.850% due 05/15/2001............................. 203,500
Lyondell Petrochemical Company:
100,000 9.125% due 03/15/2002.............................. 109,725
150,000 9.750% due 09/04/2003++............................ 170,437
250,000 Oasis Residential Inc.,
6.750% due 11/15/2001............................. 251,562
250,000 Southern National Corporation, Sub. Note,
7.050% due 05/23/2003............................. 257,407
300,000 Sun Communities Inc., Sr. Note,
7.625% due 05/01/2003**........................... 313,725
100,000 Susa Partnership LP,
7.125% due 11/01/2003............................. 102,125
Taubman Realty Corporation:
100,000 8.000% due 06/15/1999.............................. 102,240
100,000 MTN,
7.500% due 06/15/2002.............................. 103,076
50,000 Time Warner Inc.,
7.950% due 02/01/2000............................. 51,537
------------
Total Corporate Notes (Cost $2,372,518)............ 2,438,513
------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 17.6%
250,000 Carco Auto Loan Master Trust, 1997-1-A, 6.689% due
08/15/2004........................................ 251,545
Countrywide Funding Corporation:
27,038 1994-1-A3,
6.250% due 03/25/2024.............................. 26,616
500,000 1994-2-A8,
6.500% due 02/25/2009.............................. 498,905
158,071 Federal Home Loan Mortgage Corporation (FHLMC),
P/O, REMIC, #1719-C,
Zero coupon due 04/15/1999........................ 151,056
97,331 General Electric Capital Mortgage Association,
1994-27-A1,
6.500% due 07/25/2024............................. 97,037
264,789 Norwest Asset Securities Corporation,
1996-5-A13,
7.500% due 11/25/2026............................. 268,843
</TABLE>
See Notes to Financial Statements.
52
<PAGE>
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
SHORT TERM HIGH QUALITY BOND FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 2)
--------- --------
<C> <S> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- (CONTINUED)
Prudential Home Mortgage Securities:
$ 22,122 1992-47,
7.500% due 01/25/2023................................ $ 22,052
169,527 1993-43-A1,
5.400% due 10/25/2023................................ 167,513
350,000 Residential Asset Securitization Trust,
1997-A6-A5,
7.250% due 09/25/2012............................... 353,063
230,542 Residential Funding Mortgage Securitization, 1997-
S13-A8,
7.100% due 09/25/2027............................... 231,406
37,583 Ryland Acceptance Corporation,
8.950% due 08/20/2019............................... 38,053
-----------
Total Collateralized Mortgage Obligations
(Cost $2,096,235)................................... 2,106,089
-----------
ASSET-BACKED SECURITIES -- 15.3%
20,178 Advanta Mortgage Loan Trust, 1996-2-A1, 6.740% due
11/25/2009.......................................... 20,419
Green Tree Financial Corporation:
250,000 1995-1-B2,
9.200% due 06/15/2025................................ 267,967
200,000 1995-6-B1,
7.700% due 09/15/2026................................ 204,312
100,000 Green Tree Home Equity Loan Trust,
1997-B-A5,
7.150% due 04/15/2027............................... 101,281
165,000 Green Tree Home Improvement, 1995-DB2, 7.450% due
09/15/2025.......................................... 163,969
59,999 Green Tree Recreational, Equipment & Consumer, 1996-
A, Class A1,
5.550% due 02/15/2018............................... 59,750
100,000 H & T Master Trust,
8.430% due 08/15/2002++............................. 100,422
Merrill Lynch Mortgage Investors, Inc.:
18,683 1991-B-A,
9.200% due 04/15/2011................................ 18,771
50,399 1991-I-A,
7.650% due 01/15/2012................................ 50,792
123,842 1992-B-A4,
7.850% due 04/15/2012................................ 124,500
337,309 Mid-State Trust, Series 4, Class A,
8.330% due 04/01/2030............................... 364,317
69,767 Sec Pac Manufacturing Housing, 95-1, Class A1,
6.500% due 04/10/2020............................... 69,918
25,963 The Money Store, Inc. 1996-B-A1,
6.720% due 02/15/2010............................... 26,181
249,654 World Omni Automobile Lease Securitization,
1996-B,
6.850% due 11/15/2002++............................. 250,981
-----------
Total Asset-Backed Securities
(Cost $1,793,669)................................... 1,823,580
-----------
U.S. TREASURY NOTE -- 5.1% (Cost $608,027)
600,000 6.250% due 08/31/2000................................ 612,282
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 2)
--------- --------
<C> <S> <C>
COMMERCIAL PAPER -- 10.7%
$ 576,000 Ford Motor Company,
6.250% due 01/02/1998................................. $ 576,000
700,000 General Electric Capital Corporation,
6.650% due 01/02/1998................................. 700,000
-----------
Total Commercial Paper (Cost $1,276,000)............... 1,276,000
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (COST $11,724,348*)....................... 99.5% 11,885,725
OTHER ASSETS AND LIABILITIES (NET).......................... 0.5 58,662
----- -----------
NET ASSETS.................................................. 100.0% $11,944,387
===== ===========
</TABLE>
- ------------
* Aggregate cost for federal tax purposes is $11,724,481.
** A portion or all of this security is pledged as collateral for futures
contracts.
+ Variable rate security. The interest rate shown reflects the rate currently
in effect.
++ Security exempt from registration under Rule 144A of the Securities Act of
1933. This security may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
<TABLE>
<CAPTION>
NUMBER OF UNREALIZED
CONTRACTS (DEPRECIATION)
--------- --------------
<C> <S> <C>
FUTURES CONTRACTS -- SHORT POSITION
17 U.S. Treasury Note, Five Year,
March 1998......................................... $(6,501)
========
</TABLE>
GLOSSARY OF TERMS
BALLOON--Five- and seven-year
mortgages with larger
dollar amounts of
payments falling due in
the later years of the
obligation
GOLD-- Payments are on
accelerated 45-day
payment cycle instead of
75-day payment cycle
MTN-- Medium Term Note
P/O-- Principal Only
REMIC--Real Estate Mortgage
Investment Conduit
See Notes to Financial Statements.
53
<PAGE>
PORTFOLIO OF INVESTMENTS
SHORT TERM GLOBAL GOVERNMENT FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 2)
--------- --------
<C> <S> <C>
FOREIGN BONDS AND NOTES -- 51.3%
GREAT BRITAIN POUND STERLING NOTES -- 16.2%
United Kingdom Treasury Notes:
GBP 560,000 6.000% due 08/10/1999......................... $ 909,943
465,000 13.000% due 07/14/2000........................ 871,504
685,000 7.000% due 06/07/2002......................... 1,149,267
-----------
Total Great British Pound Sterling Bonds (Cost
$2,903,958).................................. 2,930,714
-----------
NEW ZEALAND DOLLAR BOND -- 7.9% (Cost $1,721,038)
NZD 2,505,000 Housing Corporation of New
Zealand, Global Note,
7.250% due 06/20/2002........................ 1,423,256
-----------
ITALIAN LIRA BOND -- 6.2% (Cost $1,189,989)
Italian Treasury Bond,
ITL 1,935,000,000 8.500% due 01/01/1999......................... 1,126,653
-----------
SWEDISH KRONA BONDS -- 6.2%
SEK 3,700,000 Kingdom of Sweden,
11.000% due 01/21/1999........................ 493,346
4,500,000 Statens Bostadfinansier S.B. A.B., Series 114,
10.250% due 05/05/2000....................... 625,598
-----------
Total Swedish Krona Bonds
(Cost $1,146,639)............................ 1,118,944
-----------
CANADIAN DOLLAR BONDS -- 5.0%
CAD 860,000 Government of Canada,
6.500% due 08/01/1999**...................... 613,293
400,000 Royal Bank of Canada,
10.900% due 01/15/1999....................... 295,721
-----------
Total Canadian Dollar Bonds
(Cost $948,190).............................. 909,014
-----------
IRISH POUND BOND -- 3.7% (Cost $726,978)
IEP 465,000 Republic of Ireland,
6.250% due 04/01/1999......................... 670,438
-----------
SPANISH PESETA BONDS -- 3.6%
Government of Spain:
ESP 59,000,000 11.450% due 08/30/1998........................ 403,647
35,000,000 10.250% due 11/30/1998........................ 240,968
-----------
Total Spanish Peseta Bonds
(Cost $780,925).............................. 644,615
-----------
ARGENTINIAN PESO BONDS -- 2.5%
ARP 250,000 Argentina Treasury Bill, Letras Del Tesoro,
0% due 03/20/1998............................. 245,125
208,000 Republic of Argentina,
8.939% due 09/01/2000+........................ 197,820
-----------
Total Argentinan Peso Bonds
(Cost $455,580).............................. 442,945
-----------
Total Foreign Bonds and Notes
(Cost $9,873,297)............................ 9,266,579
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 2)
--------- --------
<C> <S> <C>
U.S. TREASURY NOTES -- 11.4%
$ 500,000 5.125% due 03/31/1998................................ $ 499,760
1,550,000 6.375% due 01/15/1999................................ 1,561,020
-----------
Total U.S. Treasury Notes
(Cost $2,059,878)................................... 2,060,780
-----------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES -- 10.4%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) -- 7.7%
32,291 Pass-through certificates,
10.000% due 12/15/2017-01/15/2018.................... 35,910
181,056 Pass-through certificates,
10.000% due 02/15/2018-03/15/2018.................... 201,346
332,090 Pass-through certificates,
10.000% due 09/15/2018-10/15/2018.................... 369,524
264,582 Pass-through certificates,
10.000% due 02/15/2019-03/15/2019.................... 294,231
143,271 Pass-through certificates,
10.000% due 05/15/2020-06/15/2020.................... 159,600
290,854 Pass-through certificates,
10.000% due 06/15/2020-07/15/2020.................... 324,003
-----------
Total Government National Mortgage Association Notes
(Cost $1,347,186)................................... 1,384,614
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 1.2%
(Cost $215,542)
211,554 #141461,
7.784% due 11/01/2021+.............................. 218,827
-----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II (GNMA II) -- 1.0% (Cost
$181,914)
173,030 Pass-through certificates,
9.000% due 04/20/2025................................ 184,708
-----------
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) -- 0.5% (Cost $87,304)
86,835 #1223
7.250% due 07/15/2020............................... 87,024
-----------
Total U.S. Government Agency Mortgage-Backed
Securities (Cost $1,831,946)........................ 1,875,173
-----------
ASSET-BACKED SECURITIES -- 9.4%
1,200,000 BankBoston RV Asset Backed Trust,
1997-1-A4,
6.330% due 04/15/2004............................... 1,201,875
500,000 The Money Store Home Equity Trust,
1997-C-AF,
6.307% due 08/15/2012............................... 499,687
-----------
Total Asset-Backed Securities
(Cost $1,699,823)................................... 1,701,562
-----------
COMMERCIAL PAPER -- 8.1%
558,000 Ford Motor Company,
6.250% due 01/02/1998............................... 558,000
900,000 General Electric Capital Corporation,
6.650% due 01/02/1998............................... 900,000
-----------
Total Commercial Paper (Cost $1,458,000)............. 1,458,000
-----------
</TABLE>
See Notes to Financial Statements.
54
<PAGE>
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
SHORT TERM GLOBAL GOVERNMENT FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 2)
--------- --------
<C> <S> <C>
CORPORATE NOTES -- 2.3%
$ 100,000 Nabisco Inc., Industrial Note, 144A, 6.300%
due 08/26/1999.............................. $ 100,005
300,000 Sun Communities Inc., Sr. Note, 7.625% due
05/01/2003.................................. 313,725
-----------
Total Corporate Notes
(Cost $399,216)............................. 413,730
-----------
TIME DEPOSITS -- 1.6%
ZAR 673,718 Banker Trust & Company,
15.660% due 01/12/1998...................... 138,440
TRL 23,106,250,000 J.P. Morgan & Company,
81.000% due 01/12/1998...................... 111,490
TRL 9,192,500,000 J.P. Morgan & Company,
84.000% due 02/06/1998...................... 44,355
-----------
Total Time Deposits
(Cost $313,964)............................. 294,285
-----------
INDEXED NOTE -- 1.5% (Cost $270,000)
270,000 Chase Manhattan,
(Value is directly linked to the Hungarian
Forint),
19.189% due 02/06/1998....................... 265,842
-----------
</TABLE>
<TABLE>
<CAPTION>
EXPIRATION STRIKE
DATE PRICE
---------- ------
<C> <S> <C> <C> <C>
PUT OPTIONS PURCHASED ON FOREIGN CURRENCY -- 0.0%#
GBP 550,000 Great British Pound
Sterling Put........... 01/20/1998 1.609 2,362
-----------
Total Put Options Purchased on Foreign
Currency (Cost $11,605)...................... 2,362
-----------
TOTAL INVESTMENTS (COST $17,917,729*)........... 96.0% 17,338,313
-----------
CALL OPTIONS WRITTEN ON FOREIGN CURRENCY -- 0.0%#
GBP 550,000 Great British Pound
Sterling Call.......... 01/20/1998 1.648 (7,082)
-----------
Total Call Options Written on Foreign
Currency
(Premiums received $11,605)................... (7,082)
-----------
OTHER ASSETS AND LIABILITIES (NET)............... 4.0% 718,628
----- -----------
NET ASSETS....................................... 100.0% $18,049,859
===== ===========
</TABLE>
- ------------
* Aggregate cost for federal tax purposes.
** A portion of this security is pledged as collateral for option contracts.
+ Variable rate security. The interest rate shown reflects the rate currently
in effect.
# Amount represents less than 0.1% of net assets
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
U.S. FORWARD FOREIGN CURRENCY CONTRACTS TO BUY
<TABLE>
<CAPTION>
CONTRACTS TO RECEIVE NET UNREALIZED
----------------------------------------------- APPRECIATION/
EXPIRATION LOCAL VALUE IN IN EXCHANGE (DEPRECIATION)
DATE CURRENCY U.S. $ FOR U.S. $ OF CONTRACTS
- ---------- --------------------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
01/05/1998 DEM 2,000,000 1,111,826 1,117,549 $ (5,723)
01/05/1998 GBP 1,000,000 1,642,389 1,658,050 (15,661)
01/05/1998 ITL 1,696,322,211 958,901 965,026 (6,125)
01/23/1998 TRL 11,841,500,000 54,477 55,000 (523)
01/23/1998 DEM 48,796 27,162 28,213 (1,051)
02/06/1998 HFR 6,798,975 32,740 33,700 (960)
02/17/1998 PLZ 413,312 114,269 112,908 1,361
06/04/1998 MXN 829,363 102,765 95,307 7,458
--------
$(21,224)
--------
</TABLE>
U.S. FORWARD FOREIGN CURRENCY CONTRACTS TO SELL
<TABLE>
<CAPTION>
CONTRACTS TO DELIVER NET UNREALIZED
----------------------------------------------------- APPRECIATION/
EXPIRATION LOCAL VALUE IN IN EXCHANGE DEPRECIATION
DATE CURRENCY U.S. $ FOR U.S. $ OF CONTRACTS
- ---------- ----------------------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
01/05/1998 GBP 1,000,000 1,642,389 1,674,900 $ 32,511
01/05/1998 ITL 1,696,322,211 958,901 988,504 29,603
01/05/1998 DEM 2,000,000 1,111,826 1,137,656 25,830
01/07/1998 NZD 2,500,000 1,452,743 1,557,500 104,757
01/22/1998 SEK 5,100,000 642,743 671,671 28,928
01/23/1998 DEM 48,796 27,162 27,500 338
01/30/1998 DEM 2,000,000 1,113,762 1,119,194 5,432
01/30/1998 GBP 1,000,000 1,643,269 1,656,000 12,731
01/30/1998 ITL 1,696,322,211 958,645 964,696 6,051
02/09/1998 IEP 334,494 476,229 480,836 4,607
02/25/1998 SEK 2,461,840 310,546 307,346 (3,200)
03/23/1998 CAD 1,388,000 973,697 1,015,548 41,851
03/24/1998 CHF 1,139,680 787,274 792,986 5,712
--------
$295,151
--------
Net Unrealized Appreciation of Forward Foreign Currency
Contracts................................................ $273,927
========
</TABLE>
GLOSSARY OF TERMS
ARP--Argentinian Peso
CAD--Canadian Dollar
CHF--Swiss Franc
DEM--German Deutsche Mark
ESP--Spanish Peseta
GBP--Great Britain Pound
Sterling
HFR--Hungarian Forint
IEP--Irish Pound
ITL--Italian Lira
MXN--Mexican Peso
NZD--New Zealand Dollar
PLZ--Poland Zloty
SEK--Swedish Krona
TRL--Turkish Lira
ZAR--South African Rand
See Notes to Financial Statements.
55
<PAGE>
PORTFOLIO OF INVESTMENTS
U.S. GOVERNMENT FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 2)
--------- --------
<C> <S> <C>
U.S. TREASURY OBLIGATIONS -- 41.9%
U.S. TREASURY NOTES -- 26.1%
$ 1,400,000 6.375% due 05/15/2000............................... $ 1,421,000
325,000 6.625% due 03/31/2002............................... 335,511
11,170,000 6.250% due 06/30/2002***............................ 11,391,613
2,450,000 6.500% due 10/15/2006............................... 2,565,223
350,000 6.250% due 02/15/2007............................... 361,155
-----------
Total U.S. Treasury Notes
(Cost $15,788,687)................................. 16,074,502
-----------
U.S. TREASURY BONDS -- 15.8%
300,000 12.750% due 11/15/2010.............................. 428,202
3,300,000 6.250% due 08/15/2023............................... 3,399,000
5,439,000 6.625% due 02/15/2027**............................. 5,904,687
-----------
Total U.S. Treasury Bonds
(Cost $9,242,341).................................. 9,731,889
-----------
Total U.S. Treasury Obligations
(Cost $25,031,028)................................. 25,806,391
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 37.8%
Federal National Mortgage Associaton (FNMA), REMIC,
Pass-through certificates:
1,058,598 Trust 89-90, Class E,
8.700% due 12/25/2019.............................. 1,126,740
4,839,972 Trust 92-55, Class DZ,
8.000% due 04/25/2022.............................. 5,271,020
5,871,885 Trust 92-83, Class X,
7.000% due 02/25/2022.............................. 5,756,268
1,423,782 Trust 93-159, Class PA, (P/O),
Zero coupon due 01/25/2021......................... 1,318,322
854,801 Trust 94-57, Class C, (P/O),
Zero coupon due 01/25/2024......................... 714,289
1,541,555 Federal National Mortgage Association (FNMA), Trust
96-274, Class 1, (P/O), Zero coupon due
10/01/2025......................................... 1,267,436
623,558 Guaranteed Mortgage Corporation III (GNMA-CMB),
Trust B, Class 1,
9.000% due 12/01/2007.............................. 643,237
7,000,000 Vendee Mortgage Trust, Trust
1997-2, Class B, 7.500% due 01/15/2013............. 7,216,510
-----------
Total Collateralized Mortgage Obligations (Cost
$21,584,092)....................................... 23,313,822
-----------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES -- 35.0%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) -- 20.5%
2,750,000 7.000% due 02/17/2027, TBA.......................... 2,774,062
8,142,057 7.500% due 01/15/2023**............................. 8,363,358
1,370,670 8.000% due 08/15/2026-01/15/2027**.................. 1,420,869
71,158 9.000% due 08/15/2021............................... 77,094
-----------
Total GNMAs (Cost $12,427,332)...................... 12,635,383
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 2)
--------- --------
<C> <S> <C>
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) -- 11.2%
GOLD:
$ 1,118,509 5.500% due 12/01/2008**............................. $ 1,087,750
3,425,000 7.000% due 08/18/2012, TBA.......................... 3,479,586
976,540 8.750% due 01/01/2013**............................. 1,027,632
304,066 9.000% due 09/01/2020............................... 327,877
1,000,000 6.500% due 10/14/2027, TBA.......................... 987,500
-----------
Total FHLMCs (Cost $6,803,856)...................... 6,910,345
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 1.7%
635,862 8.000% due 05/01/2022............................... 664,476
341,608 8.500% due 02/01/2023............................... 358,616
-----------
Total FNMAs (Cost $1,018,240)....................... 1,023,092
-----------
RESIDENTIAL FUNDING MORTGAGE SECURITY -- 1.6%
(Cost $963,750)
1,000,000 Trust 92-539, Class A8,
7.500% due 11/25/2007.............................. 1,018,750
-----------
Total U.S. Government Agency
Mortgage-Backed Securities
(Cost $21,213,178)................................. 21,587,570
-----------
DISCOUNT NOTE -- 0.9% (Cost $569,905)
570,000 Federal Home Loan Mortgage Corporation, 6.000% due
01/02/1998+........................................ 569,905
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (COST $68,398,203*)........ 115.6% 71,277,688
OTHER ASSETS AND LIABILITIES (NET)........... (15.6) (9,621,279)
----- -----------
NET ASSETS................................... 100.0% $61,656,409
===== ===========
</TABLE>
- ------------
* Aggregate cost for federal tax purposes $68,402,549.
** A portion or all of the securities are pledged as collateral for futures
contracts and dollar roll transactions.
***A portion or all of the security is pledged as collateral for reverse
repurchase agreements (Note 5).
+ Rate represents annualized yield at date of purchase.
<TABLE>
<CAPTION>
NUMBER UNREALIZED
OF CONTRACTS (DEPRECIATION)
------------ --------------
<C> <S> <C>
FUTURES CONTRACTS -- SHORT POSITION
54 U.S. Treasury Bond, Thirty Year, March 1998..... $(82,180)
18 U.S. Treasury Bond, Ten Year, March 1998........ (12,456)
--------
$(94,636)
========
</TABLE>
GLOSSARY OF TERMS
GOLD -- Payments are on an accelerated 45-day payment cycle instead of 75-day
payment cycle
P/O -- Principal Only
REMIC -- Real Estate Mortgage Investment Conduit
TBA -- To Be Announced
See Notes to Financial Statements.
56
<PAGE>
PORTFOLIO OF INVESTMENTS
CORPORATE INCOME FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 2)
--------- --------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- 87.3%
TRANSPORTATION -- 17.8%
$1,750,000 Carnival Corporation, Deb.,
7.200% due 10/01/2023............................... $ 1,787,188
1,000,000 Conrail Inc., Deb.,
9.750% due 06/15/2020............................... 1,318,750
1,000,000 Continental Airlines Inc.,
Pass-through certificates, Series 974C,
6.800% due 07/02/2007............................... 1,017,054
1,000,000 Norfolk Southern Corporation,
7.800% due 05/15/2027............................... 1,133,750
2,000,000 Southwest Airlines Company,
Pass-through certificates, 94-A, Class A-4,
9.150% due 07/01/2016............................... 2,350,000
1,300,000 United Air Lines Inc.,
Pass-through certificates,
9.560% due 10/19/2018............................... 1,589,250
-----------
9,195,992
-----------
FINANCIAL -- 13.9%
500,000 American General Corporation,
Sinking Fund Deb.,
7.500% due 07/15/2025............................... 541,250
1,000,000 Barclays North American Capital Corporation, Capital
Note,
9.750% due 05/15/2021............................... 1,146,250
50,000 Chase Manhattan Corporation, Sub. Note,
8.000% due 06/15/1999............................... 51,313
230,000 Citicorp, Sub. Note,
8.625% due 12/01/2002............................... 251,850
First Chicago Corporation, Sub. Note:
600,000 11.250% due 02/20/2001............................... 684,000
100,000 9.250% due 11/15/2001................................ 110,000
1,000,000 First Tennessee National Corporation,
Sub. Capital Note,
10.375% due 06/01/1999.............................. 1,056,250
1,040,000 Fleet/Norstar Financial Group Inc.,
Sub. Note,
9.900% due 06/15/2001............................... 1,154,400
400,000 Ford Holdings, Inc., Deb.,
9.375% due 03/01/2020............................... 509,000
1,000,000 Hartford Life Insurance Company,
7.650% due 06/15/2027............................... 1,090,000
516,000 Security Pacific Corporation, Sub. Note,
11.500% due 11/15/2000.............................. 586,950
-----------
7,181,263
-----------
MANUFACTURING -- 13.0%
1,000,000 Boeing Company, Deb.,
8.750% due 08/15/2021............................... 1,262,500
1,500,000 Caterpillar Inc., Sinking Fund Deb.,
9.750% due 06/01/2019............................... 1,638,750
Ford Motor Company, Deb.:
250,000 8.875% due 01/15/2022................................ 308,437
600,000 8.875% due 11/15/2022................................ 665,250
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 2)
--------- --------
<C> <S> <C>
$1,000,000 General Motors Corporation, Deb.,
9.400% due 07/15/2021................................ $ 1,275,000
1,500,000 Lockheed Martin Corporation,
7.250% due 05/15/2006................................ 1,588,125
-----------
6,738,062
-----------
YANKEE (U.S. DOLLAR DENOMINATED) -- 10.6%
1,000,000 Abbey National Plc, Global Note,
6.690% due 10/17/2005................................ 1,023,750
1,700,000 Northern Telecom Capital, Sub. Note,
7.400% due 06/15/2006................................ 1,814,750
500,000 Petro-Canada, Deb.,
9.250% due 10/15/2021................................ 643,125
1,450,000 Province of Ontario, Global Bond,
6.000% due 02/21/2006................................ 1,435,500
500,000 Trans-Canada Pipeline Corporation, Deb.,
8.500% due 03/20/2023................................ 575,625
-----------
5,492,750
-----------
INDUSTRIAL -- 6.3%
1,000,000 Enron Corporation, Notes,
6.450% due 11/15/2001................................ 1,005,000
200,000 Ogden Corporation, Deb.,
9.250% due 03/01/2022................................ 241,750
1,800,000 Praxair, Inc., Deb.,
8.700% due 07/15/2022................................ 1,989,000
-----------
3,235,750
-----------
ENERGY -- 5.6%
1,300,000 Occidental Petroleum Corporation, Sr. Deb.,
11.125% due 08/01/2010............................... 1,759,875
1,000,000 Phillips Petroleum Company, Deb.,
9.180% due 09/15/2021................................ 1,111,250
-----------
2,871,125
-----------
ELECTRIC -- 5.3%
200,000 Duke Power Company,
First and Refundable Mortgage,
6.875% due 08/01/2023................................ 196,500
700,000 Florida Power & Light Company,
First Mortgage,
7.050% due 12/01/2026................................ 707,000
100,000 Philadelphia Electric Company,
First and Refundable Mortgage,
8.250% due 09/01/2022................................ 104,125
Texas Utilities Electric Company:
150,000 First and Collateral Mortgage,
8.500% due 08/01/2024................................ 164,062
1,500,000 First Mortgage,
7.875% due 04/01/2024................................ 1,584,375
-----------
2,756,062
-----------
GAS -- 4.1%
1,200,000 ANR Pipeline Company, Deb.,
9.625% due 11/01/2021................................ 1,567,500
500,000 Panhandle Eastern Pipe Line Company, Deb.,
8.625% due 04/15/2025................................ 563,750
-----------
2,131,250
-----------
</TABLE>
See Notes to Financial Statements.
57
<PAGE>
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
CORPORATE INCOME FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 2)
--------- --------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
REGIONAL BANKS -- 4.0%
$ 400,000 Banc One Corporation, Sub. Note,
10.000% due 08/15/2010............................... $ 514,500
82,000 Barnett Banks, Florida, Inc., Sub. Note,
10.875% due 03/15/2003............................... 98,195
40,000 First Interstate Bancorp, MTN,
9.375% due 11/15/1998................................ 41,094
NCNB Corporation, Sub. Note:
1,100,000 9.375% due 09/15/2009................................. 1,343,375
60,000 10.200% due 07/15/2015................................ 80,700
-----------
2,077,864
-----------
RETAIL -- 3.5%
May Department Stores Company, Deb.:
1,000,000 8.375% due 10/01/2022................................. 1,080,000
600,000 8.375% due 08/01/2024................................. 671,250
-----------
1,751,250
-----------
MEDIA -- 3.2%
1,200,000 News America Holdings,
8.000% due 10/17/2016................................ 1,290,000
300,000 Time Warner Inc., Deb.,
9.150% due 02/01/2023................................ 369,000
-----------
1,659,000
-----------
Total Corporate Bonds and Notes
(Cost $42,994,383)................................... 45,090,368
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 2)
--------- --------
U.S. TREASURY BOND -- 6.9% (Cost $3,551,563)
<C> <S> <C>
2,500,000 13.750% due 08/15/2004.......... $ 3,582,675
-----------
<CAPTION>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES -- 2.4%
<C> <S> <C>
GOVERNMENTAL NATIONAL MORTGAGE ASSOCIATION (GNMA) -- 1.6%
(Cost $787,227)
$ 762,909 #386671,
9.000% due 02/15/2025............................... 816,313
-----------
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) -- 0.8%
(Cost $415,315)
403,709 #C00385, GOLD,
9.000% due 01/01/2025............................... 429,571
-----------
Total U.S. Government Agency Mortgage-Backed
Securities (Cost $1,202,542)........................ 1,245,884
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
------
<S> <C> <C>
INVESTMENT COMPANY SECURITY -- 1.6%
(Cost $840,334)
840,334 Lehman Provident Tempfund......... 840,334
-----------
TOTAL INVESTMENTS (COST $48,588,822*)....... 98.2% 50,759,261
OTHER ASSETS AND LIABILITIES (NET).......... 1.8% 911,205
------ -----------
NET ASSETS.................................. 100.0% $51,670,466
====== ===========
</TABLE>
- ------------
* Aggregate cost for federal tax purposes.
GLOSSARY OF TERMS
GOLD -- Payments are on an accelerated 45-day payment cycle instead of 75-day
payment cycle
MTN -- Medium Term Note
See Notes to Financial Statements.
58
<PAGE>
PORTFOLIO OF INVESTMENTS
GROWTH AND INCOME FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
- ------ --------
<S> <C> <C>
COMMON STOCKS -- 96.9%
TECHNOLOGY -- 13.6%
66,200 Bay Networks Inc.+........................... $ 1,692,239
32,000 Cabletron Systems, Inc.+..................... 480,000
25,700 Dominion Resources Inc....................... 1,093,856
74,300 EMC Corporation+............................. 2,038,606
18,150 General Semiconductor, Inc. ................. 209,859
25,200 Input/Output, Inc.+.......................... 748,125
17,600 International Business Machines Corporation.. 1,840,300
22,200 Motorola, Inc. .............................. 1,266,788
23,000 Perkin Elmer Corporation..................... 1,634,437
66,700 Sensormatic Electronics Corporation.......... 1,096,381
43,700 Sun Microsystems, Inc.+...................... 1,742,537
------------
13,843,128
------------
FINANCIAL SERVICES -- 12.5%
9,200 American International Group, Inc. .......... 1,000,500
24,400 AMBAC Inc. .................................. 1,122,400
4,200 Chase Manhattan Corporation.................. 459,900
3,700 Citicorp..................................... 467,819
43,500 Fannie Mae................................... 2,482,219
12,200 First Hawaiian Inc. ......................... 484,950
50,600 First Union Corporation...................... 2,593,250
16,200 Fleet Financial Group, Inc. ................. 1,213,988
18,200 Marsh & McLennan Companies, Inc. ............ 1,357,038
34,200 Providian Financial Corporation+............. 1,545,412
------------
12,727,476
------------
HEALTH CARE -- 10.7%
35,100 ALZA Corporation+............................ 1,116,619
24,100 Bristol-Myers Squibb Co. .................... 2,280,463
1,910 Crescendo Pharmaceuticals.................... 22,084
10,700 Forest Labs Inc.+............................ 527,644
9,300 Gensia Sicor, Inc.+.......................... 54,056
86,500 Humana Inc.+................................. 1,794,875
36,800 United Healthcare Corporation................ 1,828,500
26,300 Warner Lambert Company....................... 3,261,200
------------
10,885,441
------------
ENERGY -- 9.7%
18,500 Atlantic Richfield........................... 1,482,313
18,700 Duke Energy Corporation...................... 1,035,513
27,900 Enron Corporation............................ 1,159,594
32,400 Exxon Corporation............................ 1,982,475
13,100 Mobil Corporation............................ 945,656
87,600 Tosco Corporation............................ 3,312,375
------------
9,917,926
------------
CONSUMER STAPLES -- 9.5%
44,300 Anheuser-Busch Companies Inc................. 1,949,200
19,400 General Mills, Inc. ......................... 1,389,525
33,800 PepsiCo, Inc. ............................... 1,231,587
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
- ------ --------
<S> <C> <C>
44,100 Philip Morris Companies Inc. ................. $ 1,998,281
19,900 Ralston Purina Company........................ 1,849,456
18,900 Unilever NV................................... 1,180,069
------------
9,598,118
------------
OTHER -- 8.1%
37,400 Cooper Industries, Inc........................ 1,832,600
31,922 Equity Office Properites Trust................ 1,007,537
24,500 Starwood Lodging Trust........................ 1,417,937
48,793 Tyco International Ltd........................ 2,198,763
66,000 Waste Management, Inc. ....................... 1,815,000
------------
8,271,837
------------
TELECOMMUNICATIONS -- 7.9%
24,266 Commscope, Inc ............................... 326,074
31,100 GTE Corporation............................... 1,624,975
70,000 NextLevel Systems, Inc. ...................... 1,251,250
24,700 SBC Communications, Inc. ..................... 1,809,275
25,000 Sprint Corporation............................ 1,465,625
52,100 WorldCom, Inc.+............................... 1,576,025
------------
8,053,224
------------
MATERIALS & PROCESSING -- 7.0%
25,300 Albemarle Corporation......................... 604,038
70,700 Allegheny Teledyne Inc........................ 1,829,363
35,500 Allied Signal Inc. ........................... 1,382,281
31,400 Temple-Inland, Inc. .......................... 1,642,612
39,400 Union Carbide Corporation..................... 1,691,737
------------
7,150,031
------------
CONSUMER DISCRETIONARY -- 5.7%
39,900 International Game Technology................. 1,007,475
18,700 Procter & Gamble Company...................... 1,492,494
68,644 Tele-Communications TCI Ventures Group........ 1,943,479
41,900 U.S. West Media Group......................... 1,209,862
------------
5,653,310
------------
RETAIL -- 5.5%
45,600 Circuit City Stores Inc., Circuit City Group.. 1,621,650
22,400 Federated Department Stores................... 964,600
58,900 Toys R Us Inc.+............................... 1,851,669
29,600 Wal-Mart Stores Inc........................... 1,167,350
------------
5,605,269
------------
PRODUCER DURABLES -- 2.9%
19,600 Anixter International Inc.+................... 323,400
18,600 Boeing Company................................ 910,238
7,800 Cooper Cameron Corporation.................... 475,800
20,200 Goodyear Tire & Rubber Company................ 1,285,225
------------
2,994,663
------------
COMPUTER SOFTWARE & SERVICES -- 2.8%
23,700 Autodesk Inc. ................................ 876,900
18,800 Cisco Systems, Inc............................ 1,048,100
43,150 Oracle Corporation............................ 962,784
------------
2,887,784
------------
</TABLE>
See Notes to Financial Statements.
59
<PAGE>
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
GROWTH AND INCOME FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------ --------
<C> <S> <C>
COMMON STOCKS -- (CONTINUED)
AUTOS & TRANSPORTATION -- 1.0%
16,900 Union Pacific Corporation............................ $ 1,055,194
------------
Total Common Stocks (Cost $88,258,554)............... 98,643,401
------------
<CAPTION>
PRINCIPAL
AMOUNT
----------
<C> <S> <C>
CONVERTIBLE NOTES -- 1.4%
$ 688,000 Berkshire Hathaway, Conv. Sr. Note,
1.000% due 12/03/2001............................... 1,099,940
125,000 Rohr Inc., Conv. Sub. Note,
7.750% due 05/15/2004............................... 352,969
------------
Total Convertible Notes (Cost $859,215).............. 1,452,909
------------
U.S. TREASURY BILL -- 1.3%
(Cost $1,316,964)
1,321,000 5.160% due 01/22/1998++.............................. 1,316,964
------------
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------ --------
<C> <S> <C>
PREFERRED STOCK -- 0.5%
(Cost $396,900)
8,100 TCI Communications Inc., Pfd............................ $ 519,412
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(COST $90,831,633*)......................... 100.1% 101,932,686
OTHER ASSETS AND LIABILITIES (NET)........... (0.1) (138,218)
----- ------------
NET ASSETS................................... 100.0% $101,794,468
===== ============
</TABLE>
- ------------
* Aggregate cost for federal tax purposes is $90,893,248.
+ Non-income producing security.
++ Rate represents annualized yield at date of purchase.
GLOSSARY OF TERMS
ADR -- American Depositary
Receipt
See Notes to Financial Statements.
60
<PAGE>
PORTFOLIO OF INVESTMENTS
GROWTH FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------ --------
<C> <S> <C>
COMMON STOCKS -- 94.9%
TECHNOLOGY -- 18.5%
65,475 Analog Devices, Inc.+................................... $ 1,812,838
52,962 Cisco Systems, Inc.+.................................... 2,952,659
34,300 Compaq Computer Corporation+............................ 1,935,806
20,325 Dell Computer Corporation............................... 1,707,300
45,750 EMC Corporation+........................................ 1,255,266
26,400 HBO & Company........................................... 1,267,200
32,025 Intel Corporation....................................... 2,249,756
14,150 Maxim Integrated Products, Inc. ........................ 488,175
68,466 Philips Electronics NV, NY Shares....................... 4,142,193
36 Philips Electronics NV, Ord. ........................... 2,159
40,825 Pittway Corporation, Class A............................ 2,842,441
17,315 Siebe PLC. ............................................. 339,825
12,637 Technology Solutions Company+........................... 333,301
25,550 Texas Instruments, Inc. ................................ 1,149,750
------------
22,478,669
------------
FINANCIAL SERVICES -- 14.6%
4,675 Ambanc Holding Company, Inc.+........................... 87,656
28,050 Associates First Capital Corporation, Class A........... 1,995,056
2,425 Astoria Financial Corporation........................... 135,194
137,213 Banca Commerciale Italiana.............................. 477,027
131,737 Banca Commerciale Italiana, RNC......................... 434,903
36,750 BankAmerica Corporation................................. 2,682,750
20,525 Bank of New York Company, Inc. ......................... 1,186,602
3,625 Catskill Financial Corporation.......................... 68,422
29,750 Charles Schwab Corporation.............................. 1,247,641
4,875 Citicorp................................................ 616,383
6,375 Dime Bancorp, Inc. ..................................... 192,844
5,350 First Defiance Financial Corporation.................... 85,600
1,250 First Savings Bancorp, Inc. ............................ 31,875
2,675 First Spartan Financial Corporation..................... 107,669
775 FSF Financial Corporation............................... 15,984
1,825 GSB Financial Corporation............................... 32,964
6,625 Klamath First Bancorp, Inc. ............................ 142,438
3,600 North Central Bancshares, Inc. ......................... 71,550
3,600 Peekskill Financial Corporation......................... 60,300
4,550 Provident Financial Holdings, Inc.+..................... 99,531
3,975 Queens County Bancorp, Inc. ............................ 160,987
9,525 Reliance Group Holdings, Inc. .......................... 134,541
19,475 Roslyn Bancorp, Inc. ................................... 452,794
6,375 SLM Holding Corporation................................. 886,922
12,425 Star Banc Corporation................................... 712,884
16,875 SunAmerica, Inc. ....................................... 721,406
4,325 TF Financial Corporation................................ 129,750
78,375 UNUM Corporation........................................ 4,261,641
4,300 U.S. Bancorp............................................ 481,331
------------
17,714,645
------------
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------ --------
<C> <S> <C>
HEALTH CARE -- 12.7%
9,825 Cardinal Health, Inc. .................................. $ 738,103
17,575 Centocor, Inc........................................... 584,369
35,275 Eli Lilly & Company..................................... 2,456,022
19,950 ESC Medical Systems Limited+............................ 773,062
53,875 Omnicare, Inc. ......................................... 1,670,125
16,050 Pfizer Inc. ............................................ 1,196,728
80,071 Smithkline Beecham Plc.................................. 819,273
14,750 Sofamor Danek Group, Inc.+.............................. 959,672
50,650 Warner Lambert Company.................................. 6,280,600
------------
15,477,954
------------
COMPUTER SOFTWARE & SERVICES -- 12.1%
6,850 America Online, Inc..................................... 610,934
47,750 Aspen Technology, Inc.+ ................................ 1,635,438
46,950 Cadence Design Systems Inc. ............................ 1,150,275
15,775 Ceridian Corporation.................................... 722,692
27,575 Microsoft Corporation+.................................. 3,564,069
106,000 Parametric Technology Company+.......................... 5,021,750
10,925 Peoplesoft, Inc.+....................................... 426,075
13,100 Sapient Corporation+.................................... 802,375
20,500 Wind River Systems+..................................... 813,594
------------
14,747,202
------------
OTHER -- 10.2%
62,175 CBS Corporation......................................... 1,830,277
90,950 Comcast Corporation, Class A............................ 2,870,609
11,999 Electrolux AB........................................... 832,687
10,875 Equity Office Properties Trust.......................... 343,242
35,800 Sealed Air Corporation.................................. 2,210,650
17,139 Tomra Systems ASA....................................... 383,449
141,918 Tele-Communications, Inc. .............................. 3,964,834
------------
12,435,748
------------
ENERGY -- 8.0%
30,825 Diamond Offshore Drilling............................... 1,483,453
4,727 Elf Aquitaine S.A. ..................................... 549,651
46,925 Noble Drilling Corporation+............................. 1,437,078
470,529 Ocean Rig ASA........................................... 497,644
22,550 Santa Fe International Corporation+..................... 917,503
33,625 Schlumberger Limited.................................... 2,706,812
44,600 Transocean Offshore Inc. ............................... 2,149,163
------------
9,741,304
------------
MATERIALS & PROCESSING -- 8.0%
22,175 ASM Lithography Holdings, NV+........................... 1,496,812
36,353 Metra AB, Series B, Ord. ............................... 853,921
146,400 Monsanto Company........................................ 6,148,800
48,500 Solutia Inc. ........................................... 1,294,344
------------
9,793,877
------------
</TABLE>
See Notes to Financial Statements.
61
<PAGE>
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
GROWTH FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------ --------
<C> <S> <C>
COMMON STOCKS -- (CONTINUED)
TELECOMMUNICATIONS -- 4.7%
25,360,000 Ericsson Telecomunicaoes S.A. ....................... $ 813,483
50,800 Nokia Corporation, Class A,
Sponsored ADR....................................... 3,556,000
200,594 Telecom Italia SPA................................... 1,281,352
------------
5,650,835
------------
CONSUMER DISCRETIONARY -- 3.3%
27,775 Costco Companies, Inc.+.............................. 1,239,459
19,775 Lamar Advertising Company+........................... 786,056
19,012 Outdoor Systems, Inc.+............................... 729,586
20,850 Time Warner Inc. .................................... 1,292,700
------------
4,047,801
------------
CONSUMER STAPLES -- 1.6%
11,075 Sara Lee Corporation................................. 623,661
11,347 Raisio Group PLC..................................... 1,343,099
------------
1,966,760
------------
RETAIL -- 1.2%
24,225 CompUSA Inc. ........................................ 750,975
16,625 Linens 'N Things, Inc.+.............................. 725,266
------------
1,476,241
------------
Total Common Stocks (Cost $102,023,730).............. 115,531,036
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 2)
--------- --------
<C> <S> <C>
DISCOUNT COMMERCIAL PAPER -- 8.3%
$5,100,000 General Electric Capital Corporation,
6.700% due 01/02/1998+.............................. $ 5,099,051
5,000,000 Prudential Funding Corporation,
6.400% due 01/02/1998+.............................. 4,999,111
------------
Total Commercial Paper
(Cost $10,098,162).................................. 10,098,162
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (COST $112,121,892*)...................... 103.2% 125,629,198
OTHER ASSETS AND LIABILITIES (NET).......................... (3.2) (3,863,564)
----- ------------
NET ASSETS.................................................. 100.0% $121,765,634
===== ============
</TABLE>
- ------------
*Aggregate cost for federal tax purposes is $112,259,612.
+Non-income producing security.
See Notes to Financial Statements.
62
<PAGE>
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
GROWTH FUND
DECEMBER 31, 1997
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
U.S. FORWARD FOREIGN CURRENCY CONTRACTS TO BUY
<TABLE>
<CAPTION>
CONTRACTS TO RECEIVE NET UNREALIZED
-------------------------------------------------- APPRECIATION/
EXPIRATION LOCAL VALUE IN IN EXCHANGE (DEPRECIATION)
DATE CURRENCY U.S. $ FOR U.S. $ OF CONTRACTS
- ---------- --------------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
01/06/1998 GBP 48,359 $ 79,426 $ 80,755 $ (1,329)
01/06/1998 GBP 160,552 263,693 268,106 (4,413)
01/07/1998 ITL 200,718,354 113,460 114,151 (691)
01/07/1998 GBP 340,762 559,680 564,376 (4,696)
01/08/1998 ITL 817,501,990 462,106 464,578 (2,472)
01/09/1998 NLG 750,000 369,996 385,079 (15,083)
01/15/1998 FIM 700,000 128,580 130,470 (1,890)
01/20/1998 GBP 35,000 57,502 56,079 1,423
01/20/1998 GBP 10,000 16,429 16,681 (252)
01/20/1998 GBP 65,000 106,791 106,925 (134)
01/20/1998 GBP 17,500 28,751 28,996 (245)
02/18/1998 DEM 1,150,000 641,085 652,712 (11,627)
02/18/1998 DEM 250,000 139,366 142,515 (3,149)
02/18/1998 DEM 750,000 418,099 437,701 (19,602)
02/18/1998 GBP 90,000 147,942 149,980 (2,038)
02/18/1998 DEM 300,000 167,239 175,358 (8,119)
02/18/1998 DEM 330,000 183,963 193,298 (9,335)
02/18/1998 DEM 190,000 105,918 110,497 (4,579)
02/19/1998 GBP 20,000 32,877 33,550 (673)
02/19/1998 GBP 50,000 82,192 82,590 (398)
02/19/1998 GBP 15,000 24,656 24,431 225
02/25/1998 NLG 1,500,000 742,305 770,376 (28,071)
02/25/1998 NLG 750,000 371,152 383,592 (12,440)
02/25/1998 NLG 1,600,000 791,793 804,586 (12,793)
03/04/1998 SEK 250,000 31,541 31,657 (116)
03/11/1998 ITL 390,000,000 220,383 228,423 (8,040)
03/11/1998 SEK 400,000 50,475 53,200 (2,725)
03/11/1998 ITL 180,000,000 101,715 103,968 (2,253)
03/11/1998 SEK 300,000 37,856 38,674 (818)
03/11/1998 SEK 300,000 37,856 38,035 (179)
03/26/1998 FIM 2,900,000 534,948 564,092 (29,144)
---------
$(185,656)
---------
</TABLE>
U.S. FORWARD FOREIGN CURRENCY CONTRACTS TO SELL
<TABLE>
<CAPTION>
CONTRACTS TO DELIVER NET UNREALIZED
---------------------------------------------------- APPRECIATION/
EXPIRATION LOCAL VALUE IN IN EXCHANGE (DEPRECIATION)
DATE CURRENCY U.S. $ FOR U.S. $ OF CONTRACTS
- ---------- --------------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
01/02/1998 SEK 317,104 $ 39,938 $ 40,902 $ 964
01/05/1998 NLG 7,156 3,529 3,549 20
01/05/1998 SEK 811,159 102,167 103,343 1,176
01/06/1998 NLG 2,060 1,016 1,021 5
01/07/1998 SEK 235,530 29,667 29,879 212
01/09/1998 ITL 420,000,000 237,408 243,711 6,303
01/09/1998 ITL 150,000,000 84,788 85,758 970
01/09/1998 ITL 700,000,000 395,682 398,781 3,099
01/09/1998 ITL 700,000,000 395,681 389,903 (5,778)
01/09/1998 NLG 2,000,000 986,655 976,610 (10,045)
01/15/1998 FIM 800,000 146,949 154,470 7,521
01/15/1998 FIM 2,000,000 367,372 368,711 1,339
01/20/1998 GBP 75,000 123,220 126,150 2,930
01/20/1998 GBP 70,000 115,005 113,050 (1,955)
02/18/1998 GBP 90,000 147,942 145,999 (1,943)
02/18/1998 DEM 700,000 390,225 377,684 (12,541)
02/18/1998 DEM 2,270,000 1,265,445 1,224,974 (40,471)
02/19/1998 GBP 130,000 213,698 217,750 4,052
02/25/1998 NLG 2,000,000 989,740 960,384 (29,356)
02/25/1998 NLG 4,900,000 2,424,865 2,477,250 52,385
03/04/1998 SEK 3,700,000 466,816 488,513 21,699
03/11/1998 ITL 700,000,000 395,559 394,300 (1,259)
03/11/1998 SEK 1,000,000 126,188 132,205 6,017
03/11/1998 GBP 85,000 139,776 140,165 389
03/26/1998 FIM 4,400,000 811,646 847,131 35,485
03/31/1998 FIM 1,100,000 202,969 208,934 5,965
03/31/1998 NLG 1,000,000 495,903 505,484 9,581
03/31/1998 FIM 6,000,000 1,107,103 1,159,209 52,106
03/31/1998 FIM 1,500,000 276,776 281,796 5,020
03/31/1998 NLG 700,000 347,132 352,515 5,383
05/28/1998 FIM 3,200,000 592,294 611,854 19,560
---------
$ 138,833
---------
Net Unrealized Depreciation of Forward
Foreign Currency Contracts................. $ (46,823)
=========
</TABLE>
GLOSSARY OF TERMS
ADR --American Depositary
Receipt
DEM --German Deutsche Mark
FIM --Finnish Markka
GBP --Great Britain Pound
Sterling
ITL --Italian Lira
NLG --Netherlands Guilder
SEK --Swedish Krona
See Notes to Financial Statements.
63
<PAGE>
PORTFOLIO OF INVESTMENTS
EMERGING GROWTH FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------ --------
<S> <C> <C>
COMMON STOCKS -- 91.5%
CONSUMER DISCRETIONARY -- 16.2%
33,300 Apollo Group, Inc., Class A+................... $ 1,573,425
11,650 Family Golf Centers, Inc.+..................... 365,519
14,450 Heftel Broadscasting Corporation, Class A+..... 675,537
15,762 Outdoor Systems, Inc.+......................... 604,867
42,450 Paychex, Inc. ................................. 2,149,031
20,050 Premier Parks, Inc.+........................... 812,025
16,025 Profit Recovery Group International, Inc.+..... 284,444
9,850 Rental Service Corporation..................... 241,941
8,675 Univision Communications, Inc.+................ 605,623
-----------
7,312,412
-----------
FINANCIAL SERVICES -- 14.8%
51,325 American Capital Strategies, Ltd............... 930,266
68,808 Amvescap PLC................................... 589,330
17,275 Charles Schwab Corporation..................... 724,470
975 First Empire State Corporation................. 453,375
36,450 HealthCare Financial Partners, Inc.+........... 1,293,975
38,650 Insignia Financial Group, Inc., Class A+....... 888,950
23,175 Medallion Financial Corporation................ 509,850
7,150 Protective Life Corporation.................... 427,212
25,725 UICI+.......................................... 897,159
-----------
6,714,587
-----------
RETAIL -- 12.4%
36,975 Barnett, Inc.+................................. 813,450
13,750 CompUSA Inc. .................................. 426,250
45,575 Fastenal Company............................... 1,743,244
10,100 MSC Industrial Direct Company, Inc., Class A+.. 427,988
9,550 O'Reilly Automotive, Inc.+..................... 250,687
64,775 Petco Animal Supplies, Inc.+................... 1,554,600
19,950 Renters Choice, Inc.+.......................... 408,975
-----------
5,625,194
-----------
RESTAURANTS -- 12.2%
383,863 J.D. Wetherspoon Plc Ord....................... 2,111,964
25,500 Papa John's International Inc.+................ 889,313
153,483 PizzaExpress Plc............................... 1,890,545
42,500 PJ America Inc.+............................... 637,500
-----------
5,529,322
-----------
HEALTH CARE -- 10.9%
34,950 AmeriPath, Inc................................. 594,150
18,750 Mentor Corporation............................. 684,375
73,550 Omnicare Inc. ................................. 2,280,050
21,475 Pediatrix Medical Group, Inc. . ............... 918,056
6,950 Sofamor Danek Group, Inc.+..................... 452,184
-----------
4,928,815
-----------
OTHER -- 8.2%
16,025 Chancellor Media Corporation................... 1,195,866
41,950 Cyberonics, Inc. .............................. 639,737
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------ --------
<C> <S> <C>
34,425 HA-LO Industries, Inc. ............................... $ 895,050
19,325 Hanover Compressor Company............................ 386,500
24,850 Transcrypt International, Inc. ....................... 618,144
-----------
3,735,297
-----------
MATERIALS & PROCESSING -- 4.9%
15,550 Littelfuse, Inc. ..................................... 386,806
10,075 Sealed Air Corporation+............................... 622,131
60,325 Trigen Energy Corporation............................. 1,191,419
-----------
2,200,356
-----------
TECHNOLOGY -- 3.7%
22,525 Berg Electronics Corporation.......................... 512,444
14,150 Maxim Integrated Products, Inc. ...................... 488,175
22,600 Sipex Corporation..................................... 683,650
-----------
1,684,269
-----------
COMPUTER SOFTWARE & SERVICES -- 2.7%
36,575 Cadence Design Systems, Inc. ......................... 896,088
31,125 Tier Technologies, Inc. .............................. 334,594
-----------
1,230,682
-----------
CONSUMER STAPLES -- 2.0%
24,700 JP Foodservice Inc. .................................. 912,356
-----------
TELECOMMUNICATIONS -- 1.8%
79,571 Pricellular Corporation, Class A+..................... 830,522
-----------
AUTOS & TRANSPORTATION -- 1.1%
20,400 Ryanair Holdings PLC-Sponsored ADR.................... 512,550
-----------
ENERGY -- 0.6%
5,725 AES Corporation....................................... 266,928
-----------
Total Common Stocks (Cost $32,749,004)................ 41,483,290
-----------
WARRANT -- 0.8%
15,900 Littelfuse Inc., Series A, expires 12/27/2001+........ 349,800
-----------
Total Warrants (Cost $149,086)........................ 349,800
-----------
<CAPTION>
PRINCIPAL
AMOUNT
---------
<C> <S> <C>
DISCOUNT COMMERCIAL PAPER -- 16.5%
(Cost $7,498,750)
$7,500,000 FMC Corporation,
6.000% due 01/02/1998................................ 7,498,750
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (COST $40,396,840*)........................ 108.8% 49,331,840
OTHER ASSETS AND LIABILITIES (NET)........................... (8.8) (3,970,213)
----- -----------
NET ASSETS................................................... 100.0% $45,361,627
===== ===========
</TABLE>
- ------------
*Aggregate cost for federal tax purposes is $40,581,392.
+Non-income producing security.
GLOSSARY OF TERMS
ADR--American Depositary Receipt
See Notes to Financial Statements.
64
<PAGE>
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
EMERGING GROWTH FUND
DECEMBER 31, 1997
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
U.S. FORWARD FOREIGN CURRENCY CONTRACTS TO BUY
<TABLE>
<CAPTION>
CONTRACTS TO DELIVER
-------------------------------------------------- NET UNREALIZED
EXPIRATION LOCAL VALUE IN IN EXCHANGE DEPRECIATION
DATE CURRENCY U.S. $ FOR U.S. $ OF CONTRACTS
- ---------- ------------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
01/20/1998 GBP 700,000 $1,150,054 $1,182,300 $ (32,246)
02/25/1998 GBP 175,000 287,698 295,102 (7,404)
03/04/1998 GBP 600,000 986,518 995,340 (8,822)
---------
$ (48,472)
---------
U.S. FORWARD FOREIGN CURRENCY CONTRACTS TO SELL
<CAPTION>
CONTRACTS TO DELIVER NET UNREALIZED
-------------------------------------------------- APPRECIATION/
EXPIRATION LOCAL VALUE IN IN EXCHANGE (DEPRECIATION)
DATE CURRENCY U.S. $ FOR U.S. $ OF CONTRACTS
- ---------- ------------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
01/20/1998 GBP 700,000 $1,150,054 $1,177,400 $ 27,346
02/25/1998 GBP 350,000 575,398 551,806 (23,592)
02/26/1998 GBP 136,000 223,587 215,152 (8,435)
03/04/1998 GBP 650,000 1,068,727 1,038,050 (30,677)
03/11/1998 GBP 75,000 123,331 125,562 2,231
05/06/1998 GBP 150,000 246,919 240,765 (6,154)
05/06/1998 GBP 1,100,000 1,810,741 1,842,555 31,814
05/11/1998 GBP 320,000 526,807 536,000 9,193
---------
$ 1,726
---------
Net Unrealized Depreciation of Forward Foreign
Currency Contracts................................... $ (46,746)
=========
</TABLE>
GLOSSARY OF TERMS
GBP --Great Britain Pound
Sterling
See Notes to Financial Statements.
65
<PAGE>
PORTFOLIO OF INVESTMENTS
INTERNATIONAL GROWTH FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------ --------
<C> <S> <C>
COMMON STOCKS -- 92.0%
JAPAN -- 15.4%
11,000 Advantest Corporation.................................... $ 623,518
25,000 Fuji Bank, Ltd. ......................................... 101,111
50,000 Fujikura Ltd. ........................................... 330,908
49,000 Fujitsu Ltd. ............................................ 525,469
27,000 Hankyu Realty............................................ 126,159
50,000 NEC Corporation.......................................... 532,363
2,700 Nichiei Company.......................................... 287,476
20,000 Nomura Securities Company Ltd. .......................... 266,565
13,000 Orix Corporation......................................... 906,166
8,000 Rohm Company............................................. 815,013
1,000 Shohkoh Fund & Company Ltd. ............................. 304,864
11,000 Sony Corporation......................................... 977,403
49,000 Sumitomo Bank Ltd. ...................................... 559,249
10,000 TDK Corporation.......................................... 753,734
24,000 Yamanouchi Pharmaceutical Company Ltd. .................. 514,745
-----------
7,624,743
-----------
UNITED KINGDOM -- 13.6%
13,700 Biocompatibles International Plc......................... 110,813
78,151 British Airport Authority................................ 639,189
34,900 British-Borneo Petro Syndicate Plc....................... 242,455
216,691 Cookson Group Plc........................................ 695,750
26,100 Galaxo Welcome........................................... 617,260
32,775 Hanson Plc............................................... 146,681
51,100 Imperial Chemical Industries Plc......................... 798,118
123,600 Medeva Plc............................................... 327,836
131,200 Orange Plc+.............................................. 568,857
1,900 Perpetual Plc............................................ 87,685
233,300 Pilkington Plc........................................... 490,445
127,500 Rolls Royce Plc.......................................... 492,089
47,500 Royal & Sun Alliance Insurance Group Plc................. 478,211
3,100 Safeway Plc.............................................. 17,463
81,450 Thistle Hotels Plc....................................... 212,024
152,600 Williams Holdings Plc.................................... 847,104
-----------
6,771,980
-----------
FRANCE -- 10.4%
10,450 AXA UAP.................................................. 808,400
9,200 Banque Nationale de Paris................................ 488,884
2,160 Compagnie de St. Gobain.................................. 306,777
23,757 Lagardere S.C.A. ........................................ 785,323
20,200 Rhone-Poulenc -- A Shares................................ 904,638
24,600 Societe Generale d'Enterprises SA........................ 637,475
5,800 Societe National Elf Aqutaine SA......................... 674,419
5,100 Total SA -- B Shares..................................... 554,900
-----------
5,160,816
-----------
GERMANY -- 4.7%
500 Ava Allgemeine Handels Der Verbr AG+..................... 128,822
580 Bayerische Motoren Werke AG.............................. 433,630
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------ --------
<C> <S> <C>
5,600 Fresenius Medical Care................................... $ 371,984
22,400 Hoechst AG............................................... 784,436
1,225 Mannesmann AG............................................ 618,969
-----------
2,337,841
-----------
SWEDEN -- 4.6%
82,200 ABB AB, B Shares......................................... 967,984
21,700 Biacore International AB, Sponsored ADR+................. 187,163
800 Biora AB, Sponsored ADR.................................. 16,600
13,500 Electrolux AB, B shares.................................. 936,851
32,900 Nordbanken AB............................................ 186,049
-----------
2,294,647
-----------
ITALY -- 4.1%
16,100 Assicurazioni Generali................................... 395,447
113,600 ENI, Spa................................................. 644,097
308,800 Parmalat Finanziaria Spa................................. 441,642
88,600 Telecom Italia Spa....................................... 565,958
-----------
2,047,144
-----------
NETHERLANDS -- 4.0%
9,530 ASM Lithography Holdings NV+............................. 643,275
2,800 ING Groep NV............................................. 117,927
20,600 Philips Electronics NV................................... 1,235,370
-----------
1,996,572
-----------
SWITZERLAND -- 3.4%
550 Julius Baer Holding AG, Series B......................... 1,019,738
4,840 Oerlikon Buehrle......................................... 678,822
-----------
1,698,560
-----------
NORWAY -- 3.3%
34,600 Fred Olsen Energy........................................ 717,803
17,300 SAS Norge ASA, B Shares.................................. 241,614
825 Smedvig ASA, Sponsored ADR, B Shares..................... 17,325
27,700 Smedvig ASA, B Shares.................................... 582,169
1,200 Transocean Offshore Inc. ................................ 57,825
-----------
1,616,736
-----------
NEW ZEALAND -- 2.9%
665,400 Brierly Investments Ltd. Ord. ........................... 475,228
199,700 Fletcher Challenge -- Building Division.................. 408,164
230,888 Fletcher Challenge -- Forest Division.................... 191,713
793,000 Wrightson Ltd. .......................................... 368,364
-----------
1,443,469
-----------
ISRAEL--2.8%
46,500 Blue Square-Israel Ltd., ADR+............................ 575,438
29,900 ECI Telecommunications Ltd., ADR......................... 762,450
1,100 Orbotech, Ltd., ADR...................................... 35,062
-----------
1,372,950
-----------
</TABLE>
See Notes to Financial Statements.
66
<PAGE>
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
INTERNATIONAL GROWTH FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------ --------
<C> <S> <C>
COMMON STOCKS -- (CONTINUED)
ARGENTINA -- 2.6%
11,100 Telefonica de Argentina, ADR............................. $ 413,475
25,200 YPF Sociedad Anonima, Sponsored ADR...................... 861,525
-----------
1,275,000
-----------
AUSTRALIA -- 2.3%
50,900 Foodland Associated Limited.............................. 381,203
47,900 National Australia Bank Ltd. ............................ 669,019
56,200 Oil Search Ltd. ......................................... 101,607
-----------
1,151,829
-----------
HONG KONG -- 2.3%
170,000 Cosco Pacific Ltd. ...................................... 138,211
328,262 First Pacific Company.................................... 158,857
19,400 Guangshen Railway Ltd., ADR.............................. 260,687
23,200 HSBC Holdings Plc........................................ 571,842
-----------
1,129,597
-----------
SINGAPORE -- 2.3%
75,000 D.B.S. Land Ltd. ........................................ 114,803
1,800 Development Bank of Singapore, ADR....................... 59,175
87,300 Development Bank of Singapore (F)........................ 745,844
23,421 Jardine Matheson Holdings................................ 119,447
74,000 Keppel Bank.............................................. 118,980
-----------
1,158,249
-----------
PORTUGAL -- 2.1%
11,100 Cimpor................................................... 290,934
5,100 Portugal Telecommunications, ADR......................... 239,700
10,500 Portugal Telecommunications SA........................... 487,205
-----------
1,017,839
-----------
DENMARK -- 1.9%
19,000 ISS International Service Systems A/S, Class B........... 698,784
17,400 SAS Denmark A/S.......................................... 253,944
-----------
952,728
-----------
FINLAND -- 1.6%
14,590 Huhtamaki Group, I Shares................................ 602,428
13,514 Rauma Group.............................................. 210,800
-----------
813,228
-----------
MEXICO -- 1.5%
19,689 Alfa S.A. de CV.......................................... 132,472
18,470 Panamerican Beverages, Class A........................... 602,584
-----------
735,056
-----------
INDIA -- 1.4%
33,900 Reliance Industries Ltd., GDS............................ 286,031
23,500 State Bank of India, GDR+ ++............................. 420,062
-----------
706,093
-----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------ --------
<C> <S> <C>
BRAZIL -- 1.4%
1,075,600 Cia Saneamento Basico Estado......................... $ 255,395
3,600 Telebras, Sponsored ADR.............................. 419,175
-----------
674,570
-----------
AUSTRIA -- 1.3%
4,375 VA Technologie AG.................................... 664,311
-----------
BELGIUM -- 0.9%
3,498 Credit Communal Holdings............................. 469,692
-----------
SPAIN -- 0.6%
21,000 Iberdrola SA......................................... 276,370
-----------
IRELAND -- 0.3%
29,400 Greensource Group Plc................................ 138,088
-----------
LUXEMBORG -- 0.2%
2,800 Millicom International Cellular SA+.................. 105,350
-----------
INDONESIA -- 0.1%
585,000 PT Lippo Securities.................................. 23,932
76,000 Semen Gresik (F)..................................... 44,564
-----------
68,496
-----------
Total Common Stocks
(Cost $44,287,707).................................. 45,701,954
-----------
PREFERRED STOCK -- 0.5%
(Cost $212,179)
BRAZIL -- 0.5%
976,000 Petroleo Brasileiro SA............................... 228,248
-----------
WARRANT -- 0.1%#
(Cost $1,516)
9,000 Rhone-Polenc, expires 11/05/2001+.................... 31,545
-----------
RIGHTS -- 0.0%#
2,859 Housing & Commercial Bank............................ 0
3,552 Cia Saneamento Basico Estado Rts..................... 0
-----------
Total Rights
(Cost $0)........................................... 0
-----------
<CAPTION>
PRINCIPAL
AMOUNT
---------
<C> <S> <C>
REPURCHASE AGREEMENT -- 4.9%
(Cost $2,425,000)
$2,425,000 Agreement with State Street Bank & Trust Company,
5.750% dated 12/31/1997, to be repurchased at
$2,425,775 on 01/02/1998, collateralized by
$2,435,000 U.S. Treasury Note, 6.125% due
03/31/1998.
(Market Value -- $2,474,569)........................ 2,425,000
-----------
</TABLE>
See Notes to Financial Statements.
67
<PAGE>
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
INTERNATIONAL GROWTH FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION STRIKE VALUE
CONTRACTS DATE PRICE (NOTE 2)
--------- ---------- ------ --------
<C> <S> <C> <C> <C>
CALL OPTIONS PURCHASED ON STOCK INDICES -- 0.0%#
$ 755 Singapore DBS 50 Index.............. 01/22/1998 $402.713 $ 0
733 Singapore DBS 50 Index.............. 01/23/1998 406.912 0
722 Singapore DBS 50 Index.............. 01/26/1998 407.393 0
137 Singapore DBS 50 Index.............. 02/26/1998 404.003 0
-----------
Total Call Options Purchased on Stock Indices (Cost
$102,000)................................................ 0
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (COST $47,028,402*)........................ 97.5% 48,386,747
OTHER ASSETS AND LIABILITIES (NET)........................... 2.5 1,249,235
----- -----------
NET ASSETS................................................... 100.0% $49,635,982
===== ===========
</TABLE>
- ------------
* Aggregate cost for federal tax purposes is $47,610,657.
+ Non-income producing security.
++ A portion or all of this security is exempt from registration under Rule
144A of the Securities Act of 1933. This security may be resold in
transactions exempt from registration, normally to qualified institutional
buyers.
# Amount represents less than 0.1% of net assets.
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
U. S. FORWARD FOREIGN CURRENCY CONTRACTS TO BUY
<TABLE>
<CAPTION>
CONTRACTS TO RECEIVE
-------------------------------------- UNREALIZED
EXPIRATION LOCAL VALUE IN IN EXCHANGE DEPRECIATION
DATE CURRENCY U.S. $ FOR U.S. $ OF CONTRACTS
- ---------- ----------------------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
01/05/1998 NLG 239,284 $ 118,008 $ 118,118 $ (110)
02/27/1998 JPY 99,008,000 764,806 800,000 (35,194)
--------
$(35,304)
--------
U. S. FORWARD FOREIGN CURRENCY CONTRACTS TO SELL
<CAPTION>
CONTRACTS TO DELIVER
-------------------------------------- UNREALIZED
EXPIRATION LOCAL VALUE IN IN EXCHANGE APPRECIATION
DATE CURRENCY U.S. $ FOR U.S. $ OF CONTRACTS
- ---------- ----------------------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
01/02/1998 MXN 53,474 $ 6,626 $ 6,626 $ 0
01/05/1998 JPY 57,261,400 438,709 440,303 1,594
01/05/1998 MXN 162,106 20,086 20,097 11
01/06/1998 JPY 4,379,867 33,560 33,759 199
02/27/1998 JPY 1,191,866,925 9,206,799 9,743,859 537,060
--------
$538,864
--------
Net Unrealized Appreciation of Forward Foreign
Currency Contracts........................... $503,560
========
</TABLE>
AS OF DECEMBER 31, 1997 SECTOR DIVERSIFICATION WAS AS FOLLOWS:
<TABLE>
<CAPTION>
% OF VALUE
SECTOR DIVERSIFICATION NET ASSETS (NOTE 2)
---------------------- ---------- --------
<S> <C> <C>
COMMON STOCKS:
Financial Services...................................... 17.4% $ 8,654,565
Materials & Processing.................................. 8.6 4,282,866
Producer Durables....................................... 6.5 3,236,112
Telecommunications...................................... 7.8 3,893,078
Autos & Transportation.................................. 3.8 1,829,064
Technology.............................................. 7.7 3,766,795
Consumer Discretionary.................................. 6.9 3,431,346
Health Care............................................. 5.9 2,930,837
Energy.................................................. 9.5 4,730,495
Retail.................................................. 2.0 974,104
Consumer Staples........................................ 3.2 1,599,481
Other................................................... 12.8 6,373,211
----- -----------
TOTAL COMMON STOCKS..................................... 92.1 45,701,954
OTHER INVESTMENTS....................................... 5.4 2,684,793
----- -----------
TOTAL INVESTMENTS....................................... 97.5 48,386,747
OTHER ASSETS AND LIABILITIES (NET)...................... 2.5 1,249,235
----- -----------
NET ASSETS.............................................. 100.0% $49,635,982
===== ===========
</TABLE>
GLOSSARY OF TERMS
ADR--American Depositary Receipt
DEM--German Deutsche Mark
(F)--Foreign or Alien Shares
FRF--French Franc
GDR--Global Depositary Receipt
GDS--Global Depositary Share
JPY--Japanese Yen
NLG--Netherlands Guilder
MXN--Mexican Peso
See Notes to Financial Statements.
68
<PAGE>
PORTFOLIO OF INVESTMENTS
CAPITAL GROWTH PORTFOLIO
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------ --------
<C> <S> <C>
INVESTMENT COMPANY SECURITIES -- 103.3%
3,939 Emerging Growth Fund......................................... $ 61,571
30,910 Global Money Fund............................................ 30,910
10,964 Growth and Income Fund....................................... 185,513
15,215 Growth Fund.................................................. 234,459
5,008 International Growth Fund.................................... 61,399
15,210 Short Term High Quality Bond Fund............................ 36,959
--------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (COST $618,893*)............................. 103.3% 610,811
OTHER ASSETS AND LIABILITIES (NET)............................. (3.3) (19,428)
----- --------
NET ASSETS..................................................... 100.0% $591,383
===== ========
</TABLE>
- ------------
*Aggregate cost for federal tax purposes is $619,479.
GROWTH PORTFOLIO
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------ --------
<C> <S> <C>
INVESTMENT COMPANY SECURITIES -- 89.4%
8,024 Emerging Growth Fund...................................... $ 125,418
119,801 Global Money Fund......................................... 119,801
21,805 Growth and Income Fund.................................... 368,940
20,079 Growth Fund............................................... 309,416
15,017 International Growth Fund................................. 184,110
11,944 U.S. Government Fund...................................... 119,920
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (COST $1,238,045*)......................... 89.4% 1,227,605
OTHER ASSETS AND LIABILITIES (NET)........................... 10.6 146,057
----- ----------
NET ASSETS................................................... 100.0% $1,373,662
===== ==========
</TABLE>
- ------------
*Aggregate cost for federal tax purposes is $1,262,028.
See Notes to Financial Statements.
69
<PAGE>
PORTFOLIO OF INVESTMENTS
BALANCED PORTFOLIO
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------ --------
<C> <S> <C>
INVESTMENT COMPANY SECURITIES -- 100.7%
463,824 Global Money Fund......................................... $ 463,824
41,102 Growth and Income Fund.................................... 695,443
32,909 Growth Fund............................................... 507,132
19,201 International Growth Fund................................. 235,409
46,782 U.S. Government Fund...................................... 469,688
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (COST $2,377,987*)......................... 100.7% 2,371,496
OTHER ASSETS AND LIABILITIES (NET)........................... (0.7) (17,517)
----- ----------
NET ASSETS................................................... 100.0% $2,353,979
===== ==========
</TABLE>
- ------------
*Aggregate cost for federal tax purposes is $2,385,771.
VALUE PORTFOLIO
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
------ --------
<C> <S> <C>
INVESTMENT COMPANY SECURITIES -- 115.6%
1,722 Corporate Income Fund........................................ $ 17,547
28,951 Global Money Fund............................................ 28,951
1,026 Growth and Income Fund....................................... 17,365
367 Growth Fund.................................................. 5,648
4,769 Short Term High Quality Bond Fund............................ 11,588
3,479 U.S. Government Fund......................................... 34,932
--------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (COST $116,030*)............................. 115.6% 116,031
OTHER ASSETS AND LIABILITIES (NET)............................. (15.6) (15,678)
----- --------
NET ASSETS..................................................... 100.0% $100,353
===== ========
</TABLE>
- ------------
*Aggregate cost for federal tax purposes is $116,034.
See Notes to Financial Statements.
70
<PAGE>
NOTES TO FINANCIAL STATEMENTS
THE SIERRA VARIABLE TRUST
1. ORGANIZATION AND BUSINESS
The Sierra Variable Trust (the "Trust") was organized under the laws of the
Commonwealth of Massachusetts on January 29, 1993 as a business entity commonly
known as a "Massachusetts business trust". The Trust is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as a no-load,
open-end management investment company. The Trust offers fourteen managed
investment funds, consisting of nine funds: the Global Money Fund (the "Money
Fund"); the Short Term High Quality Bond, Short Term Global Government, U.S.
Government and Corporate Income Funds (the "Bond Funds"); the Growth and
Income, Growth, Emerging Growth and International Growth Funds (the "Equity
Funds"); (collectively the "Funds" or "Underlying Funds") and five portfolios:
Capital Growth, Growth, Balanced, Value and Income Portfolios (individually a
"Portfolio" and collectively the "Portfolios"), to the public through certain
variable annuity contracts offered by American General Life Insurance Company
("AG Life"). The Income Portfolio commenced operations on October 22, 1997 and
discontinued the offering of shares on November 6, 1997. Through investment in
the Underlying Funds, the Portfolios offer a range of asset allocation
strategies designed to accommodate different investment philosophies and goals.
The Money Fund invests directly in money market instruments of foreign and U.S.
issuers. The Bond Funds and the Equity Funds invest directly in securities or
other financial instruments. Each Portfolio of the Trust invests, within
predetermined percentage ranges, in up to nine of the Underlying Funds of the
Trust. In order to achieve its investment objective, each Portfolio typically
allocates its assets, within determined percentage ranges, among certain of the
Underlying Funds. The percentages reflect the extent to which each Portfolio
will invest in the particular market segment represented by each Underlying
Fund, and the varying degrees of potential investment risk and reward
represented by each Portfolio's investments in those market segments and their
corresponding Underlying Funds. Sierra Investment Services Corporation ("Sierra
Services") may alter these percentage ranges when it deems appropriate. The
assets of each Portfolio will be allocated among the Underlying Funds in
accordance with its investment objective, Sierra Services' outlook for the
economy and the financial markets and the relative market valuations of the
Underlying Funds. In addition, generally in order to meet liquidity needs or
for temporary defensive purposes, each Portfolio may invest its assets directly
in cash, stock or bond index futures, options, money market securities and
certain short-term debt instruments.
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 Funds and
Portfolios in the preparation of their financial statements.
PORTFOLIO VALUATION:
Money Fund: The investments of the Money Fund are valued on the basis of
amortized cost so long as the Trust's Board of Trustees (the "Board of
Trustees") determines that this method constitutes fair value. Amortized cost
involves valuing a portfolio instrument at its cost initially, and, thereafter,
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. The Money Fund attempts to maintain a constant net asset value
of $1.00 per share.
Bond Funds and Equity Funds: A security that is primarily traded on a United
States ("U.S.") or foreign exchange (including securities traded through the
NASDAQ National Market System) is valued at the last sale price on that
exchange or, if there were no sales during the day, at the current quoted bid
price. Portfolio securities that are primarily traded on foreign exchanges are
generally valued at the most recent closing values of such securities on their
respective exchanges. However, when an occurrence subsequent to the time a
value was so established is likely to have changed the value, then the fair
value of those securities will be determined in good faith through
consideration of other factors by or under the direction of the Board of
Trustees or its delegates. Over-the-counter securities that are not traded
through the NASDAQ National Market System and securities listed or traded on
certain foreign exchanges whose operations are similar to the U.S. over-the-
counter market, are valued on the basis of the bid price at the close of
business on each day. Investments in U.S. Government securities (other than
short-term securities) are valued at the average of the quoted bid and asked
prices in the over-the-counter market. The current market value of an option is
the last price on the principal exchange on which such option is traded or, in
the absence of a sale, is the mean between the last bid and offering price. The
value of a futures contract equals the unrealized gain or loss on the contract,
which is determined by marking the contract to the current settlement price for
a like contract acquired on
71
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
THE SIERRA VARIABLE TRUST
the day on which the futures contract is being valued. A settlement price may
not be issued if the market makes a limited move with respect to the security
or index underlying the futures contract. In such event, the futures contract
will be valued at a fair market value to be determined by or under the
direction of the Board of Trustees. Short-term investments that mature in 60
days or less are valued at amortized cost; such investments denominated in
foreign currencies are stated at amortized cost as determined in the foreign
currency, translated to U.S. dollars at the current day's exchange rate.
Corporate debt securities and debt securities of U.S. issuers (other than U.S.
Government securities and short-term investments) are valued by an independent
pricing service which utilizes market quotations and transactions, quotations
from dealers and various relationships among securities in determining value.
If not valued by a pricing service, such securities are valued at prices
obtained from independent brokers. Investments with prices that cannot be
readily obtained, if any, are carried at fair value as determined in good faith
under consistently applied procedures established by and under the supervision
of the Board of Trustees.
The Capital Growth Portfolio, Growth Portfolio, Balanced Portfolio, Value
Portfolio and Income Portfolio are valued at the net asset value per share of
each Underlying Fund determined as of the close of the New York Stock Exchange
on the valuation date.
REPURCHASE AGREEMENTS:
Each Fund or Portfolio may engage in repurchase agreement transactions. Under
the terms of a typical repurchase agreement, the Fund or Portfolio through its
custodian, takes possession of an underlying debt obligation subject to an
obligation of the seller to repurchase, and the Fund or Portfolio to resell,
the obligation at an agreed upon price and time, thereby determining the yield
during the Fund's or Portfolio's holding period. This arrangement results in a
fixed rate of return that is not subject to market fluctuations during the
Fund's or Portfolio's holding period. The value of the collateral is at least
equal at all times to the total amount of the repurchase obligation, including
interest. In the event of counterparty default, the Fund or Portfolio has the
right to use the collateral to offset losses incurred. There is potential loss
to the Fund or Portfolio in the event the Fund or 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 Fund or Portfolio seeks to assert its
rights. Each Fund's respective Sub-advisor, acting under the supervision of the
Trust's investment advisor, Sierra Investment Advisors Corporation ("Sierra
Advisors") and the Board of Trustees, reviews the value of the collateral and
the creditworthiness of those banks and dealers with which the Fund enters into
repurchase agreements to evaluate potential risks. Sierra Services, the
Portfolios' investment advisor, acting under the supervision of the Board of
Trustees, reviews the value of the collateral and the creditworthiness of those
banks and dealers with which the Portfolio enters into repurchase agreements to
evaluate potential risks.
REVERSE REPURCHASE AGREEMENTS:
Except for the Money Fund, all Funds and Portfolios may engage in reverse
repurchase agreements. Reverse repurchase agreements are the same as repurchase
agreements except that, in this instance, the Funds or Portfolios would assume
the role of seller/borrower in the transaction. The Funds or Portfolios may use
reverse repurchase agreements to borrow short term funds. The value of the
reverse repurchase agreements that the Funds or Portfolios have committed to
repurchase are reflected in the Funds' or Portfolios' Statements of Assets and
Liabilities. The Funds or Portfolios will maintain segregated accounts with the
Trust's custodian consisting of U.S. Government securities, cash or money
market instruments that at all times are in an amount equal to their
obligations under reverse repurchase agreements. Reverse repurchase agreements
involve the risks that the market value of the securities sold by the Funds or
Portfolios may decline below the repurchase price of the securities and, if the
proceeds from the reverse repurchase agreements are invested in securities,
that the market value of the securities bought may decline below the repurchase
price of the securities sold.
OPTION CONTRACTS:
All Funds, except the Money Fund, may engage in option contracts. The Funds may
use option contracts to manage their exposure to the stock and bond markets and
to fluctuations in interest rates and currency values. The underlying principal
amounts and option values are shown in the Portfolio of Investments under the
captions "Put Options Purchased on Foreign Currency," "Call Options Purchased
on Stock Indices" and "Call Options Written on Foreign Currency". These amounts
reflect each contract's exposure to the underlying instrument at December 31,
1997. Writing puts and buying calls tends to increase the Funds' exposure to
the underlying instrument. Buying puts and writing calls tends to decrease the
Funds' exposure to the underlying instrument or to hedge other Fund
investments.
72
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
THE SIERRA VARIABLE TRUST
Upon the purchase of a put option or a call option by the Funds, the premium
paid is recorded as an investment, the value of which is marked-to-market
daily. When a purchased option expires, the Funds will realize a loss in the
amount of the cost of the option. When the Funds enter into a closing sale
transaction, the Funds will realize a gain or loss depending on whether the
sales proceeds from the closing sale transaction are greater or less than the
cost of the option. When the Funds exercise a put option, they will realize a
gain or loss from the sale of the underlying security and the proceeds from
such sale will be decreased by the premium originally paid. When the Funds
exercise a call option, the cost of the security which the Funds purchase upon
exercise will be increased by the premium originally paid.
When the Funds write a call option or a put option, an amount equal to the
premium received by the Funds are recorded as a liability, the value of which
is marked-to-market daily. When a written option expires, the Funds realize a
gain equal to the amount of the premium received. When the Funds enter into a
closing purchase transaction, the Funds realize a gain (or loss if the cost of
the closing purchase transaction exceeds the premium received when the option
was sold) without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is eliminated. When a
written call option is exercised, the Funds realize a gain or loss from the
sale of the underlying security and the proceeds from such sale are increased
by the premium originally received. When a written put option is exercised, the
amount of the premium originally received will reduce the cost of the security
that the Funds purchased upon exercise.
The risk associated with purchasing options is limited to the premium
originally paid. Options written by Funds involve, to varying degrees, risk of
loss in excess of the option value reflected in the Statements of Assets and
Liabilities. The risk in writing a covered call option is that the Funds may
forego the opportunity of profit if the market price of the underlying security
increases and the option is exercised. The risk in writing a covered put option
is that the Funds may incur a loss if the market price of the underlying
security decreases and the option is exercised. In addition, there is the risk
the Funds may not be able to enter into a closing transaction because of an
illiquid secondary market or, for over-the-counter options, because of a
counterparty's inability to perform.
The Short Term High Quality Bond, Short Term Global Government, Growth and
International Growth Funds may engage in options on foreign currency and
options on interest rate futures as a hedge to provide protection against
adverse movements in the value of foreign securities in the portfolio.
Certain risks are associated with the use of options on foreign currency and
options on interest rate futures contracts as hedging devices. The predominant
risk is that the movement in the price of the instrument underlying such
options may not correlate perfectly with the movement in the prices of the
assets being hedged. The lack of correlation could render the Funds' hedging
strategy unsuccessful and could result in a loss to the Funds. In addition,
there is the risk that the Funds may not be able to enter into a closing
transaction because of an illiquid secondary market or, for over-the-counter
options, because of the counterparty's inability to perform. Options written by
Funds involve, to varying degrees, risk of loss in excess of the option value
reflected in the Statements of Assets and Liabilities.
FUTURES CONTRACTS:
Except for the Money Fund, all Funds and Portfolios may engage in futures
transactions. The Funds and Portfolios may use futures contracts to manage
their exposure to the stock and bond markets and to fluctuations in interest
rates and currency values. The underlying value of a futures contract is
incorporated within the unrealized appreciation/(depreciation) shown in the
Portfolio of Investments under the caption "Futures Contracts". This amount
reflects each contract's exposure to the underlying instrument at December 31,
1997. Buying futures contracts tends to increase the Fund's or Portfolio's
exposure to the underlying instrument. Selling futures contracts tends to
either decrease the Fund's or Portfolio's exposure to the underlying
instrument, or to hedge other Fund or Portfolio investments.
Upon entering into a futures contract, the Fund or Portfolio is required to
deposit with the broker an amount of cash or cash equivalents equal to a
certain percentage of the contract amount. This is known as the "initial
margin". Subsequent payments ("variation margin") are made or received by the
Fund or Portfolio each day, depending on the daily fluctuation of the value of
the contract. The daily changes in contract value are recorded as unrealized
gains or losses and the Fund or Portfolio recognizes a realized gain or loss
when the contract is closed. Futures contracts are valued at the settlement
price established by the board of trade or exchange on which they are traded.
There are several risks in connection with the use of futures contracts as a
hedging device. Futures contracts involve, to varying degrees, risk of loss in
excess of the futures variation margin reflected in the Statements of Assets
and Liabilities. The change
73
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
THE SIERRA VARIABLE TRUST
in the value of futures contracts primarily corresponds with the value of their
underlying instruments, which may not correlate with the change in the value of
the hedged instruments. In addition, there is the risk that the Fund or
Portfolio may not be able to enter into a closing transaction because of an
illiquid secondary market.
FOREIGN CURRENCY:
The books and records of the Funds and Portfolios are maintained in U.S.
dollars. Foreign currencies, investments and other assets and liabilities are
translated into U.S. dollars at the exchange rates prevailing at the end of the
period, and purchases and sales of investment securities, income and expenses
are translated on the respective dates of such transactions. It is not
practicable to isolate that portion of the results of operations arising as a
result of changes in the foreign exchange rates from the portion that arises
from changes in market prices of investments during the period. Accordingly,
all such changes have been reflected as net gain/(loss) from security
transactions in the Statements of Operations.
Unrealized gains and losses, not relating to securities, which result from
changes in foreign currency exchange rates have been included in unrealized
appreciation/(depreciation) of foreign currency and other assets and
liabilities. Unrealized gains and losses of securities, which result from
changes in foreign currency exchange rates as well as changes in market prices
of securities, have been included in unrealized appreciation/(depreciation) of
securities. Net realized foreign currency gains and losses include foreign
currency gains and losses resulting from changes in exchange rates between
trade date and settlement date on investment securities transactions, gains and
losses on foreign currency transactions and the difference between the amounts
of interest and dividends recorded on the books of the Funds and the amount
actually received. The portion of foreign currency gains and losses related to
fluctuation in exchange rates between the initial purchase trade date and
subsequent sale trade date is included in realized gain/(loss) from security
transactions.
FORWARD FOREIGN CURRENCY CONTRACTS:
The Short Term High Quality Bond, Short Term Global Government, Corporate
Income, Growth and Income, Growth, Emerging Growth and International Growth
Funds may enter into forward foreign currency contracts. Forward foreign
currency contracts are agreements to exchange one currency for another at a
future date and at a specified price. The Funds may use forward foreign
currency contracts to facilitate transactions in foreign securities and to
manage the Funds' foreign currency exposure. The U.S. dollar market value,
contract value and the foreign currencies the Funds have committed to buy or
sell are shown in the Portfolio of Investments under the caption "Schedule of
Forward Foreign Currency Contracts". These amounts represent the aggregate
exposure to each foreign currency the Funds have acquired or hedged through
forward foreign currency contracts at December 31, 1997. Forward foreign
currency contracts are reflected as both a forward foreign currency contract to
buy and a forward foreign currency contract to sell. Forward foreign currency
contracts to buy generally are used to acquire exposure to foreign currencies,
while forward foreign currency contracts to sell are used to hedge the Funds'
investments against currency fluctuations. Also, a forward foreign currency
contract to buy or sell can offset a previously acquired opposite forward
foreign currency contract.
Forward foreign currency contracts are marked-to-market daily using foreign
currency exchange rates supplied by an independent pricing service. The change
in a contract's market value is recorded by the Funds as an unrealized gain or
loss. When the contract is closed or delivery is taken, the Funds record a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
The use of forward foreign currency contracts does not eliminate fluctuations
in the underlying prices of the Fund's securities, but it does establish a rate
of exchange that can be achieved in the future. These forward foreign currency
contracts involve market risk in excess of the unrealized
appreciation/(depreciation) of forward foreign currency contracts reflected in
the Funds' Statements of Assets and Liabilities. Although forward foreign
currency contracts used for hedging purposes limit the risk of loss due to a
decline in the value of the hedged currency, they also limit any potential gain
that might result should the value of the currency increase. In addition, the
Funds could be exposed to risks if the counterparties to the contracts are
unable to meet the terms of their contracts. The Fund's Sub-advisor will enter
into forward foreign currency contracts only with parties approved by the Board
of Trustees because there is a risk of loss to the Funds if the counterparties
do not complete the transaction.
DOLLAR ROLL TRANSACTIONS:
The Short Term High Quality Bond, Short Term Global Government, U.S. Government
and Corporate Income Funds, in order to seek a high level of current income,
may enter into dollar roll transactions with financial institutions to take
advantage of
74
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
THE SIERRA VARIABLE TRUST
opportunities in the mortgage market. The value of the dollar roll transactions
are reflected in the Funds' Statements of Assets and Liabilities. A dollar roll
transaction involves a sale by the Funds of securities that they hold with an
agreement by the Funds to repurchase similar securities at an agreed upon price
and date. The securities repurchased will bear the same interest as those sold,
but generally will be collateralized at time of delivery by different pools of
mortgages with different prepayment histories than those securities sold. The
Funds are paid a fee for entering into a dollar roll transaction, that is
accrued as income over the life of the dollar roll contract. During the period
between the sale and repurchase, the Funds will not be entitled to receive
interest and principal payments on the securities sold. Management anticipates
that the proceeds of the sale will be invested in additional instruments for
the Funds, and the income from these investments, together with any additional
fee income received on the dollar roll transaction will generate income for the
Funds exceeding the interest that would have been earned on the securities
sold. Dollar roll transactions involve the risk that the market value of the
securities sold by the Funds may decline below the repurchase price of those
similar securities which the Fund is obligated to purchase or that the return
earned by the Fund with the proceeds of a dollar roll may not exceed
transaction costs.
INDEXED SECURITIES:
Each of the Funds, except for the Money Fund, may invest in indexed securities
whose value is linked either directly or inversely to changes in foreign
currencies, interest rates, commodities, inflation, indices, or other reference
instruments. Indexed securities may be more volatile than the reference
instrument itself, but any loss is limited to the amount of the original
investment.
ILLIQUID INVESTMENTS:
Up to 15% of the assets of each Bond and Equity Fund, and up to 10% of the
assets of the Money Fund, may be invested in securities that are not readily
marketable, including: (1) repurchase agreements with maturities greater than
seven calendar days; (2) time deposits maturing in more than seven calendar
days; (3) except for the Money Fund, to the extent a liquid secondary market
does not exist for the instruments, futures contracts and options thereon; (4)
certain over-the-counter options; (5) for the Money Fund and Growth and Income
Fund certain variable rate demand notes having a demand period of more than
seven days; and (6) securities, the disposition of which are restricted under
Federal securities laws, excluding certain Rule 144A securities as defined
below.
Illiquid securities generally cannot be sold or disposed of in the ordinary
course of business within seven days at approximately the value at which the
Funds have valued the investments. This may have an adverse effect on the
Fund's ability to dispose of particular illiquid securities at fair market
value and may limit the Fund's ability to obtain accurate market quotations for
purposes of valuing the securities and calculating the net asset value of
shares of the Fund. The Funds may also purchase securities that are not
registered under the Securities Act of 1933, as amended (the "Act"), but that
can be sold to qualified institutional buyers in accordance with Rule 144A
under the Act ("Rule 144A securities"). If a particular investment in Rule 144A
securities is not determined to be liquid under guidelines established by the
Board of Trustees, that investment will be included within the 15% or 10%
limitation, as applicable, on investment in illiquid securities.
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
earned less premiums amortized. Dividend income is recorded on the ex-dividend
date, except that certain dividends from foreign securities where ex-dividend
date has passed are recorded as soon as the Funds are informed of the ex-
dividend date.
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 Fund instructs the custodian to segregate assets of
the Fund in a separate account 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 Money Fund are declared daily and
paid monthly. Dividends from net investment income of the Bond Funds and each
of the Balanced, Value and Income Portfolios are declared and paid quarterly.
Dividends from net investment income of the Equity Funds and the Capital Growth
and Growth Portfolios are declared and
75
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
THE SIERRA VARIABLE TRUST
paid annually. Distributions of any net long-term capital gains earned by a
Fund or Portfolio are made annually. Distributions of any net short-term
capital gains earned by a Fund or Portfolio are distributed no less frequently
than annually at the discretion of the Board of Trustees. 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 Funds or Portfolios, timing
differences and differing characterization of distributions made by each Fund
or Portfolio as a whole.
For the year ended December 31, 1997, permanent differences resulting from book
and tax accounting for organizational costs and redesignated distributions were
reclassified to paid-in capital at year end as stated in the table to follow.
Certain reclassification adjustments were also made between undistributed net
investment income and realized gains due to different book and tax accounting
for currency gains and losses, market discounts, net operating losses, and
paydowns of certain debt instruments. Per share information in the Financial
Highlights reflects the effect of these reclassifications.
<TABLE>
<CAPTION>
INCREASE/(DECREASE) INCREASE/(DECREASE
UNDISTRIBUTED NET ACCUMULATED
INCREASE/(DECREASE) INVESTMENT NET REALIZED
PAID-IN CAPITAL INCOME/(LOSS) GAIN/(LOSS)
------------------- ------------------- ------------------
<S> <C> <C> <C>
Global Money Fund....... $ (3,291) $ 3,291 $ --
Short Term High Quality
Bond Fund.............. -- (38,558) 38,558
Short Term Global
Government Fund........ (3,291) 906,419 (903,128)
U.S. Government Fund.... (3,291) (14,212) 17,503
Corporate Income Fund... (3,291) (7,932) 11,223
Growth Fund............. (3,291) 500,574 (497,283)
Emerging Growth Fund.... (114,513) 162,766 (48,253)
International Growth
Fund................... (3,291) 2,549,400 (2,546,109)
Capital Growth
Portfolio.............. (2,336) 4,495 (2,159)
Growth Portfolio........ (2,336) 3,988 (1,652)
Balanced Portfolio...... (2,336) 10,095 (7,759)
Value Portfolio......... 779 (779) --
Income Portfolio........ 23 -- (23)
</TABLE>
FEDERAL INCOME TAXES:
It is each Fund's and 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 and 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.
EXPENSES:
Expenses that are directly related to one of the Funds or Portfolios are
charged directly to that Fund or Portfolio. General expenses of the Trust are
allocated to the Funds or Portfolios based upon the relative net assets of each
Fund or Portfolio. In addition, the Portfolios will indirectly bear their
prorated share of expenses of the Underlying Funds.
OTHER:
The Corporate Income Fund may purchase floating rate, inverse floating rate and
variable rate obligations. Floating rate obligations have an interest rate that
changes whenever there is a change in the external interest rate, while
variable rate obligations provide for a specified periodic adjustment in the
interest rate. The interest rate on an inverse floating rate obligation (an
"inverse floater") can be expected to move in the opposite direction from the
market rate of interest to which the inverse floater is indexed. The Fund may
purchase floating rate, inverse floating rate and variable rate obligations
that carry a demand feature which would permit the Fund to tender them back to
the issuer or remarketing agent at par value prior to maturity. Frequently,
floating rate, inverse floating rate and variable rate obligations are secured
by letters of credit or other credit support arrangements provided by banks.
The Corporate Income Fund may purchase mortgage-backed securities that are
floating rate, inverse floating rate and variable rate obligations. The Money
Fund and Growth and Income Fund may purchase variable rate demand notes.
Although variable rate demand notes are frequently not rated by credit rating
agencies, unrated notes purchased by the Funds will be of comparable quality at
the time of purchase to rated instruments that may be purchased by such Fund,
as determined by such Fund's Sub-advisor. Moreover, while there may be no
active secondary market
76
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
THE SIERRA VARIABLE TRUST
with respect to a particular variable rate demand note purchased by a Fund, the
Fund may, upon the notice specified in the note, demand payment of the
principal of and accrued interest on the note at any time and may resell the
note at any time to a third party. The absence of such an active secondary
market, however, could make it difficult for a Fund to dispose of a particular
variable rate demand note in the event the issuer of the note defaulted on its
payment obligations, and the Fund could, for this or other reasons, suffer a
loss to the extent of the default.
An inverse floater may be considered to be leveraged to the extent that its
interest rate varies by a magnitude that exceeds the magnitude of the change in
the index rate of interest. The higher degree of leverage inherent in inverse
floaters is associated with greater volatility in their market values.
Accordingly, the duration of an inverse floater may exceed its stated final
maturity. Inherent in these instruments is the risk of potential loss should
the Fund be delayed or prevented from exercising the put feature.
3. INVESTMENT ADVISORY, SUB-ADVISORY, ADMINISTRATION FEES AND OTHER
TRANSACTIONS
Sierra Advisors, an indirect wholly-owned subsidiary of Washington Mutual,
Inc., ("Washington Mutual"), serves as investment advisor to the Funds. Sierra
Services, an indirect wholly-owned subsidiary of Washington Mutual, serves as
investment advisor of each of the Portfolios. J.P. Morgan Investment Management
Inc. ("J.P. Morgan"), a wholly-owned subsidiary of J.P. Morgan & Co.
Incorporated, a publicly traded company, serves as the Sub-advisor to the Money
Fund and Growth and Income Fund. Scudder Kemper Investments, Inc. (formerly
Scudder, Stevens & Clark, Inc.) ("Scudder") a wholly-owned subsidiary of the
Zurich Group, serves as the Sub-advisor to the Short Term High Quality Bond and
Short Term Global Government Funds. BlackRock Financial Management, Inc.
("BlackRock"), an indirect wholly-owned subsidiary of PNC Bank, N.A., an
indirect wholly-owned subsidiary of PNC Bank Corp. ("PNC"), a publicly traded
multi-bank holding company, serves as the Sub-advisor to the U.S. Government
Fund. TCW Funds Management, Inc. ("TCW"), a wholly-owned subsidiary of The TCW
Group, Inc., a privately held company, serves as the Sub-advisor to the
Corporate Income Fund. Janus Capital Corporation ("Janus"), an indirect
majority-owned subsidiary of Kansas City Southern Industries, Inc., which is a
publicly traded holding company, serves as the Sub-advisor to the Growth and
Emerging Growth Funds. Warburg Pincus Asset Management, Inc. (formerly Warburg,
Pincus Counsellors, Inc.) ("Warburg"), a privately held corporation, serves as
the Sub-advisor to the International Growth Fund. Each of the foregoing sub-
advisors is referred to individually as a "Sub-advisor" and collectively as the
"Sub-advisors".
The Trust pays Sierra Advisors a monthly fee, in arrears, based on a percentage
of the average daily net assets of each Fund during the month, out of which
Sierra Advisors pays the Sub-advisor of each Fund a monthly fee, in arrears, at
annual rates as follows:
<TABLE>
<CAPTION>
FEES ON FEES ON
ASSETS EQUAL TO ASSETS
OR LESS THAN EXCEEDING
NAME OF FUND $500 MILLION $500 MILLION
------------ --------------- ----------------
<S> <C> <C>
Global Money Fund
Sierra Advisors.......... .35% .25%
Sub-advisor.............. .15% .15%
--- ---
Total fees paid to
Sierra Advisors*....... .50% .40%
=== ===
<CAPTION>
FEES ON
ASSETS EXCEEDING
FEES ON $200 MILLION AND FEES ON
ASSETS EQUAL TO EQUAL TO OR ASSETS
OR LESS THAN LESS THAN EXCEEDING
$200 MILLION $500 MILLION $500 MILLION
--------------- ---------------- ------------
<S> <C> <C> <C>
Short Term High Quality
Bond Fund
Sierra Advisors.......... .35% .35% .30%
Sub-advisor.............. .15% .10% .10%
--- --- ---
Total fees paid to Si-
erra Advisors*......... .50% .45% .40%
=== === ===
Short Term Global Govern-
ment Fund
Sierra Advisors.......... .47% .65% .55%
Sub-advisor.............. .28% .10% .10%
--- --- ---
Total fees paid to Si-
erra Advisors*......... .75% .75% .65%
=== === ===
</TABLE>
77
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
THE SIERRA VARIABLE TRUST
<TABLE>
<CAPTION>
WHEN "COMBINED ASSETS"**
WHEN "COMBINED ASSETS"** EXCEED $650 MILLION AND
ARE EQUAL TO OR LESS THAN ARE EQUAL TO OR LESS WHEN "COMBINED ASSETS"**
$650 MILLION THAN $1 BILLION EXCEED $1 BILLION
---------------------------- ---------------------------- ----------------------------
FEES ON FEES ON FEES ON FEES ON FEES ON FEES ON
ASSETS EQUAL TO ASSETS ASSETS EQUAL TO ASSETS ASSETS EQUAL TO ASSETS
OR LESS THAN EXCEEDING OR LESS THAN EXCEEDING OR LESS THAN EXCEEDING
NAME OF FUND $500 MILLION $500 MILLION $500 MILLION $500 MILLION $500 MILLION $500 MILLION
------------ --------------- ------------ --------------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Fund
Sierra Advisors........ .415% .315% .45% .35% .50% .40%
Sub-advisor**.......... .185% .185% .15% .15% .10% .10%
---- ---- --- --- --- ---
Total fees paid to
Sierra Advisors*..... .600% .500% .60% .50% .60% .50%
==== ==== === === === ===
</TABLE>
<TABLE>
<CAPTION>
FEES ON FEES ON
ASSETS EQUAL TO ASSETS
OR LESS THAN EXCEEDING
$500 MILLION $500 MILLION
--------------- ------------
<S> <C> <C>
Corporate Income Fund
Sierra Advisors........................ .35% .25%
Sub-advisor............................ .30% .25%
--- ---
Total fees paid to Sierra Advisors*... .65% .50%
=== ===
</TABLE>
<TABLE>
<CAPTION>
FEES ON FEES ON FEES ON
ASSETS EXCEEDING ASSETS EXCEEDING ASSETS EXCEEDING
FEES ON $100 MILLION $200 MILLION $400 MILLION FEES ON
ASSETS EQUAL TO AND EQUAL TO AND EQUAL TO AND EQUAL TO ASSETS
OR LESS THAN OR LESS THAN OR LESS THAN OR LESS THAN EXCEEDING
$100 MILLION $200 MILLION $400 MILLION $500 MILLION $500 MILLION
--------------- ---------------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Growth and Income Fund
Sierra Advisors........ .35% .35% .35% .35% .275%
Sub-advisor............ .45% .40% .35% .30% .300%
--- --- --- --- ----
Total fees paid to
Sierra Advisors*..... .80% .75% .70% .65% .575%
=== === === === ====
</TABLE>
<TABLE>
<CAPTION>
FEES ON FEES ON
ASSETS EQUAL TO ASSETS
OR LESS THAN EXCEEDING
$25 MILLION $25 MILLION
--------------- ----------------
<S> <C> <C>
Growth Fund
Sierra Advisors.......... .40% .375%
Sub-advisor.............. .55% .500%
--- ----
Total fees paid to
Sierra Advisors*....... .95% .875%
=== ====
<CAPTION>
FEES ON
ASSETS EXCEEDING
FEES ON $25 MILLION AND FEES ON
ASSETS EQUAL TO EQUAL TO OR ASSETS
OR LESS THAN LESS THAN EXCEEDING
$25 MILLION $500 MILLION $500 MILLION
--------------- ---------------- ------------
<S> <C> <C> <C>
Emerging Growth Fund
Sierra Advisors.......... .35% .35% .25%
Sub-advisor.............. .55% .50% .50%
--- ---- ---
Total fees paid to Si-
erra Advisors*......... .90% .85% .75%
=== ==== ===
</TABLE>
78
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
THE SIERRA VARIABLE TRUST
<TABLE>
<CAPTION>
FEES ON
ASSETS EXCEEDING
FEES ON $50 MILLION AND FEES ON
ASSETS EQUAL TO EQUAL TO OR ASSETS
OR LESS THAN LESS THAN EXCEEDING
NAME OF FUND $50 MILLION $125 MILLION $125 MILLION
------------ --------------- ---------------- ------------
<S> <C> <C> <C>
International Growth Fund
Sierra Advisors .45% .35% .25%
Sub-advisor.............. .50% .50% .50%
--- --- ---
Total fees paid to
Sierra Advisors*....... .95% .85% .75%
=== === ===
</TABLE>
------------
* Sierra Advisors retains only the net amount of the fees after sub-
advisory fees have been paid.
** The monthly fee paid to BlackRock is based upon the combined average
daily net assets of the U.S. Government Fund and the Sierra Trust
Fund's U.S. Government Fund (together, the "Combined Assets").
As investment advisor to the Portfolios, Sierra Services provides its
proprietary asset allocation services to the Portfolios, formulates the
Portfolios' investment policies, analyzes economic and market trends, exercises
investment discretion over the assets of the Portfolios and monitors the
allocation of each Portfolio's assets and each Portfolio's performance. For its
investment advisory services to the Portfolios, Sierra Services is entitled to
a fee, which is calculated daily and paid monthly, at an annual rate of 0.10%
of each Portfolio's average daily net assets.
Sierra Advisors, certain Sub-advisors, and Sierra Services may voluntarily
waive fees payable to them from time to time. Any fee waivers by a Sub-advisor
may be retained by Sierra Advisors, or Sierra Advisors may pass part or all of
such fee waivers through to the Funds.
Fees voluntarily waived by Sierra Advisors for the year ended December 31, 1997
are as follows:
<TABLE>
<CAPTION>
NAME OF FUND FEES WAIVED
------------ -----------
<S> <C>
Global Money Fund............................................. $29,077
Short Term High Quality Bond Fund............................. 3,755
</TABLE>
Sierra Fund Administration Corporation ("Sierra Administration"), an indirect
wholly-owned subsidiary of Washington Mutual, serves as administrator to each
Fund and Portfolio. First Data Investor Services Group, Inc., a wholly-owned
subsidiary of First Data Corporation, serves as sub-administrator and transfer
agent to each Fund and Portfolio. For its services as administrator, each Fund
or Portfolio pays Sierra Administration a monthly fee at an annual rate of .18%
and .15%, respectively, of the value of each Fund's or Portfolio's average
daily net assets. Out of its fee, Sierra Administration pays First Data
Investor Services Group, Inc. for its services as sub-administrator. The Trust
pays First Data Investor Services Group, Inc. for its services as transfer
agent and for certain related out-of-pocket expenses.
Fees voluntarily waived and expenses absorbed by Sierra Administration for the
year ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
NAME OF FUND FEES WAIVED EXPENSES ABSORBED
------------ ----------- -----------------
<S> <C> <C>
Capital Growth Portfolio.................... $ 265 $26,463
Growth Portfolio............................ 665 27,116
Balanced Portfolio.......................... 1,274 29,258
Value Portfolio............................. 25 19,620
Income Portfolio............................ -- 5,469
</TABLE>
The Trust also pays Boston Safe Deposit and Trust Company ("Boston Safe"), the
Trust's custodian, certain custodial transaction charges. Boston Safe is a
wholly-owned subsidiary of Mellon Bank Corporation.
79
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
THE SIERRA VARIABLE TRUST
Custodian fees have been reduced by credits allowed by Boston Safe for the year
ended December 31, 1997 as follows:
<TABLE>
<CAPTION>
CREDITS
ALLOWED BY THE
NAME OF FUND CUSTODIAN
------------ --------------
<S> <C>
Global Money Fund.......................................... $ 441
Short Term High Quality Bond Fund.......................... 426
Short Term Global Government Fund.......................... 696
U.S. Government Fund....................................... 3,098
Corporate Income Fund...................................... 626
Growth and Income Fund..................................... 1,415
Growth Fund................................................ 6,420
Emerging Growth Fund....................................... 3,184
International Growth Fund.................................. 1,062
Capital Growth Portfolio................................... 144
Growth Portfolio........................................... 237
Balanced Portfolio......................................... 224
Value Portfolio............................................ 26
</TABLE>
4. TRUSTEES' FEES
No director, officer or employee of Washington Mutual or its subsidiaries, the
Sub-advisors or First Data Investor Services Group, Inc., or any of their
affiliates receives any compensation from the Trust for serving as an officer
or Trustee of the Trust. The Trust pays each unaffiliated Trustee, $5,000 per
annum plus $1,250 per board meeting attended, $1,000 per audit and/or
nominating committee meeting attended and reimbursement for travel and out-of-
pocket expenses. The Lead Trustee receives one and a half times the normal
Trustee's compensation. The Chairman of the Audit Committee receives $1,500 per
audit committee meeting attended.
For the year ended December 31, 1997, Sierra Advisors reimbursed the Funds and
the Portfolios for Trustees fees in the amount of $7,484 for all special
meetings held with regards to the sale of Sierra Capital Management
Corporation, as well as, to the merger between GWFC and Washington Mutual, Inc.
("Washington Mutual").
Pursuant to an exemptive order granted by the Securities and Exchange
Commission, the Trust's eligible Trustees may participate in a deferred
compensation plan (the "Plan") which may be terminated at any time. Under the
Plan, Trustees may elect to defer receipt of all or a portion of their fees
which, in accordance with the Plan, are invested in mutual fund shares. Upon
termination of the Plan, Trustees that have deferred accounts under the Plan
will be paid benefits no later than the time the payments would otherwise have
been made without regard to such termination. All benefits provided under these
plans are funded and any payments to plan participants are paid solely out of
the Trust's assets.
80
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
THE SIERRA VARIABLE TRUST
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 year ended
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
NAME OF FUND PURCHASES SALES
------------ ------------ -----------
<S> <C> <C>
Short Term High Quality Bond Fund............... $ 1,559,963 $ 2,998,737
Short Term Global Government Fund............... 13,592,038 14,403,675
U.S. Government Fund............................ 12,039,466 5,988,971
Corporate Income Fund........................... 5,404,889 12,269,016
Growth and Income Fund.......................... 109,412,719 91,679,286
Growth Fund..................................... 166,754,109 173,243,569
Emerging Growth Fund............................ 52,086,801 67,308,125
International Growth Fund....................... 46,840,009 56,620,345
Capital Growth Portfolio........................ 657,400 38,403
Growth Portfolio................................ 1,615,878 357,368
Balanced Portfolio.............................. 2,613,755 218,225
Value Portfolio................................. 118,561 2,549
Income Portfolio................................ 2,906 2,929
</TABLE>
The aggregate cost of purchases and proceeds from sales of U.S. Government
securities, excluding short-term investments, for the year ended December 31,
1997 were as follows:
<TABLE>
<CAPTION>
NAME OF FUND PURCHASES SALES
------------ ------------ ------------
<S> <C> <C>
Short Term High Quality Bond Fund.............. $ 3,381,901 $ 3,009,672
Short Term Global Government Fund.............. -- 466,345
U.S. Government Fund........................... 124,536,213 143,920,015
Corporate Income Fund.......................... 13,014,006 12,918,837
</TABLE>
At December 31, 1997, 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:
<TABLE>
<CAPTION>
TAX BASIS TAX BASIS
UNREALIZED UNREALIZED
NAME OF FUND APPRECIATION DEPRECIATION
------------ ------------ ------------
<S> <C> <C>
Short Term High Quality Bond Fund............... $ 168,192 $ 6,948
Short Term Global Government Fund............... 102,262 681,678
U.S. Government Fund............................ 2,917,482 42,343
Corporate Income Fund........................... 2,639,615 469,176
Growth and Income Fund.......................... 13,365,654 2,326,216
Growth Fund..................................... 17,377,429 4,007,843
Emerging Growth Fund............................ 9,416,720 666,272
International Growth Fund....................... 4,984,558 4,208,468
Capital Growth Portfolio........................ 3,307 11,975
Growth Portfolio................................ 8,289 42,712
Balanced Portfolio.............................. 21,253 35,528
Value Portfolio................................. 272 275
</TABLE>
Option activity for the Short Term High Quality Bond Fund for the year ended
December 31, 1997 was as follows:
<TABLE>
<CAPTION>
NUMBER OF
WRITTEN OPTIONS: PREMIUMS CONTRACTS
---------------- -------- ---------
<S> <C> <C>
Options outstanding at December 31, 1996............. $ 3,552 725,000
Options written...................................... 3,589 725,000
Options expired...................................... (3,589) (725,000)
Options closed....................................... (3,552) (725,000)
------- --------
Options outstanding at December 31, 1997............. $ 0 0
======= ========
</TABLE>
81
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
THE SIERRA VARIABLE TRUST
Option activity for the Short Term Global Government Fund for the year ended
December 31, 1997 was as follows:
<TABLE>
<CAPTION>
NUMBER OF
WRITTEN OPTIONS ON FOREIGN CURRENCY: PREMIUMS CONTRACTS
------------------------------------ --------- --------------
<S> <C> <C>
Options outstanding at December 31, 1996...... $ 34,280 4,003,600,000
Options written............................... 220,552 3,827,920,000
Options expired............................... (16,842) (1,380,000)
Options closed................................ (113,363) (17,193,500)
Options exercised............................. (113,022) (7,812,396,500)
--------- --------------
Options outstanding at December 31, 1997...... $ 11,605 550,000
========= ==============
</TABLE>
Information regarding dollar roll transactions by the U.S. Government and
Corporate Income Funds is as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT CORPORATE
DOLLAR ROLL TRANSACTIONS: FUND INCOME FUND
------------------------- --------------- -----------
<S> <C> <C>
Maximum amount outstanding during the peri-
od.......................................... $10,194,376 $3,061,563
Average amount outstanding during the peri-
od*......................................... $ 3,794,359 $ 567,141
Average monthly shares outstanding during the
period...................................... 6,388,215 5,392,785
Average debt per share outstanding during the
period...................................... $ 0.59 $ 0.21
</TABLE>
------------
* The average amount outstanding during the period was calculated by
adding the borrowings at the end of each day and dividing the sum by
the number of days in the year ended December 31, 1997.
Fee income earned for the year ended December 31, 1997 by the U.S. Government
and Corporate Income Funds for dollar roll transactions aggregated $66,904 and
$22,032, respectively.
Information regarding reverse repurchase agreement transactions by the U.S.
Government Fund is as follows:
Reverse Repurchase Agreement for the U.S. Government Fund:
<TABLE>
<CAPTION>
FACE MARKET
VALUE VALUE
----- ----------
<C> <S> <C>
$2,831,625 Reverse Repurchase Agreement with Lehman
Brothers, 6.300% dated 12/30/1997, to be
repurchased at $2,836,085 on 01/08/1998,
collateralized by $2,700,000 U.S. Treasury
Note, 6.250% due 06/30/2002.................... $2,831,625
----------
</TABLE>
<TABLE>
<CAPTION>
REVERSE REPURCHASE AGREEMENTS:
------------------------------
<S> <C>
Maximum amount outstanding during the period................. $15,642,013
Average amount outstanding during the period*................ $ 7,803,559
Average monthly shares outstanding during the period......... 6,388,215
Average debt per share outstanding during the period......... $ 1.22
</TABLE>
------------
* The average amount outstanding during the period was calculated by
adding the borrowings at the end of each day and dividing the sum by
the number of days in the year ended December 31, 1997.
Interest rates ranged from 3.40% to 6.30% during the period. Interest incurred
for the year ended December 31, 1997, on borrowings by the Fund under reverse
repurchase agreements aggregated $400,422.
6. SHARES OF BENEFICIAL INTEREST
The Trust may issue an unlimited number of shares of beneficial interest, each
without par value.
7. ORGANIZATION COSTS
Expenses incurred in connection with the organization of the Global Money,
Short Term Global Government, U.S. Government, Corporate Income, Growth and
International Growth Funds and the Portfolios, including the fees and expenses
of registering and qualifying each Fund's and Portfolio's shares for
distribution under Federal and state securities regulations,
82
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
THE SIERRA VARIABLE TRUST
are being amortized on a straight-line basis over a period of 60 months from
commencement of operations of each Fund and Portfolio. In the event any of the
initial shares of a Fund or Portfolio are redeemed by any holder thereof during
the amortization period, the proceeds of such redemptions will be reduced by an
amount equal to the pro-rata portion of the applicable Fund's and Portfolio's
unamortized deferred organizational expenses in the same proportion as the
number of shares being redeemed bears to the number of initial shares of such
Fund or Portfolio outstanding at the time of such redemption.
8. CAPITAL LOSS CARRYFORWARDS
At December 31, 1997, the following Funds had available for federal income tax
purposes unused capital losses as follows:
<TABLE>
<CAPTION>
NAME OF FUND EXPIRING IN 2002 EXPIRING IN 2003 EXPIRING IN 2004 EXPIRING IN 2005
------------ ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Short Term High Quality
Bond Fund.............. $ 87,775 $ 71,035 $241,115 $ 75,877
Short Term Global Gov-
ernment Fund........... 89,073 91,070 -- 58,016
U.S. Government Fund.... 750,083 1,366,480 -- 151,690
Corporate Income Fund... 1,219,634 878,516 144,318 --
Balanced Portfolio...... -- -- -- 4,669
</TABLE>
Under current tax law, capital losses realized after October 31, may be
deferred and treated as occurring on the first day of the following fiscal
year.
For the fiscal year ended December 31, 1997, the following Funds have elected
to defer losses occurring between November 1, 1997 and December 31, 1997 under
these rules, as follows:
<TABLE>
<CAPTION>
CAPITAL
LOSSES
NAME OF FUND DEFERRED
------------ ----------
<S> <C>
Short Term High Quality Bond Fund............................. $ 4,360
Short Term Global Government Fund............................. 70,931
U.S. Government Fund.......................................... 45,358
Corporate Income Fund......................................... 71,887
International Growth Fund..................................... 4,906,628
</TABLE>
Such deferred losses will be treated as arising on the first day of the fiscal
year ending December 31, 1997.
9. GEOGRAPHIC AND INDUSTRY CONCENTRATION
All Funds, except the U.S. Government Fund, may invest in securities of foreign
companies and foreign governments. There are certain risks involved in
investing in foreign securities that are in addition to the usual risks
inherent in domestic investments. These risks include those resulting from
future adverse political and economic developments and the possible imposition
of currency exchange blockages or other foreign governmental laws or
restrictions.
In addition, the Money Fund may invest at least 25% of its assets in bank
obligations. As a result of this concentration policy, the Fund's investments
may be subject to greater risk than a fund that does not concentrate in the
banking industry. In particular, bank obligations may be subject to the risks
associated with interest rate volatility, changes in Federal and state laws and
regulations governing the banking industry and the inability of borrowers to
pay principal and interest when due. In addition, foreign banks present risks
similar to those investing in foreign securities generally and are not subject
to the same reserve requirements and other regulations as U.S. banks.
10. RISK FACTORS OF THE PORTFOLIOS
Investing in the Underlying Funds through the Portfolios involves certain
additional expenses and tax results that would not be present in a direct
investment in the Underlying Funds. Under certain circumstances, an Underlying
Fund may determine to make payment of a redemption request by a Portfolio
wholly or partly by a distribution in kind of securities from its portfolio,
instead of cash, in accordance with the rules of the Securities and Exchange
Commission. In such cases, the Portfolios may hold securities distributed by an
Underlying Fund until Sierra Services determines that it is appropriate to
dispose of such securities.
Certain Underlying Funds may: invest a portion of their assets in foreign
securities; enter into forward foreign currency transactions; lend their
portfolio securities; enter into stock index, interest rate and currency
futures contracts, and options on
83
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
THE SIERRA VARIABLE TRUST
such contracts; enter into interest rate swaps or purchase or sell interest
rate caps or floors; engage in other types of options transactions; make short
sales; purchase zero coupon and payment-in-kind bonds; engage in repurchase or
reverse repurchase agreements; purchase and sell "when-issued" securities and
engage in "delayed-delivery" transactions; and engage in various other
investment practices each with inherent risks.
The Capital Growth Portfolio can invest as much as 50% of its total assets in
the Growth Fund and as much as 50% of its total assets in the Emerging Growth
Fund, each of which Underlying Funds may invest as much as 35% of its total
assets in lower-rated bonds. Securities rated below investment grade generally
involve greater price volatility and risk of principal and income and may be
less liquid than higher rated securities.
Certain Portfolios invest as much as 50% of their total assets in the Growth or
Emerging Growth Funds, each of which may invest up to 25% of its total assets
in foreign equity securities and as much as 5% of its total assets in
securities in developing or emerging markets countries. Certain Portfolios
invest as much as 50% of their total assets in the International Growth Fund,
which invests primarily in the foreign equity securities, and may invest as
much as 30% of its total assets in securities in developing or emerging market
countries. These investments will subject such Portfolios to risks associated
with investing in foreign securities including those resulting from future
adverse political and economic developments and the possible imposition of
currency exchange blockages or other foreign governmental laws or restrictions.
The officers and Trustees of the Trust also serve as officers and Trustees of
the Underlying Funds. In addition, Sierra Services, the investment advisor and
distributor of each Portfolio, and Sierra Advisors, the investment advisor of
the Underlying Funds, are both wholly-owned subsidiaries of SCMC. Also, Sierra
Services is the distributor of the shares of the Underlying Funds. Conflicts
may arise as these companies seek to fulfill their fiduciary responsibilities
to both the Portfolios and the Underlying Funds.
From time to time, one or more of the Underlying Funds used for investment by a
Portfolio may experience relatively large investments or redemptions due to
reallocations or rebalancings by the Portfolios as recommended by Sierra
Services. These transactions will affect the Underlying Funds, since the
Underlying Funds that experience redemptions as a result of the reallocations
or rebalancings may have to sell portfolio securities and Underlying Funds that
receive additional cash will have to invest such cash. While it is impossible
to predict the overall impact of these transactions over time, there could be
adverse effects on portfolio management to the extent that the Underlying Funds
may be required to sell securities or invest cash at times when they would not
otherwise do so. These transactions could also have tax consequences if sales
of securities resulted in gains and could also increase transactions costs.
Sierra Advisors, representing the interests of the Underlying Funds, is
committed to minimizing the impact of Portfolio transactions on the Underlying
Funds; Sierra Services, representing the interest of the shareholders of the
Portfolios, is also committed to minimizing such impact on the Underlying Funds
to the extent it is consistent with pursuing the investment objectives of the
Portfolios. Sierra Advisors and Sierra Services will nevertheless face
conflicts in fulfilling their respective responsibilities because they are
affiliates and employ some of the same investment professionals.
11. SUBSEQUENT EVENT
Effective January 17, 1998, Scudder resigned as sub-advisor to the Short Term
High Quality Bond and Short Term Global Government Funds. Until a sub-advisor
is selected and approved, the advisor has made arrangements to have the funds
sub-advised by Composite Research & Management, an affiliate of Washington
Mutual.
On January 30, 1998, the Short Term High Quality Bond Fund acquired the assets
and certain liabilities of the Short Term Global Government Fund, in a taxable
exchange for shares of the Short Term High Quality Bond Fund, pursuant to a
plan of reorganization approved by the Short Term Global Government Fund's
shareholders. Total shares issued, the value of the shares issued, and the
total net assets of the Short Term High Quality Bond Fund were $7,335,547,
$17,927,046 and $11,943,903, respectively. The total net assets of the Short
Term Global Government Fund were $17,927,046. The total net assets of the Short
Term High Quality Bond Fund after the acquisition was $29,870,949.
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REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES AND SHAREHOLDER OF THE SIERRA VARIABLE TRUST
In our opinion, the accompanying statements of assets and liabilities,
including the portfolios of investments, and the related statements of
operations, the statement of cash flows for the U.S. Government Fund, the
statements of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of each of the nine
funds and five portfolios constituting The Sierra Variable Trust (the "Trust"),
at December 31, 1997, the results of each of their operations, the cash flows
for the U.S. Government Fund, the changes in each of their net assets and the
financial highlights of each of the funds and portfolios for the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at December 31, 1997 by correspondence with the custodian and
brokers, and the application of alternative auditing procedures where
confirmations from brokers were not received, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
BOSTON, MASSACHUSETTS
FEBRUARY 20, 1998
85
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SPECIAL MEETING OF SHAREHOLDERS (UNAUDITED)
THE SIERRA VARIABLE TRUST
At a special meeting of the Trust held on December 23, 1997, the following
actions were taken:
(1) To consider and act upon a proposal to elect a Board of Trustees of the
Trust (voted on by the shareholders of the Trust as a whole).
AGAINST
OR
FOR WITHHOLD ABSTAINED TOTAL*
---------- --------- --------- ----------
74,714,546 1,885,559 -- 76,600,105
(2) To approve a new Investment Management Agreement between the Trust, on
behalf of each Fund and Portfolio, and Composite Research & Management
Co. ("Composite") (voted on separately by shareholders of each Fund and
Portfolio).
AGAINST
OR
FOR WITHHELD ABSTAINED TOTAL*
---------- --------- --------- ----------
Global Money Fund................ 27,226,762 814,456 3,408,593 31,449,815
Short Term High Quality Bond
Fund............................ 4,278,810 308,100 357,223 4,944,132
U.S. Government Fund............. 5,242,596 143,756 740,986 6,127,345
Corporate Income Fund............ 4,488,117 144,338 420,692 5,053,151
Growth and Income Fund........... 5,143,764 120,210 535,184 5,799,161
Growth Fund...................... 6,800,178 302,719 679,821 7,782,722
Emerging Growth Fund............. 2,825,092 117,905 240,115 3,183,116
International Growth Fund........ 3,898,974 193,075 312,836 4,404,893
Capital Growth Portfolio......... 49,466 -- -- 49,466
Growth Portfolio................. 104,060 -- -- 104,060
Balanced Portfolio............... 175,548 23,210 -- 198,762
Value Portfolio.................. 9,807 -- -- 9,807
(3) To approve a proposal which would authorize the Board of Trustees to
replace or appoint investment sub-advisers for each Fund without the
necessity of seeking share approval (voted on separately by shareholders
of each Fund).
AGAINST
OR
FOR WITHHELD ABSTAINED TOTAL*
---------- --------- --------- ----------
Global Money Fund................ 26,559,097 1,833,514 3,057,201 31,449,815
Short Term High Quality Bond
Fund............................ 4,085,476 316,623 542,029 4,944,132
U.S. Government Fund............. 5,044,535 426,274 656,529 6,127,345
Corporate Income Fund............ 4,262,887 350,801 439,459 5,053,151
Growth and Income Fund........... 4,868,034 427,443 503,667 5,799,161
Growth Fund...................... 6,437,191 609,605 735,922 7,782,722
Emerging Growth Fund............. 2,671,824 268,046 243,242 3,183,116
International Growth Fund........ 3,787,939 288,399 328,552 4,404,893
(4) To approve a new Investment Sub-Advisory Agreement for the Growth Fund
between Composite and Janus Capital Corporation ("Janus") (voted on by
the shareholders of the Growth Fund only).
AGAINST
OR
FOR WITHHELD ABSTAINED TOTAL*
---------- --------- --------- ----------
6,975,632 181,516 625,567 7,782,722
(5) To approve a new Investment Sub-Advisory Agreement for the Emerging
Growth Fund between Composite and Janus Capital Corporation ("Janus")
(voted on by the shareholders of the Emerging Growth Fund only).
AGAINST
OR
FOR WITHHELD ABSTAINED TOTAL*
---------- --------- --------- ----------
2,821,636 69,129 292,348 3,183,116
(6) To approve a new Investment Sub-Advisory Agreement for the International
Growth Fund between Composite and Warburg Pincus Asset Management Inc.,
(voted on by shareholders of the International Growth Fund only).
AGAINST
OR
FOR WITHHELD ABSTAINED TOTAL*
---------- --------- --------- ----------
3,949,119 113,583 342,187 4,404,893
(7) To approve or disapprove an Agreement and Plan of Reorganization
providing for the transfer of all the assets of the Short Term Global
Government Fund to the Short Term High Quality Bond Fund and the
assumption by the Short Term High Quality Bond Fund of all of the
liabilities of the Short Term Global Government Fund, and the
distribution of such shares to the shareholders of the Short Term High
Quality Bond Fund in complete liquidation of the Fund (voted on by
shareholders of the Short Term Global Government Fund only).
AGAINST
OR
FOR WITHHELD ABSTAINED TOTAL*
---------- --------- --------- ----------
6,245,017 145,151 1,103,504 7,493,675
- ------------
*Votes for, against or withheld and abstained may not add up to the total due
to rounding of fractional shares.
86
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This material is not an offer to sell nor a solicitation to buy The Sierra
Advantage Variable Annuity, Sierra Asset Manager Variable Annuity or shares of
The Sierra Variable Trust. It is not authorized for distribution unless preceded
or accompanied by a current prospectus that includes information regarding the
risk factors, expenses, policies, and objectives of The Sierra Advantage
Variable Annuity and Sierra Asset Manager Variable Annuity programs. Please read
it carefully before investing. Sierra Advantage may not be available for sale in
all states.
Shares of The Sierra Variable Trust are not insured by the FDIC. They are not
deposits or obligations of, nor are they guaranteed by, the depository
institution. These securities are subject to investment risk, including
possible loss of principal amount invested.
