<PAGE>
DEAR contract owner:
[PICTURE APPEARS As we move into 1999, I would like to take this opportunity
HERE] to reflect on the events that we have witnessed in the
investment markets this past year. While the U.S. stock and
bond markets both posted positive returns to investors in
1998, you probably know there were a couple of bumpy periods
along the way.
The widespread stock market volatility that began in Asia
and culminated in substantial declines in some Latin
American markets demonstrated quite clearly that the world's
financial markets have become intertwined in recent years.
Yet, the economies of these geographic regions, and even
individual countries, remain less closely linked. In 1998,
this difference between economic and market events
highlighted the importance of maintaining a long-term
perspective when pursuing long-term objectives. This
perspective rewarded investors who held their assets, as
equity markets rebounded significantly and closed out the
year with one of the best quarters in history.
Twenty years ago, money moved more slowly between investment
markets than it does today. The development of new
communication and money-transfer technologies over the years
has created a new type of investor-institutions who invest
large amounts of capital in short-term opportunities
throughout the world. One result is that local events which
affect one financial market can quickly spill over to far-
distant economies as money is moved around the globe. In
some cases, the result can be the tail wagging the dog. An
example is the nearly 11% decline in the U.S. stock market
in August immediately following Russia's devaluation of its
currency. That decline was in part due to the need by some
investment companies to raise cash by selling holdings in
the U.S. Maintaining a long-term perspective during such
periods can help investors avoid turning a "paper loss" into
a real one. Focusing on the longer term can also be key to
recognizing opportunity. A basic tenet of the investment
approach followed by portfolio managers who steer the
underlying funds in the WM Variable Trust is that long-term
investment opportunities are identified by focusing on
fundamental factors such as earnings. When distortions in
market prices occur due to temporary factors that do not
affect fundamentals, investment managers often have
opportunities to buy at below-value prices. In addition,
maintaining nearly fully-invested portfolios greatly
rewarded shareholders, as economic fundamentals helped push
equity markets near all-time highs to close out 1998.
THREE KEY REASONS FOR KEEPING ON TRACK
STAYING FOCUSED ON INVESTMENT OBJECTIVES can help
individuals withstand market turbulence. As an individual
investor, how you pursue your financial goals will be
affected by several factors including your investment time
frame and ability to withstand a potential loss in the value
of your investments. If you choose investments that are
appropriate for your goals, you'll probably be less tempted
to abandon your strategy during a market downturn.
MAINTAINING REALISTIC EXPECTATIONS is another key to keeping
your equilibrium during changing markets. According to a
recent survey, nearly two thirds of individual investors
expect the long-term total return on their stock investments
to average 12% per year or less.* That's actually lower than
recent trends and in line with historical averages. For
example, over the four decades that ended on December 31,
1998, the compound rate of return on the S&P 500 was exactly
12%, with periods of declining as well as rising prices.
During those 40 years, there were 13 corrections in which
prices slid by 10% or more before resuming their generally
upward trend.**
Finally, FOLLOWING SOUND INVESTMENT PRINCIPLES BY
DIVERSIFYING YOUR INVESTMENTS is always wise. Stock
investments have captured the media's attention for the last
several years, but fixed-income investments have always been
an important part of a diversified portfolio, providing an
income stream that can help smooth out returns. For example,
during the second and third quarters of 1998, bond
investments were some of the top performers while stock
prices were on the decline.
Thank you for your continued confidence in the WM Variable
Trust Funds. We are committed to continuing to serve you by
providing an appropriate selection of investment vehicles
and mutual funds managed by experienced professionals N just
as we have for nearly 60 years.
Sincerely,
/s/ William G. Papesh
William G. Papesh
President
- --------------------------------------------------------------------------------
*Source: Business Week, June 15, 1998.
**Source: Standard & Poor's. The S&P 500 is an unmanaged index that is generally
considered representative of the U.S. stock market. The performance of any index
is not indicative of the performance of a particular investment and does not
take into account the effects of fees and expenses associated with purchasing
mutual fund shares. Individuals cannot invest directly in an index. Past
performance does not guarantee future results.
1
<PAGE>
WM VARIABLE TRUST
market and economic overview
THE MARKET CLOSES STRONG IN 1998
The exceptional performance of the U.S. stock market in recent years has been
driven largely by a vibrant U.S. economy. But in 1998, events in international
markets also played a role in both the downside and upside.
From January through June, the Dow Jones Industrial Average Index of 30 Stocks
(DJIA) rose 13%, from 7908 at December 31, 1997 to 8952 at the end of June. But
from June through August, the index fell nearly 16%, erasing all of the year's
gains, as political and economic uncertainty in Asia, Eastern Europe, and Latin
America roiled financial markets around the world.
While U.S. stocks have since recovered - the DJIA posted a total return of
nearly 22% from September through December - a look at the events underlying the
market's recent volatility provides valuable investment insights.*
AN INTERNATIONAL CONFIDENCE CRISIS SHOWING SIGNS OF RESOLUTION
The start of the summer's market slide coincided with a deepening currency
crisis in Southeast Asia, which led to currency devaluations in emerging market
economies in the region, including Malaysia and Indonesia. The result was a
sharp decline in economic growth in these countries. Last year the International
Monetary Fund (IMF) predicted a global growth rate in 1998 of 3.5%. The IMF has
since revised this down to 2.2%, largely due to the Asian crisis and its
ramifications on countries around the globe. Over the summer, the downturn in
these "growth engine" countries put further pressure on Japan, which is still
struggling to reform and stabilize its own financial institutions. Currently,
the region is showing some signs of improvement as Japanese reform, coupled with
economic growth in the emerging Asian regions, paved the way for increased
global confidence.
Another major economic event occurred on August 17, when Russia defaulted on
interest payments on $40 billion in short-term debts and devalued the Ruble. The
resulting losses incurred by Russia's financial institutions led to widespread
bank failures, particularly among the nation's smaller banks, and a collapse in
stock prices. As the scope of Russia's problems widened, prices of U.S. stocks
fell sharply, with the DJIA price index dropping 4.19% on August 27 and more
than 6% on August 31.
The U.S. market's reaction to the crisis in Russia reflected short-term
considerations rather than long-term fundamentals. Russia is not
a significant trading partner with the U.S., and the impact on U.S. companies
due to a
DOW JONES INDUSTRIAL AVERAGE
12 MONTHS ENDED 12-31-98
[GRPAH APPEARS HERE]
*Source: The Wall Street Journal
Note: The Dow Jones Industrial Average is an unmanaged index of 30 stocks and
is sometimes used to measure the overall U.S. equity market. Individuals cannot
invest directly in an index.
2
<PAGE>
YIELD ON THE 30-YEAR TREASURY BOND
12 MONTHS ENDED 12-31-98
[GRAPH APPEARS HERE]
Source: The Wall Street Journal
Note: Represents yield on the 30-year Treasury Bond which is sometimes used to
characterize the overall bond market.
slower economy in Russia is likely to be minimal. However, some investment
companies in the U.S. and Europe which had invested in Russia's emerging
financial markets were forced to sell U.S. stock holdings to provide cash needed
to cover losses in Russia. Adding to the problems in Russia and Asia were
concerns about economic stability in Latin America. These fears adversely
affected stock prices in the region and remain a concern, as interest rates in
Brazil and Mexico have risen sharply as central banks seek to stem capital
outflows from worried investors.
During the period, Federal Reserve Chairman Alan Greenspan urged the U.S. and
other developed nations to focus on efforts designed to promote economic growth.
Mr. Greenspan's comments fueled a record 381 point surge in the DJIA on
September 8, as Fed watchers began anticipating a cut in U.S. interest rates.
This cut materialized on September 29, 1998 when the Fed lowered short-term
rates by one-quarter of a percentage point. This cut was less than many
investors expected, however, as evidenced by a subsequent 6% decline in the
DJIA. In October, and again in November, the Federal Reserve lowered rates by an
additional quarter point each time, citing slower growth in new jobs and
indications of lower inflation. These moves, combined with heightened global
stability, paved the way for the dramatic market rebound led by strong growth
prospects for many internet and technology firms. The fourth quarter of 1998
proved to be one of the strongest quarters for equities in recent history, as
markets appreciated around the globe.
OUTLOOK FOR MODEST GROWTH, LOW INFLATION
As the fourth quarter drew to a close, the outlook for fundamental economic
indicators - unemployment, inflation, and interest rates - remained positive for
U.S. investors. However, there are continuing concerns that pressure from a
possible economic collapse in Brazil could fuel a crisis in Latin America.
Another factor positively affecting the domestic stock market was a high level
of merger activity. During 1998, corporate mergers shattered the all-time
record, with many of the largest mergers in history having been announced during
the year.
ASSET CLASS PERFORMANCE DISPARITY
12 MONTHS ENDED 12-31-98
[GRAPH APPEARS HERE]
Source: Ibbotson Associates. Domestic stocks are represented by: S&P 500, S&P
400 Midcap, and the Russell 2000, respectively. International equities are
represented by the Morgan Stanley Capital International regional indices. Bond
indices are represented by: Merrill Lynch, Lehman Brothers, and Ibbotson,
respectively. There are additional risks associated with international
investing, including currency fluctuations. An investor would typically purchase
stocks for long-term growth of capital. However, stocks are often subject to
significant price fluctuation, and therefore, an investor may have a gain or
loss in principal when the shares are sold. Indices are unmanaged and
individuals cannot invest directly in an index. This chart is not intended to
represent the performance of any fund.
3
<PAGE>
In 1999, investors will be evaluating the potential effects of the introduction
of the new Euro currency. On January 1, eleven European countries comprised the
European Monetary Union (EMU). With a population 10% greater than the United
States, the EMU will control the world's second-largest economy and generate
nearly 25% of the world's total economic output. Countries admitted into the EMU
have to meet strict criteria to ensure their economic and financial strength, a
factor that market analysts believe may strengthen the EMUO's competitive
position and, in turn, stimulate growth and employment.
By adopting a single currency, the 11 participating countries eliminated the
costs and complications associated with currency fluctuations and conversions.
As a result, trade activities within the EMU may become less risky and less
expensive. Cost comparisons among goods and services should also be facilitated.
Monetary policy governing the Euro will be directed by the European Central
Bank, an organization similar to the U.S. Federal Reserve Bank. This
organization will monitor the money supply and set interest rate policy.
PREPARING FOR WHAT TOMORROW MAY BRING
Long-term investment opportunities remain attractive, both in the U.S. and
abroad. But as 1998 has shown, many factors can affect investment returns from
month to month. Individual investors can best prepare to weather inevitable
periods of market volatility by ensuring that their investment portfolios match
their goals and investment time frame.
The WM Variable Trust offers a comprehensive spectrum of professionally
managed products to provide investors with appropriate opportunities to pursue
their financial goals. Your Investment Representative can help you evaluate your
individual circumstances, including your need for cash reserves, investment
income, and long-term growth potential. He or she can then assist you in
selecting a portfolio that is designed to pursue your objectives with an
acceptable level of risk.
In asset allocation, we diversify among several asset classes - money market,
bond, and stock investments - which helps temper the effects of market
volatility on your portfolio returns over time. Stock and bond prices, for
example, often do not react in identical ways to economic events. A price
decline in the stock market may be partially offset by a rally in bond prices,
so holding some of each in your portfolio can help smooth out your returns.
The WM Strategic Asset Manager Portfolios offer you the added convenience of
investing in a portfolio that is actively managed to pursue market opportunities
as they arise while seeking the potential risk reduction benefits of
diversification and asset allocation. For more information on any of the
Portfolios or Funds in the WM Variable Trust, speak with your Investment
Representative.
THE RETURN OF MARKET VOLATILITY
daily equity volatility for various periods ended
12-31-98
[GRAPH APPEARS HERE]
Source: Bloomberg Business News. Represents daily results of the Dow Jones
Industrial Average. Volatility is measured by the standard deviation of
investment results. Standard deviation is a measurement of results relative to
the average return. A lower standard deviation means less volatility or
investment risk. Past performance is not a guarantee of future results.
4
<PAGE>
TO OUR CONTRACT OWNERS:
WE ARE PLEASED
TO PROVIDE YOU WITH AN OVERVIEW OF THE FUNDS IN THE WM VARIABLE TRUST
FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 1998.
TO HELP YOU BETTER UNDERSTAND THE
PROFESSIONAL INVESTMENT MANAGEMENT
AVAILABLE TO YOU AS A CONTRACT OWNER
WITH INVESTMENT OPTIONS FROM THE
WM VARIABLE TRUST FUNDS,
WE HAVE ALSO INCLUDED
BIOGRAPHIES OF THE INVESTMENT PROFESSIONALS
MANAGING THE UNDERLYING FUNDS.
WM VARIABLE TRUST
5
<PAGE>
INDIVIDUAL FUND reviews
WM Advisors, Inc. is the investment advisor to WM Variable Trust, and has
general oversight responsibility for the advisory services provided to the
underlying Funds. These services include formulating the underlying Fund's
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. WM Advisors supervises the
individual Portfolio Managers in their day-to-day management of the underlying
Funds in the WM Variable Trust family to ensure that policies and guidelines are
met, and to determine appropriate investment performance measures.
UNDERSTANDING THE ENCLOSED CHARTS
In order to help you understand each WM Variable Trust Fund's investment
performance, we have included the following discussions along with graphs that
compare the Fund's performance with certain market indices. Descriptions of
these indices are provided next to the individual graphs on the following pages.
Generally, an index represents the market value of an unmanaged group of
securities, regarded by investors as representative of a particular market. An
index does not reflect any asset-based charges for investment management or
other expenses. Total return is used to measure a Fund's performance and
reflects both changes in the unit value of the Fund as well as any income
dividend and/or capital gain distributions made by the Fund during the period.
Past performance is not a guarantee of future results. A Fund's unit value and
investment return will vary with market conditions, and the principal value of
an investment when you redeem your units may be more or less than the original
cost.
Where applicable, the total returns of the Funds reflect the Advisors' voluntary
waiver of fees, 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 Fund's performance results and the market indices reflect total
reinvestment of income, dividends, and capital gains. The unit values of these
variable options will fluctuate with market conditions.
THE YEAR 2000 PROBLEM
Many computer systems in use today cannot properly process date-related
information in relation to the year 2000. This issue originates in the practice
of abbreviating years to their last two digits. Computer systems may not be able
to decide correctly when a date entered with a year of O00O should be
interpreted as 1900 or 2000. At the turn of the new century, computer systems
may not function properly because they may not be able to recognize or interpret
the year 2000.
Should any of the computer systems employed by the underlying WM Variable Trust
Fund's or Portfolios' major service providers fail to process this type of
information properly, it could have a negative impact on underlying Fund or
Portfolio operations and services that are provided to contract owners.
Similarly, the values of certain of the underlying WM Variable Trust Funds' or
Portfolios' assets may be adversely affected by the inability of their issues or
third parties to properly process date-related information.
The Advisor, Shareholder Servicing Agent and Administrator have advised the
underlying Funds and Portfolios that they are reviewing all of their computer
systems with the goal of modifying or replacing such systems prior to January 1,
2000 to the extent necessary to avoid any such negative impact. Furthermore, the
underlying Funds and Portfolios are seeking assurances from each of their key
service providers that similar replacements or modifications will be completed
to avoid any negative impact from this issue. In the event a key service
provider cannot provide such assurances, the underlying Funds and Portfolios may
consider retaining an alternative service provider.
In addition, the Advisor has been advised by the Custodian that it is also in
the process of reviewing its systems with the same goal. As of the date of this
report, the underlying Funds, Portfolios, and Advisor have no reason to believe
that these goals will not be achieved.
The Funds of the WM Variable Trust may not be purchased directly but are
currently available only through the WM Strategic Asset Manager and WM Advantage
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
administrative charges under the WM Strategic Asset Manager and WM Advantage
variable annuity contracts.
6
<PAGE>
MONEY MARKET fund
PORTFOLIO MANAGER:
AUDREY QUAYE
WM ADVISORS, INC.
Audrey Quaye has over five years experience in investment management and
analysis. She is a Certified Public Accountant, holds an MBA, and has been with
WM Advisors, Inc. since 1996.
ECONOMIC HIGHLIGHTS AND OUTLOOK
Economic data released during 1998 indicated a moderate pace of growth in the
U.S. economy; however, some regions experienced a slowdown in manufacturing and
export activity. Consumer confidence, which was high during most of the year,
began to wane in the third quarter. Construction activity and home purchases
were strong in most regions due to relatively low interest rates. Auto sales,
which declined during the mid-year labor strike at General Motors Corp., have
begun to show a rising trend. The labor market remained tight during most of the
period; however, the unemployment rate, which declined to a 28-year low of 4.3%
in April 1998, rose to 4.6% in September 1998 and then declined again to 4.3% in
December 1998. The effects of economic problems in Asia and other emerging
markets spilled over into the U.S. economy. This resulted in a flight-to-quality
as investors purchased U.S. Treasuries in response to volatility in the equity
markets and continued weakness in Japan, Asia, Russia and other emerging
markets.
The Federal Reserve's Open Market Committee (FOMC) left its target fed funds
rate (rate at which banks borrow from one another) of 5.50% unchanged for the
first eight months of 1998, until September 29, 1998, when it cut the rate by 25
basis points from 5.50% to 5.25%. The Fed then followed with a similar move in
October, and again lowered short-term rates in November. These were the first
rate cuts since March 25, 1997, when the FOMC raised the Fed funds rate to 5.50%
in a bid to curb inflation. The Fed took the rate action in response to
mounting evidence of a slowdown in the U.S. economy and continuing turmoil in
Asian and emerging markets.
The benchmark 90-day U.S. Treasury bill yield curve averaged 4.87% for the year
ended December 31, 1998. The yield declined from a high of 5.35% on January 1,
1998 to a low of 3.62% on October 16, 1998, after the Fed rate action, and rose
to 4.45% on December 31, 1998.
Our outlook on the U.S. bond market is cautiously bullish, as we expect
inflation to remain tame and anticipate a moderate slowdown in the U.S. economy
with further declines in interest rates.
PORTFOLIO STRATEGY
The WM Variable Trust Money Market Fund's net assets at December 31, 1998
totaled $31.86 million. We reduced the underlying Fund's exposure to the banking
and foreign sectors. We also extended the weighted average maturity of the
securities in the portfolio in view of our interest rate outlook. We intend to
reduce the underlying Fund's concentration of callable securities as we
anticipate further declines in interest rates.
Note: The Variable Trust Fund's Advisor waived fees or reimbursed a portion of
the expenses. Without the waivers and reimbursements, yields and distribution
rates would have been lower. Principal is not guaranteed or insured by the U.S.
Government, and yields will fluctuate depending on market conditions. There is
no assurance the Fund will maintain a stable unit value.
7
<PAGE>
SHORT TERM HIGH QUALITY BOND fund
PORTFOLIO MANAGER:
GARY POKRZYWINSKI
WM ADVISORS, INC.
The Short Term High Quality Bond Fund is managed by a fixed-income team led by
Senior Portfolio Manager Gary Pokrzywinski, who has over 12 years of asset
management experience and has been with WM Advisors, Inc. for more than six
years. Mr. Pokrzywinski is a Chartered Financial Analyst and holds a business
degree from the University of Wisconsin.
PERFORMANCE REVIEW/4/
From the underlying Fund's inception (January 12, 1994) through December 31,
1998, the Fund's average annual total return advanced 4.49%. For the 12-month
period ended December 31, 1998, the Fund's total return was 5.28%. For
additional information, see the accompanying chart.
WHAT WERE THE MOST SIGNIFICANT FACTORS CONTRIBUTING TO THE FUND PERFORMANCE OVER
THE 12-MONTH PERIOD ENDED DECEMBER 31, 1998, AND WHAT INVESTMENT TECHNIQUES WERE
USED TO ADDRESS THOSE CONDITIONS?
During the 12-month period, there was a fairly significant drop in interest
rates; this is positive for the Fund as its unit value (price) generally moves
in the opposite direction of rates. Rates dropped by over 100 basis points
(1.00%) for intermediate-maturity Treasury notes. The interest rate decline was
segmented to the highest-quality assets such as Treasuries. The flight-to-
quality was most evident during the period of August through October, as
Treasuries outperformed all other types of fixed-income securities. Because the
underlying Fund is comprised of higher-quality securities (over 70% rated AA or
AAA*), it was able to capture some of the decline in rates. With a short-term
fund, the most important attribute for return is the income characteristics
Growth of a $10,000 Investment /2/3/
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Total Returns as of 12/31/98 /2/3/ One Year Since Inception/8
(January 12, 1994)
<S> <C> <C>
____ Fund (without annuity expenses)/4/ 5.28% 4.49%
Fund (with annuity expenses)/5/6/ 3.88% 3.03%
Fund (adjusted for the maximum sales charge)/5/7/ -1.87% 2.12%
- ---- Lehman Brothers Mutual Fund Short (1-5) Investment Grade Debt Index/1/ 7.56% 6.59%
</TABLE>
1 Index total returns were calculated from 1/31/94 in 12/31/98. The Brothers
Mutual Fund Short (1-5) Investment Grade Debt Index includes all
investment-grade corporate debt securities with maturities of one to five
years.
The Consumer Price Index is a measurement of inflation for all urban
consumers (CPI-U). The indices assume reinvestment of all dividends
distributions and do not reflect any asset-based charges for investment
management or other expenses.
2 Past investment performance does not guarantee future performance. The
reasons for the Fund assume reinvestment of all dividends/distributions.
3 During the period noted, the Advisor waived a portion of its management
fees, and credits were allowed by the Custodian. In the absence of the
waivers or credits, yield and total return would have been lower.
4 Excludes all annuity expenses (which are itemized in footnote #5) charged
by American General Life Insurance Company Separate Account D through which
shares of the Fund are purchased.
5 Total returns are based on the change in unit value and reflect expenses
such as mortality and expense risk charges and administrative expense
charges of 1.4%. Returns do not account for income taxes due at withdrawal
or for premium taxes. All of the return information shown prior to April
29, 1998 pre-dates the effective date of the Division's first investment in
the Fund. The return information after that date reflects actual annual
historical performance of the Fund. The above values relate only to the WM
Strategic Asset Manager Contract. The total return for the WM Advantage
Contract would have been lower due to higher expenses.
6 Excludes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
7 Includes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
8 Annualized.
8
<PAGE>
of the securities that make up the fund.
Delving a little deeper, global economic uncertainty, stock market jitters,
excess financial leverage, and the general slowdown in economic growth caused
investors to shy away from perceived riskier assets. These factors, coupled with
the volume of money flowing into the Treasury market and the easing of interest
rates by the Federal Reserve, pushed Treasury rates to unprecedented lows. The
risk aversion caused yield spreads between securities that are not guaranteed by
the government, such as corporate bonds and asset-backed securities, to increase
substantially. The result was that these securities underperformed Treasuries
over the past year. Despite this relative performance, historical results show
that investors with a long-term time horizon may benefit from having a diverse
portfolio of non-government guaranteed securities*. Also, with declining
interest rates, the prices of mortgage-backed securities suffered due to fears
of prepayments. The extreme relative performance strength of the Treasury market
has begun to subside and, therefore, we continue to invest in and hold the
majority of the underlying Fund in mortgage-backed, asset-backed, and corporate
securities. Because of the flight-to-quality, these securities now offer even
more attractive income characteristics relative to other investments. It is
important to remember that because the securities in the Fund are shorter
maturity and higher quality, the income characteristics of these securities will
be the dominant determinant of the return, and not the price (or unit value)
movement of the underlying Fund.
WERE THERE ANY SHIFTS IN THE UNDERLYING FUND'S HOLDINGS/SECTORS THAT HAVE HAD A
SIGNIFICANT IMPACT ON FUND PERFORMANCE?
WM Advisors, Inc. began managing the Fund in March of 1998. In the early part of
the year, we shifted the portfolio away from a heavy reliance on mortgage-backed
securities to a more balanced structure. Corporate securities now make up the
largest portion of the investment portfolio followed by Treasuries, asset-
backed, and mortgage-related issues. The concentration in corporate securities
is due to their higher yields and the fact that these securities cannot be
called or prepaid (unlike mortgages). The impact of this shift was positive, as
additional income and positive price movement was generated by these securities.
The focus of the underlying investments of the Fund will remain in high-quality
securities with an average rating of AAa. The underlying Fund invests in fixed-
income securities with an average maturity of 2.4 years and an average duration
of 1.9 years, limiting the volatility of price movements relative to longer-term
funds.
WHAT IS THE OUTLOOK FOR BOTH THE UNDERLYING FUND AND THE OVERALL ECONOMY?
The intermediate and long-term outlook remains optimistic. By investing largely
in a diverse portfolio of shorter-term, higher-quality securities, the price
(unit value) volatility of the underlying Fund should be fairly low while the
income characteristics should remain attractive, especially when compared to
inflation. We continue to closely monitor and shift between different sectors of
the market in an attempt to add income and relative performance to the Fund.
Slow economic growth should continue for the next 12 months, with a slight
possibility that growth could slip to below potential. The economy will have a
difficult time gathering momentum against the major worldwide structural forces
(excess capacity, aging demographics, fiscal austerity) pushing against growth.
These forces are slowly beginning to change, but it will likely be two or more
years before we see anything but a slow-growth, low-inflation environment. As
such, we believe interest rates should continue to trend down over the next
year. These factors should create a positive environment for fixed-income
securities and, therefore, a positive environment for the underlying Fund.
SHORT TERM HIGH QUALITY BOND fund
portfolio composition +
[PIE CHART APPEARS HERE]
++ Allocation percentages are based on total investment value of the portfolio
as of 12-31-98. Bond ratings are of portfolio holdings and are provided by a
combination of both Moody's and standard & Poor's. Past performance is not a
guarantee of future results.
fixed- income fund
9
<PAGE>
U.S. GOVERNMENT SECURITIES fund
PORTFOLIO MANAGER:
CRAIG SOSEY
WM ADVISORS, INC.
A fixed-income team led by Craig Sosey, who has over 15 years banking and
financial analysis experience and joined WM Advisors, Inc. in 1998, manages the
U.S. Government Securities Fund. Mr. Sosey has a B.S. in Finance from the
University of the Pacific and an MBA from the University of California Berkeley.
He has extensive experience managing government and mortgage-backed securities.
PERFORMANCE REVIEW/4/
From the underlying Fund's inception (May 6, 1993) through December 31, 1998,
the Fund's average annual total return was 6.04%. For the 12-month period ended
December 31, 1998, the Fund's total return was 7.03%. For additional
information, see the accompanying chart.
WHAT WERE THE MOST SIGNIFICANT FACTORS CONTRIBUTING TO THE FUND PERFORMANCE OVER
THE 12-MONTH PERIOD ENDED DECEMBER 31, 1998, AND WHAT INVESTMENT TECHNIQUES WERE
USED TO ADDRESS THOSE CONDITIONS?
Turmoil in the international financial markets, and the near collapse of several
large hedge funds drove investors to the relative safety and liquidity of U.S.
Treasury securities -- this flight-to-quality peaked in early October. As a
consequence, huge inflows of global money came into the Treasury market.
Interest rates on long-term Treasury bonds dropped to a record low during the
period, falling under 5%. Rates on nearly all Treasury maturities fell between
80 and 115 basis points (0.80%-1.15%) over the past 12 months. The yield curve
(difference between short- and long-term yields) flattened significantly as the
two-year note ended the period at
Growth of a $10,000 Investment /2/3/
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Total Returns as of 12/31/98 /2/3/ One Year Five Years/8/ Since Inception/8/
(May 6, 1993)
<S> <C> <C> <C>
____ Fund (without annuity expenses)/4/ 7.03% 6.37% 6.04%
Fund (with annuity expenses)/5/6/ 5.59% 4.90% 4.56%
Fund (adjusted for the maximum sales charge)/5/7/ -0.16% 4.16% 3.91%
____ Lehman Brothers U.S. Government Index/1/ 9.85% 7.18% 7.38%
- ---- Lehman Brothers U.S. Mortgage Index/1/ 6.97% 7.23% 6.95%
</TABLE>
1 Index total returns were calculated from 5/31/93 to 12/31/98. The Lehman
Brothers U.S. Government Index represents all U.S. Government agency and
Treasury securities. The Lehman Brothers U.S. Mortgage Index includes all
agency mortgage-backed securities.
The Consumer Price Index is a measurement of inflation for all urban
consumers (CPI-U). The indices assume reinvestment of all
dividends/distributions and do not reflect any asset-based charges for
investment management or other expenses.
2 Past investment performance does not guarantee future performance. The
returns for the Fund
assume reinvestment of all dividends/distributions.
3 During the period noted, the Advisor waived a portion of its management fees,
and credits were allowed by the Custodian. In the absence of the waivers or
credits, yield and total return would have been lower.
4 Excludes all annuity expenses (which are itemized in footnote #5) charged by
American General Life Insurance Company Separate Account D through which
shares of the Fund are purchased.
5 Total returns are based on the change in unit value and reflect expenses such
as mortality and expense risk charges and administrative expense charges of
1.4%. Returns do not account for income taxes due at withdrawal or for
premium taxes. All of the return information shown prior to April 29, 1998
pre-dates the effective date of the Division's first investment in the Fund.
The return information after that date reflects actual annual historical
performance of the Fund. The above values relate only to the WM Strategic
Asset Manager Contract. The total return for the WM Advantage Contract would
have been lower due to higher expenses.
6 Excludes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
7 Includes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
8 Annualized.
10
<PAGE>
4.53%, while the 30-year bond closed at 5.09%. As a result of this drop in rates
and the flight-to-quality and liquidity, other fixed-income securities advanced,
but did not perform nearly as well as Treasury securities.
Spreads on mortgage-backed securities (MBS) widened dramatically during the
third quarter as investors became increasingly worried about faster prepayments
given the low interest rate environment. In addition, a great deal of selling by
hedge funds and mortgage originators kept pressure on MBS spreads. Given the
high percentage of MBS held by the underlying Fund, this widening spread kept
the Fund from performing as well as might have been expected. Although MBS have
prepayment risk, they may also provide a strong level of income.
WERE THERE ANY SHIFTS IN THE UNDERLYING FUND'S HOLDINGS/SECTORS THAT HAVE HAD A
SIGNIFICANT IMPACT ON FUND PERFORMANCE?
The increased spreads and the flat yield curve (marginal differences between
yields of short-and long-term securities) decreased the attractiveness of the
mortgage "dollar-roll" market, as a way to increase the income earned by the
securities in the Fund. A fund uses dollar-rolls by selling securities and
simultaneously contracting to repurchase similar securities in the future. As a
result of our outlook, all of the dollar-rolls were removed from the underlying
portfolio during the period. We maintain our focus on mortgages and the
additional income that they can provide. The intermediate-term maturities of the
securities held by the Fund also was a benefit to overall Fund performance as
intermediate yields dropped more than both short-and long-term yields.
WHAT IS THE OUTLOOK FOR BOTH THE UNDERLYING FUND AND THE OVERALL ECONOMY?
We believe the Fund has the opportunity to perform very favorably over the
intermediate and longer term. Eventually, we believe mortgage spreads will come
back to a more historical average, while continuing to provide higher levels of
income than Treasuries. Once interest rate volatility calms down and the initial
wave of mortgage refinancing is finished, spreads should tighten, resulting in
very good overall performance of these holdings. We will continue to rely
heavily on mortgage-backed securities to provide a high level of income and,
therefore, the overall return.
The interest rate environment over the next 12 months should continue to be
volatile, although rates in general should trend downward. Overall, the
worldwide economy should remain sluggish, negatively impacting the domestic
growth. However, given an accommodating Federal Reserve Bank and strength in
many areas, the U.S. economy should not fall into a recession. The possibility
of certain events, such as a devaluation of a major Asian or Latin American
currency or collapse of a large hedge fund, will keep the markets volatile and
could potentially deepen economic problems throughout the world and cause
problems in the United States.
U.S. GOVERNMENT SECURITIES
fund portfolio composition+
[PIE CHART APPEARS HERE]
+ Allocation percentages are based on total investment value of the portfolio
as of 12-31-98.
fixed-income fund
11
<PAGE>
INCOME fund
PORTFOLIO MANAGER:
GARY POKRZYWINSKI
WM ADVISORS, INC.
The Income Fund is managed by a fixed-income team led by Senior Portfolio
Manager Gary Pokrzywinski, who has over 12 years of asset management experience
and has been with WM Advisors, Inc. for more than six years. Mr. Pokrzywinski
is a Chartered Financial Analyst and holds a business degree from the University
of Wisconsin.
PERFORMANCE REVIEW/4/
From the underlying Fund's inception (May 7, 1993) through December 31, 1998,
the Fund's average annual total return was 6.90%. For the 12-month period ended
December 31, 1998, the Fund advanced 7.45% on a total return basis. For
additional information, see the accompanying chart.
WHAT WERE THE MOST SIGNIFICANT FACTORS CONTRIBUTING TO THE FUND PERFORMANCE OVER
THE 12-MONTH PERIOD ENDED DECEMBER 31, 1998, AND WHAT INVESTMENT TECHNIQUES WERE
USED TO ADDRESS THOSE CONDITIONS?
During the 12-month period, there was a fairly significant drop in interest
rates; this is positive for the Fund as its value generally moves in the
opposite direction of rates. Rates on intermediate-maturity Treasury notes
dropped by over 100 basis points (1.00%). Yet, for much of the period, the
interest rate decline was segmented to the highest-quality assets such as
Treasuries. The flight-to-quality was most evident during the period of August
through October, as Treasuries outperformed all other types of fixed-income
securities. To summarize, despite the drop in rates and corresponding increase
in price of Treasury securities, corporate securities, which
GROWTH OF a $10,000 Investment /2/3/
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Total Returns as of 12/31/98 /2/3/ One Year Five Years/8/ Since Inception/8/
(May 6, 1993)
<S> <C> <C> <C>
____ Fund (without annuity expenses)/4/ 7.45% 6.67% 6.90%
Fund (with annuity expenses)/5/6/ 5.92% 5.18% 5.41%
Fund (adjusted for the maximum sales charge)/5/7/ 0.17% 4.45% 4.79%
- ---- Lehman Brothers U.S. Government Index/1/ 8.59% 7.74% 8.00%
- ---- Lehman Brothers U.S. Mortgage Index/1/ 9.47% 7.30% 7.51%
</TABLE>
1 Index total returns were calculated from 5/31/93 to 12/31/98. The Lehman
Brothers U.S. Government Index represents all U.S. Government agency and
Treasury securities. The Lehman Brothers U.S. Mortgage Index includes all
agency mortgage-backed securities.
The Consumer Price Index is a measurement of inflation for all urban
consumers (CPI-U). The indices assume reinvestment of all
dividends/distributions and do not reflect any asset-based charges for
investment management or other expenses .
2 Past investment performance does not guarantee future performance. The
returns for the Fund assume reinvestment of all dividends/distributions.
3 During the period noted, the Advisor waived a portion of its management fees,
and credits were allowed by the Custodian. In the absence of the waivers or
credits, yield and total return would have been lower.
4 Excludes all annuity expenses (which are itemized in footnote #5) charged by
American General Life Insurance Company Separate Account D through which
shares of the Fund are purchased.
5 Total returns are based on the change in unit value and reflect expenses such
as mortality and expense risk charges and administrative expense charges of
1.4%. Returns do not account for income taxes due at withdrawal or for
premium taxes. All of the return information shown prior to April 29, 1998
pre-dates the effective date of the Division's first investment in the Fund.
The return information after that date reflects actual annual historical
performance of the Fund. The above values relate only to the WM Strategic
Asset Manager Contract. The total return for the WM Advantage Contract would
have been lower due to higher expenses.
6 Excludes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
7 Includes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
8 Annualized.
12
<PAGE>
make up a significant portion of the holdings of the underlying Fund,
significantly underperformed the U.S. Treasury market. Corporate yields fell by
only 50 basis points for intermediate "A" or average quality securities, and
therefore, the price increase was half that of similar maturity Treasuries.
Typical of a fund of this nature, the income characteristics of the securities
produced the majority of the overall return to contract owners during the year.
The performance of the higher-risk securities (below investment grade) in which
the underlying Fund invests, was neutral, as a few did poorly and a few did
exceptionally well.
Looking a little deeper, global economic uncertainty, stock market jitters,
excess financial leverage, and the general slowdown in economic growth caused
investors to shy away from perceived riskier assets. These factors coupled with
the volume of money flowing into the Treasury market and the easing stance of
the Federal Reserve, pushed Treasury rates to unprecedented lows. The risk
aversion caused yield spreads between securities that are not guaranteed by the
government, such as corporate bonds, to increase substantially. Despite the
underperformance of corporate securities, historical results show that fixed-
income investors with a long-term time horizon may benefit from having a diverse
portfolio which includes non-government guaranteed securities. The income
generated from these securities can be substantial relative to similar maturity
Treasuries. The extreme relative performance strength of the Treasury market has
begun to subside and, therefore, we continue to invest in and hold the majority
of assets in corporate securities. Because the corporate rates did not drop as
much as government rates, these securities now offer even more attractive income
potential relative to other investments.
WERE THERE ANY SHIFTS IN THE UNDERLYING FUND'S HOLDINGS/SECTORS THAT HAVE HAD A
SIGNIFICANT IMPACT ON FUND PERFORMANCE?
There were no shifts that had a significant impact. We strive to meet the
objective of current income by investing a significant portion of the portfolio
in corporate securities. The underlying securities in the Fund have an average
rating of A-a and average nearly 12 years in maturity and 6.4 years in duration
(a measure of the price sensitivity to changes in interest rates). The general
theme of the Fund has been to concentrate purchases in the less economic
sensitive sectors of the market, like healthcare, consumer non-durables and
defense companies.
WHAT IS THE OUTLOOK FOR BOTH THE UNDERLYING FUND AND THE OVERALL ECONOMY?
The intermediate outlook of the Fund looks positive as the worries that caused
the recent underperformance of non-government guaranteed securities should
diminish. As yield spreads between Treasuries and corporate securities close, we
may see relative performance strength shift back to the corporate sector. The
longer-term outlook remains the same. By investing largely in intermediate-
maturity securities issued by corporations, conducting proprietary research, and
maintaining an average risk profile, the volatility of the underlying Fund
should be reasonable, and the income characteristics should be attractive,
especially when compared to inflation.
Slow economic growth should continue for the next 12 months, with a slight
possibility that growth could slip to below potential. The economy will have a
difficult time gathering momentum against the major worldwide structural forces
(excess capacity, aging demographics, fiscal austerity) pushing against growth.
These forces are slowly beginning to change, but it will likely be two or more
years before we see anything but a slow-growth, low-inflation environment. As
such, we believe interest rates should continue to trend down over the next
year. These factors create a positive environment for fixed-income securities
and, therefore, a positive environment for the underlying Fund.
INCOME fund
portfolio composition+
[PIE CHART APPEARS HERE]
+ Allocation percentages are based on total investment value of the portfolio
as of 12-31-98. Bond ratings are of portfolio holdings and are provided by a
combination of both Moody's and Standard & Poor's Past performance is not a
guarantee of future results.
fixed-income fund
13
<PAGE>
GROWTH & INCOME fund
PORTFOLIO MANAGER:
WM ADVISORS, INC.
The equity team at WM Advisors, Inc. manages the underlying Fund. The firm has
roots in the investment industry dating back nearly 60 years and has managed
money through multiple economic and market cycles.
PERFORMANCE REVIEW/4/
From the underlying Fund's inception (January 12, 1994) through December 31,
1998, the Fund advanced 19.51% on an average annual total return basis. For the
12-month period ended December 31, 1998, the Fund's total return was 18.98%. For
additional information, see the accompanying chart.
WHAT WERE THE MOST SIGNIFICANT FACTORS CONTRIBUTING TO THE FUND PERFORMANCE OVER
THE 12-MONTH PERIOD ENDED DECEMBER 31, 1998, AND WHAT INVESTMENT TECHNIQUES WERE
USED TO ADDRESS THOSE CONDITIONS?
The period began with strong results as, although volatile, large-cap stocks
advanced to new highs. The positive performance lasted until July when markets
began to slide in the midst of global turmoil and uncertainty. August proved to
be a very negative month, with the S&P 500 dropping nearly 15%. The period
closed on a positive note as an accommodative monetary policy aided in quelling
some of the unrest worldwide, and the stock market rebounded significantly.
Performance of the overall market was concentrated in the largest, most-liquid,
mega-caps of the S&P 500. Small stocks gained some ground late in the year, but
underperformed for the fifth year in a row. Fundamental style factors
GROWTH OF A $10,000 INVESTMENT /2/3/
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Total Returns as of 12/31/98 /2/3/ One Year Since Inception/8/
(January 12, 1994)
<S> <C> <C>
____ Fund (without annuity expenses)/4/ 18.98% 19.51%
Fund (with annuity expenses)/5/6/ 17.10% 17.82%
Fund (adjusted for the maximum sales charge)/5/7/ 11.36% 17.30%
- ---- Standard & Poor's 500 Composite Index/1/ 28.58% 23.67%
</TABLE>
1 Index total returns were calculated from 5/31/93 to 12/31/98. The Lehman
Brothers Government/Corporate Bond Index represents all government and
corporate bonds. The Lehman Brothers BBB Index represents all investment-
grade, corporate debt securities.
The Consumer Price Index is a measurement of inflation for all urban
consumers (CPI-U). The indices assume reinvestment of all
dividends/distributions and do not reflect any asset-based charges for
investment management or other expenses.
2 Past investment performance does not guarantee future performance. The
returns for the Fund assume reinvestment of all dividends/distributions.
3 During the period noted, the Advisor waived a portion of its management fees,
and credits were allowed by the Custodian. In the absence of the waivers or
credits, yield and total return would have been lower.
4 Excludes all annuity expenses (which are itemized in footnote #5) charged by
American General Life Insurance Company Separate Account D through which
shares of the Fund are purchased.
5 Total returns are based on the change in unit value and reflect expenses such
as mortality and expense risk charges and administrative expense charges of
1.4%. Returns do not account for income taxes due at withdrawal or for
premium taxes. All of the return information shown prior to April 29, 1998
pre-dates the effective date of the Division's first investment in the Fund.
The return information after that date reflects actual annual historical
performance of the Fund. The above values relate only to the WM Strategic
Asset Manager Contract. The total return for the WM Advantage Contract would
have been lower due to higher expenses.
6 Excludes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
7 Includes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
8 Annualized.
14
<PAGE>
also played a significant role in Fund performance as the growth style advanced
nearly three times more than the value style employed by the Fund. Overall,
while the Fund performance was positive, it underperformed the S&P 500 for the
12-month period.
Although many of the stocks in the portfolio were out of favor relative to the
largest positions in the S&P 500, we continue to believe we own many good
businesses that are trading at attractive prices. We utilized the volatility in
the markets to buy positions in companies whose prices had been pushed down to
levels under our overall valuation of those firms. The short-term weakness in
financial markets and the corresponding market rally was an excellent example of
the benefits of a long-term focus to equity investment, as we continue to stress
a buy and hold, value-oriented philosophy.
WERE THERE ANY SHIFTS IN THE UNDERLYING FUND'S HOLDINGS/SECTORS THAT HAVE HAD A
SIGNIFICANT IMPACT ON FUND PERFORMANCE?
During the period, large technology companies dominated the markets as holdings
such as Microsoft and EMC Corporation appreciated significantly, positively
contributing to the overall performance of the Fund. In addition, drug holdings
contributed positively toward overall Fund performance as many pharmaceutical
firms, such as Warner Lambert, performed very well. The Fund was negatively
impacted by its exposure to the aerospace and energy sectors. For example,
Northrup Grumman declined throughout the period, slightly dragging down the
positive overall results of the securities held by the Fund. Another
disappointment was Penncorp Financial, which lost much of its value before it
was sold.
An environment of slow growth and low inflation helped our overweighted position
in foods and drugs, as these sectors provided relative performance strength.
Strong domestic economic growth was good for retail and consumer cyclical
stocks, but we were underweighted in these sectors. The underlying Fund
benefited from its position in Wal-Mart, as the company's stock price more than
doubled over the course of the year. We used the decline in equity prices in the
fall to pick up fundamentally strong financial holdings; these stocks
subsequently led the market through the end of the year. We will maintain our
focus of finding strong companies at good valuations. Although value investing
has underperformed growth recently, we feel that our commitment to this approach
has the opportunity to reward contract owners over the long term.
WHAT IS THE OUTLOOK FOR BOTH THE UNDERLYING FUND AND THE OVERALL ECONOMY?
Our economic outlook is positive, as interest rate easing by the Federal Reserve
was quite beneficial to stocks and very tame inflation gives the Federal Reserve
additional flexibility in enacting monetary policy. Low interest rates and
strong consumer spending should keep the economy moving forward, although some
slowing could result as reduced corporate capital spending and lower offshore
demand for U.S. goods works its way through the economy. We think that small-and
mid-cap stocks are undervalued and oversold, and the underlying Fund's positions
in these firms could provide strong relative performance in the coming months.
We have 30% of our holdings in mid- and small-company stocks, making the overall
representation of the Portfolio less than that of the S&P 500. Lower interest
rates are especially good for these holdings. Long-term prospects for the
securities held by the underlying Fund are very strong and patience should be
rewarded. Valuations for the market as a whole look very rich, but disparities
with respect to market capitalization or overlooked sectors create some
compelling investment opportunities. Another positive demographic factor is the
currently low global savings rate. We feel that as the population ages, this
rate will increase and more money will head into investments. Overall, we expect
slow growth and low inflation in 1999, a scenario that is positive for financial
assets.
GROWTH & INCOME fund
portfolio composition+
[PIE CHART APPEARS HERE]
+ Allocation percentages are based on total investment value of the portfolio
as of 12-31-98. Differences from financial statements are a result of a
consolidation of industries or sectors.
equity fund
15
<PAGE>
GROWTH fund
PORTFOLIO MANAGER:
WARREN LAMMERT
JANUS CAPITAL
CORPORATION
Mr. Lammert is a graduate of Yale University and the London School of Economics.
He joined Janus in January 1987 and has been portfolio manager of the Growth
Fund since its inception. He is a Chartered Financial Analyst.
PERFORMANCE REVIEW/4/
From the underlying Fund's inception (May 7, 1993) through December 31, 1998,
the Fund advanced 23.14% on an average annual total return basis. For the 12-
month period ended December 31, 1998, the Fund's total return was 59.04%,
doubling the return of the S&P 500 (see chart below).
WHAT WERE THE MOST SIGNIFICANT FACTORS CONTRIBUTING TO THE FUND PERFORMANCE OVER
THE 12-MONTH PERIOD ENDED DECEMBER 31, 1998, AND WHAT INVESTMENT TECHNIQUES WERE
USED TO ADDRESS THOSE CONDITIONS?
A strong domestic economy and benign inflation lifted the markets broadly in the
first half of the year. However, after the viability of several emerging market
economies came into question, global markets encountered a difficult stretch
during the late summer and early fall. In response to these developments, the
Federal Reserve attempted to allay the growing credit crunch by cutting interest
rates three times. These easings alleviated the mounting credit crisis and
restored the market for "riskier" securities. As a result, money flowed out of
the relative safety of U.S. Treasuries and into other investments. This provided
support for the subsequent rally in stocks, which maintained its momentum for
the rest of the year.
Looking back, the performance of the market was somewhat surprising given the
prevalence of negative headlines; especially in the fourth quarter, when
investors essentially ignored the presidential impeachment, the attack on Iraq,
and negative earnings pre-announcements from many huge industrial corporations.
Instead, they focused on interest rates, fevered consumerism, and the rising
secularity of the Internet. As a result, stocks that had any link to the
Internet soared.
Early in the year, our focus in pharmaceutical and prominent technology
companies led the underlying Fund to strong results. During the tumult of the
late summer, when the market became more
Growth of a $10,000 Investment/2/3
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Total Returns as of 12/31/98 /2/3/ One Year Five Years/8/ Since Inception/8/
(May 7, 1993)
<S> <C> <C> <C>
____ Fund (without annuity expenses)/4/ 59.04% 23.72% 23.14%
Fund (with annuity expenses)/5/6/ 56.97% 22.23% 21.62%
Fund (adjusted for the maximum sales charge)/5/ 51.26% 21.85% 21.32%
- ---- Standard & Poor's 500 Composite Index/1/ 28.58% 24.06% 22.41%
</TABLE>
1 Index total returns were calculated from 5/31/93 to 12/31/98. The Standard &
Poor's 500 Composite Index (S&P 500) represents an unmanaged weighted index
of 500 industrial, transportation, utility and financial companies widely
regarded by investors as representative of the stock market.
The Consumer Price Index is a measurement of inflation for all urban
consumers (CPI-U). The indices assume reinvestment of all
dividends/distributions and do not reflect any asset-based charges for
investment management or other expenses.
2 Past investment performance does not guarantee future performance. The
returns for the Fund assume reinvestment of all dividends/distributions.
3 During the period noted, the Advisor waived a portion of its management fees,
and credits were allowed by the Custodian. In the absence of the waivers or
credits, yield and total return would have been lower.
4 Excludes all annuity expenses (which are itemized in footnote #5) charged by
American General Life Insurance Company Separate Account D through which
shares of the Fund are purchased.
5 Total returns are based on the change in unit value and reflect expenses such
as mortality and expense risk charges and administrative expense charges of
1.4%. Returns do not account for income taxes due at withdrawal or for
premium taxes. All of the return information shown prior to April 29, 1998
pre-dates the effective date of the Division's first investment in the Fund.
The return information after that date reflects actual annual historical
performance of the Fund. The above values relate only to the WM Strategic
Asset Manager Contract. The total return for the WM Advantage Contract would
have been lower due to higher expenses.
6 Excludes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
7 Includes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
8 Annualized.
16
<PAGE>
challenging, the concentration of high-quality companies brandishing either
broad franchises or niche products served contract owners well. When the market
began its rebound in October, investors no longer evaluated potential
investments on the criterion of liquidity, but rather on their fundamentals.
This change in attitude benefited the Fund immensely in the fourth quarter. We
have always believed that, against an uncertain economic backdrop, investors
would be willing to pay a premium for earnings growth. We believe some of the
outcome was a function of the positive characteristics of the "new economy"
outweighing the lumbering "industrial economy". To us, the new economy is
represented by growth, with an absence of inflation, and is driven by
productivity and efficiency. We believe that the productivity benefits of
technology and the meteoric rise to prominence of the Internet are undeniable.
As such, the securities in the Fund were positioned to capitalize on these
trends. For instance, our position in Amazon.com enjoyed a tremendous run. While
the company has achieved a high valuation by virtually any traditional measure,
we believe that the company's potential is open ended. Amazon has moved beyond
simply being an Internet bookseller. It is branching out into additional product
offerings, and we have found that its prominent brand is transferable.
WERE THERE ANY SHIFTS IN THE UNDERLYING FUND'S PORTFOLIO HOLDINGS/SECTORS THAT
HAVE HAD A SIGNIFICANT IMPACT ON FUND PERFORMANCE?
Investors' growing infatuation with Internet-related stocks contributed
significantly to the Fund's superior showing late in the year, particularly our
position in America Online (AOL), which had a memorable fourth quarter. The good
news started in November, when AOL announced it would acquire Netscape. Shortly
thereafter, the company also announced a strategic alliance with Sun
Microsystems. These two developments cemented AOL as the preeminent Internet
franchise. More interesting news came in December, when the company reported
that traffic on its shopping channel had risen over 350% in the year.
Furthermore, AOL said that not only were more people shopping on the Internet,
but they were also spending more money, on average over 50% more. In many
investors' minds, this information signified that the Internet had arrived as a
legitimate consumer forum.
We also found several compelling ideas in the telecommunications area. For
instance, our position in Nokia, the Finnish digital handset manufacturer, also
excelled. Nokia has continued to take share from Ericsson and Motorola in the
digital handset market. However, we are also interested in the company's digital
infrastructure equipment arm, an area in which Nokia has established itself as
the legitimate number two player. While the market itself is growing, Nokia has
done an exceptional job with its execution strategy. The company has continued
to enjoy double-digit revenue growth in even the most depressed economies of
Southeast Asia.
Despite the strong performance, there were a few disappointments. Our
pharmaceutical holdings, which bolstered performance all year, endured a
difficult stretch at year-end. Congress is growing increasingly concerned about
drug price inflation, and there is widespread speculation that the legislative
body might initiate some form of price regulation. Against this difficult
backdrop, our position in Warner-Lambert had a particularly challenging period
after reports emerged that several patients taking Rezulin, the company's
diabetes drug, had died from liver complications. However, Lipitor, the
company's anti-cholesterol drug, continued to enjoy tremendous success. Although
we trimmed some of the position, we remain optimistic on the company's drug
pipeline.
WHAT IS THE OUTLOOK FOR BOTH THE UNDERLYING FUND AND THE OVERALL ECONOMY?
As we look ahead to 1999, the possibility of slower economic growth is a very
real one. While this might be negative for the majority of stocks, some
companies will be relatively immune to the economic environment. As we saw in
the fourth quarter, even though several companies announced that they were
finding it difficult to build their businesses in an environment of slower
growth and selective consumerism, the market still found several companies to
embrace.
We will continue to search for these exciting franchises.
Considering the prevalence of seemingly contradictory economic data, it is
difficult to forecast economic health that far into the future. If the domestic
economy existed in a vacuum, then it would be a safe bet that the expansion may
continue throughout 1999. However, the domestic economy is closely tied to the
events in the global economy. Because there is so much uncertainty in Brazil and
Japan, it is nearly impossible to assess the domestic economy. Nevertheless, one
of the characteristics that we look for in a company is pricing power. We want
to own companies that possess either a prominent brand or a niche product with
substantial barriers to entry for competitors. Either one of these attributes
allows companies to protect their profit margins, which we hope will allow them
to flourish in spite of the economic environment.
GROWTH fund
portfolio composition+
[PIE CHART APPEARS HERE]
+ Allocation percentages are based on total investment value of the portfolio
as of 12-31-98. Differences from financial statements are a result of a
consolidation of industries or sectors.
equity fund
17
<PAGE>
BOND & STOCK fund
PORTFOLIO MANAGER:
JEFFREY D. HUFFMAN
WM ADVISORS, INC.
The equity team, led by Jeffrey D. Huffman, Senior Portfolio Manager of WM
Advisors, Inc., has managed the Bond & Stock Fund since its inception. Mr.
Huffman is a Chartered Financial Analyst, holds an MBA, and has over 12 years of
investment management experience.
WHAT WERE THE MOST SIGNIFICANT FACTORS CONTRIBUTING TO THE FUND PERFORMANCE OVER
THE PERIOD ENDED DECEMBER 31, 1998, AND WHAT INVESTMENT TECHNIQUES WERE USED TO
ADDRESS THOSE CONDITIONS?
Since the Fund's inception in April of 1998, large-cap growth stocks led the
stock market, while the value style employed by the underlying Fund has been out
of favor. The performance disparity between the two styles was the largest in
over twenty years of growth versus value measurement, as the growth stocks of
the S&P 500 outperformed the value stocks by over 27% for the year. We
believe, over time, the disparity between growth and value will close and
therefore maintain our value discipline. In addition, global uncertainty caused
significant equity market volatility during 1998. This began in Asia and spread
into Latin America and Russia with currencies and markets crashing. This decline
in equity prices in August and September allowed us to purchase higher-quality
assets at prices we feel represent excellent value. For example, we added equity
positions in Pepsico, Xerox, Mattel, T. Rowe Price, and Carnival Cruise Lines.
At the same time, we eliminated several names from the portfolio where
fundamental prospects had weakened. The net result was an increase in the
overall quality of the portfolio without materially altering its valuation
characteristics. We were able to add strong positions to the underlying Fund
without increasing the overall portfolio risk.
Fixed-income markets were strong as inflation all but disappeared. Higher-
quality bonds fared best in the turbulent market of late summer as a flight-to-
quality ensued. Treasuries tended to perform better than similar maturity
corporate and mortgage holdings. We positioned the underlying portfolio with a
bias towards Treasuries, gaining some relative performance strength in the
fixed-income arena. We maintained a duration (a measurement of price sensitivity
to changes in interest rates) of the securities held by the underlying Fund
longer than the duration of our benchmark. This also aided division performance
as rates declined for much of the period. Although we overweighted Treasuries
relative to corporate holdings, we did take advantage of the widening in spreads
to add high-quality (A-rated) financial issuers at cheap relative prices.
These issues provided positive results as the corporate market closed the year
on a good note.
WERE THERE ANY SHIFTS IN THE UNDERLYING FUND'S HOLDINGS/SECTORS THAT HAVE HAD A
SIGNIFICANT IMPACT ON FUND PERFORMANCE?
We maintain a diversified approach to our underlying investment selection. The
securities held by the underlying Fund range from common stocks, real estate
investment trusts, and convertible securities to U.S. Treasury issues, corporate
bonds, and mortgage-backed securities. This serves to mitigate risk as well as
provide the opportunity for growth. Our concentration in high-quality equity
investments during the downturn of the summer and fall led to good performance
in the fourth quarter of 1998. We also added positions in financial stocks over
the course of the year; these holdings led the market's advance in the latter
part of 1998. Despite the volatility in the market, we think the low inflation
environment provides a positive backdrop that continues to favor the long-term
ownership of both stocks and bonds.
WHAT IS THE OUTLOOK FOR BOTH THE UNDERLYING FUND AND THE OVERALL ECONOMY?
Our outlook for the Fund is positive. The economic backdrop to the financial
markets appears good, as low interest rates and strong consumer demand propel
the domestic economy forward. A low level of capacity utilization also suggests
that inflation may remain tame and gives the Federal Reserve the flexibility to
lower interest rates if growth slows. This slowing could occur as reduced
corporate capital spending and lower offshore demand for U.S. goods works its
way through the economy. Valuations for many sectors of the market appear very
rich, which could lead to stock price corrections if earnings growth does not
meet lofty expectations. However, we are still able to find value in this
market, as valuation disparities in market capitalization or overlooked sectors
create solid investment opportunities. Our strategy focuses on quality and
value. Our overriding objective continues to be that of maintaining a broadly
diversified portfolio of quality investments that have the potential to reward
contract owners without taking unnecessary risk.
BOND & STOCK fund
portfolio composition*
[PIE CHART APPEARS HERE]
+ Source: Ibbotson Associates
++ Bond ratings are of portfolio holdings and are provided by a combination of
both Moody's and Standard & Poor's.
+ Allocation percentages are based on total investment value of the portfolio
as of 12/31/98.
equity fund
18
<PAGE>
NORTHWEST fund
PORTFOLIO MANAGER:
DAVID SIMPSON
WM ADVISORS, INC.
The equity team, led by David Simpson, Senior Portfolio Manager of WM Advisors,
Inc., has managed the Northwest Fund since its inception. He is a Chartered
Financial Analyst, holds an MBA, and has over 11 years of continuous investment
experience.
WHAT WERE THE MOST SIGNIFICANT FACTORS CONTRIBUTING TO THE FUND PERFORMANCE OVER
THE PERIOD ENDED DECEMBER 31, 1998, AND WHAT INVESTMENT TECHNIQUES WERE USED TO
ADDRESS THOSE CONDITIONS?
Equity markets were extremely volatile during the period, which was magnified in
the small-capitalization area where the underlying Fund invests. Small-caps
underperformed large-caps after the inception of the Fund, eventually dropping
nearly 40% in four months (as measured by the Russell 2000 Index). The Fund
bounced back significantly in September and October and closed out the year with
very strong results. Over the period, the Fund was particularly impacted by its
high concentration in small-cap technology holdings as the sector was especially
damaging early, then led the market rebound. The weakness was largely due to the
perceived dependency of small technology companies on the economies of Asia.
Equities of companies with such exposure were indiscriminately sold by many
market participants as the impact of the Asian crisis created concern for
investors. In addition, semiconductor and personal computer manufacturers dealt
with excess inventory for much of the year, impacting their performance and the
performance of their suppliers. As improvements in Asia developed, these stocks
rallied, and a technology-led rebound ensued. Holdings such as Microsoft and
Micron Technology doubled in value in 1998. Conversely areas such as Basic
Industry and Aerospace hurt overall results; companies such as Schnitzer Steel
and Boeing lost value over the course of the year.
Although market volatility increased in 1998, our long-term investment focus
remains unchanged. We will continue to seek out strong companies located or
doing business in the Northwest region of the United States. In fact, with the
market pullback in the summer and fall, we were able to find good companies at
attractive valuations. This strategy paid off as the Fund appreciated
significantly in the fourth quarter. Our basic buy-and-hold strategy continues
as we maintain our long-term approach to stock selection. Short-term volatility
serves as a reminder of the significance of a long-term outlook and highlights
the importance of keeping sight of your financial goals.
WERE THERE ANY SHIFTS IN THE UNDERLYING FUND'S HOLDINGS/SECTORS THAT HAVE HAD A
SIGNIFICANT IMPACT ON FUND PERFORMANCE?
Early in the period, the Fund benefited from holdings in the retail and
technology sectors. Throughout the course of the summer, prices fell across the
board with almost no company left untouched. With over 50% of the portfolio
invested in small-cap companies, the Fund was especially vulnerable. After the
Asian crisis unwound and small-cap stocks dropped in value, we increased the
weighting of these holdings in the portfolio. The valuations appeared compelling
as many stocks had dropped 50% in price, providing a great buying opportunity.
Holdings such as Immunex and Multiple Zones International provided very positive
performance in the fourth quarter. We also reduced our exposure to both retail
and financial stocks that may be impacted if the economy of the Northwest slows.
WHAT IS THE OUTLOOK FOR BOTH THE UNDERLYING FUND AND THE OVERALL ECONOMY?
Until global unrest is resolved, we expect volatility in both the equity markets
and performance of the Fund to continue. It is still too early to understand all
of the ramifications of the crash in global emerging markets on worldwide growth
and demand for goods. We continue to stress that long-term investing and
patience should be rewarded. The portfolio is geared towards a longer-term time
horizon and should be able to withstand short-term market volatility. While the
economy of the Northwest region is very important to the Fund, many companies
such as Microsoft, Boeing, Starbucks, Intel, and Micron Technology have a
national or a global scope and bring increased levels of economic
diversification to the Fund. As small-cap stocks have been battered over the
summer, good values and the possibility of some catch-up in relative performance
create a positive environment for the Fund.
We expect both regional and national economies to slow in the coming months. The
effects of an overall global slowdown will be felt in the United States, but
lower interest rates should mitigate the magnitude of the impact. The diversity
of the Northwest economy should also continue to provide benefit, as invest-
ments are spread across multiple sectors. Regional employment factors will play
a role in economic advances, as the effects of workforce reductions by Boeing
will ripple through the area. Conversely, Microsoft continues to aggressively
hire and is spending in excess of $3 billion on research and development in
fiscal 1999 alone.
NORTHWEST fund
portfolio composition+
[PIE CHART APPEARS HERE]
+ Allocation percentages are based on total investment value of the portfolio
as of 12/31/98. Differences from financial statements are a result of a
consolidation of industries or sectors.
equity fund
19
<PAGE>
EMERGING GROWTH fund
PORTFOLIO MANAGERS:
DAVID SIMPSON &
LINDA WALK
WM ADVISORS, INC.
The Fund is co-managed by David Simpson and Linda Walk of WM Advisors, Inc. and
assisted by the entire equity team. Mr. Simpson and Ms. Walk began managing the
Fund on March 23, 1998. Both managers are Chartered Financial Analysts and have
experience in small-cap management.
PERFORMANCE REVIEW/4/
The underlying Fund gained 8.09% during the past year, while the benchmark, the
Russell 2000 Index, lost-2.54%. It was a difficult period, but the Fund closed
out the year with strong performance.
WHAT WERE THE MOST SIGNIFICANT FACTORS CONTRIBUTING TO THE FUND PERFORMANCE OVER
THE 12-MONTH PERIOD ENDED DECEMBER 31, 1998, AND WHAT INVESTMENT TECHNIQUES WERE
USED TO ADDRESS THOSE CONDITIONS?
Through the third quarter of 1998, investors showed increased risk aversion,
which presented itself by a flight-to-quality and liquidity. This phenomenon
surfaced through severe underperformance of all small-cap holdings relative to
the overall market, as renewed concerns about Asia pushed investors and money
managers into larger-cap, more liquid stocks. In addition, near the end of the
fiscal year, tax-loss selling by small-cap mutual fund managers reached record
levels and pushed prices down even lower. The result was an historically large
performance disparity between large- and small-cap stocks. This severely
hampered the underlying Fund's performance as approximately 80% of assets are
invested in small-company equities. Smaller-capitalization companies continued
to receive lower valuations relative to the larger companies represented in the
S&P 500-with every relative valuation measure below its historical average.
This trend reversed itself in October as the year closed with very strong
performance in small-caps, rewarding long-term, patient investors.
The value style of many of our holdings severely underperformed a growth or
earnings momentum
GROWTH OF A $10,000 INVESTMENT/2/3/
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Total Returns as of 12/31/98 /2/3/ One Year Since Inception/8/
(January 12, 1994)
<S> <C> <C>
_____ Fund (without annuity expenses)/4/ 8.09% 13.11%
Fund (with annuity expenses)/5/6/ 6.23% 11.49%
Fund (adjusted for the maximum sales charge)/5/7/ 0.48% 10.83%
- ----- Standard & Poor's 500 Composite Index/1/ 28.58% 23.67%
_____ Russell 2000 Index/1/ -2.54% 11.38%
</TABLE>
1 Index total returns were calculated from 1/31/94 to 12/31/98. Standard &
Poor's 500 Composite Index (S&P 500) represents an unmanaged weighted index
of 500 industrial, transportation, utility, and financial companies widely
regarded by investors as representative of the stock market. The Russell 2000
Index represents the smallest 2000 companies followed by Russell and is used
to measure the small-cap market.
The Consumer Price Index is a measurement of inflation for all urban
consumers (CPI-U). The indices assume reinvestment of all
dividends/distributions, and do not reflect any asset-based charges for
investment management or other expenses.
2 Past investment performance does not guarantee future performance. The
returns for the Fund assume reinvestment of all dividends/distributions.
3 During the period noted, the Advisor waived a portion of its management fees,
and credits were allowed by the Custodian. In the absence of the waivers or
credits, yield and total return would have been lower.
4 Excludes all annuity expenses (which are itemized in footnote #5) charged by
American General Life Insurance Company Separate Account D through which
shares of the Fund are purchased.
5 Total returns are based on the change in unit value and reflect expenses such
as mortality and expense risk charges and administrative expense charges of
1.4%. Returns do not account for income taxes due at withdrawal or for
premium taxes. All of the return information shown prior to April 29, 1998
pre-dates the effective date of the Division's first investment in the Fund.
The return information after that date reflects actual annual historical
performance of the Fund. The above values relate only to the WM Strategic
Asset Manager Contract. The total return for the WM Advantage Contract would
have been lower due to higher expenses.
6 Excludes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
7 Includes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
8 Annualized.
20
<PAGE>
approach. WM Advisors, Inc. began managing the Fund in March of 1998 and focused
on overweighting sectors such as technology, which previously had a significant
underweight. While this sector was very volatile in 1998, it led the market, and
we believe the long-term prospects are strong. We also brought down the overall
average market capitalization of the securities in the Fund as well as the
average valuation or price-to-earnings multiple. We tend to focus more on
valuations, looking for excellent companies at reasonable prices. We believe
that despite the volatility seen in 1998, this strategy will provide long-term
value for contract owners of the underlying Fund.
WERE THERE ANY SHIFTS IN THE UNDERLYING FUND'S PORTFOLIO HOLDINGS/SECTORS THAT
HAVE HAD A SIGNIFICANT IMPACT ON FUND PERFORMANCE?
We reduced our exposure to consumer cyclical stocks, which had previously been
significantly overweighted. In that sector, many companies had reached valuation
multiples which were at ten-year highs, leaving them vulnerable in a slowdown.
Given the global uncertainty, we encountered liquidity problems with a few
foreign issues in the Fund. Another area of concern was small-cap technology,
which was hit very hard in the third quarter (even for companies whose
fundamentals remained strong) as investors became increasingly risk averse.
Technology hardware companies were particularly challenged by the Asian
situation as well as short-term inventory shifts at companies (such as Compaq
Computer) which were beginning to use a direct sales model and were liquidating
inventory. As the inventory situation improved and there was hope for a bottom
in the Asian crisis, small-cap technology stocks shot dramatically upward in the
fourth quarter of 1998. This resulted in exceptionally strong performance for
the Fund in the fourth quarter and also helped the Fund to significantly
outperform its small-cap benchmark (Russell 2000) for the 12-month period ended
December 31, 1998.
WHAT IS THE OUTLOOK FOR BOTH THE UNDERLYING FUND AND THE OVERALL ECONOMY?
We have had the opportunity to invest in strong companies at compelling
valuations. Even with the recent upward movement in prices, small-cap technology
companies, in particular, appear to have reasonable valuations and have an
excellent long-term outlook. Our overall focus will continue to be investing in
companies with solid growth opportunities and strong management teams. This
strategy should benefit contract owners over the long term. The combination of
aggressive tax-loss selling, high cash reserves of many fund managers, and a
deeply oversold condition, have created an environment for a material rally for
the smaller-cap growth issues. For this rally to be sustained, the group must
deliver strong earnings growth over the next several quarters. If they can do
this, we may see a parallel to 1990-1992, where large-cap profits suffered while
small-cap earnings remained robust.
We believe there is likely to be improved relative performance by small- and
mid-cap stocks that still appear to be inexpensive as a result of the sharp
widening of the risk premium. As global risk premiums come down, small-cap
stocks could continue to rally, adding to results of the fourth quarter.
We forecast slowing growth for the U.S. economy as consumer spending, inventory
accumulation, and business investments weaken modestly. In addition, we see
declining corporate profits, tighter credit conditions, and a slightly stronger
trade drag through year-end 1999. While we feel that a recession is possible, it
is not likely due to three major factors: structural changes in the economy
making the business cycle less volatile (e.g. just-in-time inventory
management), declining interest rates, and the ability of policy makers to
prevent a recession by aggressively easing monetary and fiscal policy. Globally,
Brazil and Japan remain important wild cards in this picture.
A credible fiscal package from Brazil and viable bank restructuring from Japan
would calm market jitters. We also see a reduction in global risk premiums
across a broad class of assets as capital concerns begin to moderate at the
margin. However, it is possible that any of these issues could re-emerge and
frighten investors, re-inflating risk premiums. Since small-cap stocks sit as
the highest risk investment in the U.S. equity market, the recent reduction in
risk premiums and a lessening magnitude of global unrest have been particularly
beneficial to the underlying Fund.
EMERGING GROWTH fund
portfolio compostion+
[PIE CHART APPEARS HERE]
+ Allocation percentages are based on total investment value of the portfolio
as of 12/31/98. Differences from financial statements are a result of a
consolidation of industries or sectors.
equity fund
21
<PAGE>
INTERNATIONAL GROWTH fund
PORTFOLIO MANAGER:
WARBURG PINCUS ASSET MANAGEMENT, INC.
The following team has been primarily responsible for managing the International
Growth Fund: Richard H. King, Managing Director, joined Warburg in 1989 to found
the international equity department and has 33 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, Managing Director, has 15 years of investment experience.
Prior to joining Warburg, Mr. Edwards was a director and senior Fund manager at
Jardine Fleming Investment Advisers in Tokyo from 1991 to 1995. Harold W.
Ehrlich, CFA, CIC, Managing Director, has 15 years of investment experience.
Prior to joining Warburg, Mr. Ehrlich was a senior vice president, portfolio
manager and analyst at Templeton Investment Counsel Inc. from 1987 to 1995.
Vincent J. McBride, Senior Vice President, has 12 years of investment
experience. Prior to joining Warburg, Mr. McBride was an international equity
analyst at Smith Barney Inc. from 1993 to 1994. He also served as 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/4/
From the underlying Fund's inception (May 7, 1993) through December 31, 1998,
the Fund's average annual total return was 5.75%. For the 12-month period ended
December 31, 1998, the Fund's total return was 5.20%. Although a disappointing
year, the Fund closed the period with strong results. For additional
information, see the accompanying chart.
WHAT WERE THE MOST SIGNIFICANT FACTORS CONTRIBUTING TO THE FUND PERFORMANCE OVER
THE 12-MONTH PERIOD ENDED DECEMBER 31, 1998, AND WHAT INVESTMENT TECHNIQUES WERE
USED TO ADDRESS THOSE CONDITIONS?
The International Growth Fund had disappointing performance over the 12 months
ended December 31, 1998, and underperformed its benchmark by a considerable
margin (5.20%4 for the Fund vs. 20.34% for the EAFE index and 14.09% for the
Morgan Stanley All Country World ex-U.S.
GROWTH OF A $10,000 INVESTMENT/2/3/
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Total Returns as of 12/31/98 /2/3/ One Year Five Years/8/ Since Inception/8/
(May 7, 1993)
<S> <C> <C> <C>
_____ Fund (without annuity expenses)/4/ 5.20% 3.94% 5.75%
Fund (with annuity expenses)/5/6/ 3.67% 2.48% 4.27%
Fund (adjusted for the maximum sales charge)/5/7/ -2.08 1.67% 3.62%
- ----- Morgan Stanley Capital International EAFE Index/1/ 20.34 9.50% 9.61%
</TABLE>
1 Index total returns were calculated from 5/31/93 to 12/31/98. The Morgan
Stanley Capital International EAFE Index (OEAFEO) represents 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.
The Consumer Price Index is a measurement of inflation for all urban
consumers (CPI-U). The indices assume reinvestment of all
dividends/distributions and do not reflect any asset-based charges for
investment management or other expenses.
2 Past investment performance does not guarantee future performance. The
returns for the Fund assume reinvestment of all dividends/distributions.
3 During the period noted, the Advisor waived a portion of its management fees,
and credits were allowed by the Custodian. In the absence of the waivers or
credits, yield and total return would have been lower.
4 Excludes all annuity expenses (which are itemized in footnote #5) charged by
American General Life Insurance Company Separate Account D through which
shares of the Fund are purchased.
5 Total returns are based on the change in unit value and reflect expenses such
as mortality and expense risk charges and administrative expense charges of
1.4%. Returns do not account for income taxes due at withdrawal or for
premium taxes. All of the return information shown prior to April 29, 1998
pre-dates the effective date of the Division's first investment in the Fund.
The return information after that date reflects actual annual historical
performance of the Fund. The above values relate only to the WM Strategic
Asset Manager Contract. The total return for the WM Advantage Contract would
have been lower due to higher expenses.
6 Excludes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
7 Includes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
8 Annualized.
22
<PAGE>
Index). This reflected both untimely regional allocations and weakness in
specific stocks. Regional allocations that hurt the Fund included its Latin
American exposure, which, while a relatively small portion of the underlying
Fund's assets throughout the period, proved a considerable liability, given the
substantial declines suffered by that region's stock markets. Also exerting a
sizable drag on Fund performance was the relatively high level of exposure to
the Asia-Pacific region of the Fund heading into the period (we subsequently
reduced that exposure significantly), as these markets were then in the midst of
a substantial sell-off triggered by Thailand's currency devaluation. The Fund
was also hurt significantly on an opportunity-cost basis by its underweighting
in Europe in the first few months of 1998, a period that saw a significant rally
in those markets.
The period saw a marked divergence in performance among foreign stock markets.
European markets enjoyed impressive gains, benefiting from a host of factors,
including low inflation, falling interest rates and optimism regarding the
approach of European Monetary Union. Markets elsewhere saw far less favorable
results. Among developed markets, Japan was a noteworthy casualty, weighed down
by mounting concerns over its economy and, in particular, its troubled banking
sector. Emerging markets suffered sharp losses across the board, as the economic
and financial contagion that began following the Thai Baht devaluation in mid-
1997 continued to spread, dragging down markets from Asia to Eastern Europe to
Latin America.
WERE THERE ANY SHIFTS IN THE UNDERLYING FUND'S PORTFOLIO HOLDINGS/SECTORS THAT
HAVE HAD A SIGNIFICANT IMPACT ON FUND PERFORMANCE?
The positions in the Fund continued to shift emphasis to Europe and out of Asia
early in the period (continued from late 1997), with fairly large weightings
being placed in economically-sensitive stocks. This was based on our view that
there was considerable value in that sector. This served the Fund well for a
time but ultimately proved costly, as these stocks sold off heavily and
indiscriminately in August and September amid the worldwide market downturn and
widening fears of global recession. The securities held by the Fund were
concentrated in European financial stocks heading into that period; these too
fell sharply, largely due to worries over their exposure to Russia and other
emerging markets.
In the fourth quarter, we reduced the Fund's industrial-cyclical holdings,
particularly its "deep-cyclical" exposure (chemicals, steel, commodities, etc.),
in favor of more stable-growth-type companies, a move based both on valuation
considerations and on our outlook for relatively modest economic growth in
Europe, and globally, in 1999. Concurrently, we have maintained a presence in
specific consumer cyclicals, since we expect domestic demand in Europe to remain
healthy, fueled by rising real wages and still-high levels of consumer
confidence. We may look to increase that weighting again at some point during
the year on the assumption that global growth will pick up in the year 2000. We
also increased the Fund's defensive holdings during the quarter, focusing on
pharmaceuticals, electric utilities and telecommunications issues.
WHAT IS THE OUTLOOK FOR BOTH THE UNDERLYING FUND AND THE OVERALL ECONOMY?
As of December 31, 1998, the underlying Fund had 77% of its assets in European
holdings. This reflects our belief that Europe remains, on the whole, a
relatively attractive investment environment, especially viewed from a risk-
adjusted perspective. Though admittedly there are some near-term uncertainties
surrounding the Euro's introduction, as well as a number of economic and
political question marks, we still favor the prospects of the region.
In the Asia-Pacific region, we continue to tread cautiously and consider this
the prudent course, despite the sizable rallies in some of these markets in the
fourth quarter. Economic fundamentals for most of these countries remain quite
weak, as does the general outlook for corporate profits. Similarly in Japan,
we are still a bit reluctant given the troubled economic environment, and remain
highly focused in our stock selection there.
With 1998 now behind us, we have our sights firmly set on the year ahead, and
believe the Fund is well positioned to benefit from what promises to be a
rewarding, albeit challenging, year. The fourth quarter's broad global rally
notwithstanding, there remains a considerable amount of risk across much of the
world's economic and financial landscape, not just in emerging markets but in
developed ones as well. This suggests the need for both correct regional
allocations and good stock selection to ensure success in the year ahead. As
1999 begins, we are comfortable with the underlying Fund's positioning on both
counts, and look forward to the opportunities on the horizon.
INTERNATIONAL GROWTH fund
portfolio composition+
[PIE CHART APPEARS HERE]
+ Allocation percentages are based on total investment value of the portfolio
as of 12/31/98.
23
<PAGE>
STRATEGIC GROWTH portfolio
PORTFOLIO MANAGER:
STEVE SCOTT
WM ADVISORS, INC.
The Strategic Asset Manager Portfolios are managed by Senior Portfolio Manager
Steve Scott. Mr. Scott is a pioneer in the asset allocation business, with over
28 years experience. He is the architect and founder of the SAM Portfolios and
holds both a B.S. and an MBA.
PERFORMANCE REVIEW/5/
The SAM Strategic Growth Portfolio returned 26.19% for the one-year period ended
December 31, 1998. The Portfolio continues to be managed in an effort to reduce
volatility relative to single asset class equity investments. Long-term results
are favorable and provide a premium over inflation; since inception, the
Portfolio returned 19.12% above the rate of inflation.
ECONOMIC/MARKET REVIEW
Over the past 12 months, fixed-income yields fell substantially across all
maturities, with intermediate-term yields recording the most dramatic decline.
The drop in rates was primarily due to slowing inflation and strong foreign
demand for the safety and liquidity of U.S. Treasuries. A global flight-to-
quality ensued as investors worldwide sold riskier assets and poured money into
the Treasury market. The Federal Reserve enacted policy to infuse liquidity into
the market with three short-term interest rate cuts in total, occurring in
September, October, and November. These moves, coupled with easing pessimism
over the global picture, helped ease the credit crunch and infuse capital back
into lower-rated securities.
In the equity markets, the period started very strong as indices climbed to all-
time highs throughout the spring and summer, although the Asian economic crisis
increased volatility. The flight-to-quality was also evident in equities, as
large, liquid, blue-chip holdings significantly outperformed all other classes
of stocks during the period. Large-cap indices reached their peak on July 17,
1998 and then began to recess. This performance turned negative in August, as
large-cap stocks (S&P 500) declined over 14% and small-cap stocks (Russell 2000)
dropped nearly 20%. International equities were also extremely volatile and
experienced a major sell off as growing concern regarding global economic and
financial stability climaxed with the Russian default and the subsequent
devaluation of the Ruble. The period closed with positive performance around the
globe as markets rebounded and reached new
GROWTH OF A $10,000 INVESTMENT/3/4/
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Total Returns as of 12/31/98 /3/4/ One Year Since Inception/9/
(June 3, 1997)
<S> <C> <C>
_____ Portfolio (without annuity expenses)/5/ 26.19% 20.92%
Portfolio (with annuity expenses)/6/7/ 24.47% 19.26%
Portfolio (adjusted for the maximum sales charge)/6/8/ 18.71% 15.95%
_____ Capital Market Benchmark/1/ 28.57% 28.40%
</TABLE>
1 The Strategic Growth Portfolio's benchmark is a capital market index that is
intended to represent a proxy for Portfolio performance. The benchmark
allocation is as follows: 100% S&P 500.
The Consumer Price Index is a measurement of inflation for all urban
consumers (CPI-U). The indices assume reinvestment of all
dividends/distributions and do not reflect any asset-based charges for
investment management or other expenses. Index returns begin 6-1-97.
2 The Russell 3000 Index is a broad-based index and is intended to represent
the equity market as a whole.
3 Past investment performance does not guarantee future performance. The
returns for the Portfolio assume reinvestment of all dividends/distributions.
4 During the period noted, the Advisor waived a portion of its management fee
and absorbed certain other expenses, and the Custodian allowed credits. In
the absence of the waiver, absorption of other expenses or credits, total
return would have been lower.
5 Excludes all annuity expenses (which are itemized in footnote #6) charged by
American General Life Insurance Company Separate Account D through which
shares of the Fund are purchased.
6 Total returns are based on the change in unit value and reflect expenses such
as mortality and expense risk charges and administrative expense charges of
1.4%. Returns do not account for income taxes due at withdrawal or for
premium taxes.
7 Excludes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
8 Includes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
9 Annualized.
24
<PAGE>
highs. The fourth quarter of 1998 finished as one of the strongest quarters in
recent history. Overall, in addition to the capitalization disparity, a
dichotomy of style was also evident as growth stocks nearly tripled the results
of value stocks.
INVESTMENT STRATEGY
The Strategic Growth Portfolio is diversified in seven funds, representing six
major asset classes. The combination of asset classes allows us to maximize our
ability to manage risk during periods of market volatility. Asset classes
ranging in risk levels from short-term money market instruments to international
equities are intended to shield the Portfolio from drastic swings in any one
specific area of the financial markets.
The overall investment strategy for the period was to:
. Maintain a large concentration (60-65%) in the two equity funds investing
in the largest-capitalized companies.
. Concentrate in domestic equities
. Concentrate approximately 90% of assets in equities given our favorable
long-term outlook.
. Maintain a small position in the Money Market Fund throughout the year to
temper volatility during turbulent times.
REVIEW OF PORTFOLIO ALLOCATIONS
The Portfolio maintained a structure of 85-90% equities over the majority of the
period. This provided positive overall results during the past 12 months, but
performance was volatile. A good portion of the return was generated by the
Growth Fund, which benefited from its concentration in strong performing
technology and pharmaceutical issues. Although we held a position in small-caps,
the equity position was weighted towards the mid- to large-cap holdings, which
exhibited better relative performance throughout the year. The position in the
small-cap Emerging Growth Fund and Northwest Fund was increased in August, and
the Portfolio participated in the rapid increase in the small-cap growth market
in the fourth quarter. Although we slightly increased the international exposure
over the course of the year, foreign equities underperformed relative to U.S.
equities, which hurt the overall performance of the Portfolio. However, we are
maintaining our long-term focus on global markets. The small cash position and
overall diversification served to mitigate risk during the market downturn.
OUTLOOK
Inflation should remain subdued in the face of accelerating economic growth.
This trend will probably keep the yield on long-term bonds relatively flat, but
stronger than expected growth could push interest rates marginally upward. Low
inflation, strong employment, and strong levels of income create a positive
economic backdrop for U.S. markets.
Our long-term outlook calls for an increase in interest rates as the global
economic picture strengthens and the U.S. expansion continues. However, we also
feel that global deflationary forces will remain in the near term. Yet, as Asia
improves, an increase in worldwide demand could reverse the slide in commodity
prices. Overall low levels of inflation are supported by the trend of
technological enhancements, which allow for lower prices in spite of pressures
on wages. This, along with global competition, could prevent inflation from
accelerating as it has historically done at the end of economic cycles. The
effect of a low-inflation environment is very positive for financial assets and
should limit the length and magnitude of interest rate increases. We expect
foreign markets to remain volatile, but many areas should trend upward as
turmoil abates, interest rates decline, and economies improve.
Our forecast for 1999 GDP growth is slightly higher than the 4% growth rate
experienced in 1998, with continued low inflation. This will benefit the
consumer, as consumption should continue to propel the economy forward. The
trade picture should improve late in 1999 as the Dollar declines further and
foreign countries can again afford U.S. goods. In addition, strength in
Europe--as the Euro comes on the scene--and improvements in Asia could stimulate
foreign demand. We expect corporate profitability to improve as the
technological gains from capital investments continue and greater efficiencies
improve the ability to earn higher margins. This continues to support our
positive long-term outlook on stocks, especially the technology sector. Overall,
financial markets should stabilize as monetary, fiscal, and trading policies are
planned and implemented on a global scale. The Year 2000 bug may be a short-term
disruption, but efforts over the next 12 months should avert any major global
impact.
STRATEGIC GROWTH portfolio
portfolio allocation+
[PIE CHART APPEARS HERE]
underlying portfolio composition+
[PIE CHART APPEARS HERE]
+ Annual rate of inflation: 1.80%
Source: Ibbotson
+ This is as of 12/31/98 and may not reflect the current Strategic Growth
Portfolio allocation.
SAM portolios
25
<PAGE>
CONSERVATIVE GROWTH portfolio
PORTFOLIO MANAGER:
STEVE SCOTT
WM ADVISORS, INC.
The Strategic Asset Manager Portfolios are managed by Senior Portfolio Manager
Steve Scott. Mr. Scott is a pioneer in the asset allocation business, with over
28 years experience. He is the architect and founder of the SAM Portfolios and
holds both a B.S. and an MBA.
PERFORMANCE REVIEW/5/
The SAM Conservative Growth Portfolio returned 19.91%, beating its benchmark for
the one-year period ended December 31, 1998. The Portfolio continues to be
managed in an effort to reduce volatility relative to single asset class
investments. Long-term results are favorable and provide a premium over
inflation; since inception, the Portfolio returned 13.82%+ above the rate of
inflation.
ECONOMIC/MARKET REVIEW
Over the past 12 months, fixed-income yields fell substantially across all
maturities, with intermediate-term yields recording the most dramatic decline.
The drop in rates was primarily due to slowing inflation and strong foreign
demand for the safety and liquidity of U.S. Treasuries. A global flight-to-
quality ensued as investors worldwide sold riskier assets and poured money into
the Treasury market. The Federal Reserve enacted policy to infuse liquidity into
the market with three short-term interest rate cuts in total, occurring in
September, October, and November. These moves, coupled with easing pessimism
over the global picture, helped ease the credit crunch and infuse capital back
into lower-rated securities.
In the equity markets, the period started very strong as indices climbed to all-
time highs throughout the spring and summer, although the Asian economic crisis
increased volatility. The flight-to-quality was also evident in equities, as
large, liquid, blue-chip holdings significantly outperformed all other classes
of stocks during the period. Large-cap indices reached their peak on July 17,
1998 and then began to recess. This performance turned negative in August, as
large-cap stocks (S&P 500) declined over 14% and small-cap stocks (Russell 2000)
dropped nearly 20%. International equities were also extremely volatile and
experienced a major sell off as growing concern regarding global economic and
financial stability climaxed with the Russian default and the subsequent
devaluation of the Ruble. The period closed with positive performance around the
globe as markets rebounded and reached new highs. The fourth quarter of 1998
finished as one of the strongest quarters in recent
GROWTH OF A $10,000 INVESTMENT/3/4/
[GRAPH APPEARS HERE]
<TABLE>
TOTAL RETURNS AS OF 12/31/98 /3/4/ ONE YEAR SINCE INCEPTION/9/
(JUNE 3, 1997)
<S> <C> <C>
____ Portfolio (without annuity expenses)/5/ 19.91% 15.62%
Portfolio (with annuity expenses)/6/7/ 18.25% 14.02%
Portfolio (adjusted for the maximum sales charge)/6/8/ 12.51% 10.62%
____ Capital Market Benchmark/1/ 16.03% 14.42%
</TABLE>
1 The Conservative Growth Portfolio's benchmark is a blended mix of capital
market indices that is intended to represent a proxy for Portfolio
performance. The benchmark allocation is as follows: 35% S&P 500, 20% MSCI
EAFE + Emerging Markets, 20% Lehman Brothers Mutual Fund (1-5) Gov/Corp
Index, 20% Salomon Bros. 90-day T-Bills, and 5% Russell 2000 Growth.
The Consumer Price Index is a measurement of inflation for all urban
consumers (CPI-U). The indices assume reinvestment of all
dividends/distributions and do not reflect any asset-based charges for
investment management or other expenses. Index returns begin 6-1-97.
2 The Russell 3000 Index is a broad-based index and is intended to represent
the equity market as a whole.
3 Past investment performance does not guarantee future performance. The
returns for the Portfolio assume reinvestment of all dividends/distributions
4 During the period noted, the Advisor waived a portion of its management fee
and absorbed certain other expenses, and the Custodian allowed credits. In
the absence of the waiver, absorption of other expenses or credits, total
return would have been lower.
5 Excludes all annuity expenses (which are itemized in footnote #6) charged by
American General Life Insurance Company Separate Account D through which
shares of the Fund are purchased.
6 Total returns are based on the change in unit value and reflect expenses such
as mortality and expense risk charges and administrative expense charges of
1.4%. Returns do not account for income taxes due at withdrawal or for
premium taxes.
7 Excludes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
8 Includes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
9 Annualized.
26
<PAGE>
history. Overall, in addition to the capitalization disparity, a dichotomy of
style was also evident as growth stocks nearly tripled the results of value
stocks.
INVESTMENT STRATEGY
The Conservative Growth Portfolio is diversified in seven funds, representing
six major asset classes. The combination of asset classes allows us to maximize
our ability to manage risk during periods of market volatility. Asset classes
ranging in risk levels from short-term money market instruments to international
equities are intended to shield the Portfolio from drastic swings in any one
specific area of the financial markets.
The overall investment strategy for the period was to:
. Maintain a large concentration (55-59%) in the two equity funds investing in
the largest-capitalized companies and small position in small-cap holdings.
. Concentrate approximately 80-85% of assets in equities given our long-term
outlook.
. Maintain a 15-20% position in debt investments to temper volatility during
turbulent times.
REVIEW OF PORTFOLIO ALLOCATIONS
The Portfolio maintained a structure of over 80% equities during the majority of
the period. The equity component provided positive results during the past 12
months, contributing significantly to the overall return. A large portion of the
return was generated by the Growth Fund, which benefited from its concentration
in strong performing technology and pharmaceutical issues. The short-term
decline in August and subsequent market rally should remind investors to focus
on long-term investing and diversification in the face of market volatility.
Although we held a position in small-caps, the equity position was weighted
towards the mid- to large-cap holdings, which exhibited better relative
performance throughout the period. The small-cap position had a negative impact
on performance for much of the period, but provided strong performance in the
fourth quarter as growth stocks rallied significantly. We allocated 20% of the
Portfolio in international equities, which proved to be a relative drag on
performance, but we are maintaining our long-term focus on global markets.
Besides income, the debt portion also contributed price appreciation as interest
rates declined. These holdings, as well as the overall diversification, served
to mitigate risk during the market downturn.
OUTLOOK
Inflation should remain subdued in the face of accelerating economic growth.
This trend will probably keep the yield on long-term bonds relatively flat, but
stronger than expected growth could push interest rates marginally upward. Low
inflation, strong employment, and strong levels of income create a positive
economic backdrop for U.S. markets.
Our long-term outlook calls for an increase in interest rates as the global
economic picture strengthens and the U.S. expansion continues. However, we also
feel that global deflationary forces will remain in the near term. Yet, as Asia
improves, an increase in worldwide demand could reverse the slide in commodity
prices. Overall low levels of inflation are supported by the trend of
technological enhancements, which allow for lower prices in spite of pressures
on wages. This, along with global competition, could prevent inflation from
accelerating as it has historically done at the end of economic cycles. The
effect of a low-inflation environment is very positive for financial assets and
should limit the length and magnitude of interest rate increases. We expect
foreign markets to remain volatile, but many areas should trend upward as
turmoil abates, interest rates decline, and economies improve.
Our forecast for 1999 GDP growth is slightly higher than the 4% growth rate
experienced in 1998, with continued low inflation. This will benefit the
consumer, as consumption should continue to propel the economy forward. The
trade picture should improve late in 1999 as the Dollar declines further and
foreign countries can again afford U.S. goods. In addition, strength in
Europe--as the Euro comes on the scene--and improvements in Asia could stimulate
foreign demand. We expect corporate profitability to improve as the
technological gains from capital investments continue and greater efficiencies
improve the ability to earn higher margins. This continues to support our
positive long-term outlook on stocks, especially the technology sector. Overall,
financial markets should stabilize as monetary, fiscal, and trading policies are
planned and implemented on a global scale. The Year 2000 bug may be a short-term
disruption, but efforts over the next 12 months should avert any major global
impact.
CONSERVATIVE GROWTH portfolio
portfolio allocation+
[PIE CHART APPEARS HERE]
underlying portfolio composition+
[PIE CHART APPEARS HERE]
+ Annual rate of inflation: 1.80%
Source: Ibbotson
+ This is as of 12/13/98 and may not reflect the current Conservative Growth
Portfolio allocation.
SAM portfolios
27
<PAGE>
BALANCED portfolio
PORTFOLIO MANAGER:
STEVE SCOTT
WM ADVISORS, INC.
The Strategic Asset Manager Portfolios are managed by Senior Portfolio Manager
Steve Scott. Mr. Scott is a pioneer in the asset allocation business, with over
28 years experience. He is the architect and founder of the SAM Portfolios and
holds both a B.S. and an MBA.
PERFORMANCE REVIEW/6/
The SAM Balanced Portfolio returned 17.18% for the one-year period ended
December 31, 1998. The Portfolio beat its benchmark index for both the one-year
period and since inception, while being managed in an effort to reduce
volatility relative to single asset class investments. Long-term results are
favorable and provide a premium over inflation; since inception, the Portfolio
returned 12.01%+ above the rate of inflation.
ECONOMIC/MARKET REVIEW
Over the past 12 months, fixed-income yields fell substantially across all
maturities, with intermediate-term yields recording the most dramatic decline.
The drop in rates was primarily due to slowing inflation and strong foreign
demand for the safety and liquidity of U.S. Treasuries. A global flight-
to-quality ensued as investors worldwide sold riskier assets and poured money
into the Treasury market. The Federal Reserve enacted policy to infuse liquidity
into the market with three short-term interest rate cuts in total, occurring in
September, October, and November. These moves, coupled with easing pessimism
over the global picture, helped ease the credit crunch and supported the
infusion of capital back into lower-rated securities. Overall, the one-year
period ended December 31, 1998 was favorable for fixed-income investors as most
asset classes posted strong results, and the low levels of inflation provided
substantial real (inflation adjusted) returns.
In the equity markets, the period started very strong as indices climbed to all-
time highs throughout the spring and summer, although the Asian economic crisis
increased volatility. The flight-to-quality was also evident in equities, as
large, liquid, blue-chip holdings significantly outperformed all other classes
of stocks during the period. Large-cap indices reached their peak on July 17,
1998 and then began to recess. This performance turned negative in August, as
large-cap stocks (S&P 500) declined over 14% and small-cap stocks (Russell 2000)
dropped nearly 20%. International equities were also extremely volatile and
experienced a major sell off as growing concern regarding global economic and
financial stability climaxed with the Russian default and the subsequent
devaluation of the Ruble. The period closed with positive performance around the
globe as markets rebounded and reached new highs. The fourth quarter of
GROWTHH OF A $10,000 INVESTMENT /4/5/
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
TOTAL RETURNS AS OF 12/31/98/ /4/5/ ONE YEAR SINCE INCEPTION/10/
(JUNE 3, 1997)
<S> <C> <C>
____ Portfolio (without annuity expenses)/6/ 17.18% 13.81%
Portfolio (with annuity expenses)/7/8/ 15.56% 12.23%
Portfolio (adjusted for the maximum sales charge)/7/9/ 9.82% 8.81%
____ Capital Market Benchmark/1/ 11.42% 10.43%
</TABLE>
1 The Balanced Portfolio's benchmark is a blended mix of capital market indices
that is intended to represent a proxy for Portfolio performance. The
benchmark allocation is as follows: 25% Lehman Brothers Mutual Fund (1-5)
Gov/Corp Index, 25% Salomon Bros. 90-day T-Bills, 20% Lehman Brothers
Mortgage Index, 15% S&P 500, and 15% MSCI EAFE + Emerging Markets.
The Consumer Price Index is a measurement of inflation for all urban
consumers (CPI-U). The indices assume reinvestment of all
dividends/distributions and do not reflect any asset-based charges for
investment management or other expenses. Index returns begin 6-1-97.
2 The Russell 3000 Index is a broad-based index and is intended to represent
the equity market as a whole.
3 The Lehman Brothers Aggregate Bond Index is a broad-based index intended to
represent the fixed-income market as a whole.
4 Past investment performance does not guarantee future performance. The
returns for the Portfolio assume reinvestment of all
dividends/distributions.
5 During the period noted, the Advisor waived its management fee and absorbed
certain other expenses, and the Custodian allowed credits. In the absence of
the waiver, absorption of other expenses or credits, total return would have
been lower.
6 Excludes all annuity expenses (which are itemized in footnote #7) charged by
American General Life Insurance Company Separate Account D through which
shares of the Fund are purchased.
7 Total returns are based on the change in unit value and reflect expenses such
as mortality and expense risk charges and administrative expense charges of
1.4%. Returns do not account for income taxes due at withdrawal or for
premium taxes.
8 Excludes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
9 Includes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
10 Annualized.
28
<PAGE>
1998 finished as one of the strongest quarters in recent history. Overall, in
addition to the capitalization disparity, a dichotomy of style was also evident
as returns for growth stocks nearly tripled those of value stocks.
INVESTMENT STRATEGY
The Balanced Portfolio is diversified in seven funds, representing eight major
asset classes. The combination of asset classes allows us to maximize our
ability to manage risk during periods of market volatility. Asset classes
ranging in risk levels from short-term money market instruments to international
equities are intended to shield the Portfolio from drastic swings in any one
specific area of the financial markets.
The overall investment strategy for the period was to:
. Manage risk by maintaining approximately 35% invested in AAA++ short- to
intermediate-term fixed-income securities.
. Concentrate at least 60% of assets in equities; primarily large-cap growth
stocks given our positive long-term outlook.
. Maintain a 25% position in cash equivalents and short-term bonds throughout
the year to temper volatility during turbulent times.
REVIEW OF PORTFOLIO ALLOCATIONS
The Portfolio maintained a structure of over 60% equities during the majority of
the period. The equity component provided positive results during the past 12
months, contributing significantly to the overall return. Much of the return was
generated by the Growth Fund, which benefited from its concentration in strong
performing technology and pharmaceutical issues. The short-term decline in
August and subsequent market rebound should remind shareholders to focus on
long-term investing and diversification in the face of market volatility. The
equity position was weighted towards the mid- to large-cap holdings, which
exhibited better relative performance throughout the period. However, we shifted
some assets into small-caps in November, capturing much of their dramatic
rebound. We increased international exposure in April to 20%. This proved to be
a relative drag on the Portfolio, but we are maintaining our long-term focus on
global markets. Besides income, the debt portion also contributed price
appreciation as interest rates declined. These holdings, as well as the overall
diversification, served to mitigate risk during the market downturn.
OUTLOOK
Inflation should remain subdued in the face of accelerating economic growth.
This trend will probably keep the yield on long-term bonds relatively flat, but
stronger than expected growth could push interest rates marginally upward. Low
inflation, strong employment, and strong levels of income create a positive
economic backdrop for U.S. markets.
Our long-term outlook calls for an increase in interest rates as the global
economic picture strengthens and the U.S. expansion continues. However, we also
feel that global deflationary forces will remain in the near term. Yet, as Asia
improves, an increase in worldwide demand could reverse the slide in commodity
prices. Overall low levels of inflation are supported by the trend of
technological enhancements, which allow for lower prices in spite of pressures
on wages. This, along with global competition, could prevent inflation from
accelerating as it has historically done at the end of economic cycles. The
effect of a low-inflation environment is very positive for financial assets and
should limit the length and magnitude of interest rate increases. We expect
foreign markets to remain volatile, but many areas should trend upward as
turmoil abates, interest rates decline, and economies improve.
Our forecast for 1999 GDP growth is slightly higher than the 4% growth rate
experienced in 1998, with continued low inflation. This will benefit the
consumer, as consumption should continue to propel the economy forward. The
trade picture should improve late in 1999 as the Dollar declines further and
foreign countries can again afford U.S. goods. In addition, strength in
Europe--as the Euro comes on the scene--and improvements in Asia could stimulate
foreign demand. We expect corporate profitability to improve as the
technological gains from capital investments continue and greater efficiencies
improve the ability to earn higher margins. This continues to support our
positive long-term outlook on stocks, especially the technology sector. Overall,
financial markets should stabilize as monetary, fiscal, and trading policies are
planned and implemented on a global scale. The Year 2000 bug may be a short-term
disruption, but efforts over the next 12 months should avert any major global
impact.
BALANCED portfolio
portfolio allocation+
[PIE CHART APPEARS HERE]
underlying portfolio composition++
[PIE CHART APPEARS HERE]
* Annual rate of inflation: 1.80%
Source: Ibbotson
++ Bond ratings are of portfolio holdings and are provided by a combination of
both Moody's and Standard & Poor's.
+ This is as of 12/31/98 and may not reflect the current Balanced Portfolio
allocation.
SAM portfolios
29
<PAGE>
FLEXIBLE INCOME portfolio
PORTFOLIO MANAGER:
STEVE SCOTT
WM ADVISORS, INC.
The Strategic Asset Manager Portfolios are managed by Senior Portfolio Manager
Steve Scott. Mr. Scott is a pioneer in the asset allocation business, with over
28 years experience. He is the architect and founder of the SAM Portfolios and
holds both a B.S. and an MBA.
PERFORMANCE REVIEW/5/
The SAM Flexible Income Portfolio returned 11.75% for the one-year period ended
December 31, 1998. The Portfolio beat its benchmark index for the period and
since inception, while being managed in an effort to reduce volatility relative
to single asset class investments. Long-term results are favorable and provide a
premium over inflation; since inception, the Portfolio returned 9.10%+ above the
rate of inflation.
ECONOMIC/MARKET REVIEW
Over the past 12 months, fixed-income yields fell substantially across all
maturities, with intermediate-term yields recording the most dramatic decline.
In fact, the yield on the 10-year Treasury Note fell 109 basis points (1.09%)
during the period, while the yield on the 30-year Treasury Bond fell 82 basis
points (.082%). The drop in rates was primarily due to slowing inflation and
strong foreign demand for the safety and liquidity of U.S. Treasuries. This
global flight-to-quality was most evident after the August 17, 1998 collapse of
the Russian economy. Investors worldwide sold riskier assets and poured money
into the Treasury market. Other fixed-income securities suffered as high-quality
government bonds outperformed corporate issues, especially lower-rated, higher-
yielding bonds. The Federal Reserve enacted policy to infuse liquidity into the
market with three short-term interest rate cuts in total, occurring in
September, October, and November. These moves, coupled with easing pessimism
over the global picture, helped ease the credit crunch and supported an infusion
of capital back into lower-rated securities. Mortgage-backed securities
generated positive results, but were impacted by the increase in refinancings as
interest rates dropped. Overall, the one-year period ended December 31, 1998 was
favorable for fixed-income investors as most asset classes posted strong
results, and the low levels of inflation provided substantial real (inflation
adjusted) returns. In the equity markets, very strong results turned negative in
August, when large-cap stocks (S&P 500) declined
GROWTH OF A $10,000 INVESTMENT /3/4/
[GRAPH APPEARS HERE]
<TABLE>
TOTAL RETURNS AS OF 12/31/98 /3/4/ ONE YEAR SINCE iNCEPTION/9/
(SEPTEMBER 8, 1997)
<S> <C> <C>
____ Portfolio (without annuity expenses)/5/ 11.75% 10.76%
Portfolio (with annuity expenses)/6/7/ 10.21% 9.21%
Portfolio (adjusted for the maximum sales charge)/6/8/ 4.46% 4.92%
____ Capital Market Benchmark/1/ 8.70% 8.87%
</TABLE>
1 The Flexible Income Portfolio's benchmark is a blended mix of capital market
indices that are intended to represent a proxy for Portfolio performance. The
benchmark allocation is as follows: 40% Lehman Bros. Mutual Fund Short (1-5)
Gov/Corp Index, 40% Salomon Bros. 90-day T-Bills, 10% Lehman Bros. Mortgage
Index, and 10% S&P 500. The Consumer Price Index is a measurement of
inflation for all urban consumers (CPI-U). The indices assume reinvestment of
all dividends/distributions and do not reflect any asset-based charges for
investment management or other expenses. Index returns begin 9-1-97.
2 The Lehman Brothers Aggregate Bond Index is a broad-based index intended to
represent the fixed-income market as a whole.
3 Past investment performance does not guarantee future performance. The
returns for the Portfolio assume reinvestment of all
dividends/distributions.
4 During the period noted, the Advisor waived its management fee and absorbed
certain other expenses, and the Custodian allowed credits. In the absence of
the waiver, absorption of other expenses or credits, total return would have
been lower.
5 Excludes all annuity expenses (which are itemized in footnote #6) charged by
American General Life Insurance Company Separate Account D through which
shares of the Fund are purchased.
6 Total returns are based on the change in unit value and reflect expenses such
as mortality and expense risk charges and administrative expense charges of
1.4%. Returns do not account for income taxes due at withdrawal or for
premium taxes.
7 Excludes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
8 Includes maximum Contingent Deferred Sales Charge (CDSC) of 0%-7% and $35
annual contract fee.
9 Annualized.
30
<PAGE>
over 14% and small-cap stocks (Russell 2000) dropped nearly 20%. Markets then
rebounded as 1998 closed with one of the strongest quarters in recent history.
The flight-to-quality was also evident in the equity markets as large, liquid
blue-chip holdings significantly outperformed all other classes of stocks during
the period.
INVESTMENT STRATEGY
The Flexible Income Portfolio is diversified in seven funds, representing eight
major asset classes. The combination of asset classes allows us to maximize our
ability to manage risk during periods of market volatility. Asset classes
ranging in risk levels from short-term money market instruments to equities are
intended to shield the Portfolio from drastic swings in any one specific area of
the financial markets.
The overall investment strategy for the period was to:
. Maintain high concentration (40%) in intermediate- to long-term fixed-
income securities as yields dropped throughout the period.
. Focus on high-quality holdings (41% AAA rated++) for most of the period.
. Allocate additional assets (26% overall) in equities as long-term
prospects remain favorable.
REVIEW OF PORTFOLIO ALLOCATIONS
Our heaviest weighting early in the period was in the best performing WM
Variable Trust fixed-income fund, the U.S. Government Securities Fund. In
addition, the equity component provided positive results during the past 12
months, contributing significantly to the overall return. The short-term
correction in August and subsequent market rally should remind investors to
focus on long-term investing and diversification in the face of market
volatility. The Portfolio maintained a structure of 80% debt, 20% equities for
the first half of the period. In August, a slight shift was made to increase the
equity position and lower duration (a measure of price sensitivity to changes in
interest rates) to offset risk. This initially dragged on performance as both
interest rates and equities fell, but provided very positive relative results
during the latter part of the period as growth stocks advanced significantly. In
addition, we allocated 5% of assets in the High Yield Fund during the fourth
quarter. This move boosted performance as the credit crunch subsided and yield
spreads tightened.
OUTLOOK
Inflation should remain subdued in the face of accelerating economic growth.
This trend will probably keep the yield on long-term bonds relatively flat, but
stronger than expected growth could push interest rates marginally upward. We
will continue to take advantage of narrowing yield spreads among corporate
credits relative to U.S. Treasuries. Low inflation, strong employment, and
strong levels of income create a positive economic backdrop for U.S. markets.
Our long-term outlook calls for an increase in interest rates as the global
economic picture strengthens and the U.S. expansion continues. However, we also
feel that global deflationary forces will remain in the near term. Yet, as Asia
improves, an increase in worldwide demand could reverse the slide in commodity
prices. Overall low levels of inflation are supported by the trend of
technological enhancements, which allow for lower prices in spite of pressures
on wages. This, along with global competition, could prevent inflation from
accelerating as it has historically done at the end of economic cycles. The
effect of a low inflation environment is very positive for financial assets and
should limit the length and the magnitude of interest rate increases. We expect
foreign markets to remain volatile, but many areas should trend upward as
turmoil abates, interest rates decline, and economies improve.
Our forecast for 1999 GDP growth is slightly higher than the 4% growth rate
experienced in 1998, with continued low inflation. This will benefit the
consumer, as consumption should continue to propel the economy forward. The
trade picture should improve late in 1999 as the Dollar declines further and
foreign countries can again afford U.S. goods. In addition, strength in
Europe--as the Euro comes on the scene--and improvements in Asia could stimulate
foreign demand. We expect corporate profitability to improve as the
technological gains from capital investments continue and greater efficiencies
improve the ability to earn higher margins. This continues to support our
positive long-term outlook on stocks, especially the technology sector. Overall,
financial markets should stabilize as monetary, fiscal, and trading policies are
planned and implemented on a global scale. The Year 2000 bug may be a short-term
disruption, but efforts over the next 12 months should avert any major global
impact.
FLEXIBLE INCOME portfolio
portfolio allocation+
[PIE CHART APPEARS HERE]
underlying portfolio composition+
[PIE CHART APPEARS HERE]
+ Annual rate of inflation: 1.66%
Source: Ibbotson
++ Bond ratings are of portfolio holdings and are provided by a combination of
both Moody's and Standard & Poor's.
* This is as of 12/31/98 and may not reflect the current Flexible Income
Portfolio allocation.
SAM portfolios
31
<PAGE>
INCOME portfolio
PORTFOLIO MANAGER:
STEVE SCOTT
WM ADVISORS, INC.
The Strategic Asset Manager Portfolios are managed by Senior Portfolio Manager
Steve Scott. Mr. Scott is a pioneer in the asset allocation business, with over
28 years experience. He is the architect and founder of the SAM Portfolios and
holds both a B.S. and an MBA.
ECONOMIC/MARKET REVIEW
Over the past 12 months, fixed-income yields fell substantially across all
maturities, with intermediate-term yields recording the most dramatic decline.
The drop in rates was primarily due to slowing inflation and strong foreign
demand for the safety and liquidity of U.S. Treasuries. Investors worldwide sold
riskier assets and poured money into the Treasury market. Other fixed-income
securities suffered as high-quality government bonds outperformed corporate
issues, especially lower-rated, higher-yielding bonds. The Federal Reserve
enacted policy to infuse liquidity into the market with three short-term
interest rate cuts in total occurring in September, October, and November. These
moves, coupled with easing pessimism over the global picture, helped ease the
credit crunch and supported the infusion of capital back into lower-rated
securities. Mortgage-backed securities generated positive results, but were
impacted by the increase in refinancings as interest rates dropped. Overall, the
one-year period ended December 31, 1998 was favorable for fixed-income investors
as most asset classes posted strong results, and the low levels of inflation
provided substantial real (inflation adjusted) returns.
INVESTMENT STRATEGY
The Income Portfolio is diversified in five funds, representing six major asset
classes. The combination of asset classes allows us to maximize our ability to
manage risk during periods of market volatility. Asset classes ranging in risk
levels from short-term money market instruments to high-yield bonds are intended
to shield the Portfolio from drastic swings in any one specific area of the
fixed-income markets.
The overall investment strategy for the period was to:
. Maintain high concentration in intermediate-term securities as they provided
strong returns relative to interest rate risk.
. Focus on high-quality holdings (50% AAA rated++) for most of the period.
. Allocate a portion of assets in high-yield corporate securities in an
effort to boost overall income levels as the flight-to-quality unwinds.
REVIEW OF PORTFOLIO ALLOCATIONS
Positions in the U.S. Government Securities Fund and the Income Fund averaged
65% of assets during much of the period. The Portfolio maintained a balanced
structure with regard to maturity and duration (a measurement of the price
sensitivity to interest rate changes). In August, we allocated approximately 10%
of assets to below-investment-grade bonds to increase yield in the declining
rate environment. Although the allocation in high-yield bonds initially
negatively impacted Portfolio performance, we increased the position as this
Fund provided relative performance strength as the gap in yields between lower-
rated bonds and Treasuries closed to more normal levels. We shortened the
duration in November as we anticipated greater than expected growth to push
rates up slightly. This served to lower overall risk when rates did increase.
OUTLOOK
Inflation should remain subdued in the face of accelerating economic growth.
This trend will probably keep the yield on long-term bonds relatively flat, but
stronger than expected growth could push interest rates marginally upward. We
will continue to take advantage of narrowing yield spreads among corporate
credits relative to U.S. Treasuries. Low inflation, strong employment, and
strong levels of income create a positive economic backdrop for U.S. markets.
Our long-term outlook calls for an increase in interest rates as the global
economic picture strengthens and the U.S. expansion continues. However, we also
feel that global deflationary forces will remain in the near term. Yet, as Asia
improves, an increase in worldwide demand could reverse the slide in commodity
prices. Overall low levels of inflation are supported by the trend of
technological enhancements, which allow for lower prices in spite of pressures
on wages. This, along with global competition, could prevent inflation from
accelerating as it has historically done at the end of economic cycles. The
effect of a low-inflation environment is very positive for financial assets and
should limit the length and magnitude of interest rate increases.
Our forecast for 1999 GDP growth is slightly higher than the 4% growth rate
experienced in 1998, with continued low inflation. This will benefit the
consumer, as consumption should continue to propel the economy forward. In
addition, the Year 2000 bug may be a short-term disruption, but efforts over the
next 12 months should avert any major global impact.
INCOME portfolio
portfolio allocation+
[PIE CHART APPEARS HERE]
underlying portfolio composition+
[PIE CHART APPEARS HERE]
+ Bond ratings are of portfolio holdings and are provided by a combination of
both Moody's and Standard & Poor's.
+ This is as of 12/31/98 and may not reflect the current Income Portfolio
allocation.
SAM Portfolios
32
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
33
<PAGE>
statements of assets and liabilities
WM Variable Trust
December 31, 1998
<TABLE>
<CAPTION>
Short Term U.S.
Money High Government Growth &
Market Quality Bond Securities Income Income Growth
Fund Fund Fund Fund Fund Fund
----------- ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at value
(See portfolios of
investments):
Securities............ $30,838,932 $36,036,095 $40,525,678 $48,176,491 $124,478,039 $162,179,853
Repurchase
Agreements........... 2,344,000 1,015,000 1,140,000 811,000 612,000 --
----------- ----------- ----------- ----------- ------------ ------------
Total Investments(a).. 33,182,932 37,051,095 41,665,678 48,987,491 125,090,039 162,179,853
Cash and/or foreign
currency(b)............ 155 -- -- -- 54 44,312
Dividends and/or
interest receivable.... 287,950 437,590 274,456 955,118 88,690 18,713
Receivable for
investment securities
sold................... -- 1,674 100,955 -- 183,759 4,500,547
Receivable for Fund
shares sold............ 8,436 9,915 -- -- 63,877 42,898
Variation margin........ -- -- -- -- -- --
Net unrealized
appreciation of forward
foreign currency
contracts (See
portfolio of
investments)........... -- -- -- -- -- 11,881
Unamortized organization
costs and/or offering
costs.................. -- -- -- -- -- --
Receivable from
investment advisor..... -- -- -- -- -- --
Receivable from
administrator.......... -- -- -- -- -- --
Prepaid expenses and
other assets........... 813 653 1,235 1,145 2,583 3,109
----------- ----------- ----------- ----------- ------------ ------------
Total Assets.......... 33,480,286 37,500,927 42,042,324 49,943,754 125,429,002 166,801,313
----------- ----------- ----------- ----------- ------------ ------------
LIABILITIES:
Payable for investment
securities purchased... 1,500,000 -- -- -- -- 3,542,039
Net unrealized
depreciation of forward
foreign currency
contracts (See
portfolio of
investments)........... -- -- -- -- -- --
Payable for Fund shares
redeemed............... 76,056 53,098 65,694 119,002 404 116,597
Due to custodian........ -- 3,671 6,081 108,874 -- --
Investment advisory fee
payable................ 11,928 15,881 21,400 27,520 81,013 112,469
Administration fee
payable................ 4,863 5,717 6,420 7,621 18,424 22,809
Accrued legal and audit
fees................... 15,252 15,235 15,287 15,430 17,004 17,055
Accrued expenses and
other payables......... 10,136 8,028 13,048 11,549 17,595 23,056
----------- ----------- ----------- ----------- ------------ ------------
Total Liabilities..... 1,618,235 101,630 127,930 289,996 134,440 3,834,025
----------- ----------- ----------- ----------- ------------ ------------
NET ASSETS.............. $31,862,051 $37,399,297 $41,914,394 $49,653,758 $125,294,562 $162,967,288
=========== =========== =========== =========== ============ ============
(a) Investments, at
cost................... $33,182,932 $36,827,823 $39,195,891 $46,655,939 $106,137,857 $111,935,111
=========== =========== =========== =========== ============ ============
(b) Cash and/or foreign
currency, at cost...... $ 155 $ -- $ -- $ -- $ 54 $ 44,312
=========== =========== =========== =========== ============ ============
- -------------
</TABLE>
See Notes to Financial Statements.
34
<PAGE>
<TABLE>
<CAPTION>
Emerging International Strategic Conservative Flexible
Bond & Stock Northwest Growth Growth Growth Growth Balanced Income Income
Fund Fund Fund Fund Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------ ---------- ----------- ------------- ---------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$2,069,492 $2,013,451 $40,151,750 $59,350,023 $4,927,525 $ 9,997,814 $11,094,269 $ 903,313 $831,640
523,000 316,000 3,944,000 2,021,000 -- 192,000 -- -- --
---------- ---------- ----------- ----------- ---------- ----------- ----------- ---------- --------
2,592,492 2,329,451 44,095,750 61,371,023 4,927,525 10,189,814 11,094,269 903,313 831,640
2,013 599 273 32,783 45,084 13,173 59,505 3,835 4,057
7,748 1,801 10,873 132,668 11 91 -- -- 696
-- 1,650 363,797 -- -- -- 14,767 -- --
-- 8,964 8,683 32,811 -- -- -- 200,388 --
-- -- 65,875 -- -- -- -- -- --
-- -- -- -- -- -- -- -- --
-- -- -- -- 28,153 28,153 28,153 6,967 --
-- -- -- -- 4,924 4,032 -- 2,158 3,948
-- -- -- -- -- -- -- -- 4,192
30 26 963 1,384 61 131 137 6 4
---------- ---------- ----------- ----------- ---------- ----------- ----------- ---------- --------
2,602,283 2,342,491 44,546,214 61,570,669 5,005,758 10,235,394 11,196,831 1,116,667 844,537
---------- ---------- ----------- ----------- ---------- ----------- ----------- ---------- --------
1,038 15,266 61,083 -- 29,761 142,821 -- -- 1,248
-- -- -- 1,085,951 -- -- -- -- --
237 72 43,310 26,184 14,589 1,537 -- -- 158
-- -- -- -- -- -- -- -- --
452 85 30,796 35,685 2,409 8,764 9,037 -- --
333 316 6,297 9,063 -- -- 16,253 111 --
13,578 11,977 15,257 21,998 8,781 8,788 8,788 8,776 8,775
695 1,415 9,629 31,721 425 960 1,190 419 5,212
---------- ---------- ----------- ----------- ---------- ----------- ----------- ---------- --------
16,333 29,131 166,372 1,210,602 55,965 162,870 35,268 9,306 15,393
---------- ---------- ----------- ----------- ---------- ----------- ----------- ---------- --------
$2,585,950 $2,313,360 $44,379,842 $60,360,067 $4,949,793 $10,072,524 $11,161,563 $1,107,361 $829,144
========== ========== =========== =========== ========== =========== =========== ========== ========
$2,527,944 $2,077,251 $39,488,990 $57,912,832 $4,464,566 $ 9,712,432 $10,648,601 $ 881,700 $840,090
========== ========== =========== =========== ========== =========== =========== ========== ========
$ 2,013 $ 599 $ 273 $ 32,701 $ 45,084 $ 13,173 $ 59,505 $ 3,835 $ 4,057
========== ========== =========== =========== ========== =========== =========== ========== ========
</TABLE>
See Notes to Financial Statements.
35
<PAGE>
statements of assets and liabilities (continued)
WM Variable Trust
December 31, 1998
<TABLE>
<CAPTION>
Short Term U.S.
Money High Government Growth &
Market Quality Bond Securities Income Income Growth
Fund Fund Fund Fund Fund Fund
----------- ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSETS consist of:
Undistributed net investment
income..................... $ 23,539 $ 10,700 $ 69,065 $ 79,458 $ 300,109 $ --
Accumulated net realized
gain/(loss) from securities
transactions, futures
contracts, forward foreign
currency contracts, foreign
currency transactions ..... (425) (527,429) (1,243,991) (2,195,052) 11,069,662 27,036,706
Net unrealized
appreciation/(depreciation)
of securities, futures
contracts, forward foreign
currency contracts, foreign
currency, and other assets
and liabilities............ -- 223,272 2,469,787 2,331,552 18,952,182 50,256,609
Paid-in capital............. 31,838,937 37,692,754 40,619,533 49,437,800 94,972,609 85,673,973
----------- ----------- ----------- ----------- ------------ ------------
Total Net Assets.......... $31,862,051 $37,399,297 $41,914,394 $49,653,758 $125,294,562 $162,967,288
=========== =========== =========== =========== ============ ============
NET ASSET VALUE, offering
price and redemption price
per share of beneficial
interest outstanding....... $ 1.00 $ 2.44 $ 10.11 $ 10.24 $ 16.97 $ 22.36
=========== =========== =========== =========== ============ ============
Number of Fund/Portfolio
shares outstanding......... 31,855,213 15,315,030 4,146,856 4,848,621 7,383,677 7,289,760
=========== =========== =========== =========== ============ ============
</TABLE>
See Notes to Financial Statements.
36
<PAGE>
<TABLE>
<CAPTION>
Emerging International Strategic Conservative Flexible
Bond & Stock Northwest Growth Growth Growth Growth Balanced Income Income
Fund Fund Fund Fund Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------- ---------- ----------- ------------- ---------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 18,077 $ 259 $ -- $ 743,574 $ 124,368 $ 283,463 $ 336,666 $ 17,302 $ 18,416
(293) 62,574 6,941,752 (5,806,644) 50,007 229,231 223,071 4,833 985
64,548 252,200 4,764,741 2,377,311 462,959 477,382 445,668 21,613 (8,450)
2,503,618 1,998,327 32,673,349 63,045,826 4,312,459 9,082,448 10,156,158 1,063,613 818,193
---------- ---------- ----------- ----------- ---------- ----------- ----------- ---------- --------
$2,585,950 $2,313,360 $44,379,842 $60,360,067 $4,949,793 $10,072,524 $11,161,563 $1,107,361 $829,144
========== ========== =========== =========== ========== =========== =========== ========== ========
$ 10.27 $ 10.94 $ 14.59 $ 11.61 $ 13.46 $ 12.54 $ 12.20 $ 11.38 $ 10.42
========== ========== =========== =========== ========== =========== =========== ========== ========
251,905 211,413 3,041,431 5,198,137 367,784 803,155 914,675 97,269 79,607
========== ========== =========== =========== ========== =========== =========== ========== ========
</TABLE>
See Notes to Financial Statements.
37
<PAGE>
statements of operations
WM Variable Trust
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Short Term U.S.
Money High Government Growth &
Market Quality Bond Securities Income Income Growth
Fund Fund Fund Fund Fund Fund
---------- ------------ ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................... $ -- $ -- $ -- $ 7,412 $ 1,480,906 $ 508,782
Foreign withholding tax on
dividend income............ -- -- -- -- -- (6,873)
Interest.................... 1,941,084 1,784,305 3,707,202 3,828,220 86,016 302,848
Fee income (Note 5)......... -- -- 3,422 -- -- --
---------- ---------- ---------- ---------- ----------- -----------
Total investment income... 1,941,084 1,784,305 3,710,624 3,835,632 1,566,922 804,757
---------- ---------- ---------- ---------- ----------- -----------
EXPENSES:
Investment advisory fee..... 174,936 141,693 324,028 325,996 874,439 1,175,431
Administration fee.......... 62,977 51,010 97,208 90,276 197,865 237,946
Trustees' fees and
expenses................... 6,512 1,700 4,937 3,289 8,593 11,124
Legal and audit fees........ 18,359 20,099 21,697 19,891 26,103 29,003
Transfer agent fees......... 558 243 439 480 288 207
Custodian fees.............. 6,045 14,876 8,245 11,438 19,591 36,576
Registration and filing
fees....................... 3,418 2,901 6,069 5,180 10,362 12,466
Amortization of organization
costs...................... 2,170 1,691 2,102 2,119 -- 2,119
Printing fees............... 8,179 6,085 13,244 12,374 24,004 30,319
Interest expense............ -- -- 68,542 -- -- --
Other....................... 1,565 11,884 7,094 10,914 4,475 5,784
Fees waived and/or expenses
absorbed by investment
advisor and administrator.. (55,203) -- -- -- -- --
---------- ---------- ---------- ---------- ----------- -----------
Subtotal.................. 229,516 252,182 553,605 481,957 1,165,720 1,540,975
Credits allowed by the
custodian.................. (1,506) (12,531) (3,192) (65) (859) (7,001)
---------- ---------- ---------- ---------- ----------- -----------
Net expenses.............. 228,010 239,651 550,413 481,892 1,164,861 1,533,974
---------- ---------- ---------- ---------- ----------- -----------
NET INVESTMENT
INCOME/(LOSS).............. 1,713,074 1,544,654 3,160,211 3,353,740 402,061 (729,217)
---------- ---------- ---------- ---------- ----------- -----------
NET REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS:
Realized gain/(loss) from:
Security transactions...... (425) (80,456) 1,221,116 102,179 11,137,860 28,026,747
Forward foreign currency
contracts and foreign
currency transactions..... -- (7) -- -- -- (231,029)
Futures contracts.......... -- (66,691) (288,865) -- -- --
Capital gain distributions
received.................. -- -- -- -- -- --
---------- ---------- ---------- ---------- ----------- -----------
Subtotal.................. (425) (147,154) 932,251 102,179 11,137,860 27,795,718
---------- ---------- ---------- ---------- ----------- -----------
Change in unrealized
appreciation/(depreciation)
of:
Securities................. -- 61,895 (315,062) 161,113 7,851,129 36,737,436
Forward foreign currency
contracts................. -- -- -- -- -- 58,705
Foreign currency, futures
contracts and other assets
and liabilities........... -- 6,500 -- -- -- (11,189)
---------- ---------- ---------- ---------- ----------- -----------
Subtotal.................. -- 68,395 (315,062) 161,113 7,851,129 36,784,952
---------- ---------- ---------- ---------- ----------- -----------
Net realized and unrealized
gain/(loss) on
investments................ (425) (78,759) 617,189 263,292 18,988,989 64,580,670
---------- ---------- ---------- ---------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.. $1,712,649 $1,465,895 $3,777,400 $3,617,032 $19,391,050 $63,851,453
========== ========== ========== ========== =========== ===========
</TABLE>
- -------------
*The Bond & Stock Fund and Northwest Fund commenced operations on April 28,
1998.
See Notes to Financial Statements.
38
<PAGE>
<TABLE>
<CAPTION>
Emerging International Strategic Conservative Flexible
Bond & Stock Northwest Growth Growth Growth Growth Balanced Income Income
Fund* Fund* Fund Fund Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------ --------- ---------- ------------- --------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 9,178 $ 7,159 $ 118,251 $ 1,092,326 $ 40,497 $ 104,030 $ 174,889 $17,184 $ 18,604
-- -- (1,350) (134,625) -- -- -- --
27,153 6,640 178,939 173,087 96 669 1,057 89 --
-- -- -- -- -- -- -- -- --
------- -------- ---------- ----------- -------- ---------- ---------- ------- --------
36,331 13,799 295,840 1,130,788 40,593 104,699 175,946 17,273 18,604
------- -------- ---------- ----------- -------- ---------- ---------- ------- --------
6,017 5,624 365,112 537,004 2,303 4,897 5,610 329 240
1,733 1,620 74,671 103,148 3,455 7,343 8,416 496 360
91 112 6,000 5,633 196 517 635 214 29
13,628 12,024 20,696 27,713 5,291 6,263 6,901 3,798 11,286
-- -- 502 478 690 690 690 690 --
1,716 4,325 13,793 139,273 1,369 2,189 2,059 1,223 850
22 19 3,758 5,161 (881) (759) (663) (967) 8
-- -- -- 2,119 8,240 8,240 8,240 1,900 --
256 219 9,242 13,051 (2,319) (1,685) (1,540) (2,809) 58
-- -- -- -- -- -- -- -- --
667 1,024 2,770 11,935 125 186 201 86 83
(9,347) (11,192) -- (63,407) (9,366) (8,855) (9,202) (3,654) (11,807)
------- -------- ---------- ----------- -------- ---------- ---------- ------- --------
14,783 13,775 496,544 782,108 9,103 19,026 21,347 1,306 1,107
(304) (235) (2,135) (982) (1,104) (1,886) (1,866) (165) (274)
------- -------- ---------- ----------- -------- ---------- ---------- ------- --------
14,479 13,540 494,409 781,126 7,999 17,140 19,481 1,141 833
------- -------- ---------- ----------- -------- ---------- ---------- ------- --------
21,852 259 (198,569) 349,662 32,594 87,559 156,465 16,132 17,771
------- -------- ---------- ----------- -------- ---------- ---------- ------- --------
(293) 62,574 7,307,830 (393,983) (72,470) (22,529) 47,203 909 994
-- -- (73,180) 982,143 -- -- -- -- --
-- -- 44,131 -- -- -- -- -- --
-- -- -- -- 211,599 470,107 365,771 7,505 645
------- -------- ---------- ----------- -------- ---------- ---------- ------- --------
(293) 62,574 7,278,781 588,160 139,129 447,578 412,974 8,414 1,639
------- -------- ---------- ----------- -------- ---------- ---------- ------- --------
64,548 252,200 (4,328,240) 2,099,846 471,041 487,822 452,159 21,612 (8,450)
-- -- 46,746 (1,589,511) -- -- -- -- --
-- -- 157,947 27,080 -- -- -- -- --
------- -------- ---------- ----------- -------- ---------- ---------- ------- --------
64,548 252,200 (4,123,547) 537,415 471,041 487,822 452,159 21,612 (8,450)
------- -------- ---------- ----------- -------- ---------- ---------- ------- --------
64,255 314,774 3,155,234 1,125,575 610,170 935,400 865,133 30,026 (6,811)
------- -------- ---------- ----------- -------- ---------- ---------- ------- --------
$86,107 $315,033 $2,956,665 $ 1,475,237 $642,764 $1,022,959 $1,021,598 $46,158 $ 10,960
======= ======== ========== =========== ======== ========== ========== ======= ========
</TABLE>
See Notes to Financial Statements.
39
<PAGE>
statements of changes in net assets
WM Variable Trust
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Short Term U.S.
Money High Government Growth &
Market Quality Bond Securities Income Income Growth
Fund Fund Fund Fund Fund Fund
----------- ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net investment
income/(loss).............. $ 1,713,074 $ 1,544,654 $ 3,160,211 $ 3,353,740 $ 402,061 $ (729,217)
Net realized gain/(loss)
from security transactions,
forward foreign currency
contracts, foreign currency
transactions, futures
contracts during the year.. (425) (147,154) 932,251 102,179 11,137,860 27,795,718
Capital gain distributions
received................... -- -- -- -- -- --
Net unrealized
appreciation/(depreciation)
of securities, forward
foreign currency contracts,
foreign currency, futures
contracts and other assets
and liabilities during the
year....................... -- 68,395 (315,062) 161,113 7,851,129 36,784,952
----------- ----------- ----------- ----------- ------------ ------------
Net increase in net assets
resulting from operations.. 1,712,649 1,465,895 3,777,400 3,617,032 19,391,050 63,851,453
Distributions to
shareholders from:
Net investment income...... (1,713,074) (1,455,360) (3,143,989) (3,316,492) (542,109) (474,575)
Net realized gains on
investments............... -- -- -- -- (17,377,595) (11,696,897)
Net increase/(decrease) in
net assets from Fund share
transactions.............. (1,001,938) 25,444,375 (20,375,426) (2,317,248) 22,028,748 (10,478,327)
----------- ----------- ----------- ----------- ------------ ------------
Net increase/(decrease) in
net assets................ (1,002,363) 25,454,910 (19,742,015) (2,016,708) 23,500,094 41,201,654
NET ASSETS:
Beginning of year........... 32,864,414 11,944,387 61,656,409 51,670,466 101,794,468 121,765,634
----------- ----------- ----------- ----------- ------------ ------------
End of year................. $31,862,051 $37,399,297 $41,914,394 $49,653,758 $125,294,562 $162,967,288
=========== =========== =========== =========== ============ ============
Undistributed net investment
income at end of year...... $ 23,539 $ 10,700 $ 69,065 $ 79,458 $ 300,109 $ --
=========== =========== =========== =========== ============ ============
</TABLE>
- -------------
* The Bond & Stock Fund and Northwest Fund commenced operations on April 28,
1998.
See Notes to Financial Statements.
40
<PAGE>
<TABLE>
<CAPTION>
Emerging International Strategic Conservative Flexible
Bond & Stock Northwest Growth Growth Growth Growth Balanced Income Income
Fund* Fund* Fund Fund Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------ ---------- ----------- ------------- ---------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 21,852 $ 259 $ (198,569) $ 349,662 $ 32,594 $ 87,559 $ 156,465 $ 16,132 $ 17,771
(293) 62,574 7,278,781 588,160 (72,470) (22,529) 47,203 909 994
-- -- -- -- 211,599 470,107 365,771 7,505 645
64,548 252,200 (4,123,547) 537,415 471,041 487,822 452,159 21,612 (8,450)
---------- ---------- ----------- ----------- ---------- ----------- ----------- ---------- --------
86,107 315,033 2,956,665 1,475,237 642,764 1,022,959 1,021,598 46,158 10,960
(3,775) -- -- (3,299,318) (5,989) (11,420) (31,215) (486) --
-- -- (6,023,693) (2,923,585) (1,797) (5,023) -- (25) (32)
2,503,618 1,998,327 2,085,243 15,471,751 3,723,432 7,692,346 7,817,201 961,361 818,216
---------- ---------- ----------- ----------- ---------- ----------- ----------- ---------- --------
2,585,950 2,313,360 (981,785) 10,724,085 4,358,410 8,698,862 8,807,584 1,007,008 829,144
-- -- 45,361,627 49,635,982 591,383 1,373,662 2,353,979 100,353 --
---------- ---------- ----------- ----------- ---------- ----------- ----------- ---------- --------
$2,585,950 $2,313,360 $44,379,842 $60,360,067 $4,949,793 $10,072,524 $11,161,563 $1,107,361 $829,144
========== ========== =========== =========== ========== =========== =========== ========== ========
$ 18,077 $ 259 $ -- $ 743,574 $ 124,368 $ 283,463 $ 336,666 $ 17,302 $ 18,416
========== ========== =========== =========== ========== =========== =========== ========== ========
</TABLE>
See Notes to Financial Statements.
41
<PAGE>
statements of changes in net assets
WM Variable Trust
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
U.S.
Money Short Term Government
Market High Quality Securities Income
Fund(a) Bond Fund Fund(b) Fund(c)
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net investment
income/(loss).............. $ 1,471,011 $ 737,476 $ 3,942,935 $ 3,689,786
Net realized gain/(loss)
from security transactions,
forward foreign currency
contracts, foreign currency
transactions, futures
contracts and written
options during the period.. 3,305 (117,087) 117,793 (82,245)
Capital gain distribution
received................... -- -- -- --
Net unrealized
appreciation/(depreciation)
of securities, forward
foreign currency contracts,
foreign currency, written
options, futures contracts
and other assets and
liabilities during the
period..................... -- 60,370 1,427,909 1,706,635
----------- ----------- ----------- -----------
Net increase/(decrease) in
net assets resulting from
operations................. 1,474,316 680,759 5,488,637 5,314,176
Distributions to
shareholders from:
Net investment income...... (1,467,623) (687,795) (3,881,167) (3,679,274)
Net realized gains on
investments............... (3,305) -- -- --
Net increase/(decrease) in
net assets from Fund share
transactions............... 9,595,509 (450,459) (6,514,356) (9,847,636)
----------- ----------- ----------- -----------
Net increase/(decrease) in
net assets................. 9,598,897 (457,495) (4,906,886) (8,212,734)
NET ASSETS:
Beginning of year........... 23,265,517 12,401,882 66,563,295 59,883,200
----------- ----------- ----------- -----------
End of year................. $32,864,414 $11,944,387 $61,656,409 $51,670,466
=========== =========== =========== ===========
Undistributed net investment
income at end of year...... $ 22,556 $ 14,926 $ 72,796 $ 58,392
=========== =========== =========== ===========
</TABLE>
- -------------
* The Strategic Growth, Conservative Growth and Balanced Portfolios commenced
operations on June 3, 1997.
+ The Flexible Income Portfolio commenced operations on September 9, 1997.
++ The Income Portfolio commenced operations on October 22, 1997.
(a) Formerly, Sierra Global Money Fund.
(b) Formerly, Sierra U.S. Government Fund.
(c) Formerly, Sierra Corporate Income Fund.
(d) Formerly, Sierra Capital Growth Portfolio.
(e) Formerly, Sierra Growth Portfolio.
(f) Formerly, Sierra Value Portfolio.
See Notes to Financial Statements.
42
<PAGE>
<TABLE>
<CAPTION>
Growth & Emerging International Strategic Conservative Flexible
Income Growth Growth Growth Growth Growth Balanced Income Income
Fund Fund Fund Fund Portfolio(d)* Portfolio(e)* Portfolio* Portfolio(f)+ Portfolio++
- ------------ ------------ ----------- ------------- ------------- ------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 482,775 $ 86,062 $ (276,135) $ 318,567 $ 898 $ 5,496 $ 19,865 $ 1,195 $ --
17,343,219 12,732,367 5,888,420 390,662 (104) (20,465) (17,764) 18 23
-- -- -- -- 3,302 2,627 13,070 -- --
3,441,585 (216,443) (974,715) (2,047,041) (8,082) (10,440) (6,491) 1 --
- ------------ ------------ ----------- ----------- -------- ---------- ---------- -------- --------
21,267,579 12,601,986 4,637,570 (1,337,812) (3,986) (22,782) 8,680 1,214 23
(539,740) (138,925) -- (1,127,686) -- -- -- -- --
(6,617,216) (15,601,296) (2,594,503) (1,036,604) -- -- -- -- --
25,239,310 8,840,085 (12,568,929) (9,216,432) 595,369 1,396,444 2,345,299 99,139 (23)
- ------------ ------------ ----------- ----------- -------- ---------- ---------- -------- --------
39,349,933 5,701,850 (10,525,862) (12,718,534) 591,383 1,373,662 2,353,979 100,353 --
62,444,535 116,063,784 55,887,489 62,354,516 -- -- -- -- --
- ------------ ------------ ----------- ----------- -------- ---------- ---------- -------- --------
$101,794,468 $121,765,634 $45,361,627 $49,635,982 $591,383 $1,373,662 $2,353,979 $100,353 $ --
============ ============ =========== =========== ======== ========== ========== ======== ========
$ 440,157 $ 593,054 $ 46,745 $ 2,359,423 $ 5,393 $ 9,484 $ 29,960 $ 416 $ --
============ ============ =========== =========== ======== ========== ========== ======== ========
</TABLE>
See Notes to Financial Statements.
43
<PAGE>
statements of changes in net assets - capital stock activity
WM Group of Funds
<TABLE>
<CAPTION>
Short Term High Quality U.S. Government
Money Market Fund(a) Bond Fund Securities Fund(b)
-------------------------- ------------------------ --------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
12/31/98 12/31/97 12/31/98 12/31/97 10/31/98 12/31/97
------------ ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
AMOUNT
Sold................... $ 17,046,612 $ 17,390,619 $12,846,638 $ 988,207 $ 3,418,780 $ 2,062,800
Issued in exchange for
shares of the Sierra
Short Term Global
Government Fund**..... -- -- 16,658,370 -- -- --
Issued as reinvestment
of dividends.......... 1,713,073 1,470,928 1,455,360 687,795 3,143,989 3,881,167
Redeemed............... (19,761,623) (9,266,038) (5,515,993) (2,126,461) (26,938,195) (12,458,323)
------------ ------------ ----------- ----------- ------------ ------------
Net
increase/(decrease)... $ (1,001,938) $ 9,595,509 $25,444,375 $ (450,459) $(20,375,426) $ (6,514,356)
============ ============ =========== =========== ============ ============
SHARES
Sold................... 17,046,612 17,390,619 5,220,572 406,817 335,691 207,040
Issued in exchange for
shares of the Sierra
Short Term Global
Government Fund**..... -- -- 6,827,201 -- -- --
Issued as reinvestment
of dividends.......... 1,713,073 1,470,928 597,208 283,631 311,772 396,141
Redeemed............... (19,761,623) (9,266,038) (2,248,595) (871,194) (2,644,591) (1,274,529)
------------ ------------ ----------- ----------- ------------ ------------
Net
increase/(decrease)... (1,001,938) 9,595,509 10,396,386 (180,746) (1,997,128) (671,348)
============ ============ =========== =========== ============ ============
<CAPTION>
International Strategic Growth
Emerging Growth Fund Growth Fund Portfolio(d)
-------------------------- ------------------------ --------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Period Ended
12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 12/31/97 *
------------ ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
AMOUNT
Sold................... $ 5,833,895 $ 1,446,618 $18,869,153 $ 2,252,533 $ 4,002,534 $ 614,521
Issued as reinvestment
of dividends.......... 6,023,693 2,594,503 6,222,873 2,164,290 5,990 --
Redeemed............... (9,772,345) (16,610,050) (9,620,275) (13,633,255) (285,092) (19,152)
------------ ------------ ----------- ----------- ------------ ------------
Net
increase/(decrease)... $ 2,085,243 $(12,568,929) $15,471,751 $(9,216,432) $ 3,723,432 $ 595,369
============ ============ =========== =========== ============ ============
SHARES
Sold................... 431,126 98,128 1,438,878 166,404 335,227 57,065
Issued as reinvestment
of dividends.......... 436,500 182,070 507,578 150,927 629 --
Redeemed............... (728,816) (1,178,715) (797,427) (1,058,739) (23,364) (1,773)
------------ ------------ ----------- ----------- ------------ ------------
Net
increase/(decrease)... 138,810 (898,517) 1,149,029 (741,408) 312,492 55,292
============ ============ =========== =========== ============ ============
</TABLE>
- -------------
* The Strategic Growth, Conservative Growth and Balanced Portfolios commenced
operations on June 3, 1997.
** On January 30, 1998 shares were issued in exchange for Sierra Variable Trust
Short Term Global Government Fund.
+ The Flexible Income Portfolio commenced operations on September 9, 1997.
++ The Income Portfolio commenced operations on October 22, 1997, ceased opera-
tions on November 6, 1997, and re-commenced operations on April 23, 1998.
+++ The Bond & Stock Fund and Northwest Fund commenced operations on April 28,
1998.
(a) Formerly, Sierra Global Money Fund.
(b) Formerly, Sierra U.S. Government Fund.
(c) Formerly, Sierra Corporate Income Fund.
(d) Formerly, Sierra Capital Growth Portfolio
(e) Formerly, Sierra Growth Portfolio
(f) Formerly, Sierra Value Portfolio
See Notes to Financial Statements.
44
<PAGE>
<TABLE>
<CAPTION>
Bond & Stock Northwest
Income Fund(c) Growth & Income Fund Growth Fund Fund Fund
------------------------- -------------------------- -------------------------- ------------ ------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Period Ended Period Ended
12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 12/31/97 12/31/98+++ 12/31/98+++
----------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 2,636,378 $ 1,172,700 $ 18,158,872 $24,113,296 $ 7,279,293 $ 6,294,103 $2,506,015 $2,102,818
-- -- -- -- -- -- -- --
3,316,492 3,679,274 17,919,702 7,156,956 12,171,471 15,740,221 3,775 --
(8,270,118) (14,699,610) (14,049,826) (6,030,942) (29,929,091) (13,194,239) (6,172) (104,491)
----------- ------------ ------------ ----------- ------------ ------------ ---------- ----------
$(2,317,248) $ (9,847,636) $ 22,028,748 $25,239,310 $(10,478,327) $ 8,840,085 $2,503,618 $1,998,327
=========== ============ ============ =========== ============ ============ ========== ==========
256,287 116,943 1,106,063 1,556,541 401,445 412,682 252,138 222,987
-- -- -- -- -- -- -- --
324,373 374,460 1,122,085 460,254 661,853 1,081,802 386 --
(802,650) (1,516,352) (859,170) (372,884) (1,677,237) (838,693) (619) (11,574)
----------- ------------ ------------ ----------- ------------ ------------ ---------- ----------
(221,990) (1,024,949) 1,368,978 1,643,911 (613,939) 655,791 251,905 211,413
=========== ============ ============ =========== ============ ============ ========== ==========
<CAPTION>
Conservative Growth Flexible Income
Portfolio(e) Balanced Portfolio Portfolio(f) Income Portfolio
------------------------- -------------------------- -------------------------- -------------------------
Year Ended Period Ended Year Ended Period Ended Year Ended Period Ended Period Ended Period Ended
12/31/98 12/31/97* 12/31/98 12/31/97* 12/31/98 12/31/97+ 12/31/98 12/31/97++
----------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 8,084,221 $ 1,639,678 $ 8,054,479 $ 2,461,288 $ 1,105,636 $ 100,589 $ 934,501 $ 2,910
16,445 -- 31,215 -- 510 -- 32 --
(408,320) (243,234) (268,493) (115,989) (144,785) (1,450) (116,317) (2,933)
----------- ------------ ------------ ----------- ------------ ------------ ---------- ----------
$ 7,692,346 $ 1,396,444 $ 7,817,201 $ 2,345,299 $ 961,361 $ 99,139 $ 818,216 $ (23)
=========== ============ ============ =========== ============ ============ ========== ==========
707,885 154,598 710,926 235,893 100,651 9,950 90,295 291
1,391 -- 2,693 -- 47 -- 3 --
(37,067) (23,652) (23,796) (11,041) (13,236) (143) (10,691) (291)
----------- ------------ ------------ ----------- ------------ ------------ ---------- ----------
672,209 130,946 689,823 224,852 87,462 9,807 79,607 --
=========== ============ ============ =========== ============ ============ ========== ==========
</TABLE>
See Notes to Financial Statements.
45
<PAGE>
financial highlights
Money Market Fund(a)
For a Fund share outstanding throughout each year
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-------- -------- -------- -------- --------
<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 0.049 0.053 0.037
------- ------- ------- ------- ------
Total from investment
operations...................... 0.049 0.049 0.049 0.053 0.037
Less distributions:
Dividends from net investment
income.......................... (0.049) (0.049) (0.049) (0.053) (0.037)
Distributions from net realized
capital gains................... -- -- (0.000)# -- --
------- ------- ------- ------- ------
Total distributions.............. (0.049) (0.049) (0.049) (0.053) (0.037)
------- ------- ------- ------- ------
Net asset value, end of year..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======
Total return+.................... 5.01% 4.99% 4.97% 5.46% 3.69%
======= ======= ======= ======= ======
Ratios to average net
assets/supplemental data:
Net assets, end of year (in
000's).......................... $31,862 $32,864 $23,266 $20,373 $6,159
Ratio of operating expenses to
average net assets(b)........... 0.65% 0.75% 0.58% 0.50% 0.49%
Ratio of net investment income to
average net assets.............. 4.90% 4.88% 4.86% 5.30% 3.84%
Ratio of operating expenses to
average net assets without fee
waivers, expenses absorbed
and/or fees reduced by credits
allowed by the custodian........ 0.81% 0.85% 0.88% 1.01% 1.25%
</TABLE>
- -------------
+ The total return would have been lower if certain fees had not been waived
and expenses absorbed by the investment advisor or if fees had not been re-
duced by credits allowed by the custodian.
# Amount represents less than $0.01 per share.
(a) Formerly, Sierra Global Money Fund.
(b) Ratio of operating expenses to average net assets includes expenses paid
indirectly beginning in fiscal year 1995.
See Notes to Financial Statements.
46
<PAGE>
financial highlights
Short Term High Quality Bond Fund
For a Fund share outstanding throughout each year
<TABLE>
<CAPTION>
Year Year Year Year Period
Ended Ended Ended Ended Ended
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94*
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year.................. $ 2.43 $ 2.43 $ 2.49 $ 2.39 $ 2.50
------- ------- ------- ------- -------
Income from investment
operations:
Net investment income..... 0.12 0.14 0.15 0.12 0.08
Net realized and
unrealized gain/(loss) on
investments.............. 0.01 0.00# (0.06) 0.10 (0.12)
------- ------- ------- ------- -------
Total from investment
operations............... 0.13 0.14 0.09 0.22 (0.04)
Less distributions:
Dividends from net
investment income........ (0.12) (0.14) (0.15) (0.12) (0.07)
------- ------- ------- ------- -------
Total distributions....... (0.12) (0.14) (0.15) (0.12) (0.07)
------- ------- ------- ------- -------
Net asset value, end of
year..................... $ 2.44 $ 2.43 $ 2.43 $ 2.49 $ 2.39
======= ======= ======= ======= =======
Total return+............. 5.28% 5.90% 3.74% 9.30% (1.62)%
======= ======= ======= ======= =======
Ratios to average net
assets/supplemental data:
Net assets, end of year
(in 000's)............... $37,399 $11,944 $12,402 $12,365 $15,547
Ratio of operating
expenses to average net
assets(a)................ 0.85% 1.00% 0.98% 0.85% 0.77%**
Ratio of net investment
income to average net
assets................... 5.45% 6.04% 6.08% 6.14% 5.63%**
Portfolio turnover rate... 27% 43% 125% 188% 80%
Ratio of operating
expenses to average net
assets without fee
waivers and/or fees
reduced by credits
allowed by the
custodian................ 0.89% 1.03% 1.06% 1.01% 1.10%**
</TABLE>
- -------------
* The Fund commenced operations on January 12, 1994.
** Annualized.
+ Total return is not annualized for periods less than one year. The total re-
turn would have been lower if certain fees had not been waived by the invest-
ment advisor or if fees had not been reduced by credits allowed by the custo-
dian.
# Amount represents less than $0.01 per share
(a) Ratio of operating expenses to average net assets includes expenses paid
indirectly beginning in fiscal year 1995.
See Notes to Financial Statements.
47
<PAGE>
financial highlights
U.S. Government Securities Fund(a)
For a Fund share outstanding throughout each year
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year............................ $ 10.04 $ 9.77 $ 10.00 $ 9.13 $ 10.04
------- ------- ------- ------- -------
Income from investment
operations:
Net investment income............ 0.63 0.63 0.58 0.64 0.50
Net realized and unrealized
gain/(loss) on investments...... 0.06 0.26 (0.23) 0.87# (0.90)#
------- ------- ------- ------- -------
Total from investment
operations...................... 0.69 0.89 0.35 1.51 (0.40)
Less distributions:
Dividends from net investment
income.......................... (0.62) (0.62) (0.58) (0.64) (0.50)
Distributions from net realized
gains........................... -- -- -- -- (0.01)
------- ------- ------- ------- -------
Total distributions.............. (0.62) (0.62) (0.58) (0.64) (0.51)
------- ------- ------- ------- -------
Net asset value, end of year..... $ 10.11 $ 10.04 $ 9.77 $ 10.00 $ 9.13
======= ======= ======= ======= =======
Total return+.................... 7.03% 9.42% 3.69% 16.89% (4.04)%
======= ======= ======= ======= =======
Ratios to average net
assets/supplemental data:
Net assets, end of year (in
000's).......................... $41,914 $61,656 $66,563 $52,303 $43,582
Ratio of operating expenses to
average net assets(b)........... 0.89% 0.90% 0.94% 1.00% 0.85%
Ratio of net investment income to
average net assets.............. 5.85% 6.28% 6.18% 6.68% 5.75%
Portfolio turnover rate.......... 22% 194% 282% 273% 74%
Ratio of operating expenses to
average net assets without fee
waivers, expenses absorbed
and/or fees reduced by credits
allowed by the custodian........ 1.03% 0.91% 0.94% 1.03% 1.02%
Ratio of operating expenses to
average net assets including
interest expense................ 1.02% 1.54% 1.08% 1.76% 0.86%
</TABLE>
- -------------
+ The total return would have been lower if certain fees had not been waived
and expenses absorbed by the investment advisor or if fees had not been re-
duced by 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) Formerly, Sierra U.S. Government Fund.
(b) Ratio of operating expenses to average net assets includes expenses paid
indirectly beginning in fiscal year 1995.
See Notes to Financial Statements.
48
<PAGE>
financial highlights
Income Fund(a)
For a Fund share outstanding throughout each year
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year............................ $ 10.19 $ 9.82 $ 10.48 $ 9.06 $ 10.34
------- ------- ------- ------- -------
Income from investment
operations:
Net investment income............ 0.70 0.70 0.68 0.70 0.47
Net realized and unrealized
gain/(loss) on investments...... 0.04 0.37 (0.66) 1.50 (1.30)
------- ------- ------- ------- -------
Total from investment
operations...................... 0.74 1.07 0.02 2.20 (0.83)
Less distributions:
Dividends from net investment
income.......................... (0.69) (0.70) (0.68) (0.78) (0.40)
Distributions from net realized
gains........................... -- -- -- -- (0.05)
------- ------- ------- ------- -------
Total distributions.............. (0.69) (0.70) (0.68) (0.78) (0.45)
------- ------- ------- ------- -------
Net asset value, end of year..... $ 10.24 $ 10.19 $ 9.82 $ 10.48 $ 9.06
======= ======= ======= ======= =======
Total return+.................... 7.45% 11.35% 0.43% 25.09% (8.13)%
======= ======= ======= ======= =======
Ratios to average net
assets/supplemental data:
Net assets, end of year (in
000's).......................... $49,654 $51,670 $59,883 $60,676 $54,705
Ratio of operating expenses to
average net assets(b)........... 0.96% 0.96% 0.98% 0.99% 0.93%
Ratio of net investment income to
average net assets.............. 6.69% 6.95% 6.92% 7.00% 7.28%
Portfolio turnover rate.......... 4% 36% 30% 42% 23%
Ratio of operating expenses to
average net assets without fee
waivers, expenses absorbed
and/or fees reduced by credits
allowed by the custodian........ 0.96% 0.96% 0.98% 0.99% 1.07%
Ratio of operating expenses to
average net assets including
interest expense................ -- -- -- 0.99% --
</TABLE>
- -------------
+ The total return would have been lower if certain fees had not been waived
and expenses absorbed by the investment advisor or if fees had not been re-
duced by credits allowed by the custodian.
(a) Formerly, Sierra Corporate Income Fund.
(b) Ratio of operating expenses to average net assets includes expenses paid
indirectly beginning in fiscal year 1995.
See Notes to Financial Statements.
49
<PAGE>
financial highlights
Growth & Income Fund
For a Fund share outstanding throughout each year
<TABLE>
<CAPTION>
Year Year Year Year Period
Ended Ended Ended Ended Ended
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94*
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year....... $ 16.92 $ 14.29 $ 12.83 $ 9.83 $ 10.00
-------- -------- ------- ------- -------
Income from investment
operations:
Net investment income.... 0.06 0.06 0.12++ 0.12 0.07
Net realized and
unrealized gain/(loss)
on investments.......... 2.97 3.90 2.54 3.05 (0.24)
-------- -------- ------- ------- -------
Total from investment
operations.............. 3.03 3.96 2.66 3.17 (0.17)
Less distributions:
Dividends from net
investment income....... (0.09) (0.10) (0.12) (0.07) --
Distributions from net
realized gains.......... (2.89) (1.23) (1.08) (0.10) --
-------- -------- ------- ------- -------
Total distributions...... (2.98) (1.33) (1.20) (0.17) --
-------- -------- ------- ------- -------
Net asset value, end of
year.................... $ 16.97 $ 16.92 $ 14.29 $ 12.83 $ 9.83
======== ======== ======= ======= =======
Total return+............ 18.98% 28.50% 21.81% 32.41% (1.70)%
======== ======== ======= ======= =======
Ratios to average net
assets/supplemental
data:
Net assets, end of year
(in 000's).............. $125,295 $101,794 $62,445 $46,362 $24,905
Ratio of operating
expenses to average net
assets(a)............... 1.06% 1.08% 1.13% 1.06% 1.20%**
Ratio of net investment
income to average net
assets.................. 0.37% 0.55% 0.93% 1.31% 1.63%**
Portfolio turnover rate.. 78% 109% 83% 70% 44%
Ratio of operating
expenses to average net
assets without fee
waivers and/or fees
reduced by credits
allowed by the
custodian............... 1.06% 1.08% 1.13% 1.16% 1.55%**
</TABLE>
- -------------
* The Fund commenced operations on January 12, 1994.
** Annualized.
+ Total return is not annualized for periods less than one year. The total re-
turn would have been lower if certain fees had not been waived by the invest-
ment advisor or if fees had not been reduced by credits allowed by the custo-
dian.
++ Per share numbers have been calculated using the average shares method.
(a) Ratio of operating expenses to average net assets includes expenses paid
indirectly beginning in fiscal year 1995.
See Notes to Financial Statements.
50
<PAGE>
financial highlights
Growth Fund
For a Fund share outstanding throughout each year
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/98 12/31//97 12/31/96 12/31/95 12/31/94
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year...... $ 15.41 $ 16.01 $ 15.72 $ 11.48 $ 11.19
-------- -------- -------- ------- -------
Income from investment
operations:
Net investment
income/(loss).......... (0.09) 0.07 0.00++# 0.04++ 0.04
Net realized and
unrealized gain on
investments............ 8.81 1.60 2.42 4.24 0.26
-------- -------- -------- ------- -------
Total from investment
operations............. 8.72 1.67 2.42 4.28 0.30
Less distributions:
Dividends from net
investment income...... (0.07) (0.02) -- (0.04) (0.01)
Distributions from net
realized gains......... (1.70) (2.25) (2.13) (0.00)# --
-------- -------- -------- ------- -------
Total distributions..... (1.77) (2.27) (2.13) (0.04) (0.01)
-------- -------- -------- ------- -------
Net asset value, end of
year................... $ 22.36 $ 15.41 $ 16.01 $ 15.72 $ 11.48
======== ======== ======== ======= =======
Total return+........... 59.04% 11.24% 16.15% 37.34% 2.69%
======== ======== ======== ======= =======
Ratios to average net
assets/supplemental
data:
Net assets, end of year
(in 000's)............. $162,967 $121,766 $116,064 $99,699 $62,763
Ratio of operating
expenses to average net
assets(a).............. 1.16% 1.18% 1.22% 1.24% 1.26%
Ratio of net investment
income/(loss) to
average net assets..... (0.55)% 0.07% 0.01% 0.29% 0.74%
Portfolio turnover
rate................... 112% 158% 169% 187% 257%
Ratio of operating
expenses to average net
assets without fee
waivers, expenses
absorbed and/or fees
reduced by credits
allowed by the
custodian.............. 1.17% 1.19% 1.22% 1.24% 1.32%
</TABLE>
- -------------
+ The total return would have been lower if certain fees had not been waived
and expenses absorbed by the investment advisor or if fees had not been re-
duced by 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) Ratio of operating expenses to average net assets includes expenses paid
indirectly beginning in fiscal year 1995.
See Notes to Financial Statements.
51
<PAGE>
financial highlights
Bond & Stock Fund
For a Fund share outstanding throughout the period
<TABLE>
<CAPTION>
Period
Ended
12/31/98*
---------
<S> <C>
Net asset value, beginning of period................................ $10.00
------
Income from investment operations:
Net investment income............................................... 0.16++
Net realized and unrealized gain on investments..................... 0.14
------
Total from investment operations.................................... 0.30
Less distributions:
Dividends from net investment income................................ (0.03)
------
Total distributions................................................. (0.03)
------
Net asset value, end of period...................................... $10.27
======
Total return+....................................................... 3.02%
======
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's)................................ $2,586
Ratio of operating expenses to average net assets (a)............... 1.50%**
Ratio of net investment income to average net assets................ 2.26%**
Portfolio turnover rate............................................. 28%
Ratio of operating expenses to average net assets without fee
waivers and fees reduced by credits allowed by the custodian....... 2.49%**
</TABLE>
- -------------
* The Fund commenced operations on April 28, 1998.
** Annualized.
+ Total return is not annualized for periods less than one year. The total re-
turn would have been lower if certain fees had not been waived by the invest-
ment advisor or if fees had not been reduced by credits allowed by the custo-
dian.
++ Per share numbers have been calculated using the average shares method.
(a) Ratio of operating expenses to average net assets includes expenses paid
indirectly.
See Notes to Financial Statements.
52
<PAGE>
financial highlights
Northwest Fund
For a Fund share outstanding throughout the period
<TABLE>
<CAPTION>
Period
Ended
12/31/98*
---------
<S> <C>
Net asset value, beginning of period................................ $10.00
------
Income from investment operations:
Net investment income............................................... 0.00#
Net realized and unrealized gain on investments..................... 0.94
------
Total from investment operations.................................... 0.94
------
Net asset value, end of period...................................... $10.94
======
Total return+....................................................... 9.40%
======
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's)................................ $2,313
Ratio of operating expenses to average net assets(a)................ 1.50%**
Ratio of net investment income to average net assets................ 0.03%**
Portfolio turnover rate............................................. 28%
Ratio of operating expenses to average net assets without fee waiv-
ers and fees reduced by credits allowed
by the custodian................................................... 2.76%**
</TABLE>
- -------------
* The Fund commenced operations on April 28, 1998.
** Annualized.
+ Total return is not annualized for periods less than one year. The total re-
turn would have been lower if certain fees had not been waived by the invest-
ment advisor or if fees had not been reduced by credits allowed by the custo-
dian.
# Amount represents less than $0.01 per share.
(a) Ratio of operating expenses to average net assets includes expenses paid
indirectly.
See Notes to Financial Statements.
53
<PAGE>
financial highlights
Emerging Growth Fund
For a Fund share outstanding throughout each year
<TABLE>
<CAPTION>
Year Year Year Year Period
Ended Ended Ended Ended Ended
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94*
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year...... $ 15.63 $ 14.70 $ 13.74 $ 10.53 $ 10.00
------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income/(loss).......... (0.07) (0.03) (0.12)++ (0.01) 0.06
Net realized and
unrealized gain on
investments............ 1.21 1.80 1.52 3.26 0.47
------- ------- ------- ------- -------
Total from investment
operations............. 1.14 1.77 1.40 3.25 0.53
Less distributions:
Dividends from net
investment income...... -- -- -- (0.04) --
Distributions from net
realized gains......... (2.18) (0.84) (0.44) (0.00)# --
------- ------- ------- ------- -------
Total distributions..... (2.18) (0.84) (0.44) (0.04) --
------- ------- ------- ------- -------
Net asset value, end of
year................... $ 14.59 $ 15.63 $ 14.70 $ 13.74 $ 10.53
======= ======= ======= ======= =======
Total return+........... 8.09% 12.59% 10.04% 30.99% 5.30%
======= ======= ======= ======= =======
Ratios to average net
assets/supplemental
data:
Net assets, end of year
(in 000's)............. $44,380 $45,362 $55,887 $46,058 $19,885
Ratio of operating
expenses to average net
assets(a).............. 1.19% 1.20% 1.20% 1.20% 1.23%**
Ratio of net investment
income/(loss) to
average net assets..... (0.48)% (0.58)% (0.82)% (0.35)% 1.03%**
Portfolio turnover
rate................... 108% 116% 97% 135% 192%
Ratio of operating
expenses to average net
assets without fee
waivers and/or fees
reduced by credits
allowed by the
custodian.............. 1.20% 1.21% 1.21% 1.28% 1.38%**
</TABLE>
- -------------
* The Fund commenced operations on January 12, 1994.
** Annualized.
+ Total return is not annualized for periods less than one year. The total re-
turn would have been lower if certain fees had not been waived by the invest-
ment advisor or if fees had not been reduced by credits allowed by the custo-
dian.
++ Per share numbers have been calculated using the average shares method.
# Amount represents less than $0.01 per share.
(a) Ratio of operating expenses to average net assets includes expenses paid
indirectly beginning in fiscal year 1995.
See Notes to Financial Statements.
54
<PAGE>
financial highlights
International Growth Fund
For a Fund share outstanding throughout each year
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year......................... $ 12.26 $ 13.02 $ 12.11 $ 11.47 $ 11.31
------- ------- ------- ------- -------
Income from investment
operations:
Net investment income......... 0.07++ 0.71 0.07++ 0.18 0.01
Net realized and unrealized
gain/(loss) on investments... 0.64 (0.97) 1.01 0.58 0.19##
------- ------- ------- ------- -------
Total from investment
operations................... 0.71 (0.26) 1.08 0.76 0.20
Less distributions:
Dividends from net investment
income....................... (0.72) (0.26) (0.17) (0.00)# (0.03)
Distributions from net
realized gains............... (0.64) (0.24) -- (0.12) (0.01)
------- ------- ------- ------- -------
Total distributions........... (1.36) (0.50) (0.17) (0.12) (0.04)
------- ------- ------- ------- -------
Net asset value, end of year.. $ 11.61 $ 12.26 $ 13.02 $ 12.11 $ 11.47
======= ======= ======= ======= =======
Total return+................. 5.20% (2.64)% 9.04% 6.61% 1.88%
======= ======= ======= ======= =======
Ratios to average net
assets/supplemental data:
Net assets, end of year (in
000's)....................... $60,360 $49,636 $62,355 $45,909 $46,529
Ratio of operating expenses to
average net assets(a)........ 1.36% 1.35% 1.39% 1.47% 1.34%
Ratio of net investment income
to average net assets........ 0.61% 0.52% 0.56% 0.91% 0.83%
Portfolio turnover rate....... 118% 84% 98% 72% 51%
Ratio of operating expenses to
average net assets without
fee waivers, expenses
absorbed and/or fees reduced
by credits allowed by the
custodian.................... 1.48% 1.36% 1.39% 1.48% 1.50%
</TABLE>
- -------------
+ The total return would have been lower if certain fees had not been waived
and expenses absorbed by the investment advisor or if fees had not been re-
duced by 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) Ratio of operating expenses to average net assets includes expenses paid
indirectly beginning in fiscal year 1995.
See Notes to Financial Statements.
55
<PAGE>
financial highlights
Strategic Growth Portfolio(a)
For a Portfolio share outstanding throughout the year
<TABLE>
<CAPTION>
Year Period
Ended Ended
12/31/98 12/31/97*
-------- ---------
<S> <C> <C>
Net asset value, beginning of year........................ $10.70 $10.00
------ ------
Income from investment operations:
Net investment income..................................... 0.17++ 0.10
Net realized and unrealized gain on investments........... 2.63 0.60#
------ ------
Total from investment operations.......................... 2.80 0.70
Less distributions:
Dividends from net investment income...................... (0.03) --
Distributions from net realized gains..................... (0.01) --
------ ------
Total distributions....................................... (0.04) --
------ ------
Net asset value, end of year.............................. $13.46 $10.70
====== ======
Total return+............................................. 26.19% 7.00%
====== ======
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's)........................ $4,949 $ 591
Ratio of operating expenses to average net assets(b)(c)... 0.35% 0.35%**
Ratio of net investment income to average net assets...... 1.42% 0.51%**
Portfolio turnover rate................................... 39% 11%
Ratio of operating expenses to average net assets without
fee waivers, expenses absorbed and fees reduced by
credits allowed by the custodian(c)...................... 0.80% 15.54%**
</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.
++ Per share numbers have been calculated using the averate shares method.
# 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
Portfolio shares.
(a) Formerly, Sierra Capital Growth Portfolio.
(b) Ratio of operations expenses to average net assets includes expenses paid
indirectly.
(c) The Portfolio will also indirectly bear its prorated share of expenses of
the Underlying Funds.
See Notes to Financial Statements.
56
<PAGE>
financial highlights
Conservative Growth Portfolio(a)
For a Portfolio share outstanding throughout each year
<TABLE>
<CAPTION>
Year Period
Ended Ended
12/31/98 12/31/97*
-------- ---------
<S> <C> <C>
Net asset value, beginning of year........................ $ 10.49 $10.00
------- ------
Income from investment operations:
Net investment income..................................... 0.20++ 0.07
Net realized and unrealized gain on investments........... 1.89 0.42#
------- ------
Total from investment operations.......................... 2.09 0.49
Less distributions:
Dividends from net investment income...................... (0.03) --
Distributions from net realized gains..................... (0.01) --
------- ------
Total distributions....................................... (0.04) --
------- ------
Net asset value, end of year.............................. $ 12.54 $10.49
======= ======
Total return+............................................. 19.91% 4.90%
======= ======
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's)........................ $10,072 $1,374
Ratio of operating expenses to average net assets(b)(c)... 0.35% 0.35%**
Ratio of net investment income to average net assets...... 1.79% 1.24%**
Portfolio turnover rate................................... 35% 42%
Ratio of operating expenses to average net assets without
fee waivers, expenses absorbed and fees reduced by
credits allowed by the custodian(c)...................... 0.57% 6.67%**
</TABLE>
- -------------
* The Portfolio commenced operations on June 3, 1997.
** Annualized.
+ Total return is not annualized for periods less than one year. The total re-
turn would have been lower if certain fees had not been waived and expenses
absorbed by the investment advisor and/or administrator or if fees had not
been reduced by credits allowed by the custodian.
++ Per share numbers have been calculated using the average shares method.
# 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
Portfolio shares.
(a) Formerly, Sierra Growth Portfolio.
(b) Ratio of operating expenses to average net assets includes expenses paid
indirectly.
(c) The Portfolio will indirectly bear its prorated share of expenses of the
Underlying Funds.
See Notes to Financial Statements.
57
<PAGE>
financial highlights
Balanced Portfolio
For a Portfolio share outstanding throughout each year
<TABLE>
<CAPTION>
Year Period
Ended Ended
12/31/98 12/31/97 *
-------- ----------
<S> <C> <C>
Net asset value, beginning of year..................... $ 10.47 $10.00
------- ------
Income from investment operations:
Net investment income.................................. 0.31++ 0.13
Net realized and unrealized gain on investments........ 1.49 0.34#
------- ------
Total from investment operations....................... 1.80 0.47
Less distributions:
Dividends from net investment income................... (0.07) --
Distributions from net realized gains.................. --
------- ------
Total distributions.................................... (0.07) --
------- ------
Net asset value, end of year........................... $ 12.20 $10.47
======= ======
Total return+.......................................... 17.18% 4.70%
======= ======
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's)..................... $11,161 $2,354
Ratio of operating expenses to average net
assets(a)(b).......................................... 0.35% 0.35%**
Ratio of net investment income to average net assets... 2.79% 2.34%**
Portfolio turnover rate................................ 33% 15%
Ratio of operating expenses to average net assets
without fee waivers, expenses absorbed and fees
reduced by credits allowed by the custodian(b)........ 0.54% 3.97%**
</TABLE>
- -------------
* The Portfolio commenced operations on June 3, 1997.
** Annualized.
+ Total return is not annualized for periods less than one year. The total re-
turn would have been lower if certain fees had not been waived and expenses
absorbed by the investment advisor and/or adminisatrator or if fees had not
been reduced by credits allowed by the custodian.
++ Per share numbers have been calculated using the average shares method.
# 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
Portfolio shares.
(a) Ratio of operating expenses to average net assets includes expenses paid
indirectly.
(b) The Portfolio will indirectly bear its prorated share of expenses of the
Underlying Funds.
See Notes to Financial Statements.
58
<PAGE>
financial highlights
Flexible Income Portfolio(a)
For a Portfolio share outstanding throughout each year
<TABLE>
<CAPTION>
Year Period
Ended Ended
12/31/98 12/31/97 *
-------- ----------
<S> <C> <C>
Net asset value, beginning of year....................... $10.23 $ 10.00
------ -------
Income from investment operations:
Net investment income.................................... 0.48++ 0.04
Net realized and unrealized gain on investments.......... 0.69 0.19#
------ -------
Total from investment operations......................... 1.17 0.23
Less distributions:
Dividends from net investment income..................... (0.02) --
------ -------
Total distributions...................................... (0.02) --
------ -------
Net asset value, end of year............................. $11.38 $ 10.23
====== =======
Total return+............................................ 11.75% 2.30%
====== =======
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's)....................... $1,107 $ 100
Ratio of operating expenses to average net assets(b)(c).. 0.35% 0.34%**
Ratio of net investment income to average net assets..... 4.90% 7.04%**
Portfolio turnover rate.................................. 78% 5%
Ratio of operating expenses to average net assets without
fee waivers, expenses absorbed and fees reduced by
credits allowed by the custodian(c)..................... 1.51% 116.19%**
</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.
++ Per share numbers have been calculated using the average shares method.
# 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
Portfolio shares.
(a) Formerly, Sierra Value Portfolio.
(b) Ratio of operating expenses to average net assets includes expenses paid
indirectly.
(c) The Portfolio will also bear its prorated share of expenses of the Under-
lying Funds.
See Notes to Financial Statements.
59
<PAGE>
financial highlights
Income Portfolio
For a Portfolio share outstanding throughout each period
<TABLE>
<CAPTION>
Period Period
Ended Ended
12/31/98 12/31/97*
-------- ---------
<S> <C> <C>
Net asset value, beginning of year...................... $10.00 $ 10.00
------ --------
Income from investment operations:
Net investment income................................... 0.56++ --
Net realized and unrealized gain/(loss) on investments.. (0.14) --
------ --------
Total from investment operations........................ 0.42 --
------ --------
Net asset value, end of year............................ $10.42 $ 10.00#
====== ========
Total return+........................................... 4.23% 0.00%
====== ========
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's)...................... $ 829 $ 0
Ratio of operating expenses to average net
assets(a)(b)........................................... 0.35%** 0.35%**
Ratio of net investment income to average net assets.... 7.39%** 0.00%**
Portfolio turnover rate................................. 61% 99%
Ratio of operating expenses to average net assets
without fee waivers, expenses absorbed and fees reduced
by credits allowed by the custodian(b)................. 5.37%** 7,567.04%**
</TABLE>
- -------------
* The Income Portfolio commenced operations on October 22, 1997, ceased opera-
tions on November 4, 1997, and re-commenced operations on April 23, 1998.
** Annualized.
+ Total return is not annualized for periods less than one year. The total re-
turn would have been lower if certain fees had not been waived and expenses
absorbed by the investment advisor and/or adminisatrator or if fees had not
been reduced by credits allowed by the custodian.
++ Per share numbers have been calculated using the average shares method.
# Represents offering share price.
(a) Ratio of operating expenses to average net assets includes expenses paid
indirectly.
(b) The Portfolio will indirectly bear its prorated share of expenses of the
Underlying Funds.
See Notes to Financial Statements.
60
<PAGE>
portfolio of investments
Money Market Fund
December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----------
<C> <S> <C>
COMMERCIAL PAPER (DOMESTIC) - 28.2%
$1,500,000 AI Credit Corporation,
5.151% due 01/14/1999++............................. $ 1,497,210
1,500,000 American Honda Financial Corporation,
5.250% due 02/11/1999++............................. 1,491,031
1,500,000 Household Finance Corporation,
5.230% due 01/14/1999++............................. 1,497,167
1,500,000 IBM Credit,
5.229% due 01/19/1999++............................. 1,496,078
1,500,000 Weyerhauser Real Estate Company,
5.200% due 01/13/1999++............................. 1,497,400
1,500,000 Windmill Funding Corporation,
5.310% due 02/11/1999++............................. 1,490,929
-----------
Total Commercial Paper (Domestic) (Cost $8,969,815).. 8,969,815
-----------
COMMERCIAL PAPER (FOREIGN) - 4.7%
(Cost $1,497,608)
1,500,000 Xerox Capital (Europe) Plc,
5.219% due 01/12/1999++............................. 1,497,608
-----------
CERTIFICATES OF DEPOSIT (YANKEE) - 7.7%
1,000,000 Credit Suisse First Boston, NY,
5.740 due 01/07/1999................................ 1,000,000
1,500,000 Societe Generale, NY,
5.507% due 05/07/1999+.............................. 1,499,617
-----------
Total Certificates of Deposit (Yankee)
(Cost $2,499,617)................................... 2,499,617
-----------
MEDIUM TERM NOTES - 14.0%
Caterpillar Finance Service Corporation:
1,000,000 6.760% due 03/15/1999................................ 1,001,957
500,000 5.900% due 12/15/1999................................ 504,128
1,437,000 Citicorp,
9.750% due 08/01/1999............................... 1,469,650
1,500,000 US Bank NA Minnesota,
5.517% due 09/15/1999............................... 1,500,330
-----------
Total Medium Term Notes
(Cost $4,476,065)................................... 4,476,065
-----------
TAXABLE VARIABLE RATE DEMAND OBLIGATIONS - 9.1%
1,500,000 DBSI First Mortgage 1998 Corporation, (LOC: Bank,
N.A.),
5.550% due 07/01/2023+.............................. 1,500,000
570,000 Greensboro, NC, Public Improvement, Series C, (LOC:
Wachovia Bank of NC),
5.650% due 04/01/2014+.............................. 570,000
825,000 Machining Center Inc., (LOC: Comerica Bank),
5.580% due 10/01/2027+.............................. 825,000
-----------
Total Taxable Variable Rate Demand Obligations
(Cost $2,895,000)................................... 2,895,000
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----------
<C> <S> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS - 33.0%
Federal Farm Credit Bank (FFCB) - 14.1%
$1,500,000 4.850% due 02/01/1999................................ $ 1,500,000
1,500,000 5.500% due 02/01/1999................................ 1,500,000
1,500,000 4.870% due 04/01/1999................................ 1,500,000
-----------
Total FFCBs (Cost $4,500,000)........................ 4,500,000
-----------
Federal Home Loan Bank (FHLB) - 4.7%
(Cost $1,500,000)
1,500,000 5.125% due 10/13/1999................................ 1,500,000
-----------
Federal National Mortgage Association (FNMA) - 9.5%
1,500,000 5.530% due 03/11/1999................................ 1,499,665
1,500,000 5.530% due 03/16/1999................................ 1,501,162
-----------
Total FNMAs (Cost $3,000,827)........................ 3,000,827
-----------
Student Loan Mortgage Association (SLMA) - 4.7%
(Cost $1,500,000)
1,500,000 4.900% due 10/27/1999................................ 1,500,000
-----------
Total U.S. Government Agency Obligations
(Cost $10,500,827).................................. 10,500,827
-----------
REPURCHASE AGREEMENT - 7.4%
(Cost $2,344,000)
2,344,000 Agreement with Goldman Sachs Company, 4.000% dated
01/04/1999, to be repurchased at $2,345,042 on
01/04/1999, collaterized by $2,020,017 U.S. Treasury
Note, 11.750% due 02/15/2001 (Market Value
$2,397,878)......................................... 2,344,000
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost $33,182,932*)....................... 104.1% 33,182,932
OTHER ASSETS AND LIABILITIES (Net).......................... (4.1) (1,320,880)
----- -----------
NET ASSETS.................................................. 100.0% $31,862,052
===== ===========
</TABLE>
- -------------
* Aggregate cost for federal tax purposes.
+ Variable rate security. The interest rate shown reflects the rate currently
in effect.
++ Rate represents discount rate at the date of purchase (unaudited).
See Notes to Financial Statements.
61
<PAGE>
portfolio of investments (continued)
Short Term High Quality Bond Fund
December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
---------- -----------
<C> <S> <C>
CORPORATE BONDS AND NOTES - 37.7%
$ 250,000 BB&T Corporation, Sub. Note,
7.050% due 05/23/2003................................. $ 263,308
985,000 Boeing Capital Corporation, Sub. Note,
6.710% due 07/19/2000................................. 1,003,170
250,000 Camden Property Trust, Note,
6.750% due 11/15/2001................................. 247,173
500,000 Cendant Corporation, Note,
7.500% due 12/01/2000................................. 504,374
1,000,000 Chase Manhattan Corporation, Note,
5.500% due 02/15/2001................................. 1,001,310
1,000,000 Citigroup, Inc., Note,
6.125% due 06/15/2000................................. 1,010,713
100,000 Colonial Realty LP, Note,
7.500% due 07/15/2001................................. 100,624
720,000 Crane Company, Note,
7.250% due 06/15/1999................................. 725,797
1,000,000 CSX Corporation, Deb.,
9.500% due 08/01/2000................................. 1,060,243
530,000 Dobie Center Properties, Ltd., Note, Taxable,
6.010% due 05/01/2000 ++.............................. 533,144
100,000 Equistar Chemicals LP, Note,
9.125% due 03/15/2002................................. 105,840
100,000 ERP Operating LP, Note,
8.500% due 05/15/1999++............................... 100,569
250,000 Federated Department Stores, Inc., Bond,
6.790% due 07/15/2027................................. 253,799
1,000,000 First Chicago, Sr. Note,
9.250% due 11/15/2001................................. 1,096,769
1,000,000 General Electric Capital Corporation, Series A, MTN,
5.800% due 04/24/2000................................. 1,006,919
300,000 GMAC, Note,
8.625% due 06/15/1999................................. 304,058
200,000 Lockheed Martin Corporation, Company Guaranty,
6.850% due 05/15/2001................................. 206,515
150,000 Lyondell Petrochemical Company, MTN,
9.750% due 09/04/2003++............................... 162,188
1,000,000 Merrill Lynch and Company, Series B, Note,
6.100% due 10/04/1999................................. 1,004,207
100,000 Nabisco Inc., Bond,
6.300% due 08/26/1999++............................... 99,980
500,000 Occidental Petroleum, Sr. Note,
6.400% due 04/01/2003................................. 500,853
600,000 Sun Communities, Inc., Sr. Note,
7.625% due 05/01/2003................................. 604,702
100,000 SUSA Partnership LP, Note,
7.125% due 11/01/2003................................. 98,975
50,000 Time Warner, Inc., Note,
7.950% due 02/01/2000................................. 51,220
1,000,000 United Illuminating Company, Note,
6.000% due 12/15/2003................................. 995,329
250,000 US West Capital Funding, Inc., Company Guaranty,
6.125% due 07/15/2002................................. 255,864
750,000 Wal-Mart Stores, Inc., Note,
5.850% due 06/01/2000................................. 756,562
-----------
Total Corporate Bonds and Notes
(Cost $13,960,963)................................... 14,054,205
-----------
U.S. TREASURY NOTES - 24.5%
1,550,000 6.375% due 01/15/1999................................. 1,551,454
4,000,000 4.000% due 10/31/2000................................. 3,958,752
2,000,000 5.750% due 08/15/2003................................. 2,088,126
1,500,000 5.625% due 02/15/2006................................. 1,582,500
-----------
Total U.S. Treasury Notes
(Cost $9,098,371).................................... 9,180,832
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
---------- ----------
<C> <S> <C>
ASSET-BACKED SECURITIES - 13.1%
$1,091,329 BankBoston RV Trust, 1997-1 A4,
6.330% due 04/15/2004................................. $1,091,329
250,000 Carco Auto Loan Master Trust, 1997-1 A,
6.689% due 08/15/2004................................. 251,226
500,000 First USA Credit Card Master Trust, 1997-6 A,
6.420% due 03/17/2005................................. 516,151
Green Tree Financial Corporation:
250,000 1995-1 B2,
9.200% due 06/15/2025................................. 265,595
200,000 1995-6 B1,
7.700% due 09/15/2026................................. 206,201
100,000 Green Tree Home Equity Loan Trust, 1997-B A5,
7.150% due 04/15/2027................................. 101,855
165,000 Green Tree Home Improvement, 1995-D B2,
7.450% due 09/15/2025................................. 164,149
33,903 Green Tree Recreational, Equipment & Consumer, 1996-A,
Class A1,
5.550% due 02/15/2018................................. 33,976
100,000 H&T Master Trust, 1996-1,
8.430% due 08/15/2002++............................... 100,125
350,000 MBNA Master Credit Card Trust, 1995-E A,
5.755% due 01/15/2005................................. 350,145
Merrill Lynch Mortgage Investors, Inc.:
26,903 1991-IA,
7.650% due 01/15/2012................................. 26,866
29,518 1992-B-A4,
7.850% due 04/15/2012................................. 29,564
256,090 Mid-State Trust, Series 4 A,
8.330% due 04/01/2030................................. 279,577
700,000 Standard Credit Card Master Trust, 1994-4 A,
8.250% due 11/07/2003................................. 748,656
500,000 The Money Store Home Equity Trust, 1997-C AF,
6.307% due 08/15/2012................................. 501,533
247,540 World Omni Automobile Lease Securitization, 1996-B,
6.850% due 11/15/2002++............................... 245,297
----------
Total Asset-Backed Securities (Cost $4,887,855)....... 4,912,245
----------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES - 9.4%
Government National Mortgage Association
(GNMA) - 6.4%
90,190 #001991, Seasoned,
9.000% due 04/20/2025................................. 95,658
41,969 #121425, Seasoned,
11.000% due 04/15/2015................................ 46,493
62,101 #140834, Seasoned,
11.000% due 12/15/2015................................ 68,796
23,414 #144538, Seasoned,
11.000% due 12/15/2015................................ 25,939
73,792 #151670, Seasoned,
11.000% due 12/15/2015................................ 81,747
188,976 #213862, Seasoned,
10.000% due 09/15/2018................................ 206,516
85,901 #225305, Seasoned,
10.000% due 02/15/2018................................ 93,874
22,895 #234561, Seasoned,
10.000% due 12/15/2017................................ 25,020
35,649 #254937, Seasoned,
10.000% due 06/15/2019................................ 38,958
72,287 #257814, Seasoned,
10.000% due 09/15/2018................................ 78,996
215,320 #264735, Seasoned,
10.000% due 02/15/2019................................ 235,305
126,580 #289333, Seasoned,
10.000% due 05/15/2020................................ 138,328
</TABLE>
See Notes to Financial Statements.
62
<PAGE>
portfolio of investments (continued)
Short Term High Quality Bond Fund
December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
---------- ----------
<C> <S> <C>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES - (Continued)
Government National Mortgage Association
(GNMA) - (Continued)
$ 160,714 #291116, Seasoned,
10.000% due 06/15/2020................................ $ 175,631
72,493 #293511, Seasoned,
10.000% due 07/15/2020................................ 79,221
220,876 #400224, Seasoned,
8.000% due 06/15/2009................................. 228,952
289,814 #453963, Seasoned,
8.000% due 08/15/2012................................. 300,410
143,631 #780081, Seasoned,
10.000% due 02/15/2025................................ 158,884
34,796 #780121, Seasoned,
10.000% due 04/15/2025................................ 38,331
33,393 #780141, Seasoned,
10.000% due 12/15/2020................................ 36,847
212,684 #780317, Seasoned,
9.000% due 12/15/2020................................. 228,411
----------
Total GNMAs (Cost $2,377,680)......................... 2,382,317
----------
Adjustable Rate Mortgage-Backed Securities (ARM) - 1.7%
Federal Home Loan Mortgage Corporation (FHLMC),
94,147 #845988,
7.513% due 11/01/2021+............................... 95,551
Federal National Mortgage Association (FNMA):
179,246 #082247,
6.125% due 04/01/2019+............................... 180,218
28,781 #124571,
7.410% due 11/01/2022+................................ 29,369
107,426 #141461,
7.466% due 11/01/2021+................................ 109,535
53,151 #152205,
7.204% due 01/01/2019+................................ 54,265
169,009 #313257,
6.176% due 11/01/2035+................................ 170,054
----------
Total ARMs (Cost $637,041)............................ 638,992
----------
Federal National Mortgage Association (FNMA) - 0.8%
(Cost $299,947)
286,452 #313641, Seasoned,
8.500% due 11/01/2017................................. 300,416
----------
Federal Home Loan Mortgage Corporation (FHLMC) - 0.5%
15,464 #G50135, 5 Year Balloon, GOLD,
5.500% due 03/01/1999................................. 15,454
173,767 #A01226, Seasoned,
9.500% due 08/01/2016................................. 185,279
----------
Total FHLMCs (Cost $202,968).......................... 200,733
----------
Total U.S. Government Agency Mortgage-Backed
Securities (Cost $3,517,636)......................... 3,522,458
----------
COLLATERALIZED MORTGAGE OBLIGATIONS - 6.9%
Countrywide Funding Corporation:
21,819 1994-1 A3,
6.250% due 03/25/2024................................. 21,733
87,864 1994-2 A8,
6.500% due 02/25/2009................................. 87,608
491,848 Federal Home Loan Mortgage Corporation - Government
National Mortgage Corporation, Class VG, Series 24,
REMIC,
6.250% due 06/25/2004................................. 496,105
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
---------- ----------
<C> <S> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS - (Continued)
$ 37,377 Federal Home Loan Mortgage Corporation P/O, REMIC,
#001719-C,
Zero coupon due 04/15/1999............................ $ 36,962
General Electric Capital Mortgage Association:
44,795 1994-27 A1,
6.500% due 07/25/2024................................. 44,727
1,150,000 1996-HE3 A3,
7.150% due 09/25/2026................................. 1,159,654
231,914 Norwest Asset Securities Corporation,
1996-5 A13,
7.500% due 11/25/2026................................. 231,479
85,291 Prudential Home Mortgage Securities,
1993-43 A1,
5.400% due 10/25/2023................................. 84,965
350,000 Residential Asset Securitization Trust, 1997-A6,
7.250% due 09/25/2012................................. 354,974
45,198 Residential Funding Mortgage Securitization, 1997-S13
A8,
7.100% due 09/25/2027................................. 45,228
----------
Total Collateralized Mortgage Obligations
(Cost $2,564,721).................................... 2,563,435
----------
FOREIGN GOVERNMENT BONDS - 4.8%
1,000,000 Ontario, Province of Canada,
6.125% due 06/28/2000................................. 1,015,390
750,000 Province of Alberta, Government Guaranty,
9.250% due 04/01/2000................................. 787,530
----------
Total Foreign Government Bonds
(Cost $1,783,277).................................... 1,802,920
----------
REPURCHASE AGREEMENT - 2.7%
(Cost $1,015,000)
1,015,000 Agreement with Goldman Sachs Company, 4.000% dated
12/31/1998, to be repurchased at $1,015,451 on
01/04/1999, collateralized by $847,709 U.S. Treasury
Note, 11.750% due 02/15/2001 (Market Value
$1,038,330).......................................... 1,015,000
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost $36,827,823*)........................ 99.1% 37,051,095
OTHER ASSETS AND LIABILITIES (Net)........................... 0.9 348,202
----- -----------
NET ASSETS................................................... 100.0% $37,399,297
===== ===========
</TABLE>
- -------------
* Aggregate cost for federal tax purposes.
+ 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. These securities may be resold in transactions exempt from registra-
tion, normally to qualified institutional buyers.
GLOSSARY OF TERMS
<TABLE>
<C> <S>
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
LP - Limited Partnership
MTN - Medium Term Note
P/O - Principal Only
REMIC - Real Estate Mortgage Investment
Conduit
</TABLE>
See Notes to Financial Statements.
63
<PAGE>
portfolio of investments (continued)
U.S. Government Securities Fund
December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----------
<C> <S> <C>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES - 44.6%
Government National Mortgage Association
(GNMA) - 24.5%
$2,550,817 7.000% due 01/15/2028................................ $ 2,612,189
6,502,988 7.500% due 01/15/2023 - 11/15/2023................... 6,712,319
862,484 8.000% due 07/15/2026 - 06/15/2027................... 896,866
46,857 9.000% due 08/15/2021................................ 50,049
-----------
Total GNMAs (Cost $10,035,731)....................... 10,271,423
-----------
Federal Home Loan Mortgage Corporation
(FHLMC) - 18.2%
GOLD:
950,585 5.500% due 12/01/2008................................ 939,000
2,327,276 6.000% due 01/01/2013................................ 2,335,277
934,547 6.500% due 01/01/2028................................ 941,556
2,588,556 7.000% due 04/01/2008 - 01/01/2013................... 2,648,416
734,709 8.750% due 01/01/2013................................ 772,731
-----------
Total FHLMCs (Cost $7,497,299)....................... 7,636,980
-----------
Federal National Mortgage Association
(FNMA) - 1.9%
495,611 8.000% due 05/01/2022................................ 513,732
243,041 8.500% due 02/01/2023................................ 254,889
-----------
Total FNMAs (Cost $769,907).......................... 768,621
-----------
Total U.S. Government Agency Mortgage-Backed
Securities (Cost $18,302,937)....................... 18,677,024
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS - 35.9%
Federal National Mortgage Associaton, REMIC, Pass-
through Certificates:
672,418 Trust 89-90, Class E, 8.700% due 12/25/2019.......... 708,247
5,241,688 Trust 92-55, Class DZ, 8.000% due 04/25/2022......... 5,578,089
6,296,364 Trust 92-83, Class X, 7.000% due 02/25/2022.......... 6,389,066
807,499 Trust 93-159, Class PA, (P/O),
Zero coupon due 01/25/2021.......................... 771,153
250,213 Trust 94-57, Class C, (P/O),
Zero coupon due 01/25/2024.......................... 245,210
336,007 Guaranteed Mortgage Corporation III,
(GNMA-CMB), Trust B, Class 3,
9.000% due 12/01/2007............................... 335,273
1,000,000 Residential Funding Mortgage Security, Trust 92-S39,
Class A8, 7.500% due 11/25/2007..................... 1,018,178
-----------
Total Collateralized Mortgage Obligations
(Cost $13,280,169).................................. 15,045,216
-----------
U.S. TREASURY OBLIGATIONS - 8.9%
U.S Treasury Bonds - 7.2%
300,000 12.750% due 11/15/2010............................... 436,219
2,300,000 6.250% due 08/15/2023................................ 2,573,845
-----------
Total U.S. Treasury Bonds (Cost $2,704,021).......... 3,010,064
-----------
U.S. Treasury Notes - 1.7%
325,000 6.625% due 03/31/2002................................ 343,586
350,000 6.250% due 02/15/2007................................ 384,016
-----------
Total U.S. Treasury Notes (Cost $671,587)............ 727,602
-----------
Total U.S. Treasury Obligations (Cost $3,375,608).... 3,737,666
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----------
<C> <S> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS - 7.3%
$2,000,000 Federal Farm Credit Bank,
5.700% due 06/18/2003....................... $ 2,038,462
1,000,000 Federal Home Loan Bank,
5.705% due 03/19/2003....................... 1,027,310
-----------
Total U.S. Government Agency Obligations
(Cost $3,097,177)........................... 3,065,772
-----------
REPURCHASE AGREEMENT - 2.7%
(Cost $1,140,000)
1,140,000 Agreement with Goldman Sachs Company, 4.000%
dated 12/31/1998, to be repurchased at
$1,140,507 on 01/04/1999, collateralized by
$1,982,431 U.S. Treasury Note, 11.750% due
02/15/2001.
(Market Value $1,166,204)................... 1,140,000
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost $39,195,891*)....................... 99.4% 41,665,678
OTHER ASSETS AND LIABILITIES (Net).......................... 0.6 248,716
----- -----------
NET ASSETS.................................................. 100.0% $41,914,394
===== ===========
</TABLE>
- -------------
* Aggregate cost for federal tax purposes is $39,199,524.
GLOSSARY OF TERMS
<TABLE>
<C> <S>
GOLD - Payments are on an accelerated 45-
day payment cycle instead of 75-day
payment cycle
P/O - Principal Only
- Real Estate Mortgage Investment
REMIC Conduit
</TABLE>
See Notes to Financial Statements.
64
<PAGE>
portfolio of investments (continued)
Income Fund
December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
--------- ----------
<C> <S> <C>
CORPORATE BONDS AND NOTES - 90.0%
Industrial - 51.0%
$1,200,000 ANR Pipeline Company, Deb.,
9.625% due 11/01/2021................................ $1,545,029
1,000,000 Boeing Company, Deb.,
8.750% due 08/15/2021................................ 1,264,212
1,750,000 Carnival Corporation, Deb.,
7.200% due 10/01/2023................................ 1,879,488
1,500,000 Caterpillar Inc., Sinking Fund Deb.,
9.750% due 06/01/2019................................ 1,595,145
500,000 Columbia/HCA Healthcare, Sub. Deb.,
6.750% due 10/01/2006................................ 440,000
1,000,000 Conrail, Inc., Deb.,
9.750% due 06/15/2020................................ 1,325,596
1,000,000 Continental Airlines, Inc., Pass-through Certificates,
Series 974C,
6.800% due 07/02/2007................................ 1,012,170
1,000,000 Enron Corporation, Note,
6.450% due 11/15/2001................................ 1,011,032
400,000 Ford Holdings, Inc., Deb.,
9.300% due 03/01/2030................................ 538,365
Ford Motor Company, Deb.:
600,000 8.875% due 11/15/2022................................ 677,797
250,000 8.900% due 01/15/2032................................. 329,557
1,000,000 General Motors Corporation, Deb.,
9.400% due 07/15/2021................................ 1,341,472
1,500,000 Lockheed Martin Corporation, Note,
7.250% due 05/15/2006................................ 1,629,483
1,000,000 Norfolk Southern Corporation, Bond,
7.800% due 05/15/2027................................ 1,169,592
1,300,000 Occidental Petroleum Corporation, Sr. Deb., 11.125%
due 08/01/2010....................................... 1,704,164
200,000 Ogden Corporation, Deb.,
9.250% due 03/01/2022................................ 254,713
100,000 P&L Coal Holdings, Company Guaranty,
8.875% due 05/15/2008................................ 102,500
1,000,000 Phillips Petroleum Company, Deb.,
9.180% due 09/15/2021................................ 1,103,966
1,800,000 Praxair, Inc., Deb.,
8.700% due 07/15/2022................................ 1,892,713
2,000,000 Southwest Airlines Company, Pass-through Certificates,
94-A, Class A-4,
9.150% due 07/01/2016................................ 2,497,080
300,000 Time Warner, Inc., Deb.,
9.150% due 02/01/2023................................ 395,563
1,300,000 United Air Lines, Inc., Pass-through Certificates,
9.560% due 10/19/2018................................ 1,580,449
----------
25,290,086
----------
Financial/Banks - 17.4%
500,000 American General Corporation, Sinking Fund Deb.,
7.500% due 07/15/2025................................ 539,328
400,000 Banc One Corporation, Sub. Note,
10.000% due 08/15/2010............................... 536,409
1,000,000 Barclays North American Capital Corporation, Capital
Note,
9.750% due 05/15/2021................................ 1,124,287
82,000 Barnett Banks, Florida, Inc., Sub. Note,
10.875% due 03/15/2003............................... 97,406
50,000 Chase Manhattan Corporation, Sub. Note,
8.000% due 06/15/1999................................ 50,571
230,000 Citigroup, Sub. Note,
8.625% due 12/01/2002................................ 253,869
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
--------- ----------
<C> <S> <C>
Financial/Banks - (Continued)
First Chicago Corporation, Sub. Note:
$ 600,000 11.250% due 02/20/2001................................ $ 667,741
100,000 9.250% due 11/15/2001................................. 109,677
1,000,000 First Tennessee National Corporation, Sub. Capital
Note,
10.375% due 06/01/1999............................... 1,018,977
1,040,000 Fleet/Norstar Financial Group, Inc., Sub. Note, 9.900%
due 06/15/2001....................................... 1,140,536
1,000,000 Hartford Life Insurance Company, Deb.,
7.650% due 06/15/2027................................ 1,112,279
1,100,000 NCNB Corporation, Sub. Note,
9.375% due 09/15/2009................................ 1,399,540
516,000 Security Pacific Corporation, Sub. Note,
11.500% due 11/15/2000............................... 568,179
----------
8,618,799
----------
Foreign (U.S. Dollar Denominated) - 9.2%
1,000,000 Abbey National Plc, Global Note,
6.690% due 10/17/2005................................ 1,048,278
250,000 HIH Capital Ltd., Conv.,
7.500% due 09/25/2006................................ 155,000
1,700,000 Northern Telecom Capital, Sub. Note,
7.400% due 06/15/2006................................ 1,854,921
500,000 Petro-Canada, Deb.,
9.250% due 10/15/2021................................ 626,390
350,000 Poland Communications, Inc., Sr. Note,
9.875% due 11/01/2003................................ 308,000
500,000 Trans-Canada Pipeline Corporation, Deb.,
8.500% due 03/20/2023................................ 568,990
----------
4,561,579
----------
Electric - 5.4%
200,000 Duke Power Company, First and Refundable Mortgage,
6.875% due 08/01/2023................................ 204,496
700,000 Florida Power & Light Company, First Mortgage, 7.050%
due 12/01/2026....................................... 733,798
Texas Utilities Electric Company:
150,000 First and Collateral Mortgage,
8.500% due 08/01/2024................................. 163,658
1,500,000 First Mortgage,
7.875% due 04/01/2024................................. 1,592,940
----------
2,694,892
----------
Retail - 3.7%
May Department Stores Company, Deb.:
1,000,000 8.375% due 10/01/2022................................. 1,142,947
600,000 8.375% due 08/01/2024................................. 686,500
----------
1,829,447
----------
Media - 2.7%
1,200,000 News America Holdings, Sr. Deb.,
8.000% due 10/17/2016................................ 1,326,166
----------
Gaming - 0.4%
250,000 Riviera Holdings, Company Guaranty,
10.000% due 08/15/2004............................... 213,750
----------
Health Care - 0.2%
150,000 Mariner Post-Acute Network, Sr. Sub. Note, 9.500% due
11/01/2007........................................... 116,250
----------
Total Corporate Bonds and Notes
(Cost $42,363,000).................................... 44,650,969
----------
</TABLE>
See Notes to Financial Statements.
65
<PAGE>
portfolio of investments (continued)
Income Fund
December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
--------- ----------
<C> <S> <C>
U.S. TREASURY OBLIGATION - 5.8%
(Cost $2,849,688)
U.S. Treasury Bond - 5.8%
$2,000,000 13.750% due 08/15/2004................................ $2,873,126
----------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 1.3%
Government National Mortgage Association (GNMA) - 0.8%
375,482 #386671,
9.000% due 02/15/2025................................ 401,062
----------
Federal Home Loan Mortgage Corporation (FHLMC) - 0.5%
237,959 #C00385, GOLD,
9.000% due 01/01/2025................................ 251,334
----------
Total U.S. Government Agency Mortgage-Backed
Securities
(Cost $632,251)....................................... 652,396
----------
REPURCHASE AGREEMENT - 1.6%
(Cost $811,000)
811,000 Agreement with Goldman Sachs Company, 4.000% dated
12/31/1998, to be repurchased at $811,360 on
01/04/1999, collateralized by $698,905 U.S. Treasury
Note 11.750% due 02/15/2001. (Market Value $829,641) 811,000
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost $46,655,939*)....................... 98.7% 48,987,491
OTHER ASSETS AND LIABILITIES (Net).......................... 1.3 666,267
----- -----------
NET ASSETS ................................................. 100.0% $49,653,758
===== ===========
</TABLE>
- -------------
* Aggregate cost for federal tax purposes.
GLOSSARY OF TERMS
<TABLE>
<C> <S>
GOLD - Payments are on an accelerated 45-
day payment cycle instead of 75-day
payment cycle
</TABLE>
See Notes to Financial Statements.
66
<PAGE>
portfolio of investments (continued)
Growth & Income Fund
December 31, 1998
<TABLE>
<CAPTION>
Shares Value
------ ------------
<C> <S> <C>
COMMON STOCKS - 96.3%
Consumer Staples - 10.1%
39,000 Alberto-Culver Company, Class A......................... $ 984,750
18,000 Campbell Soup Company................................... 990,000
3,600 Estee Lauder Companies, Inc. ........................... 279,000
4,000 Gillette Company........................................ 193,250
30,000 Kimberly-Clark Corporation.............................. 1,635,000
48,000 Kimberly-Clark de Mexico, ADR........................... 762,039
35,000 Libbey, Inc. ........................................... 1,012,812
30,000 PepsiCo, Inc. .......................................... 1,228,125
11,800 Philip Morris Companies, Inc............................ 631,300
15,000 Procter & Gamble Company................................ 1,369,687
34,800 Ralston-Ralston Purina Company.......................... 1,126,650
44,000 Sara Lee Corporation.................................... 1,240,250
15,000 Unilever NV............................................. 1,244,063
------------
12,696,926
------------
Health Care Products - 9.4%
33,000 Abbott Laboratories..................................... 1,617,000
27,000 ALZA Corporation+....................................... 1,410,750
19,600 American Home Products Corporation...................... 1,103,725
12,500 Bristol-Myers Squibb Company............................ 1,672,656
10,000 DENTSPLY International, Inc............................. 257,500
14,000 Johnson & Johnson....................................... 1,174,250
10,000 Merck & Company, Inc. .................................. 1,476,875
7,500 Perkin Elmer Corporation................................ 731,719
9,500 Pfizer, Inc............................................. 1,191,656
14,800 Warner Lambert Company.................................. 1,112,775
------------
11,748,906
------------
Computer Software/Services - 9.0%
38,500 Adobe Systems, Inc. .................................... 1,799,875
65,000 BARRA, Inc.+............................................ 1,535,625
29,000 Computer Associates International, Inc.................. 1,236,125
45,000 First Data Corporation.................................. 1,425,937
26,000 Microsoft Corporation+.................................. 3,605,875
39,950 Oracle Corporation+..................................... 1,722,844
------------
11,326,281
------------
Financial Services - 7.4%
20,000 AMBAC, Inc.............................................. 1,203,750
50,000 Federal Home Loan Mortgage Corporation.................. 3,221,875
39,050 Heller Financial, Inc................................... 1,147,094
19,000 Legg Mason, Inc......................................... 599,687
45,000 Liberty Financial Companies............................. 1,215,000
22,650 Marsh & McLennan Companies, Inc. ....................... 1,323,609
3,500 Merrill Lynch & Company, Inc............................ 233,625
13,200 Price (T. Rowe) Associates, Inc. ....................... 452,100
------------
9,396,740
------------
Banks/Savings & Loans - 6.2%
18,400 Bank of New York Company, Inc........................... 740,600
2,000 Chase Manhattan Corporation............................. 136,125
32,750 Citigroup, Inc. ........................................ 1,621,125
40,000 First Union Corporation................................. 2,432,500
9,000 Mellon Bank Corporation................................. 618,750
42,000 Prime Bancshares, Inc................................... 724,500
37,000 Wells Fargo & Company................................... 1,477,688
------------
7,751,288
------------
Computer Systems - 5.6%
15,000 Compaq Computer Corporation............................. 629,062
42,000 EMC Corporation+........................................ 3,570,000
18,000 Hewlett-Packard Company................................. 1,229,625
8,500 International Business Machines Corporation............. 1,570,375
------------
6,999,062
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
------ ------------
<C> <S> <C>
Oil & Gas - 5.1%
5,097 British Petroleum, ADR.................................. $ 484,215
29,200 Exxon Corporation....................................... 2,135,250
13,000 Mobil Corporation....................................... 1,132,625
7,300 PennzEnergy Company..................................... 119,081
7,300 Pennzoil-Quaker State Company+.......................... 108,131
3,000 Royal Dutch Petroleum................................... 143,625
86,100 Tosco Corporation....................................... 2,227,838
------------
6,350,765
------------
Media - 4.8%
151,488 Tele-Communications TCI Ventures Group+................. 3,569,436
22,000 Viacom, Inc., Class A+.................................. 1,618,375
27,000 Walt Disney Company..................................... 810,000
------------
5,997,811
------------
Capital Goods - 4.6%
20,300 AlliedSignal, Inc. ..................................... 899,544
15,600 Caterpillar, Inc........................................ 717,600
62,300 Donaldson Company, Inc.................................. 1,292,725
39,700 International Game Technology........................... 965,206
25,494 Tyco International, Ltd................................. 1,923,176
------------
5,798,251
------------
Business Services - 4.1%
45,000 AC Nielson Corporation+................................. 1,271,250
28,000 Cendant Corporation+.................................... 533,750
40,000 Dun & Bradstreet Corporation............................ 1,262,500
44,560 Waste Management, Inc................................... 2,077,610
------------
5,145,110
------------
Retail Sales - 3.8%
18,100 Dayton Hudson Corporation............................... 981,925
16,300 Federated Department Stores, Inc.+...................... 710,069
51,000 Intimate Brands, Inc.................................... 1,523,625
19,400 Wal-Mart Stores, Inc.................................... 1,579,888
------------
4,795,507
------------
Transportation - 3.3%
9,500 Airborne Freight Corporation............................ 342,594
14,800 AMR Corporation+........................................ 878,750
37,000 Expeditors International of Washington, Inc............. 1,554,000
100,400 Miller Industries, Inc.+................................ 451,800
19,000 Union Pacific Corporation............................... 856,188
------------
4,083,332
------------
Utilities/Telecommunications - 3.2%
10,000 At Home Corporation, Series A+.......................... 742,500
29,000 Sprint Corporation...................................... 2,439,625
38,500 Sprint Corporation, PCS Group+.......................... 890,313
------------
4,072,438
------------
Basic Industry - 2.7%
20,200 Albemarle Corporation................................... 479,750
35,300 Allegheny Teledyne, Inc................................. 721,444
4,900 du Pont (E.I.) de Nemours & Company..................... 275,931
5,900 Nucor Corporation....................................... 255,175
11,900 Sealed Air Corporation+................................. 607,644
19,500 Sigma-Aldrich Corporation............................... 572,813
10,000 Weyerhaeuser Company.................................... 508,125
------------
3,420,882
------------
</TABLE>
See Notes to Financial Statements.
67
<PAGE>
portfolio of investments (continued)
Growth & Income Fund
December 31, 1998
<TABLE>
<CAPTION>
Shares Value
------ ------------
<C> <S> <C>
COMMON STOCKS - (Continued)
Consumer Durables - 2.6%
11,300 Federal-Mogul Corporation............................... $ 672,350
1,000 Honda Motor Company, Ltd., Sponsored ADR................ 66,750
19,100 Sony Corporation, ADR................................... 1,370,425
61,000 U.S. Industries, Inc.................................... 1,136,125
------------
3,245,650
------------
Health Care Services - 2.3%
10,000 Columbia/HCA Healthcare Corporation..................... 247,500
8,000 Humana, Inc.+........................................... 142,500
1,000 IMS Health, Inc......................................... 75,438
74,000 MedPartners, Inc., TAPS................................. 568,875
2,500 MedPartners, Inc. +..................................... 13,125
23,100 PacifiCare Health Systems, Inc., Class A+............... 1,680,525
------------
2,727,963
------------
Electronics/Semiconductors - 2.0%
36,800 General Semiconductor, Inc.+............................ 301,300
19,000 Intel Corporation....................................... 2,252,688
------------
2,553,988
------------
Electrical Equipment - 1.9%
5,000 Emerson Electric Company................................ 302,500
21,000 General Electric Company................................ 2,143,312
------------
2,445,812
------------
Aerospace/Defense - 1.7%
8,454 BF Goodrich Company..................................... 303,287
6,000 Boeing Company.......................................... 195,750
3,000 Lockheed Martin Corporation............................. 254,250
3,000 Loral Space & Communications, Ltd.+..................... 53,438
17,500 Northrop Grumman Corporation............................ 1,279,688
------------
2,086,413
------------
Insurance - 1.6%
13,650 American International Group, Inc....................... 1,318,931
21,446 Conseco, Inc............................................ 655,443
------------
1,974,374
------------
Real Estate Investment Trusts - 1.5%
20,000 CCA Prison Realty Trust +............................... 410,000
31,722 Equity Office Properties Trust.......................... 761,327
20,200 Health Care Property Investors, Inc..................... 621,150
4,925 Patriot American Hospitality, Inc....................... 29,550
------------
1,822,027
------------
Utilities/Gas & Electric - 1.3%
27,700 Enron Corporation....................................... 1,580,631
------------
Lodging & Restaurants - 1.1%
94,300 Choice Hotels International, Inc. +..................... 1,290,731
30,500 Sunburst Hospitality Corporation+....................... 129,625
------------
1,420,356
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
------ ------------
<C> <S> <C>
Consumer Cyclicals - 1.0%
15,900 Goodyear Tire & Rubber Company....................... $ 801,956
18,825 Mattel, Inc.......................................... 429,445
------------
1,231,401
------------
Total Common Stocks
(Cost $102,072,613).................................. 120,671,914
------------
CONVERTIBLE PREFERRED STOCKS - 1.8%
10,000 Cendant Corporation, Series CD, Conv. Pfd., 1.300%
due 02/16/2001...................................... 263,750
9,000 Lehman Brothers Holdings, Series CSCO, Conv. Pfd.,
5.000% due 02/26/2001............................... 772,875
10,000 Loral Space & Communications, Ltd., Series C, Conv.
Pfd., 6.000% due 11/01/2006 ++...................... 522,500
13,500 Nextlink Communications Corporation, Conv. Pfd.,
6.500% due 03/31/2010 ++............................ 550,125
1,600 TCI Communications, Inc., Series A, Conv. Pfd.,
2.125% due 01/15/2006............................... 180,800
------------
Total Convertible Preferred Stocks
(Cost $2,301,963 )................................... 2,290,050
------------
<CAPTION>
Principal
Amount
---------
<C> <S> <C>
CONVERTIBLE NOTE - 0.8%
(Cost $715,686)
$688,000 Berkshire Hathaway Company, Conv., Sr. Note, 1.000%
due 12/02/2001...................................... 1,049,200
------------
CONVERTIBLE BOND - 0.4%
(Cost $435,595)
830,000 At Home Corporation,
0.525% due 12/28/2018++............................. 466,875
------------
REPURCHASE AGREEMENT - 0.5%
(Cost $612,000)
612,000 Agreement with Goldman Sachs Company, 4.000%, date
12/31/1998, to be repurchased at $612,272 on
01/04/1999, collaterized by $527,411 U.S. Treasury
Note, 11.750% due 02/15/2001 (Market Value
$626,067)........................................... 612,000
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost $106,137,857*)..................... 99.8% 125,090,039
OTHER ASSETS AND LIABILITIES (Net)......................... 0.2 204,523
----- ------------
NET ASSETS................................................. 100.0% $125,294,562
===== ============
</TABLE>
- -------------
*Aggregate cost for federal tax purposes is $106,154,584.
+Non-income producing security.
++Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from registra-
tion, normally to qualified institutional buyers.
Industry categories are unaudited.
GLOSSARY OF TERMS
ADR- American Depositary Receipt
TAPS - Threshold Appreciation Price Securities
See Notes to Financial Statements.
68
<PAGE>
portfolio of investments (continued)
Growth Fund
December 31, 1998
<TABLE>
<CAPTION>
Shares Value
------ -----------
<C> <S> <C>
COMMON STOCKS - 90.9%
Utilities/Telecommunications - 16.1%
22,865 At Home Corporation+..................................... $ 1,697,726
131,295 Comcast Corporation, Class A............................. 7,705,375
34,960 Cox Communications, Inc., Class A+....................... 2,416,610
11,320 MCI WorldCom+............................................ 812,210
90,075 MediaOne Group, Inc.+.................................... 4,233,525
7,335 Qwest Communications International, Inc.+................ 366,750
107,653 Tele-Communications, Inc., Class A+...................... 5,954,557
34,870 Tele-Communications Liberty Media, Group A+.............. 1,606,199
171,919 Telecom Italia SPA....................................... 1,466,061
-----------
26,259,013
-----------
Computer Software/Services - 15.3%
17,975 Amazon.com, Inc.+........................................ 5,774,469
35,923 America Online, Inc...................................... 5,747,680
940 CDW Computer Centers, Inc.+.............................. 90,181
28,225 DoubleClick, Inc.+....................................... 1,286,002
43,495 IMS Health, Inc.......................................... 3,281,154
1,500 Inktomi Corporation+..................................... 194,062
25,585 Intuit, Inc.+............................................ 1,854,912
39,815 Microsoft Corporation+................................... 5,521,843
25,950 Technology Solutions Company+............................ 278,152
20,935 Wind River Systems, Inc.+................................ 983,945
-----------
25,012,400
-----------
Media - 14.1%
30,120 Cablevision Systems Corporation, Class A+................ 1,511,647
34,105 Chancellor Media Corporation+............................ 1,632,777
51,648 Outdoor Systems, Inc.+................................... 1,549,440
38,930 Penton Media, Inc. ...................................... 788,332
260,935 Tele-Communications TCI Ventures Group+.................. 6,148,281
139,121 Time Warner, Inc......................................... 8,634,197
65,905 United International Holdings, Inc., Class A+............ 1,268,671
44,660 USA Networks, Inc.+...................................... 1,479,362
-----------
23,012,707
-----------
Health Care Products - 12.4%
27,550 Arterial Vascular Engineering, Inc.+..................... 1,446,375
47,955 ALZA Corporation+........................................ 2,505,649
19,945 Centocor, Inc.+.......................................... 900,018
31,150 Eli Lilly and Company.................................... 2,768,456
2,960 Medtronic, Inc........................................... 219,780
4,985 MiniMed, Inc.+........................................... 522,179
38,260 Pfizer, Inc.............................................. 4,799,239
30,040 Pharmacy & Upjohn, Inc. ................................. 1,701,015
25,460 Sofamor Danek Group, Inc.+............................... 3,099,755
30,100 Warner Lambert Company................................... 2,263,144
-----------
20,225,610
-----------
Electronic/Semiconductors - 8.1%
34,445 Maxim Integrated Products, Inc.+......................... 1,504,816
81,245 Nokia Corporation, Class A, Sponsored ADR................ 9,784,945
40,370 Vitesse Semiconductor Corporation+....................... 1,841,881
-----------
13,131,642
-----------
Capital Goods - 5.5%
15,350 DaimlerChrysler AG+...................................... 1,474,524
13,490 Federal-Mogul Corporation................................ 802,655
48,780 Monsanto Company......................................... 2,317,050
58,763 Tyco International, Ltd. ................................ 4,432,934
-----------
9,027,163
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
------ ------------
<C> <S> <C>
Computer Systems - 5.3%
78,425 Cisco Systems, Inc.+.................................... $ 7,278,820
8,325 EMC Corporation+........................................ 707,625
19,360 General Instrument Corporation+......................... 654,610
------------
8,641,055
------------
Banks/Savings & Loans - 4.1%
118,635 Bank of New York Company, Inc........................... 4,775,059
17,128 Firstar Corporation..................................... 1,597,186
10,975 Newcourt Credit Group, Inc. ............................ 383,439
------------
6,755,684
------------
Business Services - 2.6%
3,790 Global Crossing Ltd.+................................... 171,024
41,192 Lamar Advertising Company+.............................. 1,534,402
44,290 Sapient Corporation+.................................... 2,480,240
------------
4,185,666
------------
Technology - 2.2%
21,050 Orbital Sciences Corporation+........................... 931,462
78,420 Pittway Corporation, Class A............................ 2,592,761
------------
3,524,223
------------
Retail Sales - 1.8%
19,695 Costco Companies, Inc.+................................. 1,421,733
2,670 Dollar Tree Stores, Inc.+............................... 116,646
33,515 Staples, Inc.+.......................................... 1,464,187
------------
3,002,566
------------
Consumer Staples - 1.4%
35,590 Nike, Inc., Class B..................................... 1,443,619
79,567 Raisio Group Plc........................................ 858,252
------------
2,301,871
------------
Airline - 0.8%
55,515 Southwest Airlines Company.............................. 1,245,618
------------
Financial Services - 0.5%
5,395 The FINOVA Group, Inc................................... 290,993
13,110 Household International, Inc............................ 519,484
------------
810,477
------------
Oil & Gas - 0.5%
749,346 Ocean Rig ASA+ ......................................... 205,126
11,460 Schlumberger Ltd........................................ 528,593
------------
733,719
------------
Insurance - 0.2%
5,845 UNUM Corporation........................................ 341,202
------------
Total Common Stocks
(Cost $98,023,993)..................................... 148,210,616
------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount
---------
<S> <C> <C>
COMMERCIAL PAPER - 7.9%
$7,000,000 CIT Group Holdings, Inc.,
5.300% due 01/04/1999++................... 6,996,908
5,900,000 FMC,
4.700% due 01/04/1999++................... 5,897,689
----------
Total Commercial Paper (Cost $12,894,597).. 12,894,597
----------
</TABLE>
See Notes to Financial Statements.
69
<PAGE>
portfolio of investments (continued)
Growth Fund
December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
--------- ------------
<C> <S> <C>
CORPORATE BOND - 0.7%
(Cost $1,016,521)
$ 1,616,000 Amazon.com, Inc., Step coupon, Sr. Disc. Note,
Zero coupon to 05/01/2003;
10.000% due 05/01/2008.......................... $ 1,074,640
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost $111,935,111*)..................... 99.5% 162,179,853
OTHER ASSETS AND LIABILITIES (Net)......................... 0.5 787,435
----- ------------
NET ASSETS................................................. 100.0% $162,967,288
===== ============
</TABLE>
- -------------
*Aggregate cost for federal tax purposes is $112,153,020.
+ Non-income producing security.
++ Rate represents annualized yield at date of purchase (unaudited).
Industry categories are unaudited.
Schedule of Forward Foreign Currency Contracts
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>
01/22/1999 FIM 20,300,000 3,985,636 3,984,298 $ (1,338)
01/22/1999 ITL 1,275,000,000 771,934 768,584 (3,350)
01/26/1999 FIM 7,700,000 1,512,128 1,522,380 10,252
01/26/1999 ITL 700,000,000 423,897 430,214 6,317
--------
Net Unrealized Appreciation of Forward Foreign Currency
Contracts.............................................. $ 11,881
========
</TABLE>
GLOSSARY OF TERMS
ADR- American Depositary Receipt
FIM- Finnish Markka
ITL- Italian Lira
See Notes to Financial Statements.
70
<PAGE>
portfolio of investments (continued)
Bond & Stock Fund
December 31, 1998
<TABLE>
<CAPTION>
Shares Value
------ ----------
<C> <S> <C>
COMMON STOCKS - 43.0%
Health Care Products - 4.2%
400 Abbott Laboratories........................................ $ 19,600
350 Baxter International, Inc. ................................ 22,509
500 Becton Dickinson & Company................................. 21,344
800 DENTSPLY International, Inc. .............................. 20,600
300 Johnson & Johnson.......................................... 25,163
----------
109,216
----------
Consumer Staples - 3.9%
600 Libbey, Inc. .............................................. 17,363
350 PepsiCo, Inc. ............................................. 14,328
450 Phillip Morris Companies, Inc. ............................ 24,075
600 Ralston Purina Company..................................... 19,425
900 Supervalu, Inc. ........................................... 25,200
----------
100,391
----------
Banks/Savings & Loans - 3.7%
500 Chase Manhattan Corporation................................ 34,031
500 Citigroup, Inc. ........................................... 24,750
250 Mellon Bank Corporation.................................... 17,187
500 Wells Fargo & Company...................................... 19,969
----------
95,937
----------
Consumer Cyclicals - 3.6%
800 Carnival Corporation....................................... 38,400
400 Nike, Inc., Class B........................................ 16,225
265 Sony Corporation, Sponsored ADR............................ 19,014
800 Warnaco Group, Inc., Class A............................... 20,200
----------
93,839
----------
Computer Software - 3.6%
700 Adobe Systems, Inc. ....................................... 32,725
800 Autodesk, Inc. ............................................ 34,150
600 Computer Associates International, Inc. ................... 25,575
----------
92,450
----------
Capital Goods - 3.2%
600 Crane Company.............................................. 18,112
400 Sundstrand Corporation..................................... 20,750
400 USG Corporation............................................ 20,375
210 Xerox Corporation.......................................... 24,780
----------
84,017
----------
Computer Systems - 3.0%
800 Diebold, Inc. ............................................. 28,550
350 Hewlett-Packard Company.................................... 23,909
300 Sun Microsystems, Inc.+.................................... 25,688
----------
78,147
----------
Basic Industry - 3.0%
800 Corrections Corporation of America+........................ 14,100
600 Fort James Corporation..................................... 24,000
400 Rayonier, Inc. ............................................ 18,375
700 Sonoco Products Company.................................... 20,738
----------
77,213
----------
Health Care Services - 2.4%
250 Aetna, Inc. ............................................... 19,656
600 Columbia/HCA Healthcare Corporation........................ 14,850
335 Pacificare Healthcare Systems, Inc., Class B+.............. 26,632
----------
61,138
----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
------ ----------
<C> <S> <C>
Utilities/Telecommunications - 2.1%
420 ALLTEL Corporation........................................ $ 25,121
300 Sprint Corporation........................................ 25,238
150 Sprint PCS Group+......................................... 3,469
----------
53,828
----------
Real Estate Investment Trusts - 2.1%
300 Arden Realty, Inc. ....................................... 6,956
200 Essex Property Trust, Inc. ............................... 5,950
250 Franchise Finance Corporation of America.................. 6,000
200 Health Care Property Investors, Inc. ..................... 6,150
300 New Plan Excel Realty Trust............................... 6,656
1,550 Patriot American Hospitality, Inc. ....................... 9,300
250 Shurgard Storage Centers, Inc. ........................... 6,453
450 Taubman Centers, Inc. .................................... 6,188
----------
53,653
----------
Financial Services - 1.6%
500 MGIC Investment Corporation............................... 19,906
600 Price (T. Rowe) Associates, Inc. ......................... 20,550
----------
40,456
----------
Oil & Gas - 1.5%
400 Ashland, Inc. ............................................ 19,350
750 YPF S.A., Sponsored ADR................................... 20,953
----------
40,303
----------
Retail Sales - 1.4%
550 Dillards, Inc., Class A................................... 15,606
700 Limited, Inc. ............................................ 20,388
----------
35,994
----------
Media - 1.0%
350 Viacom, Inc., Class A+.................................... 25,747
----------
Aerospace/Defense - 0.8%
400 Raytheon Company, Class B................................. 21,300
----------
Electrical Equipment - 0.8%
700 Tektronix, Inc. .......................................... 21,044
----------
Insurance - 0.6%
458 Conseco, Inc. ............................................ 13,998
600 PennCorp Financial Group, Inc. ........................... 600
----------
14,598
----------
Consumer Durables - 0.5%
600 Mattel, Inc. ............................................. 13,687
----------
Total Common Stocks
(Cost $1,072,126)........................................ 1,112,958
----------
CONVERTIBLE PREFERRED STOCKS - 3.0%
750 Cendant Corporation, Series CD,
Conv. Pfd., 1.300% due 02/16/2001........................ 19,781
60 Estee Lauder Companies Inc.,
Conv. Pfd., 6.250% due 06/05/2001........................ 4,650
300 Qwest Trends Trust,
Conv. Pfd., 5.750% due 11/17/2003++...................... 14,025
70 TCI Pacific Communications, Inc., Conv. Pfd., 5.000% due
07/31/2006............................................... 19,696
400 Tosco Financial Trust, Conv. Pfd.,
5.750% due 12/15/2026.................................... 19,150
----------
Total Convertible Preferred Stocks
(Cost $76,123)............................................ 77,302
----------
</TABLE>
See Notes to Financial Statements.
71
<PAGE>
portfolio of investments (continued)
Bond & Stock Fund
December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
--------- ----------
<C> <S> <C>
FIXED INCOME SECURITIES - 34.1%
U.S. TREASURY OBLIGATION - 16.1%
(Cost $396,750)
$380,000 U.S. Treasury Note, 6.500% due 05/15/2005.............. $ 416,575
----------
U.S. GOVERNMENT AGENCY SECURITY - 9.7%
(Cost $249,788)
250,000 Federal National Mortgage Association, 5.088% due
01/07/1999 +++ ....................................... 249,788
----------
CORPORATE BONDS - 7.6%
100,000 Aetna Services, Inc., Company Guaranty,
7.125% due 08/15/2006................................. 105,181
50,000 CNA Financial Corporation, Note,
6.600% due 12/15/2008................................. 49,892
40,000 Cendant Corporation, Note,
7.750% due 12/01/2003................................. 40,921
----------
Total Corporate Bonds
(Cost $194,413)........................................ 195,994
----------
CONVERTIBLE BOND - 0.7%
(Cost $15,744)
30,000 At Home Corporation, Sub. Deb.,
4.000% due 02/28/2018 ++.............................. 16,875
----------
Total Fixed Income Securities
(Cost $856,695)........................................ 879,232
----------
REPURCHASE AGREEMENT - 20.2%
(Cost $523,000)
523,000 Agreement with Goldman Sachs Company, 4.000% dated
12/31/1998, to be repurchased at $523,232 on
01/04/1999, collateralized by $450,713 U.S. Treasury
Note, 11.750% due 02/15/2001 (Market Value $535,021).. 523,000
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost $2,527,944*)......................... 100.3% 2,592,492
OTHER ASSETS AND LIABILITIES (Net)........................... (0.3) (6,542)
----- ----------
NET ASSETS................................................... 100.0% $2,585,950
===== ==========
</TABLE>
- -------------
* Aggregate cost for tax purposes is $2,528,022.
+ Non-income producing security.
++ Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from registra-
tion, normally to qualified institutional buyers.
+++ Rate represents annualized yield at date of purchase (unaudited).
Industry categories are unaudited.
GLOSSARY OF TERMS
<TABLE>
<C> <S>
ADR - American Depository Receipt
</TABLE>
See Notes to Financial Statements.
72
<PAGE>
portfolio of investments (continued)
Northwest Fund
December 31, 1998
<TABLE>
<CAPTION>
Shares Value
------ ----------
<C> <S> <C>
COMMON STOCKS - 87.0%
Computer Software/Services - 12.6%
750 Adobe Systems, Inc......................................... $ 35,062
4,085 Mentor Graphics Corporation+............................... 34,722
710 Microsoft Corporation+..................................... 98,468
1,475 Orcad, Inc.+............................................... 12,538
1,535 Visio Corporation+......................................... 56,123
2,300 Wall Data, Inc.+........................................... 55,200
----------
292,113
----------
Health Care Products - 10.7%
3,600 Corixa Corporation+........................................ 33,300
2,185 ICOS Corporation+.......................................... 65,004
425 Immunex Corporation+....................................... 53,470
2,900 NeoRx Corporation+......................................... 3,897
1,190 PathoGenesis Corporation+.................................. 69,020
2,230 Sonosite, Inc.+............................................ 23,136
----------
247,827
----------
Electrical Equipment - 7.8%
1,275 Electro Scientific Industries, Inc.+....................... 57,773
990 Flir Systems, Inc.+........................................ 23,018
700 Microvision, Inc.+......................................... 9,100
3,040 Tektronix, Inc. ........................................... 91,390
----------
181,281
----------
Electronics/Semiconductors - 7.7%
815 Credence Systems Corporation+.............................. 15,078
3,305 FEI Company+............................................... 25,201
180 Intel Corporation.......................................... 21,341
750 Lattice Semiconductor Corporation+......................... 34,430
605 Micrion Corporation+....................................... 7,109
1,000 Micron Technology, Inc.+................................... 50,562
1,295 TriQuint Semiconductor, Inc.+.............................. 24,929
----------
178,650
----------
Computer Systems - 6.6%
4,725 In Focus Systems, Inc.+.................................... 41,934
500 Micron Electronics, Inc.+.................................. 8,656
2,145 Radisys Corporation+....................................... 64,351
3,135 Sequent Computer Systems, Inc.+............................ 37,816
----------
152,757
----------
Bank/Savings & Loans - 5.6%
965 First Savings Bank of Washington Bancorp, Inc.............. 23,160
605 Interwest Bancorp, Inc..................................... 13,386
525 KeyCorp.................................................... 16,800
900 Sterling Financial Corporation+............................ 15,300
985 US Bancorp................................................. 34,968
995 Washington Federal, Inc.................................... 26,554
----------
130,168
----------
Transportation - 5.5%
1,195 Airborne Freight Corporation............................... 43,095
895 Alaska Air Group, Inc.+.................................... 39,604
1,060 Expeditors International of Washington, Inc. .............. 44,520
----------
127,219
----------
Basic Industry - 5.2%
300 Boise Cascade Corporation.................................. 9,300
2,445 Oregon Steel Mills, Inc. .................................. 29,034
2,055 Schnitzer Steel Industries, Inc., Class A.................. 29,541
510 Weyerhaeuser Company....................................... 25,914
750 Willamette Industries, Inc. ............................... 25,125
----------
118,914
----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
------ ----------
<C> <S> <C>
Consumer Staples - 3.9%
745 Albertson's, Inc........................................... $ 47,447
693 Fred Meyer, Inc., Class A+................................. 41,753
----------
89,200
----------
Lodging & Restaurants - 3.4%
1,485 Ambassadors International, Inc.+........................... 21,904
1,905 Cavanaughs Hospitality Corporation+........................ 20,479
635 Starbucks Corporation+..................................... 35,639
----------
78,022
----------
Consumer Cyclicals - 3.1%
2,500 Building Materials Holding Corporation+.................... 30,312
2,980 K2, Inc. .................................................. 30,731
270 Nike, Inc., Class B........................................ 10,952
----------
71,995
----------
Utilities/Telecommunications - 2.8%
1,200 General Communication, Inc., Class A+...................... 4,875
135 GST Telecommunications, Inc.+.............................. 886
3,290 Metro One Telecommunications, Inc.+........................ 43,592
710 Western Wireless Corporation, Class A+..................... 15,620
----------
64,973
----------
Retail Sales - 2.6%
585 Costco Companies, Inc.+.................................... 42,230
830 Multiple Zones International, Inc.+........................ 14,629
70 Nordstrom, Inc............................................. 2,428
----------
59,287
----------
Aerospace/Defense - 2.2%
965 Boeing Company............................................. 31,483
445 Precision Castparts Corporation............................ 19,691
----------
51,174
----------
Real Estate Investment Trusts - 1.7%
1,260 Pacific Gulf Properties, Inc. ............................. 25,279
545 Shurgard Storage Centers, Inc., Class A.................... 14,068
----------
39,347
----------
Consumer Durables - 1.7%
1,438 Monaco Coach Corporation+.................................. 38,094
----------
Capital Goods - 1.3%
1,040 Greenbrier Companies, Inc.................................. 14,690
375 PACCAR, Inc. .............................................. 15,422
----------
30,112
----------
Insurance - 1.1%
600 Safeco Corporation......................................... 25,762
----------
Health Care Services - 1.0%
950 Foundation Health Systems, Inc., Class A+.................. 11,341
160 PacifiCare Health Systems, Inc., Class B+.................. 12,720
----------
24,061
----------
Business Services - 0.5%
1,470 Barrett Business Services, Inc.+........................... 12,495
----------
Total Common Stocks (Cost $1,761,251)...................... 2,013,451
----------
</TABLE>
See Notes to Financial Statements.
73
<PAGE>
portfolio of investments (continued)
Northwest Fund
December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
--------- ----------
<C> <S> <C>
REPURCHASE AGREEMENT - 13.7%
(Cost $316,000)
$316,000 Agreement with Goldman Sachs Company, 4.000% dated
12/31/1998, to be repurchased at $316,140 on
01/04/1999, collateralized by $272,323 U.S. Treasury
Note, 11.750% due 02/15/2001 (Market Value
$323,263)............................................ $ 316,000
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost $2,077,251*)......................... 100.7% 2,329,451
OTHER ASSETS AND LIABILITIES (Net)........................... (0.7) (16,091)
----- ----------
NET ASSETS................................................... 100.0% $2,313,360
===== ==========
</TABLE>
- -------------
* Aggregate cost for federal tax purposes is $2,085,391.
+ Non-income producing security.
Industry categories are unaudited.
See Notes to Financial Statements.
74
<PAGE>
portfolio of investments (continued)
Emerging Growth Fund
December 31, 1998
<TABLE>
<CAPTION>
Shares Value
------ -----------
<C> <S> <C>
COMMON STOCKS - 90.0%
Computer Software/Services - 20.3%
47,050 ARIS Corporation+......................................... $ 561,659
28,800 AVT Corporation+.......................................... 835,200
23,350 AXENT Technologies, Inc.+................................. 713,634
26,350 BARRA, Inc.+.............................................. 622,519
7,075 Cadence Design Systems, Inc.+............................. 210,481
85,350 Carreker-Antinori, Inc.+.................................. 570,778
25,000 Check Point Software Technologies, Inc.+.................. 1,145,313
68,650 Harbinger Corporation+.................................... 549,200
47,250 Made2Manage Systems, Inc.+................................ 702,844
20,350 Sterling Commerce, Inc.+.................................. 915,750
11,375 Tier Technologies, Inc.+.................................. 196,219
25,360 Visio Corporation+........................................ 927,225
44,175 Wall Data, Inc.+.......................................... 1,060,200
-----------
9,011,022
-----------
Health Care Products - 12.7%
59,450 Corixa Corporation+....................................... 549,913
50,300 ESC Medical Systems, Ltd.+................................ 528,150
10,500 GelTex Pharmaceuticals, Inc.+............................. 237,563
40,800 ICOS Corporation+......................................... 1,213,800
24,600 Incyte Pharmaceuticals, Inc. +............................ 919,425
50,075 NeoRx Corporation+........................................ 67,288
15,400 PathoGenesis Corporation+................................. 893,200
34,200 Shire Pharmaceuticals Group ADR+.......................... 692,550
1,673 Sofamor Danek Group, Inc.+................................ 203,688
31,666 SonoSight, Inc.+.......................................... 328,535
-----------
5,634,112
-----------
Electronics/Semicondutors - 8.3%
32,890 ATMI, Inc.+............................................... 830,473
37,420 Credence Systems Corporation+............................. 692,270
65,050 FEI Company+.............................................. 496,006
40,382 General Semiconductor, Inc.+.............................. 330,628
16,525 Lattice Semiconductor Corporation+........................ 758,601
30,940 TriQuint Semiconductor, Inc.+............................. 595,595
-----------
3,703,573
-----------
Financial Services - 7.0%
44,188 American Capital Strategies, Ltd.......................... 762,243
28,480 Hambrecht & Quist Group+.................................. 646,140
17,095 HealthCare Financial Partners, Inc.+...................... 681,663
5,775 Paychex, Inc.............................................. 297,051
13,425 Profit Recovery Group International, Inc.+................ 502,599
13,960 Richmond County Financial Corporation..................... 224,233
-----------
3,113,929
-----------
Consumer Cyclicals - 6.6%
35,400 Building Materials Holding Corporation+................... 429,225
20,100 Cutter & Buck, Inc.+...................................... 748,725
11,975 Family Golf Centers, Inc.+................................ 236,506
9,220 Fastenal Company.......................................... 405,680
38,505 K2, Inc. ................................................. 397,083
25,750 Nortek, Inc.+............................................. 711,344
-----------
2,928,563
-----------
Computer Systems - 6.2%
29,300 Apex PC Solutions, Inc.+.................................. 846,037
75,500 In Focus Systems, Inc.+................................... 670,062
40,390 RadiSys Corporation+...................................... 1,211,700
-----------
2,727,799
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
------ ----------
<C> <S> <C>
Business Services - 5.4%
13,745 Apollo Group, Inc., Class A+.............................. $ 465,612
126,675 Asymetrix Learning Systems, Inc.+......................... 554,203
26,300 Cognizant Technology Solutions Corporation+............... 798,863
27,705 First Consulting Group, Inc.+............................. 567,953
----------
2,386,631
----------
Media - 4.9%
44,250 Bowne & Company, Inc. .................................... 790,969
13,295 HA-LO Industries, Inc. ................................... 500,225
9,843 Lamar Advertising Company+................................ 366,652
17,764 Outdoor Systems, Inc.+.................................... 532,920
----------
2,190,766
----------
Transportation - 3.6%
23,100 Airborne Freight Corporation.............................. 833,044
13,500 Expeditors International of Washington, Inc............... 567,000
5,075 Ryanair Holdings Plc, Sponsored ADR+...................... 191,581
----------
1,591,625
----------
Health Care Services - 3.1%
8,859 Pediatrix Medical Group, Inc.+............................ 530,986
23,920 Omnicare, Inc............................................. 831,220
----------
1,362,206
----------
Electrical Equipment - 2.3%
18,065 Electro Scientific Industries, Inc.+...................... 818,570
13,930 Microvision, Inc.+........................................ 181,090
----------
999,660
----------
Lodging & Restaurants - 1.9%
46,495 Cavanaugh's Hospitality Corporation+...................... 499,821
19,650 PJ America, Inc.+......................................... 356,156
----------
855,977
----------
Consumer Staples - 1.4%
13,018 U.S. Foodservice+......................................... 637,882
----------
Utilities/Telecommunications - 1.3%
16,900 Teligent, Inc.+........................................... 485,875
7,000 US LEC Corporation+....................................... 103,688
----------
589,563
----------
Retail Sales - 1.3%
10,136 Duane Reade, Inc.+........................................ 390,236
7,537 MSC Industrial Direct Company, Inc., Class A+............. 170,525
----------
560,761
----------
Oil & Gas - 1.1%
19,481 Hanover Compressor Company+............................... 500,418
----------
Utilities/Electrical - 1.0%
38,275 Trigen Energy Corporation................................. 437,770
----------
Insurance - 0.8%
9,140 Protective Life Corporation............................... 363,886
----------
Basic Industry - 0.8%
6,619 Sealed Air Corporation+................................... 337,983
----------
Total Common Stocks (Cost $35,327,536).................... 39,934,126
----------
</TABLE>
See Notes to Financial Statements.
75
<PAGE>
portfolio of investments (continued)
Emerging Growth Fund
December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----------
<C> <S> <C>
U.S. GOVERNMENT AGENCY - 0.5%
(Cost $217,454)
$ 220,000 Federal Home Loan Mortgage Corporation, 4.628% due
03/26/1999++........................................ $ 217,624
-----------
REPURCHASE AGREEMENT - 8.9%
(Cost $3,944,000)
3,944,000 Agreement with Goldman Sachs Company, 4.000% dated
12/31/1998 to be repurchased at $3,945,753
01/04/1999, collateralized by $3,398,868 U.S.
Treasury Note, 11.750% due 02/15/2001 (Market Value
$4,034,655)......................................... 3,944,000
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost $39,488,990*)....................... 99.4% 44,095,750
OTHER ASSETS AND LIABILITIES (Net).......................... 0.6 284,092
----- -----------
NET ASSETS.................................................. 100.0% $44,379,842
===== ===========
</TABLE>
- -------------
* Aggregate cost for federal tax purposes is $40,048,794.
+ Non-income producing security.
++ Rate represents annualized yield at date of purchase (unaudited).
Industry categories are unaudited.
<TABLE>
<CAPTION>
Number of Unrealized
Contracts Value Appreciation
--------- ---------- ------------
<C> <S> <C> <C>
Futures Contracts - Long Position
17 Russell 2000, March 1999................... $3,614,625 $157,981
========== ========
</TABLE>
GLOSSARY OF TERMS
ADR -- American Depository Receipt
See Notes to Financial Statements.
76
<PAGE>
portfolio of investments (continued)
International Growth Fund
December 31, 1998
<TABLE>
<CAPTION>
Shares Value
------- -----------
<C> <S> <C>
COMMON STOCKS - 97.6%
United Kingdom - 15.6%
37,600 Barclays Plc............................................ $ 810,203
34,400 Bass Plc................................................ 500,458
13,700 Biocompatibles International Plc+....................... 19,589
119,500 British Energy Plc...................................... 1,365,972
28,000 Glaxo Wellcome Plc...................................... 962,742
99,724 Guardian Royal Exchange Plc............................. 557,938
13,700 Lloyds TSB Group Plc.................................... 194,755
123,600 Medeva Plc.............................................. 217,834
112,800 Orange Plc+............................................. 1,310,016
4,400 Perpetual Plc........................................... 224,042
121,400 Reed International Plc.................................. 948,676
61,654 Royal & Sun Alliance Insurance Group Plc................ 503,063
22,500 Safeway, Plc............................................ 112,977
31,300 Standard Chartered Plc.................................. 362,466
123,400 Williams Holdings Plc................................... 700,147
14,800 Zeneca Group Plc........................................ 643,971
-----------
9,434,849
-----------
Japan - 13.3%
4,500 Advantest Corporation................................... 285,120
27,000 Hankyu Realty Company Ltd. ............................. 107,756
13,000 Matsushita Communication Industrial Company, Ltd........ 613,159
65,000 Minebea Company, Ltd.................................... 744,303
10 NTT Mobile Communication Network, Inc................... 411,486
15,000 Orix Corporation........................................ 1,120,304
7,000 Rohm Company Ltd........................................ 637,406
44,000 Sanwa Bank, Ltd......................................... 339,136
2,600 Shohkoh Fund & Company, Ltd............................. 837,485
9,000 Sony Corporation........................................ 655,458
37,000 Sumitomo Bank, Ltd...................................... 379,806
11,000 TDK Corporation......................................... 1,005,531
144,000 Toshiba Corporation..................................... 857,590
-----------
7,994,540
-----------
Germany - 13.2%
23,300 BHF-Bank AG............................................. 936,838
11,900 Degussa AG.............................................. 653,791
12,100 Fresenius Medical Care AG............................... 853,212
5,300 Hannover Rueckversicherungs AG.......................... 564,557
17,500 Hoechst AG.............................................. 725,688
1,152 KSB AG-VORZUG........................................... 195,647
5,620 Mannesmann AG........................................... 644,174
1,200 Muenchener Rueckversicherungs-Gesellschaft AG........... 581,151
6,800 Schering AG............................................. 853,902
15,000 Siemens AG.............................................. 967,684
1,675 Viag AG................................................. 982,072
-----------
7,958,716
-----------
France - 10.2%
7,720 Banque Nationale de Paris............................... 635,440
3,500 Elf Aquitaine SA........................................ 404,400
7,200 Etablissements Economiques du Casino Guichard-Perrachon
SA..................................................... 749,490
15,557 Lagardere S.C.A......................................... 660,846
3,900 PSA Peugeot Citroen..................................... 603,380
11,300 Rhone-Poulenc Rorer, Inc. -A............................ 581,270
8,100 SCOR.................................................... 535,315
17,400 Societe Generale d'Entreprises Ord...................... 815,382
5,800 Suez Lyonnaise des Eaux................................. 1,190,914
-----------
6,176,437
-----------
Italy - 7.3%
45,000 Alleanza Assicurazioni.................................. 635,489
55,480 Instituto Bancario San Paolo di Torino, Spa............. 979,779
</TABLE>
<TABLE>
<CAPTION>
Shares Value
--------- ----------
<C> <S> <C>
Italy - (continued)
1,351,000 Seat-Pagine Gialle Spa+................................ $1,037,691
131,500 Telecom Italia Spa..................................... 1,121,383
49,100 Telecom Italia Spa, RNC................................ 308,833
609,000 Unione Immobiliare Spa+................................ 317,493
----------
4,400,668
----------
Netherlands - 7.2%
20,300 CSM NR CERT............................................ 1,171,300
16,868 ING Groep NV........................................... 1,028,044
14,500 Koninklijke Pakhoed NV................................. 365,838
14,140 Laurus NV.............................................. 356,755
7,300 Philips Electronics NV................................. 489,594
17,346 Vedior NV+............................................. 341,620
25,311 Vendex NV.............................................. 614,351
----------
4,367,502
----------
Switzerland - 5.1%
418 Novartis AG............................................ 821,696
62 Roche Hodings AG Genuss................................ 756,549
663 Sulzer AG Reg.......................................... 403,544
1,700 Swisscom AG+........................................... 711,686
5,700 TAG Heuer International SA............................. 392,588
----------
3,086,063
----------
Denmark - 4.8%
10,300 International Service Systems A/S, Class B............. 670,024
5,900 Novo-Nordisk A/S, Class B.............................. 778,725
4,100 Tele Danmark A/S....................................... 553,388
9,900 Unidanmark A/S, Class A................................ 894,449
----------
2,896,586
----------
Sweden - 4.1%
8,500 Biora AB, Sponsored ADR+............................... 110,500
55,311 Electrolux AB, B Shares................................ 949,677
50,900 Ericsson LM, B Shares.................................. 1,209,108
9,200 Kinnevik AB, B Shares.................................. 215,145
----------
2,484,430
----------
Spain - 3.6%
32,754 Argentaria, Caja Postal y Banco Hipotecario de Espana
SA.................................................... 846,967
48,900 Endesa SA.............................................. 1,293,724
----------
2,140,691
----------
Israel - 2.1%
18,200 Blue Square-Israel, Ltd., ADR.......................... 188,825
12,000 ECI Telecommunications, Ltd. ADR....................... 427,500
13,800 Orbotech, Ltd.+........................................ 653,775
----------
1,270,100
----------
Ireland - 1.9%
31,700 Bank of Ireland........................................ 703,676
27,400 Greencore Group Plc.................................... 126,331
23,300 Kerry Group Plc, Class A............................... 315,352
----------
1,145,359
----------
Singapore - 1.4%
37,000 Development Bank of Singapore, Ltd. (Foreign).......... 333,919
25,000 Overseas-Chinese Banking Corporation, Ltd.............. 169,594
52,000 United Overseas Bank, Ltd. (Foreign)................... 333,858
----------
837,371
----------
Finland - 1.3%
44,600 Sonera Group Oyj+...................................... 795,968
----------
</TABLE>
See Notes to Financial Statements.
77
<PAGE>
portfolio of investments (continued)
International Growth Fund
December 31, 1998
<TABLE>
<CAPTION>
Shares Value
--------- ----------
<C> <S> <C>
COMMON STOCKS - (Continued)
Korea - 1.2%
10,600 Samsung Electronics.................................... $ 711,072
----------
Argentina - 1.1%
4,796 Banco de Galicia y Buenos Aires SA de CV, Sponsored
ADR................................................... 84,530
20,200 YPF Sociedad Anonima, Sponsored ADR.................... 564,337
----------
648,867
----------
Hong Kong - 0.9%
44,000 New World Development Company, Ltd..................... 110,744
143,000 SmarTone Telecommunications Holdings, Ltd.............. 396,833
----------
507,577
----------
Greece - 0.8%
37,000 Hellenic Telecommunication Organization SA (OTE), GDR.. 485,625
----------
Austria - 0.7%
1,800 Erste Bank Der Oesterreichischen Sparkassen AG......... 96,345
1,213 VA Technologie AG...................................... 105,123
1,223 Wienerberger Baustoffindustrie AG...................... 243,275
----------
444,743
----------
Mexico - 0.6%
14,200 Fomento Economico Mexico SA, Sponsored ADR............. 378,075
----------
New Zealand - 0.4%
142,000 Fletcher Challenge Energy - Building Division.......... 268,993
----------
South Africa - 0.3%
41,400 Sappi, Ltd. ........................................... 159,900
----------
Norway - 0.3%
825 Smedvig ASA, B Shares, Sponsored ADR................... 6,188
7,740 Sparebanken Norway..................................... 150,757
----------
156,945
----------
Portugal - 0.2%
12,483 Banco Mello, SA........................................ 138,980
----------
Total Common Stocks (Cost $55,275,546)................. 58,890,057
----------
PREFERRED STOCKS - 0.7%
10,100 GEA AG................................................. 242,445
899,000 Telecomunicacoes de Sao Paulo SA....................... 122,545
2,700,000 Telesp Participacoes SA+............................... 61,453
----------
Total Preferred Stocks (Cost $614,526)................. 426,443
----------
RIGHTS - 0.1%
184 Societe Europeenne de Communication SA, Class A,
Sponsored ADR+........................................ 3,508
1,656 Societe Europeenne de Communication SA, Class B,
Sponsored ADR+........................................ 30,015
----------
Total Rights (Cost $1,760)............................. 33,523
----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount
----------
<C> <S> <C>
REPURCHASE AGREEMENT - 3.3%
(Cost $2,021,000)
$2,021,000 Agreement with State Street Bank & Trust Company,
4.800% dated 12/31/1998, to be repurchased at
$2,022,078 on 01/04/1999, collateralized by
$1,970,000 U.S. Treasury Note, 5.500% due 02/28/2003.
(Market Value $2,066,038)............................ 2,021,000
---------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost $57,912,832*)....................... 101.7% $61,371,023
OTHER ASSETS AND LIABILITIES (Net).......................... (1.7) (1,010,956)
----- -----------
NET ASSETS.................................................. 100.0% $60,360,067
===== ===========
</TABLE>
- -------------
* Aggregate cost for federal tax purposes is $57,936,394.
+ Non-income producing security.
As of December 31, 1998 sector diversification was as follows (unaudited):
<TABLE>
<CAPTION>
% of
Sector Diversification Net Assets Value
---------------------- ---------- -----------
<S> <C> <C>
COMMON STOCKS:
Financial Services...................................... 25.0% $15,089,630
Telecommunications...................................... 13.8 8,344,985
Health Care............................................. 11.2 6,744,408
Materials & Processing.................................. 10.5 6,365,346
Technology.............................................. 8.3 4,930,594
Energy.................................................. 6.0 3,634,621
Producer Durables....................................... 4.7 2,848,500
Consumer Staples........................................ 4.7 2,848,271
Consumer Discretionary.................................. 4.5 2,728,989
Retail.................................................. 2.8 1,665,643
Autos & Transportation.................................. 1.6 969,218
Other................................................... 4.5 2,719,852
----- -----------
TOTAL COMMON STOCKS..................................... 97.6 58,890,057
PREFERRED STOCKS........................................ 0.7 426,443
RIGHTS.................................................. 0.1 33,523
REPURCHASE AGREEMENT.................................... 3.3 2,021,000
----- -----------
TOTAL INVESTMENTS....................................... 101.7 61,371,023
OTHER ASSETS AND LIABILITIES (Net)...................... (1.7) (1,010,956)
----- -----------
NET ASSETS.............................................. 100.0% $60,360,067
===== ===========
</TABLE>
Schedule of Forward Foreign Currency Contracts
U. S. Forward Foreign Currency Contracts To Sell
<TABLE>
<CAPTION>
Contracts to Receive Unrealized
---------------------------------- Appreciation
Expiration Local Value in In Exchange (Depreciation)
Date Currency U.S. $ for U.S. $ of Contracts
- ---------- --------------- --------- ----------- --------------
<S> <C> <C> <C> <C>
01/04/1999 GBP 2,430 4,040 4,058 $ 18
01/05/1999 JPY 715,006 6,330 6,331 1
02/26/1999 JPY 900,200,000 8,027,789 6,865,468 (1,162,321)
02/26/1999 JPY 150,000,000 1,337,668 1,257,785 (79,883)
-----------
(1,242,185)
-----------
U. S. Forward Foreign Currency Contracts To Buy
<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>
02/26/1999 JPY 131,500,000 1,172,689 1,066,064 106,625
02/26/1999 JPY 229,200,000 2,043,956 1,994,347 49,609
-----------
156,234
-----------
Net Unrealized Depreciation of Forward Foreign
Currency Contracts...................................... $(1,085,951)
===========
</TABLE>
GLOSSARY OF TERMS
<TABLE>
<C> <S>
ADR - American Depositary Receipt
GBP - Great Britain Pound Sterling
GDR - Global Depositary Receipt
JPY - Japanese Yen
</TABLE>
See Notes to Financial Statements.
78
<PAGE>
portfolio of investments (continued)
December 31, 1998
Strategic Growth Portfolio Flexible Income Portfolio
<TABLE>
<CAPTION>
Shares Value
------ ----------
<C> <S> <C>
INVESTMENT COMPANY SECURITIES - 99.6%
17,167 WM VT Emerging Growth Fund................................. $ 250,467
70,382 WM VT Growth Fund.......................................... 1,573,750
96,512 WM VT Growth & Income Fund................................. 1,637,801
59,314 WM VT International Growth Fund............................ 688,635
87,445 WM VT Money Market Fund.................................... 87,445
42,975 WM VT Northwest Fund....................................... 470,152
89,867 WM VT Short Term High Quality Bond Fund.................... 219,275
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost $4,464,566*)......................... 99.6% 4,927,525
OTHER ASSETS AND LIABILITIES (Net)........................... 0.4 22,268
----- ----------
NET ASSETS................................................... 100.0% $4,949,793
===== ==========
</TABLE>
- -------------
* Aggregate cost for federal tax purposes is $4,498,356.
Conservative Growth Portfolio
<TABLE>
<CAPTION>
Shares Value
------- -----------
<C> <S> <C>
INVESTMENT COMPANY SECURITIES - 99.3%
35,840 WM VT Emerging Growth Fund............................... $ 522,906
105,451 WM VT Growth Fund........................................ 2,357,882
216,507 WM VT Growth & Income Fund............................... 3,674,127
165,732 WM VT International Growth Fund.......................... 1,924,149
543,124 WM VT Money Market Fund.................................. 543,124
39,654 WM VT Northwest Fund..................................... 433,818
222,053 WM VT Short Term High Quality Bond Fund.................. 541,808
-----------
Total Investment Company Securities
(Cost $9,520,432)....................................... 9,997,814
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount
---------
<C> <S> <C>
REPURCHASE AGREEMENT - 1.9%
(Cost $192,000)
$192,000 Agreement with Boston Safe Deposit & Trust Company, 4.250%
dated 12/31/1998, to be repurchased at $192,091 on
01/04/1999, collateralized by $205,000 Student Loan
Marketing Association, 4.848% due 02/08/1999 (Market
Value $192,000).......................................... 192,000
-------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost $9,712,432*)........................ 101.2% 10,189,814
OTHER ASSETS AND LIABILITIES (Net).......................... (1.2) (117,290)
----- -----------
NET ASSETS.................................................. 100.0% $10,072,524
===== ===========
</TABLE>
- -------------
* Aggregate cost for federal tax purposes is $9,769,468.
Balanced Portfolio
<TABLE>
<CAPTION>
Shares Value
--------- -----------
<C> <S> <C>
INVESTMENT COMPANY SECURITIES - 99.4%
38,703 WM VT Emerging Growth Fund............................. $ 564,677
87,576 WM VT Growth Fund...................................... 1,958,200
180,110 WM VT Growth & Income Fund............................. 3,056,469
179,240 WM VT International Growth Fund........................ 2,080,981
1,716,970 WM VT Money Market Fund................................ 1,716,970
469,363 WM VT Short Term High Quality Bond Fund................ 1,145,245
56,551 WM VT U.S. Government Securities Fund.................. 571,727
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost $10,648,601*)....................... 99.4% 11,094,269
OTHER ASSETS AND LIABILITIES (Net).......................... 0.6 67,294
----- -----------
NET ASSETS.................................................. 100.0% $11,161,563
===== ===========
</TABLE>
- -------------
* Aggregate cost for federal tax purposes is $10,668,617.
<TABLE>
<CAPTION>
Shares Value
------ ----------
<C> <S> <C>
INVESTMENT COMPANY SECURITIES - 81.6%
2,435 WM VT Growth Fund.......................................... $ 54,445
11,040 WM VT Growth & Income Fund................................. 187,343
4,971 WM High Yield Fund......................................... 44,690
17,489 WM VT Income Fund.......................................... 179,090
87,699 WM VT Money Market Fund.................................... 87,699
89,832 WM VT Short Term High Quality Bond Fund.................... 219,189
12,943 WM VT U.S. Government Securities Fund...................... 130,857
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost $881,700*)........................... 81.6% 903,313
OTHER ASSETS AND LIABILITIES (Net)........................... 18.4 204,048
----- ----------
NET ASSETS................................................... 100.0% $1,107,361
===== ==========
</TABLE>
- -------------
* Aggregate cost for federal tax purposes is $884,635.
Income Portfolio
<TABLE>
<CAPTION>
Shares Value
------ --------
<C> <S> <C>
INVESTMENT COMPANY SECURITIES - 100.3%
13,018 WM High Yield Fund........................................... $117,037
24,724 WM VT Income Fund............................................ 253,177
90,687 WM VT Money Market Fund...................................... 90,687
84,551 WM VT Short Term High Quality Bond Fund...................... 206,304
16,265 WM VT U.S. Government Securities Fund........................ 164,435
--------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost $840,090*)............................. 100.3% 831,640
OTHER ASSETS AND LIABILITIES (Net)............................. (0.3) (2,496)
----- --------
NET ASSETS..................................................... 100.0% $829,144
===== ========
</TABLE>
- -------------
* Aggregate cost for federal tax purposes is $840,972.
See Notes to Financial Statements.
79
<PAGE>
notes to financial statements
WM Variable Trust
1. Organization and Business
The WM Variable Trust (the "Trust") was organized under the laws of the Common-
wealth of Massachusetts on January 29, 1993 as a business entity commonly known
as a "Massachusetts business trust." The Trust is registered under the Invest-
ment Company Act of 1940, as amended (the "1940 Act"), as an open-end manage-
ment investment company. The Trust offers fifteen managed investment funds,
consisting of ten funds: the Money Market Fund (the "Money Fund"); the Short
Term High Quality Bond, U.S. Government Securities and Income Funds (the "Bond
Funds"); the Bond & Stock, Growth & Income, Growth, Northwest, Emerging Growth
and International Growth Funds (the "Equity Funds"); (collectively the "Funds")
and five portfolios: Income, Flexible Income, Balanced, Conservative Growth and
Strategic Growth 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, discontinued the offering of shares
on November 6, 1997, and re-commenced operations on April 23, 1998. Through in-
vestment in certain of the Funds and certain other funds (collectively, the
"Underlying Funds"), the Portfolios offer a range of asset allocation strate-
gies designed to accommodate different investment philosophies and goals.
WM Advisors, Inc. (the "Advisor" or "WM Advisors"), a wholly-owned subsidiary
of Washington Mutual, Inc. ("Washington Mutual"), a publicly owned financial
services company, serves as investment advisor to the Trust. Sierra Investment
Advisors Corporation ("Sierra Advisors") served as investment advisor to the
Trust prior to January 30, 1998. Sierra Advisors became an indirect wholly-
owned subsidiary of Washington Mutual as a result of a merger between its par-
ent, Great Western Financial Corporation and Washington Mutual.
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 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 par-
ticular market segment represented by each Underlying Fund, and the varying de-
grees of potential investment risk and reward represented by each Portfolio's
investments in those market segments and their corresponding Underlying Funds.
WM Advisors may alter these percentage ranges when it deems appropriate. The
assets of each Portfolio will be allocated among the Underlying Funds in accor-
dance with its investment objective and WM Advisor's outlook for the economy
and the financial markets. 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 Portfo-
lios in the preparation of their financial statements.
Portfolio valuation:
A security that is primarily traded on a U.S. exchange (including securities
traded through the Nasdaq National Market System) is valued at the last sale
price on that exchange or, if there were no sales during the day, at the mean
of the current day's bid and asked prices. Securities traded only on over-the-
counter markets (other than the Nasdaq National Market System and U.S. Govern-
ment Securities) are valued at the closing over-the-counter bid prices, or if
no sale occurred on such day, at the mean of the current day's bid and asked
prices. An option is generally valued at the last sale price or, in the absence
of a last sale price, at the mean of the current day's bid and asked prices.
Short term debt securities that mature in 60 days or less are valued at amor-
tized cost. The value of a foreign security is determined in its national cur-
rency as of the close of trading on the foreign exchange on which it is traded
or as of 4:00 p.m. Eastern Time, if that is earlier, and that value is then
converted into its U.S. dollar equivalent at the foreign exchange rate in ef-
fect at noon, Eastern Time, on the day the value of the foreign security is de-
termined. 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 set-
tlement price for a like contract acquired on the day on which the futures con-
tract is being valued.
Debt securities of U.S. issuers (other than U.S. Government Securities and
short-term investments), including municipal securities, are valued by one or
more independent pricing services (each a "Pricing Service") retained by the
Trust. When, in the
80
<PAGE>
notes to financial statements (continued)
WM Variable Trust
judgment of a Pricing Service, market quotations for these securities are read-
ily available, they are valued at the mean between the quoted bid prices and
asked prices. Securities for which market quotations are not readily available
are valued at fair value as determined by or under the direction of the Board
of Trustees, which may rely on the assistance of one or more Pricing Services.
The procedures of each Pricing Service are reviewed periodically by the offi-
cers of the Trusts under the general supervision and responsibility of the
Board of Trustees.
Money Fund: The investments of the Money Fund are valued on the basis of amor-
tized 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.
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 ob-
tained 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 Portfolios: Underlying Funds are valued at their net asset value per share
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 ob-
ligation of the seller to repurchase, and the Fund or Portfolio to an obliga-
tion to resell the obligation at an agreed upon price and time, thereby deter-
mining the yield during the Fund's or Portfolio's holding period. The value of
the collateral is at all times at least equal to the total amount of the repur-
chase obligation, including interest. In the event of counterparty default, the
Fund or Portfolio would seek to use the collateral to offset losses incurred.
There is potential loss to the Fund or Portfolio in the event the Fund or Port-
folio is delayed or prevented from exercising its right to dispose of the col-
lateral 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. WM Advisors, acting under the supervision of the Board of
Trustees, reviews the value of the collateral and the creditworthiness of those
banks and dealers with whom the Funds and Portfolios enter into repurchase
agreements.
Reverse repurchase agreements:
Each Fund and Portfolio, except for the Money Fund, may engage in reverse re-
purchase 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 re-
verse repurchase agreements that the Funds or Portfolios have committed to sell
are reflected in the Funds' or Portfolios' Statements of Assets and Liabili-
ties. The Funds or Portfolios require the Trust's custodian to segregate liquid
assets that at all times are in an amount equal to their obligations under re-
verse repurchase agreements. Reverse repurchase agreements involve the risks
that the market value of the securities sold by the Funds or Portfolios may de-
cline 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.
Options contracts:
All Funds and Portfolios, except the Money Fund, may engage in options con-
tracts. The Funds and Portfolios may use options contracts to manage their ex-
posure to the stock and bond markets and to fluctuations in interest rates and
currency values. The underlying principal amounts and options values are shown
in the Portfolio of Investments under the captions "Put Options Purchased on
Foreign Currency," "Call Options Written on Foreign Currency" and "Call Options
Purchased on Stock Indices." These amounts reflect each contract's exposure to
the underlying instrument at December 31, 1998. Writing puts and buying calls
tends to increase the Funds' and/or Portfolios' exposure to the underlying in-
strument. Buying puts and writing calls tends to decrease the Funds' and Port-
folios' exposure to the underlying instrument or to hedge other Fund and/or
Portfolios' investments.
81
<PAGE>
notes to financial statements (continued)
WM Variable Trust
Upon the purchase of a put option or a call option by the Funds and/or Portfo-
lios, 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 and/or Portfolios 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 and/or Portfo-
lios 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 and/or Portfolios exercise a call
option, the cost of the security which the Funds and/or Portfolios purchase
upon exercise will be increased by the premium originally paid.
When the Funds and/or Portfolios write a call option or put option, an amount
equal to the premium received by the Funds and/or Portfolios is 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 and/or Portfolios enter into a closing purchase transaction, the
Funds and/or Portfolios realize a gain (or loss if the cost of the closing pur-
chase transaction exceeds the premium received when the option was sold) with-
out 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 and/or Portfolios 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 origi-
nally paid. Options written by a Fund involve, to varying degrees, risk of loss
in excess of the option value reflected in the Statements of Assets and Liabil-
ities. The risk in writing a covered call option is that the Funds and/or Port-
folios may forego the opportunity to profit if the market price of the under-
lying security increases and the option is exercised. The risk in writing a
covered put option is that the Funds and/or Portfolios 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 and/or Portfolios 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 Funds and the Portfolios, except the Money Fund, may engage in options on
foreign currency and options on interest rate futures for hedging transactions.
Options on foreign currency and options on interest rate futures act as a hedge
to provide protection against adverse movements in the value of foreign securi-
ties 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 op-
tions may not correlate perfectly with the movement in the prices of the assets
being hedged. The lack of correlation could render the Funds' and Portfolios'
hedging strategy unsuccessful and could result in a loss to the Funds and Port-
folios. In addition, there is the risk that the Funds and Portfolios may not be
able to enter into a closing transaction because of an illiquid secondary mar-
ket or, for over-the-counter options, because of the counterparty's inability
to perform. Options written by the Funds and/or Portfolios 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 incor-
porated within the unrealized appreciation/(depreciation) shown in the Portfo-
lio of Investments under the caption "Futures Contracts." This amount reflects
each contract's exposure to the underlying instrument at December 31, 1998.
Buying futures contracts tends to increase the Fund's or Portfolio's exposure
to the underlying instrument. Selling futures contracts tends to either de-
crease 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 de-
posit 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." Sub-
sequent payments ("variation margin") are made or received by the Fund or Port-
folio each day, depending on the daily fluctuation of the value of the con-
tract. 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.
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 in
82
<PAGE>
notes to financial statements (continued)
WM Variable Trust
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 Portfo-
lio 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. dol-
lars. 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. 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 realized and unrealized net gain/(loss) from se-
curity 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 liabili-
ties. Unrealized gains and losses of securities, which result from changes in
foreign currency exchange rates as well as changes in market prices of securi-
ties, have been included in unrealized appreciation/(depreciation) of securi-
ties. 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 inter-
est and dividends recorded on the books of the Funds and/or Portfolios and the
amount actually received. The portion of foreign currency gains and losses re-
lated to fluctuation in exchange rates between the initial purchase trade date
and subsequent sale trade date is included in realized gain/(loss) from secu-
rity transactions.
Forward foreign currency contracts:
The Short Term High Quality Bond, Income, Growth & 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. These 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 commit-
ted 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, 1998. Forward for-
eign currency contracts are reflected as both a forward foreign currency con-
tract 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 for-
ward 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 re-
alized 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 cur-
rency contracts used for hedging purposes limit the risk of loss due to a de-
cline 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 un-
able to meet the terms of their contracts. The fund's Advisor and/or Sub-advi-
sor will enter into forward foreign currency contracts only with parties ap-
proved 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 Bond Funds, in order to seek a high level of current income, may enter into
dollar roll transactions with financial institutions to take advantage of op-
portunities 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
83
<PAGE>
notes to financial statements (continued)
WM Variable Trust
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 ac-
crued 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 in-
terest 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 transac-
tion 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 cur-
rencies, interest rates, commodities, inflation, indices, or other reference
instruments. Indexed securities may be more volatile than the reference instru-
ment 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 as-
sets of the Money Fund, may be invested in securities that are not readily mar-
ketable, 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, futures contracts and options, to the ex-
tent a liquid secondary market does not exist for the instruments, futures con-
tracts and options thereon; (4) certain over-the-counter options; (5) for the
Money Fund and Growth & 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 regis-
tered 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"). Rule 144A Securities generally may be resold only
to other qualified institutional buyers. If a particular investment in Rule
144A securities is determined to be illiquid under guidelines established by
the Board of Trustees, that investment will be included within the 15%/10% lim-
itation, as applicable, on investments 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 ac-
crual basis and consists of interest accrued and, if applicable, discount ac-
creted less premiums amortized. Premiums on bonds can be amortized on the basis
of any of the following methods: yield-to-maturity, straight-line, or yield-to-
call. Discounts can be accreted using yield-to-maturity or straight-line meth-
ods. Premiums and discount on mortgage-backed securities are amortized or ac-
creted using only the straight-line method. Dividend income is recorded on the
ex-dividend date, except that certain dividends from foreign securities are re-
corded 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 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, Flexible Income and Income Portfolios are declared and paid
quarterly. Dividends from net investment income of the Equity Funds and the
Strategic Growth and Conservative Growth Portfolios are
84
<PAGE>
notes to financial statements (continued)
WM Variable Trust
declared and 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. Additional
distributions of net investment income and capital gains for each Fund may be
made at the discretion of the Board of Trustees in order to avoid the applica-
tion of a 4% non-deductible excise tax on certain undistributed amounts of or-
dinary income and capital gains. Income distributions and capital gain distri-
butions are determined in accordance with income tax regulations which may dif-
fer from generally accepted accounting principles. These differences are pri-
marily due to differing treatments of income and gains on various investment
securities held by the Funds or Portfolios, organizational costs, dividends
payable, redesignated distributions and differing characterizations of distri-
butions made by each Fund or Portfolio as a whole. Net investment income per
share calculations in the financial highlights for the year ended December 31,
1998 exclude these adjustments:
<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>
Money Market Fund....... $ (983) $ 983 $ --
Short Term High Quality
Bond Fund.............. -- (93,520) 93,520
U.S. Government
Securities Fund........ (915) (19,953) 20,868
Income Fund............. (932) (16,182) 17,114
Growth Fund............. (932) 610,738 (609,806)
Emerging Growth Fund.... -- 151,824 (151,824)
International Growth
Fund................... (932) 1,333,807 (1,332,875)
Strategic Growth
Portfolio.............. (4,006) 92,370 88,364
Conservative Growth
Portfolio.............. (4,006) 197,840 (193,834)
Balanced Portfolio...... (4,006) 181,456 (177,450)
Flexible Income
Portfolio.............. 2,334 1,240 (3,574)
Income Portfolio........ (23) 645 (622)
</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 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 pro-
rated share of expenses of the Underlying Funds.
Other:
The Bond Funds 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 in-
terest 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 Short Term
High Quality Bond, U.S. Government Securities, Emerging Growth and Interna-
tional Growth Funds may purchase mortgage-backed securities that are floating
rate, inverse floating rate and variable rate obligations. The Money Fund and
Growth & 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 pur-
chase to rated instruments that may be purchased by such Fund, as determined by
the Advisor or Sub-advisor. Moreover, while there may be no active secondary
market 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 and accrued interest on the note at any time and may resell the
85
<PAGE>
notes to financial statements (continued)
WM Variable Trust
note at any time to a third party. The absence of such an active secondary mar-
ket, 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 in-
terest 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. Accord-
ingly, the duration of an inverse floater may exceed its stated final maturity.
3. Investment Advisory, Sub-Advisory, Administration Fees and Other
Transactions
WM Advisors serves as investment advisor to the Trust. Sierra Advisors served
as investment advisor to the Trust prior to January 30, 1998. The Advisor is
entitled to a monthly fee based on a percentage of the average daily net assets
of each Fund at the following annual rates:
<TABLE>
<CAPTION>
Fees on
Net Assets Fees on
Equal to Net Assets
or Less Than Exceeding
Name of Fund $500 million $500 million
- ------------ ------------ ------------
<S> <C> <C>
Money Market Fund..................................... .500% .400%
U.S. Government Securities Fund....................... .600% .500%
Income Fund........................................... .650% .500%
Bond & Stock Fund..................................... .625% .500%
Northwest Fund........................................ .625% .500%
</TABLE>
<TABLE>
<CAPTION>
Fees on
Net Assets
Fees on Exceeding
Net Assets $200 million and Fees on
Equal to Equal to or Net Assets
or Less Than Less Than Exceeding
$200 million $500 million $500 million
------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
Short Term High Quality
Bond Fund.............. .500% .450% .400%
<CAPTION>
Fees on Fees on Fees on
Net Assets Net Assets Net Assets
Fees on Exceeding Exceeding Exceeding
Net Assets $100 million $200 million $400 million Fees on
Equal to and Equal to and Equal to and Equal to Net 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 & Income Fund.... .800% .750% .700% .650% .575%
<CAPTION>
Fees on
Net Assets Fees on
Equal to Net Assets
or Less Than Exceeding
$25 million $25 million
------------ ----------------
<S> <C> <C> <C> <C> <C>
Growth Fund............. .950% .875%
<CAPTION>
Fees on
Net Assets
Fees on Exceeding
Net Assets $25 million Fees on
Equal to and Equal to Net Assets
or Less Than or Less Than Exceeding
$25 million $500 million $500 million
------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
Emerging Growth Fund.... .900% .850% .750%
<CAPTION>
Fees on
Net Assets
Fees on Exceeding
Net Assets $50 million Fees on
Equal to And Equal to Net Assets
or Less Than or Less Than Exceeding
$50 million $125 million $125 million
------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
International Growth
Fund................... .950% .850% .750%
</TABLE>
As investment advisor to the Portfolios, WM Advisors provides its proprietary
asset allocation services to the Portfolios, formulates the Portfolios' invest-
ment policies, analyzes economic and market trends, exercises investment dis-
cretion over the assets of
86
<PAGE>
notes to financial statements (continued)
WM Variable Trust
the Portfolios and monitors the allocation of each Portfolio's assets and each
Portfolio's performance. For its investment advisory services to the Portfo-
lios, WM Advisors 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 as-
sets.
WM Shareholder Services, Inc. (the "Administrator"), an indirect wholly-owned
subsidiary of Washington Mutual, serves as administrator to each Fund and Port-
folio. For it's services as administrator, each Fund or Portfolio pays the Ad-
ministrator a monthly fee of 0.18% and 0.15% respectively, of the value of each
Fund's or Portfolio's average daily net assets. Prior to January 30, 1998, Si-
erra Fund Administration Corporation served as administrator to the Portfolios
for the same fee.
The Advisor has agreed to waive a portion of its management fees and/or reim-
burse expenses for the year ended December 31, 1998. Fees voluntarily waived
and expenses absorbed by WM Advisors for the year ended December 31, 1998 are
as follows:
<TABLE>
<CAPTION>
Name of Fund Fees Waived Expenses Absorbed
- ------------ ----------- -----------------
<S> <C> <C>
Money Market Fund................................. $55,203 $ --
Bond & Stock Fund................................. 6,017 3,330
Northwest Fund.................................... 5,624 5,568
International Growth Fund......................... 63,407 --
Strategic Growth Portfolio........................ 2,303 7,063
Conservative Growth Portfolio..................... 4,897 3,958
Balanced Portfolio................................ 5,610 3,592
Flexible Income Portfolio......................... 329 3,325
Income Portfolio.................................. 240 11,567
</TABLE>
Custodian fees for certain of the Funds and Portfolios have been reduced by
credits allowed by the custodian for uninvested cash balances. These Funds and
Portfolios could have invested this cash in income producing securities. Fees
reduced by credits allowed by the custodian for the year ended December 31,
1998 are shown separately in the Statement of Operations.
4. Trustees' Fees
No officer or employee of Washington Mutual or its subsidiaries receives any
compensation from the Trust for serving as an officer or Trustee to the Trust.
The Trust, together with other mutual funds advised by WM Advisors, Inc., pays
each Trustee who is not an officer or employee of Washington Mutual or its sub-
sidiaries, $18,000 per annum plus $3,000 per board meeting attended or $1,000
per board meeting attended by telephone. Trustees are also reimbursed for
travel and out-of-pocket expenses. The Chairman of each committee receives $500
per committee meeting attended.
Pursuant to an exemptive order granted by the Securities and Exchange Commis-
sion, 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 accor-
dance with the Plan, are invested in mutual fund shares. Upon termination of
the Plan, Trustees that have deferred compensation 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 Trusts' assets.
87
<PAGE>
notes to financial statements (continued)
WM Variable Trust
5. Purchases and Sales of Securities
The aggregate cost of purchases and proceeds from sales of securities, exclud-
ing U.S. Government and short-term investments, for the year ended December 31,
1998 were as follows:
<TABLE>
<CAPTION>
Name of Fund Purchases Sales
- ------------ ------------ ------------
<S> <C> <C>
Short Term High Quality Bond Fund.................... $ 17,624,900 $ 2,614,479
U.S. Government Securities Fund...................... -- 7,420,988
Income Fund.......................................... 2,164,584 2,917,331
Growth & Income Fund................................. 89,298,626 84,393,320
Growth Fund.......................................... 142,826,532 173,868,731
Bond & Stock Fund.................................... 1,509,292 150,811
Northwest Fund....................................... 2,008,433 309,756
Emerging Growth Fund................................. 41,608,840 46,487,224
International Growth Fund............................ 76,192,709 64,510,296
Strategic Growth Portfolio........................... 4,813,636 895,493
Conservative Growth Portfolio........................ 9,985,324 1,678,131
Balanced Portfolio................................... 10,097,924 1,874,513
Flexible Income Portfolio............................ 1,037,820 273,059
Income Portfolio..................................... 1,039,263 200,167
</TABLE>
The aggregate cost of purchases and proceeds from sales of U.S. Government se-
curities, excluding short-term investments, for the year ended December 31,
1998 were as follows:
<TABLE>
<CAPTION>
Name of Fund Purchases Sales
- ------------ ----------- -----------
<S> <C> <C>
Short Term High Quality Bond Fund...................... $ 7,548,516 $ 4,318,455
U.S. Government Securities Fund........................ 11,412,635 35,135,896
Income Fund............................................ -- 1,262,005
Growth & Income Fund................................... 692,560 730,078
Bond & Stock Fund...................................... 562,075 165,113
</TABLE>
At December 31, 1998, aggregate gross unrealized appreciation for all securi-
ties 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..................... $ 288,220 $ 64,948
U.S. Government Securities Fund....................... 2,517,432 51,278
Income Fund........................................... 3,110,585 779,033
Growth & Income Fund.................................. 25,971,488 7,036,033
Growth Fund........................................... 50,994,742 967,909
Bond & Stock Fund..................................... 142,904 78,434
Northwest Fund........................................ 354,131 110,071
Emerging Growth Fund.................................. 7,725,612 3,678,656
International Growth Fund............................. 7,843,650 4,409,021
Strategic Growth Portfolio............................ 501,948 72,779
Conservative Growth Portfolio......................... 575,198 154,852
Balanced Portfolio.................................... 594,616 168,964
Flexible Income Portfolio............................. 23,179 4,501
Income Portfolio...................................... -- 9,332
</TABLE>
88
<PAGE>
notes to financial statements (continued)
WM Variable Trust
Information regarding dollar roll transactions by the U.S. Government Securi-
ties Fund is as follows:
<TABLE>
<CAPTION>
U.S. Government
Dollar Roll Transactions: Securities Fund
- ------------------------- ---------------
<S> <C>
Maximum amount outstanding during the year...................... $7,213,723
Average amount outstanding during the year*..................... $ 374,511
Average monthly shares outstanding during the year.............. 5,304,453
Average debt per share outstanding during the year.............. $ 0.07
</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, 1998.
Fee income earned for the year ended December 31, 1998 by the U.S. Government
Securities Fund for dollar roll transactions aggregated $3,422.
Information regarding reverse repurchase agreement transactions by the U.S.
Government Securities Fund is as follows:
<TABLE>
<CAPTION>
Reverse Repurchase Agreements:
- ------------------------------
<S> <C>
Maximum amount outstanding during the year......................... $20,698,000
Average amount outstanding during the year*........................ $ 923,776
Average monthly shares outstanding during the year................. 5,304,453
Average debt per share outstanding during the year................. $ 0.17
</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, 1998.
Interest rates ranged from 5.40% to 6.30% during the year. Interest paid for
the year ended December 31, 1998, on borrowings by the U.S. Government Fund un-
der reverse repurchase agreements aggregated $68,542.
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 Money Market,
Short Term High Quality Bond, U.S. Government Securities, 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 distribu-
tion under Federal and state securities regulations, are being amortized on a
straight-line basis over a period of five years 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 unamortized deferred organizational expenses in the same pro-
portion 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
As of December 31, 1998, 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 Expiring in 2006
- ------------ ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Money Market Fund....... $ -- $ -- $ -- $ -- $ 425
Short Term High Quality
Bond Fund.............. 87,775 71,035 241,115 75,877 1,627
U.S. Government
Securities Fund........ -- 1,079,738 -- 160,620 --
Income Fund............. -- 1,172,218 878,516 144,318 --
Bond & Stock Fund....... -- -- -- -- 215
International Growth
Fund................... -- -- -- -- 5,783,082
</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.
89
<PAGE>
notes to financial statements (continued)
WM Variable Trust
9. Geographic and Industry Concentration and Risk Factors
All Funds, except the U.S. Government Securities Fund, may invest in securities
of foreign companies and foreign governments. There are certain risks involved
in investing in foreign securities. These risks include those resulting from
future adverse political and economic developments and the possible imposition
of currency exchange restrictions or other foreign laws or restrictions.
In addition, the Money Fund may invest at least 25% of its assets in bank obli-
gations. 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 associ-
ated with interest rate volatility, changes in Federal and state laws and regu-
lations governing the banking industry and the inability of borrowers to pay
principal and interest when due. In addition, foreign banks present risks simi-
lar to those investing in foreign securities generally and are not subject to
the same reserve requirements and other regulations as U.S. banks.
Investing in the Underlying Funds through the Portfolios involves certain addi-
tional expenses and tax results that would not be present in a direct invest-
ment 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 WM Advisors determines that it is appropriate to dispose of such se-
curities.
Certain Underlying Funds may: invest a portion of their assets in foreign secu-
rities; enter into forward foreign currency transactions; lend their portfolio
securities; enter into stock index, interest rate and currency futures con-
tracts, and options on such contracts; enter into interest rate swaps or pur-
chase 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 Northwest Fund concentrates its investments in companies located or doing
business in the Northwest region of the United States. The Northwest Fund is
not intended as a complete investment program and could be adversely impacted
by economic trends within the region.
The Strategic 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 as-
sets 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 securi-
ties in developing or emerging markets countries. Certain Portfolios invest as
much as 50% of their total assets in the International Growth Fund, which in-
vests 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 invest-
ing in foreign securities including those resulting from future adverse politi-
cal 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, WM Advisors serves as, the investment advi-
sor of each underlying fund and Portfolio. Conflicts may arise as the Advisor
seeks to fulfill its 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 the Advisor.
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 addi-
tional 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 ef-
fects 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 other-
wise do so. These transactions could also have tax consequences if sales of se-
curities resulted in gains and could also increase transaction costs. The Advi-
sors is committed to minimizing the impact of Portfolio transactions on the Un-
derlying Funds. The Advisor will nevertheless face conflicts in fulfilling its
respective responsibilities.
90
<PAGE>
notes to financial statements (continued)
WM Variable Trust
10. Reorganization
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 by, the value of the shares issued by, and
the total net assets of the Short Term High Quality Bond Fund were $6,827,201,
$16,658,370 and $11,943,903 respectively. The total net assets of the Short
Term Global Government Fund were $16,658,370. The total net assets of the Short
Term High Quality Bond Fund after the acquisition were $28,602,273.
91
<PAGE>
independent auditors' report
To the Trustees and Shareholders of
WM Variable Trust:
We have audited the accompanying statements of assets and liabilities of WM
Variable Trust (the "Trust") (including WM Variable Trust Money Market Fund, WM
Variable Trust Short Term High Quality Bond Fund, WM Variable Trust U.S. Gov-
ernment Securities Fund, WM Variable Trust Income Fund, WM Variable Trust
Growth & Income Fund, WM Variable Trust Growth Fund, WM Variable Trust Bond &
Stock Fund, WM Variable Trust Northwest Fund, WM Variable Trust Emerging Growth
Fund, WM Variable Trust International Growth Fund, WM Variable Trust Strategic
Growth Portfolio, WM Variable Trust Conservative Growth Portfolio, WM Variable
Trust Balanced Portfolio, WM Variable Trust Flexible Income Portfolio and WM
Variable Trust Income Portfolio), including the portfolios of investments, as
of December 31, 1998, and the related statements of operations, changes in net
assets and financial highlights for the year then ended. These financial state-
ments and financial highlights are the responsibility of the Trust's manage-
ment. Our responsibility is to express an opinion on these financial statements
and financial highlights based on our audit. The financial statements of the
Trust for the year ended December 31, 1997 and financial highlights for the
four years ended December 31, 1997 were audited by other auditors whose report,
dated February 20, 1998, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial high-
lights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at Decem-
ber 31, 1998, by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An au-
dit also includes assessing the accounting principles used and significant es-
timates made by management, as well as evaluating the overall financial state-
ment presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Trust as of De-
cember 31, 1998, the results of its operations, the changes in its net assets
and its financial highlights for the year then ended in conformity with gener-
ally accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California
February 5, 1999
92
