1933 Act Registration No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-14AE
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective [ ] Post-Effective
Amendment No. Amendment No.
MET INVESTORS SERIES TRUST
(J.P. Morgan Quality Bond Portfolio)
[Exact Name of Registrant as Specified in Charter]
Area Code and Telephone Number: (800) 848-3854
610 Newport Center Drive
Suite 1350
Newport Beach, California 92660
-----------------------------------
(Address of Principal Executive Offices)
Elizabeth M. Forget
President
Met Investors Series Trust
610 Newport Center Drive
Suite 1350
Newport Beach, California 92660
-----------------------------------------
(Name and Address of Agent for Service)
Copies of All Correspondence to:
Robert N. Hickey, Esq.
Sullivan & Worcester LLP
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
The Registrant has registered an indefinite amount of securities of its
J.P. Morgan Quality Bond Portfolio under the Securities Act of 1933 pursuant to
Section 24(f) under the Investment Company Act of 1940; accordingly, no fee is
payable herewith. A Rule 24f-2 Notice for the Registrant's fiscal year ended
December 31, 2000 will be filed with the Commission on or about March 31, 2001.
It is proposed that this filing will become effective on December 14,
2000 pursuant to Rule 488 of the Securities Act of 1933.
<PAGE>
SECURITY FIRST TRUST
11365 West Olympic Boulevard
Los Angeles, CA 90064
December , 2000
Dear Contract Owner:
As an Owner of a variable annuity contract or variable life insurance
policy (the "Contract") issued by Security First Life Insurance Company (the
"Insurance Company"), you have the right to instruct the Insurance Company how
to vote certain shares of the Neuberger Berman Bond Series (the "Portfolio") of
Security First Trust (the "Trust") at a Special Meeting of Shareholders to be
held on January 26, 2001. Although you are not directly a shareholder of the
Portfolio, some or all of your Contract value is invested, as provided by your
Contract, in the Portfolio. Accordingly, you have the right under your Contract
to instruct the Insurance Company how to vote the Portfolio's shares that are
attributable to your Contract at the Special Meeting. Before the Special
Meeting, I would like your vote on the important proposal described in the
accompanying Prospectus/Proxy Statement.
The Prospectus/Proxy Statement describes the proposed reorganization of
the Trust's Neuberger Berman Bond Series. All of the assets of the Portfolio
would be acquired by a new series of Met Investors Series Trust, the J.P. Morgan
Quality Bond Portfolio, in exchange for shares of such new series and the
assumption by the series of the identified liabilities of the Portfolio. The new
series' investment objective and policies will be similar to those of the
Portfolio. In addition, as described in the Prospectus/Proxy Statement, a
portfolio of another affiliated investment company is proposed to be merged into
the new series of Met Investors Series Trust. You will receive Class A shares of
the new series having an aggregate net asset value equal to the aggregate net
asset value of your Portfolio's shares. Details about the new series' investment
objective, performance, and management team are contained in the attached
Prospectus/Proxy Statement. For federal income tax purposes, the transaction is
expected to be a non-taxable event for shareholders and Owners.
The Board of Trustees has approved the proposal for the Portfolio and
recommends that you vote FOR the proposal.
I realize that this Prospectus/Proxy Statement will take time to
review, but your vote is very important. Please take the time to familiarize
yourself with the proposal. If you attend the meeting, you may give your voting
instructions in person. If you do not expect to attend the meeting, either
complete, date, sign and return the enclosed voting instructions form in the
enclosed postage-paid envelope, or vote by calling toll free 1-800-_________, 24
hours a day. You may also fax your completed and signed voting instructions form
(both front and back sides) to us at 1-800-________. Instructions on how to
complete the voting instructions form or vote by telephone are included
immediately after the Notice of Special Meeting.
<PAGE>
If you have any questions about the voting instructions form please
call the Security First Trust at 1-800-______ or our proxy solicitor,
________________, at 1-800- . If we do not receive your completed voting
instructions form or your telephone vote within several weeks, you may be
contacted by ________________, who will remind you to pass on your voting
instructions.
Thank you for taking this matter seriously and participating in this
important process.
Sincerely,
Richard C. Pearson
President
Security First Trust
<PAGE>
COVA SERIES TRUST
One Tower Lane
Suite 3000
Oakbrook Terrace, Illinois 60181
December , 2000
Dear Contract Owner:
As an Owner of a variable annuity contract or variable life insurance
policy (the "Contract") issued by Cova Financial Services Life Insurance
Company, Cova Financial Life Insurance Company, or First Cova Life Insurance
Company (the "Insurance Companies"), you have the right to instruct the
Insurance Companies how to vote certain shares of the Quality Bond Portfolio
(the "Portfolio") of Cova Series Trust (the "Trust") at a Special Meeting of
Shareholders to be held on January 26, 2001. Although you are not directly a
shareholder of the Portfolio, some or all of your Contract value is invested, as
provided by your Contract, in the Portfolio. Accordingly, you have the right
under your Contract to instruct the Insurance Companies how to vote the
Portfolio's shares that are attributable to your Contract at the Special
Meeting. Before the Special Meeting, I would like your vote on the important
proposal described in the accompanying Prospectus/Proxy Statement.
The Prospectus/Proxy Statement describes the proposed reorganization of
the Trust's Quality Bond Portfolio. All of the assets of the Portfolio would be
acquired by a new series of Met Investors Series Trust, the J.P. Morgan Quality
Bond Portfolio, in exchange for shares of such new series and the assumption by
the series of the identified liabilities of the Portfolio. The new series'
investment objective and policies will be substantially identical to those of
the Trust's Quality Bond Portfolio. In addition, as described in the
Prospectus/Proxy Statement, a portfolio of another affiliated investment company
is proposed to be merged into the new series of Met Investors Series Trust. You
will receive Class A shares of the new series having an aggregate net asset
value equal to the aggregate net asset value of your Portfolio's shares. Details
about the new series' investment objective, performance, and management team are
contained in the attached Prospectus/Proxy Statement. For federal income tax
purposes, the transaction is expected to be a non-taxable event for shareholders
and Owners.
The Board of Trustees has approved the proposal for the Portfolio and
recommends that you vote FOR the proposal.
I realize that this Prospectus/Proxy Statement will take time to
review, but your vote is very important. Please take the time to familiarize
yourself with the proposal. If you attend the meeting, you may give your voting
instructions in person. If you do not expect to attend the meeting, either
complete, date, sign and return the enclosed voting instructions form in the
enclosed postage-paid envelope, or vote by calling toll free 1-800-____________,
24 hours a day. You may also fax your completed and signed voting instructions
form (both front and back sides) to us at 1-800-________. Instructions on how to
complete the voting instructions form or vote by telephone are included
immediately after the Notice of Special Meeting.
<PAGE>
If you have any questions about the voting instructions form please
call the Portfolio at 1-800- - or our proxy solicitor, _________________, at
1-800- . If we do not receive your completed
voting instructions form or your telephone vote within several weeks, you may be
contacted by _________________, who will remind you to pass on your voting
instructions.
Thank you for taking this matter seriously and participating in this
important process.
Sincerely,
Mark Reynolds
President
Cova Series Trust
<PAGE>
SECURITY FIRST TRUST
11365 West Olympic Boulevard
Los Angeles, California 90064
Neuberger Berman Bond Series
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On January 26, 2001
To the Shareholders of Security First Trust:
NOTICE IS HEREBY GIVEN THAT a Special Meeting of the Shareholders of
the Neuberger Berman Bond Series of Security First Trust (the "Trust"), a
Massachusetts business trust, will be held at the offices of Met Investors
Series Trust, 610 Newport Center Drive, Suite 1350, Newport Beach, California
92660 on January 26, 2001 at 10:30 a.m. Pacific Time and any adjournments
thereof (collectively, the "Special Meeting") for the following purpose:
To consider and act upon an Agreement and Plan of Reorganization (the
"Plan") providing for the acquisition of all of the assets of Neuberger
Berman Bond Series by J.P. Morgan Quality Bond Portfolio ("Met JPM
Quality Bond" ), a series of Met Investors Series Trust, in exchange
for shares of Met JPM Quality Bond and the assumption by Met JPM
Quality Bond of the identified liabilities of Neuberger Berman Bond
Series. The Plan also provides for distribution of these shares of Met
JPM Quality Bond to shareholders of Neuberger Berman Bond Series in
liquidation and subsequent termination of Neuberger Berman Bond Series.
A vote in favor of the Plan is a vote in favor of the liquidation and
dissolution of Neuberger Berman Bond Series.
The Board of Trustees has fixed the close of business on November ,
2000 as the record date for determination of shareholders entitled to notice of
and to vote at the Special Meeting.
By order of the Board of Trustees
Cheryl J. Finney
Assistant Secretary
December , 2000
CONTRACT OWNERS WHO DO NOT EXPECT TO ATTEND THE SPECIAL MEETING ARE REQUESTED TO
COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING VOTING INSTRUCTIONS FORM IN THE
ENCLOSED ENVELOPE, WHICH NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES, OR
FOLLOW THE INSTRUCTIONS IN THE MATERIALS RELATING TO TELEPHONIC VOTING.
INSTRUCTIONS FOR THE PROPER EXECUTION OF THE VOTING INSTRUCTIONS FORM ARE SET
FORTH ON THE INSIDE COVER OF THIS NOTICE. IT IS IMPORTANT THAT THE FORM BE
RETURNED PROMPTLY.
<PAGE>
COVA SERIES TRUST
One Tower Lane
Suite 3000
Oakbrook Terrace, Illinois 60181
Quality Bond Portfolio
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On January 26, 2001
To the Shareholders of Cova Series Trust:
NOTICE IS HEREBY GIVEN THAT a Special Meeting of the Shareholders of
the Quality Bond Portfolio of Cova Series Trust (the "Trust"), a Massachusetts
business trust, will be held at the offices of Met Investors Series Trust, 610
Newport Center Drive, Suite 1350, Newport Beach, California 92660 on January 26,
2001 at 10:00 a.m. Pacific Time and any adjournments thereof (collectively, the
"Special Meeting") for the following purpose:
To consider and act upon an Agreement and Plan of
Reorganization (the "Plan") providing for the acquisition of
all of the assets of Quality Bond Portfolio by J. P. Morgan
Quality Bond Portfolio ("Met JPM Quality Bond"), a series of
Met Investors Series Trust, in exchange for shares of Met JPM
Quality Bond and the assumption by Met JPM Quality Bond of the
identified liabilities of Quality Bond Portfolio. The Plan
also provides for distribution of these shares of Met JPM
Quality Bond to shareholders of Quality Bond Portfolio in
liquidation and subsequent termination of Quality Bond
Portfolio. A vote in favor of the Plan is a vote in favor of
the liquidation and dissolution of Quality Bond Portfolio.
The Board of Trustees has fixed the close of business on November ,
2000 as the record date for determination of shareholders entitled to notice of
and to vote at the Special Meeting.
By order of the Board of Trustees
Bernard J. Spaulding
Secretary
December , 2000
CONTRACT OWNERS WHO DO NOT EXPECT TO ATTEND THE SPECIAL MEETING ARE REQUESTED TO
COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING VOTING INSTRUCTIONS FORM IN THE
ENCLOSED ENVELOPE, WHICH NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES, OR
FOLLOW THE INSTRUCTIONS IN THE MATERIALS RELATING TO TELEPHONIC VOTING.
INSTRUCTIONS FOR THE PROPER EXECUTION OF THE VOTING INSTRUCTIONS FORM ARE SET
FORTH ON THE INSIDE COVER OF THIS NOTICE. IT IS IMPORTANT THAT THE FORM BE
RETURNED PROMPTLY.
<PAGE>
INSTRUCTIONS FOR SIGNING VOTING INSTRUCTIONS FORM
The following general rules for signing voting instructions forms may
be of assistance to you and avoid the time and expense to the Trust involved in
validating your vote if you fail to sign your voting instructions form properly.
1. Individual Accounts: Sign your name exactly as it appears in the
registration on the voting instructions form.
2. Joint Accounts: Either party may sign, but the name of the party signing
should conform exactly to the name shown in the registration on the voting
instructions form.
3. All Other Accounts: The capacity of the individual signing the voting
instructions form should be indicated unless it is reflected in the form of
registration. For example:
Registration Valid Signature
Corporate Accounts
(1) ABC Corp. . . . . . . . . . . . . . . . . . . . . . .ABC Corp.
(2) ABC Corp. . . . . . . . . . . . . . . . . .John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer . . . . . . . . . . . . . . . John Doe
(4) ABC Corp. Profit Sharing Plan . . . . . . . .John Doe, Trustee
Trust Accounts
(1) ABC Trust . . . . . . . . . . . . . . . . Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee
u/t/d 12/28/78 . . . . . . . . . . . . . . . . . .Jane B. Doe
Custodial or Estate Accounts
(1) John B. Smith, Cust.
f/b/o John B. Smith, Jr. UGMA . . . . . . . . . John B. Smith
(2) Estate of John B. Smith . . . . . John B. Smith, Jr., Executor
<PAGE>
INSTRUCTIONS FOR TELEPHONE VOTING
To vote your voting instructions form by telephone follow the four easy steps
below. Or, if you prefer, you may send back your signed voting instructions form
in the postage paid envelope provided.
1. Read the accompanying proxy information and voting instructions form.
2. Identify the _____________-digit "CONTROL NO." in the middle of your voting
instructions form. This control number is the key to casting your vote over
the telephone.
3. Dial 1-888-____________
4. Follow the simple recorded instructions.
<PAGE>
ACQUISITION OF ASSETS OF
QUALITY BOND PORTFOLIO
a series of
Cova Series Trust
One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181
(800) 831-5433
and
NEUBERGER BERMAN BOND SERIES
a series of
Security First Trust
11365 West Olympic Boulevard
Los Angeles, California 90064
(800) 283-4536
BY AND IN EXCHANGE FOR SHARES OF
J.P. MORGAN QUALITY BOND PORTFOLIO
a series of
Met Investors Series Trust
610 Newport Center Drive, Suite 1350
Newport Beach, California 92660
(800) 848-3854
PROSPECTUS/PROXY STATEMENT
DATED DECEMBER , 2000
This Prospectus/Proxy Statement is being furnished in connection with
proposed Agreements and Plans of Reorganization (each a "Plan" and collectively,
the "Plans") which will be submitted to shareholders of Quality Bond Portfolio
(the "Cova Portfolio") and of Neuberger Berman Bond Series ( the "SF Portfolio")
for consideration at a Special Meeting of shareholders of each of Cova Series
Trust and Security First Trust to be held on January 26, 2001 at 10:00 a.m.
(10:30 a.m. with respect to Security First Trust) Pacific Time at the offices of
Met Investors Series Trust, 610 Newport Center Drive, Suite 1350, Newport Beach,
California 92660, and any adjournments thereof (the "Meeting").
GENERAL
The Boards of Trustees of Cova Series Trust and Security First Trust
have respectively approved the proposed reorganizations of the Cova Portfolio
and the SF Portfolio into J.P. Morgan Quality Bond Portfolio, a series of Met
Investors Series Trust (the "Met Portfolio").
The Portfolios involved in the proposed reorganizations are referred to
in this Prospectus/Proxy Statement as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------ ---------------------------------------------------------
Cova Portfolio Met Portfolio
------------------------------------------------------------ ---------------------------------------------------------
<S> <C>
------------------------------------------------------------ ---------------------------------------------------------
Quality Bond Portfolio J.P. Morgan Quality Bond Portfolio
("Cova Quality Bond") ("Met JPM Quality Bond")
------------------------------------------------------------
------------------------------------------------------------
SF Portfolio
------------------------------------------------------------
------------------------------------------------------------
Neuberger Berman Bond Series
("SF Bond")
------------------------------------------------------------ ---------------------------------------------------------
</TABLE>
Cova Series Trust and Security First Trust are each Massachusetts
business trusts and Met Investors Series Trust is a recently organized Delaware
business trust. The Met Portfolio is a new series organized specifically to
receive all the assets and carry on the business of Cova Quality Bond, into
which, effectively, SF Bond will be merged. The Cova Portfolio, the SF Portfolio
and the Met Portfolio are sometimes referred to in this Prospectus/Proxy
Statement individually as a "Portfolio" and collectively as the "Portfolios".
Cova Financial Services Life Insurance Company and its affiliated
insurance companies are the record owners of the Cova Portfolio's shares and at
the Meeting will vote the shares of the Cova Portfolio held in their applicable
separate accounts. Security First Life Insurance Company is the record owner of
substantially all of the SF Portfolio's shares and at the Meeting will vote the
shares of the SF Portfolio held in its separate account. Cova Financial Services
Life Insurance Company, its affiliated insurance companies and Security First
Life Insurance Company are collectively referred to as the "Insurance
Companies". The Insurance Companies are indirect wholly-owned subsidiaries of
Metropolitan Life Insurance Company ("MetLife"), a New York life insurance
company and a leading provider of insurance and financial products and services
to individual and group customers.
As an owner of a variable annuity contract or a variable life insurance
policy (a "Contract") issued by an Insurance Company, you have the right to
instruct the respective Insurance Company how to vote the shares of the Cova
Portfolio or the SF Portfolio that are attributable to your Contract at the
Meeting. Although you are not directly a shareholder of the Portfolios, you have
this right because some or all of your Contract value is invested, as provided
by your Contract, in the Cova Portfolio or the SF Portfolio. For simplicity, in
this Prospectus/Proxy Statement:
o "Record Holder" of the Cova Portfolio or the SF Portfolio refers
to the Insurance Company which holds the Cova Portfolio's or SF
Portfolio's shares of record;
o "shares" refers generally to your shares of beneficial interest in a
Portfolio; and
o "shareholder" or "Contract Owner" refers to you.
In the reorganizations, all of the assets of the Cova Portfolio and the
SF Portfolio will be acquired by the Met Portfolio in exchange for Class A
shares of the Met Portfolio and the assumption by the Met Portfolio of the
identified liabilities of the Cova Portfolio and SF Portfolio (each a
"Reorganization" and collectively the "Reorganizations"). If the Reorganizations
are approved, Class A shares of the Met Portfolio will be distributed to the
Record Holders in liquidation of the Cova Portfolio and the SF Portfolio, and
the Cova Portfolio and the SF Portfolio will be terminated as a series of Cova
Series Trust or Security First Trust, as applicable. You will then hold that
number of full and fractional shares of the Met Portfolio which have an
aggregate net asset value equal to the aggregate net asset value of your shares
of the Cova Portfolio or SF Portfolio in which you currently are a shareholder.
The Cova Portfolio is a separate diversified series of Cova Series
Trust, an open-end management investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). The SF Portfolio is a separate
diversified series of Security First Trust, an open-end management company
registered under the 1940 Act. The Met Portfolio is a separate diversified
series of Met Investors Series Trust, also an open-end management investment
company registered under the 1940 Act. Because Met Investors Series Trust was
recently organized, it has conducted no operations to date. The investment
objectives of the Cova Portfolio and the SF Portfolio are, respectively,
identical to or similar to those of the Met Portfolio, and are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------- -------------------------------------------------------------
Portfolio Investment Objectives
------------------------------------------------------- -------------------------------------------------------------
<S> <C>
------------------------------------------------------- -------------------------------------------------------------
Cova Quality Bond and Met JPM Quality Bond To provide
a high total return
consistent with moderate
risk of capital and
maintenance of
liquidity.
------------------------------------------------------- -------------------------------------------------------------
------------------------------------------------------- -------------------------------------------------------------
SF Bond To achieve the
highest long-term
investment income with
the preservation of
capital. The secondary
objective is growth of
principal and income by
investing in common and
preferred stocks.
------------------------------------------------------- -------------------------------------------------------------
</TABLE>
The investment strategies for Cova Quality Bond and for Met JPM Quality Bond are
substantially identical, and the investment strategies for SF Bond are similar
to those of Met JPM Quality Bond.
This Prospectus/Proxy Statement explains concisely the information
about the Met Portfolio that you should know before voting on a Reorganization.
Please read it carefully and keep it for future reference. Additional
information concerning the Met Portfolio is provided in the "Additional
Information" section of this Prospectus/Proxy Statement. Additional information
concerning the Cova Portfolio, the SF Portfolio and the Reorganizations is
contained in the documents described below, all of which have been filed with
the Securities and Exchange Commission ("SEC"):
<TABLE>
<CAPTION>
--------------------------------------------------------------------- --------------------------------------------------
Information about the Cova Portfolio: How to Obtain this Information:
------------------------------------ -------------------------------
--------------------------------------------------------------------- --------------------------------------------------
<S> <C>
--------------------------------------------------------------------- --------------------------------------------------
Prospectuses of Cova Series Trust relating to Cova Quality Bond, Copies are available upon request and without
dated May 1, 2000 charge if you:
Statement of Additional Information of Cova Series Trust relating o Write to Cova Series Trust at the
to Cova Quality Bond, dated May 1, 2000 address listed on the cover page of this
Prospectus/Proxy Statement; or
Annual Report of Cova Series Trust relating to Cova Quality Bond,
for the year ended December 31, 1999 o Call (800) 831-5433 toll-free.
Semi-Annual Report of Cova Series Trust relating to Cova Quality
Bond, for the six-month period ended June 30, 2000
--------------------------------------------------------------------- --------------------------------------------------
--------------------------------------------------------------------- --------------------------------------------------
Information about the SF Portfolio: How to Obtain this Information:
---------------------------------- ------------------------------
--------------------------------------------------------------------- --------------------------------------------------
--------------------------------------------------------------------- --------------------------------------------------
Prospectus of Security First Trust relating to SF Bond, dated Copies are available upon request and without
November 30, 2000 charge if you:
Statement of Additional Information of Security First Trust o Write to Security First Trust at the
relating to SF Bond, dated November 30, 2000 address listed on the cover page of this
Prospectus/Proxy Statement; or
Annual Report of Security First Trust relating to SF Bond, for the
year ended July 31, 2000 o Call (800) 283-4536 toll free
--------------------------------------------------------------------- --------------------------------------------------
--------------------------------------------------------------------- --------------------------------------------------
Information about the Reorganizations: How to Obtain this Information:
------------------------------------- -------------------------------
--------------------------------------------------------------------- --------------------------------------------------
--------------------------------------------------------------------- --------------------------------------------------
Statement of Additional Information dated December , 2000, A copy is available upon request and without
which relates to this Prospectus/Proxy Statement charge if you:
and the Reorganizations
o Write to Met Investors Series Trust at
the address listed on the cover page of
this Prospectus/Proxy Statement; or
o Call (800) 848-3854 toll-free.
--------------------------------------------------------------------- --------------------------------------------------
</TABLE>
You can also obtain copies of any of these documents without charge on
the EDGAR database on the SEC's Internet site at http://www.sec.gov. Copies are
available for a fee by electronic request at the following E-mail address:
[email protected], or from the Public Reference Branch, Office of Consumer
Affairs and Information Services, Securities and Exchange Commission,
Washington, D.C. 20549.
Information relating to the Cova Portfolio and the SF Portfolio
contained in the Prospectuses of Cova Series Trust dated May 1, 2000 and the
Prospectus of Security First Trust dated November 30, 2000, respectively, is
incorporated by reference in this document. (This means that such information is
legally considered to be part of this Prospectus/Proxy Statement.) The Statement
of Additional Information dated December ___, 2000 relating to this
Prospectus/Proxy Statement and the Reorganizations, which includes the financial
statements of Cova Series Trust relating to the Cova Portfolio for the year
ended December 31, 1999 and the six months ended June 30, 2000, and the
financial statements of Security First Trust relating to the SF Portfolio for
the year ended July 31, 2000 (the Met Portfolio has not yet issued financial
statements), is incorporated by reference in its entirety in this document.
-------------------------------------------------------------------------------
The Securities and Exchange Commission has not determined that the information
in this Prospectus/Proxy Statement is accurate or adequate, nor has it approved
or disapproved these securities. Anyone who tells you otherwise is committing a
criminal offense.
------------------------------------------------------------------------------
An investment in a Portfolio of Met Investors Series Trust through a
Contract:
o is not a deposit of, or guaranteed by, any bank
o is not insured by the FDIC, the Federal Reserve Board or any other government
agency o is not endorsed by any bank or government agency o involves investment
risk, including possible loss of the purchase payment of your original
investment
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY......................................................................8
Why are the Reorganizations being proposed?.........................8
What are the key features of the Reorganizations?...................8
After the Reorganizations, what shares of the Met
Portfolio will I own?........................................9
How will a Reorganization affect me?................................9
How do the Trustees recommend that I vote?..........................10
How do the Portfolios' investment objectives, principal
investment strategies and risks compare?.....................10
How do other important features of the Portfolios compare?..........13
How do the Portfolios' fees and expenses compare?...................14
How do the Portfolios' performance records compare?.................15
Will I be able to purchase and redeem shares, change my
investment options, annuitize and receive distributions
the same way?................................................17
Who will be the Manager, Adviser and Portfolio Manager of
my Portfolio after the Reorganizations? What will
the management and advisory fees be after the
Reorganizations?.............................................18
What will be the primary federal tax consequences of the
Reorganizations?.............................................20
RISKS........................................................................20
Are the risk factors for the Portfolios the same?...................20
What are the primary risks of investing in each Portfolio?..........20
Are there any other risks of investing in each Portfolio?...........24
INFORMATION ABOUT THE REORGANIZATIONS........................................24
Reasons for the Reorganizations.....................................24
Agreements and Plans of Reorganization..............................27
Federal Income Tax Consequences.....................................29
Pro-forma Capitalization............................................30
Distribution of Shares..............................................31
Purchase and Redemption Procedures..................................32
Exchange Privileges.................................................32
Dividend Policy.....................................................32
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS..............................33
Form of Organization................................................33
Capitalization......................................................34
Shareholder Liability...............................................34
Shareholder Meetings and Voting Rights..............................35
Liquidation.........................................................36
Liability and Indemnification of Trustees...........................37
VOTING INFORMATION CONCERNING THE MEETING....................................37
Shareholder Information.............................................40
Control Persons and Principal Holders of Securities.................41
FINANCIAL STATEMENTS AND EXPERTS.............................................41
LEGAL MATTERS................................................................42
ADDITIONAL INFORMATION.......................................................42
OTHER BUSINESS...............................................................51
EXHIBIT A-1 Form of Agreement and Plan of Reorganization
(SF Bond)...............................................A-1-1
EXHIBIT A-2 Form of Agreement and Plan of Reorganization
(Cova Quality Bond)....................................A-2-1
EXHIBIT B Management's Discussion and Analysis.....................B-1
<PAGE>
SUMMARY
This section summarizes the primary features and consequences of the
Reorganizations. It may not contain all of the information that is important to
you. To understand the Reorganizations, you should read this entire
Prospectus/Proxy Statement and the exhibits.
This summary is qualified in its entirety by reference to the
additional information contained elsewhere in this Prospectus/Proxy Statement,
the Prospectuses and Statement of Additional Information relating to the Cova
Portfolio, the Prospectus and Statement of Additional Information relating to
the SF Portfolio and the forms of the Agreements and Plans of Reorganization,
which are attached to this Prospectus/Proxy Statement as Exhibits A-1 and A-2.
Why are the Reorganizations being proposed?
The effect of the Reorganization of SF Bond is to merge the Portfolio
into Cova Quality Bond, which will become a series of a Delaware business trust.
Further, the Reorganizations are also part of an overall restructuring designed
to provide operating efficiencies which will result from maintaining a single
trust of investment portfolios to be offered in connection with the Insurance
Companies' insurance products and to employee benefit plans, consistency across
the entire group of those investment portfolios and the enhanced flexibility
afforded by a Delaware business trust in comparison to the Cova Portfolio's and
the SF Portfolio's previous form of organization. To accomplish the
restructuring, the holders of beneficial interests in shares of other portfolios
of Cova Series Trust and Security First Trust are also being asked to approve
reorganizations of those portfolios into portfolios of Met Investors Series
Trust.
What are the key features of the Reorganizations?
Each Plan sets forth the key features of the Reorganization to which it
relates. For a complete description of the Reorganizations, see Exhibits A-1 and
A-2. Each Plan generally provides for the following:
o the transfer of all of the assets of the Cova Portfolio or the SF
Portfolio to the Met Portfolio in exchange for Class A shares of the
Met Portfolio;
o the assumption by the Met Portfolio of the identified liabilities
of the Cova Portfolio or the SF Portfolio, as applicable (the
identified liabilities consist only of those liabilities reflected
on the Cova Portfolio's or the SF Portfolio's statement of assets
and liabilities determined immediately preceding the
Reorganization);
o the liquidation of the Cova Portfolio or the SF Portfolio by
distribution of Class A shares of the Met Portfolio to the Cova
Portfolio's or the SF Portfolio's shareholders, as applicable; and
o the structuring of each Reorganization as a tax-free reorganization
for federal income tax purposes.
The Reorganizations are expected to be completed on or about February
5, 2001.
After the Reorganizations, what shares of the Met Portfolio will I own?
If you own shares of Cova Quality Bond or SF Bond, you will own Class A
shares of Met JPM Quality Bond.
The new shares you receive will have the same total value as your
shares of Cova Quality Bond or SF Bond, respectively, as of the close of
business on the day immediately prior to the Reorganizations.
How will a Reorganization affect me?
It is anticipated that the Reorganizations will benefit you as well as
the Record Holders as follows:
o COST SAVINGS: The operating expenses of the portfolios offered by
Met Investors Series Trust may potentially decrease over the long
term in comparison to those of the Cova Portfolio and the SF
Portfolio due to the spreading of fixed costs over a larger pool
of assets in the Met Investors Series Trust.
o OPERATING EFFICIENCIES: Upon the combination of the Cova Portfolio
and the SF Portfolio, operating efficiencies may be achieved by
the Met Portfolio because it will have a greater level of assets.
As of September 30, 2000, Cova Quality Bond's total assets were
approximately $92 million, and SF Bond's total assets were
approximately $25 million.
o MORE INVESTMENT CHOICES: It is anticipated that on the effective
date of the Reorganizations, Met Investors Series Trust will offer
more investment portfolios than are currently available through
Cova Series Trust or Security First Trust. Your Insurance Company
may choose to make these additional portfolios available under
your Contract.
The Reorganizations will not affect your Contract rights. The value of
your Contract will remain the same immediately following a Reorganization. Met
Investors Series Trust will sell its shares on a continuous basis at net asset
value only to insurance companies and to employee benefit plans that are
qualified plans under federal tax law. Your Insurance Company will keep the same
separate account. Your Contract values will be allocated to the same separate
account and that separate account will invest in the Met Portfolio after the
Reorganizations. After the Reorganizations your Contract values will depend on
the performance of the Met Portfolio rather than that of your Cova Portfolio or
SF Portfolio. Neither Cova Series Trust, Security First Trust nor Contract
Owners will bear any costs of the Meeting, any additional proxy solicitation or
any adjourned session. All of the costs of the Reorganizations will be paid by
MetLife or one of its affiliates.
Like the Cova Portfolio and the SF Portfolio, the Met Portfolio will
declare and pay dividends from net investment income and will distribute net
realized capital gains, if any, to the Insurance Company separate accounts (not
to you) at least once a year. These dividends and distributions will continue to
be reinvested by your Insurance Company in additional Class A shares of the Met
Portfolio. Dividends and distributions paid on the SF Portfolio are
automatically reinvested in additional shares of the Portfolio, unless a
shareholder elects to have dividends and/or distributions paid in cash.
How do the Trustees recommend that I vote?
The Trustees of Cova Series Trust, including the Trustees who are not
"interested persons" (the "Disinterested Trustees"), as such term is defined in
the 1940 Act, have concluded that the Reorganization would be in the best
interest of the shareholders of Cova Quality Bond, and that their interests will
not be diluted as a result of the Reorganization. Accordingly, the Trustees have
submitted the Plan for the approval of the shareholders of Cova Quality Bond.
The Trustees of Security First Trust, including the Disinterested
Trustees, have concluded that the Reorganization would be in the best interest
of the shareholders of SF Bond and that their interests will not be diluted as a
result of the Reorganization. Accordingly, the Trustees have submitted the Plan
for the approval of the shareholders of SF Bond.
THE TRUSTEES RECOMMEND THAT YOU VOTE FOR THE PROPOSED
REORGANIZATION WHICH APPLIES TO YOUR COVA PORTFOLIO OR SF
PORTFOLIO.
The Trustees of Met Investors Series Trust have also approved the Plans on
behalf of the Met Portfolio.
How do the Portfolios' investment objectives, principal investment
strategies and risks compare?
The Met Portfolio is a new portfolio organized specifically to receive
all the assets and carry on the business of Cova Quality Bond. Consequently, the
investment objective of each such Portfolio is identical, and the investment
strategies of each such Portfolio are substantially identical. The investment
objectives of SF Bond are substantially similar to that of the Met Portfolio,
and the investment strategies of such Portfolio are similar. The investment
objective of the Cova Portfolio and the Met Portfolio is non-fundamental, which
means that it may be changed by vote of the Trustees and without shareholder
approval, while the investment objectives of the SF Portfolio are fundamental,
which means that they cannot be changed without shareholder approval.
The following tables summarize a comparison of the Cova Portfolio, the
SF Portfolio and the Met Portfolio with respect to their investment objectives
and principal investment strategies, as set forth in the Prospectuses and
Statement of Additional Information relating to the Cova Portfolio, the
Prospectus and Statement of Additional Information relating to the SF Portfolio,
and in the "Additional Information" section of this Prospectus/Proxy Statement
relating to the Met Portfolio.
<TABLE>
<CAPTION>
------------------ -------------------------------------------------------------------------------
Cova Quality Bond and Met JPM Quality Bond
------------------ -------------------------------------------------------------------------------
<S> <C>
------------------ -------------------------------------------------------------------------------
Investment To provide a high total return consistent with moderate risk of
Objective capital and maintenance of liquidity.
------------------ -------------------------------------------------------------------------------
------------------ -------------------------------------------------------------------------------
Principal Under normal circumstances invest at least 65% of total assets in
Investment investment grade fixed income securities rated at least A, or if
Strategies unrated are of comparable quality; fixed income investments
include U.S. government and agency securities, corporate securities including bonds,
debentures and notes, non-mortgage asset-backed,
mortgage-backed and mortgage-related securities.
Invest in securities believed to be undervalued.
Currently average duration and average maturity of their
debt securities are approximately 5.43 years and 16.10
years, respectively.
Up to 30% of investments may be in investment grade debt
securities rated Baa or BBB or better, or if unrated are
of comparable quality.
Up to 5% of investments may be in high yield debt securities.
Up to 20% of assets may be invested in foreign debt
securities, including Eurodollar bonds, Yankee bonds,
securities of foreign governments and governmental
entities; may also invest in securities of issuers located
in emerging market countries.
Derivatives such as options and futures may be used for
hedging and risk management (to adjust duration or yield
curve exposure, or to establish or adjust exposure to
particular securities markets or currencies).
------------------ -------------------------------------------------------------------------------
------------------ -------------------------------------------------------------------------------
SF Bond
------------------ -------------------------------------------------------------------------------
------------------ -------------------------------------------------------------------------------
Investment To achieve the highest long-term investment income with the preservation of
Objectives capital. The secondary objective is growth of principal and income by
investing in common and preferred stocks.
------------------ -------------------------------------------------------------------------------
------------------ -------------------------------------------------------------------------------
Principal Under normal circumstances invests at least 65% of total assets in
Investment investment grade fixed income debt securities including U.S.
Strategies government securities, corporate debt securities, non-mortgage
asset-backed securities and mortgage-backed and mortgage-related securities.
Currently average duration and average maturity of its
debt securities are approximately 4.75 years and 9.46
years, respectively.
Up to 20% of total assets may be invested in high yield
debt securities.
Invests in residential and commercial mortgages (secured
by a first lien).
U.S. dollar denominated foreign fixed income debt securities (including
securities of issuers located in emerging market countries) and Canadian
government securities may also be purchased.
------------------ -------------------------------------------------------------------------------
</TABLE>
The principal risks of investing in the Met Portfolio are the same as
those of investing in the Cova Portfolio and are similar to those of investing
in the SF Portfolio. They include:
For all Portfolios:
o Interest rate risk - the value of investments in debt securities
or stocks purchased primarily for dividend income may decline when
prevailing interest rates rise or increase when interest rates go
down; due to the increasing difficulty of predicting changes in
interest rates over longer periods of time, fixed income
securities with longer maturities are more volatile than those
with shorter maturities
o Credit risk - the value of investments in debt securities may be
adversely affected if an issuer fails to pay principal and
interest on the obligation on a timely basis
o Foreign investment risk - investments in foreign securities
involve risks relating to political, social and economic
developments abroad, as well as risks resulting from differences
between the regulations to which U.S. and foreign issuers are
subject
o Mortgage-related security risk - changes in interest rates
generally affect the value of a mortgage-backed security; some
mortgage-backed securities may be structured so that they may be
particularly sensitive to changes in interest rates; and
investments in mortgage-related securities are subject to special
risks if the issuer of the security prepays the principal prior to
the security's maturity (including increased volatility in the
price of the security and wider fluctuations in response to
interest rates)
o Asset-backed security risk - if non-mortgage asset-backed
securities fail to pay interest or repay principal, the assets
backing these securities may not be sufficient to support the
payments on the securities
o High yield debt security risk - high yield debt securities, or
junk bonds, range from those for which the prospect for repayment
of principal and interest is predominantly speculative to those
which are currently in default on principal or interest payments;
although these securities have a greater potential return than
higher quality bonds, they may be more susceptible to market risk
and credit risk because they are less secure financially and more
sensitive to market downturns
For Cova Quality Bond and Met JPM Quality Bond:
o Emerging markets risk - investments in emerging markets include
all of the risks of investments in foreign securities and are
subject to severe price declines
o Derivatives risk - the use of options, futures and other
derivatives, although designed to hedge the Portfolio's
investments against currency exposure, may not be successful and
could result in losses to the Portfolio
For a detailed discussion of the Portfolios' risks, see the section entitled
"Risks" below.
Each Portfolio may invest some or all of its assets in money market
instruments or utilize other investment strategies as a temporary defensive
measure during, or in anticipation of, adverse market conditions. This strategy,
which would be employed only in seeking to avoid losses, is inconsistent with
the Portfolios' principal investment objectives and strategies, and could result
in lower returns and loss of market opportunities.
The Portfolios have other investment policies, practices and
restrictions which, together with their related risks, are also set forth in the
Prospectuses and Statement of Additional Information relating to the Cova
Portfolio, the Prospectus and Statement of Additional Information of the SF
Portfolio, the "Additional Information" section below with respect to the Met
Portfolio and the Statement of Additional Information relating to this
Prospectus/Proxy Statement.
Because the Cova Portfolio, the SF Portfolio and the Met Portfolio have
either identical or similar investment objectives and identical or similar
investment strategies, it is not anticipated that the securities held by the
Cova Portfolio or the SF Portfolio will be sold in significant amounts in order
to comply with the policies and investment practices of the Met Portfolio in
connection with a Reorganization.
How do other important features of the Portfolios compare?
o Cova Investment Advisory Corporation is the investment adviser of
the Cova Portfolio; Met Investors Advisory Corp., formerly known
as Security First Investment Management Corporation, is the
investment adviser to the SF Portfolio and the Manager of Met
Investors Series Trust.
o J.P. Morgan Investment Management Inc., the investment sub-adviser
of the Cova Portfolio, serves in the same capacity with respect to
the Met Portfolio pursuant to an Advisory Agreement with Met
Investors Advisory Corp. and is called the Adviser of the Met
Portfolio. Unlike the investment adviser to Cova Series Trust or
the previous investment adviser to Security First Trust, Met
Investors Advisory Corp. will have the authority, upon receipt of
permission from the SEC and with the approval of the Board of
Trustees of Met Investors Series Trust, to change the Met
Portfolio's Adviser without shareholder approval under certain
conditions.
o As a result of the Reorganizations, the portfolio managers of Cova
Quality Bond and the Met Portfolio will be the same.
The Met Portfolio's Manager, Adviser and portfolio managers are
described in more detail below.
How do the Portfolios' fees and expenses compare?
The Cova Portfolio and the SF Portfolio offer one class of shares. The
Met Portfolio currently offers two classes of shares (Classes A and B) but Class
B is not part of the Reorganizations. You will not pay any initial or deferred
sales charge in connection with the Reorganizations.
The following tables allow you to compare the various fees and expenses
that you may pay for buying and holding shares of the Cova Portfolio and the SF
Portfolio and Class A shares of the Met Portfolio. The table entitled "Met JPM
Quality Bond Pro Forma" shows you what the fees and expenses are estimated to be
assuming the Reorganizations take place.
The amounts for shares of the Cova Portfolio and the SF Portfolio set
forth in the following tables and in the examples are based on the expenses for
the Cova Portfolio and the SF Portfolio for the fiscal year ended December 31,
1999 and July 31, 2000, respectively. The Met Portfolio is newly organized and
has not commenced operations to date. The amounts for Class A shares of the Met
Portfolio set forth in the following table and in the examples are based on what
the expenses of the Met Portfolio would have been for the fiscal year ended
December 31, 1999.
The shares of the Cova Portfolio, the SF Portfolio and the Class A
shares of the Met Portfolio are not charged any initial or deferred sales
charge, any 12b-1 fees, or any other transaction fees.
THESE TABLES DO NOT REFLECT THE CHARGES AND FEES ASSESSED BY THE INSURANCE
COMPANY UNDER YOUR CONTRACT.
Fees and Expenses (as a percentage of average daily net assets)
<TABLE>
<CAPTION>
----------------------------- ---------------------- ----------------------- ----------------------
Cova Quality Bond SF Bond Met JPM Quality Bond
Pro Forma (Class A)
----------------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C>
----------------------------- ---------------------- ----------------------- ----------------------
Management Fees 0.54% 0.50% 0.54%
----------------------------- ---------------------- ----------------------- ----------------------
----------------------------- ---------------------- ----------------------- ----------------------
Other Expenses 0.17% 0.18% 0.11%
----------------------------- ---------------------- ----------------------- ----------------------
----------------------------- ---------------------- ----------------------- ----------------------
Total Annual Portfolio 0.71%* 0.68% 0.65%**
Operating Expenses
----------------------------- ---------------------- ----------------------- ----------------------
</TABLE>
* Since January 1, 1999 Cova Investment Advisory Corporation has voluntarily
reimbursed operating expenses (exclusive of brokerage, advisory or other
portfolio transaction expenses, or expenses of litigation, indemnification,
taxes or other extraordinary expenses) in excess of approximately 0.10% of
average daily net assets for Cova Quality Bond. Including waivers and
reimbursements, the total annual portfolio operating expenses for the year ended
December 31, 1999 would have been 0.64% for Cova Quality Bond.
** Met Investors Advisory Corp. and the Met Investors Series Trust have entered
into an Expense Limitation Agreement whereby for a period of at least one year
from commencement of operations the Total Annual Portfolio Operating Expenses of
the Met Portfolio will not exceed 0.65% in any year in which the Agreement is in
effect. Under certain circumstances, any fees waived or expenses reimbursed by
the Manager may, with the approval of the Trust's Board of Trustees, be repaid
to the Manager.
The tables below show examples of the total expenses you would pay on a
$10,000 investment over one-, three-, five- and ten-year periods. The examples
are intended to help you compare the cost of investing in the Cova Portfolio and
the SF Portfolio versus the Met Portfolio pro forma, assuming the
Reorganizations take place. The examples assume a 5% average annual return, that
you redeem all of your shares at the end of each time period, that the
Portfolios' operating expenses are before waiver (if applicable), that they
remain the same and that you reinvest all of your dividends. To the extent that
fees are waived, the expenses would be lower. The examples are for illustration
only, and your actual costs may be higher or lower.
THE EXAMPLES DO NOT REFLECT THE FEES AND EXPENSES IMPOSED BY THE
CONTRACTS FOR WHICH THE PORTFOLIOS SERVE AS INVESTMENT VEHICLES. IF THOSE FEES
AND EXPENSES HAD BEEN INCLUDED, YOUR COSTS WOULD BE HIGHER.
Examples of Portfolio Expenses
<TABLE>
<CAPTION>
----------------------- ------------------------------------- ----------------------------------------
Met JPM Quality Bond
Cova Quality Bond Pro Forma (Class A)
----------------------- ------------------------------------- ----------------------------------------
<S> <C> <C>
----------------------- ------------------------------------- ----------------------------------------
After 1 year $ $
----------------------- ------------------------------------- ----------------------------------------
----------------------- ------------------------------------- ----------------------------------------
After 3 years $ $
----------------------- ------------------------------------- ----------------------------------------
----------------------- ------------------------------------- ----------------------------------------
After 5 years $ $
----------------------- ------------------------------------- ----------------------------------------
----------------------- ------------------------------------- ----------------------------------------
After 10 years $ $
----------------------- ------------------------------------- ----------------------------------------
----------------------- ------------------------------------- ---------------------------------------
SF Bond Met JPM Quality Bond
Pro Forma (Class A)
----------------------- ------------------------------------- ---------------------------------------
----------------------- ------------------------------------- ---------------------------------------
After 1 year $67 $
----------------------- ------------------------------------- ---------------------------------------
----------------------- ------------------------------------- ---------------------------------------
After 3 years $211 $
----------------------- ------------------------------------- ---------------------------------------
----------------------- ------------------------------------- ---------------------------------------
After 5 years $822 $
----------------------- ------------------------------------- ---------------------------------------
----------------------- ------------------------------------- ---------------------------------------
After 10 years $ $
----------------------- ------------------------------------- ---------------------------------------
</TABLE>
How do the Portfolios' performance records compare?
The following charts show how the Cova Portfolio and the SF Portfolio
have performed in the past. Past performance is not an indication of future
results.
PERFORMANCE DOES NOT REFLECT THE FEES AND EXPENSES IMPOSED BY THE
CONTRACTS FOR WHICH THE PORTFOLIOS SERVE AS INVESTMENT VEHICLES. IF THOSE FEES
AND EXPENSES HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
The Met Portfolio has been recently organized and has not yet engaged
in any operations; consequently, it does not have an investment performance
record. After the Reorganizations, Met JPM Quality Bond, as the successor to
Cova Quality Bond and SF Bond, will assume and publish the investment
performance record of Cova Quality Bond.
Year-by-Year Total Return (%)
The charts below show the percentage gain or loss for the shares of
Cova Quality Bond in each full calendar year since the inception of the
Portfolio on May 1, 1996 and for shares of SF Bond for the last ten calendar
years. The charts should give you a general idea of the risks of investing in
the Cova Portfolio and the SF Portfolio by showing how a Portfolio's return has
varied from year-to-year. These charts include the effects of Portfolio
expenses. Total return amounts are based on the inception date of each
Portfolio, which may have occurred before your Contract began; accordingly, your
investment results may differ.
------------ -----------------------------------------------------------------
Cova Quality Bond
------------ ------------------------------------------------------------------
------------ ----------------------- ---------------------- ------------------
1997 1998 1999
------------ ----------------------- ---------------------- -------------------
------------ ----------------------- ---------------------- ------------------
15%
------------ ----------------------- ---------------------- -------------------
------------ ----------------------- ---------------------- -------------------
10%
------------ ----------------------- ---------------------- -------------------
------------ ----------------------- ---------------------- --------------------
5% 9.06% 8.37%
------------ ----------------------- ---------------------- -------------------
------------ ----------------------- ---------------------- -------------------
0%
------------ ----------------------- ---------------------- ------------------
------------ ----------------------- ---------------------- ------------------
-5% -1.54%
------------ ----------------------- ---------------------- ------------------
Best Quarter: ______ Quarter 199_ +____% [Must be in 1997, 8 or 9]
Worst Quarter: 2nd Quarter 1999 -1.46%
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
SF Bond
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------------ --------- --------- --------- --------- --------- --------- --------- -------- --------- ---------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
------------ --------- --------- --------- --------- --------- --------- --------- -------- --------- ---------
------------ --------- --------- --------- --------- --------- --------- --------- -------- --------- ---------
15% 16.5%
------------ --------- --------- --------- --------- --------- --------- --------- -------- --------- ---------
------------ --------- --------- --------- --------- --------- --------- --------- -------- --------- ---------
10% 14.8%
------------ --------- --------- --------- --------- --------- --------- --------- -------- --------- ---------
------------ --------- --------- --------- --------- --------- --------- --------- -------- --------- ---------
5% 6.4% 9.5% 9.1% 7.5%
------------ --------- --------- --------- --------- --------- --------- --------- -------- --------- ---------
------------ --------- --------- --------- --------- --------- --------- --------- -------- --------- ---------
0% 4.4% 2.8%
------------ --------- --------- --------- --------- --------- --------- --------- -------- --------- ---------
------------ --------- --------- --------- --------- --------- --------- --------- -------- --------- ---------
-5% -3.5% -2.6%
------------ --------- --------- --------- --------- --------- --------- --------- -------- --------- ---------
</TABLE>
Best Quarter: 2 Quarter 1995 +5.61%
Worst Quarter: 1 Quarter 1994 -2.9%
For the quarter ended September 30, 2000, the Portfolio's total return was
2.81%.
The next set of tables lists Cova Quality Bond's average annual total
return over the past one year and since inception and SF Bond's average annual
total return over the past one, five and ten years (through 12/31/1999). These
tables include the effects of Portfolio expenses and are intended to provide you
with some indication of the risks of investing in each Portfolio by comparing
its performance with an appropriate widely recognized index of securities, which
you can find at the bottom of each table. An index does not reflect fees or
expenses. It is not possible to invest directly in an index.
Average Annual Total Return (for the period ended 12/31/1999)
<TABLE>
<CAPTION>
-------------------------------------------------- ------------------ ----------------- ----------------------
Inception Date 1 Performance Since
year Inception
-------------------------------------------------- ------------------ ----------------- ----------------------
<S> <C> <C> <C>
-------------------------------------------------- ------------------ ----------------- ----------------------
Cova Quality Bond 5/1/1996 -1.54% 5.79%
-------------------------------------------------- ------------------ ----------------- ----------------------
-------------------------------------------------- ------------------ ----------------- ----------------------
Salomon Brothers Broad Investment Grade Bond
Index -0.84% 6.43%
-------------------------------------------------- ------------------ ----------------- ----------------------
</TABLE>
The Salomon Brothers Broad Investment Grade Bond Index is an unmanaged
market - capitalized weighted index which includes fixed-rate Treasury,
government sponsored, corporate (Baa/BBB or better) and mortgage
securities.
<TABLE>
<CAPTION>
-------------------------------------------- ----------------- --------------- ---------------- -----------------
Inception Date 1 5 10
year years years
-------------------------------------------- ----------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
-------------------------------------------- ----------------- --------------- ---------------- -----------------
SF Bond 7/24/87 -2.58% 4.53% 6.34%
-------------------------------------------- ----------------- --------------- ---------------- -----------------
-------------------------------------------- ----------------- --------------- ---------------- -----------------
Lehman Gov't/Corp. Bond Index -2.15% 5.54% 7.65%*
-------------------------------------------- ----------------- --------------- ---------------- -----------------
</TABLE>
* From ____, 1987
The Lehman Government/Corporate Bond Index represents an unmanaged
group of securities regarded by investors as representative of the bond
market.
For a detailed discussion of the manner of calculating total return,
please see the Statement of Additional Information relating to this
Prospectus/Proxy Statement. Generally, the calculations of total return assume
the reinvestment of all dividends and capital gain distributions on the
reinvestment date.
Important information about Cova Quality Bond is also contained in
management's discussion of Cova Quality Bond's performance, attached as Exhibit
B to this Prospectus/Proxy Statement. This information also appears in the most
recent Annual Report of Cova Series Trust relating to Cova Quality Bond.
Will I be able to purchase and redeem shares, change my investment
options, annuitize and receive distributions the same way?
A Reorganization will not affect your right to purchase and redeem
shares, to change among your Insurance Company's separate account options, to
annuitize, and to receive distributions as permitted by your Contract. After the
Reorganizations, you will be able under your current Contract to purchase
additional Class A shares of the Met Portfolio. For more information, see
"Purchase and Redemption Procedures", "Exchange Privileges" and "Dividend
Policy" below.
Who will be the Manager, Adviser and Portfolio Manager of my Portfolio
after the Reorganizations? What will the management and advisory fees
be after the Reorganizations?
Management of the Portfolios
The overall management of the Cova Portfolio, the SF Portfolio and the
Met Portfolio is the responsibility of, and is supervised by, the Boards of
Trustees of Cova Series Trust, Security First Trust and Met Investors Series
Trust, respectively.
Manager
Met Investors Advisory Corp. (the "Manager") is the investment manager
for the Met Portfolio. The Manager selects and pays the fees of the Adviser for
the Met Portfolio and monitors the Adviser's investment program. MetLife
Investors Group, an affiliate of MetLife, owns all of the outstanding common
shares of the Manager.
Facts about the Manager:
----------------------------------------------------------------------
o The Manager was formerly known as Security First Investment
Management Corporation and is an indirect subsidiary of MetLife.
o The Manager manages with its affiliates the family of investment
portfolios sold to separate accounts of MetLife's insurance
company subsidiaries to fund variable life insurance contracts and
variable annuity certificates and contracts, with assets of
approximately [$_________ as of ___________, 2000].
o The Manager is located at 610 Newport Center Drive, Suite 1350,
Newport Beach, California 92660.
----------------------------------------------------------------------
Adviser
J.P. Morgan Investment Management Inc. ("the Adviser") is the investment adviser
to the Met Portfolio. Pursuant to an Advisory Agreement with the Manager, the
Adviser furnishes continuously an investment program for the Met Portfolio,
makes day-to-day investment decisions on behalf of the Portfolio, and arranges
for the execution of Portfolio transactions.
Facts about the Adviser:
----------------------------------------------------------------------
o The Adviser is a wholly-owned subsidiary of J.P. Morgan & Co.,
Incorporated.
o The Adviser has assets under management of approximately $373 billion as
of September 30, 2000.
o The Adviser is located at 522 Fifth Avenue, New York, New York 10036.
----------------------------------------------------------------------
Portfolio Management
The day-to-day management of the Met Portfolio is handled by Jay A.
Gladieux and James J. Dougherty.
-----------------------------------------------------------------------
o Jay A. Gladieux, Vice President of the Adviser. Mr. Gladieux is a
portfolio manager in the U.S. Fixed Income Group. A J.P. Morgan
employee for the past three years, he concentrates on broad market
strategies. Prior to that, Mr. Gladieux spent 15 years at Morgan
Stanley & Co., of which the last 13 years were in the fixed income
division focusing on the mortgage, derivative, and non-dollar
businesses. He has managed Cova Quality Bond since October 2000.
o James J. Dougherty, Vice President of the Adviser. Mr. Dougherty
joined the Adviser in 1986 and is head of the Fixed Income Trading and
Strategy Implementation. Prior to his current assignment, Mr.
Dougherty was co-Head of the mortgage investment team with primary
responsibility for asset backed and commercial mortgage backed
securities investments. He has managed Cova Quality Bond since April
2000.
---------------------------------------------------------------------
Management Fees
For its management and supervision of the daily business affairs of the
Met Portfolio, the Manager is entitled to receive a monthly fee at the annual
rate of 0.55% of the Portfolio's average daily net assets up to $75 million, and
0.50% of such net assets in excess of $75 million.
The Manager may, at its discretion, reduce or waive its fee or
reimburse the Portfolio for certain of its other expenses in order to reduce the
expense ratios. Unless otherwise agreed upon, the Manager may also reduce or
cease these voluntary waivers and reimbursements at any time. In addition, as
described above, Met Investors Series Trust and the Manager have entered into an
Expense Limitation Agreement with respect to the Met Portfolio.
Advisory Fee
Under the terms of the Advisory Agreement, the Adviser is paid by the
Manager for providing advisory services to the Met Portfolio. The Met Portfolio
does not pay a fee to the Adviser.
What will be the primary federal tax consequences of the
Reorganizations?
Prior to or at the completion of the Reorganizations, the Cova
Portfolio, the SF Portfolio and the Met Portfolio will have received an opinion
from the law firm of Sullivan & Worcester LLP that the applicable Reorganization
has been structured so that no gain or loss will be realized by the Portfolio or
its Record Holders for federal income tax purposes as a result of receiving
shares of voting stock of the Met Portfolio in connection with the
Reorganization. The holding period and aggregate tax basis of shares of voting
stock of the Met Portfolio that are received by the Record Holders of the Cova
Portfolio and the SF Portfolio will be the same as the holding period and
aggregate tax basis of shares of the Cova Portfolio or the SF Portfolio
previously held by such Record Holders, provided that such shares of the Cova
Portfolio or SF Portfolio are held as capital assets. In addition, the holding
period and tax basis of the assets of the Cova Portfolio and the SF Portfolio in
the hands of the Met Portfolio as a result of the Reorganizations will be the
same as in the hands of the Cova Portfolio or the SF Portfolio immediately prior
to the Reorganizations, and no gain or loss will be recognized by the Met
Portfolio upon the receipt of the assets of the Cova Portfolio or the SF
Portfolio in exchange for voting stock of the Met Portfolio and the assumption
by the Met Portfolio of the Cova Portfolio's or the SF Portfolio's identified
liabilities. Met Investors Series Trust believes that the Contract Owners will
have no taxable income as a consequence of a Reorganization.
RISKS
Are the risk factors for the Portfolios the same?
Yes. The risk factors are essentially the same or very similar due to
the substantial similarities of the investment objectives and policies among the
Cova Portfolio, the SF Portfolio and the Met Portfolio. The risks of the Met
Portfolio are described in greater detail in the "Additional Information"
section below.
What are the primary risks of investing in each Portfolio?
An investment in each Portfolio is subject to certain risks. There is
no assurance that investment performance of the Cova Portfolio, the SF Portfolio
or the Met Portfolio will be positive or that the Portfolios will meet their
investment objectives. The following tables and discussions highlight the
primary risks associated with investment in each of the Portfolios.
<TABLE>
<CAPTION>
-------------------------------------------------- -------------------------------------------------------------------
Each of the Portfolios is subject to Interest Rate Risk.
-------------------------------------------------- -------------------------------------------------------------------
<S> <C>
-------------------------------------------------- -------------------------------------------------------------------
Cova Quality Bond/Met JPM Quality Bond Each normally invests at least 65% of its assets in fixed income
debt securities; currently average duration and average maturity
of their debt securities are approximately 5.43 years and 16.10
years, respectively.
-------------------------------------------------- -------------------------------------------------------------------
-------------------------------------------------- -------------------------------------------------------------------
SF Bond Normally invests at
least 65% of its total assets
in fixed income debt
securities; currently average
duration and average maturity
of its debt securities are
approximately 4.75 years and
9.46 years, respectively.
-------------------------------------------------- -------------------------------------------------------------------
The values of debt securities are subject to change when prevailing
interest rates change. When interest rates go up, the value of debt securities
and certain dividend paying stocks tends to fall. If your Portfolio invests a
significant portion of its assets in debt securities or stocks purchased
primarily for dividend income and interest rates rise, then the value of your
investment may decline. Alternatively, when interest rates go down, the value of
debt securities and certain dividend paying stocks may rise.
Interest rate risk will affect the price of a fixed income security
more if the security has a longer maturity because changes in interest rates are
increasingly difficult to predict over longer periods of time. Fixed income
securities with longer maturities will therefore be more volatile than other
fixed income securities with shorter maturities. Conversely, fixed income
securities with shorter maturities will be less volatile but generally provide
lower returns than fixed income securities with longer maturities. The average
maturity and duration of a Portfolio's fixed income investments will affect the
volatility of the Portfolio's share price.
------------------------------------------------ ---------------------------------------------------------------------
Each of the Portfolios is subject to Credit Risk.
------------------------------------------------ ---------------------------------------------------------------------
------------------------------------------------ ---------------------------------------------------------------------
Cova Quality Bond/Met JPM Quality Bond Each may invest in corporate and foreign government debt
securities, mortgage-backed and mortgage-related securities, and in
non-mortgage asset-backed securities.
------------------------------------------------ ---------------------------------------------------------------------
------------------------------------------------ ---------------------------------------------------------------------
SF Bond Invests in corporate debt
securities, mortgage-backed and
mortgage-related securities,
non-mortgage asset-backed
securities and Canadian
government securities.
------------------------------------------------ ---------------------------------------------------------------------
The value of debt securities is directly affected by an issuer's
ability to pay principal and interest on time. Since your Portfolio invests in
debt securities, the value of your investment may be adversely affected when an
issuer fails to pay an obligation on a timely basis. A Portfolio may also be
subject to credit risk to the extent it engages in transactions, such as
securities loans, repurchase agreements or certain derivatives, which involve a
promise by a third party to honor an obligation to the Portfolio. Such third
party may be unwilling or unable to honor its financial obligations.
---------------------------------------- ------------------------------------------------------------------------
Each of the following Portfolios is
subject to Foreign Investment Risk.
---------------------------------------- ------------------------------------------------------------------------
---------------------------------------- ------------------------------------------------------------------------
Cova Quality Bond/Met JPM Quality Bond May invest up to 20% of their total assets in foreign debt securities.
---------------------------------------- ------------------------------------------------------------------------
---------------------------------------- ------------------------------------------------------------------------
SF Bond May invest in U.S. dollar denominated foreign fixed income debt
securities and Canadian government securities.
---------------------------------------- ------------------------------------------------------------------------
Investments in foreign securities involve risks relating to political,
social and economic developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign issuers and
markets are subject. These risks may include the seizure by the government of
company assets, excessive taxation, withholding taxes on dividends and interest,
limitations on the use or transfer of portfolio assets, and political or social
instability. Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against foreign
governments. Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may be less
public information about their operations. Foreign markets may be less liquid
and more volatile than U.S. markets. Foreign securities often trade in
currencies other than the U.S. dollar, and the Portfolio may directly hold
foreign currencies and purchase and sell foreign currencies. Changes in currency
exchange rates will affect the Portfolio's net asset value, the value of
dividends and interest earned, and gains and losses realized on the sale of
foreign securities. An increase in the strength of the U.S. dollar relative to
these other currencies may cause the value of the Portfolio to decline. Certain
foreign currencies may be particularly volatile, and foreign governments may
intervene in the currency markets, causing a decline in value or liquidity of
the Portfolio's foreign currency or securities holdings. Costs of buying,
selling and holding foreign securities, including brokerage, tax and custody
costs, may be higher than those involved in domestic transactions.
------------------------------------------------ ---------------------------------------------------------------------
Each of the following
Portfolios is subject to
Mortgage-Related Security Risk.
------------------------------------------------ ---------------------------------------------------------------------
------------------------------------------------ ---------------------------------------------------------------------
Cova Quality Bond/Met JPM Quality Bond Each may invest in
mortgage-related securities,
mortgage-backed securities
including GNMA certificates and
mortgage-backed bonds and
collateralized mortgage
obligations ("CMOs").
------------------------------------------------ ---------------------------------------------------------------------
------------------------------------------------ ---------------------------------------------------------------------
SF Bond Invests in
mortgage-related and
mortgage-backed securities
including CMOs.
------------------------------------------------ ---------------------------------------------------------------------
Like other debt securities, changes in interest rates generally affect
the value of a mortgage-backed security. Additionally, some mortgage-backed
securities may be structured so that they may be particularly sensitive to
interest rates.
Investments in mortgage-related securities are also subject to special
risks of prepayment. Prepayment risk occurs when the issuer of a security can
prepay the principal prior to the security's maturity. Securities subject to
prepayment risk, including the CMOs and other mortgage-related securities that
the Portfolio can buy, generally offer less potential for gains when prevailing
interest rates decline, and have greater potential for loss when interest rates
rise. The impact of prepayments on the price of a security may be difficult to
predict and may increase the volatility of the price. In addition, early
repayment of mortgages underlying these securities may expose the Portfolio to a
lower rate of return when it reinvests the principal. Further, the Portfolio may
buy mortgage-related securities at a premium. Accelerated prepayments on those
securities could cause the Portfolio to lose a portion of its principal
investment represented by the premium the Portfolio paid.
If interest rates rise rapidly, prepayments may occur at slower rates
than expected, which could have the effect of lengthening the expected maturity
of a short- or medium-term security. That could cause its value to fluctuate
more widely in response to changes in interest rates. In turn, this could cause
the value of the Portfolio's shares to fluctuate more.
---------------------------------------- ------------------------------------------------------------------------
Each of the following Portfolios is
subject to Asset-Backed Security Risk.
---------------------------------------- ------------------------------------------------------------------------
---------------------------------------- ------------------------------------------------------------------------
Cova Quality Bond/Met JPM Quality Bond Each may invest in non-mortgage asset-backed securities.
---------------------------------------- ------------------------------------------------------------------------
---------------------------------------- ------------------------------------------------------------------------
SF Bond Invests in non-mortgage asset-backed securities.
---------------------------------------- ------------------------------------------------------------------------
Non-mortgage asset-backed securities are not issued or guaranteed by
the U.S. government or its agencies or government-sponsored entities. In the
event of a failure of these securities to pay interest or repay principal, the
assets backing these securities such as automobiles or credit card receivables
may be insufficient to support the payments on the securities.
---------------------------------------- -----------------------------------------------------------------------------
Each of the following Portfolios is subject to High Yield Debt Security
Risk.
---------------------------------------- -----------------------------------------------------------------------------
---------------------------------------- -----------------------------------------------------------------------------
Cova Quality Bond/Met JPM Quality Bond Up to 5% of investments may be in high yield debt securities.
---------------------------------------- -----------------------------------------------------------------------------
---------------------------------------- -----------------------------------------------------------------------------
SF Bond May invest up to 20% of its total assets in high yield debt securities.
---------------------------------------- -----------------------------------------------------------------------------
High yield debt securities, or junk bonds, are securities which are
rated below "investment grade" or are not rated, but are of equivalent quality.
High yield debt securities range from those for which the prospect for repayment
of principal and interest is predominantly speculative to those which are
currently in default on principal or interest payments. A Portfolio with high
yield debt securities may be more susceptible to credit risk and market risk
than a Portfolio that invests only in higher quality debt securities because
these lower-rated debt securities are less secure financially and more sensitive
to downturns in the economy. In addition, the secondary market for such
securities may not be as liquid as that for more highly rated debt securities.
As a result, the Portfolio's Adviser may find it more difficult to sell these
securities or may have to sell them at lower prices.
High yield securities are not generally meant for short-term investing.
When the Portfolio invests in high yield securities it generally seeks to
receive a correspondingly higher return to compensate it for the additional
credit risk and market risk it has assumed.
---------------------------------------- -----------------------------------------------------------------------------
Each of the following Portfolios is subject to Emerging Markets Risk
---------------------------------------- -----------------------------------------------------------------------------
---------------------------------------- -----------------------------------------------------------------------------
Cova Quality Bond/Met JPM Quality Bond May invest in securities of issuers located in emerging market countries.
---------------------------------------- -----------------------------------------------------------------------------
---------------------------------------- -----------------------------------------------------------------------------
SF Bond May invest in dollar denominated
securities of issuers located in
emerging market countries.
---------------------------------------- -----------------------------------------------------------------------------
Investments in emerging markets include all of the risks of investments
in foreign securities and are subject to severe price declines. The economic and
political structures of developing nations, in most cases, do not compare
favorably with the U.S. or other developed countries in terms of wealth and
stability, and their financial markets often lack liquidity. Such countries may
have relatively unstable governments, immature economic structures, national
policies restricting investments by foreigners and economies based on only a few
industries. For these reasons, all of the risks of investing in foreign
securities are heightened by investing in emerging markets countries. The
markets of developing countries have been more volatile than the markets of
developed countries with more mature economies. These markets often have
provided significantly higher or lower rates of return than developed markets,
and significantly greater risks, to investors.
---------------------------------------- -----------------------------------------------------------------------------
Each of the following Portfolios is
subject to Derivatives Risk.
---------------------------------------- -----------------------------------------------------------------------------
---------------------------------------- -----------------------------------------------------------------------------
Cova Quality Bond Met/JPM Quality Bond Derivatives such as options and futures
may be used for hedging and risk
management (including to establish or
adjust exposure to particular
securities markets or currencies).
---------------------------------------- -----------------------------------------------------------------------------
</TABLE>
A Portfolio's investments in derivatives to manage currency exposure
can significantly increase the Portfolio's exposure to market risk or risk of
non-performance of the counterparty. Derivatives also involve the risk of
mispricing or improper valuation and the risks that changes in value of the
derivative may not correlate perfectly with the relevant assets, rates and
indices.
Are there any other risks of investing in each Portfolio?
As of the fiscal year ended July 31, 2000, the portfolio turnover rate
for the SF Portfolio was 177% and the portfolio turnover rate for the Cova
Portfolio for the year ended December 31, 1999 was approximately 370%. Annual
turnover rate of 100% or more is considered high and results in greater
brokerage and other transaction costs which are borne by a Portfolio and its
shareholders.
INFORMATION ABOUT THE REORGANIZATIONS
Reasons for the Reorganizations
The purposes of the Reorganizations are to merge SF Bond into Cova
Quality Bond and to reorganize Cova Quality Bond into a separate series of a
Delaware business trust. The Reorganizations are part of an overall
restructuring designed to (1) reduce the number of portfolios with overlapping
investment objectives and policies, and (2) provide the enhanced flexibility
afforded by a Delaware business trust in comparison to the Cova Portfolio's and
to the SF Portfolio's previous form of organization, operating efficiencies
which will result from maintaining a single trust of investment portfolios to be
offered in connection with the Insurance Companies' insurance products and to
employee benefit plans, and consistency across the entire group of those
investment portfolios. To accomplish the restructuring, the holders of
beneficial interests in shares of other portfolios of Cova Series Trust and
Security First Trust are also being asked to approve reorganizations of those
portfolios into portfolios of Met Investors Series Trust.
At a special meeting held on November 1, 2000, all of the Trustees of
Cova Series Trust, including the Disinterested Trustees, considered and approved
the Reorganization; they determined that the Reorganization was in the best
interests of shareholders of Cova Quality Bond, and that the interests of
existing shareholders of Cova Quality Bond will not be diluted as a result of
the transactions contemplated by the respective Reorganization.
At a special meeting held on November 2, 2000, all of the Trustees of
Security First Trust, including the Disinterested Trustees, considered and
approved the Reorganization; they determined that the Reorganization was in the
best interest of shareholders of SF Bond, and that the interests of the existing
shareholders of SF Bond will not be diluted as a result of the transactions
contemplated by the Reorganization.
Cova Series Trust and Security First Trust are each organized as a
Massachusetts business trust and Met Investors Series Trust is organized as a
Delaware business trust. The primary purpose of the Reorganization of SF Bond is
to merge this Portfolio with Cova Quality Bond. The principal reason for
reorganizing Cova Quality Bond as a series of a Delaware business trust is the
availability of certain advantages of Delaware law with respect to business
trusts. The Delaware Business Trust Act (the "Delaware Act") has been
specifically drafted to accommodate the unique governance needs of investment
companies and provides that its policy is to give maximum freedom of contract to
the trust instrument of a Delaware business trust.
Under the Delaware Act, a shareholder of a Delaware business trust is
entitled to the same limitation of personal liability extended to stockholders
of Delaware corporations. No similar statutory or other authority limiting
business trust shareholder liability exists in Massachusetts. As a result,
Delaware law is generally considered to afford more protection against potential
shareholder liability than is afforded to shareholders of Massachusetts business
trusts. See "Comparative Information on Shareholders' Rights - Shareholder
Liability". Similarly, Delaware law provides that, should a Delaware trust issue
multiple series of shares, each series will not be liable for the debts of
another series, another potential though remote risk in the case of other
business trusts, including those, such as Cova Series Trust and Security First
Trust, that are organized under Massachusetts law.
Delaware has obtained a favorable national reputation for its business
laws and business environment. The Delaware courts, which may be called upon to
interpret the Delaware Act, are among the nation's most highly respected and
have an expertise in corporate matters which in part grew out of the fact that
Delaware legal issues are concentrated in the Court of Chancery where there are
no juries and where judges issue written opinions explaining their decisions.
Accordingly, there is a well established body of precedent which may be relevant
in deciding issues pertaining to a Delaware business trust.
There are other advantages that may be afforded by a Delaware business
trust. Under Delaware law, the Met Portfolio will have the flexibility to
respond to future business contingencies. For example, the Trustees of Met
Investors Series Trust will have the power to incorporate the Trust, to merge or
consolidate it with another entity, to cause each series to become a separate
trust, and to change the Trust's domicile without a shareholder vote. This
flexibility could help to assure that Met Investors Series Trust operates under
the most advanced form of organization and could reduce the expense and
frequency of future shareholder meetings for non-investment related issues.
Before approving the Plans, the Trustees evaluated extensive
information provided by the management of Cova Series Trust, Security First
Trust and Met Investors Series Trust, as applicable, and reviewed various
factors about the Portfolios and the proposed Reorganizations. The Trustees
noted that the historical performance of Cova Quality Bond for the last three
years has exceeded that of SF Bond. In addition, the Trustees considered the
relative size of each Cova and SF Portfolio, including the benefits of each
Portfolio being associated with a larger entity, as well as their investment
styles. As of September 30, 2000, Cova Quality Bond's total assets were
approximately $92 million, and SF Bond's total assets were approximately $25
million. The relatively small asset size of Cova Quality Bond and SF Bond may
significantly impair each Portfolio's ability to achieve maximum operating
efficiency. Moreover, the offering of two Portfolios with essentially similar
investment styles could result in each Portfolio being disadvantaged due to
inability to achieve optimum size, performance levels and the greatest possible
economies of scale.
In addition, the Trustees considered, among other things:
o the advantages which apply to operating the combined
Portfolios as a series of a Delaware business trust as
compared to operating each Portfolio as series of
Massachusetts business trusts;
o the terms and conditions of each Reorganization;
o the fact that the Reorganizations would not result in the dilution of
shareholders' interests;
o the effect of the Reorganizations on the Contract Owners and
the value of their Contracts, and the anticipated availability
of a broader array of investment choices to Contract Owners of
portfolios in the Met Investors Series Trust;
o the expense ratios, fees and expenses of the Cova Portfolio and the SF
Portfolio and the anticipated expense ratios, fees and expenses of the Met
Portfolio;
o the fact that the Manager has contractually agreed to limit the total annual
operating expenses of the Met Portfolio;
o the fact that the Cova Portfolio, the SF Portfolio and the Met
Portfolio have identical or similar investment objectives and
principal investment strategies;
o the investment personnel, expertise and resources of Met
Investors Advisory Corp., the Manager for the Met Portfolio,
including the fact that it will have access to the resources
and personnel of Cova Investment Advisory Corporation, the
investment adviser to the Cova Portfolio and would manage the
Portfolio in essentially the same manner;
o the fact that the Cova Portfolio Reorganization will provide
continuity of money management for shareholders because the
sub-adviser for the Cova Portfolio will be the sub-adviser of
the Met Portfolio and the same individuals who manage Cova
Quality Bond will continue as portfolio managers of the Met
Portfolio;
o the fact that MetLife or one of its affiliates will bear the
expenses incurred by the Cova Portfolio, the SF Portfolio and
the Met Portfolio in connection with the Reorganizations;
o the benefits to shareholders, including operating
efficiencies, to be achieved from participating in the
restructuring of the investment portfolios to be offered in
connection with the Insurance Companies' insurance products
and to employee benefit plans;
o the fact that the Met Portfolio will assume the identified liabilities of the
Cova Portfolio and the SF Portfolio;
o the fact that each Reorganization is expected to be tax free for federal
income tax purposes; and
o alternatives available to shareholders of the Cova Portfolio and the SF
Portfolio, including the ability to redeem their shares.
During their consideration of the Reorganizations, the Trustees of Cova
Series Trust met with Trust counsel and counsel to the Independent Trustees
regarding the legal issues involved. The Trustees of Security First Trust also
met with Trust counsel.
After consideration of the factors noted above, together with other
factors and information considered to be relevant, and recognizing that there
can be no assurance that any operating efficiencies or other benefits will in
fact be realized, the Trustees of Cova Series Trust and of Security First Trust
each concluded that the proposed Reorganizations, as applicable, would be in the
best interests of the Cova Portfolio and the SF Portfolio and their respective
shareholders. Consequently, they approved the Plans and directed that the
respective Plans be submitted to shareholders of the Cova Portfolio and the SF
Portfolio for approval.
The Trustees of Met Investors Series Trust have also approved the Plans
on behalf of the Met Portfolio.
Agreements and Plans of Reorganization
The following summary is qualified in its entirety by reference to the
Plans (the forms of which are attached as Exhibits A-1, and A-2 to this
Prospectus/Proxy Statement).
Each Plan provides that all of the assets of the Cova Portfolio or the
SF Portfolio will be acquired by the Met Portfolio in exchange for Class A
shares of the Met Portfolio and the assumption by the Met Portfolio of the
identified liabilities of the Cova Portfolio or the SF Portfolio on or about
February 5, 2001 or such other date as may be agreed upon by the parties (the
"Closing Date"). Prior to the Closing Date, the Cova Portfolio and the SF
Portfolio will endeavor to discharge all of its known liabilities and
obligations. The Met Portfolio will not assume any liabilities or obligations of
the Cova Portfolio and the SF Portfolio other than those reflected in an
unaudited statement of assets and liabilities of the Cova Portfolio or the SF
Portfolio prepared as of the close of regular trading on the New York Stock
Exchange ("NYSE"), normally 4:00 p.m. Eastern Time, on the business day
immediately prior to the Closing Date (the "Valuation Time").
At or prior to the Closing Date, the SF Portfolio will declare a
dividend or dividends and distribution or distributions which, together with all
previous dividends and distributions, shall have the effect of distributing to
the Portfolio's shareholders all of the Portfolio's investment company taxable
income for the taxable period ending on the Closing Date (computed without
regard to any deduction for dividends paid) and all of its net capital gains
realized in all taxable periods ending on the Closing Date (after reductions for
any capital loss carry forward).
The number of full and fractional Class A shares of the Met Portfolio
to be received by the shareholders of the Cova Portfolio and the SF Portfolio
will be determined by multiplying the number of outstanding full and fractional
shares of the Cova Portfolio or the SF Portfolio by a factor which shall be
computed by dividing the net asset value per share of the Cova Portfolio or the
SF Portfolio by the net asset value per share of the Class A shares of the Met
Portfolio. These computations will take place as of the Valuation Time. The net
asset value per share will be determined by dividing assets, less liabilities,
in each case attributable to the respective class, by the total number of
outstanding shares.
Investors Bank & Trust Company, the custodian for the Met Portfolio,
will compute the value of the Cova Portfolio's and the SF Portfolio's respective
portfolio of securities. The method of valuation employed will be consistent
with the procedures set forth in the "Additional Information" section below
relating to the Met Portfolio, Rule 22c-1 under the 1940 Act, and with the
interpretations of that Rule by the SEC's Division of Investment Management.
As soon after the Closing Date as conveniently practicable, the Cova
Portfolio and the SF Portfolio will liquidate and distribute pro rata to
shareholders of record as of the close of business on the Closing Date the full
and fractional shares of voting stock of the Met Portfolio received by the Cova
Portfolio and the SF Portfolio. The liquidation and distribution will be
accomplished by the establishment of accounts in the names of the Cova
Portfolio's and the SF Portfolio's shareholders on the Met Portfolio's share
records of its transfer agent. Each account will represent the respective pro
rata number of full and fractional shares of voting stock of the Met Portfolio
due to the Cova Portfolio's and the SF Portfolio's shareholders. All issued and
outstanding shares of the Cova Portfolio and the SF Portfolio will be canceled.
The shares of voting stock of the Met Portfolio to be issued will have no
preemptive or conversion rights and no share certificates will be issued. After
these distributions and the winding up of its affairs, the Cova Portfolio and
the SF Portfolio will be terminated.
The consummation of each Reorganization is subject to the conditions
set forth in the respective Plan, including approval, as applicable, by the Cova
Portfolio's and the SF Portfolio's shareholders, accuracy of various
representations and warranties and receipt of opinions of counsel, including
opinions with respect to those matters referred to in "Federal Income Tax
Consequences" below. Notwithstanding approval of the Cova Portfolio's or the SF
Portfolio's shareholders, a Plan may be terminated (a) by the mutual agreement
of the Cova Portfolio or the SF Portfolio and the Met Portfolio; or (b) at or
prior to the Closing Date by either party (1) because of a breach by the other
party of any representation, warranty, or agreement contained in the Plan to be
performed at or prior to the Closing Date if not cured within 30 days, or (2)
because a condition to the obligation of the terminating party has not been met
and it reasonably appears that it cannot be met.
Whether or not a Reorganization is consummated, MetLife or one of its
affiliates will pay the expenses incurred by the Cova Portfolio, the SF
Portfolio and the Met Portfolio in connection with that Reorganization
(including the cost of any proxy-soliciting agent). No portion of the expenses
will be borne directly or indirectly by the Cova Portfolio, the SF Portfolio,
the Met Portfolio or their shareholders.
If the Cova Portfolio's or the SF Portfolio's shareholders do not
approve the respective Reorganization, the Trustees will consider other possible
courses of action which may be in the best interests of shareholders.
Federal Income Tax Consequences
Each Reorganization is intended to qualify for federal income tax
purposes as a tax free reorganization under section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). Met Investors Series Trust
believes that the Contract Owners will have no taxable income as a consequence
of a Reorganization. As a condition to the closing of a Reorganization, the Met
Portfolio, the Cova Portfolio or the SF Portfolio, as applicable, the respective
Record Holders and the Met Portfolio will receive an opinion from the law firm
of Sullivan & Worcester LLP to the effect that, on the basis of the existing
provisions of the Code, U.S. Treasury regulations issued thereunder, current
administrative rules, pronouncements and court decisions, for federal income tax
purposes, upon consummation of the Reorganization:
(1) The transfer of all of the assets of the Cova Portfolio or the
SF Portfolio solely in exchange for shares of voting stock
("voting stock") of the Met Portfolio and the assumption by the
Met Portfolio of the identified liabilities of the Cova
Portfolio or the SF Portfolio followed by the distribution of
the Met Portfolio's voting stock to the Record Holders of the
Cova Portfolio or the SF Portfolio in dissolution and
liquidation of the Cova Portfolio or the SF Portfolio, will
constitute a "reorganization" within the meaning of section
368(a)(1)(F) (368 (a)(1)(C)) in the case of SF Bond) of the
Code, and the Met Portfolio and the Cova Portfolio or the SF
Portfolio will each be a "party to a reorganization" within the
meaning of section 368(b) of the Code;
(2) No gain or loss will be recognized by the Met Portfolio upon the
receipt of the assets of the Cova Portfolio or the SF Portfolio
solely in exchange for the voting stock of the Met Portfolio and
the assumption by the Met Portfolio of the identified
liabilities of the Cova Portfolio or the SF Portfolio;
(3) No gain or loss will be recognized by the Cova Portfolio or the
SF Portfolio on the transfer of its assets to the Met Portfolio
in exchange for the Met Portfolio's voting stock and the
assumption by the Met Portfolio of the identified liabilities of
the Cova Portfolio or the SF Portfolio or upon the distribution
(whether actual or constructive) of the Met Portfolio's voting
stock to the Cova Portfolio's or the SF Portfolio's Record
Holders in exchange for their shares of the Cova Portfolio or
the SF Portfolio;
(4) No gain or loss will be recognized by the Cova Portfolio's or
the SF Portfolio's Record Holders upon the exchange of their
shares of the Cova Portfolio or the SF Portfolio for voting
stock of the Met Portfolio in liquidation of the Cova Portfolio
or the SF Portfolio;
(5) The aggregate tax basis of the voting stock of the Met Portfolio
received by each Record Holder of the Cova Portfolio or the SF
Portfolio pursuant to the Reorganization will be the same as the
aggregate tax basis of the shares of the Cova Portfolio or the
SF Portfolio held by such Record Holder immediately prior to the
Reorganization, and the holding period of the voting stock of
the Met Portfolio received by each Record Holder of the Cova
Portfolio or the SF Portfolio will include the period during
which the shares of the Cova Portfolio or the SF Portfolio
exchanged therefor were held by such Record Holder (provided
that the shares of the Cova Portfolio or the SF Portfolio were
held as a capital asset on the date of the Reorganization); and
(6) The tax basis of the assets of the Cova Portfolio or the SF
Portfolio acquired by the Met Portfolio will be the same as the
tax basis of such assets to the Cova Portfolio or the SF
Portfolio immediately prior to the Reorganization, and the
holding period of such assets in the hands of the Met Portfolio
will include the period during which the assets were held by the
Cova Portfolio or the SF Portfolio.
Opinions of counsel are not binding upon the Internal Revenue Service
or the courts. If a Reorganization is consummated but does not qualify as a tax
free reorganization under the Code, a Record Holder of the Cova Portfolio or the
SF Portfolio would recognize a taxable gain or loss equal to the difference
between its tax basis in its Portfolio shares and the fair market value of the
shares of the Met Portfolio it received.
Pro-forma Capitalization
The following tables set forth the capitalization of the Cova Portfolio and
the SF Portfolio as of June 30, 2000 and the capitalization of the Met Portfolio
on a pro forma basis as of that date, giving effect to the proposed acquisitions
of assets at net asset value. As a newly created series of Met Investors Series
Trust, the Met Portfolio, immediately preceding the Closing Date, will have
nominal assets and liabilities. The pro forma data reflects an exchange ratio of
approximately 0.3664 Class A shares of the Met Portfolio issued for each share
of SF Bond, and an exchange ratio of 1.00 Class A share of the Met Portfolio
issued for each share of Cova Quality Bond. It is anticipated that as of the
Closing Date, no Class B shares of the Met Portfolio will be outstanding.
Capitalization of Cova Quality Bond,
SF Bond
and Met JPM Quality Bond (Pro Forma)
<TABLE>
<CAPTION>
-------------------- -------------------------- -------------------- ------------------------
Cova Quality Bond SF Bond Met JPM Quality Bond
(Class A) (After
Reorganization)
<S> <C> <C> <C>
-------------------- -------------------------- -------------------- ------------------------
Total Net Assets $ $23,488,233 $
-------------------- -------------------------- -------------------- ------------------------
Net Asset Value $ $3.81 $
Per Share
-------------------- -------------------------- -------------------- ------------------------
Shares Outstanding 6,158,720
-------------------- -------------------------- -------------------- ------------------------
</TABLE>
Distribution of Shares
All portfolios of Cova Series Trust and Security First Trust sell
shares to the separate accounts of the Insurance Companies as a funding vehicle
for the Contracts offered by the Insurance Companies, and Security First Trust
offers its shares to qualified pension and retirement plans. The Cova Portfolio
and the SF Portfolio offer only one class of shares. Expenses of each Trust are
passed through to the Insurance Companies' separate accounts and are ultimately
borne by Contract Owners. In addition, other fees and expenses are assessed by
the Insurance Companies at the separate account level. (The Cova Contracts
Prospectus and the Security First Contracts Prospectus describe all fees and
charges relating to a Contract.)
Like Cova Series Trust and Security First Trust, Met Investors Series
Trust does not sell its shares directly to the public. The Trust continuously
sells shares of the Met Portfolio only to Insurance Company separate accounts
and to qualified pension and employee profit-sharing plans. It may also offer
shares to other separate accounts of other insurers if approved by the Board of
Trustees of the Trust. MetLife Distributors, Inc. ("MDI"), an indirect
wholly-owned subsidiary of MetLife, serves as the distributor for Met Investors
Series Trust's shares. MDI distributes the Met Portfolio's shares directly and
through broker-dealers, banks, or other financial intermediaries. The Met
Portfolio currently offers two classes of shares: Class A and Class B. (Class B
is not part of the Reorganizations.) Each class has a separate distribution
arrangement and bears its own distribution expenses, if any.
In the proposed Reorganizations, shareholders of the Cova Portfolio and
the SF Portfolio will receive Class A shares of the Met Portfolio. Class A
shares are sold at net asset value without any initial or deferred sales charges
and are not subject to distribution-related or shareholder servicing-related
fees. No Rule 12b-1 plan has been adopted for the Class A shares of the Met
Portfolio. Class A shares are only available to certain classes of investors,
such as shareholders who receive shares of the Met Portfolio in the
Reorganizations and for additional purchases under a shareholder's existing
Contract. In connection with each Reorganization, no sales charges are imposed.
Certain sales or other charges are imposed by the Contracts for which the Met
Portfolio serves as an investment vehicle. More detailed descriptions of the
Class A shares and the distribution arrangements applicable to this class of
shares are contained in the "Additional Information" section below relating to
the Met Portfolio.
Purchase and Redemption Procedures
The Cova Contracts Prospectus and the Security First Contracts
Prospectus for your Contract describes the procedures for investing your
purchase payments or premiums in shares of the Cova Portfolios and the SF
Portfolio. No fee is charged by the Cova Portfolio or the SF Portfolio for
selling (redeeming) shares. The Contracts Prospectus describes whether an
Insurance Company charges any fees for redeeming your interest in a Contract.
The Cova Portfolio and the SF Portfolio buy or sell shares at net asset value
per share of each Portfolio for orders received on a given day, and the
Insurance Companies use this value to calculate the value of your interest in
your Contract.
MDI places orders for the purchase or redemption of shares of the Met
Portfolio based on, among other things, the amount of net Contract premiums or
purchase payments transferred to the separate accounts, transfers to or from a
separate account investment division and benefit payments to be effected on a
given date pursuant to the terms of the Contracts. Orders are effected at the
net asset value per share for each Portfolio determined on that same date,
without the imposition of any sales commission or redemption charge.
Exchange Privileges
The Cova Contracts Prospectus and the Security First Contracts
Prospectus indicate whether an Insurance Company charges any fees for moving
your assets from one investment option to another. No fees for exchanges are
charged by Cova Series Trust, Security First Trust, or Met Investors Series
Trust.
Dividend Policy
The Cova Portfolio, the SF Portfolio and the Met Portfolio have the
same distribution policy. Each Portfolio declares and distributes its dividends
from net investment income to the Insurance Company separate accounts at least
once a year and not to you, the Contract Owner. These distributions are in the
form of additional shares of stock and not cash. The result is that a
Portfolio's investment performance, including the effect of dividends, is
reflected in the cash value of the Contracts. All net realized long- or
short-term capital gains of each Portfolio are also declared and distributed
once a year and reinvested in the Portfolio. Dividends and distributions paid on
the SF Portfolio are automatically reinvested in additional shares of the
Portfolio unless a shareholder elects to have dividends and/or distributions
paid in cash.
The Cova Portfolio and the SF Portfolio have each qualified and intend
to continue to qualify, and the Met Portfolio expects to qualify in its initial
year, to be treated as regulated investment companies under the Code. To remain
qualified as a regulated investment company, a Portfolio must distribute 90% of
its taxable and tax-exempt income and diversify its holdings as required by the
1940 Act and the Code. While so qualified, so long as each Portfolio distributes
all of its net investment company taxable and tax-exempt income and any net
realized gains to Record Holders, it is expected that a Portfolio will not be
required to pay any federal income taxes on the amounts distributed to Record
Holders.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
As a Delaware business trust, the operations of Met Investors Series
Trust will be governed by its Agreement and Declaration of Trust and By-Laws,
and applicable Delaware law, rather than by the Agreement and Declaration of
Trust and By-Laws of Cova Series Trust, or by the Declaration of Trust and
By-Laws of Security First Trust and Massachusetts law. The Agreements and
Declarations of Trust and Declaration of Trust are each referred to in this
Prospectus/Proxy Statement as a "Declaration of Trust." As discussed below,
certain of the differences between Cova Series Trust, Security First Trust and
Met Investors Series Trust derive from provisions of Met Investors Series
Trust's Declaration of Trust and By-Laws. Shareholders entitled to instruct the
Insurance Companies to vote at the Meeting may obtain a copy of Met Investors
Series Trust's Declaration of Trust and By-Laws, without charge, upon written
request to Met Investors Series Trust at the address and telephone number set
forth on the cover of this Prospectus/Proxy Statement.
Form of Organization
As noted above, Cova Series Trust and Security First Trust are each
organized as a Massachusetts business trust, and Met Investors Series Trust is
organized as a Delaware business trust. Cova Series Trust, Security First Trust
and Met Investors Series Trust are each open-end management investment companies
registered with the SEC under the 1940 Act, and each is organized as a "series
company" as that term is used in Rule 18f-2 under the 1940 Act. The series of
Cova Series Trust consist of the Cova Portfolio and other mutual funds of
various asset classes; the series of Security First Trust consist of the SF
Portfolio and other mutual funds of various asset classes; the series of Met
Investors Series Trust consist of the Met Portfolio and other mutual funds of
various asset classes. Cova Series Trust, Security First Trust and Met Investors
Series Trust currently offer shares of their portfolios only to insurance
company separate accounts to serve as an investment vehicle for variable annuity
contracts and variable life insurance policies issued by the Insurance
Companies. Security First Trust and Met Investors Series Trust also offer shares
of their portfolios to qualified pension and retirement plans. Each Trust is
governed by its Declaration of Trust, By-Laws, and a Board of Trustees, and by
applicable Massachusetts or Delaware and federal law.
The Board of Trustees of Met Investors Series Trust is currently
comprised of Stephen M. Alderman, who serves as a Trustee of Cova Series Trust,
Jack R. Borsting, who serves as a Trustee of Security First Trust, and six other
individuals who do not serve as Trustees of either Cova Series Trust or Security
First Trust. Accordingly, most of the Trustees who have ultimate responsibility
for the oversight and management of the Met Portfolio are different. Information
with respect to the current Trustees of Met Investors Series Trust, including
compensation received, is set forth in the Statement of Additional Information
dated December __, 2000 which relates to this Prospectus/Proxy Statement and the
Reorganizations.
Capitalization
The beneficial interests in Cova Series Trust are represented by an
unlimited number of transferable shares of beneficial interest, without par
value, and may be divided into two or more series. The beneficial interests of
Security First Trust are represented by an unlimited number of transferable
shares of beneficial interest, without par value, and may be divided into
various series. The beneficial interests in Met Investors Series Trust are
represented by an unlimited number of transferable shares of beneficial
interest, $.001 par value per share, of one or more series. The Declaration of
Trust of each of Cova Series Trust, Security First Trust and Met Investors
Series Trust permits the Trustees to allocate shares into one or more series,
and classes thereof, with rights determined by the Trustees, all without
shareholder approval. Fractional shares may be issued by the Cova Portfolio, the
SF Portfolio and by the Met Portfolio.
Shares of the Cova Portfolio and the SF Portfolio are offered in only
one class and represent an equal proportionate interest in the Portfolio. Shares
of the Met Portfolio are currently offered in Class A and Class B (Class B is
not part of the Reorganizations). Shares of the classes of the Met Portfolio
represent an equal pro rata interest in the Portfolio and generally have
identical voting, dividend, liquidation and other rights, other than the payment
of distribution fees. Shareholders of the Cova Portfolio, the SF Portfolio and
the Met Portfolio are entitled to receive dividends and other amounts as
determined by the Trustees. Shareholders of the Cova Portfolio, the SF Portfolio
and the Met Portfolio vote separately, by Portfolio, as to matters, such as
changes in fundamental investment restrictions, that affect only their
particular Portfolio. Shareholders of the Met Portfolio vote by class as to
matters, such as approval of or amendments to Rule 12b-1 distribution plans,
that affect only their particular class.
Shareholder Liability
Shareholders of Cova Series Trust and Security First Trust as
shareholders of Massachusetts business trusts may, under certain circumstances,
be held personally liable under the applicable state law for the obligations of
the respective Trust. However, the Declarations of Trust of Cova Series Trust
and Security First Trust contain an express disclaimer of shareholder liability
and require (in the case of Cova Series Trust) or permit (in the case of
Security First Trust) that notice of such disclaimer be given in each agreement
entered into or executed by Cova Series Trust, Security First Trust or the
Trustees or officers of the Trust, as applicable. Each Declaration of Trust also
provides for shareholder indemnification out of the assets of the Trust.
Under Delaware law, shareholders of a Delaware business trust are
entitled to the same limitation of personal liability extended to stockholders
of Delaware corporations. No similar statutory or other authority limiting
business trust shareholder liability exists under Massachusetts law. As a
result, Delaware law is generally considered to afford additional protection
against potential shareholder liability.
To the extent that Met Investors Series Trust or a shareholder is
subject to the jurisdiction of courts in other states, it is possible that a
court may not apply Delaware law and may thereby subject shareholders of Met
Investors Series Trust to liability. To guard against this risk, the Declaration
of Trust of Met Investors Series Trust (a) provides that any written obligation
of the Trust may contain a statement that such obligation may only be enforced
against the assets of the Trust or the particular series in question and the
obligation is not binding upon the shareholders of the Trust; however, the
omission of such a disclaimer will not operate to create personal liability for
any shareholder; and (b) provides for indemnification out of Trust property of
any shareholder held personally liable for the obligations of the Trust.
Accordingly, the risk of a shareholder of Met Investors Series Trust incurring
financial loss beyond that shareholder's investment because of shareholder
liability is limited to circumstances in which: (1) the court refuses to apply
Delaware law; (2) no contractual limitation of liability was in effect; and (3)
the Trust itself is unable to meet its obligations. In light of Delaware law,
the nature of the Trust's business, and the nature of its assets, the risk of
personal liability to a shareholder of Met Investors Series Trust is remote.
Shareholder Meetings and Voting Rights
Neither Cova Series Trust on behalf of the Cova Portfolio, Security
First Trust on behalf of the SF Portfolio nor Met Investors Series Trust on
behalf of the Met Portfolio is required to hold annual meetings of shareholders.
However, a meeting of shareholders for the purpose of voting upon the question
of removal of a Trustee must be called when requested in writing by the holders
of at least 10% of the outstanding shares of each Trust. A meeting of
shareholders of Cova Series Trust or Security First Trust must also be called
for any proper purpose upon written request of shareholders holding at least 51%
of the outstanding shares of the Trust or of a Portfolio. In addition, each
Trust is required to call a meeting of shareholders for the purpose of electing
Trustees if, at any time, less than a majority of the Trustees then holding
office were elected by shareholders. No Trust currently intends to hold regular
shareholder meetings. Cumulative voting is not permitted in the election of
Trustees of any Trust.
The Declaration of Trust of Cova Series Trust and the By-Laws of
Security First Trust provide that the holders of a majority of the outstanding
shares constitute a quorum for consideration of a matter at a shareholders'
meeting. Except when a larger quorum is required by applicable law or the
applicable governing documents, with respect to Met Investors Series Trust, 33
1/3% of the shares issued and outstanding constitutes a quorum for consideration
of a matter at a shareholders' meeting but any lesser number is sufficient for
adjourned sessions. Approval of a matter by the shareholders of Cova Series
Trust requires the affirmative vote of a majority of the shares present and
entitled to vote (for Security First Trust, the affirmative vote of a majority
of the votes cast at a meeting duly called and at which a quorum is present),
subject to applicable law, the Declaration of Trust or with respect to Cova
Series Trust, a Trustee resolution specifying a greater or lesser shareholder
vote requirement; a Trustee of Cova Series Trust must be elected by the
affirmative vote of a plurality of the shares present. For Met Investors Series
Trust, when a quorum is present at a meeting, a majority (greater than 50%) of
the shares voted is sufficient to act on a matter and a plurality of the shares
voted is required to elect a Trustee (unless otherwise specifically required by
the applicable governing documents or other law, including the 1940 Act). A
Trustee of Cova Series Trust may be removed with cause by a vote of two-thirds
of the shareholders or by a vote of two-thirds of the remaining Trustees. A
Trustee of Security First Trust may be removed by a vote or a written
declaration of two-thirds of the shares outstanding and entitled to vote, or for
cause by a vote of two-thirds of the remaining Trustees. A Trustee of Met
Investors Series Trust may be removed at a meeting of shareholders by a vote of
two-thirds of the outstanding shares of the Trust, or with or without cause by
the vote of two-thirds of the number of Trustees prior to removal.
Under the Declaration of Trust of each Trust, each whole share of
beneficial interest of a Portfolio is entitled to one vote, and each fractional
share is entitled to a proportionate vote. In particular, with respect to the
Cova Portfolio, this means that each full share of a Portfolio attributable to a
variable annuity contract is entitled to one vote and any fractional share is
entitled to a fractional vote; each $100 of the account value of a variable life
insurance policy allocated to a Portfolio on the record date is entitled to one
vote, and fractional votes are counted. With respect to the Met Portfolio,
similar voting provisions apply regarding the account value of a variable life
insurance policy allocated to the Portfolio.
The Declarations of Trust of Cova Series Trust and Security First Trust
require shareholder approval to (1) change the Trust to a corporation or other
organization, (2) terminate the Trust or in the case of Cova Series Trust a
Portfolio, or (3) merge the Trust into another entity, or merge or consolidate
(with respect to Cova Series Trust only), or sell or exchange the assets of a
Portfolio. The Trustees of Security First Trust may abolish a series or class
only if no shares of that series or class are outstanding. The Trustees of
Security First Trust may, however, combine series or classes of shares with
other series or classes of shares without shareholder approval, provided that in
a combination of series the relative net asset ratios of the affected shares is
preserved. The Declaration of Trust of Met Investors Series Trust provides that
unless otherwise required by applicable law (including the 1940 Act), the Board
of Trustees may, without obtaining a shareholder vote: (1) reorganize the Trust
as a corporation or other entity, (2) merge the Trust into another entity, or
merge, consolidate or transfer the assets and liabilities of a Portfolio or
class of shares to another entity, and (3) combine the assets and liabilities
held with respect to two or more series or classes into assets and liabilities
held with respect to a single series or class. The Trustees of Met Investors
Series Trust may also terminate the Trust, a Portfolio, or a class of shares
upon written notice to the shareholders.
The Declaration of Trust of Cova Series Trust provides that advisory,
administrative or management agreements may be entered into subject to
shareholder approval. Under the Declarations of Trust of Security First Trust
and Met Investors Series Trust, there is no specific requirement for shareholder
approval. Under the 1940 Act, absent exemptive relief from the SEC, all
investment advisory contracts must be approved by shareholders. As further
described in "Additional Information - Management of the Trust", Met Investors
Series Trust and the Manager have filed an application with the SEC seeking an
order, which among other things, would permit the Manager to retain or terminate
an unaffiliated Adviser to a Portfolio without shareholder approval. No
assurances can be given that the Trust and the Manager will receive the
requested order.
Liquidation
After paying all liabilities, the Trustees of Cova Series Trust and
Security First Trust may distribute the remaining Trust property of any
liquidated Portfolio among the shareholders of the Portfolio according to their
respective rights. In the event of the liquidation of Met Investors Series
Trust, the Met Portfolio, or a class of shares, the shareholders are entitled to
receive, when and as declared by the Trustees, the excess of the assets
belonging to the Trust, the Portfolio or attributable to the class over the
liabilities belonging to the Trust, the Portfolio or attributable to the class.
In either case, the assets so distributable to shareholders of the Portfolio
will be distributed among the shareholders in proportion to the number of shares
of a class of the Portfolio held by them on the date of distribution.
Liability and Indemnification of Trustees
Under the Declaration of Trust of Met Investors Series Trust, a Trustee
is liable to any person in connection with the assets or affairs of the Trust or
any Portfolio only for such Trustee's own willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of the
office of Trustee or the discharge of such Trustee's functions. As provided in
the Declaration of Trust, each Trustee of the Trust is entitled to be
indemnified against all liabilities against him or her, including the costs of
litigation, unless it is determined that the Trustee (1) did not act in good
faith in the reasonable belief that such Trustee's action was in or not opposed
to the best interests of the Trust; (2) had acted with willful misfeasance, bad
faith, gross negligence or reckless disregard of such Trustee's duties; and (3)
in a criminal proceeding, had reasonable cause to believe that such Trustee's
conduct was unlawful (collectively, "disabling conduct"). A determination that
the Trustee did not engage in disabling conduct and is, therefore, entitled to
indemnification may be based upon the outcome of a court action or
administrative proceeding or by (a) a vote of a majority of a quorum of those
Trustees who are neither "interested persons" within the meaning of the 1940 Act
nor parties to the proceeding or (b) an independent legal counsel in a written
opinion. A Portfolio may also advance money for such litigation expenses
provided that the Trustee undertakes to repay the Portfolio if his or her
conduct is later determined to preclude indemnification and certain other
conditions are met. The Declarations of Trust of Cova Series Trust and Security
First Trust contain similar provisions.
The foregoing is only a summary of certain characteristics of the
operations of the Declarations of Trust of Met Investors Series Trust, Cova
Series Trust and Security First Trust, their By-Laws and Delaware or
Massachusetts law and is not a complete description of those documents or law.
Shareholders should refer to the provisions of such Declarations of Trust,
By-Laws and Delaware or Massachusetts law directly for more complete
information.
VOTING INFORMATION CONCERNING THE MEETING
This Prospectus/Proxy Statement is being sent to shareholders of Cova
Quality Bond in connection with a solicitation of voting instructions by the
Trustees of Cova Series Trust, and to shareholders of SF Bond in connection with
a solicitation of voting instructions by the Trustees of Security First Trust,
to be used at the Special Meeting of shareholders (the "Meeting) to be held at
10:00 a.m. Pacific Time for the Cova Portfolio and 10:30 a.m. for the SF
Portfolio, January 26, 2001, at the offices of Met Investors Series Trust, 610
Newport Center Drive, Suite 1350, Newport Beach, California 92660, and at any
adjournments thereof. This Prospectus/Proxy Statement, along with a Notice of
the Meeting and a voting instructions form, is first being mailed to
shareholders of the Cova Portfolio and the SF Portfolio on or about December ,
2000.
The Boards of Trustees of Cova Series Trust and Security First Trust
have fixed the close of business on November , 2000 as the record date (the
"Record Date") for determining the shareholders of the Cova Portfolio and the SF
Portfolio entitled to receive notice of the Meeting and to give voting
instructions, and for determining the number of shares for which such
instructions may be given, with respect to the Meeting or any adjournment
thereof. The Insurance Companies, through certain of their separate accounts,
own all or substantially all of the shares of the Cova Portfolio and the SF
Portfolio, as applicable, and are the shareholders of record of each such
Portfolio at the close of business on the Record Date. The Insurance Companies
are entitled to be present and vote at the Meeting with respect to such shares
of the Cova Portfolio and the SF Portfolio. Each Insurance Company has
undertaken to vote its shares of the Cova Portfolio or the SF Portfolio for the
Contract Owners of that Portfolio in accordance with voting instructions
received on a timely basis from those Contract Owners. In connection with the
solicitation of such voting instructions, the Insurance Companies will furnish a
copy of this Prospectus/Proxy Statement to Contract Owners.
The number of shares as to which voting instructions may be given under
a Contract is determined by the number of full and fractional shares of the Cova
Portfolio or the SF Portfolio held in a separate account with respect to that
particular Contract. In voting for a Reorganization, each full share of the SF
Portfolio, and each full share of the Cova Portfolio attributable to a variable
annuity, is entitled to one vote and any fractional share is entitled to a
fractional vote. Each $100 of the account value of a variable life insurance
policy allocated to the Cova Portfolio on the Record Date is entitled to one
vote and fractional votes are counted.
The close of business on January 19, 2001 is the last day on which
voting instructions for the Meeting will be accepted by the Insurance Companies.
Voting instructions may be revoked by executing and delivering later-dated
signed voting instructions to your Insurance Company at any time prior to the
close of business on January 19, 2001, or by attending the Meeting in person and
instructing the Insurance Company how to vote your shares. Unless revoked, all
valid voting instructions will be voted in accordance with the specifications
thereon or, in the absence of such specifications, FOR approval of the Plan and
the Reorganization contemplated thereby.
If you wish to participate in the Meeting, you may submit the voting
instructions form included with this Prospectus/Proxy Statement, transmit your
voting instructions by telephone or fax or attend in person and provide your
voting instructions to the Insurance Company. (Guidelines on providing voting
instructions are immediately after the Notice of Special Meeting.)
If the enclosed voting instructions form is properly executed and
returned in time to be voted at the Meeting, the shares of beneficial interest
represented by the voting instructions form will be voted in accordance with the
instructions marked on the returned voting instructions form.
o Unless instructions to the contrary are marked on the voting
instructions form, it will be voted FOR a proposed Reorganization
and FOR any other matters deemed appropriate.
o Voting instructions forms which are properly executed and returned
but are not marked with voting instructions will be voted FOR a
proposed Reorganization and FOR any other matters deemed
appropriate.
Interests in Contracts for which no timely voting instructions are
received will be voted in the same proportion as an Insurance Company votes
shares for which it has received voting instructions from other Contract Owners.
An Insurance Company will also vote any shares in its general account which are
not attributable to Contracts in the same proportion as it votes shares held in
all of the insurer's registered separate accounts, in the aggregate.
Shares which represent interests in the Cova Portfolio or the SF
Portfolio vote separately on the Reorganization and those matters pertaining
only to that Portfolio. Approval of a Reorganization will require the
affirmative vote of a majority of the shares of Cova Quality Bond, present in
person or by proxy and entitled to vote, assuming a quorum is present (the
presence in person or by proxy of a majority, i.e. greater than 50%, of the
Portfolio's outstanding shares). Approval of the Reorganization will require the
affirmative vote of a majority of the shares of SF Bond cast at a shareholders'
meeting duly called and at which a quorum is present (the presence in person or
by proxy of holders entitled to cast a majority of the votes at any
shareholders' meeting). As of the Record Date, the sole shareholders of record
or substantially all of the shareholders of record of Cova Series Trust and
Security First Trust were the Insurance Companies. Since the Insurance Companies
are the legal owners of all or substantially all of the shares, attendance by
the Insurance Companies at the Meeting will constitute a quorum under the
Declarations of Trust of Cova Series Trust and Security First Trust.
Voting instructions solicitations will be made primarily by mail, but
beginning on or about December ___, 2000 voting instructions solicitations may
also be made by telephone, through the Internet or personal solicitations
conducted by officers and employees of Cova Investment Advisory Corporation, the
investment adviser of Cova Series Trust, and Met Investors Advisory Corp., the
investment adviser of Security First Trust, their affiliates or other
representatives of the Cova Portfolio and the SF Portfolio (who will not be paid
for their soliciting activities). In addition, voting instructions solicitations
may be made by ___________________, the Cova Portfolio's and the SF Portfolio's
proxy solicitor. The estimated cost of the voting instructions solicitation is
approximately $__________. The costs of solicitation and the expenses incurred
in connection with preparing this Prospectus/Proxy Statement and its enclosures
will be paid by MetLife or one of its affiliates. Neither the Cova Series Trust,
the Security First Trust nor the Contract Owners will bear any costs associated
with the Meeting, any additional proxy solicitation or any adjourned session.
If shareholders of the Cova Portfolio or of the SF Portfolio do not
vote to approve the applicable Reorganization, the Trustees of Cova Series Trust
or Security First Trust will consider other possible courses of action in the
best interests of shareholders. If sufficient votes to approve a Reorganization
are not received, the persons named as proxies on the voting instructions form
may propose one or more adjournments of the Meeting to permit further
solicitation of voting instructions. In determining whether to adjourn the
Meeting, the following factors may be considered: the percentage of votes
actually cast, the percentage of negative votes actually cast, the nature of any
further solicitation and the information to be provided to shareholders with
respect to the reasons for the solicitation. Any adjournment will require an
affirmative vote of a majority of those shares represented at the Meeting in
person or by proxy. The persons named as proxies will vote upon such adjournment
after consideration of all circumstances which may bear upon a decision to
adjourn the Meeting.
A shareholder of the Cova Portfolio or the SF Portfolio who objects to
the proposed Reorganization will not be entitled under Massachusetts law or with
respect to the SF Portfolio, the Declaration of Trust of Security First Trust,
to demand payment for, or an appraisal of, his or her shares. However,
shareholders should be aware that each Reorganization as proposed is not
expected to result in recognition of gain or loss to the Record Holders or
Contract Owners for federal income tax purposes. In addition, if a
Reorganization is consummated, the rights of shareholders to transfer their
account balances among investment options available under the Contracts or to
make withdrawals under the Contracts will not be affected.
Neither Cova Series Trust nor Security First Trust holds annual
shareholder meetings. If a Reorganization is not approved, shareholders wishing
to submit proposals to be considered for inclusion in a proxy statement for a
subsequent shareholder meeting should send their written proposals to the
Secretary of Cova Series Trust or the Secretary of Security First Trust at the
addresses set forth on the cover of this Prospectus/Proxy Statement so that they
will be received by the Trust in a reasonable period of time prior to that
meeting.
The votes of the shareholders of the Met Portfolio are not being
solicited by this Prospectus/Proxy Statement and are not required to carry out
the Reorganizations.
Shareholder Information
The Record Holders of the Cova Portfolio and the SF Portfolio at the
close of business on November , 2000 (the Record Date) will be entitled to be
present and vote at the Meeting with respect to shares of the Cova Portfolio and
the SF Portfolio owned as of the Record Date. As of the Record Date, the total
number of shares of the Cova Portfolio and the SF Portfolio outstanding and
entitled to vote was as follows:
----------------------------------- ----------------------------------
Number of Shares
----------------------------------- ----------------------------------
Cova Quality Bond
----------------------------------- ----------------------------------
----------------------------------- ----------------------------------
Number of Shares
----------------------------------- ----------------------------------
SF Bond
----------------------------------- ----------------------------------
As of ________, 2000, the officers and Trustees of Cova Series Trust,
of Security First Trust and of Met Investors Series Trust beneficially owned as
a group less than 1% of the outstanding shares of the Cova Portfolio, the SF
Portfolio and the Met Portfolio, respectively.
Control Persons and Principal Holders of Securities
On _______, 2000 to the knowledge of the Trustees and
management of Cova Series Trust, the following entities together owned of record
over 99% of shares of Cova Quality Bond:
<TABLE>
<CAPTION>
------------------------------------------------------ ----------------------------------------------
<S> <C>
Cova Variable Annuity Account One (Separate accounts of Cova Financial
Services Life Insurance Company)
Cova Variable Life Account One
Cova Variable Life Account Eight
------------------------------------------------------ ----------------------------------------------
------------------------------------------------------ ----------------------------------------------
Cova Variable Annuity Account Five (Separate accounts of Cova Financial Life
Insurance Company)
Cova Variable Life Account Five
------------------------------------------------------ ----------------------------------------------
------------------------------------------------------ ----------------------------------------------
First Cova Variable Annuity Account One (Separate account of First Cova Life
Insurance Company)
------------------------------------------------------ ----------------------------------------------
</TABLE>
On ___________, 2000 to the knowledge of the Trustees and management of
Security First Trust, Security First Separate Account A owned of record 99.58%
of the shares of SF Bond, and the Security First Group Employees 401(k) Plan
owned 0.42% of the shares of SF Bond.
The Insurance Companies have advised Cova Series Trust and Security
First Trust that as of ________, 2000 there were no persons owning Contracts
which would entitle them to instruct the Insurance Companies with respect to
more than 5% of the voting securities of either Trust.
As of __________, 2000 MetLife Investors Group owned 100% of the
outstanding shares of Met Investors Series Trust and as a result may be deemed
to be a control person with respect to the Trust.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Report of Cova Series Trust relating to Cova Quality Bond,
for the year ended as of December 31, 1999, and the financial statements and
financial highlights for the periods indicated therein, has been incorporated by
reference herein and in the Registration Statement in reliance upon the report
of KPMG LLP, independent auditors, incorporated by reference herein, and upon
the authority of said firm as experts in accounting and auditing.
The Annual Report of Security First Trust relating to the SF Bond, for
the year ended as of July 31, 2000, and the financial statements and financial
highlights for the periods indicated therein, has been incorporated by reference
herein and in the Registration Statement in reliance upon the report of Deloitte
& Touche LLP, independent certified public accountants, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Met JPM
Quality Bond will be passed upon by Sullivan & Worcester LLP, Washington, D.C.
ADDITIONAL INFORMATION
Cova Series Trust and Security First Trust are each subject to the
informational requirements of the Securities Exchange Act of 1934 and the 1940
Act, and in accordance therewith file reports and other information including
proxy material and charter documents with the SEC. These items can be inspected
and copied at the Public Reference Facilities maintained by the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices located
at Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois
60661-2511 and Seven World Trade Center, Suite 1300, New York, New York 10048.
Copies of such materials can also be obtained at prescribed rates from the
Public Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington, D.C. 20549.
Met JPM Quality Bond
The following additional information supplements information about Met
JPM Quality Bond contained elsewhere in the Prospectus/Proxy Statement.
Principal Investment Strategy
The Met Portfolio in this Prospectus/Proxy Statement is a mutual fund:
a pooled investment that is professionally managed and that gives you the
opportunity to participate in financial markets. The Portfolio strives to reach
its stated investment objective, which can be changed without shareholder
approval. As with all mutual funds, there is no guarantee that the Portfolio
will achieve its investment objective.
The Adviser may sell a portfolio security when the value of the
investment reaches or exceeds its estimated fair value, to take advantage of
more attractive fixed income yield opportunities, when the issuer's investment
fundamentals begin to deteriorate, when the Portfolio must meet redemptions, or
for other investment reasons.
Met JPM Quality Bond will invest at least 65% of its total assets in
investment grade fixed income securities under normal circumstances.
The Portfolio invests in broad sectors of the fixed income market,
including U.S. Government and agency securities, corporate securities including
bonds, debentures and notes, asset-backed securities and mortgage-backed and
mortgage related securities. The Adviser actively manages the Portfolio's
duration, the allocation of securities across market sectors, and the selection
of specific securities within sectors. Based on fundamental, economic and
capital markets research, the Adviser adjusts the duration of the Portfolio in
light of market conditions and the Adviser's interest rate outlook. For example,
if interest rates are expected to fall, the duration may be lengthened to take
advantage of the expected associated increase in bond prices. The Adviser
selects specific securities which it believes are undervalued for purchase
using: advanced quantitative tools, analysis of credit risk, the expertise of a
dedicated trading desk, and the judgment of fixed income portfolio managers and
analysts. A security is considered undervalued when its price is lower than one
would expect for an investment of similar quality, duration and structural
characteristics.
Under normal market conditions, the Portfolio's duration will range
between one year shorter and one year longer than the duration of the U.S.
investment grade fixed income universe, as represented by Salomon Brothers Broad
Investment Grade Bond Index, the Portfolio's benchmark. Currently, the
benchmark's duration is approximately 5 years. The maturities of the individual
securities in the Portfolio may vary widely, however.
The Portfolio may invest in obligations issued or guaranteed by the
U.S. Government and backed by the full faith and credit of the United States
including Treasury securities and GNMA certificates as well as obligations
issued or guaranteed by U.S. Government agencies or instrumentalities where the
Portfolio must look principally to the issuing or guaranteeing agency for
ultimate repayment. Some examples of agencies or instrumentalities issuing these
obligations are the Federal Farm Credit System, the Federal Home Loan Banks and
the Federal National Mortgage Association.
The Portfolio may also invest in municipal obligations that have been
issued on a taxable basis or that have an attractive yield excluding tax
considerations.
It is a current policy of the Portfolio that under normal circumstances
at least 65% of its total assets will consist of investment grade securities
that are rated at least A by Standard & Poor's Ratings Services ("Standard &
Poor's") or that are unrated and in the Adviser's opinion are of comparable
quality. In the case of 30% of the Portfolio's investments, the Portfolio may
purchase investment grade securities that are rated Baa or better by Moody's
Investors Services, Inc. ("Moody's") or BBB or better by Standard & Poor's or
are unrated and in the Adviser's opinion are of comparable quality.
The Portfolio may invest up to 20% of its assets in foreign debt
securities, including Eurodollar bonds and Yankee bonds and securities of
foreign governments and governmental entities. The Portfolio may also invest in
debt securities of issuers located in emerging market countries.
The Portfolio may keep a portion of its assets in cash or cash
equivalents such as high quality short-term debt obligations including bankers'
acceptances, commercial paper, certificates of deposit, Eurodollar obligations,
variable amount master demand notes and money market mutual funds. Investments
in cash or similar liquid securities (cash equivalents)generally do not provide
as high a return as would assets invested in other types of securities.
The Adviser may, when consistent with the Portfolio's investment
objective, use options or futures for hedging and for risk management (i.e., to
adjust duration or yield curve exposure, or to establish or adjust exposure to
particular securities markets, or currencies); risk management may include
management of the Portfolio's exposure relative to its benchmark.
Additional Investment Strategies
In addition to its principal investment strategies discussed above, Met
JPM Quality Bond, as indicated, may at times invest a portion of its assets in
the investment strategies and may engage in certain investment techniques as
described below. The Statement of Additional Information relating to this
Prospectus/Proxy Statement provides a more detailed discussion of certain of
these and other securities and indicates if the Portfolio is subject to any
limitations with respect to a particular investment strategy. These strategies
and techniques may involve risks. (Please note that some of these strategies may
be a principal investment strategy for the Portfolio and consequently are also
described above.)
The Portfolio is not limited by this discussion and may invest in other
types of securities not precluded by the policies discussed elsewhere in this
Prospectus/Proxy Statement.
Brady Bonds. Brady Bonds are collateralized or uncollaterlized fixed
income securities created through the exchange of existing commercial bank loans
to public and private entities in certain emerging markets for new bonds in
connection with debt restructurings. Brady Bonds have been issued only recently
and, accordingly do not have a long payment history. These securities are
subject to credit risk and interest rate risk.
Convertible Securities. Convertible securities are preferred stocks or
bonds that pay a fixed dividend or interest payment and are convertible into
common stock at a specified price or conversion ratio.
Traditionally, convertible securities have paid dividends or interest
rates higher than common stocks but lower than nonconvertible securities. They
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree. These securities
are also subject to market risk, and interest rate risk and credit risk.
Direct Participation in Corporate Loans. By purchasing a loan, the
Portfolio acquires some or all of the interest of a bank or other lending
institution in a loan to a corporate borrower. Many such loans are secured, and
most impose restrictive covenants which must be met by the borrower. These loans
are made generally to finance internal growth, mergers, acquisitions, stock
repurchases, leveraged buy-outs and other corporate activities. such loans may
be in default at the time of purchase. The Portfolio may also purchase trade or
other claims against companies, which generally represent money owed by the
company to a supplier of goods or services. These claims may also be purchased
at a time when the company is in default. Certain of the loans acquired by the
Portfolio may involve revolving credit facilities or other standby financing
commitments which obligate the Portfolio to pay additional cash on certain date
or on demand.
The highly leveraged nature of many such loans may make such loans
especially vulnerable to adverse changes in economic or market conditions. Loans
and other direct investments may not be in the form of securities or may be
subject to restrictions on transfer, and only limited opportunities may exist to
resell such instruments. As a result, the Portfolio may be unable to sell such
investments at an opportune time or may have to resell them at less than fair
market value.
Dollar Roll Transactions. Dollar roll transactions are comprised of the
sale by the Portfolio of mortgage-based or other fixed income securities,
together with a commitment to purchase similar, but not identical, securities at
a future date. In addition, the Portfolio is paid a fee as consideration for
entering into the commitment to purchase. Dollar rolls may be renewed after cash
settlement and initially may involve only a firm commitment agreement by the
Portfolio to buy a security. Dollar roll transactions are treated as borrowings
for purposes of the 1940 Act, and the aggregate of such transactions and all
other borrowings of the Portfolio (including reverse repurchase agreements) will
be subject to the requirement that the Portfolio maintain asset coverage of 300%
for all borrowings.
If the broker-dealer to whom the Portfolio sells the security becomes
insolvent, the Portfolio's right to purchase or repurchase the security may be
restricted; the value of the security may change adversely over the term of the
dollar roll; the security that the Portfolio is required to repurchase may be
worth less than the security that the Portfolio originally held; and the return
earned by the Portfolio with the proceeds of a dollar roll may not exceed
transaction costs.
Foreign Currency Transactions. Foreign currency transactions are
entered into for the purpose of hedging against foreign exchange risk arising
from the Portfolio's investment or anticipated investment in securities
denominated in foreign currencies. The Portfolio also may enter into these
contracts for purposes of increasing exposure to a foreign currency or to shift
exposure to foreign currency fluctuations from one country to another. Foreign
currency transactions include the purchase of foreign currency on a spot (or
cash) basis, contracts to purchase or sell foreign currencies at a future date
(forward contracts), the purchase and sale of foreign currency futures
contracts, and the purchase of exchange traded and over-the-counter call and put
options on foreign currency futures contracts and on foreign currencies.
These hedging transactions do not eliminate fluctuations in the
underlying prices of the securities which the Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which can be achieved
at some future point in time.
Foreign currency exchange rates may fluctuate significantly over short
periods of time. A forward foreign currency exchange contract reduces the
Portfolio's exposure to changes in the value of the currency it will deliver and
increases its exposure to changes in the value of the currency it will exchange
into. Contracts to sell foreign currency will limit any potential gain which
might be realized by the Portfolio if the value of the hedged currency
increases. In the case of forward contracts entered into for the purpose of
increasing return, the Portfolio may sustain losses which will reduce its gross
income. Forward foreign currency exchange contracts also involve the risk that
the party with which the Portfolio enters the contract may fail to perform its
obligations to the Portfolio. The purchase and sale of foreign currency futures
contracts and the purchase of call and put options on foreign currency futures
contracts and on foreign currencies involve certain risks associated with
derivatives.
Forward Commitments, When-Issued and Delayed Delivery Securities.
Forward commitments, when-issued and delayed delivery securities generally
involve the purchase of a security with payment and delivery at some time in the
future - i.e., beyond normal settlement. The Portfolio does not earn interest on
such securities until settlement and bears the risk of market value fluctuations
in between the purchase and settlement dates. New issues of stocks and bonds,
private placements and U.S. Government securities may be sold in this manner.
Hybrid Instruments. Hybrid instruments were recently developed and
combine the elements of futures contracts or options with those of debt,
preferred equity or a depositary instrument. They are often indexed to the price
of a commodity, particular currency, or a domestic or foreign debt or equity
security index. Examples of hybrid instruments include debt instruments with
interest or principal payments or redemption terms determined by reference to
the value of a currency or commodity or securities index at a future point in
time or preferred stock with dividend rates determined by reference to the value
of a currency.
Hybrids may bear interest or pay dividends at below market (or even
relatively nominal) rates. Under certain conditions, the redemption value of the
instrument could be zero. Hybrids can have volatile prices and limited liquidity
and their use by the Portfolio may not be successful.
Illiquid and Restricted Securities. The Portfolio may invest a portion
of its assets in restricted and illiquid securities, which are investments that
the Portfolio cannot easily resell within seven days at current value or that
have contractual or legal restriction on resale.
If the Portfolio buys illiquid securities it may be unable to quickly
resell them or may be able to sell them only at a price below current value or
could have difficulty valuing these holdings precisely.
Interest Rate Transactions. Interest rate transactions are hedging
transactions such as interest rate swaps and the purchase or sale of interest
rate caps and floors. They are used by the Portfolio in an attempt to protect
the value of its investments from interest rate fluctuations. Interest rate
swaps involve the exchange by the Portfolio with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments. The purchase of an interest rate cap
entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling such interest rate floor.
The Adviser enters into these transactions on behalf of the Portfolio primarily
to preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the
Portfolio anticipates purchasing at a later date. The Portfolio will not sell
interest rate caps or floors that it does not own.
There is the risk that the Adviser may incorrectly predict the
direction of interest rates resulting in losses to the Portfolio.
Municipal Securities. Municipal securities are debt obligations issued
by local, state and regional governments that provide interest income that is
exempt from federal income tax. These securities are subject to interest rate
risk and credit risk.
PIK (pay-in-kind) Debt Securities and Zero-Coupon Bonds. PIK debt
securities are debt obligations which provide that the issuer may, at its
option, pay interest on such bonds in cash or in the form of additional debt
obligations. Such investments benefit the issuer by mitigating its need for cash
to meet debt service, but also require a higher rate of return to attract
investors who are willing to defer receipt of such cash.
Zero-coupon bonds are bonds that provide for no current interest
payment and are sold at a discount. These investments pay no interest in cash to
its holder during its life and usually trade at a deep discount from their face
or par value. These investments may experience greater volatility in market
value due to changes in interest rates than debt obligations which make regular
payments of interest. The Portfolio will accrue income on such investments for
tax accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Portfolio's
distribution obligations.
These securities are subject to credit risk and interest rate risk.
Preferred Stocks. Preferred stocks are equity securities that generally
pay dividends at a specified rate and have preference over common stock in the
payment of dividends and liquidation. Preferred stock generally does not carry
voting rights.
Preferred stocks are subject to market risk. In addition, because
preferred stocks pay fixed dividends, an increase in interest rates may cause
the price of a preferred stock to fall.
Repurchase Agreements. Repurchase agreements involve the purchase of a
security by the Portfolio and a simultaneous agreement by the seller (generally
a bank or dealer) to repurchase the security from the Portfolio at a specified
date or upon demand. This technique offers a method of earning income on idle
cash.
Repurchase agreements involve credit risk, i.e. the risk that the
seller will fail to repurchase the security, as agreed. In that case, the
Portfolio will bear the risk of market value fluctuations until the security can
be sold and may encounter delays and incur costs in liquidating the security.
Reverse Repurchase Agreements. Reverse repurchase agreements involve
the sale of a security by the Portfolio to another party (generally a bank or
dealer) in return for cash and an agreement by the Portfolio to buy the security
back at a specified price and time.
Reverse repurchase agreements will be used primarily to provide cash to
satisfy unusually high redemption requests or for other temporary or emergency
purposes. Reverse repurchase agreements are considered a form of borrowing by
the Portfolio and, therefore, are a form of leverage. Leverage may cause any
gains or losses of the Portfolio to be magnified.
Securities Loans. The Portfolio may make secured loans of its portfolio
securities. The risks in lending Portfolio securities, as with other extensions
of secured credit, consist of possible delay in receiving additional collateral,
or in the recovery of the securities or possible loss of rights in their
collateral should the borrower fail financially.
Downgrades in Fixed Income Debt Securities
Unless required by applicable law, the Portfolio is not required to
sell or dispose of any debt security that either loses its rating or has its
rating reduced after the Portfolio purchases the security.
Management
Met Investors Series Trust's Board of Trustees is responsible for
managing the business affairs of the Trust. The Trustees meet periodically to
review the affairs of the Trust and to establish certain guidelines which the
Manager and Adviser are expected to follow in implementing the investment
policies and objectives of the Trust. The Trustees also review the management of
the Portfolio's assets by the Adviser. Information about the Trustees and
executive officers of the Trust is contained in the Statement of Additional
Information relating to this Prospectus/Proxy Statement.
Expense Limitation Agreement
In the interest of limiting expenses of Met JPM Quality Bond at least
until February, 2002, the Manager has entered into an expense limitation
agreement with Met Investor Series Trust with respect to the Portfolio ("Expense
Limitation Agreement"). Pursuant to that Expense Limitation Agreement, the
Manager has agreed to waive or limit its fees and to assume other expenses so
that the total annual operating expenses of the Portfolio other than interest,
taxes, brokerage commissions, other expenditures which are capitalized in
accordance with generally accepted accounting principles, other extraordinary
expenses not incurred in the ordinary course of the Portfolio's business and
amounts payable pursuant to a plan adopted in accordance with Rule 12b-1 under
the 1940 Act, are limited to 0.65% of the Portfolio's daily net assets.
The Portfolio may at a later date reimburse to the Manager the
management fees waived or limited and other expenses assumed and paid by the
Manager pursuant to the Expense Limitation Agreement provided the Portfolio has
reached a sufficient asset size to permit such reimbursement to be made without
causing the total annual expense ratio of the Portfolio to exceed the percentage
limits stated above. Consequently, no reimbursement by the Portfolio will be
made unless: (i) the Portfolio's assets exceed $100 million; (ii) the
Portfolio's total annual expense ratio is less than the respective percentages
stated above; and (iii) the payment of such reimbursement has been approved by
Met Investor Series Trust's Board of Trustees on a quarterly basis.
The total amount of reimbursement to which the Manager may be entitled
will equal, at any time, the sum of (i) all investment management fees
previously waived or reduced by the Manager and (ii) all other payments
previously remitted by the Manager to the Portfolio during any of the previous
five fiscal years, less any reimbursement that the Portfolio has previously paid
to the Manager with respect to (a) such investment management fees previously
waived or reduced and (b) such other payments previously remitted by the Manager
to the Portfolio.
The Adviser
Met Investors Series Trust and the Manager have filed an exemptive
application requesting an exemptive order from the SEC that will permit the
Manager, subject to certain conditions, and without the approval of shareholders
to: (a) employ a new unaffiliated investment adviser for the Portfolio pursuant
to the terms of a new investment advisory agreement, in each case either as a
replacement for the existing Adviser or as an additional investment adviser; (b)
change the terms of the investment advisory agreement; and (c) continue the
employment of the existing Adviser on the same advisory contract terms where a
contract has been assigned because of a change in control of the Adviser. In
such circumstances, shareholders would receive notice of such action, including
the information concerning the Adviser that normally is provided in a proxy
statement. The exemptive order would also permit disclosure of fees paid to
multiple unaffiliated investment advisers of the Portfolio on an aggregate basis
only. There is no assurance that the SEC will grant the Met Investors Series
Trust's and the Manager's application.
The Manager pays the Adviser a fee based on the Portfolio's average
daily net assets. The Portfolio is not responsible for the fees paid to the
Adviser.
Taxes
Met JPM Quality Bond expects to qualify and to continue to qualify as a
regulated investment company under Subchapter M of the Code. As qualified, the
Portfolio is not subject to federal income tax on that part of its taxable
income that it distributes to you. Taxable income consists generally of net
investment income, and any capital gains. It is the Portfolio's intention to
distribute all such income and gains.
Shares of the Portfolio are currently offered only to the separate
accounts of the Insurance Companies and to qualified pension and retirement
plans. Separate accounts are insurance company separate accounts that fund the
policies and the annuity contracts. Under the Code, an insurance company pays no
tax with respect to income of a qualifying separate account when the income is
properly allocable to the value of eligible variable annuity or variable life
insurance contracts. For a discussion of the taxation of life insurance
companies and the separate accounts, as well as the tax treatment of the
policies and annuity contracts and the holders thereof, see the discussion of
federal income tax considerations included in the respective prospectuses for
the Contracts.
Section 817(h) of the Code and the regulations thereunder impose
"diversification" requirements of the portfolio. The Portfolio intends to comply
with the diversification requirements. These requirements are in addition to the
diversification requirements imposed on the Portfolio by Subchapter M and the
1940 Act. The section 817(h) requirements place certain limitations on the
assets of each separate account that may be invested in securities of a single
issuer. Specifically, the regulations provide that, except as permitted by "safe
harbor," rules described below, as of the end of each calendar quarter or within
30 days thereafter, no more than 55% of the Portfolio's total assets may be
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments, and no more than 90% by any four
investments.
Section 817(h) also provides, as a safe harbor, that a separate account
will be treated as being adequately diversified if the diversification
requirements under Subchapter M are satisfied and no more than 55% of the value
of the account's total assets are cash and cash items, government securities,
and securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property, and all interests in the same commodity are treated as a single
investment. In addition, each U.S. Government agency or instrumentality is
treated as a separate issuer, while the securities of a particular foreign
government and its agencies, instrumentalities, and political subdivisions all
will be considered securities issued by the same issuer. If the Portfolio does
not satisfy the section 817(h) requirements, the separate accounts, the
Insurance Companies and the Contracts may be taxable.
The foregoing is only a summary of some of the important federal income
tax considerations generally affecting the Portfolio and its shareholders; see
the Statement of Additional Information relating to this Prospectus/Proxy
Statement for a more detailed discussion. Shareholders are urged to consult
their tax advisers.
Report to Policyholders
The fiscal year of the Portfolio ends on December 31 of each year. Met
Investor Series Trust will send its shareholders, at least semi-annually,
reports which show the Portfolio's composition and other information. An annual
report, with audited information, will be sent to shareholders each year.
Sales and Purchases of Shares
Met Investors Series Trust does not sell its shares directly to the
public. Met Investors Series Trust continuously sells shares of the Portfolio
only to the separate accounts of the Insurance Companies and to qualified
pension and profit-sharing plans. It could also offer shares to other separate
accounts of other insurers if approved by the Board of Trustees.
Purchase and Redemption of Shares
MDI is the principal underwriter and distributor of the Contracts. MDI
places orders for the purchase or redemption of shares of the Portfolio based
on, among other things, the amount of net Contract premiums or purchase payments
transferred to the separate accounts, transfers to or from a separate account
investment division and benefit payments to be effected on a given date pursuant
to the terms of the Contracts. Such orders are effected, without sales charge,
at the net asset value per share for the Portfolio determined on that same date.
Shares are sold and redeemed at their net asset value without the
imposition of any sales commission or redemption charge. Class A shares are not
subject to a Rule 12b-1 fee. (However, certain sales or other charges may apply
to the Contracts, as described in the respective Contract prospectuses.)
Right to Restrict Transfers
Neither Met Investor Series Trust nor the Contracts are designed for
professional market timing organizations, other entities, or individuals using
programmed, large and/or frequent transfers. The Insurance Companies, in
coordination with the Trust's Manager, the Adviser, and the Trust's other
investment advisers, reserve the right to temporarily or permanently refuse
exchange requests if, in its judgment, the Portfolio would be unable to invest
effectively in accordance with its investment objectives and policies, or would
otherwise potentially be adversely affected. In particular, a pattern of
exchanges that coincides with a "market timing" strategy may be disruptive to
the Portfolio and therefore may be refused. Investors should consult their
Contract prospectus for information on other specific limitations on the
transfer privilege.
Valuation of Shares
Met JPM Quality Bond's net asset value per share is ordinarily
determined once daily, as of the close of the regular session of business on the
New York Stock Exchange (NYSE) (usually at 4:00 p.m., Eastern Time), on each day
the Exchange is open.
Net asset value of a Met JPM Quality Bond share is computed by dividing
the value of the net assets of the Portfolio by the total number of shares
outstanding in the Portfolio. Share prices for any transaction are those next
calculated after receipt of an order.
Except for money market instruments maturing in 60 days or less,
securities held by the Portfolio are valued at market value. If market values
are not readily available, securities are valued at fair value as determined by
the Valuation Committee of Met Investor Series Trust's Board of Trustees.
Money market instruments maturing in 60 days or less, are valued on the
amortized cost basis
OTHER BUSINESS
The Trustees of Cova Series Trust and Security First Trust do not
intend to present any other business at the Meeting. If, however, any other
matters are properly brought before the Meeting, the persons named in the
accompanying form of proxy will vote thereon in accordance with their judgment.
THE TRUSTEES OF COVA SERIES TRUST RECOMMEND APPROVAL OF THE PLAN AND ANY
UNMARKED VOTING INSTRUCTIONS WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED
IN FAVOR OF APPROVAL OF THE PLAN.
THE TRUSTEES OF SECURITY FIRST TRUST RECOMMEND APPROVAL OF THE PLAN AND ANY
UNMARKED VOTING INSTRUCTIONS WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED
IN FAVOR OF APPROVAL OF THE PLAN.
December , 2000
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<PAGE>
Exhibit A - 1
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this th day of November, 2000, by and between Met Investors Series Trust, a
Delaware business trust, with its principal place of business at 610 Newport
Center Drive, Suite 1350, Newport Beach, California 92660 (the "Trust"), with
respect to its J.P. Morgan Quality Bond Portfolio series (the "Acquiring Fund"),
and Security First Trust, a Massachusetts business trust with its principal
place of business at 11365 West Olympic Boulevard, Los Angeles California 90064
("Security First"), with respect to its Neuberger Berman Bond Series (the
"Selling Fund").
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(C) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of (i) the transfer of all of
the assets of the Selling Fund in exchange solely for Class A shares of
beneficial interest, $.001 par value per share, of the Acquiring Fund (the
"Acquiring Fund Shares"); (ii) the assumption by the Acquiring Fund of the
identified liabilities of the Selling Fund; and (iii) the distribution, after
the Closing Date hereinafter referred to, of the Acquiring Fund Shares to the
shareholders of the Selling Fund in liquidation of the Selling Fund as provided
herein, all upon the terms and conditions hereinafter set forth in this
Agreement.
WHEREAS, the Selling Fund and the Acquiring Fund are each a separate
investment series of an open-end, registered investment company of the
management type and the Selling Fund owns securities that generally are assets
of the character in which the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares of beneficial
interest;
WHEREAS, the Trustees of the Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of the identified liabilities of the Selling Fund by the Acquiring
Fund on the terms and conditions hereinafter set forth are in the best interests
of the Acquiring Fund's shareholders;
WHEREAS, the Trustees of Security First have determined that the
Selling Fund should exchange all of its assets and the identified liabilities
for Acquiring Fund Shares and that the interests of the existing shareholders of
the Selling Fund will not be diluted as a result of the transactions
contemplated herein;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth
and on the basis of the representations and warranties contained herein, the
Selling Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, computed in the manner and as of the
time and date set forth in paragraphs 2.2 and 2.3; and (ii) to assume the
identified liabilities of the Selling Fund, as set forth in paragraph 1.3. Such
transactions shall take place on the Closing Date provided for in paragraph 3.1.
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, interests in futures and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
audited financial statements, which contain a list of all of Selling Fund's
assets as of the date thereof. The Selling Fund hereby represents that as of the
date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its business in connection with the purchase
and sale of securities and the payment of its normal operating expenses. The
Selling Fund reserves the right to sell any of such securities, but will not,
without the prior written approval of the Acquiring Fund, acquire any additional
securities other than securities of the type in which the Acquiring Fund is
permitted to invest.
The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a list of the securities, if any, on the
Selling Fund's list referred to in the second sentence of this paragraph that do
not conform to the Acquiring Fund's investment objectives, policies, and
restrictions. The Selling Fund will, within a reasonable period of time (not
less than 30 days) prior to the Closing Date, furnish the Acquiring Fund with a
list of its portfolio securities and other investments. In the event that the
Selling Fund holds any investments that the Acquiring Fund may not hold, the
Selling Fund, if requested by the Acquiring Fund, will dispose of such
securities prior to the Closing Date. In addition, if it is determined that the
Selling Fund and the Acquiring Fund portfolios, when aggregated, would contain
investments exceeding certain percentage limitations imposed upon the Acquiring
Fund with respect to such investments, the Selling Fund if requested by the
Acquiring Fund will dispose of a sufficient amount of such investments as may be
necessary to avoid violating such limitations as of the Closing Date.
Notwithstanding the foregoing, nothing herein will require the Selling Fund to
dispose of any investments or securities if, in the reasonable judgment of the
Selling Fund, such disposition would adversely affect the tax-free nature of the
Reorganization or would violate the Selling Fund's fiduciary duty to its
shareholders.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to
discharge all of its known liabilities and obligations prior to the Closing
Date. The Acquiring Fund shall assume only those liabilities, expenses, costs,
charges and reserves reflected on a Statement of Assets and Liabilities of the
Selling Fund prepared on behalf of the Selling Fund, as of the Valuation Date
(as defined in paragraph 2.1), in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Selling Fund reflected in such
Statement of Assets and Liabilities and shall not assume any other liabilities,
whether absolute or contingent, known or unknown, accrued or unaccrued, all of
which shall remain the obligation of the Selling Fund.
1.4 LIQUIDATION AND DISTRIBUTION. On or as soon after the Closing Date
as is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund
will liquidate and distribute pro rata to the Selling Fund's shareholders of
record, determined as of the close of business on the Valuation Date (the
"Selling Fund Shareholders"), the Acquiring Fund Shares received by the Selling
Fund pursuant to paragraph 1.1; and (b) the Selling Fund will thereupon proceed
to dissolve as set forth in paragraph 1.8 below. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund Shares
then credited to the account of the Selling Fund on the books of the Acquiring
Fund to open accounts on the share records of the Acquiring Fund in the names of
the Selling Fund Shareholders and representing the respective pro rata number of
the Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Selling Fund will simultaneously be canceled on the books of the
Selling Fund. The Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with such exchange.
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the Prospectus/Proxy
Statement on Form N-14 which has been distributed to shareholders of the Selling
Fund as described in paragraph 4.1(o).
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the Selling
Fund is and shall remain the responsibility of the Selling Fund up to and
including the Closing Date and such later date on which the Selling Fund is
terminated.
1.8 TERMINATION. The Selling Fund shall be terminated promptly following
the Closing Date and the making of all distributions pursuant to paragraph 1.4.
ARTICLE II
VALUATION
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
business day next preceding the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Trust's Agreement and Declaration of Trust and the Acquiring Fund's
then current prospectus and statement of additional information or such other
valuation procedures as shall be mutually agreed upon by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring
Fund Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the Trust's Agreement and Declaration of Trust
and the Acquiring Fund's then current prospectus and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares to be
issued (including fractional shares, if any) in exchange for the Selling Fund's
assets shall be determined by multiplying the outstanding shares of the Selling
Fund by the ratio computed by dividing the net asset value per share of the
Selling Fund by the net asset value per share of the Acquiring Fund determined
in accordance with paragraph 2.2.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
Investors Bank & Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The closing of the Reorganization (the "Closing")
shall take place on or about February 5, 2001 or such other date as the parties
may agree to in writing (the "Closing Date"). All acts taking place at the
Closing shall be deemed to take place simultaneously immediately prior to the
opening of business on the Closing Date unless otherwise provided. The Closing
shall be held as of 9:00 a.m. Eastern time at the offices of the Trust, or at
such other time and/or place as the parties may agree.
3.2 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Valuation Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
3.3 TRANSFER AGENT'S CERTIFICATE. The Bank of New York, as transfer
agent for the Selling Fund at the Closing Date, shall deliver at the Closing a
certificate of an authorized officer stating that its records contain the names
and addresses of the Selling Fund Shareholders and the number and percentage
ownership of outstanding shares owned by each such shareholder immediately prior
to the Closing. The Acquiring Fund shall issue and deliver or cause Investors
Bank & Trust Company, its transfer agent, to issue and deliver a confirmation
evidencing the Acquiring Fund Shares to be credited on the Closing Date to the
Secretary of Security First or provide evidence satisfactory to the Selling Fund
that such Acquiring Fund Shares have been credited to the Selling Fund's account
on the books of the Acquiring Fund. At the Closing, each party shall deliver to
the other such bills of sale, checks, assignments, share certificates, if any,
receipts and other documents as such other party or its counsel may reasonably
request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling Fund represents and
warrants to the Acquiring Fund as follows:
(a) The Selling Fund is a separate investment series of a
business trust duly organized, validly existing, and in good standing under the
laws of the Commonwealth of Massachusetts.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust that is registered as an investment company
classified as a management company of the open-end type, and its registration
with the Securities and Exchange Commission (the "Commission") as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
is in full force and effect.
(c) The current prospectus and statement of additional
information of the Selling Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(d) The Selling Fund is not, and the execution, delivery, and
performance of this Agreement (subject to shareholder approval) will not result,
in violation of any provision of Security First's Declaration of Trust or
By-Laws or of any material agreement, indenture, instrument, contract, lease, or
other undertaking to which the Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date, except for liabilities, if any, to be
discharged or reflected in the Statement of Assets and Liabilities as provided
in paragraph 1.3 hereof.
(f) Except as otherwise disclosed in writing to and accepted
by the Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Selling Fund or any of its properties
or assets, which, if adversely determined, would materially and adversely affect
its financial condition, the conduct of its business, or the ability of the
Selling Fund to carry out the transactions contemplated by this Agreement. The
Selling Fund knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated.
(g) The financial statements of the Selling Fund at July 31,
2000 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Acquiring Fund) fairly reflect the financial condition of the Selling
Fund as of such date, and there are no known contingent liabilities of the
Selling Fund as of such date not disclosed therein.
(h) Since July 31, 2000 there has not been any material
adverse change in the Selling Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Selling Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this subparagraph (h), a
decline in the net asset value of the Selling Fund shall not constitute a
material adverse change.
(i) At the Closing Date, all federal and other tax returns and
reports of the Selling Fund required by law to have been filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid, or provision shall have been made for the
payment thereof. To the best of the Selling Fund's knowledge, no such return is
currently under audit, and no assessment has been asserted with respect to such
returns.
(j) For each fiscal year of its operation, the Selling Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company, has distributed in each such year
all net investment income and realized capital gains and has met the
diversification requirements of Section 817 (h) of the Code and the rules
thereunder.
(k) All issued and outstanding shares of the Selling Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund. All of the issued and outstanding
shares of the Selling Fund will, at the time of the Closing Date, be held by the
persons and in the amounts set forth in the records of the transfer agent as
provided in paragraph 3.3. The Selling Fund does not have outstanding any
options, warrants, or other rights to subscribe for or purchase any of the
Selling Fund shares, nor is there outstanding any security convertible into any
of the Selling Fund shares.
(l) At the Closing Date, the Selling Fund will have good and
marketable title to the Selling Fund's assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.2 and full right, power, and authority to sell,
assign, transfer, and deliver such assets hereunder, and, upon delivery and
payment for such assets, the Acquiring Fund will acquire good and marketable
title thereto, subject to no restrictions on the full transfer thereof,
including such restrictions as might arise under the 1933 Act, other than as
disclosed to the Acquiring Fund and accepted by the Acquiring Fund.
(m) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Selling
Fund and, subject to approval by the Selling Fund's shareholders, this Agreement
constitutes a valid and binding obligation of the Selling Fund, enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(n) The information furnished by the Selling Fund for use in
no-action letters, applications for orders, registration statements, proxy
materials, and other documents that may be necessary in connection with the
transactions contemplated hereby is accurate and complete in all material
respects and complies in all material respects with federal securities and other
laws and regulations thereunder applicable thereto.
(o) The Selling Fund has provided the Acquiring Fund with
information reasonably necessary for the preparation of a prospectus, which
included the proxy statement of the Selling Fund (the "Prospectus/Proxy
Statement"), all of which was included in a Registration Statement on Form N-14
of the Acquiring Fund (the "Registration Statement"), in compliance with the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act") and
the 1940 Act in connection with the meeting of the shareholders of the Selling
Fund to approve this Agreement and the transactions contemplated hereby. The
Prospectus/Proxy Statement included in the Registration Statement (other than
information therein that relates to the Acquiring Fund and any other fund
described therein other than the Selling Fund) does not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
4.2 REPRESENTATIONS OF THE ACQUIRING FUND. The Acquiring Fund represents
and warrants to the Selling Fund as follows:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust that is registered as an investment company classified
as a management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect.
(c) At the Closing Date, the current prospectus and statement
of additional information of the Acquiring Fund will conform in all material
respects to the applicable requirements of the 1933 Act and the 1940 Act and the
rules and regulations of the Commission thereunder and will not include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Agreement and Declaration of Trust or By-Laws or of any material agreement,
indenture, instrument, contract, lease, or other undertaking to which the
Acquiring Fund is a party or by which it is bound.
(e) Except as otherwise disclosed in writing to the Selling
Fund and accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the basis for
the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions contemplated herein.
(f) The Acquiring Fund has no known liabilities of a material amount,
contingent or otherwise.
(g) At the Closing Date, there will not be any material
adverse change in the Acquiring Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Selling Fund. For the purposes of this subparagraph (g), a
decline in the net asset value of the Acquiring Fund shall not constitute a
material adverse change.
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to be filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid or provision shall have been made for the
payment thereof. To the best of the Acquiring Fund's knowledge, no such return
is currently under audit, and no assessment has been asserted with respect to
such returns.
(i) The Acquiring Fund expects to qualify for treatment as a
regulated investment company under subchapter M of the Code, and expects to meet
the diversification requirements of Section 817(h) of the Code and the rules
thereunder, for its taxable year which includes the Closing Date.
(j) All issued and outstanding Acquiring Fund Shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(k) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium, and other
laws relating to or affecting creditors' rights and to general equity
principles.
(l) The Acquiring Fund Shares to be issued and delivered to
the Selling Fund, for the account of the Selling Fund Shareholders, pursuant to
the terms of this Agreement will, at the Closing Date, have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable.
(m) The information furnished by the Acquiring Fund for use in
no-action letters, applications for orders, registration statements, proxy
materials, and other documents that may be necessary in connection with the
transactions contemplated hereby is accurate and complete in all material
respects and complies in all material respects with federal securities and other
laws and regulations applicable thereto.
(n) The Prospectus/Proxy Statement included in the
Registration Statement (only insofar as it relates to the Acquiring Fund) does
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
misleading.
(o) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling
Fund each will operate its business in the ordinary course between the date
hereof and the Closing Date, it being understood that such ordinary course of
business will include customary dividends and distributions.
5.2 APPROVAL BY SHAREHOLDERS. Security First will call a meeting of the
shareholders of the Selling Fund to consider and act upon this Agreement and to
take all other action necessary to obtain approval of the transactions
contemplated herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
5.4 ADDITIONAL INFORMATION. The Selling Fund will assist the Acquiring Fund
in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Selling Fund shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
5.6 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but
in any case within sixty days after the Closing Date, the Selling Fund shall
furnish the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Selling Fund for
federal income tax purposes that will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be reviewed by Deloitte &
Touche LLP and certified by Security First's President, Vice President or
Treasurer.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring
Fund contained in this Agreement shall be true and correct as of the date hereof
and as of the Closing Date with the same force and effect as if made on and as
of the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Trust's President or Vice
President, in form and substance reasonably satisfactory to the Selling Fund and
dated as of the Closing Date, to such effect and as to such other matters as the
Selling Fund shall reasonably request.
6.2 The Selling Fund shall have received on the Closing Date an opinion
from Sullivan & Worcester LLP, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form reasonably satisfactory to the Selling Fund, covering
the following points:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the power to own all of its
properties and assets and to carry on its business as presently conducted.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed, and
delivered by the Acquiring Fund and, assuming due authorization, execution and
delivery of this Agreement by the Selling Fund, is a valid and binding
obligation of the Acquiring Fund enforceable against the Acquiring Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights generally and to general equity principles.
(d) Assuming that a consideration therefor not less than the
net asset value thereof has been paid, the Acquiring Fund Shares to be issued
and delivered to the Selling Fund on behalf of the Selling Fund Shareholders as
provided by this Agreement are duly authorized and upon such delivery will be
legally issued and outstanding and fully paid and non-assessable, and no
shareholder of the Acquiring Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for consummation by
the Acquiring Fund of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(f) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of the Trust's Agreement and Declaration of Trust or By-Laws or any
provision of any material agreement, indenture, instrument, contract, lease or
other undertaking (in each case known to such counsel) to which the Acquiring
Fund is a party or by which it or any of its properties may be bound or to the
knowledge of such counsel, result in the acceleration of any obligation or the
imposition of any penalty, under any agreement, judgment, or decree to which the
Acquiring Fund is a party or by which it is bound.
(g) Only insofar as they relate to the Acquiring Fund, the
descriptions in the Prospectus/Proxy Statement of statutes, legal and
governmental proceedings and material contracts, if any, are accurate and fairly
present the information required to be shown.
(h) Such counsel does not know of any legal or governmental
proceedings, only insofar as they relate to the Acquiring Fund, existing on or
before the effective date of the Registration Statement or the Closing Date
required to be described in the Registration Statement or to be filed as
exhibits to the Registration Statement which are not described or filed as
required.
(i) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Acquiring Fund or
any of its properties or assets and the Acquiring Fund is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body, which materially and adversely affects its business, other
than as previously disclosed in the Registration Statement.
Such counsel shall also state that they have participated in
conferences with officers and other representatives of the Acquiring Fund at
which the contents of the Prospectus/Proxy Statement and related matters were
discussed and, although they are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Prospectus/Proxy Statement (except to the extent indicated in
paragraph (g) of their above opinion), on the basis of the foregoing (relying as
to materiality to a large extent upon the opinions of the Trust's officers and
other representatives of the Acquiring Fund), no facts have come to their
attention that lead them to believe that the Prospectus/Proxy Statement as of
its date, as of the date of the meeting of the shareholders of the Selling Fund,
and as of the Closing Date, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein regarding the
Acquiring Fund or necessary, in the light of the circumstances under which they
were made, to make the statements therein regarding the Acquiring Fund not
misleading. Such opinion may state that such counsel does not express any
opinion or belief as to the financial statements or any financial or statistical
data, or as to the information relating to the Selling Fund, contained in the
Prospectus/Proxy Statement or the Registration Statement, and that such opinion
is solely for the benefit of Security First and the Selling Fund.
Such opinion shall contain such assumptions and limitations as shall be
in the opinion of Sullivan & Worcester LLP appropriate to render the opinions
expressed therein.
In this paragraph 6.2, references to the Prospectus/Proxy Statement
include and relate to only the text of such Prospectus/Proxy Statement and not
to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the obligations to be performed by it hereunder on or before
the Closing Date and, in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by Security First's
President or Vice President, in form and substance satisfactory to the Acquiring
Fund and dated as of the Closing Date, to such effect and as to such other
matters as the Acquiring Fund shall reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of Security First.
7.3 The Acquiring Fund shall have received on the Closing Date an
opinion of Richard Pearson, Esq., President of Security First, in a form
satisfactory to the Acquiring Fund covering the following points:
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing and in good
standing under the laws of the Commonwealth of Massachusetts and has the power
to own all of its properties and assets and to carry on its business as
presently conducted.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust registered as an investment company under the 1940
Act, and, to such counsel's knowledge, such registration with the Commission as
an investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund and, assuming due authorization, execution, and
delivery of this Agreement by the Acquiring Fund, is a valid and binding
obligation of the Selling Fund enforceable against the Selling Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and to general equity principles.
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or the Commonwealth of Massachusetts is required for consummation by the
Selling Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(e) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of Security First's Declaration of Trust or By-laws, or to the
knowledge of such counsel, any provision of any material agreement, indenture,
instrument, contract, lease or other undertaking to which the Selling Fund is a
party or by which it or any of its properties may be bound or, to the knowledge
of such counsel, result in the acceleration of any obligation or the imposition
of any penalty, under any agreement, judgment, or decree to which the Selling
Fund is a party or by which it is bound.
(f) Only insofar as they relate to the Selling Fund, the
descriptions in the Prospectus/Proxy Statement of statutes, legal and government
proceedings and material contracts, if any, are accurate and fairly present the
information required to be shown.
(g) To the knowledge of such counsel, there are no legal or
governmental proceedings, only insofar as they relate to the Selling Fund
existing on or before the effective date of the Registration Statement or the
Closing Date, required to be described in the Registration Statement or to be
filed as exhibits to the Registration Statement which are not described or filed
as required.
(h) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Selling Fund or
any of its respective properties or assets and the Selling Fund is neither a
party to nor subject to the provisions of any order, decree or judgment of any
court or governmental body, which materially and adversely affects its business
other than as previously disclosed in the Prospectus/Proxy Statement.
(i) Assuming that a consideration therefor of not less than
the net asset value thereof has been paid, and assuming that such shares were
issued in accordance with the terms of the Selling Fund's registration
statement, or any amendment thereto, in effect at the time of such issuance, all
issued and outstanding shares of the Selling Fund are legally issued and fully
paid and non-assessable.
Richard Pearson, Esq. shall also state that he has participated in
conferences with officers and other representatives of the Selling Fund at which
the contents of the Prospectus/Proxy Statement and related matters were
discussed and, although he is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Prospectus/Proxy Statement (except to the extent indicated in
paragraph (f) of his above opinion), on the basis of the foregoing (relying as
to materiality to a large extent upon the opinions of Security First's officers
and other representatives of the Selling Fund), no facts have come to his
attention that lead him to believe that the Prospectus/Proxy Statement as of its
date, as of the date of the meeting of the shareholders of the Selling Fund, and
as of the Closing Date, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein regarding the
Selling Fund or necessary, in the light of the circumstances under which they
were made, to make the statements therein regarding the Selling Fund not
misleading. Such opinion may state that such counsel does not express any
opinion or belief as to the financial statements or any financial or statistical
data, or as to information relating to the Acquiring Fund, contained in the
Prospectus/Proxy Statement or Registration Statement, and that such opinion is
solely for the benefit of the Trust and the Acquiring Fund.
Such opinion shall contain such other assumptions and limitations as
shall be in the opinion of Richard Pearson, Esq. appropriate to render the
opinions expressed therein, and shall indicate, with respect to matters of
Massachusetts law that as Richard Pearson, Esq. is not admitted to the bar of
Massachusetts, such opinions are based either upon the review of published
statutes, cases and rules and regulations of the Commonwealth of Massachusetts
or upon an opinion of Massachusetts counsel.
In this paragraph 7.3, references to the Prospectus/Proxy Statement
include and relate to only the text of such Prospectus/Proxy Statement and not
to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Selling Fund in accordance with the provisions of Security First's
Declaration of Trust and By-Laws and certified copies of the resolutions
evidencing such approval shall have been delivered to the Acquiring Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund or
the Selling Fund may waive the conditions set forth in this paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
8.3 All required consents of other parties and all other consents,
orders, and permits of federal, state and local regulatory authorities
(including those of the Commission and of state Blue Sky securities authorities,
including any necessary "no-action" positions of and exemptive orders from such
federal and state authorities) to permit consummation of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order, or permit would not involve a risk of a material adverse
effect on the assets or properties of the Acquiring Fund or the Selling Fund,
provided that either party hereto may for itself waive any of such conditions.
8.4 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness of the Registration
Statement shall have been issued and, to the best knowledge of the parties
hereto, no investigation or proceeding for that purpose shall have been
instituted or be pending, threatened or contemplated under the 1933 Act.
8.5 The Selling Fund shall have declared a dividend or dividends which,
together with all previous such dividends shall have the effect of distributing
to the Selling Fund Shareholders all of the Selling Fund's investment company
taxable income for all taxable periods ending on the Closing Date (computed
without regard to any deduction for dividends paid) and all of the net capital
gains realized in all taxable periods ending on the Closing Date (after
reduction for any capital loss carryforward).
8.6 The parties shall have received a favorable opinion of Sullivan &
Worcester LLP addressed to the Acquiring Fund and the Selling Fund substantially
to the effect that for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in exchange
solely for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
the identified liabilities of the Selling Fund followed by the distribution of
the Acquiring Fund Shares to the Selling Fund Shareholders in dissolution and
liquidation of the Selling Fund will constitute a "reorganization" within the
meaning of Section 368(a)(1)(C) of the Code, and the Acquiring Fund and the
Selling Fund will each be a "party to a reorganization" within the meaning of
Section 368(b) of the Code.
(b) No gain or loss will be recognized by the Acquiring Fund
upon the receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of the identified
liabilities of the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund
upon the transfer of the Selling Fund assets to the Acquiring Fund in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of the
identified liabilities of the Selling Fund or upon the distribution (whether
actual or constructive) of the Acquiring Fund Shares to Selling Fund
Shareholders in exchange for their shares of the Selling Fund.
(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares
received by each Selling Fund Shareholder pursuant to the Reorganization will be
the same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding period of
the Acquiring Fund Shares to be received by each Selling Fund Shareholder will
include the period during which the Selling Fund shares exchanged therefor were
held by such shareholder (provided the Selling Fund shares were held as capital
assets on the date of the Reorganization).
(f) The tax basis of the Selling Fund assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the Selling
Fund immediately prior to the Reorganization, and the holding period of the
assets of the Selling Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Selling Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Selling Fund may waive the conditions set forth in this paragraph
8.6.
8.7 The Acquiring Fund shall have received from Deloitte & Touche LLP a
letter addressed to the Acquiring Fund, in form and substance satisfactory to
the Acquiring Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Selling Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the Capitalization Table
appearing in the Registration Statement and Prospectus/Proxy Statement has been
obtained from and is consistent with the accounting records of the Selling Fund;
(c) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the pro forma financial
statements that are included in the Registration Statement and Prospectus/Proxy
Statement agree to the accounting records of the Acquiring Fund and the Selling
Fund or with written estimates provided by each Fund's management, and were
found to be mathematically correct; and
(d) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the data utilized in the
calculations of the pro forma expense ratios appearing in the Registration
Statement and Prospectus/Proxy Statement agree with underlying accounting
records of the Selling Fund or with written estimates by the Selling Fund's
management and were found to be mathematically correct.
In addition, unless waived by the Acquiring Fund, the Acquiring Fund
shall have received from Deloitte & Touche LLP a letter addressed to the
Acquiring Fund dated on the Closing Date, in form and substance satisfactory to
the Acquiring Fund, to the effect that on the basis of limited procedures agreed
upon by the Acquiring Fund (but not an examination in accordance with generally
accepted auditing standards), the net asset value per share of the Selling Fund
as of the Valuation Date was computed and the valuation of the portfolio was
consistent with the valuation practices of the Acquiring Fund.
8.8 The Selling Fund shall have received from Deloitte & Touche LLP a
letter addressed to the Selling Fund, in form and substance satisfactory to the
Selling Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Acquiring Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) they had performed limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards) which consisted of a reading of any
unaudited pro forma financial statements included in the Registration Statement
and Prospectus/Proxy Statement, and making inquiries of appropriate officials of
the Trust responsible for financial and accounting matters whether such
unaudited pro forma financial statements comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and the
published rules and regulations thereunder;
(c) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards), the Capitalization Table appearing
in the Registration Statement and Prospectus/Proxy Statement has been obtained
from and is consistent with the accounting records of the Acquiring Fund; and
(d) on the basis of limited procedures agreed upon by the
Selling Fund (but not an examination in accordance with generally accepted
auditing standards), the data utilized in the calculations of the pro forma
expense ratios appearing in the Registration Statement and Prospectus/Proxy
Statement agree with written estimates by each Fund's management and were found
to be mathematically correct.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund, whether incurred before or after the date of this Agreement,
will be borne by Metropolitan Life Insurance Company or one of its affiliates.
Such expenses include, without limitation, (a) expenses incurred in connection
with the entering into and the carrying out of the provisions of this Agreement;
(b) expenses associated with the preparation and filing of the Registration
Statement under the 1933 Act covering the Acquiring Fund Shares to be issued
pursuant to the provisions of this Agreement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which the Selling Fund
Shareholders are resident as of the date of the mailing of the Prospectus/Proxy
Statement to such shareholders; (d) postage; (e) printing; (f) accounting fees;
(g) legal fees; and (h) solicitation costs of the transaction. Notwithstanding
the foregoing, the Acquiring Fund shall pay its own federal and state
registration fees.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall not survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Selling Fund. In addition, either the Acquiring Fund or
the Selling Fund may at its option terminate this Agreement at or prior to the
Closing Date because:
(a) of a breach by the other of any representation, warranty, or agreement
contained herein to be performed at or prior to the Closing Date, if not cured
within 30 days; or
(b) a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably appears
that it will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful
default, there shall be no liability for damages on the part of either the
Acquiring Fund, the Selling Fund, the Trust, Security First, the respective
Trustees, or officers, to the other party or its Trustees, or officers, but each
shall bear the expenses incurred by it incidental to the preparation and
carrying out of this Agreement as provided in paragraph 9.1.
ARTICLE XII
AMENDMENTS
12.1 This Agreement may be amended, modified, or supplemented in such
manner as may be mutually agreed upon in writing by the authorized officers of
the Selling Fund and the Acquiring Fund; provided, however, that following the
meeting of shareholders of the Selling Fund pursuant to paragraph 5.2 of this
Agreement, no such amendment may have the effect of changing the provisions for
determining the number of the Acquiring Fund Shares to be issued to the Selling
Fund Shareholders under this Agreement to the detriment of such Shareholders
without their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to the conflicts
of laws provisions thereof; provided, however, that the due authorization,
execution and delivery of this Agreement, in the case of the Selling Fund, shall
be governed and construed in accordance with the laws of the Commonwealth of
Massachusetts, without giving effect to the conflicts of laws provisions
thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but, except as provided in
this paragraph, no assignment or transfer hereof or of any rights or obligations
hereunder shall be made by any party without the written consent of the other
party. Nothing herein expressed or implied is intended or shall be construed to
confer upon or give any person, firm, or corporation, other than the parties
hereto and their respective successors and assigns, any rights or remedies under
or by reason of this Agreement.
13.5 With respect to both Security First and the Trust, the names used
herein refer respectively to the trust created and, as the case may be, the
Trustees, as trustees but not individually or personally, acting from time to
time under organizational documents filed in Massachusetts in the case of
Security First and Delaware, in the case of the Trust, which are hereby referred
to and are also on file at the principal offices of Security First or, as the
case may be, the Trust. The obligations of Security First or of the Trust
entered into in the name or on behalf thereof by any of the Trustees,
representatives or agents of Security First or the Trust, as the case may be,
are made not individually, but in such capacities, and are not binding upon any
of the Trustees, shareholders or representatives of Security First or, as the
case may be, the Trust personally, but bind only the trust property, and all
persons dealing with the Selling Fund or the Acquiring Fund must look solely to
the trust property belonging to the Selling Fund or, as the case may be, the
Acquiring Fund for the enforcement of any claims against the Selling Fund or, as
the case may be, the Acquiring Fund.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement, all
as of the date first written above.
SECURITY FIRST TRUST ON BEHALF OF NEUBERGER BERMAN
BOND SERIES
By:
Name: Richard Pearson
Title: President
MET INVESTORS SERIES TRUST ON BEHALF OF J.P. MORGAN
QUALITY BOND PORTFOLIO
By:
Name: Elizabeth M. Forget
Title: President
<PAGE>
Exhibit A - 2
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this th day of November, 2000, by and between Met Investors Series Trust, a
Delaware business trust, with its principal place of business at 610 Newport
Center Drive, Suite 1350, Newport Beach, California 92660 (the "Trust"), with
respect to its J.P. Morgan Quality Bond Portfolio series (the "Acquiring Fund"),
and Cova Series Trust, a Massachusetts business trust with its principal place
of business at One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois 60181
("Cova"), with respect to its Quality Bond Portfolio (the "Selling Fund").
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(F) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of (i) the transfer of all of
the assets of the Selling Fund in exchange solely for Class A shares of
beneficial interest, $.001 par value per share, of the Acquiring Fund (the
"Acquiring Fund Shares"); (ii) the assumption by the Acquiring Fund of the
identified liabilities of the Selling Fund; and (iii) the distribution, after
the Closing Date hereinafter referred to, of the Acquiring Fund Shares to the
shareholders of the Selling Fund in liquidation of the Selling Fund as provided
herein, all upon the terms and conditions hereinafter set forth in this
Agreement.
WHEREAS, the Selling Fund and the Acquiring Fund are each a separate
investment series of an open-end, registered investment company of the
management type and the Selling Fund owns securities that generally are assets
of the character in which the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares of beneficial
interest;
WHEREAS, the Trustees of the Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of the identified liabilities of the Selling Fund by the Acquiring
Fund on the terms and conditions hereinafter set forth are in the best interests
of the Acquiring Fund's shareholders;
WHEREAS, the Trustees of Cova have determined that the Selling Fund
should exchange all of its assets and the identified liabilities for Acquiring
Fund Shares and that the interests of the existing shareholders of the Selling
Fund will not be diluted as a result of the transactions contemplated herein;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth
and on the basis of the representations and warranties contained herein, the
Selling Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, computed in the manner and as of the
time and date set forth in paragraphs 2.2 and 2.3; and (ii) to assume the
identified liabilities of the Selling Fund, as set forth in paragraph 1.3. Such
transactions shall take place on the Closing Date provided for in paragraph 3.1.
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, interests in futures and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
audited financial statements, which contain a list of all of Selling Fund's
assets as of the date thereof. The Selling Fund hereby represents that as of the
date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its business in connection with the purchase
and sale of securities and the payment of its normal operating expenses. The
Selling Fund reserves the right to sell any of such securities, but will not,
without the prior written approval of the Acquiring Fund, acquire any additional
securities other than securities of the type in which the Acquiring Fund is
permitted to invest.
The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a list of the securities, if any, on the
Selling Fund's list referred to in the second sentence of this paragraph that do
not conform to the Acquiring Fund's investment objectives, policies, and
restrictions. The Selling Fund will, within a reasonable period of time (not
less than 30 days) prior to the Closing Date, furnish the Acquiring Fund with a
list of its portfolio securities and other investments. In the event that the
Selling Fund holds any investments that the Acquiring Fund may not hold, the
Selling Fund, if requested by the Acquiring Fund, will dispose of such
securities prior to the Closing Date. In addition, if it is determined that the
Selling Fund and the Acquiring Fund portfolios, when aggregated, would contain
investments exceeding certain percentage limitations imposed upon the Acquiring
Fund with respect to such investments, the Selling Fund if requested by the
Acquiring Fund will dispose of a sufficient amount of such investments as may be
necessary to avoid violating such limitations as of the Closing Date.
Notwithstanding the foregoing, nothing herein will require the Selling Fund to
dispose of any investments or securities if, in the reasonable judgment of the
Selling Fund, such disposition would adversely affect the tax-free nature of the
Reorganization or would violate the Selling Fund's fiduciary duty to its
shareholders.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to
discharge all of its known liabilities and obligations prior to the Closing
Date. The Acquiring Fund shall assume only those liabilities, expenses, costs,
charges and reserves reflected on a Statement of Assets and Liabilities of the
Selling Fund prepared on behalf of the Selling Fund, as of the Valuation Date
(as defined in paragraph 2.1), in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Selling Fund reflected in such
Statement of Assets and Liabilities and shall not assume any other liabilities,
whether absolute or contingent, known or unknown, accrued or unaccrued, all of
which shall remain the obligation of the Selling Fund.
1.4 LIQUIDATION AND DISTRIBUTION. On or as soon after the Closing Date
as is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund
will liquidate and distribute pro rata to the Selling Fund's shareholders of
record, determined as of the close of business on the Valuation Date (the
"Selling Fund Shareholders"), the Acquiring Fund Shares received by the Selling
Fund pursuant to paragraph 1.1; and (b) the Selling Fund will thereupon proceed
to dissolve as set forth in paragraph 1.8 below. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund Shares
then credited to the account of the Selling Fund on the books of the Acquiring
Fund to open accounts on the share records of the Acquiring Fund in the names of
the Selling Fund Shareholders and representing the respective pro rata number of
the Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Selling Fund will simultaneously be canceled on the books of the
Selling Fund. The Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with such exchange.
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the Prospectus/Proxy
Statement on Form N-14 which has been distributed to shareholders of the Selling
Fund as described in paragraph 4.1(o).
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the Selling
Fund is and shall remain the responsibility of the Selling Fund up to and
including the Closing Date and such later date on which the Selling Fund is
terminated.
1.8 TERMINATION. The Selling Fund shall be terminated promptly following
the Closing Date and the making of all distributions pursuant to paragraph 1.4.
ARTICLE II
VALUATION
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
business day next preceding the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Trust's Agreement and Declaration of Trust and the Acquiring Fund's
then current prospectus and statement of additional information or such other
valuation procedures as shall be mutually agreed upon by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring
Fund Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the Trust's Agreement and Declaration of Trust
and the Acquiring Fund's then current prospectus and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares to be
issued (including fractional shares, if any) in exchange for the Selling Fund's
assets shall be determined by multiplying the outstanding shares of the Selling
Fund by the ratio computed by dividing the net asset value per share of the
Selling Fund by the net asset value per share of the Acquiring Fund determined
in accordance with paragraph 2.2.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
Investors Bank & Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The closing of the Reorganization (the "Closing")
shall take place on or about February 5, 2001 or such other date as the parties
may agree to in writing (the "Closing Date"). All acts taking place at the
Closing shall be deemed to take place simultaneously immediately prior to the
opening of business on the Closing Date unless otherwise provided. The Closing
shall be held as of 9:00 a.m. Eastern time at the offices of the Trust, or at
such other time and/or place as the parties may agree.
3.2 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Valuation Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
3.3 TRANSFER AGENT'S CERTIFICATE. Investors Bank & Trust Company, as
transfer agent for the Selling Fund at the Closing Date, shall deliver at the
Closing a certificate of an authorized officer stating that its records contain
the names and addresses of the Selling Fund Shareholders and the number and
percentage ownership of outstanding shares owned by each such shareholder
immediately prior to the Closing. The Acquiring Fund shall issue and deliver or
cause Investors Bank & Trust Company, its transfer agent, to issue and deliver a
confirmation evidencing the Acquiring Fund Shares to be credited on the Closing
Date to the Secretary of Cova or provide evidence satisfactory to the Selling
Fund that such Acquiring Fund Shares have been credited to the Selling Fund's
account on the books of the Acquiring Fund. At the Closing, each party shall
deliver to the other such bills of sale, checks, assignments, share
certificates, if any, receipts and other documents as such other party or its
counsel may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling Fund represents and
warrants to the Acquiring Fund as follows:
(a) The Selling Fund is a separate investment series of a
business trust duly organized, validly existing, and in good standing under the
laws of the Commonwealth of Massachusetts.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust that is registered as an investment company
classified as a management company of the open-end type, and its registration
with the Securities and Exchange Commission (the "Commission") as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
is in full force and effect.
(c) The current prospectus and statement of additional
information of the Selling Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(d) The Selling Fund is not, and the execution, delivery, and
performance of this Agreement (subject to shareholder approval) will not result,
in violation of any provision of Cova's Agreement and Declaration of Trust or
By-Laws or of any material agreement, indenture, instrument, contract, lease, or
other undertaking to which the Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date, except for liabilities, if any, to be
discharged or reflected in the Statement of Assets and Liabilities as provided
in paragraph 1.3 hereof.
(f) Except as otherwise disclosed in writing to and accepted
by the Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Selling Fund or any of its properties
or assets, which, if adversely determined, would materially and adversely affect
its financial condition, the conduct of its business, or the ability of the
Selling Fund to carry out the transactions contemplated by this Agreement. The
Selling Fund knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated.
(g) The unaudited financial statements of the Selling Fund at
June 30, 2000 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Acquiring Fund) fairly reflect the financial condition of the Selling
Fund as of such date, and there are no known contingent liabilities of the
Selling Fund as of such date not disclosed therein.
(h) Since June 30, 2000 there has not been any material
adverse change in the Selling Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Selling Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this subparagraph (h), a
decline in the net asset value of the Selling Fund shall not constitute a
material adverse change.
(i) At the Closing Date, all federal and other tax returns and
reports of the Selling Fund required by law to have been filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid, or provision shall have been made for the
payment thereof. To the best of the Selling Fund's knowledge, no such return is
currently under audit, and no assessment has been asserted with respect to such
returns.
(j) For each fiscal year of its operation, the Selling Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company, has distributed in each such year
all net investment income and realized capital gains and has met the
diversification requirements of Section 817 (h) of the Code and the rules
thereunder.
(k) All issued and outstanding shares of the Selling Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund. All of the issued and outstanding
shares of the Selling Fund will, at the time of the Closing Date, be held by the
persons and in the amounts set forth in the records of the transfer agent as
provided in paragraph 3.3. The Selling Fund does not have outstanding any
options, warrants, or other rights to subscribe for or purchase any of the
Selling Fund shares, nor is there outstanding any security convertible into any
of the Selling Fund shares.
(l) At the Closing Date, the Selling Fund will have good and
marketable title to the Selling Fund's assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.2 and full right, power, and authority to sell,
assign, transfer, and deliver such assets hereunder, and, upon delivery and
payment for such assets, the Acquiring Fund will acquire good and marketable
title thereto, subject to no restrictions on the full transfer thereof,
including such restrictions as might arise under the 1933 Act, other than as
disclosed to the Acquiring Fund and accepted by the Acquiring Fund.
(m) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Selling
Fund and, subject to approval by the Selling Fund's shareholders, this Agreement
constitutes a valid and binding obligation of the Selling Fund, enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(n) The information furnished by the Selling Fund for use in
no-action letters, applications for orders, registration statements, proxy
materials, and other documents that may be necessary in connection with the
transactions contemplated hereby is accurate and complete in all material
respects and complies in all material respects with federal securities and other
laws and regulations thereunder applicable thereto.
(o) The Selling Fund has provided the Acquiring Fund with
information reasonably necessary for the preparation of a prospectus, which
included the proxy statement of the Selling Fund (the "Prospectus/Proxy
Statement"), all of which was included in a Registration Statement on Form N-14
of the Acquiring Fund (the "Registration Statement"), in compliance with the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act") and
the 1940 Act in connection with the meeting of the shareholders of the Selling
Fund to approve this Agreement and the transactions contemplated hereby. The
Prospectus/Proxy Statement included in the Registration Statement (other than
information therein that relates to the Acquiring Fund and any other fund
described therein other than the Selling Fund) does not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
4.2 REPRESENTATIONS OF THE ACQUIRING FUND. The Acquiring Fund represents
and warrants to the Selling Fund as follows:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust that is registered as an investment company classified
as a management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect.
(c) At the Closing Date, the current prospectus and statement
of additional information of the Acquiring Fund will conform in all material
respects to the applicable requirements of the 1933 Act and the 1940 Act and the
rules and regulations of the Commission thereunder and will not include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Agreement and Declaration of Trust or By-Laws or of any material agreement,
indenture, instrument, contract, lease, or other undertaking to which the
Acquiring Fund is a party or by which it is bound.
(e) Except as otherwise disclosed in writing to the Selling
Fund and accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the basis for
the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions contemplated herein.
(f) The Acquiring Fund has no known liabilities of a material amount,
contingent or otherwise.
(g) At the Closing Date, there will not be any material
adverse change in the Acquiring Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Selling Fund. For the purposes of this subparagraph (g), a
decline in the net asset value of the Acquiring Fund shall not constitute a
material adverse change.
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to be filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid or provision shall have been made for the
payment thereof. To the best of the Acquiring Fund's knowledge, no such return
is currently under audit, and no assessment has been asserted with respect to
such returns.
(i) All issued and outstanding Acquiring Fund Shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(j) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium, and other
laws relating to or affecting creditors' rights and to general equity
principles.
(k) The Acquiring Fund Shares to be issued and delivered to
the Selling Fund, for the account of the Selling Fund Shareholders, pursuant to
the terms of this Agreement will, at the Closing Date, have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable.
(l) The information furnished by the Acquiring Fund for use in
no-action letters, applications for orders, registration statements, proxy
materials, and other documents that may be necessary in connection with the
transactions contemplated hereby is accurate and complete in all material
respects and complies in all material respects with federal securities and other
laws and regulations applicable thereto.
(m) The Prospectus/Proxy Statement included in the
Registration Statement (only insofar as it relates to the Acquiring Fund) does
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
misleading.
(n) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling
Fund each will operate its business in the ordinary course between the date
hereof and the Closing Date, it being understood that such ordinary course of
business will include customary dividends and distributions.
5.2 APPROVAL BY SHAREHOLDERS. Cova will call a meeting of the shareholders
of the Selling Fund to consider and act upon this Agreement and to take all
other action necessary to obtain approval of the transactions contemplated
herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
5.4 ADDITIONAL INFORMATION. The Selling Fund will assist the Acquiring Fund
in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Selling Fund shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
5.6 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but
in any case within sixty days after the Closing Date, the Selling Fund shall
furnish the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Selling Fund for
federal income tax purposes that will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be reviewed by Deloitte &
Touche LLP and certified by Cova's President, Vice President or Treasurer.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring
Fund contained in this Agreement shall be true and correct as of the date hereof
and as of the Closing Date with the same force and effect as if made on and as
of the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Trust's President or Vice
President, in form and substance reasonably satisfactory to the Selling Fund and
dated as of the Closing Date, to such effect and as to such other matters as the
Selling Fund shall reasonably request.
6.2 The Selling Fund shall have received on the Closing Date an opinion
from Sullivan & Worcester LLP, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form reasonably satisfactory to the Selling Fund, covering
the following points:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the power to own all of its
properties and assets and to carry on its business as presently conducted.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed, and
delivered by the Acquiring Fund and, assuming due authorization, execution and
delivery of this Agreement by the Selling Fund, is a valid and binding
obligation of the Acquiring Fund enforceable against the Acquiring Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights generally and to general equity principles.
(d) Assuming that a consideration therefor not less than the
net asset value thereof has been paid, the Acquiring Fund Shares to be issued
and delivered to the Selling Fund on behalf of the Selling Fund Shareholders as
provided by this Agreement are duly authorized and upon such delivery will be
legally issued and outstanding and fully paid and non-assessable, and no
shareholder of the Acquiring Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for consummation by
the Acquiring Fund of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(f) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of the Trust's Agreement and Declaration of Trust or By-Laws or any
provision of any material agreement, indenture, instrument, contract, lease or
other undertaking (in each case known to such counsel) to which the Acquiring
Fund is a party or by which it or any of its properties may be bound or to the
knowledge of such counsel, result in the acceleration of any obligation or the
imposition of any penalty, under any agreement, judgment, or decree to which the
Acquiring Fund is a party or by which it is bound.
(g) Only insofar as they relate to the Acquiring Fund, the
descriptions in the Prospectus/Proxy Statement of statutes, legal and
governmental proceedings and material contracts, if any, are accurate and fairly
present the information required to be shown.
(h) Such counsel does not know of any legal or governmental
proceedings, only insofar as they relate to the Acquiring Fund, existing on or
before the effective date of the Registration Statement or the Closing Date
required to be described in the Registration Statement or to be filed as
exhibits to the Registration Statement which are not described or filed as
required.
(i) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Acquiring Fund or
any of its properties or assets and the Acquiring Fund is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body, which materially and adversely affects its business, other
than as previously disclosed in the Registration Statement.
Such counsel shall also state that they have participated in
conferences with officers and other representatives of the Acquiring Fund at
which the contents of the Prospectus/Proxy Statement and related matters were
discussed and, although they are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Prospectus/Proxy Statement (except to the extent indicated in
paragraph (g) of their above opinion), on the basis of the foregoing (relying as
to materiality to a large extent upon the opinions of the Trust's officers and
other representatives of the Acquiring Fund), no facts have come to their
attention that lead them to believe that the Prospectus/Proxy Statement as of
its date, as of the date of the meeting of the shareholders of the Selling Fund,
and as of the Closing Date, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein regarding the
Acquiring Fund or necessary, in the light of the circumstances under which they
were made, to make the statements therein regarding the Acquiring Fund not
misleading. Such opinion may state that such counsel does not express any
opinion or belief as to the financial statements or any financial or statistical
data, or as to the information relating to the Selling Fund, contained in the
Prospectus/Proxy Statement or the Registration Statement, and that such opinion
is solely for the benefit of Cova and the Selling Fund.
Such opinion shall contain such assumptions and limitations as shall be
in the opinion of Sullivan & Worcester LLP appropriate to render the opinions
expressed therein.
In this paragraph 6.2, references to the Prospectus/Proxy Statement
include and relate to only the text of such Prospectus/Proxy Statement and not
to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the obligations to be performed by it hereunder on or before
the Closing Date and, in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by Cova's President
or Vice President, in form and substance satisfactory to the Acquiring Fund and
dated as of the Closing Date, to such effect and as to such other matters as the
Acquiring Fund shall reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of Cova.
7.3 The Acquiring Fund shall have received on the Closing Date an
opinion of Blazzard, Grodd & Hasenauer, P.C., counsel to the Selling Fund, in a
form satisfactory to the Acquiring Fund covering the following points:
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing and in good
standing under the laws of the Commonwealth of Massachusetts and has the power
to own all of its properties and assets and to carry on its business as
presently conducted.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust registered as an investment company under the 1940
Act, and, to such counsel's knowledge, such registration with the Commission as
an investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund and, assuming due authorization, execution, and
delivery of this Agreement by the Acquiring Fund, is a valid and binding
obligation of the Selling Fund enforceable against the Selling Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and to general equity principles.
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or the Commonwealth of Massachusetts is required for consummation by the
Selling Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(e) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of Cova's Agreement and Declaration of Trust or By-laws, or to the
knowledge of such counsel, any provision of any material agreement, indenture,
instrument, contract, lease or other undertaking to which the Selling Fund is a
party or by which it or any of its properties may be bound or, to the knowledge
of such counsel, result in the acceleration of any obligation or the imposition
of any penalty, under any agreement, judgment, or decree to which the Selling
Fund is a party or by which it is bound.
(f) Only insofar as they relate to the Selling Fund, the
descriptions in the Prospectus/Proxy Statement of statutes, legal and government
proceedings and material contracts, if any, are accurate and fairly present the
information required to be shown.
(g) To the knowledge of such counsel, there are no legal or
governmental proceedings, only insofar as they relate to the Selling Fund
existing on or before the effective date of the Registration Statement or the
Closing Date, required to be described in the Registration Statement or to be
filed as exhibits to the Registration Statement which are not described or filed
as required.
(h) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Selling Fund or
any of its respective properties or assets and the Selling Fund is neither a
party to nor subject to the provisions of any order, decree or judgment of any
court or governmental body, which materially and adversely affects its business
other than as previously disclosed in the Prospectus/Proxy Statement.
(i) Assuming that a consideration therefor of not less than
the net asset value thereof has been paid, and assuming that such shares were
issued in accordance with the terms of the Selling Fund's registration
statement, or any amendment thereto, in effect at the time of such issuance, all
issued and outstanding shares of the Selling Fund are legally issued and fully
paid and non-assessable.
Such counsel shall also state that they have participated in
conferences with officers and other representatives of the Selling Fund at which
the contents of the Prospectus/Proxy Statement and related matters were
discussed and, although they are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Prospectus/Proxy Statement (except to the extent indicated in
paragraph (f) of their above opinion), on the basis of the foregoing (relying as
to materiality to a large extent upon the opinions of Cova's officers and other
representatives of the Selling Fund), no facts have come to their attention that
lead them to believe that the Prospectus/Proxy Statement as of its date, as of
the date of the meeting of the shareholders of the Selling Fund, and as of the
Closing Date, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein regarding the Selling Fund
or necessary, in the light of the circumstances under which they were made, to
make the statements therein regarding the Selling Fund not misleading. Such
opinion may state that such counsel does not express any opinion or belief as to
the financial statements or any financial or statistical data, or as to
information relating to the Acquiring Fund, contained in the Prospectus/Proxy
Statement or Registration Statement, and that such opinion is solely for the
benefit of the Trust and the Acquiring Fund.
Such opinion shall contain such other assumptions and limitations as
shall be in the opinion of Blazzard, Grodd & Hasenauer, P.C. appropriate to
render the opinions expressed therein, and shall indicate, with respect to
matters of Massachusetts law that as Blazzard, Grodd & Hasenauer, P.C. are not
admitted to the bar of Massachusetts, such opinions are based either upon the
review of published statutes, cases and rules and regulations of the
Commonwealth of Massachusetts or upon an opinion of Massachusetts counsel.
In this paragraph 7.3, references to the Prospectus/Proxy Statement
include and relate to only the text of such Prospectus/Proxy Statement and not
to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Selling Fund in accordance with the provisions of Cova's Agreement and
Declaration of Trust and By-Laws and certified copies of the resolutions
evidencing such approval shall have been delivered to the Acquiring Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund or
the Selling Fund may waive the conditions set forth in this paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
8.3 All required consents of other parties and all other consents,
orders, and permits of federal, state and local regulatory authorities
(including those of the Commission and of state Blue Sky securities authorities,
including any necessary "no-action" positions of and exemptive orders from such
federal and state authorities) to permit consummation of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order, or permit would not involve a risk of a material adverse
effect on the assets or properties of the Acquiring Fund or the Selling Fund,
provided that either party hereto may for itself waive any of such conditions.
8.4 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness of the Registration
Statement shall have been issued and, to the best knowledge of the parties
hereto, no investigation or proceeding for that purpose shall have been
instituted or be pending, threatened or contemplated under the 1933 Act.
8.5 The parties shall have received a favorable opinion of Sullivan &
Worcester LLP addressed to the Acquiring Fund and the Selling Fund substantially
to the effect that for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in exchange
solely for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
the identified liabilities of the Selling Fund followed by the distribution of
the Acquiring Fund Shares to the Selling Fund Shareholders in dissolution and
liquidation of the Selling Fund will constitute a "reorganization" within the
meaning of Section 368(a)(1)(F) of the Code, and the Acquiring Fund and the
Selling Fund will each be a "party to a reorganization" within the meaning of
Section 368(b) of the Code.
(b) No gain or loss will be recognized by the Acquiring Fund
upon the receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of the identified
liabilities of the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund
upon the transfer of the Selling Fund assets to the Acquiring Fund in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of the
identified liabilities of the Selling Fund or upon the distribution (whether
actual or constructive) of the Acquiring Fund Shares to Selling Fund
Shareholders in exchange for their shares of the Selling Fund.
(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares
received by each Selling Fund Shareholder pursuant to the Reorganization will be
the same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding period of
the Acquiring Fund Shares to be received by each Selling Fund Shareholder will
include the period during which the Selling Fund shares exchanged therefor were
held by such shareholder (provided the Selling Fund shares were held as capital
assets on the date of the Reorganization).
(f) The tax basis of the Selling Fund assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the Selling
Fund immediately prior to the Reorganization, and the holding period of the
assets of the Selling Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Selling Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Selling Fund may waive the conditions set forth in this paragraph
8.5.
8.6 The Acquiring Fund shall have received from Deloitte & Touche LLP a
letter addressed to the Acquiring Fund, in form and substance satisfactory to
the Acquiring Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Selling Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the Capitalization Table
appearing in the Registration Statement and Prospectus/Proxy Statement has been
obtained from and is consistent with the accounting records of the Selling Fund;
(c) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the pro forma financial
statements that are included in the Registration Statement and Prospectus/Proxy
Statement agree to the accounting records of the Acquiring Fund and the Selling
Fund or with written estimates provided by each Fund's management, and were
found to be mathematically correct; and
(d) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the data utilized in the
calculations of the pro forma expense ratios appearing in the Registration
Statement and Prospectus/Proxy Statement agree with underlying accounting
records of the Selling Fund or with written estimates by the Selling Fund's
management and were found to be mathematically correct.
In addition, unless waived by the Acquiring Fund, the Acquiring Fund
shall have received from Deloitte & Touche LLP a letter addressed to the
Acquiring Fund dated on the Closing Date, in form and substance satisfactory to
the Acquiring Fund, to the effect that on the basis of limited procedures agreed
upon by the Acquiring Fund (but not an examination in accordance with generally
accepted auditing standards), the net asset value per share of the Selling Fund
as of the Valuation Date was computed and the valuation of the portfolio was
consistent with the valuation practices of the Acquiring Fund.
8.7 The Selling Fund shall have received from Deloitte & Touche LLP a
letter addressed to the Selling Fund, in form and substance satisfactory to the
Selling Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Acquiring Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) they had performed limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards) which consisted of a reading of any
unaudited pro forma financial statements included in the Registration Statement
and Prospectus/Proxy Statement, and making inquiries of appropriate officials of
the Trust responsible for financial and accounting matters whether such
unaudited pro forma financial statements comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and the
published rules and regulations thereunder;
(c) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards), the Capitalization Table appearing
in the Registration Statement and Prospectus/Proxy Statement has been obtained
from and is consistent with the accounting records of the Acquiring Fund; and
(d) on the basis of limited procedures agreed upon by the
Selling Fund (but not an examination in accordance with generally accepted
auditing standards), the data utilized in the calculations of the pro forma
expense ratios appearing in the Registration Statement and Prospectus/Proxy
Statement agree with written estimates by each Fund's management and were found
to be mathematically correct.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund, whether incurred before or after the date of this Agreement,
will be borne by Metropolitan Life Insurance Company or one of its affiliates.
Such expenses include, without limitation, (a) expenses incurred in connection
with the entering into and the carrying out of the provisions of this Agreement;
(b) expenses associated with the preparation and filing of the Registration
Statement under the 1933 Act covering the Acquiring Fund Shares to be issued
pursuant to the provisions of this Agreement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which the Selling Fund
Shareholders are resident as of the date of the mailing of the Prospectus/Proxy
Statement to such shareholders; (d) postage; (e) printing; (f) accounting fees;
(g) legal fees; and (h) solicitation costs of the transaction. Notwithstanding
the foregoing, the Acquiring Fund shall pay its own federal and state
registration fees.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall not survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Selling Fund. In addition, either the Acquiring Fund or
the Selling Fund may at its option terminate this Agreement at or prior to the
Closing Date because:
(a) of a breach by the other of any representation, warranty, or agreement
contained herein to be performed at or prior to the Closing Date, if not cured
within 30 days; or
(b) a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably appears
that it will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful
default, there shall be no liability for damages on the part of either the
Acquiring Fund, the Selling Fund, the Trust, Cova, the respective Trustees, or
officers, to the other party or its Trustees, or officers, but each shall bear
the expenses incurred by it incidental to the preparation and carrying out of
this Agreement as provided in paragraph 9.1.
ARTICLE XII
AMENDMENTS
12.1 This Agreement may be amended, modified, or supplemented in such
manner as may be mutually agreed upon in writing by the authorized officers of
the Selling Fund and the Acquiring Fund; provided, however, that following the
meeting of shareholders of the Selling Fund pursuant to paragraph 5.2 of this
Agreement, no such amendment may have the effect of changing the provisions for
determining the number of the Acquiring Fund Shares to be issued to the Selling
Fund Shareholders under this Agreement to the detriment of such Shareholders
without their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to the conflicts
of laws provisions thereof; provided, however, that the due authorization,
execution and delivery of this Agreement, in the case of the Selling Fund, shall
be governed and construed in accordance with the laws of the Commonwealth of
Massachusetts, without giving effect to the conflicts of laws provisions
thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but, except as provided in
this paragraph, no assignment or transfer hereof or of any rights or obligations
hereunder shall be made by any party without the written consent of the other
party. Nothing herein expressed or implied is intended or shall be construed to
confer upon or give any person, firm, or corporation, other than the parties
hereto and their respective successors and assigns, any rights or remedies under
or by reason of this Agreement.
13.5 With respect to both Cova and the Trust, the names used herein
refer respectively to the trust created and, as the case may be, the Trustees,
as trustees but not individually or personally, acting from time to time under
organizational documents filed in Massachusetts in the case of Cova and
Delaware, in the case of the Trust, which are hereby referred to and are also on
file at the principal offices of Cova or, as the case may be, the Trust. The
obligations of Cova or of the Trust entered into in the name or on behalf
thereof by any of the Trustees, representatives or agents of Cova or the Trust,
as the case may be, are made not individually, but in such capacities, and are
not binding upon any of the Trustees, shareholders or representatives of Cova
or, as the case may be, the Trust personally, but bind only the trust property,
and all persons dealing with the Selling Fund or the Acquiring Fund must look
solely to the trust property belonging to the Selling Fund or, as the case may
be, the Acquiring Fund for the enforcement of any claims against the Selling
Fund or, as the case may be, the Acquiring Fund.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement, all as
of the date first written above.
COVA SERIES TRUST ON BEHALF OF
QUALITY BOND PORTFOLIO
By:
Name: Mark Reynolds
Title: President
MET INVESTORS SERIES TRUST ON BEHALF OF J.P. MORGAN
QUALITY BOND PORTFOLIO
By:
Name: Elizabeth M. Forget
Title: President
<PAGE>
Exhibit B
-------------------------------------------------------------------------------
Quality Bond Portfolio For the year ended 12/31/99
Managed by J.P. Morgan Investment Management
-------------------------------------------------------------------------------
The Quality Bond Portfolio provided a total return of -1.54% for the
year ending December 31, 1999. The Salomon Broad Investment Grade Index1
returned -0.84% for the same time period.
Bond yields ended the year sharply higher as investors reassessed the
strengthening economy and anticipated tighter monetary policy after the Y2K
turn. Consumption continued to grow rapidly as third quarter final GDP at 5.7%
was revised almost a full percentage point above the original estimate. The
strong equity rally in December suggests the Fed's tightening action thus far
will do little to stem economic growth. Low unemployment, firm wage laws,
together with the unprecedented external deficit, imply the need to slow the
economy to a more sustainable pace, even in the absence of any significant
consumer price pressures. The Salomon BIG Index fell 0.2% for the quarter
bringing the full year decline to -0.8%.
Earlier in the year, the Portfolio was conservatively positioned in
corporate bonds and held a heavy allocation to mortgage backed securities. In
addition we maintained an overweight position in AAA rated agency debenture
bonds. Towards the end of the year, the Portfolio's largest positions, vis-a-vis
the major aggregate indexes, reflected our positive outlook on mortgages
relative to U.S. Treasuries. The corporate sector outperformed Treasuries during
the last quarter. This was primarily due to the abatement of Y2K fears in the
market and the presence of buyers who had built up cash and were stretching for
yield ahead of the first quarter. The Portfolio was modestly overweighted in the
corporate sector and we remained comfortable with the overweight position in
anticipation of a strong economic backdrop and light near-term supply.
Following the late October Fed tightening and their move to neutral
bias, Treasury yields fell by approximately 30 basis points. With the view that
this move put yields below justifiable levels, we shifted the Portfolio's
duration position early in November from neutral to a modest short position
relative to the index. We maintained this duration position through the end of
the year.
With little sign of any material slowing in U.S. growth, aside from
some moderation in the construction sector, the U.S. bond market lacked
fundamental support at year-end. Strong business and consumer confidence, a
robust equity market and very buoyant labor market suggest the need for
additional Fed policy tightening. The market continues to discount an
insufficient amount of tightening this year in order to slow the economy to an
acceptable pace. As a result, we expect to continue to remain defensive in the
first half of next year in terms of the Portfolio's duration positions as
U.S.Treasury yields should continue to move higher.
Harriet T. Huber
William G. Tennille
Portfolio Managers
J.P. Morgan Investment Management Inc.
------------------------------------------------------------------------------
Asset Allocation (% of portfolio market value)
As of 12/31/99
JPM qual bond pie chart
U.S. Agency and Corporate Mortgage Backed 53.3
Corporate Investment Grade 24.3
U.S. Treasury and Agency 13.6
Asset Backed Securities 6.3
Corporate High Yield 1.4
Emerging Market Debt 1.1
Quality Bond Portfolio, managed by J.P. Morgan Investment Management
vs. Salomon Brothers Broad Investment-Grade Bond Index
Growth Based on $10,000+
[Line Graph]
JPM qual bond vs Salomon plot points
JPM Quality Bond Salomon
10000 10000
"6/96" 10095 10129
10140 10318
"12/96" 10577 10629
10488 10574
"6/97" 10845 10955
11190 11319
"12/97" 11495 11652
11706 11840
"6/98" 11983 12114
12481 12617
"12/98" 12469 12673
12390 12609
"6/99" 12209 12497
12277 12588
"12/99" 12277 12566
<TABLE>
<CAPTION>
------------------------------- -----------------------------------------------------------------------------------------
Average Annual Return1
------------------------------- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
------------------------------- ----------------------------- ----------------------------- -----------------------------
1 Year 3 Year Since Inception
------------------------------- ----------------------------- ----------------------------- -----------------------------
------------------------------- ----------------------------- ----------------------------- -----------------------------
Quality Bond Portfolio,
managed by JPMIM
-1.54% 5.18% 5.79%
------------------------------- ----------------------------- ----------------------------- -----------------------------
------------------------------- ----------------------------- ----------------------------- -----------------------------
Salomon Brothers BIG Index
-0.84% 5.74% 6.43%
------------------------------- ----------------------------- ----------------------------- -----------------------------
</TABLE>
+Performance is shown from date of initial public offering, May 1, 1996.
1. "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Quality Bond
Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the return on
the investment will fluctuate, and redemption proceeds may be higher or lower
than an investor's original cost.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were
generated by CDA Wiesenberger HySales software. Comparison line graphs chart the
hypothetical growth of $10,000 over a given historical period of time. Although
data are gathered from reliable sources, accuracy and completeness cannot be
guaranteed.
--------
1 The Salomon Brothers Broad Investment-Grade Bond Index (BIG) is a
market-capitalized weighted index that includes fixed-rate Treasury, government
sponsored, corporate (Baa3/BBB or better) and mortgage securities. The Index is
not available for direct investment and does not reflect any expenses.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of Assets of
QUALITY BOND PORTFOLIO
a series of
COVA SERIES TRUST
One Tower Lane
Suite 3000
Oakbrook Terrace, Illinois 60181
(800) 831-5433
and
NEUBERGER BERMAN BOND SERIES
a series of
SECURITY FIRST TRUST
11365 West Olympic Boulevard
Los Angeles, California 90064
(800) 283-4536
By and In Exchange For Shares of
J.P. MORGAN QUALITY BOND PORTFOLIO
a series of
MET INVESTORS SERIES TRUST
610 Newport Center Drive
Suite 1350
Newport Beach, California 92660
(800) 848-3854
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and liabilities of Quality Bond Portfolio (the
"Cova Portfolio"), a series of Cova Series Trust, and Neuberger Berman Bond
Series (the "SF Portfolio"), a series of Security First Trust to J.P. Morgan
Quality Bond Portfolio, (the "Met Portfolio" or the "Portfolio"), a series of
Met Investors Series Trust, in exchange for Class A shares of beneficial
interest, $.001 par value per share, of the Met Portfolio (to be issued to
holders of shares of the Cova Portfolio and the SF Portfolio), consists of the
information set forth below pertaining to the Met Portfolio and the following
described documents, each of which is attached hereto and incorporated by
reference herein:
(1) The Statement of Additional Information of the Cova Portfolio dated
May 1, 2000;
(2) The Statement of Additional Information of the SF Portfolio dated
November 30, 2000 (to be filed by amendment);
(3) Annual Report of the Cova Portfolio for the year ended December 31,
1999;
(4) Semi-Annual Report of the Cova Portfolio dated June 30, 2000;
(5) Annual Report of the SF Portfolio dated July 31, 2000; and
(6) Pro Forma Financial Statements dated as of June 30, 2000.
This Statement of Additional Information, which is not a prospectus,
supplements, and should be read in conjunction with, the Prospectus/Proxy
Statement of the Met Portfolio, the Cova Portfolio and the SF Portfolio dated
December , 2000. A copy of the Prospectus/Proxy Statement may be obtained
without charge by calling or writing to the Met Portfolio, the Cova Portfolio or
the SF Portfolio at the telephone numbers or addresses set forth above.
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the investment
objectives and policies of the Met Portfolio in the Prospectus/Proxy Statement.
Asset-Backed Securities
Asset-backed securities include interests in pools of receivables, such
as motor vehicle installment purchase obligations and credit card receivables.
Such securities are generally issued as pass-through certificates, which
represent undivided fractional ownership interests in the underlying pools of
assets.
Asset-backed securities are not issued or guaranteed by the U.S.
government or its agencies or government-sponsored entities; however, the
payment of principal and interest on such obligations may be guaranteed up to
certain amounts and for a certain time period by a letter of credit issued by a
financial institution (such as a bank or insurance company) unaffiliated with
the issuers of such securities. In addition, such securities generally will have
remaining estimated lives at the time of purchase of five years or less. Due to
the possibility that prepayments (on automobile loans and other collateral) will
alter the cash flow on asset-backed securities, is not possible to determine in
advance the actual final maturity date or average life. Faster prepayment will
shorten the average life and shorter prepayments will lengthen it.
The purchase of asset-backed securities raises considerations peculiar
to the financing of the instruments underlying such securities. For example,
most organizations that issue asset-backed securities relating to motor vehicle
installment purchase obligations perfect their interests in their respective
obligations only by filing a financing statement and by having the servicer of
the obligations, which is usually the originator, take custody thereof. In such
circumstances, if the servicer were to sell the same obligations to another
party, in violation of its duty not to do so, there is a risk that such party
could acquire an interest in the obligations superior to that of holders of the
asset-backed securities. Also, although most such obligations grant a security
interest in the motor vehicle being financed, in most states the security
interest in a motor vehicle must be noted on the certificate of title to perfect
such security interest against competing claims of other parties. Due to the
large number of vehicles involved, however, the certificate of title to each
vehicle financed, pursuant to the obligations underlying the asset-backed
securities, usually is not amended to reflect the assignment of the seller's
security interest for the benefit of the holders of the asset-backed securities.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on those securities. In
addition, various state and federal laws give the motor vehicle owner the right
to assert against the holder of the owner's obligation certain defenses such
owner would have against the seller of the motor vehicle. The assertion of such
defenses could reduce payments on the related asset-backed securities. Insofar
as credit card receivables are concerned, credit card holders are entitled to
the protection of a number of state and federal consumer credit laws, many of
which give such holders the right to set off certain amounts against balances
owed on the credit card, thereby reducing the amounts paid on such receivables.
In addition, unlike most other asset-backed securities, credit card receivables
are unsecured obligations of the card holder.
Brady Bonds
Brady Bonds are securities created through the exchange of existing
commercial bank loans to public and private entities in certain emerging markets
for new bonds in connection with debt restructurings under a debt restructuring
plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
"Brady Plan"). Brady Plan debt restructurings have been implemented to date in
Argentina, Brazil, Bulgaria, Costa Rica, Croatia, Dominican Republic, Ecuador,
Jordan, Mexico, Morocco, Nigeria, Panama, Peru, the Philippines, Poland,
Slovenia, Uruguay and Venezuela. Brady Bonds have been issued only recently, and
for that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate bonds or floating-rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (the uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
Convertible Securities
The Portfolio may invest in convertible securities of domestic and,
subject to the Portfolio's investment strategy, foreign issuers. The convertible
securities in which the Portfolio may invest include any debt securities or
preferred stock which may be converted into common stock or which carry the
right to purchase common stock. Convertible securities entitle the holder to
exchange the securities for a specified number of shares of common stock,
usually of the same company, at specified prices within a certain period of
time.
Convertible securities may be converted at either a stated price or
stated rate into underlying shares of common stock. Although to a lesser extent
than with fixed-income securities, the market value of convertible securities
tends to decline as interest rates increase and, conversely, tends to increase
as interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stock. A unique feature of convertible
securities is that as the market price of the underlying common stock declines,
convertible securities tend to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the
prices of the convertible securities tend to rise as a reflection of the value
of the underlying common stock. While no securities investments are without
risk, investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.
Convertible securities are investments that provide for a stable stream
of income with generally higher yields than common stocks. There can be no
assurance of current income because the issuers of the convertible securities
may default on their obligations. A convertible security, in addition to
providing fixed income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no assurance of
capital appreciation, however, because securities prices fluctuate. Convertible
securities, however, generally offer lower interest or dividend yields than
non-convertible securities of similar quality because of the potential for
capital appreciation.
Subsequent to purchase by the Portfolio, convertible securities may
cease to be rated or a rating may be reduced below the minimum required for
purchase for the Portfolio. Neither event will require the sale of such
securities, although the Portfolio's investment adviser will consider such event
in its determination of whether the Portfolio should continue to hold the
securities.
Dollar Roll Transactions
The Portfolio may enter into "dollar roll" transactions, which consist
of the sale by the Portfolio to a bank or broker-dealer (the "counterparty") of
Government National Mortgage Association certificates, other mortgage-backed
securities or other fixed income securities together with a commitment to
purchase from the counterparty similar, but not identical, securities at a
future date. The counterparty receives all principal and interest payments,
including prepayments, made on the security while it is the holder. The
Portfolio receives a fee from the counterparty as consideration for entering
into the commitment to purchase. Dollar rolls may be renewed over a period of
several months with a different repurchase price and a cash settlement made at
each renewal without physical delivery of securities. Moreover, the transaction
may be preceded by a firm commitment agreement pursuant to which the Portfolio
agrees to buy a security on a future date.
The Portfolio will not use such transactions for leveraging purposes
and, accordingly, will segregate cash, U.S. government securities or other
liquid assets in an amount sufficient to meet its purchase obligations under the
transactions. The Portfolio will also maintain asset coverage of at least 300%
for all outstanding firm commitments, dollar rolls and other borrowings.
Dollar rolls are treated for purposes of the Investment Company Act of
1940, as amended ("1940 Act") as borrowings of a Portfolio because they involve
the sale of a security coupled with an agreement to repurchase. Like all
borrowings, a dollar roll involves costs to the Portfolio. For example, while
the Portfolio receives a fee as consideration for agreeing to repurchase the
security, the Portfolio forgoes the right to receive all principal and interest
payments while the counterparty holds the security. These payments to the
counterparty may exceed the fee received by the Portfolio, thereby effectively
charging the Portfolio interest on its borrowing. Further, although the
Portfolio can estimate the amount of expected principal prepayment over the term
of the dollar roll, a variation in the actual amount of prepayment could
increase or decrease the cost of the Portfolio's borrowing.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, a Portfolio's right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Portfolio is able to purchase them.
Similarly, the Portfolio may be required to purchase securities in connection
with a dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical, security to the Portfolio, the security that the
Portfolio is required to buy under the dollar roll may be worth less than an
identical security. Finally, there can be no assurance that the Portfolio's use
of the cash that it receives from a dollar roll will provide a return that
exceeds borrowing costs.
Eurodollar and Yankee Dollar Obligations
Eurodollar bank obligations are U.S. dollar-denominated certificates of
deposit and time deposits issued outside the U.S. capital markets by foreign
branches of U.S. banks and by foreign banks. Yankee dollar bank obligations are
U.S. dollar-denominated obligations issued in the U.S. capital markets by
foreign banks.
Eurodollar and Yankee dollar obligations are subject to the same risks
that pertain to domestic issues, notably credit risk. Additionally, Eurodollar
(and to a limited extent, Yankee dollar) obligations are subject to certain
sovereign risks. One such risk is the possibility that a sovereign country might
prevent capital, in the form of dollars, from flowing across its borders. Other
risks include adverse political and economic developments; the extent and
quality of government regulation of financial markets and institutions; the
imposition of foreign withholding taxes; and the expropriation or
nationalization of foreign issuers.
Foreign Currency Transactions
Foreign Currency Exchange Transactions. The Portfolio may engage in
foreign currency exchange transactions to protect against uncertainty in the
level of future exchange rates. The investment adviser to the Portfolio may
engage in foreign currency exchange transactions in connection with the purchase
and sale of portfolio securities ("transaction hedging"), and to protect the
value of specific portfolio positions ("position hedging").
The Portfolio may engage in "transaction hedging" to protect against a
change in the foreign currency exchange rate between the date on which the
Portfolio contracts to purchase or sell the security and the settlement date, or
to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. For that purpose, the Portfolio may purchase or sell a foreign
currency on a spot (or cash) basis at the prevailing spot rate in connection
with the settlement of transactions in portfolio securities denominated in or
exposed to that foreign currency.
If conditions warrant, the Portfolio may also enter into contracts to
purchase or sell foreign currencies at a future date ("forward contracts") and
purchase and sell foreign currency futures contracts as a hedge against changes
in foreign currency exchange rates between the trade and settlement dates on
particular transactions and not for speculation. A foreign currency forward
contract is a negotiated agreement to exchange currency at a future time at a
rate or rates that may be higher or lower than the spot rate. Foreign currency
futures contracts are standardized exchange-traded contracts and have margin
requirements.
For transaction hedging purposes, the Portfolio may also purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives a Portfolio the right to assume a short position in the futures contract
until expiration of the option. A put option on currency gives a Portfolio the
right to sell a currency at an exercise price until the expiration of the
option. A call option on a futures contract gives a Portfolio the right to
assume a long position in the futures contract until the expiration of the
option. A call option on currency gives a Portfolio the right to purchase a
currency at the exercise price until the expiration of the option.
The Portfolio may engage in "position hedging" to protect against a
decline in the value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated, or quoted or exposed (or an increase in
the value of currency for securities which the Portfolio intends to buy, when it
holds cash reserves and short-term investments). For position hedging purposes,
the Portfolio may purchase or sell foreign currency futures contracts and
foreign currency forward contracts, and may purchase put or call options on
foreign currency futures contracts and on foreign currencies on exchanges or
over-the-counter markets. In connection with position hedging, the Portfolio may
also purchase or sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of
portfolio securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for the Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security or securities being hedged is less
than the amount of foreign currency the Portfolio is obligated to deliver and if
a decision is made to sell the security or securities and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security or
securities if the market value of such security or securities exceeds the amount
of foreign currency the Portfolio is obligated to deliver.
Hedging transactions involve costs and may result in losses. The
Portfolio may write covered call options on foreign currencies to offset some of
the costs of hedging those currencies. The Portfolio will engage in
over-the-counter transactions only when appropriate exchange-traded transactions
are unavailable and when, in the opinion of the Portfolio's investment adviser,
the pricing mechanism and liquidity are satisfactory and the participants are
responsible parties likely to meet their contractual obligations. The
Portfolio's ability to engage in hedging and related option transactions may be
limited by tax considerations.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
the value of such currency.
Currency Forward and Futures Contracts. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract as agreed by the parties, at a price set at the time of the contract.
In the case of a cancelable forward contract, the holder has the unilateral
right to cancel the contract at maturity by paying a specified fee. The
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the U.S. are designed by and traded on exchanges regulated
by the Commodity Futures Trading Commission ("CFTC"), such as the New York
Mercantile Exchange. The Portfolio would enter into foreign currency futures
contracts solely for hedging or other appropriate investment purposes as defined
in CFTC regulations.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in any
given month. Forward contracts may be in any amounts agreed upon by the parties
rather than predetermined amounts. Also, forward foreign exchange contracts are
traded directly between currency traders so that no intermediary is required. A
forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Portfolio may
either accept or make delivery of the currency specified in the contract, or at
or prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts may be closed out only
on an exchange or board of trade which provides a secondary market in such
contracts. Although a Portfolio intends to purchase or sell foreign currency
futures contracts only on exchanges or boards of trade where there appears to be
an active secondary market, there can be no assurance that a secondary market on
an exchange or board of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, a Portfolio would
continue to be required to make daily cash payments of variation margin.
Foreign Currency Options. Options on foreign currencies operate
similarly to options on securities, and are traded primarily in the
over-the-counter market, although options on foreign currencies have recently
been listed on several exchanges. Such options will be purchased or written only
when the Portfolio's investment adviser believes that a liquid secondary market
exists for such options. There can be no assurance that a liquid secondary
market will exist for a particular option at any specific time. Options on
foreign currencies are affected by all of those factors which influence foreign
exchange rates and investments generally.
The value of a foreign currency option is dependent upon the value of
the foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Portfolio at one rate, while offering a lesser rate of exchange should a
Portfolio desire to resell that currency to the dealer.
Foreign Securities
The Portfolio may invest in foreign equity and debt securities or U.S.
securities traded in foreign markets. In addition to securities issued by
foreign companies, permissible investments may also consist of obligations of
foreign branches of U.S. banks and of foreign banks, including European
certificates of deposit, European time deposits, Canadian time deposits, Yankee
certificates of deposit, Eurodollar bonds and Yankee bonds. The Portfolio may
also invest in Canadian commercial paper and Europaper. These instruments may
subject the Portfolio to additional investment risks from those related to
investments in obligations of U.S. issuers. In addition, foreign branches of
U.S. banks and foreign banks may be subject to less stringent reserve
requirements than those applicable to domestic branches of U.S. banks.
Foreign investments involve certain risks that are not present in
domestic securities. For example, foreign securities may be subject to currency
risks or to foreign government taxes which reduce their attractiveness. There
may be less information publicly available about a foreign issuer than about a
U.S. issuer, and a foreign issuer is not generally subject to uniform
accounting, auditing and financial reporting standards and practices comparable
to those in the U.S. Other risks of investing in such securities include
political or economic instability in the country involved, the difficulty of
predicting international trade patterns and the possibility of imposition of
exchange controls. The prices of such securities may be more volatile than those
of domestic securities. With respect to certain foreign countries, there is a
possibility of expropriation of assets or nationalization, imposition of
withholding taxes on dividend or interest payments, difficulty in obtaining and
enforcing judgments against foreign entities or diplomatic developments which
could affect investment in these countries. Losses and other expenses may be
incurred in converting between various currencies in connection with purchases
and sales of foreign securities.
Foreign stock markets are generally not as developed or efficient as,
and may be more volatile than, those in the U.S. While growing in volume, they
usually have substantially less volume than U.S. markets and the Portfolio's
investment securities may be less liquid and subject to more rapid and erratic
price movements than securities of comparable U.S. companies. Equity securities
may trade at price/earnings multiples higher than comparable U.S. securities and
such levels may not be sustainable. There is generally less government
supervision and regulation of foreign stock exchanges, brokers, banks and listed
companies abroad than in the U.S. Moreover, settlement practices for
transactions in foreign markets may differ from those in U.S. markets. Such
differences may include delays beyond periods customary in the U.S. and
practices, such as delivery of securities prior to receipt of payment, which
increase the likelihood of a "failed settlement", which can result in losses to
the Portfolio.
The value of foreign investments and the investment income derived from
them may also be affected unfavorable by changes in currency exchange control
regulations. Although the Portfolio will invest only in securities denominated
in foreign currencies that are fully exchangeable into U.S. dollars without
legal restriction at the time of investment, there can be no assurance that
currency controls will not be imposed subsequently. In addition, the value of
foreign fixed income investments may fluctuate in response to changes in U.S.
and foreign interest rates.
Foreign brokerage commissions, custodial expenses and other fees are
also generally higher than for securities traded in the U.S. Consequently, the
overall expense ratios of international or global funds are usually somewhat
higher than those of typical domestic stock funds.
Fluctuations in exchange rates may also affect the earning power and
asset value of the foreign entity issuing a security, even one denominated in
U.S. dollars. Dividend and interest payments will be repatriated based on the
exchange rate at the time of disbursement, and restrictions on capital flows may
be imposed.
The debt obligations of foreign governments and entities may or may not
be supported by the full faith and credit of the foreign government. The
Portfolio may buy securities issued by certain "supra-national" entities, which
include entities designated or supported by governments to promote economic
reconstruction or development, international banking organizations and related
government agencies. Examples are the International Bank for Reconstruction and
Development (commonly called the "World Bank"), the Asian Development Bank and
the Inter-American Development Bank.
The governmental members of these supranational entities are
"stockholders" that typically make capital contributions and may be committed to
make additional capital contributions if the entity is unable to repay its
borrowings. A supra-national entity's lending activities may be limited to a
percentage of its total capital, reserves and net income. There can be no
assurance that the constituent foreign governments will continue to be able or
willing to honor their capitalization commitments for those entities.
The Met Portfolio does not expect to invest more than 25% of its total
assets in securities of foreign issuers. Any foreign commercial paper must not
be subject to foreign withholding tax at the time of purchase.
Emerging Market Securities. Investments in emerging market country
securities involve special risks. Political and economic structures in many of
such countries may be undergoing significant evolution and rapid development,
and such countries may lack the social, political and economic stability
characteristic of more developed countries. Certain of such countries may have
in the past failed to recognize private property rights and have at times
nationalized or expropriated the assets of private companies. As a result, the
risks described above, including the risks of nationalization or expropriation
of assets, may be heightened. In addition, unanticipated political or social
developments may affect the values of the Portfolio's investments in those
countries and the availability to the Portfolio of additional investments in
those countries. The small size and inexperience of the securities markets in
certain of such countries and the limited volume of trading in securities in
those countries may make the Portfolio's investments in such countries illiquid
and more volatile than investment in more developed countries, and the Portfolio
may be required to establish special custodial or other arrangements before
making certain investments in those countries. There may be little financial or
accounting information available with respect to issuers located in certain of
such countries, and it may be difficult as a result to assess the value or
prospects of an investment in such issuers.
Transaction costs in emerging markets may be higher than in the U.S.
and other developed securities markets. As legal systems in emerging markets
develop, foreign investors may be adversely affected by new or amended laws and
regulations or may not be able to obtain swift and equitable enforcement of
existing law.
The Portfolio may make investments denominated in emerging markets
currencies. Some countries in emerging markets also may have managed currencies,
which are not free floating against the U.S. dollar. In addition, emerging
markets are subject to the risk of restrictions upon the free conversion of
their currencies into other currencies. Any devaluations relative to the U.S.
dollar in the currencies in which the Portfolio's securities are quoted would
reduce the Portfolio's net asset value.
Certain emerging markets limit, or require governmental approval prior
to, investments by foreign persons. Repatriation of investment income and
capital from certain emerging markets is subject to certain governmental
consents. Even where there is no outright restriction on repatriation of
capital, the mechanics of repatriation may affect the operation of the
Portfolio.
Forward Commitments, When-Issued and Delayed Delivery Securities
The Portfolio may purchase securities on a when-issued or delayed
delivery basis and may purchase or sell securities on a forward commitment
basis. Settlement of such transactions normally occurs within a month or more
after the purchase or sale commitment is made.
The Portfolio may purchase securities under such conditions only with
the intention of actually acquiring them, but may enter into a separate
agreement to sell the securities before the settlement date. Since the value of
securities purchased may fluctuate prior to settlement, the Portfolio may be
required to pay more at settlement than the security is worth. In addition, the
purchaser is not entitled to any of the interest earned prior to settlement.
Upon making a commitment to purchase a security on a when-issued,
delayed delivery or forward commitment basis the Portfolio will hold liquid
assets in a segregated account at the Portfolio's custodian bank worth at least
the equivalent of the amount due. The liquid assets will be monitored on a daily
basis and adjusted as necessary to maintain the necessary value.
Purchases made under such conditions may involve the risk that yields
secured at the time of commitment may be lower than otherwise available by the
time settlement takes place, causing an unrealized loss to the Portfolio. In
addition, when the Portfolio engages in such purchases, it relies on the other
party to consummate the sale. If the other party fails to perform its
obligations, the Portfolio may miss the opportunity to obtain a security at a
favorable price or yield. Although the Portfolio will generally enter into
forward commitments to purchase securities with the intention of actually
acquiring the security for its portfolio (or for delivery pursuant to options
contracts it has entered into), the Portfolio may dispose of a security prior to
settlement if its investment adviser deems it advisable to do so. The Portfolio
may realize short-term gains or losses in connection with such sales.
High Yield/High Risk Debt Securities
Certain lower rated securities purchased by the Portfolio, such as
those rated Ba or B by Moody's Investors Service, Inc. ("Moody's") or BB or B by
Standard & Poor's Ratings Services ("Standard & Poor's") (commonly known as junk
bonds), may be subject to certain risks with respect to the issuing entity's
ability to make scheduled payments of principal and interest and to greater
market fluctuations. While generally providing greater income than investments
in higher quality securities, lower quality fixed income securities involve
greater risk of loss of principal and income, including the possibility of
default or bankruptcy of the issuers of such securities, and have greater price
volatility, especially during periods of economic uncertainty or change. These
lower quality fixed income securities tend to be affected by economic changes
and short-term corporate and industry developments to a greater extent than
higher quality securities, which react primarily to fluctuations in the general
level of interest rates. To the extent that the Portfolio invests in such lower
quality securities, the achievement of its investment objective may be more
dependent on the investment adviser's own credit analysis.
Lower quality fixed income securities are affected by the market's
perception of their credit quality, especially during times of adverse
publicity, and the outlook for economic growth. Economic downturns or an
increase in interest rates may cause a higher incidence of default by the
issuers of these securities, especially issuers that are highly leveraged. The
market for these lower quality fixed income securities is generally less liquid
than the market for investment grade fixed income securities. It may be more
difficult to sell these lower rated securities to meet redemption requests, to
respond to changes in the market, or to value accurately a Portfolio's portfolio
securities for purposes of determining the Portfolio's net asset value.
In determining suitability of investment in a particular unrated
security, the investment adviser takes into consideration asset and debt service
coverage, the purpose of the financing, history of the issuer, existence of
other rated securities of the issuer, and other relevant conditions, such as
comparability to other issuers.
Hybrid Instruments
Although there are no percentage limitations on the amount of assets
that may be invested in hybrid instruments, the investment adviser to the
Portfolio does not anticipate that such investments will exceed 15% of the
Portfolio's total assets. Hybrid instruments have recently been developed and
combine the elements of futures contracts or options with those of debt,
preferred equity or a depository instrument. Often these hybrid instruments are
indexed to the price of a commodity, particular currency, or a domestic or
foreign debt or equity securities index. Hybrid instruments may take a variety
of forms, including, but not limited to, debt instruments with interest or
principal payments or redemption terms determined by reference to the value of a
currency or commodity or securities index at a future point in time, preferred
stock with dividend rates determined by reference to the value of a currency, or
convertible securities with the conversion terms related to a particular
commodity. Hybrid instruments may bear interest or pay dividends at below market
(or even relatively nominal) rates. Under certain conditions, the redemption
value of such an instrument could be zero. Hybrid instruments can have volatile
prices and limited liquidity and their use by the Portfolio may not be
successful.
Illiquid Securities
The Portfolio may invest up to 15% of its net assets in illiquid
securities and other securities which are not readily marketable, including
non-negotiable time deposits, certain restricted securities not deemed by the
Trust's Board of Trustees to be liquid and repurchase agreements with maturities
longer than seven days. Securities eligible for resale pursuant to Rule 144A
under the Securities Act of 1933, which have been determined to be liquid, will
not be considered by the Portfolio's investment adviser to be illiquid or not
readily marketable and, therefore, are not subject to the aforementioned 15%
limit. The inability of the Portfolio to dispose of illiquid or not readily
marketable investments readily or at a reasonable price could impair the
Portfolio's ability to raise cash for redemptions or other purposes. The
liquidity of securities purchased by the Portfolio which are eligible for resale
pursuant to Rule 144A will be monitored by the Portfolio's investment adviser on
an ongoing basis, subject to the oversight of the Trustees. In the event that
such a security is deemed to be no longer liquid, the Portfolio's holdings will
be reviewed to determine what action, if any, is required to ensure that the
retention of such security does not result in the Portfolio having more than 15%
of its assets invested in illiquid or not readily marketable securities.
Interest Rate Transactions
Among the strategic transactions into which the Portfolio may enter are
interest rate swaps and the purchase or sale of related caps and floors. The
Portfolio expects to enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its portfolio, to
protect against currency fluctuations, as a duration management technique or to
protect against any increase in the price of securities the Portfolio
anticipates purchasing at a later date. The Portfolio intends to use these
transactions as hedges and not as speculative investments and will not sell
interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Portfolio may be obligated to pay.
Interest rate swaps involve the exchange by the Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional amount
of principal. A currency swap is an agreement to exchange cash flows on a
notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser, to the extent that a specific index
exceeds a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such cap. The purchase of a
floor entitles the purchaser to receive payments on a notional principal amount
from the party selling such floor to the extent that a specified index falls
below a predetermined interest rate or amount.
The Portfolio will usually enter into swaps on a net basis, i.e., the
two payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps and floors are entered into for good faith hedging purposes, the
investment adviser to the Portfolio and the Trust believe such obligations do
not constitute senior securities under the 1940 Act and, accordingly, will not
treat them as being subject to its borrowing restrictions. The Portfolio will
not enter into any swap, cap and floor transaction unless, at the time of
entering into such transaction, the unsecured long-term debt of the
counterparty, combined with any credit enhancements, is rated at least "A" by
Standard & Poor's or Moody's or has an equivalent rating from another nationally
recognized statistical rating organization ("NRSRO") or is determined to be of
equivalent credit quality by the investment adviser. For a description of the
NRSROs and their ratings, see the Appendix. If there is a default by the
counterparty, the Portfolio may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps and floors are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
With respect to swaps, the Portfolio will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid high grade
securities having a value equal to the accrued excess. Caps and floors require
segregation of assets with a value equal to the Portfolio's net obligations, if
any.
Investment Grade Corporate Debt Securities
Debt securities are rated by NRSROs. Securities rated BBB by Standard &
Poor's or Baa by Moody's are considered investment grade securities, but are
somewhat riskier than higher rated investment grade obligations because they are
regarded as having only an adequate capacity to pay principal and interest, and
are considered to lack outstanding investment characteristics and may be
speculative. See the Appendix to this Statement of Additional Information for a
description of the various securities ratings.
Loans and Other Direct Indebtedness
By purchasing a loan, the Portfolio acquires some or all of the
interest of a bank or other lending institution in a loan to a corporate
borrower. Many such loans are secured, and most impose restrictive covenants
which must be met by the borrower. These loans are made generally to finance
internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs
and other corporate activities. Such loans may be in default at the time of
purchase. The Portfolio may also purchase trade or other claims against
companies, which generally represent money owed by the company to a supplier of
goods or services. These claims may also be purchased at a time when the company
is in default. Certain of the loans acquired by the Portfolio may involve
revolving credit facilities or other standby financing commitments which
obligate the Portfolio to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans
especially vulnerable to adverse changes in economic or market conditions. Loans
and other direct investments may not be in the form of securities or may be
subject to restrictions on transfer, and only limited opportunities may exist to
resell such instruments. As a result, the Portfolio may be unable to sell such
investments at an opportune time or may have to resell them at less than fair
market value.
Money Market Securities
Money market securities in which the Portfolio may invest include U.S.
government securities, U.S. dollar denominated instruments (such as bankers'
acceptances, commercial paper, domestic or Yankee certificates of deposit and
Eurodollar obligations) issued or guaranteed by bank holding companies in the
U.S., their subsidiaries and their foreign branches. These bank obligations may
be general obligations of the parent bank holding company or may be limited to
the issuing entity by the terms of the specific obligation or by government
regulation.
Other money market securities in which the Portfolio may invest also
include certain variable and floating rate instruments and participations in
corporate loans to corporations in whose commercial paper or other short-term
obligations the Portfolio may invest. Because the bank issuing the
participations does not guarantee them in any way, they are subject to the
credit risks generally associated with the underlying corporate borrower. To the
extent that the Portfolio may be regarded as a creditor of the issuing bank
(rather than of the underlying corporate borrower under the terms of the loan
participation), the Portfolio may also be subject to credit risks associated
with the issuing bank. The secondary market, if any, for these loan
participations is extremely limited and any such participations purchased by the
Portfolio will be regarded as illiquid.
The Portfolio may also invest in bonds and notes with remaining
maturities of thirteen months or less, variable rate notes and variable amount
master demand notes. A variable amount master demand note differs from ordinary
commercial paper in that it is issued pursuant to a written agreement between
the issuer and the holder, its amount may be increased from time to time by the
holder (subject to an agreed maximum) or decreased by the holder or the issuer,
it is payable on demand, the rate of interest payable on it varies with an
agreed formula and it is typically not rated by a rating agency. Transfer of
such notes is usually restricted by the issuer, and there is no secondary
trading market for them. Any variable amount master demand note purchased by the
Portfolio will be regarded as an illiquid security.
Generally, the Portfolio will invest only in high quality money market
instruments, i.e., securities which have been assigned the highest quality
ratings by NRSROs such as "A-1" by Standard & Poor's or "Prime-1" by Moody's, or
if not rated, determined to be of comparable quality by the Portfolio's
investment adviser. The Portfolio may also invest in money market instruments
rated A-3 by Standard & Poor's and Prime-3 by Moody's.
Mortgage-Backed Securities
A mortgage-backed security may be an obligation of the issuer backed by
a mortgage or pool of mortgages or a direct interest in an underlying pool of
mortgages. The Portfolio may invest in collaterialized mortgage obligations
("CMOs") and stripped mortgage-backed securities that represent a participation
in, or are secured by, mortgage loans. Some mortgage-backed securities, such as
CMOs, make payments of both principal and interest at a variety of intervals;
others make semi-annual interest payments at a predetermined rate and repay
principal at maturity (like a typical bond). Mortgage-backed securities are
based on different types of mortgages including those on commercial real estate
or residential properties.
CMOs may be issued by a U.S. government agency or instrumentality or by
a private issuer. Although payment of the principal of, and interest on, the
underlying collateral securing privately issued CMOs may be guaranteed by the
U.S. government or its agencies or instrumentalities, these CMOs represent
obligations solely of the private issuer and are not insured or guaranteed by
the U.S. government, its agencies or instrumentalities or any other person or
entity. Prepayments could cause early retirement of CMOs. CMOs are designed to
reduce the risk of prepayment for investors by issuing multiple classes of
securities (or "tranches"), each having different maturities, interest rates and
payment schedules, and with the principal and interest on the underlying
mortgages allocated among the several classes in various ways. Payment of
interest or principal on some classes or series of CMOs may be subject to
contingencies or some classes or series may bear some or all of the risk of
default on the underlying mortgages. CMOs of different classes or series are
generally retired in sequence as the underlying mortgage loans in the mortgage
pool are repaid. If enough mortgages are repaid ahead of schedule, the classes
or series of a CMO with the earliest maturities generally will be retired prior
to their maturities. Thus, the early retirement of particular classes or series
of a CMO held by the Portfolio would have the same effect as the prepayment of
mortgages underlying other mortgage-backed securities. Conversely, slower than
anticipated prepayments can extend the effective maturities of CMOs subjecting
them to a greater risk of decline in market value in response to rising interest
rates than traditional debt securities, and, therefore, potentially increasing
the volatility of the Portfolio that invests in CMOs.
The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities have yield and maturity
characteristics corresponding to the underlying assets. Unlike traditional debt
securities, which may pay a fixed rate of interest until maturity, when the
entire principal amount comes due, payments on certain mortgage-backed
securities include both interest and a partial repayment of principal. Besides
the scheduled repayment of principal, repayments of principal may result from
the voluntary prepayment, refinancing, or foreclosure of the underlying mortgage
loans.
Mortgage-backed securities are subject to prepayment risk. Prepayment,
which occurs when unscheduled or early payments are made on the underlying
mortgages, may shorten the effective maturities of these securities and may
lower their returns. If property owners make unscheduled prepayments of their
mortgage loans, these prepayments will result in early payment of the applicable
mortgage-related securities. In that event, the Portfolio may be unable to
invest the proceeds from the early payment of the mortgage-related securities in
an investment that provides as high a yield as the mortgage-related securities.
Consequently, early payment associated with mortgage-related securities may
cause these securities to experience significantly greater price and yield
volatility than that experienced by traditional fixed income securities. The
occurrence of mortgage prepayments is affected by factors including the level of
interest rates, general economic conditions, the location and age of the
mortgage and other social and demographic conditions. During periods of falling
interest rates, the rate of mortgage prepayments tends to increase, thereby
tending to decrease the life of mortgage-related securities. During periods of
rising interest rates, the rate of mortgage prepayments usually decreases,
thereby tending to increase the life of mortgage-related securities. If the life
of a mortgage-related security is inaccurately predicted, the Portfolio may not
be able to realize the rate of return it expected.
Mortgage-backed securities are less effective than other types of
securities as a means of "locking in" attractive long-term interest rates. One
reason is the need to reinvest prepayments of principal; another is the
possibility of significant unscheduled prepayments resulting from declines in
interest rates. Prepayments may cause losses on securities purchased at a
premium. At times, some of the mortgage-backed securities in which the Portfolio
may invest will have higher than market interest rates and, therefore, will be
purchased at a premium above their par value. Unscheduled prepayments, which are
made at par, will cause the Portfolio to experience a loss equal to any
unamortized premium.
Stripped mortgage-backed securities are created when a U.S. government
agency or a financial institution separates the interest and principal
components of a mortgage-backed security and sells them as individual
securities. The securities may be issued by agencies or instrumentalities of the
U.S. government and private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose entities of the foregoing. Stripped
mortgage-backed securities are usually structured with two classes that receive
different portions of the interest and principal distributions on a pool of
mortgage loans. The holder of the "principal-only" security ("PO") receives the
principal payments made by the underlying mortgage-backed security while the
holder of the "interest-only" security ("IO") receives interest payments from
the same underlying security. The Portfolio may invest in both the IO class and
the PO class. The prices of stripped mortgage-backed securities may be
particularly affected by changes in interest rates. The yield to maturity on an
IO class of stripped mortgage-backed securities is extremely sensitive not only
to changes in prevailing interest rates but also to the rate of the principal
payments (including prepayments) on the underlying assets. As interest rates
fall, prepayment rates tend to increase, which tends to reduce prices of IOs and
increase prices of POs. Rising interest rates can have the opposite effect.
Prepayments may also result in losses on stripped mortgage-backed
securities. A rapid rate of principal prepayments may have a measurable adverse
effect on the Portfolio's yield to maturity to the extent it invests in IOs. If
the assets underlying the IO experience greater than anticipated prepayments of
principal, the Portfolio may fail to recoup fully its initial investments in
these securities. Conversely, POs tend to increase in value if prepayments are
greater than anticipated and decline if prepayments are slower than anticipated.
The secondary market for stripped mortgage-backed securities may be more
volatile and less liquid than that for other mortgage-backed securities,
potentially limiting the Portfolio's ability to buy and sell those securities at
any particular time.
The Portfolio may also invest in directly placed mortgages including
residential mortgages, multifamily mortgages, mortgages on cooperative apartment
buildings, commercial mortgages, and sale-leasebacks. These investments are
backed by assets such as office buildings, shopping centers, retail stores,
warehouses, apartment buildings and single-family dwellings. In the event that
the Portfolio forecloses on any non-performing mortgage, it would end up
acquiring a direct interest in the underlying real property and the Portfolio
would then be subject to the risks generally associated with the ownership of
real property. There may be fluctuations in the market value of the foreclosed
property and its occupancy rates, rent schedules and operating expenses.
Investment in direct mortgages involve may of the same risks as investments in
mortgage-related securities. There may also be adverse changes in local,
regional or general economic conditions, deterioration of the real estate market
and the financial circumstances of tenants and sellers, unfavorable changes in
zoning, building, environmental and other laws, increased real property taxes,
rising interest rates, reduced availability and increased cost of mortgage
borrowing, the need for anticipated renovations, unexpected increases in the
cost of energy, environmental factors, acts of God and other factors which are
beyond the control of the Portfolio or its investment adviser. Hazardous or
toxic substances may be present on, at or under the mortgaged property and
adversely affect the value of the property. In addition, the owners of the
property containing such substances may be held responsible, under various laws,
for containing, monitoring, removing or cleaning up such substances. The
presence of such substances may also provide a basis for other claims by third
parties. Costs of clean-up or of liabilities to third parties may exceed the
value of the property. In addition, these risks may be uninsurable. In light of
these and similar risks, it may be impossible to dispose profitably of
properties in foreclosure.
Municipal Fixed Income Securities
The Portfolio may invest in municipal bonds of any state, territory or
possession of the U.S., including the District of Columbia. The Portfolio may
also invest in municipal bonds of any political subdivision, agency or
instrumentality (e.g., counties, cities, towns, villages, districts,
authorities) of the U.S. or its possessions. Municipal bonds are debt
instruments issued by or for a state or local government to support its general
financial needs or to pay for special projects such as airports, bridges,
highways, public transit, schools, hospitals, housing and water and sewer works.
Interest payments received by holders of these securities are generally
tax-free. Municipal bonds may also be issued to refinance public debt.
Municipal bonds are mainly divided between "general obligation" and
"revenue" bonds. General obligation bonds are backed by the full faith and
credit of governmental issuers with the power to tax. They are repaid from the
issuer's general revenues. Payment, however, may be dependent upon legislative
approval and may be subject to limitations on the issuer's taxing power.
Enforcement of payments due under general obligation bonds varies according to
the law applicable to the issuer. In contrast, revenue bonds are supported only
by the revenues generated by the project or facility.
The Portfolio may also invest in industrial development bonds. Such
bonds are usually revenue bonds issued to pay for facilities with a public
purpose operated by private corporations. The credit quality of industrial
development bonds is usually directly related to the credit standing of the
owner or user of the facilities. To qualify as a municipal bond, the interest
paid on an industrial development bond must qualify as fully exempt from federal
income tax. However, the interest paid on an industrial development bond may be
subject to the federal alternative minimum tax.
The yields on municipal bonds depend on such factors as market
conditions, the financial condition of the issuer and the issue's size, maturity
date and rating. Municipal bonds are rated by Standard & Poor's, Moody's and
Fitch IBCA, Inc. Such ratings, however, are opinions, not absolute standards of
quality. Municipal bonds with the same maturity, interest rates and rating may
have different yields, while municipal bonds with the same maturity and interest
rate, but different ratings, may have the same yield. Once purchased by the
Portfolio, a municipal bond may cease to be rated or receive a new rating below
the minimum required for purchase by the Portfolio. Neither event would require
the Portfolio to sell the bond, but the Portfolio's investment adviser would
consider such events in determining whether the Portfolio should continue to
hold it.
The ability of the Portfolio to achieve its investment objective
depends upon the continuing ability of the issuers of municipal bonds to pay
interest and principal when due. Municipal bonds are subject to the provisions
of bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors. Such laws extend the time for payment of principal and/or interest,
and may otherwise restrict the Portfolio's ability to enforce its rights in the
event of default. Since there is generally less information available on the
financial condition of municipal bond issuers compared to other domestic issuers
of securities, the Portfolio's investment adviser may lack sufficient knowledge
of an issue's weaknesses. Other influences, such as litigation, may also
materially affect the ability of an issuer to pay principal and interest when
due. In addition, the market for municipal bonds is often thin and can be
temporarily affected by large purchases and sales, including those by the
Portfolio.
From time to time, Congress has considered restricting or eliminating
the federal income tax exemption for interest on municipal bonds. Such actions
could materially affect the availability of municipal bonds and the value of
those already owned by the Portfolio. If such legislation were passed, the
Trust's Board of Trustees may recommend changes in the Portfolio's investment
objectives and policies.
Options and Futures Strategies
The Portfolio may seek to increase the current return on its
investments by writing covered call or covered put options. In addition, the
Portfolio may at times seek to hedge against either a decline in the value of
its portfolio securities or an increase in the price of securities which its
investment adviser plans to purchase through the writing and purchase of options
including options on stock indices and the purchase and sale of futures
contracts and related options. The Portfolio may utilize options or futures
contracts and related options for other than hedging purposes to the extent that
the aggregate initial margins and premiums do not exceed 5% of the Portfolio's
net asset value; provided, however, in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. Expenses and losses incurred as a result of such
hedging strategies will reduce a Portfolio's current return.
The ability of the Portfolio to engage in the options and futures
strategies described below will depend on the availability of liquid markets in
such instruments. Markets in options and futures with respect to stock indices
and U.S. government securities are relatively new and still developing. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures. Therefore no assurance can be given that the
Portfolio will be able to utilize these instruments effectively for the purposes
stated below.
Writing Covered Options on Securities. The Portfolio may write covered
call options and covered put options on optionable securities of the types in
which it is permitted to invest from time to time as its investment adviser
determines is appropriate in seeking to attain the Portfolio's investment
objective. Call options written by the Portfolio give the holder the right to
buy the underlying security from the Portfolio at a stated exercise price; put
options give the holder the right to sell the underlying security to the
Portfolio at a stated price.
The Portfolio may only write call options on a covered basis or for
cross-hedging purposes and will only write covered put options. A put option
would be considered "covered" if the Portfolio owns an option to sell the
underlying security subject to the option having an exercise price equal to or
greater than the exercise price of the "covered" option at all times while the
put option is outstanding. A call option is covered if the Portfolio owns or has
the right to acquire the underlying securities subject to the call option (or
comparable securities satisfying the cover requirements of securities exchanges)
at all times during the option period. A call option is for cross-hedging
purposes if it is not covered, but is designed to provide a hedge against
another security which the Portfolio owns or has the right to acquire. In the
case of a call written for cross-hedging purposes or a put option, the Portfolio
will maintain in a segregated account at the Trust's custodian bank liquid
assets with a value equal to or greater than the Portfolio's obligation under
the option. The Portfolio may also write combinations of covered puts and
covered calls on the same underlying security.
The Portfolio will receive a premium from writing an option, which
increases the Portfolio's return in the event the option expires unexercised or
is terminated at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the term of the option, and the volatility of the
market price of the underlying security. By writing a call option, the Portfolio
will limit its opportunity to profit from any increase in the market value of
the underlying security above the exercise price of the option. By writing a put
option, the Portfolio will assume the risk that it may be required to purchase
the underlying security for an exercise price higher than its then current
market price, resulting in a potential capital loss if the purchase price
exceeds the market price plus the amount of the premium received.
The Portfolio may terminate an option which it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. The Portfolio will
realize a profit (or loss) from such transaction if the cost of such transaction
is less (or more) than the premium received from the writing of the option.
Because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the repurchase of a call option may be offset in whole or in part by
unrealized appreciation of the underlying security owned by the Portfolio.
Purchasing Put and Call Options on Securities. The Portfolio may
purchase put options to protect its portfolio holdings in an underlying security
against a decline in market value. This protection is provided during the life
of the put option since the Portfolio, as holder of the put, is able to sell the
underlying security at the exercise price regardless of any decline in the
underlying security's market price. For the purchase of a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction
costs. By using put options in this manner, any profit which the Portfolio might
otherwise have realized on the underlying security will be reduced by the
premium paid for the put option and by transaction costs.
The Portfolio may also purchase a call option to hedge against an
increase in price of a security that it intends to purchase. This protection is
provided during the life of the call option since the Portfolio, as holder of
the call, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. For the
purchase of a call option to be profitable, the market price of the underlying
security must rise sufficiently above the exercise price to cover the premium
and transaction costs. By using call options in this manner, any profit which
the Portfolio might have realized had it bought the underlying security at the
time it purchased the call option will be reduced by the premium paid for the
call option and by transaction costs.
There are no specific limitations on the Portfolio's purchases of
options on securities.
Purchase and Sale of Options and Futures on Stock Indices. The
Portfolio may purchase and sell options on stock indices and stock index futures
contracts either as a hedge against movements in the equity markets or for other
investment purposes.
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars times a specified multiple. The writer
of the option is obligated, in return for the premium received, to make delivery
of this amount. Unlike options on specific securities, all settlements of
options on stock indices are in cash and gain or loss depends on general
movements in the stocks included in the index rather than price movements in
particular stocks. Currently options traded include the Standard & Poor's 500
Composite Stock Price Index, the NYSE Composite Index, the AMEX Market Value
Index, the NASDAQ 100 Index, the Nikkei 225 Stock Average Index, the Financial
Times Stock Exchange 100 Index and other standard broadly based stock market
indices. Options are also traded in certain industry or market segment indices
such as the Pharmaceutical Index.
A stock index futures contract is an agreement in which one party
agrees to deliver to the other an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made.
If the Portfolio's investment adviser expects general stock market
prices to rise, it might purchase a call option on a stock index or a futures
contract on that index as a hedge against an increase in prices of particular
equity securities it wants ultimately to buy for the Portfolio. If in fact the
stock index does rise, the price of the particular equity securities intended to
be purchased may also increase, but that increase would be offset in part by the
increase in the value of the Portfolio's index option or futures contract
resulting from the increase in the index. If, on the other hand, the Portfolio's
investment adviser expects general stock market prices to decline, it might
purchase a put option or sell a futures contract on the index. If that index
does in fact decline, the value of some or all of the equity securities held by
the Portfolio may also be expected to decline, but that decrease would be offset
in part by the increase in the value of the Portfolio's position in such put
option or futures contract.
Purchase and Sale of Interest Rate Futures. The Portfolio may purchase
and sell interest rate futures contracts on fixed income securities or indices
of such securities, including municipal indices and any other indices of fixed
income securities that may become available for trading either for the purpose
of hedging its portfolio securities against the adverse effects of anticipated
movements in interest rates or for other investment purposes.
The Portfolio may sell interest rate futures contracts in anticipation
of an increase in the general level of interest rates. Generally, as interest
rates rise, the market value of the securities held by the Portfolio will fall,
thus reducing the net asset value of the Portfolio. This interest rate risk can
be reduced without employing futures as a hedge by selling such securities and
either reinvesting the proceeds in securities with shorter maturities or by
holding assets in cash. However, this strategy entails increased transaction
costs in the form of dealer spreads and brokerage commissions and would
typically reduce the Portfolio's average yield as a result of the shortening of
maturities.
The sale of interest rate futures contracts provides a means of hedging
against rising interest rates. As rates increase, the value of the Portfolio's
short position in the futures contracts will also tend to increase thus
offsetting all or a portion of the depreciation in the market value of the
Portfolio's investments that are being hedged. While the Portfolio will incur
commission expenses in selling and closing out futures positions (which is done
by taking an opposite position in the futures contract), commissions on futures
transactions are lower than transaction costs incurred in the purchase and sale
of portfolio securities.
The Portfolio may purchase interest rate futures contracts in
anticipation of a decline in interest rates when it is not fully invested. As
such purchases are made, it is expected that an equivalent amount of futures
contracts will be closed out.
The Portfolio will enter into futures contracts which are traded on
national or foreign futures exchanges, and are standardized as to maturity date
and the underlying financial instrument. Futures exchanges and trading in the
U.S. are regulated under the Commodity Exchange Act by the CFTC. Futures are
traded in London at the London International Financial Futures Exchange, in
Paris at the MATIF, and in Tokyo at the Tokyo Stock Exchange.
Options on Futures Contracts. The Portfolio may purchase and write call
and put options on stock index and interest rate futures contracts. The
Portfolio may use such options on futures contracts in connection with its
hedging strategies in lieu of purchasing and writing options directly on the
underlying securities or stock indices or purchasing or selling the underlying
futures. For example, the Portfolio may purchase put options or write call
options on stock index futures or interest rate futures, rather than selling
futures contracts, in anticipation of a decline in general stock market prices
or rise in interest rates, respectively, or purchase call options or write put
options on stock index or interest rate futures, rather than purchasing such
futures, to hedge against possible increases in the price of equity securities
or debt securities, respectively, which the Portfolio intends to purchase.
In connection with transactions in stock index options, stock index
futures, interest rate futures and related options on such futures, the
Portfolio will be required to deposit as "initial margin" an amount of cash and
short-term U.S. government securities. The current initial margin requirements
per contract is range from approximately 2% to 10% of the contract amount.
Thereafter, subsequent payments (referred to as "variation margin") are made to
and from the broker to reflect changes in the value of the futures contract.
Brokers may establish deposit requirements higher than exchange minimums.
Limitations. The Portfolio will not purchase or sell futures contracts
or options on futures contracts or stock indices for non-hedging purposes if, as
a result, the sum of the initial margin deposits on its existing futures
contracts and related options positions and premiums paid for options on futures
contracts or stock indices would exceed 5% of the net assets of the Portfolio.
If this limitation is exceeded at any time, the Portfolio will take prompt
action to close out a sufficient number of open contracts to bring its open
futures and options positions within this limitation.
Risks of Options and Futures Strategies. The effective use of options
and futures strategies depends, among other things, on the Portfolio's ability
to terminate options and futures positions at times when its investment adviser
deems it desirable to do so. Although the Portfolio will not enter into an
option or futures position unless its investment adviser believes that a liquid
market exists for such option or future, there can be no assurance that the
Portfolio will be able to effect closing transactions at any particular time or
at an acceptable price. The investment advisers generally expect that options
and futures transactions for the Portfolio will be conducted on recognized
exchanges. In certain instances, however, the Portfolio may purchase and sell
options in the over-the-counter market. The staff of the Securities and Exchange
Commission considers over-the-counter options to be illiquid. A Portfolio's
ability to terminate option positions established in the over-the-counter market
may be more limited than in the case of exchange traded options and may also
involve the risk that securities dealers participating in such transactions
would fail to meet their obligations to the Portfolio.
The use of options and futures involves the risk of imperfect
correlation between movements in options and futures prices and movements in the
price of the securities that are the subject of the hedge. The successful use of
these strategies also depends on the ability of the Portfolio's investment
adviser to forecast correctly interest rate movements and general stock market
price movements. This risk increases as the composition of the securities held
by the Portfolio diverges from the composition of the relevant option or futures
contract.
Portfolio Turnover
While it is impossible to predict portfolio turnover rates, the
investment adviser to the Portfolio anticipates that portfolio turnover will
exceed 100% per year. Higher portfolio turnover rates usually generate
additional brokerage commissions and expenses.
Preferred Stocks
The Portfolio may purchase preferred stock. Preferred stock, unlike
common stock, has a stated dividend rate payable from the corporation's
earnings. Preferred stock dividends may be cumulative or non-cumulative,
participating, or auction rate. "Cumulative" dividend provisions require all or
a portion of prior unpaid dividends to be paid.
If interest rates rise, the fixed dividend on preferred stocks may be
less attractive, causing the price of preferred stocks to decline. Preferred
stock may have mandatory sinking fund provisions, as well as call/redemption
provisions prior to maturity, which can be a negative feature when interest
rates decline. Preferred stock also generally has a preference over common stock
on the distribution of a corporation's assets in the event of liquidation of the
corporation. Preferred stock may be "participating" stock, which means that it
may be entitled to a dividend exceeding the stated dividend in certain cases.
The rights of preferred stock on distribution of a corporation's assets in the
event of a liquidation are generally subordinate to the rights associated with a
corporation's debt securities.
Real Estate Investment Trusts
The Portfolio may invest up to 5% of its net assets in investments
related to real estate, including real estate investment trusts ("REITs"). Risks
associated with investments in securities of companies in the real estate
industry include: decline in the value of real estate; risks related to general
and local economic conditions; overbuilding and increased competition; increases
in property taxes and operating expenses; changes in zoning laws; casualty or
condemnation losses; variations in rental income; changes in neighborhood
values; the appeal of properties to tenants; and increases in interest rates. In
addition, equity REITs may be affected by changes in the values of the
underlying property owned by the trusts, while mortgage real estate investment
trusts may be affected by the quality of credit extended. REITs are dependent
upon management skills, may not be diversified and are subject to the risks of
financing projects. Such REITs are also subject to heavy cash flow dependency,
defaults by borrowers, self liquidation and the possibility of failing to
qualify for tax-free pass-through of income under the Internal Revenue Code of
1986, as amended (the "Code") and to maintain exemption from the 1940 Act. In
the event an issuer of debt securities collateralized by real estate defaults,
it is conceivable that the REITs could end up holding the underlying real
estate.
Repurchase Agreements
The Portfolio may enter into repurchase agreements with a bank,
broker-dealer, or other financial institution but may not invest more than 15%
of its net assets in illiquid securities, including repurchase agreements having
maturities of greater than seven days. The Portfolio may enter into repurchase
agreements, provided the Trust's custodian always has possession of securities
serving as collateral whose market value at least equals the amount of the
repurchase obligation. To minimize the risk of loss the Portfolio will enter
into repurchase agreements only with financial institutions which are considered
by its investment adviser to be creditworthy. If an institution enters an
insolvency proceeding, the resulting delay in liquidation of the securities
serving as collateral could cause the Portfolio some loss, as well as legal
expense, if the value of the securities declines prior to liquidation.
Reverse Repurchase Agreements
The Portfolio may enter into reverse repurchase agreements with
brokers, dealers, domestic and foreign banks or other financial institutions. In
a reverse repurchase agreement, the Portfolio sells a security and agrees to
repurchase it at a mutually agreed upon date and price, reflecting the interest
rate effective for the term of the agreement. It may also be viewed as the
borrowing of money by the Portfolio. The Portfolio's investment of the proceeds
of a reverse repurchase agreement is the speculative factor known as leverage.
Leverage may cause any gains or losses of the Portfolio to be magnified. The
Portfolio may enter into a reverse repurchase agreement only if the interest
income from investment of the proceeds is greater than the interest expense of
the transaction and the proceeds are invested for a period no longer than the
term of the agreement. At the time the Portfolio enters into a reverse
repurchase agreement, it will establish and maintain a segregated account with
an approved custodian containing cash or other liquid securities having a value
not less than the repurchase price (including accrued interest). If interest
rates rise during a reverse repurchase agreement, it may adversely affect the
Portfolio's net asset value. Reverse repurchase agreements are considered to be
borrowings under the 1940 Act.
The assets contained in the segregated account will be marked-to-market
daily and additional assets will be placed in such account on any day in which
the assets fall below the repurchase price (plus accrued interest). The
Portfolio's liquidity and ability to manage its assets might be affected when it
sets aside cash or portfolio securities to cover such commitments. Reverse
repurchase agreements involve the risk that the market value of the securities
retained in lieu of sale may decline below the price of the securities the
Portfolio has sold but is obligated to repurchase. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, such buyer or its trustee or receiver may receive an extension of
time to determine whether to enforce the Portfolio's obligation to repurchase
the securities, and the Portfolio's use of the proceeds of the reverse
repurchase agreement may effectively be restricted pending such decision.
Securities Loans
All securities loans will be made pursuant to agreements requiring the
loans to be continuously secured by collateral in cash or high grade debt
obligations at least equal at all times to the market value of the loaned
securities. The borrower pays to the Portfolio an amount equal to any dividends
or interest received on loaned securities. The Portfolio retains all or a
portion of the interest received on investment of cash collateral or receive a
fee from the borrower. Lending portfolio securities involves risks of delay in
recovery of the loaned securities or in some cases loss of rights in the
collateral should the borrower fail financially.
Securities loans are made to broker-dealers or institutional investors
or other persons, pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value of
the loaned securities marked-to-market on a daily basis. The collateral received
will consist of cash, U.S. government securities, letters of credit or such
other collateral as may be permitted under the Portfolio's securities lending
program. While the securities are being loaned, the Portfolio will continue to
receive the equivalent of the interest or dividends paid by the issuer on the
securities, as well as interest on the investment of the collateral or a fee
from the borrower. The Portfolio has a right to call each loan and obtain the
securities on five business days' notice or, in connection with securities
trading on foreign markets, within such longer period for purchases and sales of
such securities in such foreign markets. The Portfolio will generally not have
the right to vote securities while they are being loaned, but its Manager or
investment adviser will call a loan in anticipation of any important vote. The
risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to firms deemed by the
Portfolio's investment adviser to be of good standing and will not be made
unless, in the judgment of the investment adviser, the consideration to be
earned from such loans would justify the risk.
U.S. Government Securities
Securities issued or guaranteed as to principal and interest by the
U.S. government or its agencies and government-sponsored entities include U.S.
Treasury obligations, consisting of bills, notes and bonds, which principally
differ in their interest rates, maturities and times of issuance, and
obligations issued or guaranteed by agencies and government-sponsored entities
which are supported by (i) the full faith and credit of the U.S. Treasury (such
as securities of the Government National Mortgage Association), (ii) the limited
authority of the issuer to borrow from the U.S. Treasury (such as securities of
the Student Loan Marketing Association) or (iii) the authority of the U.S.
government to purchase certain obligations of the issuer (such as securities of
the Federal National Mortgage Association). No assurance can be given that the
U.S. government will provide financial support to U.S. government agencies or
government-sponsored entities as described in clauses (ii) or (iii) above in the
future, other than as set forth above, since it is not obligated to do so by
law.
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds
Zero coupon and deferred interest bonds are debt obligations which are
issued at a significant discount from face value. The discount approximates the
total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. Payment-in-kind ("PIK") bonds are debt obligations which provide that
the issuer thereof may, at its option, pay interest on such bonds in cash or in
the form of additional debt obligations. Such investments benefit the issuer by
mitigating its need for cash to meet debt service, but also require a higher
rate of return to attract investors who are willing to defer receipt of such
cash. Such investments may experience greater volatility in market value due to
changes in interest rates than debt obligations which make regular payments of
interest. The Portfolio will accrue income on such investments for tax and
accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Portfolio's
distribution obligations.
INVESTMENT RESTRICTIONS
Fundamental Policies
The following investment restrictions are fundamental policies, which
may not be changed without the approval of a majority of the outstanding shares
of the Portfolio. As provided in the 1940 Act, a vote of a majority of the
outstanding shares necessary to amend a fundamental policy means the affirmative
vote of the lesser of (1) 67% or more of the shares present at a meeting, if the
holders of more than 50% of the outstanding shares of the Portfolio are present
or represented by proxy, or (2) more than 50% of the outstanding shares of the
Portfolio.
1. Borrowing
The Portfolio may not borrow money, except to the extent permitted by
applicable law.
2. Diversification
The Portfolio may not purchase a security if, as a result, with respect
to 75% of the value of its total assets (i) more than 5% of the value of the
Portfolio's total assets would be invested in the securities of a single issuer,
except securities issued on guaranteed by the U.S. government, its agencies and
instrumentalities, or (ii) more than 10% of the outstanding voting securities of
any issuer would be held by the Portfolio, other than securities issued by the
U.S. government, its agencies and instrumentalities.
3. Concentration
The Portfolio may not invest more than 25% of the value of its total
assets in any one industry, provided that this limitation does not apply to
obligations issued or guaranteed as to interest and principal by the U.S.
government, its agencies and instrumentalities, and repurchase agreements
secured by such obligations.
4. Underwriting
The Portfolio may not underwrite securities issued by other persons,
except to the extent that in connection with the disposition of its portfolio
investments it may be deemed to be an underwriter under federal securities laws.
5. Real Estate
The Portfolio may not purchase or sell real estate, although the
Portfolio may purchase securities of issuers which deal in real estate,
securities which are secured by interests in real estate and securities
representing interests in real estate; provided, however, that the Portfolio may
hold and sell real estate acquired as a result of the ownership of securities.
6. Commodities
The Portfolio may not purchase or sell physical commodities, except
that it may (i) enter into futures contracts and options thereon in accordance
with applicable law and (ii) purchase or sell physical commodities if acquired
as a result of ownership of securities or other instruments. The Portfolio will
not consider stock index futures contracts, currency contracts, hybrid
investments, swaps or other similar instruments to be commodities.
7. Loans
The Portfolio may not make loans, except through the purchase of debt
obligations and, the entry into repurchase agreements or through lending of its
portfolio securities. Any loans of portfolio securities will be made according
to guidelines established by the Securities and Exchange Commission and the
Trust's Board of Trustees.
8. Senior Securities
The Portfolio may not issue any senior security (as defined in the 1940
Act) except in compliance with applicable law.
Non-Fundamental Policies
The following investment restrictions apply to the Portfolio, except as
noted. These restrictions may be changed for the Portfolio by the Trust's Board
of Trustees without a vote of the Portfolio's shareholders.
The Portfolio may not:
(1) Purchase securities on margin, except that the Portfolio may:
(a) make use of any short-term credit necessary for clearance
of purchases and sales of portfolio securities and (b) make
initial or variation margin deposits in connection with
futures contracts, options, currencies, or other permissible
investments;
(2) Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the Portfolio as security for indebtedness,
except as may be necessary in connection with permissible
borrowings or investments; and then such mortgaging, pledging
or hypothecating may not exceed 33 1/3 % of the respective
total assets of the Portfolio. The deposit of underlying
securities and other assets in escrow and collateral
arrangements with respect to margin accounts for futures
contracts, options, currencies or other permissible
investments are not deemed to be mortgages, pledges, or
hypothecations for these purposes;
(3) Purchase participations or other direct interests in or enter
into leases with respect to oil, gas, or other mineral
explorations or development programs, except that the
Portfolio may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development
activities or hold mineral leases acquired as a result of its
ownership of securities;
(4) Invest in companies for the purpose of exercising management or
control.
With respect to borrowing, the Portfolio may borrow from banks and
enter into reverse repurchase agreements in an amount up to 33 1/3% of its total
assets, taken at market value. Each Portfolio may also borrow up to an
additional 5% of its total assets from banks or others. The Portfolio may borrow
only as a temporary measure for extraordinary or emergency purposes such as the
redemption of Portfolio shares. The Portfolio may purchase additional securities
so long as borrowings do not exceed 5% of its total assets.
With respect to loans of portfolio securities, as a matter of operating
policy, the Portfolio will limit the aggregate of such loans to 33 1/3% of the
value of the Portfolio's total assets.
With respect to real estate investments, as a matter of operating
policy, the Portfolio will not invest in real estate limited partnership
interests.
With respect to foreign currency transactions, the Portfolio may enter
into transactions with counterparties which have received (or the guarantors of
the obligations of such counterparties have received) a credit rating of A-1 or
P-1 by Standard & Poor's or Moody's respectively or that have an equivalent
rating from an NRSRO or (except for over-the-counter currency options) are
determined to be of equivalent credit quality by the Portfolio's investment
adviser. The Portfolio will not enter into a transaction to hedge currency
exposure to an extent greater, after settling all transactions intended to
wholly or partially offset other transactions, than the aggregate market values
(at the time of entering into the transaction) of the securities held in its
portfolio that are denominated or generally quoted in or currently convertible
into such currency other than with respect or cross hedging or proxy hedging.
With respect to swaps, the Portfolio will not enter into any swap, cap,
floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the counterparty, combined with any
credit enhancements, is rated at least A by Standard & Poor's or Moody's or has
an equivalent equity rating from an NRSRO or is determined to be of equivalent
credit quality of the Portfolio's investment adviser.
PERFORMANCE INFORMATION
Total return and yield will be computed as described below.
Total Return
The Portfolio's "average annual total return" figures described and
shown in the Prospectus/Proxy Statement are computed according to a formula
prescribed by the Securities and Exchange Commission. The formula can be
expressed as follows:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1000 payment
made at the beginning of the 1, 5, or 10 years (or other)
periods at the end of the 1, 5, or 10 years (or other) periods
(or fractional portion thereof).
The calculations of total return assume the reinvestment of all
dividends and capital gain distributions on the reinvestment dates during the
period and the deduction of all recurring expenses that were charged to
shareholders' accounts. The total return figures do not reflect charges and
deductions which are, or may be, imposed under the Contracts.
The performance of the Portfolio will vary from time to time in
response to fluctuations in market conditions, interest rates, the composition
of the Portfolio's investments and expenses. Consequently, the Portfolio's
performance figures are historical and should not be considered representative
of the performance of the Portfolio for any future period.
Yield
From time to time, the Trust may quote the Portfolio's yield and
effective yield in advertisements or in reports or other communications to
shareholders. Yield quotations are expressed in annualized terms and may be
quoted on a compounded basis.
The 30-day yield for the Portfolio will be calculated according to a
formula prescribed by the Securities and Exchange Commission. The formula can be
expressed as follows:
YIELD = 2[(a-b+1)6-1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the net asset value per share on the last day of the period
For the purpose of determining the interest earned (variable "a" in the formula)
on debt obligations that were purchased by the Portfolio at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Yield information is useful in reviewing the Portfolio's performance,
but because yields fluctuate, such information cannot necessarily be used to
compare an investment in the Portfolio's shares with bank deposits, savings
accounts and similar investment alternatives which often provide an agreed or
guaranteed fixed yield for a stated period of time. Shareholders should remember
that yield is a function of the kind and quality of the instruments in the
Portfolios' investment portfolios, portfolio maturity, operating expenses and
market conditions.
It should be recognized that in periods of declining interest rates the
yields will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates the yields will tend to be somewhat lower.
Also, when interest rates are falling, the inflow of net new money to the
Portfolio from the continuous sale of its shares will likely be invested in
instruments producing lower yields than the balance of the Portfolio's
investments, thereby reducing the current yield of the Portfolio. In periods of
rising interest rates, the opposite can be expected to occur.
Non-Standardized Performance
In addition to the performance information described above, the Trust
may provide total return information with respect to the Portfolio for
designated periods, such as for the most recent six months or most recent twelve
months. This total return information is computed as described under "Total
Return" above except that no annualization is made.
PORTFOLIO TRANSACTIONS
Subject to the supervision and control of the Manager and the Trustees
of the Trust, the Portfolio's Adviser is responsible for decisions to buy and
sell securities for its account and for the placement of its portfolio business
and the negotiation of commissions, if any, paid on such transactions. Brokerage
commissions are paid on transactions in equity securities traded on a securities
exchange and on options, futures contracts and options thereon. Fixed income
securities and certain equity securities in which the Portfolio invests are
traded in the over-the-counter market. These securities are generally traded on
a net basis with dealers acting as principal for their own account without a
stated commission, although prices of such securities usually include a profit
to the dealer. In over-the-counter transactions, orders are placed directly with
a principal market maker unless a better price and execution can be obtained by
using a broker. In underwritten offerings, securities are usually purchased at a
fixed price which includes an amount of compensation to the underwriter
generally referred to as the underwriter's concession or discount. Certain money
market securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid. U.S. government securities are generally
purchased from underwriters or dealers, although certain newly-issued U.S.
government securities may be purchased directly from the U.S. Treasury or from
the issuing agency or instrumentality. The Portfolio's Adviser is responsible
for effecting its portfolio transactions and will do so in a manner deemed fair
and reasonable to the Portfolio and not according to any formula. The primary
consideration in all portfolio transactions will be prompt execution of orders
in an efficient manner at a favorable price. In selecting broker-dealers and
negotiating commissions, the Adviser considers the firm's reliability, the
quality of its execution services on a continuing basis and its financial
condition. When more than one firm is believed to meet these criteria,
preference may be given to brokers that provide the Portfolio or its Adviser
with brokerage and research services within the meaning of Section 28(e) of the
Securities Exchange Act of 1934. The Portfolio's investment adviser is of the
opinion that, because this material must be analyzed and reviewed, its receipt
and use does not tend to reduce expenses but may benefit the Portfolio by
supplementing the Adviser's research.
The Adviser, subject to seeking the most favorable price and best
execution and in compliance with the Conduct Rules of the National Association
of Securities Dealers, Inc., may consider sales of shares of the Trust as a
factor in the selection of broker-dealers. The Trust may direct the Manager to
cause the Adviser to effect securities transactions through broker-dealers in a
manner that would help to generate resources to (i) pay the cost of certain
expenses which the Trust is required to pay or for which the Trust is required
to arrange payment pursuant to the management agreement with the Manager ("Trust
Expenses"); or (ii) finance activities that are primarily intended to result in
the sale of Trust shares. At the discretion of the Board of Trustees, such
resources may be used to pay or cause the payment of Trust Expenses or may be
used to finance activities that are primarily intended to result in the sale of
Trust shares.
The Adviser may effect portfolio transactions for other investment
companies and advisory accounts. Research services furnished by broker-dealers
through which the Portfolio effects its securities transactions may be used by
the Portfolio's Adviser in servicing all of its accounts; not all such services
may be used in connection with the Portfolio. In the opinion of the Adviser, it
is not possible to measure separately the benefits from research services to
each of its accounts, including the Portfolio. Whenever concurrent decisions are
made to purchase or sell securities by the Portfolio and another account, the
Portfolio's Adviser will attempt to allocate equitably portfolio transactions
among the Portfolio and other accounts. In making such allocations between the
Portfolio and other accounts, the main factors to be considered are the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and the opinions of the persons
responsible for recommending investments to the Portfolio and the other
accounts. In some cases this procedure could have an adverse effect on the
Portfolio. In the opinion of the Adviser, however, the results of such
procedures will, on the whole, be in the best interest of each of the accounts.
The Adviser to the Portfolio may execute portfolio transactions through
certain of their affiliated brokers, acting as agent in accordance with the
procedures established by the Board of Trustees, but will not purchase any
securities from or sell any securities to any such affiliate acting as principal
for its own account. For 1999, none of the Portfolio's commissionable
transactions were executed through broker-dealers affiliated with an Adviser.
The following table shows the amounts of brokerage commissions paid by
the Portfolio's predecessor fund during the fiscal years ended December 31,
1999, December 31, 1998 and December 31, 1997.
Brokerage Commissions Paid
--------------------------
1999 1998 1997
---- ---- ----
$10,634 NA NA
MANAGEMENT OF THE TRUST
The Trust is supervised by a Board of Trustees that is responsible for
representing the interests of shareholders. The Trustees meet periodically
throughout the year to oversee the Portfolios' activities, reviewing, among
other things, the Portfolio's performance and its contractual arrangements with
various service providers.
Trustees and Officers
The Trustees and executive officers of the Trust, their ages and their
principal occupations during the past five years are set forth below. Unless
otherwise indicated, the business address of each is 610 Newport Center Drive,
Suite 1350, Newport Beach, California 92660.
<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Held with Registrant During Past 5 Years
-------------------- -------------------
<S> <C> <C>
Name, Age and Address
Partner, Sullivan & Worcester LLP (law
Robert N. Hickey (58) Trustee firm)
Sullivan & Worcester LLP
1025 Connecticut Avenue, N.W.
Washington, DC 20036
[other information to be supplied by amendment]
Elizabeth M. Forget (34) President Since July 2000, President of Met
Investors Advisory Corp.; from June 1996
to July 2000, President and Director of
Marketing and Product Development of
Equitable Distributors, Inc.; from
September 1993 to June 1996, a Vice
President of Bankers Trust Company
Mark Reynolds (50) Chief Financial Officer Since June 2000, President of Cova
and Treasurer Financial Services Life Insurance
Company;
from
July
1996
to
June
2000,
Executive
Vice
President
and
Chief
Financial
Officer
of
Cova
Financial
Services
Life
Insurance
Company;
from
December
1993
to
June
1996,
Vice
President,
Treasurer
and
Controller
of
First
Variable
Life
Insurance
Company
and
from
August
1993
to
June
1996,
Vice
President
and
Director
of
First
Variable
Capital
Services,
Inc.
</TABLE>
Committees of the Board
The Trust has a standing Audit Committee consisting of all of the
Trustees who are not "interested persons" of the Trust (as that term is defined
in the 1940 Act) ("Disinterested Trustees"). The Audit Committee's function is
to recommend to the Board independent accountants to conduct the annual audit of
the Trust's financial statements; review with the independent accountants the
outline, scope and results of the annual audit; and review the performance and
fees charged by the independent accountants for professional services. In
addition, the Audit Committee meets with the independent accountants and
representatives of management to review accounting activities and areas of
financial reporting and control.
The Trust has a Nominating and Compensation Committee consisting of all
the Disinterested Trustees. The Nominating and Compensation Committee's function
is to nominate and evaluate independent trustee candidates and review the
compensation arrangement for each of the Trustees.
The Trust has a Valuation Committee consisting of Elizabeth M. Forget,
_____________, _____________ , and such other officers of the Trust and the
Manager, as well as such officers of any Adviser to any Portfolio as are deemed
necessary by Ms. or Mr. from time to time, each of whom shall serve at the
pleasure of the Board of Trustees as members of the Valuation Committee. This
committee determines the value of any of the Trust's securities and assets for
which market quotations are not readily available or for which valuation cannot
otherwise be provided.
Compensation of the Trustees
Each Trustee, who is not an employee of the Manager or any of its
affiliates, currently receives from the Trust an annual fee of $ plus (i) an
additional fee of $ for each regularly scheduled Board meeting attended, (ii) $
for each special Board meeting or special committee meeting attended, and (iii)
$ for each telephone or other committee meeting attended, plus reimbursement for
expenses in attending in-person meetings.
A deferred compensation plan for the benefit of the Trustees has been
adopted by the Trust. Under the deferred compensation plan, each Trustee may
defer payment of all or part of the fees payable for such Trustee's services.
Each Trustee may defer payment of such fees until his or her retirement as a
Trustee or until the earlier attainment of a specified age. Fees deferred under
the deferred compensation plan, together with accrued interest thereon, will be
disbursed to a participating Trustee in monthly installments over a five to 20
year period elected by such Trustee.
The Agreement and Declaration of Trust of the Trust provides that the
Trust will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Trust, except if it is determined in the manner specified
in the Agreement and Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Trust or that such indemnification would relieve any officer or Trustee of any
liability to the Trust or its shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of his duties. The Trust, at its
expense, provides liability insurance for the benefit of its Trustees and
officers.
As of the date of this Statement of Additional Information, the
officers and Trustees of the Trust as a group owned less than 1% of the
outstanding shares of the Trust.
INVESTMENT ADVISORY AND OTHER SERVICES
The Manager
The Trust is managed by Met Investors Advisory Corp. (the "Manager")
(formerly known as Security First Investment Management Corporation) which,
subject to the supervision and direction of the Trustees of the Trust, has
overall responsibility for the general management and administration of the
Trust. MetLife Investors Group, an affiliate of Metropolitan Life Insurance
Company, owns all of the outstanding common shares of the Manager and MetLife
Distributors, Inc.
The Trust and Manager have entered into a Management Agreement dated
______, 2001 ("Management Agreement"), which was initially approved by the Board
of Trustees on , 2000 and by MetLife Investors Group, as initial shareholder of
the Trust, on _____, 2001. Subject always to the supervision and direction of
the Trustees of the Trust, under the Management Agreement the Manager will have
(i) overall supervisory responsibility for the general management and investment
of the Portfolio's assets; (ii) full discretion to select new or additional
Advisers for the Portfolio; (iii) full discretion to enter into and materially
modify investment advisory agreements with Advisers; (iv) full discretion to
terminate and replace any Adviser; and (v) full investment discretion to make
all determinations with respect to the investment of the Portfolio's assets not
then managed by an Adviser. In connection with the Manager's responsibilities
under the Management Agreement, the Manager will assess the Portfolio's
investment focus and will seek to implement decisions with respect to the
allocation and reallocation of the Portfolio's assets among one or more current
or additional Advisers from time to time, as the Manager deems appropriate, to
enable the Portfolio to achieve its investment goals. In addition, the Manager
will monitor compliance of the Adviser with the investment objectives, policies
and restrictions of the Portfolio (or portions of the Portfolio) under the
management of such Adviser, and review and report to the Trustees of the Trust
on the performance of the Adviser. The Manager will furnish, or cause the
appropriate Adviser(s) to furnish, to the Trust such statistical information,
with respect to the investments that the Portfolio (or portions of the
Portfolio) may hold or contemplate purchasing, as the Trust may reasonably
request. On the Manager's own initiative, the Manager will apprise, or cause the
appropriate Adviser(s) to apprise, the Trust of important developments
materially affecting the Portfolio (or any portion of the Portfolio that they
advise) and will furnish the Trust, from time to time, with such information as
may be appropriate for this purpose. Further, the Manager agrees to furnish, or
cause the appropriate Adviser(s) to furnish, to the Trustees of the Trust such
periodic and special reports as the Trustees of the Trust may reasonably
request. In addition, the Manager has agreed to cause the appropriate Adviser(s)
to furnish to third-party data reporting services all currently available
standardized performance information and other customary data.
Under the Management Agreement, the Manager also is required to furnish
to the Trust, at its own expense and without remuneration from or other cost to
the Trust, the following:
o Office space, all necessary office facilities and equipment.
o Necessary executive and other personnel, including personnel for the
performance of clerical and other office functions, other than those
functions:
o related to and to be performed under the Trust's contract or contracts
for administration, custodial, accounting, bookkeeping, transfer and
dividend disbursing agency or similar services by the entity selected
to perform such services; or
o related to the investment advisory services to be provided by any
Adviser pursuant to an investment advisory agreement with the Manager
("Advisory Agreement").
o Information and services, other than services of outside counsel or
independent accountants or investment advisory services to be provided by
any Adviser under an Advisory Agreement, required in connection with the
preparation of all registration statements, prospectuses and statements of
additional information, any supplements thereto, annual, semi-annual, and
periodic reports to Trust shareholders, regulatory authorities, or others,
and all notices and proxy solicitation materials, furnished to shareholders
or regulatory authorities, and all tax returns.
As compensation for these services the Trust pays the Manager a monthly
fee at the annual rate of the Portfolio's average daily net assets as follows:
0.55% of the first $75 million of such net assets and 0.50% of such net assets
over $75 million. From the management fees, the Manager pays the expenses of
providing investment advisory services to the Portfolio, including the fees of
the Adviser of the Portfolio.
The Manager and the Trust have also entered into an expense limitation
agreement with respect to the Portfolio ("Expense Limitation Agreement"),
pursuant to which the Manager has agreed to waive or limit its fees and to
assume other expenses so that the total annual operating expenses (with certain
exceptions described in the Prospectus/Proxy Statement) of the Portfolio are
limited to the extent described in the "Management--Expense Limitation
Agreement" section of the Prospectus/Proxy Statement.
In addition to the management fees, the Trust pays all expenses not
assumed by the Manager, including, without limitation, charges for the services
and expenses of the independent accountants and legal counsel retained by the
Trust, for itself and its Disinterested Trustees, accounting and auditing
services, interest, taxes, costs of printing and distributing reports to
shareholders, proxy materials and prospectuses, charges of its administrator,
custodian, transfer agent and dividend disbursing agent, registration fees, fees
and expenses of the Trustees who are not affiliated persons of the Manager,
insurance, brokerage costs, litigation, and other extraordinary or nonrecurring
expenses. All general Trust expenses are allocated among and charged to the
assets of the Portfolio of the Trust on a basis that the Trustees deem fair and
equitable, which may be on the basis of relative net assets of the Portfolio or
the nature of the services performed and relative applicability to the
Portfolio. In addition, as discussed below under "Distribution of the Trust's
Shares," the Class B shares of the Portfolio may pay for certain distribution -
related expenses in connection with activities primarily intended to result in
the sale of its shares.
The Management Agreement continues in force for two years from its
commencement date, with respect to the Portfolio, and from year to year
thereafter, but only so long as its continuation as to the Portfolio is
specifically approved at least annually (i) by the Trustees or by the vote of a
majority of the outstanding voting securities of the Portfolio, and (ii) by the
vote of a majority of the Disinterested Trustees, by votes cast in person at a
meeting called for the purpose of voting on such approval. The Management
Agreement provides that it shall terminate automatically if assigned, and that
it may be terminated as to the Portfolio without penalty by the Trustees of the
Trust or by vote of a majority of the outstanding voting securities of the
Portfolio upon 60 days' prior written notice to the Manager, or by the Manager
upon 90 days' prior written notice to the Trust, or upon such shorter notice as
may be mutually agreed upon.
It is anticipated that the Trust will commence operations on or about
February 5, 2001. The following table shows the fees paid by the Portfolio's
predecessor to the Manager or current affiliates of the Manager and any fee
waivers or reimbursements during the fiscal years ended December 31, 1999,
December 31, 1998 and December 31, 1997.
1999
---------------------------------------------------------
Investment Investment Other Expenses
Management Fee Management Fee Reimbursed
---- ---- ----------
Paid Waived
---- ------
$505,285 --- ---
1998
---------------------------------------------------------
Investment Investment Other Expenses
Management Fee Management Fee Reimbursed
---- ---- ----------
Paid Waived
---- ------
$165,294 --- ---
1997
---------------------------------------------------------
Investment Investment Other Expenses
Management Fee Management Fee Reimbursed
---- ---- ----------
Paid Waived
---- ------
$56,257 --- ---
The Adviser
Pursuant to an Advisory Agreement with the Manager, the Adviser to the
Portfolio furnishes continuously an investment program for the Portfolio, makes
investment decisions on behalf of the Portfolio, places all orders for the
purchase and sale of investments for the Portfolio's account with brokers or
dealers selected by such Adviser and may perform certain limited related
administrative functions in connection therewith. For its services, the Manager
pays the Adviser a fee based on a percentage of the average daily net assets of
the Portfolio.
The Advisory Agreement will continue in force for one year from its
commencement date, and from year to year thereafter, but only so long as its
continuation as to the Portfolio is specifically approved at least annually (i)
by the Trustees or by the vote of a majority of the outstanding voting
securities of the Portfolio, and (ii) by the vote of a majority of the
Disinterested Trustees by votes cast in person at a meeting called for the
purpose of voting on such approval. The Advisory Agreement provides that it
shall terminate automatically if assigned or if the Management Agreement with
respect to the Portfolio terminates, and that it may be terminated as to the
Portfolio without penalty by the Manager, by the Trustees of the Trust or by
vote of a majority of the outstanding voting securities of the Portfolio on not
less than 60 days' prior written notice to the Adviser or by the Adviser on not
less than 90 days' prior written notice to the Manager, or upon such shorter
notice as may be mutually agreed upon.
The Advisory Agreement provides that the Adviser shall not be subject
to any liability to the Trust or the Manager for any act or omission in the
course of or connected with rendering services thereunder in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties on the part of the Adviser.
The Trust and the Manager have applied for an exemptive order from the
Securities and Exchange Commission ("Multi-Manager Order"). The Multi-Manager
Order will permit the Manager, subject to approval of the Board of Trustees, to:
(i) select new or additional Advisers for the Trust's Portfolios; (ii) enter
into new investment advisory agreements and materially modify existing
investment advisory agreements; and (iii) terminate and replace the Advisers
without obtaining approval of the relevant Portfolio's shareholders. However,
the Manager may not enter into an investment advisory agreement with an
"affiliated person" of the Manager (as that term is defined in Section 2(a)(3)
of the 1940 Act) ("Affiliated Adviser") unless the investment advisory agreement
with the Affiliated Adviser, including compensation hereunder, is approved by
the affected Portfolio's shareholders, including, in instances in which the
investment advisory agreement pertains to a newly formed Portfolio, the
Portfolio's initial shareholder. Although shareholder approval would not be
required for the termination of Advisory Agreements, shareholders of the
Portfolio would continue to have the right to terminate such agreements for the
Portfolio at any time by a vote of a majority of outstanding voting securities
of the Portfolio. No assurance can be given that the Trust and the Manager will
receive the Multi-Manager Order.
J.P. Morgan Investment Management Inc. is the Adviser to the Portfolio.
The following table shows the fees paid to the Adviser by the Manager
or current affiliates of the Manager for the fiscal years ended December 31,
1999, December 31, 1998 and December 31, 1997.
Advisory Fee Paid
-----------------
1999 1998 1997
---- ---- ----
----------------------
The Administrator
Pursuant to an administration agreement ("Administrative Services
Agreement"), ______________________ ("Administrator") assists the Manager in the
performance of its administrative services to the Trust and provides the Trust
with other necessary administrative services. In addition, the Administrator
makes available the office space, equipment, personnel and facilities required
to provide such administrative services to the Trust.
The Administrator was organized as a __________________. Its principal
place of business is at _______________, ______________________. Under the
Administrative Services Agreement, the Administrator is entitled to a fee from
the Trust, which is calculated daily and paid monthly, at an annual rate of
____% of the average daily net assets [of each Portfolio] of the Trust. The
Administrative Services Agreement shall remain in effect until ________________,
2002 and shall thereafter continue in effect for successive periods of one year,
unless terminated by any party upon not less than ninety (90) days' prior
written notice to the other party.
The Distributor
The Trust has distribution agreements with MetLife Distributors, Inc.
("MDI" or the "Distributor") in which MDI serves as the Distributor for the
Trust's Class A shares and Class B shares. MDI an indirect wholly-owned
subsidiary of MetLife Investors Group, which is an indirect wholly-owned
subsidiary of Metropolitan Life Insurance Company. MDI's address is 610 Newport
Center Drive, Suite 1350, Newport Beach, California 92660.
The Trust's distribution agreements with respect to the Class A and
Class B shares ("Distribution Agreements") were approved by the Board of
Trustees at a Board meeting held on __________, 2000. The Distribution
Agreements will remain in effect from year to year provided each Distribution
Agreement's continuance is approved annually by (i) a majority of the Trustees
who are not parties to such agreement or "interested persons" (as defined in the
1940 Act) of the Trust or the Portfolio and, if applicable, who have no direct
or indirect financial interest in the operation of the Class B Distribution Plan
or any such related agreement and (ii) either by vote of a majority of the
Trustees or a majority of the outstanding voting securities (as defined in the
1940 Act) of the Trust.
The Distributor or its affiliates for the Class A shares will pay for
printing and distributing prospectuses or reports prepared for their use in
connection with the offering of the Class A shares to prospective contract
owners and preparing, printing and mailing any other literature or advertising
in connection with the offering of the Class A shares to prospective contract
owners.
Pursuant to the Class B Distribution Plan, the Trust compensates the
Distributor from assets attributable to the Class B and shares for services
rendered and expenses borne in connection with activities primarily intended to
result in the sale of the Trust's Class B shares. It is anticipated that a
portion of the amounts received by the Distributor will be used to defray
various costs incurred or paid by the Distributor in connection with the
printing and mailing of Trust prospectuses, statements of additional information
and any supplements thereto and shareholder reports, and holding seminars and
sales meetings with wholesale and retail sales personnel designed to promote the
distribution of Class B shares. The Distributor may also use a portion of the
amounts received to provide compensation to financial intermediaries and
third-party broker-dealers for their services in connection with the
distribution of the Class B shares.
The Class B Distribution Plan provides that the Trust, on behalf of the
Portfolio, may pay annually up to 0.50% of the average daily net assets of the
Portfolio attributable to its Class B shares in respect to activities primarily
intended to result in the sale of Class B shares. However, under the
Distribution Agreement, payments to the Distributor for activities pursuant to
the Class B Distribution Plan are limited to payments at an annual rate equal to
0.25% of average daily net assets of the Portfolio attributable to its Class B
shares. Under terms of the Class B Distribution Plan and the Distribution
Agreement, the Portfolio is authorized to make payments monthly to the
Distributor that may be used to pay or reimburse entities providing distribution
and shareholder servicing with respect to the Class B shares for such entities'
fees or expenses incurred or paid in that regard.
The Class B Distribution Plan is of a type known as a "compensation"
plan because payments are made for services rendered to the Trust with respect
to Class B shares regardless of the level of expenditures by the Distributor.
The Trustees will, however, take into account such expenditures for purposes of
reviewing operations under the Class B Distribution Plan and in connection with
their annual consideration of the Class B Distribution Plan's renewal. The
Distributor has indicated that it expects its expenditures to include, without
limitation: (a) the printing and mailing of Trust prospectuses, statements of
additional information, any supplements thereto and shareholder reports for
prospective Contract owners with respect to the Class B shares of the Trust; (b)
those relating to the development, preparation, printing and mailing of
advertisements, sales literature and other promotional materials describing
and/or relating to the Class B shares of the Trust; (c) holding seminars and
sales meetings designed to promote the distribution of Class B shares of the
Trust; (d) obtaining information and providing explanations to wholesale and
retail distributors of contracts regarding Trust investment objectives and
policies and other information about the Trust and its Portfolio, including the
performance of the Portfolio; (3) training sales personnel regarding the Class B
shares of the Trust; and (f) financing any other activity that the Distributor
determines is primarily intended to result in the sale of Class B shares.
The Distributor for each class of shares will pay all fees and expenses
in connection with its qualification and registration as a broker or dealer
under federal and state laws. In the capacity of agent, the Distributor
currently offers shares of the Portfolio on a continuous basis to the separate
accounts of insurance companies offering the Contracts in all states in which
the Portfolio or the Trust may from time to time be registered or where
permitted by applicable law. The Distribution Agreement provides that the
Distributor shall accept orders for shares at net asset value without a sales
commission or sale load being charged. The Distributor has made no firm
commitment to acquire shares of the Portfolio.
On ____________, 2000, the Board of Trustees of the Trust, including
the Disinterested Trustees, unanimously approved the Class B Distribution Plan.
The Class B Distribution Plan and any Rule 12b-1 related agreement that
is entered into by the Trust or the Distributor of the Class B shares in
connection with the Class B Distribution Plan will continue in effect for a
period of more than one year only so long as continuance is specifically
approved at least annually by vote of a majority of the Trust's Board of
Trustees, and of a majority of the Disinterested Trustees, cast in person at a
meeting called for the purpose of voting on the Class B Distribution Plan or any
Rule 12b-1 related agreement, as applicable. In addition, the Class B
Distribution Plan and any Rule 12b-1 related agreement may be terminated as to
Class B shares of the Portfolio or by vote of a majority of the Disinterested
Trustees. The Class B Distribution Plan also provides that it may not be amended
to increase materially the amount (up to 0.50%, of average daily net assets
annually) that may be spent for distribution of Class B shares of the Portfolio
without the approval of Class B shareholders of the Portfolio.
Code of Ethics
The Trust, its Manager, its Distributor, and the Adviser, have adopted
Codes of Ethics pursuant to Rule 17j-1 under the 1940 Act. Each of these Codes
of Ethics permits the personnel of their respective organizations to invest in
securities for their own accounts. A copy of each of the Codes of Ethics is on
public file with, and is available from the Securities and Exchange Commission.
Custodian
Investors Bank & Trust Company ("IBT"), located at 200 Clarendon
Street, Boston, Massachusetts 02116, serves as the custodian of the Trust. Under
the custody agreement, IBT holds the Portfolio's securities and keeps all
necessary records and documents.
Transfer Agent
IBT also serves as transfer agent for the Trust.
Legal Matters
Certain legal matters are passed on for the Trust by Sullivan & Worcester
LLP, 1025 Connecticut Avenue, N.W., Washington, D.C. 20036.
Independent Auditors
[name], located at [address], serves as the Trust's independent auditors.
REDEMPTION OF SHARES
The Trust may suspend redemption privileges or postpone the date of
payment on shares of the Portfolio for more than seven days during any period
(1) when the New York Stock Exchange is closed or trading on the Exchange is
restricted as determined by the Securities and Exchange Commission, (2) when an
emergency exists, as defined by the Securities and Exchange Commission, which
makes it not reasonably practicable for the Portfolio to dispose of securities
owned by it or fairly to determine the value of its assets, or (3) as the
Securities and Exchange Commission may otherwise permit.
The value of the shares on redemption may be more or less than the
shareholder's cost, depending upon the market value of the portfolio securities
at the time of redemption.
NET ASSET VALUE
The net asset value per share of the Portfolio is determined as of the
close of regular trading of the New York Stock Exchange (currently 4:00 p.m.,
New York City time), each day the Exchange is open for trading. Currently, the
Exchange is closed on: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. Portfolio securities for which the primary market is on a
domestic or foreign exchange or which are traded over-the-counter and quoted on
the NASDAQ System will be valued at the last sale price on the day of valuation
or, if there was no sale that day, at the last reported bid price, using prices
as of the close of trading. Portfolio securities not quoted on the NASDAQ System
that are actively traded in the over-the-counter market, including listed
securities for which the primary market is believed to be over-the-counter, will
be valued at the most recently quoted bid price provided by the principal market
makers.
In the case of any securities which are not actively traded, reliable
market quotations may not be considered to be readily available. These
investments are stated at fair value as determined under the direction of the
Trustees. Such fair value is expected to be determined by utilizing information
furnished by a pricing service which determines valuations for normal,
institutional-size trading units of such securities using methods based on
market transactions for comparable securities and various relationships between
securities which are generally recognized by institutional traders.
If any securities held by the Portfolio are restricted as to resale,
their fair value will be determined following procedures approved by the
Trustees. The fair value of such securities is generally determined as the
amount which the Portfolio could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by the Portfolio in connection with
such disposition). In addition, specific factors are also generally considered,
such as the cost of the investment, the market value of any unrestricted
securities of the same class (both at the time of purchase and at the time of
valuation), the size of the holding, the prices of any recent transactions or
offers with respect to such securities and any available analysts' reports
regarding the issuer.
Notwithstanding the foregoing, short-term debt securities with
maturities of 60 days or less will be valued at amortized cost.
Foreign securities traded outside the United States are generally
valued as of the time their trading is complete, which is usually different from
the close of the New York Stock Exchange. Occasionally, events affecting the
value of such securities may occur between such times and the close of the New
York Stock Exchange that will not be reflected in the computation of the
Portfolio's net asset value. If events materially affecting the value of such
securities occur during such period, these securities will be valued at their
fair value according to procedures decided upon in good faith by the Trust's
Board of Trustees. All securities and other assets of the Portfolio initially
expressed in foreign currencies will be converted to U.S. dollar values at the
mean of the bid and offer prices of such currencies against U.S. dollars last
quoted on a valuation date by any recognized dealer.
The Manager and Advisers may, from time to time, under the general
supervision of the Board of Trustees or the Valuation Committee, utilize the
services of one or more pricing services available in valuating the assets of
the Trust. The Manager and Adviser will continuously monitor the performance of
these services.
FEDERAL INCOME TAXES
The Portfolio intends to qualify each year as a "regulated investment
company" under the Code. By so qualifying, the Portfolio will not be subject to
federal income taxes to the extent that its net investment income and net
realized capital gains are distributed.
In order to so qualify, the Portfolio must, among other things, (1)
derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stocks or securities or foreign currencies, or other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stocks or securities;
and (2) diversify its holdings so that, at the end of each quarter of the
Portfolio's taxable year, (a) at least 50% of the market value of the
Portfolio's assets is represented by cash, government securities and other
securities limited in respect of any one issuer to 5% of the value of the
Portfolio's assets and to not more than 10% of the voting securities of such
issuer, and (b) not more than 25% of the value of its assets is invested in
securities of any one issuer (other than government securities).
As a regulated investment company, the Portfolio will not be subject to
federal income tax on net investment income and capital gains (short- and
long-term), if any, that it distributes to its shareholders if at least 90% of
its net investment income and net short-term capital gains for the taxable year
are distributed, but will be subject to tax at regular corporate rates on any
income or gains that are not distributed. In general, dividends will be treated
as paid when actually distributed, except that dividends declared in October,
November or December and made payable to shareholders of record in such a month
will be treated as having been paid by the Portfolio (and received by
shareholders) on December 31, provided the dividend is paid in the following
January. The Portfolio intends to satisfy the distribution requirement in each
taxable year.
The Portfolio will not be subject to the 4% federal excise tax imposed
on registered investment companies that do not distribute all of their income
and gains each calendar year because such tax does not apply to a registered
investment company whose only shareholders are either tax-exempt person trusts
or segregated asset accounts of life insurance companies held in connection with
variable annuity and/or variable life insurance policies.
The Trust intends to comply with section 817(h) of the Code and the
regulations issued thereunder. As required by regulations under that section,
the only shareholders of the Trust and its Portfolio will be life insurance
company segregated asset accounts (also referred to as separate accounts) that
fund variable life insurance or annuity contracts, tax-exempt pension trusts,
and the general account of MetLife Investors Group, the initial shareholder of
the Portfolio. See the prospectus or other material for the Contracts for
additional discussion of the taxation of segregated asset accounts and of the
owner of the particular Contract described therein.
Section 817(h) of the Code and Treasury Department regulations
thereunder impose certain diversification requirements on the segregated asset
accounts investing in the Portfolio of the Trust. These requirements, which are
in addition to the diversification requirements applicable to the Trust under
the 1940 Act and under the regulated investment company provisions of the Code,
may limit the types and amounts of securities in which the Portfolio may invest.
Failure to meet the requirements of section 817(h) could result in current
taxation of the owner of the Contract on the income of the Contract.
The Trust may therefore find it necessary to take action to ensure that
a Contract continues to qualify as a Contract under federal tax laws. The Trust,
for example, may be required to alter the investment objectives of the Portfolio
or substitute the shares of one Portfolio for those of another. No such change
of investment objectives or substitution of securities will take place without
notice to the shareholders of the affected Portfolio and the approval of a
majority of such shareholders and without prior approval of the Securities and
Exchange Commission, to the extent legally required.
In certain foreign countries, interest and dividends are subject to a
tax which is withheld by the issuer. U.S. income tax treaties with certain
countries reduce the rates of these withholding taxes. The Trust intends to
provide the documentation necessary to achieve the lower treaty rate of
withholding whenever applicable or to seek refund of amounts withheld in excess
of the treaty rate.
A Portfolio that invests in foreign securities may purchase the
securities of certain foreign investment funds or trusts called passive foreign
investment companies. Such trusts have been the only or primary way to invest in
certain countries. In addition to bearing their proportionate share of the
Portfolio's expenses (management fees and operating expenses), shareholders will
also indirectly bear similar expenses of such trusts. Capital gains on the sale
of such holdings are considered ordinary income regardless of how long the
Portfolio held its investment. In addition, the Portfolio could be subject to
corporate income tax and an interest charge on certain dividends and capital
gains earned from these investments, regardless of whether such income and gains
are distributed to shareholders. To avoid such tax and interest, the Portfolio's
investment adviser intends to treat these securities as sold on the last day of
its fiscal year and recognize any gains for tax purposes at that time;
deductions for losses are allowable only to the extent of any gains resulting
from these deemed sales for prior taxable years. Such gains will be considered
ordinary income, which the Portfolio will be required to distribute even though
it has not sold the security.
ORGANIZATION AND CAPITALIZATION OF THE TRUST
The Trust is a Delaware business trust organized on July 27, 2000. A
copy of the Trust's Agreement and Declaration of Trust, which is governed by
Delaware law, is available from the Trust without charge.
The Trustees of the Trust have authority to issue an unlimited number
of shares of beneficial interest without par value of one or more series.
Currently, the Trustees have established and designated fourteen series. Each
series of shares represents the beneficial interest in a separate Portfolio of
assets of the Trust, which is separately managed and has its own investment
objective and policies. The Trustees of the Trust have authority, without the
necessity of a shareholder vote, to establish additional portfolios and series
of shares. The shares outstanding are, and those offered hereby when issued will
be, fully paid and nonassessable by the Trust. The shares have no preemptive,
conversion or subscription rights and are fully transferable.
The Trust currently offers one class of shares on behalf of the
Portfolio and on or about February 5, 2001, will offer two classes of shares.
Class A shares are offered at net asset value and are not subject to
distribution fees imposed pursuant to a distribution plan. Class A shares are
only offered to contract owners and qualified plan participants who previously
allocated premiums to predecessors of the Trust's Portfolio. In addition, Class
A shares will also be offered to additional qualified pension and retirement
plans. Class B shares are offered at net asset value and are subject to
distribution fees imposed pursuant to the Class' Distribution Plan adopted
pursuant to Rule 12b-1 under the 1940 Act.
The two classes of shares are offered under the Trust's multi-class
distribution system approved by the Trust's Board of Trustees on _______, 2000,
which is designed to allow promotion of insurance products investing in the
Trust through alternative distribution channels. Under the Trust's multi-class
distribution system, shares of each class of the Portfolio represent an equal
pro rata interest in the Portfolio and, generally, will have identical voting,
dividend, liquidation, and other rights, other than the payment of distribution
fees under the Distribution Plan.
Commencing on or about February 5, 2001, the Trust will continuously
offer its shares exclusively to separate accounts of insurance companies in
connection with the Contracts and to qualified pension and retirement plans.
Class A shares are currently being offered only to separate accounts of the
MetLife Investors Group and its affiliates (collectively "MetLife") and to
qualified pension and retirement plans. As of November 30, 2000, MetLife owned
100% of the Trust's outstanding Class A shares and, as a result, may be deemed
to be a control person with respect to the Trust.
As a "series" type of mutual fund, the Trust issues separate series of
share of beneficial interest with respect to the Portfolio. The Portfolio
resembles a separate fund issuing a separate class of stock. Because of current
federal securities law requirements, the Trust expects that its shareholders
will offer to owners of the Contracts ("Contract owners") the opportunity to
instruct them as to how shares allocable to their Contracts will be voted with
respect to certain matters, such as approval of investment advisory agreements.
The Trust may in the future offer its shares to separate accounts of
other insurance companies. The Trust does not currently foresee any
disadvantages to Contract owners arising from offering the Trust's shares to
separate accounts of insurance companies that are unaffiliated with each other.
However, it is theoretically possible that, at some time, the interests of
various Contract owners participating in the Trust through their separate
accounts might conflict. In the case of a material irreconcilable conflict, one
or more separate accounts might withdraw their investments in the Trust, which
would possibly force the Trust to sell portfolio securities at disadvantageous
prices. The Trustees of the Trust intend to monitor events for the existence of
any material irreconcilable conflicts between or among such separate accounts
and will take whatever remedial action may be necessary.
The assets received from the sale of shares of the Portfolio, and all
income, earnings, profits and proceeds thereof, subject only to the rights of
creditors, constitute the underlying assets of the Portfolio. The underlying
assets of the Portfolio are required to be segregated on the Trust's books of
account and are to be charged with the expenses with respect to the Portfolio.
Any general expenses of the Trust not readily attributable to the Portfolio will
be allocated by or under the direction of the Trustees in such manner as the
Trustees determine to be fair and equitable, taking into consideration, among
other things, the nature and type of expense and the relative sizes of the
Portfolio and the other Portfolios.
Each share has one vote, with fractional shares voting proportionately.
Shareholders of the Portfolio are not entitled to vote on any matter that
requires a separate vote of the shares of another Portfolio but which does not
affect the Portfolio. The Agreement and Declaration of Trust does not require
the Trust to hold annual meetings of shareholders. Thus, there will ordinarily
be no annual shareholder meetings, unless otherwise required by the 1940 Act.
The Trustees of the Trust may appoint their successors until fewer than a
majority of the Trustees have been elected by shareholders, at which time a
meeting of shareholders will be called to elect Trustees. Under the Agreement
and Declaration of Trust, any Trustee may be removed by vote of the Trustees or
vote of two-thirds of the outstanding shares of the Trust. Holders of 10% or
more of the outstanding shares can require the Trustees to call a meeting of
shareholders for the purpose of voting on the removal of one or more Trustees.
If ten or more shareholders who have been such for at least six months and who
hold in the aggregate shares with a net asset value of at least $25,000 inform
the Trustees that they wish to communicate with other shareholders, the Trustees
either will give such shareholders access to the shareholder lists or will
inform them of the cost involved if the Trust forwards materials to the
shareholders on their behalf. If the Trustees object to mailing such materials,
they must inform the Securities and Exchange Commission and thereafter comply
with the requirements of the 1940 Act.
<PAGE>
APPENDIX
SECURITIES RATINGS
Standard & Poor's Bond Ratings
A Standard & Poor's corporate debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation. Debt
rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and to repay principal and differs from the
highest rated issues only in small degree. Debt rated "A" has a strong capacity
to pay interest and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
debt of a higher rated category. Debt rated "BBB" is regarded as having an
adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
to repay principal for debt in this category than for higher rated categories.
Bonds rated "BB", "B", "CCC" and "CC" are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. The rating "C" is reserved for income bonds on which no interest is
being paid. Debt rated "D" is in default, and payment of interest and/or
repayment of principal is in arrears. The ratings from "AA" to "B" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
Moody's Bond Ratings
Bonds which are rated "Aaa" are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues. Bonds which are rated
"Aa" are judged to be of high quality by all standards. Together with the Aaa
group they comprise what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may not be as large as
in Aaa securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities. Moody's applies numerical
modifiers 1, 2 and 3 in the Aa and A rating categories. The modifier 1 indicates
that the security ranks at a higher end of the rating category, modifier 2
indicates a mid-range rating and the modifier 3 indicates that the issue ranks
at the lower end of the rating category. Bonds which are rated "A" possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future. Bonds which are rated "Baa" are considered as
medium grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Bonds which are rated "Ba" are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate, and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class. Bonds which are rated
"B" generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small. Bonds which are rated "Caa" are of
poor standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. Bonds which are rated "Ca"
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings. Bonds which are rated "C"
are the lowest rated class of bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Standard & Poor's Commercial Paper Ratings
"A" is the highest commercial paper rating category utilized by
Standard & Poor's, which uses the numbers "1+", "1", "2" and "3" to denote
relative strength within its "A" classification. Commercial paper issuers rated
"A" by Standard & Poor's have the following characteristics. Liquidity ratios
are better than industry average. Long-term debt rating is "A" or better. The
issuer has access to at least two additional channels of borrowing. Basic
earnings and cash flow are in an upward trend. Typically, the issuer is a strong
company in a well-established industry and has superior management. Issues rated
"B" are regarded as having only an adequate capacity for timely payment.
However, such capacity may be damaged by changing conditions or short-term
adversities. The rating "C" is assigned to short-term debt obligations with a
doubtful capacity for repayment. An issue rated "D" is either in default or is
expected to be in default upon maturity.
Moody's Commercial Paper Ratings
"Prime-1" is the highest commercial paper rating assigned by Moody's,
which uses the numbers "1", "2" and "3" to denote relative strength within its
highest classification of Prime. Commercial paper issuers rated Prime by Moody's
have the following characteristics. Their short-term debt obligations carry the
smallest degree of investment risk. Margins of support for current indebtedness
are large or stable with cash flow and asset protection well assured. Current
liquidity provides ample coverage of near-term liabilities and unused
alternative financing arrangements are generally available. While protective
elements may change over the intermediate or longer terms, such changes are most
unlikely to impair the fundamentally strong position of short-term obligations.
Fitch IBCA, Inc. Commercial Paper Ratings. Fitch Investors Service L.P. employs
the rating F-1+ to indicate issues regarded as having the strongest degree of
assurance for timely payment. The rating F-1 reflects an assurance of timely
payment only slightly less in degree than issues rated F-1+, while the rating
F-2 indicates a satisfactory degree of assurance for timely payment, although
the margin of safety is not as great as indicated by the F-1+ and F-1
categories.
Duff & Phelps Inc. Commercial Paper Ratings. Duff & Phelps Inc. employs the
designation of Duff 1 with respect to top grade commercial paper and bank money
instruments. Duff 1+ indicates the highest certainty of timely payment:
short-term liquidity is clearly outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations. Duff 1- indicates high certainty of timely
payment. Duff 2 indicates good certainty of timely payment: liquidity factors
and company fundamentals are sound.
Thomson BankWatch, Inc. ("BankWatch") Commercial Paper Ratings. BankWatch will
assign both short-term debt ratings and issuer ratings to the issuers it rates.
BankWatch will assign a short-term rating ("TBW-1", "TBW-2", "TBW-3", or
"TBW-4") to each class of debt (e.g., commercial paper or non-convertible debt),
having a maturity of one-year or less, issued by a holding company structure or
an entity within the holding company structure that is rated by BankWatch.
Additionally, BankWatch will assign an issuer rating ("A", "A/B", "B", "B/C",
"C", "C/D", "D", "D/E", and "E") to each issuer that it rates.
Various of the NRSROs utilize rankings within rating categories indicated by a +
or -. The Portfolios, in accordance with industry practice, recognize such
rankings within categories as graduations, viewing for example Standard & Poor's
rating of A-1+ and A-1 as being in Standard & Poor's highest rating category.
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
COVA SERIES TRUST
One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181-4644
The date of this Statement of Additional Information is May 1, 2000
This Statement of Additional Information is not a prospectus. It contains
information that supplements the information in the prospectus dated May 1,
2000, for the Trust and its Portfolios. It also contains additional information
that may be of interest to you. The prospectus incorporates this Statement of
Additional Information by reference. You may obtain a free copy of the
prospectus from your registered representative who offered or sold you your
variable annuity contract or variable life insurance policy that uses the
Portfolios for investment. You may also obtain copies by calling Cova Financial
Services Life Insurance Company at 1-800-831-LIFE or by writing to: Cova
Financial Services Life Insurance Company, One Tower Lane, Suite 3000, Oakbrook
Terrace, Illinois 60181-4644.
TABLE OF CONTENTS
PAGE
THE TRUST 3
INVESTMENT STRATEGIES AND RISKS 3
INVESTMENT LIMITATIONS 31
DESCRIPTION OF SECURITIES RATINGS 45
MANAGEMENT OF THE TRUST 45
OFFICERS AND TRUSTEES 46
SUBSTANTIAL SHAREHOLDERS 50
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS 50
CUSTODIAN 50
DIVIDENDS 50
TAX STATUS 50
NET ASSET VALUES 51
PERFORMANCE DATA 51
LEGAL COUNSEL AND INDEPENDENT AUDITORS 53
INVESTMENT ADVISORY AGREEMENT 53
PORTFOLIO TRANSACTIONS 57
FINANCIAL STATEMENTS 58
APPENDIX 59
THE TRUST
History
The Trust was established as a Massachusetts business trust under the laws of
Massachusetts by a Declaration of Trust dated July 9, 1987 (the "Declaration of
Trust"). The Trust changed its name from "Van Kampen Merritt Series Trust" to
its current name on May 1, 1996.
Classification
The Trust is an open-end, management investment company. It is divided into
different series, each of which has its own assets, investment objectives and
policies. Each is managed separately, using distinct strategies appropriate to
its objectives and policies. The Trust currently has seventeen Portfolios. The
Trust may authorize additional Portfolios in the future. The Trust cannot change
its classification as an open-end, management investment company without the
consent of a majority of its shareholders. A Portfolio that is currently
diversified cannot change to nondiversified without the approval of a majority
of the shareholders of that Portfolio.
Shareholder Liability
Under Massachusetts law, shareholders of a trust may be held personally liable
as partners for the obligations of the trust under certain circumstances. The
Declaration of Trust contains an express disclaimer of shareholder liability in
connection with Trust property or the acts, obligations, or affairs of the
Trust. The Declaration of Trust also provides for indemnification out of a
Portfolio's property of any shareholder of that Portfolio held personally liable
for the claims and liabilities to which a shareholder may become subject by
reason of being or having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Portfolio itself would be unable to meet its
obligations. A copy of the Declaration of Trust is on file with the Secretary of
State of The Commonwealth of Massachusetts.
INVESTMENT STRATEGIES AND RISKS
Summary
The prospectus for the Trust describes the principal strategies of each of the
Portfolios and the risks of those strategies. This Section describes the
strategies that are not principal strategies for the Portfolios, but which the
Sub-Advisers may use in managing a Portfolio and the risks of those strategies.
Some of these strategies could affect the return of the Portfolio. Additional
information on certain Portfolios is also provided.
ADDITIONAL INFORMATION - PORTFOLIOS MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT
INC.
QUALITY BOND PORTFOLIO. The Quality Bond Portfolio is designed to be an
economical and convenient means of making substantial investments in a domestic
and foreign issuer, subject to certain quality and other restrictions. See
"Quality and Diversification Requirements. The Portfolio's investment objective
is to provide a high total return consistent with moderate risk of capital and
maintenance of liquidity. Although the net asset value of the Portfolio will
fluctuate, the Portfolio attempts to conserve the value of its investments to
the extent consistent with its objective.
The Portfolio attempts to achieve its investment objective by investing in
high grade corporate and government debt obligations and related securities of
domestic and foreign issuers described in the Prospectus and this Statement of
Additional Information.
INVESTMENT PROCESS
Duration/yield curve management: The Sub-Adviser's duration decision begins
with an analysis of real yields, which its research indicates are generally a
reliable indicator of longer term interest rate trends. Other factors the
Sub-Adviser studies in regard to interest rates include economic growth and
inflation, capital flows and monetary policy. Based on this analysis, the
Sub-Adviser forms a view of the most likely changes in the level and shape of
the yield curve -- as well as the timing of those changes -- and sets the
Portfolio's duration and maturity structure accordingly. The Sub-Adviser
typically limits the overall duration of the Portfolio to a range between one
year shorter and one year longer than that of the Salomon Brothers Broad
Investment Grade Bond Index, the benchmark index.
Sector allocations: Sector allocations are driven by the Sub-Adviser's
fundamental and quantitative analysis of the relative valuation of a broad array
of fixed income sectors. Specifically, the Sub-Adviser utilizes market and
credit analysis to assess whether the current risk-adjusted yield spreads of
various sectors are likely to widen or narrow. The Sub-Adviser then overweights
(underweights) those sectors its analysis indicates offer the most (least)
relative value, basing the speed and magnitude of these shifts on valuation
considerations.
Security selection: Securities are selected by the portfolio manager, with
substantial input from the Sub-Adviser's fixed income analysts and traders.
Using quantitative analysis as well as traditional valuation methods, the
Sub-Adviser's applied research analysts aim to optimize security selection
within the bounds of the Portfolio's investment objective. In addition, credit
analysts -- supported by the Sub-Adviser's equity analysts -- assess the
creditworthiness of issuers and counterparties. A dedicated trading desk
contributes to security selection by tracking new issuance, monitoring dealer
inventories, and identifying attractively priced bonds. The traders also handle
all transactions for the Portfolio.
SELECT EQUITY PORTFOLIO AND LARGE CAP STOCK PORTFOLIO. The investment
objective of each Portfolio is long-term growth of capital and income.
In normal circumstances, at least 65% of each Portfolio's net assets will
be invested in equity securities consisting of common stocks and other
securities with equity characteristics comprised of preferred stock, warrants,
rights, convertible securities, trust certificates, limited partnership
interests and equity participations (collectively, "Equity Securities"). Each
Portfolio's primary equity investments are the common stock of large and medium
sized U.S. corporations and, to a limited extent, similar securities of foreign
corporations.
INVESTMENT PROCESS
Research: The Sub-Adviser's domestic equity analysts, each an industry
specialist, follow 700 predominantly large- and medium-sized U.S. companies --
500 of which form the universe for each Portfolio's investments. Their research
goal is to forecast normalized, longer term earnings and dividends for the most
attractive companies among those they cover. In doing this, they may work in
concert with the Sub-Adviser's international equity analysts in order to gain a
broader perspective for evaluating industries and companies in today's global
economy.
Valuation: The analysts' forecasts are converted into comparable expected
returns by a dividend discount model, which calculates those expected returns by
comparing a company's current stock price with the "fair value" price forecasted
by its estimated long term earnings power. Within each sector, companies are
ranked by their expected return and grouped into quintiles: those with the
highest expected returns (Quintile 1) are deemed the most undervalued relative
to their long-term earnings power, while those with the lowest expected returns
(Quintile 5) are deemed the most overvalued.
Stock Selection: A diversified portfolio is constructed using disciplined
buy and sell rules. The specific names selected reflect the portfolio manager's
judgment concerning the soundness of the underlying forecasts, the likelihood
that the perceived misevaluation will be corrected within a reasonable time
frame and the magnitude of the risks versus the rewards. Portfolio sector
weightings are held close to those of the S&P 500 Index, reflecting the
Sub-Adviser's belief that its research has the potential to add value at the
individual stock level, but not at the sector level. Sector neutrality is also
seen as a way to help protect the portfolio from macroeconomic risks, and --
together with diversification -- represents an important element of the
Sub-Adviser's risk control strategy. A dedicated trading desk handles all
transactions for the Portfolio.
SMALL CAP STOCK PORTFOLIO. This Portfolio is designed for investors who are
willing to assume the somewhat higher risk of investing in small companies in
order to seek a higher return over time than might be expected from a portfolio
of stocks of large companies. The Portfolio's investment objective is to provide
a high total return from a portfolio of Equity Securities of small companies.
The Portfolio attempts to achieve its investment objective by investing
primarily in the common stock of small U.S. companies included in the Russell
2000 Index, which is composed of 2000 common stocks of U.S. companies with
market capitalizations ranging between $100 million and $2 billion.
INVESTMENT PROCESS
Research: The Sub-Adviser's domestic equity analysts -- each an industry
specialist -- continuously monitor the small cap stocks in their respective
sectors with the aim of identifying companies that exhibit superior financial
strength and operating returns. Meetings with management and on-site visits play
a key role in shaping their assessments. Their research goal is to forecast
normalized, long-term earnings and dividends for the most attractive small cap
companies among those they monitor -- a universe that generally contains a total
of approximately 600 names. Because the Sub-Adviser's analysts follow both the
larger and smaller companies in their industries -- in essence, covering their
industries from top to bottom -- they are able to bring broad perspective to the
research they do on both.
Valuation: The analysts' forecasts are converted into comparable expected
returns by the Sub-Adviser's dividend discount model, which calculates those
returns by comparing a company's current stock price with the "fair value" price
forecasted by its estimated long-term earnings power. Within each industry,
companies are ranked by their expected returns and grouped into quintiles: those
with the highest expected returns (Quintile 1) are deemed the most undervalued
relative to their long-term earnings power, while those with the lowest expected
returns (Quintile 5) are deemed the most overvalued.
Stock Selection: A diversified portfolio is constructed using disciplined
buy and sell rules. Purchases are concentrated among the stocks in the top two
quintiles of the rankings: the specific names selected reflect the portfolio
manager's judgment concerning the soundness of the underlying forecasts, the
likelihood that the perceived misevaluation will soon be corrected and the
magnitude of the risks versus the rewards. Once a stock falls into the third
quintile because its price has risen or its fundamentals have deteriorated -- it
generally becomes a sale candidate. The portfolio manager seeks to hold sector
weightings close to those of the Russell 2000 Index, the Portfolio's benchmark,
reflecting the Sub-Adviser's belief that its research has the potential to add
value at the individual stock level, but not at the sector level. Sector
neutrality is also seen as a way to help to protect the portfolio from
macroeconomic risks, and -- together with diversification -- represents an
important element of the Sub-Adviser's investment strategy.
INTERNATIONAL EQUITY PORTFOLIO. This Portfolio is designed for investors
with a long-term investment horizon who want to diversify their portfolios by
investing in an actively managed portfolio of non-U.S. securities that seeks to
outperform the Morgan Stanley Capital International Europe, Australia and Far
East Index (the "EAFE Index"). The Portfolio's investment objective is to
provide a high total return from a portfolio of Equity Securities of foreign
corporations.
The Portfolio seeks to achieve its investment objective by investing
primarily in the Equity Securities of foreign corporations. Under normal
circumstances, the Portfolio expects to invest at least 65% of its total assets
in such securities. The Portfolio does not intend to invest in U.S. securities
(other than money market instruments), except temporarily, when extraordinary
circumstances prevailing at the same time in a significant number of developed
foreign countries render investments in such countries inadvisable.
INVESTMENT PROCESS
Country allocation: The Sub-Adviser's country allocation decision begins
with a forecast of equity risk premiums, which provide a valuation signal by
measuring the relative attractiveness of stocks versus bonds. Using a
proprietary approach, the Sub-Adviser calculates this risk premium for each of
the nations in the Portfolio's universe, determines the extent of its deviation
- - -- if any -- from its historical norm, and then ranks countries according to
the size of those deviations. Countries with high (low) rankings are
overweighted (underweighted) in comparisons to the EAFE Index to reflect the
above-average (below-average) attractiveness of their stock markets. In
determining weightings, the Sub-Adviser analyzes a variety of qualitative
factors as well -- including the liquidity, earnings momentum and interest rate
climate of the market at hand. These qualitative assessments can change the
magnitude but not the direction of the country allocations called for by the
risk premium forecast. The Sub-Adviser places limits on the total size of the
Portfolio's country over- and under-weightings relative to the EAFE Index.
Stock selection: The Sub-Adviser's international equity analysts, each an
industry and country specialist, forecast normalized earnings and dividend
payouts for roughly 1,000 non-U.S. companies -- taking a long-term perspective
rather than the short time frame common to consensus estimates. These forecasts
are converted into comparable expected returns by a dividend discount model, and
then companies are ranked from most to least attractive by industry and country.
A diversified portfolio is constructed using disciplined buy and sell rules. The
portfolio manager's objective is to concentrate the purchases in the top third
of the rankings, and to keep sector weightings close to those of the EAFE Index,
the Portfolio's benchmark. Once a stock falls into the bottom third of the
rankings, it generally becomes a sales candidate. Where available, warrants and
convertibles may be purchased instead of common stock if they are deemed a more
attractive means of investing in an undervalued company.
Currency management: Currency is actively managed, in conjunction with
country and stock allocation, with the goal of protecting and possibly enhancing
the Portfolio's return. The Sub-Adviser's currency decisions are supported by a
proprietary tactical mode which forecasts currency movements based on an
analysis of four fundamental factors -- trade balance trends, purchasing power
parity, real short-term interest differentials and real bond yields -- plus a
technical factor designed to improve the timing of transactions. Combining the
output of this model with a subjective assessment of economic, political and
market factors, the Sub-Adviser's currency group recommends currency strategies
that are implemented in conjunction with the Portfolio's investment strategy.
EMERGING MARKETS EQUITY PORTFOLIO. This Portfolio is designed for investors
with a long term investment horizon who want exposure to the rapidly growing
emerging markets. The Portfolio's investment objective is to provide a high
total return from a portfolio of equity securities of companies in emerging
markets.
The Portfolio seeks to achieve its investment objective by investing
primarily in equity securities of emerging markets issuers. Under normal
circumstances, the Portfolio expects to invest at least 65% of its total assets
in such securities. The Portfolio does not intend to invest in U.S. securities
(other than money market instruments), except temporarily, when extraordinary
circumstances prevailing at the same time in a significant number of emerging
markets countries render investments in such countries inadvisable.
INVESTMENT PROCESS
Country allocation: The Sub-Adviser's country allocation decision begins
with a forecast of the expected return of each market in the Portfolio's
universe. These expected returns are calculated using a proprietary valuation
method that is forward looking in nature rather than based on historical data.
The Sub-Adviser then evaluates these expected returns from two different
perspectives: first, it identifies those countries that have high real expected
returns relative to their own history and other nations in their universe.
Second, it identifies those countries that it expects will provide high returns
relative to their currency risk. Countries that rank highly on one or both of
these scores are overweighted relative to the Portfolio's benchmark, the MSCI
Emerging Markets Free Index, while those that rank poorly are underweighted. To
help contain risk, the Sub-Adviser places limits on the total size of the
Portfolio's country over- and under-weightings.
Stock selection: The Sub-Adviser's 12 emerging market equity analysts--
each an industry specialist--monitor a universe of approximately 900 companies
in these countries, developing forecasts of earnings and cash flows for the most
attractive among them. Companies are ranked from most to least attractive based
on this research, and then a diversified portfolio is constructed using
disciplined buy and sell rules. The portfolio manager's objective is to
concentrate the Portfolio's holdings in the stocks deemed most undervalued, and
to keep sector weightings relatively close to those of the index. Stocks are
generally held until they fall into the bottom half of the Sub-Adviser's
rankings.
MONEY MARKET INSTRUMENTS
As discussed in the Prospectus, each Portfolio may invest in money market
instruments to the extent consistent with its investment objective and policies.
A description of the various types of money market instruments that may be
purchased by the Portfolios appears below. See "Quality and Diversification
Requirements."
U.S. TREASURY SECURITIES. Each of the Portfolios may invest in direct
obligations of the U.S. Treasury, including Treasury bills, notes and bonds, all
of which are backed as to principal and interest payments by the full faith and
credit of the United States.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. Each of the Portfolios may invest
in obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. In the case of securities not backed by the
full faith and credit of the United States, each Portfolio must look principally
to the federal agency issuing or guaranteeing the obligations for ultimate
repayment, and may not be able to assert a claim against the United States
itself in the event the agency or instrumentality does not meet its commitments.
Securities in which each Portfolio may invest that are not backed by the full
faith and credit of the United States include, but are not limited to,
obligations of the Tennessee Valley Authority, the Federal Home Loan Mortgage
Corporation and the U.S. Postal Service, each of which has the right to borrow
from the U.S. Treasury to meet its obligations, and obligations of the Federal
Farm Credit System and the Federal Home Loan Banks, both of whose obligations
may be satisfied only by the individual credits of each issuing agency.
Securities which are backed by the full faith and credit of the United States
include obligations of the Government National Mortgage Association, the Farmers
Home Administration, and the Export-Import Bank.
FOREIGN GOVERNMENT OBLIGATIONS. Each of the Portfolios, subject to its
applicable investment policies, may also invest in short-term obligations of
foreign sovereign governments or of their agencies, instrumentalities,
authorities or political subdivisions. These securities may be denominated in
the U.S. dollar or in another currency. See "Foreign Investments."
STRIPPED U.S. GOVERNMENT OBLIGATIONS. As described in the Prospectus and
subject to their respective investment policies, certain Portfolios may hold
stripped U.S. Treasury securities, including (1) coupons that have been stripped
from U.S. Treasury bonds, which are held through the Federal Reserve Bank's
book-entry system called "Separate Trading of Registered Interest and Principal
of Securities" ("STRIPS") or (2) through a program entitled "Coupon Under
Book-Entry Safekeeping" ("CUBES"). Certain Portfolios may also acquire U.S.
Government obligations and their unmatured interest coupons that have been
stripped by a custodian bank or investment brokerage firm. Having separated the
interest coupons from the underlying principal of the U.S. Government
obligations, the holder will resell the stripped securities in custodial receipt
programs with a number of different names, including "Treasury Income Growth
Receipts" ("TIGRS") and "Certificates of Accrual on Treasury Securities"
("CATS"). Such securities may not be as liquid as STRIPS and CUBES and are not
viewed by the staff of the SEC as U.S. Government securities for purposes of the
1940 Act.
The stripped coupons are sold separately from the underlying principal,
which is sold at a deep discount because the buyer receives only the right to
receive a future fixed payment on the security and does not receive any rights
to periodic interest (cash) payments. Purchasers of stripped principal-only
securities acquire, in effect, discount obligations that are economically
identical to the zero coupon securities that the Treasury Department sells
itself. In the case of bearer securities (i.e., unregistered securities which
are owned ostensibly by the bearer or holder), the underlying U.S. Treasury
bonds and notes themselves are held in trust on behalf of the owners.
The U.S. Government does not issue stripped Treasury securities directly.
The STRIPS program, which is ongoing, is designed to facilitate the secondary
market in the stripping of selected U.S. Treasury notes and bonds into separate
interest and principal components. Under the program, the U.S. Treasury
continues to sell its notes and bonds through its customary auction process. A
purchaser of those specified notes and bonds who has access to a book-entry
account at a Federal Reserve bank, however, may separate the Treasury notes and
bonds into interest and principal components. The selected Treasury securities
thereafter may be maintained in the book-entry system operated by the Federal
Reserve in a manner that permits the separate trading and ownership of the
interest and principal payments.
For custodial receipts, the underlying debt obligations are held separate
from the general assets of the custodian and nominal holder of such securities,
and are not subject to any right, charge, security interest, lien or claim of
any kind in favor of or against the custodian or any person claiming through the
custodian. The custodian is also responsible for applying all payments received
on those underlying debt obligations to the related receipts or certificates
without making any deductions other than applicable tax withholding. The
custodian is required to maintain insurance for the protection of holders of
receipts or certificates in customary amounts against losses resulting from the
custody arrangement due to dishonest or fraudulent action by the custodian's
employees. The holders of receipts or certificates, as the real parties in
interest, are entitled to the rights and privileges of the underlying debt
obligations, including the right, in the event of default in payment of
principal or interest, to proceed individually against the issuer without acting
in concert with other holders of those receipts or certificates or the
custodian.
VARIABLE AND FLOATING RATE INSTRUMENTS. Subject to their respective
investment limitations, certain Portfolios may purchase variable and floating
rate obligations. The Sub-Advisers will consider the earning power, cash flows
and other liquidity ratios of the issuers and guarantors of such obligations
and, for obligations subject to a demand feature, will monitor their financial
status to meet payment on demand. In determining average weighted portfolio
maturity, a variable or floating rate instrument issued or guaranteed by the
U.S. Government, its agencies and instrumentalities, or a variable or floating
rate instrument scheduled on its face to be paid in 397 days or less, will be
deemed to have a maturity equal to the period remaining until the obligation's
next interest rate adjustment. Other variable or floating rate notes will be
deemed to have a maturity equal to the longer of the period remaining to the
next interest rate adjustment or the time the Portfolio can recover payment of
principal as specified in the instrument.
BANK OBLIGATIONS. Each of the Portfolios, unless otherwise noted in the
Prospectus or below, may invest in negotiable certificates of deposit, time
deposits and bankers' acceptances of (i) banks, savings and loan associations
and savings banks which (for those Portfolios managed by J.P. Morgan Investment
Management Inc. except the International Equity Portfolio) have more than $2
billion in total assets and are organized under the laws of the United States or
any state, (ii) foreign branches of these banks or of foreign banks of
equivalent size (Euros) and (iii) U.S. branches of foreign banks of equivalent
size (Yankees) with respect to the Portfolios managed by J.P. Morgan Investment
Management Inc. See "Foreign Investments." Bank instruments may include
Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit
("Yankee CDs"), Eurodollar Time Deposits ("ETDs") and Canadian Time Deposits.
ECDs are issued by foreign branches of U.S. or foreign banks. Yankee CDs are
U.S. dollar-denominated certificates of deposit issued by U.S. branches of
foreign banks and held in the United States. ETDs are U.S. dollar-denominated
deposits in foreign branches of U.S. or foreign banks. Canadian Time Deposits
are U.S. dollar-denominated deposits issued by branches of major Canadian banks
located in the United States. The Portfolios will not invest in obligations for
which J.P. Morgan Investment Management Inc., or any of its affiliated persons,
is the ultimate obligor or accepting bank. Each of the Portfolios may also
invest in obligations of international banking institutions designated or
supported by national governments to promote economic reconstruction,
development or trade between nations (e.g., the European Investment Bank, the
Inter-American Development Bank, or the World Bank).
COMMERCIAL PAPER. Each of the Portfolios may invest in commercial paper,
including master demand obligations. Master demand obligations are obligations
that provide for a periodic adjustment in the interest rate paid and permit
daily changes in the amount borrowed. The monies loaned to the borrower come
from accounts managed by a Sub-Adviser or its affiliates, pursuant to
arrangements with such accounts. Interest and principal payments are credited to
such accounts. The Sub-Adviser, or its affiliates, acting as a fiduciary on
behalf of its clients, has the right to increase or decrease the amount provided
to the borrower under an obligation. The borrower has the right to pay without
penalty all or any part of the principal amount then outstanding on an
obligation together with interest to the date of payment. Since these
obligations typically provide that the interest rate is tied to the Federal
Reserve commercial paper composite rate, the rate on master demand obligations
is subject to change. Repayment of a master demand obligation to participating
accounts depends on the ability of the borrower to pay the accrued interest and
principal of the obligations on demand which is continuously monitored by the
Sub-Adviser. Since master demand obligations typically are not rated by credit
rating agencies, the Portfolios may invest in such unrated obligations only if
at the time of an investment the obligation is determined by the Sub-Adviser to
have a credit quality which satisfies the Portfolio's quality restrictions. See
"Quality and Diversification Requirements." Although there is no secondary
market for master demand obligations, such obligations are considered by the
Portfolios to be liquid because they are payable upon demand. The Portfolios do
not have any specific percentage limitation on investments in master demand
obligations.
REPURCHASE AGREEMENTS. Each of the Portfolios may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Trustees of the Trust. In a repurchase agreement, a Portfolio
buys a security from a seller that has agreed to repurchase the same security at
a mutually agreed upon date and price. The resale price normally is in excess of
the purchase price, reflecting an agreed upon interest rate. This interest rate
is effective for the period of time the Portfolio is invested in the agreement
and is not related to the coupon rate on the underlying security. A repurchase
agreement may also be viewed as a fully collateralized loan of money by a
Portfolio to the seller. The period of these repurchase agreements will usually
be short, from overnight to one week, and at no time will the Portfolios invest
in repurchase agreements for more than thirteen months. The securities which are
subject to repurchase agreements, however, may have maturity dates in excess of
thirteen months from the effective date of the repurchase agreement. The
Portfolios will always receive securities as collateral whose market value is,
and during the entire term of the agreement remains, at least equal to 100% of
the dollar amount invested by the Portfolios in each agreement plus accrued
interest, and the Portfolios will make payment for such securities only upon
physical delivery or upon evidence of book entry transfer to the account of the
Custodian. If the seller defaults, a Portfolio might incur a loss if the value
of the collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the security,
realization upon disposal of the collateral by a Portfolio may be delayed or
limited.
Each of the Portfolios may make investments in other debt securities with
remaining effective maturities of not more than thirteen months, including
without limitation corporate and foreign bonds, asset-backed securities and
other obligations described in the prospectus or this Statement of Additional
Information.
CORPORATE BONDS AND OTHER DEBT SECURITIES
As discussed in the Prospectus, certain of the Portfolios may invest in
bonds and other debt securities of domestic and foreign issuers to the extent
consistent with their investment objectives and policies. A description of these
investments appears in the prospectus and below. See "Quality and
Diversification Requirements." For information on short-term investments in
these securities, see "Money Market Instruments."
ASSET-BACKED SECURITIES. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables. Payments of principal and interest may be guaranteed up
to certain amounts and for a certain time period by a letter of credit issued by
a financial institution unaffiliated with the entities issuing the securities.
The asset-backed securities in which a Portfolio may invest are subject to the
Portfolio's overall credit requirements. However, asset-backed securities, in
general, are subject to certain risks. Most of these risks are related to
limited interests in applicable collateral. For example, credit card debt
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts on credit card debt
thereby reducing the balance due. Additionally, if the letter of credit is
exhausted, holders of asset-backed securities may also experience delays in
payments or losses if the full amounts due on underlying sales contracts are not
realized. Because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs).
Certain Portfolios may invest in CMOs. Privately issued CMOs generally represent
an ownership interest in a pool of federal agency mortgage pass-through
securities, such as those issued by the Government National Mortgage
Association. The terms and characteristics of the mortgage instruments may vary
among pass- through mortgage loan pools. The market for such CMOs has expanded
considerably since its inception. The size of the primary issuance market and
the active participation in the secondary market by securities dealers and other
investors make government-related pools highly liquid.
Generally speaking, the mortgages underlying mortgage-backed securities often
may be prepaid without penalty or premium. Therefore, mortgage-backed securities
are generally subject to higher prepayment risks than most other types of debt
instruments. Prepayment risks on mortgage securities tend to increase during
periods of declining mortgage interest rates, because many borrowers refinance
their mortgages to take advantage of the more favorable rates. Depending upon
market conditions, the yield that a Portfolio receives from the reinvestment of
such prepayments, or any scheduled principal payments, may be lower than the
yield on the original mortgage security. As a consequence, mortgage securities
may be a less effective means of "locking in" interest rates than other types of
debt securities having the same stated maturity and may also have less potential
for capital appreciation. For certain types of asset pools, such as
collateralized mortgage obligations, prepayments may be allocated to one tranche
of securities ahead of other tranches, in order to reduce the risk of
prepayments for the other tranches. Prepayments may result in a capital loss to
a Portfolio to the extent that the prepaid mortgage securities were purchased at
a market premium over their stated principal amount. Conversely, the prepayment
of mortgage securities purchased at a market discount from their stated
principal amount will accelerate the recognition of interest income by a
Portfolio, which would be taxed as ordinary income when distributed to the
shareholders.
EQUITY INVESTMENTS
As discussed in the prospectus, certain of the Portfolios invest primarily
in Equity Securities. The Equity Securities in which these Portfolios invest
include those listed on any domestic or foreign securities exchange or traded in
the over-the-counter market as well as certain restricted or unlisted
securities. A discussion of the various types of equity investments which may be
purchased by these Portfolios appears in the prospectus and below. See "Quality
and Diversification Requirements."
EQUITY SECURITIES. The Equity Securities in which these Portfolios may
invest may or may not pay dividends and may or may not carry voting rights.
Common stock occupies the most junior position in a company's capital structure.
The convertible securities in which these Portfolios may invest include any
debt securities or preferred stock which may be converted into common stock or
which carry the right to purchase common stock. Convertible securities entitle
the holder to exchange the securities for a specified number of shares of common
stock, usually of the same company, at specified prices within a certain period
of time.
The terms of any convertible security determine its ranking in a company's
capital structure. In the case of subordinated convertible debentures, the
holders' claims on assets and earnings are subordinated to the claims of other
creditors, and are senior to the claims of preferred and common shareholders. In
the case of convertible preferred stock, the holders' claims on assets and
earnings are subordinated to the claims of all creditors and are senior to the
claims of common shareholders.
RIGHTS AND WARRANTS
Certain of the Portfolios may participate in rights offerings and purchase
warrants, which are privileges issued by corporations enabling the owners to
subscribe to and purchase a specified number of shares of the corporation at a
specified price during a specified period of time. Subscription rights normally
have a short life span to expiration. Warrants may have a life ranging from less
than a year to twenty years or may be perpetual. However, most warrants have
expiration dates after which they are worthless. The purchase of rights or
warrants involves the risk that the Portfolio could lose the purchase value of a
right or warrant if the right to subscribe to additional shares is not exercised
prior to the rights' or warrants' expiration. Also, the purchase of rights or
warrants involves the risk that the effective price paid for the right or
warrant added to the subscription price of the related security may exceed the
value of the subscribed security's market price such as when there is no
movement in the level of the underlying security.
FOREIGN INVESTMENTS
Each of the Portfolios may invest in foreign securities. The International
Equity Portfolio and the Emerging Markets Equity Portfolio make substantial
investments in foreign countries. The Quality Bond, Select Equity, Large Cap
Stock and Small Cap Stock Portfolios may invest in certain foreign securities.
The Quality Bond Portfolio may invest in U.S. and non-U.S. dollar-denominated
fixed income securities of foreign issuers including in countries with emerging
economies or securities markets. The Select Equity and Large Cap Stock
Portfolios may invest in equity securities of foreign corporations listed on a
U.S. securities exchange. The Small Cap Stock Portfolio may invest in equity
securities of foreign issuers that are listed on a national securities exchange
or denominated or principally traded in the U.S. dollar. The Quality Bond
Portfolio, Select Equity Portfolio, Large Cap Stock Portfolio and the Small Cap
Stock Portfolio do not expect to invest more than 25%, 5%, 5%, and 5%,
respectively, of their total assets at the time of purchase in securities of
foreign issuers. In the case of the Quality Bond Portfolio, any foreign
commercial paper must not be subject to foreign withholding tax at the time of
purchase. Foreign investments may be made directly in securities of foreign
issuers or in the form of American Depositary Receipts ("ADRs") and European
Depositary Receipts ("EDRs"). (See "ADRs and EDRs", below.) Foreign investments
may also include ECDs, ETDs, Yankee CDs, Canadian Commercial Paper and
Europaper.
Since investments in foreign securities may involve foreign currencies, the
value of a Portfolio's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, including currency blockage. Certain of the Portfolios may enter
into forward commitments for the purchase or sale of foreign currencies in
connection with the settlement of foreign securities transactions or to manage
the Portfolios' currency exposure related to foreign investments.
Different risks may exist for ECDs, ETDs and Yankee CDs because the banks
issuing these instruments, or their domestic or foreign branches, are not
necessarily subject to the same regulatory requirements that apply to domestic
banks, such as reserve requirements, loan limitations, examinations, accounting,
auditing, and recordkeeping, and the public availability of information.
Brady Bonds
Certain Portfolios may invest in Brady bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings. Brady bonds have been issued since 1989 and do not have a long
payment history. In light of the history of defaults of countries issuing Brady
bonds on their commercial bank loans, investments in Brady bonds may be viewed
as speculative. Brady bonds may be fully or partially collateralized or
uncollateralized, are issued in various currencies (but primarily the dollar)
and are actively traded in over-the-counter secondary markets. Incomplete
collateralization of interest or principal payment obligations results in
increased credit risk. Dollar-denominated collateralized Brady bonds, which may
be fixed-rate bonds or floating-rate bonds, are generally collateralized by U.S.
Treasury zero coupon bonds having the same maturity as the Brady bonds.
Investing in Emerging Markets
Certain Portfolios may invest in countries with emerging economies or securities
markets. Political and economic structures in many of such countries may be
undergoing significant evolution and rapid development, and such countries may
lack the social, political and economic stability characteristic of more
developed countries. Certain of such countries may have in the past failed to
recognize private property rights and have at times nationalized or expropriated
the assets of private companies. As a result, the risks described above,
including the risks of nationalization or expropriation of assets, may be
heightened. In addition, unanticipated political or social developments may
affect the values of a Portfolio's investments in those countries and the
availability to a Portfolio of additional investments in those countries. The
small size and inexperience of the securities markets in certain of such
countries and the limited volume of trading in securities in those countries may
make a Portfolio's investments in such countries illiquid and more volatile than
investments in more developed countries, and a Portfolio may be required to
establish special custodial or other arrangements before making certain
investments in those countries. There may be little financial or accounting
information available with respect to issuers located in certain of such
countries, and it may be difficult as a result to assess the value or prospects
of an investment in such issuers.
Transaction costs in emerging markets may be higher than in the United States
and other developed securities markets. As legal systems in emerging markets
develop, foreign investors may be adversely affected by new or amended laws and
regulations or may not be able to obtain swift and equitable enforcement of
existing law.
Certain Portfolios may make investments denominated in emerging markets
currencies. Some countries in emerging markets also may have managed currencies,
which are not free floating against the U.S. dollar. In addition, emerging
markets are subject to the risk of restrictions upon the free conversion of
their currencies into other currencies. Any devaluations relative to the U.S.
dollar in the currencies in which the Portfolio's securities are quoted would
reduce the Portfolio's net asset value.
Restrictions on Investment and Repatriation
Certain emerging markets limit, or require governmental approval prior to,
investments by foreign persons. Repatriation of investment income and capital
from certain emerging markets is subject to certain governmental consents. Even
where there is no outright restriction on repatriation of capital, the mechanics
of repatriation may affect the operation of a Portfolio.
CONVERSION TO THE EURO
Like other mutual funds, the Trust could be affected by problems relating to the
conversion of European currencies into the Euro, which extends from 1/1/99 to
7/1/02.
The Trust is taking steps to ensure that the systems used by the Trust's major
service providers are compliant with Euro issues.
At the same time, it is impossible to know whether the ongoing conversion, which
could disrupt Trust operations and investments if problems arise, has been
adequately addressed until the conversion is complete.
ADRs AND EDRs
Certain Portfolios may invest their assets in securities such as ADRs and
EDRs, which are receipts issued by a U.S. bank or trust company evidencing
ownership of underlying securities issued by a foreign issuer. ADRs and EDRs may
be listed on a national securities exchange or may trade in the over-the-counter
market. ADR and EDR prices are denominated in U.S. dollars, even though the
underlying security may be denominated in a foreign currency. The underlying
security may be subject to foreign government taxes which would reduce the yield
on such securities. Investments in such instruments involve risks similar to
those of investing directly in foreign securities. Such risks include political
or economic instability of the issuer or the country of issue, the difficulty of
predicting international trade patterns and the possibility of imposition of
exchange controls. Such securities may also be subject to greater fluctuations
in price than securities of domestic corporations. In addition, there may be
less publicly available information about a foreign company than about a
domestic company. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. With respect to certain foreign countries,
there is a possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries.
ADDITIONAL INVESTMENTS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each of the Portfolios may
purchase securities on a when-issued or delayed delivery basis. For example,
delivery of and payment for these securities can take place a month or more
after the date of the purchase commitment. The purchase price and the interest
rate payable, if any, on the securities are fixed on the purchase commitment
date or at the time the settlement date is fixed. The value of such securities
is subject to market fluctuation and no interest accrues to a Portfolio until
settlement takes place. At the time a Portfolio makes the commitment to purchase
securities on a when-issued or delayed delivery basis, it will record the
transaction, reflect the value each day of such securities in determining its
net asset value and, if applicable, calculate the maturity for the purposes of
average maturity from that date. At the time of settlement a when-issued
security may be valued at less than the purchase price. To facilitate such
acquisitions, each Portfolio will maintain on the Trust's records a segregated
account with liquid assets, consisting of cash, U.S. Government securities or
other appropriate securities, in an amount at least equal to such commitments.
On delivery dates for such transactions, each Portfolio will meet its
obligations from maturities or sales of the securities held in the segregated
account and/or from cash flow. If a Portfolio chooses to dispose of the right to
acquire a when-issued security prior to its acquisition, it could, as with the
disposition of any other portfolio obligation, incur a gain or loss due to
market fluctuation. It is the current policy of each Portfolio not to enter into
when-issued commitments exceeding in the aggregate 15% (except for the Quality
Bond Portfolio) of the market value of the Portfolio's total assets, less
liabilities other than the obligations created by when-issued commitments. There
is no current policy limiting the percentage of assets of the Quality Bond
Portfolio which may be invested in when-issued commitments.
SECURITIES OF OTHER INVESTMENT COMPANIES. Securities of other investment
companies may be acquired by each of the Portfolios to the extent permitted
under the Investment Company Act of 1940, as amended ("1940 Act"). These limits
require that, as determined immediately after a purchase is made, (i) not more
than 5% of the value of a Portfolio's total assets will be invested in the
securities of any one investment company, (ii) not more than 10% of the value of
its total assets will be invested in the aggregate in securities of investment
companies as a group, and (iii) not more than 3% of the outstanding voting stock
of any one investment company will be owned by a Portfolio.
REVERSE REPURCHASE AGREEMENTS. Each of the Portfolios may enter into
reverse repurchase agreements. In a reverse repurchase agreement, a Portfolio
sells a security and agrees to repurchase the same security at a mutually agreed
upon date and price. For purposes of the 1940 Act it is also considered as a
borrowing of money by the Portfolio and, therefore, a form of leverage. The
Portfolios will invest the proceeds of borrowings under reverse repurchase
agreements. In addition, a Portfolio will enter into a reverse repurchase
agreement only when the interest income to be earned from the investment of the
proceeds is greater than the interest expense of the transaction. A Portfolio
will not invest the proceeds of a reverse repurchase agreement for a period
which exceeds the duration of the reverse repurchase agreement. A Portfolio may
not enter into reverse repurchase agreements exceeding in the aggregate
one-third of the market value of its total assets, less liabilities other than
the obligations created by reverse repurchase agreements. Each Portfolio will
establish and maintain on the Trust's records a separate account with a
segregated portfolio of securities in an amount at least equal to its purchase
obligations under its reverse repurchase agreements.
MORTGAGE DOLLAR ROLL TRANSACTIONS. Certain of the Portfolios of the Trust
may engage in mortgage dollar roll transactions with respect to mortgage
securities issued by the Government National Mortgage Association, the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation. In
a mortgage dollar roll transaction, the Portfolio sells a mortgage backed
security and simultaneously agrees to repurchase a similar security on a
specified future date at an agreed upon price. During the roll period, the
Portfolio will not be entitled to receive any interest or principal paid on the
securities sold. The Portfolio is compensated for the lost interest on the
securities sold by the difference between the sales price and the lower price
for the future repurchase as well as by the interest earned on the reinvestment
of the sales proceeds. The Portfolio may also be compensated by receipt of a
commitment fee. When the Portfolio enters into a mortgage dollar roll
transaction, liquid assets in an amount sufficient to pay for the future
repurchase are segregated with the Custodian. Mortgage dollar roll transactions
are considered reverse repurchase agreements for purposes of the Portfolio's
investment restrictions.
LOANS OF PORTFOLIO SECURITIES. Each of the Portfolios may lend its
securities if such loans are secured continuously by cash or equivalent
collateral or by a letter of credit in favor of the Portfolio at least equal at
all times to 100% of the market value of the securities loaned, plus accrued
interest. While such securities are on loan, the borrower will pay the Portfolio
any income accruing thereon. Loans will be subject to termination by the
Portfolios in the normal settlement time, generally five business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to a
Portfolio and its respective investors. The Portfolios may pay reasonable
finders' and custodial fees in connection with a loan. In addition, a Portfolio
will consider all facts and circumstances including the creditworthiness of the
borrowing financial institution, and no Portfolio will make any loans in excess
of one year.
PRIVATELY PLACED AND CERTAIN UNREGISTERED SECURITIES. The Portfolios may
invest in privately placed, restricted, Rule 144A or other unregistered
securities as described in the Prospectus.
As to illiquid investments, a Portfolio is subject to a risk that should
the Portfolio decide to sell them when a ready buyer is not available at a price
the Portfolio deems representative of their value, the value of the Portfolio's
net assets could be adversely affected. Where an illiquid security must be
registered under the Securities Act of 1933, as amended (the "1933 Act") before
it may be sold, a Portfolio may be obligated to pay all or part of the
registration expenses, and a considerable period may elapse between the time of
the decision to sell and the time the Portfolio may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, a Portfolio might obtain a less
favorable price than prevailed when it decided to sell.
REAL ESTATE INVESTMENT TRUSTS
Certain Portfolios may purchase interests in real estate investment trusts.
Risks associated with real estate investments include the fact that equity and
mortgage real estate investment trusts are dependent upon management skill and
are not diversified, and are, therefore, subject to the risk of financing single
projects or unlimited number of projects. They are also subject to heavy cash
flow dependency, defaults by borrowers, and self-liquidation. Additionally,
equity real estate investment trusts may be affected by any changes in the value
of the underlying property owned by the trusts, and mortgage real estate
investment trusts may be affected by the quality of any credit extended. These
risks may be mitigated by selecting real estate investment trusts diversified by
sector (shopping malls, apartments building complexes, and health care
facilities) and geographic location.
QUALITY AND DIVERSIFICATION REQUIREMENTS
Each of the Portfolios intends to meet the diversification requirements of
the 1940 Act. To meet these requirements, 75% of the assets of these Portfolios
is subject to the following fundamental limitations: (1) the Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government, its agencies and instrumentalities,
and (2) the Portfolio may not own more than 10% of the outstanding voting
securities of any one issuer. As for the other 25% of the Portfolio's assets not
subject to the limitation described above, there is no limitation on investment
of these assets under the 1940 Act, so that all of such assets may be invested
in securities of any one issuer, subject to the limitation of any applicable
state securities laws. Investments not subject to the limitations described
above could involve an increased risk to a Portfolio should an issuer, or a
state or its related entities, be unable to make interest or principal payments
or should the market value of such securities decline.
QUALITY BOND PORTFOLIO. The Quality Bond Portfolio invests principally in a
diversified portfolio of "high grade" and "investment grade" securities.
Investment grade debt is rated, on the date of investment, within the four
highest ratings of Moody's, currently Aaa, Aa, A and Baa, or of Standard &
Poor's, currently AAA, AA, A and BBB, while high grade debt is rated, on the
date of the investment, within the two highest of such ratings. The Quality Bond
Portfolio may also invest up to 5% of its total assets in securities which are
"below investment grade." Such securities must be rated, on the date of
investment, Ba by Moody's or BB by Standard & Poor's. The Portfolio may invest
in debt securities which are not rated or other debt securities to which these
ratings are not applicable, if in the opinion of the Sub-Adviser, such
securities are of comparable quality to the rated securities discussed above. In
addition, at the time the Portfolio invests in any commercial paper, bank
obligation or repurchase agreement, the issuer must have outstanding debt rated
A or higher by Moody's or Standard & Poor's, the issuer's parent corporation, if
any, must have outstanding commercial paper rated Prime-1 by Moody's or A-1 by
Standard & Poor's, or if no such ratings are available, the investment must be
of comparable quality in the Sub-Adviser's opinion.
CONVERTIBLE AND OTHER DEBT SECURITIES. Certain of the Portfolios may invest
in convertible debt securities, for which there are no specific quality
requirements. In addition, at the time a Portfolio invests in any commercial
paper, bank obligation or repurchase agreement, the issuer must have outstanding
debt rated A or higher by Moody's or Standard & Poor's, the issuer's parent
corporation, if any, must have outstanding commercial paper rated Prime-1 by
Moody's or A-1 by Standard & Poor's, or if no such ratings are available, the
investment must be of comparable quality in the Sub-Adviser's opinion. At the
time the Portfolio invests in any other short-term debt securities, they must
berated A or higher by Moody's or Standard & Poor's, or if unrated, the
investment must be of comparable quality in the Sub-Adviser's opinion.
In determining suitability of investment in a particular unrated security,
the Sub-Adviser takes into consideration asset and debt service coverage, the
purpose of the financing, history of the issuer, existence of other rated
securities of the issuer, and other relevant conditions, such as comparability
to other issuers.
GNMA CERTIFICATES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. The Government National Mortgage
Association is a wholly-owned corporate instrumentality of the United States
within the U.S. Department of Housing and Urban Development. GNMA's principal
programs involve its guarantees of privately issued securities backed by pools
of mortgages.
NATURE OF GNMA CERTIFICATES. GNMA Certificates are mortgage-backed
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which a Portfolio purchases are of the modified
pass-through type. Modified pass-through Certificates entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
fees paid to the GNMA Certificate issuer and GNMA, regardless of whether or not
the mortgagor actually makes the payment.
GNMA Certificates are backed by mortgages and, unlike most bonds, their
principal amount is paid back by the borrower over the length of the loan rather
than in a lump sum at maturity. Principal payments received by the Portfolio
will be reinvested in additional GNMA Certificates or in other permissible
investments.
GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal of and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration or the Farmers Home
Administration or guaranteed by the Veterans Administration. The GNMA guarantee
is backed by the full faith and credit of the United States. GNMA is also
empowered to borrow without limitation from the U.S. Treasury if necessary to
make any payments required under its guarantee. The net asset value and return
of the Portfolio will, however, fluctuate depending on market conditions and
other factors.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is likely
to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will result in the return of a portion of principal invested before
the maturity of the mortgages in the pool.
As prepayment rates of individual mortgage pools will vary widely, it is
not possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the Federal Housing
Administration are normally used as an indicator of the expected average life of
GNMA Certificates.
YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of the
fees paid to GNMA and the GNMA Certificate issuer.
The coupon rate by itself, however, does not indicate the yield which will
be earned on the Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather than at
par.
2. After issuance, Certificates usually trade in the secondary market at a
premium or discount.
3. Interest is paid monthly rather than semi-annually as is the case for
traditional bonds. Monthly compounding has the effect of raising the effective
yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate. If
mortgagors prepay their mortgages, the principal returned to Certificate holders
may be reinvested at higher or lower rates.
MARKET FOR GNMA CERTIFICATES. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.
FNMA AND FHLMC CERTIFICATES. Mortgage-backed securities issued by the
Federal National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage
Pass-through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the United States, but are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-backed securities issued
by the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "PCs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are
not guaranteed by the United States or by any Federal Home Loan Bank. Freddie
Macs entitle the holder to timely payment of interest, which is guaranteed by
the FHLMC. FHLMC guarantees either ultimate collection or timely payment of all
principal payments on the underlying mortgage loans. When FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
LOWER GRADE SECURITIES
Certain of the Portfolios may invest in lower-grade income securities. (The
Bond Debenture Portfolio may invest a substantial portion of its assets in
medium and lower grade corporate debt securities entailing certain risks.) Such
lower grade securities are rated BB or B by S&P or Ba or B by Moody's and are
commonly referred to as "junk bonds." Investment in such securities involves
special risks, as described herein. Liquidity relates to the ability of the
Portfolio to sell a security in a timely manner at a price which reflects the
value of that security. As discussed below, the market for lower grade
securities is considered generally to be less liquid than the market for
investment grade securities. The relative illiquidity of some of the Portfolio's
portfolio securities may adversely affect the ability of the Portfolio to
dispose of such securities in a timely manner and at a price which reflects the
value of such security in the Sub-Adviser's judgment. The market for less liquid
securities tends to be more volatile than the market for more liquid securities
and market values of relatively illiquid securities may be more susceptible to
change as a result of adverse publicity and investor perceptions than are the
market values of higher grade, more liquid securities.
The Portfolio's net asset value will change with changes in the value of
its portfolio securities. Because the Portfolio will invest in fixed income
securities, the Portfolio's net asset value can be expected to change as general
levels of interest rates fluctuate. When interest rates decline, the value of a
portfolio invested in fixed income securities can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in fixed
income securities can be expected to decline. Net asset value and market value
may be volatile due to the Portfolio's investment in lower grade and less liquid
securities. Volatility may be greater during periods of general economic
uncertainty.
The Portfolio's investments are valued pursuant to guidelines adopted and
periodically reviewed by the Board of Trustees. To the extent that there is no
established retail market for some of the securities in which the Portfolio may
invest, during periods of reduced market liquidity and in the absence of readily
available market quotations for securities held in the Portfolio's portfolio,
the valuation of such securities becomes more difficult and judgment may play a
greater role in the valuation of the Portfolio's securities due to the reduced
availability of reliable objective data. To the extent that the Portfolio
invests in illiquid securities and securities which are restricted as to resale,
the Portfolio may incur additional risks and costs. Illiquid and certain
restricted securities are particularly difficult to dispose of.
Lower grade securities generally involve greater credit risk than higher
grade securities. A general economic downturn or a significant increase in
interest rates could severely disrupt the market for lower grade securities and
adversely affect the market value of such securities. In addition, in such
circumstances, the ability of issuers of lower grade securities to repay
principal and to pay interest, to meet projected financial goals and to obtain
additional financing may be adversely affected. Such consequences could lead to
an increased incidence of default for such securities and adversely affect the
value of the lower grade securities in the Portfolio's portfolio and thus the
Portfolio's net asset value. The secondary market prices of lower grade
securities are less sensitive to changes in interest rates than are those for
higher rated securities, but are more sensitive to adverse economic changes or
individual issuer developments. Adverse publicity and investor perceptions,
whether or not based on rational analysis, may also affect the value and
liquidity of lower grade securities.
Yields on the Portfolio's portfolio securities can be expected to fluctuate
over time. In addition, periods of economic uncertainty and changes in interest
rates can be expected to result in increased volatility of the market prices of
the lower grade securities in the Portfolio's portfolio and thus in the net
asset value of the Portfolio. Net asset value and market value may be volatile
due to the Portfolio's investment in lower grade and less liquid securities.
Volatility may be greater during periods of general economic uncertainty. The
Portfolio may incur additional expenses to the extent it is required to seek
recovery upon a default in the payment of interest or a repayment of principal
on its portfolio holdings, and the Portfolio may be unable to obtain full
recovery thereof. In the event that an issuer of securities held by the
Portfolio experiences difficulties in the timely payment of principal or
interest and such issuer seeks to restructure the terms of its borrowings, the
Portfolio may incur additional expenses and may determine to invest additional
capital with respect to such issuer or the project or projects to which the
Portfolio's portfolio securities relate.
A Portfolio will rely on the Sub-Adviser's judgment, analysis and
experience in evaluating the creditworthiness of an issue. In this evaluation,
the Sub-Adviser will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends, its
operating history, the quality of the issuer's management and regulatory
matters. The Sub-Adviser also may consider, although it does not rely primarily
on, the credit ratings of S&P and Moody's in evaluating fixed-income securities.
Such ratings evaluate only the safety of principal and interest payments, not
market value risk. Additionally, because the creditworthiness of an issuer may
change more rapidly than is able to be timely reflected in changes in credit
ratings, the Sub-Adviser continuously monitors the issuers of such securities
held in the Portfolio's portfolio. The Portfolio may, if deemed appropriate by
the Sub-Adviser, retain a security whose rating has been downgraded below B by
S&P or below B by Moody's, or whose rating has been withdrawn.
With respect to Portfolios which may invest in these unrated income
securities, achievement by the Portfolio of its investment objective may be more
dependent upon the Sub-Adviser's investment analysis than would be the case if
the Portfolio were investing exclusively in rated securities.
STRATEGIC TRANSACTIONS
As described in the Prospectus, certain Portfolios of the Trust may, but
are not required to, utilize various other investment strategies as described
below to hedge various market risks (such as interest rates, currency exchange
rates and broad or specific market movements) or to manage the effective
maturity or duration of a Portfolio's income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, a Portfolio may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and income indices and other financial instruments, purchase
and sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors or collars and enter into
various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions" or
"Derivatives"). Strategic Transactions are hedging transactions which may be
used to attempt to protect against possible changes in the market value of
securities held in or to be purchased for a Portfolio's portfolio resulting from
securities markets or exchange rate fluctuations, to protect a Portfolio's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes, to manage the effective
maturity or duration of a Portfolio's portfolio, or to establish a position in
the derivatives markets as a temporary substitute for purchasing or selling
particular securities.
Any or all of these investment techniques may be used at any time and there
is no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of a Portfolio to utilize these
Strategic Transactions successfully will depend on the Sub-Adviser's ability to
predict pertinent market movements, which cannot be assured. A Portfolio will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Sub-Adviser's view as to certain market movements is incorrect, the risk
that the use of such Strategic Transactions could result in losses greater than
if they had not been used. Use of put and call options may result in losses to a
Portfolio, force the sale or purchase of portfolio securities at inopportune
times or for prices other than current market values, limit the amount of
appreciation a Portfolio can realize on its investments or cause a Portfolio to
hold a security it might otherwise sell. The use of currency transactions can
result in a Portfolio incurring losses as a result of a number of factors
including the imposition of exchange controls, suspension of settlements or the
inability to deliver or receive a specified currency. The use of options and
futures transactions entails certain other risks. In particular, the variable
degree of correlation between price movements of futures contracts and price
movements in the related portfolio position of a Portfolio creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of a Portfolio's position. In addition, futures and options markets
may not be liquid in all circumstances and certain over-the-counter options may
have no markets. As a result, in certain markets, a Portfolio might not be able
to close out a transaction without incurring substantial losses, if at all.
Although the use of futures and options transactions for hedging should
tend to minimize the risk of loss due to a decline in the value of the hedged
position, at the same time they tend to limit any potential gain which might
result from an increase in value of such position. Finally, the daily variation
margin requirements for futures contracts would create a greater ongoing
potential financial risk than would purchases of options, where the exposure is
limited to the cost of the initial premium. Losses resulting from the use of
Strategic Transactions would reduce net asset value, and possibly income, and
such losses can be greater than if the Strategic Transactions had not been
utilized. Income earned or deemed to be earned, if any, by a Portfolio from its
Strategic Transactions will generally be taxable income of the Trust. See "Tax
Status" in the Prospectus.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Portfolio assets in special accounts,
as described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Portfolio's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Portfolio the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. A Portfolio's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Portfolio against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase such instrument. An American style put or call
option may be exercised at any time during the option period while a European
style put or call option may be exercised only upon expiration or during a fixed
period prior thereto. As described in the Prospectus, certain Portfolios of the
Trust are authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as a paradigm, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Portfolio's ability to close out its position as a purchaser or seller of
an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. A
Portfolio will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Portfolio to require the
Counterparty to sell the option back to the Portfolio at a formula price within
seven days. The Portfolios expect generally to enter into OTC options that have
cash settlement provisions, although they are not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with a Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Sub-Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. A Portfolio will engage in OTC option transactions
only with United States government securities dealers recognized by the Federal
Reserve Bank of New York as "primary dealers", or broker dealers, domestic or
foreign banks or other financial institutions which have received (or the
guarantors of the obligation of which have received) a short-term credit rating
of "A-1" from Standard & Poor's Corporation or "P-1" from Moody's Investors
Service, Inc. or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO").
If a Portfolio sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase a Portfolio's income. The sale of put options can also provide income.
A Portfolio may purchase and sell call options on securities, including
U.S. Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets and or securities
indices, currencies and futures contracts. All calls sold by a Portfolio must be
"covered" (i.e., the Portfolio must own the securities or futures contract
subject to the call) or must meet the asset segregation requirements described
below as long as the call is outstanding. Even though a Portfolio will receive
the option premium to help protect it against loss, a call sold by a Portfolio
exposes the Portfolio during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Portfolio to hold a security or
instrument which it might otherwise have sold. In selling calls on securities
not owned by the Portfolio, the Portfolio may be required to acquire the
underlying security at a disadvantageous price in order to satisfy its
obligations with respect to the call.
A Portfolio may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio) and on securities indices, currencies and futures
contracts other than futures on individual corporate debt and individual equity
securities. A Portfolio will not sell put options if, as a result, more than 50%
of the Portfolio's assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that a
Portfolio may be required to buy the underlying security at a disadvantageous
price above the market price.
General Characteristics of Futures. Certain Portfolios of the Trust may
enter into financial futures contracts or purchase or sell put and call options
on such futures as a hedge against anticipated interest rate, currency, equity
or income market changes, for duration management and for risk management
purposes. Futures are generally bought and sold on the commodities exchanges
where they are listed with payment of initial and variation margin as described
below. The purchase of a futures contract creates a firm obligation by a
Portfolio, as purchaser, to take delivery from the seller of the specific type
of financial instrument called for in the contract at a specific future time for
a specified price (or, with respect to index futures and Eurodollar instruments,
the net cash amount). The sale of a futures contract creates a firm obligation
by the Portfolio, as seller, to deliver to the buyer the specific type of
financial instrument called for in the contract at a specific future time for a
specified price (or, with respect to index futures and Eurodollar instruments,
the net cash amount). Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a futures contract
and obligates the seller to deliver such option.
The Portfolio's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and, in particular,
with the rules and regulations of the Commodity Futures Trading Commission.
Typically, maintaining a futures contract or selling an option thereon requires
the Portfolio to deposit with a financial intermediary, as security for its
obligations, an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited thereafter on a daily basis as the mark to market
value of the contract fluctuates. The purchase of options on financial futures
involves payment of a premium for the option without any further obligation on
the part of the Portfolio. If the Portfolio exercises an option on a futures
contract it will be obligated to post initial margin (and potential subsequent
variation margin) for the resulting futures position just as it would for any
position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price nor that
delivery will occur.
A Portfolio will not enter into a futures contract or related option
(except for closing transactions) for other than bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the Portfolio's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below.
Options on Securities Indices and Other Financial Indices. A Portfolio also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. Certain Portfolios of the Trust may engage in
currency transactions with Counterparties in order to hedge the value of
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. A Portfolio may enter into
currency transactions with Counterparties which have received (or the guarantors
of the obligations of such Counterparties have received) a credit rating of A-1
or P-1 by S&P or Moody's, respectively, or that have an equivalent rating from
an NRSRO or (except for OTC currency options) are determined to be of equivalent
credit quality by the Sub-Adviser.
Dealings by the Portfolios in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Portfolio, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
A Portfolio will not enter into a transaction to hedge currency exposure to
an extent greater, after netting all transactions intended to wholly or
partially offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency other than with respect to cross hedging and proxy hedging as described
below.
A Portfolio may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Portfolio has or in which the
Portfolio expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, a Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio's portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which some or all of the Portfolio's portfolio
securities are or are expected to be denominated, and to buy U.S. dollars. For
example, if the Sub-Adviser considers the Austrian schilling as being linked to
the German deutschemark (the "D-mark") and the Trust holds securities
denominated in schillings and the Sub-Adviser believes that the value of
schillings will decline against the U.S. dollar, the Sub-Adviser may enter into
a contract to sell D-marks and buy dollars. Currency hedging involves some of
the same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to a Portfolio if the
currency being hedged fluctuates in value to a degree or in a direction that is
not anticipated. Further, there is the risk that the perceived linkage between
various currencies may not be present or may not be present during the
particular time that the Portfolio is engaging in proxy hedging. If a Portfolio
enters into a currency hedging transaction, the Portfolio will comply with the
asset segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to a Portfolio if it is unable to deliver or receive currency or funds
in settlement of obligations and could also cause hedges it has entered into to
be rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. Certain Portfolios of the Trust may enter into
multiple transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts), multiple interest rate transactions and any combination of futures,
options, currency and interest rate transactions ("component" transactions),
instead of a single Strategic Transaction, as part of a single or combined
strategy when, in the opinion of the Sub-Adviser, it is in the best interest of
the Portfolio to do so. A combined transaction will usually contain elements of
risk that are present in each of its component transactions. Although combined
transactions are normally entered into based on the Sub-Adviser's judgment that
the combined strategies will reduce risk or otherwise more effectively achieve
the desired portfolio management goal, it is possible that the combination will
instead increase such risks or hinder achievement of the portfolio management
objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which certain Portfolios may enter are interest rate, currency and index swaps
and the purchase or sale of related caps, floors and collars. The Portfolios
expect to enter into these transactions primarily to preserve a return or spread
on a particular investment or portion of their portfolios, to protect against
currency fluctuations, as a duration management technique or to protect against
any increase in the price of securities the Portfolio anticipates purchasing at
a later date. The Portfolios intend to use these transactions as hedges and not
as speculative investments and will not sell interest rate caps or floors where
they do not own securities or other instruments providing the income stream the
Portfolios may be obligated to pay. Interest rate swaps involve the exchange by
the Portfolio with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. A currency swap is an
agreement to exchange cashflows on a notional amount of two or more currencies
based on the relative value differential among them. An index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the
Sub-Adviser and the Portfolio believe such obligations do not constitute senior
securities under the 1940 Act and, accordingly, will not treat them as being
subject to its borrowing restrictions. A Portfolio will not enter into any swap,
cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least "A" by S&P or Moody's or has an
equivalent equity rating from an NRSRO or is determined to be of equivalent
credit quality by the Sub-Adviser. If there is a default by the Counterparty,
the Portfolio may have contractual remedies pursuant to the agreements related
to the transaction. The swap market has grown substantially in recent years with
a large number of banks and investment banking firms acting both as principals
and agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
EURODOLLAR INSTRUMENTS. Certain Portfolios of the Trust may make
investments in Eurodollar instruments. Eurodollar instruments are U.S.
dollar-denominated futures contracts or options thereon which are linked to the
London Interbank Offered Rate ("LIBOR"), although foreign currency-denominated
instruments are available from time to time. Eurodollar futures contracts enable
purchasers to obtain a fixed rate for the lending of funds and sellers to obtain
a fixed rate for borrowings. A Portfolio might use Eurodollar futures contracts
and options thereon to hedge against changes in LIBOR, to which many interest
rate swaps and income instruments are linked.
RISKS OF STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES. When conducted
outside the United States, Strategic Transactions may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantee, and are subject to the risk of governmental actions affecting
trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in a Portfolio's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) lower trading volume
and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions,
in addition to other requirements, require that the Portfolio segregate liquid
high-grade assets with its custodian to the extent Portfolio obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Portfolio to pay or deliver securities or assets must be covered at all
times by the securities, instruments or currency required to be delivered, or,
subject to any regulatory restrictions, an amount of cash or liquid high-grade
debt securities at least equal to the current amount of the obligation must be
segregated with the custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. For example, a call option written by a
Portfolio will require the Portfolio to hold the securities subject to the call
(or securities convertible into the needed securities without additional
consideration) or to segregate liquid high-grade debt securities sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by a Portfolio on an index will require the Portfolio to own portfolio
securities which correlate with the index or to segregate liquid high-grade
assets equal to the excess of the index value over the exercise price on a
current basis. A put option written by a Portfolio requires the Portfolio to
segregate liquid, high-grade assets equal to the exercise price.
Except when a Portfolio enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Portfolio to buy or sell
currency will generally require the Portfolio to hold an amount of that currency
or liquid securities denominated in that currency equal to the Portfolio's
obligations or to segregate liquid high-grade assets equal to the amount of the
Portfolio's obligation.
OTC options entered into by a Portfolio, including those on securities,
currencies, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when a
Portfolio sells these instruments it will only segregate an amount of assets
equal to its accrued net obligations, as there is no requirement for payment or
delivery of amounts in excess of the net amount. These amounts will equal 100%
of the exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Portfolio, or the in-the-money amount plus
any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Portfolio sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Portfolio will segregate,
until the option expires or is closed out, cash or cash equivalents equal in
value to such excess. OCC issued and exchange listed options sold by the
Portfolio other than those above generally settle with physical delivery or with
an election of either physical delivery or cash settlement, and the Portfolio
will segregate an amount of assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement, will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option thereon, the Portfolio must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt securities or other acceptable assets.
With respect to swaps, a Portfolio will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid high-grade
securities having a value equal to the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to a Portfolio's net
obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. A Portfolio may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, a Portfolio could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Portfolio. Moreover, instead of segregating assets if the Portfolio
held a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the price
of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction, no segregation is required. However, if it terminates
prior to such time, assets equal to any remaining obligation would need to be
segregated.
The Trust's activities involving Strategic Transactions may be limited by
the requirements of Subchapter M of the Internal Revenue Code for qualification
as a regulated investment company. See "Tax Status" in the Prospectus.
INVESTMENT LIMITATIONS
The Trust has adopted the following restrictions and policies relating to
the investment of assets of the Portfolios and their activities. These are
fundamental policies and may not be changed without the approval of the holders
of a majority of the outstanding voting shares of each Portfolio affected (which
for this purpose and under the Investment Company Act of 1940 means the lesser
of (i) 67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are present or represented by proxy and (ii) more than 50% of
the outstanding shares). A change in policy affecting only one Portfolio may be
effected with the approval of a majority of the outstanding shares of such
Portfolio. Where an investment restriction or policy restricts it to a specified
percentage of its total assets in any type of instrument, that percentage is
measured at the time of purchase. Except as noted hereunder, there will be no
violation of any investment policy or restriction if that restriction is
complied with at the time the relevant action is taken notwithstanding a later
change in the market value of an investment, in net or total assets, in the
securities rating of the investment or any other change.
QUALITY BOND PORTFOLIO
The Quality Bond Portfolio of the Trust may not:
1. Borrow money, except from banks for extraordinary or emergency purposes
and then only in amounts up to 30% of the value of the Portfolio's total assets,
taken at cost at the time of such borrowing and except in connection with
reverse repurchase agreements permitted by Investment Restriction No. 8.
Mortgage, pledge, or hypothecate any assets except in connection with any such
borrowing in amounts up to 30% of the value of the Portfolio's net assets at the
time of such borrowing. The Portfolio will not purchase securities while
borrowings (including reverse repurchase agreements) exceed 5% of the
Portfolio's total assets. This borrowing provision facilitates the orderly sale
of portfolio securities, for example, in the event of abnormally heavy
redemption requests. This provision is not for investment purposes. Collateral
arrangements for premium and margin payments in connection with the
Portfolio's's hedging activities are not deemed to be a pledge of assets;
2. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Portfolio's
total assets would be invested in securities or other obligations of any one
such issuer. This limitation shall not apply to securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities or to permitted
investments of up to 25% of the Portfolio's total assets;
3. Purchase the securities of an issuer if, immediately after such
purchase, the Portfolio owns more than 10% of the outstanding voting securities
of such issuer. This limitation shall not apply to permitted investments of up
to 25% of the Portfolio's total assets;
4. Purchase securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after such
purchase the value of its investments in such industry would exceed 25% of the
value of the Portfolio's total assets. For purposes of industry concentration,
there is no percentage limitation with respect to investments in U.S. Government
securities;
5. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities) or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the Portfolio's
investment objective and policies;
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate, commodities, commodity contracts, except for the
Portfolio's interest in hedging activities as described under "Investment
Objectives and Policies"; or interests in oil, gas, or mineral exploration or
development programs. However, the Portfolio may purchase debt obligations
secured by interests in real estate or issued by companies which invest in real
estate or interests therein including real estate investment trusts;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position in securities, except in the course of the Portfolio's
hedging activities, unless at all times when a short position is open the
Portfolio owns an equal amount of such securities, provided that this
restriction shall not be deemed to be applicable to the purchase or sale of
when-issued securities or delayed delivery securities;
8. Issue any senior security, except as appropriate to evidence
indebtedness which constitutes a senior security and which the Portfolio is
permitted to incur pursuant to Investment Restriction No. 1 and except that the
Portfolio may enter into reverse repurchase agreements, provided that the
aggregate of senior securities, including reverse repurchase agreement, shall
not exceed one-third of the market value of the Portfolio's total assets, less
liabilities other than obligations created by reverse repurchase agreements. The
Portfolio's arrangements in connection with its hedging activities as described
in "Investment Objectives and Policies" shall not be considered senior
securities for purposes hereof;
9. Acquire securities of other investment companies, except as permitted by
the 1940 Act; or
10. Act as an underwriter of securities.
SELECT EQUITY, LARGE CAP STOCK AND SMALL CAP STOCK PORTFOLIOS
Each of the Select Equity, Large Cap Stock and Small Cap Stock Portfolios
may not:
1. Purchase the securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after such
purchase the value of its investments in such industry would exceed 25% of the
value of the Portfolio's total assets. For purposes of industry concentration,
there is no percentage limitation with respect to investments in U.S. Government
securities;
2. Borrow money, except from banks for extraordinary or emergency purposes
and then only in amounts not to exceed 10% of the value of the Portfolio's total
assets, taken at cost, at the time of such borrowing. Mortgage, pledge, or
hypothecate any assets except in connection with any such borrowing and in
amounts not to exceed 10% of the value of the Portfolio's net assets at the time
of such borrowing. The Portfolio will not purchase securities while borrowings
exceed 5% of the Portfolio's total assets. This borrowing provision is included
to facilitate the orderly sale of portfolio securities, for example, in the
event of abnormally heavy redemption requests, and is not for investment
purposes. Collateral arrangements for premium and margin payments in connection
with the Portfolio's hedging activities are not deemed to be a pledge of assets;
3. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Portfolio's
total assets would be invested in securities or other obligations of any one
such issuer. This limitation shall not apply to issues of the U.S. Government,
its agencies or instrumentalities and to permitted investments of up to 25% of
the Portfolio's total assets;
4. Purchase the securities of an issuer if, immediately after such
purchase, the Portfolio owns more than 10% of the outstanding voting securities
of such issuer;
5. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities), or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the Portfolio's
investment objective and policies (see "Investment Objectives and Policies");
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate, commodities, or commodity contracts, except for the
Portfolio's interest in hedging activities as described under "Investment
Objectives and Policies"; or interests in oil, gas, or mineral exploration or
development programs. However, the Portfolio may purchase securities or
commercial paper issued by companies which invest in real estate or interests
therein, including real estate investment trusts;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position, except in the course of the Portfolio's hedging
activities, provided that this restriction shall not be deemed to be applicable
to the purchase or sale of when-issued securities or delayed delivery
securities;
8. Acquire securities of other investment companies, except as permitted by
the 1940 Act;
9. Act as an underwriter of securities;
10. Issue any senior security, except as appropriate to evidence
indebtedness which the Portfolio is permitted to incur pursuant to Investment
Restriction No. 2. The Portfolio's arrangements in connection with its hedging
activities as described in "Investment Objectives and Policies" shall not be
considered senior securities for purposes hereof; or
11. Purchase any equity security if, as a result, the Portfolio would then
have more than 5% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for fewer than
three years.
INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio may not:
1. Borrow money, except from banks for extraordinary or emergency purposes
and then only in amounts up to 30% of the value of the Portfolio's net assets at
the time of borrowing, and except in connection with reverse repurchase
agreements and then only in amounts up to 33 1/3% of the value of the
Portfolio's net assets; or purchase securities while borrowings, including
reverse repurchase agreements, exceed 5% of the Portfolio's total assets. The
Portfolio will not mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not to exceed 30% of the value
of the Portfolio's net assets at the time of such borrowing;
2. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Portfolio's
total assets would be invested in securities or other obligations of any one
such issuer. This limitation shall not apply to securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities or to permitted
investments of up to 25% of the Portfolio's total assets;
3. Purchase the securities of an issuer if, immediately after such
purchase, the Portfolio owns more than 10% of the outstanding voting securities
of such issuer. This limitation shall not apply to permitted investments of up
to 25% of the Portfolio's total assets;
4. Purchase the securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after such
purchase, the value of its investments in such industry would exceed 25% of the
value of the Portfolio's total assets. For purposes of industry concentration,
there is no percentage limitation with respect to investments in U.S. Government
securities;
5. Make loans, except through the purchase or holding of debt obligations
(including restricted securities), or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the Portfolio's
investment objective and policies, see "Investment Practices" in the Prospectus
and "Investment Objectives and Policies" in this Statement of Additional
Information;
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real property, including limited partnership interests, commodities, or
commodity contracts, except for the Portfolio's interests in hedging and foreign
exchange activities as described under "Investment Practices" in the Prospectus;
or interests in oil, gas, mineral or other exploration or development programs
or leases. However, the Portfolio may purchase securities or commercial paper
issued by companies that invest in real estate or interests therein including
real estate investment trusts;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position in securities, except to obtain such short-term credit
as necessary for the clearance of purchases and sales of securities, provided
that this restriction shall not be deemed to apply to the purchase or sale of
when-issued securities or delayed delivery securities;
8. Acquire securities of other investment companies, except as permitted by
the 1940 Act;
9. Act as an underwriter of securities, except insofar as the Portfolio may
be deemed to be an underwriter under the 1933 Act by virtue of disposing of
portfolio securities; or
10. Issue any senior security, except as appropriate to evidence
indebtedness which the Portfolio is permitted to incur pursuant to Investment
Restriction No. 1. The Portfolio's arrangements in connection with its hedging
activities as described in "Investment Practices" in the Prospectus shall not be
considered senior securities for purposes hereof.
EMERGING MARKETS EQUITY PORTFOLIO
The Emerging Markets Equity Portfolio may not:
1. Purchase any security if, as a result, more than 25% of the value of the
Portfolio's total assets would be invested in securities of issuers having their
principal business activities in the same industry. This limitation shall not
apply to obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities;
2. Borrow money, except that the Portfolio may (i) borrow money from banks
for temporary or emergency purposes (not for leveraging purposes) and (ii) enter
into reverse repurchase agreements for any purpose; provided that (i) and (ii)
in total do not exceed 33 1/3% of the value of the Portfolio's total assets
(including the amount borrowed)less liabilities (other than borrowings). If at
any time any borrowings come to exceed 33 1/3% of the value of the Portfolio's
total assets, the Portfolio will reduce its borrowings within three business
days to the extent necessary to comply with the 33 1/3% limitation;
3. With respect to 75% of its total assets, purchase any security if, as a
result, (a) more than 5% of the value of the Portfolio's total assets would be
invested in securities or other obligations of any one issuer; or (b) the
Portfolio would hold more than 10% of the outstanding voting securities of that
issuer. This limitation shall not apply to Government securities (as defined in
the 1940 Act);
4. Make loans to other persons, except through the purchase of debt
obligations, loans of portfolio securities, and participation in repurchase
agreements;
5. Purchase or sell physical commodities or contracts thereon, unless
acquired as a result of the ownership of securities or instruments, but the
Portfolio may purchase or sell futures contracts or options (including options
on futures contracts, but excluding options or futures contracts on physical
commodities) and may enter into foreign currency forward contracts;
6. Purchase or sell real estate, but the Portfolio may purchase or sell
securities that are secured by real estate or issued by companies (including
real estate investment trusts) that invest or deal in real estate;
7. Underwrite securities of other issuers, except to the extent the
Portfolio, in disposing of portfolio securities, may be deemed an underwriter
within the meaning of the 1933 Act; and
8. Issue senior securities, except as permitted under the 1940 Act or any
rule, order or interpretation thereunder.
BOND DEBENTURE PORTFOLIO
The Bond Debenture Portfolio of the Trust may not:
1. Sell short or buy on margin, although it may obtain short-term credit as
needed to clear purchases of securities;
2. Buy or sell put or call options, although it may buy, hold or sell
warrants acquired with debt securities;
3. Borrow in excess of 5% of the Portfolio's gross assets taken at cost or
market value whichever is lower at the time of borrowing, and then only as a
temporary measure for extraordinary or emergency purposes;
4. Act as an underwriter of securities issued by others, except where it
may be deemed to be an underwriter by selling a portfolio security requiring
registration under the Securities Act of 1933;
5. Invest knowingly more than 15% of its gross assets in illiquid
securities;
6. Make loans, except for (a) time or demand deposits with banks, (b)
purchasing commercial paper or publicly-offered debt securities at original
issue or otherwise, (c) short-term repurchase agreements with sellers of
securities the Portfolio has bought and (d) loans of portfolio securities to
registered broker-dealers if 100% secured by cash or cash equivalents, made in
full compliance with applicable regulations and which, in management's opinion,
do not expose the Portfolio to significant risks or impair its qualification for
pass-through tax treatment under the Internal Revenue Code;
7. Pledge, mortgage, or hypothecate its assets;
8. Buy or sell real estate (including limited partnership interests but
excluding securities of companies, such as real estate investment trusts, which
deal in real estate or interests therein) or oil, gas or other mineral leases,
or commodities, or commodity contracts although it may buy securities of
companies that deal in such interests (however, the Portfolio may hold and sell
any of the aforementioned or any other property acquired through ownership of
other securities, although the Portfolio may not purchase securities for the
purpose of acquiring those interests);
9. Buy securities issued by any other open-end investment company (except
pursuant to a plan of merger, consolidation or acquisition of assets), although
it may invest up to 5% of its gross assets, taken at market value at the time of
investment, in closed-end investment companies, provided such purchase is made
in the open market and does not involve the payment of a fee or commission
greater than the customary broker's commission;
10. Invest more than 5% of its gross assets, taken at market value at the
time of investment in securities of companies with less than three years'
continuous operation, including predecessor companies;
11. With respect to 75% of its gross assets, buy the securities of any
issuer if the purchase causes it (a) to have more than 5% of its gross assets
invested in the securities of such issuer (except obligations of the United
States, its agencies or instrumentalities) or (b) to own more than 10% of the
outstanding voting securities of such issuer;
12. Hold securities of any issuer, any of whose officers, directors or
security holders is an officer, director or partner of the Adviser or
Sub-Adviser or an officer or director of the Portfolio, if after the purchase of
the securities of such issuer, one or more of such persons owns beneficially
more than 1/2 of 1% of the securities of such issuer and such persons together
own beneficially more than 5% of such securities;
13. Concentrate its investments in a particular industry, though, if it is
deemed appropriate to its investment objective, up to 25% of the market value of
its gross assets at the time of investment may be invested in any one industry
classification used for investment purposes;
14. Buy from or sell to any of the Trust's directors, employees, or the
Investment Adviser or Sub-Adviser or any of its officers, directors, partners or
employees, any securities other than shares of the Portfolio's common stock; or
15. Invest more than 10% of the market value of its gross assets at the
time of investment in debt securities which are in default as to interest or
principal.
With respect to investment restriction 5. above, securities subject to
legal or contractual restrictions on resale, which are determined by the Board
of Trustees, or by the Sub-Adviser pursuant to delegated authority, to be liquid
are considered liquid securities.
GROWTH & INCOME EQUITY, BALANCED AND EQUITY INCOME PORTFOLIOS
The Growth & Income Equity, Balanced and Equity Income Portfolios of the
Trust may not:
1. Purchase securities of any one issuer (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities), if,
immediately after and as a result of such investments, more than 5% of the
Portfolio's total assets would be invested in the securities of such issuer, or
more than 10% of the issuer's outstanding voting securities would be owned by
the Portfolio or the Trust, except that up to 25% of the Portfolio's total
assets may be invested without regard to such limitations.
2. Purchase any securities which would cause 25% or more of the Portfolio's
total assets at the time of purchase to be invested in the securities of one or
more issuers conducting their principal business activities in the same
industry, provided that, however, (a) with respect to each Portfolio, (i) there
is no limitation with respect to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, and repurchase agreements secured
by obligations of the U.S. Government or its agencies or instrumentalities, and
with respect to the Equity Income Portfolio only, securities issued by domestic
banks, thrifts or savings institutions; (ii) wholly-owned finance companies will
be considered to be in the industries of their parents if their activities are
primarily related to financing the activities of their parents; and (iii)
utilities will be divided according to their services (for example, gas, gas
transmission, electric and gas, electric, and telephone will each be considered
a separate industry).
3. Borrow money or issue senior securities, except that the Portfolio may
borrow from banks and enter into reverse repurchase agreements for temporary
defensive purposes in amounts not in excess of 10% of the Portfolio's total
assets at the time of such borrowing; or mortgage, pledge, or hypothecate any
assets, except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the Portfolio's
total assets at the time of such borrowing; or purchase securities while its
borrowings exceed 5% of its total assets. A Portfolio's transactions in futures
and related options (including the margin posted by a Portfolio in connection
with such transactions), and securities held in escrow or separate accounts in
connection with a Portfolio's investment practices described in this Statement
of Additional Information are not subject to this limitation.
4. Make loans, except that each Portfolio may purchase or hold debt
instruments, lend portfolio securities, enter into repurchase agreements and
make other investments in accordance with its investment objective and policies.
5. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall not
apply to a Portfolio's transactions in options, and futures contracts and
related options, and (b) a Portfolio may obtain short-term credits as may be
necessary for the clearance of purchases and sales of portfolio securities.
6. Make investments for the purpose of exercising control or management.
7. Purchase or sell real estate, provided that each Portfolio may invest in
securities secured by real estate or interests therein or issued by companies or
investment trusts which invest in real estate or interests therein.
8. Act as an underwriter of securities within the meaning of the Securities
Act of 1933 except insofar as a Portfolio might be deemed to be an underwriter
upon disposition of portfolio securities acquired within the limitation on
purchases of restricted securities and except to the extent that the purchase of
obligations directly from the issuer thereof in accordance with a Portfolio's
investment objective, policies and limitations may be deemed to be underwriting.
9. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that each of the Balanced Portfolio
and the Equity Income Portfolio may, to the extent appropriate to its investment
objective, purchase publicly traded securities of companies engaging in whole or
in part in such activities and may invest in futures contracts and related
options in accordance with their respective investment activities and policies.
10. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as a Portfolio might be deemed to be an
underwriter upon disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
a Portfolio's investment objective, policies and limitations may be deemed to be
underwriting.
LORD ABBETT GROWTH AND INCOME PORTFOLIO
The Lord Abbett Growth and Income Portfolio may not:
1. sell short securities or buy securities or evidences of interests
therein on margin, although it may obtain short-term credit necessary for the
clearance of purchases of securities;
2. buy or sell put or call options, although it may buy, hold or sell
rights or warrants, write covered call options and enter into closing purchase
transactions as discussed below;
3. borrow money which is in excess of one-third of the value of its total
assets taken at market value (including the amount borrowed) and then only from
banks as a temporary measure for extraordinary or emergency purposes (borrowings
beyond 5% of such total assets may not be used for investment leverage to
purchase securities but solely to meet redemption requests where the liquidation
of the Portfolio's investment is deemed to be inconvenient or disadvantageous);
4. lend money or securities to any person except that it may enter into
short-term repurchase agreements with sellers of securities it has purchased,
and it may lend its portfolio securities to registered broker-dealers where the
loan is 100% secured by cash or its equivalent as long as it complies with
regulatory requirements and the Portfolio deems such loans not to expose the
Portfolio to significant risk (investment in repurchase agreements exceeding 7
days and in other illiquid investments is limited to a maximum of 5% of a
Portfolio's assets);
5. pledge, mortgage or hypothecate its assets; however, this provision does
not apply to permitted borrowing mentioned above or to the grant of escrow
receipts or the entry into other similar escrow arrangements arising out of the
writing of covered call options;
6. buy or sell real estate including limited partnership interests therein
(except securities of companies, such as real estate investment trusts, that
deal in real estate or interests therein), or oil, gas or other mineral leases,
commodities or commodity contracts in the ordinary course of its business,
except such interests and other property acquired as a result of owning other
securities, though securities will not be purchased in order to acquire any of
these interests;
7. invest more than 5% of its gross assets, taken at market value at the
time of investment, in companies (including their predecessors) with less than
three years' continuous operation;
8. buy securities if the purchase would then cause a Portfolio to have more
than (i) 5% of its gross assets, at market value at the time of purchase,
invested in securities of any one issuer, except securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities, or (ii) 25% of its
gross assets, at market value at the time of purchase, invested in securities
issued or guaranteed by a foreign government, its agencies or instrumentalities;
9. buy voting securities if the purchase would then cause a Portfolio to
own more than 10% of the outstanding voting stock of any one issuer;
10. own securities in a company when any of its officers, directors or
security holders is an officer or Trustee of the Trust or an officer, director
or partner of the investment adviser or sub-adviser, if after the purchase any
of such persons owns beneficially more than 1/2 of 1% of such securities and
such persons together own more than 5% of such securities;
11. concentrate its investments in any particular industry, but if deemed
appropriate for attainment of its investment objective, up to 25% of its gross
assets (at market value at the time of investment) may be invested in any one
industry classification used for investment purposes; or
12. buy securities from or sell them to the Trust's officers, directors, or
employees, or to the investment adviser or sub-adviser or to their partners,
directors and employees.
LARGE CAP RESEARCH, DEVELOPING GROWTH AND MID-CAP VALUE PORTFOLIOS
The Large Cap Research, Developing Growth and Mid-Cap Value Portfolios may
not:
1. borrow money, except that (i) the Portfolio may borrow from banks (as
defined in the Investment Company Act of 1940, as amended (the "1940 Act")) in
amounts up to 33 1/3% of its total assets (including the amount borrowed), (ii)
the Portfolio may borrow up to an additional 5% of its total assets for
temporary purposes, (iii) the Portfolio may obtain such short-term credit as may
be necessary for the clearance of purchases and sales of portfolio securities
and (iv) the Portfolio may purchase securities on margin to the extent permitted
by applicable law;
2. pledge its assets (other than to secure borrowings, or to the extent
permitted by the Portfolio's investment policies as permitted by applicable
law);
3. engage in the underwriting of securities, except pursuant to a merger or
acquisition or to the extent that, in connection with the disposition of its
portfolio securities, it may be deemed to be an underwriter under federal
securities laws;
4. make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar instruments
shall not be subject to this limitation, and except further that the Portfolio
may lend its portfolio securities, provided that the lending of portfolio
securities may be made only in accordance with applicable law;
5. buy or sell real estate (except that the Portfolio may invest in
securities directly or indirectly secured by real estate or interests therein or
issued by companies which invest in real estate or interests therein) or
commodities or commodity contracts (except to the extent the Portfolio may do so
in accordance with applicable law and without registering as a commodity pool
operator under the Commodity Exchange Act, as, for example, with futures
contracts);
6. with respect to 75% of the gross assets of the Portfolio, buy securities
of one issuer representing more than (i) 5% of the Portfolio's gross assets,
except securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or (ii) 10% of the voting securities of such issuer;
7. invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding securities of the
U.S. Government, its agencies and instrumentalities); or
8. issue senior securities to the extent such issuance would violate
applicable laws.
RIGGS STOCK, RIGGS SMALL COMPANY STOCK AND RIGGS U.S. GOVERNMENT SECURITIES
PORTFOLIOS
1. The Portfolios will not issue senior securities except that a Portfolio
may borrow money directly or through reverse repurchase agreements in amounts up
to one-third of the value of its total assets, including the amount borrowed;
and except to the extent that a Portfolio may enter into futures contracts. The
Portfolios will not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or emergency
measure or to facilitate management of the Portfolio by enabling a Portfolio to
meet redemption requests when the liquidation of portfolio securities is deemed
to be inconvenient or disadvantageous. A Portfolio will not purchase any
securities while any borrowings in excess of 5% of its total assets are
outstanding. During the period any reverse repurchase agreements are
outstanding, a Portfolio will restrict the purchase of portfolio securities to
money market instruments maturing on or before the expiration date of the
reverse repurchase agreements, but only to the extent necessary to assure
completion of the reverse repurchase agreements.
2. The Portfolios will not sell any securities short or purchase any
securities on margin, but may obtain such short-term credits as are necessary
for clearance of purchases and sales of securities. The deposit or payment by a
Portfolio of initial or variation margin in connection with futures contracts or
related options transactions is not considered the purchase of a security on
margin.
3. The Portfolios will not mortgage, pledge, or hypothecate any assets,
except to secure permitted borrowings. In these cases the Portfolios may pledge
assets having a value of 15% of assets taken at cost. For purposes of this
restriction, (a) the deposit of assets in escrow in connection with the writing
of covered put or call options and the purchase of securities on a when-issued
basis; and (b) collateral arrangements with respect to (i) the purchase and sale
of stock options and (ii) initial or variation margin for futures contracts will
not be deemed to be pledges of a Portfolio's assets. Margin deposits for the
purchase and sale of futures contracts and related options are not deemed to be
a pledge.
4. The Portfolios will not lend any of their respective assets except
portfolio securities up to one-third of the value of total assets. This shall
not prevent a Portfolio from purchasing or holding U.S. government obligations,
money market instruments, variable amount demand master notes, bonds,
debentures, notes, certificates of indebtedness, or other debt securities,
entering into repurchase agreements, or engaging in other transactions where
permitted by a Portfolio's investment objective, policies, and limitations or
the Trust's Declaration of Trust.
5. The Portfolios will not invest more than 10% of their respective net
assets in securities subject to restrictions on resale under the Securities Act
of 1933, except for commercial paper issued under Section 4(2) of the Securities
Act of 1933 and certain other restricted securities which meet the criteria for
liquidity as established by the Board of Trustees.
6. The Portfolios will not invest in commodities, except to the extent that
they may engage in transactions involving futures contracts or options on
futures contracts.
7. The Portfolios will not purchase or sell real estate, including limited
partnership interests, although they may invest in securities of issuers whose
business involves the purchase or sale of real estate or in securities which are
secured by real estate or interests in real estate.
8. With respect to 75% of the value of its respective total assets, each
Portfolio will not purchase securities issued by any one issuer (other than
cash, cash items or securities issued or guaranteed by the government of the
United States or its agencies or instrumentalities and repurchase agreements
collateralized by such securities), if as a result more than 5% of the value of
its total assets would be invested in the securities of that issuer. No
Portfolio will acquire more than 10% of the outstanding voting securities of any
one issuer.
9. A Portfolio will not invest 25% or more of the value of its respective
total assets in any one industry (other than securities issued by the U.S.
government, its agencies, or instrumentalities or repurchase agreements
collateralized by these securities).
10. A Portfolio will not underwrite any issue of securities, except as a
Portfolio may be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
Except with respect to the Portfolios' policy of borrowing money, if a
percentage limitation is adhered to at the time of investment, a later increase
or decrease in percentage resulting from any change in value or net assets will
not result in a violation of such restriction.
For purposes of their policies and limitations, the Portfolios consider
certificates of deposit and demand and time deposits issued by a U.S. branch of
a domestic bank or savings association having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment to be "cash items."
NON-FUNDAMENTAL INVESTMENT LIMITATIONS
The investment limitations described below are not fundamental policies of the
Portfolios described and may be changed by the Trustees without shareholder
approval.
NON-FUNDAMENTAL INVESTMENT LIMITATIONS - QUALITY BOND PORTFOLIO, SELECT EQUITY
PORTFOLIO, LARGE CAP STOCK PORTFOLIO, SMALL CAP STOCK PORTFOLIO AND
INTERNATIONAL EQUITY PORTFOLIO
These non-fundamental investment policies require that each such Portfolio may
not:
(i) Acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration of over
seven calendar days, if as a result thereof, more than 15% of the market value
of the Portfolio's total assets would be in investments that are illiquid;
(ii) Purchase any security if, as a result, the Portfolio would then have
more than 5% of its total assets invested in securities of companies (including
predecessors) that have been in continuous operation for fewer than three years;
(iii) Invest in warrants (other than warrants acquired by the Portfolio as
part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would exceed 5%
of the value of the Portfolio's net assets or if, as a result, more than 2% of
the Portfolio's net assets would be invested in warrants not listed on a
recognized U.S. or foreign stock exchange, to the extent permitted by applicable
state securities laws; or
(iv) Purchase or retain securities of any issuer if, to the knowledge of
the Portfolio, any of the Portfolio's officers or Trustees or any officer of the
Advisor individually owns more than 1/2 of 1% of the issuer's outstanding
securities and such persons owning more than 1/2 of 1% of such securities
together beneficially own more than 5% of such securities, all taken at market.
NON-FUNDAMENTAL INVESTMENT LIMITATIONS - EMERGING MARKETS EQUITY PORTFOLIO
The Portfolio may not:
(i) Acquire securities of other investment companies, except as permitted
by the 1940 Act or any rule, order or interpretation thereunder, or in
connection with a merger, consolidation, reorganization, acquisition of assets
or an offer of exchange;
(ii) Acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration of over
seven calendar days, if as a result thereof, more than 15% of the market value
of the Portfolio's net assets would be in investments that are illiquid;
(iii) Sell any security short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold or unless it
covers such short sales as required by the current rules or positions of the SEC
or its staff. Transactions in futures contracts and options shall not constitute
selling securities short; or
(iv) Purchase securities on margin, but the Portfolio may obtain such short
term credits as may be necessary for the clearance of transactions.
NON-FUNDAMENTAL INVESTMENT LIMITATIONS - LARGE CAP RESEARCH, DEVELOPING GROWTH
AND MID-CAP VALUE PORTFOLIOS
Each Portfolio may not:
1. borrow in excess of 5% of its gross assets taken at cost or market
value, whichever is lower at the time of borrowing, and then only as a temporary
measure for extraordinary or emergency purposes;
2. make short sales of securities or maintain a short position except to
the extent permitted by applicable law;
3. invest knowingly more than 15% of its net assets (at the time of
investment) in illiquid securities, except for securities qualifying for resale
under Rule 144A of the Securities Act of 1933, deemed to be liquid by the Board
of Trustees;
4. invest in the securities of other investment companies as defined in the
1940 Act except as permitted by applicable law;
5. invest in securities of issuers which, with their predecessors, have a
record of less than three years' continuous operations, if more than 5% of the
Portfolio's total assets would be invested in such securities (this restriction
shall not apply to mortgaged-backed securities, asset-backed securities or
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities);
6. hold securities of any issuer if more than 1/2 of 1% of the securities
of such issuer are owned beneficially by one or more officers or Trustees of the
Trust or by one or more partners or members of the Trust's underwriter or
investment adviser if these owners in the aggregate own beneficially more than
5% of the securities of such issuer;
7. invest in warrants if, at the time of the acquisition, its investment in
warrants, value at the lower of cost or market, would exceed 5% of the
Portfolio's total assets (included within such limitation, but not to exceed 2%
of the Portfolio's total assets, are warrants which are not listed on the New
York or American Stock Exchange or a major foreign exchange);
8. invest in real estate limited partnership interests or interests in oil,
gas or other mineral leases, or exploration or other development programs,
except that the Portfolio may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or other development activities;
9. write, purchase or sell puts, calls, straddles, spreads or combinations
thereof, except to the extent permitted in the Portfolio's prospectus and
statement of additional information, as they may be amended from time to time;
or
10. buy from or sell to any of its officers, Trustees, employees, or its
investment adviser or any of its officers, directors, partners or employees, any
securities other than shares of the Portfolio's common stock.
NON-FUNDAMENTAL INVESTMENT LIMITATIONS - RIGGS STOCK, RIGGS SMALL COMPANY
STOCK AND RIGGS U.S. GOVERNMENT SECURITIES PORTFOLIOS
1. The Portfolios will not invest more than 15% of the value of their
respective net assets in illiquid securities, including repurchase agreements
providing for settlement more than seven days after notice, over-the-counter
options and certain restricted securities not determined by the Trustees to be
liquid.
2. Unless permitted by order of the Securities and Exchange Commission, the
Portfolios will limit their respective investment in other investment companies
to no more than 3% of the total outstanding voting stock of any investment
company, and will not invest more than 5% of their respective total assets in
any one investment company, or invest more than 10% of their respective total
assets in investment companies in general. The Portfolios will purchase
securities of closed-end investment companies only in open market transactions
involving only customary broker's commissions. However, these limitations are
not applicable if the securities are acquired in a merger, consolidation,
reorganization, or acquisition of assets.
3. A Portfolio will not enter into transactions for the purpose of engaging
in arbitrage.
4. A Portfolio will not purchase securities of a company for the purpose of
exercising control or management.
5. The Riggs U.S. Government Securities Portfolio will not invest in
warrants. The Riggs Stock and Riggs Small Company Stock Portfolios may not
invest more than 5% of their respective net assets in warrants, including those
acquired in units or attached to other securities. For purposes of this
investment restriction, warrants will be valued at the lower of cost or market,
except that warrants acquired by the Portfolios in units with or attached to
securities may be deemed to be without value.
DESCRIPTION OF SECURITIES RATINGS
A description of the securities ratings is contained in the Appendix to the
Statement of Additional Information.
MANAGEMENT OF THE TRUST
Responsibilities of Trustees
The Board of Trustees of the Trust provides broad supervision over the affairs
of the Trust and the Portfolios. In carrying out their duties, the Trustees
follow the provisions of the Investment Company Act of 1940, the General Laws of
the Commonwealth of Massachusetts governing business trusts, the Declaration of
Trust of the Trust and its Bylaws. The Trustees approve contracts with the
investment adviser, custodians and other service providers on behalf of the
Portfolios. The Trustees also set broad policies for the management of the
assets of each Portfolio, including the pricing of securities owned by the
Portfolios and the policies governing investments by the Portfolios.
<TABLE>
<CAPTION>
OFFICERS AND TRUSTEES
MANAGEMENT OF THE TRUST
Principal Occupation During Past Five
Position(s) Held Years (and Positions held with Affiliated
Name, Address and Age with Registrant Persons or Principal Underwriters of the Registrant)
- - --------------------- --------------- ----------------------------------------------------
<S> <C> <C>
Lorry J. Stensrud* President and Chief President of Cova Financial Services Life
One Tower Lane, Suite 3000 Executive Officer Insurance Company ("Cova Life") since
Oakbrook Terrace, IL 60181- June, 1995; prior thereto, Executive Vice
4644 President of Cova
Age: 50
William C. Mair* Vice President, Vice President and Controller of Cova Life;
One Tower Lane, Suite 3000 Treasurer, Controller, Vice President, Treasurer and Controller of
Oakbrook, Terrace IL 60181- Chief Financial Officer, Cova Investment Advisory Corporation
4644 Chief Accounting Officer
Age: 58 and Trustee
Stephen M. Alderman Trustee Partner in the law firm of Garfield & Merel
211 West Wacker Drive
Chicago, IL 60606
Age: 40
Theodore A. Myers Trustee Senior Financial Advisor; formerly Chief
550 Washington Avenue Financial Officer of Qualitech Steel
Glencoe, IL 60022 Corporation, 1990-1994; Director of 34 Van
Age: 69 Kampen American Capital Mutual Funds;
member of Arthur Andersen C.F.O.
Advisory Committee.
Deborah A. Vohasek Trustee Principal, Vohasek Oetjen Marketing
7752 W. Lake Street
Morton Grove, IL 60053
Age: 36
R. Kevin Williams Trustee Partner in the law firm of O'Donnell, Byrne &
20 North Wacker Drive Williams from June 1993 through the
Chicago, IL 60606 present
Age: 46
William H. Wilton Vice President Vice President & Actuary of Cova Life; prior
One Tower Lane, Suite 3000 to October, 1992, Associate Actuary,
Oakbrook Terrace, IL 60181- Allstate Life Insurance Co., Northbrook, IL
4644
Age: 39
Bernard J. Spaulding Secretary Senior Vice President and General Counsel of
One Tower Lane, Suite 3000 Cova since March, 1999; Secretary of Cova since
Oakbrook Terrace, IL 60181- July 1, 1999; prior thereto, President of Delta
4644 Holdings
Age: 56
<FN>
* Interested person of the Trust within the meaning of the 1940 Act.
</FN>
</TABLE>
COMMITTEES
The Board has established two committees. The committees, their members and the
responsibilities of the committees are as follows:
PRICING COMMITTEE. The Pricing Committee has the responsibility of overseeing
the determination of the net asset value of the Portfolios and the calculation
of the value of any debt instrument, share of stock, or other Portfolio security
or asset. The members are as follows:
Drew Ahrens
William Flory
Terri Tanaka
AUDIT COMMITTEE. The Audit Committee makes recommendations to the Board
concerning the selection of the Trust's independent auditors and reviews with
such auditors the scope and results of the Trust's annual audit. The members are
as follows:
Stephen M. Alderman
Theodore A. Myers
Deborah A. Vohasek
R. Kevin Williams
COMPENSATION OF MANAGEMENT
Each Trustee of the Trust who is not an interested person of the Trust or
Adviser or Sub-Adviser receives an annual fee of $10,000 and an additional fee
of $1,000 for each Trustees' meeting attended. In addition, disinterested
Trustees who are members of any Board committees will receive a separate $1,000
fee for attendance of any committee meeting that is held on a day on which no
Board meeting is held.
The table below describes the compensation paid by the Trust during the past
fiscal year to each of the Trustees who is a not an interested person of the
Trust. None of the officers and no Trustee who is an interested person of the
Trust received compensation from the Trust during the past fiscal year.
<TABLE>
<CAPTION>
COMPENSATION TABLE
(1) (2) (3) (4) (5)
Total
Pension or Compensation
Retirement Estimated From Registrant
Aggregate Benefits Accrued Annual and Fund
Compensation As Part of Fund Benefits Upon Complex Paid to
Name of Person, Position From Registrant Expenses Retirement Trustees
- - ------------------------ --------------- -------- ---------- --------
<S> <C> <C> <C> <C>
William C. Mair, N/A N/A N/A N/A
Vice President, Treasurer,
Controller, Chief Financial
Officer, Chief Accounting
Officer and Trustee
Stephen M. Alderman, $15,000 N/A N/A $15,000
Trustee
Theodore A. Myers, $15,000 N/A N/A $15,000
Trustee
Deborah A. Vohasek, $15,000 N/A N/A $15,000
Trustee
R. Kevin Williams, $15,000 N/A N/A $15,000
Trustee
</TABLE>
SUBSTANTIAL SHAREHOLDERS
Shares of the Trust are issued and redeemed in connection with investments
in and payments under certain variable annuity contracts and variable life
insurance policies ("Variable Contracts") issued by Cova Financial Services Life
Insurance Company and/or its affiliated insurance companies. On March 31, 2000,
Cova Variable Annuity Account One, Cova Variable Life Account One and Cova
Variable Life Account Eight, separate accounts of Cova Financial Services Life
Insurance Company; Cova Variable Annuity Account Five and Cova Variable Life
Account Five, separate accounts of Cova Financial Life Insurance Company; and
First Cova Variable Annuity Account One, a separate account of First Cova Life
Insurance Company, together were known to the Board of Trustees and the
management of the Trust to own of record 99.71% of the Trust's shares.
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
Cova Life has advised the Trust that as of March 31, 2000, there were no
persons owning Variable Contracts which would entitle them to instruct Cova Life
with respect to more than 5% of the voting securities of the Trust.
CUSTODIAN
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston,
Massachusetts 02116, is the custodian of the Trust and has custody of all
securities and cash of the Trust. The custodian, among other things, attends to
the collection of principal and income, and payment for and collection of
proceeds of securities bought and sold by the Trust. IBT also provides fund
administration and accounting services to the Trust and is the Trust's transfer
agent.
DIVIDENDS
All dividends are distributed to the separate accounts and will be automatically
reinvested in Trust shares. Dividends and distributions made by the Portfolios
are taxable, if at all, to Cova Life; they are not taxable to Variable Contract
owners.
TAX STATUS
It is the intention of the Trust to qualify as a "regulated investment company"
under Sub-chapter M of the Internal Revenue Code. If the Trust so qualifies and
distributes each year to its shareholders at least 90% of its net investment
income in each year, it will not be required to pay federal income taxes on any
income distributed to shareholders. Each Portfolio of the Trust distributes all
of its net income and gains to its shareholders (the separate accounts). Each
Portfolio is treated as a separate entity for Federal income tax purposes and,
therefore, the investments and results of the Portfolio are determined
separately for purposes of determining whether the Trust qualifies as a
"regulated investment company" and for purposes of determining net ordinary
income (or loss) and net realized capital gains (or losses).
Some of the Trust's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Trust and affect the holding period of the securities held by the Trust and the
character of the gains or losses realized by the Trust. These provisions may
also require the Trust to mark-to-market some of the positions in its portfolio
(i.e., treat them as if they were closed out), which may cause the Trust to
recognize income without receiving cash with which to make distributions in
amounts necessary to satisfy the 90% distribution requirement and the
distribution requirements for avoiding income and excise taxes. The Trust will
monitor its transactions and may make certain tax elections in order to mitigate
the effect of these rules and prevent disqualification of the Trust as a
regulated investment company.
Investments of the Trust in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Trust will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Trust may
have to dispose of securities that it would otherwise have continued to hold.
NET ASSET VALUES
Portfolio shares are sold and redeemed at a price equal to the share's net asset
value. The net asset value of a Portfolio is determined by calculating the total
value of the Portfolio's assets, deducting its total liabilities, and dividing
the result by the number of shares outstanding. The net asset value for each
Portfolio is computed once daily as of the close of the New York Stock Exchange,
Monday through Friday, except on customary business holidays, or except on any
day on which no purchase or redemption orders are received, or there is not a
sufficient degree of trading in the Portfolio's investments so that the
Portfolio's net asset value per share might be materially affected. The Trust
reserves the right to calculate the net asset value and to adjust the public
offering price based thereon more frequently than once a day if deemed
desirable.
Securities that are listed on a securities exchange are valued at their closing
sales price on the day of the valuation. Price valuations for listed securities
are based on market quotations where the security is primarily traded or, if not
available, are valued at the mean of the bid and asked prices on any valuation
date. Unlisted securities in a Portfolio are primarily valued based on their
latest quoted bid price or, if not available, are valued by a method determined
by the Trustees to accurately reflect fair value. Money market instruments
maturing in 60 days or less are valued on the basis of amortized cost, which
means that securities are valued at their acquisition cost to reflect a constant
amortization rate to maturity of any premium or discount, rather than at current
market value.
PERFORMANCE DATA
As required by regulations of the Securities and Exchange Commission, the
annualized total return of the Portfolios for a period is computed by assuming a
hypothetical initial payment of $1,000. It is then assumed that all of the
dividends and distributions by the Portfolio over the period are reinvested. It
is then assumed that at the end of the period, the entire amount is redeemed.
The annualized total return is then calculated by determining the annual rate
required for the initial payment to grow to the amount which would have been
received upon redemption.
Quotations of average annual total return for a Portfolio will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in a Portfolio over a period of one, five and ten years (or, if less,
up to the life of a Portfolio, calculated pursuant to the formula:
(n)
P (1 + T) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = an average annual total return
n = the number of years
ERV = the ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the 1, 5, or 10 year period at the end of the 1,
5, or 10 year period (or fractional portion thereof)
From time to time, the investment adviser may reduce its compensation or assume
expenses in respect of the operations of a Portfolio in order to reduce the
Portfolio's expenses. Any such waiver or assumption would increase a Portfolio's
yield and total return during the period of the waiver or assumption.
Advertisements and other sales literature for the Portfolios may quote total
returns which are calculated for periods other than the 1-, 5- and 10-year
periods required by the Rules of the Securities and Exchange Commission or may
quote returns that do not reflect the deduction of all expenses incurred by a
Portfolio. The investment adviser may use these returns in advertising if the
investment adviser believes the nonstandard returns are useful. Nonstandard
returns are always accompanied by total returns calculated as required by Rules
of the Securities and Exchange Commission, which require performance to be
calculated for 1-, 5- and 10-year periods with the deduction of all expenses and
the assumption that all dividends and distributions are reinvested.
In addition, Portfolio performance may be advertised relative to certain indices
and benchmark investments. The composition of the investment in such indices are
the characteristics of such benchmark investments are not identical to, and in
some cases are very different from, those of a Portfolio. These indices and
averages are generally unmanaged and the items included in the calculations of
such indices and averages may be different from those of the equations used by
the Trust to calculate a Portfolio's performance figures.
A Portfolio's investment results will vary from time to time depending upon
market conditions, the composition of its investment portfolio and its operating
expenses. The effective yield and total return for a Portfolio should be
distinguished from the rate of return of a corresponding division of Cova Life's
separate account, which rate will reflect the deduction of additional charges,
including mortality and expense risk charges, and will therefore be lower.
Accordingly, performance figures for a Portfolio will only be advertised if
comparable performance figures for the corresponding division of the separate
account are included in the advertisements. Contract owners should consult the
Contract prospectus for further information. Each Portfolio's results also
should be considered relative to the risks associated with its investment
objectives and policies.
LEGAL COUNSEL AND INDEPENDENT AUDITORS
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut is counsel to the
Trust and passes upon the legality of the Trust's shares.
The independent auditors for the Trust are KPMG LLP, 99 High Street,
Boston, Massachusetts 02110.
INVESTMENT ADVISORY AGREEMENT
Cova Investment Advisory Corporation (the "Investment Adviser"), One Tower
Lane, Suite 3000, Oakbrook Terrace, Illinois 60181-4644 is an Illinois
corporation which was incorporated on August 31, 1993 under the name Oakbrook
Investment Advisory Corporation and which is registered with the Securities and
Exchange Commission as an investment adviser under the Investment Advisers Act
of 1940.
The Investment Adviser commenced providing investment advisory services to
all Portfolios of the Trust as of May 1, 1996 pursuant to an Investment Advisory
Agreement dated April 1, 1996, as amended ("Investment Advisory Agreement").
Prior to this date, Van Kampen American Capital Investment Advisory Corp. had
acted as the investment adviser to all Portfolios of the Trust. The Investment
Advisory Agreement was most recently approved by the Board of Trustees on
November 12, 1999. The Investment Advisory Agreement was most recently approved
by the shareholders of each of the Portfolios of the Trust at a Special Meeting
of Shareholders held on January 6, 2000.
As described in the Prospectus, the Investment Adviser has retained
Sub-Advisers to assist it in managing the Portfolios. The Sub-Advisory
Agreements between the Investment Adviser and each of the Sub-Advisers were
approved most recently by the Board of Trustees on November 12, 1999 and by the
shareholders of each of the Portfolios of the Trust at a Special Meeting of
Shareholders held on January 6, 2000.
Under the terms of the Investment Advisory Agreement, the Investment
Adviser is obligated to (i) manage the investment and reinvestment of the assets
of each Portfolio of the Trust in accordance with each Portfolio's investment
objective and policies and limitations, or (ii) in the event that the Investment
Adviser shall retain a sub-adviser or sub-advisers, to supervise and implement
the investment activities of any Portfolio for which any such sub-adviser has
been retained, including responsibility for overall management and
administrative support including managing, providing for and compensating any
sub-advisers; and to administer the Trust's affairs. The Investment Advisory
Agreement further provides that the Investment Adviser agrees, among other
things, to administer the business affairs of each Portfolio, to furnish offices
and necessary facilities and equipment to each Portfolio, to provide
administrative services for each Portfolio, to render periodic reports to the
Board of Trustees of the Trust with respect to each Portfolio, and to permit any
of its officers or employees, or those of any sub-adviser to serve without
compensation as trustees or officers of the Portfolio if elected to such
positions.
The Investment Advisory Agreement provides that the Investment Adviser will
not be liable for any error in judgment or of law, or for any loss suffered by
the Trust in connection with the matters to which the agreement relates, except
a loss resulting from willful misfeasance, bad faith, or gross negligence on the
part of the Investment Adviser in the performance of its obligations and duties,
or by reason of its reckless disregard of its obligations and duties under the
Agreement.
The Investment Adviser's activities are subject to the review and
supervision of the Trust's Trustees to whom the Investment Adviser renders
periodic reports of the Trust's investment activities.
The Investment Advisory Agreement may be terminated without penalty upon 60
days written notice by either party and will automatically terminate in the
event of assignment.
COMPENSATION. The Investment Adviser receives a fee from the Trust for its
services as investment adviser as described in the Prospectus.
The Investment Adviser calculates the fee each day that the New York Stock
Exchange is open for business based on the net asset value determined for that
day. The fee accrues daily and is paid monthly. The Investment Adviser received
the following fees from each Portfolio during the past three fiscal years.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name of
Portfolio Fiscal Year Ended
1999 1998 1997
Quality Bond Portfolio $ 505,285 $ 165,294 $ 56,257
Small Cap Stock Portfolio $ 687,540 $ 596,903 $292,360
Large Cap Stock Portfolio $1,479,955 $ 402,802 $130,631
Select Equity Portfolio $1,507,688 $1,023,054 $450,572
International Equity Portfolio $ 905,709 $ 717,933 $349,944
Bond Debenture Portfolio $1,210,327 $ 647,086 $196,145
Mid-Cap Value Portfolio $ 247,340 $ 92,358 $ 2,150
Large Cap Research Portfolio $ 241,534 $ 61,036 $ 1,521
Developing Growth Portfolio $ 203,145 $ 67,992 $ 1,753
Balanced Portfolio $ 73,532 $ 27,149 $ 6,200
Equity Income Portfolio $ 62,362 $ 30,163 $ 6,707
Growth & Income Equity Portfolio $ 131,419 $ 53,799 $ 8,283
Lord Abbett Growth & Income Portfolio $5,289,797 N/A N/A
Riggs Stock Portfolio $ 231 N/A N/A
Riggs U.S. Government Securities
Portfolio $ 368 N/A N/A
</TABLE>
The Investment Adviser received no advisory fee with respect to the Emerging
Markets Equity Portfolio or the Riggs Small Company Stock Portfolio through
December 31, 1999 in that these Portfolios had not yet commenced investment
operations as of that date.
EXPENSES OF THE TRUST
Although each Portfolio must bear the expenses directly attributable to it, the
Portfolios are expected to experience cost savings over the aggregate amount
that would be payable if each Portfolio were a separate fund, because they have
the same Trustees, accountants, attorneys and other general and administrative
expenses. Any expenses which are not directly attributable to a specific
Portfolio are allocated on the basis of the net assets of the respective
Portfolios.
For the year ended December 31, 1999, the expenses, taking into account the
waivers and expense assumptions, borne by the Bond Debenture Portfolio amounted
to $1,371,690 or .85% of its average net assets on an annualized basis; the net
expenses borne by the Quality Bond Portfolio amounted to $600,321 or .64% of its
average net assets on an annualized basis; the net expenses borne by the
International Equity Portfolio amounted to $1,253,973 or 1.10% of its average
net assets on an annualized basis; the net expenses borne by the Select Equity
Portfolio amounted to $1,737,044 or .77% of its average net assets on an
annualized basis; the net expenses borne by the Large Cap Stock Portfolio
amounted to $1,704,505 or .75% of its average net assets on an annualized basis;
the net expenses borne by the Small Cap Stock Portfolio amounted to $847,429 or
1.05% of its average net assets on an annualized basis; the net expenses borne
by the Balanced Portfolio amounted to $80,904 or 1.10% of its average net assets
on an annualized basis; the net expenses borne by the Equity Income Portfolio
amounted to $68,615 or 1.10% of its average net assets on an annualized basis;
the net expenses borne by the Growth & Income Equity Portfolio amounted to
$144,592 or 1.10% of its average net assets on an annualized basis; the net
expenses borne by the Mid-Cap Value Portfolio amounted to $308,331 or 1.25% of
its average net assets on an annualized basis; the net expenses borne by the
Large Cap Research Portfolio amounted to $301,679 or 1.25% of its average net
assets on an annualized basis; the net expenses borne by the Developing Growth
Portfolio amounted to $259,188 or 1.15% of its average net assets on an
annualized basis;; the net expenses borne by the Lord Abbett Growth and Income
Portfolio amounted to $5,736,259 or .70% of its average net assets on an
annualized basis; the net expenses borne by the Riggs Stock Portfolio amounted
to $255 or 1.05% of its average net assets on an annualized basis; and the net
expenses borne by the Riggs U.S. Government Securities Portfolio amounted to
$417 or .85% of its average net assets on an annualized basis.
Cova Life and/or the Adviser and/or the Sub-Adviser(s) may at their discretion,
but are not obligated to, assume all or any portion of Trust expenses. For the
year ended December 31, 1999, Cova Life and the Adviser together assumed
expenses of $59,975, with respect to the Quality Bond Portfolio; $55,853, with
respect to the International Equity Portfolio; $21,437 with respect to the Bond
Debenture Portfolio; $412, with respect to the Select Equity Portfolio; $21,826,
with respect to the Large Cap Stock Portfolio; $32,598, with respect to the
Small Cap Stock Portfolio; $70,427 with respect to the Balanced Portfolio;
$70,417 with respect to the Equity Income Portfolio; $64,401 with respect to the
Growth & Income Equity Portfolio; $39,659 with respect to the Mid-Cap Value
Portfolio; $31,960 with respect to the Large Cap Research Portfolio; $42,877
with respect to the Developing Growth Portfolio; $23,044 with respect to the
Riggs Stock Portfolio; and $24,025 with respect to the Riggs U.S. Government
Securities Portfolio.
CODE OF ETHICS
To mitigate the possibility that a Portfolio will be adversely affected by
personal trading of employees, the Trust, the Adviser and the Sub-Advisers have
adopted Codes of Ethics under Rule 17j-1 of the 1940 Act. These Codes contain
policies restricting securities trading in personal accounts of the portfolio
managers and others who normally come into possession of information on
portfolio transactions. These Codes comply, in all material respects, with the
recommendations of the Investment Company Institute. Employees subject to the
Codes of Ethics may invest in securities for their own investment accounts,
including securities that may be purchased or held by the Trust.
SUB-ADVISERS
APPOINTMENT. The Investment Adviser has entered into agreements with registered
investment advisers to carry out the management of the assets of the Portfolios
based on the investment objectives and policies of the Portfolios. The
Sub-Advisers are responsible for deciding which securities to purchase and sell
for the Portfolios and for placing trades for those securities. The prospectus
provides more information about the Sub-Advisers.
COMPENSATION. The Investment Adviser pays the Sub-Advisers fees for their
services, as described in the Prospectus, out of the compensation the Investment
Adviser receives from each Portfolio.
INVESTMENT DECISIONS
Investment decisions for the Trust and for the other investment advisory
clients of the Sub-Advisers are made with a view to achieving their respective
investment objectives and after consideration of such factors as their current
holdings, availability of cash for investment, and the size of their investments
generally. Frequently, a particular security may be bought or sold for only one
client or in different amounts and at different times for more than one but less
than all clients. Likewise, a particular security may be bought for one or more
clients when one or more other clients are selling the security. In addition,
purchases or sales of the same security may be made for two or more clients of a
Sub-Adviser on the same day. In such event, such transactions will be allocated
among the clients in a manner believed by the Sub-Adviser to be equitable to
each. In some cases, this procedure could have an adverse effect on the price or
amount of the securities purchased or sold by the Trust. Purchase and sale
orders for the Trust may be combined with those of other clients of a
Sub-Adviser in the interest of achieving the most favorable net results for the
Trust.
PORTFOLIO TRANSACTIONS
Transactions on U.S. stock exchanges and other agency transactions involve
the payment by the Trust of negotiated brokerage commissions. Such commissions
vary among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign securities often involve the payment of
fixed brokerage commissions, which are generally higher than those in the United
States. There is generally no stated commission in the case of securities traded
in the over-the-counter markets, but the price paid by the Trust usually
includes an undisclosed dealer commission or mark-up. In underwritten offerings,
the price paid by the Trust includes a disclosed, fixed commission or discount
retained by the underwriter or dealer. It is currently intended that the
Sub-Advisers will place all orders for the purchase and sale of portfolio
securities for the Trust and buy and sell securities for the Trust through a
substantial number of brokers and dealers. In so doing, the Sub-Advisers will
use their best efforts to obtain for the Trust the best price and execution
available. In seeking the best price and execution, the Sub-Advisers, having in
mind the Trust's best interests, will consider all factors they deem relevant,
including, by way of illustration, price, the size of the transaction, the
nature of the market for the security, the amount of the commission, the timing
of the transaction taking into account market prices and trends, the reputation,
experience, and financial stability of the broker-dealer involved, and the
quality of service rendered by the broker-dealer in other transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research, statistical, and quotation services from broker-dealers who
execute portfolio transactions for the clients of such advisers. Consistent with
this practice, the Sub-Advisers may receive research, statistical, and quotation
services from any broker-dealers with whom they place the Trust's portfolio
transactions. These services, which in some cases may also be purchased for
cash, include such matters as general economic and security market reviews,
industry and company reviews, evaluations of securities, and recommendations as
to the purchase and sale of securities. Some of these services may be of value
to the Sub-Advisers and/or their affiliates in advising various other clients
(including the Trust), although not all of these services are necessarily useful
and of value in managing the Trust. The management fees paid by the Trust are
not reduced because the Sub-Advisers and/or their affiliates may receive such
services. As permitted by Section 28(e) of the Securities Exchange Act of 1934,
a Sub-Adviser may cause a Portfolio to pay a broker-dealer who provides
brokerage and research services to the Sub-Adviser an amount of disclosed
commission for effecting a securities transaction for the Portfolio in excess of
the commission which another broker-dealer would have charged for effecting that
transaction provided that the Sub-Adviser determines in good faith that such
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker-dealer viewed in terms of that particular
transaction or in terms of all of the accounts over which investment discretion
is so exercised. A Sub-Adviser's authority to cause a Portfolio to pay any such
greater commissions is also subject to such policies as the Adviser or the
Trustees may adopt from time to time.
COMMISSIONS PAID BY THE PORTFOLIOS. The following are the aggregate amounts of
commissions paid by each of the Portfolios for brokerage during the past three
fiscal years:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name of Fiscal Year Ended
Portfolio
1999 1998 1997
Quality Bond Portfolio $ 10,634 N/A N/A
Small Cap Stock Portfolio $ 128,288 $ 91,650 $ 69,720
Large Cap Stock Portfolio $ 174,716 $ 59,636 $ 18,544
Select Equity Portfolio $ 564,579 $437,251 $174,538
International Equity Portfolio $ 267,666 $255,634 $280,279
Bond Debenture Portfolio $ 5,341 $ 3,461 N/A
Mid-Cap Value Portfolio $ 109,084 $ 53,000 $ 3,986
Large Cap Research Portfolio $ 54,923 $ 23,532 $ 1,399
Developing Growth Portfolio $ 25,992 $ 15,664 $ 1,204
Balanced Portfolio $ 6,617 $ 3,945 $ 1,215
Equity Income Portfolio $ 12,897 $ 10,665 $ 2,451
Growth & Income Equity Portfolio $ 16,692 $ 13,871 $ 3,580
Lord Abbett Growth and Income Portfolio $1,325,443 N/A N/A
Riggs Stock Portfolio $ 320 N/A N/A
Riggs U.S. Government Securities
Portfolio N/A N/A N/A
</TABLE>
FINANCIAL STATEMENTS
The Financial Statements and notes thereto for the year ended December 31, 1999
and the independent auditors' report thereon appear in the Trust's Annual Report
for the year ended December 31, 1999, which is incorporated by reference into
this Statement of Additional Information. The Trust delivers a copy of the
Annual Report to investors. In addition, the Trust will furnish, without charge,
additional copies of such Annual Report and copies of the Statement of
Additional Information to investors which may be obtained without charge by
calling the Life Company at (800) 831-LIFE.
APPENDIX - DESCRIPTION OF CORPORATE BOND RATINGS
STANDARD & POOR'S CORPORATION. A brief description of the applicable Standard &
Poor's Corporation ("S&P") rating symbols and their meanings (as published by
S&P) follows:
An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. S&P does not perform an audit
in connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default - capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
LONG-TERM CORPORATE BONDS.
AAA - Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC - Debt rated 'BB', 'B', 'CCC', or 'CC' is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest degree of speculation and 'CC' the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - This rating is reserved for income bonds on which no interest is being
paid.
D - Debt rated 'D' is in default, and payment of interest and/or repayment
of principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from 'A' to 'B' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PROVISIONAL RATINGS: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise judgment with respect to such likelihood and risk.
L - The letter 'L' indicates that the rating pertains to the principal
amount of those bonds where the underlying deposit collateral is fully insured
by the Federal Deposit Insurance Corp.
[DAGGER] - Continuance of the rating is contingent upon S&P's receipt of
closing documentation confirming investments and cash flow.
* - Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement.
NR - Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
MOODY'S INVESTORS SERVICE, INC. A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings (as published
by Moody's Investors Service, Inc.) follows:
LONG-TERM CORPORATE BONDS.
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e. they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
COMMERCIAL PAPER RATINGS
COMMERCIAL PAPER
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The four categories are as
follows:
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative degree
of safety. Those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign designation.
A-1 This designation indicates that the degree of safety regarding timely
payment is very strong.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for
issues designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for
timely of payment. They are, however, somewhat more vulnerable to the
adverse effects changes in circumstances than obligations carrying the
higher designations.
B Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C&D These ratings indicate that the issue is either in default or is
expected to be in default upon maturity.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+." "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection factors. Risk factors
are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk factors
are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection factors
qualify issue as investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics. Liquidity is
not sufficient to ensure against disruption in debt service. Operating factors
and market access may be subject to a high degree of variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree than
issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this rating
have a satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this rating
have characteristics suggesting that the degree of assurance for timely payment
is adequate; however, near-term adverse changes could cause these securities to
be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this rating
have characteristics suggesting a minimal degree of assurance for timely payment
and are vulnerable to near-term adverse changes in financial and economic
conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to indicate
that the rating is based upon a letter of credit issued by a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an untimely
or incomplete payment of principal or interest of unsubordinated instruments
having a maturity of one year or less which are issued by United States
commercial banks, thrifts and non-bank banks; non-United States banks; and
broker-dealers. The following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade category
and indicates that while the debt is more susceptible to adverse developments
(both internal and external) than obligations with higher ratings, capacity to
service principal and interest in a timely fashion is considered adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by a strong capacity for timely repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
Such capacity is more susceptible to adverse changes in business, economic or
financial conditions than for obligations in higher categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
"C" - Obligations for which there is an inadequate capacity to ensure
timely repayment.
"D" - Obligations which have a high risk of default or which are currently
in default.
VARIABLE RATE DEMAND BOND RATINGS
Standard & Poor's assigns "dual" ratings to all long-term debt issues that
have as part of their provisions a variable rate demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, 'AAA/A-1') or if the nominal maturity is short, a rating of
'SP-1+/AAA' is assigned.
NOTES
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assignment:
- - Amortization schedule (the longer the final maturity relative to other
maturities the more likely it will be treated as a note).
- - Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note). Note rating
symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
PREFERRED STOCK RATINGS (STANDARD & POOR'S)
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA A preferred stock issue rated 'AA' also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated 'AAA'.
A An issue rated 'A' is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB An issue rated 'BBB' is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the 'A' category.
BB Preferred stock rated 'BB', 'B' and 'CCC' is regarded, on balance, as
B Predominantly speculative with respect to the issuer's capacity to pay
CCC preferred stock obligations. 'BB' indicates the lowest degree of
speculation and 'CCC' the highest degree of speculation. While such issues will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CC The rating 'CC' is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently paying.
C A preferred stock rated 'C' is a non-paying issue.
D A preferred stock rated 'D' is a non-paying issue with the issuer in
default on debt instruments.
PLUS (+) OR MINUS (-): To provide more detailed indications of preferred
stock quality, the ratings from 'AA' to 'B' may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
NR This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
A preferred stock rating is not a recommendation to purchase, sell, or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
MOODY'S INVESTORS SERVICE, INC. - A brief description of the applicable
Moody's Investors Service, Inc. rating symbols with respect to preferred stock
and their meanings (as published by Moody's Investors Service, Inc.) follows:
PREFERRED STOCK RATINGS (MOODY'S)
Preferred stock rating symbols and their definitions are as follows:
aaa: An issue which is rated 'aaa' is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa: An issue which is rated 'aa' is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance the earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
a: An issue which is rated 'a' is considered to be an upper-medium
preferred stock. While risks are judged to be somewhat greater than in the 'aaa'
and 'aa' classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa: An issue which is rated 'baa' is considered to be a medium grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
ba: An issue which is rated 'ba' is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b: An issue which is rated 'b' generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa: An issue which is rated 'caa' is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
ca: An issue which is rated 'ca' is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual payment.
c: This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
NOTE: Beginning May 3, 1982, Moody's began applying numerical modifiers 1,
2 and 3 in each rating classification from "aa" through "b" in its preferred
stock rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
<PAGE>
--------------------------------------------------------------------------------
February 11, 2000
LETTER FROM THE PRESIDENT
Dear contract holder:
It has been more than a year now since the world began counting down the days to
January 1, 2000 and the looming Y2K computer issue. The opinions of what might
happen varied from those who passed Y2K off as nothing but media hysteria to
those who truly believed we were facing a global Armageddon. Well, I am thankful
to report that the New Year uneventfully came and passed, and the world
celebrated the arrival of the year 2000 with much jubilation.
We at Cova were especially glad to see the New Year come as we anxiously awaited
the closing of the acquisition of the Cova companies by Metropolitan Life
Insurance Company. As you are probably aware, Metropolitan announced their
intention to purchase the Cova companies on August 26, 1999. The transaction was
completed on January 6, 2000, and as I draft this letter, I am pleased to
announce that Cova is now a MetLife company.
For Cova, this transaction meant that we would be affiliated with the largest
life insurance company in North America, with more than $400 billion in assets
under management and more than $1.7 trillion of life insurance in force. For
Cova and its contract holders, being affiliated with MetLife resulted in
immediate benefits as Cova's ratings were quickly upgraded by the following
rating agencies once the closing was announced:
Standard & Poor's AA- (Excellent) for claims-paying ability
Moody's Aa2 (Excellent) for financial strength
A.M. Best A (Excellent) for financial strength
Duff & Phelp's AA+ (Very High) for claims-paying ability
With the deal now behind us, we enter into a planning stage to determine how we
can capitalize on the synergies that exist between the Cova companies and
MetLife. For MetLife, this means a partnership with a company characterized by
award-winning service as well as by the value we bring to our contract holders.
For Cova, this means access to a wealth of resources offered by MetLife.
We look forward to a prosperous and enterprising future as a MetLife company--a
future that will allow us to offer even greater value to you--our contract
holders. Of course, it is to our contract holders that we provide this annual
report of the fund managers in the Cova Series Trust. Also enclosed is the
financial report for the General American Capital Company Money Market Fund. We
thank you for placing your long-term retirement needs in the hands of Cova.
Sincerely,
[Sig L.J. Stensrud] [GRAPHIC OMITTED]
L.J. Stensrud
President and CEO
Cova Life Sales Company
[Cova logo] [GRAPHIC OMITTED]
<PAGE>
--------------------------------------------------------------------------------
Small Cap Stock Portfolio For the year ended 12/31/99
Managed by J.P. Morgan Investment Management
--------------------------------------------------------------------------------
The Small Cap Stock Portfolio finished the year strong up 44.56%. The fund
outperformed its benchmark, the Russell 2000 Index1 in the year ending December
31,1999.
The broad small cap market narrowly edged past the S&P 500 for the year. The
Russell 2000 Index was up 21.26% for the 12 months ending December 31, 1999,
while the S&P 5002 returned 21.04% over the same period. Once again growth
indices dominated by technology shares led the market, while value stocks
lagged. The Russell 2000 Growth Index3 was up 43.09% for the 12 month period
versus the Russell 2000 index +21.26% and the Russell 2000 Value Index4, -1.49%.
The portfolio's outperformance can be attributed to stock selection and sector
allocation. The decision to overweight in the technology sector allowed the
portfolio to end the year well ahead of the benchmark. For the past twelve
months, SDL Inc. (+1,000.3%), a company that manufactures semiconductor lasers
and fiber optic products had the biggest impact on portfolio performance. The
company rallied in-line with other tech infrastructure companies that enhance
broadband capabilities. Orbital Sciences Corp. (-57.8%), a company that designs
and manufactures space and information systems, was the largest detractor to
performance over the past 12 months due to earnings shortfalls and accounting
restatements.
Though the portfolio went into year-end with significant overweighted positions
in both technology and communications companies, over the month of December we
began trimming these positions. We've shifted more assets into the consumer
services and insurance sectors, which we believe are attractively valued,
relative to their long-term earnings potential. The portfolio remains highly
diversified and well positioned for a broadening in the market. On a valuation
basis, our internal valuation tools, as well as current price-to-earnings
ratios, are still near historical extremes in favor of small caps. Given both
the prolonged underperformance of the small-cap market and relative valuation,
we continue to believe small-cap stocks are undervalued relative to large-cap
stocks. In addition we believe that the portfolio, which is highly diversified,
is well positioned to absorb volatility.
1 The Russell 2000 Index is an unmanaged index consisting of the stocks of 2000
U.S.-based companies. The Index does not include fees or expenses and is not
available for direct investment.
2 The S&P 500 Index is an unmanaged index consisting of stocks of 500 of the
largest U.S.-based companies. The Index does not include fees or expenses and is
not available for direct investment.
3 The Russell 2000 Growth Index is an unmanaged index and measures the
performance of those Russell 2000 companies with higher price-to-book ratios and
higher forecasted growth values. The index does not include fees or expenses and
is not available for direct investment.
4 The Russell 2000 Value Index measures the performance of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth values.
This index does not include fees or expenses and is not available for direct
investment.
Marian U. Pardo
Alexandra Wells
Portfolio Managers
J.P. Morgan Investment Management Inc.
<TABLE>
<CAPTION>
Top 10 Portfolio Holdings by Market Value
As of 12/31/99
% of portfolio
------------------------------------------ ------------------
<S> <C>
Human Genome Sciences Inc. 2.6
------------------------------------------ ------------------
Microstrategy Inc. 2.2
------------------------------------------ ------------------
Checkfree Holdings Inc. 1.8
------------------------------------------ ------------------
Applied Micro Circuits Corp. 1.7
------------------------------------------ ------------------
Georgia Gulf Corp. 1.3
------------------------------------------ ------------------
Geon Co. 1.3
------------------------------------------ ------------------
Advanced Fibre Communications Inc. 1.3
------------------------------------------ ------------------
Cooper Cameron Corp. 1.2
------------------------------------------ ------------------
Wellman Inc. 1.1
------------------------------------------ ------------------
Allegiance Telecom Inc. 1.1
------------------------------------------ ------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Sector Allocation (% of portfolio market value)
As of 12/31/99
-----------------------------------------------------------------------
JPM small cap pie chart
<S> <C>
Technology 35.1
Healthcare/Drugs 10.6
Finance 9
Basic Industry 7.6
Consumer Services 6.5
Capital Goods 3.6
Energy 3.6
Consumer Staples 3.1
Utilities 2.5
Other 18.4
-----------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Small Cap Stock Portfolio, managed by
J.P. Morgan Investment Management vs. Russell 2000 Index
Growth Based on $10,000+
[Line Graph]
JPM small cap vs Russell 2000 plot points
JPM Small Cap Russell 2000
<S> <C> <C>
10000 10000
"6/96" 9955 9967
10091 10001
"12/96" 10825 10521
10089 9977
"6/97" 11630 11595
13371 13320
"12/97" 13135 12874
14739 14169
"6/98" 13753 13508
10797 10787
"12/98" 12426 12546
11834 11865
"6/99" 13172 13710
13293 12844
"12/99" 17963 15172
</TABLE>
<TABLE>
<CAPTION>
----------------------------- ---------------- ----------- -------------------
Average Annual
Return1
----------------------------- ---------------- ----------- -------------------
1 Year 3 Year Since inception+
----------------------------- ---------------- ----------- -------------------
<S> <C> <C> <C>
Small Cap Stock Portfolio,
managed by JPMIM 44.56% 18.23% 17.30%
----------------------------- ---------------- ----------- -------------------
Russell 2000 Index 21.26% 13.08% 10.87%
----------------------------- ---------------- ----------- -------------------
</TABLE>
+Performance is shown from date of initial public offering, May 1, 1996.
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Small Cap
Stock Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the
return on the investment will fluctuate, and redemption proceeds may be higher
or lower than an investor's original cost.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE>
--------------------------------------------------------------------------------
Quality Bond Portfolio For the year ended 12/31/99
Managed by J.P. Morgan Investment Management
--------------------------------------------------------------------------------
The Quality Bond Portfolio provided a total return of -1.54% for the year ending
December 31, 1999. The Salomon Broad Investment Grade Index1 returned -0.84% for
the same time period.
Bond yields ended the year sharply higher as investors reassessed the
strengthening economy and anticipated tighter monetary policy after the Y2K
turn. Consumption continued to grow rapidly as third quarter final GDP at 5.7%
was revised almost a full percentage point above the original estimate. The
strong equity rally in December suggests the Fed's tightening action thus far
will do little to stem economic growth. Low unemployment, firm wage laws,
together with the unprecedented external deficit, imply the need to slow the
economy to a more sustainable pace, even in the absence of any significant
consumer price pressures. The Salomon BIG Index fell 0.2% for the quarter
bringing the full year decline to -0.8%.
Earlier in the year, the Portfolio was conservatively positioned in corporate
bonds and held a heavy allocation to mortgage backed securities. In addition we
maintained an overweight position in AAA rated agency debenture bonds. Towards
the end of the year, the Portfolio's largest positions, vis-a-vis the major
aggregate indexes, reflected our positive outlook on mortgages relative to U.S.
Treasuries. The corporate sector outperformed Treasuries during the last
quarter. This was primarily due to the abatement of Y2K fears in the market and
the presence of buyers who had built up cash and were stretching for yield ahead
of the first quarter. The Portfolio was modestly overweighted in the corporate
sector and we remained comfortable with the overweight position in anticipation
of a strong economic backdrop and light near-term supply.
Following the late October Fed tightening and their move to neutral bias,
Treasury yields fell by approximately 30 basis points. With the view that this
move put yields below justifiable levels, we shifted the Portfolio's duration
position early in November from neutral to a modest short position relative to
the index. We maintained this duration position through the end of the year.
With little sign of any material slowing in U.S. growth, aside from some
moderation in the construction sector, the U.S. bond market lacked fundamental
support at year-end. Strong business and consumer confidence, a robust equity
market and very buoyant labor market suggest the need for additional Fed policy
tightening. The market continues to discount an insufficient amount of
tightening this year in order to slow the economy to an acceptable pace. As a
result, we expect to continue to remain defensive in the first half of next year
in terms of the Portfolio's duration positions as U.S.Treasury yields should
continue to move higher.
1 The Salomon Brothers Broad Investment-Grade Bond Index (BIG) is a
market-capitalized weighted index that includes fixed-rate Treasury, government
sponsored, corporate (Baa3/BBB or better) and mortgage securities. The Index is
not available for direct investment and does not reflect any expenses.
Harriet T. Huber
William G. Tennille
Portfolio Managers
<TABLE>
<CAPTION>
J.P. Morgan Investment Management Inc.
------------------------------------------------------------------------------
Asset Allocation (% of portfolio market value)
As of 12/31/99
JPM qual bond pie chart
<S> <C>
U.S. Agency and Corporate Mortgage Backed 53.3
Corporate Investment Grade 24.3
U.S. Treasury and Agency 13.6
Asset Backed Securities 6.3
Corporate High Yield 1.4
Emerging Market Debt 1.1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quality Bond Portfolio, managed by J.P. Morgan Investment Management
vs. Salomon Brothers Broad Investment-Grade Bond Index
Growth Based on $10,000+
[Line Graph]
JPM qual bond vs Salomon plot points
JPM Quality Bond Salomon
<S> <C> <C>
10000 10000
"6/96" 10095 10129
10140 10318
"12/96" 10577 10629
10488 10574
"6/97" 10845 10955
11190 11319
"12/97" 11495 11652
11706 11840
"6/98" 11983 12114
12481 12617
"12/98" 12469 12673
12390 12609
"6/99" 12209 12497
12277 12588
"12/99" 12277 12566
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------ -------------------- -------- --------------
Average Annual
Return1
------------------------------------------ -------------------- -------- --------------
1 Year 3 Year Since
inception+
------------------------------------------ -------------------- -------- --------------
<S> <C> <C> <C>
Quality Bond Portfolio,
managed by JPMIM -1.54% 5.18% 5.79%
------------------------------------------ -------------------- -------- --------------
Salomon Brothers BIG Index -0.84% 5.74% 6.43%
------------------------------------------ -------------------- -------- --------------
</TABLE>
+Performance is shown from date of initial public offering, May 1, 1996.
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Quality Bond
Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the return on
the investment will fluctuate, and redemption proceeds may be higher or lower
than an investor's original cost.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE>
--------------------------------------------------------------------------------
Select Equity Portfolio For the year ended 12/31/99
Managed by J.P. Morgan Investment Management
--------------------------------------------------------------------------------
The Select Equity Portfolio returned 9.71% for the year ended December 31,1999.
Our investment approach, which selects stocks which are the most undervalued
relative to their longer term earnings and cash flow prospects, proved less
effective in a market fiercely driven by price momentum.
The confluence of a strong economy, abundant liquidity, and high investor
confidence going into the Year 2000 rollover fueled a stunning year-end rally.
Stocks surged during the final quarter of 1999, leading the major indexes to
close out the millennium at record highs. Still, despite outstanding performance
in the broader market averages, 1999 was a turbulent year with significant
dispersion in returns between sectors and investment styles. Once again, growth
outperformed value, large-cap stocks outperformed small-cap stocks, and
technology stocks, despite a difficult first half, delivered spectacular
performance for the year. Internet obsession led the technology sector to jump
109% -- a stunning achievement, particularly following last year's gain of 78%.
Technology now accounts for 30% of the market capitalization of the S&P 500
index.1
By contrast, six of the sixteen sectors we track actually lost value during
1999: consumer staples (-12.9%), utilities (-9.7%), transportation (-9.6%),
drugs (-9.3%), health service (-7.8%), and consumer cyclical (-7.8%). Indeed,
fully 49.5% of the stocks in the S&P 500 finished the year lower. This explains
why an equal-weighted version of the index would have produced roughly one-half
the index return, or 11.9%, for the year.
Like the market, the sector performance within the fund showed both a wide
distribution of individual returns and a narrow concentration of outperforming
issues. Stock selection among technology issues was particularly beneficial. Sun
Microsystems gained 262% while Internet optimism also propelled holdings in
Cisco Systems (+131%) and EMC Corp (+116%). Improving semiconductor
supply/demand characteristics, together with explosive growth in wireless
communications, powered Texas Instruments shares 126% higher. Underweighting PC
makers Dell and Compaq, which underperformed during the year, also contributed
to results. On the other hand, stock picks in the multi-industry group performed
poorly. Waste Management was the worst performer in the portfolio, losing 63% of
its value as it restated earnings and lowered forecasts. Underweighting GE,
whose 54% gain accounted for almost 10% of the rise in the S&P 500 index, also
hurt results.
The strength of high-profile equity indexes despite notable increases in bond
yields and measured price inflation was arguably the defining feature of the
financial market action in 1999. The Federal Reserve's active pursuit of a
generous monetary policy on the eve of the calendar date change to 2000,
coincident with high investor confidence, produced this result. Going forward,
we believe the medium-term goal will be tighter, not easier, monetary
conditions. Rising interest rates should curb euphoric consumer confidence and
spending, and could dampen upside potential for U.S. stocks. Technology may be
particularly vulnerable in this scenario, since stocks in this sector trade at
2.5 times the market multiple and currently claim over 80% of net domestic
mutual fund inflows.
Peggy Adams
Thomas M. Luddy
Portfolio Managers
J.P. Morgan Investment Management Inc.
1 The S&P 500 Index is an unmanaged index consisting of stocks of 500 of the
largest U.S.-based companies. The Index does not include fees or expenses and is
not available for direct investment.
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Sector Allocation (% of portfolio market value)
As of 12/31/99
JPM select equity pie chart
<S> <C>
Technology 24.6
Finance 9.7
Telephone 9.3
Multi-Industry 8.1
Drugs 6.9
Energy 6.4
Basic Industry 6.2
Consumer Staples 6
Services 5.7
Other 17.1
</TABLE>
<TABLE>
<CAPTION>
Top 10 Portfolio Holdings by Market Value
As of 12/31/99
% of portfolio
--------------------------------- -----------------
<S> <C>
Microsoft Corp. 5.3
--------------------------------- -----------------
Exxon Mobil Corp. 4.3
--------------------------------- -----------------
Tyco International Ltd. 3.1
--------------------------------- -----------------
Cisco Systems Inc. 3.1
--------------------------------- -----------------
General Electric Co. 3.0
--------------------------------- -----------------
Sun Microsystems Inc. 2.0
--------------------------------- -----------------
Intel Corp. 2.0
--------------------------------- -----------------
AT&T Corp. 1.9
--------------------------------- -----------------
MCI WorldCom Inc. 1.9
--------------------------------- -----------------
Rohm & Haas Co. 1.7
--------------------------------- -----------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Select Equity Portfolio, managed by
J.P. Morgan Investment Management vs. S&P 500 Index
Growth Based on $10,000+
[Line Graph]
JPM select equity vs S&P 500 plot points
JPM Sel Equity S&P 500
<S> <C> <C>
10000 10000
"6/96" 9852 10252
10004 10507
"12/96" 10837 11323
10932 11574
"6/97" 12966 13531
14372 14481
"12/97" 14224 14835
15930 16842
"6/98" 16147 17332
14384 15547
"12/98" 17496 18791
17779 19664
"6/99" 19476 20984
16955 19608
"12/99" 19195 22460
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------- ------------------------ --------
Average Annual Return1
------------------------------------------- ------------------------ --------
1 Year 3 Year Since
inception+
----------------------------- ----------- ------------ ----------------
<S> <C> <C> <C>
Select Equity Portfolio,
managed by JPMIM 9.71% 20.92% 19.44%
----------------------------- ----------- ------------ ----------------
S&P 500 Index 21.04% 27.56% 23.93%
----------------------------- ----------- ------------ ----------------
</TABLE>
+Performance is shown from date of initial public offering, May 1, 1996.
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Select Equity
Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the return on
the investment will fluctuate, and redemption proceeds may be higher or lower
than an investor's original cost.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE>
--------------------------------------------------------------------------------
Large Cap Stock Portfolio For the year ended 12/31/99
Managed by J.P. Morgan Investment Management
--------------------------------------------------------------------------------
The Large Cap Stock Portfolio returned 17.64% for the year ended December
31,1999. The S&P 5001 returned 21.04% during this period, posting record highs
by climbing to a record 1,469.25 for the year.
After a strong 1998 and first half of 1999, the third and fourth quarters were
difficult ones for the Large Cap Stock Portfolio. In the second half of the
year, the equity market reverted back to a very narrow group of outperforming
stocks as investors sought out the companies with positive earnings and price
momentum.
During the latter half of the year, investors tended to focus on short-term
earnings, projecting them forward indefinitely, which was a challenge to the
performance of the portfolio. The investment strategy employed by the portfolio
focuses on normalized earnings and intermediate growth rates, thus it tended to
be challenged by the unprecedented market environment that we experienced during
the latter part of the year. In addition, while the portfolio is well
diversified and its risk controls are robust, during times of extreme internal
market divergence, even modest exposures to common risk factors such as price
momentum can result in out of scale performance results.
Finally, our analysts depend on accurate financial data from the companies that
they cover to set their earnings forecasts. Companies that look attractive to
our analysts are overweighted in the portfolio and in some instances, less than
candid disclosures by company management followed by divergent reported earnings
resulted in a sharp correction in stock prices. In particular, underperformance
in the second half of the year was led by Waste Management, which was
overweighted and detracted from relative performance due to the accounting
issues discussed above. Strong relative performance in the tech sector added to
performance but was more than offset by challenges from the Services sector
(primarily due to an overweight in Service Corp.) and Insurance (an underweight
in AIG and an overweight in UnumProvident was pressed by the market's momentum
buying in AIG). Additionally, difficulty with American Home Products and diet
pill litigation also hurt performance.
We remain confident in our investment process and risk controls, and expect that
the historically wide spread between the most and least attractive names in our
universe suggests opportunities ahead.
1 The S&P 500 Index is an unmanaged index consisting of stocks of 500 of the
largest U.S.-based companies. The Index does not include fees or expenses and is
not available for direct investment.
John M. Devlin, Jr.
James Wiess
Portfolio Managers
J.P. Morgan Investment Management Inc.
<TABLE>
<CAPTION>
Top 10 Portfolio Holdings by Market Value
As of 12/31/99
% of portfolio
--------------------------------------------------
<S> <C>
Microsoft Corp. 5.9
--------------------------------- ----------------
General Electric Co. 4.1
--------------------------------- ----------------
Cisco Systems Inc. 3.9
--------------------------------- ----------------
Intel Corp. 3.2
--------------------------------- ----------------
Exxon Mobil Corp. 3.0
--------------------------------- ----------------
Lucent Technologies Inc. 2.6
--------------------------------- ----------------
Wal-Mart Stores Inc. 2.4
--------------------------------- ----------------
SBC Communications Corp. 2.1
--------------------------------- ----------------
MCI WorldCom Inc. 2.0
--------------------------------- ----------------
Procter & Gamble Co. 2.0
--------------------------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
Top 10 Portfolio Sectors (% of portfolio market value)
As of 12/31/99
JPM Large Cap pie chart
<S> <C>
Data Processing/Electronics 29.1
Finance 10.1
Telephone 8.4
Drugs 7.9
Multi-Sector/Misc. Industrial 7.6
Retail 6.6
Consumer Staples 6.1
Energy 5.6
Services 5
Other 13.6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Large Cap Stock Portfolio, managed by
J.P. Morgan Investment Management vs. S&P 500 Index
Growth Based on $10,000+
[Line Graph]
JPM Large Cap vs. S&P 500 plot points
JPM Large Cap S&P 500
<S> <C> <C>
10000 10000
"6/96" 10237 10252
10419 10507
"12/96" 11467 11323
11724 11574
"6/97" 13863 13531
14902 14481
"12/97" 15238 14835
17516 16842
"6/98" 18192 17332
16400 15547
"12/98" 20161 18791
20840 19664
"6/99" 22731 20984
21170 19608
"12/99" 23717 22460
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------ ---------------------
Average Annual
Return1
------------------------------------------ ---------------------
1 Year 3 Year Since inception+
----------------------------- --------- -------- ----------------------
<S> <C> <C> <C>
Large Cap Stock Portfolio,
managed by JPMIM 17.64% 27.50% 26.52%
----------------------------- --------- -------- ----------------------
S&P 500 Index 21.04% 27.56% 23.93%
----------------------------- --------- -------- ----------------------
</TABLE>
+Performance is shown from date of initial public offering, May 1, 1996.
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Large Cap
Stock Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the
return on the investment will fluctuate, and redemption proceeds may be higher
or lower than an investor's original cost.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE>
--------------------------------------------------------------------------------
International Equity Portfolio For the year ended 12/31/99
Managed by J.P. Morgan Investment Management
--------------------------------------------------------------------------------
The International Equity Portfolio returned 28.52% for the year-end December 31,
1999. The Portfolio outperformed the benchmark, MSCI EAFE Index1, which returned
27.30% for the same time period.
This outperformance reflects added value from stock selection in all major
regions: the United Kingdom, continental Europe, and particularly Japan. Japan
was the best performer amongst the major markets, reflecting both the surprising
strength of its economy as well as signs of corporate restructuring. Two of our
Japanese holdings that performed quite well were Softbank, the technology
company with Internet interests, and Sony, which has transformed itself from an
audio-visual hardware manufacturer to an entertainment conglomerate with its
PlayStation. Another holding, Mitsubishi Chemical has been increasingly
proactive in managing costs and improving profitability. Amongst the smaller
markets, Hong Kong and Singapore did particularly well, with the surprising
strength of the Asia region's recovery driving the returns to levels that even
outperformed Japan.
Looking forward, the prospect of a further round of monetary policy tightening
by central banks in the first quarter may dampen sentiment towards equities.
However, the background of continuing global economic growth is supportive. In
the UK we believe economic growth is set to continue, although the prospect of
further interest rate increases is likely to prove to be a dampening effect. As
for vulnerability in respect to Federal tightening, the Japanese central bank
will maintain an easy monetary policy, but the market may pause after a strong
1999. Continental Europe continues to look attractive with low inflation and a
strong improvement in corporate earnings. There is also still significant
potential for corporate restructuring, and the expectation of a high level of
mergers and acquisition and initial public offering activity.
1 The Morgan Stanley Capital International Europe, Australia and Far East Index
is an unmanaged index and is an aggregate of 15 individual country indexes that
collectively represent many of the major markets of the world. The Index does
not include fees or expenses and is not available for direct investment.
Nigel Emmett
Paul Quinsee
Portfolio Managers
J.P. Morgan Investment Management Inc.
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Country Allocation (% of portfolio market value)
As of 12/31/99
JPM Int. Equity pie chart
<S> <C>
United Kingdom 17.9
Japan 19.3
France 11.5
Germany 10.8
Netherlands 8.6
Switzerland 6.9
Spain 4.8
Italy 4.2
Sweden 3.5
Other 12.5
</TABLE>
<TABLE>
<CAPTION>
Top 10 Portfolio Holdings by Market Value
As of 12/31/99
% of portfolio
------------------------------------- ---------------
<S> <C>
Mannesmann AG 2.4
------------------------------------- ---------------
LM Ericcson 2.3
------------------------------------- ---------------
Total Cie Francaise Petroles (Fina) 2.0
------------------------------------- ---------------
BP Amoco Plc 2.0
------------------------------------- ---------------
Telefonica S.A. 1.8
------------------------------------- ---------------
Nokia Oyj 1.7
------------------------------------- ---------------
Roche Holding AG 1.7
------------------------------------- ---------------
Nippon Telegraph and Telephone Corp. 1.6
------------------------------------- ---------------
Vodafone Group Plc 1.6
------------------------------------- ---------------
Vivendi 1.5
------------------------------------- ---------------
------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
International Equity Portfolio, managed by J.P. Morgan Investment Management
vs. MSCI EAFE Index
Growth Based on $10,000+
[Line Graph]
JPM IE VS MSCI EAFE plot points
JPM Int. Equity MSCI EAFE
<S> <C> <C>
10000 10000
"6/96" 10172 10059
10149 10054
"12/96" 10859 10221
11032 10068
"6/97" 12003 11383
12090 11310
"12/97" 11491 10432
12913 11974
"6/98" 13189 12109
11008 10396
"12/98" 13107 12553
13372 12736
"6/99" 13851 13069
14230 13651
"12/99" 16846 15979
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------- ---------------------
Average Annual
Return1
---------------------------------- ---------------- -------- ---------------
1 Year 3 Year Since
inception+
---------------------------------- ---------------- -------- ---------------
<S> <C> <C> <C>
International Equity Portfolio,
managed by JPMIM 28.52% 15.80% 15.26%
---------------------------------- ---------------- -------- ---------------
MSCI EAFE Index 27.30% 16.00% 13.64%
---------------------------------- ---------------- -------- ---------------
</TABLE>
+Performance is shown from date of initial public offering, May 1, 1996.
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the International
Equity Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the
return on the investment will fluctuate, and redemption proceeds may be higher
or lower than an investor's original cost.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE>
--------------------------------------------------------------------------------
Bond Debenture Portfolio For the year ended 12/31/99
Managed by Lord, Abbett & Co.
--------------------------------------------------------------------------------
Market Review
1999 was a difficult year for bond investors. Interest rates began to rise
during the first and second quarter of 1999 on the heels of exceptional U.S.
economic growth. Despite little hard evidence of increasing wages or rising
basic materials costs, the strength of the U.S. economy sparked concerns about a
surge in inflation. Given these conditions, the U.S. Federal Reserve Board
increased its key, short-term interest rate three separate times in 1999.
Throughout the year, inflationary fears continued to plague the bond market.
Investors worried that continued growth in the U.S. economy and rising oil
prices would spark inflation even though excess capacity in industrial
materials, a competitive world economy, high productivity, and low unemployment
were still prominent. This tug of war between continued U.S. economic growth and
the fear of escalating inflation resulted in one of the flattest bond markets in
recent years, and many bond prices ended the year in decline. The notion that
additional interest rate increases may lie ahead merely added to the ills of the
U.S. bond market.
Portfolio Review
Overall, high-yield bonds held up better than government bonds despite
challenging market conditions and the fact that interest rates rose 200 basis
points (2%) during the past 15 months. The Portfolio's focus on
high-yield/lower-rated bonds enabled it to perform well when compared to
traditional government or investment-grade bond portfolios. Throughout the year,
over 65% of the Portfolio consisted of high-yield bonds in order to take
advantage of the tremendous yield advantages over Treasuries. Convertible
securities, which posted solid returns as the stock market advanced, helped
boost the Portfolio's performance. We continued to find good value in the
technology, drug, telecommunications and media sectors. We maintained our
moderate exposure to mortgage-backed securities, investing mainly in new, higher
coupon FNMA bonds that were acquired at discount prices. If inflation remains in
check, we may increase our exposure to these mortgage securities in lieu of
Treasuries.
Outlook
We believe that the economy is experiencing a return to the inflation levels we
had before the global deflationary prices of 1998, rather than a new level of
high inflation. We will continue to be watchful of the Fed in light of talks of
a rate hike in early 2000. However, we feel that bonds represent excellent value
given today's level of inflation, and will continue to be attractive if the
inflation level remains in the area of 2-3%. While in the short term we do not
anticipate a meaningful decline in interest rates, we remain encouraged by signs
such as lower housing starts, low inflation, and a U.S. government budget
surplus. Typically, these signs indicate that the U.S. economy is slowing -- a
factor which would bode well for the bond markets.
Christopher J. Towle
Portfolio Manager
Lord, Abbett & Co.
<TABLE>
<CAPTION>
Top 10 Corporate Holdings by Market Value
As of 12/31/99
% of portfolio
------------------------------------------ ----------------
<S> <C>
NTL Inc. 2.0
------------------------------------------ ----------------
United Pan-Europe Communications NV 1.2
------------------------------------------ ----------------
Intermedia Communications of Florida Inc. 1.2
------------------------------------------ ----------------
Exodus Communications Inc. 1.2
------------------------------------------ ----------------
Devon Energy Corp. 1.2
------------------------------------------ ----------------
EchoStar Communications Corp. 1.1
------------------------------------------ ----------------
McLeodUSA Inc. 1.0
------------------------------------------ ----------------
Iron Mountain Inc. 1.0
------------------------------------------ ----------------
Sinclair Broadcast Group, Inc. 1.0
------------------------------------------ ----------------
Call-Net Enterprises Inc. 0.9
------------------------------------------ ----------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------
Portfolio Composition by Credit Quality
Ratings % of portfolio
--------------------------------------------- ----------------
<S> <C>
U.S. Treasury and Agency 13.6
AA 1.0
A 1.8
BBB 10.1
BB 18.7
B 40.4
CCC 2.5
NR 11.9
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------
Top Portfolio Sectors (% of portfolio market value)
As of 12/31/99
LA Bond Deb pie chart
<S> <C>
High Yield 61.3
U.S. Treasury and Agency 13.6
Convertibles 15.4
Other 4.7
Preferred Stock 0.5
Convertible Preferred Stock 2
Common Stock 2.5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Bond Debenture Portfolio, managed by Lord Abbett vs. Indices2
Growth Based on $10,000+
[Line Graph]
LA bond deb vs indices plot points
LA Bond Deb ML Conv Ind FB Hi Yield Ind Salomon BIHGI
<S> <C> <C> <C> <C>
"6/96" 10000 10000 10000 10000
10202 10069 10022 10129
"12/96" 10718 10288 10398 10318
11359 10685 10857 10629
"6/97" 11433 10720 11017 10574
12148 11722 11493 10955
"12/97" 12779 12895 12033 11319
13053 12776 12228 11652
"6/98" 13711 13874 12595 11840
13792 13768 12754 12114
"12/98" 13198 12232 11970 12617
13870 13917 12299 12673
"6/99" 14083 14648 12501 12609
14005 15758 12646 12497
"12/99" 13813 15686 12443 12588
14342 20083 12702 12566
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------- --------------------- ----------
Average Annual
Return1
----------------------------------------- --------------------- ----------
1 Year 3 Year Since
inception+
--------------------------------- ------------ ---------- ---------------
<S> <C> <C> <C>
Bond Debenture Portfolio
managed by Lord Abbett 3.40% 8.30% 10.32%
--------------------------------- ------------ ---------- ---------------
First Boston High Yield Index2 3.28% 5.37% 6.98%
--------------------------------- ---------------------- ---------------
Salomon Brothers Broad
Investment High Grade Index2 -0.84% 5.74% 6.43%
--------------------------------- ------------ ---------- ---------------
Merrill Lynch All
Convertible Index2 44.31% 22.93% 20.23%
--------------------------------- ------------ ---------- ---------------
</TABLE>
+Performance is shown from date of initial public offering, May 1, 1996.
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Bond Debenture
Portfolio managed by Lord Abbett and the return on the investment will
fluctuate, and redemption proceeds may be higher or lower than an investor's
original cost.
2 The First Boston High Yield Index is representative of the lower rated debt
(including straight-preferred stocks) investments in the portfolio; the Merrill
Lynch All Convertible Index is representative of the equity-related securities
in the portfolio; and Salomon Brothers Broad Investment High Grade Index is
representative of the high-grade debt in the portfolio. The three indices chosen
have elements of these three categories, but since there is no one index
combining all three categories, these three separate indices may not be a valid
comparison for the Portfolio. You may not directly invest in any of these
indices. The indices do not reflect any expenses. Performance data is historical
and includes changes in share price and reinvestment of dividends and capital
gains.
Performance numbers are net of all Portfolio operating expenses, but they do not
include the administrative fee, the insurance risk charge, the annual contract
maintenance charge or the 5% withdrawal charge imposed by the Cova variable
annuity contract. If this performance information included the effect of the
insurance charges, performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software and Bloomberg. Comparison line graphs chart
the hypothetical growth of $10,000 over a given historical period of time.
Although data are gathered from reliable sources, accuracy and completeness
cannot be guaranteed.
<PAGE>
--------------------------------------------------------------------------------
Mid-Cap Value Portfolio For the year ended 12/31/99
Managed by Lord, Abbett & Co.
--------------------------------------------------------------------------------
Market Review
After a tough start in early 1999, value investors were rewarded briefly in the
second quarter as performance in the stock market broadened out after several
quarters of very narrow leadership. The stocks of mid-sized companies handily
outperformed the large-cap growth stocks that had dominated the attention of
investors. Stocks then retreated during the third quarter as fears of rising
interest rates and slower earnings growth dampened investors' enthusiasm. Market
leadership again narrowed and only a few specific industries were able to post
gains. Performance across various market indices was similar, unlike earlier in
the year when large capitalization stocks were the dominant leaders. Once again,
stocks snapped back in the final quarter of the year. However, only a narrow
group of high performers continued to dominate the market as the stocks of
technology and communication companies overwhelmed the performance of the
broader indices. As evidence, the S&P Mid-Cap 400 BARRA Value Index (mid-sized
companies whose stocks are considered "value" oriented) was up only 2.3% for
1999, while the S&P Mid-Cap 400 BARRA Growth Index (mid-sized companies whose
stocks are considered "growth" oriented) advanced by 28.7%.1
Portfolio Review
Technology stocks performed strongly throughout the year and, consistent with
the overall market, the Portfolio benefited from its technology holdings.
Investments in the electric utilities sector performed well as a result of a
trend toward deregulation in the industry. Energy stocks were among the best
performers during the third quarter, and the Portfolio benefited from its
overweighting in this sector. Financial stocks were among the weakest
performers. We consciously reduced the Portfolio's exposure to banks and other
financial companies in 1998 and benefited in early 1999 from that decision.
However, the few financial company stocks that we held (primarily insurance
companies) provided positive contributions as fears of aggressive interest rate
hikes by the Federal Reserve moderated and the prospect for insurance industry
price hikes improved late in the year. Despite the bounce back in financials, we
will probably remain underweighted in this group, as we see few catalysts to
drive strong performance in this sector.
Outlook
With stocks of mid-sized companies selling at appealing discounts in comparison
to large-company stocks and with many mid-sized companies displaying strong
fundamentals and promising business developments, we believe the potential
reward opportunities in the mid-cap value market are excellent. In our opinion,
the greater risk now exists in stocks that have experienced the strongest recent
performance; primarily large companies with strong expected earnings growth and
technology companies. We feel these stocks have become very expensive relative
to their fundamental business characteristics. We expect that a trend favoring
value stocks will resume in 2000. We look forward to executing our
research-driven, value-based investment strategy in such an environment.
Edward von der Linde
Portfolio Manager
Lord, Abbett & Co.
1The S&P Mid-Cap 400 Index consists of 400 domestic stocks chosen for market
size, liquidity, and industry group representation. The S&P/BARRA Growth and
Value Indexes are constructed by dividing the stocks in an index according to a
single attribute: book-to-price ratio. This splits the index into two mutually
exclusive groups designed to track two of the predominant investment styles in
the U.S. equity market. The Value Index contains stocks with higher
book-to-price ratios; conversely, the Growth Index includes stocks with lower
book-to-price ratios. Indices cited are unmanaged, do not reflect the deduction
of fees or expenses and are not available for direct investment.
<TABLE>
<CAPTION>
Top 10 Holdings by Market Value
As of 12/31/99
% of portfolio
-------------------------------------------------- ---------------
<S> <C>
Dynergy Inc. 4.0
-------------------------------------------------- ---------------
Polymer Group Inc. 3.8
-------------------------------------------------- ---------------
Cabletron Systems Inc. 3.2
-------------------------------------------------- ---------------
CK Witco Corp. 3.1
-------------------------------------------------- ---------------
Varian Medical Systems Inc. 3.1
-------------------------------------------------- ---------------
Varian Semiconductor Equipment Associates Inc. 2.9
-------------------------------------------------- ---------------
Mylan Laboratories Inc. 2.9
-------------------------------------------------- ---------------
Illinova Corp. 2.8
-------------------------------------------------- ---------------
Caremark Rx Inc. 2.6
-------------------------------------------------- ---------------
EOG Resources Inc. 2.4
-------------------------------------------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------
Top 10 Portfolio Sectors (% of portfolio market value)
As of 12/31/99
LA mid cap pie chart
<S> <C>
Energy 15.5
Finance 11.2
Utilities 15.8
Not Classified 8.4
Other 1.8
Capital Goods 2.2
Technology 8.2
Basic Industry 7.8
Consumer Non Cyclicals 22.1
Consumer Cyclicals 7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Mid-Cap Value Portfolio, managed by Lord Abbett vs. Russell Midcap Index2
Growth Based on $10,000+
[Line Graph]
LA mid cap vs Rus mid cap plot points
LAmid cap Russ mid cap
<S> <C> <C>
10000 10000
10440 10571
"12/97" 10490 10689
11361 11844
"6/98" 11308 11665
9383 9935
"12/98" 10606 11767
10125 11712
"6/99" 11829 12984
10940 11814
"12/99" 11211 13851
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------- ---------------------
Average Annual
Return1
--------------------------- ---------------------
1 Year Since
inception+
--------------------------- ---------------------
<S> <C> <C>
Mid-Cap Value Portfolio
managed by Lord Abbett 5.71% 4.95%
--------------------------- ---------------------
Russell Midcap Index2 17.71% 14.77%
--------------------------- ---------------------
</TABLE>
+Index is shown from the first full month since Portfolio's inception.
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Mid-Cap Value
Portfolio managed by Lord Abbett and the return on the investment will
fluctuate, and redemption proceeds may be higher or lower than an investor's
original cost.
2 The Russell Midcap Index measures the performance of the 800 smallest
securities in the Russell 1000 Index, which represent approximately 35% of the
total market capitalization. The index does not reflect any expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software and Bloomberg. Comparison line graphs chart
the hypothetical growth of $10,000 over a given historical period of time.
Although data are gathered from reliable sources, accuracy and completeness
cannot be guaranteed.
<PAGE>
--------------------------------------------------------------------------------
Large Cap Research Portfolio For the year ended 12/31/99
Managed by Lord, Abbett & Co.
--------------------------------------------------------------------------------
Market Review
The year was characterized by continued overall strength in both the equity
market and the U.S. economy, but also by rising interest rates and continued
global deflationary pressures. These factors combined to create an environment
that, among large companies, favored a very select group of growth stocks with
stable earnings growth. With the exception of a brief broadening of the market
during the second quarter, investors stayed with names familiar to them,
investing in companies that exhibited strong earnings and recent outstanding
stock performance.
Portfolio Review
The Portfolio's performance was helped by our exposure to the technology sector.
We are now beginning to pare back the Portfolio's allocation to technology
stocks. The proceeds from those sales will most likely be used to increase our
allocation to cyclical stocks such as paper, chemicals and electrical equipment,
as well as other industrial stocks that tend to reflect the improving global
economies.
We also began focusing some attention on the property and casualty insurance
sector, and will seek out companies in this market segment that display
improving fundamentals. At the same time, we were generally underweighted in
financial companies, which worked to the Portfolio's advantage since many of
these stocks continued to struggle as interest rates increased. Our holdings in
health care services hurt the Portfolio, as political issues and government
influence hampered the performance of these companies. Furthermore, electric
utilities stocks, which typically do not perform well in a rising interest rate
environment, also underperformed.
Outlook
We anticipate that the global economy will maintain steady improvement. We
continue to be encouraged by low inflation rates and minimal trade restrictions
around the world. As we begin the New Year, we believe that global cyclicals,
(paper, chemicals and electric equipment) are among the best values in the
market. Many financial services companies currently display solid fundamentals
and, save for an increase in short-term interest rates by the Federal Reserve,
we will likely add to our exposure in this area.
There are some signs that the U.S. economy may be moderating. As consumer debt
levels climb, and mortgage refinancings, which reduce consumers' monthly
mortgage payments, decrease, a slowdown in consumer spending is possible.
Consequently, we remain moderately underweighted in consumer stocks, especially
those that are highly sensitive to changes in economic activity.
Robert Morris
Portfolio Manager
Lord, Abbett & Co.
<TABLE>
<CAPTION>
Top 10 Holdings by Market Value
As of 12/31/99
% of
portfolio
------------------------------------------------ -------------
<S> <C>
Exxon Mobil Corp. 4.4
------------------------------------------------ -------------
Unisys Corp. 3.3
------------------------------------------------ -------------
Computer Sciences Corp. 2.9
------------------------------------------------ -------------
Qualcomm Inc. 2.8
------------------------------------------------ -------------
Aon Corp. 2.5
------------------------------------------------ -------------
AT&T Corp. 2.3
------------------------------------------------ -------------
Apple Computer Inc. 2.2
------------------------------------------------ -------------
Marsh & McLennan Co. Inc. 2.2
------------------------------------------------ -------------
First Data Corp. 2.2
------------------------------------------------ -------------
Compaq Computer Corp. 2.1
------------------------------------------------ -------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------
Top 10 Portfolio Sectors (% of portfolio market value)
As of 12/31/99
LA lg cap pie chart
<S> <C>
Capital Goods 6.5
Conglomerates 1.1
Technology 22.9
Basic Industry 7.4
Transportation 0.4
Consumer Non Cyclicals 9
Consumer Cyclicals 10.6
Energy 9.9
Finance 14.5
Utilities 7.4
Not Classified 1.9
Other 8.4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Large Cap Research Portfolio, managed by Lord Abbett vs. S&P 500 Index
Growth Based on $10,000+
[Line Graph]
LA lg cap vs S&P500 plot points
LA Large Cap S&P500
<S> <C> <C>
10000 10000
10040 10532
"12/97" 9926 10789
11298 12249
"6/98" 11452 12606
10035 11307
"12/98" 12014 13666
12436 14301
"6/99" 13631 15261
13131 14261
"12/99" 15083 16335
</TABLE>
<TABLE>
<CAPTION>
-------------------------------- --------------------- ---------------
Average Annual
Return1
-------------------------------- --------------------- ---------------
1 Year Since
inception+
-------------------------------- --------------------- ---------------
<S> <C> <C>
Large Cap Research Portfolio,
managed by Lord Abbett 25.54% 18.96%
-------------------------------- --------------------- ---------------
S&P 500 Index 21.04% 23.05%
-------------------------------- --------------------- ---------------
</TABLE>
+Index is shown from first full month since Portfolio's inception.
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Large Cap
Research Portfolio managed by Lord Abbett and the return on the investment will
fluctuate, and redemption proceeds may be higher or lower than an investor's
original cost.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns for the graph above were generated by
Cova from CDA Wiesenberger HySales software. Comparison line graphs chart the
hypothetical growth of $10,000 over a given historical period of time. Although
data are gathered from reliable sources, accuracy and completeness cannot be
guaranteed.
<PAGE>
--------------------------------------------------------------------------------
Developing Growth Portfolio For the year ended 12/31/99
Managed by Lord, Abbett & Co.
--------------------------------------------------------------------------------
Market Review
The year was interesting for the stock markets. Many of the broad indexes (S&P
5001, Russell 20002, etc.) posted returns in excess of 20%. However, overall
performance of these indexes was driven by a relatively narrow group of stocks.
Stocks of technology and internet companies, which were subject to some
volatility, influenced performance the most in the small-cap growth sector
throughout the year.
Portfolio Review
Careful bottom-up stock selection contributed to the Portfolio's positive return
throughout the year. The Portfolio's overall performance was most significantly
affected by our overweighting in technology stocks, which benefited from rapid
multiple expansion and strong earnings growth. In addition, the Portfolio was
overweighted in the retail and leisure industries, where we uncovered several
opportunities as a result of our ongoing, proprietary research.
We reduced our exposure to the healthcare stocks as influence from Washington,
D.C. and market speculation regarding possible government intervention, made
1999 a disappointing year for the healthcare sector. Many information technology
(IT) services companies also experienced some difficulty surrounding Y2K
spending. In addition, the Portfolio was underweighted in financial services
stocks, because we did not believe this area offered the long-term earnings
growth potential we sought. With the exception of a resurgence in energy stocks,
we saw very few "themes" emerge during the third quarter. Our best investment
returns were company-specific rather than sector-wide.
For the remainder of the year, we continued our aggressive pursuit of companies
with strong earnings and the potential for outstanding growth. The Portfolio's
performance was positively impacted by companies in the technology outsourcing
area that focus on helping corporate America implement and operate Internet
businesses. Some of the smallest companies we owned posted earnings slightly
below expectations, in some cases citing business slowdowns due to anticipated
Y2K problems. The technology weighting in the Portfolio expanded solely as a
function of the strong performance by companies in the technology universe in
recent months.
Outlook
We are encouraged that the economy continues to exhibit steady growth, but
remain watchful of consumer debt levels and interest rates, as well as overall
consumer confidence. In the New Year, we believe that many small companies will
experience solid earnings growth. Based on our belief that many small companies
currently have attractive fundamentals and offer very good relative value versus
large-company stocks, we expect small-cap stocks to deliver good relative
performance in the future. The Portfolio management team continues to focus on
companies with strong earnings potential and outstanding growth prospects across
a diverse group of industries.
Stephen J. McGruder
Portfolio Manager
Lord, Abbett & Co.
1The S&P 500 Index is an unmanaged index consisting of stocks of 500 of the
largest U.S.-based companies. The Index does not include fees or expenses and is
not available for direct investment.
2The Russell 2000 Index is an unmanaged index consisting of the stocks of 2000
U.S.-based companies. The Index does not include fees or expenses and is not
available for direct investment.
<TABLE>
<CAPTION>
Top 10 Holdings by Market Value
As of 12/31/99
% of portfolio
--------------------------------------------- ---------------
<S> <C>
Cambridge Technology Partners Inc. 3.0
--------------------------------------------- ---------------
S1 Corp. 2.8
--------------------------------------------- ---------------
NBC Internet Inc. Class A 2.6
--------------------------------------------- ---------------
Teletech Holdings Inc. 2.4
--------------------------------------------- ---------------
Plantronics, Inc. 2.4
--------------------------------------------- ---------------
Sawtek Inc. 2.3
--------------------------------------------- ---------------
Micros Systems Inc. 2.2
--------------------------------------------- ---------------
Radisys Corp. 2.1
--------------------------------------------- ---------------
Xircom Inc. 1.8
--------------------------------------------- ---------------
Student Advantage Inc. 1.5
--------------------------------------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Top 10 Portfolio Sectors (% of portfolio market value)
As of 12/31/99
LA dev growth pie chart
<S> <C>
Technology 26.4
Health Care 7.1
Consumer Discretionary 26.9
Consumer Staples 2.2
Other Energy 4.2
Materials and Processing 3.1
Producer Durables 9.8
Auto and Transportation 0.9
Financial Services 4.7
Utilities 4.9
Not Classified 4.4
Other 5.4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Developing Growth Portfolio, managed by Lord Abbett vs. Russell 2000 Index2
Growth Based on $10,000+
[Line Graph]
LA dev grow vs Rus 2000 plot points
LA Dev Growth Russell 2000
<S> <C> <C>
10000 10000
11190 10732
"12/97" 10552 10372
11732 11416
"6/98" 11419 10883
8927 8691
"12/98" 11248 10108
11509 9560
"6/99" 13020 11046
12289 10348
"12/99" 14901 12224
</TABLE>
<TABLE>
<CAPTION>
--------------------------------- --------------------- ---------------
Average Annual
Return1
--------------------------------- --------------------- ---------------
1 Year Since
inception+
--------------------------------- --------------------- ---------------
<S> <C> <C>
Developing Growth Portfolio
managed by Lord Abbett 32.47% 18.35%
--------------------------------- --------------------- ---------------
Russell 2000 Index2 21.26% 8.87%
--------------------------------- --------------------- ---------------
</TABLE>
+Index is shown from the first full month since Portfolio's inception.
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Developing
Growth Portfolio managed by Lord Abbett and the return on the investment will
fluctuate, and redemption proceeds may be higher or lower than an investor's
original cost.
2 The Russell 2000 Index is an unmanaged index consisting of the stocks of 2000
U.S.-based companies. The Index does not include fees or expenses and is not
available for direct investment.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software and Bloomberg. Comparison line graphs chart
the hypothetical growth of $10,000 over a given historical period of time.
Although data are gathered from reliable sources, accuracy and completeness
cannot be guaranteed.
<PAGE>
--------------------------------------------------------------------------------
Lord Abbett Growth and Income Portfolio For the year ended 12/31/99
Managed by Lord, Abbett & Co.
--------------------------------------------------------------------------------
Market Review
Since 1997, low interest rates and a deceleration in earnings drove the U.S.
equity market. This environment favored a very select group of large-cap stocks
that had stable earnings growth. Rather than venturing into unknown waters,
investors stayed the course and continued to purchase names familiar to them,
remaining with companies that exhibited strong earnings and/or good recent stock
performance. The first quarter of 1999 saw a continuation of this trend, with
large-cap growth stocks continuing to dominate the market. In the second quarter
we saw a broadening of the market, where for the first time in many quarters
value outperformed growth, and small- and mid-cap stocks outperformed large-cap
issues. Towards the end of the year, the trend reversed once again, and growth
stocks returned to favor. Global growth rates continued to surge throughout
1999, instilling inflationary concerns in many investors. The Federal Reserve
Board responded by initiating a series of fall rate hikes that have normalized
U.S. interest rates from their record lows last year.
Portfolio Review
In early 1999, we sold some of our holdings in non-cyclical stocks, such as
technology, healthcare and pharmaceuticals, because they approached what we
believed to be their full values. We then used the proceeds to build or add to
positions in stocks of undervalued cyclical companies in the manufacturing and
commodities industries. When cyclical stocks advanced in April, the Portfolio
was well positioned to benefit from the upswing. Anticipating some improvement
in the global economy, we made an early entry into the energy sector that paid
off well in both the first half of the year and in the third quarter. Rising
interest rates in the latter part of the year caused interest-rate-sensitive
sectors such as electric utilities and financial services to underperform.
However, technology stocks demonstrated tremendous relative strength despite
their high valuations. Over the course of the year, the Portfolio remained
underweighted in financial services companies in anticipation of rising interest
rates, although we maintained a focus on property and casualty insurance
companies, as this market segment continues to benefit from industry
consolidation. We were well positioned to benefit from the leadership position
of the technology sector, and many of our technology holdings posted strong
gains. We also increased our exposure in basic materials industries, in
anticipation of further global economic recovery in 2000 and beyond.
Outlook
We expect to see global economic growth continue throughout the coming year. In
response, we are investing in companies that are likely to benefit from this
recovery, such as those producing basic materials and capital goods. In the
U.S., some signs are emerging that the economy may be moderating, which
diminishes the risk of significant future U.S. interest rate hikes. As a result,
we are reconsidering financial services stocks, many of which display solid
fundamentals at attractive prices. We believe that any possibility of a future
interest rate increase is already reflected in the low stock prices of these
companies.
W. Thomas Hudson Jr.
Portfolio Manager
Lord, Abbett & Co.
<TABLE>
<CAPTION>
Top 10 Holdings by Market Value
As of 12/31/99
% of portfolio
---------------------------------------------------- -----------------
<S> <C>
International Paper Co. 2.8
---------------------------------------------------- -----------------
Exxon Mobil Corp. 2.6
---------------------------------------------------- -----------------
Alcoa Inc. 2.5
---------------------------------------------------- -----------------
Oracle Corp. 2.5
---------------------------------------------------- -----------------
American General Corp. 2.4
---------------------------------------------------- -----------------
Honeywell International Inc. 2.3
---------------------------------------------------- -----------------
AT&T Corp. 2.2
---------------------------------------------------- -----------------
Aon Corp. 2.1
---------------------------------------------------- -----------------
Dow Chemical Co. 2.0
---------------------------------------------------- -----------------
IBM Corp. 2.0
---------------------------------------------------- -----------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Top 10 Portfolio Sectors (% of portfolio market value)
As of 12/31/99
LA G&I pie chart
<S> <C>
Capital Goods 6.7
Conglomerates 1.2
Technology 18.7
Basic Industry 11
Consumer Non-Cyclicals 9.4
Consumer Cyclicals 9.7
Energy 11.8
Finance 17
Utilities 10.9
Other 3.6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Lord Abbett Growth and Income Portfolio, managed by Lord Abbett vs.
S&P 500 Index2
Growth Based on $10,000+
[Line Graph]
Lord Abbett G&I vs S&P500 plot points
LA S&P 500
<S> <C> <C>
10000 10000
9829 10053
"6/99" 10958 10727
10083 10024
"12/99" 11138 11482
</TABLE>
<TABLE>
<CAPTION>
----------------------------------- ----------------
Total Return 1
----------------------------------- ----------------
Since
inception+
----------------------------------- ----------------
<S> <C>
Lord Abbett Growth and Income
Portfolio, managed by Lord Abbett 11.38%
----------------------------------- ----------------
S&P 500 Index 2 16.79%
----------------------------------- ----------------
</TABLE>
+Index is shown from first full month since inception (1/8/99).
1 "Total Return" is calculated including reinvestment of all income dividends
and capital gain distributions. Results represent past performance and do not
indicate future results. The value of an investment in the LA Growth and Income
Portfolio and the return on the investment both will fluctuate, and redemption
proceeds may be higher or lower than an investor's original cost.
2 The S&P 500 Index is an unmanaged index generally considered to be
representative of stock market activity.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
Cova from CDA Wiesenberger HySales software. Comparison line graphs chart the
hypothetical growth of $10,000 over a given historical period of time. Although
data are gathered from reliable sources, accuracy and completeness cannot be
guaranteed.
<PAGE>
--------------------------------------------------------------------------------
Balanced Portfolio For the year ended 12/31/99
Managed by Mississippi Valley Advisors
--------------------------------------------------------------------------------
The stock market finished the year with a phenomenal surge and the S&P 5001
gained 21.04% for the year. While substantial, these gains were miniscule
compared to the 85% increase in the NASDAQ Composite Index2. It was only the
second time in the composite's history that it was able to rally more than 40%.
Given that the S&P 500 has advanced for eight of those nine years, one could
call for some caution looking forward. Most market strategists have some concern
for the market in 2000. GDP, corporate profits, and inflation concerns will be
major factors in the determination of the success of the stock market next year.
The bond market ended the reporting period, and entire year, in negative
territory. The bellwether 30-year bond ended the quarter down 4%, and ended the
year down over 15%. With the last of three rate hikes in 1999 on November 16,
the Fed felt confident that a 5.50% Fed funds rate would be a sufficient level
to help balance the economy. Many bond-market strategists and economists are
calling for three more rate hikes in the first six months of the year 2000. This
summer's 6.28% high in the 30-year bond has been surpassed. Most likely the
stock market will give us an additional clue as to the Fed's next rate hike.
The prospect of declining economic growth and corporate profits suggests a
defensive stock mix.
Peter Merzian
Portfolio Manager
Mississippi Valley Advisors
1 The S&P 500 Index is an unmanaged index consisting of stocks of 500 of the
largest U.S.-based companies. The Index does not include fees or expenses and is
not available for direct investment.
2 The NASDAQ Composite Index is a market-value weighted index of all common
stocks listed on NASDAQ.
<TABLE>
<CAPTION>
Top 10 Portfolio Holdings by Market Value
As of 12/31/99
% of portfolio
------------------------------------------ -----------------
<S> <C>
FNMA Bond (6.0%, 2013) 5.0%
------------------------------------------ -----------------
U.S. Treasury Note (7.25%, 2004) 3.8
------------------------------------------ -----------------
U.S. Treasury Note (6.625%, 5/15/07) 3.7
------------------------------------------ -----------------
U.S. Treasury Note (6.0%, 8/15/09) 2.4
------------------------------------------ -----------------
Applied Materials Inc. 2.1
------------------------------------------ -----------------
KLA-Tencor Corp. 2.0
------------------------------------------ -----------------
Du Pont (E.I.) de Nemours (8.25%, 2006) 1.9
------------------------------------------ -----------------
Wal-Mart Stores Inc. 1.9
------------------------------------------ -----------------
U.S. Treasury Note (6.375%, 2002) 1.8
------------------------------------------ -----------------
U.S. Treasury Note (6.375%, 2000) 1.8
------------------------------------------ -----------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------
Top 10 Portfolio Sectors (% of portfolio market value)
As of 12/31/99
MVA Balanced pie chart
<S> <C>
Consumer Growth 11.6
Technology 13.6
Interest Sensitive 10
Consumer Staples 4.3
Industrial Cyclicals 7
Energy 2.8
Capital Goods 2.2
Consumer Cyclicals 0.5
Corporate Securities 12.4
U.S. Treasury and Agency Securities 25.9
Other 9.7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Balanced Portfolio, managed by
Mississippi Valley Advisors vs. Indices
Growth Based on $10,000+
[Line Graph]
MVA Balanced vs S&P500 and Salomon Bros. Broad
MVA Bal. S&P 500 Salomon Bros. Broad
<S> <C> <C> <C>
10000 10000 10000
10510 9926 10060
"12/97" 10601 10169 10356
11346 11545 10523
"6/98" 11327 11881 10767
10760 10657 11213
"12/98" 12013 12881 11263
12139 13480 11207
"6/99" 12887 14384 11107
12222 13441 11188
"12/99" 12870 15396 11168
</TABLE>
<TABLE>
<CAPTION>
------------------------- ---------------------- ---------------
Average Annual
Return1
------------------------- ---------------------- ---------------
1 Year Since
inception+
------------------------------------------- ---------------
<S> <C> <C>
Balanced Portfolio,
managed by MVA 7.14% 10.60%
------------------------------------------- ---------------
S&P 500 Index 21.04% 18.84%
------------------------------------------- ---------------
Salomon Brothers
BIG Index -0.84% 4.52%
------------------------------------------- ---------------
</TABLE>
+Index is shown from the first full month since Portfolio's inception.
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Balanced
Portfolio managed by Mississippi Valley Advisors (MVA) and the return on the
investment will fluctuate, and redemption proceeds may be higher or lower than
an investor's original cost.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE>
--------------------------------------------------------------------------------
Equity Income Portfolio For the year ended 12/31/99
Managed by Mississippi Valley Advisors
--------------------------------------------------------------------------------
The Equity Income Portfolio finished the year with a 2.51% return, compared to a
20.92% return of its benchmark Russell 1000 Index.1 Earlier in the year, the
Portfolio benefited from continued strength in the U.S. economy, and improving
economic trends worldwide helped focus investor attention back on cyclical
stocks. In addition, higher interest rates during the period put pressure on
some of the more overvalued higher multiple growth stocks, which in turn helped
the valued segment of the market show improvement. The fourth quarter of 1999
proved to be a disappointing one for value investors. Rising interest rates once
again took their toll on banks and utilities. Consumer product stocks turned in
mixed performances, while pharmaceuticals lagged the overall market. Technology
stocks turned in a strong performance, as did our industrial cyclical holdings,
which were benefiting from a strong economy. Oil companies took a breather from
their good showing during the first three-quarters of the year, as oil prices
stopped going up.
The normal catalysts for value stocks to do well (a strong economy, accelerating
earnings growth and rising interest rates), have all taken place, but the market
continues to focus on large cap growth, especially technology, and more
specifically Internet related issues. How large the valuation gap can become is
anyone's guess, but it would appear to be at a fairly extreme level at present.
We continue to believe the value sector holds above average return potential
over the next 12-24 months, especially with many worldwide economies
strengthening and the U.S. economy continuing to maintain its solid growth.
Gregory A. Glidden
Portfolio Manager
Mississippi Valley Advisors
1 The Russell 1000 Index consists of the largest 1000 companies in the Russell
3000 Index. The Index represents the universe of large capitalization stocks
from which most active money managers typically select. The Index does not
include fees or expenses and is not available for direct investment.
<TABLE>
<CAPTION>
Top 10 Portfolio Holdings by Market Value
As of 12/31/99
% of portfolio
--------------------------------- ----------------
<S> <C>
SPDR Trust Unit 5.0
--------------------------------- ----------------
Alcoa Inc. 2.7
--------------------------------- ----------------
Sysco Corp. 2.5
--------------------------------- ----------------
Pepsico Inc. 2.3
--------------------------------- ----------------
USX - U.S. Steel Group Inc. 2.3
--------------------------------- ----------------
GTE Corp. 2.2
--------------------------------- ----------------
First Data Corp. 2.2
--------------------------------- ----------------
Murphy Oil Corp. 2.1
--------------------------------- ----------------
Intel Corp. 2.1
--------------------------------- ----------------
Baxter International Inc. 2.0
--------------------------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------
Top 10 Portfolio Sectors (% of portfolio market value)
As of 12/31/99
MVA equity inc. pie chart
<S> <C>
Interest Sensitive 35.3
Energy 8.3
Consumer Growth 9.4
Industrial Cyclical 12.3
Consumer Staples 9.1
Technology 8.6
Capital Goods 1
Consumer Cyclical 3.3
Other 12.7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Equity Income Portfolio, managed by
Mississippi Valley Advisors vs. Russell 1000
Growth Based on $10,000+
[Line Graph]
MVA equity inc vs russ 1000 plot points
MVA Equity Inc. Russell 1000
<S> <C> <C>
10000 10000
10900 10051
"12/97" 11269 10353
12656 11737
"6/98" 12427 12031
11266 10790
"12/98" 12323 13151
12354 13693
"6/99" 13700 14670
12631 13701
"12/99" 12632 15902
</TABLE>
<TABLE>
<CAPTION>
---------------------------- --------------------- -----------------
Average Annual
Return1
---------------------------- --------------------- -----------------
1 Year Since inception+
---------------------------- --------------------- -----------------
<S> <C> <C>
Equity Income Portfolio,
managed by MVA 2.51% 9.78%
---------------------------- --------------------- -----------------
Russell 1000 Index 20.92% 20.39%
---------------------------- --------------------- -----------------
</TABLE>
+Index is shown from the first full month since Portfolio's inception.
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Equity Income
Portfolio managed by Mississippi Valley Advisors (MVA) and the return on the
investment will fluctuate, and redemption proceeds may be higher or lower than
an investor's original cost.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE>
--------------------------------------------------------------------------------
Growth & Income Equity Portfolio For the year ended 12/31/99
Managed by Mississippi Valley Advisors
--------------------------------------------------------------------------------
The Growth & Income Equity Portfolio finished the year with a 16.17% return,
compared to a 21.04% return of its benchmark S&P 500 Index.1 Over the year, the
Portfolio benefited from continued improvement in the global economy, which had
a direct impact on energy stocks and economically sensitive stocks. In the
second quarter, value investing came into vogue and small caps became more
interesting than large cap growth. The fourth quarter of 1999 staged a strong
recovery following the seasonal weakness experienced in the third quarter.
Despite a more stringent Federal Reserve policy and nine years of economic
expansion, the equity market posted double-digit gains lead by the technology
and telecom sectors. For the 5th year in a row, the equity market has had an
upward bias despite the fact that it has become more pyramidal in nature in that
as the market moves higher fewer stocks are participating. This is evidenced by
the fact that 57% of the equities in the S&P 500 posted negative returns for the
year. Equity purchases have focused on momentum and ignored value, thus while
some sectors of the market are overvalued some sectors appear to be undervalued.
Fears of inflation and global economic expansion have caused the recent back up
in interest rates. This global recovery should benefit the industrial cyclical
and capital goods sectors of the market.
With stocks near record valuation levels, we continue to be cautious and focus
on the most attractive relative values that would include specialty retailers,
financials, industrial cyclical and selected technology stocks. Our portfolio
remains well diversified and biased towards predictable growth.
Equity Committee
Mississippi Valley Advisors
1 The S&P 500 Index is an unmanaged index consisting of stocks of 500 of the
largest U.S.-based companies. The Index does not include fees or expenses and is
not available for direct investment.
<TABLE>
<CAPTION>
Top 10 Holdings by Market Value
As of 12/31/99
% of portfolio
------------------------------ ---------------
<S> <C>
BMC Software Inc. 4.1
------------------------------ ---------------
Applied Materials Inc. 3.9
------------------------------ ---------------
KLA-Tencor Corp. 3.7
------------------------------ ---------------
Wal-Mart Stores Inc. 2.9
------------------------------ ---------------
General Electric Co. 2.6
------------------------------ ---------------
Microsoft Corp. 2.5
------------------------------ ---------------
Alcoa Inc. 2.5
------------------------------ ---------------
Sysco Corp. 2.5
------------------------------ ---------------
Altera Corp. 2.4
------------------------------ ---------------
Hewlett Packard Co. 2.3
------------------------------ ---------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------
Top 10 Portfolio Sectors (% of portfolio market value)
As of 12/31/99
MVA G&I Equity pie chart
<S> <C>
Consumer Growth 21.6
Technology 28.6
Interest Sensitive 17.6
Industrial Cyclicals 13.7
Energy 5
Consumer Staples 8.1
Capital Goods 4.2
Consumer Cyclical 1.2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Growth & Income Equity Portfolio, managed by
Mississippi Valley Advisors vs. S&P 500 Index
Growth Based on $10,000+
[Line Graph]
MVA G&I Equity vs S&P500 plot points
MVA G&I S&P 500
<S> <C> <C>
10000 10000
10772 9926
"12/97" 10826 10169
12191 11545
"6/98" 11976 11881
10344 10657
"12/98" 12445 12881
12746 13480
"6/99" 14167 14384
13006 13441
"12/99" 14457 15396
</TABLE>
<TABLE>
<CAPTION>
----------------------------- ---------------- ----------------
Average Annual
Return1
----------------------------- ---------------- ----------------
1 Year Since
inception+
----------------------------- ---------------- ----------------
<S> <C> <C>
Growth and Income Equity
Portfolio, managed by MVA 16.17% 15.86%
----------------------------- ---------------- ----------------
S&P 500 Index 21.04% 18.84%
----------------------------- ---------------- ----------------
</TABLE>
+Index is shown from the first full month since Portfolio's inception.
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Growth and
Income Equity Portfolio managed by Mississippi Valley Advisors (MVA) and the
return on the investment will fluctuate, and redemption proceeds may be higher
or lower than an investor's original cost.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE>
--------------------------------------------------------------------------------
Riggs U.S. Government Securities Portfolio For the year ended 12/31/99
Managed by Riggs Bank N.A.
--------------------------------------------------------------------------------
The fixed income markets experienced their second worst performance in 50 years
during 1999. Only 1994 surpassed this year in generating negative rates of
return. From a year, which began with expectations of a slowing economy,
accompanied by declining rates, 1999 turned into a very powerful bear market.
The continued residual from both the Russian default and the Long Term Capital
rescue did not slow the U.S. economy in 1999. In fact GDP is expected to have
grown in excess of 4.00% during the year. In addition, oil prices, which began
the year by falling to their lowest level since April 1986, ended 1999 at $25.60
or more than double the low of $11.26 reached in February.
The Federal Reserve took back its three twenty-five basis point easings of 1998
by tightening 25 basis points in June, August and November. Granted the easings
of 1998 were attributable to the crisis surrounding Russia and Long Term
Capital, the tightenings still weighed on the bond market. The resiliency of the
U.S. economy to withstand the global problems and continue to expand at a 4.00%
rate surprised most economists, and probably the Fed. Add the fact that
unemployment reached its lowest level since January 1970 and you have a central
bank concerned about inflationary pressures. The only reassuring factor limiting
the Fed from tightening more rapidly was the continued rise in productivity and
the tame core inflation rate.
The fourth quarter's major highlight surrounded the Y2K issue. The Fed announced
in December that it would have tightened or at least gone to a bias favoring
tightening had it not been for the uncertainty surrounding any Y2K glitches. In
addition, corporations, banks and individuals increased their liquidity to
varying degrees into year-end 1999. Inventories and supplies were stockpiled
"just in case". The bond market continued to deteriorate in the fourth quarter
as the majority of economic indicators pointed toward continued strength instead
of any weakening trend. This combined with the low unemployment rate led most
bond participants to question the "new paradigm" of strong growth and low
inflation. The result was that the yield curve flattened as rates rose in
anticipation of future tightening in 2000.
Following the end of the Y2K uncertainty, the Fed should respond by increasing
interest rates in 2000. We believe the Fed will likely wish to get its
restrictive monetary policy out of the way before the national conventions and
presidential elections. Thus the Fed is likely to respond to any hint of
inflation or continued strength in the economy by hiking rates. There are
several caveats to our forecast. The first is that any substantial "meltdown" in
the equity market would likely short circuit this bear market and force the Fed
to end its tightening and even ease to restore confidence. The second is the
dollar. The United States is running the highest trade deficit of the western
industrialized nations. Any substantial decline in the dollar could cause a rise
in inflationary expectations and rates, which would have a negative effect on
equities.
John Lockhart
Portfolio Manager
Riggs Bank N.A.
<TABLE>
<CAPTION>
Top Portfolio Holdings by Market Value
As of 12/31/99
% of
portfolio
------------------------------------ --------------
<S> <C>
FHLB (7.2%, 2009) 17.7
------------------------------------ --------------
FHLB (8.0%, 2009) 16.3
------------------------------------ --------------
FFCB (7.1%, 2005) 16.3
------------------------------------ --------------
FHLMC (7.76%, 2009) 11.4
------------------------------------ --------------
U.S. Treasury Note (6.875%, 2006) 8.4
------------------------------------ --------------
U.S. Treasury Note (6.625%, 2007) 8.3
------------------------------------ --------------
U.S. Treasury Note (6.5%, 2006) 8.2
------------------------------------ --------------
GNMA (7.0%, 2007) 7.1
------------------------------------ --------------
FNMA (7.40%, 2014) 6.3
------------------------------------ --------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------
Portfolio Composition (% of portfolio market value)
As of 12/31/99
Riggs U.S. Government Securities
<S> <C>
FHLB 34
FFCB 16.3
FNMA 6.3
FHLMC 11.4
GNMA 7.1
U.S. Treasury 24.9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Riggs U.S. Government Securities, managed by
Riggs Bank N.A. vs. Lehman Brothers Government Bond Index
Growth Based on $10,000+
[Line Graph]
PLOT POINTS
Riggs U.S. Government Securities portfolio vs.
Lehman Bros. Government Bond Index
Riggs Lehman
<S> <C> <C>
"6/99"
10000 10000
"12/99" 9882 9935
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------- ----------------
Total Return1
------------------------------------------- ----------------
Since
inception+
------------------------------------------- ----------------
<S> <C>
Riggs U.S. Government Securities
Portfolio, managed by
Riggs Bank N.A. -1.18%
------------------------------------------- ----------------
Lehman Brothers Gov. Bond Index -0.79%
------------------------------------------- ----------------
</TABLE>
+Index is shown from the first full month since Portfolio's inception (11/3/99).
1 "Total Return" is calculated including reinvestment of all income dividends
and capital gain distributions. Results represent past performance and do not
indicate future results. The value of an investment in the U.S. Government
Securities Portfolio managed by Riggs Bank N.A. and the return on the investment
will fluctuate, and redemption proceeds may be higher or lower than an
investor's original cost.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE>
--------------------------------------------------------------------------------
Riggs Stock Portfolio For the year ended 12/31/99
Managed by Riggs Bank N.A.
--------------------------------------------------------------------------------
The equity markets were immune to the travails of the fixed income markets.
Higher productivity, the "new" economy (i.e. technology), the Internet and
e-commerce were the buzzwords that kept the stock market floating in the ether
of the new valuation metrics. The old economy (anything not technology) was
susceptible to the rising trend of interest rates and the competition from the
new. The new versus the old produced a dichotomy in the equity markets that led
to the most narrow momentum driven market in history.
Some interesting facts regarding the unusual stock market environment in the
past year:
o A select group1 of about 5% of the stocks in the S&P 5002 produced nearly
100% of the index's returns.
o The median stock in the S&P 500 was up only 0.40%.
o The technology sector at year-end constituted 30% of the market
capitalization of the S&P 500 and accounted for roughly 70% of the return.
Technology, up 109% in 1999, was by far the strongest sector.
The strong returns of the past several years (over 20% for each of the past five
years for the S&P 500) are unlikely to be repeated over the next several years.
Keep in mind, however, that many stocks have not participated in the success of
late and may benefit to a greater degree as money shifts from technology into
different sectors of the market. Though technology spending will continue to be
robust as the communications revolution takes hold, the rate of growth in
several segments of technology will decelerate from the higher-than-trend growth
rate over the last few years. This was partly a function of corporations rushing
to prepare themselves for Y2K, as well as the need to offset higher wages with
improving productivity.
Further, through the downturn in world economies, larger companies have been
able to maintain their earnings power by reducing input costs by taking
advantage of lower commodity prices and by squeezing their suppliers. As the
world economies begin to recover (their stock markets being a leading
indicator), smaller companies may have a better chance of demonstrating an
improving earnings trend relative to larger companies. In this respect, we
believe there may be a broadening out of stock market returns to areas other
than the technology sector. As this happens we are positioned to benefit in this
diversified portfolio.
John Lockhart
Portfolio Manager
Riggs Bank N.A.
1 Microsoft, Cisco, General Electric, Wal-Mart, Oracle Systems, Nortel Networks,
Qualcomm, Sun Microsystems, Citigroup, Intel, America Online, EMC Corp, Home
Depot, Lucent Technologies, Motorola, American Intl Group, Hewlett-Packard,
Texas Instruments, Morgan Stanley Dean Witter, Dell Computer
2 The S&P 500 Index is an unmanaged index consisting of stocks of 500 of the
largest U.S.-based companies. The Index does not include fees or expenses and is
not available for direct investment.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Sector Allocation (% of portfolio market value)
As of 12/31/99
Riggs Stock Portfolio largest sectors
<S> <C>
Basic Materials 2.8
Energy 5.6
Capital Goods 7.6
Technology 19.4
Health Care 9.9
Consumer Cyclical 11.6
Consumer Services 5.6
Consumer Staples 10
Financials 18.6
Utilities Gas & Electric 3.5
Utilities Telephone 5.4
</TABLE>
<TABLE>
<CAPTION>
Top 10 Portfolio Holdings by Market Value
As of 12/31/99
% of portfolio
----------------------------------------- ----------------
<S> <C>
Safeway, Inc. 3.7
----------------------------------------- ----------------
Lucent Technologies, Inc. 2.8
----------------------------------------- ----------------
International Business Machines Corp. 2.7
----------------------------------------- ----------------
Tyco International Ltd. 2.6
----------------------------------------- ----------------
Philip Morris Co., Inc. 2.6
----------------------------------------- ----------------
Exxon Mobil Corp. 2.6
----------------------------------------- ----------------
SCI Systems, Inc. 2.2
----------------------------------------- ----------------
Cisco Systems, Inc. 2.2
----------------------------------------- ----------------
Cendant Corp. 2.1
----------------------------------------- ----------------
Hartford Financial Services Group, Inc. 2.1
----------------------------------------- ----------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Riggs Stock Portfolio, managed by
Riggs Bank N.A. vs. S&P 500 Index
Growth Based on $10,000+
[Line Graph]
Riggs Stock Portfolio vs. S&P 500
Riggs Stock S&P 500
<S> <C> <C>
"6/99"
10000 10000
"12/99" 10178 10804
</TABLE>
<TABLE>
<CAPTION>
------------------------------ ----------------
Total Return1
------------------------------ ----------------
Since
inception+
------------------------------ ----------------
<S> <C>
Riggs Stock Portfolio,
managed by Riggs Bank N.A. 1.78%
------------------------------ ----------------
S&P 500 Index 8.04%
------------------------------ ----------------
</TABLE>
+Index is shown from the first full month since Portfolio's inception (11/3/99).
1 "Total Return" is calculated including reinvestment of all income dividends
and capital gain distributions. Results represent past performance and do not
indicate future results. The value of an investment in the Stock Portfolio
managed by Riggs Bank N.A. and the return on the investment will fluctuate, and
redemption proceeds may be higher or lower than an investor's original cost.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE>
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Cova Series Trust:
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of Small Cap Stock Portfolio, Quality Bond
Portfolio, Select Equity Portfolio, Large Cap Stock Portfolio, International
Equity Portfolio, Bond Debenture Portfolio, Mid-Cap Value Portfolio, Large Cap
Research Portfolio, Developing Growth Portfolio, Lord Abbett Growth & Income
Portfolio, Balanced Portfolio, Equity Income Portfolio, Growth & Income Equity
Portfolio, Riggs U.S. Government Securities Portfolio, and Riggs Stock
Portfolio, portfolios of Cova Series Trust (the Trust), as of December 31, 1999
and the related statements of operations for the year or periods then ended and
changes in net assets for each of the years or periods in the two-year period
then ended and the financial highlights for each of the years or periods in the
four-year period then ended. These financial statements and financial highlights
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1999 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Small
Cap Stock Portfolio, Quality Bond Portfolio, Select Equity Portfolio, Large Cap
Stock Portfolio, International Equity Portfolio, Bond Debenture Portfolio,
Mid-Cap Value Portfolio, Large Cap Research Portfolio, Developing Growth
Portfolio, Lord Abbett Growth & Income Portfolio, Balanced Portfolio, Equity
Income Portfolio, Growth & Income Equity Portfolio, Riggs U.S. Government
Securities Portfolio, and Riggs Stock Portfolio, as of December 31, 1999, the
results of their operations for the year or periods then ended, changes in their
net assets for each of the years or periods in the two-year period then ended
and the financial highlights for each of the years or periods in the four-year
period then ended in conformity with generally accepted accounting principles.
[KPMG logo] [Graphic omitted]
Boston, Massachusetts
February 4, 2000
-------------------------------------------------------------------------------
<PAGE>
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS
December 31, 1999
(Percentage of Net Assets)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Security Value
Description Shares (Note 1)
---------------------------------------------------------------------------------------
Common Stocks - 95.2%
Advertising - 0.8%
<S> <C> <C>
24/7 Media, Inc.* ..............................................8,800 $ 495,000
Digital Impact, Inc.* ..........................................2,700 135,338
Obie Media Corp. ...............................................9,100 105,788
Webstakes.com, Inc.*............................................9,200 181,700
-------------
917,826
-------------
Apparel Retailers - 0.6%
AnnTaylor Stores Corp.*........................................19,800 681,863
---------------
Automotive - 1.0%
Dura Automotive Systems, Inc.* .................................7,000 122,063
Lithia Motors, Inc.* ..........................................14,100 252,038
Monaco Coach Corp.* ............................................9,300 237,731
National R.V. Holdings, Inc.* .................................17,100 329,175
Sonic Automotive, Inc. ........................................15,200 148,200
---------------
1,089,207
---------------
Banking - 3.7%
BancorpSouth, Inc. .............................................5,300 86,456
Bank United Corp. .............................................25,300 689,425
Capital Crossing Bank* .........................................7,400 92,500
City National Corp. ............................................9,000 296,438
Colonial Bancgroup, Inc. ......................................39,500 409,813
Commercial Federal Corp. ......................................20,450 364,266
Community First Bankshares, Inc. ..............................22,700 357,525
Creditrust Corp.* ..............................................9,500 73,031
Gold Banc Corp., Inc. ..........................................4,800 43,200
Hamilton Bancorp, Inc.* .......................................14,300 253,825
MicroFinancial, Inc. ...........................................6,500 75,969
National Commerce Bancorp .....................................21,300 483,244
Pacific Century Financial Corp. ...............................13,700 256,019
Republic Security Financial Corp. .............................21,000 150,282
Sterling Bancshares, Inc. ......................................1,900 21,256
Summit Bancshares, Inc. ........................................4,800 88,800
Sun Bancorp, Inc. .............................................13,480 133,958
Westamerica Bancorp ............................................6,500 181,594
---------------
4,057,601
---------------
Beverages, Food & Tobacco - 1.2%
American Italian Pasta Co.* ...................................13,700 421,275
Beringer Wine Estates Holdings, Inc.* ..........................8,700 346,913
Keebler Foods Co.* ............................................19,300 542,813
---------------
1,311,001
---------------
Building Materials - 0.4%
Caprock Communications Corp.* ..................................8,800 285,450
Elcor Corp. ....................................................5,550 167,194
---------------
452,644
---------------
Chemicals - 5.0%
Albemarle Corp. ...............................................24,200 464,338
Bush Boake Allen, Inc.* .......................................14,000 343,875
General Chemical Group, Inc. ..................................27,700 64,056
Gentek, Inc. ..................................................30,100 314,169
Geon Co. (The) ................................................40,700 1,322,750
Georgia Gulf Corp. ............................................45,600 1,387,950
Lyondell Petro Chemical Co. ...................................16,900 215,475
Minerals Technologies, Inc. ....................................5,500 220,344
Wellman, Inc. .................................................61,400 1,143,575
---------------
5,476,532
---------------
Commercial Services - 2.9%
FreeMarkets, Inc.* ...............................................600 204,788
Media Metrix, Inc.* ............................................7,600 271,700
Modis Professional Services, Inc.* ............................18,600 265,050
NetRatings, Inc.* ..............................................5,100 245,438
On Assignment, Inc.* ..........................................16,500 492,938
Pfsweb, Inc* ...................................................1,300 48,750
Profit Recovery Group International, Inc. (The) ................3,850 102,266
Regis Corp. ...................................................14,650 276,519
Trimeris, Inc.* ................................................9,200 217,350
Wind River Systems, Inc.* .....................................29,300 1,073,113
--------------
3,197,912
--------------
Communications - 3.9%
Advanced Fibre Communications, Inc.* ..........................29,200 1,304,875
Allegiance Telecom, Inc.* .....................................12,000 1,107,000
Juniper Networks, Inc.* ........................................1,300 442,000
L-3 Communications Holdings, Inc.* ............................17,000 707,625
Seachange International, Inc. .................................13,950 493,481
Williams Communications Group, Inc.* ...........................6,400 185,200
-------------
4,240,181
-------------
Computer Software & Processing - 20.4%
3DO Co. (The)* ................................................21,700 197,335
Accrue Software, Inc.* .........................................8,000 433,000
Agency.COM., Inc.* .............................................2,700 137,700
Aether Systems, Inc.* ..........................................2,000 143,250
Agile Software Corp.* ..........................................1,200 260,681
Akamai Technologies, Inc.* .....................................1,700 556,963
Alteon Websystems, Inc.* .......................................1,500 131,625
Art Technology Group, Inc.* ....................................6,600 845,625
Business Objects S.A. (ADR)* ...................................2,100 280,613
CareInsite, Inc.* ..............................................6,000 483,000
C-bridge Internet Solutions, Inc.* .............................1,000 48,625
CheckFree Corp.* ..............................................17,900 1,870,540
Clarent Corp.* .................................................6,900 536,475
Computer Horizons Corp.* ......................................27,500 445,156
Digex, Inc.* ...................................................4,700 323,125
eGain Communications Corp.* ....................................4,500 169,875
eSPEED, Inc. (Class A)* ........................................7,000 248,938
Excalibur Technologies Corp.* .................................19,200 396,000
Exchange Applications, Inc.* ...................................6,300 352,013
E. Piphany, Inc.* ..............................................1,800 401,625
Gartner Group, Inc. (Class A)..................................17,500 266,875
IDX Systems Corp.* .............................................7,500 234,375
Ilife.com Inc. * ...............................................4,900 22,050
Informatica Corp* ..............................................6,600 702,075
Informix Corp.* ...............................................35,900 410,606
Interleaf, Inc.* ...............................................5,500 184,938
Liberate Technologies, Inc.* ...................................2,800 719,600
Liquid Audio, Inc.* ............................................6,500 170,625
Looksmart, Ltd.* ..............................................12,900 348,300
Mediaplex, Inc.* ...............................................4,100 257,275
Metasolv Software, Inc.* .......................................2,300 188,025
MicroStratetgy, Inc.* .........................................11,000 2,309,980
National Information Consortium, Inc.* .........................6,400 204,800
Net Perceptions, Inc.* ........................................10,900 457,800
Official Payments Corp.* .......................................1,900 98,800
Ondisplay, Inc.* .................................................900 81,788
OpenTV Corp.* ..................................................2,100 168,525
Packeteer, Inc.* ...............................................7,800 553,800
PcOrder.com, Inc.* .............................................4,800 244,800
Peregrine Systems, Inc.* .......................................4,600 387,263
Preview Systems, Inc.* .........................................1,200 77,850
Proxicom, Inc.* ................................................6,000 745,875
Quokka Sports, Inc.* ...........................................8,800 115,500
Rainmaker Systems, Inc.* .......................................5,700 115,425
Retek Inc.* ....................................................5,700 428,925
Sanchez Computer Associates, Inc. .............................16,200 667,238
Software.com, Inc.* ............................................3,700 355,200
Source Information Management Co. (The)* ......................22,400 375,200
Technology Solutions Co.* .....................................13,100 429,025
Tumbleweed Communications Corp.* ..............................10,300 872,925
Verio Inc. ....................................................13,000 600,438
Viant Corp.* ...................................................4,100 405,900
Watchguard Technologies, Inc.* ................................11,200 338,800
WebTrends Corp.* ...............................................4,700 380,700
-------------
22,183,465
-------------
Computers & Information - 0.9%
Va Linux Systems, Inc.* ........................................2,200 454,575
Visual Networks, Inc.* .........................................6,800 538,900
-------------
993,475
-------------
Containers & Packaging - 0.3%
American National Can Group, Inc. .............................14,700 191,100
Ivex Packaging Corp.* .........................................17,400 174,000
-------------
365,100
-------------
Cosmetics & Personal Care - 0.4%
Alberto-Culver Co. (Class B)...................................17,000 438,813
--------------
Electric Utilities - 1.0%
Cleco Corp. ...................................................25,800 827,213
Rare Medium Group, Inc.* .......................................7,700 262,763
-------------
1,089,976
-------------
Electronics - 7.3%
ACT Manufacturing, Inc.* ......................................12,300 461,250
Applied Micro Circuits Corp. ..................................14,300 1,819,675
ATMI, Inc.* ...................................................20,400 674,475
Caliper Technologies Corp.* ....................................1,800 120,150
C-Cube Microsystems Inc.* ......................................5,800 361,050
Cobalt Networks, Inc.* .........................................1,900 205,913
E-Tek Dynamics, Inc.* ..........................................6,900 928,913
Exar Corp.* ...................................................13,900 818,363
Finisar Corp.* .................................................3,600 323,550
Power-One, Inc.* ..............................................12,500 572,656
Sage, Inc.* ....................................................2,200 42,625
SDL, Inc. ......................................................4,400 959,200
Silicon Image, Inc.* ...........................................5,400 378,338
Sycamore Networks, Inc.* .........................................400 123,200
World Access, Inc.* ...........................................11,500 221,375
------------
8,010,733
------------
Entertainment & Leisure - 2.2%
Anchor Gaming* ................................................16,800 729,750
Boca Resorts, Inc.* ...........................................14,700 143,325
Cinar Corp.* ..................................................20,300 497,350
JAKKS Pacific, Inc.* ...........................................3,500 65,406
Premier Parks, Inc.* ..........................................15,300 441,788
Ticketmaster Online-CitySearch, Inc.* ..........................8,500 326,719
World Wrestling Federation Entertainment, Inc.* ................8,600 148,350
-------------
2,352,688
-------------
Financial Services - 1.7%
Allied Capital Corp. ..........................................23,800 435,838
American Home Mortgage Holdings, Inc.* ........................11,900 78,838
Gabelli Asset Management, Inc.* ...............................14,000 227,500
Heller Financial, Inc. ........................................28,500 571,781
Ocwen Financial Corp.* ........................................24,900 155,625
TD Waterhouse Group, Inc.* ....................................16,700 274,506
Web Street, Inc.* .............................................10,400 128,700
------------
1,872,788
------------
Food Retailers - 0.0%
Webvan Group Inc.* .............................................2,100 34,650
-------------
Forest Products & Paper - 1.4%
Buckeye Technologies, Inc.* ...................................15,700 233,538
Caraustar Industries, Inc. ....................................31,900 765,600
Universal Forest Products, Inc. ...............................36,200 533,950
------------
1,533,088
------------
Health Care Providers - 0.1%
Women First Healthcare, Inc.* .................................14,800 77,700
--------------
Heavy Machinery - 3.0%
Applied Science and Technology, Inc.* ..........................8,100 269,199
CNH Global N.V. ...............................................24,300 323,494
Dycom Industries, Inc.* ........................................4,300 189,469
IDEX Corp. ....................................................10,300 312,863
Kennametal, Inc. ...............................................9,100 305,988
Lam Research Corp.* ............................................6,400 714,000
Manitowoc Company, Inc. ........................................6,100 207,400
Smith International, Inc.* ....................................10,100 501,844
Terex Corp.* ..................................................15,800 438,450
------------
3,262,707
------------
Home Construction, Furnishings & Appliances - 0.7%
Furniture Brands International, Inc.* .........................18,300 402,600
Stanley Furniture Co., Inc.* ..................................21,100 387,713
------------
790,313
------------
Household Products - 0.0%
Jore Corp.* 2,500 19,531
-------------
Industrial - Diversified - 0.9%
AptarGroup, Inc. ...............................................7,800 195,975
Shaw Group, Inc.* .............................................19,400 491,063
Symyx Technologies Inc.* ......................................11,600 348,000
------------
1,035,038
------------
Insurance - 2.6%
Annuity and Life Re (Holdings) Ltd. ...........................25,100 655,738
E. W. Blanch Holdings, Inc. ....................................1,800 110,250
Fremont General Corp. .........................................66,300 488,963
HealthExtras, Inc.* ...........................................16,100 193,200
MIIX Group, Inc. ...............................................3,700 54,113
Oxford Health Plans, Inc.* ....................................25,800 327,338
Quotesmith.com, Inc.* ..........................................7,300 83,038
RenaissanceRe Holdings Ltd. ...................................21,400 874,725
StanCorp Financial Group, Inc. .................................3,600 90,675
------------
2,878,040
------------
Lodging - 0.6%
Aztar Corp.* ..................................................21,400 232,725
Extended Stay America, Inc.* ..................................21,000 160,125
Sun International Hotels Ltd.* ................................10,800 209,250
------------
602,100
------------
Media - Broadcasting & Publishing - 3.6%
Entercom Communications Corp.* ................................11,500 759,000
Insight Communications Co., Inc.* .............................14,300 423,638
NBC Internet, Inc. Class A* ....................................2,200 169,950
Radio One, Inc.* ...............................................2,000 184,000
Radio Unica Corp.* ...............................................900 25,988
Spanish Broadcasting System, Inc.* ............................16,400 660,100
TV Guide, Inc..................................................18,200 782,600
Wink Communications, Inc. * ....................................3,200 192,200
World Gate Communications, Inc.* ..............................14,500 689,656
-------------
3,887,132
-------------
Medical Bio - Technology - 1.5%
Affymetrix, Inc.* ..............................................6,200 1,052,063
Maxygen Inc.* ..................................................1,900 134,900
MedQuist, Inc.* ...............................................19,500 503,344
-------------
1,690,307
-------------
Medical Supplies - 4.7%
CONMED Corp.* ..................................................8,000 207,000
Cyberonics, Inc.* .............................................14,300 227,906
Cytyc Corp.* ...................................................2,100 128,231
Eclipse Surgical Technologies, Inc.* ..........................12,400 91,450
IDEXX Laboratories, Inc.* .....................................16,600 267,675
I-STAT Corp.* .................................................16,100 233,450
Kopin Corp. ...................................................26,200 1,100,400
Meade Instruments Corp.* .......................................1,000 28,500
Mettler-Toledo International, Inc.* ...........................25,500 973,781
MKS Instruments, Inc.* ........................................19,800 715,275
ResMed, Inc.* ..................................................8,800 367,400
Sangstat Medical Corp.* .......................................25,600 761,600
-------------
5,102,668
-------------
Metals - 0.9%
Mueller Industries* ...........................................18,600 674,250
Schnitzer Steel Industries, Inc. ..............................15,000 285,000
-------------
959,250
-------------
Oil & Gas - 4.1%
Atmos Energy Corp. ............................................24,500 500,719
Cooper Cameron Corp.* .........................................25,700 1,257,700
Devon Energy Corp. ............................................10,100 332,038
Global Marine, Inc.* ..........................................32,900 546,963
Kinder Morgan, Inc. ...........................................20,500 413,844
National-Oilwell, Inc.* .......................................22,400 351,400
Newfield Exploration Co.* .....................................22,400 599,200
Public Service Co. of North Carolina ...........................9,500 306,969
Spinnaker Exploration Co.* .....................................9,200 129,950
Unit Corp.* ....................................................8,200 63,038
--------------
4,501,821
--------------
Pharmaceuticals - 6.4%
Allscripts, Inc.* .............................................15,900 699,600
BioCryst Pharmaceuticals, Inc.* ................................6,500 191,750
Human Genome Sciences, Inc.* ..................................17,600 2,686,200
IDEC Pharmaceuticals Corp. .....................................9,900 972,675
ILEX Oncology, Inc.* ...........................................5,100 123,038
Ligand Pharmaceuticals* .......................................50,100 645,038
MedImmune, Inc.* ...............................................2,025 335,897
Millennium Pharmaceuticals, Inc.* ..............................6,500 793,000
Triangle Pharmaceuticals, Inc.* ...............................12,900 165,281
Vertex Pharmaceuticals Inc.* ..................................11,500 402,500
-------------
7,014,979
-------------
Real Estate - 3.1%
Arden Realty Group, Inc. (REIT) ...............................20,000 401,250
Centerpoint Properties Corp. (REIT) ............................8,800 315,700
CoStar Group Inc.* .............................................7,300 261,888
Cousins Properties, Inc. (REIT) ...............................14,600 495,488
Macerich Co. (The) (REIT) .....................................12,300 255,994
Manufactured Home Communities, Inc. (REIT) ....................19,400 471,663
Mills Corp. (REIT) ............................................13,500 241,313
Misson West Properties Inc. (REIT) ............................20,900 161,975
Post Properties, Inc. (REIT) ..................................21,867 836,413
-------------
3,441,684
-------------
Restaurants - 0.3%
Papa John's International, Inc.*...............................12,000 312,750
--------------
Retailers - 2.0%
1-800-FLOWERS.COM, Inc.* ......................................10,100 107,944
Alloy Online, Inc.* ...........................................17,000 267,750
Barnesandnoble.com inc.* .......................................5,800 82,288
Cost Plus, Inc.* ...............................................5,400 192,375
eToys Inc.* ....................................................1,400 36,750
RoweCom, Inc.* .................................................5,800 263,175
School Specialty, Inc.* .......................................32,300 488,538
Stamps.com, Inc.* ..............................................7,400 308,025
Williams-Sonoma, Inc.* .........................................8,800 404,800
-------------
2,151,645
-------------
Telephone Systems - 2.4%
American Mobile Satellite Corp.* ..............................28,600 602,388
Citadel Communication Corp.* ...................................8,100 525,488
Deltathree.com, Inc.* ..........................................6,700 172,525
Digital Island, Inc.* ..........................................1,600 152,200
IBasis, Inc.* ..................................................2,800 80,500
ITC/ \ DeltaCom, Inc.* ........................................11,200 309,400
Net2Phone, Inc.* ...............................................5,500 252,656
Redback Networks, Inc.* ..........................................700 124,250
TeleCorp PCS, Inc.* ............................................3,300 125,400
Tritel, Inc.* ..................................................3,100 98,231
Z-Tel Technologies, Inc.* ......................................3,400 137,275
------------
2,580,313
------------
Textiles, Clothing & Fabrics - 0.4%
Columbia Sportswear Co.* ......................................11,000 236,500
Vans, Inc.* ...................................................12,400 151,900
------------
388,400
------------
Transportation - 2.3%
American Classic Voyages Co.* ..................................9,800 343,000
C.H. Robinson Worldwide, Inc. .................................20,800 826,800
PNV.net, Inc.* ................................................21,300 174,394
Travel Services International, Inc.* ...........................9,200 83,950
Werner Enterprises, Inc. ......................................37,275 524,180
Willis Lease Finance Corp.* ...................................29,600 190,550
Wisconsin Central Transport Corp.* ............................24,300 326,531
-------------
2,469,405
-------------
Water Companies - 0.5%
E-Town Corp.....................................................8,800 547,800
-------------
TOTAL INVESTMENTS - 95.2%
(Cost $74,481,487) 104,013,126
Other Assets and Liabilities (net) - 4.8% 5,298,505
--------------
TOTAL NET ASSETS - 100.0% $109,311,631
===============
</TABLE>
Portfolio Footnotes:
* Non-income producing security.
REIT - Real Estate Investment Trust
ADR - American Depositary Receipt
Cova Series Trust
Quality Bond Portfolio
PORTFOLIO OF INVESTMENTS
December 31, 1999
(Percentage of Net Assets)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Par Security Value
Amount Description Coupon Maturity (Note 1)
-----------------------------------------------------------------------------------------------------------------------------------
Domestic Bonds & Debt Securities - 100.1%
Asset Backed Securities - 6.3%
<S> <C> <C> <C>
$ 400,000 California Infrastructure..................................... 6.420% 09/25/2008 $ 390,010
1,000,000 Chase Credit Master Trust..................................... 6.300% 04/15/2003 999,725
360,000 Citibank Credit Card Master Trust............................. 5.500% 02/15/2006 340,677
1,230,000 Citibank Credit Card Master Trust............................. 6.150% 03/10/2011 1,114,165
730,000 Ford Credit Auto Loan Master Trust............................ 5.500% 02/15/2003 720,090
900,000 MBNA Master Credit Card Trust................................. 7.000% 02/15/2012 882,716
595,000 Money Store Home Equity Trust (The)........................... 6.485% 12/15/2038 572,833
500,000 Nationsbank Card Master Trust................................. 6.450% 04/15/2003 500,323
500,000 Peco Energy Transition Trust.................................. 5.800% 03/01/2007 476,178
------------
5,996,717
------------
Automotive - 1.6%
155,000 Federal - Mogul Corp.......................................... 7.375% 01/15/2006 142,187
95,000 Federal - Mogul Corp.......................................... 7.750% 07/01/2006 88,093
845,000 Ford Motor Credit Co.......................................... 7.375% 10/28/2009 835,893
500,000 General Motors Acceptance Corp................................ 6.750% 11/04/2004 489,578
------------
1,555,751
------------
Banking - 6.5%
2,000,000 Chase Manhattan Corp.......................................... 9.750% 11/01/2001 2,095,530
225,000 Fleet Capital Ltd............................................. 7.920% 12/11/2026 209,871
475,000 Household Finance Corp........................................ 5.875% 02/01/2009 421,477
10,000 NationsBank Corp.............................................. 7.250% 10/15/2025 9,287
2,000,000 Providian National Bank....................................... 6.250% 05/06/2001 1,961,814
1,500,000 Wachovia Corp................................................. 6.700% 06/21/2004 1,478,042
--------------
6,176,021
--------------
Beverages, Food, & Tobacco - 0.2%
250,000 Smithfield Foods, Inc......................................... 7.625% 02/15/2008 226,250
--------------
Collateralized Mortgage Obligations - 5.1
2,200,000 Credit Suisse First Boston Mortgage Securities Corp.(b)....... 7.290% 09/15/2009 2,161,377
252,460 Federal Home Loan Mortgage Corp. (b).......................... 6.500% 07/15/2016 249,737
150,000 Federal Home Loan Mortgage Corp. (b).......................... 6.500% 09/15/2023 145,978
150,000 Federal National Mortgage Association (b)..................... 6.500% 11/25/2007 147,749
1,999,338 First Nationwide Trust........................................ 6.500% 08/31/2029 1,846,899
322,113 Ocwen Residential MBS Corp. (144A)^ (b)....................... 7.000% 10/25/2040 317,257
--------------
4,868,997
--------------
Communications - 0.4%
735,000 Aerial Communications, Inc. (144A)^........................... + 02/01/2008 347,439
70,000 Tele-Communications TCI Group................................. 7.875% 02/15/2026 70,407
------------
417,846
------------
Corporate Mortgage Backed Securities - 9.9%
121,015 Chase Commercial Mortgage Securities (b)...................... 6.025% 08/18/2007 115,166
2,000,000 Chase Manhattan Bank - First Union National (b)............... 7.439% 07/15/2009 1,987,850
1,065,000 Deutsche Mortgage and Asset Receiving Corp. (b)............... 6.538% 02/15/2008 1,002,117
3,000,000 First Union Lehman Brothers Co. (b)........................... 6.650% 12/18/2007 2,864,535
165,000 LB Commercial Conduit Mortgage Trust (b)...................... 7.325% 09/15/2009 163,082
400,000 Lehman Brothers Commercial Conduit Mortgage Trust (b)......... 6.480% 01/18/2008 377,218
170,000 Morgan Stanley Capital, Inc. (b).............................. 6.520% 01/15/2008 160,999
305,000 Morgan Stanley Capital, Inc. (b).............................. 6.170% 10/03/2008 280,507
1,872,582 Morgan Stanley Capital, Inc. (b).............................. 6.590% 10/03/2030 1,828,885
685,000 Nomura Asset Securities Corp. (b)............................. 6.590% 03/17/2028 644,904
-----------
9,425,263
-----------
Electric Utilities - 1.3%
50,000 CalEnergy Co., Inc............................................ 7.520% 09/15/2008 48,748
188,000 Calpine Corp.................................................. 7.625% 04/15/2006 180,010
50,000 Calpine Corp.................................................. 7.875% 04/01/2008 48,125
250,000 Columbus Southern Power....................................... 6.850% 10/03/2005 239,779
125,000 Kincaid Generation LLC (144A)^................................ 7.330% 06/15/2020 110,548
150,000 PacifiCorp.................................................... 6.750% 07/15/2004 146,984
500,000 Western Resources, Inc........................................ 6.250% 08/15/2003 479,341
-------------
1,253,535
-------------
Electrical Equipment - 1.1%
1,000,000 General Electric Capital Corp................................. 8.125% 04/01/2008 1,038,273
--------------
Financial Services - 0.6%
650,000 Citigroup Capital............................................. 7.750% 12/01/2036 595,764
--------------
Heavy Machinery - 0.2%
225,000 Ingersoll-Rand Co............................................. 6.391% 11/15/2027 216,800
--------------
Industrial - Diversified - 0.5%
500,000 Armstrong World Industries, Inc............................... 6.350% 08/15/2003 482,290
--------------
Media - Broadcasting & Publishing - 2.7%
125,000 Clear Channel Communications, Inc............................. 7.250% 10/15/2027 113,199
750,000 Comcast Cable Communications.................................. 6.200% 11/15/2008 680,970
250,000 Fox Liberty Networks LLC...................................... 8.875% 08/15/2007 256,250
30,000 News America Holdings, Inc.................................... 7.700% 10/30/2025 28,046
500,000 Time Warner, Inc.............................................. 7.975% 08/15/2004 509,311
1,000,000 Turner Broadcasting Systems, Inc.............................. 7.400% 02/01/2004 999,012
---------------
2,586,788
---------------
Oil & Gas - 2.1%
1,200,000 Coastal Corp.................................................. 6.500% 05/15/2006 1,129,278
200,000 Dynegy, Inc................................................... 6.875% 07/15/2002 197,875
65,000 Enron Corp.................................................... 6.950% 07/15/2028 57,268
200,000 LASMO (USA), Inc.............................................. 7.500% 06/30/2006 197,166
300,000 National Fuel Gas Co.......................................... 6.214% 08/12/2027 289,790
100,000 NGC Corp...................................................... 7.625% 10/15/2026 90,127
-------------
1,961,504
-------------
Retailers - 2.1%
1,000,000 Federated Department Stores, Inc.............................. 8.125% 10/15/2002 1,021,017
1,000,000 Wal-Mart Stores, Inc.......................................... 6.875% 08/10/2009 975,138
--------------
1,996,155
--------------
Telephone Systems - 2.5%
250,000 Global Crossing Holding Ltd. (144A)^.......................... 9.125% 11/15/2006 248,438
1,000,000 Sprint Capital Corp........................................... 6.125% 11/15/2008 908,104
100,000 U.S. Cellular Corp............................................ 7.250% 08/15/2007 95,538
1,100,000 WorldCom, Inc................................................. 7.750% 04/01/2027 1,124,509
--------------
2,376,589
--------------
U.S. Government Agency - 12.9%
23,929 Federal Home Loan Mortgage Corp. (b).......................... 8.000% 09/01/2008 24,156
1,200,000 Federal Home Loan Mortgage Corp. (b).......................... 5.125% 10/15/2008 1,050,658
1,020,000 Federal National Mortgage Association (b)..................... 6.000% 05/15/2008 954,843
2,085,000 Federal National Mortgage Association (b)..................... 6.625% 09/15/2009 2,026,308
460,000 Federal National Mortgage Association (b)..................... 6.160% 08/07/2028 400,418
5,260,000 Federal National Mortgage Association (a)..................... 6.000% 01/29/2030 4,816,172
3,070,000 Federal National Mortgage Association (a)..................... 6.500% 01/29/2030 2,894,427
---------------
12,166,982
---------------
U.S. Government Agency Mortgage Backed Securities - 38.2%
25,208 Federal National Mortgage Association (b)..................... 8.500% 07/01/2019 25,886
389,015 Federal National Mortgage Association......................... 7.000% 09/01/2027 376,357
466,806 Federal National Mortgage Association......................... 7.000% 09/01/2027 451,616
506,405 Federal National Mortgage Association (b)..................... 6.500% 01/01/2028 477,478
73,371 Federal National Mortgage Association (b)..................... 8.000% 01/01/2028 74,014
891,341 Federal National Mortgage Association......................... 7.000% 06/01/2028 862,337
417,949 Federal National Mortgage Association......................... 6.000% 07/01/2028 382,772
413,746 Federal National Mortgage Association......................... 7.000% 08/01/2028 400,283
887,191 Federal National Mortgage Association (b)..................... 7.000% 09/01/2028 859,934
395,746 Federal National Mortgage Association......................... 6.000% 10/01/2028 362,437
640,460 Federal National Mortgage Association......................... 6.500% 10/01/2028 603,875
388,866 Federal National Mortgage Association......................... 6.000% 11/01/2028 356,136
294,624 Federal National Mortgage Association......................... 6.000% 11/01/2028 269,826
300,409 Federal National Mortgage Association......................... 6.000% 11/01/2028 275,124
612,353 Federal National Mortgage Association......................... 6.500% 11/01/2028 577,373
278,471 Federal National Mortgage Association......................... 6.500% 11/01/2028 262,564
331,996 Federal National Mortgage Association......................... 7.000% 11/01/2028 321,192
289,795 Federal National Mortgage Association......................... 6.000% 12/01/2028 265,404
291,281 Federal National Mortgage Association......................... 6.000% 02/01/2029 266,765
429,982 Federal National Mortgage Association......................... 7.000% 02/01/2029 415,991
284,489 Federal National Mortgage Association......................... 6.000% 03/01/2029 260,545
419,096 Federal National Mortgage Association......................... 6.500% 03/01/2029 395,156
399,542 Federal National Mortgage Association......................... 6.500% 03/01/2029 376,719
386,200 Federal National Mortgage Association......................... 6.500% 03/01/2029 364,139
287,227 Federal National Mortgage Association......................... 6.000% 04/01/2029 263,052
292,063 Federal National Mortgage Association......................... 6.500% 04/01/2029 275,379
41,152 Federal National Mortgage Association......................... 6.500% 04/01/2029 38,802
84,040 Federal National Mortgage Association......................... 6.500% 04/01/2029 79,240
650,332 Federal National Mortgage Association......................... 6.500% 04/01/2029 613,183
318,878 Federal National Mortgage Association......................... 6.500% 04/01/2029 300,663
34,527 Federal National Mortgage Association......................... 6.000% 05/01/2029 31,621
262,953 Federal National Mortgage Association......................... 7.500% 06/01/2029 260,281
84,702 Federal National Mortgage Association......................... 7.500% 06/01/2029 83,841
718,985 Federal National Mortgage Association......................... 7.500% 06/01/2029 711,680
368,116 Federal National Mortgage Association......................... 7.000% 07/01/2029 356,137
793,513 Federal National Mortgage Association......................... 7.500% 07/01/2029 785,451
273,385 Federal National Mortgage Association......................... 7.500% 07/01/2029 270,607
263,692 Federal National Mortgage Association......................... 7.500% 07/01/2029 261,012
957,407 Federal National Mortgage Association......................... 7.500% 08/01/2029 947,679
677,667 Federal National Mortgage Association......................... 7.500% 08/01/2029 670,781
54,026 Federal National Mortgage Association......................... 8.000% 08/01/2029 54,500
600,238 Federal National Mortgage Association......................... 7.000% 09/01/2029 580,706
563,132 Federal National Mortgage Association......................... 7.000% 09/01/2029 544,808
62,735 Federal National Mortgage Association......................... 7.000% 09/01/2029 60,694
703,864 Federal National Mortgage Association......................... 7.500% 09/01/2029 696,712
1,995,627 Federal National Mortgage Association......................... 7.500% 09/01/2029 1,975,349
173,536 Federal National Mortgage Association......................... 7.500% 09/01/2029 171,772
934,869 Federal National Mortgage Association......................... 7.500% 09/01/2029 925,370
319,157 Federal National Mortgage Association......................... 7.500% 09/01/2029 315,914
993,403 Federal National Mortgage Association......................... 7.500% 09/01/2029 983,309
503,770 Federal National Mortgage Association......................... 7.500% 09/01/2029 498,651
121,221 Federal National Mortgage Association......................... 8.000% 09/01/2029 122,283
173,076 Federal National Mortgage Association......................... 8.000% 09/01/2029 174,592
33,609 Federal National Mortgage Association (b)..................... 8.500% 09/01/2029 34,514
353,502 Federal National Mortgage Association......................... 7.500% 10/01/2029 349,910
587,227 Federal National Mortgage Association......................... 7.500% 10/01/2029 581,260
703,034 Federal National Mortgage Association......................... 7.500% 10/01/2029 695,891
84,643 Federal National Mortgage Association......................... 8.000% 10/01/2029 85,385
122,296 Federal National Mortgage Association......................... 8.000% 10/01/2029 123,367
175,753 Federal National Mortgage Association......................... 8.000% 10/01/2029 177,292
49,310 Federal National Mortgage Association......................... 8.000% 10/01/2029 49,741
294,649 Federal National Mortgage Association......................... 7.500% 11/01/2029 291,655
833,420 Federal National Mortgage Association......................... 8.000% 11/01/2029 840,719
630,527 Federal National Mortgage Association......................... 8.000% 11/01/2029 636,050
1,583,337 Federal National Mortgage Association......................... 8.000% 11/01/2029 1,597,205
40,581 Government National Mortgage Association (b).................. 9.000% 01/15/2020 42,530
70,003 Government National Mortgage Association...................... 7.500% 02/15/2027 69,296
2,726,488 Government National Mortgage Association...................... 6.500% 12/15/2028 2,562,048
5,921,790 Government National Mortgage Association (b).................. 7.000% 01/15/2029 5,726,247
--------------
36,201,102
--------------
U.S. Treasury Securities - 5.9%
100,000 U.S. Treasury Note (c)........................................ 5.625% 11/30/2000 99,656
1,490,000 U.S. Treasury Note (b)........................................ 5.625% 09/30/2001 1,475,100
3,315,000 U.S. Treasury Bond (b)........................................ 8.875% 02/15/2019 4,032,906
18,000 U.S. Treasury Bond (b)........................................ 6.750% 08/15/2026 18,084
------------
5,625,746
------------
Total Domestic Bonds & Debt Securities (Cost $98,020,609) 95,168,373
-----------
Foreign Bonds & Debt Securities - 4.5%
Canada - 2.7%
200,000 Canadian Imperial Bank (Yankee)............................... 6.200% 08/01/2000 199,563
149,700 Express Pipeline L.P. (U.S.$) (144A)^......................... 6.470% 12/31/2011 133,926
80,000 Gulf Canada Resources Ltd. (Yankee)........................... 8.250% 03/15/2017 69,765
1,390,000 Hydro-Quebec (Yankee)......................................... 11.750% 02/01/2012 1,834,703
100,000 Hydro-Quebec (Yankee)......................................... 9.500% 11/15/2030 119,165
200,000 Laidlaw, Inc. (Yankee)........................................ 6.720% 10/01/2027 172,222
--------------
2,529,344
--------------
Mexico - 0.5%
445,000 United Mexican States (U.S.$)................................. 11.375% 09/15/2016 504,675
--------------
Netherlands - 0.3%
250,000 KPNQwest B.V. (Euro).......................................... 8.125% 06/01/2009 241,250
--------------
Norway - 0.4%
500,000 Statoil (144A)^ (U.S.$)....................................... 6.500% 12/01/2028 422,656
--------------
Panama - 0.2%
274,335 Panama (PDI) (U.S.$).......................................... 4.000% 07/17/2016 218,876
--------------
Peru - 0.2%
280,000 Peru (PDI) (U.S.$)............................................ 4.500% 03/07/2017 194,544
--------------
Philippine Islands - 0.1%
90,000 Philippines (Republic of) (U.S.$)............................. 8.875% 04/15/2008 88,200
--------------
Sweden - 0.1%
60,000 Stena AB (Yankee)............................................. 8.750% 06/15/2007 49,200
--------------
Total Foreign Bonds & Debt Securities ($4,581,299) 4,248,745
--------------
TOTAL INVESTMENTS - 104.6%
(Cost $102,601,908) $ 99,417,118
--------------
Other Assets and Liabilities (net) - (4.6%) (4,352,049)
--------------
TOTAL NET ASSETS - 100.0% $ 95,065,069
==============
Portfolio Footnotes:
(a) Security purchased on a delayed delivery or when-issued basis. (See note 1 to financial statements)
(b) Assets segregated for purchase price of delayed delivery or when-issued security.
(c) Held as collateral for open futures contracts
^ Securities that may be resold to "qualified institutional
buyers" under Rule 144A or securities offered pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
These securities have been determined to be liquid under
guidelines established by the Board of Trustees.
+ Zero coupon bond
Yankee - U.S. Dollar denominated bonds issued by non-U.S. companies in the U.S.
PDI - Past Due Interest
</TABLE>
<PAGE>
Cova Series Trust
Select Equity Portfolio
PORTFOLIO OF INVESTMENTS
December 31, 1999
(Percentage of Net Assets)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Security Value
Description Shares (Note 1)
--------------------------------------------------------------------------------------
Common Stocks - 99.0%
Aerospace & Defense - 0.6%
<S> <C> <C>
Honeywell International Inc....................................26,100 $ 1,505,644
---------------
Automotive - 1.1%
Ford Motor Co..................................................25,900 1,384,031
Lear Corp.*....................................................45,600 1,459,200
---------------
2,843,231
---------------
Banking - 4.9%
Astoria Financial Corp.........................................23,700 721,369
Bank of America Corp...........................................26,954 1,352,754
Dime Bancorp, Inc..............................................44,600 674,575
First Union Corp...............................................85,400 2,802,188
KeyCorp........................................................40,000 885,000
U.S. Bancorp..................................................164,700 3,921,919
Washington Mutual, Inc.........................................73,060 1,899,560
--------------
12,257,365
--------------
Beverages, Food & Tobacco - 3.7%
Bestfoods......................................................25,600 1,345,600
Coca-Cola Co. (The)............................................18,200 1,060,150
Coca-Cola Enterprises, Inc.....................................31,500 633,938
Pepsico, Inc...................................................31,100 1,096,275
Philip Morris Co., Inc........................................171,000 3,965,063
Seagrams Co., Ltd..............................................25,400 1,141,413
-------------
9,242,439
-------------
Chemicals - 4.2%
Air Products & Chemicals, Inc..................................72,900 2,446,706
Monsanto Co...................................................108,100 3,851,063
Rohm & Haas Co................................................101,300 4,121,644
--------------
10,419,413
--------------
Commercial Services - 0.4%
Cendant Corp.*.................................................36,175 960,898
---------------
Communications - 1.4%
Lucent Technologies, Inc.......................................45,745 3,422,298
---------------
Computer Software & Processing - 12.8%
America Online, Inc............................................44,900 3,387,144
Automatic Data Processing, Inc.................................37,400 2,014,925
BMC Software, Inc.*............................................21,800 1,742,638
Cisco Systems, Inc.............................................70,600 7,563,025
Citrix Systems, Inc.*..........................................10,000 1,230,000
Microsoft Corp.*..............................................113,100 13,204,414
Oracle Corp.*..................................................26,050 2,919,228
--------------
32,061,374
--------------
Computers & Information - 6.7%
Compaq Computer Corp...........................................50,800 1,374,775
Dell Computer Corp.*...........................................50,400 2,570,400
EMC Corp. *....................................................19,200 2,097,600
International Business Machines Corp...........................17,200 1,857,600
Quantum Corp. - DLT & Storage Systems*........................117,600 1,778,700
Quantum Corp. - Hard Disk Drive*...............................70,100 486,319
Seagate Technology, Inc.*......................................34,700 1,615,719
Sun Microsystems, Inc. *.......................................64,800 5,017,950
--------------
16,799,063
--------------
Cosmetics & Personal Care - 0.9%
Gillette Co....................................................53,700 2,211,769
---------------
Electrical Equipment - 3.0%
General Electric Co............................................48,400 7,489,900
---------------
Electric Utilities - 1.0%
Carolina Power & Light Co......................................19,000 578,313
Northern States Power Co.......................................30,300 590,850
PG&E Corp......................................................38,800 795,400
Wisconsin Energy Corp..........................................28,500 548,625
---------------
2,513,188
---------------
Electronics - 4.7%
Applied Materials, Inc.*........................................5,300 671,444
Intel Corp.....................................................58,800 4,839,975
Motorola, Inc..................................................24,700 3,637,075
Texas Instruments, Inc.........................................27,200 2,635,000
--------------
11,783,494
--------------
Entertainment & Leisure - 0.7%
International Game Technology..................................83,900 1,704,219
---------------
Environmental Controls - 1.4%
Republic Services, Inc.*......................................149,700 2,151,938
Waste Management, Inc..........................................76,574 1,316,116
------------
3,468,054
------------
Financial Services - 4.7%
CIT Group, Inc. (The)..........................................58,600 1,237,925
Citigroup, Inc.................................................73,400 4,078,288
Federal Home Loan Mortgage Corp................................25,300 1,190,681
Federal National Mortgage Association..........................27,300 1,704,544
Goldman Sachs Group, Inc. (The)................................36,400 3,428,425
---------------
11,639,863
---------------
Forest Products & Paper - 2.1%
Bowater, Inc...................................................19,500 1,059,094
Kimberly-Clark Corp............................................17,700 1,154,925
Smurfit-Stone Container Corp.*................................127,883 3,133,134
------------
5,347,153
------------
Health Care Providers - 0.5%
Tenet Healthcare Corp.*........................................53,200 1,250,200
---------------
Heavy Machinery - 1.2%
Cooper Industries, Inc.........................................50,500 2,042,094
Deere & Co.....................................................22,700 984,613
-------------
3,026,707
-------------
Household Products - 1.4%
Procter & Gamble Co............................................31,200 3,418,350
---------------
Industrial - Diversified - 3.0%
Tyco International Ltd........................................195,020 7,581,403
---------------
Insurance - 5.2%
Ambac Financial Group, Inc.....................................65,500 3,418,281
American International Group...................................17,800 1,924,625
Aon Corp.......................................................69,200 2,768,000
Marsh & McLennan Co., Inc......................................12,800 1,224,800
UnumProvident Corp............................................112,143 3,595,585
--------------
12,931,291
--------------
Media - Broadcasting & Publishing - 1.7%
Comcast Corp...................................................19,200 964,800
MediaOne Group, Inc.*..........................................27,300 2,096,981
News Corp., Ltd. (The) (ADR)...................................32,200 1,231,650
--------------
4,293,431
--------------
Medical Supplies - 1.8%
Forest Laboratories, Inc.*.....................................24,900 1,529,794
PE Corp - PE Biosystems Group..................................24,800 2,983,750
--------------
4,513,544
--------------
Metals - 1.8%
Allegheny Technologies, Inc....................................69,700 1,563,894
Phelps Dodge Corp...............................................8,200 550,425
Reynolds Metals Co.............................................12,600 965,475
USX - U.S. Steel Group, Inc....................................45,400 1,498,200
------------
4,577,994
------------
Oil & Gas - 7.8%
Columbia Energy Group..........................................54,300 3,434,475
Conoco Inc. (Class B)..........................................41,800 1,039,775
Cooper Cameron Corp.*..........................................27,100 1,326,206
Exxon Mobil Corp..............................................132,010 10,635,056
Texaco, Inc....................................................29,800 1,618,513
Tosco Corp.....................................................23,400 636,188
Union Pacific Resources Group, Inc.............................46,900 597,975
---------------
19,288,188
---------------
Pharmaceuticals - 4.7%
American Home Products Corp....................................64,700 2,551,606
Amgen, Inc.....................................................25,500 1,531,594
Bristol-Myers Squibb Co........................................39,300 2,522,569
Eli Lilly & Co.................................................53,600 3,564,400
Warner Lambert Co..............................................20,000 1,638,750
-------------
11,808,919
-------------
Retailers - 3.9%
Abercrombie & Fitch Co.........................................39,200 1,046,150
Circuit City Stores, Inc.......................................24,800 1,117,550
Dayton-Hudson Corp.............................................20,100 1,476,094
Federated Department Stores, Inc.*.............................34,000 1,719,125
TJX Companies, Inc.............................................61,000 1,246,688
Wal-Mart Stores, Inc...........................................46,500 3,214,313
--------------
9,819,920
--------------
Telephone Systems - 10.4%
AT&T Corp. - Liberty Media Group*..............................82,700 4,693,225
AT&T Corp......................................................72,000 3,654,000
Bell Atlantic Corp.............................................18,000 1,108,125
Global Crossing Ltd.*..........................................39,800 1,990,000
GTE Corp.......................................................35,200 2,483,800
Level 3 Communications, Inc.*..................................27,800 2,276,125
MCI WorldCom, Inc..............................................86,871 4,609,592
SBC Communications Corp........................................82,077 4,001,254
Sprint Corp (PCS Group)*........................................8,200 840,500
----------------
25,656,621
----------------
Transportation - 1.3%
CSX Corp.......................................................28,000 878,500
Union Pacific Corp.............................................55,800 2,434,275
---------------
3,312,775
---------------
TOTAL INVESTMENTS - 99.0%
(Cost $225,019,940) 247,148,708
Other Assets and Liabilities (net) - 1.0% 2,553,241
---------------
TOTAL NET ASSETS - 100.0% $ 249,701,949
===============
Portfolio Footnotes:
* Non-income producing security.
ADR - American Depositary Receipt
</TABLE>
<PAGE>
Cova Series Trust
Large Cap Stock Portfolio
PORTFOLIO OF INVESTMENTS
December 31, 1999
(Percentage of Net Assets)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Security Value
Description Shares (Note 1)
--------------------------------------------------------------------------------------
Common Stocks - 98.5%
Advertising - 0.1%
<S> <C> <C>
DoubleClick Inc.* ..............................................1,500 $ 379,594
-------------
Aerospace & Defense - 0.9%
B.F. Goodrich Company (The).....................................5,300 145,750
Honeywell International Inc....................................24,900 1,436,419
Lockheed Martin Corp...........................................30,900 675,938
Teledyne Technologies, Inc.*........................................5 47
-------------
2,258,154
-------------
Airlines - 0.1%
Northwest Airlines Corp.*.......................................2,400 53,400
Southwest Airlines, Inc.........................................8,800 142,450
------------
195,850
------------
Automotive - 1.7%
Cooper Tire & Rubber Co.........................................1,600 24,900
Dana Corp......................................................11,700 350,269
Delphi Automotive Systems Corp.................................33,100 521,325
Ford Motor Co..................................................49,100 2,623,781
Genuine Parts Co...............................................10,400 258,050
Goodyear Tire & Rubber Co......................................11,000 310,063
Lear Corp.*.....................................................4,600 147,200
Paccar, Inc.....................................................3,600 159,525
-------------
4,395,113
-------------
Banking - 6.5%
AmSouth Bancorp................................................17,000 328,313
Associated Banc-Corp............................................3,000 102,750
Associates First Capital Corp..................................32,200 883,488
Astoria Financial Corp..........................................1,400 42,613
BancWest Corp...................................................3,300 64,350
Bank of America Corp...........................................73,700 3,698,819
Bank One Corp..................................................50,200 1,609,538
Colonial Bancgroup, Inc...........................................600 6,225
Comerica, Inc...................................................6,900 322,144
Commercial Federal Corp...........................................600 10,688
Compass Bancshares, Inc.........................................5,400 120,488
Dime Bancorp, Inc...............................................6,600 99,825
First Tennessee National Corp...................................6,200 176,700
First Union Corp...............................................48,800 1,601,250
Firstar Corp...................................................35,400 747,825
FirstMerit Corp.................................................4,300 98,900
Fleet Boston Financial Corp....................................28,100 978,231
Golden West Financial Corp......................................7,800 261,300
Greenpoint Financial Corp.......................................5,500 130,969
Hibernia Corp...................................................7,600 80,750
Household International, Inc...................................19,100 711,475
Huntington Bancshares, Inc.....................................11,000 262,625
KeyCorp........................................................21,400 473,475
Mercantile Bankshares Corp......................................3,300 105,394
M&T Bank Corp.....................................................400 165,700
National City Corp.............................................27,300 646,669
North Fork Bancorp., Inc........................................6,500 113,750
Pacific Century Financial Corp..................................2,400 44,850
Peoples Heritage Financial Group, Inc...........................3,200 48,200
PNC Bank Corp..................................................14,700 654,150
Southtrust Corp.................................................7,300 276,031
Sovereign Bancorp, Inc..........................................6,000 44,719
Summit Bancorp..................................................8,500 260,313
TCF Financial Corp..............................................3,600 89,550
Union Planters Corp.............................................6,800 268,175
U.S. Bancorp...................................................33,400 795,338
Washington Federal, Inc...........................................200 3,950
Washington Mutual, Inc.........................................28,800 748,800
Wilmington Trust Corp...........................................1,100 53,075
------------
17,131,405
------------
Beverages, Food & Tobacco - 3.8%
Bestfoods.......................................................9,400 494,088
Coca-Cola Co. (The)............................................26,100 1,520,325
General Mills, Inc.............................................14,100 504,075
Heinz (H.J.), Co...............................................16,200 644,963
Hershey Foods Corp..............................................6,200 294,500
Nabisco Holdings Corp...........................................1,800 56,925
Philip Morris Co., Inc........................................114,800 2,661,925
Sara Lee Corp..................................................40,500 893,531
Seagrams Co., Ltd..............................................38,900 1,748,069
Unilever N.V...................................................21,700 1,181,294
-------------
9,999,695
-------------
Building Materials - 0.1%
Owens Corning...................................................3,300 63,731
USG Corp........................................................1,700 80,113
-------------
143,844
-------------
Chemicals - 2.0%
Air Products & Chemicals, Inc..................................26,800 899,475
Georgia Gulf Corp.................................................200 6,088
IMC Global, Inc.................................................7,300 119,538
Lyondell Petro Chemical Co.....................................13,100 167,025
Monsanto Co....................................................45,500 1,620,938
PPG Industries, Inc.............................................1,700 106,356
Praxair, Inc....................................................2,500 125,781
Rohm & Haas Co.................................................27,900 1,135,181
Solutia, Inc....................................................7,800 120,413
Union Carbide Corp.............................................12,800 854,400
USEC, Inc.......................................................1,800 12,600
-------------
5,167,795
-------------
Commercial Services - 1.2%
Cendant Corp.*.................................................98,700 2,621,719
Equifax, Inc...................................................14,900 351,081
Service Corp. International....................................31,400 217,838
-------------
3,190,638
-------------
Communications - 3.7%
Lucent Technologies, Inc.......................................88,500 6,620,906
Nortel Networks Corp...........................................14,500 1,464,500
QUALCOMM, Inc...................................................8,800 1,551,000
--------------
9,636,406
--------------
Computer Software & Processing - 13.7%
3 Com Corp.*....................................................3,300 155,100
Adobe Systems, Inc..............................................3,300 221,925
America Online, Inc............................................63,600 4,797,825
Automatic Data Processing, Inc.................................19,400 1,045,175
BMC Software, Inc.*.............................................9,300 743,419
Cisco Systems, Inc.............................................94,900 10,166,163
Citrix Systems, Inc.*...........................................1,700 209,100
First Data Corp................................................15,500 764,344
Microsoft Corp................................................131,100 15,305,888
Networks Associates, Inc.*......................................1,900 50,706
Novell, Inc.*..................................................11,400 453,863
Oracle Corp.....................................................2,900 324,981
Yahoo!, Inc.*...................................................3,400 1,471,138
--------------
35,709,627
--------------
Computers & Information - 5.1%
Apple Computer, Inc.*.............................................600 61,688
Compaq Computer Corp...........................................48,600 1,315,238
Dell Computer Corp................................................300 15,300
Electronic Data Systems Corp...................................14,200 950,513
EMC Corp.*.....................................................40,000 4,370,000
International Business Machines Corp...........................13,800 1,490,400
Lexmark International Group, Inc.*..............................3,600 325,800
Quantum Corp. - DLT & Storage Systems*..........................6,000 90,750
Seagate Technology, Inc.*.......................................7,200 335,250
Sun Microsystems, Inc..........................................57,000 4,413,938
-------------
13,368,877
-------------
Cosmetics & Personal Care - 0.7%
Gillette Co....................................................45,300 1,865,794
--------------
Electric Utilities - 2.0%
Allegheny Energy, Inc...........................................6,000 161,625
Carolina Power & Light Co......................................14,700 447,431
Central & South West Corp......................................28,500 570,000
Cinergy Corp....................................................8,100 195,413
CMS Energy Corp.................................................6,200 193,363
Dominion Resources, Inc........................................11,900 467,075
DTE Energy Co...................................................7,000 219,625
Entergy Corp...................................................11,300 290,975
FPL Group, Inc..................................................9,000 385,313
GPU, Inc........................................................6,200 185,613
NiSource, Inc...................................................6,600 117,975
Northern States Power Co.......................................16,900 329,550
PG&E Corp......................................................19,500 399,750
Pinnacle West Capital Corp......................................4,500 137,531
PP&L Resources, Inc.............................................8,000 183,000
Reliant Energy, Inc.............................................9,200 210,450
TECO Energy, Inc................................................6,700 124,369
Texas Utilities Co.............................................14,900 529,881
Wisconsin Energy Corp...........................................6,200 119,350
------------
5,268,289
------------
Electrical Equipment - 4.4%
Emerson Electric Co............................................15,300 877,838
General Electric Co............................................68,200 10,553,950
National Service Industries, Inc..................................300 8,850
Symbol Technologies, Inc........................................2,800 177,975
-------------
11,618,613
-------------
Electronics - 6.2%
Anixter International, Inc.*......................................300 6,188
Applied Materials, Inc.*.......................................11,500 1,456,906
Input/Output, Inc.*...............................................200 1,013
Intel Corp.(a)................................................100,700 8,288,869
Motorola, Inc..................................................18,900 2,783,025
National Semiconductor Corp.*...................................6,200 265,438
Raytheon Co....................................................14,400 357,300
Raytheon Co.(Class B)...........................................5,200 138,125
Texas Instruments, Inc.........................................28,800 2,790,000
Xilinx, Inc.....................................................2,600 118,219
-------------
16,205,083
-------------
Entertainment & Leisure - 1.1%
Eastman Kodak Co...............................................25,200 1,669,500
Hasbro, Inc.....................................................3,600 68,625
International Game Technology...................................5,000 101,563
Mattel, Inc....................................................23,500 308,438
Mirage Resorts, Inc.*..........................................18,200 278,688
Times Mirror Co.................................................7,000 469,000
------------
2,895,814
------------
Environmental Controls - 0.3%
Waste Management, Inc..........................................45,500 782,031
------------
Financial Services - 3.4%
Bear Stearns Co., Inc...........................................5,400 230,850
Charter One Financial, Inc.....................................10,200 195,075
CIT Group, Inc. (The)...........................................6,300 133,088
Citigroup, Inc.................................................23,600 1,311,275
Countrywide Credit Industries, Inc..............................5,400 136,350
Federal Home Loan Mortgage Corp................................31,000 1,458,938
Federal National Mortgage Association..........................31,900 1,991,756
Financial Security Assurance Holdings Ltd.........................500 26,063
Finova Group, Inc...............................................3,100 110,050
Franklin Resources, Inc.........................................1,200 38,475
Goldman Sachs Group, Inc. (The)................................11,900 1,120,831
Merrill Lynch & Co., Inc.......................................17,500 1,461,250
Ocwen Financial Corp.*............................................400 2,500
Paine Webber Group, Inc.........................................6,200 240,638
Provident Financial Group, Inc....................................500 17,938
Regions Financial Corp.........................................10,700 268,838
TD Waterhouse Group, Inc.*.....................................17,900 294,231
-------------
9,038,146
-------------
Food Retailers - 0.7%
Albertson's, Inc................................................6,300 203,175
Kroger Co......................................................43,500 821,063
Safeway, Inc.*.................................................26,600 945,963
------------
1,970,201
------------
Forest Products & Paper - 0.6%
Bowater, Inc....................................................1,900 103,194
Fort James Corp.................................................9,500 260,063
Georgia-Pacific Corp............................................2,800 142,100
International Paper Co.........................................14,900 840,919
Louisiana-Pacific Corp..........................................3,900 55,575
Pactiv Corporation*.............................................1,000 10,625
Smurfit-Stone Container Corp.*..................................8,400 205,800
-------------
1,618,276
-------------
Health Care Providers - 0.8%
Columbia/HCA Healthcare Corp...................................20,600 603,838
HEALTHSOUTH Corp.*.............................................19,900 106,963
Medtronic, Inc.................................................15,400 561,138
Tenet Healthcare Corp.*........................................18,400 432,400
United Healthcare Corp..........................................5,100 270,938
Wellpoint Health Networks, Inc.*................................3,400 224,188
------------
2,199,465
------------
Heavy Machinery - 0.8%
Baker Hughes, Inc...............................................8,500 179,031
Caterpillar Inc...................................................200 9,413
Cooper Industries, Inc..........................................7,100 287,106
Deere & Co.....................................................16,400 711,350
Eaton Corp......................................................5,000 363,125
Ingersoll-Rand Co...............................................6,800 374,425
Smith International, Inc.*......................................2,600 129,188
------------
2,053,638
------------
Home Construction, Furnishings & Appliances - 0.1%
Furniture Brands International, Inc.*.............................900 19,800
Leggett & Platt, Inc...........................................13,600 291,550
------------
311,350
------------
Household Products - 2.2%
Clorox Co......................................................11,000 554,125
Procter & Gamble Co............................................47,800 5,237,088
--------------
5,791,213
--------------
Industrial - Diversified - 1.2%
ITT Industries, Inc.............................................8,600 287,563
Temple Inland, Inc..............................................2,000 131,875
Tyco International Ltd.........................................67,800 2,635,725
Water Pik Tecnologies, Inc.*........................................5 48
-------------
3,055,211
-------------
Insurance - 3.3%
Aetna, Inc......................................................7,200 401,850
Allstate Corp..................................................63,200 1,516,800
Ambac Financial Group, Inc......................................5,600 292,250
American International Group....................................8,600 929,875
Aon Corp.......................................................19,900 796,000
AXA Financial, Inc.............................................11,600 392,950
Cigna Corp.....................................................10,200 821,738
Fremont General Corp............................................1,600 11,800
Hartford Financial Services Group, Inc.........................18,000 852,750
Lincoln National Corp..........................................13,000 520,000
MBIA, Inc.......................................................8,300 438,344
Mercury General Corp............................................3,000 66,750
Safeco Corp....................................................10,400 258,700
St. Paul Co....................................................14,600 491,838
Torchmark Corp..................................................5,200 151,125
Travelers Property Casualty Corp................................4,800 164,400
UnumProvident Corp.............................................19,800 634,838
------------
8,742,008
------------
Lodging - 0.3%
Extended Stay America, Inc.*......................................700 5,338
Hilton Hotels Corp.............................................26,400 254,100
Mandalay Resort Group*..........................................1,000 20,125
Starwood Hotels & Resorts Worldwide, Inc.......................17,700 415,950
------------
695,513
------------
Media - Broadcasting & Publishing - 2.9%
Comcast Corp...................................................39,000 1,959,750
Gannett Co., Inc...............................................12,400 1,011,375
Knight-Ridder, Inc.............................................10,000 595,000
MediaOne Group, Inc.*..........................................40,300 3,095,544
New York Times Co..............................................18,300 898,988
-------------
7,560,657
-------------
Medical Supplies - 0.6%
Becton Dickinson & Co...........................................4,900 131,075
Boston Scientific Corp.*........................................7,600 166,250
Forest Laboratories, Inc.*.....................................11,900 731,106
Humana, Inc.*...................................................6,000 49,125
Perkin-Elmer Biosystems Group...................................3,500 421,094
St. Jude Medical, Inc.*.........................................2,300 70,581
-------------
1,569,231
-------------
Metals - 0.8%
Alcoa, Inc.....................................................16,300 1,352,900
Allegheny Technologies, Inc.....................................7,850 176,134
Freeport-McMoran Copper & Gold, Inc. (Class B)*................10,900 230,263
Hubbell, Inc....................................................2,400 65,400
Phelps Dodge Corp.................................................600 40,275
Reynolds Metals Co..............................................2,900 222,213
-------------
2,087,185
-------------
Office Equipment - 0.3%
Harris Corp., Inc.................................................100 2,669
Xerox Corp.....................................................39,300 891,619
-------------
894,288
-------------
Oil & Gas - 5.6%
Chevron Corp...................................................18,800 1,628,550
Columbia Energy Group...........................................4,100 259,325
Conoco Inc. (Class B)..........................................17,900 445,263
Consolidated Natural Gas Co.....................................3,900 253,256
Cooper Cameron Corp.*...........................................2,900 141,919
ENSCO International, Inc........................................6,600 150,975
Exxon Mobil Corp...............................................97,184 7,829,386
Global Marine, Inc.*............................................9,000 149,625
Phillips Petroleum Co...........................................7,900 371,300
Royal Dutch Petroleum Co.......................................49,500 2,991,656
R&B Falcon Corp.*..............................................10,400 137,800
Tosco Corp......................................................8,200 222,938
Ultramar Diamond Shamrock Corp..................................4,700 106,631
Union Pacific Resources Group, Inc..............................7,300 93,075
Valero Energy Corp................................................800 15,900
-------------
14,797,599
-------------
Pharmaceuticals - 6.9%
Abbott Laboratories............................................44,200 1,605,013
Alza Corp.*....................................................19,100 661,338
American Home Products Corp....................................55,700 2,196,669
Bristol-Myers Squibb Co........................................77,600 4,980,950
Eli Lilly & Co.................................................49,000 3,258,500
Genzyme Corp.*..................................................7,900 355,500
Human Genome Sciences, Inc.*......................................900 137,363
Johnson & Johnson...............................................1,700 158,313
Merck & Co., Inc...............................................14,500 972,406
Pfizer, Inc....................................................17,500 567,656
Schering-Plough Corp............................................2,200 92,813
Warner Lambert Co..............................................35,500 2,908,781
Watson Pharmaceutical, Inc.*....................................6,500 232,781
------------
18,128,083
------------
Retailers - 5.8%
Abercrombie & Fitch Co..........................................5,500 146,781
Circuit City Stores, Inc........................................3,400 153,213
CompUSA, Inc.*..................................................2,100 10,763
CVS Corp........................................................3,700 147,769
Dayton-Hudson Corp.............................................23,600 1,733,125
Federated Department Stores, Inc.*.............................11,400 576,413
Gap, Inc.......................................................45,000 2,070,000
Home Depot, Inc................................................36,600 2,509,388
J.C. Penney Co., Inc...........................................14,200 283,113
K-Mart Corp.*..................................................26,900 270,681
May Department Stores Co. (The)................................18,200 586,950
Nordstrom, Inc..................................................7,300 191,169
Sears, Roebuck and Co.............................................400 12,175
TJX Companies, Inc.............................................17,800 363,788
Wal-Mart Stores, Inc...........................................89,300 6,172,863
-------------
15,228,191
-------------
Telephone Systems - 7.9%
AT&T Corp......................................................31,900 1,618,925
AT&T Corp. - Liberty Media Group...............................33,900 1,923,825
Bell Atlantic Corp.............................................22,700 1,397,469
Exodus Communications, Inc......................................5,200 461,825
Global Crossing Ltd.*..........................................24,600 1,230,000
GTE Corp.......................................................34,400 2,427,350
Level 3 Communications, Inc.*..................................15,600 1,277,250
MCI WorldCom, Inc..............................................99,750 5,292,984
SBC Communications Corp.......................................111,500 5,435,625
-------------
21,065,253
-------------
Textiles, Clothing & Fabrics - 0.1%
Jones Apparel Group, Inc.*......................................7,300 198,013
Reebok International Ltd.*......................................1,100 9,006
Unifi, Inc.*....................................................1,100 13,544
-------------
220,563
-------------
Transportation - 0.6%
AMR Corp. *.....................................................5,500 368,500
Burlington Northern Santa Fe Corp..............................14,100 341,925
CNF Transportation, Inc.........................................1,400 48,300
Consolidated Freightways Corp.*...................................100 794
CSX Corp........................................................6,500 203,938
Norfolk Southern Corp..........................................10,600 217,300
Ryder System, Inc...............................................1,900 46,431
Union Pacific Corp..............................................7,400 322,825
Wisconsin Central Transport Corp.*................................300 4,031
-------------
1,554,044
-------------
Total Common Stocks (Cost $232,008,679) 258,792,737
-------------
U.S. Treasury Securities - 0.0% Par
U.S. Treasury Note at 5.875%, due 2/15/00 (a)................$310,000 $ 310,291
(Cost $311,519) -------------
TOTAL INVESTMENTS - 98.5%
(Cost $232,320,198) 259,103,028
Other Assets and Liabilities - 1.5% 4,024,120
-------------
TOTAL NET ASSETS - 100.0% $ 263,127,148
=============
Portfolio Footnotes:
(a) Held as collateral for open futures contracts.
* Non-income producing security.
</TABLE>
<PAGE>
Cova Series Trust
International Equity Portfolio
PORTFOLIO OF INVESTMENTS
December 31, 1999
(Percentage of Net Assets)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Security Value
Description Shares (Note 1)
--------------------------------------------------------------------------------------
Common and Preferred Stocks - 99.1%
Australia - 2.8%
<S> <C> <C>
AMP Ltd........................................................21,000 $ 231,673
Broken Hill Proprietary Co., Ltd...............................29,800 390,698
CSR Ltd........................................................73,500 178,263
Lend Lease Corp., Ltd..........................................24,400 341,316
National Australia Bank Ltd....................................30,800 470,413
News Corp., Ltd. (The) Preferred...............................96,000 821,210
Southcorp Holdings Ltd........................................108,400 381,572
Telstra Corp., Ltd.............................................92,900 504,218
Telstra Corp., Ltd.*...........................................29,192 158,441
Westpac Banking Corp. Ltd......................................30,900 212,819
WMC Ltd........................................................34,900 192,166
-------------
3,882,789
-------------
Austria - 0.5%
Bank Austria AG ...............................................12,153 686,081
-------------
Belgium - 0.0%
Real Software.....................................................814 64,663
-------------
Denmark - 0.1%
Ratin A/S (B Shs) ..............................................1,733 194,893
--------------
Finland - 3.0%
Nokia Oyj......................................................12,966 2,352,790
Sonera Oyj......................................................7,061 484,393
Stora Enso Oyj.................................................57,484 988,419
Tietoenator Oyj.................................................5,705 356,575
------------
4,182,177
------------
France -11.5%
Alcatel.........................................................4,024 924,904
Alstom.........................................................18,386 613,506
Atos SA*........................................................1,510 250,559
Aventis S.A....................................................18,659 1,085,336
AXA Co..........................................................6,933 967,299
Banque Nationale de Paris......................................11,070 1,022,225
Carrefour S.A...................................................4,278 789,647
Castorama Dubois Investisse.....................................1,900 578,448
Christian Dior SA...............................................1,484 368,021
CNP Assurances..................................................5,600 206,394
Coflexip SA.....................................................1,603 116,593
Compagnie de Saint Goban........................................2,767 520,783
Elf Aquitaine SA ..................................................65 10,026
Groupe Danone...................................................2,707 638,569
Lagardere Groupe................................................8,614 468,924
LVMH (Louis Vuitton Moet Hennessy)................................789 353,710
Pinault-Printemps-Redoute S.A...................................2,388 630,724
Renault S.A.....................................................4,942 238,440
Rhodia, S.A....................................................22,490 508,763
Suez Lyonnaise Des Eaux SA......................................1,509 242,027
Total Fina SA..................................................21,045 2,811,049
Usinor Sacilor.................................................19,821 372,656
Vivendi........................................................22,847 2,064,824
-------------
15,783,427
-------------
Germany - 10.7%
BASF AG........................................................14,475 744,205
Bayer AG........................................................7,749 367,153
Bilfinger and Berger Bau AG....................................12,540 273,058
Celanese AG*....................................................1,116 20,363
Consors Discount Broker AG*.....................................2,808 234,952
DaimlerChrysler AG.............................................14,013 1,090,566
Deutsche Bank AG...............................................14,408 1,217,896
Deutsche Telekom AG............................................28,108 2,011,833
Dresdner Bank AG................................................8,240 448,564
Entrium Direct Bankers AG*......................................6,500 99,600
Hochtief AG.....................................................4,400 164,119
Mannesmann AG..................................................13,546 3,304,685
Marschollek, Lautenschlaeger und Partner AG.......................600 181,458
ProSieben Media AG Preferred (144A)^............................4,100 238,486
SAP AG..........................................................1,452 715,779
Schering AG.....................................................2,607 317,608
Siemans AG.....................................................12,590 1,602,997
Stinnes AG*....................................................11,148 236,004
Thyssen Krupp AG...............................................15,893 484,657
Veba AG........................................................12,682 616,863
Volkswagen AG - Preferred.......................................3,900 126,204
Volkswagen AG...................................................5,979 337,235
-------------
14,834,285
-------------
Hong Kong - 2.8%
Cable & Wireless HKT Ltd......................................150,000 433,230
Cheung Kong (Holdings) Ltd.....................................54,000 686,029
Dao Heng Bank Group Ltd........................................80,000 412,711
Hong Kong Electric.............................................71,000 221,961
Hutchison Whampoa Ltd..........................................80,000 1,163,000
SmarTone Telecommunications Holdings Ltd.......................68,500 330,471
Sun Hung Kai Properties Ltd....................................45,000 468,931
Wharf (Holdings) Ltd...........................................86,000 199,704
-------------
3,916,037
-------------
Ireland - 0.9%
Bank of Ireland................................................42,633 339,529
CRH Plc........................................................15,728 339,305
Irish Life & Permanent Plc.....................................19,361 183,468
Jefferson Smurfit Group Plc...................................135,628 410,180
------------
1,272,482
------------
Italy - 4.2%
Assicurazioni Generali..........................................6,975 231,618
Banca Fideuram SpA.............................................60,681 707,215
Banca Nazionale del Lavoro *...................................64,729 215,336
Bipop-Carire SpA................................................2,703 239,273
ENI SpA.......................................................114,421 627,838
Fiat SpA*.......................................................9,790 279,795
Mediaset SpA...................................................23,973 370,773
Mediolanum SpA.................................................22,410 299,699
Saipem SpA.....................................................48,900 178,008
Telecom Italia Mobile SpA......................................88,868 990,931
Telecom Italia SpA.............................................39,263 552,155
Telecom Italia SpA.............................................64,630 394,439
Unicredito Italiano SpA.......................................143,670 707,368
-------------
5,794,448
-------------
Japan - 19.2%
Advantest Corp..................................................1,000 264,343
Aiful Corp........................................................500 61,191
Ajinomoto Co., Inc.............................................15,000 156,403
Asahi Bank Ltd.................................................79,000 487,272
Bank of Fukuoka Ltd............................................23,000 159,653
Bank of Tokyo - Mitsubishi Ltd. (The)..........................33,000 460,074
Bridgestone Corp................................................9,000 198,257
Citizen Watch Co, Ltd..........................................25,000 159,095
DDI Corp...........................................................33 452,320
EBARA Corp.....................................................39,000 435,285
Fuji Bank, Ltd.................................................36,000 349,990
Fuji Heavy Industries Ltd......................................21,000 143,920
Fujitsu Ltd....................................................23,000 1,049,344
Hitachi Ltd....................................................25,000 401,410
Hitachi Software Engineering Co., Ltd...........................2,200 320,932
Honda Motor Co., Ltd...........................................11,000 409,242
Ito-Yokado Co., Ltd.............................................4,000 434,697
Japan Tobacco, Inc.................................................19 145,467
Kaken Pharmaceutical Co. Ltd...................................10,000 55,610
Kawasaki Steel Corp............................................97,000 173,791
Kyocera Corp....................................................4,000 1,037,791
Marui Co., Ltd.................................................11,000 164,343
Matsushita Electric Industry...................................20,000 554,141
Minebea Co., Ltd...............................................34,000 583,532
Mitsubishi Chemical Corp......................................158,000 556,883
Mitsubishi Corp................................................72,000 556,178
Mitsubishi Estate Co., Ltd.....................................20,000 195,222
Mitsui Marine & Fire Insurance Co., Ltd........................25,000 148,326
Mitsui Trust & Banking Co., Ltd (The)..........................31,000 70,110
NAMCO Ltd.......................................................9,300 602,761
NEC Corp.......................................................16,000 381,437
Nintendo Co. Ltd................................................1,400 232,739
Nippon Telegraph and Telephone Corp...............................129 2,210,202
Nippon Yusen Kabushiki Kaisha.................................140,000 572,939
Nishimatsu Construction Co.....................................73,000 293,029
Nisshin Steel Co., Ltd..........................................4,000 4,425
Omron Corp......................................................9,000 207,509
Osaka Gas Co., Ltd.............................................75,000 180,634
Pioneer Corp...................................................19,000 502,252
Promise Co., Ltd................................................5,200 264,735
Ricoh Corp., Ltd...............................................28,000 527,981
Rohm Co.........................................................1,600 657,921
Sanyo Electric Co., Ltd........................................42,000 170,648
Sekisui Chemical Co., Ltd......................................41,000 181,839
Shohkoh Fund......................................................440 174,251
Snow Brand Milk Product Co Ltd.................................29,000 116,977
Softbank Corp...................................................1,400 1,340,513
Sony Music Entertainment, Inc...................................9,600 1,915,489
Sumitomo Bakelite Co., Ltd.....................................14,000 125,416
Sumitomo Bank, Ltd.............................................16,000 219,150
Sumitomo Rubber Industries Ltd.................................45,000 199,138
Suzuki Motor Corp..............................................23,000 335,745
Taiheiyo Cement Corp...........................................49,000 93,548
Takeda Chemical Industries.....................................13,000 642,745
</TABLE>
<PAGE>
--------------------------------------------------------------------------------
SMALL CAP STOCK PORTFOLIO For the Period ended 6/30/00
MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT
Letter to Policyholders
--------------------------------------------------------------------------------
MARKET REVIEW
The Russell 2000 Index returned 3.04% for the six months ended June 30, 2000,
outperforming the S&P 500 Index's -0.42% return for the same period. During the
first half of the year, small cap value companies (+5.85%) topped small cap
growth companies (+1.22%), and volatility figured as one of the main stories in
almost every asset class. Small cap stocks charged into year 2000 fueled by
strong performance at the end of 1999. During the first quarter, small caps
(+7.08%) outperformed large caps (+2.29%) by a considerable margin. Investors
continued to have a healthy appetite for tech-related names -- as the strong
global economy charged along -- and growth stocks set the pace, as the Russell
2000 Growth (+9.28%) topped the Russell 2000 Value (+3.82%). However, the sharp
pull back in technology, communications and biotech shares in March, April and
May erased much of the progress made earlier in the year. The second quarter
represented a reversal of fortune, as small company stocks (-3.78%) lagged large
company stocks (-2.66%), and the Russell 2000 Value (+1.95%) outperformed the
Russell 2000 Growth (-7.37%). The market responded somewhat nervously to mixed
economic data, and reacted severely to earnings disappointments, during the
second quarter. Though volatility did not halt rampant M&A activity or the flow
of assets into small cap funds, it had a serious impact on the number of IPO
deals, as a number of companies delayed their scheduled debuts for fear of an
unfavorable reception.
PORTFOLIO REVIEW
The Portfolio lagged its benchmark for the six months ended June 30, 2000. Both
stock selection and sector allocation detracted from return as the portfolio
underperformed in ten of seventeen sectors. Holdings that had the most positive
impact on performance included Human Genome Sciences (pharmaceuticals),
Power-One (hardware) and Exar Corp (software). Holdings that had the most
negative impact on performance included Checkfree Holdings (capital markets),
Mediaplex (services) and Geon Co. (industrial cyclical). The Portfolio's
holdings in the (i) pharmaceuticals, (ii) finance and (iii) consumer cyclical
sectors contributed most to overall return, while holdings in the (i) software &
services, (ii) services and (iii) health services & systems sectors were
detractors.
OUTLOOK
We believe that volatility will be a fixture in the small cap market,
particularly in high growth sectors like technology, services, biotech and
communications. We also expect to see the market broaden as more sectors of the
economy achieve positive results. For this reason we believe that multi-sector
exposure, which positions the Portfolio to participate in a broad market rally,
remains the most prudent approach for this core strategy.
DENISE E. HIGGINS
STEPHEN J. RICH
Portfolio Managers
J.P. Morgan Investment Management Inc.
<TABLE>
<CAPTION>
TOP 10 PORTFOLIO HOLDINGS BY MARKET VALUE
As of 6/30/00
% of net assets
--------------------------------------------------------
<S> <C>
1. Human Genome Sciences Inc. 1.6
--------------------------------------------------------
2. Advanced Fibre Communication 1.3
--------------------------------------------------------
3. Exar 1.3
--------------------------------------------------------
4. CH Robison 1.0
--------------------------------------------------------
5. Power-One 1.0
--------------------------------------------------------
6. Valassis Communications 1.0
--------------------------------------------------------
7. Atmi 1.0
--------------------------------------------------------
8. Mettler Toledo 1.0
--------------------------------------------------------
9. Kopin 1.0
--------------------------------------------------------
10. On Assignment 1.0
--------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SECTOR ALLOCATION
As of 6/30/00
[Bar Graph]
--------------------------------------------
<S> <C>
Other 18.4
--------------------------------------------
Software & Services 16.5
--------------------------------------------
Industrial Cyclicals 15.6
--------------------------------------------
Pharmaceuticals 8.7
--------------------------------------------
Hardware 8.7
--------------------------------------------
Conumer Cyclical 7.8
--------------------------------------------
Services 7.0
--------------------------------------------
Semiconductor 6.8
--------------------------------------------
Energy 5.4
--------------------------------------------
Finance 5.1
--------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Average Annual Return2
Inception 5/1/96 (for the period ended
6/30/00)
--------------------------------------- -------------- --------------------------- -----------------------
<S> <C> <C> <C>
1 Year 3 Year Since inception
--------------------------------------- -------------- --------------------------- -----------------------
Small Cap Stock Portfolio,
managed by JPMIM 37.46% 15.90% 15.30%
--------------------------------------- -------------- --------------------------- -----------------------
Russell 2000 Index1 14.48% 10.69% 11.47%
--------------------------------------- -------------- --------------------------- -----------------------
</TABLE>
1 The Russell 2000 Index is an unmanaged index consisting of the stocks of 2000
U.S.-based companies. The Index does not include fees or expenses and is not
available for direct investment.
2 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Small Cap
Stock Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the
return on the investment will fluctuate, and redemption proceeds may be higher
or lower than an investor's original cost.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include any insurance charges
imposed in connection with your variable insurance contract. If this performance
information included the effects of these fees or charges, performance numbers
would be lower.
<PAGE>
--------------------------------------------------------------------------------
QUALITY BOND PORTFOLIO For the Period ended 6/30/00
MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT
Letter to Policyholders
--------------------------------------------------------------------------------
MARKET REVIEW
The supply/demand factors that pushed bond yields lower earlier in the year
(Treasury buyback and recommended changes to the Government Sponsored
Enterprises) gave way, in the second half, to the reality of stronger growth and
rising inflationary signals. Following strong GDP and inflationary reports, the
Fed tightened monetary policy in mid-May by 50 basis points to 6.50%. In
response, the economic reports prompted additional projected tightening needs to
slow U.S. growth and tame inflation. That, in turn, caused spread sectors to
deteriorate early in the second quarter, with investment grade corporate debt
reaching the highest spread level in 81 years outside of recession.
However, growth and inflationary indicators for the remainder of 2000 were more
mixed, suggesting that inflation (excluding the impact of recent increases in
energy prices) is not accelerating sharply. As a result, the Fed did not change
policy at their June meeting and market expectations of future Fed tightening
moderated significantly as the 2000 ended.
PORTFOLIO REVIEW
As we anticipated the yield curve inversion, the rally in long Treasury bonds
and widening of spreads earlier in the year, we positioned the portfolio
accordingly by extending duration in the portfolio. With the anticipated further
U.S.
government fiscal surplus in the second half
of the year and related paydown of U.S. Treasuries, we maintained a modest long
duration position mostly concentrated in the longer maturity sector of the yield
curve. Additionally, we started the year off overweighting Treasuries by
reducing allocations to investment grade corporate bonds and selling off the
portfolio's agency notes. We maintained the portfolio's underweight position in
investment grade corporate bonds during the period, but moved to a more neutral
position near the end of the reporting period. We reduced the portfolio's
exposure to Treasuries at the end of the period by adding to mortgage backed
securities and residential mortgages.
OUTLOOK
We believe that global growth has peaked and that the likely path for the U.S.
economy is for a "soft landing" slowdown, with GDP growth moving below 4% in the
coming months. Inflation pressures will remain contained. Fed tightening of
monetary policy is nearly done, with one final move of 25bps before year-end
still likely. Interest rates will remain in a range roughly around current
levels, with short rates responding to any further moves by the Fed.
HARRIET T. HUBER
WILLIAM G. TENNILLE
Portfolio Managers
J.P. Morgan Investment Management Inc.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
CREDIT QUALITY
As of 6/30/00
-----------------------------------------------------------
<S> <C>
Treasury 15.23%
-----------------------------------------------------------
Agency 45.93
-----------------------------------------------------------
AAA 20.26
-----------------------------------------------------------
AA 3.06
-----------------------------------------------------------
A 8.80
-----------------------------------------------------------
BBB 5.57
-----------------------------------------------------------
BB 1.15
-----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
As of 6/30/00
[Bar Graph]
--------------------------------------------------------------------
<S> <C>
U.S. Agency & Corp.- Mortg. Backed 55.7%
--------------------------------------------------------------------
U.S. Treasury & Agency 18.6
--------------------------------------------------------------------
Corporate Investment Grade 15.7
--------------------------------------------------------------------
Asset Backed Securities 8.3
--------------------------------------------------------------------
Corporate High Yield 0.9
--------------------------------------------------------------------
Emerging Market Debt 0.8
--------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Average Annual Return2
Inception 5/1/96 (for the period ended 6/30/00)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 Year 3 Year Since inception
--------------------------------------- ----------- ------------------------------- -------------------
Quality Bond Portfolio,
managed by JPMIM 4.23% 5.47% 5.99%
--------------------------------------- ----------- ------------------------------- -------------------
Salomon Brothers BIG Index1 4.57% 6.04% 6.59%
--------------------------------------- ----------- ------------------------------- -------------------
</TABLE>
1 The Salomon Brothers Broad Investment-Grade Bond Index (BIG) is a
market-capitalized weighted index that includes fixed-rate Treasury, government
sponsored, corporate (Baa3/BBB or better) and mortgage securities. The index
does not reflect any expenses.
2 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Quality Bond
Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the return on
the investment will fluctuate, and redemption proceeds may be higher or lower
than an investor's original cost.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include any insurance charges
imposed in connection with your variable insurance contract. If this performance
information included the effects of these fees or charges, performance numbers
would be lower.
<PAGE>
------------------------------------------------------------------------------
SELECT EQUITY PORTFOLIO For the Period ended 6/30/00
MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT
Letter to Policyholders
------------------------------------------------------------------------------
MARKET REVIEW
The U.S. Equity market cycled erratically during the first six months of the
year between growth stocks and value stocks based on the announced economic
data. Weak data lead to powerful rallies in technology and other growth stocks.
Data reflecting a strong economy caused a surge in lower priced value stocks.
While value stocks outperformed dramatically at the beginning of the period,
growth stocks came back strong in June and managed to outperform value for the
second quarter (Russell 1000 Growth -2.7% vs. Russell 1000 Value -4.69%). The
market's reaction to the data flow is based entirely on the impact the economy
has on and interest rates. The U.S. Federal Reserve raised rates several times
in the first half of the year and continues to monitor the situation. Higher
rates are just beginning to slow the economy somewhat which will start to impact
corporate earnings. Any earnings disappointments at the company level are being
penalized heavily across all sectors. We believe that the second quarter is
evidence that the market is transitioning from the strong momentum focus it had
in 1999, to a more balanced environment.
PORTFOLIO REVIEW
The fund's performance during the period was positively impacted by stock
selection within the hardware and semi-conductor sectors. The portfolios
underweight position in Qualcomm Inc. contributed positively to its performance
as the company announced a weakening in chip sales and a less positive outlook
for its third generation CDMA wireless sales. Industrial cyclical and finance
sectors were among the worst performers during the first half of the year. The
slowdown of the U.S. economy has led several companies to pre-announce second
quarter earnings below expectations, and has started to negatively impact share
prices, with the financial sector taking the worst hit, down 15% for June. In
Industrial cyclicals, Rohm & Haas and Honeywell had second quarter earnings
disappointments, and in the insurance sector, earnings warnings deflated shares
of Aon Corp earlier in the year.
Overall, the pharmaceuticals and capital markets sectors moved ahead as
investors continued their rotation out of "new economy" stocks. As a
consequence, the software and services, telecommunications and technology
sectors fell. While the pharmaceuticals and capital markets sectors posted a
positive return for the six month period, holdings such as Oracle and Microsoft
pulled down performance as the latter was roiled with detailed announcements of
Judge Jackson's ruling against the company in the lengthy anti-trust suit.
Individual security selection contributed to the portfolio's overall
performance. The portfolio ended the period with an overweight position in Intel
which posted a positive total return for the six months ending June 30, 2000.
OUTLOOK
The strategy for the portfolio remains unchanged and we continue to be fully
invested and largely sector neutral. We anticipate that another short-term rate
rise is still possible for the second half of the year. The economy has been
slowing, as share prices of more speculative equity were disproportionately
impacted toward the end of the first quarter. We expect the slowdown to continue
as evidenced by the recent cooling of the overheated rate of late 1999 and early
2000.
PEGGY ADAMS
MICHAEL J. KELLY
Portfolio Managers
J.P. Morgan Investment Management Inc.
<TABLE>
<CAPTION>
TOP 10 PORTFOLIO HOLDINGS BY MARKET VALUE
As of 6/30/00
% of net assets
--------------------------------------------------------
<S> <C>
1. Exxon Mobil Corp. 4.0
--------------------------------------------------------
2. Cisco Systems Inc. 3.9
--------------------------------------------------------
3. Microsoft Corp. 3.9
--------------------------------------------------------
4. Intel Corp. 3.5
--------------------------------------------------------
5. General Electric Co. 3.4
--------------------------------------------------------
6. Tyco Intl. Ltd. New 3.1
--------------------------------------------------------
7. Sun Microsystems Inc. 2.9
--------------------------------------------------------
8. Eli Lilly & Co. 1.9
--------------------------------------------------------
9. Wal-Mart Stores Inc. 1.9
--------------------------------------------------------
10. America Online Inc. 1.9
--------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SECTOR ALLOCATION
As of 6/30/00
[Bar Graph]
--------------------------------------------------------------------
<S> <C>
Hardware & Semiconductor 19.2%
--------------------------------------------------------------------
Other 17.9
--------------------------------------------------------------------
Industrial Cyclical 14.1
--------------------------------------------------------------------
Pharmaceuticals 10.1
--------------------------------------------------------------------
Software & Services 8.8
--------------------------------------------------------------------
Telecommunications 7.3
--------------------------------------------------------------------
Energy 6.4
--------------------------------------------------------------------
Services 5.9
--------------------------------------------------------------------
Consumer Stable 5.3
--------------------------------------------------------------------
Capital Services 5.0
--------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Average Annual Return2
Inception 5/1/96 (for the period ended
6/30/00)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 Year 3 Year Since inception
--------------------------------------- --------------------------- --------------------------- --------------------
Select Equity Portfolio,
managed by JPMIM (2.40)% 13.59% 16.65%
--------------------------------------- --------------------------- --------------------------- --------------------
S&P 500 Index1 7.24% 19.64% 23.06%
--------------------------------------- --------------------------- --------------------------- --------------------
</TABLE>
1 The S&P 500 Index is an unmanaged index consisting of the stocks of 500 of the
largest U.S.-based companies. The Index does not include fees or expenses and is
not available for direct investment.
2 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Select Equity
Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the return on
the investment will fluctuate, and redemption proceeds may be higher or lower
than an investor's original cost.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include any insurance charges
imposed in connection with your variable insurance contract. If this performance
information included the effects of these fees or charges, performance numbers
would be lower.
<PAGE>
--------------------------------------------------------------------------------
LARGE CAP STOCK PORTFOLIO For the Period ended 6/30/00
MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT
Letter to Policyholders
--------------------------------------------------------------------------------
MARKET REVIEW
The U.S. Equity market cycled erratically across the first six months of the
year between growth stocks and value stocks based on the announced economic
data. Weak data led to powerful rallies in technology and other growth stocks.
Data reflecting a strong economy caused a surge in lower priced value stocks.
While value stocks outperformed dramatically throughout the first half of the
period, growth stocks came back strong in June and managed to outperform value
for the second quarter (Russell 1000 Growth -2.7% vs. Russell 1000 Value
-4.69%). The market's reaction to the data flow is based entirely on the impact
the economy has on interest rates. The U.S. Federal Reserve raised rates several
times in the quarter and continues to monitor the situation. Higher rates are
just beginning to slow the economy somewhat which will start to impact corporate
earnings. Any earnings disappointements at the company level are being penalized
heavily across all sectors, and will continue to affect the market.
PORTFOLIO REVIEW
Stock selection within the energy sector added to returns as an overweight
position in oil and gas price sensitive stocks like Global Marine benefited
performance. The pharmaceuticals sector benefited from an overweighting of Alza,
which proved beneficial when the company announced several new drugs, the most
important being the receipt of FDA approval on Concerta, a once-a-day treatment
for children with Attention Deficit Disorder. Drugs, Chemicals and Services
holdings were among the strongest performers earlier this year. Drugs benefited
from an overweight in Human Genome Sciences and an underweighting in Johnson &
Johnson earlier this year. Human Genome Sciences proved to be a positive
contributor in the first quarter as the company announced a new patent for a
gene that is believed to be the entry point for the AIDS virus. The stock also
benefited from market enthusiasm for genomic stocks in general.
Industrial cyclical and finance sectors were among the worst performers during
the second quarter. The rising interest rate environment has led many financial
services stocks to continue to underperform and resulted in a 15% decline for
the sector in June. In Industrial cyclicals, Rohm & Haas and Honeywell had
second quarter earnings disappointments. In the Insurance sector, earnings
warnings deflated shares of Aon Corp earlier this year.
OUTLOOK
The strategy for the portfolio remains unchanged and we continue to be fully
invested and sector neutral. We anticipate that another short-term rate rise is
still possible for the second half of the year. The economy has been slowing, as
share prices of more speculative equity were disproportionately impacted toward
the end of the first quarter. We expect the slowdown to continue as evidenced by
the recent cooling of the overheated rate of late 1999 and early 2000.
JOHN M. DEVLIN, JR.
JAMES WIESS
Portfolio Managers
J.P. Morgan Investment Management Inc.
<TABLE>
<CAPTION>
TOP 10 PORTFOLIO HOLDINGS BY MARKET VALUE
As of 6/30/00
% of net assets
--------------------------------------------------------------------
<S> <C>
1. Intel Corp. 4.5
--------------------------------------------------------------------
2. Cisco Systems Inc. 4.5
--------------------------------------------------------------------
3. Microsoft Corp. 4.3
--------------------------------------------------------------------
4. General Electric Co. 4.1
--------------------------------------------------------------------
5. Exxon Mobil Corp. 2.8
--------------------------------------------------------------------
6. Wal-Mart Stores Inc. 2.4
--------------------------------------------------------------------
7. Citigroup Inc. 2.2
--------------------------------------------------------------------
8. Sun Microsystems, Inc. 2.1
--------------------------------------------------------------------
9. Eli Lilly & Co. 1.8
--------------------------------------------------------------------
10. Texas Instruments, Inc. 1.7
--------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------
SECTOR ALLOCATION
As of 6/30/00
[Bar Graph]
-----------------------------------------------------------------
<S> <C>
Hardware & Semiconductors 23.1
-----------------------------------------------------------------
Other 19.2
-----------------------------------------------------------------
Industrial Cyclicals 10.1
-----------------------------------------------------------------
Pharmaceuticals 9.9
-----------------------------------------------------------------
Software & Services 7.4
-----------------------------------------------------------------
Telecommunications 7.0
-----------------------------------------------------------------
Energy 6.2
-----------------------------------------------------------------
Capital Markets 5.9
-----------------------------------------------------------------
Retail 5.7
-----------------------------------------------------------------
Consumer Staples 5.5
-----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Average Annual Return2
Inception 5/1/96 (for the period ended 6/30/00)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 Year 3 Year Since inception
--------------------------------------- ------------------ ------------------------------------ ---------------------
Large Cap Stock Portfolio,
managed by JPMIM 2.09% 18.72% 22.37%
--------------------------------------- ------------------ ------------------------------------ ---------------------
S&P 500 Index1 7.24% 19.64% 23.06%
--------------------------------------- ------------------ ------------------------------------ ---------------------
</TABLE>
1 The S&P 500 Index is an unmanaged index consisting of the stocks of 500 of the
largest U.S.-based companies. The Index does not include fees or expenses and is
not available for direct investment.
2 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Large Cap
Stock Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the
return on the investment will fluctuate, and redemption proceeds may be higher
or lower than an investor's original cost.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include any insurance charges
imposed in connection with your variable insurance contract. If this performance
information included the effects of these fees or charges, performance numbers
would be lower.
<PAGE>
----------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO For the Period ended 6/30/00
MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT
Letter to Policyholders
----------------------------------------------------------------------------
MARKET REVIEW
International equity markets were highly correlated during the quarter, with
sentiment dominated by the likely actions of the Federal Reserve, and the debate
between investors predicting a hard vs. a soft landing for the U.S. economy.
`New economy' sectors, particularly TMT (Technology, Media and Telecom), were
volatile over the period. Performance, particularly in Europe, was strong during
the first quarter, but very weak during the second quarter, as much of the
market moved into the more `value' orientated sectors.
PORTFOLIO REVIEW
Against this background, your portfolio underperformed its benchmark over the
period. We focus on three sources of potential added value; country/regional
allocation, stock selection and currency management. In aggregate, the macro
decisions (country currency) were positive over the period, although stock
selection held back performance. Stock choices in Japan have been positive,
particularly in the media and telecoms sectors. For example, an overweight
position in DDI was positive for performance. The company announced plans to
merge with KDD and IDO to form a leading telecom carrier, providing a strong
competitor to NTT Docomo. Decisions in continental Europe and the U.K. were,
however, less beneficial. While overweight positions in Alcatel (France,
Technology) and Reckitt Benckiser (U.K., Consumer Non-Durable) helped
performance, holding UPC (Netherlands, Media and Leisure) which suffered from
concerns over future sources of funding, and Equant (France, Technology) which
suffered from pricing pressure, held back performance.
OUTLOOK
In general, the Fed's policy regarding inflation risk and the market's
perception of the Fed's actions will continue to drive overall sentiment. Within
the international equity market universe, we continue to favor the U.K. market.
Short-term interest rates appear to be peaking, and sterling should fall
modestly from its current overvalued levels. Both of these factors should be
supportive of the markets. The Continental European markets do not look as
attractively valued, but expectations of economic growth are being revised
upwards. The equity markets could, however, be held back due to investor
concerns over the valuation of the technology/telecom sectors. We are becoming
more cautious about the Japanese market. Growth has picked up, but may not be
enough to cope with a potential tightening of monetary policy. While the
longer-term valuation remains reasonable, the shorter-term news flow could be
difficult.
NIGEL EMMETT
PAUL QUINSEE
Portfolio Managers
J.P. Morgan Investment Management Inc.
<TABLE>
<CAPTION>
TOP 10 PORTFOLIO HOLDINGS BY MARKET VALUE
As of 6/30/00
% of net assets
----------------------------------------------------------------
<S> <C>
1. Vodafone Airtouch 2.7
----------------------------------------------------------------
2. BP Amoco 2.3
----------------------------------------------------------------
3. Nokia 2.2
----------------------------------------------------------------
4. Ericsson 1.7
----------------------------------------------------------------
5. Nippon Telegraph & Telephone 1.7
----------------------------------------------------------------
6. Alcatel 1.7
----------------------------------------------------------------
7. Koninklijke Philips Elec. 1.4
----------------------------------------------------------------
8. Total Fina 1.3
----------------------------------------------------------------
9. Glaxo Wellcome 1.3
----------------------------------------------------------------
10. Fujitsu 1.2
----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Sector Allocation
As of 6/30/00
[Bar Graph]
----------------------------------------------------------------
<S> <C>
Japan 27.7
----------------------------------------------------------------
United Kingdom 20.1
----------------------------------------------------------------
Other 11.1
----------------------------------------------------------------
France 9.9
----------------------------------------------------------------
Switzerland 7.5
----------------------------------------------------------------
Germany 6.9
----------------------------------------------------------------
Netherlands 6.0
----------------------------------------------------------------
Sweden 3.9
----------------------------------------------------------------
Italy 3.7
----------------------------------------------------------------
Spain 3.2
----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Average Annual Return2
Inception 5/1/96 (for the period ended
6/30/00)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 Year 3 Year Since inception
--------------------------------------- ---------------------- ---------------------------- --------------------------
International Equity Portfolio,
managed by JPMIM 16.66% 10.41% 12.20%
--------------------------------------- ---------------------- ---------------------------- --------------------------
MSCI EAFE Index1 17.38% 10.42% 10.04%
--------------------------------------- ---------------------- ---------------------------- --------------------------
</TABLE>
1 The Morgan Stanley Capital International Europe, Australia and Far East Index
is an unmanaged index and is an aggregate of 15 individual country indexes that
collectively represent many of the major markets of the world. The Index does
not include fees or expenses and is not available for direct investment.
2 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the International
Equity Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the
return on the investment will fluctuate, and redemption proceeds may be higher
or lower than an investor's original cost.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include any insurance charges
imposed in connection with your variable insurance contract. If this performance
information included the effects of these fees or charges, performance numbers
would be lower.
<PAGE>
------------------------------------------------------------------------------
BOND DEBENTURE PORTFOLIO For the Period ended 6/30/00
MANAGED BY LORD, ABBETT & CO.
Letter to Policyholders
------------------------------------------------------------------------------
This period proved to be a very difficult credit environment, characterized by
rising borrowing costs and reduced access to capital for many companies. Fragile
market conditions, low issuances of new high yield bonds, and heavy outflows
from high yield bond mutual funds resulted in lackluster performance and wider
spreads. In fact, the yield spread, or difference, between lower-rated, high
yield bonds and 10-year Treasury notes remained at historically wide levels for
most of this reporting period, increasing to where high yield bonds (represented
by the Merrill Lynch High Yield Master Index) were yielding roughly 5.65% more
than Treasurys.
We placed a higher degree of emphasis on better quality securities, increasing
the portfolio's weighting of high-grade corporate/investment grade bonds
overall. Since current coupon mortgage rates increased by nearly 60 basis points
to more than 8%, we identified what we believe are compelling opportunities to
capture attractive yield in the mortgage-backed securities market. We added to
this asset class, thereby raising the overall credit quality of the portfolio.
In addition, we increased the percentage of equity-related securities, primarily
convertible bonds issued by technology and wireless-telecommunications
companies. Finally, we reduced the number of companies represented in the
portfolio by culling the portfolio of underperforming securities and increasing
our exposure to the holdings that we favor, including certain oil and gas
companies.
If the Fed is successful in engineering a "soft landing" for the economy and in
slowing consumer demand, we believe high yield securities are apt to provide
good returns, and accordingly, we expect to increase our exposure to this asset
class. We will continue to place emphasis on the securities issued by select
wireless-telecommunications companies, as we anticipate strong growth and
further consolidation in this industry sector. Likewise, we continue to favor
securities associated with companies in oil and natural gas, since we believe
oil and gas prices are likely to remain above historical averages throughout the
remainder of the year. In general, we expect that the Fed's attempts to slow
U.S. economic growth will continue to impact the market. As sufficient evidence
of an economic slowdown becomes more apparent in the second half of this year,
the Fed is likely to abandon its tightening posture.
CHRISTOPHER J. TOWLE
Portfolio Manager
Lord, Abbett & Co.
<TABLE>
<CAPTION>
TOP 10 PORTFOLIO HOLDINGS BY MARKET VALUE
As of 6/30/00
% of net assets
------------------------------------------------------------------
<S> <C>
1. GNMA Pool #528207 6.7
------------------------------------------------------------------
2. GNMA Pool #529158 5.5
------------------------------------------------------------------
3. U.S. Treasury Note 4.1
------------------------------------------------------------------
4. Iron Mountain 1.5
------------------------------------------------------------------
5. Devon Energy 1.2
------------------------------------------------------------------
6. Elan Corp. 1.1
------------------------------------------------------------------
7. Roche Holdings 1.0
------------------------------------------------------------------
8. Solectron Corp. 1.0
------------------------------------------------------------------
9. Harrahs Operating 0.9
------------------------------------------------------------------
10. Sinclair Broadcasting 0.9
------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
As of 6/30/00
[Bar Graph]
--------------------------------------------------------------------------------
<S> <C>
High Yield 54.8
--------------------------------------------------------------------------------
Convertibles 18.2
--------------------------------------------------------------------------------
U.S. Government Securities 17.2
--------------------------------------------------------------------------------
Investment Grade 6.8
--------------------------------------------------------------------------------
Conv. Preferred Stk. 2.4
--------------------------------------------------------------------------------
Preferred Stock 0.5
--------------------------------------------------------------------------------
Common Stock 0.1
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Average Annual Return1
Inception 5/1/96 (for the period ended 6/30/00)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 Year 3 Year Since inception
--------------------------------------- -------------- ----------------------------------- -----------------------
Bond Debenture Portfolio,
managed by Lord, Abbett 3.91% 6.19% 9.41%
--------------------------------------- -------------- ----------------------------------- -----------------------
First Boston High
Yield Index2 (.40)% 3.10% 5.91%
--------------------------------------- -------------- ----------------------------------- -----------------------
Salomon Brothers
BIG Index3 4.57% 6.04% 6.59%
--------------------------------------- -------------- ----------------------------------- -----------------------
Merrill Lynch
Convertible Index4 28.31% 19.54% 17.82%
--------------------------------------- -------------- ----------------------------------- -----------------------
</TABLE>
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Bond Debenture
Portfolio managed by Lord Abbett and the return on the investment will
fluctuate, and redemption proceeds may be higher or lower than an investor's
original cost.
2The First Boston High Yield Index is representative of lower rated debt,
including straight-preferred stocks.
3The Salomon Brothers Broad Investment-Grade Bond Index (BIG) is a
market-capitalized weighted index that includes fixed-rate Treasury, government
sponsored, corporate (Baa3/BBB or better) and mortgage securities. The index
does not reflect any expenses.
4The Merrill Lynch Convertible Index is representative of the equity-related
securities. The three indices chosen have elements of these three categories,
but since there is no one index combining all three categories, these three
separate indices may not be a valid comparison for the Portfolio. These indices
do not include fees or expenses and are not available for direct investment.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include any insurance charges
imposed in connection with your variable insurance contract. If this performance
information included the effects of these fees or charges, performance numbers
would be lower.
<PAGE>
-------------------------------------------------------------------------------
MID-CAP VALUE PORTFOLIO For the Period ended 6/30/00
MANAGED BY LORD, ABBETT & CO.
Letter to Policyholders
-------------------------------------------------------------------------------
The strong performance of our mid-cap value funds relative to the S&P Mid-Cap
400 BARRA Value Index was driven by solid gains in our stocks of healthcare,
energy and select consumer companies. In the energy sector, we benefited from
our exposure to natural gas companies. With natural gas prices currently high
during what is normally a seasonally weak period, increasing demand for natural
gas from electric generators and a shrinking reserve base, we remain very
optimistic on the outlook for natural gas. Additionally, our holdings in stocks
of insurance companies helped performance in the financial services sector.
We were able to sidestep the recent correction in the technology sector by
investing selectively in stocks of medical technology companies that remained
afloat based on their solid fundamentals, healthy profits and realistic profit
projections. Nevertheless, we did have a few disappointments in the portfolio.
In particular, while high oil prices benefited many of our energy holdings, they
did not bode well for our holdings in the transportation sector, where companies
found it difficult to pass on rising fuel costs. Additionally, a few retail and
food company stocks in the consumer non-durables sector underperformed, holding
down performance in that area. In many cases though, the problems were generally
company specific and our broad diversification muted their impact on the
portfolio.
Momentum investing in technology appears to have fizzled out, and investors are
turning to solid values with quantifiable earnings. We believe the trend toward
fundamental investing will continue as more investors discover companies with
exceptional values and strong business prospects, especially those presented by
mid-cap stocks. Many mid-sized companies have shown promising business
developments and many of these stocks are selling at appealing discounts when
compared to stocks of large companies.
EDWARD VON DER LINDE
Portfolio Manager
Lord, Abbett & Co.
<TABLE>
<CAPTION>
TOP 10 PORTFOLIO HOLDINGS BY MARKET VALUE
As of 6/30/00
% of net assets
------------------------------------------------------
<S> <C>
1. Caremark Rx Inc. 3.6
------------------------------------------------------
2. EOG Resources Inc. 3.3
------------------------------------------------------
3. St. Jude Medical, Inc. 3.3
------------------------------------------------------
4. CBRL Group Inc. 3.1
------------------------------------------------------
5. Oxford Health Plans 3.1
------------------------------------------------------
6. R&B Falcon Corp. 2.9
------------------------------------------------------
7. Dynergy Inc. 2.8
------------------------------------------------------
8. XL Capital Ltd. Class A 2.7
------------------------------------------------------
9. Santa Fe Snyder Corp. 2.6
------------------------------------------------------
10. Kerr-McGee Corp. 2.6
------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SECTOR ALLOCATION
As of 6/30/00
[Bar Graph]
-----------------------------------------------------------------
<S> <C>
Heath Care 17.3
-----------------------------------------------------------------
Energy 17.2
-----------------------------------------------------------------
Utilities 14.8
-----------------------------------------------------------------
Materials and Processing 11.2
-----------------------------------------------------------------
Financial Services 10.9
-----------------------------------------------------------------
Consumer Non-Cyclical 8.8
-----------------------------------------------------------------
Other 8.1
-----------------------------------------------------------------
Basic Industry 6.5
-----------------------------------------------------------------
Consumer Cyclicals 2.6
-----------------------------------------------------------------
Consumer Staples 2.6
-----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Average Annual Return1
Inception 8/20/97 (for the period ended 6/30/00)
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
1 Year Since inception
--------------------------------------- --------------------- ------------------------------------------
Mid-Cap Value Portfolio,
managed by Lord, Abbett 11.57% 10.17%
--------------------------------------- --------------------- ------------------------------------------
S&P 400 Midcap2 16.95% 17.85%
--------------------------------------- --------------------- ------------------------------------------
</TABLE>
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Mid-Cap Value
Portfolio managed by Lord Abbett and the return on the investment will
fluctuate, and redemption proceeds may be higher or lower than an investor's
original cost.
2The S&P 400 Midcap Index consists of 400 domestic stocks of midsize companies
in the U.S. market. The Index does not include fees and expenses and is not
available for direct investment.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include any insurance charges
imposed in connection with your variable insurance contract. If this performance
information included the effects of these fees or charges, performance numbers
would be lower.
Index return since inception is as of 8/22/97.
<PAGE>
-------------------------------------------------------------------------------
LARGE CAP RESEARCH PORTFOLIO For the Period ended 6/30/00
MANAGED BY LORD, ABBETT & CO.
Letter to Policyholders
-------------------------------------------------------------------------------
Utility stocks, a lead indicator of a change in monetary policy, were the star
performers of the large cap style in the second quarter. We selectively added to
the sector in a defensive stance in preparation for a slowdown in the economy
and because we believed the Fed was near the end of its recent round of
tightenings. A development in the utilities sector involving the convergence of
electric and gas power also benefited several of our holdings. Sector
overweights in the high-performing healthcare and utilities sectors, together
with an underweight in the weak-performing communications services sector, also
added relative performance.
At the onset of the second quarter, we had already begun to reduce the
portfolio's exposure to many "new economy" stocks in the technology,
telecommunications and media sectors due to high valuations and some concerns
over inflated expectations on the sustainability of current business
fundamentals. In exchange, we made select investments in undervalued "old
economy" stocks in basic industries, utilities and financial services
(especially insurance stocks) where we saw more intrinsic value. We maintained
this weighting shift throughout the second quarter.
Your overweight position in consumer cyclical stocks detracted from performance
this quarter. General Motors Corp. and Federated Department Stores were two
weaker performing stocks.
The second quarter brought a shift in attitudes toward equity investing.
Throughout 1999 and the opening months of this year investors were caught up in
a price and earnings growth-driven "momentum market." They bought a company's
stock simply because its price was going up and its earnings were growing at a
faster rate than other companies. They all but ignored the sustainability of
corporate earnings, valuations, and interest rates. But, toward the end of the
first quarter, this pattern began to change. Investors in late March seemed to
wake up to the risks of "momentum" investing. In April and May, equity markets
experienced a considerable turnaround. Whereas the technology rich NASDAQ index
had previously led the market, it fell by some 37 percent from its March peak to
the end of May. By contrast, the broad S&P 500 Index fell only 10 percent, and
the Dow Jones Industrial Average (DJIA) fell less than five percent.
Uncertainty persisted throughout the quarter with respect to the ultimate
economic and market impact of the Fed's initiatives. Investors reacted abruptly
to economic and corporate earnings announcements. Focus on consumer-oriented
factors, such as retail sales, housing, investor confidence and employment,
signaled economic slowing from the extremely high levels of prior periods. Hope
for a "soft landing" emerged. Momentum-oriented sectors, such as technology,
returned to favor in June. Nevertheless, a renewed sensitivity to risk and
wariness about fundamentals challenged many investors' decisions.
The investing environment now seems suited to a moderately defensive strategy
consistent with a slowdown in the economy, but not an absolute downturn.
Investors' clear new preference for stable sectors suggests a renewed interest
in earnings predictability, valuations, and financial strength -- qualities that
are well suited to a slower growth environment. At the same time, concern over
value has led investors to reconsider small and particularly medium
capitalization issues which investors have neglected, at least relatively
speaking. Signs of a slowdown in economic growth confirm the desirability of a
cautious approach and a renewed attention to investment fundamentals and value.
ROBERT MORRIS
Portfolio Manager
Lord, Abbett & Co.
<TABLE>
<CAPTION>
TOP 10 PORTFOLIO HOLDINGS BY MARKET VALUE
As of 6/30/00
% of net assets
-----------------------------------------------------
<S> <C>
1. Exxon Mobil Corp. 4.8
-----------------------------------------------------
2. ACE Ltd. 2.8
-----------------------------------------------------
3. Duke Energy Corp. 2.4
-----------------------------------------------------
4. H.J. Heinz Co. 2.1
-----------------------------------------------------
5. M&T Bank Corporation 2.0
-----------------------------------------------------
6. Boeing Co. 2.0
-----------------------------------------------------
7. First Data Corp. 2.0
-----------------------------------------------------
8. The Coastal Corp. 1.9
-----------------------------------------------------
9. Morgan Stanley Dean Witter 1.9
-----------------------------------------------------
10. Ceridian Corp. 1.9
-----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SECTOR ALLOCATION
As of 6/30/00
[Bar Graph]
-------------------------------------------------------------------
<S> <C>
Other 21.9
-------------------------------------------------------------------
Financial Services 17.3
-------------------------------------------------------------------
Technology 16.2
-------------------------------------------------------------------
Health Care 8.4
-------------------------------------------------------------------
Utilities 8.1
-------------------------------------------------------------------
Energy 7.3
-------------------------------------------------------------------
Integrated Oils 7.2
-------------------------------------------------------------------
Consumer Cyclicals 4.9
-------------------------------------------------------------------
Consumer Services 4.5
-------------------------------------------------------------------
Basic Industry 4.2
-------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Average Annual Return1
Inception 8/20/97 (for the period ended 6/30/00)
------------------------------------------------------------------------------------------------
<S> <C> <C>
1 Year Since inception
--------------------------------------- ------------------------------- ------------------------
Large Cap Research Portfolio,
managed by Lord, Abbett 5.35% 13.46%
--------------------------------------- ------------------------------- ------------------------
S&P 500 Index2 7.24% 18.85%
--------------------------------------- ------------------------------- ------------------------
</TABLE>
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Large Cap
Research Portfolio managed by Lord Abbett and the return on the investment will
fluctuate, and redemption proceeds may be higher or lower than an investor's
original cost.
2The S&P 500 Index is an unmanaged index consisting of the stocks of 500 of the
largest U.S.-based companies. The Index does not include fees or expenses and is
not available for direct investment.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include any insurance charges
imposed in connection with your variable insurance contract. If this performance
information included the effects of these fees or charges, performance numbers
would be lower.
Index return since inception is as of 8/22/97.
<PAGE>
Cova Series Trust
Small Cap Stock Portfolio
--------------------------------------------------------------------------------
DEVELOPING GROWTH PORTFOLIO For the Period ended 6/30/00
Managed by Lord, Abbett & Co.
Letter to Policyholders
--------------------------------------------------------------------------------
Healthcare sector stocks, coupled with the decision to underweight this area
versus the Russell 2000 Growth Index, impeded performance. Hooper Holmes, a
provider of home-based medical exams for insurance applicants, lost significant
value after warning that analyst expectations were overly optimistic due to the
overall poor performance in the life insurance industry. Although this company
has hurt performance lately, this holding had been extremely advantageous to the
portfolio historically. Given our strong fundamental outlook for this company,
we will add to our position on this present weakness. Strong performance was
experienced by a top ten holding, Coherent, a provider of electro-optical
systems and medical instruments. It is interesting to note that the stocks
within this sector that contributed most favorably to the index's return were
companies with market capitalizations ranging from $4-$11 billion. Our market
cap constraints precluded us from investing in these particular companies.
Stock selection within the Financials sector detracted from performance. S1
Corp., a provider of internet-based financial services, has been plagued by the
area's extreme stock price movements. Although the price of the stock has
declined significantly during this year, S1 was one of the largest contributors
to performance during 1999. S1, having established strong alliances with global
banking giants, is positioned uniquely within the area of internet based
banking, continuing to make this holding a prudent investment.
Technology holdings have also affected performance. Although under-weighting the
sector relative to the benchmark proved to be advantageous, stock selection
within this sector detracted from performance. Igate Capital, an information
technology consulting firm, experienced difficulty during the quarter. Although
the stock price has been down recently, we are adding to our position to take
advantage of the temporary sell-off. However, some technology stocks did add
value. Nvidia, a designer of graphics processors and software, contributed
positively, having rapidly appreciated to one of your largest holdings. The
company has been profitable supporting the computer gaming industry -- a large
and rapidly growing segment within the tech sector.
Your largest holding, Plantronics, a manufacturer of telephone headsets, was one
of the largest contributors to performance during the quarter. Plantronics has
been a major holding for several quarters and while it experienced significant
performance difficulties in the third quarter of 1999, we continued to hold the
stock as we believed that the company's fundamental outlook remained strong. Our
ability not to be swayed by the market's fickle nature was ultimately rewarded.
As we move into the second half of the year, we believe the volatility in the
market is likely to continue in the short-term and liquidity and earnings
shortfalls will continue to be concerns for small company investors. However,
once the market begins to slow, we believe we will begin to see many smaller
companies experience some double-digit growth. Regardless of market conditions,
we will continue to execute our disciplined investment approach remaining
focused on finding the highest quality companies possible for the portfolio.
STEPHEN J. MCGRUDER
Portfolio Manager
Lord, Abbett & Co.
<TABLE>
<CAPTION>
TOP 10 PORTFOLIO HOLDINGS BY MARKET VALUE
As of 6/30/00
% of net assets
---------------------------------------------------------
<S> <C>
1. Plantronics, Inc. 4.3
---------------------------------------------------------
2. Teletech Holdings 2.4
---------------------------------------------------------
3. Radisys Corp. 1.9
---------------------------------------------------------
4. Coherent Inc. 1.9
---------------------------------------------------------
5. Timberland Company 1.8
---------------------------------------------------------
6. OM Group Inc. 1.7
---------------------------------------------------------
7. Sawtech Inc. 1.5
---------------------------------------------------------
8. Nvidia Corp. 1.4
---------------------------------------------------------
9. Core Laboratories 1.4
---------------------------------------------------------
10. Ann Taylor Stores Corp. 1.3
---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------
SECTOR ALLOCATION
As of 6/30/00
[Bar Graph]
--------------------------------------------------------------------
<S> <C>
Technology 29.3
--------------------------------------------------------------------
Financial Services 13.4
--------------------------------------------------------------------
Consumer Cyclicals 12.2
--------------------------------------------------------------------
Other 12.2
--------------------------------------------------------------------
Health Care 10.1
--------------------------------------------------------------------
Energy 6.3
--------------------------------------------------------------------
Producer Durables 5.0
--------------------------------------------------------------------
Materials and Processing 4.1
--------------------------------------------------------------------
Consumer Discretionary 4.0
--------------------------------------------------------------------
Consumer Services 3.4
--------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Average Annual Return2
Inception 8/20/97 (for the period ended 6/30/00)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
1 Year Since inception
--------------------------------------- ------------------------------------- -------------------------
Developing Growth Portfolio,
managed by Lord Abbett .97% 10.02%
--------------------------------------- ------------------------------------- -------------------------
Russell 2000 Index1 14.48% 9.36%
--------------------------------------- ------------------------------------- -------------------------
</TABLE>
1The Russell Growth 2000 Index is an unmanaged index and measures the
performance of those Russell 2000 companies with higher price-to-book ratios and
higher forecasted growth values. The Index does not include fees or expenses and
is not available for direct investment.
2 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Developing
Growth Portfolio managed by Lord Abbett and the return on the investment will
fluctuate, and redemption proceeds may be higher or lower than an investor's
original cost.
3The Russell 2000 Index is an unmanaged index consisting of the stocks of 2000
U.S. -based companies. The Index does not include fees or expenses and is not
available for direct investment.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include any insurance charges
imposed in connection with your variable insurance contract. If this performance
information included the effects of these fees or charges, performance numbers
would be lower.
Index return since inception is as of 8/22/97.
<PAGE>
-------------------------------------------------------------------------------
LORD ABBETT GROWTH AND INCOME PORTFOLIO For the Period ended 6/30/00
Managed by Lord, Abbett & Co.
Letter to Policyholders
-------------------------------------------------------------------------------
Utility stocks, a lead indicator of a change in monetary policy, were the star
performers of the large cap style in the second quarter. We selectively added to
the sector in a defensive stance in preparation for a slowdown in the economy
and because we believed the Fed was near the end of its recent round of
tightenings. A development in the utilities sector involving the convergence of
electric and gas power also benefited several of our holdings. Throughout the
quarter, our relatively large exposure to oil service companies paid off well,
as rising oil prices helped boost the price of many of these stocks. Our careful
stock picking and general overweighting in stocks of consumer non-cyclical
companies, particularly healthcare companies, also significantly buoyed
performance for the quarter.
At the onset of the second quarter, we had already begun to reduce the
portfolio's exposure to many "new economy" stocks in the technology,
telecommunications and media sectors due to high valuations and some concerns
over inflated expectations on the sustainability of current business
fundamentals. In exchange, we made select investments in undervalued "old
economy" stocks in basic industries, utilities and financial services
(especially insurance stocks) where we saw more intrinsic value. We maintained
this weighting shift throughout the second quarter.
Our move to basic industries (paper, chemicals, and metals) proved to be a bit
premature and worked against our performance for the quarter. However, if the
U.S. economy slows later this year, we believe investors will begin to
anticipate a more balanced global economic growth environment that should favor
the performance of these stocks. Restructuring and consolidation of production
capacity in many of these markets is also occurring and will ultimately aid
pricing and profit margins.
The second quarter brought a shift in attitudes toward equity investing.
Throughout 1999 and the opening months of this year investors were caught up in
a price and earnings growth-driven "momentum market." They bought a company's
stock simply because its price was going up and its earnings were growing at a
faster rate than other companies. They all but ignored the sustainability of
corporate earnings, valuations, and interest rates. But, toward the end of the
first quarter, this pattern began to change. Investors in late March seemed to
wake up to the risks of "momentum" investing. In April and May, equity markets
experienced a considerable turnaround. Whereas the technology rich NASDAQ index
had previously led the market, it fell by some 37 percent from its March peak to
the end of May. By contrast, the broad S&P 500 Index fell only 10 percent, and
the Dow Jones Industrial Average (DJIA)fell less than five percent.
Uncertainty persisted throughout the quarter with respect to the ultimate
economic and market impact of the Fed's initiatives. Investors reacted abruptly
to economic and corporate earnings announcements. Focus on consumer-oriented
factors, such as retail sales, housing, investor confidence and employment,
signaled economic slowing from the extremely high levels of prior periods. Hope
for a "soft landing" emerged. Momentum-oriented sectors, such as technology,
returned to favor in June. Nevertheless, a renewed sensitivity to risk and
wariness about fundamentals challenged many investors' decisions.
The investing environment now seems suited to a moderately defensive strategy
consistent with a slowdown in the economy, but not an absolute downturn.
Investors' clear new preference for stable sectors suggests a renewed interest
in earnings predictability, valuations, and financial strength -- qualities that
are well suited to a slower growth environment. At the same time, concern over
value has led investors to reconsider small and particularly medium
capitalization issues which investors have neglected, at least relatively
speaking. Signs of a slowdown in economic growth confirm the desirability of a
cautious approach and a renewed attention to investment fundamentals and value.
W. THOMAS HUDSON JR.
Portfolio Manager
Lord, Abbett & Co.
<TABLE>
<CAPTION>
TOP 10 PORTFOLIO HOLDINGS BY MARKET VALUE
As of 6/30/00
% of net assets
------------------------------------------------------------
<S> <C>
1. Exxon-Mobil Corp. 2.8
------------------------------------------------------------
2. American Home Products 2.8
------------------------------------------------------------
3. The Coastal Corp. 2.8
------------------------------------------------------------
4. BP Amoco PLC Spon. ADR 2.7
------------------------------------------------------------
5. ACE Ltd. 2.5
------------------------------------------------------------
6. American General Corp. 2.4
------------------------------------------------------------
7. Schlumberger Ltd. 2.2
------------------------------------------------------------
8. Total Fina S.A. ADR 2.2
------------------------------------------------------------
9. Duke Energy Corp. 2.2
------------------------------------------------------------
10. Minnesota Mining and Manufacturing 2.2
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------
SECTOR ALLOCATION
As of 6/30/00
[Bar Graph]
------------------------------------------------------------------
<S> <C>
Financial Services 19.1
------------------------------------------------------------------
Other 16.8
------------------------------------------------------------------
Technology 12.7
------------------------------------------------------------------
Health Care 9.5
------------------------------------------------------------------
Consumer Services 8.6
------------------------------------------------------------------
Integrated Oils 7.7
------------------------------------------------------------------
Utilities 7.7
------------------------------------------------------------------
Energy 6.7
------------------------------------------------------------------
Telecommunications 5.8
------------------------------------------------------------------
Materials and Processing 5.4
------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Average Annual Return1
Inception 1/8/99 (for the period ended
6/30/00)
------------------------------------------------------------------------------------------
<S> <C> <C>
1 Year Since inception
-------------------------------------------- ---------------------------- ----------------
Lord Abbett Growth and Income
Portfolio, managed by Lord, Abbett (0.56%) 5.99%
-------------------------------------------- ---------------------------- ----------------
S&P 500 Index2 7.24% 10.66%
-------------------------------------------- ---------------------------- ----------------
</TABLE>
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Lord Abbett
Growth and Income Portfolio managed by Lord Abbett and the return on the
investment will fluctuate, and redemption proceeds may be higher or lower than
an investor's original cost.
2 The S&P 500 Index is an unmanaged index consisting of the stocks of 500 of the
largest U.S.-based companies. The Index does not include fees or expenses and is
not available for direct investment.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include any insurance charges
imposed in connection with your variable insurance contract. If this performance
information included the effects of these fees or charges, performance numbers
would be lower.
<PAGE>
--------------------------------------------------------------------------------
BALANCED PORTFOLIO For the Period ended 6/30/00
Managed by the Mississippi Valley Advisors
Division of FIRMCO
Letter to Policyholders
--------------------------------------------------------------------------------
Market volatility continued during the second quarter of 2000 culminating in an
important change in market psychology. Investors appear to be returning to
fundamental investment criteria in valuing securities -- criteria such as
earnings and cash flow. A return to the basics bolstered the returns of your
portfolio relative to the overall market during this period. The Standard &
Poor's 500 fell -2.65% during the second quarter, bringing the six month return
to -0.42%. The technology heavy NASDAQ decline was even more dramatic at -13.3%
for the quarter after having fallen 29% from the end of March through the end of
May. Smaller stocks continued to outperform larger companies as the Standard &
Poor's SmallCap 600 rose +6.9%. Fixed income securities, as measured by the
(Lehman Bros. Intermediate Government/Corporate or Lehman Brothers 7-year
tax-exempt index) returned (3.2%/3.2%).
Future market direction will likely be influenced by the Federal Reserve and the
direction of interest rates. The Fed is currently "on hold pending further
information on the strength of our economy. We believe the U.S. economy is
incredibly resilient and it will likely require further interest rate moves to
accomplish the Fed's goal. In this environment we will continue to focus our
stock selection on those companies that are providing products or services that
are in demand regardless of the level of rates."
Currently the entire Treasury yield curve is trading below the Fed Funds rate of
6.5%; apparently the market is discounting an easing of credit at the next Fed
meeting, which occurs on August 22. We believe that this is a very optimistic
view and that rates on Treasuries are below a sustainable level given the strong
economic environment that is present today.
BOB BERNSTEIN
Portfolio Manager
Mississippi Valley Advisors Division of FIRMCO
<TABLE>
<CAPTION>
TOP 10 PORTFOLIO HOLDINGS BY MARKET VALUE
As of 6/30/00
% of net assets
--------------------------------------------------------
<S> <C> <C> <C> <C>
1. FNMA (6.0%, 11/01/13) 4.0%
--------------------------------------------------------
2. U.S. Treasury Note (7.25%, 5/15/04) 3.1%
--------------------------------------------------------
3. U.S. Treasury Note (6.625%, 5/15/07) 3.1%
--------------------------------------------------------
4. Millipore Corp. 2.1%
--------------------------------------------------------
5. U.S. Treasury Note (6.0%, 8/15/09) 2.0%
--------------------------------------------------------
6. Norwest Financial (6.625%, 7/15/04) 2.0%
--------------------------------------------------------
7. Lilly, Eli & Company 1.9%
--------------------------------------------------------
8. DuPont E I De Nem (8.25%, 9/15/06) 1.6%
--------------------------------------------------------
9. Sysco Corp. 1.6%
--------------------------------------------------------
10. Cisco Systems 1.6%
--------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
SECTOR ALLOCATION
As of 6/30/00
[Bar Graph]
-------------------------------------------------------------------------
<S> <C>
U.S. Gov't & Agency Securities 19.7
-------------------------------------------------------------------------
Technology 14.0
-------------------------------------------------------------------------
Interest Sensitive 13.0
-------------------------------------------------------------------------
Consumer Growth 13.0
-------------------------------------------------------------------------
Corporate Debt 12.2
-------------------------------------------------------------------------
Other 11.1
-------------------------------------------------------------------------
Industrial Cyclicals 7.0
-------------------------------------------------------------------------
Consumer Staples 5.0
-------------------------------------------------------------------------
Energy 3.0
-------------------------------------------------------------------------
Capital Goods 2.0
-------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Average Annual Return2
Inception 7/1/97 (for the period ended
6/30/00)
-------------------------------------------------------------------------------------
<S> <C> <C>
1 Year Since inception
--------------------------------------- -------------------------- ------------------
Balanced Portfolio,
managed by MVA (.13)% 8.77%
--------------------------------------- -------------------------- ------------------
S&P 500 Index1 7.24% 19.64%
--------------------------------------- -------------------------- ------------------
Salomon Brothers BIG Index3 4.57% 6.04%
--------------------------------------- -------------------------- ------------------
</TABLE>
1 The S&P 500 Index is an unmanaged index consisting of the stocks of 500 of the
largest U.S.-based companies. The Index does not include fees or expenses and is
not available for direct investment.
2 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Balanced
Portfolio managed by Mississippi Valley Advisors (MVA) and the return on the
investment will fluctuate, and redemption proceeds may be higher or lower than
an investor's original cost.
3 The Salomon Brothers Broad Investment-Grade Bond Index (BIG) is a
market-capitalized weighted index that includes fixed-rate Treasury, government
sponsored, corporate (Baa3/BBB or better) and mortgage securities. The index
does not reflect any expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include any insurance charges
imposed in connection with your variable insurance contract. If this performance
information included the effects of these fees or charges, performance numbers
would be lower.
<PAGE>
------------------------------------------------------------------------------
EQUITY INCOME PORTFOLIO For the Period ended 6/30/00
MANAGED BY THE MISSISSIPPI VALLEY ADVISORS
DIVISION OF FIRMCO
Letter to Policyholders
------------------------------------------------------------------------------
The Equity Income Portfolio seeks to provide an above average level of income
consistent with long-term capital appreciation. We believe our strength is in
stock selection, and will therefore typically maintain a well-diversified
portfolio among numerous economic sectors.
Early 2000 saw large cap growth stocks continue their outperformance, becoming
even more expensive versus value stocks. Value stocks underperformed the S&P 500
until March when Fed rate increases began to scare the markets, driving
investors toward value names. In this very concentrated market, we see above
average returns in energy, selected electric utilities, and technology stocks.
Retailers and industrial cyclicals remain the weakest sectors due in part to
concern that the Federal Reserve will slow the economy.
With short-term interest rates approaching 7%, stock prices will continue to be
volatile over the summer months. However, volatility creates opportunities to
buy top quality companies with proven management teams at attractive prices. As
always, the Fund's focus is high quality companies with predictable sales,
earnings and cash flow growth, strong balance sheets and innovative management.
Ongoing market volatility should force investors to seek companies with strong
underlying fundamentals rather than chase the hottest new internet story.
We continue to believe the value sector holds well above average return
potential over the next year or two, especially with many worldwide economies
strengthening and the U.S. economy continuing to maintain its solid growth. Many
value stocks are in the financial services industries, which should see good
performance when the Fed completes its rate increases. Moreover, having been out
of favor for nearly four years, value stocks truly deserve the name.
JOHN H. BLIXEN
Portfolio Manager
Mississippi Valley Advisors Division of FIRMCO
<TABLE>
<CAPTION>
TOP 10 PORTFOLIO HOLDINGS BY MARKET VALUE
As of 6/30/00
% of net assets
--------------------------------------------------------
<S> <C>
1. Baxter Intl. Inc. 2.2
--------------------------------------------------------
2. Heinz H.J. 2.2
--------------------------------------------------------
3. First Data Corp. 2.2
--------------------------------------------------------
4. Pharmacia 2.1
--------------------------------------------------------
5. Intel Corp. 2.1
--------------------------------------------------------
6. Duke Energy 2.1
--------------------------------------------------------
7. GTE Corp. 2.1
--------------------------------------------------------
8. SLM Holding Corp. 2.1
--------------------------------------------------------
9. Citigroup Inc. 2.0
--------------------------------------------------------
10. Phillips Petroleum 2.0
--------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Sector Allocation
As of 6/30/00
[Bar Graph]
---------------------------------------------------------------------
<S> <C>
Interest Sensitive 38.8
---------------------------------------------------------------------
Consumer Growth 15.2
---------------------------------------------------------------------
Technology 11.9
---------------------------------------------------------------------
Industrial Cyclicals 8.6
---------------------------------------------------------------------
Energy 8.5
---------------------------------------------------------------------
Consumer Staples 7.3
---------------------------------------------------------------------
Other 3.9
---------------------------------------------------------------------
Capital Goods 3.1
---------------------------------------------------------------------
Consumer Cylicals 2.7
---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Average Annual Return1
Inception 7/1/97 (for the period ended 6/30/00)
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
1 Year Since inception
-------------------------------------- --------------------------------------- --------------------------
Equity Income Portfolio,
managed by MVA (10.67)% 6.96%
-------------------------------------- --------------------------------------- --------------------------
Russell 1000 Index2 9.14% 20.01%
-------------------------------------- --------------------------------------- --------------------------
</TABLE>
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Equity Income
Portfolio managed by Mississippi Valley Advisors (MVA) and the return on the
investment will fluctuate, and redemption proceeds may be higher or lower than
an investor's original cost.
2 The Russell 1000 Index consists of the largest 1000 companies in the Russell
3000 Index. The Index represents the universe of large capitalization stocks
from which most active money managers typically select. The Index does not
include fees or expenses and is not available for direct investment.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include any insurance charges
imposed in connection with your variable insurance contract. If this performance
information included the effects of these fees or charges, performance numbers
would be lower.
<PAGE>
--------------------------------------------------------------------------------
GROWTH & INCOME EQUITY PORTFOLIO For the Period ended 6/30/00
MANAGED BY THE MISSISSIPPI VALLEY ADVISORS
DIVISION OF FIRMCO
Letter to Policyholders
--------------------------------------------------------------------------------
The Mercantile Growth and Income Fund posted a (1.72%) total return during the
first six months of the year. This compares to a -0.42% return for the Standard
& Poor's 500 Index and a -4.07% return for the Standard & Poor's Barra Value
Index. Based on the Fund's profile, an appropriate benchmark is a fifty-fifty
blend of these two indexes.
Within the technology sector, we emphasized companies benefiting from
accelerating unit growth in internet infrastructure and wireless communications.
Specific holdings that contributed to the Fund's strong relative performance
were Intel, the world leader in semiconductor chips; Nortel Networks, the
leading provider of fiber optic technology for the telecommunications industry;
and Nokia, the largest global producer of cellular phones.
Strength in the Fund's holdings in the capital goods sector was paced by
Millipore, a manufacturer of products used to analyze and purify liquids and
gases. In the microelectronics segment, Millipore has been a beneficiary of a
strong semi conductor capital equipment cycle while the company's
biopharmaceutical segment should benefit from increased research and development
activity in genomics and monclonal antibodies.
With short-term interest rates approaching 7%, stock prices will continue to be
volatile over the summer months. However, volatility creates opportunities to
buy top quality companies with proven management teams at attractive prices. As
always, the Growth and Income Fund's focus is high quality companies with
predictable sales, earnings and cash flow growth, strong balance sheets and
innovative management. Ongoing market volatility should force investors to seek
companies with strong underlying fundamentals rather than chase the hottest new
internet story. Investor rotation back to quality stocks should equate to even
better relative performance for the Growth and Income Fund.
BOB BERNSTEIN
Portfolio Manager
Mississippi Valley Advisors Division of FIRMCO
<TABLE>
<CAPTION>
TOP 10 PORTFOLIO HOLDINGS BY MARKET VALUE
As of 6/30/00
% of net assets
----------------------------------------------------------
<S> <C>
1. Eli Lilly & Company 3.2
----------------------------------------------------------
2. Schering Plough 2.6
----------------------------------------------------------
3. Cisco Systems 2.5
----------------------------------------------------------
4. General Electric 2.5
----------------------------------------------------------
5. MBNA Corp. 2.4
----------------------------------------------------------
6. Heinz, H.J. 2.4
----------------------------------------------------------
7. Microsoft Corp. 2.3
----------------------------------------------------------
8. Millipore Co. 2.3
----------------------------------------------------------
9. Intel Corp. 2.3
----------------------------------------------------------
10. Merck & Company 2.3
----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SECTOR ALLOCATION
As of 6/30/00
[Bar Graph]
--------------------------------------------------------------------
<S> <C>
Technology 27.1
--------------------------------------------------------------------
Consumer Growth 24.3
--------------------------------------------------------------------
Interest Sensitive 22.3
--------------------------------------------------------------------
Industrial Cyclicals 9.1
--------------------------------------------------------------------
Consumer Staples 7.5
--------------------------------------------------------------------
Energy 5.1
--------------------------------------------------------------------
Capital Goods 4.6
--------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Average Annual Return2
Inception 7/1/97 (for the period ended 6/30/00)
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
1 Year Since inception
------------------------------------------- -------------------------------- ----------------------------
Growth & Income Equity Portfolio,
managed by MVA .30% 12.41%
------------------------------------------- -------------------------------- ----------------------------
S&P 500 Index1 7.24% 19.64%
------------------------------------------- -------------------------------- ----------------------------
</TABLE>
1 The S&P 500 Index is an unmanaged index consisting of the stocks of 500 of the
largest U.S.-based companies. The Index does not include fees or expenses and is
not available for direct investment.
2 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Growth &
Income Equity Portfolio managed by Mississippi Valley Advisors (MVA) and the
return on the investment will fluctuate, and redemption proceeds may be higher
or lower than an investor's original cost.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include any insurance charges
imposed in connection with your variable insurance contract. If this performance
information included the effects of these fees or charges, performance numbers
would be lower.
<PAGE>
PORTFOLIO OF INVESTMENTS
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 93.6%
ADVERTISING - 0.1%
Obie Media Corp.*................................................................ 11,700 $ 93,600
Promotions.com, Inc.*............................................................. 9,900 49,500
-----------
143,100
-----------
APPAREL RETAILERS - 0.1%
Pacific Sunwear of California, Inc.*.............................................. 8,600 161,250
-----------
AUTOMOTIVE - 1.0%
Borg-Warner Automotive, Inc....................................................... 8,700 305,587
Lithia Motors, Inc.*............................................................. 15,200 203,300
Monaco Coach Corp.*.............................................................. 20,500 279,312
National R.V. Holdings, Inc.*.................................................... 18,500 194,250
Sonic Automotive, Inc.*.......................................................... 10,900 116,494
-----------
1,098,943
-----------
BANKING - 2.9%
American Capital Strategies, Ltd.................................................. 7,100 169,512
Bank United Corp................................................................. 27,300 960,619
Capital Crossing Bank*............................................................ 8,000 82,000
City National Corp................................................................ 9,700 344,350
Commercial Federal Corp.......................................................... 20,450 318,253
Hamilton Bancorp, Inc.*.......................................................... 14,300 250,250
Medallion Financial Corp.......................................................... 7,100 109,606
MicroFinancial, Inc............................................................... 6,500 65,000
National Commerce Bancorp........................................................ 19,700 316,431
Pacific Century Financial Corp................................................... 14,800 216,450
Sterling Bancshares, Inc.......................................................... 5,700 61,631
Summit Bancshares, Inc............................................................ 5,200 89,700
Sun Bancorp, Inc.*............................................................... 15,254 91,524
Westamerica Bancorp............................................................... 7,000 182,875
-----------
3,258,201
-----------
BEVERAGES, FOOD & TOBACCO - 1.2%
American Italian Pasta Co.*...................................................... 13,700 283,419
Beringer Wine Estates Holdings, Inc.*............................................. 9,400 331,937
Keebler Foods Co................................................................. 20,800 772,200
-----------
1,387,556
-----------
BUILDING MATERIALS - 0.8%
Caprock Communications Corp.*.................................................... 17,000 331,500
Elcor Corp....................................................................... 20,950 481,850
Omnicare, Inc.................................................................... 10,400 94,250
-----------
907,600
-----------
CHEMICALS - 4.5%
Albemarle Corp................................................................... 26,100 515,475
Bush Boake Allen, Inc.*........................................................... 6,600 288,750
General Chemical Group, Inc.*.................................................... 29,900 20,556
Gentek, Inc...................................................................... 39,020 436,536
Geon Co. (The)................................................................... 43,900 812,150
Georgia Gulf Corp................................................................ 36,300 755,494
Minerals Technologies, Inc....................................................... 19,400 892,400
<CAPTION>
-----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
CHEMICALS - CONTINUED
Solutia, Inc..................................................................... 19,400 $ 266,750
Wellman, Inc..................................................................... 66,200 1,071,612
-----------
5,059,723
-----------
COMMERCIAL SERVICES - 6.1%
Core Laboratories N.V............................................................ 10,900 316,100
Diamond Technology Partners, Inc.*................................................ 8,300 730,400
Digitas Inc.*..................................................................... 5,300 86,456
Diversa Corp.*.................................................................... 4,800 159,000
Exelixis, Inc.*................................................................... 7,400 246,975
Gene Logic, Inc.*................................................................. 3,600 128,475
iBEAM Broadcasting Corp.*........................................................ 26,800 482,400
Media Metrix, Inc.*............................................................... 2,500 63,594
NetRatings, Inc.*................................................................ 16,100 412,562
On Assignment, Inc.*............................................................. 35,600 1,085,800
Orchid Biosciences, Inc.*........................................................ 18,300 694,829
StorageNetworks, Inc.*............................................................ 2,000 180,500
Trimeris, Inc.*................................................................... 6,400 447,600
Universal Compression Holdings, Inc.*............................................. 6,400 214,400
Valassis Communications, Inc.*................................................... 29,800 1,136,125
Wind River Systems, Inc.*........................................................ 12,100 458,287
-----------
6,843,503
-----------
COMMUNICATIONS - 4.7%
Advanced Fibre Communications, Inc.*............................................. 32,700 1,481,719
L-3 Communications Holdings, Inc.*................................................ 6,700 382,319
LifeMinders, Inc.*................................................................ 5,300 156,681
Metawave Communications Corp*..................................................... 7,900 210,831
Netro Corp.*...................................................................... 5,500 315,562
ONI Systems Corp.*................................................................ 2,400 281,287
Plantronics, Inc.*................................................................ 1,800 207,900
Polycom, Inc.*.................................................................... 9,100 856,254
Seachange International, Inc.*................................................... 13,950 402,806
Titan Corp. (The)*................................................................ 7,200 322,200
Turnstone Systems, Inc.*.......................................................... 2,100 347,911
U.S. Wireless Corp.*................................................................ 900 19,237
Ulticom, Inc.*.................................................................... 2,500 60,039
Williams Communications Group, Inc.*.............................................. 6,900 228,994
-----------
5,273,740
-----------
COMPUTER SOFTWARE & PROCESSING - 15.5%
Accrue Software, Inc.*............................................................ 9,600 340,800
Aether Systems, Inc.*............................................................. 1,700 348,500
Agile Software Corp.*............................................................ 12,400 876,525
Allaire Corp.*.................................................................... 1,000 36,750
Alteon Websystems, Inc.*.......................................................... 5,100 510,319
Art Technology Group, Inc.*....................................................... 9,700 979,094
ARTISTdirect, Inc.,*.............................................................. 5,500 17,187
Certicom Corp.................................................................... 10,200 698,541
CheckFree Holdings Corp.*........................................................ 13,200 680,625
Clarent Corp.*................................................................... 12,300 879,450
Click2Learn.com, Inc.*........................................................... 21,600 380,700
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Small Cap Stock Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
COMPUTER SOFTWARE & PROCESSING - CONTINUED
Computer Horizons Corp.*......................................................... 32,200 $ 432,687
Corillian Corp*................................................................... 9,600 159,600
E. Piphany, Inc.*................................................................. 2,600 278,687
eFunds Corp.*.................................................................... 18,375 213,609
eSPEED, Inc. - Class A*.......................................................... 19,000 825,312
Excalibur Technologies Corp.*..................................................... 9,000 359,437
FASTNET Corp.*................................................................... 11,600 43,500
Gartner Group, Inc. - Class A.................................................... 28,700 344,400
Healthgate Data Corp.*........................................................... 19,300 31,362
Informatica Corp*................................................................ 10,600 868,537
Information Resources Engineering, Inc.*............................................ 100 2,525
Informix Corp.*.................................................................. 33,300 247,669
ISS Group, Inc.*.................................................................. 4,400 434,431
Keynote Systems, Inc.*............................................................ 7,600 536,275
Mediaplex, Inc.*................................................................. 20,500 395,906
Metasolv Software, Inc.*.......................................................... 3,800 167,200
Net Perceptions, Inc.*........................................................... 11,800 187,325
Nuance Communications Inc.*....................................................... 1,300 108,306
Packeteer, Inc.*................................................................. 10,500 305,812
Peregrine Systems, Inc.*......................................................... 17,900 620,906
Precise Software Solutions Ltd.*.................................................. 2,400 57,600
PRI Automation, Inc.*............................................................. 7,500 490,429
Quest Software, Inc.*............................................................. 2,400 132,900
Quokka Sports, Inc.*.............................................................. 9,500 76,297
Retek Inc.*...................................................................... 11,700 374,400
Sequoia Software Corp*............................................................ 8,100 132,637
SmartForce Plc - ADR*............................................................ 13,600 652,800
Software Technologies Corp.*..................................................... 12,900 395,869
Sonic Foundry, Inc.*............................................................. 11,900 238,000
Source Information Management Co. (The)*......................................... 17,400 265,350
Tumbleweed Communications Corp.*................................................. 10,300 524,012
Verio Inc.*....................................................................... 4,500 266,062
Vicinity Corp.*................................................................... 5,000 98,125
Watchguard Technologies, Inc.*................................................... 11,200 615,300
Websense, Inc.*................................................................... 4,800 120,600
WebTrends Corp.*................................................................. 10,600 410,087
Witness Systems, Inc.*........................................................... 15,400 375,375
-----------
17,537,820
-----------
COMPUTERS & INFORMATION - 1.4%
Accelerated Networks, Inc.*....................................................... 1,400 59,062
Cirrus Logic, Inc.*.............................................................. 12,000 192,000
Fargo Electronics*............................................................... 17,800 63,412
M-Systems Flash Disk Pioneer Ltd.*................................................ 8,100 630,787
Visual Networks, Inc.*........................................................... 21,100 601,350
-----------
1,546,611
-----------
COSMETICS & PERSONAL CARE - 0.5%
Alberto-Culver Co. - Class B..................................................... 18,300 559,294
-----------
<CAPTION>
-----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
ELECTRIC UTILITIES - 1.5%
Cleco Corp....................................................................... 27,800 $ 931,300
CMS Energy Corp.................................................................. 35,200 778,800
-----------
1,710,100
-----------
ELECTRICAL EQUIPMENT - 0.6%
Capstone Turbine Corp.*........................................................... 2,100 94,631
Rayovac Corp.*................................................................... 27,500 615,312
-----------
709,943
-----------
ELECTRONICS - 8.3%
ACT Manufacturing, Inc.*......................................................... 14,700 682,632
ATMI, Inc.*...................................................................... 23,800 1,106,700
C-Cube Microsystems Inc.*........................................................ 21,700 425,862
DDI Corp.*....................................................................... 26,700 760,950
Exar Corp.*...................................................................... 16,850 1,469,109
Genesis Microchip Inc.*........................................................... 5,500 98,312
Integrated Circuit Systems, Inc.*................................................ 14,500 248,312
JNI Corp.*........................................................................ 3,000 94,875
Lattice Semiconductor Corp.*..................................................... 11,700 808,763
Manufacturers' Services Ltd.*..................................................... 5,300 108,981
MMC Networks, Inc.*............................................................... 5,700 304,594
New Focus, Inc.*.................................................................. 3,800 312,075
Power-One, Inc.*................................................................. 10,000 1,139,375
Silicon Image, Inc.*.............................................................. 7,500 374,063
Silicon Laboratories Inc.*........................................................ 3,100 164,688
Stratos Lightwave, Inc.*.......................................................... 2,575 71,778
TranSwitch Corp.*................................................................. 2,600 200,688
Virata Corp.*..................................................................... 7,400 441,225
Vyyo Inc.*........................................................................ 6,900 186,300
World Access, Inc.*.............................................................. 32,600 360,638
-----------
9,359,920
-----------
ENTERTAINMENT & LEISURE - 1.5%
Anchor Gaming*................................................................... 18,100 867,669
Boca Resorts, Inc.*.............................................................. 14,700 145,163
Concord Camera Corp.*............................................................. 2,600 54,275
JAKKS Pacific, Inc.*............................................................. 20,800 306,800
Ticketmaster Online-City - Class B*.............................................. 22,400 357,000
-----------
1,730,907
-----------
FINANCIAL SERVICES - 2.6%
Allied Capital Corp.............................................................. 41,400 703,800
Amcv Capital Trust I*............................................................. 3,900 162,825
American Home Mortgage Holdings, Inc.*........................................... 16,300 74,369
Donaldson, Lufkin & Jenrette, Inc................................................. 5,000 212,188
Doral Financial Corp............................................................. 24,400 279,075
Gabelli Asset Management, Inc.*.................................................. 11,600 290,000
Heller Financial, Inc............................................................ 33,300 682,650
LendingTree, Inc.*................................................................ 4,200 31,500
Ocwen Financial Corp.*........................................................... 28,900 160,756
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Small Cap Stock Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL SERVICES - CONTINUED
Southwest Securities Group, Inc................................................... 8,100 $ 301,725
Web Street, Inc.*................................................................ 10,400 26,000
-----------
2,924,888
-----------
FOREST PRODUCTS & PAPER - 1.6%
Buckeye Technologies, Inc.*...................................................... 22,400 491,400
Caraustar Industries, Inc........................................................ 47,500 718,438
Universal Forest Products, Inc................................................... 39,100 537,625
-----------
1,747,463
-----------
HEALTH CARE PROVIDERS - 0.8%
Accredo Health, Inc.*............................................................ 13,550 468,322
Community Health Care*............................................................ 5,300 85,794
Hooper Holmes, Inc............................................................... 38,500 308,000
-----------
862,116
-----------
HEAVY CONSTRUCTION - 0.5%
Mcdermott International, Inc..................................................... 66,800 588,675
-----------
HEAVY MACHINERY - 2.4%
Applied Science and Technology, Inc.*............................................ 12,600 326,025
Dycom Industries, Inc.*........................................................... 6,450 296,700
IDEX Corp........................................................................ 11,100 350,344
Lam Research Corp.*.............................................................. 14,700 551,250
Manitowoc Company, Inc............................................................ 6,600 176,550
Optimal Robotics Corp.*.......................................................... 13,500 518,063
Smith International, Inc.*........................................................ 7,000 509,688
-----------
2,728,620
-----------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 0.5%
Furniture Brands International, Inc.*............................................. 9,000 136,125
Stanley Furniture Co., Inc.*..................................................... 21,100 464,200
-----------
600,325
-----------
HOUSEHOLD PRODUCTS - 0.2%
Snap-On, Inc...................................................................... 7,800 207,675
-----------
INDUSTRIAL - DIVERSIFIED - 1.4%
Shaw Group, Inc.*................................................................ 20,900 984,913
Symyx Technologies Inc.*......................................................... 14,200 605,053
-----------
1,589,966
-----------
INSURANCE - 2.1%
E. W. Blanch Holdings, Inc....................................................... 10,500 213,281
Fremont General Corp............................................................. 37,500 147,656
HealthExtras, Inc.*.............................................................. 22,900 123,088
MIIX Group, Inc................................................................... 3,700 44,400
Nationwide Financial Services, Inc. - Class A.................................... 21,800 716,675
Protective Life Corp............................................................. 13,400 356,775
Quotesmith.com, Inc.*............................................................ 23,200 50,026
RenaissanceRe Holdings Ltd....................................................... 10,400 453,050
StanCorp Financial Group, Inc..................................................... 8,600 276,275
-----------
2,381,226
-----------
<CAPTION>
-----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
LODGING - 0.3%
Aztar Corp.*..................................................................... 16,000 $ 248,000
Extended Stay America, Inc.*..................................................... 13,900 128,575
-----------
376,575
-----------
MEDIA - BROADCASTING & PUBLISHING - 1.9%
Entercom Communications Corp.*................................................... 12,400 604,500
Hearst-Argyle Television, Inc.*.................................................. 12,700 247,650
Insight Communications Co., Inc.*................................................ 15,400 240,625
Spanish Broadcasting System, Inc.*............................................... 39,700 816,331
World Gate Communications, Inc.*................................................. 15,600 276,900
-----------
2,186,006
-----------
MEDICAL BIO - TECHNOLOGY - 0.8%
Affymetrix, Inc.*................................................................. 4,500 743,063
Maxygen Inc.*..................................................................... 3,000 170,297
-----------
913,360
-----------
MEDICAL SUPPLIES - 4.4%
Aclara Biosciences Inc.*.......................................................... 2,200 112,063
August Technology Corp.*.......................................................... 3,700 60,819
Cyberonics, Inc.*................................................................. 7,800 93,600
Cytyc Corp.*...................................................................... 1,800 96,075
Eclipse Surgical Technologies, Inc.*............................................. 32,900 143,938
Enzon, Inc.*...................................................................... 5,500 233,750
Exfo Electro-Optical Engineering, Inc.*........................................... 1,000 43,875
I-STAT Corp.*.................................................................... 21,500 374,906
Kopin Corp.*..................................................................... 15,800 1,094,150
Meade Instruments Corp.*......................................................... 13,500 339,188
Mettler-Toledo International, Inc.*.............................................. 27,500 1,100,000
MKS Instruments, Inc.*........................................................... 12,300 481,238
Molecular Devices Corp.*.......................................................... 1,400 96,863
ORATEC Interventions, Inc*........................................................ 8,700 290,363
ResMed, Inc.*.................................................................... 11,600 310,300
Sonic Innovations, Inc*........................................................... 5,000 92,813
Therma-Wave Inc.*................................................................. 1,200 26,775
-----------
4,990,716
-----------
METALS - 0.7%
Gulf Island Fabrication, Inc.*.................................................... 5,800 98,600
Mueller Industries*.............................................................. 20,100 562,800
Schnitzer Steel Industries, Inc.................................................. 10,000 158,750
-----------
820,150
-----------
OIL & GAS - 3.8%
Atmos Energy Corp................................................................ 26,400 462,000
Cooper Cameron Corp.*............................................................ 11,100 732,600
Global Industries, Ltd.*......................................................... 11,500 217,063
Kinder Morgan, Inc............................................................... 15,100 521,894
National-Oilwell, Inc.*.......................................................... 32,700 1,075,013
Newfield Exploration Co.*........................................................ 24,200 946,825
Spinnaker Exploration Co.*........................................................ 9,900 253,688
Unit Corp.*....................................................................... 8,800 118,800
-----------
4,327,883
-----------
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Small Cap Stock Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
PHARMACEUTICALS - 6.5%
Abgenix, Inc.*.................................................................... 5,400 $ 647,241
Akorn, Inc.*..................................................................... 31,200 247,650
Allscripts, Inc.*................................................................ 12,000 276,000
Bindley Western Industries, Inc.................................................. 20,000 528,750
Charles River Laboratories Int'l., Inc.*.......................................... 3,300 73,219
Corixa Corp.*..................................................................... 8,800 377,850
Gilead Sciences, Inc.*............................................................ 1,700 120,913
Human Genome Sciences, Inc.*..................................................... 13,805 1,840,653
IDEC Pharmaceuticals Corp.*....................................................... 7,300 856,381
ILEX Oncology, Inc.*.............................................................. 5,100 179,775
Ligand Pharmaceuticals*.......................................................... 50,100 660,694
Millennium Pharmaceuticals, Inc.*................................................. 1,100 123,063
Neurocrine Biosciences, Inc.*.................................................... 11,900 423,194
Vertex Pharmaceuticals Inc.*...................................................... 8,900 937,838
Vical, Inc.*...................................................................... 1,400 26,950
-----------
7,320,171
-----------
REAL ESTATE - 4.0%
Arden Realty Group, Inc. (REIT).................................................. 21,600 507,600
Centerpoint Properties Corp. (REIT)............................................... 9,500 387,125
CoStar Group Inc.*................................................................ 7,900 197,994
Cousins Properties, Inc. (REIT).................................................. 15,800 608,300
General Growth Properties, Inc. (REIT)........................................... 17,300 549,275
Macerich Co. (The) (REIT)........................................................ 12,300 271,369
Manufactured Home Communities, Inc. (REIT)....................................... 20,900 500,294
Mills Corp. (REIT)............................................................... 13,500 253,969
Misson West Properties Inc. (REIT)............................................... 22,600 237,300
Post Properties, Inc. (REIT)..................................................... 23,567 1,036,948
-----------
4,550,174
-----------
RETAILERS - 1.5%
Alloy Online, Inc.*.............................................................. 18,300 205,875
BJ's Wholesale Club, Inc.*........................................................ 3,800 125,400
Cost Plus, Inc.*................................................................. 19,200 550,800
School Specialty, Inc.*.......................................................... 35,700 662,681
Stamps.com, Inc.*................................................................ 13,800 100,913
-----------
1,645,669
-----------
TELEPHONE SYSTEMS - 3.5%
Choice One Communications, Inc.*................................................. 11,000 448,938
Digital Island, Inc.*............................................................. 8,600 418,175
ECtel Ltd.*....................................................................... 4,200 96,600
Flag Telecom Holdings Ltd.*....................................................... 9,400 139,825
GoAmerica, Inc.*.................................................................. 8,700 134,306
IBasis, Inc.*.................................................................... 20,900 900,006
ITC DeltaCom, Inc.*.............................................................. 15,300 341,381
MGC Communications, Inc.*........................................................ 12,000 719,250
Motient Corp*.................................................................... 23,400 367,088
Net2Phone, Inc.*.................................................................. 8,000 285,500
TeleCorp PCS Inc.*................................................................ 3,600 145,125
-----------
3,996,194
-----------
<CAPTION>
-----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
TEXTILES, CLOTHING & FABRICS - 0.3%
Genesco Inc.*.................................................................... 11,000 $ 176,688
Vans, Inc.*...................................................................... 13,400 195,975
-----------
372,663
-----------
TRANSPORTATION - 2.5%
American Classic Voyages Co.*.................................................... 15,100 311,438
C.H. Robinson Worldwide, Inc..................................................... 23,300 1,153,350
GATX Corp......................................................................... 7,300 248,200
PNV.net, Inc.*.................................................................... 9,300 12,788
Werner Enterprises, Inc.......................................................... 40,175 464,523
Willis Lease Finance Corp.*...................................................... 31,900 199,375
Wisconsin Central Transport Corp.*............................................... 34,600 449,800
-----------
2,839,474
-----------
WATER COMPANIES - 0.6%
E-Town Corp....................................................................... 9,500 631,156
-----------
Total Common Stocks (Cost $90,715,994) 105,889,356
-----------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
PAR SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
-------------------------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS - 14.3%
$1,335,090 American Express Centurion Bank, 6.65%,
due 07/10/00(a)..................................................... $ 1,335,090
1,375,726 Bank of America, 6.67%,
due 03/22/01(a)..................................................... 1,375,726
667,545 Royal Bank of Scotland, 6.85%,
due 07/05/00(a)..................................................... 667,545
2,670,180 American Express Centurion Bank, 7%,
due 07/07/00(a)..................................................... 2,670,180
667,545 First Union National Bank, 6.9%,
due 05/09/01(a)..................................................... 667,545
1,633,879 Fleet National Bank, 7.125%,
due 10/31/00(a)..................................................... 1,633,879
1,335,090 Goldman Sachs, 6.64875%,
due 08/17/00(a)..................................................... 1,335,090
1,335,090 Janus Money Market Fund(a)............................................ 1,335,090
3,887,014 Merrimac Cash Fund-Premium Class(a)................................... 3,887,014
1,335,090 BNP Paribas, 6.75%, due 07/05/00(a)................................... 1,335,090
------------
Total Short-Term Investments
(Cost $16,242,249) 16,242,249
------------
</TABLE>
<TABLE>
<S> <C>
TOTAL INVESTMENTS - 107.9%
(Cost $106,958,243) 122,131,605
Other Assets and Liabilities (net) -
(7.9%) (8,942,461)
-------------
TOTAL NET ASSETS - 100.0% $ 113,189,144
=============
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security.
(a) Represents investment of collateral received from securities
lending transactions.
ADR - American Depositary Receipt
REIT - Real Estate Investment Trust
See notes to financial statements
<PAGE>
Cova Series Trust
Quality Bond Portfolio
PORTFOLIO OF INVESTMENTS
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
PAR VALUE
AMOUNT SECURITY DESCRIPTION COUPON MATURITY (NOTE 1)
-----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
DOMESTIC BONDS & DEBT SECURITIES - 95.7%
ASSET BACKED SECURITIES - 8.1%
$ 400,000 California Infrastructure......................... 6.420% 09/25/2008 $ 388,814
1,500,000 Carco Auto Loan Master Trust...................... 5.780% 03/15/2004 1,465,867
360,000 Citibank Credit Card Master Trust................. 5.500% 02/15/2006 341,037
1,230,000 Citibank Credit Card Master Trust................. 6.150% 03/10/2011 1,120,930
730,000 Ford Credit Auto Loan Master Trust................ 5.500% 02/15/2003 723,105
1,800,000 Ford Credit Auto Owner Trust...................... 6.820% 06/17/2002 1,798,317
595,000 Money Store Home Equity Trust (The)............... 6.485% 12/15/2038 569,132
500,000 Nationsbank Card Master Trust..................... 6.450% 04/15/2003 500,042
500,000 Peco Energy Transition Trust...................... 5.800% 03/01/2007 475,637
-----------
7,382,881
-----------
AUTOMOTIVE - 0.0%
25,000 Federal - Mogul Corp.............................. 7.750% 07/01/2006 18,202
-----------
BANKING - 4.1%
2,000,000 Chase Manhattan Corp.............................. 9.750% 11/01/2001 2,063,140
225,000 Fleet Capital Ltd................................. 7.920% 12/11/2026 197,253
10,000 NationsBank Corp.................................. 7.250% 10/15/2025 9,036
1,500,000 Wachovia Corp..................................... 6.700% 06/21/2004 1,464,864
-----------
3,734,293
-----------
BEVERAGES, FOOD & TOBACCO - 0.7%
455,000 J Seagram & Sons.................................. 7.600% 12/15/2028 431,522
250,000 Smithfield Foods, Inc............................. 7.625% 02/15/2008 225,000
-----------
656,522
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS - 12.9%
209,951 Chase Manhattan Bank - First Union National....... 7.134% 07/15/2007 208,273
2,000,000 Chase Manhattan Bank - First Union National....... 7.439% 07/15/2009 1,994,818
1,980,000 Commercial Mortgage Acceptance Corp............... 6.030% 03/15/2008 1,822,956
890,000 Credit Suisse First Boston Mortgage Securities
Corp............................................ 7.290% 09/15/2009 878,503
1,959,096 First Nationwide Trust............................ 6.500% 01/19/2029 1,813,525
1,655,000 First Union Commercial Mortgage................... 6.070% 10/15/2008 1,517,344
240,000 First Union-Lehman Brothers Commercial............ 6.600% 05/18/2007 232,177
1,730,000 First Union-Lehman Brothers Commercial............ 6.650% 12/18/2007 1,652,629
1,500,000 Morgan Stanley Capital, Inc....................... 6.170% 10/03/2008 1,377,849
299,278 Ocwen Residential MBS Corp. (144A)(a)............. 7.000% 10/25/2040 293,237
-----------
11,791,311
-----------
COMMUNICATIONS - 1.2%
1,070,000 TCI Communications, Inc........................... 7.875% 02/15/2026 1,065,776
-----------
ELECTRIC UTILITIES - 0.3%
250,000 Columbus Southern Power........................... 6.850% 10/03/2005 240,979
-----------
FINANCIAL SERVICES - 2.8%
650,000 Citigroup Capital................................. 7.750% 12/01/2036 590,921
1,500,000 General Motors Acceptance Corp.................... 5.500% 01/14/2002 1,460,698
500,000 General Motors Acceptance Corp.................... 6.750% 11/04/2004 486,662
-----------
2,538,281
-----------
INDUSTRIAL - DIVERSIFIED - 0.5%
495,000 Armstrong World Industries, Inc................... 6.350% 08/15/2003 436,335
-----------
MEDIA - BROADCASTING & PUBLISHING - 2.0%
250,000 Fox Liberty Networks LLC.......................... 8.875% 08/15/2007 249,375
30,000 News America Holdings, Inc........................ 7.700% 10/30/2025 27,296
500,000 Time Warner, Inc.................................. 7.975% 08/15/2004 510,000
1,000,000 Turner Broadcasting Systems, Inc.................. 7.400% 02/01/2004 996,095
-----------
1,782,766
-----------
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Quality Bond Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
PAR VALUE
AMOUNT SECURITY DESCRIPTION COUPON MATURITY (NOTE 1)
-----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
OIL & GAS - 1.2%
$ 600,000 Coastal Corp...................................... 6.500% 05/15/2006 $ 569,035
200,000 Dynegy, Inc....................................... 6.875% 07/15/2002 197,912
65,000 Enron Corp........................................ 6.950% 07/15/2028 57,325
300,000 National Fuel Gas Co.............................. 6.214% 08/12/2027 291,248
-----------
1,115,520
-----------
TELEPHONE SYSTEMS - 2.0%
250,000 Global Crossing Hldg. Ltd. (144A)(a).............. 9.125% 11/15/2006 240,625
455,000 Liberty Media Group............................... 8.250% 02/01/2030 418,896
100,000 U.S. Cellular Corp................................ 7.250% 08/15/2007 95,199
1,100,000 WorldCom, Inc..................................... 7.750% 04/01/2027 1,096,565
-----------
1,851,285
-----------
TRANSPORTATION - 0.3%
375,000 Union Pacific Corp................................ 6.625% 02/01/2029 310,800
-----------
U.S. GOVERNMENT AGENCY - 3.3%
2,630,000 Federal National Mortgage Association............. 7.250% 01/15/2010 2,655,992
402,000 Federal National Mortgage Association(b).......... 7.125% 01/15/2030 404,234
-----------
3,060,226
-----------
U.S. GOVERNMENT AGENCY MORTGAGE BACKED SECURITIES - 41.4%
20,754 Federal Home Loan Mortgage Corp................... 8.000% 09/01/2008 20,805
215,039 Federal Home Loan Mortgage Corp................... 6.500% 07/15/2016 212,590
877,043 Federal National Mortgage Association............. 6.500% 06/01/2014 845,988
76,936 Federal National Mortgage Association............. 6.500% 08/01/2014 74,212
26,330 Federal National Mortgage Association............. 6.500% 09/01/2014 25,398
214,908 Federal National Mortgage Association............. 6.500% 09/01/2014 207,298
140,080 Federal National Mortgage Association............. 6.500% 12/01/2014 135,120
625,136 Federal National Mortgage Association............. 6.500% 12/01/2014 603,001
89,044 Federal National Mortgage Association............. 6.500% 01/01/2015 85,891
824,020 Federal National Mortgage Association............. 6.500% 02/01/2015 794,842
799,576 Federal National Mortgage Association............. 7.000% 03/01/2015 784,756
345,330 Federal National Mortgage Association............. 7.000% 03/01/2015 338,929
886,472 Federal National Mortgage Association............. 7.000% 03/01/2015 870,042
828,557 Federal National Mortgage Association............. 7.000% 03/01/2015 813,200
21,652 Federal National Mortgage Association............. 8.500% 07/01/2019 22,067
377,388 Federal National Mortgage Association............. 7.500% 12/01/2022 372,313
838,560 Federal National Mortgage Association............. 7.000% 06/01/2028 809,803
415,264 Federal National Mortgage Association............. 6.000% 07/01/2028 379,983
399,787 Federal National Mortgage Association............. 7.000% 08/01/2028 386,077
844,608 Federal National Mortgage Association............. 7.000% 09/01/2028 815,643
80,628 Federal National Mortgage Association............. 6.000% 10/01/2028 73,777
313,565 Federal National Mortgage Association............. 6.000% 12/01/2028 286,925
271,037 Federal National Mortgage Association............. 7.500% 06/01/2029 267,392
713,263 Federal National Mortgage Association............. 7.500% 06/01/2029 703,670
55,085 Federal National Mortgage Association............. 7.500% 07/01/2029 54,344
738,927 Federal National Mortgage Association............. 7.000% 08/01/2029 713,586
283,934 Federal National Mortgage Association............. 7.500% 08/01/2029 280,115
96,730 Federal National Mortgage Association............. 7.500% 08/01/2029 95,429
395,051 Federal National Mortgage Association............. 7.000% 09/01/2029 381,503
501,290 Federal National Mortgage Association............. 7.500% 09/01/2029 494,547
406,755 Federal National Mortgage Association............. 7.500% 09/01/2029 401,284
34,902 Federal National Mortgage Association............. 7.500% 09/01/2029 34,433
310,748 Federal National Mortgage Association............. 7.500% 09/01/2029 306,569
665,156 Federal National Mortgage Association............. 7.500% 09/01/2029 656,210
158,000 Federal National Mortgage Association............. 8.000% 09/01/2029 158,753
399,317 Federal National Mortgage Association............. 7.500% 10/01/2029 393,946
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Quality Bond Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
PAR VALUE
AMOUNT SECURITY DESCRIPTION COUPON MATURITY (NOTE 1)
-----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT AGENCY MORTGAGE BACKED SECURITIES - CONTINUED
$ 630,003 Federal National Mortgage Association............. 7.500% 10/01/2029 $ 621,530
726,079 Federal National Mortgage Association............. 7.500% 10/01/2029 716,313
568,859 Federal National Mortgage Association............. 7.500% 10/01/2029 561,208
868,463 Federal National Mortgage Association............. 7.500% 10/01/2029 856,782
289,419 Federal National Mortgage Association............. 7.500% 11/01/2029 285,526
52,275 Federal National Mortgage Association............. 8.000% 11/01/2029 52,524
30,155 Federal National Mortgage Association............. 8.000% 11/01/2029 30,299
25,680 Federal National Mortgage Association............. 7.000% 12/01/2029 24,800
565,122 Federal National Mortgage Association............. 7.500% 01/01/2030 557,521
490,431 Federal National Mortgage Association............. 7.500% 01/01/2030 483,835
832,462 Federal National Mortgage Association............. 7.500% 01/01/2030 821,265
317,832 Federal National Mortgage Association............. 7.500% 02/01/2030 313,557
990,001 Federal National Mortgage Association............. 7.500% 02/01/2030 976,685
314,633 Federal National Mortgage Association............. 8.000% 02/01/2030 316,134
997,135 Federal National Mortgage Association............. 8.000% 02/01/2030 1,001,889
848,459 Federal National Mortgage Association............. 8.000% 02/01/2030 852,505
421,289 Federal National Mortgage Association............. 7.500% 04/01/2030 415,623
944,404 Federal National Mortgage Association............. 7.000% 05/01/2030 912,017
141,388 Federal National Mortgage Association............. 7.500% 06/01/2030 139,486
999,900 Federal National Mortgage Association............. 8.000% 06/01/2030 1,004,668
499,950 Federal National Mortgage Association............. 8.000% 06/01/2030 502,334
2,125,000 Federal National Mortgage Association(c).......... 7.000% 07/17/2030 2,050,620
4,390,000 Federal National Mortgage Association(c).......... 7.500% 07/17/2030 4,325,511
39,687 Government National Mortgage Association.......... 9.000% 01/15/2020 41,013
26,407 Government National Mortgage Association.......... 8.000% 03/15/2026 26,677
65,497 Government National Mortgage Association.......... 7.500% 02/15/2027 65,096
2,633,462 Government National Mortgage Association.......... 6.500% 12/15/2028 2,499,890
28,732 Government National Mortgage Association.......... 8.000% 12/15/2029 29,063
86,033 Government National Mortgage Association.......... 8.000% 01/15/2030 87,023
885,235 Government National Mortgage Association.......... 8.000% 02/15/2030 895,422
25,824 Government National Mortgage Association.......... 8.000% 02/15/2030 26,121
27,396 Government National Mortgage Association.......... 8.000% 04/15/2030 27,711
25,839 Government National Mortgage Association.......... 8.000% 04/15/2030 26,137
948,317 Government National Mortgage Association.......... 8.000% 06/15/2030 959,230
946,216 Government National Mortgage Association.......... 8.000% 06/15/2030 957,105
500,000 Government National Mortgage Association.......... 8.000% 06/15/2030 505,754
-----------
37,869,315
-----------
U.S. TREASURY SECURITIES - 14.9%
5,000 U.S. Treasury Note................................ 6.000% 08/15/2004 4,955
2,750,000 U.S. Treasury Note................................ 5.500% 05/15/2009 2,630,548
1,810,000 U.S. Treasury Note................................ 6.500% 02/15/2010 1,872,219
1,715,000 U.S. Treasury Bond(d)............................. 8.875% 02/15/2019 2,203,240
5,653,000 U.S. Treasury Bond................................ 6.750% 08/15/2026 6,076,975
335,000 U.S. Treasury Bond................................ 6.500% 11/15/2026 349,552
1,300,000 U.S. Treasury Bond - Strip Principal(d)........... 9.125% 05/15/2018 431,410
-----------
13,568,899
-----------
Total Domestic Bonds & Debt Securities (Cost
$87,901,855) 87,423,391
-----------
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Quality Bond Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
PAR VALUE
AMOUNT SECURITY DESCRIPTION COUPON MATURITY (NOTE 1)
-----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FOREIGN BONDS & DEBT SECURITIES - 1.6%
CANADA - 0.6%
$ 80,000 Gulf Canada Resources Ltd. (Yankee)............... 8.250% 03/15/2017 $ 73,800
500,000 Quebec Province (Global).......................... 7.500% 09/15/2029 492,010
-----------
565,810
-----------
CHANNEL ISLANDS - 0.5%
420,000 HSBC Capital Funding LT (144A) (Yankee)........... 10.176% 12/29/2049 450,849
-----------
COLOMBIA - 0.2%
195,000 Colombia (Republic of) (Global)................... 9.750% 04/23/2009 153,563
-----------
NETHERLANDS - 0.2%
250,000 KPNQwest B.V. (Yankee)............................ 8.125% 06/01/2009 236,250
-----------
PHILIPPINE ISLANDS - 0.1%
90,000 Philippines (Republic of) (Global) (Yankee)....... 10.625% 03/16/2025 77,175
-----------
Total Foreign Bonds & Debt Securities (Cost
$1,546,559) 1,483,647
-----------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
PAR VALUE
AMOUNT SECURITY DESCRIPTION (NOTE 1)
-----------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS - 8.0%
$ 200,000 Canadian Imperial Bank........................ $ 199,842
582,103 American Express Centurion Bank, 6.65%, due
07/10/00(e)................................. 582,103
291,051 Royal Bank of Scotland, 6.85%, due
07/05/00(e)................................. 291,051
1,164,205 American Express Centurion Bank, 7%, due
07/07/00(e)................................. 1,164,205
291,051 First Union National Bank, 6.9%, due
05/09/01(e)................................. 291,051
1,312,195 Fleet National Bank, 7.125%, due
10/31/00(e)................................. 1,312,195
582,104 Goldman Sachs, 6.64875%, due 08/17/00(e)...... 582,104
582,103 Janus Money Market Fund(e).................... 582,103
1,694,748 Merrimac Cash Fund-Premium Class(e)........... 1,694,748
582,103 BNP Paribas, 6.75%, due 07/05/00(e)........... 582,103
-----------
Total Short-Term Investments
(Cost $7,281,668) 7,281,505
-----------
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL INVESTMENTS - 105.3%
(Cost $96,730,082) 96,188,543
Other Assets and Liabilities (net) -
(5.3%) (4,817,889)
-------------
TOTAL NET ASSETS - 100.0% $ 91,370,654
=============
</TABLE>
PORTFOLIO FOOTNOTES:
(a) Securities that may be resold to "qualified institutional buyers" under
Rule 144A or securities offered pursuant to Section 4(2) of the Securities
Act of 1933, as amended. These securities have been determined to be
liquid under guidelines established by the Board of Trustees.
(b) Assets segregated for purchase for purchase price of delayed delivery or
when-issued security.
(c) Security purchased on a delayed or when-issued basis. (See note 1 to
financial statements)
(d) Held as collateral for open futures contracts.
(e) Represents investment of collateral received from securities lending
transactions.
Yankee - U.S. Dollar denominated bonds issued by non-U.S. companies in the U.S.
See notes to financial statements
<PAGE>
Cova Series Trust
Select Equity Portfolio
PORTFOLIO OF INVESTMENTS
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 97.7%
AUTOMOTIVE - 0.8%
Ford Motor Co..................................................................... 27,100 $ 1,165,300
Lear Corp.*....................................................................... 43,400 868,000
Visteon Corp.*..................................................................... 3,548 43,023
------------
2,076,323
------------
BANKING - 4.3%
Astoria Financial Corp............................................................ 22,100 569,075
Bank One Corp..................................................................... 41,100 1,091,719
Capital One Financial Corp........................................................ 64,400 2,873,850
Dime Bancorp, Inc................................................................. 41,600 655,200
First Union Corp.................................................................. 84,400 2,094,175
KeyCorp........................................................................... 37,400 659,175
U.S. Bancorp..................................................................... 140,100 2,696,925
------------
10,640,119
------------
BEVERAGES, FOOD & TOBACCO - 3.6%
Coca-Cola Co. (The)............................................................... 37,400 2,148,162
Philip Morris Co., Inc........................................................... 159,500 4,236,719
Quaker Oats Co. (The)............................................................. 17,800 1,337,225
Seagrams Co., Ltd................................................................. 18,500 1,073,000
------------
8,795,106
------------
CHEMICALS - 2.6%
Air Products & Chemicals, Inc..................................................... 95,600 2,945,675
Praxair, Inc...................................................................... 31,500 1,179,281
Rohm & Haas Co.................................................................... 62,300 2,149,350
------------
6,274,306
------------
COMMERCIAL SERVICES - 0.5%
Cendant Corp.*.................................................................... 90,775 1,270,850
------------
COMMUNICATIONS - 2.0%
Allegiance Telecom, Inc.*......................................................... 13,000 832,000
Lucent Technologies, Inc.......................................................... 38,245 2,266,016
QUALCOMM, Inc.*.................................................................... 8,500 510,000
Tellabs Inc.*..................................................................... 19,100 1,307,156
------------
4,915,172
------------
COMPUTER SOFTWARE & PROCESSING - 13.6%
America Online, Inc.*............................................................. 84,400 4,452,100
Automatic Data Processing, Inc.................................................... 23,200 1,242,650
Cisco Systems, Inc.*............................................................. 151,200 9,610,650
Citrix Systems, Inc.*............................................................. 31,000 587,062
Computer Associates International, Inc............................................ 56,600 2,897,212
Microsoft Corp.*................................................................. 120,000 9,600,000
Oracle Corp.*..................................................................... 37,400 3,143,937
Parametric Technology Corp.*...................................................... 53,100 584,100
Siebel Systems, Inc.*.............................................................. 7,800 1,275,787
------------
33,393,498
------------
COMPUTERS & INFORMATION - 7.2%
Compaq Computer Corp.............................................................. 45,400 1,160,537
Dell Computer Corp.*.............................................................. 39,000 1,923,187
EMC Corp. Mass*................................................................... 42,800 3,292,925
International Business Machines Corp.............................................. 11,700 1,281,881
Quantum Corp. - DLT & Storage*................................................... 112,500 1,089,844
<CAPTION>
-------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMPUTERS & INFORMATION - CONTINUED
Seagate Technology, Inc.*......................................................... 33,400 $ 1,837,000
Sun Microsystems, Inc.*........................................................... 79,400 7,220,437
------------
17,805,811
------------
COSMETICS & PERSONAL CARE - 0.8%
Gillette Co....................................................................... 53,200 1,858,675
------------
ELECTRIC UTILITIES - 0.8%
CP&L, Energy Inc.................................................................. 17,700 565,294
PG&E Corp......................................................................... 36,200 891,425
Wisconsin Energy Corp............................................................. 26,600 527,012
------------
1,983,731
------------
ELECTRICAL EQUIPMENT - 3.4%
General Electric Co.............................................................. 159,600 8,458,800
------------
ELECTRONICS - 6.8%
Altera Corp.*...................................................................... 8,300 846,081
Applied Materials, Inc.*........................................................... 9,800 888,125
Intel Corp........................................................................ 64,600 8,636,212
Micron Technology, Inc.*.......................................................... 12,200 1,074,363
Motorola, Inc..................................................................... 66,902 1,735,031
Texas Instruments, Inc............................................................ 50,600 3,475,588
------------
16,655,400
------------
ENVIRONMENTAL CONTROLS - 1.2%
Republic Services, Inc.*.......................................................... 79,300 1,268,800
Waste Management, Inc............................................................. 89,674 1,703,806
------------
2,972,606
------------
FINANCIAL SERVICES - 5.0%
CIT Group, Inc. (The)............................................................. 54,700 888,875
Citigroup, Inc.................................................................... 68,500 4,127,125
E*Trade Group, Inc.*.............................................................. 59,300 978,450
Federal Home Loan Mortgage Corp................................................... 24,000 972,000
Federal National Mortgage Association............................................. 25,400 1,325,563
Goldman Sachs Group, Inc. (The)................................................... 41,400 3,927,825
------------
12,219,838
------------
FOREST PRODUCTS & PAPER - 0.8%
Smurfit-Stone Container Corp.*................................................... 154,583 1,990,256
------------
HEALTH CARE PROVIDERS - 0.3%
Tenet Healthcare Corp............................................................. 29,700 801,900
------------
HEAVY MACHINERY - 1.4%
Baker Hughes, Inc................................................................. 59,600 1,907,200
Cooper Industries, Inc............................................................ 47,100 1,533,694
------------
3,440,894
------------
HOUSEHOLD PRODUCTS - 1.3%
Clorox Co......................................................................... 34,100 1,528,106
Procter & Gamble Co............................................................... 29,200 1,671,700
------------
3,199,806
------------
INDUSTRIAL - DIVERSIFIED - 3.7%
Honeywell International Inc....................................................... 40,649 1,369,363
Tyco International Ltd........................................................... 162,920 7,718,335
------------
9,087,698
------------
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Select Equity Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
INSURANCE - 3.9%
Allstate Corp..................................................................... 47,000 $ 1,045,750
Ambac Financial Group, Inc........................................................ 65,800 3,606,663
American International Group...................................................... 19,400 2,279,500
Aon Corp.......................................................................... 30,800 956,725
Cigna Corp........................................................................ 18,000 1,683,000
------------
9,571,638
------------
LODGING - 0.3%
Marriott International, Inc. - Class A............................................ 20,700 746,494
------------
MEDIA - BROADCASTING & PUBLISHING - 2.5%
Comcast Corp.*.................................................................... 58,900 2,385,450
Fox Entertainment Group, Inc. - Class A*.......................................... 46,800 1,421,550
MediaOne Group, Inc.*.............................................................. 8,600 570,298
Time Warner, Inc.................................................................. 22,900 1,740,400
------------
6,117,698
------------
MEDICAL SUPPLIES - 0.8%
C.R. Bard, Inc.................................................................... 15,900 765,188
PE Corp - PE Biosystems Group..................................................... 17,000 1,119,875
------------
1,885,063
------------
METALS - 0.9%
Alcoa, Inc........................................................................ 25,016 725,464
Allegheny Technologies, Inc....................................................... 67,700 1,218,600
Phelps Dodge Corp.................................................................. 6,500 241,719
------------
2,185,783
------------
OIL & GAS - 6.0%
Anadarko Petroleum Corp........................................................... 25,600 1,262,400
Columbia Energy Group............................................................. 18,300 1,200,938
Dynegy, Inc....................................................................... 18,500 1,263,781
Exxon Mobil Corp................................................................. 124,510 9,774,035
Global Marine, Inc.*.............................................................. 43,700 1,231,794
------------
14,732,948
------------
PHARMACEUTICALS - 9.9%
Alza Corp.*....................................................................... 46,400 2,743,400
American Home Products Corp....................................................... 25,700 1,509,875
Amgen, Inc.*...................................................................... 18,400 1,292,600
Bristol-Myers Squibb Co........................................................... 42,200 2,458,150
Eli Lilly & Co.................................................................... 47,400 4,734,075
Merck & Co., Inc................................................................... 9,700 743,263
Pfizer, Inc....................................................................... 81,750 3,924,000
Pharmacia Corp.................................................................... 84,674 4,376,587
Schering-Plough Corp.............................................................. 49,800 2,514,900
------------
24,296,850
------------
RETAILERS - 4.8%
Abercrombie & Fitch Co.*.......................................................... 66,400 809,250
Circuit City Stores, Inc.......................................................... 20,200 670,388
Gap, Inc.......................................................................... 27,200 850,000
Home Depot, Inc................................................................... 21,800 1,088,638
Target Corp....................................................................... 38,100 2,209,800
TJX Companies, Inc................................................................ 83,200 1,560,000
Wal-Mart Stores, Inc.............................................................. 79,300 4,569,663
------------
11,757,739
------------
<CAPTION>
-------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
TELEPHONE SYSTEMS - 8.0%
AT&T Corp......................................................................... 61,800 $ 1,954,425
Global Crossing Ltd.*............................................................. 50,000 1,315,625
GTE Corp.......................................................................... 32,900 2,048,025
Level 3 Communications, Inc.*..................................................... 21,900 1,927,200
Liberty Media Group*............................................................. 129,700 3,145,225
Qwest Communications Int'l., Inc.*................................................ 32,200 1,599,938
SBC Communications Corp........................................................... 76,577 3,311,955
Sprint Corp (PCS Group)*.......................................................... 26,600 1,582,700
WorldCom, Inc*.................................................................... 59,271 2,719,057
------------
19,604,150
------------
TRANSPORTATION - 0.5%
Union Pacific Corp................................................................ 36,200 1,346,188
------------
Total Common Stocks (Cost $228,864,409) 240,085,340
------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------
PAR SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
-----------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS - 5.0%
$1,018,071 American Express Centurion Bank, 6.65%,
due 07/10/00(a)....................... $ 1,018,071
1,018,071 Bank of America, 6.67%, due
03/22/01(a)........................... 1,018,071
509,033 Royal Bank of Scotland, 6.85%,
due 07/05/00(a)....................... 509,033
2,036,141 American Express Centurion Bank 7%,
due 07/07/00(a)....................... 2,036,141
509,035 First Union National Bank, 6.9%,
due 05/09/01(a)....................... 509,035
1,276,900 Fleet National Bank, 7.125%, due
10/31/00(a)........................... 1,276,900
1,018,071 Goldman Sachs, 6.64875%, 08/17/00(a).... 1,018,071
1,018,071 Janus Money Market Fund(a).............. 1,018,071
2,964,036 Merrimac Cash Fund-Premium Class(a)..... 2,964,036
1,018,071 BNP Paribas, 6.75%, due 07/05/00(a)..... 1,018,071
-----------
Total Short-Term Investments
(Cost $12,385,500) 12,385,500
-----------
</TABLE>
<TABLE>
<S> <C>
TOTAL INVESTMENTS - 102.7%
(Cost $241,249,909) 252,470,840
Other Assets and Liabilities (net) -
(2.7%) (6,618,954)
-------------
TOTAL NET ASSETS - 100.0% $ 245,851,886
=============
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security.
(a) Represents investment of collateral received from securities
lending transactions.
See notes to financial statements
<PAGE>
Cova Series Trust Large Cap Stock Portfolio PORTFOLIO OF INVESTMENTS JUNE 30,
2000 (UNAUDITED) (PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 97.8%
ADVERTISING - 0.1%
DoubleClick Inc.*.................................................................. 4,900 $ 186,812
------------
AEROSPACE & DEFENSE - 0.1%
B.F. Goodrich Company (The)........................................................ 7,400 252,062
------------
AIRLINES - 0.0%
Delta Air Lines, Inc............................................................... 1,400 70,787
Northwest Airlines Corp.*.......................................................... 2,100 63,919
------------
134,706
------------
APPAREL RETAILERS - 0.2%
The Limited, Inc.................................................................. 20,400 441,150
------------
AUTOMOTIVE - 2.1%
Dana Corp......................................................................... 13,700 290,269
Delphi Automotive Systems Corp.................................................... 31,100 452,894
Ford Motor Co..................................................................... 53,400 2,296,200
Ford Motor Co.(a).................................................................. 3,700 159,100
General Motors Corp............................................................... 28,000 1,625,750
Goodyear Tire & Rubber Co......................................................... 13,100 262,000
Paccar, Inc........................................................................ 4,400 174,625
Rockwell International Corp....................................................... 14,100 444,150
Visteon Corp.*..................................................................... 6,992 84,776
------------
5,789,764
------------
BANKING - 3.1%
Associates First Capital Corp..................................................... 31,400 700,612
Bank One Corp..................................................................... 34,200 908,437
Banknorth Group, Inc............................................................... 5,800 88,812
Capital One Financial Corp......................................................... 7,900 352,537
Comerica, Inc...................................................................... 5,300 237,837
Compass Bancshares, Inc............................................................ 2,600 44,362
Dime Bancorp, Inc.................................................................. 7,600 119,700
First Tennessee National Corp...................................................... 5,300 87,781
First Union Corp.................................................................. 48,800 1,210,850
Firstar Corp...................................................................... 23,800 501,287
Fleet Boston Financial Corp........................................................ 9,400 319,600
Golden West Financial Corp......................................................... 4,800 195,900
Greenpoint Financial Corp.......................................................... 4,700 88,125
Hibernia Corp. - Class A........................................................... 4,900 53,287
KeyCorp........................................................................... 21,400 377,175
Marshall And Ilsley Corp........................................................... 4,800 199,200
Mercantile Bankshares Corp......................................................... 2,800 83,475
North Fork Bancorp., Inc........................................................... 6,500 98,312
PNC Bank Corp..................................................................... 14,600 684,375
Providian Financial Corp........................................................... 5,000 450,000
Southtrust Corp.................................................................... 6,800 153,850
Summit Bancorp..................................................................... 7,200 177,300
TCF Financial Corp................................................................. 2,500 64,219
U.S. Bancorp...................................................................... 33,000 635,250
Union Planters Corp................................................................ 5,500 153,656
Washington Mutual, Inc............................................................ 24,700 713,212
------------
8,699,151
------------
<CAPTION>
-------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
BEVERAGES, FOOD & TOBACCO - 3.7%
Bestfoods......................................................................... 13,600 $ 941,800
Coca-Cola Co. (The)................................................................ 9,100 522,681
General Mills, Inc................................................................. 8,300 317,475
Hershey Foods Corp................................................................. 1,600 77,900
HJ Heinz Co....................................................................... 19,200 840,000
Kellogg Co........................................................................ 21,000 624,750
Nabisco Holdings Corp.............................................................. 1,800 94,500
Philip Morris Co., Inc........................................................... 129,200 3,431,875
Quaker Oats Co. (The).............................................................. 7,300 548,412
Seagrams Co., Ltd................................................................. 36,900 2,140,200
Unilever N.V. - New York Shares................................................... 15,900 683,700
------------
10,223,293
------------
CHEMICALS - 1.2%
Air Products & Chemicals, Inc..................................................... 26,800 825,775
Dow Chemical Co................................................................... 19,100 576,581
PPG Industries, Inc............................................................... 10,300 456,419
Praxair, Inc...................................................................... 10,900 408,069
Rohm & Haas Co.................................................................... 27,900 962,550
------------
3,229,394
------------
COMMERCIAL SERVICES - 0.5%
Cendant Corp.*.................................................................... 98,700 1,381,800
------------
COMMUNICATIONS - 2.5%
Allegiance Telecom, Inc.*.......................................................... 3,400 217,600
Corning Inc........................................................................ 2,700 728,662
JDS Uniphase Corp*................................................................... 200 23,975
Lucent Technologies, Inc.......................................................... 24,400 1,445,700
Nortel Networks Corp.............................................................. 42,600 2,907,450
QUALCOMM, Inc.*.................................................................... 5,400 324,000
Tellabs Inc.*..................................................................... 18,800 1,286,625
------------
6,934,012
------------
COMPUTER SOFTWARE & PROCESSING - 12.7%
Adobe Systems, Inc................................................................. 4,500 585,000
America Online, Inc.*............................................................. 68,100 3,592,275
Autodesk, Inc...................................................................... 2,300 79,781
BMC Software, Inc.*............................................................... 10,500 383,086
Cisco Systems, Inc.(b)*.......................................................... 193,700 12,312,056
Citrix Systems, Inc.*.............................................................. 8,000 151,500
Computer Associates International, Inc............................................ 23,200 1,187,550
Microsoft Corp.*................................................................. 149,500 11,960,000
Networks Associates, Inc.*......................................................... 4,000 81,500
Oracle Corp.*..................................................................... 26,700 2,244,469
Siebel Systems, Inc.*.............................................................. 7,700 1,259,431
Symantec Corp.*.................................................................... 2,600 140,237
VERITAS Software Corp.*............................................................ 9,300 1,051,045
------------
35,027,930
------------
COMPUTERS & INFORMATION - 7.2%
Apple Computer, Inc.*............................................................. 13,600 712,300
Compaq Computer Corp.............................................................. 63,400 1,620,662
Dell Computer Corp.*.............................................................. 91,400 4,507,162
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Large Cap Stock Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMPUTERS & INFORMATION - CONTINUED
Electronic Data Systems Corp....................................................... 2,400 $ 99,000
EMC Corp. Mass*................................................................... 11,600 892,475
Hewlett-Packard Co................................................................ 26,500 3,309,187
International Business Machines Corp.............................................. 14,200 1,555,787
Lexmark International Group, Inc.*................................................. 6,000 403,500
Seagate Technology, Inc.*......................................................... 14,900 819,500
Sun Microsystems, Inc.*........................................................... 64,900 5,901,844
------------
19,821,417
------------
COSMETICS & PERSONAL CARE - 0.8%
Estee Lauder Co.................................................................... 4,300 212,581
Gillette Co....................................................................... 54,000 1,886,625
------------
2,099,206
------------
ELECTRIC UTILITIES - 1.5%
Allegheny Energy, Inc.............................................................. 4,800 131,400
Cinergy Corp....................................................................... 8,100 206,044
CMS Energy Corp.................................................................... 6,200 137,175
Consolidated Edison, Inc.......................................................... 10,100 299,212
CP&L, Energy Inc.................................................................. 16,100 514,194
Dominion Resources, Inc.............................................................. 100 4,287
DTE Energy Co...................................................................... 9,200 281,175
Edison International.............................................................. 16,900 346,450
Entergy Corp...................................................................... 11,000 299,062
FPL Group, Inc..................................................................... 8,300 410,850
GPU, Inc........................................................................... 6,900 186,731
NiSource, Inc...................................................................... 5,800 108,025
PG&E Corp......................................................................... 18,400 453,100
Pinnacle West Capital Corp......................................................... 5,000 169,375
PPL Corp........................................................................... 8,000 175,500
TXU Corp.......................................................................... 14,900 439,550
Wisconsin Energy Corp.............................................................. 6,900 136,706
------------
4,298,836
------------
ELECTRICAL EQUIPMENT - 4.3%
Emerson Electric Co............................................................... 11,200 676,200
General Electric Co.(c).......................................................... 212,700 11,273,100
------------
11,949,300
------------
ELECTRONICS - 8.5%
Advanced Micro Devices, Inc.*...................................................... 5,500 424,875
Altera Corp.*........................................................................ 100 10,194
Applied Materials, Inc.*.......................................................... 30,700 2,782,187
Intel Corp.(c).................................................................... 93,700 12,526,519
Lattice Semiconductor Corp.*....................................................... 2,700 186,637
Motorola, Inc..................................................................... 87,000 2,528,437
National Semiconductor Corp.*...................................................... 8,200 465,350
Texas Instruments, Inc............................................................ 68,600 4,711,962
------------
23,636,161
------------
ENTERTAINMENT & LEISURE - 0.5%
Eastman Kodak Co.................................................................. 19,100 1,136,450
<CAPTION>
-------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
ENTERTAINMENT & LEISURE - CONTINUED
Hasbro, Inc........................................................................ 7,900 $ 118,994
International Game Technology*..................................................... 4,100 108,650
------------
1,364,094
------------
FINANCIAL SERVICES - 6.9%
A.G. Edwards, Inc.................................................................. 1,900 74,100
Ameritrade Holding Corp*........................................................... 5,700 66,262
Bear Stearns Co., Inc.............................................................. 3,900 162,337
Charles Schwab & Corp............................................................. 67,471 2,268,712
Charter One Financial, Inc......................................................... 8,500 195,500
CIT Group, Inc. (The)............................................................. 11,300 183,625
Citigroup, Inc................................................................... 100,100 6,031,025
E*Trade Group, Inc.*.............................................................. 12,900 212,850
Federal Home Loan Mortgage Corp................................................... 28,300 1,146,150
Federal National Mortgage Association............................................. 41,500 2,165,781
Financial Security Assurance Holdings Ltd............................................ 500 37,938
Franklin Resources, Inc........................................................... 11,100 337,163
Goldman Sachs Group, Inc. (The)................................................... 19,900 1,888,013
Lehman Brothers Holdings, Inc...................................................... 5,600 529,550
Merrill Lynch & Co., Inc.......................................................... 18,400 2,116,000
Morgan Stanley Dean Witter & Co................................................... 11,800 982,350
Paine Webber Group, Inc............................................................ 4,600 209,300
Regions Financial Corp............................................................. 6,100 121,238
TD Waterhouse Group, Inc.*........................................................ 17,500 302,969
------------
19,030,863
------------
FOOD RETAILERS - 0.3%
Kroger Co.*....................................................................... 38,900 858,231
------------
FOREST PRODUCTS & PAPER - 0.9%
Bowater, Inc....................................................................... 1,500 66,188
Fort James Corp................................................................... 11,900 275,188
Georgia-Pacific Corp............................................................... 4,700 123,375
International Paper Co............................................................ 16,500 491,906
Kimberly-Clark Corp............................................................... 19,300 1,107,338
Smurfit-Stone Container Corp.*.................................................... 13,100 168,663
Temple Inland, Inc................................................................. 3,600 151,200
------------
2,383,858
------------
HEALTH CARE PROVIDERS - 0.7%
HCA-The Healthcare Corp........................................................... 10,500 318,938
Medtronic, Inc.................................................................... 18,900 941,456
Tenet Healthcare Corp............................................................. 20,000 540,000
Wellpoint Health Networks, Inc.*................................................... 4,000 289,750
------------
2,090,144
------------
HEAVY MACHINERY - 0.9%
Baker Hughes, Inc.................................................................. 9,000 288,000
Caterpillar Inc................................................................... 19,200 650,400
Cooper Industries, Inc............................................................. 8,000 260,500
Deere & Co......................................................................... 7,200 266,400
Eaton Corp......................................................................... 6,300 422,100
Grainger (W.W.), Inc................................................................. 500 15,406
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Large Cap Stock Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEAVY MACHINERY - CONTINUED
Ingersoll-Rand Co................................................................. 11,200 $ 450,800
Parker-Hannifin Corp............................................................... 4,100 140,425
------------
2,494,031
------------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 0.1%
Johnson Controls, Inc.............................................................. 4,100 210,381
------------
HOUSEHOLD PRODUCTS - 1.3%
Clorox Co......................................................................... 12,900 578,081
Procter & Gamble Co............................................................... 53,700 3,074,325
------------
3,652,406
------------
INDUSTRIAL - DIVERSIFIED - 1.8%
Honeywell International Inc....................................................... 50,300 1,694,481
ITT Industries, Inc................................................................ 7,700 233,888
Tyco International Ltd............................................................ 61,900 2,932,513
------------
4,860,882
------------
INSURANCE - 3.5%
Aetna, Inc......................................................................... 8,600 552,013
Allstate Corp..................................................................... 70,900 1,577,525
Ambac Financial Group, Inc......................................................... 6,200 339,838
American General Corp.............................................................. 1,400 85,400
American International Group....................................................... 9,700 1,139,750
Aon Corp.......................................................................... 15,800 490,788
AXA Financial, Inc................................................................ 24,700 839,800
Cigna Corp........................................................................ 10,200 953,700
Hartford Financial Services Group, Inc............................................ 16,000 895,000
John Hancock Financial Services, Inc.*............................................ 30,800 729,575
Lincoln National Corp............................................................. 14,900 538,263
MBIA, Inc.......................................................................... 8,800 424,050
Torchmark Corp.................................................................... 11,600 286,375
UnitedHealth Group, Inc............................................................ 8,800 754,600
------------
9,606,677
------------
LODGING - 0.4%
Marriott International, Inc. - Class A............................................ 11,600 418,325
Starwood Hotels & Resorts Worldwide, Inc.......................................... 17,700 571,931
------------
990,256
------------
MEDIA - BROADCASTING & PUBLISHING - 3.0%
Comcast Corp.*.................................................................... 35,500 1,437,750
Fox Entertainment Group, Inc. - Class A*.......................................... 10,000 303,750
Gannett Co., Inc................................................................... 9,300 556,256
Knight-Ridder, Inc................................................................. 4,900 260,619
MediaOne Group, Inc.*............................................................. 40,300 2,672,444
New York Times Co.................................................................. 5,200 205,400
Time Warner, Inc.................................................................. 38,200 2,903,200
------------
8,339,419
------------
MEDICAL SUPPLIES - 0.8%
Agilent Technologies, Inc.*....................................................... 10,800 796,500
Baxter International, Inc............................................................ 500 35,156
Becton Dickinson & Co............................................................. 14,900 427,444
Boston Scientific Corp.*............................................................. 600 13,163
<CAPTION>
-------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
MEDICAL SUPPLIES - CONTINUED
C.R. Bard, Inc..................................................................... 1,700 $ 81,813
Forest Laboratories, Inc.*......................................................... 5,400 545,400
Guidant Corp.*..................................................................... 1,100 54,450
PE Corp - PE Biosystems Group........................................................ 400 26,350
St. Jude Medical, Inc.*............................................................ 3,900 178,913
------------
2,159,189
------------
METALS - 0.6%
Alcoa, Inc........................................................................ 45,200 1,310,800
Allegheny Technologies, Inc........................................................ 7,800 140,400
Nucor Corp......................................................................... 4,200 139,388
------------
1,590,588
------------
OIL & GAS - 6.1%
Chevron Corp...................................................................... 19,300 1,636,881
Columbia Energy Group.............................................................. 4,100 269,063
Conoco Inc. - Class B............................................................. 16,800 412,650
Cooper Cameron Corp.*.............................................................. 1,400 92,400
Devon Energy Corp.................................................................. 2,500 140,469
Dynegy, Inc........................................................................ 4,800 327,900
El Paso Energy Corp................................................................ 7,300 371,844
Exxon Mobil Corp................................................................. 100,000 7,850,000
Global Marine, Inc.*............................................................... 5,000 140,938
Phillips Petroleum Co.............................................................. 3,800 192,613
Royal Dutch Petroleum Co.......................................................... 58,600 3,607,563
Texaco, Inc....................................................................... 16,300 867,975
Union Pacific Resources Group, Inc................................................ 15,400 338,800
Williams Companies, Inc........................................................... 12,200 508,588
------------
16,757,684
------------
PHARMACEUTICALS - 9.5%
Abbott Laboratories............................................................... 43,600 1,942,925
Alza Corp.*....................................................................... 19,100 1,129,288
American Home Products Corp....................................................... 51,400 3,019,750
Bristol-Myers Squibb Co........................................................... 77,600 4,520,200
Eli Lilly & Co.................................................................... 49,000 4,893,875
Genzyme Corp.*..................................................................... 2,700 160,481
Incyte Pharmaceuticals, Inc.*...................................................... 1,000 82,188
Johnson & Johnson.................................................................. 2,900 295,438
Merck & Co., Inc.................................................................. 15,600 1,195,350
Pfizer, Inc....................................................................... 76,600 3,676,800
Pharmacia Corp.................................................................... 61,800 3,194,288
Schering-Plough Corp.............................................................. 39,700 2,004,850
Watson Pharmaceutical, Inc.*....................................................... 3,400 182,750
------------
26,298,183
------------
RESTAURANTS - 0.1%
McDonald's Corp.................................................................... 9,300 306,319
------------
RETAILERS - 5.1%
Circuit City Stores, Inc........................................................... 9,600 318,600
Federated Department Stores, Inc.*................................................ 11,400 384,750
Gap, Inc.......................................................................... 45,900 1,434,375
Home Depot, Inc................................................................... 36,000 1,797,750
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Large Cap Stock Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAILERS - CONTINUED
J.C. Penney Co., Inc.............................................................. 14,200 $ 261,813
Lowes Co., Inc.................................................................... 15,500 636,469
May Department Stores Co. (The)................................................... 18,200 436,800
Nordstrom, Inc..................................................................... 1,800 43,425
Sears, Roebuck and Co............................................................. 14,100 460,013
Target Corp....................................................................... 23,600 1,368,800
TJX Companies, Inc................................................................ 17,800 333,750
Wal-Mart Stores, Inc............................................................. 114,700 6,609,588
------------
14,086,133
------------
TELEPHONE SYSTEMS - 6.2%
Alltel Corp........................................................................ 8,400 520,275
AT&T Corp......................................................................... 41,100 1,299,788
Bell Atlantic Corp................................................................ 27,500 1,397,344
Global Crossing Ltd.*............................................................. 33,500 881,469
GTE Corp.......................................................................... 42,500 2,645,625
Liberty Media Group*.............................................................. 55,800 1,353,150
SBC Communications Corp........................................................... 94,400 4,082,800
Sprint Corp (PCS Group)*........................................................... 1,300 77,350
US West Inc........................................................................ 5,100 437,325
WorldCom, Inc*.................................................................... 99,700 4,573,738
------------
17,268,864
------------
TEXTILES, CLOTHING & FABRICS - 0.1%
Jones Apparel Group, Inc.*........................................................ 10,200 239,700
------------
TRANSPORTATION - 0.5%
Burlington Northern Santa Fe Corp................................................. 21,200 486,275
C.H. Robinson Worldwide, Inc......................................................... 600 29,700
CSX Corp........................................................................... 5,900 125,006
FedEx Corp.*....................................................................... 7,600 288,800
Norfolk Southern Corp............................................................. 12,800 190,400
Union Pacific Corp................................................................ 10,700 397,906
------------
1,518,087
------------
Total Common Stocks (Cost $248,740,104) 270,210,983
------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------
PAR SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
--------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS - 4.7%
$ 1,076,736 American Express Centurion Bank, 6.65%,
due 07/10/00(d)....................... $ 1,076,736
934,227 Bank of America, 6.67%,
due 03/22/01(d)....................... 934,227
538,368 Royal Bank of Scotland, 6.85%,
due 07/05/00(d)....................... 538,368
2,153,472 American Express Centurion Bank, 7%,
due 07/07/00(d)....................... 2,153,472
538,368 First Union(d).......................... 538,368
1,492,985 Fleet National Bank, 7.125%,
due 10/31/00(d)....................... 1,492,985
1,076,736 Goldman Sachs, 6.64875%,
due 08/17/00(d)....................... 1,076,736
1,076,736 Janus Money Market Fund(d).............. 1,076,736
3,134,836 Merrimac Cash Fund-Premium Class(d)..... 3,134,836
1,076,736 BNP Paribas, 6.75%, due 07/05/00(d)..... 1,076,736
------------
Total Short-Term Investments
(Cost $13,099,200) 13,099,200
------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------
SECURITY VALUE
DESCRIPTION PAR (NOTE 1)
----------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY SECURITIES - 0.2%
U.S. Treasury Note at 5.625%, due
2/28/01 (Cost $522,798)(c)............ $525,000... $ 522,375
----------
</TABLE>
<TABLE>
<S> <C>
TOTAL INVESTMENTS - 102.7%
(Cost $262,362,102) 283,832,558
Other Assets and Liabilities (net) -
(2.7%) (7,545,268)
-------------
TOTAL NET ASSETS - 100.0% $ 276,287,290
=============
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security.
(a) Security purchased on a delayed or when-issued basis. (See note 1 to
financial statements)
(b) Assets segregated for purchase for purchase price of delayed delivery or
when-issued security.
(c) Held as collateral for open futures contracts.
(d) Represents investment of collateral received from securities lending
transactions.
See notes to financial statements
<PAGE>
Cova Series Trust
International Equity Portfolio
PORTFOLIO OF INVESTMENTS
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON AND PREFERRED STOCKS - 98.1%
AUSTRALIA - 2.8%
AMP Ltd........................................................................... 35,200 $ 359,938
Broken Hill Proprietary Co., Ltd.................................................. 29,800 354,013
CSR Ltd........................................................................... 83,591 233,299
Lend Lease Corp., Ltd............................................................. 24,400 312,729
National Australia Bank Ltd....................................................... 25,616 429,853
News Corp., Ltd. (The) - Preferred................................................ 78,946 957,556
Southcorp Holdings Ltd........................................................... 108,400 314,277
Telstra Corp., Ltd............................................................... 127,183 518,674
Westpac Banking Corp. Ltd......................................................... 38,947 282,291
WMC Ltd........................................................................... 29,051 130,584
-----------
3,893,214
-----------
AUSTRIA - 0.2%
Bank of Austria AG................................................................. 3,991 195,171
-----------
BELGIUM - 0.4%
Agfa Gevaert N.V................................................................... 3,324 73,916
Audiofina.......................................................................... 2,040 262,016
Real Software...................................................................... 2,000 128,439
Ubizen*............................................................................ 3,940 137,842
-----------
602,213
-----------
DENMARK - 0.3%
Novo Nordisk A/S - B............................................................... 2,381 406,914
-----------
FINLAND - 2.8%
Nokia Oyj......................................................................... 59,504 3,048,499
Sampo Insurance Co. Plc............................................................ 3,366 137,118
Stora Enso Oyj.................................................................... 56,284 516,691
Tietoenator Corp................................................................... 4,762 159,525
-----------
3,861,833
-----------
FRANCE - 10.1%
Alcatel........................................................................... 34,935 2,300,433
Alstom............................................................................ 11,379 308,771
Aventis............................................................................ 6,298 461,501
AXA Co............................................................................. 2,573 406,926
BNP Paribas........................................................................ 8,390 810,615
Carrefour SA....................................................................... 4,946 339,437
Christian Dior SA.................................................................. 1,900 432,523
Coface............................................................................. 1,592 152,593
Coflexip SA........................................................................ 1,912 232,747
Compagnie de Saint Goban........................................................... 1,400 190,013
Danone............................................................................. 7,186 957,402
Equant N.V.*...................................................................... 10,332 421,481
Fimatex*.......................................................................... 14,659 218,066
France Telecom SA.................................................................. 2,811 394,452
Genset SA*......................................................................... 3,226 231,909
Lafarge SA......................................................................... 6,050 472,032
Lagardere Groupe................................................................... 4,285 328,574
LVMH (Louis Vuitton Moet Hennessy)*.................................................. 789 326,627
Renault SA......................................................................... 8,154 372,023
Rhodia, SA........................................................................ 11,971 201,946
<CAPTION>
------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
------------------------------------------------------------------------------------------------------
<S> <C> <C>
FRANCE - CONTINUED
Suez Lyonnaise Des Eaux SA......................................................... 4,657 $ 819,095
Total FINA ELF.................................................................... 11,587 1,783,646
Usinor............................................................................ 15,427 188,975
Vivendi........................................................................... 18,137 1,607,180
-----------
13,958,967
-----------
GERMANY - 7.2%
Allianz AG......................................................................... 3,155 1,149,146
BASF AG........................................................................... 20,507 834,395
Bayer AG.......................................................................... 21,262 831,489
Brokat Infosystems AG*............................................................. 2,004 156,548
Carrier1 International SA*......................................................... 3,415 189,850
Consors Discount Broker AG*........................................................ 2,808 250,979
DaimlerChrysler AG................................................................. 6,801 358,206
Deutsche Bank AG.................................................................. 11,075 917,169
Deutsche Lufthansa AG............................................................. 10,307 242,042
Deutsche Telekom AG............................................................... 16,114 920,538
E. On............................................................................. 12,107 132,434
Intershop Communications AG*......................................................... 515 235,411
Lycos Europe N.V.*................................................................ 16,290 153,017
Marschollek, Lautenschlaeger und Partner AG.......................................... 600 252,469
Marschollek, Lautenschlaeger und
Partner AG - Preferred............................................................. 920 462,074
New E. On.......................................................................... 2,736 586,030
PrimaCom AG*....................................................................... 4,031 177,731
ProSieben Media AG - Preferred..................................................... 1,721 216,095
Schering AG........................................................................ 8,982 494,171
Siemens AG......................................................................... 7,546 1,139,172
Volkswagen AG...................................................................... 4,079 156,389
-----------
9,855,355
-----------
HONG KONG - 2.0%
Bank of East Asia, Ltd........................................................... 137,800 321,748
Cable & Wireless HKT Ltd......................................................... 124,800 274,583
Cheung Kong (Holdings) Ltd........................................................ 27,000 298,757
Hong Kong Electric............................................................... 125,500 404,122
Hutchison Whampoa Ltd............................................................. 87,000 1,093,806
SmarTone Telecommunications Holdings Ltd.......................................... 83,500 184,787
Sunevision Holdings Ltd. (144A)*(a).............................................. 203,500 163,170
-----------
2,740,973
-----------
IRELAND - 0.4%
CRH Plc............................................................................ 6,717 121,683
Jefferson Smurfit Group Plc*...................................................... 99,046 170,884
Trintech Group Plc (ADR)*......................................................... 11,115 215,205
-----------
507,772
-----------
ITALY - 3.8%
Banca Fideuram SpA................................................................ 28,036 429,691
Banca Popolare Di Milano.......................................................... 38,802 276,706
Bipop-Carire SpA.................................................................. 36,050 284,724
Credito Emiliano SpA.............................................................. 73,935 211,891
ENI SpA.......................................................................... 140,881 815,608
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
International Equity Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
------------------------------------------------------------------------------------------------------
<S> <C> <C>
ITALY - CONTINUED
Fiat SpA........................................................................... 9,790 $ 255,331
Mediolanum SpA.................................................................... 22,410 366,234
Saipem SpA........................................................................ 48,900 291,067
San Paolo - IMI SpA............................................................... 34,873 584,951
Telecom Italia Mobile SpA......................................................... 77,073 792,673
Telecom Italia SpA................................................................ 46,763 643,649
Unicredito Italiano SpA........................................................... 45,509 219,410
-----------
5,171,935
-----------
JAPAN - 27.7%
Advantest Corp..................................................................... 1,400 312,329
Aiful Corp......................................................................... 1,500 138,383
Aiful Corp. (144A)(a)................................................................ 750 69,192
Ajinomoto Co., Inc................................................................ 44,000 564,475
Asahi Bank Ltd.................................................................... 14,002 58,909
Bank of Fukuoka Ltd............................................................... 46,000 313,291
Bank of Tokyo - Mitsubishi Ltd. (The)............................................. 58,000 700,858
Bridgestone Corp.................................................................. 23,000 487,077
Daiwa Securities Group, Inc....................................................... 20,000 264,126
DDI Corp.............................................................................. 18 173,191
EBARA Corp........................................................................ 48,000 650,656
Fuji Bank, Ltd.................................................................... 53,000 402,962
Fuji Heavy Industries Ltd......................................................... 49,000 355,910
Fujitsu Ltd....................................................................... 49,000 1,696,349
Hitachi Ltd....................................................................... 52,000 750,495
Hitachi Software Engineering Co., Ltd.............................................. 1,300 141,024
Honda Motor Co., Ltd.............................................................. 14,000 476,747
Industrial Bank of Japan.......................................................... 37,000 280,615
Ito-Yokado Co., Ltd................................................................ 4,000 240,732
Kaken Pharmaceutical Co. Ltd...................................................... 11,000 85,190
Kawasaki Steel Corp.............................................................. 144,000 206,471
MACNICA, Inc....................................................................... 1,300 201,113
Marui Co., Ltd.................................................................... 18,000 344,684
Matsushita Electric Industry...................................................... 33,000 856,051
Minebea Co., Ltd.................................................................. 65,000 815,489
Mitsubishi Chemical Corp......................................................... 264,000 1,083,294
Mitsubishi Corp.................................................................. 112,000 1,013,187
Mitsubishi Estate Co., Ltd........................................................ 35,000 412,037
NAMCO Ltd.......................................................................... 7,600 273,861
NEC Corp.......................................................................... 41,000 1,287,897
Nintendo Co. Ltd................................................................... 2,500 436,751
Nippon Meat Packers, Inc.......................................................... 22,000 321,668
Nippon Telegraph and Telephone Corp.................................................. 174 2,314,310
Nippon Yusen Kabushiki Kaisha.................................................... 208,000 1,000,660
Nishimatsu Construction Co........................................................ 87,000 343,043
Nissan Motor Co., Ltd.*.......................................................... 144,000 848,976
Nisshin Steel Co., Ltd............................................................ 93,000 101,764
Nomura Securities Co., Ltd........................................................ 30,000 734,365
Omron Corp......................................................................... 6,000 163,003
Oriental Land Co., Ltd............................................................. 2,300 234,968
Orix Corp.......................................................................... 2,280 336,591
Osaka Gas Co., Ltd............................................................... 113,000 325,111
Paris Miki, Inc.................................................................... 3,370 219,347
Pioneer Corp...................................................................... 16,000 623,337
Promise Co., Ltd................................................................... 4,200 332,006
<CAPTION>
------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
------------------------------------------------------------------------------------------------------
<S> <C> <C>
JAPAN - CONTINUED
Ricoh Corp., Ltd.................................................................. 21,000 $ 444,722
Rohm Co............................................................................ 2,400 701,821
Sanwa Bank Ltd. (The).............................................................. 4,942 39,439
Snow Brand Milk Product Co Ltd.................................................... 45,000 241,958
Softbank Corp...................................................................... 2,600 353,174
Softbank Corp. - new*.............................................................. 2,000 298,085
Sony Corp......................................................................... 16,900 1,578,247
Sumitomo Bakelite Co., Ltd........................................................ 19,000 250,382
Sumitomo Bank, Ltd................................................................ 29,000 355,627
Sumitomo Rubber Industries Ltd.................................................... 65,000 391,803
Sumitomo Trust & Banking Co., Ltd................................................. 51,000 363,220
Suzuki Motor Corp................................................................. 18,000 232,280
Taiheiyo Cement Corp.............................................................. 57,000 119,366
Takeda Chemical Industries........................................................ 18,774 1,232,592
Takefuji Corp...................................................................... 2,200 265,843
TDK Corp........................................................................... 2,000 287,520
Tokio Marine & Fire Insurance Co. Ltd............................................. 24,000 277,106
Tokuyama Corp..................................................................... 34,000 246,958
Tokyo Electric Power Co., Inc..................................................... 19,600 477,936
Tokyo Electron Ltd................................................................. 4,000 547,873
Tokyo Gas Co., Ltd................................................................ 99,000 278,294
Tokyo Steel Manufacturing Co., Ltd................................................ 41,200 134,859
Toppan Printing Co., Ltd.......................................................... 53,000 560,947
Tostem Corp....................................................................... 33,000 538,534
Toyo Trust & Banking Co., Ltd..................................................... 70,000 236,393
Toyota Motor Co................................................................... 34,104 1,553,838
Uny Co. Ltd....................................................................... 37,000 511,320
Welfide Corp...................................................................... 16,000 204,962
West Japan Railway Co................................................................ 227 920,762
Yamanouchi Pharmaceutical......................................................... 21,000 1,146,967
Yasuda Fire & Marine Insurance Co., Ltd........................................... 39,000 205,650
York-Benimaru Co., Ltd............................................................. 4,000 113,197
-----------
38,104,170
-----------
NETHERLANDS - 5.7%
ASM Lithography Holding N.V.*...................................................... 6,014 259,514
Getronics N.V..................................................................... 12,789 197,971
Heineken N.V...................................................................... 10,660 651,373
ING Groep N.V..................................................................... 12,722 863,338
Koninklijke (Royal) Phillips Electronics N.V...................................... 39,391 1,865,160
Koninklijke KPN N.V............................................................... 25,674 1,152,910
Koninklijke Numico, N.V............................................................ 9,078 428,102
Royal Dutch Petroleum Co.......................................................... 19,493 1,216,331
United Pan-Europe Communications N.V.*............................................ 15,709 412,413
Ver Ned Uitgeversbedr ver Bezit.................................................... 2,900 150,379
Ver Ned Uitgeversbedr ver Bezit (144A)(a).......................................... 2,400 124,451
Versatel Telecom International N.V.*............................................... 7,798 328,873
VIA NET.WORKS, Inc.*.............................................................. 13,608 239,996
-----------
7,890,811
-----------
NEW ZEALAND - 0.3%
Fletcher Challenge Building Ltd................................................... 12,709 13,528
Fletcher Challenge Energy.......................................................... 6,359 20,816
Lion Nathan Ltd................................................................... 34,656 77,534
Telecom New Zealand............................................................... 70,857 248,634
-----------
360,512
-----------
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
International Equity Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
------------------------------------------------------------------------------------------------------
<S> <C> <C>
PORTUGAL - 0.3%
PT Multimedia Servicos*............................................................ 3,736 $ 186,210
PT Multimedia.com*................................................................. 3,736 28,755
Telecel-Comunicacoes Pessoai, SA*................................................. 13,632 207,754
-----------
422,719
-----------
SINGAPORE - 0.7%
Chartered Semiconductor Manufacturing Ltd.*....................................... 11,000 96,095
DBS Group Holdings Ltd............................................................ 37,705 484,264
Singapore Press Holdings Ltd...................................................... 25,000 390,512
Venture Manufacturing Ltd.......................................................... 3,000 30,547
-----------
1,001,418
-----------
SPAIN - 3.2%
Banco Bilbao Vizcaya SA........................................................... 34,765 513,163
Banco Santander Central Hispano SA................................................ 67,272 712,506
Endesa SA......................................................................... 44,801 871,288
Indra Sistemas SA.................................................................. 7,954 182,669
Repsol SA......................................................................... 25,517 509,950
Telefonica SA*.................................................................... 76,891 1,658,251
-----------
4,447,827
-----------
SWEDEN - 3.5%
Autoliv, Inc. - Class B........................................................... 11,138 274,354
Investor AB*...................................................................... 14,446 198,511
Skandia Forsakrings AB............................................................ 53,104 1,411,020
Skandinaviska Enskilda Banken..................................................... 35,960 428,535
Tele1 Europe Holding AB*.......................................................... 14,326 176,441
Telefonaktiebolaget LM Ericsson AB............................................... 117,656 2,341,313
-----------
4,830,174
-----------
SWITZERLAND - 7.4%
ABB Ltd............................................................................ 3,914 470,109
Compagnie Financiere Richemont AG - Units A.......................................... 201 543,427
Credit Suisse Group................................................................ 3,682 734,996
Fantastic Corp.*................................................................... 5,588 54,632
Givaudan*............................................................................ 143 43,676
Nestle S.A........................................................................... 787 1,580,681
Novartis AG........................................................................ 1,049 1,667,456
Roche Holding AG..................................................................... 143 1,396,924
SGS Societe Generale de Surveillance Holding S.A.*................................... 161 279,294
Swatch Group AG...................................................................... 228 290,891
Swiss Life........................................................................... 470 281,896
Swisscom AG........................................................................ 2,016 700,689
UBS AG............................................................................. 7,492 1,101,494
Zurich Allied AG................................................................... 2,124 1,053,115
-----------
10,199,280
-----------
UNITED KINGDOM - 19.3%
3i Group Plc...................................................................... 18,249 375,404
ARM Holdings Plc*................................................................. 33,407 358,023
AstraZeneca Group Plc.............................................................. 9,050 422,614
BAE Systems Plc................................................................... 55,209 344,308
Bank of Scotland.................................................................. 33,800 321,560
BG Group Plc...................................................................... 56,811 367,198
Billiton Plc...................................................................... 69,966 284,891
Bookham Technology Plc*............................................................ 1,400 81,504
BP Amoco Plc..................................................................... 327,752 3,145,389
<CAPTION>
------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
------------------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM - CONTINUED
British Airways Plc............................................................... 21,100 $ 121,368
British American Tobacco Plc...................................................... 17,108 114,203
British Sky Broadcasting Group Plc*............................................... 24,600 481,102
British Telecommunications Plc.................................................... 59,614 770,630
Cable & Wireless Plc.............................................................. 15,885 269,065
Cadbury Schweppes Plc............................................................. 75,109 493,425
Carlton Communications Plc........................................................ 14,655 188,558
Celltech Group Plc*................................................................ 9,400 182,128
CMG Plc........................................................................... 11,300 160,101
Compass Group Plc................................................................. 21,586 284,434
FirstGroup Plc.................................................................... 22,800 81,449
Glaxo Wellcome Plc................................................................ 59,107 1,724,092
Glynwed International Plc......................................................... 51,702 185,479
Granada Group Plc................................................................. 25,000 249,760
Great Universal Stores Plc........................................................ 34,287 220,576
Hanson Plc........................................................................ 55,634 393,276
Hays Plc.......................................................................... 51,400 286,708
Hilton Group Plc.................................................................. 47,392 166,430
HSBC Holdings Plc................................................................. 92,450 1,057,259
Imperial Chemical Industries Plc.................................................. 17,100 135,763
Johnson Matthey Plc................................................................ 6,328 89,082
Kingfisher Plc.................................................................... 26,300 239,459
Lloyds TSB Group Plc............................................................. 104,848 990,341
Marconi Plc....................................................................... 44,549 579,931
MFI Furniture Group Plc........................................................... 90,755 88,264
National Power Plc................................................................ 31,040 197,808
New Dixons Group Plc.............................................................. 49,918 203,259
Northern Foods Plc................................................................ 53,034 95,530
Nycomed Amersham Plc.............................................................. 27,867 276,716
Ocean Group Plc................................................................... 12,200 201,292
Pearson Plc....................................................................... 11,244 357,421
Prudential Corp................................................................... 33,367 488,914
Reckitt Benckiser................................................................. 32,686 366,128
Reuters Group Plc................................................................. 24,242 413,554
Royal & Sun Alliance Insurance Group Plc.......................................... 82,681 536,912
Royal Bank of Scotland............................................................ 30,845 516,392
Schroders Plc...................................................................... 6,800 122,283
Scottish Power Plc................................................................ 44,363 376,053
Severn Trent Plc.................................................................. 15,566 169,766
Smith & Nephew Plc................................................................ 47,100 173,960
SmithKline Beecham Plc............................................................ 87,060 1,139,921
Standard Chartered PLC............................................................ 23,492 292,657
Tesco Plc........................................................................ 112,423 349,709
The Sage Group Plc................................................................ 29,007 234,907
TI Group Plc...................................................................... 29,100 158,575
Trinity Mirror Plc................................................................ 11,500 102,705
United News & Media Plc............................................................ 9,800 140,925
Vodafone Group Plc............................................................... 918,517 3,712,259
Williams Plc...................................................................... 35,400 206,302
Woolwich Plc...................................................................... 38,950 164,937
WPP Group Plc..................................................................... 22,106 322,907
-----------
26,575,566
-----------
UNITED STATES - 0.0%
NTL Inc.*............................................................................ 275 16,143
-----------
Total Common and Preferred Stocks (Cost $124,389,413) 135,042,967
-----------
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
International Equity Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
PAR VALUE
AMOUNT SECURITY DESCRIPTION (NOTE 1)
------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS - 8.5%
UNITED STATES - 8.5%
$ 938,909 American Express Centurion Bank, 6.65%, due
07/10/00(b)...................................... $ 938,909
953,540 Bank of America, 6.67%, due 03/22/01(b)............ 953,540
469,454 Royal Bank of Scotland, 6.85%, due 07/05/00(b)..... 469,454
1,877,818 American Express Centurion Bank, 7%, due
07/07/00(b)...................................... 1,877,818
469,452 First Union National Bank, 6.9%, due 05/09/01(b)... 469,452
1,162,981 Fleet National Bank, 7.125%, due 10/31/00(b)....... 1,162,981
938,909 Goldman Sachs, 6.64875%, due 08/17/00(b)........... 938,909
938,908 Janus Money Market Fund(b)......................... 938,908
2,733,564 Merrimac Cash Fund-Premium Class(b)................ 2,733,564
938,909 BNP Paribas, 6.75%, due 07/05/00(b)................ 938,909
200,000 US Tresury Bill, 5.725%, due 10/12/00(c)........... 196,724
60,000 US Tresury Bill, 5.73%, due 10/12/00............... 59,016
----------
Total Short-Term Investments
(Cost $11,678,184) 11,678,184
----------
<CAPTION>
------------------------------------------------------------------------------------
PAR VALUE
AMOUNT SECURITY DESCRIPTION COUPON MATURITY (NOTE 1)
------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FOREIGN BONDS & DEBT
SECURITIES - 0.1%
BERMUDA - 0.1%
Y10,000,000 AB International Cayman Trust
(Cost $60,741).............. 0.500% 08/01/2007 112,725
----------
</TABLE>
<TABLE>
<C> <S> <C> <C> <C>
TOTAL INVESTMENTS - 106.7%
(Cost $136,128,338) 146,833,876
Other Assets and Liabilities (net) -
(6.6%) (9,108,979)
-------------
TOTAL NET ASSETS - 100.0% $ 137,724,897
=============
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security.
(a) Securities that may be resold to "qualified institutional buyers" under
Rule 144A or securities offered pursuant to Section 4(2) of the Securities
Act of 1933, as amended. These securities have been determined to be
liquid under guidelines established by the Board of Trustees.
(b) Represents investment of collateral received from securities lending
transactions.
(c) Held as collateral for open futures contracts.
ADR - American Depositary Receipt
See notes to financial statements
<PAGE>
Cova Series Trust
Bond Debenture Portfolio
PORTFOLIO OF INVESTMENTS
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
PAR SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
DOMESTIC BONDS & DEBT
SECURITIES - 79.8%
ADVERTISING - 2.8%
$ 1,000,000 Ackerley Group, Inc. (The).... 9.000% 01/15/2009 $ 922,500
505,000 Interpublic Group of
Companies, Inc. (The)
Convertible (144A)(a)....... 1.800% 09/16/2004 595,900
95,000 Interpublic Group of
Companies, Inc. (The)
Convertible................. 1.800% 09/16/2004 112,100
300,000 Interpublic Group of
Companies, Inc. (The)
Convertible (144A)(a)....... 1.870% 06/01/2006 290,250
1,500,000 Lamar Media Corp.............. 9.625% 12/01/2006 1,515,000
1,275,000 R.H. Donnelly Corp............ 9.125% 06/01/2008 1,206,469
------------
4,642,219
------------
AEROSPACE & DEFENSE - 1.6%
1,000,000 BE Aerospace, Inc............. 9.875% 02/01/2006 955,000
850,000 Dyncorp, Inc.................. 9.500% 03/01/2007 650,250
500,000 L-3 Communications Corp....... 10.375% 05/01/2007 511,250
500,000 United Defense Industries,
Inc......................... 8.750% 11/15/2007 465,000
------------
2,581,500
------------
AIRLINES - 0.9%
1,000,000 America West Airlines, Inc.... 10.750% 09/01/2005 962,500
650,000 Continental Airlines, Inc..... 8.000% 12/15/2005 601,250
------------
1,563,750
------------
AUTOMOTIVE - 3.3%
1,000,000 Collins & Aikman Corp......... 11.500% 04/15/2006 967,500
500,000 Dura Operating Corp........... 9.000% 05/01/2009 437,500
1,000,000 Ford Motor Credit Corp.
Convertible................. 7.875% 06/15/2010 999,820
1,200,000 Navistar International
Corp........................ 8.000% 02/01/2008 1,107,000
1,100,000 Oshkosh Truck Corp............ 8.750% 03/01/2008 1,028,500
1,000,000 Safelite Glass Corp.(b)....... 9.875% 12/15/2006 13,750
1,000,000 Tenneco Automotive Inc........ 11.625% 10/15/2009 895,000
------------
5,449,070
------------
BUILDING MATERIALS - 1.0%
1,000,000 American Standard Inc.*....... 8.250% 06/01/2009 962,500
750,000 Kevco, Inc.................... 10.375% 12/01/2007 183,750
500,000 Nortek, Inc................... 8.875% 08/01/2008 455,000
------------
1,601,250
------------
CABLE - 6.7%
1,500,000 Century Communications
Corp........................ 9.500% 03/01/2005 1,455,000
1,000,000 Charter Communications
Holdings LLC................ 8.625% 04/01/2009 883,750
1,250,000 Charter Communications
Holdings LLC................ 10.000% 04/01/2009 1,212,500
500,000 CSC Holdings, Inc............. 9.250% 11/01/2005 505,625
300,000 CSC Holdings, Inc............. 10.500% 05/15/2016 320,250
1,500,000 EchoStar Communications Corp.
Convertible (144A)(a)....... 4.875% 01/01/2007 1,425,000
500,000 FrontierVision................ 11.000% 10/15/2006 507,500
1,000,000 FrontierVision LP/Capital..... 0%, 11.875% ++ 09/15/2007 870,000
1,000,000 Mediacom LLC.................. 8.500% 04/15/2008 925,000
1,000,000 NTL Inc. Convertible
(144A)(a)................... 5.750% 12/15/2009 790,000
1,000,000 NTL, Inc...................... 10.000% 02/15/2007 950,000
1,000,000 NTL, Inc...................... 0%, 12.375% ++ 10/01/2008 640,000
750,000 Renaissance Media Group....... 0%, 10.000% ++ 04/15/2008 513,750
------------
10,998,375
------------
CHEMICALS - 1.7%
1,000,000 Huntsman Corp. (144A)(a)...... 9.500% 07/01/2007 915,000
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Bond Debenture Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
PAR SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CHEMICALS - CONTINUED
$ 1,000,000 Lyondell Chemical Corp........ 9.625% 05/01/2007 $ 987,500
1,000,000 Scotts Co. (The) (144A)(a).... 8.625% 01/15/2009 965,000
------------
2,867,500
------------
COMMERCIAL SERVICES - 3.1% 500,000 Affemetrix, Inc.
Convertible................. 4.750% 02/15/2007 384,375
1,000,000 Allied Waste North America,
Inc......................... 7.875% 01/01/2009 857,500
750,000 Avis Group Holdings, Inc...... 11.000% 05/01/2009 785,625
2,500,000 Iron Mountain, Inc............ 10.125% 10/01/2006 2,512,500
622,000 Unicco Service Co............. 9.875% 10/15/2007 597,120
------------
5,137,120
------------
COMMUNICATIONS - 4.8%
500,000 Crown Castle Int'l. Corp...... 10.750% 08/01/2011 497,518
1,000,000 ICG Holdings, Inc............. 0%, 13.500% ++ 09/15/2005 972,500
400,000 Logix Communications
Enterprises................. 12.250% 06/15/2008 158,000
1,500,000 McLeod USA, Inc............... 9.500% 11/01/2008 1,473,750
2,000,000 Nextel Communications, Inc.... 0%, 9.950% ++ 02/15/2008 1,475,000
700,000 Nextel Communications, Inc.
Convertible (144A)(a)....... 5.250% 01/15/2010 710,500
1,250,000 Sprint Spectrum L.P........... 0%, 12.500% ++ 08/15/2006 1,203,144
500,000 Time Warner Telecom, LLC...... 9.750% 07/15/2008 486,250
900,000 Williams Communications Group,
Inc......................... 10.875% 10/01/2009 884,250
------------
7,860,912
------------
COMPUTER SOFTWARE & PROCESSING - 2.4%
600,000 Affiliated Computer Services,
Inc. Convertible
(144A)(a)................... 4.000% 03/15/2005 589,500
400,000 Arbor Software Corp.
Convertible (144A)(a)....... 4.500% 03/15/2005 353,000
250,000 Globix Corp................... 12.500% 02/01/2010 206,250
1,000,000 Juniper Networks, Inc.
Convertible................. 4.750% 03/15/2007 1,093,750
350,000 Mercury Interactive Corp.
Convertible (144A)(a)....... 4.750% 07/01/2007 370,562
600,000 Orbital Imaging Corp.
(144A)(a)................... 11.625% 03/01/2005 277,500
200,000 PSINet, Inc................... 11.500% 11/01/2008 189,000
750,000 Verio Inc..................... 10.625% 11/15/2009 835,312
------------
3,914,874
------------
COMPUTERS & INFORMATION - 2.4% 1,500,000 National Data Corp.
Convertible................. 5.000% 11/01/2003 1,245,000
2,540,000 Solectron Corp Convertible.... + 05/08/2020 1,612,900
400,000 Solectron Corp. Convertible... + 01/27/2019 271,500
1,200,000 Solectron Corp. Convertible
(144A)(a)................... + 01/27/2019 814,500
------------
3,943,900
------------
CONTAINERS & PACKAGING - 0.7%
250,000 Fonda Group, Inc.............. 9.500% 03/01/2007 200,000
1,000,000 U.S. Can Corp................. 10.125% 10/15/2006 1,030,000
------------
1,230,000
------------
COSMETICS & PERSONAL CARE - 0.4%
750,000 Chattem, Inc.................. 8.875% 04/01/2008 603,750
------------
ELECTRIC UTILITIES - 0.8%
74,859 Midland Cogeneration Venture
L.P......................... 10.330% 07/23/2002 76,644
1,250,000 PP&L Resources, Inc........... 6.550% 03/01/2006 1,195,596
------------
1,272,240
------------
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Bond Debenture Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
PAR SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ELECTRONICS - 1.8% $ 1,000,000 Cypress Semiconductor Corp.
Convertible................. 4.000% 02/01/2005 $ 1,151,250
500,000 Cypress Semiconductor Corp.... 3.750% 07/01/2005 481,250
125,000 Lattice Semiconductor Corp.
Convertible (144A)(a)....... 4.750% 11/01/2006 225,000
650,000 Sci Systems, Inc.
Convertible................. 3.000% 03/15/2007 641,062
500,000 Vitesse Semiconductor
Convertible (144A)(a)....... 4.000% 03/15/2005 465,000
------------
2,963,562
------------
ENERGY - 0.1%
1,000,000 AEI Holding Co., Inc.
(144A)(a)................... 10.500% 12/15/2005 205,000
------------
ENTERTAINMENT & LEISURE - 2.0% 1,700,000 Harrah's Operating Co.,
Inc......................... 7.500% 01/15/2009 1,579,169
500,000 Loews Cineplex Entertainment
Corp........................ 8.875% 08/01/2008 237,500
1,500,000 Mohegan Tribal Gaming......... 8.750% 01/01/2009 1,432,500
------------
3,249,169
------------
FINANCIAL SERVICES - 0.8%
1,000,000 Accuride Corp................. 9.250% 02/01/2008 845,000
500,000 Merrill Lynch & Co., Inc...... 1.500% 12/15/2005 569,375
------------
1,414,375
------------
FOREST PRODUCTS & PAPER - 1.4%
1,000,000 International Paper Co........ 8.125% 07/08/2005 1,009,845
1,250,000 Packaging Corp. of America.... 9.625% 04/01/2009 1,246,875
------------
2,256,720
------------
HEALTH CARE PROVIDERS - 1.3%
1,000,000 Leiner Health Products
Group....................... 9.625% 07/01/2007 725,000
500,000 Prime Medical Services,
Inc......................... 8.750% 04/01/2008 417,500
1,000,000 Tenet Healthcare Corp......... 8.625% 01/15/2007 960,000
------------
2,102,500
------------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 1.7%
1,000,000 D.R. Horton, Inc.............. 10.000% 04/15/2006 992,500
1,000,000 Lennar Corp................... 7.625% 03/01/2009 866,833
1,000,000 MDC Holdings, Inc............. 8.375% 02/01/2008 890,000
------------
2,749,333
------------
LODGING - 1.1%
1,000,000 Aztar Corporation............. 8.875% 05/15/2007 947,500
1,000,000 Park Place Entertainment
Corp........................ 7.875% 12/15/2005 942,500
------------
1,890,000
------------
MEDIA - BROADCASTING & PUBLISHING - 4.2%
1,000,000 Allbritton Communications
Co.......................... 9.750% 11/30/2007 965,000
350,000 Capstar Broadcasting Corp..... 9.250% 07/01/2007 358,750
200,000 Clear Channel Communications,
Inc......................... 1.500% 12/01/2002 195,750
500,000 Cumulus Media, Inc............ 10.375% 07/01/2008 425,000
450,000 EZ Communications, Inc........ 9.750% 12/01/2005 474,887
1,000,000 Fox Liberty Networks LLC...... 8.875% 08/15/2007 997,500
400,000 Gray Communications Systems,
Inc......................... 10.625% 10/01/2006 400,000
1,000,000 Interep National Radio Sales,
Inc......................... 10.000% 07/01/2008 890,000
425,000 K-III Communications Corp..... 10.250% 06/01/2004 427,125
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Bond Debenture Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
PAR SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MEDIA - CONTINUED
$ 1,591,000 Sinclair Broadcast Group,
Inc......................... 10.000% 09/30/2005 $ 1,527,360
350,000 Young Broadcasting, Inc....... 11.750% 11/15/2004 357,875
------------
7,019,247
------------
MEDICAL SUPPLIES - 0.6%
1,000,000 Fisher Scientific
International, Inc.......... 9.000% 02/01/2008 920,000
------------
METALS - 0.8%
1,000,000 Armco Inc..................... 9.000% 09/15/2007 947,500
500,000 WCI Steel, Inc................ 10.000% 12/01/2004 467,500
------------
1,415,000
------------
OIL & GAS - 4.7%
750,000 Chesapeake Energy Corp........ 9.625% 05/01/2005 731,250
750,000 Cross Timbers Royalty Trust... 9.250% 04/01/2007 733,125
2,000,000 Devon Energy Corp.
Convertible................. 4.950% 08/15/2008 1,925,000
1,000,000 HS Resources, Inc............. 9.875% 12/01/2003 1,002,500
150,000 KCS Energy, Inc.(b)........... 11.000% 01/15/2003 143,250
1,000,000 Kerr-McGee Corp.
Convertible................. 5.250% 02/15/2010 1,156,250
500,000 Parker Drilling Corp.
Convertible................. 5.500% 08/01/2004 411,250
500,000 Pogo Producing Co............. 8.750% 05/15/2007 475,000
750,000 Swift Energy Co.
Convertible................. 6.250% 11/15/2006 729,375
500,000 Vintage Petroleum, Inc........ 8.625% 02/01/2009 481,250
------------
7,788,250
------------
PHARMACEUTICALS - 1.6%
750,000 Ivax Corp. Convertible........ 5.500% 05/15/2007 970,312
1,800,000 Roche Holdings, Inc.
Convertible (144A)(a)....... + 01/19/2015 1,624,500
------------
2,594,812
------------
RETAILERS - 0.4% 250,000 Costco Wholesale Corp.
Convertible................. + 08/19/2017 207,188
500,000 Costco Wholesale Corp.
Convertible (144A)(a)....... + 08/19/2017 414,375
------------
621,563
------------
TELEPHONE SYSTEMS - 7.7%
350,000 AMSC Acquisition Co., Inc..... 12.250% 04/01/2008 274,750
400,000 Exodus Communications, Inc.
Convertible (144A)(a)....... 4.750% 07/15/2008 572,000
25,000 Exodus Communications, Inc.
(144A)(a)................... 4.750% 07/15/2008 35,750
750,000 Exodus Communications, Inc.
(144A)(a)................... 10.750% 12/15/2009 727,500
750,000 Exodus Communications, Inc.
Convertible (144A)(a)....... 11.625% 07/15/2010 752,344
1,000,000 Hyperion Telecommunications,
Inc......................... 12.250% 09/01/2004 1,015,000
1,000,000 Intermedia Communications of
Florida, Inc................ 9.500% 03/01/2009 955,000
1,000,000 Level 3 Communications, Inc.
(144A)(a)................... 11.000% 03/15/2008 995,000
400,000 MasTec, Inc................... 7.750% 02/01/2008 370,000
1,000,000 Metromedia Fiber Network,
Inc......................... 10.000% 12/15/2009 990,000
1,000,000 NEXTLINK Communications,
Inc......................... 10.750% 11/15/2008 990,000
250,000 Price Communications Wireless,
Inc......................... 9.125% 12/15/2006 253,750
1,000,000 Qwest Communications Int'l.,
Inc......................... 7.500% 11/01/2008 972,051
1,000,000 SBA Communications Corp....... 0%, 12.000% ++ 03/01/2008 710,000
1,000,000 Triton PCS, Inc............... 0%, 11.000% ++ 05/01/2008 730,000
2,000,000 United States Cellular Corp.
Convertible................. + 06/15/2015 1,195,000
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Bond Debenture Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
PAR SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TELEPHONE SYSTEMS - CONTINUED
$ 1,000,000 Viatel, Inc................... 11.250% 04/15/2008 $ 745,000
500,000 VoiceStream Wireless Corp..... 10.375% 11/15/2009 520,000
------------
12,803,145
------------
TEXTILES, CLOTHING & FABRICS - 0.3%
500,000 Interface, Inc................ 9.500% 11/15/2005 437,500
------------
TRANSPORTATION - 0.4%
600,000 Commscope, Inc. (144A)(a)..... 4.000% 12/15/2006 654,000
------------
U.S. GOVERNMENT AGENCY MORTGAGE BACKED SECURITIES - 12.2%
10,992,366 Government National Mortgage
Association................. 8.000% 05/15/2030 11,128,000
8,994,154 Government National Mortgage
Association................. 8.000% 05/15/2030 9,105,133
------------
20,233,133
------------
U.S. TREASURY SECURITIES - 4.1%
7,500,000 U.S. Treasury Note............ 4.750% 11/15/2008 6,813,285
------------
Total Domestic Bonds & Debt
Securities (Cost
$138,661,198) 131,797,054
------------
FOREIGN BONDS & DEBT
SECURITIES - 12.6%
ARGENTINA - 0.6%
1,000,000 Telefonica de Argentina S.A.
(U.S.$) (144A)(a)........... 9.125% 05/07/2008 932,500
------------
BERMUDA - 1.5%
2,500,000 Elan Finance Corp. Convertible
(U.S. $) (144A)(a).......... + 12/14/2018 1,825,000
750,000 Global Crossing Holdings Ltd.
(U.S.$)..................... 9.625% 05/15/2008 731,250
------------
2,556,250
------------
BRAZIL - 0.3%
500,000 Globo Comunicacoes
Participation (U.S.$)
(144A)(a)................... 10.625% 12/05/2008 421,250
------------
CANADA - 2.4% 1,000,000 Clearnet Communications, Inc.
(Yankee).................... 0%, 10.125% ++ 05/01/2009 605,000
1,500,000 Gulf Canada Resources Ltd.
(Yankee).................... 8.375% 11/15/2005 1,492,500
1,000,000 Rogers Cantel, Inc.
(Yankee).................... 8.300% 10/01/2007 982,500
1,000,000 Tembec Industries, Inc.
(Yankee).................... 8.625% 06/30/2009 965,000
------------
4,045,000
------------
CHINA - 0.1% 250,000 Cathay International Ltd.
(U.S.$) (144A)(a)........... 13.500% 04/15/2008 126,250
------------
LUXEMBOURG - 0.5%
1,000,000 Millicom International
Cellular S.A. (Yankee)
(144A)(a)................... 0%, 13.500% ++ 06/01/2006 855,000
------------
MEXICO - 0.7% 500,000 Satelites Mexicanos S.A.
(Yankee).................... 10.125% 11/01/2004 336,250
1,000,000 TV Azteca S.A. (Yankee)....... 10.500% 02/15/2007 900,000
------------
1,236,250
------------
NETHERLANDS - 2.8% 1,000,000 ASM Lithography Holding N.V.
(U.S.$) (144A)(a)........... 4.250% 11/30/2004 1,337,500
550,000 STMicroelectronics N.V.
Convertible (U.S.$)......... + 09/22/2009 933,625
2,700,000 United Pan-Europe
Communications N.V.
(Yankee).................... 0%, 12.500% ++ 08/01/2009 1,370,250
500,000 United Pan-Europe
Communications N.V.
(Yankee).................... 11.250% 11/01/2009 442,500
500,000 Versatel Telecom International
N.V. (Yankee)............... 11.875% 07/15/2009 495,000
------------
4,578,875
------------
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Bond Debenture Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
PAR SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
-------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SINGAPORE - 0.3%
$ 525,000 Flextronics Int'l. Ltd.
(U.S.$) (144A)(a)........... 9.875% 07/01/2010 $ 531,562
------------
SWITZERLAND - 1.3%
500,000 Credit Suisse First Boston
Convertible (Yankee)........ 2.625% 04/20/2003 468,125
600,000 Credit Suisse First Boston
Convertible (Yankee)........ 2.250% 03/16/2004 555,750
2,000,000 Roche Holdings, Inc.
Convertible
(U.S.$)(144A)(a)............ + 04/20/2010 1,052,500
------------
2,076,375
------------
UNITED KINGDOM - 2.1%
550,000 Diamond Cable Communication
Plc (Yankee)................ 0%, 10.750% ++ 02/15/2007 422,125
1,000,000 Esprit Telecom Group Plc
(Yankee).................... 10.875% 06/15/2008 685,000
1,000,000 RSL Communications Plc
(Yankee).................... 12.000% 11/01/2008 745,000
750,000 Swiss Life Finance Ltd.
(U.S.$) (144A)(a)........... 2.000% 05/20/2003 747,188
1,500,000 Telewest Communications Plc
(Yankee).................... 0%, 9.250% ++ 04/15/2009 813,750
------------
3,413,063
------------
Total Foreign Bonds & Debt
Securities (Cost
$21,733,785) 20,772,375
------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COMMON AND PREFERRED STOCKS -
2.8%
BANKING - 0.1%
$ 10,000 Coastal Finance, Inc.
Preferred................... $ 226,875
------------
CHEMICALS - 0.4%
15,000 Monsanto Co. Convertible
Preferred................... 678,750
------------
ELECTRIC UTILITIES - 1.1%
16,000 AES Trust VII Convertible
Preferred (144A)(a)*........ 950,500
20,000 TXU Corp. Convertible
Preferred................... 777,500
------------
1,728,000
------------
ELECTRONICS - 0.0%
66 DecisionOne Corp(b)........... 1
------------
FOREST PRODUCTS & PAPER - 0.2%
10,000 Georgia-Pacific Group
Convertible Preferred....... 320,000
------------
HEAVY MACHINERY - 0.1%
10,000 Ingersoll-Rand Co. Convertible
Preferred................... 203,750
------------
INSURANCE - 0.3% 25,000 AmerUs Life Holdings, Inc.
Convertible Preferred....... 539,062
------------
MEDIA - BROADCASTING & PUBLISHING - 0.5% 10,000 Cox Communication,
Inc.
Preferred................... 614,375
8,500 Sinclair Broadcast Group, Inc.
Convertible Preferred....... 263,500
------------
877,875
------------
TELEPHONE SYSTEMS - 0.1%
1,533 Intermedia Communications,
Inc.*....................... 45,607
2,015 Viatel, Inc. Convertible
Preferred*.................. 57,553
------------
103,160
------------
Total Common and Preferred
Stocks (Cost $5,605,088) 4,677,473
------------
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Bond Debenture Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
WARRANTS - 0.1%
COMMUNICATIONS - 0.1%
$ 522 NTL, Inc. (expiring
10/14/08)*.................. $ 33,995
450 Splitrock Services, Inc.
(expiring 07/15/08)*........ 83,925
------------
117,920
------------
COMPUTER SOFTWARE & PROCESSING - 0.0% 600 Orbital Imaging Corp.
(expiring 03/01/05)
(144A)(a)*.................. 12,075
------------
MEDICAL SUPPLIES - 0.0% 250 Urohealth Systems, Inc.
(expiring 04/10/04)
(144a)(a)*.................. 3
------------
TELEPHONE SYSTEMS - 0.0%
350 Motient Corporation (expiring
01/01/08) (144A)(a)*........ 14,044
------------
Total Warrants (Cost $7,898) 144,042
------------
<CAPTION>
-----------------------------------------------------------------------------
PAR SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS - 5.2%
$ 705,561 American Express Centurion
Bank, 6.65%, due
07/10/00(c)................. $ 705,561
924,894 Bank of America, 6.67%, due
03/22/01(c)................. 924,894
352,785 Royal Bank of Scotland, 6.85%,
due 07/05/00(c)............. 352,785
1,411,132 American Express Centurion
Bank, 7%, due 07/07/00(c)... 1,411,132
352,786 First Union National Bank,
6.9%, due 05/09/01(c)....... 352,786
1,265,609 Fleet National Bank, 7.125%,
due 10/31/00(c)............. 1,265,609
705,562 Goldman Sachs, 6.64875%, due
08/17/00(c)................. 705,562
705,565 Janus Money Market Fund(c).... 705,565
1,454,199 Merrimac Cash Fund-Premium
Class(c).................... 1,454,199
705,563 BNP Paribas, 6.75%, due
07/05/00(c)................. 705,563
------------
Total Short-Term Investments
(Cost $8,583,656) 8,583,656
------------
</TABLE>
<TABLE>
<C> <S> <C>
TOTAL INVESTMENTS - 100.5%
(Cost $174,591,625) 165,974,600
Other Assets and Liabilities (net) -
(0.5%) (809,066)
-------------
TOTAL NET ASSETS - 100.0% $ 165,165,534
=============
</TABLE>
PORTFOLIO FOOTNOTES:
(a) Securities that may be resold to "qualified institutional buyers" under
Rule 144A or securities offered pursuant to Section 4(2) of the Securities
Act of 1933, as amended. These securities have been determined to be
liquid under guidelines established by the Board of Trustees.
(b) Security is in Bankruptcy or is in default.
* Non-income producing security.
(c) Represents investment of collateral received from securities lending
transactions.
+ Zero coupon bond
++ Security is a "step-up" bond where coupon increases or steps up at a
predetermined date. Rates shown are current coupon and next coupon rate
when security steps up.
Yankee - U.S. Dollar denominated bonds issued by non-U.S. companies in the U.S.
See notes to financial statements
<PAGE>
Cova Series Trust
Bond Debenture Portfolio
PORTFOLIO COMPOSITION BY CREDIT QUALITY (UNAUDITED)
JUNE 30, 2000
--------------------------------------------------------------------------------
The following table summarizes the portfolio composition of long-term debt
holdings at June 30, 2000, based upon quality ratings issued by Standard &
Poor's. For securities not rated by Standard & Poor's, the Moody's rating is
used.
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION BY CREDIT QUALITY
-------------------------------------------------------------------------------
<S> <C>
RATINGS % OF PORTFOLIO
U.S. Gov't and Agency Obligations 16.3%
AA 2.0
A 2.2
BBB 13.7
BB 15.8
B 39.3
CCC 1.8
NR 8.9
-----
100.0%
=====
Note: NR = Not Rated
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Mid-Cap Value Portfolio
PORTFOLIO OF INVESTMENTS
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 96.0%
AIRLINES - 0.9%
AMR Corp.*........................................................................ 13,600 $ 359,550
-----------
AUTOMOTIVE - 0.9%
Genuine Parts Co.................................................................. 18,500 370,000
-----------
BEVERAGES, FOOD & TOBACCO - 9.8%
Archer-Daniels-Midland Co......................................................... 39,200 384,650
Corn Products International, Inc.................................................. 24,000 636,000
Dean Foods Co..................................................................... 19,700 624,244
Del Monte Foods Co.*.............................................................. 20,500 139,656
IBP, Inc.......................................................................... 38,100 588,169
Smithfield Foods, Inc.*........................................................... 20,600 578,087
Universal Foods Corp.............................................................. 46,800 865,800
-----------
3,816,606
-----------
CHEMICALS - 4.9%
Crompton Corp..................................................................... 65,300 799,925
IMC Global, Inc................................................................... 56,600 735,800
Potash Corporation of Saskatchewan, Inc............................................ 7,100 391,831
-----------
1,927,556
-----------
CONTAINERS & PACKAGING - 5.5%
American National Can Group, Inc.................................................. 36,300 612,562
Ball Corp......................................................................... 25,500 820,781
Pactiv Corporation*............................................................... 88,600 697,725
-----------
2,131,068
-----------
ELECTRIC UTILITIES - 11.5%
Constellation Energy Group, Inc................................................... 10,100 328,881
FirstEnergy Corp.................................................................. 32,300 755,012
IPALCO Enterprises, Inc........................................................... 31,100 625,887
Niagara Mohawk Holdings, Inc.*.................................................... 47,500 662,031
Northeast Utilities............................................................... 30,900 672,075
Reliant Energy, Inc............................................................... 20,100 594,206
Scana Corp........................................................................ 12,038 290,417
TECO Energy, Inc.................................................................. 28,800 577,800
-----------
4,506,309
-----------
FINANCIAL SERVICES - 1.6%
CIT Group, Inc. (The)............................................................. 38,400 624,000
-----------
FOOD RETAILERS - 1.0%
Delhaize America, Inc............................................................. 21,300 376,744
-----------
HEALTH CARE PROVIDERS - 7.7%
Caremark Rx, Inc.*............................................................... 203,900 1,389,069
Oxford Health Plans, Inc.*........................................................ 50,300 1,197,769
Trigon Healthcare, Inc.*........................................................... 8,300 427,969
-----------
3,014,807
-----------
HOUSEHOLD PRODUCTS - 2.0%
Snap-On, Inc...................................................................... 29,700 790,762
-----------
INSURANCE - 7.2%
Ace Ltd........................................................................... 20,500 574,000
PartnerRe Ltd..................................................................... 14,900 528,019
Transatlantic Holdings, Inc........................................................ 7,900 661,625
XL Capital Ltd.................................................................... 19,300 1,044,612
-----------
2,808,256
-----------
MEDICAL SUPPLIES - 9.6%
Acuson Corp.*..................................................................... 57,200 772,200
Boston Scientific Corp.*.......................................................... 30,700 673,481
St. Jude Medical, Inc.*........................................................... 28,000 1,284,500
Varian Medical Systems, Inc.*..................................................... 25,500 997,688
-----------
3,727,869
-----------
OIL & GAS - 22.0%
Amerada Hess Corp.................................................................. 8,800 543,400
Dynegy, Inc....................................................................... 16,092 1,099,285
Eastern Enterprises............................................................... 10,900 686,700
<CAPTION>
------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
------------------------------------------------------------------------------------------------------
<S> <C> <C>
OIL & GAS - CONTINUED
ENSCO International, Inc.......................................................... 18,800 $ 673,275
EOG Resources, Inc................................................................ 38,500 1,289,750
Kerr-Mcgee Corp................................................................... 17,000 1,001,938
R&B Falcon Corp.*................................................................. 47,600 1,121,575
Santa Fe Snyder Corp.*............................................................ 89,800 1,021,475
Southwest Gas Corp................................................................ 30,400 532,000
Valero Energy Corp................................................................ 19,200 609,600
-----------
8,578,998
-----------
REAL ESTATE - 2.1%
Healthcare Realty Trust, Inc. (REIT).............................................. 47,855 816,526
-----------
RESTAURANTS - 3.1%
CBRL Group, Inc................................................................... 82,600 1,213,188
-----------
RETAILERS - 4.3%
Consolidated Stores Corp.*........................................................ 70,700 848,400
J.C. Penney Co., Inc.............................................................. 44,100 813,094
-----------
1,661,494
-----------
TEXTILES, CLOTHING & FABRICS - 1.9%
Polymer Group, Inc................................................................ 74,400 688,200
V.F. Corp.......................................................................... 2,300 54,769
-----------
742,969
-----------
Total Common Stocks (Cost $34,382,915) 37,466,702
-----------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------
PAR SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
--------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS - 0.6%
$19,836 American Express Centurion Bank, 6.65%,
due 07/10/00(a)....................... $ 19,836
19,836 Bank of America, 6.67%, due
03/22/01(a)........................... 19,836
9,918 Royal Bank of Scotland, 6.85%, due
07/05/00(a)........................... 9,918
39,672 American Express Centurion Bank 7%,
due 07/07/00(a)....................... 39,672
9,918 First Union National Bank, 6.9%,
due 05/09/01(a)....................... 9,918
24,880 Fleet National Bank, 7.125%, due
10/31/00(a)........................... 24,880
19,836 Goldman Sachs, 6.64875%, 08/17/00(a).... 19,836
19,836 Janus Money Market Fund(a).............. 19,836
57,752 Merrimac Cash Fund-Premium Class(a)..... 57,752
19,836 BNP Paribas, 6.75%, due 07/05/00(a)..... 19,836
-----------
Total Short-Term Investments
(Cost $241,320) 241,320
-----------
</TABLE>
<TABLE>
<S> <C>
TOTAL INVESTMENTS - 96.6%
(Cost $34,624,235) 37,708,022
Other Assets and Liabilities (net) -
3.4% 1,335,031
-------------
TOTAL NET ASSETS - 100.0% $ 39,043,053
=============
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security.
(a) Represents investment of collateral received from securities
lending transactions.
REIT - Real Estate Investment Trust
See notes to financial statements
<PAGE>
Cova Series Trust Large Cap Research Portfolio PORTFOLIO OF INVESTMENTS JUNE 30,
2000 (UNAUDITED) (PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 93.7%
AEROSPACE & DEFENSE - 2.0%
Boeing Co........................................................................ 19,300 $ 806,981
-----------
AUTOMOTIVE - 1.9%
Ford Motor Co..................................................................... 5,700 245,100
General Motors Corp............................................................... 8,440 490,047
Visteon Corp.*...................................................................... 746 9,049
-----------
744,196
-----------
BANKING - 9.5%
Bank One Corp.................................................................... 13,100 347,969
Chase Manhattan Corp............................................................. 11,925 549,295
First Tennessee National Corp.................................................... 30,300 501,844
Fleet Boston Financial Corp...................................................... 13,495 458,830
M&T Bank Corp..................................................................... 1,800 810,000
Mellon Financial Corp............................................................ 17,800 648,587
Wells Fargo Co................................................................... 12,650 490,187
-----------
3,806,712
-----------
BEVERAGES, FOOD & TOBACCO - 3.0%
Archer-Daniels-Midland Co........................................................ 36,600 359,137
HJ Heinz Co...................................................................... 19,100 835,625
-----------
1,194,762
-----------
COMMUNICATIONS - 1.0%
Lucent Technologies, Inc.......................................................... 6,900 408,825
-----------
COMPUTER SOFTWARE & PROCESSING - 7.5%
BMC Software, Inc.*............................................................... 6,400 233,500
Cadence Design Systems, Inc.*.................................................... 30,900 629,587
Ceridian Corp.*.................................................................. 31,800 765,187
Computer Sciences Corp.*.......................................................... 5,500 410,781
Electronics for Imaging, Inc.*.................................................... 7,700 194,906
First Data Corp.................................................................. 15,800 784,075
-----------
3,018,036
-----------
COMPUTERS & INFORMATION - 4.1%
Apple Computer, Inc.*............................................................. 7,800 408,525
Compaq Computer Corp............................................................. 28,600 731,087
Solectron Corp.*................................................................. 12,500 523,438
-----------
1,663,050
-----------
ELECTRIC UTILITIES - 8.1%
CP&L, Energy Inc.................................................................. 9,520 304,045
Dominion Resources, Inc.......................................................... 13,600 583,100
Duke Energy Corp................................................................. 16,900 952,738
FPL Group, Inc................................................................... 13,350 660,825
Unicom Corp...................................................................... 19,700 762,144
-----------
3,262,852
-----------
ELECTRONICS - 0.7%
General Motors Corp. - Class H*................................................... 1,128 98,982
Motorola, Inc..................................................................... 6,600 191,813
-----------
290,795
-----------
<CAPTION>
-----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL SERVICES - 2.4%
Knight Trading Group, Inc.*....................................................... 7,200 $ 214,650
Morgan Stanley Dean Witter & Co................................................... 9,200 765,900
-----------
980,550
-----------
FOOD RETAILERS - 1.2%
Safeway, Inc.*................................................................... 10,800 487,350
-----------
FOREST PRODUCTS & PAPER - 4.2%
Bowater, Inc..................................................................... 11,600 511,850
International Paper Co........................................................... 16,100 479,981
Packaging Corp. of America*...................................................... 69,500 703,688
-----------
1,695,519
-----------
HEALTH CARE PROVIDERS - 1.8%
HCA-The Healthcare Corp.......................................................... 23,400 710,775
-----------
HEAVY MACHINERY - 5.7%
Baker Hughes, Inc................................................................ 19,900 636,800
Deere & Co....................................................................... 19,600 725,200
Eaton Corp........................................................................ 8,800 589,600
Pall Corp........................................................................ 17,900 331,150
-----------
2,282,750
-----------
INDUSTRIAL - DIVERSIFIED - 1.8%
Honeywell International Inc....................................................... 6,700 225,706
Minnesota Mining & Manufacturing Co. (3M)......................................... 6,000 495,000
-----------
720,706
-----------
INSURANCE - 7.6%
Ace Ltd.......................................................................... 35,400 991,200
American General Corp............................................................. 9,450 576,450
Aon Corp......................................................................... 19,400 602,613
Cigna Corp........................................................................ 2,300 215,050
UnitedHealth Group, Inc........................................................... 7,800 668,850
-----------
3,054,163
-----------
MEDIA - BROADCASTING & PUBLISHING - 3.7%
Dow Jones & Co., Inc.............................................................. 7,900 578,675
Time Warner, Inc.................................................................. 5,300 402,800
Viacom Inc - Class B*............................................................. 7,670 522,998
-----------
1,504,473
-----------
METALS - 1.2%
Alcoa, Inc....................................................................... 16,600 481,400
-----------
OFFICE EQUIPMENT - 1.2%
Harris Corp., Inc................................................................. 9,700 317,675
Xerox Corp........................................................................ 7,400 153,550
-----------
471,225
-----------
OIL & GAS - 12.9%
BP Amoco Plc (ADR)............................................................... 10,220 578,069
Coastal Corp..................................................................... 12,720 774,330
Exxon Mobil Corp................................................................. 24,420 1,916,970
Schlumberger Ltd.................................................................. 9,600 716,400
Tosco Corp....................................................................... 12,600 356,738
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust Large Cap Research Portfolio PORTFOLIO OF INVESTMENTS -
CONTINUED JUNE 30, 2000 (UNAUDITED) (PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
OIL & GAS - CONTINUED
Total S.A. (ADR).................................................................. 5,100 $ 391,744
Transocean Sedco Forex, Inc....................................................... 8,187 437,493
-----------
5,171,744
-----------
PHARMACEUTICALS - 4.4%
Alza Corp.*....................................................................... 7,800 461,175
American Home Products Corp...................................................... 12,100 710,875
Pharmacia Corp................................................................... 11,662 602,780
-----------
1,774,830
-----------
RETAILERS - 2.7%
Consolidated Stores Corp.*....................................................... 42,200 506,400
Federated Department Stores, Inc.*............................................... 17,000 573,750
-----------
1,080,150
-----------
TELEPHONE SYSTEMS - 3.7%
Alltel Corp....................................................................... 6,500 402,594
AT&T Corp........................................................................ 16,350 517,069
Bell Atlantic Corp............................................................... 11,400 579,263
-----------
1,498,926
-----------
TRANSPORTATION - 1.4%
United Parcel Service, Inc. - Class B............................................. 9,300 548,700
-----------
Total Common Stocks (Cost $37,101,203) 37,659,470
-----------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------
PAR SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS - 9.9%
$ 327,014 American Express Centurion Bank, 6.65%,
due 07/10/00(a)....................... $ 327,014
327,014 Bank of America, 6.67%,
due 03/22/01(a)....................... 327,014
163,507 Royal Bank of Scotland, 6.85%,
due 07/05/00(a)....................... 163,507
654,027 American Express Centurion Bank, 7%,
due 07/07/00(a)....................... 654,027
163,507 First Union National Bank, 6.9%,
due 05/09/01(a)....................... 163,507
410,149 Fleet National Bank, 7.125%,
due 10/31/00(a)....................... 410,149
327,014 Goldman Sachs, 6.64875%,
due 08/17/00(a)....................... 327,014
327,014 Janus Money Market Fund(a).............. 327,014
952,076 Merrimac Cash Fund-Premium Class(a)..... 952,076
327,014 BNP Paribas, 6.75%,
due 07/05/00(a)....................... 327,014
-----------
Total Short-Term Investments
(Cost $3,978,336) 3,978,336
-----------
</TABLE>
<TABLE>
<S> <C>
TOTAL INVESTMENTS - 103.6%
(Cost $41,079,540) 41,637,806
Other Assets and Liabilities (net) -
(3.6%) (1,442,195)
-------------
TOTAL NET ASSETS - 100.0% $ 40,195,611
=============
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security.
(a) Represents investment of collateral received from securities
lending transactions.
ADR - American Depositary Receipt
See notes to financial statements
<PAGE>
Cova Series Trust
Developing Growth Portfolio
PORTFOLIO OF INVESTMENTS
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 93.3%
AEROSPACE & DEFENSE - 0.9%
Orbital Sciences Corp.*.......................................................... 30,700 $ 374,156
-----------
AIRLINES - 1.3%
Frontier Airlines, Inc.*......................................................... 13,700 196,081
Skywest, Inc...................................................................... 8,900 329,856
-----------
525,937
-----------
APPAREL RETAILERS - 2.8%
AnnTaylor Stores Corp.*.......................................................... 16,400 543,250
Children's Place Retail Stores, Inc.*............................................ 13,500 276,750
Pacific Sunwear of California, Inc.*............................................. 17,550 329,062
-----------
1,149,062
-----------
BEVERAGES, FOOD & TOBACCO - 0.7%
Horizon Organic Holding Corp.*.................................................... 6,000 63,750
Smithfield Foods, Inc.*........................................................... 5,500 154,344
Twinlab Corp.*.................................................................... 8,500 54,187
-----------
272,281
-----------
BUILDING MATERIALS - 0.6%
Elcor Corp........................................................................ 9,900 227,700
-----------
CHEMICALS - 1.9%
H.B. Fuller Co.................................................................... 2,400 109,350
OM Group, Inc.................................................................... 15,500 682,000
-----------
791,350
-----------
COMMERCIAL SERVICES - 13.7%
Aegis Communications Group, Inc.*................................................ 41,800 42,218
Butler International, Inc.*....................................................... 6,250 53,125
CDI Corp.*........................................................................ 3,700 75,387
Core Laboratories N.V. (ADR)*.................................................... 19,000 551,000
Cornell Corrections, Inc.*....................................................... 10,100 80,800
Corporate Executive Board Co.*.................................................... 8,900 532,887
Diamond Technology Partners, Inc.*................................................ 5,650 497,200
Etinuum, Inc.*.................................................................... 4,800 27,000
First Consulting Group, Inc.*..................................................... 5,800 32,262
G & K Services, Inc.............................................................. 12,600 315,787
ICOS Corp.*....................................................................... 9,500 418,000
Iron Mountain, Inc.*............................................................. 14,800 503,200
Labor Ready, Inc.*................................................................ 8,700 57,638
MarchFirst, Inc.*................................................................. 9,012 164,469
Maxim Pharmaceuticals, Inc.*...................................................... 3,100 159,262
Memberworks, Inc.*................................................................ 6,600 221,925
Modis Professional Services, Inc.*............................................... 10,300 91,412
NCO Group, Inc.*.................................................................. 6,200 143,375
On Assignment, Inc.*.............................................................. 8,900 271,450
Pharmaceutical Product Development, Inc.*......................................... 2,900 60,900
Steiner Leisure Ltd.*............................................................ 10,200 230,775
Student Advantage, Inc.*......................................................... 30,100 220,106
TeleTech Holdings, Inc.*......................................................... 27,500 854,219
-----------
5,604,397
-----------
<CAPTION>
-----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMUNICATIONS - 7.4%
ADC Telecommunications, Inc.*..................................................... 1,548 $ 129,838
Cable Design Technologies Corp.*.................................................. 8,000 268,000
Comtech Telecommunications Corp.*................................................. 7,800 128,700
Netro Corp.*...................................................................... 1,900 109,012
Plantronics, Inc.*............................................................... 15,200 1,755,600
Sawtek, Inc.*.................................................................... 10,900 627,431
-----------
3,018,581
-----------
COMPUTER SOFTWARE & PROCESSING - 16.4%
3DO Co. (The)*.................................................................... 9,700 76,085
Activision, Inc.*................................................................. 9,200 59,800
Acxiom Corp.*.................................................................... 18,200 495,950
Cambridge Technology Partners, Inc.*............................................. 38,600 336,546
CheckFree Holdings Corp.*......................................................... 4,500 232,031
CIBER, Inc.*...................................................................... 8,900 117,925
Corillian Corp*................................................................... 3,400 56,525
CyberSource Corp.*................................................................ 6,500 89,781
Dendrite International, Inc.*..................................................... 6,700 223,194
eCollege.com Inc.*............................................................... 10,800 47,250
eLoyalty Corp.*................................................................... 4,500 57,375
eMerge Interactive, Inc. - Class A*............................................... 6,600 118,387
ePresence, Inc.*.................................................................. 2,500 18,203
Exchange Applications, Inc.*...................................................... 6,200 165,075
iGate Capital Corp.*............................................................. 18,700 257,125
IMRglobal Corp.*.................................................................. 4,900 64,006
InfoCure Corp.*................................................................... 7,000 39,375
Jupiter Communications, Inc.*..................................................... 5,400 124,200
Landmark Systems Corp.*........................................................... 9,800 58,800
Lionbridge Technologies, Inc.*.................................................... 8,000 78,000
Manhattan Associates, Inc.*....................................................... 6,100 152,500
Manugistics Group, Inc.*.......................................................... 4,200 196,350
Multex.com, Inc.*................................................................. 6,200 156,162
National Computer Systems, Inc................................................... 10,900 536,825
National Instruments Corp.*....................................................... 6,250 272,656
Netopia, Inc.*.................................................................... 3,300 132,825
Optio Software, Inc.*............................................................. 5,600 33,513
Pegasus Systems, Inc.*........................................................... 15,850 172,369
Phoenix Technologies Ltd.*........................................................ 7,900 128,869
Primus Knowledge Solutions, Inc.*................................................. 2,400 108,000
Project Software & Development, Inc.*............................................. 4,500 81,000
Proxicom, Inc.*................................................................... 2,200 105,325
RadiSys Corp.*................................................................... 13,900 788,825
Ravisent Technologies, Inc.*...................................................... 6,600 46,612
Renaissance Worldwide, Inc.*..................................................... 19,000 29,687
Rudolph Technologies, Inc.*....................................................... 1,300 50,375
S1 Corp.*........................................................................ 15,300 356,681
Switchboard Inc.*................................................................. 7,500 75,000
Sykes Enterprises, Inc.*......................................................... 15,600 200,850
Technology Solutions Co.*......................................................... 9,500 58,781
THQ, Inc.*........................................................................ 7,550 92,016
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Developing Growth Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
COMPUTER SOFTWARE & PROCESSING - CONTINUED
Verio Inc.*....................................................................... 3,900 $ 148,200
Vicinity Corp.*................................................................... 2,400 47,100
-----------
6,686,154
-----------
COMPUTERS & INFORMATION - 5.3%
Advanced Digital Information Corp.*.............................................. 27,000 430,312
Analogic Corp..................................................................... 5,100 204,000
Cyberian Outpost, Inc.*........................................................... 9,800 47,162
Fvc.com, Inc.*.................................................................... 8,600 66,650
InFocus Corp.*.................................................................... 7,400 238,187
Insight Enterprises, Inc.*........................................................ 8,600 510,087
MICROS Systems, Inc.*............................................................ 10,500 194,906
MicroTouch Systems, Inc.*......................................................... 7,400 63,825
ScanSoft, Inc.*.................................................................. 15,428 43,391
Xircom, Inc.*..................................................................... 7,400 351,500
-----------
2,150,020
-----------
ELECTRIC UTILITIES - 0.3%
Independent Energy Holdings Plc (ADR)*........................................... 12,400 103,075
-----------
ELECTRICAL EQUIPMENT - 1.8%
Ampex Corp.*..................................................................... 27,100 45,731
Moog, Inc. - Class A*............................................................. 3,800 100,225
Technitrol, Inc................................................................... 5,400 523,125
Universal Electronics Inc.*....................................................... 2,800 68,775
-----------
737,856
-----------
ELECTRONICS - 5.2%
American Xtal Technology, Inc.*................................................... 3,000 129,750
Artesyn Technologies, Inc.*...................................................... 10,400 289,250
CellStar Corp.*.................................................................. 45,500 126,549
Dionex Corp.*..................................................................... 2,200 58,850
EMS Technologies, Inc.*........................................................... 7,600 136,800
Helix Technology Corp............................................................. 1,500 58,500
Lecroy Corp.*..................................................................... 7,900 78,012
NVIDIA Corp.*..................................................................... 9,000 572,062
Pioneer-Standard Electronics, Inc................................................. 3,600 53,100
SLI, Inc......................................................................... 17,000 206,125
Three-Five Systems, Inc.*......................................................... 6,850 404,150
-----------
2,113,148
-----------
ENTERTAINMENT & LEISURE - 0.9%
Bally Total Fitness Holdings Corp.*............................................... 6,900 175,087
Championship Auto Racing Teams, Inc.*............................................. 6,900 175,950
Cinar Corp.(a)*................................................................... 6,300 33,579
-----------
384,616
-----------
FINANCIAL SERVICES - 0.3%
Federal Agricultural Mortgage Corp.*.............................................. 9,400 136,888
-----------
FOOD RETAILERS - 1.4%
Whole Foods Market, Inc.*........................................................ 11,100 458,569
Wild Oats Markets, Inc.*.......................................................... 8,250 103,641
-----------
562,210
-----------
<CAPTION>
-----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE PROVIDERS - 1.5%
Apria Healthcare Group Inc.*..................................................... 16,500 $ 202,125
Healthcare Services Group, Inc.*................................................. 11,750 52,875
Hooper Holmes, Inc............................................................... 27,700 221,600
Matria Healthcare, Inc.*......................................................... 30,000 137,814
-----------
614,414
-----------
HEAVY CONSTRUCTION - 0.3%
McGrath Rentcorp.................................................................. 6,200 105,400
-----------
HEAVY MACHINERY - 0.7%
Flow International Corp.*......................................................... 9,100 91,000
Semitool, Inc.*.................................................................. 10,200 176,588
-----------
267,588
-----------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 0.3%
Crossmann Communities, Inc.*...................................................... 8,400 138,600
-----------
INDUSTRIAL - DIVERSIFIED - 0.1%
Identix, Inc.*.................................................................... 3,800 59,613
-----------
INSURANCE - 0.5%
Advance Paradigm, Inc.*.......................................................... 10,300 211,150
-----------
MEDIA - BROADCASTING & PUBLISHING - 0.5%
NBC Internet, Inc. - Class A*....................................................... 300 3,750
Regent Communications, Inc.*..................................................... 14,800 127,188
Salem Communications Corp. - Class A*............................................. 8,900 82,604
-----------
213,542
-----------
MEDICAL BIO - TECHNOLOGY - 0.2%
MedQuist, Inc.*................................................................... 2,123 72,175
-----------
MEDICAL SUPPLIES - 6.1%
Armor Holdings, Inc.*............................................................ 17,800 231,400
Arrow International, Inc......................................................... 10,000 335,000
ATS Medical, Inc.*............................................................... 18,100 264,713
Coherent, Inc.*................................................................... 9,100 763,263
Hanger Orthopedic Group, Inc.*................................................... 13,800 68,138
Ionics, Inc.*..................................................................... 5,200 159,250
Meade Instruments Corp.*.......................................................... 5,800 145,725
Orthofix International N.V.*...................................................... 9,900 176,963
SonoSite, Inc.*................................................................... 6,600 190,163
Theragenics Corp.*............................................................... 15,000 128,438
Therma-Wave Inc.*................................................................. 1,500 33,469
-----------
2,496,522
-----------
METALS - 1.7%
Matthews International Corp....................................................... 6,600 191,400
Stillwater Mining Co.*........................................................... 18,200 507,325
-----------
698,725
-----------
OIL & GAS - 4.9%
Evergreen Resources, Inc.*....................................................... 10,500 311,063
Exco Resources Inc.*.............................................................. 7,400 74,000
Louis Dreyfus Natural Gas Corp.*................................................. 14,400 450,900
Seitel, Inc.*..................................................................... 9,600 78,000
Stone Energy Corp.*............................................................... 6,000 358,500
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Developing Growth Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
OIL & GAS - CONTINUED
Superior Energy Services, Inc.*.................................................. 12,100 $ 125,538
TransMontaigne Oil Co.*.......................................................... 20,200 123,725
Vintage Petroleum, Inc........................................................... 20,900 471,556
-----------
1,993,282
-----------
PHARMACEUTICALS - 3.2%
Albany Molecular Research, Inc.*.................................................. 3,500 190,531
Barr Laboratories, Inc.*.......................................................... 3,750 168,047
Corixa Corp.*..................................................................... 7,100 304,856
ILEX Oncology, Inc.*.............................................................. 3,700 130,425
Kos Pharmaceuticals, Inc.*........................................................ 3,800 61,038
Noven Pharmaceuticals, Inc*....................................................... 4,300 129,269
PathoGenesis Corp.*.............................................................. 11,700 304,200
-----------
1,288,366
-----------
REAL ESTATE - 0.4%
Catellus Development Corp.*....................................................... 4,200 63,000
Healthcare Realty Trust, Inc. (REIT).............................................. 4,700 80,194
-----------
143,194
-----------
RESTAURANTS - 0.6%
CEC Entertainment Inc.*........................................................... 4,500 115,313
P.F. Chang's China Bistro*........................................................ 4,500 143,719
-----------
259,032
-----------
RETAILERS - 2.9%
Alloy Online, Inc.*............................................................... 9,700 109,125
Ames Department Stores, Inc.*..................................................... 8,000 62,000
Cost Plus, Inc.*.................................................................. 4,350 124,791
Fatbrain.com Inc.*................................................................ 8,300 54,729
iGo Corp.*....................................................................... 10,300 39,913
MSC Industrial Direct Co., Inc.*................................................. 18,500 387,344
Tuesday Morning Corp.*............................................................ 6,300 66,150
ValueVision International, Inc. - Class A*....................................... 12,200 292,800
Zany Brainy, Inc.*............................................................... 16,600 43,575
-----------
1,180,427
-----------
TELEPHONE SYSTEMS - 2.9%
Boston Communications Group, Inc.*................................................ 9,300 130,200
Clearnet Communications Inc.*.................................................... 13,000 360,953
GST Telecommunications, Inc.(a)*.................................................. 8,900 3,894
Lightbridge, Inc.*................................................................ 7,400 176,675
MGC Communications, Inc.*......................................................... 5,800 347,638
Talk.com, Inc.*.................................................................. 24,400 141,825
-----------
1,161,185
-----------
TEXTILES, CLOTHING & FABRICS - 4.8%
Cutter & Buck, Inc.*.............................................................. 6,800 53,975
Kenneth Cole Productions, Inc.*................................................... 6,600 264,000
Quiksilver, Inc.*................................................................ 20,800 323,700
Shoe Carnival, Inc.*............................................................. 10,700 66,875
Tarrant Apparel Group*........................................................... 14,000 125,125
Timberland Co. (The)*............................................................ 10,400 736,450
Tropical Sportswear International Corp.*......................................... 14,000 245,000
Vans, Inc.*....................................................................... 9,900 144,788
-----------
1,959,913
-----------
<CAPTION>
-----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION - 0.8%
American Classic Voyages Co.*..................................................... 8,300 $ 171,188
Railworks Corp.*.................................................................. 9,500 77,188
Wabtec Corp....................................................................... 7,969 82,678
-----------
331,054
-----------
Total Common Stocks (Cost $36,672,223) 38,031,613
-----------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------
PAR SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
---------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS - 7.7%
$257,002 American Express Centurion Bank, 6.65%,
due 07/10/00(b)....................... $ 257,002
257,002 Bank of America, 6.67%, due
03/22/01(b)........................... 257,002
128,501 Royal Bank of Scotland, 6.85%,
due 07/05/00(b)....................... 128,501
514,004 American Express Centurion Bank 7%,
due 07/07/00(b)....................... 514,004
128,501 First Union National Bank, 6.9%,
due 05/09/01(b)....................... 128,501
322,342 Fleet National Bank, 7.125%, due
10/31/00(b)........................... 322,342
257,002 Goldman Sachs, 6.64875%, 08/17/00(b).... 257,002
257,002 Janus Money Market Fund(b).............. 257,002
748,242 Merrimac Cash Fund-Premium Class(b)..... 748,242
257,002 BNP Paribas, 6.75%, due 07/05/00(b)..... 257,002
-----------
Total Short-Term Investments
(Cost $3,126,600) 3,126,600
-----------
</TABLE>
<TABLE>
<S> <C>
TOTAL INVESTMENTS - 101.0%
(Cost $39,798,822) 41,158,213
Other Assets and Liabilities (net) -
(1.0%) (389,930)
-------------
TOTAL NET ASSETS - 100.0% $ 40,768,283
=============
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security.
(a) Security is in Bankruptcy.
(b) Represents investment of collateral received from securities
lending transactions.
ADR - American Depositary Receipt
REIT - Real Estate Investment Trust
See notes to financial statements
<PAGE>
Cova Series Trust
Lord Abbett Growth and Income Portfolio
PORTFOLIO OF INVESTMENTS
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 93.8%
AEROSPACE & DEFENSE - 0.7%
Boeing Co........................................................................ 150,000 $ 6,271,875
------------
AUTOMOTIVE - 1.4%
General Motors Corp............................................................... 80,000 4,645,000
TRW Inc.......................................................................... 160,000 6,940,000
------------
11,585,000
------------
BANKING - 6.2%
Bank One Corp.................................................................... 280,000 7,437,500
Chase Manhattan Corp............................................................. 315,000 14,509,687
Fleet Boston Financial Corp...................................................... 460,000 15,640,000
Wells Fargo Co................................................................... 380,000 14,748,036
------------
52,335,223
------------
BEVERAGES, FOOD & TOBACCO - 1.3%
Archer-Daniels-Midland Co...................................................... 1,100,000 10,793,750
------------
CHEMICALS - 2.9%
Dow Chemical Co.................................................................. 510,000 15,395,625
Rohm & Haas Co................................................................... 250,000 8,625,000
------------
24,020,625
------------
COMPUTER SOFTWARE & PROCESSING - 4.6%
Cadence Design Systems, Inc.*.................................................... 400,000 8,150,000
Computer Sciences Corp.*.......................................................... 80,000 5,975,000
First Data Corp.................................................................. 210,000 10,421,250
Oracle Corp.*.................................................................... 170,000 14,290,625
------------
38,836,875
------------
COMPUTERS & INFORMATION - 4.2%
Apple Computer, Inc.*............................................................ 160,000 8,380,000
Compaq Computer Corp............................................................. 380,000 9,713,750
International Business Machines Corp............................................. 100,000 10,956,250
Sun Microsystems, Inc.*........................................................... 70,000 6,365,625
------------
35,415,625
------------
COSMETICS & PERSONAL CARE - 0.7%
Avon Products, Inc............................................................... 140,000 6,230,000
------------
ELECTRIC UTILITIES - 7.7%
Dominion Resources, Inc.......................................................... 420,000 18,007,500
Duke Energy Corp................................................................. 325,000 18,321,875
FirstEnergy Corp................................................................. 550,000 12,856,250
Reliant Energy, Inc.............................................................. 150,000 4,438,756
Unicom Corp...................................................................... 280,000 10,832,500
------------
64,456,881
------------
ELECTRONICS - 1.5%
General Motors Corp. - Class H*................................................... 11,881 1,042,558
Texas Instruments, Inc........................................................... 166,000 11,402,125
------------
12,444,683
------------
FINANCIAL SERVICES - 3.3%
Federal National Mortgage Association............................................ 270,000 14,090,625
Morgan Stanley Dean Witter & Co.................................................. 160,000 13,320,000
------------
27,410,625
------------
<CAPTION>
-------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
FOOD RETAILERS - 1.4%
Safeway, Inc.*................................................................... 260,000 $ 11,732,500
------------
FOREST PRODUCTS & PAPER - 1.9%
Bowater, Inc..................................................................... 260,000 11,472,500
International Paper Co........................................................... 140,000 4,184,760
------------
15,657,260
------------
HEALTH CARE PROVIDERS - 1.4%
HCA-The Healthcare Corp.......................................................... 400,000 12,150,000
------------
HEAVY MACHINERY - 1.8%
Deere & Co....................................................................... 412,700 15,273,117
------------
HOUSEHOLD PRODUCTS - 1.2%
Black & Decker Corp.............................................................. 250,000 9,828,125
------------
INDUSTRIAL - DIVERSIFIED - 4.6%
Honeywell International Inc...................................................... 400,000 13,475,000
Minnesota Mining & Manufacturing Co. (3M)........................................ 220,000 18,150,000
United Technologies Corp......................................................... 120,000 6,851,138
------------
38,476,138
------------
INSURANCE - 12.9%
Ace Ltd.......................................................................... 750,000 21,000,000
American General Corp............................................................ 330,000 20,130,000
Aon Corp......................................................................... 550,000 17,084,375
Cigna Corp....................................................................... 130,000 12,155,000
Jefferson-Pilot Corp............................................................. 250,000 14,109,375
St. Paul Co...................................................................... 250,000 8,531,250
UnitedHealth Group, Inc.......................................................... 175,000 15,006,250
------------
108,016,250
------------
MEDIA - BROADCASTING & PUBLISHING - 4.7%
Dow Jones & Co., Inc............................................................. 220,000 16,115,000
MediaOne Group, Inc.*............................................................ 130,000 8,620,788
Viacom Inc - Class B*............................................................ 220,000 15,001,250
------------
39,737,038
------------
MEDICAL SUPPLIES - 0.5%
Baxter International, Inc......................................................... 60,000 4,219,630
------------
METALS - 2.5%
Alcoa, Inc....................................................................... 530,000 15,370,600
USX - U.S. Steel Group, Inc...................................................... 300,000 5,568,750
------------
20,939,350
------------
OIL & GAS - 14.4%
BP Amoco Plc (ADR)............................................................... 400,000 22,625,000
Coastal Corp..................................................................... 380,000 23,132,500
Exxon Mobil Corp................................................................. 300,000 23,550,000
Schlumberger Ltd................................................................. 250,000 18,656,250
Tosco Corp....................................................................... 300,000 8,493,750
Total S.A. (ADR)................................................................. 240,000 18,435,000
Transocean Sedco Forex, Inc...................................................... 110,000 5,878,125
------------
120,770,625
------------
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Lord Abbett Growth and Income Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
PHARMACEUTICALS - 4.3%
American Home Products Corp...................................................... 400,000 $ 23,500,000
Pharmacia Corp................................................................... 240,000 12,397,450
------------
35,897,450
------------
RETAILERS - 1.8%
Consolidated Stores Corp.*....................................................... 580,000 6,960,000
Federated Department Stores, Inc.*............................................... 240,000 8,100,000
------------
15,060,000
------------
TELEPHONE SYSTEMS - 5.3%
Alltel Corp...................................................................... 170,000 10,529,375
AT&T Corp......................................................................... 36,500 1,154,312
Bell Atlantic Corp............................................................... 250,000 12,703,125
SBC Communications Corp.......................................................... 200,000 8,650,000
WorldCom, Inc*................................................................... 250,000 11,468,750
------------
44,505,562
------------
TRANSPORTATION - 0.6%
United Parcel Service, Inc. - Class B............................................. 85,000 5,015,000
------------
Total Common Stocks (Cost $749,779,079) 787,079,207
------------
</TABLE>
<TABLE>
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS - 2.5%
BEVERAGES, FOOD & TOBACCO - 1.3%
Seagram Co. Ltd.......................... 200,000 10,750,000
------------
ELECTRIC UTILITIES - 1.2%
Houston Industries, Inc................... 80,000 9,950,000
------------
Total Convertible Preferred Stocks (Cost
$17,843,874) 20,700,000
------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------
PAR SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
--------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS - 5.4%
$ 3,739,678 American Express Centurion Bank, 6.65%,
due 07/10/00(a)....................... $ 3,739,678
4,189,690 Bank of America, 6.67%,
due 03/22/01(a)....................... 4,189,690
1,869,838 Royal Bank of Scotland, 6.85%,
due 07/05/00(a)....................... 1,869,838
7,479,349 American Express Centurion Bank, 7%,
due 07/07/00(a)....................... 7,479,349
1,869,837 First Union National Bank, 6.9%,
due 05/09/01(a)....................... 1,869,837
3,640,413 Fleet National Bank, 7.125%,
due 10/31/00(a)....................... 3,640,413
3,739,676 Goldman Sachs, 6.64875%,
due 08/17/00(a)....................... 3,739,676
3,739,675 Janus Money Market Fund(a).............. 3,739,675
11,487,783 Merrimac Cash Fund-Premium Class(a)..... 11,487,783
3,739,676 BNP Paribas, 6.75%, due 07/05/00 (a).... 3,739,676
------------
Total Short-Term Investments
(Cost $45,495,615) 45,495,615
------------
</TABLE>
<TABLE>
<S> <C>
TOTAL INVESTMENTS - 101.7%
(Cost $813,118,568) 853,274,822
Other Assets and Liabilities (net) -
(1.7%) (13,862,664)
-------------
TOTAL NET ASSETS - 100.0% $ 839,412,158
=============
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security.
(a) Represents investment of collateral received from securities
lending transactions.
ADR - American Depositary Receipt
See notes to financial statements
<PAGE>
Cova Series Trust
Balanced Portfolio
PORTFOLIO OF INVESTMENTS
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
----------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 58.4%
AEROSPACE & DEFENSE - 0.6%
General Dynamics Corp.............................................................. 1,200 $ 62,700
---------
BANKING - 1.9%
Chase Manhattan Corp............................................................... 2,070 95,349
First Union Corp................................................................... 3,880 96,273
---------
191,622
---------
BEVERAGES, FOOD & TOBACCO - 3.9%
HJ Heinz Co........................................................................ 3,400 148,750
Ralston-Ralston Purina Group....................................................... 4,200 83,737
Sysco Corp......................................................................... 3,625 152,703
---------
385,190
---------
BUILDING MATERIALS - 1.8%
Martin Marietta Materials, Inc..................................................... 1,400 56,612
Masco Corp......................................................................... 6,815 123,096
---------
179,708
---------
CHEMICALS - 2.8%
Millipore Corp..................................................................... 2,760 208,035
Solutia, Inc....................................................................... 4,990 68,612
---------
276,647
---------
COMMUNICATIONS - 1.6%
Nokia Corp. (ADR).................................................................... 800 39,950
Nortel Networks Corp............................................................... 1,800 122,850
---------
162,800
---------
COMPUTER SOFTWARE & PROCESSING - 5.1%
BMC Software, Inc.*................................................................ 2,700 98,508
Cisco Systems, Inc.*............................................................... 2,400 152,550
First Data Corp.................................................................... 2,390 118,604
Microsoft Corp.*................................................................... 1,685 134,800
---------
504,462
---------
COMPUTERS & INFORMATION - 2.8%
Compaq Computer Corp............................................................... 2,210 56,493
Dell Computer Corp.*............................................................... 1,350 66,572
Electronic Data Systems Corp......................................................... 800 33,000
Hewlett-Packard Co................................................................... 950 118,631
---------
274,696
---------
CONTAINERS & PACKAGING - 1.8%
Avery-Dennison Corp................................................................ 1,810 121,496
Crown Cork & Seal, Inc............................................................. 3,480 52,200
---------
173,696
---------
COSMETICS & PERSONAL CARE - 1.2%
Estee Lauder Co.................................................................... 1,230 60,808
Gillette Co........................................................................ 1,640 57,297
---------
118,105
---------
ELECTRIC SERVICES - 0.7%
AES Corp.*......................................................................... 1,600 73,000
---------
<CAPTION>
----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
----------------------------------------------------------------------------------------------------
<S> <C> <C>
ELECTRIC UTILITIES - 1.3%
Cinergy Corp....................................................................... 2,460 $ 62,576
Duke Energy Corp................................................................... 1,110 62,576
---------
125,152
---------
ELECTRICAL EQUIPMENT - 1.2%
General Electric Co................................................................ 2,325 123,225
---------
ELECTRONICS - 4.4%
Adaptec, Inc.*..................................................................... 2,520 57,330
Altera Corp.*........................................................................ 810 82,569
Applied Materials, Inc.*............................................................. 530 48,031
Intel Corp........................................................................... 775 103,608
KLA-Tencor Corp.*.................................................................. 1,260 73,789
Maxim Integrated Products, Inc.*..................................................... 940 63,861
---------
429,188
---------
ENTERTAINMENT & LEISURE - 0.6%
Carnival Corp...................................................................... 2,800 54,600
---------
FINANCIAL SERVICES - 4.2%
Heller Financial, Inc.............................................................. 2,895 59,348
MBNA Corp.......................................................................... 5,490 148,916
Morgan Stanley Dean Witter & Co...................................................... 900 74,925
SLM Holding Corp................................................................... 3,563 133,390
---------
416,579
---------
FOREST PRODUCTS & PAPER - 0.9%
Mead Corp.......................................................................... 3,430 86,608
---------
HEAVY MACHINERY - 0.6%
Illinois Tool Works, Inc........................................................... 1,060 60,420
---------
HOUSEHOLD PRODUCTS - 0.9%
Energizer Holdings, Inc.*.......................................................... 3,200 58,400
Procter & Gamble Co.................................................................. 600 34,350
---------
92,750
---------
MEDIA - BROADCASTING & PUBLISHING - 0.5%
Time Warner, Inc..................................................................... 670 50,920
---------
MEDICAL SUPPLIES - 2.4%
Agilent Technologies, Inc.*.......................................................... 362 26,698
Baxter International, Inc.......................................................... 1,980 139,219
C.R. Bard, Inc..................................................................... 1,440 69,300
---------
235,217
---------
METALS - 1.1%
Alcoa, Inc......................................................................... 3,600 104,400
---------
OIL & GAS - 3.4%
Murphy Oil Corp.................................................................... 1,060 63,004
Ocean Energy, Inc.*................................................................ 6,505 92,290
Transocean Sedco Forex, Inc........................................................ 1,100 58,781
USX - Marathon Group............................................................... 4,940 123,809
---------
337,884
---------
PHARMACEUTICALS - 5.7%
Bristol-Myers Squibb Co............................................................ 1,945 113,296
Eli Lilly & Co..................................................................... 1,880 187,765
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Balanced Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
----------------------------------------------------------------------------------------------------
<S> <C> <C>
PHARMACEUTICALS - CONTINUED
Merck & Co., Inc................................................................... 1,550 $ 118,769
Schering-Plough Corp............................................................... 2,725 137,613
---------
557,443
---------
RESTAURANTS - 0.6%
Tricon Global Restaurants, Inc.*................................................... 2,140 60,455
---------
RETAILERS - 3.2%
Consolidated Stores Corp.*......................................................... 3,573 42,876
Lowes Co., Inc..................................................................... 2,400 98,550
<CAPTION>
----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
----------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAILERS - CONTINUED
Office Depot, Inc.*................................................................ 8,395 $ 52,469
Wal-Mart Stores, Inc............................................................... 2,090 120,436
---------
314,331
---------
TELEPHONE SYSTEMS - 3.2%
GTE Corp........................................................................... 1,700 105,825
SBC Communications Corp............................................................ 2,400 103,800
WorldCom, Inc*..................................................................... 2,250 103,219
---------
312,844
---------
Total Common Stocks (Cost $5,521,066) 5,764,642
---------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
PAR SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
-------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE DEBT - 12.2%
BANKING - 2.0%
$200,000 Norwest Financial............. 6.625% 07/15/2004 $ 195,052
----------
CHEMICALS - 1.6%
150,000 Du Pont (E.I.) de Nemours and
Co.......................... 8.250% 09/15/2006 157,426
----------
ENTERTAINMENT & LEISURE - 1.4%
150,000 Walt Disney Co. (The)......... 5.250% 11/10/2003 141,857
----------
FINANCIAL SERVICES - 5.8%
150,000 Associates Corp. of North
America..................... 5.800% 04/20/2004 140,693
150,000 General Motors Acceptance
Corp........................ 6.850% 06/17/2004 146,798
150,000 Household Finance Corp........ 6.000% 05/01/2004 141,475
150,000 Merrill Lynch & Co., Inc...... 6.550% 08/01/2004 145,317
----------
574,283
----------
RETAILERS - 1.4%
150,000 J.C. Penney Co., Inc.......... 7.600% 04/01/2007 132,913
----------
Total Corporate Debt (Cost
$1,289,481) 1,201,531
----------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS - 19.7%
U.S. GOVERNMENT AGENCY MORTGAGE BACKED SECURITIES - 7.0%
30,252 Federal Home Loan Mortgage
Corp........................ 6.500% 01/01/2012 29,194
29,373 Federal National Mortgage
Association................. 6.000% 03/01/2011 27,796
414,641 Federal National Mortgage
Association................. 6.000% 11/01/2013 392,370
71,429 Federal National Mortgage
Association................. 7.000% 02/01/2016 69,781
113,296 Government National Mortgage
Association................. 6.000% 01/15/2011 107,777
31,269 Government National Mortgage
Association................. 6.500% 03/15/2024 29,683
32,482 Government National Mortgage
Association................. 7.000% 07/20/2027 31,419
----------
688,020
----------
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Balanced Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
PAR SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
-------------------------------------------------------------------------
<C> <S> <C> <C> <C>
U.S. TREASURY SECURITIES - 12.7%
$150,000 U.S. Treasury Note............ 6.375% 08/15/2002 $ 149,813
300,000 U.S. Treasury Note............ 7.250% 05/15/2004 309,375
300,000 U.S. Treasury Note............ 6.625% 05/15/2007 306,281
150,000 U.S. Treasury Note............ 6.125% 08/15/2007 149,156
150,000 U.S. Treasury Note............ 5.625% 05/15/2008 144,703
200,000 U.S. Treasury Note............ 6.000% 08/15/2009 198,438
----------
1,257,766
----------
Total U.S. Government and
Agency Obligations (Cost
$2,009,708) 1,945,786
----------
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL INVESTMENTS - 90.3%
(Cost $8,820,254) 8,911,959
Other Assets and Liabilities (net) -
9.7% 952,172
-------------
TOTAL NET ASSETS - 100.0% $ 9,864,131
=============
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security.
ADR - American Depositary Receipt
See notes to financial statements
<PAGE>
Cova Series Trust
Equity Income Portfolio
PORTFOLIO OF INVESTMENTS
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
----------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 92.8%
AEROSPACE & DEFENSE - 1.9%
General Dynamics Corp............................................................. 1,200 $ 62,700
Raytheon Co....................................................................... 3,400 66,087
----------
128,787
----------
BANKING - 10.8%
Chase Manhattan Corp.............................................................. 2,850 131,278
Comerica, Inc..................................................................... 2,800 125,650
First Union Corp.................................................................. 4,000 99,250
Mellon Financial Corp............................................................. 3,700 134,819
National City Corp................................................................ 4,600 78,487
PNC Bank Corp..................................................................... 1,800 84,375
Union Planters Corp............................................................... 3,400 94,987
----------
748,846
----------
BEVERAGES, FOOD & TOBACCO - 5.8%
HJ Heinz Co....................................................................... 3,500 153,125
Ralston-Ralston Purina Group...................................................... 4,500 89,719
Sara Lee Corp..................................................................... 4,600 88,837
Sysco Corp........................................................................ 1,700 71,613
----------
403,294
----------
BUILDING MATERIALS - 3.7%
Martin Marietta Materials, Inc.................................................... 1,600 64,700
Masco Corp........................................................................ 6,500 117,406
Sherwin Williams Co............................................................... 3,500 74,156
----------
256,262
----------
CHEMICALS - 1.0%
Solutia, Inc...................................................................... 5,000 68,750
----------
COMPUTER SOFTWARE & PROCESSING - 4.9%
BMC Software, Inc.*............................................................... 1,600 58,375
First Data Corp................................................................... 3,000 148,875
Sungard Data Systems, Inc.*....................................................... 4,200 130,200
----------
337,450
----------
COMPUTERS & INFORMATION - 3.7%
Hewlett-Packard Co................................................................ 1,000 124,875
International Business Machines Corp.............................................. 1,200 131,475
----------
256,350
----------
CONTAINERS & PACKAGING - 1.4%
Crown Cork & Seal, Inc............................................................ 6,700 100,500
----------
COSMETICS & PERSONAL CARE - 1.0%
Gillette Co....................................................................... 1,900 66,381
----------
ELECTRIC UTILITIES - 6.1%
Cinergy Corp...................................................................... 3,400 86,488
Constellation Energy Group, Inc................................................... 3,200 104,200
Duke Energy Corp.................................................................. 2,600 146,575
New Century Energies, Inc......................................................... 2,800 84,000
----------
421,263
----------
ELECTRONICS - 2.1%
Intel Corp........................................................................ 1,100 147,056
----------
<CAPTION>
----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
----------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL SERVICES - 8.5%
Citigroup, Inc.................................................................... 2,300 $ 138,575
Federal National Mortgage Association............................................. 2,000 104,375
Heller Financial, Inc............................................................. 4,000 82,000
MBNA Corp......................................................................... 4,600 124,775
SLM Holding Corp.................................................................. 3,800 142,262
----------
591,987
----------
FOREST PRODUCTS & PAPER - 2.5%
Mead Corp......................................................................... 3,000 75,750
Temple Inland, Inc................................................................ 2,300 96,600
----------
172,350
----------
HEALTH CARE PROVIDERS - 1.0%
HCA-The Healthcare Corp........................................................... 2,400 72,900
----------
HEAVY MACHINERY - 1.0%
Illinois Tool Works, Inc.......................................................... 1,200 68,400
----------
HOUSEHOLD PRODUCTS - 0.9%
Energizer Holdings, Inc.*......................................................... 3,600 65,700
----------
MEDICAL SUPPLIES - 5.6%
Agilent Technologies, Inc.*......................................................... 381 28,099
Baxter International, Inc......................................................... 2,200 154,688
Becton Dickinson & Co............................................................. 2,400 68,850
C.R. Bard, Inc.................................................................... 2,800 134,750
----------
386,387
----------
METALS - 3.1%
Alcoa, Inc........................................................................ 4,400 127,600
USX - U.S. Steel Group, Inc....................................................... 4,700 87,244
----------
214,844
----------
OIL & GAS - 9.8%
Conoco Inc........................................................................ 5,700 125,400
Murphy Oil Corp................................................................... 1,400 83,213
National Fuel Gas Co.............................................................. 2,600 126,750
Ocean Energy, Inc.*............................................................... 5,900 83,706
Phillips Petroleum Co............................................................. 2,700 136,856
USX - Marathon Group.............................................................. 4,800 120,300
----------
676,225
----------
PHARMACEUTICALS - 4.0%
Merck & Co., Inc.................................................................. 1,700 130,263
Pharmacia Corp.................................................................... 2,856 147,620
----------
277,883
----------
REAL ESTATE - 3.4%
Archstone Communities Trust (REIT)................................................ 6,000 126,375
Prentiss Properties Trust (REIT).................................................. 4,500 108,000
----------
234,375
----------
RETAILERS - 5.5%
Consolidated Stores Corp.*........................................................ 3,800 45,600
Dillard's, Inc.................................................................... 6,200 75,950
Lowes Co., Inc.................................................................... 3,000 123,188
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust
Equity Income Portfolio
PORTFOLIO OF INVESTMENTS - CONTINUED
JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
----------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAILERS - CONTINUED
May Department Stores Co. (The)................................................... 4,100 $ 98,400
Office Depot, Inc.*............................................................... 5,800 36,250
----------
379,388
----------
TELEPHONE SYSTEMS - 5.1%
GTE Corp.......................................................................... 2,300 143,175
SBC Communications Corp........................................................... 3,000 129,750
WorldCom, Inc*.................................................................... 1,800 82,575
----------
355,500
----------
</TABLE>
<TABLE>
<S> <C>
TOTAL INVESTMENTS - 92.8%
(Cost $6,914,688) 6,430,878
Other Assets and Liabilities (net) -
7.2% 496,809
-------------
TOTAL NET ASSETS - 100.0% $ 6,927,687
=============
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security.
REIT - Real Estate Investment Trust
See notes to financial statements
<PAGE>
Cova Series Trust Growth & Income Equity Portfolio PORTFOLIO OF INVESTMENTS JUNE
30, 2000 (UNAUDITED) (PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
----------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 95.7%
AEROSPACE & DEFENSE - 1.0%
General Dynamics Corp............................................................. 3,200 $ 167,200
----------
BANKING - 3.0%
Chase Manhattan Corp.............................................................. 6,045 278,448
First Union Corp.................................................................. 8,350 207,184
----------
485,632
----------
BEVERAGES, FOOD & TOBACCO - 4.7%
HJ Heinz Co....................................................................... 9,000 393,750
Ralston-Ralston Purina Group..................................................... 11,000 219,312
Sysco Corp........................................................................ 3,760 158,390
----------
771,452
----------
BUILDING MATERIALS - 3.2%
Martin Marietta Materials, Inc.................................................... 3,800 153,662
Masco Corp....................................................................... 15,600 281,775
----------
435,437
----------
CHEMICALS - 2.7%
Millipore Corp.................................................................... 5,000 376,875
Solutia, Inc...................................................................... 4,650 63,937
----------
440,812
----------
COMMUNICATIONS - 2.8%
Nokia Corp. (ADR)................................................................. 2,720 135,830
Nortel Networks Corp.............................................................. 4,800 327,600
----------
463,430
----------
COMPUTER SOFTWARE & PROCESSING - 8.5%
BMC Software, Inc.*............................................................... 7,800 284,578
Cisco Systems, Inc.*.............................................................. 6,500 413,156
First Data Corp................................................................... 6,355 315,367
Microsoft Corp.*.................................................................. 4,800 384,000
----------
1,397,101
----------
COMPUTERS & INFORMATION - 4.7%
Compaq Computer Corp.............................................................. 5,900 150,819
Dell Computer Corp.*.............................................................. 4,500 221,906
Electronic Data Systems Corp...................................................... 2,200 90,750
Hewlett-Packard Co................................................................ 2,400 299,700
----------
763,175
----------
CONTAINERS & PACKAGING - 2.9%
Avery-Dennison Corp............................................................... 4,800 322,200
Crown Cork & Seal, Inc........................................................... 10,225 153,375
----------
475,575
----------
COSMETICS & PERSONAL CARE - 1.9%
Estee Lauder Co................................................................... 3,300 163,144
Gillette Co....................................................................... 4,000 139,750
----------
302,894
----------
ELECTRIC SERVICES - 2.2%
AES Corp.*........................................................................ 7,800 355,875
----------
<CAPTION>
----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
----------------------------------------------------------------------------------------------------
<S> <C> <C>
ELECTRIC UTILITIES - 1.3%
Cinergy Corp...................................................................... 2,378 $ 60,490
Duke Energy Corp.................................................................. 2,700 152,212
----------
212,702
----------
ELECTRICAL EQUIPMENT - 3.4%
General Electric Co............................................................... 7,725 409,425
----------
ELECTRONICS - 9.5%
Adaptec, Inc.*.................................................................... 6,580 149,695
Altera Corp.*..................................................................... 2,500 254,844
Applied Materials, Inc.*.......................................................... 3,700 335,312
Intel Corp........................................................................ 2,800 374,325
KLA-Tencor Corp.*................................................................. 4,000 234,250
Maxim Integrated Products, Inc.*.................................................. 3,200 217,400
----------
1,565,826
----------
ENTERTAINMENT & LEISURE - 0.7%
Carnival Corp..................................................................... 6,000 117,000
----------
FINANCIAL SERVICES - 6.5%
Heller Financial, Inc............................................................. 8,200 168,100
MBNA Corp........................................................................ 14,700 398,737
Morgan Stanley Dean Witter & Co................................................... 1,800 149,850
SLM Holding Corp.................................................................. 9,435 353,223
----------
1,069,910
----------
FOREST PRODUCTS & PAPER - 2.4%
Mead Corp......................................................................... 9,775 246,819
----------
HEAVY MACHINERY - 0.9%
Illinois Tool Works, Inc.......................................................... 2,650 151,050
----------
HOUSEHOLD PRODUCTS - 0.6%
Energizer Holdings, Inc.*......................................................... 8,466 154,505
Procter & Gamble Co............................................................... 1,600 91,600
----------
246,105
----------
MEDIA - BROADCASTING & PUBLISHING - 1.0%
Time Warner, Inc.................................................................. 2,100 159,600
----------
MEDICAL SUPPLIES - 4.7%
Agilent Technologies, Inc.*......................................................... 915 67,481
Baxter International, Inc......................................................... 5,200 365,625
Becton Dickinson & Co............................................................. 5,640 161,798
C.R. Bard, Inc.................................................................... 3,720 179,025
----------
773,929
----------
METALS - 1.6%
Alcoa, Inc........................................................................ 9,200 266,800
----------
OIL & GAS - 5.9%
Murphy Oil Corp................................................................... 2,750 163,453
Ocean Energy, Inc.*.............................................................. 11,000 156,063
Transocean Sedco Forex, Inc....................................................... 2,900 154,969
USX - Marathon Group............................................................. 13,080 327,818
Williams Companies, Inc........................................................... 3,800 158,413
----------
960,716
----------
</TABLE>
See notes to financial statements
<PAGE>
Cova Series Trust Growth & Income Equity Portfolio PORTFOLIO OF INVESTMENTS -
CONTINUED JUNE 30, 2000 (UNAUDITED)
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
----------------------------------------------------------------------------------------------------
<S> <C> <C>
PHARMACEUTICALS - 9.8%
Allergan Specialty Therapeutics, Inc.*................................................ 1 $ 9
Bristol-Myers Squibb Co........................................................... 5,100 297,075
Eli Lilly & Co.................................................................... 5,180 517,353
Merck & Co., Inc.................................................................. 4,840 370,865
Schering-Plough Corp.............................................................. 8,510 429,755
----------
1,615,057
----------
RESTAURANTS - 0.9%
Tricon Global Restaurants, Inc.*.................................................. 5,423 153,200
----------
RETAILERS - 4.1%
Consolidated Stores Corp.*....................................................... 11,881 142,572
Lowes Co., Inc.................................................................... 6,100 250,481
Office Depot, Inc.*.............................................................. 24,950 155,938
Wal-Mart Stores, Inc.............................................................. 6,360 366,495
----------
915,486
----------
TELEPHONE SYSTEMS - 4.8%
GTE Corp.......................................................................... 3,960 $ 246,510
<CAPTION>
----------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
----------------------------------------------------------------------------------------------------
<S> <C> <C>
TELEPHONE SYSTEMS - CONTINUED
SBC Communications Corp........................................................... 6,000 259,500
WorldCom, Inc*.................................................................... 6,000 275,250
----------
781,260
----------
</TABLE>
<TABLE>
<S> <C>
TOTAL INVESTMENTS - 95.7%
(Cost $14,388,046) 15,703,468
Other Assets and Liabilities (net) -
4.3% 708,166
-------------
TOTAL NET ASSETS - 100.0% $ 16,411,634
=============
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security.
ADR - American Depositary Receipt
See notes to financial statements
<PAGE>
COVA SERIES TRUST
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Small Cap Stock Quality Bond Select Equity
Portfolio Portfolio Portfolio
---------------- ---------------- ----------------
<S> <C> <C> <C>
ASSETS
Investments, at value (Note 1)* $ 122,131,605 $ 96,188,543 $ 252,470,840
Cash 8,520,408 7,714,291 5,235,755
Cash denominated in foreign
currencies** -- 3,690 --
Receivable for investments sold 1,052,218 20,919 1,671,208
Receivable for Trust shares sold -- -- --
Dividends receivable 93,419 -- 229,385
Interest receivable 40,430 1,055,487 118,179
Net variation margin on
financial futures contracts
(Note 4) -- -- --
Unrealized appreciation on
forward currency contracts
(Note 5) -- -- --
-------------- -------------- --------------
Total assets 131,838,080 104,982,930 259,725,367
-------------- -------------- --------------
LIABILITIES
Payables for:
Investments purchased 2,220,548 -- 1,130,762
Delayed delivery investments -- 6,362,249 --
Trust shares redeemed 70,078 100,484 77,987
Net variation margin on
financial futures
contracts (Note 4) -- 8,156 --
Unrealized depreciation on
forward currency
contracts (Note 5) -- -- --
Securities on loan (Note 1) 16,242,249 7,081,663 12,385,500
Investment advisory fee
payable (Note 2) 75,294 29,096 135,691
Accrued expenses 40,767 30,628 143,541
-------------- -------------- --------------
Total liabilities 18,648,936 13,612,276 13,873,481
-------------- -------------- --------------
NET ASSETS $ 113,189,144 $ 91,370,654 $ 245,851,886
============== ============== ==============
NET ASSETS REPRESENTED BY:
Paid in surplus $ 83,158,583 $ 94,300,584 $ 227,876,088
Accumulated net realized gain
(loss) 14,854,265 (5,227,395) 6,205,625
Unrealized appreciation
(depreciation) on
investments, futures
contracts and foreign
currency 15,173,362 (665,840) 11,220,931
Undistributed net investment
income 2,934 2,963,305 549,242
-------------- -------------- --------------
Total $ 113,189,144 $ 91,370,654 $ 245,851,886
============== ============== ==============
Capital shares outstanding 6,777,725 8,779,470 16,592,820
============== ============== ==============
NET ASSET VALUE AND OFFERING PRICE
PER SHARE $16.700 $10.407 $14.817
============== ============== ==============
------------------------------------------------------------------------------------------
* Investments at cost $ 106,958,243 $ 96,730,082 $ 241,249,909
** Cost of cash denominated in
foreign currencies -- 1,430 --
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Mid-Cap
Large Cap Stock International Equity Bond Debenture Value
Portfolio Portfolio Portfolio Portfolio
---------------- -------------------- ---------------- ----------------
<S> <C> <C> <C> <C>
ASSETS
Investments, at value (Note 1)* $ 283,832,558 $ 146,833,876 $ 165,974,600 $ 37,708,022
Cash 5,687,979 78,098 5,576,599 3,417,122
Cash denominated in foreign
currencies** -- 2,192,675 -- --
Receivable for investments sold 242,051 968,279 1,927,965 66,998
Receivable for Trust shares sold -- -- -- 8,731
Dividends receivable 292,077 272,399 5,234 33,622
Interest receivable 28,772 77,651 2,655,773 15,993
Net variation margin on
financial futures contracts
(Note 4) 42,925 40,241 -- --
Unrealized appreciation on
forward currency contracts
(Note 5) -- 909,931 -- --
-------------- -------------- -------------- --------------
Total assets 290,126,362 151,373,150 176,140,171 41,250,488
-------------- -------------- -------------- --------------
LIABILITIES
Payables for:
Investments purchased 240,872 1,091,377 2,183,125 1,911,362
Delayed delivery investments 157,141 -- -- --
Trust shares redeemed 146,995 29,889 76,534 --
Net variation margin on
financial futures
contracts (Note 4) -- -- -- --
Unrealized depreciation on
forward currency
contracts (Note 5) -- 886,162 -- --
Securities on loan (Note 1) 13,099,200 11,422,790 8,583,656 241,320
Investment advisory fee
payable (Note 2) 147,617 88,747 90,240 32,299
Accrued expenses 47,247 129,288 41,082 22,454
-------------- -------------- -------------- --------------
Total liabilities 13,839,072 13,648,253 10,974,637 2,207,435
-------------- -------------- -------------- --------------
NET ASSETS $ 276,287,290 $ 137,724,897 $ 165,165,534 $ 39,043,053
============== ============== ============== ==============
NET ASSETS REPRESENTED BY:
Paid in surplus $ 254,900,513 $ 113,506,867 $ 168,748,274 $ 32,189,359
Accumulated net realized gain
(loss) (945,374) 13,124,814 (1,595,520) 3,672,127
Unrealized appreciation
(depreciation) on
investments, futures
contracts and foreign
currency 21,383,788 10,654,224 (8,617,025) 3,083,787
Undistributed net investment
income 948,363 438,992 6,629,805 97,780
-------------- -------------- -------------- --------------
Total $ 276,287,290 $ 137,724,897 $ 165,165,534 $ 39,043,053
============== ============== ============== ==============
Capital shares outstanding 14,899,044 9,478,465 13,974,772 2,996,199
============== ============== ============== ==============
NET ASSET VALUE AND OFFERING PRICE
PER SHARE $18.544 $14.530 $11.819 $13.031
============== ============== ============== ==============
----------------------------------------------------------------------------------------------------------------
* Investments at cost $ 262,362,102 $ 136,128,338 $ 174,591,625 $ 34,624,235
** Cost of cash denominated in
foreign currencies -- 2,183,379 -- --
</TABLE>
See notes to financial statements
<PAGE>
COVA SERIES TRUST
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Large Cap Developing Lord Abbett
Research Growth Growth and Income
Portfolio Portfolio Portfolio
----------------- ----------------- -----------------
<S> <C> <C> <C>
ASSETS
Investments, at value (Note 1)* $ 41,637,806 $ 41,158,213 $ 853,274,822
Cash 2,535,227 2,633,101 32,167,074
Receivable for investments sold -- 9,962 6,569,863
Receivable for Trust shares sold -- 131,073 --
Dividends receivable 66,000 1,340 1,498,959
Interest receivable 29,156 27,701 508,157
Receivable from investment adviser
(Note 2) -- -- --
--------------- --------------- ---------------
Total assets 44,268,189 43,961,390 894,018,875
--------------- --------------- ---------------
LIABILITIES
Payables for:
Investments purchased -- 3,718 8,175,518
Trust shares redeemed 26,242 -- --
Securities on loan (Note 1) 3,978,336 3,126,600 45,495,615
Investment advisory fee payable
(Note 2) 33,224 28,533 463,363
Accrued expenses 34,776 34,256 472,221
--------------- --------------- ---------------
Total liabilities 4,072,578 3,193,107 54,606,717
--------------- --------------- ---------------
NET ASSETS $ 40,195,611 $ 40,768,283 $ 839,412,158
=============== =============== ===============
NET ASSETS REPRESENTED BY:
Paid in surplus $ 38,196,019 $ 39,471,113 $ 791,592,156
Accumulated net realized gain 1,308,037 71,299 1,647,638
Unrealized appreciation
(depreciation) on investments,
futures contracts and foreign
currency 558,266 1,359,391 40,156,254
Undistributed (distributions in
excess of) net investment income 133,289 (133,520) 6,016,110
--------------- --------------- ---------------
Total $ 40,195,611 $ 40,768,283 $ 839,412,158
=============== =============== ===============
Capital shares outstanding 3,096,268 3,278,079 36,688,348
=============== =============== ===============
NET ASSET VALUE AND OFFERING PRICE PER
SHARE $12.982 $12.437 $22.880
=============== =============== ===============
-------------------------------------------------------------------------------------------------
* Investments at cost $ 41,079,540 $ 39,798,822 $ 813,118,568
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Growth & Income
Balanced Equity Income Equity
Portfolio Portfolio Portfolio
----------------- ----------------- -----------------
<S> <C> <C> <C>
ASSETS
Investments, at value (Note 1)* $ 8,911,959 $ 6,430,878 $ 15,703,468
Cash 908,148 474,926 717,686
Receivable for investments sold -- 15,063 --
Receivable for Trust shares sold -- -- --
Dividends receivable 4,566 11,618 11,980
Interest receivable 58,012 8,033 8,602
Receivable from investment adviser
(Note 2) -- 746 --
--------------- --------------- ---------------
Total assets 9,882,685 6,941,264 16,441,736
--------------- --------------- ---------------
LIABILITIES
Payables for:
Investments purchased -- -- --
Trust shares redeemed 1,751 2,297 5,997
Securities on loan (Note 1) -- -- --
Investment advisory fee payable
(Note 2) 8,086 -- 13,412
Accrued expenses 8,717 11,280 10,693
--------------- --------------- ---------------
Total liabilities 18,554 13,577 30,102
--------------- --------------- ---------------
NET ASSETS $ 9,864,131 $ 6,927,687 $ 16,411,634
=============== =============== ===============
NET ASSETS REPRESENTED BY:
Paid in surplus $ 9,389,867 $ 7,261,871 $ 14,337,317
Accumulated net realized gain 269,226 89,915 736,144
Unrealized appreciation
(depreciation) on investments,
futures contracts and foreign
currency 91,705 (483,810) 1,315,422
Undistributed (distributions in
excess of) net investment income 113,333 59,711 22,751
--------------- --------------- ---------------
Total $ 9,864,131 $ 6,927,687 $ 16,411,634
=============== =============== ===============
Capital shares outstanding 837,636 640,184 1,228,437
=============== =============== ===============
NET ASSET VALUE AND OFFERING PRICE PER
SHARE $11.776 $10.821 $13.360
=============== =============== ===============
-------------------------------------------------------------------------------------------------
* Investments at cost $ 8,820,254 $ 6,914,688 $ 14,388,046
</TABLE>
See notes to financial statements
<PAGE>
COVA SERIES TRUST
STATEMENTS OF OPERATIONS
FOR SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Small Cap Stock Quality Bond Select Equity
Portfolio Portfolio Portfolio
----------------- ----------------- -----------------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends (1) $ 383,180 $ -- $ 1,330,231
Interest (2) 194,582 3,252,598 135,239
---------------- ---------------- ----------------
Total investment income 577,762 3,252,598 1,465,470
---------------- ---------------- ----------------
EXPENSES
Investment advisory fee (Note 2) 475,544 247,693 810,557
Custody, fund accounting,
administration, and transfer
agent fees 75,942 61,219 75,887
Audit 8,580 9,403 8,580
Trustee fees and expenses 1,862 1,862 1,862
Legal 2,826 2,826 2,826
Shareholder reporting 10,230 8,084 15,723
---------------- ---------------- ----------------
Total expenses 574,984 331,087 915,435
Less expenses reimbursed by the
adviser -- 41,045 --
---------------- ---------------- ----------------
Net expenses 574,984 290,042 915,435
---------------- ---------------- ----------------
Net investment income 2,778 2,962,556 550,035
---------------- ---------------- ----------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS, FUTURES CONTRACTS
AND FOREIGN CURRENCY RELATED
TRANSACTIONS
Net realized gain (loss) on
investments 15,085,400 (2,450,027) 7,821,531
Net realized gain (loss) on futures
contracts -- 340,865 --
Net realized gain on foreign
currency related transactions -- -- --
---------------- ---------------- ----------------
Net realized gain (loss) on
investments, futures
contracts and foreign
currency related
transactions 15,085,400 (2,109,162) 7,821,531
---------------- ---------------- ----------------
Unrealized appreciation
(depreciation) on investments,
futures contracts and foreign
currency
Beginning of period 29,531,639 (3,085,537) 22,128,768
End of period 15,173,362 (665,840) 11,220,931
---------------- ---------------- ----------------
Net change in unrealized
appreciation (depreciation) on
investments, futures contracts
and foreign currency (14,358,277) 2,419,697 (10,907,837)
---------------- ---------------- ----------------
Net realized and unrealized gain
(loss) on investments, futures
contracts and foreign currency
related transactions 727,123 310,535 (3,086,306)
---------------- ---------------- ----------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 729,901 $ 3,273,091 $ (2,536,271)
================ ================ ================
-------------------------------------------------------------------------------------------------
(1) Dividend income is net of
withholding taxes of: $ -- $ -- $ 921
(2) Interest income includes security
lending income of: $ 43,992 $ 19,050 $ 5,997
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
Mid-Cap
Large Cap Stock International Equity Bond Debenture Value
Portfolio Portfolio Portfolio Portfolio
----------------- -------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends (1) $ 1,754,617 $ 1,300,431 $ 253,328 $ 254,539
Interest (2) 181,388 29,130 7,080,693 62,274
---------------- ---------------- ---------------- ----------------
Total investment income 1,936,005 1,329,561 7,334,021 316,813
---------------- ---------------- ---------------- ----------------
EXPENSES
Investment advisory fee (Note 2) 862,445 539,174 621,182 168,256
Custody, fund accounting,
administration, and transfer
agent fees 97,543 215,161 72,039 35,257
Audit 8,580 11,802 10,324 9,501
Trustee fees and expenses 1,862 1,862 1,862 1,862
Legal 2,826 2,826 2,826 2,826
Shareholder reporting 13,956 12,234 12,634 3,607
---------------- ---------------- ---------------- ----------------
Total expenses 987,212 783,059 720,867 221,309
Less expenses reimbursed by the
adviser -- -- 16,929 2,499
---------------- ---------------- ---------------- ----------------
Net expenses 987,212 783,059 703,938 218,810
---------------- ---------------- ---------------- ----------------
Net investment income 948,793 546,502 6,630,083 98,003
---------------- ---------------- ---------------- ----------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS, FUTURES CONTRACTS
AND FOREIGN CURRENCY RELATED
TRANSACTIONS
Net realized gain (loss) on
investments (471,380) 12,761,000 702,445 3,680,634
Net realized gain (loss) on futures
contracts (21,225) -- -- --
Net realized gain on foreign
currency related transactions -- 615,735 -- --
---------------- ---------------- ---------------- ----------------
Net realized gain (loss) on
investments, futures
contracts and foreign
currency related
transactions (492,605) 13,376,735 702,445 3,680,634
---------------- ---------------- ---------------- ----------------
Unrealized appreciation
(depreciation) on investments,
futures contracts and foreign
currency
Beginning of period 26,924,802 30,271,049 (3,658,955) 1,206,064
End of period 21,383,788 10,654,224 (8,617,025) 3,083,787
---------------- ---------------- ---------------- ----------------
Net change in unrealized
appreciation (depreciation) on
investments, futures contracts
and foreign currency (5,541,014) (19,616,825) (4,958,070) 1,877,723
---------------- ---------------- ---------------- ----------------
Net realized and unrealized gain
(loss) on investments, futures
contracts and foreign currency
related transactions (6,033,619) (6,240,090) (4,255,625) 5,558,357
---------------- ---------------- ---------------- ----------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (5,084,826) $ (5,693,588) $ 2,374,458 $ 5,656,360
================ ================ ================ ================
-----------------------------------------------------------------------------------------------------------------------
(1) Dividend income is net of
withholding taxes of: $ 10,774 $ 172,382 $ -- $ --
(2) Interest income includes security
lending income of: $ 12,228 $ 19,148 $ 15,990 $ 405
</TABLE>
See notes to financial statements.
<PAGE>
COVA SERIES TRUST
STATEMENTS OF OPERATIONS
FOR SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Large Cap Developing Lord Abbett
Research Growth Growth and Income
Portfolio Portfolio Portfolio
----------------- ----------------- -----------------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends (1) $ 308,744 $ 21,956 $ 8,210,864
Interest (2) 58,811 76,117 780,425
---------------- ---------------- ----------------
Total investment income 367,555 98,073 8,991,289
---------------- ---------------- ----------------
EXPENSES
Investment advisory fee (Note 2) 186,583 169,650 2,743,783
Custody, fund accounting,
administration, and transfer
agent fees 30,952 46,041 180,536
Audit 9,501 9,501 9,501
Trustee fees and expenses 1,862 1,862 1,862
Legal 2,826 2,826 2,826
Shareholder reporting 2,286 2,653 34,181
---------------- ---------------- ----------------
Total expenses 234,010 232,533 2,972,689
Less expenses reimbursed by the
adviser -- 296 --
---------------- ---------------- ----------------
Net expenses 234,010 232,237 2,972,689
---------------- ---------------- ----------------
Net investment income 133,545 (134,164) 6,018,600
---------------- ---------------- ----------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS, FUTURES CONTRACTS
AND FOREIGN CURRENCY RELATED
TRANSACTIONS
Net realized gain on investments 1,321,388 71,594 2,045,170
---------------- ---------------- ----------------
Unrealized appreciation
(depreciation) on investments,
futures contracts and foreign
currency
Beginning of period 3,702,361 6,233,807 67,801,952
End of period 558,266 1,359,391 40,156,254
---------------- ---------------- ----------------
Net change in unrealized
depreciation on investments,
futures contracts and foreign
currency (3,144,095) (4,874,416) (27,645,698)
---------------- ---------------- ----------------
Net realized and unrealized loss on
investments, futures contracts
and foreign currency related
transactions (1,822,707) (4,802,822) (25,600,528)
---------------- ---------------- ----------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ (1,689,162) $ (4,936,986) $ (19,581,928)
================ ================ ================
-------------------------------------------------------------------------------------------------
(1) Dividend income is net of
withholding taxes of: $ 1,053 $ -- $ 61,808
(2) Interest income includes security
lending income of: $ 3,703 $ 8,937 $ 113,765
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Growth & Income
Balanced Equity Income Equity
Portfolio Portfolio Portfolio
----------------- ----------------- -----------------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends (1) $ 34,994 $ 82,315 $ 89,256
Interest (2) 131,163 15,052 21,288
---------------- ---------------- ----------------
Total investment income 166,157 97,367 110,544
---------------- ---------------- ----------------
EXPENSES
Investment advisory fee (Note 2) 48,006 34,181 79,806
Custody, fund accounting,
administration, and transfer
agent fees 26,463 25,853 27,537
Audit 7,687 7,313 7,313
Trustee fees and expenses 1,862 1,862 1,862
Legal 2,826 2,826 2,826
Shareholder reporting 577 567 872
---------------- ---------------- ----------------
Total expenses 87,421 72,602 120,216
Less expenses reimbursed by the
adviser 34,609 34,999 32,421
---------------- ---------------- ----------------
Net expenses 52,812 37,603 87,795
---------------- ---------------- ----------------
Net investment income 113,345 59,764 22,749
---------------- ---------------- ----------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS, FUTURES CONTRACTS
AND FOREIGN CURRENCY RELATED
TRANSACTIONS
Net realized gain on investments 269,262 130,418 738,764
---------------- ---------------- ----------------
Unrealized appreciation
(depreciation) on investments,
futures contracts and foreign
currency
Beginning of period 477,859 (86,125) 2,349,356
End of period 91,705 (483,810) 1,315,422
---------------- ---------------- ----------------
Net change in unrealized
depreciation on investments,
futures contracts and foreign
currency (386,154) (397,685) (1,033,934)
---------------- ---------------- ----------------
Net realized and unrealized loss on
investments, futures contracts
and foreign currency related
transactions (116,892) (267,267) (295,170)
---------------- ---------------- ----------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ (3,547) $ (207,503) $ (272,421)
================ ================ ================
-------------------------------------------------------------------------------------------------
(1) Dividend income is net of
withholding taxes of: $ 28 $ -- $ 92
(2) Interest income includes security
lending income of: $ -- $ -- $ --
</TABLE>
See notes to financial statements
<PAGE>
COVA SERIES TRUST
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Small Cap Stock Quality Bond
Portfolio Portfolio
----------------------------------- -----------------------------------
Six months ended Year ended Six months ended Year ended
June 30, 2000 December 31, June 30, 2000 December 31,
(Unaudited) 1999 (Unaudited) 1999
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 2,778 $ 88,108 $ 2,962,556 $ 5,313,461
Net realized gain (loss) on
investments, futures contracts,
and foreign currency related
transactions 15,085,400 8,168,219 (2,109,162) (3,044,365)
Net change in unrealized
appreciation (depreciation) on
investments, futures contracts
and foreign currency related
transactions (14,358,277) 25,442,404 2,419,697 (3,536,555)
-------------- -------------- -------------- --------------
Net increase (decrease) in net
assets resulting from operations 729,901 33,698,731 3,273,091 (1,267,459)
-------------- -------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,301) (225,815) (5,358,301) (1,063,522)
Net realized gains (4,473,735) -- -- (532,208)
-------------- -------------- -------------- --------------
Total distributions (4,475,036) (225,815) (5,358,301) (1,595,730)
-------------- -------------- -------------- --------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 5,917,913 5,349,852 2,512,245 66,930,667
Net asset value of shares issued
through dividend reinvestment 4,475,036 225,815 5,358,301 1,595,730
Cost of shares repurchased (2,770,301) (7,898,260) (10,019,751) (15,870,190)
-------------- -------------- -------------- --------------
Net increase (decrease) in net
assets from capital
share transactions 7,622,648 (2,322,593) (2,149,205) 52,656,207
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 3,877,513 31,150,323 (4,234,415) 49,793,018
NET ASSETS:
Beginning period 109,311,631 78,161,308 95,605,069 45,812,051
-------------- -------------- -------------- --------------
End of period $ 113,189,144 $ 109,311,631 $ 91,370,654 $ 95,605,069
============== ============== ============== ==============
Net Assets at end of period includes
undistributed net investment
income $ 2,934 $ 1,457 $ 2,963,305 $ 5,359,050
============== ============== ============== ==============
CAPITAL SHARE TRANSACTIONS:
Beginning shares 6,330,087 6,523,058 8,960,770 4,157,310
-------------- -------------- -------------- --------------
Shares sold 328,739 433,399 232,767 6,125,624
Shares issued through dividend
reinvestment 275,833 18,118 516,874 150,560
Shares repurchased (156,934) (644,488) (930,941) (1,472,724)
-------------- -------------- -------------- --------------
Net increase (decrease) in shares
outstanding 447,638 (192,971) (181,300) 4,803,460
-------------- -------------- -------------- --------------
Ending shares 6,777,725 6,330,087 8,779,470 8,960,770
============== ============== ============== ==============
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Select Equity Large Cap Stock
Portfolio Portfolio
----------------------------------- -----------------------------------
Six months ended Year ended Six months ended Year ended
June 30, 2000 December 31, June 30, 2000 December 31,
(Unaudited) 1999 (Unaudited) 1999
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 550,035 $ 1,222,805 $ 948,793 $ 1,705,284
Net realized gain (loss) on
investments, futures contracts,
and foreign currency related
transactions 7,821,531 15,949,952 (492,605) 21,044,860
Net change in unrealized
appreciation (depreciation) on
investments, futures contracts
and foreign currency related
transactions (10,907,837) 3,971,464 (5,541,014) 10,578,973
-------------- -------------- -------------- --------------
Net increase (decrease) in net
assets resulting from operations (2,536,271) 21,144,221 (5,084,826) 33,329,117
-------------- -------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,210,437) (584,001) (1,704,999) (316,889)
Net realized gains (16,230,646) (19,820,406) (21,235,976) (6,916,352)
-------------- -------------- -------------- --------------
Total distributions (17,441,083) (20,404,407) (22,940,975) (7,233,241)
-------------- -------------- -------------- --------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 5,391,930 34,325,012 23,683,680 152,714,691
Net asset value of shares issued
through dividend reinvestment 17,441,083 20,404,407 22,940,975 7,233,241
Cost of shares repurchased (6,705,722) (3,535,467) (5,438,712) (26,677,903)
-------------- -------------- -------------- --------------
Net increase (decrease) in net
assets from capital
share transactions 16,127,291 51,193,952 41,185,943 133,270,029
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (3,850,063) 51,933,766 13,160,142 159,365,905
NET ASSETS:
Beginning period 249,701,949 197,768,183 263,127,148 103,761,243
-------------- -------------- -------------- --------------
End of period $ 245,851,886 $ 249,701,949 $ 276,287,290 $ 263,127,148
============== ============== ============== ==============
Net Assets at end of period includes
undistributed net investment
income $ 549,242 $ 1,209,644 $ 948,363 $ 1,704,569
============== ============== ============== ==============
CAPITAL SHARE TRANSACTIONS:
Beginning shares 15,497,466 12,301,851 12,726,910 5,727,886
-------------- -------------- -------------- --------------
Shares sold 345,020 2,116,682 1,203,684 8,057,353
Shares issued through dividend
reinvestment 1,179,463 1,303,210 1,241,655 375,063
Shares repurchased (429,129) (224,277) (273,205) (1,433,392)
-------------- -------------- -------------- --------------
Net increase (decrease) in shares
outstanding 1,095,354 3,195,615 2,172,134 6,999,024
-------------- -------------- -------------- --------------
Ending shares 16,592,820 15,497,466 14,899,044 12,726,910
============== ============== ============== ==============
<CAPTION>
International Equity
Portfolio
-----------------------------------
Six months ended Year ended
June 30, 2000 December 31,
(Unaudited) 1999
----------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 546,502 $ 704,396
Net realized gain (loss) on
investments, futures contracts,
and foreign currency related
transactions 13,376,735 8,612,909
Net change in unrealized
appreciation (depreciation) on
investments, futures contracts
and foreign currency related
transactions (19,616,825) 21,164,293
-------------- --------------
Net increase (decrease) in net
assets resulting from operations (5,693,588) 30,481,598
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (585,699) (565,919)
Net realized gains (8,527,635) (1,512,457)
-------------- --------------
Total distributions (9,113,334) (2,078,376)
-------------- --------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 9,540,658 11,679,051
Net asset value of shares issued
through dividend reinvestment 9,113,334 2,078,376
Cost of shares repurchased (4,193,326) (8,564,792)
-------------- --------------
Net increase (decrease) in net
assets from capital
share transactions 14,460,666 5,192,635
-------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (346,256) 33,595,857
NET ASSETS:
Beginning period 138,071,153 104,475,296
-------------- --------------
End of period $ 137,724,897 $ 138,071,153
============== ==============
Net Assets at end of period includes
undistributed net investment
income $ 438,992 $ 478,189
============== ==============
CAPITAL SHARE TRANSACTIONS:
Beginning shares 8,509,824 8,125,765
-------------- --------------
Shares sold 601,224 861,951
Shares issued through dividend
reinvestment 632,819 153,263
Shares repurchased (265,402) (631,155)
-------------- --------------
Net increase (decrease) in shares
outstanding 968,641 384,059
-------------- --------------
Ending shares 9,478,465 8,509,824
============== ==============
</TABLE>
See notes to financial statements
<PAGE>
COVA SERIES TRUST
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Bond Debenture Mid-Cap Value
Portfolio Portfolio
---------------------------------- ----------------------------------
Six months ended Year ended Six months ended Year ended
June 30, 2000 December 31, June 30, 2000 December 31,
(Unaudited) 1999 (Unaudited) 1999
----------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ 6,630,083 $ 10,881,164 $ 98,003 $ 123,771
Net realized gain (loss) on
investments, futures contracts,
and foreign currency related
transactions 702,445 (2,283,490) 3,680,634 459,652
Net change in unrealized
appreciation (depreciation) on
investments, futures contracts
and foreign currency related
transactions (4,958,070) (3,287,343) 1,877,723 821,269
-------------- -------------- -------------- --------------
Net increase (decrease) in net
assets resulting from operations 2,374,458 5,310,331 5,656,360 1,404,692
-------------- -------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (10,882,595) (3,223,792) (115,041) (33,769)
Net realized gains -- (1,044,699) (243,686) --
-------------- -------------- -------------- --------------
Total distributions (10,882,595) (4,268,491) (358,727) (33,769)
-------------- -------------- -------------- --------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 2,914,261 53,944,111 4,685,779 10,362,789
Net asset value of shares issued
through dividend reinvestment 10,882,595 4,268,491 358,727 33,769
Cost of shares repurchased (10,278,992) (9,101,140) (723,206) (663,920)
-------------- -------------- -------------- --------------
Net increase (decrease) in net
assets from capital
share transactions 3,517,864 49,111,462 4,321,300 9,732,638
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (4,990,273) 50,153,302 9,618,933 11,103,561
NET ASSETS:
Beginning period 170,155,807 120,002,505 29,424,120 18,320,559
-------------- -------------- -------------- --------------
End of period $ 165,165,534 $ 170,155,807 $ 39,043,053 $ 29,424,120
============== ============== ============== ==============
Net Assets at end of period includes
undistributed (distributions in
excess of) net investment income $ 6,629,805 $ 10,882,317 $ 97,780 $ 114,818
============== ============== ============== ==============
CAPITAL SHARE TRANSACTIONS:
Beginning shares 13,640,172 9,692,597 2,634,576 1,731,193
-------------- -------------- -------------- --------------
Shares sold 232,906 4,336,782 395,360 960,855
Shares issued through dividend
reinvestment 921,489 349,891 27,185 2,901
Shares repurchased (819,795) (739,098) (60,922) (60,373)
-------------- -------------- -------------- --------------
Net increase (decrease) in shares
outstanding 334,600 3,947,575 361,623 903,383
-------------- -------------- -------------- --------------
Ending shares 13,974,772 13,640,172 2,996,199 2,634,576
============== ============== ============== ==============
</TABLE>
-------------------
* Fund commenced operations on January 8, 1999.
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Large Cap Research Developing Growth
Portfolio Portfolio
---------------------------------- ----------------------------------
Six months ended Year ended Six months ended Year ended
June 30, 2000 December 31, June 30, 2000 December 31,
(Unaudited) 1999 (Unaudited) 1999
----------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ 133,545 $ 99,599 $ (134,164) $ (164,847)
Net realized gain (loss) on
investments, futures contracts,
and foreign currency related
transactions 1,321,388 3,703,701 71,594 2,631,357
Net change in unrealized
appreciation (depreciation) on
investments, futures contracts
and foreign currency related
transactions (3,144,095) 2,233,661 (4,874,416) 4,835,963
-------------- -------------- -------------- --------------
Net increase (decrease) in net
assets resulting from operations (1,689,162) 6,036,961 (4,936,986) 7,302,473
-------------- -------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (99,829) (43,197) -- --
Net realized gains (3,585,970) -- (2,070,624) --
-------------- -------------- -------------- --------------
Total distributions (3,685,799) (43,197) (2,070,624) --
-------------- -------------- -------------- --------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 6,714,450 16,222,683 12,434,665 11,026,779
Net asset value of shares issued
through dividend reinvestment 3,685,799 43,197 2,070,624 --
Cost of shares repurchased (827,590) (127,622) (286,509) (662,604)
-------------- -------------- -------------- --------------
Net increase (decrease) in net
assets from capital
share transactions 9,572,659 16,138,258 14,218,780 10,364,175
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 4,197,698 22,132,022 7,211,170 17,666,648
NET ASSETS:
Beginning period 35,997,913 13,865,891 33,557,113 15,890,465
-------------- -------------- -------------- --------------
End of period $ 40,195,611 $ 35,997,913 $ 40,768,283 $ 33,557,113
============== ============== ============== ==============
Net Assets at end of period includes
undistributed (distributions in
excess of) net investment income $ 133,289 $ 99,573 $ (133,520) $ 644
============== ============== ============== ==============
CAPITAL SHARE TRANSACTIONS:
Beginning shares 2,401,262 1,158,927 2,254,403 1,413,656
-------------- -------------- -------------- --------------
Shares sold 473,007 1,248,721 872,716 895,038
Shares issued through dividend
reinvestment 280,043 3,287 172,239 --
Shares repurchased (58,044) (9,673) (21,279) (54,291)
-------------- -------------- -------------- --------------
Net increase (decrease) in shares
outstanding 695,006 1,242,335 1,023,676 840,747
-------------- -------------- -------------- --------------
Ending shares 3,096,268 2,401,262 3,278,079 2,254,403
============== ============== ============== ==============
<CAPTION>
Lord Abbett
Growth and Income Portfolio
----------------------------------
Six months ended Period ended
June 30, 2000 December 31,
(Unaudited) 1999*
----------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ 6,018,600 $ 10,096,702
Net realized gain (loss) on
investments, futures contracts,
and foreign currency related
transactions 2,045,170 13,627,935
Net change in unrealized
appreciation (depreciation) on
investments, futures contracts
and foreign currency related
transactions (27,645,698) 67,801,952
-------------- --------------
Net increase (decrease) in net
assets resulting from operations (19,581,928) 91,526,589
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (10,099,192) --
Net realized gains (14,025,467) --
-------------- --------------
Total distributions (24,124,659) --
-------------- --------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 4,900,141 831,899,157
Net asset value of shares issued
through dividend reinvestment 24,124,659 --
Cost of shares repurchased (32,894,413) (36,437,388)
-------------- --------------
Net increase (decrease) in net
assets from capital
share transactions (3,869,613) 795,461,769
-------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (47,576,200) 886,988,358
NET ASSETS:
Beginning period 886,988,358 --
-------------- --------------
End of period $ 839,412,158 $ 886,988,358
============== ==============
Net Assets at end of period includes
undistributed (distributions in
excess of) net investment income $ 6,016,110 $ 10,096,702
============== ==============
CAPITAL SHARE TRANSACTIONS:
Beginning shares 36,849,506 --
-------------- --------------
Shares sold 210,321 38,459,861
Shares issued through dividend
reinvestment 1,041,818 --
Shares repurchased (1,413,297) (1,610,355)
-------------- --------------
Net increase (decrease) in shares
outstanding (161,158) 36,849,506
-------------- --------------
Ending shares 36,688,348 36,849,506
============== ==============
</TABLE>
-------------------
* Fund commenced operations on January 8, 1999.
See notes to financial statements
<PAGE>
COVA SERIES TRUST
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Balanced
Portfolio
-----------------------------------
Six months ended Year ended
June 30, 2000 December 31,
(Unaudited) 1999
----------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 113,345 $ 185,242
Net realized gain on investments,
futures contracts, and foreign
currency related transactions 269,262 148,258
Net change in unrealized
appreciation (depreciation) on
investments, futures contracts
and foreign currency related
transactions (386,154) 175,022
-------------- --------------
Net increase (decrease) in net
assets resulting from operations (3,547) 508,522
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (754) (185,699)
Net realized gains (66,570) (92,940)
-------------- --------------
Total distributions (67,324) (278,639)
-------------- --------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 808,361 5,153,301
Net asset value of shares issued
through dividend reinvestment 67,324 278,639
Cost of shares repurchased (668,330) (506,935)
-------------- --------------
Net increase in net assets from
capital share transactions 207,356 4,925,005
-------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 136,485 5,154,888
NET ASSETS:
Beginning period 9,727,646 4,572,758
-------------- --------------
End of period $ 9,864,131 $ 9,727,646
============== ==============
Net Assets at end of period includes
undistributed net investment
income $ 113,333 $ 742
============== ==============
CAPITAL SHARE TRANSACTIONS:
Beginning shares 820,358 401,205
-------------- --------------
Shares sold 69,588 436,860
Shares issued through dividend
reinvestment 5,737 23,528
Shares repurchased (58,047) (41,235)
-------------- --------------
Net increase in shares outstanding 17,278 419,153
-------------- --------------
Ending shares 837,636 820,358
============== ==============
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Equity Income Growth & Income Equity
Portfolio Portfolio
----------------------------------- -----------------------------------
Six months ended Year ended Six months ended Year ended
June 30, 2000 December 31, June 30, 2000 December 31,
(Unaudited) 1999 (Unaudited) 1999
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 59,764 $ 115,317 $ 22,749 $ 58,659
Net realized gain on investments,
futures contracts, and foreign
currency related transactions 130,418 199,162 738,764 230,954
Net change in unrealized
appreciation (depreciation) on
investments, futures contracts
and foreign currency related
transactions (397,685) (233,913) (1,033,934) 1,678,750
-------------- -------------- -------------- --------------
Net increase (decrease) in net
assets resulting from operations (207,503) 80,566 (272,421) 1,968,363
-------------- -------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,537) (112,474) -- (58,640)
Net realized gains -- (327,155) (232,645) (104,246)
-------------- -------------- -------------- --------------
Total distributions (1,537) (439,629) (232,645) (162,886)
-------------- -------------- -------------- --------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 387,706 2,550,012 628,656 5,893,218
Net asset value of shares issued
through dividend reinvestment 1,537 439,629 232,645 162,886
Cost of shares repurchased (223,032) (355,199) (362,644) (510,033)
-------------- -------------- -------------- --------------
Net increase in net assets from
capital share transactions 166,211 2,634,442 498,657 5,546,071
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (42,829) 2,275,379 (6,409) 7,351,548
NET ASSETS:
Beginning period 6,970,516 4,695,137 16,418,043 9,066,495
-------------- -------------- -------------- --------------
End of period $ 6,927,687 $ 6,970,516 $ 16,411,634 $ 16,418,043
============== ============== ============== ==============
Net Assets at end of period includes
undistributed net investment
income $ 59,711 $ 1,484 $ 22,751 $ 2
============== ============== ============== ==============
CAPITAL SHARE TRANSACTIONS:
Beginning shares 624,111 403,852 1,190,729 755,861
-------------- -------------- -------------- --------------
Shares sold 36,934 209,770 47,582 461,285
Shares issued through dividend
reinvestment 138 38,718 17,503 12,120
Shares repurchased (20,999) (28,229) (27,377) (38,537)
-------------- -------------- -------------- --------------
Net increase in shares outstanding 16,073 220,259 37,708 434,868
-------------- -------------- -------------- --------------
Ending shares 640,184 624,111 1,228,437 1,190,729
============== ============== ============== ==============
</TABLE>
See notes to financial statements
<PAGE>
COVA SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE HELD THROUGHOUT THE PERIODS INDICATED
<TABLE>
<CAPTION>
Small Cap Stock
Portfolio
--------------------------------------------------------------------------------------------
For the period
from May 1, 1996
Six months ended Year ended Year ended Year ended (date of initial
June 30, 2000 December 31, December 31, December 31, public offering) to
(Unaudited) 1999 1998 1997 December 31, 1996
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 17.269 $ 11.982 $ 13.105 $ 10.922 $ 10.512
------------ ---------- ---------- ---------- --------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income 0.000+ 0.015 0.051 0.057 0.057
Net realized and
unrealized
gains (losses) 0.119 5.307 (0.722) 2.217 0.843
------------ ---------- ---------- ---------- --------------
TOTAL FROM INVESTMENT
OPERATIONS 0.119 5.322 (0.671) 2.274 0.900
------------ ---------- ---------- ---------- --------------
DISTRIBUTIONS
Dividends from net
investment
income --+ (0.035) (0.017) (0.055) (0.055)
Distributions from
net realized
gains (0.688) -- (0.435) (0.036) (0.435)
------------ ---------- ---------- ---------- --------------
TOTAL DISTRIBUTIONS (0.688) (0.035) (0.452) (0.091) (0.490)
------------ ---------- ---------- ---------- --------------
NET ASSET VALUE, END OF PERIOD $ 16.700 $ 17.269 $ 11.982 $ 13.105 $ 10.922
------------ ---------- ---------- ---------- --------------
TOTAL RETURN 0.80%* 44.56% (5.40%) 20.89% 8.65%*
------------ ---------- ---------- ---------- --------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, end of period
(In millions) $ 113.2 $ 109.3 $ 78.2 $ 59.8 $ 14.7
RATIOS TO AVERAGE NET
ASSETS (1):
Expenses 1.03%** 1.05% 0.95% 0.95% 0.95%**
Net investment income 0.00%**(1) 0.11% 0.45% 0.56% 0.87%**
PORTFOLIO TURNOVER RATE 57.4%* 123.5% 62.4% 79.1% 102.4%*
(1)If certain expenses had not been reimbursed by the Adviser, total return
would have been lower and the ratios would have been as follows:
Ratio of Operating Expenses
to Average Net Assets: N/A 1.09% 1.12% 1.39% 2.68%**
Ratio of Net Investment
Income to Average Net
Assets: N/A 0.07% 0.28% 0.12% (0.86%)**
</TABLE>
* Non-annualized
** Annualized
+ Less than $.0005 per share (1) Amount is less than 0.00% N/A Not Applicable
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Quality Bond
Portfolio
--------------------------------------------------------------------------------------------
For the period
from May 1, 1996
Six months ended Year ended Year ended Year ended (date of initial
June 30, 2000 December 31, December 31, December 31, public offering) to
(Unaudited) 1999 1998 1997 December 31, 1996
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.669 $ 11.020 $ 10.405 $ 10.082 $ 9.897
------------ ---------- ---------- ---------- --------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income 0.386 0.459 0.490 0.446 0.459
Net realized and
unrealized
gains (losses) (0.001) (0.631) 0.365 0.452 0.102
------------ ---------- ---------- ---------- --------------
TOTAL FROM INVESTMENT
OPERATIONS 0.385 (0.172) 0.855 0.898 0.561
------------ ---------- ---------- ---------- --------------
DISTRIBUTIONS
Dividends from net
investment
income (0.647) (0.119) (0.240) (0.531) (0.376)
Distributions from
net realized
gains -- (0.060) -- (0.044) --
------------ ---------- ---------- ---------- --------------
TOTAL DISTRIBUTIONS (0.647) (0.179) (0.240) (0.575) (0.376)
------------ ---------- ---------- ---------- --------------
NET ASSET VALUE, END OF PERIOD $ 10.407 $ 10.669 $ 11.020 $ 10.405 $ 10.082
------------ ---------- ---------- ---------- --------------
TOTAL RETURN 3.65%* (1.54%) 8.37% 9.06% 5.68%*
------------ ---------- ---------- ---------- --------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, end of period
(In millions) $ 91.4 $ 95.6 $ 45.8 $ 18.6 $ 5.8
RATIOS TO AVERAGE NET
ASSETS (1):
Expenses 0.63%** 0.64% 0.65% 0.65% 0.65%**
Net investment income 6.47%** 5.67% 5.59% 5.92% 5.94%**
PORTFOLIO TURNOVER RATE 135.5%* 369.5% 255.4% 163.7% 181.3%*
(1)If certain expenses had not been reimbursed by the Adviser, total return
would have been lower and the ratios would have been as follows:
Ratio of Operating Expenses
to Average Net Assets: 0.72%** 0.71% 0.86% 1.08% 1.52%**
Ratio of Net Investment
Income to Average Net
Assets: 6.38%** 5.60% 5.38% 5.49% 5.07%**
</TABLE>
* Non-annualized
** Annualized
+ Less than $.0005 per share (1) Amount is less than 0.00% N/A Not Applicable
See notes to financial statements
<PAGE>
COVA SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE HELD THROUGHOUT THE PERIODS INDICATED
<TABLE>
<CAPTION>
Select Equity
Portfolio
--------------------------------------------------------------------------------------------
For the period
from May 1, 1996
Six months ended Year ended Year ended Year ended (date of initial
June 30, 2000 December 31, December 31, December 31, public offering) to
(Unaudited) 1999 1998 1997 December 31, 1996
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.112 $ 16.076 $ 13.966 $ 10.742 $ 10.084
------------ ---------- ---------- ---------- --------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income 0.034 0.074 0.091 0.078 0.081
Net realized and
unrealized
gains (losses) (0.197) 1.451 2.983 3.294 0.771
------------ ---------- ---------- ---------- --------------
TOTAL FROM INVESTMENT
OPERATIONS (0.163) 1.525 3.074 3.372 0.852
------------ ---------- ---------- ---------- --------------
DISTRIBUTIONS
Dividends from net
investment
income (0.079) (0.043) (0.046) (0.077) (0.081)
Distributions from
net realized
gains (1.053) (1.446) (0.918) (0.071) (0.113)
------------ ---------- ---------- ---------- --------------
TOTAL DISTRIBUTIONS (1.132) (1.489) (0.964) (0.148) (0.194)
------------ ---------- ---------- ---------- --------------
NET ASSET VALUE, END OF PERIOD $ 14.817 $ 16.112 $ 16.076 $ 13.966 $ 10.742
------------ ---------- ---------- ---------- --------------
TOTAL RETURN (0.97%)* 9.71% 22.56% 31.55% 8.52%*
------------ ---------- ---------- ---------- --------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, end of period
(In millions) $ 245.9 $ 249.7 $ 197.8 $ 106.9 $ 23.8
RATIOS TO AVERAGE NET
ASSETS (1):
Expenses 0.76%** 0.77% 0.78% 0.83% 0.85%**
Net investment income 0.46%** 0.55% 0.68% 0.81% 1.35%**
PORTFOLIO TURNOVER RATE 4.6%* 133.8% 182.9% 134.8% 123.9%*
(1)If certain expenses had not been reimbursed by the Adviser, total return
would have been lower and the ratios would have been as follows:
Ratio of Operating Expenses
to Average Net Assets: N/A N/A 0.86% 1.00% 1.70%**
Ratio of Net Investment
Income to Average Net
Assets: N/A N/A 0.60% 0.64% 0.50%**
</TABLE>
* Non-annualized
** Annualized
N/A Not Applicable
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Large Cap Stock
Portfolio
--------------------------------------------------------------------------------------------
For the period
from May 1, 1996
Six months ended Year ended Year ended Year ended (date of initial
June 30, 2000 December 31, December 31, December 31, public offering) to
(Unaudited) 1999 1998 1997 December 31, 1996
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 20.675 $ 18.115 $ 13.845 $ 11.112 $ 10.003
------------ ---------- ---------- ---------- --------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income 0.055 0.105 0.098 0.113 0.124
Net realized and
unrealized
gains (losses) (0.507) 3.057 4.357 3.560 1.304
------------ ---------- ---------- ---------- --------------
TOTAL FROM INVESTMENT
OPERATIONS (0.452) 3.162 4.455 3.673 1.428
------------ ---------- ---------- ---------- --------------
DISTRIBUTIONS
Dividends from net
investment
income (0.125) (0.026) (0.043) (0.118) (0.122)
Distributions from
net realized
gains (1.554) (0.576) (0.142) (0.822) (0.197)
------------ ---------- ---------- ---------- --------------
TOTAL DISTRIBUTIONS (1.679) (0.602) (0.185) (0.940) (0.319)
------------ ---------- ---------- ---------- --------------
NET ASSET VALUE, END OF PERIOD $ 18.544 $ 20.675 $ 18.115 $ 13.845 $ 11.112
------------ ---------- ---------- ---------- --------------
TOTAL RETURN (2.15%)* 17.64% 32.31% 33.25% 14.35%*
------------ ---------- ---------- ---------- --------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, end of period
(In millions) $ 276.3 $ 263.1 $ 103.8 $ 32.3 $ 16.8
RATIOS TO AVERAGE NET
ASSETS (1):
Expenses 0.74%** 0.75% 0.75% 0.75% 0.75%**
Net investment income 0.71%** 0.75% 0.77% 0.99% 1.56%**
PORTFOLIO TURNOVER RATE 30.1%* 63.2% 62.4% 59.5% 35.5%*
(1)If certain expenses had not been reimbursed by the Adviser, total return
would have been lower and the ratios would have been as follows:
Ratio of Operating Expenses
to Average Net Assets: N/A 0.76% 0.94% 1.08% 1.23%**
Ratio of Net Investment
Income to Average Net
Assets: N/A 0.74% 0.58% 0.66% 1.08%**
</TABLE>
* Non-annualized
** Annualized
N/A Not Applicable
See notes to financial statements
<PAGE>
COVA SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE HELD THROUGHOUT THE PERIODS INDICATED
<TABLE>
<CAPTION>
International Equity
Portfolio
--------------------------------------------------------------------------------------------
For the period
from May 1, 1996
Six months ended Year ended Year ended Year ended (date of initial
June 30, 2000 December 31, December 31, December 31, public offering) to
(Unaudited) 1999 1998 1997 December 31, 1996
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.225 $ 12.857 $ 11.472 $ 10.959 $ 10.215
------------ ---------- ---------- ---------- --------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income 0.056 0.083 0.117 0.122 0.096
Net realized and
unrealized
gains (losses) (0.723) 3.534 1.491 0.539 0.755
------------ ---------- ---------- ---------- --------------
TOTAL FROM INVESTMENT
OPERATIONS (0.667) 3.617 1.608 0.661 0.851
------------ ---------- ---------- ---------- --------------
DISTRIBUTIONS
Dividends from net
investment
income (0.066) (0.068) (0.220) (0.137) (0.086)
Distributions from
net realized
gains (0.962) (0.181) (0.003) (0.011) (0.021)
------------ ---------- ---------- ---------- --------------
TOTAL DISTRIBUTIONS (1.028) (0.249) (0.223) (0.148) (0.107)
------------ ---------- ---------- ---------- --------------
NET ASSET VALUE, END OF PERIOD $ 14.530 $ 16.225 $ 12.857 $ 11.472 $ 10.959
------------ ---------- ---------- ---------- --------------
TOTAL RETURN (4.08%)* 28.52% 14.07% 5.96% 8.44%*
------------ ---------- ---------- ---------- --------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, end of period
(In millions) $ 137.7 $ 138.1 $ 104.5 $ 68.8 $ 15.6
RATIOS TO AVERAGE NET
ASSETS (1):
Expenses 1.15%** 1.10% 0.91% 0.95% 0.95%**
Net investment income 0.80%** 0.62% 0.97% 1.35% 1.43%**
PORTFOLIO TURNOVER RATE 56.3%* 82.8% 74.0% 74.1% 48.2%*
(1)If certain expenses had not been reimbursed by the Adviser, total return
would have been lower and the ratios would have been as follows:
Ratio of Operating Expenses
to Average Net Assets: N/A 1.15% 1.09% 1.53% 3.80%**
Ratio of Net Investment
Income to Average Net
Assets: N/A 0.57% 0.79% 0.77% (1.42%)**
</TABLE>
* Non-annualized
** Annualized
N/A Not Applicable
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Bond Debenture
Portfolio
--------------------------------------------------------------------------------------------
For the period
from May 1, 1996
Six months ended Year ended Year ended Year ended (date of initial
June 30, 2000 December 31, December 31, December 31, public offering) to
(Unaudited) 1999 1998 1997 December 31, 1996
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 12.475 $ 12.381 $ 12.112 $ 10.970 $ 10.098
------------ ---------- ---------- ---------- --------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income 0.509 0.710 0.682 0.544 0.345
Net realized and
unrealized
gains (losses) (0.333) (0.293) 0.072 1.147 0.949
------------ ---------- ---------- ---------- --------------
TOTAL FROM INVESTMENT
OPERATIONS 0.176 0.417 0.754 1.691 1.294
------------ ---------- ---------- ---------- --------------
DISTRIBUTIONS
Dividends from net
investment
income (0.832) (0.244) (0.349) (0.549) (0.342)
Distributions from
net realized
gains -- (0.079) (0.136) -- (0.080)
------------ ---------- ---------- ---------- --------------
TOTAL DISTRIBUTIONS (0.832) (0.323) (0.485) (0.549) (0.422)
------------ ---------- ---------- ---------- --------------
NET ASSET VALUE, END OF PERIOD $ 11.819 $ 12.475 $ 12.381 $ 12.112 $ 10.970
------------ ---------- ---------- ---------- --------------
TOTAL RETURN 1.47%* 3.40% 6.26% 15.63% 12.89%*
------------ ---------- ---------- ---------- --------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, end of period
(In millions) $ 165.2 $ 170.2 $ 120.0 $ 55.4 $ 7.7
RATIOS TO AVERAGE NET
ASSETS (1):
Expenses 0.85%** 0.85% 0.85% 0.85% 0.85%**
Net investment income 8.01%** 6.74% 6.58% 6.68% 7.26%**
PORTFOLIO TURNOVER RATE 34.7%* 46.7% 84.7% 100.3% 58.1%*
(1)If certain expenses had not been reimbursed by the Adviser, total return
would have been lower and the ratios would have been as follows:
Ratio of Operating Expenses
to Average Net Assets: 0.87%** 0.86% 0.93% 1.07% 2.05%**
Ratio of Net Investment
Income to Average Net
Assets: 7.99%** 6.73% 6.50% 6.46% 6.06%**
</TABLE>
* Non-annualized
** Annualized
N/A Not Applicable
See notes to financial statements
<PAGE>
COVA SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE HELD THROUGHOUT THE PERIODS INDICATED
<TABLE>
<CAPTION>
Mid-Cap Value
Portfolio
-----------------------------------------------------------------------------------
For the period
from August 20, 1997
Six months ended Year ended Year ended (commencement
June 30, 2000 December 31, December 31, of operations) to
(Unaudited) 1999 1998 December 31, 1997
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.168 $ 10.583 $ 10.481 $ 10.000
-------------- -------------- -------------- --------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.028 0.042 0.032 0.010
Net realized and unrealized
gains (losses) 1.956 0.557 0.087 0.481
-------------- -------------- -------------- --------------
TOTAL FROM INVESTMENT OPERATIONS 1.984 0.599 0.119 0.491
-------------- -------------- -------------- --------------
DISTRIBUTIONS
Dividends from net
investment income (0.039) (0.014) (0.017) (0.010)
Distributions from net
realized gains (0.082) -- -- --
-------------- -------------- -------------- --------------
TOTAL DISTRIBUTIONS (0.121) (0.014) (0.017) (0.010)
-------------- -------------- -------------- --------------
NET ASSET VALUE, END OF PERIOD $ 13.031 $ 11.168 $ 10.583 $ 10.481
-------------- -------------- -------------- --------------
TOTAL RETURN 17.72%* 5.71% 1.11% 4.90%*
-------------- -------------- -------------- --------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, end of period (In
millions) $ 39.0 $ 29.4 $ 18.3 $ 2.2
RATIOS TO AVERAGE NET ASSETS (1):
Expenses 1.30%** 1.25% 1.10% 1.10%**
Net investment income 0.58%** 0.50% 0.44% 0.97%**
PORTFOLIO TURNOVER RATE 47.8%* 64.3% 41.0% 1.5%*
(1)If certain expenses had not been reimbursed by the Adviser, total return
would have been lower and the ratios would have been as follows:
Ratio of Operating Expenses to
Average Net Assets: 1.31%** 1.41% 1.68% 8.41%**
Ratio of Net Investment Income to
Average Net Assets: 0.57%** 0.34% (0.14%) (6.34%)**
</TABLE>
* Non-annualized
** Annualized
N/A Not Applicable
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Large Cap Research
Portfolio
-----------------------------------------------------------------------------------
For the period
from August 20, 1997
Six months ended Year ended Year ended (commencement
June 30, 2000 December 31, December 31, of operations) to
(Unaudited) 1999 1998 December 31, 1997
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.991 $ 11.964 $ 9.905 $ 10.000
-------------- -------------- -------------- --------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.038 0.026 0.069 0.017
Net realized and unrealized
gains (losses) (0.736) 3.023 2.023 (0.096)
-------------- -------------- -------------- --------------
TOTAL FROM INVESTMENT OPERATIONS (0.698) 3.049 2.092 (0.079)
-------------- -------------- -------------- --------------
DISTRIBUTIONS
Dividends from net
investment income (0.036) (0.022) (0.033) (0.016)
Distributions from net
realized gains (1.275) -- -- --
-------------- -------------- -------------- --------------
TOTAL DISTRIBUTIONS (1.311) (0.022) (0.033) (0.016)
-------------- -------------- -------------- --------------
NET ASSET VALUE, END OF PERIOD $ 12.982 $ 14.991 $ 11.964 $ 9.905
-------------- -------------- -------------- --------------
TOTAL RETURN (4.78%)* 25.54% 21.04% (0.74%)*
-------------- -------------- -------------- --------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, end of period (In
millions) $ 40.2 $ 36.0 $ 13.9 $ 1.4
RATIOS TO AVERAGE NET ASSETS (1):
Expenses 1.25%** 1.25% 1.10% 1.10%**
Net investment income 0.72%** 0.41% 0.97% 1.53%**
PORTFOLIO TURNOVER RATE 38.5%* 67.7% 103.0% 1.3%*
(1)If certain expenses had not been reimbursed by the Adviser, total return
would have been lower and the ratios would have been as follows:
Ratio of Operating Expenses to
Average Net Assets: N/A 1.38% 1.95% 10.04%**
Ratio of Net Investment Income to
Average Net Assets: N/A 0.28% 0.12% (7.41%)**
</TABLE>
* Non-annualized
** Annualized
N/A Not Applicable
See notes to financial statements
<PAGE>
COVA SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE HELD THROUGHOUT THE PERIODS INDICATED
<TABLE>
<CAPTION>
Developing Growth
Portfolio
-----------------------------------------------------------------------------------
For the period
from August 20, 1997
Six months ended Year ended Year ended (commencement
June 30, 2000 December 31, December 31, of operations) to
(Unaudited) 1999 1998 December 31, 1997
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.885 $ 11.241 $ 10.549 $ 10.000
-------------- -------------- -------------- --------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (0.041) (0.073) (0.025) 0.002
Net realized and unrealized
gains (losses) (1.734) 3.717 0.723 0.549
-------------- -------------- -------------- --------------
TOTAL FROM INVESTMENT OPERATIONS (1.775) 3.644 0.698 0.551
-------------- -------------- -------------- --------------
DISTRIBUTIONS
Dividends from net investment
income -- -- -- (0.002)
Distributions from net realized
gains (0.673) -- (0.006) --
-------------- -------------- -------------- --------------
TOTAL DISTRIBUTIONS (0.673) -- (0.006) (0.002)
-------------- -------------- -------------- --------------
NET ASSET VALUE, END OF PERIOD $ 12.437 $ 14.885 $ 11.241 $ 10.549
-------------- -------------- -------------- --------------
TOTAL RETURN (11.78%)* 32.47%* 6.60% 5.52%*
-------------- -------------- -------------- --------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, end of period (In millions) $ 40.8 $ 33.6 $ 15.9 $ 1.7
RATIOS TO AVERAGE NET ASSETS (1):
Expenses 1.23%** 1.15% 1.00% 1.00%**
Net investment income (0.71%)** (0.73%) (0.47%) 0.18%**
PORTFOLIO TURNOVER RATE 26.0%* 53.2% 18.7% 9.1%*
(1)If certain expenses had not been reimbursed by the Adviser, total return
would have been lower and the ratios would have been as follows:
Ratio of Operating Expenses to Average
Net Assets: 1.23%** 1.34% 1.70% 9.00%**
Ratio of Net Investment Income to Average
Net Assets: (0.71%)** (0.92%) (1.17%) (7.82%)**
</TABLE>
* Non-annualized
** Annualized
N/A Not Applicable
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Lord Abbett Growth and Income
Portfolio
-----------------------------------------
For the period
from January 8, 1999
Six months ended (commencement
June 30, 2000 of operations) to
(Unaudited) December 31, 1999
<S> <C> <C>
-----------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 24.071 $ 21.603
-------------- --------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.173 0.274
Net realized and unrealized gains
(losses) (0.688) 2.194
-------------- --------------
TOTAL FROM INVESTMENT OPERATIONS (0.515) 2.468
-------------- --------------
DISTRIBUTIONS
Dividends from net investment income (0.283) --
Distributions from net realized gains (0.393) --
-------------- --------------
TOTAL DISTRIBUTIONS (0.676) --
-------------- --------------
NET ASSET VALUE, END OF PERIOD $ 22.880 $ 24.071
-------------- --------------
TOTAL RETURN (2.17%)* 11.38%*
-------------- --------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, end of period (In millions) $ 839.4 $ 887.0
RATIOS TO AVERAGE NET ASSETS (1):
Expenses 0.70%** 0.70%**
Net investment income 1.43%** 1.24%**
PORTFOLIO TURNOVER RATE 28.6%* 70.8%*
(1)If certain expenses had not been reimbursed by the Adviser, total return
would have been lower and the ratios would have been as follows:
Ratio of Operating Expenses to Average Net
Assets: N/A N/A
Ratio of Net Investment Income to Average Net
Assets: N/A N/A
<CAPTION>
Balanced
Portfolio
--------------------------------------------------------------------------------
For the period
from July 1, 1997
Six months ended Year ended Year ended (commencement
June 30, 2000 December 31, December 31, of operations) to
(Unaudited) 1999 1998 December 31, 1997
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.858 $ 11.398 $ 10.389 $ 10.000
-------------- -------------- -------------- --------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.135 0.232 0.223 0.123
Net realized and unrealized gains
(losses) (0.136) 0.581 1.152 0.477
-------------- -------------- -------------- --------------
TOTAL FROM INVESTMENT OPERATIONS (0.001) 0.813 1.375 0.600
-------------- -------------- -------------- --------------
DISTRIBUTIONS
Dividends from net investment income (0.001) (0.233) (0.222) (0.124)
Distributions from net realized gains (0.080) (0.120) (0.144) (0.087)
-------------- -------------- -------------- --------------
TOTAL DISTRIBUTIONS (0.081) (0.353) (0.366) (0.211)
-------------- -------------- -------------- --------------
NET ASSET VALUE, END OF PERIOD $ 11.776 $ 11.858 $ 11.398 $ 10.389
-------------- -------------- -------------- --------------
TOTAL RETURN 0.01%* 7.14% 13.31% 6.01%*
-------------- -------------- -------------- --------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, end of period (In millions) $ 9.9 $ 9.7 $ 4.6 $ 1.5
RATIOS TO AVERAGE NET ASSETS (1):
Expenses 1.10%** 1.10% 1.10% 1.10%*
*
Net investment income 2.36%** 2.52% 2.54% 2.74%*
*
PORTFOLIO TURNOVER RATE 23.3%* 27.4% 36.0% 13.6%*
(1) If certain expenses had not been reimbursed by
the Adviser, total return would have been lower
and the ratios would have been as follows:
Ratio of Operating Expenses to Average Net
Assets: 1.82%** 2.06% 3.08% 3.81%*
*
Ratio of Net Investment Income to Average Net
Assets: 1.64%** 1.56% 0.56% 0.03%*
*
</TABLE>
* Non-annualized
** Annualized
N/A Not Applicable
See notes to financial statements
<PAGE>
COVA SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE HELD THROUGHOUT THE PERIODS INDICATED
<TABLE>
<CAPTION>
Equity Income
Portfolio
--------------------------------------------------------------------------------
For the period
from July 1, 1997
Six months ended Year ended Year ended (commencement
June 30, 2000 December 31, December 31, of operations) to
(Unaudited) 1999 1998 December 31, 1997
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.169 $ 11.626 $ 11.047 $ 10.000
-------------- -------------- -------------- --------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.093 0.194 0.167 0.074
Net realized and unrealized
gains (losses) (0.439) 0.107 0.862 1.192
-------------- -------------- -------------- --------------
TOTAL FROM INVESTMENT OPERATIONS (0.346) 0.301 1.029 1.266
-------------- -------------- -------------- --------------
DISTRIBUTIONS
Dividends from net
investment income (0.002) (0.190) (0.167) (0.074)
Distributions from net
realized gains -- (0.568) (0.283) (0.145)
-------------- -------------- -------------- --------------
TOTAL DISTRIBUTIONS (0.002) (0.758) (0.450) (0.219)
-------------- -------------- -------------- --------------
NET ASSET VALUE, END OF PERIOD $ 10.821 $ 11.169 $ 11.626 $ 11.047
-------------- -------------- -------------- --------------
TOTAL RETURN (3.11%)* 2.51% 9.35% 12.69%*
-------------- -------------- -------------- --------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, end of period (In
millions) $ 6.9 $ 7.0 $ 4.7 $ 1.7
RATIOS TO AVERAGE NET ASSETS (1):
Expenses 1.10%** 1.10% 1.10% 1.10%**
Net investment income 1.75%** 1.85% 1.79% 1.65%**
PORTFOLIO TURNOVER RATE 27.4%* 58.8% 79.4% 17.9%*
(1)If certain expenses had not been reimbursed by the Adviser, total return
would have been lower and the ratios would have been as follows:
Ratio of Operating Expenses to
Average Net Assets: 2.12%** 2.23% 2.69% 3.58%**
Ratio of Net Investment Income to
Average Net Assets: 0.73%** 0.72% 0.20% (0.83%)**
</TABLE>
* Non-annualized
** Annualized
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Growth & Income Equity
Portfolio
--------------------------------------------------------------------------------
For the period
from July 1, 1997
Six months ended Year ended Year ended (commencement
June 30, 2000 December 31, December 31, of operations) to
(Unaudited) 1999 1998 December 31, 1997
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.788 $ 11.995 $ 10.710 $ 10.000
-------------- -------------- -------------- --------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.019 0.049 0.057 0.033
Net realized and unrealized
gains (losses) (0.255) 1.890 1.538 0.793
-------------- -------------- -------------- --------------
TOTAL FROM INVESTMENT OPERATIONS (0.236) 1.939 1.595 0.826
-------------- -------------- -------------- --------------
DISTRIBUTIONS
Dividends from net
investment income -- (0.049) (0.058) (0.032)
Distributions from net
realized gains (0.192) (0.097) (0.252) (0.084)
-------------- -------------- -------------- --------------
TOTAL DISTRIBUTIONS (0.192) (0.146) (0.310) (0.116)
-------------- -------------- -------------- --------------
NET ASSET VALUE, END OF PERIOD $ 13.360 $ 13.788 $ 11.995 $ 10.710
-------------- -------------- -------------- --------------
TOTAL RETURN (1.72%)* 16.17% 14.95% 8.26%*
-------------- -------------- -------------- --------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, end of period (In
millions) $ 16.4 $ 16.4 $ 9.1 $ 2.4
RATIOS TO AVERAGE NET ASSETS (1):
Expenses 1.10%** 1.10% 1.10% 1.10%**
Net investment income 0.29%** 0.45% 0.65% 0.87%**
PORTFOLIO TURNOVER RATE 32.7%* 37.8% 57.5% 18.1%*
(1)If certain expenses had not been reimbursed by the Adviser, total return
would have been lower and the ratios would have been as follows:
Ratio of Operating Expenses to
Average Net Assets: 1.51%** 1.59% 2.00% 3.51%**
Ratio of Net Investment Income to
Average Net Assets: (0.12%)** (0.04%) (0.25%) (1.54%)**
</TABLE>
* Non-annualized
** Annualized
See notes to financial statements
<PAGE>
COVA SERIES TRUST
Notes to Financial Statements (Unaudited)
June 30, 2000
1. SIGNIFICANT ACCOUNTING POLICIES
Cova Series Trust (the Trust) is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the 1940 Act). The
Trust offers thirteen diversified portfolios (each, a Fund and collectively, the
Funds) each of which operates as a distinct investment vehicle of the Trust.
J.P. Morgan Investment Management Inc. manages the Small Cap Stock Portfolio,
Quality Bond Portfolio, Select Equity Portfolio, Large Cap Stock Portfolio, and
International Equity Portfolio. Lord, Abbett & Co. manages the Bond Debenture
Portfolio, Mid-Cap Value Portfolio, Large Cap Research Portfolio, Developing
Growth Portfolio, and Lord Abbett Growth and Income Portfolio. FIRSTAR
Investment and Research Management Company, LLC, "FIRMCO", (formerly Mississippi
Valley Advisors Inc.) manages the Balanced Portfolio, Equity Income Portfolio
and Growth & Income Equity Portfolio.
The Small Cap Stock Portfolio, Quality Bond Portfolio, Select Equity Portfolio,
Large Cap Stock Portfolio, International Equity Portfolio and Bond Debenture
Portfolio commenced operations on April 2, 1996. The Balanced Portfolio, Equity
Income Portfolio and Growth & Income Equity Portfolio commenced operations on
July 1, 1997. The Mid-Cap Value Portfolio, Large Cap Research Portfolio and
Developing Growth Portfolio commenced operations on August 20, 1997. The Lord
Abbett Growth and Income Portfolio commenced operations on January 8, 1999. The
Riggs U.S. Government Securities Portfolio and Riggs Stock Portfolio, managed by
Riggs Bank N.A., ceased operations on June 29, 2000.
The preparation of financial statements in conformity with generally accepted
accounting principles may require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from these estimates.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements.
A. SECURITY VALUATION - Investments in securities listed on a securities
exchange are valued at their sale price as of the close of such securities
exchange. If there was no sale on such day, the securities are valued at the
mean between the most recently quoted bid and asked prices. Investments in
securities not listed on a securities exchange are valued based on their last
quoted bid price or, if not available, their fair value as determined in good
faith by the Board of Trustees. Domestic fixed income investments are stated at
values using the mean between the most recently quoted bid and asked prices.
Foreign fixed income securities are valued at their sale price as of the close
of the securities exchange on which the securities are listed. If such
valuations are not available, estimates obtained from yield data relating to
instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Board of Trustees are used.
Short-term securities with remaining maturities of less than 60 days are valued
at amortized cost, which approximates market value.
Under the amortized cost method, investments are recorded at cost and any
discount or premium is accreted or amortized, respectively, on a straight line
basis to the maturity of the investment. Value on any given date equals original
cost plus or minus accreted discount or amortized premium, respectively, to that
date. Futures contracts and options are valued based upon their daily settlement
prices. Forward currency exchange contracts are valued at forward rates and are
marked-to-market daily.
B. SECURITY TRANSACTIONS - Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Funds may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Funds
segregate assets having an aggregate value at least equal to the amount of the
when issued or delayed delivery purchase commitments until payment is made.
C. INVESTMENT INCOME AND EXPENSES - Dividend income is recorded on the
ex-dividend date, or in the case of some foreign securities, on the date
thereafter when the Fund is made aware of the dividend. Interest income and
expenses are recorded when earned or incurred, respectively. Foreign income and
foreign capital gains realized on some foreign securities may be subject to
foreign withholding taxes, which are accrued as applicable.
D. FEDERAL INCOME TAXES - The Trust's policy is to comply with the requirements
of Subchapter M of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income, including
net realized gains, if any, to its shareholders. Accordingly, the Funds have not
recorded a provision for federal income taxes. In addition, any Funds subject to
federal excise tax regulations will distribute substantially all of their net
investment income and net capital gains, if any, in each calendar year in order
to avoid the payment of federal excise taxes.
Distributions from net investment income and capital gains are determined in
accordance with federal income tax regulations which may differ from generally
accepted accounting principles. As a result, distributions from net investment
income and net realized capital gains may differ from their ultimate
characterization for federal income tax purposes due to timing differences. For
the Large Cap Stock, Quality Bond and International Equity Portfolios, net
realized gains and losses may differ for financial and tax reporting purposes
primarily as a result of timing differences.
E. DISTRIBUTION OF INCOME AND GAINS - The Funds annually declare, pay and
automatically reinvest dividends from net investment income and distributions of
any net realized capital gains.
<PAGE>
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
F. DERIVATIVES - A derivative financial instrument, in general terms, is a
security whose value is "derived" from the value of an underlying asset,
reference rate or index. The Funds primarily use derivative instruments to
protect against possible changes in the market value of their investments. All
of the Funds' holdings, including derivative instruments, are marked to market
each day with the change in value reflected in unrealized
appreciation/depreciation of investments. Upon disposition, a realized gain or
loss is recognized accordingly.
The primary risks associated with the use of these financial instruments for
hedging purposes are the possibility of (a) an imperfect correlation between the
change in market value of the hedged securities held by the Funds and the change
in market value of these financial instruments, and (b) an illiquid market. As a
result, the use of these financial instruments may involve, to a varying degree,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities. The following are brief descriptions of derivative
instruments the Funds may hold.
A. FUTURES CONTRACTS - A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. These
contracts are generally used to provide the return of an index without
purchasing all of the securities underlying the index or as a temporary
substitute for purchasing or selling specific securities.
Upon entering into a futures contract, the Funds are required to make initial
margin deposits with the broker or segregate liquid investments to satisfy the
broker's margin requirements. Initial margin deposits are recorded as assets and
held in a segregated account at the custodian. During the period the futures
contract is open, changes in the value of the contract are recognized as
unrealized gains or losses by "marking to market" the contract on a daily basis
to reflect the value of the contract's settlement price at the end of each day's
trading. Variation margin payments are made or received and recognized as assets
due from or liabilities to the broker depending upon whether unrealized gains or
losses, respectively, are incurred. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the proceeds
from (or cost of) the closing transaction and its basis in the contract.
B. OPTIONS CONTRACTS - A purchased option contract gives the buyer the right,
but not the obligation, to buy (call) or sell (put) an underlying item at a
fixed exercise price during a specified period. These contracts are generally
used by the Funds to provide the return of an index without purchasing all of
the securities underlying the index or as a substitute for purchasing or selling
specific securities.
Purchases of put and call options are recorded as investments, the value of
which are market-to-market daily. When a purchased option expires, the Fund will
realize a loss equal to the premium paid. When the Fund enters into a closing
sale transaction, the Fund will realize a gain or loss depending on whether the
sales proceeds from the closing sale transaction are greater or less the cost of
the option. When the Fund exercises a put option, it 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 Fund exercises a call option,
the cost of the security which the Fund purchases upon exercise will be
increased by the premium originally paid.
The premium received for a written option is recorded as a liability. The
liability is marked-to-market daily based on the option's quoted market price.
When an option expires or the Fund enters into a closing purchase transaction,
the Fund realizes a gain (or loss if the cost of the closing purchase
transaction exceeds the premium received when the option was sold) without
regard to any unrealized gain or loss on the underlying security and the
liability related to such option is eliminated. When a written call option is
exercised, the Fund realizes a gain or loss from the sale of the underlying
security and the proceeds from such sale are increased by the premium originally
received. If a written put option is exercised, the amount of the premium
originally received will reduce the cost of the underlying security purchased.
The risk associated with purchasing options is limited to the premium originally
paid. The risk in writing a call option is that the Fund may forego the
opportunity for profit if the market price of the underlying security increases
and the option is exercised. The risk in writing a put option is that the Fund
may incur a loss if the market price of the underlying security decreases and
the option is exercised this loss can be greater than premium received. In
addition, the Fund could be exposed to risks if the counterparties to the
transactions are unable to meet the terms of the contracts.
C. FORWARD FOREIGN CURRENCY CONTRACTS - The Quality Bond and International
Equity Portfolios may enter into forward foreign currency contracts to hedge
their portfolio holdings against future movements in certain foreign currency
exchange rates. A forward currency contract is a commitment to purchase or sell
a foreign currency at a future date at a set price. The forward currency
contracts are valued at the forward rate and are marked-to-market daily. The
change in market value is recorded by the Fund as an unrealized gain or loss.
When the contract is closed, the Fund recognizes a realized gain or loss equal
to the difference between the value of the contract at the time it was opened
and the value at the time it was closed.
The use of forward foreign currency contracts does not eliminate fluctuations in
the underlying prices of the securities of the Fund, but it does establish a
rate of exchange that can be achieved in the future. Although forward foreign
currency contracts to sell limit the risk of loss due to a decline in the value
of the currency holdings, they also limit any potential gain that might result
should the value of the currency increase. In addition, the Fund could be
exposed to risks if the counterparties to the contracts are unable to meet the
terms of the contracts.
G. SECURITY LENDING - The Funds may lend their securities to certain qualified
brokers. The loans are collateralized at all times with cash or securities with
a market value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Funds may bear the risk of delay in
recovery or even loss of rights in the collateral should the borrower
financially. The Funds receive compensation for lending their securities.
<PAGE>
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
H. FOREIGN CURRENCY TRANSLATION - Assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at the rate of exchange at the end
of the period. Purchases and sales of securities are translated at the rates of
exchange prevailing when such securities were acquired or sold. Income is
translated at rates of exchange prevailing when interest is accrued or dividends
are recorded.
The Fund does not isolate that portion of operations resulting from changes in
foreign exchange rates on investments from the fluctuations arising from changes
in market prices of securities held. Such fluctuations are included with the net
realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from activity in
forward foreign currency contracts, sales of foreign currencies, currency gains
or losses realized between the trade and settlement dates on securities
transactions, and the difference between the amounts of dividends, interest, and
foreign withholding taxes recorded on the Fund's books, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at fiscal year end, from
changes in the exchange rates of foreign currency held, and from changes in the
contract value of forward foreign currency contracts.
I. REPURCHASE AGREEMENTS - The Funds may enter into repurchase agreements with
selected commercial banks and broker-dealers, under which the Fund acquires
securities as collateral and agrees to resell the securities at an agreed upon
time and at an agreed upon price. The Fund accrues interest for the difference
between the amount it pays for the securities and the amount it receives upon
resale. At the time the Fund enters into a repurchase agreement, the value of
the collateral securities including accrued interest will be equal to or exceed
the value of the repurchase agreement and, for repurchase agreements that mature
in more than one day, the seller will agree that the value of the collateral
securities including accrued interest will continue to be at least equal to the
value of the repurchase agreement.
J. REVERSE REPURCHASE AGREEMENTS - The Funds may enter into reverse repurchase
agreements with selected commercial banks or broker-dealers. In a reverse
repurchase agreement, the Fund sells securities as collateral and agrees to
repurchase them at a mutually agreed upon date and price. This practice is the
equivalent of borrowing using the securities as collateral and can create
leverage. During the reverse repurchase agreement period, the Fund continues to
receive principal and interest payments on these securities but pays interest to
the counter-party based upon competitive market rates at the time of issuance.
At the time the Fund enters into a reverse repurchase agreement, it will
establish and maintain a segregated account with the custodian containing liquid
assets having a value not less than the repurchase price (including accrued
interest). If the counterparty to the transaction is rendered insolvent, the
ultimate realization of the collateral securities to be repurchased by the Fund
may be delayed or limited.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
The Trust has entered into an investment advisory agreement with Cova Investment
Advisory Corporation (the "Adviser"), pursuant to which the Adviser manages the
investment operations of the Trust's affairs. On January 6, 2000, the Adviser's
ultimate parent company, General American Mutual Holding Company, was acquired
by the Metropolitan Life Insurance Company. The Adviser has entered into
sub-advisory agreements with J.P. Morgan Investment Management Inc., Lord,
Abbett & Co., and FIRMCO (the "Sub-advisers") for investment advisory services
in connection with the investment management of the Funds.
The Adviser supervises the Sub-advisers and makes recommendations to the Board
of Trustees with respect to the retention or renewal of the sub-advisory
agreements. The Adviser pays the Sub-advisers and bears the cost of compensating
officers of the Trust.
Under the terms of the Funds' investment advisory agreement, the Funds pay the
Adviser a monthly fee based upon annual rates applied to each of the Funds'
average daily net assets as follows:
<TABLE>
<CAPTION>
Fund Average Daily Net Assets % Per Annum
---- ------------------------ -----------
<S> <C> <C>
Small Cap Stock All .85%
Quality Bond First $75 Million .55%
Over $75 Million .50%
Select Equity First $50 Million .75%
Over $50 Million .65%
Large Cap Stock All .65%
International Equity First $50 Million .85%
Over $50 Million .75%
Lord Abbett Growth and Income All .65%
Bond Debenture All .75%
</TABLE>
<PAGE>
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES -
CONTINUED
<TABLE>
<CAPTION>
Fund Average Daily Net Assets % Per Annum
---- ------------------------ -----------
<S> <C> <C>
Mid-Cap Value All 1%
Large Cap Research All 1%
Developing Growth All .90%
Balanced All 1%
Equity Income All 1%
Growth & Income Equity All 1%
</TABLE>
The Trust has entered into a Custodian, Fund Accounting, and Transfer Agency
Agreement with Investors Bank & Trust Company ("Investors Bank").
Cova Variable Annuity Account One and Five, Cova Variable Life Account One,
Five, and Eight, and First Cova Variable Annuity Account One are separate
investment accounts offered by Cova Financial Services Life Insurance Co. and
its subsidiaries, Cova Financial Life Insurance Co. and First Cova Life
Insurance Co. (collectively "Cova Life"). At June 30, 2000, Cova Life owned all
shares of beneficial interest of each Fund except those listed below.
<TABLE>
<CAPTION>
Percentage of Ownership
------------------------------------------
Cova Life Lord, Abbett & Co. FIRMCO
--------- ------------------ ------
<S> <C> <C> <C>
Mid-Cap Value 99.6% 0.4% --
Large Cap Research 99.6% 0.4% --
Developing Growth 99.7% 0.3% --
Balanced 86.9% -- 13.1%
Equity Income 82.3% -- 17.7%
Growth & Income Equity 91.3% -- 8.7%
</TABLE>
The Adviser has voluntarily reimbursed each of the Funds, exclusive of the Lord
Abbett Growth and Income, Small Cap, Select Equity, and International Equity
Portfolios, for their operating expenses, exclusive of brokerage, advisory, or
other portfolio transaction expenses or expenses of litigation, indemnification,
taxes, or other extraordinary expenses, to the extent that they exceeded an
annual rate of .10% of the average daily net assets of the Quality Bond, Large
Cap Stock, Bond Debenture, Balanced, Equity Income, and Growth & Income Equity
Portfolios. The Adviser has voluntarily reimbursed the Mid-Cap Value, Large Cap
Research, and Developing Growth Portfolios for their operating expenses,
exclusive of brokerage, advisory, or other portfolio transaction expenses or
expenses of litigation, indemnification, taxes, or other extraordinary expenses,
to the extent that they exceeded an annual rate of .30% of the average daily net
assets.
<PAGE>
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
3. INVESTMENT TRANSACTIONS
Aggregate cost of purchases and proceeds of sales of investment securities,
excluding short-term securities, for the six months ended June 30, 2000 were as
follows:
<TABLE>
<CAPTION>
Purchases
----------------------------------------------
Portfolio: U.S. Government Non-Government Total
---------- --------------- -------------- -----
<S> <C> <C> <C>
Small Cap Stock $ 0 $ 61,473,274 $ 61,473,274
Quality Bond 108,071,373 16,607,144 124,678,517
Select Equity 0 10,973,856 10,973,856
Large Cap Stock 0 93,880,879 93,880,879
International Equity 0 80,933,763 80,933,763
Bond Debenture 20,012,500 34,491,859 54,504,359
Mid-Cap Value 0 18,268,542 18,268,542
Large Cap Research 0 19,895,989 19,895,989
Developing Growth 0 20,104,723 20,104,723
Lord Abbett Growth and Income 0 234,740,901 234,740,901
Balanced 0 2,728,051 2,728,051
Equity Income 0 1,772,941 1,772,941
Growth & Income Equity 0 5,545,837 5,545,837
</TABLE>
<TABLE>
<CAPTION>
Sales
----------------------------------------------
Portfolio: U.S. Government Non-Government Total
---------- --------------- -------------- -----
<S> <C> <C> <C>
Small Cap Stock $ 0 $ 61,023,145 $ 61,023,145
Quality Bond 101,737,631 26,679,858 128,417,489
Select Equity 0 10,880,658 10,880,658
Large Cap Stock 0 78,481,255 78,481,255
International Equity 0 76,253,081 76,253,081
Bond Debenture 16,035,355 47,909,901 63,945,256
Mid-Cap Value 0 15,245,078 15,245,078
Large Cap Research 0 13,645,532 13,645,532
Developing Growth 0 9,217,013 9,217,013
Lord Abbett Growth and Income 0 277,147,340 277,147,340
Balanced 196,307 1,815,925 2,012,232
Equity Income 0 2,008,456 2,008,456
Growth & Income Equity 0 5,038,894 5,038,894
</TABLE>
<PAGE>
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
3. INVESTMENT TRANSACTIONS - CONTINUED
At June 30, 2000, the cost of securities for federal income tax purposes and the
unrealized appreciation (depreciation) of investments for federal income tax
purposes for each Fund was as follows:
<TABLE>
<CAPTION>
Unrealized Net
Federal Income Gross Unrealized Gross Unrealized Appreciation/
Portfolio: Tax Cost Appreciation (Depreciation) (Depreciation)
---------- -------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Small Cap Stock $106,958,243 $ 25,335,304 $(10,161,942) $15,173,362
Quality Bond 96,730,082 678,372 (1,219,911) (541,539)
Select Equity 241,249,909 39,261,778 (28,040,847) 11,220,931
Large Cap Stock 262,362,102 46,081,034 (24,610,578) 21,470,456
International Equity 136,128,338 18,710,105 (8,004,567) 10,705,538
Bond Debenture 174,591,625 4,356,576 (12,973,601) (8,617,025)
Mid-Cap Value 34,624,235 5,386,100 (2,302,313) 3,083,787
Large Cap Research 41,079,540 3,763,853 (3,205,587) 558,266
Developing Growth 39,798,822 8,672,415 (7,313,024) 1,359,391
Lord Abbett Growth and Income 813,118,568 106,197,064 (65,817,869) 40,379,195
Balanced 8,820,254 921,501 (829,796) 91,705
Equity Income 6,914,688 554,668 (1,038,478) (483,810)
Growth & Income Equity 14,388,046 3,023,266 (1,707,844) 1,315,422
</TABLE>
4. FUTURES CONTRACTS
Transactions in futures contracts for the six months ended June 30, 2000, were
as follows:
<TABLE>
<CAPTION>
Quality Large International
Bond Cap Stock Equity
Portfolio Portfolio Portfolio
--------- --------- ---------
<S> <C> <C> <C>
Futures Contracts Outstanding at
December 31, 1999 318 11 --
Contracts Opened 736 61 55
Contracts Closed (931) (55) --
------- ------ --------
Futures Contracts Outstanding at
June 30, 2000 123 17 55
======= ====== ========
</TABLE>
The futures contracts outstanding as of June 30, 2000 and the description and
unrealized appreciation or depreciation were as follows:
<TABLE>
<CAPTION>
Unrealized
Contracts Notional Value Appreciation/(Depreciation)
--------- -------------- ---------------------------
<S> <C> <C> <C>
International Equity Portfolio:
Dow Jones Euro Stock 50 Futures 39 $1,928,934 $ (49,877)
September 2000 - Long
International Equity Portfolio:
FTSE 100 Index Futures 3 $ 289,631 $ 5,175
September 2000 - Long
International Equity Portfolio:
SPI Futures 6 $ 302,656 $ (8,008)
September 2000 - Short
</TABLE>
<PAGE>
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
4. FUTURES CONTRACTS - CONTINUED
<TABLE>
<CAPTION>
Unrealized
Contracts Notional Value Appreciation/(Depreciation)
--------- -------------- ---------------------------
<S> <C> <C> <C>
International Equity Portfolio:
TSE Topix Futures 7 $1,062,315 $ (25,878)
September 2000 - Short
Large Cap Stock Portfolio:
S & P 500 Index Futures 17 $6,239,426 $ (86,668)
September 2000 - Long
Quality Bond Portfolio:
U.S. Treasury Bond Futures 4 $ 389,375 $ 10,470
September 2000 - Long
Quality Bond Portfolio:
U.S. Treasury Note 5 Year Futures 55 $5,452,568 $ 7,266
September 2000 - Long
Quality Bond Portfolio:
U.S. Treasury Note 10 Year Futures 64 $6,303,000 $(129,766)
September 2000 - Short
</TABLE>
5. FORWARD FOREIGN CURRENCY CONTRACTS
Open forward foreign currency contracts for the International Equity Portfolio
at June 30, 2000, were as follows:
Forward Foreign Currency Contracts to Buy:
<TABLE>
<CAPTION>
Net Unrealized
Value at In Exchange Appreciation/
Settlement Date Contracts to Receive June 30, 2000 for U.S. $ (Depreciation)
--------------- -------------------- ------------- ---------- --------------
<S> <C> <C> <C> <C>
7/3/2000 550,000 Euro Dollar $ 527,284 $ 523,435 $ 3,849
7/10/2000 1,947,399 British Pound Sterling 2,948,388 3,042,949 (94,561)
7/10/2000 18,650,302 Euro Dollar 17,888,624 17,199,236 689,388
7/10/2000 1,873,524,730 Japanese Yen 17,707,947 17,695,756 12,191
7/10/2000 2,177,765 Swiss Franc 1,341,065 1,268,000 73,065
--------
683,932
========
</TABLE>
Forward Foreign Currency Contracts to Sell:
<TABLE>
<CAPTION>
Net Unrealized
Value at In Exchange Appreciation/
Settlement Date Contracts to Deliver June 30, 2000 for U.S. $ (Depreciation)
--------------- -------------------- ------------- ---------- --------------
<S> <C> <C> <C> <C>
7/3/2000 344,300 British Pound Sterling $ 521,199 $ 523,435 $ 2,236
7/10/2000 2,519,451 British Pound Sterling 3,814,483 3,943,685 129,202
7/10/2000 11,459,837 Euro Dollar 10,991,818 10,456,986 (534,832)
7/10/2000 2,373,673,309 Japanese Yen 22,435,192 22,269,197 (165,995)
7/10/2000 6,125,290 Swiss Franc 3,771,947 3,681,173 (90,774)
---------
(660,163)
=========
</TABLE>
<PAGE>
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
6. SECURITY LENDING
As of June 30, 2000, certain Portfolios had loaned securities which were
collateralized by short term investments. Each Portfolio receives transaction
fees for providing services in connection with the securities lending program.
The risks to the Portfolios of securities lending are that the borrower may not
provide additional collateral when required or return the securities when due.
The value of the securities on loan and the value of the related collateral were
as follows:
<TABLE>
<CAPTION>
Fund Value of Securities Value of Collateral
---- ------------------- -------------------
<S> <C> <C>
Small Cap Stock $15,662,592 $16,242,249
Quality Bond $ 6,960,136 $ 7,081,663
Select Equity $12,018,263 $12,385,500
Large Cap Stock $12,684,051 $13,099,200
International Equity $10,784,238 $11,422,790
Bond Debenture $ 8,393,044 $ 8,583,656
Mid-Cap Value $ 232,967 $ 241,320
Large Cap Research $ 3,839,734 $ 3,978,336
Developing Growth $ 2,994,457 $ 3,126,600
Lord Abbett Growth and Income $43,761,343 $45,495,615
</TABLE>
7. PROXY VOTING RESULTS
A special meeting of the Funds' shareholders was held on January 6, 2000, as
adjourned from December 23, 1999. The results of votes taken among shareholders
on proposals before them are reported below.
PROPOSAL 1:
To approve a New Investment Advisory Agreement between Cova Investment
Advisory Corporation and Cova Series Trust, such New Investment Advisory
Agreement to contain the same terms and conditions as the current Investment
Advisory Agreement except for the dates of execution, effectiveness and
termination.
<TABLE>
<CAPTION>
Name of Portfolio FOR AGAINST ABSTAIN
----------------- --- ------- -------
<S> <C> <C> <C>
J.P. Morgan:
Quality Bond 8,691,406.774 79,946.014 198,606.356
Small Cap Stock 6,077,177.487 37,360.639 211,859.963
Large Cap Stock 12,184,212.280 75,152.574 306,007.895
Select Equity 14,886,139.727 84,172.180 409,902.260
International Equity 8,166,318.635 49,903.063 236,732.570
Lord, Abbett & Co.:
Bond Debenture 13,122,272.625 86,410.035 420,341.120
Mid-Cap Value 2,462,281.489 9,053.062 73,431.172
Large Cap Research 2,200,043.069 0.000 64,962.829
Developing Growth 2,032,302.306 17,915.644 72,575.772
Lord Abbett Growth and Income 35,394,437.195 248,869.019 1,178,927.909
Mississippi Valley Advisors Inc.:
Balanced 622,428.276 18,133.335 23,004.638
Equity Income 458,726.574 2,578.520 11,462.263
Growth & Income Equity 1,034,850.037 0.000 28,214.795
Riggs Bank:
Riggs Stock 11,942.215 0.000 0.000
Riggs U.S. Government Securities 21,483.451 0.000 0.000
</TABLE>
<PAGE>
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
7. PROXY VOTING RESULTS - CONTINUED
PROPOSAL 2:
To approve a New Sub-Advisory Agreement among Cova Investment Advisory
Corporation, Cova Series Trust and J.P. Morgan Investment Management Inc.,
such New Sub-Advisory Agreement to contain the same terms and conditions as
the current Sub-Advisory Agreement except for the dates of execution,
effectiveness and termination.
<TABLE>
<CAPTION>
Name of Portfolio FOR AGAINST ABSTAIN
----------------- --- ------- -------
<S> <C> <C> <C>
J.P. Morgan
Quality Bond 8,694,267.577 80,941.416 194,750.150
Small Cap Stock 6,077,447.504 52,260.865 196,689.720
Large Cap Stock 12,232,013.184 72,413.984 260,945.581
Select Equity 14,896,949.669 92,745.539 390,518.958
International Equity 8,143,073.567 63,584.094 246,296.607
</TABLE>
PROPOSAL 3:
To approve a New Sub-Advisory Agreement among Cova Investment Advisory
Corporation, Cova Series Trust and Lord, Abbett & Co., such New Sub-Advisory
Agreement to contain the same terms and conditions as the current
Sub-Advisory Agreement except for the dates of execution, effectiveness and
termination.
<TABLE>
<CAPTION>
Name of Portfolio FOR AGAINST ABSTAIN
----------------- --- ------- -------
<S> <C> <C> <C>
Lord, Abbett:
Bond Debenture 13,164,795.350 91,879.238 372,349.193
Mid-Cap Value 2,469,786.540 4,786.053 70,193.129
Large Cap Research 2,197,789.176 0.000 67,216.722
Developing Growth 2,044,088.035 14,413.495 64,242.193
Lord Abbett Growth and Income 35,428,800.441 269,039.875 1,124,393.808
</TABLE>
PROPOSAL 4:
To approve a New Sub-Advisory Agreement among Cova Investment Advisory
Corporation, Cova Series Trust and Mississippi Valley Advisors Inc., such
New Sub-Advisory Agreement to contain the same terms and conditions as the
current Sub-Advisory Agreement except for the dates of execution,
effectiveness and termination.
<TABLE>
<CAPTION>
Name of Portfolio FOR AGAINST ABSTAIN
----------------- --- ------- -------
<S> <C> <C> <C>
Mississippi Valley Advisors Inc.:
Balanced 621,704.426 18,133.335 23,728.489
Equity Income 458,726.574 0.000 14,040.784
Growth & Income Equity 1,029,055.878 0.000 34,008.954
</TABLE>
PROPOSAL 5:
To approve a New Sub-Advisory Agreement among Cova Investment Advisory
Corporation, Cova Series Trust and Riggs Bank N.A., such New Sub-Advisory
Agreement to contain the same terms and conditions as the current
Sub-Advisory Agreement except for the dates of execution, effectiveness and
termination.
<TABLE>
<CAPTION>
Name of Portfolio FOR AGAINST ABSTAIN
----------------- --- ------- -------
<S> <C> <C> <C>
Riggs Bank:
Riggs Stock 11,942.215 0.000 0.000
Riggs U.S. Government Securities 21,483.451 0.000 0.000
</TABLE>
<PAGE>
================================================================================
Dear Contract Owner:
The stock market soared, dove, then rose again during the six months ended July
31, 2000, creating significant volatility among various sectors and individual
stocks. By the time the dust settled at the end of June, most major market
indices were mixed for the six-month period.
Bond prices, which move inversely to their yields, have risen in expectation of
a slowing economy due to higher short-term interest rates. Treasury yields
decreased in the first half of 2000. Over the course of the last six months, the
yield of the thirty year Treasury has decreased by nearly 58 basis points.
I encourage you to review the following report covering the past six months and
to contact us if you have any questions.
Respectfully submitted,
/s/ RICHARD C. PEARSON
-------------------------------------
Richard C. Pearson
President
[SECURITY FIRST TRUST LOGO]
================================================================================
<PAGE> 2
================================================================================
SECURITY FIRST TRUST:
T. ROWE PRICE GROWTH
AND INCOME SERIES AND
EQUITY SERIES
EQUITY MARKET OVERVIEW
There have been signs during the past few months that momentum may have
begun to shift back toward quality companies with a history of earnings growth
and relatively high dividend yields, and we regard this development -- if it
continues --as a welcome return to reality in the equities market.
The year began with a continuation of the pattern that characterized the
stock market through most of last year. In the first quarter, the
technology-heavy Nasdaq Composite led the way as the more aggressive market
sectors provided the strongest performance. In April and May, those stocks
experienced a sudden and sharp decline, and traditional value stocks provided
better relative performance. In June, the market under-went another reversal in
sentiment, with growth stocks rebounding from their spring decline. By the end
of July, the Standard and Poors 500 rose slightly while the Nasdaq Composite
suffered a modest loss. Within these indices, growth stocks generally fared
better than value stocks, and smaller and mid-cap shares outperformed the
largest-cap stocks.
EQUITY MARKET OUTLOOK
After the shakeout of the past six months, the market ended up treading
water as investors digested a series of tightening moves by the Fed aimed at
slowing the pace of economic growth. In earlier reports we discussed the
de-linkage between stock prices and the earnings and dividend growth that
normally support them, since share prices have risen at a faster pace in recent
years. This gap began to close modestly during the recent period, with earnings
and dividend growth moving ahead while stocks declined in value. Despite the
improved performance of value stocks mentioned earlier, they remain very
inexpensive relative to their growth stock siblings. If history is any guide,
true value tends to reassert itself over time.
PORTFOLIO MANAGEMENT:
T. ROWE PRICE GROWTH
AND INCOME SERIES
During the six-month period, the portfolio benefited from several
successful investments and suffered from some that did not work out as well. Our
holdings in the financial, consumer nondurables, and technology sectors were
generally good performers, while business services, transportation, and basic
materials were weaker overall.
GROWTH AND INCOME SERIES
SECTOR DIVERSIFICATION PIE CHART
<TABLE>
<S> <C>
Utilities 5.3%
Capital Equipment 4.1%
Consumer Non-Durables 20.6%
Short-Term Securities 3.4%
Consumer Services 16.6%
Transportation 5.9%
Energy 10.5%
Financial 16.9%
Consumer Cyclicals 0.5%
Process Industries 10.7%
Technology 5.5%
</TABLE>
Among our major holdings were BP Amoco, Citigroup, American Home
Products, Abbott Laboratories, Disney, and Starwood Hotels & Resorts Worldwide.
================================================================================
1
<PAGE> 3
================================================================================
--------------------------------------------------------------------------------
GROWTH & INCOME SERIES
15 LARGEST HOLDINGS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage of
Security Portfolio
-------- -------------
<S> <C>
BP Amoco PLC 3.9
Citigroup, Inc. 3.6
American Home Products 2.0
Abbott Laboratories 1.9
Disney Walt Company Holding Co. 1.9
Starwood Hotel & Resort
Worldwide, Inc. 1.8
First Data Corp. 1.8
Kimberly-Clarke Corp. 1.8
General Electric Co. 1.7
Viacom, Inc. CL B 1.7
Target Corp. 1.6
Boeing Company 1.5
Chubb Corp. 1.5
St. Paul Companies, Inc. 1.4
Waste Management, Inc. 1.4
-----
TOTAL 29.5
=====
</TABLE>
The strategy we followed during the period was to invest in good
companies after the sell-off. Equity investors not only have high expectations
for future returns, but also little tolerance for any disappointing news
affecting their investments. As a result, the stocks of many quality companies
with solid earnings histories suffered in the downdraft.
In this climate, we capitalized on the significant price declines in
several stocks to make new investments. Our experience suggests that investing
in strong companies after they lose much of their value is often a rewarding
move. This was our reason for purchases of Rockwell International, Gillette,
Microsoft, America Online, Black & Decker, and Motorola. Rockwell is the classic
value stock. Having fallen substantially in price, the stock sold for 10 times
earnings and sported a dividend yield of 3% --an attractive valuation for a
leading manufacturing company. Our other purchases share the common
characteristics of recent price weakness, strong market position, and attractive
valuations. Microsoft is a slightly unusual holding for us given our general
reluctance to invest in technology stocks for valuation reasons. Nonetheless,
after its highly publicized antitrust problems and stock price nosedive, we
though it was an opportune time to initiate a small position.
Most of the portfolio sales were of successful investments whose
valuations reached unattractive levels as their share prices rose, which
diminished their appeal for us. Included among our major sales were Baker Hughes
and General Electric.
The fund's holdings sell at a substantial discount to the overall
market. Our historical approach has been to invest in companies selling at
relatively low price/earnings ratios with attractive dividend yields and other
compelling valuation characteristics. Compared with the broad market, at the end
of June we had a portfolio of undervalued companies with good prospects over the
next few years.
PORTFOLIO MANAGEMENT:
EQUITY SERIES
In this volatile market environment, the Security First Trust Equity
Series portfolio underperformed the Standard and Poors 500 Index for the
quarter. In particular, an overweight position in the technology sector and an
underweight position in the consumer staples sector early in the second quarter
hurt performance.
EQUITY SERIES
SECTOR DIVERSIFICATION PIE CHART
<TABLE>
<S> <C>
Utilities 8.2%
Capital Equipment 6.3%
Consumer Non-Durables 14.9%
Consumer Services 10.2%
Energy 5.6%
Financial 18.1%
Consumer Cyclicals 0.5%
Process Industries 1.9%
Technology 34.3%
</TABLE>
================================================================================
2
<PAGE> 4
================================================================================
Stock selection also detracted from performance among the larger
positions in the portfolio while stock selection among the smaller positions in
the portfolio contributed positively to performance.
During the last few months, we bought Alcatel, Anheuser Busch, Ericsson
and Mellon Financial Group. This group showed improving fundamentals and
attractive growth prospects. We sold Fleet Boston Financial Corp. due to
earnings uncertainty, sold Qualcomm because of deteriorating fundamentals and
sold Warner-Lambert because it was fully valued. As of the end of June, the top
ten holdings included Cisco Systems, General Electric, Intel and Microsoft.
--------------------------------------------------------------------------------
EQUITY SERIES
15 LARGEST HOLDINGS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage of
Security Portfolio
-------- -------------
<S> <C>
Cisco Systems 4.8
General Electric 4.2
Intel Corp. 4.2
Citigroup, Inc. 4.1
SPDR Trust 3.4
Microsoft Corp. 3.2
American International Group 2.8
Exxon Mobil Corp. 2.8
Nortel Networks Corp. 2.7
Walmart Stores 2.5
EMC Mass Corp. 1.9
Merck & Co. 1.9
Pfizer, Inc. 1.8
Dell Computer Corp. 1.8
Royal Dutch Petroleum Co. ADR 1.8
-----
TOTAL 43.9
=====
</TABLE>
Going forward, the portfolio still maintains a value tilt with modes
overweight positions in the capital goods, energy and financial sectors relative
to the Standard and Poors 500 Index. Despite this value bias, the Portfolio
holds many companies that should benefit from the market's emphasis on companies
with strong earnings growth prospects.
SECURITY FIRST TRUST:
BOND SERIES AND U.S.
GOVERNMENT INCOME SERIES
FIXED-INCOME MARKET OVERVIEW
The U.S. economy finally slowed from its rapid pace in the second
quarter as gains related to Y2K liquidity and preparations, bonus compensation
payments, unseasonably warm weather and tax receipts began to dissipate. While
the consumer continued to spend, it was clearly with less enthusiasm than the
first quarter, as retail sales declined significantly in the second quarter. A
slowdown in the manufacturing sector appeared as well, with the NAPM Purchasing
Managers Index falling to its lowest level in 18 months. While the economy is
surely slowing, inflation appears less clear. Secular trends such as improving
technology and globalization of labor markets continue to put downward pressure
on inflation. However, the sharp increase in oil and natural gas prices, along
with an upward trending core CPI and Personal Consumption Expenditure deflator,
suggest that cyclical inflationary pressures could continue to build even if the
economy slows to a more sustainable pace. In March, the Federal Reserve raised
both the overnight rate and the discount rate 0.25% to 6.0% and 5.5%,
respectively. Despite the sell-off in the equity market in April, in May
concerns about an overheating economy due to an increased shortage of labor and
rising oil prices led the Federal Reserve to rise rates another 0.50% to 6.5%
Treasury yields decreased in the first half of 2000. Over the course of
the year so far, the yield of the 30-year Treasury has decreased by nearly 58
basis points (0.58%). The yield of the 10-Year Treasury posted a net decrease of
42 basis points (0.42%). We anticipate a continued flattening of the yield curve
as a result of an active Federal Reserve and potential Treasury repurchases of
long maturity debt.
Mortgages posted positive returns during the first half of the year, but
trailed the broader market, which was led by the strong rally in the Treasury
market. As measured by the Lehman Brothers Mortgage Index, mortgages posted a
3.67% total return versus 3.99% for the Lehman Brothers Aggregate Index.
Strength in the housing market has continued unabated, leading
================================================================================
3
<PAGE> 5
================================================================================
to more supply than expected, but in comparison to other spread sectors,
mortgages benefited from greater liquidity and higher credit quality. On a
relative valuation basis mortgages appear cheap, although uncertainty was
increased in the market by Treasury Undersecretary Gensler's testimony
concerning a bill seeking to end the quasi-governmental status of FNMA and
FHLMC. GNMAs performed well during the first quarter as a Treasury substitute,
since it is the only other asset class backed by the full faith and credit of
the U.S. Government.
FIXED-INCOME MARKET OUTLOOK
While some imbalanced and potential inflationary pressures exist, data
points to slower economic growth and restrained inflation. We believe that the
Fed will refrain from tightening rates for the rest of the year.
PORTFOLIO MANAGEMENT:
BOND SERIES
We manage the Bond Series portfolio with the objective of earning
superior total returns than broadly diversified investment quality bond
portfolios that are measured against the Lehman Aggregate Index. We seek to meet
this objective through a superior yield profile, diversification, capital
appreciation and minimal capital loss.
During the first half of the Series' fiscal year (August 1, 1999 -
January 31, 2000), an extension of the bear market produced anemic returns (-14%
at the portfolio level). However, in the second half (February 1, 2000 - July
31, 2000) a bond market rally produced much more robust returns (4.49% at the
portfolio level).
In addition, while reviewing those results one should bear in mind that
for the last year, risk involving fixed income securities has simply not been
rewarded. Treasury Bills -- the risk free asset class --have provided some of
the highest returns and the under-performance of riskier asset classes is
perhaps not surprising.
The evolution of the portfolio structure over the last year has been a
reduction to our commitment to the Treasury sector, an increase in commitment to
the mortgage sector, reduced commitment to high yield and international issues
and our conservative duration posture.
BOND SERIES
SECTOR DIVERSIFICATION CHART
<TABLE>
<S> <C>
Corporate Bonds 26.6%
Foreign Governments 1.6%
Federal Agencies 58.0%
U.S. Government Obligations 13.8%
</TABLE>
During the last year mortgage spreads returned to levels not seen in the
last decade, and we took advantage of this by adding primarily GNMA securities
that offer the full faith and credit of the United States Government combined
with minimal prepayment risk. Offered the opportunity to add yield with no
credit risk, we increased our commitment by over 50% during the course of the
year.
The high yield and international sectors suffered during the last year.
High yield was buffeted by higher rates, a slowing economy and increasing
downgrade and defaults. International markets suffered as the dollar continued
to show strength versus all currencies except the yen. We responded by cutting
our commitment. There are a number of high yield issuers that seem quite
attractive. We have moved to issues with good visibility, larger size and access
to the equity market. Internationally, we expect that the dollar's strength will
wane in the coming months and present us with new opportunities. In the meantime
caution is our watchword, and we will add to positions slowly.
================================================================================
4
<PAGE> 6
PORTFOLIO MANAGEMENT:
U.S. GOVERNMENT
INCOME SERIES
During the semi-annual period, the duration of the Portfolio remained
long relative to its benchmark for most of the first quarter. The Portfolio
ended the quarter with a duration of 5.75 versus 5.64 for the benchmark. We
reduced residential mortgage positions during the quarter in favor of
Treasuries/Agencies, although mortgages are our largest overweight position. The
Portfolio's residential mortgage exposure in the quarter decreased from 45% to
40%. We added slightly to Treasuries/Agencies in the quarter, although our
Treasury and agency allocation remains below the market weighting. The
Portfolio's exposure to Treasuries/Agencies decreased from 97.4% to 91.5% for
the quarter. We also had a slightly higher allocation to cash at the end of the
quarter. Looking forward, we are structuring the Portfolio to take advantage of
the intermediate-long part of the yield curve. Our yield curve structure in the
Portfolio emphasizes the 10- to 20-year part of the curve over the front-end.
U.S. GOVERNMENT INCOME SERIES
SECTOR DIVERSIFICATION CHART
<TABLE>
<S> <C>
Corporate Bonds 1.9%
Federal Agencies 59.5%
Short-Term Securities 6.6%
U.S. Government Obligations 32.0%
</TABLE>
PERFORMANCE OF SECURITY FIRST TRUST
GROWTH AND INCOME SERIES, BOND
SERIES, EQUITY SERIES AND U.S.
GOVERNMENT INCOME SERIES
The following are the average annual and total returns for each series
for the period ending July 31, 2000, assuming an investment of $10,000 at
the start of the period, and redemption at the end of the period, with dividends
reinvested. These returns are based on past experience. Future values of shares
will fluctuate so that their redemption values may be more or less than original
cost.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Average Annual Total Returns
--------------------------------------------------------------------------------
Fund 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth and
Income -7.48% 6.17% 15.02% 13.37%
Series(1)(2)
--------------------------------------------------------------------------------
Bond 3.29% 3.90% 5.30% 6.52%
Series(1)(2)
--------------------------------------------------------------------------------
Equity 8.11% 13.74% 18.89% N/A(*)
Series(1)
--------------------------------------------------------------------------------
U.S
Government 5.99% 4.31% 5.18% N/A(*)
Income(1)
--------------------------------------------------------------------------------
Consumer 3.61% 2.47% 2.51% 2.84%
Price Index
--------------------------------------------------------------------------------
</TABLE>
(*) Funds were introduced as of May 1993.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Compound Total Returns
--------------------------------------------------------------------------------
Fund 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth and
Income -7.48% 19.68% 101.31% 250.74%
Series(1)(2)
--------------------------------------------------------------------------------
Bond 3.29% 12.16% 29.46% 88.07%
Series(1)(2)
--------------------------------------------------------------------------------
Equity
Series(1) 8.11% 47.14% 137.53% N/A(*)
--------------------------------------------------------------------------------
U.S
Government 5.99% 13.50% 28.73% N/A(*)
Income(1)
--------------------------------------------------------------------------------
Consumer 3.61% 7.59% 13.20% 32.32%
Price Index
--------------------------------------------------------------------------------
</TABLE>
(*) Funds were introduced as of May 1993.
(1) Return is computed after deduction of all series expenses, but before
deduction of actuarial risk charges and other fees of the variable
annuity account.
(2) From inception to July 1983, Security First Investment Management
Corporation reimbursed the Growth and Income Series for expenses in
excess of the maximum expense limitation, and these reimbursements
were repaid from August 1983 to July 1986. Likewise, the Bond Series
was reimbursed for excess expenses from inception to July 1985, and
these reimbursements were repaid from August 1985 to July 1993.
Reimbursement of expenses to a series increases average annual total
returns while repayments of such reimbursements reduces these returns.
================================================================================
5
<PAGE> 7
================================================================================
The following graphs set forth the historical performance of each series as
compared to a stated market index for the periods ended July 31:
Comparison of Change in Value of $10,000 Investment in Security First Trust
T. Rowe Price Growth and Income Series and Standard and Poors 500 Index
Assuming Dividends and Distributions are Reinvested.
[GRAPH]
10000 0
9500 550
10000 2000
10500 3000
11500 2500
13500 1500
15000 4000
17000 5000
25000 9000
28000 12000
38000 8000
35000 15000
The performance indicated here may not be indicative of future performance.
Comparison of Change in Value of $10,000 Investment in Security First Trust
Bond Series, Lehman Government Bonds Index, and the Lehman Aggregate Bond Index
Assuming Dividends and Distributions are Reinvested.
[GRAPH]
10000 0 0
11000 230 242
12500 400 400
13000 750 750
12750 800 800
14000 900 1000
15000 900 1000
16000 1000 1000
17000 1200 1000
17500 1500 750
18000 2500 500
The performance indicated here may not be indicative of future performance.
Comparison of Change in Value of $10,000 Investment in Security First Trust
Equity Series and Standard and Poors 500 Index
Assuming Dividends and Distributions are Reinvested.
[GRAPH]
10000 0
10000 256
10040 745
12000 2014
12500 3115
18000 6500
25500 9000
27500 10000
The performance indicated here may not be indicative of future performance.
(*)The Series commenced operations on 5/19/93.
Comparison of Change in Value of $10,000 Investment in Security First Trust
U.S. Government Income Series and Lehman Government and Intermediate Index
Assuming Dividends and Distributions are Reinvested.
[GRAPH]
10000 0
10100 0
10000 100
10750 150
11100 400
12000 500
12900 750
13000 1000
13750 1250
The performance indicated here may not be indicative of future performance.
(*)The Series commenced operations on 5/19/93.
================================================================================
6
<PAGE> 8
================================================================================
SECURITY FIRST TRUST T. ROWE
PRICE GROWTH AND INCOME SERIES
The graph and Per Share Data Table below illustrate the growth in per share
value for the period ending July 31, 2000, of one share of the Security First
Trust T. Rowe Price Growth and Income Series purchased on August 1, 1979, at a
price of $5.07, assuming that dividends and capital gains were reinvested.
The results shown should not be considered a representation of the income
that may be earned by investing in the Series today. The value of variable
annuities funded by shares in this Series will be reduced by any actuarial risk
charges.
[GROWTH AND INCOME SERIES GRAPH]
PER SHARE DATA
<TABLE>
<CAPTION>
Per Share
Value with Cumulative
Calendar Net Dividend Dividends & Change
Year Asset & Capital Capital Gains Yearly from
Ending Value Gains Reinvested Change 8/1/79
-------- ----- ---------- ------------- ------ ----------
<S> <C> <C> <C> <C> <C>
1990 6.25 .44 23.70 -11.0 +367.5
1991 7.69 .24 30.07 +26.9 +493.1
1992 8.17 .22 32.80 +9.1 +546.9
1993 9.12 .22 37.49 +14.3 +639.4
1994 9.05 .32 38.51 +2.7 +659.6
1995 11.52 .34 50.49 +31.1 +895.8
1996 13.18 .83 61.42 +21.7 +1111.4
1997 15.52 1.25 78.12 +27.2 +1440.8
1998 15.81 1.29 86.06 +10.2 +1597.4
1999 16.06 1.06 93.67 +8.8 +1747.5
7/2000 15.63 -- 90.68 -3.2 +1688.6
</TABLE>
SECURITY FIRST TRUST
BOND SERIES
The graph and Per Share Data Table below illustrate the growth in per share
value for the period ending July 31, 2000, of one share of the Security First
Trust Bond Series purchased on August 1, 1979, at a price of $3.12, assuming
that dividends and capital gains were reinvested.
The results shown should not be considered a representation of the income
that may be earned by investing in the Series today. The value of variable
annuities funded by shares in this Series will be reduced by any actuarial risk
charges.
[BOND SERIES GRAPH]
PER SHARE DATA
<TABLE>
<CAPTION>
Per Share
Value with Cumulative
Calendar Net Dividend Dividends & Change
Year Asset & Capital Capital Gains Yearly from
Ending Value Gains Reinvested Change 8/1/79
-------- ----- ---------- ------------- ------ ----------
<S> <C> <C> <C> <C> <C>
1990 3.52 .54 8.76 +4.4 +180.8
1991 3.79 .25 10.06 +14.8 +222.4
1992 3.80 .23 10.70 +6.4 +242.9
1993 3.94 .22 11.72 +9.5 +275.6
1994 3.58 .22 11.31 -3.5 +262.5
1995 3.94 .24 13.21 +16.8 +323.4
1996 3.82 .24 13.58 +2.8 +335.3
1997 3.95 .21 14.81 +9.1 +374.6
1998 4.03 .21 15.92 +7.5 +410.3
1999 3.72 .22 15.51 -2.6 +397.1
7/2000 3.84 -- 16.03 +3.4 +413.8
</TABLE>
================================================================================
7
<PAGE> 9
================================================================================
SECURITY FIRST TRUST
EQUITY SERIES
The Per Share Data Table below illustrates the growth in per share value
for the period ending July 31, 2000, of one share of the Security First Trust
Equity Series purchased on May 19, 1993, at a price of $5.00, assuming that
dividends and capital gains were reinvested.
The results shown should not be considered a representation of the
income that may be earned by investing in the Series today. The value of
variable annuities funded by shares in this Series will be reduced by any
actuarial risk charges.
PER SHARE DATA
<TABLE>
<CAPTION>
Per Share
Value with Cumulative
Calendar Net Dividend Dividends & Change
Year Asset & Capital Capital Gains Yearly from
Ending Value Gains Reinvested Change 5/19/93
-------- ------ --------- ------------- ------ ----------
<S> <C> <C> <C> <C> <C>
1993 $ 5.15 $ .03 $ 5.18 +3.6% +3.6%+
1994 4.78 .05 4.85 -6.3 -3.0
1995 5.91 .21 6.21 +28.0 +24.2
1996 6.45 .55 7.36 +18.5 +47.2
1997 7.63 .72 9.52 +29.3 +90.4
1998 7.89 1.51 11.73 +23.2 +134.6
1999 9.19 .31 14.16 +20.7 +183.2
7/2000 8.93 -- 13.73 -3.0 +174.6
</TABLE>
+change from 5-19-93 to 12-31-93
SECURITY FIRST TRUST
U.S. GOVERNMENT INCOME SERIES
The Per Share Data Table below illustrates the growth in per share value
for the period ending July 31, 2000, of one share of the Security First Trust
U.S. Government Income Series purchased on May 19, 1993, at a price of $5.00,
assuming the dividends and capital gains were reinvested.
The results shown should not be considered a representation of the
income that may be earned by investing in the Series today. The value of
variable annuities funded by shares in this Series will be reduced by any
actuarial risk charges.
PER SHARE DATA
<TABLE>
<CAPTION>
Per Share
Value with Cumulative
Calendar Net Dividend Dividends & Change
Year Asset & Capital Capital Gains Yearly from
Ending Value Gains Reinvested Change 5/19/93
-------- ------ --------- ------------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
1993 $ 5.04 $ .08 $ 5.11 +2.2% +2.2%(+)
1994 4.74 .14 4.96 -2.9 -0.8
1995 5.18 .20 5.63 +13.5 +12.6
1996 5.14 .22 5.83 +3.6 +16.6
1997 5.26 .24 6.24 +7.0 +24.8
1998 5.25 .40 6.70 +7.4 +34.0
1999 4.83 .29 6.53 -2.5 +30.6
7/2000 5.10 -- 6.90 +5.7 +38.0
</TABLE>
+change from 5-19-93 to 12-31-93
================================================================================
8
<PAGE> 10
================================================================================
SECURITY FIRST TRUST
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 2000
<TABLE>
<CAPTION>
T. Rowe Price
Growth and U.S. Government
Income Equity Income
Bond Series Series Series Series
------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Investments at market - Note A and Schedule I:
Investment securities (cost:
Bond Series - $22,623,192; Growth
and Income Series - $279,333,808;
Equity Series - $44,935,123;
U.S. Government Income Series - $32,553,278) $ 22,203,630 $323,981,404 $58,124,170 $ 32,011,805
Cash 606,373 720,133 1,098,402 63,714
Interest receivable 219,885 2,936 4,478 467,431
Dividends receivable 436,244 26,446
Receivable for securities sold 1,846,756 1,218,552 2,102,505
------------- ------------ ----------- ------------
24,876,644 325,140,717 60,472,048 34,645,455
LIABILITIES
Payable for securities purchased 1,614,601 1,411,012 2,099,625
Accrued expenses 14,023 51,269 15,642 14,198
Payable for capital shares redeemed 19,729 33,871 882 304
Payable to investment adviser - Note B 6,947 97,241 28,309 10,653
Payable for directors' fees 305 4,332 776 626
Unrealized depreciation on foreign
currency contracts 1,349
------------- ------------ ----------- ------------
1,656,954 186,713 1,456,621 2,125,406
NET ASSETS
Capital shares (authorized 100,000,000
shares of $.01 par value for each series) 24,156,181 261,640,068 41,153,313 32,937,994
Undistributed net investment income 876,932 3,412,895 35,302 1,113,498
Undistributed net realized gain (loss) (1,392,512) 15,253,445 4,637,765 (989,970)
Net unrealized appreciation (depreciation)
of investments (420,911) 44,647,596 13,189,047 (541,473)
------------- ------------ ----------- ------------
NET ASSETS $ 23,219,690 $324,954,004 $59,015,427 $ 32,520,049
============= ============ =========== ============
Capital shares outstanding 6,052,985 20,789,263 6,610,048 6,379,108
Net asset value per share $ 3.84 $ 15.63 $ 8.93 $ 5.10
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
9
<PAGE> 11
================================================================================
SECURITY FIRST TRUST
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 2000
<TABLE>
<CAPTION>
T. Rowe Price
Growth and U.S. Government
Income Equity Income
Bond Series Series Series Series
----------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $ 6,810,679 $ 607,061
Interest $ 1,685,659 1,273,872 52,216 $ 2,121,312
----------- ------------ ----------- -----------
1,685,659 8,084,551 659,277 2,121,312
EXPENSES
Custodian fees 16,947 50,938 22,847 18,950
Adviser fees - Note B 84,927 1,199,868 329,031 129,811
Management fees - Note B 36,397 514,229 89,736 48,679
Printing expenses 16,391 31,743 13,490 14,542
Insurance expenses 1,064 15,631 2,744 1,487
Audit fees 5,132 7,676 6,397 5,116
Directors' fees and expenses 1,781 26,514 4,468 2,079
Miscellaneous expenses 859 6,914 5,708 8,128
----------- ------------ ----------- -----------
163,498 1,853,513 474,421 228,792
----------- ------------ ----------- -----------
NET INVESTMENT INCOME 1,522,161 6,231,038 184,856 1,892,520
NET REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS - Notes A and C
Net realized gain (loss) on sale of investments (1,106,001) 20,126,873 5,002,057 (464,991)
Net unrealized appreciation (depreciation) of:
Investments during the period 334,147 (55,204,755) (545,090) 454,161
Assets denominated in foreign currencies (1,349)
----------- ------------ ----------- -----------
Net gain (loss) on investments (773,203) (35,077,882) 4,456,967 (10,830)
----------- ------------ ----------- -----------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 748,958 $(28,846,844) $ 4,641,823 $ 1,881,690
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
10
<PAGE> 12
================================================================================
SECURITY FIRST TRUST
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED JULY 31, 2000
<TABLE>
<CAPTION>
T. Rowe Price
Growth and U.S. Government
Income Equity Income
Bond Series Series Series Series
------------ ------------- ------------ ---------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income $ 1,522,161 $ 6,231,038 $ 184,856 $ 1,892,520
Net realized gain (loss) on sale
of investments (1,106,001) 20,126,873 5,002,057 (464,991)
Net unrealized appreciation (depreciation)
during the period 332,798 (55,204,755) (545,090) 454,161
------------ ------------- ------------ ------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 748,958 (28,846,844) 4,641,823 1,881,690
------------ ------------- ------------ ------------
DISTRIBUTIONS TO SHAREOWNERS
Net investment income (1,410,330) (6,182,728) (360,159) (1,836,952)
Net realized gains (16,135,169) (1,714,979)
CAPITAL SHARE TRANSACTIONS - NOTE D
Reinvestment of net investment income
distributed 1,410,330 6,182,728 360,159 1,836,952
Reinvestment of net realized gains 16,135,169 1,714,979
Sales of capital shares 3,319,764 19,704,012 1,705,091 2,282,843
Redemptions of capital shares (5,566,736) (35,014,349) (5,644,649) (3,957,033)
------------ ------------- ------------ ------------
INCREASE (DECREASE) IN NET ASSETS
FROM CAPITAL SHARE
TRANSACTIONS (836,642) 7,007,560 (1,864,420) 162,762
------------ ------------- ------------ ------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS (1,498,014) (44,157,181) 702,265 207,500
NET ASSETS
BEGINNING OF YEAR 24,717,704 369,111,185 58,313,162 32,312,549
------------ ------------- ------------ ------------
END OF YEAR (including undistributed net
investment income: Bond Series -$876,932;
Growth and Income Series - $3,412,895;
Equity Series - $35,302; U.S. Government
Income Series - $1,113,498) $ 23,219,690 $ 324,954,004 $ 59,015,427 $ 32,520,049
============ ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
11
<PAGE> 13
================================================================================
SECURITY FIRST TRUST
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED JULY 31, 1999
<TABLE>
<CAPTION>
T. Rowe Price
Growth and U.S. Government
Income Equity Income
Bond Series Series Series Series
------------ -------------- ------------ ---------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income $ 1,222,895 $ 5,764,382 $ 398,609 $ 1,803,367
Net realized gain (loss) on sale
of investments (198,084) 17,734,362 1,354,678 (13,673)
Net unrealized appreciation (depreciation)
during the period (968,222) 31,098,623 7,802,709 (1,476,045)
------------ ------------- ------------ ------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 56,589 54,597,367 9,555,996 313,649
------------ ------------- ------------ ------------
DISTRIBUTIONS TO SHAREOWNERS
Net investment income (968,742) (5,234,796) (449,055) (1,847,027)
Net realized gains (207,719) (18,412,869) (8,668,236) (597,259)
CAPITAL SHARE TRANSACTIONS - NOTE D
Reinvestment of net investment income
distributed 968,742 5,234,796 449,055 1,847,027
Reinvestment of net realized gains 207,719 18,412,869 8,668,236 597,259
Sales of capital shares 9,504,353 37,641,014 793,709 2,362,361
Redemptions of capital shares (2,777,630) (13,568,724) (6,839,695) (4,454,380)
------------ ------------- ------------ ------------
INCREASE IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS 7,903,184 47,719,955 3,071,305 352,267
------------ ------------- ------------ ------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS 6,783,312 78,669,657 3,510,010 (1,778,370)
NET ASSETS
BEGINNING OF YEAR 17,934,392 290,441,528 54,803,152 34,090,919
------------ ------------- ------------ ------------
END OF YEAR (including undistributed net
investment income: Bond Series - $765,101;
Growth and Income Series - $3,364,585;
Equity Series - $210,605; U.S. Government
Income Series - $1,057,930) $ 24,717,704 $ 369,111,185 $ 58,313,162 $ 32,312,549
============ ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
12
<PAGE> 14
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
---------------- ---------- --------- ------
<S> <C> <C> <C>
CORPORATE NOTES 26.6%
Aerospace & Defense: 1.0%
Boeing Co., 8.75%, 08/15/21 50,000 $ 56,688
Lockheed Martin Corp., 7.75%, 05/01/26 90,000 86,063
Tyco International, Ltd., 6.375%, 06/15/05 80,000 76,100
--------
218,851
Automobiles & Related: 2.1%
Amerco., 8.80%, 02/04/05 150,000 143,813
Borg Warner Automotive, Inc., 6.5%, 02/15/09 235,000 208,269
Capital Auto Receivables Asset, 6.30%, 05/15/04 125,000 123,628
--------
475,710
Banking: 1.6%
Dime Bancorp, Inc., 6.375%, 01/30/01 250,000 248,445
HSBC Fin Nederland Bank, 7.40%, 04/15/03 100,000 99,750
--------
348,195
Chemicals and Allied Products: 0.8%
Fort James Corp., 6.875%, 09/15/07 195,000 182,325
Electric Utilities: 1.9%
CMS Energy Corp., 8.00%, 07/01/11 225,000 222,188
National Rural Utilities, 6.50%, 09/15/02 100,000 98,875
Public Service Electric & Gas Co., 6.25%, 01/01/07 100,000 92,750
--------
413,813
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
13
<PAGE> 15
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
---------------- ---------- --------- ----------
<S> <C> <C> <C>
CORPORATE NOTES (Continued)
Finance & Credit: 7.5%
G.E. Capital Mortgage Svcs., Inc., 6.25%, 12/25/28 245,861 $ 169,644
G.E. Capital Mortgage Svcs., Inc., 6.50%, 04/25/29 305,696 208,240
Honda Auto Lease Trust, 6.45%, 09/16/02 325,000 322,943
Hayes Lemerz International, Inc., 8.25%, 12/15/08 50,000 43,500
Northwest Asset Corp., 6.75%, 05/25/29 246,974 178,864
Merrill Lynch Mtg. Investment, Inc., 7.56%, 09/15/09 115,000 113,850
Salomon Smith Barney, Inc., 7.375%, 05/15/07 300,000 291,750
Texaco Capital, Inc., 5.5%, 01/15/09 220,000 194,700
Valero Pass-Through Asset Trust, 6.75%, 12/15/02 140,000 135,450
----------
1,658,941
Food & Beverages: 0.4%
Archer Daniels Midland Co., 6.625%, 05/01/29 120,000 102,150
Forest Products: 0.4%
Noranda Forest, Inc., 7.50%, 07/15/03 100,000 98,625
Health Services: 0.3%
Tenet Healthcare Corp., 7.875%, 01/15/03 70,000 68,950
Insurance Carriers: 1.2%
Conseco, Inc., 6.40%, 06/15/01 200,000 169,000
Prudential Insurance Co. America, 6.875%, 04/15/03 100,000 98,125
----------
267,125
Media & Communications: 1.5%
CSC Holdings, Inc., 8.125%, 07/15/2009 25,000 24,594
Isle of Capri Casinos, Inc., 8.75%, 04/15/09 100,000 91,500
Liberty Media Corp., 7.875%, 07/15/09 150,000 145,875
Metromedia Fiber Network, Inc., 10.00%, 12/15/09 70,000 68,250
----------
330,219
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
14
<PAGE> 16
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
----------------- ---------- --------- -----------
<S> <C> <C> <C>
CORPORATE NOTES (Continued)
Miscellaneous Business Services: 0.5%
Allied Waste North America, 7.875%, 01/0/09 115,000 $ 102,063
Miscellaneous Consumer Products: 2.5%
American Standard, Inc., 7.375%, 04/15/05 45,000 42,525
Jones Apparel Group, Inc., 7.875%, 06/15/06 230,000 219,937
S C International Service, Inc., 9.25%, 09/01/07 60,000 57,375
WMX Technologies, Inc., 7.125%, 06/15/01 250,000 245,625
------------
565,462
Oil and Gas Extraction: 1.6%
Apache Corp., 7.70%, 03/15/26 155,000 153,063
Quaker State Corp., 6.625%, 10/15/05 100,000 96,375
Tosco Corp., 8.125%, 02/15/2030 100,000 101,500
------------
350,938
Telephone Communication: 1.9%
Allegiance Telecom, Inc., 0.00%, 02/15/08 25,000 18,625
Charter Communications Holdings, 8.625%, 04/01/09 100,000 88,000
Crown Castle International, 0.00%, 05/15/11 75,000 47,250
GTE Corp., 6.94%, 04/15/28 100,000 90,121
Global Crossing Holdings, Ltd., 9.625%, 05/15/08 100,000 98,250
US West Communications, Inc., 7.50%, 06/15/23 80,000 73,900
------------
416,146
Transportation: 1.4%
Canadian National Railway Co., 6.90%, 07/15/28 165,000 145,200
Newport News Shipbuilding, Inc., 9.25% 12/01/06 60,000 60,600
Norfolk Southern Corp., 7.80%, 05/15/27 100,000 98,250
------------
304,050
------------
TOTAL CORPORATE NOTES
(COST $6,195,796) 5,903,563
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
15
<PAGE> 17
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
----------------- ----------- --------- -----------
<S> <C> <C> <C>
FEDERAL AGENCIES 58.0%
Federal Home Loan Mortgage Corp.: 0.2%
9.50%, 04/01/19 26,287 $ 27,346
9.00%, 06/01/19 13,352 13,811
------------
41,157
Federal National Mortgage Assn.: 10.8%
6.625%, 01/15/02 1,835,000 1,828,908
7.00%, 09/01/10 149,495 146,831
7.00%, 05/01/12 132,560 130,197
6.50%, 03/01/13 290,404 280,510
7.50%, 08/25/21 9,069 9,086
------------
2,395,532
Government National Mortgage Assn.: 47.0%
9.00%, 04/15/09 2,174 2,227
9.00%, 05/15/09 11,631 11,915
9.00%, 05/15/09 3,477 3,562
9.00%, 05/15/09 2,752 2,819
9.00%, 05/15/09 1,061 1,087
9.00%, 05/15/09 1,599 1,638
11.25%, 09/15/15 78,115 85,511
11.50%, 11/15/15 9,611 10,662
10.00%, 06/15/17 21,329 22,782
9.25%, 07/15/17 7,003 7,200
10.00%, 11/15/17 7,615 8,134
11.50%, 02/15/18 3,244 3,599
10.00%, 03/15/19 23,635 25,245
10.00%, 03/15/20 13,654 14,584
9.25%, 05/15/20 29,390 30,216
9.25%, 05/15/21 86,986 89,432
9.25%, 06/15/21 21,090 21,683
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
16
<PAGE> 18
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
Of Market
Value of Market
Fixed Maturities Portfolio Principal Value
----------------- ---------- --------- -----------
<S> <C> <C> <C>
FEDERAL AGENCIES (Continued)
Government National Mortgage Assn. (Continued)
7.00%, 08/15/23 70,120 $ 68,213
7.50%, 06/15/23 79,457 78,836
7.50%, 10/15/23 117,086 116,170
7.00%, 01/15/24 113,194 110,116
7.00%, 03/15/24 78,222 76,095
7.00%, 01/15/25 350,914 341,590
9.50%, 01/15/25 10,583 10,983
9.50%, 05/15/25 7,044 7,310
7.00%, 02/15/26 462,666 450,086
7.50%, 09/15/26 163,631 162,351
8.00%, 05/15/27 196,047 197,884
6.50%, 04/15/28 731,865 694,810
7.00%, 05/15/28 339,969 330,726
7.00%, 06/15/28 298,407 290,293
6.50%, 10/15/28 1,760,691 1,671,548
6.50%, 11/15/28 504,356 478,821
6.50%, 01/15/29 233,482 221,661
6.50%, 03/15/29 261,925 248,663
6.50%, 04/15/29 245,761 233,318
6.50%, 05/15/29 937,928 891,031
6.50%, 05/15/29 272,923 259,276
6.50%, 06/15/29 149,737 142,156
6.50%, 07/15/29 653,751 620,652
8.00%, 07/15/29 157,641 159,118
7.00%, 08/15/29 988,686 961,803
7.50%, 09/15/29 543,844 539,592
8.00%, 09/15/29 246,506 248,816
8.00%, 01/15/30 252,752 255,120
8.00%, 06/15/30 229,799 231,885
---------------
10,441,219
---------------
TOTAL FEDERAL AGENCIES
(COST $13,094,895) 12,877,908
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
17
<PAGE> 19
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
----------------- ---------- --------- -----------
<S> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS 13.8%
U.S. Treasury Bonds: 3.4%
6.625%, 02/15/27 260,000 $ 280,067
5.25%, 02/15/29 520,000 469,622
------------
749,689
U.S. Treasury Notes: 10.4%
3.375%, 01/15/07 316,839 305,252
5.50%, 05/15/09 1,385,000 1,327,869
6.00%, 08/15/09 675,000 670,565
------------
2,303,686
------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $2,969,151) 3,053,375
FOREIGN GOVERNMENT OBLIGATIONS 1.6%
Argentina Rep, 0.00%, 03/31/05 400,000 368,784
------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(COST $363,350) 368,784
------------
TOTAL INVESTMENTS
(COST $22,623,192) 100.0% 22,203,630
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
18
<PAGE> 20
================================================================================
SECURITY FIRST TRUST SCHEDULE I
BOND SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
Of Market
Value of Market
Forward Foreign Currency Contracts Portfolio Principal Value
----------------------------------- ---------- --------- -----------
<S> <C> <C> <C>
CONTRACTS TO BUY
557,000 Canadian Dollars (Settlement Date 08/09/00;
Payable amount $377,627; Market value $376,922) $ (705)
25,000 Euro Dollars (Settlement Date 08/22/00;
Payable amount $23,739; Market value $23,095) (644)
------------
(1,349)
Other assets less liabilities 1,017,409
------------
NET ASSETS $23,219,690
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
19
<PAGE> 21
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ---------- -------- ------------
<S> <C> <C> <C>
CAPITAL EQUIPMENT 4.1%
Electrical Equipment: 4.1%
Black & Decker Corp. 68,200 $ 2,536,187
General Electric Co. 105,000 5,400,938
Hubbell, Inc. Class B 60,000 1,447,500
Stanley Works 150,000 3,928,125
-------------
13,312,750
CONSUMER CYCLICALS 0.5%
Automobiles & Related: 0.5%
Genuine Parts Co. 80,000 1,605,000
CONSUMER NONDURABLES 20.6%
Food & Beverages: 6.4%
Anheuser-Busch Company, Inc. 50,000 4,025,000
Campbell Soup Co. 100,000 2,650,000
General Mills, Inc. 108,000 3,712,500
Hershey Foods, Inc. 70,000 3,237,500
McCormick & Co. 100,000 2,931,250
Pepsico, Inc. 50,000 2,290,625
Ralston Purina Group 100,000 2,018,750
-------------
20,865,625
Health Services: 0.7%
Baxter International, Inc. 30,000 2,332,500
Miscellaneous Consumer Products: 5.5%
Colgate Palmolive Co. 60,000 3,341,250
Eastman Kodak Company 60,000 3,292,500
Fortune Brands, Inc. 120,000 2,700,000
Gillette Co. 51,300 1,497,318
</TABLE>
These accompanying notes are an integral part of these financial statements.
================================================================================
20
<PAGE> 22
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
------------------ ---------- -------- ------------
<S> <C> <C> <C>
CONSUMER NONDURABLES (Continued)
Miscellaneous Consumer Products (Continued)
Int'l. Flavors & Fragrance 100,000 $ 2,675,000
Owens Corning Fiber 70,000 385,000
Philip Morris Companies, Inc. 100,000 2,525,000
UST, Inc. 100,000 1,450,000
-------------
17,866,068
Pharmaceuticals: 8.0%
Abbott Laboratories 150,000 6,243,750
American Home Products Corporation 125,000 6,632,812
Johnson & Johnson 45,000 4,187,813
Merck & Co. 27,500 1,971,406
Pharmacia Corporation 59,500 3,257,625
Schering-Plough Corp. 80,000 3,455,000
-------------
25,748,406
CONSUMER SERVICES 16.6%
Entertainment & Leisure: 3.1%
Hilton Hotels Corp. 400,000 4,100,000
Starwood Hotel & Resort Worldwide, Inc. 175,000 5,971,875
-------------
10,071,875
General Merchandise Stores: 6.6%
Albertsons, Inc. 125,000 3,773,437
May Department Stores Co. 58,000 1,377,500
Neiman-Marcus Group, Inc.* 90,000 2,970,000
Nordstrom, Inc. 67,000 1,172,500
Penney J C Co. 50,000 806,250
Target Corp. 180,000 5,220,000
Toys R Us, Inc.* 250,000 4,125,000
Tupperware Corp. 100,000 1,943,750
-------------
21,388,437
</TABLE>
* Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
21
<PAGE> 23
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ----------- -------- ------------
<S> <C> <C> <C>
CONSUMER SERVICES (Continued)
Media & Communications: 5.5%
Walt Disney Company Holding Co. 156,300 $ 6,046,855
Knight Ridder, Inc. 60,000 3,127,500
Meredith Corp. 60,000 1,908,750
Readers Digest Assn., Inc. 35,000 1,194,375
Viacom, Inc. CL B * 81,375 5,396,180
-------------
17,673,660
Miscellaneous Business Services: 1.4%
Waste Management, Inc. 250,000 4,671,875
ENERGY 10.5%
Oil And Gas Extraction: 10.5%
Amerada Hess Corp. 65,000 3,932,500
BP Amoco PLC. 241,532 12,635,143
Baker Hughes, Inc. 131,200 4,542,800
Chevron Corp. 40,000 3,160,000
Exxon Mobil Corp. 57,122 4,569,760
Texaco, Inc. 30,600 1,512,788
Unocal Corp. 125,000 3,781,250
-------------
34,134,241
FINANCIAL 16.9%
Banking: 6.6%
Bank One Corp. 110,000 3,499,375
Chase Manhattan Corp. 45,000 2,235,938
Firstar Corp.* 175,000 3,456,250
Mellon Financial Corp. 100,000 3,768,750
National City Corp. 100,000 1,775,000
Washington Mutual, Inc. 120,000 3,855,000
</TABLE>
* Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
22
<PAGE> 24
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ---------- -------- -------------
<S> <C> <C> <C>
FINANCIAL (Continued)
Banking (Continued)
Wells Fargo & Co. 66,660 $ 2,753,891
-------------
21,344,204
Federal Agencies: 0.7%
Freddie Mac 60,000 2,366,250
Financial Services: 5.2%
H&R Block, Inc. 60,000 1,920,000
Citigroup, Inc. 165,547 11,681,410
J.P. Morgan & Co. 25,000 3,337,500
-------------
16,938,910
Insurance Carriers: 4.4%
Chubb Corp. 65,000 4,810,000
Loews Corp. 30,000 1,882,500
St. Paul Companies, Inc. 105,136 4,671,981
UnumProvident Corp. 125,000 2,875,000
-------------
14,239,481
PROCESS INDUSTRIES 10.7%
Chemicals and Allied Products: 7.0%
Dow Chemical Co. 90,000 2,587,500
Dupont Co. 50,000 2,265,625
Fort James Corp. 125,000 3,820,313
Great Lakes Chemical Corp. 100,000 2,937,500
Hercules, Inc. 130,000 1,941,875
Imperial Chemical ADR 100,000 2,868,750
Minnesota Mining & Manufacturing Co. 38,300 3,449,394
Pall Corp. 125,000 2,593,750
-------------
22,464,707
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
23
<PAGE> 25
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- --------- ------ -----
PROCESS INDUSTRIES (Continued)
<S> <C> <C> <C>
Forest Products: 0.4%
Weyerhaeuser Co. 30,000 $ 1,370,625
Metal Mining: 1.0%
Newmont Mining Corp. 75,000 1,331,250
Phelps Dodge Corp. 50,000 2,034,375
-------------
3,365,625
Paper And Allied Products: 2.3%
Kimberly-Clark Corp. 100,000 5,743,750
International Paper Co. 47,278 1,607,452
-------------
7,351,202
TECHNOLOGY 5.5%
Computer and Office Equipment: 5.5%
America Online, Inc.* 40,000 2,132,500
BMC Software, Inc.* 100,000 1,887,500
Computer Associates International, Inc. 75,000 1,860,938
First Data Corp. 125,000 5,757,813
Microsoft Corp. 40,000 2,792,500
Motorola, Inc. 50,000 1,653,125
Xerox Corp. 120,000 1,785,000
-------------
17,869,376
TRANSPORTATION 5.9%
Aerospace and Defense: 3.8%
Boeing Company 100,000 4,900,000
Lockheed Martin Corp. 100,000 2,812,500
Raytheon Co. CL B 100,000 2,425,000
Rockwell International Corp. 60,000 2,103,750
-------------
12,241,250
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
24
<PAGE> 26
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- --------- ------ -----
<S> <C> <C> <C>
TRANSPORTATION (Continued)
Railroad Transportation: 2.1%
Norfolk Southern Corp. 200,000 $ 3,725,000
Union Pacific Corp. 70,000 3,023,125
------------
6,748,125
UTILITIES 5.3%
Telephone Communication: 2.4%
AT&T Co. 30,000 928,125
SBC Communications, Inc. 104,865 4,463,317
Verizon Communications, Inc. 48,800 2,293,600
------------
7,685,042
Utility Holding Companies: 2.9%
Edison International 50,000 984,375
Niagara Mohawk Holdings, Inc.* 137,500 1,830,468
Peco Energy Co. 50,000 2,134,375
Scottish Power PLC* 40,600 1,344,875
Unicom Corp. 75,000 3,079,688
------------
9,373,781
============
TOTAL EQUITY SECURITIES
(COST $268,381,419) 313,029,015
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
25
<PAGE> 27
================================================================================
SECURITY FIRST TRUST SCHEDULE I
T. ROWE PRICE GROWTH AND INCOME SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Short-Term Investments Portfolio Principal Value
---------------------- ----------- ---------- -------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS 3.4%
Commercial Paper: 3.4%
Ciesco L.P, 6.55%, 08/17/2000 5,000,000 $ 4,985,340
Knight Ridder Inc., 6.54%, 08/31/2000 6,000,000 5,967,049
------------
TOTAL SHORT-TERM INVESTMENTS
(COST $10,952,389) 10,952,389
------------
TOTAL INVESTMENTS
(COST $279,333,808) 100.0% 323,981,404
Other assets less liabilities 972,600
------------
NET ASSETS $ 324,954,004
=============
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
26
<PAGE> 28
================================================================================
SECURITY FIRST TRUST SCHEDULE I
EQUITY SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ----------- -------- -----------
<S> <C> <C> <C>
CAPITAL EQUIPMENT 6.3%
Aerospace & Defense: 1.1%
Boeing Company 4,400 $ 215,600
Tyco International, Ltd. 8,100 433,350
-----------
648,950
Electrical Equipment: 4.2%
General Electric Co. 47,600 2,448,425
Machinery: 1.0%
Illinois Tool Works, Inc. 9,600 549,600
CONSUMER NONDURABLES 14.9%
Food & Beverages: 3.4%
Anheuser-Busch Company, Inc. 9,700 780,850
Coca Cola 13,800 846,112
Pepsico, Inc. 7,400 339,013
-----------
1,965,975
Health Services: 0.7%
Medtronic, Inc. 7,900 403,394
Miscellaneous Consumer Products: 1.3%
McDonalds Corp. 10,300 324,450
Proctor & Gamble Co. 7,200 409,500
-----------
733,950
Pharmaceuticals: 9.5%
American Home Products Co. 12,000 636,750
Amgen, Inc.* 6,000 389,625
Johnson & Johnson 10,300 958,544
Lilly Eli & Co. 7,800 810,225
Merck & Co. 15,100 1,082,481
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
27
<PAGE> 29
================================================================================
SECURITY FIRST TRUST SCHEDULE I
EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ------------ ------- ------------
<S> <C> <C> <C>
CONSUMER NONDURABLES (Continued)
Pharmaceuticals (Continued)
Pfizer, Inc. 24,475 $ 1,055,484
Schering Plough Corp. 13,800 595,988
------------
5,529,097
CONSUMER CYCLICALS 0.5%
Automobiles & Related: 0.5%
Ford Motor Co. 6,400 298,000
CONSUMER SERVICES 10.2%
General Merchandise Stores: 5.2%
Costco Wholesale Corp.* 14,300 465,644
Gap, Inc. 8,300 297,244
Home Depot, Inc. 16,450 851,288
Walmart Stores 26,000 1,428,375
------------
3,042,551
Media & Communications: 5.0%
A T & T Corp Liberty Media Group 15,400 342,650
Clear Channel Communication, Inc.* 10,500 799,969
Walt Disney Company Holding Co. 14,000 541,625
Time Warner, Inc. 7,600 582,825
Viacom, Inc. CL B * 9,154 607,025
------------
2,874,094
ENERGY 5.6%
Oil And Gas Extraction: 5.6%
Exxon Mobil Corp. 20,528 1,642,240
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
28
<PAGE> 30
================================================================================
SECURITY FIRST TRUST SCHEDULE I
EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ----------- -------- ------------
<S> <C> <C> <C>
ENERGY (Continued)
Oil And Gas Extraction (Continued)
Royal Dutch Petroleum Co. ADR 17,700 $ 1,031,025
Schlumberger Limited 8,200 606,288
Transocean Sedco Forex, Inc. 26 1,287
------------
3,280,840
FINANCIAL 18.1%
Banking: 1.8%
Chase Manhattan Corp. 12,800 636,000
Mellon Financial Corp. 11,500 433,406
------------
1,069,406
Federal Agencies: 1.3%
Federal National Mortgage Assn. 18,700 737,481
Financial Services: 12.0%
American Express Co. 6,400 362,800
Citigroup, Inc. 33,475 2,362,080
MBNA Corp. 13,700 457,238
Morgan Stanley Dean Witter 9,870 900,638
Northern Trust Corp. 6,500 486,688
Charles Schwab Corp. 12,100 437,113
SPDR Trust 13,800 1,972,535
------------
6,979,092
Insurance Carriers: 3.0%
Ace Limited 2,400 86,400
American International Group 18,880 1,655,540
------------
1,741,940
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
29
<PAGE> 31
================================================================================
SECURITY FIRST TRUST SCHEDULE I
EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ------------ ------ -----------
<S> <C> <C> <C>
PROCESS INDUSTRIES 1.9%
Chemicals and Allied Products: 0.6%
Dow Chemical Co. 11,100 $ 319,125
Metal Mining: 0.7%
Alcoa, Inc. 14,300 432,575
Paper And Allied Products: 0.6%
International Paper Co. 10,700 363,800
TECHNOLOGY 34.3%
Communication Equipment: 8.3%
Arcatel Sponsored ADRS 4,100 299,813
Corning, Inc. 2,000 467,875
Lucent Technologies, Inc. 16,300 713,125
Motorola, Inc. 27,000 892,688
Nextel Communication, Inc.* 9,800 548,188
Nortel Networks Corp. 20,900 1,554,436
Vodafone Airtouch PLC ADR 8,000 340,000
-----------
4,816,125
Computer & Office Equipment: 26.0%
America Online, Inc.* 18,100 964,956
Applied Materials, Inc.* 4,000 303,500
Cisco Systems Inc.* 42,600 2,787,638
Dell Computer Corp.* 24,000 1,054,500
EMC Mass Corp.* 13,100 1,115,138
Electronic Data System Corp. 10,500 451,500
Hewlett Packard Co. 5,200 567,775
Intel Corp. 36,600 2,443,050
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
30
<PAGE> 32
================================================================================
SECURITY FIRST TRUST SCHEDULE I
EQUITY SERIES
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of No. of Market
Equity Securities Portfolio Shares Value
----------------- ----------- ------ ------------
<S> <C> <C> <C>
TECHNOLOGY (Continued)
Computer & Office Equipment (Continued)
International Business Machines Corp. 8,800 $ 989,450
Microsoft Corp. 26,800 1,870,975
Oracle Corp.* 13,500 1,015,031
Sun Microsystems, Inc.* 7,900 832,956
Texas Instruments, Inc. 12,700 745,331
-------------
15,141,800
UTILITIES 8.2%
Telephone Communication: 5.9%
AT&T Co. 12,000 371,250
Qwest Communications International, Inc. 11,936 560,246
SBC Communications, Inc. 19,000 808,687
Verizon Communications, Inc. 19,900 935,300
Worldcom, Inc.* 19,000 742,187
-------------
3,417,670
Utility Holding Companies: 2.3%
Aes Corp.* 13,800 737,437
American Power Conversion Corp.* 6,500 165,343
Calpine Corp. 6,000 427,500
-------------
1,330,280
-------------
TOTAL INVESTMENTS
(COST $44,935,123) 100.0% 58,124,170
Other assets less liabilities 891,257
-------------
NET ASSETS $ 59,015,427
=============
</TABLE>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
================================================================================
31
<PAGE> 33
================================================================================
SECURITY FIRST TRUST SCHEDULE I
U.S. GOVERNMENT INCOME SERIES
PORTFOLIO OF INVESTMENTS
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
---------------- ----------- ---------- -----------
<S> <C> <C> <C>
CORPORATE NOTES 1.9%
Finance & Credit: 1.9%
Deutsche Mortgage & Asset, 6.22%, 09/15/07 106,776 $ 102,804
GMAC Mortgage Corp., 5.94%, 07/01/13 431,651 387,757
Residential Accredit Lines, Inc., 6.75%, 05/25/28 116,248 113,822
-----------
604,383
-----------
TOTAL CORPORATE NOTES
(COST $639,117) 604,383
U.S. GOVERNMENT OBLIGATIONS 32.0%
U.S. Treasury Bonds: 30.7%
8.75%, 11/15/08 500,000 532,030
12.75%, 11/15/10 600,000 768,186
14.00%, 11/15/11 50,000 69,438
9.25%, 02/15/16 410,000 536,202
8.50%, 02/15/20 3,130,000 3,969,216
6.375%, 08/15/27 3,580,000 3,744,429
5.25%, 02/15/29 230,000 207,718
-----------
9,827,219
U.S. Treasury Notes: 1.3%
6.375%, 04/30/02 250,000 250,000
5.875%, 11/15/04 170,000 167,768
-----------
417,768
-----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $10,361,424) 10,244,987
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
32
<PAGE> 34
================================================================================
SECURITY FIRST TRUST SCHEDULE I
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
of Market
Value of Market
Fixed Maturities Portfolio Principal Value
---------------- ---------- ---------- -----------
<S> <C> <C> <C>
FEDERAL AGENCIES 59.5%
Federal Farm Credit Bank: 6.7%
6.05%, 04/21/03 550,000 $ 538,203
6.94%, 05/19/05 125,000 124,816
7.37%, 08/01/06 1,500,000 1,496,835
-----------
2,159,854
Federal Home Loan Bank: 0.8%
8.00%, 08/27/01 250,000 252,768
Federal Home Loan Mortgage Corp.: 16.1%
7.36%, 06/05/07 1,500,000 1,476,150
7.00%, 07/01/07 54,479 53,236
7.00%, 09/01/10 159,137 156,500
6.50%, 04/01/11 942,803 911,568
6.00%, 05/11/11 999,667 949,054
5.50%, 05/01/14 465,156 432,595
6.918%, 07/01/27 6,176 6,183
6.50%, 04/01/29 487,194 461,158
6.50%, 05/01/29 715,730 677,481
6.50%, 06/01/29 35,025 33,154
-----------
5,157,079
Federal National Mortgage Assn.: 22.1%
6.125%, 11/25/03 130,144 128,787
5.125%, 02/13/04 175,000 165,120
6.14%, 09/10/08 225,000 208,861
6.09%, 10/01/08 513,030 475,168
6.00%, 11/01/08 270,526 259,705
6.50%, 03/01/09 71,587 70,693
7.00%, 04/01/11 775,935 762,108
7.00%, 05/01/11 370,525 363,922
5.50%, 07/01/13 428,017 396,985
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
33
<PAGE> 35
================================================================================
SECURITY FIRST TRUST SCHEDULE I
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
Of Market
Value of Market
Fixed Maturities Portfolio Principal Value
---------------- ------------ ----------- -----------
<S> <C> <C> <C>
FEDERAL AGENCIES (Continued)
Federal National Mortgage Assn. (Continued)
8.00%, 11/01/13 523,443 $ 525,406
5.50%, 01/01/14 462,803 429,249
5.50%, 02/01/14 458,187 424,968
6.00%, 03/01/14 61,348 58,127
8.00%, 08/01/14 246,977 249,677
6.50%, 05/17/15 700,000 662,816
6.32%, 10/01/23 691,946 633,131
8.00%, 10/01/25 144,592 145,134
6.00%, 06/01/29 487,442 447,681
6.50%, 06/01/29 495,016 467,944
6.50%, 09/01/29 194,289 183,663
-----------
7,059,145
Government National Mortgage Assn.: 12.9%
8.25%, 02/15/09 199,930 203,179
6.00%, 04/15/14 453,313 431,780
7.00%, 10/15/23 480,979 467,901
7.50%, 01/15/26 689,529 684,135
6.50%, 03/15/29 214,265 203,417
6.50%, 04/15/29 176,935 167,977
6.50%, 05/15/29 230,708 219,028
6.50%, 06/15/29 216,195 205,249
6.50%, 07/15/29 537,122 509,927
6.50%, 07/15/29 498,364 473,132
6.50%, 08/15/29 602,089 571,605
-----------
4,137,330
Other Federal Agencies: 0.9%
Small Business Admin., 5.50%, 10/01/18 334,152 296,259
-----------
TOTAL FEDERAL AGENCIES
(COST $19,452,737) 19,062,435
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
34
<PAGE> 36
================================================================================
SECURITY FIRST TRUST SCHEDULE I
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2000
<TABLE>
<CAPTION>
Percentage
Of Market
Value of Market
Short-Term Investments Portfolio Principal Value
---------------------- --------- ---------- -------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS 6.6%
Federal Home Loan Bank, 5.72%, 08/01/00
(COST $2,100,000) 2,100,000 $ 2,100,000
-------------
TOTAL INVESTMENTS
(COST $32,553,278) 100.0% 32,011,805
Other assets less liabilities 508,244
-------------
NET ASSETS $ 32,520,049
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
35
<PAGE> 37
================================================================================
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2000
NOTE A -- ORGANIZATION OF THE TRUST AND SIGNIFICANT ACCOUNTING POLICIES
Security First Trust (the Trust) was established under Massachusetts law
pursuant to a Declaration of Trust dated February 13, 1987, as an unincorporated
business trust, a form of organization that is commonly called a Massachusetts
Business Trust. The Trust is registered with the Securities and Exchange
Commission as a diversified open-end management investment company (mutual fund)
under the Investment Company Act of 1940 (1940 Act).
On June 17, 1987, the shareowners of Security First Legal Reserve Fund, Inc. and
Security First Variable Life Fund, Inc. (the Funds), each of which was a
Maryland corporation registered as an investment company under the 1940 Act,
approved Plans of Reorganization and Liquidation and on July 24, 1987, the Funds
became Series of the Trust and their shareowners became shareowners of the Bond
Series and the T. Rowe Price Growth and Income Series (the Growth and Income
Series), respectively, in a tax-free exchange of shares. The Trust operates as a
"series company," as that term is used in Rule 18f-2 under the 1940 Act.
Financial information for periods prior to June 17, 1987, reflect the results of
the respective funds.
The Declaration of Trust permits the Trustees to issue an unlimited number of
shares and to divide such shares into an unlimited number of series, all without
shareowner approval. Pursuant to this authority, the Board of Trustees of
Security First Trust established the Equity Series and the U.S. Government
Income Series on July 11, 1993, which commenced operations May 19, 1993.
The following is a summary of significant accounting policies followed by the
Trust:
FEDERAL INCOME TAXES -- Each series of the Trust has elected to qualify as a
"Regulated Investment Company." No provision for federal income taxes is
necessary because each series intends to maintain its qualification as a
"Regulated Investment Company" under the Internal Revenue Code and distribute
each year substantially all of its net income and realized capital gains to its
shareowners. Income and gains to be distributed are determined annually as of
December 31.
As of 12/31/1999 the Bond Series and U.S. Government Income Series had capital
loss carryforwards of $657,021 and $857,344, respectively. The loss
carryforwards expire on 12/31/2009.
PORTFOLIO VALUATION -- Investments are carried at market value. The market value
of equity securities is determined as follows: securities traded on a national
securities exchange are valued at the last sale price; securities not traded on
a national securities exchange are valued at the bid price for such securities
as reported by security dealers. Fixed maturities are valued at prices obtained
from a major dealer in bonds.
Short-term investments that have remaining maturities of more than 60 days and
for which representative market quotations are readily available are valued at
the most recent bid price or yield equivalent as quoted by a major broker-dealer
in money market securities. Securities with remaining maturities of 60 days or
less are valued at their amortized cost, which approximates market value due to
the short duration to maturity. Securities and other assets for which such
procedures are deemed not to reflect fair value, or for which representative
quotes are not readily available, are valued at prices deemed best to reflect
their fair value as determined in good faith by or under supervision of officers
of the Trust in a manner specifically authorized by the Board of Directors and
applied on a consistent basis.
================================================================================
36
<PAGE> 38
================================================================================
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A--ORGANIZATION OF THE TRUST AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CURRENCY TRANSLATION -- Assets and liabilities are translated into U.S. dollars
at the prevailing exchange rate at the end of the reporting period. Purchases
and sales of securities and income and expenses are translated into U.S. dollars
at the prevailing exchange rate on the dates of such transactions. The effect of
changes in foreign exchange rates on realized and unrealized security gains and
losses is reflected as a component of such gains and losses.
FOREIGN CURRENCY CONTRACTS -- The Trust may use foreign currency contracts to
facilitate transactions in foreign securities and to manage the Trust's currency
exposure.
Contracts to buy and to sell foreign currency generally are used to minimize the
effect of currency fluctuation on the portfolios. Also, a contract to buy or to
sell can offset a previous contract. Losses may arise from changes in the value
of the foreign currency or if the counterparties do not perform under the
contractual terms.
The U.S. dollar value of forward foreign currency contracts is determined using
forward currency exchange rates supplied by The Wall Street Journal. Purchases
and sales of forward foreign currency contracts having the same settlement date
are offset, and any gain or loss is recognized on the date of offset; otherwise,
the gain or loss is recognized on the settlement date.
DIVIDENDS AND DISTRIBUTIONS -- Each series declares dividends annually. Net
realized gains from security transactions, if any, are distributed annually.
OTHER -- As is common in the industry, security transactions are accounted for
no later than the day following the date the securities are purchased or sold.
Dividend income is recorded on the ex-dividend date. Interest income is accrued
daily. Net realized gain or loss on sale of investments is determined by the
specific identification method.
ESTIMATES -- Certain amounts reported in the accompanying financial statements
are based on management's best estimates and judgements. Actual results could
differ from those estimates.
NOTE B -- REMUNERATION OF MANAGER AND OTHERS
Bond Series and T. Rowe Price Growth and Income Series:
Security First Investment Management Corporation (Security Management or
Manager) serves as both investment adviser and manager, and is entitled by
agreement to a monthly fee equal to 1/24 of 1% of the average daily net asset
value of the Bond Series and Growth and Income Series (equivalent annually to
.5%), less compensation payable to the Series' sub-advisers, Neuberger & Berman,
LLC and T. Rowe Price Associates, respectively. However, to the extent that
operating expenses (including management fees but excluding interest and taxes
and certain extraordinary expenses) of each series exceed 2.5% of the first $30
million of each series' average daily net assets, 2.0% of the next $70 million
of each series' average daily net assets, and 1.5% of each series' average daily
net assets in excess of that amount, calculated on the basis of each series'
fiscal year (the expense limitation), the agreement requires that Security
Management waive its fee. In addition, for the year ended July 31, 2000,
Security Management has also agreed to reimburse the Bond Series for any
remaining expenses exceeding a limitation
SECURITY FIRST TRUST
================================================================================
37
<PAGE> 39
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- REMUNERATION OF MANAGER AND OTHERS (CONTINUED)
equivalent annually to 1.5%. Security Management may elect on an annual basis to
reimburse the Series for future excess expenses.
If during the fiscal year repayments are made to the Manager and the series'
expenses subsequently exceed the expense limitation, the Series shall recover
such repayments from the Manager to the extent of the excess determined.
Conversely, if during the fiscal year repayments are made by the Manager and the
series' expenses subsequently are within the expense limitation, the Manager
shall recover such repayments to the extent of the excess repaid. It is
management's opinion that it is reasonably possible that actual operating
expense may be less than the expense limitation; however, in accordance with the
requirements of FASB Statement No. 5, no accrual has been made for the
contingent obligation to repay Security Management for excess expense
reimbursements since the conditions required for such accrual have not, in the
opinion of management, been met.
T. Rowe Price Associates provides investment advice and makes investment
decisions for the Growth and Income Series, while Neuberger & Berman, LLC
provides the same for the Bond Series. T. Rowe Price Associates and Neuberger &
Berman, LLC are each paid an annual fee of .35% of the average daily net assets
of the series for which they respectively provide investment advice less any
compensation payable to Security Management acting as adviser on certain assets
in which a series may invest.
Equity Series and U.S. Government Income Series:
Security Management serves as both investment adviser and manager, and is
entitled by agreement to a monthly fee equal to 1/17 of 1% (equivalent annually
to .7%) of the average daily net asset value of the Equity Series and 1/22 of 1%
(equivalent annually to .55%) of the average daily net asset value of the U.S.
Government Income Series, less compensation payable to the Series' sub-adviser,
Blackrock, Inc. (Blackrock). However, to the extent that operating expenses
(including management fees but excluding interest and taxes and certain
extraordinary expenses) of each series exceed 2.5% of the first $30 million of
each series' average daily net assets, 2.0% of the next $70 million of each
series' average daily net assets and 1.5% of each series' average daily net
assets in excess of that amount, calculated on the basis of each series' fiscal
year (the expense limitation), the agreement requires that Security Management
and Blackrock waive their fees.
Blackrock provides investment advice and makes investment decisions for the U.S.
Government Income Series and for the Equity Series. Blackrock is paid an annual
fee of .40% of the average daily net assets of the U.S. Government Income Series
and an annual fee of .55% of the average daily net assets of the Equity Series.
SECURITY FIRST TRUST
================================================================================
38
<PAGE> 40
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C -- INVESTMENT SECURITIES TRANSACTIONS
Purchases and sales of fixed maturities and equity securities for the year ended
July 31, 2000 were as follows:
<TABLE>
<CAPTION>
T. Rowe Price
Growth U.S.
and Government
Income Equity Income
Bond Series Series Series Series
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Government Securities:
Purchases $ 27,262,380 $ 50,241,251
Sales 28,207,320 51,138,844
Other Investment Securities:
Purchases 15,323,341 $ 77,736,240 $ 48,945,616 256,172
Sales 16,089,569 50,617,104 48,275,745 1,597,940
</TABLE>
The cost of investments at July 31, 2000 was the same for both financial
statement and federal income tax purposes. At July 31, 2000, the composition of
unrealized appreciation and depreciation of investment securities was as
follows:
<TABLE>
<CAPTION>
Unrealized
Appreciation Depreciation Net
-------------- -------------- ---------------
<S> <C> <C> <C>
Bond Series $ 151,839 $ (572,750) $ (420,911)
T. Rowe Price Growth and Income Series 87,812,518 (43,164,922) 44,647,596
Equity Series 15,042,867 (1,853,820) 13,189,047
U.S. Government Income Series 235,733 (777,206) (541,473)
</TABLE>
================================================================================
39
<PAGE> 41
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE D -- CAPITAL SHARE TRANSACTIONS
Transactions in capital shares of the Trust were as follows:
<TABLE>
<CAPTION>
Shares Issued
in Connection
with Reinvestment of
Net Net
Investment Realized
Income Gain
Sold Distributions Distributions Redeemed Net
---------- ------------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JULY 31, 2000
Bond Series 860,594 379,121 (1,471,680) (231,965)
T. Rowe Price Growth and Income Series 1,176,075 385,000 1,004,682 (2,272,433) 293,324
Equity Series 191,684 39,195 186,614 (634,942) (217,449)
U.S. Government Income Series 453,683 380,323 (790,971) 43,035
YEAR ENDED JULY 31, 1999
Bond Series 2,312,332 240,383 51,543 (682,801) 1,921,457
T. Rowe Price Growth and Income Series 2,272,424 331,107 1,164,634 (812,020) 2,956,145
Equity Series 94,561 56,914 1,098,636 (814,089) 436,022
U.S. Government Income Series 441,277 351,815 113,764 (828,203) 78,653
</TABLE>
================================================================================
40
<PAGE> 42
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- FINANCIAL HIGHLIGHTS
The per share information for each respective series' capital stock outstanding
throughout the period is as follows:
<TABLE>
<CAPTION>
NET REALIZED TOTAL
AND UNREALIZED INCOME
NET ASSET GAINS (LOSS) DIVIDENDS
VALUE AT NET (LOSSES) ON FROM FROM NET
BEGINNING INVESTMENT INVESTMENTS INVESTMENT INVESTMENT
OF YEAR INCOME OPERATIONS INCOME
-------------- -------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
BOND SERIES
Year ended July 31,
1996 $ 3.92 $ .24 $ (.04) $ .20 $ (.24)
1997 3.88 .24 .14 .38 (.24)
1998 4.02 .19 .11 .30 (.21)
1999 4.11 .18 (.14) .04 (.18)
2000 3.93 .24 (.11) .13 (.22)
T. ROWE PRICE
GROWTH AND
INCOME SERIES
Year ended July 31,
1996 $ 10.58 $ .30 $ 1.56 $ 1.86 $ (.30)
1997 12.10 .30 4.69 4.99 (.29)
1998 16.26 .28 1.27 1.55 (.30)
1999 16.56 .29 2.45 2.74 (.29)
2000 18.01 .29 (1.61) (1.32) (.29)
EQUITY SERIES
Year ended July 31,
1996 $ 5.70 $ .10 $ .46 $ .56 $ (.05)
1997 6.05 .09 2.60 2.69 (.11)
1998 8.18 .07 1.04 1.11 (.08)
1999 8.57 .06 1.42 1.48 (.07)
2000 8.54 .02 .68 .70 (.05)
U.S. GOVERNMENT
INCOME SERIES
Year ended July 31,
1996 $ 5.13 $ .18 $ .04 $ .22 $ (.19)
1997 5.15 .23 .20 .43 (.22)
1998 5.36 .27 .06 .33 (.24)
1999 5.45 .30 (.24) .06 (.31)
2000 5.10 .30 (.01) .29 (.29)
<CAPTION>
DISTRIBUTIONS
FROM NET ASSET
REALIZED VALUE AT
CAPITAL END OF TOTAL
GAINS YEAR RETURN(1)
--------------- ------------- --------------
<S> <C> <C> <C>
BOND SERIES
Year ended July 31,
1996 $ 3.88 5.10%
1997 4.02 9.79
1998 4.11 7.46
1999 $ (.04) 3.93 0.97
2000 3.84 3.31
T. ROWE PRICE
GROWTH AND
INCOME SERIES
Year ended July 31,
1996 $ (.04) $ 12.10 17.58%
1997 (.54) 16.26 41.24
1998 (.95) 16.56 9.53
1999 (1.00) 18.01 16.55
2000 (.77) 15.63 (7.33
EQUITY SERIES
Year ended July 31,
1996 $ (.16) $ 6.05 9.82%
1997 (.45) 8.18 44.46
1998 (.64) 8.57 13.57
1999 (1.44) 8.54 17.27
2000 (.26) 8.93 8.20
U.S. GOVERNMENT
INCOME SERIES
Year ended July 31,
1996 $ (.01) $ 5 .15 4.29%
1997 5.36 8.35
1998 5.45 6.16
1999 (.10) 5.10 1.10
2000 5.10 5.69
</TABLE>
(1) Total return computed after deduction of all series expenses, but before
deduction of actuarial risk charges and other fees of the variable annuity
account.
================================================================================
41
<PAGE> 43
================================================================================
SECURITY FIRST TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
Ratio of
Ratio of Net
Operating Investment
Expenses Income Portfolio Net Assets
to Average to Average Turnover End of
Net Assets Net Assets Rate Year
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
BOND SERIES
Year ended July 31,
1996 .90% 6.32% 34% $ 8,981,365
1997 .75 6.41 54 10,634,720
1998 .73 5.78 125 17,934,392
1999 .66 5.46 147 24,717,704
2000 .68 6.30 177 23,219,690
T. ROWE PRICE
GROWTH AND INCOME SERIES
Year ended July 31,
1996 .64% 2.73% 8% $ 112,552,893
1997 .57 2.44 14 204,703,098
1998 .57 1.92 11 290,441,528
1999 .59 1.83 15 369,111,185
2000 .55 1.83 16 324,954,004
EQUITY SERIES
Year ended July 31,
1996 1.00% 2.24% 88% $ 20,701,776
1997 1.00* 1.56* 55 47,571,469
1998 .91* .86* 87 54,803,152
1999 .81 .72 23 58,313,162
2000 .80 .31 83 59,015,427
U.S. GOVERNMENT INCOME SERIES
Year ended July 31,
1996 .70% 5.38% 148% $ 14,888,824
1997 .70** 5.68** 62 28,889,460
1998 .66** 5.53** 103 34,090,919
1999 .71 5.37 307 32,312,549
2000 .71 5.85 159 32,520,049
</TABLE>
* The former investment adviser had agreed to waive a portion of its management
and advisory fees. Absent this agreement, the ratio of expenses to average net
assets and the ratio of net investment income to average net assets would have
been .98% and .81% and 1.05% and 1.51% for 1998 and 1997 respectively.
** The former investment adviser had agreed to waive a portion of its management
and advisory fees. Absent this agreement, the ratio of expenses to average net
assets and the ratio of net investment income to average net assets would have
been .90% and 5.27% and 1.04% and 5.34% for 1998 and 1997 respectively.
================================================================================
42
<PAGE> 44
INDEPENDENT AUDITORS' REPORT
To the Shareholders and the Board of Trustees
of the Security First Trust:
We have audited the accompanying statements of assets and liabilities, including
the portfolio of investments, of the Security First Trust comprised of the Bond
Series, the T. Rowe Price Growth and Income Series, the Equity Series, and the
U.S. Government Income Series (collectively, the "Trust") as of July 31, 2000
and the related statements of operations for the year then ended and the
statements of changes in net assets and the financial highlights for each of the
two years in the period then ended. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights for the three years ended July 31,
1998, were audited by other auditors whose report, dated September 14, 1998,
expressed an unqualified opinion on those financial highlights for each of the
three years.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of July 31, 2000, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Security First Trust's Bond Series, T. Rowe Price Growth and Income Series,
Equity Series, and U.S. Government Income Series as of July 31, 2000, the
results of their operations for the year then ended, and the changes in their
net assets and the financial highlights for each of the two years in the period
then ended, in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
-------------------------
September 1, 2000
Los Angeles, California
<PAGE> 45
VARIABLE ANNUITIES OFFER CHOICES AND BENEFITS THAT REGULAR MUTUAL FUNDS CAN'T
Tax-deferred retirement savings plans are among the best investments a
person can make today for his or her future. As a vehicle for creating
tax-favored retirement savings, variable annuities offer many advantages.
A variable annuity offers the opportunity to invest in a diversified
portfolio of securities similar to mutual funds. Taxes are deferred on all
dividends and on all increases in portfolio value until you take your money out.
At retirement, another significant advantage is that the variable
annuity can provide you with income that is based on the performance of the fund
or funds in which you participated. You may elect to receive monthly, quarterly
or annual payments for a specified number of years, your lifetime, or the longer
of your lifetime and the lifetime of your joint payee. See your policy for
specific options available to you.
The Security First Trust series offers you a choice of professionally
managed options. You may invest in a Bond Series, Growth and Income Series,
Equity Series, or U.S. Government Income Series, each with a varying degree of
risk:
SECURITY FIRST TRUST BOND SERIES is for conservative investors. The
objective is to achieve the highest investment income over the long term
consistent with the preservation of capital.
SECURITY FIRST TRUST T. ROWE PRICE GROWTH AND INCOME SERIES is for
individuals willing to accept a degree of risk. The fund's goal is growth of
principal with a reasonable level of income primarily through investment in
common stocks.
SECURITY FIRST TRUST EQUITY SERIES also seeks to provide growth of
capital and income through investment in common stocks of high quality
companies. The fund is for individuals willing to accept a degree of risk.
SECURITY FIRST TRUST U.S. GOVERNMENT INCOME SERIES is for conservative
investors and seeks to provide current income through investment in a
diversified portfolio limited primarily to U.S. government securities.
ANNUAL REPORT
JULY 31, 2000
SECURITY
FIRST
TRUST
--------------------------------------------------------------------------------
BOARD OF TRUSTEES
Jack R. Borsting Howard H. Kayton
Katherine L. Hensley Lawrence E. Marcus
[SECURITY FIRST TRUST LOGO]
11365 West Olympic Boulevard
Los Angeles, California 90064
(310) 312-6100
SFG 1768
Security First Trust Bond Series
Security First Trust T. Rowe Price Growth and Income Series
Security First Trust Equity Series
Security First Trust U.S. Government Income Series
<PAGE>
COMBINED PRO FORMA PORTFOLIO OF INVESTMENTS
June 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
PAR AMOUNT
-------------------------------------------
SECURITY COVA
FIRST TRUST SERIES TRUST
BOND QUALITY BOND SECURITY
SERIES PORTFOLIO COMBINED DESCRIPTION COUPON MATURITY
-----------------------------------------------------------------------------------------------------------------------------
DOMESTIC BONDS & DEBT SECURITIES
AEROSPACE & DEFENSE
<S> <C> <C> <C> <C> <C>
$50,000 $ $50,000 Boeing Co. 8.750% 08/15/2021
90,000 90,000 Lockheed Martin Corp. 7.750% 06/15/2005
ASSET BACKED SECURITIES
400,000 400,000 California Infrastructure 6.420% 09/25/2008
125,000 125,000 Capital Auto Receivables Asset 6.300% 05/15/2004
1,500,000 1,500,000 Carco Auto Loan Master Trust 5.780% 03/15/2004
360,000 360,000 Citibank Credit Card Master Trust 5.500% 02/15/2006
1,230,000 1,230,000 Citibank Credit Card Master Trust 6.150% 03/10/2011
730,000 730,000 Ford Credit Auto Loan Master Trust 5.500% 02/15/2003
1,800,000 1,800,000 Ford Credit Auto Owner Trust 6.820% 06/17/2002
325,000 325,000 Honda Auto Lease Trust 6.450% 09/16/2002
595,000 595,000 Money Store Home Equity Trust (The) 6.485% 12/15/2038
500,000 500,000 Nationsbank Card Master Trust 6.450% 04/15/2003
247,202 247,202 Northwest Asset Corp. 6.750% 05/25/2029
500,000 500,000 Peco Energy Transition Trust 5.800% 03/01/2007
140,000 140,000 Valero Pass-Through Asset Trust 6.750% 12/15/2002
AUTOMOTIVE
235,000 235,000 Borg Warner Automotive, Inc. 6.500% 02/15/2009
25,000 25,000 Federal - Mogul Corp. 7.750% 07/01/2006
100,000 100,000 Venture Holdings Trust, Inc. 12.000% 06/01/2009
BANKING
2,000,000 2,000,000 Chase Manhattan Corp. 9.750% 11/01/2001
250,000 250,000 Dime Bancorp, Inc. 6.375% 01/30/2001
225,000 225,000 Fleet Capital Ltd. 7.920% 12/11/2026
100,000 100,000 HSBC Fin Nederland Bank 7.400% 04/15/2003
10,000 10,000 NationsBank Corp. 7.250% 10/15/2025
1,500,000 1,500,000 Wachovia Corp. 6.700% 06/21/2004
BEVERAGES, FOOD & TOBACCO
120,000 120,000 Archer Daniels Midland Co. 6.625% 05/01/2029
455,000 455,000 J Seagram & Sons 7.600% 12/15/2028
250,000 250,000 Smithfield Foods, Inc. 7.625% 02/15/2008
BUILDING MATERIALS
45,000 45,000 American Standard, Inc. 7.375% 04/15/2005
COLLATERALIZED MORTGAGE OBLIGATIONS
209,951 209,951 Chase Manhattan Bank - First
Union National 7.134% 07/15/2007
2,000,000 2,000,000 Chase Manhattan Bank - First
Union National 7.439% 07/15/2009
1,980,000 1,980,000 Commercial Mortgage Acceptance Corp. 6.030% 03/15/2008
890,000 890,000 Credit Suisse First Boston
Mortgage Securities Corp. 7.290% 09/15/2009
1,959,096 1,959,096 First Nationwide Trust 6.500% 01/19/2029
1,655,000 1,655,000 First Union Commercial Mortgage 6.070% 10/15/2008
240,000 240,000 First Union-Lehman Brothers Commercial 6.600% 05/18/2007
1,730,000 1,730,000 First Union-Lehman Brothers Commercial 6.650% 12/18/2007
1,500,000 1,500,000 Morgan Stanley Capital, Inc. 6.170% 10/03/2008
299,278 299,278 Ocwen Residential MBS Corp. (144A)(a) 7.000% 10/25/2040
COMMERCIAL SERVICES
115,000 115,000 Allied Waste North America 7.875% 01/01/2009
150,000 150,000 Amerco. 8.800% 02/04/2005
60,000 60,000 S C International Service, Inc. 9.250% 09/01/2007
See notes to financial statements
<PAGE>
COMMUNICATIONS
75,000 75,000 Crown Castle International 0%, 10.375% ++ 05/15/2011
1,070,000 1,070,000 TCI Communications, Inc. 7.875% 02/15/2026
COMPUTERS & INFORMATION
30,000 30,000 Printpack, Inc. 10.630% 08/15/2006
ELECTRIC UTILITIES
225,000 225,000 CMS Energy Corp. 8.000% 07/01/2011
250,000 250,000 Columbus Southern Power 6.850% 10/03/2005
100,000 100,000 National Rural Utilities 6.500% 09/15/2002
100,000 100,000 Public Service Electric & Gas Co. 6.250% 01/01/2007
FINANCIAL SERVICES
650,000 650,000 Citigroup Capital 7.750% 12/01/2036
246,095 246,095 G.E. Capital Mortgage Services, Inc. 6.250% 12/25/2028
305,982 305,982 G.E. Capital Mortgage Services, Inc. 6.500% 04/25/2029
1,500,000 1,500,000 General Motors Acceptance Corp. 5.500% 01/14/2002
500,000 500,000 General Motors Acceptance Corp. 6.750% 11/04/2004
50,000 50,000 Hayes Lemerz International, Inc. 8.250% 12/15/2008
115,000 115,000 Merrill Lynch Mortgage Investment, Inc. 7.560% 09/15/2009
300,000 300,000 Salomon Smith Barney, Inc. 7.375% 05/15/2007
220,000 220,000 Texaco Capital, Inc. 5.500% 01/15/2009
FOREST PRODCUST & PAPER
245,000 245,000 Fort James Corp. 6.875% 09/15/2007
100,000 100,000 Noranda Forest, Inc. 7.500% 07/15/2003
HEALTH CARE PROVIDERS
70,000 70,000 Tenet Healthcare Corp. 7.875% 01/15/2003
HEAVY CONSTRUCTION
40,000 40,000 Webb Del Corp. 10.250% 02/15/2010
INDUSTRIAL - DIVERSIFIED
495,000 495,000 Armstrong World Industries, Inc. 6.350% 08/15/2003
80,000 80,000 Tyco International, Ltd. 6.375% 06/15/2005
INSURANCE
200,000 200,000 Conseco, Inc. 6.400% 06/15/2001
100,000 100,000 Prudential Insurance Co. America 6.875% 04/15/2003
MEDIA - BROADCASTING & PUBLISHING
25,000 25,000 Allegiance Telecom, Inc. 0%, 11.750% ++ 02/15/2008
100,000 100,000 Charter Communications Holdings 8.625% 04/01/2009
25,000 25,000 CSC Holdings, Inc. 8.125% 07/15/2009
250,000 250,000 Fox Liberty Networks LLC 8.875% 08/15/2007
30,000 30,000 News America Holdings, Inc. 7.700% 10/30/2025
500,000 500,000 Time Warner, Inc. 7.975% 08/15/2004
1,000,000 1,000,000 Turner Broadcasting Systems, Inc. 7.400% 02/01/2004
OIL & GAS
155,000 155,000 Apache Corp. 7.700% 03/15/2026
600,000 600,000 Coastal Corp. 6.500% 05/15/2006
200,000 200,000 Dynegy, Inc. 6.875% 07/15/2002
65,000 65,000 Enron Corp. 6.950% 07/15/2028
300,000 300,000 National Fuel Gas Co. 6.214% 08/12/2027
100,000 100,000 Quaker State Corp. 6.625% 10/15/2005
TELEPHONE SYSTEMS
250,000 250,000 Global Crossing Hldg. Ltd. (144A)(a) 9.125% 11/15/2006
100,000 100,000 Global Crossing Holdings, Ltd. 9.625% 05/15/2008
100,000 100,000 GTE Corp. 6.940% 04/15/2028
150,000 150,000 Liberty Media Corp. 7.875% 07/15/2009
455,000 455,000 Liberty Media Group 8.250% 02/01/2030
70,000 70,000 Metromedia Fiber Network, Inc. 10.000% 12/15/2009
100,000 100,000 U.S. Cellular Corp. 7.250% 08/15/2007
80,000 80,000 US West Communications, Inc. 7.500% 06/15/2023
100,000 100,000 WorldCom, Inc. GA 6.950% 01/01/2007
1,100,000 1,100,000 WorldCom, Inc. 7.750% 04/01/2027
See notes to financial statements
<PAGE>
TEXTILES, CLOTHING, & FABRICS
230,000 230,000 Jones Apparel Group, Inc. 7.875% 06/15/2006
TRANSPORTATION
165,000 165,000 Canadian National Railway Co. 6.900% 07/15/2028
60,000 60,000 Newport News Shipbuilding, Inc. 9.250% 12/01/2006
100,000 100,000 Norfolk Southern Corp. 7.800% 05/15/2027
375,000 375,000 Union Pacific Corp. 6.625% 02/01/2029
U.S. GOVERNMENT AGENCY
1,835,000 1,835,000 Federal National Mortgage Association 6.625% 01/15/2002
2,630,000 2,630,000 Federal National Mortgage Association 7.250% 01/15/2010
402,000 402,000 Federal National Mortgage Association (b) 7.125% 01/15/2030
U.S. GOVERNMENT AGENCY MORTGAGE BACKED SECURITIES
20,754 20,754 Federal Home Loan Mortgage Corp. 8.000% 09/01/2008
215,039 215,039 Federal Home Loan Mortgage Corp. 6.500% 07/15/2016
26,324 26,324 Federal Home Loan Mortgage Corp. 9.500% 04/01/2019
13,371 13,371 Federal Home Loan Mortgage Corp. 9.000% 06/01/2019
150,781 150,781 Federal National Mortgage Association 7.000% 09/01/2010
133,317 133,317 Federal National Mortgage Association 7.000% 05/01/2012
293,963 293,963 Federal National Mortgage Association 6.500% 03/01/2013
877,043 877,043 Federal National Mortgage Association 6.500% 06/01/2014
76,936 76,936 Federal National Mortgage Association 6.500% 08/01/2014
26,330 26,330 Federal National Mortgage Association 6.500% 09/01/2014
214,908 214,908 Federal National Mortgage Association 6.500% 09/01/2014
140,080 140,080 Federal National Mortgage Association 6.500% 12/01/2014
625,136 625,136 Federal National Mortgage Association 6.500% 12/01/2014
89,044 89,044 Federal National Mortgage Association 6.500% 01/01/2015
824,020 824,020 Federal National Mortgage Association 6.500% 02/01/2015
799,576 799,576 Federal National Mortgage Association 7.000% 03/01/2015
345,330 345,330 Federal National Mortgage Association 7.000% 03/01/2015
886,472 886,472 Federal National Mortgage Association 7.000% 03/01/2015
828,557 828,557 Federal National Mortgage Association 7.000% 03/01/2015
21,652 21,652 Federal National Mortgage Association 8.500% 07/01/2019
9,069 9,069 Federal National Mortgage Association 7.500% 08/25/2021
377,388 377,388 Federal National Mortgage Association 7.500% 12/01/2022
838,560 838,560 Federal National Mortgage Association 7.000% 06/01/2028
415,264 415,264 Federal National Mortgage Association 6.000% 07/01/2028
399,787 399,787 Federal National Mortgage Association 7.000% 08/01/2028
844,608 844,608 Federal National Mortgage Association 7.000% 09/01/2028
80,628 80,628 Federal National Mortgage Association 6.000% 10/01/2028
313,565 313,565 Federal National Mortgage Association 6.000% 12/01/2028
271,037 271,037 Federal National Mortgage Association 7.500% 06/01/2029
713,263 713,263 Federal National Mortgage Association 7.500% 06/01/2029
55,085 55,085 Federal National Mortgage Association 7.500% 07/01/2029
738,927 738,927 Federal National Mortgage Association 7.000% 08/01/2029
283,934 283,934 Federal National Mortgage Association 7.500% 08/01/2029
96,730 96,730 Federal National Mortgage Association 7.500% 08/01/2029
395,051 395,051 Federal National Mortgage Association 7.000% 09/01/2029
501,290 501,290 Federal National Mortgage Association 7.500% 09/01/2029
406,755 406,755 Federal National Mortgage Association 7.500% 09/01/2029
34,902 34,902 Federal National Mortgage Association 7.500% 09/01/2029
310,748 310,748 Federal National Mortgage Association 7.500% 09/01/2029
665,156 665,156 Federal National Mortgage Association 7.500% 09/01/2029
158,000 158,000 Federal National Mortgage Association 8.000% 09/01/2029
399,317 399,317 Federal National Mortgage Association 7.500% 10/01/2029
630,003 630,003 Federal National Mortgage Association 7.500% 10/01/2029
726,079 726,079 Federal National Mortgage Association 7.500% 10/01/2029
568,859 568,859 Federal National Mortgage Association 7.500% 10/01/2029
868,463 868,463 Federal National Mortgage Association 7.500% 10/01/2029
289,419 289,419 Federal National Mortgage Association 7.500% 11/01/2029
52,275 52,275 Federal National Mortgage Association 8.000% 11/01/2029
30,155 30,155 Federal National Mortgage Association 8.000% 11/01/2029
25,680 25,680 Federal National Mortgage Association 7.000% 12/01/2029
565,122 565,122 Federal National Mortgage Association 7.500% 01/01/2030
490,431 490,431 Federal National Mortgage Association 7.500% 01/01/2030
832,462 832,462 Federal National Mortgage Association 7.500% 01/01/2030
317,832 317,832 Federal National Mortgage Association 7.500% 02/01/2030
990,001 990,001 Federal National Mortgage Association 7.500% 02/01/2030
314,633 314,633 Federal National Mortgage Association 8.000% 02/01/2030
997,135 997,135 Federal National Mortgage Association 8.000% 02/01/2030
848,459 848,459 Federal National Mortgage Association 8.000% 02/01/2030
421,289 421,289 Federal National Mortgage Association 7.500% 04/01/2030
944,404 944,404 Federal National Mortgage Association 7.000% 05/01/2030
141,388 141,388 Federal National Mortgage Association 7.500% 06/01/2030
999,900 999,900 Federal National Mortgage Association 8.000% 06/01/2030
499,950 499,950 Federal National Mortgage Association 8.000% 06/01/2030
2,125,000 2,125,000 Federal National Mortgage Association (c) 7.000% 07/17/2030
4,390,000 4,390,000 Federal National Mortgage Association (c) 7.500% 07/17/2030
See notes to financial statements
<PAGE>
U.S. GOVERNMENT AGENCY MORTGAGE BACKED SECURITIES, CONTINUED
2,188 2,188 Government National Mortgage Association 9.000% 04/15/2009
11,749 11,749 Government National Mortgage Association 9.000% 05/15/2009
3,499 3,499 Government National Mortgage Association 9.000% 05/15/2009
2,777 2,777 Government National Mortgage Association 9.000% 05/15/2009
1,068 1,068 Government National Mortgage Association 9.000% 05/15/2009
1,610 1,610 Government National Mortgage Association 9.000% 05/15/2009
78,272 78,272 Government National Mortgage Association 11.250% 09/15/2015
9,636 9,636 Government National Mortgage Association 11.250% 11/15/2015
21,368 21,368 Government National Mortgage Association 10.000% 06/15/2017
7,017 7,017 Government National Mortgage Association 9.250% 07/15/2017
7,629 7,629 Government National Mortgage Association 10.000% 11/15/2017
3,249 3,249 Government National Mortgage Association 11.500% 02/15/2018
25,631 25,631 Government National Mortgage Association 10.000% 03/15/2019
39,687 39,687 Government National Mortgage Association 9.000% 01/15/2020
13,672 13,672 Government National Mortgage Association 10.000% 03/15/2020
29,431 29,431 Government National Mortgage Association 9.250% 05/15/2020
87,097 87,097 Government National Mortgage Association 9.250% 05/15/2021
21,116 21,116 Government National Mortgage Association 9.250% 06/15/2021
80,328 80,328 Government National Mortgage Association 7.500% 06/15/2023
70,286 70,286 Government National Mortgage Association 7.000% 08/15/2023
117,281 117,281 Government National Mortgage Association 7.500% 10/15/2023
121,785 121,785 Government National Mortgage Association 7.000% 01/15/2024
78,371 78,371 Government National Mortgage Association 7.000% 03/15/2024
354,619 354,619 Government National Mortgage Association 7.000% 01/15/2025
10,656 10,656 Government National Mortgage Association 9.500% 01/15/2025
8,769 8,769 Government National Mortgage Association 9.500% 05/15/2025
463,185 463,185 Government National Mortgage Association 7.000% 02/15/2026
26,407 26,407 Government National Mortgage Association 8.000% 03/15/2026
167,511 167,511 Government National Mortgage Association 7.500% 09/15/2026
65,497 65,497 Government National Mortgage Association 7.500% 02/15/2027
196,330 196,330 Government National Mortgage Association 8.000% 05/15/2027
732,671 732,671 Government National Mortgage Association 6.500% 04/15/2028
344,243 344,243 Government National Mortgage Association 7.000% 05/15/2028
302,005 302,005 Government National Mortgage Association 7.000% 06/15/2028
1,780,469 1,780,469 Government National Mortgage Association 6.500% 10/15/2028
505,005 505,005 Government National Mortgage Association 6.500% 11/15/2028
2,633,462 2,633,462 Government National Mortgage Association 6.500% 12/15/2028
235,000 235,000 Government National Mortgage Association 6.500% 01/15/2029
263,475 263,475 Government National Mortgage Association 6.500% 03/15/2029
247,504 247,504 Government National Mortgage Association 6.500% 04/15/2029
944,999 944,999 Government National Mortgage Association 6.500% 05/15/2029
275,000 275,000 Government National Mortgage Association 6.500% 05/15/2029
149,875 149,875 Government National Mortgage Association 6.500% 06/15/2029
654,401 654,401 Government National Mortgage Association 6.500% 07/15/2029
157,768 157,768 Government National Mortgage Association 8.000% 07/15/2029
989,561 989,561 Government National Mortgage Association 7.000% 08/15/2029
544,314 544,314 Government National Mortgage Association 7.500% 09/15/2029
246,679 246,679 Government National Mortgage Association 8.000% 09/15/2029
28,732 28,732 Government National Mortgage Association 8.000% 12/15/2029
257,181 257,181 Government National Mortgage Association 8.000% 01/15/2030
86,033 86,033 Government National Mortgage Association 8.000% 01/15/2030
885,235 885,235 Government National Mortgage Association 8.000% 02/15/2030
25,824 25,824 Government National Mortgage Association 8.000% 02/15/2030
27,396 27,396 Government National Mortgage Association 8.000% 04/15/2030
25,839 25,839 Government National Mortgage Association 8.000% 04/15/2030
229,977 229,977 Government National Mortgage Association 8.000% 06/15/2030
948,317 948,317 Government National Mortgage Association 8.000% 06/15/2030
946,216 946,216 Government National Mortgage Association 8.000% 06/15/2030
500,000 500,000 Government National Mortgage Association 8.000% 06/15/2030
U.S. TREASURY SECURITIES
1,715,000 1,715,000 U.S. Treasury Bond (d) 8.875% 02/15/2019
5,653,000 5,653,000 U.S. Treasury Bond 6.750% 08/15/2026
335,000 335,000 U.S. Treasury Bond 6.500% 11/15/2026
260,000 260,000 U.S. Treasury Bond 6.625% 02/15/2027
520,000 520,000 U.S. Treasury Bond 5.250% 02/15/2029
1,300,000 1,300,000 U.S. Treasury Bond - Strip Principal (d) 9.125% 05/15/2018
5,000 5,000 U.S. Treasury Note 6.000% 08/15/2004
316,573 316,573 U.S. Treasury Note 3.375% 01/15/2007
2,165,000 2,750,000 4,915,000 U.S. Treasury Note 5.500% 05/15/2009
555,000 555,000 U.S. Treasury Note 6.000% 08/15/2009
1,810,000 1,810,000 U.S. Treasury Note 6.500% 02/15/2010
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
PAR AMOUNT
---------------------------------------
Security COVA
FIRST TRUST SERIES TRUST
BOND QUALITY BOND SECURITY
SERIES PORTFOLIO COMBINED DESCRIPTION COUPON MATURITY
-----------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS & DEBT SECURITIES
ARGENTINA
<S> <C> <C> <C> <C>
$400,000 $ $400,000 Argentina Republic 7.625% 03/31/2005
CANADA
80,000 80,000 Gulf Canada Resources Ltd. (Yankee) 8.250% 03/15/2017
500,000 500,000 Quebec Province (Global) 7.500% 09/15/2029
CHANNEL ISLANDS
420,000 420,000 HSBC Capital Funding LT (144A)(a) (Yankee) 10.176% 12/29/2049
COLOMBIA
195,000 195,000 Colombia (Republic of) (Global) 9.750% 04/23/2009
NETHERLANDS
250,000 250,000 KPNQwest B.V. (Yankee) 8.125% 06/01/2009
PHILIPPINE ISLANDS
90,000 90,000 Philippines (Republic of) (Global) (Yankee) 10.625% 03/16/2025
SHORT-TERM INVESTMENTS
582,103 582,103 American Express Centurion Bank, 6.65%, due 07/10/00 (e)
1,164,205 1,164,205 American Express Centurion Bank, 7%, due 07/07/00 (e)
582,103 582,103 BNP Paribas, 6.75%, due 07/05/00 (e)
200,000 200,000 Canadian Imperial Bank
291,051 291,051 First Union National Bank, 6.9%, due 05/09/01 (e)
1,312,195 1,312,195 Fleet National Bank, 7.125%, due 10/31/00 (e)
582,104 582,104 Goldman Sachs, 6.64875%, due 08/17/00 (e)
582,103 582,103 Janus Money Market (e)
1,694,748 1,694,748 Merrimac Cash Fund -Premium Class (e)
291,051 291,051 Royal Bank of Scotland, 6.85%, due 07/05/00 (e)
</TABLE>
See notes to financial statements
<PAGE>
COMBINED PRO FORMA PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
VALUE
------------------------------------------------
SECURITY COVA
FIRST TRUST SERIES TRUST
SECURITY BOND QUALITY BOND
DESCRIPTION COUPON MATURITY SERIES PORTFOLIO COMBINED
------------------------------------------------------------------------------------------------------------------------------------
DOMESTIC BONDS & DEBT SECURITIES
AEROSPACE & DEFENSE
<S> <C> <C> <C> <C> <C>
Boeing Co. 8.750% 08/15/2021 $ 55,562 $ $ 55,562
Lockheed Martin Corp. 7.750% 06/15/2005 84,825 84,825
------------ -------------
140,387 140,387
------------ -------------
ASSET BACKED SECURITIES
California Infrastructure 6.420% 09/25/2008 388,814 388,814
Capital Auto Receivables Asset 6.300% 05/15/2004 123,599 123,599
Carco Auto Loan Master Trust 5.780% 03/15/2004 1,465,867 1,465,867
Citibank Credit Card Master Trust 5.500% 02/15/2006 341,037 341,037
Citibank Credit Card Master Trust 6.150% 03/10/2011 1,120,930 1,120,930
Ford Credit Auto Loan Master Trust 5.500% 02/15/2003 723,105 723,105
Ford Credit Auto Owner Trust 6.820% 06/17/2002 1,798,317 1,798,317
Honda Auto Lease Trust 6.450% 09/16/2002 322,783 322,783
Money Store Home Equity Trust (The) 6.485% 12/15/2038 569,132 569,132
Nationsbank Card Master Trust 6.450% 04/15/2003 500,042 500,042
Northwest Asset Corp. 6.750% 05/25/2029 179,029 179,029
Peco Energy Transition Trust 5.800% 03/01/2007 475,637 475,637
Valero Pass-Through Asset Trust 6.750% 12/15/2002 135,450 135,450
------------ ------------- -------------
760,861 7,382,881 8,143,742
------------ ------------- -------------
AUTOMOTIVE
Borg Warner Automotive, Inc. 6.500% 02/15/2009 210,031 210,031
Federal - Mogul Corp. 7.750% 07/01/2006 18,202 18,202
Venture Holdings Trust, Inc. 12.000% 06/01/2009 60,125 60,125
------------ ------------- -------------
270,156 18,202 288,358
------------ ------------- -------------
BANKING
Chase Manhattan Corp. 9.750% 11/01/2001 2,063,140 2,063,140
Dime Bancorp, Inc. 6.375% 01/30/2001 248,125 248,125
Fleet Capital Ltd. 7.920% 12/11/2026 197,253 197,253
HSBC Fin Nederland Bank 7.400% 04/15/2003 99,625 99,625
NationsBank Corp. 7.250% 10/15/2025 9,036 9,036
Wachovia Corp. 6.700% 06/21/2004 1,464,864 1,464,864
------------ ------------- -------------
347,750 3,734,293 4,082,043
------------ ------------- -------------
BEVERAGES, FOOD & TOBACCO
Archer Daniels Midland Co. 6.625% 05/01/2029 100,650 100,650
J Seagram & Sons 7.600% 12/15/2028 431,522 431,522
Smithfield Foods, Inc. 7.625% 02/15/2008 225,000 225,000
------------ ------------- -------------
100,650 656,522 757,172
------------ ------------- -------------
BUILDING MATERIALS
American Standard, Inc. 7.375% 04/15/2005 42,356 42,356
------------ -------------
COLLATERALIZED MORTGAGE OBLIGATIONS
Chase Manhattan Bank - First
Union National 7.134% 07/15/2007 208,273 208,273
Chase Manhattan Bank - First
Union National 7.439% 07/15/2009 1,994,818 1,994,818
Commercial Mortgage Acceptance Corp. 6.030% 03/15/2008 1,822,956 1,822,956
Credit Suisse First Boston
Mortgage Securities Corp. 7.290% 09/15/2009 878,503 878,503
First Nationwide Trust 6.500% 01/19/2029 1,813,525 1,813,525
First Union Commercial Mortgage 6.070% 10/15/2008 1,517,344 1,517,344
First Union-Lehman Brothers Commercial 6.600% 05/18/2007 232,177 232,177
First Union-Lehman Brothers Commercial 6.650% 12/18/2007 1,652,629 1,652,629
Morgan Stanley Capital, Inc. 6.170% 10/03/2008 1,377,849 1,377,849
Ocwen Residential MBS Corp. (144A)(a) 7.000% 10/25/2040 293,237 293,237
------------- -------------
11,791,311 11,791,311
------------- -------------
See notes to financial statements
<PAGE>
COMMERCIAL SERVICES
Allied Waste North America 7.875% 01/01/2009 98,613 98,613
Amerco. 8.800% 02/04/2005 143,625 143,625
S C International Service, Inc. 9.250% 09/01/2007 57,300 57,300
------------ -------------
299,538 299,538
------------ -------------
COMMUNICATIONS
Crown Castle International 0%, 10.375% ++ 05/15/2011 46,218 46,218
TCI Communications, Inc. 7.875% 02/15/2026 1,065,776 1,065,776
------------ ------------- -------------
46,218 1,065,776 1,111,994
------------ ------------- -------------
COMPUTERS & INFORMATION
Printpack, Inc. 10.630% 08/15/2006 28,050 28,050
------------ -------------
ELECTRIC UTILITIES
CMS Energy Corp. 8.000% 07/01/2011 221,625 221,625
Columbus Southern Power 6.850% 10/03/2005 240,979 240,979
National Rural Utilities 6.500% 09/15/2002 98,500 98,500
Public Service Electric & Gas Co. 6.250% 01/01/2007 93,375 93,375
------------ ------------- -------------
413,500 240,979 654,479
------------ ------------- -------------
FINANCIAL SERVICES
Citigroup Capital 7.750% 12/01/2036 590,921 590,921
G.E. Capital Mortgage Services, Inc. 6.250% 12/25/2028 171,036 171,036
G.E. Capital Mortgage Services, Inc. 6.500% 04/25/2029 207,988 207,988
General Motors Acceptance Corp. 5.500% 01/14/2002 1,460,698 1,460,698
General Motors Acceptance Corp. 6.750% 11/04/2004 486,662 486,662
Hayes Lemerz International, Inc. 8.250% 12/15/2008 42,500 42,500
Merrill Lynch Mortgage Investment, Inc. 7.560% 09/15/2009 113,850 113,850
Salomon Smith Barney, Inc. 7.375% 05/15/2007 290,625 290,625
Texaco Capital, Inc. 5.500% 01/15/2009 194,700 194,700
------------ ------------- -------------
1,020,699 2,538,281 3,558,980
------------ ------------- -------------
FOREST PRODCUST & PAPER
Fort James Corp. 6.875% 09/15/2007 228,769 228,769
Noranda Forest, Inc. 7.500% 07/15/2003 98,375 98,375
------------ -------------
327,144 327,144
------------ -------------
HEALTH CARE PROVIDERS
Tenet Healthcare Corp. 7.875% 01/15/2003 68,600 68,600
------------ -------------
HEAVY CONSTRUCTION
Webb Del Corp. 10.250% 02/15/2010 34,900 34,900
------------ -------------
INDUSTRIAL - DIVERSIFIED
Armstrong World Industries, Inc. 6.350% 08/15/2003 436,335 436,335
Tyco International, Ltd. 6.375% 06/15/2005 75,600 75,600
------------ ------------- -------------
75,600 436,335 511,935
------------ ------------- -------------
INSURANCE
Conseco, Inc. 6.400% 06/15/2001 159,000 159,000
Prudential Insurance Co. America 6.875% 04/15/2003 97,750 97,750
------------ -------------
256,750 256,750
------------ -------------
MEDIA - BROADCASTING & PUBLISHING
Allegiance Telecom, Inc. 0%, 11.750% ++ 02/15/2008 18,250 18,250
Charter Communications Holdings 8.625% 04/01/2009 88,375 88,375
CSC Holdings, Inc. 8.125% 07/15/2009 24,375 24,375
Fox Liberty Networks LLC 8.875% 08/15/2007 249,375 249,375
News America Holdings, Inc. 7.700% 10/30/2025 27,296 27,296
Time Warner, Inc. 7.975% 08/15/2004 510,000 510,000
Turner Broadcasting Systems, Inc. 7.400% 02/01/2004 996,095 996,095
------------ ------------- -------------
131,000 1,782,766 1,913,766
------------ ------------- -------------
OIL & GAS
Apache Corp. 7.700% 03/15/2026 151,512 151,512
Coastal Corp. 6.500% 05/15/2006 569,035 569,035
Dynegy, Inc. 6.875% 07/15/2002 197,912 197,912
Enron Corp. 6.950% 07/15/2028 57,325 57,325
National Fuel Gas Co. 6.214% 08/12/2027 291,248 291,248
Quaker State Corp. 6.625% 10/15/2005 96,125 96,125
------------ ------------- -------------
247,637 1,115,520 1,363,157
------------ ------------- -------------
See notes to financial statements
<PAGE>
TELEPHONE SYSTEMS
Global Crossing Hldg. Ltd. (144A)(a) 9.125% 11/15/2006 240,625 240,625
Global Crossing Holdings, Ltd. 9.625% 05/15/2008 97,500 97,500
GTE Corp. 6.940% 04/15/2028 88,625 88,625
Liberty Media Corp. 7.875% 07/15/2009 144,562 144,562
Liberty Media Group 8.250% 02/01/2030 418,896 418,896
Metromedia Fiber Network, Inc. 10.000% 12/15/2009 69,300 69,300
U.S. Cellular Corp. 7.250% 08/15/2007 95,199 95,199
US West Communications, Inc. 7.500% 06/15/2023 73,300 73,300
WorldCom, Inc. GA 6.950% 01/01/2007 88,625 88,625
WorldCom, Inc. 7.750% 04/01/2027 1,096,565 1,096,565
------------ ------------- -------------
561,912 1,851,285 2,413,197
------------ ------------- -------------
TEXTILES, CLOTHING, & FABRICS
Jones Apparel Group, Inc. 7.875% 06/15/2006 221,087 221,087
------------ -------------
TRANSPORTATION
Canadian National Railway Co. 6.900% 07/15/2028 143,756 143,756
Newport News Shipbuilding, Inc. 9.250% 12/01/2006 60,300 60,300
Norfolk Southern Corp. 7.800% 05/15/2027 96,375 96,375
Union Pacific Corp. 6.625% 02/01/2029 310,800 310,800
------------ ------------- -------------
300,431 310,800 611,231
------------ ------------- -------------
U.S. GOVERNMENT AGENCY
Federal National Mortgage Association 6.625% 01/15/2002 1,828,082 1,828,082
Federal National Mortgage Association 7.250% 01/15/2010 2,655,992 2,655,992
Federal National Mortgage Association (b) 7.125% 01/15/2030 404,234 404,234
------------ ------------- -------------
1,828,082 3,060,226 4,888,308
------------ ------------- -------------
U.S. GOVERNMENT AGENCY MORTGAGE BACKED SECURITIES
Federal Home Loan Mortgage Corp. 8.000% 09/01/2008 20,805 20,805
Federal Home Loan Mortgage Corp. 6.500% 07/15/2016 212,590 212,590
Federal Home Loan Mortgage Corp. 9.500% 04/01/2019 27,434 27,434
Federal Home Loan Mortgage Corp. 9.000% 06/01/2019 13,868 13,868
Federal National Mortgage Association 7.000% 09/01/2010 148,000 148,000
Federal National Mortgage Association 7.000% 05/01/2012 130,859 130,859
Federal National Mortgage Association 6.500% 03/01/2013 283,580 283,580
Federal National Mortgage Association 6.500% 06/01/2014 845,988 845,988
Federal National Mortgage Association 6.500% 08/01/2014 74,212 74,212
Federal National Mortgage Association 6.500% 09/01/2014 25,398 25,398
Federal National Mortgage Association 6.500% 09/01/2014 207,298 207,298
Federal National Mortgage Association 6.500% 12/01/2014 135,120 135,120
Federal National Mortgage Association 6.500% 12/01/2014 603,001 603,001
Federal National Mortgage Association 6.500% 01/01/2015 85,891 85,891
Federal National Mortgage Association 6.500% 02/01/2015 794,842 794,842
Federal National Mortgage Association 7.000% 03/01/2015 784,756 784,756
Federal National Mortgage Association 7.000% 03/01/2015 338,929 338,929
Federal National Mortgage Association 7.000% 03/01/2015 870,042 870,042
Federal National Mortgage Association 7.000% 03/01/2015 813,200 813,200
Federal National Mortgage Association 8.500% 07/01/2019 22,067 22,067
Federal National Mortgage Association 7.500% 08/25/2021 9,096 9,096
Federal National Mortgage Association 7.500% 12/01/2022 372,313 372,313
Federal National Mortgage Association 7.000% 06/01/2028 809,803 809,803
Federal National Mortgage Association 6.000% 07/01/2028 379,983 379,983
Federal National Mortgage Association 7.000% 08/01/2028 386,077 386,077
Federal National Mortgage Association 7.000% 09/01/2028 815,643 815,643
Federal National Mortgage Association 6.000% 10/01/2028 73,777 73,777
Federal National Mortgage Association 6.000% 12/01/2028 286,925 286,925
Federal National Mortgage Association 7.500% 06/01/2029 267,392 267,392
Federal National Mortgage Association 7.500% 06/01/2029 703,670 703,670
Federal National Mortgage Association 7.500% 07/01/2029 54,344 54,344
Federal National Mortgage Association 7.000% 08/01/2029 713,586 713,586
Federal National Mortgage Association 7.500% 08/01/2029 280,115 280,115
Federal National Mortgage Association 7.500% 08/01/2029 95,429 95,429
Federal National Mortgage Association 7.000% 09/01/2029 381,503 381,503
Federal National Mortgage Association 7.500% 09/01/2029 494,547 494,547
Federal National Mortgage Association 7.500% 09/01/2029 401,284 401,284
Federal National Mortgage Association 7.500% 09/01/2029 34,433 34,433
Federal National Mortgage Association 7.500% 09/01/2029 306,569 306,569
Federal National Mortgage Association 7.500% 09/01/2029 656,210 656,210
Federal National Mortgage Association 8.000% 09/01/2029 158,753 158,753
Federal National Mortgage Association 7.500% 10/01/2029 393,946 393,946
Federal National Mortgage Association 7.500% 10/01/2029 621,530 621,530
Federal National Mortgage Association 7.500% 10/01/2029 716,313 716,313
Federal National Mortgage Association 7.500% 10/01/2029 561,208 561,208
Federal National Mortgage Association 7.500% 10/01/2029 856,782 856,782
Federal National Mortgage Association 7.500% 11/01/2029 285,526 285,526
Federal National Mortgage Association 8.000% 11/01/2029 52,524 52,524
Federal National Mortgage Association 8.000% 11/01/2029 30,299 30,299
Federal National Mortgage Association 7.000% 12/01/2029 24,800 24,800
See notes to financial statements
<PAGE>
U.S. GOVERNMENT AGENCY MORTGAGE BACKED SECURITIES, CONTINUED
Federal National Mortgage Association 7.500% 01/01/2030 557,521 557,521
Federal National Mortgage Association 7.500% 01/01/2030 483,835 483,835
Federal National Mortgage Association 7.500% 01/01/2030 821,265 821,265
Federal National Mortgage Association 7.500% 02/01/2030 313,557 313,557
Federal National Mortgage Association 7.500% 02/01/2030 976,685 976,685
Federal National Mortgage Association 8.000% 02/01/2030 316,134 316,134
Federal National Mortgage Association 8.000% 02/01/2030 1,001,889 1,001,889
Federal National Mortgage Association 8.000% 02/01/2030 852,505 852,505
Federal National Mortgage Association 7.500% 04/01/2030 415,623 415,623
Federal National Mortgage Association 7.000% 05/01/2030 912,017 912,017
Federal National Mortgage Association 7.500% 06/01/2030 139,486 139,486
Federal National Mortgage Association 8.000% 06/01/2030 1,004,668 1,004,668
Federal National Mortgage Association 8.000% 06/01/2030 502,334 502,334
Federal National Mortgage Association (c) 7.000% 07/17/2030 2,050,620 2,050,620
Federal National Mortgage Association (c) 7.500% 07/17/2030 4,325,511 4,325,511
Government National Mortgage Association 9.000% 04/15/2009 2,248 2,248
Government National Mortgage Association 9.000% 05/15/2009 12,072 12,072
Government National Mortgage Association 9.000% 05/15/2009 3,595 3,595
Government National Mortgage Association 9.000% 05/15/2009 2,853 2,853
Government National Mortgage Association 9.000% 05/15/2009 1,097 1,097
Government National Mortgage Association 9.000% 05/15/2009 1,654 1,654
Government National Mortgage Association 11.250% 09/15/2015 85,439 85,439
Government National Mortgage Association 11.250% 11/15/2015 10,687 10,687
Government National Mortgage Association 10.000% 06/15/2017 22,817 22,817
Government National Mortgage Association 9.250% 07/15/2017 7,234 7,234
Government National Mortgage Association 10.000% 11/15/2017 8,146 8,146
Government National Mortgage Association 11.500% 02/15/2018 3,603 3,603
Government National Mortgage Association 10.000% 03/15/2019 27,369 27,369
Government National Mortgage Association 9.000% 01/15/2020 41,013 41,013
Government National Mortgage Association 10.000% 03/15/2020 14,599 14,599
Government National Mortgage Association 9.250% 05/15/2020 30,341 30,341
Government National Mortgage Association 9.250% 05/15/2021 89,790 89,790
Government National Mortgage Association 9.250% 06/15/2021 21,768 21,768
Government National Mortgage Association 7.500% 06/15/2023 79,800 79,800
Government National Mortgage Association 7.000% 08/15/2023 68,396 68,396
Government National Mortgage Association 7.500% 10/15/2023 116,510 116,510
Government National Mortgage Association 7.000% 01/15/2024 118,511 118,511
Government National Mortgage Association 7.000% 03/15/2024 76,265 76,265
Government National Mortgage Association 7.000% 01/15/2025 345,311 345,311
Government National Mortgage Association 9.500% 01/15/2025 11,085 11,085
Government National Mortgage Association 9.500% 05/15/2025 9,123 9,123
Government National Mortgage Association 7.000% 02/15/2026 450,736 450,736
Government National Mortgage Association 8.000% 03/15/2026 26,677 26,677
Government National Mortgage Association 7.500% 09/15/2026 166,410 166,410
Government National Mortgage Association 7.500% 02/15/2027 65,096 65,096
Government National Mortgage Association 8.000% 05/15/2027 198,538 198,538
Government National Mortgage Association 6.500% 04/15/2028 695,803 695,803
Government National Mortgage Association 7.000% 05/15/2028 334,989 334,989
Government National Mortgage Association 7.000% 06/15/2028 293,888 293,888
Government National Mortgage Association 6.500% 10/15/2028 1,690,877 1,690,877
Government National Mortgage Association 6.500% 11/15/2028 479,592 479,592
Government National Mortgage Association 6.500% 12/15/2028 2,499,890 2,499,890
Government National Mortgage Association 6.500% 01/15/2029 223,174 223,174
Government National Mortgage Association 6.500% 03/15/2029 250,217 250,217
Government National Mortgage Association 6.500% 04/15/2029 235,049 235,049
Government National Mortgage Association 6.500% 05/15/2029 898,042 898,042
Government National Mortgage Association 6.500% 05/15/2029 261,335 261,335
Government National Mortgage Association 6.500% 06/15/2029 142,335 142,335
Government National Mortgage Association 6.500% 07/15/2029 621,471 621,471
Government National Mortgage Association 8.000% 07/15/2029 159,543 159,543
Government National Mortgage Association 7.000% 08/15/2029 962,962 962,962
Government National Mortgage Association 7.500% 09/15/2029 540,739 540,739
Government National Mortgage Association 8.000% 09/15/2029 249,455 249,455
Government National Mortgage Association 8.000% 12/15/2029 29,063 29,063
Government National Mortgage Association 8.000% 01/15/2030 260,075 260,075
Government National Mortgage Association 8.000% 01/15/2030 87,023 87,023
Government National Mortgage Association 8.000% 02/15/2030 895,422 895,422
Government National Mortgage Association 8.000% 02/15/2030 26,121 26,121
Government National Mortgage Association 8.000% 04/15/2030 27,711 27,711
Government National Mortgage Association 8.000% 04/15/2030 26,137 26,137
Government National Mortgage Association 8.000% 06/15/2030 232,565 232,565
Government National Mortgage Association 8.000% 06/15/2030 959,230 959,230
Government National Mortgage Association 8.000% 06/15/2030 957,105 957,105
Government National Mortgage Association 8.000% 06/15/2030 505,754 505,754
------------ ------------- -------------
11,130,945 37,869,315 49,000,260
------------ ------------- -------------
See notes to financial statements
<PAGE>
U.S. TREASURY SECURITIES
U.S. Treasury Bond (d) 8.875% 02/15/2019 2,203,240 2,203,240
U.S. Treasury Bond 6.750% 08/15/2026 6,076,975 6,076,975
U.S. Treasury Bond 6.500% 11/15/2026 349,552 349,552
U.S. Treasury Bond 6.625% 02/15/2027 275,762 275,762
U.S. Treasury Bond 5.250% 02/15/2029 461,500 461,500
U.S. Treasury Bond - Strip Principal (d) 9.125% 05/15/2018 431,410 431,410
U.S. Treasury Note 6.000% 08/15/2004 4,955 4,955
U.S. Treasury Note 3.375% 01/15/2007 303,910 303,910
U.S. Treasury Note 5.500% 05/15/2009 2,070,952 2,630,548 4,701,500
U.S. Treasury Note 6.000% 08/15/2009 550,660 550,660
U.S. Treasury Note 6.500% 02/15/2010 1,872,219 1,872,219
------------ ------------- -------------
3,662,784 13,568,899 17,231,683
------------ ------------- -------------
Total Domestic Bonds & Debt Securities
(Cost $22,825,612, $87,901,855,
$110,727,467, respectively) 22,317,037 87,423,391 109,740,428
------------ ------------- -------------
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
VALUE
----------------------------------------------
SECURITY COVA
FIRST TRUST SERIES TRUST
SECURITY BOND QUALITY BOND
DESCRIPTION COUPON MATURITY SERIES PORTFOLIO COMBINED
------------------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS & DEBT SECURITIES
ARGENTINA
<S> <C> <C> <C> <C> <C>
Argentina Republic 7.625% 03/31/2005 $363,000 $ $ 363,000
------------- --------------
CANADA
Gulf Canada Resources Ltd. (Yankee) 8.250% 03/15/2017 73,800 73,800
Quebec Province (Global) 7.500% 09/15/2029 492,010 492,010
------------- --------------
565,810 565,810
------------- --------------
CHANNEL ISLANDS
HSBC Capital Funding LT (144A)(a) (Yankee) 10.176% 12/29/2049 450,849 450,849
------------- --------------
COLOMBIA
Colombia (Republic of) (Global) 9.750% 04/23/2009 153,563 153,563
--------------
NETHERLANDS
KPNQwest B.V. (Yankee) 8.125% 06/01/2009 236,250 236,250
--------------
PHILIPPINE ISLANDS
Philippines (Republic of) (Global) (Yankee) 10.625% 03/16/2025 77,175 77,175
--------------
Total Foreign Bonds & Debt Securities (Cost $362,682, $1,546,559,
$1,909,241 respectively) 1,846,647 1,846,647
------------- --------------
SHORT-TERM INVESTMENTS
American Express Centurion Bank, 6.65%, due 07/10/00 (e) 582,103 582,103
American Express Centurion Bank, 7%, due 07/07/00 (e) 1,164,205 1,164,205
BNP Paribas, 6.75%, due 07/05/00 (e) 582,103 582,103
Canadian Imperial Bank 199,842 199,842
First Union National Bank, 6.9%, due 05/09/01 (e) 291,051 291,051
Fleet National Bank, 7.125%, due 10/31/00 (e) 1,312,195 1,312,195
Goldman Sachs, 6.64875%, due 08/17/00 (e) 582,104 582,104
Janus Money Market (e) 582,103 582,103
Merrimac Cash Fund -Premium Class (e) 1,694,748 1,694,748
Royal Bank of Scotland, 6.85%, due 07/05/00 (e) 291,051 291,051
------------- --------------
Total Short-Term Investments (Cost $7,281,668) 7,281,505 7,281,505
------------- --------------
TOTAL INVESTMENTS
(Cost $23,188,294 $96,730,082, $119,918,376 respectively) 22,680,037 96,188,543 118,868,580
Other Assets and Liabilities (net) 808,196 (4,817,889) (4,009,693)
------------- ------------- --------------
TOTAL NET ASSETS $23,488,233 $91,370,654 $114,858,887
============= ============= ==============
</TABLE>
See notes to financial statements
<PAGE>
PORTFOLIO FOOTNOTES:
(a)Securities that may be resold to "qualified institutional
buyers" under Rule 144A or securities offered pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
These securities have been determined to be liquid under
guidelines established by the Board of Trustees.
(b)Assets segregated for purchase for purchase price of delayed
delivery or when-issued security.
(c)Security purchased on a delayed or when-issued basis.
(d)Held as collateral for open futures contracts.
(e)Represents investment of collateral received from securities
lending transactions.
Yankee - U.S. Dollar denominated bonds issued by non-U.S.
companies in the U.S.
++ Security is a "step-up" bond where coupon increases or steps
up at a predetermined date. Rates shown are current coupon
and next coupon rate when security steps up.
See notes to financial statements
<TABLE>
<CAPTION>
COMBINED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2000 (UNAUDITED)
ADJUSTMENTS
SECURITY FIRST COVA SERIES TRUST (REFERENCES ARE
TRUST QUALITY BOND TO PRO FORMA PRO FORMA
BOND SERIES PORTFOLIO FOOTNOTES) COMBINED
--------------- ----------------- -------------- -------------
ASSETS
<S> <C> <C> <C> <C>
Investments, at value * $ 22,680,037 $ 96,188,543 $ -- $ 118,868,580
Cash 696,586 7,714,291 -- 8,410,877
Cash denominated in foreign currencies** -- 3,690 -- 3,690
Receivable for investments sold 536,629 20,919 -- 557,548
Interest receivable 277,917 1,055,487 -- 1,333,404
------------ -------------
------------ ----------------- -------------
Total assets 24,191,169 104,982,930 -- 129,174,099
------------ ----------------- -------------
LIABILITIES
Payables for:
Investments purchased 642,486 -- -- 642,486
Delayed delivery investments -- 6,362,249 -- 6,362,249
Trust shares redeemed 3,797 100,484 -- 104,281
Net variation margin on financial
futures contracts -- 8,156 -- 8,156
Unrealized depreciation on foreign
currency contracts 5,987 -- -- 5,987
Securities on loan -- 7,081,663 -- 7,081,663
Investment advisory fee payable 20,239 29,096 -- 49,335
Accrued expenses 30,427 30,628 61,055
------------
------------ ----------------- -------------
Total liabilities 702,936 13,612,276 -- 14,315,212
------------ ----------------- -------------
------------ ----------------- -------------
NET ASSETS $ 23,488,233 $ 91,370,654 $ -- $ 114,858,887
============ ================= =============
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS REPRESENTED BY:
Paid in surplus $ 24,560,555 $ 94,300,584 $ -- 118,861,139
Accumulated net realized (loss) (1,309,446) (5,227,395) -- (6,536,841)
Unrealized (depreciation) on investments,
futures contracts and foreign currency (514,240) (665,840) -- (1,180,080)
Undistributed net investment income 751,364 2,963,305 3,714,669
------------ ----------------- -------------
Total $ 23,488,233 $ 91,370,654 $ -- $ 114,858,887
============ ================= =============
Capital shares outstanding 6,158,720 8,779,470 (3,901,755)(a) 11,036,435
============ ================= ============== =============
NET ASSET VALUE AND OFFERING PRICE PER SHARE $3.814 $10.407 $10.407
============ ================= =============
------------------------------------------------------------------------------------------------------------------------------------
* Investments in securities, at cost $ 23,188,294 $ 96,730,082 $ -- 119,918,376
** Cost of cash denominated in foreign currencies -- 1,430 -- 1,430
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMBINED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000 (UNAUDITED)
COVA SERIES ADJUSTMENTS
SECURITY FIRST TRUST (REFERENCES ARE
TRUST QUALITY BOND TO PRO FORMA PRO FORMA
BOND SERIES PORTFOLIO FOOTNOTES) COMBINED
-------------- -------------- ------------- --------------
INVESTMENT INCOME
<S> <C> <C> <C> <C> <C>
Total interest income (1) $ 1,673,777 $ 6,431,361 $ -- $ 8,105,138
-------------- -------------- ------------- --------------
EXPENSES
Investment advisory fee 85,135 510,162 23,268 (b) 618,565
Management fees 36,486 -- (36,486)(c) --
Custody, fund accounting, administration,
and transfer agent fees -- 118,544 30,405 (c) 148,949
Custody 17,323 -- (17,323)(c) --
Audit 5,345 17,659 (5,345)(d) 17,659
Trustee fees and expenses 1,243 3,878 -- 5,121
Legal -- 6,045 -- 6,045
Shareholder reporting and printing expenses 12,903 14,191 (8,000)(d) 19,094
Miscellaneous expenses 4,036 -- -- 4,036
-------------- -------------- ------------- --------------
Total Expenses 162,471 670,479 (13,481) 819,469
Less expenses reimbursed by the adviser -- 68,332 13,859 (e) 82,191
-------------- -------------- ------------- --------------
Net expenses 162,471 602,147 (27,340) 737,278
-------------- -------------- ------------- --------------
Net investment income 1,511,306 5,829,214 27,340 7,367,860
-------------- -------------- ------------- --------------
NET REALIZED AND UNREALIZED (LOSS) ON
INVESTMENTS, FUTURES CONTRACTS AND
FOREIGN CURRENCY RELATED TRANSACTIONS
Net realized (loss) on investments (1,071,236) (4,197,375) -- (5,268,611)
Net realized gain on futures contracts -- 352,375 -- 352,375
Net realized gain on foreign currency
related transactions -- 57,260 -- 57,260
-------------- -------------- ------------- --------------
Net realized (loss) on investments,
futures contracts and foreign currency
related transactions (1,071,236) (3,787,740) -- (4,858,976)
Net change in unrealized appreciation
on investments, futures contracts
and foreign currency 27,661 1,794,361 -- 1,822,022
-------------- -------------- ------------- --------------
Net realized and unrealized (loss) on
investments, futures contracts and
foreign currency related transactions (1,043,575) (1,993,379) -- (3,036,954)
-------------- -------------- ------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 467,731 $ 3,835,835 $ 27,340 $ 4,330,906
============== ============== ============= ==============
---------------------------------------------------------------------------------------------------------------------------------
Interest income includes security lending income of: $ -- $ 19,050 $ -- 19,050
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
INTRODUCTORY PARAGRAPH
Cova Series Trust and Security First Trust are each Massachusetts business
trusts. Met Investors Series Trust is a recently organized Delaware business
trust. The J.P. Morgan Quality Portfolio is a new series of the Met Investors
Series Trust. It has been organized specifically to receive all the assets and
carry on the business of Quality Bond Portfolio of Cova Series Trust, into
which, effectively, Bond Series of the Security First Trust will be merged.
The pro forma statements give effect to the proposed transfer of the assets and
stated liabilities of Bond Series in exchange for shares of Quality Bond
Portfolio at net asset value. The J.P. Morgan Quality Bond has had no operations
to date and as such is not included in the pro forma financial statements. Under
generally accepted accounting principles, the historical cost of investment
securities will be carried forward to the surviving entity and the results of
operations of Quality Bond Portfolio for pre-combination periods will not be
restated. The pro forma combined financial statements do not reflect the
expenses of either fund in carrying out its obligation under the proposed
Agreement and Plan or Reorganization.
The pro forma unaudited combining statements of assets and liabilities and
portfolio of investments reflect the financial position of the Quality Bond
Portfolio and the Bond Series, as though the reorganization occurred as of June
30, 2000. The pro forma unaudited statement of operations reflects the results
of operations of each of the merged funds for the year ended June 30, 2000 as
though the reorganization occurred as of July 1,1999.
The pro forma combining statements should be read in conjunction with the
financial statements and financial highlights of the Quality Bond and the Bond
Series, which are incorporated by reference in the Statement of Additional
Information.
<PAGE>
NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
Note a
Reflects change in shares outstanding due to the conversion of Bond Series
shares into Quality Bond Portfolio shares based upon the net asset value of the
Quality Bond Portfolio shares at June 30, 2000.
Note b
Reflects the surviving fund's investment advisory fee rate.
Note c
Reflects reclassification of certain balances to conform to the surviving fund's
format. Also reflects expected savings due to economies of scale.
Note d
Reflects expected savings due to economies of scale.
Note e
Reflects adjustment to the level of the surviving fund's expense reimbursement.
<PAGE>
MET INVESTORS SERIES TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification.
The response to this item is incorporated by reference to "Liability
and Indemnification of Trustees" under the caption "Comparative Information on
Shareholders' Rights" in Part A of this Registration Statement.
Item 16. Exhibits:
1. Declaration of Trust. Incorporated by reference to Met Investors Series
Trust's Registration Statement on Form N-1A filed on October 23, 2000,
Registration No. 333-48456 ("Form N-1A Registration Statement")
2. Bylaws. Incorporated by reference to the Form N-1A Registration Statement.
3. Not applicable.
4. Agreement and Plan of Reorganization. Exhibits A-1 and A-2 to the Prospectus
contained in Part A of this Registration Statement.
5. None other than as set forth in Exhibits 1 and 2.
6(a). Form of Management Agreement between Met Investors Advisory Corp. and Met
Investors Series Trust. Incorporated by reference to the Form N-1A Registration
Statement.
6(b). Form of Investment Advisory Agreement between J.P. Morgan Investment
Management Inc. and Met Investors Advisory Corp. with respect to the J.P. Morgan
Quality Bond Portfolio. Incorporated by reference to the Form N-1A Registration
Statement.
7. Form of Distribution Agreement between Met Investors Series Trust and MetLife
Distributors, Inc. with respect to the Class A shares. Incorporated by reference
to the Form N-1A Registration Statement.
8. Form of Deferred Compensation Plan. Incorporated by reference to the Form
N-1A Registration Statement.
9. Form of Custody Agreement between Investors Bank & Trust Company and Met
Investors Series Trust. To be filed by amendment.
10(a). Rule 12b-1 Distribution Plans. Incorporated by reference to the Form N-1A
Registration Statement.
10(b). Multiple Class Plan. Incorporated by reference to the Form N-1A
Registration Statement.
11. Opinion and consent of Sullivan & Worcester LLP. Filed herewith.
12. Tax opinion and consent of Sullivan & Worcester LLP. To be filed by
amendment.
13. Not applicable.
14(a). Consent of Deloitte & Touche LLP (with respect to the Neuberger Berman
Bond Series of Security First Trust). Filed herewith.
14(b). Consent of KPMG LLP (with respect to the Quality Bond Portfolio of Cova
Series Trust). Filed herewith.
15. Not applicable.
16. Powers of Attorney. Incorporated by reference to the Form N-1A Registration
Statement.
17. Form of Proxy Card and Voting Instructions. Filed herewith.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus that is
a part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
the reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new Registration Statement for
the securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the Registrant, in the City of Newport Beach and
State of California on the 13th day of November, 2000.
MET INVESTORS SERIES TRUST
By: /s/Elizabeth M. Forget
-----------------------
Name: Elizabeth M. Forget
Title: President
As required by the Securities Act of 1933, the following persons have
signed this Registration Statement in the capacities indicated on the 13th day
of November, 2000.
Signatures Title
---------- -----
/s/Elizabeth M. Forget President
---------------------------
Elizabeth M. Forget
/s/Mark Reynolds* Treasurer
---------------------
Mark Reynolds
/s/Robert N. Hickey Trustee
-------------------------
Robert N. Hickey
* By: /s/Robert N. Hickey
----------------------
Attorney-in-Fact
