Registration Nos. 33-16005
811-5252
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 14 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 15 [X]
(Check appropriate box or boxes.)
VAN KAMPEN MERRITT SERIES TRUST
--------------------------------
(Exact name of registrant as specified in charter)
One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181-4644
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (708) 368-9060
Jeffery K. Hoelzel, Esq.
Secretary
Van Kampen Merritt Series Trust
One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181-4644
(Name and Address of Agent For Service)
Copy to:
Raymond A. O'Hara III, Esq.
Blazzard, Grodd & Hasenauer, P.C.
P.O. Box 5108
Westport, CT 06881
(203) 226-7866
It is proposed that this filing will become effective:
--- immediately upon filing pursuant to paragraph (b)
--- on May 1, 1996 pursuant to paragraph (b)
--- 60 days after filing pursuant to paragraph (a)(1)
--- on (date) pursuant to paragraph (a)(1)
--- 75 days after filing pursuant to paragraph (a)(2)
--- on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
--- this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has declared that it has registered an indefinite number or amount
of securities under the Securities Act of 1933 pursuant to Investment Company
Act Rule 24f-2 and the Rule 24f-2 Notice for Registrant's fiscal year 1995
was filed on February 28, 1996.
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CROSS REFERENCE SHEET
(as required by Rule 495)
Item No. Location
- -------- -----------------------------------
PART A
Item 1. Cover Page......................... Cover Page
Item 2. Synopsis........................... Not Applicable
Item 3. Condensed Financial Information.... Financial Highlights
Item 4. General Description of Registrant.. The Trust; Investment Objectives
and Policies of the Portfolios;
Investment Practices
Item 5. Management of the Fund............. Management of the Trust
Item 6. Capital Stock and Other Securities. Description of the Trust
Item 7. Purchase of Securities Being
Offered........................ Description of the Trust
Item 8. Redemption or Repurchase........... Description of the Trust
Item 9. Pending Legal Proceedings.......... Not Applicable
PART B
Item 10. Cover Page......................... Cover Page
Item 11. Table of Contents.................. Table of Contents
Item 12. General Information and History.... Not Applicable
Item 13. Investment Objectives and Policies. Investment Objectives and Policies
Item 14. Management of the Fund............. Officers and Trustees
Item 15. Control Persons and Principal
Holders of Securities.......... Officers and Trustees
Item 16. Investment Advisory and Other
Services....................... Investment Advisory Agreement
Item 17. Brokerage Allocation and
Other Practices................ Portfolio Transactions
Item 18. Capital Stock and Other Securities. Description of the Trust (Part A)
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered....... Net Asset Values (Part A)
Item 20. Tax Status......................... Tax Status (Part A)
Item 21. Underwriters....................... Distribution and Redemption of
Shares (Part A)
Item 22. Calculation of Performance Data.... Performance Data
Item 23. Financial Statements............... Financial Statements (Part B)
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
EXPLANATORY NOTE
- -----------------------------------------------------------------------------
This Registration Statement contains eleven Portfolios of Van Kampen Merritt
Series Trust. Two versions of Prospectuses will be created from this
Registration Statement. The distribution system for each version of the
Prospectus is different. One version of the Prospectus will contain all
Portfolios except for the Large Cap Stock Portfolio. The other version of
the Prospectus will contain the following eight Portfolios: Money Market
Portfolio, Quality Income Portfolio, Stock Index Portfolio, Quality Bond
Portfolio, Small Cap Stock Portfolio, Large Cap Stock Portfolio,
Select Equity Portfolio and International Equity Portfolio. These Prospectuses
will be filed with the Commission pursuant to Rule 497 under the Securities
Act of 1933.
The Registrant undertakes to update this Explanatory Note each time a
Post-Effective Amendment is filed.
- -----------------------------------------------------------------------------
PART A
COVA SERIES TRUST
ONE TOWER LANE, SUITE 3000
OAKBROOK TERRACE, ILLINOIS 60181-4644
COVA SERIES TRUST ("Trust") (formerly Van Kampen Merritt Series Trust) is
intended to meet differing investment objectives with its separate
Portfolios: Money Market Portfolio, Quality Income Portfolio, High Yield
Portfolio, Stock Index Portfolio, Growth and Income Portfolio, Bond
Debenture Portfolio, Quality Bond Portfolio, Small Cap Stock Portfolio,
Large Cap Stock Portfolio, Select Equity Portfolio and International
Equity Portfolio. SHARES OF THE HIGH YIELD PORTFOLIO ARE NOT CURRENTLY
AVAILABLE FOR SALE IN THE STATE OF CALIFORNIA. The Trustees may provide
for additional Portfolios from time to time. Each Portfolio issues its
own class of shares which has rights separate from the other classes of
shares.
This Prospectus concisely sets forth the information about the Trust that a
prospective investor should know before investing. Investors should read and
retain this Prospectus for future reference.
A Statement of Additional Information, dated May 1, 1996, containing
information about the Trust has been filed with the Securities and Exchange
Commission and is hereby incorporated by reference into this Prospectus. A
copy of the Statement of Additional Information may be obtained without charge
by calling (800) 831-LIFE, or writing Cova Financial Services Life Insurance
Company at One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois 60181-4644.
PURCHASERS SHOULD BE AWARE THAT AN INVESTMENT IN THE MONEY MARKET PORTFOLIO IS
NEITHER INSURED NOR GUARANTEED BY THE U. S. GOVERNMENT. THERE CAN BE NO
ASSURANCE THAT THE MONEY MARKET PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE.
THE HIGH YIELD PORTFOLIO AND THE BOND DEBENTURE PORTFOLIO MAY INVEST A
SUBSTANTIAL PORTION OF THEIR ASSETS IN LOWER GRADE CORPORATE DEBT SECURITIES
COMMONLY KNOWN AS "JUNK BONDS." INVESTORS SHOULD BE AWARE THAT SUCH
INVESTMENTS INVOLVE A SIGNIFICANT DEGREE OF RISK. SEE "RISK FACTORS - SPECIAL
RISKS OF HIGH YIELD INVESTING."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS IS DATED: MAY 1, 1996.
TABLE OF CONTENTS
PAGE
SUMMARY
The Trust
Investment Adviser and Sub-Advisers
The Portfolios
Investment Risks
Sales and Redemptions
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
ADDITIONAL PERFORMANCE INFORMATION
THE TRUST
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
Money Market Portfolio
Quality Income Portfolio
High Yield Portfolio
Stock Index Portfolio
Growth and Income Portfolio
Bond Debenture Portfolio
Quality Bond Portfolio
Small Cap Stock Portfolio
Large Cap Stock Portfolio
Select Equity Portfolio
International Equity Portfolio
INVESTMENT PRACTICES
Investment Limitations
RISK FACTORS
Tax Considerations
Special Considerations Relating to Foreign Securities
PORTFOLIO TURNOVER RATES
Money Market Portfolio and Quality Income Portfolio
High Yield Portfolio and Bond Debenture Portfolio
Stock Index Portfolio
Growth and Income Portfolio
Quality Bond, Small Cap Stock, Large Cap Stock, Select Equity and
International Equity Portfolios
MANAGEMENT OF THE TRUST
The Trustees
Adviser
Portfolio Management
Expenses of the Trust
Sub-Advisers
Sub-Advisory Fees
DESCRIPTION OF THE TRUST
Shareholder Rights
Inquiries
Distribution and Redemption of Shares
Dividends
Tax Status
Net Asset Values
FUND PERFORMANCE
APPENDIX - DESCRIPTION OF CORPORATE BOND RATINGS
SUMMARY
THE TRUST
The Trust is an open-end management investment company established as a
Massachusetts business trust under a Declaration of Trust dated July 9, 1987.
Each Portfolio issues a separate class of shares. The Declaration of Trust
permits the Trustees to issue an unlimited number of full or fractional shares
of each class of stock.
Each Portfolio has distinct investment objectives and policies. (See
"Investment Objectives and Policies of the Portfolios.") Additional Portfolios
may be added to the Trust in the future. This Prospectus will be supplemented
to reflect the addition of new Portfolios.
INVESTMENT ADVISER AND SUB-ADVISERS
Subject to the authority of the Board of Trustees of the Trust, Cova
Investment Advisory Corporation (the "Adviser") serves as the Trust's
investment adviser and has responsibility for the overall management of the
investment strategies and policies of the Portfolios. The Adviser has engaged
Sub-Advisers for each of the Portfolios to make investment decisions and place
orders. The Sub-Advisers for the Portfolios are:
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SUB-ADVISER NAME OF PORTFOLIO
Van Kampen American Capital Money Market Portfolio
Investment Advisory Corp. Quality Income Portfolio
High Yield Portfolio
Stock Index Portfolio
Growth and Income Portfolio
Lord, Abbett & Co. Bond Debenture Portfolio
J.P. Morgan Investment Quality Bond Portfolio
Management Inc. Small Cap Stock Portfolio
Large Cap Stock Portfolio
Select Equity Portfolio
International Equity Portfolio
</TABLE>
For additional information concerning the Adviser and the Sub-Advisers,
including a description of advisory and sub-advisory fees, see "Management of
the Trust."
THE PORTFOLIOS
PORTFOLIOS MANAGED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.:
MONEY MARKET PORTFOLIO. The investment objective of this Portfolio is to
provide high current income consistent with the preservation of capital and
liquidity through investment in a broad range of money market instruments that
will mature within 12 months of the date of purchase. An investment in the
Money Market Portfolio is neither insured nor guaranteed by the U.S.
Government.
QUALITY INCOME PORTFOLIO. The investment objective of this Portfolio is
to seek a high level of current income, consistent with safety of principal,
by investing in obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities or in various investment grade debt obligations
including mortgage pass-through certificates and collateralized mortgage
obligations.
HIGH YIELD PORTFOLIO. The investment objective of this Portfolio is the
maximization of total investment return through income and capital
appreciation. The Portfolio will pursue its investment objective by investing
in a portfolio substantially consisting of medium and lower grade domestic
corporate debt securities. The Portfolio may also invest up to 35% of its
assets in foreign government and foreign corporate debt securities of similar
quality. The Portfolio may also, from time to time, invest in cash or cash
equivalents due to market conditions or for other defensive purposes. Lower
grade corporate debt securities are commonly known as "junk bonds" and involve
a significant degree of risk. (See "Risk Factors - Special Risks of High Yield
Investing.")
STOCK INDEX PORTFOLIO. The investment objective of this Portfolio is to
achieve investment results that approximate the aggregate price and yield
performance of the Standard & Poor's 500 Composite Stock Price Index by
investing in common stocks, stock index futures contracts and options on stock
indexes and stock index futures contracts, and certain short-term fixed income
securities such as cash reserves.
"Standard & Poor's", "S&P", "S&P 500", "Standard & Poor's 500" and "500"
are trademarks of McGraw-Hill Inc. and have been licensed for use by Cova
Financial Services Life Insurance Company and its affiliates ("Cova Life").
The Stock Index Portfolio is not sponsored, endorsed, sold or promoted by
Standard & Poor's Corporation ("S&P") and S&P makes no representation
regarding the advisability of investing in the Stock Index Portfolio.
GROWTH AND INCOME PORTFOLIO. The investment objective of this Portfolio
is to seek long-term growth of both capital and income by investing in a
portfolio of common stocks which are considered by the Portfolio's Sub-Adviser
to have potential for capital appreciation and dividend growth. The Portfolio
may also invest up to 35% of its assets in common stocks which are considered
by the Portfolio's Sub-Adviser to have potential for capital appreciation but
which are issued by foreign corporations.
PORTFOLIO MANAGED BY LORD, ABBETT & CO.:
BOND DEBENTURE PORTFOLIO. The investment objective of this Portfolio is
high current income and the opportunity for capital appreciation to produce a
high total return through a professionally-managed portfolio consisting
primarily of convertible and discount debt securities, many of which are
lower-rated. These lower-rated debt securities entail greater risks than
investments in higher-rated debt securities. Investors should carefully
consider these risks set forth under "Risk Factors - Special Risks of High
Yield Investing" before investing.
PORTFOLIOS MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT INC.:
QUALITY BOND PORTFOLIO. The investment objective of this Portfolio 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 preserve the value of its investments to
the extent consistent with its objective.
SMALL CAP STOCK PORTFOLIO. The investment objective of this
Portfolio is to provide a high total return from a portfolio of equity
securities of small companies. The Portfolio will invest primarily in the
common stock of small U.S. companies. The small company holdings of the
Portfolio will be primarily securities included in the Russell 2000 Index.
LARGE CAP STOCK PORTFOLIO. The investment objective of this
Portfolio is long-term growth of capital and income. The equity holdings of
the Portfolio will be primarily stocks of large- and medium-sized companies.
The Portfolio will be highly diversified and typically hold between 225 and
250 stocks.
SELECT EQUITY PORTFOLIO. The investment objective of this Portfolio is
long-term growth of capital and income. The equity holdings of the Portfolio
will be primarily stocks of large- and medium-sized companies. The Portfolio
will typically hold between 60 and 90 stocks.
INTERNATIONAL EQUITY PORTFOLIO. The investment objective of this
Portfolio is to provide a high total return from a portfolio of equity
securities of foreign corporations. The equity holdings of the Portfolio will
be primarily stocks of established companies based in developed countries
outside the United States. The Portfolio is actively managed and seeks to
outperform the Morgan Stanley Capital International Europe, Australia and Far
East Index.
The investment objectives of a Portfolio and policies and restrictions
specifically cited as fundamental may not be changed without the approval of a
majority of the outstanding shares of that Portfolio. Other investment
policies and practices described in this Prospectus and the Statement of
Additional Information are not fundamental, and the Board of Trustees may
change them without shareholder approval. A complete list of investment
restrictions, including those restrictions which cannot be changed without
shareholder approval, is contained in the Statement of Additional Information.
There is no assurance that a Portfolio will meet its stated objective.
INVESTMENT RISKS
The value of a Portfolio's shares will fluctuate with the value of the
underlying securities in its portfolio, and in the case of debt securities,
with the general level of interest rates. When interest rates decline, the
value of an investment portfolio invested in fixed-income securities can be
expected to rise. Conversely, when interest rates rise, the value of an
investment portfolio invested in fixed-income securities can be expected to
decline. In the case of foreign currency denominated securities, these trends
may be offset or amplified by fluctuations in foreign currencies. Investments
by a Portfolio in foreign securities may be affected by adverse political,
diplomatic, and economic developments, changes in foreign currency exchange
rates, taxes or other assessments imposed on distributions with respect to
those investments, and other factors affecting foreign investments generally.
High-yielding fixed-income securities, which are commonly known as "junk
bonds", are subject to greater market fluctuations and risk of loss of income
and principal than investments in lower yielding fixed-income securities.
Certain of the Portfolios intend to employ, from time to time, certain
investment techniques which are designed to enhance income or total return or
hedge against market or currency risks but which themselves involve additional
risks. These techniques include options on securities, futures, options on
futures, options on indexes, options on foreign currencies, foreign currency
exchange transactions, lending of securities and when-issued securities and
delayed-delivery transactions. The Portfolios may have higher-than-average
portfolio turnover which may result in higher-than-average brokerage
commissions and transaction costs.
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of Cova Life as a funding
vehicle for the variable annuity contracts offered by Cova Life. No fee is
charged upon the sale or redemption of the Trust's shares. Expenses of the
Trust are passed through to the separate accounts of Cova Life, and therefore,
are ultimately borne by variable annuity contract owners. In addition, other
fees and expenses are assessed by Cova Life at the separate account level.
(See the Prospectus for the variable annuity contract for a description of all
fees and charges relating to the variable annuity contract.)
FINANCIAL HIGHLIGHTS
(FOR ONE SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following schedule presents financial highlights for one share of the
Portfolio throughout the periods indicated. The financial highlights have been
audited by KPMG Peat Marwick LLP, independent auditors, for each of the
periods through December 31, 1995 presented below, and their report thereon
appears in the Portfolio's related Statement of Additional Information. This
information should be read in conjunction with the financial statements and
related notes thereto included in the Statement of Additional Information, a
copy of which may be obtained without charge as indicated elsewhere in this
Prospectus.
MONEY MARKET PORTFOLIO
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July 1, 1991
(Commencement of
Investment
Year Ended December 31, Operations) to
------ ------- ---------- ------
1995 1994 1993 1992 December 31, 1991
------ ------- ---------- ------ -------------------
Net Asset Value, Beginning of Period $1.00 $ 1.00 $ 1.00 $1.00 $ 1.00
------ ------- ---------- ------ -------------------
Net Investment Income .059 .041 .032 .038 .027
Less Distributions from Net Investment Income .059 .041 .032 .038 $ 1.00
------ ------- ---------- ------ -------------------
Net Asset Value, End of Period $1.00 $ 1.00 $ 1.00 $1.00 $ 1.00
====== ======= ========== ====== ====================
Total Return* 6.01% 4.23% 3.24% 3.88% 2.75%**
Net Assets at End of Period (in millions) $34.4 $ 75.9 $ 6.6 $ 4.0 $ 5.4
Ratio of Expenses to Average Net Assets*
(Annualized) .11% .10% .10% .10% .09%
Ratio of Net Investment Income to Average
Net Assets* (Annualized) 5.68% 4.37% 3.23% 3.63% 5.11%
*If certain expenses had not been assumed
by the Adviser and Cova Life,
total return would have been lower
and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets
(Annualized) .64% .68% .86% 1.30% 1.11%
Ratio of Net Investment Income to Average
Net Assets (Annualized) 5.25% 3.79% 2.47% 2.43% 4.10%
</TABLE>
**Non-annualized
See Notes to Financial Statements
FINANCIAL HIGHLIGHTS
(FOR ONE SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following schedule presents financial highlights for one share of the
Portfolio throughout the periods indicated. The financial highlights have been
audited by KPMG Peat Marwick LLP, independent auditors, for each of the
periods through December 31, 1995 presented below, and their report thereon
appears in the Portfolio's related Statement of Additional Information. This
information should be read in conjunction with the financial statements and
related notes thereto included in the Statement of Additional Information, a
copy of which may be obtained without charge as indicated elsewhere in this
Prospectus.
QUALITY INCOME PORTFOLIO
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December 11, 1989
(Commencement of
Investment
Year Ended December 31, Operations) to
-------- -------- ---------- -------
1995 1994 1993 1992 1991 1990 December 31, 1989
-------- -------- -------- -------- ---------- ------- -------------------
Net Asset Value, Beginning of Period $ 9.815 $10.886 $10.699 $10.618 $ 9.969 $9.930 $ 10.000
------- ------- -------- ------- --------- ------- -------------------
Net Investment Income .667 .603 .641 .696 .753 .713 .043
Net Realized and Unrealized Gain/Loss on
Investments 1.056 (1.071) .518 .081 .649 .039 (.070)
------- ------- ------- ------- --------- ------- ------------------
Total from Investment Operations 1.723 (.468) 1.159 .777 1.402 .752 (.027)
------- ------- ------- ------ -------- ------- ------------------
Less:
Distributions from Net Investment Income .667 .603 .641 .696 .753 .713 .043
Distributions from Net Realized Gain on
Investments .000 .000 .331 .000 .000 .000 .000
------- ------- ------ ------- -------- ------ -----------------
Total Distributions .667 .603 .972 .696 .753 .713 .043
------- ------- ------ ------ ------- ----- ----------------
Net Asset Value, End of Period $10.871 $ 9.815 $10.886 $10.699 $ 10.618 $9.969 $ 9.930
======= ========= ======== ========= ========== ======= ====================
Total Return* 17.99% (4.33%) 11.04% 7.61% 14.71% 7.99% (.27%)**
Net Assets at End of Period (in millions) $ 41.4 $ 33.9 $ 51.1 $ 24.1 $ 6.8 $ 6.1 $ 2.5
Ratio of Operating Expenses to Average Net
Assets* (Annualized) .60% .59% .60% .60% .60% .74% .70%
Ratio of Interest Expenses to Average Net
Assets* (Annualized) (Note 4) .05% N/A N/A N/A N/A N/A N/A
Ratio of Net Investment Income to Average
Net Assets* (Annualized) 6.42% 5.69% 5.82% 6.87% 7.45% 7.64% 7.83%
Portfolio Turnover 219.46% 177.63% 318.40% 231.91% 12.86% 59.25% .00%
*If certain expenses had not been assumed
by Cova Life, total return would
have been lower and the ratios
would have been as follows:
Ratio of Operating Expenses to Average Net
Assets (Annualized) .75% .68% .70% .88% 1.10% 1.53% 9.15%
Ratio of Net Investment Income to Average
Net Assets (Annualized) 6.27% 5.60% 5.73% 6.59% 6.96% 6.85% (.62%)
</TABLE>
**Non-Annualized
N/A - Prior to 1995, interest expense was immaterial and subsequently netted
against interest income.
See Notes to Financial Statements
FINANCIAL HIGHLIGHTS
(FOR ONE SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following schedule presents financial highlights for one share of the
Portfolio throughout the periods indicated. The financial highlights have been
audited by KPMG Peat Marwick LLP, independent auditors, for each of the
periods through December 31, 1995 presented below, and their report thereon
appears in the Portfolio's related Statement of Additional Information. This
information should be read in conjunction with the financial statements and
related notes thereto included in the Statement of Additional Information, a
copy of which may be obtained without charge as indicated elsewhere in this
Prospectus.
HIGH YIELD PORTFOLIO
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December 11, 1989
(Commencement of
Investment
Year Ended December 31, Operations) to
-------- -------- ---------- -------
1995 1994 1993 1992 1991 1990 December 31, 1989
-------- -------- -------- -------- ---------- ------- -------------------
Net Asset Value, Beginning of Period $ 9.823 $11.287 $10.445 $10.410 $ 9.073 $9.974 $ 10.000
-------- -------- -------- -------- ---------- ------- -------------------
Net Investment Income 0.949 .978 1.028 1.250 1.124 1.085 .053
Net Realized and Unrealized Gain/Loss on
Investments .621 (1.464) 1.170 .658 1.337 (.901) (.026)
-------- --------- -------- -------- ---------- ------- -----------------
Total from Investment Operations 1.570 (.486) 2.198 1.908 2.461 .184 .027
-------- --------- -------- -------- ---------- ------- ----------------
Less:
Distributions from Net Investment Income .947 .978 1.028 1.250 1.124 1.085 .053
Distributions from Net Realized Gain on
Investments .000 .000 .328 .623 .000 .000 .000
------- ---------- -------- --------- --------- ------ ---------------
Total Distributions .947 .978 1.356 1.873 1.124 1.085 .053
-------- --------- ------- -------- --------- ------- ---------------
Net Asset Value, End of Period $10.446 $ 9.823 $11.287 $10.445 $ 10.410 $9.073 $ 9.974
======== ========= ======== ======= ========= ======= =================
Total Return* 16.69% (4.52%) 21.98% 19.12% 28.31% 1.86% .23%**
Net Assets at End of Period (in millions) $ 36.5 $ 19.7 $ 18.8 $ 5.4 $ 3.8 $ 2.9 $ 2.5
Ratio of Expenses to Average Net Assets*
(Annualized) .86% .86% .84% .87% .86% 1.01% .95%
Ratio of Net Investment Income to Average
Net Assets* (Annualized) 9.50% 9.48% 8.97% 11.67% 11.31% 11.43% 9.67%
Portfolio Turnover 118.90% 200.06% 213.09% 157.42% 147.57% 28.32% .00%
*If certain expenses had not been assumed
by Cova Life, total return would have
been lower and the ratios would have been
as follows:
Ratio of Expenses to Average Net Assets
(Annualized) 1.09% 1.16% 1.38% 1.79% 1.91% 2.42% 9.42%
Ratio of Net Investment Income to Average
Net Assets (Annualized) 9.27% 9.18% 8.43% 10.75% 10.25% 10.01% 1.19%
</TABLE>
**Non-annualized
See Notes to Financial Statements
FINANCIAL HIGHLIGHTS
(FOR ONE SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following schedule presents financial highlights for one share of the
Portfolio throughout the periods indicated. The financial highlights have been
audited by KPMG Peat Marwick LLP, independent auditors, for each of the
periods through December 31, 1995 presented below, and their report thereon
appears in the Portfolio's related Statement of Additional Information. This
information should be read in conjunction with the financial statements and
related notes thereto included in the Statement of Additional Information, a
copy of which may be obtained without charge as indicated elsewhere in this
Prospectus.
STOCK INDEX PORTFOLIO
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November 1, 1991
(Commencement of
Investment
Year Ended December 31, Operations) to
-------- -------- ---------- --------
1995 1994 1993 1992 December 31, 1991
-------- -------- ---------- -------- -------------------
Net Asset Value, Beginning of Period $10.587 $11.115 $ 10.552 $10.572 $ 10.000
-------- -------- ---------- -------- -------------------
Net Investment Income .260 .311 .205 .172 .038
Net Realized and Unrealized Gain/Loss on
Investments 3.637 (.337) .726 .477 .534
-------- -------- ---------- -------- -------------------
Total from Investment Operations 3.897 (.026) .931 .649 .572
-------- -------- ---------- -------- -------------------
Less:
Distributions from Net Investment Income .260 .311 .205 .210 .000
Distributions from Net Realized Gain on
Investments .380 .185 .163 .459 .000
Return of Capital Distributions .000 .006 .000 .000 .000
-------- --------- ---------- ------- -------------------
Total Distributions .640 .502 .368 .669 .000
-------- -------- ---------- -------- -------------------
Net Asset Value, End of the Period $13.844 $10.587 $ 11.115 $10.552 $ 10.572
======== ======= ======== ======= =================
Total Return* 36.87% (.11%) 8.84% 6.22% 5.70%**
Net Assets at End of the Period (in millions) $ 86.0 $ 36.8 $ 91.3 $ 35.0 $ 6.8
Ratio of Expenses to Average Net Assets*
(Annualized) .61% .58% .60% .59% .40%
Ratio of Net Investment Income to Average
Net Assets* (Annualized) 2.41% 2.23% 2.29% 2.54% 3.02%
Portfolio Turnover 3.94% 47.05% 44.09% 85.73% .00%
*If certain expenses had not been assumed
by Cova Life, total return would have
been lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net Assets
(Annualized) .78% .80% .74% 1.21% 1.84%
Ratio of Net Investment Income to Average
Net Assets (Annualized) 2.24% 2.01% 2.15% 1.92% 1.58%
</TABLE>
**Non-Annualized
See Notes to Financial Statements
FINANCIAL HIGHLIGHTS
(FOR ONE SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following schedule presents financial highlights for one share of the
Portfolio throughout the periods indicated. The financial highlights have been
audited by KPMG Peat Marwick, LLP, independent auditors, for each of the
periods through December 31, 1995 presented below, and their report thereon
appears in the Portfolio's related Statement of Additional Information. This
information should be read in conjunction with the financial statements and
related notes thereto included in the Statement of Additional Information, a
copy of which may be obtained without charge as indicated elsewhere in this
Prospectus.
GROWTH AND INCOME PORTFOLIO
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
May 1, 1992
(Commencement of
Investment
Year Ended December 31 Operations) to
-------- -------- -------------
1995 1994 1993 December 31, 1992
-------- -------- ------------- -------------------
Net Asset Value, Beginning of Period $ 10.306 $11.170 $ 10.282 $ 10.000
-------- -------- ------------- -------------------
Net Investment Income .224 .331 .182 .125
Net Realized and Unrealized Gain/Loss on
Investments 3.089 (.864) 1.371 .444
-------- -------- ------------- -------------------
Total from Investment Operations 3.313 (.533) 1.553 .569
-------- -------- ------------- -------------------
Less:
Distributions from Net Investment Income .232 .323 .182 .125
Distributions from Net Realized Gain on
Investments .875 .008 .483 .162
------- -------- ------------- -------------------
Total Distributions 1.107 .331 .665 .287
-------- -------- ------------- -------------------
Net Asset Value, End of Period $12.512 $10.306 $ 11.170 $ 10.282
======== ========= ============ ====================
Total Return* 32.24% (4.54%) 15.01% 5.67%**
Net Assets at End of Period (in millions) $ 19.7 $ 10.9 $ 6.5 $ 2.6
Ratio of Expenses to Average Net Assets*
(Annualized) .69% .70% .69% .70%
Ratio of Net Investment Income to Average
Net Assets* (Annualized) 2.05% 3.47% 1.84% 2.27%
Portfolio Turnover 180.11% 326.01% 135.92% 99.93%
*If certain expenses had not been assumed
by Cova Life, total return would have been
lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net Assets
(Annualized) 1.19% 1.49% 2.05% 3.69%
Ratio of Net Investment Income to Average 1.55% 2.68% .47% (.73%)
Net Assets (Annualized)
</TABLE>
**Non-Annualized
See Notes to Financial Statements
ADDITIONAL PERFORMANCE INFORMATION
Further information about the Trust's performance is contained in the Annual
Report to shareholders which may be obtained, without charge, by calling (800)
831-LIFE, or writing Cova Life at One Tower Lane, Suite 3000, Oakbrook
Terrace, Illinois 60181-4644.
THE TRUST
The Trust is currently comprised of eleven separate Portfolios: Money Market
Portfolio, Quality Income Portfolio, High Yield Portfolio, Growth and Income
Portfolio, Stock Index Portfolio, Bond Debenture Portfolio, Quality Bond
Portfolio, Small Cap Stock Portfolio, Large Cap Stock Portfolio,
Select Equity Portfolio and International Equity Portfolio. SHARES OF THE HIGH
YIELD PORTFOLIO ARE NOT CURRENTLY AVAILABLE FOR SALE IN THE STATE OF
CALIFORNIA. The Trustees may provide for additional Portfolios from time to
time. Each Portfolio issues a separate class of shares. The Declaration of
Trust permits the Trustees to issue an unlimited number of full or fractional
shares of each class of stock.
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
Each Portfolio of the Trust has a different investment objective which it
pursues through separate investment policies as described below. The risks and
opportunities of each Portfolio should be examined separately. The differences
in objectives and policies among the Portfolios can be expected to affect the
return of each Portfolio and the degree of market and financial risk of each
Portfolio.
There is no assurance that the investment objectives of the various Portfolios
will be met.
PORTFOLIOS MANAGED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.:
MONEY MARKET PORTFOLIO
The investment objective of the Money Market Portfolio is to provide high
current income consistent with the preservation of capital and liquidity
through investment in a broad range of money market instruments that will
mature within 12 months of the date of purchase.
INVESTMENT PROGRAM
The Money Market Portfolio seeks to achieve its objective by investing only in
the following securities and instruments: (a) obligations of or guaranteed by
the U.S. government, its agencies or instrumentalities ("U.S. Government
Securities"); (b) obligations of banks subject to U.S. government regulation
as well as such other bank obligations as are insured by a U.S. government
agency ("Bank Obligations"); (c) commercial paper (including variable amount
master demand notes); and (d) debt obligations (other than commercial paper)
of corporate issuers.
U.S. Government Securities include Treasury Bills, Notes and Bonds issued by
the U.S. government and backed by the full faith and credit of the U.S.
government, as well as securities issued or guaranteed as to principal and
interest by agencies and instrumentalities of the U.S. government. Bank
Obligations include certificates of deposit and bankers' acceptances of
domestic banks (or Euro-dollar obligations of foreign branches of those
domestic banks) subject to U.S. government regulation and time deposits of
federal and state banks whose accounts are insured by a government agency as
well as the accounts themselves.
See "Risk Factors - Tax Considerations" for a discussion of special
diversification standards which the Portfolio will meet.
The Portfolio may lend portfolio securities. The Portfolio may also enter into
repurchase agreements but only if the underlying securities are either
Government securities or First Tier Securities (see "Investment Quality" and
"Portfolio Maturity", below). The Portfolio may purchase and sell securities
on a "when issued" and "delayed delivery" basis. The Portfolio may borrow up
to 10% of its net assets in order to pay for redemptions when liquidation of
portfolio securities is considered disadvantageous or inconvenient and may
pledge up to 10% of its net assets to secure borrowings. The Portfolio may
invest up to 10% of its net assets in restricted securities. A more complete
description of these investments and transactions is contained under
"Investment Practices".
The Portfolio may also invest in Floating Rate Securities. Floating Rate
Securities provide for automatic adjustment of the interest rate whenever some
specified interest rate index changes. The interest rate on Floating Rate
Securities is ordinarily determined by reference to or is a percentage of a
bank's prime rate, the 90-day U.S. Treasury bill rate, the rate of return on
commercial paper or bank certificates of deposit, an index of short-term
interest rates, or some other objective measure. Floating Rate Securities
often include a demand feature which entitles the holder to sell the
securities to the issuer at par. In many cases, the demand feature can be
exercised at any time on seven days' notice; in other cases, the demand
feature is exercisable at any time on 30 days' notice or on similar notice at
intervals of not more than one year. With respect to Floating Rate Securities,
the financial institution issuing the instrument is considered the issuer.
However, where the securities are backed by an irrevocable letter of credit or
by insurance, without which the securities would not qualify for purchase
under the Portfolio's quality restrictions, the issuer of the letter of credit
will be considered the issuer of the securities.
Although the securities in which the Portfolio invests are of high quality and
the transactions which it enters into entail low risk, there is still the
possibility of loss of principal. Corporate issuers may default on their
obligations. Repurchase agreements may be deemed to be collateralized loans
and the Portfolio could experience delay and expenses in liquidating
collateral in the event of the failure of the repurchasing party to honor its
agreement to repurchase. Agencies or instrumentalities of the U.S. government
could also default on their securities which may not be guaranteed by or be
backed by the full faith and credit of the U.S. government.
INVESTMENT QUALITY
(a) Eligible Securities
The Money Market Portfolio will invest only in United States
dollar-denominated instruments which, at the time of acquisition, are
determined to be eligible securities ("Eligible Securities") by the
Sub-Adviser and which are determined by the Sub-Adviser to present minimal
credit risks.
An Eligible Security is any security that has a remaining maturity of
less than one year and (i) which is rated in one of the two highest rating
categories for short-term debt obligations by any two nationally recognized
statistical rating organizations ("NRSROs") that have issued a rating with
respect to a security or class of debt obligations of an issuer, or if only
one NRSRO has issued a rating, that NRSRO ("Requisite NRSROs"); or (ii) has a
security that has been issued by an issuer that has outstanding short-term
debt obligations (or security within that class) that are comparable in
priority and security with the security ("CPS Security") which is rated, or
the issuer of which is rated, by the Requisite NRSROs in one of the two
highest rating categories for short-term debt obligations. An unrated security
may also be an Eligible Security if it is determined by the Sub-Adviser to be
of comparable quality ("Comparable Quality Security") to either a First Tier
Security or Second Tier Security, as those terms are defined below.
A First Tier Security is an Eligible Security that (i) is itself rated,
has a CPS Security rated or the issuer of which security is rated by the
Requisite NRSROs in the highest rating category for short-term debt
obligations or (ii) is a Comparable Quality Security which is determined by
the Sub-Adviser to be of comparable quality to a First Tier Security.
A Second Tier Security is (i) an Eligible Security that is itself rated,
has a CPS Security rated or the issuer of which security is rated by the
Requisite NRSROs in the second highest rating category for short-term debt
obligations, (ii) an instrument that has been rated in the highest rating
category for short-term debt obligations by one NRSRO and has been rated in
the second highest rating category for short-term debt obligations by one or
more other NRSROs or (iii) a Comparable Quality Security which is determined
by the Sub-Adviser to be of comparable quality to a Second Tier Security.
(b) Guidelines for Purchasing Eligible Securities
The Sub-Adviser, on behalf of the Money Market Portfolio, may (i) acquire
any First Tier Security that, at the time of acquisition, has received the
highest rating from any two NRSROs; (ii) acquire any Second Tier Security
that, at the time of acquisition, has received the second highest rating from
any two NRSROs, and (iii) acquire any First Tier Security or any Second Tier
Security that at time of purchase is rated by a single NRSRO, or any
Comparable Quality Security, subject to approval by the Board of Trustees of
the Trust.
PORTFOLIO MATURITY
The Money Market Portfolio may not purchase any instrument, other than a
Government security, with a remaining maturity of greater than one year. A
Government security is any security issued or guaranteed as to principal or
interest by the United States, or by a person controlled or supervised by and
acting as an instrumentality of the Government of the United States, or any
certificate of deposit for any of the above.
The Money Market Portfolio maintains a dollar-weighted average portfolio
maturity of ninety (90) days or less. The Portfolio determines the maturity of
portfolio investments in accordance with Rule 2a-7, a valuation and pricing
rule under the Investment Company Act of 1940, as amended.
QUALITY INCOME PORTFOLIO
The investment objective of the Quality Income Portfolio is to seek a high
level of current income, consistent with safety of principal, by investing in
obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities or in various investment grade debt obligations including
mortgage pass-through certificates and collateralized mortgage obligations.
The Sub-Adviser will use the Lehman Brothers Government/Corporate Bond Index
as a benchmark against which it will gauge the performance of the Portfolio
and determine risk measurement. The Lehman Brothers Government/Corporate Bond
Index is comprised of all publicly issued, non-convertible, domestic debt of
the U.S. Government or any agency thereof, quasi-Federal corporation, or
corporate debt guaranteed by the U.S. Government and all publicly issued,
fixed-rate, non-convertible, domestic debt of the four major corporate
classifications: industrial, utility, financial and Yankee bond. Only notes
and bonds with a minimum outstanding principal amount of $50,000,000 and a
minimum maturity of one year are included. Bonds included must have a rating
of at least Baa by Moody's Investors Service, Inc. ("Moody's"), BBB by
Standard & Poor's Corporation ("S&P") or in the case of bank bonds not rated
by either Moody's or S&P, BBB by Fitch Investors Service, Inc.
Depending on market conditions and subject to the special diversification
provisions imposed on the Portfolio (see "Risk Factors"), the Portfolio may
invest a substantial portion of its assets in Government National Mortgage
Association ("GNMA") Certificates of the modified pass-through type. These
GNMA Certificates are debt securities issued by a mortgage holder (such as a
mortgage banker) and represent an interest in a pool of mortgages insured by
the Federal Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. GNMA guarantees the timely payment
of monthly installments of principal and interest on the GNMA Certificates.
These guarantees are backed by the full faith and credit of the U.S.
government.
To the extent the Portfolio acquires GNMA Certificates at par or at discount,
the GNMA Certificates offer a high degree of safety of the principal
investment because of the GNMA guarantee. If the Portfolio buys GNMA
Certificates at a premium, however, mortgage foreclosures and repayments of
principal by mortgagors (which may be made at any time without penalty) may
result in some loss of the Portfolio's principal investment to the extent of
the premium paid. To avoid loss of this premium and of any gain in value of
its GNMA Certificates resulting from a decrease in interest rates generally,
the Portfolio may sell its GNMA Certificates which are selling at a
substantial premium. This practice may increase the Portfolio's portfolio
turnover rate. A more complete description of GNMA Certificates is contained
in the Statement of Additional Information.
The Portfolio, subject to the limitations on investments as described in "Risk
Factors", may invest in other obligations issued or guaranteed by the U.S.
government or by its agencies or instrumentalities. These instruments may be
either direct obligations of the Treasury (such as U.S. Treasury Notes, Bills
or Bonds) or securities issued or guaranteed by government agencies or
instrumentalities. Of the obligations issued or guaranteed by agencies or
instrumentalities of the U.S. government, some are backed by the full faith
and credit of the U.S. government (such as Maritime Administration Title XI
Ship Financing Bonds) and others are backed only by the rights of the issuer
to borrow from the U.S. Treasury (such as Federal Home Loan Bank Bonds and
Federal National Mortgage Association Bonds).
The Portfolio may also invest in one or more of the following:
(1) Marketable straight-debt securities of domestic issuers, and of
foreign issuers (payable in U.S. dollars) rated at the time of purchase within
the four highest grades assigned by Moody's (Aaa, Aa, A or Baa) or by S&P
(AAA, AA, A or BBB);
(2) Commercial paper rated at time of purchase Prime-3 by Moody's or A-3
by S&P;
(3) Bank obligations (including repurchase agreements and those
denominated in Eurodollars) of banks having total assets in excess of $1
billion; and
(4) Mortgage pass-through certificates and collateralized mortgage
obligations.
Securities rated Baa or BBB may have speculative characteristics and changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is the case
with higher grade bonds. For a further description of the above investments
and the ratings used, see "Appendix - Description of Corporate Bond Ratings"
herein and "Description of Securities Ratings - Commercial Paper Ratings" in
the Statement of Additional Information.
The Portfolio may invest up to 35% of its assets in securities of foreign
issuers. These investments will be marketable straight-debt securities of
foreign issuers payable in U.S. dollars and rated at the time of purchase
within the four highest grades assigned by Moody's or by S&P. Investments in
foreign securities present certain risks not ordinarily found in investments
in securities of U.S. issuers. See "Risk Factors - Special Considerations
Relating to Foreign Securities."
The Portfolio may lend portfolio securities. The Portfolio may borrow under
certain circumstances. The Portfolio may also enter into repurchase
agreements, reverse repurchase agreements and may sell securities short. The
Portfolio may purchase and sell securities on a "when issued" and "delayed
delivery" basis. The Portfolio may invest in restricted securities. A more
complete description of these investments and transactions is contained under
"Investment Practices."
If the Sub-Adviser deems it appropriate to seek to partially hedge the
Portfolio's assets against market value changes, the Portfolio may enter into
various hedging transactions, such as futures contracts, financial index
futures contracts, and the related put or call options contracts on futures
contracts. Hedging is a means of offsetting, or neutralizing, the price
movement of an investment by making another investment, the price of which
should tend to move in the opposite direction from that of the original
investment. See "Investment Practices - Strategic Transactions" and the
Statement of Additional Information for a more complete description of these
transactions.
The Portfolio will be affected by general changes in interest rates resulting
in increases or decreases in the value of the Portfolio securities. Market
prices of debt securities tend to rise when interest rates fall and market
prices tend to fall when interest rates rise. Repurchase agreements may be
deemed to be collateralized loans and the Portfolio could experience delay and
expenses in liquidating such collateral in the event of the failure of the
repurchasing party to honor its agreement to repurchase. Agencies or
instrumentalities of the U.S. government could also default on their
securities which may not be guaranteed by or be backed by the full faith and
credit of the U.S. government.
See "Risk Factors - Tax Considerations" for a discussion of special
diversification standards which the Portfolio will meet.
HIGH YIELD PORTFOLIO
The investment objective of the High Yield Portfolio is the maximization of
total investment return through income and capital appreciation.
The High Yield Portfolio will pursue its investment objective by investing in
a portfolio substantially consisting of medium and lower grade domestic
corporate debt securities. The Portfolio may also invest up to 35% of its
assets in foreign government and foreign corporate debt securities of similar
quality. The Portfolio may also, from time to time, invest in cash or cash
equivalents due to market conditions or for other defensive purposes.
Lower grade corporate debt securities are commonly known as "junk bonds" and
involve a significant degree of risk. See "Risk Factors - Special Risks of
High Yield Investing."
Medium grade corporate securities are generally regarded as having adequate,
but not outstanding, capacity to pay interest and repay principal. Medium
grade securities are obligations that are rated A and Baa by Moody's or A and
BBB by S&P, or which are not rated by either Moody's or S&P but are considered
by the Sub-Adviser to be of comparable quality. Securities rated Baa or BBB
may have speculative characteristics and changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade bonds.
Lower grade corporate securities are those that are rated Ba or B by Moody's
or BB or B by S&P, or which are unrated or considered by the Sub-Adviser to be
of comparable quality. If the Sub-Adviser deems it appropriate, the Portfolio
may invest in domestic corporate debt securities of a higher quality. For a
further description of these ratings, see "Appendix - Description of Corporate
Bond Ratings."
Many issuers of medium and lower grade securities choose not to have a rating
assigned to their obligations by one of the rating agencies. Therefore, the
Portfolio's assets may at times consist of a high proportion of unrated
securities. The Portfolio will purchase only those unrated securities which
the Sub-Adviser believes are comparable to rated securities that qualify for
purchase by the Portfolio pursuant to criteria established by the Board of
Trustees. Although the Portfolio will invest primarily in medium and lower
grade securities, from time to time the Portfolio may also invest in higher
grade securities if the Sub-Adviser considers it appropriate, as when the
difference in return between different grades of securities is very narrow,
when the Sub-Adviser expects interest rates to increase, or when the
availability of medium and lower grade securities is limited. These
investments may result in a lower current income than if the Portfolio were
fully invested in medium and lower grade securities.
The Portfolio may invest up to 35% of its assets in foreign government and
foreign corporate debt securities of similar quality. Investments in foreign
securities present certain risks not ordinarily found in investments in
securities of U.S. issuers. See "Risk Factors - Special Considerations
Relating to Foreign Securities."
If the Sub-Adviser deems it appropriate to seek to partially hedge the
Portfolio's assets against market value changes resulting from changes in
interest rates or (with respect to the foreign securities which the Portfolio
invests in) currency fluctuations, the Portfolio may also enter into various
hedging transactions, such as futures contracts, financial index futures
contracts, and related put or call options contracts on these contracts and
foreign currency contracts. In addition, if the Sub-Adviser deems it
appropriate, the Portfolio may enter into other hedging transactions, such as
forward foreign currency contracts, currency futures contracts, and related
options contracts in order to protect the U.S. dollar equivalent values of
those foreign securities in which the Portfolio invests against declines
resulting from currency value fluctuations.
Hedging is a means of offsetting, or neutralizing, the price movement of an
investment by making another investment, the price of which should tend to
move in the opposite direction from that of the original investment. See
"Investment Practices - Strategic Transactions" and the Statement of
Additional Information for a more complete discussion of these
transactions.
The Portfolio may lend portfolio securities. The Portfolio may borrow
under certain circumstances. The Portfolio may also enter into repurchase
agreements and reverse repurchase agreements. Repurchase agreements may be
deemed to be collateralized loans and the Portfolio could experience delay and
expenses in liquidating such collateral in the event of the failure of the
repurchasing party to honor its agreement to repurchase. The Portfolio may
invest in restricted securities. The Portfolio may purchase and sell
securities on a "when issued" and "delayed delivery" basis. A more complete
description of these investments and transactions is contained under
"Investment Practices."
See "Risk Factors - Tax Considerations" for a discussion of special
diversification standards which the Portfolio will meet.
ASSET COMPOSITION
At December 31, 1995, the High Yield Portfolio was invested in bonds rated by
Moody's as follows:
<TABLE>
<CAPTION>
<S> <C>
Moody's Ratings Percentage of Total Bond Investments in the Portfolio
Caa 2.8%
Ba1 0.3%
Ba2 1.2%
Ba3 13.3%
B1 15.2%
B2 29.8%
B3 26.6%
Other 10.8%
</TABLE>
STOCK INDEX PORTFOLIO
INVESTMENT OBJECTIVE
The investment objective of the Stock Index Portfolio is to achieve investment
results that approximate the aggregate price and yield performance of the
Standard & Poor's 500 Composite Stock Price Index (the "S&P 500 Index" or the
"Index").
The S&P 500 Index represents more than 70% of the total market value of all
publicly-traded common stocks, and is widely viewed among investors as a good
representative of the aggregate performance of publicly-traded common stocks.
"Standard & Poor's", "S&P", "S&P 500", "Standard & Poor's 500", and "500" are
trademarks of McGraw-Hill Inc. and have been licensed for use by Cova Life.
The Stock Index Portfolio is not sponsored, endorsed, sold or promoted by
Standard & Poor's Corporation ("S&P") and S&P makes no representation or
warranty, express or implied, to the owners of the Stock Index Portfolio or
any member of the public regarding the advisability of investing in securities
generally or in the Stock Index Portfolio particularly or the ability of the
S&P 500 Index to track general stock market performance. S&P's only
relationship to Cova Life is the licensing of certain trademarks and trade
names of S&P and of the S&P 500 Index which is determined, composed and
calculated by S&P without regard to Cova Life or the Stock Index Portfolio.
S&P has no obligation to take the needs of Cova Life or the owners of the
Stock Index Portfolio into consideration in determining, composing or
calculating the S&P 500 Index. S&P is not responsible for and has not
participated in the determination of the prices and amount of the Stock Index
Portfolio or the timing of the issuance or sale of the Stock Index Portfolio
or in the determination or calculation of the equation by which the Stock
Index Portfolio is to be converted into cash. S&P has no obligation or
liability in connection with the administration, marketing or trading of the
Stock Index Portfolio.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY COVA LIFE, OWNERS OF THE STOCK INDEX
PORTFOLIO, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR
ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA
INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P
HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL
DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH
DAMAGES.
INVESTMENT POLICIES
The Stock Index Portfolio is not managed according to traditional methods of
"active" investment management, which involve the buying and selling of
securities based upon economic, financial and market analysis and investment
judgment. Instead, the Portfolio, utilizing a "passive" or "indexing"
investment approach, attempts to duplicate the investment performance of the
respective index through statistical procedures.
The Sub-Adviser believes that the "indexing" approach described above is an
effective method of substantially duplicating percentage changes in the S&P
500 Index. It is a reasonable expectation that the correlation between the
performance of the Portfolio and that of the Index will be approximately 98%;
a figure of 100% would indicate perfect correlation. Perfect correlation would
be achieved when the net asset value per share of the Portfolio increases and
decreases in exact proportion to changes in the Index. The Board of Trustees
of the Trust will review the correlation between the Portfolio and the Index
on a quarterly basis. See the Statement of Additional Information for a
description of the monitoring procedures established by the Board.
In pursuing its investment objective, the Portfolio will invest in no fewer
than 100 stocks with the majority of the Portfolio consisting of those stocks
having the largest weightings in the Index. The Sub-Adviser will select stocks
for the Portfolio after taking into account their individual weights in the
Index and the weights in the Index of the industry groups to which they
belong.
Although the Portfolio will attempt to remain fully invested in common stocks,
it may also invest in certain short-term fixed income securities such as cash
reserves.
As described further below under "Implementation of Policies", the Portfolio
may also enter into stock index futures contracts and options on stock indexes
and stock index futures contracts for various reasons including to hedge
against changes in security prices. Hedging is a means of offsetting, or
neutralizing, the price movement of an investment by making another
investment, the price of which should tend to move in the opposite direction
from that of the original investment. See the Statement of Additional
Information for a more complete description of hedging and for a discussion of
the risks involved therein.
IMPLEMENTATION OF POLICIES
The S&P 500 Index is composed of 500 common stocks which are chosen by S&P to
be included in the unmanaged Index. Market value, liquidity and industry
representation are considered in the selection process. The inclusion of a
stock in the S&P 500 Index in no way implies that S&P believes the stock to be
an attractive investment. The 500 securities, 95% of which trade on the New
York Stock Exchange, represent approximately 75% of the market value of all
U.S. common stocks. Each stock in the S&P 500 Index is weighted by its market
value: its market price per share times the number of shares outstanding.
Because of the market-value weighting, the 50 largest companies in the S&P 500
Index currently account for approximately 50% of the Index. Typically,
companies included in the S&P 500 Index are the largest and most dominant
firms in their respective industries. As of December 31, 1995, the five
largest companies in the Index were: General Electric, AT&T, Exxon, Coca Cola
and Merck & Company. The largest industry categories were: International Oil,
Telephone, Regional Banks, Health Care - Drugs, Pharmaceuticals and Health
Care-Diverse.
Although the Portfolio will normally seek to remain substantially fully
invested in common stocks, the Portfolio may invest temporarily in certain
short-term fixed income securities. Such securities may be used to invest
uncommitted cash balances or to maintain liquidity to meet shareholder
redemptions. These securities include: obligations of the United States
government and its agencies or instrumentalities; commercial paper, bank
certificates of deposit and bankers' acceptances; and repurchase agreements
and reverse repurchase agreements collateralized by these securities.
Repurchase agreements may be deemed to be collateralized loans and the
Portfolio could experience delay and expenses in liquidating such collateral
in the event of the failure of the repurchasing party to honor its agreement
to repurchase.
The Portfolio will employ a combination of an indexing strategy known as
"sampling" and stock index futures contracts and options. Sampling is a method
that is used to attempt to replicate the return of the Index without having to
purchase a weighted portfolio containing all 500 stocks in the Index. This
process selects stocks for the Portfolio so that various industry weightings,
market capitalizations and fundamental characteristics (e.g. price to book,
price to earnings, debt to asset ratios and dividend yields) match those of
the Index. The use of sampling involves certain risks with respect to the
ability of the Portfolio to achieve the desired correlation with the Index.
(See "Risk Factors - Stock Index Portfolio - Sampling", below).
As indicated above, the Portfolio may utilize stock index futures contracts
and options on stock indexes and stock index futures contracts. Specifically,
the Portfolio may enter into futures contracts provided that not more than 5%
of its assets are required as a futures contract deposit.
Stock index futures contracts and options may be used for several reasons: to
maintain cash reserves while remaining fully invested, to facilitate trading,
to reduce transaction costs, to hedge against changes in securities prices, or
to seek higher investment returns when a futures contract is priced more
attractively than the underlying equity security or the Index.
The Portfolio may lend its investment securities to qualified institutional
investors for the purpose of realizing additional income. Loans of securities
by the Portfolio will be collateralized by cash or securities issued or
guaranteed by the U.S. government or its agencies. The collateral will equal
at least 100% of the current market value of the loaned securities. The
Portfolio may borrow money from a bank but only for temporary or emergency
purposes. The Portfolio may borrow money up to one-third of the value of its
total assets taken at current value. The Portfolio would borrow money only to
meet redemption requests prior to the settlement of securities already sold or
in the process of being sold by the Portfolio. To the extent that the
Portfolio borrows money prior to selling securities, the Portfolio may be
leveraged; at such times, the Portfolio may appreciate or depreciate in value
more rapidly than the Index. The Portfolio may purchase and sell securities on
a "when issued" and "delayed delivery" basis. The Portfolio may invest in
restricted securities and may sell securities short. See "Investment
Practices" for a description of these investments and transactions.
See "Risk Factors - Tax Considerations" for a discussion of special
diversification standards which the Portfolio will meet.
RISK FACTORS - STOCK INDEX PORTFOLIO
FUTURES CONTRACTS AND OPTIONS
The primary risks associated with the use of futures contracts and options
are: (i) imperfect correlation between the change in market value of the
stocks held by the Portfolio and the prices of futures contracts and options;
and (ii) possible lack of a liquid secondary market for a futures contract and
the resulting inability to close a futures position when desired. The risk of
imperfect correlation will be minimized by investing only in those contracts
whose behavior is expected to resemble that of the Portfolio's underlying
securities. The risk that the Portfolio will be unable to close out a futures
position will be minimized by entering into such transactions on a national
exchange with an active and liquid secondary market. See the Statement of
Additional Information for a more complete discussion of the risks involved
with respect to investment in stock index futures contracts and options on
stock indexes and stock index futures contracts.
MARKET RISK
As the Portfolio invests primarily in common stocks, the Portfolio is subject
to market risk - i.e. the possibility that common stock prices will decline
over short or even extended periods. The U.S. stock market tends to be
cyclical, with periods when stock prices generally rise and periods when
prices generally decline.
To illustrate the volatility of stock prices, the following table sets forth
the extremes for stock market returns as well as the average return for the
period from 1926 to 1995, as measured by the S&P 500 Index:
U.S. STOCK MARKET RETURNS (1926-1995)
OVER VARIOUS TIME HORIZONS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
One Five Ten Twenty
Year Years Years Years
------- ------- ------- -------
Best +53.9% +23.9% +20.1% +16.9%
Worst - 43.3 - 12.5 - 0.9 + 3.1
Average +12.5 +10.3 +10.7 +10.7
</TABLE>
As shown, from 1926 to 1995, common stocks, as measured by the S&P 500 Index,
have provided an average annual total return (capital appreciation plus
dividend income) of +12.5%. While this average return can be used as a guide
for setting reasonable expectations for future stock market returns, it may
not be useful for forecasting future returns in any particular period, as
stock returns are quite volatile from year to year.
SAMPLING
The use of the sampling technique may, particularly under certain market
conditions, result in a lower correlation between the Portfolio and the Index
than if the Portfolio owned all 500 stocks in the Index. The sampling
technique, when employed successfully, is effective primarily due to the
existence of long-term correlations between groups of stocks and whole
industry sectors within the Index. Sampling, by definition, creates a bias
toward the purchase by the Portfolio of the stocks of larger capitalization
companies. As a result, the Portfolio can be negatively impacted by the use of
sampling in a market where the stocks of smaller capitalization companies are
outperforming those of larger capitalization companies. When this happens, it
may result in the Portfolio underperforming the Index and not achieving its
anticipated degree of correlation with the Index. The Sub-Adviser will
actively monitor the effectiveness of its sampling technique and will
undertake corrective actions should the use of the sampling technique result
in underperformance or undercorrelation with respect to the Index. Such
corrective actions may include, but not necessarily be limited to, increasing
the number of companies represented in the Portfolio to incorporate more
secondary issues. As described under "Investment Policies" above, the Board of
Trustees of the Trust reviews the correlation between the Portfolio and the
Index on a quarterly basis. The Board has adopted monitoring procedures which
require, among other things, that the Sub-Adviser notify the Board in the
event that the correlation between the performance of the Portfolio and that
of the Index falls below 95%.
GROWTH AND INCOME PORTFOLIO
The investment objective of the Growth and Income Portfolio is to seek
long-term growth of both capital and income by investing in a portfolio of
common stocks which are considered by the Sub-Adviser to have potential for
capital appreciation and dividend growth. The Portfolio may also invest up to
35% of its assets in common stocks which are considered by the Sub-Adviser to
have potential for capital appreciation but which are issued by foreign
corporations.
The Portfolio seeks to achieve its objective by investing primarily in a
diversified portfolio of dividend paying common stocks of large established
companies which are considered by the Sub-Adviser to have potential for both
capital appreciation and dividend growth. The Portfolio's stocks are actively
traded in U.S. domestic markets, primarily on national securities exchanges,
and are selected principally on the basis of fundamental investment values as
determined by the Sub-Adviser. The Portfolio's investments are usually viewed
by the Sub-Adviser as having comparatively low price-earning ratios and
anticipated higher dividends than the S&P 500 average and, at the time of
purchase, are considered by the Sub-Adviser to be undervalued in the
marketplace.
The Portfolio may invest up to 35% of its assets in dividend paying common
stocks of large established companies which are considered by the Sub-Adviser
to have potential for both capital appreciation and dividend growth but which
are issued by foreign corporations of the same type as the U.S. securities
described above. There is no current intention that these investments will
exceed 20% of the Portfolio's assets. Investments in foreign securities
present certain risks not ordinarily found in investments in securities of
U.S. issuers. See "Risk Factors - Special Considerations Relating to Foreign
Securities".
If the the Sub-Adviser deems it appropriate to seek to partially hedge the
Portfolio's assets against market value changes resulting from changes in
interest rates or (with respect to the foreign securities which the Portfolio
invests in) currency fluctuations, the Portfolio may enter into various
hedging transactions, such as futures contracts, financial index futures
contracts, and related put or call options contracts on these contracts and
foreign currency contracts. In addition, if the Sub-Adviser deems it
appropriate, the Portfolio may enter into other hedging transactions, such as
forward foreign currency contracts, currency futures contracts, and related
options contracts in order to protect the U.S. dollar equivalent values of
those foreign securities in which the Portfolio invests against declines
resulting from currency value fluctuations. Hedging is a means of offsetting,
or neutralizing, the price movement of an investment by making another
investment, the price of which should tend to move in the opposite direction
from that of the original investment. See "Investment Practices - Strategic
Transactions" and the Statement of Additional Information for a more complete
description of these transactions.
The Portfolio may lend portfolio securities. The Portfolio may borrow under
certain circumstances. The Portfolio may also enter into repurchase
agreements, reverse repurchase agreements and may sell securities short. The
Portfolio may also invest in restricted securities. The Portfolio may purchase
and sell securities on a "when issued" and "delayed delivery" basis. A more
complete description of these investments and transactions is contained under
"Investment Practices".
See "Risk Factors - Tax Considerations" for a discussion of special
diversification standards which the Portfolio will meet.
As the Portfolio invests primarily in common stocks, the Portfolio is subject
to market risk - i.e. the possibility that common stock prices will decline
over short or even extended periods. Stock markets tend to be cyclical, with
periods when stock prices generally rise and periods when prices generally
decline.
The Portfolio's policy of investing in securities that have a potential for
growth means that the assets of the Portfolio generally will be subject to
greater risk than may be involved in investing in securities which are not
selected for such growth characteristics. Repurchase agreements may be deemed
to be collateralized loans and the Portfolio could experience delay and
expenses in liquidating such collateral in the event of the failure of the
repurchasing party to honor its agreement to repurchase.
PORTFOLIO MANAGED BY LORD, ABBETT & CO.:
BOND DEBENTURE PORTFOLIO
The investment objective of the Bond Debenture Portfolio is high current
income and the opportunity for capital appreciation to produce a high total
return through a professionally-managed portfolio consisting primarily of
convertible and discount debt securities, many of which are lower-rated. These
lower-rated debt securities entail greater risks than investments in
higher-rated debt securities. Investors should carefully consider these risks
set forth under "Risk Factors - Special Risks of High Yield Investing."
The Sub-Adviser believes that a high total return (current income and capital
appreciation) may be derived from an actively-managed, diversified debt-
security portfolio. In no event will the Portfolio voluntarily purchase any
securities other than debt securities, if, at the time of such purchase or
acquisition, the value of the debt securities in the Portfolio is less than
80% of the value of its total assets. The Portfolio seeks unusual values,
particularly in lower-rated debt securities, some of which are convertible
into common stocks or have warrants to purchase common stocks.
Higher yield on debt securities can occur during periods of inflation when the
demand for borrowed funds is high. Also, buying lower-rated bonds when the
credit risk is above average but, the Sub-Adviser thinks, likely to decrease,
can generate higher yields. Such debt securities normally will consist of
secured debt obligations of the issuer (i.e., bonds), general unsecured debt
obligations of the issuer (i.e., debentures) and debt securities which are
subordinate in right of payment to other debt of the issuer.
Capital appreciation potential is an important consideration in the selection
of portfolio securities. Capital appreciation may be obtained by (1) investing
in debt securities when the trend of interest rates is expected to be down;
(2) investing in convertible debt securities or debt securities with warrants
attached entitling the holder to purchase common stock; and (3) investing in
debt securities of issuers in financial difficulties when, in the
Sub-Adviser's opinion, the problems giving rise to such difficulties can be
successfully resolved, with a consequent improvement in the credit standing of
the issuers (such investments involve corresponding risks that interest and
principal payments may not be made if such difficulties are not resolved). In
no event will the Portfolio invest more than 10% of its gross assets at the
time of investment in debt securities which are in default as to interest or
principal.
Normally, the Sub-Adviser invests in long-term debt securities when the
Sub-Adviser believes that interest rates in the long run will decline and
prices of such securities generally will be higher. When the Sub-Adviser
believes that long-term interest rates will rise, the Sub-Adviser will
endeavor to shift the Portfolio into short-term debt securities whose prices
might not be affected as much by an increase in interest rates.
The following policies are subject to change without shareholder approval: (a)
the Portfolio must keep at least 20% of the value of its total assets in (1)
debt securities which, at the time of purchase, are rated within one of the
four highest grades determined either by Moody's or S&P, (2) debt securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, (3) cash or cash equivalents (short-term obligations of
banks, corporations or the U.S. Government), or (4) a combination of any of
the foregoing; (b) the Portfolio may invest up to 10% of its gross assets, at
market value, in debt securities primarily traded in foreign countries - such
foreign debt securities normally will be limited to issues where there does
not appear to be substantial risk of nationalization, exchange controls,
confiscation or other government restrictions; (c) subject to the percentage
limitations for purchases of other than debt securities described below, the
Portfolio may purchase common and preferred stocks; (d) the Portfolio may hold
or sell any property or securities which it may obtain through the exercise of
conversion rights or warrants or as a result of any reorganization,
recapitalization or liquidation proceedings for any issuer of securities owned
by it. In no event will the Portfolio voluntarily purchase any securities
other than debt securities, if, at the time of such purchase or acquisition,
the value of the property and securities, other than debt securities, in the
Portfolio is greater than 20% of the value of its gross assets. A purchase or
acquisition will not be considered "voluntary" if made in order to avoid loss
in value of a conversion or other premium; and (e) the Portfolio does not
purchase securities for short-term trading, nor does it purchase securities
for the purpose of exercising control of management.
The Portfolio may invest up to 15% of its net assets in illiquid securities.
Bonds which are subject to legal or contractual restrictions on resale, but
which have been determined by the Board of Trustees to be liquid, will not be
subject to this limit. Investment by the Portfolio in such securities,
initially determined to be liquid, could have the effect of diminishing the
level of the Portfolio's liquidity during periods of decreased market interest
in such securities.
The Portfolio may, but has no present intention to, commit more than 5% of its
gross assets to the lending of its portfolio securities.
The Portfolio will not change its investment objective without shareholder
approval.
The Portfolio may invest substantially in lower-rated bonds for their higher
yields which entail greater risks. Since the risk of default generally is
higher among lower-rated bonds, the research and analysis performed by the
Sub-Adviser is especially important in the selection of such bonds, which, if
rated BB/Ba or lower, often are described as "high-yield bonds" because of
their generally higher yields and referred to colloquially as "junk bonds"
because of their greater risks. In selecting lower-rated bonds for investment,
the Sub-Adviser does not rely upon ratings, which evaluate only the safety of
principal and interest, not market value risk, and which, furthermore, may not
accurately reflect an issuer's current financial condition. The Portfolio does
not have any minimum rating criteria for its investments in bonds and some
issuers may default as to principal and/or interest payments subsequent to the
purchase of their securities. Through portfolio diversification, good credit
analysis and attention to current developments and trends in interest rates
and economic conditions, investment risk can be reduced, although there is no
assurance that losses will not occur.
The Portfolio may invest in the securities markets of foreign countries.
Investments in foreign securities present certain risks not ordinarily found
in investments in securities of U.S. issuers. See "Risk Factors - Special
Considerations Relating to Foreign Securities."
PORTFOLIOS MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT INC.:
QUALITY BOND PORTFOLIO
The investment objective of the Portfolio is to provide a high total return
consistent with moderate risk of capital and maintenance of liquidity. Total
return will consist of income plus realized and unrealized capital gains and
losses.
The Portfolio is designed for investors who seek a total return over time that
is higher than that generally available from a portfolio of shorter-term
obligations while recognizing the greater price fluctuation of longer-term
instruments. It may also be a convenient way to add fixed income exposure to
diversify an existing portfolio.
The Sub-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 Sub-Adviser adjusts the duration of the Portfolio in light of market
conditions and the Sub-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 Sub-Adviser
also actively allocates the Portfolio's assets among the broad sectors of the
fixed income market including, but not limited to, U.S. Government and agency
securities, corporate securities, private placements, and asset-backed and
mortgage related securities. Specific securities which the Sub-Adviser
believes are undervalued are selected for purchase within the sectors 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. Under normal circumstances, the Sub-Adviser intends to keep the
Portfolio essentially fully invested with at least 65% of the Portfolio's
assets invested in bonds.
Duration is a measure of the weighted average maturity of the bonds held in
the Portfolio and can be used as a measure of the sensitivity of the
Portfolio's market value to changes in interest rates. 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 4.5 years. The maturities of the individual securities in the
Portfolio may vary widely, however.
The Portfolio intends to manage its portfolio actively in pursuit of its
investment objective. Portfolio transactions are undertaken principally to
accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates, but the Portfolio may also engage in
short-term trading consistent with its objective. To the extent the Portfolio
engages in short-term trading, it may incur increased transaction costs.
CORPORATE BONDS, ETC. The Portfolio may invest in a broad range of debt
securities of domestic and foreign issuers. These include debt securities of
various types and maturities, e.g., debentures, notes, mortgage securities,
equipment trust certificates and other collateralized securities and zero
coupon securities. Collateralized securities are backed by a pool of assets
such as loans or receivables which generate cash flow to cover the payments
due on the securities. Collateralized securities are subject to certain risks,
including a decline in the value of the collateral backing the security,
failure of the collateral to generate the anticipated cash flow or in certain
cases more rapid prepayment because of events affecting the collateral, such
as accelerated prepayment of mortgages or other loans backing these securities
or destruction of equipment subject to equipment trust certificates. In the
event of any such prepayment the Portfolio will be required to reinvest the
proceeds of prepayments at interest rates prevailing at the time of
reinvestment, which may be lower. In addition, the value of zero coupon
securities which do not pay interest is more volatile than that of interest
bearing debt securities with the same maturity. The Portfolio does not intend
to invest in common stock but may invest to a limited extent in convertible
debt or preferred stock. The Portfolio does not expect to invest more than 25%
of its assets in securities of foreign issuers. If the Portfolio invests in
non-U.S. dollar denominated securities, it hedges the foreign currency
exposure into the U.S. dollar. See "Investment Practices" and "Risk Factors"
for further information on foreign investments and convertible securities.
GOVERNMENT OBLIGATIONS, ETC. 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. These securities include Treasury securities,
GNMA Certificates, and obligations of the Farmers Home Administration and the
Export Import Bank. GNMA Certificates are mortgage-backed securities which
evidence an undivided interest in mortgage pools. These securities are subject
to more rapid repayment than their stated maturity would indicate because
prepayments of principal on mortgages in the pool are passed through to the
holder of the securities. During periods of declining interest rates,
prepayments of mortgages in the pool can be expected to increase. The
pass-through of these prepayments would have the effect of reducing the
Portfolio's positions in these securities and requiring the Portfolio to
reinvest the prepayments at interest rates prevailing at the time of
reinvestment. The Portfolio may also invest in 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. Although these
governmental issuers are responsible for payments on their obligations, they
do not guarantee their market value.
The Portfolio may also invest in municipal obligations which may be general
obligations of the issuer or payable only from specific revenue sources.
However, the Portfolio will invest only in municipal obligations that have
been issued on a taxable basis or have an attractive yield excluding tax
considerations. In addition, the Portfolio may invest in debt securities of
foreign governments and governmental entities. See "Investment Practices" and
"Risk Factors" for further information on foreign investments.
MONEY MARKET INSTRUMENTS. The Portfolio may purchase money market
instruments to invest temporary cash balances or to maintain liquidity to meet
withdrawals. However, the Portfolio may also invest in money market
instruments as a temporary defensive measure taken during, or in anticipation
of, adverse market conditions. The money market investments permitted for the
Portfolio include U.S. Government Securities, other debt securities,
commercial paper, bank obligations and repurchase agreements. For more
detailed information about these money market investments, see "Investment
Objectives and Policies" in the Statement of Additional Information.
QUALITY INFORMATION. It is a current policy of the Portfolio that under
normal circumstances at least 65% of its total assets will consist of
securities that are rated at least A by Moody's or S&P or that are unrated and
in the Sub-Adviser's opinion are of comparable quality. In the case of 30% of
the Portfolio's investments, the Portfolio may purchase debt securities that
are rated Baa or better by Moody's or BBB or better by S&P or are unrated and
in the Sub-Adviser's opinion are of comparable quality. The remaining 5% of
the Portfolio's assets may be invested in debt securities that are rated Ba or
better by Moody's or BB or better by S&P or are unrated and in the
Sub-Adviser's opinion are of comparable quality. Securities rated Baa by
Moody's or BBB by S&P are considered investment grade, but have some
speculative characteristics. Securities rated Ba by Moody's or BB by S&P are
below investment grade and considered to be speculative with regard to payment
of interest and principal. These standards must be satisfied at the time an
investment is made. If the quality of the investment later declines, the
Portfolio may continue to hold the investment. See "Appendix - Description of
Corporate Bond Ratings" for more detailed information on these ratings.
The Portfolio may also purchase and sell obligations on a when-issued or
delayed delivery basis, enter into repurchase and reverse repurchase
agreements, loan its portfolio securities, purchase certain privately placed
securities and enter into certain hedging transactions that may involve
options on securities and securities indexes, futures contracts and options on
futures contracts. For a discussion of these investments and investment
techniques, see "Investment Practices" and "Risk Factors."
SMALL CAP STOCK PORTFOLIO
The investment objective of the Portfolio is to provide a high total return
from a portfolio of equity securities of small companies. Total return will
consist of realized and unrealized capital gains and losses plus income. The
Portfolio invests primarily in the common stock of small U.S. companies. The
small company holdings of the Portfolio are primarily companies included in
the Russell 2000 Index.
The 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 may also serve as an efficient vehicle to
diversify an existing portfolio by adding the equities of smaller U.S.
companies.
The Sub-Adviser seeks to enhance the Portfolio's total return relative to that
of the U.S. small company universe. To do so, the Sub-Adviser uses fundamental
research, systematic stock valuation and a disciplined portfolio construction
process. The Sub-Adviser continually screens the universe of small
capitalization companies to identify for further analysis those companies
which exhibit favorable characteristics such as significant and predictable
cash flow and high quality management. Based on fundamental research and using
a dividend discount model, the Sub-Adviser ranks these companies within
economic sectors according to their relative value. The Sub-Adviser then
selects for purchase the most attractive companies within each economic
sector.
The Sub-Adviser uses a disciplined portfolio construction process to seek to
enhance returns and reduce volatility in the market value of the Portfolio
relative to that of the U.S. small company universe. The Sub-Adviser believes
that under normal market conditions, the Portfolio will have sector weightings
comparable to that of the U.S. small company universe, although it may
moderately under- or over-weight selected economic sectors. In addition, as a
company moves out of the market capitalization range of the small company
universe, it generally becomes a candidate for sale by the Portfolio.
The Portfolio intends to manage its investments actively in pursuit of its
investment objective. Since the Portfolio has a long-term investment
perspective, it does not intend to respond to short-term market fluctuations
or to acquire securities for the purpose of short-term trading; however, it
may take advantage of short-term trading opportunities that are consistent
with its objective. To the extent the Portfolio engages in short-term trading,
it may incur increased transaction costs.
EQUITY INVESTMENTS. During ordinary market conditions, the Sub-Adviser
intends to keep the Portfolio essentially fully invested with at least 65% of
the Portfolio's net assets invested in equity securities consisting of common
stocks and other securities with equity characteristics such as preferred
stocks, warrants, rights and convertible securities. The Portfolio's primary
equity investments are the common stocks of small U.S. companies and, to a
limited extent, similar securities of foreign corporations. The common stock
in which the Portfolio may invest includes the common stock of any class or
series or any similar equity interest, such as trust or limited partnership
interests. The small company holdings of the Portfolio are primarily
companies included in the Russell 2000 Index. These equity investments may or
may not pay dividends and may or may not carry voting rights. The Portfolio
invests in securities listed on a securities exchange or traded in an
over-the-counter market, and may invest in certain restricted or unlisted
securities.
FOREIGN INVESTMENTS. The Portfolio may invest in equity securities of
foreign issuers that are listed on a national securities exchange or
denominated or principally traded in U.S. dollars. However, the Portfolio does
not expect to invest more than 5% of its assets at the time of purchase in
foreign equity securities. For further information on foreign investments and
foreign currency exchange transactions, see "Investment Practices" and "Risk
Factors."
The Portfolio may also purchase and sell securities on a when-issued or
delayed delivery basis, enter into repurchase and reverse repurchase
agreements, loan its portfolio securities, purchase certain privately placed
securities and money market instruments, and enter into certain hedging
transactions that may involve options on securities and securities indexes,
futures contracts and options on futures contracts. For a discussion of these
investments and investment techniques, see "Investment Practices" and "Risk
Factors."
LARGE CAP STOCK PORTFOLIO
The investment objective of the Portfolio is long-term growth of capital and
income. The Portfolio seeks to achieve its objective consistent with
reasonable investment risk.
The Portfolio is designed for investors who want an actively managed portfolio
of medium- to large-cap equity securities that seeks to outperform the total
return of the S&P 500.
Ordinarily, the Portfolio pursues its investment objective by investing
primarily in dividend-paying common stock. The Portfolio may also invest in
other equity securities, consisting of, among other things,
non-dividend-paying common stock, preferred stock, and securities convertible
into common stock, such as convertible preferred stock and convertible bonds,
and warrants. The Portfolio may also invest in ADRs and in various foreign
securities if U.S. exchange-listed.
STOCK SELECTION. The Portfolio is not subject to any limit on the size
of companies in which it may invest, but intends, under normal circumstances,
to be fully invested to the extent practicable in the stock of large- and
medium-sized companies primarily included in the S&P 500. In managing the
Portfolio, the potential for appreciation and dividend growth is given more
weight than current dividends. Nonetheless, the Sub-Adviser will normally
strive for gross income for the Portfolio at a level not less than 75% of the
dividend income generated on the stocks included in the S&P 500, although this
income level is merely a guideline and there can be no certainty that this
income level will be achieved.
The Portfolio does not seek to achieve its objective with any individual
portfolio security, but rather it aims to manage the portfolio as a whole in
such a way as to achieve its objective. The Portfolio attempts to reduce risk
by investing in many different economic sectors, industries and companies. The
Sub-Adviser may under- or over-weight selected economic sectors against the
S&P 500's sector weightings to seek to enhance the Portfolio's total return or
reduce fluctuations in market value relative to the S&P 500. In selecting
securities, the Sub-Adviser may emphasize securities that it believes to be
undervalued. Securities of a company may be undervalued for a variety of
reasons such as an overreaction by investors to unfavorable news about a
company, an industry, or the stock markets in general; or as a result of a
market decline, poor economic conditions, tax-loss selling, or actual or
anticipated unfavorable developments affecting a company.
The Sub-Adviser uses a dividend discount model to rank companies within
economic sectors according to their relative value and then separates them
into quintiles by sector. The Portfolio will typically be comprised, based on
the dividend discount model, of approximately 35% of stocks from the first
quintile, 35% of stocks from the second quintile and 30% of stocks from the
third quintile. The Portfolio will be highly diversified and will typically
hold between 225 and 250 stocks.
OTHER SECURITIES. During ordinary market conditions, the Sub-Adviser
will keep the Portfolio as fully invested as practicable in the equity
securities described above. The Portfolio may also invest in money market
instruments, including U.S. Government Securities, short term bank obligations
rated in the highest two rating categories by Moody's or S&P, or, if unrated,
determined to be of equal quality by the Sub-Adviser, certificates of deposit,
time deposits and banker's acceptances issued by U.S. and foreign banks and
savings and loan institutions with assets of at least $500 million as of the
end of their most recent fiscal year; and commercial paper and corporate
obligations, including variable rate demand notes, that are issued by U.S. and
foreign issuers and that are rated in the highest two rating categories by
Moody's or S&P, or if unrated, determined to be of equal quality by the
Sub-Adviser. Under normal circumstances, the Portfolio will invest in such
money market instruments to invest temporary cash balances or to maintain
liquidity to meet redemptions or expenses. The Portfolio may also, however,
invest in these instruments, without limitation, as a temporary defensive
measure taken during, or in anticipation of, adverse market conditions.
Convertible bonds and other fixed income securities (other than money market
instruments) in which the Portfolio may invest will, at the time of
investment, be rated Baa or better by Moody's or BBB or better by S&P or, if
not rated by Moody's or S&P, will be of comparable quality as determined by
the Sub-Adviser. In the event that an existing holding is downgraded below
these ratings, the Portfolio may nonetheless retain the security.
OTHER TECHNIQUES. In pursuing its investment objective, the Portfolio may
purchase and sell put and call options on securities and stock indexes. In
addition, the Portfolio may purchase or sell stock index futures contracts and
options thereon. These investment techniques may involve a greater degree or
different type of risk than those inherent in more conservative investment
approaches. See "Investment Practices" and "Risk Factors."
SELECT EQUITY PORTFOLIO
The investment objective of the Portfolio is long-term growth of capital and
income. The Portfolio seeks to achieve its objective consistent with
reasonable investment risk.
The Portfolio is designed for investors who want an actively managed portfolio
of selected equity securities that seeks to outperform the total return of the
S&P 500.
Ordinarily, the Portfolio pursues its investment objective by investing
primarily in dividend-paying common stock. The Portfolio may also invest in
other equity securities, consisting of, among other things,
non-dividend-paying common stock, preferred stock, and securities convertible
into common stock, such as convertible preferred stock and convertible bonds,
and warrants. The Portfolio may also invest in ADRs and in various foreign
securities if U.S. exchange-listed.
STOCK SELECTION. The Portfolio is not subject to any limit on the size
of companies in which it may invest, but intends, under normal circumstances,
to be fully invested to the extent practicable in the stock of large- and
medium-sized companies primarily included in the S&P 500. In managing the
Portfolio, the potential for appreciation and dividend growth is given more
weight than current dividends. Nonetheless, the Sub-Adviser will normally
strive for gross income for the Portfolio at a level not less than 75% of the
dividend income generated on the stocks included in the S&P 500, although this
income level is merely a guideline and there can be no certainty that this
income level will be achieved.
The Portfolio does not seek to achieve its objective with any individual
portfolio security, but rather it aims to manage the portfolio as a whole in
such a way as to achieve its objective. The Portfolio attempts to reduce risk
by investing in many different economic sectors, industries and companies. The
Sub-Adviser may under- or over-weight selected economic sectors against the
S&P 500's sector weightings to seek to enhance the Portfolio's total return or
reduce fluctuations in market value relative to the S&P 500. In selecting
securities, the Sub-Adviser may emphasize securities that it believes to be
undervalued. Securities of a company may be undervalued for a variety of
reasons such as an overreaction by investors to unfavorable news about a
company, an industry, or the stock markets in general; or as a result of a
market decline, poor economic conditions, tax-loss selling, or actual or
anticipated unfavorable developments affecting a company.
The Sub-Adviser uses a dividend discount model to rank companies within
economic sectors according to their relative value and then separates them
into quintiles by sector. The Portfolio will primarily consist of stocks of
companies from the first and second quintiles. The Portfolio will typically
hold between 60 and 90 stocks.
OTHER SECURITIES. During ordinary market conditions, the Sub-Adviser
will keep the Portfolio as fully invested as practicable in the equity
securities described above. The Portfolio may also invest in money market
instruments, including U.S. Government Securities, short term bank obligations
rated in the highest two rating categories by Moody's or S&P, or, if unrated,
determined to be of equal quality by the Sub-Adviser, certificates of deposit,
time deposits and banker's acceptances issued by U.S. and foreign banks and
savings and loan institutions with assets of at least $500 million as of the
end of their most recent fiscal year; and commercial paper and corporate
obligations, including variable rate demand notes, that are issued by U.S. and
foreign issuers and that are rated in the highest two rating categories by
Moody's or S&P, or if unrated, determined to be of equal quality by the
Sub-Adviser. Under normal circumstances, the Portfolio will invest in such
money market instruments to invest temporary cash balances or to maintain
liquidity to meet redemptions or expenses. The Portfolio may also, however,
invest in these instruments, without limitation, as a temporary defensive
measure taken during, or in anticipation of, adverse market conditions.
Convertible bonds and other fixed income securities (other than money market
instruments) in which the Portfolio may invest will, at the time of
investment, be rated Baa or better by Moody's or BBB or better by S&P or, if
not rated by Moody's or S&P, will be of comparable quality as determined by
the Sub-Adviser. In the event that an existing holding is downgraded below
these ratings, the Portfolio may nonetheless retain the security.
OTHER TECHNIQUES. In pursuing its investment objective, the Portfolio may
purchase and sell put and call options on securities and stock indexes. In
addition, the Portfolio may purchase or sell stock index futures contracts and
options thereon. These investment techniques may involve a greater degree or
different type of risk than those inherent in more conservative investment
approaches. See "Investment Practices" and "Risk Factors."
INTERNATIONAL EQUITY PORTFOLIO
The investment objective of the Portfolio is to provide a high total return
from a portfolio of equity securities of foreign corporations. Total return
will consist of realized and unrealized capital gains and losses plus income.
The 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 seeks to achieve its investment objective through country
allocation, stock selection and management of currency exposure. The
Sub-Adviser uses a disciplined portfolio construction process to seek to
enhance returns and reduce volatility in the market value of the Portfolio
relative to that of the EAFE Index.
Based on fundamental research, quantitative valuation techniques, and
experienced judgment, the Sub-Adviser uses a structured decision-making
process to allocate the Portfolio primarily across the developed countries of
the world outside the United States by under- or over-weighting selected
countries in the EAFE Index. Currently, Japan has the heaviest weighting in
the EAFE Index (approximately 23%). The Portfolio will not invest more than
25% of its net assets in Japan notwithstanding the Japan weighting in the EAFE
Index.
Using a dividend discount model and based on analysts' industry expertise,
securities within each country are ranked within economic sectors according to
their relative value. Based on this valuation, the Sub-Adviser selects the
securities which appear the most attractive for the Portfolio. The Sub-Adviser
believes that under normal market conditions, economic sector weightings
generally will be similar to those of the EAFE Index.
Finally, the Sub-Adviser actively manages currency exposure, in conjunction
with country and stock allocation, in an attempt to protect and possibly
enhance the Portfolio's market value. Through the use of forward foreign
currency exchange contracts, the Sub-Adviser will adjust the Portfolio's
foreign currency weightings to reduce its exposure to currencies deemed
unattractive and, in certain circumstances, increase exposure to currencies
deemed attractive, as market conditions warrant, based on fundamental
research, technical factors, and the judgment of a team of experienced
currency managers. For further information on foreign currency exchange
transactions, see "Investment Practices" and "Risk Factors."
The Portfolio intends to manage its portfolio actively in pursuit of its
investment objective. The Portfolio does not expect to trade in securities for
short-term profits; however, when circumstances warrant, securities may be
sold without regard to the length of time held. To the extent the Portfolio
engages in short-term trading, it may incur increased transaction costs.
EQUITY INVESTMENTS. In normal circumstances, the Sub-Adviser intends to
keep the Portfolio essentially fully invested with at least 65% of the value
of its total assets in equity securities of foreign issuers, consisting of
common stocks and other securities with equity characteristics such as
preferred stock, warrants, rights and convertible securities. The Portfolio's
primary equity investments are the common stock of established companies based
in developed countries outside the United States. Such investments will be
made in at least three foreign countries. The common stock in which the
Portfolio may invest includes the common stock of any class or series or any
similar equity interest such as trust or limited partnership interests. The
Portfolio may also invest in securities of issuers located in developing
countries. See "Investment Practices" and "Risk Factors." The Portfolio
invests in securities listed on foreign or domestic securities exchanges and
securities traded in foreign or domestic over-the-counter markets, and may
invest in certain restricted or unlisted securities.
The Portfolio may also invest in money market instruments denominated in U.S.
dollars and other currencies, purchase and sell securities on a when-issued or
delayed delivery basis, enter into repurchase and reverse repurchase
agreements, loan its portfolio securities, purchase certain privately placed
securities, enter into forward contracts on foreign currencies and enter into
certain hedging transactions that may involve options on securities and
securities indexes, futures contracts and options on futures contracts. For a
discussion of these investments and investment techniques, see "Investment
Practices" and "Risk Factors."
INVESTMENT PRACTICES
In connection with the investment policies of the Portfolios described above,
the Portfolios may engage in certain investment practices subject to the
limitations set forth below. These investments entail risks.
STRATEGIC TRANSACTIONS. The Quality Income Portfolio, Growth and Income
Portfolio, High Yield Portfolio, and each of the Portfolios for which J.P.
Morgan Investment Management Inc. acts as Sub-Adviser, may purchase and sell
exchange-listed and over-the-counter put and call options on securities,
financial futures, fixed-income and equity indices and other financial
instruments and purchase and sell financial futures contracts. The Growth and
Income Portfolio, High Yield Portfolio, and each of the Portfolios for which
J.P. Morgan Investment Management Inc. acts as Sub-Adviser, may enter into
various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency
futures. The Stock Index Portfolio may enter into stock index futures
contracts and options on stock indexes and stock index futures contracts.
Collectively, all of the above are referred to as "Strategic Transactions."
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, 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 interest rate
exposure of a Portfolio, to protect against changes in currency exchange
rates, 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 a Sub-Adviser's ability to predict pertinent
market movements, which cannot be assured. The Portfolios 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 of portfolio securities at inopportune
times or for prices other than at 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 contemplated use of these futures contracts
and options thereon 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. The Strategic Transactions that the Portfolios may
use and some of their risks are described more fully in the Statement of
Additional Information.
REPURCHASE AGREEMENTS. All of the Portfolios may enter into repurchase
agreements with selected commercial banks and broker-dealers, under which the
Portfolio acquires securities and agrees to resell the securities at an agreed
upon time and at an agreed upon price. The Portfolio accrues as interest the
difference between the amount it pays for the securities and the amount it
receives upon resale. At the time the Portfolio enters into a repurchase
agreement, the value of the underlying security 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 underlying security including accrued interest will
continue to be at least equal to the value of the repurchase agreement. Each
Sub-Adviser will monitor the value of the underlying security in this regard.
The Portfolio will enter into repurchase agreements only with commercial banks
whose deposits are insured by the Federal Deposit Insurance Corporation and
whose assets exceed $500 million or broker-dealers who are registered with the
Securities and Exchange Commission. In determining whether the Portfolio
should enter into a repurchase agreement with a bank or broker-dealer, the
Sub-Adviser will take into account the credit-worthiness of the party and will
monitor its credit-worthiness on an ongoing basis in accordance with standards
established by the Board of Trustees. In the event of a default by the party,
the delays and expenses potentially involved in establishing the Portfolio's
rights to, and in liquidating, the security may result in a loss to the
Portfolio. The Money Market Portfolio may not invest in repurchase agreements
which mature in more than seven days.
There are additional limitations and restrictions relating to the ability of
the Money Market Portfolio to invest in repurchase agreements which have been
adopted by the Board of Trustees of the Trust and which relate primarily to
investment quality and diversification.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS. All Portfolios may purchase and
sell securities on a "when issued" and "delayed delivery" basis, that is,
obligate themselves to purchase or sell securities with delivery and payment
to occur at a later date in order to secure what is considered to be an
advantageous price and yield to the Portfolio at the time of entering into the
obligation. When a Portfolio engages in such transactions, the Portfolio
relies on the buyer or seller, as the case may be, to consummate the sale. No
income accrues to or is earned by the Portfolio on portfolio securities in
connection with such transactions prior to the date the Portfolio actually
takes delivery of such securities. These transactions are subject to market
fluctuation; the value of such securities at delivery may be more or less than
their purchase price, and yields generally available on such securities when
delivery occurs may be higher than yields on such securities obtained pursuant
to such transactions. Because the Portfolio relies on the buyer or seller, as
the case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Portfolio missing the opportunity
of obtaining a price or yield considered to be advantageous. When the
Portfolio is the buyer in such a transaction, however, it will maintain, in a
segregated account with its custodian, cash or high-grade portfolio securities
having an aggregate value equal to the amount of such purchase commitments
until payment is made. The Portfolio will make commitments to purchase
securities on such basis only with the intention of actually acquiring these
securities, but the Portfolio may sell such securities prior to the settlement
date if such sale is considered to be advisable. To the extent the Portfolio
engages in when issued and delayed delivery transactions, it will do so for
the purpose of acquiring securities for the Portfolio consistent with the
Portfolio's investment objective and policies and not for the purposes of
investment leverage. No specific limitation exists as to the percentage of any
Portfolio's assets which may be used to acquire securities on a when issued or
delayed delivery basis. See the Statement of Additional Information for
additional discussion of these transactions.
RESTRICTED AND ILLIQUID SECURITIES. The Portfolios may each invest up to 15%
(10% with respect to the Portfolios for which Van Kampen American Capital
Investment Advisory Corp. acts as Sub-Adviser) of their respective net assets
in securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted and illiquid securities in all
Portfolios will be valued at fair value as determined in good faith by or at
the direction of the Trustees for the purposes of determining the net asset
value of each Portfolio. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933 that are determined to be liquid by the Sub-Adviser
under guidelines adopted by the Board of Trustees of the Trust (under which
guidelines the Sub-Adviser will consider factors such as trading activities
and the availability of price quotations) will not be treated as restricted
securities by the Portfolios pursuant to such rules.
LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, all of the Portfolios may lend their securities to selected
commercial banks or broker-dealers up to a maximum of 25% of the assets of
each Portfolio. Such loans must be callable at any time and be continuously
secured by collateral deposited by the borrower in a segregated account
with the Trust's custodian consisting of cash or of securities issued or
guaranteed by the U.S. Government or its agencies, which collateral is
equal at all times to at least 100% of the value of the securities loaned,
including accrued interest. A Portfolio will receive amounts equal to
earned income for having made the loan. Any cash collateral pursuant to
these loans will be invested in short-term instruments. A Portfolio is the
beneficial owner of the loaned securities in that any gain or loss in the
market price during the loan inures to the Portfolio and its shareholders.
Thus, when the loan is terminated, the value of the securities may be
more or less than their value at the beginning of the loan. In determining
whether to lend its portfolio securities to a bank or broker-dealer, a
Portfolio will take into account the credit-worthiness of such borrower
and will monitor such credit-worthiness on an ongoing basis in as much
as a default by the other party may cause delays or other collection
difficulties. A Portfolio may pay finders' fees in connection with loans
of its portfolio securities.
REVERSE REPURCHASE AGREEMENTS AND BORROWINGS. All of the Portfolios may enter
into reverse repurchase agreements with selected commercial banks or
broker-dealers with respect to securities which could otherwise be sold by the
Portfolios. Reverse repurchase agreements involve sales by a Portfolio of
Portfolio assets concurrently with an agreement by the Portfolio to repurchase
the same assets at a later date at a fixed price which is greater than the
sales price. The difference between the amount the Portfolio receives for the
securities and the amount it pays on repurchase is deemed to be a payment of
interest by the Portfolio. Each Portfolio will maintain, in a segregated
account with its custodian, cash, Treasury bills, or other U.S. Government
Securities having an aggregate value equal to the amount of commitment to
repurchase, including accrued interest, until payment is made. Each Portfolio
will enter into reverse repurchase agreements only with commercial banks whose
deposits are insured by the Federal Deposit Insurance Corporation and whose
assets exceed $500 million or broker-dealers who are registered with the SEC.
In determining whether a Portfolio should enter into a reverse repurchase
agreement with a bank or broker-dealer, each Sub-Adviser will take into
account the credit-worthiness of the party and will monitor the
credit-worthiness on an ongoing basis. During the reverse repurchase agreement
period, a Portfolio continues to receive principal and interest payments on
these securities. Reverse repurchase agreements involve the risk that the
market value of the securities retained by the Portfolio may decline below the
price of the securities the Portfolio has sold but is obligated to repurchase
under the agreement. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, a Portfolio's
use of the proceeds of the agreement may be restricted pending a determination
by the other party, or its trustee or receiver, whether to enforce the
Portfolio's obligation to repurchase the securities. Reverse repurchase
agreements create leverage and will be treated as borrowings for the purposes
of each Portfolio's investment restriction on borrowings.
Each of the Portfolios except the Money Market Portfolio is permitted to
borrow money up to one-third of the value of its net assets taken at current
value. The Money Market Portfolio may borrow up to 10% of its net assets.
Borrowing by these Portfolios may be only from banks as a temporary measure
for extraordinary or emergency purposes and not for investment leverage. The
Portfolios may each enter into reverse repurchase agreements in an amount not
exceeding 5% of the net assets of each such Portfolio (33 1/3% together with
any other borrowings with respect to the Portfolios for which J.P. Morgan
Investment Management, Inc. acts as Sub-Adviser) at the time of entering into
any agreement.
As a matter of operating policy, the Money Market Portfolio, the Quality
Income Portfolio, the Stock Index Portfolio and the Growth and Income
Portfolio will not borrow more than 10% of their net asset value when
borrowing is for any general purpose and 25% of their net asset value when
borrowing is a temporary measure to facilitate redemptions.
Borrowing by a Portfolio creates an opportunity for increased net income but,
at the same time, creates special risk considerations such as changes in the
net asset value of the shares and in the yield on the Portfolio. Although the
principal of such borrowings will be fixed, the Portfolio's assets may change
in value during the time the borrowing is outstanding. Borrowing will create
interest expenses for the Portfolio which can exceed the income from the
assets retained. To the extent the income derived from securities purchased
with borrowed funds exceeds the interest the Portfolio will have to pay, the
Portfolio's net income will be greater than if borrowing were not used.
Conversely, if the income from the assets retained with borrowed funds is not
sufficient to cover the cost of borrowing, the net income of the Portfolio
will be less than if borrowing were not used.
SHORT SALES. The Quality Income Portfolio, Stock Index Portfolio and the
Growth and Income Portfolio may utilize short sales on securities to implement
their investment objectives. A short sale is effected when it is believed that
the price of a particular investment will decline, and involves the sale of an
investment which the Portfolio does not own in the hope of purchasing the same
investment at a later date at a lower price. To make delivery to the buyer,
the Portfolio must borrow the investment, and the Portfolio is obligated to
return the investment to the lender, which is accomplished by a later purchase
of the investment by the Portfolio.
The Portfolio will incur a loss as a result of the short sale if the price of
the investment increases between the date of the short sale and the date on
which the Portfolio purchases the investment to replace the borrowed
investment. The Portfolio will realize a gain if the investment declines in
price between those dates. The amount of any gain will be decreased and the
amount of any loss increased by any premium or interest the Portfolio may be
required to pay in connection with a short sale. It should be noted that
possible losses from short sales differ from those that could arise from a
cash investment in that the former may be limitless while the latter can only
equal the total amount of the Portfolio's investment in the investment. For
example, if the Portfolio purchases a $10 investment, the most that can be
lost is $10. However, if the Portfolio sells a $10 investment short, it may
have to purchase the investment for return to the lender when the market value
is $50, thereby incurring a loss of $40. The amount of any gain or loss on a
short sale transaction is also dependent on brokerage and other transaction
costs.
CONVERTIBLE SECURITIES. The convertible securities in which a 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.
WARRANTS. A Portfolio may invest in warrants, which entitle the holder to buy
common stock from the issuer at a specific price (the strike price) for a
specific period of time. The strike price of warrants sometimes is much lower
than the current market price of the underlying securities, yet warrants are
subject to similar price fluctuations. As a result, warrants may be more
volatile investments than the underlying securities.
Warrants do not entitle the holder to dividends or voting rights with respect
to the underlying securities and do not represent any rights in the assets of
the issuing company. Also, the value of the warrant does not necessarily
change with the value of the underlying securities and a warrant ceases to
have value if it is not exercised prior to the expiration date.
MONEY MARKET INSTRUMENTS. Certain Portfolios are permitted to invest in money
market instruments although they intend to stay invested in equity securities
to the extent practical in light of their objectives and long-term investment
perspective. These Portfolios may make money market investments pending other
investment or settlement, for liquidity or in adverse market conditions. The
money market investments permitted for these Portfolios include U.S.
Government Securities, other debt securities, commercial paper, bank
obligations and repurchase agreements. These Portfolios may also invest in
short-term obligations of sovereign foreign governments, their agencies,
instrumentalities and political subdivisions. For more detailed information
about these money market investments, see "Investment Objectives and Policies"
in the Statement of Additional Information.
INVESTMENT LIMITATIONS
In addition to the investment policies set forth above, certain additional
restrictive policies relating to the investment of assets of the Portfolios
have been adopted by the Trust. The Investment Limitations of the Trust are
deemed fundamental 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 the Portfolio. Details as to the policies are set forth
in the Statement of Additional Information.
RISK FACTORS
TAX CONSIDERATIONS
The Trust was established as the underlying investment for variable contracts
issued by Cova Life.
Section 817(h) of the Internal Revenue Code of 1986, as amended (the "Code"),
imposes certain diversification standards on the underlying assets of variable
contracts held in the Portfolios of the Trust. The Code provides that a
variable contract shall not be treated as an annuity contract for any period
(and any subsequent period) for which the investments are not, in accordance
with regulations prescribed by the Treasury Department, adequately
diversified. Disqualification of the variable contract as an annuity contract
would result in imposition of federal income tax on contract owners with
respect to earnings allocable to the variable contract prior to the receipt of
payments under the variable contract. Section 817(h)(2) of the Code is a safe
harbor provision which provides that contracts such as the variable contracts
meet the diversification requirements if, as of the close of each quarter, the
underlying assets meet the diversification standards for a regulated
investment company and no more than fifty-five percent (55%) of the total
assets consists of cash, cash items, U.S. government securities and securities
of other regulated investment companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas. Reg.
1.817-5), which established diversification requirements for the investment
portfolios underlying variable contracts. The Regulations amplify the
diversification requirements for variable contracts set forth in Section
817(h) of the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if (i) no more than 55 percent of the value of the
total assets of the portfolio is represented by any one investment; (ii) no
more than 70 percent of such value is represented by any two investments;
(iii) no more than 80 percent of such value is represented by any three
investments; and (iv) no more than 90 percent of such value is represented by
any four investments. For purposes of these Regulations, all securities of the
same issuer are treated as a single investment.
The Code provides that for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable
contracts by Section 817(h) of the Code have been met, "each United States
government agency or instrumentality shall be treated as a separate issuer".
Each Portfolio of the Trust will be managed in such a manner as to comply with
these diversification requirements. It is possible that in order to comply
with the diversification requirements, less desirable investment decisions may
be made which would affect the investment performance of the Portfolios.
SPECIAL CONSIDERATIONS RELATING TO FOREIGN SECURITIES
All of the Portfolios may invest in foreign securities. The Stock Index
Portfolio, however, may only invest in foreign securities to the extent that
it invests in American Depositary Receipts ("ADRs") for foreign securities.
ADRs are dollar-denominated receipts issued generally by domestic banks and
representing the deposit with the bank of a security of a foreign issuer. ADRs
are publicly traded on exchanges or over-the-counter in the United States. The
Growth and Income Portfolio, High Yield Portfolio and Quality Income Portfolio
may invest up to 35% in foreign securities. The International Equity Portfolio
may invest without limitation in foreign securities. However, the Trust has no
current intention that these investments will exceed 20% of a Portfolio's
assets except with respect to the International Equity Portfolio. Investments
in the securities of foreign entities and securities denominated in foreign
currencies involve risks not typically involved in domestic investment,
including fluctuations in foreign exchange rates, future foreign political
and economic developments, and the possible imposition of exchange controls
or other foreign or United States governmental laws or restrictions applicable
to such investments. Where a Portfolio invests in securities denominated or
quoted in currencies other than the United States dollar, changes in foreign
currency exchange rates may affect the value of investments in the Portfolio
and the accrued income and unrealized appreciation or depreciation of
investments. Changes in foreign currency exchange rates relative to the
U.S. dollar will affect the U.S. dollar value of a Portfolio's assets
denominated in that currency and the Portfolio's yield on such assets.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social
instability or diplomatic developments which could affect investment in
those countries. There may be less publicly available information about a
foreign security than about a United States security, and foreign entities may
not be subject to accounting, auditing and financial reporting standards and
requirements comparable to those of United States entities. In addition,
certain foreign investments made by a Portfolio may be subject to foreign
withholding taxes, which would reduce the Portfolio's total return on such
investments and the amounts available for distributions by the Portfolio to
its shareholders. Foreign financial markets, while growing in volume, have,
for the most part, substantially less volume than United States markets, and
securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable domestic companies. The foreign markets
also have different clearance and settlement procedures and in certain markets
there have been times when settlements have been unable to keep pace with the
volume of securities transactions making it difficult to conduct such
transactions. Delays in settlement could result in temporary periods when
assets of a Portfolio are not invested and no return is earned thereon. The
inability of a Portfolio to make intended security purchases due to settlement
problems could cause the Portfolio to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to a Portfolio due to subsequent
declines in value of the portfolio security or, if a Portfolio has entered
into a contract to sell the security, could result in possible liability to
the purchaser. Costs associated with transactions in foreign securities,
including custodial costs and foreign brokerage commissions, are generally
higher than with transactions in United States securities. In addition, a
Portfolio will incur costs in connection with conversions between various
currencies. There is generally less government supervision and regulation of
exchanges, financial institutions and issuers in foreign countries than there
is in the United States.
As a matter of operating policy, each Portfolio will comply with the
following:
1. a Portfolio will be invested in a minimum of five different foreign
countries at all times. However, this minimum is reduced to four when foreign
country investments comprise less than 80% of the Portfolio's net asset value;
to three when less than 60% of such value; to two when less than 40% of such
value; and to one when less than 20% of such value.
2. except as set forth in items 3 and 4 below, a Portfolio will have no
more than 20% of its net asset value invested in securities of issuers located
in any one country.
3. a Portfolio may have an additional 15% of its value invested in
securities of issuers located in any one of the following countries:
Australia, Canada, France, Japan, the United Kingdom or Germany.
4. a Portfolio's investments in United States issuers are not subject to
the foregoing operating policies.
SPECIAL RISKS OF HIGH YIELD INVESTING
Each of the High Yield Portfolio and the Bond Debenture Portfolio intends to
invest a substantial portion of its assets in medium and lower grade corporate
debt securities.
Debt securities which are in those medium and lower grade categories generally
offer a higher current yield than is offered by securities which are in the
higher grade categories, but they also generally involve greater price
volatility and greater credit and market risk. Credit risk relates to the
issuer's ability to make timely payments of principal and interest when due as
well as fundamental developments in an issuer's business. Market risk relates
to the changes in market value that occur as a result of variation in the
level of prevailing interest rates and yield relationships in the securities
market. Typically, market prices tend to fall as interest rates rise and tend
to rise as interest rates fall. Generally, prices tend to fluctuate more for
lower grade issues than for higher grade issues, and, for any given change in
interest rates, prices for longer maturity issues tend to fluctuate more than
for shorter maturity issues. Yields on lower-rated securities will fluctuate
over time.
The prices of lower-grade securities, while generally less sensitive to
interest rate changes than higher-rated investments, tend to be more sensitive
to adverse economic changes or individual corporate developments. During an
economic downturn or substantial period of rising interest rates, the ability
of a highly leveraged issuer to service its principal and interest payment
obligations, to meet projected business goals and to obtain additional
financing may be adversely affected. An economic downturn could disrupt the
market for high yield bonds, adversely affect the value of outstanding bonds
and the ability of the issuers of such bonds to repay principal and interest,
cause increased volatility in the market prices of high yield bonds and a
Portfolio's net asset value and may result in a higher incidence of defaults
by issuers on bond obligations. If the issuer of a bond defaults, a Portfolio
may incur additional expenses to seek recovery. A Portfolio will seek to
reduce risk through portfolio diversification, credit analysis, and attention
to current developments and trends in the industries and with the issuers
involved. The Portfolios' Sub-Advisers will continuously monitor the condition
of the economy and the financial and credit markets.
To the extent that there is no established retail secondary market for high
yield bonds, such bonds may be thinly traded, making the bonds less liquid
than investment grade bonds. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of high yield bonds, especially in a thinly traded market. In the
event of an illiquid secondary market, or in the absence of readily available
market quotations, the responsibility of the Board of Trustees of the Trust to
value the securities becomes more difficult and will involve a greater degree
of judgment in that there is less reliable, objective data available.
If the market for high yield bonds is restricted by the enactment of
legislation, or if steps are taken to limit the use of such securities, or
other advantages of such securities, the value of the securities and the
Portfolio's ability to acquire them may be adversely affected.
A description of the corporate bond ratings is contained in the Appendix.
Purchasers should be aware, however, that credit ratings evaluate the safety
of principal and interest payments and not the market value risk of high yield
bonds. In addition, credit ratings may not always be modified on a timely
basis to reflect events subsequent to the most recent ratings which may have a
material impact on the securities rated. However, the Portfolios' Sub-Advisers
will continuously monitor the issuers of high yield bonds in the Portfolios to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments, and to assure the bonds' liquidity.
Achievement of the investment objectives of the Portfolios may be more
dependent on the credit analysis of the Portfolios' Sub-Advisers than is the
case with higher quality bonds.
The Portfolios may also invest in unrated corporate securities. Although
unrated securities are not necessarily of lower quality than rated securities,
the market for them may not be as broad and, accordingly, they may carry
greater risk and higher yield than rated securities.
PORTFOLIO TURNOVER RATES
MONEY MARKET PORTFOLIO AND QUALITY INCOME PORTFOLIO
Although the Money Market and Quality Income Portfolios are not subject to
specific restrictions on portfolio turnover, they generally do not seek
profits by short-term trading. However, they may dispose of a portfolio
security prior to its maturity where disposition seems advisable because of a
revised credit evaluation of the issuer or other considerations. Because
brokerage commissions are not customarily charged on the investments invested
in by each of the two Portfolios, a high turnover rate should not affect the
net asset value.
HIGH YIELD PORTFOLIO AND BOND DEBENTURE PORTFOLIO
The Portfolios will not generally engage in trading of securities for the
purpose of realizing short-term profits, but they will adjust their portfolios
as they deem advisable in view of prevailing or anticipated market conditions
to accomplish their investment objectives. For example, the Portfolios may
sell securities in anticipation of a movement in interest rates or to avoid
loss of premiums paid and unrealized capital gains earned on GNMA Certificates
selling at a substantial premium. Frequency of portfolio turnover will not be
a limiting factor if the Sub-Adviser considers it advantageous to purchase or
sell securities. Each Portfolio anticipates that its portfolio turnover rate
will normally be less than 200%, and may be significantly less in a period of
stable or rising interest rates. For the years ended December 31, 1995 and
1994, the portfolio turnover rates for the High Yield Portfolio were 119% and
200%, respectively. The Bond-Debenture Portfolio has only recently commenced
investment operations. A high rate of portfolio turnover involves
correspondingly higher brokerage commissions and transaction expenses than a
lower rate, which expenses must be borne by the Portfolio and its
shareholders.
STOCK INDEX PORTFOLIO
Although the Portfolio generally seeks to invest for the long term, the
Portfolio retains the right to sell securities irrespective of how long they
have been held. However, because of the "passive" investment management
approach of the Portfolio, the portfolio turnover rate is expected to be under
50%, a generally lower turnover rate than for most other investment companies.
A portfolio turnover rate of 50% would occur if one-half of the Portfolio's
securities were sold within one year. Ordinarily, securities will be sold from
the Portfolio only to reflect certain administrative changes in the Index
(including mergers or changes in the composition of the Index) or to
accommodate cash flows into and out of the Portfolio while maintaining the
similarity of the Portfolio to the Index. For the years ended December 31,
1995 and 1994, the portfolio turnover rates for the Stock Index Portfolio were
4% and 47%, respectively.
GROWTH AND INCOME PORTFOLIO
The Portfolio will not generally engage in trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as
it deem advisable in view of prevailing or anticipated market conditions to
accomplish the Portfolio's investment objectives. For example, the Portfolio
may sell portfolio securities in anticipation of a movement in interest rates.
Other than for tax purposes, frequency of portfolio turnover will not be a
limiting factor if the Portfolio considers it advantageous to purchase or sell
securities. The Portfolio anticipates that its annual portfolio turnover rate
will normally be less than 200%. A high rate of portfolio turnover involves
correspondingly higher brokerage commissions and transaction expenses than a
lower rate, which expenses must be borne by the Portfolio and its
shareholders. For the years ended December 31, 1995 and 1994, the portfolio
turnover rates for the Growth and Income Portfolio were 180% and 326%,
respectively.
QUALITY BOND, SMALL CAP STOCK, LARGE CAP STOCK, SELECT EQUITY AND
INTERNATIONAL EQUITY PORTFOLIOS
Portfolio transactions for these Portfolios will be undertaken principally to
accomplish their respective investment objectives, and the Portfolios may
engage in short-term trading consistent with their respective objectives. A
portfolio turnover rate of 100% indicates that the equivalent of all of a
Portfolio's assets have been sold and reinvested in a year. Overall, high
portfolio turnover may result in increased portfolio transaction costs and the
realization of substantial net capital gains or losses. To the extent net
short term capital gains are realized, any distributions resulting from such
gains are considered ordinary income for general income tax purposes. The
Quality Bond Portfolio's annual turnover rate is not expected to exceed 300%.
The turnover rate for each of the Small Cap Stock, Large Cap Stock,
Select Equity and International Equity Portfolios is not expected to exceed
100%.
MANAGEMENT OF THE TRUST
THE TRUSTEES
The Trust is organized as a Massachusetts business trust. The overall
responsibility for the supervision of the affairs of the Trust vests in the
Trustees. The Trustees have entered into an Investment Advisory Agreement with
the Adviser to handle the day-to-day affairs of the Trust (see below). The
Trustees meet periodically to review the affairs of the Trust and to establish
certain guidelines which the Adviser is expected to follow in implementing the
investment policies and objectives of the Trust.
ADVISER
Under an Investment Advisory Agreement dated April 1, 1996, the Adviser
located at One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois 60181-4644,
manages the business and affairs of the Portfolios and the Trust, subject to
the control of the Trustees.
The Adviser 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 Adviser is a
wholly-owned subsidiary of Cova Life Management Company, a Delaware
corporation, which in turn, is a wholly-owned subsidiary of Cova Corporation,
a Missouri corporation, which in turn, is a wholly-owned subsidiary of General
American Life Insurance Company ("General American"), a St. Louis-based mutual
company. General American has more than $235 billion of life insurance in
force and approximately $9.6 billion in assets. The Adviser has had no
previous experience in advising a mutual fund.
Under the terms of the Investment Advisory Agreement, the 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 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 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.
As full compensation for its services under the Investment Advisory Agreement,
the Trust will pay the Adviser a monthly fee at the following annual rates
shown in the table below based on the average daily net assets of each
Portfolio:
<TABLE>
<CAPTION>
<S> <C> <C>
Average Daily
Portfolio Net Assets % Per Annum
Money Market Portfolio First $500 million .500 of 1%
Over $500 million .400 of 1%
Quality Income Portfolio First $500 million .500 of 1%
Over $500 million .450 of 1%
High Yield Portfolio First $500 million .750 of 1%
Over $500 million .650 of 1%
Growth and Income Portfolio First $500 million .600 of 1%
Over $500 million .500 of 1%
Stock Index Portfolio ------------------ .500 of 1%
Bond Debenture Portfolio ------------------ .75%
Quality Bond Portfolio First $75 million .55%
Over $75 million .50%
International Equity First $50 million .85%
Portfolio Over $50 million .75%
Select Equity Portfolio First $50 million .75%
Over $50 million .65%
Large Cap Stock Portfolio ------------------- .65%
Small Cap Stock Portfolio ------------------- .85%
</TABLE>
The advisory fee of .750 of 1% to be deducted on the first $500 million of
assets of the High Yield Portfolio is higher than fees paid by many other
investment companies with similar investment objectives.
Cova Financial Services Life Insurance Company, Cova Life Management Company
and the Investment Adviser have entered into an Investment Advisory Services
Agreement, dated April 1, 1996, the purpose of which is to ensure that
the Investment Adviser, which is minimally capitalized, has adequate
facilities and financing for the carrying on of its business. Under the terms
of the Agreement, Cova Financial Services Life Insurance Company is obligated
to provide the Investment Adviser with adequate capitalization in order for
the Investment Adviser to meet any minimum capital requirements. Cova
Financial Services Life Insurance Company is further obligated to reimburse
the Investment Adviser or assume payment for any obligation incurred by the
Investment Adviser. Cova Life Management Company is obligated to provide the
Investment Adviser with facilities and personnel sufficient for the Investment
Adviser to perform its obligations under the Investment Advisory Agreement.
The Investment Adviser retains Investors Bank & Trust Company ("IBTC"), a
Massachusetts trust company, to supervise various aspects of the Trusts
administrative operations and to perform certain specific services including,
but not limited to, the preparation and filing of Trust reports and tax
returns, pursuant to an Administration Agreement between the Trust, the
Investment Adviser and IBTC.
PORTFOLIO MANAGEMENT
Prior to the date of this Prospectus, Van Kampen American Capital Investment
Advisory Corp. served as the investment adviser to the Trust. For the year
ended December 31, 1995, Van Kampen American Capital Investment Advisory Corp.
was paid advisory fees as follows: $195,378, with respect to the Quality Income
Portfolio, $219,052, with respect to the High Yield Portfolio, $296,648 with
respect to the Stock Index Portfolio and $83,035, with respect to the Growth
and Income Portfolio. Van Kampen American Capital Investment Advisory Corp.
waived its advisory fees of $259,159, with respect to the Money Market
Portfolio.
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, 1995, the expenses, taking into account the
waivers and expense assumptions, borne by the Quality Income Portfolio
amounted to $252,556 or .60% of its average net assets on an annualized basis;
the net expenses borne by the High Yield Portfolio amounted to $248,259 or .86%
of its average net assets on an annualized basis; the expenses borne by the
Money Market Portfolio amounted to $58,028 or .64% of its average net assets
on an annualized basis; the net expenses borne by the Stock Index Portfolio
amounted to $362,170 or .61% of its average net assets on an annualized basis;
and the net expenses borne by the Growth and Income Portfolio amounted to
$96,874 or .69% of its average net assets on an annualized basis.
Cova Life may at its discretion, but is not obligated to, assume all or any
portion of Trust expenses. For the year ended December 31, 1995, Xerox
Financial Services Life Insurance Company (now known as Cova Financial
Services Life Insurance Company) assumed expenses of $57,283 with respect to
the Quality Income Portfolio; $66,766 with respect to the High Yield
Portfolio; $28,672 with respect to the Money Market Portfolio; $103,824 with
respect to the Stock Index Portfolio and $69,469 with respect to the Growth
and Income Portfolio.
SUB-ADVISERS
In accordance with each Portfolio's investment objective and
policies and under the supervision of Adviser and the Trust's Board of
Trustees, each Portfolio's Sub-Adviser is responsible for the day-to-day
investment management of the Portfolio, makes investment decisions for the
Portfolio and places orders on behalf of the Portfolio to effect the
investment decisions made as provided in separate Sub-Advisory Agreements
among each Sub-Adviser, the Adviser and the Trust. The following
organizations act as Sub-Advisers to the Portfolios:
VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP. ("VKAC"), One Parkview
Plaza, Oakbrook Terrace, Illinois 60181. VKAC, formerly known as Van Kampen
Merritt Investment Advisory Corp., served as the investment adviser to the
Trust from its commencement of operations until the date of the Prospectus.
VKAC is the Sub-Adviser for the Quality Income, High Yield, Stock Index, Money
Market and Growth and Income Portfolios of the Trust. VKAC is a wholly-owned
subsidiary of Van Kampen American Capital, Inc. which in turn is a
wholly-owned subsidiary of VKAC Holding, Inc. VKAC Holding, Inc. is
indirectly controlled by Clayton & Dubilier Associates IV Limited Partnership,
the general partners of which are Joseph L. Rice, III, B. Charles Ames,
William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of
Clayton, Dubilier & Rice, Inc., a New York based private investment
partnership.
Van Kampen American Capital, Inc. is a diversified asset management company
with more than two million retail investor accounts and nearly $50 billion
under management or supervision. Van Kampen American Capital, Inc.'s over 40
open-end and 38 closed-end funds and more than 2,700 unit investment trusts
are distributed by financial advisers nationwide. In connection with advising
the Trust, VKAC utilizes at its own expense credit analysis and research
services provided by its affiliate, McCarthy, Crisanti & Maffei, Inc.
Pete Papageorgakis has been a member of VKAC since 1992 and is currently
the Portfolio Manager for the Stock Index Portfolio of the Trust.
Additionally, he serves as a Portfolio Analyst for Institutional Accounts and
is responsible for both equity and corporate bond securities. Prior to his
current duties, he assisted in the management of the Van Kampen Merritt Growth
& Income Fund, the Growth and Income Portfolio of the Trust, the Van Kampen
Merritt Utility Fund and the Van Kampen Merritt Balanced Fund. Mr.
Papageorgakis received his B.S. degree, Summa Cum Laude, in Finance from the
University of Illinois at Urbana-Champaign. He is currently working towards
receiving his Chartered Financial Analyst (CFA) designation, having
successfully completed the CFA Level II Exam.
James A. Gilligan is the Portfolio Manager for the Growth and Income
Portfolio of the Trust. Mr. Gilligan is also the Portfolio Manager for the
American Capital Equity Income Fund and American Capital Growth & Income Fund.
Mr. Gilligan has nine years investment experience. Prior to joining VKAC in
1985, as Securities Analyst, he was an Auditor, Credit Analyst, and Financial
Analyst for Gulf Oil Corporation. Mr. Gilligan holds a BS in Business
Administration from Miami University and an MBA from the University of
Pittsburgh. He is a Chartered Financial Analyst and Certified Public
Accountant.
Anne Lorsung is Vice President of VKAC and the Portfolio Manager for the
High Yield Portfolio of the Trust. Ms. Lorsung joined VKAC in January, 1994,
as a high yield "desk" analyst, where her responsibilities were that of an
Associate Portfolio Manager and included credit analysis, value assessment,
and trading. As of May, 1995, Ms. Lorsung took over as the Portfolio Manager
for the Van Kampen American Capital High Yield Fund, the Van Kampen Series
Trust High Yield Fund, the Van Kampen Intermediate Term High Income Trust, and
the Van Kampen Limited Term High Income Trust. Prior to joining Van Kampen
American Capital, Ms. Lorsung was a Group Vice President in the high yield
research area of Duff & Phelps and its predecessor (McCarthy, Crisanti &
Maffei) where responsibilities included supervising other analysts as well as
covering the casino industry. She started in high yield/corporate bond
research in 1984 at Kidder, Peabody & Co., in New York. Since that time, Ms.
Lorsung has analyzed high yield bond investments in a variety of industries,
including cable/media, housing and health care. Ms. Lorsung is a Chartered
Financial Analyst. She received a B.A. degree, cum laude, in economics from
Dartmouth College.
Reid J. Hill is the Portfolio Manager for the Money Market Portfolio of
the Trust. Mr. Hill is also the Portfolio Manager for the Van Kampen American
Capital Tax Free Money Fund and the Van Kampen Series Trust Money Market Fund.
Mr. Hill has two years of experience in the taxable and tax free fixed income
sector. Mr. Hill is also responsible for the management of the short term cash
for the entire complex of Van Kampen funds. Mr. Hill received his B.S. degree
in Finance and Marketing from Bradley University.
Robert J. Hickey is the Portfolio Manager for the Quality Income Portfolio
of the Trust. Mr. Hickey is Vice President of VKAC. He has been a member of
VKAC since 1989. He has eight years of experience in the taxable and tax free
fixed income sector. Currently, he is the Portfolio Manager for the Van
Kampen American Capital Strategic Income Fund and the Van Kampen Series Trust
Quality Income Fund. In addition, Mr. Hickey manages the assets of the OakRe
Life Insurance portfolio, formerly known as Xerox Financial Services Life
Insurance. Previous experience includes managing the Van Kampen Adjustable
Rate U.S. Government Fund, the Van Kampen Money Market Fund, and the Van
Kampen Tax Free Money Fund. Mr. Hickey received his B.A. in Economics
and International Affairs from the University of Wisconsin at Madison, and
his M.B.A. with a specialization in Finance from the Kellogg Graduate
School of Management at Northwestern University.
J.P. MORGAN INVESTMENT MANAGEMENT INC., 522 Fifth Avenue, New York, New York
10036, a Delaware corporation, and a wholly-owned subsidiary of J.P. Morgan &
Co., Incorporated, is the Sub-Adviser for the Quality Bond, International
Equity, Select Equity, Large Capital Stock and Small Capital Stock Portfolios
of the Trust.
Ronald Arons, Vice President of the Sub-Adviser, is the Portfolio Manager
for the Quality Bond Portfolio. Mr. Arons is a member of the Fixed Income
Group, specializing in portfolio management for active fixed income and
insurance company clients. He joined Morgan from MetLife Investment Management
Corp. where he managed active and structured bond portfolios. Mr. Arons is a
graduate of George Washington University and received his M.B.A. at New York
University. He is a Chartered Financial Analyst.
Anne Richards, Assistant Vice President of the Sub-Adviser, is the
Portfolio Manager for the International Equity Portfolio. Ms. Richards joined
J.P. Morgan in 1994 as an international equity portfolio manager. Previously
she has held positions as an engineering analyst with Alliance Capital, a
project engineer for Cambridge Consultants and a research fellow for CERN,
European Laboratory for Particle Physics. Ms. Richards holds a BSc from the
University of Edinburgh and an MBA from INSEAD, France.
James B. Otness, Managing Director of the Sub-Adviser, is the Portfolio
Manager for the Small Cap Stock Portfolio. Mr. Otness is a member of the
Equity and Balanced Accounts Group. Mr. Otness co-manages Morgan's Small
Company Fund and other client portfolios employing a small company investment
approach. Mr. Otness joined Morgan in 1970 after graduation from Harvard
University and service in the U.S. Marine Corps Reserve. Prior to his current
assignment, he managed large capitalization equities and before that was unit
head in the Investment Research Department. Mr. Otness is a Chartered
Financial Analyst with 23 years of investment experience.
James Wiess, Vice President of the Sub-Adviser, is the Portfolio Manager
for the Large Cap Stock Portfolio. Mr. Wiess is a member of the Equity and
Balanced Accounts Group, with responsibility for portfolio rebalancing and
product research and development in structured equity strategies. Prior to
joining Morgan in 1992, Mr. Wiess gained experience in stock index arbitrage
during seven years at Oppenheimer & Co. He also was a financial markets
consultant at Data Resources. Mr. Wiess earned his undergraduate degree from
the Wharton School at the University of Pennsylvania.
Michael J. Kelly, Vice President of the Sub-Adviser, is the Portfolio
Manager for the Select Equity Portfolio. Mr. Kelly is an institutional
portfolio manager with responsibility for a number of employee benefit,
foundation, and endowments clients. Prior to assuming his current position, he
was in the Equity Research Group covering capital goods, electrical equipment,
and conglomerates. Mr. Kelly also served as the group's generalist. Before
joining Morgan in 1985, he held a position at the economic firm
Townsend-Greenspan & Co., Inc. Mr. Kelly served as President of the Machinery
Analysts of New York, Vice President of the Electrical Products Group,
committee member for the AIMR and is a member of the Money Marketeers of New
York. Mr. Kelly has an undergraduate degree from Gettysburg College and an
M.B.A. from The Wharton School. Mr. Kelly is a Chartered Financial Analyst.
LORD, ABBETT & CO. ("LORD ABBETT"), The General Motors Building, 767 Fifth
Avenue, New York, New York 10153-0203. Lord Abbett has been an investment
manager for over 62 years and currently manages approximately $16 billion in a
family of mutual funds and other advisory accounts. Lord Abbett is the
Sub-Adviser for the Bond Debenture Portfolio.
Christopher J. Towle, Executive Vice President of the Sub-Adviser, is
Portfolio Manager for the Bond Debenture Portfolio. Mr. Towle joined Lord
Abbett in 1987 as Assistant Fixed Income Portfolio Manager and assumed full
responsibilities as Fixed Income Portfolio Manager in August, 1995. Prior
to joining Lord Abbett, Mr. Towle was an Assistant Vice President and
Portfolio Manager with American International Group. He earned a B.A.
degree in economics from Rutgers University and he is a Chartered Financial
Analyst.
SUB-ADVISORY FEES
Under the terms of the Sub-Advisory Agreements, the Adviser shall pay to the
Sub-Advisers, as full compensation for services rendered under the respective
Agreements with respect to the various Portfolios, monthly fees at the
following annual rates shown in the table below based on the average daily net
assets of each Portfolio.
<TABLE>
<CAPTION>
<S> <C> <C>
Average Daily
Portfolio Net Assets Sub-Advisory Fee
Money Market First $500 million .25%
Over $500 million .15%
Quality Income First $500 million .25%
Over $500 million .20%
High Yield First $500 million .50%
Over $500 million .40%
Growth and Income First $500 million .35%
Over $500 million .25%
Stock Index ------------------ .25%
Bond Debenture ------------------ .50%
Quality Bond First $75 million .30%
Over $75 million .25%
International Equity First $50 million .60%
Over $50 million .50%
Select Equity First $50 million .50%
Over $50 million .40%
Large Cap Stock ------------------- .40%
Small Cap Stock ------------------- .60%
</TABLE>
DESCRIPTION OF THE TRUST
SHAREHOLDER RIGHTS
The Trust is an unincorporated business trust established under the laws of
the Commonwealth of Massachusetts by a Declaration of Trust dated July 9,
1987. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares.
Each Portfolio issues its own class of shares. Each share represents an equal
proportionate interest in the assets of the Portfolio with each other share in
the Portfolio. On any matter submitted to a vote of shareholders, all shares
of the Trust then issued and outstanding and entitled to vote will be voted in
the aggregate and not by class except for matters concerning only one class.
The holders of each share of stock of the Trust will be entitled to one vote
for each full share and a fractional vote for each fractional share of stock.
Shares of one class may not bear the same economic relationship to the Trust
as another class.
In accordance with its view of present applicable law, the separate account(s)
of Cova Life, as shareholder(s) of the Trust, have the right to vote Trust
shares at any meeting of shareholders and will provide pass-through voting
privileges to all contract owners. Cova Life will vote shares of the Trust
held in the separate account(s) for which no timely voting instructions from
contract owners are received, as well as shares it owns, in the same
proportion as those shares for which voting instructions are received.
Additional information concerning voting rights is described in the Variable
Account Prospectus attached hereto under the caption, "The Variable Account -
Voting Rights".
The Trust is not required to hold annual meetings of shareholders and does not
plan to do so. The Trustees may call special meetings of shareholders for
action by shareholder vote as may be required by the Investment Company Act of
1940, as amended, or the Declaration of Trust. The Trust will hold a
shareholder meeting to fill existing vacancies on the Board in the event that
less than a majority of Trustees were elected by the shareholders. The
Trustees shall also call a meeting of shareholders for the purpose of voting
upon the question of removal of any Trustee when requested in writing to do so
by the record holders of not less than 10 percent of the outstanding shares.
The Trust has an obligation to assist shareholder communications.
The Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust, requires inclusion of a clause to that effect in
every agreement entered into by the Trust and indemnifies shareholders against
any liability. Although shareholders of an unincorporated business trust
established under Massachusetts law may, under certain limited circumstances,
be held personally liable for the obligations of the Trust as though they were
general partners in a partnership, the provisions of the Declaration of Trust
described in the foregoing sentence make the likelihood of personal liability
remote.
The Trustees may amend the Declaration of Trust in any manner without
shareholder approval, except that the Trustees may not adopt any amendment
adversely affecting the rights of shareholders without approval by a
majority of the shares present at a meeting of shareholders (or higher vote as
may be required by the Investment Company Act of 1940, as amended, or other
applicable law) and except that the Trustees cannot amend the Declaration of
Trust to impose any liability on shareholders, make any assessment on shares,
or impose liabilities on the Trustees without approval from each affected
shareholder or Trustee, as the case may be.
INQUIRIES
Any inquiries should be directed to Cova Life, One Tower Lane, Suite 3000,
Oakbrook Terrace, Illinois 60181-4644. The telephone number is (800) 831-LIFE.
DISTRIBUTION AND REDEMPTION OF SHARES
Shares of the Trust are currently issued and redeemed only in connection with
investment in and payments under certain variable annuity contracts ("variable
contracts") issued by Cova Life. The shares of the Trust are purchased and
redeemed at net asset value (see below). Redemptions will be effected by the
separate accounts to meet obligations under the variable contracts. Contract
Owners do not deal directly with the Trust with respect to acquisition or
redemption of shares.
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 annuity 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.
The Trust's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Trust's annual gross income be derived from the disposition of
securities held for less than three months.
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.
The Money Market Portfolio values its securities on the basis of amortized
cost, which means that securities are valued at their acquisition cost to
reflect a constant amortized rate to maturity of any premium or discount,
rather than at current market value. Calculations are made to compare the
amortized cost valuation of the securities with current market values. Money
market valuations are obtained by using market quotations provided by market
makers, estimates of market values, or values obtained from published yield
data of money market instruments. If a deviation of 1/2 of 1% or more were to
occur between the net asset value calculated by reference to market values and
the Portfolio's $1.00 per share net asset value, or if there were any other
deviation which the Trustees believe would result in a material dilution to
shareholders, the Trustees would promptly consider what action, if any, should
be initiated. Other assets are valued at fair value as determined in good
faith by the Trustees. The method of calculating yields is described in the
Statement of Additional Information.
FUND PERFORMANCE
From time to time advertisements and other sales materials for the Trust may
include information concerning the historical performance of the Trust. Such
advertisements will also describe the performance of the relevant insurance
company separate accounts. Any such information will include the average
annual total return of the Trust calculated on a compounded basis for
specified periods of time. Total return information will be calculated
pursuant to rules established by the Securities and Exchange Commission. In
lieu of or in addition to total return calculations, such information may
include performance rankings and similar information from independent
organizations such as Lipper Analytical Services, Inc., Morningstar,
Business Week, Forbes or other industry publications.
The Trust calculates average annual total return by determining the
redemption value at the end of specified periods (assuming reinvestment of all
dividends and distributions) of a $1,000 investment in the Trust at the
beginning of the period, deducting the initial $1,000 investment, annualizing
the increase or decrease over the specified period and expressing the result
as a percentage.
Total return figures utilized by the Trust are based on historical performance
and are not intended to indicate future performance. Total return and net
asset value per share can be expected to fluctuate over time, and accordingly,
upon redemption, shares may be worth more or less than their original cost.
See "Performance Data" in the Statement of Additional Information.
PUBLIC FUND PERFORMANCE
The Bond Debenture Portfolio, which is managed by Lord, Abbett & Co., is
newly organized and does not yet have its own performance record. However,
the Portfolio has the same investment objective and follows substantially
the same investment strategies as a mutual fund ("public fund") whose
shares are sold to the public and managed by the same portfolio manager of
Lord, Abbett & Co.
Set forth below is the historical performance of the public fund. Investors
should not consider the performance data of the public fund as an indication
of the future performance of the Portfolio. The performance
figures shown below reflect the deduction of the historical fees and expenses
paid by the public fund, and not those to be paid by the Portfolio. The
figures also do not reflect the deduction of any insurance fees or charges
which are imposed by Cova Life in connection with its sale of variable annuity
contracts. Investors should refer to the separate account prospectus
describing the variable annuity contracts for information pertaining to these
insurance fees and charges. The insurance separate account fees will have a
detrimental effect on the performance of the Portfolio. The results shown
reflect the reinvestment of dividends and distributions, and were calculated
in the same manner that will be used by the Portfolio to calculate its own
performance.
The following tables show average annualized total returns for the time
periods shown for the public fund.
BOND DEBENTURE PORTFOLIO
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Corresponding
- ---------------------------
Public Fund 1 Year 5 Year 10 Year
- --------------------------- ------- ------- --------
Lord Abbett Bond -
Debenture Fund, Inc. 17.50% 16.00% 10.10%
</TABLE>
PRIVATE ACCOUNT PERFORMANCE
The Select Equity, Large Cap Stock, Small Cap Stock and Quality Bond
Portfolios, each of which is managed by J.P. Morgan Investment Management
Inc., are newly organized and do not yet have their own performance records.
However, each of these Portfolios has investment objectives, policies and
strategies which are substantially similar to those employed by J.P. Morgan
Investment Management Inc. with respect to certain Private Accounts.
Thus, the performance information derived from these Private Accounts is
deemed relevant to the investor. The performance of the Portfolios may
vary from the Private Account composite information because each
Portfolio will be actively managed and its investments will vary from
time to time and will not be identical to the past portfolio investments
of the Private Accounts. Moreover, the Private Accounts are not
registered under the Investment Company Act of 1940 ("1940 Act") and
therefore are not subject to certain investment restrictions that are
imposed by the 1940 Act, which, if imposed, could have adversely
affected the Private Accounts' performances.
The chart below shows hypothetical performance information derived from
historical composite performance of the Private Accounts included in the
Active Equity Composite, Structured Stock Selection Composite, Small Cap
Directly Invested Composite and Public Bond Composite. The hypothetical
performance figures for the Portfolios represent the actual performance
results of the composites of comparable Private Accounts, adjusted to reflect
the deduction of the fees and expenses anticipated to be paid by the
Portfolios. The actual Private Account composite performance figures are
time-weighted rates of return which include all income and accrued income and
realized and unrealized gains or losses, but do not reflect the deduction of
investment advisory fees actually charged to the Private Accounts. Inception
was January 1, 1986 for the Active Equity Composite, June 1, 1987 for the
Public Bond Composite, and November 1, 1989 for the Structured Stock Selection
Composite.
Investors should not consider the performance data of these Private Accounts
as an indication of the future performance of the respective Portfolios. The
figures also do not reflect the deduction of any insurance fees or charges
which are imposed by Cova Life in connection with its sale of variable annuity
contracts. Investors should refer to the separate account prospectus
describing the variable annuity contracts for information pertaining to these
insurance fees and charges. The insurance fees and charges will have a
detrimental effect on the performance of a Portfolio.
Hypothetical Performance Information Derived from
Private Account Composite Performance
Reduced by Anticipated Portfolio Fees and Expenses
For the periods ended 12/31/95
Performance Derived from Private Accounts
<TABLE>
<CAPTION>
Hypothetical Investment Portfolio
Performance
Portfolio 1 year 5 years 10 Years Since Inception
- ---------------------------- ------------- ----------- --------- ----------------
<S> <C> <C> <C> <C>
Active Equity Composite 32.56% 17.71% - 15.51%
(Select Equity Portfolio)
Structured Stock Selection
Composite 37.47% 17.40% - 14.05%
(Large Cap Stock Portfolio)
Small Cap Directly Invested
Composite 35.29% 20.75% 12.00% -
(Small Cap Stock Portfolio)
Public Bond Composite 17.71% 9.46% - 9.52%
(Quality Bond Portfolio)
</TABLE>
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 obligers 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 exhibits 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 Debt rated 'BB', 'B', 'CCC', or 'CC' is regarded,
B on balance, as predominantly speculative with
CCC respect to capacity to pay interest and repay
CC 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.
l 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.
PART B
STATEMENT OF ADDITIONAL INFORMATION
COVA SERIES TRUST
ONE TOWER LANE, SUITE 3000
OAKBROOK TERRACE, ILLINOIS 60181-4644
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS BUT SHOULD
BE READ IN CONJUNCTION WITH THE PROSPECTUS FOR COVA SERIES TRUST,
DATED MAY 1, 1996 (the "PROSPECTUS"). A COPY OF THE PROSPECTUS MAY BE
OBTAINED WITHOUT CHARGE BY CALLING (800) 831-LIFE, OR WRITING COVA FINANCIAL
SERVICES LIFE INSURANCE COMPANY AT ONE TOWER LANE, SUITE 3000, OAKBROOK
TERRACE, ILLINOIS 60181-4644.
The Prospectus and this Statement of Additional Information omit certain
of the information contained in the registration statement filed with the
Securities and Exchange Commission, Washington, D.C. These items may be
obtained from the Commission upon payment of the fee prescribed, or inspected
at the Commission's office at no charge.
THIS STATEMENT OF ADDITIONAL INFORMATION IS
DATED MAY 1, 1996.
TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVES AND POLICIES
STOCK INDEX PORTFOLIO - MONITORING PROCEDURES
INVESTMENT LIMITATIONS
DESCRIPTION OF SECURITIES RATINGS
OFFICERS AND TRUSTEES
SUBSTANTIAL SHAREHOLDERS
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
CUSTODIAN
PERFORMANCE DATA
LEGAL COUNSEL AND INDEPENDENT AUDITORS
INVESTMENT ADVISORY AGREEMENT
PORTFOLIO TRANSACTIONS
FINANCIAL STATEMENTS
INVESTMENT OBJECTIVES AND POLICIES
OBJECTIVES
For a description of the objectives of the Portfolios, see "Prospectus -
Investment Objectives." The following information is provided for those
investors wishing to have more comprehensive information than that contained
in the Prospectus.
ADDITIONAL INFORMATION - INVESTMENT OBJECTIVES AND POLICIES OF 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 broad
range of corporate and government debt obligations and related investments of
domestic and foreign issuers, 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. These
Portfolios are designed for investors who want an actively managed portfolio
of selected equity securities that seeks to outperform the S&P 500 Index. The
investment objective of each Portfolio is to provide a high total return from
a portfolio of selected equity securities.
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 certifications, 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
Fundamental research: The Sub-Adviser's domestic equity analysts, each an
industry specialist with an average of 11 years of experience, 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.
Systematic 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.
Disciplined portfolio construction: 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 misvaluation will be
corrected within a reasonable time frame and the magnitude of the risks versus
the rewards. The portfolio seeks to hold sector weightings 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 $1.5 billion.
INVESTMENT PROCESS
Fundamental Research: The Sub-Adviser's domestic equity analysts -- each
an industry specialist with an average of 11 years of experience --
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
300-350 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.
Systematic 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.
Disciplined portfolio construction: 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 32 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.
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."
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 (the "Asset Limitation") 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." 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, 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. The Money Market
Portfolio will be fully collateralized within the meaning of paragraph (a)(3)
of Rule 2a-7 under the Investment Company Act of 1940, as amended (the "1940
Act"). 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.
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.
WARRANTS
Certain of the Portfolios may invest in warrants, which entitle the
holder to buy common stock from the issuer at a specific price (the strike
price) for a specific period of time. The strike price of warrants sometimes
is much lower than the current market price of the underlying securities, yet
warrants are subject to similar price fluctuations. As a result, warrants may
be more volatile investments than the underlying securities.
Warrants do not entitle the holder to dividends or voting rights with
respect to the underlying securities and do not represent any rights in the
assets of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to the expiration date.
FOREIGN INVESTMENTS
Each of the Portfolios may invest in foreign securities. The
International Equity Portfolio may make substantial investments in foreign
countries. The Money Market, Quality Bond, Select Equity, Large Cap Stock,
Small Cap Stock and Quality Income Portfolios may invest in certain foreign
securities. The Quality Bond Portfolio may invest in dollar-denominated
fixed income securities of foreign issuers. The Select Equity and Large Cap
Stock Portfolios may invest in equity securities of foreign corporations
included in the S&P 500 Index or listed on a national 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. All investments of the Money Market Portfolio must be U.S.
dollar-denominated. In the case of the Money Market and Quality Bond
Portfolios, 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").
Generally, ADRs and EDRs are receipts issued by a bank or trust company that
evidence ownership of underlying securities issued by a foreign corporation
and that are designed for use in the domestic, in the case of ADRs, or
European, in the case of EDRs, securities markets.
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. The
Portfolios will not enter into such commitments for speculative purposes.
For a description of the risks associated with investing in foreign
securities, see "Investment Practices" and "Risk Factors" in the Prospectus.
INVESTING IN JAPAN. Investing in Japanese securities may involve the
risks associated with investing in foreign securities generally. In addition,
because it invests in Japan, the International Equity Portfolio will be
subject to the general economic and political conditions in Japan.
Share prices of companies listed on Japanese stock exchanges and on the
Japanese OTC market reached historical peaks (which were later referred to as
the "bubble") as well as historically high trading volumes in 1989 and 1990.
Since then, stock prices in both markets decreased significantly, with listed
stock prices reaching their lowest levels in the third quarter of 1992 and OTC
stock prices reaching their lowest levels in the fourth quarter of 1992.
During the period from January 1, 1989 through December 31, 1994, the highest
Nikkei stock average and Nikkei OTC average were 38,915.87 and 4,149.20,
respectively, and the lowest for each were 14,309.41 and 1,099.32,
respectively. There can be no assurance that additional market corrections
will not occur.
The common stocks of many Japanese companies continue to trade at high
price earnings ratios in comparison with those in the United States, even
after the recent market decline. Differences in accounting methods make it
difficult to compare the earnings of Japanese companies with those of
companies in other countries, especially the United States.
Since the International Equity Portfolio invests in securities
denominated in yen, changes in exchange rates between the U.S. dollar and the
yen affect the U.S. dollar value of the International Equity Portfolio's
assets. Such rate of exchange is determined by forces of supply and demand on
the foreign exchange markets. These forces are in turn affected by the
international balance of payments and other economic, political and financial
conditions, government intervention, speculation and other factors. See
Foreign Currency Exchange Transactions.
Japanese securities held by the International Equity Portfolio are not
registered with the SEC nor are the issuers thereof subject to its reporting
requirements. There may be less publicly available information about issuers
of Japanese securities than about U.S. companies and such issuers may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which U.S. companies are subject.
Although the Japanese economy has grown substantially over the past four
decades, recently the rate of growth had slowed substantially. During 1991,
1992 and 1993, the Japanese economy grew at rates of 4.3%, 1.1% and 0.1%,
respectively, as measured by real gross domestic product.
Japan's success in exporting its products has generated a sizeable trade
surplus. Such trade surplus has caused tensions at times between Japan and
some of its trading partners. In particular, Japan's trade relations with the
United States have recently been the subject of discussion and negotiation
between the two nations. The United States has imposed certain measures
designed to address trade issues in specific industries. These measures and
similar measures in the future may adversely affect the performance of the
International Equity Portfolio.
Japan's economy has typically exhibited low inflation and low interest
rates. There can be no assurance that low inflation and low interest rates
will continue, and it is likely that a reversal of such factors would
adversely affect the Japanese economy. Moreover, the Japanese economy may
differ, favorably or unfavorably, from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resources, self-sufficiency and balance of payments position.
Japan has a parliamentary form of government. In 1993, a coalition
government was formed which, for the first time since 1955, did not include
the Liberal Democratic Party. Since mid-1993, there have been several changes
in leadership in Japan. What, if any, effect the current political situation
will have on prospective regulatory reforms of the economy in Japan cannot be
predicted. Recent and future developments in Japan and neighboring Asian
countries may lead to changes in policy that might adversely affect the
International Equity Portfolio.
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 with the Custodian
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 comments. 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% of
the market value of the Portfolio's total assets, less liabilities other than
the obligations created by when-issued commitments.
INVESTMENT COMPANY SECURITIES. Securities of other investment companies
may be acquired by each of the Portfolios to the extent permitted under the
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 with the Custodian 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.
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, or with respect to the
Money Market Portfolio, as described below. 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 AND QUALITY INCOME PORTFOLIOS. These Portfolios invest
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
Portfolios 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 Portfolios invest 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 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, of ir 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 be rated 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 the 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. These statistics indicate that the average life of
single-family dwelling mortgages with 25-30 year maturities (the type of
mortgages backing the vast majority of GNMA Certificates) is approximately 12
years. For this reason, it is customary for pricing purposes to consider GNMA
Certificates as 30-year mortgage-backed securities which prepay fully in the
twelfth year.
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. For the most common
type of mortgage pool, containing single-family dwelling mortgages, GNMA
receives an annual fee of 0.06 of 1% of the outstanding principal for
providing its guarantee, and the GNMA Certificate issuer is paid an annual
servicing fee of 0.44 of 1% for assembling the mortgage pool and for passing
through monthly payments of interest and principal to Certificate holders.
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.
In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a 12-year life. Compared on this
basis, GNMA Certificates have historically yielded roughly 1/4 of 1% more than
high grade corporate bonds and 1/2 of 1% more than U.S. Government and U.S.
Government agency bonds. As the life of individual pools may vary widely,
however, the actual yield earned on any issue of GNMA Certificates may differ
significantly from the yield estimated on the assumption of a 12-year life.
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.
LOWER GRADE SECURITIES
Certain of the Portfolios may invest in lower-grade income securities.
(The High Yield Portfolio may invest a substantial portion of its assets in
medium and lower grade corporate debt securities entailing certain risks. See
"Special Risks of High Yield Investing" in the Prospectus.) 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 Sub-Adviser values the Portfolio's investments 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, there may be relatively inactive trading in such
securities and the ability of the Sub-Adviser to accurately value such
securities may be adversely affected. During periods of reduced market
liquidity and in the absence of readily available market quotations for
securities held in the Portfolio's portfolio, the responsibility of the
Sub-Adviser to value the Portfolio's securities becomes more difficult and the
Sub-Adviser's 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 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.
The 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"). 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"). The staff of the SEC currently takes the position that, in
general, OTC options on securities other than U.S. government securities
purchased by a Portfolio, and portfolio securities "covering" the amount of
the Portfolio's obligation pursuant to an OTC option sold by it (the cost of
the sell-back plus the in-the-money amount, if any) are illiquid, and are
subject to each Portfolio's limitation on investing no more than 10% of its
assets in restricted securities (15% with respect to the World Equity
Portfolio and the Utility Portfolio).
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 or 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 Investment Company Act of 1940, as
amended, 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.
GROWTH AND INCOME PORTFOLIO - DEBT SECURITIES INVESTMENTS
The Growth and Income Portfolio may invest up to 5% of its assets in
various debt securities. These include obligations issued or guaranteed by
the U.S. government or its agencies or instrumentalities or in various
investment grade debt obligations including mortgage pass-through certificates
and collateralized mortgage obligations. These securities may also include
corporate debt securities, some of which may be medium and lower grade
quality. Lower grade corporate debt securities are commonly known as "junk
bonds" and involve a significant degree of risk.
STOCK INDEX PORTFOLIO - MONITORING PROCEDURES
MONITORING PROCEDURES
The Board of Trustees of the Trust reviews the correlation between the
Portfolio and the Index on a quarterly basis. The Board of Trustees has
adopted monitoring procedures which it believes are reasonably designed to
assure a high degree of correlation between the performance of the Portfolio
and the S&P 500 Index. The procedures, which are reviewed and reconfirmed
annually by the Board, provide that in the event that the correlation between
the performance of the Portfolio and that of the S&P 500 Index falls below
95%, the Sub-Adviser will promptly notify the Board which shall consider what
action, if any, should be taken.
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.
QUALITY INCOME, HIGH YIELD, MONEY MARKET, GROWTH AND INCOME AND STOCK INDEX
PORTFOLIOS
Each of the Quality Income, High Yield, Money Market, Growth and Income
and Stock Index Portfolios of the Trust may not:
1. Borrow money which is in excess of one-third of the value of its
total assets taken at market value (including the amount borrowed) (except the
Money Market Portfolio which is limited to 10% of the value of its total
assets) and then only from banks as a temporary measure for extraordinary or
emergency purposes. This borrowing provision is not for investment leverage
but solely to facilitate management of the Portfolio by enabling the Trust to
meet redemption requests where the liquidation of the Portfolio's investment
is deemed to be inconvenient or disadvantageous. Monies used to pay interest
on borrowed funds will not be available for investment. The Portfolio will
not make additional investments while it has borrowings outstanding;
2. Underwrite securities of other issuers;
3. Invest 25% or more of a Portfolio's assets taken at market value in
any one industry. Investing in cash items (including bank time and demand
deposits such as certificates of deposit), U.S. Treasury bills or securities
issued or guaranteed by the U.S. government, its agencies or
instrumentalities, or instruments secured by those money market instruments,
such as repurchase agreements, will not be considered investments in any one
industry;
4. Purchase or sell commodities, commodity contracts, foreign exchange
or real estate, or invest in oil, gas or other mineral development or
exploration programs, except as noted in connection with hedging transactions.
(This does not prohibit investment in the securities of corporations which
own interests in commodities, foreign exchange, real estate or oil, gas or
other mineral development or exploration programs);
5. Invest more than 5% of the value of the assets of a Portfolio in
securities of any one issuer (except in the case of the securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities), or, if,
as a result, the Portfolio would hold more than 10% of the outstanding voting
securities of an issuer except that up to 25% of the Portfolio's total assets
may be invested without regard to such limitations;
6. Invest in securities of a company for the purpose of exercising
control or management;
7. Invest in securities issued by any other registered investment
company;
8. Purchase or sell real estate, except the Portfolios may purchase
securities which are issued by companies which invest in real estate or
interests therein;
9. Issue senior securities as defined in the Investment Company Act of
1940, except insofar as a Portfolio may be deemed to have issued a senior
security by reason of (a) entering into any repurchase agreement; (b)
borrowing money in accordance with restrictions described above; (c) lending
Portfolio securities; (d) purchasing securities on a when-issued or delayed
delivery basis; (e) accommodating short sales; (f) implementing the hedging
transactions described above. If the asset coverage falls below 300%, when
taking into account items (a) through (e), the Portfolio may be required to
liquidate investments to be in compliance with the Investment Company Act of
1940;
10. Lend portfolio securities in excess of twenty-five percent (25%) of
the value of a Portfolio's assets. Any loans of a Portfolio's securities will
be made according to guidelines established by the Trustees, including
maintenance of collateral of the borrower at least equal at all times to the
current market value of the securities loaned;
11. Invest in securities subject to legal or contractual restrictions on
resale and repurchase agreements maturing in more than seven days if, as a
result of the investment, more than 10% of the total assets of the Portfolio
(taken at market value at the time of such investment) would be invested in
the securities;
12. Make loans (the acquisition of a portion of an issue of publicly
distributed bonds, debentures, notes and other securities as permitted by the
investment objectives of the Portfolios will not be deemed to be the making of
loans) except that the Portfolios may purchase securities subject to
repurchase agreements under policies established by the Trustees or lend
portfolio securities pursuant to restriction 10 above;
13. Purchase securities on margin (but the Portfolios may obtain such
short-term credits as may be necessary for the clearance of transactions or to
implement the hedging transactions described above); and
14. Make short sales of securities or maintain a short position, unless
not more than 10% of the Portfolio's net assets (taken at current value) is
held as collateral for the sales at any one time, or unless at all times when
a short position is open the Portfolio owns an equal amount of the securities
or securities convertible into or exchangeable, without payment of any further
consideration (or for additional cash consideration held in a segregated
account by the Trust's custodian), for securities of the same issue as, and
equal in amount to, the securities sold short ("short sale against-the-box").
ADDITIONAL INVESTMENT LIMITATION - STOCK INDEX PORTFOLIO
The Stock Index Portfolio may not invest more than 5% of assets in the
securities of companies that have a continuous operating history of less than
3 years. However, such period of three years may include the operation of any
predecessor company or companies, partnership or individual enterprise if the
company whose securities are proposed as an investment for funds of the
Portfolio has come into existence as the result of a merger, consolidation,
reorganization or the purchase of substantially all of the assets of such
predecessor company or companies, partnership or individual enterprise.
ADDITIONAL INVESTMENT LIMITATIONS - MONEY MARKET PORTFOLIO
Rule 2a-7 under the Investment Company Act of 1940, which contains
certain requirements relating to the diversification, quality and maturity of
a money market fund's investments, was recently amended by the Securities and
Exchange Commission. The Board of Trustees of the Trust has modified its Rule
2a-7 procedures in order to comply with the Rule, as amended. As part of that
modification, the Board has adopted certain additional investment restrictions
pertaining to the diversification of the investments of the Money Market
Portfolio. These investment limitations, which are not fundamental policies
and which therefore may be changed without shareholder approval, are as
follows:
The Money Market Portfolio shall not acquire any instrument, including
puts, repurchase agreements and bank instruments, which, as measured at the
time of acquisition, would cause the Portfolio to:
1. invest, at any time, more than 5% of its total assets in the First
Tier Securities (as that term is defined in the Trust Prospectus) of a single
issuer (including puts written by, and repurchase agreements entered into
with, such issuer); except that the Portfolio may invest more than 5% of its
total assets in Government securities; and, for purposes of this calculation,
entering into a repurchase agreement shall be deemed to be an acquisition of
the underlying securities to the extent that the repurchase agreement is
collateralized fully;
2. invest, at any time, more than 5% of its total assets in securities
which when acquired by the Portfolio were Second Tier Securities (as that term
is defined in the Trust Prospectus); or
3. invest, at any time, more than the greater of 1% of the Portfolio's
total assets or $1,000,000 in securities of a single issuer which were Second
Tier Securities when acquired by the Portfolio.
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; provided, however, that the
Portfolio may increase its interest in an open-end management investment
company with the same investment objective and restrictions as the Portfolio's
while such borrowings are outstanding. 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; provided, however, that the Portfolio may invest all or part of
its investable assets in an open-end management investment company with the
same investment objective and restrictions as the Portfolio's. 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; provided, however, that the Portfolio may invest
all or part of its investable assets in an open-end management investment
company with the same investment objective and restrictions as the
Portfolio's. 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; provided, however, that the Portfolio
may invest all or part of its investable assets in an open-end management
investment company with the same investment objective and restrictions as the
Portfolio's. 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; provided, however, that the
Portfolio may invest all or part of its investable assets in an open-end
management investment company with the same investment objective and
restrictions as the Portfolio's. 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;
provided, however, that the Portfolio may increase its interest in an open-end
management investment company with the same investment objective and
restrictions as the Portfolio's while such borrowings are outstanding. 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; provided, however, that the Portfolio may invest all or part of
its investable assets in an open-end management investment company with the
same investment objective and restrictions as the Portfolio's. 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; provided, however, that the Portfolio may invest
all or part of its investable assets in an open-end management investment
company with the same investment objective and restrictions as the
Portfolio's;
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;
provided, however, that the Portfolio may increase its interest in an open-end
management investment company with the same investment objective and
restrictions as the Portfolio's while such borrowings are outstanding. 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; provided, however, that the Portfolio may invest all or part of
its investable assets in an open-end management investment company with the
same investment objective and restrictions as the Portfolio's. 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; provided, however, that the Portfolio may invest
all or part of its investable assets in an open-end management investment
company with the same investment objective and restrictions as the
Portfolio's. 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; provided, however, that the
Portfolio may invest all or part of its investable assets in an open-end
management investment company with the same investment objective and
restrictions as the Portfolio's. 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 "Additional Investment
Information" 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 "Additional Investment
Information" 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 "Additional Investment Information" in the
Prospectus shall not be considered senior securities for purposes hereof.
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.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - QUALITY BOND PORTFOLIO, SELECT
EQUITY PORTFOLIO, LARGE CAP STOCK PORTFOLIO AND INTERNATIONAL EQUITY
PORTFOLIO
The investment restriction described below is not a fundamental policy of
these Portfolios and may be changed by the Trustees. This non-fundamental
investment policy requires 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.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - INTERNATIONAL EQUITY PORTFOLIO
The investment restrictions described below are not fundamental policies
of the Portfolio and may be changed by the Trustees. These non-fundamental
investment policies require that the Portfolio may not:
1. 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;
2. 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
3. Invest in any securities issued by an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of the Trust,
or is an officer of the Investment Adviser or Sub-Adviser, if after the
Portfolio's purchase of the securities of such issuer, one or more of such
persons owns beneficially more than 1/2 of 1% of the shares or securities, or
both, all taken at market value, of such issuer, and such persons owning more
than 1/2 of 1% of such shares or securities together own beneficially more
than 5% of such shares or securities, or both, all taken at market value.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - SELECT EQUITY PORTFOLIO, LARGE
CAP STOCK PORTFOLIO AND SMALL CAP STOCK PORTFOLIO
The investment restrictions described below are not fundamental policies
of these Portfolios and may be changed by the Trustees. These non-fundamental
investment policies require that each such Portfolio may not:
1. 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
recognized U.S. or foreign stock exchange, to the extent permitted by
applicable state securities laws; or
2. Invest in any securities issued by an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of the Trust,
or is an officer of the Investment Adviser or Sub-Adviser, if after the
Portfolio's purchase of the securities of such issuer, one or more of such
persons owns beneficially more than 1/2 of 1% of the shares or securities, or
both, all taken at market value, of such issuer, and such persons owning more
than 1/2 of 1% of such shares or securities together own beneficially more
than 5% of such shares or securities, or both, all taken at market value;
3. Invest in real estate limited partnership interests; or
4. Invest in oil, gas or other mineral leases.
DESCRIPTION OF SECURITIES RATINGS
A description of Corporate Bond Ratings is found in the Appendix to the
Prospectus.
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:
<TABLE>
<CAPTION>
<S> <C>
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.
</TABLE>
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.
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.
OFFICERS AND TRUSTEES
MANAGEMENT OF THE TRUST
<TABLE>
<CAPTION>
<S> <C> <C>
Lorry J. Stensrud* President and Chief President of Cova Financial Services
One Tower Lane, Suite 3000 Executive Officer Life Insurance Company ("Cova Life")
Oakbrook Terrace, IL 60181-4644 since June, 1995; prior thereto,
Age: -- Executive Vice President of Cova
Life
William C. Mair* Vice President, Treasurer, Vice President and Controller of
One Tower Lane, Suite 3000 Controller, Chief Cova Life; Vice President, Treasurer
Oakbrook Terrace, IL 60181-4644 Financial Officer, Chief and Controller of Cova Investment
Age: 54 Accounting Officer and Advisory Corporation
Trustee
Stephen M. Alderman Trustee Partner in the law firm of Garfield
211 West Wacker Drive & Merel
Chicago, IL 60606
Age: 36
Theodore A. Myers Trustee Executive Vice President and Chief
1940 East 6th Street Financial Officer of Qualitech
Cleveland, OH 44114 Steel Corporation, a producer of
Age: 65 high quality engineered steels for
automotive, transportation and
capital goods industries; Director
of McClouth Steel Co.; Prior to
August, 1993, Senior Vice President,
Chief Financial Officer and a
Director of Doskocil Companies,
Inc., a food processing and
distribution company; Trustee of
other investment companies advised
by VKAC
Deborah A. Vohasek Trustee Principal, Vohasek Oetjen Marketing
601 South LaSalle Street
Chicago, IL 60605
Age: 32
R. Kevin Williams Trustee Partner in the law firm of
20 North Wacker Drive O'Donnell, Byrne & Williams from
Chicago, IL 60606 June 1993 through the present;
Age: 41 Associate Attorney, Sonnenberg,
Anderson, O'Donnell & Rodriguez,
September 1988 through May 1993
William H. Wilton Vice President Vice President & Actuary of Cova
One Tower Lane, Suite 3000 Life; Prior to October, 1992,
Oakbrook Terrace, IL 60181-4844 Associate Actuary, Allstate Life
Age: -- Insurance Co., Northbrook, IL
Jeffery K. Hoelzel Senior Vice President and Senior Vice President, General
One Tower Lane, Suite 3000 Secretary Counsel, Secretary and Director of
Oakbrook Terrace, IL 60181-4644 Cova Life; Secretary and Director of
Age: 32 Cova Investment Advisory Corporation;
prior to June, 1992, Associate
Attorney with the law firm of Lord,
Bissell & Brook in Chicago
<FN>
* Interested person of the Trust within the meaning of the 1940 Act.
</TABLE>
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.
SUBSTANTIAL SHAREHOLDERS
Shares of the Trust are issued and redeemed only in connection with
investments in and payments under certain variable annuity contracts
("variable contracts") issued by Cova Financial Services Life Insurance
Company and its affiliated insurance companies. On March 31, 1996, Cova
Variable Annuity Account One, a separate account of Cova Life, was known to
the Board of Trustees and the management of the Trust to own of record 98.85%
of the shares of the Trust and Cova Variable Annuity Account Five, a
separate account of Cova Financial Life Insurance Company, was known to own
of record 1.15%. Cova Life contributed the initial capital to the Trust.
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
Cova Life has advised the Trust that as of April 23, 1996, 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 any Portfolio of
the Trust.
CUSTODIAN
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111, 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.
PERFORMANCE DATA
As required by regulations of the Securities and Exchange Commission, the
annualized total return of the Growth and Income, Money Market, Quality
Income, High Yield and Stock Index 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.
Investment operations for the Portfolios depicted below commenced on December
11, 1989 for the Quality Income and High Yield Portfolios; July 1, 1991 for
the Money Market Portfolio; November 1, 1991 for the Stock Index Portfolio;
and May 1, 1992 for the Growth and Income Portfolio. The average annual total
return computations for these Portfolios are calculated from the first day of
the month following the month in which the investment operations commenced.
The performance figures shown for the Portfolios in the chart below reflect
the actual fees and expenses paid by the Portfolios.
Average Annual Total Return for the Periods Ended 12/31/95
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Portfolio Performance
---------- ------------
Portfolio 1 year 5 years Since Inception
- ----------------- ---------- ------------ ----------------
Growth and Income 32.24% -- 12.26%
Money Market 6.01% -- 4.47%
Quality Income 17.99% 9.12% 8.93%
High Yield 16.69% 15.14% 13.35%
Stock Index 36.87% -- 14.59%
</TABLE>
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 Peat Marwick, LLP.
The selection of independent auditors was ratified by the shareholders of
the Trust at a Special Meeting of Shareholders of the Trust held on
February 9, 1996.
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 is a wholly-owned subsidiary of Cova Life
Management Company, a Delaware corporation, which in turn, is a wholly-owned
subsidiary of Cova Corporation, a Missouri corporation, which in turn, is a
wholly-owned subsidiary of General American Life Insurance Company ("General
American"), a St. Louis-based mutual company. General American has more than
$235 billion of life insurance in force and approximately $9.6 billion in
assets.
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 ("Investment Advisory Agreement").
Prior to this date, VKAC had acted as the investment adviser to all Portfolios
of the Trust. The Investment Advisory Agreement, between the Investment
Adviser and the Trust, was approved by shareholders of the Trust at a Special
Meeting of Shareholders held on February 9, 1996 and was also approved by the
Board of Trustees of the Trust on that same date.
As described in the Prospectus, the Investment Adviser has retained
Sub-Advisers to assist it in managing the Portfolios. The Sub-Advisory
Agreement between the Investment Adviser and Van Kampen American Capital
Investment Advisory Corp. was approved by the Board of Trustees, including a
majority of the independent Trustees, at a meeting held on February 9, 1996
and was also approved by the shareholders of the Trust at the Special Meeting
held on that same date. The Sub-Advisory Agreements between the Investment
Adviser and Lord, Abbett & Co. and J. P. Morgan Investment Management Inc.,
respectively, were approved by the Board of Trustees, including a majority of
the independent Trustees, on February 9, 1996. Cova Financial Services Life
Insurance Company, as sole shareholder of the Portfolios for which J. P.
Morgan Investment Management Inc. and Lord, Abbett & Co. act as Sub-Advisers,
approved the Sub-Advisory Agreements between the Investment Adviser and each
of these two Sub-Advisers by way of corporate resolutions adopted in April of
1996.
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.
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.
FINANCIAL STATEMENTS
The financial statements, notes and reports of the Independent Auditors for
each of the Portfolios of the Trust are included herein.
Van Kampen Merritt Series Trust Quality Income Portfolio
For the 12-month period ended 12/31/95
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders of the Quality Income
Portfolio of the Van Kampen Merritt Series Trust:
We have audited the accompanying statement of assets and liabilities of the
Quality Income Portfolio (one of the portfolios comprising the Van Kampen
Merritt Series Trust) (the "Fund"),including the portfolio of investments, as
of December 31, 1995, and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years
in the period then ended, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the responsi-
bility of the Fund'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, 1995, 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 the
Quality Income Portfolio of the Van Kampen Merritt Series Trust as of
December 31, 1995, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and the financial highlights for each of the periods presented, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 30, 1996, except as to
Note 6, which is as of February 9, 1996
Van Kampen Merritt Series Trust Quality Income Portfolio
<TABLE>
Portfolio of Investments
December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------
Par Amount
in Local
Currency U.S. $
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestic Bonds and Debt Securities 83.9%
Agencies 3.0%
250 Guaranteed Export Trust 95-A 6.28 % 06/15/04 $ 255,045
1,000 New England Education Loan Marketing Corp. 6.125 07/17/98 1,009,410
--------------
1,264,455
--------------
Asset-Backed Securities 3.6%
1,000 American Express Master Trust Ser 93-1A 5.375 07/15/01 986,269
500 Signet Master Trust Ser 94-4A 6.800 12/15/00 511,515
--------------
1,497,784
--------------
Bonds 47.0%
2,000 Allegheny Generating Co. 6.875 09/01/23 2,006,856
2,000 AT & T Corp. 8.250 01/11/00 2,173,220
3,000 Bank of Boston Corp. 5.925 08/26/98 2,978,100
1,500 Cyprus Amax Minerals Co. 7.375 05/15/07 1,605,318
16,000 DLJ Mortgage Acceptance Corp. - Interest Only 3.833 09/25/25 1,012,501
3,000 Exxon Capital Corp. * 11/15/04 1,780,320
2,000 Florida Gas Transmission Co. 7.750 11/01/97 2,060,460
1,000 General Electric Capital Corp. 5.800 04/01/08 1,122,540
630 Greyhound Financial Corp. 8.500 02/15/99 678,606
1,928 Jet Equipment Trust Ser A3 8.160 12/15/96 1,966,020
2,000 Sandoz Corp. 6.625 07/28/05 2,059,000
--------------
19,442,941
--------------
Medium-Term Securities 5.4%
1,000 General Motors Acceptance Corp. 8.875 06/01/10 1,220,967
1,000 MBNA Corp. 6.500 09/15/00 1,024,682
--------------
2,245,649
--------------
Mortgage-Backed Securities 12.8%
1,500 Citicorp Mortgage Securities Inc. #94-11A2 6.250 08/25/24 1,498,717
667 FHLB 4.140 06/04/98 646,821
74 FHLMC 8.000 09/01/08 76,564
2,000 FNMA 6.630 09/03/98 2,015,440
85 FNMA 8.000 09/01/03 87,686
73 FNMA 8.500 07/01/19 76,270
100 FNMA REMIC #89-94G PAC 7.500 12/25/19 103,350
171 GNMA 9.000 01/15/20 181,836
600 Prudential Home Mortgage Securities Co. #93-28A7 7.375 08/25/23 610,875
--------------
5,297,559
--------------
</TABLE>
See Notes to Financial Statements
<TABLE>
Portfolio of Investments
December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------
Par Amount
in Local
Currency U.S. $
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities 12.1%
1,650 U.S. T-Bonds 6.250 % 08/15/23 $ 1,699,945
400 U.S. T-Notes 6.000 08/31/97 405,000
2,750 U.S. T-Notes 6.875 03/31/00 2,907,135
--------------
5,012,080
--------------
Total Domestic Bonds and Debt Securities 34,760,468
--------------
Foreign Bonds and Debt Securities 12.3%
Cayman Islands 9.7%
1,500 Banco Bilbao Vizcaya International Finance (US$) 6.875 10/27/05 1,531,875
1,500 Santander Financial Issuances (US$) 6.775 09/30/49 1,383,750
1,000 Santander Financial Issuances Limited (US$) 7.875 04/15/05 1,102,986
--------------
4,018,611
--------------
Colombia 2.6%
1,060 Financiera Energet (US$) 6.625 12/13/96 1,058,675
--------------
Total Foreign Bonds and Debt Securities 5,077,286
--------------
Total Long-Term Investment 96.2%
(Cost $38,465,877) <F1> 39,837,754
Repurchase Agreement 4.8%
State Street Bank & Trust, U.S. T-Note, $1,705,000 par, 7.50%
coupon, due 11/15/16, dated 12/29/95,to be sold on 01/02/96
at $1,968,257 1,967,000
Liabilities in Excess of Other Assets -1.0% (413,891)
--------------
Net Assets 100.0% $ 41,390,863
==============
*Zero coupon bond
<FN>
<F1> At December 31, 1995, cost for federal income tax purposes is $38,465,877; the aggregate
gross unrealized appreciation is $1,376,727 and the aggregate gross unrealized depreciation is
$4,850, resulting in net unrealized appreciation of $1,371,877.
</TABLE>
See Notes to Financial Statements
<TABLE>
The following table summarizes the portfolio composition at December 31, 1995,
based upon quality ratings issued by Standard & Poor's. For securities not rated by
Standard and Poor's, the Moody's rating is used.
Portfolio Composition by Credit Quality
--------------------------------------------------------------------------------------------
<S> <C>
U.S. Govt. and Agency Obligations 21.7 %
AAA 20.6
AA 11.0
A 21.9
BBB 19.4
NR 5.4
------------
100.0 %
============
</TABLE>
See Notes to Financial Statements
<TABLE>
VAN KAMPEN MERRITT SERIES TRUST QUALITY INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
- -----------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at Market Value
(Cost $38,465,877) (Note 1) $ 39,837,754
Repurchase Agreements (Note 1) 1,967,000
Cash 406
Interest Receivable 685,422
-------------
Total Assets 42,490,582
-------------
LIABILITIES:
Payables:
Investments Purchased 1,064,501
Investment Advisory Fee (Note 2) 17,366
Fund Shares Repurchased 420
Accrued Expenses 17,432
--------------
Total Liabilities 1,099,719
--------------
NET ASSETS $ 41,390,863
==============
NET ASSETS CONSIST OF:
Paid In Surplus (Note 3) $ 41,324,208
Net Unrealized Appreciation on Investments 1,371,877
Accumulated Net Realized Loss on Investments (1,305,222)
--------------
NET ASSETS $ 41,390,863
==============
NET ASSET VALUE PER SHARE
($41,390,863 divided by 3,807,302 shares
outstanding; an unlimited number of shares without
par value are authorized) (Note 3) $10.87
==============
</TABLE>
See Notes to Financial Statements
<TABLE>
VAN KAMPEN MERRITT SERIES TRUST QUALITY INCOME PORTFOLIO
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
- -----------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest $ 2,746,403
-------------
EXPENSES:
Investment Advisory Fee (Note 2) 195,378
Custody 36,034
Trustees Fees and Expenses (Note 2) 21,153
Audit 18,879
Legal (Note 2) 9,961
Other 10,332
-------------
Total Operating Expenses 291,737
Interest Expense (Note 4) 18,102
-------------
Total Expenses 309,839
Less Expenses Reimbursed by Cova Life 57,283
-------------
Net Expenses 252,556
-------------
NET INVESTMENT INCOME $ 2,493,847
=============
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS:
Realized Gain/Loss on Investments:
Proceeds from Sales $ 81,937,725
Cost of Securities Sold (81,484,103)
-------------
Net Realized Gain on Investments 453,622
-------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period (1,792,274)
End of the Period 1,371,877
-------------
Net Unrealized Appreciation on Investments
During the Period 3,164,151
-------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS $ 3,617,773
=============
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 6,111,620
=============
</TABLE>
See Notes to Financial Statements
<TABLE>
VAN KAMPEN MERRITT SERIES TRUST QUALITY INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1995 and 1994
- ----------------------------------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1995 December 31, 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income $ 2,493,847 $ 2,355,865
Net Realized Gain/Loss on Investments 453,622 (1,758,844)
Net Unrealized Appreciation/Depreciation on
Investments During the Period 3,164,151 (2,283,981)
--------------- ----------------
Change in Net Assets from Operations 6,111,620 (1,686,960)
Distributions from Net Investment Income (2,493,847) (2,355,865)
--------------- ----------------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES 3,617,773 (4,042,825)
--------------- ----------------
FROM CAPITAL TRANSACTIONS (Note 3):
Proceeds from Shares Sold 22,566,180 40,415,842
Net Asset Value of Shares Issued Through
Dividend Reinvestment 2,493,847 2,355,865
Cost of Shares Repurchased (21,223,354) (55,910,839)
--------------- ----------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS 3,836,673 (13,139,132)
--------------- ----------------
TOTAL INCREASE/DECREASE IN NET ASSETS 7,454,446 (17,181,957)
NET ASSETS:
Beginning of the Period 33,936,417 51,118,374
--------------- ----------------
End of the Period $ 41,390,863 $ 33,936,417
=============== ================
</TABLE>
See Notes to Financial Statements
<TABLE>
Van Kampen Merritt Series Trust Quality Income Portfolio
Financial Highlights
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- -----------------------------------------------------------------------------------------------------------------------------
December 11, 1989
(Commencement of
Years Ended December 31, Investment
------------------------ Operations) to
1995 1994 1993 1992 1991 1990 December 31, 1989
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $9.815 $10.886 $10.699 $10.618 $9.969 $9.930 $10.000
------- ------- ------- ------- ------- ------ -------
Net Investment Income .667 .603 .641 .696 .753 .713 .043
Net Realized and Unrealized Gain/Loss on
Investments 1.056 (1.071) .518 .081 .649 .039 (.070)
------- ------- ------- ------- ------- ------ -------
Total from Investment Operations 1.723 (.468) 1.159 .777 1.402 .752 (.027)
------- ------- ------- ------- ------- ------ -------
Less:
Distributions from Net Investment Income .667 .603 .641 .696 .753 .713 .043
Distributions from Net Realized Gain on
Investments .000 .000 .331 .000 .000 .000 .000
------- ------- ------- ------- ------- ------ -------
Total Distributions .667 .603 .972 .696 .753 .713 .043
------- ------- ------- ------- ------- ------ -------
Net Asset Value, End of Period $10.871 $9.815 $10.886 $10.699 $10.618 $9.969 $9.930
======= ======= ======= ======= ======= ====== =======
Total Return * 17.99% (4.33%) 11.04% 7.61% 14.71% 7.99% (.27%) **
Net Assets at End of Period (In millions) $41.4 $33.9 $51.1 $24.1 $6.8 $6.1 $2.5
Ratio of Operating Expenses to Average Net
Assets* (Annualized) .60% .59% .60% .60% .60% .74% .70%
Ratio of Interest Expenses to Average Net
Assets* (Annualized) (Note 4) .05% N/A N/A N/A N/A N/A N/A
Ratio of Net Investment Income to
Average Net Assets* (Annualized) 6.42% 5.69% 5.82% 6.87% 7.45% 7.64% 7.83%
Portfolio Turnover 219.46% 177.63% 318.40% 231.91% 12.86% 59.25% .00%
*If certain expenses had not been assumed by
Cova Life, total return would have been
lower and the ratios would have been as
follows:
Ratio of Operating Expenses to Average Net
Assets (Annualized) .75% .68% .70% .88% 1.10% 1.53% 9.15%
Ratio of Net Investment Income to Average
Net Assets (Annualized) 6.27% 5.60% 5.73% 6.59% 6.96% 6.85% (.62%)
** Non-annualized
</TABLE>
N/A - Prior to 1995, interest expense was immaterial and subsequently
netted against interest income.
See Notes to Financial Statements
VAN KAMPEN MERRITT
SERIES TRUST QUALITY INCOME PORTFOLIO
Notes to Financial Statements
December 31, 1995
1. Significant Accounting Policies
Van Kampen Merritt Series Trust (the "Trust"), under which the Quality Income
Portfolio (the "Fund") is organized as a separate sub-trust, is registered as
a diversified open-end management investment company under the Investment
Company Act of 1940, as amended. The Fund's investment objective is to seek a
high level of current income, consistent with safety of principal, by
investing in obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities or in various investment grade debt obligations
including mortgage pass-through certificates and collateralized mortgage
obligations. The Trust and Fund commenced investment operations on December
11, 1989.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
A. Security Valuation - Investments are stated at value using market
quotations, or 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. Short-term securities with remaining maturities of less than 60
days are valued at amortized cost.
B. Security Transactions - Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund 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 Fund will maintain in a segregated account with its custodian assets
having an aggregate value at least equal to the amount of the when issued or
delayed delivery purchase commitments until payment is made. At December 31,
1995, there were no when issued or delayed delivery purchase commitments.
C. Investment Income and Expense - Interest income and expenses are recorded
on an accrual basis. Bond premium and original issue discount are amortized
over the expected life of each applicable security.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
D. Federal Income Taxes - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is
required.
The Fund intends to utilize provisions of the Federal income tax laws
which allow it to carry a realized capital loss forward for eight years
following the year of the loss and offset such losses against any future
realized capital gains. At December 31, 1995, the Fund had an accumulated
capital loss carryforward for tax purposes of $1,305,222 which will expire on
December 31, 2002.
E. Distribution of Income and Gains - The Fund declares and pays dividends
monthly from net investment income. Net realized gains, if any, are
distributed annually. Distributions are automatically reinvested in Fund
Shares. Distributions from net realized gains for book purposes may include
short-term capital gains which are included in ordinary income for tax
purposes.
2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
American Capital Investment Advisory Corp. (the "Adviser") will provide
investment advice and facilities to the Fund for an annual fee payable
monthly as follows:
<TABLE>
Average Net Assets % Per Annum
<S> <C>
- ------------------------------ --------------
First $500 million .50 of 1%
Over $500 million .45 of 1%
</TABLE>
Cova Variable Annuity Accounts One and Five are separate investment
accounts offered by Cova Financial Services Life Insurance Co. and Cova
Financial Life Insurance Co. (collectively "Cova Life"), respectively. At
December 31, 1995, Cova Variable Annuity Accounts One and Five owned all
shares beneficial interest of the Fund.
Certain officers and trustees of the Fund are also officers and directors
of Van Kampen American Capital Distributors, Inc. or its affiliates
(collectively "VKAC"). The Fund does not compensate its officers or trustees
who are officers of VKAC.
The Fund has implemented a retirement plan which covers those trustees who
are not officers of VKAC. The Fund's liability under the retirement plan at
December 31, 1995, was approximately $7,300.
For the year ended December 31, 1995, the Fund recognized expenses of
approximately $12,100, representing VKAC's cost of providing accounting and
legal services.
3. Capital Transactions
At December 31, 1995 and 1994, paid in surplus aggregated $41,324,208 and
$37,487,535, respectively.
VAN KAMPEN MERRITT
SERIES TRUST QUALITY INCOME PORTFOLIO
Notes to Financial Statements (Continued)
December 31, 1995
Transactions in shares were as follows:
<TABLE>
Year Year
Ended Ended
December 31, December 31,
1995 1994
<S> <C> <C>
--------------- --------------
Beginning Shares 3,457,435 4,695,907
--------------- --------------
Shares Sold 2,141,344 3,968,977
Shares Issued through
Dividend Reinvestment 238,868 231,691
Shares Repurchased (2,030,345) (5,439,140)
--------------- --------------
Net Increase/Decrease in
Shares Outstanding 349,867 (1,238,472)
--------------- --------------
Ending Shares 3,807,302 3,457,435
--------------- --------------
--------------- --------------
</TABLE>
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended December 31, 1995, were $83,985,046 and
$81,484,103, respectively.
The Fund utilizes an investment technique called reverse repurchase
agreements for cash management purposes. In a reverse repurchase agreement,
the Fund sells securities and agrees to repurchase them at a mutually agreed
upon date and price. During the reverse repurchase agreement period, the Fund
continues to receive principal and interest payments on these securities but
pay interest to the counter-party based upon a short-term interest rate. The
average daily balance of reverse repurchase agreements during the period was
approximately $304,000 with an average interest rate of 5.955%.
5. Mortgage and Asset Backed Securities
A Mortgage Backed Security (MBS) is a pass-through security created by pooling
mortgages and selling participations in the principal and interest payments
received from borrowers. Most of these securities are guaranteed by federally
sponsored agencies -- Government National Mortgage Association (GNMA), Federal
National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation
(FHLMC) or Federal Home Loan Bank (FHLB).
A Collateralized Mortgage Obligation (CMO) is a bond which is
collateralized by a pool of MBS's. The Fund also invests in REMIC's (Real
Estate Mortgage Investment Conduit) which are simply another form of CMO.
These MBS pools are divided into classes or tranches with each class having
its own characteristics. For instance, a PAC (Planned Amortization Class) is
a specific class of mortgages with the most stable cash flows and the lowest
prepayment risk.
Asset Backed Securities are similar to MBS but made up of pools of other
assets, such as credit card receivables, which are grouped together for
investment purposes. Payments of principal and interest on the securities are
made from the cash flows of the group of assets.
An Interest Only security is another class of MBS representing ownership
in the cash flows of the interest payments made from a specified pool of MBS.
The cash flow on this instrument decreases as the mortgage principal balance
is repaid by the borrower.
6. Subsequent Events
On February 9, 1996, shareholders approved a change in the Trust's name to
Cova Series Trust. A new investment advisory agreement was entered into with
Cova Investment Advisory Corp. A sub-advisory agreement between Cova
Investment Advisory Corp. and Van Kampen American Capital Investment Advisory
Corp. was also approved. The investment advisory fee schedule was not
modified by this change. All of the above changes will take effect on May 1,
1996.
Van Kampen Merritt Series Trust High Yield Portfolio
For the 12-month period ened 12/31/95
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders of the High Yield Portfolio of the
Van Kampen Merritt Series Trust:
We have audited the accompanying statement of assets and liabilities of the
High Yield Portfolio (one of the portfolios comprising the Van Kampen
Merritt Series Trust) (the "Fund"), including the portfolio of investments,
as of December 31, 1995, and the related statement of operations for the
year then ended, the statement of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of
the periods presented. These financial statements and financial highlights
are the responsibility of the Fund'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, 1995, 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 the High Yield Portfolio of the Van Kampen Merritt Series Trust as of
December 31, 1995, the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period then
ended, and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 6, 1996, except as to
Note 6, which is as of February 9, 1996
<TABLE>
VAN KAMPEN MERRITT SERIES TRUST HIGH YIELD PORTFOLIO
Portfolio of Investments
December 31, 1995
- --------------------------------------------------------------------------------------------------------------------------------
Par
Amount
in Local
Currency S & P Moody's U.S.$
(000) Description Rating Rating Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Corporate Bonds 77.1%
Aerospace & Defense 1.4%
150 Sequa Corp. BB B1 9.625% 10/15/99 $ 148,500
400 Sequa Corp. B+ B3 9.375 12/15/03 377,000
--------------
525,500
--------------
Automobile 1.0%
350 Exide Corp. NR NR 10.000 04/15/05 379,750
--------------
Beverage, Food & Tobacco 1.0%
100 Fleming Cos. Inc. (Var. Rate Cpn.) BB- Ba1 8.125 12/15/01 86,000
300 Pilgrims Pride Corp. B- B3 10.875 08/01/03 268,500
--------------
354,500
--------------
Buildings & Real Estate 8.2%
400 American Standard Inc. BB- Ba3 10.875 05/15/99 443,000
200 American Standard Inc. BB- Ba3 11.375 05/15/04 221,500
550 Building Material Corp. <F2> BB B1 0/11.750 07/01/04 374,000
450 Schuller International Group Inc. BB- Ba3 10.875 12/15/04 508,500
400 Southdown Inc. B B2 14.000 10/15/01 440,000
500 Value Property Trust NR NR 11.125 09/29/02 505,000
500 Walter Industries Inc. NR NR 12.190 03/15/00 506,250
--------------
2,998,250
--------------
Chemicals, Plastics & Rubber 0.5%
250 G I Holdings Inc. B+ Ba3 * 10/01/98 193,125
--------------
Containers, Packaging & Glass 4.5%
50 Anchor Glass Container Corp. B- B2 10.250 06/30/02 40,750
50 Anchor Glass Container Corp. CCC+ B3 9.875 12/15/08 30,500
300 Atlantis Group Inc. B- B2 11.000 02/15/03 262,500
50 Owens Illinois Inc. B+ B2 10.250 04/01/99 51,750
100 Owens Illinois Inc. B+ B2 10.500 06/15/02 106,500
350 Owens Illinois Inc. BB Ba3 11.000 12/01/03 397,250
200 S.D. Warren Co. B+ B1 12.000 12/15/04 221,000
563 Silgan Holdings Inc. <F2> B- B3 0/13.250 12/15/02 539,072
--------------
1,649,322
--------------
Diversified/Conglomerate Manufacturing 4.9%
200 Communications & Power Industries Inc. <F3> NR B3 12.000 08/01/05 206,000
361 IMO Industries Inc. B- Caa 12.250 08/15/97 362,805
500 Jordan Industries Inc. B+ B3 10.375 08/01/03 425,000
250 Republic Engineered Steels Inc. B+ B2 9.875 12/15/01 225,625
</TABLE>
1 See Notes to Financial Statements
<TABLE>
Portfolio of Investments (Continued)
December 31, 1995
- --------------------------------------------------------------------------------------------------------------------------------
Par
Amount
in Local
Currency S & P Moody's U.S.$
(000) Description Rating Rating Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Corporate Bonds (Continued)
Diversified/Conglomerate Manufacturing (Continued)
200 Talley Industries Inc. <F2> B- B2 0/12.250% 10/15/05 $ 149,500
400 Talley Manufacturing & Technology Inc. B B2 10.750 10/15/03 402,000
--------------
1,770,930
--------------
Ecological 1.8%
500 Envirosource Inc. B B3 9.750 06/15/03 437,500
200 Norcal Waste Systems Inc. <F2> NR NR 12.50/13.50 11/15/05 202,500
--------------
640,000
--------------
Electronics 1.6%
500 Bell & Howell Holdings Co. <F2> B B3 0/11.500 03/01/05 328,750
250 Computervision B- B3 11.375 08/15/99 263,125
--------------
591,875
--------------
Farming & Agriculture 0.8%
320 Trans Resources Inc. B- B2 11.875 07/01/02 296,000
--------------
Grocery 3.7%
500 Pantry Inc. B+ B3 12.000 11/15/00 492,500
450 Pathmark Stores Inc. B- B2 9.625 05/01/03 437,625
300 Purity Supreme Inc. BBB- Ba1 11.750 08/01/99 329,250
100 Safeway Inc. BB+ Ba2 9.350 03/15/99 107,250
--------------
1,366,625
--------------
Healthcare 3.5%
100 Merit Behavioral Care Corp. NR B3 11.500 11/15/05 104,000
500 Ornda Healthcorp B- B2 11.375 08/15/04 562,500
150 Paracelsus Healthcare Corp. B B1 9.875 10/15/03 151,500
400 Tenet Healthcare Corp. BB- Ba3 10.125 03/01/05 443,000
--------------
1,261,000
--------------
Hotel, Motel, Inns & Gaming 4.0%
475 California Hotel Finance Corp. BB- B2 11.000 12/01/02 503,500
325 GB Property Funding Corp. B+ B2 10.875 01/15/04 286,813
400 Hollywood Casino Inc. B+ B2 12.750 11/01/03 364,000
300 Trump Plaza Funding Inc. B+ B3 10.875 06/15/01 312,000
--------------
1,466,313
--------------
</TABLE>
2 See Notes to Financial Statements
<TABLE>
Portfolio of Investments (Continued)
December 31, 1995
- --------------------------------------------------------------------------------------------------------------------------------
Par
Amount
in Local
Currency S & P Moody's U.S.$
(000) Description Rating Rating Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Corporate Bonds (Continued)
Insurance 2.6%
350 American Annuity Group Inc. B+ Ba3 11.125% 02/01/03 $ 378,875
275 Americo Life Inc. <F4> BB+ Ba2 9.250 06/01/05 262,625
300 Nacolah Holding Corp. BB- B1 9.500 12/01/03 315,000
--------------
956,500
--------------
Leisure 1.4%
500 Alliance Entertainment Corp. B- B3 11.250 07/15/05 503,750
--------------
Mining, Steel, Iron & Non-Precious Metal 2.7%
300 Armco Inc. B B2 11.375 10/15/99 307,500
200 Carbide/Graphite Group Inc. B+ B3 11.500 09/01/03 217,000
350 Easco Corp. B B1 10.000 03/15/01 351,750
100 Magma Copper Co. BB+ Ba3 11.500 01/15/02 106,250
--------------
982,500
--------------
Oil & Gas 6.8%
175 Clark R & M Holdings Inc. NR NR * 02/15/00 116,813
375 Giant Industries Inc. B+ B2 9.750 11/15/03 379,687
500 Global Marine Inc. B+ B1 12.750 12/15/99 555,000
350 Petroleum Heat & Power Inc. B+ B2 12.250 02/01/05 390,250
150 Plains Resources Inc. B- B3 12.000 10/01/99 157,125
450 TransTexas Gas Corp. BB- B2 11.500 06/15/02 463,500
50 Triton Energy Corp. B+ B1 * 11/01/97 43,250
360 Triton Energy Corp. <F2> B+ B1 0/9.750 12/15/00 340,200
25 United Meridian Corp. B B2 10.375 10/15/05 26,500
--------------
2,472,325
--------------
Personal & Non-Durable 2.1%
50 Herff Jones Inc. NR B2 11.000 08/15/05 53,500
210 Playtex Family Products Corp. B+ B2 9.000 12/15/03 185,325
540 Revlon Consumer Products Corp. B B2 9.375 04/01/01 545,400
--------------
784,225
--------------
Printing, Publishing & Broadcasting 10.2%
200 American Telecasting Inc. <F2> CCC+ Caa 0/14.500 06/15/04 137,500
250 Century Communications Corp. BB- Ba3 9.750 02/15/02 258,750
200 Century Communications Corp. B+ B2 11.875 10/15/03 215,000
250 Comcast Corp. B+ B1 9.375 05/15/05 263,125
500 Insight Communications Co. L.P. <F2> B- Caa 8.25/11.25 03/01/00 502,500
225 K-III Communications Corp. BB- Ba3 10.625 05/01/02 240,750
</TABLE>
3 See Notes to Financial Statements
<TABLE>
Portfolio of Investments (Continued)
December 31, 1995
- --------------------------------------------------------------------------------------------------------------------------------
Par
Amount
in Local
Currency S & P Moody's U.S.$
(000) Description Rating Rating Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Corporate Bonds (Continued)
Printing, Publishing & Broadcasting (Continued)
200 K-III Communications Corp. BB- Ba3 10.250% 06/01/04 $ 215,000
500 SCI Television Inc. NR NR 11.000 06/30/05 532,500
250 Storer Communications Inc. B+ B1 10.000 05/15/03 250,625
500 Viacom International Inc. BB- B1 10.250 09/15/01 575,000
100 Young Broadcasting Inc. B B2 11.750 11/15/04 112,000
400 Young Broadcasting Inc. B B2 10.125 02/15/05 424,000
--------------
3,726,750
--------------
Retail 2.7%
250 Hosiery Corp. America Inc.
(Including 250 common stock warrants) B- B3 13.750 08/01/02 270,625
400 Thrifty Payless Inc. B B2 11.750 04/15/03 434,000
275 Waban Inc. BB- Ba3 11.000 05/15/04 281,875
--------------
986,500
--------------
Telecommunications 7.8%
50 Cablevision Systems Corp. B B3 10.750 04/01/04 53,000
500 Centennial Cellular Corp. B B2 10.125 05/15/05 527,500
300 Continental Cablevision Inc. BB+ NR 8.300 05/15/06 301,500
350 Intermedia Communications of Florida, Inc.
(Including 350 common stock warrants) B- B3 13.500 06/01/05 392,000
250 IXC Communications Inc.(Var. Rate Cpn.) NR B3 13.000 10/01/05 267,500
300 Metrocall Inc. B- B2 10.375 10/01/07 319,500
400 Mobilemedia Communications Inc. <F2> B- B3 0/10.500 12/01/03 312,000
100 Mobilemedia Communications Inc. B- B3 9.375 11/01/07 103,500
300 Panamsat L.P. <F2> B B3 0/11.375 08/01/03 244,500
300 Pricellular Wireless Corp. <F2> CCC+ Caa 0/14.000 11/15/01 264,000
100 Pricellular Wireless Corp. <F2> CCC+ B3 0/12.250 10/01/03 77,250
--------------
2,862,250
--------------
Textiles 1.1%
420 Dan River Inc. B B3 10.125 12/15/03 388,500
--------------
Transportation 1.4%
500 U.S. Air B+ B1 8.625 09/01/98 492,500
--------------
Utilities 1.4%
200 California Energy Inc. BB- Ba3 9.875 06/30/03 209,500
300 Midland Funding Corp. II B- B2 11.750 07/23/05 314,250
--------------
523,750
--------------
Total Corporate Bonds 28,172,740
--------------
</TABLE>
4 See Notes to Financial Statements
<TABLE>
Portfolio of Investments (Continued)
December 31, 1995
- --------------------------------------------------------------------------------------------------------------------------------
Par
Amount
in Local
Currency S & P Moody's U.S.$
(000) Description Rating Rating Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foreign Bonds and Debt Securities 6.3%
Argentina 0.7%
450 Federal Republic of Argentina (Var. Rate Cpn.) (US$) BB- B2 5.000 % 03/31/23 $ 257,625
--------------
Brazil 0.6%
400 Federal Republic of Brazil (Var. Rate Cpn.) (US$) NR NR 4.250 04/15/24 212,500
--------------
Canada 1.8%
200 Doman Industries Ltd. (US$) BB- Ba3 8.750 03/15/04 193,000
450 Rogers Communications Inc. (US$) BB- B2 10.875 04/15/04 470,250
--------------
663,250
--------------
Colombia 1.0%
350 Oleoducto Central South America (US$) NR NR 9.350 09/01/05 355,250
--------------
United Kingdom 0.8%
200 International Cabletel Inc. (US$) <F2> B B3 0/12.750 04/15/05 127,500
300 Telewest Plc (US$) <F2> BB B1 0/11.000 10/01/07 180,750
--------------
308,250
--------------
Poland 0.6%
300 Government of Poland (Var. Rate Cpn.) (US$) NR NR 6.875 10/27/24 226,125
--------------
Indonesia 0.8%
180 Indah Kiat International Finance Co. B.V. (US$) BB Ba3 11.875 06/15/02 182,250
100 Tjiwi Kimia International Finance (US$) BB Ba3 13.250 08/01/01 109,000
--------------
291,250
--------------
Total Foreign Bonds and Debt Securities 2,314,250
--------------
U.S. Government Obligations 1.4%
500 U.S. T-Note NR Aaa 9.375 04/15/96 505,760
--------------
Total Debt Securities 30,992,750
--------------
Equities 2.1%
American Telecasting Inc. (930 common stock warrants) 2,790
Cablevision Systems Corp. (4,118 preferred shares) 425,132
Casino America Inc. (653 common stock warrants) 652
Panamsat L.P. (212 preferred shares) 238,500
Supermarkets General Holdings Corp. (3,177 preferred shares) 91,736
--------------
Total Equities 758,810
--------------
</TABLE>
5 See Notes to Financial Statements
<TABLE>
Portfolio of Investments (Continued)
December 31, 1995
- --------------------------------------------------------------------------------------------------------------------------------
Par
Amount
in Local
Currency S & P Moody's U.S.$
(000) Description Rating Rating Coupon Maturity Market Value
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Investments 86.9%
(Cost $31,007,997) <F1> $ 31,751,560
Repurchase Agreement 10.6%
State Street Bank & Trust, U.S. T-Note, $3,340,000 par, 7.500% coupon due
11/15/16, dated 12/29/95, to be sold on 01/02/96 at $3,860,465 3,858,000
Other Assets in Excess of Liabilities 2.5% 905,860
--------------
Net Assets 100% 36,515,420
==============
*Zero coupon bond
<FN>
<F1>At December 31, 1995, cost for federal income tax purposes is $31,007,997;
the aggregate gross unrealized appreciation is $1,030,946 and the
aggregate gross unrealized depreciation is $287,383, resulting in net
unrealized appreciation of $743,563.
<F2>Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.
<F3>Securities purchased on a when issued or delayed delivery basis.
<F4>Assets segregated as collateral for when issued or delayed delivery
purchase commitments.
</TABLE>
6 See Notes to Financial Statements
<TABLE>
VAN KAMPEN MERRITT SERIES TRUST HIGH YIELD PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
- ------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at Market Value (Cost $31,007,997) (Note 1) $ 31,751,560
Repurchase Agreement (Note 1) 3,858,000
Cash 377
Receivables:
Interest 668,318
Investments Sold 464,718
Other 823
-------------
Total Assets 36,743,796
-------------
LIABILITIES:
Payables:
Investments Purchased 173,428
Fund Shares Repurchased 32,144
Investment Advisory Fee (Note 2) 22,804
-------------
Total Liabilities 228,376
-------------
NET ASSETS $ 36,515,420
=============
NET ASSETS CONSIST OF:
Paid In Surplus (Note 3) $ 37,281,871
Net Unrealized Appreciation on Investments 743,563
Accumulated Undistributed Net Investment Income 7,484
Accumulated Net Realized Loss on Investments (1,517,498)
-------------
NET ASSETS $ 36,515,420
=============
NET ASSET VALUE PER SHARE
($36,515,420 divided by 3,495,538 shares outstanding; an
unlimited number of shares without par value are authorized) $10.45
=============
</TABLE>
7 See Notes to Financial Statements
<TABLE>
VAN KAMPEN MERRITT SERIES TRUST HIGH YIELD PORTFOLIO
STATEMENT OF OF OPERATIONS
For the Year Ended December 31, 1995
- ------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest $ 2,934,803
Dividends 11,665
Other 48,825
-------------
Total Income 2,995,293
-------------
EXPENSES:
Investment Advisory Fee (Note 2) 219,052
Custody 46,759
Trustees Fees and Expenses (Note 2) 21,062
Audit 18,879
Legal (Note 2) 7,381
Other 1,892
-------------
Total Expenses 315,025
Less Expenses Reimbursed by Cova Life 66,766
-------------
Net Expenses 248,259
-------------
NET INVESTMENT INCOME $ 2,747,034
=============
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS:
Realized Gain/Loss on Investments:
Proceeds from Sales $ 29,060,092
Cost of Securities Sold (28,922,790)
-------------
Net Realized Gain on Investments (Including realized loss on
expired option transactions of $3,162) 137,302
-------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period (779,999)
End of the Period 743,563
-------------
Net Unrealized Appreciation on Investments During the Period 1,523,562
-------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS $ 1,660,864
-------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 4,407,898
=============
</TABLE>
8 See Notes to Financial Statements
<TABLE>
VAN KAMPEN MERRITT SERIES TRUST HIGH YIELD PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1995 and 1994
- ----------------------------------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1995 December 31, 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income $ 2,747,034 $ 1,901,381
Net Realized Gain/Loss on Investments 137,302 (1,654,800)
Net Unrealized Appreciation/Depreciation on
Investments During the Period 1,523,562 (1,233,657)
--------------- ---------------
Change in Net Assets from Operations 4,407,898 (987,076)
Distributions from Net Investment Income (2,739,550) (1,901,381)
--------------- ---------------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES 1,668,348 (2,888,457)
--------------- ---------------
FROM CAPITAL TRANSACTIONS (Note 3):
Proceeds from Shares Sold 14,408,614 10,939,186
Net Asset Value of Shares Issued Through
Dividend Reinvestment 2,739,550 1,901,381
Cost of Shares Repurchased (1,956,676) (9,145,332)
--------------- ---------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS 15,191,488 3,695,235
--------------- ---------------
TOTAL INCREASE IN NET ASSETS 16,859,836 806,778
NET ASSETS:
Beginning of the Period 19,655,584 18,848,806
--------------- ---------------
End of the Period (Including undistributed net
investment income of $7,484 and $0, respectively) $ 36,515,420 $ 19,655,584
=============== ===============
</TABLE>
9 See Notes to Financial Statements
<TABLE>
VAN KAMPEN MERRITT SERIES TRUST HIGH YIELD PORTFOLIO
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------------------------------------------------------
December 11,1989
(Commencement of
Investment
Year Ended December 31, Operations) to
1995 1994 1993 1992 1991 1990 December 31,1989
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $9.823 $11.287 $10.445 $10.410 $9.073 $9.974 $10.000
------- ------- ------- ------- ------- ------- -------
Net Investment Income .949 .978 1.028 1.250 1.124 1.085 .053
Net Realized and Unrealized Gain/Loss
on Investments .621 (1.464) 1.170 .658 1.337 (.901) (.026)
------- ------- ------- ------- ------- ------- -------
Total from Investment Operations 1.570 (.486) 2.198 1.908 2.461 .184 .027
------- ------- ------- ------- ------- ------- -------
Less:
Distributions from Net Investment Income .947 .978 1.028 1.250 1.124 1.085 .053
Distributions from Net Realized Gain
on Investments .000 .000 .328 .623 .000 .000 .000
------- ------- ------- ------- ------- ------- -------
Total Distributions .947 .978 1.356 1.873 1.124 1.085 .053
------- ------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $10.446 $9.823 $11.287 $10.445 $10.410 $9.073 $9.974
======= ======= ======= ======= ======= ======= =======
Total Return * 16.69% (4.52%) 21.98% 19.12% 28.31% 1.86% .23% **
Net Assets at End of Period (In millions) $36.5 $19.7 $18.8 $5.4 $3.8 $2.9 $2.5
Ratio of Expenses to Average Net Assets*
(Annualized) .86% .86% .84% .87% .86% 1.01% .95%
Ratio of Net Investment Income to Average
Net Assets* (Annualized) 9.50% 9.48% 8.97% 11.67% 11.31% 11.43% 9.67%
Portfolio Turnover 118.90% 200.06% 213.09% 157.42% 147.57% 28.32% .00%
* If certain expenses had not been assumed
by Cova Life, total return would have
been lower and the ratios would have been
as follows:
Ratio of Expenses to Average Net Assets
(Annualized)
1.09% 1.16% 1.38% 1.79% 1.91% 2.42% 9.42%
Ratio of Net Investment Income to Average
Net Assets (Annualized) 9.27% 9.18% 8.43% 10.75% 10.25% 10.01% 1.19%
</TABLE>
** Non-annualized
10 See Notes to Financial Statements
Van Kampen Merritt Series Trust High Yield Portfolio
Notes to Financial Statements December 31, 1995
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Van Kampen Merritt Series Trust (the "Trust"), under which the High Yield
Portfolio (the "Fund") is organized as a separate sub-trust, is registered as
a diversified open-end management investment company under the Investment
Company Act of 1940, as amended. The Fund's investment objective is to seek
high current income by investing in a portfolio of medium and lower grade
domestic corporate debt securities. The Portfolio may invest up to 35% of its
assets in foreign government and corporate debt securities of similar quality.
The Trust and Fund commenced investment operations on December 11, 1989.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
A. Security Valuation - Investments are stated at value using market
quotations, or 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. Short-term securities with remaining maturities of less than 60
days are valued at amortized cost.
B. Security Transactions - Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund 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 Fund will maintain in a segregated account with its custodian 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 Expense - Interest income and expenses are recorded
on an accrual basis. Dividend income is recorded on the ex-dividend date.
Bond discount is amortized over the expected life of each applicable
security.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liablilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
D. Federal Income Taxes - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is
required.
The Fund intends to utilize provisions of the Federal income tax laws
which allow it to carry a realized capital loss forward for eight years
following the year of the loss and offset such losses against any future
realized capital gains. At December 31, 1995, the Fund had an accumulated
capital loss carryforward for tax purposes of $1,517,498 which will expire on
December 31, 2002.
E. Distribution of Income and Gains - The Fund declares and pays dividends
monthly from net investment income. Net realized gains, if any, are
distributed annually. All distributions are automatically reinvested in Fund
shares. Distributions from net realized gains for book purposes may include
short-term capital gains, which are included as ordinary income for tax
purposes.
2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
American Capital Investment Advisory Corp. (the "Adviser") will provide
investment advice and facilities to the Fund for an annual fee payable monthly
as follows:
<TABLE>
Average Net Assets % Per Annum
<S> <C>
- --------------------------------------- -----------
First $500 million .75 of 1%
Over $500 million .65 of 1%
</TABLE>
Cova Variable Annuity Accounts One and Five are separate investment
accounts offered by Cova Financial Services Life Insurance Co. and Cova
Financial Life Insurance Co.(collectively "Cova Life"), respectively. At
December 31, 1995, Cova Variable Annuity Accounts One and Five owned all
shares of beneficial interest of the Fund.
Certain officers and trustees of the Fund are also officers and directors
of Van Kampen American Capital Distributors, Inc. or its affiliates
(collectively "VKAC"). The Fund does not compensate its officers or trustees
who are officers of VKAC.
The Fund has implemented a retirement plan which covers those trustees
who are not officers of VKAC. The Fund had no liability under the retirement
plan at December 31, 1995.
For the year ended December 31, 1995, the Fund recognized expenses of
approximately $9,200 representing VKAC's cost of providing accounting and
legal services.
3. Capital Transactions
At December 31, 1995, and 1994, paid in surplus aggregated $37,281,871 and
$22,090,383, respectively.
11
Van Kampen Merritt Series Trust High Yield Portfolio
Notes to Financial Statements (Continued) December 31, 1995
- --------------------------------------------------------------------------------
Transactions in shares were as follows:
<TABLE>
Year Year
Ended Ended
December 31, December 31,
1995 1994
<S> <C> <C>
----------------- ---------------
Beginning Shares 2,000,944 1,669,943
----------------- ---------------
Shares Sold 1,420,820 1,006,022
Shares Issued Through
Dividend Reinvestment 267,010 182,215
Shares Repurchased (193,236) (857,236)
----------------- ---------------
Net Increase in Shares
Outstanding 1,494,594 331,001
----------------- ---------------
Ending Shares 3,495,538 2,000,944
================= ===============
</TABLE>
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended December 31, 1995, were $42,405,268 and
$28,922,790 respectively.
5. Derivative Financial Instruments
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as
to attempt to protect the Fund against possible changes in the market value
of its portfolio, manage the portfolio's effective yield, maturity and
duration or to generate potential gain. All of the Fund's portfolio holdings,
including derivative instruments, are marked to market each day with the
change in value reflected in the unrealized appreciation/depreciation on
investments. Upon disposition, a realized gain or loss is recognized
accordingly, except for exercised option contracts where the recognition of
gain or loss is postponed until the disposal of the security underlying the
option contract.
During the period, the Fund entered into option contracts, a type of
derivative. An 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
Fund to manage the portfolio's effective maturity and duration.
Transactions in options for the year ended December 31, 1995, were as follows:
<TABLE>
Contracts Premium
<S> <C> <C>
----------- ------------
Outstanding at
December 31, 1994 0 $0
Options Written (Net) 115 (3,162)
Options Expired (Net) (115) 3,162
----------- ------------
Outstanding at
December 31, 1995 0 $0
=========== ============
</TABLE>
6. Subsequent Events
On February 9, 1996, shareholders approved a change in the Trust's name to
Cova Series Trust. A new investment advisory agreement was entered into with
Cova Investment Advisory Corp. A sub-advisory agreement between Cova
Investment Advisory Corp. and Van Kampen American Capital Investment Advisory
Corp. was also approved. The investment advisory fee schedule was not
modified by this change. All of the above changes will take effect on May 1,
1996.
Van Kampen Merritt Series Trust Growth and Income Portfolio
For the 12-month period ended 12/31/95
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders of the Growth and Income
Portfolio of the Van Kampen Merritt Series Trust:
We have audited the accompanying statement of assets and liabilities of the
Growth and Income Portfolio (one of the portfolios comprising the Van Kampen
Merritt Series Trust) (the "Fund"), including the portfolio of investments, as
of December 31, 1995, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund'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, 1995, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe 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 the
Growth and Income Portfolio of the Van Kampen Merritt Series Trust as of
December 31, 1995, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and the financial highlights for each of the periods presented, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 30, 1996, except as to
Note 6, which is as of February 9, 1996
<TABLE>
Van Kampen Merrit Series Trust Growth And Income Portfolio
Portfolio of Investments
December 31, 1995
- -------------------------------------------------------------------------------------------------------------------------------
Security Shares Market Value
Description
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common and Preferred Stocks 86.5%
Aerospace & Defense 2.4%
Boeing Co. 2,300 $ 180,263
Loral Corp. 5,000 176,875
McDonnell Douglas Corp. 1,300 119,600
-------------
476,738
-------------
Automobile 1.8%
Chrysler Corp. 2,300 127,363
General Motors Corp. 4,400 232,650
-------------
360,013
-------------
Banking 3.2%
BancOne Corp. 4,000 151,000
Bank of Boston Corp. - Including Stock Rights 250 11,563
Bankers Trust NY Corp. 3,800 252,700
State Street Boston Corp. 4,700 211,500
-------------
626,763
-------------
Beverage, Food & Tobacco 7.6%
Coca Cola Co. 1,800 133,650
CPC International Inc. 800 54,900
Interstate Bakeries Corp. 700 15,663
McDonalds Corp. 3,700 166,962
Nabisco Holdings Corp. 8,900 290,362
Philip Morris Cos. Inc. 3,600 325,800
Quaker Oats Co. - Including Stock Rights 3,300 113,850
Ralston Purina Co. 3,200 199,600
RJR Nabisco Holdings Corp. 2,300 71,013
Wendys International Inc. 5,600 119,000
-------------
1,490,800
-------------
Chemical 3.3%
Air Products & Chemicals Inc. 1,055 55,651
Grace, W. R. & Co. 2,000 118,250
Monsanto Co. 2,000 245,000
Praxair Inc. 4,200 141,225
Sigma Aldrich 1,800 89,100
-------------
649,226
-------------
</TABLE>
See Notes to Financial Statements
Van Kampen Merrit Series Trust Growth And Income Portfolio
<TABLE>
Portfolio of Investments (continued)
December 31, 1995
- -------------------------------------------------------------------------------------------------------------------------------
Security Shares Market Value
Description
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Consumer Non-Durables 3.5%
Corning Delaware LP 1,400 $ 70,525
Eastman Kodak Co. 700 46,900
General Mills Inc. 1,300 75,075
Gillette Co. 1,700 88,613
Nike Inc. 2,360 164,315
Procter & Gamble Co. 2,290 190,070
Sunbeam Oster Inc. 3,500 53,375
-------------
688,873
-------------
Diversified/Conglomerate Manufacturing 2.1%
Allied Signal Inc. 2,800 133,000
General Electric Co. 2,400 172,800
Illinois Tool Works Inc. 1,700 100,300
-------------
406,100
-------------
Diversified/Conglomerate Service 0.5%
Browning Ferris Industries Inc. <F2> 3,000 94,125
-------------
Ecological 0.8%
WMX Technologies Inc. <F3> 5,400 161,325
-------------
Electronics 1.4%
General Signal Corp. - Including Stock Rights 2,100 67,988
Honeywell Inc. - Including Stocks Rights 2,600 126,425
Perkin Elmer Corp. 2,200 83,050
-------------
277,463
-------------
Energy 1.8%
Texaco Inc. 4,600 361,100
-------------
Engineering & Construction 1.3%
Fluor Corp. - Including Stock Rights 2,500 165,000
Foster Wheeler Corp. - Including Stock Rights 2,100 89,250
-------------
254,250
-------------
Entertainment 0.4%
Time Warner Financing Trust - Preferred 2,500 78,125
-------------
</TABLE>
See Notes to Financial Statements
Van Kampen Merrit Series Trust Growth And Income Portfolio
<TABLE>
Portfolio of Investments (continued)
December 31, 1995
- -------------------------------------------------------------------------------------------------------------------------------
Security Shares Market Value
Description
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial Services 5.7%
Ahmanson H.F. & Co. 1,400 $ 37,100
Chubb Corp. 1,700 164,475
DeBartolo Realty Corp. 2,900 37,700
Federal National Mtg Assn. 3,100 384,787
Healthcare Realty Trust Inc. 8,300 190,900
J.P. Morgan & Co. Inc. 3,900 312,975
-------------
1,127,937
-------------
Grocery 0.3%
Vons Cos. Inc. <F2> 2,100 59,325
-------------
Healthcare 3.1%
Baxter International Inc. 2,000 83,750
Charter Medical Corp. <F2> 6,200 148,800
Merck & Co. Inc. 4,280 281,410
Tenet Healthcare Corp. <F2> 4,500 93,375
-------------
607,335
-------------
Home & Office Furnishings 0.4%
Harris Corp. 1,600 87,400
-------------
Insurance 4.0%
American International Group Inc. 2,700 249,750
Horace Mann Educators Corp. 4,500 140,625
Prudential Reinsurance Holdings Inc. 6,700 156,613
Travelers Inc. 3,900 245,212
-------------
792,200
-------------
Leisure 0.8%
Walt Disney Co. 2,600 153,400
-------------
Machinery 0.7%
Stewart & Stevenson Services Inc. 2,400 60,600
York International Corp. 1,800 84,600
-------------
145,200
-------------
</TABLE>
See Notes to Financial Statements
Van Kampen Merrit Series Trust Growth And Income Portfolio
<TABLE>
Portfolio of Investments (continued)
December 31, 1995
- -------------------------------------------------------------------------------------------------------------------------------
Security Shares Market Value
Description
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Medical Supplies 0.9%
United Healthcare Corp. 1,600 $ 104,800
Vencor Inc. <F2> 2,300 74,750
-------------
179,550
-------------
Mining, Steel, Iron & Non-Precious Metal 0.6%
Aluminum Company America 2,300 121,613
-------------
Oil & Gas 3.7%
Exxon Corp. 3,600 288,450
Mobil Corp. - Including Stock Rights <F3> 3,300 369,600
Panhandle Eastern Corp. 2,700 75,262
-------------
733,312
-------------
Packaging & Container 0.6%
Bemis Inc. - Including Stock Rights 2,775 71,109
Crown Cork & Seal Inc. <F2> 1,000 41,750
-------------
112,859
-------------
Paper 1.6%
James River Corp. 3,300 77,138
James River Corp. - Including Stock Rights 3,800 91,675
Kimberly Clark Corp. 1,660 137,365
-------------
306,178
-------------
Pharmaceuticals 3.8%
Amgen Inc. <F2> 3,300 195,937
Pfizer Inc. 2,800 176,400
Pharmacia & Upjohn Inc. 4,500 174,375
Schering Plough Corp. 3,500 191,625
-------------
738,337
-------------
Printing, Publishing & Broadcasting 1.4%
Capital Cities/ABC Inc. - Including Stock Rights 1,000 123,375
Omnicom Group 2,200 81,950
U.S. West Media Group 1,900 67,925
-------------
273,250
-------------
</TABLE>
See Notes to Financial Statements
Van Kampen Merrit Series Trust Growth And Income Portfolio
<TABLE>
Portfolio of Investments (continued)
December 31, 1995
- -------------------------------------------------------------------------------------------------------------------------------
Security Shares Market Value
Description
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Retail 4.7%
AnnTaylor Stores Corp. <F2> 1,700 $ 17,425
Dayton Hudson Corp. 1,000 75,000
Federated Dept. Stores Inc. <F2> 8,000 220,000
Gap Inc. 1,900 79,800
Home Depot Inc. 1,300 62,237
May Department Stores Co. 4,800 202,800
Nine West Group Inc. <F2> 1,050 39,375
Nordstrom Inc. 1,900 76,950
Sears Roebuck & Co. 4,000 156,000
-------------
929,587
-------------
Technology 5.1%
Adobe Systems Inc. 1,800 111,600
Compaq Computer Corp. <F2> 300 14,400
Computer Associates International Inc. 3,200 182,000
Digital Equipment Corp. - Including Stock Rights <F2> 2,500 160,312
Hewlett Packard Co. 1,100 92,125
International Business Machines 800 73,400
Microsoft Corp. <F2> 1,200 105,300
Motorola Inc. 1,100 62,700
Xerox Corp. 1,500 205,500
-------------
1,007,337
-------------
Telecommunications 4.9%
Ameritech Corp. 3,000 177,000
AT & T Corp. 4,900 317,275
Frontier Corp. 5,225 156,750
MCI Communications Corp. 6,680 174,515
Viacom Inc. <F2> 2,900 137,387
-------------
962,927
-------------
Transportation 0.7%
Union Pacific Corp. 2,200 145,200
-------------
Utilities 5.3%
Central & South West Corp. 3,940 109,827
Cincinnati Bell Inc. 3,000 104,250
DPL Inc. 3,450 85,388
</TABLE>
See Notes to Financial Statements
Van Kampen Merrit Series Trust Growth And Income Portfolio
<TABLE>
Portfolio of Investments (continued)
December 31, 1995
- -------------------------------------------------------------------------------------------------------------------------------
Security Shares Market Value
Description
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Utilities (continued)
Duke Power Co. 900 $ 42,638
Nipsco Inc. 2,500 95,625
Pacific Enterprises - Including Stock Rights 5,600 158,200
Peco Energy Co. 3,650 109,956
SBC Communications Inc. 1,200 69,000
Southern NE Telecomm Corp. 2,000 79,500
U.S. West Communications Inc. <F2> 1,900 36,100
Williams Cos. Inc. - Preferred 2,200 162,525
-------------
1,053,009
-------------
Foreign 8.1%
Adidas - ADR (Germany) 3,000 80,437
Astra AB- ADR (Sweden) 4,000 158,000
British Petroleum PLC - ADR (UK) 1,400 142,975
Canadian National Railway Co. (Canada) 700 10,500
Canadian Pacific Ltd. (Canada) 5,200 94,250
GCR Holdings Ltd. (Bermuda) <F2> 1,500 33,750
National Power PLC - ADR (UK) <F2> 5,400 49,950
Newbridge Networks Corp. (Canada) <F2> 1,200 49,650
News Corporation Limited - ADR (Australia) 200 4,275
Nokia Corporation - ADR (Finland) 1,500 58,313
Powergen PLC - ADR (UK) 5,150 67,594
Royal Dutch Petroleum Co. (Netherlands) 2,700 381,037
Telefonos De Mexico SA - ADR (Mexico) 5,000 159,375
Teva Pharmaceutical Inds Ltd. - ADR (Israel) 2,800 129,850
Total S. A. - ADR (France) 3,300 112,200
Zeneca Group PLC - ADR (UK) 1,100 64,213
-------------
1,596,369
-------------
Total Common and Preferred Stocks 17,057,226
-------------
Fixed-Income Securities 6.8%
ADT Operations Inc. - Liquid Yield Option Note ($350,000 par,
0% coupon, 07/06/10 maturity, S&P rating BB+)
166,250
Equitable Cos Inc. - Convertible into Common Stock ($200,000
par, 6.125% coupon, 12/15/24 maturity, S&P rating A)
226,000
Federated Dept Stores Inc. - Convertible into Common Stock
($75,000 par, 5.00% coupon, 10/01/03 maturity, S&P rating
BB-)
75,844
Grand Metropolitan Public Ltd. - Convertible into Common Stock
($150,000 par, 6.50% coupon, 01/31/00 maturity, S&P rating
AA) 174,000
</TABLE>
See Notes to Financial Statements
Van Kampen Merrit Series Trust Growth And Income Portfolio
<TABLE>
Portfolio of Investments (continued)
December 31, 1995
- -------------------------------------------------------------------------------------------------------------------------------
Security Shares Market Value
Description
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed-Income Securities (continued)
News America Holdings Inc. - Liquid Yield Option Note
($200,000 par, 0% coupon, 03/11/13 maturity, S&P rating BBB)
$ 91,000
Roche Holdings Inc. - Liquid Yield Option Note ($400,000 par,
0% coupon, 04/20/10 maturity, S&P rating NR)
177,500
Sandoz Cao Bvi Ltd. - Convertible into Common Stock ($50,000
par, 2.00% coupon, 10/06/02 maturity, S&P rating NR)
47,437
United States Cellular Corp. - Liquid Yield Option Note
($420,000 par, 0% coupon, 06/15/15 maturity, S&P rating
BBB-)
149,100
United Technologies Corp. - Convertible into Common Stock
($180,000 par, 0% coupon, 09/08/97 maturity, S&P rating A+) 234,675
-------------
Total Fixed-Income Securities 1,341,806
-------------
Total Long-Term Investments 93.3%
(Cost $16,643,935) <F1> 18,399,032
Short-Term Investments 6.2%
Federal Home Ln Mtg Corp. Disc Nts ($1,230,000 par, yielding
5.75%, maturing 01/02/96) 1,229,804
Other Assets in Excess of Liabilities 0.5% 95,471
-------------
Net Assets 100% $ 19,724,307
=============
<FN>
<F1>At December 31, 1995, cost for federal income tax purposes is $16,643,935;
the aggregate gross unrealized appreciation is $1,994,297 and the aggregate
gross unrealized depreciation is $246,050, resulting in net
unrealized appreciation including futures transactions of $1,748,247.
<F2>Non-income producing security as this stock currently does not declare
dividends.
<F3>Assets segregated for open futures transactions.
</TABLE>
See Notes to Financial Statements
<TABLE>
VAN KAMPEN MERRITT SERIES TRUST GROWTH AND INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at Market Value (Cost $16,643,935) (Note 1) $ 18,399,032
Short-Term Investments (Note 1) 1,229,804
Cash 5,129
Receivables:
Investments Sold 570,240
Dividends 47,493
Fund Shares Sold 25,117
Interest 7,653
Margin on Futures (Note 5) 700
Other 3,220
-------------
Total Assets 20,288,388
-------------
LIABILITIES:
Payables:
Investments Purchased 554,395
Investment Advisory Fee (Note 2) 9,686
-------------
Total Liabilities 564,081
-------------
NET ASSETS $ 19,724,307
==============
NET ASSETS CONSIST OF:
Paid In Surplus (Note 3) $ 17,969,650
Net Unrealized Appreciation on Investments 1,748,247
Accumulated Net Realized Gain on Investments 6,410
-------------
NET ASSETS $ 19,724,307
==============
NET ASSET VALUE PER SHARE ($19,724,307 divided by
1,576,436 shares outstanding; an unlimited number of shares
without par value are authorized) (Note 3) $12.51
==============
</TABLE>
See Notes to Financial Statements
<TABLE>
VAN KAMPEN MERRITT SERIES TRUST GROWTH AND INCOME PORTFOLIO
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends (Net of foreign withholding taxes of $5,713) $ 320,603
Interest 62,420
-------------
Total Income 383,023
-------------
EXPENSES:
Investment Advisory Fee (Note 2) 83,035
Custody 41,635
Trustees Fees and Expenses (Note 2) 16,917
Audit 14,096
Legal (Note 2) 7,667
Other 2,993
-------------
Total Expenses 166,343
Less Expenses Reimbursed by Cova Life 69,469
-------------
Net Expenses 96,874
-------------
NET INVESTMENT INCOME $ 286,149
=============
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS:
Realized Gain/Loss on Investments:
Proceeds from Sales $ 25,568,050
Cost of Securities Sold (23,966,281)
--------------
Net Realized Gain on Investments (Including realized gain
on closed and expired option transactions of $113,371
and realized loss on futures transactions of $112,172) 1,601,769
--------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period (224,826)
End of the Period (Including unrealized depreciation
on open futures transactions of $6,850) 1,748,247
--------------
Net Unrealized Appreciation on Investments During the Period 1,973,073
--------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS $ 3,574,842
==============
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 3,860,991
==============
</TABLE>
See Notes to Financial Statements
<TABLE>
VAN KAMPEN MERRITT SERIES TRUST GROWTH AND INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1995 and 1994
- -------------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1995 December 31, 1994
------------------- -----------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income $ 286,149 $ 337,412
Net Realized Gain/Loss on Investments 1,601,769 (318,342)
Net Unrealized Appreciation/Depreciation
on Investments During the Period 1,973,073 (483,559)
--------------- --------------
Change in Net Assets from Operations 3,860,991 (464,489)
Distributions from Net Investment Income (294,561) (329,231)
Distributions from Net Realized Gain on
Investments (1,277,017) (8,412)
---------------- --------------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES 2,289,413 (802,132)
---------------- --------------
FROM CAPITAL TRANSACTIONS (Note 3):
Proceeds from Shares Sold 6,076,696 6,301,797
Net Asset Value of Shares Issued
Through Dividend Reinvestment 1,571,578 337,642
Cost of Shares Repurchased (1,155,316) (1,423,903)
---------------- --------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS 6,492,958 5,215,536
---------------- --------------
TOTAL INCREASE IN NET ASSETS 8,782,371 4,413,404
NET ASSETS:
Beginning of the Period 10,941,936 6,528,532
---------------- -------------
End of the Period (Including undistributed
net investment income of $0 and
$8,412, respectively) $ 19,724,307 $ 10,941,936
=============== ==============
</TABLE>
<TABLE>
Van Kampen Merritt Series Trust Growth and Income Portfolio
Financial Highlights
The following schedule presents financial highlights for one
share of the Fund outstanding throughout the periods indicated.
- ---------------------------------------------------------------------------------------------------------------------------
May 1, 1992
(Commencement of
Year Ended December 31 Investment
------------------------------------------ Operations) to
1995 1994 1993 December 31, 1992
- --------------------------------------------------------- -------------- -------------- ------------ ------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.306 $11.170 $10.282 $10.000
-------------- ------------- ----------- ----------------
Net Investment Income .224 .331 .182 .125
Net Realized and Unrealized Gain/Loss on Investments 3.089 (.864) 1.371 .444
-------------- ------------- ----------- ----------------
Total from Investment Operations 3.313 (.533) 1.553 .569
-------------- ------------- ----------- ----------------
Less:
Distributions from Net Investment Income .232 .323 .182 .125
Distributions from Net Realized Gain on Investments .875 .008 .483 .162
-------------- ------------- ----------- ---------------
Total Distributions 1.107 .331 .665 .287
-------------- ------------- ----------- ---------------
Net Asset Value, End of Period $12.512 $10.306 $11.170 $10.282
============== ============= =========== ===============
Total Return* 32.24% (4.54%) 15.01% 5.67%**
Net Assets at End of Period (In millions) $19.7 $10.9 $6.5 $2.6
Ratio of Expenses to Average Net Assets*
(Annualized) .69% .70% .69% .70%
Ratio of Net Investment Income to Average Net Assets*
(Annualized) 2.05% 3.47% 1.84% 2.27%
Portfolio Turnover 180.11% 326.01% 135.92% 99.93%
*If certain expenses had not been assumed by Cova Life,
total return would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net Assets (Annualized) 1.19% 1.49% 2.05% 3.69%
Ratio of Net Investment Income to Average Net Assets
(Annualized) 1.55% 2.68% .47% (.73%)
**Non-Annualized
</TABLE>
See Notes to Financial Statements
Van Kampen Merritt Series Trust Growth and Income Portfolio
Notes to Financial Statements
December 31, 1995
1. Significant Accounting Policies
Van Kampen Merritt Series Trust (the "Trust"), under which the Growth and
Income Portfolio (the "Fund") is organized as a separate sub-trust, is
registered as a diversified open-end management investment company under the
Investment Company Act of 1940, as amended. The investment objective of the
Growth and Income Portfolio is to seek long-term growth of both capital and
income by investing in a portfolio of common stocks which are considered by
the Investment Advisor to have potential for capital appreciation and dividend
growth. The Trust commenced operations on December 11, 1989. The Fund
commenced investment operations on May 1, 1992.
The following is a summary of significant accounting policies consistently
followed by the Fund 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. 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 by the Board of Trustees. Fixed income investments are
stated at values using market quotations or, 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. Short-term securities
with remaining maturities of less than 60 days are valued at amortized
cost.
B. Security Transactions - Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
C. Investment Income and Expenses - Dividend income is recorded on the
ex-dividend date and interest income, and expenses are recorded on an accrual
basis.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
D. Federal Income Taxes - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is
required.
Net realized gains or losses may differ for financial and tax reporting
purposes primarily as a result of timing differences related to open option
and futures transactions at year end.
E. Distribution of Income and Gains - The Fund declares and pays dividends
semi-annually from net investment income. Net realized gains, if any, are
distributed annually. Distributions are automatically reinvested in Fund
shares. Distributions from net realized gains for book purposes may include
short-term capital gains and gains on option and futures transactions. Any
short-term capital gains and a portion of option and futures gains would be
included in ordinary income for tax purposes.
2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
American Capital Investment Advisory Corp. (the "Adviser") will provide
investment advice and facilities to the Fund for an annual fee payable
monthly as follows:
<TABLE>
Average Net Assets % Per Annum
- ------------------------------------ -----------
<S> <C>
First $500 million .60 of 1%
Over $500 million .50 of 1%
</TABLE>
Cova Variable Annuity Accounts One and Five are separate investment
accounts offered by Cova Financial Services Life Insurance Co. and Cova
Financial Life Insurance Co. (collectively "Cova Life"), respectively. At
December 31, 1995, Cova Variable Annuity Accounts One and Five owned all
shares of beneficial interest of the Fund.
Certain officers and trustees of the Fund are also officers and directors
of Van Kampen American Capital Distributors, Inc. or its affiliates
(collectively "VKAC"). The Fund does not compensate its officers or trustees
who are officers of VKAC.
The Fund has implemented a retirement plan which covers those trustees who
are not officers of VKAC. Due to the current size of the Fund, the trustees
have waived their annual fee and therefore, the Fund has no liability under
the retirement plan.
For the year ended December 31, 1995, the Fund recognized expenses of
approximately $9,100 representing VKAC's cost of providing accounting and
legal services.
3. Capital Transactions
At December 31, 1995 and 1994, paid in surplus aggregated $17,969,650 and
$11,476,692, respectively.
Transactions in shares were as follows:
<TABLE>
Year Ended Year Ended
December 31, 1995 December 31, 1994
------------------ -----------------
<S> <C> <C>
Beginning Shares 1,061,698 584,482
------------------ -----------------
Shares Sold 489,524 576,486
Shares Issued through
Dividend Reinvestment 126,226 32,783
Shares Repurchased (101,012) (132,053)
------------------ -----------------
Net Increase in Shares
Outstanding 514,738 477,216
------------------ -----------------
Ending Shares 1,576,436 1,061,698
================== =================
</TABLE>
Van Kampen Merritt Series Trust Growth and Income Portfolio
Notes to Financial Statements
December 31, 1995 (Continued)
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended December 31, 1995, were $29,610,171 and
$23,966,281, respectively.
5. Derivative Financial Instruments
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as
to attempt to protect the Fund against possible changes in the market value of
its portfolio or generate potential gain. All of the Fund's portfolio
holdings, including derivative instruments, are marked to market each day with
the change in value reflected in the unrealized appreciation/depreciation on
investments. Upon disposition, a realized gain or loss is recognized
accordingly, except for exercised option contracts where the recognition of
gain or loss is postponed until the disposal of the security underlying the
option contract.
Summarized below are the specific types of derivative financial instruments
used by the Fund.
A. Option Contracts - An 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 Fund 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.
Transactions in options for the year ended
December 31, 1995, were as follows:
<TABLE>
Contracts Premium
------------- ----------
<S> <C> <C>
Outstanding at
December 31, 1994 4,000 $ 491,415
Options Written and
Purchased (Net) 1,940 (265,085)
Options Terminated in Closing
Transactions (Net) (1,886) 248,723
Options Expired (Net) (2,000) (89,235)
Options Exercised (Net) (2,054) (385,818)
------------- ----------
Outstanding at
December 31, 1995 0 $ 0
============ ============
</TABLE>
B. 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. The Fund generally invests in financial and stock index futures.
These contracts are generally used 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.
The fluctuation in market value of the contracts is settled daily through
a cash margin account.
Transactions in futures contracts for the year ended December 31, 1995,
were as follows:
<TABLE>
Contracts
------------
<S> <C>
Outstanding at
December 31, 1994 0
Futures Opened 2,063
Futures Closed (2,061)
------------
Outstanding at
December 31, 1995 2
============
</TABLE>
The futures contracts outstanding as of December 31, 1995 and the
description and unrealized depreciation is as follows:
<TABLE>
Unrealized
Contracts Depreciation
- ----------------------------------------------------------------
<S> <C> <C>
S&P 500 Index Futures
Mar 1996 - Buys to Open 2 $ 6,850
============= ===========
</TABLE>
6. Subsequent Events
On February 9, 1996, shareholders approved a change in the Trust's name to
Cova Series Trust. A new investment advisory agreement was entered into with
Cova Investment Advisory Corp. A sub-advisory agreement between Cova
Investment Advisory Corp. and Van Kampen American Capital Investment Advisory
Corp. was also approved. The investment advisory fee schedule was not
modified by this change. All of the above changes will take effect on May 1,
1996.
Van Kampen Merritt Series Trust Money Market Portfolio
For the 12-month period ended 12/31/95
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders of the Money Market
Portfolio of the Van Kampen Merritt Series Trust:
We have audited the accompanying statement of assets and liabilities of the
Money Market Portfolio (one of the portfolios comprising the Van Kampen
Merritt Series Trust) (the "Fund"), including the portfolio of investments,
as of December 31, 1995, and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years
in the period then ended, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund'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, 1995, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe 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 the
Money Market Portfolio of the Van Kampen Merritt Series Trust as of
December 31, 1995, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and the financial highlights for each of the periods presented, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 30, 1996, except as to
Note 4, which is as of February 9, 1996
Van Kampen Merritt Series Trust Money Market Portfolio
Portfolio of Investments
December 31, 1995
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
Discount
Par Yield on
Amount Maturity Date of Amortized
(000) Security Description Date Purchase Cost
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Agency 29.0%
$ 220 Student Loan Marketing Assn. 01/03/96 5.400% $ 220,604
325 Federal Home Loan Bank 01/17/96 5.930 324,143
1,500 Federal Farm Credit Bank 02/01/96 5.660 1,500,000
2,000 Federal Home Loan Mtg Corp. Disc Note 02/01/96 5.420 1,990,666
2,000 Federal National Mtg Assn. Disc Note 03/01/96 5.360 1,982,133
1,000 Federal National Mtg Assn. Disc Note 03/22/96 5.390 987,873
2,000 Federal Home Loan Bank 03/27/96 5.330 1,974,534
1,000 Federal Home Loan Bank 08/16/96 6.000 1,000,000
---------------
Total Agency 9,979,953
---------------
Bankers Acceptances 4.8%
452 Northern Trust Bank 01/19/96 5.690 450,824
1,200 Union Bank of Los Angeles 02/09/96 5.650 1,192,655
---------------
Total Bankers Acceptances 1,643,479
---------------
Commercial Paper 34.9%
1,500 Heller Financial Inc. 01/05/96 5.800 1,499,033
1,000 General Electric Capital Corp. 01/11/96 5.760 1,000,000
1,500 IBM Credit Corp. 01/17/96 5.790 1,500,000
1,500 Merrill Lynch & Co. Inc. 01/29/96 5.760 1,493,280
1,500 AT & T Capital Corp. 01/30/96 5.670 1,493,149
1,000 Ford Motor Credit Co. 02/12/96 5.620 1,000,000
1,500 John Deere Capital Corp. 02/20/96 5.510 1,500,000
1,000 American General Finance Corp. 02/26/96 5.420 991,569
1,500 American Express Credit Corp. 03/13/96 5.530 1,500,000
---------------
Total Commercial Paper 11,977,031
---------------
Variable Rate Demand Obligations 11.2%
1,150 Catholic Healthcare West (Gtd: Toronto Dominion Bank) 01/03/96 6.050 1,150,000
300 Health Insurance Plan Greater New York (L.O.C. Morgan
Gty) 01/03/96 5.950 300,000
800 Mississippi Business Finance Corp. 01/03/96 5.900 800,000
1,600 Virginia State Housing Development Authority 01/03/96 5.950 1,600,000
---------------
Total Variable Rate Demand Obligations 3,850,000
---------------
</TABLE>
See Notes to Financial Statements
Van Kampen Merritt Series Trust Money Market Portfolio
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
Amortized
Security Description Cost
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreement 19.9%
State Street Bank and Trust, U.S. T-Bill, $7,340,000
par, 0% coupon, due 12/12/96, dated 12/29/95, to be
sold on 01/02/96 at $6,855,377
$ 6,851,000
---------------
Total Investments - 99.8% <F1> 34,301,463
Other Assets in Excess of Liabilities - 0.2% 81,033
---------------
Net Assets - 100.0% $ 34,382,496
---------------
---------------
<FN>
<F1>At December 31, 1995, cost is identical for both book and federal income tax purposes.
</TABLE>
See Notes to Financial Statements
<TABLE>
VAN KAMPEN MERRITT SERIES TRUST MONEY MARKET PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
- ------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments at Amortized Cost Which Approximates
Market (Note 1) $ 34,301,463
Cash 487
Receivables:
Interest 103,126
Fund Shares Sold 25,017
-------------
Total Assets 34,430,093
-------------
LIABILITIES:
Accrued Expenses 36,412
Payable for Fund Shares Repurchased 11,185
-------------
Total Liabilities 47,597
-------------
NET ASSETS $ 34,382,496
-------------
-------------
NET ASSETS CONSIST OF:
Paid In Surplus $ 34,458,054
Accumulated Net Realized Loss on Investments (75,558)
-------------
NET ASSETS
(Equivalent to $1.00 per share on 34,458,054 shares
outstanding; an unlimited number of shares without
par value are authorized) (Note 3) $ 34,382,496
-------------
-------------
</TABLE>
See Notes to Financial Statements
<TABLE>
VAN KAMPEN MERRITT SERIES TRUST MONEY MARKET PORTFOLIO
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
- ------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest $ 3,110,220
-------------
EXPENSES:
Investment Advisory Fee (Note 2) 259,159
Custody 27,283
Trustees Fees and Expenses (Note 2) 26,354
Legal (Note 2) 9,976
Other 23,087
-------------
Total Expenses 345,859
Less Fees Waived by the Adviser and Expenses
Reimbursed by Cova Life ($259,159 and $28,672,
respectively) 287,831
-------------
Net Expenses 58,028
-------------
NET INVESTMENT INCOME $ 3,052,192
-------------
-------------
Realized Gain/Loss on Investments:
Proceeds from Sales $ 31,558,663
Cost of Securities Sold (31,524,318)
-------------
NET REALIZED GAIN ON INVESTMENTS 34,345
-------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 3,086,537
-------------
-------------
</TABLE>
See Notes to Financial Statements
<TABLE>
VAN KAMPEN MERRITT SERIES TRUST MONEY MARKET PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1995 and 1994
- ----------------------------------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1995 December 31, 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income $ 3,052,192 $ 2,528,826
Net Realized Gain/Loss on Investments 34,345 (77,617)
-------------- --------------
Change in Net Assets from Operations 3,086,537 2,451,209
Distributions from Net Investment Income (3,052,192) (2,528,826)
-------------- --------------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES 34,345 (77,617)
-------------- --------------
FROM CAPITAL TRANSACTIONS (Note 3):
Proceeds from Shares Sold 27,981,115 127,080,727
Net Asset Value of Shares Issued
through Dividend Reinvestment 3,052,192 2,528,826
Cost of Shares Repurchased (72,571,677) (60,198,925)
-------------- --------------
NET CHANGE IN NET ASSETS FROM
CAPITAL TRANSACTIONS (41,538,370) 69,410,628
-------------- --------------
TOTAL INCREASE/DECREASE IN NET ASSETS (41,504,025) 69,333,011
NET ASSETS:
Beginning of the Period 75,886,521 6,553,510
-------------- --------------
End of the Period $ 34,382,496 $ 75,886,521
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Financial Statements
<TABLE>
Van Kampen Merritt Series Trust Money Market Portfolio
Financial Highlights
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
- -------------------------------------------------------------------------------------------------------------------
July 1, 1991
(Commencement of
Years Ended December 31 Investment
------------------------------------ Operations) to
1995 1994 1993 1992 December 31, 1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -------
Net Investment Income .059 .041 .032 .038 .027
Less Distributions from Net Investment Income .059 .041 .032 .038 .027
----- ----- ----- ----- -------
Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -------
----- ----- ----- ----- -------
Total Return* 6.01% 4.23% 3.24% 3.88% 2.75%**
Net Assets at End of Period (In millions) $34.4 $75.9 $6.6 $4.0 $5.4
Ratio of Expenses to Average Net
Assets *(Annualized) .11% .10% .10% .10% .09%
Ratio of Net Investment Income to Average
Net Assets* (Annualized) 5.68% 4.37% 3.23% 3.63% 5.11%
*If certain expenses had not been assumed by
the Adviser and Cova Life, total return would
have been lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net Assets (Annualized) .64% .68% .86% 1.30% 1.11%
Ratio of Net Investment Income to Average Net Assets
(Annualized) 5.25% 3.79% 2.47% 2.43% 4.10%
** Non-annualized
</TABLE>
VAN KAMPEN MERRITT
SERIES TRUST MONEY MARKET PORTFOLIO
Notes to Financial Statements
December 31, 1995
1. Significant Accounting Policies
Van Kampen Merritt Series Trust (the "Trust"), under which the Money Market
Portfolio (the "Fund") is organized as a separate sub-trust, is registered as
a diversified open-end management investment company under the Investment
Company Act of 1940, as amended. The investment objective of the Portfolio is
to provide high current income consistent with the preservation of capital and
liquidity through investment in a broad range of money market instruments.
The Trust commenced investment operations on December 11, 1989 and the Fund
commenced investment operations on July 1, 1991.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
A. Security Valuation - Investments are valued at amortized cost, which
approximates market. Under this valuation method, a portfolio instrument is
valued at cost and any discount or premium is amortized on a straight line
basis to the maturity of the instrument.
B. Security Transactions - Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
Interest income and expenses are recorded on an accrual basis.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
C. Distribution of Income and Gains - The Fund declares dividends from net
investment income daily and automatically reinvests such dividends daily. Net
realized gains, if any, are distributed annually.
D. Federal Income Taxes - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is
required.
The Fund intends to utilize the provisions of the federal income tax laws
which allow it to carry a realized capital loss forward for eight years
following the year of the loss and offset such losses against any future
realized capital gains. At December 31, 1995 the Fund had an accumulated
capital loss carryforward of $75,558 which will expire on December 31,
2002.
2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
American Capital Investment Advisory Corp. (the "Adviser") will provide
investment advice and facilities to the Fund for an annual fee payable monthly
as follows:
<TABLE>
Average Net Assets % Per Annum
<S> <C>
- ------------------ ------------
First $500 million .500 of 1%
Over $500 million .400 of 1%
</TABLE>
Cova Variable Annuity Accounts One and Five are separate investment
accounts offered by Cova Financial Services Life Insurance Co. and Cova
Financial Life Insurance Co. (collectively "Cova Life"), respectively. At
December 31, 1995, Cova Variable Annuity Accounts One and Five owned all
shares of beneficial interest of the Fund.
Certain officers and trustees of the Fund are also officers and directors
of Van Kampen American Capital Distributors, Inc. or its affiliates
(collectively "VKAC"). The Fund does not compensate its officers or trustees
who are officers of VKAC. The Fund has implemented a retirement plan which
covers those trustees who are not officers of VKAC. The Fund's liability
under the retirement plan at December 31, 1995, was approximately $6,200.
For the year ended December 31, 1995, the Fund recognized expenses of
approximately $12,200, representing VKAC's cost of providing accounting and
legal services.
3. Capital Transactions
At December 31, 1995 and 1994, paid in surplus aggregated $34,458,054 and
$75,996,424, respectively.
Transactions in shares were as follows:
<TABLE>
Year Year
Ended Ended
December 31, December 31,
1995 1994
<S> <C> <C>
----------------- ----------------
Beginning Shares 75,996,424 6,585,796
----------------- ----------------
Shares Sold 27,981,115 127,080,727
Shares Issued Through
Dividend Reinvestment 3,052,192 2,528,826
Shares Repurchased (72,571,677) (60,198,925)
----------------- ----------------
Net Increase/Decrease
in Shares Outstanding (41,538,370) 69,410,628
----------------- ----------------
Ending Shares 34,458,054 75,996,424
----------------- ----------------
----------------- ----------------
</TABLE>
4. Subsequent Events
On February 9, 1996, shareholders approved a change in the Trust's name to
Cova Series Trust. A new investment advisory agreement was entered into with
Cova Investment Advisory Corp. A sub-advisory agreement between Cova
Investment Advisory Corp. and Van Kampen American Capital Investment Advisory
Corp. was also approved. The investment advisory fee schedule was not
modified by this change. All of the above changes will take effect on May 1,
1996.
Van Kampen Merritt Series Trust Stock Index Portfolio
For the 12-month period ended 12/31/95
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders of the Stock Index
Portfolio of the Van Kampen Merritt Series Trust:
We have audited the accompanying statement of assets and liabilities of the
Stock Index Portfolio (one of the portfolios comprising the Van Kampen
Merritt Series Trust) (the "Fund"), including the portfolio of investments,
as of December 31, 1995, and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years
in the period then ended, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund'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, 1995, by correspondence
with the custodian. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe 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 the Stock Index Portfolio of the Van Kampen Merritt Series Trust as of
December 31, 1995, the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period then
ended, and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 30, 1996, except as to
Note 6, which is as of February 9, 1996
Van Kampen Merritt Series Trust Stock Index Portfolio
Portfolio of Investments
December 31, 1995
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
Security
Description Shares Market Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common and Preferred Stocks
Basic Industries 7.2%
Air Products & Chemicals Inc. 2,400 $126,600
Alcan Aluminum Ltd. 6,100 189,862
Allied Signal Inc. 5,600 266,000
Aluminum Company America 4,200 222,075
Avery Dennison Corp. 1,400 70,175
Barrick Gold Corp. 6,400 168,800
Crown Cork & Seal Inc. <F2> 1,800 75,150
Cyprus Amax Minerals Co. 2,100 54,863
Dow Chemical Co. 5,300 372,987
Du Pont (E. I.) De Nemours Co. 10,300 719,712
Eastman Chemical Co. 1,700 106,463
Eaton Corp. 1,500 80,438
FMC Corp. <F2> 1,100 74,388
Genuine Parts Co. 3,300 135,300
Georgia Pacific Corp. 2,200 150,975
Grace, W. R. & Co. 1,800 106,425
Grainger Inc. 1,000 66,250
Hercules Inc. 2,000 112,750
Homestake Mining Co. 3,600 56,250
Illinois Tool Works Inc. 2,600 153,400
Inco Ltd. 2,400 79,800
Ingersoll Rand Co. 2,200 77,275
International Paper Co. 6,800 257,550
Kimberly Clark Corp. 5,106 422,521
Louisiana Pacific Corp. 2,300 55,775
Monsanto Co. 2,200 269,500
Morton International Inc. 3,300 118,387
Nalco Chemical Co. 1,500 45,188
Newmont Mining Corp. 2,200 99,550
Nucor Corp. 1,600 91,400
Pall Corp. 2,200 59,125
Phelps Dodge Corp. 1,900 118,275
Pioneer Hi Bred International Inc. 1,700 94,563
Placer Dome Inc. 4,600 110,975
</TABLE>
See Notes to Financial Statements
<TABLE>
Portfolio of Investments (Continued)
December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------
Security
Description Shares Market Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Basic Industries (Continued)
PPG Inds. Inc. 4,200 $192,150
Reynolds Metals Co. 1,900 107,587
Temple Inland Inc. 1,300 57,363
Union Camp Corp. 1,800 85,725
Union Carbide Corp. 2,900 108,750
USX US Steel 1,600 49,200
Wachovia Corp. 3,300 150,975
Westvaco Corp. 2,200 61,050
Weyerhaeuser Co. 4,500 194,625
-----------
6,216,172
-----------
Capital Goods 6.4%
Boeing Co. 6,200 485,925
Browning Ferris Inds. Inc. 4,200 123,900
Brunswick Corp. 1,900 45,600
Caterpillar Inc. 3,900 229,125
Champion International Corp. 2,200 92,400
Cooper Inds. Inc. 2,200 80,850
Dana Corp. 2,100 61,425
Deere & Co. 5,100 179,775
Dover Corp. 2,600 95,875
Emerson Electric Co. 4,500 367,875
Engelhard Corp. 2,700 58,725
General Dynamics Corp. 1,400 82,775
General Electric Co. 30,700 2,210,400
ITT Inds. Inc. 2,100 50,400
Johnson Controls Inc. 1,100 75,625
Lockheed Martin Corp. 3,700 292,300
Parker Hannifin Corp. 1,600 54,800
Pitney Bowes Inc. 3,100 145,700
Praxair Inc. 2,800 94,150
Raytheon Co. 4,400 207,900
Rockwell International Corp. 4,000 211,500
Textron Inc. 1,800 121,500
</TABLE>
See Notes to Financial Statements
<TABLE>
Portfolio of Investments (Continued)
December 31, 1995
- -------------------------------------------------------------------------------------------------------------------------------
Security
Description Shares Market Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Capital Goods (Continued)
Tyco Interest Limited 3,200 $114,000
-----------
5,482,525
-----------
Consumer Durables 2.7%
Black & Decker Corp. 1,700 59,925
Chrysler Corp. 7,100 393,163
Ford Motor Co. 19,600 568,400
General Motors Corp. 13,700 724,387
Goodyear Tire & Rubber Co. 3,200 145,200
Masco Corp. 2,900 90,988
Newell Co. 3,400 87,975
Westinghouse Electric Corp. 7,200 118,800
Whirlpool Corp. 1,600 85,200
-----------
2,274,038
-----------
Consumer Non-Durables 12.8%
American Brands Inc. 3,700 165,113
American Stores Co. 2,900 77,575
Anheuser Busch Cos. Inc. 4,700 314,312
Archer Daniels Midland Co. 9,700 174,600
Avon Products Inc. 1,500 113,063
Campbell Soup Co. 4,800 288,000
Clorox Co. 1,200 85,950
Coca Cola Co. <F3> 23,100 1,715,175
Colgate Palmolive Co. 2,700 189,675
ConAgra Inc. 4,800 198,000
Conrail Inc. 1,600 112,000
CPC International Inc. 2,700 185,288
CUC International Inc. <F2> 3,400 116,025
De Luxe Corp. 1,800 52,200
Eastman Kodak Co. 6,100 408,700
General Mills Inc. 2,800 161,700
Gillette Co. 8,200 427,425
</TABLE>
See Notes to Financial Statements
<TABLE>
Portfolio of Investments (Continued)
December 31, 1995
- --------------------------------------------------------------------------------------------------------------------------------
Security
Description Shares Market Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Consumer Non-Durables (Continued)
Hasbro Inc. 1,900 $58,900
Heinz, H. J. & Co. 5,850 193,781
Hershey Foods Corp. 1,700 110,500
International Flavours 2,000 96,000
Kellogg Co. 3,600 278,100
Mattel Inc. 4,600 141,450
Mead Corp. 1,000 52,250
Melville Corp. 2,400 73,800
Nike Inc. 2,700 187,988
Pepsico Inc. 14,100 787,837
Philip Morris Cos. Inc. 15,300 1,384,650
Premark International Inc. 1,200 60,750
Procter & Gamble Co. 12,400 1,029,200
Quaker Oats Co. 2,700 93,150
Ralston Purina Co. 1,800 112,275
Reebok International Ltd. 1,600 45,200
Rubbermaid Inc. 3,000 76,500
Sara Lee Corp. 8,300 264,562
Seagram Ltd. 7,000 242,375
Sherwin Williams Co. 1,700 69,275
Unilever 3,000 422,250
UST Inc. 3,800 126,825
VF Corp. 1,400 73,850
Winn Dixie Stores Inc. 3,000 110,625
Wrigley Wm Junior Co. 2,100 110,250
-----------
10,987,144
-----------
Consumer Services 9.6%
Albertsons Inc. 4,700 154,512
Automatic Data Processing Inc. 2,900 215,325
Block H & R Inc. 2,100 85,050
Capital Cities/ABC Inc. 2,900 357,787
Circuit City Stores Inc. 1,700 46,963
Comcast Corp. 4,600 83,663
</TABLE>
See Notes to Financial Statements
<TABLE>
Portfolio of Investments (Continued)
December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Security
Description Shares Market Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Consumer Services (Continued)
Computer Sciences Corp. <F2> 1,300 $91,325
Darden Restaurants Inc. 3,300 39,188
Dayton Hudson Corp. 1,500 112,500
Dillard Department Stores Inc. 2,400 68,400
Donnelley R.R. & Sons Co. 3,300 129,937
Dow Jones & Co. Inc. 2,300 91,713
Dun & Bradstreet Corp. 3,400 220,150
Federal Express Corp. <F2> 1,100 81,263
Gannett Inc. 2,900 177,987
Gap Inc. 2,800 117,600
Harcourt General Inc. 1,400 58,625
Harrahs Entertainment Inc. 2,200 53,350
Hilton Hotels Corp. 1,100 67,650
Home Depot Inc. 8,800 421,300
Interpublic Group Cos. Inc. 1,400 60,725
ITT Corp. <F2> 2,100 111,300
Kmart Corp. 8,600 62,350
Knight Ridder Inc. 1,100 68,750
Kroger Co. <F2> 2,500 93,750
Limited Inc. 6,800 118,150
Lowes Cos. Inc. 3,100 103,850
Marriot International Inc. 2,400 91,800
May Department Stores Co. 5,000 211,250
McDonalds Corp. 12,400 559,550
MCI Communications Corp. 12,100 316,112
Moore Corp. Ltd. 2,300 42,838
Nordstrom Inc. 1,800 72,900
Penney, J.C. Inc. 4,400 209,550
Price Costco Inc. <F2> 4,100 62,525
Schweitzer Mauduit International Inc. <F2> 300 6,938
Sears Roebuck & Co. 6,900 269,100
Service Corp. International 2,000 88,000
Tele Communications Inc. 12,200 242,475
Time Warner Inc. 7,200 272,700
Toys R Us Inc. <F2> 5,200 113,100
</TABLE>
See Notes to Financial Statements
<TABLE>
Portfolio of Investments (Continued)
December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Security
Description Shares Market Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Consumer Services (Continued)
Tribune Co. 1,400 $85,575
TRW Inc. 1,500 116,250
Viacom Inc. <F2> 6,400 303,200
Wal-Mart Stores Inc. 43,300 968,837
Walgreen Co. 4,300 128,462
Walt Disney Co. 9,400 554,600
WMX Technologies Inc. 8,800 262,900
-----------
8,271,825
-----------
Energy 9.3%
Amerada Hess Corp. 1,900 100,700
Amoco Corp. 9,200 661,250
Ashland Inc. 1,500 52,688
Atlantic Richfield Co. 2,900 321,175
Baker Hughes Inc. 2,900 70,688
Burlington Resources Inc. 2,500 98,125
Chevron Corp. 12,100 635,250
Coastal Corp. 2,200 81,950
Dresser Inds. Inc. 4,000 97,500
Enron Corp. 4,500 171,562
Exxon Corp. <F3> 22,100 1,770,762
Halliburton Co. 2,000 101,250
Kerr McGee Corp. 1,300 82,550
Mobil Corp. 7,300 817,600
Occidental Petroleum Corp. 6,300 134,662
Phillips Petroleum Co. 5,100 174,037
Royal Dutch Petroleum Co. 10,000 1,411,250
Schlumberger Ltd. 4,500 311,625
Sonat Inc. 2,000 71,250
Sun Inc. 1,900 52,013
Texaco Inc. 5,200 408,200
Unocal Corp. 5,500 160,187
USX Marathon Group 5,200 101,400
Western Atlas Inc. 1,000 50,500
</TABLE>
See Notes to Financial Statements
<TABLE>
Portfolio of Investments (Continued)
December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Security
Description Shares Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Energy (Continued)
Williams Cos. Inc. 1,900 $83,363
-----------
8,021,537
-----------
Financial Services 12.4%
Aetna Life & Casualty Co. 2,200 152,350
Ahmanson H.F. & Co. 2,600 68,900
Allstate Corp. 8,000 329,000
American Express Co. 9,100 376,512
American General Corp. 3,900 136,013
American International Group Inc. 8,400 777,000
BancOne Corp. 7,100 268,025
Bank of New York Inc. 3,500 170,625
Bank of Boston Corp. 2,000 92,500
Bankamerica Corp. 6,700 433,825
Bankers Trust NY Corp. 1,600 106,400
Barnett Banks Inc. 2,000 118,000
Beneficial Corp. 1,400 65,275
Boatmens Bancshares Inc. 2,400 98,100
Chase Manhattan Corp. 3,300 200,062
Chemical Banking Corp. 4,700 276,125
Chubb Corp. 1,700 164,475
Cigna Corp. 1,400 144,550
Citicorp 7,400 497,650
Corestates Financial Corp. 2,600 98,475
Dean Witter Discover & Co. 3,300 155,100
Federal Home Loan Mortgage Corp. 3,500 292,250
Federal National Mortgage Assn. 5,100 633,037
First Chicago NBD Corp. 5,253 207,493
First Fidelity Bancorp 1,500 113,063
First Interstate Bancorp 1,500 204,750
First Union Corp. 2,900 161,312
Fleet Financial Group Inc. 4,862 198,126
General Reinsurance Corp. 1,500 232,500
Golden West Financial Corp. 1,100 60,775
</TABLE>
See Notes to Financial Statements
<TABLE>
Portfolio of Investments (Continued)
December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Security
Description Shares Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial Services (Continued)
Great Western Financial Corp. 2,800 $71,400
Household International Inc. 2,000 118,250
ITT Hartford Group Inc. <F2> 2,100 101,588
Jefferson Pilot Corp. 1,500 69,750
Keycorp 4,300 155,875
Lincoln National Corp. Inc. 2,100 112,875
Loews Corp. 2,600 203,775
Marsh & Mclennan Co. Inc. 1,300 115,375
MBNA Corp. 2,500 92,188
McGraw Hill Inc. 1,200 104,550
Mellon Bank Corp. 2,800 150,500
Merrill Lynch & Co. Inc. 3,300 168,300
Morgan, J.P. & Co. Inc. 3,600 288,900
National City Corp. 3,000 99,375
NationsBank Corp. 5,000 348,125
Norwest Corp. 5,600 184,800
PNC Bank Corp. 4,000 129,000
Providian Corp. 2,100 85,575
Safeco Corp. 2,600 89,700
Salomon Inc. 2,000 71,000
St. Paul Cos. Inc. 1,700 94,563
SunTrust Banks Inc. 2,300 157,550
Torchmark Inc. 1,500 67,875
Transamerica Corp. 1,300 94,738
Travelers Inc. 5,900 370,962
Unum Corp. 1,400 77,000
Wells Fargo & Co. 900 194,400
-----------
10,650,257
-----------
Healthcare 10.1%
Abbott Labs 14,400 601,200
Alco Standard Corp. 2,200 100,375
American Home Products Corp. 5,700 552,900
Amgen Inc. <F2> 4,900 290,937
</TABLE>
See Notes to Financial Statements
<TABLE>
Portfolio of Investments (Continued)
December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Security
Description Shares Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Healthcare (Continued)
Baxter International Inc. 5,200 $217,750
Becton Dickinson & Co. 1,400 105,000
Boston Scientific Corp. <F2> 2,800 137,200
Bristol Myers Squibb Co. 9,200 790,050
Columbia / HCA Healthcare Corp. 8,500 431,375
Eli Lilly & Co. 9,800 551,250
Johnson & Johnson 11,600 993,250
Mallinckrodt Group Inc. 1,800 65,475
Medtronic Inc. 4,200 234,675
Merck & Co. Inc. 22,300 1,466,225
Pfizer Inc. 11,400 718,200
Pharmacia & Upjohn Inc. 9,100 352,625
Schering-Plough Corp. 6,700 366,825
Tenet Healthcare Corp. <F2> 3,700 76,775
U.S. Healthcare Inc. 2,800 130,200
United Healthcare Corp. 3,300 216,150
Warner Lambert Co. 2,500 242,813
-----------
8,641,250
-----------
Public Utilities 8.6%
American Electric Power Inc. 3,200 129,600
Ameritech Corp. 9,800 578,200
Baltimore Gas & Electric Co. 3,100 88,350
Bell Atlantic Corp. 7,700 514,937
Bellsouth Corp. 17,400 756,900
Carolina Power & Light Co. 2,500 86,250
Central & South West Corp. 3,600 100,350
Cinergy Corp. 2,600 79,625
Consolidated Edison Co. 3,900 124,800
Consolidated Natural Gas Co. 1,800 81,675
Detroit Edison Co. 2,800 96,600
Dominion Resources Inc. 3,400 140,250
Duke Power Co. 3,500 165,813
Entergy Corp. 4,100 119,925
</TABLE>
See Notes to Financial Institutions
<TABLE>
Portfolio of Investments (Continued)
December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Security
Description Shares Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Public Utilities (Continued)
FPL Group Inc. 3,600 $166,950
General Public Utilities Corp. 2,300 78,200
GTE Corp. 17,400 765,600
Houston Inds. Inc. 5,000 121,250
Northern STS Power Co. 1,500 73,688
Nynex Corp. 7,500 405,000
Ohio Edison Co. 3,400 79,900
Pacific Gas & Electric Co. 7,800 221,325
Pacific Telesis Group 7,500 252,187
Pacificorp 4,000 85,000
Panhandle Eastern Corp. 2,900 80,838
Peco Energy Co. 3,800 114,475
Public Service Enterprise Group 4,400 134,750
SCE Corp. 7,400 131,350
Southern Co. 12,300 302,887
Sprint Corp. 6,400 255,200
Tenneco Inc. 3,700 183,613
Texas Utilities Co. 3,900 160,388
U.S. West Inc. 8,200 293,150
Unicom Corp. 3,500 114,625
Union Electric Co. 1,900 79,325
United Technologies Corp. 2,500 237,187
-----------
7,400,163
-----------
Technology 13.1%
Advanced Micro Devices Inc. <F2> 1,900 31,350
Airtouch Communications Inc. <F2> 9,400 265,550
AMP Inc. 4,400 168,850
Apple Computer 2,200 70,125
Applied Materials Inc. <F2> 3,400 133,875
AT & T Corp. 28,700 1,858,325
Cisco Systems Inc. <F2> 5,000 373,125
Compaq Computer Corp. <F2> 4,900 235,200
Computer Associates International Inc. 4,400 250,250
</TABLE>
See Notes to Financial Institutions
<TABLE>
Portfolio of Investments (Continued)
December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Security
Description Shares Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Technology (Continued)
Corning Inc. 4,300 $137,600
Digital Equipment Corp. <F2> 2,800 179,550
DSC Communications Corp. <F2> 2,300 84,812
First Data Corp. 4,100 274,187
Fluor Corp. 1,700 112,200
Great Lakes Chemical Corp. 1,400 100,800
Hewlett Packard Co. 9,500 795,625
Honeywell Inc. 2,600 126,425
Intel Corp. 15,200 862,600
International Business Machines 10,100 926,675
Loral Corp. 3,200 113,200
McDonnell Douglas Corp. 2,000 184,000
Micron Technology Inc. 3,800 150,575
Microsoft Corp. <F2> 10,600 930,150
Minnesota Mining & Manufacturing Co. 8,100 536,625
Motorola Inc. 11,100 632,700
National Semiconductor Corp. <F2> 2,500 55,625
Northern Telecom Ltd. 4,600 197,800
Northrop Corp. 1,100 70,400
Novell Inc. <F2> 7,100 101,175
Oracle Systems Corp. <F2> 8,000 339,000
Rohm & Haas Co. 1,300 83,688
Silicon Graphics Inc. <F2> 2,900 79,750
Sun Microsystems Inc. <F2> 3,600 164,250
Sysco Corp. 3,300 107,250
Tandy Corp. 1,200 49,800
Texas Instruments Inc. 3,700 191,475
Xerox Corp. 2,100 287,700
-----------
11,262,287
-----------
</TABLE>
See Notes to Financial Statements
<TABLE>
Portfolio of Investments (Continued)
December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Security
Description Shares Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Telecommunications 1.0%
Alltel Corp. 3,700 $109,150
SBC Communications Inc. 10,800 621,000
US West Inc. <F2> 8,600 163,400
-----------
893,550
-----------
Transportation 1.3%
AMR Corp. <F2> 1,600 118,800
Burlington Northern Santa Fe 2,800 218,400
CSX Corp. 4,200 191,625
Delta Air Lines Inc. 1,100 81,263
Norfolk Southern Corp. 2,500 198,437
Southwest Airlines Co. 2,900 67,425
Union Pacific Corp. 3,800 250,800
-----------
1,126,750
-----------
Total Long-Term Investments 94.5%
(Cost $67,139,734) <F1> 81,227,498
Repurchase Agreement 5.4%
State Street Bank & Trust, U.S. T-Note, $4,015,000 par,
7.500% coupon, due 11/15/16, dated 12/29/95, to be sold
on 01/02/96 at $4,638,962. 4,636,000
Other Assets in Excess of Liabilities 0.1% 119,902
-----------
Net Assets 100% $85,983,400
-----------
-----------
<FN>
<F1>At December 31, 1995, cost for federal income tax purposes is $67,139,734; the
aggregate gross unrealized appreciation is $14,860,196 and the aggregate gross
unrealized depreciation is $806,855, resulting in net unrealized appreciation
including open option and futures transactions of $14,053,341.
<F2>Non-income producing security as this stock currently does not declare
dividends.
<F3>Assets segregated for open option and futures transactions.
</TABLE>
See Notes to Financial Statements
<TABLE>
VAN KAMPEN MERRITT SERIES TRUST STOCK INDEX PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
- ------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at Market Value (Cost $67,139,734) (Note 1) $ 81,227,498
Repurchase Agreements (Note 1) 4,636,000
Cash 200
Receivables:
Dividends 160,895
Fund Shares Sold 4,710
Margin on Futures (Note 5) 3,850
Interest 2,221
Options at Market Value (Net premiums paid of $23,298) (Note 5) 24,075
-------------
Total Assets 86,059,449
-------------
LIABILITIES:
Investment Advisory Fee Payable (Note 2) 38,629
Accrued Expenses 37,420
-------------
Total Liabilities 76,049
-------------
NET ASSETS $ 85,983,400
-------------
-------------
NET ASSETS CONSIST OF:
Paid In Surplus (Note 3) $ 71,895,636
Net Unrealized Appreciation on Investments 14,053,341
Accumulated Net Realized Gain on Investments 34,423
-------------
NET ASSETS $ 85,983,400
-------------
-------------
NET ASSET VALUE PER SHARE
($85,983,400 divided by 6,210,939 shares outstanding;
an unlimited number of shares without par value are
authorized) (Note 3) $13.84
-------------
-------------
</TABLE>
See Notes to Financial Statements
<TABLE>
VAN KAMPEN MERRITT SERIES TRUST STOCK INDEX PORTFOLIO
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
- ------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends (Net of foreign withholding taxes of $8,900) $ 1,299,662
Interest 496,725
-------------
Total Income 1,796,387
-------------
EXPENSES:
Investment Advisory Fee (Note 2) 296,648
Custody 93,697
Audit 33,879
Trustees Fees and Expenses (Note 2) 20,206
Legal (Note 2) 13,721
Other 7,843
-------------
Total Expenses 465,994
Less Expenses Reimbursed by Cova Life 103,824
-------------
Net Expenses 362,170
-------------
NET INVESTMENT INCOME $ 1,434,217
-------------
-------------
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS:
Realized Gain/Loss on Investments:
Proceeds from Sales $ 4,307,481
Cost of Securities Sold (2,019,570)
-------------
Net Realized Gain on Investments (Including realized
gain on closed option and futures transactions of
$60,351 and $2,124,689, respectively) 2,287,911
-------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period (363,126)
End of the Period (Including unrealized appreciation
on open option transactions of $777 and unrealized
depreciation on open futures transactions of $35,200) 14,053,341
-------------
Net Unrealized Appreciation on Investments During the Period 14,416,467
-------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS $ 16,704,378
-------------
-------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 18,138,595
-------------
-------------
</TABLE>
See Notes to Financial Statements
<TABLE>
VAN KAMPEN MERRITT SERIES TRUST STOCK INDEX PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1995 and 1994
- ----------------------------------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1995 December 31, 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income $ 1,434,217 $ 1,218,783
Net Realized Gain on Investments 2,287,911 311,001
Net Unrealized Appreciation/Depreciation
on Investments During the Period 14,416,467 (2,393,977)
--------------- ---------------
Change in Net Assets from Operations 18,138,595 (864,193)
--------------- ---------------
Distributions from Net Investment Income (1,434,217) (1,218,783)
Distributions from Net Realized Gain on Investments (2,274,444) (623,624)
Return of Capital Distribution 0 (20,956)
--------------- ---------------
Total Distributions (3,708,661) (1,863,363)
--------------- ---------------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES 14,429,934 (2,727,556)
--------------- ---------------
FROM CAPITAL TRANSACTIONS (Note 3):
Proceeds from Shares Sold 50,283,187 14,386,901
Net Asset Value of Shares Issued
through Dividend Reinvestment 3,708,661 1,863,363
Cost of Shares Repurchased (19,249,305) (67,994,792)
--------------- ---------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS 34,742,543 (51,744,528)
--------------- ---------------
TOTAL INCREASE/DECREASE IN NET ASSETS 49,172,477 (54,472,084)
NET ASSETS:
Beginning of the Period 36,810,923 91,283,007
--------------- ---------------
End of the Period $ 85,983,400 $ 36,810,923
--------------- ---------------
--------------- ---------------
</TABLE>
See Notes to Financial Statements
<TABLE>
VAN KAMPEN MERRITT SERIES TRUST STOCK INDEX PORTFOLIO
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- -------------------------------------------------------------------------------------------------------------------
November 1,1991
(Commencement of
Investment
Year Ended December 31, Operations) to
1995 1994 1993 1992 December 31,1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period $10.587 $11.115 $10.552 $10.572 $10.000
------- ------- ------- ------- -------
Net Investment Income .260 .311 .205 .172 .038
Net Realized and Unrealized Gain/Loss on Investments 3.637 (.337) .726 .477 .534
------- ------- ------- ------- -------
Total from Investment Operations 3.897 (.026) .931 .649 .572
------- ------- ------- ------- -------
Less:
Distributions from Net Investment Income .260 .311 .205 .210 .000
Distributions from Net Realized Gain on Investments .380 .185 .163 .459 .000
Return of Capital Distributions .000 .006 .000 .000 .000
------- ------- ------- ------- -------
Total Distributions .640 .502 .368 .669 .000
------- ------- ------- ------- -------
Net Asset Value, End of the Period $13.844 $10.587 $11.115 $10.552 $10.572
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Total Return* 36.87% (.11%) 8.84% 6.22% 5.70%**
Net Assets at End of the Period (In millions) $86.0 $36.8 $91.3 $35.0 $6.8
Ratio of Expenses to Average Net Assets *(Annualized) .61% .58% .60% .59% .40%
Ratio of Net Investment Income to Average Net
Assets* (Annualized) 2.41% 2.23% 2.29% 2.54% 3.02%
Portfolio Turnover 3.94% 47.05% 44.09% 85.73% .00%
* If certain expenses had not been assumed by
Cova Life, total return would have been lower
and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets (Annualized) .78% .80% .74% 1.21% 1.84%
Ratio of Net Investment Income to Average Net Assets
(Annualized) 2.24% 2.01% 2.15% 1.92% 1.58%
**Non-Annualized
</TABLE>
See Notes to Financial Statements
VAN KAMPEN MERRITT SERIES TRUST STOCK INDEX PORTFOLIO
Notes to Financial Statements
December 31, 1995
1. Significant Accounting Policies
Van Kampen Merritt Series Trust (the "Trust"), under which the Stock Index
Portfolio (the "Fund") is organized as a separate sub-trust, is registered as
a diversified open-end management investment company under the Investment
Company Act of 1940, as amended. The Trust's investment objective is to
achieve investment results that approximate the aggregate price and yield
performance of the Standard & Poor's 500 Composite Stock Price Index by
investing in common stocks, stock index futures contracts and options on stock
index futures contracts, and certain short-term fixed income securities such
as cash reserves. The Trust commenced investment operations on December 11,
1989. The Fund commenced investment operations on November 1, 1991.
The following is a summary of significant accounting policies consistently
followed by the Fund 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. 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 by the Board of Trustees. Short-term securities with
remaining maturities of less than 60 days are valued at amortized cost.
B. Security Transactions - Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
C. Investment Income and Expenses - Dividend income is recorded on the
ex-dividend date and interest income and expenses are recorded on an accrual
basis.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
D. Federal Income Taxes - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is
required.
Net realized gains or losses may differ for financial and tax reporting
purposes primarily as a result of timing differences related to open option
and futures transactions at year end.
E. Distribution of Income and Gains - The Fund declares and pays dividends
semi-annually from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains and gains on option and futures
transactions. Any short-term capital gains and a portion of option and
futures gains would be included in ordinary income for tax purposes.
Distributions are automatically reinvested in Fund shares.
2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
American Capital Investment Advisory Corp. (the "Adviser") will provide
investment advice and facilities to the Fund for an annual fee payable
monthly of .50% of the average net assets of the Fund.
Cova Variable Annuity Accounts One and Five are separate investment
accounts offered by Cova Financial Services Life Insurance Co. and Cova
Financial Life Insurance Co. (collectively "Cova Life"), respectively. At
December 31, 1995, Cova Variable Annuity Accounts One and Five owned all
shares of beneficial interest of the Fund.
Certain officers and trustees of the Fund are also officers and directors
of Van Kampen American Capital Distributors, Inc. or its affiliates
(collectively "VKAC"). The Fund does not compensate its officers or trustees
who are officers of VKAC.
The Fund has implemented a retirement plan which covers those trustees
who are not officers of VKAC. The Fund's liability under the retirement plan
at December 31, 1995, was approximately $6,200.
For the year ended December 31, 1995, the Fund recognized expenses of
approximately $16,500 representing VKAC's cost of providing accounting and
legal services.
3. Capital Transactions
At December 31, 1995 and 1994, paid in surplus aggregated $71,895,636 and
$37,153,093, respectively.
Transactions in shares were as follows:
<TABLE>
Year Year
Ended Ended
December 31, December 31,
1995 1994
<S> <C> <C>
----------------- ----------------
Beginning Shares 3,477,141 8,212,885
----------------- ----------------
Shares Sold 3,889,063 1,323,458
Shares Issued through
Dividend Reinvestment 271,456 176,442
Shares Repurchased (1,426,721) (6,235,644)
------------------ ---------------
Net Increase/Decrease in
Shares Outstanding 2,733,798 (4,735,744)
----------------- ---------------
Ending Shares 6,210,939 3,477,141
------------------ ---------------
</TABLE>
VAN KAMPEN MERRITT SERIES TRUST STOCK INDEX PORTFOLIO
Notes to Financial Statements (Continued)
December 31, 1995
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended December 31, 1995, were $34,676,159 and
$2,019,570, respectively.
5. Derivative Financial Instruments
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as
to attempt to protect the Fund against possible changes in the market value of
its portfolio or to generate potential gain. All of the Fund's portfolio
holdings, including derivative instruments, are marked to market each day with
the change in value reflected in the unrealized appreciation/depreciation on
investments. Upon disposition, a realized gain or loss is recognized
accordingly, except for exercised option contracts where the recognition of
gain or loss is postponed until the disposal of the security underlying the
option contract.
Summarized below are the specific types of derivative financial instruments
used by the Fund.
A. Option Contracts - An 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 Fund 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.
Transactions in options for the year ended December 31, 1995, were as
follows:
<TABLE>
Contracts Premium
<S> <C> <C>
------------------------
Outstanding at
December 31, 1994 6 $169
Options Written
and Purchased (Net) 156 (60,040)
Options Terminated
in Closing Transactions
(Net) (126) 36,573
------------ -----------
Outstanding at
December 31, 1995 36 ($23,298)
------------ ----------
------------ ----------
</TABLE>
The related futures contracts of the options outstanding at December 31, 1995,
and their descriptions and market values are as follows:
<TABLE>
Expiration
Month/ Market
Exercise Value
Contracts Price of Options
<S> <C> <C> <C>
------------------------------------
S&P 500
Index Futures
Written Puts 18 Mar/605 $ (14,063)
Purchased Calls 18 Mar/605 38,138
----------- ------------
36 $ 24,075
----------- ------------
</TABLE>
B. 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. The Fund generally invests in futures on the S&P 500 Index and
typically closes the contract prior to the delivery date. These contracts are
generally used to provide the return of an index without purchasing or selling
all of the securities underlying the index.
The fluctuation in market value of the contracts is settled daily through
a cash margin account. Realized gains and losses are recognized when the
contracts are closed or expire.
Transactions in futures contracts for the year ended December 31, 1995,
were as follows:
<TABLE>
Contracts
<S> <C>
-----------
Outstanding at
December 31, 1994 11
Futures Opened 227
Futures Closed
(227)
-----------
Outstanding at
December 31, 1995
11
-----------
-----------
</TABLE>
The futures contracts outstanding at December 31, 1995, and the description
and unrealized depreciation is as follows:
<TABLE>
Unrealized
Contracts Depreciation
<S> <C> <C>
----------- --------------
S&P 500 Index Futures
Mar 1996 - Buys to Open 11 $ 35,200
----------- --------------
----------- --------------
</TABLE>
6. Subsequent Events
On February 9, 1996, shareholders approved a change in the Trust's name to
Cova Series Trust. A new investment advisory agreement was entered into with
Cova Investment Advisory Corp. A sub-advisory agreement between Cova
Investment Advisory Corp. and Van Kampen American Capital Investment Advisory
Corp. was also approved. The investment advisory fee schedule was not
modified by this change. All of the above changes will take effect on May 1,
1996.
VAN KAMPEN MERRITT SERIES TRUST
STATEMENTS OF ASSETS AND LIABILITIES OF
BOND DEBENTURE PORTFOLIO
QUALITY BOND PORTFOLIO
SMALL CAPITAL STOCK PORTFOLIO
LARGE CAPITAL STOCK PORTFOLIO
SELECT EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
APRIL 1, 1996
<TABLE>
<CAPTION>
BOND QUALITY SMALL CAPITAL LARGE CAPITAL SELECT INTERNATIONAL
DEBENTURE BOND STOCK STOCK EQUITY EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash $500,000 $5,000,000 $5,000,000 $15,000,000 $5,000,000 $5,000,000
-------- ---------- ---------- ----------- ---------- ----------
Total Assets $500,000 $5,000,000 $5,000,000 $15,000,000 $5,000,000 $5,000,000
======== ========== ========== =========== ========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
- - - - - -
======== ========== ========== =========== ========== ==========
NET ASSETS $500,000 $5,000,000 $5,000,000 $15,000,000 $5,000,000 $5,000,000
======== ========== ========== =========== ========== ==========
NET ASSETS CONSIST OF:
Paid in Capital $500,000 $5,000,000 $5,000,000 $15,000,000 $5,000,000 $5,000,000
======== ========== ========== =========== ========== ==========
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
======== ========== ========== =========== ========== ==========
NUMBER OF FUND SHARES OUTSTANDING 50,000 500,000 500,000 1,500,000 500,000 500,000
======== ========== ========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE>
Van Kampen Merritt Series Trust
Notes to the Statements of Assets and Liabilities
April 1, 1996
1. ORGANIZATION
The Van Kampen Merritt Series Trust (the "Trust") was established as a
Massachusetts business trust under a Declaration of Trust dated July 9, 1987.
The Trust is registered as an open-end management investment company under the
Investment Company Act of 1940, as amended. On February 9, 1996, shareholders
approved a change in the Trust's name to Cova Series Trust effective May 1,
1996. Also on February 9, 1996 the Board of Trustees voted to add six separate
diversified investment portfolios (the "Portfolios") to the existing investment
portfolios of the Trust. The new Portfolios are the Bond Debenture Portfolio,
Quality Bond Portfolio, Small Capital Stock Portfolio, Large Capital Stock
Portfolio, Select Equity Portfolio, and International Equity Portfolio.
The Portfolios have had no operations, other than those relating to
organizational matters, including the issuance of seed money shares, on April 1,
1996, to Cova Financial Services Life Insurance Company ("Cova"), the provider
of the Portfolios' initial capital and ultimate Company sponsor of variable
annuity contracts investing in the Portfolios.
The Portfolios are available through the purchase of variable annuity policies.
Bond Debenture Portfolio seeks high current income and the opportunity for
capital appreciation by investing in convertible and discount debt securities,
many of which will be lower rated. Quality Bond Portfolio seeks a high total
return consistent with a moderate risk of capital and maintenance of liquidity.
Small Capital Stock Portfolio seeks high total return from a portfolio of equity
securities of small companies. Large Capital Stock and Select Equity Portfolios
seek long-term growth of capital and income by investing in equity holdings of
large and medium sized companies. International Equity Portfolio seeks a high
total return from a portfolio of equity securities of foreign corporations.
Organizational costs incurred in connection with the initial registration and
public offering of shares of the Portfolios are being borne and directly
expensed by Cova.
2. AFFILIATED SERVICE PROVIDER
The Trust has entered into an investment advisory agreement (the
"Advisory Agreement") with Cova Investment Advisory Corporation (the "Adviser").
The Adviser is affiliated with Cova. Certain officers and directors of the
Adviser are also officers or trustees of the Trust. The Advisory Agreement
provides for the Fund to pay the Adviser an advisory fee based on the fund's
average daily net assets.
<PAGE>
The following annual rates represent total advisory fees for each Portfolio:
<TABLE>
<CAPTION>
PORTFOLIO TOTAL ADVISORY FEES
<S> <C>
Bond Debenture Portfolio 0.75%
Quality Bond Portfolio 0.55% on first $75 million
0.50% on amounts above $75 million
Small Capital Stock Portfolio 0.85%
Large Capital Stock Portfolio 0.65%
Select Equity Portfolio 0.75% on first $50 million
0.65% on amounts above $50 million
International Equity Portfolio 0.85% on first $50 million
0.75% on amounts above $50 million
</TABLE>
The Adviser has engaged Lord Abbett & Co. to act as sub-adviser to provide the
day-to-day portfolio management for Bond Debenture Portfolio. The Adviser has
also engaged J.P. Morgan Investment Management, Inc. to act as sub-adviser to
provide the day-to-day portfolio management for Quality Bond Portfolio, Small
Capital Stock Portfolio, Large Capital Stock Portfolio, Select Equity Portfolio,
and International Equity Portfolio.
3. INCOME TAXES
The Fund intends to comply with the requirements of the Internal
Revenue Code necessary to qualify as a regulated investment company and to make
the requisite distributions of taxable income to its shareholders which will be
sufficient to relieve it from all or substantially all federal income taxes.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders of the Van Kampen
Merritt Series Trust
We have audited the accompanying opening statements of assets and liabilities of
the Bond Debenture, Quality Bond, Small Capital Stock, Large Capital Stock,
Select Equity and International Equity Portfolio funds (the Portfolios) of the
Van Kampen Merritt Series Trust (the "Trust") as of April 1, 1996. This
financial statement is the responsibility of the Trust's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. Our procedures included
confirmation of cash balances as of April 1, 1996, by correspondence with the
custodian. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of the Portfolios of the Van
Kampen Merritt Series Trust as of April 1, 1996 in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri
April 15, 1996
PART C
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
(a) FINANCIAL STATEMENTS
The following financial statements of the Trust are included in Parts A and B
hereof:
Financial Highlights.
The following financial statements of the Trust are included in Part B thereof:
Statements of Assets and Liabilities, December 31, 1995.
Statements of Operations, For the Year Ended December 31, 1995.
Statements of Changes in Net Assets, for the Years Ended December 31, 1995 and
December 31, 1994.
Portfolios of Investments, December 31, 1995.
Notes to Financial Statements, December 31, 1995.
Independent Auditors' Reports for the Portfolios as of and for the Period
Ended December 31, 1995.
Statements of Assets and Liabilities of the Quality Bond Portfolio, Small Cap
Stock Portfolio, Large Cap Stock Portfolio, Select Equity Portfolio,
International Equity Portfolio and Bond Debenture Portfolio as of April 1,
1996.
Independent Auditors' Reports
(b) EXHIBITS
(1) Declaration of Trust
(2) By-laws of Trust
(3) Not Applicable
(4) Not Applicable
(5)(a) Form of Investment Advisory Agreement
(b)(i) Form of Sub-Advisory Agreement - Lord, Abbett & Co.
(b)(ii) Form of Sub-Advisory Agreement - J.P. Morgan Investment
Management Inc.
(b)(iii)Form of Sub-Advisory Agreement - Van Kampen American
Capital Investment Advisory Corp.
(6)(a) Principal Underwriters Agreement**
(6)(b) Form of Addendum to Principal Underwriters Agreement***
(7) Not Applicable
(8)(a) Form of Custodian Contract (to be filed by amendment)
(8)(b) Form of Transfer Agency Agreement (to be filed by amendment)
(9)(a) Agency and Service Agreement*
(b) Form of Administration Agreement (to be filed by amendment)
(10) Consent and Opinion of Counsel
(11) Consents of Independent Auditors
(12) Not Applicable
(13) Agreement Governing Contribution of Capital*
(14) Not Applicable
(15) Not Applicable
(16) Schedule for Computation of Performance Quotations
(27) Financial Data Schedules
<FN>
* incorporated by reference to Registrant's initial registration on Form
N-1A filed on July 23, 1987.
** incorporated by reference to Registrant's Post-Effective Amendment No.
8 filed on May 1, 1993.
*** incorporated by reference to Registrant's Post-Effective Amendment No.
10 filed on January 14, 1994.
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The shares of the Trust are currently sold to Cova Variable Annuity Account
One of Cova Financial Services Life Insurance Company and Cova Variable
Annuity Account Five of Cova Financial Life Insurance Company. Cova Variable
Annuity Account One and Cova Variable Annuity Account Five currently control
all Portfolios of the Trust through their share ownership thereof.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
Cova Variable Annuity Account One and Cova Variable Annuity Account Five own
all shares of beneficial interest of the Trust.
ITEM 27. INDEMNIFICATION
Please see Article 5.3 of the Registrant's Agreement and Declaration of Trust
(Exhibit 1) for indemnification of officers and trustees. Registrant's
trustees and officers are also covered by an Errors and Omissions Policy.
Section 5 of the Investment Advisory Agreement between the Registrant and
Cova Investment Advisory Corporation ("Adviser") provides that in the
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of the obligations or duties under the Investment Advisory Agreement
on the part of the Adviser, the Adviser shall not be liable to the Registrant
or to any shareholder of the Registrant for any error in judgment or of law,
or for any loss suffered by the Registrant in connection with the matters to
which the Investment Advisory Agreement relates.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant and the Adviser pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a trustee, officer, or
controlling person of the Registrant and the Adviser in connection with the
successful defense of any action, suit or proceeding) is asserted against
the Registrant by such trustee, officer or controlling person or Adviser in
connection with the shares being registered the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
See "Management of the Trust" in the Prospectus and "Officers and Trustees" in
the Statement of Additional Information for information regarding the
Investment Adviser. For information as to the business, profession, vocation
or employment of a substantial nature of each of the officers and directors of
the Investment Adviser, reference is made to the Investment Adviser's current
Form ADV filed under the Investment Advisers Act of 1940, incorporated herein
by reference (File No. 801-45567).
With respect to information regarding the Sub-Advisers, reference is hereby
made to "Management of the Trust" in the Prospectus. For information as to
the business, profession, vocation or employment of a substantial nature of
each of the officers and directors of the Sub-Advisers, reference is made to
the current Form ADVs of the Sub-Advisers filed under the Investment Advisers
Act of 1940, incorporated herein by reference and the file numbers of which
are as follows:
Van Kampen American Capital Investment Advisory Corp.
File No. 801-18161
Lord, Abbett & Co.
File No. 801-6997
J.P. Morgan Investment Management Inc.
File No. 801-21011
ITEM 29. PRINCIPAL UNDERWRITER
Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required by Section 31(a) of the
Investment Company Act of 1940 and the Rules thereunder to be maintained (i)
by Registrant will be maintained at its offices, located at One Tower Lane,
Suite 3000, Oakbrook Terrace, Illinois 60181-4644 or at Investors Bank &
Trust Company, 89 South Street, Boston, Massachusetts 02111; and (ii) by the
Adviser will be maintained at its offices, located at One Tower Lane, Suite
3000, Oakbrook Terrace, Illinois 60181-4644; and (iii) by each of the
Sub-Advisers at their respective offices as follows: Van Kampen
American Capital Investment Advisory Corp., One Parkview Plaza,
Oakbrook Terrace, Illinois 60181; J.P. Morgan Investment Management
Inc., 522 Fifth Avenue, New York, NY 10036; and Lord, Abbett & Co.,
The General Motors Building, 767 Fifth Avenue, New York, NY
10153-0203.
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS
The Registrant will furnish each person to whom a prospectus is delivered with
a copy of the Registrant's latest Annual Report upon request and without
charge.
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities
Act Rule 485(b) and has duly caused this Post-Effective Amendment No. 14
to its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Oakbrook Terrace, and State of
Illinois on the 25th day of April, 1996.
<TABLE>
<CAPTION>
<S> <C>
VAN KAMPEN MERRITT SERIES TRUST
By: /S/LORRY J. STENSRUD
-------------------------------
Lorry J. Stensrud
President
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 14 has been signed below by the following persons
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE
/S/LORRY J. STENSRUD President 4-25-96
- ---------------------- --------
Lorry J. Stensrud (Principal Executive Officer)
Vice President, Treasurer,
/S/WILLIAM C. MAIR* Controller and Trustee (Prin- 4-25-96
- ---------------------- cipal Financial Officer and --------
William C. Mair Principal Accounting Officer)
/S/WILLIAM H. WILTON* Vice President 4-25-96
- ---------------------- --------
William H. Wilton
/S/JEFFERY K. HOELZEL* Senior Vice President 4-25-96
- ---------------------- and Secretary --------
Jeffery K. Hoelzel
/S/STEPHEN M. ALDERMAN* Trustee 4-25-96
- ---------------------- --------
Stephen M. Alderman
/S/THEODORE A. MYERS* Trustee 4-25-96
- ---------------------- --------
Theodore A. Myers
/S/DEBORAH A. VOHASEK* Trustee 4-25-96
- ---------------------- --------
Deborah A. Vohasek
/S/R. KEVIN WILLIAMS* Trustee 4-25-96
- ---------------------- --------
R. Kevin Williams
</TABLE>
*By: /s/ LORRY J. STENSRUD
-------------------------------
Lorry J. Stensrud, Attorney-in-Fact
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that VAN KAMPEN MERRITT SERIES TRUST, a
Massachusetts Business Trust (the "Trust"), and each of its undersigned
officers and Trustees hereby nominate, constitute and appoint Lorry J.
Stensrud and Jeffery K. Hoelzel (with full power to each of them to act alone)
its/his/her true and lawful attorney-in-fact and agent, for it/him/her and in
its/his/her name, place and stead in any and all capacities, to make, execute
and sign all amendments to the Trust's Registration Statement on Form N-1A
under the Securities Act of 1933 and the Investment Company Act of 1940, and
to file with the Securities and Exchange Commission and any other regulatory
authority having jurisdiction over the offer and sale of shares of the Trust,
such amendments, and any and all amendments and supplements thereto, and any
and all exhibits and other documents requisite in connection therewith
granting unto said attorneys and each of them, full power and authority to do
and perform each and every act necessary and/or appropriate as fully to all
intents and purposes as the Trust and the undersigned officers and Trustees
itself/themselves might or could do.
IN WITNESS WHEREOF, VAN KAMPEN MERRITT SERIES TRUST has caused this power
of attorney to be executed in its name by its President and attested by its
Secretary, and the undersigned officers and Trustees have hereunto set their
hands this 9th day of February, 1996.
<TABLE>
<CAPTION>
<S> <C>
VAN KAMPEN MERRITT SERIES TRUST
By:/S/LORRY J. STENSRUD
________________________________
Lorry J. Stensrud
President
ATTEST:
/S/JEFFERY K. HOELZEL
- --------------------------
Jeffery K. Hoelzel, Secretary
</TABLE>
(signatures continue)
<TABLE>
<CAPTION>
<S> <C>
SIGNATURE TITLE
/S/LORRY J. STENSRUD
President
Lorry J. Stensrud (Principal Executive Officer)
/S/WILLIAM C. MAIR
Vice President, Treasurer & Controller
William C. Mair and Trustee (Principal Financial Officer
and Principal Accounting Officer)
/S/WILLIAM H. WILTON
Vice President
William H. Wilton
/S/JEFFERY K. HOELZEL
Senior Vice President and Secretary
Jeffery K. Hoelzel
/S/STEPHEN M. ALDERMAN
Trustee
Stephen M. Alderman
/S/THEODORE A. MYERS
Trustee
Theodore A. Myers
/S/DEBORAH A. VOHASEK
Trustee
Deborah A. Vohasek
/S/R. KEVIN WILLIAMS
Trustee
R. Kevin Williams
</TABLE>
Index to Exhibits
EX-99.B1 Declaration of Trust
EX-99.B2 By-Laws of Trust
EX-99.B(5)(a) Form of Investment Advisory Agreement
EX-99.B(5)(b)(i) Form of Sub-Advisory Agreement - Lord, Abbett & Co.
EX-99.B(5)(b)(ii) Form of Sub-Advisory Agreement - J.P. Morgan
Investment Management Inc.
EX-99.B(5)(b)(iii) Form of Sub-Advisory Agreement - Van Kampen American
Capital Investment Advisory Corp.
EX-99.B10 Consent and Opinion of Counsel
EX-99.B11 Consents of Independent Auditors
EX-99.B16 Schedule for Computation of Performance Quotations
EX-27 Financial Data Schedules
VAN KAMPEN MERRITT SERIES TRUST
AGREEMENT AND DECLARATION OF TRUST
AGREEMENT AND DECLARATION OF TRUST made at Lisle, Illinois, this 9th day
of July, 1987, by the Trustees hereunder, and by the borders of shares of
beneficial interest to be issued hereunder as hereinafter provided.
WHEREAS, this Trust has been formed to carry on business as set forth
more particularly hereinafter;
WHEREAS, this Trust is authorized to issue its shares of beneficial
interest in separate series, each separate Series (which may also be referred
to as a Portfolio) to be a sub-trust hereunder, all in accordance with the
provisions hereinafter set forth; and
WHEREAS, the Trustees have agreed to manage all property coming into
their hands as Trustees of a Massachusetts business trust in accordance with
the provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby declare that they will hold all cash,
securities, and other assets which they may from time to time acquire in any
manner as Trustees hereunder IN TRUST to manage and dispose of the same upon
the following terms and conditions for the benefit of the holders from time to
time of shares of beneficial interest in this Trust or sub- trusts created
hereunder as hereinafter set forth.
ARTICLE I
The Trust
1.1. Name. This Trust shall be known as the "Van Kampen Merritt
Series Trust" and the Trustees shall conduct the business of the Trust under
that name or any other name or names as they may from time to time determine.
1.2. Definitions. As used in this Declaration, the following terms
shall have the following meanings:
The terms "Affiliated Person", "Assignment", "Commission", "Interested
Person", "Majority Shareholder Vote", "Person" and "Principal Underwriter"
shall have the meanings given them in the 1940 Act.
"Declaration" shall mean this Declaration of Trust as amended from time
to time.
"Fundamental Policies" shall mean the investment policies and
restrictions as set forth from time to time in the Prospectus of the Trust or
any Series and designated as fundamental policies therein.
"Person" shall mean and include individuals, corporations, partnerships,
trusts, associations, joint ventures and other entities, whether or not legal
entities, and governments and agencies and political subdivisions thereof.
"Prospectus" shall mean the currently effective Prospectus of the Trust
or of any Series under the Securities Act of 1933, as amended.
"Series" shall mean the separate sub-trusts that may be established and
designated as series pursuant to Section 6.2 or any one of such subtrusts.
"Shareholders" shall mean as of any particular time the holders of
record of outstanding Shares at such time.
"Shares" shall mean the equal proportionate transferable units of
interest into which the beneficial interest in any Series of the Trust shall
be divided from time to time and includes fractions of Shares as well as
whole Shares. All references to Shares shall be deemed to be Shares of any
or all Series as the context may require.
"Trust" shall mean the Trust established by this Declaration, as amended
from time to time, inclusive of each and every sub-trust established as a
Series hereunder.
"Trustees" shall mean the signatories to this Declaration, so long as
they shall continue in office in accordance with the terms hereof, and all
other persons who at the time in question have been duly elected or appointed
and have qualified as trustees in accordance with the provisions hereof and
are then in office.
"Trust Property" shall mean as of any particular time any and all
property, real or personal, tangible or intangible, which at such time is
owned or held by or for the account of the Trust, any Series thereof or the
Trustees in such capacity.
The "1940 Act" refers to the Investment Company Act of 1940 and the
rules and regulations promulgated thereunder, as amended from time to time.
ARTICLE II
Trustees
2.1. Number and Qualification. The number of Trustees shall be
established from time to time by written instrument signed by a majority of
the Trustees then in office, provided, however, that the number of Trustees
shall in no event be less than three or more than eleven. No reduction in
the number of Trustees shall have the effect of removing any Trustee from
office prior to the expiration of his term. A Trustee shall be an
individual at least 21 years of age who is not under legal disability.
Trustees may succeed themselves in office.
2.2 Term and Election. Except for the Trustees named herein or
appointed to fill vacancies pursuant to Section 2.4 hereof, the Trustees shall
be elected by written ballot at the initial meeting of Shareholders. Subject
to Section 2.4 hereof, each Trustee named herein, or elected or appointed
pursuant to the terms hereof shall hold office until his successor has been
elected at such meetings and has qualified to serve as Trustee. Election of
Trustees shall be by the affirmative vote of the holders of a plurality of the
Shares present in person or by proxy. Each individual elected or appointed
as a Trustee of the Trust shall by such election or appointment also be
elected or appointed, as the case may be, as a Trustee of each Series of the
Trust then in existence. The election or appointment of any Trustee (other
than an individual who was serving as a Trustee immediately prior thereto)
shall not become effective unless and until such person shall have in writing
accepted his election and agreed to be bound by the terms of this Declaration.
2.3 Resignation and Removal. Any Trustee may resign his trust
(without need for prior or subsequent accounting except in the event of
removal for cause) by an instrument in writing signed by him and delivered or
mailed to the Chairman, if any, the President or the Secretary and such
resignation shall be effective upon such delivery, or at a later date
according to the terms of the instrument. Any of the Trustees may be removed
(provided the aggregate number of Trustees after such removal shall not be
less than the minimum number required by Section 2.1 hereof) with cause, by
the action of two-thirds of the remaining Trustees or the holders of
two-thirds of the Shares. Upon the resignation or removal of a Trustee, or
his otherwise ceasing to be a Trustee, he shall execute and deliver such
documents as the remaining Trustees shall require for the purpose of conveying
to the Trust or the remaining Trustees any Trust Property held in the name of
the resigning or removed Trustee. Upon the incapacity or death of any
Trustee, his legal representative shall execute and deliver on his behalf such
documents as the remaining Trustees shall require as provided in the preceding
sentence.
2.4 Vacancies. The term of office of a Trustee shall terminate and a
vacancy shall occur in the event of the death, resignation, bankruptcy,
adjudicated incompetence or other incapacity to perform the duties of the
office, or removal, of a Trustee. No such vacancy shall operate to annul
this Declaration or to revoke any existing agency created pursuant to the
terms of this Declaration. Any vacancy created by an increase in Trustees
may be filled by the appointment of an individual having the qualifications
described in this Article made by a written instrument signed by a majority of
the Trustees then in office or by election by the Shareholders. However, if
after filling the vacancy, more than one-third of the Trustees have not been
elected by the Shareholders of the Trust, such appointment is subject to
ratification by the Shareholders of the Trust. Whenever a vacancy in the
number of Trustees shall occur, until such vacancy is filled as provided
herein, the Trustees in office, regardless of their number, shall have all the
powers granted to the Trustees and shall discharge all the duties imposed upon
the Trustees by this Declaration.
2.5. Meetings. Meetings of the Trustees shall be held from time to
time upon the call of the Chairman, if any, the President, the Secretary or
any two Trustees. Regular meetings of the Trustees may be held without call
or notice at a time and place fixed by the By-Laws or by resolution of the
Trustees. Notice of any other meeting shall be mailed not less than 48 hours
before the meeting or otherwise actually delivered orally or in writing not
less than 24 hours before the meeting, but may be waived in writing by any
Trustee either before or after such meeting. The attendance of a Trustee at
a meeting shall constitute a waiver of notice of such meeting except where a
Trustee attends a meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting has not been
lawfully called or convened. The Trustees may act with or without a meeting.
A quorum for all meetings of the Trustees shall be a majority of the
Trustees. Unless provided otherwise in this Declaration of Trust, any action
of the Trustees may be taken at a meeting by vote of a majority of the
Trustees present (a quorum being present) or without a meeting by written
consent of a majority of the Trustees.
Any committee of the Trustees, including an executive committee, if any,
may act with or without a meeting. A quorum for all meetings of any such
committee shall be a majority of the members thereof. Unless provided
otherwise in this Declaration, any action of any such committee may be taken
at a meeting by vote of a majority of the members present (a quorum being
present) or without a meeting by written consent of a majority of the members.
With respect to actions of the Trustees and any committee of the
Trustees, Trustees who are Interested Persons in any action to be taken may be
counted for quorum purposes under this Section and shall be entitled to vote
to the extent not prohibited by the 1940 Act.
All or any one or more Trustees may participate in a meeting of the
Trustees or any committee thereof by means of a conference telephone or
similar communications equipment by means of which all persons participating
in the meeting can hear each other; participation in a meeting pursuant to any
such communications systems shall constitute presence in person at such
meeting.
2.6. Officers. The Trustees shall annually elect a President, a
Secretary and a Treasurer and may elect a Chairman. The Trustees may elect
or appoint or may authorize the Chairman, if any, or President to appoint such
other officers or agents with such powers as the Trustees may deem to be
advisable. A Chairman shall, and the President, Secretary and Treasurer may,
but need not, be a Trustee.
ARTICLE III
Powers of Trustees
3.1 General. The Trustees shall have exclusive and absolute control
over the Trust Property and over the business of the Trust or any Series
thereof to the same extent as if the Trustees were the sole owners of the
Trust Property and business in their own right, but with such powers of
delegation as may be permitted by this Declaration. The Trustees may perform
such acts as in their sole discretion are proper for conducting the business
of the Trust or any Series thereof. The enumeration of any specific power
herein shall not be construed as limiting the aforesaid power. Such powers
of the Trustees may be exercised without order of or resort to any court.
3.2. Investments. The Trustees shall have power, subject to the
fundamental Policies in effect from time to time with respect to the Trust or
a particular sub-trust, to:
(a) manage, conduct, operate and carry on the business of an investment
company;
(b) subscribe for, invest in, reinvest in, purchase or otherwise
acquire, hold, pledge, sell, assign, transfer, exchange, distribute or
otherwise deal in or dispose of any and all sorts of property, tangible or
intangible, including but not limited to securities of any type whatsoever,
whether equity or non-equity, of any issuer, evidences of indebtedness of any
person and any other rights, interests, instruments or property of any sort
and to exercise any and all rights, powers and privileges of ownership or
interest in respect of any and all such investments of every kind and
description, including, without limitation, the right to consent and otherwise
act with respect thereto, with power to designate one or more Persons to
exercise any of said rights, powers and privileges in respect of any of said
investments. The Trustees shall not be limited by any law limiting the
investments which may be made by fiduciaries.
3.3. Legal Title. Legal title to all the Trust Property shall be
vested in the Trustees as joint tenants except that the Trustees shall have
power to cause legal title to any Trust Property to be held by or in the name
of one or more of the Trustees, or in the name of the Trust or any Series
thereof, or in the name of any other Person as nominee, custodian or pledgee,
on such terms as the Trustees may determine, provided that the interest of the
Trust or any Series thereof therein is appropriately protected.
The right, title and interest of the Trustees in the Trust Property shall
vest automatically in each person who may hereafter become a Trustee upon his
due election and qualification. Upon the ceasing of any person to be a
Trustee for any reason, such person shall automatically cease to have any
right, title or interest in any of the Trust Property, and the right, title
and interest of such Trustee in the Trust Property shall vest automatically in
the remaining Trustees. Such vesting and cessation of title shall be
effective whether or not conveyancing documents have been executed and
delivered.
3.4. Issuance and Repurchase of Shares. The Trustees shall have the
power to issue, sell, repurchase, redeem, retire, cancel, acquire, hold,
resell, reissue, dispose of, transfer, and otherwise deal in, Shares,
including shares in fractional denominations, and, subject to the more
detailed provisions set forth in Articles VIII and IX, to apply to any such
repurchase, redemption, retirement, cancellation or acquisition of Shares any
funds or property of the applicable Series of the Trust whether capital or
surplus or otherwise, to the full extent now or hereafter permitted by the
laws of the Commonwealth of Massachusetts governing business corporations.
3.5. Borrow Money. Subject to the Fundamental Policies in effect
from time to time with respect to the Trust or a particular Series, the
Trustees shall have the power to borrow money or otherwise obtain credit and
to secure the same by mortgaging, pledging or otherwise subjecting as security
the assets of the Trust or any Series thereof, including the lending of
portfolio securities, and to endorse, guarantee, or undertake the performance
of any obligation, contract or engagement of any other person, firm,
association or corporation; provided, however, that the assets of any
particular Series shall not be used as security for any credit extended to any
other Series.
3.6. Declaration; Committees. The Trustees shall have power,
consistent with their continuing exclusive authority over the management of
the Trust and the Trust Property, to delegate from time to time to such of
their number or to officers, employees or agents of the Trust the doing of
such things and the execution of such instruments either in the name of the
Trust or the names of the Trustees or otherwise as the Trustees may deem
expedient, to the same extent as such delegation is permitted to directors of
a Massachusetts business corporation and is permitted by the 1940 Act.
3.7. Collection and Payment. The Trustees shall have power to
collect all property due to the Trust or any Series thereof; to pay all
claims, including taxes, against the Trust Property, the Trust or any Series
thereof, the Trustees or any officer, employee or agent of the Trust; to
prosecute, defend, compromise or abandon any claims relating to the Trust
Property, the Trust or any Series thereof, or the Trustees or any officer,
employee or agent of the Trust; to foreclose any security interest securing
any obligations, by virtue of which any property is owed to the Trust or any
Series thereof; and to enter into releases, agreements and other instruments.
Except to the extent required for a Massachusetts business corporation, the
Shareholders shall have no power to vote as to whether or not a court action,
legal proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of the Trust or the Shareholders.
3.8. Expenses. The Trustees shall have power to incur and pay out
of the assets or income of the Trust or the appropriate Series thereof, any
expenses which in the opinion of the Trustees are necessary or incidental to
carry out any of the purposes of this Declaration, and the business of the
Trust, and to pay reasonable compensation from the funds of the Trust to
themselves as Trustees. The Trustees shall fix the compensation of all
officers, employees and Trustees. The Trustees may pay themselves such
compensation or special services, including legal, underwriting, syndicating
and brokerage services, as they in good faith may deem reasonable and
reimbursement for expenses reasonably incurred by themselves on behalf of the
Trust. The Trustees shall have the power, as frequently as they may
determine, to cause each Shareholder, or each Shareholder of any particular
Series, to pay directly, in advance or arrears, for charges of the custodian
or transfer, Shareholder servicing or similar agent of such Series, a pro rata
amount as defined from time to time by the Trustees, by setting off such
charges due from such Shareholder from declared but unpaid dividends owed such
Shareholder and/or by reducing the number of shares in the account of such
Shareholder by that number of full and/or fractional Shares which represents
the outstanding amount of such charger due from such Shareholder.
3.9. By-Laws. The Trustees may adopt and from time to time amend or
repeal By-Laws for the conduct of the business of the Trust.
3.10. Miscellaneous Powers. The Trustees shall have the power to:
(a) employ or contract with such Persons as the Trustees may deem desirable
for the transaction of the business of the Trust or any Series thereof; (b)
enter into joint ventures, partnerships and any other combinations or
associations; (c) purchase, and pay for out of Trust Property, insurance
policies insuring the Shareholders, Trustees, officers, employees, agents,
investment advisors, distributors, selected dealers or independent contractors
of the Trust or any Series thereof against all claims arising by reason of
holding any such position or by reason of any action taken or omitted by any
such Person in such capacity, whether or not constituting negligence, or
whether or not the Trust would have the power to indemnify such Person against
such liability; (d) to the extent permitted by law, indemnify any Person with
whom the Trust or any Series thereof has dealings, including any advisor,
administrator, manager, distributor or selected dealer, to such extent as the
Trustees shall determine; (e) guarantee indebtedness or contractual
obligations of others; (f) determine and change the fiscal year of the Trust
and the method in which its accounts shall be kept; and (g) adopt a seal for
the Trust but the absence of such seal shall not impair the validity of any
instrument executed on behalf of the Trust.
3.11. Further Powers. The Trustees shall have power to conduct the
business of the Trust or any Series thereof and carry on its operations in any
and all of its branches and maintain offices both within and without the
Commonwealth of Massachusetts, in any and all states of the United States of
America, in the District of Columbia, and in any and all commonwealths,
territories, dependencies, colonies, possessions, agencies or
instrumentalities of the United States of America and of foreign governments,
and to do all such other things and execute all such instruments as they deem
necessary, proper or desirable in order to promote the interests of the Trust
or any Series thereof although such things are not herein specifically
mentioned. Any determination as to what is in the interests of the Trust or
any Series thereof made by the Trustees in good faith shall be conclusive.
In construing the provisions of this Declaration, the presumption shall be in
favor of a grant of power to the Trustees. The Trustees will not be required
to obtain any court order to deal with the Trust Property.
ARTICLE IV
Advisory, Management and Distribution Arrangements
4.1. Advisory and Management Arrangements. Subject to a Majority
shareholder vote of the applicable Series, the Trustees may in their
discretion from time to time enter into advisory, administration or management
contracts whereby the other party to such contract shall undertake to furnish
the Trustees such advisory, administrative and management services, with
respect to a Series as the Trustees shall from time to time consider desirable
and all upon such terms and conditions as the Trustees mad in their discretion
determine. Notwithstanding any provisions of this Declaration of Trust, the
Trustees may authorize any advisor, administrator or manager (subject to such
general or specific instructions as the Trustees may from time to time adopt)
to effect investment transactions with respect to the assets of any Series on
behalf of the Trustees to the full extent of the power of the Trustees to
effect such transactions or may authorize any officer, employee or Trustee to
effect such transactions pursuant to recommendations of any such advisor,
administrator or manager (and all without further action by the Trustees).
Any such investment transaction shall be deemed to have been authorized by all
of the Trustees.
4.2. Distribution Arrangements. Subject to compliance with the 1940
Act, the Trustees may adopt and amend or repeal from time to time and
implement a plan of distribution pursuant to Rule 12b-1 of the 1940 Act which
plan will provide for the payment of specified marketing, distribution and
shareholder relations expenses of the Trust and any or all Series and their
agents and the agents of such agents. The Trustees may in their discretion
from time to time enter into one or more contracts, providing for the sale of
the Shares of the Trust or any Series of the Trust to net the Trust not less
than the par value per Share, whereby the Trust may either agree to sell the
Shares to the other party to the contract or appoint such other party its
sales agent for such Shares. In either case, the contract shall be on such
terms and conditions as the Trustees may in their discretion determine not
inconsistent with the provisions of this Article IV or the By-Laws; and such
contract may also provide for the repurchase or sale of Shares by such other
party as principal or as agent of the Trust and may provide that such other
party may enter into selected dealer agreements with registered securities
dealers and brokers and servicing and similar agreements with persons who are
not registered securities dealers to further the purposes of the distribution
or repurchase of the Shares and any plan of distribution adopted by the
Trustees.
4.3. Parties to Contract. Any contract of the character described
in Section 4.1 and 4.2 of this Article IV or in Article VII hereof may be
entered into with any Person, although one or more of the Trustees, officers
or employees of the Trust may be an officer, director, Trustee, shareholder,
or member of such other party to the contract, and no such contract shall be
invalidated or rendered voidable by reason of the existence of any such
relationship, nor shall any Person holding such relationship be liable merely
by reason of such relationship for any loss or expense to the Trust under or
by reason of said contract or accountable for any profit realized directly or
indirectly therefrom, provided that the contract when entered into was
reasonable and fair and not inconsistent with the provisions of this Article
IV or the By-Laws. The same Person may be the other party to contracts
entered into pursuant to Sections 4.1 and 4.2 above or Article VII, and any
individual may be financially interested or otherwise affiliated with Persons
who are parties to any or all of the contracts mentioned in this Section 4.3.
ARTICLE V
Limitations of Liability of
Shareholders, Trustees and Others
5.1. No Personal Liability of Shareholders, Trustees, etc. No
shareholder shall be subject to any personal liability whatsoever to any
Person in connection with Trust Property or the acts, obligations or affairs
of the Trust or any Series thereof. No Trustee, officer, employee or agent
of the Trust shall be subject to any personal liability whatsoever to any
Person, other than the Trust or its Shareholders, in connection with Trust
Property or the affairs of the Trust or any Series thereof, save only that
arising from his bad faith, willful misfeasance, gross negligence or reckless
disregard of his duty to such Person; and all such Persons shall look solely
to the Trust Property belonging to the applicable Series for satisfaction of
claims of any nature arising in connection with the affairs of the Trust or
any Series thereof. In any Shareholder, Trustee, officer, employee, or
agent, as such, of the Trust, is made a party to any suit or proceeding to
enforce any such liability, he shall not on account thereof, be held to any
personal liability. The Trust shall indemnify and hold each Shareholder
harmless from and against all claims and liabilities, to which such
Shareholder may become subject by reason of his being or having been a
Shareholder, and shall reimburse such Shareholder for all legal and other
expenses reasonably incurred by him in connection with any such claims or
liability. The rights accruing to a Shareholder under this Section 5.1 shall
not exclude any other right to which such Shareholder may be lawfully
entitled, nor shall anything herein contained restrict the right of the Trust
to indemnify or reimburse a Shareholder in any appropriate situation even
though not specifically provided herein. The rights accruing to a
Shareholder hereunder shall not prevent the Trustees from requiring each
Shareholder to pay his pro rata portion of the applicable Series' custodian,
transfer, shareholder servicing or similar agent as permitted by Section 3.8
hereof.
5.2. Non-Liability of Trustees, etc. No Trustee, officer, employee
or agent of the Trust shall be liable to the Trust, any Series, its
Shareholders, or to any Shareholder, Trustee, officer, employee, or agent
thereof for any action or failure to act (including without limitation the
failure to compel in any way any former or acting Trustee to redress any
breach of Trust) except for his own bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties.
5.3. Mandatory Indemnification. The Trust shall indemnify each of
its Trustees, officers, employees, and agents (including persons who serve at
its request as directors, officers or Trustees of another organization in
which it has any interest, as a shareholder, creditor or otherwise) against
all liabilities and expenses (including amounts paid in satisfaction of
Judgments, in compromise, as fines and penalties, and as counsel fees)
reasonably incurred by him in connection with the defense or disposition of
any action, suit or other proceeding, whether civil or criminal, before any
court or administrative or investigative body, in which he may be involved or
with which he may be threatened, while in office or thereafter, by reason of
his being or having been such a Trustee, officer, employee or agent, except
with respect to any matter as to which he shall have been adjudicated not to
have acted in good faith in the reasonable belief that his action was ln the
best interest of the Trust or the Series in question and furthermore, ln the
case of any criminal proceeding, he had no reasonable cause to believe that
the conduct was unlawful, provided that (1) no indemnitee shall be indemnified
hereunder against any liability to the Trust or any Series or its shareholders
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his position, (2) as to any
matter disposed of by settlement or a compromise payment by such indemnitee,
pursuant to a consent decree or otherwise, no indemnification either for said
payment or for any other expenses shall be provided unless there has been a
determination that such compromise is in the best interests of the Trust or
the Series involved and that such indemnitee appears to have acted in good
faith in the reasonable belief that his action was in the best interests of
the Trust or the Series involved and did not engage in willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in
the conduct of his position and (3) with respect to any action, suit or other
proceeding voluntarily prosecuted by any indemnitee as plaintiff,
indemnification shall be mandatory only if the prosecution of such action,
suit or other proceeding by such indemnitee was authorized by a majority of
the Trustees. All determinations that the applicable standards of conduct
have been met for indemnification hereunder, or that advance payments in
connection with the expense of defending any action shall be authorized, shall
be made (a) by a final decision on the merits by a court or other body before
whom the proceeding was brought that such indemnitee is not liable by reason
of disabling conduct or, (b) in the absence of such a decision, by (i) a
majority vote of a quorum consisting of Trustees who are neither "interested
persons" of the Trust (as defined in Section 2(a)(19) of the 1940 Act) nor
parties to the proceeding ("disinterested non-party Trustees"), or (ii) if
such a quorum is not obtainable or even, if obtainable, if a majority vote of
such quorum so directs, independent legal counsel in a written opinion. All
determinations that advance payments in connection with the expense of
defending any proceeding shall be authorized and shall be made in accordance
with clause (b) above.
The rights accruing to any indemnitee under these provisions shall not
exclude any other right to which he may be lawfully entitled. The Trustees
may make advance payments in connection with the expense of defending any
action with respect to which indemnification might be sought under this
Section, Provided that the Trustees shall receive a written affirmation of the
indemnified indemnitee's good faith belief that the standard of conduct
necessary for indemnification has been met and a written undertaking to
reimburse the Trust or the appropriate Series in the event it is subsequently
determined that he is not entitled to such indemnification and provided
further that the Trustees determine that the facts then known to them would
not preclude indemnification. In addition, at least one of the following
conditions must be met:
(a) the indemnitee shall provide a security for his undertaking,
(b) the Trust or applicable Series shall be insured against losses
arising by reason of any lawful advances; or
(c) a majority of a quorum of the disinterested non-party Trustees or an
independent legal counsel in a written opinion, shall determine, based on a
review of readily available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the indemnitee ultimately will be found
entitled to indemnification.
5.4. No Bond Required of Trustees. No Trustee shall, as such, be
obligated to give any bond or other security for the performance of any of his
duties hereunder.
5.5. No Duty of Investigation: Notice in Trust Instruments, etc. No
purchaser, lender, transfer agent or other person dealing with the Trustees or
with any officer, employee or agent of the Trust shall be bound to make any
inquiry concerning the validity of any transaction purporting to be made by
the Trustees or by said officer, employee or agent or be liable for the
application of money or property paid, loaned, or delivered to or on the order
of the Trustees or of said officer, employee or agent. Every obligation,
contract, undertaking, instrument, certificate, Share, other security of the
Trust or any Series, and every other act or thing whatsoever executed in
connection with the Trust or any Series shall be conclusively taken to have
been executed or done by the executors thereof only in their capacity as
Trustees under this Declaration or in their capacity as officers, employees or
agents of the Trust. Every written obligation, contract, undertaking,
instrument, certificate, Share, other security of the Trust or any Series made
or issued by the Trustees or by any officers, employees or agents of the
Trust, in their capacity as such, shall contain an appropriate recital to the
effect that the Shareholders, Trustees, officers, employees or agents of the
Trust shall not personally be bound by or liable thereunder, nor shall resort
be had to their private property for the satisfaction of any obligation or
claim thereunder, and appropriate references shall be made therein to this
Declaration, and may contain any further recital which they may deem
appropriate, but the omission of such recital shall not operate to impose
personal liability on any of the Trustees, Shareholders, officers, employees
or agents of the Trust. The Trustees may maintain insurance for the
protection of the Trust Property, its Shareholders, Trustees, officers,
employees and agents in such amount as the Trustees shall deem adequate to
cover possible tort or other liability, and such other insurance as the
Trustees in their sole judgement shall deem advisable.
5.6. Reliance on Experts, etc. Each Trustee and officer or employee
of the Trust shall, in the performance of his duties, be fully and completely
Justified and protected with regard to any act or any failure to act resulting
from reliance in good faith upon the books of account or other records of the
Trust, upon an opinion of counsel, or upon reports made to the Trust by any of
its officers or employees or by any advisor, administrator, manager,
distributor, selected dealer, accountant, appraiser or other expert or
consultant selected with reasonable care by the Trustees, officers or
employees of the Trust, regardless of whether such counsel or expert may also
be a Trustee.
ARTICLE VI
Shares of Beneficial Interest
6.1. Beneficial Interest. The interest of the beneficiaries
hereunder shall be divided into an unlimited transferable shares of beneficial
interest without par value. All Shares issued in accordance with the terms
hereof, including, without limitation, Shares issued in connection with a
dividend in Shares or a split of Shares, shall be fully paid and, except as
provided in the last sentence of Section 3.8, nonassessable when the
consideration (if any) therefor shall have been received by the Trust.
6.2. Series Designation. The Trustees, in their discretion from
time to time, may authorize the division of Shares into two or more Series,
each Series relating to a separate portfolio of investments and each of which
Series shall be a separate and distinct sub-trust of the Trust. Each Series
so established hereunder shall be deemed to be a separate Trust under the
provisions of Massachusetts law. The Trustees shall have exclusive power
without the requirement of Shareholder approval to establish and designate
such separate and distinct Series and to fix and determine the relative rights
and preferences as between the different Series. The Trustees shall have
exclusive power to add to, delete, replace or otherwise modify any provisions
of this Declaration relating to any Shares if prior to adopting any such
change the Trustees shall have determined that such change is consistent with
the fair and equitable treatment of the affected Shareholders and that
Shareholder approval is not required by this Declaration or applicable law or
the Trustees shall have obtained Shareholder approval for such change. All
references to Shares in this Declaration shall be deemed to be Shares of any
or all Series as the context may require.
If the Trustees shall create sub-trusts and divide the Shares into one or
more Series, the following provisions shall be applicable:
(a) The number of Shares of each Series that may be issued shall be
unlimited. The Trustees may classify or reclassify any unissued Shares or
any Shares previously issued and reacquired of any Series into one or more
Series that may be established and designated from time to time. The
Trustees may hold as treasury Shares (of the same or some other Series),
reissue for such consideration and on such terms as they may determine, or
cancel any shares of any Series reacquired by the Trust at their discretion
from time to time.
(b) The power of the Trustees to invest and reinvest the Trust Property
of each Series that may be established shall be governed by Section 3.2 of
this Declaration.
(c) All consideration received by the Trust for the issue or sale of
shares of a particular Series, together with all assets in which such
consideration is invested or reinvested, all income,
earnings, profits, and proceeds thereof, including any proceeds derived from
the sale, exchange or liquidation of such assets, and any funds or payment
derived from any reinvestment of such proceeds in whatever form the same may
be, shall be held by the Trustees and Trust for the benefit of the
Shareholders of such Series and, subject to the rights of creditors of such
Series only, shall irrevocably belong to that Series for all purposes, and
shall be so recorded upon the books of account of the Trust. In the event
that there are any assets, income, earnings, profits, and proceeds thereof,
funds or payments which are not readily identifiable as belonging to any
particular Series, the Trustees shall allocate them among any one or more of
the Series established and designated from time to time in such manner and on
such basis as they, in their sole discretion, deem fair and equitable, and
anything so allocated to a Series shall belong to such Series. Each such
allocation by the Trustees shall be conclusive and binding upon the
Shareholders of all Series for all purposes.
(d) The assets belonging to each particular Series shall be charged with
the liabilities of the Trust in respect of that Series and all expenses,
costs, charges and reserves attributable to that Series, and any general
liabilities, expenses, coats, charges or reserves of the Trust which are not
readily identifiable as belonging to any particular Series shall be allocated
and charged by the Trustees to and among any one or more of the Series
established and designated from time to time in such manner and on such basis
as the Trustees in their sole discretion deem fair and equitable. Each
allocation of liabilities, expenses, costs, charges and reserves by the
Trustees shall be conclusive and binding upon the Shareholders of all Series
for all purposes. The Trustees shall have full discretion, to the extent not
inconsistent with the 1940 Act, to determine which items shall be treated as
income and which items as capital; and each such determination and allocation
shall be conclusive and binding upon the Shareholders. Under no
circumstances shall the assets allocated or belonging to a particular Series
be charged with any liabilities attributable to another Series. Any creditor
may look only to the assets of the particular Series with respect to which
such person is a creditor for satisfaction of such creditor's debt.
(e) The power of the Trustees to pay dividends and make distributions
with respect to any one or more Series shall be governed by Section 9.2 of
this Trust Dividends and distributions on Shares of a particular Series may be
paid with such frequency as the Trustees may determine, which may be daily or
otherwise, pursuant to a standing resolution or resolutions adopted only once
or with such frequency as the Trustees may determine, to the holders of Shares
of that Series, from such of the income and capital gains, accrued or
realized, from the assets belonging to that Series, as the Trustees may
determine, after providing for actual and accrued liabilities belonging to
that Series. All dividends and distributions on Shares of a particular
Series shall be distributed pro rata to the holders of that Series in
proportion to the number of Shares of that Series held by such holders at the
date and time of record established for the payment of such dividends or
distributions. The establishment and designation of any Series of Shares
shall be effective upon the execution by a majority of the then Trustees of an
instrument setting forth the establishment and designation of such Series.
Such Instrument shall also set forth any rights and preferences of such Series
which are in addition to the rights and preferences of Shares set forth in
this Declaration. Any time that there are no Shares outstanding of any
particular Series previously established and designated, the Trustees may by
an instrument executed by a majority of their number abolish that Series and
the
establishment and designation thereof. Each instrument referred to in this
paragraph shall have the status of an amendment to this Declaration.
6.3. Rights of Shareholders. The Shares shall be personal property
giving only the rights in this Declaration specifically set forth. The
ownership of the Trust Property of every description and the right to conduct
any business hereinbefore described are vested exclusively in the Trustees,
and the Shareholders shall have no interest therein other than the beneficial
interest conferred by their Shares with respect to a particular Series, and
they shall have no right to call for any partition or division of any
property, profits, rights or interests of the Trust nor can they be called
upon to share or assume any losses of the Trust or, subject to the right of
the Trustees to charge certain expenses directly to Shareholders, as provided
in the last sentence of Section 3.8, suffer an assessment of any kind by
virtue of their ownership of Shares. The Shares shall not entitle the holder
to preference, preemptive, appraisal, conversion or exchange rights (except
for rights of appraisal specified in Section 11.4). No Shares shall have any
priority or preference over any other Share of the same Series with respect to
dividends or distributions or upon termination of the Trust or of such Series.
6.4. Trust Only. It is the intention of the Trustees to create only
the relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to
create a general partnership, limited partnership, Joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in this Declaration shall be construed to make the Shareholders,
either by themselves or with the Trustees, partners or members of a joint
stock association.
6.5. Issuance of Shares. The Trustees, in their discretion, may
from time to time without vote of the Shareholders issue Shares with respect
to any Series that may have been established pursuant to Section 6.2, in
addition to the then issued and outstanding Shares and Shares held in the
treasury, to such party or parties and for such amount not less than par value
and type of consideration, including cash or property, at such time or times,
and on such terms as the Trustees may determine, and may in such manner
acquire other assets (including the acquisition of assets subject to, and in
connection with the assumption of, liabilities) and businesses. The Trustees
may from time to time divide or combine the Shares of any Series into a
greater or lesser number without thereby changing the proportionate beneficial
interest in such Series of the Trust. Issuances and redemptions of Shares
may be made in whole Shares and/or 1/1,000ths of a Share or multiples thereof.
6.6. Register of Shares. A register shall be kept at the Trust or
any transfer agent duly appointed by the Trustees under the direction of the
Trustees which shall contain the names and addressee of the Shareholders and
the number of Shares held by them respectively and a record of all transfers
thereof. Separate registers shall be established and maintained for each
Series of the Trust. Each such register shall be conclusive as to who are
the holders of the Shares of the applicable Series and who shall be entitled
to receive dividends or distributions or otherwise to exercise or enjoy the
rights of Shareholders. No Shareholder shall be entitled to receive payment
of any dividend or distribution, nor to have notice given to him as herein
provided, until he has given his address to a transfer agent or such other
officer or agent of the Trustees as shall keep the register for entry thereon.
It is not contemplated that certificates will be issued for the Shares;
however, the Trustees, in their discretion, may authorize the issuance of
share certificates and promulgate appropriate rules and regulations as to
their use.
6.7. Transfer Agent and Registrar. The Trustees shall have power to
employ a transfer agent or transfer agents, and a registrar or registrars,
with respect to the Shares of the various Series. The transfer agent or
transfer agents may keep the applicable register and record therein the
original issues and transfers, if any, of the said shares of the applicable
Series. Any such transfer agent and registrars shall perform the duties
usually performed by transfer agents and registrars of certificates of stock
in a corporation, as modified by the Trustees.
6.8. Transfer of Shares. Shares shall be transferable on the
records of the Trust only by the record holder thereof or by his agent thereto
duly authorized in writing, upon delivery to the Trustees or a transfer agent
of the Trust of a duly executed instrument of transfer, together with such
evidence of the genuineness of each such execution and authorization and of
other matters as may reasonably be required. Upon such delivery the transfer
shall be recorded on the applicable register of the Trust. Until such record
is made, the Shareholder of record shall be deemed to be the holder of such
Shares for all purposes hereof and neither the Trustees nor any transfer agent
or registrar nor any officer, employee or agent of the Trust shall be affected
by any notice of the proposed transfer.
Any person becoming entitled to any Shares in consequence of the death,
bankruptcy, or incompetence of any Shareholder, or otherwise by operation of
law, shall be recorded on the applicable register of Shares as the holder of
such Shares upon production of the proper evidence thereof to the Trustees or
a transfer agent of the Trust, but until such record is made, the Shareholder
of record shall be deemed to be the holder of such for all purposes hereof,
and neither the Trustees nor any transfer agent or registrar nor any officer
or agent of the Trust shall be affected by any notice of such death,
bankruptcy or incompetence, or other operation of law.
6.9. Notices. Any and all notices to which any Shareholder
hereunder may be entitled and any and all communications shall be deemed duly
served or given if mailed, postage prepaid, addressed to any Shareholder of
record at his last known address as recorded on the applicable register of the
Trust.
ARTICLE VII
Custodians
7.1. Appointment and Duties. The Trustee shall at all times employ
a custodian or custodians, meeting the qualifications for custodians for
portfolio securities of investment companies contained in the 1940 Act, as
custodian with respect to each Series of the Trust. Any custodian, acting
with respect to one or more Series, shall have authority as agent of the Trust
or the Series with respect to which it is acting, but subject to such
restrictions, limitations and other requirements, if any, as may be contained
in the By-Laws of the Trust and the 1940 Act:
(1) to hold the securities owned by the Trust or the Series and deliver
the same upon written order;
(2) to receive and receipt for any moneys due to the Trust or the Series
and deposit the same in its own banking department (if a bank) or elsewhere as
the Trustees may direct;
(3) to disburse such funds upon orders or vouchers;
(4) if authorized by the Trustees, to keep the books and accounts of the
Trust or the Series and furnish clerical and accounting services;
(5) if authorized to do so by the Trustees, to compute the net income or
net asset value of the Trust or the Series; and
(6) if authorized to do so by the Trustees, to perform any other services
permitted by applicable law to be performed by custodians;
all upon such basis of compensation as may be agreed upon between the Trustees
and the custodian. If so directed by a Majority Shareholder Vote of the
Series with respect to which the custodian is acting, the custodian shall
deliver and pay over all property of the Trust held by it as specified in such
vote.
The Trustees may also authorize each custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services of
the custodian and upon such terms and conditions, as may be agreed upon
between the custodian and such sub-custodian and approved by the Trustees,
provided that in every case such sub-custodian shall meet the qualifications
for custodians contained in the 1940 Act.
7.2. Central Certificate System. Subject to such rules, regulations
and order as the commission may adopt, the Trustees may direct the custodian
to deposit all or any part of the securities owned by the Trust or the Series
in a system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, or such other person as
may be permitted by the Commission, or otherwise in accordance with the 1940
Act, pursuant to which system all securities of any particular class or series
of any issuer deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical delivery of such
securities, provided that all such deposits shall be subject to withdrawal
only upon the order of the Trust.
ARTICLE VIII
Redemption
8.1. Redemptions. All outstanding Shares of any Series of the Trust
may be redeemed at the option of the holders thereof, upon and subject to the
terms and conditions provided in this Article VIII. The Trust shall, upon
application by any Shareholder or pursuant to authorization from any
Shareholder of a particular Series, redeem or repurchase from such Shareholder
outstanding Shares of such Series for an amount per share determined by the
application of a formula adopted for such purpose by the Trustees with respect
to such Series (which formula shall be consistent with the 1940 Act): provided
that (a) such amount per Share shall not exceed the cash equivalent of the
proportionate interest of each Share in the assets of the Series of the Trust
at the time of the repurchase or redemption and (b) if so authorized by the
Trustees, the Trust may, at any time and from time to time, charge fees for
effecting such redemption, at such rates a~ the Trustees may establish, as and
to the extent permitted under the 1940 Act, and may, at any time and from time
to time, pursuant to such Act, suspend such right of redemption. The
procedures for effecting redemption shall be as set forth in the Prospectus
with respect to the applicable Series from time to time.
8.2. Disclosure of Holding. The holders of Shares or other
securities of the Trust shall upon demand disclose to the Trustees in writing
such information with respect to direct and indirect ownership of Shares of
other securities of the Trust as the Trustees deem necessary to comply with
the provisions of the Internal Revenue Code, or to comply with the
requirements of any other taxing authority.
ARTICLE IX
Determination of Net Asset Value,
Net Income and Distributions
9.1. Net Asset Value. The net asset value of each outstanding Share
of each Series of the Trust shall be determined at such time or times on such
days as the Trustees may determine, in accordance with the 1940 Act, with
respect to each Series. The method of determination of net asset value shall
be determined by the Trustees and shall be as set forth in the Prospectus with
respect to the applicable Series. The power and duty to make the net asset
value calculations for any Series may be delegated by the Trustees. The
power and duty to make the daily calculations for any Series may be delegated
by the Trustees to the adviser, administrator, manager, custodian, transfer
agent or such other person as the Trustees may determine. The Trustees may
suspend the daily determination of net asset value to the extent permitted by
the 1940 Act.
9.2. Distributions to Shareholders. The Trustees shall from time to
time distribute ratably among the Shareholders of any Series such proportion
of the net profits, surplus (including paid-in surplus ), capital, or assets
with respect to such Series held by the Trustees as they may deem proper.
Such distribution may be made in cash or property (including without
limitation any type of obligations of the Trust or any assets thereof), and
the Trustees may distribute ratably among the Shareholders of any Series
additional Shares of such Series in such manner, at such times, and on such
terms as the Trustees may deem proper. Such distribution may be among the
Shareholders of record at the time of declaring a distribution or among the
Shareholders of record at such later date as the Trustees shall determine and
specify at the time of declaration. The Trustees may always retain from the
net profits such amount as they may deem necessary to pay the debts or
expenses of the Trust or to meet obligations of the Trust, or as they may deem
desirable to use in the conduct of its affairs or to retain for future
requirements or extensions of the business.
Inasmuch as the computation of net income and gains for federal income
tax purposes may vary from the computation thereof on the books, the above
provision shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust to avoid or reduce liability for taxes.
9.3. Power to Modify Foregoing Procedures. Notwithstanding any of
the foregoing provisions of this Article IX, the Trustees may prescribe, in
their absolute discretion except as may be required by the 1940 Act, such
other bases and times for determining the per share asset value of the Trust's
Shares or net income, or the declaration and payment of dividends and
distributions as they deem necessary or desirable for any reason, including to
enable the Trust to comply with any provision of the 1940 Act, or any
securities association registered under the Securities Exchange Act of 1934,
or any order of exemption issued by said Commission, all as in effect now or
hereafter amended or modified.
ARTICLE X
Shareholders
10.1. Meetings of Shareholders. It is contemplated that the Trust
will not hold annual meetings of the Shareholders. A Special Meeting of
Shareholders may be called at any time by a majority of the Trustees and shall
be called by any Trustee for any proper purpose upon written request of
Shareholders of the Trust or such Series holding in the aggregate: not less
than 51% of the outstanding Shares of the Trust or Series having voting
rights, such request specifying the purpose or purposes for which such meeting
is to be called; or, in the case of a meeting for the purpose of voting on the
question of removal of any trustee or trustees, upon written request of
Shareholders of the Trust holding in the aggregate not less than 10% of the
outstanding Shares of the Trust.
10.2. Voting. Shareholders shall have no power to vote on any
matter except matters on which a vote of Shareholders is required by
applicable law, this Declaration or resolution of the Trustees. Any matter
required to be submitted to shareholders and affecting one or more Series
shall require separate approval by the required vote of Shareholders of each
affected Series; provided, however, that to the extent required by the 1940
Act, there shall be no separate Series votes on the election or removal of
Trustees, the selection of auditors for the Trust and its Series or approval
of any agreement or contract entered into by the Trust or any Series.
Shareholders of a particular Series shall not be entitled to vote on any
matter that affects only one or more other Series. There shall be no
cumulative voting in the election or removal of Trustees.
10.3. Notice of Meeting and Record Date. Notice of all meetings of
Shareholders, stating the time, place and purposes of the meeting, shall be
given by the Trustees by mail to each Shareholder of record entitled to vote
thereat at his registered address, mailed at least 10 days and not more than
60 days before the meeting. Only the business stated in the notice of the
meeting shall be considered at such meeting. Any adjourned meeting may be
held as adjourned without further notice. For the purposes of determining
the Shareholders who are entitled to notice of and to vote at any meeting the
Trustees may, without closing the transfer books, fix a date not more than 60
days prior to the date of such meeting of Shareholders as a record date for
the determination of the Persons to be treated as Shareholders of record for
such purposes.
10.4. Quorum and Required Vote. The holders of a majority of
outstanding Shares of the Trust present in person or by proxy shall constitute
a quorum at any meeting of the Shareholders for purposes of conducting
business on which a vote of Shareholders of the Trust is being taken, and the
holders of a majority of outstanding Shares of the applicable Series present
in person or by proxy shall constitute a quorum at any meeting of the
Shareholders for purposes of conducting business on which a vote of
Shareholders of such Series is being taken. Subject to any provision of
applicable law, this Declaration or resolution of the Trustees specifying a
greater or lesser vote requirement for the transaction of any item of business
at any meeting of Shareholders, (i) the affirmative vote of a majority of the
Shares present in person or represented by proxy and entitled to vote on the
subject matter shall be the act of the Shareholders with respect to such
matter and (ii) where a separate vote of any Series is also required on any
matter, the affirmative vote of a majority of the Shares of such Series
present in person or represented by proxy at the meeting shall be the act of
the Shareholders of such Series with respect to such matter.
10.5. Proxies, etc. At any meeting of Shareholders, any holder of
Shares entitled to vote thereat may vote by properly executed proxy, provided
that no proxy shall be voted at any meeting unless it shall have been placed
on file with the Secretary, or with such other officer or agent of the Trust
as the Secretary may direct, for verification prior to the time at which such
vote shall be taken. Pursuant to a resolution of a majority of the Trustees,
proxies may be solicited in the name of one or more Trustees or one or more of
the officers or employees of the Trust. Only Shareholders of record shall be
entitled to vote. Each full Share shall be entitled to one vote and
fractional Shares shall be entitled to a vote of such fractions. A proxy
purporting to be executed by or on behalf of a Shareholder shall be deemed
valid unless challenged at or prior to its exercise, and the burden of proving
invalidity shall rest on the challenger.
10.6. Reports. The Trustees shall cause to be prepared with respect
to each Series at least annually and more frequently to the extent required by
law a report of operations containing a balance sheet and statement of income
and undistributed income of the applicable Series of the Trust prepared in
conformity with generally accepted accounting principles and an opinion of an
independent public accountant on such financial statements. It is
contemplated that separate reports may be prepared for the various Series.
Copies of such reports shall be mailed to all Shareholders of record of the
applicable Series within the time required by the 1940 Act. The Trustees
shall, in addition, furnish to the Shareholders at least semi-annually to the
extent required by law, interim reports containing an unaudited balance sheet
of the Series as of the end of such period and an unaudited statement of
income and surplus for the period from the beginning of the current fiscal
year to the end of such period.
10.7. Inspection of Records. The records of the Trust shall be open
to inspection by Shareholders to the same extent as is permitted shareholders
of a Massachusetts business corporation.
10.8. Shareholder Action by Written Consent. Any action which may
be taken by Shareholders by vote may be taken without a meeting if the holders
entitled to vote thereon of the proportion of Shares required for approval of
such action at a meeting of Shareholders pursuant to Section 10.4 consent to
the action in writing and the written consents be filed with the records of
the meetings of Shareholders. Such consent ~hall be treated for all purposes
as a vote taken at meeting of Shareholders.
ARTICLE XI
Duration: Termination of Trust;
Amendment; Mergers, Etc.
11.1. Duration. Subject to possible termination in accordance with
the provisions of Section 11.2 hereof, the Trust shall continue until the
expiration of 20 years after the death of the last survivor of the initial
Trustees named herein and the following named persons:
<TABLE>
<CAPTION>
<S> <C> <C>
Name Address Date of Birth
Allison Joy Nyberg 1346 Green Trails Drive April 17, 1982
Naperville, IL 60540
Peter Andrew Nyberg 1346 Green Trails Drive May 15, 1984
Naperville, IL 60540
Erika Ann Nyberg 1346 Green Trails Drive May 8, 1987
Naperville, IL 60540
</TABLE>
11.2. Termination.
(a) The Trust may be terminated, after a majority of the Trustees have
approved a resolution therefor, upon approval by Shareholders. Any Series
may be terminated, after a majority of the Trustees thereof have approved a
resolution therefor, upon approval by Shareholders. Upon the termination of
the Trust or any Series,
(i) The Trust or such Series shall carry on no business except for
the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the Trust
or such Series and all of the powers of the Trustees under this Declaration
shall continue until the affairs of the Trust or such Series shall have been
wound up, including the power to fulfill or discharge the contracts of the
Trust or such Series, collect its assets, sell, convey, assign, exchange,
transfer or otherwise dispose of all or any part of the remaining Trust
Property to one or more persons at public or private sale for consideration
which may consist in whole or in part in cash, securities or other property of
any kind, discharge or pay its liabilities, and do all other acts appropriate
to liquidate its business; provided that any sale, conveyance, assignment,
exchange, transfer or other disposition of all or substantially all the Trust
Property of the Trust or any Series shall require approval of the principal
terms of the transaction and the nature and amount of the consideration by
Shareholders.
(iii) After paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and refunding
agreements, as they deem necessary for their protection, the Trustees may
distribute the remaining Trust Property of any Series, in cash or in kind or
partly each, among the Shareholders of such Series according to their
respective rights.
(b) After termination of the Trust or any Series and distribution to the
Shareholders as herein provided, a majority of the Trustees shall execute and
lodge among the records of the Trust an instrument in writing setting forth
the fact of such termination. Upon termination of the Trust, the Trustees
shall thereupon be discharged from all further liabilities and duties
hereunder, and the rights and interests of all Shareholders shall thereupon
cease. Upon termination of any Series, the Trustees shall thereunder be
discharged from all further liabilities and duties with respect to such
Series, and the rights and interests of all Shareholders of such Series shall
thereupon cease.
11.3. Amendment Procedure.
(a) This Declaration may be amended, after a majority of the Trustees
have approved a resolution therefor, by the affirmative vote of the holders of
not less than a majority of the affected Shares.
The Trustees may also amend this Declaration without any vote of
Shareholders to divide the Trust into one or more Series or additional Series,
to change the name of the Trust on any Series thereof, to make any change that
does not adversely affect the relative rights or preferences of any Series or
as they may deem necessary to conform this Declaration to the requirements of
applicable federal laws or regulations or the requirements of the regulated
investment company provisions of the Internal Revenue Code, but the Trustees
shall not be liable for failing to do so.
(b) No amendment may be made under Section 11.3(a) above, which would
change any rights with respect to any Shares of the Trust or any Series
thereof by reducing the amount payable thereon upon liquidation of the Trust
or by diminishing or eliminating any voting rights pertaining thereto, except
with the vote of the holders of two-thirds of the Shares of the Trust or such
Series. Nothing contained in this Declaration shall permit the amendment of
this Declaration to impair the exemption from personal liability of the
Shareholders, Trustees, officers, employees and agents of the Trust or to
permit assessments upon Shareholders.
(c) A certification in recordable form signed by a majority of the
Trustees setting forth an amendment and reciting that it was duly adopted by
the Trustees and, if required, the shareholders as aforesaid, or a copy of the
Declaration, as amended, in recordable form, and executed by a majority of the
Trustees, shall be conclusive evidence of such amendment when lodged among the
records of the Trust.
Notwithstanding any other provision hereof, until such time as a
Registration Statement under the Securities Act of 1933, as amended, covering
the first public offering of Shares of the Trust shall have become effective,
this Declaration may be terminated or amended in any respect by the
affirmative vote of a majority of the Trustees or by an instrument signed by a
majority of the Trustees.
11.4. Merger, Consolidation and Sale of Assets. The Trust may merge
or consolidate with any other corporation, association, trust or other
organization or may sell, lease or exchange all or substantially all of the
Trust Property, including its good will, upon such terms and conditions and
for such consideration when and as authorized by the Trustees and approved by
shareholders and any such merger, consolidation, sale, lease or exchange shall
be determined for all purposes to have been accomplished under and pursuant to
the statutes of the Commonwealth of Massachusetts. Any Series may so merge,
consolidate or effect a sale or exchange of assets when and as authorized by
the Trustees and approved by Shareholders. In respect of any such merger,
consolidation, sale or exchange of assets, any Shareholder of the Trust or the
Series, as the case may be, who shall vote against such action shall be
entitled to rights of appraisal of his Shares to the same extent as a
shareholder of a Massachusetts business corporation in respect of a merger,
consolidation, sale or exchange of assets of a Massachusetts business
corporation, and such rights shall be his exclusive remedy of dissent from any
such action.
11.5. Incorporation. Upon approval by Shareholders, the Trustees
may cause to be organized or assist in organizing a corporation or
corporations under the laws of any Jurisdiction or any other trust,
partnership, association or other organization to take over all of the Trust
Property or to carry on any business in which the Trust shall directly or
indirectly have any interest, and to sell, convey and transfer the Trust
Property to any such corporation, trust, association or organization in
exchange for the shares or securities thereof, or otherwise, and to lend money
to, subscribe for the shares of securities of, and enter into any contracts
with any such corporation, trust, partnership, association or organization, or
any corporation, partnership, trust, association or organization in which the
Trust holds or is about to acquire shares or any other interests. The
Trustees may also cause a merger or consolidation between the Trust or any
successor thereto and any such corporation, trust, partnership, association or
other organization if and to the extent permitted by law, as provided under
the law then in effect. Nothing contained herein shall be construed as
requiring approval of Shareholders for the Trustees to organize or assist in
organizing one or more corporation, trusts, partnerships, associations or
other organizations and selling, conveying or transferring a portion of the
Trust Property to such organizations or entities.
ARTICLE XII
Miscellaneous
12.1. Filing. This Declaration and any amendment hereto shall be
filed in the office of the Secretary of the Commonwealth of Massachusetts and
in such other places as may be required in such other places as the Trustees
deem appropriate. Each amendment so filed shall be accompanied by a
certificate signed and acknowledged by a Trustee stating that such action was
duly taken in a manner provided herein, and unless such amendment or such
certificate sets forth some later time for the effectiveness of such
amendment, such amendment shall be effective upon its filing. A restated
Declaration, containing the original Declaration and all amendments
theretofore made, may be executed from time to time by a majority of the
Trustees and shall, upon filing with the Secretary of Commonwealth of
Massachusetts, be conclusive evidence of all amendments contained therein and
may thereafter be referred to in lieu of the original Declaration and the
various amendments thereto.
12.2 Resident Agent. The Trust shall maintain a resident agent in the
Commonwealth of Massachusetts, which agent shall initially be CT Corporation
System, 10 Post Office Square, Boston, Massachusetts 02109. The Trustees may
designate a successor resident agent, provided, however, that such appointment
shall not become effective until written notice thereof is delivered to the
office of the Secretary of the Commonwealth.
12.3. Governing Law. This Declaration is executed by the Trustees
and delivered in the Commonwealth of Massachusetts and with reference to the
laws thereof, and the rights of all parties and the validity and construction
of every provision hereof shall be subject to and construed according to laws
of said State and reference shall be specifically made to the business
corporation law of the Commonwealth of Massachusetts as to the construction of
matters not specifically covered herein or as to which an ambiguity exists.
12.4. Counterparts. This Declaration may be simultaneously executed
in several counterparts, each of which shall be deemed to be an original, and
such counterparts, together, shall constitute one and the same instrument,
which shall be sufficiently evidenced by any such original counterpart.
12.5. Reliance by Third Parties. Any certificate executed by an
individual who, according to the records of the Trust, or of any recording
office in which this Declaration may be recorded, appears to be a Trustee
hereunder, certifying to: (a) the number or identity of Trustees or
Shareholders, (b) the name of the Trust or any Series thereof, (c) the
establishment of any Series, (d) the due authorization of the execution of any
instrument or writing, (e) the form of any vote passed at a meeting of
Trustees or Shareholders, (f) the fact that the number of Trustees or
Shareholders present at any meeting or executing any written instrument
satisfies the requirements of this Declaration, (g) the form of any By-Laws
adopted by or the identity of any officers elected by the Trustees, or (h) the
existence of any fact or facts which in any manner relate to the affairs of
the Trust or any Series, shall be conclusive evidence as to the matters so
certified in favor of any person dealing with the Trustees and their
successors.
12.6. Provisions in Conflict With Law or Regulation.
(a) The provisions of this Declaration are severable, and if the Trustees
shall determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the regulated investment company provisions of the
Internal Revenue Code or with other applicable laws and regulations, the
conflicting provision shall be deemed never to have constituted a part of this
Declaration; provided, however, that such determination shall not affect any
of the remaining provisions of this Declaration or render invalid or improper
any action taken or omitted prior to such determination.
(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such Jurisdiction and shall not in any manner
affect such provision in any other Jurisdiction or any other provision of this
Declaration in any Jurisdiction.
12.7. Use of the Name "Van Kampen Merritt". Van Kampen Merritt Inc.
("Van Kampen") has consented to the use by the Trust of the identifying word
or name "Van Kampen Merritt" in the name of the Trust and its Series. Such
consent is conditioned upon the employment of Van Kampen, its successors or
any affiliate thereof, as investment advisor and distributor of the Trust and
each of its Series. As between the Trust and itself, Van Kampen controls the
use of the name of the Trust insofar as such name contains "Van Kampen
Merritt." The name or identifying word "Van Kampen Merritt" may be used from
time to time in other connections and for other purposes by Van Kampen or
affiliated entities. Van Kampen may require the Trust to cease using "Van
Kampen Merritt" in the name of the Trust if the Trust ceases to employ, for
any reason, Van Kampen, an affiliate, or any successor as investment advisor
and distributor of the Trust and each of its Series.
IN WITNESS WHEREOF, the undersigned have caused these presents to be
executed as of the day and year first above written.
/S/: RONALD A. NYBERG /S/: EDWARD C. WOOD
- ----------------------- ---------------------
Ronald A. Nyberg Edward C. Wood
/S/: SCOTT E. MARTIN
- -----------------------
Scott E. Martin
STATE OF ILLINOIS )
) SS
COUNTY OF DUPAGE )
Then personally appeared before me Ronald A. Nyberg, who resides at
Naperville, Illinois, Edward C. Wood III, who resides at Orland Park, Illinois
and Scott E. Martin, who resides at Wheaton, Illinois, who acknowledged the
foregoing instrument to be their free act and deed and the free act and deed
of the Trustees of Van Kampen Merritt Series Trust.
/S/: PATRICIA A. LOPOED
---------------------------
Notary Public
My Commission expires:
My Commission Expires Jan. 8, 1996
- ----------------------------------
BY-LAWS
OF
VAN KAMPEN MERRITT SERIES TRUST
VAN KAMPEN MERRITT SERIES TRUST
BY-LAWS
These By-Laws are made and adopted pursuant to Section 2.7 of the
Declaration of Trust establishing VAN KAMPEN MERRITT SERIES TRUST dated July
9, 1987 as from time to time amended (hereinafter called the "Declaration").
All words and terms capitalized in these By-Laws shall have the meaning or
meanings set forth for such words or terms in the Declaration.
ARTICLE I
Shareholder Meetings
Section 1.1 Chairman. The Chairman, if any, shall act as chairman at
all meetings of the Shareholders; in his absence, the Trustee or Trustees
present at each meeting may elect a temporary chairman for the meeting, who
may be one of themselves.
Section 1.2. Proxies; Voting. Shareholders may vote either in person
or by duly executed proxy and each full share represented at the meeting shall
have one vote, all as provided in Article 10 of the Declaration. No proxy
shall be valid after eleven (11) months from the date of its execution, unless
a longer period is expressly stated in such proxy.
Section 1.3. Closing of Transfer Books and Fixing Record Dates. For
the purpose of determining the Shareholders who are entitled to notice of or
to vote or act at any meeting, including any adjournment thereof, or who are
entitled to participate in any dividends, or for any other proper purpose, the
Trustees may from time to time close the transfer bonds or fix a record date
in the manner provided in Section 10.3 of the Declaration. If the Trustees do
not prior to any meeting of Shareholders so fix a record date or close the
transfer books, then the date of mailing notice of the meeting or the date
upon which the dividend resolution is adopted, as the case may be, shall be
the record date.
Section 1.4. Inspectors of Election. In advance of any meeting of
Shareholders, the Trustees may appoint Inspectors of Election to act at the
meeting or any adjournment thereof. If Inspectors of Election are not so
appointed, the Chairman, if any, of any meeting of Shareholders may, and on
the request of any Shareholder or his proxy shall, appoint Inspectors of
Election of the meeting. The number of Inspectors shall be either one or
three. If appointed at the meeting on the request of one or more Shareholders
or proxies, a majority of Shares present shall determine whether one or three
Inspectors are to be appointed, but failure to allow such determination by the
Shareholders shall not affect the validity of the appointment of Inspectors of
Election. In case any person appointed as Inspector fails to appear or fails
or refuses to act, the vacancy may be filled by appointment made by the
Trustees in advance of the convening of the meeting or at the meeting by the
person acting as chairman. The Inspectors of Election shall determine the
number of Shares outstanding, the Shares represented at the meeting, the
existence of a quorum, the authenticity, validity and effect of proxies, shall
receive votes, ballots or consents, shall hear and determine all challenges
and questions in any way arising in connection with right to vote, shall count
and tabula..e all votes or consents, determine the results, and do such other
acts as any be proper to conduct the election or vote with fairness to all
Shareholders. If there are three Inspectors of Election, the decision, act or
certificate of a majority is effective in all respects as the decision, act or
certificate of all. On request of the Chairman, if any of the meeting, or of
any Shareholder or his proxy, the Inspectors of Election shall make a report
in writing of any challenge or question or matter determined by them and shall
execute a certificate of any facts found by them.
Section 1.5. Records at Shareholder Meetings. At each meeting of the
Shareholders there shall be open for inspection the minutes of the last
previous Meeting of Shareholders of the Trust and a list of the Shareholders
of the Trust, certified to be true and correct by the Secretary or other
proper agent of the Trust, as of the record date of the meeting or the date of
closing of transfer books, as the case may be. Such list of Shareholders
shall contain the name of each Shareholder in alphabetical order and the
address of Shares owned by such Shareholder. Shareholders shall have such
other rights and procedures of inspection of the books and records of the
Trust as are granted to shareholders of a Pennsylvania common law trust.
ARTICLE II
Trustees
Section 2.1. Trustees Meeting. The Trustees shall hold an annual
meeting for the election of officers and the transaction of other business
which may come before such meeting. Neither the business to be transacted at,
nor the purpose of, any meeting of the Board of Trustees need be stated in the
notice or waiver of notice of such meeting, and no notice need be given of
action proposed to be taken by unanimous written consent.
Section 2.2. Chairman; Records. The Chairman, if any, shall act as
chairman at all meetings of the Trustees; in his absence the Trustees present
shall elect one of their number to act as temporary chairman. The results of
all actions taken at a meeting of the Trustees, or by unanimous written
consent of the Trustees, shall be recorded-by the secretary.
ARTICLE III
Officers
Section 3.1. Officers of the Trust. The officers of the Trust shall
consist of a Chairman, if any, a President, a Secretary, a Treasurer and such
other officers or assistant officers, including Vice Presidents, as may be
elected by the Trustees. Any two or more of the offices may be held by the
same person, except that the same person may not be both President and
Secretary. The Trustees may designate the order in which the other Vice
Presidents may act. The Chairman, if any, shall be a Trustee, but no other
officer of the Trust need be a Trustee.
Section 3.2 Election and Tenure. At the initial organization meeting
and thereafter at each annual meeting of the Trustees, the Trustees shall
elect the Chairman, if any, President, Secretary, Treasurer and such other
officers as the Trustees shall deem necessary or appropriate in order to carry
out the business of the Trust. Such officers shall hold office until the next
annual meeting of the Trustees and until their successors have been duly
elected and qualified. The Trustees may fill any vacancy in office or add any
additional officers at any time.
Section 3.3. Removal of Officers. Any officer may be removed at any
time, with or without cause, by action of a majority of the Trustees. This
provision shall not prevent the making of a contract of employment for a
definite term with any officer and shall have no effect upon any cause of
action which any officer may have as a result of removal in breach of a
contract of employment. Any officer may resign at any time by notice in
writing signed by such officer and delivered or mailed to the Chairman, if
any, President, or Secretary, and such resignation shall take effect
immediately upon receipt by the Chairman, if any, President, or Secretary, or
at a later date according to the terms of such notice in writing.
Section 3.4. Bonds and Surety. Any officer may be required by the
Trustees to be bonded for the faithful performance of his duties in such
amount and with such sureties as the Trustees may determine.
Section 3.5. Chairman, President, and Vice President. The Chairman,
if any, shall, if present, preside at all meetings of the Shareholders and of
the Trustees and shall exercise and perform such other powers and duties as
may be from time to time assigned to him by the Trustees. Subject to such
supervisory powers, if any, as may be given by the Trustees to the Chairman,
if any, the President shall be the chief executive officer of the Trust and,
Subject to the control of the Trustees, shall have general supervision,
direction and control of the business of the Trust and of its employees and
shall exercise such general powers of management as are usually vested in the
office of President of a corporation. Subject to direction of the Trustees,
the Chairman, if any, and the President shall each have power in the name and
on behalf of the Trust or any of its Series to execute any and all loans,
documents, contracts, agreements, deeds, mortgages, registration statements
application, requests, filings and other instruments in writing, and to employ
and discharge employees and agents of the Trust. Unless otherwise directed by
the Trustees, the Chairman, if any, the President shall each have full
authority and power, on behalf of all of the Trustees, to attend and to act to
vote, on behalf of the Trust at any meetings of business organizations in
which the Trust holds an interest, or to confer such powers upon any other
persons, by executing any proxies duly authorizing such persons. The
Chairman, if any, and the President shall have such further authorities and
duties as the Trustees shall from time to time determine. In the absence or
disability of the President, the Vice Presidents in order of their rank as
fixed by the Trustees or, if more than one and not ranked, the Vice President
designated by the Trustees, shall perform all of the duties of the President,
and when so acting shall have all the powers of and be Subject to all of the
restrictions upon the President. Subject to the direction of the Trustees,
and of the President, each Vice President shall have the power in the name and
on behalf of the Trust to execute any and all instruments in writing, and, in
addition, shall have such other duties and powers as shall be designated from
time to time by the Trustees or by the President.
Section 3.6. Secretary. The Secretary shall keep the minutes of all
meetings of, and record all votes of, Shareholders, Trustees and the Executive
Committee, if any. He shall be custodian of the seal of the Trust, if any,
and he (and any other person so authorized by the Trustees) shall affix the
seal or, if permitted, facsimile thereof, to any instrument executed by the
Trust which would be sealed by a Pennsylvania common law trust executing the
same or a similar instrument and shall attest the seal and the signature or
signatures of the officer of officers executing such instrument on behalf of
the Trust. The Secretary shall also perform any other duties commonly
incident to such office in a Pennsylvania common law trust, and shall have
such other authorities and duties as the Trustees shall from time to time
determine.
Section 3.7. Treasurer. Except as otherwise directed by the Trustees,
the Treasurer shall have the general supervision of the monies, funds,
securities, notes receivable and other valuable papers and documents of the
Trust, and shall have and exercise under the supervision of the Trustees and
of the President all powers and duties normally incident to his office. He
may endorse for deposit or collection all notes, checks and other instruments
payable to the Trust or to its order. He shall deposit all funds of the Trust
in such depositories as the Trustees shall designate. He shall be responsible
for such disbursement of the funds of the Trust as may be ordered by the
Trustees or the President. He shall keep accurate account of the books of the
Trust's transactions which shall be the property of the Trust, and which
together with all other property of the Trust in his possession, shall be
Subject at all times to the inspection and control of the Trustees. Unless
the Trustees shall otherwise determine, the Treasurer shall be the principal
accounting officer of the Trust and shall also be the principal financial
officer of the Trust. He shall have such other duties and authorities as the
Trustees shall from time to time determine. Notwithstanding anything to the
contrary herein contained, the Trustees may authorize any adviser,
administrator, manager or transfer agent to maintain bank accounts and deposit
and disburse funds of the Trust.
Section 3.8. Other Officers and Duties. The Trustees may elect such
other officers and assistant officers as they shall from time to time
determine to be necessary or desirable in order to conduct the business of the
Trust. Assistant officers shall act generally in the absence of the officer
whom they assist and shall assist that officer in the duties of his office.
Each officer, employee and agent of the Trust shall have such other duties and
authority as may be conferred upon him by the Trustees or delegated to him by
the President.
ARTICLE IV
Miscellaneous
Section 4.1. Depositories. In accordance with Section 7.1 of the
Declaration, the funds of the Trust shall be deposited in such depositories as
the Trustees shall designate and shall be drawn out on checks, drafts or other
orders signed by such officer, officers, agent or agents (including the
adviser, administrator or manager), as the Trustees may from time to time
authorize.
Section 4.2. Signatures. All contracts and other instruments shall be
executed on behalf of the Trust by its properly authorized officers, agent or
agents, as provided in the Declaration or By-Laws or as the Trustees may from
time to time by resolution provide.
Section 4.3. Seal. The seal of the Trust, if any, may be affixed to
any instrument, and the seal and its attestation may be lithographed, engraved
or otherwise printed on any document with the same force and effect as if it
had been imprinted and affixed manually in the same manner and with the same
force and effect as if done by a Pennsylvania common law trust.
ARTICLE V
Stock Transfers
Section 5.1. Transfer Agents, Registrars and the Like. As provided in
Section 6.6 of the Declaration, the Trustees shall have authority to employ
and compensate such transfer agents and registrars with respect to the Shares
of the Trust as the Trustees shall deem necessary or desirable. In addition,
the Trustees shall have power to employ and compensate such dividend
disbursing agents, warrant agents and agents for the reinvestment of dividends
as they shall deem necessary or desirable. Any of such agents shall have such
power and authority as is delegated to any of them by the Trustees.
Section 5.2. Transfer of Shares. The Shares of the Trust shall be
transferable on the books of the Trust only upon delivery to the Trustees or a
transfer agent of the Trust of proper documentation as provided in Section 6.7
of the Declaration. The Trust, or its transfer agents, shall be authorized to
refuse any transfer unless and until presentation of such evidence as may be
reasonably required to show that the requested transfer is proper.
Section 5.3. Registered Shareholders. The Trust may deem and treat
the holder of record of any Shares the absolute owner thereof for all purposes
and shall not be required to take any notice of any right or claim of right of
any other person.
ARTICLE VI
Amendment of By-Laws
Section 6.1. Amendment and Repeal of By-Laws. In accordance with
Section 3.9 of the Declaration, the Trustees shall have the power to alter,
amend or repeal the By-Laws or adopt new By-Laws at any time; provided,
however, that By-Laws adopted by the Shareholders may, if such By-Laws so
state, be altered, amended or repealed only by the Shareholders and not the
Trustees. Action by the Trustees with respect to the By-Laws shall be taken
by an affirmative vote of a majority of the Trustees. The Trustees shall in
no event adopt By-Laws which are in conflict with the Declaration, and any
apparent inconsistency shall be construed in favor of the related provisions
in the Declaration.
The Declaration of Trust establishing Van Kampen Merritt Series Trust,
dated July 9, 1987, a copy of which, together with all amendments thereto (the
"Declaration") provides that the name Van Kampen Merritt Series Trust refers
to the Trustees under the Declaration collectively as Trustees, but not as
individuals or personally; and no Trustee, Shareholder, officer, employee or
agent of Van Kampen Merritt Series Trust shall be held to any personal
liability, nor shall resort be had to their private property for the
satisfaction of any obligation or claim or otherwise in connection with the
affairs of said Van Kampen Merritt Series Trust but the Trust Property only
shall be liable.
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT dated as of April 1, 1996, by and
between VAN KAMPEN MERRITT SERIES TRUST (the "Trust"), a Massachusetts
business trust, and COVA INVESTMENT ADVISORY CORPORATION (the "Advisor"), an
Illinois corporation.
1. (a) Retention of Advisor by Trust. The Trust hereby employs the
Advisor to act as the investment advisor for and to (i) manage the investment
and reinvestment of the assets of the Quality Income Portfolio, High Yield
Portfolio, Growth and Income Portfolio, Money Market Portfolio, Stock Index
Portfolio, World Equity Portfolio and the Utility Portfolio, each being a
sub-trust of the Trust (hereinafter referred to individually as the
"Sub-Trust"), in accordance with each such Sub-Trust's investment objective
and policies and limitations, or (ii) in the event the Advisor shall retain a
sub-advisor in accordance with the provisions of sub-paragraph (b) hereunder,
to supervise and implement the investment activities of any Sub-Trust for
which such sub-advisor has been retained, including responsibility for overall
management and administrative support including managing, providing for and
compensating any sub-advisors; and to administer its affairs to the extent
requested by, and subject to the review and supervision of, the Board of
Trustees of the Trust for the period and upon the terms herein set forth. The
Advisor shall select the entities with or through which the purchase, sale or
loan of securities is to be effected; provided that the Advisor will place
orders pursuant to its investment determinations either directly with the
issuer or with a broker or dealer, and if with a broker or dealer, (a) will
attempt to obtain the best net price and most favorable execution of its
orders, and (b) may nevertheless in its discretion purchase and sell portfolio
securities from and to brokers and dealers who provide the Advisor with
research, analysis, advice and similar services and pay such brokers and
dealers in return a higher commission or spread than may be charged by other
brokers or dealers.
The Trust hereby authorizes any entity or person associated with the
Advisor or any sub-advisor retained by Advisor pursuant to this Agreement,
which is a member of a national securities exchange, to effect any transaction
on the exchange for the account of the Trust which is permitted by Section
11(a) of the Securities Exchange Act of 1934 and Rule 11a2-2(T) thereunder,
and the Trust hereby consents to the retention of compensation for such
transactions in accordance with Rule 11a2-2(T)(a)(iv).
The investment of funds shall be subject to all applicable restrictions
of applicable law and of the Declaration of Trust and By-Laws of the Trust,
and resolutions of the Board of Trustees of the Trust with respect to each
Sub-Trust as may from time to time be in force and delivered or made available
to the Advisor.
(b) Advisor's Acceptance of Employment. The Advisor accepts such
employment and agrees during such period to render such services, to select,
retain and compensate any sub-advisors, to supply investment research and
portfolio management (including without limitation the selection of securities
for each Sub-Trust to purchase, hold or sell and the selection of brokers
through whom such Sub-Trust's portfolio transactions are executed, in
accordance with the policies adopted by the Sub-Trust and its Board of
Trustees), to administer the business affairs of each Sub-Trust, to furnish
offices and necessary facilities and equipment to each Sub-Trust, to provide
administrative services for each Sub-Trust, to render periodic reports to the
Board of Trustees of the Trust with respect to each Sub-Trust, and to permit
any of its officers or employees, or those of any sub-advisor to serve without
compensation as trustees or officers of the Sub-Trust if elected to such
positions.
(c) Independent Contractor. The Advisor and any sub-advisors shall
be deemed to be independent contractors under this Agreement and any
sub-advisory agreements with the Advisor and, unless otherwise expressly
provided or authorized, shall have no authority to act for or represent the
Trust or any Sub-Trust in any way or otherwise be deemed an agent of the Trust
or any Sub-Trust.
(d) Non-Exclusive Agreement. The services of the Advisor to any
Sub-Trust under this Agreement are not to be deemed exclusive, and the Advisor
shall be free to render similar services or other services to others so long
as its services hereunder are not impaired thereby.
2. (a) Fee. For the services and facilities described in Section 1,
each Sub-Trust will pay to the Advisor at the end of each calendar month an
investment management fee equal to a percentage of the average daily net
assets of such Sub-Trust as set forth in Schedules A through G attached hereto
and incorporated by reference herein.
(b) Determination of Net Asset Value. The net asset value of each
Sub-Trust shall be calculated as of the close of the New York Stock Exchange
(the "Exchange") on each day the Exchange is open for trading or such other
time or times as the trustees may determine in accordance with the provisions
of applicable law and of the Declaration of Trust and By-Laws of the Trust,
and resolutions of the Board of Trustees of the Trust as from time to time in
force. For the purpose of the foregoing computations, on each day when net
asset value is not calculated, the net asset value of a share of beneficial
interest of each Sub-Trust shall be deemed to be the net asset value of such
share as of the close of business of the last day on which such calculation
was made.
(c) Proration. For the month and year in which this Agreement
becomes effective or terminates, there shall be an appropriate proration of
the Advisor's fee on the basis of the number of days that the Agreement is in
effect during such month and year, respectively.
3. Expenses. In addition to the fee of the Advisor, the Sub-Trust
shall assume and pay any expenses for services rendered by a custodian for the
safekeeping of such Sub-Trust's securities or other property, for keeping its
books of account, for any other charges of the custodian and for calculating
the net asset value of the Sub-Trust as provided above. Neither the Advisor
nor any sub-advisor shall be required to pay, and each Sub-Trust shall assume
and pay, the charges and expenses of its operations, including compensation of
the trustees of the Trust (other than those who are interested persons of the
Advisor or any sub-advisor and other than those who are interested persons of
the principal underwriter of the Sub-Trust but not of the Advisor or any
sub-advisor, if the principal underwriter has agreed to pay such
compensation), charges and expenses of independent accountants, of legal
counsel and of any transfer or dividend disbursing agent, costs of acquiring
and disposing of portfolio securities, interest (if any) on obligations
incurred by such Sub-Trust, costs of share certificates, membership dues in
the Investment Company Institute or any similar organization, costs of reports
and notices to shareholders, costs of registering shares of such Sub-Trust
under the federal securities laws, miscellaneous expenses and all taxes and
fees to federal, state or other governmental agencies on account of the
registration of securities issued by such Sub-Trust, filing of corporate
documents or otherwise. Neither the Trust nor any Sub-Trust shall pay or
incur any obligation for any management or administrative expenses for which
the Trust or such Sub-Trust intends to seek reimbursement from the Advisor
without first obtaining the written approval of the Advisor. The Advisor
shall arrange, if desired by the Trust, for officers or employees of the
Advisor or any sub-advisor to serve, without compensation from the Trust, as
trustees, officers or agents of the Trust if duly elected or appointed to such
positions and subject to their individual consent to any limitations imposed
by law.
4. Interested Persons. Subject to applicable statutes and regulations,
it is understood that trustees, officers, shareholders and agents of the Trust
or any Sub-Trust are or may be interested in the Advisor or any sub-advisor as
trustees, directors, officers, shareholders, agents or otherwise and that the
trustees, directors, officers, shareholders and agents of the Advisor may be
interested in the Trust and any Sub-Trust as trustees, officers, shareholders,
agents or otherwise.
5. Liability. The Advisor shall not be liable for any error in judgment
or of law, or for any loss suffered by the Trust or any Sub-Trust in
connection with the matters to which this Agreement or any sub-advisory
agreement relates, except (1) a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Advisor in the performance of its
obligations and duties, or (2) by reason of its reckless disregard of its
obligations and duties under this Agreement.
6. (a) Term. This Agreement shall become effective on the date hereof
and shall remain in full force until _________, 1998 unless sooner terminated
as hereinafter provided. This Agreement shall continue in force from year to
year thereafter, but only as long as such continuance is specifically approved
at least annually in the manner required by the Investment Company Act of
1940, as amended (the "Investment Company Act"). Any sub-advisory agreement
between the Advisor and any sub-advisor shall remain in full force and effect
from its date of effectiveness until the second anniversary of such date
unless sooner terminated as hereinafter provided. Any such sub-advisory
agreement shall continue in force from year to year thereafter, but only as
long as such continuance is specifically approved at least annually in the
manner required by the Investment Company Act.
(b) Termination. This Agreement, and any sub-advisory agreement
between the Advisor and any sub-advisor, shall be submitted to the
shareholders of the Trust and each Sub-Trust for approval at a shareholders'
meeting and shall automatically terminate if not approved by a majority of the
shares of the Sub-Trust present and voting at such meeting. This Agreement,
and any sub-advisory agreement between the Advisor and any sub-advisor, shall
automatically terminate in the event of its assignment. This Agreement, and
any sub-advisory agreement between the Advisor and any sub-advisor, may be
terminated at any time without the payment of any penalty by a majority of the
Board of Trustees of the Trust, by vote of the outstanding shares of
beneficial interest of any Sub-Trust or, in the case of this Advisory
Agreement only, by the Advisor or, in the case of a sub-advisory agreement
between the Advisor and any sub-advisor, the sub-advisor, on sixty (60) days
written notice to the other party. The Trust or any Sub-Trust may effect
termination by action of the Board of Trustees or by vote of a majority of the
outstanding shares of beneficial interest of such Sub-Trust, accompanied by
appropriate notice. No sub-advisory agreement shall be cancelable by the
Advisor without the approval of a majority of the Board of Trustees of the
Trust. Any sub-advisory agreement will terminate automatically in the event
of the termination of this Agreement.
(c) Payment upon Termination. Termination of this Agreement shall
not affect the right of the Advisor to receive payment on any unpaid balance
of the compensation described in Section 2 earned prior to such termination.
7. Consistency with Sub-Advisory Agreements. The Advisor shall not
enter into any sub-advisory agreement with any sub-advisor respecting the
management of assets of any Sub-Trust which is inconsistent with the terms
hereof or with the Investment Company Act or the Investment Advisers Act of
1940.
8. Severability. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder
shall not be thereby affected.
9. Notices. Any notice under this Agreement shall be in writing,
addressed and delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate for the receipt of such notice.
10. Disclaimer. The Advisor acknowledges and agrees that, as provided
by Section 5.5 of the Declaration of Trust of the Trust, the shareholders,
trustees, officers, employees and other agents of the Trust and any Sub-Trust
shall not personally be bound by or liable hereunder, nor shall resort be had
to their private property for the satisfaction of any obligation or claim
hereunder.
IN WITNESS WHEREOF, the Trust and the Advisor have caused this Agreement
to be executed on the day and year first above written.
COVA INVESTMENT ADVISORY CORPORATION
By:____________________________________________
VAN KAMPEN MERRITT SERIES TRUST
By:____________________________________________
SCHEDULE A
VAN KAMPEN MERRITT SERIES TRUST, QUALITY INCOME PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated
__________, 1996, the Quality Income Portfolio shall pay to the Advisor at the
end of each calendar month an investment management fee equal to a percentage
of the average daily net assets of the Quality Income Portfolio as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Average Daily Net Assets % Per Annum
________________________ ____________
First $500 Million .500 of 1%
Over $500 Million .450 of 1%
</TABLE>
SCHEDULE B
VAN KAMPEN MERRITT SERIES TRUST, HIGH YIELD PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated
___________, 1996, the High Yield Portfolio shall pay to the Advisor at the
end of each calendar month an investment management fee equal to a percentage
of the average daily net assets of the High Yield Portfolio as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Average Daily Net Assets % Per Annum
________________________ ____________
First $500 Million .750 of 1%
Over $500 Million .650 of 1%
</TABLE>
SCHEDULE C
VAN KAMPEN MERRITT SERIES TRUST, GROWTH AND INCOME PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated
___________, 1996, the Growth and Income Portfolio shall pay to the Advisor at
the end of each calendar month an investment management fee equal to a
percentage of the average daily net assets of the Growth and Income Portfolio
as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Average Daily Net Assets % Per Annum
________________________ ____________
First $500 Million .600 of 1%
Over $500 Million .500 of 1%
</TABLE>
SCHEDULE D
VAN KAMPEN MERRITT SERIES TRUST, MONEY MARKET PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated
__________, 1996, the Money Market Portfolio shall pay to the Advisor at the
end of each calendar month an investment management fee equal to a percentage
of the average daily net assets of the Money Market Portfolio as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Average Daily Net Assets % Per Annum
________________________ ____________
First $500 Million .500 of 1%
Over $500 Million .400 of 1%
</TABLE>
SCHEDULE E
VAN KAMPEN MERRITT SERIES TRUST, STOCK INDEX PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated
___________, 1996, the Stock Index Portfolio shall pay to the Advisor at the
end of each calendar month an investment management fee equal to .500 of 1% of
the average daily net assets of the Stock Index Portfolio.
SCHEDULE F
VAN KAMPEN MERRITT SERIES TRUST, WORLD EQUITY PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated
_____________, 1996, the World Equity Portfolio shall pay to the Advisor at
the end of each calendar month an investment management fee equal to a
percentage of the average daily net assets of the World Equity Portfolio as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Average Daily Net Assets % Per Annum
________________________ ____________
First $500 Million .750 of 1%
Over $500 Million .650 of 1%
</TABLE>
SCHEDULE G
VAN KAMPEN MERRITT SERIES TRUST, UTILITY PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated
____________, 1996, the Utility Portfolio shall pay to the Advisor at the end
of each calendar month an investment management fee equal to a percentage of
the average daily net assets of the Utility Portfolio as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Average Daily Net Assets % Per Annum
________________________ ____________
First $500 Million .650 of 1%
Over $500 Million but
less than $1 Billion .600 of 1%
Over $1 Billion .550 of 1%
</TABLE>
COVA SERIES TRUST
SUB-ADVISORY AGREEMENT
This Agreement is made between COVA INVESTMENT ADVISORY CORPORATION, an
Illinois corporation, having its principal place of business in Oakbrook
Terrace, Illinois (hereinafter referred to as the "Advisor"), Lord Abbett &
Co., a New York partnership, having its principal place of business in New
York, New York (hereinafter referred to as the "Sub-Advisor") and Cova Series
Trust, a Massachusetts business trust (hereinafter referred to as the
"Trust").
WHEREAS, the Trust, an open-end diversified management investment
company, as that term is defined in the Investment Company Act of 1940, as
amended (the "Act"), that is registered as such with the Securities and
Exchange Commission has appointed Advisor as investment adviser for and to the
Bond Debenture Portfolio (referred to as the "Sub-Trust"), pursuant to the
terms of an investment advisory agreement between the Trust and Advisor ( "
Investment Advisory Agreement" );
WHEREAS, Sub-Advisor is engaged in the business of rendering investment
management services; and
WHEREAS, Advisor desires to retain Sub-Advisor to provide certain
investment management services for the Sub-Trust as more fully described
below;
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Retention of Sub-Advisor. Advisor hereby retains Sub-Advisor to
assist Advisor in its capacity as investment adviser for the Sub-Trust.
Subject to the oversight and review of Advisor and the Board of Trustees of
the Trust, Sub-Advisor shall manage the investment and reinvestment of the
assets of the Sub-Trust. Sub-Advisor will determine in its discretion, subject
to the oversight and review of Advisor, the investments to be purchased or
sold, will provide Advisor with records (if any) concerning its activities
pursuant to the agreement and will render regular reports to Advisor and to
officers and Trustees of the Trust concerning its discharge of the foregoing
responsibilities.
Sub-Advisor, in its supervision of the investments of the Sub-Trust, will
be guided by the Sub-Trust's investment objectives and policies and the
provisions and restrictions contained in the Declaration of Trust and By-Laws
of the Trust and as set forth in the Registration Statement and exhibits as
may be on the file with the Securities and Exchange Commission, all as
communicated by Advisor to Sub-Advisor.
Sub-Advisor shall be deemed to be an independent contractor under this
Agreement and, unless otherwise expressly provided or authorized, shall have
no authority to act for or represent the Trust or any Sub-Trust in any way or
otherwise be deemed an agent of the Trust or any Sub-Trust.
2. Fee. Advisor shall pay to Sub-Advisor, for all services rendered to
the Sub-Trust by Sub-Advisor hereunder, the sub-advisory fees set forth in
Exhibit A attached hereto. During the term of this Agreement, Sub-Advisor will
bear all expenses incurred by it in the performance of its duties hereunder.
3. Term. The term of this Agreement shall begin on the date of its
execution and shall remain in effect for two years from that date and from
year to year thereafter, subject to the provisions for termination and all of
the other terms and conditions hereof, if such continuation is specifically
approved at least annually in the manner required by the Act. This Agreement
shall be submitted to the shareholders of the Trust and each Sub-Trust for
approval at a shareholders' meeting and shall automatically terminate if not
approved by a majority of the shares of the Sub-Trust present and voting at
such meeting.
4. Termination. This Agreement may be terminated at any time without
the
payment of any penalty, by a majority of the Board of Trustees of the Trust,
by a vote of the majority of the outstanding shares of beneficial interest of
the Sub-Trust or by the Sub-Advisor on sixty (60) days written notice to the
Advisor.
This Agreement will terminate automatically in the event of the
termination of the Investment Advisory Agreement
Notwithstanding any provision of this Agreement, this Agreement may not
be canceled by the Advisor without the approval of a majority of the Board of
Trustees of the Trust.
This Agreement shall automatically terminate it the event of its
assignment. The Sub-Advisor may employ or contract with any other person,
persons, corporation, or corporations at its own cost and expense as it shall
determine in order to assist it in carrying out its obligations and duties
under this Agreement.
5. Sub-Advisor's Representations. Sub-Advisor represents and warrants
that the Sub-Trust will at all times be invested in such a manner as to ensure
compliance with Subchapter M of the Internal Revenue Code, relating to the
diversification requirements for regulated investment companies. Sub-Advisor
will be held harmless when direction from the Advisor or Trust causes non-
compliance. Sub-Advisor agrees to provide quarterly reports to Advisor,
executed by a duly authorized officer to Sub-Advisor, within seven (7) days of
the close of each calendar quarter certifying as to compliance. In addition to
the quarterly reports, Advisor may request and Sub-Advisor agrees to provide
diversification compliance reports at more frequent intervals, as reasonably
requested by Advisor.
6. Liability. The Sub-Advisor shall not be liable for any error in
judgment or of law, or for any loss suffered by the Trust or any Sub-Trust in
connection with the matters to which this Agreement relates, except (1) a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of the Sub-Advisor in the performance of its obligations and duties or (2) by
reason of its reckless disregard of its obligations and duties under this
Agreement.
7. Brokerage. The Sub-Advisor shall place all orders for the purchase
and sale of portfolio securities for the accounts of the Sub-Trust with
broker-dealers selected by the Sub-Advisor. In executing portfolio
transactions and selecting broker-dealers, the Sub-Advisor will use its best
efforts to seek best execution on behalf of the Sub-Trust. In assessing the
best execution available for any transaction, the Sub-Advisor shall consider
all factors it deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker-dealer, and the reasonableness of the commission, if
any (all for the specific transaction and on a continuing basis). In
evaluating the best execution available, and in selecting the broker-dealer to
execute a particular transaction, the Sub-Advisor may also consider the
brokerage and research services (as those terms are used in Section 28(e) of
the Securities Exchange Act of 1934) provided to the Sub-Trust and/or other
accounts over which the Sub-Advisor or an affiliate of the Sub-Advisor (to the
extent permitted by law) exercises investment discretion. The Sub-Advisor is
authorized to cause the Sub-Trust to pay a broker-dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for the Sub-Trust which is in excess of the amount of commission
another broker-dealer would have charged for effecting that transaction if,
but only if, the Sub-Advisor determines in good faith that such commission is
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.
8. Amendment. This Agreement may be amended at any time by agreement of
the parties, provided that the amendment shall be approved in the manner
required by the Act.
9. Services to Other Customers and Accounts. It is understood that the
services of the Sub-Advisor are not deemed to be exclusive, and nothing in
this Agreement shall prevent the Sub-Advisor, or any officer, director,
partner or employee thereof, from providing similar services to other
companies and other clients (whether or not their investment objectives and
policies are similar to those of the Trust) or to engage in other activities.
When other clients of the Sub-Advisor desire to purchase or sell the same
portfolio security at the same time as the Trust, it is understood that such
purchases and sales will be made as nearly as practicable on a pro rata basis
in proportion to the amounts desired to be purchased or sold by each client.
10. Governing Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of Illinois.
11. Registration as an Investment Advisor. Advisor and Sub-Advisor
hereby acknowledge each is registered as an investment adviser under the
Investment Advisers Act of 1940, it will use its reasonable best efforts to
maintain such registration, and it will promptly notify the other if it ceases
to be so registered, if its registration is suspended for any reason, or if it
is notified by any regulatory organization or court of competent jurisdiction
that it should show cause why its registration should not be suspended or
terminated.
Witness the due execution hereof this ----- day of ---------, 1996.
Attest: COVA INVESTMENT ADVISORY
CORPORATION
- ------------------------ By: ----------------------------
Attest: LORD ABBETT & CO.
- ------------------------ By: ----------------------------
Attest: COVA SERIES TRUST
- ------------------------ By: ----------------------------
EXHIBIT A
COVA SERIES TRUST
SUB-ADVISORY COMPENSATION
For all services rendered by Sub-Advisor hereunder, Advisor shall pay to
Sub-Advisor and Sub-Advisor agrees to accept as full compensation for all
services rendered hereunder, fees at the end of each calendar month equal to a
percentage of the average daily net assets of the Sub-Trusts as follows:
Portfolio % Per Annum
----------------------- -----------
Bond Debenture Portfolio .50 of 1 %
COVA SERIES TRUST
SUB-ADVISORY AGREEMENT
This Agreement is made between COVA INVESTMENT ADVISORY CORPORATION, an
Illinois corporation, having its principal place of business in Oakbrook
Terrace, Illinois (hereinafter referred to as the "Advisor"), J.P. Morgan
Investment Management Inc., a Delaware corporation, having its principal place
of business in New York, New York (hereinafter referred to as the
"Sub-Advisor") and Cova Series Trust, a Massachusetts business trust
(hereinafter referred to as the " Trust " ) .
WHEREAS, the Trust, an open-end diversified management investment
company, as that term is defined in the Investment Company Act of 1940, as
amended (the "Act"), that is registered as such with the Securities and
Exchange Commission has appointed Advisor as investment adviser for and to the
Quality Bond Portfolio, the International Equity Portfolio, the Select Equity
Portfolio, the Large Capital Stock Portfolio and the Small Capital Stock
Portfolio, each being a sub-trust of the Trust (referred to individually as
the "Sub-Trust"), pursuant to the terms of an investment advisory agreement
between the Trust and Advisor ("Investment Advisory Agreement" );
WHEREAS, Sub-Advisor is engaged in the business of rendering investment
management services; and
WHEREAS, Advisor desires to retain Sub-Advisor to provide certain
investment management services for the Sub-Trusts as more fully described
below;
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Retention of Sub-Advisor. Advisor hereby retains Sub-Advisor to
assist Advisor
in its capacity as investment adviser for the Sub-Trusts. Subject to the
oversight and review of Advisor and the Board of Trustees of the Trust,
Sub-Advisor shall manage the investment and reinvestment of the assets of the
Sub-Trusts. Sub-Advisor will determine in its discretion, subject to the
oversight and review of Advisor, the investments to be purchased or sold, will
provide Advisor with records concerning its activities which Sub-Advisor is
required to maintain by applicable law or regulation, and will render regular
reports as Advisor may reasonably request to Advisor and to officers and
Trustees of the Trust concerning its discharge of the foregoing
responsibilities.
Subject to paragraph 5 hereof, Sub-Advisor, in its supervision of the
investments of the Sub-Trusts, will be guided by each Sub-Trust's investment
objectives and policies and the provisions and restrictions contained in the
Declaration of Trust and By-Laws of the Trust and as set forth in the
Registration Statement and exhibits as may be on the file with the Securities
and Exchange Commission, all as communicated by Advisor to Sub-Advisor.
Sub-Advisor shall be deemed to be an independent contractor under this
Agreement and, unless otherwise expressly provided or authorized, shall have
no authority to act for or represent the Trust or any Sub-Trust in any way or
otherwise be deemed an agent of the Trust or any Sub-Trust.
2. Fee. Advisor shall pay to Sub-Advisor, for all services
rendered to the Sub-Trusts by Sub-Advisor hereunder, the sub-advisory fees set
forth in Exhibit A attached hereto. During the term of this Agreement,
Sub-Advisor will bear all expenses incurred by it in the performance of its
duties hereunder. The expenses not to be borne by the Sub-Advisor include,
without limitation, the following: organizational costs, taxes, interest,
brokerage fees and commissions, Director's fees, Securities and Exchange
Commission fees and state Blue Sky qualification fees, advisory fees, charges
of custodians, transfer and dividend disbursing agents' fees, certain
insurance premiums, industry association fees, outside auditing and legal
expenses, costs of independent pricing services, costs of maintaining
existence, costs attributable to investor services (including, without
limitation, telephone and personnel expenses), costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing stockholders, costs of stockholders' resorts
and meetings, and any extraordinary expenses.
3. Term. The term of this Agreement shall begin on the date of its
execution and shall remain in effect for two years from that date and from
year to year thereafter, subject to the provisions for termination and all of
the other terms and conditions hereof, if such continuation is specifically
approved at least annually in the manner required by the Act. This Agreement
shall be submitted to the shareholders of the Trust and each Sub-Trust for
approval at a shareholders" meeting and shall automatically terminate if not
approved by a majority of the shares of the Sub-Trust present and voting at
such meeting.
4. Termination. This Agreement may be terminated at any time
without the payment of any penalty, by a majority of the Board of Trustees of
the Trust, by a vote of the majority of the outstanding shares of beneficial
interest of any Sub-Trust or by the Sub-Advisor on sixty (60) days written
notice to the Advisor.
This Agreement will terminate five (5) business days after the Sub-Advisor
receives written notice of the termination of the Investment Advisory
Agreement.
Notwithstanding any provision of this Agreement, this Agreement may not be
canceled by the Advisor without the approval of a majority of the Board of
Trustees of the Trust.
This Agreement shall automatically terminate in the event of its assignment
(as defined in the Act). The Sub-Advisor may employ or contract with any other
person, persons, corporation, or corporations at its own cost and expense as
it shall determine in order to assist it in carrying out its obligations and
duties under this Agreement.
5. Guidelines and Reports. The Advisor agrees on an on-going basis
to provide or cause to be provided to the Sub-Advisor guidelines, which may
include each Sub-Trust's current prospectus and statement of additional
information, to be revised as provided below (the "Guidelines"), setting forth
limitations by dollar amount or percentage of net assets, on the types of
securities in which the Sub-Trusts are permitted to invest or investment
activities in which the Sub-Trusts are permitted to engage. Among other
matters, the Guidelines shall set forth clearly the limitations imposed upon
the Sub-Trusts as a result of relevant diversification requirements under
state and federal law pertaining to insurance products, including, without
limitation, the provisions of Section 81 7(h) of the Internal Revenue Code of
1986, as amended (the "Code"). The Guidelines shall remain in effect until
12:00 p.m. on the third business day following actual receipt by the
Sub-Advisor of a written notice, denominated clearly as such, setting forth
revised Guidelines. Sub-Advisor agrees to provide quarterly reports to
Advisor, executed by a duly authorized officer of Sub-Adviser, within ten (10)
business days of the close of each calendar quarter certifying as to
compliance with said Guidelines. In addition to the quarterly reports, Advisor
may request and Sub-Advisor agrees to provide Section 817 diversification
compliance reports at more frequent intervals, as reasonably requested by
Advisor.
The Advisor agrees to cause to be delivered to a person designated in writing
for such purpose by the Sub-Advisor, within ten (10) business days after each
quarter end and within ten (10) business days after each month end when the
result of the prior quarter's test reflected short-three income exceeding 20%
of total income, or more often as necessary, a written report dated the date
of its delivery (the "Report") with respect to each Sub-Trust's compliance for
its current fiscal year with the short-three test set forth in Section 851
(b)(3) of the Code (the "short-three test"). The Report shall include in chart
form the Sub-Trusts gross income (within the meaning of Section 851 of the
Code) from the beginning of the current fiscal year to the date of the Report
and its cumulative income and gains described in Section 851 (b)(3) of the
Code for such period. The Report shall be required only as long as the
short-three test remains a requirement of the Code. The Trust and the Advisor
agree that the Sub-Advisor may rely on the Guidelines and the Report without
independent verification of their accuracy.
6. Liability and Indemnification. The Sub-Advisor shall not be
liable for any error in judgment or of law, or for any loss suffered by the
Trust or any Sub-Trust in connection with the matters to which this Agreement
relates, except (1) a loss resulting from willful misfeasance, bad faith or
gross negligence on the part of the Sub-Advisor in the performance of its
obligations and duties or (2) by reason of its reckless disregard of its
obligations and duties under this Agreement. The Advisor agrees to indemnify
and hold harmless the Sub-Advisor from and against any and all claims, losses,
liabilities or damages (including reasonable attorneys' fees and other related
expenses), howsoever arising, from or in connection with this Agreement or the
performance by the Sub-Advisor of its duties hereunder, provided, however,
that nothing contained herein shall require that the Sub-Advisor be
indemnified for any loss suffered by the Trust or the Advisor due to the
Sub-Advisor's willful misfeasance, bad faith or gross negligence on its part
in the performance of its obligations and duties or from reckless disregard of
its obligations and duties under this Agreement.
7. Brokerage. The Sub-Advisor shall place all orders for the
purchase and sale of portfolio securities for the accounts of the Sub-Trusts
with broker-dealers selected by the Sub-Advisor. In executing portfolio
transactions and selecting broker-dealers, the Sub-Advisor will use its best
efforts to seek best execution on behalf of the Sub-Trusts. In assessing the
best execution available for any transaction, the Sub-Advisor shall consider
all factors it deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker-dealer, and the reasonableness of the commission, if
any (all for the specific transaction and on a continuing basis). In
evaluating the best execution available, and in selecting the broker-dealer to
execute a particular transaction, the Sub-Advisor may also consider the
brokerage and research services (as those terms are used in Section 28(e) of
the Securities Exchange Act of 1934) provided to the Sub-Trusts and/or other
accounts over which the Sub-Advisor or an affiliate of the Sub-Advisor (to the
extent permitted by law) exercises investment discretion. The Sub-Advisor is
authorized to cause the Sub-Trusts to pay a broker-dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for the Sub-Trusts which is in excess of the amount of commission
another broker-dealer would have charged for effecting that transaction if,
but only if, the Sub-Advisor determines in good faith that such commission is
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.
8. Amendment. This Agreement may be amended at any time by
agreement of the parties, provided that the amendment shall be approved in the
manner required by the Act.
9. Governing Law. This Agreement shall be construed in accordance
with and governed by the laws of the State of Illinois.
10. Registration as an Investment Advisor. Advisor and Sub-Advisor
hereby acknowledge each is registered as an investment adviser under the
Investment Advisers Act of 1940, it will use its reasonable best efforts to
maintain such registration, and it will promptly notify the other if it ceases
to be so registered, if its registration is suspended for any reason, or if it
is notified by any regulatory organization or court of competent jurisdiction
that it should show cause why its registration should not be suspended or
terminated.
11. Services to Other Companies or Accounts. The Trust and the
Adviser understand that the Sub-Adviser now acts, will continue to act and may
act in the future as investment adviser to fiduciary and other managed
accounts and as investment adviser to other investment companies, and the
Trust and the Adviser have no objection to the Sub-Adviser so acting, provided
that whenever a Sub-trust and one or more other accounts or investment
companies advised by the Sub-Adviser have available funds for investment,
investments suitable and appropriate for each will be allocated in accordance
with a methodology believed to be equitable to each entity. The Sub-Adviser
agrees to allocate similar opportunities to sell securities. The Trust and the
Adviser recognize that, in some cases, this procedure may limit the size of
the position that may be acquired or sold for a Sub-Trust. In addition, the
Trust understands that the persons employed by the Sub-Adviser to assist in
the performance of the Sub-Adviser's duties hereunder will not devote their
full time to such service and nothing contained herein shall be deemed to
limit or restrict the right of the Sub-Adviser or any affiliate of the
Sub-Adviser to engage in and devote time and attention to other business or to
render services of whatever kind or nature.
12. Books and Records. In compliance with the requirements of
Rule 31 a-3 under the Act, the Sub-Adviser hereby agrees that all records
which it maintains for the Sub-Trusts are the property of the Trust and
further agrees to surrender promptly to the Trust copies of any of such
records upon the Trust's or the Adviser's request. The Sub-Adviser further
agrees to preserve for the periods prescribed by Rule 31a-2 under the Act the
records relating to its activities hereunder required to be maintained by Rule
31a-1 under the Act and to preserve the records relating to its activities
hereunder required by Rule 204-2 under the Investment Advisers Act of 1940, as
amended, for the period specified in said Rule.
13. Disclosure. Neither the Trust nor the Advisor shall, without
the prior written consent of the Sub-Adviser, make representations regarding
the Sub-Adviser or any affiliates in any disclosure document, advertisement,
sales literature or other promotional materials. Sub-Adviser shall respond in
writing within ten ( 10) business days of any such request for prior written
consent from Adviser or any affiliate and in the event Sub-Adviser does not
respond in writing, Sub-Adviser shall be deemed to have disapproved the
disclosure document, advertisement, sales literature or other promotional
materials submitted to Sub- Adviser.
14. Miscellaneous. All notices provided for by this Agreement
shall be in writing and shall be deemed given when received, against
appropriate receipt, by the President in the case of the Sub-Adviser, the
President in the case of the Adviser, and the Trust's Secretary in the case of
the Trust, or such other person a party shall designate by notice to the other
parties. No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought. This Agreement constitutes the entire agreement among the parties
hereto and supersedes any prior agreement among the parties relating to the
subject matter hereof. The paragraph headings of this Agreement are for
convenience of reference and do not constitute a part hereof.
Witness the due execution hereof this --- day of ------------- , 1996.
<TABLE>
<CAPTION>
<S> <C>
Attest: COVA INVESTMENT ADVISORY
CORPORATION
- ------------------------- By: ----------------------------
Attest: J.P. MORGAN INVESTMENT
MANAGEMENT. INC.
- ------------------------- By: -----------------------------
Attest: COVA SERIES TRUST
- ------------------------- By: -----------------------------
</TABLE>
EXHIBIT A
COVA SERIES TRUST
SUB-ADVISORY COMPENSATION
For all services rendered by Sub-Advisor hereunder, Advisor shall pay to
Sub-Advisor and Sub-Advisor agrees to accept as full compensation for all
services rendered hereunder, fees at the end of each calendar month equal to a
percentage of the average daily net assets of the Sub-Trusts as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Portfolio Average Daily Net Assets % Per Annum
- ------------------------------ ------------------------ ------------
Quality Bond Portfolio First $75 million .30 of 1 %
Over $75 million .25 of 1%
International Equity Portfolio First $50 million .60 of 1 %
Over $50 million .50 of 1 %
Select Equity Portfolio First $50 million .50 of 1 %
Over $50 million .40 of 1%
Large Capital Stock Portfolio .40 of 1%
Small Capital Stock Portfolio .60 of 1 %
</TABLE>
VAN KAMPEN MERRITT SERIES TRUST
SUB-ADVISORY AGREEMENT
This Agreement is made between COVA INVESTMENT ADVISORY CORPORATION, an
Illinois corporation, having its principal place of business in Oakbrook
Terrace, Illinois (hereinafter referred to as the "Advisor"), VAN KAMPEN
AMERICAN CAPITAL INVESTMENT ADVISORY CORP., a Delaware corporation, having its
principal place of business in Oakbrook Terrace, Illinois (hereinafter
referred to as the "Sub-Advisor") and VAN KAMPEN MERRITT SERIES TRUST, a
Massachusetts business trust (hereinafter referred to as the "Trust").
WHEREAS, the Trust, an open-end diversified management investment company, as
that term is defined in the Investment Company Act of 1940, as amended (the
"Act"), that is registered as such with the Securities and Exchange Commission
has appointed Advisor as investment adviser for and to the Quality Income
Portfolio, the High Yield Portfolio, the Growth and Income Portfolio, the
Money Market Portfolio, the Stock Index Portfolio, the World Equity Portfolio
and the Utility Portfolio, each being a sub-trust of the Trust (referred to
individually as the "Sub-Trust"), pursuant to the terms of an investment
advisory agreement between the Trust and Advisor ("Investment Advisory
Agreement");
WHEREAS, Sub-Advisor is engaged in the business of rendering investment
management services; and
WHEREAS, Advisor desires to retain Sub-Advisor to provide certain investment
management services for the Sub-Trusts as more fully described below;
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Retention of Sub-Advisor. Advisor hereby retains Sub-Advisor to
assist Advisor in its capacity as investment adviser for the Sub-Trusts.
Subject to the oversight and review of Advisor and the Board of Trustees of
the Trust, Sub-Advisor shall manage the investment and reinvestment of the
assets of the Sub-Trusts. Sub-Advisor will determine in its discretion,
subject to the oversight and review of Advisor, the investments to be
purchased or sold, will provide Advisor with records concerning its activities
which Advisor or the Trust is required to maintain, and will render regular
reports to Advisor and to officers and Trustees of the Trust concerning its
discharge of the foregoing responsibilities.
Sub-Advisor, in its supervision of the investments of the Sub-Trusts,
will be guided by each Sub-Trust's investment objectives and policies and the
provisions and restrictions contained in the Declaration of Trust and By-Laws
of the Trust and as set forth in the Registration Statement and exhibits as
may be on file with the Securities and Exchange Commission, all as
communicated by Advisor to Sub-Advisor.
Sub-Advisor shall be deemed to be an independent contractor under this
Agreement and, unless otherwise expressly provided or authorized, shall have
no authority to act for or represent the Trust or any Sub-Trust in any way or
otherwise be deemed an agent of the Trust or any Sub-Trust.
2. Fee. Advisor shall pay to Sub-Advisor, for all services rendered to
the Sub-Trusts by Sub-Advisor hereunder, the sub-advisory fees set forth in
Exhibit A attached hereto. During the term of this Agreement, Sub-Advisor
will bear all expenses incurred by it in the performance of its duties
hereunder.
3. Term. The term of this Agreement shall begin on the date of its
execution and shall remain in effect for two years from that date and from
year to year thereafter, subject to the provisions for termination and all of
the other terms and conditions hereof, if such continuation is specifically
approved at least annually in the manner required by the Act. This Agreement
shall be submitted to the shareholders of the Trust and each Sub-Trust for
approval at a shareholders' meeting and shall automatically terminate if not
approved by a majority of the shares of the Sub-Trust present and voting at
such meeting.
4. Termination. This Agreement may be terminated at any time without
the payment of any penalty, by a majority of the Board of Trustees of the
Trust, by a vote of the majority of the outstanding shares of beneficial
interest of any Sub-Trust or by the Sub-Advisor on sixty (60) days written
notice to the Advisor.
This Agreement will terminate automatically in the event of the
termination of the Investment Advisory Agreement.
Notwithstanding any provision of this Agreement, this Agreement may not
be canceled by the Advisor without the approval of a majority of the Board of
Trustees of the Trust.
This Agreement shall automatically terminate in the event of its
assignment. The Sub-Advisor may employ or contract with any other person,
persons, corporation, or corporations at its own cost and expense as it shall
determine in order to assist it in carrying out its obligations and duties
under this Agreement.
5. Sub-Advisor's Representations - Section 817(h). Sub-Advisor
represents and warrants that the Sub-Trusts will at all times be invested in
such a manner as to ensure compliance with Section 817(h) of the Internal
Revenue Code of 1986, as amended and Treasury Regulations Section 1.817-5,
relating to the diversification requirements for variable annuity, endowment,
or life insurance contracts and any amendments or other modifications to such
Section or Regulations. Sub-Advisor will be relieved of this obligation and
shall be held harmless when direction from the Advisor or Trustees causes
non-compliance with Section 817(h) and/or Regulation Section 1.817-5.
Sub-Advisor agrees to provide quarterly reports to Advisor, executed by a duly
authorized officer of Sub-Advisor, within seven (7) days of the close of each
calendar quarter certifying as to compliance with said Section or Regulations.
In addition to the quarterly reports, Advisor may request and Sub-Advisor
agrees to provide Section 817 diversification compliance reports at more
frequent intervals, as reasonably requested by Advisor.
6. Liability. The Sub-Advisor shall not be liable for any error in
judgment or of law, or for any loss suffered by the Trust or any Sub-Trust in
connection with the matters to which this Agreement relates, except (1) a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of the Sub-Advisor in the performance of its obligations and duties or (2) by
reason of its reckless disregard of its obligations and duties under this
Agreement.
7. Brokerage. The Sub-Advisor shall place all orders for the purchase
and sale of portfolio securities for the accounts of the Sub-Trusts with
broker-dealers selected by the Sub-Advisor. In executing portfolio
transactions and selecting broker-dealers, the Sub-Advisor will use its best
efforts to seek best execution on behalf of the Sub-Trusts. In assessing the
best execution available for any transaction, the Sub-Advisor shall consider
all factors it deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker-dealer, and the reasonableness of the commission, if
any (all for the specific transaction and on a continuing basis). In
evaluating the best execution available, and in selecting the broker-dealer to
execute a particular transaction, the Sub-Advisor may also consider the
brokerage and research services (as those terms are used in Section 28(e) of
the Securities Exchange Act of 1934) provided to the Sub-Trusts and/or other
accounts over which the Sub-Advisor or an affiliate of the Sub-Advisor (to the
extent permitted by law) exercises investment discretion. The Sub-Advisor is
authorized to cause the Sub-Trusts to pay a broker-dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for the Sub-Trusts which is in excess of the amount of commission
another broker-dealer would have charged for effecting that transaction if,
but only if, the Sub-Advisor determines in good faith that such commission is
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.
8. Amendment. This Agreement may be amended at any time by agreement of
the parties, provided that the amendment shall be approved in the manner
required by the Act.
9. Governing Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of Illinois.
10. Registration as Investment Adviser. The Advisor and Sub-Advisor
each hereby acknowledges that it is registered as an investment adviser under
the Investment Advisers Act of 1940, it will use its reasonable best efforts
to maintain such registration, and it will promptly notify the other if it
ceases to be so registered, if its registration is suspended for any reason,
or if it is notified by any regulatory organization or court of competent
jurisdiction that it should show cause why its registration should not be
suspended or terminated.
Witness the due execution hereof this ---- day of ---------, 1996.
<TABLE>
<CAPTION>
<S> <C>
COVA INVESTMENT ADVISORY CORPORATION
Attest:
- ---------------------- By:-------------------------------------------
VAN KAMPEN AMERICAN CAPITAL INVESTMENT
ADVISORY CORP.
Attest:
- ---------------------- By:-------------------------------------------
VAN KAMPEN MERRITT SERIES TRUST
Attest:
- -------------------------- By:-------------------------------------------
</TABLE>
EXHIBIT A
VAN KAMPEN MERRITT SERIES TRUST
SUB-ADVISORY COMPENSATION
For all services rendered by Sub-Advisor hereunder, Advisor shall pay to
Sub-Advisor and Sub-Advisor agrees to accept as full compensation for all
services rendered hereunder, fees at the end of each calendar month equal to a
percentage of the average daily net assets of the Sub-Trusts as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Portfolio Average Daily Net Assets % Per Annum
- -------------------------- ------------------------ ------------
Money Market Portfolio First $500 million .25 of 1%
Over $500 million .15 of 1%
Quality Income Portfolio First $500 million .25 of 1%
Over $500 million .20 of 1%
High Yield Portfolio First $500 million .50 of 1%
Over $500 million .40 of 1%
Growth and Income Portfolio First $500 million .35 of 1%
Over $500 million .25 of 1%
Stock Index Portfolio ------------------ .25 of 1%
World Equity Portfolio First $500 million .50 of 1%
Over $500 million .40 of 1%
Utility Portfolio First $500 million .40 of 1%
Over $500 million but less
than $1 billion .35 of 1%
Over $1 billion .30 of 1%
</TABLE>
April 26, 1996
Board of Trustees
Van Kampen Merritt Series Trust
One Tower Lane
Suite 3000
Oakbrook Terrace, IL 60181-4644
Re: Opinion of Counsel - Van Kampen Merritt Series Trust
Gentlemen:
You have requested our Opinion of Counsel in connection with the filing with
the Securities and Exchange Commission of a Post-Effective Amendment to a
Registration Statement on Form N-1A with respect to Van Kampen Merritt Series
Trust.
We have made such examination of the law and have examined such records and
documents as in our judgment are necessary or appropriate to enable us to
render the opinions expressed below.
We are of the following opinions:
1. Van Kampen Merritt Series Trust ("Trust") is a valid and existing
unincorporated voluntary association, commonly known as a business trust.
2. The Trust is a business Trust created and validly existing pursuant
to the Massachusetts Laws.
3. All of the prescribed Trust procedures for the issuance of the shares
have been followed, and, when such shares are issued in accordance with the
Prospectus contained in the Registration Statement for such shares, all state
requirements relating to such Trust shares will have been complied with.
4. Upon the acceptance of purchase payments made by shareholders in
accordance with the Prospectus contained in the Registration Statement and
upon compliance with applicable law, such shareholders will have
legally-issued, fully paid, non-assessable shares of the Trust.
You may use this opinion letter, or a copy thereof, as an exhibit to the
Registration.
We consent to the reference to our Firm under the caption "Legal Counsel"
contained in the Statement of Additional Information which forms a part of the
Registration Statement.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By: /s/ RAYMOND A. O'HARA III
-----------------------------
Raymond A. O'Hara III
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders of the Growth and Income Portfolio
of the Van Kampen Merritt Series Trust:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Legal Counsel and Independent Auditors" in the Statement of
Additional Information.
KPMG Peat Marwick LLP
Chicago, Illinois
April 23, 1996
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders of the High Yield Portfolio
of the Van Kampen Merritt Series Trust:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Legal Counsel and Independent Auditors" in the Statement of
Additional Information.
KPMG Peat Marwick LLP
Chicago, Illinois
April 23, 1996
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders of the Money Market Portfolio
of the Van Kampen Merritt Series Trust:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Legal Counsel and Independent Auditors" in the Statement of
Additional Information.
KPMG Peat Marwick LLP
Illinois
April 23, 1996
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders of the Quality Income Portfolio
of the Van Kampen Merritt Series Trust:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Legal Counsel and Independent Auditors" in the Statement of
Additional Information.
KPMG Peat Marwick LLP
Chicago, Illinois
April 23, 1996
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders of the Stock Index Portfolio
of the Van Kampen Merritt Series Trust:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Legal Counsel and Independent Auditors" in the Statement of
Additional Information.
KPMG Peat Marwick LLP
Chicago, Illinois
April 23, 1996
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholder of the Bond Debenture,
Quality Bond, Small Cap Stock, Large Cap Stock,
Select Equity and International Equity Portfolios of the
Van Kampen Merritt Series Trust:
We consent to the use of our report in the Statement of Additional Information
which is incorporated by reference into the Prospectus and to the reference to
our Firm under the headings "Financial Highlights" in the Prospectus and
"Legal Counsel and Independent Auditors" in the Statement of Additional
Information.
St. Louis, Missouri
April 23, 1996
SERIES TRUST GROWTH AND INCOME FUND PORTFOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Net Asset Value $12.51
Initial Investment $1,155.50 = P
Ending Redeemable Value $1,528.06 = ERV
One year period ended 12/31/95 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 32.24% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Net Asset Value $12.51
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,528.06 = ERV
Inception through 12/31/95 = (44 Mos.) 3.66667 = n
TOTAL RETURN FOR THE PERIOD 12.26% = T
SERIES TRUST HIGH YIELD PORTOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Net Asset Value $10.45
Initial Investment $1,817.47 = P
Ending Redeemable Value $2,120.80 = ERV
One year period ended 12/31/95 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 16.69% = T
TOTAL RETURN CALCULATION FIVE YEARS ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Net Asset Value $10.45
Initial Investment $1,048.02 = P
Ending Redeemable Value $2,120.80 = ERV
Five years ended 12/31/95 = (60 Mos.) 5 = n
TOTAL RETURN FOR THE PERIOD 15.14% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Net Asset Value $10.45
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,120.80 = ERV
Inception through 12/31/95 = (72 Mos.) 6 = n
TOTAL RETURN FOR THE PERIOD 13.35% = T
SERIES TRUST MONEY MARKET PORTFOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Net Asset Value $1.00
Initial Investment $1,148.50 = P
Ending Redeemable Value $1,217.56 = ERV
One year period ended 12/31/95 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 6.01% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Net Asset Value $1.00
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,217.56 = ERV
Inception through 12/31/95 = (54 Mos.) 4.50000 = n
TOTAL RETURN FOR THE PERIOD 4.47% = T
SERIES TRUST QUALITY INCOME PORTOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Net Asset Value $10.87
Initial Investment $1,415.97 = P
Ending Redeemable Value $1,670.72 = ERV
One year period ended 12/31/95 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 17.99% = T
TOTAL RETURN CALCULATION FIVE YEARS ENDED DECEMBER 31, 1995
Formula P(1+T) = ERV
Net Asset Value $10.87
Initial Investment $1,079.93 = P
Ending Redeemable Value $1,670.72 = ERV
Five years ended 12/31/95 = (60 Mos.) 5 = n
TOTAL RETURN FOR THE PERIOD 9.12% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Net Asset Value $10.87
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,670.72 = ERV
Inception through 12/31/95 = (72 Mos.) 6 = n
TOTAL RETURN FOR THE PERIOD 8.93% = T
SERIES TRUST STOCK INDEX PORTFOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Net Asset Value $13.84
Initial Investment $1,274.24 = P
Ending Redeemable Value $1,744.10 = ERV
One year period ended 12/31/95 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 36.87% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Net Asset Value $13.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,744.10 = ERV
Inception through 12/31/95 = (49 Mos.) 4.08333 = n
TOTAL RETURN FOR THE PERIOD 14.59% = T
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> Series Trust Quality Income
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 40432877
<INVESTMENTS-AT-VALUE> 41804754
<RECEIVABLES> 685422
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 406
<TOTAL-ASSETS> 42490582
<PAYABLE-FOR-SECURITIES> 1064501
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 35218
<TOTAL-LIABILITIES> 1099719
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 41324208
<SHARES-COMMON-STOCK> 3807302
<SHARES-COMMON-PRIOR> 3457435
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1305222)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1371877
<NET-ASSETS> 41390863
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2746403
<OTHER-INCOME> 0
<EXPENSES-NET> 252556
<NET-INVESTMENT-INCOME> 2493847
<REALIZED-GAINS-CURRENT> 453622
<APPREC-INCREASE-CURRENT> 3164151
<NET-CHANGE-FROM-OPS> 6111620
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2493847)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2141344
<NUMBER-OF-SHARES-REDEEMED> (2030345)
<SHARES-REINVESTED> 238868
<NET-CHANGE-IN-ASSETS> 7454446
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1758844)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 195378
<INTEREST-EXPENSE> 18102
<GROSS-EXPENSE> 309839
<AVERAGE-NET-ASSETS> 38854190
<PER-SHARE-NAV-BEGIN> 9.815
<PER-SHARE-NII> .667
<PER-SHARE-GAIN-APPREC> 1.056
<PER-SHARE-DIVIDEND> (.667)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.871
<EXPENSE-RATIO> .60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> Series Trust High Yield
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 34865997
<INVESTMENTS-AT-VALUE> 35609560
<RECEIVABLES> 1133036
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1200
<TOTAL-ASSETS> 36743796
<PAYABLE-FOR-SECURITIES> 173428
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 54948
<TOTAL-LIABILITIES> 228376
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 37281871
<SHARES-COMMON-STOCK> 3495538
<SHARES-COMMON-PRIOR> 2000944
<ACCUMULATED-NII-CURRENT> 7484
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1517498)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 743563
<NET-ASSETS> 36515420
<DIVIDEND-INCOME> 11665
<INTEREST-INCOME> 2934803
<OTHER-INCOME> 48825
<EXPENSES-NET> 248259
<NET-INVESTMENT-INCOME> 2747034
<REALIZED-GAINS-CURRENT> 137302
<APPREC-INCREASE-CURRENT> 1523562
<NET-CHANGE-FROM-OPS> 4407898
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2739550)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1420820
<NUMBER-OF-SHARES-REDEEMED> (193236)
<SHARES-REINVESTED> 267010
<NET-CHANGE-IN-ASSETS> 16859836
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1654800)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 219052
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 315025
<AVERAGE-NET-ASSETS> 28908891
<PER-SHARE-NAV-BEGIN> 9.823
<PER-SHARE-NII> .949
<PER-SHARE-GAIN-APPREC> .621
<PER-SHARE-DIVIDEND> (.947)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.446
<EXPENSE-RATIO> .86
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> Series Trust Money Market
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 34301463
<INVESTMENTS-AT-VALUE> 34301463
<RECEIVABLES> 128143
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 487
<TOTAL-ASSETS> 34430093
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 47597
<TOTAL-LIABILITIES> 47597
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 34458054
<SHARES-COMMON-STOCK> 34458054
<SHARES-COMMON-PRIOR> 75996424
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (75558)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 34382496
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3110220
<OTHER-INCOME> 0
<EXPENSES-NET> (58028)
<NET-INVESTMENT-INCOME> 3052192
<REALIZED-GAINS-CURRENT> 34345
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 3086537
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3052192)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 27981115
<NUMBER-OF-SHARES-REDEEMED> (72571677)
<SHARES-REINVESTED> 3052192
<NET-CHANGE-IN-ASSETS> (41504025)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (109903)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 259159
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 345859
<AVERAGE-NET-ASSETS> 53782642
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .059
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.059)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .11
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> Series Trust Stock Index
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 71775734
<INVESTMENTS-AT-VALUE> 85863498
<RECEIVABLES> 171676
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 24275
<TOTAL-ASSETS> 86059449
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 76049
<TOTAL-LIABILITIES> 76049
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 71895636
<SHARES-COMMON-STOCK> 6210939
<SHARES-COMMON-PRIOR> 3477141
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 34423
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14053341
<NET-ASSETS> 85983400
<DIVIDEND-INCOME> 1299662
<INTEREST-INCOME> 496725
<OTHER-INCOME> 0
<EXPENSES-NET> (362170)
<NET-INVESTMENT-INCOME> 1434217
<REALIZED-GAINS-CURRENT> 2287911
<APPREC-INCREASE-CURRENT> 14416467
<NET-CHANGE-FROM-OPS> 18138595
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1434217)
<DISTRIBUTIONS-OF-GAINS> (2274444)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3889063
<NUMBER-OF-SHARES-REDEEMED> (1426721)
<SHARES-REINVESTED> 271456
<NET-CHANGE-IN-ASSETS> 49172477
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 20956
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 296648
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 465994
<AVERAGE-NET-ASSETS> 59416148
<PER-SHARE-NAV-BEGIN> 10.587
<PER-SHARE-NII> .260
<PER-SHARE-GAIN-APPREC> 3.637
<PER-SHARE-DIVIDEND> (.260)
<PER-SHARE-DISTRIBUTIONS> (.380)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.844
<EXPENSE-RATIO> .61
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> Series Trust Growth and Income
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 17873739
<INVESTMENTS-AT-VALUE> 19628836
<RECEIVABLES> 651203
<ASSETS-OTHER> 3220
<OTHER-ITEMS-ASSETS> 5129
<TOTAL-ASSETS> 20288388
<PAYABLE-FOR-SECURITIES> 554395
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9686
<TOTAL-LIABILITIES> 564081
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17969650
<SHARES-COMMON-STOCK> 1576436
<SHARES-COMMON-PRIOR> 1061698
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6410
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1748247
<NET-ASSETS> 19724307
<DIVIDEND-INCOME> 320603
<INTEREST-INCOME> 62420
<OTHER-INCOME> 0
<EXPENSES-NET> (96874)
<NET-INVESTMENT-INCOME> 286149
<REALIZED-GAINS-CURRENT> 1601769
<APPREC-INCREASE-CURRENT> 1973073
<NET-CHANGE-FROM-OPS> 3860991
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (294561)
<DISTRIBUTIONS-OF-GAINS> (1277017)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6076696
<NUMBER-OF-SHARES-REDEEMED> (1155316)
<SHARES-REINVESTED> 1571578
<NET-CHANGE-IN-ASSETS> 8782371
<ACCUMULATED-NII-PRIOR> 8412
<ACCUMULATED-GAINS-PRIOR> (318342)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 83035
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 166343
<AVERAGE-NET-ASSETS> 13950159
<PER-SHARE-NAV-BEGIN> 10.306
<PER-SHARE-NII> .224
<PER-SHARE-GAIN-APPREC> 3.089
<PER-SHARE-DIVIDEND> (.232)
<PER-SHARE-DISTRIBUTIONS> (.875)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.512
<EXPENSE-RATIO> .69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial
information extracted from Van Kampen Merritt
Series Trust initial balance sheet at April 1, 1996
and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> Small Capital Stock
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> APR-1-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 5,000,000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,000,000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,000,000
<SHARES-COMMON-STOCK> 500,000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 5,000,000
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 500,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 5,000,000
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.00
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial
information extracted from Van Kampen Merritt
Series Trust initial balance sheet at April 1, 1996
and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> Quality Bond
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> APR-1-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 5,000,000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,000,000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,000,000
<SHARES-COMMON-STOCK> 500,000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 5,000,000
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 500,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 5,000,000
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.00
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial
information extracted from Van Kampen Merritt
Series Trust initial balance sheet at April 1, 1996
and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> Select Equity
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> APR-1-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 5,000,000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,000,000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,000,000
<SHARES-COMMON-STOCK> 500,000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 5,000,000
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 500,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 5,000,000
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.00
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial
information extracted from Van Kampen Merritt
Series Trust initial balance sheet at April 1, 1996
and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> Large Capital Stock
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> APR-1-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 15,000,000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 15,000,000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 15,000,000
<SHARES-COMMON-STOCK> 1,500,000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 15,000,000
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,500,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 15,000,000
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.00
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial
information extracted from Van Kampen Merritt
Series Trust initial balance sheet at April 1, 1996
and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 5
<NAME> International Equity
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> APR-1-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 5,000,000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,000,000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,000,000
<SHARES-COMMON-STOCK> 500,000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 5,000,000
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 500,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 5,000,000
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.00
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial
information extracted from Van Kampen Merritt
Series Trust initial balance sheet at April 1, 1996
and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 6
<NAME> Bond Debenture
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> APR-1-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 500,000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 500,000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 500,000
<SHARES-COMMON-STOCK> 50,000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 500,000
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 50,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 500,000
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.00
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
