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Previous: HANCOCK JOHN SERIES INC, 485BPOS, 1996-02-28 |
Next: VAN KAMPEN MERRITT SERIES TRUST, 24F-2NT, 1996-02-28 |
Van Kampen Merritt Series Trust Quality Income Portfolio
For the 12-month period ended 12/31/95
Letter to Contract Owners
Financial markets rebounded nicely from last year's tumble and finished
with a strong fourth quarter. Inflation and unemployment numbers, the
Gross Domestic Product (GDP), and toward the end of the year, the budget
battle between the President and Congress, were major themes effecting
the market in 1995 Of course, a major influence on the market was the
Fed's decision to increase the Federal Funds rate by 50 basis points in
February, and then reverse that direction with two decreases of 25 basis
points each, one in July and another in December. Briefly, let's recap
what happened in the bond market's major sectors.
Corporates
Net new issuance rose dramatically from $30.4 billion in 1994 to $90.9
billion in 1995, establishing a net new issuance record. The increase in
new issuance did not appear to hinder performance in the corporate sector
as the corporate sector led the Lehman Aggregate Index sectors in total
return for 1995.
U.S. Treasuries
At the beginning of 1995, the yield of the two-year Treasury was more than
200 basis points over the Federal Funds target of 5.5%. By the end of 1995,
the two-year yield was 35 basis points less than the Federal Funds level.
This dramatic decline in rates led to strong overall Treasury market
performance, which was a far cry from the negative returns recorded in 1994.
For the year, the government index posted an 18.3% return versus -3.4% in
1994.
Asset-Backed Securities
For the year, ABS had a total return of l3.43%, which is comparable to a
similar duration 3-year Treasury total return of 13.37%. The ABS market was
able to absorb a record breaking issuance of $118 billion, which was 43%
greater than 1994, and exceeded the combined issuance of 1992 and 1993.
Agencies
The 1995 total return for agencies was 18.25%, only 8 basis points below the
Treasury market. This return is especially strong considering the duration of
the agency index finished one-half year shorter than the Treasury index at 4.61
years after the two indices began the year at virtually the same mark.
Mortgage-Backed Securities
Mortgage-backed securities have remained unpredictable over the last several
years, which has led to uncertainty and poor performance. The mortgage index
had a total return of 16.8%, trailing the Corporate, Treasury and Agency
sectors on a nominal basis.
Looking ahead, assuming economic and employment growth remain weak, inflation
should continue to fluctuate around 3% in 1996. Low inflation and slow
growth will likely allow the Federal Reserve Board to drop short-term interest
rates further this year, with the timing and magnitude determined by the
performance of the economy, and long-term rates should follow short rates as
long as inflationary pressures remain in check.
Robert J. Hickey
Portfolio Manager
Van Kampen American Capital
Investment Advisory Corp.
[GRAPH]
Van Kampen Merritt Series Trust Quality Income Portfolio
vs Lehman Brothers Government/Corporate Bond Index <F3>
(Growth Based on $10,000 invested on 1/1/90)
VKM
Series Trust Quality Lehman Brothers
Income Portfolio Gov/Com. Bond Index
Dec-89 10,000.00 10,000.00
Jan-90 9,882.90 9,823.80
Feb-90 9,907.62 9,852.10
Mar-90 9,915.43 9,852.96
Apr-90 9,821 45 9,735.78
May-90 10,067.23 10,101.60
Jun-90 10,211.01 10,310.81
Jul-90 10,355.56 10,474.28
Aug-90 10,209.73 10,281.37
Sep-90 10,284.57 10,390.54
Oct-9O 10,426.61 10,566.03
Nov-90 10,642.77 10,858.11
Dec-90 10,799.27 11,065.32
Jan-91 10,899.49 11,221.65
Feb-91 10,965.43 11,342.54
Mar-91 11,024.27 11,440.57
Apr-91 11,127.44 11,605.19
May-91 11,197.27 11,672.36
Jun-91 11,189,87 11,656.64
Jul-91 11,304.21 11,838.69
Aug-91 11,558.42 12,177.37
Sep-91 11,778.54 12,491.46
Oct-91 11,909.55 12,628.64
Nov-91 12,016.01 12,782.98
Dec-91 12,387.75 13,310.56
Jan-92 12,161.83 13,070.78
Feb-92 12,245.06 13,155.37
Mar-92 12,190.96 13,067.92
Apr-92 12,255.60 13,162.80
May-92 12,329.67 13,473.76
Jun-92 12,664.91 13,712.97
Jul-92 13,016.96 14,136.81
Aug-92 13,152.83 14,288.57
Sep-92 13,325.77 14,522.64
Oct-92 13,140.94 14,257.42
Nov-92 13,138.67 14,241.70
Dec-92 13,329.92 14,536.36
Jan-93 13,609.79 14,914.76
Feb-93 13,912.99 15,283.73
Mar-93 13,984.86 15,345.17
Apr-93 14,059.68 15,485.22
May-93 14,072.78 15,475.50
Jun-93 14,366.30 15,891.62
Jul-93 14,494.82 16,011.37
Aug-93 14,821.09 16,444.65
Sep-93 14,875.08 16,511.81
Oct-93 14,947.31 16,590.98
Nov-93 14,751.72 16,371.20
Dec-93 14,801.05 16,455.22
Jan-94 14,987.83 16,745.88
Feb-94 14,666.56 16.319.47
Mar-94 14,300.03 15,850.47
Apr-94 14,178.65 15,695.56
May-94 14,129.93 15,661.27
Jun-94 14,102.77 15,617.83
Jul-94 14,327.91 15,987.08
Aug-94 14,285.89 15,994.80
Sep-94 14,134.06 15,709.28
Oct-94 14,113.60 15,688.71
Nov-94 14,065.39 15,655.55
Dec-94 14,159.73 15,777.59
Jan-95 14,399.63 16,135.41
Feb-95 14,668.77 16,575.83
Mar-95 14,781.32 16,706.15
Apr-95 14,981.10 16,979.09
May-95 15,603.14 17,810.48
Jun-95 15,746.94 17,975.68
Jul-95 15,681.32 17,895.37
Aug-95 15,856.30 18,160.88
Sep-95 16,014.98 18,374.37
Oct-95 16,251.44 18,686.18
Nov-95 16,485.69 19,040.85
Dec-95 16,707.22 19,363.52
<TABLE>
<CAPTION>
Average Annual Total Return <F2>
1 Year 5 Years Since Inception <F1>
<S> <C> <C> <C>
VKM Series Trust
Quality Income Portfolio 17.99% 9.12% 8.93%
Lehman Brothers
Gov't./Corp. Bond Index <F3> 22.73% 11.84% 11.64%
<FN>
<F1>Portfolio is shown from first full month since inception.
<F2>"Total Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past
performance and do not indicate future results. The value of an
investment in the VKM Series Trust Quality Income Portfolio and the
return on the investment both will fluctuate, and redemption
proceeds may be higher or lower than an investor's original cost.
<F3>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
domestic major corporate classifications: industrial, utility,
financial and Yankee bond.
Performance data is historical and includes changes in share price
and reinvestment of dividends and capital gains. Performance
numbers are net of all Portfolio operating expenses, but they do
not include the administrative fee, the insurance risk charge, the
annual contract maintenance charge or the 5% withdrawal charge
imposed by the Cova variable annuity contract. If this performance
information included the effect of the insurance charges, performance
numbers would be lower.
The above performance graph has been generated by Van Kampen American
Capital Investment Advisory Corp. using information from Bloomberg.
Comparison line graphs chart the hypothetical growth of $10,000 over
a given historical period of time. Although data are gathered from
reliable sources, accuracy and completeness cannot be guaranteed.
</TABLE>
In the past, we have compared this Portfolio's performance to 6-month
CD's because they are such a widely purchased fixed-income investment.
However, we believe a comparison between this Portfolio and the Lehman
Brothers Government/Corporate Bond Index gives a more accurate picture
of this Portfolio's performance in its peer group.
VAN KAMPEN MERRITT SERIES TRUST QUALTIY INCOME PORTFOLIO
VS. 6 MONTH CD INDEX <F3> <F4>
(Growth Based on $10,000 invested on 1/1/90)
VKM
Series Trust Quality
Income Portfolio 6 Month CD Index
Dec-89 10,000.00 10,000
Jan-90 9,882.90 10,066
Feb-90 9,907.62 10,132
Mar-90 9,915.43 10,201
Apr-90 9,821 45 10,272
May-90 10,067.23 10,342
Jun-90 10,211.01 10,411
Jul-90 10,355.56 10,479
Aug-90 10,209.73 10,546
Sep-90 10,284.57 10,614
Oct-9O 10,426.61 10,683
Nov-90 10,642.77 10,752
Dec-90 10,799.27 10,818
Jan-91 10,899.49 10,885
Feb-91 10,965.43 10,943
Mar-91 11,024.27 11,001
Apr-91 11,127.44 11,056
May-91 11,197.27 11,110
Jun-91 11,189,87 11,167
Jul-91 11,304.21 11,224
Aug-91 11,558.42 11,276
Sep-91 11,778.54 11,328
Oct-91 11,909.55 11,377
Nov-91 12,016.01 11,423
Dec-91 12,387.75 11,464
Jan-92 12,161.83 11,502
Feb-92 12,245.06 11,541
Mar-92 12,190.96 11,582
Apr-92 12,255.60 11,622
May-92 12,329.67 11,659
Jun-92 12,664.91 11,697
Jul-92 13,016.96 11,731
Aug-92 13,152.83 11,764
Sep-92 13,325.77 11,795
Oct-92 13,140.94 11,826
Nov-92 13,138.67 11,862
Dec-92 13,329.92 11,896
Jan-93 13,609.79 11,928
Feb-93 13,912.99 11,959
Mar-93 13,984.86 11,991
Apr-93 14,059.68 12,022
May-93 14,072.78 12,053
Jun-93 14,366.30 12,087
Jul-93 14,494.82 12,119
Aug-93 14,821.09 12,152
Sep-93 14,875.08 12,185
Oct-93 14,947.31 12,218
Nov-93 14,751.72 12,252
Dec-93 14,801.05 12,286
Jan-94 14,987.83 12,326
Feb-94 14,666.56 12,363
Mar-94 14,300.03 12,403
Apr-94 14,178.65 12,448
May-94 14,129.93 12,498
Jun-94 14,102.77 12,548
Jul-94 14,327.91 12,600
Aug-94 14,285.89 12,653
Sep-94 14,134.06 12,709
Oct-94 14,113.60 12,769
Nov-94 14,065.39 12,833
Dec-94 14,159.73 12,903
Jan-95 14,399.63 12,973
Feb-95 14,668.77 13,040
Mar-95 14,781.32 13,107
Apr-95 14,981.10 13,174
May-95 15,603.14 13,238
Jun-95 15,746.94 13,301
Jul-95 15,681.32 13,363
Aug-95 15,856.30 13,426
Sep-95 16,014.98 13,489
Oct-95 16,251.44 13,552
Nov-95 16,485.69 13,615
Dec-95 16,707.22 13,676
<TABLE>
<CAPTION>
Average Total Return <F2>
1 Year 5 Years Since Inception <F1>
<S> <C> <C> <C>
VKM Series Trust
Quality Income Portfolio 17.99% 9.12% 8.93%
6-Month CD Index <F3> 5.99% 4.80% 5.36%
<FN>
<F1>Portfolio is shown from first full month since inception.
<F2>"Total Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past
performance and do not indicate future results. The value of an
investment in the VKM Series Trust Quality Income Portfolio and the
return on the investment both will fluctuate, and redemption
proceeds may be higher or lower than an investor's original cost.
<F3>The 6-Month CD Index, as reported by the Wall Street Journal, is
the average of top rates by major New York banks on Primary new
issues of negotiable CDs, usually on amounts of $1 milion or more.
The minimum unit is $100,000.
Performance data is historical and includes changes in share price
and reinvestment of dividends and capital gains. Performance
numbers are net of all Portfolio operating expenses, but they do
not include the administrative fee, the insurance risk charge, the
annual contract maintenance charge or the 5% withdrawal charge
imposed by the Cova variable annuity contract. If this performance
information included the effect of the insurance charges, performance
numbers would be lower.
The above performance graph has been generated by Cova from
Morningstar "Variable Annuity/Life on Floppy" software. For
Morningstar information, call 800-876-5000. Comparison line graphs
chart the hypothetical growth of $10,000 over a given historical
period of time. Although data are gathered from reliable sources,
accuracy and completeness cannot be guaranteed.
<F4>Copyright Morningstar Inc., 1996
</TABLE>
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
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
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
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
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.
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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
Letter to Contract Owners
The High Yield Portfolio posted a solid total return in
1995. The gain was in line with that of Treasury bonds,
but lagged that of investment grade bonds and stocks.
This reflects both the shorter duration, or interest
sensitivity, of high yield bonds relative to these asset
classes. It also reflects concerns about increasing credit
risk among more leveraged companies, such as those
rated below investment grade, during a time of slowing
economic growth.
Technical conditions were relatively stable during the
last six months of the year. While the new issue
calendar was fairly heavy during the period, this supply
was absorbed by cash moving into the market as well
as cash received in coupon payments, bond calls, and
tender offers.
We currently have six analysts working full time
analyzing the credit quality of our high yield bond
holdings and prospective investments. Our credit
selection process continued to provide good results
during the period. While default rates for the market in
general increased for the second year in a row, we were
able to avoid defaults among companies held in the
portfolio. We also experienced gains from positive
developments such as mergers with higher quality
companies and tender offers for bonds held.
At the current time, we are somewhat cautious
regarding the high yield market's prospects for 1996.
We expect high yield companies to show mixed
performance as long as the economy continues its
current slow growth. However, we believe the portfolio
is positioned to perform relatively well unless the
economy deteriorates significantly. To help us obtain
the portfolio's objectives, we have underweighted
bonds in the cyclical industries, and we will continue
to emphasize quality in the credit selection process.
Anne Lorsung
Portfolio Manager
Van Kampen American Capital
Investment Advisory Corp.
Top 10 Long-Term Holdings by Market Value
As of 12/31/95
% of Portfolio
Viacom International Inc. 1.9%
Ornda Healthcorp 1.8
Global Marine Inc. 1.8
Revlon Consumer Products Corp. 1.8
Silgan Holdings Inc. 1.7
SCI Television Inc. 1.7
Centennial Cellular Corp. 1.7
Schuller International Group Inc. 1.6
Walter Industries Inc. 1.6
U.S. Treasury Note 1.6
[PIE CHART]
Distribution by Moody's Rating
As of 12/31/95
B2 30.8%
B3 22.2
Ba3 14.2
B1 13.8
Other 10.8
Caa 4.1
Aaa 1.6
Ba1 1.3
Ba2 1.2
Van Kampen Merritt Series Trust High Yield Portfolio
vs Salomon Brothers High Yield Index-Composite <F3>
(Growth Based on $10,000 invested on 1/1/90)
[GRAPH]
VKM
Series Trust Salomon Brothers
High Yield High Yield Index -
Portfolio Composite
31-Dec-89 10,000 10,000
31-Jan-90 9,941 9,736
28-Feb-90 9,940 9,604
31-Mar-90 10,073 9,706
30-Apr-90 10,053 9,638
31-May-90 10,291 9,926
30-Jun-90 10,458 10,090
31-Jul-90 10,624 10,262
31-Aug-90 10,409 9,778
30-Sep-90 10,173 9,200
31-Oct-90 9,958 8,890
30-Nov-90 10,104 9,140
31-Dec-90 10,186 9,252
31-Jan-91 10,347 9,568
28-Feb-91 10,916 10,511
31-Mar-91 11,358 11,065
30-Apr-91 11,578 11,437
31-May-91 11,651 11,528
30-Jun-91 11,908 11,786
31-Jul-91 12,191 12,136
31-Aug-91 12,371 12,448
30-Sep-91 12,577 12,546
31-Oct-91 12,920 12,960
30-Nov-91 13,003 13,071
31-Dec-91 13,070 13,251
31-Jan-92 13,810 13,576
28-Feb-92 14,159 14,041
31-Mar-92 14,319 14,244
30-Apr-92 14,414 14,313
31-May-92 14,496 14,619
30-Jun-92 14,612 14,808
31-Jul-92 14,938 15,122
31-Aug-92 15,175 15,343
30-Sep-92 15,480 15,473
31-Oct-92 15,252 15,215
30-Nov-92 15,384 15,476
31-Dec-92 15,561 15,674
31-Jan-93 15,952 16,077
28-Feb-93 16,479 16,406
31-Mar-93 16,867 16,690
30-Apr-93 16,948 16,832
31-May-93 17,185 17,058
30-Jun-93 17,661 17,471
31-Jul-93 17,872 17,651
31-Aug-93 17,971 17,833
30-Sep-93 17,996 17,873
31-Oct-93 18,597 18,291
30-Nov-93 18,730 18,352
31-Dec-93 18,981 18,548
31-Jan-94 19,410 18,971
28-Feb-94 19,465 18,838
31-Mar-94 18,700 18,063
29-Apr-94 18,469 17,868
31-May-94 18,421 17,896
30-Jun-94 18,506 17,910
31-Aug-94 18,110 18,098
30-Sep-94 18,112 18,218
31-Oct-94 18,028 18,128
30-Nov-94 17,784 18,095
30-Dec-94 17,973 17,887
31-Jan-95 18,141 18,352
28-Feb-95 18,545 19,034
31-Mar-95 18,759 19,235
28-Apr-95 19,178 19,749
31-May-95 19,583 20,383
30-Jun-95 19,649 20,559
31-Jul-95 19,972 20,814
31-Aug-95 20,058 20,950
30-Sep-95 20,326 21,211
31-Oct-95 20,532 21,440
30-Nov-95 20,688 21,740
31-Dec-95 20,972 22,131
<TABLE>
<CAPTION>
Average Total Return<F2>
1 Year 5 Years Since Inception<F1>
<S> <C> <C> <C>
VKM Series Trust
High Yield Portfolio 16.69% 15.14% 13.35%
Salomon Brothers
High Yield Index<F3> 23.73% 19.06% 14.16%
<FN>
<F1> Portfolio is shown from first full month since inception.
<F2> "Total Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past
performnace and do not indicate future results. The value of an
investment in the VKM Series Trust High Yield Portfolio and the
return on the investment both will fluctuate, and redemption
proceeds may be higher or lower than an investor's original cost.
<F3> The Salomon Brothers High Yield Index tracks the composite high
yield market excluding issues with less than 7 years maturity.
Performance data is historical and includes changes in share price
and reinvestment of dividends and capital gains. Performance
numbers are net of all Portfolio operating expenses, but they do not
include the administrative fee, the insurance risk charge, the
annual contract maintenance charge or the 5% withdrawal charge
imposed by the Cova variable annuity contract. If this performance
information included the effect of the insurance charges,
performance numbers would be lower.
The above performance graph has been generated by Van
Kampen American Investment Advisory Corp. using
information from Bloomberg. Comparison line graphs chart the
hypothetical growth of $10,000 over a given historical period of
time. Although data are gathered from reliable sources, accuracy
and completeness cannot be guaranteed.
</TABLE>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
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>
<CAPTION>
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$) BB Ba3 13.250 08/01/01 109,000
--------------
291,250
--------------
Total Foreign Bonds and Debt Securities 2,314,250
--------------
U.S. Government Obligations 1.4%
500 U.S. T-Note NR Aaa 9.375 04/15/96 505,760
--------------
Total Debt Securities 30,992,750
--------------
Equities 2.1%
American Telecasting Inc. (930 common stock warrants) 2,790
Cablevision Systems Corp. (4,118 preferred shares) 425,132
Casino America Inc. (653 common stock warrants) 652
Panamsat L.P. (212 preferred shares) 238,500
Supermarkets General Holdings Corp. (3,177 preferred shares) 91,736
--------------
Total Equities 758,810
--------------
</TABLE>
5 See Notes to Financial Statements
<TABLE>
<CAPTION>
Portfolio of Investments (Continued)
December 31, 1995
- --------------------------------------------------------------------------------------------------------------------------------
Par
Amount
in Local
Currency S & P Moody's U.S.$
(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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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.
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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
Letter to Contract Owners
During 1995, the stock market as a whole benefited
from continuing economic growth that generated
strong corporate profits without increased inflation.
The portfolio benefited from being heavily invested
in finance and health care stocks, as well as the strong
performance of technology stocks. Technology was
the best performing sector of the market during the
past year, but we limited the portfolio's exposure in
technology because of our commitment to being
broadly diversified.
We continue to focus on stock selection, identifying
those companies that we believe are poised to benefit
from a restructuring or repositioning. For example,
in the telecommunications area, we owned shares
of AT&T Corp., which announced the breakup of
the company into three clearly defined companies.
This announcement led to significant share price
appreciation due to the perception of increased focus
on each company and cost savings to be realized. In
the health care arena, the portfolio owned shares of
Merck, which enjoyed a rise in its stock price after the
company received approval from the Food and Drug
Administration for a new drug to combat osteoporosis.
Ralston Purina, which the portfolio owned during the
past year, continued restructuring to focus on its core
pet food and battery businesses, pushing up the price
of its stock.
Throughout the year, we gradually reduced the
portfolio's holdings of stocks that were most affected
by changing economic conditions, often called cyclical
stocks. As a result, we reduced the percentage of
the portfolio's assets invested in the stocks of raw
materials and manufacturing companies. These assets
were invested instead in a broader range of stocks,
including those of health care and retail companies.
We expect the retail industry to be one of the next
sectors to benefit from continued economic growth.
The outlook for 1996 is excellent, which is not to
say that a correction could not occur in the near
term. However, some very positive forces are present:
moderate economic growth, low inflation and
acceptable levels of interest rates. These factors should
limit any decline to a modest one. Looking farther into
the future, these, three conditions--perhaps aided by
another move by the Federal Reserves to lower short-
term interest rates--should lead to higher stock prices.
<TABLE>
<CAPTION>
Top 10 Holdings by Market Value
As of 12/31/95
<S> <C>
% of Portfolio
Federal National Mtg. Assn. 2.09%
Royal Dutch Petroleum Co. (Neth.) 2.07
Mobil Corp. 2.01
Texaco Inc. 1.96
Phillip Morris Cos. Inc. 1.77
AT&T Corp. 1.72
J.P. Morgan & Co. Inc. 1.70
Nabisco Holdings Corp. 1.58
Exxon Corp. 1.57
Merck & Co. Inc. 1.53
</TABLE>
James A. Gilligan
Portfolio Manager
Van Kampen American Capital
Investment Advisory Corp.
<TABLE>
<CAPTION>
Van Kampen Merritt Series Trust Growth and Income Portfolio
vs. S & P 500 Index <F2>
(Growth Based on $10,000 Invested on 6/1/92)
[GRAPH]
Fund S&P INDEX
<S> <C> <C>
May-92 10,000.00 10,000.00
Jun-92 9,711.16 9,851.28
Jul-92 9,880.48 10,253.82
Aug-92 9,731.08 10,043.95
Sep-92 9,930.28 10,162.15
Oct-92 10,109.56 10,196.95
Nov-92 10,338.65 10,543.06
Dec-92 10,524.96 10,672.28
Jan-93 10,637.58 10,761.52
Feb-93 10,729.73 10,908.03
Mar-93 11,169.97 11,138.18
Apr-93 11,057.35 10,869.17
May-93 11,333.79 11,158.86
Jun-93 11,452.97 11,191.62
Jul-93 11,432.26 11,146.34
Aug-93 11,898.25 11,568.14
Sep-93 12,012.16 11,479.22
Oct-93 12,281.39 11,716.33
Nov-93 11,867.18 11,605.24
Dec-93 12,104.68 11,745.68
Jan-94 12,538.93 12,144.76
Feb-94 12,180.67 11,815.37
Mar-94 11,637.86 11,300.91
Apr-94 11,507.59 11,445.90
May-94 11,561.87 11,633.24
Jun-94 11,219.50 11,348.43
Jul-94 11,602.24 11,720.92
Aug-94 12,072.45 12,200.85
Sep-94 11,777.20 11,903.21
Oct-94 11,886.55 12,169.63
Nov-94 11,438.21 11,726.98
Dec-94 11,554.98 11,900.60
Jan-95 11,667.06 12,208.81
Feb-95 12,137.78 12,684.32
Mar-95 12,395.55 13,058.02
Apr-95 12,642.12 13,442.17
May-95 12,911.10 13,978.28
Jun-95 13,370.54 14,302.96
Jul-95 13,981.89 14,777.12
Aug-95 14,038.50 14,813.97
Sep-95 14,434.75 15,438.94
Oct-95 14,174.36 15,383.58
Nov-95 14,921.57 16,058.04
Dec-95 15,280.58 16,367.11
</TABLE>
<TABLE>
<CAPTION>
Average Total Return
1 Year Since inception (+)
---------- -------------------
<S> <C> <C>
VKM Growth and
Income Portfolio 32.24% 12.26%
S&P 500 Index <F2> 37.45% 14.91%
<FN>
(+) Portfolio is shown from first full month since inception.
<F1>"Total Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past
performance and do not indicate future results. The value of an
investment in the VKM Series Trust Growth and Income Portfolio
and the return on the investment both will fluctuate, and redemption
proceeds may be higher or lower than an investor's original cost.
<F2>The S&P 500 Index is an unmanaged index generally considered to be
representative of stock market activity.
Performance data is historical and includes changes in share price
and reinvestment of dividends and capital gains. Performance
numbers are net of all Portfolio operating expenses, but they do
not include the administrative fee, the insurance risk charge, the
annual contract maintenance charge or the 5% withdrawal charge
imposed by the Cova variable annuity contract. If this performance
information included the effect of the insurance charges, performance
numbers would be lower.
The above performance graph has been generated by Van Kampen American
Capital Investment Advisory Corp. using information from Bloomberg.
Comparison line graphs chart the hypothetical growth of $10,000 over
a given historical period of time. Although data are gathered from
reliable sources, accuracy and completeness cannot be guaranteed.
</TABLE>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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
Letter to Contract Owners
At the beginning of 1995, yields rose as the Fed continued its restrictive
policy of 1994 by increasing the Federal Funds rate from 5.50% to 6.00% at
the February 1 meeting. In response to the Fed's actions, the Portfolio
maintained a defensive posture throughout most of the first quarter. As
the year progressed, and rates began to decline, the flow of new economic
data led to increased speculation in the markets that the Fed could be on
its way to achieve the elusive "soft landing." In response to this new
outlook, we restructured the Portfolio by locking in higher yields on
longer maturing investments.
The second half of the year began with a bang as the Fed cut the
target Federal Funds rate on overnight bank loans to 5.75% from 6.00% at
the July 6 meeting. A sagging economy and a decreased threat of inflation
were two of the factors that led to the cut. Throughout the second half of
the year, the economy remained sluggish as rates continued to fall across
the yield curve. Anticipation of another rate cut led us to continue
lengthening the Portfolio, adding longer maturing securities and increasing
the average days to maturity. Agency discount notes proved to be an
excellent profit-taking tool during this period. The year ended with the
Fed once again cutting the target Fed Funds rate from 5.75% to 5.50%.
The bullish structure of the Portfolio proved to be very successful in
1995 as it was able to achieve a high yield while investing in only the
highest rated and most liquid of securities.
In the future, we believe the Fed will continue to lower rates as long
as inflation poses no viable threat. Therefore, we shall look for
opportunities in which to extend the Portfolio while cautiously
watching for signs of an overheating economy.
Reid Hill
Portfolio Manager
Van Kampen American Capital
Investment Advisory Corp.
[PIE CHART]
Portfolio by Sector
As of 12/31/95
Commerical Paper 34.9%
Government/Agency 29.1%
Repurchase Agreements 20.0%
Variable Rate Demand Obligations 11.2%
Bankers Acceptances 4.8%
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>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
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>
<CAPTION>
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>
[CAPTION]
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
Letter to Contract Owners
Investors started 1995 with trepidation as many analysts were predicting an
economic slowdown to be accompanied by a substantial market correction. But
when all was said and done, few investors could find cause to complain about
the market's return in 1995 as the Standard & Poor's 500 Index generated a
total return of 37.45%
Many elements fell into place at the right time to provide us with one of
the greatest stock rallies we've witnessed in several decades. Throughout
the year, the equity markets were supported by the underpinnings of
moderate growth, benign inflation and low interest rate forecasts.
Additionally, corporate America's continuation of restructuring, mergers
and cost cutting measures helped drive profitability to record levels.
For example, the banking industry alone announced 15 deals that exceeded
$1.1 billion in value, helping spur the banking and finance industries to
gains in the 50%-60% range. However, this year's largest gains were
realized by the electronics industry, delivering gains in excess of 90%.
Pharmaceuticals and medical products also generated gains in excess of 60%,
which placed them among the year's top performing industry groups.
Late in the fourth quarter, however, evidence of a slowing economy presented
itself, causing portfolio managers to focus their purchases on the stocks of
companies and industries perceived to have relatively stable earnings, such
as consumer non-durables, health care, insurance and utilities and away from
cyclical industries such as retailers, transportation, paper producers and
technology companies.
For those who are sensitive to interest rates, all eyes were glued on the
Federal Reserve as it raised interest rates in February in an attempt to
orchestrate a so-called soft landing. As the year progressed and the economy
showed signs of weakening, the Fed reversed its direction and cut rates,
once in July and then again in December, sending the stock market rocketing
to higher levels with each cut.
As 1996 gets underway and the economy enters into its sixth consecutive year
of expansion, many economists are calling for a moderating Gross Domestic
Product growth rate of about 2%. While this creates a favorable environment
for stocks, further interest rate cuts provide the market with its greatest
motivation. Many experts feel rate cuts may not come fast enough or be
large enough to keep the market from slumping. As such, we will keep a close
eye on the policies of the Federal Reserve. While we may not experience the
exceptional performance offered by the market in 1995, if we continue along
without significant disturbances, we believe the Stock Index Portfolio
can offer investors favorable returns in 1996.
<TABLE>
<CAPTION>
Top 10 Long-Term Holdings by Market Value
As of 12/31/95
% of Portfolio
<S> <C>
General Electric Co. 2.7
AT&T Corp. 2.3
Exxon Corp. 2.2
Coca Cola Co. 2.1
Merck & Co. Inc. 1.8
Royal Dutch Petroleum Co. 1.7
Philip Morris Cos. Inc. 1.7
Procter & Gamble Co. 1.3
Johnson & Johnson 1.2
Wal-Mart Stores Inc. 1.2
</TABLE>
Pete Papageorgakis
Portfolio Manager
Van Kampen American Capital
Investment Advisory Corporation
Van Kampen Merritt Series Trust Stock Index Portfolio
vs S&P 500 Index <F3>
(Growth Based on $10,000 invested on 12/1/91)
[GRAPH]
Fund S&P INDEX
Nov-91 10,000.00 $10,000.00
Dec-91 11,033.40 11,141.73
Jan-92 10,824.63 10,934.05
Feb-92 10,949.89 11,076.04
Mar-92 10,730.69 10,860.88
Apr-92 11,054.28 11,179.17
May-92 11,096.03 11,233.97
Jun-92 10,939.57 11,066.72
Jul-92 11,372.51 11,518.85
Aug-92 11,129.64 11,283.15
Sep-92 11,256.35 11,415.97
Oct-92 11,266.91 11,455.08
Nov-92 11,636.49 11,844.01
Dec-92 11,719.75 11,989.43
Jan-93 11,753.08 12,089.71
Feb-93 11,908.60 12,254.58
Mar-93 12,141.89 12,513.07
Apr-93 11,853.06 12,210.43
May-93 12,175.21 12,535.99
Jun-93 12,208.54 12,572.49
Jul-93 12,152.49 12,521.65
Aug-93 12,589.71 12,995.90
Sep-93 12,477.60 12,896.39
Oct-93 12,735.45 13,162.86
Nov-93 12,623.34 13,038.18
Dec-93 12,755.82 13,195.87
Jan-94 13,180.64 13,644.01
Feb-94 12,801.75 13,274.25
Mar-94 12,227.68 12,696.14
Apr-94 12,365.46 12,859.05
May-94 12,549.16 13,069.42
Jun-94 12,238.90 12,749.22
Jul-94 12,634.83 13,167.64
Aug-94 13,123.92 13,706.76
Sep-94 12,797.86 13,372.32
Oct-94 13,077.34 13,671.70
Nov-94 12,588.25 13,174.25
Dec-94 12,742.42 13,369.35
Jan-95 13,079.33 13,716.04
Feb-95 13,572.66 14,249.82
Mar-95 13,969.73 14,669.80
Apr-95 14,378.84 15,101.59
May-95 14,643.55 15,703.83
Jun-95 15,259.74 16,068.49
Jul-95 15,769.21 16,601.00
Aug-95 15,805.60 16,642.32
Sep-95 16,460.63 17,344.12
Oct-95 16,424.24 17,282.18
Nov-95 17,139.92 18,040.03
Dec-95 17,441.02 18,387.36
<TABLE>
<CAPTION>
Average Annual Total Return <F2>
1 Year Since Inception <F1>
<S> <C> <C>
VKM Series Trust
Stock Index Portfolio 36.87% 14.59%
S&P 500 Index <F3> 37.45% 16.23%
<FN>
<F1>Portfolio is shown from first full month since inception.
<F2>"Total Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past
performance and do not indicate future results. The value of an
investment in the VKM Series Trust Stock Index Portfolio and the
return on the investment both will fluctuate, and redemption
proceeds may be higher or lower than an investor's original cost.
<F3>The S&P 500 Index is an unmanaged index generally considered to
representative of stock market activity.
Performance data is historical and includes changes in share price
and reinvestment of dividends and capital gains. Performance
numbers are net of all Portfolio operating expenses, but they do
not include the administrative fee, the insurance risk charge, the
annual contract maintenance charge or the 5% withdrawal charge
imposed by the Cova variable annuity contract. If this performance
information included the effect of the insurance charges, performance
numbers would be lower.
The above performance graph has been generated by Van Kampen American
Capital Investment Advisory Corp. using information from Bloomberg.
Comparison line graphs chart the hypothetical growth of $10,000 over
a given historical period of time. Although data are gathered from
reliable sources, accuracy and completeness cannot be guaranteed.
</TABLE>
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>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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.
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