COVA SERIES TRUST
SUPPLEMENT DATED NOVEMBER 1, 1996
TO THE PROSPECTUS DATED MAY 1, 1996,
AS AMENDED
FINANCIAL HIGHLIGHTS
This Supplement contains financial highlights for the period ended
June 30, 1996, with respect to the Quality Bond Portfolio, Small Cap Stock
Portfolio, Large Cap Stock Portfolio, Select Equity Portfolio, International
Equity Portfolio and Bond Debenture Portfolio of the Trust. With the filing
of this Supplement, the date of the Prospectus is changed to October 18, 1996.
COVA SERIES TRUST
QUALITY BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
For the Period Ended June 30, 1996 (UNAUDITED)*
<TABLE>
<CAPTION>
<S> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.000
- ---------------------------------------------------------- ---------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.126
Net realized and unrealized loss on investments (0.130)
Total from investment operations (0.004)
---------------------------------------------------- ---------------
DISTRIBUTIONS:
Dividends from net investment income (0.124)
Distributions from net realized gain 0.000
Total distributions (0.124)
---------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 9.872
- ---------------------------------------------------------- ---------------
TOTAL RETURN (0.06%)
- ---------------------------------------------------------- ---------------
RATIOS/SUPPLEMENTAL DATA:
- ---------------------------------------------------------- ---------------
Net Assets, end of period (000) $ 5,502
RATIOS TO AVERAGE NET ASSETS (1)
- ---------------------------------------------------------- ---------------
Expenses 0.65%**
Net investment income 5.70%**
PORTFOLIO TURNOVER RATE: 67.58%
- ---------------------------------------------------------- ---------------
<FN>
* Fund commenced investment operations on April 2, 1996
** Annualized
</TABLE>
(1) If certain expenses had not been assumed by Cova Life and/or the Adviser,
total return would have been lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net Assets: 1.39%**
Ratio of Net Investment Income to Average Net Assets: 4.96%**
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
FINANCIAL HIGHLIGHTS
For the Period Ended June 30, 1996 (UNAUDITED)*
<TABLE>
<CAPTION>
<S> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.000
- ---------------------------------------------------------- ---------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.026
Net realized and unrealized gain on investments 0.460
Total from investment operations 0.486
---------------------------------------------------- ---------------
DISTRIBUTIONS:
Dividends from net investment income (0.026)
Distributions from net realized gain 0.000
Total distributions (0.026)
---------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 10.460
- ---------------------------------------------------------- ---------------
TOTAL RETURN 4.86%
- ---------------------------------------------------------- ---------------
RATIOS/SUPPLEMENTAL DATA:
- ---------------------------------------------------------- ---------------
Net Assets, end of period (000) $ 5,754
RATIOS TO AVERAGE NET ASSETS (1)
- ---------------------------------------------------------- ---------------
Expenses 0.95%**
Net investment income 1.00%**
PORTFOLIO TURNOVER RATE: 31.50%
- ---------------------------------------------------------- ---------------
AVERAGE COMMISSION RATE PAID (2): $ 0.0336
- ---------------------------------------------------------- ---------------
<FN>
* Fund commenced investment operations on April 2, 1996
** Annualized
</TABLE>
(1) If certain expenses had not been assumed by Cova Life and/or the Adviser,
total return would have been lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net Assets: 1.82%**
Ratio of Net Investment Income to Average Net Assets: 0.13%**
(2) Average commission rate paid is computed by dividing the total dollar
amount of commissions paid during the period by the total number of shares
purchased and sold during the period for which commissions were charged.
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
FINANCIAL HIGHLIGHTS
For the Period Ended June 30, 1996 (UNAUDITED)*
<TABLE>
<CAPTION>
<S> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.000
- ---------------------------------------------------------- ---------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.047
Net realized and unrealized gain on investments 0.190
Total from investment operations 0.237
---------------------------------------------------- ---------------
DISTRIBUTIONS:
Dividends from net investment income (0.046)
Distributions from net realized gain 0.000
Total distributions (0.046)
---------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 10.191
- ---------------------------------------------------------- ---------------
TOTAL RETURN 2.36%
- ---------------------------------------------------------- ---------------
RATIOS/SUPPLEMENTAL DATA:
- ---------------------------------------------------------- ---------------
Net Assets, end of period (000) $ 15,504
RATIOS TO AVERAGE NET ASSETS (1)
- ---------------------------------------------------------- ---------------
Expenses 0.75%**
Net investment income 1.94%**
PORTFOLIO TURNOVER RATE: 11.23%
- ---------------------------------------------------------- ---------------
AVERAGE COMMISSION RATE PAID (2): $ 0.0306
- ---------------------------------------------------------- ---------------
<FN>
* Fund commenced investment operations on April 2, 1996
** Annualized
</TABLE>
(1) If certain expenses had not been assumed by Cova Life and/or the Adviser,
total return would have been lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net Assets: 1.34%**
Ratio of Net Investment Income to Average Net Assets: 1.35%**
(2) Average commission rate paid is computed by dividing the total dollar
amount of commissions paid during the period by the total number of shares
purchased and sold during the period for which commissions were charged.
COVA SERIES TRUST
SELECT EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS
For the Period Ended June 30, 1996 (UNAUDITED)*
<TABLE>
<CAPTION>
<S> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.000
- ---------------------------------------------------------- ---------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.042
Net realized and unrealized loss on investments (0.110)
Total from investment operations (0.068)
---------------------------------------------------- ---------------
DISTRIBUTIONS:
Dividends from net investment income (0.042)
Distributions from net realized gain 0.000
Total distributions (0.042)
---------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 9.890
- ---------------------------------------------------------- ---------------
TOTAL RETURN (0.68%)
- ---------------------------------------------------------- ---------------
RATIOS/SUPPLEMENTAL DATA:
- ---------------------------------------------------------- ---------------
Net Assets, end of period (000) $ 5,624
RATIOS TO AVERAGE NET ASSETS (1)
- ---------------------------------------------------------- ---------------
Expenses 0.85%**
Net investment income 1.74%**
PORTFOLIO TURNOVER RATE: 65.22%
- ---------------------------------------------------------- ---------------
AVERAGE COMMISSION RATE PAID (2): $ 0.0375
- ---------------------------------------------------------- ---------------
<FN>
* Fund commenced investment operations on April 2, 1996
** Annualized
</TABLE>
(1) If certain expenses had not been assumed by Cova Life and/or the Adviser,
total return would have been lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net Assets: 1.59%**
Ratio of Net Investment Income to Average Net Assets: 1.00%**
(2) Average commission rate paid is computed by dividing the total dollar
amount of commissions paid during the period by the total number of shares
purchased and sold during the period for which commissions were charged.
COVA SERIES TRUST
INTERNATIONAL EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS
For the Period Ended June 30, 1996 (UNAUDITED)*
<TABLE>
<CAPTION>
<S> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.000
- ---------------------------------------------------------- ---------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.089
Net realized and unrealized gain on investments 0.300
Total from investment operations 0.389
---------------------------------------------------- ---------------
DISTRIBUTIONS:
Dividends from net investment income (0.055)
Distributions from net realized gain 0.000
Total distributions (0.055)
---------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 10.334
- ---------------------------------------------------------- ---------------
TOTAL RETURN 3.85%
- ---------------------------------------------------------- ---------------
RATIOS/SUPPLEMENTAL DATA:
- ---------------------------------------------------------- ---------------
Net Assets, end of period (000) $ 7,252
RATIOS TO AVERAGE NET ASSETS (1)
- ---------------------------------------------------------- ---------------
Expenses 0.95%**
Net investment income 4.40%**
PORTFOLIO TURNOVER RATE: 33.07%
- ---------------------------------------------------------- ---------------
AVERAGE COMMISSION RATE PAID (2): $ 0.0063
- ---------------------------------------------------------- ---------------
<FN>
* Fund commenced investment operations on April 2, 1996
** Annualized
</TABLE>
(1) If certain expenses had not been assumed by Cova Life and/or the Adviser,
total return would have been lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net Assets: 2.66%**
Ratio of Net Investment Income to Average Net Assets: 2.69%**
(2) Average commission rate paid is computed by dividing the total dollar
amount of commissions paid during the period by the total number of shares
purchased and sold during the period for which commissions were charged.
COVA SERIES TRUST
BOND DEBENTURE PORTFOLIO
FINANCIAL HIGHLIGHTS
For the Period Ended June 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.000
- ---------------------------------------------------------- ---------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.085
Net realized and unrealized gain on investments 0.220
Total from investment operations 0.305
---------------------------------------------------- ---------------
DISTRIBUTIONS:
Dividends from net investment income (0.083)
Distributions from net realized gain 0.000
Total distributions (0.083)
---------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 10.222
- ---------------------------------------------------------- ---------------
TOTAL RETURN 3.03%
- ---------------------------------------------------------- ---------------
RATIOS/SUPPLEMENTAL DATA:
- ---------------------------------------------------------- ---------------
Net Assets, end of period (000) $ 1,934
RATIOS TO AVERAGE NET ASSETS (1)
- ---------------------------------------------------------- ---------------
Expenses 0.85%**
Net investment income 7.50%**
PORTFOLIO TURNOVER RATE: 67.49%
- ---------------------------------------------------------- ---------------
<FN>
* Fund commenced investment operations on April 2, 1996
** Annualized
</TABLE>
(1) If certain expenses had not been assumed by Cova Life and/or the Adviser,
total return would have been lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net Assets: 2.75%**
Ratio of Net Investment Income to Average Net Assets: 5.60%**
COVA SERIES TRUST
ONE TOWER LANE, SUITE 3000
OAKBROOK TERRACE, ILLINOIS 60181-4644
COVA SERIES TRUST ("Trust") (formerly Van Kampen Merritt Series Trust) is
intended to meet differing investment objectives with its eleven separate
Portfolios, six of which are offered herein: Bond Debenture Portfolio, Quality
Bond Portfolio, Small Cap Stock Portfolio, Large Cap Stock Portfolio, Select
Equity Portfolio and International Equity Portfolio. The Trustees may provide
for additional Portfolios from time to time. Each Portfolio issues its own class
of shares which has rights separate from the other classes of shares.
This Prospectus concisely sets forth the information about the Trust that a
prospective investor should know before investing. Investors should read and
retain this Prospectus for future reference.
A Statement of Additional Information, dated October 18, 1996, containing
information about the Trust has been filed with the Securities and Exchange
Commission and is hereby incorporated by reference into this Prospectus. A copy
of the Statement of Additional Information may be obtained without charge by
calling (800) 831-LIFE, or writing First Cova Life Insurance Company at One
Tower Lane, Suite 3000, Oakbrook Terrace, Illinois 60181-4644.
THE BOND DEBENTURE PORTFOLIO MAY INVEST A SUBSTANTIAL PORTION OF ITS ASSETS IN
LOWER GRADE CORPORATE DEBT SECURITIES COMMONLY KNOWN AS "JUNK BONDS."
INVESTORS SHOULD BE AWARE THAT SUCH INVESTMENTS INVOLVE A SIGNIFICANT DEGREE
OF RISK. SEE "RISK FACTORS - SPECIAL RISKS OF HIGH YIELD INVESTING."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This Prospectus is dated: May 1, 1996, as amended.
TABLE OF CONTENTS
PAGE
SUMMARY
The Trust
Investment Adviser and Sub-Advisers
The Portfolios
Investment Risks
Sales and Redemptions
THE TRUST
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
Quality Bond Portfolio
Small Cap Stock Portfolio
Large Cap Stock Portfolio
Select Equity Portfolio
International Equity Portfolio
Bond Debenture Portfolio
INVESTMENT PRACTICES
Investment Limitations
RISK FACTORS
Tax Considerations
Special Considerations Relating to Foreign Securities
Special Risks of High Yield Investing
PORTFOLIO TURNOVER RATES
Bond Debenture Portfolio
Quality Bond, Small Cap Stock, Large Cap Stock, Select Equity and
International Equity Portfolios
MANAGEMENT OF THE TRUST
The Trustees
Adviser
Expenses of the Trust
Sub-Advisers
Sub-Advisory Fees
DESCRIPTION OF THE TRUST
Shareholder Rights
Inquiries
Distribution and Redemption of Shares
Dividends
Tax Status
Net Asset Values
FUND PERFORMANCE
APPENDIX - DESCRIPTION OF CORPORATE BOND RATINGS
SUMMARY
THE TRUST
The Trust is an open-end management investment company established as a
Massachusetts business trust under a Declaration of Trust dated July 9, 1987.
Each Portfolio issues a separate class of shares. The Declaration of Trust
permits the Trustees to issue an unlimited number of full or fractional shares
of each class of stock.
Each Portfolio has distinct investment objectives and policies. (See
"Investment Objectives and Policies of the Portfolios.") Additional Portfolios
may be added to the Trust in the future. This Prospectus will be supplemented
to reflect the addition of new Portfolios.
INVESTMENT ADVISER AND SUB-ADVISERS
Subject to the authority of the Board of Trustees of the Trust, Cova
Investment Advisory Corporation (the "Adviser") serves as the Trust's
investment adviser and has responsibility for the overall management of the
investment strategies and policies of the Portfolios. The Adviser has engaged
Sub-Advisers for each of the Portfolios to make investment decisions and place
orders. The Sub-Advisers for the Portfolios are:
<TABLE>
<CAPTION>
<S> <C>
SUB-ADVISER NAME OF PORTFOLIO
J.P. Morgan Quality Bond Portfolio
Investment Small Cap Stock Portfolio
Management Inc. Large Cap Stock Portfolio
Select Equity Portfolio
International Equity Portfolio
Lord, Abbett & Co. Bond Debenture Portfolio
</TABLE>
For additional information concerning the Adviser and the Sub-Advisers,
including a description of advisory and sub-advisory fees, see "Management of
the Trust."
THE PORTFOLIOS
PORTFOLIOS MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT INC.:
QUALITY BOND PORTFOLIO. The investment objective of this Portfolio is to
provide a high total return consistent with moderate risk of capital and
maintenance of liquidity. Although the net asset value of the Portfolio will
fluctuate, the Portfolio attempts to preserve the value of its investments to
the extent consistent with its objective.
SMALL CAP STOCK PORTFOLIO. The investment objective of this Portfolio is
to provide a high total return from a portfolio of equity securities of small
companies. The Portfolio will invest primarily in the common stock of small
U.S. companies. The small company holdings of the Portfolio will be primarily
securities included in the Russell 2000 Index.
LARGE CAP STOCK PORTFOLIO. The investment objective of this Portfolio is
long-term growth of capital and income. The equity holdings of the Portfolio
will be primarily stocks of large- and medium-sized companies. The Portfolio
will be highly diversified and typically hold between 225 and 250 stocks.
SELECT EQUITY PORTFOLIO. The investment objective of this Portfolio is
long-term growth of capital and income. The equity holdings of the Portfolio
will be primarily stocks of large- and medium-sized companies. The Portfolio
will typically hold between 60 and 90 stocks.
INTERNATIONAL EQUITY PORTFOLIO. The investment objective of this
Portfolio is to provide a high total return from a portfolio of equity
securities of foreign corporations. The equity holdings of the Portfolio will
be primarily stocks of established companies based in developed countries
outside the United States. The Portfolio is actively managed and seeks to
outperform the Morgan Stanley Capital International Europe, Australia and Far
East Index.
PORTFOLIO MANAGED BY LORD, ABBETT & CO.:
BOND DEBENTURE PORTFOLIO. The investment objective of this Portfolio is
high current income and the opportunity for capital appreciation to produce a
high total return through a professionally-managed portfolio consisting
primarily of convertible and discount debt securities, many of which are
lower-rated. These lower-rated debt securities entail greater risks than
investments in higher-rated debt securities. Investors should carefully
consider these risks set forth under "Risk Factors - Special Risks of High
Yield Investing" before investing.
The investment objectives of a Portfolio and policies and restrictions
specifically cited as fundamental may not be changed without the approval of a
majority of the outstanding shares of that Portfolio. Other investment
policies and practices described in this Prospectus and the Statement of
Additional Information are not fundamental, and the Board of Trustees may
change them without shareholder approval. A complete list of investment
restrictions, including those restrictions which cannot be changed without
shareholder approval, is contained in the Statement of Additional Information.
There is no assurance that a Portfolio will meet its stated objective.
INVESTMENT RISKS
The value of a Portfolio's shares will fluctuate with the value of the
underlying securities in its portfolio, and in the case of debt securities,
with the general level of interest rates. When interest rates decline, the
value of an investment portfolio invested in fixed-income securities can be
expected to rise. Conversely, when interest rates rise, the value of an
investment portfolio invested in fixed-income securities can be expected to
decline. In the case of foreign currency denominated securities, these trends
may be offset or amplified by fluctuations in foreign currencies. Investments
by a Portfolio in foreign securities may be affected by adverse political,
diplomatic, and economic developments, changes in foreign currency exchange
rates, taxes or other assessments imposed on distributions with respect to
those investments, and other factors affecting foreign investments generally.
High-yielding fixed-income securities, which are commonly known as "junk
bonds", are subject to greater market fluctuations and risk of loss of income
and principal than investments in lower yielding fixed-income securities.
Certain of the Portfolios intend to employ, from time to time, certain
investment techniques which are designed to enhance income or total return or
hedge against market or currency risks but which themselves involve additional
risks. These techniques include options on securities, futures, options on
futures, options on indexes, options on foreign currencies, foreign currency
exchange transactions, lending of securities and when-issued securities and
delayed-delivery transactions. The Portfolios may have higher-than-average
portfolio turnover which may result in higher-than-average brokerage
commissions and transaction costs.
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of First Cova Life
Insurance Company and its affiliates ("First Cova") as a funding vehicle for the
variable annuity contracts offered by First Cova. No fee is charged upon the
sale or redemption of the Trust's shares. Expenses of the Trust are passed
through to the separate accounts of First Cova, and therefore, are ultimately
borne by variable annuity contract owners. In addition, other fees and expenses
are assessed by First Cova at the separate account level. (See the Prospectus
for the variable annuity contract for a description of all fees and charges
relating to the variable annuity contract.)
THE TRUST
The Trust is currently comprised of eleven separate Portfolios, six of which are
offered herein: Bond Debenture Portfolio, Quality Bond Portfolio, Small Cap
Stock Portfolio, Large Cap Stock Portfolio, Select Equity Portfolio and
International Equity Portfolio. The Trustees may provide for additional
Portfolios from time to time. Each Portfolio issues a separate class of shares.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full or fractional shares of each class of stock.
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
Each Portfolio of the Trust has a different investment objective which it
pursues through separate investment policies as described below. The risks and
opportunities of each Portfolio should be examined separately. The differences
in objectives and policies among the Portfolios can be expected to affect the
return of each Portfolio and the degree of market and financial risk of each
Portfolio.
There is no assurance that the investment objectives of the various Portfolios
will be met.
PORTFOLIOS MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT INC.:
QUALITY BOND PORTFOLIO .
The investment objective of the Portfolio is to provide a high total return
consistent with moderate risk of capital and maintenance of liquidity. Total
return will consist of income plus realized and unrealized capital gains and
losses.
The Portfolio is designed for investors who seek a total return over time that
is higher than that generally available from a portfolio of shorter-term
obligations while recognizing the greater price fluctuation of longer-term
instruments. It may also be a convenient way to add fixed income exposure to
diversify an existing portfolio.
The Sub-Adviser actively manages the Portfolio's duration, the allocation of
securities across market sectors, and the selection of specific securities
within sectors. Based on fundamental, economic and capital markets research,
the Sub-Adviser adjusts the duration of the Portfolio in light of market
conditions and the Sub-Adviser's interest rate outlook. For example, if
interest rates are expected to fall, the duration may be lengthened to take
advantage of the expected associated increase in bond prices. The Sub-Adviser
also actively allocates the Portfolio's assets among the broad sectors of the
fixed income market including, but not limited to, U.S. Government and agency
securities, corporate securities, private placements, and asset-backed and
mortgage related securities. Specific securities which the Sub-Adviser
believes are undervalued are selected for purchase within the sectors using
advanced quantitative tools, analysis of credit risk, the expertise of a
dedicated trading desk, and the judgment of fixed income portfolio managers
and analysts. Under normal circumstances, the Sub-Adviser intends to keep the
Portfolio essentially fully invested with at least 65% of the Portfolio's
assets invested in bonds.
Duration is a measure of the weighted average maturity of the bonds held in
the Portfolio and can be used as a measure of the sensitivity of the
Portfolio's market value to changes in interest rates. Under normal market
conditions the Portfolio's duration will range between one year shorter and
one year longer than the duration of the U.S. investment grade fixed income
universe, as represented by Salomon Brothers Broad Investment Grade Bond
Index, the Portfolio's benchmark. Currently, the benchmark's duration is
approximately 4.5 years. The maturities of the individual securities in the
Portfolio may vary widely, however.
The Portfolio intends to manage its portfolio actively in pursuit of its
investment objective. Portfolio transactions are undertaken principally to
accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates, but the Portfolio may also engage in
short-term trading consistent with its objective. To the extent the Portfolio
engages in short-term trading, it may incur increased transaction costs.
CORPORATE BONDS, ETC. The Portfolio may invest in a broad range of debt
securities of domestic and foreign issuers. These include debt securities of
various types and maturities, e.g., debentures, notes, mortgage securities,
equipment trust certificates and other collateralized securities and zero
coupon securities. Collateralized securities are backed by a pool of assets
such as loans or receivables which generate cash flow to cover the payments
due on the securities. Collateralized securities are subject to certain risks,
including a decline in the value of the collateral backing the security,
failure of the collateral to generate the anticipated cash flow or in certain
cases more rapid prepayment because of events affecting the collateral, such
as accelerated prepayment of mortgages or other loans backing these securities
or destruction of equipment subject to equipment trust certificates. In the
event of any such prepayment the Portfolio will be required to reinvest the
proceeds of prepayments at interest rates prevailing at the time of
reinvestment, which may be lower. In addition, the value of zero coupon
securities which do not pay interest is more volatile than that of interest
bearing debt securities with the same maturity. The Portfolio does not intend
to invest in common stock but may invest to a limited extent in convertible
debt or preferred stock. The Portfolio does not expect to invest more than 25%
of its assets in securities of foreign issuers. If the Portfolio invests in
non-U.S. dollar denominated securities, it hedges the foreign currency
exposure into the U.S. dollar. See "Investment Practices" and "Risk Factors"
for further information on foreign investments and convertible securities.
GOVERNMENT OBLIGATIONS, ETC. The Portfolio may invest in obligations issued
or guaranteed by the U.S. Government and backed by the full faith and credit of
the United States. These securities include Treasury securities, GNMA
Certificates, and obligations of the Farmers Home Administration and the Export
Import Bank. Government National Mortgage Association ("GNMA") Certificates are
mortgage-backed securities which evidence an undivided interest in mortgage
pools. These securities are subject to more rapid repayment than their stated
maturity would indicate because prepayments of principal on mortgages in the
pool are passed through to the holder of the securities. During periods of
declining interest rates, prepayments of mortgages in the pool can be expected
to increase. The pass-through of these prepayments would have the effect of
reducing the Portfolio's positions in these securities and requiring the
Portfolio to reinvest the prepayments at interest rates prevailing at the time
of reinvestment. The Portfolio may also invest in obligations issued or
guaranteed by U.S. Government agencies or instrumentalities where the Portfolio
must look principally to the issuing or guaranteeing agency for ultimate
repayment; some examples of agencies or instrumentalities issuing these
obligations are the Federal Farm Credit System, the Federal Home Loan Banks and
the Federal National Mortgage Association. Although these governmental issuers
are responsible for payments on their obligations, they do not guarantee their
market value.
The Portfolio may also invest in municipal obligations which may be
general obligations of the issuer or payable only from specific revenue
sources. However, the Portfolio will invest only in municipal obligations that
have been issued on a taxable basis or have an attractive yield excluding tax
considerations. In addition, the Portfolio may invest in debt securities of
foreign governments and governmental entities. See "Investment Practices" and
"Risk Factors" for further information on foreign investments.
MONEY MARKET INSTRUMENTS. The Portfolio may purchase money market
instruments to invest temporary cash balances or to maintain liquidity to meet
withdrawals. However, the Portfolio may also invest in money market
instruments as a temporary defensive measure taken during, or in anticipation
of, adverse market conditions. The money market investments permitted for the
Portfolio include U.S. Government Securities, other debt securities,
commercial paper, bank obligations and repurchase agreements. For more
detailed information about these money market investments, see "Investment
Objectives and Policies" in the Statement of Additional Information.
QUALITY INFORMATION. It is a current policy of the Portfolio that under
normal circumstances at least 65% of its total assets will consist of
securities that are rated at least A by Moody's or S&P or that are unrated and
in the Sub-Adviser's opinion are of comparable quality. In the case of 30% of
the Portfolio's investments, the Portfolio may purchase debt securities that
are rated Baa or better by Moody's or BBB or better by S&P or are unrated and
in the Sub-Adviser's opinion are of comparable quality. The remaining 5% of
the Portfolio's assets may be invested in debt securities that are rated Ba or
better by Moody's or BB or better by S&P or are unrated and in the
Sub-Adviser's opinion are of comparable quality. Securities rated Baa by
Moody's or BBB by S&P are considered investment grade, but have some
speculative characteristics. Securities rated Ba by Moody's or BB by S&P are
below investment grade and considered to be speculative with regard to payment
of interest and principal. These standards must be satisfied at the time an
investment is made. If the quality of the investment later declines, the
Portfolio may continue to hold the investment. See "Appendix - Description of
Corporate Bond Ratings" for more detailed information on these ratings.
The Portfolio may also purchase and sell obligations on a when-issued or
delayed delivery basis, enter into repurchase and reverse repurchase
agreements, loan its portfolio securities, purchase certain privately placed
securities and enter into certain hedging transactions that may involve
options on securities and securities indexes, futures contracts and options on
futures contracts. For a discussion of these investments and investment
techniques, see "Investment Practices" and "Risk Factors."
SMALL CAP STOCK PORTFOLIO .
The investment objective of the Portfolio is to provide a high total return
from a portfolio of equity securities of small companies. Total return will
consist of realized and unrealized capital gains and losses plus income. The
Portfolio invests primarily in the common stock of small U.S. companies. The
small company holdings of the Portfolio are primarily companies included in
the Russell 2000 Index.
The Portfolio is designed for investors who are willing to assume the somewhat
higher risk of investing in small companies in order to seek a higher return
over time than might be expected from a portfolio of stocks of large
companies. The Portfolio may also serve as an efficient vehicle to diversify
an existing portfolio by adding the equities of smaller U.S. companies.
The Sub-Adviser seeks to enhance the Portfolio's total return relative to that
of the U.S. small company universe. To do so, the Sub-Adviser uses fundamental
research, systematic stock valuation and a disciplined portfolio construction
process. The Sub-Adviser continually screens the universe of small
capitalization companies to identify for further analysis those companies
which exhibit favorable characteristics such as significant and predictable
cash flow and high quality management. Based on fundamental research and using
a dividend discount model, the Sub-Adviser ranks these companies within
economic sectors according to their relative value. The Sub-Adviser then
selects for purchase the most attractive companies within each economic
sector.
The Sub-Adviser uses a disciplined portfolio construction process to seek to
enhance returns and reduce volatility in the market value of the Portfolio
relative to that of the U.S. small company universe. The Sub-Adviser believes
that under normal market conditions, the Portfolio will have sector weightings
comparable to that of the U.S. small company universe, although it may
moderately under- or over-weight selected economic sectors. In addition, as a
company moves out of the market capitalization range of the small company
universe, it generally becomes a candidate for sale by the Portfolio.
The Portfolio intends to manage its investments actively in pursuit of its
investment objective. Since the Portfolio has a long-term investment
perspective, it does not intend to respond to short-term market fluctuations
or to acquire securities for the purpose of short-term trading; however, it
may take advantage of short-term trading opportunities that are consistent
with its objective. To the extent the Portfolio engages in short-term trading,
it may incur increased transaction costs.
EQUITY INVESTMENTS. During ordinary market conditions, the Sub-Adviser
intends to keep the Portfolio essentially fully invested with at least 65% of
the Portfolio's net assets invested in equity securities consisting of common
stocks and other securities with equity characteristics such as preferred
stocks, warrants, rights and convertible securities. The Portfolio's primary
equity investments are the common stocks of small U.S. companies and, to a
limited extent, similar securities of foreign corporations. The common stock
in which the Portfolio may invest includes the common stock of any class or
series or any similar equity interest, such as trust or limited partnership
interests. The small company holdings of the Portfolio are primarily
companies included in the Russell 2000 Index. These equity investments may or
may not pay dividends and may or may not carry voting rights. The Portfolio
invests in securities listed on a securities exchange or traded in an
over-the-counter market, and may invest in certain restricted or unlisted
securities.
FOREIGN INVESTMENTS. The Portfolio may invest in equity securities of
foreign issuers that are listed on a national securities exchange or
denominated or principally traded in U.S. dollars. However, the Portfolio does
not expect to invest more than 5% of its assets at the time of purchase in
foreign equity securities. For further information on foreign investments and
foreign currency exchange transactions, see "Investment Practices" and "Risk
Factors."
The Portfolio may also purchase and sell securities on a when-issued or
delayed delivery basis, enter into repurchase and reverse repurchase
agreements, loan its portfolio securities, purchase certain privately placed
securities and money market instruments, and enter into certain hedging
transactions that may involve options on securities and securities indexes,
futures contracts and options on futures contracts. For a discussion of these
investments and investment techniques, see "Investment Practices" and "Risk
Factors."
LARGE CAP STOCK PORTFOLIO .
The investment objective of the Portfolio is long-term growth of capital and
income. The Portfolio seeks to achieve its objective consistent with
reasonable investment risk.
The Portfolio is designed for investors who want an actively managed portfolio
of medium- to large-cap equity securities that seeks to outperform the total
return of the S&P 500.
Ordinarily, the Portfolio pursues its investment objective by investing
primarily in dividend-paying common stock. The Portfolio may also invest in
other equity securities, consisting of, among other things,
non-dividend-paying common stock, preferred stock, and securities convertible
into common stock, such as convertible preferred stock and convertible bonds,
and warrants. The Portfolio may also invest in ADRs and in various foreign
securities if U.S. exchange-listed.
STOCK SELECTION. The Portfolio is not subject to any limit on the size
of companies in which it may invest, but intends, under normal circumstances,
to be fully invested to the extent practicable in the stock of large- and
medium-sized companies primarily included in the S&P 500. In managing the
Portfolio, the potential for appreciation and dividend growth is given more
weight than current dividends. Nonetheless, the Sub-Adviser will normally
strive for gross income for the Portfolio at a level not less than 75% of the
dividend income generated on the stocks included in the S&P 500, although this
income level is merely a guideline and there can be no certainty that this
income level will be achieved.
The Portfolio does not seek to achieve its objective with any individual
portfolio security, but rather it aims to manage the portfolio as a whole in
such a way as to achieve its objective. The Portfolio attempts to reduce risk
by investing in many different economic sectors, industries and companies. The
Sub-Adviser may under- or over-weight selected economic sectors against the
S&P 500's sector weightings to seek to enhance the Portfolio's total return or
reduce fluctuations in market value relative to the S&P 500. In selecting
securities, the Sub-Adviser may emphasize securities that it believes to be
undervalued. Securities of a company may be undervalued for a variety of
reasons such as an overreaction by investors to unfavorable news about a
company, an industry, or the stock markets in general; or as a result of a
market decline, poor economic conditions, tax-loss selling, or actual or
anticipated unfavorable developments affecting a company.
The Sub-Adviser uses a dividend discount model to rank companies within
economic sectors according to their relative value and then separates them
into quintiles by sector. The Portfolio will typically be comprised, based on
the dividend discount model, of approximately 35% of stocks from the first
quintile, 35% of stocks from the second quintile and 30% of stocks from the
third quintile. The Portfolio will be highly diversified and will typically
hold between 225 and 250 stocks.
OTHER SECURITIES. During ordinary market conditions, the Sub-Adviser
will keep the Portfolio as fully invested as practicable in the equity
securities described above. The Portfolio may also invest in money market
instruments, including U.S. Government Securities, short term bank obligations
rated in the highest two rating categories by Moody's or S&P, or, if unrated,
determined to be of equal quality by the Sub-Adviser, certificates of deposit,
time deposits and banker's acceptances issued by U.S. and foreign banks and
savings and loan institutions with assets of at least $500 million as of the
end of their most recent fiscal year; and commercial paper and corporate
obligations, including variable rate demand notes, that are issued by U.S. and
foreign issuers and that are rated in the highest two rating categories by
Moody's or S&P, or if unrated, determined to be of equal quality by the
Sub-Adviser. Under normal circumstances, the Portfolio will invest in such
money market instruments to invest temporary cash balances or to maintain
liquidity to meet redemptions or expenses. The Portfolio may also, however,
invest in these instruments, without limitation, as a temporary defensive
measure taken during, or in anticipation of, adverse market conditions.
Convertible bonds and other fixed income securities (other than money market
instruments) in which the Portfolio may invest will, at the time of
investment, be rated Baa or better by Moody's or BBB or better by S&P or, if
not rated by Moody's or S&P, will be of comparable quality as determined by
the Sub-Adviser. In the event that an existing holding is downgraded below
these ratings, the Portfolio may nonetheless retain the security.
OTHER TECHNIQUES. In pursuing its investment objective, the Portfolio may
purchase and sell put and call options on securities and stock indexes. In
addition, the Portfolio may purchase or sell stock index futures contracts and
options thereon. These investment techniques may involve a greater degree or
different type of risk than those inherent in more conservative investment
approaches. See "Investment Practices" and "Risk Factors."
SELECT EQUITY PORTFOLIO .
The investment objective of the Portfolio is long-term growth of capital and
income. The Portfolio seeks to achieve its objective consistent with
reasonable investment risk.
The Portfolio is designed for investors who want an actively managed portfolio
of selected equity securities that seeks to outperform the total return of the
S&P 500.
Ordinarily, the Portfolio pursues its investment objective by investing
primarily in dividend-paying common stock. The Portfolio may also invest in
other equity securities, consisting of, among other things,
non-dividend-paying common stock, preferred stock, and securities convertible
into common stock, such as convertible preferred stock and convertible bonds,
and warrants. The Portfolio may also invest in ADRs and in various foreign
securities if U.S. exchange-listed.
STOCK SELECTION. The Portfolio is not subject to any limit on the size
of companies in which it may invest, but intends, under normal circumstances,
to be fully invested to the extent practicable in the stock of large- and
medium-sized companies primarily included in the S&P 500. In managing the
Portfolio, the potential for appreciation and dividend growth is given more
weight than current dividends. Nonetheless, the Sub-Adviser will normally
strive for gross income for the Portfolio at a level not less than 75% of the
dividend income generated on the stocks included in the S&P 500, although this
income level is merely a guideline and there can be no certainty that this
income level will be achieved.
The Portfolio does not seek to achieve its objective with any individual
portfolio security, but rather it aims to manage the portfolio as a whole in
such a way as to achieve its objective. The Portfolio attempts to reduce risk
by investing in many different economic sectors, industries and companies. The
Sub-Adviser may under- or over-weight selected economic sectors against the
S&P 500's sector weightings to seek to enhance the Portfolio's total return or
reduce fluctuations in market value relative to the S&P 500. In selecting
securities, the Sub-Adviser may emphasize securities that it believes to be
undervalued. Securities of a company may be undervalued for a variety of
reasons such as an overreaction by investors to unfavorable news about a
company, an industry, or the stock markets in general; or as a result of a
market decline, poor economic conditions, tax-loss selling, or actual or
anticipated unfavorable developments affecting a company.
The Sub-Adviser uses a dividend discount model to rank companies within
economic sectors according to their relative value and then separates them
into quintiles by sector. The Portfolio will primarily consist of stocks of
companies from the first and second quintiles. The Portfolio will typically
hold between 60 and 90 stocks.
OTHER SECURITIES. During ordinary market conditions, the Sub-Adviser
will keep the Portfolio as fully invested as practicable in the equity
securities described above. The Portfolio may also invest in money market
instruments, including U.S. Government Securities, short term bank obligations
rated in the highest two rating categories by Moody's or S&P, or, if unrated,
determined to be of equal quality by the Sub-Adviser, certificates of deposit,
time deposits and banker's acceptances issued by U.S. and foreign banks and
savings and loan institutions with assets of at least $500 million as of the
end of their most recent fiscal year; and commercial paper and corporate
obligations, including variable rate demand notes, that are issued by U.S. and
foreign issuers and that are rated in the highest two rating categories by
Moody's or S&P, or if unrated, determined to be of equal quality by the
Sub-Adviser. Under normal circumstances, the Portfolio will invest in such
money market instruments to invest temporary cash balances or to maintain
liquidity to meet redemptions or expenses. The Portfolio may also, however,
invest in these instruments, without limitation, as a temporary defensive
measure taken during, or in anticipation of, adverse market conditions.
Convertible bonds and other fixed income securities (other than money market
instruments) in which the Portfolio may invest will, at the time of
investment, be rated Baa or better by Moody's or BBB or better by S&P or, if
not rated by Moody's or S&P, will be of comparable quality as determined by
the Sub-Adviser. In the event that an existing holding is downgraded below
these ratings, the Portfolio may nonetheless retain the security.
OTHER TECHNIQUES. In pursuing its investment objective, the Portfolio may
purchase and sell put and call options on securities and stock indexes. In
addition, the Portfolio may purchase or sell stock index futures contracts and
options thereon. These investment techniques may involve a greater degree or
different type of risk than those inherent in more conservative investment
approaches. See "Investment Practices" and "Risk Factors."
INTERNATIONAL EQUITY PORTFOLIO.
The investment objective of the Portfolio is to provide a high total return
from a portfolio of equity securities of foreign corporations. Total return
will consist of realized and unrealized capital gains and losses plus income.
The Portfolio is designed for investors with a long-term investment horizon
who want to diversify their portfolios by investing in an actively managed
portfolio of non-U.S. securities that seeks to outperform the Morgan Stanley
Capital International Europe, Australia and Far East Index (the "EAFE Index").
The Portfolio seeks to achieve its investment objective through country
allocation, stock selection and management of currency exposure. The
Sub-Adviser uses a disciplined portfolio construction process to seek to
enhance returns and reduce volatility in the market value of the Portfolio
relative to that of the EAFE Index.
Based on fundamental research, quantitative valuation techniques, and
experienced judgment, the Sub-Adviser uses a structured decision-making
process to allocate the Portfolio primarily across the developed countries of
the world outside the United States by under- or over-weighting selected
countries in the EAFE Index. Currently, Japan has the heaviest weighting in
the EAFE Index (approximately 39.9%). The Portfolio will not invest more than
25% of its net assets in Japan notwithstanding the Japan weighting in the EAFE
Index.
Using a dividend discount model and based on analysts' industry expertise,
securities within each country are ranked within economic sectors according to
their relative value. Based on this valuation, the Sub-Adviser selects the
securities which appear the most attractive for the Portfolio. The Sub-Adviser
believes that under normal market conditions, economic sector weightings
generally will be similar to those of the EAFE Index.
Finally, the Sub-Adviser actively manages currency exposure, in conjunction
with country and stock allocation, in an attempt to protect and possibly
enhance the Portfolio's market value. Through the use of forward foreign
currency exchange contracts, the Sub-Adviser will adjust the Portfolio's
foreign currency weightings to reduce its exposure to currencies deemed
unattractive and, in certain circumstances, increase exposure to currencies
deemed attractive, as market conditions warrant, based on fundamental
research, technical factors, and the judgment of a team of experienced
currency managers. For further information on foreign currency exchange
transactions, see "Investment Practices" and "Risk Factors."
The Portfolio intends to manage its portfolio actively in pursuit of its
investment objective. The Portfolio does not expect to trade in securities for
short-term profits; however, when circumstances warrant, securities may be
sold without regard to the length of time held. To the extent the Portfolio
engages in short-term trading, it may incur increased transaction costs.
EQUITY INVESTMENTS. In normal circumstances, the Sub-Adviser intends to
keep the Portfolio essentially fully invested with at least 65% of the value
of its total assets in equity securities of foreign issuers, consisting of
common stocks and other securities with equity characteristics such as
preferred stock, warrants, rights and convertible securities. The Portfolio's
primary equity investments are the common stock of established companies based
in developed countries outside the United States. Such investments will be
made in at least three foreign countries. The common stock in which the
Portfolio may invest includes the common stock of any class or series or any
similar equity interest such as trust or limited partnership interests. The
Portfolio may also invest in securities of issuers located in developing
countries. See "Investment Practices" and "Risk Factors." The Portfolio
invests in securities listed on foreign or domestic securities exchanges and
securities traded in foreign or domestic over-the-counter markets, and may
invest in certain restricted or unlisted securities.
The Portfolio may also invest in money market instruments denominated in U.S.
dollars and other currencies, purchase and sell securities on a when-issued or
delayed delivery basis, enter into repurchase and reverse repurchase
agreements, loan its portfolio securities, purchase certain privately placed
securities, enter into forward contracts on foreign currencies and enter into
certain hedging transactions that may involve options on securities and
securities indexes, futures contracts and options on futures contracts. For a
discussion of these investments and investment techniques, see "Investment
Practices" and "Risk Factors."
PORTFOLIO MANAGED BY LORD, ABBETT & CO.:
BOND DEBENTURE PORTFOLIO .
The investment objective of the Bond Debenture Portfolio is high current
income and the opportunity for capital appreciation to produce a high total
return through a professionally-managed portfolio consisting primarily of
convertible and discount debt securities, many of which are lower-rated. These
lower-rated debt securities entail greater risks than investments in
higher-rated debt securities. Investors should carefully consider these risks
set forth under "Risk Factors - Special Risks of High Yield Investing."
The Sub-Adviser believes that a high total return (current income and capital
appreciation) may be derived from an actively-managed, diversified debt-
security portfolio. In no event will the Portfolio voluntarily purchase any
securities other than debt securities, if, at the time of such purchase or
acquisition, the value of the debt securities in the Portfolio is less than
80% of the value of its total assets. The Portfolio seeks unusual values,
particularly in lower-rated debt securities, some of which are convertible
into common stocks or have warrants to purchase common stocks.
Higher yield on debt securities can occur during periods of inflation when the
demand for borrowed funds is high. Also, buying lower-rated bonds when the
credit risk is above average but, the Sub-Adviser thinks, likely to decrease,
can generate higher yields. Such debt securities normally will consist of
secured debt obligations of the issuer (i.e., bonds), general unsecured debt
obligations of the issuer (i.e., debentures) and debt securities which are
subordinate in right of payment to other debt of the issuer.
Capital appreciation potential is an important consideration in the selection
of portfolio securities. Capital appreciation may be obtained by (1) investing
in debt securities when the trend of interest rates is expected to be down;
(2) investing in convertible debt securities or debt securities with warrants
attached entitling the holder to purchase common stock; and (3) investing in
debt securities of issuers in financial difficulties when, in the
Sub-Adviser's opinion, the problems giving rise to such difficulties can be
successfully resolved, with a consequent improvement in the credit standing of
the issuers (such investments involve corresponding risks that interest and
principal payments may not be made if such difficulties are not resolved). In
no event will the Portfolio invest more than 10% of its gross assets at the
time of investment in debt securities which are in default as to interest or
principal.
Normally, the Sub-Adviser invests in long-term debt securities when the
Sub-Adviser believes that interest rates in the long run will decline and
prices of such securities generally will be higher. When the Sub-Adviser
believes that long-term interest rates will rise, the Sub-Adviser will
endeavor to shift the Portfolio into short-term debt securities whose prices
might not be affected as much by an increase in interest rates.
The following policies are subject to change without shareholder approval: (a)
the Portfolio must keep at least 20% of the value of its total assets in (1)
debt securities which, at the time of purchase, are rated within one of the
four highest grades determined either by Moody's or S&P, (2) debt securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, (3) cash or cash equivalents (short-term obligations of
banks, corporations or the U.S. Government), or (4) a combination of any of
the foregoing; (b) the Portfolio may invest up to 10% of its gross assets, at
market value, in debt securities primarily traded in foreign countries - such
foreign debt securities normally will be limited to issues where there does
not appear to be substantial risk of nationalization, exchange controls,
confiscation or other government restrictions; (c) subject to the percentage
limitations for purchases of other than debt securities described below, the
Portfolio may purchase common and preferred stocks; (d) the Portfolio may hold
or sell any property or securities which it may obtain through the exercise of
conversion rights or warrants or as a result of any reorganization,
recapitalization or liquidation proceedings for any issuer of securities owned
by it. In no event will the Portfolio voluntarily purchase any securities
other than debt securities, if, at the time of such purchase or acquisition,
the value of the property and securities, other than debt securities, in the
Portfolio is greater than 20% of the value of its gross assets. A purchase or
acquisition will not be considered "voluntary" if made in order to avoid loss
in value of a conversion or other premium; and (e) the Portfolio does not
purchase securities for short-term trading, nor does it purchase securities
for the purpose of exercising control of management.
The Portfolio may invest up to 15% of its net assets in illiquid securities.
Bonds which are subject to legal or contractual restrictions on resale, but
which have been determined by the Board of Trustees to be liquid, will not be
subject to this limit. Investment by the Portfolio in such securities,
initially determined to be liquid, could have the effect of diminishing the
level of the Portfolio's liquidity during periods of decreased market interest
in such securities.
The Portfolio may, but has no present intention to, commit more than 5% of its
gross assets to the lending of its portfolio securities.
The Portfolio will not change its investment objective without shareholder
approval.
The Portfolio may invest substantially in lower-rated bonds for their higher
yields which entail greater risks. Since the risk of default generally is
higher among lower-rated bonds, the research and analysis performed by the
Sub-Adviser is especially important in the selection of such bonds, which, if
rated BB/Ba or lower, often are described as "high-yield bonds" because of
their generally higher yields and referred to colloquially as "junk bonds"
because of their greater risks. In selecting lower-rated bonds for investment,
the Sub-Adviser does not rely upon ratings, which evaluate only the safety of
principal and interest, not market value risk, and which, furthermore, may not
accurately reflect an issuer's current financial condition. The Portfolio does
not have any minimum rating criteria for its investments in bonds and some
issuers may default as to principal and/or interest payments subsequent to the
purchase of their securities. Through portfolio diversification, good credit
analysis and attention to current developments and trends in interest rates
and economic conditions, investment risk can be reduced, although there is no
assurance that losses will not occur.
The Portfolio may invest in the securities markets of foreign countries.
Investments in foreign securities present certain risks not ordinarily found
in investments in securities of U.S. issuers. See "Risk Factors - Special
Considerations Relating to Foreign Securities."
INVESTMENT PRACTICES
In connection with the investment policies of the Portfolios described above,
the Portfolios may engage in certain investment practices subject to the
limitations set forth below. These investments entail risks.
STRATEGIC TRANSACTIONS. Each of the Portfolios for which J.P. Morgan
Investment Management Inc. acts as Sub-Adviser, may purchase and sell
exchange-listed and over-the-counter put and call options on securities,
financial futures, fixed-income and equity indices and other financial
instruments and purchase and sell financial futures contracts. Each of the
Portfolios for which J.P. Morgan Investment Management Inc. acts as Sub-Adviser,
may enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures. Collectively, all of the above are referred to as "Strategic
Transactions." Strategic Transactions are hedging transactions which may be used
to attempt to protect against possible changes in the market value of securities
held in or to be purchased for a Portfolio, to protect a Portfolio's unrealized
gains in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective interest rate
exposure of a Portfolio, to protect against changes in currency exchange rates,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of a Portfolio to utilize these Strategic Transactions successfully will
depend on a Sub-Adviser's ability to predict pertinent market movements, which
cannot be assured. The Portfolios will comply with applicable regulatory
requirements when implementing these strategies, techniques and instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Sub-Adviser's view as to certain market movements is incorrect, the risk
that the use of such Strategic Transactions could result in losses greater
than if they had not been used. Use of put and call options may result in
losses to a Portfolio, force the sale of portfolio securities at inopportune
times or for prices other than at current market values, limit the amount of
appreciation a Portfolio can realize on its investments or cause a Portfolio
to hold a security it might otherwise sell. The use of currency transactions
can result in a Portfolio incurring losses as a result of a number of factors
including the imposition of exchange controls, suspension of settlements or
the inability to deliver or receive a specified currency. The use of options
and futures transactions entails certain other risks. In particular, the
variable degree of correlation between price movements of futures contracts
and price movements in the related portfolio position of a Portfolio creates
the possibility that losses on the hedging instrument may be greater than
gains in the value of a Portfolio's position. In addition, futures and options
markets may not be liquid in all circumstances and certain over-the-counter
options may have no markets. As a result, in certain markets, a Portfolio
might not be able to close out a transaction without incurring substantial
losses, if at all. Although the contemplated use of these futures contracts
and options thereon should tend to minimize the risk of loss due to a decline
in the value of the hedged position, at the same time they tend to limit any
potential gain which might result from an increase in value of such position.
Finally, the daily variation margin requirements for futures contracts would
create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value and possibly income. The Strategic Transactions that the Portfolios may
use and some of their risks are described more fully in the Statement of
Additional Information.
REPURCHASE AGREEMENTS. All of the Portfolios may enter into repurchase
agreements with selected commercial banks and broker-dealers, under which the
Portfolio acquires securities and agrees to resell the securities at an agreed
upon time and at an agreed upon price. The Portfolio accrues as interest the
difference between the amount it pays for the securities and the amount it
receives upon resale. At the time the Portfolio enters into a repurchase
agreement, the value of the underlying security including accrued interest
will be equal to or exceed the value of the repurchase agreement and, for
repurchase agreements that mature in more than one day, the seller will agree
that the value of the underlying security including accrued interest will
continue to be at least equal to the value of the repurchase agreement. Each
Sub-Adviser will monitor the value of the underlying security in this regard.
The Portfolio will enter into repurchase agreements only with commercial banks
whose deposits are insured by the Federal Deposit Insurance Corporation and
whose assets exceed $500 million or broker-dealers who are registered with the
Securities and Exchange Commission. In determining whether the Portfolio
should enter into a repurchase agreement with a bank or broker-dealer, the
Sub-Adviser will take into account the credit-worthiness of the party and will
monitor its credit-worthiness on an ongoing basis in accordance with standards
established by the Board of Trustees. In the event of a default by the party,
the delays and expenses potentially involved in establishing the Portfolio's
rights to, and in liquidating, the security may result in a loss to the
Portfolio.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS. All Portfolios may
purchase and sell securities on a "when issued" and "delayed delivery" basis,
that is, obligate themselves to purchase or sell securities with delivery and
payment to occur at a later date in order to secure what is considered to be
an advantageous price and yield to the Portfolio at the time of entering into
the obligation. When a Portfolio engages in such transactions, the Portfolio
relies on the buyer or seller, as the case may be, to consummate the sale. No
income accrues to or is earned by the Portfolio on portfolio securities in
connection with such transactions prior to the date the Portfolio actually
takes delivery of such securities. These transactions are subject to market
fluctuation; the value of such securities at delivery may be more or less than
their purchase price, and yields generally available on such securities when
delivery occurs may be higher than yields on such securities obtained pursuant
to such transactions. Because the Portfolio relies on the buyer or seller, as
the case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Portfolio missing the opportunity
of obtaining a price or yield considered to be advantageous. When the
Portfolio is the buyer in such a transaction, however, it will maintain, in a
segregated account with its custodian, cash or high-grade portfolio securities
having an aggregate value equal to the amount of such purchase commitments
until payment is made. The Portfolio will make commitments to purchase
securities on such basis only with the intention of actually acquiring these
securities, but the Portfolio may sell such securities prior to the settlement
date if such sale is considered to be advisable. To the extent the Portfolio
engages in when issued and delayed delivery transactions, it will do so for
the purpose of acquiring securities for the Portfolio consistent with the
Portfolio's investment objective and policies and not for the purposes of
investment leverage. No specific limitation exists as to the percentage of any
Portfolio's assets which may be used to acquire securities on a when issued or
delayed delivery basis. See the Statement of Additional Information for
additional discussion of these transactions.
RESTRICTED AND ILLIQUID SECURITIES. The Portfolios may each invest up to
15% of their respective net assets in securities the disposition of which is
subject to substantial legal or contractual restrictions on resale and
securities that are not readily marketable. The sale of restricted and illiquid
securities often requires more time and results in higher brokerage charges or
dealer discounts and other selling expenses than does the sale of securities
eligible for trading on national securities exchanges or in the over-the-counter
markets. Restricted securities may sell at a price lower than similar securities
that are not subject to restrictions on resale. Restricted and illiquid
securities in all Portfolios will be valued at fair value as determined in good
faith by or at the direction of the Trustees for the purposes of determining the
net asset value of each Portfolio. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933 that are determined to be liquid by the Sub-Adviser under
guidelines adopted by the Board of Trustees of the Trust (under which guidelines
the Sub-Adviser will consider factors such as trading activities and the
availability of price quotations) will not be treated as restricted securities
by the Portfolios pursuant to such rules.
LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, all of the Portfolios may lend their securities to selected
commercial banks or broker-dealers up to a maximum of 25% of the assets of
each Portfolio. Such loans must be callable at any time and be continuously
secured by collateral deposited by the borrower in a segregated account with
the Trust's custodian consisting of cash or of securities issued or guaranteed
by the U.S. Government or its agencies, which collateral is equal at all times
to at least 100% of the value of the securities loaned, including accrued
interest. A Portfolio will receive amounts equal to earned income for having
made the loan. Any cash collateral pursuant to these loans will be invested in
short-term instruments. A Portfolio is the beneficial owner of the loaned
securities in that any gain or loss in the market price during the loan inures
to the Portfolio and its shareholders. Thus, when the loan is terminated, the
value of the securities may be more or less than their value at the beginning
of the loan. In determining whether to lend its portfolio securities to a bank
or broker-dealer, a Portfolio will take into account the credit-worthiness of
such borrower and will monitor such credit-worthiness on an ongoing basis in
as much as a default by the other party may cause delays or other collection
difficulties. A Portfolio may pay finders' fees in connection with loans of
its portfolio securities.
REVERSE REPURCHASE AGREEMENTS AND BORROWINGS. All of the Portfolios may
enter into reverse repurchase agreements with selected commercial banks or
broker-dealers with respect to securities which could otherwise be sold by the
Portfolios. Reverse repurchase agreements involve sales by a Portfolio of
Portfolio assets concurrently with an agreement by the Portfolio to repurchase
the same assets at a later date at a fixed price which is greater than the
sales price. The difference between the amount the Portfolio receives for the
securities and the amount it pays on repurchase is deemed to be a payment of
interest by the Portfolio. Each Portfolio will maintain, in a segregated
account with its custodian, cash, Treasury bills, or other U.S. Government
Securities having an aggregate value equal to the amount of commitment to
repurchase, including accrued interest, until payment is made. Each Portfolio
will enter into reverse repurchase agreements only with commercial banks whose
deposits are insured by the Federal Deposit Insurance Corporation and whose
assets exceed $500 million or broker-dealers who are registered with the SEC.
In determining whether a Portfolio should enter into a reverse repurchase
agreement with a bank or broker-dealer, each Sub-Adviser will take into
account the credit-worthiness of the party and will monitor the
credit-worthiness on an ongoing basis. During the reverse repurchase agreement
period, a Portfolio continues to receive principal and interest payments on
these securities. Reverse repurchase agreements involve the risk that the
market value of the securities retained by the Portfolio may decline below the
price of the securities the Portfolio has sold but is obligated to repurchase
under the agreement. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, a Portfolio's
use of the proceeds of the agreement may be restricted pending a determination
by the other party, or its trustee or receiver, whether to enforce the
Portfolio's obligation to repurchase the securities. Reverse repurchase
agreements create leverage and will be treated as borrowings for the purposes
of each Portfolio's investment restriction on borrowings.
Each of the Select Equity, Large Cap Stock and Small Cap Stock Portfolios is
permitted to borrow money for extraordinary or emergency purposes in amounts up
to 10% of the value of the Portfolio's total assets. Each of the Quality Bond
and International Equity Portfolios is permitted to borrow money for
extraordinary or emergency purposes in amounts up to 30% of the value of the
Portfolio's total assets and in connection with reverse repurchase agreements.
The Bond Debenture Portfolio is permitted to borrow money for extraordinary or
emergency purposes in amounts up to 5% of the Portfolio's gross assets.
Borrowing by a Portfolio creates an opportunity for increased net income but,
at the same time, creates special risk considerations such as changes in the
net asset value of the shares and in the yield on the Portfolio. Although the
principal of such borrowings will be fixed, the Portfolio's assets may change
in value during the time the borrowing is outstanding. Borrowing will create
interest expenses for the Portfolio which can exceed the income from the
assets retained. To the extent the income derived from securities purchased
with borrowed funds exceeds the interest the Portfolio will have to pay, the
Portfolio's net income will be greater than if borrowing were not used.
Conversely, if the income from the assets retained with borrowed funds is not
sufficient to cover the cost of borrowing, the net income of the Portfolio
will be less than if borrowing were not used.
CONVERTIBLE SECURITIES. The convertible securities in which a Portfolio
may invest include any debt securities or preferred stock which may be
converted into common stock or which carry the right to purchase common stock.
Convertible securities entitle the holder to exchange the securities for a
specified number of shares of common stock, usually of the same company, at
specified prices within a certain period of time.
WARRANTS. A Portfolio may invest in warrants, which entitle the holder
to buy common stock from the issuer at a specific price (the strike price) for
a specific period of time. The strike price of warrants sometimes is much
lower than the current market price of the underlying securities, yet warrants
are subject to similar price fluctuations. As a result, warrants may be more
volatile investments than the underlying securities.
Warrants do not entitle the holder to dividends or voting rights with respect
to the underlying securities and do not represent any rights in the assets of
the issuing company. Also, the value of the warrant does not necessarily
change with the value of the underlying securities and a warrant ceases to
have value if it is not exercised prior to the expiration date.
MONEY MARKET INSTRUMENTS. Certain Portfolios are permitted to invest in
money market instruments although they intend to stay invested in equity
securities to the extent practical in light of their objectives and long-term
investment perspective. These Portfolios may make money market investments
pending other investment or settlement, for liquidity or in adverse market
conditions. The money market investments permitted for these Portfolios
include U.S. Government Securities, other debt securities, commercial paper,
bank obligations and repurchase agreements. These Portfolios may also invest
in short-term obligations of sovereign foreign governments, their agencies,
instrumentalities and political subdivisions. For more detailed information
about these money market investments, see "Investment Objectives and Policies"
in the Statement of Additional Information.
INVESTMENT LIMITATIONS
In addition to the investment policies set forth above, certain additional
restrictive policies relating to the investment of assets of the Portfolios
have been adopted by the Trust. The Investment Limitations of the Trust are
deemed fundamental and may not be changed without the approval of the holders
of a majority of the outstanding voting shares of each Portfolio affected
(which for this purpose and under the Investment Company Act of 1940 means the
lesser of (i) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are present or represented by proxy and (ii)
more than 50% of the outstanding shares). A change in policy affecting only
one Portfolio may be effected with the approval of a majority of the
outstanding shares of the Portfolio. Details as to the policies are set forth
in the Statement of Additional Information.
RISK FACTORS
TAX CONSIDERATIONS
The Trust was initially established as the underlying investment for variable
contracts issued by Cova Financial Services Life Insurance Company ("Cova
Life"), an affiliate of First Cova.
Section 817(h) of the Internal Revenue Code of 1986, as amended (the "Code"),
imposes certain diversification standards on the underlying assets of variable
contracts held in the Portfolios of the Trust. The Code provides that a
variable contract shall not be treated as an annuity contract for any period
(and any subsequent period) for which the investments are not, in accordance
with regulations prescribed by the Treasury Department, adequately
diversified. Disqualification of the variable contract as an annuity contract
would result in imposition of federal income tax on contract owners with
respect to earnings allocable to the variable contract prior to the receipt of
payments under the variable contract. Section 817(h)(2) of the Code is a safe
harbor provision which provides that contracts such as the variable contracts
meet the diversification requirements if, as of the close of each quarter, the
underlying assets meet the diversification standards for a regulated
investment company and no more than fifty-five percent (55%) of the total
assets consists of cash, cash items, U.S. government securities and securities
of other regulated investment companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas. Reg.
1.817-5), which established diversification requirements for the investment
portfolios underlying variable contracts. The Regulations amplify the
diversification requirements for variable contracts set forth in Section
817(h) of the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if (i) no more than 55 percent of the value of the
total assets of the portfolio is represented by any one investment; (ii) no
more than 70 percent of such value is represented by any two investments;
(iii) no more than 80 percent of such value is represented by any three
investments; and (iv) no more than 90 percent of such value is represented by
any four investments. For purposes of these Regulations, all securities of the
same issuer are treated as a single investment.
The Code provides that for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable
contracts by Section 817(h) of the Code have been met, "each United States
government agency or instrumentality shall be treated as a separate issuer".
Each Portfolio of the Trust will be managed in such a manner as to comply with
these diversification requirements. It is possible that in order to comply
with the diversification requirements, less desirable investment decisions may
be made which would affect the investment performance of the Portfolios.
SPECIAL CONSIDERATIONS RELATING TO FOREIGN SECURITIES
All of the Portfolios may invest in foreign securities. The International Equity
Portfolio may invest without limitation in foreign securities. Investments in
the securities of foreign entities and securities denominated in foreign
currencies involve risks not typically involved in domestic investment,
including fluctuations in foreign exchange rates, future foreign political and
economic developments, and the possible imposition of exchange controls or other
foreign or United States governmental laws or restrictions applicable to such
investments. Where a Portfolio invests in securities denominated or quoted in
currencies other than the United States dollar, changes in foreign currency
exchange rates may affect the value of investments in the Portfolio and the
accrued income and unrealized appreciation or depreciation of investments.
Changes in foreign currency exchange rates relative to the U.S. dollar will
affect the U.S. dollar value of a Portfolio's assets denominated in that
currency and the Portfolio's yield on such assets. With respect to certain
foreign countries, there is the possibility of expropriation of assets,
confiscatory taxation, political or social instability or diplomatic
developments which could affect investment in those countries. There may be less
publicly available information about a foreign security than about a United
States security, and foreign entities may not be subject to accounting, auditing
and financial reporting standards and requirements comparable to those of United
States entities. In addition, certain foreign investments made by a Portfolio
may be subject to foreign withholding taxes, which would reduce the Portfolio's
total return on such investments and the amounts available for distributions by
the Portfolio to its shareholders. Foreign financial markets, while growing in
volume, have, for the most part, substantially less volume than United States
markets, and securities of many foreign companies are less liquid and their
prices more volatile than securities of comparable domestic companies. The
foreign markets also have different clearance and settlement procedures and in
certain markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions making it difficult to conduct
such transactions. Delays in settlement could result in temporary periods when
assets of a Portfolio are not invested and no return is earned thereon. The
inability of a Portfolio to make intended security purchases due to settlement
problems could cause the Portfolio to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to a Portfolio due to subsequent declines in value of
the portfolio security or, if a Portfolio has entered into a contract to sell
the security, could result in possible liability to the purchaser. Costs
associated with transactions in foreign securities, including custodial costs
and foreign brokerage commissions, are generally higher than with transactions
in United States securities. In addition, a Portfolio will incur costs in
connection with conversions between various currencies. There is generally less
government supervision and regulation of exchanges, financial institutions and
issuers in foreign countries than there is in the United States.
As a matter of operating policy, each Portfolio will comply with the
following:
1. a Portfolio will be invested in a minimum of five different foreign
countries at all times. However, this minimum is reduced to four when foreign
country investments comprise less than 80% of the Portfolio's net asset value;
to three when less than 60% of such value; to two when less than 40% of such
value; and to one when less than 20% of such value.
2. except as set forth in items 3 and 4 below, a Portfolio will have no
more than 20% of its net asset value invested in securities of issuers located
in any one country.
3. a Portfolio may have an additional 15% of its value invested in
securities of issuers located in any one of the following countries:
Australia, Canada, France, Japan, the United Kingdom or Germany.
4. a Portfolio's investments in United States issuers are not subject to
the foregoing operating policies.
SPECIAL RISKS OF HIGH YIELD INVESTING
The Bond Debenture Portfolio intends to invest a substantial portion of its
assets in medium and lower grade corporate debt securities.
Debt securities which are in those medium and lower grade categories generally
offer a higher current yield than is offered by securities which are in the
higher grade categories, but they also generally involve greater price
volatility and greater credit and market risk. Credit risk relates to the
issuer's ability to make timely payments of principal and interest when due as
well as fundamental developments in an issuer's business. Market risk relates
to the changes in market value that occur as a result of variation in the
level of prevailing interest rates and yield relationships in the securities
market. Typically, market prices tend to fall as interest rates rise and tend
to rise as interest rates fall. Generally, prices tend to fluctuate more for
lower grade issues than for higher grade issues, and, for any given change in
interest rates, prices for longer maturity issues tend to fluctuate more than
for shorter maturity issues. Yields on lower-rated securities will fluctuate
over time.
The prices of lower-grade securities, while generally less sensitive to
interest rate changes than higher-rated investments, tend to be more sensitive
to adverse economic changes or individual corporate developments. During an
economic downturn or substantial period of rising interest rates, the ability
of a highly leveraged issuer to service its principal and interest payment
obligations, to meet projected business goals and to obtain additional
financing may be adversely affected. An economic downturn could disrupt the
market for high yield bonds, adversely affect the value of outstanding bonds
and the ability of the issuers of such bonds to repay principal and interest,
cause increased volatility in the market prices of high yield bonds and the
Portfolio's net asset value and may result in a higher incidence of defaults
by issuers on bond obligations. If the issuer of a bond defaults, the
Portfolio may incur additional expenses to seek recovery. The Portfolio will
seek to reduce risk through portfolio diversification, credit analysis, and
attention to current developments and trends in the industries and with the
issuers involved. The Portfolio's Sub-Adviser will continuously monitor the
condition of the economy and the financial and credit markets.
To the extent that there is no established retail secondary market for high
yield bonds, such bonds may be thinly traded, making the bonds less liquid
than investment grade bonds. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of high yield bonds, especially in a thinly traded market. In the
event of an illiquid secondary market, or in the absence of readily available
market quotations, the responsibility of the Board of Trustees of the Trust to
value the securities becomes more difficult and will involve a greater degree
of judgment in that there is less reliable, objective data available.
If the market for high yield bonds is restricted by the enactment of
legislation, or if steps are taken to limit the use of such securities, or
other advantages of such securities, the value of the securities and the
Portfolio's ability to acquire them may be adversely affected.
A description of the corporate bond ratings is contained in the Appendix.
Purchasers should be aware, however, that credit ratings evaluate the safety
of principal and interest payments and not the market value risk of high yield
bonds. In addition, credit ratings may not always be modified on a timely
basis to reflect events subsequent to the most recent ratings which may have a
material impact on the securities rated. However, the Portfolio's Sub-Adviser
will continuously monitor the issuers of high yield bonds in the Portfolio to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments, and to assure the bonds' liquidity.
Achievement of the investment objective of the Portfolio may be more dependent
on the credit analysis of the Portfolio's Sub-Adviser than is the case with
higher quality bonds.
The Portfolio may also invest in unrated corporate securities. Although
unrated securities are not necessarily of lower quality than rated securities,
the market for them may not be as broad and, accordingly, they may carry
greater risk and higher yield than rated securities.
PORTFOLIO TURNOVER RATES
BOND DEBENTURE PORTFOLIO
The Portfolio will not generally engage in trading of securities for the
purpose of realizing short-term profits, but they will adjust its portfolio as
it deems advisable in view of prevailing or anticipated market conditions to
accomplish its investment objectives. For example, the Portfolio may sell
securities in anticipation of a movement in interest rates or to avoid loss of
premiums paid and unrealized capital gains earned on GNMA Certificates selling
at a substantial premium. Frequency of portfolio turnover will not be a
limiting factor if the Sub-Adviser considers it advantageous to purchase or
sell securities. The Portfolio anticipates that its portfolio turnover rate
will normally be less than 200%, and may be significantly less in a period of
stable or rising interest rates. The Bond Debenture Portfolio has only
recently commenced investment operations. A high rate of portfolio turnover
involves correspondingly higher brokerage commissions and transaction expenses
than a lower rate, which expenses must be borne by the Portfolio and its
shareholders.
QUALITY BOND, SMALL CAP STOCK, LARGE CAP STOCK,
SELECT EQUITY AND INTERNATIONAL EQUITY PORTFOLIOS
Portfolio transactions for these Portfolios will be undertaken principally to
accomplish their respective investment objectives, and the Portfolios may
engage in short-term trading consistent with their respective objectives. A
portfolio turnover rate of 100% indicates that the equivalent of all of a
Portfolio's assets have been sold and reinvested in a year. Overall, high
portfolio turnover may result in increased portfolio transaction costs and the
realization of substantial net capital gains or losses. To the extent net
short term capital gains are realized, any distributions resulting from such
gains are considered ordinary income for general income tax purposes. The
Quality Bond Portfolio's annual turnover rate is not expected to exceed 300%.
The turnover rate for each of the Small Cap Stock, Large Cap Stock, Select
Equity and International Equity Portfolios is not expected to exceed 100%.
MANAGEMENT OF THE TRUST
THE TRUSTEES
The Trust is organized as a Massachusetts business trust. The overall
responsibility for the supervision of the affairs of the Trust vests in the
Trustees. The Trustees have entered into an Investment Advisory Agreement with
the Adviser to handle the day-to-day affairs of the Trust (see below). The
Trustees meet periodically to review the affairs of the Trust and to establish
certain guidelines which the Adviser is expected to follow in implementing the
investment policies and objectives of the Trust.
ADVISER
Under an Investment Advisory Agreement dated April 1, 1996, the Adviser
located at One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois 60181-4644,
manages the business and affairs of the Portfolios and the Trust, subject to
the control of the Trustees.
The Adviser is an Illinois corporation which was incorporated on August 31,
1993 under the name Oakbrook Investment Advisory Corporation and which is
registered with the Securities and Exchange Commission as an investment
adviser under the Investment Advisers Act of 1940. The Adviser is a
wholly-owned subsidiary of Cova Life Management Company, a Delaware
corporation, which in turn, is a wholly-owned subsidiary of Cova Corporation,
a Missouri corporation, which in turn, is a wholly-owned subsidiary of General
American Life Insurance Company ("General American"), a St. Louis-based mutual
company. General American has more than $235 billion of life insurance in
force and approximately $9.6 billion in assets. The Adviser has had no
previous experience in advising a mutual fund.
Under the terms of the Investment Advisory Agreement, the Adviser is obligated
to (i) manage the investment and reinvestment of the assets of each Portfolio
of the Trust in accordance with each Portfolio's investment objective and
policies and limitations, or (ii) in the event that Adviser shall retain a
sub-adviser or sub-advisers, to supervise and implement the investment
activities of any Portfolio for which any such sub-adviser has been retained,
including responsibility for overall management and administrative support
including managing, providing for and compensating any sub-advisers; and to
administer the Trust's affairs. The Investment Advisory Agreement further
provides that Adviser agrees, among other things, to administer the business
affairs of each Portfolio, to furnish offices and necessary facilities and
equipment to each Portfolio, to provide administrative services for each
Portfolio, to render periodic reports to the Board of Trustees of the Trust
with respect to each Portfolio, and to permit any of its officers or
employees, or those of any sub-adviser to serve without compensation as
trustees or officers of the Portfolio if elected to such positions.
As full compensation for its services under the Investment Advisory Agreement,
the Trust will pay the Adviser a monthly fee at the following annual rates
shown in the table below based on the average daily net assets of each
Portfolio:
<TABLE>
<CAPTION>
<S> <C> <C>
Average Daily
Portfolio Net Assets % Per Annum
- -------------------- ------------------ ------------
Bond Debenture _______________ .75%
Quality Bond First $75 million .55%
Over $75 million .50%
International Equity First $50 million .85%
Over $50 million .75%
Select Equity First $50 million .75%
Over $50 million .65%
Large Cap Stock _______________ .65%
Small Cap Stock _______________ .85%
</TABLE>
Cova Life, Cova Life Management Company and the Adviser have entered into an
Investment Advisory Services Agreement, dated April 1, 1996, the purpose of
which is to ensure that the Adviser, which is minimally capitalized, has
adequate facilities and financing for the carrying on of its business. Under
the terms of the Agreement, Cova Life is obligated to provide the Adviser with
adequate capitalization in order for the Adviser to meet any minimum capital
requirements. Cova Life is further obligated to reimburse the Adviser or
assume payment for any obligation incurred by the Adviser. Cova Life
Management Company is obligated to provide the Adviser with facilities and
personnel sufficient for the Adviser to perform its obligations under the
Investment Advisory Agreement.
The Adviser retains Investors Bank & Trust Company ("IBTC"), a Massachusetts
trust company, to supervise various aspects of the Trust's administrative
operations and to perform certain specific services including, but not limited
to, the preparation and filing of Trust reports and tax returns, pursuant to
an Administration Agreement between the Trust, the Adviser and IBTC.
EXPENSES OF THE TRUST
Although each Portfolio must bear the expenses directly attributable to it,
the Portfolios are expected to experience cost savings over the aggregate
amount that would be payable if each Portfolio were a separate fund, because
they have the same Trustees, accountants, attorneys and other general and
administrative expenses. Any expenses which are not directly attributable to a
specific Portfolio are allocated on the basis of the net assets of the
respective Portfolios.
First Cova may at its discretion, but is not obligated to, assume all or any
portion of Trust expenses.
SUB-ADVISERS
In accordance with each Portfolio's investment objective and policies and
under the supervision of Adviser and the Trust's Board of Trustees, each
Portfolio's Sub-Adviser is responsible for the day-to-day investment
management of the Portfolio, makes investment decisions for the Portfolio and
places orders on behalf of the Portfolio to effect the investment decisions
made as provided in separate Sub-Advisory Agreements among each Sub-Adviser,
the Adviser and the Trust. The following organizations act as Sub-Advisers to
the Portfolios:
J.P. MORGAN INVESTMENT MANAGEMENT INC., 522 Fifth Avenue, New York, New
York 10036, a Delaware corporation, and a wholly-owned subsidiary of J.P.
Morgan & Co., Incorporated, is the Sub-Adviser for the Quality Bond,
International Equity, Select Equity, Large Cap Stock and Small Cap Stock
Portfolios of the Trust.
Ronald Arons, Vice President of the Sub-Adviser, is the Portfolio Manager for
the Quality Bond Portfolio. Mr. Arons is a member of the Fixed Income Group,
specializing in portfolio management for active fixed income and insurance
company clients. He joined Morgan from MetLife Investment Management Corp.
where he managed active and structured bond portfolios. Mr. Arons is a
graduate of George Washington University and received his M.B.A. at New York
University. He is a Chartered Financial Analyst.
Anne Richards, Assistant Vice President of the Sub-Adviser, is the Portfolio
Manager for the International Equity Portfolio. Ms. Richards joined J.P.
Morgan in 1994 as an international equity portfolio manager. Previously she
has held positions as an engineering analyst with Alliance Capital, a project
engineer for Cambridge Consultants and a research fellow for CERN, European
Laboratory for Particle Physics. Ms. Richards holds a BSc from the University
of Edinburgh and an MBA from INSEAD, France.
James B. Otness, Managing Director of the Sub-Adviser, is the Portfolio
Manager for the Small Cap Stock Portfolio. Mr. Otness is a member of the
Equity and Balanced Accounts Group. Mr. Otness co-manages Morgan's Small
Company Fund and other client portfolios employing a small company investment
approach. Mr. Otness joined Morgan in 1970 after graduation from Harvard
University and service in the U.S. Marine Corps Reserve. Prior to his current
assignment, he managed large capitalization equities and before that was unit
head in the Investment Research Department. Mr. Otness is a Chartered
Financial Analyst with 23 years of investment experience.
James Wiess, Vice President of the Sub-Adviser, is the Portfolio Manager for
the Large Cap Stock Portfolio. Mr. Wiess is a member of the Equity and
Balanced Accounts Group, with responsibility for portfolio rebalancing and
product research and development in structured equity strategies. Prior to
joining Morgan in 1992, Mr. Wiess gained experience in stock index arbitrage
during seven years at Oppenheimer & Co. He also was a financial markets
consultant at Data Resources. Mr. Wiess earned his undergraduate degree from
the Wharton School at the University of Pennsylvania.
Michael J. Kelly, Vice President of the Sub-Adviser, is the Portfolio Manager
for the Select Equity Portfolio. Mr. Kelly is an institutional portfolio
manager with responsibility for a number of employee benefit, foundation, and
endowments clients. Prior to assuming his current position, he was in the
Equity Research Group covering capital goods, electrical equipment, and
conglomerates. Mr. Kelly also served as the group's generalist. Before joining
Morgan in 1985, he held a position at the economic firm Townsend-Greenspan &
Co., Inc. Mr. Kelly served as President of the Machinery Analysts of New York,
Vice President of the Electrical Products Group, committee member for the AIMR
and is a member of the Money Marketeers of New York. Mr. Kelly has an
undergraduate degree from Gettysburg College and an M.B.A. from The Wharton
School. Mr. Kelly is a Chartered Financial Analyst.
LORD, ABBETT & CO. ("LORD ABBETT"), The General Motors Building, 767 Fifth
Avenue, New York, New York 10153-0203. Lord Abbett has been an investment
manager for over 65 years and currently manages approximately $19 billion in a
family of mutual funds and other advisory accounts. Lord Abbett is the
Sub-Adviser for the Bond Debenture Portfolio.
Christopher J. Towle, Executive Vice President of the Sub-Adviser, is
Portfolio Manager for the Bond Debenture Portfolio. Mr. Towle joined Lord
Abbett in 1987 as Assistant Fixed Income Portfolio Manager and assumed full
responsibilities as Fixed Income Portfolio Manager in August, 1995. Prior to
joining Lord Abbett, Mr. Towle was an Assistant Vice President and Portfolio
Manager with American International Group. He earned a B.A. degree in
economics from Rutgers University and he is a Chartered Financial Analyst.
SUB-ADVISORY FEES
Under the terms of the Sub-Advisory Agreements, the Adviser shall pay to the
Sub-Advisers, as full compensation for services rendered under the respective
Agreements with respect to the various Portfolios, monthly fees at the
following annual rates shown in the table below based on the average daily net
assets of each Portfolio.
<TABLE>
<CAPTION>
<S> <C> <C>
Average Daily Sub-Advisory
Portfolio Net Assets Fee
- -------------------- ------------------ -------------
Bond Debenture _______________ .50%
Quality Bond First $75 million .30%
Over $75 million .25%
International Equity First $50 million .60%
Over $50 million .50%
Select Equity First $50 million .50%
Over $50 million .40%
Large Cap Stock _______________ .40%
Small Cap Stock _______________ .60%
</TABLE>
DESCRIPTION OF THE TRUST
SHAREHOLDER RIGHTS
The Trust is an unincorporated business trust established under the laws of
the Commonwealth of Massachusetts by a Declaration of Trust dated July 9,
1987. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares.
Each Portfolio issues its own class of shares. Each share represents an equal
proportionate interest in the assets of the Portfolio with each other share in
the Portfolio. On any matter submitted to a vote of shareholders, all shares
of the Trust then issued and outstanding and entitled to vote will be voted in
the aggregate and not by class except for matters concerning only one class.
The holders of each share of stock of the Trust will be entitled to one vote
for each full share and a fractional vote for each fractional share of stock.
Shares of one class may not bear the same economic relationship to the Trust
as another class.
In accordance with its view of present applicable law, the separate account(s)
of First Cova, as shareholder(s) of the Trust, have the right to vote Trust
shares at any meeting of shareholders and will provide pass-through voting
privileges to all contract owners. First Cova will vote shares of the Trust
held in the separate account(s) for which no timely voting instructions from
contract owners are received, as well as shares it owns, in the same
proportion as those shares for which voting instructions are received.
Additional information concerning voting rights is described in the Variable
Account Prospectus attached hereto under the caption, "Investment Options -
Voting Rights".
The Trust is not required to hold annual meetings of shareholders and does not
plan to do so. The Trustees may call special meetings of shareholders for
action by shareholder vote as may be required by the Investment Company Act of
1940, as amended, or the Declaration of Trust. The Trust will hold a
shareholder meeting to fill existing vacancies on the Board in the event that
less than a majority of Trustees were elected by the shareholders. The
Trustees shall also call a meeting of shareholders for the purpose of voting
upon the question of removal of any Trustee when requested in writing to do so
by the record holders of not less than 10 percent of the outstanding shares.
The Trust has an obligation to assist shareholder communications.
The Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust, requires inclusion of a clause to that effect in
every agreement entered into by the Trust and indemnifies shareholders against
any liability. Although shareholders of an unincorporated business trust
established under Massachusetts law may, under certain limited circumstances,
be held personally liable for the obligations of the Trust as though they were
general partners in a partnership, the provisions of the Declaration of Trust
described in the foregoing sentence make the likelihood of personal liability
remote.
The Trustees may amend the Declaration of Trust in any manner without
shareholder approval, except that the Trustees may not adopt any amendment
adversely affecting the rights of shareholders without approval by a majority
of the shares present at a meeting of shareholders (or higher vote as may be
required by the Investment Company Act of 1940, as amended, or other
applicable law) and except that the Trustees cannot amend the Declaration of
Trust to impose any liability on shareholders, make any assessment on shares,
or impose liabilities on the Trustees without approval from each affected
shareholder or Trustee, as the case may be.
INQUIRIES
Any inquiries should be directed to First Cova, One Tower Lane, Suite 3000,
Oakbrook Terrace, Illinois 60181-4644. The telephone number is (800) 831-LIFE.
DISTRIBUTION AND REDEMPTION OF SHARES
Shares of the Trust are currently issued and redeemed only in connection with
investment in and payments under certain variable annuity contracts ("variable
contracts") issued by First Cova. The shares of the Trust are purchased and
redeemed at net asset value (see below). Redemptions will be effected by the
separate accounts to meet obligations under the variable contracts. Contract
Owners do not deal directly with the Trust with respect to acquisition or
redemption of shares.
DIVIDENDS
All dividends are distributed to the separate accounts and will be
automatically reinvested in Trust shares. Dividends and distributions made by
the Portfolios are taxable, if at all, to First Cova; they are not taxable to
variable annuity contract owners.
TAX STATUS
It is the intention of the Trust to qualify as a "regulated investment
company" under Sub-chapter M of the Internal Revenue Code. If the Trust so
qualifies and distributes each year to its shareholders at least 90% of its
net investment income in each year, it will not be required to pay federal
income taxes on any income distributed to shareholders. Each Portfolio of the
Trust distributes all of its net income and gains to its shareholders (the
separate accounts). Each Portfolio is treated as a separate entity for Federal
income tax purposes and, therefore, the investments and results of the
Portfolio are determined separately for purposes of determining whether the
Trust qualifies as a "regulated investment company" and for purposes of
determining net ordinary income (or loss) and net realized capital gains (or
losses).
Some of the Trust's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Trust and affect the holding period of the securities held by the Trust and
the character of the gains or losses realized by the Trust. These provisions
may also require the Trust to mark-to-market some of the positions in its
portfolio (i.e., treat them as if they were closed out), which may cause the
Trust to recognize income without receiving cash with which to make
distributions in amounts necessary to satisfy the 90% distribution requirement
and the distribution requirements for avoiding income and excise taxes. The
Trust will monitor its transactions and may make certain tax elections in
order to mitigate the effect of these rules and prevent disqualification of
the Trust as a regulated investment company.
Investments of the Trust in securities issued at a discount or providing
for deferred interest or payment of interest in kind are subject to special
tax rules that will affect the amount, timing and character of distributions
to shareholders. For example, with respect to securities issued at a discount,
the Trust will be required to accrue as income each year a portion of the
discount and to distribute such income each year in order to maintain its
qualification as a regulated investment company and to avoid income and excise
taxes. In order to generate sufficient cash to make distributions necessary
to satisfy the 90% distribution requirement and to avoid income and excise
taxes, the Trust may have to dispose of securities that it would otherwise
have continued to hold.
The Trust's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Trust's annual gross income be derived from the disposition of
securities held for less than three months.
NET ASSET VALUES
Portfolio shares are sold and redeemed at a price equal to the share's net
asset value. The net asset value of a Portfolio is determined by calculating
the total value of the Portfolio's assets, deducting its total liabilities,
and dividing the result by the number of shares outstanding. The net asset
value for each Portfolio is computed once daily as of the close of the New
York Stock Exchange, Monday through Friday, except on customary business
holidays, or except on any day on which no purchase or redemption orders are
received, or there is not a sufficient degree of trading in the Portfolio's
investments so that the Portfolio's net asset value per share might
be materially affected. The Trust reserves the right to calculate the net
asset value and to adjust the public offering price based thereon more
frequently than once a day if deemed desirable.
Securities that are listed on a securities exchange are valued at their
closing sales price on the day of the valuation. Price valuations for listed
securities are based on market quotations where the security is primarily
traded or, if not available, are valued at the mean of the bid and asked
prices on any valuation date. Unlisted securities in a Portfolio are primarily
valued based on their latest quoted bid price or, if not available, are valued
by a method determined by the Trustees to accurately reflect fair value. Money
market instruments maturing in 60 days or less are valued on the basis of
amortized cost, which means that securities are valued at their acquisition
cost to reflect a constant amortization rate to maturity of any premium or
discount, rather than at current market value.
FUND PERFORMANCE
From time to time advertisements and other sales materials for the Trust may
include information concerning the historical performance of the Trust. Such
advertisements will also describe the performance of the relevant insurance
company separate accounts. Any such information will include the average
annual total return of the Trust calculated on a compounded basis for
specified periods of time. Total return information will be calculated
pursuant to rules established by the Securities and Exchange Commission. In
lieu of or in addition to total return calculations, such information may
include performance rankings and similar information from independent
organizations such as Lipper Analytical Services, Inc., Morningstar,
Business Week, Forbes or other industry publications.
The Trust calculates average annual total return by determining the redemption
value at the end of specified periods (assuming reinvestment of all dividends
and distributions) of a $1,000 investment in the Trust at the beginning of
the period, deducting the initial $1,000 investment, annualizing the increase
or decrease over the specified period and expressing the result as a
percentage.
Total return figures utilized by the Trust are based on historical performance
and are not intended to indicate future performance. Total return and net
asset value per share can be expected to fluctuate over time, and accordingly,
upon redemption, shares may be worth more or less than their original cost.
See "Performance Data" in the Statement of Additional Information.
PUBLIC FUND PERFORMANCE
The Bond Debenture Portfolio, which is managed by Lord, Abbett & Co., is
relatively new and does not yet have any meaningful performance record. However,
the Portfolio has the same investment objective and follows substantially the
same investment strategies as a mutual fund ("public fund") whose shares are
sold to the public and managed by the same portfolio manager of Lord, Abbett &
Co.
Set forth below is the historical performance of the public fund. Investors
should not consider the performance data of the public fund as an indication
of the future performance of the Portfolio. The performance figures shown
below reflect the deduction of the historical fees and expenses paid by the
public fund, and not those to be paid by the Portfolio. The figures also do
not reflect the deduction of any insurance fees or charges which are imposed
by First Cova in connection with its sale of variable annuity contracts.
Investors should refer to the separate account prospectus describing the
variable annuity contracts for information pertaining to these insurance fees
and charges. The insurance separate account fees will have a detrimental
effect on the performance of the Portfolio. The results shown reflect the
reinvestment of dividends and distributions, and were calculated in the same
manner that will be used by the Portfolio to calculate its own performance.
The following tables show average annualized total returns for the time
periods shown for the public fund.
BOND DEBENTURE PORTFOLIO
Corresponding 1 5 10
Public Fund Year Year Year
__________________________________________________________________
Lord Abbett Bond -
Debenture Fund, Inc. 17.50% 16.00% 10.10%
PRIVATE ACCOUNT PERFORMANCE
The Select Equity, Large Cap Stock, Small Cap Stock and Quality Bond
Portfolios, each of which is managed by J.P. Morgan Investment Management
Inc., are relatively new and do not yet have any meaningful performance records.
However, each of these Portfolios has investment objectives, policies and
strategies which are substantially similar to those employed by J.P. Morgan
Investment Management Inc. with respect to certain Private Accounts.
Thus, the performance information derived from these Private Accounts is
deemed relevant to the investor. The performance of the Portfolios may vary
from the Private Account composite information because each Portfolio will be
actively managed and its investments will vary from time to time and will not
be identical to the past portfolio investments of the Private Accounts.
Moreover, the Private Accounts are not registered under the Investment Company
Act of 1940 ("1940 Act") and therefore are not subject to certain investment
restrictions that are imposed by the 1940 Act, which, if imposed, could
have adversely affected the Private Accounts' performances.
The chart below shows hypothetical performance information derived from
historical composite performance of the Private Accounts included in the
Active Equity Composite, Structured Stock Selection Composite, Small Cap
Directly Invested Composite and Public Bond Composite. The hypothetical
performance figures for the Portfolios represent the actual performance
results of the composites of comparable Private Accounts, adjusted to reflect
the deduction of the fees and expenses anticipated to be paid by the
Portfolios. The actual Private Account composite performance figures are
time-weighted rates of return which include all income and accrued income and
realized and unrealized gains or losses, but do not reflect the deduction of
investment advisory fees actually charged to the Private Accounts. Inception
was June 1, 1987 for the Public Bond Composite and November 1, 1989 for the
Structured Stock Selection Composite.
Investors should not consider the performance data of these Private Accounts
as an indication of the future performance of the respective Portfolios. The
figures also do not reflect the deduction of any insurance fees or charges
which are imposed by First Cova in connection with its sale of variable annuity
contracts. Investors should refer to the separate account prospectus
describing the variable annuity contracts for information pertaining to these
insurance fees and charges. The insurance fees and charges will have a
detrimental effect on the performance of a Portfolio.
HYPOTHETICAL PERFORMANCE INFORMATION DERIVED FROM
PRIVATE ACCOUNT COMPOSITE PERFORMANCE
REDUCED BY ANTICIPATED PORTFOLIO FEES AND EXPENSES
FOR THE PERIODS ENDED 12/31/95
HYPOTHETICAL AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
<S> <C> <C> <C>
10 Years
or Since
Portfolio 1 Year 5 Years Inception
- ----------------------------- ------- -------- ----------
Active Equity
Composite 32.56% 17.71% 15.51%
(Select Equity Portfolio)
Structured Stock Selection
Composite 37.47% 17.40% 14.05%
(Large Cap Stock Portfolio)
Small Cap Directly Invested
Composite 35.29% 20.75% 12.00%
(Small Cap Stock Portfolio)
Public Bond
Composite 17.71% 9.46% 9.52%
(Quality Bond Portfolio)
</TABLE>
APPENDIX - DESCRIPTION OF CORPORATE BOND RATINGS
STANDARD & POOR'S CORPORATION. A brief description of the applicable Standard
& Poor's Corporation ("S&P") rating symbols and their meanings (as published
by S&P) follows:
An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as
a result of changes in, or unavailability of, such information, or for other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default - capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
LONG-TERM CORPORATE BONDS.
AAA - Debt rated 'AAA' has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in small
degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC - Debt rated 'BB', 'B', 'CCC', or 'CC' is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest degree of speculation and 'CC' the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - This rating is reserved for income bonds on which no interest is being
paid.
D - Debt rated 'D' is in default, and payment of interest and/or
repayment of principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from 'A' to 'B' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PROVISIONAL RATINGS: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on
the likelihood of, or the risk of default upon failure of, such completion.
The investor should exercise judgment with respect to such likelihood and
risk.
L - The letter 'L' indicates that the rating pertains to the principal
amount of those bonds where the underlying deposit collateral is fully insured
by the Federal Deposit Insurance Corp.
[dagger] - Continuance of the rating is contingent upon S&P's receipt of
closing documentation confirming investments and cash flow.
* - Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement.
NR - Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
MOODY'S INVESTORS SERVICE, INC. A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings (as
published by Moody's Investors Service, Inc.) follows:
LONG-TERM CORPORATE BONDS.
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e. they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa
1, A 1, Baa 1, Ba 1 and B 1.
