STATEMENT OF ADDITIONAL INFORMATION
COVA SERIES TRUST
ONE TOWER LANE, SUITE 3000
OAKBROOK TERRACE, ILLINOIS 60181-4644
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS BUT SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS FOR COVA SERIES TRUST, DATED MAY 1,
1997 (the "PROSPECTUS"). A COPY OF THE PROSPECTUS MAY BE OBTAINED WITHOUT
CHARGE BY CALLING (800) 831-LIFE, OR WRITING COVA FINANCIAL SERVICES LIFE
INSURANCE COMPANY AT ONE TOWER LANE, SUITE 3000, OAKBROOK TERRACE, ILLINOIS
60181-4644.
The Prospectus and this Statement of Additional Information omit certain of
the information contained in the registration statement filed with the
Securities and Exchange Commission, Washington, D.C. These items may be
obtained from the Commission upon payment of the fee prescribed, or inspected
at the Commission's office at no charge.
THIS STATEMENT OF ADDITIONAL INFORMATION IS
DATED MAY 1, 1997
TABLE OF CONTENTS
PAGE
GENERAL INFORMATION AND HISTORY
INVESTMENT OBJECTIVES AND POLICIES
STOCK INDEX PORTFOLIO - MONITORING PROCEDURES
INVESTMENT LIMITATIONS
DESCRIPTION OF SECURITIES RATINGS
OFFICERS AND TRUSTEES
COMPENSATION TABLE
SUBSTANTIAL SHAREHOLDERS
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
CUSTODIAN
PERFORMANCE DATA
LEGAL COUNSEL AND INDEPENDENT AUDITORS
INVESTMENT ADVISORY AGREEMENT
PORTFOLIO TRANSACTIONS
FINANCIAL STATEMENTS
GENERAL INFORMATION AND HISTORY
Cova Series Trust was established as a Massachusetts business trust under a
Declaration of Trust dated July 9, 1987. The Trust changed its name from "Van
Kampen Merritt Series Trust" to its current name on May 1, 1996.
INVESTMENT OBJECTIVES AND POLICIES
OBJECTIVES
For a description of the objectives of the Portfolios, see "Prospectus -
Investment Objectives." The following information is provided for those
investors wishing to have more comprehensive information than that contained
in the Prospectus.
ADDITIONAL INFORMATION - INVESTMENT OBJECTIVES AND POLICIES OF PORTFOLIOS
MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT INC.
QUALITY BOND PORTFOLIO. The Quality Bond Portfolio is designed to be an
economical and convenient means of making substantial investments in a broad
range of corporate and government debt obligations and related investments of
domestic and foreign issuers, subject to certain quality and other
restrictions. See "Quality and Diversification Requirements." The Portfolio's
investment objective is to provide a high total return consistent with
moderate risk of capital and maintenance of liquidity. Although the net asset
value of the Portfolio will fluctuate, the Portfolio attempts to conserve the
value of its investments to the extent consistent with its objective.
The Portfolio attempts to achieve its investment objective by investing
in high grade corporate and government debt obligations and related securities
of domestic and foreign issuers described in the Prospectus and this Statement
of Additional Information.
INVESTMENT PROCESS
Duration/yield curve management: The Sub-Adviser's duration decision
begins with an analysis of real yields, which its research indicates are
generally a reliable indicator of longer term interest rate trends. Other
factors the Sub-Adviser studies in regard to interest rates include economic
growth and inflation, capital flows and monetary policy. Based on this
analysis, the Sub-Adviser forms a view of the most likely changes in the level
and shape of the yield curve -- as well as the timing of those changes -- and
sets the Portfolio's duration and maturity structure accordingly. The
Sub-Adviser typically limits the overall duration of the Portfolio to a range
between one year shorter and one year longer than that of the Salomon Brothers
Broad Investment Grade Bond Index, the benchmark index.
Sector allocations: Sector allocations are driven by the Sub-Adviser's
fundamental and quantitative analysis of the relative valuation of a broad
array of fixed income sectors. Specifically, the Sub-Adviser utilizes market
and credit analysis to assess whether the current risk-adjusted yield spreads
of various sectors are likely to widen or narrow. The Sub-Adviser then
overweights (underweights) those sectors its analysis indicates offer the most
(least) relative value, basing the speed and magnitude of these shifts on
valuation considerations.
Security selection: Securities are selected by the portfolio manager,
with substantial input from the Sub-Adviser's fixed income analysts and
traders. Using quantitative analysis as well as traditional valuation methods,
the Sub-Adviser's applied research analysts aim to optimize security selection
within the bounds of the Portfolio's investment objective. In addition, credit
analysts -- supported by the Sub-Adviser's equity analysts -- assess the
creditworthiness of issuers and counterparties. A dedicated trading desk
contributes to security selection by tracking new issuance, monitoring dealer
inventories, and identifying attractively priced bonds. The traders also
handle all transactions for the Portfolio.
SELECT EQUITY PORTFOLIO AND LARGE CAP STOCK PORTFOLIO. The investment
objective of each Portfolio is long-term growth of capital and income.
In normal circumstances, at least 65% of each Portfolio's net assets will
be invested in equity securities consisting of common stocks and other
securities with equity characteristics comprised of preferred stock, warrants,
rights, convertible securities, trust certificates, limited partnership
interests and equity participations (collectively, "Equity Securities"). Each
Portfolio's primary equity investments are the common stock of large and
medium sized U.S. corporations and, to a limited extent, similar securities of
foreign corporations.
INVESTMENT PROCESS
Fundamental research: The Sub-Adviser's domestic equity analysts, each an
industry specialist, follow 700 predominantly large- and medium-sized U.S.
companies -- 500 of which form the universe for each Portfolio's investments.
Their research goal is to forecast normalized, longer term earnings and
dividends for the most attractive companies among those they cover. In doing
this, they may work in concert with the Sub-Adviser's international equity
analysts in order to gain a broader perspective for evaluating industries and
companies in today's global economy.
Systematic valuation: The analysts' forecasts are converted into
comparable expected returns by a dividend discount model, which calculates
those expected returns by comparing a company's current stock price with the
"fair value" price forecasted by its estimated long term earnings power.
Within each sector, companies are ranked by their expected return and grouped
into quintiles: those with the highest expected returns (Quintile 1) are
deemed the most undervalued relative to their long-term earnings power, while
those with the lowest expected returns (Quintile 5) are deemed the most
overvalued.
Disciplined portfolio construction: A diversified portfolio is
constructed using disciplined buy and sell rules. The specific names selected
reflect the portfolio manager's judgment concerning the soundness of the
underlying forecasts, the likelihood that the perceived misvaluation will be
corrected within a reasonable time frame and the magnitude of the risks versus
the rewards. Portfolio sector weightings are held close to those of the S&P
500 Index, reflecting the Sub-Adviser's belief that its research has the
potential to add value at the individual stock level, but not at the sector
level. Sector neutrality is also seen as a way to help protect the portfolio
from macroeconomic risks, and -- together with diversification -- represents
an important element of the Sub-Adviser's risk control strategy. A dedicated
trading desk handles all transactions for the Portfolio.
SMALL CAP STOCK PORTFOLIO. This Portfolio is designed for investors who
are willing to assume the somewhat higher risk of investing in small companies
in order to seek a higher return over time than might be expected from a
portfolio of stocks of large companies. The Portfolio's investment objective
is to provide a high total return from a portfolio of Equity Securities of
small companies.
The Portfolio attempts to achieve its investment objective by investing
primarily in the common stock of small U.S. companies included in the Russell
2000 Index, which is composed of 2000 common stocks of U.S. companies with
market capitalizations ranging between $100 million and $1.5 billion.
INVESTMENT PROCESS
Fundamental Research: The Sub-Adviser's domestic equity analysts -- each
an industry specialist -- continuously monitor the small cap stocks in their
respective sectors with the aim of identifying companies that exhibit superior
financial strength and operating returns. Meetings with management and on-site
visits play a key role in shaping their assessments. Their research goal is to
forecast normalized, long-term earnings and dividends for the most attractive
small cap companies among those they monitor -- a universe that generally
contains a total of 300-350 names. Because the Sub-Adviser's analysts follow
both the larger and smaller companies in their industries -- in essence,
covering their industries from top to bottom -- they are able to bring broad
perspective to the research they do on both.
Systematic valuation: The analysts' forecasts are converted into
comparable expected returns by the Sub-Adviser's dividend discount model,
which calculates those returns by comparing a company's current stock price
with the "fair value" price forecasted by its estimated long-term earnings
power. Within each industry, companies are ranked by their expected returns
and grouped into quintiles: those with the highest expected returns (Quintile
1) are deemed the most undervalued relative to their long-term earnings power,
while those with the lowest expected returns (Quintile 5) are deemed the most
overvalued.
Disciplined portfolio construction: A diversified portfolio is
constructed using disciplined buy and sell rules. Purchases are concentrated
among the stocks in the top two quintiles of the rankings: the specific names
selected reflect the portfolio manager's judgment concerning the soundness of
the underlying forecasts, the likelihood that the perceived misevaluation will
soon be corrected and the magnitude of the risks versus the rewards. Once a
stock falls into the third quintile -- because its price has risen or its
fundamentals have deteriorated -- it generally becomes a sale candidate. The
portfolio manager seeks to hold sector weightings close to those of the
Russell 2000 Index, the Portfolio's benchmark, reflecting the Sub-Adviser's
belief that its research has the potential to add value at the individual
stock level, but not at the sector level. Sector neutrality is also seen as a
way to help to protect the portfolio from macroeconomic risks, and -- together
with diversification -- represents an important element of the Sub-Adviser's
investment strategy.
INTERNATIONAL EQUITY PORTFOLIO. This Portfolio is designed for investors
with a long-term investment horizon who want to diversify their portfolios by
investing in an actively managed portfolio of non-U.S. securities that seeks
to outperform the Morgan Stanley Capital International Europe, Australia and
Far East Index (the "EAFE Index"). The Portfolio's investment objective is to
provide a high total return from a portfolio of Equity Securities of foreign
corporations.
The Portfolio seeks to achieve its investment objective by investing
primarily in the Equity Securities of foreign corporations. Under normal
circumstances, the Portfolio expects to invest at least 65% of its total
assets in such securities. The Portfolio does not intend to invest in U.S.
securities (other than money market instruments), except temporarily, when
extraordinary circumstances prevailing at the same time in a significant
number of developed foreign countries render investments in such countries
inadvisable.
INVESTMENT PROCESS
Country allocation: The Sub-Adviser's country allocation decision begins
with a forecast of equity risk premiums, which provide a valuation signal by
measuring the relative attractiveness of stocks versus bonds. Using a
proprietary approach, the Sub-Adviser calculates this risk premium for each of
the nations in the Portfolio's universe, determines the extent of its
deviation -- if any -- from its historical norm, and then ranks countries
according to the size of those deviations. Countries with high (low) rankings
are overweighted (underweighted) in comparisons to the EAFE Index to reflect
the above-average (below-average) attractiveness of their stock markets. In
determining weightings, the Sub-Adviser analyzes a variety of qualitative
factors as well -- including the liquidity, earnings momentum and interest
rate climate of the market at hand. These qualitative assessments can change
the magnitude but not the direction of the country allocations called for by
the risk premium forecast. The Sub-Adviser places limits on the total size of
the Portfolio's country over- and under-weightings relative to the EAFE Index.
Stock selection: The Sub-Adviser's international equity analysts, each an
industry and country specialist, forecast normalized earnings and dividend
payouts for roughly 1,000 non-U.S. companies -- taking a long-term perspective
rather than the short time frame common to consensus estimates. These
forecasts are converted into comparable expected returns by a dividend
discount model, and then companies are ranked from most to least attractive by
industry and country. A diversified portfolio is constructed using disciplined
buy and sell rules. The portfolio manager's objective is to concentrate the
purchases in the top third of the rankings, and to keep sector weightings
close to those of the EAFE Index, the Portfolio's benchmark. Once a stock
falls into the bottom third of the rankings, it generally becomes a sales
candidate. Where available, warrants and convertibles may be purchased instead
of common stock if they are deemed a more attractive means of investing in an
undervalued company.
Currency management: Currency is actively managed, in conjunction with
country and stock allocation, with the goal of protecting and possibly
enhancing the Portfolio's return. The Sub-Adviser's currency decisions are
supported by a proprietary tactical mode which forecasts currency movements
based on an analysis of four fundamental factors -- trade balance trends,
purchasing power parity, real short-term interest differentials and real bond
yields -- plus a technical factor designed to improve the timing of
transactions. Combining the output of this model with a subjective assessment
of economic, political and market factors, the Sub-Adviser's currency group
recommends currency strategies that are implemented in conjunction with the
Portfolio's investment strategy.
MONEY MARKET INSTRUMENTS
As discussed in the Prospectus, each Portfolio may invest in money market
instruments to the extent consistent with its investment objective and
policies. A description of the various types of money market instruments that
may be purchased by the Portfolios appears below. See "Quality and
Diversification Requirements."
U.S. TREASURY SECURITIES. Each of the Portfolios may invest in direct
obligations of the U.S. Treasury, including Treasury bills, notes and bonds,
all of which are backed as to principal and interest payments by the full
faith and credit of the United States.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. Each of the Portfolios may invest
in obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full
faith and credit" of the United States. In the case of securities not backed
by the full faith and credit of the United States, each Portfolio must look
principally to the federal agency issuing or guaranteeing the obligations for
ultimate repayment, and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality does not meet its
commitments. Securities in which each Portfolio may invest that are not backed
by the full faith and credit of the United States include, but are not limited
to, obligations of the Tennessee Valley Authority, the Federal Home Loan
Mortgage Corporation and the U.S. Postal Service, each of which has the right
to borrow from the U.S. Treasury to meet its obligations, and obligations of
the Federal Farm Credit System and the Federal Home Loan Banks, both of whose
obligations may be satisfied only by the individual credits of each issuing
agency. Securities which are backed by the full faith and credit of the United
States include obligations of the Government National Mortgage Association,
the Farmers Home Administration, and the Export-Import Bank.
FOREIGN GOVERNMENT OBLIGATIONS. Each of the Portfolios, subject to its
applicable investment policies, may also invest in short-term obligations of
foreign sovereign governments or of their agencies, instrumentalities,
authorities or political subdivisions. These securities may be denominated in
the U.S. dollar or in another currency. See "Foreign Investments."
STRIPPED U.S. GOVERNMENT OBLIGATIONS. As described in the Prospectus and
subject to their respective investment policies, certain Portfolios may hold
stripped U.S. Treasury securities, including (1) coupons that have been
stripped from U.S. Treasury bonds, which are held through the Federal Reserve
Bank's book-entry system called "Separate Trading of Registered Interest and
Principal of Securities" ("STRIPS") or (2) through a program entitled "Coupon
Under Book-Entry Safekeeping" ("CUBES"). Certain Portfolios may also acquire
U.S. Government obligations and their unmatured interest coupons that have
been stripped by a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government obligations, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including
"Treasury Income Growth Receipts" ("TIGRS") and "Certificates of Accrual on
Treasury Securities" ("CATS"). Such securities may not be as liquid as STRIPS
and CUBES and are not viewed by the staff of the SEC as U.S. Government
securities for purposes of the 1940 Act.
The stripped coupons are sold separately from the underlying principal,
which is sold at a deep discount because the buyer receives only the right to
receive a future fixed payment on the security and does not receive any rights
to periodic interest (cash) payments. Purchasers of stripped principal-only
securities acquire, in effect, discount obligations that are economically
identical to the zero coupon securities that the Treasury Department sells
itself. In the case of bearer securities (i.e., unregistered securities which
are owned ostensibly by the bearer or holder), the underlying U.S. Treasury
bonds and notes themselves are held in trust on behalf of the owners.
The U.S. Government does not issue stripped Treasury securities directly.
The STRIPS program, which is ongoing, is designed to facilitate the secondary
market in the stripping of selected U.S. Treasury notes and bonds into
separate interest and principal components. Under the program, the U.S.
Treasury continues to sell its notes and bonds through its customary auction
process. A purchaser of those specified notes and bonds who has access to a
book-entry account at a Federal Reserve bank, however, may separate the
Treasury notes and bonds into interest and principal components. The selected
Treasury securities thereafter may be maintained in the book-entry system
operated by the Federal Reserve in a manner that permits the separate trading
and ownership of the interest and principal payments.
For custodial receipts, the underlying debt obligations are held separate
from the general assets of the custodian and nominal holder of such
securities, and are not subject to any right, charge, security interest, lien
or claim of any kind in favor of or against the custodian or any person
claiming through the custodian. The custodian is also responsible for
applying all payments received on those underlying debt obligations to the
related receipts or certificates without making any deductions other than
applicable tax withholding. The custodian is required to maintain insurance
for the protection of holders of receipts or certificates in customary amounts
against losses resulting from the custody arrangement due to dishonest or
fraudulent action by the custodian's employees. The holders of receipts or
certificates, as the real parties in interest, are entitled to the rights and
privileges of the underlying debt obligations, including the right, in the
event of default in payment of principal or interest, to proceed individually
against the issuer without acting in concert with other holders of those
receipts or certificates or the custodian.
VARIABLE AND FLOATING RATE INSTRUMENTS. Subject to their respective
investment limitations, certain Portfolios may purchase variable and floating
rate obligations. The Sub-Advisers will consider the earning power, cash
flows and other liquidity ratios of the issuers and guarantors of such
obligations and, for obligations subject to a demand feature, will monitor
their financial status to meet payment on demand. In determining average
weighted portfolio maturity, a variable or floating rate instrument issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, or a
variable or floating rate instrument scheduled on its face to be paid in 397
days or less, will be deemed to have a maturity equal to the period remaining
until the obligation's next interest rate adjustment. Other variable or
floating rate notes will be deemed to have a maturity equal to the longer of
the period remaining to the next interest rate adjustment or the time the
Portfolio can recover payment of principal as specified in the instrument.
BANK OBLIGATIONS. Each of the Portfolios, unless otherwise noted in the
Prospectus or below, may invest in negotiable certificates of deposit, time
deposits and bankers' acceptances of (i) banks, savings and loan associations
and savings banks which (for those Portfolios managed by J.P. Morgan
Investment Management Inc. except the International Equity Portfolio) have
more than $2 billion in total assets and are organized under the laws of the
United States or any state, (ii) foreign branches of these banks or of foreign
banks of equivalent size (Euros) and (iii) U.S. branches of foreign banks of
equivalent size (Yankees) with respect to the Portfolios managed by J.P.
Morgan Investment Management Inc. See "Foreign Investments." The Portfolios
will not invest in obligations for which J.P. Morgan Investment Management
Inc., or any of its affiliated persons, is the ultimate obligor or accepting
bank. Each of the Portfolios may also invest in obligations of international
banking institutions designated or supported by national governments to
promote economic reconstruction, development or trade between nations (e.g.,
the European Investment Bank, the Inter-American Development Bank, or the
World Bank).
COMMERCIAL PAPER. Each of the Portfolios may invest in commercial paper,
including master demand obligations. Master demand obligations are obligations
that provide for a periodic adjustment in the interest rate paid and permit
daily changes in the amount borrowed. The monies loaned to the borrower come
from accounts managed by a Sub-Adviser or its affiliates, pursuant to
arrangements with such accounts. Interest and principal payments are credited
to such accounts. The Sub-Adviser, or its affiliates, acting as a fiduciary on
behalf of its clients, has the right to increase or decrease the amount
provided to the borrower under an obligation. The borrower has the right to
pay without penalty all or any part of the principal amount then outstanding
on an obligation together with interest to the date of payment. Since these
obligations typically provide that the interest rate is tied to the Federal
Reserve commercial paper composite rate, the rate on master demand obligations
is subject to change. Repayment of a master demand obligation to participating
accounts depends on the ability of the borrower to pay the accrued interest
and principal of the obligations on demand which is continuously monitored by
the Sub-Adviser. Since master demand obligations typically are not rated by
credit rating agencies, the Portfolios may invest in such unrated obligations
only if at the time of an investment the obligation is determined by the
Sub-Adviser to have a credit quality which satisfies the Portfolio's quality
restrictions. See "Quality and Diversification Requirements." Although there
is no secondary market for master demand obligations, such obligations are
considered by the Portfolios to be liquid because they are payable upon
demand. The Portfolios do not have any specific percentage limitation on
investments in master demand obligations.
REPURCHASE AGREEMENTS. Each of the Portfolios may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Trustees of the Trust. In a repurchase agreement, a Portfolio
buys a security from a seller that has agreed to repurchase the same security
at a mutually agreed upon date and price. The resale price normally is in
excess of the purchase price, reflecting an agreed upon interest rate. This
interest rate is effective for the period of time the Portfolio is invested in
the agreement and is not related to the coupon rate on the underlying
security. A repurchase agreement may also be viewed as a fully collateralized
loan of money by a Portfolio to the seller. The period of these repurchase
agreements will usually be short, from overnight to one week, and at no time
will the Portfolios invest in repurchase agreements for more than thirteen
months. The securities which are subject to repurchase agreements, however,
may have maturity dates in excess of thirteen months from the effective date
of the repurchase agreement. The Portfolios will always receive securities as
collateral whose market value is, and during the entire term of the agreement
remains, at least equal to 100% of the dollar amount invested by the
Portfolios in each agreement plus accrued interest, and the Portfolios will
make payment for such securities only upon physical delivery or upon evidence
of book entry transfer to the account of the Custodian. The Money Market
Portfolio will be fully collateralized within the meaning of paragraph (a)(3)
of Rule 2a-7 under the Investment Company Act of 1940, as amended (the "1940
Act"). If the seller defaults, a Portfolio might incur a loss if the value of
the collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. In addition,
if bankruptcy proceedings are commenced with respect to the seller of the
security, realization upon disposal of the collateral by a Portfolio may be
delayed or limited.
Each of the Portfolios may make investments in other debt securities with
remaining effective maturities of not more than thirteen months, including
without limitation corporate and foreign bonds, asset-backed securities and
other obligations described in the prospectus or this Statement of Additional
Information.
CORPORATE BONDS AND OTHER DEBT SECURITIES
As discussed in the Prospectus, certain of the Portfolios may invest in bonds
and other debt securities of domestic and foreign issuers to the extent
consistent with their investment objectives and policies. A description of
these investments appears in the prospectus and below. See "Quality and
Diversification Requirements." For information on short-term investments in
these securities, see "Money Market Instruments."
ASSET-BACKED SECURITIES. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables. Payments of principal and interest may be guaranteed
up to certain amounts and for a certain time period by a letter of credit
issued by a financial institution unaffiliated with the entities issuing the
securities. The asset-backed securities in which a Portfolio may invest are
subject to the Portfolio's overall credit requirements. However, asset-backed
securities, in general, are subject to certain risks. Most of these risks are
related to limited interests in applicable collateral. For example, credit
card debt receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts on credit card
debt thereby reducing the balance due. Additionally, if the letter of credit
is exhausted, holders of asset-backed securities may also experience delays in
payments or losses if the full amounts due on underlying sales contracts are
not realized. Because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested.
EQUITY INVESTMENTS
As discussed in the prospectus, certain of the Portfolios invest primarily in
Equity Securities. The Equity Securities in which these Portfolios invest
include those listed on any domestic or foreign securities exchange or traded
in the over-the-counter market as well as certain restricted or unlisted
securities. A discussion of the various types of equity investments which may
be purchased by these Portfolios appears in the prospectus and below. See
"Quality and Diversification Requirements."
EQUITY SECURITIES. The Equity Securities in which these Portfolios may
invest may or may not pay dividends and may or may not carry voting rights.
Common stock occupies the most junior position in a company's capital
structure.
The convertible securities in which these Portfolios may invest include
any debt securities or preferred stock which may be converted into common
stock or which carry the right to purchase common stock. Convertible
securities entitle the holder to exchange the securities for a specified
number of shares of common stock, usually of the same company, at specified
prices within a certain period of time.
The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible
debentures, the holders' claims on assets and earnings are subordinated to the
claims of other creditors, and are senior to the claims of preferred and
common shareholders. In the case of convertible preferred stock, the holders'
claims on assets and earnings are subordinated to the claims of all creditors
and are senior to the claims of common shareholders.
RIGHTS AND WARRANTS
Certain of the Portfolios may participate in rights offerings and purchase
warrants, which are privileges issued by corporations enabling the owners to
subscribe to and purchase a specified number of shares of the corporation at a
specified price during a specified period of time. Subscription rights
normally have a short life span to expiration. The purchase of rights or
warrants involves the risk that the Portfolio could lose the purchase value of
a right or warrant if the right to subscribe to additional shares is not
exercised prior to the rights' or warrants' expiration. Also, the purchase of
rights or warrants involves the risk that the effective price paid for the
right or warrant added to the subscription price of the related security may
exceed the value of the subscribed security's market price such as when there
is no movement in the level of the underlying security.
FOREIGN INVESTMENTS
Each of the Portfolios may invest in foreign securities except that the
Stock Index Portfolio may only invest in the foreign securities of issuers in
the S&P 500 Index. The International Equity Portfolio makes substantial
investments in foreign countries. The Quality Bond, Select Equity, Large Cap
Stock, Small Cap Stock and Quality Income Portfolios may invest in certain
foreign securities. The Quality Bond Portfolio may invest in U.S. and non-U.S.
dollar-denominated fixed income securities of foreign issuers. The Select
Equity and Large Cap Stock Portfolios may invest in equity securities of
foreign corporations listed on a U.S. securities exchange. The Small Cap
Stock Portfolio may invest in equity securities of foreign issuers that are
listed on a national securities exchange or denominated or principally traded
in the U.S. dollar. The Quality Bond Portfolio, Select Equity Portfolio,
Large Cap Stock Portfolio and the Small Cap Stock Portfolio do not expect to
invest more than 25%, 5%, 5%, and 5%, respectively, of their total assets at
the time of purchase in securities of foreign issuers. All investments of the
Money Market Portfolio must be U.S. dollar-denominated. In the case of the
Quality Bond Portfolio, any foreign commercial paper must not be subject to
foreign withholding tax at the time of purchase. Foreign investments may be
made directly in securities of foreign issuers or in the form of American
Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs"). (See
"ADRs and EDRs", below.)
Since investments in foreign securities may involve foreign currencies, the
value of a Portfolio's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, including currency blockage. Certain of the Portfolios may enter
into forward commitments for the purchase or sale of foreign currencies in
connection with the settlement of foreign securities transactions or to manage
the Portfolios' currency exposure related to foreign investments. The
Portfolios will not enter into such commitments for speculative purposes.
For a description of the risks associated with investing in foreign
securities, see "Investment Practices" and "Risk Factors" in the Prospectus.
ADRs AND EDRs
Certain Portfolios may invest their assets in securities such as ADRs and
EDRs, which are receipts issued by a U.S. bank or trust company evidencing
ownership of underlying securities issued by a foreign issuer. ADRs and EDRs
may be listed on a national securities exchange or may trade in the
over-the-counter market. ADR and EDR prices are denominated in U.S. dollars,
even though the underlying security may be denominated in a foreign currency.
The underlying security may be subject to foreign government taxes which would
reduce the yield on such securities. Investments in such instruments involve
risks similar to those of investing directly in foreign securities. Such
risks include political or economic instability of the issuer or the country
of issue, the difficulty of predicting international trade patterns and the
possibility of imposition of exchange controls. Such securities may also be
subject to greater fluctuations in price than securities of domestic
corporations. In addition, there may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies.
With respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, or diplomatic developments which could
affect investment in those countries.
ADDITIONAL INVESTMENTS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each of the Portfolios may
purchase securities on a when-issued or delayed delivery basis. For example,
delivery of and payment for these securities can take place a month or more
after the date of the purchase commitment. The purchase price and the interest
rate payable, if any, on the securities are fixed on the purchase commitment
date or at the time the settlement date is fixed. The value of such securities
is subject to market fluctuation and no interest accrues to a Portfolio until
settlement takes place. At the time a Portfolio makes the commitment to
purchase securities on a when-issued or delayed delivery basis, it will record
the transaction, reflect the value each day of such securities in determining
its net asset value and, if applicable, calculate the maturity for the
purposes of average maturity from that date. At the time of settlement a
when-issued security may be valued at less than the purchase price. To
facilitate such acquisitions, each Portfolio will maintain with the Custodian
a segregated account with liquid assets, consisting of cash, U.S. Government
securities or other appropriate securities, in an amount at least equal to
such comments. On delivery dates for such transactions, each Portfolio will
meet its obligations from maturities or sales of the securities held in the
segregated account and/or from cash flow. If a Portfolio chooses to dispose of
the right to acquire a when-issued security prior to its acquisition, it
could, as with the disposition of any other portfolio obligation, incur a gain
or loss due to market fluctuation. It is the current policy of each Portfolio
not to enter into when-issued commitments exceeding in the aggregate 15% of
the market value of the Portfolio's total assets, less liabilities other than
the obligations created by when-issued commitments.
SECURITIES OF OTHER INVESTMENT COMPANIES. Securities of other investment
companies may be acquired by each of the Portfolios to the extent permitted
under the 1940 Act. These limits require that, as determined immediately after
a purchase is made, (I) not more than 5% of the value of a Portfolio's total
assets will be invested in the securities of any one investment company, (ii)
not more than 10% of the value of its total assets will be invested in the
aggregate in securities of investment companies as a group, and (iii) not more
than 3% of the outstanding voting stock of any one investment company will be
owned by a Portfolio.
REVERSE REPURCHASE AGREEMENTS. Each of the Portfolios may enter into
reverse repurchase agreements. In a reverse repurchase agreement, a Portfolio
sells a security and agrees to repurchase the same security at a mutually
agreed upon date and price. For purposes of the 1940 Act it is also considered
as a borrowing of money by the Portfolio and, therefore, a form of leverage.
The Portfolios will invest the proceeds of borrowings under reverse repurchase
agreements. In addition, a Portfolio will enter into a reverse repurchase
agreement only when the interest income to be earned from the investment of
the proceeds is greater than the interest expense of the transaction. A
Portfolio will not invest the proceeds of a reverse repurchase agreement for a
period which exceeds the duration of the reverse repurchase agreement. A
Portfolio may not enter into reverse repurchase agreements exceeding in the
aggregate one-third of the market value of its total assets, less liabilities
other than the obligations created by reverse repurchase agreements. Each
Portfolio will establish and maintain with the Custodian a separate account
with a segregated portfolio of securities in an amount at least equal to its
purchase obligations under its reverse repurchase agreements.
MORTGAGE DOLLAR ROLL TRANSACTIONS. Certain of the Portfolios of the Trust
may engage in mortgage dollar roll transactions with respect to mortgage
securities issued by the Government National Mortgage Association, the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation,
In a mortgage dollar roll transaction, the Portfolio sells a mortgage backed
security and simultaneously agrees to repurchase a similar security on a
specified future date at an agreed upon price. During the roll period, the
Portfolio will not be entitled to receive any interest or principal paid on
the securities sold. The Portfolio is compensated for the lost interest on the
securities sold by the difference between the sales price and the lower price
for the future repurchase as well as by the interest earned on the
reinvestment of the sales proceeds. The Portfolio may also be compensated by
receipt of a commitment fee. When the Portfolio enters into a mortgage dollar
roll transaction, liquid assets in an amount sufficient to pay for the future
repurchase are segregated with the Custodian. Mortgage dollar roll
transactions are considered reverse repurchase agreements for purposes of the
Portfolio's investment restrictions.
LOANS OF PORTFOLIO SECURITIES. Each of the Portfolios may lend its
securities if such loans are secured continuously by cash or equivalent
collateral or by a letter of credit in favor of the Portfolio at least equal
at all times to 100% of the market value of the securities loaned, plus
accrued interest. While such securities are on loan, the borrower will pay the
Portfolio any income accruing thereon. Loans will be subject to termination by
the Portfolios in the normal settlement time, generally five business days
after notice, or by the borrower on one day's notice. Borrowed securities must
be returned when the loan is terminated. Any gain or loss in the market price
of the borrowed securities which occurs during the term of the loan inures to
a Portfolio and its respective investors. The Portfolios may pay reasonable
finders' and custodial fees in connection with a loan. In addition, a
Portfolio will consider all facts and circumstances including the
creditworthiness of the borrowing financial institution, and no Portfolio will
make any loans in excess of one year.
PRIVATELY PLACED AND CERTAIN UNREGISTERED SECURITIES. The Portfolios may
invest in privately placed, restricted, Rule 144A or other unregistered
securities as described in the Prospectus.
As to illiquid investments, a Portfolio is subject to a risk that should
the Portfolio decide to sell them when a ready buyer is not available at a
price the Portfolio deems representative of their value, the value of the
Portfolio's net assets could be adversely affected. Where an illiquid security
must be registered under the Securities Act of 1933, as amended (the "1933
Act") before it may be sold, a Portfolio may be obligated to pay all or part
of the registration expenses, and a considerable period may elapse between the
time of the decision to sell and the time the Portfolio may be permitted to
sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, a Portfolio might obtain a
less favorable price than prevailed when it decided to sell.
QUALITY AND DIVERSIFICATION REQUIREMENTS
Each of the Portfolios intends to meet the diversification requirements of the
1940 Act. To meet these requirements, 75% of the assets of these Portfolios is
subject to the following fundamental limitations: (1) the Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government, its agencies and instrumentalities,
and (2) the Portfolio may not own more than 10% of the outstanding voting
securities of any one issuer. As for the other 25% of the Portfolio's assets
not subject to the limitation described above, there is no limitation on
investment of these assets under the 1940 Act, so that all of such assets may
be invested in securities of any one issuer, subject to the limitation of any
applicable state securities laws, or with respect to the Money Market
Portfolio, as described below. Investments not subject to the limitations
described above could involve an increased risk to a Portfolio should an
issuer, or a state or its related entities, be unable to make interest or
principal payments or should the market value of such securities decline.
QUALITY BOND AND QUALITY INCOME PORTFOLIOS. These Portfolios invest
principally in a diversified portfolio of "high grade" and "investment grade"
securities. Investment grade debt is rated, on the date of investment, within
the four highest ratings of Moody's, currently Aaa, Aa, A and Baa, or of
Standard & Poor's, currently AAA, AA, A and BBB, while high grade debt is
rated, on the date of the investment, within the two highest of such ratings.
The Quality Bond Portfolio may also invest up to 5% of its total assets in
securities which are "below investment grade." Such securities must be rated,
on the date of investment, Ba by Moody's or BB by Standard & Poor's. The
Portfolios may invest in debt securities which are not rated or other debt
securities to which these ratings are not applicable, if in the opinion of the
Sub-Adviser, such securities are of comparable quality to the rated securities
discussed above. In addition, at the time the Portfolios invest in any
commercial paper, bank obligation or repurchase agreement, the issuer must
have outstanding debt rated A or higher by Moody's or Standard & Poor's, the
issuer's parent corporation, if any, must have outstanding commercial paper
rated Prime-1 by Moody's or A-1 by Standard & Poor's, or if no such ratings
are available, the investment must be of comparable quality in the
Sub-Adviser's opinion.
CONVERTIBLE AND OTHER DEBT SECURITIES. Certain of the Portfolios may
invest in convertible debt securities, for which there are no specific quality
requirements. In addition, at the time a Portfolio invests in any commercial
paper, bank obligation or repurchase agreement, the issuer must have
outstanding debt rated A or higher by Moody's or Standard & Poor's, the
issuer's parent corporation, if any, must have outstanding commercial paper
rated Prime-1 by Moody's or A-1 by Standard & Poor's, of ir no such ratings
are available, the investment must be of comparable quality in the
Sub-Adviser's opinion. At the time the Portfolio invests in any other
short-term debt securities, they must be rated A or higher by Moody's or
Standard & Poor's, or if unrated, the investment must be of comparable quality
in the Sub-Adviser's opinion.
In determining suitability of investment in a particular unrated
security, the Sub-Adviser takes into consideration asset and debt service
coverage, the purpose of the financing, history of the issuer, existence of
other rated securities of the issuer, and other relevant conditions, such as
comparability to other issuers.
GNMA CERTIFICATES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. The Government National
Mortgage Association is a wholly-owned corporate instrumentality of the United
States within the U.S. Department of Housing and Urban Development. GNMA's
principal programs involve its guarantees of privately issued securities
backed by pools of mortgages.
NATURE OF GNMA CERTIFICATES. GNMA Certificates are mortgage-backed
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which the Portfolio purchases are of the modified
pass-through type. Modified pass-through Certificates entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
fees paid to the GNMA Certificate issuer and GNMA, regardless of whether or
not the mortgagor actually makes the payment.
GNMA Certificates are backed by mortgages and, unlike most bonds, their
principal amount is paid back by the borrower over the length of the loan
rather than in a lump sum at maturity. Principal payments received by the
Portfolio will be reinvested in additional GNMA Certificates or in other
permissible investments.
GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal of and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration or the Farmers Home
Administration or guaranteed by the Veterans Administration. The GNMA
guarantee is backed by the full faith and credit of the United States. GNMA is
also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee. The net asset
value and return of the Portfolio will, however, fluctuate depending on market
conditions and other factors.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage
pools underlying the securities. Prepayments of principal by mortgagors and
mortgage foreclosures will result in the return of a portion of principal
invested before the maturity of the mortgages in the pool.
As prepayment rates of individual mortgage pools will vary widely, it is
not possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the Federal Housing
Administration are normally used as an indicator of the expected average life
of GNMA Certificates. These statistics indicate that the average life of
single-family dwelling mortgages with 25-30 year maturities (the type of
mortgages backing the vast majority of GNMA Certificates) is approximately 12
years. For this reason, it is customary for pricing purposes to consider GNMA
Certificates as 30-year mortgage-backed securities which prepay fully in the
twelfth year.
YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of
the fees paid to GNMA and the GNMA Certificate issuer. For the most common
type of mortgage pool, containing single-family dwelling mortgages, GNMA
receives an annual fee of 0.06 of 1% of the outstanding principal for
providing its guarantee, and the GNMA Certificate issuer is paid an annual
servicing fee of 0.44 of 1% for assembling the mortgage pool and for passing
through monthly payments of interest and principal to Certificate holders.
The coupon rate by itself, however, does not indicate the yield which
will be earned on the Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather than
at par.
2. After issuance, Certificates usually trade in the secondary market at
a premium or discount.
3. Interest is paid monthly rather than semi-annually as is the case for
traditional bonds. Monthly compounding has the effect of raising the effective
yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate. If
mortgagors prepay their mortgages, the principal returned to Certificate
holders may be reinvested at higher or lower rates.
In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a 12-year life. Compared on this basis,
GNMA Certificates have historically yielded roughly 1/4 of 1% more than high
grade corporate bonds and 1/2 of 1% more than U.S. Government and U.S.
Government agency bonds. As the life of individual pools may vary widely,
however, the actual yield earned on any issue of GNMA Certificates may differ
significantly from the yield estimated on the assumption of a 12-year life.
MARKET FOR GNMA CERTIFICATES. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on,
among other things, the level of market rates, the Certificate's coupon rate
and the prepayment experience of the pool of mortgages backing each
Certificate.
FNMA AND FHLMC CERTIFICATES. Mortgage-backed securities issued by the
Federal National Mortgage Association ("FNMA") include FNMA Guaranteed
Mortgage Pass-through Certificates (also known as "Fannie Maes") which are
solely the obligations of the FNMA and are not backed by or entitled to the
full faith and credit of the United States, but are supported by the right of
the issuer to borrow from the Treasury. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are
guaranteed as to timely payment of the principal and interest by FNMA.
Mortgage-backed securities issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "PCs"). FHLMC is a corporate instrumentality of
the United States, created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Bank. Freddie Macs entitle the
holder to timely payment of interest, which is guaranteed by the FHLMC. FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When FHLMC does not guarantee
timely payment of principal, FHLMC may remit the amount due on account of its
guarantee of ultimate payment of principal at any time after default on an
underlying mortgage, but in no event later than one year after it becomes
payable.
LOWER GRADE SECURITIES
Certain of the Portfolios may invest in lower-grade income securities. (The
High Yield Portfolio may invest a substantial portion of its assets in medium
and lower grade corporate debt securities entailing certain risks. See
"Special Risks of High Yield Investing" in the Prospectus.) Such lower grade
securities are rated BB or B by S&P or Ba or B by Moody's and are commonly
referred to as "junk bonds." Investment in such securities involves special
risks, as described herein. Liquidity relates to the ability of the Portfolio
to sell a security in a timely manner at a price which reflects the value of
that security. As discussed below, the market for lower grade securities is
considered generally to be less liquid than the market for investment grade
securities. The relative illiquidity of some of the Portfolio's portfolio
securities may adversely affect the ability of the Portfolio to dispose of
such securities in a timely manner and at a price which reflects the value of
such security in the Sub-Adviser's judgment. The market for less liquid
securities tends to be more volatile than the market for more liquid
securities and market values of relatively illiquid securities may be more
susceptible to change as a result of adverse publicity and investor
perceptions than are the market values of higher grade, more liquid
securities.
The Portfolio's net asset value will change with changes in the value of its
portfolio securities. Because the Portfolio will invest in fixed income
securities, the Portfolio's net asset value can be expected to change as
general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities can be expected to
rise. Conversely, when interest rates rise, the value of a portfolio invested
in fixed income securities can be expected to decline. Net asset value and
market value may be volatile due to the Portfolio's investment in lower grade
and less liquid securities. Volatility may be greater during periods of
general economic uncertainty.
The Portfolio's investments are valued pursuant to guidelines adopted and
periodically reviewed by the Board of Trustees. To the extent that there is no
established retail market for some of the securities in which the Portfolio
may invest, during periods of reduced market liquidity and in the absence of
readily available market quotations for securities held in the Portfolio's
portfolio, the valuation of such securities becomes more difficult and
judgment may play a greater role in the valuation of the Portfolio's
securities due to the reduced availability of reliable objective data. To the
extent that the Portfolio invests in illiquid securities and securities which
are restricted as to resale, the Portfolio may incur additional risks and
costs. Illiquid and certain restricted securities are particularly difficult
to dispose of.
Lower grade securities generally involve greater credit risk than higher grade
securities. A general economic downturn or a significant increase in interest
rates could severely disrupt the market for lower grade securities and
adversely affect the market value of such securities. In addition, in such
circumstances, the ability of issuers of lower grade securities to repay
principal and to pay interest, to meet projected financial goals and to obtain
additional financing may be adversely affected. Such consequences could lead
to an increased incidence of default for such securities and adversely affect
the value of the lower grade securities in the Portfolio's portfolio and thus
the Portfolio's net asset value. The secondary market prices of lower grade
securities are less sensitive to changes in interest rates than are those for
higher rated securities, but are more sensitive to adverse economic changes or
individual issuer developments. Adverse publicity and investor perceptions,
whether or not based on rational analysis, may also affect the value and
liquidity of lower grade securities.
Yields on the Portfolio's portfolio securities can be expected to fluctuate
over time. In addition, periods of economic uncertainty and changes in
interest rates can be expected to result in increased volatility of the market
prices of the lower grade securities in the Portfolio's portfolio and thus in
the net asset value of the Portfolio. Net asset value and market value may be
volatile due to the Portfolio's investment in lower grade and less liquid
securities. Volatility may be greater during periods of general economic
uncertainty. The Portfolio may incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of interest or a
repayment of principal on its portfolio holdings, and the Portfolio may be
unable to obtain full recovery thereof. In the event that an issuer of
securities held by the Portfolio experiences difficulties in the timely
payment of principal or interest and such issuer seeks to restructure the
terms of its borrowings, the Portfolio may incur additional expenses and may
determine to invest additional capital with respect to such issuer or the
project or projects to which the Portfolio's portfolio securities relate.
The Portfolio will rely on the Sub-Adviser's judgment, analysis and experience
in evaluating the creditworthiness of an issue. In this evaluation, the
Sub-Adviser will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends, its
operating history, the quality of the issuer's management and regulatory
matters. The Sub-Adviser also may consider, although it does not rely
primarily on, the credit ratings of S&P and Moody's in evaluating fixed-income
securities. Such ratings evaluate only the safety of principal and interest
payments, not market value risk. Additionally, because the creditworthiness of
an issuer may change more rapidly than is able to be timely reflected in
changes in credit ratings, the Sub-Adviser continuously monitors the issuers
of such securities held in the Portfolio's portfolio. The Portfolio may, if
deemed appropriate by the Sub-Adviser, retain a security whose rating has been
downgraded below B by S&P or below B by Moody's, or whose rating has been
withdrawn.
With respect to Portfolios which may invest in these unrated income
securities, achievement by the Portfolio of its investment objective may be
more dependent upon the Sub-Adviser's investment analysis than would be the
case if the Portfolio were investing exclusively in rated securities.
STRATEGIC TRANSACTIONS
As described in the Prospectus, certain Portfolios of the Trust may, but are
not required to, utilize various other investment strategies as described
below to hedge various market risks (such as interest rates, currency exchange
rates and broad or specific market movements) or to manage the effective
maturity or duration of a Portfolio's income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and
instruments may change over time as new instruments and strategies are
developed or regulatory changes occur.
In the course of pursuing these investment strategies, a Portfolio may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or
currency futures (collectively, all the above are called "Strategic
Transactions"). Strategic Transactions are hedging transactions which may be
used to attempt to protect against possible changes in the market value of
securities held in or to be purchased for a Portfolio's portfolio resulting
from securities markets or exchange rate fluctuations, to protect a
Portfolio's unrealized gains in the value of its portfolio securities, to
facilitate the sale of such securities for investment purposes, to manage the
effective maturity or duration of a Portfolio's portfolio, or to establish a
position in the derivatives markets as a temporary substitute for purchasing
or selling particular securities.
Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of a Portfolio to utilize
these Strategic Transactions successfully will depend on the Sub-Adviser's
ability to predict pertinent market movements, which cannot be assured. A
Portfolio will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Sub-Adviser's view as to certain market movements is incorrect, the risk
that the use of such Strategic Transactions could result in losses greater
than if they had not been used. Use of put and call options may result in
losses to a Portfolio, force the sale or purchase of portfolio securities at
inopportune times or for prices other than current market values, limit the
amount of appreciation a Portfolio can realize on its investments or cause a
Portfolio to hold a security it might otherwise sell. The use of currency
transactions can result in a Portfolio incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of a
Portfolio creates the possibility that losses on the hedging instrument may be
greater than gains in the value of a Portfolio's position. In addition,
futures and options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
a Portfolio might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to
limit any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if
the Strategic Transactions had not been utilized. Income earned or deemed to
be earned, if any, by a Portfolio from its Strategic Transactions will
generally be taxable income of the Trust. See "Tax Status" in the Prospectus.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options
typically have similar structural characteristics and operational mechanics
regardless of the underlying instrument on which they are purchased or sold.
Thus, the following general discussion relates to each of the particular types
of options discussed in greater detail below. In addition, many Strategic
Transactions involving options require segregation of Portfolio assets in
special accounts, as described below under "Use of Segregated and Other
Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the
underlying security, commodity, index, currency or other instrument at the
exercise price. For instance, a Portfolio's purchase of a put option on a
security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the market value by giving the Portfolio the right to sell such
instrument at the option exercise price. A call option, upon payment of a
premium, gives the purchaser of the option the right to buy, and the seller
the obligation to sell, the underlying instrument at the exercise price. A
Portfolio's purchase of a call option on a security, financial future, index,
currency or other instrument might be intended to protect the Portfolio
against an increase in the price of the underlying instrument that it intends
to purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. As
described in the Prospectus, certain Portfolios of the Trust are authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance
of the obligations of the parties to such options. The discussion below uses
the OCC as a paradigm, but is also applicable to other financial
intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although
in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which
the option is "in-the-money" (i.e., where the value of the underlying
instrument exceeds, in the case of a call option, or is less than, in the case
of a put option, the exercise price of the option) at the time the option is
exercised. Frequently, rather than taking or making delivery of the underlying
instrument through the process of exercising the option, listed options are
closed by entering into offsetting purchase or sale transactions that do not
result in ownership of the new option.
A Portfolio's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon
the liquidity of the option market. Among the possible reasons for the absence
of a liquid option market on an exchange are: (i) insufficient trading
interest in certain options; (ii) restrictions on transactions imposed by an
exchange; (iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities
including reaching daily price limits; (iv) interruption of the normal
operations of the OCC or an exchange; (v) inadequacy of the facilities of an
exchange or OCC to handle current trading volume; or (vi) a decision by one or
more exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the relevant market for that option on that
exchange would cease to exist, although outstanding options on that exchange
would generally continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of
an OTC option, including such terms as method of settlement, term, exercise
price, premium, guarantees and security, are set by negotiation of the
parties. A Portfolio will only sell OTC options (other than OTC currency
options) that are subject to a buy-back provision permitting the Portfolio to
require the Counterparty to sell the option back to the Portfolio at a formula
price within seven days. The Portfolios expect generally to enter into OTC
options that have cash settlement provisions, although they are not required
to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Portfolio or fails to make a cash
settlement payment due in accordance with the terms of that option, the
Portfolio will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Accordingly, the Sub-Adviser must
assess the creditworthiness of each such Counterparty or any guarantor or
credit enhancement of the Counterparty's credit to determine the likelihood
that the terms of the OTC option will be satisfied. A Portfolio will engage in
OTC option transactions only with United States government securities dealers
recognized by the Federal Reserve Bank of New York as "primary dealers", or
broker dealers, domestic or foreign banks or other financial institutions
which have received (or the guarantors of the obligation of which have
received) a short-term credit rating of "A-1" from Standard & Poor's
Corporation or "P-1" from Moody's Investors Service, Inc. or an equivalent
rating from any other nationally recognized statistical rating organization
("NRSRO"). The staff of the SEC currently takes the position that, in general,
OTC options on securities other than U.S. government securities purchased by a
Portfolio, and portfolio securities "covering" the amount of the Portfolio's
obligation pursuant to an OTC option sold by it (the cost of the sell-back
plus the in-the-money amount, if any) are illiquid, and are subject to each
Portfolio's limitation on investing no more than 10% of its assets in
restricted securities.
If a Portfolio sells a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase a Portfolio's income. The sale of put options can
also provide income.
A Portfolio may purchase and sell call options on securities, including
U.S. Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments that are traded on U.S. and
foreign securities exchanges and in the over-the-counter markets and or
securities indices, currencies and futures contracts. All calls sold by a
Portfolio must be "covered" (i.e., the Portfolio must own the securities or
futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though a
Portfolio will receive the option premium to help protect it against loss, a
call sold by a Portfolio exposes the Portfolio during the term of the option
to possible loss of opportunity to realize appreciation in the market price of
the underlying security or instrument and may require the Portfolio to hold a
security or instrument which it might otherwise have sold. In selling calls on
securities not owned by the Portfolio, the Portfolio may be required to
acquire the underlying security at a disadvantageous price in order to satisfy
its obligations with respect to the call.
A Portfolio may purchase and sell put options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, municipal
obligations, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds
the above securities in its portfolio) and on securities indices, currencies
and futures contracts other than futures on individual corporate debt and
individual equity securities. A Portfolio will not sell put options if, as a
result, more than 50% of the Portfolio's assets would be required to be
segregated to cover its potential obligations under such put options other
than those with respect to futures and options thereon. In selling put
options, there is a risk that a Portfolio may be required to buy the
underlying security at a disadvantageous price above the market price.
General Characteristics of Futures. Certain Portfolios of the Trust may
enter into financial futures contracts or purchase or sell put and call
options on such futures as a hedge against anticipated interest rate,
currency, equity or income market changes, for duration management and for
risk management purposes. Futures are generally bought and sold on the
commodities exchanges where they are listed with payment of initial and
variation margin as described below. The purchase of a futures contract
creates a firm obligation by a Portfolio, as purchaser, to take delivery from
the seller of the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). The sale of a
futures contract creates a firm obligation by the Portfolio, as seller, to
deliver to the buyer the specific type of financial instrument called for in
the contract at a specific future time for a specified price (or, with respect
to index futures and Eurodollar instruments, the net cash amount). Options on
futures contracts are similar to options on securities except that an option
on a futures contract gives the purchaser the right in return for the premium
paid to assume a position in a futures contract and obligates the seller to
deliver such option.
The Portfolio's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and, in
particular, with the rules and regulations of the Commodity Futures Trading
Commission. Typically, maintaining a futures contract or selling an option
thereon requires the Portfolio to deposit with a financial intermediary, as
security for its obligations, an amount of cash or other specified assets
(initial margin) which initially is typically 1% to 10% of the face amount of
the contract (but may be higher in some circumstances). Additional cash or
assets (variation margin) may be required to be deposited thereafter on a
daily basis as the mark to market value of the contract fluctuates. The
purchase of options on financial futures involves payment of a premium for the
option without any further obligation on the part of the Portfolio. If the
Portfolio exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price nor that delivery will
occur.
A Portfolio will not enter into a futures contract or related option
(except for closing transactions) for other than bona fide hedging purposes
if, immediately thereafter, the sum of the amount of its initial margin and
premiums on open futures contracts and options thereon would exceed 5% of the
Portfolio's total assets (taken at current value); however, in the case of an
option that is in-the-money at the time of the purchase, the in-the-money
amount may be excluded in calculating the 5% limitation. The segregation
requirements with respect to futures contracts and options thereon are
described below.
Options on Securities Indices and Other Financial Indices. A Portfolio
also may purchase and sell call and put options on securities indices and
other financial indices and in so doing can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement, i.e., an option on an
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is
based exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option (except if, in the case of an OTC option,
physical delivery is specified). This amount of cash is equal to the excess of
the closing price of the index over the exercise price of the option, which
also may be multiplied by a formula value. The seller of the option is
obligated, in return for the premium received, to make delivery of this
amount. The gain or loss on an option on an index depends on price movements
in the instruments making up the market, market segment, industry or other
composite on which the underlying index is based, rather than price movements
in individual securities, as is the case with respect to options on
securities.
Currency Transactions. Certain Portfolios of the Trust may engage in
currency transactions with Counterparties in order to hedge the value of
portfolio holdings denominated in particular currencies against fluctuations
in relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on
currencies, and currency swaps. A forward currency contract involves a
privately negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, which may be any fixed number
of days from the date of the contract agreed upon by the parties, at a price
set at the time of the contract. A currency swap is an agreement to exchange
cash flows based on the notional difference among two or more currencies and
operates similarly to an interest rate swap, which is described below. A
Portfolio may enter into currency transactions with Counterparties which have
received (or the guarantors of the obligations of such Counterparties have
received) a credit rating of A-1 or P-1 by S&P or Moody's, respectively, or
that have an equivalent rating from an NRSRO or (except for OTC currency
options) are determined to be of equivalent credit quality by the Sub-Adviser.
Dealings by the Portfolios in forward currency contracts and other
currency transactions such as futures, options, options on futures and swaps
will be limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Portfolio, which will
generally arise in connection with the purchase or sale of its portfolio
securities or the receipt of income therefrom. Position hedging is entering
into a currency transaction with respect to portfolio security positions
denominated or generally quoted in that currency.
A Portfolio will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended to wholly or
partially offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency other than with respect to cross hedging and proxy hedging as
described below.
A Portfolio may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Portfolio has or in which the
Portfolio expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, a Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio's portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which some or all of the Portfolio's portfolio
securities are or are expected to be denominated, and to buy U.S. dollars. For
example, if the Sub-Adviser considers the Austrian schilling as being linked
to the German deutschemark (the "D-mark") and the Trust holds securities
denominated in schillings and the Sub-Adviser believes that the value of
schillings will decline against the U.S. dollar, the Sub-Adviser may enter
into a contract to sell D-marks and buy dollars. Currency hedging involves
some of the same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to a Portfolio if the
currency being hedged fluctuates in value to a degree or in a direction that
is not anticipated. Further, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that the Portfolio is engaging in proxy hedging. If a
Portfolio enters into a currency hedging transaction, the Portfolio will
comply with the asset segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to
risks different from those of other portfolio transactions. Because currency
control is of great importance to the issuing governments and influences
economic planning and policy, purchases and sales of currency and related
instruments can be negatively affected by government exchange controls,
blockages, and manipulations or exchange restrictions imposed by governments.
These can result in losses to a Portfolio if it is unable to deliver or
receive currency or funds in settlement of obligations and could also cause
hedges it has entered into to be rendered useless, resulting in full currency
exposure as well as incurring transaction costs. Buyers and sellers of
currency futures are subject to the same risks that apply to the use of
futures generally. Further, settlement of a currency futures contract for the
purchase of most currencies must occur at a bank based in the issuing nation.
Trading options on currency futures is relatively new, and the ability to
establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Combined Transactions. Certain Portfolios of the Trust may enter into
multiple transactions, including multiple options transactions, multiple
futures transactions, multiple currency transactions (including forward
currency contracts), multiple interest rate transactions and any combination
of futures, options, currency and interest rate transactions ("component"
transactions), instead of a single Strategic Transaction, as part of a single
or combined strategy when, in the opinion of the Sub-Adviser, it is in the
best interest of the Portfolio to do so. A combined transaction will usually
contain elements of risk that are present in each of its component
transactions. Although combined transactions are normally entered into based
on the Sub-Adviser's judgment that the combined strategies will reduce risk or
otherwise more effectively achieve the desired portfolio management goal, it
is possible that the combination will instead increase such risks or hinder
achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which certain Portfolios may enter are interest rate, currency and index swaps
and the purchase or sale of related caps, floors and collars. The Portfolios
expect to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of their portfolios, to protect
against currency fluctuations, as a duration management technique or to
protect against any increase in the price of securities the Portfolio
anticipates purchasing at a later date. The Portfolios intend to use these
transactions as hedges and not as speculative investments and will not sell
interest rate caps or floors where they do not own securities or other
instruments providing the income stream the Portfolios may be obligated to
pay. Interest rate swaps involve the exchange by the Portfolio with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange
cashflows on a notional amount of two or more currencies based on the relative
value differential among them. An index swap is an agreement to swap cash
flows on a notional amount based on changes in the values of the reference
indices. The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling such cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase
of a floor entitles the purchaser to receive payments on a notional principal
amount from the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is a combination
of a cap and a floor that preserves a certain return within a predetermined
range of interest rates or values.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors and collars are entered into for good faith hedging
purposes, the Sub-Adviser and the Portfolio believe such obligations do not
constitute senior securities under the Investment Company Act of 1940, as
amended, and, accordingly, will not treat them as being subject to its
borrowing restrictions. A Portfolio will not enter into any swap, cap, floor
or collar transaction unless, at the time of entering into such transaction,
the unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit
quality by the Sub-Adviser. If there is a default by the Counterparty, the
Portfolio may have contractual remedies pursuant to the agreements related to
the transaction. The swap market has grown substantially in recent years with
a large number of banks and investment banking firms acting both as principals
and agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
EURODOLLAR INSTRUMENTS. Certain Portfolios of the Trust may make
investments in Eurodollar instruments. Eurodollar instruments are U.S.
dollar-denominated futures contracts or options thereon which are linked to
the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated instruments are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. A Portfolio might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and income instruments are linked.
RISKS OF STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES. When conducted
outside the United States, Strategic Transactions may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantee, and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and
other instruments. The value of such positions also could be adversely
affected by: (i) other complex foreign political, legal and economic factors,
(ii) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in a Portfolio's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lower
trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic
Transactions, in addition to other requirements, require that the Portfolio
segregate liquid high-grade assets with its custodian to the extent Portfolio
obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency. In general, either the full amount
of any obligation by the Portfolio to pay or deliver securities or assets must
be covered at all times by the securities, instruments or currency required to
be delivered, or, subject to any regulatory restrictions, an amount of cash or
liquid high-grade debt securities at least equal to the current amount of the
obligation must be segregated with the custodian. The segregated assets cannot
be sold or transferred unless equivalent assets are substituted in their place
or it is no longer necessary to segregate them. For example, a call option
written by a Portfolio will require the Portfolio to hold the securities
subject to the call (or securities convertible into the needed securities
without additional consideration) or to segregate liquid high-grade debt
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by a Portfolio on an index will require the
Portfolio to own portfolio securities which correlate with the index or to
segregate liquid high-grade assets equal to the excess of the index value over
the exercise price on a current basis. A put option written by a Portfolio
requires the Portfolio to segregate liquid, high-grade assets equal to the
exercise price.
Except when a Portfolio enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Portfolio to buy or sell
currency will generally require the Portfolio to hold an amount of that
currency or liquid securities denominated in that currency equal to the
Portfolio's obligations or to segregate liquid high-grade assets equal to the
amount of the Portfolio's obligation.
OTC options entered into by a Portfolio, including those on securities,
currencies, financial instruments or indices and OCC issued and exchange
listed index options, will generally provide for cash settlement. As a result,
when a Portfolio sells these instruments it will only segregate an amount of
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the
same as an OCC guaranteed listed option sold by the Portfolio, or the
in-the-money amount plus any sell-back formula amount in the case of a
cash-settled put or call. In addition, when the Portfolio sells a call option
on an index at a time when the in-the-money amount exceeds the exercise price,
the Portfolio will segregate, until the option expires or is closed out, cash
or cash equivalents equal in value to such excess. OCC issued and exchange
listed options sold by the Portfolio other than those above generally settle
with physical delivery or with an election of either physical delivery or cash
settlement, and the Portfolio will segregate an amount of assets equal to the
full value of the option. OTC options settling with physical delivery, or with
an election of either physical delivery or cash settlement, will be treated
the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Portfolio
must deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash
equivalents, liquid debt securities or other acceptable assets.
With respect to swaps, a Portfolio will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid
high-grade securities having a value equal to the accrued excess. Caps, floors
and collars require segregation of assets with a value equal to a Portfolio's
net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. A Portfolio may also enter into offsetting
transactions so that its combined position, coupled with any segregated
assets, equals its net outstanding obligation in related options and Strategic
Transactions. For example, a Portfolio could purchase a put option if the
strike price of that option is the same or higher than the strike price of a
put option sold by the Portfolio. Moreover, instead of segregating assets if
the Portfolio held a futures or forward contract, it could purchase a put
option on the same futures or forward contract with a strike price as high or
higher than the price of the contract held. Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at
the time of or after the primary transaction, no segregation is required.
However, if it terminates prior to such time, assets equal to any remaining
obligation would need to be segregated.
The Trust's activities involving Strategic Transactions may be limited by
the requirements of Subchapter M of the Internal Revenue Code for
qualification as a regulated investment company. See "Tax Status" in the
Prospectus.
VKAC GROWTH AND INCOME PORTFOLIO - DEBT SECURITIES INVESTMENTS
The VKAC Growth and Income Portfolio may invest up to 5% of its assets in
various debt securities. These include obligations issued or guaranteed by the
U.S. government or its agencies or instrumentalities or in various investment
grade debt obligations including mortgage pass-through certificates and
collateralized mortgage obligations. These securities may also include
corporate debt securities, some of which may be medium and lower grade
quality. Lower grade corporate debt securities are commonly known as "junk
bonds" and involve a significant degree of risk.
STOCK INDEX PORTFOLIO - MONITORING PROCEDURES
MONITORING PROCEDURES
The Board of Trustees of the Trust reviews the correlation between the
Portfolio and the Index on a quarterly basis. The Board of Trustees has
adopted monitoring procedures which it believes are reasonably designed to
assure a high degree of correlation between the performance of the Portfolio
and the S&P 500 Index. The procedures, which are reviewed and reconfirmed
annually by the Board, provide that in the event that the correlation between
the performance of the Portfolio and that of the S&P 500 Index falls below
95%, the Sub-Adviser will promptly notify the Board which shall consider what
action, if any, should be taken.
INVESTMENT LIMITATIONS
The Trust has adopted the following restrictions and policies relating to the
investment of assets of the Portfolios and their activities. These are
fundamental policies and may not be changed without the approval of the
holders of a majority of the outstanding voting shares of each Portfolio
affected (which for this purpose and under the Investment Company Act of 1940
means the lesser of (i) 67% of the shares represented at a meeting at which
more than 50% of the outstanding shares are present or represented by proxy
and (ii) more than 50% of the outstanding shares). A change in policy
affecting only one Portfolio may be effected with the approval of a majority
of the outstanding shares of such Portfolio. Where an investment restriction
or policy restricts it to a specified percentage of its total assets in any
type of instrument, that percentage is measured at the time of purchase.
There will be no violation of any investment policy or restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in the market value of an investment, in net or
total assets, in the securities rating of the investment or any other change.
QUALITY INCOME, HIGH YIELD, MONEY MARKET, VKAC GROWTH AND INCOME AND STOCK
INDEX PORTFOLIOS
Each of the Quality Income, High Yield, Money Market, VKAC Growth and Income
and Stock Index Portfolios of the Trust may not:
1. Borrow money which is in excess of one-third of the value of its total
assets taken at market value (including the amount borrowed) (except the Money
Market Portfolio which is limited to 10% of the value of its total assets) and
then only from banks as a temporary measure for extraordinary or emergency
purposes. This borrowing provision is not for investment leverage but solely
to facilitate management of the Portfolio by enabling the Trust to meet
redemption requests where the liquidation of the Portfolio's investment is
deemed to be inconvenient or disadvantageous. Monies used to pay interest on
borrowed funds will not be available for investment. The Portfolio will not
make additional investments while it has borrowings outstanding;
2. Underwrite securities of other issuers;
3. Invest 25% or more of a Portfolio's assets taken at market value in
any one industry. Investing in cash items (including bank time and demand
deposits such as certificates of deposit), U.S. Treasury bills or securities
issued or guaranteed by the U.S. government, its agencies or
instrumentalities, or instruments secured by those money market instruments,
such as repurchase agreements, will not be considered investments in any one
industry;
4. Purchase or sell commodities, commodity contracts, foreign exchange or
real estate, or invest in oil, gas or other mineral development or exploration
programs, except as noted in connection with hedging transactions. (This does
not prohibit investment in the securities of corporations which own interests
in commodities, foreign exchange, real estate or oil, gas or other mineral
development or exploration programs);
5. Invest more than 5% of the value of the assets of a Portfolio in
securities of any one issuer (except in the case of the securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities), or, if,
as a result, the Portfolio would hold more than 10% of the outstanding voting
securities of an issuer except that up to 25% of the Portfolio's total assets
may be invested without regard to such limitations;
6. Invest in securities of a company for the purpose of exercising
control or management;
7. Invest in securities issued by any other registered investment
company;
8. Purchase or sell real estate, except the Portfolios may purchase
securities which are issued by companies which invest in real estate or
interests therein;
9. Issue senior securities as defined in the Investment Company Act of
1940, except insofar as a Portfolio may be deemed to have issued a senior
security by reason of (a) entering into any repurchase agreement; (b)
borrowing money in accordance with restrictions described above; (c) lending
Portfolio securities; (d) purchasing securities on a when-issued or delayed
delivery basis; (e) accommodating short sales; (f) implementing the hedging
transactions described above. If the asset coverage falls below 300%, when
taking into account items (a) through (e), the Portfolio may be required to
liquidate investments to be in compliance with the Investment Company Act of
1940;
10. Lend portfolio securities in excess of twenty-five percent (25%) of
the value of a Portfolio's assets. Any loans of a Portfolio's securities will
be made according to guidelines established by the Trustees, including
maintenance of collateral of the borrower at least equal at all times to the
current market value of the securities loaned;
11. Invest in securities subject to legal or contractual restrictions on
resale and repurchase agreements maturing in more than seven days if, as a
result of the investment, more than 10% of the total assets of the Portfolio
(taken at market value at the time of such investment) would be invested in
the securities;
12. Make loans (the acquisition of a portion of an issue of publicly
distributed bonds, debentures, notes and other securities as permitted by the
investment objectives of the Portfolios will not be deemed to be the making of
loans) except that the Portfolios may purchase securities subject to
repurchase agreements under policies established by the Trustees or lend
portfolio securities pursuant to restriction 10 above;
13. Purchase securities on margin (but the Portfolios may obtain such
short-term credits as may be necessary for the clearance of transactions or to
implement the hedging transactions described above); and
14. Make short sales of securities or maintain a short position, unless
not more than 10% of the Portfolio's net assets (taken at current value) is
held as collateral for the sales at any one time, or unless at all times when
a short position is open the Portfolio owns an equal amount of the securities
or securities convertible into or exchangeable, without payment of any further
consideration (or for additional cash consideration held in a segregated
account by the Trust's custodian), for securities of the same issue as, and
equal in amount to, the securities sold short ("short sale against-the-box").
ADDITIONAL INVESTMENT LIMITATION - STOCK INDEX PORTFOLIO
The Stock Index Portfolio may not invest more than 5% of assets in the
securities of companies that have a continuous operating history of less than
3 years. However, such period of three years may include the operation of any
predecessor company or companies, partnership or individual enterprise if the
company whose securities are proposed as an investment for funds of the
Portfolio has come into existence as the result of a merger, consolidation,
reorganization or the purchase of substantially all of the assets of such
predecessor company or companies, partnership or individual enterprise.
ADDITIONAL INVESTMENT LIMITATIONS - MONEY MARKET PORTFOLIO
Rule 2a-7 under the Investment Company Act of 1940, which contains certain
requirements relating to the diversification, quality and maturity of a money
market fund's investments, was recently amended by the Securities and Exchange
Commission. The Board of Trustees of the Trust has modified its Rule 2a-7
procedures in order to comply with the Rule, as amended. As part of that
modification, the Board has adopted certain additional investment restrictions
pertaining to the diversification of the investments of the Money Market
Portfolio. These investment limitations, which are not fundamental policies
and which therefore may be changed without shareholder approval, are as
follows:
The Money Market Portfolio shall not acquire any instrument, including puts,
repurchase agreements and bank instruments, which, as measured at the time of
acquisition, would cause the Portfolio to:
1. invest, at any time, more than 5% of its total assets in the First
Tier Securities (as that term is defined in the Trust Prospectus) of a single
issuer (including puts written by, and repurchase agreements entered into
with, such issuer); except that the Portfolio may invest more than 5% of its
total assets in Government securities; and, for purposes of this calculation,
entering into a repurchase agreement shall be deemed to be an acquisition of
the underlying securities to the extent that the repurchase agreement is
collateralized fully;
2. invest, at any time, more than 5% of its total assets in securities
which when acquired by the Portfolio were Second Tier Securities (as that term
is defined in the Trust Prospectus); or
3. invest, at any time, more than the greater of 1% of the Portfolio's
total assets or $1,000,000 in securities of a single issuer which were Second
Tier Securities when acquired by the Portfolio.
QUALITY BOND PORTFOLIO
The Quality Bond Portfolio of the Trust may not:
1. Borrow money, except from banks for extraordinary or emergency
purposes and then only in amounts up to 30% of the value of the Portfolio's
total assets, taken at cost at the time of such borrowing and except in
connection with reverse repurchase agreements permitted by Investment
Restriction No. 8. Mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing in amounts up to 30% of the value of the
Portfolio's net assets at the time of such borrowing. The Portfolio will not
purchase securities while borrowings (including reverse repurchase agreements)
exceed 5% of the Portfolio's total assets. This borrowing provision
facilitates the orderly sale of portfolio securities, for example, in the
event of abnormally heavy redemption requests. This provision is not for
investment purposes. Collateral arrangements for premium and margin payments
in connection with the Portfolio's's hedging activities are not deemed to be a
pledge of assets;
2. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Portfolio's
total assets would be invested in securities or other obligations of any one
such issuer. This limitation shall not apply to securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or to
permitted investments of up to 25% of the Portfolio's total assets;
3. Purchase the securities of an issuer if, immediately after such
purchase, the Portfolio owns more than 10% of the outstanding voting
securities of such issuer. This limitation shall not apply to permitted
investments of up to 25% of the Portfolio's total assets;
4. Purchase securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after such
purchase the value of its investments in such industry would exceed 25% of the
value of the Portfolio's total assets. For purposes of industry concentration,
there is no percentage limitation with respect to investments in U.S.
Government securities;
5. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities) or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the
Portfolio's investment objective and policies;
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate, commodities, commodity contracts, except for the
Portfolio's interest in hedging activities as described under "Investment
Objectives and Policies"; or interests in oil, gas, or mineral exploration or
development programs. However, the Portfolio may purchase debt obligations
secured by interests in real estate or issued by companies which invest in
real estate or interests therein including real estate investment trusts;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position in securities, except in the course of the
Portfolio's hedging activities, unless at all times when a short position is
open the Portfolio owns an equal amount of such securities, provided that this
restriction shall not be deemed to be applicable to the purchase or sale of
when-issued securities or delayed delivery securities;
8. Issue any senior security, except as appropriate to evidence
indebtedness which constitutes a senior security and which the Portfolio is
permitted to incur pursuant to Investment Restriction No. 1 and except that
the Portfolio may enter into reverse repurchase agreements, provided that the
aggregate of senior securities, including reverse repurchase agreement, shall
not exceed one-third of the market value of the Portfolio's total assets, less
liabilities other than obligations created by reverse repurchase agreements.
The Portfolio's arrangements in connection with its hedging activities as
described in "Investment Objectives and Policies" shall not be considered
senior securities for purposes hereof;
9. Acquire securities of other investment companies, except as permitted
by the 1940 Act; or
10. Act as an underwriter of securities.
SELECT EQUITY, LARGE CAP STOCK AND SMALL CAP STOCK PORTFOLIOS
Each of the Select Equity, Large Cap Stock and Small Cap Stock Portfolios
may not:
1. Purchase the securities or other obligations of issuers conducting
their principal business activity in the same industry if, immediately after
such purchase the value of its investments in such industry would exceed 25%
of the value of the Portfolio's total assets. For purposes of industry
concentration, there is no percentage limitation with respect to investments
in U.S. Government securities;
2. Borrow money, except from banks for extraordinary or emergency
purposes and then only in amounts not to exceed 10% of the value of the
Portfolio's total assets, taken at cost, at the time of such borrowing.
Mortgage, pledge, or hypothecate any assets except in connection with any such
borrowing and in amounts not to exceed 10% of the value of the Portfolio's net
assets at the time of such borrowing. The Portfolio will not purchase
securities while borrowings exceed 5% of the Portfolio's total assets. This
borrowing provision is included to facilitate the orderly sale of portfolio
securities, for example, in the event of abnormally heavy redemption requests,
and is not for investment purposes. Collateral arrangements for premium and
margin payments in connection with the Portfolio's hedging activities are not
deemed to be a pledge of assets;
3. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Portfolio's
total assets would be invested in securities or other obligations of any one
such issuer. This limitation shall not apply to issues of the U.S. Government,
its agencies or instrumentalities and to permitted investments of up to 25% of
the Portfolio's total assets;
4. Purchase the securities of an issuer if, immediately after such
purchase, the Portfolio owns more than 10% of the outstanding voting
securities of such issuer;
5. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities), or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the
Portfolio's investment objective and policies (see "Investment Objectives and
Policies");
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate, commodities, or commodity contracts, except for the
Portfolio's interest in hedging activities as described under "Investment
Objectives and Policies"; or interests in oil, gas, or mineral exploration or
development programs. However, the Portfolio may purchase securities or
commercial paper issued by companies which invest in real estate or interests
therein, including real estate investment trusts;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position, except in the course of the Portfolio's hedging
activities, provided that this restriction shall not be deemed to be
applicable to the purchase or sale of when-issued securities or delayed
delivery securities;
8. Acquire securities of other investment companies, except as permitted
by the 1940 Act;
9. Act as an underwriter of securities;
10. Issue any senior security, except as appropriate to evidence
indebtedness which the Portfolio is permitted to incur pursuant to Investment
Restriction No. 2. The Portfolio's arrangements in connection with its hedging
activities as described in "Investment Objectives and Policies" shall not be
considered senior securities for purposes hereof; or
11. Purchase any equity security if, as a result, the Portfolio would
then have more than 5% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for fewer than
three years.
INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio may not:
1. Borrow money, except from banks for extraordinary or emergency
purposes and then only in amounts up to 30% of the value of the Portfolio's
net assets at the time of borrowing, and except in connection with reverse
repurchase agreements and then only in amounts up to 33 1/3% of the value of
the Portfolio's net assets; or purchase securities while borrowings, including
reverse repurchase agreements, exceed 5% of the Portfolio's total assets. The
Portfolio will not mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not to exceed 30% of the
value of the Portfolio's net assets at the time of such borrowing;
2. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Portfolio's
total assets would be invested in securities or other obligations of any one
such issuer. This limitation shall not apply to securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or to
permitted investments of up to 25% of the Portfolio's total assets;
3. Purchase the securities of an issuer if, immediately after such
purchase, the Portfolio owns more than 10% of the outstanding voting
securities of such issuer. This limitation shall not apply to permitted
investments of up to 25% of the Portfolio's total assets;
4. Purchase the securities or other obligations of issuers conducting
their principal business activity in the same industry if, immediately after
such purchase, the value of its investments in such industry would exceed 25%
of the value of the Portfolio's total assets. For purposes of industry
concentration, there is no percentage limitation with respect to investments
in U.S. Government securities;
5. Make loans, except through the purchase or holding of debt obligations
(including restricted securities), or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the
Portfolio's investment objective and policies, see "Investment Practices" in
the Prospectus and "Investment Objectives and Policies" in this Statement of
Additional Information;
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real property, including limited partnership interests, commodities,
or commodity contracts, except for the Portfolio's interests in hedging and
foreign exchange activities as described under "Investment Practices" in the
Prospectus; or interests in oil, gas, mineral or other exploration or
development programs or leases. However, the Portfolio may purchase securities
or commercial paper issued by companies that invest in real estate or
interests therein including real estate investment trusts;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position in securities, except to obtain such short-term
credit as necessary for the clearance of purchases and sales of securities,
provided that this restriction shall not be deemed to apply to the purchase or
sale of when-issued securities or delayed delivery securities;
8. Acquire securities of other investment companies, except as permitted
by the 1940 Act;
9. Act as an underwriter of securities, except insofar as the Portfolio
may be deemed to be an underwriter under the 1933 Act by virtue of disposing
of portfolio securities; or
10. Issue any senior security, except as appropriate to evidence
indebtedness which the Portfolio is permitted to incur pursuant to Investment
Restriction No. 1. The Portfolio's arrangements in connection with its hedging
activities as described in "Investment Practices" in the Prospectus shall not
be considered senior securities for purposes hereof.
BOND DEBENTURE PORTFOLIO
The Bond Debenture Portfolio of the Trust may not:
1. Sell short or buy on margin, although it may obtain short-term credit
as needed to clear purchases of securities;
2. Buy or sell put or call options, although it may buy, hold or sell
warrants acquired with debt securities;
3. Borrow in excess of 5% of the Portfolio's gross assets taken at cost
or market value whichever is lower at the time of borrowing, and then only as
a temporary measure for extraordinary or emergency purposes;
4. Act as an underwriter of securities issued by others, except where it
may be deemed to be an underwriter by selling a portfolio security requiring
registration under the Securities Act of 1933;
5. Invest knowingly more than 15% of its gross assets in illiquid
securities;
6. Make loans, except for (a) time or demand deposits with banks, (b)
purchasing commercial paper or publicly-offered debt securities at original
issue or otherwise, (c) short-term repurchase agreements with sellers of
securities the Portfolio has bought and (d) loans of portfolio securities to
registered broker-dealers if 100% secured by cash or cash equivalents, made in
full compliance with applicable regulations and which, in management's
opinion, do not expose the Portfolio to significant risks or impair its
qualification for pass-through tax treatment under the Internal Revenue Code;
7. Pledge, mortgage, or hypothecate its assets;
8. Buy or sell real estate (including limited partnership interests but
excluding securities of companies, such as real estate investment trusts,
which deal in real estate or interests therein) or oil, gas or other mineral
leases, or commodities, or commodity contracts although it may buy securities
of companies that deal in such interests (however, the Portfolio may hold and
sell any of the aforementioned or any other property acquired through
ownership of other securities, although the Portfolio may not purchase
securities for the purpose of acquiring those interests);
9. Buy securities issued by any other open-end investment company (except
pursuant to a plan of merger, consolidation or acquisition of assets),
although it may invest up to 5% of its gross assets, taken at market value at
the time of investment, in closed-end investment companies, provided such
purchase is made in the open market and does not involve the payment of a fee
or commission greater than the customary broker's commission;
10. Invest more than 5% of its gross assets, taken at market value at the
time of investment in securities of companies with less than three years'
continuous operation, including predecessor companies;
11. With respect to 75% of its gross assets, buy the securities of any
issuer if the purchase causes it (a) to have more than 5% of its gross assets
invested in the securities of such issuer (except obligations of the United
States, its agencies or instrumentalities) or (b) to own more than 10% of the
outstanding voting securities of such issuer;
12. Hold securities of any issuer, any of whose officers, directors or
security holders is an officer, director or partner of the Adviser or
Sub-Adviser or an officer or director of the Portfolio, if after the purchase
of the securities of such issuer, one or more of such persons owns
beneficially more than 1/2 of 1% of the securities of such issuer and such
persons together own beneficially more than 5% of such securities;
13. Concentrate its investments in a particular industry, though, if it
is deemed appropriate to its investment objective, up to 25% of the market
value of its gross assets at the time of investment may be invested in any one
industry classification used for investment purposes;
14. Buy from or sell to any of the Trust's directors, employees, or the
Investment Adviser or Sub-Adviser or any of its officers, directors, partners
or employees, any securities other than shares of the Portfolio's common
stock; or
15. Invest more than 10% of the market value of its gross assets at the
time of investment in debt securities which are in default as to interest or
principal.
With respect to investment restriction 5. above, securities subject to legal
or contractual restrictions on resale, which are determined by the Board of
Trustees, or by the Sub-Adviser pursuant to delegated authority, to be liquid
are considered liquid securities.
GROWTH & INCOME EQUITY, SMALL CAP EQUITY, BALANCED AND EQUITY INCOME
PORTFOLIOS
The Growth & Income Equity, Small Cap Equity, Balanced and Equity Income
Portfolios of the Trust may not:
1. Purchase securities of any one issuer (other than obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities), if,
immediately after and as a result of such investments, more than 5% of the
Portfolio's total assets would be invested in the securities of such issuer,
or more than 10% of the issuer's outstanding voting securities would be owned
by the Portfolio or the Trust, except that up to 25% of the Portfolio's total
assets may be invested without regard to such limitations.
2. Purchase any securities which would cause 25% or more of the
Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that, however, (a) with respect to
each Portfolio, (i) there is no limitation with respect to obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities, and
repurchase agreements secured by obligations of the U.S. Government or its
agencies or instrumentalities, and with respect to the Equity Income Portfolio
only, securities issued by domestic banks, thrifts or savings institutions;
(ii) wholly-owned finance companies will be considered to be in the industries
of their parents if their activities are primarily related to financing the
activities of their parents; and (iii) utilities will be divided according to
their services (for example, gas, gas transmission, electric and gas,
electric, and telephone will each be considered a separate industry).
3. Borrow money or issue senior securities, except that the Portfolio
may borrow from banks and enter into reverse repurchase agreements for
temporary defensive purposes in amounts not in excess of 10% of the
Portfolio's total assets at the time of such borrowing; or mortgage, pledge,
or hypothecate any assets, except in connection with any such borrowing and in
amounts not in excess of the lesser of the dollar amounts borrowed or 10% of
the Portfolio's total assets at the time of such borrowing; or purchase
securities while its borrowings exceed 5% of its total assets. A Portfolio's
transactions in futures and related options (including the margin posted by a
Portfolio in connection with such transactions), and securities held in escrow
or separate accounts in connection with a Portfolio's investment practices
described in this Statement of Additional Information are not subject to this
limitation.
4. Make loans, except that each Portfolio may purchase or hold debt
instruments, lend portfolio securities, enter into repurchase agreements and
make other investments in accordance with its investment objective and
policies.
5. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall
not apply to a Portfolio's transactions in options, and futures contracts and
related options, and (b) a Portfolio may obtain short-term credits as may be
necessary for the clearance of purchases and sales of portfolio securities.
6. Make investments for the purpose of exercising control or management.
7. Purchase or sell real estate, provided that each Portfolio may invest
in securities secured by real estate or interests therein or issued by
companies or investment trusts which invest in real estate or interests
therein.
8. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as a Portfolio might be deemed to be an
underwriter upon disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance
with a Portfolio's investment objective, policies and limitations may be
deemed to be underwriting.
9. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that each of the Balanced
Portfolio and the Equity Income Portfolio may, to the extent appropriate to
its investment objective, purchase publicly traded securities of companies
engaging in whole or in part in such activities and may invest in futures
contracts and related options in accordance with their respective investment
activities and policies.
10. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as a Portfolio might be deemed to be an
underwriter upon disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance
with a Portfolio's investment objective, policies and limitations may be
deemed to be underwriting.
LORD ABBETT GROWTH AND INCOME PORTFOLIO
The Lord Abbett Growth and Income Portfolio may not:
1. sell short securities or buy securities or evidences of interests
therein on margin, although it may obtain short-term credit necessary for the
clearance of purchases of securities;
2. buy or sell put or call options, although it may buy, hold or sell
rights or warrants, write covered call options and enter into closing purchase
transactions as discussed below;
3. borrow money which is in excess of one-third of the value of its
total assets taken at market value (including the amount borrowed) and then
only from banks as a temporary measure for extraordinary or emergency purposes
(borrowings beyond 5% of such total assets may not be used for investment
leverage to purchase securities but solely to meet redemption requests where
the liquidation of the Portfolio's investment is deemed to be inconvenient or
disadvantageous);
4. lend money or securities to any person except that it may enter into
short-term repurchase agreements with sellers of securities it has purchased,
and it may lend its portfolio securities to registered broker-dealers where
the loan is 100% secured by cash or its equivalent as long as it complies with
regulatory requirements and the Portfolio deems such loans not to expose the
Portfolio to significant risk (investment in repurchase agreements exceeding 7
days and in other illiquid investments is limited to a maximum of 5% of a
Portfolio's assets);
5. pledge, mortgage or hypothecate its assets; however, this provision
does not apply to permitted borrowing mentioned above or to the grant of
escrow receipts or the entry into other similar escrow arrangements arising
out of the writing of covered call options;
6. buy or sell real estate including limited partnership interests
therein (except securities of companies, such as real estate investment
trusts, that deal in real estate or interests therein), or oil, gas or other
mineral leases, commodities or commodity contracts in the ordinary course of
its business, except such interests and other property acquired as a result of
owning other securities, though securities will not be purchased in order to
acquire any of these interests;
7. invest more than 5% of its gross assets, taken at market value at the
time of investment, in companies (including their predecessors) with less than
three years' continuous operation;
8. buy securities if the purchase would then cause a Portfolio to have
more than (i) 5% of its gross assets, at market value at the time of purchase,
invested in securities of any one issuer, except securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, or (ii)
25% of its gross assets, at market value at the time of purchase, invested in
securities issued or guaranteed by a foreign government, its agencies or
instrumentalities;
9. buy voting securities if the purchase would then cause a Portfolio to
own more than 10% of the outstanding voting stock of any one issuer;
10. own securities in a company when any of its officers, directors or
security holders is an officer or Trustee of the Trust or an officer, director
or partner of the investment adviser or sub-adviser, if after the purchase any
of such persons owns beneficially more than 1/2 of 1% of such securities and
such persons together own more than 5% of such securities;
11. concentrate its investments in any particular industry, but if
deemed appropriate for attainment of its investment objective, up to 25% of
its gross assets (at market value at the time of investment) may be invested
in any one industry classification used for investment purposes; or
12. buy securities from or sell them to the Trust's officers, directors,
or employees, or to the investment adviser or sub-adviser or to their
partners, directors and employees.
LARGE CAP RESEARCH, DEVELOPING GROWTH AND MID-CAP VALUE PORTFOLIOS
The Large Cap Research, Developing Growth and Mid-Cap Value Portfolios
may not:
1. borrow money, except that (i) the Portfolio may borrow from banks (as
defined in the Investment Company Act of 1940, as amended (the "1940 Act")) in
amounts up to 33 1/3% of its total assets (including the amount borrowed),
(ii) the Portfolio may borrow up to an additional 5% of its total assets for
temporary purposes, (iii) the Portfolio may obtain such short-term credit as
may be necessary for the clearance of purchases and sales of portfolio
securities and (iv) the Portfolio may purchase securities on margin to the
extent permitted by applicable law;
2. pledge its assets (other than to secure borrowings, or to the extent
permitted by the Portfolio's investment policies as permitted by applicable
law);
3. engage in the underwriting of securities, except pursuant to a merger
or acquisition or to the extent that, in connection with the disposition of
its portfolio securities, it may be deemed to be an underwriter under federal
securities laws;
4. make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar instruments
shall not be subject to this limitation, and except further that the Portfolio
may lend its portfolio securities, provided that the lending of portfolio
securities may be made only in accordance with applicable law;
5. buy or sell real estate (except that the Portfolio may invest in
securities directly or indirectly secured by real estate or interests therein
or issued by companies which invest in real estate or interests therein) or
commodities or commodity contracts (except to the extent the Portfolio may do
so in accordance with applicable law and without registering as a commodity
pool operator under the Commodity Exchange Act, as, for example, with futures
contracts);
6. with respect to 75% of the gross assets of the Portfolio, buy
securities of one issuer representing more than (i) 5% of the Portfolio's
gross assets, except securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities or (ii) 10% of the voting securities of such
issuer;
7. invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding securities of the
U.S. Government, its agencies and instrumentalities); or
8. issue senior securities to the extent such issuance would violate
applicable laws.
NON-FUNDAMENTAL INVESTMENT LIMITATIONS - QUALITY BOND PORTFOLIO, SELECT EQUITY
PORTFOLIO, LARGE CAP STOCK PORTFOLIO, SMALL CAP STOCK PORTFOLIO AND
INTERNATIONAL EQUITY PORTFOLIO
The investment limitation described below is not a fundamental policy of these
Portfolios and may be changed by the Trustees. This non-fundamental investment
policy requires that each such Portfolio may not:
(i) Acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration of
over seven calendar days, if as a result thereof, more than 15% of the market
value of the Portfolio's total assets would be in investments that are
illiquid;
(ii) Purchase any security if, as a result, the Portfolio would then have
more than 5% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for fewer than
three years;
(iii) Invest in warrants (other than warrants acquired by the Portfolio
as part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would exceed
5% of the value of the Portfolio's net assets or if, as a result, more than 2%
of the Portfolio's net assets would be invested in warrants not listed on a
recognized U.S. or foreign stock exchange, to the extent permitted by
applicable state securities laws; or
(iv) Purchase or retain securities of any issuer if, to the knowledge of
the Portfolio, any of the Portfolio's officers or Trustees or any officer of
the Advisor individually owns more than 1/2 of 1% of the issuer's outstanding
securities and such persons owning more than 1/2 of 1% of such securities
together beneficially own more than 5% of such securities, all taken at
market.
NON-FUNDAMENTAL INVESTMENT LIMITATIONS - LARGE CAP RESEARCH, DEVELOPING GROWTH
AND MID-CAP VALUE PORTFOLIOS
Each Portfolio may not:
1. borrow in excess of 5% of its gross assets taken at cost or market
value, whichever is lower at the time of borrowing, and then only as a
temporary measure for extraordinary or emergency purposes;
2. make short sales of securities or maintain a short position except to
the extent permitted by applicable law;
3. invest knowingly more than 15% of its net assets (at the time of
investment) in illiquid securities, except for securities qualifying for
resale under Rule 144A of the Securities Act of 1933, deemed to be liquid by
the Board of Trustees;
4. invest in the securities of other investment companies as defined in
the 1940 Act except as permitted by applicable law;
5. invest in securities of issuers which, with their predecessors, have
a record of less than three years' continuous operations, if more than 5% of
the Portfolio's total assets would be invested in such securities (this
restriction shall not apply to mortgaged-backed securities, asset-backed
securities or obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities);
6. hold securities of any issuer if more than 1/2 of 1% of the
securities of such issuer are owned beneficially by one or more officers or
Trustees of the Trust or by one or more partners or members of the Trust's
underwriter or investment adviser if these owners in the aggregate own
beneficially more than 5% of the securities of such issuer;
7. invest in warrants if, at the time of the acquisition, its investment
in warrants, value at the lower of cost or market, would exceed 5% of the
Portfolio's total assets (included within such limitation, but not to exceed
2% of the Portfolio's total assets, are warrants which are not listed on the
New York or American Stock Exchange or a major foreign exchange);
8. invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or other development
programs, except that the Portfolio may invest in securities issued by
companies that engage in oil, gas or other mineral exploration or other
development activities;
9. write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Portfolio's
prospectus and statement of additional information, as they may be amended
from time to time; or
10. buy from or sell to any of its officers, Trustees, employees, or its
investment adviser or any of its officers, directors, partners or employees,
any securities other than shares of the Portfolio's common stock.
DESCRIPTION OF SECURITIES RATINGS
A description of Corporate Bond Ratings is found in the Appendix to the
Prospectus.
COMMERCIAL PAPER RATINGS
COMMERCIAL PAPER
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no
more than 365 days. Ratings are graded into four categories, ranging from "A"
for the highest quality obligations to "D" for the lowest. The four categories
are as follows:
<TABLE>
<CAPTION>
<S> <C>
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative
degree of safety. Those issues determined to possess overwhelming
safety characteristics are denoted with a plus (+) sign designation.
A-1 This designation indicates that the degree of safety regarding
timely payment is very strong.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for
timely of payment. They are, however, somewhat more vulnerable to
the adverse effects changes in circumstances than obligations
carrying the higher designations.
B Issues rated "B" are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by
changing conditions or short-term adversities.
C&D These ratings indicate that the issue is either in default or is
expected to be in default upon maturity.
</TABLE>
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+." "D-1" and "D-1-," within the
highest rating category. The following summarizes the rating categories used
by Duff & Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an untimely
or incomplete payment of principal or interest of unsubordinated instruments
having a maturity of one year or less which are issued by United States
commercial banks, thrifts and non-bank banks; non-United States banks; and
broker-dealers. The following summarizes the ratings used by Thomson
BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher
ratings, capacity to service principal and interest in a timely fashion is
considered adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for timely
repayment.
"A1" - Obligations are supported by a strong capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for
timely repayment, although such capacity may be susceptible to adverse changes
in business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for
timely repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in higher
categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.
"D" - Obligations which have a high risk of default or which are
currently in default.
VARIABLE RATE DEMAND BOND RATINGS
Standard & Poor's assigns "dual" ratings to all long-term debt issues that
have as part of their provisions a variable rate demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, 'AAA/A-1') or if the nominal maturity is short, a rating
of 'SP-1+/AAA' is assigned.
NOTES
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive
a note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assignment:
- - Amortization schedule (the longer the final maturity relative to
other maturities the more likely it will be treated as a note).
- - Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a note). Note
rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given
a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
PREFERRED STOCK RATINGS (STANDARD & POOR'S)
AAA This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong capacity to pay
the preferred stock obligations.
AA A preferred stock issue rated 'AA' also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated 'AAA'.
A An issue rated 'A' is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB An issue rated 'BBB' is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to make payments for a
preferred stock in this category than for issues in the 'A' category.
BB Preferred stock rated 'BB', 'B' and 'CCC' is regarded, on balance, as
B Predominantly speculative with respect to the issuer's capacity to pay
CCC preferred stock obligations. 'BB' indicates the lowest degree of
speculation and 'CCC' the highest degree of speculation. While such issues
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
CC The rating 'CC' is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently paying.
C A preferred stock rated 'C' is a non-paying issue.
D A preferred stock rated 'D' is a non-paying issue with the issuer in
default on debt instruments.
PLUS (+) OR MINUS (-): To provide more detailed indications of preferred
stock quality, the ratings from 'AA' to 'B' may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
NR This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
a particular type of obligation as a matter of policy.
A preferred stock rating is not a recommendation to purchase, sell, or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to S&P by the issuer or obtained by S&P from other
sources it considers reliable. S&P does not perform an audit in connection
with any rating and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended, or withdrawn as a result of changes in,
or unavailability of, such information, or based on other circumstances.
MOODY'S INVESTORS SERVICE, INC. - A brief description of the applicable
Moody's Investors Service, Inc. rating symbols with respect to preferred stock
and their meanings (as published by Moody's Investors Service, Inc.) follows:
PREFERRED STOCK RATINGS (MOODY'S)
Preferred stock rating symbols and their definitions are as follows:
aaa: An issue which is rated 'aaa' is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least
risk of dividend impairment within the universe of preferred stocks.
aa: An issue which is rated 'aa' is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance the earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
a: An issue which is rated 'a' is considered to be an upper-medium
preferred stock. While risks are judged to be somewhat greater than in the
'aaa' and 'aa' classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa: An issue which is rated 'baa' is considered to be a medium grade
preferred stock, neither highly protected nor poorly secured. Earnings and
asset protection appear adequate at present but may be questionable over any
great length of time.
ba: An issue which is rated 'ba' is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this class.
b: An issue which is rated 'b' generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa: An issue which is rated 'caa' is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments.
ca: An issue which is rated 'ca' is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.
c: This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NOTE: Beginning May 3, 1982, Moody's began applying numerical modifiers
1, 2 and 3 in each rating classification from "aa" through "b" in its
preferred stock rating system. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue
ranks in the lower end of its generic rating category.
OFFICERS AND TRUSTEES
MANAGEMENT OF THE TRUST
<TABLE>
<CAPTION>
<S> <C> <C>
Principal Occupation During Past
Position(s) Five Years (and Positions held with
Held with Affiliated Persons or Principal
Name, Address and Age Registrant Underwriters of the Registrant)
- ------------------------------- ------------------------- -------------------------------------
Lorry J. Stensrud* President and Chief President of Cova Financial Services
One Tower Lane, Suite 3000 Executive Officer Life Insurance Company ("Cova Life")
Oakbrook Terrace, IL 60181-4644 since June, 1995; prior thereto,
Age: 47 Executive Vice President of Cova Life
William C. Mair* Vice President, Treasurer, Vice President and Controller of
One Tower Lane, Suite 3000 Controller, Chief Cova Life; Vice President, Treasurer
Oakbrook Terrace, IL 60181-4644 Financial Officer, Chief and Controller of Cova Investment
Age: 55 Accounting Officer and Advisory Corporation
Trustee
Stephen M. Alderman Trustee Partner in the law firm of Garfield
211 West Wacker Drive & Merel
Chicago, IL 60606
Age: 37
Theodore A. Myers Trustee Senior Financial Advisor; formerly
550 Washington Avenue Chief Financial Officer of Qualitech Steel
Glencoe, IL 60022 Corporation, 1990-1994; Director of 34
Age: 66 Van Kampen American Capital Mutual Funds;
member of Arthur Andersen C.F.O. Advisory
Committee.
Deborah A. Vohasek Trustee Principal, Vohasek Oetjen Marketing
7752 W. Lake Street
Morton Grove, IL 60053
Age: 33
R. Kevin Williams Trustee Partner in the law firm of
20 North Wacker Drive O'Donnell, Byrne & Williams from
Chicago, IL 60606 June 1993 through the present;
Age: 43 Associate Attorney, Sonnenberg,
Anderson, O'Donnell & Rodriguez,
September 1988 through May 1993
William H. Wilton Vice President Vice President & Actuary of Cova
One Tower Lane, Suite 3000 Life; Prior to October, 1992,
Oakbrook Terrace, IL 60181-4844 Associate Actuary, Allstate Life
Age: 36 Insurance Co., Northbrook, IL
Jeffery K. Hoelzel Senior Vice President and Senior Vice President, General
One Tower Lane, Suite 3000 Secretary Counsel, Secretary and Director of
Oakbrook Terrace, IL 60181-4644 Cova Life; Secretary and Director of
Age: 34 Cova Investment Advisory Corporation;
prior to June, 1992, Associate
Attorney with the law firm of Lord,
Bissell & Brook in Chicago
<FN>
* Interested person of the Trust within the meaning of the 1940 Act.
</TABLE>
Each Trustee of the Trust who is not an interested person of the Trust or
Adviser or Sub-Adviser receives an annual fee of $10,000 and an additional fee
of $1,000 for each Trustees' meeting attended. In addition, disinterested
Trustees who are members of any Board committees will receive a separate
$1,000 fee for attendance of any committee meeting that is held on a day on
which no Board meeting is held.
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Pension or Total
Aggregate Retirement Estimated Compensation
Compensation Benefits Accrued Annual From Registrant
Name of Person, From As Part of Fund Benefits Upon and Fund Complex
Position Registrant Expenses Retirement Paid to Trustees
- ---------------------------- -------------- ----------------- -------------- ------------------
William C. Mair, N/A N/A N/A N/A
Vice President, Treasurer,
Controller, Chief Financial
Officer, Chief Accounting
Officer and Trustee
Stephen M. Alderman, $15,000 N/A N/A $15,000
Trustee
Theodore A. Myers, $15,000 N/A N/A $15,000
Trustee
Deborah A. Vohasek, $15,000 N/A N/A $15,000
Trustee
R. Kevin Williams, $14,000 N/A N/A $14,000
Trustee
</TABLE>
SUBSTANTIAL SHAREHOLDERS
Shares of the Trust are issued and redeemed only in connection with
investments in and payments under certain variable annuity contracts and
variable life insurance policies ("Variable Contracts") issued by Cova
Financial Services Life Insurance Company and/or its affiliated insurance
companies. On April 4, 1997, Cova Variable Annuity Account One, a separate
account of Cova Financial Services Life Insurance Company and Cova Variable
Annuity Account Five, a separate account of Cova Financial Life Insurance
Company, were known to the Board of Trustees and the management of the Trust
to own of record 97% of the Trust's shares. Cova Financial Services Life
Insurance Company, which contributed the initial capital to the Trust, owned
of record 3% of the Trust's shares as of April 4, 1997.
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
Cova Life has advised the Trust that as of April 7, 1997, there were no
persons owning Variable Contracts which would entitle them to instruct Cova
Life with respect to more than 5% of the voting securities of the Trust.
CUSTODIAN
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts 02111,
is the custodian of the Trust and has custody of all securities and cash of
the Trust. The custodian, among other things, attends to the collection of
principal and income, and payment for and collection of proceeds of securities
bought and sold by the Trust.
PERFORMANCE DATA
As required by regulations of the Securities and Exchange Commission, the
annualized total return of the Portfolios for a period is computed by assuming
a hypothetical initial payment of $1,000. It is then assumed that all of the
dividends and distributions by the Portfolio over the period are reinvested.
It is then assumed that at the end of the period, the entire amount is
redeemed. The annualized total return is then calculated by determining the
annual rate required for the initial payment to grow to the amount which would
have been received upon redemption.
Quotations of average annual total return for a Portfolio will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in a Portfolio over a period of one, five and ten years (or,if less,
up to the life of a Portfolio, calculated pursuant to the formula:
(n)
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = an average annual total return
n = the number of years
ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5, or 10 year period at the
end of the 1, 5, or 10 year period (or fractional portion
thereof)
LEGAL COUNSEL AND INDEPENDENT AUDITORS
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut is counsel to the
Trust and passes upon the legality of the Trust's shares.
The independent auditors for the Trust are KPMG Peat Marwick, LLP, 99 High
Street, Boston, Massachusetts 02110.
INVESTMENT ADVISORY AGREEMENT
Cova Investment Advisory Corporation (the "Investment Adviser"), One Tower
Lane, Suite 3000, Oakbrook Terrace, Illinois 60181-4644 is an Illinois
corporation which was incorporated on August 31, 1993 under the name Oakbrook
Investment Advisory Corporation and which is registered with the Securities
and Exchange Commission as an investment adviser under the Investment Advisers
Act of 1940. The Investment Adviser is a wholly-owned subsidiary of Cova Life
Management Company, a Delaware corporation, which in turn, is a wholly-owned
subsidiary of Cova Corporation, a Missouri corporation, which in turn, is a
wholly-owned subsidiary of General American Life Insurance Company ("General
American"), a St. Louis-based mutual company. General American has more than
$235 billion of life insurance in force and approximately $9.6 billion in
assets.
The Investment Adviser commenced providing investment advisory services to all
Portfolios of the Trust as of May 1, 1996 pursuant to an Investment Advisory
Agreement dated April 1, 1996 ("Investment Advisory Agreement"). Prior to this
date, VKAC had acted as the investment adviser to all Portfolios of the Trust.
The Investment Advisory Agreement, between the Investment Adviser and the
Trust, was approved by shareholders of the Trust at a Special Meeting of
Shareholders held on February 9, 1996 and was also approved by the Board of
Trustees of the Trust on that same date. An Amendment to the Investment
Advisory Agreement providing for the addition of eight new Portfolios to the
Agreement was approved by the Board of Trustees of the Trust on April 22, 1997
and by Cova Financial Services Life Insurance Company, as sole shareholder of
the eight new Portfolios, on April 28, 1997.
As described in the Prospectus, the Investment Adviser has retained
Sub-Advisers to assist it in managing the Portfolios. The Sub-Advisory
Agreement between the Investment Adviser and Van Kampen American Capital
Investment Advisory Corp. was approved by the Board of Trustees, including a
majority of the independent Trustees, at a meeting held on February 9, 1996
and was also approved by the shareholders of the Trust at the Special Meeting
held on that same date. The Sub-Advisory Agreements between the Investment
Adviser and Lord, Abbett & Co. (with respect to the Bond Debenture Portfolio)
and between the Investment Adviser and J. P. Morgan Investment Management
Inc., respectively, were approved by the Board of Trustees, including a
majority of the independent Trustees, on February 9, 1996. Cova Financial
Services Life Insurance Company, as sole shareholder of the Portfolios for
which J. P. Morgan Investment Management Inc. and Lord, Abbett & Co. act as
Sub-Advisers, approved the Sub-Advisory Agreements between the Investment
Adviser and each of these two Sub-Advisers by way of corporate resolutions
adopted in April of 1996. The Sub-Advisory Agreements between the Investment
Adviser and Mississippi Valley Advisors Inc. ("MVA") and between the
Investment Adviser and Lord, Abbett & Co. (with respect to the Mid-Cap Value
Portfolio, Large Cap Research Portfolio, Developing Growth Portfolio and Lord
Abbett Growth and Income Portfolio), respectively, were approved by the Board
of Trustees, including a majority of the independent Trustees, on
April 22, 1997. Cova Financial Services Life Insurance Company, as sole
shareholder of the Portfolios for which MVA acts as Sub-Adviser and as sole
shareholder of the Portfolios listed above for which Lord, Abbett & Co. acts
as Sub-Adviser, approved the Sub-Advisory Agreements between the Investment
Adviser and each of these two Sub-Advisers by way of corporate resolutions
adopted on April 28, 1997.
Under the terms of the Investment Advisory Agreement, the Investment Adviser
is obligated to (i) manage the investment and reinvestment of the assets of
each Portfolio of the Trust in accordance with each Portfolio's investment
objective and policies and limitations, or (ii) in the event that the
Investment Adviser shall retain a sub-adviser or sub-advisers, to supervise
and implement the investment activities of any Portfolio for which any such
sub-adviser has been retained, including responsibility for overall management
and administrative support including managing, providing for and compensating
any sub-advisers; and to administer the Trust's affairs. The Investment
Advisory Agreement further provides that the Investment Adviser agrees, among
other things, to administer the business affairs of each Portfolio, to furnish
offices and necessary facilities and equipment to each Portfolio, to provide
administrative services for each Portfolio, to render periodic reports to the
Board of Trustees of the Trust with respect to each Portfolio, and to permit
any of its officers or employees, or those of any sub-adviser to serve without
compensation as trustees or officers of the Portfolio if elected to such
positions.
The Investment Advisory Agreement provides that the Investment Adviser will
not be liable for any error in judgment or of law, or for any loss suffered by
the Trust in connection with the matters to which the agreement relates,
except a loss resulting from willful misfeasance, bad faith, or gross
negligence on the part of the Investment Adviser in the performance of its
obligations and duties, or by reason of its reckless disregard of its
obligations and duties under the Agreement.
The Investment Adviser's activities are subject to the review and supervision
of the Trust's Trustees to whom the Investment Adviser renders periodic
reports of the Trust's investment activities.
The Investment Advisory Agreement may be terminated without penalty upon 60
days written notice by either party and will automatically terminate in the
event of assignment.
INVESTMENT DECISIONS
Investment decisions for the Trust and for the other investment advisory
clients of the Sub-Advisers are made with a view to achieving their respective
investment objectives and after consideration of such factors as their current
holdings, availability of cash for investment, and the size of their
investments generally. Frequently, a particular security may be bought or sold
for only one client or in different amounts and at different times for more
than one but less than all clients. Likewise, a particular security may be
bought for one or more clients when one or more other clients are selling the
security. In addition, purchases or sales of the same security may be made for
two or more clients of a Sub-Adviser on the same day. In such event, such
transactions will be allocated among the clients in a manner believed by the
Sub-Adviser to be equitable to each. In some cases, this procedure could have
an adverse effect on the price or amount of the securities purchased or sold
by the Trust. Purchase and sale orders for the Trust may be combined with
those of other clients of a Sub-Adviser in the interest of achieving the most
favorable net results for the Trust.
PORTFOLIO TRANSACTIONS
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Trust of negotiated brokerage commissions. Such commissions
vary among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign securities often involve the payment of
fixed brokerage commissions, which are generally higher than those in the
United States. There is generally no stated commission in the case of
securities traded in the over-the-counter markets, but the price paid by the
Trust usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Trust includes a disclosed,
fixed commission or discount retained by the underwriter or dealer. It is
currently intended that the Sub-Advisers will place all orders for the
purchase and sale of portfolio securities for the Trust and buy and sell
securities for the Trust through a substantial number of brokers and dealers.
In so doing, the Sub-Advisers will use their best efforts to obtain for the
Trust the best price and execution available. In seeking the best price and
execution, the Sub-Advisers, having in mind the Trust's best interests, will
consider all factors they deem relevant, including, by way of illustration,
price, the size of the transaction, the nature of the market for the security,
the amount of the commission, the timing of the transaction taking into
account market prices and trends, the reputation, experience, and financial
stability of the broker-dealer involved, and the quality of service rendered
by the broker-dealer in other transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional
investors to receive research, statistical, and quotation services from
broker-dealers who execute portfolio transactions for the clients of such
advisers. Consistent with this practice, the Sub-Advisers may receive
research, statistical, and quotation services from any broker-dealers with
whom they place the Trust's portfolio transactions. These services, which in
some cases may also be purchased for cash, include such matters as general
economic and security market reviews, industry and company reviews,
evaluations of securities, and recommendations as to the purchase and sale of
securities. Some of these services may be of value to the Sub-Advisers and/or
their affiliates in advising various other clients (including the Trust),
although not all of these services are necessarily useful and of value in
managing the Trust. The management fees paid by the Trust are not reduced
because the Sub-Advisers and/or their affiliates may receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, a
Sub-Adviser may cause a Portfolio to pay a broker-dealer who provides
brokerage and research services to the Sub-Adviser an amount of disclosed
commission for effecting a securities transaction for the Portfolio in excess
of the commission which another broker-dealer would have charged for effecting
that transaction provided that the Sub-Adviser determines in good faith that
such commission was reasonable in relation to the value of the brokerage and
research services provided by such broker-dealer viewed in terms of that
particular transaction or in terms of all of the accounts over which
investment discretion is so exercised. A Sub-Adviser's authority to cause a
Portfolio to pay any such greater commissions is also subject to such policies
as the Adviser or the Trustees may adopt from time to time.
FINANCIAL STATEMENTS
The financial statements, notes and reports of the Independent Auditors for
each of the Portfolios of the Trust are included herein.
================================================================================
SMALL CAP STOCK PORTFOLIO For the period ended 12/31/96
MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT
Letter to Policyholders
- --------------------------------------------------------------------------------
Despite the strong sell-off in July, the small cap market posted strong gains in
the months following and finished the year at a similar level to the peak it
reached in mid-May. Even with the strong performance of small cap stocks in the
fourth quarter, it continued to trail the return of the S&P 500 for the year.
Small cap stocks did end the year on a positive note, however, as they regained
some ground on large cap stocks during the final days of the year. In fact,
December was the first month since August that small cap stocks outperformed
large cap stocks.
Within the Russell 2000 Index, the energy, banks, savings and loans, and REITs
sectors were the strongest sectors for the fourth quarter as well as the leaders
for the year. Similarly, healthcare was the most significant underperformer for
the quarter and the year.
The Portfolio significantly outperformed the Russell 2000 since inception and
for the fourth quarter of 1996. An attribution analysis indicates that stock
selection was widespread as 14 of 20 sectors outperformed the index. Sectors
contributing the most to performance included basic industry and miscellaneous
services. These sectors were helped by two of the larger holdings in the
Portfolio. Dekalb Genetics had a strong fourth quarter and was the best
performing security in the Portfolio for the year. During the quarter, Dekalb
announced that margins will be higher than originally expected due to good fall
weather and lower production costs. Dekalb continues to be the largest security
in the portfolio and we continue to believe that stock is attractive.
Consolidated Graphics, one of the fastest growing printing companies in the
country, announced that earnings would be above expectations. Results during the
quarter were enhanced by earlier than anticipated completion of several recent
acquisitions. The sectors detracting from performance included consumer stable
and retail.
Entering 1997, the investing environment is remarkably similar to a year ago;
despite some recent slowing, profit growth has been robust, with margins at or
near record levels. We see three positive prospects for the small cap market:
(1) improved relative valuation due to prolonged underperformance relative to
large cap stocks, (2) the likelihood of a stable or additional strengthening of
the dollar, and (3) seasonally, this should be a strong period for small cap
stocks.
TOP 10 LONG-TERM HOLDINGS BY MARKET VALUE
As of 12/31/96
% of Portfolio
--------------
Dekalb Genetics 3.0%
Capital Re 2.9
Internet 2.0
Commercial Metals 1.4
Roosevelt Financial Group 1.3
Applied Power 1.2
MMI 1.2
Network General 1.2
DR Horton 1.1
Colonial Bancgroup 1.0
JAMES B. OTNESS
Portfolio Manager
J.P. Morgan Investment Management Inc.
================================================================================
================================================================================
SMALL CAP STOCK PORTFOLIO, MANAGED BY
J.P. MORGAN INVESTMENT MANAGEMENT VS. RUSSELL 20002
Growth Based on $10,000 invested on 5/1/96
Small Cap Stock Portfolio
managed by JPMIM Russell 2000 Index
------------------------- ------------------
$10,000 10,000
$9,955 9,967
$10,091 10,001
$10,825 10,521
Total Return1
-------------
Since inception+
----------------
Small Cap Stock Portfolio,
managed by JPMIM 8.65%
Russell 20002 5.22%
+Performance is shown from date of initial public offering, May 1, 1996.
1 "Total Return" is calculated including reinvestment of all income dividends
and capital gain distributions. Results represent past performance and do not
indicate future results. The value of an investment in the Small Cap Stock
Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the return on
the investment both will fluctuate, and redemption proceeds may be higher or
lower than an investor's original cost.
2 The Russell 2000 is a capitalized weighted index including 2,000 of the
smallest stocks representing approximately 11% of the U.S. equity market. The
index does not reflect any expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
================================================================================
================================================================================
QUALITY BOND PORTFOLIO For the period ended 12/31/96
MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT
Letter to Policyholders
- --------------------------------------------------------------------------------
After seesawing concerns about the economic growth grabbed headlines throughout
most of the year, U.S. bonds were able to close out 1996 in an environment of
moderate economic growth and subdued inflation. The modest 3.6% gain for the
year seen in the Salomon Brothers BIG Index was largely attributable to its
fourth quarter performance. The 5.0% gain for the year seen in the Merrill Lynch
1-3 Year Index demonstrates that shorter maturities outperformed longer
maturities for the period. Despite a fourth quarter rally on maturities of 1
year or longer, yields rose across the entire maturity spectrum during 1996. The
2-year Treasury note provided a total return of 4.7% for the period while the
long bond returned -4.5%.
The Portfolio's duration decision slightly detracted from its relative returns
in 1996. The negative impact of a longer-than-benchmark duration during the
first half of the year more than offset the positive impact when a similar
strategy was pursued during the second half. In terms of sector strategy, the
Portfolio achieved positive investment results by maintaining overweighted
positions in mortgage-backed securities, asset-backed securities and corporate
bonds while maintaining an underweighted position in U.S. Treasuries throughout
the year. These sectors continue to be supported by sustained mutual fund
inflows, U.S. economic stability, and improving political and fundamental
environments.
Recent figures have reinforced investor hopes that economic growth has slowed to
a sustainable pace and that labor market tightness is not a problem. However, we
continue to believe that evidence reconfirming labor cost pressures will focus
the debate on whether Federal Reserve tightening is ultimately necessary to slow
the economy. We suspect that warning signs of impending inflation may accumulate
sufficiently over the next few months to convince the Federal Reserve's less
hawkish members to engineer an economic slowdown during 1997.
Given this environment, we plan to maintain the Portfolio's duration at close to
neutral in the short-term, despite yields being above our long-term equilibrium
assumption. We currently do not have an information advantage that compels us to
assume a different posture. We also plan to maintain the Portfolio's
overweighted exposure to mortgage-backed securities, asset-backed securities and
corporate bonds
RONALD ARONS
Portfolio Manager
J.P. Morgan Investment Management Inc.
======================================
DISTRIBUTION BY S&P RATING*
As of 12/31/96
A 12.8%
AA 1.6%
AAA 14.3%
BBB 3.1%
Agency 30.4%
Cash 5.0%
Treasury 32.8%
*% of holdings
================================================================================
QUALITY BOND PORTFOLIO, MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT
VS. SALOMON BROTHERS BROAD INVESTMENT GRADE BOND INDEX2
Growth Based on $10,000 invested on 5/1/96
Quality Bond Portfolio
managed by JPMIM Salomon Brothers BIG
---------------------- --------------------
$10,000 $10,000
$10,095 $10,124
$10,140 $10,312
$10,577 $10,624
Total Return1
Since inception+
----------------
Quality Bond Portfolio,
managed by JPMIM 5.68%
Salomon Brothers BIG2 6.24%
+Performance is shown from date of initial public offering, May 1, 1996.
1 "Total Return" is calculated including reinvestment of all income dividends
and capital gain distributions. Results represent past performance and do not
indicate future results. The value of an investment in the Quality Bond
Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the return on
the investment both will fluctuate, and redemption proceeds may be higher or
lower than an investor's original cost.
2 The Salomon Brothers Broad Investment Grade Bond Index (BIG) is a
market-capitalized weighted index which includes fixed-rate Treasury, government
sponsored, corporate (Baa3/BBB or better) and mortgage securities. The index
does not reflect any expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
================================================================================
================================================================================
LARGE CAP STOCK PORTFOLIO For the period ended 12/31/96
MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT
Letter to Policyholders
- --------------------------------------------------------------------------------
During the first half of 1996, a calming of inflation and interest rate fears
drove stock prices to new highs. Volatility in the stock market also increased
dramatically during this period. The rally was fueled by a combination of
declining interest rates, expanding corporate earnings and profitability,
continued prospects for benign inflation, and record flows of money into
domestic stock funds.
The stock market continued its record setting pace in the second half of 1996,
despite a veiled warning from Alan Greenspan, the Federal Reserve chairman.
Positive market influences included: weaker economic data which alleviated
concerns about inflationary pressures, earnings announcements which exceeded
expectations, and the election results. The S&P 500 climbed 7.6% in November,
its strongest one-month advance in five years, and 22.96% for the 12-month
period. The larger-capitalization and defensive growth stocks that have led the
market the past two years continued their outperformance. Searching for
turnaround candidates was rewarded in relatively few sectors, with traditional
value factors such as price-to-book having been less effective. Growth stocks
outperformed value stocks by approximately four percentage points over the past
12 months.
The Portfolio's strategy combines key advantages of J.P. Morgan Investment
Management's Active Management (purchasing stocks deemed most attractive while
avoiding overvalued issues) with the reduced expenses and risk relative to the
market found in traditional index funds. The Portfolio maintains broad
diversification of large and mid-cap stocks with a sector-neutral approach
coupled with a continued focus on individual stocks. As breadth returned to the
market in the fourth quarter, the Portfolio outperformed the benchmark by about
thirty basis points.
During 1996, the biggest contributions to performance came from stock picking in
the finance, services, and technology sectors, with Federal National Mortgage
Association, Turner Broadcasting, and Intel as three of the stocks in those
sectors that positively impacted performance since inception. Stock picking in
the health service and multi-industry sectors lagged for the year, with United
Healthcare and General Motors as two examples of stocks from those sectors that
negatively impacted performance.
Entering 1997, the investing environment is remarkably similar to what it was at
the beginning of 1996; despite some recent slowing, profit growth has been
robust, with margins at or near record levels. We believe that some of these
influences are losing momentum or coming to an end. We continue to believe that
higher wage costs, due to a tight labor market, plus an inability for
competitive reasons to pass along cost increases, will generally put pressure on
profit margins. Our diversified approach and aversion to overvalued stocks and
market timing should be beneficial as the large blue-chip stocks, that have
scored impressive gains as of late, turn out of favor as breadth continues to
return to the market.
TOP 10 LONG-TERM HOLDINGS BY MARKET VALUE
As of 12/31/96
% of Portfolio
--------------
Exxon 3.0%
Intel 2.9
Philip Morris 2.8
Royal Dutch Petroleum 2.4
Procter & Gamble 2.4
IBM 2.1
General Electric 1.8
Wal Mart 1.8
Boeing 1.7
Pfizer 1.7
JAMES WIESS
Portfolio Manager
J.P. Morgan Investment Management Inc.
================================================================================
================================================================================
LARGE CAP STOCK PORTFOLIO, MANAGED BY
J.P. MORGAN INVESTMENT MANAGEMENT VS. S&P 500 INDEX2
Growth Based on $10,000 invested on 5/1/96
Large Cap Stock Portfolio
managed by JPMIM S&P 500 Index
------------------------- -------------
$10,000 $10,000
$10,237 $10,288
$10,420 $10,601
$11,467 $11,482
Total Return1
Since inception+
----------------
Large Cap Stock Portfolio,
managed by JPMIM 14.35%
S&P 500 Index2 14.82%
+Performance is shown from date of initial public offering, May 1, 1996.
1 "Total Return" is calculated including reinvestment of all income dividends
and capital gain distributions. Results represent past performance and do not
indicate future results. The value of an investment in the Large Cap Stock
Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the return on
the investment both will fluctuate, and redemption proceeds may be higher or
lower than an investor's original cost.
2 The S&P 500 Index is an unmanaged index generally considered to be
representative of stock market activity. The index does not reflect any
expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
================================================================================
================================================================================
SELECT EQUITY PORTFOLIO For the period ended 12/31/96
MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT
Letter to Policyholders
- --------------------------------------------------------------------------------
During the first half of 1996, a calming of inflation and interest rate fears
drove stock prices to new highs. Volatility in the stock market also increased
dramatically during this period. The rally was fueled by a combination of
declining interest rates, expanding corporate earnings and profitability,
continued prospects for benign inflation, and record flows of money into
domestic stock funds.
The stock market continued its record setting pace in the second half of 1996,
despite a veiled warning from Alan Greenspan, the Federal Reserve chairman.
Positive market influences included: weaker economic data which alleviated
concerns about inflationary pressures, earnings announcements which exceeded
expectations, and the election results. The S&P 500 climbed 7.6% in November,
its strongest one-month advance in five years, and 22.96% for the 12-month
period. The larger-capitalization and defensive growth stocks that have led the
market the past two years continued their outperformance. Searching for
turnaround candidates was rewarded in relatively few sectors, with traditional
value factors such as price-to-book having been less effective. Growth stocks
outperformed value stocks by approximately four percentage points over the past
12 months.
Our approach to investing, which avoids dependence on the strength of a few
stocks or industry sectors, can underperform the broader market when buying is
heavily focused on certain subsets of the market; therefore, the stock picking
lagged in the beginning months, causing the Portfolio to underperform the S&P
500. Since inception, our investment strategy involved maintaining our sector
neutral approach coupled with a continued focus on individual stock selection
with an emphasis on holding a highly diversified selection of value stocks.
During 1996, the biggest contributions to performance came from stock picking in
the finance and transportation sectors, with Union Pacific and Bear Stearns as
two of the stocks in those sectors that positively impacted performance since
inception. Stock picking in the technology and multi-industry sectors lagged for
the year, with General Instrument and General Motors as two examples of stocks
from those sectors that negatively impacted performance.
Entering 1997, the investing environment is remarkably similar to what it was at
the beginning of 1996; despite some recent slowing, profit growth has been
robust, with margins at or near record levels. We believe that some of these
influences are losing momentum or coming to an end. We continue to believe that
higher wage costs, due to a tight labor market, plus an inability for
competitive reasons to pass along cost increases, will generally put pressure on
profit margins. Our diversified approach and aversion to overvalued stocks and
market timing should be beneficial as the large blue-chip stocks, that have
scored impressive gains as of late, turn out of favor as breadth continues to
return to the market.
TOP 10 LONG-TERM HOLDINGS BY MARKET VALUE
As of 12/31/96
% of Portfolio
--------------
Exxon 3.3%
Cooper Industries 3.3
Warner Lambert 2.8
Tele Communications 2.8
Providian 2.6
Procter & Gamble 2.5
Unilever 2.5
Rohr 2.3
DuPont 2.3
Philip Morris 2.2
MICHAEL J. KELLY
Portfolio Manager
J.P. Morgan Investment Management Inc.
================================================================================
================================================================================
SELECT EQUITY PORTFOLIO, MANAGED BY
J.P. MORGAN INVESTMENT MANAGEMENT VS. S&P 500 INDEX2
Growth Based on $10,000 invested on 5/1/96
Select Equity Portfolio
managed by JPMIM S&P 500 Index
----------------------- -------------
$10,000 $10,000
$9,852 $10,288
$10,004 $10,601
$10,837 $11,482
Total Return1
Since inception+
----------------
Select Equity Portfolio,
managed by JPMIM 8.52%
S&P 500 Index2 14.82%
+Performance is shown from date of initial public offering, May 1, 1996.
1 "Total Return" is calculated including reinvestment of all income dividends
and capital gain distributions. Results represent past performance and do not
indicate future results. The value of an investment in the Select Equity
Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the return on
the investment both will fluctuate, and redemption proceeds may be higher or
lower than an investor's original cost.
2 The S&P 500 Index is an unmanaged index generally considered to be
representative of stock market activity. The index does not reflect any
expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
================================================================================
================================================================================
INTERNATIONAL EQUITY PORTFOLIO For the period ended 12/31/96
MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT
Letter to Policyholders
- --------------------------------------------------------------------------------
International equity markets continued to make progress the fourth quarter and
for the calendar year despite the U.S. Dollar having a negative impact on
benchmark returns. Returns in many European markets were ahead of the U.S.
market. The strongest European markets in 1996 were Spain (+50.2%), Finland
(+42.2%), Sweden (+41.4%), and the Netherlands (+37.6%). The weakest market was
Italy which rose only 7.9% during the year. The advance in Spain was driven
mostly by interest rates, which have fallen by around 100 basis points during
the fourth quarter and increased liquidity flows in the equity markets by
private investors moving away from less attractive money market funds. The
strength of Finland's equity market was primarily due to Nokia (43% of the
market), which was up almost 50% for the year. The Dutch market saw mixed
performance in the fourth quarter, starting off with a series of profit
warnings, then boosted by strong results in the financial sector, in particular
ABN Amro's decision to buy Standard Federal Bank in the U.S.
During the final quarter of 1996, the Japanese market continued its downward
trend, returning -7.8% for the year. The market remained unexcited about the
general election of Japan's Diet in October, although was driven by aggressive
buying into international blue chips such as Honda Motor by a handful of large
U.S. investors in November. Hong Kong, the top performing market in the Pacific
Rim (+33.1%) for the year, surged 12.2% during the final quarter, driven by
lower U.S. rates, a continuing economic recovery and a strengthening property
market.
Within the Pacific Rim, stock picking in Hong Kong, Malaysia, Australia and
Singapore contributed to returns. In Europe, stock picking in Germany, Italy,
the Netherlands, and Switzerland also contributed to performance while selection
in France slightly lagged the benchmark. In terms of currency allocation,
hedging out of the Yen into the U.S. Dollar was a positive move for the
Portfolio as was taking advantage of the strong Sterling appreciation in the
fourth quarter. Country allocation in Europe, particularly overweighting France,
Germany, Spain, Italy, and Norway made a contribution to performance. However,
underweighting the strong markets of Switzerland, the Netherlands and Sweden
offset some of the fund's performance compared to the index.
In an environment of continued low interest rates and a positive earnings cycle
in both Continental Europe and Japan, there exists potential for reasonable
equity returns close to the long term average. Although markets would inevitably
be hurt by a sudden fall in U.S. stock prices, we believe that fundamentally
European valuations are more reasonable and that these markets will outperform
the U.S. in 1997.
Within Europe, valuations in the major markets are now close to fair value and
as a consequence we are looking to reduce our overweighted positions slightly in
France and Germany. However, we believe that there is still positive earnings
momentum in these markets. Our strategy also favors the smaller markets of
Spain, Belgium and Ireland where valuations are more compelling.
In the Pacific Rim, we remain neutral on Japanese stocks. Although valuations
are improving in Japan, oversupply and sagging investor confidence is still
weighing on the market. New Zealand and Australian stocks continue to offer good
value, however. We also expect to remain relatively neutral compared to the
benchmark in both Singapore and Hong Kong and to be underweighted in Malaysia.
======================================
FOREIGN INVESTMENT BY COUNTRY
As of 12/31/96
Australia 4.2%
France 12.1%
Germany 14.6%
Hong Kong 4.9%
Japan 14.6%
Netherlands 5.5%
Other 19.3%
Spain 4.3%
UK 20.5%
ANNE RICHARDS
Portfolio Manager
J.P. Morgan Investment Management Inc.
================================================================================
================================================================================
INTERNATIONAL EQUITY PORTFOLIO, MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT
VS. MSCI EAFE INDEX2
Growth Based on $10,000 invested on 5/1/96
International Equity Portfolio
managed by JPMIM MSCI EAFE Index
------------------------------ ---------------
$10,000 $10,000
$10,172 $9,876
$10,149 $9,871
$10,860 $10,036
Total Return1
Since inception+
----------------
International Equity Portfolio,
managed by JPMIM 8.44%
MSCI EAFE Index2 .36%
+Performance is shown from date of initial public offering, May 1, 1996.
1 "Total Return" is calculated including reinvestment of all income dividends
and capital gain distributions. Results represent past performance and do not
indicate future results. The value of an investment in the International Equity
Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the return on
the investment both will fluctuate, and redemption proceeds may be higher or
lower than an investor's original cost.
2 The Morgan Stanley Capital International Europe, Australia, and Far East Index
(MSCI EAFE) is an aggregate of 15 individual country indices that collectively
represent many of the major markets of the world. The index does not reflect any
expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
================================================================================
================================================================================
LORD ABBETT BOND DEBENTURE PORTFOLIO For the period ended 12/31/96
Letter to Policyholders
- --------------------------------------------------------------------------------
Throughout 1996, the Portfolio benefited from its value style, as well as its
emphasis on high-yield corporate bonds and convertible issues. Returns on these
securities are related to the individual issuer's business strategy and
financial results and less dependent upon the movement of interest rates.
Therefore, the portfolio was able to post attractive gains during a period of
rising interest rates by focusing on companies with improving fundamentals and
rising earnings.
In addition, the Portfolio profited from its convertible debt holdings in the
energy, financial and technology sectors. These issues, which were purchased
when they were out of favor in the marketplace, provided strong appreciation as
they rebounded toward the end of the year.
Heading into 1997, we expect economic growth to slow to approximately 2% or less
and inflation to average between 2-1/2% - 3%. We will continue to utilize
in-depth research to uncover investment opportunities, focusing on companies
with strong balance sheets and competitive market position.
CHRISTOPHER J. TOWLE
Portfolio Manager
Lord, Abbett & Co.
TOP 10 HOLDINGS BY MARKET VALUE
As of 12/31/96
% of Portfolio
--------------
U.S. Treasury Note (6% due 8/15/2005) 6.6%
FNMA 5.5
U.S. Treasury Note (8.5% due 7/15/1997) 3.3
Fuji International Finance Trust* 2.4
Ocwen Financial Corp. 2.2
U.S. Can Corp. 2.1
Omnicom Group Inc. 2.0
Rayovac Corp. 2.0
Flores & Rucks Inc. 1.7
Ryder TRS 1.7
PORTFOLIO FACTS
As of 12/31/96
Duration 6.0 years
Average Yield 8.6%
Average Coupon 8.0%
*Preferred Stock Investment
======================================
DISTRIBUTION OF HOLDINGS
As of 12/31/96
Convertibles 25.0%
High Yield 58.0%
Short-Term Securities
and Cash 1.8%
U.S. Government 15.2%
======================================
DISTRIBUTION BY S&P RATING
As of 12/31/96
A 8.76%
AA 1.90%
AAA 16.98%
B 51.10%
BB 7.61%
BBB 10.24%
NR 3.41%
================================================================================
LORD ABBETT BOND DEBENTURE PORTFOLIO
Growth Based on $10,000 invested on 5/1/96
Lord Abbett Bond First Boston High Merrill Lynch Salomon Brothers Broad
Debenture Portfolio Yield Index Convertible Index Investment Grade Index
$10,000 $10,000 $10,000 $10,000
$10,202 $10,158 $10,068 $10,124
$10,718 $10,539 $10,303 $10,312
$11,359 $11,004 $10,601 $10,624
Total Return1
Since inception+
----------------
Lord Abbett Bond
Debenture Portfolio 12.89%
First Boston High Yield Index2 10.04%
Salomon Brothers Broad
Investment High Grade Index2 6.24%
Merrill Lynch Convertible Index2 6.01%
+Performance is shown from date of initial public offering, May 1, 1996.
1 "Total Return" is calculated including reinvestment of all income dividends
and capital gain distributions. Results represent past performance and do not
indicate future results. The value of an investment in the Lord Abbett Bond
Debenture Portfolio and the return on the investment both will fluctuate, and
redemption proceeds may be higher or lower than an investor's original cost.
2 The First Boston High Yield Index is representative of the lower rated debt
(including straight-preferred stocks) investments in the portfolio; the Merrill
Lynch Convertible Index is representative of the equity-related securities in
the portfolio; and Salomon Brothers Broad Investment High Grade Index is
representative of the high-grade debt in the portfolio. The three indices chosen
have elements of these three categories, but since there is no one index
combining all three categories, these three separate indices may not be a valid
comparison for the Portfolio. You may not directly invest in any of these
indices. The indices do not reflect any expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software and Bloomberg. Comparison line graphs chart
the hypothetical growth of $10,000 over a given historical period of time.
Although data are gathered from reliable sources, accuracy and completeness
cannot be guaranteed.
================================================================================
================================================================================
QUALITY INCOME PORTFOLIO For the 12-month period ended 12/31/96
MANAGED BY VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
Letter to Policyholders
- --------------------------------------------------------------------------------
For the 1996 calendar year, intermediate term rates rose more than 80 basis
points (bps) while the yield of the long treasury bond rose 70 bps. Market
expectations about the direction of interest rates continue to call for higher
rates across the yield curve. The year-end slope of the yield curve as measured
by the spread between two and ten year treasuries stood at 57 bps suggesting
moderate economic growth in 1997.
Duration-neutral agencies outperformed treasuries by 32 bps last year, while
callable agency yields increased modestly. With corporate spreads remaining
tight all year, agencies have issued more callable paper meeting the market
demand for a higher yielding product. Given the narrowness of agency spreads, we
expect to move from an overweighted position to a neutral position in 1997.
The mortgage sector completed 1996 as the top performing domestic sector with
5.4% return. Mortgages performed well for the year due to continued low
volatility and a modest increase in yields. We have maintained a 10%
overweighting in mortgages and are looking for opportunities to increase our
position. Asset-backed securities continued to experience spread tightening last
year despite concerns about increasing credit card delinquency rates. Asset
backed securities are still viewed as a safe alternative to the corporate
sector.
Despite a slowing growth in corporate earnings, corporate spreads remained
relatively narrow in 1996. Corporates continued to be buoyed by both solid
economic fundamentals and technical factors (i.e., strong demand for dollar
assets). Looking ahead, corporate spreads should be relatively stable depending
on the degree of the slowdown in corporate earnings. The biggest concern will be
event risk related to either merger activity or credit surprise. In order to
minimize these risks, we expect to maintain a broadly diversified portfolio of
corporate issues.
A building supply of municipal issues in November pushed yield ratios to the
most attractive level of the year. Year-end seasonal factors resurfaced during
late December and should continue to manifest themselves into January. From that
point on we expect net supply to be positive. With increased issuance, municipal
yield spreads should widen again.
Looking ahead, the likely scenario for 1997 is that inflation and growth will be
similar to what we saw in 1996, about 2%-3% growth of GDP and inflation
relatively controlled at around 2%-21/2%. Of course, this doesn't mean 1997 will
not present risks, especially in relation to inflation. Based on employment
statistics, we're starting to see some wage inflation flowing through and high
oil prices will continue to have an adverse effect. In general, we think the
economy may closely mirror what we experienced in 1996.
ROBERT J. HICKEY
Portfolio Manager
Van Kampen American Capital
Investment Advisory Corp.
======================================
PORTFOLIO BY SECTOR
As of 12/31/96
Asset Backed Securities 2.76%
Corpoate Bonds 47.32%
Foreign Bonds/Debt 15.28%
Medium Term Securities 3.44%
Mortgage Backed 2.03%
Repurchase Agreements 4.57%
U.S. Treasuries/Agencies 24.60%
================================================================================
================================================================================
VAN KAMPEN AMERICAN CAPITAL QUALITY INCOME PORTFOLIO VS. LEHMAN BROTHERS
GOVERNMENT/CORPORATE BOND INDEX2
Growth Based on $10,000 invested on 1/1/90
VKAC Quality Lehman Brothers
Income Portfolio Gov't/Corp. Bond Index
---------------- ----------------------
$10,000 $10,000
$9,915 $9,885
$10,208 $10,241
$10,281 $10,303
$10,819 $10,828
$11,046 $11,120
$11,216 $11,288
$11,838 $11,937
$12,516 $12,574
$12,316 $12,386
$12,792 $12,887
$13,485 $13,517
$13,487 $13,528
$14,159 $14,157
$14,566 $14,582
$15,128 $15,064
$15,042 $15,020
$14,532 $14,550
$14,339 $14,369
$14,367 $14,440
$14,392 $14,493
$15,032 $15,215
$16,075 $16,202
$16,380 $16,512
$17,194 $17,282
$16,827 $16,877
$16,912 $16,957
$17,151 $17,256
$17,663 $17,783
Average Annual Return1
----------------------
1 Year 5 Years Since inception+
------ ------- ----------------
VKAC Quality
Income Portfolio 2.82% 6.76% 8.04%
Lehman Brothers
Gov't./Corp. Bond Index2 2.90% 7.18% 8.57%
+Portfolio is shown from first full month since inception.
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Van Kampen
American Capital (VKAC) Quality Income Portfolio and the return on the
investment both will fluctuate, and redemption proceeds may be higher or lower
than an investor's original cost.
2 The Lehman Brothers Government/Corporate Bond Index is comprised of all
publicly issued, non-convertible, domestic debt of the U.S. Government or any
agency thereof, quasi-Federal Corporation, or corporate debt guaranteed by the
U.S. Government and all publicly issued, fixed-rate non-convertible, domestic
debt of the four domestic major corporate classifications: industrial, utility,
financial and Yankee bond. The index does not reflect any expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
================================================================================
================================================================================
HIGH YIELD PORTFOLIO For the 12-month period ended 12/31/96
MANAGED BY VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
Letter to Policyholders
- --------------------------------------------------------------------------------
The High Yield Portfolio posted a solid total return in 1996. The gain was
better than that of Treasury bonds, but lagged overall returns of stocks. The
high yield market's solid performance resulted from two primary factors. First,
general economic conditions were favorable, with modest growth and low
inflation. Second, technical conditions were strong during the year, as money
flowed into the market from mutual fund investors as well as institutional
investors and new participants.
We currently have six analysts working full time analyzing the credit quality of
our high yield bond holdings and prospective investments. Our credit selection
process continued to provide good results during the period. For example, we
were able to avoid defaults among companies held in the portfolio. We also
experienced gains from positive developments such as mergers with higher quality
companies and tender offers for bonds held.
At the current time, we are somewhat cautious regarding the high yield market's
prospects for 1997. We expect high yield companies to show mixed performance as
long as the economy continues its current slow growth. However, we believe the
portfolio is positioned to perform well under these conditions. To help us
obtain the portfolio's objectives, we have underweighted bonds in the cyclical
industries, and we will continue to emphasize quality in the credit selection
process
ANNE LORSUNG
Portfolio Manager
Van Kampen American Capital
Investment Advisory Corp.
TOP 10 LONG-TERM HOLDINGS BY MARKET VALUE
As of 12/31/96
% of Portfolio
--------------
Thrifty Payless 1.8%
IXC Communications 1.7
Selmer 1.7
Connecticut Yankee 1.6
Fonorola 1.6
Communications & Power 1.6
Waban 1.6
AES 1.5
SCI TV 1.5
Tally 1.5
======================================
DISTRIBUTION BY MOODY'S RATING
As of 12/31/96
Aaa 1.4%
Ba1 4.3%
Ba2 4.0%
Ba3 18.4%
B1 17.0%
B2 27.9%
B3 22.5%
Caa 1.2%
Other 3.3%
================================================================================
================================================================================
VAN KAMPEN AMERICAN CAPITAL
HIGH YIELD PORTFOLIO VS. SALOMON BROTHERS
HIGH YIELD INDEX-COMPOSITE2
Growth Based on $10,000 invested on 1/1/90
VKAC High Salomon Brothers
Yield Portfolio High Yield Index
--------------- ----------------
$10,000 $10,000
$10,073 $9,706
$10,458 $10,090
$10,173 $9,200
$10,186 $9,252
$11,358 $11,065
$11,908 $11,786
$12,577 $12,546
$13,064 $13,251
$14,313 $14,244
$14,606 $14,808
$15,473 $15,473
$15,554 $15,674
$15,859 $16,690
$17,653 $17,471
$17,988 $17,873
$18,972 $18,548
$18,691 $18,068
$18,498 $17,910
$18,254 $18,218
$18,114 $17,887
$18,907 $19,235
$19,804 $20,559
$20,486 $21,211
$21,137 $22,131
$21,610 $22,376
$21,936 $22,562
$22,738 $23,528
$23,588 $24,619
Average Annual Return1
----------------------
1 Year 5 Years Since inception+
------ ------- -----------------
VKAC High
Yield Portfolio 11.29% 12.50% 13.05%
Salomon Brothers
High Yield Index2 11.24% 13.17% 13.55%
+Portfolio is shown from first full month since inception.
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Van Kampen
American Capital (VKAC) High Yield Portfolio and the return on the investment
both will fluctuate, and redemption proceeds may be higher or lower than an
investor's original cost.
2 The Salomon Brothers High Yield Index-Composite tracks the composite high
yield market excluding issues with less than 7 years maturity. The index does
not reflect any expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
================================================================================
================================================================================
STOCK INDEX PORTFOLIO For the 12-month period ended 12/31/96
MANAGED BY VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
Letter to Policyholders
- --------------------------------------------------------------------------------
Stock markets around the world rallied considerably in 1996, but few countries
were able to match the returns generated by the U.S. stock market. Low inflation
and interest rates, steady corporate profit growth, and insatiable investor
demand for shares of equity mutual funds combined to provide another year of
exceptional returns for equities as the Standard & Poor's 500 Index generated a
total return of 22.96% for the year.
The nature of the stock market rally in 1996 was drastically different from that
of 1995. In 1995, the stock market was driven by a 193 basis point decline in
long-term interest rates and an 18% increase in corporate earnings. In contrast,
long-term rates in 1996 increased by 69 basis points and corporate profits grew
by a more modest 8%. The 1996 rally owes much credit to record investor flows
into equity mutual funds as well as an increase in investors' willingness to
take on more risk in their search for capital gains. Investment flows into
equity mutual funds topped $220 billion in 1996. Even after subtracting the
liquidation of almost $90 billion of non-mutual fund equity holdings by
investors, net inflows to equities for the year exceeded the combined annual
savings of every American.
As 1997 gets underway and the economy enters into its seventh consecutive year
of expansion, many analysts have once again dusted off their perennial list of
fears for the new year. Some argue that stock prices tend to perform poorly in
the year following a presidential election, or the year following two
consecutive years of phenomenal performance. However, we believe that the
fundamental underpinnings that have provided us with this dramatic bull market
remain in place. Moderate economic growth, steady corporate profit growth,
sustained investor flows into equities and favorable inflation and interest
rates are expected to continue. While these factors currently remain favorable,
deterioration in any of these fundamental underpinnings may lead to significant
increases in volatility and potential declines in share prices.
Specifically, corporate profits are expected to experience a decline in their
rate of growth. At some point, declining profit margins will not go unnoticed by
investors and significant investment gains will be much harder to achieve;
however, at this time, investors appear comfortable with the risks inherent in
equity investments.
As long as investors' expectations of 1997's performance more closely
approximate the stock market's long term average market returns, we believe the
Stock Index Portfolio will continue to offer favorable returns in the year
ahead.
TOP 10 LONG-TERM HOLDINGS BY MARKET VALUE
As of 12/31/96
% of Portfolio
--------------
General Electric Co. 3.00%
Coca-Cola 2.43
Intel Corp. 2.05
Exxon 2.05
Microsoft 1.80
Merck 1.79
Philip Morris 1.65
Royal Dutch Petroleum 1.63
IBM 1.49
Procter & Gamble 1.29
PETE PAPAGEORGAKIS
Portfolio Manager
Van Kampen American Capital
Investment Advisory Corporation
================================================================================
================================================================================
VAN KAMPEN AMERICAN CAPITAL STOCK INDEX PORTFOLIO VS. S&P 500 INDEX2
Growth Based on $10,000 invested on 12/1/91
VKAC Stock
Index Portfolio S&P 500 Index
--------------- -------------
$10,000 $10,000
$10,570 $11,143
$10,279 $10,865
$10,470 $11,066
$10,764 $11,412
$11,219 $11,989
$11,627 $12,517
$11,686 $12,573
$11,948 $12,896
$12,231 $13,196
$11,711 $12,697
$11,716 $12,746
$12,222 $13,367
$12,156 $13,362
$13,364 $14,667
$14,763 $16,060
$16,188 $17,326
$17,451 $18,367
$18,411 $19,355
$19,256 $20,216
$19,821 $20,832
$21,632 $22,563
Average Annual Return1
----------------------
1 Year 5 Year Since inception+
------ ------ ----------------
VKAC Stock
Index Portfolio 22.48% 14.13% 16.10%
S&P 500 Index2 22.96% 15.15% 17.36%
+Portfolio is shown from first full month since inception.
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Van Kampen
American Capital (VKAC) Stock Index Portfolio and the return on the investment
both will fluctuate, and redemption proceeds may be higher or lower than an
investor's original cost.
2 The S&P 500 Index is an unmanaged index generally considered to be
representative of stock market activity. The index does not reflect any
expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
================================================================================
================================================================================
GROWTH AND INCOME PORTFOLIO For the 12-month period ended 12/31/96
MANAGED BY VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
Letter to Policyholders
- --------------------------------------------------------------------------------
Moderate economic growth, benign inflation, and favorable corporate profits
helped the stock market register another banner year in 1996. In general, it was
a year in which the stocks of larger companies performed better than the stocks
of smaller companies, which benefited this Portfolio since we invest more in
larger capitalized, blue chip companies. Playing a lead role in the Portfolio's
performance this year were technology picks, which generated about a 37% return.
As in years' past, we focused on stock selection, identifying those companies
that we believe were poised to benefit from a restructuring or repositioning. As
an example, we took a relatively large position in Lucent Technologies with the
expectation of capturing growth in the expanding telecommunications arena. We
felt the company would be able to successfully market its technologies when
unbridled from AT&T. The company's IPO opened at 28 in March and closed the year
at about 46. In the energy sector, Texaco gave the portfolio a boost by
outperforming the market and delivering an impressive yield. Texaco has become a
more focused company. They've sold all their chemical operations in the last
couple of years and have formed joint ventures for some of their refinery and
marketing operations. In addition, the company is experiencing an increase in
production of oil and gas that is in excess of the industry.
While a strong market in 1996 was not surprising, its performance exceeded our
initial expectations. Early in the year, we cautiously positioned the portfolio;
however, as the year evolved, all the fundamentals were in place for the
market's ascent. While there was some turbulence along the way, we viewed these
temporary downturns as buying opportunities. As an example, we added to our
technology holdings in August and September, which as we noted earlier,
contributed greatly to the portfolio's performance.
Looking ahead, we think the prospects for the stock market will be positive in
1997, although we would caution investors not to expect the exceptional gains
witnessed in 1995 and 1996. Fundamentally, we don't see all the pieces in place
to push the economy much higher, so we look for low to moderate growth. Our
greatest fear is inflation, which we think may notch up slightly during the
year. As long as rates remain about the same, we expect a favorable environment
for stocks in 1997.
TOP 10 LONG-TERM HOLDINGS BY MARKET VALUE
As of 12/31/96
% of Portfolio
--------------
Texaco 2.56%
AT&T 2.37
Bankamerica 1.87
Federated Department Stores 1.76
Philip Morris 1.71
Royal Dutch Petroleum 1.55
Crown Cork & Seal 1.47
SmithKline Beecham 1.44
3 Com Corp. 1.29
Canadian Pacific 1.27
JAMES A. GILLIGAN
Portfolio Manager
Van Kampen American Capital
Investment Advisory Corp.
================================================================================
================================================================================
VAN KAMPEN AMERICAN CAPITAL GROWTH AND INCOME PORTFOLIO VS. S&P 500 INDEX2
Growth Based on $10,000 invested on 6/1/92
VKAC Growth and Income Portfolio S&P 500 Index
-------------------------------- -------------
$10,000 $10,000
$9,750 $9,851
$9,962 $10,159
$10,569 $10,673
$11,226 $11,143
$11,527 $11,193
$12,143 $11,480
$12,234 $11,747
$11,746 $11,304
$11,342 $11,347
$11,858 $11,900
$11,634 $11,895
$12,498 $13,057
$13,581 $14,297
$14,862 $15,424
$15,948 $16,351
$16,737 $17,230
$17,082 $17,997
$17,466 $18,545
$18,998 $20,086
Average Annual Return1
----------------------
1 Year Since inception+
------ ----------------
VKAC Growth and
Income Portfolio 18.18% 13.50%
S&P 500 Index2 22.96% 16.44%
+Portfolio is shown from first full month since inception.
1 "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Van Kampen
American Capital (VKAC) Growth and Income Portfolio and the return on the
investment both will fluctuate, and redemption proceeds may be higher or lower
than an investor's original cost.
2 The S&P 500 Index is an unmanaged index generally considered to be
representative of stock market activity. The index does not reflect any
expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
Cova from CDA Wiesenberger HySales software. Comparison line graphs chart the
hypothetical growth of $10,000 over a given historical period of time. Although
data are gathered from reliable sources, accuracy and completeness cannot be
guaranteed.
================================================================================
================================================================================
MONEY MARKET PORTFOLIO For the 12-month period ended 12/31/96
MANAGED BY VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
Letter to Policyholders
- --------------------------------------------------------------------------------
In 1996, the year got off to a fast start as the Federal Reserve Board cut the
Federal Funds rate in January by a quarter of a point from 5.50% to 5.25%. With
little sign of inflation, it appeared evident that there would be future
interest rate adjustments to follow. However, to the disappointment of many, the
Fed would not adjust the Federal Funds Rate for the remainder of the year. The
Portfolio remained in a neutral posture for the first quarter of the year,
keeping a weighted average maturity of 50 days or shorter.
As the summer approached and the hopes of an interest-rate easing faded, wage
pressures brought back fears of increased inflation. Yields on 3-month
commercial paper peaked during the month of July. The Portfolio maintained a
very defensive structure during this period, shortening the weighted average
maturity to 25 days.
In the fall, the economic data once again pointed to a slower growth scenario,
and inflation fears subsided. We extended the Portfolio's maturity to 68 days in
late October by locking in higher yields on longer maturing securities such as
commercial paper and agency discount notes.
Year-end concerns and volatile markets caused another back-up in rates in
December. The Portfolio increased its weighting in cash in order to become more
defensive and to pick up on the seasonal jump in the overnight repo rate. For
the year, the Portfolio realized a 5.42% total return.
The strategy of the Portfolio remains to achieve competitive yield by investing
in only the highest rated and most liquid of securities.
In the future, we believe that inflation pressures will find their way back into
the market. We look for the Federal Reserve Board to increase the Fed Funds Rate
in the first half of 1997. Therefore, the Portfolio will continue to emphasize
securities with shorter maturities in anticipation of higher rates.
REID HILL
Portfolio Manager
Van Kampen American Capital
Investment Advisory Corp.
======================================
PORTFOLIO BY SECTOR
As of 12/31/96
Bankers Acceptances 7.50%
Commerical Paper 34.97%
Government/Agency 13.22%
Municipal Obligations 4.91%
Repurchase Agreements 11.11%
Variable Rate Demand
Obligations 28.29%
================================================================================
KPMG Peat Marwick LLP
REPORT OF INDEPENDENT AUDITORS'
The Board of Trustees
Cova Series Trust:
We have audited the accompanying statements of assets and liabilities of Small
Cap Stock Portfolio, Quality Bond Portfolio, Select Equity Portfolio, Large Cap
Stock Portfolio, International Equity Portfolio, Bond Debenture Portfolio, Money
Market Portfolio, Quality Income Portfolio, Stock Index Portfolio, Growth and
Income Portfolio and High Yield Portfolio, portfolios of Cova Series Trust
(formerly the Van Kampen Merritt Series Trust), including the portfolios of
investments, as of December 31, 1996 and the related statements of operations
for the year or period then ended and statements of changes in net assets for
each of the years or periods in the two-year period then ended and the financial
highlights as listed below:
o for each of the years in the seven-year period then ended and for the
period from December 11, 1989 (commencement of operations) to December 31,
1989 for Quality Income Portfolio and High Yield Portfolio,
o for each of the years in the five-year period then ended and for the period
from July 1, 1991 (commencement of operations) to December 31, 1991 for
Money Market Portfolio,
o for each of the years in the five-year period then ended and for the period
from November 1, 1991 (commencement of operations) to December 31, 1991 for
Stock Index Portfolio,
o for each of the years in the four-year period then ended and for the period
from May 1, 1992 (commencement of operations) to December 31, 1992 for
Growth and Income Portfolio, and
o for the period from May 1, 1996 (date of initial public offering) to
December 31, 1996 for Small Cap Stock Portfolio, Quality Bond Portfolio,
Select Equity Portfolio, Large Cap Stock Portfolio, International Equity
Portfolio and Bond Debenture Portfolio.
These financial statements and financial highlights are the responsibility of
the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Small
Cap Stock Portfolio, Quality Bond Portfolio, Select Equity Portfolio, Large Cap
Stock Portfolio, International Equity Portfolio, Bond Debenture Portfolio, Money
Market Portfolio, Quality Income Portfolio, Stock Index Portfolio, Growth and
Income Portfolio and High Yield Portfolio as of December 31, 1996, the results
of their operations for the year or period then ended, the changes in their net
assets for each of the years or periods in the two-year period then ended, and
the financial highlights for each of the years or periods indicated above in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
February 3, 1997
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON AND PREFERRED STOCKS - 91.3%
AEROSPACE & DEFENSE - 1.2%
Orbital Sciences Corp. * 5,600 $ 96,600
Rohr, Inc. * 3,000 67,875
Special Devices, Inc. * 300 5,325
---------------------
169,800
---------------------
AIRLINES - 0.2%
Mesa Air Group, Inc * 5,300 35,775
---------------------
AUTOMOTIVE - 3.8%
Excel Industries, Inc 8,100 134,663
Intermet Corp 16,300 262,813
Lithia Motors, Inc. Class A * 1,200 13,350
Modine Manufacturing Co 700 18,725
Simpson Industries 8,600 93,659
Wabash National Corp 1,700 31,238
---------------------
554,448
---------------------
BANKING - 6.7%
Bank North Group, Inc 1,900 78,850
Bank United Corp. * 1,100 29,494
CCB Financial Corp 600 40,950
Cole Taylor Financial Group 200 5,300
Colonial Bancgroup, Inc 3,500 140,000
Community First Bankshares 765 21,229
First Hawaiian, Inc 700 24,500
First Republic Bancorp, Inc. * 1,200 20,100
GBC Bancorp California 3,900 109,688
Irwin Financial Corp 1,400 34,650
Mark Twain Bancshares, Inc 900 43,875
National Commerce Bancorp 1,500 57,375
North Fork Bancorporation, Inc 400 14,250
Roosevelt Financial Group, Inc 8,400 176,400
Sterling Bancshares, Inc 1,800 33,863
Trans Financial, Inc 700 16,275
Trustco Bank Corp. N.Y 1,695 36,231
United Carolina Bancshares 500 19,750
Westamerica Bancorp 1,500 86,625
---------------------
989,405
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO - CONTINUED
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BEVERAGES, FOOD & TOBACCO - 4.3%
Consolidated Cigars * 800 $ 19,800
Coors (Adolph) 1,300 24,700
Dekalb Genetics Corp. Class B 8,000 408,000
Dreyers Grand Ice Cream, Inc 700 20,300
Eskimo Pie Corp 1,200 13,350
Kensey Nash Corp. * 2,900 43,500
Morningstar Group, Inc. * 1,500 29,625
Riviana Foods, Inc 1,300 22,425
Sanderson Farms, Inc 700 11,725
Savannah Foods & Industries., Inc 1,400 18,900
Swisher International Group Class A * 1,500 23,813
---------------------
636,138
---------------------
CHEMICALS - 2.3%
Bush Boake Allen, Inc. * 2,500 66,563
Calgene, Inc. * 1,700 8,606
General Chemical Group, Inc 2,800 66,150
Mycogen Corp. * 400 8,500
OM Group, Inc 500 13,500
Petrolite Corp 900 43,200
Synalloy Corp 700 11,025
Tetra Technologies, Inc. * 4,800 121,200
---------------------
338,744
---------------------
COMMERCIAL SERVICES - 2.1%
DeVry, Inc. * 5,000 117,500
Equity Corporation International * 1,400 28,000
National Processing, Inc. * 600 9,600
Pinkertons, Inc. * 1,600 40,200
Robert Half International, Inc. * 2,300 79,063
Steiner Leisure Ltd * 1,500 30,188
Whittman-Hart, Inc. * 200 5,125
---------------------
309,676
---------------------
COMMUNICATIONS - 2.8%
Advanced Fibre Communication * 100 5,569
Analogy Inc. * 700 3,150
Digital Microwave Corp. * 4,300 119,863
DSP Communications, Inc. * 400 7,725
ICG Communications, Inc. * 1,300 22,913
Leasing Solutions, Inc. * 700 18,025
Omnipoint Corp. * 1,700 32,725
Paging Network, Inc. * 6,000 91,500
Premiere Technologies, Inc. * 2,700 67,500
</TABLE>
See notes to financial statements
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMUNICATIONS - CONTINUED
Proxim, Inc. * 1,000 $ 23,125
Videoserver, Inc. * 400 16,900
Wireless One, Inc. * 300 1,988
---------------------
410,983
---------------------
COMPUTER SOFTWARE & PROCESSING - 4.4%
Adept Technology, Inc. * 4,800 35,400
American Disposal Services * 2,500 46,250
Aurum Software, Inc. * 100 2,313
Avid Technology, Inc. * 1,400 14,525
BA Merchant Services, Inc. Class A * 1,100 19,663
Citrix Systems, Inc. * 100 3,906
DST Systems, Inc. * 1,300 40,788
Edify Corp. * 2,300 36,800
Ingram Micro, Inc. * 1,000 23,000
Legato Systems, Inc. * 200 6,488
Mathsoft, Inc. * 2,700 10,125
Mentor Graphics Corp. * 1,600 15,600
Metromail Corp. * 800 14,600
Microware Systems Corp. * 700 9,975
Network General Corp. * 5,200 157,300
Oak Technology, Inc. * 4,200 47,250
Objective Systems Integrator * 1,000 23,688
Pinnacle Systems, Inc. * 1,700 17,850
S3 Incorporated * 800 13,050
Sapient Corp. * 400 16,850
Security First Network Bank * 1,000 10,250
Select Software Tools * 100 1,781
Simulation Sciences, Inc. * 800 11,900
Transaction Systems Architects, Inc. Class A * 1,000 33,250
Verity, Inc. * 100 1,538
Visigenic Software, Inc. * 1,900 28,381
---------------------
642,521
---------------------
COMPUTERS & INFORMATION - 0.6%
BBN Corp. * 2,300 51,750
Raster Graphics, Inc. * 1,700 19,338
Red Brick Systems, Inc. * 700 15,925
---------------------
87,013
---------------------
CONSUMER SERVICES - 0.1%
Education Management * 800 16,800
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ELECTRIC UTILITIES - 1.9%
Black Hills Corp 200 $ 5,625
Calpine Corp. * 700 14,000
Central Hudson Gas & Electric 4,400 138,050
Central Louisiana Electric, Inc 4,000 110,500
Saint Joseph Light & Power 1,000 15,375
---------------------
283,550
---------------------
ELECTRICAL EQUIPMENT - 2.7%
Advanced Technology Material * 6,700 115,575
American Residential Services * 400 10,850
Applied Power, Inc. Class A 4,200 166,425
Bolder Electrical Equipment * 1,000 16,438
Encore Wire Corp. * 4,100 70,725
Microchip Technology, Inc. * 200 10,175
Silicon Valley Group, Inc. * 300 6,019
---------------------
396,207
---------------------
ELECTRONICS - 2.1%
ESS Technology * 1,300 36,563
Flextronics International, Ltd * 500 14,000
Input / Output, Inc. * 1,700 31,450
Itron, Inc. * 2,400 42,600
Puma Technology, Inc. * 100 1,700
SDL, Inc. * 4,900 128,625
WH Brady Co. Class A 2,400 59,100
---------------------
314,038
---------------------
ENTERTAINMENT & LEISURE - 2.0%
Ascent Entertainment Group * 3,700 59,663
Imax Corp. * 1,800 55,800
Johnson Worldwide Associates * 3,200 42,400
SCP Pool Corp. * 1,000 20,750
WMS Industries, Inc. * 5,400 108,000
---------------------
286,613
---------------------
ENVIRONMENTAL CONTROLS - 0.9%
Dames & Moore, Inc 6,600 96,525
Sevenson Environmental Services 1,600 29,200
---------------------
125,725
---------------------
FINANCIAL SERVICES - 1.9%
Charter One Financial, Inc 800 33,600
Delta Financial Corp. * 300 5,400
First Federal Financial Corp * 1,900 41,800
Hambrecht & Quist Group * 700 15,138
IMC Mortgage Co. * 500 16,750
</TABLE>
See notes to financial statements
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL SERVICES - CONTINUED
Litchfield Financial Corp 2,030 $ 29,943
Ocwen Financial Corp. * 100 2,650
Pinnacle Financial Services 1,100 25,988
Southwest Securities Group, Inc 4,300 64,500
WFS Financial, Inc. * 2,000 39,750
---------------------
275,519
---------------------
FOREST PRODUCTS & PAPER - 0.6%
Caraustar Industries, Inc 1,700 56,525
Universal Forest Products, Inc 1,900 25,175
---------------------
81,700
---------------------
HEALTH CARE PROVIDERS - 1.6%
Affymetrix, Inc. * 700 14,131
Diagnostic Health Services, Inc. * 1,800 14,400
Kapson Senior Quarters * 1,300 10,400
Paracelsus Healthcare Corp. * 1,900 6,888
Safety First, Inc. * 7,800 79,950
Sierra Health Services, Inc. * 1,500 36,938
Sterling House Corp. * 1,900 16,625
Summit Care Corp. * 2,400 39,300
Virus Research Institute, Inc. * 1,700 9,775
---------------------
228,407
---------------------
HEAVY MACHINERY - 2.2%
Credence Systems Corp. * 1,400 28,175
Dreco Energy Services Ltd Class A * 2,000 73,500
Greenfield Industries, Inc 1,300 39,731
Idex Corp 1,700 67,788
Infocus Systems, Inc. * 1,300 27,869
Kuhlman Corp 600 11,625
Measurex Corp 2,900 69,600
---------------------
318,288
---------------------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 1.9%
Aaron Rents, Inc. Class B 1,500 17,813
Bush Industries Class A 2,600 50,050
D.R. Horton, Inc. * 13,100 142,463
Landec Corp. * 200 1,525
Micrel, Inc. * 2,200 69,575
---------------------
281,426
---------------------
HOUSEHOLD PRODUCTS - 0.6%
Libbey, Inc 3,000 83,625
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INDUSTRIAL - DIVERSIFIED - 0.7%
ABC Rail Products Corp. * 700 $ 13,913
Emergent Group, Inc. * 700 7,350
Fisher Scientific 500 23,563
Hexcel Corp. * 1,000 16,250
Shaw Group, Inc. * 600 14,025
Strategic Distribution, Inc. * 3,100 24,413
---------------------
99,514
---------------------
INSURANCE - 4.8%
Capital RE Corp 8,400 391,650
Chartwell RE Corp 1,500 40,125
MMI Companies, Inc 4,900 158,025
Renaissancere Holdings Ltd 3,900 128,700
---------------------
718,500
---------------------
LODGING - 1.1%
Candlewood Hotel Co., Inc. * 2,400 23,100
Doubletree Corp. * 800 36,000
Extended Stay America, Inc. * 4,900 98,613
---------------------
157,713
---------------------
MEDIA - BROADCASTING & PUBLISHING - 2.9%
American Pad & Paper Co. * 4,700 106,338
Banta Corp 1,300 29,738
Books-A-Million, Inc. * 2,900 19,938
Consolidated Graphics, Inc. * 2,500 140,000
Ditgital Generation Systems * 800 6,700
Heartland Wireless Communications., Inc. * 1,300 17,063
Heritage Media Corp. Class A * 2,500 28,125
K-III Communications Corp. * 2,400 25,800
Norwood Promotional Products * 1,400 25,550
SJW Corp 500 23,438
---------------------
422,690
---------------------
MEDICAL SUPPLIES - 3.5%
Aspen Technologies, Inc. * 200 16,050
Cellpro, Inc. * 3,700 46,250
Eclipse Surgical Tech, Inc. * 1,200 10,500
Heartstream, Inc. * 2,900 36,250
Keravision, Inc. * 5,900 81,125
Lifeline Systems, Inc. * 700 12,206
Mariner Health Group, Inc. * 7,200 59,850
Physio-Control International Corp. * 800 18,000
Research Medical, Inc. * 2,900 66,700
</TABLE>
See notes to financial statements
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MEDICAL SUPPLIES - CONTINUED
Sangstat Medical Corp. * 2,500 $ 66,250
Sola International * 1,300 49,400
Somatogen, Inc. * 4,400 48,400
---------------------
510,981
---------------------
MEDICAL & BIO-TECHNOLOGY - 0.7%
Arqule, Inc. * 600 9,225
Sequana Therapeutics, Inc. * 2,600 43,550
Sunrise Assisted Living, Inc. * 200 5,575
Transkaryotic Therapies, Inc. * 200 3,688
Tripos, Inc. * 3,600 42,300
---------------------
104,338
---------------------
METALS - 3.4%
Amcast Industrial Corp 1,900 47,025
Commercial Metals Co 6,400 192,800
Mueller Industries * 1,000 38,500
Oregon Steel Mills 1,800 30,150
Schnitzer Steel Inds., Inc. Class A 1,900 48,450
Steel Technologies, Inc 10,500 139,125
---------------------
496,050
---------------------
MINING - 0.3%
Smith International * 1,000 44,875
TPC Corp. * 400 3,600
---------------------
48,475
---------------------
OFFICE EQUIPMENT - 2.7%
Actel Corp. * 5,200 123,500
Acxiom Corp. * 1,100 26,400
Checkfree Corp. * 1,500 25,688
Clarify, Inc. * 100 4,769
Forte Software, Inc * 500 16,344
Gemstar International Group Ltd * 100 1,750
Inso Corp. * 800 31,800
May & Speh, Inc. * 3,000 36,750
Metatools, Inc. * 800 9,400
Nu-Kote Holding, Inc. * 900 9,225
P-Com, Inc. * 1,400 41,475
Vanstar Corp. * 1,700 41,650
Winthrop Resources Corp 800 23,000
---------------------
391,751
---------------------
OIL & GAS - 5.1%
Camco International, Inc 1,200 55,350
Devon Energy Corp 1,600 55,600
</TABLE>
See notes to financial statements
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OIL & GAS - CONTINUED
Flores & Rucks, Inc. * 1,800 $ 95,850
K N Energy 1,700 66,725
Monterey Resources, Inc. * 1,900 30,638
National-Oilwell, Inc. * 2,100 64,575
New Jersey Resources Corp 200 5,850
Newfield Exploration Co. * 2,600 67,600
Providence Energy Corp 1,900 33,250
Texas Meridian Resources Corp. * 2,800 47,950
Trico Marine Services, Inc. * 700 33,600
Ultramar Diamond Shamrock Corp 612 19,355
United Cities Gas Co 3,900 87,750
Vastar Resources, Inc 1,500 57,000
Wicor, Inc 1,000 35,875
---------------------
756,968
---------------------
PHARMACEUTICALS - 3.0%
Agouron Pharmaceuticals, Inc. * 200 13,550
Applied Analytical Industries., Inc. * 700 13,475
First Alliance Corp. * 200 6,050
Houghten Pharmaceuticals * 2,500 13,125
Hubco, Inc 3,887 95,232
Human Genome Sciences, Inc. * 2,300 93,725
Idec Pharmaceuticals Corp. * 800 19,000
Incyte Pharmaceuticals, Inc. * 1,100 56,650
Medi-Ject Corp. * 3,000 10,875
Onyx Pharmaceuticals, Inc. * 1,000 11,125
Ventana Medical Systems * 2,600 37,700
Vertex Pharmaceuticals, Inc. * 1,100 44,275
Vical, Inc. * 1,500 24,750
---------------------
439,532
---------------------
REAL ESTATE - 9.1%
Amresco, Inc. * 1,000 26,750
Arden Realty Group, Inc 1,500 41,625
Bay Apartment Communities 1,700 61,200
Brandywine Realty Trust 600 11,700
Cali Realty Corp 1,800 55,575
Capstone Capital Trust, Inc 3,700 82,788
Chelsea GCA Realty, Inc 2,200 76,175
Colonial Properties Trust 3,400 103,275
Columbus Realty Trust 3,700 84,175
Developers Divers Realty Corp 2,800 103,950
Gables Residential Trust 3,200 92,800
</TABLE>
See notes to financial statements
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REAL ESTATE - CONTINUED
Healthcare Realty Trust 2,400 $ 63,600
Highwood Properties, Inc 2,300 77,625
Liberty Property Trust 3,400 87,550
Merry Land & Investment Co 800 17,200
Oasis Residential, Inc 2,600 59,150
Patriot American Hospitality 1,800 77,625
Price REIT, Inc 1,100 42,350
Public Storage, Inc 2,400 74,400
Starwood Lodging Trust 1,500 82,688
Weeks Corp 700 23,275
---------------------
1,345,476
---------------------
RESTAURANTS - 0.7%
Landry's Seafood Restaurants * 2,200 47,025
Nimbus CD International, Inc. * 3,000 25,500
Papa John's International., Inc. * 750 25,313
PJ America, Inc. * 100 1,800
Planet Hollywood International * 100 1,975
---------------------
101,613
---------------------
RETAILERS - 2.5%
BMC West Corp. * 600 7,350
Catherines Stores Corp. * 3,800 20,900
Charming Shoppes, Inc. * 5,700 28,856
Delia's, Inc. * 100 1,969
Dominick's Supermarkets * 700 15,225
Duckwall-Alco Stores, Inc. * 600 8,475
French Fragrances, Inc. * 2,500 19,375
Garden Ridge Corp. * 6,800 58,650
Lazare Kaplan International * 1,000 17,125
Linens 'N Things, Inc. * 1,800 35,325
Loehmann's, Inc. * 1,000 23,000
One Price Clothing Stores * 2,400 6,900
Pacific Sunwear of California * 400 10,275
Party City Corp * 1,800 30,150
Penn Traffic Co. * 5,400 19,575
Stage Stores, Inc. * 1,000 18,250
Urban Outfitters, Inc. * 3,500 45,500
---------------------
366,900
---------------------
TEXTILES, CLOTHING & FABRICS - 0.7%
Ashworth Inc. * 1,500 8,484
Collins & Aikman Corp. * 7,300 45,625
Wolverine World Wide 950 27,550
Worldtex, Inc. * 1,800 15,975
---------------------
97,634
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION - 2.0%
Allied Holdings, Inc. * 500 $ 3,875
American Freightways Corp. * 4,500 50,063
Caliber Systems, Inc 1,000 19,250
Genesee & Wyoming Inc., Class A * 1,700 59,075
Rollins Truck Leasing Corp 6,900 87,113
USA Truck, Inc. * 1,000 8,000
Werner Enterprises, Inc 2,800 50,750
Willis Lease Finance Corp. * 900 11,419
---------------------
289,545
---------------------
WATER COMPANIES - 1.2%
Aquarion Co 500 13,938
Culligan Water Technologies * 1,400 56,700
E-Town Corp 1,800 56,925
Southern California Water Co 1,900 41,325
---------------------
168,888
---------------------
Total Common and Preferred Stocks (Cost $12,884,617) 13,382,969
---------------------
TOTAL INVESTMENTS - 91.3%
(Cost $12,884,617) 13,382,969
Other Assets and Liabilities (net) - 8.7% 1,267,710
---------------------
TOTAL NET ASSETS - 100.0% $ 14,650,679
=====================
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security as this stock did not declare
or pay dividends in the 12 month period.
See notes to financial statements
COVA SERIES TRUST
QUALITY BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PAR SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DOMESTIC BONDS AND DEBT SECURITIES - 95.1%
ASSET BACKED SECURITIES - 17.8%
$150,000 Caterpillar Financial Asset Trust 6.300% 05/25/02 $ 150,237
100,000 Chase Manhattan Credit Card Master Trust 7.040% 02/15/04 102,621
100,000 First Omni Bank Credit Card Master Trust 6.650% 09/15/03 101,155
200,000 Nationsbank Auto Owner Trust 6.125% 07/15/99 201,204
175,000 Premier Auto Trust 6.150% 03/06/00 175,378
100,000 Sears Credit Account Master Trust 6.500% 10/15/03 101,012
100,000 World Omni Auto Lease Sec. Trust 6.300% 06/25/02 100,715
100,000 World Omni Auto Lease Sec. Trust 5.950% 11/15/02 100,346
---------------------
1,032,668
---------------------
CORPORATE BONDS - 11.4%
100,000 ABN Amro Bank NV (Chicago) 7.550% 06/28/06 103,588
60,000 Banc One Corp 7.625% 10/15/26 60,549
100,000 Columbia Gas System 7.620% 11/28/25 97,552
100,000 Midland Bank PLC 7.625% 06/15/06 103,456
60,000 Nationsbank Corp 7.250% 10/15/25 57,900
100,000 NGC Corporation 7.625% 10/15/26 102,187
40,000 Tele-Communications, Inc 7.875% 02/15/26 34,689
100,000 Trans Financial Bank N.A 6.320% 10/17/97 99,890
---------------------
659,811
---------------------
MEDIUM TERM SECURITIES - 9.5%
200,000 Ford Motor Credit 7.470% 07/29/99 205,350
200,000 General Motors Acceptance Corp 6.700% 06/24/99 201,991
150,000 Nationsbank Corp 5.750% 01/25/01 145,749
---------------------
553,090
---------------------
MORTGAGED BACK SECURITIES - 29.3%
86,223 Federal Home Loan Mortgage Corp 8.500% 08/01/26 89,429
131,074 Federal National Mortgage Association 9.000% 05/01/25 138,283
73,668 Federal National Mortgage Association 7.500% 09/01/25 73,737
199,453 Federal National Mortgage Association 6.500% 02/01/26 190,540
149,972 Federal National Mortgage Association 6.000% 02/01/26 139,427
226,856 Federal National Mortgage Association 7.000% 07/01/26 222,248
100,000 Government National Mortgage Assn 9.000% 01/01/16 107,250
201,999 Government National Mortgage Assn 7.500% 09/15/25 203,524
236,782 Government National Mortgage Assn 7.500% 03/15/26 237,223
200,526 Government National Mortgage Assn 7.000% 04/15/26 196,453
98,559 Government National Mortgage Assn 8.000% 08/15/26 100,653
---------------------
1,698,767
---------------------
COLLATERALIZED MORTGAGE OBLIGATIONS - 5.1%
150,000 Federal Home Loan Mortgage Corp 1694 PQ (PAC) 6.500% 09/15/23(a) 146,063
150,000 Federal National Mortgage Association 1993-78 G (PAC) 6.500% 11/25/07(a) 147,617
---------------------
293,680
---------------------
U.S. TREASURY SECURITIES - 22.0%
75,000 U.S. Treasury Note 6.250% 05/31/00 75,352
80,000 U.S. Treasury Note 6.250% 04/30/01 80,200
100,000 U.S. Treasury Note 6.625% 06/30/01 101,625
100,000 U.S. Treasury Note 6.625% 07/31/01 101,625
160,000 U.S. Treasury Note 5.875% 02/15/04 155,850
345,000 U.S. Treasury Note 7.500% 02/15/05 369,150
150,000 U.S. Treasury Note 6.500% 05/15/05 151,125
110,000 U.S. Treasury Note 6.875% 05/15/06 113,438
130,000 U.S. Treasury Note 6.750% 08/15/26 130,934
---------------------
1,279,299
---------------------
Total Domestic Bonds and Debt Securities (Cost $5,462,532) 5,517,315
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
QUALITY BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PAR SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOREIGN BONDS AND DEBT SECURITIES - 2.9%
CANADA - 2.1%
$100,000 Hydro - Quebec (U.S.$) 9.500% 11/15/30 $ 123,232
ITALY - 0.8%
50,000 Italy Global Bond (U.S.$) 6.875% 09/27/23 47,735
---------------------
Total Foreign Bonds and Debt Securities (Cost $162,013) 170,967
---------------------
TOTAL INVESTMENTS - 98.0%
(Cost $5,624,545) 5,688,282
Other Assets and Liabilities (net) - 2.0% 113,766
---------------------
TOTAL NET ASSETS - 100.0% $ 5,802,048
=====================
Portfolio Footnotes:
(a) The estimated maturity of a collateralized mortgage
obligation ("CMO") is based on current and projected
prepayment rates. Change in interest rates can cause
the estimated maturity to differ from the listed date.
</TABLE>
See notes to financial statements
COVA SERIES TRUST
SELECT EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON AND PREFERRED STOCKS - 98.8%
AEROSPACE & DEFENSE - 6.9%
AlliedSignal, Inc 5,000 $ 335,166
Boeing Co 1,600 170,200
Coltec Industries * 6,800 128,331
General Motors Corp. Class H (Hughes Electronics) 8,300 467,131
Rohr, Inc. * 24,400 551,993
---------------------
1,652,821
---------------------
AUTOMOTIVE - 2.4%
General Motors Corp 10,400 579,831
---------------------
BANKING - 5.1%
Banc One Corp 100 4,300
Boatmens Bancshares, Inc 3,800 244,919
Corestates Financial Corp 3,555 184,469
Crestar Financial Corp 1,100 81,813
First Chicago NBD Corp 4,200 225,791
Firstar Corp 2,100 110,250
Great Western Financial 12,400 359,759
---------------------
1,211,301
---------------------
BEVERAGES, FOOD & TOBACCO - 6.8%
CPC International, Inc 1,500 116,250
Kellogg Co 2,900 190,453
Pepsico, Inc 6,800 199,005
Philip Morris Companies, Inc 4,700 529,616
Unilever 3,300 578,391
---------------------
1,613,715
---------------------
BUILDING MATERIALS - 1.0%
Owens Corning 5,840 248,933
---------------------
CHEMICALS - 4.6%
Albemarle Corp 16,300 295,277
Crompton & Knowles Corp 6,200 119,353
Du Pont (E.I.) De Nemours 5,700 537,891
Union Carbide Corp 3,400 138,975
---------------------
1,091,496
---------------------
COMMUNICATIONS - 6.1%
Lucent Technologies 100 4,625
MCI Communications Corp 12,400 405,494
SBC Communications, Inc 2,000 103,500
Tele-Communications, Inc. Series A * 50,300 657,250
Worldcom, Inc. * 10,900 284,044
---------------------
1,454,913
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
SELECT EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMPUTER SOFTWARE & PROCESSING - 2.3%
Cisco Systems, Inc. * 6,700 $ 426,488
Learning Co., Inc. * 7,800 111,681
---------------------
538,169
---------------------
COMPUTERS & INFORMATION - 5.1%
Compaq Computer * 2,400 178,278
Intel Corp 2,400 314,456
International Business Machines Corp 2,100 317,100
Read-Rite Corp. * 8,400 212,000
Sun Microsystems, Inc. * 7,440 191,128
---------------------
1,212,962
---------------------
ELECTRIC UTILITIES - 2.8%
Consolidated Edison of N.Y 7,500 219,431
Dominion Resources, Inc 5,000 192,503
New England Electric System 3,600 125,566
Pacific Gas & Electric 6,700 140,731
---------------------
678,231
---------------------
ELECTRONICS - 1.6%
Anixter International, Inc. * 12,300 198,338
Perkin-Elmer Corp 3,100 182,541
---------------------
380,879
---------------------
ENTERTAINMENT & LEISURE - 1.8%
International Game Technology 7,500 136,831
Time Warner, Inc 8,100 303,781
---------------------
440,612
---------------------
ENVIRONMENTAL CONTROLS - 2.6%
Wheelabrator Technologies, Inc 17,100 277,687
WMX Technologies, Inc 10,200 333,031
---------------------
610,718
---------------------
FINANCIAL SERVICES - 6.2%
Advanta Corporation 4,000 163,513
A.G. Edwards, Inc 4,720 158,776
Bear Stearns Companies, Inc 16,200 451,737
Dean Witter Discover & Co 6,080 402,978
Salomon, Inc 6,500 306,378
---------------------
1,483,382
---------------------
HEALTH CARE PROVIDERS - 3.1%
Columbia / HCA Healthcare Corp 11,650 474,859
United Healthcare Corp 6,100 274,517
---------------------
749,376
---------------------
HEAVY MACHINERY - 3.2%
Cooper Industries, Inc 18,200 766,487
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
SELECT EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOUSEHOLD PRODUCTS - 2.5%
Procter & Gamble Co 5,500 $ 591,416
---------------------
INDUSTRIAL - DIVERSIFIED - 1.0%
Temple Inland, Inc 4,400 238,141
---------------------
INSURANCE - 3.9%
Capital RE Corp 6,700 312,319
Providian Corp 11,800 606,369
---------------------
918,688
---------------------
MEDIA - BROADCASTING & PUBLISHING - 1.1%
General Instrument Corp. * 9,500 205,469
TCI Satellite Entertainment Inc., Class A * 4,990 49,619
---------------------
255,088
---------------------
MEDICAL SUPPLIES - 0.6%
Forest Laboratories, Inc. * 4,320 141,480
---------------------
METALS - 0.6%
Allegheny Teledyne, Inc 6,373 146,595
---------------------
OFFICE EQUIPMENT - 2.5%
EMC Corp. * 10,450 346,237
Xerox Corp 4,800 252,641
---------------------
598,878
---------------------
OIL & GAS - 9.7%
Anadarko Petroleum Corp 3,100 200,541
Ashland, Inc 4,800 210,616
British Petroleum Co. PLC 3,311 468,133
Chevron Corp 1,800 117,000
Exxon Corp 8,000 784,331
Transcanada Pipeline Ltd 5,500 96,266
Ultramar Diamond Shamrock Corp 9,343 295,472
Union Pacific Resources Group 4,010 117,283
---------------------
2,289,642
---------------------
PHARMACEUTICALS - 4.8%
Bristol-Myers Squibb Co 3,600 391,703
Schering-Plough Corp 1,600 103,600
Warner Lambert Co 8,800 660,381
---------------------
1,155,684
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
SELECT EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAILERS - 4.1%
General Nutrition Co., Inc. * 14,500 $ 246,500
Toys "R" Us, Inc. Holding Co. * 6,700 201,081
Wal-Mart Stores, Inc 22,900 523,978
---------------------
971,559
---------------------
TELEPHONE SYSTEMS - 2.5%
NYNEX Corp 7,900 380,444
Sprint Corp 100 3,988
U.S. West, Inc 6,900 222,581
---------------------
607,013
---------------------
TEXTILES, CLOTHING & FABRICS - 1.4%
Collins & Aikman Corp. * 53,030 331,324
---------------------
TRANSPORTATION - 2.5%
Consolidated Freightways Corp. * 5,300 47,063
Consolidated Freightways, Inc 10,800 240,281
Union Pacific Corp 5,200 312,766
---------------------
600,110
---------------------
Total Common and Preferred Stocks (Cost $22,504,869) 23,559,444
---------------------
TOTAL INVESTMENTS - 98.8%
(Cost $22,504,869) 23,559,444
Other Assets and Liabilities (net) - 1.2% 274,475
---------------------
TOTAL NET ASSETS - 100.0% $ 23,833,919
=====================
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security as this stock did not declare
or pay dividends in the 12 month period.
See notes to financial statements
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON AND PREFERRED STOCKS - 102.3%
AEROSPACE & DEFENSE - 5.1%
AlliedSignal, Inc 2,800 $ 187,600
Boeing Co 2,800 297,850
Coltec Industries * 300 5,663
Cummins Engine Co., Inc 300 13,800
General Dynamics 300 21,150
General Motors Corp. Class H (Hughes Electric) 3,300 185,625
Lockheed Martin Corp 700 64,050
McDonnell Douglas Corp 700 44,800
Newport News Shipbuilding, Inc. * 340 5,100
Raytheon Co 600 28,875
---------------------
854,513
---------------------
AIRLINES - 0.4%
AMR Corp. * 400 35,250
Comair Holdings, Inc 200 4,838
Delta Air Lines, Inc 100 7,088
Southwest Airlines, Inc 700 15,488
---------------------
62,664
---------------------
AUTOMOTIVE - 2.8%
AutoZone, Inc. * 900 24,750
Cooper Tire & Rubber Co 400 7,900
Eaton Corp 600 41,850
Ford Motor Co 5,200 165,750
General Motors Corp 3,200 178,400
Goodyear Tire & Rubber Co 400 20,550
Lear Corp. * 300 10,238
Paccar, Inc 200 13,600
---------------------
463,038
---------------------
BANKING - 8.4%
Banc One Corp 2,200 94,600
Bancorp Hawaii, Inc 200 8,400
Bankamerica Corp 2,000 199,500
Beneficial Corp 300 19,013
Boatmens Bancshares, Inc 1,000 64,438
Central Fidelity Banks, Inc 300 7,725
Citicorp 2,200 226,600
Corestates Financial Corp 1,200 62,250
Crestar Financial Corp 200 14,875
Deposit Guaranty Corp 200 6,200
Dime Bancorp, Inc. * 600 8,850
First Chicago NBD Corp 1,700 91,375
</TABLE>
See notes to financial statements
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BANKING - CONTINUED
First Tennessee National Corp 400 $ 15,000
First Union Corp. New England 1,500 111,000
First Virginia Banks, Inc 200 9,575
Firstar Corp 400 21,000
Fleet Financial Group, Inc 1,400 69,825
Golden West Financial Corp 300 18,938
Great Western Financial 700 20,300
Greenpoint Financial Corp 300 14,175
H. F. Ahmanson & Co 600 19,500
Mark Twain Bancshares, Inc 300 14,625
Nationsbank Corp 1,600 156,400
PNC Bank Corp 1,600 60,200
Republic New York Corp 300 24,488
Signet Banking Corp 300 9,225
Standard Federal Bancorp 200 11,375
TCF Financial Corp 200 8,700
Washington Federal, Inc 200 5,250
Washington Mutual, Inc 400 17,325
---------------------
1,410,727
---------------------
BEVERAGES, FOOD & TOBACCO - 8.7%
Anheuser Busch 2,000 80,000
Coca-Cola Co 4,100 215,763
CPC International, Inc 800 62,000
General Mills Co 300 19,013
Kellogg Co 1,200 78,750
Nabisco Holdings Corp. Class A 300 11,663
Pepsico, Inc 8,700 254,475
Philip Morris Companies, Inc 4,200 473,025
Pioneer Hi-Bred International 200 14,000
Ralston Purina Group 600 44,025
Sara Lee Corp 1,200 44,700
Unilever 900 157,725
---------------------
1,455,139
---------------------
BUILDING MATERIALS - 0.2%
Owens Corning 600 25,575
USG Corp. * 300 10,163
---------------------
35,738
---------------------
CHEMICALS - 3.1%
Albemarle Corp 300 5,438
Crompton & Knowles Corp 400 7,700
Cytec Industries, Inc. * 300 12,188
</TABLE>
See notes to financial statements
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CHEMICALS - CONTINUED
Dow Chemical Co 1,300 $ 101,888
Du Pont (E.I.) De Nemours 2,900 273,688
Georgia Gulf Corp 200 5,375
IMC Global, Inc 500 19,563
International Flavors & Fragrances 600 27,000
Lyondell Petro Chemical 400 8,800
Morton International, Inc 200 8,150
Rohm & Haas Co 300 24,488
Union Carbide Corp 700 28,613
---------------------
522,891
---------------------
COMMERCIAL SERVICES - 0.2%
Service Corp. International 1,400 39,200
---------------------
COMMUNICATIONS - 2.4%
360 Communications Co.* 400 9,250
Airtouch Communications, Inc. * 3,100 78,275
Cox Communications Class A * 300 6,938
Lucent Technologies 1,400 64,750
MCI Communications Corp 2,800 91,525
Paging Network, Inc. * 500 7,625
SBC Communications, Inc 200 10,350
Tele-Communications, Inc. Series A * 3,700 48,331
Worldcom, Inc. * 3,570 93,043
---------------------
410,087
---------------------
COMPUTER SOFTWARE & PROCESSING - 3.2%
Autodesk, Inc 200 5,600
Cisco Systems, Inc. * 3,300 209,963
First Data Corp 2,400 87,600
Intuit, Inc. * 100 3,175
Learning Co., Inc. * 200 2,863
Microsoft Corp. * 1,200 99,150
Oracle Corp. * 3,100 129,425
---------------------
537,776
---------------------
COMPUTERS & INFORMATION - 6.3%
Compaq Computer * 1,300 96,525
Gateway 2000, Inc. * 400 21,425
Intel Corporation 3,800 497,522
International Business Machines Corp 2,400 362,400
Read-Rite Corp. * 200 5,050
Silicon Graphics * 800 20,400
Sun Microsystems, Inc. * 2,000 51,375
---------------------
1,054,697
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COSMETICS & PERSONAL CARE - 0.2%
Avon Products, Inc 300 $ 17,138
Ecolab, Inc 300 11,288
---------------------
28,426
---------------------
ELECTRIC UTILITIES - 2.8%
Allegheny Power System, Inc 500 15,188
Baltimore Gas and Electric 600 16,050
Central & South West Corp 600 15,375
Cinergy Corp 600 20,025
Consolidated Edison of N.Y 1,000 29,250
Dominion Resources, Inc 700 26,950
Edison International 1,800 35,775
Entergy Corp 500 13,875
GPU, Inc 400 13,450
Houston Industries, Inc 200 4,525
Illinova Corp 300 8,250
New England Electric System 300 10,463
Northeast Utilities 500 6,625
Northern States Power Co 600 27,525
P P & L Resources, Inc 700 16,100
Pacific Gas & Electric 1,700 35,700
Pinnacle West Capital Corp 400 12,700
Portland General Electric 700 29,400
Potomac Electric Power 1,000 25,750
Southern Co 2,800 63,350
Teco Energy 100 2,413
Unicom Corp 900 24,413
Union Electric Co 100 3,850
Western Resources, Inc 300 9,263
---------------------
466,265
---------------------
ELECTRICAL EQUIPMENT - 2.6%
Applied Materials, Inc. * 1,000 35,938
Emerson Electric 100 9,675
General Electric Co 3,200 316,400
Grainger W.W., Inc 400 32,100
Raychem Corp 300 24,038
Scientific Atlanta, Inc 400 6,000
Symbol Technologies, Inc. * 200 8,850
---------------------
433,001
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ELECTRONICS - 1.0%
Altera Corp. * 200 $ 14,538
Anixter International, Inc. * 300 4,838
Input / Output, Inc. * 200 3,700
Johnson Controls 500 41,438
National Semiconductor Corp. * 700 17,063
Perkin-Elmer Corp 600 35,325
Sensormatic Electronics Corp 400 6,700
Texas Instruments 700 44,625
Xilinx, Inc. * 300 11,044
---------------------
179,271
---------------------
ENTERTAINMENT & LEISURE - 3.0%
Carnival Corp 1,200 39,600
Circus Circus Enterprises, Inc. * 600 20,625
Grand Casinos, Inc. * 200 2,700
Harrah's Entertainment, Inc. * 500 9,938
Mattel 1,100 30,525
MGM Grand, Inc. * 300 10,463
Mirage Resorts, Inc. * 1,000 21,625
Time Warner, Inc 3,100 116,250
Viacom Inc. Class B * 2,000 69,750
Walt Disney Co 2,500 174,063
---------------------
495,539
---------------------
ENVIRONMENTAL CONTROLS - 0.9%
WMX Technologies, Inc 4,700 153,338
---------------------
FINANCIAL SERVICES - 2.8%
Advanta Corp 100 4,088
American General Corp 1,900 77,663
A.G. Edwards, Inc 300 10,088
Bear Stearns Companies,Inc 600 16,725
Charter One Financial, Inc 200 8,400
Contifinancial Corp. * 200 7,225
Dean Witter Discover & Co 900 59,625
Federal National Mortgage Association 4,000 149,000
First USA, Inc 600 20,775
Lehman Brothers Holding, Inc 500 15,688
Mercury Financial Co 1,000 12,250
Merrill Lynch & Co., Inc 200 16,300
Morgan Stanley Group, Inc 100 5,713
Paine Webber, Inc 500 14,063
</TABLE>
See notes to financial statements
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL SERVICES - CONTINUED
Regions Financial Corp 300 $ 15,506
Salomon, Inc 600 28,275
The Money Store, Inc 300 8,325
Wilmington Trust Corp 200 7,900
---------------------
477,609
---------------------
FOREST PRODUCTS & PAPER - 0.9%
Boise Cascade Corp 400 12,700
Bowater, Inc 400 15,050
Champion International 900 38,925
Louisiana Pacific Corp 1,100 23,238
Mead Corp 500 29,063
Weyerhauser Co 500 23,688
---------------------
142,664
---------------------
HEALTH CARE PROVIDERS - 2.9%
Apria Healthcare Group * 700 13,125
Columbia / HCA Healthcare Corp 6,500 264,875
Health Management Associates * 1,300 29,250
Tenet Healthcare Corp. * 2,700 59,063
United Healthcare Corp 2,300 103,500
Vivra, Inc. * 500 13,813
---------------------
483,626
---------------------
HEAVY CONSTRUCTION - 0.0%
Foster Wheeler Corp 200 7,425
---------------------
HEAVY MACHINERY - 1.1%
Caterpiller Tractor, Inc 1,400 105,350
Cooper Industries, Inc 800 33,700
Ingersoll Rand Co 500 22,250
Parker-Hannifin Corp 500 19,375
---------------------
180,675
---------------------
HOUSEHOLD PRODUCTS - 3.5%
Black & Decker Corp 900 27,113
Colgate-Palmolive Co 800 73,800
Procter & Gamble Co 3,800 408,500
Rubbermaid, Inc 1,600 36,400
Whirlpool Corp 800 37,300
---------------------
583,113
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INDUSTRIAL - DIVERSIFIED - 1.9%
Baker Hughes, Inc 500 $ 17,250
ITT Corp. * 600 26,025
ITT Hartford Group, Inc 1,100 74,250
ITT Industries, Inc 700 17,150
Temple Inland, Inc 500 27,063
Tenneco, Inc. * 1,700 76,713
Trinova Corp 200 7,275
Tyco Lab 1,500 79,313
---------------------
325,039
---------------------
INSURANCE - 3.3%
Chubb Corp 1,600 86,000
Cigna Corp 700 95,638
Lincoln National Corp 1,000 52,500
MBIA, Inc 400 40,500
Mercury General Corp 300 15,806
Ohio Casualty Corp 300 10,725
Providian Corp 900 46,238
Safeco Corp 1,200 47,325
St. Paul Cos 800 46,900
The PMI Group, Inc 300 16,613
Torchmark Corp 600 30,300
Transamerica Corp 600 47,400
US Life Corp 300 9,975
---------------------
545,920
---------------------
LODGING - 0.5%
Choice Hotels * 700 12,338
Extended Stay America, Inc. * 300 6,038
Hilton Hotels 2,200 57,475
---------------------
75,851
---------------------
MEDIA - BROADCASTING & PUBLISHING - 0.9%
Comcast Corp 2,000 35,625
General Instrument Corp. * 700 15,138
R.R. Donnelley & Sons 900 28,238
TCI Satellite Entertainment Inc. Class A * 370 3,677
U.S. West Media Group * 3,700 68,450
---------------------
151,128
---------------------
MEDICAL SUPPLIES - 0.7%
Bard C.R 700 19,600
Bausch & Lomb, Inc 700 24,500
Forest Laboratories, Inc. * 400 13,100
</TABLE>
See notes to financial statements
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MEDICAL SUPPLIES - CONTINUED
Humana, Inc. * 2,200 $ 42,075
Manor Care, Inc 800 21,600
---------------------
120,875
---------------------
METALS - 1.5%
Allegheny Teledyne, Inc 1,300 29,900
Aluminum Company of America 1,400 89,250
Bethlehem Steel Corp. * 900 8,100
Freeport-McMoran 500 14,938
Inland Steel Industries, Inc 400 8,000
Nucor Corp 600 30,600
Phelps Dodge Corp 400 27,000
Reynolds Metals Co 500 28,188
USX-U.S. Steel Group, Inc 500 15,688
Worthington Industries, Inc 200 3,764
---------------------
255,428
---------------------
MINING - 0.1%
Inco Ltd 100 3,188
Smith International * 200 8,975
---------------------
12,163
---------------------
OFFICE EQUIPMENT - 2.5%
Bay Networks * 800 16,700
EMC Corp. * 1,300 43,063
Harris Corp., Inc 200 13,725
Hewlett-Packard Co 4,800 241,200
Ryder System 400 11,250
Xerox Corp 1,700 89,463
---------------------
415,401
---------------------
OIL & GAS - 10.4%
Anadarko Petroleum Corp 300 19,425
Ashland, Inc 300 13,163
Chevron Corp 600 39,000
Columbia Gas System 400 25,450
El Paso Natural Gas Co 158 7,979
Enron Corp 1,800 77,625
Exxon Corp 5,300 519,400
Global Marine, Inc. * 800 16,500
Mobil Corp 1,800 220,050
Panenergy Corp 1,600 72,000
Pogo Producing Co 200 9,450
Royal Dutch Petroleum Co 2,400 409,800
</TABLE>
See notes to financial statements
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS- CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OIL & GAS - CONTINUED
Schlumberger Ltd 1,100 $ 109,863
Texaco, Inc 1,200 117,750
Tosco Corp 200 15,825
Ultramar Diamond Shamrock Corp 302 9,551
Union Pacific Resources Group 800 23,400
Unocal Corp 800 32,500
---------------------
1,738,731
---------------------
PHARMACEUTICALS - 6.9%
Alza Corp. * 800 20,700
American Home Products Corp 3,200 187,600
Bristol-Myers Squibb Co 2,100 228,375
Johnson & Johnson 700 34,825
Merck & Co., Inc 1,500 118,875
Pfizer, Inc 3,500 290,063
Schering-Plough Corp 1,100 71,225
Southtrust Corp 500 17,438
Warner Lambert Co 2,500 187,500
Watson Pharmaceutical, Inc. * 200 8,988
---------------------
1,165,589
---------------------
RETAILERS - 4.2%
Albertson's, Inc 400 14,250
Circuit City Stores, Inc 600 18,075
Dayton-Hudson Corp 1,000 39,250
Federated Department Stores * 1,200 40,950
General Nutrition Co., Inc. * 500 8,500
Jones Apparel Group, Inc. * 400 14,950
J.C. Penney Co., Inc 1,300 63,375
Nine West Group, Inc. * 200 9,275
Nordstrom, Inc 500 17,719
Sears Roebuck 2,300 106,088
The Limited, Inc 1,300 23,888
Toys "R" Us, Inc., Holding Co. * 1,600 48,000
Wal-Mart Stores, Inc 13,100 299,663
---------------------
703,983
---------------------
TELEPHONE SYSTEMS - 5.4%
Ameritech Corp 2,100 127,313
AT & T Corp 6,500 282,750
Bell Atlantic Corp 1,700 110,075
GTE Corp 3,800 172,900
</TABLE>
See notes to financial statements
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS- CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TELEPHONE SYSTEMS - CONTINUED
NYNEX Corp 1,800 $ 86,625
Sprint Corp 1,800 71,775
U.S. West, Inc 1,900 61,275
---------------------
912,713
---------------------
TEXTILES, CLOTHING & FABRICS - 0.4%
Fruit of the Loom, Inc. * 800 30,300
VF Corp 500 33,750
---------------------
64,050
---------------------
TRANSPORTATION - 1.1%
Burlington Northern Santa Fe 700 60,463
Caliber Systems, Inc 200 3,850
Consolidated Freightways Corp. * 100 888
Consolidated Freightways, Inc 200 4,450
CSX Corp 900 38,025
Federal Express Corp. * 200 8,900
Union Pacific Corp 1,100 66,138
---------------------
182,714
---------------------
WATER COMPANIES - 0.0%
American Water Works Co 300 6,188
---------------------
TOTAL Common and Preferred Stocks (Cost $15,570,806) 17,153,195
---------------------
TOTAL INVESTMENTS - 102.3%
(Cost $15,570,806) 17,153,195
Other Assets and Liabilities (net) - (2.3%) (381,600)
---------------------
TOTAL NET ASSETS - 100.0% $ 16,771,595
=====================
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security as this stock did not declare
or pay dividends in the 12 month period.
See notes to financial statements
COVA SERIES TRUST
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON AND PREFERRED STOCKS - 95.3%
AUSTRALIA - 4.0%
Broken Hill Proprietary Co. Ltd 12,700 $ 181,111
National Australia Bank Ltd 16,000 188,445
News Corporation Ltd 29,800 132,803
Western Mining Corp. Holding Ltd 20,600 130,000
---------------------
632,359
---------------------
BELGIUM - 2.1%
Delhaize Le PS 279 16,456
Electrabel 458 107,625
Fortis AG 240 38,224
Kredietbank NPV 220 71,592
Petrofina SA NPV 125 39,504
Solvay Et Cie 'A' NPV 100 60,781
---------------------
334,182
---------------------
FINLAND - 1.2%
Kemira Oy-Sponsored ADR * 800 19,947
Metra Oy "B" Shares 300 16,582
Nokia AB Class A 1,600 92,238
Outokumpo OY 1,000 16,949
Rautaruukki OY 1,500 13,732
UPM-Kymmeme * 1,700 35,420
---------------------
194,868
---------------------
FRANCE - 11.5%
Air Liquide French 352 54,449
Alcatel Alsthom 500 39,798
AXA Co 652 41,089
Bouygues 400 41,096
Carrefour Supermarche 100 64,471
Castorama Dubois Investissem 242 41,269
Christian Dior SA 575 91,908
Cie Generale Des Eaux 728 89,393
Compagnie Bancaire 300 35,176
Compagnie De Saint Goban 244 34,201
Credit Commercial De France 730 33,457
Credit Local De France 600 51,790
Elf Sanofi 516 50,846
Eridania Beghin Say 200 31,892
Essilor International 135 40,604
Groupe Danone 356 49,153
GTM Entrepose SA 840 38,499
Lafarge Coppee French 600 35,669
</TABLE>
See notes to financial statements
COVA SERIES TRUST
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS-CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FRANCE - CONTINUED
Lagardere Groupe 1,900 $ 51,668
Montupet 200 19,097
Pathe SA * 220 52,516
Peugeot SA 375 41,822
Printemps, AU 80 31,441
Promodes 270 75,537
Rhone Polenc 2,300 77,699
Schneider SA 575 26,342
SGS-Thomson Microelectronics * 637 44,644
Sidel 360 24,543
Societe Generale French 720 77,135
Societe National Elf-Aquitaine 1,450 130,781
Sommer-Allibert 1,350 39,960
Synthelabo 410 43,924
Thomson CSF 1,280 41,139
Total Cie Francaise Petroles 952 76,720
Union Assurancesfederale SA 410 50,110
Usinor Sacilor 1,530 22,060
---------------------
1,791,898
---------------------
GERMANY - 13.9%
Allianz AG Holdings Ger Reg 63 113,755
Ava Allg Handels Der Verbrau * 260 73,773
BASF AG 6,590 251,922
Bayer Hypoth-Und Wechsel Bank 3,600 107,951
Bilfinger and Berger Bau AG 1,300 47,366
Daimler Benz * 650 44,432
Deutsche Pfandbrief & Hypobk 1,900 85,118
Deutsche Telekom AG 8,100 169,501
Dresdner Bank 2,590 76,997
GEA Preferred Shares 180 56,239
Henkel KGAA * 1,710 85,241
Krupp Fried AG Hoesch 559 89,760
Muenchener Rueckversicherungs 70 173,567
M.A.N. AG DM50 100 24,054
M.A.N 274 54,599
Sap AG Vorzug 350 48,526
Siemens AG 2,960 138,389
Thyssen AG DM50 150 26,359
Veba AG 4,580 262,862
Volkswagen AG 600 247,630
---------------------
2,178,041
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS-CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GREAT BRITAIN - 19.5%
Abbey National 6,800 $ 88,538
Allied Colloids Group Plc 12,600 25,841
Allied Domecq Plc 6,050 47,058
Amersham International Plc 2,300 45,409
Bass Plc 2,900 40,523
Boc Group 900 13,403
Britannic Assurance Plc 5,250 64,336
British Aerospace Plc 1,400 30,500
British Airways 6,000 61,987
British Petroleum Co. Plc 17,081 203,648
British Telecommunications Plc 13,700 92,104
BTR Limited 8,000 38,669
B.A.T. Industries 7,600 62,736
Cadbury Schweppes Plc 6,400 53,647
Compass Group Plc 3,500 36,933
Dalgety 7,000 43,248
General Cable Plc * 3,100 10,289
General Electric Plc 4,900 31,941
Glaxo Wellcome Plc 10,700 172,644
Glynwed International Plc 7,900 45,178
Guardian Royal Exchange 15,600 74,211
Guinness Plc 5,650 44,139
Hillsdown Holdings Plc 12,200 41,529
HSBC Holdings Plc 5,250 116,787
Htder Plc Ord 2,000 25,309
Kingfisher Plc 5,500 59,349
Ladbroke Group 14,700 57,795
Lloyds Tsb Group Plc 15,100 110,639
Lucas Variety 11,200 42,414
MEPC 7,000 51,707
National Grid Holdings 10,700 35,603
National Power Plc 6,650 55,346
Pilkington Plc 11,600 31,194
Racal Electronics 10,100 44,265
Rank Group 8,350 62,247
Reuters Holdings Plc 3,200 40,930
RMC Group Plc 1,950 33,106
Rolls Royce Plc 13,000 56,974
Royal Bank of Scotland 7,900 75,767
RTZ Corp 2,100 33,526
Sainsbury (J) Plc 12,140 80,170
</TABLE>
See notes to financial statements
COVA SERIES TRUST
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS-CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GREAT BRITAIN - CONTINUED
Scottish Power Plc 10,400 $ 62,484
Sears Plc 49,500 80,879
SmithKline Beecham Plc 5,051 69,591
Standard Chartered Plc 4,190 51,417
Tarmac Plc 19,100 31,858
Tesco Plc 7,200 43,503
Thorn EMI Plc 1,300 30,645
Tomkins Plc 10,800 49,630
United News & Media Plc 3,000 35,589
Vodafone Group Plc 14,000 58,855
Wessex Water Plc 8,800 55,717
Zeneca Group Plc 2,950 82,719
---------------------
3,034,526
---------------------
HONG KONG - 4.7%
Bank of East Asia Hong Kong 6,400 28,466
Cheung Kong 20,000 177,782
Henderson Land Development 8,000 80,681
Hong Kong Electric 15,000 49,844
Hong Kong Telecom 13,600 21,892
HSBC Holdings Plc 4,000 85,594
Hutchison Whampoa 10,000 78,547
Sun Hung Kai Properties Ltd 6,000 73,505
Swire Pacific Ltd, Class A 7,500 71,517
Television Broadcasts Ltd 17,000 67,919
---------------------
735,747
---------------------
IRELAND - 1.4%
Bank of Ireland 6,900 62,532
CRH Plc 2,575 26,546
Greencore Plc 5,000 32,006
Irish Life Plc 8,600 40,273
Smurfit (Jefferson) Group 19,000 57,450
---------------------
218,807
---------------------
ITALY - 3.5%
Arnoldo Mondadori Editore SPA 4,500 36,680
Assicurazione Generali 4,400 81,866
ENI SPA 21,600 110,358
Fiat SPA 16,300 48,785
Istituto Mobiliare Italiano 6,300 53,378
Montedison SPA * 57,600 39,148
Parmalat Finanziaria SPA 24,100 36,609
</TABLE>
See notes to financial statements
COVA SERIES TRUST
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS-CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ITALY - CONTINUED
Stet D Risp Non CV 14,100 $ 47,287
Telicom Italia SPA 34,000 87,713
---------------------
541,824
---------------------
JAPAN - 13.9%
Asahi Bank Ltd 5,000 44,347
Asatsu Inc 1,000 31,689
Central Glass Co. Ltd * 5,000 14,122
Cosmo Oil Company Ltd 4,000 19,185
Daiwa Bank 6,000 31,258
East Japan Railway Co 5 22,432
Ebaba Corp 4,000 52,011
Familymart 700 27,908
Fujitsu Ltd 4,000 37,200
Heiwa Real Estate 4,000 23,112
Hitachi Ltd 8,000 74,399
Hokkaido Takushoku Bank 5,000 9,687
Hokuriku Bank 10,000 48,911
Izumi 2,000 27,900
Japan Tobacco, Inc 9 60,837
Kyodo Printing Co 4,000 32,033
Matsushita Electric Industry 2,000 32,550
Mitsubishi Electric 10,000 59,416
Mitsubishi Heavy 6,000 47,533
Mitsui Mining & Smelting 17,000 57,823
Mitsui Toatsu Chemical 20,000 60,794
Mitsui Trust & Banking 3,000 23,379
Nagase & Co 4,000 33,101
Nippon Express Co., Ltd 2,000 13,674
Nippon Steel Corp 24,000 70,679
Nippon Telegraph and Telephone Corp 4 30,242
Nishimatsu Construction Co 6,000 52,183
Nissan Motors 10,000 57,866
Nomura Securities Co. Ltd 5,000 74,916
NSK Ltd 3,000 18,135
Oji Paper Co. Ltd 4,500 28,404
Omron Corp 2,000 37,027
Ono Pharmaceutical 1,500 43,916
Promise Co. Ltd 300 14,725
Ricoh Corp Ltd 4,000 45,811
</TABLE>
See notes to financial statements
COVA SERIES TRUST
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS-CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
JAPAN - CONTINUED
Ryoyo Electro Corp 1,000 $ 18,083
Sakura Bank Ltd 8,000 57,040
Sanden 3,000 23,973
Sanwa Bank 2,000 27,211
Sekisui Chemical 6,000 60,449
Sony Corp 500 32,679
Sumitomo Forestry 3,000 35,650
Takashimaya Co 2,000 23,939
The Bank of Tokyo Mitsubishi 5,000 92,569
Tokai Bank 2,000 20,839
Tokio Marine & Fire Insurance 4,000 37,544
Tokyo Electric Power Co., Inc 3,600 78,739
Toyo Trust & Banking 5,000 40,257
Toyota Motor Co 4,000 114,699
West Japan Railway Co 12 38,750
Yamaha Motor Co. Ltd 1,000 8,955
Yamanouchi Pharmaceutical 2,000 40,989
Yamato Transport Co. Ltd 2,000 20,666
Yokohyama Rubber Co. Ltd 7,000 32,489
---------------------
2,164,725
---------------------
LUXEMBOURG - 0.3%
Arbed 375 40,482
---------------------
MALAYSIA - 2.3%
Commerce Asset Holdings Convertible Preferred 1.75 45,000 60,806
IJM Corp. Berhad Class A 5,000 11,779
New Straits Times Press Berhad 8,000 46,245
Petronas Dagangan Berhad 36,000 92,648
Sime Darby Berhad 17,000 66,972
Tenaga Nasional Berhad 16,000 76,652
---------------------
355,102
---------------------
NETHERLANDS - 5.2%
ABN Amro Holdings 350 22,603
Aegon NV 1,377 87,106
DSM NV 440 43,077
ING Groep N.V 1,295 46,279
Koninklijke Hoogovens 600 24,820
Philips Electronics NV 1,200 48,262
Polygram 410 20,730
Royal Dutch Petroleum Co 1,615 281,054
</TABLE>
See notes to financial statements
COVA SERIES TRUST
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS-CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NETHERLANDS - CONTINUED
Royal PTT Nederland NV 1,400 $ 53,008
Unilever NV 720 126,419
Wolters Kluwer N.V 420 55,381
---------------------
808,739
---------------------
NEW ZEALAND - 1.4%
Fletcher Challenge Paper 37,200 76,513
Lion Nathan 28,200 67,569
Telecom New Zealand 15,400 78,588
---------------------
222,670
---------------------
NORWAY - 1.4%
Kvaerner B Free 1,000 42,950
Norsk Hydro 1,600 85,839
Nycomed ASA Class B * 1,500 22,793
Orkla A/S-B-Aksjer 500 31,321
Uni-Storebrand AS Class A * 6,000 34,422
---------------------
217,325
---------------------
SINGAPORE - 1.2%
Development Bank Of Singapore 4,000 54,050
Keppel Corp. Ltd 4,000 31,172
Singapore Airlines Ltd-Foreign 4,500 40,859
Singapore Press Holdings Ltd 2,000 39,465
Singapore Telecom Ltd 100 11,000 25,953
---------------------
191,499
---------------------
SPAIN - 4.1%
Asturiana De Zinc * 1,700 16,707
Autopistas Concesionaria 2,000 27,380
Banco Bilbao Vizcaya 840 45,036
Banco Popular Espanola 350 68,260
Bankinter - Banco Interc ESP 350 53,885
Cortefiel Sa 900 26,845
Cubiertas 100 7,648
Empresa Nac De Electricidad 950 67,136
Fuerzas Electricas Cataluna 1,412 13,823
Hidroelectrica Del Cantabrico 1,000 37,897
Iberdrola I.S.A 7,700 108,359
Repsol S.A 3,000 114,264
Telefonica De Espana 2,600 59,954
---------------------
647,194
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS-CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SWITZERLAND - 3.7%
Alusuis-Lonza Hldg 36 $ 28,525
BIL GT AG - Part Schein 60 30,566
Cie Financ Richemont 10 13,961
Fischer 25 25,806
Holderbank Finan Glaris Class B 45 31,947
Nestle 30 32,014
Novartis AG-Reg * 172 195,426
Roche Holding AG 8 61,874
Schw Rueckversicherungs 50 53,060
Schweizerischer Bankverein 427 80,701
SGS Soc. Gen. Surveillance Class B 9 21,989
---------------------
575,869
---------------------
Total Common and Preferred Stocks (Cost $14,023,644) 14,885,857
---------------------
TOTAL INVESTMENTS - 95.3%
(Cost $14,023,644) 14,885,857
Other Assets and Liabilities (net) - 4.7% 733,398
---------------------
TOTAL NET ASSETS - 100.0% $ 15,619,255
=====================
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security as this stock did not declare
or pay dividends in the 12 month period.
See notes to financial statements
COVA SERIES TRUST
BOND DEBENTURE PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON AND PREFERRED STOCKS - 10.1%
CONTAINERS & PACKAGING - 1.7%
2,500 Crown Cork & Seal, Inc. Convertible Preferred $ 130,000
---------------------
ELECTRIC UTILITIES - 0.8%
1,000 Cal Energy Capital Trust Convertible Preferred (144A)*^ 62,359
---------------------
ELECTRONICS - 0.0%
20 Exide Electronics Group Warrants 103
---------------------
FINANCIAL SERVICES - 4.9%
1,000 American Bankers Insurance Preferred 59,688
2,500 Frontier Fin. Convertible Preferred (144A)^ 129,430
70 Fuji International Finance Trust (144A)*^ 184,464
---------------------
373,582
---------------------
INDUSTRIAL - DIVERSIFIED - 1.2%
1,500 Corning Delaware Convertible Preferred 95,438
---------------------
RESTAURANTS - 1.5%
2,200 Wendy's Financing Convertible Preferred 114,400
---------------------
Total Common and Preferred Stocks (Cost $721,430) 775,882
---------------------
DOMESTIC BONDS AND DEBT SECURITIES - 73.9%
ADVERTISING - 3.4%
$100,000 Lamar Advertising 9.625% 12/01/06 103,250
150,000 Omnicom Group, Inc. (144A)^ 4.250% 01/03/07 155,550
---------------------
258,800
---------------------
AEROSPACE & DEFENSE - 1.8%
70,000 BE Aerospace 9.875% 02/01/06 73,850
60,000 UNC, Inc 11.000% 06/01/06 64,500
---------------------
138,350
---------------------
AUTOMOTIVE - 1.4%
100,000 Blue Bird Body Co. (144A)^ 10.750% 11/15/06 104,750
---------------------
BEVERAGES, FOOD & TOBACCO - 2.7%
100,000 Delta Beverage (144A)^ 9.750% 12/15/03 103,000
100,000 Doane Products Co 10.625% 03/01/06 106,000
---------------------
209,000
---------------------
CHEMICALS - 3.5%
50,000 Acetex Corp 9.750% 10/01/03 49,625
100,000 Agricultural Mining & Chemical 10.750% 09/30/03 110,000
100,000 Texas Petrochem 11.125% 07/01/06 108,250
---------------------
267,875
---------------------
COMMERCIAL SERVICES - 2.8%
100,000 Iron Mountain 10.125% 10/01/06 106,500
100,000 Outsourcing Solutions (144A)^ 11.000% 11/01/06 105,000
---------------------
211,500
---------------------
COMMUNICATIONS - 3.7%
20,000 Cablevision Systems, Corp 9.250% 11/01/05 19,900
100,000 Comcast Cellular + 03/05/00 72,500
50,000 General Instrument Convertible Preferred 5.000% 06/15/00 53,500
75,000 Gray Communications Systems, Inc 10.625% 10/01/06 79,688
75,000 MFS Communications Corp 0%, 8.875%++ 01/15/06 55,594
---------------------
281,182
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
BOND DEBENTURE PORTFOLIO
PORTFOLIO OF INVESTMENTS- CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMPUTER SOFTWARE & PROCESSING - 0.7%
$100,000 Automatic Data Processing, Inc + 02/20/12 $ 56,750
---------------------
CONSUMER SERVICES - 1.3%
100,000 Rose Hills (144A)^ 9.500% 11/15/04 102,500
---------------------
CONTAINERS & PACKAGING - 4.3%
75,000 Four M Corp 12.000% 06/01/06 78,750
40,000 Owens-Illinois, Inc 10.000% 08/01/02 42,000
50,000 Printpack, Inc. (144A)^ 9.875% 08/15/04 52,188
150,000 U.S. Can Corp (144A)^ 10.125% 10/01/06 157,875
---------------------
330,813
---------------------
ELECTRIC UTILITIES - 1.7%
125,000 Cal Energy (144A)^ 9.500% 09/15/06 129,063
---------------------
ELECTRICAL EQUIPMENT - 1.5%
50,000 Broadband Technology (144A)^ 5.000% 05/15/01 37,891
75,000 Thermo Instrument 4.500% 10/15/03 78,059
---------------------
115,950
---------------------
ELECTRONICS - 0.3%
20,000 Exide Electronics Group 11.500% 03/15/06 21,300
---------------------
ENTERTAINMENT & LEISURE - 6.0%
20,000 Aztar Corp 11.000% 10/01/02 19,400
75,000 E & S Holdings Corp (144A)^ 10.375% 10/01/06 78,844
50,000 Majestic Star (144A)^ 12.750% 05/15/03 54,000
150,000 Rayovac Corp (144A)^ 10.250% 11/01/06 154,500
50,000 Showboat Marina Casino 13.500% 03/15/03 55,250
50,000 Trump Atlantic City 11.250% 05/01/06 49,750
50,000 Viacom International 8.000% 07/07/06 48,313
---------------------
460,057
---------------------
ENVIRONMENTAL CONTROLS - 1.2%
100,000 WMX Technologies, Inc 2.000% 01/24/05 94,000
---------------------
FINANCIAL SERVICES - 2.1%
150,000 Ocwen Financial Corp 11.875% 10/01/03 164,250
---------------------
FOREST PRODUCTS & PAPER - 3.3%
100,000 Pacific Lumber Co 10.500% 03/01/03 102,000
20,000 Repap Wisconsin 9.875% 05/01/06 20,250
100,000 SD Warren Co 12.000% 12/15/04 108,500
20,000 Sweetheart Cup 10.500% 09/01/03 21,100
---------------------
251,850
---------------------
HEALTH CARE PROVIDERS - 2.0%
50,000 Integrated Health Services Convertible Preferred 6.000% 01/01/03 47,582
100,000 Integrated Health Services (144A)^ 10.250% 04/30/06 104,750
---------------------
152,332
---------------------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 1.0%
75,000 Interface, Inc 9.500% 11/15/05 76,688
---------------------
HOUSEHOLD PRODUCTS - 0.7%
50,000 Shop Vac Corp (144A)^ 10.625% 09/01/03 52,875
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
BOND DEBENTURE PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDUSTRIAL - DIVERSIFIED - 7.0%
$100,000 Baker Hughes, Inc + 05/05/08 $ 73,125
20,000 Essex Group 10.000% 05/01/03 20,850
100,000 Euramax International PLC (144A)^ 11.250% 10/01/06 104,000
100,000 J. Ray McDermott 9.375% 07/15/06 104,500
75,000 Mettler Toledo 9.750% 10/01/06 79,125
50,000 Safelite Glass (144A)^ 9.875% 12/15/06 51,625
100,000 Tokheim Corp (144A)^ 11.500% 08/01/06 106,750
---------------------
539,975
---------------------
MEDIA - BROADCASTING & PUBLISHING - 3.4%
25,000 Grupo Televisa (144A)^ 11.875% 05/15/06 27,781
100,000 Heritage Media Corp 8.750% 02/15/06 96,500
100,000 NWCG Holding Corp + 06/15/99 83,750
50,000 Scholastic Corp 5.000% 08/15/05 52,917
---------------------
260,948
---------------------
OIL & GAS - 9.1%
100,000 Amerigas Partners (144A)^ 10.125% 04/15/07 103,750
125,000 Flores & Rucks, Inc 9.750% 10/01/06 132,813
100,000 HS Resources 9.250% 11/15/06 103,250
70,000 Mesa Operating Co 10.625% 07/01/06 76,300
50,000 Nuevo Energy Co 9.500% 04/15/06 53,250
50,000 Pennzoil Co. Convertible Preferred 4.750% 10/01/03 58,000
50,000 Pogo Producing Co. Convertible Preferred (144A)^ 5.500% 06/15/06 62,923
100,000 Swift Energy Co 6.250% 11/15/06 108,875
---------------------
699,161
---------------------
PHARMACEUTICALS - 2.5%
100,000 Alza Corp 5.000% 05/01/06 97,198
200,000 Roche Holdings, Inc. (144A)^ + 04/20/10 91,500
---------------------
188,698
---------------------
RESTAURANTS - 1.4%
100,000 Ameriking, Inc. (144A)^ 10.750% 12/01/06 104,000
---------------------
RETAILERS - 1.3%
100,000 Pep Boys 4.000% 09/01/99 100,250
---------------------
TEXTILES, CLOTHING & FABRICS - 2.1%
100,000 Prime Succession Acquisition Co. (144A)^ 10.750% 08/15/04 108,750
50,000 William Carter (144A)^ 10.375% 12/01/06 52,625
---------------------
161,375
---------------------
TRANSPORTATION - 1.7%
125,000 Ryder TRS, Inc (144A)^ 10.000% 12/01/06 130,313
---------------------
Total Domestic Bonds and Debt Securities (Cost $5,437,529) 5,664,605
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
BOND DEBENTURE PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS - 15.4%
$400,000 Federal National Mortgage Association 8.500% 02/01/05 $ 420,788
500,000 U.S. Treasury Bond 6.500% 08/15/05 503,587
250,000 U.S. Treasury Note 8.500% 07/15/97 253,672
----------------
Total U.S. Government and Agency Obligations (Cost $1,176,514) 1,178,047
----------------
TOTAL INVESTMENTS - 99.4%
(Cost $7,335,473) 7,618,534
Other Assets and Liabilities (net) - 0.6% 44,728
---------------------
TOTAL NET ASSETS - 100.0% $ 7,663,262
=====================
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security as this stock did not
declare or pay dividends in the 12 month period.
^ Securities that may be resold to "qualified institutional
buyers" under Rule 144A or securities offered pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
These securities have been determined to be liquid under
guidelines established by the Board of Trustees.
+ Zero coupon bond
++ Security is a "step-up" bond where the coupon increases
or steps up at a predetermined date.
See notes to financial statements
COVA SERIES TRUST
BOND DEBENTURE PORTFOLIO
PORTFOLIO COMPOSITION BY CREDIT QUALITY (UNAUDITED)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
The following table summarizes the portfolio composition at December
31, 1996, based upon quality ratings issued by Standard & Poor's.
For securities not rated by Standard & Poor's, the Moody rating is
used.
PORTFOLIO COMPOSITION BY CREDIT QUALITY
--------------------------------------------------------------------
RATINGS % OF PORTFOLIO
U.S. Gov't and Agency Obligations 15.5%
AAA 1.2
AA 0.7
A 6.5
BBB 10.4
BB 8.9
B 54.4
NR 2.4
---------
100.0%
---------
Note: NR = Not Rated
See notes to financial statements
COVA SERIES TRUST
MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Par Security Value
Amount Description Rate Maturity (Note 1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS - 89.5%
BANKERS ACCEPTANCE - 7.6%
$1,000,000 Nationsbank South 5.390% 01/06/97 $ 999,251
1,350,000 Union Bank 5.300% 02/21/97 1,339,864
----------------------
2,339,115
COMMERCIAL PAPER - 35.2%
1,500,000 American General Finance 5.300% 01/13/97 1,497,350
1,000,000 Associate Corp 5.700% 01/14/97 997,942
1,500,000 Ford Motor Credit Corp 5.330% 04/14/97 1,477,125
1,500,000 General Electric Capital Corp 5.350% 04/02/97 1,479,715
1,000,000 Heller Financial 5.380% 01/21/97 997,011
1,500,000 Household Finance Co 5.320% 01/27/97 1,494,236
1,500,000 IBM Credit Corp 5.320% 01/06/97 1,498,892
1,500,000 Merrill Lynch & Co., Inc 5.380% 06/16/97 1,462,789
----------------------
10,905,060
----------------------
MUNICIPAL BONDS - 4.9%
530,000 Chicago Ill. Pub. Bldg. Com. Spl. Oblig 5.820% 07/01/97 530,000
1,000,000 Ohio S/T Taxable Dev. Assistance 5.640% 04/01/97 1,000,000
----------------------
1,530,000
----------------------
U.S. GOVERNMENT AGENCIES - 8.7%
1,220,000 Federal Home Loan Mortgage Corp 5.380% 02/27/97 1,209,608
1,500,000 Federal National Mortgage Association 5.370% 03/31/97 1,480,086
----------------------
2,689,694
----------------------
U.S. TREASURY SECURITIES - 4.6%
1,500,000 U.S. Treasury Bill 5.190% 11/13/97 1,431,665
----------------------
VARIABLE RATE DEMAND OBLIGATIONS - 28.5%
1,200,000 Baptist Health System of South Florida 5.900%# 05/15/25 1,200,000
1,000,000 Dade County Florida Expressway Authority 5.900%# 07/01/19 1,000,000
1,000,000 Health Insurance Plan Gr New York 5.800%# 07/01/20 1,000,000
1,500,000 Mississippi Business Financial Corp 5.700%# 02/01/19 1,500,000
1,000,000 New York, New York (Municipal) Taxable 5.600%# 02/11/97 1,000,000
220,000 Student Loan Marketing Assn. Floater 5.570%# 11/20/97 219,419
1,500,000 Student Loan Marketing Assn. Floater 5.370%# 05/08/97 1,500,000
1,400,000 Virginia State Housing Development Authority 5.800%# 03/01/02 1,400,000
----------------------
8,819,419
----------------------
Total Short-Term Investments (Cost $27,714,953) 27,714,953
----------------------
REPURCHASE AGREEMENT - 11.20%
J.P Morgan U.S. Gov't Repurchase Agreement at 6.25% due 1/2/97,
collaterized by U.S. Treasury Bond, $3,487,000 par, 5.50% coupon,
due 09/30/97, dated 09/30/92, repurchase proceeds
3,465,000 of $3,466,203. (Cost $3,465,000) 01/02/97 3,465,000
----------------------
TOTAL INVESTMENTS - 100.7%
(Cost $31,179,953) 31,179,953
Other Assets and Liabilities (net) - ( 0.7%) (225,065)
----------------------
TOTAL NET ASSETS - 100.0% $ 30,954,888
======================
</TABLE>
PORTFOLIO FOOTNOTES:
# Variable rate security. Interest rates reset either daily or
weekly. The rate shown represents the rate in effect at
December 31, 1996.
See notes to financial statements
COVA SERIES TRUST
QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PAR SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
DOMESTIC BONDS AND DEBT SECURITIES - 83.3%
ASSET BACKED SECURITIES - 2.9%
$1,000,000 American Express Master Trust 5.375% 07/15/01 $ 968,410
500,000 Signet Credit Card Master Trust 1994-4 A 6.800% 12/15/00 504,525
----------------------
1,472,935
----------------------
CORPORATE BONDS - 49.2%
1,000,000 Advanta Bank Corp 6.520% 04/30/98 1,001,920
1,000,000 Aramark Services 8.150% 05/01/05 1,037,551
1,000,000 Bank Hawaii Capital 8.250% 12/15/26 1,009,810
2,000,000 Coastal Corp 7.750% 10/15/35 2,004,540
1,000,000 Columbia / HCA Healthcare Corp 7.690% 06/15/25 1,029,255
2,000,000 F-Global Fund (Ford Motor Credit) 7.000% 09/25/01 2,031,410
1,000,000 General Electric Capital Corp 5.800% 04/01/08 1,081,490
1,500,000 Johnson & Johnson 8.250% 11/09/04 1,647,300
2,000,000 Lehman Brothers, Inc 6.840% 10/07/99 2,011,472
2,000,000 Medpartners, Inc 7.375% 10/01/06 2,008,660
2,000,000 National Bank of Hungary 8.800% 10/01/02 2,163,410
1,000,000 New England Education Loan Marketing Corp 6.125% 07/17/98 998,494
1,000,000 Norwest Corp 6.550% 12/01/06 974,400
2,000,000 Panenergy Corp 7.000% 10/15/06 1,999,700
2,000,000 Union Pacific Resources Group 7.000% 10/15/06 2,009,824
2,200,000 Yale University 7.375% 04/15/26 2,249,944
----------------------
25,259,180
----------------------
MEDIUM TERM SECURITIES - 3.6%
1,000,000 Advanta Corp 7.000% 05/01/01 1,000,600
900,000 Ford Motor Credit Corp 5.730% 01/13/05 836,099
----------------------
1,836,699
----------------------
MORTGAGED BACK SECURITIES - 2.1%
654,862 Citicorp Mortgage Securities 6.250% 08/25/24 653,631
59,137 Federal Home Loan Mortgage Corp 8.000% 09/01/08 60,338
63,699 Federal National Mortgage Association 8.000% 09/01/03 65,610
60,785 Federal National Mortgage Association 8.500% 07/01/19 63,008
100,000 Federal National Mortgage Association 7.500% 12/25/19 101,156
134,496 Government National Mortgage Assn 9.000% 01/15/20 141,893
----------------------
1,085,636
----------------------
U.S. TREASURY SECURITIES AND AGENCIES - 25.5%
171,797 Federal Home Loan Bank 4.140% 06/04/98 168,163
4,000,000 U.S. Treasury Note 5.625% 11/30/98 3,980,000
5,000,000 U.S. Treasury Note (a) 6.375% 09/30/01 5,029,686
2,000,000 U.S. Treasury Note 5.750% 08/15/03 1,940,624
2,000,000 U.S. Treasury Note 6.500% 10/15/06 2,011,874
----------------------
13,130,347
----------------------
Total Domestic Bonds and Debt Securities (Cost $42,313,732) 42,784,797
----------------------
FOREIGN BONDS AND DEBT SECURITIES - 15.9%
COLUMBIA - 2.0%
1,000,000 Financiera Energy (U.S.$) 9.375% 06/15/06 1,058,590
----------------------
FRANCE - 4.1%
2,000,000 Credit Foncier De France (U.S.$) 8.000% 01/14/02 2,108,760
----------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PAR SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
GREAT BRITAIN - 5.8%
$2,000,000 BOC Group PLC (U.S.$) 5.875% 01/29/01 $ 1,949,840
1,000,000 SmithKline Beecham Cap (U.S.$) 6.750% 10/30/01 1,011,875
----------------------
2,961,715
----------------------
MALAYSIA - 4.0%
2,000,000 Petroliam Nasional Berhd (U.S.$) (144A) ^ 7.625% 10/15/26 2,029,262
----------------------
Total Foreign Bonds and Debt Securities (Cost $7,955,730) 8,158,327
----------------------
REPURCHASE AGREEMENT - 4.8%
J.P Morgan Repurchase Agreement at 6.25% due 1/2/97,
collaterized by U.S. Treasury Bond, $2,281,000 par, 7.50%
coupon, due 11/15/16, dated 11/15/86, repurchase proceeds
2,440,000 of $2,440,847. (Cost $2,440,000) 01/02/97 2,440,000
----------------------
TOTAL INVESTMENTS - 104.0%
(Cost $52,709,462) 53,383,124
Other Assets and Liabilities (net) - (4.0%) (2,058,976)
----------------------
TOTAL NET ASSETS - 100.0% $ 51,324,148
======================
</TABLE>
PORTFOLIO FOOTNOTES:
^ Securities that may be resold to "qualified
institutional buyers" under Rule 144A or securities
offered pursuant to Section 4(2) of the Securities Act
of 1933, as amended. These securities have been
determined to be liquid under guidelines established
by the Board of Trustees.
(a) Assets segregated for open futures
See notes to financial statements
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON AND PREFERRED STOCKS - 101.7%
AEROSPACE & DEFENSE - 3.0%
AlliedSignal, Inc 4,800 $ 321,600
Boeing Co 5,968 634,846
General Dynamics 1,400 98,700
Lockheed Martin Corp 2,625 240,188
McDonnell Douglas Corp 3,800 243,200
Newport News Shipbuilding, Inc. * 680 10,200
Northrop Grumman Corp 1,100 91,025
Raytheon Co 4,400 211,750
Rockwell International Corp.* 4,000 243,500
Textron, Inc 1,700 160,225
United Technologies 4,600 303,600
---------------------
2,558,834
---------------------
AIRLINES - 0.3%
AMR Corp. - Del * 1,600 141,000
Delta Air Lines, Inc 1,100 77,963
Southwest Airlines, Inc 2,900 64,163
---------------------
283,126
---------------------
AUTOMOTIVE - 2.7%
Chrysler Corp 12,000 396,000
Dana Corp 2,000 65,250
Eaton Corp 1,500 104,625
Ford Motor Co 17,800 567,375
General Motors Corp 12,700 708,025
Genuine Parts 3,300 146,850
Goodyear Tire & Rubber Co 3,200 164,400
TRW Inc 3,000 148,500
---------------------
2,301,025
---------------------
BANKING - 7.6%
Banc One Corp 7,310 314,330
Bank of Boston Corp 1,800 115,650
Bank of New York 7,000 236,250
Bankamerica Corp 6,400 638,400
Bankers Trust New York Corp 1,300 112,125
Barnett Banks, Inc 4,000 164,500
Beneficial Corp 1,000 63,375
Boatmens Bancshares, Inc 2,400 154,800
Chase Manhattan Corp 7,532 672,231
Citicorp 6,400 659,200
Corestates Financial Corp 2,600 134,875
First Chicago NBD Corp 5,253 282,349
</TABLE>
See notes to financial statements
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BANKING - CONTINUED
First Union Corp. New England 4,925 $ 364,450
Fleet Financial Group, Inc 4,862 242,492
Golden West Financial Corp 1,100 69,438
Great Western Financial 2,000 58,000
H. F. Ahmanson & Co 1,500 48,750
KeyCorp 4,300 217,150
MBNA Corp 3,750 155,625
Mellon Bank Corp 2,300 163,300
National City Corp 3,000 134,625
Nationsbank Corp 3,900 381,225
Norwest Corp 5,600 243,600
PNC Bank Corp 4,000 150,500
Suntrust Banks, Inc 4,600 226,550
Wachovia Corp 3,000 169,500
Wells Fargo & Co 1,600 431,600
---------------------
6,604,890
---------------------
BEVERAGES, FOOD & TOBACCO - 8.9%
American Brands, Inc 3,000 148,875
Anheuser Busch 7,800 312,000
Archer Daniels Midland 9,555 210,210
Campbell Soup Co 4,500 361,125
Coca-Cola Co 41,600 2,189,200
Conagra, Inc 4,300 213,925
CPC International, Inc 2,400 186,000
General Mills Co 2,700 171,113
Heinz ( H.J.) Co 5,450 194,838
Hershey Foods Corp 3,400 148,750
Kellogg Co 3,000 196,875
Pepsico, Inc 26,000 760,500
Philip Morris Companies, Inc 13,200 1,486,650
Pioneer Hi-Bred International 1,300 91,000
Quaker Oats Co 2,600 99,125
Ralston Purina Group 1,800 132,075
Sara Lee Corp 6,600 245,850
Seagrams Co. Ltd 5,900 228,625
Sysco Corp 3,300 107,663
UST, Inc 3,500 113,313
Wrigley William Jr. Co 2,000 112,500
---------------------
7,710,212
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BUILDING MATERIALS - 0.3%
Martin Marietta Materials 2,714 $ 63,101
Masco Corp 2,900 104,400
Sherwin Williams Co 1,700 95,200
---------------------
262,701
---------------------
CHEMICALS - 3.3%
Air Products & Chemicals 2,000 138,250
Dow Chemical Co 4,500 352,688
Du Pont (E.I.) De Nemours 9,000 849,375
Eastman Chemical Co 1,700 93,925
FMC Corp. * 1,100 77,138
Great Lakes Chemical Corp 1,400 65,450
Hercules, Inc 2,000 86,500
International Flavors & Fragrances 2,000 90,000
Monsanto Co 10,500 408,188
Morton International, Inc 2,700 110,025
Nalco Chemical 1,500 54,188
PPG Industries 3,500 196,438
Praxair, Inc 2,800 129,150
Rohm & Haas Co 1,200 97,950
Union Carbide Corp 2,400 98,100
---------------------
2,847,365
---------------------
COMMERCIAL SERVICES - 0.4%
ACNielson Corp. * 1,133 17,137
CUC International, Inc. * 4,950 117,563
Interpublic Group, Inc 1,400 66,500
Service Corp. International 4,000 112,000
---------------------
313,200
---------------------
COMMUNICATIONS - 2.1%
Airtouch Communications, Inc. * 8,800 222,200
Alltel Corp 3,700 116,088
DSC Communications * 2,300 41,113
Loral Space & Communications * 3,200 58,800
Lucent Technologies 8,361 386,696
MCI Communications Corp 11,500 375,906
SBC Communications, Inc 9,600 496,800
Tele-Communications, Inc. Series A * 6,000 78,375
---------------------
1,775,978
---------------------
COMPUTER SOFTWARE & PROCESSING - 4.4%
Automatic Data Processing, Inc 5,700 244,388
Cisco Systems, Inc. * 9,700 617,163
Cognizant Corp 3,400 112,200
</TABLE>
See notes to financial statements
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMPUTER SOFTWARE & PROCESSING - CONTINUED
Computer Associates International, Inc 6,150 $ 305,963
Computer Sciences Corp. * 1,200 98,550
First Data Corp 8,000 292,000
Microsoft Corp. * 19,600 1,619,450
Novell, Inc. * 6,500 61,547
Oracle Corp. * 11,700 488,475
---------------------
3,839,736
---------------------
COMPUTERS & INFORMATION - 4.6%
Apple Computer, Inc. * 2,200 45,925
Compaq Computer * 4,500 334,125
Digital Equipment Corp. * 2,600 94,575
Intel Corp 14,100 1,846,219
International Business Machines Corp 8,900 1,343,900
Silicon Graphics * 2,900 73,950
Sun Microsystems, Inc. * 6,600 169,538
---------------------
3,908,232
---------------------
CONTAINERS & PACKAGING - 0.2%
Avery-Dennison Corp 2,600 91,975
Crown Cork & Seal, Inc 1,800 97,875
---------------------
189,850
---------------------
COSMETICS & PERSONAL CARE - 0.8%
Avon Products, Inc 2,600 148,525
Gillette Co 7,100 552,025
---------------------
700,550
---------------------
ELECTRIC UTILITIES - 3.0%
Allegheny Power System, Inc 3,200 131,600
Baltimore Gas and Electric 3,100 82,925
Carolina Power & Light Co 2,500 91,250
Central & South West Corp 3,600 92,250
Cinergy Corp 1,900 63,413
Consolidated Edison of N.Y 3,900 114,075
Dominion Resources, Inc 3,100 119,350
DTE Energy Co 1,900 61,513
Duke Power Co 3,500 161,875
Edison International 6,900 137,138
Entergy Corp 3,100 86,025
FPL Group,Inc 3,600 165,600
GPU, Inc 2,300 77,338
Houston Industries, Inc 5,000 113,125
Northern States Power Co 800 36,700
Ohio Edison Co 3,400 77,350
Pacific Gas & Electric 6,400 134,400
</TABLE>
See notes to financial statements
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ELECTRIC UTILITIES - CONTINUED
Pacificorp 4,000 $ 82,000
Peco Energy Co 3,800 95,950
Public Service Enterprise Group, Inc 4,400 119,900
Southern Company 10,900 246,613
Texas Utilities Co 3,100 126,325
Unicom Corp 2,700 73,238
Union Electric Co 1,900 73,150
---------------------
2,563,103
---------------------
ELECTRICAL EQUIPMENT - 4.5%
AMP Inc 4,400 168,850
Applied Materials, Inc. * 3,400 122,188
Emerson Electric 4,400 425,700
General Electric Co 27,300 2,699,288
Grainger (W.W.), Inc 1,000 80,250
Northern Telecom Ltd 4,400 272,250
Westinghouse Electric 7,200 143,100
---------------------
3,911,626
---------------------
ELECTRONICS - 1.5%
Advanced Micro Devices * 1,900 48,925
Honeywell, Inc 2,600 170,950
Johnson Controls 1,100 91,163
Micron Technology, Inc 3,800 110,675
Motorola, Inc 10,000 613,750
National Semiconductor Corp. * 2,500 60,938
Texas Instruments 3,700 235,875
---------------------
1,332,276
---------------------
ENTERTAINMENT & LEISURE - 1.4%
Brunswick Corp., Inc 1,900 45,600
Harrah's Entertainment, Inc. * 1,900 37,763
Hasbro, Inc 1,900 73,863
Mattel 5,750 159,563
Viacom Inc. Class B * 4,600 160,425
Walt Disney Co 11,043 768,869
---------------------
1,246,083
---------------------
ENVIRONMENTAL CONTROLS - 0.4%
Browning-Ferris Industries, Inc 4,200 110,250
WMX Technologies, Inc 8,400 274,050
---------------------
384,300
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL SERVICES - 3.2%
American Express Co 8,300 $ 468,950
American General Corp 3,800 155,325
H.& R. Block, Inc 2,100 60,900
Dean Witter Discover & Co 3,100 205,375
Federal Home Loan Mortgage Corp 3,100 341,388
Federal National Mortgage Association 18,500 689,125
Household International, Inc 1,900 175,275
J. P. Morgan & Co., Inc 3,000 292,875
Merrill Lynch & Co., Inc 3,100 252,650
Salomon, Inc 1,800 84,825
---------------------
2,726,688
---------------------
FOREST PRODUCTS & PAPER - 0.9%
Champion International 2,000 86,500
Georgia-Pacific Corp 1,700 122,400
International Paper Co 4,700 189,763
Louisiana Pacific Corp 2,000 42,250
Mead Corp 1,000 58,125
Union Camp Corp 1,400 66,850
Westvaco Corp 2,200 63,250
Weyerhauser Co 4,000 189,500
---------------------
818,638
---------------------
HEALTH CARE PROVIDERS - 1.2%
Allegiance Corp 1,000 27,625
Columbia / HCA Healthcare Corp 11,550 470,663
Fresenius Medical Care (ADR) * 1,888 53,100
Medtronic, Inc 4,200 285,600
Tenet Healthcare Corp.* 3,700 80,938
United Healthcare Corp 3,100 139,500
---------------------
1,057,426
---------------------
HEAVY MACHINERY - 0.9%
Caterpiller Tractor, Inc 3,500 263,375
Cooper Industries, Inc 2,200 92,675
Deere & Co 4,800 195,000
Ingersoll Rand Co 2,200 97,900
Pall Corp 2,200 56,100
Parker-Hannifin Corp 1,500 58,125
---------------------
763,175
---------------------
HOUSEHOLD PRODUCTS - 2.1%
Black & Decker Corp 1,500 45,188
Clorox Co 1,100 110,372
Colgate-Palmolive Co 2,200 202,950
</TABLE>
See notes to financial statements
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOUSEHOLD PRODUCTS - CONTINUED
Newell Co 2,800 $ 88,200
Premark International, Inc 1,100 24,475
Procter & Gamble Co 10,800 1,161,000
Rubbermaid, Inc 2,700 61,425
Tupperware Corp 1,100 58,987
Whirlpool Corp 1,600 74,600
---------------------
1,827,197
---------------------
INDUSTRIAL - DIVERSIFIED - 2.1%
Baker Hughes, Inc 2,500 86,250
Corning, Inc 4,300 198,875
Dover Corp 2,400 120,600
Eastman Kodak Co 5,600 449,400
Fluor Corp 1,400 87,850
Illinois Tool Works, Inc 2,400 191,700
Imation Corp.* 700 19,688
ITT Corp. * 1,900 82,413
ITT Hartford Group, Inc 2,000 135,000
ITT Industries, Inc 2,100 51,450
Temple Inland, Inc 1,200 64,950
Tenneco, Inc. * 3,400 153,425
Tyco Lab 2,900 153,338
---------------------
1,794,939
---------------------
INSURANCE - 4.0%
Aetna, Inc. 6.25% Convertible Preferred 202 16,034
Aetna, Inc 2,505 200,400
Allstate Corp 7,500 434,063
American International Group 6,900 746,925
Chubb Corp 2,500 134,375
Cigna Corp 1,100 150,288
General RE Corp 1,400 220,850
Jefferson Pilot Corp 1,500 84,938
Lincoln National Corp 1,700 89,250
Loews Corp 1,800 169,650
Marsh & McLennan Cos., Inc 1,300 135,200
Providian Corp 2,100 107,888
Safeco Corp 2,300 90,706
St. Paul Cos 1,300 76,213
Torchmark Corp 1,500 75,750
Transamerica Corp 1,200 94,800
Travelers, Inc 11,000 499,113
Unum Corp 1,300 93,925
---------------------
3,420,368
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LODGING - 0.3%
Hilton Hotels 3,600 $ 94,050
Marriott International, Inc 2,400 132,600
---------------------
226,650
---------------------
MEDIA - BROADCASTING & PUBLISHING - 1.5%
Comcast Corp 3,500 62,344
Deluxe Corporation 1,800 58,950
Dow Jones & Co., Inc 2,300 77,913
Dun & Bradstreet Corp 3,400 80,750
Gannett Co., Inc 2,900 217,138
Knight-Ridder, Inc 2,200 84,150
McGraw-Hill Companies, Inc 2,200 101,475
Moore Corp.Ltd 2,300 46,863
R.R. Donnelley & Sons 3,100 97,263
TCI Satellite Entertainment Inc. Class A * 600 5,963
Time Warner, Inc 7,200 270,000
Tribune Co 1,300 102,538
U.S. West Media Group * 7,100 131,350
---------------------
1,336,697
---------------------
MEDICAL SUPPLIES - 0.6%
Baxter International, Inc 5,000 205,000
Becton Dickinson & Co 2,400 104,100
Boston Scientific Corp. * 2,800 168,000
Mallinckrodt, Inc 1,800 79,425
---------------------
556,525
---------------------
METALS - 1.2%
Alcan Aluminum Ltd 4,800 161,400
Aluminum Company of America 3,500 223,125
Barrick Gold Corp 6,400 184,000
Engelhard Corp 2,700 51,638
Nucor Corp 1,500 76,500
Phelps Dodge Corp 1,500 101,250
Placer Dome, Inc 4,600 100,050
Reynolds Metals Co 1,200 67,650
USX - U.S. Steel Group, Inc 1,500 47,063
---------------------
1,012,676
---------------------
MINING - 1.0%
Cyprus Amax Minerals Co 1,900 44,413
Homestake Mining Co 3,600 51,300
Inco Ltd 2,100 66,938
Minnesota Mining & Manufacturing 7,000 580,125
Newmont Mining 2,200 98,450
---------------------
841,226
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OFFICE EQUIPMENT - 1.7%
Alco Standard Corp 2,200 $ 113,575
Hewlett-Packard Co 18,200 914,550
Pitney Bowes, Inc 3,100 168,950
Xerox Corp 5,400 284,175
---------------------
1,481,250
---------------------
OIL & GAS - 9.9%
Amerada Hess Corp 1,800 104,175
Amoco Corp 8,100 652,050
Ashland Inc 1,500 65,813
Atlantic Richfield Co 2,700 357,750
Burlington Resources, Inc 2,300 115,863
Chevron Corp 10,000 650,000
Coastal Corp 2,000 97,750
Consolidated Natural Gas 1,800 99,450
Dresser Industries, Inc 4,000 124,000
El Paso Natural Gas Co 316 15,958
Enron Corp 4,300 185,438
Exxon Corp 18,800 1,842,400
Halliburton Co 2,000 120,500
Kerr - Mcgee Corp 900 64,800
Mobil Corp 6,000 733,500
Occidental Petroleum 5,100 119,213
Panenergy Corp 2,500 112,500
Phillips Petroleum Co 4,600 203,550
Royal Dutch Petroleum Co 8,600 1,468,450
Schlumberger Ltd 4,100 409,488
Sonat, Inc 1,800 92,700
Sun Co., Inc 1,800 43,875
Texaco, Inc 4,200 412,125
Union Pacific Resources Group 2,964 86,697
Unocal Corp 4,400 178,750
USX - Marathon Group 5,200 124,150
Western Atlas, Inc. * 1,000 70,875
Williams Companies, Inc 2,850 106,875
---------------------
8,658,695
---------------------
PHARMACEUTICALS - 9.1%
Abbott Laboratories 13,300 674,975
American Home Products Corp 10,400 609,700
Amgen, Inc. * 4,500 244,688
Bristol-Myers Squibb Co 8,900 967,875
Eli Lilly & Co 9,000 657,000
</TABLE>
See notes to financial statements
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PHARMACEUTICALS - CONTINUED
Grace (W.R). & Co 1,800 $ 93,150
Johnson & Johnson 21,600 1,074,600
Merck & Co., Inc 20,300 1,608,775
Pfizer, Inc 10,800 895,050
Pharmacia & Upjohn, Inc 7,000 277,375
Schering-Plough Corp 6,300 407,925
Warner Lambert Co 4,800 360,000
---------------------
7,871,113
---------------------
RETAILERS - 5.7%
Albertson's, Inc 4,700 167,438
American Stores Co 2,500 102,188
Circuit City Stores, Inc 1,700 51,213
CVS Corp 2,300 95,163
Darden Restaurants, Inc 2,600 22,750
Dayton-Hudson Corp 4,200 164,850
Dillard Dept. Stores 2,300 71,013
Footstar, Inc. * 662 16,467
Gap Stores 5,300 159,663
Harcourt General, Inc 1,300 59,963
Home Depot 8,000 401,000
J.C. Penney Co., Inc 4,400 214,500
Kimberly-Clark Corp 4,406 419,672
K-Mart Corp. * 8,000 83,000
Kroger Co. * 2,500 116,250
Lowe's Companies, Inc 3,000 106,500
May Dept Stores 5,000 233,750
McDonald's Corp 11,200 506,800
Nordstrom, Inc 1,300 46,069
Price / Costco, Inc. * 4,100 103,013
Sears Roebuck 6,400 295,200
Tandy Corp 1,200 52,800
The Limited, Inc 4,800 88,200
Toys "R" Us, Inc. Holding Co. * 4,700 141,000
Walgreen Co 4,100 164,000
Wal-Mart Stores, Inc 43,300 990,488
Winn Dixie 2,100 66,413
---------------------
4,939,363
---------------------
TELEPHONE SYSTEMS - 5.2%
Ameritech Corp 8,900 539,563
AT & T Corp 25,800 1,122,300
Bell Atlantic Corp 6,700 433,825
</TABLE>
See notes to financial statements
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TELEPHONE SYSTEMS - CONTINUED
Bellsouth Corp 16,300 $ 658,113
GTE Corp 13,800 627,900
NYNEX Corp 7,100 341,688
Pacific Telesis Group 6,700 246,225
Sprint Corp 6,400 255,200
U.S. West, Inc 7,400 238,650
---------------------
4,463,464
---------------------
TEXTILES, CLOTHING & FABRICS - 0.5%
Nike, Inc 4,800 286,800
Payless Shoesource, Inc. * 800 30,000
Reebok International Ltd * 1,200 50,400
VF Corp 1,400 94,500
---------------------
461,700
---------------------
TRANSPORTATION - 1.2%
Burlington Northern Santa Fe 2,600 224,575
Conrail, Inc 1,300 129,513
CSX Corp 4,000 169,000
Federal Express Corp. * 2,200 97,900
Norfolk Southern Corp 1,900 166,250
Union Pacific Corp 3,500 210,438
---------------------
997,676
---------------------
Total Common and Preferred Stocks (Cost $60,745,359) 87,988,553
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION PAR AMOUNT (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 2.3%
REPURCHASE AGREEMENT - 2.2%
J.P. Morgan Repurchase Agreement at 6.25% due 1/2/97,
collaterized by U.S. Treasury Bond, $1,813,000 par, 7.50% coupon,
due 11/15/16, dated 11/15/86, repurchase proceeds
of $1,939,673. $1,939,000 $ 1,939,000
---------------------
U.S. GOVERNMENT - 0.1%
Federal Home Loan Mortgage Corp. Discount Note (a) 100,000 99,075
---------------------
Total Short-Term Investments (Cost $2,038,075) 2,038,075
---------------------
TOTAL INVESTMENTS - 104.0%
(Cost $62,783,434) 90,026,628
Other Assets and Liabilities (net) - (4.0%) (3,466,444)
---------------------
TOTAL NET ASSETS - 100.0% $ 86,560,184
=====================
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security as this stock did not declare
or pay dividends in the 12 month period.
(a) Assets segregated for open futures
ADR - American Depositary Receipt
See notes to financial statements
COVA SERIES TRUST
GROWTH & INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON AND PREFERRED STOCKS - 92.5%
ADVERTISING - 0.5%
3,300 Omnicom Group, Inc $ 150,975
---------------------
AEROSPACE & DEFENSE - 2.1%
4,900 AlliedSignal, Inc 328,300
3,200 Boeing Co 340,400
---------------------
668,700
---------------------
AUTOMOTIVE - 0.8%
8,900 Stewart & Stevenson Services 259,213
---------------------
BANKING - 6.2%
6,100 Bankamerica Corp 608,475
2,700 Bankers Trust New York Corp 232,875
3,800 Chase Manhattan Corp 339,150
4,400 Comerica, Inc 230,450
2,700 First Bank System, Inc 184,275
2,100 First Union Corp. New England 155,400
1,700 Nationsbank Corp 166,175
---------------------
1,916,800
---------------------
BEVERAGES, FOOD & TOBACCO - 5.9%
4,700 American Brands, Inc 233,238
1,700 Campbell Soup Co 136,425
9,000 Nabisco Holdings Corp. Class A 349,875
5,000 Philip Morris Companies, Inc 563,125
4,800 Quaker Oats Co 183,000
1,500 Ralston Purina Group 110,063
8,300 RJR Holdings Group, Inc 282,200
---------------------
1,857,926
---------------------
BUILDING MATERIALS - 0.9%
3,900 Keystone International Inc 78,488
5,800 Masco Corp 208,800
---------------------
287,288
---------------------
CHEMICALS - 2.2%
2,900 Betz Labs 169,650
2,900 Monsanto Co 112,738
3,800 Morton International, Inc 154,850
5,900 Praxair, Inc 272,138
---------------------
709,376
---------------------
COMMERCIAL SERVICES - 0.0%
666 AC Nielson Corp. * 10,073
---------------------
COMMUNICATIONS - 4.5%
6,300 Cable & Wireless PLC 155,138
5,000 DSC Communications * 89,688
7,400 Ericsson L M Telephone 223,388
5,925 Frontier Corp 134,053
3,405 Lucent Technologies 157,481
7,400 Newbridge Network Corp. * 209,050
4,500 Nokia Corp 259,313
4,800 Tellabs, Inc. * 180,600
---------------------
1,408,711
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
GROWTH & INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMPUTER SOFTWARE & PROCESSING - 5.5%
5,800 3 Com Corp. * $ 425,195
7,100 BMC Software, Inc. * 293,763
3,700 Cisco Systems, Inc. * 235,413
2,000 Cognizant Corp. 66,000
6,450 Computer Associates International, Inc 320,888
2,000 Microsoft Corp. Convertible Preferred 160,125
2,800 Microsoft Corp. * 231,350
---------------------
1,732,734
---------------------
COMPUTERS & INFORMATION - 2.1%
2,700 Intel Corp 353,531
2,100 International Business Machines Corp 317,100
---------------------
670,631
---------------------
CONTAINERS & PACKAGING - 1.5%
8,900 Crown Cork & Seal, Inc 483,938
---------------------
ELECTRIC UTILITIES - 4.7%
3,400 Allegheny Power System, Inc 103,275
6,300 Boston Edison Co 169,313
3,400 CMS Energy Corp 114,325
12,200 DTE Energy Co 394,975
7,400 Edison International 147,075
4,000 Houston Industries, Inc 90,500
2,600 Nipsco Industries, Inc 103,025
2,500 Ohio Edison Co 56,875
5,700 Scana Corp 152,475
6,000 Unicom Corp 162,750
---------------------
1,494,588
---------------------
ELECTRICAL EQUIPMENT - 0.9%
2,900 General Electric Co 286,738
---------------------
ELECTRONICS - 3.7%
13,200 General Instrument Corp. * 285,450
5,600 General Signal 239,400
4,400 Honeywell, Inc 289,300
2,300 Johnson Controls 190,613
2,500 Linear Technology Corp 109,688
1,800 Oak Industries, Inc. * 41,400
---------------------
1,155,851
---------------------
ENTERTAINMENT & LEISURE - 1.0%
5,300 Time Warner, Inc 198,750
1,800 Walt Disney Co 125,325
---------------------
324,075
---------------------
ENVIRONMENTAL CONTROLS - 0.9%
8,600 WMX Technologies, Inc. (a) 280,575
---------------------
FINANCIAL SERVICES - 3.6%
7,200 H.& R. Block, Inc 208,800
10,000 Federal National Mortgage Association 372,500
3,200 J. P. Morgan & Co., Inc 312,400
2,700 Student Loan Marketing Association 251,438
---------------------
1,145,138
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
GROWTH & INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FOREST PRODUCTS & PAPER - 0.6%
5,300 James River Corp $ 175,563
---------------------
HEALTH CARE PROVIDERS - 1.0%
3,800 Pacificare Health Systems, Inc. * 323,475
---------------------
HEAVY MACHINERY - 0.9%
6,700 Ingersoll Rand Co 298,150
---------------------
HOUSEHOLD PRODUCTS - 1.7%
2,000 Colgate-Palmolive Co 184,500
5,700 Newell Co 179,550
1,600 Procter & Gamble Co 172,000
---------------------
536,050
---------------------
INDUSTRIAL - DIVERSIFIED - 0.6%
2,400 Eastman Kodak Co 192,600
---------------------
INSURANCE - 6.8%
3,100 Aetna, Inc 248,000
5,800 Allstate Corp 335,675
2,900 American International Group 313,925
3,000 Conseco, Inc 191,250
6,800 Everest Re Holdings 195,500
5,100 Horace Mann Educators 205,913
2,100 MBIA, Inc 212,625
4,933 Travelers, Inc 223,845
8,400 USF&G Corp 175,350
---------------------
2,102,083
---------------------
MEDIA - BROADCASTING & PUBLISHING - 0.8%
3,900 Deluxe Corp 127,725
2,000 Dun & Bradstreet Corp 47,500
1,100 Tribune Co 86,763
---------------------
261,988
---------------------
MEDICAL SUPPLIES - 0.4%
6,400 Nellcor Puritan Bennett Inc. * 139,200
---------------------
OFFICE EQUIPMENT - 0.3%
2,100 Hewlett-Packard Co 105,525
---------------------
OIL & GAS - 9.2%
1,700 Amerada Hess Corp 98,388
5,300 Apache Corp 109,663
6,300 Burlington Resources, Inc 186,388
3,500 Coastal Corp 171,063
1,700 Exxon Corp 169,285
3,000 Royal Dutch Petroleum Co 512,250
3,700 Sun Co., Inc 90,188
8,600 Texaco, Inc 843,875
10,000 Unocal Corp 406,250
5,500 USX-Marathon Group 131,313
2,200 Williams Companies, Inc 192,619
---------------------
2,911,282
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
GROWTH & INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PHARMACEUTICALS - 9.9%
5,800 Abbott Laboratories $ 294,350
3,400 Amgen, Inc. * 184,875
3,400 Bristol-Myers Squibb Co 369,750
10,100 Glaxo Wellcome PLC 320,675
4,300 Merck & Co., Inc 340,775
2,800 Mylan Laboratories, Inc 46,900
6,300 Novartis AG ADR 359,638
7,000 SmithKline Beecham PLC 476,000
3,200 Teva Pharmaceutical 160,800
5,000 Warner Lambert Co 375,000
4,200 Watson Pharmaceutical, Inc. * 188,738
---------------------
3,117,501
---------------------
REAL ESTATE - 0.9%
8,600 Healthcare Realty Trust 227,900
2,108 Simon Debartolo Group, Inc 65,348
---------------------
293,248
---------------------
RETAILERS - 5.6%
6,900 Dayton-Hudson Corp 270,825
17,000 Federated Department Stores * 580,125
3,900 Gymboree Corp. * 89,213
2,100 K-Mart Financing Preferred 102,375
700 Lone Star Steakhouse & Saloon * 18,813
2,600 Revco D.S. Inc. * 96,200
3,700 Sears Roebuck 170,663
5,900 Talbots, Inc 168,888
3,100 The Vons Co., Inc. * 185,613
3,000 Toys "R" Us, Inc. Holding Co. * 90,000
---------------------
1,772,715
---------------------
TELEPHONE SYSTEMS - 3.4%
18,000 AT & T Corp 783,000
3,400 Cincinnati Bell, Inc 209,525
2,400 Sprint Corp 86,100
---------------------
1,078,625
---------------------
TEXTILES, CLOTHING & FABRICS - 2.1%
5,600 Adidas AG (144A)^ 241,643
15,800 Canadian Pacific 418,700
---------------------
660,343
---------------------
TRANSPORTATION - 1.3%
6,250 Canadian National Railway Co 237,500
3,000 Union Pacific Corp 180,375
---------------------
417,875
---------------------
Total Common and Preferred Stocks (Cost $25,261,741) 29,229,553
---------------------
DOMESTIC BONDS AND DEBT SECURITIES - 3.3% COUPON MATURITY
AIRLINES - 0.2% ------ --------
$45,000 Continental Airlines (144A)^ 6.750% 04/15/06 49,500
---------------------
BEVERAGES, FOOD & TOBACCO - 0.6%
150,000 Grand Metropolitan (144A)^ 6.500% 01/31/00 177,989
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
GROWTH & INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DOMESTIC BONDS AND DEBT SECURITIES - CONTINUED
FINANCIAL SERVICES - 0.3%
$100,000 MBL International Finance 3.000% 11/30/02 $ 104,125
-----------------
INDUSTRIAL - DIVERSIFIED - 0.7%
350,000 ADT Operations, Inc. + 07/06/10 227,938
-----------------
MEDIA - BROADCASTING & PUBLISHING - 0.3%
200,000 News America Holdings + 03/11/13 94,250
-----------------
PHARMACEUTICALS - 1.2%
700,000 Roche Holdings, Inc. (144A)^ + 04/20/10 320,250
50,000 Sandoz (144A)^ 2.000% 10/06/02 53,750
-----------------
374,000
-----------------
Total Domestic Bonds and Debt Securities (Cost $937,834) 1,027,802
-----------------
SHORT-TERM INVESTMENTS - 8.7%
U.S. GOVERNMENT AND AGENCY OBLIGATIONS- 8.7%
2,765,000 Student Loan Marketing Association (Cost $2,764,002) 6.500% 01/02/97 2,764,002
-----------------
TOTAL INVESTMENTS - 104.5%
(Cost $28,963,577) 33,021,357
Other Assets and Liabilities (net) - (4.5%) (1,428,191)
-----------------
TOTAL NET ASSETS - 100.0% $ 31,593,166
=================
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security as this stock did not
declare or pay dividends in the 12 month period.
^ Securities that may be resold to "qualified
institutional buyers" under Rule 144A or securities
offered pursuant to Section 4(2) of the Securities Act
of 1933, as amended. These securities have been
determined to be liquid under guidelines established by
the Board of Trustees.
+ Zero coupon bond
(a) Assets segregated for open futures
See notes to financial statements
COVA SERIES TRUST
HIGH YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DOMESTIC BONDS AND DEBT SECURITIES - 87.0%
AEROSPACE & DEFENSE - 2.9%
$300,000 Sequa Corp 9.625% 10/15/99 $ 311,250
250,000 Sequa Corp 9.375% 12/15/03 253,750
600,000 Talley Manufacturing & Technical Corp 10.750% 10/15/03 628,500
---------------------
1,193,500
---------------------
AIRLINES - 1.2%
500,000 U.S. Air, Inc 8.625% 09/01/98 501,250
---------------------
AUTOMOTIVE - 1.1%
300,000 Exide Corp 10.750% 12/15/02 315,000
150,000 JPS Automotive Products 11.125% 06/15/01 161,625
---------------------
476,625
---------------------
BEVERAGES, FOOD & TOBACCO - 0.6%
250,000 Pilgrims Pride 10.875% 08/01/03 248,750
---------------------
BUILDING MATERIALS - 3.4%
550,000 American Standard, Inc 10.875% 05/15/99 588,500
250,000 Clark Materials (144A)^ 10.750% 11/15/06 261,250
500,000 Schuller International Group, Inc 10.875% 12/15/04 559,375
---------------------
1,409,125
---------------------
CHEMICALS - 1.9%
200,000 Trans-Resources 11.875% 07/01/02 202,000
534,000 ISP Holdings, Inc. 9.750% 02/15/02 559,365
---------------------
761,365
---------------------
COMMUNICATIONS - 9.5%
100,000 Cablevision Systems, Corp 10.750% 04/01/04 104,250
150,000 Cablevision Systems, Corp 10.500% 05/15/16 156,000
500,000 Centennial Cellular 10.125% 05/15/05 505,000
200,000 Echostar Communications 0%, 12.875%++ 06/01/04 166,500
600,000 Fonorola, Inc 12.500% 08/15/02 660,000
150,000 Intermedia Communications of Florida, Inc 13.500% 06/01/05 172,125
300,000 Intermedia Communications of Florida, Inc 0%, 12.500%++ 05/15/06 201,000
650,000 IXC Communications, Inc 12.500% 10/01/05 718,250
300,000 Millicon International Cellular (144A)^ 0%, 13.500%++ 06/01/06 187,500
300,000 Panamsat L.P 9.750% 08/01/00 319,500
100,000 Pricellular Wireless Corp 0%, 14.000%++ 11/15/01 99,500
300,000 Pricellular Wireless Corp 0%, 12.250%++ 10/01/03 258,000
500,000 Teleport Communications 0%, 11.125%++ 07/01/07 345,000
---------------------
3,892,625
---------------------
COMPUTER SOFTWARE & PROCESSING - 1.3%
500,000 Computervision 11.375% 08/15/99 525,000
---------------------
CONTAINERS & PACKAGING - 3.0%
100,000 Owens-Illinois, Inc 10.250% 04/01/99 101,000
450,000 Owens-Illinois, Inc 11.000% 12/01/03 502,875
600,000 U.S. Can Co 13.500% 01/15/02 624,750
---------------------
1,228,625
---------------------
COSMETICS & PERSONAL CARE - 1.4%
300,000 Revlon Consumer Products Corp 9.375% 04/01/01 308,250
150,000 Revlon Consumer Products Corp 10.500% 02/15/03 157,875
100,000 Revlon Consumer Products Corp 10.875% 07/15/10 102,625
---------------------
568,750
---------------------
ELECTRIC UTILITIES - 5.5%
600,000 AES Corp 10.250% 07/15/06 648,000
350,000 California Energy, Inc 9.875% 06/30/03 371,000
</TABLE>
See notes to financial statements
COVA SERIES TRUST
HIGH YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ELECTRIC UTILITIES - CONTINUED
$659,000 Connecticut Yankee Atomic 12.000% 06/01/00 $ 675,717
150,000 El Paso Electric Company 8.250% 02/01/03 154,500
50,000 El Paso Electric Company 8.900% 02/01/06 53,000
300,000 Midland Funding Corp. II 11.750% 07/23/05 337,500
---------------------
2,239,717
---------------------
ELECTRONICS - 2.4%
300,000 Advanced Micro Devices 11.000% 08/01/03 327,000
450,000 Bell & Howell Holdings Co 0%,11.500%++ 03/01/05 329,625
300,000 Exide Electronics Group 11.500% 03/15/06 319,500
---------------------
976,125
---------------------
ENTERTAINMENT & LEISURE - 9.3%
350,000 Agrosy Gaming 13.250% 06/01/04 326,375
325,000 California Hotel Financial Corp 11.000% 12/01/02 338,813
400,000 Coast Hotels & Casino 13.000% 12/15/02 442,000
350,000 Grand Casinos, Inc 10.125% 12/01/03 355,250
350,000 Hollywood Casino, Inc 12.750% 11/01/03 337,750
400,000 Majestic Star 12.750% 05/15/03 429,000
100,000 Rayovac Corp (144A)^ 10.250% 11/01/06 103,000
650,000 Selmer Co., Inc 11.000% 05/15/05 710,125
250,000 Trump Atlantic City 11.250% 05/01/06 248,750
500,000 Viacom International 10.250% 09/15/01 543,550
---------------------
3,834,613
---------------------
ENVIRONMENTAL CONTROLS - 0.5%
100,000 Envirosource Inc 9.750% 06/15/03 94,500
100,000 Norcal Waste Systems, Inc 13.000% 11/15/05 111,500
---------------------
206,000
---------------------
FOREST PRODUCTS & PAPER - 1.3%
200,000 SD Warren Co 12.000% 12/15/04 217,000
150,000 Sweetheart Cup 9.625% 09/01/00 155,250
150,000 Sweetheart Cup 10.500% 09/01/03 158,250
---------------------
530,500
---------------------
HEALTH CARE PROVIDERS - 4.0%
500,000 Fresenius Med Care Preferred 9.000% 12/01/06 510,000
250,000 Merit Behavioral Care 11.500% 11/15/05 272,500
500,000 Ornda Healthcorp 12.250% 05/15/02 533,750
300,000 Tenet Healthcare Corp 10.125% 03/01/05 333,000
---------------------
1,649,250
---------------------
INDUSTRIAL - DIVERSIFIED - 2.4%
150,000 Aetna Industry, Inc 11.875% 10/01/06 161,625
600,000 Communications & Power Corp 12.000% 08/01/05 670,500
150,000 Jordan Industries, Inc 10.375% 08/01/03 148,500
---------------------
980,625
---------------------
INSURANCE - 1.2%
475,000 Americo Life, Inc 9.250% 06/01/05 475,000
---------------------
MEDIA - BROADCASTING & PUBLISHING - 11.2%
300,000 Century Communications Corp 11.875% 10/15/03 318,000
150,000 Comcast Corp 9.375% 05/15/05 156,375
150,000 Comcast Corp 9.125% 10/15/06 154,125
500,000 EZ Communications 9.750% 12/01/05 521,250
500,000 Heritage Media Services 11.000% 06/15/02 532,500
500,000 Insight Communications Co. L.P 11.250% 03/01/00 515,000
450,000 International Cabletel, Inc 0%,12.750%++ 04/15/05 337,500
100,000 International Cabletel, Inc 0%,11.500%++ 02/01/06 68,500
100,000 JCAC, Inc 10.125% 06/15/06 104,250
</TABLE>
See notes to financial statements
COVA SERIES TRUST
HIGH YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MEDIA - BROADCASTING & PUBLISHING - CONTINUED
$300,000 Katz Media Corp (144A)^ 10.500% 01/15/07 $ 308,250
225,000 K-III Communications Corp 10.625% 05/01/02 237,938
150,000 K-III Communications Corp 10.250% 06/01/04 157,875
600,000 SCI Television 11.000% 06/30/05 645,000
250,000 Young Broadcasting Corp 11.750% 11/15/04 267,500
250,000 Young Broadcasting Corp 10.125% 02/15/05 260,000
---------------------
4,584,063
---------------------
METALS - 4.1%
500,000 Armco Inc 11.375% 10/15/99 526,250
500,000 Carbide/Graphite Group, Inc 11.500% 09/01/03 548,750
350,000 Easco Corp 10.000% 03/15/01 355,250
250,000 WCI Steel, Inc (144A)^ 10.000% 12/01/04 256,250
---------------------
1,686,500
---------------------
OIL & GAS - 8.9%
175,000 Clark R&M Holdings + 02/15/00 126,438
500,000 Coda Energy, Inc 10.500% 04/01/06 531,250
495,000 Giant Industries 9.750% 11/15/03 517,275
530,000 Global Marine, Inc 12.750% 12/15/99 572,400
500,000 KCS Energy, Inc 11.000% 01/15/03 543,750
150,000 National Energy Group (144A)^ 10.750% 11/01/06 158,250
150,000 Parker Drilling Corp 9.750% 11/15/06 158,625
500,000 Petroleum Heat & Power 12.250% 02/01/05 561,250
475,000 Triton Energy Corp 0%,9.750%++ 12/15/00 498,750
---------------------
3,667,988
---------------------
RETAILERS - 8.1%
100,000 Cole National Group (144A)^ 9.875% 12/31/06 103,500
300,000 Loehmann's, Inc 11.875% 05/15/03 324,750
500,000 Pantry, Inc 12.000% 11/15/00 473,750
400,000 Pathmark Stores, Inc 9.625% 05/01/03 385,000
630,000 Thrifty Payless, Inc 12.250% 04/15/04 737,100
600,000 Vons Company, Inc 9.625% 04/01/02 628,500
600,000 Waban, Inc 11.000% 05/15/04 675,000
---------------------
3,327,600
---------------------
TEXTILES, CLOTHING & FABRICS - 0.5%
220,000 Dan River, Inc 10.125% 12/15/03 221,100
---------------------
U.S. GOVERNMENT - 1.3%
500,000 U.S. Treasury Note 9.000% 05/15/98 520,000
---------------------
Total Domestic Bonds and Debt Securities (Cost $35,508,655) 35,704,696
---------------------
FOREIGN BONDS AND DEBT SECURITIES - 6.3%
CANADA -4.7%
600,000 Doman Industries Ltd. (U.S.$) 8.750% 03/15/04 565,500
500,000 Fundy Cable Ltd. (U.S.$) 11.000% 11/15/05 532,500
400,000 Rogers Communications, Inc. (U.S.$) 10.875% 04/15/04 423,000
300,000 Speedy Muffler King, Inc. (U.S.$) 10.875% 10/01/06 323,250
100,000 Stone Consolidated (U.S.$) 10.250% 12/15/00 106,500
---------------------
1,950,750
---------------------
GREAT BRITAIN - 0.4%
250,000 Telewest PLC (U.S.$) 0%,11.000%++ 10/01/07 175,000
---------------------
PORTUGAL - 1.2%
500,000 Fresh Del Monte (U.S.$) 10.000% 05/01/03 477,500
---------------------
Total Foreign Bonds and Debt Securities (Cost $1,833,324) 2,603,250
---------------------
</TABLE>
See notes to financial statements
COVA SERIES TRUST
HIGH YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1996
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EQUITIES - 2.0%
COMMUNICATIONS - 1.5%
3,470 Cablevision Systems, Corp. Preferred $ 325,315
350 Intermedia Communications of Florida, Inc. Warrants *. 8,750
241 Panamsat Corp. Preferred 294,780
---------------------
628,845
---------------------
ELECTRIC UTILITIES - 0.3%
1,084 El Paso Electric Co. Preferred 120,731
---------------------
ELECTRONICS - 0.0%
250 Exide Electronics Group Warrants * 1,282
---------------------
FOOD RETAILERS - 0.2%
3,177 Super Markets General Holding Preferred 84,985
---------------------
MEDIA - BROADCASTING & PUBLISHING - 0.0%
930 American Telecasting, Inc. Warrants * 5,115
---------------------
Total Equities (Cost $769,748) 840,958
---------------------
REPURCHASE AGREEMENT - 7.2%
J.P Morgan Repurchase Agreement at 6.25 % due 1/2/97,
collaterized by U.S. Treasury Bond, $2,747,000 par, 7.50%
coupon, due 11/15/16, dated 11/15/86, repurchase proceeds
$2,938,000 of $2,939,020. (Cost $2,938,000) 01/02/97 2,938,000
---------------------
TOTAL INVESTMENTS - 102.5%
(Cost $41,049,727) 42,086,904
Other Assets and Liabilities (net) - (2.5%) (1,022,266)
---------------------
TOTAL NET ASSETS - 100.0% $ 41,064,638
=====================
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security as this stock did not
declare or pay dividends in the 12 month period.
^ Securities that may be resold to "qualified
institutional buyers" under Rule 144A or securities
offered pursuant to Section 4(2) of the Securities Act
of 1933, as amended. These securities have been
determined to be liquid under guidelines established by
the Board of Trustees.
+ Zero coupon bond
++ Security is a "step-up" bond where the coupon increases
or steps up at a predetermined date.
See notes to financial statements
COVA SERIES TRUST
HIGH YIELD PORTFOLIO
PORTFOLIO COMPOSITION BY CREDIT QUALITY (UNAUDITED)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
The following table summarizes the portfolio composition at December
31, 1996, based upon quality ratings issued by Standard & Poor's.
For securities not rated by Standard & Poor's, the Moody rating is
used.
PORTFOLIO COMPOSITION BY CREDIT QUALITY
--------------------------------------------------------------------
RATINGS % OF PORTFOLIO
U.S. Gov't and Agency Obligations 8.2%
BB 28.3
B 61.5
CCC 2.0
---------
100.0%
---------
See notes to financial statements
COVA SERIES TRUST
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Small Cap Stock Quality Bond Select Equity Large Cap Stock
Portfolio Portfolio Portfolio Portfolio
---------------- ------------- -------------- ----------------
ASSETS
Investments, at value (Note 1)* $ 13,382,969 $ 5,688,282 $ 23,559,444 $ 17,153,195
Cash 1,831,624 302,633 1,116,477 5,719
Cash denominated in foreign currencies ** ----- ----- ----- -----
Receivable for investments sold ----- ----- 848,504 28,763
Receivable for Trust shares sold 31,918 57,305 74,983 383
Dividends receivable 12,712 ----- 38,042 33,916
Interest receivable 6,474 58,886 4,071 65
Net variation margin on financial futures
contracts (Note 5) ----- ----- ----- -----
Net open forward currency contracts (Note 7) ----- ----- ----- -----
Receivable from investment adviser (Note 2) 42,607 13,018 14,939 8,715
---------------- ------------- -------------- ----------------
Total assets 15,308,304 6,120,124 25,656,460 17,230,756
---------------- ------------- -------------- ----------------
LIABILITIES
Payables for:
Payable for investments purchased 8,384 159,393 1,467,718 30,923
Payable for Trust shares redeemed 331 180 538 383
Distributions declared 621,596 143,022 335,310 410,398
Net variation margin on financial futures
contracts (Note 5) ----- ----- ----- -----
Investment advisory fee payable (Note 2) ----- ----- ----- -----
Accrued expenses 27,314 15,481 18,975 17,457
---------------- ------------- -------------- ----------------
Total liabilities 657,625 318,076 1,822,541 459,161
---------------- ------------- -------------- ----------------
NET ASSETS $ 14,650,679 $ 5,802,048 $ 23,833,919 $ 16,771,595
================ ============= ============== ================
- ---------------------------------------------------------------------------------------------------------------------------------
SOURCES OF NET ASSETS REPRESENTED BY:
Paid in surplus $ 14,098,386 $ 5,725,522 $ 22,545,717 $ 15,096,391
Accumulated net realized gain (loss) 57,896 (34,027) 233,870 89,850
Unrealized appreciation of investments, futures
contracts, option contracts and foreign currency 498,352 63,737 1,054,575 1,582,389
Undistributed (distributions in excess of) net
investment income (3,955) 46,816 (243) 2,965
---------------- ------------- -------------- ----------------
Total $ 14,650,679 $ 5,802,048 $ 23,833,919 $ 16,771,595
================ ============= ============== ================
Capital shares outstanding 1,341,383 575,476 2,218,737 1,509,371
================ ============= ============== ================
NET ASSET VALUE AND OFFERING PRICE PER SHARE $10.922 $10.082 $10.742 $11.112
================ ============= ============== ================
- ---------------------------------------------------------------------------------------------------------------------------------
* Investments in securities, at cost $ 12,884,617 $ 5,624,545 $ 22,504,869 $ 15,570,806
** Cost of cash denominated in foreign currencies ---- ---- ----- -----
</TABLE>
See notes to financial statements
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
International Equity Bond Debenture Money Market Quality Income Stock Index Growth and Income High Yield
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------------------- --------------- ------------- --------------- ------------ ------------------ -----------
$ 14,885,857 $ 7,618,534 $ 31,179,953 $ 53,383,124 $ 90,026,628 $ 33,021,357 $42,086,904
623,946 211,800 24,659 23,376 ----- 27,266 23,174
1,008,852 ----- ----- ----- ----- ----- -----
126,558 ----- ----- 1,027,340 24,592 235,263 -----
58,507 78,532 ----- ----- ----- 27,722 -----
20,515 375 ----- ----- 165,159 72,076 -----
5,018 142,450 79,381 975,697 456 5,697 787,434
----- ----- ----- 31,250 ----- ----- -----
17,611 ----- ----- ----- ----- ----- -----
71,444 11,155 37,960 454 ----- 23,137 6,910
--------------------- --------------- ------------- --------------- ------------ ------------------ -----------
16,818,308 8,062,846 31,321,953 55,441,241 90,216,835 33,412,518 42,904,422
--------------------- --------------- ------------- --------------- ------------ ------------------ -----------
1,088,609 150,000 ----- 3,252,095 ----- 261,052 -----
358 120 326,589 41,363 32,036 186 12,119
73,693 234,247 ----- 800,988 3,509,017 1,508,080 1,805,641
----- ----- ----- ----- 36,500 29,200 -----
----- ----- ----- ----- 42,725 ----- -----
36,393 15,217 40,476 22,647 36,373 20,834 22,024
--------------------- --------------- ------------- --------------- ------------ ------------------ -----------
1,199,053 399,584 367,065 4,117,093 3,656,651 1,819,352 1,839,784
--------------------- --------------- ------------- --------------- ------------ ------------------ -----------
$ 15,619,255 $ 7,663,262 $ 30,954,888 $ 51,324,148 $ 86,560,184 $ 31,593,166 $41,064,638
===================== =============== ============= =============== ============ ================== ===========
- ------------------------- ------------------ --------------- ----------------- --------------- -------------------- --------------
$ 14,684,592 $ 7,369,249 $ 31,030,072 $ 51,750,081 $ 59,203,346 $ 27,066,459 $41,040,513
24,393 8,944 (75,184) (1,994,025) 92,013 479,013 (993,881)
883,114 283,061 ----- 683,818 27,209,404 4,042,130 1,037,177
27,156 2,008 ----- 884,274 55,421 5,564 (19,171)
--------------------- --------------- ------------- --------------- ------------ ------------------ -----------
$ 15,619,255 $ 7,663,262 $ 30,954,888 $ 51,324,148 $ 86,560,184 $ 31,593,166 $41,064,638
===================== =============== ============= =============== ============ ================== ===========
1,425,198 698,547 31,030,072 4,801,097 5,367,589 2,258,899 3,864,501
===================== =============== ============= =============== ============ ================== ===========
$10.959 $10.970 $1.00 $10.690 $16.126 $13.986 $10.626
===================== =============== ============= =============== ============ ================== ===========
- ------------------------- ------------------ --------------- ----------------- --------------- -------------------- --------------
$ 14,023,644 $ 7,335,473 $ 31,179,953 $ 52,709,462 $ 62,783,434 $ 28,963,577 $41,049,727
1,007,557 ----- ----- ----- ----- ----- -----
</TABLE>
See notes to financial statements
COVA SERIES TRUST
STATEMENTS OF OPERATIONS
PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Small Cap Stock Quality Bond Select Equity Large Cap Stock
Portfolio* Portfolio* Portfolio* Portfolio*
--------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends (1) $ 81,122 $ ----- $ 144,812 $ 258,530
Interest 31,544 287,492 33,390 15,616
--------------- ------------- -------------- ----------------
Total investment income 112,666 287,492 178,202 274,146
--------------- ------------- -------------- ----------------
EXPENSES
Investment advisory fee (Note 2) 51,031 24,070 60,950 76,508
Custody, fund accounting, and transfer agent fees 81,423 17,339 52,583 39,841
Audit 15,041 15,041 15,041 15,013
Trustee fees and expenses 4,840 4,840 4,840 4,828
Legal 961 943 987 1,657
Shareholder reporting 932 932 932 932
Miscellaneous 17 18 18 18
--------------- ------------- -------------- ----------------
Total expenses 154,245 63,183 135,351 138,797
Less fees waived and expenses reimbursed by the adviser 97,214 34,737 66,275 50,521
--------------- ------------- -------------- ----------------
Net expenses 57,031 28,446 69,076 88,276
--------------- ------------- -------------- ----------------
Net investment income 55,635 259,046 109,126 185,870
--------------- ------------- -------------- ----------------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS,
FUTURES CONTRACTS, OPTION CONTRACTS AND FOREIGN CURRENCY
RELATED TRANSACTIONS
Net realized gain (loss) on investments 640,056 (35,063) 483,583 387,045
Net realized gain from futures contracts ----- ----- ----- -----
Net realized gain from option contracts ----- ----- ----- -----
Net realized gain from foreign currency related transactions ----- ----- ----- -----
Net realized gain (loss) on investments, futures contracts,
--------------- ------------- -------------- ----------------
option contracts and foreign currency related transactions 640,056 (35,063) 483,583 387,045
--------------- ------------- -------------- ----------------
Unrealized appreciation of investments, futures contracts,
option contracts and foreign currency
Beginning of period ----- ----- ----- -----
End of period 498,352 63,737 1,054,575 1,582,389
--------------- ------------- -------------- ----------------
Net change in unrealized appreciation (depreciation) of
investments futures contracts, option contracts and foreign
currency 498,352 63,737 1,054,575 1,582,389
--------------- ------------- -------------- ----------------
Net realized and unrealized gain/(loss) on investments,
futures contracts, option contracts and foreign currency
related transactions 1,138,408 28,674 1,538,158 1,969,434
--------------- ------------- -------------- ----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,194,043 $ 287,720 $ 1,647,284 $ 2,155,304
=============== ============= ============== ================
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Dividend income is net of withhholding taxes of: $ ----- $ ----- $ 1,527 $ 1,402
* Fund commenced operations on April 2, 1996
</TABLE>
See notes to financial statements
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
International Equity Bond Debenture Money Market Quality Income Stock Index Growth and Income High Yield
Portfolio* Portfolio* Portfolio Portfolio Portfolio Portfolio Portfolio
--------------------- --------------- ------------- --------------- ------------ ------------------ ------------------
$ 126,138 $ 8,157 $ ----- $ ----- $ 1,843,491 $ 535,039 $ 42,859
31,144 211,396 1,815,351 3,334,012 220,679 164,214 3,743,587
--------------------- --------------- ------------- --------------- ------------ ------------------ ------------------
157,282 219,553 1,815,351 3,334,012 2,064,170 699,253 3,786,446
--------------------- --------------- ------------- --------------- ------------ ------------------ ------------------
53,647 20,291 167,093 250,111 434,880 156,205 291,539
153,087 13,450 49,615 66,109 113,139 69,655 57,419
15,041 15,053 14,942 14,926 14,792 14,980 14,935
4,840 4,845 6,804 6,797 6,741 6,820 6,455
973 649 5,442 17,503 10,105 14,178 10,807
932 932 882 882 882 897 882
18 18 3,193 ----- 2,924 2,274 20,939
--------------------- --------------- ------------- --------------- ------------ ------------------ ------------------
228,538 55,238 247,971 356,328 583,463 265,009 402,976
168,580 32,241 211,378 56,022 59,573 82,770 72,558
--------------------- --------------- ------------- --------------- ------------ ------------------ ------------------
59,958 22,997 36,593 300,306 523,890 182,239 330,418
--------------------- --------------- ------------- --------------- ------------ ------------------ ------------------
97,324 196,556 1,778,758 3,033,706 1,540,280 517,014 3,456,028
--------------------- --------------- ------------- --------------- ------------ ------------------ ------------------
54,069 64,118 374 (661,414) 2,248,079 1,578,166 513,675
----- ----- ----- ----- 595,054 97,180 -----
----- ----- ----- ----- 39,964 4,940 -----
11,779 ----- ----- ----- ----- ----- -----
--------------------- --------------- ------------- --------------- --------------------------------- ------------------
65,848 64,118 374 (661,414) 2,883,097 1,680,286 513,675
--------------------- --------------- ------------- --------------- ------------ ------------------ ------------------
----- ----- ----- 1,371,877 14,053,341 1,748,247 743,563
883,114 283,061 ----- 683,818 27,209,404 4,042,130 1,037,177
--------------------- --------------- ------------- --------------- ------------ ------------------ ------------------
883,114 283,061 ----- (688,059) 13,156,063 2,293,883 293,614
--------------------- --------------- ------------- --------------- ------------ ------------------ ------------------
948,962 347,179 374 (1,349,473) 16,039,160 3,974,169 807,289
--------------------- --------------- ------------- --------------- ------------ ------------------ ------------------
$ 1,046,286 $ 543,735 $ 1,779,132 $ 1,684,233 $ 17,579,440 $ 4,491,183 $ 4,263,317
===================== =============== ============= =============== ============ ================== ==================
- ----------------------------------------------------------- ------------------------------------------------------------------------
$ 20,632 $ ----- $ ----- $ ----- $ 7,879 $ 10,951 $ -----
</TABLE>
See notes to financial statements
COVA SERIES TRUST
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Small Cap Stock Quality Bond Select Equity Large Cap Stock
Portfolio Portfolio Portfolio Portfolio
---------------- ------------- -------------- ----------------
Period ended Period ended Period ended Period ended
December 31, December 31, December 31, December 31,
1996 * 1996 * 1996 * 1996 *
---------------- ------------- -------------- ----------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 55,635 $ 259,046 $ 109,126 $ 185,870
Net realized gain (loss) on investments, futures contracts,
option contracts and foreign currency related transactions 640,056 (35,063) 483,583 387,045
Net change in unrealized appreciation (depreciation)
on investments, futures contracts, option contracts and
foreign currency 498,352 63,737 1,054,575 1,582,389
---------------- ------------- -------------- ----------------
Net increase in net assets resulting from operations 1,194,043 287,720 1,647,284 2,155,304
---------------- ------------- -------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (53,613) (211,194) (109,126) (182,905)
Net realized gains (582,244) ----- (249,713) (297,195)
In excess of net investment income ----- ----- (243) -----
---------------- ------------- -------------- ----------------
Total distributions (635,857) (211,194) (359,082) (480,100)
---------------- ------------- -------------- ----------------
CAPITAL SHARE TRANSACTIONS (NOTE 3):
Proceeds from shares sold 10,623,372 3,657,629 19,036,561 1,106,964
Net asset value of shares issued through dividend reinvestment 14,261 68,171 23,772 69,702
Cost of shares repurchased (1,545,140) (3,000,278) (1,514,616) (1,080,275)
---------------- ------------- -------------- ----------------
Net increase (decrease) in net assets derived from
capital share transactions 9,092,493 725,522 17,545,717 96,391
---------------- ------------- -------------- ----------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 9,650,679 802,048 18,833,919 1,771,595
NET ASSETS:
Beginning of period 5,000,000 5,000,000 5,000,000 15,000,000
---------------- ------------- -------------- ----------------
End of period $ 14,650,679 $ 5,802,048 $ 23,833,919 $ 16,771,595
================ ============= ============== ================
Undistributed (distributions in excess of) net investment
income $ (3,955) $ 46,816 $ (243) $ 2,965
================ ============= ============== ================
</TABLE>
* Fund commenced operations on April 2, 1996
See notes to financial statements
<TABLE>
<CAPTION>
International Equity Bond Debenture Money Market Quality Income
Portfolio Portfolio Portfolio Portfolio
---------------------- ------------------- ---------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
Period ended Period ended Year ended Year ended Year ended Year ended
December 31, December 31, December 31, December 31, December 31, December 31,
1996 * 1996 * 1996 1995 1996 1995
---------------------- ------------------- ---------------------------------------- ----------------------------------------
$ 97,324 $ 196,556 $ 1,778,758 $ 3,052,192 $ 3,033,706 $ 2,493,847
65,848 64,118 374 34,345 (661,414) 453,622
883,114 283,061 ----- ----- (688,059) 3,164,151
---------------------- ------------------- ------------------ ------------------- ------------------ -------------------
1,046,286 543,735 1,779,132 3,086,537 1,684,233 6,111,620
---------------------- ------------------- ------------------ ------------------- ------------------ -------------------
(81,947) (194,548) (1,778,758) (3,052,192) (2,168,653) (2,493,847)
(29,676) (55,174) ----- ----- (8,168) -----
----- ----- ----- ----- ----- -----
---------------------- ------------------- ------------------ ------------------- ------------------ -------------------
(111,623) (249,722) (1,778,758) (3,052,192) (2,176,821) (2,493,847)
---------------------- ------------------- ------------------ ------------------- ------------------ -------------------
14,218,522 7,553,231 34,135,639 27,981,115 22,903,638 22,566,180
37,930 15,475 1,778,758 3,052,192 1,375,833 2,493,847
(4,571,860) (699,457) (39,342,379) (72,571,677) (13,853,598) (21,223,354)
---------------------- ------------------- ------------------ ------------------- ------------------ -------------------
9,684,592 6,869,249 (3,427,982) (41,538,370) 10,425,873 3,836,673
---------------------- ------------------- ------------------ ------------------- ------------------ -------------------
10,619,255 7,163,262 (3,427,608) (41,504,025) 9,933,285 7,454,446
5,000,000 500,000 34,382,496 75,886,521 41,390,863 33,936,417
---------------------- ------------------- ------------------ ------------------- ------------------ -------------------
$ 15,619,255 $ 7,663,262 $ 30,954,888 $ 34,382,496 $ 51,324,148 $ 41,390,863
====================== =================== ================== =================== ================== ===================
$ 27,156 $ 2,008 $ ------ $ ------ $ 884,274 $ ------
====================== =================== ================== =================== ================== ===================
</TABLE>
See notes to financial statements
COVA SERIES TRUST
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Stock Index Growth and Income
Portfolio Portfolio
---------------------------- ------------------------------
<S> <C> <C> <C> <C>
Year ended Year ended Year ended Year ended
December 31, December 31, December 31, December 31,
1996 1995 1996 1995
---------------------------- ------------------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 1,540,280 $ 1,434,217 $ 517,014 $ 286,149
Net realized gain (loss) on investments, futures contracts,
option contracts and foreign currency related transactions 2,883,097 2,287,911 1,680,286 1,601,769
Net change in unrealized appreciation (depreciation)
on investments, futures contracts, option contracts and
foreign currency 13,156,063 14,416,467 2,293,883 1,973,073
------------- ------------- ------------- --------------
Net increase in net assets resulting from operations 17,579,440 18,138,595 4,491,183 3,860,991
------------- ------------- ------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,532,148) (1,434,217) (511,450) (294,561)
Net realized gains (2,778,218) (2,274,444) (1,207,683) (1,277,017)
In excess of net investment income ----- ----- ----- -----
------------- ------------- ------------- --------------
Total distributions (4,310,366) (3,708,661) (1,719,133) (1,571,578)
------------- ------------- ------------- --------------
CAPITAL SHARE TRANSACTIONS (NOTE 3):
Proceeds from shares sold 7,574,621 50,283,187 10,401,256 6,076,696
Net asset value of shares issued through dividend reinvestment 801,349 3,708,661 211,053 1,571,578
Cost of shares repurchased (21,068,260) (19,249,305) (1,515,500) (1,155,316)
------------- ------------- ------------- --------------
Net increase (decrease) in net assets derived from
capital share transactions (12,692,290) 34,742,543 9,096,809 6,492,958
------------- ------------- ------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 576,784 49,172,477 11,868,859 8,782,371
NET ASSETS:
Beginning of period 85,983,400 36,810,923 19,724,307 10,941,936
------------- ------------- ------------- --------------
End of period $ 86,560,184 $ 85,983,400 $ 31,593,166 $ 19,724,307
============= ============= ============= ==============
Undistributed (distributions in excess of) net investment income $ 55,421 $ ------ $ 5,564 $ ------
============= ============= ============= ==============
</TABLE>
See notes to financial statements
<TABLE>
<CAPTION>
High Yield
Portfolio
-------------------------------------------------
Year ended Year ended
December 31, December 31,
1996 1995
-------------------------------------------------
<S> <C>
$ 3,456,028 $ 2,747,034
513,675 137,302
293,614 1,523,562
----------------------- ----------------------
4,263,317 4,407,898
----------------------- ----------------------
(3,453,570) (2,739,550)
----- -----
(19,171) -----
----------------------- ----------------------
(3,472,741) (2,739,550)
----------------------- ----------------------
25,000,540 14,408,614
1,667,100 2,739,550
(22,908,998) (1,956,676)
----------------------- ----------------------
3,758,642 15,191,488
----------------------- ----------------------
4,549,218 16,859,836
36,515,420 19,655,584
----------------------- ----------------------
$ 41,064,638 $ 36,515,420
======================= ======================
$ (19,171) $ 7,484
======================= ======================
</TABLE>
See notes to financial statements
COVA SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR SHARES HELD THROUGHOUT THE PERIODS INDICATED
<TABLE>
<CAPTION>
-------- For the period from May 1, 1996 (date of initial public offering) to December 31, 1996 ------
Small Quality Select Large International
Cap Stock Bond Equity Cap Stock Equity
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.512 $ 9.897 $ 10.084 $ 10.003 $ 10.215
--------- -------- ---------- --------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.057 0.459 0.081 0.124 0.096
Net realized and unrealized gains
(losses) 0.843 0.102 0.771 1.304 0.755
--------- -------- ---------- --------- -----------
Total from investment operations 0.900 0.561 0.852 1.428 0.851
--------- -------- ---------- --------- -----------
DISTRIBUTIONS
Dividends from net investment income (0.055) (0.376) (0.081) (0.122) (0.086)
Distributions from net realized gains (0.435) ---- (0.113) (0.197) (0.021)
Distributions in excess of net
investment income ---- ---- + ---- ----
Return of capital distributions ---- ---- ---- ---- ----
--------- -------- ---------- --------- -----------
Total distributions (0.490) (0.376) (0.194) (0.319) (0.107)
--------- -------- ---------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 10.922 $ 10.082 $ 10.742 $ 11.112 $ 10.959
--------- -------- ---------- --------- -----------
TOTAL RETURN 8.65%* 5.68%* 8.52%* 14.35%* 8.44%*
--------- -------- ---------- --------- -----------
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (In millions) $ 14.7 $ 5.8 $ 23.8 $ 16.8 $ 15.6
RATIOS TO AVERAGE NET ASSETS (1):
Expenses 0.95%** 0.65%** 0.85%** 0.75%** 0.95%**
Net investment income 0.87%** 5.94%** 1.35%** 1.56%** 1.43%**
PORTFOLIO TURNOVER RATE 102.4% 181.3% 123.9% 35.5% 48.2%
AVERAGE COMMISSION RATE PAID (2) $0.0371 N/A $0.0406 $0.0323 $0.0107
(1) If certain expenses had not been reimbursed
by the Adviser, total return would have
been lower and the ratios would have been
as follows:
Ratio of Expenses to Average Net Assets: 2.68%** 1.52%** 1.70%** 1.23%** 3.80%**
Ratio of Net Investment Income to Average
Net Assets: (0.86%)** 5.07%** 0.50%** 1.08%** (1.42%**)
(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.
+ Amount is less than .0005
* Non-annualized
** Annualized
N/A Not Applicable
</TABLE>
See notes to financial statements
<TABLE>
<CAPTION>
MONEY MARKET
PORTFOLIO
-------------------------------------------------------------------------------------------
JULY 1, 1991
(COMMENCEMENT OF
YEARS ENDED DECEMBER 31, INVESTMENT
BOND DEBENTURE ------------------------ OPERATIONS) TO
PORTFOLIOS 1996 1995 1994 1993 1992 DECEMBER 31, 1991
----------- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 10.098 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ----------- ----------- ----------- ---------------
0.345 0.053 0.059 0.041 0.032 0.038 0.027
0.949 ---- ---- ---- ---- ---- ----
---------- ---------- ---------- ----------- ----------- ----------- ---------------
1.294 0.053 0.059 0.041 0.032 0.038 0.027
---------- ---------- ---------- ----------- ----------- ----------- ---------------
(0.342) (0.053) (0.059) (0.041) (0.032) (0.038) (0.027)
(0.080) ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
---------- ---------- ---------- ----------- ----------- ----------- ---------------
(0.422) (0.053) (0.059) (0.041) (0.032) (0.038) (0.027)
---------- ---------- ---------- ----------- ----------- ----------- ---------------
$ 10.970 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ----------- ----------- ----------- ---------------
12.89%* 5.42% 6.01% 4.23% 3.24% 3.88% 2.75%*
---------- ---------- ---------- ----------- ----------- ----------- ---------------
$ 7.7 $ 31.0 $ 34.4 $ 75.9 $ 6.6 $ 4.0 $ 5.4
0.85%** 0.11% 0.11% 0.10% 0.10% 0.10% 0.09%**
7.26%** 5.31% 5.68% 4.37% 3.23% 3.63% 5.11%**
58.1% N/A N/A N/A N/A N/A N/A
$0.0677 N/A N/A N/A N/A N/A N/A
2.05%** 0.74% 0.64% 0.68% 0.86% 1.30% 1.11%**
6.06%** 4.68% 5.25% 3.79% 2.47% 2.43% 4.10%**
</TABLE>
See notes to financial statements
COVA SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR SHARES HELD THROUGHOUT THE PERIODS INDICATED
<TABLE>
<CAPTION>
QUALITY INCOME
PORTFOLIO
---------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995 1994 1993 1992 1991 1990
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.871 $ 9.815 $ 10.886 $ 10.699 $ 10.618 $ 9.969 $ 9.930
-------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.651 0.667 0.603 0.641 0.696 0.753 0.713
Net realized and unrealized gains (losses) (0.359) 1.056 (1.071) 0.518 0.081 0.649 0.039
-------- -------- -------- -------- -------- -------- --------
Total from investment operations 0.292 1.723 (0.468) 1.159 0.777 1.402 0.752
-------- -------- -------- -------- -------- -------- --------
DISTRIBUTIONS
Dividends from net investment income (0.471) (0.667) (0.603) (0.641) (0.696) (0.753) (0.713)
Distributions from net realized gains (0.002) ---- ---- (0.331) ---- ---- ----
Distributions in excess of net investment income ---- ---- ---- ---- ---- ---- ----
Return of capital distributions ---- ---- ---- ---- ---- ---- ----
-------- -------- -------- -------- -------- -------- --------
Total distributions (0.473) (0.667) (0.603) (0.972) (0.696) (0.753) (0.713)
-------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 10.690 $ 10.871 $ 9.815 $ 10.886 $ 10.699 $ 10.618 $ 9.969
-------- -------- -------- -------- -------- -------- --------
TOTAL RETURN 2.82% 17.99% (4.33%) 11.04% 7.61% 14.71% 7.99%
-------- -------- -------- -------- -------- -------- --------
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (In millions) $ 51.3 $ 41.4 $ 33.9 $ 51.1 $ 24.1 $ 6.8 $ 6.1
RATIOS TO AVERAGE NET ASSETS (1):
Expenses 0.60% 0.60% 0.59% 0.60% 0.60% 0.60% 0.74%
Net investment income 6.06% 6.42% 5.69% 5.82% 6.87% 7.45% 7.64%
PORTFOLIO TURNOVER RATE 320.3% 219.5% 177.6% 318.4% 231.9% 12.9% 59.3%
AVERAGE COMMISSION RATE PAID (2) N/A N/A N/A N/A N/A N/A N/A
(1) If certain expenses had not been reimbursed by the
Adviser, total return would have been lower and
the ratios would have been as follows:
Ratio of Expenses to Average Net Assets: 0.71% 0.75% 0.68% 0.70% 0.88% 1.10% 1.53%
Ratio of Net Investment Income to Average Net Assets: 5.95% 6.27% 5.60% 5.73% 6.59% 6.96% 6.85%
(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.
</TABLE>
* Non-annualized
** Annualized
N/A Not Applicable
See notes to financial statements
<TABLE>
<CAPTION>
-----------------
DECEMBER 11, 1989
COMMENCEMENT OF
INVESTMENT
OPERATIONS) TO
DECEMBER 31, 1989
-----------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.000
-------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.043
Net realized and unrealized gains (losses) (0.070)
-------
Total from investment operations (0.027)
-------
DISTRIBUTIONS
Dividends from net investment income (0.043)
Distributions from net realized gains ----
Distributions in excess of net investment income ----
Return of capital distributions ----
-------
Total distributions (0.043)
-------
NET ASSET VALUE, END OF PERIOD $ 9.930
-------
TOTAL RETURN (0.27%)*
-------
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (In millions) $ 2.5
RATIOS TO AVERAGE NET ASSETS (1):
Expenses 0.70%**
Net investment income 7.83%**
PORTFOLIO TURNOVER RATE 0.0%
AVERAGE COMMISSION RATE PAID (2) N/A
(1) If certain expenses had not been reimbursed by the
Adviser, total return would have been lower and
the ratios would have been as follows:
Ratio of Expenses to Average Net Assets: 9.15%**
Ratio of Net Investment Income to Average Net Assets: (0.62%**)
(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.
</TABLE>
* Non-annualized
** Annualized
N/A Not Applicable
See notes to financial statements
<TABLE>
<CAPTION>
STOCK INDEX
PORTFOLIO
- ------------------------------------------------------------------------------------------------
NOVEMBER 1, 1991
(COMMENCEMENT OF
YEARS ENDED DECEMBER 31, INVESTMENT
OPERATIONS) TO
1996 1995 1994 1993 1992 DECEMBER 31, 1991
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 13.844 $ 10.587 $ 11.115 $ 10.552 $ 10.572 $ 10.000
---------- ---------- ---------- ---------- ---------- ----------
0.286 0.260 0.311 0.205 0.172 0.038
2.797 3.637 (0.337) 0.726 0.477 0.534
---------- ---------- ---------- ---------- ---------- ----------
3.083 3.897 (0.026) 0.931 0.649 0.572
---------- ---------- ---------- ---------- ---------- ----------
(0.284) (0.260) (0.311) (0.205) (0.210) ----
(0.517) (0.380) (0.185) (0.163) (0.459) ----
---- ---- ---- ---- ---- ----
---- ---- (0.006) ---- ---- ----
---------- ---------- ---------- ---------- ---------- ----------
(0.801) (0.640) (0.502) (0.368) (0.669) ----
---------- ---------- ---------- ---------- ---------- ----------
$ 16.126 $ 13.844 $ 10.587 $ 11.115 $ 10.552 $ 10.572
---------- ---------- ---------- ---------- ---------- ----------
22.48% 36.87% (0.11%) 8.84% 6.22% 5.70%*
---------- ---------- ---------- ---------- ---------- ----------
$ 86.6 $ 86.0 $ 36.8 $ 91.3 $ 35.0 $ 6.8
0.60% 0.61% 0.58% 0.60% 0.59% 0.40%**
1.77% 2.41% 2.23% 2.29% 2.54% 3.02%**
1.3% 3.9% 47.1% 44.1% 85.7% ----
$0.0333 N/A N/A N/A N/A N/A
0.67% 0.78% 0.80% 0.74% 1.21% 1.84%**
1.70% 2.24% 2.01% 2.15% 1.92% 1.58%**
</TABLE>
<TABLE>
<CAPTION>
GROWTH AND INCOME
PORTFOLIO
- --------------------------------------------------------------------------------
MAY 1, 1992
(COMMENCEMENT OF
YEARS ENDED DECEMBER 31, INVESTMENT
OPERATIONS) TO
1996 1995 1994 1993 DECEMBER 31, 1992
- --------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
$ 12.512 $ 10.306 $ 11.170 $ 10.282 $ 10.000
- -------- ---------- ---------- ---------- ----------
0.243 0.224 0.331 0.182 0.125
2.007 3.089 (0.864) 1.371 0.444
- -------- ---------- ---------- ---------- ----------
2.250 3.313 (0.533) 1.553 0.569
- -------- ---------- ---------- ---------- ----------
(0.241) (0.232) (0.323) (0.182) (0.125)
(0.535) (0.875) (0.008) (0.483) (0.162)
---- ---- ---- ---- ----
---- ---- ---- ---- ----
- -------- ---------- ---------- ---------- ----------
(0.776) (1.107) (0.331) (0.665) (0.287)
- -------- ---------- ---------- ---------- ----------
$ 13.986 $ 12.512 $ 10.306 $ 11.170 $ 10.282
- -------- ---------- ---------- ---------- ----------
18.18% 32.24% (4.54%) 15.01% 5.67%*
- -------- ---------- ---------- ---------- ----------
$ 31.6 $ 19.7 $ 10.9 $ 6.5 $ 2.6
0.70% 0.69% 0.70% 0.69% 0.70%**
1.99% 2.05% 3.47% 1.84% 2.27%**
113.0% 180.1% 326.0% 135.9% 99.9%
$0.0566 N/A N/A N/A N/A
1.02% 1.19% 1.49% 2.05% 3.69%**
1.67% 1.55% 2.68% 0.47% (0.73%)**
</TABLE>
See notes to finanacial statements
COVA SERIES TRUST
FINANCIAL HIGHLIGHTS
For shares held throughout the periods indicated
<TABLE>
<CAPTION>
HIGH YIELD
PORTFOLIO
------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995 1994 1993 1992
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.446 $ 9.823 $ 11.287 $ 10.445 $ 10.410
--------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.952 0.949 0.978 1.028 1.250
Net realized and unrealized gains (losses) 0.187 0.621 (1.464) 1.170 0.658
--------- ----------- ----------- ----------- -----------
Total from investment operations 1.139 1.570 (0.486) 2.198 1.908
--------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Dividends from net investment income (0.954) (0.947) (0.978) (1.028) (1.250)
Distributions from net realized gains ---- ---- ---- (0.328) (0.623)
Distributions in excess of net investment income (0.005) ---- ---- ---- ----
Return of capital distributions ---- ---- ---- ---- ----
--------- ----------- ----------- ----------- -----------
Total distributions (0.959) (0.947) (0.978) (1.356) (1.873)
--------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 10.626 $ 10.446 $ 9.823 $ 11.287 $ 10.445
--------- ----------- ----------- ----------- -----------
TOTAL RETURN 11.29% 16.69% (4.52%) 21.98% 19.12%
--------- ----------- ----------- ----------- -----------
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (In millions) $ 41.1 $ 36.5 $ 19.7 $ 18.8 $ 5.4
RATIOS TO AVERAGE NET ASSETS (1):
Expenses 0.85% 0.86% 0.86% 0.84% 0.87%
Net investment income 8.89% 9.50% 9.48% 8.97% 11.67%
PORTFOLIO TURNOVER RATE 117.3% 118.9% 200.1% 213.1% 157.4%
AVERAGE COMMISSION RATE PAID (2) N/A N/A N/A N/A N/A
(1) If certain expenses had not been reimbursed by the
Adviser, total return would have been lower and the
ratios would have been as follows:
Ratio of Expenses to Average Net Assets: 1.04% 1.09% 1.16% 1.38% 1.79%
Ratio of Net Investment Income to Average Net Assets: 8.70% 9.27% 9.18% 8.43% 10.75%
(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.
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
DECEMBER 11, 1989
(COMMENCEMENT OF
INVESTMENT
OPERATIONS) TO
1991 1990 DECEMBER 31, 1989
--------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.073 $ 9.974 $ 10.000
----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 1.124 1.085 0.053
Net realized and unrealized gains (losses) 1.337 (0.901) (0.026)
----------- ----------- -----------
Total from investment operations 2.461 0.184 0.027
----------- ----------- -----------
DISTRIBUTIONS
Dividends from net investment income (1.124) (1.085) (0.053)
Distributions from net realized gains ---- ---- ----
Distributions in excess of net investment income ---- ---- ----
Return of capital distributions ---- ----
----------- ----------- -----------
Total distributions (1.124) (1.085) (0.053)
----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 10.410 $ 9.073 $ 9.974
----------- ----------- -----------
TOTAL RETURN 28.31% 1.86% 0.23%*
----------- ----------- -----------
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (In millions) $ 3.8 $ 2.9 $ 2.5
RATIOS TO AVERAGE NET ASSETS (1):
Expenses 0.86% 1.01% 0.95%**
Net investment income 11.31% 11.43% 9.67%**
PORTFOLIO TURNOVER RATE 147.6% 28.3% 0.0%
AVERAGE COMMISSION RATE PAID (2) N/A N/A N/A
(1) If certain expenses had not been reimbursed by the
Adviser, total return would have been lower and the
ratios would have been as follows:
Ratio of Expenses to Average Net Assets: 1.91% 2.42% 9.42%**
Ratio of Net Investment Income to Average Net Assets: 10.25% 10.01% 1.19%**
(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.
</TABLE>
* Non-annualized
** Annualized
N/A Not Applicable
See notes to financial statements
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Cova Series Trust (the "Trust") (formerly the Van Kampen Merritt Series Trust)
is registered as a diversified open-end management investment company under the
Investment Company Act of 1940, as amended. The Trust offers eleven portfolios
to its policyholders for investment, each of which operates as a distinct
investment vehicle of the Trust. J.P. Morgan Investment Management Inc. manages
the Small Cap Stock Portfolio, Quality Bond Portfolio, Select Equity Portfolio,
Large Cap Stock Portfolio, and International Equity Portfolio. Lord Abbett & Co.
manages the Bond Debenture Portfolio. Van Kampen American Capital Investment
Advisory Corporation manages the Money Market Portfolio, Quality Income
Portfolio, Stock Index Portfolio, Growth and Income Portfolio, and the High
Yield Portfolio. Depending on the policyholder's contract, not all portfolios
are available to all policyholders.
The Trust commenced operations on December 11, 1989 with the Quality Income
Portfolio and High Yield Portfolio. The Money Market Portfolio commenced
operations on July 1, 1991. The Stock Index Portfolio commenced operations on
November 1, 1991. The Growth and Income Portfolio commenced operations on May 1,
1992. The Small Cap Stock Portfolio, Quality Bond Portfolio, Select Equity
Portfolio, Large Cap Stock Portfolio, International Equity Portfolio and Bond
Debenture Portfolio commenced operations on April 2, 1996.
The preparation of financial statements in conformity with generally accepted
accounting principles may require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses during the
reporting period. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the Funds.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements.
A. SECURITY VALUATION - Investments in securities listed on a securities
exchange are valued at their sale price as of the close of such securities
exchange. If there was no sale on such day, the securities are valued at the
mean between the most recently quoted bid and asked prices. Investments in
securities not listed on a securities exchange are valued based on their last
quoted bid price or, if not available, their fair value as determined in good
faith by the Board of Trustees. Domestic fixed income investments are stated at
values using the mean between the most recently quoted bid and asked prices.
Foreign fixed income securities are valued at their sale price as of the close
of such securities exchange. If such valuations are not available, estimates
obtained from yield data relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith by the
Board of Trustees are used. Short-term securities with remaining maturities of
less than 60 days are valued at amortized cost. For the Money Market Portfolio,
investments are valued at amortized cost, which approximates market value. Under
this valuation method, a portfolio instrument is valued at cost and any discount
or premium is amortized on a straight line basis to the maturity of the
investment. Futures contracts and options are valued based upon their daily
settlement prices.
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
B. SECURITY TRANSACTIONS - Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Funds may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Funds will
maintain in a segregated account with their custodian assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made.
C. INVESTMENT INCOME AND EXPENSES - Dividend income is recorded on the
ex-dividend date and interest income and expenses are recorded when earned or
incurred, respectively.
D. FEDERAL INCOME TAXES - It is the Trust's policy to comply with the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially all of its
taxable income, including net realized gains, if any, to its shareholders.
Accordingly, the Funds have not recorded a provision for federal income taxes.
Distributions from net investment income and capital gains are determined in
accordance with federal income tax regulations which may differ from generally
accepted accounting principles. As a result, distributions may differ from net
investment income and net realized capital gains due to timing differences,
primarily from wash sales and net realized capital losses recognized subsequent
to October. For the Quality Income, Stock Index and Growth and Income
Portfolios, net realized gains and losses may differ for financial and tax
reporting purposes primarily as a result of timing differences related to open
futures transactions at year end.
The Funds utilize the provisions of the federal income tax laws that provide for
the carryforward of capital losses for eight years, offsetting such losses
against any future net realized capital gains. At December 31, 1996, the
accumulated capital loss carryforwards and expiration dates by Fund were as
follows: Quality Bond $34,027 expiring in 2004, Money Market $75,184 expiring in
2002, Quality Income $1,975,700 expiring in 2002 and 2004, and High Yield
$983,144 expiring in 2002.
E. DISTRIBUTION OF INCOME AND GAINS - The Funds, except the Money Market
Portfolio, declare, pay and automatically reinvest dividends semi-annually from
net investment income. The Money Market Portfolio declares dividends from net
investment income daily and automatically reinvests such dividends daily.
Net realized gains, if any, are distributed annually. Distributions are
automatically reinvested in the Funds as additional shares. Distributions from
net realized gains for book purposes may include short-term capital gains and
gains from futures transactions which may be characterized as ordinary income
for tax purposes.
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
F. DERIVATIVES - A derivative financial instrument, in general terms, is a
security whose value is "derived" from the value of an underlying asset,
reference rate or index. The Funds have various reasons to use derivative
instruments, such as to attempt to protect the Portfolios against possible
changes in the market value of its investments or to generate potential gains.
All of the Funds' holdings, including derivative instruments, are marked to
market each day with the change in value reflected in the unrealized
appreciation/depreciation of investments. Upon disposition, a realized gain or
loss is recognized accordingly.
The primary risks associated with the use of these financial instruments for
hedging purposes are (a) an imperfect correlation between the change in market
value of the other securities held by the Funds and the change in market value
of these financial instruments, and (b) the possibility of an illiquid market.
As a result, the use of these financial instruments may involve, to a varying
degree, elements of market risk in excess of the amount recognized in the
Statement of Assets and Liabilities. The following are brief descriptions of
derivative instruments held by the Funds.
a. FUTURES CONTRACTS - A futures contract is an agreement involving the
delivery of a particular asset on a specified future date at an agreed upon
price. The Funds generally invest in stock index futures. These contracts are
generally used to provide the return of an index without purchasing all of the
securities underlying the index or as a substitute for purchasing or selling
specific securities.
Initial margin deposits made upon entering into futures contracts are recognized
as assets due from the broker. During the period the futures contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" on a daily basis to reflect the value of the
contract at the end of each day's trading. Variation margin payments are made or
received and recognized as assets due from or liabilities to the broker
depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
its basis in the contract.
b. OPTIONS CONTRACTS - An option contract gives the buyer the right,
but not the obligation, to buy (call) or sell (put) an underlying item at a
fixed exercise price during a specified period. These contracts are generally
used by the Funds to provide the return of an index without purchasing all of
the securities underlying the index or as a substitute for purchasing or selling
specific securities.
Purchases of put and call options are recorded as an investment, the value of
which is marked-to-market daily. When a purchased option expires, the Fund will
realize a loss equal to the premium paid. When the Fund enters into a closing
sale transaction, the Fund will realize a gain or loss depending on whether the
sales proceeds from the closing sale transaction are greater or less than the
cost of the option. When the Fund exercises a put option, it will realize a gain
or loss from the sale of the underlying security and the proceeds from such sale
will be decreased by the premium originally paid. When the Fund exercises a call
option, the cost of the security which the Fund purchases upon exercise will be
increased by the premium originally paid.
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
F. DERIVATIVES - CONTINUED
The premium received for a written option is recorded as a liability. The
liability is marked-to-market based on the option's quoted daily settlement
price. When an option expires or the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or loss if the cost of the closing
purchase transaction exceeds the premium received when the option was sold)
without regard to any unrealized gain or loss on the underlying security and the
liability related to such option is eliminated. When a written call option is
exercised, the Fund realizes a gain or loss from the sale of the underlying
security and the proceeds from such sale are increased by the premium originally
received. If a written put option is exercised, the amount of the premium
originally received will reduce the cost of the underlying security which the
Fund purchased.
The risk associated with purchasing options is limited to the premium originally
paid. The risk in writing a call option is that the Fund may forego the
opportunity for profit if the market price of the underlying security increases
and the option is exercised. The risk in writing a put option is that the Fund
may incur a loss if the market price of the underlying security decreases and
the option is exercised. In addition, the Fund could be exposed to risks if the
counterparties to the transactions are unable to meet the terms of the
contracts.
c. FORWARD FOREIGN CURRENCY CONTRACTS - The International Equity
Portfolio may enter into forward foreign currency contracts to hedge its
portfolio holdings against future movements in certain foreign currency exchange
rates. A forward currency contract is a commitment to purchase or sell a foreign
currency at a future date at a set price. The forward currency contracts are
valued at the forward rate and are marked-to-market daily. The change in market
value is recorded by the Fund as an unrealized gain or loss. When the contract
is closed, the Fund recognizes a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at the
time it was closed.
The use of forward foreign currency contracts does not eliminate fluctuations in
the underlying prices of the securities of the Fund, but it does establish a
rate of exchange that can be achieved in the future. Although forward foreign
currency contracts limit the risk of loss due to a decline in the value of the
currency holdings, they also limit any potential gain that might result should
the value of the currency increase. In addition, the Fund could be exposed to
risks if the counterparties to the contracts are unable to meet the terms of the
contracts.
G. FOREIGN CURRENCY TRANSLATION - Assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at the rate of exchange at the end
of the period. Purchases and sales of securities are translated at the rates of
exchange prevailing when such securities were acquired or sold. Income is
translated at rates of exchange prevailing when interest is accrued or dividends
are recorded.
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
G. FOREIGN CURRENCY TRANSLATION - CONTINUED
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales and
maturities of short-term securities, sales of foreign currencies, currency gains
or losses realized between the trade and settlement dates on securities
transactions, the difference between the amounts of dividends, interest, and
foreign withholding taxes recorded on the Fund's books, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at fiscal year end, resulting
from changes in the exchange rate.
H. REPURCHASE AGREEMENTS - The Funds may enter into repurchase agreements with
selected commercial banks and broker-dealers, under which the Fund acquires
securities and agrees to resell the securities at an agreed upon time and at an
agreed upon price. The Fund accrues as interest the difference between the
amount it pays for the securities and the amount it receives upon resale. At the
time the Fund enters into a repurchase agreement, the value of the 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.
I. REVERSE REPURCHASE AGREEMENTS - The Funds may enter into reverse repurchase
agreements with selected commercial banks or broker-dealers. In a reverse
repurchase agreement, the Fund sells securities and agrees to repurchase them at
a mutually agreed upon date and price. During the reverse repurchase agreement
period, the Fund continues to receive principal and interest payments on these
securities but pays interest to the counter-party based upon competitive market
rates at the time of issuance. At the time the Fund enters into a reverse
repurchase agreement, it will establish and maintain a segregated account with
the custodian containing liquid assets having a value not less than the
repurchase price (including accrued interest). If the counterparty to the
transaction is rendered insolvent, the ultimate realization of the securities to
be repurchased by the Fund may be delayed or limited.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
The Trust has entered into an investment advisory agreement with Cova Investment
Advisory Corporation (the "Adviser") (formerly Oakbrook Investment Advisory
Corporation), pursuant to which the Adviser manages the investment operations of
the Trust's affairs. The Adviser has entered into sub-advisory agreements with
J.P. Morgan Investment Management Inc., Lord Abbett & Co. and Van Kampen
American Capital Investment Advisory Corporation ( the "Sub-advisers") for
investment advisory services in connection with the investment or management of
the portfolios of the Funds. The Adviser supervises the Sub-advisers'
performance of advisory services and will make recommendations
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES -
CONTINUED
to the Board of Trustees with respect to the retention or renewal of
the sub-advisory agreements. The Adviser pays the Sub-advisers and bears the
cost of compensating officers of the Trust.
Under the terms of the Funds' investment advisory agreement, the Funds pay the
Adviser a monthly fee based on the average daily net assets as follows:
Fund Average Daily Net Assets % Per Annum
Small Cap Stock ________________________ .85 of 1%
Quality Bond First $75 Million .55 of 1%
Over $75 Million .50 of 1%
Select Equity First $50 Million .75 of 1%
Over $50 Million .65 of 1%
Large Cap Stock ________________________ .65 of 1%
International Equity First $50 Million .85 of 1%
Over $50 Million .75 of 1%
Bond Debenture ________________________ .75 of 1%
Money Market First $500 Million .50 of 1%
Over $500 Million .40 of 1%
Quality Income First $500 Million .50 of 1%
Over $500 Million .45 of 1%
Stock Index _________________________ .50 of 1%
Growth and Income First $500 Million .60 of 1%
Over $500 Million .50 of 1%
High Yield First $500 Million .75 of 1%
Over $500 Million .65 of 1%
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES -
CONTINUED
The Adviser has voluntarily waived its monthly advisory fee for the Money Market
Portfolio. In addition, the Adviser has voluntarily waived or otherwise
reimbursed the Funds for their operating expenses, exclusive of brokerage or
other portfolio transaction expenses or expenses of litigation, indemnification,
taxes, or other extraordinary expenses, to the extent that they exceed .10% of
the average daily net assets of each Fund.
Cova Variable Annuity Accounts One and Five are separate investment accounts
offered by Cova Financial Services Life Insurance Co. and Cova Financial Life
Insurance Co. (collectively "Cova Life"), respectively. At December 31, 1996,
Cova Variable Annuity Accounts One and Five owned all shares of beneficial
interest of the Funds.
3. CAPITAL TRANSACTIONS
Transactions in shares were as follows:
Small Cap Stock Quality Bond Select Equity
Portfolio Portfolio Portfolio
Period ended Period ended Period ended
December 31, December 31, December 31,
1996* 1996* 1996*
----- ----- -----
Beginning Shares 500,000 500,000 500,000
------- ------- -------
Shares Sold 986,571 364,502 1,868,411
Shares Issued through
Dividend Reinvestment 1,363 6,904 2,403
Shares Repurchased (146,551) (295,930) (152,077)
-------- -------- --------
Net Increase in Shares
Outstanding 841,383 75,476 1,718,737
------- ------ ---------
Ending Shares 1,341,383 575,476 2,218,737
========= ======= =========
* Portfolio commenced operations April 2, 1996.
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
3. CAPITAL TRANSACTIONS - CONTINUED
Large Cap Stock International Bond Debenture
Portfolio Equity Portfolio
Portfolio
Period ended Period ended Period ended
December 31, December 31, December 31,
1996* 1996* 1996*
----- ----- -----
Beginning Shares 1,500,000 500,000 50,000
--------- ------- ------
Shares Sold 101,577 1,367,780 714,357
Shares Issued through
Dividend Reinvestment 6,843 3,673 1,514
Shares Repurchased (99,049) (446,255) (67,324)
------- -------- -------
Net Increase in Shares
Outstanding 9,371 925,198 648,547
----- ------- -------
Ending Shares 1,509,371 1,425,198 698,547
========= ========= =======
* Portfolio commenced operations April 2, 1996.
<TABLE>
<CAPTION>
Money Market Portfolio Quality Income Portfolio
Year ended Year ended Year ended Year ended
December 31, December 31, December 31, December 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Beginning Shares 34,458,054 75,996,424 3,807,302 3,457,435
---------- ---------- --------- ---------
Shares Sold 34,135,639 27,981,115 2,174,582 2,141,344
Shares Issued through
Dividend Reinvestment 1,778,758 3,052,192 130,798 238,868
Shares Repurchased (39,342,379) (72,571,677) (1,311,585) (2,030,345)
---------- ---------- --------- ---------
Net Increase/(Decrease)in
Shares Outstanding (3,427,982) (41,538,370) 993,795 349,867
---------- ---------- --------- ---------
Ending Shares 31,030,072 34,458,054 4,801,097 3,807,302
========== ========== ========= =========
</TABLE>
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
3. CAPITAL TRANSACTIONS - CONTINUED
<TABLE>
<CAPTION>
Stock Index Portfolio Growth and Income Portfolio
Year ended Year ended Year ended Year ended
December 31, December 31, December 31, December 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Beginning Shares 6,210,939 3,477,141 1,576,436 1,061,698
--------- --------- --------- ---------
Shares Sold 513,644 3,889,063 780,898 489,524
Shares Issued through
Dividend Reinvestment 53,172 271,456 15,904 126,226
Shares Repurchased (1,410,166) (1,426,721) (114,339) (101,012)
--------- --------- --------- ---------
Net Increase /(Decrease)
in Shares Outstanding (843,350) 2,733,798 682,463 514,738
--------- --------- --------- ---------
Ending Shares 5,367,589 6,210,939 2,258,899 1,576,436
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
High Yield Portfolio
Year ended Year ended
December 31, December 31,
1996 1995
--------- ---------
<S> <C> <C>
Beginning Shares 3,495,538 2,000,944
--------- ---------
Shares Sold 2,395,207 1,420,820
Shares Issued through
Dividend Reinvestment 159,825 267,010
Shares Repurchased (2,186,069) (193,236)
--------- ---------
Net Increase in Shares
Outstanding 368,963 1,494,594
--------- ---------
Ending Shares 3,864,501 3,495,538
========= =========
</TABLE>
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
4. INVESTMENT TRANSACTIONS
Aggregate cost of purchases and proceeds of sales of investment securities,
excluding short-term notes, for the year ended December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Purchases
---------------------------------------------------------------
Portfolio: Government Non-Government Total
- ---------- ---------- -------------- -----
<S> <C> <C> <C>
Small Cap Stock * $ 0 $ 20,413,446 $ 20,413,446
Quality Bond * 12,479,739 3,385,357 15,865,096
Select Equity * 0 35,961,685 35,961,685
Large Cap Stock * 0 20,771,532 20,771,532
International Equity * 0 18,038,698 18,038,698
Bond Debenture * 1,580,349 7,873,836 9,454,185
Quality Income 88,679,109 81,773,017 170,452,126
Stock Index 0 1,074,698 1,074,698
Growth and Income 0 35,159,878 35,159,878
High Yield 532,344 46,299,471 46,831,815
Sales
---------------------------------------------------------------
Portfolio: Government Non-Government Total
- ---------- ---------- -------------- -----
Small Cap Stock * $ 0 $ 8,168,870 $ 8,168,870
Quality Bond * 9,715,520 420,224 10,135,744
Select Equity * 0 13,940,399 13,940,399
Large Cap Stock * 0 5,587,771 5,587,771
International Equity * 0 4,068,092 4,068,092
Bond Debenture * 404,125 1,794,602 2,198,727
Quality Income 80,823,465 76,250,786 157,074,251
Stock Index 0 9,739,036 9,739,036
Growth and Income 0 27,410,399 27,410,399
High Yield 501,641 40,091,831 40,593,472
* Portfolio commenced operations April 2, 1996.
</TABLE>
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
4. INVESTMENT TRANSACTIONS - CONTINUED
At December 31, 1996, the cost of securities for federal income tax purposes and
the unrealized appreciation (depreciation) of investments for federal income tax
purposes for each Portfolio was as follows:
<TABLE>
<CAPTION>
Federal Gross Gross
Portfolio: Income Unrealized Unrealized
Tax Cost Appreciation (Depreciation)
-------- ------------ --------------
<S> <C> <C> <C>
Small Cap Stock $ 12,929,870 $ 1,186,516 $ (733,417)
Quality Bond 5,625,025 68,921 (5,664)
Select Equity 22,593,075 1,318,250 (351,881)
Large Cap Stock 15,571,232 1,961,411 (379,448)
International Equity 14,010,278 1,271,448 (395,869)
Bond Debenture 7,335,661 304,708 (21,835)
Money Market 31,179,953 --- ---
Quality Income 52,712,989 731,435 (61,300)
Stock Index 62,783,434 28,241,602 (998,408)
Growth and Income 29,014,877 4,340,354 (333,874)
High Yield 41,060,464 1,196,777 (170,337)
</TABLE>
The Quality Income Portfolio invests in reverse repurchase agreements for cash
management purposes. The average daily balance of reverse repurchase agreements
outstanding during the year ended December 31, 1996 was $2,111,585 at a weighted
average interest rate of 4.64%. The maximum amount of borrowing during the year
was $7,219,713 (including accrued interest).
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
5. FUTURES CONTRACTS
Transactions in futures contracts for the year ended December 31, 1996, were as
follows:
<TABLE>
<CAPTION>
Quality Income Stock Index Growth and Income
Portfolio Portfolio Portfolio
--------- --------- ---------
<S> <C> <C> <C>
Futures Contracts Outstanding at December 31, 1995 0 11 2
Contracts Opened 25 64 15
Contracts Closed 0 (70) (13)
------- ------- ------
Futures Contracts Outstanding at December 31, 1996 25 5 4
======= ======= ======
</TABLE>
The futures contracts outstanding as of December 31, 1996 and the description
and unrealized appreciation (depreciation) were as follows:
<TABLE>
<CAPTION>
Unrealized
Notional Appreciation /
Contracts Value (Depreciation)
--------- ----- --------------
<S> <C> <C> <C>
Quality Income Portfolio:
U.S. Long Bond (CBT)
March 1997 - Sales to Close 25 $ 2,815,625 $ 10,156
Stock Index Portfolio:
S&P 500 Index Futures
March 1997 - Buys to Open 5 $ 1,861,250 $ (33,790)
Growth & Income Portfolio:
S&P 500 Index Futures
March 1997 - Buys to Open 4 $ 1,489,000 $ (15,650)
</TABLE>
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
6. OPTION CONTRACTS
The Stock Index Portfolio's transactions in options for the year ended December
31, 1996, were as follows:
OPTIONS PURCHASED CONTRACTS PREMIUM
- ----------------- --------- -------
Options Outstanding at December 31, 1995 18 $ 39,699
Options Purchased 61 93,460
Options Terminated in Closing (79) (133,159)
------- ----------
Options Outstanding at December 31, 1996 0 $ 0
======= ==========
OPTIONS WRITTEN CONTRACTS PREMIUM
- --------------- --------- -------
Options Outstanding at December 31, 1995 18 $ (16,401)
Options Written 61 (136,524)
Options Terminated in Closing (79) 152,925
------- ----------
Options Outstanding at December 31, 1996 0 $ 0
======= ==========
The Growth and Income Portfolio's transactions in options for the year ended
December 31, 1996, were as follows:
OPTIONS WRITTEN CONTRACTS PREMIUM
- --------------- --------- -------
Options Outstanding at December 31, 1995 0 $ 0
Options Written 2,003 (4,940)
Options Expired (2,003) 4,940
-------- --------
Options Outstanding at December 31, 1996 0 $ 0
======== ========
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
7. FORWARD FOREIGN CURRENCY CONTRACTS
Open foreign forward currency contracts for the International Equity Portfolio
at December 31, 1996 were as follows:
Forward Foreign Currency Contracts to Buy:
<TABLE>
<CAPTION>
Value at In Unrealized
Settlement December 31, Exchange Appreciation/
Date Contracts to Receive 1996 for U.S. $ (Depreciation)
---- -------------------- ---- ---------- --------------
<S> <C> <C> <C> <C> <C>
1/13/97 464,494 Deutsche Mark $ 299,801 $ 305,000 $ (5,199)
1/3/97 26,000 French Franc 4,966 4,953 13
1/13/97 985,764 French Franc 188,398 195,000 (6,602)
1/3/97 9,000 Irish Punt 15,160 15,057 103
1/13/97 41,294,162 Japanese Yen 356,264 372,000 (15,736)
1/3/97 9,000 Netherlands Guilder 5,172 5,152 20
1/3/97 39,000 New Zealand Dollar 27,561 27,554 7
1/3/97 4,100,000 Spanish Peseta 31,355 31,274 81
Forward Foreign Currency Contracts to Sell:
Value at In Unrealized
Settlement December 31, Exchange Appreciation/
Date Contracts to Deliver 1996 for U.S. $ (Depreciation)
---- -------------------- ---- ---------- --------------
1/13/97 789,020 Deutsche Mark $ 509,262 $ 519,142 $ 9,880
1/13/97 2,090,450 French Franc 399,525 406,307 6,782
1/13/97 93,735,907 Japanese Yen 808,702 836,964 28,262
</TABLE>
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
8. MORTGAGE AND ASSET BACKED SECURITIES
The Quality Income and Quality Bond Portfolios invest in Mortgage and Asset
Backed Securities. A Mortgage Backed Security (MBS) is a pass-through security
created by pooling and selling participations in the principal and interest
payments received from borrowers. Most of these securities are guaranteed by
federally sponsored agencies -- Government National Mortgage Association (GNMA),
Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage
Corporation (FHLMC) or Federal Home Loan Bank (FHLB).
A Collateralized Mortgage Obligation (CMO) is a bond which is collateralized by
a pool of MBSs. The Quality Income and Quality Bond Portfolios also invest in
REMICs (Real Estate Mortgage Investment Conduits) which are simply another form
of CMO. These MBS pools are divided into classes or tranches with each class
having its own characteristics. For instance, a PAC (Planned Amortization Class)
is a specific class of mortgages with the most stable cash flow and the lowest
prepayment risk.
Asset Backed Securities are similar to MBSs but made up of pools of other
assets, such as credit card receivables, which are grouped together for
investment purposes. Payments of principal and interest on the securities are
made from the cash flows of the group of assets.
