COVA SERIES TRUST
ONE TOWER LANE, SUITE 3000
OAKBROOK TERRACE, ILLINOIS 60181-4644
COVA SERIES TRUST ("Trust") is intended to meet differing investment
objectives with its nineteen separate Portfolios, six of which are offered
herein: Bond Debenture Portfolio, Quality Bond Portfolio, Small Cap Stock
Portfolio, Large Cap Stock Portfolio, Select Equity Portfolio and
International Equity Portfolio. The Trustees may provide for additional
Portfolios from time to time. Each Portfolio issues its own class of shares
which has rights separate from the other classes of shares.
This Prospectus concisely sets forth the information about the Trust that a
prospective investor should know before investing. Investors should read and
retain this Prospectus for future reference.
A Statement of Additional Information, dated May 1, 1997, containing
information about the Trust has been filed with the Securities and Exchange
Commission and is hereby incorporated by reference into this Prospectus. A
copy of the Statement of Additional Information may be obtained without charge
by calling (800) 831-LIFE, or writing First Cova Life Insurance Company at One
Tower Lane, Suite 3000, Oakbrook Terrace, Illinois 60181-4644.
THE BOND DEBENTURE PORTFOLIO MAY INVEST A SUBSTANTIAL PORTION OF ITS ASSETS IN
LOWER GRADE CORPORATE DEBT SECURITIES COMMONLY KNOWN AS "JUNK BONDS."
INVESTORS SHOULD BE AWARE THAT SUCH INVESTMENTS INVOLVE A SIGNIFICANT DEGREE
OF RISK. SEE "RISK FACTORS - SPECIAL RISKS OF HIGH YIELD INVESTING."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This Prospectus is dated: May 1, 1997.
TABLE OF CONTENTS PAGE
SUMMARY
The Trust
Investment Adviser and Sub-Advisers
The Portfolios
Investment Risks
Sales and Redemptions
FINANCIAL HIGHLIGHTS
THE TRUST
INVESTMENT OBJECTIVES AND
POLICIES OF THE PORTFOLIOS
Quality Bond Portfolio
Small Cap Stock Portfolio
Large Cap Stock Portfolio
Select Equity Portfolio
International Equity Portfolio
Bond Debenture Portfolio
INVESTMENT PRACTICES
Investment Limitations
RISK FACTORS
Tax Considerations
Special Considerations Relating to
Foreign Securities
Special Risks of High Yield Investing
PORTFOLIO TURNOVER RATES
Bond Debenture Portfolio
Quality Bond, Small Cap Stock,
Large Cap Stock, Select Equity
and International Equity Portfolios
MANAGEMENT OF THE TRUST
The Trustees
Adviser
Trust Administration
Portfolio Management
Expenses of the Trust
Sub-Advisers
Sub-Advisory Fees
DESCRIPTION OF THE TRUST
Shareholder Rights
Inquiries
Distribution and Redemption of Shares
Dividends
Tax Status
Net Asset Values
FUND PERFORMANCE
APPENDIX -- DESCRIPTION OF
CORPORATE BOND RATINGS
SUMMARY
THE TRUST
The Trust is an open-end management investment company established as a
Massachusetts business trust under a Declaration of Trust dated July 9, 1987.
Each Portfolio issues a separate class of shares. The Declaration of Trust
permits the Trustees to issue an unlimited number of full or fractional shares
of each class of stock.
Each Portfolio has distinct investment objectives and policies. (See
"Investment Objectives and Policies of the Portfolios.") Additional Portfolios
may be added to the Trust in the future. This Prospectus will be supplemented
to reflect the addition of new Portfolios.
INVESTMENT ADVISER AND SUB-ADVISERS
Subject to the authority of the Board of Trustees of the Trust, Cova
Investment Advisory Corporation (the "Adviser") serves as the Trust's
investment adviser and has responsibility for the overall management of the
investment strategies and policies of the Portfolios. The Adviser has engaged
Sub-Advisers for each of the Portfolios to make investment decisions and place
orders. The Sub-Advisers for the Portfolios are:
<TABLE>
<CAPTION>
<S> <C>
SUB-ADVISER NAME OF PORTFOLIO
J.P. Morgan Quality Bond Portfolio
Investment Small Cap Stock Portfolio
Management Inc. Large Cap Stock Portfolio
Select Equity Portfolio
International Equity Portfolio
Lord, Abbett & Co. Bond Debenture Portfolio
</TABLE>
For additional information concerning the Adviser and the Sub-Advisers,
including a description of advisory and sub-advisory fees, see "Management of
the Trust."
THE PORTFOLIOS
PORTFOLIOS MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT INC.:
QUALITY BOND PORTFOLIO.
The investment objective of this Portfolio is to provide a high total return
consistent with moderate risk of capital and maintenance of liquidity.
Although the net asset value of the Portfolio will fluctuate, the Portfolio
attempts to preserve the value of its investments to the extent consistent
with its objective.
SMALL CAP STOCK PORTFOLIO.
The investment objective of this Portfolio is to provide a high total return
from a portfolio of equity securities of small companies. The Portfolio will
invest primarily in the common stock of small U.S. companies. The small
company holdings of the Portfolio will be primarily securities included in the
Russell 2000 Index.
LARGE CAP STOCK PORTFOLIO.
The investment objective of this Portfolio is long-term growth of capital and
income. The equity holdings of the Portfolio will be primarily stocks of
large- and medium-sized companies. The Portfolio will be highly diversified
and hold approximately 300 stocks.
SELECT EQUITY PORTFOLIO.
The investment objective of this Portfolio is long-term growth of capital and
income. The equity holdings of the Portfolio will be primarily stocks of
large- and medium-sized companies. The Portfolio will typically hold between
60 and 90 stocks.
INTERNATIONAL EQUITY PORTFOLIO.
The investment objective of this Portfolio is to provide a high total return
from a portfolio of equity securities of foreign corporations. The equity
holdings of the Portfolio will be primarily stocks of established companies
based in developed countries outside the United States. The Portfolio is
actively managed and seeks to outperform the Morgan Stanley Capital
International Europe, Australia and Far East Index.
PORTFOLIO MANAGED BY LORD, ABBETT & CO.:
BOND DEBENTURE PORTFOLIO.
The investment objective of this Portfolio is high current income and the
opportunity for capital appreciation to produce a high total return through a
professionally-managed portfolio consisting primarily of convertible and
discount debt securities, many of which are lower-rated. These lower-rated
debt securities entail greater risks than investments in higher-rated debt
securities. Investors should carefully consider these risks set forth under
"Risk Factors - Special Risks of High Yield Investing" before investing.
The investment objectives of a Portfolio and policies and restrictions
specifically cited as fundamental may not be changed without the approval of a
majority of the outstanding shares of that Portfolio. Other investment
policies and practices described in this Prospectus and the Statement of
Additional Information are not fundamental, and the Board of Trustees may
change them without shareholder approval. A complete list of investment
restrictions, including those restrictions which cannot be changed without
shareholder approval, is contained in the Statement of Additional Information.
There is no assurance that a Portfolio will meet its stated objective.
INVESTMENT RISKS
The value of a Portfolio's shares will fluctuate with the value of the
underlying securities in its portfolio, and in the case of debt securities,
with the general level of interest rates. When interest rates decline, the
value of an investment portfolio invested in fixed-income securities can be
expected to rise. Conversely, when interest rates rise, the value of an
investment portfolio invested in fixed-income securities can be expected to
decline. In the case of foreign currency denominated securities, these trends
may be offset or amplified by fluctuations in foreign currencies. Investments
by a Portfolio in foreign securities may be affected by adverse political,
diplomatic, and economic developments, changes in foreign currency exchange
rates, taxes or other assessments imposed on distributions with respect to
those investments, and other factors affecting foreign investments generally.
High-yielding fixed-income securities, which are commonly known as "junk
bonds", are subject to greater market fluctuations and risk of loss of income
and principal than investments in lower yielding fixed-income securities.
Certain of the Portfolios intend to employ, from time to time, certain
investment techniques which are designed to enhance income or total return or
hedge against market or currency risks but which themselves involve additional
risks. These techniques include options on securities, futures, options on
futures, options on indexes, options on foreign currencies, foreign currency
exchange transactions, lending of securities and when-issued securities and
delayed-delivery transactions. The Portfolios may have higher-than-average
portfolio turnover which may result in higher-than-average brokerage
commissions and transaction costs.
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of First Cova Life
Insurance Company and its affiliated life insurance companies (collectively,
"First Cova") as a funding vehicle for the variable annuity contracts and/or
variable life insurance policies ("Variable Contracts") offered by First Cova.
No fee is charged upon the sale or redemption of the Trust's shares. Expenses
of the Trust are passed through to the separate accounts of First Cova, and
therefore, are ultimately borne by Variable Contract owners. In addition,
other fees and expenses are assessed by First Cova at the separate account
level. (See the Prospectus for the Variable Contract for a description of all
fees and charges relating to the Variable Contract.)
FINANCIAL HIGHLIGHTS
(for one share of each Portfolio outstanding throughout the period)
The following schedule presents financial highlights for one share of each of
the Portfolios throughout the periods indicated. The financial highlights have
been audited by KPMG Peat Marwick LLP, independent auditors, for each of the
periods through December 31, 1996 presented below, and their report thereon
appears in the Portfolios' related Statement of Additional Information. This
information should be read in conjunction with the financial statements and
related notes thereto included in the Statement of Additional Information, a
copy of which may be obtained without charge as indicated elsewhere in this
Prospectus.
COVA SERIES TRUST
FINANCIAL HIGHLIGHTS
For Shares Held Throughout the Periods Indicated
For the Period from May 1, 1996 (date of initial public offering) to December
31, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Inter-
Small Cap Quality Select Large Cap national Bond
Stock Bond Equity Stock Equity Debenture
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- ---------- ----------
Net Asset Value, Beginning of Period $ 10.512 $ 9.897 $ 10.084 $ 10.003 $ 10.215 $ 10.098
---------- ---------- ---------- ---------- ---------- ----------
Income from Investment Operations
Net investment income 0.057 0.459 0.081 0.124 0.096 0.345
Net realized and unrealized gains (losses) 0.843 0.102 0.771 1.304 0.755 0.949
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations 0.900 0.561 0.852 1.428 0.851 1.294
---------- ---------- ---------- ---------- ---------- ----------
Distributions
Dividends from net investment income (0.055) (0.376) (0.081) (0.122) (0.086) (0.342)
Distributions from net realized gains (0.435) _ _ (0.113) (0.197) (0.021) (0.080)
Distributions in excess of net
investment income _ _ _ _ + _ _ _ _ _ _
Return of capital distributions _ _ _ _ _ _ _ _ _ _ _ _
---------- ---------- ---------- ---------- ---------- ----------
Total distributions (0.490) (0.376) (0.194) (0.319) (0.107) (0.422)
---------- ---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period $ 10.922 $ 10.082 $ 10.742 $ 11.112 $ 10.959 $ 10.970
---------- ---------- ---------- ---------- ---------- ----------
Total Return 8.65%* 5.68%* 8.52%* 14.35%* 8.44%* 12.89%*
---------- ---------- ---------- ---------- ---------- ----------
Ratios/Supplemental Data:
Net Assets, end of period (in millions) $ 14.7 $ 5.8 $ 23.8 $ 16.8 $ 15.6 $ 7.7
Ratios to Average Net Assets (1):
Expenses 0.95%** 0.65%** 0.85%** 0.75%** 0.95%** 0.85%**
Net investment income 0.87%** 5.94%** 1.35%** 1.56%** 1.43%** 7.26%**
Portfolio Turnover Rate 102.4% 181.3% 123.9% 35.5% 48.2% 58.1%
Average Commission Rate Paid (2) $ 0.0371 N/A $ 0.0406 $ 0.0323 $ 0.0107 $ 0.0677
(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%** 2.05%**
Ratio of Net Investment Income to
Average Net Assets: (0.86%)** 5.07%** 0.50%** 1.08%** (1.42%)** 6.06%**
(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.
<FN>
+ Amount is less than .0005% * Non-Annualized ** Annualized N/A Not Applicable
</TABLE>
See Notes to Financial Statements
THE TRUST
The Trust is currently comprised of nineteen separate Portfolios, six of which
are offered herein: Bond Debenture Portfolio, Quality Bond Portfolio, Small
Cap Stock Portfolio, Large Cap Stock Portfolio, Select Equity Portfolio and
International Equity Portfolio. The Trustees may provide for additional
Portfolios from time to time. Each Portfolio issues a separate class of
shares. The Declaration of Trust permits the Trustees to issue an unlimited
number of full or fractional shares of each class of stock.
INVESTMENT OBJECTIVES AND
POLICIES OF THE PORTFOLIOS
Each Portfolio of the Trust has a different investment objective which it
pursues through separate investment policies as described below. The risks and
opportunities of each Portfolio should be examined separately. The differences
in objectives and policies among the Portfolios can be expected to affect the
return of each Portfolio and the degree of market and financial risk of each
Portfolio.
There is no assurance that the investment objectives of the various Portfolios
will be met.
PORTFOLIOS MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT INC.:
QUALITY BOND PORTFOLIO.
The investment objective of the Portfolio is to provide a high total return
consistent with moderate risk of capital and maintenance of liquidity. Total
return will consist of income plus realized and unrealized capital gains and
losses.
The Portfolio is designed for investors who seek a total return over time that
is higher than that generally available from a portfolio of shorter-term
obligations while recognizing the greater price fluctuation of longer-term
instruments. It may also be a convenient way to add fixed income exposure to
diversify an existing portfolio.
The Sub-Adviser actively manages the Portfolio's duration, the allocation of
securities across market sectors, and the selection of specific securities
within sectors. Based on fundamental, economic and capital markets research,
the Sub-Adviser adjusts the duration of the Portfolio in light of market
conditions and the Sub-Adviser's interest rate outlook. For example, if
interest rates are expected to fall, the duration may be lengthened to take
advantage of the expected associated increase in bond prices. The Sub-Adviser
also actively allocates the Portfolio's assets among the broad sectors of the
fixed income market including, but not limited to, U.S. Government and agency
securities, corporate securities, private placements, and asset-backed and
mortgage related securities. Specific securities which the Sub-Adviser
believes are undervalued are selected for purchase within the sectors using
advanced quantitative tools, analysis of credit risk, the expertise of a
dedicated trading desk, and the judgment of fixed income portfolio managers
and analysts. Under normal circumstances, the Sub-Adviser intends to keep the
Portfolio essentially fully invested with at least 65% of the Portfolio's
assets invested in bonds.
Duration is a measure of the weighted average maturity of the bonds held in
the Portfolio and can be used as a measure of the sensitivity of the
Portfolio's market value to changes in interest rates. Under normal market
conditions the Portfolio's duration will range between one year shorter and
one year longer than the duration of the U.S. investment grade fixed income
universe, as represented by Salomon Brothers Broad Investment Grade Bond
Index, the Portfolio's benchmark. Currently, the benchmark's duration is
approximately 4.78 years. The maturities of the individual securities in the
Portfolio may vary widely, however.
The Portfolio intends to manage its portfolio actively in pursuit of its
investment objective. Portfolio transactions are undertaken principally to
accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates, but the Portfolio may also engage in
short-term trading consistent with its objective. To the extent the Portfolio
engages in short-term trading, it may incur increased transaction costs.
CORPORATE BONDS, ETC. The Portfolio may invest in a broad range of debt
securities of domestic and foreign issuers. These include debt securities of
various types and maturities, e.g., debentures, notes, mortgage securities,
equipment trust certificates and other collateralized securities and zero
coupon securities. Collateralized securities are backed by a pool of assets
such as loans or receivables which generate cash flow to cover the payments
due on the securities. Collateralized securities are subject to certain risks,
including a decline in the value of the collateral backing the security,
failure of the collateral to generate the anticipated cash flow or in certain
cases more rapid prepayment because of events affecting the collateral, such
as accelerated prepayment of mortgages or other loans backing these securities
or destruction of equipment subject to equipment trust certificates. In the
event of any such prepayment the Portfolio will be required to reinvest the
proceeds of prepayments at interest rates prevailing at the time of
reinvestment, which may be lower. In addition, the value of zero coupon
securities which do not pay interest is more volatile than that of interest
bearing debt securities with the same maturity. The Portfolio does not intend
to invest in common stock but may invest to a limited extent in convertible
debt or preferred stock. The Portfolio does not expect to invest more than 25%
of its assets in securities of foreign issuers. If the Portfolio invests in
non-U.S. dollar denominated securities, it hedges the foreign currency
exposure into the U.S. dollar. See "Investment Practices" and "Risk Factors"
for further information on foreign investments and convertible securities.
GOVERNMENT OBLIGATIONS, ETC. The Portfolio may invest in obligations issued or
guaranteed by the U.S. Government and backed by the full faith and credit of
the United States. These securities include Treasury securities, GNMA
Certificates, and obligations of the Farmers Home Administration and the
Export Import Bank. Government National Mortgage Association ("GNMA")
Certificates are mortgage-backed securities which evidence an undivided
interest in mortgage pools. These securities are subject to more rapid
repayment than their stated maturity would indicate because prepayments of
principal on mortgages in the pool are passed through to the holder of the
securities. During periods of declining interest rates, prepayments of
mortgages in the pool can be expected to increase. The pass-through of these
prepayments would have the effect of reducing the Portfolio's positions in
these securities and requiring the Portfolio to reinvest the prepayments at
interest rates prevailing at the time of reinvestment. The Portfolio may also
invest in obligations issued or guaranteed by U.S. Government agencies or
instrumentalities where the Portfolio must look principally to the issuing or
guaranteeing agency for ultimate repayment; some examples of agencies or
instrumentalities issuing these obligations are the Federal Farm Credit
System, the Federal Home Loan Banks and the Federal National Mortgage
Association. Although these governmental issuers are responsible for payments
on their obligations, they do not guarantee their market value.
The Portfolio may also invest in municipal obligations which may be general
obligations of the issuer or payable only from specific revenue sources.
However, the Portfolio will invest only in municipal obligations that have
been issued on a taxable basis or have an attractive yield excluding tax
considerations. In addition, the Portfolio may invest in debt securities of
foreign governments and governmental entities. See "Investment Practices" and
"Risk Factors" for further information on foreign investments.
MONEY MARKET INSTRUMENTS. The Portfolio may purchase money market instruments
to invest temporary cash balances or to maintain liquidity to meet
withdrawals. However, the Portfolio may also invest in money market
instruments as a temporary defensive measure taken during, or in anticipation
of, adverse market conditions. The money market investments permitted for the
Portfolio include U.S. Government Securities, other debt securities,
commercial paper, bank obligations and repurchase agreements. For more
detailed information about these money market investments, see "Investment
Objectives and Policies" in the Statement of Additional Information.
QUALITY INFORMATION. It is a current policy of the Portfolio that under normal
circumstances at least 65% of its total assets will consist of securities that
are rated at least A by Moody's or S&P or that are unrated and in the
Sub-Adviser's opinion are of comparable quality. In the case of 30% of the
Portfolio's investments, the Portfolio may purchase debt securities that are
rated Baa or better by Moody's or BBB or better by S&P or are unrated and in
the Sub-Adviser's opinion are of comparable quality. The remaining 5% of the
Portfolio's assets may be invested in debt securities that are rated Ba or
better by Moody's or BB or better by S&P or are unrated and in the
Sub-Adviser's opinion are of comparable quality. Securities rated Baa by
Moody's or BBB by S&P are considered investment grade, but have some
speculative characteristics. Securities rated Ba by Moody's or BB by S&P are
below investment grade and considered to be speculative with regard to payment
of interest and principal. These standards must be satisfied at the time an
investment is made. If the quality of the investment later declines, the
Portfolio may continue to hold the investment. See "Appendix - Description of
Corporate Bond Ratings" for more detailed information on these ratings.
The Portfolio may also purchase and sell obligations on a when-issued or
delayed delivery basis, enter into repurchase and reverse repurchase
agreements, loan its portfolio securities, purchase certain privately placed
securities and enter into certain hedging transactions that may involve
options on securities and securities indexes, futures contracts and options on
futures contracts. For a discussion of these investments and investment
techniques, see "Investment Practices" and "Risk Factors."
SMALL CAP STOCK PORTFOLIO.
The investment objective of the Portfolio is to provide a high total return
from a portfolio of equity securities of small companies. Total return will
consist of realized and unrealized capital gains and losses plus income. The
Portfolio invests primarily in the common stock of small U.S. companies. The
small company holdings of the Portfolio are primarily companies included in
the Russell 2000 Index.
The Portfolio is designed for investors who are willing to assume the somewhat
higher risk of investing in small companies in order to seek a higher return
over time than might be expected from a portfolio of stocks of large
companies. The Portfolio may also serve as an efficient vehicle to diversify
an existing portfolio by adding the equities of smaller U.S. companies.
The Sub-Adviser seeks to enhance the Portfolio's total return relative to that
of the U.S. small company universe. To do so, the Sub-Adviser uses fundamental
research, systematic stock valuation and a disciplined portfolio construction
process. The Sub-Adviser continually screens the universe of small
capitalization companies to identify for further analysis those companies
which exhibit favorable characteristics such as significant and predictable
cash flow and high quality management. Based on fundamental research and using
a dividend discount model, the Sub-Adviser ranks these companies within
economic sectors according to their relative value. The Sub-Adviser then
selects for purchase the most attractive companies within each economic
sector.
The Sub-Adviser uses a disciplined portfolio construction process to seek to
enhance returns and reduce volatility in the market value of the Portfolio
relative to that of the U.S. small company universe. The Sub-Adviser believes
that under normal market conditions, the Portfolio will have sector weightings
comparable to that of the U.S. small company universe, although it may
moderately under- or over-weight selected economic sectors. In addition, as a
company moves out of the market capitalization range of the small company
universe, it generally becomes a candidate for sale by the Portfolio.
The Portfolio intends to manage its investments actively in pursuit of its
investment objective. Since the Portfolio has a long-term investment
perspective, it does not intend to respond to short-term market fluctuations
or to acquire securities for the purpose of short-term trading; however, it
may take advantage of short-term trading opportunities that are consistent
with its objective. To the extent the Portfolio engages in short-term trading,
it may incur increased transaction costs.
EQUITY INVESTMENTS. During ordinary market conditions, the Sub-Adviser intends
to keep the Portfolio essentially fully invested with at least 65% of the
Portfolio's net assets invested in equity securities consisting of common
stocks and other securities with equity characteristics such as preferred
stocks, warrants, rights and convertible securities. The Portfolio's primary
equity investments are the common stocks of small U.S. companies and, to a
limited extent, similar securities of foreign corporations. The common stock
in which the Portfolio may invest includes the common stock of any class or
series or any similar equity interest, such as trust or limited partnership
interests. The small company holdings of the Portfolio are primarily companies
included in the Russell 2000 Index. These equity investments may or may not
pay dividends and may or may not carry voting rights. The Portfolio invests in
securities listed on a securities exchange or traded in an over-the-counter
market, and may invest in certain restricted or unlisted securities.
FOREIGN INVESTMENTS. The Portfolio may invest in equity securities of foreign
issuers that are listed on a national securities exchange or denominated or
principally traded in U.S. dollars. However, the Portfolio does not expect to
invest more than 5% of its assets at the time of purchase in foreign equity
securities. For further information on foreign investments and foreign
currency exchange transactions, see "Investment Practices" and "Risk Factors."
The Portfolio may also purchase and sell securities on a when-issued or
delayed delivery basis, enter into repurchase and reverse repurchase
agreements, loan its portfolio securities, purchase certain privately placed
securities and money market instruments, and enter into certain hedging
transactions that may involve options on securities and securities indexes,
futures contracts and options on futures contracts. For a discussion of these
investments and investment techniques, see "Investment Practices" and "Risk
Factors."
LARGE CAP STOCK PORTFOLIO.
The investment objective of the Portfolio is long-term growth of capital and
income. The Portfolio seeks to achieve its objective consistent with
reasonable investment risk.
The Portfolio is designed for investors who want an actively managed portfolio
of medium- to large-cap equity securities that seeks to outperform the total
return of the S&P 500.
Ordinarily, the Portfolio pursues its investment objective by investing
primarily in dividend-paying common stock. The Portfolio may also invest in
other equity securities, consisting of, among other things,
non-dividend-paying common stock, preferred stock, and securities convertible
into common stock, such as convertible preferred stock and convertible bonds,
and warrants. The Portfolio may also invest in ADRs and in various foreign
securities if U.S. exchange-listed.
STOCK SELECTION. The Portfolio is not subject to any limit on the size of
companies in which it may invest, but intends, under normal circumstances, to
be fully invested to the extent practicable in the stock of large- and
medium-sized companies typically represented by the S&P 500. In managing the
Portfolio, the potential for appreciation and dividend growth is given more
weight than current dividends. Nonetheless, the Sub-Adviser will normally
strive for gross income for the Portfolio at a level not less than 75% of the
dividend income generated on the stocks included in the S&P 500, although this
income level is merely a guideline and there can be no certainty that this
income level will be achieved.
The Portfolio does not seek to achieve its objective with any individual
portfolio security, but rather it aims to manage the portfolio as a whole in
such a way as to achieve its objective. The Portfolio attempts to reduce risk
by investing in many different economic sectors, industries and companies.
Portfolio sector weightings will generally equal those of the S&P 500. In
selecting securities, the Sub-Adviser may emphasize securities that it
believes to be undervalued. Securities of a company may be undervalued for a
variety of reasons such as an overreaction by investors to unfavorable news
about a company, an industry, or the stock markets in general; or as a result
of a market decline, poor economic conditions, tax-loss selling, or actual or
anticipated unfavorable developments affecting a company.
The Sub-Adviser uses a dividend discount model to rank companies within
economic sectors according to their relative value and then separates them
into quintiles by sector. The Portfolio will typically be comprised, based on
the dividend discount model, of stocks in the first three quintiles. The
Portfolio will be highly diversified and will typically hold approximately 300
stocks.
OTHER SECURITIES. During ordinary market conditions, the Sub-Adviser will keep
the Portfolio as fully invested as practicable in the equity securities
described above. The Portfolio may also invest in money market instruments,
including U.S. Government Securities, short term bank obligations rated in the
highest two rating categories by Moody's or S&P, or, if unrated, determined to
be of equal quality by the Sub-Adviser, certificates of deposit, time deposits
and banker's acceptances issued by U.S. and foreign banks and savings and loan
institutions with assets of at least $500 million as of the end of their most
recent fiscal year; and commercial paper and corporate obligations, including
variable rate demand notes, that are issued by U.S. and foreign issuers and
that are rated in the highest two rating categories by Moody's or S&P, or if
unrated, determined to be of equal quality by the Sub-Adviser. Under normal
circumstances, the Portfolio will invest in such money market instruments to
invest temporary cash balances or to maintain liquidity to meet redemptions or
expenses. The Portfolio may also, however, invest in these instruments,
without limitation, as a temporary defensive measure taken during, or in
anticipation of, adverse market conditions.
Convertible bonds and other fixed income securities (other than money market
instruments) in which the Portfolio may invest will, at the time of
investment, be rated Baa or better by Moody's or BBB or better by S&P or, if
not rated by Moody's or S&P, will be of comparable quality as determined by
the Sub-Adviser. In the event that an existing holding is downgraded below
these ratings, the Portfolio may nonetheless retain the security.
OTHER TECHNIQUES. In pursuing its investment objective, the Portfolio may
purchase and sell put and call options on securities and stock indexes. In
addition, the Portfolio may purchase or sell stock index futures contracts and
options thereon. These investment techniques may involve a greater degree or
different type of risk than those inherent in more conservative investment
approaches. See "Investment Practices" and "Risk Factors."
SELECT EQUITY PORTFOLIO.
The investment objective of the Portfolio is long-term growth of capital and
income. The Portfolio seeks to achieve its objective consistent with
reasonable investment risk.
The Portfolio is designed for investors who want an actively managed portfolio
of selected equity securities that seeks to outperform the total return of the
S&P 500.
Ordinarily, the Portfolio pursues its investment objective by investing
primarily in dividend-paying common stock. The Portfolio may also invest in
other equity securities, consisting of, among other things,
non-dividend-paying common stock, preferred stock, and securities convertible
into common stock, such as convertible preferred stock and convertible bonds,
and warrants. The Portfolio may also invest in ADRs and in various foreign
securities if U.S. exchange-listed.
STOCK SELECTION. The Portfolio is not subject to any limit on the size of
companies in which it may invest, but intends, under normal circumstances, to
be fully invested to the extent practicable in the stock of large- and
medium-sized companies primarily included in the S&P 500. In managing the
Portfolio, the potential for appreciation and dividend growth is given more
weight than current dividends. Nonetheless, the Sub-Adviser will normally
strive for gross income for the Portfolio at a level not less than 75% of the
dividend income generated on the stocks included in the S&P 500, although this
income level is merely a guideline and there can be no certainty that this
income level will be achieved.
The Portfolio does not seek to achieve its objective with any individual
portfolio security, but rather it aims to manage the portfolio as a whole in
such a way as to achieve its objective. The Portfolio attempts to reduce risk
by investing in many different economic sectors, industries and companies. The
Sub-Adviser may under- or over-weight selected economic sectors against the
S&P 500's sector weightings to seek to enhance the Portfolio's total return or
reduce fluctuations in market value relative to the S&P 500. In selecting
securities, the Sub-Adviser may emphasize securities that it believes to be
undervalued. Securities of a company may be undervalued for a variety of
reasons such as an overreaction by investors to unfavorable news about a
company, an industry, or the stock markets in general; or as a result of a
market decline, poor economic conditions, tax-loss selling, or actual or
anticipated unfavorable developments affecting a company.
The Sub-Adviser uses a dividend discount model to rank companies within
economic sectors according to their relative value and then separates them
into quintiles by sector. The Portfolio will primarily consist of stocks of
companies from the first and second quintiles. The Portfolio will typically
hold between 60 and 90 stocks.
OTHER SECURITIES. During ordinary market conditions, the Sub-Adviser will keep
the Portfolio as fully invested as practicable in the equity securities
described above. The Portfolio may also invest in money market instruments,
including U.S. Government Securities, short term bank obligations rated in the
highest two rating categories by Moody's or S&P, or, if unrated, determined to
be of equal quality by the Sub-Adviser, certificates of deposit, time deposits
and banker's acceptances issued by U.S. and foreign banks and savings and loan
institutions with assets of at least $500 million as of the end of their most
recent fiscal year; and commercial paper and corporate obligations, including
variable rate demand notes, that are issued by U.S. and foreign issuers and
that are rated in the highest two rating categories by Moody's or S&P, or if
unrated, determined to be of equal quality by the Sub-Adviser. Under normal
circumstances, the Portfolio will invest in such money market instruments to
invest temporary cash balances or to maintain liquidity to meet redemptions or
expenses. The Portfolio may also, however, invest in these instruments,
without limitation, as a temporary defensive measure taken during, or in
anticipation of, adverse market conditions.
Convertible bonds and other fixed income securities (other than money market
instruments) in which the Portfolio may invest will, at the time of
investment, be rated Baa or better by Moody's or BBB or better by S&P or, if
not rated by Moody's or S&P, will be of comparable quality as determined by
the Sub-Adviser. In the event that an existing holding is downgraded below
these ratings, the Portfolio may nonetheless retain the security.
OTHER TECHNIQUES. In pursuing its investment objective, the Portfolio may
purchase and sell put and call options on securities and stock indexes. In
addition, the Portfolio may purchase or sell stock index futures contracts and
options thereon. These investment techniques may involve a greater degree or
different type of risk than those inherent in more conservative investment
approaches. See "Investment Practices" and "Risk Factors."
INTERNATIONAL EQUITY PORTFOLIO.
The investment objective of the Portfolio is to provide a high total return
from a portfolio of equity securities of foreign corporations. Total return
will consist of realized and unrealized capital gains and losses plus income.
The Portfolio is designed for investors with a long-term investment horizon
who want to diversify their portfolios by investing in an actively managed
portfolio of non-U.S. securities that seeks to outperform the Morgan Stanley
Capital International Europe, Australia and Far East Index (the "EAFE Index").
The Portfolio seeks to achieve its investment objective through country
allocation, stock selection and management of currency exposure. The
Sub-Adviser uses a disciplined portfolio construction process to seek to
enhance returns and reduce volatility in the market value of the Portfolio
relative to that of the EAFE Index.
Based on fundamental research, quantitative valuation techniques, and
experienced judgment, the Sub-Adviser uses a structured decision-making
process to allocate the Portfolio primarily across the developed countries of
the world outside the United States by under- or over-weighting selected
countries in the EAFE Index. Currently, Japan has the heaviest weighting in
the EAFE Index (approximately 29%). The Portfolio will not invest more than
25% of its net assets in Japan notwithstanding the Japan weighting in the EAFE
Index.
Using a dividend discount model and based on analysts' industry expertise,
securities within each country are ranked within economic sectors according to
their relative value. Based on this valuation, the Sub-Adviser selects the
securities which appear the most attractive for the Portfolio. The Sub-Adviser
believes that under normal market conditions, economic sector weightings
generally will be similar to those of the EAFE Index.
Finally, the Sub-Adviser actively manages currency exposure, in conjunction
with country and stock allocation, in an attempt to protect and possibly
enhance the Portfolio's market value. Through the use of forward foreign
currency exchange contracts, the Sub-Adviser will adjust the Portfolio's
foreign currency weightings to reduce its exposure to currencies deemed
unattractive and, in certain circumstances, increase exposure to currencies
deemed attractive, as market conditions warrant, based on fundamental
research, technical factors, and the judgment of a team of experienced
currency managers. For further information on foreign currency exchange
transactions, see "Investment Practices" and "Risk Factors."
The Portfolio intends to manage its portfolio actively in pursuit of its
investment objective. The Portfolio does not expect to trade in securities for
short-term profits; however, when circumstances warrant, securities may be
sold without regard to the length of time held. To the extent the Portfolio
engages in short-term trading, it may incur increased transaction costs.
EQUITY INVESTMENTS. In normal circumstances, the Sub-Adviser intends to keep
the Portfolio essentially fully invested with at least 65% of the value of its
total assets in equity securities of foreign issuers, consisting of common
stocks and other securities with equity characteristics such as preferred
stock, warrants, rights and convertible securities. The Portfolio's primary
equity investments are the common stock of established companies based in
developed countries outside the United States. Such investments will be made
in at least three foreign countries. The common stock in which the Portfolio
may invest includes the common stock of any class or series or any similar
equity interest such as trust or limited partnership interests. The Portfolio
may also invest in securities of issuers located in developing countries. See
"Investment Practices" and "Risk Factors." The Portfolio invests in securities
listed on foreign or domestic securities exchanges and securities traded in
foreign or domestic over-the-counter markets, and may invest in certain
restricted or unlisted securities.
The Portfolio may also invest in money market instruments denominated in U.S.
dollars and other currencies, purchase and sell securities on a when-issued or
delayed delivery basis, enter into repurchase and reverse repurchase
agreements, loan its portfolio securities, purchase certain privately placed
securities, enter into forward contracts on foreign currencies and enter into
certain hedging transactions that may involve options on securities and
securities indexes, futures contracts and options on futures contracts. For a
discussion of these investments and investment techniques, see "Investment
Practices" and "Risk Factors."
PORTFOLIO MANAGED BY LORD, ABBETT & CO.:
BOND DEBENTURE PORTFOLIO.
The investment objective of the Bond Debenture Portfolio is high current
income and the opportunity for capital appreciation to produce a high total
return through a professionally-managed portfolio consisting primarily of
convertible and discount debt securities, many of which are lower-rated. These
lower-rated debt securities entail greater risks than investments in
higher-rated debt securities. Investors should carefully consider these risks
set forth under "Risk Factors - Special Risks of High Yield Investing."
It is the belief of the Portfolio's management that a high total return
(current income and capital appreciation) may be derived from an
actively-managed, diversified debt- security portfolio. In no event will the
Portfolio voluntarily purchase any securities other than debt securities, if,
at the time of such purchase or acquisition, the value of the debt securities
in the Portfolio is less than 80% of the value of its total assets. The
Portfolio seeks unusual values, particularly in lower-rated debt securities,
some of which are convertible into common stocks or have warrants to purchase
common stocks.
Higher yield on debt securities can occur during periods of inflation when the
demand for borrowed funds is high. Also, buying lower-rated bonds when the
credit risk is above average but, in the view of Portfolio management, likely
to decrease, can generate higher yields. Such debt securities normally will
consist of secured debt obligations of the issuer (i.e., bonds), general
unsecured debt obligations of the issuer (i.e., debentures) and debt
securities which are subordinate in right of payment to other debt of the
issuer.
Capital appreciation potential is an important consideration in the selection
of portfolio securities. Capital appreciation may be obtained by (1) investing
in debt securities when the trend of interest rates is expected to be down;
(2) investing in convertible debt securities or debt securities with warrants
attached entitling the holder to purchase common stock; and
(3) investing in debt securities of issuers in financial difficulties when, in
the view of Portfolio management, the problems giving rise to such
difficulties can be successfully resolved, with a consequent improvement in
the credit standing of the issuers (such investments involve corresponding
risks that interest and principal payments may not be made if such
difficulties are not resolved). In no event will the Portfolio invest more
than 10% of its gross assets at the time of investment in debt securities
which are in default as to interest or principal.
Normally, the Portfolio invests in long-term debt securities when Portfolio
management believes that interest rates in the long run will decline and
prices of such securities generally will be higher. When Portfolio management
believes that long-term interest rates will rise, Portfolio management will
endeavor to shift the Portfolio into short-term debt securities whose prices
might not be affected as much by an increase in interest rates.
The following policies are subject to change without shareholder approval: (a)
the Portfolio must keep at least 20% of the value of its total assets in (1)
debt securities which, at the time of purchase, are rated within one of the
four highest grades determined either by Moody's or S&P, (2) debt securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, (3) cash or cash equivalents (short-term obligations of
banks, corporations or the U.S. Government), or (4) a combination of any of
the foregoing; (b) the Portfolio may invest up to 10% of its gross assets, at
market value, in debt securities primarily traded in foreign countries - such
foreign debt securities normally will be limited to issues where there does
not appear to be substantial risk of nationalization, exchange controls,
confiscation or other government restrictions; (c) subject to the percentage
limitations for purchases of other than debt securities described below, the
Portfolio may purchase common and preferred stocks; (d) the Portfolio may hold
or sell any property or securities which it may obtain through the exercise of
conversion rights or warrants or as a result of any reorganization,
recapitalization or liquidation proceedings for any issuer of securities owned
by it. In no event will the Portfolio voluntarily purchase any securities
other than debt securities, if, at the time of such purchase or acquisition,
the value of the property and securities, other than debt securities, in the
Portfolio is greater than 20% of the value of its gross assets. A purchase or
acquisition will not be considered "voluntary" if made in order to avoid loss
in value of a conversion or other premium; and (e) the Portfolio does not
purchase securities for short-term trading, nor does it purchase securities
for the purpose of exercising control of management.
The Portfolio may invest up to 15% of its net assets in illiquid securities.
Bonds which are subject to legal or contractual restrictions on resale, but
which have been determined by the Board of Trustees to be liquid, will not be
subject to this limit. Investment by the Portfolio in such securities,
initially determined to be liquid, could have the effect of diminishing the
level of the Portfolio's liquidity during periods of decreased market interest
in such securities.
The Portfolio may, but has no present intention to, commit more than 5% of its
gross assets to the lending of its portfolio securities.
The Portfolio will not change its investment objective without shareholder
approval.
The Portfolio may invest substantially in lower-rated bonds for their higher
yields which entail greater risks. Since the risk of default generally is
higher among lower-rated bonds, the research and analysis performed by the
Sub-Adviser are especially important in the selection of such bonds, which, if
rated BB/Ba or lower, often are described as "high-yield bonds" because of
their generally higher yields and referred to colloquially as "junk bonds"
because of their greater risks. In selecting lower-rated bonds for investment,
the Sub-Adviser does not rely upon ratings, which evaluate only the safety of
principal and interest, not market value risk, and which, furthermore, may not
accurately reflect an issuer's current financial condition. The Portfolio does
not have any minimum rating criteria for its investments in bonds and some
issuers may default as to principal and/or interest payments subsequent to the
purchase of their securities. Through portfolio diversification, good credit
analysis and attention to current developments and trends in interest rates
and economic conditions, investment risk can be reduced, although there is no
assurance that losses will not occur.
The Portfolio may invest in the securities markets of foreign countries.
Investments in foreign securities present certain risks not ordinarily found
in investments in securities of U.S. issuers. See "Risk Factors - Special
Considerations Relating to Foreign Securities."
INVESTMENT PRACTICES
In connection with the investment policies of the Portfolios described above,
the Portfolios may engage in certain investment practices subject to the
limitations set forth below. These investments entail risks.
STRATEGIC TRANSACTIONS. Certain Portfolios may purchase and sell
exchange-listed and over-the-counter put and call options on securities,
financial futures, fixed-income and equity indices and other financial
instruments and purchase and sell financial futures contracts. Certain
Portfolios may also enter into various currency transactions such as currency
forward contracts, currency futures contracts, currency swaps or options on
currencies or currency futures. Collectively, all of the above are referred to
as "Strategic Transactions." Strategic Transactions are hedging transactions
which may be used to attempt to protect against possible changes in the market
value of securities held in or to be purchased for a Portfolio, to protect a
Portfolio's unrealized gains in the value of its portfolio securities, to
facilitate the sale of such securities for investment purposes, to manage the
effective interest rate exposure of a Portfolio, to protect against changes in
currency exchange rates, or to establish a position in the derivatives markets
as a temporary substitute for purchasing or selling particular securities. Any
or all of these investment techniques may be used at any time and there is no
particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of a Portfolio to utilize
these Strategic Transactions successfully will depend on a Sub-Adviser's
ability to predict pertinent market movements, which cannot be assured. The
Portfolios will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Sub-Adviser's view as to certain market movements is incorrect, the risk
that the use of such Strategic Transactions could result in losses greater
than if they had not been used. Use of put and call options may result in
losses to a Portfolio, force the sale of portfolio securities at inopportune
times or for prices other than at current market values, limit the amount of
appreciation a Portfolio can realize on its investments or cause a Portfolio
to hold a security it might otherwise sell. The use of currency transactions
can result in a Portfolio incurring losses as a result of a number of factors
including the imposition of exchange controls, suspension of settlements or
the inability to deliver or receive a specified currency. The use of options
and futures transactions entails certain other risks. In particular, the
variable degree of correlation between price movements of futures contracts
and price movements in the related portfolio position of a Portfolio creates
the possibility that losses on the hedging instrument may be greater than
gains in the value of a Portfolio's position. In addition, futures and options
markets may not be liquid in all circumstances and certain over-the-counter
options may have no markets. As a result, in certain markets, a Portfolio
might not be able to close out a transaction without incurring substantial
losses, if at all. Although the contemplated use of these futures contracts
and options thereon should tend to minimize the risk of loss due to a decline
in the value of the hedged position, at the same time they tend to limit any
potential gain which might result from an increase in value of such position.
Finally, the daily variation margin requirements for futures contracts would
create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value and possibly income. The Strategic Transactions that the Portfolios may
use and some of their risks are described more fully in the Statement of
Additional Information.
REPURCHASE AGREEMENTS. The Portfolios may enter into repurchase agreements
with selected commercial banks and broker-dealers, under which the Portfolio
acquires securities and agrees to resell the securities at an agreed upon time
and at an agreed upon price. The Portfolio accrues as interest the difference
between the amount it pays for the securities and the amount it receives upon
resale. At the time the Portfolio enters into a repurchase agreement, the
value of the underlying security including accrued interest will be equal to
or exceed the value of the repurchase agreement and, for repurchase agreements
that mature in more than one day, the seller will agree that the value of the
underlying security including accrued interest will continue to be at least
equal to the value of the repurchase agreement. Each Sub-Adviser will monitor
the value of the underlying security in this regard. The Portfolio will enter
into repurchase agreements only with commercial banks whose deposits are
insured by the Federal Deposit Insurance Corporation and whose assets exceed
$500 million or broker-dealers who are registered with the Securities and
Exchange Commission. In determining whether the Portfolio should enter into a
repurchase agreement with a bank or broker-dealer, the Sub-Adviser will take
into account the credit-worthiness of the party and will monitor its
credit-worthiness on an ongoing basis in accordance with standards established
by the Board of Trustees. In the event of a default by the party, the delays
and expenses potentially involved in establishing the Portfolio's rights to,
and in liquidating, the security may result in a loss to the Portfolio.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS. Certain Portfolios may purchase
and sell securities on a "when issued" and "delayed delivery" basis, that is,
obligate themselves to purchase or sell securities with delivery and payment
to occur at a later date in order to secure what is considered to be an
advantageous price and yield to the Portfolio at the time of entering into the
obligation. When a Portfolio engages in such transactions, the Portfolio
relies on the buyer or seller, as the case may be, to consummate the sale. No
income accrues to or is earned by the Portfolio on portfolio securities in
connection with such transactions prior to the date the Portfolio actually
takes delivery of such securities. These transactions are subject to market
fluctuation; the value of such securities at delivery may be more or less than
their purchase price, and yields generally available on such securities when
delivery occurs may be higher than yields on such securities obtained pursuant
to such transactions. Because the Portfolio relies on the buyer or seller, as
the case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Portfolio missing the opportunity
of obtaining a price or yield considered to be advantageous. When the
Portfolio is the buyer in such a transaction, however, it will maintain, in a
segregated account with its custodian, cash or high-grade portfolio securities
having an aggregate value equal to the amount of such purchase commitments
until payment is made. The Portfolio will make commitments to purchase
securities on such basis only with the intention of actually acquiring these
securities, but the Portfolio may sell such securities prior to the settlement
date if such sale is considered to be advisable. To the extent the Portfolio
engages in when issued and delayed delivery transactions, it will do so for
the purpose of acquiring securities for the Portfolio consistent with the
Portfolio's investment objective and policies and not for the purposes of
investment leverage. No specific limitation exists as to the percentage of any
Portfolio's assets which may be used to acquire securities on a when issued or
delayed delivery basis. See the Statement of Additional Information for
additional discussion of these transactions.
RESTRICTED AND ILLIQUID SECURITIES. The Portfolios may each invest up to 15%
of their respective net assets in securities the disposition of which is
subject to substantial legal or contractual restrictions on resale and
securities that are not readily marketable. The sale of restricted and
illiquid securities often requires more time and results in higher brokerage
charges or dealer discounts and other selling expenses than does the sale of
securities eligible for trading on national securities exchanges or in the
over-the-counter markets. Restricted securities may sell at a price lower than
similar securities that are not subject to restrictions on resale. Restricted
and illiquid securities in all Portfolios will be valued at fair value as
determined in good faith by or at the direction of the Trustees for the
purposes of determining the net asset value of each Portfolio. Restricted
securities salable among qualified institutional buyers without restriction
pursuant to Rule 144A under the Securities Act of 1933 that are determined to
be liquid by the Sub-Adviser under guidelines adopted by the Board of Trustees
of the Trust (under which guidelines the Sub-Adviser will consider factors
such as trading activities and the availability of price quotations) will not
be treated as restricted securities by the Portfolios pursuant to such rules.
LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, all of the Portfolios may lend their securities to selected
commercial banks or broker-dealers up to a maximum of 25% of the assets of
each Portfolio. Such loans must be callable at any time and be continuously
secured by collateral deposited by the borrower in a segregated account with
the Trust's custodian consisting of cash or of securities issued or guaranteed
by the U.S. Government or its agencies, which collateral is equal at all times
to at least 100% of the value of the securities loaned, including accrued
interest. A Portfolio will receive amounts equal to earned income for having
made the loan. Any cash collateral pursuant to these loans will be invested in
short-term instruments. A Portfolio is the beneficial owner of the loaned
securities in that any gain or loss in the market price during the loan inures
to the Portfolio and its shareholders. Thus, when the loan is terminated, the
value of the securities may be more or less than their value at the beginning
of the loan. In determining whether to lend its portfolio securities to a bank
or broker-dealer, a Portfolio will take into account the credit-worthiness of
such borrower and will monitor such credit-worthiness on an ongoing basis in
as much as a default by the other party may cause delays or other collection
difficulties. A Portfolio may pay finders' fees in connection with loans of
its portfolio securities.
REVERSE REPURCHASE AGREEMENTS AND BORROWINGS. The Portfolios may enter into
reverse repurchase agreements with selected commercial banks or broker-dealers
with respect to securities which could otherwise be sold by the Portfolios.
Reverse repurchase agreements involve sales by a Portfolio of Portfolio assets
concurrently with an agreement by the Portfolio to repurchase the same assets
at a later date at a fixed price which is greater than the sales price. The
difference between the amount the Portfolio receives for the securities and
the amount it pays on repurchase is deemed to be a payment of interest by the
Portfolio. Each Portfolio will maintain, in a segregated account with its
custodian, cash, Treasury bills, or other U.S. Government Securities having an
aggregate value equal to the amount of commitment to repurchase, including
accrued interest, until payment is made. Each Portfolio will enter into
reverse repurchase agreements only with commercial banks whose deposits are
insured by the Federal Deposit Insurance Corporation and whose assets exceed
$500 million or broker-dealers who are registered with the SEC. In determining
whether a Portfolio should enter into a reverse repurchase agreement with a
bank or broker-dealer, each Sub-Adviser will take into account the
credit-worthiness of the party and will monitor the credit-worthiness on an
ongoing basis. During the reverse repurchase agreement period, a Portfolio
continues to receive principal and interest payments on these securities.
Reverse repurchase agreements involve the risk that the market value of the
securities retained by the Portfolio may decline below the price of the
securities the Portfolio has sold but is obligated to repurchase under the
agreement. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, a Portfolio's use of the
proceeds of the agreement may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce the Portfolio's
obligation to repurchase the securities. Reverse repurchase agreements create
leverage and will be treated as borrowings for the purposes of each
Portfolio's investment restriction on borrowings.
Each of the Select Equity, Large Cap Stock and Small Cap Stock Portfolios is
permitted to borrow money for extraordinary or emergency purposes in amounts
up to 10% of the value of the Portfolio's total assets. Each of the Quality
Bond and International Equity Portfolios is permitted to borrow money for
extraordinary or emergency purposes in amounts up to 30% of the value of the
Portfolio's total assets and in connection with reverse repurchase agreements.
The Bond Debenture Portfolio is permitted to borrow money for extraordinary or
emergency purposes in amounts up to 5% of the Portfolio's gross assets.
Borrowing by a Portfolio creates an opportunity for increased net income but,
at the same time, creates special risk considerations such as changes in the
net asset value of the shares and in the yield on the Portfolio. Although the
principal of such borrowings will be fixed, the Portfolio's assets may change
in value during the time the borrowing is outstanding. Borrowing will create
interest expenses for the Portfolio which can exceed the income from the
assets retained. To the extent the income derived from securities purchased
with borrowed funds exceeds the interest the Portfolio will have to pay, the
Portfolio's net income will be greater than if borrowing were not used.
Conversely, if the income from the assets retained with borrowed funds is not
sufficient to cover the cost of borrowing, the net income of the Portfolio
will be less than if borrowing were not used.
CONVERTIBLE SECURITIES. The convertible securities in which a Portfolio may
invest include any debt securities or preferred stock which may be converted
into common stock or which carry the right to purchase common stock.
Convertible securities entitle the holder to exchange the securities for a
specified number of shares of common stock, usually of the same company, at
specified prices within a certain period of time.
WARRANTS. A Portfolio may invest in warrants, which entitle the holder to buy
common stock from the issuer at a specific price (the strike price) for a
specific period of time. The strike price of warrants sometimes is much lower
than the current market price of the underlying securities, yet warrants are
subject to similar price fluctuations. As a result, warrants may be more
volatile investments than the underlying securities.
Warrants do not entitle the holder to dividends or voting rights with respect
to the underlying securities and do not represent any rights in the assets of
the issuing company. Also, the value of the warrant does not necessarily
change with the value of the underlying securities and a warrant ceases to
have value if it is not exercised prior to the expiration date.
MONEY MARKET INSTRUMENTS. Certain Portfolios are permitted to invest in money
market instruments although they intend to stay invested in equity securities
to the extent practical in light of their objectives and long-term investment
perspective. These Portfolios may make money market investments pending other
investment or settlement, for liquidity or in adverse market conditions. The
money market investments permitted for these Portfolios include U.S.
Government Securities, other debt securities, commercial paper, bank
obligations and repurchase agreements. These Portfolios may also invest in
short-term obligations of sovereign foreign governments, their agencies,
instrumentalities and political subdivisions. For more detailed information
about these money market investments, see "Investment Objectives and Policies"
in the Statement of Additional Information.
INVESTMENT LIMITATIONS
In addition to the investment policies set forth above, certain additional
restrictive policies relating to the investment of assets of the Portfolios
have been adopted by the Trust. The Investment Limitations of the Trust are
deemed fundamental and may not be changed without the approval of the holders
of a majority of the outstanding voting shares of each Portfolio affected
(which for this purpose and under the Investment Company Act of 1940 means the
lesser of (i) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are present or represented by proxy and (ii)
more than 50% of the outstanding shares). A change in policy affecting only
one Portfolio may be effected with the approval of a majority of the
outstanding shares of the Portfolio. Details as to the policies are set forth
in the Statement of Additional Information.
RISK FACTORS
TAX CONSIDERATIONS
The Trust serves as the underlying investment for Variable Contracts issued by
First Cova.
Section 817(h) of the Internal Revenue Code of 1986, as amended (the "Code"),
imposes certain diversification standards on the underlying assets of variable
contracts held in the Portfolios of the Trust. The Code provides that a
variable contract shall not be treated as an annuity contract for any period
(and any subsequent period) for which the investments are not, in accordance
with regulations prescribed by the Treasury Department, adequately
diversified. Disqualification of the variable contract as an annuity contract
would result in imposition of federal income tax on contract owners with
respect to earnings allocable to the variable contract prior to the receipt of
payments under the Variable Contract. Section 817(h)(2) of the Code is a safe
harbor provision which provides that contracts such as the variable contracts
meet the diversification requirements if, as of the close of each quarter, the
underlying assets meet the diversification standards for a regulated
investment company and no more than fifty-five percent (55%) of the total
assets consists of cash, cash items, U.S. government securities and securities
of other regulated investment companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas. Reg.
1.817-5), which established diversification requirements for the investment
portfolios underlying variable contracts. The Regulations amplify the
diversification requirements for variable contracts set forth in Section
817(h) of the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if (i) no more than 55 percent of the value of the
total assets of the portfolio is represented by any one investment; (ii) no
more than 70 percent of such value is represented by any two investments;
(iii) no more than 80 percent of such value is represented by any three
investments; and (iv) no more than 90 percent of such value is represented by
any four investments. For purposes of these Regulations, all securities of the
same issuer are treated as a single investment.
The Code provides that for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable
contracts by Section 817(h) of the Code have been met, "each United States
government agency or instrumentality shall be treated as a separate issuer".
Each Portfolio of the Trust will be managed in such a manner as to comply with
these diversification requirements. It is possible that in order to comply
with the diversification requirements, less desirable investment decisions may
be made which would affect the investment performance of the Portfolios.
SPECIAL CONSIDERATIONS RELATING TO FOREIGN SECURITIES
All of the Portfolios may invest in foreign securities. The International
Equity Portfolio may invest without limitation in foreign securities.
Investments in the securities of foreign entities and securities denominated
in foreign currencies involve risks not typically involved in domestic
investment, including fluctuations in foreign exchange rates, future foreign
political and economic developments, and the possible imposition of exchange
controls or other foreign or United States governmental laws or restrictions
applicable to such investments. Where a Portfolio invests in securities
denominated or quoted in currencies other than the United States dollar,
changes in foreign currency exchange rates may affect the value of investments
in the Portfolio and the accrued income and unrealized appreciation or
depreciation of investments. Changes in foreign currency exchange rates
relative to the U.S. dollar will affect the U.S. dollar value of a Portfolio's
assets denominated in that currency and the Portfolio's yield on such assets.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social
instability or diplomatic developments which could affect investment in those
countries. There may be less publicly available information about a foreign
security than about a United States security, and foreign entities may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those of United States entities. In addition,
certain foreign investments made by a Portfolio may be subject to foreign
withholding taxes, which would reduce the Portfolio's total return on such
investments and the amounts available for distributions by the Portfolio to
its shareholders. Foreign financial markets, while growing in volume, have,
for the most part, substantially less volume than United States markets, and
securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable domestic companies. The foreign markets
also have different clearance and settlement procedures and in certain markets
there have been times when settlements have been unable to keep pace with the
volume of securities transactions making it difficult to conduct such
transactions. Delays in settlement could result in temporary periods when
assets of a Portfolio are not invested and no return is earned thereon. The
inability of a Portfolio to make intended security purchases due to settlement
problems could cause the Portfolio to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to a Portfolio due to subsequent
declines in value of the portfolio security or, if a Portfolio has entered
into a contract to sell the security, could result in possible liability to
the purchaser. Costs associated with transactions in foreign securities,
including custodial costs and foreign brokerage commissions, are generally
higher than with transactions in United States securities. In addition, a
Portfolio will incur costs in connection with conversions between various
currencies. There is generally less government supervision and regulation of
exchanges, financial institutions and issuers in foreign countries than there
is in the United States.
As a matter of operating policy, each Portfolio will comply with the
following:
1. a Portfolio will be invested in a minimum of five different foreign
countries at all times. However, this minimum is reduced to four when foreign
country investments comprise less than 80% of the Portfolio's net asset value;
to three when less than 60% of such value; to two when less than 40% of such
value; and to one when less than 20% of such value.
2. except as set forth in items 3 and 4 below, a Portfolio will have no more
than 20% of its net asset value invested in securities of issuers located in
any one country.
3. a Portfolio may have an additional 15% of its value invested in securities
of issuers located in any one of the following countries: Australia, Canada,
France, Japan, the United Kingdom or Germany.
4. a Portfolio's investments in United States issuers are not subject to the
foregoing operating policies.
SPECIAL RISKS OF HIGH YIELD INVESTING
The Bond Debenture Portfolio intends to invest a substantial portion of its
assets in medium and lower grade corporate debt securities.
Debt securities which are in those medium and lower grade categories generally
offer a higher current yield than is offered by securities which are in the
higher grade categories, but they also generally involve greater price
volatility and greater credit and market risk. Credit risk relates to the
issuer's ability to make timely payments of principal and interest when due as
well as fundamental developments in an issuer's business. Market risk relates
to the changes in market value that occur as a result of variation in the
level of prevailing interest rates and yield relationships in the securities
market. Typically, market prices tend to fall as interest rates rise and tend
to rise as interest rates fall. Generally, prices tend to fluctuate more for
lower grade issues than for higher grade issues, and, for any given change in
interest rates, prices for longer maturity issues tend to fluctuate more than
for shorter maturity issues. Yields on lower-rated securities will fluctuate
over time.
The prices of lower-grade securities, while generally less sensitive to
interest rate changes than higher-rated investments, tend to be more sensitive
to adverse economic changes or individual corporate developments. During an
economic downturn or substantial period of rising interest rates, the ability
of a highly leveraged issuer to service its principal and interest payment
obligations, to meet projected business goals and to obtain additional
financing may be adversely affected. An economic downturn could disrupt the
market for high yield bonds, adversely affect the value of outstanding bonds
and the ability of the issuers of such bonds to repay principal and interest,
cause increased volatility in the market prices of high yield bonds and the
Portfolio's net asset value and may result in a higher incidence of defaults
by issuers on bond obligations. If the issuer of a bond defaults, the
Portfolio may incur additional expenses to seek recovery. The Portfolio will
seek to reduce risk through portfolio diversification, credit analysis, and
attention to current developments and trends in the industries and with the
issuers involved. The Portfolio's Sub-Adviser will continuously monitor the
condition of the economy and the financial and credit markets.
To the extent that there is no established retail secondary market for high
yield bonds, such bonds may be thinly traded, making the bonds less liquid
than investment grade bonds. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of high yield bonds, especially in a thinly traded market. In the
event of an illiquid secondary market, or in the absence of readily available
market quotations, the responsibility of the Board of Trustees of the Trust to
value the securities becomes more difficult and will involve a greater degree
of judgment in that there is less reliable, objective data available.
If the market for high yield bonds is restricted by the enactment of
legislation, or if steps are taken to limit the use of such securities, or
other advantages of such securities, the value of the securities and the
Portfolio's ability to acquire them may be adversely affected.
A description of the corporate bond ratings is contained in the Appendix.
Purchasers should be aware, however, that credit ratings evaluate the safety
of principal and interest payments and not the market value risk of high yield
bonds. In addition, credit ratings may not always be modified on a timely
basis to reflect events subsequent to the most recent ratings which may have a
material impact on the securities rated. However, the Portfolio's Sub-Adviser
will continuously monitor the issuers of high yield bonds in the Portfolio to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments, and to assure the bonds' liquidity.
Achievement of the investment objective of the Portfolio may be more dependent
on the credit analysis of the Portfolio's Sub-Adviser than is the case with
higher quality bonds.
The Portfolio may also invest in unrated corporate securities. Although
unrated securities are not necessarily of lower quality than rated securities,
the market for them may not be as broad and, accordingly, they may carry
greater risk and higher yield than rated securities.
PORTFOLIO TURNOVER RATES
BOND DEBENTURE PORTFOLIO
The Portfolio will not generally engage in trading of securities for the
purpose of realizing short-term profits, but they will adjust its portfolio as
it deems advisable in view of prevailing or anticipated market conditions to
accomplish its investment objectives. For example, the Portfolio may sell
securities in anticipation of a movement in interest rates or to avoid loss of
premiums paid and unrealized capital gains earned on GNMA Certificates selling
at a substantial premium. Frequency of portfolio turnover will not be a
limiting factor if the Sub-Adviser considers it advantageous to purchase or
sell securities. The Portfolio anticipates that its portfolio turnover rate
will normally be less than 200%, and may be significantly less in a period of
stable or rising interest rates. For the period ended December 31, 1996, the
portfolio turnover rate for the Bond Debenture Portfolio was 58%. A high rate
of portfolio turnover involves correspondingly higher brokerage commissions
and transaction expenses than a lower rate, which expenses must be borne by
the Portfolio and its shareholders.
QUALITY BOND, SMALL CAP STOCK, LARGE CAP STOCK,
SELECT EQUITY AND INTERNATIONAL EQUITY PORTFOLIOS
Portfolio transactions for these Portfolios will be undertaken principally to
accomplish their respective investment objectives, and the Portfolios may
engage in short-term trading consistent with their respective objectives. A
portfolio turnover rate of 100% indicates that the equivalent of all of a
Portfolio's assets have been sold and reinvested in a year. Overall, high
portfolio turnover may result in increased portfolio transaction costs and the
realization of substantial net capital gains or losses. To the extent net
short term capital gains are realized, any distributions resulting from such
gains are considered ordinary income for general income tax purposes. The
Quality Bond Portfolio's annual turnover rate is not expected to exceed 300%.
The turnover rate for each of the Small Cap Stock, Large Cap Stock, Select
Equity and International Equity Portfolios is not expected to exceed 100%. For
the period ended December 31, 1996, the portfolio turnover rates for the
Quality Bond, Small Cap Stock, Select Equity, International Equity and Large
Cap Stock Portfolios were 181%, 102%, 124%, 48% and 36%, respectively.
MANAGEMENT OF THE TRUST
THE TRUSTEES
The Trust is organized as a Massachusetts business trust. The overall
responsibility for the supervision of the affairs of the Trust vests in the
Trustees. The Trustees have entered into an Investment Advisory Agreement with
the Adviser to handle the day-to-day affairs of the Trust (see below). The
Trustees meet periodically to review the affairs of the Trust and to establish
certain guidelines which the Adviser is expected to follow in implementing the
investment policies and objectives of the Trust.
ADVISER
Under an Investment Advisory Agreement dated April 1, 1996, the Adviser,
located at One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois 60181-4644,
manages the business and affairs of the Portfolios and the Trust, subject to
the control of the Trustees.
The Adviser is an Illinois corporation which was incorporated on August 31,
1993 under the name Oakbrook Investment Advisory Corporation and is registered
with the Securities and Exchange Commission as an investment adviser under the
Investment Advisers Act of 1940. The Adviser changed its name to its present
name on January 17, 1996. The Adviser is a wholly-owned subsidiary of Cova
Life Management Company, a Delaware corporation, which in turn, is a
wholly-owned subsidiary of Cova Corporation, a Missouri corporation, which in
turn, is a wholly-owned subsidiary of General American Life Insurance Company
("General American"), a St. Louis-based mutual company. General American has
more than $235 billion of life insurance in force and approximately $9.6
billion in assets. The Adviser has acted as the investment adviser to the
Trust since May 1, 1996.
Under the terms of the Investment Advisory Agreement, the Adviser is obligated
to (i) manage the investment and reinvestment of the assets of each Portfolio
of the Trust in accordance with each Portfolio's investment objective and
policies and limitations, or (ii) in the event that Adviser shall retain a
sub-adviser or sub-advisers, to supervise and implement the investment
activities of any Portfolio for which any such sub-adviser has been retained,
including responsibility for overall management and administrative support
including managing, providing for and compensating any sub-advisers; and to
administer the Trust's affairs. The Investment Advisory Agreement further
provides that Adviser agrees, among other things, to administer the business
affairs of each Portfolio, to furnish offices and necessary facilities and
equipment to each Portfolio, to provide administrative services for each
Portfolio, to render periodic reports to the Board of Trustees of the Trust
with respect to each Portfolio, and to permit any of its officers or
employees, or those of any sub-adviser to serve without compensation as
trustees or officers of the Portfolio if elected to such positions.
As full compensation for its services under the Investment Advisory Agreement,
the Trust will pay the Adviser a monthly fee at the following annual rates
shown in the table below based on the average daily net assets of each
Portfolio:
<TABLE>
<CAPTION>
<S> <C> <C>
Average Daily
Portfolio Net Assets % Per Annum
Bond Debenture _______________ .75%
Quality Bond First $75 million .55%
Over $75 million .50%
International First $50 million .85%
Equity Over $50 million .75%
Select Equity First $50 million .75%
Over $50 million .65%
Large Cap _______________ .65%
Stock
Small Cap _______________ .85%
Stock
</TABLE>
Cova Financial Services Life Insurance Company, an affiliate of First Cova
Life Insurance Company, Cova Life Management Company and the Adviser have
entered into an Investment Advisory Services Agreement, dated April 1, 1996,
the purpose of which is to ensure that the Adviser, which is minimally
capitalized, has adequate facilities and financing for the carrying on of its
business. Under the terms of the Agreement, Cova Financial Services Life
Insurance Company is obligated to provide the Adviser with adequate
capitalization in order for the Adviser to meet any minimum capital
requirements. Cova Financial Services Life Insurance Company is further
obligated to reimburse the Adviser or assume payment for any obligation
incurred by the Adviser. Cova Life Management Company is obligated to provide
the Adviser with facilities and personnel sufficient for the Adviser to
perform its obligations under the Investment Advisory Agreement.
TRUST ADMINISTRATION
The Adviser retains Investors Bank & Trust Company ("IBTC"), a Massachusetts
trust company, to supervise various aspects of the Trust's administrative
operations and to perform certain specific services including, but not limited
to, the preparation and filing of Trust reports and tax returns, pursuant to
an Administration Agreement between the Trust, the Adviser and IBTC.
PORTFOLIO MANAGEMENT
For the year ended December 31, 1996, the Adviser was paid advisory fees as
follows: $20,291, with respect to the Bond Debenture Portfolio, $24,070, with
respect to the Quality Bond Portfolio, $53,647, with respect to the
International Equity Portfolio, $60,950, with respect to the Select Equity
Portfolio, $76,508, with respect to the Large Cap Stock Portfolio and $51,031,
with respect to the Small Cap Stock Portfolio.
EXPENSES OF THE TRUST
Although each Portfolio must bear the expenses directly attributable to it,
the Portfolios are expected to experience cost savings over the aggregate
amount that would be payable if each Portfolio were a separate fund, because
they have the same Trustees, accountants, attorneys and other general and
administrative expenses. Any expenses which are not directly attributable to a
specific Portfolio are allocated on the basis of the net assets of the
respective Portfolios.
For the year ended December 31, 1996, the expenses, taking into account the
waivers and expense assumptions, borne by the Bond Debenture Portfolio
amounted to $22,997 or .85% of its average net assets on an annualized basis;
the net expenses borne by the Quality Bond Portfolio amounted to $28,446 or
.65% of its average net assets on an annualized basis; the net expenses borne
by the International Equity Portfolio amounted to $59,958 or .95% of its
average net assets on an annualized basis; the net expenses borne by the
Select Equity Portfolio amounted to $69,076 or .85% of its average net assets
on an annualized basis; the net expenses borne by the Large Cap Stock
Portfolio amounted to $88,276 or .75% of its average net assets on an
annualized basis; and the net expenses borne by the Small Cap Stock Portfolio
amounted to $57,031 or .95% of its average net assets on an annualized basis.
First Cova and/or the Adviser may at their discretion, but are not obligated
to, assume all or any portion of Trust expenses. For the year ended December
31, 1996, First Cova and the Adviser together assumed expenses of $32,241
with respect to the Bond Debenture Portfolio; $34,737 with respect to the
Quality Bond Portfolio; $168,580, with respect to the International Equity
Portfolio, $66,275, with respect to the Select Equity Portfolio; $50,521, with
respect to the Large Cap Stock Portfolio; and $97,214, with respect to the
Small Cap Stock Portfolio.
SUB-ADVISERS
In accordance with each Portfolio's investment objective and policies and
under the supervision of Adviser and the Trust's Board of Trustees, each
Portfolio's Sub-Adviser is responsible for the day-to-day investment
management of the Portfolio, makes investment decisions for the Portfolio and
places orders on behalf of the Portfolio to effect the investment decisions
made as provided in separate Sub-Advisory Agreements among each Sub-Adviser,
the Adviser and the Trust. The following organizations act as Sub-Advisers to
the Portfolios:
J.P. MORGAN INVESTMENT MANAGEMENT INC., 522 Fifth Avenue, New York, New York
10036, a Delaware corporation, and a wholly-owned subsidiary of J.P. Morgan &
Co., Incorporated, is the Sub-Adviser for the Quality Bond, International
Equity, Select Equity, Large Cap Stock and Small Cap Stock Portfolios of the
Trust.
Ronald Arons, Vice President of the Sub-Adviser, is the Portfolio Manager for
the Quality Bond Portfolio. Mr. Arons is a member of the Fixed Income Group,
specializing in portfolio management for active fixed income and insurance
company clients. He joined Morgan from MetLife Investment Management Corp.
where he managed active and structured bond portfolios. Mr. Arons is a
graduate of George Washington University and received his M.B.A. at New York
University. He is a Chartered Financial Analyst.
Anne Richards, Assistant Vice President of the Sub-Adviser, is the Portfolio
Manager for the International Equity Portfolio. Ms. Richards joined J.P.
Morgan in 1994 as an international equity portfolio manager. Previously she
has held positions as an engineering analyst with Alliance Capital, a project
engineer for Cambridge Consultants and a research fellow for CERN, European
Laboratory for Particle Physics. Ms. Richards holds a BSc from the University
of Edinburgh and an MBA from INSEAD, France.
James B. Otness, Managing Director of the Sub-Adviser, is the Portfolio
Manager for the Small Cap Stock Portfolio. Mr. Otness is a member of the
Equity and Balanced Accounts Group. Mr. Otness co-manages Morgan's Small
Company Fund and other client portfolios employing a small company investment
approach. Mr. Otness joined Morgan in 1970 after graduation from Harvard
University and service in the U.S. Marine Corps Reserve. Prior to his current
assignment, he managed large capitalization equities and before that was unit
head in the Investment Research Department. Mr. Otness is a Chartered
Financial Analyst with 24 years of investment experience.
James Wiess, Vice President of the Sub-Adviser, is the Portfolio Manager for
the Large Cap Stock Portfolio. Mr. Wiess is a member of the Equity and
Balanced Accounts Group, with responsibility for portfolio rebalancing and
product research and development in structured equity strategies. Prior to
joining Morgan in 1992, Mr. Wiess gained experience in stock index arbitrage
during seven years at Oppenheimer & Co. He also was a financial markets
consultant at Data Resources. Mr. Wiess earned his undergraduate degree from
the Wharton School at the University of Pennsylvania.
Michael J. Kelly, Vice President of the Sub-Adviser, is the Portfolio Manager
for the Select Equity Portfolio. Mr. Kelly is an institutional portfolio
manager with responsibility for a number of employee benefit, foundation, and
endowments clients. Prior to assuming his current position, he was in the
Equity Research Group covering capital goods, electrical equipment, and
conglomerates. Mr. Kelly also served as the group's generalist. Before joining
Morgan in 1985, he held a position at the economic firm Townsend-Greenspan &
Co., Inc. Mr. Kelly served as President of the Machinery Analysts of New York,
Vice President of the Electrical Products Group, committee member for the AIMR
and is a member of the Money Marketeers of New York. Mr. Kelly has an
undergraduate degree from Gettysburg College and an M.B.A. from The Wharton
School. Mr. Kelly is a Chartered Financial Analyst.
LORD, ABBETT & CO. ("LORD ABBETT"), The General Motors Building, 767 Fifth
Avenue, New York, New York 10153-0203. Lord Abbett has been an investment
manager for over 67 years and currently manages approximately $22 billion in a
family of mutual funds and other advisory accounts. Lord Abbett is the
Sub-Adviser for the Bond Debenture Portfolio.
Christopher J. Towle, Executive Vice President of the Sub-Adviser, is
Portfolio Manager for the Bond Debenture Portfolio. Mr. Towle joined Lord
Abbett in 1987 as Assistant Fixed Income Portfolio Manager and assumed full
responsibilities as Fixed Income Portfolio Manager in August, 1995. Prior to
joining Lord Abbett, Mr. Towle was an Assistant Vice President and Portfolio
Manager with American International Group. He earned a B.A. degree in
economics from Rutgers University and is a Chartered Financial Analyst.
SUB-ADVISORY FEES
Under the terms of the Sub-Advisory Agreements, the Adviser shall pay to the
Sub-Advisers, as full compensation for services rendered under the respective
Agreements with respect to the various Portfolios, monthly fees at the
following annual rates shown in the table below based on the average daily net
assets of each Portfolio.
<TABLE>
<CAPTION>
<S> <C> <C>
Average Daily Sub-Advisory
Portfolio Net Assets Fee
Bond Debenture _______________ .50%
Quality Bond First $75 million .30%
Over $75 million .25%
International First $50 million .60%
Equity Over $50 million .50%
Select Equity First $50 million .50%
Over $50 million .40%
Large Cap _______________ .40%
Stock
Small Cap _______________ .60%
Stock
</TABLE>
DESCRIPTION OF THE TRUST
SHAREHOLDER RIGHTS
The Trust is an unincorporated business trust established under the laws of
the Commonwealth of Massachusetts by a Declaration of Trust dated July 9,
1987. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares.
Each Portfolio issues its own class of shares. Each share represents an equal
proportionate interest in the assets of the Portfolio with each other share in
the Portfolio. On any matter submitted to a vote of shareholders, all shares
of the Trust then issued and outstanding and entitled to vote will be voted in
the aggregate and not by class except for matters concerning only one class.
The holders of each share of stock of the Trust will be entitled to one vote
for each full share and a fractional vote for each fractional share of stock.
Shares of one class may not bear the same economic relationship to the Trust
as another class.
In accordance with its view of present applicable law, the separate account(s)
of First Cova, as shareholder(s) of the Trust, have the right to vote Trust
shares at any meeting of shareholders and will provide pass-through voting
privileges to all contract owners. First Cova will vote shares of the Trust
held in the separate account(s) for which no timely voting instructions from
contract owners are received, as well as shares it owns, in the same
proportion as those shares for which voting instructions are received.
Additional information concerning voting rights is described in the Variable
Account Prospectus attached hereto under the caption, "Investment Options -
Voting Rights".
The Trust is not required to hold annual meetings of shareholders and does not
plan to do so. The Trustees may call special meetings of shareholders for
action by shareholder vote as may be required by the Investment Company Act of
1940, as amended, or the Declaration of Trust. The Trust will hold a
shareholder meeting to fill existing vacancies on the Board in the event that
less than a majority of Trustees were elected by the shareholders. The
Trustees shall also call a meeting of shareholders for the purpose of voting
upon the question of removal of any Trustee when requested in writing to do so
by the record holders of not less than 10 percent of the outstanding shares.
The Trust has an obligation to assist shareholder communications.
The Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust, requires inclusion of a clause to that effect in
every agreement entered into by the Trust and indemnifies shareholders against
any liability. Although shareholders of an unincorporated business trust
established under Massachusetts law may, under certain limited circumstances,
be held personally liable for the obligations of the Trust as though they were
general partners in a partnership, the provisions of the Declaration of Trust
described in the foregoing sentence make the likelihood of personal liability
remote.
The Trustees may amend the Declaration of Trust in any manner without
shareholder approval, except that the Trustees may not adopt any amendment
adversely affecting the rights of shareholders without approval by a majority
of the shares present at a meeting of shareholders (or higher vote as may be
required by the Investment Company Act of 1940, as amended, or other
applicable law) and except that the Trustees cannot amend the Declaration of
Trust to impose any liability on shareholders, make any assessment on shares,
or impose liabilities on the Trustees without approval from each affected
shareholder or Trustee, as the case may be.
INQUIRIES
Any inquiries should be directed to First Cova, One Tower Lane, Suite 3000,
Oakbrook Terrace, Illinois 60181-4644. The telephone number is (800) 831-LIFE.
DISTRIBUTION AND REDEMPTION OF SHARES
Shares of the Trust are currently issued and redeemed only in connection with
investment in and payments under the Variable Contracts issued by First Cova.
The shares of the Trust are purchased and redeemed at net asset value (see
below). Redemptions will be effected by the separate accounts to meet
obligations under the Variable Contracts. Variable Contract owners do not deal
directly with the Trust with respect to acquisition or redemption of shares.
DIVIDENDS
All dividends are distributed to the separate accounts and will be
automatically reinvested in Trust shares. Dividends and distributions made by
the Portfolios are taxable, if at all, to First Cova; they are not taxable to
Variable Contract owners.
TAX STATUS
It is the intention of the Trust to qualify as a "regulated investment
company" under Sub-chapter M of the Internal Revenue Code. If the Trust so
qualifies and distributes each year to its shareholders at least 90% of its
net investment income in each year, it will not be required to pay federal
income taxes on any income distributed to shareholders. Each Portfolio of the
Trust distributes all of its net income and gains to its shareholders (the
separate accounts). Each Portfolio is treated as a separate entity for Federal
income tax purposes and, therefore, the investments and results of the
Portfolio are determined separately for purposes of determining whether the
Trust qualifies as a "regulated investment company" and for purposes of
determining net ordinary income (or loss) and net realized capital gains (or
losses).
Some of the Trust's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Trust and affect the holding period of the securities held by the Trust and
the character of the gains or losses realized by the Trust. These provisions
may also require the Trust to mark-to-market some of the positions in its
portfolio (i.e., treat them as if they were closed out), which may cause the
Trust to recognize income without receiving cash with which to make
distributions in amounts necessary to satisfy the 90% distribution requirement
and the distribution requirements for avoiding income and excise taxes. The
Trust will monitor its transactions and may make certain tax elections in
order to mitigate the effect of these rules and prevent disqualification of
the Trust as a regulated investment company.
Investments of the Trust in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount,
the Trust will be required to accrue as income each year a portion of the
discount and to distribute such income each year in order to maintain its
qualification as a regulated investment company and to avoid income and excise
taxes. In order to generate sufficient cash to make distributions necessary to
satisfy the 90% distribution requirement and to avoid income and excise taxes,
the Trust may have to dispose of securities that it would otherwise have
continued to hold.
The Trust's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Trust's annual gross income be derived from the disposition of
securities held for less than three months.
NET ASSET VALUES
Portfolio shares are sold and redeemed at a price equal to the share's net
asset value. The net asset value of a Portfolio is determined by calculating
the total value of the Portfolio's assets, deducting its total liabilities,
and dividing the result by the number of shares outstanding. The net asset
value for each Portfolio is computed once daily as of the close of the New
York Stock Exchange, Monday through Friday, except on customary business
holidays, or except on any day on which no purchase or redemption orders are
received, or there is not a sufficient degree of trading in the Portfolio's
investments so that the Portfolio's net asset value per share might be
materially affected. The Trust reserves the right to calculate the net asset
value and to adjust the public offering price based thereon more frequently
than once a day if deemed desirable.
Securities that are listed on a securities exchange are valued at their
closing sales price on the day of the valuation. Price valuations for listed
securities are based on market quotations where the security is primarily
traded or, if not available, are valued at the mean of the bid and asked
prices on any valuation date. Unlisted securities in a Portfolio are primarily
valued based on their latest quoted bid price or, if not available, are valued
by a method determined by the Trustees to accurately reflect fair value. Money
market instruments maturing in 60 days or less are valued on the basis of
amortized cost, which means that securities are valued at their acquisition
cost to reflect a constant amortization rate to maturity of any premium or
discount, rather than at current market value.
FUND PERFORMANCE
From time to time advertisements and other sales materials for the Trust may
include information concerning the historical performance of the Trust. Such
advertisements will also describe the performance of the relevant insurance
company separate accounts. Any such information will include the average
annual total return of the Trust calculated on a compounded basis for
specified periods of time. Total return information will be calculated
pursuant to rules established by the Securities and Exchange Commission. In
lieu of or in addition to total return calculations, such information may
include performance rankings and similar information from independent
organizations such as Lipper Analytical Services, Inc., Morningstar, Business
Week, Forbes or other industry publications.
The Trust calculates average annual total return by determining the redemption
value at the end of specified periods (assuming reinvestment of all dividends
and distributions) of a $1,000 investment in the Trust at the beginning of the
period, deducting the initial $1,000 investment, annualizing the increase or
decrease over the specified period and expressing the result as a percentage.
Total return figures utilized by the Trust are based on historical performance
and are not intended to indicate future performance. Total return and net
asset value per share can be expected to fluctuate over time, and accordingly,
upon redemption, shares may be worth more or less than their original cost.
See "Performance Data" in the Statement of Additional Information.
The inception date for the Quality Bond, Small Cap Stock, Large Cap Stock,
Select Equity, International Equity and Bond Debenture Portfolios is May 1,
1996, which is the date from which the average annual total return
computations are calculated for these Portfolios.
The performance figures shown for the Portfolios in the chart below reflect
the actual fees and expenses paid by the Portfolios.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIOD ENDED 12/31/96
Portfolio Performance
<S> <C> <C> <C>
Since
Portfolio 1 year 5 years Inception
- -------------------- ------ ------- ---------
Quality Bond -- -- 5.68%*
Small Cap Stock -- -- 8.65%*
Large Cap Stock -- -- 14.35%*
Select Equity -- -- 8.52%*
International Equity -- -- 8.44%*
Bond Debenture -- -- 12.89%*
<FN>
*Not annualized
</TABLE>
PUBLIC FUND PERFORMANCE
The Bond Debenture Portfolio, which is managed by Lord, Abbett & Co.,
commenced public sale of its shares on May 1, 1996. It does not yet have a
meaningful performance record. However, the Portfolio has the same investment
objective and follows substantially the same investment strategies as a mutual
fund ("public fund") whose shares are sold to the public and managed by the
same portfolio manager of Lord, Abbett & Co.
Set forth below is the historical performance of the public fund. Investors
should not consider the performance data of the public fund as an indication
of the future performance of the Portfolio. The performance figures shown
below reflect the deduction of the historical fees and expenses paid by the
public fund, and not those to be paid by the Portfolio. The figures also do
not reflect the deduction of any insurance fees or charges which are imposed
by First Cova in connection with its sale of Variable Contracts. Investors
should refer to the separate account prospectus describing the Variable
Contracts for information pertaining to these insurance fees and charges. The
insurance separate account fees will have a detrimental effect on the
performance of the Portfolio. Additionally, although it is anticipated that
the Portfolio and its corresponding public fund series will hold similar
securities, their investment results are expected to differ. In particular,
differences in asset size and in cash flow resulting from purchases and
redemptions of Portfolio shares may result in different security selections,
differences in the relative weightings of securities or differences in the
price paid for particular portfolio holdings. The results shown reflect the
reinvestment of dividends and distributions, and were calculated in the same
manner that will be used by the Portfolio to calculate its own performance.
The following tables show average annualized total returns for the time
periods shown for the public fund.
BOND DEBENTURE PORTFOLIO
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Corresponding 1 5 10
Public Fund Year Year Year
---- ---- ----
Lord Abbett Bond -
Debenture Fund, Inc. 5.90% 9.98% 9.62%
</TABLE>
PRIVATE ACCOUNT PERFORMANCE
The Select Equity, Large Cap Stock, Small Cap Stock
and Quality Bond Portfolios, each of which is managed by J.P. Morgan
Investment Management Inc., commenced public sale of their shares on May 1,
1996, and therefore do not yet have any meaningful performance records.
However, each of these Portfolios has investment objectives, policies and
strategies which are substantially similar to those employed by J.P. Morgan
Investment Management Inc. with respect to certain Private Accounts.
Thus, the performance information derived from these Private Accounts may be
deemed relevant to the investor. The performance of the Portfolios will vary
from the Private Account composite information because each Portfolio will be
actively managed and its investments will vary from time to time and will not
be identical to the past portfolio investments of the Private Accounts.
Moreover, the Private Accounts are not subject to certain investment
limitations, diversification requirements and other restrictions imposed by
the Investment Company Act of 1940 and the Internal Revenue Code of 1986, as
amended, which, if applicable, may have adversely affected the performance
results of the Private Account Composites.
The chart below shows performance information derived from historical
composite performance of the Private Accounts. The performance figures for the
Portfolios represent the actual performance results of the composites of
comparable Private Accounts, adjusted to reflect the deduction of the fees and
expenses paid by the Portfolios. The Private Account composite performance
figures are time-weighted rates of return which include all income and accrued
income and realized and unrealized gains or losses, but do not reflect the
deduction of investment advisory fees actually charged to the Private
Accounts. Inception was June 1, 1987 for the Public Bond Composite and
November 1, 1989 for the Structured Stock Selection Composite.
Investors should not consider the performance data of these Private Accounts
as an indication of the future performance of the respective Portfolios. The
figures also do not reflect the deduction of any insurance fees or charges
which are imposed by First Cova in connection with its sale of Variable
Contracts. Investors should refer to the separate account prospectus
describing the Variable Contracts for information pertaining to these
insurance fees and charges. The insurance fees and charges will have a
detrimental
effect on the performance of a Portfolio.
PRIVATE ACCOUNT COMPOSITE PERFORMANCE
REDUCED BY PORTFOLIO FEES AND EXPENSES
FOR THE PERIODS ENDED 12/31/96
HYPOTHETICAL AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
<S> <C> <C> <C>
10 Years
or Since
Portfolio 1 year 5 years Inception
- ----------------- ------ ------- ---------
Active Equity
Composite 21.22% 16.33% 16.13%
(Select Equity
Portfolio)
Structured Stock
Selection
Composite 23.03% 16.19% 15.35%
(Large Cap Stock
Portfolio)
Small Cap
Directly Invested
Composite 22.69% 17.33% 13.71%
(Small Cap
Stock Portfolio)
Public Bond
Composite 2.85% 6.84% 8.86%
(Quality Bond
Portfolio)
</TABLE>
ADDITIONAL PERFORMANCE INFORMATION
Further information about the Trust's performance is contained in the
Annual Report to shareholders which may be obtained, without charge,
by calling (800) 831-LIFE, or writing First Cova at One Tower Lane, Suite
3000, Oakbrook Terrace, Illinois 60181-4644.
APPENDIX -- DESCRIPTION OF
CORPORATE BOND RATINGS
STANDARD & POOR'S CORPORATION. A brief description of the applicable Standard
& Poor's Corporation ("S&P") rating symbols and their meanings (as published
by S&P) follows:
An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as
a result of changes in, or unavailability of, such information, or for other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default - capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
LONG-TERM CORPORATE BONDS.
AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB Debt rated 'BB', 'B', 'CCC', or 'CC' is regarded,
B on balance, as predominantly speculative with
CCC respect to capacity to pay interest and repay
CC principal in accordance with the terms of the obligation. 'BB' indicates
the lowest degree of speculation and 'CC' the highest degree of speculation.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C This rating is reserved for income bonds on which no interest is being paid.
D Debt rated 'D' is in default, and payment of interest and/or repayment of
principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from 'A' to 'B' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PROVISIONAL RATINGS: The letter "p" indicates that the rating is provisional.
A provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise judgment with respect to such likelihood and risk.
L The letter 'L' indicates that the rating pertains to the principal amount
of those bonds where the underlying deposit collateral is fully insured by the
Federal Deposit Insurance Corp.
[dagger] Continuance of the rating is contingent upon S&P's receipt of closing
documentation confirming investments and cash flow.
* Continuance of the rating is contingent upon S&P's receipt of an executed
copy of the escrow agreement.
NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
MOODY'S INVESTORS SERVICE, INC. A brief description of the applicable Moody's
Investors Service, Inc. rating symbols and their meanings (as published by
Moody's Investors Service, Inc.) follows:
LONG-TERM CORPORATE BONDS.
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e. they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols
Aa 1, A 1, Baa 1, Ba 1 and B 1.
<TABLE>
<CAPTION>
Performance
<S> <C> <C> <C> <C>
PERFORMANCE RECAP
10 Yrs or
Portfolio Type 1 Yr 5 Yrs Since Inception
- ---------- ---- ------ ------ ----------------
MANAGED BY J. P. MORGAN
INVESTMENT MANAGEMENT INC.
Select Equity Private Account 21.22% 16.33% 16.13%
Composite
Existing Portfolio -- -- 8.52%*
Small Cap Stock Private Account 22.69% 17.33% 13.71%
Composite
Existing Portfolio -- -- 8.65%*
Quality Bond Private Account 2.85% 6.84% 8.86%
Composite
Existing Portfolio -- -- 5.68%*
Large Cap Stock Private Account 23.03% 16.19% 15.35%
Composite
Existing Portfolio -- -- 14.35%*
International Equity Existing Portfolio -- -- 8.44%*
MANAGED BY LORD, ABBETT & CO.
Bond Debenture Public Fund 5.90% 9.98% 9.62%
Existing Portfolio -- -- 12.89%*
</TABLE>
* The inception date for the Quality Bond, Small Cap Stock, Large Cap
Stock, Select Equity, International Equity and Bond Debenture Portfolios is May
1, 1996, which is the date from which the average annual total return
computations are calculated for these Portfolios.
(1) Investors should not consider the performance data of these Private
Accounts and Public Funds as an indication of the future performance of the
respective Portfolios. The figures also do not reflect the deduction of any
insurance fees or charges which are imposed by First Cova in connection with its
sale of Variable Contracts. Investors should refer to the separate account
prospectus describing the Variable Contracts for information pertaining to these
insurance fees and charges. The insurance fees and charges will have a
detrimental effect on the performance of a Portfolio.