STATEMENT OF ADDITIONAL INFORMATION
COVA SERIES TRUST
ONE TOWER LANE, SUITE 3000
OAKBROOK TERRACE, ILLINOIS 60181-4644
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS BUT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS FOR COVA SERIES TRUST, DATED MAY 1, 1998 (the
"PROSPECTUS"). A COPY OF THE PROSPECTUS MAY BE OBTAINED WITHOUT CHARGE BY
CALLING (800) 831-LIFE, OR WRITING COVA FINANCIAL SERVICES LIFE INSURANCE
COMPANY AT ONE TOWER LANE, SUITE 3000, OAKBROOK TERRACE, ILLINOIS 60181-4644.
The Prospectus and this Statement of Additional Information omit certain of the
information contained in the registration statement filed with the Securities
and Exchange Commission, Washington, D.C. These items may be obtained from the
Commission upon payment of the fee prescribed, or inspected at the Commission's
office at no charge.
THIS STATEMENT OF ADDITIONAL INFORMATION IS
DATED MAY 1, 1998
TABLE OF CONTENTS
PAGE
GENERAL INFORMATION AND HISTORY................................................3
INVESTMENT OBJECTIVES AND POLICIES.............................................3
STOCK INDEX PORTFOLIO - MONITORING PROCEDURES.................................34
INVESTMENT LIMITATIONS........................................................35
DESCRIPTION OF SECURITIES RATINGS.............................................52
OFFICERS AND TRUSTEES.........................................................59
COMPENSATION TABLE............................................................61
SUBSTANTIAL SHAREHOLDERS......................................................61
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS........................................61
CUSTODIAN.....................................................................61
PERFORMANCE DATA..............................................................62
LEGAL COUNSEL AND INDEPENDENT AUDITORS........................................62
INVESTMENT ADVISORY AGREEMENT.................................................62
PORTFOLIO TRANSACTIONS........................................................65
FINANCIAL STATEMENTS..........................................................66
GENERAL INFORMATION AND HISTORY
Cova Series Trust was established as a Massachusetts business trust under a
Declaration of Trust dated July 9, 1987. The Trust changed its name from "Van
Kampen Merritt Series Trust" to its current name on May 1, 1996.
INVESTMENT OBJECTIVES AND POLICIES
OBJECTIVES
For a description of the objectives of the Portfolios, see "Prospectus -
Investment Objectives." The following information is provided for those
investors wishing to have more comprehensive information than that contained in
the Prospectus.
ADDITIONAL INFORMATION - INVESTMENT OBJECTIVES AND POLICIES OF PORTFOLIOS
MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT INC.
QUALITY BOND PORTFOLIO. The Quality Bond Portfolio is designed to be an
economical and convenient means of making substantial investments in a domestic
and foreign issuers, subject to certain quality and other restrictions. See
"Quality and Diversification Requirements." The Portfolio's investment objective
is to provide a high total return consistent with moderate risk of capital and
maintenance of liquidity. Although the net asset value of the Portfolio will
fluctuate, the Portfolio attempts to conserve the value of its investments to
the extent consistent with its objective.
The Portfolio attempts to achieve its investment objective by investing in
high grade corporate and government debt obligations and related securities of
domestic and foreign issuers described in the Prospectus and this Statement of
Additional Information.
INVESTMENT PROCESS
Duration/yield curve management: The Sub-Adviser's duration decision begins
with an analysis of real yields, which its research indicates are generally a
reliable indicator of longer term interest rate trends. Other factors the
Sub-Adviser studies in regard to interest rates include economic growth and
inflation, capital flows and monetary policy. Based on this analysis, the
Sub-Adviser forms a view of the most likely changes in the level and shape of
the yield curve -- as well as the timing of those changes -- and sets the
Portfolio's duration and maturity structure accordingly. The Sub-Adviser
typically limits the overall duration of the Portfolio to a range between one
year shorter and one year longer than that of the Salomon Brothers Broad
Investment Grade Bond Index, the benchmark index.
Sector allocations: Sector allocations are driven by the Sub-Adviser's
fundamental and quantitative analysis of the relative valuation of a broad array
of fixed income sectors. Specifically, the Sub-Adviser utilizes market and
credit analysis to assess whether the current risk-adjusted yield spreads of
various sectors are likely to widen or narrow. The Sub-Adviser then overweights
(underweights) those sectors its analysis indicates offer the most (least)
relative value, basing the speed and magnitude of these shifts on valuation
considerations.
Security selection: Securities are selected by the portfolio manager, with
substantial input from the Sub-Adviser's fixed income analysts and traders.
Using quantitative analysis as well as traditional valuation methods, the
Sub-Adviser's applied research analysts aim to optimize security selection
within the bounds of the Portfolio's investment objective. In addition, credit
analysts -- supported by the Sub-Adviser's equity analysts -- assess the
creditworthiness of issuers and counterparties. A dedicated trading desk
contributes to security selection by tracking new issuance, monitoring dealer
inventories, and identifying attractively priced bonds. The traders also handle
all transactions for the Portfolio.
SELECT EQUITY PORTFOLIO AND LARGE CAP STOCK PORTFOLIO. The investment
objective of each Portfolio is long-term growth of capital and income.
In normal circumstances, at least 65% of each Portfolio's net assets will
be invested in equity securities consisting of common stocks and other
securities with equity characteristics comprised of preferred stock, warrants,
rights, convertible securities, trust certificates, limited partnership
interests and equity participations (collectively, "Equity Securities"). Each
Portfolio's primary equity investments are the common stock of large and medium
sized U.S. corporations and, to a limited extent, similar securities of foreign
corporations.
INVESTMENT PROCESS
Fundamental research: The Sub-Adviser's domestic equity analysts, each an
industry specialist, follow 700 predominantly large- and medium-sized U.S.
companies -- 500 of which form the universe for each Portfolio's investments.
Their research goal is to forecast normalized, longer term earnings and
dividends for the most attractive companies among those they cover. In doing
this, they may work in concert with the Sub-Adviser's international equity
analysts in order to gain a broader perspective for evaluating industries and
companies in today's global economy.
Systematic valuation: The analysts' forecasts are converted into comparable
expected returns by a dividend discount model, which calculates those expected
returns by comparing a company's current stock price with the "fair value" price
forecasted by its estimated long term earnings power. Within each sector,
companies are ranked by their expected return and grouped into quintiles: those
with the highest expected returns (Quintile 1) are deemed the most undervalued
relative to their long-term earnings power, while those with the lowest expected
returns (Quintile 5) are deemed the most overvalued.
Disciplined portfolio construction: A diversified portfolio is constructed
using disciplined buy and sell rules. The specific names selected reflect the
portfolio manager's judgment concerning the soundness of the underlying
forecasts, the likelihood that the perceived misevaluation will be corrected
within a reasonable time frame and the magnitude of the risks versus the
rewards. Portfolio sector weightings are held close to those of the S&P 500
Index, reflecting the Sub-Adviser's belief that its research has the potential
to add value at the individual stock level, but not at the sector level. Sector
neutrality is also seen as a way to help protect the portfolio from
macroeconomic risks, and -- together with diversification -- represents an
important element of the Sub-Adviser's risk control strategy. A dedicated
trading desk handles all transactions for the Portfolio.
SMALL CAP STOCK PORTFOLIO. This Portfolio is designed for investors who are
willing to assume the somewhat higher risk of investing in small companies in
order to seek a higher return over time than might be expected from a portfolio
of stocks of large companies. The Portfolio's investment objective is to provide
a high total return from a portfolio of Equity Securities of small companies.
The Portfolio attempts to achieve its investment objective by investing
primarily in the common stock of small U.S. companies included in the Russell
2000 Index, which is composed of 2000 common stocks of U.S. companies with
market capitalizations ranging between $100 million and $1.5 billion.
INVESTMENT PROCESS
Fundamental Research: The Sub-Adviser's domestic equity analysts -- each an
industry specialist -- continuously monitor the small cap stocks in their
respective sectors with the aim of identifying companies that exhibit superior
financial strength and operating returns. Meetings with management and on-site
visits play a key role in shaping their assessments. Their research goal is to
forecast normalized, long-term earnings and dividends for the most attractive
small cap companies among those they monitor -- a universe that generally
contains a total of 300-350 names. Because the Sub-Adviser's analysts follow
both the larger and smaller companies in their industries -- in essence,
covering their industries from top to bottom -- they are able to bring broad
perspective to the research they do on both.
Systematic valuation: The analysts' forecasts are converted into comparable
expected returns by the Sub-Adviser's dividend discount model, which calculates
those returns by comparing a company's current stock price with the "fair value"
price forecasted by its estimated long-term earnings power. Within each
industry, companies are ranked by their expected returns and grouped into
quintiles: those with the highest expected returns (Quintile 1) are deemed the
most undervalued relative to their long-term earnings power, while those with
the lowest expected returns (Quintile 5) are deemed the most overvalued.
Disciplined portfolio construction: A diversified portfolio is constructed
using disciplined buy and sell rules. Purchases are concentrated among the
stocks in the top two quintiles of the rankings: the specific names selected
reflect the portfolio manager's judgment concerning the soundness of the
underlying forecasts, the likelihood that the perceived misevaluation will soon
be corrected and the magnitude of the risks versus the rewards. Once a stock
falls into the third quintile -- because its price has risen or its fundamentals
have deteriorated -- it generally becomes a sale candidate. The portfolio
manager seeks to hold sector weightings close to those of the Russell 2000
Index, the Portfolio's benchmark, reflecting the Sub-Adviser's belief that its
research has the potential to add value at the individual stock level, but not
at the sector level. Sector neutrality is also seen as a way to help to protect
the portfolio from macroeconomic risks, and -- together with diversification --
represents an important element of the Sub-Adviser's investment strategy.
INTERNATIONAL EQUITY PORTFOLIO. This Portfolio is designed for investors
with a long-term investment horizon who want to diversify their portfolios by
investing in an actively managed portfolio of non-U.S. securities that seeks to
outperform the Morgan Stanley Capital International Europe, Australia and Far
East Index (the "EAFE Index"). The Portfolio's investment objective is to
provide a high total return from a portfolio of Equity Securities of foreign
corporations.
The Portfolio seeks to achieve its investment objective by investing
primarily in the Equity Securities of foreign corporations. Under normal
circumstances, the Portfolio expects to invest at least 65% of its total assets
in such securities. The Portfolio does not intend to invest in U.S. securities
(other than money market instruments), except temporarily, when extraordinary
circumstances prevailing at the same time in a significant number of developed
foreign countries render investments in such countries inadvisable.
INVESTMENT PROCESS
Country allocation: The Sub-Adviser's country allocation decision begins
with a forecast of equity risk premiums, which provide a valuation signal by
measuring the relative attractiveness of stocks versus bonds. Using a
proprietary approach, the Sub-Adviser calculates this risk premium for each of
the nations in the Portfolio's universe, determines the extent of its deviation
- -- if any -- from its historical norm, and then ranks countries according to the
size of those deviations. Countries with high (low) rankings are overweighted
(underweighted) in comparisons to the EAFE Index to reflect the above-average
(below-average) attractiveness of their stock markets. In determining
weightings, the Sub-Adviser analyzes a variety of qualitative factors as well --
including the liquidity, earnings momentum and interest rate climate of the
market at hand. These qualitative assessments can change the magnitude but not
the direction of the country allocations called for by the risk premium
forecast. The Sub-Adviser places limits on the total size of the Portfolio's
country over- and under-weightings relative to the EAFE Index.
Stock selection: The Sub-Adviser's international equity analysts, each an
industry and country specialist, forecast normalized earnings and dividend
payouts for roughly 1,000 non-U.S. companies -- taking a long-term perspective
rather than the short time frame common to consensus estimates. These forecasts
are converted into comparable expected returns by a dividend discount model, and
then companies are ranked from most to least attractive by industry and country.
A diversified portfolio is constructed using disciplined buy and sell rules. The
portfolio manager's objective is to concentrate the purchases in the top third
of the rankings, and to keep sector weightings close to those of the EAFE Index,
the Portfolio's benchmark. Once a stock falls into the bottom third of the
rankings, it generally becomes a sales candidate. Where available, warrants and
convertibles may be purchased instead of common stock if they are deemed a more
attractive means of investing in an undervalued company.
Currency management: Currency is actively managed, in conjunction with
country and stock allocation, with the goal of protecting and possibly enhancing
the Portfolio's return. The Sub-Adviser's currency decisions are supported by a
proprietary tactical mode which forecasts currency movements based on an
analysis of four fundamental factors -- trade balance trends, purchasing power
parity, real short-term interest differentials and real bond yields -- plus a
technical factor designed to improve the timing of transactions. Combining the
output of this model with a subjective assessment of economic, political and
market factors, the Sub-Adviser's currency group recommends currency strategies
that are implemented in conjunction with the Portfolio's investment strategy.
EMERGING MARKETS EQUITY PORTFOLIO. This Portfolio is designed for investors
with a long term investment horizon who want exposure to the rapidly growing
emerging markets. The Portfolio's investment objective is to provide a high
total return from a portfolio of equity securities of companies in emerging
markets.
The Portfolio seeks to achieve its investment objective by investing
primarily in equity securities of emerging markets issuers. Under normal
circumstances, the Portfolio expects to invest at least 65% of its total assets
in such securities. The Portfolio does not intend to invest in U.S. securities
(other than money market instruments), except temporarily, when extraordinary
circumstances prevailing at the same time in a significant number of emerging
markets countries render investments in such countries inadvisable.
INVESTMENT PROCESS
Country allocation: The Sub-Adviser's country allocation decision begins
with a forecast of the expected return of each market in the Portfolio's
universe. These expected returns are calculated using a proprietary valuation
method that is forward looking in nature rather than based on historical data.
The Sub-Adviser then evaluates these expected returns from two different
perspectives: first, it identifies those countries that have high real expected
returns relative to their own history and other nations in their universe.
Second, it identifies those countries that it expects will provide high returns
relative to their currency risk. Countries that rank highly on one or both of
these scores are overweighted relative to the Portfolio's benchmark, the MSCI
Emerging Markets Free Index, while those that rank poorly are underweighted. To
help contain risk, the Sub-Adviser places limits on the total size of the
Portfolio's country over- and under-weightings.
Stock selection: The Sub-Adviser's 12 emerging market equity analysts--
each an industry specialist--monitor a universe of approximately 900 companies
in these countries, developing forecasts of earnings and cash flows for the most
attractive among them. Companies are ranked from most to least attractive based
on this research, and then a diversified portfolio is constructed using
disciplined buy and sell rules. The portfolio manager's objective is to
concentrate the Portfolio's holdings in the stocks deemed most undervalued, and
to keep sector weightings relatively close to those of the index. Stocks are
generally held until they fall into the bottom half of the Sub-Adviser's
rankings.
MONEY MARKET INSTRUMENTS
As discussed in the Prospectus, each Portfolio may invest in money market
instruments to the extent consistent with its investment objective and policies.
A description of the various types of money market instruments that may be
purchased by the Portfolios appears below. See "Quality and Diversification
Requirements."
U.S. TREASURY SECURITIES. Each of the Portfolios may invest in direct
obligations of the U.S. Treasury, including Treasury bills, notes and bonds, all
of which are backed as to principal and interest payments by the full faith and
credit of the United States.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. Each of the Portfolios may invest
in obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. In the case of securities not backed by the
full faith and credit of the United States, each Portfolio must look principally
to the federal agency issuing or guaranteeing the obligations for ultimate
repayment, and may not be able to assert a claim against the United States
itself in the event the agency or instrumentality does not meet its commitments.
Securities in which each Portfolio may invest that are not backed by the full
faith and credit of the United States include, but are not limited to,
obligations of the Tennessee Valley Authority, the Federal Home Loan Mortgage
Corporation and the U.S. Postal Service, each of which has the right to borrow
from the U.S. Treasury to meet its obligations, and obligations of the Federal
Farm Credit System and the Federal Home Loan Banks, both of whose obligations
may be satisfied only by the individual credits of each issuing agency.
Securities which are backed by the full faith and credit of the United States
include obligations of the Government National Mortgage Association, the Farmers
Home Administration, and the Export-Import Bank.
FOREIGN GOVERNMENT OBLIGATIONS. Each of the Portfolios, subject to its
applicable investment policies, may also invest in short-term obligations of
foreign sovereign governments or of their agencies, instrumentalities,
authorities or political subdivisions. These securities may be denominated in
the U.S. dollar or in another currency. See "Foreign Investments."
STRIPPED U.S. GOVERNMENT OBLIGATIONS. As described in the Prospectus and
subject to their respective investment policies, certain Portfolios may hold
stripped U.S. Treasury securities, including (1) coupons that have been stripped
from U.S. Treasury bonds, which are held through the Federal Reserve Bank's
book-entry system called "Separate Trading of Registered Interest and Principal
of Securities" ("STRIPS") or (2) through a program entitled "Coupon Under
Book-Entry Safekeeping" ("CUBES"). Certain Portfolios may also acquire U.S.
Government obligations and their unmatured interest coupons that have been
stripped by a custodian bank or investment brokerage firm. Having separated the
interest coupons from the underlying principal of the U.S. Government
obligations, the holder will resell the stripped securities in custodial receipt
programs with a number of different names, including "Treasury Income Growth
Receipts" ("TIGRS") and "Certificates of Accrual on Treasury Securities"
("CATS"). Such securities may not be as liquid as STRIPS and CUBES and are not
viewed by the staff of the SEC as U.S. Government securities for purposes of the
1940 Act.
The stripped coupons are sold separately from the underlying principal,
which is sold at a deep discount because the buyer receives only the right to
receive a future fixed payment on the security and does not receive any rights
to periodic interest (cash) payments. Purchasers of stripped principal-only
securities acquire, in effect, discount obligations that are economically
identical to the zero coupon securities that the Treasury Department sells
itself. In the case of bearer securities (i.e., unregistered securities which
are owned ostensibly by the bearer or holder), the underlying U.S. Treasury
bonds and notes themselves are held in trust on behalf of the owners.
The U.S. Government does not issue stripped Treasury securities directly.
The STRIPS program, which is ongoing, is designed to facilitate the secondary
market in the stripping of selected U.S. Treasury notes and bonds into separate
interest and principal components. Under the program, the U.S. Treasury
continues to sell its notes and bonds through its customary auction process. A
purchaser of those specified notes and bonds who has access to a book-entry
account at a Federal Reserve bank, however, may separate the Treasury notes and
bonds into interest and principal components. The selected Treasury securities
thereafter may be maintained in the book-entry system operated by the Federal
Reserve in a manner that permits the separate trading and ownership of the
interest and principal payments.
For custodial receipts, the underlying debt obligations are held separate
from the general assets of the custodian and nominal holder of such securities,
and are not subject to any right, charge, security interest, lien or claim of
any kind in favor of or against the custodian or any person claiming through the
custodian. The custodian is also responsible for applying all payments received
on those underlying debt obligations to the related receipts or certificates
without making any deductions other than applicable tax withholding. The
custodian is required to maintain insurance for the protection of holders of
receipts or certificates in customary amounts against losses resulting from the
custody arrangement due to dishonest or fraudulent action by the custodian's
employees. The holders of receipts or certificates, as the real parties in
interest, are entitled to the rights and privileges of the underlying debt
obligations, including the right, in the event of default in payment of
principal or interest, to proceed individually against the issuer without acting
in concert with other holders of those receipts or certificates or the
custodian.
VARIABLE AND FLOATING RATE INSTRUMENTS. Subject to their respective
investment limitations, certain Portfolios may purchase variable and floating
rate obligations. The Sub-Advisers will consider the earning power, cash flows
and other liquidity ratios of the issuers and guarantors of such obligations
and, for obligations subject to a demand feature, will monitor their financial
status to meet payment on demand. In determining average weighted portfolio
maturity, a variable or floating rate instrument issued or guaranteed by the
U.S. Government, its agencies and instrumentalities, or a variable or floating
rate instrument scheduled on its face to be paid in 397 days or less, will be
deemed to have a maturity equal to the period remaining until the obligation's
next interest rate adjustment. Other variable or floating rate notes will be
deemed to have a maturity equal to the longer of the period remaining to the
next interest rate adjustment or the time the Portfolio can recover payment of
principal as specified in the instrument.
BANK OBLIGATIONS. Each of the Portfolios, unless otherwise noted in the
Prospectus or below, may invest in negotiable certificates of deposit, time
deposits and bankers' acceptances of (i) banks, savings and loan associations
and savings banks which (for those Portfolios managed by J.P. Morgan Investment
Management Inc. except the International Equity Portfolio) have more than $2
billion in total assets and are organized under the laws of the United States or
any state, (ii) foreign branches of these banks or of foreign banks of
equivalent size (Euros) and (iii) U.S. branches of foreign banks of equivalent
size (Yankees) with respect to the Portfolios managed by J.P. Morgan Investment
Management Inc. See "Foreign Investments." The Portfolios will not invest in
obligations for which J.P. Morgan Investment Management Inc., or any of its
affiliated persons, is the ultimate obligor or accepting bank. Each of the
Portfolios may also invest in obligations of international banking institutions
designated or supported by national governments to promote economic
reconstruction, development or trade between nations (e.g., the European
Investment Bank, the Inter-American Development Bank, or the World Bank).
COMMERCIAL PAPER. Each of the Portfolios may invest in commercial paper,
including master demand obligations. Master demand obligations are obligations
that provide for a periodic adjustment in the interest rate paid and permit
daily changes in the amount borrowed. The monies loaned to the borrower come
from accounts managed by a Sub-Adviser or its affiliates, pursuant to
arrangements with such accounts. Interest and principal payments are credited to
such accounts. The Sub-Adviser, or its affiliates, acting as a fiduciary on
behalf of its clients, has the right to increase or decrease the amount provided
to the borrower under an obligation. The borrower has the right to pay without
penalty all or any part of the principal amount then outstanding on an
obligation together with interest to the date of payment. Since these
obligations typically provide that the interest rate is tied to the Federal
Reserve commercial paper composite rate, the rate on master demand obligations
is subject to change. Repayment of a master demand obligation to participating
accounts depends on the ability of the borrower to pay the accrued interest and
principal of the obligations on demand which is continuously monitored by the
Sub-Adviser. Since master demand obligations typically are not rated by credit
rating agencies, the Portfolios may invest in such unrated obligations only if
at the time of an investment the obligation is determined by the Sub-Adviser to
have a credit quality which satisfies the Portfolio's quality restrictions. See
"Quality and Diversification Requirements." Although there is no secondary
market for master demand obligations, such obligations are considered by the
Portfolios to be liquid because they are payable upon demand. The Portfolios do
not have any specific percentage limitation on investments in master demand
obligations.
REPURCHASE AGREEMENTS. Each of the Portfolios may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Trustees of the Trust. In a repurchase agreement, a Portfolio
buys a security from a seller that has agreed to repurchase the same security at
a mutually agreed upon date and price. The resale price normally is in excess of
the purchase price, reflecting an agreed upon interest rate. This interest rate
is effective for the period of time the Portfolio is invested in the agreement
and is not related to the coupon rate on the underlying security. A repurchase
agreement may also be viewed as a fully collateralized loan of money by a
Portfolio to the seller. The period of these repurchase agreements will usually
be short, from overnight to one week, and at no time will the Portfolios invest
in repurchase agreements for more than thirteen months. The securities which are
subject to repurchase agreements, however, may have maturity dates in excess of
thirteen months from the effective date of the repurchase agreement. The
Portfolios will always receive securities as collateral whose market value is,
and during the entire term of the agreement remains, at least equal to 100% of
the dollar amount invested by the Portfolios in each agreement plus accrued
interest, and the Portfolios will make payment for such securities only upon
physical delivery or upon evidence of book entry transfer to the account of the
Custodian. The Money Market Portfolio will be fully collateralized within the
meaning of paragraph (a)(3) of Rule 2a-7 under the Investment Company Act of
1940, as amended (the "1940 Act"). If the seller defaults, a Portfolio might
incur a loss if the value of the collateral securing the repurchase agreement
declines and might incur disposition costs in connection with liquidating the
collateral. In addition, if bankruptcy proceedings are commenced with respect to
the seller of the security, realization upon disposal of the collateral by a
Portfolio may be delayed or limited.
Each of the Portfolios may make investments in other debt securities with
remaining effective maturities of not more than thirteen months, including
without limitation corporate and foreign bonds, asset-backed securities and
other obligations described in the prospectus or this Statement of Additional
Information.
CORPORATE BONDS AND OTHER DEBT SECURITIES
As discussed in the Prospectus, certain of the Portfolios may invest in
bonds and other debt securities of domestic and foreign issuers to the extent
consistent with their investment objectives and policies. A description of these
investments appears in the prospectus and below. See "Quality and
Diversification Requirements." For information on short-term investments in
these securities, see "Money Market Instruments."
ASSET-BACKED SECURITIES. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables. Payments of principal and interest may be guaranteed up
to certain amounts and for a certain time period by a letter of credit issued by
a financial institution unaffiliated with the entities issuing the securities.
The asset-backed securities in which a Portfolio may invest are subject to the
Portfolio's overall credit requirements. However, asset-backed securities, in
general, are subject to certain risks. Most of these risks are related to
limited interests in applicable collateral. For example, credit card debt
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts on credit card debt
thereby reducing the balance due. Additionally, if the letter of credit is
exhausted, holders of asset-backed securities may also experience delays in
payments or losses if the full amounts due on underlying sales contracts are not
realized. Because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested.
EQUITY INVESTMENTS
As discussed in the prospectus, certain of the Portfolios invest primarily
in Equity Securities. The Equity Securities in which these Portfolios invest
include those listed on any domestic or foreign securities exchange or traded in
the over-the-counter market as well as certain restricted or unlisted
securities. A discussion of the various types of equity investments which may be
purchased by these Portfolios appears in the prospectus and below. See "Quality
and Diversification Requirements."
EQUITY SECURITIES. The Equity Securities in which these Portfolios may
invest may or may not pay dividends and may or may not carry voting rights.
Common stock occupies the most junior position in a company's capital structure.
The convertible securities in which these Portfolios may invest include any
debt securities or preferred stock which may be converted into common stock or
which carry the right to purchase common stock. Convertible securities entitle
the holder to exchange the securities for a specified number of shares of common
stock, usually of the same company, at specified prices within a certain period
of time.
The terms of any convertible security determine its ranking in a company's
capital structure. In the case of subordinated convertible debentures, the
holders' claims on assets and earnings are subordinated to the claims of other
creditors, and are senior to the claims of preferred and common shareholders. In
the case of convertible preferred stock, the holders' claims on assets and
earnings are subordinated to the claims of all creditors and are senior to the
claims of common shareholders.
RIGHTS AND WARRANTS
Certain of the Portfolios may participate in rights offerings and purchase
warrants, which are privileges issued by corporations enabling the owners to
subscribe to and purchase a specified number of shares of the corporation at a
specified price during a specified period of time. Subscription rights normally
have a short life span to expiration. The purchase of rights or warrants
involves the risk that the Portfolio could lose the purchase value of a right or
warrant if the right to subscribe to additional shares is not exercised prior to
the rights' or warrants' expiration. Also, the purchase of rights or warrants
involves the risk that the effective price paid for the right or warrant added
to the subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in the
level of the underlying security.
FOREIGN INVESTMENTS
Each of the Portfolios may invest in foreign securities except that the
Stock Index Portfolio may only invest in the foreign securities of issuers in
the S&P 500 Index. The International Equity Portfolio and the Emerging Markets
Equity Portfolio make substantial investments in foreign countries. The Quality
Bond, Select Equity, Large Cap Stock, Small Cap Stock and Quality Income
Portfolios may invest in certain foreign securities. The Quality Bond Portfolio
may invest in U.S. and non-U.S. dollar-denominated fixed income securities of
foreign issuers. The Select Equity and Large Cap Stock Portfolios may invest in
equity securities of foreign corporations listed on a U.S. securities exchange.
The Small Cap Stock Portfolio may invest in equity securities of foreign issuers
that are listed on a national securities exchange or denominated or principally
traded in the U.S. dollar. The Quality Bond Portfolio, Select Equity Portfolio,
Large Cap Stock Portfolio and the Small Cap Stock Portfolio do not expect to
invest more than 25%, 5%, 5%, and 5%, respectively, of their total assets at the
time of purchase in securities of foreign issuers. All investments of the Money
Market Portfolio must be U.S. dollar-denominated. In the case of the Quality
Bond Portfolio, any foreign commercial paper must not be subject to foreign
withholding tax at the time of purchase. Foreign investments may be made
directly in securities of foreign issuers or in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). (See "ADRs and
EDRs", below.)
Since investments in foreign securities may involve foreign currencies, the
value of a Portfolio's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, including currency blockage. Certain of the Portfolios may enter
into forward commitments for the purchase or sale of foreign currencies in
connection with the settlement of foreign securities transactions or to manage
the Portfolios' currency exposure related to foreign investments.
For a description of the risks associated with investing in foreign
securities, see "Investment Practices" and "Risk Factors" in the Prospectus.
ADRs AND EDRs
Certain Portfolios may invest their assets in securities such as ADRs and
EDRs, which are receipts issued by a U.S. bank or trust company evidencing
ownership of underlying securities issued by a foreign issuer. ADRs and EDRs may
be listed on a national securities exchange or may trade in the over-the-counter
market. ADR and EDR prices are denominated in U.S. dollars, even though the
underlying security may be denominated in a foreign currency. The underlying
security may be subject to foreign government taxes which would reduce the yield
on such securities. Investments in such instruments involve risks similar to
those of investing directly in foreign securities. Such risks include political
or economic instability of the issuer or the country of issue, the difficulty of
predicting international trade patterns and the possibility of imposition of
exchange controls. Such securities may also be subject to greater fluctuations
in price than securities of domestic corporations. In addition, there may be
less publicly available information about a foreign company than about a
domestic company. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. With respect to certain foreign countries,
there is a possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries.
ADDITIONAL INVESTMENTS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each of the Portfolios may
purchase securities on a when-issued or delayed delivery basis. For example,
delivery of and payment for these securities can take place a month or more
after the date of the purchase commitment. The purchase price and the interest
rate payable, if any, on the securities are fixed on the purchase commitment
date or at the time the settlement date is fixed. The value of such securities
is subject to market fluctuation and no interest accrues to a Portfolio until
settlement takes place. At the time a Portfolio makes the commitment to purchase
securities on a when-issued or delayed delivery basis, it will record the
transaction, reflect the value each day of such securities in determining its
net asset value and, if applicable, calculate the maturity for the purposes of
average maturity from that date. At the time of settlement a when-issued
security may be valued at less than the purchase price. To facilitate such
acquisitions, each Portfolio will maintain with the Custodian a segregated
account with liquid assets, consisting of cash, U.S. Government securities or
other appropriate securities, in an amount at least equal to such comments. On
delivery dates for such transactions, each Portfolio will meet its obligations
from maturities or sales of the securities held in the segregated account and/or
from cash flow. If a Portfolio chooses to dispose of the right to acquire a
when-issued security prior to its acquisition, it could, as with the disposition
of any other portfolio obligation, incur a gain or loss due to market
fluctuation. It is the current policy of each Portfolio not to enter into
when-issued commitments exceeding in the aggregate 15% of the market value of
the Portfolio's total assets, less liabilities other than the obligations
created by when-issued commitments.
SECURITIES OF OTHER INVESTMENT COMPANIES. Securities of other investment
companies may be acquired by each of the Portfolios to the extent permitted
under the 1940 Act. These limits require that, as determined immediately after a
purchase is made, (i) not more than 5% of the value of a Portfolio's total
assets will be invested in the securities of any one investment company, (ii)
not more than 10% of the value of its total assets will be invested in the
aggregate in securities of investment companies as a group, and (iii) not more
than 3% of the outstanding voting stock of any one investment company will be
owned by a Portfolio.
REVERSE REPURCHASE AGREEMENTS. Each of the Portfolios may enter into
reverse repurchase agreements. In a reverse repurchase agreement, a Portfolio
sells a security and agrees to repurchase the same security at a mutually agreed
upon date and price. For purposes of the 1940 Act it is also considered as a
borrowing of money by the Portfolio and, therefore, a form of leverage. The
Portfolios will invest the proceeds of borrowings under reverse repurchase
agreements. In addition, a Portfolio will enter into a reverse repurchase
agreement only when the interest income to be earned from the investment of the
proceeds is greater than the interest expense of the transaction. A Portfolio
will not invest the proceeds of a reverse repurchase agreement for a period
which exceeds the duration of the reverse repurchase agreement. A Portfolio may
not enter into reverse repurchase agreements exceeding in the aggregate
one-third of the market value of its total assets, less liabilities other than
the obligations created by reverse repurchase agreements. Each Portfolio will
establish and maintain with the Custodian a separate account with a segregated
portfolio of securities in an amount at least equal to its purchase obligations
under its reverse repurchase agreements.
MORTGAGE DOLLAR ROLL TRANSACTIONS. Certain of the Portfolios of the Trust
may engage in mortgage dollar roll transactions with respect to mortgage
securities issued by the Government National Mortgage Association, the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation, In
a mortgage dollar roll transaction, the Portfolio sells a mortgage backed
security and simultaneously agrees to repurchase a similar security on a
specified future date at an agreed upon price. During the roll period, the
Portfolio will not be entitled to receive any interest or principal paid on the
securities sold. The Portfolio is compensated for the lost interest on the
securities sold by the difference between the sales price and the lower price
for the future repurchase as well as by the interest earned on the reinvestment
of the sales proceeds. The Portfolio may also be compensated by receipt of a
commitment fee. When the Portfolio enters into a mortgage dollar roll
transaction, liquid assets in an amount sufficient to pay for the future
repurchase are segregated with the Custodian. Mortgage dollar roll transactions
are considered reverse repurchase agreements for purposes of the Portfolio's
investment restrictions.
LOANS OF PORTFOLIO SECURITIES. Each of the Portfolios may lend its
securities if such loans are secured continuously by cash or equivalent
collateral or by a letter of credit in favor of the Portfolio at least equal at
all times to 100% of the market value of the securities loaned, plus accrued
interest. While such securities are on loan, the borrower will pay the Portfolio
any income accruing thereon. Loans will be subject to termination by the
Portfolios in the normal settlement time, generally five business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to a
Portfolio and its respective investors. The Portfolios may pay reasonable
finders' and custodial fees in connection with a loan. In addition, a Portfolio
will consider all facts and circumstances including the creditworthiness of the
borrowing financial institution, and no Portfolio will make any loans in excess
of one year.
PRIVATELY PLACED AND CERTAIN UNREGISTERED SECURITIES. The Portfolios may
invest in privately placed, restricted, Rule 144A or other unregistered
securities as described in the Prospectus.
As to illiquid investments, a Portfolio is subject to a risk that should
the Portfolio decide to sell them when a ready buyer is not available at a price
the Portfolio deems representative of their value, the value of the Portfolio's
net assets could be adversely affected. Where an illiquid security must be
registered under the Securities Act of 1933, as amended (the "1933 Act") before
it may be sold, a Portfolio may be obligated to pay all or part of the
registration expenses, and a considerable period may elapse between the time of
the decision to sell and the time the Portfolio may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, a Portfolio might obtain a less
favorable price than prevailed when it decided to sell.
QUALITY AND DIVERSIFICATION REQUIREMENTS
Each of the Portfolios intends to meet the diversification requirements of
the 1940 Act. To meet these requirements, 75% of the assets of these Portfolios
is subject to the following fundamental limitations: (1) the Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government, its agencies and instrumentalities,
and (2) the Portfolio may not own more than 10% of the outstanding voting
securities of any one issuer. As for the other 25% of the Portfolio's assets not
subject to the limitation described above, there is no limitation on investment
of these assets under the 1940 Act, so that all of such assets may be invested
in securities of any one issuer, subject to the limitation of any applicable
state securities laws, or with respect to the Money Market Portfolio, as
described below. Investments not subject to the limitations described above
could involve an increased risk to a Portfolio should an issuer, or a state or
its related entities, be unable to make interest or principal payments or should
the market value of such securities decline.
QUALITY BOND AND QUALITY INCOME PORTFOLIOS. These Portfolios invest
principally in a diversified portfolio of "high grade" and "investment grade"
securities. Investment grade debt is rated, on the date of investment, within
the four highest ratings of Moody's, currently Aaa, Aa, A and Baa, or of
Standard & Poor's, currently AAA, AA, A and BBB, while high grade debt is rated,
on the date of the investment, within the two highest of such ratings. The
Quality Bond Portfolio may also invest up to 5% of its total assets in
securities which are "below investment grade." Such securities must be rated, on
the date of investment, Ba by Moody's or BB by Standard & Poor's. The Portfolios
may invest in debt securities which are not rated or other debt securities to
which these ratings are not applicable, if in the opinion of the Sub-Adviser,
such securities are of comparable quality to the rated securities discussed
above. In addition, at the time the Portfolios invest in any commercial paper,
bank obligation or repurchase agreement, the issuer must have outstanding debt
rated A or higher by Moody's or Standard & Poor's, the issuer's parent
corporation, if any, must have outstanding commercial paper rated Prime-1 by
Moody's or A-1 by Standard & Poor's, or if no such ratings are available, the
investment must be of comparable quality in the Sub-Adviser's opinion.
CONVERTIBLE AND OTHER DEBT SECURITIES. Certain of the Portfolios may invest
in convertible debt securities, for which there are no specific quality
requirements. In addition, at the time a Portfolio invests in any commercial
paper, bank obligation or repurchase agreement, the issuer must have outstanding
debt rated A or higher by Moody's or Standard & Poor's, the issuer's parent
corporation, if any, must have outstanding commercial paper rated Prime-1 by
Moody's or A-1 by Standard & Poor's, or if no such ratings are available, the
investment must be of comparable quality in the Sub-Adviser's opinion. At the
time the Portfolio invests in any other short-term debt securities, they must
berated A or higher by Moody's or Standard & Poor's, or if unrated, the
investment must be of comparable quality in the Sub-Adviser's opinion.
In determining suitability of investment in a particular unrated security,
the Sub-Adviser takes into consideration asset and debt service coverage, the
purpose of the financing, history of the issuer, existence of other rated
securities of the issuer, and other relevant conditions, such as comparability
to other issuers.
GNMA CERTIFICATES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. The Government National Mortgage
Association is a wholly-owned corporate instrumentality of the United States
within the U.S. Department of Housing and Urban Development. GNMA's principal
programs involve its guarantees of privately issued securities backed by pools
of mortgages.
NATURE OF GNMA CERTIFICATES. GNMA Certificates are mortgage-backed
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which the Portfolio purchases are of the modified
pass-through type. Modified pass-through Certificates entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
fees paid to the GNMA Certificate issuer and GNMA, regardless of whether or not
the mortgagor actually makes the payment.
GNMA Certificates are backed by mortgages and, unlike most bonds, their
principal amount is paid back by the borrower over the length of the loan rather
than in a lump sum at maturity. Principal payments received by the Portfolio
will be reinvested in additional GNMA Certificates or in other permissible
investments.
GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal of and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration or the Farmers Home
Administration or guaranteed by the Veterans Administration. The GNMA guarantee
is backed by the full faith and credit of the United States. GNMA is also
empowered to borrow without limitation from the U.S. Treasury if necessary to
make any payments required under its guarantee. The net asset value and return
of the Portfolio will, however, fluctuate depending on market conditions and
other factors.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is likely
to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will result in the return of a portion of principal invested before
the maturity of the mortgages in the pool.
As prepayment rates of individual mortgage pools will vary widely, it is
not possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the Federal Housing
Administration are normally used as an indicator of the expected average life of
GNMA Certificates. These statistics indicate that the average life of
single-family dwelling mortgages with 25-30 year maturities (the type of
mortgages backing the vast majority of GNMA Certificates) is approximately 12
years. For this reason, it is customary for pricing purposes to consider GNMA
Certificates as 30-year mortgage-backed securities which prepay fully in the
twelfth year.
YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of the
fees paid to GNMA and the GNMA Certificate issuer. For the most common type of
mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of 1% of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of 1% for assembling the mortgage pool and for passing through monthly
payments of interest and principal to Certificate holders.
The coupon rate by itself, however, does not indicate the yield which will
be earned on the Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather than at
par.
2. After issuance, Certificates usually trade in the secondary market at a
premium or discount.
3. Interest is paid monthly rather than semi-annually as is the case for
traditional bonds. Monthly compounding has the effect of raising the effective
yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate. If
mortgagors prepay their mortgages, the principal returned to Certificate holders
may be reinvested at higher or lower rates.
In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a 12-year life. Compared on this basis,
GNMA Certificates have historically yielded roughly 1/4 of 1% more than high
grade corporate bonds and 1/2 of 1% more than U.S. Government and U.S.
Government agency bonds. As the life of individual pools may vary widely,
however, the actual yield earned on any issue of GNMA Certificates may differ
significantly from the yield estimated on the assumption of a 12-year life.
MARKET FOR GNMA CERTIFICATES. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.
FNMA AND FHLMC CERTIFICATES. Mortgage-backed securities issued by the
Federal National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage
Pass-through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the United States, but are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-backed securities issued
by the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "PCs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are
not guaranteed by the United States or by any Federal Home Loan Bank. Freddie
Macs entitle the holder to timely payment of interest, which is guaranteed by
the FHLMC. FHLMC guarantees either ultimate collection or timely payment of all
principal payments on the underlying mortgage loans. When FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
LOWER GRADE SECURITIES
Certain of the Portfolios may invest in lower-grade income securities. (The
High Yield Portfolio may invest a substantial portion of its assets in medium
and lower grade corporate debt securities entailing certain risks. See "Special
Risks of High Yield Investing" in the Prospectus.) Such lower grade securities
are rated BB or B by S&P or Ba or B by Moody's and are commonly referred to as
"junk bonds." Investment in such securities involves special risks, as described
herein. Liquidity relates to the ability of the Portfolio to sell a security in
a timely manner at a price which reflects the value of that security. As
discussed below, the market for lower grade securities is considered generally
to be less liquid than the market for investment grade securities. The relative
illiquidity of some of the Portfolio's portfolio securities may adversely affect
the ability of the Portfolio to dispose of such securities in a timely manner
and at a price which reflects the value of such security in the Sub-Adviser's
judgment. The market for less liquid securities tends to be more volatile than
the market for more liquid securities and market values of relatively illiquid
securities may be more susceptible to change as a result of adverse publicity
and investor perceptions than are the market values of higher grade, more liquid
securities.
The Portfolio's net asset value will change with changes in the value of
its portfolio securities. Because the Portfolio will invest in fixed income
securities, the Portfolio's net asset value can be expected to change as general
levels of interest rates fluctuate. When interest rates decline, the value of a
portfolio invested in fixed income securities can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in fixed
income securities can be expected to decline. Net asset value and market value
may be volatile due to the Portfolio's investment in lower grade and less liquid
securities. Volatility may be greater during periods of general economic
uncertainty.
The Portfolio's investments are valued pursuant to guidelines adopted and
periodically reviewed by the Board of Trustees. To the extent that there is no
established retail market for some of the securities in which the Portfolio may
invest, during periods of reduced market liquidity and in the absence of readily
available market quotations for securities held in the Portfolio's portfolio,
the valuation of such securities becomes more difficult and judgment may play a
greater role in the valuation of the Portfolio's securities due to the reduced
availability of reliable objective data. To the extent that the Portfolio
invests in illiquid securities and securities which are restricted as to resale,
the Portfolio may incur additional risks and costs. Illiquid and certain
restricted securities are particularly difficult to dispose of.
Lower grade securities generally involve greater credit risk than higher
grade securities. A general economic downturn or a significant increase in
interest rates could severely disrupt the market for lower grade securities and
adversely affect the market value of such securities. In addition, in such
circumstances, the ability of issuers of lower grade securities to repay
principal and to pay interest, to meet projected financial goals and to obtain
additional financing may be adversely affected. Such consequences could lead to
an increased incidence of default for such securities and adversely affect the
value of the lower grade securities in the Portfolio's portfolio and thus the
Portfolio's net asset value. The secondary market prices of lower grade
securities are less sensitive to changes in interest rates than are those for
higher rated securities, but are more sensitive to adverse economic changes or
individual issuer developments. Adverse publicity and investor perceptions,
whether or not based on rational analysis, may also affect the value and
liquidity of lower grade securities.
Yields on the Portfolio's portfolio securities can be expected to fluctuate
over time. In addition, periods of economic uncertainty and changes in interest
rates can be expected to result in increased volatility of the market prices of
the lower grade securities in the Portfolio's portfolio and thus in the net
asset value of the Portfolio. Net asset value and market value may be volatile
due to the Portfolio's investment in lower grade and less liquid securities.
Volatility may be greater during periods of general economic uncertainty. The
Portfolio may incur additional expenses to the extent it is required to seek
recovery upon a default in the payment of interest or a repayment of principal
on its portfolio holdings, and the Portfolio may be unable to obtain full
recovery thereof. In the event that an issuer of securities held by the
Portfolio experiences difficulties in the timely payment of principal or
interest and such issuer seeks to restructure the terms of its borrowings, the
Portfolio may incur additional expenses and may determine to invest additional
capital with respect to such issuer or the project or projects to which the
Portfolio's portfolio securities relate.
The Portfolio will rely on the Sub-Adviser's judgment, analysis and
experience in evaluating the creditworthiness of an issue. In this evaluation,
the Sub-Adviser will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends, its
operating history, the quality of the issuer's management and regulatory
matters. The Sub-Adviser also may consider, although it does not rely primarily
on, the credit ratings of S&P and Moody's in evaluating fixed-income securities.
Such ratings evaluate only the safety of principal and interest payments, not
market value risk. Additionally, because the creditworthiness of an issuer may
change more rapidly than is able to be timely reflected in changes in credit
ratings, the Sub-Adviser continuously monitors the issuers of such securities
held in the Portfolio's portfolio. The Portfolio may, if deemed appropriate by
the Sub-Adviser, retain a security whose rating has been downgraded below B by
S&P or below B by Moody's, or whose rating has been withdrawn.
With respect to Portfolios which may invest in these unrated income
securities, achievement by the Portfolio of its investment objective may be more
dependent upon the Sub-Adviser's investment analysis than would be the case if
the Portfolio were investing exclusively in rated securities.
STRATEGIC TRANSACTIONS
As described in the Prospectus, certain Portfolios of the Trust may, but
are not required to, utilize various other investment strategies as described
below to hedge various market risks (such as interest rates, currency exchange
rates and broad or specific market movements) or to manage the effective
maturity or duration of a Portfolio's income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, a Portfolio may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and income indices and other financial instruments, purchase
and sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors or collars and enter into
various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions"). Strategic
Transactions are hedging transactions which may be used to attempt to protect
against possible changes in the market value of securities held in or to be
purchased for a Portfolio's portfolio resulting from securities markets or
exchange rate fluctuations, to protect a Portfolio's unrealized gains in the
value of its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of a
Portfolio's portfolio, or to establish a position in the derivatives markets as
a temporary substitute for purchasing or selling particular securities.
Any or all of these investment techniques may be used at any time and there
is no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of a Portfolio to utilize these
Strategic Transactions successfully will depend on the Sub-Adviser's ability to
predict pertinent market movements, which cannot be assured. A Portfolio will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Sub-Adviser's view as to certain market movements is incorrect, the risk
that the use of such Strategic Transactions could result in losses greater than
if they had not been used. Use of put and call options may result in losses to a
Portfolio, force the sale or purchase of portfolio securities at inopportune
times or for prices other than current market values, limit the amount of
appreciation a Portfolio can realize on its investments or cause a Portfolio to
hold a security it might otherwise sell. The use of currency transactions can
result in a Portfolio incurring losses as a result of a number of factors
including the imposition of exchange controls, suspension of settlements or the
inability to deliver or receive a specified currency. The use of options and
futures transactions entails certain other risks. In particular, the variable
degree of correlation between price movements of futures contracts and price
movements in the related portfolio position of a Portfolio creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of a Portfolio's position. In addition, futures and options markets
may not be liquid in all circumstances and certain over-the-counter options may
have no markets. As a result, in certain markets, a Portfolio might not be able
to close out a transaction without incurring substantial losses, if at all.
Although the use of futures and options transactions for hedging should
tend to minimize the risk of loss due to a decline in the value of the hedged
position, at the same time they tend to limit any potential gain which might
result from an increase in value of such position. Finally, the daily variation
margin requirements for futures contracts would create a greater ongoing
potential financial risk than would purchases of options, where the exposure is
limited to the cost of the initial premium. Losses resulting from the use of
Strategic Transactions would reduce net asset value, and possibly income, and
such losses can be greater than if the Strategic Transactions had not been
utilized. Income earned or deemed to be earned, if any, by a Portfolio from its
Strategic Transactions will generally be taxable income of the Trust. See "Tax
Status" in the Prospectus.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Portfolio assets in special accounts,
as described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Portfolio's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Portfolio the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. A Portfolio's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Portfolio against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase such instrument. An American style put or call
option may be exercised at any time during the option period while a European
style put or call option may be exercised only upon expiration or during a fixed
period prior thereto. As described in the Prospectus, certain Portfolios of the
Trust are authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as a paradigm, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Portfolio's ability to close out its position as a purchaser or seller of
an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. A
Portfolio will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Portfolio to require the
Counterparty to sell the option back to the Portfolio at a formula price within
seven days. The Portfolios expect generally to enter into OTC options that have
cash settlement provisions, although they are not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with a Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Sub-Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. A Portfolio will engage in OTC option transactions
only with United States government securities dealers recognized by the Federal
Reserve Bank of New York as "primary dealers", or broker dealers, domestic or
foreign banks or other financial institutions which have received (or the
guarantors of the obligation of which have received) a short-term credit rating
of "A-1" from Standard & Poor's Corporation or "P-1" from Moody's Investors
Service, Inc. or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO"). The staff of the SEC currently takes
the position that, in general, OTC options on securities other than U.S.
government securities purchased by a Portfolio, and portfolio securities
"covering" the amount of the Portfolio's obligation pursuant to an OTC option
sold by it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to each Portfolio's limitation on investing no more
than 10% of its assets in restricted securities.
If a Portfolio sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase a Portfolio's income. The sale of put options can also provide income.
A Portfolio may purchase and sell call options on securities, including
U.S. Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets and or securities
indices, currencies and futures contracts. All calls sold by a Portfolio must be
"covered" (i.e., the Portfolio must own the securities or futures contract
subject to the call) or must meet the asset segregation requirements described
below as long as the call is outstanding. Even though a Portfolio will receive
the option premium to help protect it against loss, a call sold by a Portfolio
exposes the Portfolio during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Portfolio to hold a security or
instrument which it might otherwise have sold. In selling calls on securities
not owned by the Portfolio, the Portfolio may be required to acquire the
underlying security at a disadvantageous price in order to satisfy its
obligations with respect to the call.
A Portfolio may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio) and on securities indices, currencies and futures
contracts other than futures on individual corporate debt and individual equity
securities. A Portfolio will not sell put options if, as a result, more than 50%
of the Portfolio's assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that a
Portfolio may be required to buy the underlying security at a disadvantageous
price above the market price.
General Characteristics of Futures. Certain Portfolios of the Trust may
enter into financial futures contracts or purchase or sell put and call options
on such futures as a hedge against anticipated interest rate, currency, equity
or income market changes, for duration management and for risk management
purposes. Futures are generally bought and sold on the commodities exchanges
where they are listed with payment of initial and variation margin as described
below. The purchase of a futures contract creates a firm obligation by a
Portfolio, as purchaser, to take delivery from the seller of the specific type
of financial instrument called for in the contract at a specific future time for
a specified price (or, with respect to index futures and Eurodollar instruments,
the net cash amount). The sale of a futures contract creates a firm obligation
by the Portfolio, as seller, to deliver to the buyer the specific type of
financial instrument called for in the contract at a specific future time for a
specified price (or, with respect to index futures and Eurodollar instruments,
the net cash amount). Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a futures contract
and obligates the seller to deliver such option.
The Portfolio's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and, in particular,
with the rules and regulations of the Commodity Futures Trading Commission.
Typically, maintaining a futures contract or selling an option thereon requires
the Portfolio to deposit with a financial intermediary, as security for its
obligations, an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited thereafter on a daily basis as the mark to market
value of the contract fluctuates. The purchase of options on financial futures
involves payment of a premium for the option without any further obligation on
the part of the Portfolio. If the Portfolio exercises an option on a futures
contract it will be obligated to post initial margin (and potential subsequent
variation margin) for the resulting futures position just as it would for any
position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price nor that
delivery will occur.
A Portfolio will not enter into a futures contract or related option
(except for closing transactions) for other than bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the Portfolio's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below.
Options on Securities Indices and Other Financial Indices. A Portfolio also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. Certain Portfolios of the Trust may engage in
currency transactions with Counterparties in order to hedge the value of
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. A Portfolio may enter into
currency transactions with Counterparties which have received (or the guarantors
of the obligations of such Counterparties have received) a credit rating of A-1
or P-1 by S&P or Moody's, respectively, or that have an equivalent rating from
an NRSRO or (except for OTC currency options) are determined to be of equivalent
credit quality by the Sub-Adviser.
Dealings by the Portfolios in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Portfolio, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
A Portfolio will not enter into a transaction to hedge currency exposure to
an extent greater, after netting all transactions intended to wholly or
partially offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency other than with respect to cross hedging and proxy hedging as described
below.
A Portfolio may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Portfolio has or in which the
Portfolio expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, a Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio's portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which some or all of the Portfolio's portfolio
securities are or are expected to be denominated, and to buy U.S. dollars. For
example, if the Sub-Adviser considers the Austrian schilling as being linked to
the German deutschemark (the "D-mark") and the Trust holds securities
denominated in schillings and the Sub-Adviser believes that the value of
schillings will decline against the U.S. dollar, the Sub-Adviser may enter into
a contract to sell D-marks and buy dollars. Currency hedging involves some of
the same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to a Portfolio if the
currency being hedged fluctuates in value to a degree or in a direction that is
not anticipated. Further, there is the risk that the perceived linkage between
various currencies may not be present or may not be present during the
particular time that the Portfolio is engaging in proxy hedging. If a Portfolio
enters into a currency hedging transaction, the Portfolio will comply with the
asset segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to a Portfolio if it is unable to deliver or receive currency or funds
in settlement of obligations and could also cause hedges it has entered into to
be rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. Certain Portfolios of the Trust may enter into
multiple transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts), multiple interest rate transactions and any combination of futures,
options, currency and interest rate transactions ("component" transactions),
instead of a single Strategic Transaction, as part of a single or combined
strategy when, in the opinion of the Sub-Adviser, it is in the best interest of
the Portfolio to do so. A combined transaction will usually contain elements of
risk that are present in each of its component transactions. Although combined
transactions are normally entered into based on the Sub-Adviser's judgment that
the combined strategies will reduce risk or otherwise more effectively achieve
the desired portfolio management goal, it is possible that the combination will
instead increase such risks or hinder achievement of the portfolio management
objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which certain Portfolios may enter are interest rate, currency and index swaps
and the purchase or sale of related caps, floors and collars. The Portfolios
expect to enter into these transactions primarily to preserve a return or spread
on a particular investment or portion of their portfolios, to protect against
currency fluctuations, as a duration management technique or to protect against
any increase in the price of securities the Portfolio anticipates purchasing at
a later date. The Portfolios intend to use these transactions as hedges and not
as speculative investments and will not sell interest rate caps or floors where
they do not own securities or other instruments providing the income stream the
Portfolios may be obligated to pay. Interest rate swaps involve the exchange by
the Portfolio with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. A currency swap is an
agreement to exchange cashflows on a notional amount of two or more currencies
based on the relative value differential among them. An index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the
Sub-Adviser and the Portfolio believe such obligations do not constitute senior
securities under the Investment Company Act of 1940, as amended, and,
accordingly, will not treat them as being subject to its borrowing restrictions.
A Portfolio will not enter into any swap, cap, floor or collar transaction
unless, at the time of entering into such transaction, the unsecured long-term
debt of the Counterparty, combined with any credit enhancements, is rated at
least "A" by S&P or Moody's or has an equivalent equity rating from an NRSRO or
is determined to be of equivalent credit quality by the Sub-Adviser. If there is
a default by the Counterparty, the Portfolio may have contractual remedies
pursuant to the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and agents utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid. Caps,
floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, accordingly, they are less
liquid than swaps.
EURODOLLAR INSTRUMENTS. Certain Portfolios of the Trust may make
investments in Eurodollar instruments. Eurodollar instruments are U.S.
dollar-denominated futures contracts or options thereon which are linked to the
London Interbank Offered Rate ("LIBOR"), although foreign currency-denominated
instruments are available from time to time. Eurodollar futures contracts enable
purchasers to obtain a fixed rate for the lending of funds and sellers to obtain
a fixed rate for borrowings. A Portfolio might use Eurodollar futures contracts
and options thereon to hedge against changes in LIBOR, to which many interest
rate swaps and income instruments are linked.
RISKS OF STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES. When conducted
outside the United States, Strategic Transactions may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantee, and are subject to the risk of governmental actions affecting
trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in a Portfolio's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) lower trading volume
and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions,
in addition to other requirements, require that the Portfolio segregate liquid
high-grade assets with its custodian to the extent Portfolio obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Portfolio to pay or deliver securities or assets must be covered at all
times by the securities, instruments or currency required to be delivered, or,
subject to any regulatory restrictions, an amount of cash or liquid high-grade
debt securities at least equal to the current amount of the obligation must be
segregated with the custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. For example, a call option written by a
Portfolio will require the Portfolio to hold the securities subject to the call
(or securities convertible into the needed securities without additional
consideration) or to segregate liquid high-grade debt securities sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by a Portfolio on an index will require the Portfolio to own portfolio
securities which correlate with the index or to segregate liquid high-grade
assets equal to the excess of the index value over the exercise price on a
current basis. A put option written by a Portfolio requires the Portfolio to
segregate liquid, high-grade assets equal to the exercise price.
Except when a Portfolio enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Portfolio to buy or sell
currency will generally require the Portfolio to hold an amount of that currency
or liquid securities denominated in that currency equal to the Portfolio's
obligations or to segregate liquid high-grade assets equal to the amount of the
Portfolio's obligation.
OTC options entered into by a Portfolio, including those on securities,
currencies, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when a
Portfolio sells these instruments it will only segregate an amount of assets
equal to its accrued net obligations, as there is no requirement for payment or
delivery of amounts in excess of the net amount. These amounts will equal 100%
of the exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Portfolio, or the in-the-money amount plus
any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Portfolio sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Portfolio will segregate,
until the option expires or is closed out, cash or cash equivalents equal in
value to such excess. OCC issued and exchange listed options sold by the
Portfolio other than those above generally settle with physical delivery or with
an election of either physical delivery or cash settlement, and the Portfolio
will segregate an amount of assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement, will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option thereon, the Portfolio must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt securities or other acceptable assets.
With respect to swaps, a Portfolio will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid high-grade
securities having a value equal to the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to a Portfolio's net
obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. A Portfolio may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, a Portfolio could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Portfolio. Moreover, instead of segregating assets if the Portfolio
held a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the price
of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction, no segregation is required. However, if it terminates
prior to such time, assets equal to any remaining obligation would need to be
segregated.
The Trust's activities involving Strategic Transactions may be limited by
the requirements of Subchapter M of the Internal Revenue Code for qualification
as a regulated investment company. See "Tax Status" in the Prospectus.
VKAC GROWTH AND INCOME PORTFOLIO - DEBT SECURITIES INVESTMENTS
The VKAC Growth and Income Portfolio may invest up to 5% of its assets in
various debt securities. These include obligations issued or guaranteed by the
U.S. government or its agencies or instrumentalities or in various investment
grade debt obligations including mortgage pass-through certificates and
collateralized mortgage obligations. These securities may also include corporate
debt securities, some of which may be medium and lower grade quality. Lower
grade corporate debt securities are commonly known as "junk bonds" and involve a
significant degree of risk.
STOCK INDEX PORTFOLIO - MONITORING PROCEDURES
MONITORING PROCEDURES
The Board of Trustees of the Trust reviews the correlation between the
Portfolio and the Index on a quarterly basis. The Board of Trustees has adopted
monitoring procedures which it believes are reasonably designed to assure a high
degree of correlation between the performance of the Portfolio and the S&P 500
Index. The procedures, which are reviewed and reconfirmed annually by the Board,
provide that in the event that the correlation between the performance of the
Portfolio and that of the S&P 500 Index falls below 95%, the Sub-Adviser will
promptly notify the Board which shall consider what action, if any, should be
taken.
INVESTMENT LIMITATIONS
The Trust has adopted the following restrictions and policies relating to
the investment of assets of the Portfolios and their activities. These are
fundamental policies and may not be changed without the approval of the holders
of a majority of the outstanding voting shares of each Portfolio affected (which
for this purpose and under the Investment Company Act of 1940 means the lesser
of (i) 67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are present or represented by proxy and (ii) more than 50% of
the outstanding shares). A change in policy affecting only one Portfolio may be
effected with the approval of a majority of the outstanding shares of such
Portfolio. Where an investment restriction or policy restricts it to a specified
percentage of its total assets in any type of instrument, that percentage is
measured at the time of purchase. There will be no violation of any investment
policy or restriction if that restriction is complied with at the time the
relevant action is taken notwithstanding a later change in the market value of
an investment, in net or total assets, in the securities rating of the
investment or any other change.
QUALITY INCOME, HIGH YIELD, MONEY MARKET, VKAC GROWTH AND INCOME AND STOCK INDEX
PORTFOLIOS
Each of the Quality Income, High Yield, Money Market, VKAC Growth and
Income and Stock Index Portfolios of the Trust may not:
1. Borrow money which is in excess of one-third of the value of its total
assets taken at market value (including the amount borrowed) (except the Money
Market Portfolio which is limited to 10% of the value of its total assets) and
then only from banks as a temporary measure for extraordinary or emergency
purposes. This borrowing provision is not for investment leverage but solely to
facilitate management of the Portfolio by enabling the Trust to meet redemption
requests where the liquidation of the Portfolio's investment is deemed to be
inconvenient or disadvantageous. Monies used to pay interest on borrowed funds
will not be available for investment. The Portfolio will not make additional
investments while it has borrowings outstanding;
2. Underwrite securities of other issuers;
3. Invest 25% or more of a Portfolio's assets taken at market value in any
one industry. Investing in cash items (including bank time and demand deposits
such as certificates of deposit), U.S. Treasury bills or securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, or
instruments secured by those money market instruments, such as repurchase
agreements, will not be considered investments in any one industry;
4. Purchase or sell commodities, commodity contracts, foreign exchange or
real estate, or invest in oil, gas or other mineral development or exploration
programs, except as noted in connection with hedging transactions. (This does
not prohibit investment in the securities of corporations which own interests in
commodities, foreign exchange, real estate or oil, gas or other mineral
development or exploration programs);
5. Invest more than 5% of the value of the assets of a Portfolio in
securities of any one issuer (except in the case of the securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities), or, if,
as a result, the Portfolio would hold more than 10% of the outstanding voting
securities of an issuer except that up to 25% of the Portfolio's total assets
may be invested without regard to such limitations;
6. Invest in securities of a company for the purpose of exercising control
or management;
7. Invest in securities issued by any other registered investment company;
8. Purchase or sell real estate, except the Portfolios may purchase
securities which are issued by companies which invest in real estate or
interests therein;
9. Issue senior securities as defined in the Investment Company Act of
1940, except insofar as a Portfolio may be deemed to have issued a senior
security by reason of (a) entering into any repurchase agreement; (b) borrowing
money in accordance with restrictions described above; (c) lending Portfolio
securities; (d) purchasing securities on a when-issued or delayed delivery
basis; (e) accommodating short sales; (f) implementing the hedging transactions
described above. If the asset coverage falls below 300%, when taking into
account items (a) through (e), the Portfolio may be required to liquidate
investments to be in compliance with the Investment Company Act of 1940;
10. Lend portfolio securities in excess of twenty-five percent (25%) of the
value of a Portfolio's assets. Any loans of a Portfolio's securities will be
made according to guidelines established by the Trustees, including maintenance
of collateral of the borrower at least equal at all times to the current market
value of the securities loaned;
11. Invest in securities subject to legal or contractual restrictions on
resale and repurchase agreements maturing in more than seven days if, as a
result of the investment, more than 10% of the total assets of the Portfolio
(taken at market value at the time of such investment) would be invested in the
securities;
12. Make loans (the acquisition of a portion of an issue of publicly
distributed bonds, debentures, notes and other securities as permitted by the
investment objectives of the Portfolios will not be deemed to be the making of
loans) except that the Portfolios may purchase securities subject to repurchase
agreements under policies established by the Trustees or lend portfolio
securities pursuant to restriction 10 above;
13. Purchase securities on margin (but the Portfolios may obtain such
short-term credits as may be necessary for the clearance of transactions or to
implement the hedging transactions described above); and
14. Make short sales of securities or maintain a short position, unless not
more than 10% of the Portfolio's net assets (taken at current value) is held as
collateral for the sales at any one time, or unless at all times when a short
position is open the Portfolio owns an equal amount of the securities or
securities convertible into or exchangeable, without payment of any further
consideration (or for additional cash consideration held in a segregated account
by the Trust's custodian), for securities of the same issue as, and equal in
amount to, the securities sold short ("short sale against-the-box").
ADDITIONAL INVESTMENT LIMITATION - STOCK INDEX PORTFOLIO
The Stock Index Portfolio may not invest more than 5% of assets in the
securities of companies that have a continuous operating history of less than 3
years. However, such period of three years may include the operation of any
predecessor company or companies, partnership or individual enterprise if the
company whose securities are proposed as an investment for funds of the
Portfolio has come into existence as the result of a merger, consolidation,
reorganization or the purchase of substantially all of the assets of such
predecessor company or companies, partnership or individual enterprise.
ADDITIONAL INVESTMENT LIMITATIONS - MONEY MARKET PORTFOLIO
Rule 2a-7 under the Investment Company Act of 1940, which contains certain
requirements relating to the diversification, quality and maturity of a money
market fund's investments, was recently amended by the Securities and Exchange
Commission. The Board of Trustees of the Trust has modified its Rule 2a-7
procedures in order to comply with the Rule, as amended. As part of that
modification, the Board has adopted certain additional investment restrictions
pertaining to the diversification of the investments of the Money Market
Portfolio. These investment limitations, which are not fundamental policies and
which therefore may be changed without shareholder approval, are as follows:
The Money Market Portfolio shall not acquire any instrument, including
puts, repurchase agreements and bank instruments, which, as measured at the time
of acquisition, would cause the Portfolio to:
1. invest, at any time, more than 5% of its total assets in the First Tier
Securities (as that term is defined in the Trust Prospectus) of a single issuer
(including puts written by, and repurchase agreements entered into with, such
issuer); except that the Portfolio may invest more than 5% of its total assets
in Government securities; and, for purposes of this calculation, entering into a
repurchase agreement shall be deemed to be an acquisition of the underlying
securities to the extent that the repurchase agreement is collateralized fully;
2. invest, at any time, more than 5% of its total assets in securities
which when acquired by the Portfolio were Second Tier Securities (as that term
is defined in the Trust Prospectus); or
3. invest, at any time, more than the greater of 1% of the Portfolio's
total assets or $1,000,000 in securities of a single issuer which were Second
Tier Securities when acquired by the Portfolio.
QUALITY BOND PORTFOLIO
The Quality Bond Portfolio of the Trust may not:
1. Borrow money, except from banks for extraordinary or emergency purposes
and then only in amounts up to 30% of the value of the Portfolio's total assets,
taken at cost at the time of such borrowing and except in connection with
reverse repurchase agreements permitted by Investment Restriction No. 8.
Mortgage, pledge, or hypothecate any assets except in connection with any such
borrowing in amounts up to 30% of the value of the Portfolio's net assets at the
time of such borrowing. The Portfolio will not purchase securities while
borrowings (including reverse repurchase agreements) exceed 5% of the
Portfolio's total assets. This borrowing provision facilitates the orderly sale
of portfolio securities, for example, in the event of abnormally heavy
redemption requests. This provision is not for investment purposes. Collateral
arrangements for premium and margin payments in connection with the
Portfolio's's hedging activities are not deemed to be a pledge of assets;
2. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Portfolio's
total assets would be invested in securities or other obligations of any one
such issuer. This limitation shall not apply to securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities or to permitted
investments of up to 25% of the Portfolio's total assets;
3. Purchase the securities of an issuer if, immediately after such
purchase, the Portfolio owns more than 10% of the outstanding voting securities
of such issuer. This limitation shall not apply to permitted investments of up
to 25% of the Portfolio's total assets;
4. Purchase securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after such
purchase the value of its investments in such industry would exceed 25% of the
value of the Portfolio's total assets. For purposes of industry concentration,
there is no percentage limitation with respect to investments in U.S. Government
securities;
5. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities) or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the Portfolio's
investment objective and policies;
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate, commodities, commodity contracts, except for the
Portfolio's interest in hedging activities as described under "Investment
Objectives and Policies"; or interests in oil, gas, or mineral exploration or
development programs. However, the Portfolio may purchase debt obligations
secured by interests in real estate or issued by companies which invest in real
estate or interests therein including real estate investment trusts;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position in securities, except in the course of the Portfolio's
hedging activities, unless at all times when a short position is open the
Portfolio owns an equal amount of such securities, provided that this
restriction shall not be deemed to be applicable to the purchase or sale of
when-issued securities or delayed delivery securities;
8. Issue any senior security, except as appropriate to evidence
indebtedness which constitutes a senior security and which the Portfolio is
permitted to incur pursuant to Investment Restriction No. 1 and except that the
Portfolio may enter into reverse repurchase agreements, provided that the
aggregate of senior securities, including reverse repurchase agreement, shall
not exceed one-third of the market value of the Portfolio's total assets, less
liabilities other than obligations created by reverse repurchase agreements. The
Portfolio's arrangements in connection with its hedging activities as described
in "Investment Objectives and Policies" shall not be considered senior
securities for purposes hereof;
9. Acquire securities of other investment companies, except as permitted by
the 1940 Act; or
10. Act as an underwriter of securities.
SELECT EQUITY, LARGE CAP STOCK AND SMALL CAP STOCK PORTFOLIOS
Each of the Select Equity, Large Cap Stock and Small Cap Stock Portfolios
may not:
1. Purchase the securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after such
purchase the value of its investments in such industry would exceed 25% of the
value of the Portfolio's total assets. For purposes of industry concentration,
there is no percentage limitation with respect to investments in U.S. Government
securities;
2. Borrow money, except from banks for extraordinary or emergency purposes
and then only in amounts not to exceed 10% of the value of the Portfolio's total
assets, taken at cost, at the time of such borrowing. Mortgage, pledge, or
hypothecate any assets except in connection with any such borrowing and in
amounts not to exceed 10% of the value of the Portfolio's net assets at the time
of such borrowing. The Portfolio will not purchase securities while borrowings
exceed 5% of the Portfolio's total assets. This borrowing provision is included
to facilitate the orderly sale of portfolio securities, for example, in the
event of abnormally heavy redemption requests, and is not for investment
purposes. Collateral arrangements for premium and margin payments in connection
with the Portfolio's hedging activities are not deemed to be a pledge of assets;
3. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Portfolio's
total assets would be invested in securities or other obligations of any one
such issuer. This limitation shall not apply to issues of the U.S. Government,
its agencies or instrumentalities and to permitted investments of up to 25% of
the Portfolio's total assets;
4. Purchase the securities of an issuer if, immediately after such
purchase, the Portfolio owns more than 10% of the outstanding voting securities
of such issuer;
5. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities), or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the Portfolio's
investment objective and policies (see "Investment Objectives and Policies");
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate, commodities, or commodity contracts, except for the
Portfolio's interest in hedging activities as described under "Investment
Objectives and Policies"; or interests in oil, gas, or mineral exploration or
development programs. However, the Portfolio may purchase securities or
commercial paper issued by companies which invest in real estate or interests
therein, including real estate investment trusts;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position, except in the course of the Portfolio's hedging
activities, provided that this restriction shall not be deemed to be applicable
to the purchase or sale of when-issued securities or delayed delivery
securities;
8. Acquire securities of other investment companies, except as permitted by
the 1940 Act;
9. Act as an underwriter of securities;
10. Issue any senior security, except as appropriate to evidence
indebtedness which the Portfolio is permitted to incur pursuant to Investment
Restriction No. 2. The Portfolio's arrangements in connection with its hedging
activities as described in "Investment Objectives and Policies" shall not be
considered senior securities for purposes hereof; or
11. Purchase any equity security if, as a result, the Portfolio would then
have more than 5% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for fewer than
three years.
INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio may not:
1. Borrow money, except from banks for extraordinary or emergency purposes
and then only in amounts up to 30% of the value of the Portfolio's net assets at
the time of borrowing, and except in connection with reverse repurchase
agreements and then only in amounts up to 33 1/3% of the value of the
Portfolio's net assets; or purchase securities while borrowings, including
reverse repurchase agreements, exceed 5% of the Portfolio's total assets. The
Portfolio will not mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not to exceed 30% of the value
of the Portfolio's net assets at the time of such borrowing;
2. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Portfolio's
total assets would be invested in securities or other obligations of any one
such issuer. This limitation shall not apply to securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities or to permitted
investments of up to 25% of the Portfolio's total assets;
3. Purchase the securities of an issuer if, immediately after such
purchase, the Portfolio owns more than 10% of the outstanding voting securities
of such issuer. This limitation shall not apply to permitted investments of up
to 25% of the Portfolio's total assets;
4. Purchase the securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after such
purchase, the value of its investments in such industry would exceed 25% of the
value of the Portfolio's total assets. For purposes of industry concentration,
there is no percentage limitation with respect to investments in U.S. Government
securities;
5. Make loans, except through the purchase or holding of debt obligations
(including restricted securities), or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the Portfolio's
investment objective and policies, see "Investment Practices" in the Prospectus
and "Investment Objectives and Policies" in this Statement of Additional
Information;
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real property, including limited partnership interests, commodities, or
commodity contracts, except for the Portfolio's interests in hedging and foreign
exchange activities as described under "Investment Practices" in the Prospectus;
or interests in oil, gas, mineral or other exploration or development programs
or leases. However, the Portfolio may purchase securities or commercial paper
issued by companies that invest in real estate or interests therein including
real estate investment trusts;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position in securities, except to obtain such short-term credit
as necessary for the clearance of purchases and sales of securities, provided
that this restriction shall not be deemed to apply to the purchase or sale of
when-issued securities or delayed delivery securities;
8. Acquire securities of other investment companies, except as permitted by
the 1940 Act;
9. Act as an underwriter of securities, except insofar as the Portfolio may
be deemed to be an underwriter under the 1933 Act by virtue of disposing of
portfolio securities; or
10. Issue any senior security, except as appropriate to evidence
indebtedness which the Portfolio is permitted to incur pursuant to Investment
Restriction No. 1. The Portfolio's arrangements in connection with its hedging
activities as described in "Investment Practices" in the Prospectus shall not be
considered senior securities for purposes hereof.
EMERGING MARKETS EQUITY PORTFOLIO
The Emerging Markets Equity Portfolio may not:
1. Purchase any security if, as a result, more than 25% of the value of the
Portfolio's total assets would be invested in securities of issuers having their
principal business activities in the same industry. This limitation shall not
apply to obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities;
2. Borrow money, except that the Portfolio may (i) borrow money from banks
for temporary or emergency purposes (not for leveraging purposes) and (ii) enter
into reverse repurchase agreements for any purpose; provided that (i) and (ii)
in total do not exceed 33 1/3% of the value of the Portfolio's total assets
(including the amount borrowed)less liabilities (other than borrowings). If at
any time any borrowings come to exceed 33 1/3% of the value of the Portfolio's
total assets, the Portfolio will reduce its borrowings within three business
days to the extent necessary to comply with the 33 1/3% limitation;
3. With respect to 75% of its total assets, purchase any security if, as a
result, (a) more than 5% of the value of the Portfolio's total assets would be
invested in securities or other obligations of any one issuer; or (b) the
Portfolio would hold more than 10% of the outstanding voting securities of that
issuer. This limitation shall not apply to Government securities (as defined in
the 1940 Act);
4. Make loans to other persons, except through the purchase of debt
obligations, loans of portfolio securities, and participation in repurchase
agreements;
5. Purchase or sell physical commodities or contracts thereon, unless
acquired as a result of the ownership of securities or instruments, but the
Portfolio may purchase or sell futures contracts or options (including options
on futures contracts, but excluding options or futures contracts on physical
commodities) and may enter into foreign currency forward contracts;
6. Purchase or sell real estate, but the Portfolio may purchase or sell
securities that are secured by real estate or issued by companies (including
real estate investment trusts) that invest or deal in real estate;
7. Underwrite securities of other issuers, except to the extent the
Portfolio, in disposing of portfolio securities, may be deemed an underwriter
within the meaning of the 1933 Act; and
8. Issue senior securities, except as permitted under the 1940 Act or any
rule, order or interpretation thereunder.
BOND DEBENTURE PORTFOLIO
The Bond Debenture Portfolio of the Trust may not:
1. Sell short or buy on margin, although it may obtain short-term credit as
needed to clear purchases of securities;
2. Buy or sell put or call options, although it may buy, hold or sell
warrants acquired with debt securities;
3. Borrow in excess of 5% of the Portfolio's gross assets taken at cost or
market value whichever is lower at the time of borrowing, and then only as a
temporary measure for extraordinary or emergency purposes;
4. Act as an underwriter of securities issued by others, except where it
may be deemed to be an underwriter by selling a portfolio security requiring
registration under the Securities Act of 1933;
5. Invest knowingly more than 15% of its gross assets in illiquid
securities;
6. Make loans, except for (a) time or demand deposits with banks, (b)
purchasing commercial paper or publicly-offered debt securities at original
issue or otherwise, (c) short-term repurchase agreements with sellers of
securities the Portfolio has bought and (d) loans of portfolio securities to
registered broker-dealers if 100% secured by cash or cash equivalents, made in
full compliance with applicable regulations and which, in management's opinion,
do not expose the Portfolio to significant risks or impair its qualification for
pass-through tax treatment under the Internal Revenue Code;
7. Pledge, mortgage, or hypothecate its assets;
8. Buy or sell real estate (including limited partnership interests but
excluding securities of companies, such as real estate investment trusts, which
deal in real estate or interests therein) or oil, gas or other mineral leases,
or commodities, or commodity contracts although it may buy securities of
companies that deal in such interests (however, the Portfolio may hold and sell
any of the aforementioned or any other property acquired through ownership of
other securities, although the Portfolio may not purchase securities for the
purpose of acquiring those interests);
9. Buy securities issued by any other open-end investment company (except
pursuant to a plan of merger, consolidation or acquisition of assets), although
it may invest up to 5% of its gross assets, taken at market value at the time of
investment, in closed-end investment companies, provided such purchase is made
in the open market and does not involve the payment of a fee or commission
greater than the customary broker's commission;
10. Invest more than 5% of its gross assets, taken at market value at the
time of investment in securities of companies with less than three years'
continuous operation, including predecessor companies;
11. With respect to 75% of its gross assets, buy the securities of any
issuer if the purchase causes it (a) to have more than 5% of its gross assets
invested in the securities of such issuer (except obligations of the United
States, its agencies or instrumentalities) or (b) to own more than 10% of the
outstanding voting securities of such issuer;
12. Hold securities of any issuer, any of whose officers, directors or
security holders is an officer, director or partner of the Adviser or
Sub-Adviser or an officer or director of the Portfolio, if after the purchase of
the securities of such issuer, one or more of such persons owns beneficially
more than 1/2 of 1% of the securities of such issuer and such persons together
own beneficially more than 5% of such securities;
13. Concentrate its investments in a particular industry, though, if it is
deemed appropriate to its investment objective, up to 25% of the market value of
its gross assets at the time of investment may be invested in any one industry
classification used for investment purposes;
14. Buy from or sell to any of the Trust's directors, employees, or the
Investment Adviser or Sub-Adviser or any of its officers, directors, partners or
employees, any securities other than shares of the Portfolio's common stock; or
15. Invest more than 10% of the market value of its gross assets at the
time of investment in debt securities which are in default as to interest or
principal.
With respect to investment restriction 5. above, securities subject to
legal or contractual restrictions on resale, which are determined by the Board
of Trustees, or by the Sub-Adviser pursuant to delegated authority, to be liquid
are considered liquid securities.
GROWTH & INCOME EQUITY, SMALL CAP EQUITY, BALANCED AND EQUITY INCOME PORTFOLIOS
The Growth & Income Equity, Small Cap Equity, Balanced and Equity Income
Portfolios of the Trust may not:
1. Purchase securities of any one issuer (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities), if,
immediately after and as a result of such investments, more than 5% of the
Portfolio's total assets would be invested in the securities of such issuer, or
more than 10% of the issuer's outstanding voting securities would be owned by
the Portfolio or the Trust, except that up to 25% of the Portfolio's total
assets may be invested without regard to such limitations.
2. Purchase any securities which would cause 25% or more of the Portfolio's
total assets at the time of purchase to be invested in the securities of one or
more issuers conducting their principal business activities in the same
industry, provided that, however, (a) with respect to each Portfolio, (i) there
is no limitation with respect to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, and repurchase agreements secured
by obligations of the U.S. Government or its agencies or instrumentalities, and
with respect to the Equity Income Portfolio only, securities issued by domestic
banks, thrifts or savings institutions; (ii) wholly-owned finance companies will
be considered to be in the industries of their parents if their activities are
primarily related to financing the activities of their parents; and (iii)
utilities will be divided according to their services (for example, gas, gas
transmission, electric and gas, electric, and telephone will each be considered
a separate industry).
3. Borrow money or issue senior securities, except that the Portfolio may
borrow from banks and enter into reverse repurchase agreements for temporary
defensive purposes in amounts not in excess of 10% of the Portfolio's total
assets at the time of such borrowing; or mortgage, pledge, or hypothecate any
assets, except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the Portfolio's
total assets at the time of such borrowing; or purchase securities while its
borrowings exceed 5% of its total assets. A Portfolio's transactions in futures
and related options (including the margin posted by a Portfolio in connection
with such transactions), and securities held in escrow or separate accounts in
connection with a Portfolio's investment practices described in this Statement
of Additional Information are not subject to this limitation.
4. Make loans, except that each Portfolio may purchase or hold debt
instruments, lend portfolio securities, enter into repurchase agreements and
make other investments in accordance with its investment objective and policies.
5. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall not
apply to a Portfolio's transactions in options, and futures contracts and
related options, and (b) a Portfolio may obtain short-term credits as may be
necessary for the clearance of purchases and sales of portfolio securities.
6. Make investments for the purpose of exercising control or management.
7. Purchase or sell real estate, provided that each Portfolio may invest in
securities secured by real estate or interests therein or issued by companies or
investment trusts which invest in real estate or interests therein.
8. Act as an underwriter of securities within the meaning of the Securities
Act of 1933 except insofar as a Portfolio might be deemed to be an underwriter
upon disposition of portfolio securities acquired within the limitation on
purchases of restricted securities and except to the extent that the purchase of
obligations directly from the issuer thereof in accordance with a Portfolio's
investment objective, policies and limitations may be deemed to be underwriting.
9. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that each of the Balanced Portfolio
and the Equity Income Portfolio may, to the extent appropriate to its investment
objective, purchase publicly traded securities of companies engaging in whole or
in part in such activities and may invest in futures contracts and related
options in accordance with their respective investment activities and policies.
10. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as a Portfolio might be deemed to be an
underwriter upon disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
a Portfolio's investment objective, policies and limitations may be deemed to be
underwriting.
LORD ABBETT GROWTH AND INCOME PORTFOLIO
The Lord Abbett Growth and Income Portfolio may not:
1. sell short securities or buy securities or evidences of interests
therein on margin, although it may obtain short-term credit necessary for the
clearance of purchases of securities;
2. buy or sell put or call options, although it may buy, hold or sell
rights or warrants, write covered call options and enter into closing purchase
transactions as discussed below;
3. borrow money which is in excess of one-third of the value of its total
assets taken at market value (including the amount borrowed) and then only from
banks as a temporary measure for extraordinary or emergency purposes (borrowings
beyond 5% of such total assets may not be used for investment leverage to
purchase securities but solely to meet redemption requests where the liquidation
of the Portfolio's investment is deemed to be inconvenient or disadvantageous);
4. lend money or securities to any person except that it may enter into
short-term repurchase agreements with sellers of securities it has purchased,
and it may lend its portfolio securities to registered broker-dealers where the
loan is 100% secured by cash or its equivalent as long as it complies with
regulatory requirements and the Portfolio deems such loans not to expose the
Portfolio to significant risk (investment in repurchase agreements exceeding 7
days and in other illiquid investments is limited to a maximum of 5% of a
Portfolio's assets);
5. pledge, mortgage or hypothecate its assets; however, this provision does
not apply to permitted borrowing mentioned above or to the grant of escrow
receipts or the entry into other similar escrow arrangements arising out of the
writing of covered call options;
6. buy or sell real estate including limited partnership interests therein
(except securities of companies, such as real estate investment trusts, that
deal in real estate or interests therein), or oil, gas or other mineral leases,
commodities or commodity contracts in the ordinary course of its business,
except such interests and other property acquired as a result of owning other
securities, though securities will not be purchased in order to acquire any of
these interests;
7. invest more than 5% of its gross assets, taken at market value at the
time of investment, in companies (including their predecessors) with less than
three years' continuous operation;
8. buy securities if the purchase would then cause a Portfolio to have more
than (i) 5% of its gross assets, at market value at the time of purchase,
invested in securities of any one issuer, except securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities, or (ii) 25% of its
gross assets, at market value at the time of purchase, invested in securities
issued or guaranteed by a foreign government, its agencies or instrumentalities;
9. buy voting securities if the purchase would then cause a Portfolio to
own more than 10% of the outstanding voting stock of any one issuer;
10. own securities in a company when any of its officers, directors or
security holders is an officer or Trustee of the Trust or an officer, director
or partner of the investment adviser or sub-adviser, if after the purchase any
of such persons owns beneficially more than 1/2 of 1% of such securities and
such persons together own more than 5% of such securities;
11. concentrate its investments in any particular industry, but if deemed
appropriate for attainment of its investment objective, up to 25% of its gross
assets (at market value at the time of investment) may be invested in any one
industry classification used for investment purposes; or
12. buy securities from or sell them to the Trust's officers, directors, or
employees, or to the investment adviser or sub-adviser or to their partners,
directors and employees.
LARGE CAP RESEARCH, DEVELOPING GROWTH AND MID-CAP VALUE PORTFOLIOS
The Large Cap Research, Developing Growth and Mid-Cap Value Portfolios may
not:
1. borrow money, except that (i) the Portfolio may borrow from banks (as
defined in the Investment Company Act of 1940, as amended (the "1940 Act")) in
amounts up to 33 1/3% of its total assets (including the amount borrowed), (ii)
the Portfolio may borrow up to an additional 5% of its total assets for
temporary purposes, (iii) the Portfolio may obtain such short-term credit as may
be necessary for the clearance of purchases and sales of portfolio securities
and (iv) the Portfolio may purchase securities on margin to the extent permitted
by applicable law;
2. pledge its assets (other than to secure borrowings, or to the extent
permitted by the Portfolio's investment policies as permitted by applicable
law);
3. engage in the underwriting of securities, except pursuant to a merger or
acquisition or to the extent that, in connection with the disposition of its
portfolio securities, it may be deemed to be an underwriter under federal
securities laws;
4. make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar instruments
shall not be subject to this limitation, and except further that the Portfolio
may lend its portfolio securities, provided that the lending of portfolio
securities may be made only in accordance with applicable law;
5. buy or sell real estate (except that the Portfolio may invest in
securities directly or indirectly secured by real estate or interests therein or
issued by companies which invest in real estate or interests therein) or
commodities or commodity contracts (except to the extent the Portfolio may do so
in accordance with applicable law and without registering as a commodity pool
operator under the Commodity Exchange Act, as, for example, with futures
contracts);
6. with respect to 75% of the gross assets of the Portfolio, buy securities
of one issuer representing more than (i) 5% of the Portfolio's gross assets,
except securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or (ii) 10% of the voting securities of such issuer;
7. invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding securities of the
U.S. Government, its agencies and instrumentalities); or
8. issue senior securities to the extent such issuance would violate
applicable laws.
NON-FUNDAMENTAL INVESTMENT LIMITATIONS - QUALITY BOND PORTFOLIO, SELECT EQUITY
PORTFOLIO, LARGE CAP STOCK PORTFOLIO, SMALL CAP STOCK PORTFOLIO AND
INTERNATIONAL EQUITY PORTFOLIO
The investment limitation described below is not a fundamental policy of
these Portfolios and may be changed by the Trustees. This non-fundamental
investment policy requires that each such Portfolio may not:
(i) Acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration of over
seven calendar days, if as a result thereof, more than 15% of the market value
of the Portfolio's total assets would be in investments that are illiquid;
(ii) Purchase any security if, as a result, the Portfolio would then have
more than 5% of its total assets invested in securities of companies (including
predecessors) that have been in continuous operation for fewer than three years;
(iii) Invest in warrants (other than warrants acquired by the Portfolio as
part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would exceed 5%
of the value of the Portfolio's net assets or if, as a result, more than 2% of
the Portfolio's net assets would be invested in warrants not listed on a
recognized U.S. or foreign stock exchange, to the extent permitted by applicable
state securities laws; or
(iv) Purchase or retain securities of any issuer if, to the knowledge of
the Portfolio, any of the Portfolio's officers or Trustees or any officer of the
Advisor individually owns more than 1/2 of 1% of the issuer's outstanding
securities and such persons owning more than 1/2 of 1% of such securities
together beneficially own more than 5% of such securities, all taken at market.
NON-FUNDAMENTAL INVESTMENT LIMITATIONS - EMERGING MARKETS EQUITY PORTFOLIO
(i) Acquire securities of other investment companies, except as permitted
by the 1940 Act or any rule, order or interpretation thereunder, or in
connection with a merger, consolidation, reorganization, acquisition of assets
or an offer of exchange;
(ii) Acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration of over
seven calendar days, if as a result thereof, more than 15% of the market value
of the Portfolio's net assets would be in investments that are illiquid;
(iii) Sell any security short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold or unless it
covers such short sales as required by the current rules or positions of the SEC
or its staff. Transactions in futures contracts and options shall not constitute
selling securities short; or
(iv) Purchase securities on margin, but the Portfolio may obtain such short
term credits as may be necessary for the clearance of transactions.
NON-FUNDAMENTAL INVESTMENT LIMITATIONS - LARGE CAP RESEARCH, DEVELOPING GROWTH
AND MID-CAP VALUE PORTFOLIOS
Each Portfolio may not:
1. borrow in excess of 5% of its gross assets taken at cost or market
value, whichever is lower at the time of borrowing, and then only as a temporary
measure for extraordinary or emergency purposes;
2. make short sales of securities or maintain a short position except to
the extent permitted by applicable law;
3. invest knowingly more than 15% of its net assets (at the time of
investment) in illiquid securities, except for securities qualifying for resale
under Rule 144A of the Securities Act of 1933, deemed to be liquid by the Board
of Trustees;
4. invest in the securities of other investment companies as defined in the
1940 Act except as permitted by applicable law;
5. invest in securities of issuers which, with their predecessors, have a
record of less than three years' continuous operations, if more than 5% of the
Portfolio's total assets would be invested in such securities (this restriction
shall not apply to mortgaged-backed securities, asset-backed securities or
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities);
6. hold securities of any issuer if more than 1/2 of 1% of the securities
of such issuer are owned beneficially by one or more officers or Trustees of the
Trust or by one or more partners or members of the Trust's underwriter or
investment adviser if these owners in the aggregate own beneficially more than
5% of the securities of such issuer;
7. invest in warrants if, at the time of the acquisition, its investment in
warrants, value at the lower of cost or market, would exceed 5% of the
Portfolio's total assets (included within such limitation, but not to exceed 2%
of the Portfolio's total assets, are warrants which are not listed on the New
York or American Stock Exchange or a major foreign exchange);
8. invest in real estate limited partnership interests or interests in oil,
gas or other mineral leases, or exploration or other development programs,
except that the Portfolio may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or other development activities;
9. write, purchase or sell puts, calls, straddles, spreads or combinations
thereof, except to the extent permitted in the Portfolio's prospectus and
statement of additional information, as they may be amended from time to time;
or
10. buy from or sell to any of its officers, Trustees, employees, or its
investment adviser or any of its officers, directors, partners or employees, any
securities other than shares of the Portfolio's common stock.
DESCRIPTION OF SECURITIES RATINGS
A description of Corporate Bond Ratings is found in the Appendix to the
Prospectus.
COMMERCIAL PAPER RATINGS
COMMERCIAL PAPER
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The four categories are as
follows:
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative degree
of safety. Those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign designation.
A-1 This designation indicates that the degree of safety regarding timely
payment is very strong.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for
issues designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for
timely of payment. They are, however, somewhat more vulnerable to the
adverse effects changes in circumstances than obligations carrying the
higher designations.
B Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C&D These ratings indicate that the issue is either in default or is
expected to be in default upon maturity.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+." "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection factors. Risk factors
are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk factors
are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection factors
qualify issue as investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics. Liquidity is
not sufficient to ensure against disruption in debt service. Operating factors
and market access may be subject to a high degree of variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree than
issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this rating
have a satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this rating
have characteristics suggesting that the degree of assurance for timely payment
is adequate; however, near-term adverse changes could cause these securities to
be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this rating
have characteristics suggesting a minimal degree of assurance for timely payment
and are vulnerable to near-term adverse changes in financial and economic
conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to indicate
that the rating is based upon a letter of credit issued by a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an untimely
or incomplete payment of principal or interest of unsubordinated instruments
having a maturity of one year or less which are issued by United States
commercial banks, thrifts and non-bank banks; non-United States banks; and
broker-dealers. The following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade category
and indicates that while the debt is more susceptible to adverse developments
(both internal and external) than obligations with higher ratings, capacity to
service principal and interest in a timely fashion is considered adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by a strong capacity for timely repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
Such capacity is more susceptible to adverse changes in business, economic or
financial conditions than for obligations in higher categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
"C" - Obligations for which there is an inadequate capacity to ensure
timely repayment.
"D" - Obligations which have a high risk of default or which are currently
in default.
VARIABLE RATE DEMAND BOND RATINGS
Standard & Poor's assigns "dual" ratings to all long-term debt issues that
have as part of their provisions a variable rate demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, 'AAA/A-1') or if the nominal maturity is short, a rating of
'SP-1+/AAA' is assigned.
NOTES
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assignment:
- - Amortization schedule (the longer the final maturity relative to other
maturities the more likely it will be treated as a note).
- - Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note). Note rating
symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
PREFERRED STOCK RATINGS (STANDARD & POOR'S)
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA A preferred stock issue rated 'AA' also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated 'AAA'.
A An issue rated 'A' is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB An issue rated 'BBB' is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the 'A' category.
BB Preferred stock rated 'BB', 'B' and 'CCC' is regarded, on balance, as
B Predominantly speculative with respect to the issuer's capacity to pay
CCC preferred stock obligations. 'BB' indicates the lowest degree of
speculation and 'CCC' the highest degree of speculation. While such issues will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CC The rating 'CC' is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently paying.
C A preferred stock rated 'C' is a non-paying issue.
D A preferred stock rated 'D' is a non-paying issue with the issuer in
default on debt instruments.
PLUS (+) OR MINUS (-): To provide more detailed indications of preferred
stock quality, the ratings from 'AA' to 'B' may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
NR This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
A preferred stock rating is not a recommendation to purchase, sell, or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
MOODY'S INVESTORS SERVICE, INC. - A brief description of the applicable
Moody's Investors Service, Inc. rating symbols with respect to preferred stock
and their meanings (as published by Moody's Investors Service, Inc.) follows:
PREFERRED STOCK RATINGS (MOODY'S)
Preferred stock rating symbols and their definitions are as follows:
aaa: An issue which is rated 'aaa' is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa: An issue which is rated 'aa' is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance the earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
a: An issue which is rated 'a' is considered to be an upper-medium
preferred stock. While risks are judged to be somewhat greater than in the 'aaa'
and 'aa' classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa: An issue which is rated 'baa' is considered to be a medium grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
ba: An issue which is rated 'ba' is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b: An issue which is rated 'b' generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa: An issue which is rated 'caa' is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
ca: An issue which is rated 'ca' is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual payment.
c: This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
NOTE: Beginning May 3, 1982, Moody's began applying numerical modifiers 1,
2 and 3 in each rating classification from "aa" through "b" in its preferred
stock rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
<TABLE>
<CAPTION>
OFFICERS AND TRUSTEES
MANAGEMENT OF THE TRUST
Principal Occupation During Past Five
Position(s) Held Years (and Positions held with Affiliated
Name, Address and Age with Registrant Persons or Principal Underwriters of the Registrant)
- --------------------- --------------- ----------------------------------------------------
<S> <C> <C>
Lorry J. Stensrud* President and Chief President of Cova Financial Services Life
One Tower Lane, Suite 3000 Executive Officer Insurance Company ("Cova Life") since
Oakbrook Terrace, IL 60181- June, 1995; prior thereto, Executive Vice
4644 President of Cova
Age: 48
William C. Mair* Vice President, Vice President and Controller of Cova Life;
One Tower Lane, Suite 3000 Treasurer, Controller, Vice President, Treasurer and Controller of
Oakbrook, Terrace IL 60181- Chief Financial Officer, Cova Investment Advisory Corporation
4644 Chief Accounting Officer
Age: 56 and Trustee
Stephen M. Alderman Trustee Partner in the law firm of Garfield & Merel
211 West Wacker Drive
Chicago, IL 60606
Age: 38
Theodore A. Myers Trustee Senior Financial Advisor; formerly Chief
550 Washington Avenue Financial Officer of Qualitech Steel
Glencoe, IL 60022 Corporation, 1990-1994; Director of 34 Van
Age: 67 Kampen American Capital Mutual Funds;
member of Arthur Andersen C.F.O.
Advisory Committee.
Deborah A. Vohasek Trustee Principal, Vohasek Oetjen Marketing
7752 W. Lake Street
Morton Grove, IL 60053
Age: 34
R. Kevin Williams Trustee Partner in the law firm of O'Donnell, Byrne &
20 North Wacker Drive Williams from June 1993 through the
Chicago, IL 60606 present; Associate Attorney, Sonnenberg,
Age: 44 Anderson, O'Donnell & Rodriguez,
September 1988 through May 1993
William H. Wilton Vice President Vice President & Actuary of Cova Life; prior
One Tower Lane, Suite 3000 to October, 1992, Associate Actuary,
Oakbrook Terrace, IL 60181- Allstate Life Insurance Co., Northbrook, IL
4644
Age: 37
Frances S. Cook Secretary First Vice President and Associate General
One Tower Lane, Suite 3000 Counsel of Cova Life since 1990
Oakbrook Terrace, IL 60181-
4644
Age: 44
<FN>
* Interested person of the Trust within the meaning of the 1940 Act.
</FN>
</TABLE>
Each Trustee of the Trust who is not an interested person of the Trust or
Adviser or Sub-Adviser receives an annual fee of $10,000 and an additional fee
of $1,000 for each Trustees' meeting attended. In addition, disinterested
Trustees who are members of any Board committees will receive a separate $1,000
fee for attendance of any committee meeting that is held on a day on which no
Board meeting is held.
<TABLE>
<CAPTION>
COMPENSATION TABLE
(1) (2) (3) (4) (5)
Total
Pension or Compensation
Retirement Estimated From Registrant
Aggregate Benefits Accrued Annual and Fund
Compensation As Part of Fund Benefits Upon Complex Paid to
Name of Person, Position From Registrant Expenses Retirement Trustees
- ------------------------ --------------- -------- ---------- --------
<S> <C> <C> <C> <C>
William C. Mair, N/A N/A N/A N/A
Vice President, Treasurer,
Controller, Chief Financial
Officer, Chief Accounting
Officer and Trustee
Stephen M. Alderman, $14,000 N/A N/A N/A
Trustee
Theodore A. Myers, $14,000 N/A N/A N/A
Trustee
Deborah A. Vohasek, $14,000 N/A N/A N/A
Trustee
R. Kevin Williams, $14,000 N/A N/A N/A
Trustee
</TABLE>
SUBSTANTIAL SHAREHOLDERS
Shares of the Trust are issued and redeemed in connection with investments
in and payments under certain variable annuity contracts and variable life
insurance policies ("Variable Contracts") issued by Cova Financial Services Life
Insurance Company and/or its affiliated insurance companies. On April 1, 1998,
Cova Variable Annuity Account One and Cova Variable Life Account One, separate
accounts of Cova Financial Services Life Insurance Company, Cova Variable
Annuity Account Five, a separate account of Cova Financial Life Insurance
Company, First Cova Variable Annuity Account One, a separate account of First
Cova Life Insurance Company, together were known to the Board of Trustees and
the management of the Trust to own of record 99% of the Trust's shares.
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
Cova Life has advised the Trust that as of April 1, 1998, there were no
persons owning Variable Contracts which would entitle them to instruct Cova Life
with respect to more than 5% of the voting securities of the Trust.
CUSTODIAN
Investors Bank & Trust Company, 200 Clarendon Street, Boston, Massachusetts
02116, is the custodian of the Trust and has custody of all securities and cash
of the Trust. The custodian, among other things, attends to the collection of
principal and income, and payment for and collection of proceeds of securities
bought and sold by the Trust.
PERFORMANCE DATA
As required by regulations of the Securities and Exchange Commission, the
annualized total return of the Portfolios for a period is computed by assuming a
hypothetical initial payment of $1,000. It is then assumed that all of the
dividends and distributions by the Portfolio over the period are reinvested. It
is then assumed that at the end of the period, the entire amount is redeemed.
The annualized total return is then calculated by determining the annual rate
required for the initial payment to grow to the amount which would have been
received upon redemption.
Quotations of average annual total return for a Portfolio will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in a Portfolio over a period of one, five and ten years (or, if less,
up to the life of a Portfolio, calculated pursuant to the formula:
(n)
P (1 + T) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = an average annual total return
n = the number of years
ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5, or 10 year period at the
end of the 1, 5, or 10 year period (or fractional portion
thereof)
LEGAL COUNSEL AND INDEPENDENT AUDITORS
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut is counsel to the
Trust and passes upon the legality of the Trust's shares.
The independent auditors for the Trust are KPMG Peat Marwick LLP, 99 High
Street, Boston, Massachusetts 02110.
INVESTMENT ADVISORY AGREEMENT
Cova Investment Advisory Corporation (the "Investment Adviser"), One Tower
Lane, Suite 3000, Oakbrook Terrace, Illinois 60181-4644 is an Illinois
corporation which was incorporated on August 31, 1993 under the name Oakbrook
Investment Advisory Corporation and which is registered with the Securities and
Exchange Commission as an investment adviser under the Investment Advisers Act
of 1940. The Investment Adviser is a wholly-owned subsidiary of Cova Life
Management Company, a Delaware corporation, which in turn, is a wholly-owned
subsidiary of Cova Corporation, a Missouri corporation, which in turn, is a
wholly-owned subsidiary of General American Life Insurance Company ("General
American"), a St. Louis-based mutual company. General American has more than
$235 billion of life insurance in force and approximately $9.6 billion in
assets.
The Investment Adviser commenced providing investment advisory services to
all Portfolios of the Trust as of May 1, 1996 pursuant to an Investment Advisory
Agreement dated April 1, 1996, as amended ("Investment Advisory Agreement").
Prior to this date, VKAC had acted as the investment adviser to all Portfolios
of the Trust. The Investment Advisory Agreement, between the Investment Adviser
and the Trust, was approved by shareholders of the Trust at a Special Meeting of
Shareholders held on February 9, 1996 and was reapproved by the Board of
Trustees of the Trust on February 26, 1998. An Amendment to the Investment
Advisory Agreement providing for the addition of eight new Portfolios to the
Agreement was approved by the Board of Trustees of the Trust on April 22, 1997
and by Cova Financial Services Life Insurance Company, as sole shareholder of
the eight new Portfolios, on April 28, 1997. An Amendment to the Investment
Advisory Agreement, providing for the addition of the Emerging Markets Equity
Portfolio, was approved by the Board of Trustees of the Trust on February 26,
1998.
As described in the Prospectus, the Investment Adviser has retained
Sub-Advisers to assist it in managing the Portfolios. The Sub-Advisory Agreement
between the Investment Adviser and Van Kampen American Capital Investment
Advisory Corp. was reapproved by the Board of Trustees, including a majority of
the independent Trustees, at a meeting held on February 26, 1998 and was
approved by the shareholders of the Trust at a Special Meeting held on February
9, 1996. The Sub-Advisory Agreements between the Investment Adviser and Lord,
Abbett & Co. (with respect to the Bond Debenture Portfolio) and between the
Investment Adviser and J. P. Morgan Investment Management Inc., respectively,
were reapproved by the Board of Trustees, including a majority of the
independent Trustees, on February 26, 1998. Cova Financial Services Life
Insurance Company, as sole shareholder of the Portfolios for which J. P. Morgan
Investment Management Inc. and Lord, Abbett & Co. act as Sub-Advisers, approved
the Sub-Advisory Agreements between the Investment Adviser and each of these two
Sub-Advisers by way of corporate resolutions adopted in April of 1996. An
Amendment to the Sub-Advisory Agreement between the Adviser and J.P. Morgan
Investment Management, Inc., providing for the addition of the Emerging Markets
Equity Portfolio, was approved by the Board of Trustees of the Trust on February
26, 1998. The Sub-Advisory Agreements between the Investment Adviser and
Mississippi Valley Advisors Inc. ("MVA") and between the Investment Adviser and
Lord, Abbett & Co. (with respect to the Mid-Cap Value Portfolio, Large Cap
Research Portfolio, Developing Growth Portfolio and Lord Abbett Growth and
Income Portfolio), respectively, were approved by the Board of Trustees,
including a majority of the independent Trustees, on April 22, 1997. Cova
Financial Services Life Insurance Company, as sole shareholder of the Portfolios
for which MVA acts as Sub-Adviser and as sole shareholder of the Portfolios
listed above for which Lord, Abbett & Co. acts as Sub-Adviser, approved the
Sub-Advisory Agreements between the Investment Adviser and each of these two
Sub-Advisers by way of corporate resolutions adopted on April 28, 1997.
Under the terms of the Investment Advisory Agreement, the Investment
Adviser is obligated to (i) manage the investment and reinvestment of the assets
of each Portfolio of the Trust in accordance with each Portfolio's investment
objective and policies and limitations, or (ii) in the event that the Investment
Adviser shall retain a sub-adviser or sub-advisers, to supervise and implement
the investment activities of any Portfolio for which any such sub-adviser has
been retained, including responsibility for overall management and
administrative support including managing, providing for and compensating any
sub-advisers; and to administer the Trust's affairs. The Investment Advisory
Agreement further provides that the Investment Adviser agrees, among other
things, to administer the business affairs of each Portfolio, to furnish offices
and necessary facilities and equipment to each Portfolio, to provide
administrative services for each Portfolio, to render periodic reports to the
Board of Trustees of the Trust with respect to each Portfolio, and to permit any
of its officers or employees, or those of any sub-adviser to serve without
compensation as trustees or officers of the Portfolio if elected to such
positions.
The Investment Advisory Agreement provides that the Investment Adviser will
not be liable for any error in judgment or of law, or for any loss suffered by
the Trust in connection with the matters to which the agreement relates, except
a loss resulting from willful misfeasance, bad faith, or gross negligence on the
part of the Investment Adviser in the performance of its obligations and duties,
or by reason of its reckless disregard of its obligations and duties under the
Agreement.
The Investment Adviser's activities are subject to the review and
supervision of the Trust's Trustees to whom the Investment Adviser renders
periodic reports of the Trust's investment activities.
The Investment Advisory Agreement may be terminated without penalty upon 60
days written notice by either party and will automatically terminate in the
event of assignment.
INVESTMENT DECISIONS
Investment decisions for the Trust and for the other investment advisory
clients of the Sub-Advisers are made with a view to achieving their respective
investment objectives and after consideration of such factors as their current
holdings, availability of cash for investment, and the size of their investments
generally. Frequently, a particular security may be bought or sold for only one
client or in different amounts and at different times for more than one but less
than all clients. Likewise, a particular security may be bought for one or more
clients when one or more other clients are selling the security. In addition,
purchases or sales of the same security may be made for two or more clients of a
Sub-Adviser on the same day. In such event, such transactions will be allocated
among the clients in a manner believed by the Sub-Adviser to be equitable to
each. In some cases, this procedure could have an adverse effect on the price or
amount of the securities purchased or sold by the Trust. Purchase and sale
orders for the Trust may be combined with those of other clients of a
Sub-Adviser in the interest of achieving the most favorable net results for the
Trust.
PORTFOLIO TRANSACTIONS
Transactions on U.S. stock exchanges and other agency transactions involve
the payment by the Trust of negotiated brokerage commissions. Such commissions
vary among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign securities often involve the payment of
fixed brokerage commissions, which are generally higher than those in the United
States. There is generally no stated commission in the case of securities traded
in the over-the-counter markets, but the price paid by the Trust usually
includes an undisclosed dealer commission or mark-up. In underwritten offerings,
the price paid by the Trust includes a disclosed, fixed commission or discount
retained by the underwriter or dealer. It is currently intended that the
Sub-Advisers will place all orders for the purchase and sale of portfolio
securities for the Trust and buy and sell securities for the Trust through a
substantial number of brokers and dealers. In so doing, the Sub-Advisers will
use their best efforts to obtain for the Trust the best price and execution
available. In seeking the best price and execution, the Sub-Advisers, having in
mind the Trust's best interests, will consider all factors they deem relevant,
including, by way of illustration, price, the size of the transaction, the
nature of the market for the security, the amount of the commission, the timing
of the transaction taking into account market prices and trends, the reputation,
experience, and financial stability of the broker-dealer involved, and the
quality of service rendered by the broker-dealer in other transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research, statistical, and quotation services from broker-dealers who
execute portfolio transactions for the clients of such advisers. Consistent with
this practice, the Sub-Advisers may receive research, statistical, and quotation
services from any broker-dealers with whom they place the Trust's portfolio
transactions. These services, which in some cases may also be purchased for
cash, include such matters as general economic and security market reviews,
industry and company reviews, evaluations of securities, and recommendations as
to the purchase and sale of securities. Some of these services may be of value
to the Sub-Advisers and/or their affiliates in advising various other clients
(including the Trust), although not all of these services are necessarily useful
and of value in managing the Trust. The management fees paid by the Trust are
not reduced because the Sub-Advisers and/or their affiliates may receive such
services. As permitted by Section 28(e) of the Securities Exchange Act of 1934,
a Sub-Adviser may cause a Portfolio to pay a broker-dealer who provides
brokerage and research services to the Sub-Adviser an amount of disclosed
commission for effecting a securities transaction for the Portfolio in excess of
the commission which another broker-dealer would have charged for effecting that
transaction provided that the Sub-Adviser determines in good faith that such
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker-dealer viewed in terms of that particular
transaction or in terms of all of the accounts over which investment discretion
is so exercised. A Sub-Adviser's authority to cause a Portfolio to pay any such
greater commissions is also subject to such policies as the Adviser or the
Trustees may adopt from time to time.
FINANCIAL STATEMENTS
The financial statements, notes and report of the Independent Auditors for
each of the Portfolios of the Trust are included herein.
<PAGE> 1
February 6, 1998
LETTER FROM THE PRESIDENT
1997 -- WHAT A RIDE!
Although some market pundits were expecting the bear market to begin rearing its
ugly head, investors were again rewarded with another outstanding year. The S&P
500 Index concluded the year with a 33.36% return, which marked the first time
in its history it posted returns of 20% or more in three consecutive years. Over
this incredible three-year period, the S&P 500 has returned more than 120%.
Certainly, all the pieces were in place to complete the picture of another
outstanding year. The U.S. economy continued to expand at a moderate pace,
inflation was firmly under control, if not nearly eliminated, and investor
confidence in the markets paved the way for strong cash-flows into the equity
markets. As we all know, while the U.S. stock market reached higher ground at
the end of the year, we also saw many more setbacks and of greater magnitude
than in the previous two years. Indeed, 1997 sensitized investors to the concept
of volatility. Briefly, let's review the influential events of 1997.
- - Alan Greenspan's "irrational exuberance" comment in late 1996 to see the Dow
Jones Industrial Average (DJIA) reach 7,000 in February, the fastest ever
1,000 point ascent in the history of the index.
- - Greenspan again shook the markets near the end of February, noting
"excessive optimism" in the stock market.
- - The Fed raised interest rates a quarter point near the end of March, sending
the markets down nearly 10% during the Spring -- a sobering reminder of the
influence of interest rates over the equity markets.
- - Solid corporate earnings helped the DJIA to reach the 8000 mark in July,
later pushing the index to a record high of 8259 on August 6.
- - In late summer, many notable companies' earnings fell short of estimates.
This sent the DJIA plunging 247 points, the single biggest point drop in the
history of the index -- at that time.
- - In late October, the DJIA would more than double its August swoon on news of
the Hong Kong markets, sending the index spiraling downward 554 points, or
7.18%. From its all time high on August 6, the DJIA had declined about 13%.
With all eyes focused on Asia, the domestic markets remained little changed for
the remainder of the year. While we can conclude that 1997 provided us with
another year of solid returns in the domestic markets, it was also one of the
more volatile one-year markets in history.
There were few, if any, asset classes not influenced by the economic forces of
1997. Benign inflation and a flight to quality took the bond markets on a
capricious ride during the course of 1997. Near the end of the year, the yield
on the benchmark 30-yield Treasury was at its lowest level in more than four
years. This was not far from October 1993's 5.78% yield, the lowest level since
the 30-year bonds were reintroduced in 1977. The yield on the 30-year bond,
which moves in the opposite direction of its price, began the year at 6.64% and
rose during much of the spring before hitting 7.71% in early April on
anticipation that the Fed would increase interest rates. A bond rally in
December, precipitated by the crisis in the Asian markets saw investors looking
for shelter and consequently led to a flight to quality. This pushed the yields
on the benchmark 30-year bond from 6.27% on October 24 down to 5.92% at year
end. In addition, the yield curve flattened almost 50 basis points as the yield
of the two year treasuries went from 5.87 to 5.64 and the long bond went from a
6.64 yield to a yield of 5.92%.
<PAGE> 2
LOOKING AHEAD
Many investment managers are proceeding ahead in 1998 as they did in 1997 --
with much due caution. It might be unrealistic to expect the kind of returns
we've seen in the last three years to continue for any length of time. Consensus
expectations project returns between 8% to 12%. Of course, the field is clearly
split between two extreme viewpoints, many cautiously looking for the bear and
others believing the bull will continue to speed ahead.
Certainly, eyes will be focused on inflation, but more so on the Fed's reaction
to inflation. Most fears of a rate increase have subsided as inflation by most
standards seems to be under control and even decreasing. However, some still
cautiously watch for wage inflation to creep into the picture and force a rate
hike. Even the currency crisis in Asia could have a positive effect on inflation
as the cost of imported goods will most likely decrease. Conversely, weak Asian
currencies and a strong dollar could squeeze the profits of American companies,
and U.S. economic growth could slow from 4% last year to 2% this year.
As always, corporate earnings will be a driver in stock performance. The market
can severely punish a stock that doesn't meet earnings expectations or reward an
undervalued stock that posts a positive earnings surprise. During these times,
an emphasis on stock picking will be of vital importance.
COVA -- COMMITTED TO VALUE
It's the basis for our name -- COmmitted to VAlue -- and it's an integral part
of our products. In an investment environment of such great uncertainty, we at
Cova are committed to providing our investors with a variety of opportunities
that should help them weather the storms. First there is a selection of
investment portfolios managed by world-class money managers covering a variety
of asset classes. Your investment management team's disciplined approach to
security analysis should provide a strong foundation for the long-term investor.
With this selection of investments, we offer a dollar cost averaging plan and
automatic portfolio rebalancing. These important financial planning techniques
help investors take a disciplined approach to managing their money and are
available at no additional charge. We also offer a fixed account that locks in a
fixed rate of interest for one calendar year. Finally, there's the aspect of
tax-deferred savings, with the triple-compounding advantage. This allows 1) your
principal, 2) your earnings, and 3) the money you would have paid in taxes to
accumulate uninhibited by taxes. In addition, transfers between portfolios in an
annuity do not generate a capital gains tax, which might be experienced in
similar investments outside of an annuity.
Now that we've recapped the events of 1997, we would be remiss not to remind you
that these are only the events of one year. Over the long-term, equities have
always rewarded investors favorably. Of course, annuities are an excellent
investment for long-term objectives, such as retirement. We consider it a
privilege to be entrusted for your long-term savings needs in 1998.
Sincerely,
/s/ L.J. Stensrud
- ----------------------------
L.J. Stensrud
President & CEO
P.S. IMPORTANT NOTICE! PROPOSED BUDGET ITEM COULD CHANGE THE TAX-DEFERRED
STATUS OF YOUR ANNUITY...
DEAR POLICYHOLDER: At the time of this writing, President Clinton's
budget for 1999 contained certain proposals that would seek to impose
taxation on non-qualified annuities. Don't allow these drastic measures
to pass without voicing your objections to your representative in
Washington.
<PAGE> 3
GROWTH & INCOME EQUITY PORTFOLIO For the period ended 12/31/97
MANAGED BY MISSISSIPPI VALLEY ADVISORS
Letter to Policyholders
Stocks in the portfolio continued to perform well, despite a market correction
in October and increased volatility late in the period due to problems in many
Asian markets. Shares of large company stocks posted the strongest gains during
the period. Those gains did broaden out somewhat during the period to include
shares of some smaller firms.
We continued to take a bottom-up approach to stock selection, looking for good
values. We also took a very diversified approach toward managing the Portfolio.
We did not bet on the fortunes of any particular sector. Near year end, our
portfolio was broadly diversified with money across eight sectors with the
approximate allocations: 24% in consumer growth stocks; 21% in interest
sensitive stocks such as banks and financial institutions; 15% in industrial
cyclicals; 14% in technology stocks; 13% in consumer staples stocks; 6% in
energy stocks; 4% in capital goods stocks; and 3% in consumer cyclicals.
As the investment environment changed throughout the period, we purchased shares
of select technology companies that traded at attractive prices. We also found
opportunities among certain consumer staples stocks, as well as shares of drug
makers and industrial cyclical companies. We reduced the Portfolio's exposure to
energy stocks and capital goods stocks. Those sectors performed very well
recently and appeared to be overvalued relative to the market.
Looking ahead, we will continue to carefully select stocks that appear
undervalued. Currently, such stocks included medical and drug stocks, financial
services companies and technology firms. We also will continue to maintain a
broadly diversified portfolio, giving investors exposure to various sectors of
the stock market without taking excessive or unnecessary risks.
TIMOTHY S. ENGELBRECHT
Portfolio Manager
Mississippi Valley Advisors
TOP 10 LONG-TERM HOLDINGS BY MARKET VALUE
As of 12/31/97
<TABLE>
<CAPTION>
% of portfolio
- --------------------------------------------------------------------------------
<S> <C>
Albertson's, Inc. 2.3%
- --------------------------------------------------------------------------------
First Data Corp. 2.2
- --------------------------------------------------------------------------------
Computer Associates International, Inc. 2.1
- --------------------------------------------------------------------------------
Solutia, Inc. 2.1
- --------------------------------------------------------------------------------
Avery-Dennison Corp. 2.1
- --------------------------------------------------------------------------------
Automatic Data Processing, Inc. 2.1
- --------------------------------------------------------------------------------
Cendant Corp. 2.1
- --------------------------------------------------------------------------------
Pepsico, Inc. 2.1
- --------------------------------------------------------------------------------
Chase Manhattan Corp. 2.0
- --------------------------------------------------------------------------------
PMI Group, Inc. (The) 2.0
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 4
GROWTH & INCOME EQUITY PORTFOLIO, MANAGED BY
MISSISSIPPI VALLEY ADVISORS VS. S&P 500 INDEX(2)
Growth Based on $10,000(+)
[CHART]
MVA G&I vs S&P500 plot points
<TABLE>
<S> <C> <C>
10000 10000
"Sep-97" 10772 10749
"Dec-97" 10826 11058
</TABLE>
<TABLE>
<CAPTION>
Total Return(1)
- --------------------------------------------------------------------------------
Since inception(+)
- --------------------------------------------------------------------------------
<S> <C>
Growth and Income Equity
Portfolio, managed by MVA 8.26%**
- --------------------------------------------------------------------------------
S&P 500 Index(2) 10.58%
- --------------------------------------------------------------------------------
</TABLE>
**Portfolio commenced operations on 7/1/97.
+ Index is shown from the first full month since Portfolio's inception.
(1) "Total Return" is calculated including reinvestment of all income dividends
and capital gain distributions. Results represent past performance and do not
indicate future results. The value of an investment in the Growth and Income
Equity Portfolio managed by Mississippi Valley Advisors (MVA) and the return on
the investment both will fluctuate, and redemption proceeds may be higher or
lower than an investor's original cost.
(2) The S&P 500 Index is an unmanaged index generally considered to be
representative of stock market activity. The index does not reflect any
expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE> 5
EQUITY INCOME PORTFOLIO For the period ended 12/31/97
MANAGED BY MISSISSIPPI VALLEY ADVISORS
Letter to Policyholders
The overall stock market environment was generally very favorable during the
period. Factors contributing to the stocks' strong performance were continued
corporate earnings growth, low interest rates and low inflation. The flow of
money into the stock market was also steady during the period, driven primarily
by individuals contributing to 401(k) plans.
We take a very disciplined, value-oriented approach to stock selection, focusing
on shares that offer attractive yields and are selling at low prices relative to
the stock's actual worth.
The Russell 1000 Value Index is our benchmark, so the Portfolio consists
primarily of high-quality, large-company stocks.
The financial services sector offered some of the best investment opportunities
during the period, as these stocks benefited from low interest rates and
consolidation within the banking industry. For example, we bought shares of Core
States Financial, a regional bank that has since received buyout offers from
other institutions. Those offers helped boost the stock's price. We also
increased the Portfolio's weighting in utility stocks, from approximately 5% to
10%, to take advantage of these stocks' higher yields. Two recent purchases in
this sector were Baltimore Gas & Electric and Union Electric. We were
underweighted in the telecommunications sector during the period because we felt
that the competition in the industry might hurt corporate profits. However, we
found good values in shares of SBC Communications, Bell Atlantic and U.S. West.
Looking forward, we anticipate low inflation and low interest rates, making for
predictable corporate earnings growth. In that favorable environment, we will
continue to focus on individual stock selection, looking for value in stocks
that haven't taken part in group moves.
GREGORY A. GLIDDEN
Portfolio Manager
Mississippi Valley Advisors
TOP 10 LONG-TERM HOLDINGS BY MARKET VALUE
As of 12/31/97
<TABLE>
<CAPTION>
% of portfolio
- --------------------------------------------------------------------------------
<S> <C>
- --------------------------------------------------------------------------------
American Home Products Corp. 2.5%
- --------------------------------------------------------------------------------
PNC Bank Corp. 2.4
- --------------------------------------------------------------------------------
Bristol-Myers Squibb Co. 2.4
- --------------------------------------------------------------------------------
Federal National Mortgage Association 2.3
- --------------------------------------------------------------------------------
Dresser Industries, Inc. 2.3
- --------------------------------------------------------------------------------
Mellon Bank Corp. 2.2
- --------------------------------------------------------------------------------
U.S. West Communications Group 2.2
- --------------------------------------------------------------------------------
National City Corp. 2.1
- --------------------------------------------------------------------------------
Frontier Corp. 2.1
- --------------------------------------------------------------------------------
Newell Co. 2.1
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 6
EQUITY INCOME PORTFOLIO, MANAGED BY
MISSISSIPPI VALLEY ADVISORS VS. RUSSELL 1000(2)
Growth Based on $10,000(+)
[CHART]
MVA equity inc vs Russell 1000 plot points
<TABLE>
<S> <C> <C>
10000 10000
"Sep-97" 10900 10873
"Dec-97" 11269 11200
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Total Return(1)
- --------------------------------------------------------------------------------
Since inception(+)
<S> <C>
Equity Income Portfolio,
managed by MVA 12.69%**
- --------------------------------------------------------------------------------
Russell 1000(2) Index 12.00%
- --------------------------------------------------------------------------------
</TABLE>
**Portfolio commenced operations on 7/1/97.
(+) Index is shown from the first full month since Portfolio's inception.
(1) "Total Return" is calculated including reinvestment of all income dividends
and capital gain distributions. Results represent past performance and do not
indicate future results. The value of an investment in the Equity Income
Portfolio managed by Mississippi Valley Advisors (MVA) and the return on the
investment both will fluctuate, and redemption proceeds may be higher or lower
than an investor's original cost.
(2) The Russell 1000 Index consists of the largest 1000 companies in the Russell
3000 Index. This index represents the universe of large capitalization stocks
from which most active money managers typically select. The index does not
reflect any expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE> 7
BALANCED PORTFOLIO For the period ended 12/31/97
MANAGED BY MISSISSIPPI VALLEY ADVISORS
Letter to Policyholders
The Portfolio is designed for those investors who want exposure to both equities
and fixed-income securities. Looking back over the last year, the Portfolio's
performance was affected by trends in both the stock and bond markets.
Stocks continued to perform well during the period, with shares of large-company
stocks posting the biggest gains. The Portfolio typically seeks out undervalued
shares of companies with strong earnings growth potential. High valuations in
the stock market caused us to take a relatively defensive position in stocks. We
emphasized shares of industrial cyclical stocks and consumer staples stocks.
These sectors of the market typically hold up well when overall stock prices
decline. We also reduced the Portfolio's holdings in oil and energy services
stocks.
In the fixed-income markets, prices of longer-term bonds declined through March
due to concerns that strong economic growth could lead to rising inflation. Bond
prices rose during most of the rest of the period, however, as such concerns
diminished.
The bond portion of the Portfolio is based on the Lehman Brothers Aggregate Bond
Index, an unmanaged index comprised of the Lehman Brothers Government/Corporate
Bond Index and two Lehman Brothers asset-backed securities indices. The
Portfolio invested mainly in high-quality Treasury securities and
mortgage-backed securities, as well as some bonds issued by corporations.
The Portfolio typically invests about 50% to 60% of its assets in stocks, with
the remainder in bonds. During the period, we reduced the Portfolio's stock
allocation from around 60% of assets to roughly 58%. That decision was based
largely on the possibility of declining corporate profits going forward.
Approximately 40% of the Portfolio's assets were invested in bonds, while cash
equivalents made up the remaining 10%.
We will remain cautiously optimistic about the stock market's prospects, and we
may increase the Portfolio's equity holdings to around 60% of assets in the
months ahead. Whatever happens, we will carefully monitor the financial markets
and make any necessary changes to the Portfolio that may help to enhance returns
or reduce risk.
PETER MERZIAN
Portfolio Manager
Mississippi Valley Advisors
TOP 10 LONG-TERM HOLDINGS BY MARKET VALUE
As of 12/31/97
<TABLE>
<CAPTION>
% of portfolio
- --------------------------------------------------------------------------------
<S> <C>
U.S. Treasury Note 7.250%, 5/15/04 8.4%
- --------------------------------------------------------------------------------
U.S. Treasury Note 6.625%, 5/15/07 8.2
- --------------------------------------------------------------------------------
U.S. Treasury Note 6.375%, 8/15/02 7.9
- --------------------------------------------------------------------------------
U.S. Treasury Note 6.375%, 5/15/00 3.9
- --------------------------------------------------------------------------------
Government National Mortgage
Association 7.000%, 7/20/27 3.8
- --------------------------------------------------------------------------------
Federal Home Loan Mortgage
Corp. 6.500%, 1/01/12 3.8
- --------------------------------------------------------------------------------
Federal National Mortgage
Association 6.000%, 3/01/11 3.6
- --------------------------------------------------------------------------------
Government National Mortgage
Association 6.500%, 3/15/24 3.4
- --------------------------------------------------------------------------------
Merck & Co., Inc. 1.4
- --------------------------------------------------------------------------------
Networks Associates, Inc. 1.4
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 8
BALANCED PORTFOLIO, MANAGED BY
MISSISSIPPI VALLEY ADVISORS VS. S&P 500 INDEX(2)
Growth Based on $10,000(+)
[CHART]
MVA balanced vs S&P500 plot points
<TABLE>
<S> <C> <C>
10000 10000
"Sep-97" 10510 10749
"Dec-97" 10601 11058
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Total Return(1)
- --------------------------------------------------------------------------------
Since inception(+)
- --------------------------------------------------------------------------------
<S> <C>
Balanced Portfolio,
managed by MVA 6.01%**
- --------------------------------------------------------------------------------
S&P 500 Index(2) 10.58%
- --------------------------------------------------------------------------------
</TABLE>
**Portfolio commenced operations on 7/1/97.
(+) Index is shown from the first full month since Portfolio's inception.
(1) "Total Return" is calculated including reinvestment of all income dividends
and capital gain distributions. Results represent past performance and do not
indicate future results. The value of an investment in the Balanced Portfolio
managed by Mississippi Valley Advisors (MVA) and the return on the investment
both will fluctuate, and redemption proceeds may be higher or lower than an
investor's original cost.
(2) The S&P 500 Index is an unmanaged index generally considered to be
representative of stock market activity. The index does not reflect any
expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE> 9
SMALL CAP EQUITY PORTFOLIO For the period ended 12/31/97
MANAGED BY MISSISSIPPI VALLEY ADVISORS
Letter to Policyholders
Small-company shares underperformed large-company stocks during the first few
months of the period. In April, however, a strengthening dollar and earnings
disappointments by large companies such as Coca-Cola and Gillette contributed to
a shift in favor of small-company stocks. From April 25 to September 30, 1997,
small-company shares gained 35% versus 24% for the S&P 500. But, in the fourth
quarter, uncertainty over economic turmoil in Asia caused investors to seek
safety in shares of large, well-established companies. As a result,
small-company stocks underperformed again. Overall, 1997 marked the third
straight year that small-company stocks underperformed large-company stocks.
We were able to find excellent values in several areas of the market. For
instance, we acquired shares of broadcast companies SFX and Evergreen Media. The
Portfolio also benefited when two of our technology holdings were acquired by
larger companies: Verifone was bought by Hewlett-Packard and Network General was
acquired by McAfee Associates.
Some of our earlier investment also contributed to the Portfolio's strong
performance in the third quarter. For example, we sold SFX and Evergreen Media
after their stock prices had climbed more than 50%. The market's shift away from
small-company stocks in the fourth quarter created more buying opportunities for
the Portfolio. Technology stocks in particular were hit very hard in the fourth
quarter, allowing us to add shares of carefully selected companies such as
software maker SPSS, semiconductor and capital goods manufacturer CFM Technology
and computer-based systems company SBS Technology.
We believe that small-company stocks will continue to provide excellent values.
They offer lower price-to-earnings ratios, lower price-to-book values and more
growth potential than large-company stocks. What's more, we expect the
three-year trend of small-company stocks' under performance to reverse itself at
some point. This means the values we find now have good potential for price
appreciation. We will continue to seek out the best values in the small-cap
universe, using careful bottom-up, stock-by-stock security analysis.
ROBERT J. ANTHONY
Portfolio Manager
Mississippi Valley Advisors
TOP 10 LONG-TERM HOLDINGS BY MARKET VALUE
As of 12/31/97
<TABLE>
<CAPTION>
% of portfolio
- --------------------------------------------------------------------------------
<S> <C>
National Data Corp. 2.3%
- --------------------------------------------------------------------------------
Canadaigua Wine Co. Inc. 2.2
- --------------------------------------------------------------------------------
Minerals Technologies, Inc. 2.2
- --------------------------------------------------------------------------------
Cognos, Inc. 2.0
- --------------------------------------------------------------------------------
Hanna (M.A.) Co. 2.0
- --------------------------------------------------------------------------------
Sungard Data Systems, Inc. 2.0
- --------------------------------------------------------------------------------
Networks Associates, Inc. 2.0
- --------------------------------------------------------------------------------
R.P. Scherer Corp. 2.0
- --------------------------------------------------------------------------------
Zebra Technologies Corp. 1.9
- --------------------------------------------------------------------------------
Mobile Telecommunications Technologies Corp. 1.8
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 10
SMALL CAP EQUITY PORTFOLIO, MANAGED BY
MISSISSIPPI VALLEY ADVISORS VS. RUSSELL 2000(2)
Growth Based on $10,000(+)
[CHART]
MVA small cap vs Russell 2000 plot points
<TABLE>
<S> <C> <C>
10000 10000
"Sep-97" 11190 11488
"Dec-97" 10486 11103
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Total Return(1)
- --------------------------------------------------------------------------------
Since inception(+)
- --------------------------------------------------------------------------------
<S> <C>
Small Cap Equity Portfolio,
managed by MVA 4.86%**
- --------------------------------------------------------------------------------
Russell 2000(2) 11.03%
- --------------------------------------------------------------------------------
</TABLE>
**Portfolio commenced operations on 7/1/97.
(+) Index is shown from the first full month since Portfolio's inception.
(1) "Total Return" is calculated including reinvestment of all income dividends
and capital gain distributions. Results represent past performance and do not
indicate future results. The value of an investment in the Small Cap Equity
Portfolio managed by Mississippi Valley Advisors (MVA) and the return on the
investment both will fluctuate, and redemption proceeds may be higher or lower
than an investor's original cost.
(2) The Russell 2000 is a capitalized weighted index including 2,000 of the
smallest stocks representing approximately 11% of the U.S. equity market. The
index does not reflect any expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE> 11
BOND DEBENTURE PORTFOLIO For the year ended 12/31/97
MANAGED BY LORD, ABBETT & CO.
Letter to Policyholders
The Portfolio posted a solid return during the past year as the country had
another year of economic growth, low inflation and a favorable interest-rate
environment. Particularly beneficial to the portfolio's strong performance were
the Portfolio's overweightings in the telephone, media and energy sectors. The
Portfolio was also positively impacted by holdings of high-yield bonds in
industrial sectors, such as paper, chemicals and steel. Robust U.S. economic
growth provided significant increases in corporate profitability, which resulted
in improved credit ratings and strong gains for many of our holdings. Our
commitment to fundamental research is proving more meaningful as the financial
markets have little tolerance for earnings shortfalls. While U.S. Treasury and
mortgage securities provided good total returns (in the 9.0%-9 1/2% range)
during the year, they did not match the significantly higher total returns
earned by high-yield and convertible securities.
Our outlook for 1998 is for the economy to slow considerably, with growth
falling to 2% or less in the later half of the year. We expect inflation to
remain moderate. Our economic forecasts bode well for the convertible and
high-yield bond markets and should provide our management team an opportunity to
uncover value using our in-depth research process. We remain watchful of the
weaknesses in the Asian markets, but are encouraged by the fact that most of our
holdings do not have high exposure in the Asian economies. We will continue to
seek opportunities in the emerging markets of Latin America, particularly
Mexico, where our value-based investments have recently provided strong gains
for the portfolio. At this time, we are emphasizing the domestic high-yield
sector as these securities should benefit from low interest rates and a stable
U.S. economy.
[Pie Chart]
DISTRIBUTION OF HOLDINGS
As of 12/31/97
<TABLE>
<CAPTION>
U.S. Government Convertibles High Yield Equities
<S> <C> <C> <C>
13.89% 19.70% 62.65% 3.76%
</TABLE>
We are pleased that you chose to make the Bond-Debenture Portfolio a part of
your investment strategy and look forward to assisting you with your financial
goals in the future.
<TABLE>
<CAPTION>
TOP 10 HOLDINGS BY MARKET VALUE
As of 12/31/97
% of portfolio
-----------------------------------------------------------
<S> <C>
U.S. Treasury Notes (7.50%, 5/15/02) 7.10%
-----------------------------------------------------------
FNMA (7.50%, 5/01/27) 3.82
-----------------------------------------------------------
FNMA (8.50%, 2/01/05) 2.97
-----------------------------------------------------------
Teleport Communications Group Inc. (0%, 7/01/07) 2.33
-----------------------------------------------------------
NL Inds (0%, 10/15/05) 1.90
-----------------------------------------------------------
Orbital Sciences (cvt 5%, 10/01/02) 1.21
-----------------------------------------------------------
Iron Mountain Inc. (10.125%, 10/01/06) 1.05
-----------------------------------------------------------
Flores & Rucks (9.75%, 10/01/06) 1.05
-----------------------------------------------------------
L-3 Communications (10.375%, 5/01/07) 1.04
-----------------------------------------------------------
Leiner Health Products Group (9.625%, 7/10/07) 1.02
-----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO FACTS
As of 12/31/97
<S> <C>
Duration 5.96 years
--------------------------------------------------------
Average Yield 8.03%
--------------------------------------------------------
Average Coupon 7.73%
--------------------------------------------------------
</TABLE>
CHRISTOPHER J. TOWLE
Portfolio Manager
Lord, Abbett & Co.
<PAGE> 12
BOND DEBENTURE PORTFOLIO MANAGED BY LORD ABBETT VS. INDICES(2)
Growth Based on $10,000 +
[Graph]
<TABLE>
<CAPTION>
LA bond deb vs indices plot points
10000 10000 10000 10000
<S> <C> <C> <C> <C>
"6/97" 10202 10103 10068 10124
10718 10482 10303 10312
"12/97" 11359 10945 10601 10624
11433 11106 10682 10568
"6/97" 12148 11586 11532 10949
12779 12131 12540 11313
"12/97" 13053 12327 12387 11646
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Average Annual Return(1)
- -------------------------------------------------------------
1 Year Since inception(+)
- -------------------------------------------------------------
<S> <C> <C>
Bond Debenture Portfolio
managed by Lord Abbett 15.63% 17.28%
- --------------------------------------------------------------
First Boston High Yield Index(2) 12.63% 13.37%
- --------------------------------------------------------------
Salomon Brothers Broad
Investment High Grade Index(2) 9.62% 9.58%
- --------------------------------------------------------------
Merrill Lynch Convertible Index(2) 17.86% 14.32%
- --------------------------------------------------------------
</TABLE>
(+) Performance is shown from date of initial public offering, May 1, 1996.
(1) "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Bond Debenture
Portfolio managed by Lord Abbett and the return on the investment both will
fluctuate, and redemption proceeds may be higher or lower than an investor's
original cost.
(2) The First Boston High Yield Index is representative of the lower rated debt
(including straight-preferred stocks) investments in the portfolio; the Merrill
Lynch Convertible Index is representative of the equity-related securities in
the portfolio; and Salomon Brothers Broad Investment High Grade Index is
representative of the high-grade debt in the portfolio. The three indices chosen
have elements of these three categories, but since there is no one index
combining all three categories, these three separate indices may not be a valid
comparison for the Portfolio. You may not directly invest in any of these
indices. The indices do not reflect any expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software and Bloomberg. Comparison line graphs chart
the hypothetical growth of $10,000 over a given historical period of time.
Although data are gathered from reliable sources, accuracy and completeness
cannot be guaranteed.
<PAGE> 13
MID-CAP VALUE PORTFOLIO For the period ended 12/31/97
MANAGED BY LORD, ABBETT & CO.
Letter to Policyholders
In an environment of continuing economic growth, low inflation and rising stock
market averages, the Portfolio continued to rely on careful stock selection in
seeking superior performance. (The Mid-Cap Value Portfolio was first offered on
November 7, 1997. Initial investing occurred August 20, 1997. Therefore, this
letter covers an abbreviated fiscal year.) The Portfolio does not seek to
emphasize particular sectors, but to focus on investing in those companies we
believe offer the best value in the mid-capitalization sector (companies with
market capitalizations ranging from $500 million to $5 billion). At the close of
the year, the Portfolio had strong exposure to the insurance, specialty chemical
and electric power sectors only because we located a number of companies
offering exceptional value in those sectors.
Over the coming year, we expect economic growth to slow and inflation to remain
moderate. As such, the yield on the benchmark 30-year U.S. Treasury bond is
likely to drop to 5 1/2% later in 1998. We are watchful of the currency crises
in Asia, but believe the absence of inflationary pressures in the U.S., combined
with the virtual elimination of the Federal budget deficit, bodes well for the
equity markets. Overall, we will continue to seek out value opportunities,
focusing on those companies with the potential for relatively strong,
predictable earnings in the economic environment we are forecasting.
We will temper our optimism with a note of caution. The stock market has
provided handsome returns over each of the past three years. Investors should
recognize that these returns are above historical norms and may be difficult to
duplicate going forward. We continue to believe that active portfolio management
and research driven stock selection will provide you the best opportunity for
strong returns in the mid-cap market.
We remain committed to helping you achieve your long-term financial goals. Thank
you for the confidence you have placed in us.
<TABLE>
<CAPTION>
TOP 10 HOLDINGS BY MARKET VALUE
As of 12/31/97
% of portfolio
-----------------------------------------------------------
<S> <C>
Tricon Global Restaurants 2.5%
-----------------------------------------------------------
Humana 2.5
-----------------------------------------------------------
Pencorp Financial 2.4
-----------------------------------------------------------
Adobe Systems 2.4
-----------------------------------------------------------
Everest Reinsurance 2.4
-----------------------------------------------------------
NGC Corporation 2.4
-----------------------------------------------------------
Fruit of the Loom 2.4
-----------------------------------------------------------
Niagara Mohawk 2.3
-----------------------------------------------------------
Proffitt's Inc. 2.3
-----------------------------------------------------------
Hasbro 2.3
-----------------------------------------------------------
</TABLE>
EDWARD VON DER LINDE
Portfolio Manager
Lord, Abbett & Co.
<PAGE> 14
MID-CAP VALUE PORTFOLIO MANAGED BY LORD ABBETT VS. RUSSELL MIDCAP INDEX2
Growth Based on $10,000(+)
[Line Graph]
<TABLE>
<CAPTION>
LA mid cap vs Russell mid cap plot points
<S> <C> <C>
10000 10000
"9/97" 10440 10564
"12/97" 10490 10624
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------
Total Return(1)
- ---------------------------------------------------
Since inception(+)
- ---------------------------------------------------
<S> <C>
Mid-Cap Value Portfolio
managed by Lord Abbett 4.90%*
- ---------------------------------------------------
Russell Midcap Index(2) 6.24%
- ---------------------------------------------------
</TABLE>
* Portfolio commenced operations on 8/20/97.
(+) Index is shown from the first full month since Portfolio's inception.
(1)"Total Return" is calculated including reinvestment of all income dividends
and capital gain distributions. Results represent past performance and do not
indicate future results. The value of an investment in the Mid-Cap Value
Portfolio managed by Lord Abbett and the return on the investment both will
fluctuate, and redemption proceeds may be higher or lower than an investor's
original cost.
(2)The Russell Midcap Index measures the performance of the 800 smallest
securities in the Russell 1000 Index, which represent approximately 35% of the
total market capitalization. The index does not reflect any expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software and Bloomberg. Comparison line graphs chart
the hypothetical growth of $10,000 over a given historical period of time.
Although data are gathered from reliable sources, accuracy and completeness
cannot be guaranteed.
<PAGE> 15
LARGE CAP RESEARCH PORTFOLIO For the period ended 12/31/97
MANAGED BY LORD, ABBETT & CO.
Letter to Policyholders
Over the quarter, the stock market rallied off its October low against a
backdrop of strong economic growth and low inflation. (The Large Cap Research
Portfolio was first offered on November 7, 1997. Initial investing occurred
August 20, 1997. Therefore, this letter covers an abbreviated fiscal year.) The
Portfolio's performance can be attributed to its exposure to the stocks of
select financial companies (such as banks), utilities (including electric and
regional telephone companies) and consumer noncyclicals (stocks of companies
whose performance is not directly tied to economic conditions).
Over the coming year, we expect an environment of slowing economic growth,
continued moderate inflation and declining long-term interest rates. We continue
to emphasize the financial, utility and consumer noncyclical sectors, which we
believe offer good value. Overall, we will continue to seek out value
opportunities, focusing on those companies with the potential for relatively
strong predictable earnings in the economic environment we are forecasting.
The yield on the benchmark 30-year U.S. Treasury bond is likely to decline to
5 1/2% later in 1998 as the economy slows. We are watchful of the currency
crises in Asia, but believe the absence of inflationary pressures in the U.S.,
combined with the virtual elimination of the Federal budget deficit, bodes well
for both the bond and equity markets.
We temper our optimism with a note of caution. The stock market has rewarded
investors with returns in excess of 20% in each of the past three years.
Investors should recognize that these returns are above historical norms and may
be difficult to duplicate going forward. We continue to believe that active
portfolio management and research driven stock selection will provide you the
best opportunity for attractive returns in the large cap market.
We remain committed to helping you achieve your long-term financial goals. Thank
you for the continued confidence you have placed in us.
<TABLE>
<CAPTION>
TOP 11 HOLDINGS BY MARKET VALUE
As of 12/31/97
% of portfolio
----------------------------------------------------------
<S> <C>
Cigna Corp. 2.8%
----------------------------------------------------------
First Energy Corp. 2.1
----------------------------------------------------------
Washington Mutual, Inc. 2.1
----------------------------------------------------------
Carolina Power & Lights Co. 2.1
----------------------------------------------------------
Citicorp 2.1
----------------------------------------------------------
Alltel Corp. 2.0
----------------------------------------------------------
Baltimore Gas and Electric Co. 1.9
----------------------------------------------------------
Deere & Co. 1.9
----------------------------------------------------------
Cinergy Corp. 1.9
----------------------------------------------------------
Fort James Corp. 1.9
----------------------------------------------------------
American Home Products Corp. 1.9
----------------------------------------------------------
</TABLE>
ROBERT MORRIS
Portfolio Manager
Lord, Abbett & Co.
<PAGE> 16
LARGE CAP RESEARCH PORTFOLIO MANAGED BY LORD ABBETT VS. S&P 500 INDEX(2)
Growth Based on $10,000(+)
[Line Graph]
<TABLE>
<CAPTION>
LA lg cap vs S&P500 plot points
<S> <C> <C>
10000 10000
"9/97" 10040 10547
"12/97" 9926 10850
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------
Total Return(1)
- --------------------------------------------------------
Since inception(+)
- --------------------------------------------------------
<S> <C>
Large Cap Research Portfolio
managed by Lord Abbett (0.74%)*
-----------------------------------------------------
S&P 500 Index (2) 8.50%
- --------------------------------------------------------
</TABLE>
* Portfolio commenced operations on 8/20/97.
(+) Index is shown from first full month since Portfolio's inception.
(1) "Total Return" is calculated including reinvestment of all income dividends
and capital gain distributions. Results represent past performance and do not
indicate future results. The value of an investment in the Large Cap Research
Portfolio managed by Lord Abbett and the return on the investment both will
fluctuate, and redemption proceeds may be higher or lower than an investor's
original cost.
(2) The S&P 500 Index is an unmanaged index generally considered to be
representative of stock market activity. The index does not reflect any
expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns for the graph above were generated by
Cova from CDA Wiesenberger HySales software. Comparison line graphs chart the
hypothetical growth of $10,000 over a given historical period of time. Although
data are gathered from reliable sources, accuracy and completeness cannot be
guaranteed.
<PAGE> 17
DEVELOPING GROWTH PORTFOLIO For the period ended 12/31/97
MANAGED BY LORD, ABBETT & CO.
Letter to Policyholders
Despite an environment of strong economic growth and subdued inflation, the
fourth quarter was generally difficult for small capitalization growth stocks.
(The Developing Growth Portfolio was first offered on November 7, 1997. Initial
investing occurred August 20, 1997. Therefore, this letter covers an abbreviated
fiscal year.) Trade uncertainties brought on by the volatility in the Asian
markets, sharp price declines in oil-service stocks and broad-based troubles in
the technology sector all contributed to the overall lag in small-cap
performance relative to large-caps. Despite this environment, the portfolio
enjoyed good relative performance by emphasizing research-driven stock
selection. Our goal is to focus on those small, dynamic companies whose
underlying strengths position them to withstand downswings in the market. The
result: a portfolio of stocks that we believe should offer above-average growth
rates over the long term.
We seek to broadly diversify the portfolio, in an attempt to reduce risk. Recent
purchases have included a number of innovative small companies in the
technology, computer software, retail and health services sectors. These
companies were added in recognition of their leading market positions in their
respective industries as well as their potential to perform well in the slowing
economic environment we are forecasting.
Over the coming year, we expect slowing economic growth, continued moderate
inflation and declining long-term interest rates. While small-capitalization
stocks have underperformed their large-capitalization counterparts over the last
several quarters, we continue to believe that investing in the small-cap growth
arena will prove rewarding over the long term due to the superior earnings
growth potential these companies offer.
We remain committed to helping you achieve your long-term financial goals. Thank
you for the confidence you have placed in us.
<TABLE>
<CAPTION>
TOP 10 HOLDINGS BY MARKET VALUE
As of 12/31/97
% of portfolio
------------------------------------------------------------
<S> <C>
Information Management Resources, Inc. 5.5%
------------------------------------------------------------
Orbital Sciences Corp. 4.7
------------------------------------------------------------
Computer Learning Centers, Inc. 4.3
------------------------------------------------------------
McGrath Rentcorp 4.2
------------------------------------------------------------
Technitrol, Inc. 3.6
------------------------------------------------------------
Stage Stores, Inc. 3.6
------------------------------------------------------------
Vintage Petroleum, Inc. 3.0
------------------------------------------------------------
Cellstar Corp. 2.8
------------------------------------------------------------
Matthews International Corp. Class A 2.5
------------------------------------------------------------
Infocus Systems, Inc. 2.3
------------------------------------------------------------
</TABLE>
STEPHEN J. MCGRUDER
Portfolio Manager
Lord, Abbett & Co.
<PAGE> 18
DEVELOPING GROWTH PORTFOLIO MANAGED BY LORD ABBETT VS. RUSSELL 2000 INDEX(2)
Growth Based on $10,000(+)
[Line Graph]
<TABLE>
<CAPTION>
LA dev grow vs Russell 2000 plot points
<S> <C> <C>
10000 10000
"9/97" 11190 10732
"12/97" 10552 10373
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------
Total Return(1)
- -----------------------------------------------------
Since inception(+)
- -----------------------------------------------------
<S> <C>
Developing Growth Portfolio
managed by Lord Abbett 5.52%*
- -----------------------------------------------------
Russell 2000 Index(2) 3.73%
- -----------------------------------------------------
</TABLE>
* Portfolio commenced operations on 8/20/97.
(+) Index is shown from the first full month since Portfolio's inception.
(1) "Total Return" is calculated including reinvestment of all income dividends
and capital gain distributions. Results represent past performance and do not
indicate future results. The value of an investment in the Developing Growth
Portfolio managed by Lord Abbett and the return on the investment both will
fluctuate, and redemption proceeds may be higher or lower than an investor's
original cost.
(2) The Russell 2000 is a capitalized weighted index including 2,000 of the
smallest stocks representing approximately 11% of the U.S. equity market. The
index does not reflect any expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software and Bloomberg. Comparison line graphs chart
the hypothetical growth of $10,000 over a given historical period of time.
Although data are gathered from reliable sources, accuracy and completeness
cannot be guaranteed.
<PAGE> 19
SELECT EQUITY PORTFOLIO For the year ended 12/31/97
MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT
Letter to Policyholders
During the first half of 1997, the market suffered a setback when the Federal
Reserve raised the Fed Funds rate by 25 basis points from 5.25% to 5.50%.
Volatility increased as expectations of future Fed tightenings strengthened,
however, the rate remained steady as all indicators pointed to continued low
inflation, a cooling economy, and strong earnings growth. Fueled by a favorable
economy, interest rates and corporate earnings news, the stock market surged
17.44% in the second quarter.
The stock market changed its course in the second half of 1997 as the fifty
largest stocks underperformed the small and mid cap by a wide margin for the
first time in years. However, the Asian financial crisis stunned the US equity
market in October, with aftershocks reverberating throughout the remainder of
the period. The trend towards a broadening market seen in the third quarter was
abandoned as investors sought safety in the large cap, more liquid stocks.
Our approach to investing, which avoids dependence on the strength of a few
stocks or industry sectors, can underperform the broader market when buying is
heavily focused on certain subsets of the market. Since inception, our
investment strategy involved maintaining our sector neutral approach coupled
with a continued focus on individual stock selection with an emphasis on holding
a highly diversified selection of value stocks.
The biggest contributions to performance in the first half of the year came from
stockpicking in the retail and drugs sector, with Worldcom and Toys R' Us as two
examples of stocks that have positively impacted performance. The telephone and
basic industry sectors positively contributed throughout the second half of
1997. However, the service industry sector was the biggest contributor to
relative performance for the fourth quarter and calendar year with stocks such
as Tele Communications and TCI Ventures. These two issues were among the top
five performers across the entire portfolio in 1997. Stock selections in the
energy, multi-industry, and technology sectors were negative contributors to
performance during the year.
We use fundamental research to identify stocks which are underpriced relative to
their longer-term ability to grow earnings and generate cash flow. As such, we
sometimes buy stocks that are temporarily out of favor. Our investments in cable
stocks, which we overweighted significantly during the year, serve as a case in
point. Going into 1997, these stocks had languished for three years as hopes for
a 500-channel universe, video-on-demand, cable-based telephone and industry
consolidation seemed to have faded. During this period, regulators reduced basic
rates twice; meanwhile, Direct Broadcast Satellite competition increased
significantly. Desperate, the cable industry embarked on an extremely ambitious
capital investment program, plunging cash flow into negative territory. This
year also saw the successful launch of high-speed data, digital cable, and other
new service initiatives, validating recent infrastructure investments. The
confluence of these events fueled the dramatic reversal and outperformance of
stocks such as TCI, TCI Ventures and Time Warner.
We will continue to invest in attractively valued stocks where we have a high
degree of confidence in our forecasts, where we can identify events that can
cause value to be realized, and that offer a good risk-reward profile.
<TABLE>
<CAPTION>
TOP 10 LONG-TERM HOLDINGS BY MARKET VALUE
As of 12/31/97
% of portfolio
------------------------------------------------------------
<S> <C>
Tosco 3.3%
------------------------------------------------------------
Merck & Co. Inc. 2.9
------------------------------------------------------------
MCI Communications 2.7
------------------------------------------------------------
Warner Lambert Co. 2.6
------------------------------------------------------------
Anheuser Busch Cos. Inc. 2.5
------------------------------------------------------------
Tele Communications 2.5
------------------------------------------------------------
Cooper Industries 2.4
------------------------------------------------------------
United Healthcare Corp. 2.3
------------------------------------------------------------
Procter & Gamble 2.2
------------------------------------------------------------
IBM Corp. 2.2
------------------------------------------------------------
</TABLE>
MICHAEL J. KELLY
Portfolio Manager
J.P. Morgan Investment Management Inc.
<PAGE> 20
SELECT EQUITY PORTFOLIO, MANAGED BY
J.P. MORGAN INVESTMENT MANAGEMENT VS. S&P 500 INDEX(2)
Growth Based on $10,000(+)
[Line Graph]
<TABLE>
<CAPTION>
JPM Select equity vs S&P500 plot points
<S> <C> <C>
10000 10000
"Jun-96" 9851.57 10288
10004.2 10601
"Dec-96" 10837.2 11482
10932 11808
"Jun-97" 12966 13870
14372 14909
"Dec-97" 14224 15337
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------
Average Annual Return(1)
- --------------------------------------------------------
1 Year Since inception(+)
- --------------------------------------------------------
<S> <C> <C>
Select Equity Portfolio,
managed by JPMIM 31.55% 23.74%
- --------------------------------------------------------
S&P 500 Index(2) 33.36% 29.25%
- --------------------------------------------------------
</TABLE>
(+) Performance is shown from date of initial public offering, May 1, 1996.
(1) "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Select Equity
Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the return on
the investment both will fluctuate, and redemption proceeds may be higher or
lower than an investor's original cost.
(2) The S&P 500 Index is an unmanaged index generally considered to be
representative of stock market activity. The index does not reflect any
expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE> 21
SMALL CAP STOCK PORTFOLIO For the year ended 12/31/97
MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT
Letter to Policyholders
During 1997, the Russell 2000 was able to produce a robust return of 22.4% and
continue its streak of returning greater than 16% for the third consecutive
year. However, 1997 proved to be a tremulous year for the small cap market with
volatility rising to levels not seen since 1987. In somewhat of a seesaw
fashion, the strong results in the second and third quarters were significant
enough to offset the negative results in the first and fourth quarters. The
first quarter was the worst quarter for the Russell as speculation mounted over
the Fed's need to raise interest rates causing investors to seek safety in
larger capitalization issues. This trend was reversed in the second quarter as
the Russell produced its largest quarterly gain since March of 1991. The rise in
small cap stocks continued in the third quarter as they outperformed the S&P 500
by more than 7%. In the fourth quarter, the market once again got jittery and
punished small cap stocks as fears grew over the financial crisis in Asia.
Within the Russell 2000 Index, the value sectors outperformed growth sectors by
9.8% in the quarter and by 18.9% in the one year period. Utilities and banks
were the best performing sectors in the fourth quarter, while technology, basic
industry, and drugs underperformed.
In both the third and fourth quarters the Portfolio outperformed the Russell
2000 by a substantial margin, leaving the Portfolio ahead of the benchmark for
the one year period. Not only did the Portfolio outperform the benchmark, on a
competitive basis, the Portfolio continues to look better and better in this
volatile market. The best performing sectors in the Portfolio included
technology hardware, banks and health services. Orbital Sciences was the best
performing stock in the portfolio and we continue to see Orbital as one of the
most attractive stocks in the technology sector. In December, Orbital
successfully launched eight satellites, which are a significant part of a global
communication network that it is building. The network, ORBCOMM, is designed to
provide nearly continuous low cost monitoring, tracking and messaging
communications coverage over most of the Earth's surface. Subscribers will be
able to use inexpensive communicators to send and receive short messages, high
priority alerts and other information, such as the location and condition of
automobiles, trucks, industrial equipment, shipping vessels and other remote
assets.
The sectors detracting from performance included consumer stable, miscellaneous
finance, and transportation. American Pad and Paper was one of the portfolio's
largest negative contributors to performance as it fell 22.6%. The company
announced an earnings disappointment and attributed it to the competitive
pricing environment in its commodity envelope business. We continue to like
American Pad and Paper and have increased our position during this weakness.
The 1998 forecast is similar to a year ago: We continue to believe that small
cap stocks are attractive relative to large cap stocks for two reasons: (1)
improved relative valuation due to prolonged underperformance relative to large
cap stocks, and (2) the likelihood of a strengthening or at a minimum stable
dollar.
TOP 10 LONG-TERM HOLDINGS BY MARKET VALUE
As of 12/31/97
<TABLE>
<CAPTION>
% of portfolio
- -------------------------------------------------------------
<S> <C>
Capital RE Corp. 2.9%
- -------------------------------------------------------------
DR Horton 2.9
- -------------------------------------------------------------
Commercial Metals 2.3
- -------------------------------------------------------------
Dekalb Genetics Corp. 2.3
- -------------------------------------------------------------
Intermet Corp. 1.7
- -------------------------------------------------------------
Renaissance RE Holdings Ltd. 1.5
- -------------------------------------------------------------
Mueller Industries Inc. 1.4
- -------------------------------------------------------------
Wabash National Corp. 1.3
- -------------------------------------------------------------
Central Louisiana Electric 1.2
- -------------------------------------------------------------
Bank United Corp. 1.2
- -------------------------------------------------------------
</TABLE>
JAMES B. OTNESS
Portfolio Manager
J.P. Morgan Investment Management Inc.
<PAGE> 22
SMALL CAP STOCK PORTFOLIO, MANAGED BY
J.P. MORGAN INVESTMENT MANAGEMENT VS. RUSSELL 2000(2)
Growth Based on $10,000(+)
[LINE CHART]
JPM small cap vs Russell 2000 plot points
<TABLE>
<S> <C> <C>
10000 10000
"Jun-96" 9955.36 9967
10091.4 10001
"Dec-96" 10825.3 10521
10089 9977
"Jun-97" 11630 11595
13371 13320
"Dec-97" 13135 12874
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Average Annual Return(1)
- ------------------------------------------------------------
1 Year Since inception(+)
- ------------------------------------------------------------
<S> <C> <C>
Small Cap Stock Portfolio,
managed by JPMIM 20.89% 17.72%
- ------------------------------------------------------------
Russell 2000(2) 22.40% 16.40%
- ------------------------------------------------------------
</TABLE>
(+) Performance is shown from date of initial public offering, May 1, 1996.
(1) "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Small Cap
Stock Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the
return on the investment both will fluctuate, and redemption proceeds may be
higher or lower than an investor's original cost.
(2) The Russell 2000 is a capitalized weighted index including 2,000 of the
smallest stocks representing approximately 11% of the U.S. equity market. The
index does not reflect any expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE> 23
INTERNATIONAL EQUITY PORTFOLIO For the year ended 12/31/97
MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT
Letter to Policyholders
Returns from the major equity markets continued to diverge widely in December.
European stocks surged, helped by falling long term interest rates and continued
optimism over the prospects for corporate profits as a result of the
strengthening U.S. Dollar. Over the year, the Italian, German and Swiss markets
showed the strongest returns gaining 33.6%, 23.3% and 43.2% respectively.
Asian equity markets continued to struggle. In Japan, stocks suffered a decline
of -24.2% in 1997, with a string of disappointing economic statistics
emphasizing the poor outlook for corporate profits. The government's package of
tax cuts was poorly received and falling stock prices continued to threaten the
health of many second-line banks and brokerage companies.
Country allocation decisions in the portfolio contributed positively throughout
most of the year. Overweight positions in Germany and France both proved
beneficial while underweighting Japan and Malaysia relative to the benchmark
contributed positively to performance. The decision to underweight the Swiss
market during the second quarter suppressed performance. In addition, our
underweighting Hong Kong during the second quarter detracted from performance as
this market was very strong during this time period. However, our underweight
position helped during the fourth quarter, as the Hong Kong market was
negatively affected by the turmoil in Asia.
Stock selection in Germany had a positive impact on performance, particularly
the overweight position in Krupp Hoesch. Our overweight position in Volkswagen
contributed positively as it outperformed its sector following settlement with
General Motors. However, we have since reduced our position in Volkswagen as
this company underperformed during the fourth quarter. In the UK, our
underweight position in British Gas and overweight position in Sears detracted
from performance. Stock selection in France contributed positively with the
Portfolio's holding in Lagarderc (media sector) which outperformed due to
defense deals and merger speculation. Another contributor in France was Societe
Generale (banking sector) which experienced better than expected results. The
Portfolio benefitted from the Japanese stock, Sony (electronics) as strong sales
in the U.S. contributed to fuel its upward move. Its music entertainment
subsidiary also generated better than expected profits. In contrast, favoring
Nissan Motor detracted from performance as it experienced slow domestic sales
due to a recent tax hike.
[PIE CHART]
FOREIGN INVESTMENT BY COUNTRY
As of 12/31/97
<TABLE>
<CAPTION>
UK Japan Germany France Netherlands Italy Australia Spain Switzerland Other
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
25.0% 14.6% 12.4% 10.1% 4.5% 5.8% 6.2% 3.3% 7.2% 10.9%
</TABLE>
Currency allocation decisions added to results. The U.S. Dollar strengthened
against both the Yen and European currencies, as a robust U.S. economy led to an
increase in both short and long term rates. The overweight U.S. Dollar position
versus the Yen, boosted performance, as the Yen weakened from 120.73 to 130.02
versus the U.S. Dollar at the end of the year.
Looking ahead, most international equity markets appear fully valued, but there
is still potential for further gains particularly in Europe. Profit expectations
are still rising and, with signs of stronger domestic demand and continued
enthusiasm for corporate restructuring, further positive surprises are still
possible.
In the Pacific, Australian and New Zealand stocks offer the best value. Domestic
economic conditions are improving here too, although the expected slump in Asian
economies will have some offsetting impact. In Japan the near term outlook
remains very difficult and, although stock prices are much more reasonable, the
best companies still appear expensive in international comparisons.
The Portfolio remains overweight in the UK and Germany. In addition, we continue
to emphasize Australia and New Zealand. Japanese positions have been reduced
further to a clear underweighting versus the benchmark.
ANNE RICHARDS
Portfolio Manager
J.P. Morgan Investment Management Inc.
<PAGE> 24
INTERNATIONAL EQUITY PORTFOLIO, MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT
VS. MSCI EAFE INDEX(2)
Growth Based on $10,000(+)
[LINE CHART]
JPM int equity vs MSCI EAFE plot points
<TABLE>
<S> <C> <C>
10000 10000
"Jun-96" 10172.4 9876
10149.3 9871
"Dec-96" 10859.8 10036
11032 9859
"Jun-97" 12003 11146
12090 11074
"Dec-97" 11491 10214
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
Average Annual Return(1)
- ----------------------------------------------------------------
1 Year Since inception(+)
- ----------------------------------------------------------------
<S> <C> <C>
International Equity Portfolio,
managed by JPMIM 5.96% 8.67%
- ----------------------------------------------------------------
MSCI EAFE Index(2) 1.99% 1.28%
- ----------------------------------------------------------------
</TABLE>
(+) Performance is shown from date of initial public offering, May 1, 1996.
(1) "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the International
Equity Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the
return on the investment both will fluctuate, and redemption proceeds may be
higher or lower than an investor's original cost.
(2) The Morgan Stanley Capital International Europe, Australia, and Far East
Index (MSCI EAFE) is an aggregate of 15 individual country indices that
collectively represent many of the major markets of the world. The index does
not reflect any expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE> 25
QUALITY BOND PORTFOLIO For the year ended 12/31/97
MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT
Letter to Policyholders
Throughout 1997, the U.S. economy continued to grow at above trend levels and
unemployment moved to cyclical lows. Income, consumption and confidence
measures, generally, remained robust as well. In spite of an ongoing drift
upward in wage rates, inflation at both the wholesale and retail levels remained
remarkably benign.
In managing the Quality Bond Portfolio, we make three key decisions to add
value. First, we determine the Portfolio's duration, which is a measure of the
Portfolio's sensitivity to changes in interest rates. The Portfolio's duration,
which averaged approximately a quarter year longer than the Salomon Investment
Grade Bond index, enhanced performance and partially offset the poor showing of
the spread sectors.
Secondly, we allocate the Portfolio's assets across the broad sectors of the
fixed income market, including governments, corporates, high-yield, emerging
market debt, international bonds, and mortgage-backed securities. During most of
the year, the Portfolio's performance benefited from our decision to overweight
mortgage backed securities and investment grade corporates while maintaining an
underweight position in U.S. Treasuries. This decision, particularly our
underweighted position in U.S. Treasuries, negatively affected the Portfolio at
the end of the year. The volatility in Asia consequently spilling into markets
worldwide, caused a 'flight to quality' with many investors. Another positive
contributor to performance was our moderate increase in the high-yield
allocation.
Finally, we select individual securities for the Portfolio. Securities are
selected on a daily basis by our portfolio managers, with substantial input from
four fixed income analysts and traders. Security selection continued to add
value during the year. The Portfolio maintained its focus on high-quality
issues, keeping the average credit quality of its holdings between AA and AAA.
We have reduced the Portfolio's position in mortgages and callable corporate
securities, as they have become particularly vulnerable with the fall in rates.
As we believe the volatility in the financial markets will not dissipate any
time soon, we have increased the Portfolio's holdings in U.S. Treasury
securities. The Portfolio remains strategically overweighted in the spread
sectors, although to a lesser degree.
Harriet T. Huber
Portfolio Manager
J.P. Morgan Investment Management Inc.
[PIE CHART]
DISTRIBUTION BY S&P RATING*
As of 12/31/97
<TABLE>
<CAPTION>
Treasury Cash Agency AAA AA A BBB BB
<S> <C> <C> <C> <C> <C> <C> <C>
23.1% 10.9% 27.8% 9.2% 1.4% 12.8% 13.4% 1.4%
</TABLE>
* % of holdings
<PAGE> 26
QUALITY BOND PORTFOLIO, MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT
VS. SALOMON BROTHERS BROAD INVESTMENT GRADE BOND INDEX(2)
Growth Based on $10,000(+)
[LINE GRAPH]
JPM qual bond vs Salomon plot points
<TABLE>
<S> <C> <C>
10000 10000
"Jun-96" 10095 10124
10140 10312
"Dec-96" 10577 10624
10488 10568
"Jun-97" 10845 10949
11190 11313
"Dec-97" 11495 11646
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Average Annual Return(1)
- -----------------------------------------------------------
1 Year Since inception(+)
- -----------------------------------------------------------
<S> <C> <C>
Quality Bond Portfolio,
managed by JPMIM 9.06% 8.87%
- -----------------------------------------------------------
Salomon Brothers BIG(2) 9.62% 9.58%
- -----------------------------------------------------------
</TABLE>
(+) Performance is shown from date of initial public offering, May 1, 1996.
(1) "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Quality Bond
Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the return on
the investment both will fluctuate, and redemption proceeds may be higher or
lower than an investor's original cost.
(2) The Salomon Brothers Broad Investment Grade Bond Index (BIG) is a
market-capitalized weighted index which includes fixed-rate Treasury, government
sponsored, corporate (Baa3/BBB or better) and mortgage securities. The index
does not reflect any expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE> 27
LARGE CAP STOCK PORTFOLIO For the year ended 12/31/97
MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT
Letter to Policyholders
The S&P 500 rose 33.36% in 1997, capping an unprecedented three consecutive
years of above 20% returns. Despite spectacular returns, the market was again
relatively concentrated in 1997. Only 43% of the S&P 500 stocks outperformed the
index last year, compared with an average of 48% since 1971. The market has been
more concentrated in the last three years than any other time since the "nifty
fifty" era of the early 1970's. Further, the largest 50 stocks in the S&P 500
outperformed the smallest 450 by 5.6% in 1997.
Strong stock selection within the drug and consumer stable sectors contributed
significantly to the portfolio's performance in 1997. The single most successful
decision was to underweight Merck (+35%), which lagged the sector return of 54%.
That allowed us to overweight Schering Plough (+95%) and Warner Lambert (+68%).
Schering had been a neglected stock with solid management and an enormously
successful allergy drug, Claritin. Warner had two of the most successful drug
launches ever this year with Lipitor (a cholesterol drug) and Rezulin (a
diabetes drug), far exceeding analysts' sales estimates. The stock gave back
some of its gains in December due to side effects related to Rezulin, but
remains attractive.
In the consumer stable sector, Procter and Gamble was the best performer. P&G's
success last year can be attributed to their ability to grow sales while
simultaneously improving distribution efficiency of their product line, helping
to keep inventory levels down. A strong management team gives us confidence in
their ability to continue their success.
Stock selection in the telephone and health service sectors detracted from
performance last year and can be attributed to two stocks: AT&T and Columbia
Healthcare. AT&T (underweight in the portfolio), a laggard in the first half of
1997, has rallied on the cost-cutting reputation of its new CEO Michael
Armstrong, and the prospects of a merger as industry consolidation continues.
Indeed, in the first week of January a deal was reached with Teleport
representing a bid to penetrate the local phone markets. Shares of Columbia
Healthcare came under pressure early last year when federal investigators began
scrutinizing their medicare billing practices.
The Cova Large Cap Stock Portfolio uses valuation rankings that are generated by
our team of 26 equity research analysts. The Portfolio avoids the lowest ranked
stocks (most overvalued) in each sector of the market, and redistributes the
weight across the most undervalued stocks. Portfolio characteristics and sector
weights are matched to the index, leaving stock selection as the sole source of
incremental return.
Going forward, we will continue to invest in attractively valued stocks where we
have a high degree of confidence in our forecasts, where we can identify events
which can cause value to be realized, and which offer a compelling risk-reward
profile.
TOP 10 LONG-TERM HOLDINGS BY MARKET VALUE
As of 12/31/97
<TABLE>
<CAPTION>
% of portfolio
- -------------------------------------------------------------
<S> <C>
Exxon 2.5%
- -------------------------------------------------------------
Merck & Co. 2.5
- -------------------------------------------------------------
Intel 2.4
- -------------------------------------------------------------
Bristol Myers Squibb 2.2
- -------------------------------------------------------------
Philip Morris Cos. Inc. 2.1
- -------------------------------------------------------------
General Electric Co. 2.1
- -------------------------------------------------------------
IBM Corp. 2.1
- -------------------------------------------------------------
Procter & Gamble 2.0
- -------------------------------------------------------------
American International Group 1.7
- -------------------------------------------------------------
SBC Communications, Inc. 1.5
- -------------------------------------------------------------
</TABLE>
JAMES WIESS
Portfolio Manager
J.P. Morgan Investment Management Inc.
<PAGE> 28
LARGE CAP STOCK PORTFOLIO, MANAGED BY
J.P. MORGAN INVESTMENT MANAGEMENT VS. S&P 500 INDEX(2)
Growth Based on $10,000(+)
[LINE CHART]
JPM large cap vs S&P500 plot points
<TABLE>
<S> <C> <C>
10000 10000
"Jun-96" 10237.4 10288
10419.8 10601
"Dec-96" 11467.3 11482
11724 11808
"Jun-97" 13863 13870
14902 14909
"Dec-97" 15238 15337
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Average Annual Return(1)
- ------------------------------------------------------------
1 Year Since inception(+)
- ------------------------------------------------------------
<S> <C> <C>
Large Cap Stock Portfolio,
managed by JPMIM 33.25% 28.66%
- ------------------------------------------------------------
S&P 500 Index(2) 33.36% 29.25%
- ------------------------------------------------------------
</TABLE>
(+) Performance is shown from date of initial public offering, May 1, 1996.
(1) "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Large Cap
Stock Portfolio managed by J.P. Morgan Investment Management (JPMIM) and the
return on the investment both will fluctuate, and redemption proceeds may be
higher or lower than an investor's original cost.
(2) The S&P 500 Index is an unmanaged index generally considered to be
representative of stock market activity. The index does not reflect any
expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE> 29
QUALITY INCOME PORTFOLIO For the year ended 12/31/97
MANAGED BY VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
Letter to Policyholders
1997 was one big roller coaster ride for many market participants. The U.S.
treasury curve flattened almost 50 basis points as the yield on two year
treasuries went from a 5.87 to a 5.64, and the long bond went from a 6.64 yield
to a yield of 5.92 on December 31st. Throughout most of the year, the market was
on "Fed Watch", as many expected another tightening should inflation ever pick
up. Well, inflation remained under control, and subsequently, the Fed stayed on
hold.
The mortgage-backed sector was definitely a star performer in 1997, posting an
excess return of 121 basis points relative to the treasuries. Despite the drop
in yields, mortgage backed securities performed extremely well due to stable
prepayments, and the continued fall in volatility. Looking ahead to 1998, we are
cautious on the mortgage sector and feel that prepayment speeds will pick up due
to the drop in yields.
After performing extremely well for 3/4 of the year, Investment grade corporates
gave up most, if not all of their gains once the Asian crisis hit the market in
October. Investment grade corporates ended the year with a return of -.29%, the
first year since 1990 that they had posted a negative return. Leading the way
down was the Yankee sector, as names such as Korea Development Bank widened more
than 400 basis points since October 1st.
[PIE CHART]
DISTRIBUTION BY MOODY'S RATING
As of 12/31/97
AA1 AA2
0% 0%
<TABLE>
<CAPTION>
AAA AA3 A1 A2 A3 BAA1 BAA2 BAA3 BA1
<S> <C> <C> <C> <C> <C> <C> <C> <C>
13% 2% 7% 11% 6% 16% 15% 21% 9%
</TABLE>
Due to the economic turmoil in Asia, we feel the growth rate in the U.S. economy
will slow somewhat in 1998. Consequently, the corporate market should show mixed
results throughout the year and thus, we feel a more defensive posture is
warranted. We feel the portfolio is positioned well for these conditions, as we
have continued and will continue to emphasize credit quality in the selection
process.
TOP 10 LONG-TERM HOLDINGS BY MARKET VALUE
As of 12/31/97
<TABLE>
<CAPTION>
% of portfolio
- -------------------------------------------------------------
<S> <C>
Yale 5.1%
- -------------------------------------------------------------
Chase 4.6
- -------------------------------------------------------------
NGC Corp Cap Trust 4.6
- -------------------------------------------------------------
Bank of New York 4.5
- -------------------------------------------------------------
USX 4.5
- -------------------------------------------------------------
Panenergy 4.2
- -------------------------------------------------------------
LCI 4.2
- -------------------------------------------------------------
USA Waste 4.2
- -------------------------------------------------------------
Gap Inc. 4.2
- -------------------------------------------------------------
Hydro Quebec 4.1
- -------------------------------------------------------------
</TABLE>
ROBERT J. HICKEY
Portfolio Manager
Van Kampen American Capital
Investment Advisory Corp.
<PAGE> 30
QUALITY INCOME PORTFOLIO MANAGED BY VAN KAMPEN AMERICAN CAPITAL
VS. LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX(2)
Growth Based on $10,000(+)
[LINE GRAPH]
VKM quality income vs Lehman plot points
<TABLE>
<S> <C> <C>
10000 10000
9915.07 9885
"Jun-90" 10208 10241
10280.9 10303
"Dec-90" 10819 10828
11046 11120
"Jun-91" 11215.9 11288
11837.9 11937
"Dec-91" 12516.2 12574
12316.4 12386
"Jun-92" 12791.8 12887
13485.3 13517
"Dec-92" 13486.7 13528
14159 14157
"Jun-93" 14566.3 14582
15127.7 15064
"Dec-93" 15042 15020
14532.2 14550
"Jun-94" 14339.2 14369
14367.1 14440
"Dec-94" 14391.6 14493
15032.1 15215
"Jun-95" 16075.3 16202
16380.2 16512
"Dec-95" 17194.2 17282
16826.7 16877
"Jun-96" 16912.4 16957
17150.5 17256
"Dec-96" 17663.3 17783
17051 17630
"Jun-97" 17622 18270
18146 18911
"Dec-97" 18687 19519
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
Average Annual Return(1)
- ----------------------------------------------------------------
1 Year 5 Years Since inception(+)
- ----------------------------------------------------------------
<S> <C> <C> <C>
Quality Income Portfolio
managed by VKAC 9.08% 7.05% 8.17%
- ----------------------------------------------------------------
Lehman Brothers
Gov't/Corp. Bond Index(2) 9.76% 7.61% 8.72%
- ----------------------------------------------------------------
</TABLE>
(+)Performance is shown from first full month since inception (1/1/90).
(1) "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Quality Income
Portfolio managed by Van Kampen American Capital (VKAC) and the return on the
investment both will fluctuate, and redemption proceeds may be higher or lower
than an investor's original cost.
(2) The Lehman Brothers Government/Corporate Bond Index is comprised of all
publicly issued, non-convertible, domestic debt of the U.S. Government or any
agency thereof, quasi-Federal Corporation, or corporate debt guaranteed by the
U.S. Government and all publicly issued, fixed-rate non-convertible, domestic
debt of the four domestic major corporate classifications; industrial, utility,
financial and Yankee bond. The index does not reflect any expenses.
Performance data is historical and includes changes in share
price and reinvestment of dividends and capital gains. Performance numbers are
net of all Portfolio operating expenses, but they do not include the
administrative fee, the insurance risk charge, the annual contract maintenance
charge or the 5% withdrawal charge imposed by the Cova variable annuity
contract. If this performance information included the effect of the insurance
charges, performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE> 31
VKAC GROWTH AND INCOME PORTFOLIO For the year ended 12/31/97
MANAGED BY VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
Letter to Policyholders
1997 provided investors with another solid year of investment performance, but
not without more volatility than what we've seen during the last several years.
Certain fundamentals and events eroded the overall market near yearend and held
down many specific sectors and stocks. These conditions notwithstanding, the
portfolio overall was well positioned and provided investors with another
excellent return.
In review, we look back in surprise at the continued strength of the sectors.
While at the end of the year, this sector began to show weakness due primarily
to events associated with Asia, banks have been significant outperformers over
the last three years. BankAmerica has shown an increasing commitment to
increasing their return on assets and was up in excess of 40% for the year.
Over the year, we did make some significant moves in our healthcare holdings.
Mainly, we realigned the holdings based on valuations while keeping the sector
weighting roughly the same. We added to our position of SmithKline Beecham,
which is one of the portfolio's larger holdings. They have one of the best
pharmaceutical distribution networks and are undervalued relative to a peer of
domestic U.S. companies. We have great expectations of them.
We still continue to have significant holdings in techs because they have a high
growth rate relative to the GDP. We added to our position in IBM, which is now
one of the largest holdings. We're seeing an acceleration of their revenue
growth and a commitment to hitting their earnings. The biggest surprise in this
group was ATT. The price of the stock bottomed at $35 in July and was selling at
$65 at year-end. This was exceptional and unexpected performance out of a stock
that most people didn't like. We were selling off our position during the first
half of the year, but as we saw the change coming, we added shares and were able
to capture some of the gains.
We did reduce our oil exposure based on the price of oil and valuations. Texaco,
another large holding, did fine and was outperforming the group until the oil
stocks started selling off near the end of the year. Texaco is more oil
sensitive than some of the other oil companies because they sold off their
chemical operations and joint ventured some of their refining and marketing
operations. It's a stock that's done well since we've held it. A related holding
is McDermott, an oil service and energy related company. We began accumulating
McDermott at about $18 near the end of '96 and we recently began selling the
stock nearly double that because we couldn't make a case for it on a valuation
basis. The price of McDermott's stock was relatively unchanged for years but a
management change signaled a buying opportunity for us.
Worthy of mention is Philip Morris, another of the larger holdings in the
portfolio. We have not added to our position while the stock has underperformed
due to uncertainty of the pending tobacco settlement. However, we do expect a
conclusive settlement to come about soon. At that point, it should be in a
position to advance, which is why we are still holding a large position in the
stock.
Looking ahead for 1998, certain fundamental and technical indicators seem to be
slowing down the change of the bull market we've enjoyed for so long. That does
not mean we'll be seeking shelter during the year, however, it does mean we will
be more cautious and selective. We'll be far more critical when looking at
balance sheets, cash flows, and how companies are getting their cash flows.
Clearly, earnings and the financial stability of a company's ability to generate
cash is more important now than at the beginning of a cycle.
TOP 10 LONG-TERM HOLDINGS BY MARKET VALUE
As of 12/31/97
<TABLE>
<CAPTION>
% of portfolio
- -------------------------------------------------------------
<S> <C>
International Business Machines Corp. 2.6%
- -------------------------------------------------------------
Philip Morris Companies, Inc. 2.5
- -------------------------------------------------------------
SmithKline Beecham Plc. (ADR) 2.3
- -------------------------------------------------------------
BankAmerica Corp. 2.1
- -------------------------------------------------------------
Texaco, Inc. 2.0
- -------------------------------------------------------------
Chase Manhattan Corp. 1.8
- -------------------------------------------------------------
Pharmacia & Upjohn, Inc. 1.5
- -------------------------------------------------------------
BankBoston Corp. 1.5
- -------------------------------------------------------------
Pacificare Health Systems, Inc. Class B 1.5
- -------------------------------------------------------------
YPF Sociedad Anonima (ADR) 1.5
- -------------------------------------------------------------
</TABLE>
JAMES A. GILLIGAN
Portfolio Manager
Van Kampen American Capital
Investment Advisory Corp.
<PAGE> 32
VKAC GROWTH AND INCOME PORTFOLIO MANAGED BY
VAN KAMPEN AMERICAN CAPITAL VS. S&P 500 INDEX(2)
Growth Based on $10,000(+)
[LINE CHART]
VKM G&I vs S&P500 plot points
<TABLE>
<S> <C> <C>
10000 10000
"Jun-92" 9750 9851
9962 10159
"Dec-92" 10569 10673
11226 11143
"Jun-93" 11527 11193
12143 11480
"Dec-93" 12234 11747
11746 11304
"Jun-94" 11342 11347
11858 11900
"Dec-94" 11634 11895
12498 13057
"Jun-95" 13581 14297
14862 15424
"Dec-95" 15948 16351
16737 17230
"Jun-96" 17082 17997
17466 18545
"Dec-96" 18998 20086
18377 20678
"Jun-97" 21114 24288
22343 26107
"Dec-97" 22659 26857
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------
Average Annual Return(1)
- ------------------------------------------------------
1 Year 5 Year Since inception(+)
- ------------------------------------------------------
<S> <C> <C> <C>
VKAC Growth and
Income Portfolio
managed by Van
Kampen American
Capital 24.98% 16.48% 15.45%
- ------------------------------------------------------
S&P 500 Index(2) 33.36% 20.27% 19.36%
- ------------------------------------------------------
</TABLE>
(+) Performance is shown from first full month since inception (6/1/92).
(1) "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the VKAC Growth
and Income Portfolio managed by Van Kampen American Capital and the return on
the investment both will fluctuate, and redemption proceeds may be higher or
lower than an investor's original cost.
(2) The S&P 500 Index is an unmanaged index generally considered to be
representative of stock market activity. The index does not reflect any
expenses.
Performance data is historical and includes changes in share
price and reinvestment of dividends and capital gains. Performance numbers are
net of all Portfolio operating expenses, but they do not include the
administrative fee, the insurance risk charge, the annual contract maintenance
charge or the 5% withdrawal charge imposed by the Cova variable annuity
contract. If this performance information included the effect of the insurance
charges, performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
Cova from CDA Wiesenberger HySales software. Comparison line graphs chart the
hypothetical growth of $10,000 over a given historical period of time. Although
data are gathered from reliable sources, accuracy and completeness cannot be
guaranteed.
<PAGE> 33
MONEY MARKET PORTFOLIO For the year ended 12/31/97
MANAGED BY VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
Letter to Policyholders
The first quarter of 1997 was marked by a 25 basis point tightening in the
Federal Funds rate at the end of March. The Federal Reserve Board raised the
overnight bank rate from 5.25% to 5.50% on fears of excess demand in the
economy. Concerns that this was the first of a series of tightenings by the Fed
played havoc with the market. We shortened the weighted average maturity of the
fund to 28 days by the end of the first quarter.
The Fed watching continued into the spring as a strong economy led many to
believe the Federal Reserve Board would act preemptively before inflation roared
out of control. The yield on the 1-year Treasury bill peaked for the year at
6.07% in late April. A tight job market failed to produce expected inflation
however. Many began to believe that the economy could clip along at a healthy
pace without Fed intervention. One year Treasury bill yields fell more than 40
basis points to yield a 5.60% by the end of summer. We extended the Fund's
average maturity to 70 days during August.
The short term yield curve began to flatten substantially during the fall. Value
could no longer be found by purchasing longer dated paper. Therefore the fund
began to concentrate on paper that matured in 90 days or less. Direct issue
commercial paper provided the greatest value to the fund, with yield spreads
averaging 30 basis points above their treasury counterparts.
Turmoil in Asia dominated the market at the end of the year. Due to a flight to
quality, money poured into the U.S. treasury market from home and abroad. Yields
on treasury bills fell below the 5.50% level.
The strategy of the Portfolio remains to achieve competitive yield by investing
in only the highest rated and most liquid of securities.
In the future, we will continue to monitor the situation in Asia. Any recourse
in the Far East may lead to increased demand in the U.S. and the threat of
inflation. We will maintain a neutral position in the Portfolio until a clearer
picture on the economy materializes.
REID HILL
Portfolio Manager
Van Kampen American Capital
Investment Advisory Corp.
[PIE CHART]
PORTFOLIO BY SECTOR
As of 12/31/97
<TABLE>
<CAPTION>
Government/Agency Repurchase Agreement Bankers Acceptances Commercial Paper Municipal Obligations
<S> <C> <C> <C> <C>
20.55% 1.05% 18% 47.7% 12.7%
</TABLE>
<PAGE> 34
STOCK INDEX PORTFOLIO For the year ended 12/31/97
MANAGED BY VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
Letter to Policyholders
World equity returns continued their impressive ascent in 1997 and while many
countries were able to outperform U.S. equity market returns this year, domestic
investors have little cause for complaint. The U.S. equity market, as measured
by the S&P 500, posted a 33.36% increase in 1997 - marking the first time that
market returns exceeded 20% in three consecutive years. In fact, the S&P 500
provided a total return of roughly 120% over the last three years. Favorable
conditions including moderate economic growth, decelerating inflation, declining
interest rates, solid corporate earnings gains and strong cash-flows into equity
mutual funds have undoubtedly been at the root of the market's advance.
An analysis of the nature of the equity market rallies over the past three years
provides some insight to the current outlook for 1998. In 1995, equity market
returns were largely driven by a 193 basis point decline in long-term interest
rates and an 18% increase in corporate earnings. In contrast, long-term rates
rose by 69 basis points in 1996 and corporate profits grew by a more modest 8%.
The 1996 rally owed much credit to record investor flows into equity mutual
funds as well as an increase in investors' willingness to take on more risk in
their search for performance. The 1997 rally was generated by a combination of
factors seen in 1995 and 1996. Specifically, long-term interest rates declined
by 72 basis points, corporate profits grew by 12% and investor flows into equity
mutual funds remained strong. In the fourth quarter, however, investors grew
more risk adverse in response to significant increases in volatility brought
about by the Asian crisis.
As we enter 1998, and the economy enters its eighth consecutive year of
expansion, market fears of an economic slowdown brought about by the Asian
crisis remain a reality. Whatever the catalyst, many analysts expect the U.S.
economy to decelerate from its current pace. Corporate profit growth is expected
to decline to 7% in 1998 and investors may have an increasingly difficult time
purchasing all but the highest quality issues exhibiting consistent growth. This
is especially true given the recent pick-up in market volatility. In 1997,
volatility of the S&P 500 reached 18% -- just below the long-term average of
19%. In the five-year period preceding 1997, the average annual level of
volatility averaged only 10%. With corporate profit growth slowing and investors
becoming increasingly risk adverse, equity market returns will likely be more
heavily dependent on interest rate improvement to bolster valuations.
We believe that many of the fundamental underpinnings that have supported the
equity markets in the past three years remain in place. However, investors
should take note of the challenges that lie ahead and adjust their expectations
regarding market performance to more closely approximate long-term averages. As
such, we believe the Stock Index Portfolio will continue to offer favorable
returns in the year ahead.
TOP 10 LONG-TERM HOLDINGS BY MARKET VALUE
As of 12/31/97
<TABLE>
<CAPTION>
% of portfolio
- --------------------------------------------------------------
<S> <C>
General Electric Co. 3.05%
- --------------------------------------------------------------
Coca-Cola 2.11
- --------------------------------------------------------------
Microsoft 1.97
- --------------------------------------------------------------
Exxon 1.93
- --------------------------------------------------------------
Merck 1.64
- --------------------------------------------------------------
Royal Dutch Petroleum 1.48
- --------------------------------------------------------------
Intel Corp. 1.47
- --------------------------------------------------------------
Philip Morris 1.39
- --------------------------------------------------------------
Procter & Gamble 1.38
- --------------------------------------------------------------
IBM 1.26
- --------------------------------------------------------------
</TABLE>
PETE PAPAGEORGAKIS, CFA
Portfolio Manager
Van Kampen American Capital
Investment Advisory Corporation
<PAGE> 35
STOCK INDEX PORTFOLIO MANAGED BY VAN KAMPEN AMERICAN CAPITAL
VS. S&P 500 INDEX(2)
Growth Based on $10,000(+)
VKM stock index vs. S&P500 plot points
<TABLE>
<S> <C> <C>
10000 10000
"Dec-91" 10570 11143
10279.4 10865
"Jun-92" 10470.3 11066
10763.8 11412
"Dec-92" 11219 11989
11627.2 12517
"Jun-93" 11685.5 12573
11948 12896
"Dec-93" 12230.8 13196
11710.9 12697
"Jun-94" 11715.8 12746
12222 13367
"Dec-94" 12156 13362
13364.4 14667
"Jun-95" 14762.6 16060
16188.2 17326
"Dec-95" 17451.4 18367
18410.6 19355
"Jun-96" 19256 20216
19821.4 20832
"Dec-96" 21631.8 22563
21035.9 22234
"Jun-97" 24652.1 27290
26435.9 29334
"Dec-97" 27200.7 30176
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Average Annual Return(1)
- --------------------------------------------------------------
1 Year 5 Year Since inception(+)
- --------------------------------------------------------------
<S> <C> <C> <C>
Stock Index Portfolio
managed by VKAC 32.91% 19.36% 18.71%
- --------------------------------------------------------------
S&P 500 Index(2) 33.36% 20.27% 19.91%
- --------------------------------------------------------------
</TABLE>
(+) Performance is shown from first full month since inception (12/1/91).
(1) "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the Stock Index
Portfolio managed by Van Kampen American Capital (VKAC) and the return on the
investment both will fluctuate, and redemption proceeds may be higher or lower
than an investor's original cost.
(2) The S&P 500 Index is an unmanaged index generally considered to be
representative of stock market activity. The index does not reflect any
expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE> 36
HIGH YIELD PORTFOLIO For the year ended 12/31/97
MANAGED BY VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
Letter to Policyholders
The High Yield Portfolio posted a solid return in 1997. The gain was greater
than that of US Treasury bonds, but lagged the overall US equity market due to
several factors. First, the general economic conditions were favorable, with
modest growth and low inflation. Second, the technical condition of the high
yield market continued to be strong as money poured into high yield mutual funds
at a record pace last year. Also, a number of Collateralized Bond Obligations
(CBOs) entered the market during 1997 causing another source of strong demand
for high yield instruments.
We have six analysts working full time researching the credit quality of our
high yield bond holdings and prospective investments. Our investment selection
process continued to provide good results during the period evidenced by the
fact that we were able to avoid defaults among the companies held in the
portfolio. We also experienced gains from positive developments such as mergers
with higher quality companies as well as tender offers for bonds held.
Due to the economic turmoil in Asia, we feel the growth rate in the US economy
will slow somewhat in 1998. Consequently, the high yield market should show
mixed results throughout the year and we feel a more defensive posture is
warranted. The portfolio is positioned to perform well under these conditions as
reflected by underweighting bonds in cyclical industries and emphasizing quality
in the selection process.
ANNE LORSUNG
Portfolio Manager
Van Kampen American Capital
Investment Advisory Corp.
TOP 10 LONG-TERM HOLDINGS BY MARKET VALUE
As of 12/31/97
<TABLE>
<CAPTION>
% of portfolio
- -------------------------------------------------------------
<S> <C>
IXC Communications 2.5%
- -------------------------------------------------------------
Millicom 2.4
- -------------------------------------------------------------
Selmer 2.3
- -------------------------------------------------------------
Communications & Power 2.0
- -------------------------------------------------------------
American Standard 2.0
- -------------------------------------------------------------
Time Warner (Pfd. stock) 2.0
- -------------------------------------------------------------
ISP Holdings 1.9
- -------------------------------------------------------------
Fonorola 1.8
- -------------------------------------------------------------
Dan River Inc. 1.8
- -------------------------------------------------------------
Petroleum Heat & Power 1.8
- -------------------------------------------------------------
</TABLE>
[PIE CHART]
DISTRIBUTION BY MOODY'S RATING
As of 12/31/97
<TABLE>
<CAPTION>
Aaa Ba B NR
<S> <C> <C> <C>
2.3% 24.3% 68.4% 5%
</TABLE>
<PAGE> 37
HIGH YIELD PORTFOLIO MANAGED BY VAN KAMPEN AMERICAN CAPITAL
VS. SALOMON BROTHERS HIGH YIELD INDEX-COMPOSITE(2)
Growth Based on $10,000(+)
[LINE GRAPH]
VKM hi yield vs Salomon plot points
<TABLE>
<S> <C> <C>
10000 10000
10073 9706
"Jun-90" 10458 10090
10173 9200
"Dec-90" 10186 9252
11358 11065
"Jun-91" 11908 11786
12577 12546
"Dec-91" 13064 13251
14313 14244
"Jun-92" 14606 14808
15473 15473
"Dec-92" 15554 15674
15859 16690
"Jun-93" 17653 17471
17988 17873
"Dec-93" 18972 18548
18691 18068
"Jun-94" 18498 17910
18254 18218
"Dec-94" 18114 17887
18907 19235
"Jun-95" 19804 20559
20486 21211
"Dec-95" 21137 22131
21610 22376
"Jun-96" 21936 22562
22738 23528
"Dec-96" 23588 24619
23892 24599
"Jun-97" 24733 25816
25680 27044
"Dec-97" 26328 27837
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Average Annual Return(1)
- --------------------------------------------------------------
1 Year 5 Years Since inception(+)
- --------------------------------------------------------------
<S> <C> <C> <C>
High Yield Portfolio
managed by VKAC 11.54% 11.03% 12.83%
- --------------------------------------------------------------
Salomon Brothers
High Yield Index(2) 14.27% 12.40% 13.64%
- --------------------------------------------------------------
</TABLE>
(+)Performance is shown from first full month since inception (1/1/90).
(1) "Average Annual Return" is calculated including reinvestment of all income
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The value of an investment in the High Yield
Portfolio managed by Van Kampen American Capital (VKAC) and the return on the
investment both will fluctuate, and redemption proceeds may be higher or lower
than an investor's original cost.
(2) The Salomon Brothers High Yield Index-Composite tracks the composite high
yield market excluding issues with less than 7 years maturity. The index does
not reflect any expenses.
Performance data is historical and includes changes in share price and
reinvestment of dividends and capital gains. Performance numbers are net of all
Portfolio operating expenses, but they do not include the administrative fee,
the insurance risk charge, the annual contract maintenance charge or the 5%
withdrawal charge imposed by the Cova variable annuity contract. If this
performance information included the effect of the insurance charges,
performance numbers would be lower.
Graph prepared by Cova. The index returns in the graph above were generated by
CDA Wiesenberger HySales software. Comparison line graphs chart the hypothetical
growth of $10,000 over a given historical period of time. Although data are
gathered from reliable sources, accuracy and completeness cannot be guaranteed.
<PAGE> 38
KPMG Peat Marwick LLP
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees
Cova Series Trust:
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of Small Cap Stock Portfolio, Quality Bond
Portfolio, Select Equity Portfolio, Large Cap Stock Portfolio, International
Equity Portfolio, Money Market Portfolio, Quality Income Portfolio, Stock Index
Portfolio, VKAC Growth and Income Portfolio, High Yield Portfolio, Bond
Debenture Portfolio, Mid-Cap Value Portfolio, Large Cap Research Portfolio,
Developing Growth Portfolio, Balanced Portfolio, Small Cap Equity Portfolio,
Equity Income Portfolio and Growth & Income Equity Portfolio, portfolios of Cova
Series Trust (the Trust), as of December 31, 1997 and the related statements of
operations for the year then ended (for the period from August 20, 1997,
commencement of operations, to December 31, 1997 for Mid-Cap Value Portfolio,
Large Cap Research Portfolio and Developing Growth Portfolio; and for the period
from July 1, 1997, commencement of operations, to December 31, 1997 for Balanced
Portfolio, Small Cap Equity Portfolio, Equity Income Portfolio and Growth &
Income Equity Portfolio) and statements of changes in net assets for each of the
years in the two-year period then ended (for the year ended December 31, 1997
and the period from April 2, 1996, commencement of operations, to December 31,
1996 for Small Cap Stock Portfolio, Quality Bond Portfolio, Select Equity
Portfolio, Large Cap Stock Portfolio, International Equity Portfolio and Bond
Debenture Portfolio; for the period from August 20, 1997, commencement of
operations, to December 31, 1997 for Mid-Cap Value Portfolio, Large Cap Research
Portfolio and Developing Growth Portfolio; and for the period from July 1, 1997,
commencement of operations, to December 31, 1997 for Balanced Portfolio, Small
Cap Equity Portfolio, Equity Income Portfolio and Growth & Income Equity
Portfolio) and the financial highlights for each of the years in the five-year
period then ended (for the year ended December 31, 1997 and the period from May
1, 1996, date of initial public offering, to December 31, 1996 for Small Cap
Stock Portfolio, Quality Bond Portfolio, Select Equity Portfolio, Large Cap
Stock Portfolio, International Equity Portfolio and Bond Debenture Portfolio;
for the period from August 20, 1997, commencement of operations, to December 31,
1997 for Mid-Cap Value Portfolio, Large Cap Research Portfolio and Developing
Growth Portfolio; and for the period from July 1, 1997, commencement of
operations, to December 31, 1997 for Balanced Portfolio, Small Cap Equity
Portfolio, Equity Income Portfolio and Growth & Income Equity Portfolio). These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1997 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Small
Cap Stock Portfolio, Quality Bond Portfolio, Select Equity Portfolio, Large Cap
Stock Portfolio, International Equity Portfolio, Money Market Portfolio, Quality
Income Portfolio, Stock Index Portfolio, VKAC Growth and Income Portfolio, High
Yield Portfolio, Bond Debenture Portfolio, Mid-Cap Value Portfolio, Large Cap
Research Portfolio, Developing Growth Portfolio, Balanced Portfolio, Small Cap
Equity Portfolio, Equity Income Portfolio and Growth & Income Equity Portfolio,
as of December 31, 1997, the results of their operations, changes in their net
assets and the financial highlights for each of the years or periods indicated
above in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 6, 1998
<PAGE> 39
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 95.2%
AEROSPACE & DEFENSE - 0.5%
Orbital Sciences Corp. * .................................... 10,700 $ 318,325
----------
AIRLINES - 0.5%
ASA Holdings, Inc. .......................................... 10,600 301,438
----------
AUTOMOTIVE - 3.5%
Intermet Corp. .............................................. 53,800 941,500
Lithia Motors, Inc. Class A * .............................. 8,800 129,800
Modine Manufacturing Co. .................................... 5,500 187,688
Sonic Automotive, Inc. * .................................... 6,700 64,488
Wabash National Corp. ....................................... 26,000 739,375
----------
2,062,851
----------
BANKING - 6.8%
Bank North Group, Inc. ...................................... 7,900 507,575
Bank United Corp. ........................................... 13,600 665,550
BankUnited Financial Corp. Class A * ........................ 2,500 38,516
Colonial Bancgroup, Inc. .................................... 12,800 440,800
Commercial Federal Corp. .................................... 5,650 200,901
Community First Bankshares, Inc. ............................ 2,600 138,450
First Hawaiian, Inc. ........................................ 3,900 155,025
First Republic Bank * ....................................... 5,500 175,656
Flagstar Bancorp, Inc. ...................................... 8,900 176,192
GBC Bancorp ................................................. 3,700 235,875
Hamilton Bancorp, Inc. * .................................... 2,300 66,988
Interwest Bancorp, Inc. ..................................... 4,200 158,550
Irwin Financial Corp. ....................................... 3,900 163,313
National Commerce Bancorp ................................... 14,200 500,550
Sun Bancorp, Inc. * ......................................... 1,300 42,575
Trustco Bank Corp. .......................................... 16,225 442,131
----------
4,108,647
----------
BEVERAGES, FOOD & TOBACCO - 2.9%
American Italian Pasta Co. Class A * ........................ 1,400 35,000
Beringer Wine Estates Holdings, Inc. (Series B) * ........... 800 30,400
Dekalb Genetics Corp. Class B ............................... 33,400 1,310,950
Kensey Nash Corp. * ......................................... 20,900 347,463
----------
1,723,813
----------
BUILDING MATERIALS - 0.1%
Rock of Ages Corp. * ........................................ 3,000 46,500
----------
</TABLE>
See notes to financial statements
<PAGE> 40
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
CHEMICALS - 2.2%
Bush Boake Allen, Inc. * .................................... 8,900 $ 233,069
General Chemical Group, Inc. ................................ 3,700 98,975
Georgia Gulf Corp. .......................................... 3,400 104,125
Minerals Technologies, Inc. ................................. 6,200 281,713
OM Group, Inc. .............................................. 1,800 65,925
Tetra Technologies, Inc. * .................................. 16,700 351,744
The Geon Co. ................................................ 7,500 175,313
----------
1,310,864
----------
COMMERCIAL SERVICES - 2.2%
Comfort Systems USA, Inc. * ................................. 5,700 112,575
Equity Corporation International * ......................... 5,400 124,875
Hospitality Worldwide Services, Inc. * ...................... 1,800 23,625
ONSALE, Inc. * .............................................. 7,500 135,000
Pinkertons, Inc. * .......................................... 9,150 215,025
ProMedCo Management Co. * ................................... 4,700 47,588
Service Experts, Inc. * ..................................... 8,500 243,313
Steiner Leisure Ltd. * ...................................... 5,950 183,706
Wackenhut Corrections Corp. * ............................... 4,000 107,500
Youth Services International, Inc. * ........................ 6,500 101,969
----------
1,295,176
----------
COMMUNICATIONS - 2.8%
ANTEC Corp. * ............................................... 2,000 31,250
Aspect Telecommunications Corp. * ........................... 10,500 219,188
Excel Switching Corp. * ..................................... 6,400 114,400
Glenayre Technologies, Inc. * ............................... 17,000 167,875
ICG Communications, Inc. * .................................. 2,700 73,575
MetroNet Communications Corp. Class B * ..................... 2,100 36,488
Natural Microsystems Corp. * ................................ 6,700 310,294
Omnipoint Corp. * ........................................... 12,100 281,325
Premiere Technologies, Inc. * ............................... 12,000 331,500
Proxim, Inc. * .............................................. 9,400 106,631
----------
1,672,526
----------
COMPUTER SOFTWARE & PROCESSING - 5.3%
Aspect Development, Inc. * .................................. 2,200 114,400
Avid Technology, Inc. * ..................................... 7,100 189,925
Cognicase, Inc. * ........................................... 1,200 14,550
Computer Horizons Corp. * ................................... 1,800 81,000
CSG Systems International, Inc. * ........................... 2,300 92,000
Edify Corp. * ............................................... 18,500 346,875
Hypercom Corp. * ............................................ 7,100 100,288
</TABLE>
See notes to financial statements
<PAGE> 41
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
COMPUTER SOFTWARE & PROCESSING - continued
Intergrated Systems, Inc. * ................................. 4,700 $ 64,625
International Network Services * ............................ 13,600 314,500
MAPICS, Inc. * .............................................. 11,400 123,975
Mathsoft, Inc. * ............................................ 2,200 6,050
Metro Informaton Services, Inc. * ........................... 6,600 183,150
Metromail Corp. * ........................................... 14,900 266,338
Pinnacle Systems, Inc. * .................................... 9,000 219,375
Radiant Systems, Inc. * ..................................... 4,600 131,100
Remedy Corp. * .............................................. 6,700 140,700
Sapient Corp. * ............................................. 4,300 263,375
Security First Network Bank * ............................... 1,600 11,600
Transaction Systems Architects, Inc. Class A * .............. 9,400 357,200
Viasoft, Inc. * ............................................. 1,900 80,275
Visigenic Software, Inc. * .................................. 9,000 50,906
----------
3,152,207
----------
COMPUTERS & INFORMATION - 1.0%
Bell & Howell Co. * ......................................... 1,800 43,538
HMT Technology Corp. * ...................................... 17,300 224,900
Infocus Systems, Inc. * ..................................... 5,800 176,175
Raster Graphics, Inc. * ..................................... 7,700 34,890
Sandisk Corp. * ............................................. 1,700 34,531
SCM Microsystems, Inc. * .................................... 3,700 88,800
----------
602,834
----------
CONSUMER SERVICES - 0.2%
Education Management Corp. * ................................ 4,100 127,100
----------
ELECTRIC UTILITIES - 2.6%
Central Hudson Gas & Electric ............................... 15,000 658,125
Central Louisiana Electric, Inc. ............................ 21,900 709,013
Otter Tail Power Co. ........................................ 5,200 198,250
----------
1,565,388
----------
ELECTRICAL EQUIPMENT - 2.2%
American Residential Services, Inc. ......................... 16,100 251,563
Applied Power Inc. Class A .................................. 4,800 331,200
BOLDER Technologies Corp. * ................................. 7,700 74,113
MagneTek, Inc. * ............................................ 33,900 661,050
----------
1,317,926
----------
ELECTRONICS - 3.3%
8X8, Inc. * ................................................. 11,300 123,594
Alliance Semiconductor Corp. * .............................. 12,400 56,575
ATMI, Inc. * ................................................ 3,700 89,725
</TABLE>
See notes to financial statements
<PAGE> 42
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ELECTRONICS - continued
Exar Corp. * ................................................ 3,000 $ 49,500
Galileo Technology Ltd. * ................................... 2,400 69,300
Input/Output, Inc. * ........................................ 13,100 388,906
Integrated Device Technology, Inc. * ........................ 27,300 257,644
Integrated Silicon Solution, Inc. * ......................... 11,600 88,450
Itron, Inc. * ............................................... 6,400 115,200
Perceptron, Inc. * .......................................... 8,100 172,631
Quickturn Design Systems, Inc. * ............................ 13,500 156,938
SDL Inc. * .................................................. 10,400 150,800
Sipex Corp. * ............................................... 3,800 114,950
WH Brady Co. Class A ........................................ 4,100 127,100
----------
1,961,313
----------
ENTERTAINMENT & LEISURE - 0.6%
Cinar Films, Inc. Class B * ................................. 1,700 66,088
Imax Corp. * ................................................ 11,900 261,800
N2K, Inc. * ................................................. 1,000 14,625
Toymax International, Inc. * ................................ 2,100 18,113
----------
360,626
----------
ENVIRONMENTAL CONTROLS - 0.5%
American Disposal Services, Inc. ............................ 5,800 211,700
Sevenson Environmental Services, Inc. ....................... 6,880 84,280
The Middleby Corp. * ........................................ 2,400 18,750
----------
314,730
----------
FINANCIAL SERVICES - 1.7%
First Federal Financial Corp. * ............................. 8,300 321,625
Hanover Capital Mortgage Holdings, Inc. ..................... 2,500 41,250
Litchfield Financial Corp. .................................. 14,730 285,394
Ocwen Financial Corp. * ..................................... 7,800 198,656
WFS Financial, Inc. * ....................................... 14,400 162,000
----------
1,008,925
----------
FOREST PRODUCTS & PAPER - 1.8%
American Pad & Paper Co. * .................................. 44,100 424,463
Caraustar Industries, Inc. .................................. 14,300 489,775
Universal Forest Products, Inc. ............................. 12,700 173,038
----------
1,087,276
----------
HEALTH CARE PROVIDERS - 2.1%
Alternative Living Services, Inc. * ......................... 8,360 247,143
Paracelsus Healthcare Corp. * ............................... 9,100 30,713
Pediatrix Medical Group, Inc. * ............................. 3,600 153,900
Renal Care Group, Inc. * .................................... 2,700 86,400
</TABLE>
See notes to financial statements
<PAGE> 43
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE PROVIDERS - continued
Renal Treatment Centers, Inc. * ............................. 2,700 $ 97,538
Sierra Health Services, Inc. * .............................. 14,900 501,013
Summit Care Corp. * ......................................... 2,300 37,663
Sunrise Assisted Living, Inc. * ............................. 2,300 99,188
----------
1,253,558
----------
HEAVY MACHINERY - 0.7%
IDEXX Corp. ................................................. 12,050 420,244
----------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 4.6%
Aaron Rents Inc. Class B .................................... 17,600 341,000
Bush Industries Class A ..................................... 23,300 605,800
D.R. Horton, Inc. ........................................... 93,400 1,622,825
Ladd Furniture, Inc. * ...................................... 4,000 60,000
Royal Appliance Manufacturing Co. * ......................... 5,500 36,438
Stanley Furniture Co., Inc. * ............................... 3,800 105,925
----------
2,771,988
----------
INDUSTRIAL - DIVERSIFIED - 0.5%
ABC Rail Products Corp. * ................................... 4,100 82,000
Shaw Group, Inc. * .......................................... 9,500 218,500
----------
300,500
----------
INSURANCE - 4.5%
Capital RE Corp. ............................................ 26,800 1,663,275
Nationwide Financial Services, Inc. Class A ................. 4,800 173,400
Renaissancere Holdings Ltd. ................................. 19,300 851,613
----------
2,688,288
----------
LODGING - 0.4%
Candlewood Hotel Co., Inc. * ................................ 15,500 135,625
Extended Stay America, Inc. * ............................... 6,600 82,088
----------
217,713
----------
MEDIA - BROADCASTING & PUBLISHING - 1.0%
Banta Corp. ................................................. 11,900 321,300
Ditgital Generation Systems * ............................... 2,300 5,750
PRIMEDIA, Inc. * ............................................ 14,400 181,800
SJW Corp. ................................................... 1,700 102,850
----------
611,700
----------
MEDICAL SUPPLIES - 4.6%
Aspen Technologies, Inc. * .................................. 8,600 294,550
AutoCyte, Inc * ............................................. 5,700 40,613
Cardiac Pathways Corp. * .................................... 3,800 26,600
</TABLE>
See notes to financial statements
<PAGE> 44
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
MEDICAL SUPPLIES - continued
Closure Medical Corp. * ..................................... 3,000 $ 77,625
Computer Motion, Inc. * ..................................... 3,600 37,800
Conceptus, Inc. * ........................................... 2,600 13,000
CONMED Corp. * .............................................. 4,400 115,500
Eclipse Surgical Tech, Inc. * ............................... 13,500 79,313
Endocardial Solutions, Inc. * ............................... 4,600 46,575
Focal, Inc. * ............................................... 1,900 20,188
Heartstream, Inc. * ......................................... 13,200 141,075
Lifeline Systems, Inc. * .................................... 8,800 221,100
Mariner Health Group, Inc. * ................................ 39,600 643,500
Novoste Corp. * ............................................. 2,300 51,750
Physio-Control International Corp. * ........................ 5,200 82,550
ResMed, Inc. * .............................................. 2,900 81,563
Sangstat Medical Corp. * .................................... 11,700 473,850
Sola International, Inc. * .................................. 7,300 237,250
Urologix, Inc. * ............................................ 2,100 38,063
----------
2,722,465
----------
MEDICAL & BIO-TECHNOLOGY - 0.4%
Arqule, Inc. * .............................................. 6,900 158,269
Tripos, Inc. * .............................................. 5,900 86,288
----------
244,557
----------
METALS - 5.3%
Amcast Industrial Corp. ..................................... 15,600 357,825
Commercial Metals Co. ....................................... 41,900 1,322,469
Mueller Industries * ........................................ 13,500 796,500
Schnitzer Steel Industries, Inc. Class A .................... 15,800 445,363
Steel Technologies, Inc. .................................... 18,900 222,075
----------
3,144,232
----------
OFFICE EQUIPMENT - 0.8%
CheckFree Corp. * ........................................... 10,800 291,600
P-Com, Inc. * ............................................... 9,800 169,050
----------
460,650
----------
OIL & GAS - 5.3%
Atmos Energy Corp. .......................................... 11,000 332,750
Bayard Drilling Technologies, Inc. * ........................ 1,500 24,375
Hanover Compressor Co. * .................................... 6,900 141,019
IRI International Corp. * ................................... 3,000 42,000
Newfield Exploration Co. * .................................. 17,300 403,306
Ocean Energy, Inc. * ........................................ 3,600 177,525
Patterson Energy, Inc. * .................................... 8,300 321,106
</TABLE>
See notes to financial statements
<PAGE> 45
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
OIL & GAS - continued
Plains Resource, Inc. * ..................................... 15,900 $ 273,281
Seacor Holdings, Inc. * ..................................... 8,600 518,150
Snyder Oil Corp. ............................................ 14,100 257,325
Vintage Petroleum, Inc. ..................................... 5,700 108,300
Wicor, Inc. ................................................. 12,300 571,181
-----------
3,170,318
-----------
PHARMACEUTICALS - 4.9%
Applied Analytical Industries, Inc. * ....................... 12,800 211,200
COR Therapeutics, Inc. * .................................... 2,500 56,250
First Alliance Corp. * ...................................... 6,250 114,844
Henry Schein, Inc. * ........................................ 2,000 70,000
Hubco, Inc. ................................................. 12,140 474,978
Human Genome Sciences, Inc. * ............................... 14,000 556,500
Hyseq, Inc. * ............................................... 1,300 12,513
Incyte Pharmaceuticals, Inc. * .............................. 12,300 553,500
Kos Pharmaceuticals, Inc. * ................................. 10,900 168,269
Ligand Pharmaceuticals Class B * ............................ 4,600 59,225
Medi-Ject Corp. * ........................................... 13,500 27,000
Millennium Pharmaceuticals, Inc. * .......................... 4,800 91,200
Synaptic Pharmaceutical Corp. * ............................. 1,500 16,313
Ventana Medical Systems, Inc. * ............................. 31,400 478,850
Vical, Inc. * ............................................... 3,700 44,400
-----------
2,935,042
-----------
REAL ESTATE - 8.1%
American General Hospitality Corp. (REIT) ................... 12,300 329,025
American Residential Investment Trust, Inc. (REIT) .......... 2,600 30,875
Amresco, Inc. * ............................................. 4,700 142,175
Arden Realty Group, Inc. (REIT) ............................. 14,600 448,950
Brandywine Realty Trust (REIT) .............................. 5,300 133,163
Burnham Pacific Properties, Inc. (REIT) ..................... 12,900 197,531
Developers Diversified Realty Corp. (REIT) .................. 6,100 233,325
Entertainment Properties Trust (REIT) ....................... 6,200 120,125
Gables Residential Trust (REIT) ............................. 19,500 538,688
IMH Commercial Holdings, Inc. (REIT) ........................ 2,800 49,700
Innkeepers USA Trust (REIT) ................................. 3,400 52,700
Manufactured Home Communities, Inc. (REIT) .................. 6,500 175,500
National Golf Properties, Inc. (REIT) ....................... 5,100 167,344
Oasis Residential, Inc. (REIT) .............................. 16,500 368,156
Post Properties, Inc. (REIT) ................................ 13,167 534,909
Price REIT, Inc. (REIT) ..................................... 5,100 208,781
</TABLE>
See notes to financial statements
<PAGE> 46
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
REAL ESTATE - continued
Sunstone Hotel Investors, Inc. (REIT) ....................... 5,600 $ 96,600
Tower Realty Trust, Inc. (REIT) ............................. 5,000 123,125
TriNet Corporate Realty Trust, Inc. (REIT) .................. 8,000 309,500
Urban Shopping Centers, Inc. (REIT) ......................... 4,000 139,500
Weeks Corp. (REIT) .......................................... 11,000 352,000
Westfield America, Inc. (REIT) .............................. 4,300 73,100
-----------
4,824,772
-----------
RESTAURANTS - 1.2%
Applebee's International, Inc. .............................. 4,200 75,863
Friendly Ice Cream Corp. * .................................. 3,100 36,038
Papa John's International, Inc. * ........................... 12,300 428,963
Showbiz Pizza Time, Inc. * .................................. 6,700 154,100
-----------
694,964
-----------
RETAILERS - 4.7%
Central Garden & Pet Co. * .................................. 4,600 120,750
Charming Shoppes, Inc. * .................................... 17,900 83,906
CML Group, Inc. * ........................................... 9,300 30,806
Delia's, Inc. * ............................................. 9,200 204,700
Garden Ridge Corp. * ........................................ 39,600 564,300
Gymboree Corp. * ............................................ 10,500 287,438
Lazare Kaplan International, Inc. * ......................... 5,300 71,550
Let's Talk Cellular & Wireless, Inc. * ...................... 3,000 30,750
One Price Clothing Stores, Inc. * ........................... 13,000 19,500
Pacific Sunwear of California * ............................. 2,650 78,838
Party City Corp. * .......................................... 15,900 509,794
Penn Traffic Co. * .......................................... 6,200 51,150
ShopKo Stores, Inc. * ....................................... 2,900 63,075
Sports Authority, Inc. (The) * .............................. 4,600 67,850
Urban Outfitters, Inc. * .................................... 33,500 611,375
-----------
2,795,782
-----------
TELEPHONE SYSTEMS - 1.4%
American Communications Services, Inc. * .................... 8,900 114,031
Concentric Network Corp. * .................................. 13,400 118,925
Intermedia Communications, Inc. * ........................... 4,300 261,225
ITC DeltaCom, Inc. * ........................................ 1,100 18,150
Mobile Telecommunications Technologies Corp. * .............. 13,600 299,200
NEXTLINK Communications, Inc. * ............................. 1,500 31,969
-----------
843,500
-----------
</TABLE>
See notes to financial statements
<PAGE> 47
COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
TEXTILES, CLOTHING & FABRICS - 0.8%
Ashworth, Inc. * ............................................ 21,000 $ 231,000
Collins & Aikman Corp. * .................................... 21,500 185,438
Tropical Sportswear International Corp. * ................... 2,900 29,000
Worldtex, Inc. * ............................................ 5,700 45,244
-----------
490,682
-----------
TRANSPORTATION - 1.9%
Allied Holdings, Inc. * ..................................... 9,800 187,425
American Freightways Corp. * ................................ 14,900 147,138
Genesee & Wyoming Inc. Class A * ............................ 9,400 219,725
Jevic Transportation, Inc. * ................................ 1,500 24,188
Motor Cargo Industries, Inc. * .............................. 2,800 33,600
Werner Enterprises, Inc. .................................... 16,100 330,050
Willis Lease Finance Corp. * ................................ 12,200 211,975
-----------
1,154,101
-----------
WATER COMPANIES - 1.3%
E-Town Corp. ................................................ 13,200 530,475
Southern California Water Co. ............................... 10,000 251,250
-----------
781,725
-----------
WHOLESALE - 0.0%
U.S.A. Floral Products, Inc. * .............................. 1,500 23,625
-----------
TOTAL INVESTMENTS - 95.2%
(Cost $51,833,249) 56,888,871
Other Assets and Liabilities (net) - 4.8% 2,868,197
-----------
TOTAL NET ASSETS - 100.0% $59,757,068
===========
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security as this stock did not declare
or pay dividends in the last 12 month period.
REIT - Real Estate Investment Trust
See notes to financial statements
<PAGE> 48
COVA SERIES TRUST
QUALITY BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PAR SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DOMESTIC BONDS AND DEBT SECURITIES - 81.9%
ASSET BACKED - 6.7%
$150,000 Caterpillar Asset Financial Trust .............................. 6.300% 05/25/02 $ 151,068
300,000 Chase Credit Card Master Trust ................................. 6.300% 08/15/00 302,673
100,000 First Omni Credit Card Master Trust ............................ 6.650% 09/15/03 102,000
51,982 Nationsbank Auto Owner Trust ................................... 6.125% 07/15/99 52,068
175,000 Premier Auto Trust ............................................. 6.150% 03/06/00 175,404
200,000 Premier Auto Trust ............................................. 6.050% 04/06/00 200,258
100,000 Sears Credit Account Master Trust .............................. 6.500% 10/15/03 100,801
75,350 World Omni Automobile Securitization Trust ..................... 6.300% 06/25/02 75,541
89,117 World Omni Lease Trust ......................................... 5.950% 11/15/02 89,247
-----------
1,249,060
-----------
CORPORATE BONDS - 19.8%
60,000 Banc One Corp. ................................................. 7.625% 01/15/26 65,699
200,000 Canadian Imperial Bank ......................................... 6.200% 08/01/00 200,599
125,000 Clear Channel Communications, Inc. ............................. 7.250% 10/15/27 127,511
100,000 Columbia Gas System, Inc. ...................................... 7.620% 11/28/25 103,913
250,000 Columbus Southern Power ........................................ 6.850% 10/03/05 254,581
250,000 Eastman Chemical Co. ........................................... 6.375% 01/15/04 250,420
100,000 Eastman Chemical Co. ........................................... 7.250% 01/15/24 104,482
225,000 FBS Capital, Inc. .............................................. 8.090% 11/15/26 244,798
225,000 Fleet Capital Ltd. ............................................. 7.920% 12/11/26 238,860
225,000 Ingersoll-Rand Co. ............................................. 6.391% 11/15/27 231,136
300,000 National Fuel Gas .............................................. 6.214% 08/12/27 305,532
60,000 Nationsbank Corp. .............................................. 7.250% 10/15/25 63,316
100,000 NGC Corp. ...................................................... 7.625% 10/15/26 108,306
250,000 Oil Purchase Co. (144A)@ ....................................... 7.100% 04/30/02 250,385
200,000 PacifiCorp ..................................................... 6.750% 07/15/04 205,262
250,000 Sears Roebuck Acceptance Corp. ................................. 6.930% 11/15/02 256,833
200,000 Suntrust Banks, Inc. ........................................... 7.375% 07/01/02 209,373
40,000 Tele-Communications, Inc. ...................................... 7.875% 02/15/26 43,052
100,000 U.S. Cellular Corp. ............................................ 7.250% 08/15/07 102,214
200,000 Western Resources, Inc. ........................................ 6.875% 08/01/04 203,948
100,000 Worldcom, Inc. ................................................. 7.750% 04/01/27 109,925
-----------
3,680,145
-----------
MEDIUM TERM SECURITIES - 3.0%
200,000 Ford Motor Credit Co. .......................................... 7.470% 07/29/99 204,438
200,000 General Motors Acceptance Corp. ................................ 6.700% 06/24/99 201,705
150,000 Nationsbank Corp. .............................................. 5.750% 01/25/01 148,693
-----------
554,836
-----------
U.S. GOVERNMENT AGENCY MORTGAGE BACKED SECURITIES - 27.4%
325,000 Federal Home Loan Mortgage Corp. ............................... 6.500% 07/15/16 321,953
147,566 Federal Home Loan Mortgage Corp. ............................... 6.500% 09/15/23 149,004
72,651 Federal Home Loan Mortgage Corp. ............................... 8.500% 08/01/26 75,989
190,000 Federal National Mortgage Association Commitment (a) ........... 7.000% 01/01/27 191,544
150,000 Federal National Mortgage Association .......................... 6.500% 11/25/07 151,624
316,980 Federal National Mortgage Association .......................... 7.500% 05/01/12 325,499
65,867 Federal National Mortgage Association .......................... 7.500% 09/01/25 67,452
147,508 Federal National Mortgage Association .......................... 6.000% 02/01/26 142,299
184,119 Federal National Mortgage Association .......................... 6.500% 02/01/26 181,932
219,076 Federal National Mortgage Association .......................... 7.000% 07/01/26 220,856
87,381 Federal National Mortgage Association .......................... 8.500% 12/01/26 91,340
108,406 Federal National Mortgage Association .......................... 7.500% 06/01/27 111,014
</TABLE>
See notes to financial statements
<PAGE> 49
COVA SERIES TRUST
QUALITY BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PAR SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY MORTGAGE BACKED SECURITIES - CONTINUED
$268,623 Federal National Mortgage Association .......................... 8.500% 07/01/27 $ 280,794
224,120 Federal National Mortgage Association .......................... 7.000% 08/01/27 225,941
78,411 Federal National Mortgage Association .......................... 7.500% 08/01/27 80,298
201,890 Federal National Mortgage Association .......................... 8.500% 08/01/27 211,038
90,387 Federal National Mortgage Association .......................... 8.000% 09/01/27 93,663
446,152 Federal National Mortgage Association .......................... 8.000% 09/01/27 462,325
541,035 Federal National Mortgage Association .......................... 7.500% 11/01/27 554,053
66,182 Government National Mortgage Association ....................... 9.000% 09/15/16 70,856
88,429 Government National Mortgage Association ....................... 9.000% 06/15/17 94,674
208,166 Government National Mortgage Association ....................... 8.000% 03/15/22 216,103
223,303 Government National Mortgage Association ....................... 7.000% 04/15/24 225,257
172,593 Government National Mortgage Association ....................... 7.500% 03/15/26 176,962
194,019 Government National Mortgage Association ....................... 7.000% 04/15/26 195,717
96,910 Government National Mortgage Association ....................... 7.500% 08/15/26 99,363
97,555 Government National Mortgage Association ....................... 7.500% 02/15/27 100,025
-----------
5,117,575
-----------
CORPORATE MORTGAGE BACKED SECURITIES - 2.5%
200,000 Green Tree Financial Corp. ..................................... 6.270% 09/15/12 201,028
129,416 Morgan Stanley Capital, Inc. (144A) @ .......................... 6.700% 10/03/30 130,771
129,310 Mortgage Capital Funding, Inc. ................................. 6.525% 01/20/07 130,018
-----------
461,817
-----------
U.S. TREASURY SECURITIES - 22.5%
1,105,000 U.S. Treasury Bond ............................................. 6.750% 08/15/26 1,216,881
190,000 U.S. Treasury Bond ............................................. 6.500% 11/15/26 202,884
210,000 U.S. Treasury Note ............................................. 6.375% 09/30/01 214,463
410,000 U.S. Treasury Note ............................................. 6.250% 02/15/03 419,481
1,907,000 U.S. Treasury Note ............................................. 5.750% 08/15/03 1,909,384
80,000 U.S. Treasury Note ............................................. 5.875% 11/15/05 80,450
150,000 U.S. Treasury Note ............................................. 6.250% 03/31/99 151,125
-----------
4,194,668
-----------
Total Domestic Bonds and Debt Securities (Cost $14,964,918) 15,258,101
-----------
FOREIGN BONDS AND DEBT SECURITIES - 5.7%
CANADA - 3.3%
50,000 Gulf Canada Resources, Ltd. (Yankee) ........................... 8.250% 03/15/17 54,529
100,000 Hydro-Quebec (Yankee) .......................................... 9.500% 11/15/30 133,496
200,000 Laidlaw, Inc. (Yankee) ......................................... 6.720% 10/01/27 204,558
200,000 Quebec Province (Series NJ) (Yankee) ........................... 7.500% 07/15/23 216,148
-----------
608,731
-----------
CHILE - 1.3%
250,000 Celulosa Arauco (Yankee) ....................................... 6.950% 09/15/05 249,965
-----------
GREAT BRITAIN - 0.6%
100,000 Midland Bank Plc (Yankee) ...................................... 7.625% 06/15/06 107,437
-----------
ITALY - 0.3%
50,000 Republic of Italy (Global Bond) (U.S.$) ........................ 6.875% 09/27/23 51,874
-----------
</TABLE>
See notes to financial statements
<PAGE> 50
COVA SERIES TRUST
QUALITY BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PAR SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MEXICO - 0.2%
$35,000 Mexican United States (Global Bond) (U.S.$) .................... 11.500% 05/15/26 $ 41,563
-----------
Total Foreign Bonds and Debt Securities (Cost $1,007,763) 1,059,570
-----------
TOTAL INVESTMENTS - 87.6%
(Cost $15,972,681) 16,317,671
Other Assets and Liabilities (net) - 12.4% 2,309,795
-----------
TOTAL NET ASSETS - 100.0% $18,627,466
===========
</TABLE>
Portfolio Footnotes:
@ Securities that may be resold to "qualified institutional
buyers" under Rule 144A or securities offered pursuant to
Section 4(2) of the Securities Act of 1933, as amended. These
securities have been determined to be liquid under guidelines
established by the Board of Trustees.
(a) Security purchased on a delayed delivery or when-issued basis.
(See note 1 to financial statements)
Yankee - U.S. Dollar denominated bonds issued by non-U.S. companies
in the U.S.
See notes to financial statements
<PAGE> 51
COVA SERIES TRUST
SELECT EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- -----------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 97.6%
AEROSPACE & DEFENSE - 3.0%
AlliedSignal, Inc. .................................. 49,500 $ 1,927,406
Boeing Co. .......................................... 9,000 440,438
Coltec Industries, Inc. * ........................... 38,400 890,400
------------
3,258,244
------------
AUTOMOTIVE - 1.9%
Goodyear Tire & Rubber Co. .......................... 31,100 1,978,738
------------
BANKING - 7.3%
Chase Manhattan Corp. ............................... 9,000 985,500
First Union Corp. ................................... 43,700 2,239,625
Fleet Financial Group, Inc. ......................... 14,400 1,079,100
Nationsbank Corp. ................................... 25,601 1,556,861
Southtrust Corp. .................................... 7,800 494,813
Washington Mutual, Inc. ............................. 24,340 1,553,196
------------
7,909,095
------------
BEVERAGES, FOOD & TOBACCO - 7.1%
Anheuser-Busch Companies, Inc. ...................... 60,000 2,640,000
Pepsico, Inc. ....................................... 35,600 1,297,175
Philip Morris Companies, Inc. ....................... 44,700 2,025,462
Ralston-Ralston Purina Group ........................ 17,000 1,579,938
Unilever N.V. (N.Y. Shares) ......................... 800 49,950
------------
7,592,525
------------
CHEMICALS - 1.3%
Albemarle Corp. ..................................... 14,000 334,250
Dow Chemical Co. .................................... 10,000 1,015,000
------------
1,349,250
------------
COMMERCIAL SERVICES - 1.6%
Waste Management, Inc. .............................. 60,700 1,669,250
------------
COMMUNICATIONS - 5.1%
MCI Communications Corp. ............................ 66,900 2,864,156
Tele-Communications, Inc. * ......................... 91,102 2,579,325
------------
5,443,481
------------
COMPUTER SOFTWARE & PROCESSING - 2.9%
Autodesk, Inc. ...................................... 12,400 458,800
Cisco Systems, Inc. * ............................... 14,200 791,650
First Data Corp. .................................... 61,700 1,804,725
------------
3,055,175
------------
</TABLE>
See notes to financial statements
<PAGE> 52
COVA SERIES TRUST
SELECT EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- -----------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -----------------------------------------------------------------------------------
<S> <C> <C>
COMPUTERS & INFORMATION - 6.3%
EMC Corp. * ......................................... 78,700 $ 2,159,331
International Business Machines Corp. ............... 21,500 2,248,094
Quantum Corp. * ..................................... 50,900 1,021,181
Sun Microsystems, Inc. * ............................ 33,500 1,335,813
------------
6,764,419
------------
CONGLOMERATES - 0.9%
American Express Credit Corp. ....................... 11,300 1,008,525
------------
ELECTRIC UTILITIES - 1.9%
Dominion Resources, Inc. ............................ 21,400 910,838
New England Electric System ......................... 14,100 602,775
Northern States Power Co. ........................... 9,700 565,025
------------
2,078,638
------------
ELECTRICAL EQUIPMENT - 1.0%
Emerson Electric Co. ................................ 18,700 1,055,381
------------
ELECTRONICS - 2.9%
Input/Output, Inc. * ................................ 58,500 1,736,719
Motorola, Inc. ...................................... 12,400 707,575
Perkin-Elmer Corp. .................................. 9,200 653,775
------------
3,098,069
------------
ENTERTAINMENT & LEISURE - 0.9%
International Game Technology ....................... 39,900 1,007,475
------------
FINANCIAL SERVICES - 3.3%
Financial Security Assurance Holdings, Ltd. ......... 20,000 965,000
Morgan Stanley, Dean Witter, Discover & Co. ......... 22,200 1,312,575
Providian Financial Corp. ........................... 27,600 1,247,175
------------
3,524,750
------------
HEALTH CARE PROVIDERS - 3.0%
Humana, Inc. * ...................................... 37,200 771,900
United Healthcare Corp. ............................. 49,300 2,449,594
------------
3,221,494
------------
HEAVY MACHINERY - 2.4%
Cooper Industries, Inc. ............................. 51,800 2,538,200
------------
HOUSEHOLD PRODUCTS - 2.1%
Procter & Gamble Co. ................................ 28,500 2,274,656
------------
</TABLE>
See notes to financial statements
<PAGE> 53
COVA SERIES TRUST
SELECT EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- -----------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -----------------------------------------------------------------------------------
<S> <C> <C>
INDUSTRIAL - DIVERSIFIED - 4.4%
ITT Corp. * ......................................... 8,000 $ 663,000
Temple Inland, Inc. ................................. 26,200 1,370,588
Tenneco, Inc. ....................................... 31,600 1,248,200
Tyco International Ltd. ............................. 30,684 1,382,698
------------
4,664,486
------------
INSURANCE - 2.0%
Marsh & McLennan Cos., Inc. ......................... 28,900 2,154,856
------------
MEDIA - BROADCASTING & PUBLISHING - 1.8%
Time Warner, Inc. ................................... 10,100 626,200
U.S. West Media Group * ............................. 43,200 1,247,400
------------
1,873,600
------------
METALS - 0.4%
Allegheny Teledyne, Inc. ............................ 16,400 424,350
------------
OFFICE EQUIPMENT - 0.6%
Bay Networks, Inc. * ................................ 27,100 692,744
------------
OIL & GAS - 9.9%
Atlantic Richfield Co. .............................. 12,700 1,017,588
British Petroleum Co. Plc (ADR) ..................... 46 3,666
Enron Corp. ......................................... 32,200 1,338,313
Exxon Corp. ......................................... 25,200 1,541,925
Mobil Corp. ......................................... 29,000 2,093,438
Occidental Petroleum Corp. .......................... 36,000 1,055,250
Tosco Corp. ......................................... 92,300 3,490,094
------------
10,540,274
------------
PHARMACEUTICALS - 8.0%
Alza Corp. * ........................................ 20,300 645,794
Crescendo Pharmaceuticals Corp. * ................... 1,115 12,892
Merck & Co., Inc. ................................... 28,200 2,996,250
Pfizer, Inc. ........................................ 29,400 2,192,138
Warner Lambert Co. .................................. 22,100 2,742,999
------------
8,590,073
------------
REAL ESTATE - 3.0%
Simon Debartolo Group, Inc. (REIT) .................. 32,200 1,052,538
Starwood Hotels & Resorts Trust (REIT) .............. 36,700 2,124,013
------------
3,176,551
------------
</TABLE>
See notes to financial statements
<PAGE> 54
COVA SERIES TRUST
SELECT EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- -----------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -----------------------------------------------------------------------------------
<S> <C> <C>
RETAILERS - 3.4%
Circuit City Stores, Inc. ........................... 24,500 $ 871,281
Federated Department Stores, Inc. * ................. 21,100 908,619
Toys "R" Us, Inc. * ................................. 58,700 1,845,381
------------
3,625,281
------------
TELEPHONE SYSTEMS - 3.8%
GTE Corp. ........................................... 43,000 2,246,750
Sprint Corp. ........................................ 30,600 1,793,925
------------
4,040,675
------------
TEXTILES, CLOTHING & FABRICS - 2.9%
Collins & Aikman Corp. * ............................ 69,800 602,025
Fruit of the Loom, Inc. * ........................... 60,900 1,560,563
WestPoint Stevens, Inc. * ........................... 18,800 888,300
------------
3,050,888
------------
TRANSPORTATION - 2.5%
Union Pacific Corp. ................................. 31,100 1,941,806
Wisconsin Central Transport Corp. * ................. 32,500 759,688
------------
2,701,494
------------
TOTAL INVESTMENTS - 97.6%
(Cost $98,564,630) 104,362,637
Other Assets and Liabilities (net) - 2.4% 2,568,238
------------
TOTAL NET ASSETS - 100.0% $106,930,875
============
</TABLE>
Portfolio Footnotes:
* Non-income producing security as this stock did not declare
or pay dividends in the last 12 month period.
ADR - American Depositary Receipt
REIT - Real Estate Investment Trust
See notes to financial statements
<PAGE> 55
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ----------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ----------------------------------------------------------------------------------------
COMMON STOCKS - 99.2%
<S> <C> <C>
AEROSPACE & DEFENSE - 2.5%
AlliedSignal, Inc. ........................................... 6,800 $ 264,775
Boeing Co. ................................................... 9,000 440,408
Coltec Industries, Inc. * .................................... 600 13,913
General Motors Corp. Class H ................................. 600 22,163
Raytheon Co. Class A ......................................... 638 31,480
Raytheon Co. Class B ......................................... 300 15,150
Sundstrand Corp. ............................................. 100 5,038
----------
792,927
----------
AIRLINES - 0.1%
Southwest Airlines, Inc. ..................................... 1,100 27,088
----------
AUTOMOTIVE - 1.9%
Chrysler Corp. ............................................... 8,700 306,131
Cooper Tire & Rubber Co. ..................................... 1,000 24,375
Eaton Corp. .................................................. 400 35,700
Echlin, Inc. ................................................. 800 28,950
Ford Motor Co. ............................................... 100 4,869
Genuine Parts Co. ............................................ 2,000 67,875
Goodyear Tire & Rubber Co. ................................... 2,100 133,613
----------
601,513
----------
BANKING - 8.3%
Associated Banc-Corp. ........................................ 200 11,025
Associates First Capital Corp. ............................... 300 21,338
Banc One Corp. ............................................... 2,800 152,075
BankAmerica Corp. ............................................ 3,500 255,500
BankBoston Corp. ............................................. 700 65,756
Bankers Trust New York Corp. ................................. 500 56,219
Barnett Banks, Inc. .......................................... 200 14,375
Beneficial Corp. ............................................. 300 24,938
Chase Manhattan Corp. ........................................ 2,200 240,900
Citicorp ..................................................... 2,300 290,806
Colonial Bancgroup, Inc. ..................................... 200 6,888
Compass Bancshares, Inc. ..................................... 300 13,125
Crestar Financial Corp. ...................................... 600 34,200
Dime Bancorp, Inc. ........................................... 600 18,150
First American Corp. ......................................... 400 19,900
First Chicago NBD Corp. ...................................... 1,700 141,950
First Commerce Corp. ......................................... 400 26,900
First Hawaiian, Inc. ......................................... 100 3,975
</TABLE>
See notes to financial statements
<PAGE> 56
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ----------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ----------------------------------------------------------------------------------------
BANKING - continued
<S> <C> <C>
First of America Bank Corp. .................................. 100 $ 7,713
First Tennessee National Corp. ............................... 200 13,350
First Union Corp. ............................................ 4,900 251,125
Fleet Financial Group, Inc. .................................. 1,400 104,913
Golden West Financial Corp. .................................. 300 29,344
Greenpoint Financial Corp. ................................... 200 14,513
H.F. Ahmanson & Co. .......................................... 500 33,469
MBNA Corp. ................................................... 2,600 71,013
Mercantile Bancorp., Inc. .................................... 600 36,900
National Commerce Bancorp. ................................... 300 10,575
Nationsbank Corp. ............................................ 4,601 279,798
North Fork Bancorp., Inc. .................................... 400 13,425
Pacific Century Financial Corp. .............................. 400 9,900
Republic New York Corp. ...................................... 300 34,256
Southtrust Corp. ............................................. 500 31,719
Sovereign Bancorp, Inc. ...................................... 400 8,300
Star Banc Corp. .............................................. 400 22,950
TCF Financial Corp. .......................................... 500 16,969
Valley National Bancorp ...................................... 200 7,863
Washington Federal, Inc. ..................................... 200 6,294
Washington Mutual, Inc. ...................................... 1,400 89,338
Wells Fargo & Co. ............................................ 400 135,775
Westamerica Bancorp .......................................... 100 10,225
----------
2,637,747
----------
BEVERAGES, FOOD & TOBACCO - 7.4%
Anheuser-Busch Companies, Inc. ............................... 3,000 132,000
Coca-Cola Co. ................................................ 5,900 393,088
CPC International, Inc. ...................................... 800 86,200
General Mills Co. ............................................ 900 64,463
Heinz (H.J.), Co. ............................................ 100 5,081
Hershey Foods Corp. .......................................... 200 12,388
Kellogg Co. .................................................. 2,500 124,063
Nabisco Holdings Corp. Class A ............................... 300 14,531
Pepsico, Inc. ................................................ 9,000 327,938
Philip Morris Companies, Inc. ................................ 15,100 684,219
Ralston-Ralston Purina Group ................................. 700 65,056
Sara Lee Corp. ............................................... 2,300 129,519
Seagrams Co., Ltd. ........................................... 2,000 64,625
Unilever N.V. (N.Y. Shares) .................................. 4,000 249,750
----------
2,352,921
----------
</TABLE>
See notes to financial statements
<PAGE> 57
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ----------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ----------------------------------------------------------------------------------------
BUILDING MATERIALS - 0.1%
<S> <C> <C>
Owens Corning ................................................ 800 $ 27,300
----------
CHEMICALS - 2.7%
Albemarle Corp. .............................................. 300 7,163
Crompton & Knowles Corp. ..................................... 400 10,600
Cytec Industries, Inc. * ..................................... 300 14,081
Dow Chemical Co. ............................................. 1,300 131,950
Du Pont (E.I.) De Nemours and Co. ............................ 6,100 366,381
Georgia Gulf Corp. ........................................... 200 6,125
International Flavors & Fragrances, Inc. ..................... 600 30,900
Lyondell Petro Chemical Co. .................................. 400 10,600
Monsanto Co. ................................................. 3,200 134,400
PPG Industries, Inc. ......................................... 700 39,988
Praxair, Inc. ................................................ 800 36,000
Rohm & Haas Co. .............................................. 300 28,725
Solutia, Inc. ................................................ 700 18,681
Union Carbide Corp. .......................................... 700 30,056
----------
865,650
----------
COMMERCIAL SERVICES - 0.8%
Service Corp. International .................................. 2,600 96,038
Waste Management, Inc. ....................................... 5,500 151,250
----------
247,288
----------
COMMUNICATIONS - 2.4%
360 Communications Co. * ..................................... 900 18,169
Lucent Technologies, Inc. .................................... 4,100 327,488
MCI Communications Corp. ..................................... 6,100 261,156
Tele-Communications, Inc. (Series A) * ....................... 4,800 134,100
Tele-Communications, Inc. * .................................. 1,700 48,131
----------
789,044
----------
COMPUTER SOFTWARE & PROCESSING - 3.0%
Autodesk, Inc. ............................................... 200 7,400
Cabletron Systems, Inc. * .................................... 1,000 15,000
Cisco Systems, Inc.* ......................................... 6,800 379,100
Computer Associates International, Inc. ...................... 500 26,438
First Data Corp. ............................................. 2,800 81,900
Microsoft Corp * ............................................. 2,500 323,125
Oracle Corp. * ............................................... 6,500 145,031
----------
977,994
----------
</TABLE>
See notes to financial statements
<PAGE> 58
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ----------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ----------------------------------------------------------------------------------------
COMPUTERS & INFORMATION - 4.2%
<S> <C> <C>
Compaq Computer Corp. ........................................ 5,100 $ 287,831
Dell Computer Corp. * ........................................ 2,100 176,400
EMC Corp. * .................................................. 3,300 90,544
International Business Machines Corp. ........................ 6,500 679,656
Quantum Corp. * .............................................. 900 18,056
Sun Microsystems, Inc. * ..................................... 2,500 99,688
----------
1,352,175
----------
CONGLOMERATES - 0.7%
American Express Credit Corp. ................................ 2,400 214,200
----------
COSMETICS & PERSONAL CARE - 1.3%
Avon Products, Inc. .......................................... 800 49,100
Colgate-Palmolive Co. ........................................ 100 7,350
Gillette Co. ................................................. 3,500 351,531
----------
407,981
----------
ELECTRIC UTILITIES - 2.7%
Baltimore Gas and Electric Co. ............................... 800 27,250
Central & South West Corp. ................................... 1,100 29,769
Cinergy Corp. ................................................ 1,000 38,313
CMS Energy Corp. ............................................. 600 26,438
Dominion Resources, Inc. ..................................... 1,200 51,075
DTE Energy Co. ............................................... 300 10,406
Duke Energy Corp. ............................................ 2,400 132,900
Edison International ......................................... 300 8,156
Entergy Corp. ................................................ 1,600 47,900
GPU, Inc. .................................................... 600 25,275
Houston Industries, Inc. ..................................... 1,800 48,038
Illinova Corp. ............................................... 500 13,469
New England Electric System .................................. 400 17,100
NIPSCO Industries, Inc. ...................................... 300 14,831
Northeast Utilities * ........................................ 700 8,269
Northern States Power Co. .................................... 600 34,950
Potomac Electric Power Co. ................................... 800 20,650
Southern Co. ................................................. 4,600 119,025
TECO Energy, Inc. ............................................ 800 22,500
Texas Utilities Co. .......................................... 1,600 66,500
Unicom Corp. ................................................. 1,400 43,050
Union Electric Co. ........................................... 700 30,275
Western Resources, Inc. ...................................... 400 17,200
Wisconsin Energy Corp. ....................................... 700 20,125
----------
873,464
----------
</TABLE>
See notes to financial statements
<PAGE> 59
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ----------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ----------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT - 3.1%
<S> <C> <C>
Applied Materials, Inc. * .................................... 2,400 $ 72,300
Emerson Electric Co. ......................................... 3,300 186,244
General Electric Co. ......................................... 9,300 682,388
General Semiconductor, Inc * ................................. 200 2,313
Grainger (W.W.), Inc. ........................................ 400 38,875
Symbol Technologies, Inc. .................................... 500 18,875
----------
1,000,995
----------
ELECTRONICS - 4.1%
Anixter International, Inc. * ................................ 300 4,950
CommScope, Inc. * ............................................ 200 2,688
General Signal ............................................... 400 16,875
Input/Output, Inc. * ......................................... 200 5,938
Intel Corp. .................................................. 10,900 765,725
Motorola, Inc. ............................................... 4,000 228,250
National Semiconductor Corp. * ............................... 1,100 28,531
NextLevel Systems, Inc.* ..................................... 400 7,150
Perkin-Elmer Corp. ........................................... 600 42,638
Rockwell International Corp. ................................. 1,700 88,825
Sensormatic Electronics Corp. * .............................. 400 6,575
Texas Instruments, Inc. ...................................... 2,600 117,000
Xilinx, Inc. * ............................................... 500 17,531
----------
1,332,676
----------
ENTERTAINMENT & LEISURE - 1.7%
Circus Circus Enterprises, Inc. * ............................ 900 18,450
Harrah's Entertainment, Inc. * ............................... 800 15,100
Hasbro, Inc. ................................................. 2,100 66,150
International Game Technology ................................ 1,200 30,300
Mattel, Inc. ................................................. 3,600 134,100
MGM Grand, Inc. * ............................................ 600 21,638
Mirage Resorts, Inc. * ....................................... 1,700 38,675
Viacom Inc. Class B * ........................................ 3,600 149,175
Walt Disney Co. .............................................. 600 59,438
----------
533,026
----------
FINANCIAL SERVICES - 3.2%
American General Corp. ....................................... 1,700 91,906
A.G. Edwards, Inc. ........................................... 500 19,875
Bear Stearns Companies, Inc. ................................. 600 28,500
Capital One Financial Corp. .................................. 300 16,256
Charter One Financial, Inc. .................................. 300 18,938
ContiFinancial Corp. * ....................................... 200 5,038
</TABLE>
See notes to financial statements
<PAGE> 60
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ----------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ----------------------------------------------------------------------------------------
FINANCIAL SERVICES - continued
<S> <C> <C>
Federal Home Loan Mortgage Corp. ............................. 3,600 $ 150,975
Federal National Mortgage Association ........................ 5,600 319,550
Financial Security Assurance Holdings, Ltd. .................. 200 9,650
Finova Group, Inc ............................................ 300 14,906
Green Tree Financial Corp. ................................... 700 18,331
Household International, Inc. ................................ 500 63,781
Lehman Brothers Holdings, Inc. ............................... 600 30,600
Money Store, Inc. (The) ...................................... 300 6,309
Morgan Stanley, Dean Witter, Discover & Co. .................. 3,000 177,375
Ocwen Financial Corp. * ...................................... 300 7,631
Provident Financial Group, Inc. .............................. 200 9,700
Providian Financial Corp. .................................... 900 40,669
----------
1,029,990
----------
FOOD RETAILERS - 0.7%
Kroger Co. * ................................................. 2,800 103,425
Safeway, Inc. * .............................................. 2,100 132,825
----------
236,250
----------
FOREST PRODUCTS & PAPER - 0.8%
Boise Cascade Corp. .......................................... 700 21,175
Bowater, Inc. ................................................ 500 22,219
Champion International Corp .................................. 800 36,250
Corporate Express, Inc. * .................................... 1,600 20,600
Georgia-Pacific Corp. (Timber Group) * ....................... 600 13,613
Georgia-Pacific Corp. ........................................ 600 36,450
Louisiana Pacific Corp. ...................................... 300 5,700
Mead Corp. ................................................... 1,400 39,200
Stone Container Corp. * ...................................... 700 7,306
Weyerhauser Co. .............................................. 1,100 53,969
----------
256,482
----------
HEALTH CARE PROVIDERS - 1.6%
Columbia/HCA Healthcare Corp. ................................ 7,100 210,338
Health Care & Retirement Corp. * ............................. 500 20,125
Humana, Inc. * ............................................... 3,100 64,325
Tenet Healthcare Corp. * ..................................... 3,700 122,563
United Healthcare Corp. ...................................... 2,300 114,281
----------
531,632
----------
HEAVY CONSTRUCTION - 0.0%
Foster Wheeler Corp. ......................................... 300 8,119
----------
</TABLE>
See notes to financial statements
<PAGE> 61
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ----------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ----------------------------------------------------------------------------------------
HEAVY MACHINERY - 0.7%
<S> <C> <C>
Caterpiller Tractor, Inc. .................................... 2,800 $ 135,975
Cooper Industries, Inc. ...................................... 1,000 49,000
Cummins Engine Co., Inc. ..................................... 300 17,719
Harnischfeger Industries, Inc. ............................... 400 14,125
Smith International, Inc. * .................................. 300 18,413
----------
235,232
----------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 0.5%
Black & Decker Corp. ......................................... 1,200 46,875
Leggett & Platt, Inc. ........................................ 1,200 50,250
Whirlpool Corp. .............................................. 1,000 55,000
----------
152,125
----------
HOUSEHOLD PRODUCTS - 2.1%
Procter & Gamble Co. ......................................... 8,000 638,500
Rubbermaid, Inc. ............................................. 1,900 47,500
----------
686,000
----------
INDUSTRIAL - DIVERSIFIED - 3.0%
Aeroquip-Vickers, Inc. ....................................... 200 9,813
Baker Hughes, Inc. ........................................... 1,200 52,350
Eastman Kodak Co. ............................................ 4,400 267,575
Fluor Corp. .................................................. 600 22,425
ITT Corp. * .................................................. 1,200 99,450
ITT Industries, Inc. ......................................... 1,400 43,925
Johnson Controls, Inc. ....................................... 1,000 47,750
Temple Inland, Inc. .......................................... 700 36,619
Tenneco, Inc. ................................................ 2,100 82,950
Tyco International Ltd. ...................................... 6,800 306,425
----------
969,282
----------
INSURANCE - 5.0%
Aetna, Inc. .................................................. 1,700 119,956
Ambac Financial Group, Inc ................................... 500 23,000
American International Group ................................. 5,100 554,625
Cigna Corp. .................................................. 500 86,531
Fremont General Corp. ........................................ 200 10,950
General RE Corp. ............................................. 100 21,200
Hartford Financial Services Group, Inc. ...................... 900 84,206
Marsh & McLennan Cos., Inc. .................................. 1,200 89,475
MBIA, Inc. ................................................... 800 53,450
Ohio Casualty Corp. .......................................... 200 8,925
PMI Group, Inc. (The) ........................................ 300 21,694
Safeco Corp. ................................................. 1,000 48,750
</TABLE>
See notes to financial statements
<PAGE> 62
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ----------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ----------------------------------------------------------------------------------------
INSURANCE - continued
<S> <C> <C>
St. Paul Cos. ................................................ 600 $ 49,238
Transamerica Corp. ........................................... 400 42,600
Travelers Group, Inc. ........................................ 5,900 317,863
Travelers Property Casualty Corp. Class A .................... 400 17,600
Unum Corp. ................................................... 1,000 54,375
----------
1,604,438
----------
LODGING - 0.2%
Extended Stay America, Inc. * ................................ 700 8,706
Hilton Hotels Corp. .......................................... 2,400 71,400
----------
80,106
----------
MEDIA - BROADCASTING & PUBLISHING - 1.7%
R.R. Donnelley & Sons Co. .................................... 1,500 55,875
Time Warner, Inc. ............................................ 5,300 328,600
U.S. West Media Group * ...................................... 6,200 179,025
----------
563,500
----------
MEDICAL SUPPLIES - 0.6%
Bard (C.R.), Inc. ............................................ 500 15,656
Bausch & Lomb, Inc. .......................................... 700 27,738
Boston Scientific Corp. * .................................... 2,400 110,100
Forest Laboratories Inc. * ................................... 800 39,450
----------
192,944
----------
METALS - 0.8%
Alcan Aluminum Ltd. .......................................... 1,500 41,438
Allegheny Teledyne, Inc. ..................................... 1,200 31,050
Aluminum Company of America .................................. 1,400 98,525
Freeport-McMoran Copper & Gold, Inc. ......................... 1,400 21,438
Oregon Metallurgical Corp. * ................................. 300 10,013
Phelps Dodge Corp. ........................................... 500 31,125
Reynolds Metals Co. .......................................... 600 36,000
----------
269,589
----------
MINING - 0.1%
Inco, Ltd. ................................................... 1,200 20,400
----------
OFFICE EQUIPMENT - 1.2%
Bay Networks, Inc. * ......................................... 1,400 35,788
Harris Corp., Inc. ........................................... 1,000 45,875
Ryder System ................................................. 500 16,375
Xerox Corp. .................................................. 4,000 295,250
----------
393,288
----------
</TABLE>
See notes to financial statements
<PAGE> 63
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ----------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ----------------------------------------------------------------------------------------
OIL & GAS - 8.8%
<S> <C> <C>
Anadarko Petroleum Corp. ..................................... 400 $ 24,275
Ashland, Inc. ................................................ 600 32,213
Atlantic Richfield Co. ....................................... 2,200 176,275
Chevron Corp. ................................................ 2,600 200,200
Consolidated Natural Gas Co. ................................. 600 36,300
Cooper Cameron Corp. * ....................................... 400 24,400
Diamond Offshore Drilling, Inc. .............................. 600 28,875
El Paso Natural Gas Co. ...................................... 400 26,600
Enron Corp. .................................................. 2,400 99,750
ENSCO International, Inc ..................................... 200 6,700
Exxon Corp. .................................................. 13,300 813,794
Falcon Drilling Co., Inc. * .................................. 500 17,531
Halliburton Co. .............................................. 1,600 83,100
Mobil Corp. .................................................. 5,000 360,938
Noble Drilling Corp. * ....................................... 900 27,563
Occidental Petroleum Corp. ................................... 1,300 38,106
Royal Dutch Petroleum Co. (N.Y. Shares) ...................... 6,500 352,219
Schlumberger Ltd. ............................................ 2,900 233,450
Texaco, Inc. ................................................. 3,200 174,000
Tosco Corp. .................................................. 1,100 41,594
Ultramar Diamond Shamrock Corp. .............................. 300 9,563
Valero Energy Corp. .......................................... 400 12,575
----------
2,820,021
----------
PHARMACEUTICALS - 8.4%
Alza Corp.* .................................................. 800 25,450
American Home Products Corp. ................................. 3,200 244,800
Bristol-Myers Squibb Co. ..................................... 7,600 719,150
Chiron Corp. * ............................................... 1,100 18,734
Johnson & Johnson ............................................ 2,700 177,863
Merck & Co., Inc. ............................................ 7,400 786,250
Pfizer, Inc. ................................................. 1,500 111,844
Schering-Plough Corp. ........................................ 3,400 211,225
Warner Lambert Co. ........................................... 3,200 396,800
Watson Pharmaceutical, Inc. * ................................ 1,000 32,438
----------
2,724,554
----------
RESTAURANTS - 1.0%
McDonald's Corp. ............................................. 7,000 334,250
----------
</TABLE>
See notes to financial statements
<PAGE> 64
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ----------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ----------------------------------------------------------------------------------------
RETAILERS - 4.5%
<S> <C> <C>
Albertson's, Inc. ............................................ 400 $ 18,950
American Stores Co. .......................................... 2,200 45,238
AutoZone, Inc. * ............................................. 1,300 37,700
Best Buy Co., Inc. * ......................................... 400 14,750
Circuit City Stores, Inc. .................................... 800 28,450
Dayton-Hudson Corp. .......................................... 2,300 155,250
Dillard's, Inc. Class A ...................................... 1,200 42,300
Federated Department Stores, Inc. * .......................... 1,800 77,513
General Nutrition Co., Inc. * ................................ 600 20,363
Home Depot, Inc. ............................................. 100 5,888
J.C. Penney Co., Inc. ........................................ 100 6,031
Kimberly-Clark Corp. ......................................... 3,400 167,663
K-Mart Corp. * ............................................... 4,100 47,406
May Department Stores ........................................ 1,800 94,838
Nine West Group, Inc. * ...................................... 200 5,188
Sears, Roebuck and Co. ....................................... 3,500 158,375
TJX Companies, Inc. .......................................... 1,200 41,250
Toys "R" Us, Inc. * .......................................... 2,400 75,450
Wal-Mart Stores, Inc. ........................................ 10,200 402,263
----------
1,444,866
----------
TELEPHONE SYSTEMS - 6.0%
Airtouch Communications, Inc. * .............................. 3,600 149,625
AT&T Corp. ................................................... 4,600 281,750
Bell Atlantic Corp. .......................................... 1,400 127,400
Bellsouth Corp. .............................................. 3,900 219,619
GTE Corp. .................................................... 6,900 360,525
SBC Communications, Inc. ..................................... 6,400 468,800
Sprint Corp. ................................................. 3,100 181,738
Worldcom, Inc. * ............................................. 5,200 157,300
----------
1,946,757
----------
TEXTILES, CLOTHING & FABRICS - 0.2%
Fruit of the Loom, Inc. * .................................... 800 20,500
Nike, Inc. ................................................... 1,000 39,250
Reebok International, Ltd. * ................................. 700 20,169
----------
79,919
----------
TRANSPORTATION - 1.1%
Burlington Northern Santa Fe Corp. ........................... 1,000 92,938
CNF Transportation, Inc. ..................................... 300 11,513
Consolidated Freightways Corp. * ............................. 100 1,363
</TABLE>
See notes to financial statements
<PAGE> 65
COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ----------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ----------------------------------------------------------------------------------------
TRANSPORTATION - continued
<S> <C> <C>
CSX Corp. .................................................... 1,300 $ 70,200
Illinois Central Corp. ....................................... 400 13,625
Norfolk Southern Corp. ....................................... 2,400 73,950
Union Pacific Corp. .......................................... 1,500 93,656
Wisconsin Central Transport Corp. * .......................... 300 7,013
----------
364,258
----------
WATER COMPANIES - 0.0%
American Water Works Co. ..................................... 500 13,656
----------
TOTAL INVESTMENTS - 99.2%
(Cost $27,263,342) 31,991,647
Other Assets and Liabilities (net) - 0.8% 264,442
----------
TOTAL NET ASSETS - 100.0% $ 32,256,089
==========
</TABLE>
Portfolio Footnotes:
* Non-income producing security as this stock did not declare
or pay dividends in the 12 month period.
See notes to financial statements
<PAGE> 66
COVA SERIES TRUST
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ---------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
COMMON AND PREFERRED STOCKS - 93.7%
AUSTRALIA - 5.9%
Alcan Australia Ltd. .................................... 50,400 $ 105,784
Amcor Ltd. .............................................. 28,600 125,830
Broken Hill Proprietary Co., Ltd. ....................... 27,600 256,353
CRA Ltd. ................................................ 16,300 190,208
CSR Ltd. ................................................ 69,200 234,544
Email Ltd. .............................................. 27,100 64,014
Foster's Brewing Group Ltd. ............................. 62,000 118,002
Leighton Holdings Ltd. .................................. 29,200 102,015
Mayne Nickless Ltd. ..................................... 32,000 169,155
National Australia Bank Ltd. ............................ 12,500 174,601
News Corporation Ltd. ................................... 79,900 395,487
North Ltd. .............................................. 178,500 470,272
Pacific Dunlop Ltd. ..................................... 55,000 116,509
Pioneer International Ltd ............................... 110,000 300,415
Santos Ltd. ............................................. 52,300 215,443
Southcorp Holdings Ltd. ................................. 52,100 172,511
Telstra Corp., Ltd. * ................................... 45,800 96,722
Western Mining Corp. Holdings Ltd. ...................... 117,900 411,133
Westpac Banking Corp. ................................... 49,020 313,633
-----------
4,032,631
-----------
AUSTRIA - 0.6%
Bank Austria AG-Preferred EM II * ....................... 8,800 391,607
-----------
BELGIUM - 0.7%
Almanij NPV ............................................. 4,000 202,020
Groupe Bruxelles Lambert, S.A. .......................... 636 92,069
Petrofina S.A. NPV ...................................... 445 164,354
-----------
458,443
-----------
FINLAND - 0.6%
UPM-Kymmeme ............................................. 19,700 398,016
-----------
FRANCE - 9.6%
Air Liquide French ...................................... 2,453 384,065
AXA Company ............................................. 5,381 416,510
Carrefour Supermarche ................................... 395 206,150
Cie Generale Des Eaux ................................... 7,642 1,066,946
Compagnie Bancaire S.A. ................................. 1,843 298,666
Compagnie De Saint Goban ................................ 1,973 280,381
Compagnie Financiere de Paribas - Class A ............... 1,400 121,699
</TABLE>
See notes to financial statements
<PAGE> 67
COVA SERIES TRUST
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ---------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
FRANCE - CONTINUED
Elf Sanofi .............................................. 4,139 $ 460,921
Eridania Beghin Say ..................................... 1,187 185,651
France Telecom S.A. ..................................... 8,500 308,410
Lagardere Groupe ........................................ 6,569 217,274
Peugeot S.A. ............................................ 2,240 282,583
Seita ................................................... 3,460 124,218
SGS-Thomson Microelectronics ............................ 5,410 334,950
Societe Generale ........................................ 1,770 241,237
Societe National Elf-Aquitaine .......................... 3,486 405,585
Synthelabo .............................................. 1,469 183,610
Thomson Csf ............................................. 10,000 315,300
Total Cie Francaise Petroles ............................ 2,474 269,338
Union Assurancesfederale S.A. ........................... 2,210 290,185
Usinor Sacilor .......................................... 12,783 184,633
-----------
6,578,312
-----------
GERMANY - 11.7%
Axa Colonia Konzern AG Preferred ........................ 1,450 138,717
Bayer AG ................................................ 9,470 353,960
Bilfinger and Berger Bau AG ............................. 5,940 184,355
Continental AG .......................................... 20,180 445,601
Deutsche Bank AG ........................................ 13,000 918,294
Deutsche Lufthansa AG ................................... 23,800 456,699
Deutsche Pfandbrief & Hypobk ............................ 2,650 157,122
Hannover Rueckversicherungs AG .......................... 3,650 341,065
Henkel KGAA ............................................. 5,210 328,903
Jungheinrich AG ......................................... 560 84,098
Krones AG Preferred ..................................... 230 71,639
Lufthansa ............................................... 10,100 193,809
Muenchener Rueckversicherungs - Gesellschaft AG ......... 2,126 801,729
ProSieben Media AG Preferred ............................ 1,900 88,770
ProSieben Media AG Preferred ............................ 366 7,549
RWE AG .................................................. 5,970 252,361
SAP AG Vorzug ........................................... 850 278,227
SAP AG .................................................. 1,950 592,733
Schering AG ............................................. 2,300 221,953
SGL Carbon AG ........................................... 1,301 167,880
Siemens AG .............................................. 13,650 808,568
SKW Trostberg AG ........................................ 3,270 103,671
Veba AG ................................................. 15,130 1,030,883
Volkswagen AG ........................................... 80 34,574
-----------
8,063,160
-----------
</TABLE>
See notes to financial statements
<PAGE> 68
COVA SERIES TRUST
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ---------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
GREAT BRITAIN - 23.5%
Allied Colloids Group Plc ............................... 66,257 $ 180,884
Amersham International Plc .............................. 4,270 158,848
Bass Plc ................................................ 21,100 328,633
Billiton Plc * .......................................... 56,200 144,185
British Airways Plc ..................................... 25,800 237,612
British Petroleum Co. Plc ............................... 36,242 480,107
British Sky Broadcasting Group Plc ...................... 4,500 33,747
British Telecommunications Plc .......................... 75,200 589,306
Burmah Castrol Plc ...................................... 11,700 196,651
B.A.T. Industries ....................................... 37,100 338,021
Cadbury Schweppes Plc ................................... 17,800 179,882
Compass Group Plc ....................................... 21,800 268,534
Diageo Plc .............................................. 43,500 398,478
General Cable Plc ....................................... 31,600 43,394
General Electric Plc .................................... 14,000 90,831
Glaxo Wellcome Plc ...................................... 47,800 1,141,036
Glynwed International Plc ............................... 56,100 238,959
Great Universal Stores Plc .............................. 29,300 369,593
HSBC Holdings Plc (Frankfurt) ........................... 19,750 506,701
HSBC Holdings Plc (London) .............................. 8,000 197,225
Hutchison Whampoa ....................................... 37,000 232,101
Kingfisher Plc .......................................... 15,700 219,472
Lloyds TSB Group Plc .................................... 103,900 1,353,424
Lucas Variety ........................................... 96,500 341,213
MEPC Plc ................................................ 27,400 228,915
MFI Furniture Group Plc ................................. 114,032 226,920
National Power Plc (New) ................................ 9,000 88,660
Nycomed Amersham Plc .................................... 13,884 503,194
Pearson Plc ............................................. 10,000 130,088
Pilkington Plc .......................................... 97,600 204,654
PowerGen Plc ............................................ 19,000 247,479
Prudential Corp. ........................................ 38,700 471,865
Racal Electronics ....................................... 59,900 263,026
Rank Group .............................................. 40,150 223,844
Reed International Ltd. ................................. 35,700 340,531
RMC Group Plc ........................................... 11,350 160,903
Rolls Royce Plc ......................................... 29,900 115,558
Royal Bank of Scotland .................................. 43,300 552,734
Royal & Sun Alliance Insurance Group Plc ................ 28,000 282,279
</TABLE>
See notes to financial statements
<PAGE> 69
COVA SERIES TRUST
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ---------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
GREAT BRITAIN - CONTINUED
Sainsbury (J.) Plc ...................................... 42,444 $ 355,299
Scottish Power Plc ...................................... 38,800 343,300
Sears Plc ............................................... 224,300 195,508
Shell Transport & Trading ............................... 32,800 230,336
Smith & Nephew Plc ...................................... 23,000 68,086
SmithKline Beecham Plc .................................. 2 20
Standard Chartered Plc .................................. 18,800 204,835
Tomkins Plc ............................................. 46,600 220,718
Unilever Ltd. ........................................... 16,000 137,804
Unilever Plc ............................................ 26,000 223,932
United News & Media Plc ................................. 11,900 135,625
Vickers Plc ............................................. 53,000 205,707
Vodafone Group Plc ...................................... 61,200 441,851
Wessex Water Plc ........................................ 45,400 383,031
Zeneca Group Plc ........................................ 21,750 771,399
-----------
16,226,938
-----------
HONG KONG - 1.1%
Bank of East Asia Hong Kong ............................. 80 187
Dickson Concepts International, Ltd. .................... 73,000 106,473
Hong Kong Electric ...................................... 75,500 286,993
New World Development Co., Ltd. ......................... 48,000 166,041
Swire Pacific Ltd, Class A .............................. 41,500 227,654
-----------
787,348
-----------
IRELAND - 1.3%
Allied Irish Banks Plc .................................. 33,600 325,881
Bank of Ireland ......................................... 3,700 56,834
CRH Plc ................................................. 10,475 122,811
Irish Life Plc .......................................... 21,700 124,731
Smurfit (Jefferson) Group ............................... 47,800 134,991
Waterford Wedgewood ..................................... 112,200 152,029
-----------
917,277
-----------
ITALY - 5.4%
Edison SPA .............................................. 55,200 330,451
ENI SPA ................................................. 131,000 748,508
Istituto Banc San Paolo Torina .......................... 45,000 432,438
Istituto Mobiliare Italiano ............................. 35,000 415,189
Istituto Nazionale delle Assicurazioni .................. 402,000 815,824
Mediolanum SPA .......................................... 10,560 198,896
Parmalat Finanziaria SPA ................................ 187,000 266,962
Telecom Italia SPA-RNC .................................. 109,200 480,097
-----------
3,688,365
-----------
</TABLE>
See notes to financial statements
<PAGE> 70
COVA SERIES TRUST
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ---------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
JAPAN - 13.4%
Asatsu, Inc. ............................................ 3,200 $ 46,277
Ashikaga Bank Ltd. ...................................... 22,000 35,538
Bridgestone Corp. ....................................... 20,000 435,385
Canon Sales Co., Inc. ................................... 6,000 68,769
Canon, Inc. ............................................. 13,000 304,000
Daiwa Danchi Co., Ltd. * ................................ 5,000 7,308
DDI Corp. ............................................... 43 114,115
Ebaba Corp. ............................................. 16,000 169,846
Familymart .............................................. 40 1,440
Fanuc Co. ............................................... 7,000 266,000
Fuji Photo Film ......................................... 9,000 346,154
Fujitsu Ltd. ............................................ 43,000 463,077
Hitachi Ltd . ........................................... 23,000 164,538
Ishihara Sangyo Kaisha * ................................ 20,000 22,308
Ito-Yokado Co., Ltd. .................................... 4,000 204,615
Japan Tobacco, Inc. ..................................... 29 206,569
Keiyo Bank .............................................. 15,000 31,154
Kyodo Printing Co. ...................................... 5,000 19,615
Marubeni Corp. .......................................... 33,000 58,131
Mitsubishi Corp. ........................................ 28,000 221,846
Mitsubishi Estate Co., Ltd. ............................. 34,000 371,385
Mitsubishi Rayon Co. .................................... 37,000 91,077
Mitsui Mining & Smelting ................................ 30,000 120,923
Mitsui Trust & Banking .................................. 71,000 138,177
Nichiei Co., Ltd. (Kyoto) ............................... 2,000 213,846
Nippon Steel Corp. ...................................... 80,000 118,769
Nippon Telegraph and Telephone Corp. .................... 64 551,385
Nishimatsu Construction Co. ............................. 7,000 22,077
Nissan Motors ........................................... 37,000 153,692
Nomura Securities Co., Ltd. ............................. 14,000 187,385
Ono Pharmaceutical ...................................... 500 9,308
Promise Co., Ltd. ....................................... 2,640 147,028
Ricoh Corp., Ltd. ....................................... 21,000 261,692
Rohm Co. ................................................ 1,000 100,769
Sanki Engineering ....................................... 2,000 14,215
Secom Co., Ltd. ......................................... 2,000 128,308
Sekisui Chemical Co., Ltd. .............................. 7,000 35,700
Shin-Etsu Chemical Co. .................................. 12,000 229,846
Sony Corp. .............................................. 4,700 419,385
Sumitomo Forestry ....................................... 9,000 43,962
</TABLE>
See notes to financial statements
<PAGE> 71
COVA SERIES TRUST
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ---------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
JAPAN - CONTINUED
Tadano Ltd. ............................................. 3,000 $ 8,192
Takeda Chemical Industries .............................. 14,000 400,615
TDK Corp. ............................................... 4,000 302,769
The Bank of Tokyo Mitsubishi ............................ 32,000 443,077
Toda Construction Co. ................................... 7,000 19,115
Tokio Marine & Fire Insurance Co. ....................... 4,000 45,538
Tokyo Electric Power Co., Inc. .......................... 4,800 87,877
Tokyo Steel, Mfg. ....................................... 9,000 30,531
Toppan Printing Co., Ltd. ............................... 19,000 248,462
Tostem Corp. ............................................ 7,000 75,385
Toyota Motor Co. ........................................ 26,000 748,000
Yamanouchi Pharmaceutical ............................... 12,000 258,462
Yokogawa Bridge Corp. ................................... 300 762
-----------
9,214,399
-----------
LUXEMBOURG - 0.2%
Arbed ................................................... 950 103,913
-----------
MALAYSIA - 0.0%
Commerce Asset Holdings Berhad .......................... 4,280 2,047
Gamuda Berhad ........................................... 44,000 24,441
-----------
26,488
-----------
NETHERLANDS - 4.2%
Aegon, N.V. ............................................. 4,527 403,219
ING Groep N.V. .......................................... 7,155 301,523
Koninklijke Ahold N.V. .................................. 5,828 152,135
Philips Electronics N.V. ................................ 3,646 218,778
Royal Dutch Petroleum Co. ............................... 28,980 1,591,648
Unilever N.V. ........................................... 3,800 234,394
-----------
2,901,697
-----------
NEW ZEALAND - 1.6%
Brierley Investments Ltd. ............................... 129,000 92,203
Carter Holt Harvey Ltd. ................................. 87,000 134,478
Fletcher Challenge Forestry Shares ...................... 85,000 70,633
Fletcher Challenge Ltd. ................................. 49,000 100,228
Fletcher Challenge Paper Shares ......................... 104,000 135,977
Lion Nathan ............................................. 70,800 158,808
Telecom New Zealand ..................................... 88,600 429,904
-----------
1,122,231
-----------
NORWAY - 0.5%
Kvaerner B .............................................. 3,800 176,447
Norsk Hydro ............................................. 2,900 141,331
-----------
317,778
-----------
</TABLE>
See notes to financial statements
<PAGE> 72
COVA SERIES TRUST
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ---------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
SINGAPORE - 1.6%
City Developments Ltd. .................................. 27,000 $ 125,059
Fraser & Neave Ltd. ..................................... 25,000 108,373
Osprey Maritime Ltd. .................................... 141,000 113,034
Sembawang Maritime Ltd. ................................. 62,000 91,306
Singapore Airlines Ltd. ................................. 53,500 349,466
United Overseas Bank .................................... 53,000 294,270
Wong's Circuits Holdings Ltd. * ......................... 72,000 47,160
-----------
1,128,668
-----------
SPAIN - 3.1%
Acerinox, S.A. .......................................... 500 73,833
Banco Bilbao Vizcaya, S.A. .............................. 16,300 527,394
Banco Popular Espanola S.A. ............................. 1,520 106,241
Hidroelectrica Del Cantabrico ........................... 2,200 96,449
Iberdrola I.S.A. ........................................ 80,000 1,052,701
Repsol S.A. ............................................. 4,100 174,903
Vallehermoso SA ......................................... 3,233 99,088
-----------
2,130,609
-----------
SWEDEN - 1.6%
Autoliv, Inc. ........................................... 11,100 361,766
Incentive AB-B Shares ................................... 2,755 249,049
Skandia Forsakrings AB .................................. 10,489 495,257
-----------
1,106,072
-----------
SWITZERLAND - 6.8%
ABB AG - Bearer New * ................................... 100 124,820
ABB AG .................................................. 218 274,388
Liechtenstein Global Trust .............................. 240 148,981
Holderbank Finan Glaris Class B ......................... 156 127,548
Nestle .................................................. 600 900,885
Novartis AG ............................................. 411 670,669
Roche Holding AG ........................................ 107 1,064,569
UBS (Schw. Bank Gesellschaft) ........................... 937 1,357,394
-----------
4,669,254
-----------
UNITED STATES - 0.3%
Ispat International, N.V. * ............................. 4,679 95,920
Westpac Banking Strypes Trust ........................... 3,400 113,900
-----------
209,820
-----------
Total Common and Preferred Stocks (Cost $63,658,134) 64,473,026
-----------
</TABLE>
See notes to financial statements
<PAGE> 73
COVA SERIES TRUST
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- -----------------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION (NOTE 1)
- -----------------------------------------------------------------------------------------------------
PAR AMOUNT FOREIGN BONDS AND DEBT SECURITIES - 0.4% COUPON MATURITY
JAPAN - 0.4%
<S> <C> <C> <C>
(Y)10,000,000 BOT Cayman Finance Ltd ........................... 4.25% 03/31/03 $ 83,846
(Y)10,000,000 STB Cayman Capital Ltd ........................... 4.25% 10/01/07 57,069
(Y)10,000,000 Yamanouchi Pharmaceutical ........................ 4.25% 03/31/14 109,038
-----------
249,953
-----------
Total Foreign Bonds and Debt Securities (Cost $298,078) ............... 249,953
-----------
WARRANTS - 0.4%
GERMANY - 0.3% SHARES
Muenchener Rueckversicherungs (expiring 03/13/98) ............ 250 146,004
Volkswagen AG (expiring 10/27/98) ............................ 250 70,777
-----------
216,781
-----------
JAPAN - 0.1%
Shin-Etsu Chemical Co. (expiring 08/01/00) ................... 14 36,400
-----------
MALAYSIA - 0.0%
Commerce Asset Holdings Berhad (expiring 12/31/02) ........... 112 53
-----------
Total Warrants (Cost $199,104) 253,234
-----------
TOTAL INVESTMENTS - 94.5%
(Cost $64,155,316) 64,976,213
Other Assets and Liabilities (net) - 5.5% 3,792,826
-----------
TOTAL NET ASSETS - 100.0% $68,769,039
===========
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security as this stock did not
declare or pay dividends in the 12 month period.
(Y) - Japanese Yen
See notes to financial statements
<PAGE> 74
COVA SERIES TRUST
MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
PAR SECURITY VALUE
AMOUNT DESCRIPTION RATE MATURITY (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS - 98.6%
BANKERS ACCEPTANCE - 17.9%
$2,153,334 Bank of America ................................. 5.500% 01/12/98 $2,149,715
1,000,000 Chase Manhattan Corp. ........................... 5.780% 01/14/98 997,913
790,429 Union Bank of California ........................ 5.750% 01/12/98 789,040
-----------
3,936,668
-----------
COMMERCIAL PAPER - 47.5%
1,500,000 American Express Credit Corp. ................... 5.540% 03/10/98 1,484,303
2,000,000 Associates Corp. of North America ............... 5.510% 02/19/98 1,985,000
1,500,000 Chevron UK Investment Plc ....................... 5.720% 01/22/98 1,494,995
1,500,000 CIT Group Holdings, Inc. ........................ 5.540% 01/26/98 1,494,229
1,000,000 Ford Motor Credit Co. ........................... 5.830% 01/16/98 997,571
2,000,000 General Electric Capital Corp. .................. 5.540% 01/13/98 1,996,307
1,000,000 John Deere Capital Corp. ........................ 5.780% 01/16/98 997,592
-----------
10,449,997
-----------
MUNICIPAL BONDS - 12.7%
1,500,000 Botsford General Hospital Michigan Revenue ...... 6.700%# 02/15/27 1,500,000
1,280,000 New York City Taxable ........................... 6.050%# 01/12/98 1,280,000
-----------
2,780,000
-----------
U.S. GOVERNMENT AGENCIES - 20.5%
1,000,000 Federal Home Loan Bank (Discount Note) .......... 5.370% 01/07/98 999,105
1,500,000 Federal Home Loan Bank .......................... 5.750% 02/27/98 1,500,000
2,000,000 Federal Home Loan Bank .......................... 5.875% 09/24/98 2,000,000
-----------
4,499,105
-----------
Total Short-Term Investments (Cost $21,665,770) 21,665,770
-----------
REPURCHASE AGREEMENT - 1.0%
J.P Morgan U.S. Gov't Repurchase Agreement at 6.25% due
01/02/98, collaterized by U.S. Treasury Note, $230,000 par,
5.875% coupon, due 08/15/98, dated 08/09/95, repurchase
proceeds of $230,080.
230,000 (Cost $230,000). 01/02/98 230,000
-----------
TOTAL INVESTMENTS - 99.6%
(Cost $21,895,770) 21,895,770
Other Assets and Liabilities (net) - 0.4% 82,993
-----------
TOTAL NET ASSETS - 100.0% $21,978,763
===========
</TABLE>
PORTFOLIO FOOTNOTES:
# Variable rate security. Interest rate resets either daily or
weekly. The rate shown represents the rate in effect at
December 31, 1997.
See notes to financial statements
<PAGE> 75
COVA SERIES TRUST
QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
PAR SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DOMESTIC BONDS AND DEBT SECURITIES - 87.7%
AIRLINES - 5.1%
$1,000,000 Delta Air Lines, Inc. .................................. 10.500% 04/30/16 $ 1,319,010
1,000,000 United Air Lines, Inc. ................................. 9.125% 01/15/12 1,203,106
-----------
2,522,116
-----------
BANKING - 11.0%
1,000,000 Advanta Bank Corp. ..................................... 6.520% 04/30/98 1,001,980
2,000,000 Bank of New York ....................................... 8.500% 12/15/04 2,234,440
2,000,000 Chase Manhattan Corp. .................................. 9.750% 11/01/01 2,239,184
-----------
5,475,604
-----------
BEVERAGES, FOOD & TOBACCO - 2.0%
1,000,000 Archer-Daniels-Midland Co. ............................. 6.750% 12/15/27 1,004,744
-----------
CHEMICALS - 2.1%
1,000,000 Solutia, Inc. .......................................... 7.375% 10/15/27 1,034,990
-----------
CONGLOMERATES - 2.3%
1,000,000 General Electric Capital Corp. ......................... 5.800% 04/01/08 1,146,435
-----------
CONSUMER SERVICES - 5.0%
2,200,000 Yale University ........................................ 7.375% 04/15/26 2,487,646
-----------
ELECTRIC UTILITIES - 2.0%
1,000,000 Nipsco Capital Markets, Inc. ........................... 6.780% 12/01/27 1,009,930
-----------
ELECTRICAL EQUIPMENT - 2.0%
1,000,000 Polaroid Corp. ......................................... 6.750% 01/15/02 1,015,297
-----------
ENVIRONMENTAL CONTROLS - 4.1%
2,000,000 USA Waste Services, Inc. (a) ........................... 7.000% 10/01/04 2,047,996
-----------
FINANCIAL SERVICES - 6.0%
2,000,000 Corp Andina De Fomento (144A) @ ........................ 7.250% 04/30/98 2,007,780
1,000,000 Lehman Brothers Holdings, Inc. ......................... 6.625% 12/27/02 1,005,161
-----------
3,012,941
-----------
HEAVY MACHINERY - 2.1%
1,000,000 Black & Decker Corp. ................................... 7.500% 04/01/03 1,049,147
-----------
INSURANCE - 2.1%
1,000,000 American Annuity Group, Inc. ........................... 7.250% 09/28/01 1,022,640
-----------
LODGING - 2.1%
1,000,000 Hilton Hotels Corp. .................................... 7.375% 06/01/02 1,021,850
-----------
MEDIA - BROADCASTING & PUBLISHING - 2.1%
1,000,000 Turner Broadcasting Systems, Inc. ...................... 7.400% 02/01/04 1,040,420
-----------
</TABLE>
See notes to financial statements
<PAGE> 76
COVA SERIES TRUST
QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
PAR SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OIL & GAS - 17.4%
$2,000,000 NGC Corp. Capital Trust (Series B) ..................... 8.316% 06/01/27 $ 2,268,340
2,000,000 Panenergy Corp. ........................................ 7.000% 10/15/06 2,085,328
1,000,000 Tosco Corp. ............................................ 7.625% 05/15/06 1,073,678
2,000,000 USX Corp. .............................................. 9.800% 07/01/01 2,218,330
1,000,000 Weatherford Enterra, Inc. .............................. 7.250% 05/15/06 1,047,382
-----------
8,693,058
-----------
PHARMACEUTICALS - 2.2%
1,000,000 Johnson & Johnson ...................................... 8.250% 11/09/04 1,111,111
-----------
REAL ESTATE - 2.1%
1,000,000 Federal Realty Investment Trust (REIT) ................. 8.875% 01/15/00 1,046,475
-----------
RETAILERS - 6.3%
1,000,000 Federated Department Stores, Inc. ...................... 8.125% 10/15/02 1,072,830
2,000,000 Gap, Inc. .............................................. 6.900% 09/15/07 2,075,520
-----------
3,148,350
-----------
TELEPHONE SYSTEMS - 6.4%
2,000,000 LCI International, Inc. ................................ 7.250% 06/15/07 2,077,360
1,000,000 Worldcom, Inc. ......................................... 7.750% 04/01/27 1,101,790
-----------
3,179,150
-----------
TRANSPORTATION - 2.3%
1,000,000 Norfolk Southern Corp. ................................. 7.800% 05/15/27 1,126,280
-----------
Total Corporate Bonds (Cost $41,376,089) 43,196,180
-----------
U.S.GOVERNMENT AGENCY MORTGAGE BACKED SECURITIES - 0.9%
138,259 Federal Home Loan Bank ................................. 4.140% 06/04/98 137,491
46,952 Federal Home Loan Mortgage Corp ........................ 8.000% 09/01/08 48,581
97,280 Federal National Mortgage Association .................. 7.500% 12/25/19 99,787
48,520 Federal National Mortgage Association .................. 8.500% 07/01/19 50,718
44,808 Federal National Mortgage Association .................. 8.000% 09/01/03 46,405
98,192 Government National Mortgage Association ............... 9.000% 01/15/20 105,127
-----------
Total Mortgage Backed Securities (Cost $439,768) 488,109
-----------
CORPORATE MORTGAGE BACKED SECURITIES - 0.1%
46,282 Citicorp Mortgage Securities ........................... 6.250% 08/25/24 46,160
-----------
(Cost $45,617)
Total Domestic Bonds and Debt Securities (Cost $41,861,474) 43,730,449
-----------
FOREIGN BONDS AND DEBT SECURITIES - 10.6%
CANADA - 5.4%
1,390,000 Hydro-Quebec (Yankee) .................................. 11.750% 02/01/12 2,021,366
600,000 Hydro-Quebec (Yankee) .................................. 13.250% 12/15/13 668,061
-----------
2,689,427
-----------
CAYMAN ISLANDS - 2.0%
1,000,000 BCH Cayman Islands, Ltd. (Yankee) ...................... 6.500% 02/15/06 990,008
-----------
NORWAY - 3.2%
1,500,000 Petroleum Geo-Services (Yankee) ........................ 7.500% 03/31/07 1,600,556
-----------
Total Foreign Bonds and Debt Securities (Cost $5,104,248) 5,279,991
-----------
</TABLE>
See notes to financial statements
<PAGE> 77
COVA SERIES TRUST
QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
PAR SECURITY VALUE
AMOUNT DESCRIPTION MATURITY (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS - 0.3%
J.P Morgan U.S. Gov't Repurchase Agreement at 6.25% due
01/02/98, collaterized by U.S. Treasury Bond, $115,000 par,
8.50% coupon, due 02/15/20, dated 02/15/90, repurchase
proceeds of $149,052.
$149,000 (Cost $149,000). 01/02/98 $ 149,000
-----------
TOTAL INVESTMENTS - 98.6%
(Cost $47,114,722) 49,159,440
Other Assets and Liabilities (net) - 1.4% 676,220
-----------
TOTAL NET ASSETS - 100.0% $49,835,660
===========
</TABLE>
Portfolio Footnotes:
@ Securities that may be resold to "qualified institutional
buyers" under Rule 144A or securities offered pursuant to
Section 4(2) of the Securities Act of 1933, as amended. These
securities have been determined to be liquid under guidelines
established by the Board of Trustees.
(a) Assets segregated for open futures
REIT - Real Estate Investment Trust
Yankee - U.S. Dollar denominated bonds issued by non-U.S.
companies in the U.S.
See notes to financial statements
<PAGE> 78
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 96.3%
AEROSPACE & DEFENSE - 1.9%
AlliedSignal, Inc. .............................................. 6,600 $ 256,988
Boeing Co. ...................................................... 11,500 562,781
General Dynamics Corp. .......................................... 900 77,794
Lockheed Martin Corp. ........................................... 2,300 226,550
Northrop Grumman Corp. .......................................... 800 92,000
Raytheon Co. Class B ............................................ 2,900 146,450
Textron, Inc. ................................................... 2,100 131,250
United Technologies Corp. ....................................... 2,800 203,875
----------
1,697,688
----------
AIRLINES - 0.4%
AMR Corp. ....................................................... 1,000 128,500
Delta Air Lines, Inc. ........................................... 1,000 119,000
Southwest Airlines, Inc. ........................................ 2,550 62,794
US Airways Group, Inc. .......................................... 1,000 62,500
----------
372,794
----------
AUTOMOTIVE - 2.3%
Chrysler Corp. .................................................. 8,200 288,538
Dana Corp. ...................................................... 1,400 66,500
Eaton Corp. ..................................................... 1,000 89,250
Ford Motor Co. .................................................. 13,800 671,888
General Motors Corp. ............................................ 8,500 515,313
Genuine Parts ................................................... 2,700 91,631
Goodyear Tire & Rubber Co. ...................................... 2,000 127,250
Meritor Automotive, Inc. ........................................ 866 18,240
Navistar International Corp. * .................................. 1,200 29,775
Paccar, Inc. .................................................... 1,100 57,750
TRW, Inc. ....................................................... 1,700 90,738
----------
2,046,873
----------
BANKING - 8.6%
Banc One Corp. .................................................. 6,500 353,031
Bank of New York ................................................ 4,500 260,156
BankAmerica Corp. ............................................... 8,100 591,300
BankBoston Corp. ................................................ 1,700 159,694
Bankers Trust New York Corp. .................................... 1,100 123,681
Barnett Banks, Inc. ............................................. 2,300 165,313
Beneficial Corp. ................................................ 1,100 91,438
Chase Manhattan Corp. ........................................... 4,800 525,600
Citicorp ........................................................ 5,200 657,475
Comerica, Inc. .................................................. 1,300 117,325
Corestates Financial Corp. ...................................... 2,500 200,156
Fifth Third Bancorp ............................................. 1,900 155,325
</TABLE>
See notes to financial statements
<PAGE> 79
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
BANKING - continued
First Chicago NBD Corp. ......................................... 3,600 $ 300,600
First Union Corp. ............................................... 6,600 338,250
Fleet Financial Group, Inc. ..................................... 3,000 224,813
Golden West Financial Corp. ..................................... 800 78,250
Huntington Bancshares, Inc. ..................................... 2,100 75,600
H.F. Ahmanson & Co. ............................................. 1,300 87,019
KeyCorp ......................................................... 2,600 184,113
MBNA Corp. ...................................................... 6,450 176,166
Mellon Bank Corp. ............................................... 3,100 187,938
National City Corp. ............................................. 2,600 170,950
Nationsbank Corp. ............................................... 8,300 504,744
Norwest Corp. ................................................... 8,600 332,175
PNC Bank Corp. .................................................. 3,800 216,838
Republic New York Corp. ......................................... 700 79,931
State Street Corp. .............................................. 2,000 116,375
Suntrust Banks, Inc. ............................................ 2,600 185,575
U.S. Bancorp .................................................... 2,800 313,425
Wachovia Corp. .................................................. 2,000 162,250
Washington Mutual, Inc. ......................................... 2,800 178,675
Wells Fargo & Co. ............................................... 1,000 339,438
----------
7,653,619
----------
BEVERAGES, FOOD & TOBACCO - 8.1%
Anheuser-Busch Companies, Inc. .................................. 5,700 250,800
Archer-Daniels-Midland Co. ...................................... 6,600 143,138
Brown Forman Corp. Class B ...................................... 1,100 60,775
Campbell Soup Co. ............................................... 5,400 313,875
Coca-Cola Co. ................................................... 28,600 1,905,475
Conagra, Inc. ................................................... 5,600 183,750
CPC International, Inc. ......................................... 1,600 172,400
Fortune Brands, Inc. ............................................ 2,100 77,831
General Mills Co. ............................................... 1,800 128,925
Heinz (H.J.), Co. ............................................... 4,200 213,413
Hershey Foods Corp. ............................................. 1,700 105,294
Kellogg Co. ..................................................... 4,800 238,200
Pepsico, Inc. ................................................... 17,600 641,300
Philip Morris Companies, Inc. ................................... 27,800 1,259,688
Pioneer Hi-Bred International, Inc. ............................. 1,000 107,250
Quaker Oats Co. ................................................. 1,900 100,225
Ralston-Ralston Purina Group .................................... 1,300 120,819
Sara Lee Corp. .................................................. 5,600 315,350
Seagrams Co., Ltd. .............................................. 4,500 145,406
</TABLE>
See notes to financial statements
<PAGE> 80
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
BEVERAGES, FOOD & TOBACCO - continued
Sysco Corp. ..................................................... 2,400 $ 109,350
Unilever N.V. ................................................... 7,200 449,550
UST, Inc. ....................................................... 2,600 96,038
Wrigley (William Jr), Co. ....................................... 1,400 111,388
----------
7,250,240
----------
BUILDING MATERIALS - 0.2%
Masco Corp. ..................................................... 2,100 106,838
Sherwin Williams Co. ............................................ 2,600 72,150
----------
178,988
----------
CHEMICALS - 2.4%
Air Products & Chemicals, Inc. .................................. 1,400 115,150
Dow Chemical Co. ................................................ 2,700 274,050
Du Pont (E.I.) De Nemours and Co. ............................... 13,000 780,766
Eastman Chemical Co. ............................................ 1,200 71,475
Grace (W.R.), & Co. ............................................. 900 72,394
Hercules, Inc. .................................................. 1,300 65,081
International Flavors & Fragrances, Inc. ........................ 1,500 77,250
Monsanto Co. .................................................... 6,800 285,600
Morton International, Inc. ...................................... 1,900 65,313
PPG Industries .................................................. 2,200 125,675
Praxair, Inc. ................................................... 1,900 85,500
Rohm & Haas Co. ................................................. 800 76,600
Sigma Aldrich Corp. ............................................. 1,500 59,625
Union Carbide Corp. ............................................. 1,600 68,700
----------
2,223,179
----------
COMMERCIAL SERVICES - 0.8%
Cendant Corp. * ................................................. 9,566 328,827
Equifax, Inc. ................................................... 2,000 70,875
Interpublic Group, Inc. ......................................... 1,700 84,681
Service Corp. International ..................................... 3,100 114,506
Waste Management, Inc. .......................................... 5,400 148,500
----------
747,389
----------
COMMUNICATIONS - 1.8%
3 Com Corp. ..................................................... 3,900 136,256
Alltel Corp. .................................................... 2,600 106,763
Andrew Corp. * .................................................. 1,300 31,200
DSC Communications .............................................. 1,400 33,600
Lucent Technologies, Inc. ....................................... 7,500 599,063
MCI Communications Corp. ........................................ 8,100 346,781
Tele-Communications, Inc. (Series A) * .......................... 7,800 217,913
Tellabs, Inc. * ................................................. 2,200 116,325
----------
1,587,901
----------
</TABLE>
See notes to financial statements
<PAGE> 81
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
COMPUTER SOFTWARE & PROCESSING - 4.1%
Adobe Systems, Inc. ............................................. 900 $ 37,125
Automatic Data Processing, Inc. ................................. 3,500 214,813
Cabletron Systems, Inc. * ....................................... 1,900 28,500
Ceridian Corp. * ................................................ 1,200 54,975
Cisco Systems, Inc. * ........................................... 11,550 643,913
Computer Associates International, Inc. ......................... 6,300 333,113
Computer Sciences Corp. ......................................... 1,000 83,500
First Data Corp. ................................................ 5,300 155,025
Microsoft Corp. * ............................................... 13,800 1,783,650
Novell Inc. ..................................................... 4,600 34,500
Oracle Corp. * .................................................. 11,400 254,363
Parametric Technology Co. * ..................................... 1,600 75,700
----------
3,699,177
----------
COMPUTERS & INFORMATION - 3.8%
Apple Computer, Inc. * .......................................... 1,600 21,000
Cognizant Corp. ................................................. 2,200 98,038
Compaq Computer Corp. ........................................... 8,600 485,363
Dell Computer Corp. * ........................................... 3,900 327,600
Digital Equipment Corp. ......................................... 1,900 70,300
EMC Corp. * ..................................................... 5,800 159,138
Hewlett-Packard Co. ............................................. 11,700 731,250
International Business Machines Corp. ........................... 11,500 1,202,469
Seagate Technology, Inc * ....................................... 2,900 55,825
Silicon Graphics, Inc. .......................................... 2,200 27,363
Sun Microsystems, Inc. * ........................................ 4,300 171,463
Unisys Corp. .................................................... 2,600 36,075
Unova, Inc. * ................................................... 800 13,150
----------
3,399,034
----------
CONGLOMERATES - 0.6%
American Express Credit Corp. ................................... 5,600 499,800
----------
CONTAINERS & PACKAGING - 0.2%
Avery-Dennison Corp. ............................................ 1,400 62,650
Crown Cork & Seal, Inc. ......................................... 1,600 80,200
----------
142,850
----------
COSMETICS & PERSONAL CARE - 1.1%
Avon Products, Inc. ............................................. 1,700 104,338
Colgate-Palmolive Co. ........................................... 3,500 257,250
Gillette Co. .................................................... 6,400 642,800
----------
1,004,388
----------
</TABLE>
See notes to financial statements
<PAGE> 82
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ELECTRIC UTILITIES - 2.6%
American Electric Power Co. ..................................... 2,400 $ 123,900
Carolina Power & Light Co. ...................................... 2,200 93,363
Central & South West Corp. ...................................... 3,600 97,425
Cinergy Corp. ................................................... 2,300 88,119
Consolidated Edison of N.Y. ..................................... 3,300 135,300
Dominion Resources, Inc. ........................................ 2,500 106,406
DTE Energy Co. .................................................. 2,500 86,719
Duke Power Co. .................................................. 4,100 227,038
Edison International ............................................ 5,000 135,938
Entergy Corp. ................................................... 3,700 110,769
FPL Group, Inc. ................................................. 2,200 130,213
Houston Industries, Inc. ........................................ 4,200 112,088
Pacificorp ...................................................... 4,200 114,713
Peco Energy Co. ................................................. 3,900 94,575
Public Service Enterprise Group, Inc. ........................... 3,500 110,906
PG&E Corp. ...................................................... 5,400 164,363
Southern Co. .................................................... 8,100 209,588
Texas Utilities Co. ............................................. 3,100 128,844
Unicom Corp. .................................................... 3,600 110,700
----------
2,380,967
----------
ELECTRICAL EQUIPMENT - 4.2%
AMP Inc. ........................................................ 2,700 113,400
Applied Materials, Inc. ......................................... 4,200 126,525
Emerson Electric Co. ............................................ 5,300 299,119
General Electric Co. ............................................ 37,600 2,758,900
Grainger (W.W.), Inc. ........................................... 800 77,750
Northern Telecom Ltd. ........................................... 3,100 275,900
Polaroid Corp. .................................................. 700 34,081
Raychem Corp. ................................................... 1,200 51,675
Thermo Electron Corp. * ......................................... 1,900 84,550
----------
3,821,900
----------
ELECTRONICS - 2.9%
Advanced Micro Devices .......................................... 1,700 30,494
CBS Corp. ....................................................... 7,500 220,781
Honeywell, Inc. ................................................. 1,600 109,600
Intel Corp. ..................................................... 18,900 1,327,725
LSI Logic Corp. ................................................. 1,700 33,575
Micron Technology, Inc. ......................................... 2,500 65,000
Motorola, Inc. .................................................. 6,900 393,731
National Semiconductor Corp. .................................... 1,700 44,094
NextLevel Systems, Inc. * ....................................... 2,100 37,538
</TABLE>
See notes to financial statements
<PAGE> 83
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ELECTRONICS - continued
Perkin-Elmer Corp. .............................................. 700 $ 49,744
Rockwell International Corp. .................................... 2,600 135,850
Texas Instruments, Inc. ......................................... 4,400 198,000
----------
2,646,132
----------
ENTERTAINMENT & LEISURE - 1.4%
Brunswick Corp., Inc. ........................................... 1,500 45,469
Harrah's Entertainment, Inc. .................................... 1,500 28,313
Hasbro, Inc. .................................................... 1,800 56,700
Mattel, Inc. .................................................... 3,500 130,375
Mirage Resorts, Inc. * .......................................... 2,300 52,325
Viacom Inc. Class B ............................................. 4,300 178,181
Walt Disney Co. ................................................. 7,700 762,781
----------
1,254,144
----------
ENVIRONMENTAL CONTROLS - 0.1%
Browning-Ferris Industries, Inc. ................................ 2,700 99,900
----------
FINANCIAL SERVICES - 2.6%
American General Corp. .......................................... 2,900 156,781
Block, (H.& R.), Inc. ........................................... 1,600 71,700
Charles Schwab Corp. ............................................ 3,450 144,684
Countrywide Credit Industries, Inc. ............................. 1,600 68,600
Federal Home Loan Mortgage Corp. ................................ 8,200 343,888
Federal National Mortgage Association ........................... 12,100 690,456
Green Tree Financial Corp. ...................................... 1,800 47,138
Household International, Inc. ................................... 1,400 178,588
J.P. Morgan & Co., Inc. ......................................... 2,100 237,038
Merrill Lynch & Co., Inc. ....................................... 4,000 291,750
MGIC Investment Corp. ........................................... 1,500 99,750
Providian Financial Corp. ....................................... 1,400 63,263
----------
2,393,636
----------
FOREST PRODUCTS & PAPER - 0.8%
Champion International .......................................... 1,200 54,375
Fort James Corp. ................................................ 2,300 87,975
Georgia-Pacific Corp. (Timber Group) * .......................... 1,100 24,956
Georgia-Pacific Corp. ........................................... 1,100 66,825
International Paper Co. ......................................... 3,500 150,938
Mead Corp. ...................................................... 1,600 44,800
Union Camp Corp. ................................................ 1,000 53,688
Westvaco Corp. .................................................. 1,700 53,444
Weyerhauser Co. ................................................. 2,400 117,750
Willamette Industries, Inc. ..................................... 1,400 45,063
----------
699,814
----------
</TABLE>
See notes to financial statements
<PAGE> 84
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE PROVIDERS - 1.0%
Columbia/HCA Healthcare Corp. ................................... 7,800 $ 231,075
Healthsouth Corp. * ............................................. 4,200 116,550
Humana, Inc. * .................................................. 2,300 47,725
Medtronic, Inc. ................................................. 5,600 292,950
Tenet Healthcare Corp. .......................................... 3,700 122,563
United Healthcare Corp. ......................................... 2,200 109,313
----------
920,176
----------
HEAVY MACHINERY - 0.9%
Case Corp. ...................................................... 1,000 60,438
Caterpiller Tractor, Inc. ....................................... 4,500 218,531
Cooper Industries, Inc. ......................................... 1,500 73,500
Cummins Engine Co., Inc. ........................................ 600 35,438
Deere & Co. ..................................................... 3,100 180,769
Ingersoll-Rand Co. .............................................. 2,950 119,475
Pall Corp. ...................................................... 2,000 41,375
Parker-Hannifin Corp. ........................................... 1,650 75,694
----------
805,220
----------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 0.1%
Black & Decker Corp. ............................................ 1,400 54,688
Whirlpool Corp. ................................................. 1,100 60,500
----------
115,188
----------
HOUSEHOLD PRODUCTS - 1.8%
Clorox Co. ...................................................... 1,400 110,688
Newell Co. ...................................................... 2,100 89,250
Owens-Illinois, Inc. * .......................................... 1,800 68,288
Procter & Gamble Co. ............................................ 15,600 1,245,075
Rubbermaid, Inc. ................................................ 2,200 55,000
Stanley Works, (The) ............................................ 1,300 61,344
----------
1,629,645
----------
INDUSTRIAL - DIVERSIFIED - 2.0%
Armstrong World Industries, Inc. ................................ 800 59,800
Baker Hughes, Inc. .............................................. 1,800 78,525
Corning, Inc. ................................................... 2,800 103,950
Dover Corp. ..................................................... 2,800 101,150
Eastman Kodak Co. ............................................... 3,800 231,088
Fluor Corp. ..................................................... 1,200 44,850
Illinois Tool Works, Inc. ....................................... 3,100 186,388
ITT Corp. * ..................................................... 1,400 116,025
ITT Industries, Inc. ............................................ 1,700 53,338
Johnson Controls, Inc. .......................................... 1,200 57,300
</TABLE>
See notes to financial statements
<PAGE> 85
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
INDUSTRIAL - DIVERSIFIED - continued
Minnesota Mining & Manufacturing Co. ............................ 4,800 $ 393,900
Temple Inland, Inc. ............................................. 800 41,850
Tenneco, Inc. ................................................... 2,200 86,900
Tyco International Ltd. ......................................... 6,200 279,388
----------
1,834,452
----------
INSURANCE - 4.7%
Aetna, Inc. ..................................................... 1,800 127,013
Allstate Corp. .................................................. 5,100 463,463
American International Group .................................... 8,000 870,000
Aon Corp. ....................................................... 2,000 117,250
Chubb Corp. ..................................................... 2,100 158,813
Cigna Corp. ..................................................... 800 138,450
Conseco, Inc. ................................................... 2,200 99,963
General RE Corp. ................................................ 900 190,800
Hartford Financial Services Group, Inc. ......................... 1,400 130,988
Jefferson Pilot Corp. ........................................... 1,000 77,875
Lincoln National Corp. .......................................... 1,300 101,563
Loews Corp. ..................................................... 1,400 148,575
Marsh & McLennan Cos., Inc. ..................................... 2,000 149,125
MBIA, Inc. ...................................................... 1,000 66,813
Progressive Corp. ............................................... 900 107,888
Safeco Corp. .................................................... 1,600 78,000
St. Paul Cos. ................................................... 1,100 90,269
SunAmerica, Inc. ................................................ 2,500 106,875
Torchmark Corp. ................................................. 1,800 75,713
Transamerica Corp. .............................................. 900 95,850
Travelers Group, Inc. ........................................... 13,962 752,203
Unum Corp. ...................................................... 1,700 92,438
----------
4,239,927
----------
LODGING - 0.2%
Hilton Hotels Corp. ............................................. 3,100 92,225
Marriott International, Inc. .................................... 1,600 110,800
----------
203,025
----------
MEDIA - BROADCASTING & PUBLISHING - 1.9%
Clear Channel Communications, Inc. * ............................ 1,100 87,381
Comcast Corp. ................................................... 4,200 132,563
Dow Jones & Co., Inc. ........................................... 1,400 75,163
Dun & Bradstreet Corp. .......................................... 2,300 71,156
Gannett Co., Inc. ............................................... 3,400 210,163
Knight-Ridder, Inc. ............................................. 1,300 67,600
McGraw-Hill Companies, Inc. ..................................... 1,400 103,600
</TABLE>
See notes to financial statements
<PAGE> 86
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
MEDIA - BROADCASTING & PUBLISHING - continued
New York Times Co. .............................................. 1,400 $ 92,575
R.R. Donnelley & Sons ........................................... 2,000 74,500
Time Warner, Inc. ............................................... 6,400 396,800
Times Mirror Co. Class A ........................................ 1,400 86,100
Tribune Co. ..................................................... 1,600 99,600
U.S. West Media Group * ......................................... 7,500 216,563
----------
1,713,764
----------
MEDICAL SUPPLIES - 0.8%
Baxter International, Inc. ...................................... 3,300 166,444
Becton Dickinson & Co. .......................................... 1,600 80,000
Biomet, Inc. .................................................... 1,700 43,563
Boston Scientific Corp. ......................................... 2,300 105,513
Cardinal Health, Inc. ........................................... 1,400 105,175
Guidant Corp. ................................................... 2,000 124,500
Mallinckrodt Inc. ............................................... 1,300 49,400
St. Jude Medical, Inc. * ........................................ 1,200 36,600
United States Surgical Corp. .................................... 1,000 29,313
----------
740,508
----------
METALS - 0.8%
Alcan Aluminum Ltd. ............................................. 3,000 82,875
Allegheny Teledyne, Inc. ........................................ 2,400 62,100
Aluminum Company of America ..................................... 2,000 140,750
Barrick Gold Corp. .............................................. 4,800 89,400
Engelhard Corp. ................................................. 2,400 41,700
Freeport-McMoran Copper & Gold, Inc. ............................ 3,000 47,250
Nucor Corp. ..................................................... 1,200 57,975
Phelps Dodge Corp. .............................................. 900 56,025
Placer Dome, Inc. ............................................... 3,400 43,138
Reynolds Metals Co. ............................................. 1,100 66,000
USX - U.S. Steel Group, Inc. .................................... 1,600 50,000
----------
737,213
----------
MINING - 0.1%
Inco, Ltd. ...................................................... 2,400 40,800
Newmont Mining .................................................. 2,000 58,750
----------
99,550
----------
OFFICE EQUIPMENT - 0.7%
Bay Networks, Inc. * ............................................ 2,400 61,350
Harris Corp., Inc. .............................................. 1,200 55,050
IKON Office Solutions, Inc. ..................................... 1,800 50,625
Pitney Bowes, Inc. .............................................. 1,800 161,888
Xerox Corp. ..................................................... 3,800 280,488
----------
609,401
----------
</TABLE>
See notes to financial statements
<PAGE> 87
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
OIL & GAS - 8.6%
Amerada Hess Corp. .............................................. 1,400 $ 76,825
Amoco Corp. ..................................................... 5,600 476,700
Anadarko Petroleum Corp. ........................................ 800 48,550
Apache Corp. .................................................... 1,200 42,075
Ashland, Inc. ................................................... 1,100 59,056
Atlantic Richfield Co. .......................................... 3,700 296,463
Burlington Resources, Inc. ...................................... 1,600 71,700
Chevron Corp. ................................................... 7,600 585,200
Coastal Corp. ................................................... 1,300 80,519
Columbia Gas System, Inc. ....................................... 800 62,850
Consolidated Natural Gas Co. .................................... 1,300 78,650
Dresser Industries, Inc. ........................................ 2,200 92,263
Enron Corp. ..................................................... 3,500 145,469
Exxon Corp. ..................................................... 28,500 1,743,844
Halliburton Co. ................................................. 3,000 155,813
Mobil Corp. ..................................................... 9,100 656,906
Occidental Petroleum Corp. ...................................... 4,400 128,975
Oryx Energy Co. ................................................. 1,700 43,350
Pennzoil Co. .................................................... 700 46,769
Phillips Petroleum Co. .......................................... 3,200 155,600
Rowan Companies, Inc. * ......................................... 1,200 36,600
Royal Dutch Petroleum Co. ....................................... 24,600 1,333,013
Schlumberger Ltd. ............................................... 5,600 450,800
Sonat, Inc. ..................................................... 1,100 50,325
Sun Co., Inc. ................................................... 1,000 42,063
Texaco, Inc. .................................................... 6,200 337,125
Union Pacific Resources Group ................................... 3,200 77,600
Unocal Corp. .................................................... 3,300 128,081
USX - Marathon Group ............................................ 3,600 121,500
Western Atlas, Inc. ............................................. 800 59,200
Williams Companies, Inc. ........................................ 4,200 119,175
----------
7,803,059
----------
PHARMACEUTICALS - 9.0%
Abbott Laboratories ............................................. 8,900 583,506
Alza Corp. * .................................................... 1,300 41,356
American Home Products Corp. .................................... 7,400 566,100
Amgen, Inc. * ................................................... 3,100 167,788
Bristol-Myers Squibb Co. ........................................ 11,500 1,088,188
Crescendo Pharmaceuticals Corp. * ............................... 65 752
Eli Lilly & Co. ................................................. 12,800 891,200
</TABLE>
See notes to financial statements
<PAGE> 88
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
PHARMACEUTICALS - continued
Johnson & Johnson ............................................... 15,300 $ 1,007,888
Merck & Co., Inc. ............................................... 13,900 1,476,875
Pfizer, Inc. .................................................... 14,900 1,110,981
Pharmacia & Upjohn, Inc. ........................................ 6,000 219,750
Schering-Plough Corp. ........................................... 8,500 528,063
Warner Lambert Co. .............................................. 3,100 384,400
----------
8,066,847
----------
RESTAURANTS - 0.5%
McDonald's Corp. ................................................ 8,000 382,000
Tricon Global Restaurants, Inc. * ............................... 1,760 51,150
Wendy's International, Inc. ..................................... 2,100 50,531
----------
483,681
----------
RETAILERS - 5.0%
Albertson's, Inc. ............................................... 3,200 151,600
American Stores Co. ............................................. 3,600 74,025
AutoZone, Inc. .................................................. 2,000 58,000
Circuit City Stores, Inc. ....................................... 1,400 49,788
Costco Companies, Inc. .......................................... 2,600 116,025
CVS Corp. ....................................................... 2,000 128,125
Dayton-Hudson Corp. ............................................. 2,500 168,750
Dillard's, Inc. Class A ......................................... 1,500 52,875
F. W. Woolworth Co. ............................................. 2,100 42,788
Federated Department Stores, Inc. ............................... 2,500 107,656
Gap Stores ...................................................... 4,800 170,100
Home Depot, Inc. ................................................ 8,400 494,550
J.C. Penney Co., Inc. ........................................... 2,900 174,906
Kimberly-Clark Corp. ............................................ 6,500 320,531
K-Mart Corp. .................................................... 6,000 69,375
Kroger Co. ...................................................... 3,100 114,506
Limited, Inc. (The) ............................................. 3,400 86,700
Lowes Companies, Inc. ........................................... 2,200 104,913
May Department Stores ........................................... 2,800 147,525
Nordstrom, Inc. ................................................. 1,000 60,250
Rite Aid Corp. .................................................. 1,600 93,900
Sears, Roebuck and Co. .......................................... 4,500 203,625
Tandy Corp. ..................................................... 1,400 53,988
TJX Companies, Inc. ............................................. 2,000 68,750
Toys "R" Us, Inc. ............................................... 3,400 106,888
Walgreen Co. .................................................... 6,000 188,250
Wal-Mart Stores, Inc. ........................................... 26,100 1,029,319
Winn Dixie Stores, Inc. ......................................... 2,300 100,481
----------
4,538,189
----------
</TABLE>
See notes to financial statements
<PAGE> 89
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
TELEPHONE SYSTEMS - 6.2%
Airtouch Communications, Inc. ................................... 6,000 $ 249,375
Ameritech Corp. ................................................. 6,300 507,150
AT&T Corp. ...................................................... 18,600 1,139,250
Bell Atlantic Corp. ............................................. 8,900 809,900
Bellsouth Corp. ................................................. 11,400 641,963
Frontier Corp. .................................................. 2,400 57,750
GTE Corp. ....................................................... 10,900 569,525
SBC Communications, Inc. ........................................ 10,401 761,844
Sprint Corp. .................................................... 5,100 298,988
U.S. West Communications Group .................................. 5,800 261,725
Worldcom, Inc. * ................................................ 10,500 317,625
----------
5,615,095
----------
TEXTILES, CLOTHING & FABRICS - 0.3%
Liz Claiborne, Inc. ............................................. 1,100 45,994
Nike, Inc. ...................................................... 3,500 137,375
VF Corp. ........................................................ 2,000 91,875
----------
275,244
----------
TRANSPORTATION - 0.8%
Burlington Northern Santa Fe Corp. .............................. 1,800 167,288
CSX Corp. ....................................................... 2,500 135,000
Federal Express Corp. * ......................................... 1,400 85,488
Laidlaw, Inc. Class B ........................................... 4,400 59,950
Norfolk Southern Corp. .......................................... 4,500 138,656
Union Pacific Corp. ............................................. 2,800 174,825
----------
761,207
----------
TOTAL COMMON STOCKS (Cost $55,062,866) 86,991,804
----------
</TABLE>
See notes to financial statements
<PAGE> 90
COVA SERIES TRUST
STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ------------------------------------------------------------------------------------------------
<CAPTION>
SECURITY PAR VALUE
DESCRIPTION AMOUNT (NOTE 1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 3.7%
U.S. GOVERNMENT AGENCY - 1.1%
Federal Home Loan Mortgage Corp. (Discount Note) at 5.45%,
due 01/21/98 (a) (Cost $986,072) $1,000,000 $ 986,072
----------
REPURCHASE AGREEMENT - 2.6%
J.P. Morgan U.S. Gov't Repurchase Agreement at 6.25% due 01/02/98,
collaterized by U.S. Treasury Bond, $1,831,000 par, 8.50% coupon,
due 02/15/20, dated 02/15/90, repurchase proceeds of $2,376,825. 2,376,000 2,376,000
----------
(Cost $2,376,000).
Total short-term investments (Cost $3,362,072) 3,362,072
----------
TOTAL INVESTMENTS - 100.0%
(Cost $58,424,938) 90,353,876
Other Assets and Liabilities (net) - 0.0% 23,426
----------
TOTAL NET ASSETS - 100.0% $ 90,377,302
==========
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security as this stock did not declare
or pay dividends in the last 12 month period.
(a) Assets segregated for open futures
ADR - American Depositary Receipt
See notes to financial statements
<PAGE> 91
COVA SERIES TRUST
VKAC GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHARE SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON AND PREFERRED STOCKS - 89.5%
AEROSPACE & DEFENSE - 0.9%
11,400 AlliedSignal, Inc. ............................................................................ $ 443,902
-----------
BANKING - 8.8%
13,050 BankAmerica Corp. ............................................................................. 952,650
7,180 BankBoston Corp. .............................................................................. 674,471
680 Bankers Trust New York Corp. .................................................................. 76,458
7,490 Chase Manhattan Corp. ......................................................................... 820,155
11,270 First Union Corp. ............................................................................. 577,588
3,550 Golden West Financial Corp. ................................................................... 347,234
3,650 Nationsbank Corp. ............................................................................. 221,966
7,100 Washington Mutual, Inc. ....................................................................... 453,069
420 Wells Fargo & Co. ............................................................................. 142,554
-----------
4,266,145
-----------
BEVERAGES, FOOD & TOBACCO - 4.5%
13,400 Nabisco Holdings Corp. Class A ................................................................ 649,063
24,220 Philip Morris Companies, Inc. ................................................................. 1,097,469
4,330 Ralston-Ralston Purina Group .................................................................. 402,419
-----------
2,148,951
-----------
CHEMICALS - 1.2%
5,670 BetzDearborn, Inc. ............................................................................ 346,224
3,200 Grace (W.R.) & Co. ............................................................................ 257,400
-----------
603,624
-----------
COMMERCIAL SERVICES - 0.6%
10,300 Waste Management, Inc. (a) .................................................................... 283,250
-----------
COMMUNICATIONS - 3.7%
7,800 3 Com Corp. ................................................................................... 272,513
20,900 Alcatel Alsthom (ADR) ......................................................................... 529,031
8,260 Ericsson L.M. Telephone (ADR) ................................................................. 308,201
400 Loral Space & Communications .................................................................. 8,575
5,600 Newbridge Network Corp. ....................................................................... 195,300
6,280 Nokia Corp. (ADR) ............................................................................. 439,600
-----------
1,753,220
-----------
COMPUTER SOFTWARE & PROCESSING - 3.0%
6,890 BMC Software, Inc. * .......................................................................... 452,156
18,430 Cabletron Systems, Inc. * ..................................................................... 276,450
9,855 Computer Associates International, Inc. ....................................................... 521,083
2,000 Microsoft Corp. Convertible Preferred ......................................................... 179,750
-----------
1,429,439
-----------
COMPUTERS & INFORMATION - 4.8%
8,150 Bell & Howell Co. ............................................................................. 197,128
13,840 Cognizant Corp. ............................................................................... 616,745
13,670 Creative Technology Ltd. * .................................................................... 300,740
11,060 International Business Machines Corp. ......................................................... 1,156,461
-----------
2,271,074
-----------
CONTAINERS & PACKAGING - 1.1%
10,500 Crown Cork & Seal, Inc. ....................................................................... 526,313
-----------
</TABLE>
See notes to financial statements
<PAGE> 92
COVA SERIES TRUST
VKAC GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHARE SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COSMETICS & PERSONAL CARE - 1.1%
700 Avon Products, Inc. ........................................................................... $ 42,963
6,500 Colgate-Palmolive Co. ......................................................................... 477,750
-----------
520,713
-----------
ELECTRIC UTILITIES - 5.5%
8,420 Boston Edison Co. ............................................................................. 318,908
11,300 Consolidated Edison of N.Y. ................................................................... 463,300
9,820 Edison International .......................................................................... 266,981
5,010 FPL Group, Inc. ............................................................................... 296,529
12,190 GPU, Inc. ..................................................................................... 513,504
32,500 Northeast Utilities ........................................................................... 383,906
14,900 P.G. & E. Corp. ............................................................................... 453,519
-----------
2,696,647
-----------
ELECTRONICS - 2.8%
6,620 Motorola, Inc. ................................................................................ 377,754
7,930 Philips Electronics N.V. ...................................................................... 479,765
4,500 Rockwell International Corp. .................................................................. 235,125
10,200 VLSI Technology, Inc. ......................................................................... 240,975
-----------
1,333,619
-----------
ENTERTAINMENT & LEISURE - 0.7%
3,250 Walt Disney Co. ............................................................................... 321,953
-----------
FINANCIAL SERVICES - 2.5%
10,340 American General Corp. ........................................................................ 559,006
13,720 Block, (H.& R.), Inc. ......................................................................... 614,828
-----------
1,173,834
-----------
FOREST PRODUCTS & PAPER - 2.0%
10,860 Boise Cascade Corp. ........................................................................... 328,515
8,500 Fort James Corp. .............................................................................. 325,125
5,530 Union Camp Corp. .............................................................................. 296,892
-----------
950,532
-----------
HEALTH CARE PROVIDERS - 1.4%
400 Fresenius Medical Care AG Preferred Class D ................................................... 28
12,700 Pacificare Health Systems, Inc. Class B ....................................................... 667,146
-----------
667,174
-----------
HEAVY MACHINERY - 3.6%
15,600 AGCO Corp. .................................................................................... 456,300
11,800 Flowserve Corp. ............................................................................... 329,663
16,280 Ingersoll-Rand Co. ............................................................................ 659,340
7,030 McDermott International, Inc. ................................................................. 257,474
-----------
1,702,777
-----------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 0.8%
9,450 Black & Decker Corp. .......................................................................... 369,141
-----------
HOUSEHOLD PRODUCTS - 0.5%
5,500 Benckiser NV - B Shares * ..................................................................... 226,188
-----------
INDUSTRIAL - DIVERSIFIED - 2.5%
6,550 Fluor Corp. ................................................................................... 244,806
6,000 ITT Corp. * ................................................................................... 497,250
9,600 Johnson Controls, Inc. ........................................................................ 458,400
-----------
1,200,456
-----------
</TABLE>
See notes to financial statements
<PAGE> 93
COVA SERIES TRUST
VKAC GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHARE SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INSURANCE - 5.3%
1,200 Aetna, Inc. ................................................................................... $ 84,675
7,250 Allstate Corp. ................................................................................ 658,844
8,960 Conseco, Inc. ................................................................................. 407,120
6,200 Everest RE Holdings, Inc. ..................................................................... 255,750
6,520 Equitable Companies, Inc. (The) ............................................................... 324,370
12,390 Provident Companies, Inc. ..................................................................... 478,564
6,650 Travelers Group, Inc. ......................................................................... 358,269
-----------
2,567,592
-----------
MEDIA - BROADCASTING & PUBLISHING - 0.3%
5,940 Readers Digest Association, Inc. Class A ...................................................... 140,333
-----------
MEDICAL SUPPLIES - 0.4%
5,000 Beckman Instruments, Inc. ..................................................................... 200,000
-----------
METALS - 0.3%
2,400 Reynolds Metals Co. ........................................................................... 144,000
-----------
OFFICE EQUIPMENT - 0.4%
2,560 Xerox Corp. ................................................................................... 188,960
-----------
OIL & GAS - 8.6%
10,230 Coastal Corp. ................................................................................. 633,621
8,300 El Paso Natural Gas Co. ....................................................................... 551,950
5,550 Exxon Corp. ................................................................................... 339,591
8,960 Royal Dutch Petroleum Co. ..................................................................... 485,520
16,370 Texaco, Inc. .................................................................................. 890,119
15,540 USX - Marathon Group .......................................................................... 524,475
900 Valero Energy Corp. ........................................................................... 28,294
19,540 YPF Sociedad Anonima (ADR) .................................................................... 668,024
-----------
4,121,594
-----------
PHARMACEUTICALS - 9.5%
10,650 Alza Corp. * .................................................................................. 338,803
8,570 American Home Products Corp. .................................................................. 655,605
4,290 Merck & Co., Inc. ............................................................................. 455,813
16,430 Mylan Laboratories, Inc. ...................................................................... 344,003
2,280 Pfizer, Inc. .................................................................................. 170,003
18,690 Pharmacia & Upjohn, Inc. ...................................................................... 684,521
10,720 Rhone-Poulenc, S.A. (ADR) ..................................................................... 475,700
9,000 Rhone-Poulenc, S.A. (Warrants) ................................................................ 29,250
19,990 SmithKline Beecham Plc (ADR) .................................................................. 1,028,236
11,090 Watson Pharmaceutical, Inc. ................................................................... 359,732
-----------
4,541,666
-----------
RESTAURANTS - 0.3%
8,600 Lone Star Steakhouse & Saloon, Inc. ........................................................... 150,500
-----------
RETAILERS - 2.6%
9,600 Federated Department Stores, Inc. * ........................................................... 413,400
10,800 Gap, Inc. ..................................................................................... 382,725
15,630 Gymboree Corp. ................................................................................ 427,871
-----------
1,223,996
-----------
</TABLE>
See notes to financial statements
<PAGE> 94
COVA SERIES TRUST
VKAC GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHARE SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TELEPHONE SYSTEMS - 6.4%
7,360 Airtouch Communications, Inc. ................................................................. $ 305,900
6,010 AT&T Corp. .................................................................................... 368,113
10,380 Bellsouth Corp. ............................................................................... 584,524
12,670 Cincinnati Bell, Inc. ......................................................................... 392,770
9,810 GTE Corp. ..................................................................................... 512,573
5,950 SBC Communications, Inc. ...................................................................... 435,838
10,290 U.S. West Communications Group ................................................................ 464,336
-----------
3,064,054
-----------
TEXTILES, CLOTHING & FABRICS - 1.3%
4,400 Adidas AG (ADR) ............................................................................... 289,492
8,890 Tommy Hilfiger Corp. * ........................................................................ 312,261
-----------
601,753
-----------
TRANSPORTATION - 2.1%
9,830 Canadian National Railway Co. ................................................................. 464,468
20,290 Canadian Pacific, Ltd. ........................................................................ 552,903
-----------
1,017,371
-----------
Total Common and Preferred Stocks (Cost $36,811,995) 42,850,771
-----------
CORPORATE BONDS AND DEBT SECURITIES - 3.8% COUPON MATURITY
------ --------
BEVERAGES, FOOD & TOBACCO - 0.4%
$140,000 Grand Metropolitan - Convertible (144A) @ ................... 6.500% 01/31/00 195,261
-----------
COMPUTERS & INFORMATION - 0.6%
500,000 Hewlett-Packard Co.- Convertible (144A) @ .................. + 10/14/07 263,930
-----------
FINANCIAL SERVICES - 0.9%
1,000,000 Deutsche Bank Finance BV - Convertible (144A) @ ............. + 02/12/17 447,500
-----------
INDUSTRIAL - DIVERSIFIED - 0.9%
350,000 ADT Operations, Inc.- Convertible ........................... + 07/06/10 431,375
-----------
PHARMACEUTICALS - 1.0%
700,000 Roche Holdings, Inc - Convertible (144A) @ .................. + 04/20/10 387,625
50,000 Sandoz Capital BVI Ltd - Convertible (144A) @ ............... 2.000% 10/06/02 77,125
-----------
464,750
-----------
Total Corporate Bonds and Debt Securities (Cost $1,394,901) 1,802,816
-----------
</TABLE>
See notes to financial statements
<PAGE> 95
COVA SERIES TRUST
VKAC GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION RATE MATURITY (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RATE MATURITY
SHORT-TERM INVESTMENT - 6.4%
$3,050,000 Federal Home Loan Bank (Discount Note) 5.750% 01/02/98 3,049,026
-----------
(Cost $3,049,026)
TOTAL INVESTMENTS - 99.7%
(Cost $41,255,922) 47,702,613
Other Assets and Liabilities (net) - 0.3% 126,751
-----------
TOTAL NET ASSETS - 100.0% $47,829,364
===========
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security as this stock did not declare or
pay dividends in the last 12 month period.
@ Securities that may be resold to "qualified institutional
buyers" under Rule 144A or securities offered pursuant to
Section 4(2) of the Securities Act of 1933, as amended. These
securities have been determined to be liquid under guidelines
established by the Board of Trustees.
+ Zero coupon bond
(a) Assets segregated for open futures
ADR - American Depositary Receipt
See notes to financial statements
<PAGE> 96
COVA SERIES TRUST
HIGH YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DOMESTIC BONDS AND DEBT SECURITIES - 81.9%
AEROSPACE & DEFENSE - 3.4%
$300,000 Sequa Corp. .............................................. 9.625% 10/15/99 $ 311,250
250,000 Sequa Corp. .............................................. 9.375% 12/15/03 259,375
500,000 Talley Manufacturing & Technical Corp. ................... 10.750% 10/15/03 546,250
----------
1,116,875
----------
AUTOMOTIVE - 1.8%
200,000 Exide Corp. .............................................. 10.750% 12/15/02 211,740
200,000 Insilco Corp. ............................................ 10.250% 08/15/07 210,500
200,000 Venture Holdings Trust ................................... 9.750% 04/01/04 196,500
----------
618,740
----------
BEVERAGES, FOOD & TOBACCO - 0.6%
150,000 Fleming Companies, Inc. .................................. 10.500% 12/01/04 157,875
50,000 Fleming Companies, Inc. .................................. 10.625% 07/31/07 53,000
----------
210,875
----------
BUILDING MATERIALS - 2.6%
575,000 American Standard, Inc. .................................. 10.875% 05/15/99 606,625
250,000 Kevco, Inc. (144A) ** .................................... 10.375% 12/01/07 254,063
----------
860,688
----------
CHEMICALS - 2.9%
534,000 ISP Holdings, Inc. ....................................... 9.750% 02/15/02 566,708
400,000 Pioneer Americas Acquisition Corp. (Series B) ............ 9.250% 06/15/07 405,000
----------
971,708
----------
COMMERCIAL SERVICES - 1.1%
350,000 Dyncorp, Inc. ............................................ 9.500% 03/01/07 357,000
----------
COMMUNICATIONS - 2.1%
400,000 Echostar Communications Corp. ............................ 0%, 12.88%++ 06/01/04 368,000
400,000 Viatel, Inc. ............................................. 0%, 15.00%++ 01/15/05 329,000
----------
697,000
----------
COMPUTER SOFTWARE & PROCESSING - 0.3%
50,000 Decisionone Corp. ........................................ 9.750% 08/01/07 51,625
50,000 Decisionone Holdings ..................................... 0%, 11.50%++ 08/01/08 32,250
----------
83,875
----------
COSMETICS & PERSONAL CARE - 1.5%
500,000 Revlon Consumer Products Corp. ........................... 9.375% 04/01/01 515,000
----------
ELECTRIC UTILITIES - 3.0%
500,000 AES Corp. ................................................ 10.250% 07/15/06 546,250
100,000 AES Corp. ................................................ 8.375% 08/15/07 100,250
200,000 El Paso Electric Co. ..................................... 8.250% 02/01/03 211,500
123,695 Midland Cogeneration Venture L.P. ........................ 10.330% 07/23/02 133,655
----------
991,655
----------
ELECTRONICS - 3.4%
550,000 Communications & Power Corp. ............................. 12.000% 08/01/05 616,000
430,000 Exide Electronics Group .................................. 11.500% 03/15/06 512,775
----------
1,128,775
----------
ENTERTAINMENT & LEISURE - 9.2%
500,000 Agrosy Gaming ............................................ 13.250% 06/01/04 525,000
300,000 Coast Hotels & Casino .................................... 13.000% 12/15/02 340,500
400,000 Cobblestone Golf * ....................................... 11.500% 06/01/03 434,000
400,000 Grand Casinos, Inc. ...................................... 10.125% 12/01/03 432,000
650,000 Selmer Co., Inc. ......................................... 11.000% 05/15/05 718,250
450,000 Trump Atlantic City Assoc. ............................... 11.250% 05/01/06 441,000
189,000 Waterford Gaming LLC ..................................... 12.750% 11/15/03 208,373
----------
3,099,123
----------
</TABLE>
See notes to financial statements
<PAGE> 97
COVA SERIES TRUST
HIGH YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ENVIRONMENTAL CONTROLS - 0.9%
$230,000 Envirosource, Inc. ....................................... 9.750% 06/15/03 $ 231,150
50,000 Norcal Waste Systems, Inc. ............................... 13.500% 11/15/05 57,750
----------
288,900
----------
FiNANCIAL SERVICES - 3.3%
500,000 AmeriCredit Corp. ........................................ 9.250% 02/01/04 500,000
300,000 ContiFinancial Corp. ..................................... 8.375% 08/15/03 312,750
50,000 Superior National Capital Trust, Inc. .................... 10.750% 12/01/17 51,250
200,000 Trizec Finance Ltd. ...................................... 10.875% 10/15/05 225,000
----------
1,089,000
----------
FOOD RETAILERS - 1.9%
100,000 Jitney-Jungle Stores of America, Inc. .................... 12.000% 03/01/06 114,000
290,000 Pantry, Inc. (The) ....................................... 12.000% 11/15/00 314,650
200,000 Pantry, Inc. (The) ....................................... 10.250% 10/15/07 205,000
----------
633,650
----------
FOREST PRODUCTS & PAPER - 1.8%
150,000 Community Distributors (144A) ** ......................... 10.250% 10/15/04 153,750
300,000 SD Warren Co. ............................................ 12.000% 12/15/04 334,500
100,000 Sweetheart Cup ........................................... 9.625% 09/01/00 99,000
----------
587,250
----------
HEALTH CARE PROVIDERS - 4.9%
250,000 Fresenius Medical Care AG Preferred ...................... 9.000% 12/01/06 259,800
150,000 Merit Behavioral Care .................................... 11.500% 11/15/05 174,750
150,000 Paragon Health Networks, Inc. (144A) ** .................. 9.500% 11/01/07 150,375
450,000 Sun Healthcare Group, Inc. (144A) ** ..................... 9.500% 07/01/07 463,500
250,000 Tenet Healthcare Corp. ................................... 8.625% 12/01/03 265,381
300,000 Tenet Healthcare Corp. ................................... 10.125% 03/01/05 328,875
----------
1,642,681
----------
HEAVY MACHINERY - 0.3%
100,000 Terex Corp. .............................................. 13.250% 05/15/02 114,500
----------
INDUSTRIAL - DIVERSIFIED - 1.0%
100,000 Aetna Industries, Inc. ................................... 11.875% 10/01/06 87,500
250,000 Fonda Group, Inc. ........................................ 9.500% 03/01/07 236,250
----------
323,750
----------
INSURANCE - 1.5%
475,000 Americo Life, Inc. ....................................... 9.250% 06/01/05 489,250
----------
MEDIA - BROADCASTING & PUBLISHING - 10.7%
300,000 Cablevision Systems Corp. ................................ 7.875% 12/15/07 307,500
300,000 Cablevision Systems Corp. ................................ 10.500% 05/15/16 350,250
350,000 Capstar Broadcasting Corp. ............................... 9.250% 07/01/07 359,625
300,000 Century Communications Corp. ............................. 8.875% 01/15/07 310,500
450,000 EZ Communications, Inc. .................................. 9.750% 12/01/05 493,875
250,000 Gray Communications Systems, Inc. ........................ 10.625% 10/01/06 271,875
425,000 K-III Communications Corp. ............................... 10.250% 06/01/04 456,875
150,000 Northland Cable Television (144A) ** ..................... 10.250% 11/15/07 158,625
300,000 Pegasus Communications Corp. ............................. 9.625% 10/15/05 309,000
350,000 Young Broadcasting, Inc. ................................. 11.750% 11/15/04 389,375
150,000 Young Broadcasting, Inc. (Series B) ...................... 8.750% 06/15/07 149,250
----------
3,556,750
----------
MEDICAL SUPPLIES - 0.4%
150,000 Imagyn Medical Technologies, Inc. ........................ 12.500% 04/01/04 142,875
----------
</TABLE>
See notes to financial statements
<PAGE> 98
COVA SERIES TRUST
HIGH YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
METALS - 1.3%
$125,000 LTV Corp. (144A) ** ...................................... 8.200% 09/15/07 $ 121,875
300,000 WCI Steel, Inc. (Series B) ............................... 10.000% 12/01/04 307,500
----------
429,375
----------
OIL & GAS - 8.4%
350,000 Dawson Production Services, Inc. ......................... 9.375% 02/01/07 370,563
400,000 DI Industries, Inc. ...................................... 8.875% 07/01/07 416,000
50,000 Falcon Drilling Co., Inc. (Series B) ..................... 9.750% 01/15/01 52,438
145,000 Giant Industries, Inc. ................................... 9.750% 11/15/03 149,350
500,000 Giant Industries, Inc. ................................... 9.000% 09/01/07 500,000
300,000 KCS Energy, Inc. ......................................... 11.000% 01/15/03 331,500
400,000 National Energy Group .................................... 10.750% 11/01/06 419,000
550,000 Petroleum Heat & Power Co., Inc. ......................... 12.250% 02/01/05 547,250
----------
2,786,101
----------
RETAILERS - 1.3%
400,000 Cole National Group ...................................... 9.875% 12/31/06 430,000
----------
TELEPHONE SYSTEMS - 8.7%
350,000 Centennial Cellular Corp. ................................ 10.125% 05/15/05 381,500
300,000 Centennial Cellular Corp. ................................ 8.875% 11/01/01 309,000
300,000 Intermedia Communications of Florida, Inc. ............... 0%, 12.50%++ 05/15/06 237,000
150,000 Intermedia Communications of Florida, Inc. ............... 13.500% 06/01/05 183,375
150,000 Intermedia Communications of Florida, Inc. (Series B) .... 0%, 11.25%++ 07/15/07 108,375
650,000 IXC Communications, Inc. ................................. 12.500% 10/01/05 752,371
250,000 Pricellular Wireless Corp. ............................... 10.750% 11/01/04 271,875
100,000 Pricellular Wireless Corp. ............................... 0%, 12.25%++ 10/01/03 103,000
100,000 Teleport Communications Group, Inc. ...................... 0%, 11.125%++ 07/01/07 81,750
400,000 Teleport Communications Group, Inc. ...................... 9.875% 07/01/06 450,000
----------
2,878,246
----------
TEXTILES, CLOTHING & FABRICS - 3.6%
200,000 Anvil Knitwear, Inc. (Series B) .......................... 10.875% 03/15/07 206,500
100,000 Collins & Aikman Corp. ................................... 11.500% 04/15/06 113,000
520,000 Dan River, Inc. .......................................... 10.125% 12/15/03 558,350
50,000 Pillowtex Corp. (144A) ** ................................ 9.000% 12/15/07 51,500
250,000 Scovill Fasteners, Inc. (144A) ** ........................ 11.250% 11/30/07 256,250
----------
1,185,600
----------
Total Domestic Bonds and Debt Securities (Cost $26,207,675) 27,229,242
----------
FOREIGN BONDS AND DEBT SECURITIES - 7.8%
CANADA - 2.3%
200,000 Doman Industries, Ltd.(U.S.$) (144A) ** ................. 9.250% 11/15/07 196,000
500,000 Fonorola, Inc (U.S.$) .................................... 12.500% 08/15/02 560,000
----------
756,000
----------
GREAT BRITAIN - 2.2%
300,000 Diamond Cable Communication Plc (Yankee) ................. 0%, 10.75%++ 02/15/07 205,500
100,000 Esprit Telecom Group Plc (Yankee) ....................... 11.500% 12/15/07 103,500
450,000 International Cabletel, Inc. (U.S.$) ..................... 0%, 12.75%++ 04/15/05 376,875
100,000 International Cabletel, Inc. (U.S.$) ..................... 0%, 11.50%++ 02/01/06 78,125
----------
764,000
----------
LUXEMBOURG - 2.2%
1,000,000 Millicom International Cellular S.A. (Yankee) ............ 0%, 13.50%++ 06/01/06 737,500
----------
NETHERLANDS - 1.1%
341,000 Fresh Del Monte Produce, Inc (U.S.$) ..................... 10.000% 05/01/03 356,345
----------
Total Foreign Bonds and Debt Securities (Cost $2,433,679) 2,613,845
----------
</TABLE>
See notes to financial statements
<PAGE> 99
COVA SERIES TRUST
HIGH YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
EQUITIES - 2.3%
ELECTRIC UTILITIES - 0.4%
1,210 El Paso Electric Co. Preferred ............................................................. $ 134,310
-----------
MEDIA - BROADCASTING & PUBLISHING - 1.9%
930 American Telecasting, Inc. (Warrants - expiring 06/15/99) .................................. 5,115
110 Cablevision Systems Corp. Preferred ........................................................ 13,145
538 Time Warner, Inc. Preferred (Series M) ..................................................... 605,745
-----------
624,005
-----------
MEDICAL SUPPLIES - 0.0%
150 Urohealth Systems, Inc. (Warrants - expiring 04/01/04) * ................................... 2,250
-----------
TELEPHONE SYSTEMS - 0.0%
350 Intermedia Communications of Florida, Inc. (Warrants - expiring 06/01/00) * ................ 8,750
-----------
TOTAL Equities (Cost $665,788) 769,315
-----------
REPURCHASE AGREEMENT - 6.8% MATURITY
J.P Morgan U.S. Gov't Repurchase Agreement at 6.25% due 01/02/98,
collaterized by U.S. Treasury Bond, $1,745,000 par, 8.50% coupon,
due 02/15/20, dated 02/15/90, repurchase proceeds of $2,264,786.
$2,264,000 (Cost $2,264,000). 01/02/98 2,264,000
-----------
TOTAL INVESTMENTS - 98.8%
(Cost $31,571,142) 32,876,402
Other Assets and Liabilities (net) - 1.2% 386,055
-----------
TOTAL NET ASSETS - 100.0% $33,262,457
===========
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security as this stock
did not declare or pay dividends in the 12
month period.
** Securities that may be resold to "qualified
institutional buyers" under Rule 144A or
securities offered pursuant to Section 4(2)
of the Securities Act of 1933, as amended.
These securities have been determined to be
liquid under guidelines established by the
Board of Trustees.
++ Security is a "step-up" bond where the coupon
increases or steps up at a predetermined
date.
Yankee - U.S. Dollar denominated bonds issued by non-U.S. companies
in the U.S.
See notes to financial statements
<PAGE> 100
COVA SERIES TRUST
HIGH YIELD PORTFOLIO
PORTFOLIO COMPOSITION BY CREDIT QUALITY (UNAUDITED)
DECEMBER 31, 1997
<TABLE>
- -----------------------------------------------------------------------------------------------
<CAPTION>
The following table summarizes the portfolio composition of
long-term debt holdings at December 31, 1997, based upon quality
ratings issued by Standard & Poor's. For securities not rated by
Standard & Poor's, the Moody rating is used.
PORTFOLIO COMPOSITION BY CREDIT QUALITY
----------------------------------------------------------------------------------
<S> <C>
RATINGS % OF PORTFOLIO
BB 20.3
B 77.9
CCC 1.5
NR 0.3
-------
100.0%
-------
</TABLE>
Note: NR = Not Rated
See notes to financial statements
<PAGE> 101
COVA SERIES TRUST
BOND DEBENTURE PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON AND PREFERRED STOCKS - 3.6%
BANKING - 0.6%
9,500 Westpac Banking Strypes Trust .................................................................. $ 318,250
-----------
CONTAINERS & PACKAGING - 0.2%
2,500 Crown Cork & Seal, Inc. Convertible Preferred .................................................. 117,500
-----------
FINANCIAL SERVICES - 0.9%
10,000 Federal-Mogul Financial Trust (144A) ** ........................................................ 505,000
-----------
INDUSTRIAL - DIVERSIFIED - 0.4%
3,500 Corning Delaware Convertible Preferred ......................................................... 215,688
-----------
MEDIA - BROADCASTING & PUBLISHING - 0.6%
4,000 Evergreen Media Corp. Preferred ................................................................ 309,500
-----------
OIL & GAS - 0.9%
5,000 Lomak Petroleum, Inc. (144A) ** ................................................................ 236,095
5,000 Unocal Capital Trust ........................................................................... 279,375
-----------
515,470
-----------
TOTAL Common and Preferred Stocks (Cost $1,906,403) 1,981,408
-----------
DOMESTIC BONDS AND DEBT SECURITIES - 82.0%
ADVERTISING - 0.6%
$100,000 Lamar Advertising ......................................... 9.625% 12/01/06 108,250
150,000 Omnicom Group, Inc. (144A) ** ............................. 4.250% 01/03/07 210,257
-----------
318,507
-----------
AEROSPACE & DEFENSE - 2.8%
390,000 BE Aerospace .............................................. 9.875% 02/01/06 413,400
500,000 Orbital Sciences Corp. .................................... 5.000% 10/01/02 637,865
500,000 United Defense Industries, Inc. ........................... 8.750% 11/15/07 505,625
-----------
1,556,890
-----------
AUTOMOTIVE - 0.9%
500,000 Stanadyne Automotive Corp. (144A) ** ...................... 10.250% 12/15/07 503,750
-----------
BUILDING MATERIALS - 0.9%
500,000 Kevco, Inc. (144A) ** ..................................... 10.375% 12/01/07 512,500
-----------
CHEMICALS - 3.2%
100,000 Agricultural Mining & Chemical ............................ 10.750% 09/30/03 107,500
1,000,000 NL Industries, Inc. ....................................... 0%, 13.00%++ 10/15/05 1,000,000
150,000 Pioneer Americas Acquisition Corp. (Series B) ............. 9.250% 06/15/07 151,875
500,000 Sovereign Specialty Chemical (144A) ** .................... 9.500% 08/01/07 515,000
-----------
1,774,375
-----------
COMMERCIAL SERVICES - 5.5%
500,000 Corestaff, Inc. Conv. ..................................... 2.940% 08/15/04 416,875
500,000 Dyncorp, Inc. ............................................. 9.500% 03/01/07 510,000
505,000 Interpublic Group Companies (144A) ** ..................... 1.800% 09/16/04 415,994
500,000 Iron Mountain ............................................. 10.125% 10/01/06 552,500
100,000 Outsourcing Solutions, Inc. ............................... 11.000% 11/01/06 111,250
500,000 Pierce Leahy Corp. ........................................ 9.125% 07/15/07 522,500
500,000 Unicco Service Co. (144A) ** .............................. 9.875% 10/15/07 500,625
-----------
3,029,744
-----------
</TABLE>
See notes to financial statements
<PAGE> 102
COVA SERIES TRUST
BOND DEBENTURE PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMUNICATIONS - 2.5%
$500,000 Comcast Cellular Holdings (Series B) ...................... 9.500% 05/01/07 $ 523,750
100,000 Frontiervision ............................................ 11.000% 10/15/06 111,500
500,000 NTL, Inc. (Series B) ...................................... 10.000% 02/15/07 528,750
250,000 Synoptics Communications .................................. 5.250% 05/15/03 240,314
-----------
1,404,314
-----------
COMPUTER SOFTWARE & PROCESSING - 2.2%
300,000 Automatic Data Processing, Inc. ........................... + 02/20/12 238,125
500,000 Decisionone Corp. ......................................... 9.750% 08/01/07 516,250
500,000 National Data Corp. ....................................... 5.000% 11/01/03 478,125
-----------
1,232,500
-----------
COMPUTERS & INFORMATION - 1.0%
200,000 EMC Corp. ................................................. 3.250% 03/15/02 271,750
500,000 Hewlett-Packard Co. ....................................... + 10/14/07 262,500
-----------
534,250
-----------
CONTAINERS & PACKAGING - 0.3%
150,000 U.S. Can Corp. (Series B) ................................. 10.125% 10/15/06 159,750
-----------
ELECTRIC UTILITIES - 0.2%
125,000 Cal Energy ................................................ 9.500% 09/15/06 137,181
-----------
ELECTRONICS - 1.3%
20,000 Exide Electronics Group ................................... 11.500% 03/15/06 23,850
250,000 Read-Rite Corp. ........................................... 6.500% 09/01/04 211,250
500,000 Xilinx, Inc. .............................................. 5.250% 11/01/02 486,875
-----------
721,975
-----------
ENTERTAINMENT & LEISURE - 4.6%
500,000 Aztar Corp. ............................................... 11.000% 10/01/02 518,750
250,000 Fox Kids Worldwide, Inc. .................................. 9.250% 11/01/07 243,125
250,000 Majestic Star ............................................. 12.750% 05/15/03 271,250
500,000 Riddell Sports, Inc. ...................................... 10.500% 07/15/07 516,250
500,000 Trump Atlantic City Assoc. ................................ 11.250% 05/01/06 490,000
500,000 Viacom International ...................................... 8.000% 07/07/06 506,875
-----------
2,546,250
-----------
FINANCIAL SERVICES - 2.1%
250,000 AEI Holding Co. (144A) ** ................................. 10.000% 11/15/07 258,750
200,000 Morgan Stanley, Dean Witter, Discover & Co. ............... 1.500% 07/31/03 191,718
500,000 Navistar Financial Corp. (Series B) ....................... 9.000% 06/01/02 520,625
150,000 Ocwen Financial Corp. ..................................... 11.875% 10/01/03 169,875
-----------
1,140,968
-----------
FOOD RETAILERS - 0.9%
500,000 Stater Brothers Holdings, Inc. ............................ 9.000% 07/01/04 525,000
-----------
FOREST PRODUCTS & PAPER - 1.7%
500,000 Pacific Lumber Co. ........................................ 10.500% 03/01/03 517,500
100,000 SD Warren Co. ............................................. 12.000% 12/15/04 111,500
300,000 U.S. Timberlands, Inc. (144A) ** .......................... 9.625% 11/15/07 312,000
-----------
941,000
-----------
HEALTH CARE PROVIDERS - 2.6%
500,000 Genesis Eldercare Acquisition ............................. 9.000% 08/01/07 490,000
375,000 Integrated Health Services, Inc. (Series A) ............... 10.250% 04/30/06 399,375
500,000 Leiner Health Products Group .............................. 9.625% 07/10/07 535,000
-----------
1,424,375
-----------
HEAVY CONSTRUCTION - 0.7%
350,000 American Builders & Contractors ........................... 10.625% 05/15/07 365,750
-----------
</TABLE>
See notes to financial statements
<PAGE> 103
COVA SERIES TRUST
BOND DEBENTURE PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HEAVY MACHINERY - 0.2%
$100,000 Tokheim Corp. (Series B) .................................. 11.500% 08/01/06 $ 114,000
-----------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 1.3%
500,000 Falcon Building Products, Inc. (Series B) ................. 0%, 10.50%++ 06/15/07 337,500
335,000 Interface, Inc. ........................................... 9.500% 11/15/05 360,125
-----------
697,625
-----------
HOUSEHOLD PRODUCTS - 0.2%
97,000 Rayovac Corp. ............................................. 10.250% 11/01/06 106,215
-----------
INDUSTRIAL - DIVERSIFIED - 2.1%
500,000 Baker Hughes, Inc. ........................................ + 05/05/08 430,000
150,000 Fonda Group, Inc. ......................................... 9.500% 03/01/07 141,750
250,000 Safelite Glass, Inc. (144A) ** ............................ 9.875% 12/15/06 267,500
300,000 Viasystems, Inc. .......................................... 9.750% 06/01/07 311,625
-----------
1,150,875
-----------
INSURANCE - 1.4%
250,000 American International Group .............................. 2.250% 07/30/04 252,023
500,000 Loews Corp. ............................................... 3.125% 09/15/07 503,800
-----------
755,823
-----------
MEDIA - BROADCASTING & PUBLISHING - 3.5%
100,000 Cablevision Systems Corp. ................................. 9.250% 11/01/05 106,875
100,000 Chancellor Radio .......................................... 9.375% 10/01/04 104,250
500,000 L-3 Communications Corp. (Series B) ....................... 10.375% 05/01/07 545,000
200,000 Price Communications Wireless, Inc. ....................... 11.750% 07/15/07 217,500
500,000 Sinclair Broadcasting Group, Inc. (144A) ** ............... 10.000% 09/30/05 532,500
250,000 Times Mirror Co. .......................................... + 04/15/17 107,188
350,000 World Color Press, Inc. ................................... 6.000% 10/01/07 332,500
-----------
1,945,813
-----------
MEDICAL & BIO-TECHNOLOGY - 0.4%
100,000 LDM Technologies, Inc. .................................... 10.750% 01/15/07 109,500
135,000 Packard Bioscience Co. (Series B) ......................... 9.375% 03/01/07 130,275
-----------
239,775
-----------
METALS - 1.7%
500,000 Armco, Inc. ............................................... 9.000% 09/15/07 488,750
250,000 Mascotech, Inc. ........................................... 4.500% 12/15/03 220,625
250,000 WCI Steel, Inc. (Series B) ................................ 10.000% 12/01/04 256,250
-----------
965,625
-----------
MISCELLANEOUS - 0.2%
100,000 Prime Succession Acquisition Co. .......................... 10.750% 08/15/04 110,000
-----------
OIL & GAS - 9.1%
500,000 Cross Timbers Oil Co. ..................................... 9.250% 04/01/07 520,000
500,000 Dailey Petroleum Services Corp. (144A) ** ................. 9.750% 08/15/07 527,500
500,000 Flores & Rucks, Inc. ...................................... 9.750% 10/01/06 551,875
400,000 Giant Industries, Inc. .................................... 9.000% 09/01/07 400,000
500,000 GSI Group, Inc. (144A) ** ................................. 10.250% 11/01/07 516,250
500,000 H.S. Resources, Inc ....................................... 9.250% 11/15/06 514,375
200,000 Lomak Petroleum, Inc. ..................................... 8.750% 01/15/07 203,000
250,000 Newpark Resources, Inc. (144A) ** ......................... 8.625% 12/15/07 255,313
450,000 Pogo Producing Co. (Series B) ............................. 8.750% 05/15/07 459,000
400,000 Swift Energy Co. .......................................... 6.250% 11/15/06 396,500
500,000 Texaco Capital, Inc. ...................................... 3.500% 08/05/04 493,750
225,000 Vintage Petroleum, Inc. ................................... 8.625% 02/01/09 235,688
-----------
5,073,251
-----------
</TABLE>
See notes to financial statements
<PAGE> 104
COVA SERIES TRUST
BOND DEBENTURE PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PHARMACEUTICALS - 1.1%
$200,000 Alza Corp. ................................................ 5.000% 05/01/06 $ 212,030
300,000 SBC Jersey ................................................ 2.500% 07/07/02 306,375
100,000 Synetic, Inc. ............................................. 5.000% 02/15/07 85,000
-----------
603,405
-----------
RESTAURANTS - 0.2%
100,000 Ameriking, Inc. (144A) ** ................................. 10.750% 12/01/06 105,500
-----------
RETAILERS - 1.6%
250,000 Businessland, Inc. ........................................ 5.500% 03/01/07 181,250
750,000 Costco Companies, Inc. .................................... + 08/19/17 447,188
250,000 Specialty Retailers, Inc. (Series B) ...................... 9.000% 07/15/07 256,250
-----------
884,688
-----------
TELEPHONE SYSTEMS - 5.8%
250,000 Hyperion Telecommunications, Inc. (Series B) .............. 12.250% 09/01/04 277,500
500,000 Intermedia Communications, Inc. ........................... 8.875% 11/01/07 515,000
500,000 NEXTLINK Communications, Inc. ............................. 9.625% 10/01/07 520,000
250,000 RCN Corp. ................................................. 0%, 11.13%++ 10/15/07 157,500
500,000 Telefonica Europe (144A) ** ............................... 2.000% 07/15/02 530,000
1,500,000 Teleport Communications Group, Inc. ....................... 0%, 11.13%++ 07/01/07 1,226,250
-----------
3,226,250
-----------
TEXTILES, CLOTHING & FABRICS - 5.1%
500,000 Delta Mills, Inc. ......................................... 9.625% 09/01/07 510,000
200,000 Dyersburg Corp. (Series B) ................................ 9.750% 09/01/07 210,000
430,000 GFSI, Inc. (Series B) ..................................... 9.625% 03/01/07 453,650
500,000 Guess ?, Inc. ............................................. 9.500% 08/15/03 517,500
500,000 Pillowtex Corp. (144A) ** ................................. 9.000% 12/15/07 515,000
100,000 William Carter ............................................ 10.375% 12/01/06 105,500
500,000 Worldtex, Inc. (144A) ** .................................. 9.625% 12/15/07 515,000
-----------
2,826,650
-----------
TRANSPORTATION - 0.9%
500,000 Ryder TRS, Inc. ........................................... 10.000% 12/01/06 503,750
-----------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS - 13.2%
1,500,000 Federal National Mortgage Association ..................... 8.500% 02/01/05 1,563,276
1,964,669 Federal National Mortgage Association ..................... 7.500% 05/01/27 2,010,721
3,500,000 U.S. Treasury Note ........................................ 7.500% 05/15/02 3,738,438
-----------
7,312,435
-----------
Total Domestic Bonds and Debt Securities (Cost $44,419,457) 45,450,759
-----------
FOREIGN BONDS AND DEBT SECURITIES - 9.4%
ARGENTINA - 0.6%
300,000 Comp Nav Perez Companc (U.S.$) (144A) ** ................. 9.000% 01/30/04 305,250
-----------
BRAZIL - 0.5%
300,000 Companhia Energetica Sao Paul (U.S.$) (144A) ** ........... 9.125% 06/26/07 271,500
-----------
CANADA - 1.8%
250,000 Plitt Theaters, Inc. (Yankee) ............................. 10.875% 06/15/04 271,250
500,000 Rogers Cantel, Inc. (Yankee) .............................. 8.300% 10/01/07 498,750
200,000 Westmin Resources Ltd (Yankee) ............................ 11.000% 03/15/07 220,000
-----------
990,000
-----------
GREAT BRITAIN - 0.7%
500,000 Telewest Communications PLC (Yankee) ...................... 0%, 11.00%++ 10/01/07 390,625
-----------
</TABLE>
See notes to financial statements
<PAGE> 105
COVA SERIES TRUST
BOND DEBENTURE PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION COUPON MATURITY (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MEXICO - 3.9%
$500,000 Mexican United States (Global) (U.S.$) .................... 9.875% 01/15/07 $ 521,750
300,000 Mexican United States (Series B) (U.S.$) .................. 6.250% 12/31/19 250,500
250,000 Pepsi-Gemex, S.A. (Series B) (Yankee) ..................... 9.750% 03/30/04 258,750
500,000 Petroleos Mexicanos (U.S.$) ............................... 9.000% 06/01/07 499,350
500,000 TV Azteca, S.A. (Yankee) .................................. 10.500% 02/15/07 517,500
150,000 Vicap S.A (U.S.$) ......................................... 11.375% 05/15/07 162,000
-----------
2,209,850
-----------
NETHERLAND ANTILLES - 0.6%
350,000 Voto-Votorantim O/S Trad (U.S.$) (144A)** ................ 8.500% 06/27/05 320,250
-----------
NETHERLANDS - 0.4%
250,000 Indah Kiat International Finance (U.S.$) (Series C) ....... 12.500% 06/15/06 233,750
-----------
SWITZERLAND - 0.5%
500,000 Roche Holdings, Inc. (U.S.$) (144A)** .................... + 04/20/10 276,875
-----------
VENEZUELA - 0.4%
250,000 Venezuela (Global) (U.S.$) ................................ 9.250% 09/15/27 224,625
-----------
Total Foreign Bonds and Debt Securities (Cost $5,115,329) 5,222,725
-----------
TOTAL INVESTMENTS - 95.0%
(Cost $51,441,189) 52,654,892
Other Assets and Liabilities (net) - 5.0% 2,757,287
-----------
TOTAL NET ASSETS - 100.0% $55,412,179
===========
PORTFOLIO FOOTNOTES:
* Non-income producing security as this stock
did not declare or pay dividends in the last
12 month period.
** Securities that may be resold to "qualified
institutional buyers" under Rule 144A or
securities offered pursuant to Section 4(2)
of the Securities Act of 1933, as amended.
These securities have been determined to be
liquid under guidelines established by the
Board of Trustees.
+ Zero coupon bond
++ Security is a "step-up" bond where the coupon
increases or steps up at a predetermined
date.
Yankee - U.S. Dollar denominated bonds issued by non-U.S.
companies in the U.S.
</TABLE>
See notes to financial statements
<PAGE> 106
COVA SERIES TRUST
BOND DEBENTURE PORTFOLIO
PORTFOLIO COMPOSITION BY CREDIT QUALITY (UNAUDITED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
The following table summarizes the portfolio composition of long-term
debt holdings at December 31, 1997, based upon quality ratings issued
by Standard & Poor's. For securities not rated by Standard & Poor's,
the Moody rating is used.
PORTFOLIO COMPOSITION BY CREDIT QUALITY
----------------------------------------------------------------------
RATINGS % OF PORTFOLIO
U.S. Gov't and Agency Obligations 14.4%
AAA 1.0
AA 1.6
A 4.9
BBB 2.1
BB 14.4
B 61.6
-----
100.0%
-----
See notes to financial statements
<PAGE> 107
COVA SERIES TRUST
MID CAP VALUE PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE><CAPTION>
- --------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 92.4%
AEROSPACE & DEFENSE - 3.7%
Coltec Industries, Inc. *..................... 2,000 $ 46,375
Orbital Sciences Corp *....................... 1,200 35,700
------------
82,075
------------
AUTOMOTIVE - 2.7%
Echlin, Inc................................... 1,200 43,425
Snap-On, Inc.................................. 400 17,450
------------
60,875
------------
BANKING - 4.7%
Crestar Financial Corp........................ 600 34,200
Cullen/Frost Bankers, Inc..................... 600 36,413
TCF Financial Corp............................ 1,000 33,938
------------
104,551
------------
BEVERAGES, FOOD & TOBACCO - 4.1%
Dean Foods Co................................. 500 29,750
Flowers Industries, Inc....................... 1,000 20,563
Universal Foods Corp.......................... 900 38,025
------------
88,338
------------
CHEMICALS - 4.4%
Crompton & Knowles Corp....................... 1,400 37,100
Morton International, Inc..................... 1,200 41,250
Witco Corp.................................... 500 20,406
------------
98,756
------------
COMMUNICATIONS - 1.4%
Plantronics, Inc. *........................... 800 32,000
------------
COMPUTER SOFTWARE & PROCESSING - 2.2%
Adobe Systems, Inc............................ 1,200 49,500
------------
CONTAINERS & PACKAGING - 1.9%
Ball Corp..................................... 1,200 42,375
------------
ELECTRIC UTILITIES - 7.2%
FirstEnergy Corp.............................. 1,500 43,500
Niagara Mohawk Power Corp. *.................. 4,600 48,300
Northeast Utilities *......................... 3,200 37,800
Sierra Pacific Resources...................... 800 30,000
------------
159,600
------------
ELECTRONICS - 1.9%
Perkin-Elmer Corp............................. 600 42,638
-----------
</TABLE>
See notes to financial statements
<PAGE> 108
COVA SERIES TRUST
MID CAP VALUE PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE><CAPTION>
- --------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
Entertainment & Leisure - 2.1%
Hasbro, Inc..................................... 1,500 $ 47,250
------------
Food Retailers - 1.4%
Dreyers Grand Ice Cream, Inc.................... 1,300 31,363
------------
Forest Products & Paper - 2.9%
Buckeye Technologies, Inc. *.................... 1,000 46,250
Fort James Corp................................. 500 19,125
------------
65,375
------------
Health Care Providers - 6.2%
Humana, Inc. *.................................. 2,500 51,875
Sierra Health Services, Inc. *.................. 1,300 43,713
Trigon Healthcare, Inc. *....................... 1,600 41,800
------------
137,388
------------
Heavy Machinery - 2.0%
AGCO Corp....................................... 1,500 43,875
------------
Household Products - 1.6%
Jostens, Inc.................................... 1,500 34,588
------------
Insurance - 5.7%
Everest RE Holdings, Inc........................ 1,200 49,500
Penncorp Financial Group, Inc................... 1,400 49,963
Transatlantic Holdings, Inc..................... 400 28,600
------------
128,063
------------
Media - Broadcasting & Publishing - 1.8%
TV Azteca, S.A. (ADR) *......................... 1,800 40,613
------------
Medical Supplies - 4.5%
Acuson Corp. *.................................. 2,500 41,406
Mettler-Toledo International, Inc. *............ 1,000 17,250
St. Jude Medical, Inc. *........................ 1,400 42,700
------------
101,356
------------
Oil & Gas - 8.1%
NGC Corp........................................ 2,800 49,000
Sonat, Inc...................................... 1,000 45,750
Southwest Gas Corp.............................. 2,200 41,113
Ultramar Diamond Shamrock Corp.................. 1,400 44,625
------------
180,488
------------
Pharmaceuticals - 2.1%
Mylan Laboratories, Inc......................... 2,200 46,063
------------
</TABLE>
See notes to financial statements
<PAGE> 109
COVA SERIES TRUST
MID CAP VALUE PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE><CAPTION>
- --------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
REAL ESTATE - 3.8%
Equity Office Properties Trust (REIT)............. 1,300 $ 41,031
Healthcare Realty Trust, Inc. (REIT).............. 1,500 43,406
------------
84,437
------------
RESTAURANTS - 2.3%
Tricon Global Restaurants, Inc. *................ 1,800 52,313
------------
RETAILERS - 9.4%
Office Depot, Inc. *............................. 1,800 43,088
OfficeMax, Inc. *................................ 3,300 47,025
Proffitt's, Inc. *............................... 1,700 48,344
Stride Rite Corp................................. 2,000 24,000
Talbots, Inc..................................... 2,600 47,125
------------
209,582
------------
TEXTILES, CLOTHING & FABRICS - 4.3%
Fruit of the Loom, Inc. *........................ 1,900 48,688
Polymer Group, Inc. *............................ 5,000 47,500
------------
96,188
------------
TOTAL INVESTMENTS - 92.4%
(Cost $2,012,664) 2,059,650
Other Assets and Liabilities (net) - 7.6% 169,258
------------
TOTAL NET ASSETS - 100.0% $ 2,228,908
============
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security as this stock did not declare
or pay dividends in the 12 month period.
ADR - American Depositary Receipt
REIT - Real Estate Investment Trust
See notes to financial statements
<PAGE> 110
COVA SERIES TRUST
LARGE CAP RESEARCH PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ---------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 90.6%
AUTOMOTIVE - 1.2%
Genuine Parts Co. .......................................... 100 $ 3,394
Snap-On, Inc. .............................................. 300 13,088
----------
16,482
----------
BANKING - 12.2%
BankAmerica Corp. .......................................... 200 14,600
BankBoston Corp. ........................................... 100 9,394
Chase Manhattan Corp. ...................................... 200 21,900
Citicorp ................................................... 200 25,288
Comerica, Inc. ............................................. 200 18,050
First Chicago NBD Corp. .................................... 200 16,700
First Union Corp. .......................................... 300 15,375
Mellon Bank Corp. .......................................... 300 18,188
Washington Mutual, Inc. .................................... 400 25,525
----------
165,020
----------
BEVERAGES, FOOD & TOBACCO - 11.6%
Archer-Daniels-Midland Co. ................................. 900 19,519
Conagra, Inc. .............................................. 400 13,125
CPC International, Inc. .................................... 200 21,600
Fortune Brands, Inc. ....................................... 400 14,825
Heinz (H.J.), Co. .......................................... 400 20,325
Philip Morris Companies, Inc. .............................. 300 13,594
Pioneer Hi-Bred International, Inc. ........................ 200 21,450
RJR Nabisco Holdings Corp., Inc. ........................... 400 15,000
Sara Lee Corp. ............................................. 300 16,883
----------
156,321
----------
CHEMICALS - 4.1%
Air Products & Chemicals, Inc. ............................. 200 16,450
International Flavors & Fragrances, Inc. ................... 300 15,450
Morton International, Inc. ................................. 400 13,750
Rohm & Haas Co. ............................................ 100 9,575
----------
55,225
----------
COMMUNICATIONS - 1.8%
Alltel Corp. ............................................... 600 24,638
----------
COMPUTER SOFTWARE & PROCESSING - 0.8%
Cisco Systems, Inc. * ...................................... 200 11,150
----------
COMPUTERS & INFORMATION - 5.0%
Digital Equipment Corp. * .................................. 200 7,400
EMC Corp. * ................................................ 400 10,975
</TABLE>
See notes to financial statements
<PAGE> 111
COVA SERIES TRUST
LARGE CAP RESEARCH PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ---------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
COMPUTERS & INFORMATION - CONTINUED
Hewlett-Packard Co. ........................................ 100 $ 6,250
International Business Machines Corp. ...................... 200 20,913
Seagate Technology, Inc * .................................. 300 5,775
Sun Microsystems, Inc. * ................................... 400 15,950
----------
67,263
----------
CONTAINERS & PACKAGING - 1.1%
Crown Cork & Seal, Inc. .................................... 300 15,038
----------
ELECTRIC UTILITIES - 7.3%
Baltimore Gas and Electric Co. ............................. 700 23,844
Carolina Power & Light Co. ................................. 600 25,463
Cinergy Corp. .............................................. 600 22,988
FirstEnergy Corp. * ........................................ 900 26,100
----------
98,395
----------
ELECTRICAL EQUIPMENT - 1.7%
Emerson Electric Co. ....................................... 400 22,575
----------
ELECTRONICS - 3.7%
CBS Corporation ............................................ 500 14,719
Intel Corp. ................................................ 200 14,050
Micron Technology, Inc. .................................... 400 10,400
Motorola, Inc. ............................................. 200 11,413
----------
50,582
----------
ENTERTAINMENT & LEISURE - 1.4%
Hasbro, Inc. ............................................... 600 18,900
----------
FINANCIAL SERVICES - 3.1%
American General Corp. ..................................... 300 16,219
Morgan Stanley, Dean Witter, Discover & Co. ................ 200 11,825
Providian Financial Corp. .................................. 300 13,556
----------
41,600
----------
FOREST PRODUCTS & PAPER - 3.7%
Bowater, Inc. .............................................. 300 13,331
Fort James Corp. ........................................... 600 22,950
Sonoco Products Co. ........................................ 400 13,875
----------
50,156
----------
HEALTH CARE PROVIDERS - 2.3%
Humana, Inc. * ............................................. 800 16,600
United Healthcare Corp. .................................... 300 14,906
----------
31,506
----------
</TABLE>
See notes to financial statements
<PAGE> 112
COVA SERIES TRUST
LARGE CAP RESEARCH PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ---------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
HEAVY MACHINERY - 2.6%
Case Corp. ................................................. 200 $ 12,088
Deere & Co. ................................................ 400 23,325
----------
35,413
----------
INDUSTRIAL - DIVERSIFIED - 2.8%
Corning, Inc. .............................................. 300 11,138
Minnesota Mining & Manufacturing Co. ....................... 200 16,413
Temple Inland, Inc. ........................................ 200 10,463
----------
38,014
----------
INSURANCE - 6.0%
Aetna, Inc. ................................................ 100 7,056
Allstate Corp. ............................................. 100 9,088
Chubb Corp. ................................................ 300 22,688
Cigna Corp. ................................................ 200 34,613
Jefferson Pilot Corp. ...................................... 100 7,788
----------
81,233
----------
MEDICAL SUPPLIES - 2.0%
Baxter International, Inc. ................................. 300 15,131
St. Jude Medical, Inc. * ................................... 400 12,200
----------
27,331
----------
OIL & GAS - 4.8%
Coastal Corp. .............................................. 200 12,388
Columbia Gas System, Inc. .................................. 200 15,713
ENI SPA (ADR) * ............................................ 200 11,413
Mobil Corp. ................................................ 200 14,438
Total S.A. (ADR) ........................................... 200 11,100
----------
65,052
----------
PHARMACEUTICALS - 4.2%
American Home Products Corp. ............................... 300 22,950
Bristol-Myers Squibb Co. ................................... 200 18,925
SmithKline Beecham Plc (ADR) ............................... 300 15,431
----------
57,306
----------
RESTAURANTS - 1.1%
Tricon Global Restaurants, Inc. * .......................... 500 14,531
----------
RETAILERS - 1.7%
Kimberly-Clark Corp. ....................................... 200 9,863
Toys "R" Us, Inc. * ........................................ 400 12,575
----------
22,438
----------
</TABLE>
See notes to financial statements
<PAGE> 113
COVA SERIES TRUST
LARGE CAP RESEARCH PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- ---------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
TELEPHONE SYSTEMS - 2.6%
Bell Atlantic Corp. ........................................ 100 $ 9,100
Bellsouth Corp. ............................................ 200 11,263
SBC Communications, Inc. ................................... 200 14,650
----------
35,013
----------
TEXTILES, CLOTHING & FABRICS - 1.8%
Fruit of the Loom, Inc. * .................................. 400 10,250
VF Corp. ................................................... 300 13,781
----------
24,031
----------
TOTAL INVESTMENTS - 90.6%
(Cost $1,218,629) 1,225,213
Other Assets and Liabilities (net) - 9.4% 127,797
----------
TOTAL NET ASSETS - 100.0% $1,353,010
==========
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security as this stock did not declare or pay
dividends in the 12 month period.
ADR - American Depositary Receipt
See notes to financial statements
<PAGE> 114
COVA SERIES TRUST
DEVELOPING GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- -------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 90.9%
AEROSPACE & DEFENSE - 4.3%
Orbital Sciences Corp. * .............................. 2,500 $ 74,375
----------
APPAREL RETAILERS - 3.2%
Stage Stores, Inc. * .................................. 1,500 56,063
----------
BUILDING MATERIALS - 1.4%
Park-Ohio Industries * ................................ 1,300 23,725
----------
COMMERCIAL SERVICES - 12.2%
Amor Holdings, Inc. * ................................. 1,900 21,138
Butler International, Inc. * .......................... 1,500 26,250
Computer Learning Centers, Inc. * ..................... 1,100 67,375
G & K Services, Inc. Class A .......................... 800 33,600
Kroll-O'Gara Co. (The) * .............................. 1,600 28,200
M/A/R/C, Inc .......................................... 1,000 18,000
SOS Staffing Services, Inc. * ......................... 900 16,984
----------
211,547
----------
COMMUNICATIONS - 3.7%
Plantronics, Inc. * ................................... 1,600 64,000
----------
COMPUTER SOFTWARE & PROCESSING - 11.8%
Accer8 Technology Corp. * ............................. 900 24,300
AlphaNet Solutions, Inc. * ............................ 1,500 17,250
Information Management Resources, Inc. * .............. 2,300 86,250
INTERSOLV, Inc. * ..................................... 1,200 24,300
Mastech Corp. * ....................................... 600 19,050
The Learning Co., Inc. * .............................. 2,100 33,731
----------
204,881
----------
COMPUTERS & INFORMATION - 2.9%
Infocus Systems, Inc. * ............................... 1,200 36,450
MICROS Systems, Inc. * ................................ 300 13,500
----------
49,950
----------
ELECTRICAL EQUIPMENT - 2.0%
Advanced Lighting Technolgies, Inc .................... 900 17,100
Chicago Miniature Lamp, Inc ........................... 500 16,875
----------
33,975
----------
ELECTRONICS - 9.4%
ADFlex Solutions, Inc. * .............................. 900 14,513
CellStar Corp. * ...................................... 2,200 43,725
</TABLE>
See notes to financial statements
<PAGE> 115
COVA SERIES TRUST
DEVELOPING GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- -------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ELECTRONICS - CONTINUED
Fluke Corp ............................................ 800 $ 20,850
Lecroy Corp. * ........................................ 500 15,125
LTX Corp. * ........................................... 2,700 11,981
Technitrol, Inc ....................................... 1,900 57,000
----------
163,194
----------
FOOD RETAILERS - 1.4%
Dreyers Grand Ice Cream, Inc .......................... 1,000 24,125
----------
HEALTH CARE PROVIDERS - 6.4%
Counsel Corp. * ....................................... 1,900 24,700
Healthcare Services Group, Inc. * ..................... 2,000 25,250
Hooper Holmes, Inc .................................... 2,100 30,581
Horizon Health Corp. * ................................ 1,300 30,225
----------
110,756
----------
HEAVY MACHINERY - 1.0%
JLG Industries, Inc ................................... 1,300 18,363
----------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 3.8%
McGrath Rentcorp ...................................... 2,700 66,150
----------
MEDICAL SUPPLIES - 8.5%
Arrow International, Inc .............................. 700 25,900
Hologic, Inc. * ....................................... 1,700 35,169
Life Technologies, Inc ................................ 800 26,600
Maxxim Medical, Inc. * ................................ 1,300 28,275
Orthofix International, N.V. * ........................ 1,300 15,275
Protocol Systems, Inc. * .............................. 1,600 16,100
----------
147,319
----------
METALS - 2.3%
Matthews International Corp. Class A .................. 900 39,600
----------
OIL & GAS - 12.3%
Core Laboratories N.V. * .............................. 1,600 28,900
Dawson Production Services, Inc. * .................... 1,800 31,275
Edge Petroleum Corp. * ................................ 2,000 23,000
Friede Goldman International, Inc. * .................. 300 8,963
Harken Energy Corp. * ................................. 4,500 31,500
Seitel, Inc. * ........................................ 900 15,413
Stone Energy Corp. * .................................. 800 26,800
Vintage Petroleum, Inc ................................ 2,500 47,500
----------
213,351
----------
</TABLE>
See notes to financial statements
<PAGE> 116
COVA SERIES TRUST
DEVELOPING GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- -------------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
PHARMACEUTICALS - 0.4%
Kos Pharmaceuticals, Inc. * ........................... 500 $ 7,719
----------
RETAILERS - 1.8%
Ames Department Stores, Inc. * ........................ 1,800 31,500
----------
TEXTILES, CLOTHING & FABRICS - 2.1%
Kenneth Cole Productions, Inc. Class A * .............. 1,000 16,063
Tarrant Apparel Group * ............................... 1,300 20,313
----------
36,376
----------
TOTAL INVESTMENTS - 90.9%
(Cost $1,568,464) 1,576,969
Other Assets and Liabilities (net) - 9.1% 157,181
----------
TOTAL NET ASSETS - 100.0% $1,734,150
==========
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security as this stock did not declare or pay
dividends in the 12 month period.
See notes to financial statements
<PAGE> 117
COVA SERIES TRUST
BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- --------------------------------------------------------------------------------------------------------
<CAPTION>
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS - 50.5%
AUTOMOTIVE - 0.5%
150 Echlin, Inc. ................................................................ $ 5,428
20 Goodyear Tire & Rubber Co. .................................................. 1,273
----------
6,701
----------
BANKING - 3.6%
300 Banc One Corp. .............................................................. 16,294
100 Chase Manhattan Corp. ....................................................... 10,950
130 Crestar Financial Corp. ..................................................... 7,410
300 First Union Corp. ........................................................... 15,375
38 Southtrust Corp. ............................................................ 2,411
----------
52,440
----------
BEVERAGES, FOOD & TOBACCO - 3.8%
675 IBP, Inc. ................................................................... 14,133
390 Pepsico, Inc. ............................................................... 14,211
280 Philip Morris Companies, Inc. ............................................... 12,681
325 Sysco Corp. ................................................................. 14,808
----------
55,833
----------
BUILDING MATERIALS - 0.8%
410 Sherwin Williams Co. ........................................................ 11,378
----------
CHEMICALS - 2.1%
325 Praxair, Inc. ............................................................... 14,625
610 Solutia, Inc. ............................................................... 16,279
----------
30,904
----------
COMMERCIAL SERVICES - 2.0%
485 Cendant Corp. * ............................................................. 16,672
230 Ecolab, Inc. ................................................................ 12,751
----------
29,423
----------
COMMUNICATIONS - 0.8%
234 Tellabs, Inc. * ............................................................. 12,373
----------
COMPUTER SOFTWARE & PROCESSING - 6.0%
210 Automatic Data Processing, Inc. ............................................. 12,889
270 Computer Associates International, Inc. ..................................... 14,276
600 First Data Corp. ............................................................ 17,550
100 Microsoft Corp. * ........................................................... 12,925
335 Networks Associates, Inc. * ................................................. 17,713
475 Oracle Corp. * .............................................................. 10,598
----------
85,951
----------
CONTAINERS & PACKAGING - 1.9%
350 Avery-Dennison Corp. ........................................................ 15,663
230 Crown Cork & Seal, Inc. ..................................................... 11,529
----------
27,192
----------
COSMETICS & PERSONAL CARE - 0.4%
117 Estee Lauder Companies - Class A ............................................ 6,018
----------
ELECTRIC UTILITIES - 1.3%
190 Baltimore Gas and Electric Co. .............................................. 6,472
240 Central & South West Corp. .................................................. 6,495
150 Western Resources, Inc. ..................................................... 6,450
----------
19,417
----------
</TABLE>
See notes to financial statements
<PAGE> 118
COVA SERIES TRUST
BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- --------------------------------------------------------------------------------------------------------
<CAPTION>
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ELECTRICAL EQUIPMENT - 2.3%
250 Applied Materials, Inc. * ................................................... $ 7,531
185 General Electric Co. ........................................................ 13,574
130 Grainger (W.W.), Inc. ....................................................... 12,634
----------
33,739
----------
ELECTRONICS - 1.5%
203 Analog Devices, Inc. * ...................................................... 5,621
280 Motorola, Inc. .............................................................. 15,978
----------
21,599
----------
FINANCIAL SERVICES - 2.1%
470 Green Tree Financial Corp. .................................................. 12,308
118 SLM Holding Corp. ........................................................... 16,417
160 United Companies Financial Corp. ............................................ 2,480
----------
31,205
----------
FOREST PRODUCTS & PAPER - 0.6%
310 Mead Corp. .................................................................. 8,680
----------
HEALTH CARE PROVIDERS - 0.7%
360 Columbia/HCA Healthcare Corp. ............................................... 10,665
----------
HOUSEHOLD PRODUCTS - 0.9%
300 Newell Co. .................................................................. 12,750
----------
INDUSTRIAL - DIVERSIFIED - 1.8%
196 Baker Hughes, Inc. .......................................................... 8,551
380 Millipore Corp. ............................................................. 12,896
225 Republic Industries, Inc. * ................................................. 5,245
----------
26,692
----------
INSURANCE - 0.9%
180 PMI Group, Inc. (The) ....................................................... 13,016
----------
MEDICAL SUPPLIES - 0.3%
160 Bard (C.R.), Inc. ........................................................... 5,010
----------
METALS - 0.5%
180 UCAR International, Inc. * .................................................. 7,189
----------
OIL & GAS - 3.1%
390 Dresser Industries, Inc. .................................................... 16,356
690 Union Texas Petroleum Holdings, Inc. ........................................ 14,361
400 Vastar Resources, Inc. ...................................................... 14,300
----------
45,017
----------
PHARMACEUTICALS - 6.5%
160 Allergan, Inc. .............................................................. 5,370
210 American Home Products Corp. ................................................ 16,065
155 Bristol-Myers Squibb Co. .................................................... 14,667
170 Eli Lilly & Co. ............................................................. 11,836
170 Merck & Co., Inc. ........................................................... 18,063
240 Schering-Plough Corp. ....................................................... 14,910
260 SmithKline Beecham Plc (ADR) ................................................ 13,374
----------
94,285
----------
RESTAURANTS - 0.4%
210 Tricon Global Restaurants, Inc. * ........................................... 6,103
----------
</TABLE>
See notes to financial statements
<PAGE> 119
COVA SERIES TRUST
BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- --------------------------------------------------------------------------------------------------------
<CAPTION>
PAR/SHARE SECURITY VALUE
AMOUNT DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RETAILERS - 4.5%
340 Albertson's, Inc. ........................................................... $ 16,108
320 Consolidated Stores Corp. * ................................................. 14,060
200 J.C. Penney Co., Inc. ....................................................... 12,063
430 Pep Boys - Manny, Moe & Jack ................................................ 10,266
340 Wal-Mart Stores, Inc. ....................................................... 13,409
----------
65,906
----------
TELEPHONE SYSTEMS - 0.4%
250 Frontier Corp. .............................................................. 6,016
----------
TRANSPORTATION - 0.8%
125 Burlington Northern Santa Fe Corp. .......................................... 11,617
----------
Total Common Stocks (Cost $701,774) ......................................... 737,119
----------
U.S. GOVERNMENT AGENCY MORTGAGE BACKED SECURITIES - 13.0% COUPON MATURITY
------ --------
$49,570 Federal Home Loan Mortgage Corp. ........................ 6.500% 01/01/12 49,709
47,578 Federal National Mortgage Association ................... 6.000% 03/01/11 46,865
44,505 Government National Mortgage Association ................ 6.500% 03/15/24 44,074
49,641 Government National Mortgage Association ................ 7.000% 07/20/27 49,766
----------
Total Mortgage Backed Securities (Cost $186,375) 190,414
----------
U.S. TREASURY SECURITIES - 25.1%
50,000 U.S. Treasury Note 6.375% 05/15/00 50,766
100,000 U.S. Treasury Note 6.375% 08/15/02 102,625
100,000 U.S. Treasury Note 7.250% 05/15/04 107,969
100,000 U.S. Treasury Note 6.625% 05/15/07 105,906
----------
Total U.S. Treasury Securities (Cost $361,726) 367,266
----------
TOTAL INVESTMENTS - 88.6%
(Cost $1,249,875) 1,294,799
Other Assets and Liabilities (net) - 11.4% 166,251
----------
TOTAL NET ASSETS - 100.0% $1,461,050
==========
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security as this stock did not declare or
pay dividends in the 12 month period.
ADR - American Depositary Receipt
See notes to financial statements
<PAGE> 120
COVA SERIES TRUST
SMALL CAP EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 94.3%
BANKING - 4.7%
Associated Banc-Corp ................................... 267 $ 14,718
Bank United Corp. ...................................... 400 19,575
CCB Financial Corp. .................................... 150 16,125
St. Paul Bancorp, Inc. ................................. 450 11,813
------------
62,231
------------
BEVERAGES, FOOD & TOBACCO - 4.7%
Canandaigua Wine Co. Inc. Class A * .................... 500 27,688
Hormel Foods Corp. ..................................... 500 16,375
Performance Food Group Co. * ........................... 746 17,718
------------
61,781
------------
BUILDING MATERIALS - 0.8%
Barnett, Inc. * ........................................ 500 11,000
------------
CHEMICALS - 8.2%
Cytec Industries, Inc. * ............................... 300 14,081
Hanna (M. A.) Co. ...................................... 1,000 25,250
International Specialty Products, Inc. *................ 800 11,950
Minerals Technologies, Inc. ............................ 600 27,253
OM Group, Inc. ......................................... 350 12,819
RPM, Inc. .............................................. 1,125 17,156
------------
108,509
------------
COAL - 1.0%
Zeigler Coal Holding Co. ............................... 800 13,050
------------
COMMERCIAL SERVICES - 3.3%
IntelliQuest Information Group, Inc. * ................. 850 11,263
Interim Services, Inc. * ............................... 400 10,350
Rental Service Corp. * ................................. 500 12,281
Unitog Co. ............................................. 450 10,013
------------
43,907
------------
COMPUTER SOFTWARE & PROCESSING - 11.3%
Active Voice Corp. * ................................... 600 7,500
Cognos, Inc. * ......................................... 1,100 25,300
Cotelligent Group, Inc. * .............................. 800 15,300
National Data Corp. .................................... 800 28,900
Networks Associates, Inc. * ............................ 467 24,693
SPSS, Inc. * ........................................... 800 15,400
Sungard Data Systems, Inc. * ........................... 800 24,800
SystemSoft Corp. * ..................................... 1,172 7,472
------------
149,365
------------
</TABLE>
See notes to financial statements
<PAGE> 121
COVA SERIES TRUST
SMALL CAP EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMPUTERS & INFORMATION - 1.8%
Zebra Technologies Corp. Class A * ................... 800 $ 23,800
------------
CONTAINERS & PACKAGING - 0.8%
AptarGroup, Inc. ..................................... 200 11,100
------------
COSMETICS & PERSONAL CARE - 1.4%
Cole National Corp. Class A * ........................ 600 17,963
------------
ELECTRIC UTILITIES - 0.9%
Central Louisiana Electric, Inc. ..................... 350 11,331
------------
ELECTRICAL EQUIPMENT - 1.1%
Hubbell, Inc. Class B ................................ 300 14,794
------------
ELECTRONICS - 2.9%
CFM Technologies, Inc. * ............................. 662 10,178
Komag, Inc. * ........................................ 816 12,138
SBS Technologies, Inc. * ............................. 600 16,275
------------
38,591
------------
FINANCIAL SERVICES - 4.8%
Aames Financial Corp. ................................ 550 7,116
Finova Group, Inc .................................... 300 14,906
Money Store, Inc. (The) .............................. 700 14,700
Resource Bancshares Mortgage Group, Inc............... 735 11,990
Southern Pacific Funding Corp. * ..................... 900 11,813
United Companies Financial Corp. ..................... 208 3,224
------------
63,749
------------
FOREST PRODUCTS & PAPER - 0.8%
Caraustar Industries, Inc. ........................... 300 10,275
------------
HEALTH CARE PROVIDERS - 4.3%
Apria Healthcare Group * ............................. 1,000 13,438
Beverly Enterprises, Inc. * .......................... 700 9,100
Integrated Health Services, Inc. ..................... 550 17,153
Sun Healthcare Group, Inc. * ......................... 900 17,438
------------
57,129
------------
HEAVY MACHINERY - 4.0%
Albany International Corp. Class A ................... 550 12,650
DT Industries, Inc. .................................. 400 13,600
Kulicke & Soffa Industries, Inc. * ................... 900 16,763
Tecumseh Products Co. Class A ........................ 200 9,750
------------
52,763
------------
</TABLE>
See notes to financial statements
<PAGE> 122
COVA SERIES TRUST
SMALL CAP EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 0.9%
Furniture Brands International, Inc. * ................ 600 $ 12,300
------------
HOUSEHOLD PRODUCTS - 2.8%
Blyth Industries, Inc. * .............................. 600 17,963
Samsonite Corp. * ..................................... 600 18,975
------------
36,938
------------
INDUSTRIAL - DIVERSIFIED - 0.9%
Lydall, Inc. * ........................................ 600 11,700
------------
INSURANCE - 2.8%
CMAC Investment Corp. ................................. 300 18,113
HCC Insurance Holdings, Inc. .......................... 900 19,125
------------
37,238
------------
MEDICAL SUPPLIES - 5.2%
DENTSPLY International, Inc. .......................... 600 18,300
Fisher Scientific International, Inc. ................. 400 19,100
Hanger Orthopedic Group, Inc. * ....................... 700 9,013
Lunar Corp. * ......................................... 500 10,250
ResMed, Inc. * ........................................ 400 11,250
------------
67,913
------------
METALS - 2.0%
AK Steel Holding Corp. ................................ 800 14,150
J&L Specialty Steel, Inc. ............................. 1,200 12,075
------------
26,225
------------
OIL & GAS - 6.1%
Global Industries Ltd. * .............................. 1,000 17,000
Ocean Energy, Inc. * .................................. 450 22,191
Swift Energy Co. * .................................... 580 12,210
Union Texas Petroleum Holdings, Inc. .................. 700 14,569
United Meridian Corp. * ............................... 500 14,063
------------
80,033
------------
PHARMACEUTICALS - 4.9%
Allergan, Inc. ........................................ 600 20,138
Penederm, Inc. * ...................................... 800 8,000
PharMerica, Inc. ...................................... 1,118 11,599
R. P. Scherer Corp. * ................................. 400 24,400
------------
64,137
------------
</TABLE>
See notes to financial statements
<PAGE> 123
COVA SERIES TRUST
SMALL CAP EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
RETAILERS - 3.5%
Bombay Co., Inc. (The) * ............................ 1,400 $ 6,475
Brinker International, Inc. * ....................... 800 12,800
Discount Auto Parts, Inc. * ......................... 550 10,519
Marks Brothers Jewelers, Inc. * ..................... 1,000 16,500
------------
46,294
------------
TELEPHONE SYSTEMS - 3.8%
Arch Communications Group, Inc. * ................... 1,500 7,688
IXC Communications, Inc. * .......................... 650 20,394
Mobile Telecommunications Technologies Corp. *....... 1,027 22,594
------------
50,676
------------
TEXTILES, CLOTHING & FABRICS - 1.8%
Donna Karan International, Inc. * ................... 900 11,588
Kellwood Co. ........................................ 400 12,000
------------
23,588
------------
TRANSPORTATION - 2.8%
Hub Group, Inc. Class A * ........................... 500 14,875
Simon Transportation Services, Inc. * ............... 400 9,600
USFreightways Corp. ................................. 400 13,000
------------
37,475
------------
TOTAL INVESTMENTS - 94.3%
(Cost $1,243,256) 1,245,855
Other Assets and Liabilities (net) - 5.7% 75,090
------------
TOTAL NET ASSETS - 100.0% $ 1,320,945
============
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security as this stock did not declare
or pay dividends in the 12 month period.
See notes to financial statements
<PAGE> 124
COVA SERIES TRUST
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- -------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 94.5%
AUTOMOTIVE - 4.5%
Chrysler Corp. .......................................... 610 $ 21,464
Echlin, Inc. ............................................ 840 30,398
Goodyear Tire & Rubber Co. .............................. 370 23,541
---------
75,403
---------
BANKING - 23.0%
Banc One Corp. .......................................... 560 30,415
Chase Manhattan Corp. ................................... 300 32,850
Comerica, Inc. .......................................... 300 27,075
Corestates Financial Corp. .............................. 420 33,626
Crestar Financial Corp. ................................. 580 33,060
First Union Corp. ....................................... 650 33,313
KeyCorp ................................................. 450 31,866
Mellon Bank Corp. ....................................... 590 35,769
National City Corp. ..................................... 520 34,190
PNC Bank Corp. .......................................... 670 38,232
U.S. Bancorp ............................................ 280 31,343
Wachovia Corp. .......................................... 360 29,205
---------
390,944
---------
BEVERAGES, FOOD & TOBACCO - 5.0%
IBP, Inc. ............................................... 840 17,581
Philip Morris Companies, Inc. ........................... 720 32,625
Sara Lee Corp. .......................................... 600 33,788
---------
83,994
---------
BUILDING MATERIALS - 1.8%
Sherwin Williams Co. .................................... 1,080 29,970
---------
CHEMICALS - 3.9%
PPG Industries, Inc. .................................... 390 22,279
Praxair, Inc. ........................................... 380 17,100
RPM, Inc. ............................................... 713 10,866
Solutia, Inc. ........................................... 600 16,013
---------
66,258
---------
COMMERCIAL SERVICES - 1.0%
Ecolab, Inc. ............................................ 305 16,908
---------
CONTAINERS & PACKAGING - 2.3%
Avery-Dennison Corp. .................................... 440 19,690
Crown Cork & Seal, Inc. ................................. 370 18,546
---------
38,236
---------
</TABLE>
See notes to financial statements
<PAGE> 125
COVA SERIES TRUST
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- -------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -------------------------------------------------------------------------------------
<S> <C> <C>
ELECTRIC UTILITIES - 6.0%
Baltimore Gas and Electric Co. .......................... 780 $ 26,569
Central & South West Corp. .............................. 845 22,868
Scana Corp. ............................................. 840 25,148
Union Electric Co. ...................................... 610 26,383
---------
100,968
---------
ELECTRICAL EQUIPMENT - 1.7%
Grainger (W.W.), Inc. ................................... 290 28,184
---------
ELECTRONICS - 1.3%
Motorola, Inc. .......................................... 380 21,684
---------
FINANCIAL SERVICES - 4.6%
Federal National Mortgage Association ................... 650 37,091
Green Tree Financial Corp. .............................. 680 17,808
SLM Holding Corp. ....................................... 110 15,304
United Companies Financial Corp. ........................ 420 6,510
---------
76,713
---------
FOREST PRODUCTS & PAPER - 2.3%
Consolidated Papers, Inc. ............................... 420 22,418
Mead Corp. .............................................. 560 15,680
---------
38,098
---------
HEALTH CARE PROVIDERS - 0.9%
Columbia/HCA Healthcare Corp. ........................... 495 14,664
---------
HOUSEHOLD PRODUCTS - 2.0%
Newell Co. .............................................. 800 34,000
---------
INDUSTRIAL - DIVERSIFIED - 1.3%
Millipore Corp. ......................................... 630 21,381
---------
INSURANCE - 1.4%
PMI Group, Inc. (The) ................................... 330 23,863
---------
MEDICAL SUPPLIES - 1.4%
Bard (C.R.), Inc. ....................................... 750 23,484
---------
OIL & GAS - 5.6%
Atlantic Richfield Co. .................................. 350 28,044
Dresser Industries, Inc. ................................ 860 36,066
Tidewater, Inc. ......................................... 70 3,859
Union Texas Petroleum Holdings, Inc. .................... 1,300 27,056
---------
95,025
---------
</TABLE>
See notes to financial statements
<PAGE> 126
COVA SERIES TRUST
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- -------------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -------------------------------------------------------------------------------------
<S> <C> <C>
PHARMACEUTICALS - 11.7%
Abbott Laboratories ..................................... 480 $ 31,470
Allergan, Inc. .......................................... 750 25,172
American Home Products Corp. ............................ 525 40,163
Bristol-Myers Squibb Co. ................................ 400 37,850
Schering-Plough Corp. ................................... 510 31,684
SmithKline Beecham Plc (ADR) ............................ 580 29,834
---------
196,173
---------
REAL ESTATE - 2.5%
Nationwide Health Properties, Inc. (REIT) ............... 790 20,145
Prentiss Properties Trust (REIT) ........................ 780 21,791
---------
41,936
---------
RETAILERS - 4.5%
Albertson's, Inc. ....................................... 620 29,373
J.C. Penney Co., Inc. ................................... 540 32,569
Pep Boys - Manny, Moe & Jack ............................ 595 14,206
---------
76,148
---------
TELEPHONE SYSTEMS - 4.1%
Frontier Corp. .......................................... 1,415 34,048
U.S. West Communications Group .......................... 760 34,295
---------
68,343
---------
TRANSPORTATION - 1.7%
Burlington Northern Santa Fe Corp. ...................... 310 28,811
---------
TOTAL INVESTMENTS - 94.5%
(Cost $1,468,437) 1,591,188
Other Assets and Liabilities (net) - 5.5% 92,123
---------
TOTAL NET ASSETS - 100.0% $ 1,683,311
=========
</TABLE>
PORTFOLIO FOOTNOTES:
ADR - American Depositary Receipt
REIT - Real Estate Investment Trust
See notes to financial statements
<PAGE> 127
COVA SERIES TRUST
GROWTH & INCOME EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 92.8%
AUTOMOTIVE - 0.9%
Echlin, Inc. .................................... 620 $ 22,436
-----------
BANKING - 7.1%
Banc One Corp. .................................. 800 43,450
Chase Manhattan Corp. ........................... 415 45,443
Crestar Financial Corp. ......................... 490 27,930
First Union Corp. ............................... 860 44,075
Southtrust Corp. ................................ 122 7,739
-----------
168,637
-----------
BEVERAGES, FOOD & TOBACCO - 7.4%
IBP, Inc. ....................................... 2,000 41,875
Pepsico, Inc. ................................... 1,265 46,093
Philip Morris Companies, Inc. ................... 980 44,402
Sysco Corp. ..................................... 980 44,651
-----------
177,021
-----------
BUILDING MATERIALS - 1.6%
Sherwin Williams Co. ............................ 1,400 38,850
-----------
CHEMICALS - 3.8%
Praxair, Inc. ................................... 975 43,875
Solutia, Inc. ................................... 1,775 47,370
-----------
91,245
-----------
COMMERCIAL SERVICES - 2.9%
Cendant Corp. * ................................. 1,350 46,406
Ecolab, Inc. .................................... 400 22,175
-----------
68,581
-----------
COMMUNICATIONS - 1.9%
Tellabs, Inc. * ................................. 850 44,944
-----------
COMPUTER SOFTWARE & PROCESSING - 9.7%
Automatic Data Processing, Inc. ................. 765 46,952
Computer Associates International, Inc. ......... 900 47,588
First Data Corp. ................................ 1,655 48,409
Microsoft Corp. * ............................... 175 22,619
Network Associates, Inc. * ...................... 420 22,208
Oracle Corp. * .................................. 2,000 44,625
-----------
232,401
-----------
CONTAINERS & PACKAGING - 3.7%
Avery-Dennison Corp. ............................ 1,050 46,988
Crown Cork & Seal, Inc. ......................... 825 41,353
-----------
88,341
-----------
</TABLE>
See notes to financial statements
<PAGE> 128
COVA SERIES TRUST
GROWTH & INCOME EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C>
COSMETICS & PERSONAL CARE - 0.9%
Estee Lauder Companies - Class A ................ 400 $ 20,575
-----------
ELECTRIC UTILITIES - 3.4%
Baltimore Gas and Electric Co. .................. 1,075 36,617
Central & South West Corp. ...................... 1,300 35,181
Western Resources, Inc. ......................... 200 8,600
-----------
80,398
-----------
ELECTRICAL EQUIPMENT - 4.6%
Applied Materials, Inc. * ....................... 750 22,594
General Electric Co. ............................ 600 44,025
Grainger (W.W.), Inc. ........................... 450 43,734
-----------
110,353
-----------
ELECTRONICS - 2.6%
Analog Devices, Inc. * .......................... 664 18,385
Motorola, Inc. .................................. 775 44,223
-----------
62,608
-----------
FINANCIAL SERVICES - 2.2%
SLM Holding Corp. ............................... 293 40,764
United Companies Financial Corp. ................ 693 10,742
-----------
51,506
-----------
FOREST PRODUCTS & PAPER - 0.9%
Mead Corp. ...................................... 750 21,000
-----------
HEALTH CARE PROVIDERS - 1.6%
Columbia/HCA Healthcare Corp. ................... 1,290 38,216
-----------
HOUSEHOLD PRODUCTS - 1.8%
Newell Co. ...................................... 1,015 43,138
-----------
INDUSTRIAL - DIVERSIFIED - 3.8%
Baker Hughes, Inc. .............................. 615 26,829
Millipore Corp. ................................. 1,225 41,573
Republic Industries, Inc. * ..................... 1,000 23,313
-----------
91,715
-----------
INSURANCE - 1.9%
PMI Group, Inc. (The) ........................... 625 45,195
----------
MEDICAL SUPPLIES - 0.9%
Bard (C.R.), Inc. ............................... 700 21,919
----------
METALS - 0.9%
UCAR International, Inc. * ...................... 545 21,766
----------
</TABLE>
See notes to financial statements
<PAGE> 129
COVA SERIES TRUST
GROWTH & INCOME EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C>
OIL & GAS - 5.4%
Dresser Industries, Inc. ........................ 1,050 $ 44,034
Union Texas Petroleum Holdings, Inc. ............ 2,080 43,290
Vastar Resources, Inc. .......................... 1,175 42,006
----------
129,330
----------
PHARMACEUTICALS - 10.9%
Allergan, Inc. .................................. 585 19,634
American Home Products Corp. .................... 575 43,988
Bristol-Myers Squibb Co. ........................ 465 44,001
Eli Lilly & Co. ................................. 300 20,888
Merck & Co., Inc. ............................... 420 44,625
Schering-Plough Corp. ........................... 725 45,041
SmithKline Beecham Plc (ADR) .................... 840 43,208
----------
261,385
----------
RESTAURANTS - 0.9%
Tricon Global Restaurants, Inc. * ............... 724 21,027
----------
RETAILERS - 8.5%
Albertson's, Inc. ............................... 1,055 49,981
Consolidated Stores Corp. * ..................... 530 23,287
J.C. Penney Co., Inc. ........................... 725 43,727
Pep Boys - Manny, Moe & Jack .................... 1,850 44,169
Wal-Mart Stores, Inc. ........................... 1,090 42,987
----------
204,151
----------
TELEPHONE SYSTEMS - 0.9%
Frontier Corp. .................................. 900 21,656
----------
</TABLE>
See notes to financial statements
<PAGE> 130
COVA SERIES TRUST
GROWTH & INCOME EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - CONTINUED
DECEMBER 31, 1997
(PERCENTAGE OF NET ASSETS)
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
SECURITY VALUE
DESCRIPTION SHARES (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION - 1.7%
Burlington Northern Santa Fe Corp. .............. 450 $ 41,822
----------
TOTAL INVESTMENTS - 92.8%
(Cost $2,121,294) 2,220,216
Other Assets and Liabilities (net) - 7.2% ...... 171,143
----------
TOTAL NET ASSETS - 100.0% $2,391,359
==========
</TABLE>
PORTFOLIO FOOTNOTES:
* Non-income producing security as this stock did not declare
or pay dividends in the 12 month period.
ADR - American Depositary Receipt
See notes to financial statements
<PAGE> 131
COVA SERIES TRUST
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Small Cap Stock Quality Bond Select Equity Large Cap Stock
Portfolio Portfolio Portfolio Portfolio
--------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Investments, at value (Note 1)* $56,888,871 $ 16,317,671 $104,362,637 $31,991,647
Cash 3,692,013 2,271,646 1,729,556 411,289
Cash denominated in foreign currencies ** -- -- -- --
Receivable for investments sold 343,445 -- 1,128,549 58,126
Receivable for Trust shares sold 37,314 9,390 153,132 116,232
Dividends receivable 60,695 -- 153,447 45,423
Interest receivable 14,027 222,042 12,725 3,276
Unrealized appreciation on forward
currency contracts (Note 5) -- -- -- --
Receivable from investment adviser (Note 2) 21,879 17,311 -- 20,851
----------- ------------ ------------ -----------
Total assets 61,058,244 18,838,060 107,540,046 32,646,844
----------- ------------ ------------ -----------
LIABILITIES
Payables for:
Payable for investments purchased 1,269,275 -- 556,166 366,614
Payable for delayed delivery investments -- 190,119 -- --
Payable for Trust shares redeemed -- 11 -- --
Net variation margin on financial
futures contracts (Note 4) -- -- -- --
Unrealized depreciation on forward
currency contracts (Note 5) -- -- -- --
Investment advisory fee payable (Note 2) -- -- 19,878 --
Accrued expenses 31,901 20,464 33,127 24,141
----------- ------------ ------------ -----------
Total liabilities 1,301,176 210,594 609,171 390,755
----------- ------------ ------------ -----------
NET ASSETS $59,757,068 $ 18,627,466 $106,930,875 $32,256,089
=========== ============ ============ ===========
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS REPRESENTED BY:
Paid in surplus $52,430,798 $ 18,282,956 $ 92,097,837 $27,000,889
Accumulated net realized gain (loss) 2,270,648 -- 9,025,815 526,895
Unrealized appreciation on investments,
futures contracts and foreign currency 5,055,622 344,990 5,798,007 4,728,305
Undistributed (distributions in excess of)
net investment income -- (480) 9,216 --
----------- ------------ ------------ -----------
Total $59,757,068 $ 18,627,466 $106,930,875 $32,256,089
=========== ============ ============ ===========
Capital shares outstanding 4,559,948 1,790,249 7,656,774 2,329,781
=========== ============ ============ ===========
NET ASSET VALUE AND OFFERING PRICE PER SHARE $13.105 $10.405 $13.966 $13.845
- ---------------------------------------------------------------------------------------------------------------------
* Investments in securities, at cost $51,833,249 $ 15,972,681 $ 98,564,630 $27,263,342
** Cost of cash denominated in foreign currencies -- -- -- --
----------- ------------ ------------ -----------
</TABLE>
See notes to financial statements
<PAGE> 132
<TABLE>
<CAPTION>
VKAC
International Growth and
Equity Money Market Quality Income Stock Index Income High Yield
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------- ------------ -------------- ----------- ----------- -----------
<C> <C> <C> <C> <C> <C>
$ 64,976,213 $ 21,895,770 $ 49,159,440 $90,353,876 $47,702,613 $ 32,876,402
3,022,655 19 133 667 3,344 81
752,108 -- -- -- -- --
1,174,476 -- -- -- 82,088 183
8,539 -- -- -- -- --
117,916 -- -- 127,140 58,462 --
33,317 118,235 789,722 11,313 4,514 632,422
586,417 -- -- -- -- --
32,178 7,475 -- -- 15,178 8,142
- ------------ ------------ ------------ ----------- ----------- ------------
70,703,819 22,021,499 49,949,295 90,492,996 47,866,199 33,517,230
- ------------ ------------ ------------ ----------- ----------- ------------
1,812,341 -- -- -- -- 183,750
-- -- -- -- -- --
-- 8,882 55,844 38,280 9,586 47,447
-- -- 20,781 1,100 200 --
86,614 -- -- -- -- --
-- -- 11,767 34,593 -- --
35,825 33,854 25,243 41,721 27,049 23,576
- ------------ ------------ ------------ ----------- ----------- ------------
1,934,780 42,736 113,635 115,694 36,835 254,773
- ------------ ------------ ------------ ----------- ----------- ------------
$ 68,769,039 $ 21,978,763 $ 49,835,660 $90,377,302 $47,829,364 $ 33,262,457
============ ============ ============ =========== =========== ============
- -----------------------------------------------------------------------------------------------------------
$ 67,285,371 $ 22,056,402 $ 49,378,186 $42,253,168 $35,493,304 $ 32,042,446
(151,362) (77,639) (2,430,004) 16,142,542 5,860,286 (94,492)
1,285,706 -- 1,993,312 31,962,906 6,466,491 1,305,260
349,324 -- 894,166 18,686 9,283 9,243
- ------------ ------------ ------------ ----------- ----------- ------------
$ 68,769,039 $ 21,978,763 $ 49,835,660 $90,377,302 $47,829,364 $ 33,262,457
============ ============ ============ =========== =========== ============
5,994,704 21,981,219 4,572,261 4,289,352 2,804,973 3,051,753
============ ============ ============ =========== =========== ============
$11.472 $1.00 $10.900 $21.070 $17.052 $10.899
============ ============ ============ =========== =========== ============
- -----------------------------------------------------------------------------------------------------------
$ 64,155,316 $ 21,895,770 $ 47,114,722 $58,424,938 $41,255,922 $ 31,571,142
800,400 -- -- -- -- --
</TABLE>
See notes to financial statements
<PAGE> 133
COVA SERIES TRUST
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Mid-Cap Large Cap Developing
Bond Debenture Value Research Growth
Portfolio Portfolio Portfolio Portfolio
-------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments, at value (Note 1)* $52,654,892 $2,059,650 $ 1,225,213 $1,576,969
Cash 1,743,892 163,793 122,623 258,794
Cash denominated in foreign currencies ** -- -- -- --
Receivable for investments sold -- -- -- --
Receivable for Trust shares sold 92,477 -- -- 16,414
Dividends receivable 2,596 359 1,245 94
Interest receivable 949,354 2,001 1,298 1,230
Unrealized appreciation on forward
currency contracts (Note 5) -- -- -- --
Receivable from investment adviser (Note 2) -- 12,532 11,050 12,973
---------- --------- --------- ---------
Total assets 55,443,211 2,238,335 1,361,429 1,866,474
---------- --------- --------- ---------
LIABILITIES
Payables for:
Payable for investments purchased -- -- -- 122,937
Payable for delayed delivery investments -- -- -- --
Payable for Trust shares redeemed -- -- -- --
Net variation margin on financial futures
contracts (Note 4) -- -- -- --
Unrealized depreciation on forward
currency contracts (Note 5) -- -- -- --
Investment advisory fee payable (Note 2) 6,575 -- -- --
Accrued expenses 24,457 9,427 8,419 9,387
---------- --------- --------- ---------
Total liabilities 31,032 9,427 8,419 132,324
---------- --------- --------- ---------
NET ASSETS $55,412,179 $2,228,908 $ 1,353,010 $1,734,150
=========== ========== =========== ==========
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS REPRESENTED BY:
Paid in surplus $53,243,809 $2,181,763 $ 1,346,866 $1,721,071
Accumulated net realized gain (loss) 954,667 150 (633) 4,555
Unrealized appreciation on investments,
futures contracts and foreign currency 1,213,703 46,986 6,584 8,505
Undistributed (distributions in excess of)
net investment income -- 9 193 19
---------- --------- --------- ---------
Total $55,412,179 $2,228,908 $ 1,353,010 $1,734,150
=========== ========== =========== ==========
Capital shares outstanding 4,574,812 212,659 136,592 164,390
=========== ========== =========== ==========
NET ASSET VALUE AND OFFERING PRICE PER SHARE $12.112 $10.481 $9.905 $10.549
=========== ========== =========== ==========
- ------------------------------------------------------------------------------------------------------------------
* Investments in securities, at cost $51,441,189 $2,012,664 $ 1,218,629 $1,568,464
** Cost of cash denominated in foreign currencies -- -- -- --
</TABLE>
See notes to financial statements
<PAGE> 134
<TABLE>
<CAPTION>
Small Cap Growth & Income
Balanced Equity Equity Income Equity
Portfolio Portfolio Portfolio Portfolio
- ----------- ---------- ------------- ---------------
<C> <C> <C> <C>
$ 1,294,799 $1,245,855 $1,591,188 $ 2,220,216
155,235 72,599 86,028 163,216
-- -- -- --
-- -- -- --
-- -- -- --
1,067 568 2,808 3,126
6,650 470 477 1,002
-- -- -- --
12,073 12,556 11,513 13,078
- ----------- ---------- ---------- -----------
1,469,824 1,332,048 1,692,014 2,400,638
-- 2,243 -- --
-- -- -- --
-- -- -- --
-- -- -- --
-- -- -- --
-- -- -- --
8,774 8,860 8,703 9,279
- ----------- ---------- ---------- -----------
8,774 11,103 8,703 9,279
- ----------- ---------- ---------- -----------
$ 1,461,050 $1,320,945 $1,683,311 $ 2,391,359
- --------------------------------------------------------------------------------
$ 1,420,702 $1,283,849 $1,558,030 $ 2,302,284
(4,576) 34,497 2,530 (9,976)
44,924 2,599 122,751 98,922
-- -- -- 129
- ----------- ---------- ---------- -----------
$ 1,461,050 $1,320,945 $1,683,311 $ 2,391,359
=========== ========== ========== ===========
140,640 126,779 152,372 223,292
=========== ========== ========== ===========
$10.389 $10.419 $11.047 $10.710
=========== ========== ========== ===========
- --------------------------------------------------------------------------------
$ 1,249,875 $1,243,256 $1,468,437 $ 2,121,294
-- -- -- --
</TABLE>
<PAGE> 135
COVA SERIES TRUST
STATEMENTS OF OPERATIONS
YEAR OR PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Small Cap Stock Quality Bond Select Equity Large Cap Stock
Portfolio Portfolio Portfolio Portfolio
--------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends (1) $ 407,650 $ -- $ 898,439 $ 341,153
Interest 111,790 672,432 114,895 8,910
---------- -------- ----------- ----------
Total investment income 519,440 672,432 1,013,334 350,063
---------- -------- ----------- ----------
EXPENSES
Investment advisory fee (Note 2) 292,360 56,257 450,572 130,631
Custody, fund accounting, and transfer agent fees 165,391 33,447 147,320 67,129
Audit 14,796 14,796 14,795 14,823
Trustee fees and expenses 4,490 4,490 4,490 4,502
Legal 1,436 1,455 1,410 739
Shareholder reporting -- -- -- --
---------- -------- ----------- ----------
Total operating expenses 478,473 110,445 618,587 217,824
Interest Expense (Note 3) -- -- -- --
---------- -------- ----------- ----------
Total expenses 478,473 110,445 618,587 217,824
Less fees waived and expenses
reimbursed by the adviser 151,718 43,959 105,432 67,096
---------- -------- ----------- ----------
Net expenses 326,755 66,486 513,155 150,728
---------- -------- ----------- ----------
Net investment income 192,685 605,946 500,179 199,335
---------- -------- ----------- ----------
NET REALIZED AND UNREALIZED GAIN/(LOSS)
ON INVESTMENTS, FUTURES CONTRACTS AND
FOREIGN CURRENCY RELATED TRANSACTIONS
Net realized gain (loss) on investments 2,316,556 98,268 9,123,149 2,193,907
Net realized gain on futures contracts -- -- -- --
Net realized gain on foreign currency
related transactions -- -- -- --
---------- -------- ----------- ----------
Net realized gain (loss) on investments,
futures contracts and foreign currency
related transactions 2,316,556 98,268 9,123,149 2,193,907
---------- -------- ----------- ----------
Unrealized appreciation on investments,
futures contracts and foreign currency
Beginning of year or period 498,352 63,737 1,054,575 1,582,389
End of year or period 5,055,622 344,990 5,798,007 4,728,305
---------- -------- ----------- ----------
Net change in unrealized appreciation on
investments futures contracts and
foreign currency 4,557,270 281,253 4,743,432 3,145,916
---------- -------- ----------- ----------
Net realized and unrealized gain/(loss)
on investments, futures contracts and
foreign currency related transactions 6,873,826 379,521 13,866,581 5,339,823
---------- -------- ----------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $7,066,511 $985,467 $14,366,760 $5,539,158
========== ======== =========== ==========
- -------------------------------------------------------------------------------------------------------------------
(1)Dividend income is net of withhholding taxes of: $ -- $ -- $ 209 $ 806
---------- -------- ----------- ----------
</TABLE>
See notes to financial statements
<PAGE> 136
<TABLE>
<CAPTION>
International VKAC
Equity Money Market Quality Income Stock Index Growth and Income High Yield
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ----------- ----------- ----------- ----------- ---------- ----------
<C> <C> <C> <C> <C> <C>
$ 823,904 $ -- $ -- $ 1,350,382 $ 648,343 $ 7,760
125,313 2,573,384 3,695,548 219,414 210,995 3,481,423
- ----------- ----------- ----------- ----------- ---------- ----------
949,217 2,573,384 3,695,548 1,569,796 859,338 3,489,183
- ----------- ----------- ----------- ----------- ---------- ----------
349,944 230,006 261,037 403,448 250,012 290,717
263,329 63,741 85,394 134,979 95,653 72,862
14,795 14,894 14,910 15,045 14,856 14,901
4,491 4,526 4,533 4,589 4,510 4,876
1,424 -- -- -- 282 --
-- -- -- -- -- --
- ----------- ----------- ----------- ----------- ---------- ----------
633,983 313,167 365,874 558,061 365,313 383,356
-- -- 33,910 17,096 -- 6,213
- ----------- ----------- ----------- ----------- ---------- ----------
633,983 313,167 399,784 575,157 365,313 389,569
239,837 267,166 52,630 73,922 73,632 53,876
- ----------- ----------- ----------- ----------- ---------- ----------
394,146 46,001 347,154 501,235 291,681 335,693
- ----------- ----------- ----------- ----------- ---------- ----------
555,071 2,527,383 3,348,394 1,068,561 567,657 3,153,490
- ----------- ----------- ----------- ----------- ---------- ----------
(19,776) (2,455) 160,119 15,275,548 5,648,388 909,331
-- -- (596,214) 1,015,725 245,836 --
211,256 -- -- -- -- --
- ----------- ----------- ----------- ----------- ---------- ----------
191,480 (2,455) (436,095) 16,291,273 5,894,224 909,331
- ----------- ----------- ----------- ----------- ---------- ----------
883,114 -- 683,818 27,209,404 4,042,130 1,037,177
1,285,706 -- 1,993,312 31,962,906 6,466,491 1,305,260
- ----------- ----------- ----------- ----------- ---------- ----------
402,592 -- 1,309,494 4,753,502 2,424,361 268,083
- ----------- ----------- ----------- ----------- ---------- ----------
594,072 (2,455) 873,399 21,044,775 8,318,585 1,177,414
- ----------- ----------- ----------- ----------- ---------- ----------
$ 1,149,143 $ 2,524,928 $ 4,221,793 $22,113,336 $8,886,242 $4,330,904
=========== =========== =========== =========== ========== ==========
- ------------------------------------------------------------------------------------------------------
$ 117,295 $ -- $ -- $ 3,140 $ 4,561 $ --
</TABLE>
See notes to financial statements
<PAGE> 137
COVA SERIES TRUST
STATEMENTS OF OPERATIONS
YEAR OR PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Mid-Cap Large Cap Developing
Bond Debenture Value Research Growth
Portfolio Portfolio* Portfolio* Portfolio*
---------- ------- -------- -------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends (1) $ 43,867 $ 1,866 $ 2,257 $ 186
Interest 1,924,244 2,590 1,738 2,107
---------- ------- -------- -------
Total investment income 1,968,111 4,456 3,995 2,293
---------- ------- -------- -------
EXPENSES
Investment advisory fee (Note 2) 196,145 2,150 1,521 1,753
Custody, fund accounting, and transfer agent fees 63,034 6,528 4,292 6,325
Audit 14,783 8,000 8,000 8,000
Trustee fees and expenses 4,485 880 889 889
Legal 1,749 408 408 408
Shareholder reporting -- 160 160 160
---------- ------- -------- -------
Total operating expenses 280,196 18,126 15,270 17,535
Interest Expense (Note 3) -- -- -- --
---------- ------- -------- -------
Total expenses 280,196 18,126 15,270 17,535
Less fees waived and expenses reimbursed
by the adviser 57,898 15,768 13,597 15,587
---------- ------- -------- -------
Net expenses 222,298 2,358 1,673 1,948
---------- ------- -------- -------
Net investment income 1,745,813 2,098 2,322 345
---------- ------- -------- -------
NET REALIZED AND UNREALIZED GAIN/(LOSS)
ON INVESTMENTS, FUTURES CONTRACTS AND
FOREIGN CURRENCY RELATED TRANSACTIONS
Net realized gain (loss) on investments 964,071 150 (633) 4,555
Net realized gain on futures contracts -- -- -- --
Net realized gain on foreign currency
related transactions -- -- -- --
---------- ------- -------- -------
Net realized gain (loss) on investments,
futures contracts and foreign
currency related transactions 964,071 150 (633) 4,555
---------- ------- -------- -------
Unrealized appreciation on investments,
futures contracts and foreign currency
Beginning of year or period 283,061 -- -- --
End of year or period 1,213,703 46,986 6,584 8,505
---------- ------- -------- -------
Net change in unrealized appreciation
on investments futures contracts
and foreign currency 930,642 46,986 6,584 8,505
---------- ------- -------- -------
Net realized and unrealized gain/(loss)
on investments, futures contracts and
foreign currency related transactions 1,894,713 47,136 5,951 13,060
---------- ------- -------- -------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,640,526 $49,234 $ 8,273 $13,405
========== ======= ======== =======
- -----------------------------------------------------------------------------------------------------------------
(1) Dividend income is net of withhholding taxes of: $ -- $ -- $ 6 $ --
* Fund commenced operations on August 20, 1997
** Fund commenced operations on July 1, 1997
</TABLE>
See notes to financial statemetns
<PAGE> 138
<TABLE>
<CAPTION>
Small Cap Growth & Income
Balanced Equity Equity Income Equity
Portfolio** Portfolio** Portfolio** Portfolio**
----------- ----------- ------------- ---------------
<C> <C> <C> <C>
$ 4,301 $ 3,459 $ 15,242 $ 11,217
19,534 3,085 3,188 5,093
------- -------- -------- --------
23,835 6,544 18,430 16,310
------- -------- -------- --------
6,200 6,036 6,707 8,283
7,660 8,206 7,577 11,007
8,000 8,000 8,000 8,000
1,022 1,022 1,022 1,022
560 560 560 560
160 160 160 160
------- -------- -------- --------
23,602 23,984 24,026 29,032
-- -- -- --
------- -------- -------- --------
23,602 23,984 24,026 29,032
16,782 17,344 16,648 19,921
------- -------- -------- --------
6,820 6,640 7,378 9,111
------- -------- -------- --------
17,015 (96) 11,052 7,199
------- -------- -------- --------
7,388 42,782 24,201 8,581
-- -- -- --
-- -- -- --
------- -------- -------- --------
7,388 42,782 24,201 8,581
------- -------- -------- --------
-- -- -- --
44,924 2,599 122,751 98,922
------- -------- -------- --------
44,924 2,599 122,751 98,922
------- -------- -------- --------
52,312 45,381 146,952 107,503
------- -------- -------- --------
$69,327 $ 45,285 $158,004 $114,702
======= ======== ======== ========
-----------------------------------------------------
$ 11 $ -- $ 23 $ 27
------- -------- -------- --------
</TABLE>
See notes to financial statements
<PAGE> 139
COVA SERIES TRUST
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Small Cap Stock Quality Bond
Portfolio Portfolio
------------------------------- -------------------------------
Year ended Period ended Year ended Period ended
December 31, December 31, December 31, December 31,
1997 1996* 1997 1996*
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 192,685 $ 55,635 $ 605,946 $ 259,046
Net realized gain (loss) on investments,
futures contracts, option contracts and
foreign currency related transactions 2,316,556 640,056 98,268 (35,063)
Net change in unrealized appreciation
(depreciation) on investments, futures
contracts, options contracts and foreign
currency related transactions 4,557,270 498,352 281,253 63,737
------------ ------------ ------------ -----------
Net increase in net assets resulting from operations 7,066,511 1,194,043 985,467 287,720
------------ ------------ ------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (192,883) (53,613) (660,166) (211,194)
Net realized gains (99,847) (582,244) (76,278) --
In excess of net investment income -- -- -- --
------------ ------------ ------------ -----------
Total distributions (292,730) (635,857) (736,444) (211,194)
------------ ------------ ------------ -----------
CAPITAL SHARE TRANSACTIONS (NOTE 3):
Proceeds from shares sold 38,022,176 10,623,372 15,683,372 3,657,629
Net asset value of shares issued through
dividend reinvestment 914,326 14,261 879,467 68,171
Cost of shares repurchased (603,894) (1,545,140) (3,986,444) (3,000,278)
------------ ------------ ------------ -----------
Net increase (decrease) in net assets from
capital share transactions 38,332,608 9,092,493 12,576,395 725,522
------------ ------------ ------------ -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 45,106,389 9,650,679 12,825,418 802,048
NET ASSETS:
Beginning of period 14,650,679 5,000,000 5,802,048 5,000,000
------------ ------------ ------------ -----------
End of period $ 59,757,068 $ 14,650,679 $ 18,627,466 $ 5,802,048
============ ============ ============ ===========
Net Assets at end of period includes
undistributed (distributions in excess of)
net investment income $ -- $ (3,955) $ (480) $ 46,816
============ ============ ============ ===========
CAPITAL SHARE TRANSACTIONS:
Beginning shares 1,341,383 500,000 575,476 500,000
------------ ------------ ------------ -----------
Shares sold 3,186,388 986,571 1,518,698 364,502
Shares issued through dividend reinvestment 82,158 1,363 85,914 6,904
Shares repurchased (49,981) (146,551) (389,839) (295,930)
------------ ------------ ------------ -----------
Net increase / (decrease) in shares outstanding 3,218,565 841,383 1,214,773 75,476
------------ ------------ ------------ -----------
Ending shares 4,559,948 1,341,383 1,790,249 575,476
============ ============ ============ ===========
* Fund commenced operations on April 2, 1996
</TABLE>
See notes to financial statements
<PAGE> 140
<TABLE>
<CAPTION>
Select Equity Large Cap Stock International Equity
Portfolio Portfolio Portfolio
-------------------------------- ------------------------------- -------------------------------
Year ended Period ended Year ended Period ended Year ended Period ended
December 31, December 31, December 31, December 31, December 31, December 31,
1997 1996* 1997 1996* 1997 1996*
------------- ------------ ------------ ------------ ------------ ------------
<C> <C> <C> <C> <C> <C>
$ 500,179 $ 109,126 $ 199,335 $ 185,870 $ 555,071 $ 97,324
9,123,149 483,583 2,193,907 387,045 191,480 65,848
4,743,432 1,054,575 3,145,916 1,582,389 402,592 883,114
------------- ------------ ------------ ------------ ------------ ------------
14,366,760 1,647,284 5,539,158 2,155,304 1,149,143 1,046,286
------------- ------------ ------------ ------------ ------------ ------------
(490,963) (109,126) (202,300) (182,905) (557,716) (81,947)
(330,961) (249,713) (1,756,862) (297,195) (42,415) (29,676)
-- (243) -- -- -- --
------------- ------------ ------------ ------------ ------------ ------------
(821,924) (359,082) (1,959,162) (480,100) (600,131) (111,623)
------------- ------------ ------------ ------------ ------------ ------------
68,852,468 19,036,561 17,343,331 1,106,964 52,754,470 14,218,522
1,157,234 23,772 2,369,560 69,702 673,824 37,930
(457,582) (1,514,616) (7,808,393) (1,080,275) (827,522) (4,571,860)
------------- ------------ ------------ ------------ ------------ ------------
69,552,120 17,545,717 11,904,498 96,391 52,600,772 9,684,592
------------- ------------ ------------ ------------ ------------ ------------
83,096,956 18,833,919 15,484,494 1,771,595 53,149,784 10,619,255
23,833,919 5,000,000 16,771,595 15,000,000 15,619,255 5,000,000
------------- ------------ ------------ ------------ ------------ ------------
$ 106,930,875 $ 23,833,919 $ 32,256,089 $ 16,771,595 $ 68,769,039 $ 15,619,255
============= ============ ============ ============ ============ ============
$ 9,216 $ (243) $ -- $ 2,965 $ 349,324 $ 27,156
============= ============ ============ ============ ============ ============
2,218,737 500,000 1,509,371 1,500,000 1,425,198 500,000
------------- ------------ ------------ ------------ ------------ ------------
5,382,252 1,868,411 1,243,518 101,577 4,584,724 1,367,780
93,395 2,403 179,193 6,843 57,454 3,673
(37,610) (152,077) (602,301) (99,049) (72,672) (446,255)
------------- ------------ ------------ ------------ ------------ ------------
5,438,037 1,718,737 820,410 9,371 4,569,506 925,198
------------- ------------ ------------ ------------ ------------ ------------
7,656,774 2,218,737 2,329,781 1,509,371 5,994,704 1,425,198
============= ============ ============ ============ ============ ============
</TABLE>
See notes to financial statements
<PAGE> 141
COVA SERIES TRUST
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Money Makket Quality Income
Portfolio Portfolio
------------------------------- -------------------------------
Year ended Year ended Year ended Year ended
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 2,527,383 $ 1,778,758 $ 3,348,394 $ 3,033,706
Net realized gain (loss) on investments,
futures contracts, option contracts and
foreign currency related transactions (2,455) 374 (436,095) (661,414)
Net change in unrealized appreciation
(depreciation) on investments, futures
contracts, options contracts and foreign
currency related transactions -- -- 1,309,494 (688,059)
------------ ------------ ------------ ------------
Net increase in net assets resulting
from operations 2,524,928 1,779,132 4,221,793 1,684,233
------------ ------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (2,527,383) (1,778,758) (3,338,386) (2,168,653)
Net realized gains -- -- -- (8,168)
In excess of net investment income -- -- -- --
------------ ------------ ------------ ------------
Total distributions (2,527,383) (1,778,758) (3,338,386) (2,176,821)
------------ ------------ ------------ ------------
CAPITAL SHARE TRANSACTIONS (NOTE 3):
Proceeds from shares sold 57,494,205 34,135,639 27,417,912 22,903,638
Net asset value of shares issued through
dividend reinvestment 2,527,383 1,778,758 4,139,374 1,375,833
Cost of shares repurchased (68,995,258) (39,342,379) (33,929,181) (13,853,598)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
capital share transactions (8,973,670) (3,427,982) (2,371,895) 10,425,873
------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (8,976,125) (3,427,608) (1,488,488) 9,933,285
NET ASSETS:
Beginning of period 30,954,888 34,382,496 51,324,148 41,390,863
------------ ------------ ------------ ------------
End of period $ 21,978,763 $ 30,954,888 $ 49,835,660 $ 51,324,148
============ ============ ============ ============
Net Assets at end of period includes
undistributed (distributions in
excess of) net investment income $ -- $ -- $ 894,166 $ 884,274
============ ============ ============ ============
CAPITAL SHARE TRANSACTIONS:
Beginning shares 31,030,072 34,458,054 4,801,097 3,807,302
------------ ------------ ------------ ------------
Shares sold 57,419,022 34,135,639 2,544,684 2,174,582
Shares issued through dividend reinvestment 2,527,383 1,778,758 392,730 130,798
Shares repurchased (68,995,258) (39,342,379) (3,166,250) (1,311,585)
------------ ------------ ------------ ------------
Net increase / (decrease) in shares outstanding (9,048,853) (3,427,982) (228,836) 993,795
------------ ------------ ------------ ------------
Ending shares 21,981,219 31,030,072 4,572,261 4,801,097
============ ============ ============ ============
</TABLE>
See notes to financial statements
<PAGE> 142
<TABLE>
<CAPTION>
Stock Index VKAC Growth and Income High Yield
Portfolio Portfolio Portfolio
------------------------------- ------------------------------- -------------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
December 31, December 31, December 31, December 31, December 31, December 31,
1997 1996 1997 1996 1997 1996
------------ ------------ ------------ ------------ ------------ ------------
<C> <C> <C> <C> <C> <C>
$ 1,068,561 $ 1,540,280 $ 567,657 $ 517,014 $ 3,153,490 $ 3,456,028
16,291,273 2,883,097 5,894,224 1,680,286 909,331 513,675
4,753,502 13,156,063 2,424,361 2,293,883 268,083 293,614
------------ ------------ ------------ ------------ ------------ ------------
22,113,336 17,579,440 8,886,242 4,491,183 4,330,904 4,263,317
------------ ------------ ------------ ------------ ------------ ------------
(1,058,007) (1,532,148) (563,938) (511,450) (3,144,247) (3,453,570)
(288,033) (2,778,218) (513,391) (1,207,683) -- --
-- -- -- -- -- (19,171)
------------ ------------ ------------ ------------ ------------ ------------
(1,346,040) (4,310,366) (1,077,329) (1,719,133) (3,144,247) (3,472,741)
------------ ------------ ------------ ------------ ------------ ------------
34,246,387 7,574,621 9,997,804 10,401,256 13,533,122 25,000,540
4,855,058 801,349 2,585,409 211,053 4,949,889 1,667,100
(56,051,623) (21,068,260) (4,155,928) (1,515,500) (27,471,849) (22,908,998)
------------ ------------ ------------ ------------ ------------ ------------
(16,950,178) (12,692,290) 8,427,285 9,096,809 (8,988,838) 3,758,642
------------ ------------ ------------ ------------ ------------ ------------
3,817,118 576,784 16,236,198 11,868,859 (7,802,181) 4,549,218
86,560,184 85,983,400 31,593,166 19,724,307 41,064,638 36,515,420
------------ ------------ ------------ ------------ ------------ ------------
$ 90,377,302 $ 86,560,184 $ 47,829,364 $ 31,593,166 $ 33,262,457 $ 41,064,638
============ ============ ============ ============ ============ ============
$ 18,686 $ 55,421 $ 9,283 $ 5,564 $ 9,243 $ (19,171)
============ ============ ============ ============ ============ ============
5,367,589 6,210,939 2,258,899 1,576,436 3,864,501 3,495,538
------------ ------------ ------------ ------------ ------------ ------------
1,698,260 513,644 626,726 780,898 1,249,817 2,395,207
286,130 53,172 175,231 15,904 461,088 159,825
(3,062,627) (1,410,166) (255,883) (114,339) (2,523,653) (2,186,069)
------------ ------------ ------------ ------------ ------------ ------------
(1,078,237) (843,350) 546,074 682,463 (812,748) 368,963
------------ ------------ ------------ ------------ ------------ ------------
4,289,352 5,367,589 2,804,973 2,258,899 3,051,753 3,864,501
============ ============ ============ ============ ============ ============
</TABLE>
See notes to financial statements
<PAGE> 143
COVA SERIES TRUST
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Mid-Cap Large Cap
Bond Debenture Value Research
Portfolio Portfolio Portfolio
------------------------------ ------------- ------------
Year ended Period ended Period ended Period ended
December 31, December 31, December 31, December 31,
1997 1996* 1997** 1997**
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 1,745,813 $ 196,556 $ 2,098 $ 2,322
Net realized gain (loss) on investments,
futures contracts, option contracts and
foreign currency related transactions 964,071 64,118 150 (633)
Net change in unrealized appreciation
(depreciation) on investments, futures
contracts, options contracts and foreign
currency related transactions 930,642 283,061 46,986 6,584
------------ ----------- ----------- -----------
Net increase in net assets resulting from operations 3,640,526 543,735 49,234 8,273
------------ ----------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,747,981) (194,548) (2,089) (2,129)
Net realized gains (18,188) (55,174) -- --
In excess of net investment income -- -- -- --
------------ ----------- ----------- -----------
Total distributions (1,766,169) (249,722) (2,089) (2,129)
------------ ----------- ----------- -----------
CAPITAL SHARE TRANSACTIONS (NOTE 3):
Proceeds from shares sold 44,653,139 7,553,231 2,185,306 1,345,530
Net asset value of shares issued through
dividend reinvestment 2,000,414 15,475 2,089 2,129
Cost of shares repurchased (778,993) (699,457) (5,632) (793)
------------ ----------- ----------- -----------
Net increase (decrease) in net assets from
capital share transactions 45,874,560 6,869,249 2,181,763 1,346,866
------------ ----------- ----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 47,748,917 7,163,262 2,228,908 1,353,010
NET ASSETS:
Beginning of period 7,663,262 500,000 -- --
------------ ----------- ----------- -----------
End of period $ 55,412,179 $ 7,663,262 $ 2,228,908 $ 1,353,010
============ =========== =========== ===========
Net Assets at end of period includes
undistributed (distributions in excess of)
net investment income $ -- $ 2,008 $ 9 $ 193
============ =========== =========== ===========
CAPITAL SHARE TRANSACTIONS:
Beginning shares 698,547 50,000 -- --
------------ ----------- ----------- -----------
Shares sold 3,775,808 714,357 213,013 136,458
Shares issued through dividend reinvestment 169,197 1,514 200 215
Shares repurchased (68,740) (67,324) (554) (81)
------------ ----------- ----------- -----------
Net increase/(decrease) in shares outstanding 3,876,265 648,547 212,659 136,592
------------ ----------- ----------- -----------
Ending shares 4,574,812 698,547 212,659 136,592
============ =========== =========== ===========
* Fund commenced operations on April 2, 1996
** Fund commenced operations on August 20, 1997
*** Fund commenced operations on July 1, 1997
</TABLE>
See notes to financial statements
<PAGE> 144
<TABLE>
<CAPTION>
Developing Small Cap Growth & Income
Growth Balanced Equity Equity Income Equity
Portfolio Portfolio Portfolio Portfolio Portfolio
------------ ------------ ------------ ------------- ----------------
Period ended Period ended Period ended Period ended Period ended
December 31, December 31, December 31, December 31, December 31,
1997** 1997*** 1997*** 1997*** 1997***
----------- ----------- ----------- ----------- -----------
<C> <C> <C> <C> <C>
$ 345 $ 17,015 $ (96) $ 11,052 $ 7,199
4,555 7,388 42,782 24,201 8,581
8,505 44,924 2,599 122,751 98,922
----------- ----------- ----------- ----------- -----------
13,405 69,327 45,285 158,004 114,702
----------- ----------- ----------- ----------- -----------
(326) (17,093) -- (11,052) (7,070)
-- (11,993) (8,189) (21,671) (18,557)
-- -- -- -- --
----------- ----------- ----------- ----------- -----------
(326) (29,086) (8,189) (32,723) (25,627)
----------- ----------- ----------- ----------- -----------
1,735,826 1,429,858 1,277,390 1,528,693 2,310,416
326 29,086 8,189 32,723 25,628
(15,081) (38,135) (1,730) (3,386) (33,760)
----------- ----------- ----------- ----------- -----------
1,721,071 1,420,809 1,283,849 1,558,030 2,302,284
----------- ----------- ----------- ----------- -----------
1,734,150 1,461,050 1,320,945 1,683,311 2,391,359
-- -- -- -- --
----------- ----------- ----------- ----------- -----------
$ 1,734,150 $ 1,461,050 $ 1,320,945 $ 1,683,311 $ 2,391,359
=========== =========== =========== =========== ===========
$ 19 $ -- $ -- $ -- $ 129
=========== =========== =========== =========== ===========
-- -- -- -- --
----------- ----------- ----------- ----------- -----------
165,753 141,462 126,145 149,720 224,036
31 2,804 798 2,966 2,398
(1,394) (3,626) (164) (314) (3,142)
----------- ----------- ----------- ----------- -----------
164,390 140,640 126,779 152,372 223,292
----------- ----------- ----------- ----------- -----------
164,390 140,640 126,779 152,372 223,292
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements
<PAGE> 145
COVA SERIES TRUST
FINANCIAL HIGHLIGHTS
- --------------------
For a share held throughout the periods indicated
<TABLE>
<CAPTION>
Small Cap Stock Quality Bond
Portfolio Portfolio
-------------------------------- ----------------------------
For the period For the period
from May 1, 1996 from May 1, 1996
Year ended (date of initial Year ended (date of initial
December 31, public offering) December 31, public offering)
1997 December 31, 1996 1997 December 31, 1996
-------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning Of Period $ 10.922 $ 10.512 $ 10.082 $ 9.897
-------- -------- -------- --------
Income From Investment Operations
Net investment income 0.057 0.057 0.446 0.459
Net realized and unrealized gains (losses) 2.217 0.843 0.452 0.102
-------- -------- -------- --------
Total from investment operations 2.274 0.900 0.898 0.561
-------- -------- -------- --------
Distributions
Dividends from net investment income (0.055) (0.055) (0.531) (0.376)
Distributions from net realized gains (0.036) (0.435) (0.044) ----
Distributions in excess of net investment income ---- ---- ---- ----
Return of capital distributions ---- ---- ---- ----
-------- -------- -------- --------
Total distributions (0.091) (0.490) (0.575) (0.376)
-------- -------- -------- --------
Net Asset Value, end of period $ 13.105 $ 10.922 $ 10.405 $ 10.082
-------- -------- -------- --------
Total Return 20.89% 8.65%* 9.06% 5.68%*
-------- -------- -------- ---------
Ratios/Supplemental Data:
Net Assets, end of period (In millions) $ 59.8 $ 14.7 $ 18.6 $ 5.8
Ratios to Average Net Assets (1):
Operating Expenses 0.95% 0.95%** 0.65% 0.65%**
Interest Expense ----- ----- ----- -----
Net investment income 0.56% 0.87%** 5.92% 5.94%**
Portfolio turnover rate 79.1% 102.4% 163.7% 181.3%
Average commission rate paid (2) $ 0.0375 $ 0.0371 N/A N/A
(1) If certain expenses had not been reimbursed
by the Adviser, total return would have been
lower and the ratios would have been as follows:
Ratio of Operating Expenses to Average Net Assets: 1.39% 2.68%** 1.08% 1.52%**
Ratio of Net Investment Income to Average Net Assets: 0.12% (0.86%)** 5.49% 5.07%**
(2) Average commission rate paid is computed by dividing
the total dollar amount of commissions paid during the
period by the total number of shares purchased and sold
during the period for which commissions were charged.
</TABLE>
+ Amount is less than $.0005
* Non-annualized
** Annualized
N/A Not Applicable
See notes to financial statements
<PAGE> 146
<TABLE>
<CAPTION>
Select Equity Large Cap Stock International Equity
Portfolio Portfolio Portfolio
- ------------------------------------- ----------------------------------- ------------------------------------
For the period For the period For the period
from May 1, 1996 from May 1, 1996 from May 1, 1996
Year ended (date of initial Year ended (date of initial Year ended (date of initial
December 31, public offering) December 31, public offering) December 31, public offering)
1997 December 31, 1996 1997 December 31, 1996 1997 December 31, 1996
- ------------------------------------- ----------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
$ 10.742 $ 10.084 $ 11.112 $ 10.003 $ 10.959 $ 10.215
- ------------ ------------ ------------ ------------ ------------ ------------
0.078 0.081 0.113 0.124 0.122 0.096
3.294 0.771 3.560 1.304 0.539 0.755
- ------------ ------------ ------------ ------------ ------------ ------------
3.372 0.852 3.673 1.428 0.661 0.851
- ------------ ------------ ------------ ------------ ------------ ------------
(0.077) (0.081) (0.118) (0.122) (0.137) (0.086)
(0.071) (0.113) (0.822) (0.197) (0.011) (0.021)
---- (0.000)+ ---- ---- ---- ----
---- ---- ---- ---- ---- ----
- -------------- ------------ ------------ ------------ ------------- ------------
(0.148) (0.194) (0.940) (0.319) (0.148) (0.107)
- -------------- ------------ ------------ ------------ ------------- ------------
$ 13.966 $ 10.742 $ 13.845 $ 11.112 $ 11.472 $ 10.959
- -------------- ------------ ------------ ------------ ------------- ------------
31.55% 8.52%* 33.25% 14.35%* 5.96% 8.44%*
- -------------- ------------ ------------ ------------ ------------- ------------
$ 106.9 $ 23.8 $ 32.3 $ 16.8 $ 68.8 $ 15.6
0.83% 0.85%** 0.75% 0.75** 0.95% 0.95%**
---- ---- ----- ----- ----- ----
0.81% 1.35%** 0.99% 1.56** 1.35% 1.43%**
134.8% 123.9% 59.5% 35.5% 74.1% 48.2%
$ 0.0406 $ 0.0406 $ 0.0324 $ 0.0323 $ 0.0217 $ 0.0107
1.00% 1.70%** 1.08% 1.23%** 1.53% 3.80%**
0.64% 0.50%** 0.66% 1.08%** 0.77% (1.42%)**
</TABLE>
See notes to financial statements
<PAGE> 147
COVA SERIES TRUST
FINANCIAL HIGHLIGHTS
For a share held throughout the periods indicated
<TABLE>
<CAPTION>
Money Market
Portfolio
-----------------------------------------------------
YEARS ENDED DECEMBER 31,
1997 1996 1995 1994 1993
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------ ------ ------ ------
Income From Investment Operations
Net investment income 0.055 0.053 0.059 0.041 0.032
Net realized and unrealized gains (losses) ---- ---- ---- ---- ----
------- ------ ------ ------ -------
Total from investment operations 0.055 0.053 0.059 0.041 0.032
------- ------ ------ ------ -------
Distributions
Dividends from net investment income (0.055) (0.053) (0.059) (0.041) (0.032)
Distributions from net realized gains ---- ---- ---- ---- ----
Distributions in excess of net investment income ---- ---- ---- ---- ----
Return of capital distributions ---- ---- ---- ---- ----
------- ------ ------ ------ ------
Total distributions (0.055) (0.053) (0.059) (0.041) (0.032)
Net Asset Value, end of period ------- ------ ------ ------ ------
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------ ------ ------ ------
Total Return
5.49% 5.42% 6.01% 4.23% 3.24%
------- ------ ------ ------ ------
Ratios/Supplemental Data:
Net Assets, end of period (In millions) $ 22.0 $ 31.0 $ 34.4 $ 75.9 $ 6.6
Ratios to Average Net Assets (1):
Operating Expenses 0.10% 0.11% 0.11% 0.10% 0.10%
Interest Expense ---- ---- ---- ---- ----
Net investment income 5.49% 5.31% 5.68% 4.37% 3.23%
Portfolio turnover rate N/A N/A N/A N/A N/A
Average commission rate paid (2) N/A N/A N/A N/A N/A
(1) If certain expenses had not been reimbursed
by the Adviser, total return would have been
lower and the ratios would have been as follows:
Ratio of Operating Expenses to Average Net Assets: 0.68% 0.74% 0.64% 0.68% 0.86%
Ratio of Net Investment Income to Average Net Assets: 4.91% 4.68% 5.25% 3.79% 2.47%
(2) Average commission rate paid is computed by dividing
the total dollar amount of commissions paid during the
period by the total number of shares purchased and sold
during the period for which commissions were charged.
</TABLE>
N/A Not Applicable
See notes to financial statements
<PAGE> 148
<TABLE>
<CAPTION>
Quality Income Stock Index
Portfolio Portfolio
----------------------------------------------------- -------------------------------------------------------
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
------------------------ ------------------------
1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
------------------------------------------------------ -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.690 $ 10.871 $ 9.815 $ 10.886 $ 10.699 $ 16.126 $ 13.844 $ 10.587 $ 11.115 $ 10.552
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
0.737 0.651 0.667 0.603 0.641 0.273 0.286 0.260 0.311 0.205
0.199 (0.359) 1.056 (1.071) 0.518 5.018 2.797 3.637 (0.337) 0.726
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
0.936 0.292 1.723 (.468) 01.159 5.291 3.083 3.897 (0.026) 0.931
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(0.726) (0.471) (0.667) (0.603) (0.641) (0.268) (0.284) (0.260) (0.311) (0.205)
---- (0.002) ---- ---- (0.331) (0.079) (0.517) (0.380) (0.185) (0.163)
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ---- ---- (0.006) ----
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(0.726) (0.473) (0.667) (0.603) (0.972) (0.347) (0.801) (0.640) (0.502) (0.368)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
$ 10.900 $ 10.690 $ 10.871 $ 9.815 $ 10.886 $ 21.070 $ 16.126 $ 13.844 $ 10.587 $ 11.115
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
9.08% 2.82% 17.99% (4.33%) 11.04% 32.91% 36.87% (0.11%) 8.84%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
$ 49.8 $ 51.3 $ 41.4 $ 33.9 $ 51.1 $ 90.4 $ 86.6 $ 86.0 $ 36.8 $ 91.3
0.60% 0.60% 0.60% 0.59% 0.60% 0.60% 0.60% 0.61% 0.58% 0.60%
0.06% ---- ---- ---- ---- 0.02% ---- ---- ---- ----
6.41% 6.06% 6.42% 5.69% 5.82% 1.32% 1.77% 2.41% 2.23% 2.29%
308.0% 320.3% 219.5% 177.6% 318.4% 27.2% 1.3% 3.9% 47.1% 44.1%
N/A N/A N/A N/A N/A $ 0.0324 $ 0.0333 N/A N/A N/A
0.70% 0.71% 0.75% 0.68% 0.70% 0.69% 0.67% 0.78% 0.80% 0.74%
6.31% 5.95% 6.27% 5.60% 5.73% 1.23% 1.70% 2.24% 2.01% 2.15%
</TABLE>
<PAGE> 149
COVA SERIES TRUST
FINANCIAL HIGHLIGHTS
For a share held throughout the periods indicated
<TABLE>
<CAPTION>
VKAC Growth and Income
Portfolio
---------------------------------------------------------
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.986 $ 12.512 $ 10.306 $ 11.170 $ 10.282
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income
Net realized and unrealized gains (losses) 0.212 0.243 0.224 0.331 0.182
3.265 2.007 3.089 (0.864) 1.371
Total from investment operations -------- -------- ------ -------- --------
3.477 2.250 3.313 (0.533) 1.553
-------- -------- ------ -------- --------
DISTRIBUTIONS
Dividends from net investment income (0.211) (0.241) (0.232) (0.323) (0.182)
Distributions from net realized gains (0.200) (0.535) (0.875) (0.008) (0.483)
Distributions in excess of net investment income -- -- -- -- --
Return of capital distributions -- -- -- -- --
-------- -------- -------- -------- --------
Total distributions (0.411) (0.776) (1.107) (0.331) (0.665)
-------- --------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 17.052 $ 13.986 $ 12.512 $ 10.306 $ 11.170
-------- --------- -------- -------- --------
TOTAL RETURN 24.9% 18.18% 32.24% (4.54%) 15.01%
-------- --------- -------- --------- -------
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (In millions) $ 47.8 $ 31.6 $ 19.7 $ 10.9 $ 6.5
RATIOS TO AVERAGE NET ASSETS (1):
Operating Expenses 0.70% 0.70% 0.69% 0.70% 0.69%
Interest Expense ---- ---- ---- ---- ----
Net investment income 1.36% 1.99% 2.05% 3.47% 1.84%
PORTFOLIO TURNOVER RATE 94.5% 113.0% 180.1% 326.0% 135.9%
AVERAGE COMMISSION RATE PAID (2) $ 0.0548 $ 0.0566 N/A N/A N/A
(1) If certain expenses had not been reimbursed
by the Adviser, total return would have been
lower and the ratios would have been as follows:
Ratio of Operating Expenses to Average Net Assets: 0.88% 1.02% 1.19% 1.49% 2.05%
Ratio of Net Investment Income to Average Net Assets: 1.18% 1.67% 1.55% 2.68% 0.47%
(2) Average commission rate paid is computed by dividing
the total dollar amount of commissions paid during the
period by the total number of shares purchased and sold
during the period for which commissions were charged.
</TABLE>
* Non-annualized
** Annualized
N/A Not Applicable
See notes in financial statements
<PAGE> 150
<TABLE>
<CAPTION>
High Yield Bond Debenture
Portfolio Portfolio
------------------------------------------------------ -----------------------------------------------
For the period
from May 1, 1996
YEARS ENDED DECEMBER 31, Year ended (date of initial
December 31, public offering)
1997 1996 1995 1994 1993 1997 December 31, 1996
------------------------------------------------------ -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 10.626 $ 10.446 $ 9.823 $ 11.287 $ 10.445 $ 10.970 $ 10.098
-------- -------- -------- -------- -------- --------- ---------
0.922 0.952 0.949 0.978 1.028 0.544 0.345
0.281 0.187 0.621 (1.464) 1.170 1.147 0.949
-------- -------- -------- --------- -------- --------- ---------
1.203 1.139 1.570 (0.486) 2.198 1.691 1.294
-------- -------- -------- -------- -------- --------- ---------
(0.930) (0.954) (0.947) (0.978) (1.028) (0.549) (0.342)
---- ---- ---- ---- (0.328) ---- (0.080)
---- (0.005) ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
-------- -------- -------- ------ -------- --------- ---------
(0.930) (0.959) (0.947) (0.978) (1.356) (0.549) (0.422)
-------- -------- -------- -------- -------- --------- ---------
$ 10.899 $ 10.626 $ 10.446 $ 9.823 $ 11.287 $ 12.112 $ 10.970
-------- -------- -------- -------- -------- --------- ---------
11.54% 11.29% 16.69% (4.52%) 21.98% 15.63% 12.89%*
-------- -------- -------- -------- -------- --------- ---------
$ 33.3 $ 41.1 $ 36.5 $ 19.7 $ 18.8 $ 55.4 $ 7.7
0.85% 0.85% 0.86% 0.86% 0.84% 0.85% 0.85**
0.02% ---- ---- ---- ---- ---- ----
8.13% 8.8% 9.50% 9.48% 8.97% 6.68% 7.26**
109.4% 117.3% 118.9% 200.1% 213.1% 100.3% 58.1%
N/A N/A N/A N/A N/A N/A $ 0.0677
0.99% 1.04% 1.09% 1.16% 1.38% 1.07% 2.05**
7.99% 8.70% 9.27% 9.18% 8.43% 6.46% 6.06**
</TABLE>
See notes to financial statements
<PAGE> 151
COVA SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE HELD THROUGHOUT THE PERIODS INDICATED
<TABLE>
<CAPTION>
Period from August 20, 1997 (commencement of operations)
to December 31, 1997
--------------------------------------------------------------
Mid-Cap Large Cap Developing
Value Research Growth
Portfolio Portfolio Portfolio
------------- ------------- -------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.000 $ 10.000 $ 10.000
--------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.010 0.017 0.002
Net realized and unrealized gains (losses) 0.481 (0.096) 0.549
--------- --------- ---------
Total from investment operations 0.491 (0.079) 0.551
--------- --------- ---------
Distributions
Dividends from net investment income (0.010) (0.016) (0.002)
Distributions from net realized gains ---- ---- ----
Distributions in excess of net investment income ---- ---- ----
Return of capital distributions ---- ---- ----
--------- --------- ---------
Total Distributions (0.010) (0.016) (0.002)
--------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 10.481 $ 9.905 $ 10.549
--------- --------- ---------
TOTAL RETURN 4.90%* (0.74%)* 5.52%*
--------- --------- ---------
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (In millions) $ 2.2 $ 1.4 $ 1.7
RATIOS TO AVERAGE NET ASSETS (1):
Operating Expenses 1.10%** 1.10%** 1.00%**
Interest Expense --------- --------- ---------
Net investment income 0.97%** 1.53%** 0.18%**
Portfolio turnover rate 1.5% 1.3% 9.1%
AVERAGE COMMISSION RATE PAID (2) $ 0.0508 $ 0.0593 $ 0.0421
(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 Operating Expenses to Average Net Assets: 8.41%** 10.04** 9.00%**
Ratio of Net Investment Income to Average Net Assets: (6.34%)** (7.41)** (7.82%)**
(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 so
during the period for which commissions were charged.
</TABLE>
* Non-annualized
** Annualized
See notes to financial statements
<PAGE> 152
Period from July 1, 1997 (commencement of operations)
to December 31, 1997
- -------------------------------------------------------------------------------
Small Cap Growth & Income
Balanced Equity Equity Income Equity
Portfolio Portfolio Portfolio Portfolio
--------- --------- ------------- ---------------
$10.000 $10.000 $10.000 $10.000
------- ------- ------- -------
0.123 (0.001) 0.074 0.033
0.477 0.485 1.192 0.793
------- ------- ------- -------
0.600 0.484 1.266 0.826
------- ------- ------- -------
(0.124) ---- (0.074) (0.032)
(0.087) (0.065) (0.145) (0.084)
---- ---- ---- ----
---- ---- ---- ----
------- ------- ------- -------
(0.211) ---- (0.219) (0.116)
------- ------- ------- -------
$10.389 $10.419 $11.047 $10.710
------- ------- ------- -------
6.01%* 4.86%* 12.69%* 8.26%*
------- ------- ------- -------
$ 1.5 $ 1.3 $ 1.7 $ 2.4
1.10%** 1.10%** 1.10%** 1.10%**
---- ---- ---- ----
2.74%** (0.02%)** 1.65%** 0.87%**
13.6% 36.2% 17.9% 18.1%
$0.0600 $0.0597 $0.0600 $0.0600
3.81%** 3.97%** 3.58%** 3.51%**
0.03%** (2.89%)** (0.83%)** (1.54%)**
See notes to financial statements
<PAGE> 153
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
Cova Series Trust (the Trust) is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the 1940 Act). The
Trust offers eighteen diversified portfolios (each, a Fund and collectively, the
Funds) to its policyholders for investment, each of which operates as a distinct
investment vehicle of the Trust. J.P. Morgan Investment Management Inc. manages
the Small Cap Stock Portfolio, Quality Bond Portfolio, Select Equity Portfolio,
Large Cap Stock Portfolio, and International Equity Portfolio. Lord Abbett & Co.
manages the Bond Debenture Portfolio, Mid-Cap Value, Portfolio, Large Cap
Research Portfolio and Developing Growth Portfolio. Van Kampen American Capital
Investment Advisory Corporation manages the Money Market Portfolio, Quality
Income Portfolio, Stock Index Portfolio, VKAC Growth and Income Portfolio
(formerly Growth and Income Portfolio), and the High Yield Portfolio.
Mississippi Valley Advisors Inc. manages the Balanced Portfolio, Small Cap
Equity Portfolio, Equity Income Portfolio and Growth & Income Equity Portfolio.
Depending on the policyholder's contract, not all portfolios are available to
all policyholders.
The Trust commenced operations on December 11, 1989 with the Quality Income
Portfolio and High Yield Portfolio. The Money Market Portfolio commenced
operations on July 1, 1991. The Stock Index Portfolio commenced operations on
November 1, 1991. The VKAC Growth and Income Portfolio commenced operations on
May 1, 1992. The Small Cap Stock Portfolio, Quality Bond Portfolio, Select
Equity Portfolio, Large Cap Stock Portfolio, International Equity Portfolio and
Bond Debenture Portfolio commenced operations on April 2, 1996. The Balanced
Portfolio, Small Cap Equity Portfolio, Equity Income Portfolio and Growth &
Income Equity Portfolio commenced operations on July 1, 1997. The Mid-Cap Value
Portfolio, Large Cap Research Portfolio and Developing Growth Portfolio
commenced operations on August 20, 1997.
The preparation of financial statements in conformity with generally accepted
accounting principles may require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses during the
reporting period. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the Funds.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements.
A. SECURITY VALUATION - Investments in securities listed on a securities
exchange are valued at their sale price as of the close of such securities
exchange. If there was no sale on such day, the securities are valued at the
mean between the most recently quoted bid and asked prices. Investments in
securities not listed on a securities exchange are valued based on their last
quoted bid price or, if not available, their fair value as determined in good
faith by the Board of Trustees. Domestic fixed income investments are stated at
values using the mean between the most recently quoted bid and asked prices.
Foreign fixed income securities are valued at their sale price as of the close
of the securities exchange on which the securities are listed. If such
valuations are not available, estimates obtained from yield data relating to
instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Board of Trustees are used.
Short-term securities with remaining maturities of less than 60 days are valued
at amortized cost, which approximates market value. The Money Market Portfolio,
in accordance with Rule 2a-7 of the 1940 Act, values its investments at
amortized cost.
<PAGE> 154
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
A. SECURITY VALUATION - CONTINUED
Under the amortized cost method, investments are recorded at cost and any
discount or premium is accreted or amortized, respectively, on a straight line
basis to the maturity of the investment. Value on any given date equals original
cost plus or minus accreted discount or amortized premium, respectively, to that
date. Futures contracts and options are valued based upon their daily settlement
prices. Forward currency exchange contracts are valued at forward rates and are
marked-to-market daily.
B. SECURITY TRANSACTIONS - Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Funds may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Funds will
maintain in a segregated account with their custodian assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made.
C. INVESTMENT INCOME AND EXPENSES - Dividend income is recorded on the
ex-dividend date and interest income and expenses are recorded when earned or
incurred, respectively.
D. FEDERAL INCOME TAXES - It is the Trust's policy to comply with the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially all of its
taxable income, including net realized gains, if any, to its shareholders.
Accordingly, the Funds have not recorded a provision for federal income taxes.
In addition, any Funds subject to federal excise tax regulations will distribute
substantially all of their net investment income and net capital gains, if any,
in each calendar year in order to avoid the payment of federal excise taxes.
Distributions from net investment income and capital gains are determined in
accordance with federal income tax regulations which may differ from generally
accepted accounting principles. As a result, distributions from net investment
income and net realized capital gains may differ from their ultimate
characterization for federal income tax purposes due to timing differences. For
the Quality Income, Stock Index and VKAC Growth and Income Portfolios, net
realized gains and losses may differ for financial and tax reporting purposes
primarily as a result of timing differences related to open futures transactions
at year end.
The Funds utilize the provisions of the federal income tax laws that provide for
the carryforward of capital losses for eight years, offsetting such losses
against any future net realized capital gains. At December 31, 1997, the
accumulated capital loss carryforwards and expiration dates by Fund were as
follows: Money Market $77,639 expiring in 2002 and 2005, Quality Income
$2,481,691 expiring in 2002, 2004 and 2005, and High Yield $88,356 expiring in
2002, and Large Cap Research $633 expiring in 2005.
The Growth & Income Equity Portfolio and Balanced Portfolio elected to defer to
their fiscal year ending December 31, 1998, $10,043 and $1,036 of losses,
respectively, recognized during the period November 1, 1997 to
December 31, 1997.
E. DISTRIBUTION OF INCOME AND GAINS - The Funds, except the Money Market
Portfolio, declare, pay and automatically reinvest dividends semi-annually from
net investment income. The Money Market Portfolio declares dividends from net
investment income daily and automatically reinvests such dividends daily.
Net realized gains, if any, are distributed annually. Distributions are
automatically reinvested in the Funds as additional shares.
<PAGE> 155
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
F. DERIVATIVES - A derivative financial instrument, in general terms, is a
security whose value is "derived" from the value of an underlying asset,
reference rate or index. The Funds primarily use derivative instruments to
protect the Portfolios against possible changes in the market value of their
investments. All of the Funds' holdings, including derivative instruments, are
marked to market each day with the change in value reflected in unrealized
appreciation/depreciation of investments. Upon disposition, a realized gain or
loss is recognized accordingly.
The primary risks associated with the use of these financial instruments for
hedging purposes are the possibility of (a) an imperfect correlation between the
change in market value of the hedged securities held by the Funds and the change
in market value of these financial instruments, and (b) an illiquid market. As a
result, the use of these financial instruments may involve, to a varying degree,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities. The following are brief descriptions of derivative
instruments the Funds may hold.
a. FUTURES CONTRACTS - A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Funds generally invest in stock index futures. These contracts are generally
used to provide the return of an index without purchasing all of the securities
underlying the index or as a temporary substitute for purchasing or selling
specific securities.
Upon entering into a futures contract, the Funds are required to make initial
margin deposits with the broker or segregate liquid investments to satisfy the
broker's margin requirements. Initial margin deposits are recorded as assets due
from the broker. During the period the futures contract is open, changes in the
value of the contract are recognized as unrealized gains or losses by "marking
to market" the contract on a daily basis to reflect the value of the contract's
settlement price at the end of each day's trading. Variation margin payments are
made or received and recognized as assets due from or liabilities to the broker
depending upon whether unrealized gains or losses, respectively, are incurred.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the proceeds from (or cost of) the closing transaction
and its basis in the contract.
b. OPTIONS CONTRACTS - A purchased option contract gives the buyer the right,
but not the obligation, to buy (call) or sell (put) an underlying item at a
fixed exercise price during a specified period. These contracts are generally
used by the Funds to provide the return of an index without purchasing all of
the securities underlying the index or as a substitute for purchasing or selling
specific securities.
Purchases of put and call options are recorded as investments, the value of
which are marked-to-market daily. When a purchased option expires, the Fund will
realize a loss equal to the premium paid. When the Fund enters into a closing
sale transaction, the Fund will realize a gain or loss depending on whether the
sales proceeds from the closing sale transaction are greater or less than the
cost of the option. When the Fund exercises a put option, it will realize a gain
or loss from the sale of the underlying security and the proceeds from such sale
will be decreased by the premium originally paid. When the Fund exercises a call
option, the cost of the security which the Fund purchases upon exercise will be
increased by the premium originally paid.
<PAGE> 156
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
F. DERIVATIVES - CONTINUED
The premium received for a written option is recorded as a liability. The
liability is marked-to-market daily based on the option's quoted market price.
When an option expires or the Fund enters into a closing purchase transaction,
the Fund realizes a gain (or loss if the cost of the closing purchase
transaction exceeds the premium received when the option was sold) without
regard to any unrealized gain or loss on the underlying security and the
liability related to such option is eliminated. When a written call option is
exercised, the Fund realizes a gain or loss from the sale of the underlying
security and the proceeds from such sale are increased by the premium originally
received. If a written put option is exercised, the amount of the premium
originally received will reduce the cost of the underlying security purchased.
The risk associated with purchasing options is limited to the premium originally
paid. The risk in writing a call option is that the Fund may forego the
opportunity for profit if the market price of the underlying security increases
and the option is exercised. The risk in writing a put option is that the Fund
may incur a loss if the market price of the underlying security decreases and
the option is exercised this loss can be greater than premium received. In
addition, the Fund could be exposed to risks if the counterparties to the
transactions are unable to meet the terms of the contracts.
c. FORWARD FOREIGN CURRENCY CONTRACTS - The International Equity Portfolio may
enter into forward foreign currency contracts to hedge its portfolio holdings
against future movements in certain foreign currency exchange rates. A forward
currency contract is a commitment to purchase or sell a foreign currency at a
future date at a set price. The forward currency contracts are valued at the
forward rate and are marked-to-market daily. The change in market value is
recorded by the Fund as an unrealized gain or loss. When the contract is closed,
the Fund recognizes a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the time it was
closed.
The use of forward foreign currency contracts does not eliminate fluctuations in
the underlying prices of the securities of the Fund, but it does establish a
rate of exchange that can be achieved in the future. Although forward foreign
currency contracts to sell limit the risk of loss due to a decline in the value
of the currency holdings, they also limit any potential gain that might result
should the value of the currency increase. In addition, the Fund could be
exposed to risks if the counterparties to the contracts are unable to meet the
terms of the contracts.
G. FOREIGN CURRENCY TRANSLATION - Assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at the rate of exchange at the end
of the period. Purchases and sales of securities are translated at the rates of
exchange prevailing when such securities were acquired or sold. Income is
translated at rates of exchange prevailing when interest is accrued or dividends
are recorded.
<PAGE> 157
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
G. FOREIGN CURRENCY TRANSLATION - CONTINUED
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from activity in
forward foreign currency contracts, sales of foreign currencies, currency gains
or losses realized between the trade and settlement dates on securities
transactions, the difference between the amounts of dividends, interest, and
foreign withholding taxes recorded on the Fund's books, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at fiscal year end, resulting
from changes in the exchange rate, and changes in the contract value of forward
foreign currency contracts.
H. REPURCHASE AGREEMENTS - The Funds may enter into repurchase agreements with
selected commercial banks and broker-dealers, under which the Fund acquires
securities as collateral and agrees to resell the securities at an agreed upon
time and at an agreed upon price. The Fund accrues interest for the difference
between the amount it pays for the securities and the amount it receives upon
resale. At the time the Fund enters into a repurchase agreement, the value of
the collateral securities 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 collateral
securities including accrued interest will continue to be at least equal to the
value of the repurchase agreement.
I. REVERSE REPURCHASE AGREEMENTS - The Funds may enter into reverse repurchase
agreements with selected commercial banks or broker-dealers. In a reverse
repurchase agreement, the Fund sells securities as collateral and agrees to
repurchase them at a mutually agreed upon date and price. This practice is the
equivalent of borrowing using the securities as collateral and can create
leverage. During the reverse repurchase agreement period, the Fund continues to
receive principal and interest payments on these securities but pays interest to
the counter-party based upon competitive market rates at the time of issuance.
At the time the Fund enters into a reverse repurchase agreement, it will
establish and maintain a segregated account with the custodian containing liquid
assets having a value not less than the repurchase price (including accrued
interest). If the counterparty to the transaction is rendered insolvent, the
ultimate realization of the collateral securities to be repurchased by the Fund
may be delayed or limited.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES - The
Trust has entered into an investment advisory agreement with Cova Investment
Advisory Corporation (the "Adviser"), pursuant to which the Adviser manages the
investment operations of the Trust's affairs. The Adviser has entered into
sub-advisory agreements with J.P. Morgan Investment Management Inc., Lord Abbett
& Co., Van Kampen American Capital Investment Advisory Corporation, and
Mississippi Valley Advisors Inc. ( the "Sub-advisers") for investment advisory
services in connection with the investment or management of the portfolios of
the Funds. The Adviser supervises the Sub-advisers, sub-advisers'
<PAGE> 158
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES -
CONTINUED
performance of advisory services and will make recommendations to the Board of
Trustees with respect to the retention or renewal of the sub-advisory
agreements. The Adviser pays the Sub-advisers and bears the cost of compensating
officers of the Trust.
Under the terms of the Funds' investment advisory agreement, the Funds pay the
Adviser a monthly fee based on the average daily net assets as follows:
<TABLE>
<CAPTION>
Fund Average Daily Net Assets % Per Annum
- ---- ------------------------ -----------
<S> <C> <C>
Small Cap Stock All .85%
Quality Bond First $75 Million .55%
Over $75 Million .50%
Select Equity First $50 Million .75%
Over $50 Million .65%
Large Cap Stock All .65%
International Equity First $50 Million .85%
Over $50 Million .75%
Money Market First $500 Million .50%
Over $500 Million .40%
Quality Income First $500 Million .50%
Over $500 Million .45%
Stock Index All .50%
VKAC Growth and Income First $500 Million .60%
Over $500 Million .50%
High Yield First $500 Million .75%
Over $500 Million .65%
Bond Debenture All .75%
Mid-Cap Value All 1%
</TABLE>
<PAGE> 159
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES -
CONTINUED
<TABLE>
<CAPTION>
Fund Average Daily Net Assets % Per Annum
- ---- ------------------------ -----------
<S> <C> <C>
Large Cap Research All 1%
Developing Growth All .90%
Balanced All 1%
Small Cap Equity All 1%
Equity Income All 1%
Growth & Income Equity All 1%
</TABLE>
The Adviser has voluntarily waived its monthly advisory fee for the Money Market
Portfolio. In addition, the Adviser has voluntarily waived or otherwise
reimbursed the Funds for their other operating expenses, exclusive of brokerage
or other portfolio transaction expenses or expenses of litigation,
indemnification, taxes, or other extraordinary expenses, to the extent that they
exceed 0.10% of the average daily net assets of each Fund.
Cova Variable Annuity Accounts One, Five and First Cova Variable Annuity Acount
One are separate investment accounts offered by Cova Financial Services Life
Insurance Co. and Cova Financial Life Insurance Co. (collectively "Cova Life").
At December 31, 1997, Cova Life owned all shares of beneficial interest of each
Fund except those listed below.
<TABLE>
<CAPTION>
Percentage of Ownership
-----------------------------------------------------
Mississippi Valley
Cova Life Lord Abbett & Co. Advisors Inc.
--------- ---------------- ------------------
<S> <C> <C> <C>
Mid-Cap Value 95.3% 4.7% ---
Large Cap Research 91.1% 8.9% ---
Developing Growth 93.9% 6.1% ---
Balanced 27.4% --- 72.6%
Small Cap Equity 20.6% --- 79.4%
Equity Income 33.1% --- 66.9%
Growth & Income Equity 54.7% --- 45.3%
</TABLE>
<PAGE> 160
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
3. INVESTMENT TRANSACTIONS
Aggregate cost of purchases and proceeds of sales of investment securities,
excluding short-term securities, for the period ended December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
Purchases
---------------------------------------------------
Portfolio: U.S. Government Non-Government Total
- ---------- --------------- -------------- ------------
<S> <C> <C> <C>
Small Cap Stock $ 0 $ 67,605,432 $ 67,605,432
Quality Bond 20,760,132 5,735,996 26,496,128
Select Equity 0 148,163,972 148,163,972
Large Cap Stock 0 21,576,856 21,576,856
International Equity 0 79,195,610 79,195,610
Quality Income 47,678,089 107,991,560 155,669,649
Stock Index 0 20,924,957 20,924,957
VKAC Growth and Income 0 42,675,420 42,675,420
High Yield 0 37,487,847 37,487,847
Bond Debenture 15,366,165 52,494,680 67,860,845
Mid-Cap Value* 0 2,020,572 2,020,572
Large Cap Research* 0 1,224,423 1,224,423
Developing Growth* 0 1,610,385 1,610,385
Balanced** 551,460 815,129 1,366,589
Small Cap Equity** 0 1,550,773 1,550,733
Equity Income** 0 1,639,927 1,639,927
Growth & Income Equity** 0 2,362,112 2,362,112
</TABLE>
* Portfolio commenced operations August 20, 1997.
** Portfolio commenced operations July 1, 1997.
<PAGE> 161
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
3. INVESTMENT TRANSACTIONS - CONTINUED
<TABLE>
<CAPTION>
Sales
----------------------------------------------------
Portfolio: U.s. Government Non-Government Total
- ---------- --------------- -------------- ------------
<S> <C> <C> <C>
Small Cap Stock $ 0 $25,976,318 $ 25,976,318
Quality Bond 14,440,660 1,249,470 15,690,130
Select Equity 0 81,230,737 81,230,737
Large Cap Stock 0 12,078,226 12,078,226
International Equity 0 28,864,924 28,864,924
Quality Income 60,583,419 97,441,811 158,025,230
Stock Index 0 41,966,209 41,966,209
VKAC Growth and Income 0 36,454,880 36,454,880
High Yield 0 47,391,759 47,391,759
Bond Debenture 9,324,473 15,433,275 24,757,748
Mid-Cap Value* 0 8,058 8,058
Large Cap Research* 0 5,124 5,124
Developing Growth* 0 46,475 46,475
Balanced** 0 120,653 120,653
Small Cap Equity** 0 350,259 350,259
Equity Income** 0 195,691 195,691
Growth & Income Equity** 0 249,400 249,400
</TABLE>
* Portfolio commenced operations August 20, 1997.
** Portfolio commenced operations July 1, 1997.
<PAGE> 162
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
3. INVESTMENT TRANSACTIONS - CONTINUED
At December 31, 1997, the cost of securities for federal income tax purposes and
the unrealized appreciation (depreciation) of investments for federal income tax
purposes for each Portfolio was as follows:
<TABLE>
<CAPTION>
Federal Gross Gross
Income Unrealized Unrealized
Portfolio: Tax Cost Appreciation (Depreciation)
- ---------- ----------- ------------ --------------
<S> <C> <C> <C>
Small Cap Stock $52,024,392 $ 7,485,196 $(2,620,717)
Quality Bond 15,972,681 347,072 (2,082)
Select Equity 98,622,676 8,480,963 (2,741,002)
Large Cap Stock 27,274,428 5,269,657 (552,438)
International Equity 64,349,561 5,536,543 (4,909,891)
Money Market 21,895,770 ----- -----
Quality Income 47,114,722 2,061,749 (17,031)
Stock Index 58,424,938 33,037,391 (1,108,453)
VKAC Growth and Income 41,285,482 7,630,302 (1,213,171)
High Yield 31,577,280 1,416,106 (116,982)
Bond Debenture 51,441,189 1,633,184 (419,481)
Mid-Cap Value 2,012,664 73,060 (26,074)
Large Cap Research 1,218,629 32,167 (25,583)
Developing Growth 1,568,464 81,506 (73,001)
Balanced 1,253,415 78,103 (36,719)
Small Cap Equity 1,244,343 97,380 (95,868)
Equity Income 1,468,437 162,554 (39,803)
Growth & Income Equity 2,121,294 182,664 (83,742)
</TABLE>
The Quality Income Portfolio enters into reverse repurchase agreements
(borrowing) for cash management purposes. The average daily balance of reverse
repurchase agreements outstanding during the period was $509,439 at a weighted
average interest rate of 4.97%. The maximum amount of borrowing outstanding
during the year ended December 31, 1997 was $ 4,096,250 (including accrued
interest).
For temporary cash management purposes, the following Portfolios engaged in bank
borrowings:
<TABLE>
<CAPTION>
Average Daily Weighted Average Maximum Dollar
Portfolio Borrowings Interest Rate Amount Borrowed
- --------- ------------- ---------------- ---------------
<S> <C> <C> <C>
Quality Income $132,213 6.50% $ 2,509,362
Stock Index 266,022 6.43% 14,224,060
High Yield 95,584 6.50% 7,214,854
</TABLE>
<PAGE> 163
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
4. FUTURES CONTRACTS
Transactions in futures contracts for the year ended December 31, 1997, were as
follows:
<TABLE>
<CAPTION>
VKAC
Quality Income Stock Index Growth and Income
Portfolio Portfolio Portfolio
-------------- ----------- -----------------
<S> <C> <C> <C>
Futures Contracts Outstanding at December 31, 1996 25 5 4
Contracts Opened 668 196 17
Contracts Closed (658) (179) (17)
---- ---- ---
Futures Contracts Outstanding at December 31, 1997 35 22 4
==== ==== ===
</TABLE>
The futures contracts outstanding as of December 31, 1997 and the description
and unrealized appreciation (depreciation) were as follows:
<TABLE>
<CAPTION>
Unrealized
Notional Appreciation/
Contracts Value (Depreciation)
--------- ---------- --------------
<S> <C> <C> <C>
Quality Income Portfolio:
U.S. Long Bond
March 1998 - Sold 35 $4,216,406 $(51,406)
Stock Index Portfolio:
S&P 500 Index Futures
March 1998 - Purchased 22 $5,385,050 $ 33,968
VKAC Growth and Income Portfolio:
S&P 500 Index Futures
March 1998 - Purchased 4 $ 979,100 $ 19,800
</TABLE>
<PAGE> 164
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
5. FORWARD FOREIGN CURRENCY CONTRACTS
Open forward foreign currency contracts for the International Equity Portfolio
at December 31, 1997, were as follows:
Forward Foreign Currency Contracts to Buy:
<TABLE>
<CAPTION>
Value at In Unrealized
Settlement December 31, Exchange Appreciation/
Date Contracts To Receive 1997 For U.s. $ (Depreciation)
- ---------- ------------------------------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
1/02/98 439,101 Australian Dollar $ 286,221 $ 287,040 $ (819)
1/02/98 22,034,928 Spanish Peseta 144,622 146,071 (1,449)
1/02/98 1,042,806 Swedish Krona 131,485 133,246 (1,761)
1/13/98 163,012,080 Japanese Yen 1,256,452 1,320,000 (63,548)
--------
(67,577)
========
</TABLE>
Forward Foreign Currency Contracts to Sell:
<TABLE>
<CAPTION>
Value at In Unrealized
Settlement December 31, Exchange Appreciation/
Date Contracts To Deliver 1997 For U.s. $ (Depreciation)
- ---------- ------------------------------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
1/02/98 4,907,758 Belgian Franc $ 132,565 $ 133,245 $ 680
1/02/98 255,803,479 Italian Lira 144,683 146,072 1,389
1/13/98 3,017,248 Australian Dollar 1,967,296 2,181,625 214,329
1/13/98 603,206 British Pound Sterling 991,405 972,368 (19,037)
1/13/98 408,924,139 Italian Lira 231,267 237,071 5,804
1/13/98 387,810,322 Japanese Yen 2,989,135 3,232,726 243,591
1/13/98 1,370,452 New Zealand Dollar 795,508 868,116 72,608
1/13/98 1,319,087 Singapore Dollar 782,299 830,315 48,016
--------
567,380
========
</TABLE>
<PAGE> 165
COVA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
6. MORTGAGE AND ASSET BACKED SECURITIES
The Quality Income and Quality Bond Portfolios invest in Mortgage and Asset
Backed Securities. A Mortgage Backed Security (MBS) is a pass-through security
created by pooling and selling participations in the principal and interest
payments received from borrowers. Most of these securities are issued by
federally sponsored agencies -- Government National Mortgage Association (GNMA),
Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage
Corporation (FHLMC) or Federal Home Loan Bank (FHLB).
A Collateralized Mortgage Obligation (CMO) is a bond which is collateralized by
a pool of MBSs. The Quality Income and Quality Bond Portfolios also invest in
REMICs (Real Estate Mortgage Investment Conduits) which are simply another form
of CMO. These MBS pools are divided into classes or tranches with each class
having its own characteristics. For instance, a PAC (Planned Amortization Class)
is a specific class of mortgages with the most stable cash flow and the lowest
prepayment risk.
Asset Backed Securities are similar to MBSs but made up of pools of other
assets, such as credit card receivables, which are grouped together for
investment purposes. Payments of principal and interest on the securities are
made from the cash flows of the group of assets.
