<PAGE>
As filed with the Securities and Exchange Commission on April 29 , 1996
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1933 Act File No. 33-77138
1940 Act File No. 811-8456
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
Pre-Effective Amendment No. [_]
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Post-Effective Amendment No. 2 [X]
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
Amendment No. 3
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GNA VARIABLE SERIES TRUST
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(Exact Name of Registrant as Specified in Charter)
Suite 5600, Two Union Square, Seattle, Washington 98101
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (206) 625-1755
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Edward J. Wiles, Esq.
GNA Variable Series Trust
Suite 5600
Two Union Square
Seattle, Washington 98101
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective under Rule 485:
[_] Immediately upon filing pursuant [X] On May 1, 1996 pursuant to
to paragraph (b), paragraph (b),
[_] 60 days after filing pursuant [_] On ______________ pursuant to
to paragraph (a)(1), paragraph (a)(1).
[_] 75 days after filing pursuant [_] On ______________ pursuant to
to paragraph (a)(2), paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[_] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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The Registrant hereby declares that, pursuant to Rule 24f-2(a)(1)
promulgated under the Investment Company Act of 1940, as amended, it has
registered an indefinite number of shares of beneficial interest, no par value,
of each of the GNA Adjustable Rate Portfolio series, GNA Government Portfolio
series, GNA Value Portfolio series and GNA Growth Portfolio series, and of the
Registrant. The Registrant filed its Rule 24f-2 notice for the fiscal year ended
December 31, 1995 on or about February 28, 1996.
1
<PAGE>
CROSS REFERENCE SHEET
(REGISTRATION STATEMENT ON
FORM N-1A AND PROSPECTUS)
<TABLE>
<CAPTION>
Form N-1A Item No.
- ------------------ Caption or
Part A Location in the Prospectus
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<S> <C> <C>
1. Cover Page......................... Cover page
2. Synopsis........................... Not Applicable
3. Condensed Financial Information.... Not Applicable
4. General Description of Registrant.. Investment Objective and Policies;
The Trust, the Portfolios and
Management
5. Management of the Portfolio........ The Information Trust, the
Portfolios and Management;
Additional Portfolios and Management
6. Capital Stock and Other
Securities....................... Dividends, Distributions and Taxes;
The Trust, the
7. Purchase of Securities Being
Offered.......................... Purchases and Redemptions
8. Redemption or Repurchase........... Purchases and Redemptions
9. Pending Legal Proceedings.......... Not Applicable
Caption or
Part A Statement of Additional Information
------ -----------------------------------
10. Cover Page......................... Cover Page
11. Table of Contents.................. Table of Contents
12. General Information and History.... General Information
13. Investment Objectives and
Policies......................... Additional Information Concerning
Certain Investment Techniques; Debt
Instruments and Permitted Cash
Investments; Debt Securities
Ratings; Investment Restrictions;
Portfolio Transactions
14. Management of the Registrant....... Management of the Trust
15. Control Persons and Principal
Holder of Securities............. Management of the Trust
16. Investment Advisory and Other
Services......................... The Investment Adviser and Sub-
Advisers
17. Brokerage Allocation and Other
Practices.. Portfolio Transactions
18. Capital Stock and Other
Securities........ General Information
19. Purchase, Redemption and Pricing
of Securities Being Offered...... Purchase and Redemption
Information; Net Asset Value
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Caption or
Part A Statement of Additional Information
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<S> <C> <C>
20. Tax Status......................... Certain Tax Matters
21. Underwriters....................... Not Applicable
22. Calculation of Performance Data.... Performance Information
23. Financial Statements............... Financial Statements
</TABLE>
3
<PAGE>
GNA VARIABLE SERIES TRUSTSM
GNA Variable Series Trust (the "Trust") is a professionally managed, open-end
investment company that offers a selection of diversified managed investment
portfolios (individually a "Portfolio"; collectively, the "Portfolios"), each
with its own investment objective and policies. This Prospectus describes the
following four Portfolios currently offered by the Trust.
THE GNA ADJUSTABLE RATE PORTFOLIO'S investment objective is to produce a high
level of current income consistent with limiting fluctuations in net asset
value of shares. This Portfolio will seek to achieve its objective by invest-
ing primarily in adjustable rate securities, including, but not limited to ad-
justable rate mortgage securities.
THE GNA GOVERNMENT PORTFOLIO'S investment objective is to produce a high level
of current income consistent with safety of principal. This Portfolio will
seek to achieve its objective by investing primarily in obligations issued or
guaranteed by the U.S. Government or by its agencies or instrumentalities.
THE GNA VALUE PORTFOLIO'S investment objective is to provide long-term growth
of capital and an above-average level of dividend income by investing primar-
ily in equity securities. This Portfolio will seek to provide a higher total
return than that of the Standard & Poor's 500 Stock Index (the "S&P 500 In-
dex").
THE GNA GROWTH PORTFOLIO'S investment objective is to provide long term growth
of capital. This Portfolio will seek to achieve its objective by investing
primarily in equity securities of companies which, in the opinion of the Port-
folio's sub-adviser, have above average prospects for growth.
Shares of each Portfolio are offered only to insurance company separate ac-
counts that fund certain variable contracts. The information contained in this
Prospectus should be read together with the Prospectus for the variable con-
tracts.
This Prospectus sets forth the information about the Trust and the Portfolios
that you ought to know before allocating premiums or cash value from variable
contracts to the Portfolios. Please read this Prospectus carefully and retain
it for future reference. A Statement of Additional Information (dated May 1,
1996) for the Portfolios has been filed with the Securities and Exchange Com-
mission and is incorporated herein by reference. This Statement of Additional
Information is available upon request and without charge by contacting the
Trust at Suite 5600, Two Union Square, 601 Union Street, Seattle, Washington
98101 or by telephoning (800) 455-0870.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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THESE SECURITIES ARE NOT DEPOSITS WITH OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR ANY AFFILIATE THEREOF, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC), THE FEDERAL RESERVE BOARD OR
ANY OTHER GOVERNMENT AGENCY.
PROSPECTUS
May 1, 1996
TABLE OF CONTENTS
<TABLE>
<S> <C>
FINANCIAL
HIGHLIGHTS......... 2
GENERAL INFORMATION. 3
INVESTMENT
OBJECTIVES AND
POLICIES........... 3
GNA Adjustable Rate
Portfolio.......... 3
GNA Government
Portfolio.......... 9
GNA Value Portfolio. 14
GNA Growth
Portfolio.......... 17
Additional
Investment
Techniques......... 19
PURCHASES AND
REDEMPTIONS........ 23
EXCHANGE PRIVILEGE.. 24
NET ASSET VALUE..... 24
GNA Adjustable Rate
Portfolio.......... 24
GNA Government
Portfolio.......... 24
GNA Value Portfolio. 24
GNA Growth
Portfolio.......... 25
DIVIDENDS,
DISTRIBUTIONS AND
TAXES.............. 25
PERFORMANCE
INFORMATION........ 26
Yield............... 26
Total Return........ 26
Periodicals and
Indices............ 26
THE TRUST, THE
PORTFOLIOS AND
MANAGEMENT......... 27
GNA Adjustable Rate
Portfolio.......... 28
GNA Government
Portfolio.......... 28
GNA Value Portfolio. 29
GNA Growth
Portfolio.......... 30
ADDITIONAL
INFORMATION........ 31
Transfer Agent and
Custodian.......... 31
Independent
Accountants and
Counsel............ 31
</TABLE>
Two Union Square
601 Union Street, Suite 5600
Seattle, Washington 98101-2336
GNA Variable Series Trust--1
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<PAGE>
FINANCIAL HIGHLIGHTS
FOR THE PERIOD JANUARY 3, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,
1995.
The financial highlights set forth below include selected data for a share
outstanding throughout the year and other performance information derived from
the financial statements of each of the Portfolios that have been audited by
Coopers and Lybrand L.L.P., independent accountants whose report therein is
contained in the Statement of Additional information. The Statement of
Additional Information may be obtained upon request and without charge by
contacting the Trust at Suite 5600, Two Union Square, 601 Union Street, Seattle
Washington 98101 or by telephoning (800) 455-0870.
<TABLE>
<CAPTION>
GNA
ADJUSTABLE GNA GNA GNA
RATE GOVERNMENT VALUE GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ............................. $25.00 $25.00 $25.00 $25.00
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a).......... 1.38 1.70 0.55 0.10
Net realized and unrealized gain on
investments....................... 1.44 2.19 6.31 8.24
------ ------ ------ ------
Total from investment operations..... 2.82 3.89 6.86 8.34
------ ------ ------ ------
LESS DISTRIBUTIONS FROM
Net investment income.............. (1.38) (1.70) (0.54) (0.10)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD....... $26.44 $27.19 $31.32 $33.24
------ ------ ------ ------
TOTAL RETURN (%)**................... 11.50 15.99 27.68 33.37
Ratios/Supplemental Data
Ratios (%):
Expenses, net, to average daily net
assets (a)........................ 0.70* 0.90* 1.10* 1.10*
Expenses, gross, excluding
reimbursement for expenses, to
average daily net assets.......... 2.05* 2.09* 2.89* 3.87*
Net investment income to average
daily net assets.................. 5.38* 6.51* 2.03* 0.47*
Portfolio turnover................. 36.47 129.71 41.67 65.88
Net Assets, end of period (millions). $ 5.6 $ 7.2 $ 4.5 $ 6.9
(a) Reimbursement for expenses from
Adviser............................. $0.346 $0.311 $0.747 $0.380
</TABLE>
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* Annualized.
** Periods less than one year are not annualized.
2--GNA Variable Series Trust
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<PAGE>
GENERAL INFORMATION
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GNA Variable Series Trust(SM) (the "Trust") is a Delaware business trust, and is
an open-end, diversified, management investment company. Shares of the Trust
are offered only to insurance company separate accounts that fund certain
variable contracts (the "Contracts"). Separate accounts may purchase or redeem
shares at net asset value without any sales or redemption charge. Fees and
charges imposed by a separate account, however, will affect the actual return
to the holder of a Contract. A separate account may also impose certain re-
strictions or limitations on the allocation of purchase payments or Contract
value to the Trust, and the Trust may not be available in connection with a
particular Contract. Prospective investors should consult the applicable Con-
tract prospectus for information regarding fees and expenses of the Contract
and separate account and any applicable restrictions or limitations.
Shares of the Portfolios are offered to the separate accounts of insurance
companies that are affiliated with GNA Capital Management, Inc., the Trust's
investment adviser, and may also be offered to the separate accounts of unaf-
filiated insurance companies. Shares of the Portfolios may serve as the under-
lying investments for both annuity and life insurance contracts. In that
event, certain conflicts may at some point arise between variable annuity con-
tract holders and variable life insurance contract holders which could ad-
versely affect the management of the Portfolios. See "Purchases and Redemp-
tions."
INVESTMENT OBJECTIVES AND POLICIES
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The Trust offers four series of shares, each of which represents a segregated,
separately managed portfolio of securities with its own investment objective.
The investment objective of each Portfolio is a fundamental policy that cannot
be changed without shareholder approval. Except as expressly provided in this
Prospectus or the Statement of Additional Information, the other investment
policies of each Portfolio are not fundamental and may be changed without such
approval. There can be no assurance that a Portfolio will be able to achieve
its investment objective.
GNA ADJUSTABLE RATE PORTFOLIO
The investment objective of the GNA Adjustable Rate Portfolio (the "Adjustable
Rate Portfolio") is to produce a high level of current income consistent with
limiting fluctuations in the net asset value of Adjustable Rate Portfolio
shares.
The Adjustable Rate Portfolio will seek to achieve its investment objective by
investing primarily in adjustable rate securities, including, but not limited
to, adjustable rate mortgage securities ("ARMs"). ARMs are collateralized by
adjustable rate, rather than fixed-rate, mortgages. The Adjustable Rate Port-
folio intends to invest at least 65% of the value of its total assets in ad-
justable rate securities under normal market conditions.
At least 50% of the Adjustable Rate Portfolio's total assets will be invested
in securities issued or guaranteed by the U.S. Government, its agencies or in-
strumentalities ("U.S. Government Securities") or securities that are collat-
eralized by U.S. Government Securities. The Adjustable Rate Portfolio may also
invest in high-grade fixed and adjustable rate mortgage and debt securities
rated within the three highest credit categories by Moody's, S&P or Fitch In-
vestors Service ("Fitch") or, if unrated, determined by the Adjustable Rate
Portfolio's sub-adviser, Standish, Ayer & Wood, Inc. ("Standish, Ayer & Wood")
to be of equivalent quality. In the event the rating of a security is down-
graded, Standish, Ayer & Wood will determine whether the securities should be
retained or sold depending on an assessment of all facts and circumstances at
that time. The Adjustable Rate Portfolio will concentrate at least 25% of its
total assets in asset-backed securities, including mortgage securities of gov-
ernmental and non-governmental issuers, collateralized mortgage obligations
and other asset-backed securities. The
GNA Variable Series Trust--3
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<PAGE>
Adjustable Rate Portfolio is expected to have an effective duration ranging
from 1 year to 2 years. A bond's duration is the weighted average life of its
principal and interest payments and is often considered a useful indication of
its price volatility.
Adjustable rate mortgages, like fixed-rate mortgages, have a specified matu-
rity date, and the principal amount of the mortgage is repaid over the life of
the mortgage. Unlike fixed-rate mortgages, the interest rate on adjustable
rate mortgages is adjusted at regular intervals based on a specified, pub-
lished interest rate "index." The new rate is determined by adding a specific
interest amount, the "margin" or "spread," to the interest rate of the index.
See "Characteristics of ARMs." As a result, ARMs generally provide higher
yields than money market securities and more stable principal values than
longer term fixed-rate mortgage securities. Investment in ARMs allows the Ad-
justable Rate Portfolio to participate in changing interest rate levels
through regular adjustments in the coupons of the underlying mortgages, re-
sulting in more variable current income and lower price volatility than longer
term fixed-rate mortgage securities. The ARMs in which the Adjustable Rate
Portfolio expects to invest will generally adjust their interest rates at reg-
ular intervals of two years or less. ARMs are a less effective means of lock-
ing in long-term rates than securities collateralized by fixed-rate mortgages
because the income from adjustable rate mortgages will increase during periods
of rising interest rates and decline during periods of falling rates.
MORTGAGE SECURITIES. A mortgage security is an interest in a pool of mortgage
loans. The Adjustable Rate Portfolio will invest primarily in mortgage securi-
ties that are collateralized by a pool of adjustable rate mortgages. The pri-
mary issuers of ARMs are the Federal National Mortgage Association, the Fed-
eral Home Loan Mortgage Corporation and the Government National Mortgage Asso-
ciation. The principal and interest on GNMA securities are guaranteed by GNMA
and backed by the full faith and credit of the U.S. Government. While the ARMs
issued by FNMA and FHLMC are not backed by the full faith and credit of the
U.S. Government, their close relationship with the U.S. Government makes them
high quality securities with minimal credit risks.
Some mortgage securities are called "pass-through certificates" because a pro-
rata share of interest (less GNMA, FHLMC, or FNMA fees and any applicable loan
servicing fees) as well as scheduled and unscheduled principal payments on the
underlying mortgage pool are passed through each month to the owner of the se-
curity (e.g., the Adjustable Rate Portfolio). While the Adjustable Rate Port-
folio's net income will be distributed to shareholders, the Adjustable Rate
Portfolio will reinvest scheduled and unscheduled principal payments, and pre-
vailing interest rates may be higher or lower than the Adjustable Rate Portfo-
lio's current yield at the time these investments are made.
CHARACTERISTICS OF ARMS. The interest rates paid on the adjustable rate mort-
gages underlying ARMs are reset at regular intervals by adding an interest
rate margin to a specified interest rate index. There are two main categories
of indices: rates tied to the yield on U.S. Treasury securities or the London
interbank offered rate; and those derived from a calculated measure such as a
cost of living index or a moving average of mortgage rates. Some indices, such
as the one-year constant maturity Treasury rate, closely mirror changes in in-
terest rate levels. Others, such as the 11th District Home Loan Bank Cost of
Funds Index, tend to lag behind changes in market rate levels and tend to be
somewhat less volatile. Due to the inverse relationship between interest rates
and the value of certain securities, such a delay in adjusting to changes in
interest rates may cause the Adjustable Rate Portfolio's net asset value to
increase or decrease in value, particularly during periods between interest
adjustment dates.
The underlying adjustable rate mortgages in which the Adjustable Rate Portfo-
lio invests will frequently have caps and floors which limit the maximum
amount by which the interest rate to the residential borrower may
4--GNA Variable Series Trust
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<PAGE>
move up or down, respectively, during each adjustment period and over the life
of the loan. Interest rate caps on mortgages underlying ARMs may prevent their
income from increasing to prevailing interest rate levels, and cause these se-
curities to decrease in value. Conversely, interest rate floors on mortgages
underlying ARMs may cause their income to remain higher than prevailing inter-
est rate levels and result in an increase in the value of such securities. In
addition, some residential mortgage loans limit adjustments to the borrower's
monthly principal and interest payments rather than limiting interest rate
changes. These payment caps may cause the outstanding principal balance of the
mortgage to increase.
Mortgage securities generally have a maximum maturity of 15 to 30 years. How-
ever, due to the adjustable rate feature of the mortgages underlying ARMs,
their prices are considered to have volatility characteristics which approxi-
mate the average period of time until the next adjustment of the interest
rate. As a result, the principal volatility of ARMs may be more comparable to
short- and intermediate-term securities than to longer term fixed-rate mort-
gage securities.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). The Adjustable Rate Portfolio
may also invest in CMOs which are debt obligations fully collateralized by a
portfolio of mortgages or mortgage-related securities. Typically, CMOs are
collateralized by mortgage securities guaranteed or issued by GNMA, FNMA or
FHLMC. Payments of principal and interest on the mortgages are passed through
to the holders of the CMOs on the same schedule as they are received, although
certain classes of CMOs have priority over others with respect to the receipt
of prepayments on the mortgages. Therefore, depending on the types of CMOs in
which the Adjustable Rate Portfolio invests, the investment may be subject to
a greater or lesser risk of prepayment than other types of mortgage-related
securities.
U.S. GOVERNMENT SECURITIES. The U.S. Government Securities which the Adjust-
able Rate Portfolio may purchase include but are not limited to (1) U.S. Trea-
sury obligations: Treasury Notes (maturities of one to ten years) and Treasury
Bonds (generally maturities of greater than ten years); and (2) obligations
issued, guaranteed or otherwise backed by the U.S. Government, its agencies or
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Treasury (such as obligations of GNMA, the Gen-
eral Services Administration and Federal Maritime Administration), (b) the
right of the issuer to borrow an amount limited to a specific line of credit
from the U.S. Treasury (such as obligations of the FNMA, FHLMC and the U.S.
Postal Service); the U.S. Treasury has discretionary authority to provide fi-
nancial assistance to such entities, however, it is not obligated to do so by
law and may take steps to restrict or eliminate such support in the future; or
(c) the credit of the agency or instrumentality (such as obligations of the
Federal Home Loan Bank and Federal Farm Credit System).
U.S. Government Securities of the type to be included in the Adjustable Rate
Portfolio's portfolio have historically involved little risk of loss of prin-
cipal if held to maturity. However, the prices of such securities are in-
versely affected by changes in interest rate levels. A decrease in rates gen-
erally produces an increase in the value of the Adjustable Rate Portfolio's
investments while an increase in rates generally reduces the value of these
investments.
OTHER SECURITIES
The Adjustable Rate Portfolio may invest up to 35% of its total assets in se-
curities other than adjustable rate mortgage securities, either alone or in
combination with money market securities.
MULTI-CLASS RESIDENTIAL MORTGAGE SECURITIES. The Adjustable Rate Portfolio may
invest in Multi-Class Residential Mortgage Securities. Such securities repre-
sent interests in pools of mortgage loans to residential home buyers made by
commercial banks, savings and loan associations or other financial institu-
tions. Unlike GNMA, FNMA and FHLMC
GNA Variable Series Trust--5
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<PAGE>
securities, the payment of principal and interest on Multi-Class Residential
Mortgage Securities is not guaranteed or otherwise backed by the U.S. Govern-
ment or any of its agencies. Accordingly, yields on Multi-Class Residential
Mortgage Securities have been historically higher than the yields on U.S. Gov-
ernment mortgage securities. However, the risk of loss due to default on such
instruments is higher since they are not guaranteed by the U.S. Government,
its agencies or instrumentalities. Additionally, pools of such securities may
be divided into senior or subordinated segments. Although subordinated mort-
gage securities may have a higher yield than senior mortgage securities, the
risk of loss of principal is greater because losses on the underlying mortgage
loans must be borne by persons holding subordinated securities before those
holding senior mortgage securities.
STRIPPED MORTGAGE SECURITIES. The Adjustable Rate Portfolio may also invest in
stripped mortgage securities. With such securities, the principal and interest
payments on a pool of mortgages are separated or "stripped" to create two
classes of securities. In general, the interest-only, or "IO" class of
stripped securities, receives all interest and no principal payments, while
the principal-only, or "PO" class, is entitled to receive all principal and no
interest payments. Stripped mortgage securities are expected to be acutely
sensitive to fluctuations in interest rates which, in turn, affect prepayment
rates on the mortgages underlying stripped securities. The Adjustable Rate
Portfolio will invest principally in IO securities for the purpose of reduc-
ing, or hedging against, the decline in principal value of mortgage securities
which may occur as a result of increasing interest and prepayment rates.
ASSET-BACKED SECURITIES. Asset-backed securities represent a participation in,
or are secured by and payable from, a stream of payments generated by particu-
lar assets, for example, credit card or automobile receivables and home equity
loans. Asset-backed commercial paper, one type of asset-backed security, is
issued by a special purpose entity, organized solely to issue the commercial
paper and to purchase interests in the assets. The credit quality of these se-
curities depends primarily upon the quality of the underlying assets and the
level of credit support and/or enhancement provided.
The underlying assets (e.g., loans) are subject to prepayments which shorten
the securities' weighted average life and may lower their return. If the
credit support or enhancement is exhausted, losses or delays in payment may
result if the required payments of principal and interest are not made. The
value of these securities also may change because of changes in the market's
perception of the creditworthiness of the servicing agent for the pool, the
originator of the pool, or the financial institution providing the credit sup-
port or enhancement.
NON U.S. GOVERNMENT ARMS OR CMOS. The Adjustable Rate Portfolio may purchase
ARMs or CMOs issued by private issuers. Privately issued ARMs and CMOs may
take a form similar to ARMs or CMOs issued or guaranteed by GNMA, FNMA or
FHMLC. Private issuers include originators of or investors in mortgage loans
and receivables such as savings and loan associations, savings banks, commer-
cial banks, investment banks, finance companies and special purpose finance
subsidiaries of any of the above. Securities issued by private issuers must be
rated at least A by S&P, Moody's or Fitch or, if unrated, be judged by Stand-
ish, Ayer & Wood to be of equivalent quality. Such rating may be based, in
part, on certain types of credit enhancements issued in respect of such secu-
rities. Such credit enhancements may include insurance policies, bank letters
of credit, or guaranties by third parties. CMOs may also be issued by private
issuers. Such CMOs are collateralized by mortgages or mortgage related securi-
ties of such private issuers. Certain private issuers of ARMs and CMOs may be
considered investment companies under the Investment Company Act of 1940. In
such event, the Adjustable Rate Portfolio may be restricted from investing in
the securities of such issuers.
CASH RESERVES. The Adjustable Rate Portfolio may hold short-term U.S. govern-
ment cash reserves (money market securities maturing in
6--GNA Variable Series Trust
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<PAGE>
one year or less) if Standish, Ayer & Wood believes such holdings are advis-
able to facilitate the Adjustable Rate Portfolio's cash flow needs (e.g., re-
demptions and expenses) or for temporary defensive purposes.
DEBT SECURITIES. The Adjustable Rate Portfolio may invest in short-term debt
securities, such as commercial paper, that are rated at least A3 by S&P or
Fitch or Prime-3 by Moody's or, if not rated, are of equivalent investment
quality as determined by Standish, Ayer & Wood. Debt securities within the top
credit categories comprise what are generally known as high-quality bonds.
OTHER PORTFOLIO STRATEGIES
LENDING OF PORTFOLIO SECURITIES. The Adjustable Rate Portfolio may lend its
portfolio securities to qualified institutional investors for the purpose of
realizing additional income. Loans may be made pursuant to agreements which
provide safeguards for the Adjustable Rate Portfolio, e.g., that the loans
will be continuously secured by collateral in any combination of cash, letters
of credit and securities of the U.S. Government or its agencies, equal to at
least the market value at all times of the securities lent. The bank or banks
issuing any such letters of credit must meet creditworthiness standards ap-
proved by the Adjustable Rate Portfolio's Board of Trustees. The Adjustable
Rate Portfolio will not make securities loans if as a result the aggregate of
all outstanding securities loans exceeds one-third of the value of the Adjust-
able Rate Portfolio's total assets. The Adjustable Rate Portfolio receives
compensation for lending its securities in the form of fees or it retains a
portion of interest on the investment of any cash collateral it receives. The
Adjustable Rate Portfolio also continues to receive interest or dividends on
the securities lent. However, the amounts received by the Adjustable Rate
Portfolio may be reduced by administrative or finders' fees paid to broker-
dealers and related expenses.
The primary risk in lending securities is that the borrower may become insol-
vent at a time at which the loaned security is rapidly increasing in value. In
such event, if the borrower fails to return the loaned security, the existing
collateral might be insufficient to purchase back the full amount of the secu-
rity loaned, and the borrower would be unable to furnish additional collater-
al. The borrower would be liable for any shortage, but the lending Adjustable
Rate Portfolio would be an unsecured creditor with respect to such shortage
and might not be able to recover all or any thereof. However, this risk may be
minimized by a careful selection of borrowers and securities to be lent and by
monitoring collateral.
WHEN-ISSUED AND FORWARD COMMITMENT CONTRACTS. The Adjustable Rate Portfolio
may purchase securities on a "when-issued" or delayed delivery basis or may
purchase or sell securities on a forward commitment basis. No more than 25% of
the Adjustable Rate Portfolio's assets will be invested in these types of se-
curities, including forward roll transactions described below. When such
transactions are negotiated, the price is fixed at the time of the commitment,
but delivery and payment for the securities can take place a month or more af-
ter the date of the commitment to purchase. The securities so purchased or
sold are subject to market fluctuation, and no interest accrues to the pur-
chaser during this period. At the time of delivery of the securities, their
value may be more or less than the purchase or sale price. The Adjustable Rate
Portfolio may receive a fee for entering into forward commitment contracts.
FORWARD ROLL TRANSACTIONS. In order to enhance current income, the Adjustable
Rate Portfolio may enter into forward roll transactions with respect to mort-
gage-backed securities. In a forward roll transaction, the Adjustable Rate
Portfolio sells a mortgage-backed security to a financial institution, such as
a bank or broker-dealer, and simultaneously agrees to repurchase a similar se-
curity from the institution at a later date at an agreed-upon price. The mort-
gage-backed securities that are repurchased will bear the same interest rate
as those sold, but with different prepayment histories than those sold. The
Adjustable Rate Portfolio is compensated by the difference between the current
sales price and
GNA Variable Series Trust--7
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<PAGE>
the lower forward price for the future purchase as well as by the interest
earned on the cash proceeds of the initial sale. The value of securities sold
by the Adjustable Rate Portfolio in forward roll transactions may decline be-
low the repurchase price of the corresponding similar securities. At the time
the Adjustable Rate Portfolio enters into a forward roll transaction, it will
place in an account with the Custodian cash, U.S. Government Securities or
high grade debt obligations having a value equal to the repurchase price (in-
cluding accrued interest) and will subsequently monitor the account to insure
that the equivalent value is maintained.
144A SECURITIES. The Adjustable Rate Portfolio may invest in restricted secu-
rities in accordance with Rule 144A under the Securities Act of 1933, which
allows for the resale of such securities among certain qualified institutional
buyers. Because the market for such securities is still developing, such secu-
rities could possibly become illiquid in particular circumstances. See the
Statement of Additional Information.
PORTFOLIO TURNOVER. The Adjustable Rate Portfolio will not generally trade in
securities for short-term profits but, when circumstances warrant, securities
may be purchased and sold without regard to length of time held. Standish,
Ayer & Wood anticipates that the Adjustable Rate Portfolio's annual portfolio
turnover rate may exceed 100% but generally will not exceed 150%. A high port-
folio turnover rate in any year will increase brokerage commissions which are
borne directly by the Adjustable Rate Portfolio and could result in a high
amount of realized investment gain. See "Portfolio Transactions," "Portfolio
Turnover" and "Certain Tax Matters" in the Statement of Additional Informa-
tion.
RISK FACTORS. The types of securities in which the Adjustable Rate Portfolio
invests have certain unique attributes that warrant special consideration or
that present risks that may not exist in other types of mutual fund invest-
ments. Some of these considerations and risks pertain to the characteristics
of mortgage-backed securities generally, while others are peculiar to ARMs.
One of the principal risks regarding mortgage-backed securities is the risk of
prepayments. Recently, prepayment rates on mortgage-backed securities have
been high, however, prepayment rates may vary significantly over relatively
short periods of time. The net asset value of a share of the Adjustable Rate
Portfolio will fluctuate as market conditions change. The amount received upon
redemption may be more or less than a purchaser's original cost.
INVESTMENTS IN FOREIGN COMPANIES. The Adjustable Rate Portfolio may invest up
to 10% of its total assets in U.S. dollar denominated American Depository Re-
ceipts which represent securities of foreign companies. ADRs are traded in the
United States on national securities exchanges or over-the-counter and are is-
sued by domestic banks. The Adjustable Rate Portfolio will not make invest-
ments in foreign securities other than through ADRs.
When investing in ADRs, the Adjustable Rate Portfolio assumes certain addi-
tional risks that are not present with investments in stocks of domestic com-
panies. These risks include political and economic developments such as possi-
ble expropriation or confiscatory taxation that might adversely affect the
market value of such ADRs. In addition, there might be less publicly available
information about such foreign issuers than about domestic issuers, and such
foreign issuers may not be subject to the same accounting, auditing and finan-
cial standards and requirements as domestic issuers.
INVESTMENT RESTRICTIONS
In seeking to reduce investment risk, the Adjustable Rate Portfolio operates
under certain investment restrictions. The restrictions in the following para-
graph may not be changed except by a vote of the shareholders of the Adjust-
able Rate Portfolio. The remaining restrictions and policies are subject to
change by the Trustees.
The Adjustable Rate Portfolio may not invest in a security if, at the time of
purchase, the transaction would result in: (a) more than 5% of the Adjustable
Rate Portfolio's total assets
8--GNA Variable Series Trust
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<PAGE>
being invested in any one issuer (excluding securities issued or guaranteed by
U.S. Government, its agencies and instrumentalities); or (b) the Adjustable
Rate Portfolio's owning more than 10% of the outstanding voting securities of
an issuer (excluding securities issued or guaranteed by U.S. Government, its
agencies and instrumentalities).
The Adjustable Rate Portfolio may not: (a) invest more than 15% of its net as-
sets in illiquid securities, including certain IOs and POs and securities re-
stricted as to resale (which restricted securities are limited to 5% of total
assets), repurchase agreements extending for more than seven days and other
securities which are not readily marketable; (b) invest in securities of for-
eign issuers other than through ADRs; (c) borrow in excess of 10% of the value
of its total assets (through reverse repurchase agreements, forward rolls or
otherwise) and then only as a temporary measure or (d) make cash loans except
that it may purchase debt obligations, including money market instruments, di-
rectly from the issuer thereof or in the open market and may engage in repur-
chase transactions collateralized by obligations of the U.S. Government and
its agencies and instrumentalities. For further information on these and other
investment restrictions, including other non-fundamental investment restric-
tions which may be changed without a shareholder vote, see the Statement of
Additional Information.
GNA GOVERNMENT PORTFOLIO
The investment objective of the GNA Government Portfolio (the "Government
Portfolio") is to produce a high level of current income consistent with
safety of principal.
The Government Portfolio will seek to achieve its investment objective by in-
vesting primarily in obligations issued or guaranteed by the U.S. Government
or by its agencies or instrumentalities, having remaining maturities of one
year or more ("U.S. Government Securities"). The Government Portfolio intends
to invest at least 65% of the value of its total assets in U.S. Government Se-
curities except during times when the Government Portfolio's Adviser, GNA Cap-
ital Management, Inc., (the "Adviser") believes the adoption of a temporary
defensive position is desirable due to prevailing market or economic condi-
tions.
The remainder of the Government Portfolio's assets will be invested in other
debt instruments having a rating from Standard & Poor's Corporation ("S&P") of
AAA and cash or cash equivalents. Cash equivalents, for purposes of the Gov-
ernment Portfolio, are highly liquid instruments which include commercial pa-
per having a rating from S&P of A-1 or A-1+.
The composition and weighted average maturity of the Government Portfolio will
vary from time to time, based upon a determination of how best to further the
Government Portfolio's investment objective. The Government Portfolio is ex-
pected to have an average duration of approximately 4 years. A bond's duration
is the weighted average life of its principal and interest payments and is of-
ten considered a useful indication of its price volatility.
U.S. GOVERNMENT SECURITIES. The U.S. Government Securities which the Govern-
ment Portfolio may purchase include but are not limited to (1) U.S. Treasury
obligations: Treasury Notes (maturities of one to ten years) and Treasury
Bonds (generally maturities of greater than ten years); and (2) obligations
issued, guaranteed or otherwise backed by U.S. Government agencies and instru-
mentalities which are supported by any of the following: (a) the full faith
and credit of the U.S. Treasury (such as obligations of the Government Na-
tional Mortgage Association ("GNMA"'), the General Services Administration and
Federal Maritime Administration), (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the U.S. Treasury (such as
obligations of the Federal National Mortgage Association ("FNMA"), the Federal
Home Loan Mortgage Corporation ("FHLMC"), the Federal Housing Administration
("FHA"), and the U.S. Postal Service); the U.S. Treasury has discretionary au-
thority to provide financial assistance to such entities, however, it is not
obligated to do so by law and may take steps to restrict or eliminate such
support in the future; or (c) the credit of the
GNA Variable Series Trust--9
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<PAGE>
agency or instrumentality (such as obligations of the Federal Home Loan Bank
and Federal Farm Credit System).
U.S. Government Securities of the type to be included in the Government Port-
folio have historically involved little risk of loss of principal if held to
maturity. However, the prices of such securities are inversely affected by
changes in interest rate levels. A decrease in rates generally produces an in-
crease in the value of the Government Portfolio's investments, while an in-
crease in rates generally reduces the value of these investments. Certain ad-
ditional risks are described below.
MORTGAGE SECURITIES. A mortgage security is an interest in a pool of mortgage
loans. With the requisite degree of government backing, a mortgage security
may constitute a U.S. Government Security. The primary issuers of mortgage se-
curities that constitute U.S. Government Securities are the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation and the Gov-
ernment National Mortgage Association. The principal and interest on GNMA se-
curities are guaranteed by GNMA and backed by the full faith and credit of the
U.S. Government. While the mortgage securities issued by FNMA and FHLMC are
not backed by the full faith and credit of the U.S. Government, their close
relationship with the U.S. Government makes them high quality securities with
minimal credit risk. There is no limit upon the Government Portfolio's invest-
ments in mortgage-backed U.S. Government Securities and from time-to-time a
majority of the Government Portfolio may be invested in such securities.
Some mortgage securities are called "pass-through certificates" because a pro
rata share of interest (less GNMA, FHLMC or FNMA fees and any applicable loan
servicing fees) as well as scheduled and unscheduled principal payments on the
underlying mortgage pool are passed through each month to the owner of the se-
curity (e.g., the Government Portfolio).
Investments by the Government Portfolio in U.S. Government Securities which
are mortgage-backed securities may have maturities shorter than anticipated if
the underlying mortgages are prepaid. This prepayment feature will make such
mortgage-backed securities less effective than other types of securities as a
means of locking in attractive long-term interest rates. This is caused by the
need to reinvest prepayments of principal generally and the possibility of
significant unscheduled prepayments resulting from declines in mortgage inter-
est rates. At the time principal payments or prepayments are received by the
Government Portfolio, prevailing interest rates may be higher or lower than
the current yield of the Government Portfolio. As a result, GNMA certificates
and other mortgage-backed securities will have less potential for capital ap-
preciation during periods of declining interest rates than other investments
of comparable maturities due to the likelihood of increased prepayments of
mortgages as interest rates decline. If the Government Portfolio buys mort-
gage-backed securities at a premium, mortgage foreclosures and prepayment of
principal by mortgagors (which may be made at any time without penalty) may
result in some loss of the Government Portfolio's principal investment to the
extent of the premium paid.
As prepayment rates of individual mortgage pools vary widely, it is not possi-
ble to predict accurately the average life of a particular issue of GNMA cer-
tificates or other mortgage-backed security. However, statistics published by
the FHA indicate that the average life of single-family dwelling mortgages
with 25- to 30-year maturities, the type of mortgages backing the vast major-
ity of GNMA certificates, is approximately 12 years. Therefore, it is custom-
ary to treat GNMA certificates as 30-year mortgage-backed securities which
prepay fully in the twelfth year.
The coupon rate of interest on GNMA certificates is lower than the interest
rate paid on the mortgages underlying the certificates, by the amount of the
fees paid to GNMA and the issuer. The coupon rate by itself, however, does not
indicate the yield which will be earned on GNMA certificates. First, GNMA cer-
tificates may be issued at a premium or discount, rather than at par, and, af-
ter issuance,
10--GNA Variable Series Trust
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<PAGE>
GNMA certificates may trade in the secondary market at a premium or discount.
Second, interest is earned monthly, rather than semi-annually as with tradi-
tional bonds; monthly compounding raises the effective yield earned. Finally,
the actual yield of a GNMA certificate is influenced by the prepayment experi-
ence of the mortgage pool underlying it.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). The Government Portfolio may also
invest in CMOs which are debt obligations fully collateralized by a portfolio
of mortgages or mortgage-related securities. Typically, CMOs are collateral-
ized by mortgage securities guaranteed or issued by GNMA, FNMA or FHLMC. Pay-
ments of principal and interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are received, although cer-
tain classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the types of CMOs in
which the Government Portfolio invests, the investment may be subject to a
greater or lesser risk of prepayment than other types of mortgage-related se-
curities.
STRIPPED MORTGAGE SECURITIES. The Government Portfolio may also invest in
stripped mortgage securities. With such securities, the principal and interest
payments on a pool of mortgages are separated or "stripped" to create two
classes of securities. In general, the interest-only, or "IO" class of
stripped securities, receives all interest and no principal payments, while
the principal-only, or "PO" class, is entitled to receive all principal and no
interest payments. Stripped mortgage securities are expected to be acutely
sensitive to fluctuations in interest rates which, in turn, affect prepayment
rates on the mortgages underlying stripped securities. The Government Portfo-
lio will invest principally in IO securities for the purpose of reducing, or
hedging against, the decline in, principal value of mortgage securities which
may occur as a result of increasing interest and prepayment rates.
INVERSE FLOATING OBLIGATIONS. The Government Portfolio may invest in mortgage
securities and other instruments that are "inverse floating obligations." The
interest rates on these instruments typically decline as market interest rates
increase, and increase as market rates decline. Such instruments have the ef-
fect of providing the opportunity for incremental returns, because they will
generally increase or decrease in value in response to changes in market in-
terest rates at a rate which is a multiple of the rate at which fixed-rate se-
curities increase or decrease in response to such changes. As a result, the
market values of such securities will generally be more volatile than the mar-
ket values of conventional securities.
FORWARD ROLL TRANSACTIONS. In order to enhance current income, the Government
Portfolio may enter into forward roll transactions with respect to mortgage-
backed securities. In a forward roll transaction, the Government Portfolio
sells a mortgage-backed security to a financial institution, such as a bank or
broker-dealer, and simultaneously agrees to repurchase a similar security from
the institution at a later date at an agreed-upon price. The mortgage-backed
securities that are repurchased will bear the same interest rate as those
sold, but with different prepayment histories than those sold. The Government
Portfolio is compensated by the difference between the current sales price and
the lower forward price for the future purchase as well as by the interest
earned on the cash proceeds of the initial sale. The value of securities sold
by the Government Portfolio in forward roll transactions may decline below the
repurchase price of the corresponding similar securities. At the time the Gov-
ernment Portfolio enters into a forward roll transaction, it will place in an
account with the Custodian cash, U.S. Government Securities or high grade debt
obligations having a value equal to the repurchase price (including accrued
interest) and will subsequently monitor the account to insure that the equiva-
lent value is maintained.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARM'S"). The Government Portfolio may
invest in mortgage securities backed by pools of adjustable rate mortgages, as
well as mortgage securities backed by pools of fixed-rate
GNA Variable Series Trust--11
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<PAGE>
mortgages. Adjustable rate mortgages, like fixed-rate mortgages, have a speci-
fied maturity date, and the principal amount of the mortgage is repaid over
the life of the mortgage. Unlike fixed-rate mortgages, the interest rate on
adjustable rate mortgages is adjusted at regular intervals based on a speci-
fied, published interest rate "index." The new rate is determined by adding a
specific interest amount, the "margin" or "spread," to the interest rate of
the index. As a result, ARMs generally provide higher yields than money market
securities and more stable principal values than longer term fixed-rate mort-
gage securities. Investment in ARMs allows the Government Portfolio to partic-
ipate in changing interest rate levels through regular adjustments in the cou-
pons of the underlying mortgages, resulting in more variable current income
and lower price volatility than longer term fixed-rate mortgage securities.
The ARMs in which the Fund expects to invest will generally adjust their in-
terest rates at regular intervals of two years or less. ARMs are a less effec-
tive means of locking in long-term rates than securities collateralized by
fixed-rate mortgages because the income from adjustable rate mortgages will
increase during periods of rising interest rates and decline during periods of
falling rates. The interest rates paid on the adjustable rate mortgages under-
lying ARMs are reset at regular intervals by adding an interest rate margin to
a specified interest rate index. There are two main categories of indices:
rates tied to the yield on U.S. Treasury securities or the London interbank
offered rate; and those derived from a calculated measure such as a cost of
living index or a moving average of mortgage rates. Some indices, such as the
one-year constant maturity Treasury rate, closely mirror changes in interest
rate levels. Others, such as the 11th District Home Loan Bank Cost of Funds
Index, tend to lag behind changes in market rate levels and tend to be some-
what less volatile. Due to the inverse relationship between interest rates and
the value of certain securities, such a delay in adjusting to changes in in-
terest rates may cause the Government Portfolio's net asset value to increase
or decrease in value, particularly during periods between interest adjustment
dates.
The underlying adjustable rate mortgages in which the Government Portfolio in-
vests will frequently have caps and floors which limit the maximum amount by
which the interest rate to the residential borrower may move up or down, re-
spectively, during each adjustment period and over the life of the loan. In-
terest rate caps on mortgages underlying ARMs may prevent their income from
increasing to prevailing interest rate levels, and cause these securities to
decrease in value. Conversely, interest rate floors on mortgages underlying
ARMs may cause their income to remain higher than prevailing interest rate
levels and result in an increase in the value of such securities. In addition,
some residential mortgage loans limit adjustments to the borrower's monthly
principal and interest payments rather than limiting interest rate changes.
These payment caps may cause the outstanding principal balance of the mortgage
to increase.
Mortgage securities generally have a maximum maturity of 15 to 30 years. How-
ever, due to the adjustable rate feature of the mortgages underlying ARMS,
their prices are considered to have volatility characteristics which approxi-
mate the average period of time until the next adjustment of the interest
rate. As a result, the principal volatility of ARMs may be more comparable to
short- and intermediate-term securities than to longer term fixed-rate mort-
gage securities.
SECURITIES LENDING. The Government Portfolio may lend its portfolio securities
to qualified institutional investors for the purpose of realizing additional
income. Loans may be made pursuant to agreements which provide safeguards for
the Government Portfolio, e.g., that the loans will be continuously secured by
collateral in any combination of cash, letters of credit and securities of the
U.S. Government or its agencies, equal to at least the market value at all
times of the securities lent. The bank or banks issuing any such letters of
credit must meet creditworthiness standards approved by the Trustees. The Gov-
ernment Portfolio will not make securities loans if as a result the aggregate
of all outstanding securities loans exceeds one-third of the value of the
12--GNA Variable Series Trust
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<PAGE>
Government Portfolio's total assets. The Government Portfolio receives compen-
sation for lending its securities in the form of fees or it retains a portion
of interest on the investment of any cash collateral it receives. The Govern-
ment Portfolio also continues to receive interest or dividends on the securi-
ties lent. However, the amounts received by the Government Portfolio may be
reduced by finders' fees paid to broker-dealers and related expenses.
The primary risk in lending securities is that the borrower may become insol-
vent at a time at which the loaned security is rapidly increasing in value. In
such event, if the borrower fails to return the loaned security, the existing
collateral might be insufficient to purchase back the full amount of the secu-
rity loaned, and the borrower would be unable to furnish additional collater-
al. The borrower would be liable for any shortage, but the lending Government
Portfolio would be an unsecured creditor with respect to such shortage and
might not be able to recover all or any thereof. However, this risk may be
minimized by a careful selection of borrowers and securities to be lent and by
monitoring collateral.
OTHER INVESTMENT TECHNIQUES. The Government Portfolio may engage in when is-
sued and delayed delivery transactions, short sales against the box, and pay-
ment of premiums with respect to straddles and real estate investment trusts
but presently has no intention to engage in any such investment techniques to
the extent that more than 5% of the Government Portfolio's net assets would be
at risk. For further information on these investment techniques, see the
Statement of Additional Information.
TEMPORARY INVESTMENTS. The Government Portfolio may hold up to 100% of its as-
sets in cash or short-term, high-quality money market securities such as re-
purchase agreements for temporary defensive purposes if, in the opinion of the
Adviser, unusual market conditions warrant such a position. See the Statement
of Additional Information.
PORTFOLIO TURNOVER. The Government Portfolio may experience a very substantial
turnover of its portfolio because of its options transactions, since the Gov-
ernment Portfolio may be forced to sell portfolio securities in order to meet
its obligations under call options written by the Government Portfolio. See
"Additional Investment Techniques--Options." In addition, options are gener-
ally entered into for hedging purposes on a quarterly basis and the Government
Portfolio's options holdings may be adjusted at the end of each quarter. Al-
though it is anticipated that the annual portfolio turnover rate will exceed
100%, portfolio turnover is not expected to exceed 200%. Generally, a 100%
turnover rate would occur if all of the securities in the portfolio (except
those excluded from the calculation of portfolio turnover by the Securities
and Exchange Commission (the "SEC")) were sold and either repurchased or re-
placed within one year. While the Government Portfolio will pay commissions in
connection with its options transactions, U.S. Government Securities are gen-
erally traded on a "net" basis with dealers acting as principal for their own
accounts without a stated commission. Nevertheless, high portfolio turnover
may involve correspondingly greater brokerage commissions and other transac-
tion costs, which will be borne directly by the Government Portfolio. See
"Portfolio Transactions," "Portfolio Turnover" and "Certain Tax Matters" in
the Statement of Additional Information.
RISK FACTORS. There are risks in any investment program, and there is no as-
surance that the Government Portfolio will achieve its investment objective.
The securities in which the Government Portfolio may invest are subject to
relative degrees of credit risk and market volatility. Credit risk relates to
the issuer's (and any guarantor's) ability to make timely payments of princi-
pal and interest. Market volatility relates to the changes in market price
that occur as a result of variations in the level of prevailing interest rates
and yield relationships between sectors in the market and other market fac-
tors. The net asset value of a share of the Government Portfolio will fluctu-
ate as market conditions change. The amount received upon redemption may be
more or less than a purchaser's original cost.
GNA Variable Series Trust--13
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<PAGE>
INVESTMENT RESTRICTIONS. In seeking to reduce investment risk, the Government
Portfolio operates under certain investment restrictions. The restrictions in
the following paragraph may not be changed except by a vote of the sharehold-
ers of the Government Portfolio. The remaining restrictions and policies are
subject to change by the Trustees.
The Government Portfolio may not invest in a security if, at the time of pur-
chase, the transaction would result in: (a) more than 5% of the Government
Portfolio's total assets being invested in any one issuer; or (b) more than
25% of its assets being invested in any one industry. These restrictions do
not apply to investments in securities issued or guaranteed by the U.S. Gov-
ernment or its agencies or instrumentalities.
The Government Portfolio may not: (a) purchase more than 10% of any class of
securities of any one issuer (except U.S. Government Securities); (b) purchase
securities of any other investment company, except in the open market in a
transaction involving no commission or profit to a sponsor or dealer (other
than the customary brokerage commission) and only to the extent of 10% of its
assets or as part of a merger, consolidation, reorganization or acquisition of
assets; (c) invest in or retain the securities of any issuer, if, to the
knowledge of the Trust, the officers and Trustees of the Trust who individu-
ally own in excess of of 1% of the issuer's securities own more than 5% of
such securities in the aggregate. For further information on these and other
investment restrictions, including other non-fundamental investment restric-
tions which may be changed without a shareholder vote, see the Statement of
Additional Information.
GNA VALUE PORTFOLIO
The investment objective of the GNA Value Portfolio (the "Value Portfolio") is
to provide long-term growth of capital and an above-average level of dividend
income by investing in equity securities.
The Value Portfolio invests primarily in equity securities, including common
stock, preferred stock, warrants and "investment grade" securities convertible
into common stock. Under normal market conditions, the Value Portfolio's sub-
adviser, Duff & Phelps Investment Management Co. ("Duff & Phelps") will seek
to invest substantially all of the Value Portfolio's assets in a diversified
portfolio of equity securities. It is a fundamental policy of the Value Port-
folio under normal market conditions to invest at least 65% of its total as-
sets in such equity securities. The Value Portfolio will attempt to generate
relatively high levels of dividend income and provide the potential for capi-
tal appreciation. The Value Portfolio seeks to provide a higher total return
than that of the S&P 500 Index. No assurance can be given that the Value Port-
folio will achieve its objective.
In seeking an above-average level of dividend income, the Value Portfolio will
invest primarily in companies with established operating histories, potential
for dividend growth and low price-to-earnings ratios relative to the S&P 500
Index. The Value Portfolio's investments will tend to be in issuers with me-
dium to large capitalizations, although the Value Portfolio is not limited by
issuer size in selecting equity securities for investment. It is anticipated
that a majority of the equity securities in which the Value Portfolio invests
will be listed on a national securities exchange.
The Value Portfolio will generally consider debt securities to be "investment
grade" if such securities are rated investment grade by a nationally recog-
nized statistical rating agency (i.e., BBB or better by S&P or Baa or better
by Moody's, or if such securities are not so rated but are considered by Duff
& Phelps to be of equivalent investment quality. Bonds rated BBB by S&P or Baa
by Moody's or unrated securities of comparable investment quality lack out-
standing characteristics and in fact have speculative characteristics as well,
and changes in economic conditions and other circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal. In the event
the rating of a security is downgraded, Duff & Phelps will determine whether
the security should be retained or sold depending on an assessment of all
facts
14--GNA Variable Series Trust
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<PAGE>
and circumstances at that time. For further information concerning the ratings
of debt securities, see the Statement of Additional Information. The mix of
convertible and nonconvertible securities in different rating categories var-
ies over time depending on, among other factors, changes in investment strate-
gy.
SECURITIES LENDING. The Value Portfolio may lend its portfolio securities to
qualified institutional investors for the purpose of realizing additional in-
come. Loans may be made pursuant to agreements which provide safeguards for
the Value Portfolio, e.g., that the loans will be continuously secured by col-
lateral in any combination of cash, letters of credit and securities of the
U.S. Government or its agencies, equal to at least the market value at all
times of the securities lent. The bank or banks issuing any such letters of
credit must meet creditworthiness standards approved by the Trustees. The
Value Portfolio will not make securities loans if as a result the aggregate of
all outstanding securities loans exceeds one-third of the value of the Value
Portfolio's total assets. The Value Portfolio receives compensation for lend-
ing its securities in the form of fees or it retains a portion of interest on
the investment of any cash collateral it receives. The Value Portfolio also
continues to receive interest or dividends on the securities lent. However,
the amounts received by the Value Portfolio may be reduced by finders' fees
paid to broker-dealers and related expenses.
The primary risk in lending securities is that the borrower may become insol-
vent at a time at which the loaned security is rapidly increasing in value. In
such event, if the borrower fails to return the loaned security, the existing
collateral might be insufficient to purchase back the full amount of the secu-
rity loaned, and the borrower would be unable to furnish additional collater-
al. The borrower would be liable for any shortage, but the lending Value Port-
folio would be an unsecured creditor with respect to such shortage and might
not be able to recover all or any thereof. However, this may be minimized by a
careful selection of borrowers and securities to be lent and by monitoring
collateral.
OTHER INVESTMENT TECHNIQUES. The Value Portfolio may engage in when issued and
delayed delivery transactions, short sales against the box, payment of premi-
ums with respect to straddles and real estate investment trusts but presently
has no intention to engage in any such investment techniques to the extent
that more than 5% of the Value Portfolio's net assets would be at risk. For
further information on these investment techniques, see the Statement of Addi-
tional Information.
The Value Portfolio may invest in restricted securities in accordance with
Rule 144A under the Securities Act of 1933, which allows for the resale of
such securities among certain qualified institutional buyers. Because the mar-
ket for such securities is still developing, such securities could possibly
become illiquid in particular circumstances. See the Statement of Additional
Information.
INVESTMENTS IN FOREIGN COMPANIES. The Value Portfolio may invest up to 10% of
its total assets in U.S. dollar denominated American Depository Receipts which
represent securities of foreign companies. ADRs are traded in the United
States on national securities exchanges or over-the-counter and are issued by
domestic banks. The Value Portfolio will not make investments in foreign secu-
rities other than through ADRs.
When investing in ADRs, the Value Portfolio assumes certain additional risks
that are not present with investments in stocks of domestic companies. These
risks include political and economic developments such as possible expropria-
tion or confiscatory taxation that might adversely affect the market value of
such ADRs. In addition, there might be less publicly available information
about such foreign issuers than about domestic issuers, and such foreign is-
suers may not be subject to the same accounting, auditing and financial stan-
dards and requirements as domestic issuers.
TEMPORARY INVESTMENTS. The Value Portfolio may hold up to 100% of its assets
in cash or short-term debt securities for temporary, defensive purposes if, in
the opinion of Duff &
GNA Variable Series Trust--15
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<PAGE>
Phelps, unusual market conditions warrant such a position. The types of short-
term instruments in which the Value Portfolio may invest for such purposes in-
clude short-term money market securities such as repurchase agreements and se-
curities issued or guaranteed by the U.S. Government or its agencies or in-
strumentalities, certificates of deposit, master notes, time deposits and
bankers' acceptances of certain qualified financial institutions and corporate
commercial paper rated at the time of purchase at least "A" by S&P or "Prime"
by Moody's (or, if not rated, issued by companies having an outstanding long-
term unsecured debt issue rated at least "A" by S&P or Moody's). See the
Statement of Additional Information.
PORTFOLIO TURNOVER. It is the Value Portfolio's policy not to purchase and
sell securities with a view toward obtaining short-term profits. The Value
Portfolio will not ordinarily trade in securities for short-term profits. How-
ever, when circumstances warrant, securities may be sold without regard to the
length of time held. Duff & Phelps anticipates that the Value Portfolio's an-
nual portfolio turnover rate may exceed 50% but generally will not exceed
100%. A high portfolio turnover rate in any year will increase brokerage com-
missions paid and could result in a high amount of realized investment gain.
See "Portfolio Transactions," "Portfolio Turnover" and "Certain Tax Matters"
in the Statement of Additional Information.
RISK FACTORS. Because the Value Portfolio invests primarily in equity securi-
ties, it is subject to market risk--i.e., the possibility that stock prices in
general will decline over short or even extended periods. The stock market
tends to be cyclical, with periods when stock prices generally rise and peri-
ods when stock prices generally decline. The net asset value of a share of the
Value Portfolio will fluctuate as market conditions change. The amount re-
ceived upon redemption may be more or less than a purchaser's original cost.
INVESTMENT RESTRICTIONS
In seeking to reduce investment risk, the Value Portfolio operates under cer-
tain investment restrictions. The restrictions in the following paragraph may
not be changed except by a vote of the shareholders of the Value Portfolio.
The remaining restrictions and policies are subject to change by the Trustees.
The Value Portfolio may not invest in a security if, at the time of purchase,
the transaction would result in: (a) more than 5% of the Value Portfolio's to-
tal assets being invested in any one issuer; (b) the Value Portfolio's owning
more than 5% of the outstanding voting securities of an issuer; (c) more than
5% of the Value Portfolio's total assets being invested in securities of is-
suers (including predecessors) with less than three years of continuous opera-
tions except in the case of debt securities rated BBB or higher by S&P or Baa
or higher by Moody's; (d) more than 5% of the Value Portfolio's total assets
being invested in warrants of all types, or more than 2% of the Value Portfo-
lio's total assets being invested in warrants other than warrants attached to
the other securities; or (e) more than 20% of the Value Portfolio's total as-
sets being invested in any one industry. These restrictions do not apply to
investments in securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities.
The Value Portfolio may not: (a) invest more than 15% of its net assets in il-
liquid securities, including securities restricted as to resale (which re-
stricted securities are limited to 5% of total assets), repurchase agreements
extending for more than seven days and other securities which are not readily
marketable; (b) invest in securities of foreign issuers other than through
ADRs; (c) borrow in excess of 10% of the value of its total assets and then
only as a temporary measure; or (d) make cash loans except that it may pur-
chase debt obligations, including money market instruments, directly from the
issuer thereof or in the open market and may engage in repurchase transactions
collateralized by obligations of the U.S. Government and its agencies and in-
strumentalities. For further information on these and other investment re-
strictions, including other non-fundamental investment restrictions which may
be changed with-
16--GNA Variable Series Trust
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<PAGE>
out a shareholder vote, see the Statement of Additional Information.
GNA GROWTH PORTFOLIO
The investment objective of the GNA Growth Portfolio (the "Growth Portfolio")
is to provide long-term growth of capital.
The Growth Portfolio will seek to achieve its investment objective by invest-
ing substantially all of its assets in common stocks under normal market con-
ditions. However, a portion of the Growth Portfolio's assets may be held from
time to time in other equity securities including preferred stock and war-
rants. The Growth Portfolio intends to invest in securities of companies
which, in the opinion of the Growth Portfolio's sub-adviser, Value Line, Inc.
("Value Line"), have above average prospects for growth. No assurance can be
given that the Growth Portfolio will achieve its objective. The Growth Portfo-
lio may also invest less than 5% of its total assets in equity securities con-
vertible into common stocks.
In seeking long-term growth of capital, the Growth Portfolio will invest pri-
marily in companies whose earnings and/or assets are expected to grow at a
rate above the average for the Standard & Poor's 500 Stock Index (the "S&P 500
Index") over the long term. Consequently, the Growth Portfolio's sub-adviser,
Value Line, seeks to identify those industries which offer the greatest possi-
bilities for profitable expansion and, within such industries, those companies
which appear most capable of sustained growth. Investments may also be made in
securities of companies which Value Line believes are selling below their in-
trinsic values or in securities of cyclical companies which Value Line be-
lieves are at a low point in their cycles. It is anticipated that the Growth
Portfolio will have a higher level of price volatility than the S&P 500 Index.
The Growth Portfolio's investments will tend to be in issuers with small to
medium capitalizations, although the Growth Portfolio is not limited by issuer
size in selecting equity securities for investment. It is anticipated that a
majority of the equity securities in which the Growth Portfolio invests will
be listed on a national securities exchange.
In selecting securities for purchase or sale, Value Line will rely on the
Value Line Ranking System for Timeliness which has evolved after many years of
research and has been used in substantially its present form since 1965. The
Value Line Ranking System is based upon historical prices and reported earn-
ings, recent earnings and price momentum and the degree to which the latest
reported earnings deviate from estimated earnings. The Rankings are published
weekly in The Value Line Investment Survey for approximately 1,700 stocks. On
a scale of 1 (highest) to 5 (lowest), the Rankings compare Value Line's esti-
mate of the probable market performance of each stock during the coming twelve
months relative to all 1,700 stocks under review. The Value Line Rankings are
updated weekly to reflect the most recent information. The Value Line Rankings
do not eliminate market risk, but Value Line believes that they provide objec-
tive standards for determining whether the market is undervaluing or overvalu-
ing a particular security. The Growth Portfolio will usually invest in securi-
ties ranked 1 or 2, although it may invest in securities ranked 3 if Value
Line believes such securities are appropriate for the Growth Portfolio. Reli-
ance on the Rankings is no assurance that the Growth Portfolio will perform
more favorably than the market in general over any particular period.
SECURITIES LENDING. The Growth Portfolio may lend its portfolio securities to
qualified institutional investors for the purpose of realizing additional in-
come. Loans may be made pursuant to agreements which provide safeguards for
the Growth Portfolio, e.g., that the loans will be continuously secured by
collateral in any combination of cash, letters of credit and securities of the
U.S. Government or its agencies, equal to at least the market value at all
times of the securities lent. The bank or banks issuing any such letters of
credit must meet creditworthiness standards approved by the Trustees. The
Growth Portfolio will not make securities loans if as a result the aggregate
of all outstanding securities loans exceeds one-third of the value of the
Growth Portfolio's total assets. The Growth
GNA Variable Series Trust--17
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<PAGE>
Portfolio receives compensation for lending its securities in the form of fees
or it retains a portion of interest on the investment of any cash collateral
it receives. The Growth Portfolio also continues to receive interest or divi-
dends on the securities lent. However, the amounts received by the Growth
Portfolio may be reduced by finders' fees paid to broker-dealers and related
expenses.
The primary risk in lending securities is that the borrower may become insol-
vent at a time at which the loaned security is rapidly increasing in value. In
such event, if the borrower fails to return the loaned security, the existing
collateral might be insufficient to purchase back the full amount of the secu-
rity loaned, and the borrower would be unable to furnish additional collater-
al. The borrower would be liable for any shortage, but the lending Growth
Portfolio would be an unsecured creditor with respect to such shortage and
might not be able to recover all or any thereof. However, this risk may be
minimized by a careful selection of borrowers and securities to be lent and by
monitoring collateral.
OTHER INVESTMENT TECHNIQUES. The Growth Portfolio may engage in when issued
and delayed delivery transactions, short sales against the box and payment of
premiums with respect to straddles and real estate investment trusts but pres-
ently has no intention to engage in any such investment techniques to the ex-
tent that more than 5% of the Growth Portfolio's net assets would be at risk.
For further information on these investment techniques, see the Statement of
Additional Information.
The Growth Portfolio may invest in restricted securities in accordance with
Rule 144A under the Securities Act of 1933, which allows for the resale of
such securities among certain qualified institutional buyers. Because the mar-
ket for such securities is still developing, such securities could possibly
become illiquid in particular circumstances. See the Statement of Additional
Information.
INVESTMENTS IN ISSUERS WITH SMALL TO MEDIUM CAPITALIZATIONS. Value Line con-
siders issuers with small to medium capitalization to be those companies which
are less mature and have the potential to grow substantially faster than the
economy. Investments in these securities may involve greater than average
risks because of the possible limited marketability of such securities and the
possibility that their prices may fluctuate more widely than the securities of
larger more established companies or than the market as a whole.
INVESTMENTS IN FOREIGN COMPANIES. The Growth Portfolio may invest up to 10% of
its total assets in U.S. dollar denominated American Depository Receipts
("ADRs") which represent securities of foreign companies. ADRs are traded in
the United States on national securities exchanges or over-the-counter and are
issued by domestic banks. The Growth Portfolio will not make investments in
foreign securities other than through ADRs.
When investing in ADRs, the Growth Portfolio assumes certain additional risks
that are not present with investments in stocks of domestic companies. These
risks include political and economic developments such as possible expropria-
tion or confiscatory taxation that might adversely affect the market value of
such ADRs. In addition, there might be less publicly available information
about such foreign issuers than about domestic issuers, and such foreign is-
suers may not be subject to the same accounting, auditing and financial stan-
dards and requirements as domestic issuers.
TEMPORARY INVESTMENTS. The Growth Portfolio may hold up to 100% of its assets
in cash or short-term, high-grade debt securities for temporary defensive pur-
poses if, in the opinion of Value Line, unusual market conditions warrant such
a position. The types of short-term instruments in which the Growth Portfolios
may invest for such purposes include short-term money market securities such
as repurchase agreements and securities issued or guaranteed by the U.S. Gov-
ernment or its agencies or instrumentalities, certificates of deposit, time
deposits and bankers' acceptances of certain qualified financial institutions
and corporate commercial paper rated at the
18--GNA Variable Series Trust
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<PAGE>
time of purchase at least "A" by S&P or "Prime" by Moody's Investor's Servic-
es, Inc. ("Moody's") (or, if not rated, issued by companies having an out-
standing long-term unsecured debt issue rated at least "A" by S&P or Moody's).
See the Statement of Additional Information.
PORTFOLIO TURNOVER. The Growth Portfolio may trade in securities for short-
term profits in order to achieve its objective. Value Line anticipates that
the Growth Portfolio's annual portfolio turnover rate may exceed 100% but gen-
erally will not exceed 200%. A high portfolio turnover rate in any year will
increase brokerage commissions paid and could result in high amount of real-
ized investment gain. See "Portfolio Transactions," "Portfolio Turnover" and
"Certain Tax Matters" in the Statement of Additional Information.
RISK FACTORS. Because the Growth Portfolio invests primarily in equity securi-
ties, it is subject to market risk--i.e., the possibility that stock prices in
general will decline over short or even extended periods. The stock market
tends to be cyclical, with periods when stock prices generally rise and peri-
ods when stock prices generally decline. The net asset value of a share of the
Growth Portfolio will fluctuate as market conditions change. The amount re-
ceived upon redemption may be more or less than a purchaser's original
cost.
INVESTMENT RESTRICTIONS
In seeking to reduce investment risk, the Growth Portfolio operates under cer-
tain investment restrictions. The restrictions in the following paragraph may
not be changed except by a vote of the shareholders of the Growth Portfolio.
The remaining restrictions and policies are subject to change by the
Trustees.
The Growth Portfolio may not invest in a security if, at the time of purchase,
the transaction would result in: (a) more than 5% of the Growth Portfolio's
total assets being invested in any one issuer; (b) the Growth Portfolio's own-
ing more than 10% of the outstanding voting securities of an issuer; (c) more
than 5% of the Growth Portfolio's total assets being invested in securities of
issuers (including predecessors) with less than three years continuous opera-
tions except in the case of debt securities rated BBB or higher by S&P or Baa
or higher by Moody's; (d) more than 5% of the Growth Portfolio's total assets
being invested in warrants of all types, or more than 2% of the Growth Portfo-
lio's total assets being invested in warrants other than warrants attached to
other securities; or (e) more than 25% of the Growth Portfolio's total assets
being invested in any one industry. These restrictions do not apply to invest-
ments in securities issued or guaranteed by the U.S. Government or its agen-
cies or instrumentalities.
The Growth Portfolio may not: (a) invest more than 15% of its net assets in
illiquid securities, including securities restricted as to resale (which re-
stricted securities are limited to 5% of total assets), repurchase agreements
extending for more than seven days and other securities which are not readily
marketable; (b) invest in securities of foreign issuers other than through
ADRs; (c) borrow in excess of 10% of the value of its total assets and then
only as a temporary measure; or (d) make cash loans except that it may pur-
chase debt obligations, including money market instruments, directly from the
issuer thereof or in the open market and may engage in repurchase transactions
collateralized by obligations of the U.S. Government and its agencies and in-
strumentalities. For further information on these and other investment re-
strictions, including other non-fundamental investment restrictions which may
be changed without a shareholder vote, see the Statement of Additional Infor-
mation.
ADDITIONAL INVESTMENT TECHNIQUES
Some or all of the Portfolios may invest in the types of instruments and en-
gage in the types of strategies described in detail below.
REPURCHASE AGREEMENTS. A Portfolio may enter into repurchase agreements in or-
der to generate additional income. When a Portfolio acquires securities from a
bank or broker-dealer, it may simultaneously enter into a repurchase agreement
with the seller wherein
GNA Variable Series Trust--19
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<PAGE>
the seller agrees at the time of sale to repurchase the security at the cost
plus interest within a specified time (normally one day). Except as further
provided, each repurchase agreement entered into by a Portfolio will provide
that the value of the collateral underlying the repurchase agreement will al-
ways be at least 102% of the repurchase price, including accrued interest.
With respect to repurchase agreements entered into with a broker/dealer or
bank whose unsecured debt is rated AAA or whose commercial paper is rated A-1+
by S&P, the value of the collateral will always be at least 100% of the repur-
chase price, including accrued interest. In the event of default or bankruptcy
by the seller, the Portfolio will seek to liquidate such collateral. The exer-
cise of the Portfolio's right to such a liquidation could involve certain
costs or delays and, to the extent that proceeds from any sale upon a default
of the obligation to repurchase are less than the repurchase price, the Port-
folio could suffer a loss. In addition, if the seller becomes involved in and
subject to liquidation or reorganization under the Bankruptcy Code or other
laws, a court may determine that the underlying security is collateral for a
loan by the Portfolio not within the control of the Portfolio and therefore
subject to sale by the trustee in bankruptcy. Finally, it is possible that the
Portfolio may not be able to substantiate its interest in the underlying secu-
rity and may be deemed an unsecured creditor of the other party to the agree-
ment. While each Portfolio acknowledges these risks, it is expected that they
can be controlled through careful monitoring procedures, including the moni-
toring by each Portfolio's Adviser or relevant sub-adviser of the creditwor-
thiness of broker-dealers or the financial institutions engaging in repurchase
agreements with the Portfolio. A Portfolio will not enter into a repurchase
agreement having more than seven days remaining to maturity if, as a result,
such agreements, together with any other securities which are not readily mar-
ketable, would exceed 10% of the net assets of the Portfolio. In addition, not
more than one-third of the current market value of a Portfolio's total assets
shall constitute secured "loans" by the Portfolio under repurchase agreements.
BORROWING. A Portfolio may borrow for temporary purposes in an aggregate
amount of up to 10% of its total assets. As a non-fundamental policy, a Port-
folio will not purchase any security while borrowings representing more than
5% of the Portfolio's total assets are outstanding. Such borrowing may be made
by obtaining a loan from a bank or by entering into a reverse purchase agree-
ment with a bank or broker-dealer. Reverse repurchase agreements involve the
sale of a security held by a Portfolio and its agreement to repurchase the in-
strument at a stated price, date and interest payment. A Portfolio will use
the proceeds of a reverse repurchase agreement to purchase securities or to
honor redemption requests made of the Portfolio. The use of reverse repurchase
agreements to purchase portfolio securities involves the borrowing of money to
purchase securities and entails additional risks such as the incurrence of in-
terest expenses and fluctuation of the Portfolio's net asset value. There is
no guarantee that the securities purchased will maintain a value equal to or
greater than the amount borrowed to purchase them. The technique of leveraging
the value of portfolio securities for the purpose of purchasing additional
portfolio securities is speculative. A Portfolio may not enter into reverse
repurchase agreements with broker-dealers if its obligations under such agree-
ments would exceed 5% of the current market value of its total assets.
OPTIONS. A Portfolio may write or purchase options on securities held in its
portfolio. By purchasing a call, a Portfolio pays a premium for the right to
buy the underlying security at the exercise price at any time during the op-
tion period. When a Portfolio purchases a put, it pays a premium in return for
the right to sell the underlying security at the exercise price at any time
during the option period. If any call or put purchased by the Portfolio is not
exercised or sold, it will become worthless on its expiration date. A Portfo-
lio will not purchase puts or calls if more than 5% of its total assets would
be invested in premiums on puts or calls. A Portfolio will write and purchase
only exchange-traded options. A Portfolio's option positions may be closed
only in a second-
20--GNA Variable Series Trust
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<PAGE>
ary market for options written or purchased by the Portfolio. Each Portfolio's
Adviser or relevant sub-adviser will consider the liquidity of the secondary
market in writing or purchasing options for the Portfolio, but there can be no
assurance that a liquid secondary market will exist at a given time for any
particular option. A Portfolio could be unable to control losses by closing
the position where a liquid secondary market does not exist.
A Portfolio may write (i.e., sell) options to increase the return of the Port-
folio and to hedge against a decline in the market value of the underlying se-
curities held by the Portfolio to the extent of the premium income received. A
covered call option is an option to purchase underlying securities which a
Portfolio either owns or has the right to acquire, or for which a Portfolio
maintains a segregated account with its Custodian of cash, cash equivalents or
U.S. Government Securities having a value sufficient to meet its obligations
under the call. By writing a covered call option a Portfolio might lose the
potential for gain on the underlying security while the option is open. When a
Portfolio writes a "secured" put option, it receives a premium and gives the
purchaser of the put the right to sell the underlying security to the Portfo-
lio at a specified price ("exercise price") at any time during the option pe-
riod. A put is "secured" if the Portfolio maintains with the Custodian cash,
cash equivalents, or U.S. Government Securities having a value equal to the
exercise price or holds a put on the same underlying security at an equal or
greater exercise price. A Portfolio will write only covered call options and
secured put options. The Government Portfolio will not write puts if more than
50% of its total assets would be needed to cover its obligations in connection
therewith, and will not write calls if more than 100% of its total assets
would be needed to cover its obligations in connection with such calls. Each
of the other Portfolio's will not write puts if more than 25% of its total as-
sets would be needed to cover its obligations in connection therewith, and
will not write calls if more than 25% of its total assets would be needed to
cover its obligations in connection with such calls.
FUTURES CONTRACTS AND OPTIONS ON SUCH CONTRACTS. A Portfolio may purchase and
sell futures contracts, subject to certain limitations. A futures contract is
an agreement between two parties to buy and sell a security for a set price on
a future date. Futures contracts are traded on designated "contracts markets"
which, through their clearing corporations, guarantee performance of the con-
tracts.
Typically, maintaining a futures contract or selling an option thereon re-
quires a 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
value of the contract fluctuates. The purchase of an option on a futures con-
tract involves payment of a premium for the option without any further obliga-
tion on the part of a Portfolio. If a 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.
Positions in futures may be closed out by an offsetting transaction only on an
exchange which provides a secondary market for such futures. A Portfolio will
enter into a futures contract only if there appears to be a liquid secondary
market for such futures contract. However, there can be no assurance that a
liquid secondary market will exist at a specific time.
Utilization of futures transactions involves the risk of imperfect correlation
in movements in the price of futures contracts and movements in the price of
the securities which are the subject of the transaction. If the price of the
futures contract moves more or less than the price of the security, the Port-
folio will experience a gain or loss which will not be completely offset by
movements in the price of the securities which are the subject of the transac-
tion. There is also a risk of imperfect correla-
GNA Variable Series Trust--21
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<PAGE>
tion where the securities underlying the futures contract have different matu-
rities than the portfolio securities. Transactions in options on futures con-
tracts involve similar risks.
A Portfolio also may purchase and sell listed put and call options on futures
contracts. 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, at a
specified exercise price at any time during the option period. When an option
on a futures contract is exercised, settlement is effected by the payment of
cash representing the difference between the current market price of the
futures contract and the exercise price of the option.
Options on futures contracts do not require the purchaser to enter into the
futures contract, but rather grant the purchaser the right to do so. Thus, the
risk of loss to the purchaser of an option is limited to the premium paid for
the option.
The success of a Portfolio's transactions in futures contracts and options
thereon is dependent upon the ability of that Portfolio's Adviser or relevant
sub-adviser to predict fluctuations in interest rates and the price of futures
contracts and options thereon, as the case may be. A Portfolio may suffer
losses on futures contracts or options thereon, as well as on the underlying
securities. There is no limit to the potential exposure of a Portfolio from
investments in futures contracts. There can be no assurance that a Portfolio's
transactions in futures contracts and options thereon will be successful.
A Portfolio's use of financial futures and options thereon will in all cases
be consistent with the applicable regulatory requirements and in particular
the regulations of the Commodity Futures Trading Commission relating to exclu-
sions from regulation as a commodity pool operator. Those regulations cur-
rently provide that a Portfolio may use commodity futures and option positions
(i) for bona fide hedging purposes without regard to the percentage of assets
committed to margin andoption premiums, or (ii) for other purposes permitted
by the entity's principal regulator (in the case of the Portfolios, the Secu-
rities and Exchange Commission) to the extent that the aggregate initial mar-
gin and option premiums required to establish such non-hedging positions do
not exceed 5% of the liquidation value (i.e., the net asset value) of the
Portfolio. For further information regarding futures contracts and options
thereon, see the Statement of Additional Information.
OTHER INTEREST RATE TRANSACTIONS. To preserve a return or spread on a particu-
lar investment or portion of its portfolio, to create synthetic adjustable
rate mortgage securities or for other nonspeculative purposes, the Adjustable
Rate Portfolio may enter into various transactions, such as interest rate
swaps and the purchase or sale of interest rate collars, caps and floors. The
Adjustable Rate Portfolio will not use these transactions for speculative pur-
poses and will not sell interest collars, caps or floors with respect to a po-
sition that it does not own. Interest rate swaps involve the exchange by the
Adjustable Rate 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. The purchase of an interest rate cap entitles the pur-
chaser, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually-based principal
amount from the party selling such interest rate cap. The purchase of an in-
terest rate floor entitles the purchaser, to the extent that a specified index
falls below a predetermined interest rate, to receive payments of interest on
a contractually-based principal amount from the party selling such interest
rate floor. In an interest rate collar, the Adjustable Rate Portfolio combines
the elements of purchasing a cap and selling a floor. The collar protects the
Adjustable Rate Portfolio against an interest rate rise above the maximum
amount but causes the Adjustable Rate Portfolio to forego the benefits of an
interest rate decline below the minimum amount.
22--GNA Variable Series Trust
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<PAGE>
The Adjustable Rate Portfolio may enter into interest rate swaps, collars,
caps and floors on either an asset-based or liability-based basis, depending
upon whether it is hedging its assets or its liabilities, and will usually en-
ter into interest rate swaps on a net basis, i.e., the two payment streams are
netted out, with the Adjustable Rate Portfolio receiving or paying, as the
case may be, only the net amount of the two payments. The Adjustable Rate
Portfolio will not enter into any interest rate swap, collar, cap or floor
transaction unless the unsecured senior debt or the claims paying ability of
the other party thereto is rated at least AA by S&P or Aa by Moody's. If there
is a default by the other party to such a transaction, the Adjustable Rate
Portfolio will 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 as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Collars, caps and floors are more recent
innovations for which standardized documentation has not yet been developed
and, accordingly, they are less liquid than swaps. The use of interest rate
swaps is a highly specialized activity which involves investment techniques
and risks different from those associated with ordinary portfolio securities
transactions. If Standish, Ayer & Wood is incorrect in its forecasts of market
values, interest rates and other applicable factors, the investment perfor-
mance of the Adjustable Rate Portfolio would diminish compared with what it
would have been if these investment techniques were not used. Moreover, even
if Standish, Ayer & Wood is correct in its forecasts, there is a risk that the
swap position may correlate imperfectly with the price of the asset or liabil-
ity being hedged. In connection with entering rate swaps, collars, and floors,
the Adjustable Rate Portfolio will create and maintain a segregated account
with the Custodian consisting of U.S. Government Securities or cash or cash
equivalents in accordance with current policies determined by the Securities
and Exchange Commission.
PURCHASES AND REDEMPTIONS
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Shares of each Portfolio are offered only to the insurance company separate
accounts that fund the Contracts, and may at any time be offered to other sep-
arate accounts of Great Northern Insured Annuity Corporation ("GNA") or any of
its affiliates or any other insurer approved by the Trustees. Shares of each
Portfolio may be purchased and redeemed by the separate accounts without any
sales charge at net asset value. State Street Bank and Trust Company, through
its affiliate, National Financial Data Services, P.O. Box 419031, Kansas City,
MO 64141-6031, acts as each Portfolio's transfer agent and shareholder servic-
ing agent ("Transfer Agent"). The Contracts are described in the separate pro-
spectuses issued by GNA or any of its affiliates and any other insurance com-
pany which has established separate accounts which invest in the Portfolios.
Purchase and redemption orders will be processed at the net asset value next
determined after such order has been received in proper form by the Transfer
Agent. See "Net Asset Value." Orders for purchases or sales of each Portfolio
must be received by the Transfer Agent before the close of regular trading on
the New York Stock Exchange in order to receive that day's net asset value.
Proceeds from redemption orders will be wired to the insurance company on or
before the [seventh] day following the request for redemption. Under unusual
circumstances, a Portfolio may suspend redemptions or postpone payment of re-
demption proceeds, as permitted by applicable law. Each Portfolio reserves the
right to suspend the offering of shares for a period of time. Each Portfolio
also reserves the right to reject any specific purchase order.
Due to differences in tax treatment or other considerations, the interests of
various Contract owners might at some time be in conflict. The Trust currently
does not foresee any such conflict. If such a conflict were to occur, one or
more insurance companies' separate accounts might be required to withdraw its
investments
GNA Variable Series Trust--23
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<PAGE>
in a Portfolio. This might force such Portfolio to sell securities at disad-
vantageous prices or otherwise adversely affect such Portfolio.
EXCHANGE PRIVILEGE
- -------------------------------------------------------------------------------
A separate account may exchange shares of a Portfolio for shares, when avail-
able, of any of the other Portfolios at any time on the basis of the relative
net asset values of the respective shares to be exchanged, subject to compli-
ance with applicable securities laws. Exchange orders will be processed at the
net asset value next determined after an exchange order has been received and
accepted by the Transfer Agent.
Under an exchange privilege offered by the Trust, shares of each Portfolio may
be exchanged for shares of any of the other Portfolios, all of which are de-
scribed in this Prospectus, at their respective net asset values. Exchanges
are treated as a redemption of shares of one Portfolio and a purchase of
shares of another portfolio. The Trust may, upon 60 days prior written notice,
materially modify or terminate the exchange privilege with respect to the
Portfolios.
Shareholders exercising the exchange privilege should carefully review the
prospectus disclosure for the Portfolio they are considering investing in
prior to making an exchange.
NET ASSET VALUE
- -------------------------------------------------------------------------------
The price of one share of each Portfolio is its net asset value ("NAV") which
such Portfolio's Custodian calculates as of 4:00 p.m. eastern time, Monday
through Friday, exclusive of national business holidays during which the New
York Stock Exchange is closed.
GNA ADJUSTABLE RATE PORTFOLIO
Securities in the Adjustable Rate Portfolio are valued primarily based on
pricing services provided by Merrill Lynch, Pierce, Fenner & Smith and market
quotations provided by dealers of adjustable rate securities and U.S. Govern-
ment Securities. Investments in certain long-term debt securities not traded
in an organized market are valued on the basis of valuations furnished by in-
dependent pricing services or broker/dealers which utilize information with
respect to market transactions and other information in such securities or
comparable securities. Certain short-term obligations are valued at amortized
cost which approximates market value. If quotations are not available, securi-
ties are valued by a method that the Trustees believe accurately reflects fair
value.
GNA GOVERNMENT PORTFOLIO
Securities in the Government Portfolio are valued primarily based on market
quotations provided by recognized dealers of U.S. Government Securities. In-
vestments in certain long-term debt securities not traded in an organized mar-
ket are valued on the basis of valuations furnished by independent pricing
services or broker/dealers which utilize information with respect to market
transactions and other information in such securities or comparable securi-
ties. Certain short-term obligations are valued at amortized cost which ap-
proximates market value. If quotations are not available, securities are val-
ued by a method that the Trustees believe accurately reflects fair value.
GNA VALUE PORTFOLIO
Assets held by the Value Portfolio are valued on the basis of the last re-
ported sale price or quotations as of the close of business on the valuation
date, except that securities and assets for which market quotations are not
readily available are valued as determined in good faith by or under the au-
thority of the Trustees of the Trust. In determining the value of certain as-
sets for which market quotations are not readily available, the Value Portfo-
lio may use one or more pricing services. The pricing services utilize infor-
mation with respect to market transactions, quotations from dealers and vari-
ous relationships among securities in determining value and may provide prices
determined as of times prior to the close of the New York Stock Exchange.
24--GNA Variable Series Trust
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<PAGE>
GNA GROWTH PORTFOLIO
Assets held by the Growth Portfolio are valued on the basis of the last re-
ported sale price or quotations as of the close of business on the valuation
date, except that securities and assets for which market quotations are not
readily available are valued as determined in good faith by or under the au-
thority of the Trustees of the Trust. In determining the value of certain as-
sets for which market quotations are not readily available, the Growth Portfo-
lio may use one or more pricing services. The pricing services utilize infor-
mation with respect to market transactions, quotations from dealers and vari-
ous relationships among securities in determining value and may provide prices
determined as of times prior to the close of the New York Stock Exchange.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
The Adjustable Rate Portfolio and Government Portfolio will declare dividends
from net investment income daily and pay such dividends monthly. The Value
Portfolio will declare and pay dividends from net investment income quarterly.
The Growth Portfolio will declare and pay dividends from net investment income
annually. Distributions from each Portfolio will automatically be reinvested
in additional shares of the Portfolio.
Each Portfolio intends to qualify and elect to be treated each taxable year as
a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). Accordingly, a Portfolio will not be
liable for federal income taxes to the extent its taxable investment income
and net capital gain are distributed to its shareholders, provided that at
least 90% of its net investment income and net short-term capital gain for the
taxable year are distributed.
Each Portfolio is subject to a nondeductible 4% excise tax calculated as a
percentage of certain undistributed amounts of taxable ordinary income and
capital gain net income. Each Portfolio intends to make such additional dis-
tributions of taxable ordinary income and capital gain net income as may be
necessary to avoid this excise tax.
Shares of each Portfolio are offered only to insurance company separate ac-
counts that fund variable annuity and variable life insurance contracts. Under
the Internal Revenue Code, no tax is imposed on an insurance company with re-
spect to income of a qualifying separate account properly allocable to the
value of eligible variable annuity or variable life insurance contracts. See
the applicable Contract prospectus for a discussion of the federal income tax
status of (1) the separate accounts that purchase and hold shares of a Portfo-
lio and (2) the holders of Contracts funded through those accounts.
Each Portfolio intends to comply with the diversification requirements imposed
by section 817(h) of the Internal Revenue Code and the regulations thereunder.
These requirements, which are in addition to the diversification requirements
imposed on a Portfolio by the 1940 Act and Subchapter M of the Internal Reve-
nue Code, place certain limitations on the assets of each separate account
and--because section 817(h) and those regulations treat the assets of a Port-
folio as assets of the related separate account--the assets of a Portfolio,
that may be invested in securities of a single issuer. Specifically, the regu-
lations provide that, except as permitted by the "safe harbor" described be-
low, as of the end of each calendar quarter or within 30 days thereafter no
more than 55% of the total assets of a Portfolio may be represented by any one
investment, no more than 70% by any two investments, no more than 80% by any
three investments and no more than 90% by any four investments. For this pur-
pose, all securities of the same issuer are considered a single investment,
and while each U.S. government agency and instrumentality is considered a sep-
arate issuer, a particular foreign government and its agencies, instrumentali-
ties and political subdivisions all will be considered the same issuer. Sec-
tion 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied
GNA Variable Series Trust--25
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<PAGE>
and no more than 55% of the value of the account's total assets are cash and
cash items, government securities and securities of other registered invest-
ment companies. Failure by a Portfolio to satisfy the section 817(h) require-
ments would result in taxation of the insurance company issuing the Contracts
and treatment of the Contract holders other than as described in the applica-
ble Contract prospectus.
The foregoing is only a summary of some of the important federal income tax
considerations generally affecting each Portfolio and its respective share-
holders; see the Statement of Additional Information for a more detailed dis-
cussion. Prospective shareholders are urged to consult their tax advisers.
PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------
YIELD
From time to time the Trust may advertise the 30-day yields for each of the
Portfolios if accompanied by performance at the insurance company's separate
account. The yield of a Portfolio refers to the income generated by an invest-
ment in the Portfolio over the 30-day period identified in the advertisement,
and is computed by dividing the net investment income per share earned by the
Portfolio during the period by the net asset value per share of the Portfolio
on the last day of the period. The result is "annualized" by assuming that the
amount of income is generated each month over a one-year period and is com-
pounded semiannually. The annualized income is then shown as a percentage.
The Trust may quote yields for each of the Portfolios in advertisements or in
reports to shareholders. Yield information may be useful in reviewing the per-
formance of a Portfolio and for providing a basis for comparison with other
investment alternatives. However, since net investment income of a Portfolio
changes in response to fluctuations in interest rates and Portfolio expenses,
any given yield quotation should not be considered representative of a Portfo-
lio's yield for any future period. Investors reviewing yield comparisons of a
Portfolio should also bear in mind that the net asset value per share of a
Portfolio fluctuates.
TOTAL RETURN
The Trust may advertise "average annual total return" over various periods of
time for each of the Portfolios if accompanied by performance at the insurance
company's separate account. Average annual total return figures show the aver-
age percentage change in value of an investment in a Portfolio from the begin-
ning date of the measuring period to the end of the measuring period. These
figures reflect changes in the price of a Portfolio's shares, assume that any
income dividends and/or capital gains distributions made by the Portfolio dur-
ing the period were reinvested in shares of the same Portfolio. Figures will
be given for recent one-, five- and ten-year periods (if applicable), and may
be given for other periods as well (such as from commencement of a Portfolio's
operations, or on a year-by-year basis). When considering "average" total re-
turn figures for periods longer than one year, it is important to note that a
Portfolio's annual total return for any one year in the period might have been
greater or less than the average for the entire period.
The Trust may also use "aggregate total return" figures for various periods,
representing the cumulative change in value of an investment in a Portfolio
for the specific period (again reflecting changes in Portfolio share prices
and assuming reinvestment of dividends and distributions). Aggregate total re-
turns may be shown by means of schedules, charts, or graphs, and may indicate
subtotals of the various components of total return (that is, the change in
value of initial investment, income dividends, and capital gains distribu-
tions).
The Trust may, in addition to quoting a Portfolio's average annual and aggre-
gate total returns, advertise the actual annual and annualized total return
performance data for various periods of time. Actual annual and annualized to-
tal returns may be shown by means of schedules, charts or graphs. Actual an-
nual and annualized total return data gen-
26--GNA Variable Series Trust
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<PAGE>
erally will be lower than average total return data, which reflects com-
pounding.
Any Portfolio performance information presented will also include performance
information for the insurance company separate accounts that fund Contracts
investing in the Trust, which will take into account insurance-related charges
and expenses under such contracts.
Additional performance information is contained in each Fund's annual report
which may be obtained without charge, by contacting the Trust at (800) 455-
0870. See "Performance Information" in the Statement of Additional Informa-
tion.
PERIODICALS AND INDICES
In advertisements or in reports to shareholders, the Trust may compare a Port-
folio's performance to that of other mutual funds with similar investment ob-
jectives and to other relevant indices. For example, a Portfolio may compare
its performance to rankings prepared by Lipper Analytical Services, Inc. or
Morningstar, Inc., widely recognized independent services which monitor the
performance of mutual funds, to a government bond index, or to the Consumer
Price Index.
THE TRUST, THE PORTFOLIOS AND MANAGEMENT
- -------------------------------------------------------------------------------
GNA Variable Series Trust is an open-end diversified management investment
company established as a Delaware business trust on March 25, 1994. Each of
the Portfolios is a series of the Trust. Overall responsibility for management
and supervision of each Portfolio rests with the Board of Trustees in accor-
dance with the laws of the State of Delaware. The Trustees approve all signif-
icant agreements between the Trust and the persons and companies that furnish
services to the Trust and each Portfolio, including agreements with each Port-
folio's investment adviser, custodian and transfer agent.
The rights of holders of shares of a Portfolio may be modified by the Trustees
at any time, so long as such modifications do not have a material, adverse ef-
fect on the rights of any shareholder.
The Trust is not required to hold annual shareholder meetings and, at this
time, does not intend to do so. However, special meetings may be called for a
Portfolio or the Trust as a whole for purposes such as electing or removing
Trustees, changing fundamental policies or approving an advisory contract. On
any matter submitted to the shareholders, the holder of each share of a Port-
folio is entitled to one vote per share (with proportionate voting for frac-
tional shares) regardless of the relative net asset value thereof. An insur-
ance company issuing a Contract that participates in a Portfolio will vote
shares in the applicable separate account as required by law and interpreta-
tion thereof, as such may be amended or changed from time to time. In accor-
dance with current law and interpretations thereof, a participating insurance
company is required to request voting instructions from Contract owners and
must vote shares in the applicable separate account in proportion to the vot-
ing instructions received. For further discussion, please refer to the pro-
spectus for your Contract.
GNA Capital Management, Inc. (the "Adviser") is the investment adviser of each
Portfolio and is a wholly-owned subsidiary of GNA Corporation having its prin-
cipal business at Suite 5600, Two Union Square, 601 Union Street, Seattle,
Washington 98101. GNA Capital Management, Inc. also serves as investment ad-
viser to Investors Trust, an open-end diversified management investment com-
pany established as a Massachusetts business trust. As each Portfolio's advis-
er, the Adviser shall manage, supervise and conduct the affairs of each Port-
folio, including the selection of sub-advisers to furnish an investment pro-
gram for any Portfolio as described below. GNA Corporation also is the parent
company of GNA Securities, Inc. and GNA Distributors, Inc. GNA Corporation is
a direct subsidiary of General Electric Capital Corporation. The officers of
the Adviser manage the investments of seven affiliated companies, Great North-
ern
GNA Variable Series Trust--27
- -------------------------------------------------------------------------------
<PAGE>
Insured Annuity Corporation, GE Capital Life Assurance Company of New York,
General Electric Capital Assurance Company, Federal Home Life Insurance Compa-
ny, The Harvest Life Insurance Company, PHF Life Insurance Company and Amex
Life Assurance Company which had combined assets of approximately $21.7 bil-
lion as of December 31, 1995.
GNA ADJUSTABLE RATE PORTFOLIO
Standish, Ayer & Wood, Inc. ("Standish, Ayer & Wood"), One Financial Center,
Boston, Massachusetts 02111, a registered investment adviser, has been re-
tained by the Adviser to act as portfolio manger of the Adjustable Rate Port-
folio under a sub-advisory contract with the Adviser dated September 19, 1994.
Standish, Ayer & Wood acted as investment adviser for total assets in excess
of $29.0 billion as of December 31, 1995. As portfolio manager, Standish, Ayer
& Wood is responsible for the actual investment management of the Adjustable
Rate Portfolio's assets including the responsibility for making decisions and
placing orders to buy, sell or hold a particular security, under the general
supervision of the Adviser and the Board of Trustees. Pursuant to the sub-ad-
visory contract, the Adviser will periodically review the investment activi-
ties of Standish, Ayer & Wood, and the Adviser will have the right to termi-
nate the sub-advisory contract upon 60 days written notice to the Standish,
Ayer & Wood.
Overall portfolio management strategy for the Adjustable Rate Portfolio is de-
termined by Standish, Ayer & Wood under the supervision and direction of
Dolores S. Driscoll, a Managing Director of Standish, Ayer & Wood.
Ms. Driscoll has been employed by Standish, Ayer & Wood since 1974. Ms.
Driscoll previously worked as a bond manager for Davis L. Babson, Inc. Ms.
Driscoll holds a B.A. degree in Mathematics from Indiana University and an MBA
degree in Finance from Boston University and is a Chartered Financial
Analyst.
The Adviser receives an investment advisory fee, payable monthly, based upon
the Adjustable Rate Portfolio's average daily net assets, equal to an annual
rate of .40% of the Adjustable Rate Portfolio's average daily net assets. Dur-
ing the initial period following commencement of operations of the Adjustable
Rate Portfolio, the sharing of fixed costs among a relatively small base of
net assets may result in certain operating expenses, such as custodial and
transfer agency fees, being substantially higher, as a percentage of average
daily net assets, than those of comparable funds. The Adviser has indicated
that it intends to reimburse such portion of these expenses as is necessary to
cause the total annual operating expenses not to exceed .70% of the Adjustable
Rate Portfolio's average daily net asset value through the fiscal year ending
December 31, 1996. The Adviser may also elect to continue these voluntary ex-
pense reimbursements with respect to subsequent fiscal years.
For its services under its sub-advisory agreement, Standish, Ayer & Wood re-
ceives from the Adviser a fee, payable monthly, based upon the Adjustable Rate
Portfolio's average daily net assets equal to an annual rate of .20% of the
Adjustable Rate Portfolio's average daily net assets.
For the twelve month period ended December 31, 1995, the Adjustable Rate
Portfolio's fee to the Adviser was $21,241 or .40% (annualized) of the average
daily net assets of the Adjustable Rate Portfolio.
GNA GOVERNMENT PORTFOLIO
GNA Capital Management, Inc. (the "Adviser"), Suite 5600, Two Union Square,
601 Union Street, Seattle, Washington 98101, a registered investment adviser,
acts as the portfolio manager of the Government Portfolio under an advisory
agreement with the Trust dated September 19, 1994. As portfolio manager, the
Adviser is responsible for the actual investment management of the Portfolio's
assets including the responsibility for making decisions and placing orders to
buy, sell or hold a particular security, under the general supervision of the
Board of Trustees.
Overall portfolio management strategy for the Government Portfolio is deter-
mined by the
28--GNA Variable Series Trust
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<PAGE>
Adviser under the supervision and direction of Charles A. Kaminski, a Senior
Vice President of the Adviser. Mr. Kaminski is also an officer of Great North-
ern Insured Annuity Corporation, General Electric Capital Assurance Company,
GNA Securities, Inc., Investors Trust and the Trust. Mr. Kaminski previously
served as Vice President of Investments for the Adviser, and prior to joining
the Adviser in 1992 he was Vice President and Director of Baring America Asset
Management.
Mr. Kaminski holds B.S. and M.S. degrees in Electrical Engineering from the
Massachusetts Institute of Technology and an M.B.A. from the Harvard Business
School.
The Adviser receives an investment advisory fee, payable monthly, based upon
the Government Portfolio's average daily net assets, equal to an annual rate
of .65% of the Government Portfolio's average daily net assets if the combined
average daily net assets of the Government Portfolio and the Investors Trust
Government Fund equals $500 million or less, .60% of the Government Portfo-
lio's average daily net assets if the combined average daily net assets of the
Government Portfolio and the Investors Trust Government Fund is greater than
$500 million and is equal to or less than $750 million, .55% of the Government
Portfolio's average daily net assets if the combined average daily net assets
of the Government Portfolio and the Investors Trust Government Fund is greater
than $750 million and is equal to or less than $1.25 billion, .50% of the Gov-
ernment Portfolio's average daily net assets if the combined average daily net
assets of the Government Portfolio and the Investors Trust Government Fund is
greater than $1.25 billion and is equal to or less than $1.5 billion and .45%
of the Government Portfolio's average daily net assets if the combined average
daily net assets of the Government Portfolio and the Investors Trust Govern-
ment Fund exceed $1.5 billion. During the initial period following commence-
ment of operations of the Government Portfolio, the sharing of fixed costs
among a relatively small base of net assets may result in certain operating
expenses, such as custodial and transfer agency fees, being substantially
higher, as a percentage of average daily net assets, than those of comparable
funds. The Adviser has indicated that it intends to reimburse such portion of
these expenses as is necessary to cause the total annualized operating ex-
penses not to exceed .90% of the Government Portfolio's average daily net as-
set value through the fiscal year ending December 31, 1996. The Adviser may
also elect to continue these voluntary expense reimbursements with respect to
subsequent fiscal years.
For the twelve month period ended December 31, 1995, the Government Portfo-
lio's fee to the Adviser was $31,935 or .55% (annualized) of the average daily
net assets of the Government Portfolio.
GNA VALUE PORTFOLIO
Duff & Phelps Investment Management Co. ("Duff & Phelps"), Suite 3800, 55 East
Monroe Street, Chicago, Illinois 60603, a registered investment adviser, has
been retained by the Adviser to act as portfolio manager of the Value Portfo-
lio under a sub-advisory contract with Adviser dated September 19, 1994. Duff
& Phelps acted as investment adviser for total assets in excess of $42.0 bil-
lion as of December 31, 1995. Duff & Phelps is a wholly owned subsidiary of
Phoenix Duff & Phelps Corporation, which itself is a majority owned subsidiary
of Phoenix Home Life Mutual Insurance Company. As portfolio manager, Duff &
Phelps is responsible for the actual investment management of the Value Port-
folio's assets including the responsibility for making decisions and placing
orders to buy, sell or hold a particular security, under the general supervi-
sion of the Adviser and the Board of Trustees. Pursuant to the sub-advisory
contract, the Adviser will periodically review the investment activities of
Duff & Phelps, and the Adviser will have the right to terminate the sub-advi-
sory contract upon 60 days written notice to Duff & Phelps.
Overall portfolio management strategy for the Value Portfolio is determined by
Duff & Phelps under the supervision and direction of Carl F. Faust, an Execu-
tive Vice President of Duff & Phelps and a member of its Investment
GNA Variable Series Trust--29
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<PAGE>
Policy Committee. Mr. Faust has been employed by Duff & Phelps since 1988. Mr.
Faust previously worked as an investment analyst with Harris Bank, followed by
three years as the Director of the Illinois State Board of Investment before
joining First National Bank of Chicago as Vice President and Director of Eq-
uity Research. He then served as Vice President and Senior Account Manager for
First Chicago Investment Advisers prior to joining Duff & Phelps. Mr. Faust is
a Chartered Financial Analyst and holds a B.S. degree from the University of
Illinois and an M.B.A. degree from the Harvard Graduate School of Business. He
is a member and past Director of the Investment Analysts Society of Chicago.
The Adviser receives an investment advisory fee, payable monthly, based upon
the Value Portfolio's average daily net assets, equal to an annual rate of
.80% of the Value Portfolio's average daily net assets if the combined average
daily net assets of the Value Portfolio and the Investors Trust Value Fund
equal $100 million or less and .70% of the Value Portfolio's average daily net
assets if the combined average daily net assets of the Value Portfolio and the
Investors Trust Value Fund exceed $100 million. During the initial period fol-
lowing commencement of operations of the Value Portfolio, the sharing of fixed
costs among a relatively small base of net assets may result in certain oper-
ating expenses, such as custodial and transfer agency fees, being substan-
tially higher, as a percentage of average daily net assets, than those of com-
parable funds The Adviser has indicated that it intends to reimburse such por-
tion of these expenses as is necessary to cause the total annual operating ex-
penses not to exceed 1.10% of the Value Portfolio's average daily net asset
value through the fiscal year ending December 31, 1996. The Adviser may also
elect to continue these voluntary expense reimbursements with respect to sub-
sequent fiscal years.
For its services under its sub-advisory agreement, Duff & Phelps receives from
the Adviser a fee, payable monthly, based upon the Value Portfolio's average
daily net assets equal to an annual rate of .30% of the Value Portfolio's av-
erage daily net assets if the combined average daily net assets of the Value
Portfolio and the Investors Trust Value Fund equal $100 million or less and
.20% of the Value Portfolio's average daily net assets if the combined average
daily net assets of the Value Portfolio and the Investors Trust Value Fund ex-
ceed $100 million.
For the twelve month period ended December 31, 1995, the Value Portfolio's fee
to the Adviser was $20,356 or .80% (annualized) of the average daily net as-
sets of the Value Portfolio.
GNA GROWTH PORTFOLIO
Value Line, Inc. ("Value Line"), 711 Third Avenue, 8th Floor, New York, New
York 10017, a registered investment adviser, has been retained by the Adviser
to act as portfolio manager of the Growth Portfolio under a sub-advisory con-
tract with Adviser dated September 19, 1994. Value Line managed total assets
of approximately $5.3 billion as of December 31, 1995. As portfolio manager,
Value Line is responsible for the actual investment management of the Portfo-
lio's assets including the responsibility for making decisions and placing or-
ders to buy, sell or hold a particular security, under the general supervision
of the Adviser and the Board of Trustees. Pursuant to the sub-advisory con-
tract, the Adviser will periodically review the investment activities of Value
Line, and the Adviser will have the right to terminate the sub-advisory con-
tract upon 60 days written notice to Value Line.
Overall portfolio management strategy for the Growth Portfolio is determined
by committee. No person is primarily responsible for making recommendations to
the committee.
The Adviser receives an investment advisory fee, payable monthly, based upon
the Growth Portfolio's average daily net assets, equal to an annual rate of
.80% of the first $100 million of the Growth Portfolio's average daily net as-
sets and .70% of the Growth Portfolio's average daily net assets in excess of
$100 million. During the initial period following commencement of operations
of the Growth Portfolio, the sharing of fixed costs among a relatively small
base of net assets may result in certain oper-
30--GNA Variable Series Trust
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<PAGE>
ating expenses, such as custodial and transfer agency fees, being substan-
tially higher, as a percentage of average daily net assets, than those of com-
parable funds. The Adviser has indicated that it intends to reimburse such
portion of these expenses as is necessary to cause the total annualized oper-
ating expenses not to exceed 1.10% of the Growth Portfolio's average daily net
asset value through the fiscal year ending December 31, 1996. The Adviser may
also elect to continue these voluntary expense reimbursements with respect to
subsequent fiscal years.
For its services under its sub-advisory agreement, Value Line receives from
the Adviser a fee, payable monthly, based upon the Growth Portfolio's average
daily net assets equal to an annual rate of .45% of the Growth Portfolio's av-
erage daily net assets.
For the twelve month period ended December 31, 1995, the Growth Portfolio's
fee to the Adviser was $34,065 or .80% (annualized) of the average daily net
assets of the Growth Portfolio.
ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
TRANSFER AGENT AND CUSTODIAN. State Street Bank and Trust Company acts as
transfer agent for each Portfolio. State Street Bank and Trust Company also
holds all cash and securities of each Portfolio, as custodian.
INDEPENDENT ACCOUNTANTS AND COUNSEL. For the year ended December 31, 1995,
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts 02109,
acted as the independent accountants for each Portfolio. Messrs. Goodwin,
Procter & Hoar LLP, Exchange Place, Boston, Massachusetts 02109, acted as
counsel to each Portfolio.
GNA Variable Series Trust--31
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<PAGE>
PART B
32
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 1996
GNA VARIABLE SERIES TRUST/SM/
CONSISTING OF FOUR SERIES,
GNA ADJUSTABLE RATE PORTFOLIO
GNA GOVERNMENT PORTFOLIO
GNA VALUE PORTFOLIO
GNA GROWTH PORTFOLIO
TABLE OF CONTENTS
<TABLE>
<S> <C>
General Information............................................
Additional Information Concerning Certain Investment Techniques
Debt Instruments and Permitted Cash Investments................
Debt Securities Ratings........................................
Investment Restrictions........................................
Portfolio Transactions.........................................
Portfolio Turnover.............................................
Purchase and Redemption Information............................
Net Asset Value................................................
Certain Tax Matters............................................
Management of the Trust........................................
The Investment Adviser and Sub-Advisers........................
Performance Information........................................
Independent Accountants........................................
Custodian......................................................
Financial Statements...........................................
</TABLE>
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the Prospectus dated May 1, 1996, for GNA Variable
Series Trust (the "Trust") which may be obtained without charge by contacting
the Trust at Two Union Square, 601 Union Street, Suite 5600, Seattle, Washington
98101-2336 or by telephoning (800) 455-0870. Unless otherwise defined herein,
capitalized terms have the meanings given to them in the Prospectus.
33
<PAGE>
GENERAL INFORMATION
GNA Variable Series Trust (the "Trust") is an open-end, diversified,
management investment company organized as a Delaware business trust on March
25, 1994. The Trust currently has four series of shares, GNA Adjustable Rate
Portfolio (the "Adjustable Rate Portfolio"), GNA Government Portfolio (the
"Government Portfolio"), GNA Value Portfolio (the "Value Portfolio") and GNA
Growth Portfolio (the "Growth Portfolio"). The Trustees of the Trust have the
authority to create additional series. Shares of the Portfolios are currently
offered only to insurance company separate accounts that fund certain variable
contracts (the "Contracts").
The rights of holders of shares of the Trust may be modified by the Trustees
at any time, so long as such modifications do not adversely affect the rights of
any shareholder. On any matter submitted to the shareholders, the holder of each
share is entitled to one vote per share (with proportionate voting for
fractional shares) regardless of the relative net asset value thereof.
Shareholders of a Portfolio are not entitled to vote on any matter which does
not affect that Portfolio.
The assets received by the Trust from the sale of shares of a Portfolio, and
all income, earnings, profits and proceeds thereof, subject only to the rights
of creditors, constitute the underlying assets of that Portfolio. The underlying
assets of each Portfolio are required to be segregated on the books of account
and are to be charged with the expenses in respect of that Portfolio and the
Trust. Any general expenses of the Trust not readily identifiable as belonging
to a particular Portfolio shall be allocated by or under the direction of the
Trustees in such manner as the Trustees determine to be fair and equitable,
taking into consideration, among other things, the nature and type of expense
and the relative sizes of the Portfolios.
Each share of a Portfolio represents an equal proportionate interest in that
Portfolio with each other share and is entitled to such dividends and
distributions out of the income belonging to such Portfolio as are declared by
the Trustees. Upon liquidation of a Portfolio, shareholders of that Portfolio
are entitled to share pro rata in the net assets belonging to such Portfolio
available for distribution.
Under the Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required. In addition, after the Trustees have been initially
elected by shareholders, the Board of Trustees is a self-perpetuating body.
Thus, there will ordinarily be no shareholder meetings unless otherwise required
by the Investment Company Act of 1940, as amended (the "1940 Act").
Shares do not have cumulative voting rights, which means that in situations in
which shareholders elect trustees, holders of more than 50% of the shares voting
for the election of trustees can elect 100% of the Trust's trustees, and the
holders of less than 50% of the shares voting for the election of trustees will
not be able to elect any person as a trustee.
Shares have no preemptive or subscription rights and are fully transferable.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
The Portfolios may buy and sell options, future contracts and options on
futures contracts with respect to interest rates, securities and securities
indices and use other instruments and techniques as described below under
circumstances in which such instruments and techniques are expected by a
Portfolio's Adviser or relevant Sub-Adviser to aid in achieving the investment
objectives of such Portfolio.
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REPURCHASE AGREEMENTS
Each Portfolio may enter into repurchase agreements with banks, broker-dealers
or other financial institutions in order to generate additional current income.
A repurchase agreement is an agreement under which a Portfolio acquires a
security from a seller subject to resale to the seller at an agreed upon price
and date. The resale price reflects an agreed upon interest rate effective for
the time period the security is held by the Portfolio and is unrelated to the
interest rate on the security. Repurchase agreements usually are for short
periods, such as one week or less, but may be for longer periods. However, as a
matter of investment policy, the Portfolios will not enter into repurchase
agreements of more than one week's duration if, as a result, such agreements
(together with any other securities which are not readily marketable) would
exceed 10% of the Portfolio's net assets.
Under the 1940 Act, repurchase agreements are considered to be loans by the
purchaser collateralized by the underlying securities. Each Portfolio's Adviser
or relevant Sub-Adviser monitors the value of the underlying securities at the
time the repurchase agreement is entered into and at all times during the term
of the agreement to ensure that their market value always equals or exceeds the
agreed-upon repurchase price to be paid to the Portfolio. In addition, not more
than one-third of the current market value of a Portfolio's total assets shall
constitute secured "loans" by such Portfolio under repurchase agreements. Each
Portfolio will maintain a segregated account with its Custodian for the
securities and other collateral, if any, acquired under a repurchase agreement
with a broker-dealer for the term of the agreement.
In addition to the risk of the seller's default or a decline in value of the
underlying security (see "Investment Objective and Policies -- Repurchase
Agreements" in each Portfolio's Prospectus), a Portfolio also might incur
disposition costs in connection with liquidating the securities. If the seller
becomes insolvent and subject to liquidation or reorganization under the
Bankruptcy Code or other laws, a court may determine that the underlying
security is collateral for a loan by the Portfolio not within the control of the
Portfolio and therefore subject to sale by the trustee in bankruptcy. Finally,
it is possible that the Portfolio may not be able to substantiate its interest
in the underlying security and may be deemed an unsecured creditor of the other
party to the agreement. While the Portfolios acknowledge these risks, it is
expected that they can be controlled through careful monitoring procedures,
including the monitoring by the Adviser or relevant Sub-Adviser of the credit-
worthiness of broker-dealers or other financial institutions engaging in
repurchase agreements with a Portfolio.
BORROWING
Each Portfolio may borrow for temporary purposes in an aggregate amount up to
10% of its total assets. Such borrowings may be made by obtaining a loan from a
bank or by entering into a reverse repurchase agreement with a bank or broker
dealer. Reverse repurchase agreements involve the sale of a security held by a
Portfolio and its agreement to repurchase the instrument at a stated price, date
and interest payment. A Portfolio may use the proceeds of a reverse repurchase
agreement to purchase other securities which either mature at a date
simultaneous with or prior to the expiration of the reverse repurchase agreement
or which are held under an agreement to resell maturing as of that time.
In connection with entering into reverse repurchase agreements, a Portfolio
will create and maintain a segregated account with the Custodian consisting of
U.S. Government Securities or cash or cash equivalents of an aggregate current
value sufficient to repurchase the securities or equal to the proceeds received
upon the sale plus accrued interest. A Portfolio may not enter into reverse
repurchase agreements with broker-dealers if its obligations under such
agreements, together with other outstanding borrowings, would exceed 5% of the
market value of its total assets.
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FIRM COMMITMENT AGREEMENTS
Each Portfolio may enter into firm commitment agreements ("when-issued"
purchases) for the purchase of securities at an agreed upon price on a specified
future date. A Portfolio will not enter into such agreements for the purpose of
investment leverage.
Liability for the purchase price and all the rights and risks of ownership of
the securities accrue to a Portfolio at the time it becomes obligated to
purchase the securities, although delivery and payment occur at a later date,
generally within 45 days of the date of the commitment to purchase. Accordingly,
if the market price of the security should decline, the effect of the agreement
would be to obligate the Portfolio to purchase the security at a price above the
current market price on the date of delivery and payment. During the time the
Portfolio is obligated to purchase such securities, it will maintain with the
Custodian a segregated account with U.S. Government Securities or cash or cash
equivalents of an aggregate current value sufficient to make payment for the
securities.
LOANS OF PORTFOLIO SECURITIES
Each Portfolio may lend its portfolio securities to qualified brokers, dealers
or other financial institutions as long as the terms, the structure and the
aggregate amount of such loans are not inconsistent with the 1940 Act, or the
rules and regulations or interpretations of the Securities and Exchange
Commission (the "SEC") thereunder. Loan arrangements made by a Portfolio will
comply with all other applicable regulatory requirements, including the rules of
the New York Stock Exchange (the "NYSE") which presently require the borrower,
after notice, to redeliver the securities within the normal settlement time of
five (5) business days.
At the present time the staff of the SEC does not object if an investment
company pays reasonable negotiated fees to its custodian in connection with
loaned securities as long as such fees are pursuant to a contract approved by
the investment company's trustees. In addition, voting rights may pass with the
loaned securities, but if a material event will occur affecting a security on
loan, the loan must be called and the security voted. The Portfolios do not
presently intend to engage in lending securities. Should a Portfolio wish to
commence any such activities, such Portfolio may seek to enter into an agreement
with the Custodian which complies with the position of the staff of the SEC.
RULE 144A SECURITIES
Subject to the limitations on illiquid and restricted securities noted below,
a Portfolio may buy or sell restricted securities in accordance with Rule 144A
under the Securities Act of 1933 ("Rule 144A Securities"). Securities may be
resold pursuant to Rule 144A under certain circumstances only to qualified
institutional buyers as defined in the rule, and the markets and trading
practices for such securities are relatively new and still developing.
OPTIONS
Each Portfolio may engage, at such time and from time to time as such
Portfolio's Adviser or relevant Sub-Adviser shall determine to be appropriate,
in the writing of covered call option contracts ("calls"). A covered call is
an option to purchase securities which the Portfolio owns or has the right to
acquire or for which the Portfolio maintains a segregated account with the
Custodian of cash, cash equivalents or U.S. Government Securities having a value
sufficient to meet its obligations under the call.
When a Portfolio writes a call, it receives a premium and gives the purchaser
the right to buy the underlying security at any time during the call period
(usually less than nine months) or at the end of the call period at a fixed
exercise price regardless of market price changes during the call period. If the
call is exercised, the Portfolio forgoes any gain from an increase in the market
price of the underlying security over the exercise price.
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When a covered call is written by a Portfolio, the Portfolio will make
arrangements with the Custodian to segregate the underlying securities or an
equivalent value in cash, cash equivalents or U.S. Government Securities until
the option is either exercised or has lapsed or the Portfolio closes out the
option as described below.
A Portfolio may purchase a call, for example, to effect a "closing purchase
transaction," which is the purchase of a call on the same security with the
same exercise price and expiration date as the call which it has previously
written. When a security on which the Portfolio has written a call is to be sold
from the Portfolio's portfolio, the Portfolio will first effect a closing
purchase transaction so as to close out the existing call option contract on
that security. The Portfolio will realize a profit (or loss) from a closing
purchase transaction if the amount paid to purchase a call option contract is
less (or more) than the amount received from the sale thereof.
A Portfolio also may purchase and write (i.e., sell) put options ("puts") on
securities. A put option is a contract that grants the right to sell at a
specified price a specified number of securities by a certain date. A Portfolio
may write puts only if they are secured. A put is "secured" if the Portfolio
maintains cash, cash equivalents or securities with a value equal to the
exercise price in a segregated account with the Custodian or holds a put on the
same underlying security at an equal or greater exercise price.
The purchase and sale of option contracts is a highly specialized activity
which involves investment techniques and risks different from those ordinarily
associated with investment companies. It should be noted that transaction costs
relating to options transactions may tend to be higher than the transaction
costs with respect to transactions in securities. In addition, if a Portfolio
were to write a substantial number of option contracts which are exercised, the
portfolio turnover rate of such Portfolio could increase.
Securities for a Portfolio's portfolio will continue to be bought and sold
solely on the basis of appropriateness to fulfill the Portfolio's investment
objective. Option transactions can be used, among other things, to increase the
return on portfolio positions.
A Portfolio will not write option contracts in an amount such that the income
derived from such activity would, in the opinion of the Trust's counsel,
disqualify the Trust as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code") if such qualification
is in the best interests of the Trust's shareholders.
FUTURES CONTRACTS AND OPTIONS THEREON
Each Portfolio may purchase and sell futures contracts ("futures
contracts"). Futures contracts are publicly traded contracts to buy or sell
underlying assets, such as certain securities or an index of securities, at a
future time at a specified price. A contract to buy establishes a "long"
position while a contract to sell establishes a "short" position.
The purchase of a futures contract on an equity security or an index of equity
securities normally enables a buyer to participate in the market movement of the
underlying asset or index after paying a transaction charge and posting margin
in an amount equal to a small percentage of the value of the underlying asset or
index. This characteristic makes futures useful for hedging purposes.
Futures contracts can also be used as a hedge against changes in interest
rates. Generally, if market interest rates increase, the value of outstanding
debt securities declines (and vice versa). If, for example, a Portfolio holds
long-term U.S. Government Securities and such Portfolio's Adviser or relevant
Sub-Adviser anticipates a rise in long-term interest rates, it could, in lieu of
disposing of its portfolio securities, enter into futures contracts for the sale
of similar long-term securities. If rates increased and the value of the
Portfolio's portfolio securities declined, the value of the Portfolio's futures
contract would increase, thereby protecting the Portfolio by preventing net
asset
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value from declining as much as it otherwise would have. If such Portfolio's
Adviser or relevant Sub-Adviser expects long-term interest rates to decline,
the Portfolio might enter into futures contracts for the purchase of long-term
securities, so that it could offset anticipated increases in the cost of such
securities it intends to purchase while continuing to hold higher-yielding
short-term securities or waiting for the long-term market to stabilize.
Each Portfolio also may purchase and sell listed put and call options on
futures contracts. 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 (a long position if the option is a call and a short position if the
option is a put), at a specified exercise price at any time during the option
period. When an option on a futures contract is exercised, settlement is
effected by the payment of cash representing the difference between the current
market price of the futures contract and the exercise price of the option.
A basic option strategy for protecting a Portfolio against a decline in
securities prices could involve (a) the purchase of a put--thus "locking in"
the selling price of the underlying securities or securities indices--or (b) the
writing of a call on securities or securities indices held by a Portfolio--
thereby generating income (the premium paid by the buyer) by giving the holder
of such call the option to buy the underlying asset at a fixed price. The
premium will offset, in whole or in part, a decline in portfolio value; however,
if prices of the relevant securities or securities indices rose instead of
falling, the call might be exercised, thereby resulting in a potential loss of
appreciation in the underlying securities or securities indices.
A basic option strategy when a rise in securities prices is anticipated is the
purchase of a call--thus "locking in" the purchase price of the underlying
security or other asset. In transactions involving the purchase of call options
by a Portfolio, money market instruments equal to the aggregate exercise price
of the options will be identified by that Portfolio to the Trust's custodian to
insure that the use of such investments is unleveraged.
A Portfolio may also purchase put options on interest rate futures contracts
in lieu of, and for the same purpose as, its sale of a futures contract: to
hedge a long position in the underlying futures contract. The purchase of call
options on interest rate futures contracts is intended to serve the same purpose
as the actual purchase of the futures contract, and the Portfolio will make
arrangements with the Custodian to segregate cash, cash equivalents or U.S.
Government Securities sufficient to purchase the amount of portfolio securities
represented by the underlying futures contracts.
A Portfolio would write a call option on a futures contract in order to hedge
against a decline in the prices of the securities underlying the futures
contracts. If the price of the futures contract at expiration is below the
exercise price, the Portfolio would retain the option premium, which would
offset, in part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase
of the futures contract, except that, if market price declines, the Portfolio
would pay more than the market price for the underlying securities. The net cost
to the Portfolio will be reduced, however, by the premium received on the sale
of the put, less any transaction costs.
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"STRADDLE" TRANSACTIONS
Each Portfolio may engage in "straddle" transactions, which involve the
purchase or sale of combinations of call and put options on the same underlying
securities or futures contracts. A Portfolio will not purchase calls or puts, in
connection with such straddle transactions, if the aggregate premiums paid for
such options will exceed 5% of its net assets.
LIMITATIONS AND RISKS RELATED TO OPTIONS AND FUTURES TRANSACTIONS
The Portfolios will engage in transactions in futures contracts or options
only as a hedge against changes resulting from market conditions which produce
changes in the values of their securities or the securities which they intend to
purchase (e.g., to replace portfolio securities which will mature in the near
future) and, subject to the limitations described below, to enhance return. No
Portfolio will purchase any futures contract or purchase any call option if,
immediately thereafter, more than one-third of the Portfolio's net assets would
be represented by long futures contracts or call options. No Portfolio will
write a covered call or put option if, immediately thereafter, the aggregate
value of the assets (securities in the case of written calls and cash or cash
equivalents in the case of written puts) underlying all such options, determined
as of the dates such options were written, would exceed 25% of that Portfolio's
net assets. In addition, no Portfolio may establish a position in a futures
contract or purchase or sell an option for other than bona fide hedging purposes
if immediately thereafter the sum of the amount of initial margin deposits and
premiums on open positions with respect to futures and options used for such
non-hedging purposes would exceed 5% of the market value of the Portfolio's net
assets.
Although effective hedging can generally capture the bulk of a desired risk
adjustment, no hedge is completely effective. Each Portfolio's ability to hedge
effectively through transactions in futures or options depends on the degree to
which price movements in its holdings correlate with price movements of the
futures and options. The prices of the assets being hedged may not move in the
same amount as the hedging instrument, or there may be a negative correlation
which would result in an ineffective hedge and a loss to a Portfolio.
Positions in futures and options may be closed out only on an exchange which
provides a secondary market therefor. There can be no assurance that a liquid
secondary market will exist for any particular futures contract or option at any
specific time. Thus, it may not be possible to close such an option or futures
position prior to maturity. The inability to close options and futures positions
also could have an adverse impact on a Portfolio's ability to effectively hedge
its securities and might in some cases require a Portfolio to deposit cash to
meet applicable margin requirements. Each Portfolio will enter into an option or
futures position only if it appears to be a liquid investment.
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
As indicated in each Portfolio's Prospectus, a Portfolio may invest in long-
term and short-term debt securities. A Portfolio may invest in cash and short-
term securities for temporary, defensive purposes when, in the opinion of such
Portfolio's Adviser or relevant Sub-Adviser, such investments are more likely to
provide protection against unfavorable market conditions than adherence to other
investment policies. Certain debt securities and money market instruments in
which the Portfolios, particularly the Adjustable Rate Portfolio, may invest are
described below.
Tax-Exempt Bonds. As used in this Statement of Additional Information, the
term "tax-exempt" obligations refers to debt obligations the interest on which
was at the time of issuance, in the opinion of bond counsel to the issuer,
exempt from federal income tax. Tax-exempt bonds include debt obligations issued
by a state, the District of Columbia or a territory or possession of the United
States, or any political subdivision thereof, in order to obtain funds for
various public purposes, including the construction of such public facilities as
airports, bridges, highways, housing, mass transportation, roads, schools and
water and sewer works. Other public purposes for
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which tax-exempt bonds may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses and obtaining funds to lend to
other public institutions and facilities. In addition, certain debt obligations
known as industrial development bonds may be issued by or on behalf of public
authorities to obtain funds to provide privately-operated housing facilities,
sports facilities, conventions or trade show facilities, airports, mass transit,
port or parking facilities, air or water pollution control facilities and
certain local facilities for water supply, gas, electricity or sewage or solid
waste disposal. Such obligations are included within the term tax-exempt bonds
if the interest paid thereon is exempt from federal income tax. Interest on
industrial development bonds used to fund the acquisition, construction,
equipment, repair or improvement of privately operated industrial or commercial
facilities may also be exempt from federal income tax, but the size of such
issues is limited under current federal tax law.
The two principal classifications of tax-exempt bonds are general obligation
bonds and limited obligation (or revenue) bonds.
General obligation bonds are obligations involving the credit of an issuer
possessing taxing power and are payable from the issuer's general unrestricted
revenues and not from any particular fund or source. The characteristics and
method of enforcement of general obligation bonds vary according to the law
applicable to the particular issuer, and payment may be dependent upon
appropriation by the issuer's legislative body.
Limited obligation bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise or other specific revenue source. Tax-exempt industrial
development bonds generally are revenue bonds and thus not payable from the
unrestricted revenues of the issuer. The credit and quality of industrial
development revenue bonds is usually directly related to the credit of the
corporate user of the facilities. Payment of principal of and interest on
industrial development revenue bonds is the responsibility of the corporate user
(and any guarantor).
Prices and yields on tax-exempt bonds are dependent on a variety of factors,
including general money market conditions, the financial condition of the
issuer, general conditions in the tax-exempt bond market, the size of a
particular offering, the maturity of the obligation and ratings of particular
issues, and are subject to change from time to time. Information about the
financial condition of an issuer of tax-exempt bonds may not be as extensive as
that which is made available by corporations whose securities are publicly
traded.
The ratings of Moody's Investors Service, Inc. ("Moody's") and Standard &
Poor's Corporation ("S&P") represent their opinions and are not absolute
standards of quality. Tax-exempt bonds with the same maturity, interest rate and
rating may have different yields while tax-exempt bonds of the same maturity and
interest rate with different ratings may have the same yield.
Obligations of issuers of tax-exempt bonds are subject to the provisions of
bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform Act
of 1978, affecting the rights and remedies of creditors. Congress or state
legislators may seek to extend the time for payment of principal or interest, or
both, or to impose other constraints upon enforcement of such obligations. There
is also the possibility that, as a result of litigation or other conditions, the
power or ability of issuers to meet their obligations to pay interest on and
principal of their tax-exempt bonds may be materially impaired or their
obligations may be found to be invalid or unenforceable. Such litigation or
conditions may from time to time have the effect of introducing uncertainties in
the market for tax-exempt bonds or certain segments thereof, or materially
affecting the credit risk with respect to particular bonds. Adverse economic,
business, legal or political developments might affect tax-exempt bonds in the
same manner.
Refunded Municipal Bonds. Refunded municipal bonds are general obligation or
revenue bonds that have been fully secured or collateralized by an "escrow
fund" consisting of U.S. Government obligations in an amount adequate to meet
all interest and principal payments as such payments become due.
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Mortgage-Backed Securities. Generally, mortgage-backed securities are
securities representing interest in a pool of mortgages. Principal and interest
payments made on the mortgages in the underlying mortgage pool are passed
through to holders of securities issued by such pools. Unscheduled prepayments
of principal shorten the securities' weighted average life and may lower their
total return. (When a mortgage in the underlying mortgage pool is prepaid, an
unscheduled principal prepayment is passed through to holders of securities
issued by such pools. This principal is returned to holders of securities issued
by such pools at par. As a result, if a mortgage security were trading at a
premium, its total return would be lowered by prepayments, and if a mortgage
security were trading at a discount, its total return would be increased by
prepayments.) The value of these securities also may change because of changes
in the market's perception of the creditworthiness of the federal agency that
issued them. In addition, the mortgage securities market in general may be
adversely affected by changes in governmental regulation or tax policies.
U.S. Government Agency Mortgage-Backed Securities. These are obligations
issued or guaranteed by the United States Government or one of its agencies or
instrumentalities, such as the Government National Mortgage Association
("Ginnie Mae" or "GNMA"), the Federal National Mortgage Association
("Fannie Mae" or "FNMA"), the Federal Home Loan Mortgage Corporation
("Freddie Mac" or "FHLMC") and the Federal Housing Administration ("FHA").
FNMA, FHLMC and FHA obligations are not backed by the full faith and credit of
the U.S. Government as GNMA certificates are, but FNMA, FHLMC and FHA securities
are supported by the instrumentality's right to borrow from the United States
Treasury. U.S. government agency mortgage-backed certificates provide for the
pass-through to investors of their pro-rata share of monthly payments (including
any prepayments) made by the individual borrowers on the pooled mortgage loans,
net of any fees paid to the guarantor of such securities and the servicer of the
underlying mortgage loans. Each of GNMA, FNMA and FHLMC guarantees timely
distributions of interest to certificate holders. GNMA and FNMA guarantee timely
distributions of scheduled principal. FHLMC has in the past guaranteed only the
ultimate collection of principal of the underlying mortgage loan; however, FHLMC
now issues Mortgage-Backed Securities (FHLMC Gold PCs) which also guarantee
timely payment of monthly principal reductions. FHA generally guarantees only
the ultimate collection of 99% of the principal of the underlying mortgage
loans.
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The National Housing Act of 1934, as amended (the "Housing Act"),
authorizes Ginnie Mae to guarantee the timely payment of the principal of and
interest on certificates that are based on and backed by a pool of mortgage
loans insured by the Federal Housing Administration under the Housing Act, or
Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed by the
Department of Veteran Affairs under the Servicemen's Readjustment Act of 1944,
as amended ("VA Loans"), or by pools of other eligible mortgage loans. The
Housing Act provides that the full faith and credit of the United States
Government is pledged to the payment of all amounts that may be required to be
paid under any guaranty. In order to meet its obligations under such guaranty,
Ginnie Mae is authorized to borrow from the United States Treasury with no
limitations as to amount.
The Ginnie Mae Certificates in which the Portfolios may invest generally will
represent a pro-rata interest in one or more pools of the following types of
mortgage loans: (i) fixed rate level payment mortgage loans; (ii) fixed rate
graduated payment mortgage loans; (iii) fixed rate growing equity mortgage
loans; (iv) fixed rate mortgage loans secured by manufactured (mobile) homes;
(v) mortgage loans on completed multifamily projects; (vii) fixed rate mortgage
loans as to which escrowed funds are used to reduce the borrower's monthly
payments during the early years of the mortgage loans ("buydown" mortgage
loans); (viii) mortgage loans that provide for adjustments in payments based on
periodic changes in interest rates or in other payment terms of the mortgage
loans; and (ix) mortgage-backed serial notes. All of these mortgage loans will
be FHA Loans or VA Loans and, except as otherwise specified above, will be
fully-amortizing loans secured by first liens on one- to four-family housing
units.
Fannie Mae Certificates. Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. The obligations of FNMA are not
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backed by the full faith and credit of the U.S. Government.
Each Fannie Mae Certificate will generally represent a pro-rata interest in
one or more pools of FHA Loans or VA Loans of the following types: (i) fixed
rate level payment mortgage loans; (ii) fixed rate growing equity mortgage
loans; (iii) fixed rate graduated payment mortgage loans; (iv) variable rate
California mortgage loans; (v) other adjustable rate mortgage loans; and (vi)
fixed rate and adjustable mortgage loans secured by multifamily projects.
Freddie Mac Certificates. Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). The obligations of Freddie Mac are obligations
solely of Freddie Mac and are not backed by the full faith and credit of the
U.S. Government.
Freddie Mac Certificates represent a pro-rata interest in a group of mortgage
loans (a "Freddie Mac Certificate group") purchased by Freddie Mac. The
mortgage loans underlying the Freddie Mac Certificates will consist of fixed
rate or adjustable rate mortgage loans with original terms to maturity of
between 10 and 30 years, substantially all of which are secured by first liens
on one- to four-family residential properties or multifamily projects. Each
mortgage loan must meet the applicable standards set forth in the FHLMC Act. A
Freddie Mac Certificate group may include whole loans, participation interests
in whole loans and undivided interests in whole loans and participations
comprising another Freddie Mac Certificate group.
FHA. FHA was created in 1934 under the Housing Act and incorporated into HUD
in 1965. The obligations of FHA are not backed by the full faith and credit of
the U.S. Government.
Project Loans. Project Loan securities are backed by GNMA or FHA insured
mortgage loans made by HUD-approved public and private lenders for (i) the
construction or substantial rehabilitation of moderate-income multi family
housing and retirement centers, (ii) the construction, substantial
rehabilitation or refinancing of nursing houses, (iii) the purchase or
refinancing of existing multi family projects and (iv) the refinancing of
existing HUD-insured mortgages.
Project loans are generally structured in one of two ways: as Construction
Loan Certificates/Permanent Loan Certificates ("CLC/PLCs") or as Permanent Loan
Certificates ("PLCs"). Project Loan lenders, subject to HUD guidelines,
typically include various prepayment penalties and/or lockout periods that are
applicable during the early years of the permanent phase of CLC/PLC loans. The
majority of newly issued PLC loans also contain provisions that inhibit
prepayment during the earlier years of the loan. Although amortized over a
period of 30-40 years, Project loans are typically prepaid after a period of
approximately 8 to 12 years.
Certain Project Loans originated before 1985 contain a provision allowing the
investor to "put" the loan to FHA twenty years after origination, Project Loans
which are putable prior to November 1995 are putable at par. Project Loans
which are putable after November 1995 are putable into an equal amount of "MM
Debentures," which are semi-annual pay, interest only, 20-year maturity
securities backed by the full faith and credit of the U.S. Government, callable
every six months at par.
In the event of a default on the underlying mortgage, holders of GNMA Project
Loans will continue to receive scheduled principal and interest payments until
payment of the insurance claim. The final distribution to holders of GNMA
Project Loans will include 100% of the outstanding amount of the Project Loan
certificate plus accrued interest. In the event of a default on the underlying
mortgage, holders of FHA Project Loans will generally receive 99% of the
outstanding amount of the Project Loan certificates paid either in cash or MM
Debentures.
Adjustable Rate Mortgages--Interest Rate Indices. The "One Year Treasury
Index" is the figure derived from the average weekly quoted yield on U.S.
Treasury Securities adjusted to a constant maturity of one year. The "Cost of
Funds Index" reflects the monthly weighted average cost of funds of savings and
loan associations and savings
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banks whose home offices are located in Arizona, California and Nevada (the
"FHLB Eleventh District") that are member institutions of the Federal Home
Loan Bank of San Francisco (the "FHLB of San Francisco"), as computed from
statistics tabulated and published by the FHLB of San Francisco. The FHLB of San
Francisco normally announces the Cost of Funds Index on the last working day of
the month following the month in which the cost of funds was incurred.
A number of factors affect the performance of the Cost of Funds Index and may
cause the Cost of Funds Index to move in a manner different from indices based
upon specific interest rates, such as the One Year Treasury Index. Because of
the various origination dates and maturities of the liabilities of member
institutions of the FHLB Eleventh District upon which the Cost of Funds Index is
based, among other things, at any time the Cost of Funds Index may not reflect
the average of prevailing market interest rates on new liabilities of similar
maturities. There can be no assurance that the Cost of Funds Index will
necessarily move in the same direction or at the same rate as prevailing
interest rates because as longer term deposits or borrowings mature and are
renewed at market interest rates, the Cost of Funds Index will rise or fall
depending upon the differential between the prior and the new rates on such
deposits and borrowings. In addition, dislocations in the thrift industry in
recent years have caused and may continue to cause the cost of funds of thrift
institutions to change for reasons unrelated to changes in general interest rate
levels. Furthermore, any movement in the Cost of Funds Index as compared to
other indices based upon specific interest rates may be affected by changes
instituted by the FHLB of San Francisco in the method used to calculate the Cost
of Funds Index. To the extent that the Cost of Funds Index may reflect interest
changes on a more delayed basis than other indices, in a period of rising
interest rates, any increase may produce a higher yield later than would be
produced by such other indices, and in a period of declining interest rates
which may result in a higher level of principal prepayments on mortgage loans
which adjust in accordance with the Cost of Funds Index than mortgage loans
which adjust in accordance with other indices.
LIBOR, the London interbank offered rate, is the interest rate that the most
creditworthy international banks dealing in U.S. dollar-denominated deposits and
loans charge each other for large dollar-denominated loans. LIBOR is also
usually the base rate for large dollar-denominated loans in the international
market. LIBOR is generally quoted for loans having rate adjustments at one,
three, six or 12 month intervals.
Stripped Agency Mortgage-Backed Securities. These are securities representing
interests in a pool of mortgages, the cash flow of which has been separated into
its interest and principal components. "IOs" (interest only securities)
receive the interest portion of the cash flow while "POs" (principal only
securities) receive the principal portion. Stripped Agency Mortgage-Backed
Securities may be issued by U.S. Government Agencies or by private issuers
similar to those described below with respect to CMOs and privately-issued
mortgage-backed certificates. As interest rates rise and fall, the value of IOs
tends to move in the same direction as interest rates. The value of the other
mortgage-backed securities described herein, like other debt instruments, will
tend to move in the opposite direction compared to interest rates. Accordingly,
for example, investing in IOs may offset fluctuations in the value of other
mortgage-backed securities which are owned by the Portfolios. Under the
Internal Revenue Code of 1986, as amended (the "Code"), POs may generate
taxable income from the current accrual of original issue discount, without a
corresponding distribution of cash to the Portfolio which owns them.
The cash flows and yields on IO and PO classes are extremely sensitive to the
rate of principal payments (including prepayments) on the related underlying
mortgage assets. For example, a rapid or slow rate of principal payments may
have a material adverse effect on the yield to maturity of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to recoup fully its
initial investment in an IO class of a stripped mortgage-backed security, even
if the IO class is rated AAA or Aaa. Conversely, if the underlying mortgage
assets experience slower than anticipated prepayments of principal, the yield on
a PO class will be affected more severely than would be the case with a
traditional mortgage-backed security.
A Portfolio will generally treat IOs and POs, other than IOs or POs backed by
fixed rate mortgages issued or
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guaranteed by the U.S. Government or one of its agencies or instrumentalities,
as illiquid securities and, accordingly, limit its investment in such
securities, together with all other illiquid securities, to 15% of the
Portfolio's net assets, except that the Government Portfolio will limit its
investment in such securities, together with all other illiquid securities, to
10% of the Government Portfolio's net assets.
Inverse Floating Obligations. The Portfolios may invest in mortgage securities
and other instruments that are "inverse floating obligations."
One such instrument is an inverse floating rate bond, which pays a rate of
interest that fluctuates inversely with changes in a floating rate index such as
LIBOR. As the index decreases, the formula used to set the interest rate on
such a bond results in an increased yield. Conversely, as the index increases,
the formula used to set the interest rate on such a bond results in a decreased
yield. Although the right of the holder to a return of principal is not
affected by changes in interest rates, in a rising interest rate environment
repayment of principal will usually be slower than expected due to a decrease in
prepayment speeds usually associated with higher interest rates. Under such
circumstances, the market value of such instruments can be expected to decline.
Another such instrument is an "inverse IO," which is created by dividing a
fixed-rate bond class into floating and inverse floating components based upon a
market interest rate index, such that, at any time, the sum of the interest
payments to the two classes is no greater than the coupon on the fixed-rate
bond. As the index rises, more interest is required for the floating rate
component and therefore less is available to the holder of the inverse floating
rate holder. In a rising interest rate environment, the lower coupon payments
due to the inverse IO holder may be partially offset by the IO structure of the
security. With rising rates, slower prepayments will still enable the inverse
IO holder to recognize a decreased coupon on an outstanding balance for a longer
period. Unlike an inverse floating rate bond, an inverse IO does not entitle
the holder to receive a payment of principal and accordingly may have
incremental risk.
Inverse floating rate obligations generally increase or decrease in value in
response to changes in market interest rates at a rate which is a multiple of
the rate at which fixed-rate securities increase or decrease in response to such
changes. As a result, the market values of such securities will generally be
more volatile than the market values of conventional securities.
Collateralized Mortgage Obligations (CMOs). CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are received, although certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
a Portfolio invests, the investment may be subject to a greater or lesser risk
of prepayment than other types of mortgage-related securities. All CMOs
purchased by the Portfolios will be either issued by a Government agency or
rated in the two highest credit categories by a nationally recognized rating
agency.
U.S. Government Agency Multiclass Pass-Through Securities. Unlike CMOs, U.S.
Government Agency Multiclass Pass-Through Securities, which include FNMA
Guaranteed REMIC Pass-Through Certificates and FHLMC Multi-Class Mortgage
Participation Certificates, are ownership interests in a pool of Mortgage
Assets. Unless the context indicates otherwise, all references herein to CMOs
include such multiclass pass-through securities.
Privately-Issued Mortgage-Backed Certificates that Represent Interests in U.S.
Government Agency Mortgage-Backed Certificates. These are privately-issued
mortgage pass-through securities which represent interests in GNMA, FNMA and
FHLMC mortgage certificates but are generally divided into several classes in
the same manner as CMOs.
The Government Portfolio will invest in privately-issued mortgage-backed
securities only if they are rated at
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the time of investment AAA by S&P. Each of the other Portfolios will invest in
privately-issued mortgage-backed securities only if they are rated at the time
of investment A or better by S&P or A or better by Moody's. While U.S.
Government Securities and U.S. Government Agency Mortgage-Backed Securities are
guaranteed, as described above, as to the timely payment of principal and
interest, the market value of such obligations is not guaranteed and may rise
and fall in response to changes in interest rates and other factors.
After purchase by a Portfolio, a security may cease to be rated or its rating
may be reduced below the minimum required for purchase by such Portfolio.
Neither event will require a sale of such security by the Portfolio. However,
each Portfolio's Adviser or relevant Sub-Adviser will consider such event in its
determination of whether such Portfolio should continue to hold the security. To
the extent that the ratings given by Moody's or S&P may change as a result of
changes in such organizations or their rating systems, the Adviser or relevant
Sub-Adviser for each Portfolio will attempt to use comparable ratings as
standards for investments in accordance with the investment policies contained
in the prospectus.
Highly rated mortgage- and asset-backed securities carry a relatively low risk
of default. Like all investors in interest-bearing securities, however, a
Portfolio is exposed to the risk that the prices of individual securities held
by it can fluctuate, in some cases significantly, in response to changes in
prevailing levels of interest rates. In addition, a Portfolio could experience a
loss on an investment in a Stripped Mortgage-Backed Security held by it if the
mortgage loans underlying such security experienced a rapid rate of prepayment.
Adjustable Rate Securities. Certain securities may be issued with adjustable
interest rates that are reset periodically by predetermined formulas or indexes
in order to minimize movements in the principal value of the investment. Such
securities may have long-term maturities, but may be treated as a short-term
investment under certain conditions. Generally, as interest rates decrease or
increase, the potential for capital appreciation or depreciation on these
securities is less than for fixed-rate obligations. These securities may take
the following forms:
Variable Rate Securities. Variable rate instruments are those whose terms
provide for the adjustment of their interest rates on set dates and which, upon
such adjustment, can reasonably be expected to have a market value that
approximates its par value. A variable rate instrument, the principal amount of
which is scheduled to be paid in 397 days or less, is deemed to have a maturity
equal to the period remaining until the next readjustment of the interest. A
variable rate instrument which is subject to a demand feature entitles the
purchaser to receive the principal amount of the underlying security or
securities, either (i) upon notice of no more than 30 days or (ii) at specified
intervals not exceeding 397 days and upon no more than 30 days notice is deemed
to have a maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand.
Floating Rate Securities. Floating rate instruments are those whose terms
provide for the adjustment of their interest rates whenever a specified interest
rate changes and which, at any time, can reasonably be expected to have a market
value that approximates its par value. The maturity of a floating rate
instrument is deemed to be the period remaining until the date (noted on the
face of the instrument) on which the principal amount must be paid, or in the
case of an instrument called for redemption, the date on which the redemption
payment must be made. Floating rate instruments with demand features are deemed
to have a maturity equal to the period remaining until the principal amount can
be recovered through demand.
Put Option Bonds. Long-term obligations with maturities longer than one year
may provide purchasers an optional or mandatory tender of the security at par
value at predetermined intervals, often ranging from one month to several years
(e.g., a 30-year bond with a five-year tender period). These instruments are
deemed to have a maturity equal to the period remaining to the put date.
Asset-Backed Securities. A Portfolio may invest a portion of its assets in
debt obligations known as asset-
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backed securities. The credit quality of most asset-backed securities depends
primarily on the credit quality of the assets underlying such securities, how
well the entity issuing the security is insulated from the credit risk of the
originator or any other affiliated entities and the amount and quality of any
credit support provided to the securities. The rate of principal payment on
asset-backed securities generally depends on the rate of principal payments
received on the underlying assets which in turn may be affected by a variety of
economic and other factors. As a result, the yield on any asset-backed security
is difficult to predict with precision and actual yield to maturity may be more
or less than the anticipated yield to maturity. Asset-backed securities may be
classified either as pass-through certificates or collateralized obligations.
Pass-through certificates are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets. Pass-
through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because pass-
through certificates represent an ownership interest in the underlying assets,
the holders thereof bear directly the risk of any defaults by the obligors on
the underlying assets not covered by any credit support. See "Types of Credit
Support."
Asset-backed securities issued in the form of debt instruments, also known as
collateralized obligations, are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Such assets may be credit card or automobile receivables,
home equity loans or other consumer or commercial obligations. The assets
collateralizing such asset-backed securities are pledged to a trustee or
custodian for the benefit of the holders thereof. Such issuers generally hold no
assets other than those underlying the asset-backed securities and any credit
support provided. As a result, although payments on such asset-backed securities
are obligations of the issuers, in the event of defaults on the underlying
assets not covered by any credit support (see "Types of Credit Support"), the
issuing entities are unlikely to have sufficient assets to satisfy their
obligations on the related asset-backed securities.
Methods of Allocating Cash Flows. While many asset-backed securities are
issued with only one class of security, many asset-backed securities are issued
in more than one class, each with different payment terms. Multiple class asset-
backed securities are issued for two main reasons. First, multiple classes may
be used as a method of providing credit support. This is accomplished typically
through creation of one or more classes whose right to such payments on the
asset-backed security is made subordinate to the right to such payments of the
remaining class or classes. See "Types of Credit Support". Second, multiple
classes may permit the issuance of securities with payment terms, interest rates
or other characteristics differing both from those of each other and from those
of the underlying assets. Examples include so-called "strips" (asset-backed
securities entitling the holder to disproportionate interests with respect to
the allocation of interest and principal of the assets backing the security),
and securities with a class or classes having characteristics which mimic the
characteristics of non-asset-backed securities, such as floating interest rates
(i.e., interest rates which adjust as a specified benchmark change) or scheduled
amortization of principal.
Asset-backed securities in which the payment streams on the underlying assets
are allocated in a manner different than those described above may be issued in
the future. A Portfolio may invest in such asset-backed securities if such
investment is otherwise consistent with its investment objective and policies
and with the investment restrictions of the Portfolio.
Types of Credit Support. Asset-backed securities are often backed by a pool of
assets representing the obligations of a number of different parties. To lessen
the effect of failures by obligors on underlying assets to make payments, such
securities may contain elements of credit support. Such credit support falls
into two classes: Liquidity protection and protection against ultimate default
by an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that scheduled payments on the underlying pool are made in a timely
fashion. Protection against ultimate default ensures ultimate payment of the
obligations on at least a portion of the assets in the pool. Such protection may
be
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provided through guarantees, insurance policies or letters of credit obtained
from third parties, through various means of structuring the transaction or
through a combination of such approaches. Examples of asset-backed securities
with credit support arising out of the structure of the transaction include
"senior-subordinated securities" (multiple class asset-backed securities with
certain classes subordinate to other classes as to the payment of principal
thereon, with the result that defaults on the underlying assets are borne first
by the holders of the subordinated class) and asset-backed securities that have
"reserve funds" (where cash or investments, sometimes funded from a portion of
the initial payments on the underlying assets, are held in reserve against
future losses) or that have been "overcollateralized" (where the scheduled
payments on, or the principal amount of, the underlying assets substantially
exceeds that required to make payment of the asset-backed securities and pay any
servicing or other fees). The degree of credit support provided on each issue is
based generally on historical information respecting the level of credit risk
associated with such payments. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in an asset-backed security.
Automobile Receivable Securities. A Portfolio may invest in Asset Backed
Securities which are backed by receivables from motor vehicle installment sales
contracts or installment loans secured by motor vehicles ("Automobile
Receivable Securities"). Since installment sales contracts for motor vehicles
or installment loans related thereto ("Automobile Contracts") typically have
shorter durations and lower incidences of prepayment, Automobile Receivable
Securities generally will exhibit a shorter average life and are less
susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities create an
enforceable interest in their respective Automobile Contracts only by filing a
financing statement and by having the servicer of the Automobile Contracts,
which is usually the originator of the Automobile Contracts, take custody
thereof. In such circumstances, if the servicer of the Automobile Contracts were
to sell the same Automobile Contracts to another party, in violation of its
obligation not to do so, there is a risk that such party could acquire an
interest in the Automobile Contracts superior to that of the holders of
Automobile Receivable Securities. Also although most Automobile Contracts grant
a security interest in the motor vehicle being financed, in most states the
security interest in a motor vehicle must be noted on the certificate of title
to create an enforceable security interest against competing claims of other
parties. Due to the large number of vehicles involved, however, the certificate
of title to each vehicle financed, pursuant to the Automobile Contracts
underlying the Automobile Receivable Security, usually is not amended to reflect
the assignment of the seller's security interest for the benefit of the holders
of the Automobile Receivable Securities. Therefore, there is the possibility
that recoveries on repossessed collateral may not, in some case, be available to
support payments on the securities. In addition, various state and federal
securities laws give the motor vehicle owner the right to assert against the
holder of the owner's Automobile Contract certain defenses such owner would have
against the seller of the motor vehicle. The assertion of such defenses could
reduce payments on the Automobile Receivable Securities.
Credit Card Receivable Securities. A Portfolio may invest in Asset Backed
Securities backed by receivables from revolving credit card agreements ("Credit
Card Receivable Securities"). Credit balances on revolving credit card
agreements ("Accounts") are generally paid down more rapidly than the
Automobile Contracts. Most of the Credit Card Receivable Securities issued
publicly to date have been Pass-Through Certificates. In order to lengthen the
maturity of Credit Card Receivable Securities, most such securities provide for
a fixed period during which only interest payments on the underlying Accounts
are passed through to the security holder and principal payments received on
such Accounts are used to fund the transfer to the pool of assets supporting the
related Credit Card Receivable Securities of additional credit card charges made
on an Account. The initial fixed period usually may be shortened upon the
occurrence of specified events which signal a potential deterioration in the
quality of the assets backing the security, such as the imposition of a cap on
interest rates. The ability of the issuer to extend the life of an issue of
Credit Card Receivables Securities thus depends upon the continued generation of
additional principal amounts in the underlying accounts during the initial
period and non-occurrence of specified events. An acceleration in cardholders'
payment rates or any other event which shortens the period during which
additional credit card charges on an Account may be transferred to the pool of
assets supporting the related Credit Card
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Receivable Security could shorten the weighted average life and yield of the
Credit Card Receivable Security.
Credit cardholders are entitled to the protection of a number of state and
federal consumer credit laws, many of which give such holder the right to set
off certain amounts against balances owed on the credit card, thereby reducing
amounts paid on Accounts. In addition, unlike most other Asset Backed
Securities, Accounts are unsecured obligations of the cardholder.
Other Assets. The Sub-Advisers anticipate that Asset Backed Securities backed
by assets other than those described above will be issued in the future. A
Portfolio may invest in such securities in the future if such investment is
otherwise consistent with its investment objective and policies.
There are, of course, other types of securities that are, or may become,
available, which are similar to the foregoing.
U.S. Government Securities. U.S. Government securities consist of various
types of marketable securities issued by the U.S. Treasury, i.e., bills, notes
and bonds. Such securities are direct obligations of the U.S. Government and
differ mainly in the lengths of their maturities. Treasury bills, the most
frequently issued marketable government security, have a maturity of up to one
year and are issued on a discount basis.
Securities issued or guaranteed as to principal and interest by the U.S.
Government may be acquired by a Portfolio in the form of separately traded
principal and interest components of securities issued or guaranteed by the U.S.
Treasury. The principal and interest components of selected securities are
currently traded independently under the Separate Trading of Registered Interest
and Principal of Securities ("STRIPS") program. Under the STRIPS program, the
principal and interest components are individually numbered and separately
issued by the U.S. Treasury at the request of depository financial institutions,
which then trade the component parts independently. The interest and principal
payments on the U.S. Treasury securities underlying STRIPS are direct
obligations of the U.S. Government.
Bank Money Investments. Bank money investments include but are not limited to
certificates of deposit, bankers' acceptances and time deposits. Certificates of
deposit are generally short-term (i.e., less than one year), interest-bearing
negotiable certificates issued by commercial banks or savings and loan
associations against funds deposited in the issuing institution. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods). A bankers' acceptance may be obtained
from a domestic or foreign bank including a U.S. branch or agency of a foreign
bank. The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. Time deposits are nonnegotiable deposits
for a fixed period of time at a stated interest rate. A Portfolio will not
invest in any such bank money investment unless the investment is issued by a
U.S. bank that is a member of the Federal Deposit Insurance Corporation
("FDIC"), including any foreign branch thereof, a U.S. branch or agency of a
foreign bank, or a savings bank or savings and loan association that is a member
of the FDIC and which at the date of investment has capital, surplus and
undivided profits (as of the date of its most recently published financial
statements) in excess of $1 billion. A Portfolio will not invest in time
deposits maturing in more than seven days and will not invest more than 10% of
its total assets in time deposits maturing in two to seven days.
U.S. branches and agencies of foreign banks are offices of foreign banks and
are not separately incorporated entities. They are chartered and regulated
either federally or under state law. U.S. federal branches or agencies of
foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however, not
all such branches elect FDIC insurance. Unlike U.S. branches of foreign banks,
U.S. agencies of foreign banks may not accept deposits
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and thus are not eligible for FDIC insurance. Both branches and agencies can
maintain credit balances, which are funds received by the office incidental to
or arising out of the exercise of their banking powers and can exercise other
commercial functions, such as lending activities.
Short-Term Corporate Debt Instruments. Short-term corporate debt instruments
include commercial paper to finance short-term credit needs (i.e., short-term,
unsecured promissory notes) issued by corporations including but not limited to
(a) domestic or foreign bank holding companies or (b) their subsidiaries or
affiliates where the debt instrument is guaranteed by the bank holding company
or an affiliated bank or where the bank holding company or the affiliated bank
is unconditionally liable for the debt instrument. Commercial paper is usually
sold on a discounted basis and has a maturity at the time of issuance not
exceeding nine months.
Commercial paper investments at the time of purchase will be rated A by S&P or
Prime by Moody's, or, if not rated, issued by companies having an outstanding
long-term unsecured debt issue rated at least A by S&P or by Moody's. The money
market investments in corporate bonds and debentures (which must have maturities
at the date of settlement of one year or less) must be rated at the time of
purchase at least A by S&P or by Moody's.
Commercial Paper Ratings. Commercial paper rated A (highest quality) by S&P is
issued by entities which have liquidity ratios which are adequate to meet cash
requirements. Long-term senior debt is rated A or better, although in some cases
BBB credits may be allowed. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry. The
reliability and quality of management are unquestioned. The relative strength or
weakness of the above factors determines whether the issuer's commercial paper
is rated A-1, A-2 or A-3. (Those A-1 issues determined to possess overwhelming
safety characteristics are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the following:
evaluation of the management of the issuer; economic evaluation of the issuer's
industry or industries and an appraisal of speculative-type risks which may be
inherent in certain areas; evaluation of the issuer's products in relation to
competition and customer acceptance; liquidity; amount and quality of long-term
debt; trend of earnings over a period of 10 years; financial management of
obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. These factors are all
considered in determining whether the commercial paper is rated Prime-1, Prime-2
or Prime-3.
In the event the lowering of ratings of a Portfolio's portfolio holdings by
applicable rating agencies results in a material decline in the overall quality
of the Portfolio's portfolio, the Trustees will review the situation and take
such action as they deem in the best interests of such Portfolio's shareholders,
including, if necessary, changing the composition of the portfolio.
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DEBT SECURITIES RATINGS
STANDARD & POOR'S CORPORATION
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a
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bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The rating from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
SP-1: Notes rated SP-1 are of the highest quality with very strong or strong
capacity to pay principal and interest. Issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
SP-2: Notes rated SP-2 are of high quality with satisfactory capacity to pay
principal and interest.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance or
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
1, 2 or 3: The ratings from Aa through B may be modified by the addition of a
numeral indicating a bond's rank within its rating category.
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MIG-1: Notes bearing this designation are the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
MIG-2: Notes bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
INVESTMENT RESTRICTIONS
GNA ADJUSTABLE RATE PORTFOLIO
The Trust has adopted the following investment restrictions for the Adjustable
Rate Portfolio. Restrictions 1, 2, 14, 15 and 18 may not be changed without
approval of the holders of a majority of the Adjustable Rate Portfolio's
outstanding shares as defined by the 1940 Act. The other investment restrictions
may be changed by the Trustees without a vote of the shareholders. So long as
these restrictions are in effect, the Adjustable Rate Portfolio may not:
1. Purchase more than 10% of any class of securities of any one issuer
(except securities issued or guaranteed by the U.S. Government, its agencies
and instrumentalities).
2. Invest more than 5% of its total assets in the securities of any one
issuer (except securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities and options thereon) or in securities of
issuers (including predecessors) with less than three years of continuous
operations except in the case of debt securities rated BBB or higher by S&P or
Baa or higher by Moody's, and except that this restriction shall not apply to
investments in securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities.
3. Purchase or sell commodities (other than the options and futures
contracts described in the Prospectus and Statement of Additional Information)
or real estate (other than securities secured by real estate or interests
therein, or issued by entities which invest in real estate or interests
therein), but it may lease office space for its own use and invest up to 5% of
its assets in publicly held real estate investment trusts.
4. Borrow amounts in excess of 10% of its total assets and then only as a
temporary measure for extraordinary or emergency purposes. This restriction
shall not prohibit entry into reverse repurchase agreements if as a result the
Portfolio's current obligations under such agreements would not exceed one-
third of the current market value of its total assets (less its liabilities
other than under reverse repurchase agreements).
5. Make loans, except that this restriction shall not prohibit the purchase
and holding of a portion of an issue of publicly distributed debt securities,
the lending of portfolio securities (not more than 5 percent of the
Portfolio's net assets) and the entry into repurchase agreements (not more
than one-third of the current market value of the Adjustable Rate Portfolio's
total assets shall constitute secured "loans" by the Adjustable Rate
Portfolio under repurchase agreements).
6. Engage in the business of underwriting securities of others, except that
the Trust may be deemed to be an underwriter under the Securities Act of 1933,
as amended, when it purchases or sells portfolio securities.
7. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.
8. Purchase securities of any other investment company, except in the open
market in a transaction
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involving no commission or profit to a sponsor or dealer (other than the
customary brokerage commission) and only to the extent of 10% of its assets or
as part of a merger, consolidation, reorganization, or acquisition of
assets.
9. Invest in or retain the securities of any issuer, if, to the knowledge
of the Trust, the officers and trustees of the Trust who individually own in
excess of 1/2 of 1% of the issuer's securities own more than 5% of such
securities in the aggregate.
10. Invest in securities which are not registered under the Securities Act
of 1933, as amended, or the marketability of which is restricted including
securities restricted as to resale (limited to 5% of total assets), if as a
result, more than 10% of its total assets would consist of such securities;
provided, however, that this restriction shall not apply to securities which
are not required to be registered under the Securities Act of 1933, as
amended, or to repurchase agreements having less than seven days to maturity,
reverse repurchase agreements, firm commitment agreements, and futures
contracts and options thereon.
11. Purchase securities on margin, except any short-term credits which may
be necessary for the clearance of transactions and the initial or maintenance
margin in connection with options and futures contracts and related
options.
12. Make short sales of securities, unless the Adjustable Rate Portfolio
owns an equal amount of the securities or securities convertible into or
exchangeable without further consideration for securities of the same issue as
the securities sold short; provided that this restriction shall not prohibit
the use of options and futures contracts for hedging purposes.
13. Invest more than 25% of its total assets in any one industry
(except U.S. Government Securities).
14. Issue senior securities, as defined in the 1940 Act, except as
permitted by Section 18(f)(2) of that Act and the rules under such Act, as
set forth herein, or as permitted by an SEC exemptive order.
15. Change the nature of its business so as to cease to be an investment
company.
16. Conduct arbitrage transactions (provided that investments in futures
and options for hedging purposes shall not be deemed arbitrage
transactions).
17. Invest in oil, gas or other mineral leases or exploration or
development programs (provided that the Portfolio may invest in securities
issued by or which are based, directly or indirectly, on the credit of
companies which invest in or sponsor such programs).
18. Invest more than 5% of its total assets in warrants of all types, or
more than 2% of its total assets in warrants other than warrants attached to
other securities.
19. Invest in securities of foreign issuers other than through ADRs.
20. Invest in real estate limited partnership.
21. Purchase any security while borrowings representing more than 5% of the
Portfolio's net assets (including loans, reverse repurchase agreements,
forward rolls or other borrowings) are outstanding.
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GNA GOVERNMENT PORTFOLIO
The Trust has adopted the following investment restrictions for the Government
Portfolio. Restrictions 2, 3, 4, 6, 14, 15 and 16 may not be changed without
approval of the holders of a majority of the Government Portfolio's outstanding
shares as defined by the 1940 Act. The other investment restrictions may be
changed by the Trustees without a vote of the shareholders. So long as these
restrictions are in effect, the Portfolio may not:
1. Purchase more than 10% of any class of securities of any one issuer
(except U.S. Government Securities as defined in the Government Portfolio
Prospectus).
2. Invest more than 5% of its total assets in the securities of any one
issuer (except U.S. Government Securities and options thereon) or in
securities of issuers (other than issuers of U.S. Government Securities) with
less than three years of continuous operations.
3. Purchase or sell commodities (other than the options and interest rate
futures contracts described in the Prospectus and Statement of Additional
Information) or real estate (other than securities secured by real estate or
interests therein, or issued by entities which invest in real estate or
interests therein), but it may lease office space for its own use and invest
up to 5% of its assets in publicly held real estate investment trusts.
4. Borrow amounts in excess of 10% of its total assets and then only as a
temporary measure for extraordinary or emergency purposes. This restriction
shall not prohibit entry into reverse repurchase agreements if as a result the
Portfolio's current obligations under such agreements would not exceed one-
third of the current market value of its total assets (less its liabilities
other than under reverse repurchase agreements).
5. Make loans, except that this restriction shall not prohibit the purchase
and holding of a portion of an issue of publicly distributed debt securities,
the lending of portfolio securities (not more than 5 percent of the
Portfolio's net assets) and the entry into repurchase agreements (not more
than one-third of the current market value of the Portfolio's total assets
shall constitute secured "loans" by the Portfolio under repurchase
agreements).
6. Engage in the business of underwriting securities of others, except that
the Trust may be deemed to be an underwriter under the Securities Act of 1933,
as amended, when it purchases or sells portfolio securities.
7. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.
8. Purchase securities of any other investment company, except in the open
market in a transaction involving no commission or profit to a sponsor or
dealer (other than the customary brokerage commission) and only to the extent
of 10% of its assets or as part of a merger, consolidation, reorganization, or
acquisition of assets.
9. Participate on a joint or joint and several basis in any securities
trading account; provided, however, that combining or ''bunching'' of the
orders of other accounts under the investment management of the Adviser shall
not be considered participation in a joint securities trading account;
10. Invest in or retain the securities of any issuer, if, to the knowledge
of the Trust, the officers and trustees of the Trust who individually own in
excess of 1/2 of 1% of the issuer's securities own more than 5% of such
securities in the aggregate.
11. Invest in securities which are not registered under the Securities Act
of 1933, as amended, or the
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marketability of which is restricted, if as a result, more than 10% of its
total assets would consist of such securities; provided, however, that this
restriction shall not apply to securities which are not required to be
registered under the Securities Act of 1933, as amended, or to repurchase
agreements having less than seven days to maturity, reverse repurchase
agreements, firm commitment agreements, and futures contracts and options
thereon.
12. Purchase securities on margin, except any short-term credits which may
be necessary for the clearance of transactions and the initial or maintenance
margin in connection with options and futures contracts and related
options.
13. Make short sales of securities, unless the Portfolio owns an equal
amount of the securities or securities convertible into or exchangeable
without further consideration for securities of the same issue as the
securities sold short.
14. Invest more than 25% of its total assets in any one industry (except
U.S. Government Securities).
15. Issue senior securities, as defined in the 1940 Act, except as
permitted by Section 18(f)(2) of that Act and the rules under such Act, as set
forth herein, or as permitted by an SEC exemptive order.
16. Change the nature of its business so as to cease to be an investment
company.
17. Invest in real estate limited partnerships.
18. Purchase any security while borrowings representing more than 5% of the
Portfolio's net assets (including loans, reverse repurchase agreements or
other borrowings) are outstanding.
GNA VALUE PORTFOLIO
The Trust has adopted the following investment restrictions for the Value
Portfolio. Restrictions 1, 2, 14, 15 and 18 may not be changed without approval
of the holders of a majority of the Value Portfolio's outstanding shares as
defined by the 1940 Act. The other investment restrictions may be changed by the
Trustees without a vote of the shareholders. So long as these restrictions are
in effect, the Value Portfolio may not:
1. Purchase more than 5% of any class of securities of any one issuer
(except securities issued or guaranteed by the U.S. Government, its agencies
and instrumentalities).
2. Invest more than 5% of its total assets in the securities of any one
issuer (except securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities and options thereon) or in securities of
issuers (including predecessors) with less than three years of continuous
operations except in the case of debt securities rated BBB or higher by S&P or
Baa or higher by Moody's, and except that this restriction shall not apply to
investments in securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities.
3. Purchase or sell commodities (other than the options and futures
contracts described in the Prospectus and Statement of Additional Information)
or real estate (other than securities secured by real estate or interests
therein, or issued by entities which invest in real estate or interests
therein), but it may lease office space for its own use and invest up to 5% of
its assets in publicly held real estate investment trusts.
4. Borrow amounts in excess of 10% of its total assets and then only as a
temporary measure for extraordinary or emergency purposes. This restriction
shall not prohibit entry into reverse repurchase agreements if as a result the
Portfolio's current obligations under such agreements would not exceed one-
third
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of the current market value of its total assets (less its liabilities other
than under reverse repurchase agreements).
5. Make loans, except that this restriction shall not prohibit the purchase
and holding of a portion of an issue of publicly distributed debt securities,
the lending of portfolio securities (not more than 5 percent of the
Portfolio's net assets) and the entry into repurchase agreements (not more
than one-third of the current market value of the Value Portfolio's total
assets shall constitute secured "loans" by the Value Portfolio under
repurchase agreements).
6. Engage in the business of underwriting securities of others, except that
the Trust may be deemed to be an underwriter under the Securities Act of 1933,
as amended, when it purchases or sells portfolio securities.
7. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.
8. Purchase securities of any other investment company, except in the open
market in a transaction involving no commission or profit to a sponsor or
dealer (other than the customary brokerage commission) and only to the extent
of 10% of its assets or as part of a merger, consolidation, reorganization, or
acquisition of assets.
9. Invest in or retain the securities of any issuer, if, to the knowledge
of the Trust, the officers and trustees of the Trust who individually own in
excess of 1/2 of 1% of the issuer's securities own more than 5% of such
securities in the aggregate.
10. Invest in securities which are not registered under the Securities Act
of 1933, as amended, or the marketability of which is restricted including
securities restricted as to resale (limited to 5% of total assets), if as a
result, more than 10% of its total assets would consist of such securities;
provided, however, that this restriction shall not apply to securities which
are not required to be registered under the Securities Act of 1933, as
amended, or to repurchase agreements having less than seven days to maturity,
reverse repurchase agreements, firm commitment agreements, and futures
contracts and options thereon.
11. Purchase securities on margin, except any short-term credits which may
be necessary for the clearance of transactions and the initial or maintenance
margin in connection with options and futures contracts and related options.
12. Make short sales of securities, unless the Value Portfolio owns an
equal amount of the securities or securities convertible into or exchangeable
without further consideration for securities of the same issue as the
securities sold short; provided that this restriction shall not prohibit the
use of options and futures contracts for hedging purposes.
13. Invest more than 20% of its total assets in any one industry (except
U.S. Government Securities).
14. Issue senior securities, as defined in the 1940 Act, except as
permitted by Section 18(f)(2) of that Act and the rules under such Act, as set
forth herein, or as permitted by an SEC exemptive order.
15. Change the nature of its business so as to cease to be an investment
company.
16. Conduct arbitrage transactions (provided that investments in futures
and options for hedging purposes shall not be deemed arbitrage transactions).
17. Invest in oil, gas or other mineral leases or exploration or
development programs (provided that the
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Portfolio may invest in securities issued by or which are based, directly or
indirectly, on the credit of companies which invest in or sponsor such
programs).
18. Invest more than 5% of its total assets in warrants of all types, or
more than 2% of its total assets in warrants other than warrants attached to
other securities.
19. Invest in securities of foreign issuers other than through ADRs.
20. Invest in real estate limited partnerships.
21. Purchase any security while borrowings representing more than 5% of the
Portfolio's net assets (including loans, reverse repurchase agreements or
other borrowings) are outstanding.
GNA GROWTH PORTFOLIO
The Trust has adopted the following investment restrictions for the Growth
Portfolio. Restrictions 1, 2, 14, 15 and 18 may not be changed without approval
of the holders of a majority of the Growth Portfolio's outstanding shares as
defined by the 1940 Act. The other investment restrictions may be changed by the
Trustees without a vote of the shareholders. So long as these restrictions are
in effect, the Growth Portfolio may not:
1. Purchase more than 10% of any class of securities of any one issuer
(except securities issued or guaranteed by the U.S. Government, its agencies
and instrumentalities).
2. Invest more than 5% of its total assets in the securities of any one
issuer (except securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities and options thereon) or in securities of
issuers (including predecessors) with less than three years of continuous
operations except in the case of debt securities rated BBB or higher by S&P or
Baa or higher by Moody's, and except that this restriction shall not apply to
investments in securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities.
3. Purchase or sell commodities (other than the options and futures
contracts described in the Prospectus and Statement of Additional Information)
or real estate (other than securities secured by real estate or interests
therein, or issued by entities which invest in real estate or interests
therein), but it may lease office space for its own use and invest up to 5% of
its assets in publicly held real estate investment trusts.
4. Borrow amounts in excess of 10% of its total assets and then only as a
temporary measure for extraordinary or emergency purposes. This restriction
shall not prohibit entry into reverse repurchase agreements if as a result the
Portfolio's current obligations under such agreements would not exceed one-
third of the current market value of its total assets (less its liabilities
other than under reverse repurchase agreements).
5. Make loans, except that this restriction shall not prohibit the purchase
and holding of a portion of an issue of publicly distributed debt securities,
the lending of portfolio securities (not more than 5 percent of the
Portfolio's net assets) and the entry into repurchase agreements (not more
than one-third of the current market value of the Growth Portfolio's total
assets shall constitute secured "loans" by the Growth Portfolio under
repurchase agreements).
6. Engage in the business of underwriting securities of others, except that
the Trust may be deemed to be an underwriter under the Securities Act of 1933,
as amended, when it purchases or sells portfolio securities.
7. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do
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so where it is deemed advisable to protect or enhance the value of an existing
investment.
8. Purchase securities of any other investment company, except in the open
market in a transaction involving no commission or profit to a sponsor or
dealer (other than the customary brokerage commission) and only to the extent
of 10% of its assets or as part of a merger, consolidation, reorganization, or
acquisition of assets.
9. Invest in or retain the securities of any issuer, if, to the knowledge
of the Trust, the officers and trustees of the Trust who individually own in
excess of 1/2 of 1% of the issuer's securities own more than 5% of such
securities in the aggregate.
10. Invest in securities which are not registered under the Securities Act
of 1933, as amended, or the marketability of which is restricted including
securities restricted as to resale (limited to 5% of total assets), if as a
result, more than 10% of its total assets would consist of such securities;
provided, however, that this restriction shall not apply to securities which
are not required to be registered under the Securities Act of 1933, as
amended, or to repurchase agreements having less than seven days to maturity,
reverse repurchase agreements, firm commitment agreements, and futures
contracts and options thereon.
11. Purchase securities on margin, except any short-term credits which may
be necessary for the clearance of transactions and the initial or maintenance
margin in connection with options and futures contracts and related
options.
12. Make short sales of securities, unless the Growth Portfolio owns an
equal amount of the securities or securities convertible into or exchangeable
without further consideration for securities of the same issue as the
securities sold short; provided that this restriction shall not prohibit the
use of options and futures contracts for hedging purposes.
13. Invest more than 25% of its total assets in any one industry (except
U.S. Government Securities).
14. Issue senior securities, as defined in the 1940 Act, except as
permitted by Section 18(f)(2) of that Act and the rules under such Act, as set
forth herein, or as permitted by an SEC exemptive order.
15. Change the nature of its business so as to cease to be an investment
company.
16. Conduct arbitrage transactions (provided that investments in futures
and options for hedging purposes shall not be deemed arbitrage
transactions).
17. Invest in oil, gas or other mineral leases or exploration or
development programs (provided that the Portfolio may invest in securities
issued by or which are based, directly or indirectly, on the credit of
companies which invest in or sponsor such programs).
18. Invest more than 5% of its total assets in warrants of all types, or
more than 2% of its total assets in warrants other than warrants attached to
other securities.
19. Invest in securities of foreign issuers other than through U.S. dollar
denominated American Depository Receipts ("ADRs").
20. Invest in real estate limited partnerships.
21. Purchase any security while borrowings representing more than 5% of the
Portfolio's net assets (including loans, reverse repurchase agreements or
other borrowings) are outstanding.
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PERCENTAGE LIMITATIONS
In connection with the investment restrictions of each Portfolio, all
percentage limitations apply only at the time a transaction is entered.
Accordingly, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in the percentage which results from a
relative change in values or from a change in a Portfolio's net assets will not
be treated as a violation. Under the 1940 Act, each Portfolio will be required
to maintain an asset coverage of at least 300% for borrowings from a bank. In
the event that such asset coverage is below 300%, the Portfolio will be required
to reduce the amount of its borrowings to obtain 300% asset coverage, within
three days (not including Sundays and holidays) or such longer period as the
rules and regulations of the SEC prescribe.
PORTFOLIO TRANSACTIONS
It is the general policy of the Portfolios, the Adviser and the Sub-Advisers
not to employ any broker in the purchase or sale of securities for any
Portfolio's portfolio unless the Adviser or a Sub-Adviser believes that the
broker will obtain the best results for the Portfolio, taking into consideration
such relevant factors as price, the ability of the broker to effect the
transaction and the broker's facilities, reliability and financial
responsibility. Commission rates, being a component of price, are considered
together with such factors.
U.S. Government Securities and municipal securities are traded primarily in
the over-the-counter market. Transactions in the over-the-counter market are
generally principal transactions with dealers and the costs of such transactions
involve dealer spreads rather than brokerage commissions. With respect to any
over-the-counter transactions, the Adviser or relevant Sub-Adviser, where
possible, deals directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution are
available elsewhere.
Under the 1940 Act, persons affiliated with the Trust are prohibited from
dealing with the Trust as a principal in the purchase and sale of securities.
Since transactions in the over-the-counter market usually involve transactions
with dealers acting as principal for their own account, affiliated persons of a
Portfolio may not serve as such Portfolio's dealer in connection with such
transactions. However, affiliated persons of the Trust, including Value Line
Securities, Inc. ("Value Line Securities"), an affiliate of the Growth
Portfolio's Sub-Adviser, may serve as a broker in transactions for a Portfolio
conducted on an exchange or over-the-counter transactions conducted on an agency
basis. The Adviser is affiliated with the following broker/dealers: GE Capital
Corp., Capital Markets Group, Inc., Polaris Securities Corp., Kidder Peabody &
Company, Inc., GE Investment Services, Inc., GNA Securities, Inc., GNA
Distributors, Inc., and Forth Financial Securities Corp. The Sub-Advisers have
been instructed not to engage in transactions with the Adviser's affiliated
broker/dealers. The Trust is not obligated to deal with any broker or group of
brokers in the execution of transactions in portfolio securities.
The commission rate on all exchange orders is subject to negotiation. Section
17(e) of the 1940 Act limits to "the usual and customary broker's commission"
the amount which can be paid by the Trust to an affiliated person acting as
broker in connection with transactions effected on a securities exchange. The
Trustees of the Trust, including a majority of the Trustees who are not
"interested persons" of the Trust, the Adviser, or the Sub-Advisers, have
adopted procedures designed to comply with the requirements of Section 17(e) and
Rule 17e-1 of the 1940 Act if an affiliated person acts as such a broker, to
ensure a broker's commission that is "reasonable and fair compared to the
commission, fee or other remuneration received by other brokers in connection
with comparable transactions involving similar securities being purchased or
sold on a securities exchange during a comparable period of time . . . ."
A transaction will not be placed with any affiliated party if a Portfolio
would have to pay a commission rate less favorable than such affiliated party's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers except for accounts for which the affiliated party
acts as a clearing broker for another brokerage firm, and any customers of the
affiliated party determined by a majority of the Trustees who are not
"interested persons" of the Trust, the Adviser, or such affiliated party not
to be comparable to the Trust.
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Since Value Line, Inc. as an affiliate of Value Line Securities, has, as a
Sub-Adviser to a Portfolio, the obligation to provide investment management
services, which include elements of research and related investment skills, such
research and related investment skills will not be used by Value Line Securities
as a basis for negotiating commissions at a rate higher than that determined in
accordance with the above criteria. When appropriate, orders for the account of
the Growth Portfolio may be combined with orders for the account of other funds
of which Value Line Securities is affiliated in order to obtain a more favorable
commission rate.
In selecting brokers to effect transactions on securities exchanges, each
Portfolio's Adviser or relevant Sub-Adviser considers the factors set forth in
the first paragraph under this heading and any investment information provided
by such brokers, subject to the criteria of Section 28(e) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Accordingly, if a
Portfolio's Adviser or relevant Sub-Adviser determines in good faith that the
amount of commissions charged by a broker is reasonable in relation to the value
of the brokerage and research services provided by such broker, such Adviser or
relevant Sub-Adviser may pay commissions to such broker in an amount greater
than the amount another firm might charge. Research services provided to a
Portfolio include research reports on particular industries and companies,
economic surveys and analyses, and recommendations as to specific securities.
From time to time brokerage for a Portfolio may be allocated on the basis of
sales of the shares of such Portfolio.
Each year, each Portfolio's Adviser or relevant Sub-Adviser will consider the
amount and nature of the research services provided by other brokers as well as
the extent to which such services provided by other brokers are relied upon, and
attempts to allocate a portion of the brokerage business of its clients, such as
the Portfolios, on the basis of that consideration. In addition, brokers
sometimes suggest a level of business they would like to receive in return for
the various services they provide. Actual brokerage business received by any
broker may be less than the suggested allocations, but can (and often does)
exceed the suggestions, because total brokerage is allocated on the basis of all
the considerations described above. In no instance is a broker excluded from
receiving business because it has not been identified as providing research
services. As permitted by Section 28(e), the investment information received
from other brokers may be used by the Adviser or relevant Sub-Adviser (and its
subsidiaries) in servicing all its accounts and not all such information may be
used by the Adviser or relevant Sub-Adviser in connection with the applicable
Portfolio. Nonetheless, the Portfolios believes that such investment information
provides the Portfolios with benefits by supplementing the research otherwise
available to the Trust.
The Growth Portfolio may employ Value Line Securities, as its principal broker
on exchange transactions. Section 11(a) of the Exchange Act provides that a
member firm of a national securities exchange (such as Value Line Securities)
may not effect transactions on such exchange for the account of an investment
company (such as the Trust) of which the member firm or its affiliate (such as
the Sub-Adviser) is the investment adviser. However, the SEC has adopted a rule,
Rule 11a2-2(T) (the "Rule"), which permits member firms which are subject to
Section 11(a) to effect exchange transactions otherwise prohibited by Section
11(a), provided such transactions are initiated from off the floor of the
exchange and are executed on the floor, or through use of the facilities of the
exchange, by another member which is not an "associated person" (as defined in
the Exchange Act) of the member firm which initiated the transaction. The Rule
also permits the initiating member to retain compensation in connection with
effecting such transactions if expressly so authorized in a written contract
with the investment company. The Growth Portfolio and Value Line Securities will
enter into such a contract if Value Line Securities is employed as such a
broker. Any such transactions effected by Value Line Securities on the NYSE for
the account of the Growth Portfolio, will be made in the manner prescribed by
the Rule. The Trust, of course, will continue to effect its portfolio
transactions in a manner consistent with the Exchange Act and the rules and
regulations thereunder.
Value Line Securities will furnish the Growth Portfolio, at least annually a
statement setting forth the total amount of all compensation retained by Value
Line Securities, or any associated person of Value Line Securities, in
connection with effecting transactions for the account of the Growth Portfolio,
and the Trustees of the Trust will review and approve all the Growth Portfolio's
portfolio transactions and the compensation received by Value Line
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<PAGE>
Securities, in connection therewith.
Value Line Securities will not knowingly participate in commissions paid by
the Growth Portfolio to other brokers or dealers and does not seek or knowingly
receive any reciprocal business as the result of the payment of such
commissions. In the event Value Line Securities at any time learns that it has
knowingly received reciprocal business, it will so inform the Trustees of the
Trust.
During the twelve month period ended December 31, 1995, the Government
Portfolio, Value Portfolio and Growth Portfolio paid $24, $5,435 and $9,684,
respectively, in brokerage commissions. No brokerage commissions were paid by
the Adjustable Rate Portfolio. There were no brokerage commissions paid to
affiliates of the Portfolios.
Subject to general supervision by the Trustees and the Adviser, all investment
decisions of each Portfolio are made by such Portfolio's Adviser or relevant
Sub-Adviser, which places orders for all purchases and sales of portfolio
securities for such Portfolio with brokers and dealers.
PORTFOLIO TURNOVER
In determining a Portfolio's portfolio turnover, securities (including
options) which have maturities at the time of acquisition of one year or less
("short-term securities") are excluded. The annual portfolio turnover rate is
calculated by dividing the lesser of the purchase or sales of portfolio
securities for the year by the monthly average of the value of the portfolio
securities owned by the Portfolio during the year. The monthly average is
calculated by totaling the values of the portfolio securities as of the
beginning and end of the first month of the year and as of the end of the
succeeding 11 months and dividing the sum by 13. A turnover rate of 100% would
occur if all of a Portfolio's portfolio securities (other than short-term
securities) were replaced once in a period of one year. It should be noted that
if a Portfolio were to write a substantial number of option contracts which are
exercised, the portfolio turnover rate of such Portfolio would increase.
The Government Portfolio anticipates that its annual portfolio turnover rate
will not exceed 200%. The Government Portfolio will trade its portfolio
securities without regard to the length of time for which they have been held.
The Growth Portfolio may trade in securities for short-term profits in order to
achieve its objective. The Growth Portfolio anticipates that its annual
portfolio turnover rate may exceed 100% but generally will not exceed 200%. It
is the policy of each of the Value Portfolio and the Adjustable Rate Portfolio
not to trade in securities with a view toward obtaining short term profits.
However, when circumstances warrant, such Portfolios may sell securities without
regard to the length of time held. The Value Portfolio anticipates that its
annual portfolio turnover rate may exceed 100% but generally will not exceed
175%. The Adjustable Rate Portfolio anticipates that it annual portfolio
turnover rate may exceed 100% but generally will not exceed 150%. A high
portfolio turnover rate in any year will increase brokerage commissions paid by
a fund and could result in higher expenses.
To the extent that its portfolio is traded for short-term market
considerations and turnover exceeds 100%, the annual portfolio turnover rate of
a Portfolio could be higher than most mutual funds.
No Portfolio will engage in short-term trading to an extent which would in the
opinion of the Trust's counsel disqualify the Trust as a regulated investment
company under Subchapter M of the Code.
PURCHASE AND REDEMPTION INFORMATION
The insurance company separate accounts may purchase and redeem shares of the
Portfolios on each day, Monday through Friday, on which the NYSE is open for
trading based on, among other things, the amount of premium payments to be
invested and surrendered and transfer requests to be effected on that day
pursuant to the variable contracts. The NYSE will be closed on the following
national business holidays: New Year's Day,
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<PAGE>
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas. Such purchases and redemptions of shares of each
Portfolio are effected at their respective net asset values per share determined
as of 4:00 p.m. on that day. Payment for redemptions are made by the Portfolios
within seven days thereafter. No fee is charged the separate accounts when they
purchase or redeem Portfolio shares.
The Portfolios may not suspend redemption privileges or postpone the date of
payment on shares of the Portfolios for more than seven days except during any
period (1) when the NYSE is closed or trading on the Exchange is restricted as
determined by the SEC; (2) when an emergency exists, as defined by the SEC,
which makes it not reasonably practicable for the Portfolio to dispose of
securities owned by it or fairly to determine the value of its assets; or (3) as
the SEC may otherwise permit.
The value of the shares on redemption may be more or less than the
shareholder's cost, depending upon the market value of the portfolio securities
at the time of redemption.
Reorganizations--In the event of mergers or reorganizations with other public
or private collective investment entities, including investment companies as
defined in the 1940 Act, a Portfolio may issue its shares at net asset value (or
more) to such entities or to their security holders.
NET ASSET VALUE
The net asset value per share of each Portfolio is determined as of 4:00 p.m.
Eastern time, Monday through Friday, exclusive of national business holidays on
which the NYSE is closed.
The following is a description of the procedures used by each Portfolio to
value assets. Net asset value per share is computed by taking the market value
of all assets of a Portfolio (including interest accrued but not collected),
less liabilities (including accrued expenses but excluding capital and surplus),
and dividing by the total number of shares of the Portfolio outstanding.
Portfolio securities for which market quotations are readily available are
stated at market value. A security (including an option) listed or traded on an
exchange or quoted on NASDAQ is valued at its last sale price prior to the time
when assets are valued. Lacking any sales on that day, the security is valued at
the mean between the current closing bid and asked prices. Other securities are,
in general, valued at the mean of the bid and asked quotations last quoted prior
to the time when assets are valued if there are market quotations readily
available, or in the absence of such market quotations, then at the fair value
thereof as determined by or under authority of the Trustees of the Trust
utilizing such pricing services as may be deemed appropriate. Investments in
certain long-term debt securities not traded in an organized market are valued
on the basis of valuations furnished by independent pricing services or
broker/dealers which utilize information with respect to market transactions and
other information in such securities or comparable securities. Securities
deemed restricted as to resale are valued at the fair value thereof as
determined by or in accordance with methods adopted by the Trustees of the
Trust.
Short-term debt instruments issued with a maturity of one year or less which
have a remaining maturity of 60 days or less are valued using the amortized cost
method, provided that during any period in which more than 25% of a Portfolio's
total assets is invested in short-term debt securities the current market value
of such securities will be used in calculating net asset value per share in lieu
of the amortized cost method.
The amortized cost method is used when the value obtained is fair value. Under
the amortized cost method of valuation, the security is initially valued at cost
on the date of purchase (or in the case of short-term debt instruments purchased
with more than 60 days remaining to maturity, the market value on the 61st day
prior to maturity), and thereafter a constant amortization to maturity of any
discount or premium is assumed regardless of the impact of fluctuating interest
rates on the market value of the security.
Generally, trading in mortgage-backed or other securities issued or guaranteed
by U.S. Government agencies
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<PAGE>
or instrumentalities is substantially completed each day at various times prior
to 4:15 P.M., Eastern time. The value of such securities used in computing the
net asset value of a Portfolio's shares are determined as of such times.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the time the Portfolio determines its
net asset value which will not be reflected in the computation of the
Portfolio's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value as determined in good faith by the Trustees.
CERTAIN TAX MATTERS
Shares of the Portfolios are currently offered only to insurance company
separate asset accounts that fund certain variable annuity contracts. See the
applicable Contract prospectus for a discussion of the special taxation of
insurance companies with respect to such accounts and of Contact holders.
FEDERAL TAXATION OF THE PORTFOLIOS--IN GENERAL
Each Portfolio intends to qualify and elect to be treated each taxable year as
a "regulated investment company" under Subchapter M of the Code. To so
qualify, a Portfolio must, among other things, (a) derive at least 90% of its
gross income from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) derive less than 30% of its
gross income from the sale or other disposition of any of the following which
was held less than three months (the "30% test"): (i) stock or securities;
(ii) options, futures or forward contracts (other than on foreign currencies);
or (iii) foreign currencies (or options, futures or forward contracts on foreign
currencies) but only if such currencies (or options, futures or forward
contracts) are not directly related to a Portfolio's principal business of
investing in stock or securities; and (c) satisfy certain diversification
requirements.
As noted in the Prospectus, each Portfolio must, and intends to continue to,
comply with the diversification requirements imposed by Section 817(h) of the
Internal Revenue Code and the regulations thereunder. These requirements, which
are in addition to the diversification requirements mentioned above, place
certain limitations on the proportion of each Portfolio's assets that may be
represented by any single investment (which includes all securities of the same
issuer).
As a regulated investment company, the Portfolios will not be subject to
federal income tax on its net investment income (including net short-term
capital gains) and net capital gain that it distributes to shareholders if at
least 90% of its net investment income and net short-term capital gains and net
tax-exempt income for the taxable year are distributed. However, if for any
taxable year any Portfolio does not satisfy the requirements of Subchapter M of
the Code, all of its taxable income will be subject to tax at regular corporate
rates without any deduction for distributions to shareholders, and such
distributions will be taxable to shareholders as ordinary income to the extent
of such Portfolio's current or accumulated earnings or profits.
A Portfolio will be liable for a nondeductible 4% excise tax on amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement. To avoid the tax, during each calendar year a Portfolio must
distribute (i) at least 98% of its ordinary income (not taking into account any
net tax-exempt income or capital gains or losses) for the calendar year, (ii) at
least 98% of its capital gain net income for the twelve month period ending on
October 31 (or December 31, if a Portfolio so elects), and (iii) any portion
(not taxed to a Portfolio) of the respective 2% undistributed balances from the
prior year. Each Portfolio intends to make sufficient distributions to avoid
this 4% excise tax.
A Portfolio's ability to make certain investments may be limited by provisions
of the Code that require inclusion of certain unrealized gains or losses in a
Portfolio's income for purposes of the 90% test, the 30% test, the excise tax
and the distribution requirements of the Code, and by provisions of the Code
that characterize certain
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<PAGE>
income or loss as ordinary income or loss rather than capital gain or loss. Such
recognition, characterization and timing rules generally apply to investments in
certain options, futures contracts and debt securities with original issue or
market discount.
TAXATION OF THE PORTFOLIOS' INVESTMENTS
Original Issue Discount. For federal income tax purposes, debt securities
purchased by a Portfolio may be treated as having original issue discount.
Original issue discount represents interest for federal income tax purposes and
can generally be defined as the excess of the stated redemption price at
maturity of a debt obligation over the issue price. Original issue discount is
treated for federal income tax purposes as income earned by a Portfolio, whether
or not any income is actually received, and therefore is subject to the
distribution requirements of the Code. Generally, the amount of original issue
discount is determined on the basis of a constant yield to maturity which takes
into account the compounding of accrued interest. Under Section 1286 of the
Code, an investment in a stripped bond or stripped coupon may result in original
issue discount.
Debt securities may be purchased by a Portfolio at a discount that exceeds the
original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time a Portfolio purchases the
securities. This additional discount represents market discount for income tax
purposes. In the case of any debt security issued after July 18, 1984, having a
fixed maturity date of more than one year from the date of issue and having
market discount, the gain realized on disposition will be treated as interest to
the extent it does not exceed the accrued market discount on the security
(unless a Portfolio elects to include such accrued market discount in income in
the tax year to which it is attributable). Generally, market discount is accrued
on a daily basis. A Portfolio may be required to capitalize, rather than deduct
currently, part or all of any direct interest expense incurred or continued to
purchase or carry any debt security having market discount, unless a Portfolio
makes the election to include market discount currently. Because each Portfolio
must include original issue discount in income, it will be more difficult for
such Portfolio to make the distributions required for such Portfolio to maintain
its status as a regulated investment company under Subchapter M of the Code or
to avoid the 4% excise tax described above.
Options and Futures Transactions. Certain of a Portfolio's investments may be
subject to provisions of the Code that (i) require inclusion of unrealized gains
or losses in a Portfolio's income for purposes of the 90% test, the 30% test,
the excise tax and the distribution requirements applicable to regulated
investment companies; (ii) defer recognition of realized losses; and (iii)
characterize both realized and unrealized gain or loss as short-term or long-
term gain or loss. Such provisions generally apply to, among other investments,
options on debt securities, indices on securities and futures contracts.
The foregoing is only a general summary of some of the important federal
income tax considerations generally affecting the Portfolios and their
shareholders. No attempt is made to present a complete explanation of the
federal tax treatment of the Portfolios' activities, and this discussion is not
intended as a substitute for careful tax planning. Accordingly, potential
investors are urged to consult their own tax advisers for more detailed
information and for information regarding any state, local or foreign taxes
applicable to the Portfolios and to dividends and other distributions therefrom.
MANAGEMENT OF THE TRUST
The Trustees and executive officers of the Trust and their principal
occupations during the past five years are set forth below. Unless otherwise
indicated, the business address of each is Suite 5600, Two Union Square, 601
Union Street, Seattle, Washington 98101.
<TABLE>
<CAPTION>
Principal Occupation(s)
Name Title During the Past Five Years
- ---- ----- --------------------------
<S> <C> <C>
Patrick E. Welch* (49) Trustee, Chairman of President, CEO and
the Board, President Director of GNA
and CEO Corporation
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Principal Occupation(s)
Name Title During the Past Five Years
- ---- ----- --------------------------
<S> <C> <C>
and its subsidiaries.
Formerly Executive V.P.
and COO of GNA Corporation
and its subsidiaries.
Trustee, Investors Trust.
Pierce T. Lindberg (72) Trustee Mr. Lindberg was
4501 Grandview Dr., Assistant Treasurer and
W #307T Director of Money
Tacoma, WA 98466 Management for
Weyerhaeuser Company
until his retirement in
1984. Trustee, Investors
Trust.
Edward R. McMillan (75) Trustee Investment consultant to
1600 Crista Shores Lane, several private concerns
#302 and is presently Vice
Silverdale, WA 98383 Chairman of the Seattle
Pacific University
Foundation and Member of
the Investment
Committee, Blue Cross of
Washington and Alaska.
Senior Vice President
and Chief Economist for
Rainier National Bank
until his retirement in
1983 and formerly a
Member of the Government
Securities Committee,
Public Securities
Association. Trustee,
Investors Trust.
Douglas H. Pedersen (48) Trustee Mr. Pedersen is a
13190 Phelps Road Seattle-based business
Bainbridge Island, WA 98110 economist and principal
of Pedersen &
Associates, a consulting
firm. Mr. Pedersen is
also co-publisher of
"The Puget Sound
Economic Forecaster," a
quarterly newsletter.
Formerly, Vice President
and Economist for
Security Pacific Bank.
Mr. Pedersen is a member
of the Governor's
Council of Economic
Advisors for Washington
State, a participant on
the Western Blue Chip
Economic Panel and past
President of the Seattle
Chapter of the National
Association of Business
Economists. He also
serves as a Director of
the Washington Research
Council. Trustee,
Investors Trust.
Victor C. Moses (48) Senior Vice President Senior Vice President
and Chief Actuary of GNA
Corporation and its
subsidiaries.
Geoffrey S. Stiff (44) Senior Vice Senior Vice President
President and and Chief Financial
Treasurer Officer and Treasurer of
GNA Corporation and its
subsidiaries.
</TABLE>
* Trustees who are interested persons as defined by the Investment Company Act
of 1940.
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<PAGE>
<TABLE>
<CAPTION>
Principal Occupation(s)
Name Title During the Past Five Years
- ---- ----- --------------------------
<S> <C> <C>
Edward J. Wiles, Jr. (48) Vice President & Vice President and
Secretary Counsel of GNA
Corporation and its
subsidiaries.
Charles A. Kaminski (47) Senior Vice President Senior Vice President,
GNA Securities, Inc.,
Great Northern Insured
Annuity Corporation,
General Electric
Capital Assurance
Corporation and GE
Capital Life Assurance
Company of New York.
Member of the
Washington Investment
Board. Former Director
and Senior Fixed Income
Portfolio Manager,
Baring America Asset
Management Company.
Thomas W. Casey (33) Vice President and Vice President and
Controller Controller, GNA
Corporation and its
subsidiaries. Formerly
Technical Adviser,
General Electric
Capital Corporation;
Assistant Vice
President, Citibank;
Supervisor, Coopers &
Lybrand, L.L.P.
</TABLE>
Messrs. Casey, Kaminski, Moses, Stiff, Welch and Wiles are all directors or
officers of the Adviser as well as the Trust.
No remuneration will be paid by the Trust to any Trustee or officer of the
Trust who is affiliated with the Adviser. The Trust maintains a policy of paying
all Trustees who are not "interested persons" of the Trust an annual fee of
$2,000 and a fee of $250 for attendance at each meeting of the Board of Trustees
plus reasonable expenses associated with their attendance at such meetings. The
Board of Trustees generally meets quarterly. The following table summarizes the
compensation paid to Trustees of the Trust for the calendar year ended December
31, 1995.
<TABLE>
<CAPTION>
Pension or Estimated Total
Aggregate Retirement Annual Compensation
Aggregate Compensation Benefits Accrued Benfits From
Compensation from As Part of Fund Upon Registrant and
Name of Trustee From Registrant Investors Trust Expenses Retirement Investors Trust
- --------------- --------------- --------------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Patrick E. Welch none none none none none
Edward R. McMillan $3,000 $6,500 none none $9,500
Pierce T. Lindberg $3,000 $6,500 none none $9,500
Douglas H. Pedersen $3,000 $6,500 none none $9,500
</TABLE>
To the best knowledge of the Trust, there are no persons owning 5% or more of
the outstanding shares of any Portfolio, except the GNA Variable Investment
Account of Great Northern Insured Annuity Corporation which currently holds 100%
of the shares of each of the Portfolios.
THE INVESTMENT ADVISER AND SUB-ADVISERS
INVESTMENT ADVISER
The investment adviser for each Portfolio is GNA Capital Management, Inc., a
Washington corporation (the "Adviser"), with offices at Two Union Square, 601
Union Street, Suite 5600, Seattle, Washington 98101-2336. The Adviser is a
registered investment advisory firm which maintains a securities research
department, the efforts of which will be made available to the Portfolios.
The Adviser is a wholly-owned subsidiary of GNA Corporation. GNA Corporation
also is the parent company of GNA Securities, Inc. and GNA Distributors, Inc.
GNA Corporation is a subsidiary of General Electric Capital Corporation. The
officers of the Adviser also manage the investments of seven affiliated
companies which had combined assets of approximately $21.7 billion as of
December 31, 1995.
The services provided to the Portfolios by the Adviser are described in the
Prospectus of each Portfolio.
The advisory fee, payable monthly by the Adjustable Rate Portfolio to the
Adviser, is based upon the
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<PAGE>
Adjustable Rate Portfolio's average daily net assets, and is equal to an annual
rate of .40% of the Adjustable Rate Portfolio's average daily net assets.
The advisory fee, payable monthly by the Government Portfolio to the Adviser,
is based upon the Government Portfolio's average daily net assets, and is equal
to an annual rate of .65% of the Government Portfolio's average daily net assets
if the combined average daily net assets of the Government Portfolio and the
Investors Trust Government Fund equals $500 million or less, .60% of the
Government Portfolio's average daily net assets if the combined average daily
net assets of the Government Portfolio and the Investors Trust Government Fund
is greater than $500 million and is equal to or less than $750 million, .55% of
the Government Portfolio's average daily net assets if the combined average
daily net assets of the Government Portfolio and the Investors Trust Government
Fund is greater than $750 million and is equal to or less than $1.25 billion,
.50% of the Government Portfolio's average daily net assets if the combined
average daily net assets of the Government Portfolio and the Investors Trust
Government Fund is greater than $1.25 billion and is equal to or less than $1.5
billion and .45% of the Government Portfolio's average daily net assets if the
combined average daily net assets of the Government Portfolio and the Investors
Trust Government Fund exceed $1.5 billion.
The advisory fee, payable monthly by the Value Portfolio to the Adviser, is
based upon the Value Portfolio's average daily net assets, and is equal to an
annual rate of .80% of the Value Portfolio's average daily net assets if the
combined average daily net assets of the Value Portfolio and the Investors Trust
Value Fund equals $100 million or less and .70% of the Value Portfolio's average
daily net assets if the combined average daily net assets of the Value Portfolio
and the Investors Trust Value Fund exceed $100 million.
The advisory fee, payable monthly by the Growth Portfolio to the Adviser, is
based upon the Growth Portfolio's average daily net assets, and is equal to an
annual rate of .80% of the first $100 million of the Growth Portfolio's average
daily net assets and .70% of the Growth Portfolio's average daily net assets in
excess of $100 million.
For the twelve month period ended December 31, 1995, the advisory fees
incurred for the Adjustable Rate Portfolio, Government Portfolio, Value
Portfolio and Growth Portfolio were $21,241; $31,935; $20,356; and $34,065,
respectively.
The Adviser has agreed to reimburse each Portfolio for expenses incurred to
the extent that such expenses exceed 0.70% for the Adjustable Rate Portfolio,
0.90% for Government Portfolio, 1.10% for the Value Portfolio and 1.10% for the
Growth Portfolio of the Portfolio's average daily net assets during the year
ended December 31, 1995. The expense reimbursement may be extended or modified
by the Adviser, and the expense reimbursement is currently extended to December
31, 1996. The expenses reimbursed for year ended December, 1995, for the
Adjustable Rate Portfolio, Government Portfolio, Value Portfolio and Growth
Portfolio were $71,422 ($0.346 per share), $68,821 ($0.311 per share), $70,275
($0.747 per share) and $75,721 ($0.380 per share), respectively. The
reimbursement for expenses by the Adviser is being offset by the payables to the
Adviser monthly.
GNA Capital Management, Inc. (the "Adviser"), Suite 5600, Two Union Square,
601 Union Street, Seattle, Washington 98101, a registered investment adviser,
acts as the portfolio manager of the Government Portfolio under an advisory
agreement with the Trust dated September 19, 1994. As portfolio manager, the
Adviser is responsible for the actual investment management of the Portfolio's
assets including the responsibility for making decisions and placing orders to
buy, sell or hold a particular security, under the general supervision of the
Board of Trustees.
Standish, Ayer & Wood, Inc. ("Standish"), One Financial Center, Boston,
Massachusetts 02111, a registered investment adviser, has been retained by the
Adviser to act as portfolio manger of the Adjustable Rate Portfolio under a sub-
advisory contract with the Adviser dated September 19, 1994. Standish acted as
investment adviser for total assets in excess of $29.0 billion as of December
31, 1995. As portfolio manager, Standish is responsible for the actual
investment management of the Adjustable Rate Portfolio's assets including the
responsibility for making decisions and placing orders to buy, sell or hold a
particular security, under the general supervision of the Adviser and the Board
of Trustees. Pursuant to the sub-advisory contract, the Adviser will
periodically review the investment activities of Standish, and the Adviser will
have the right to terminate the sub-advisory contract upon 60 days written
notice to the Standish.
Overall portfolio management strategy for the Adjustable Rate Portfolio is
determined by Standish under the supervision and direction of Dolores S.
Driscoll, a Managing Director of Standish. Ms. Driscoll had been employed by
Standish since 1974. Ms. Driscoll previously worked as a bond manager for Davis
L. Babson, Inc. Ms. Driscoll
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<PAGE>
holds a B.A. degree in Mathematics from Indiana University and an M.B.A degree
in Finance from Boston University and is a Chartered Financial Analyst.
For its services under its Sub-Advisory Agreement, Standish receives from the
Adviser a fee, payable monthly, based upon the Adjustable Rate Portfolio's
average daily net assets equal to an annual rate of .20% of the Adjustable Rate
Portfolio's average daily net assets.
Overall portfolio management strategy for the Government Portfolio is
determined by the Adviser under the supervision and direction of Charles A.
Kaminski, a Senior Vice President of the Adviser. Mr. Kaminski is also an
officer of Great Northern Insured Annuity Corporation, General Electric Capital
Assurance Company, GNA Securities, Inc., Investors Trust and the Trust. Mr.
Kaminski previously served as Vice President of Investments for the Adviser, and
prior to joining the Adviser in 1992 he was Vice President and Director of
Baring America Asset Management.
Mr. Kaminski holds B.S. and M.S. degrees in Electrical Engineering from the
Massachusetts Institute of Technology and an M.B.A. from the Harvard Business
School.
Duff & Phelps Investment Management Co. ("Duff & Phelps"), Suite 3800, 55
East Monroe Street, Chicago, Illinois 60603, a registered investment adviser,
has been retained by the Adviser to act as portfolio manager of the Value
Portfolio under a sub-advisory contract with Adviser dated September 19, 1994.
Duff & Phelps acted as investment adviser for total assets in excess of $42.0
billion as of December 31, 1995. Duff & Phelps is a wholly owned subsidiary of
Phoenix Duff & Phelps Corporation, which is itself a majority owned subsidiary
of Phoenix Home Life Mutual Insurance Company. As portfolio manager, Duff &
Phelps is responsible for the actual investment management of the Value
Portfolio's assets including the responsibility for making decisions and placing
orders to buy, sell or hold a particular security, under the general supervision
of the Adviser and the Board of Trustees. Pursuant to the sub-advisory contract,
the Adviser will periodically review the investment activities of Duff & Phelps,
and the Adviser will have the right to terminate the sub-advisory contract upon
60 days written notice to Duff & Phelps.
Overall portfolio management strategy for the Value Portfolio is determined by
Duff & Phelps under the supervision and direction of Carl F. Faust, an Executive
Vice President of Duff & Phelps and a member of its Investment Policy Committee.
Mr. Faust has been employed by Duff & Phelps since 1988. Mr. Faust previously
worked as an investment analyst with Harris Bank, followed by three years as the
Director of the Illinois State Board of Investment before joining First National
Bank of Chicago as Vice President and Director of Equity Research. He then
served as Vice President and Senior Account Manager for First Chicago Investment
Advisors just prior to joining Duff & Phelps. Mr. Faust holds a B.S. degree from
the University of Illinois and an M.B.A. degree from the Harvard Graduate School
of Business and is a Chartered Financial Analyst. He is a member and past
Director of the Investment Analysts Society of Chicago.
For its services under its Sub-Advisory Agreement, Duff & Phelps receives from
the Adviser a fee, payable monthly, based upon the Value Portfolio's average
daily net assets equal to an annual rate of .30% of the Value Portfolio's
average daily net assets if the combined average daily net assets of the Value
Portfolio and the Investors Trust Value Fund equal $100 million or less, and
.20% of the Value Portfolio's average daily net assets if combined average daily
net assets of the Value Portfolio and the Investors Trust Value Fund exceed $100
million.
Value Line, Inc. ("Value Line"), 711 Third Avenue, 8th Floor, New York, New
York 10017, a registered investment adviser, has been retained by the Adviser to
act as portfolio manager of the Growth Portfolio under a sub-advisory contract
with Adviser dated September 19, 1994. Value Line acted as investment adviser
for total assets of approximately $5.3 billion as of December 31, 1995. As
portfolio manager, Value Line is responsible for the actual investment
management of the Growth Portfolio's assets including the responsibility for
making decisions and placing orders to buy, sell or hold a particular security,
under the general supervision of the Adviser
68
<PAGE>
and the Board of Trustees. Pursuant to the sub-advisory contract, the Adviser
will periodically review the investment activities of Value Line, and the
Adviser will have the right to terminate the sub-advisory contract upon 60 days
written notice to Value Line.
Overall portfolio management strategy for the Growth Portfolio is determined
by committee. No person is primarily responsible for making recommendations to
the committee.
For its services under its Sub-Advisory Agreement, Value Line receives from
the Adviser a fee, payable monthly, based upon the Growth Portfolio's average
daily net assets equal to an annual rate of .45% of the Growth Portfolio's
average daily net assets.
From time to time certain of the states in which the shares of the Portfolio
are qualified for sale may impose limitations on the expenses of the Portfolios.
The Advisory Agreement provides that if, in any fiscal year, the total expenses
of any Portfolio (excluding taxes, distribution expenses, interest, brokerage
commissions and extraordinary items, but including the management fee) exceed
the expense limitations applicable to the Portfolios imposed by the securities
regulations of any state in which it is then registered to sell shares, the
Adviser will waive all or a portion of its annual investment advisory fee equal
to such excess. The Adviser is only required to reimburse the Portfolios for any
expenses which exceed state expense limitations up to the amount of advisory
fees paid or payable by such Portfolio during such fiscal year. Although there
is no certainty that these limitations will be in effect in the future, the most
restrictive of these limitations, in the states in which the Portfolio are to be
sold, on an annual basis currently is 2.5% of the first $30,000,000 of average
net assets of the Portfolio, 2.0% of the next $70,000,000 of average net assets,
and 1.5% of average net assets over $100,000,000.
The Advisory Agreement for the Trust and the Sub-Advisory Agreements for each
of the Adjustable Rate Portfolio, Value Portfolio and Growth Portfolio were
originally approved by all of the Trustees, including all of the Trustees who
are not parties to the Advisory Agreement or any such Sub-Advisory Agreement or
"interested persons" (as defined in the 1940 Act) of any such party on March
18, 1994, and were last approved by all of the Trustees, including all of the
Trustees who are not parties to the Advisory Agreement or such Sub-advisory
Agreements or "interested persons" of any such party, on March 15, 1996. The
Advisory Agreement for the Trust and the Sub-Advisory Agreements for each of the
Growth Portfolio, Value Portfolio and Adjustable Rate Portfolio were approved by
the sole shareholder of each such Portfolio on September 19, 1994. The Advisory
Agreement and Sub-Advisory Agreements will continue in effect for two years
following the date of their approval, and thereafter from year to year, provided
that their continuance is approved annually both (i) by the holders of a
majority of the outstanding voting securities of the applicable Portfolio or by
the Board of Trustees, and (ii) by a majority of the Trustees who are not
parties to the Advisory Agreement or any such Sub-Advisory Agreements or
"interested persons" of any such party. The Advisory Agreement and Sub-
Advisory Agreements may be terminated on sixty (60) days written notice by any
party and will terminate automatically if they are assigned.
PERFORMANCE INFORMATION
GENERAL
As described in the Prospectus, a Portfolio's historical performance or return
may be shown in the form of "average annual total return," "aggregate total
return" and "yield." These various measures of performance are described
below.
Average annual total return and aggregate total return measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments of a Portfolio.
Yield is a measure of the net investment income per share earned over a specific
one month or thirty (30) day period expressed as a percentage of the net asset
value.
69
<PAGE>
Calculation of a Portfolio's aggregate total return is not subject to a
standardized formula. Aggregate total return performance for a specific period
is calculated by first taking an investment in a Portfolio's shares on the first
day of the period at the offering price, which is the net asset value per share
("initial investment") and computing the "ending value" of that investment
at the end of the period. The aggregate total return percentage is then
determined by subtracting the initial investment from the ending value and
dividing the remainder by the initial investment and expressing the result as a
percentage. The calculation assumes that all income and capital gains dividends
by a Portfolio have been reinvested at net asset value on the reinvestment dates
during the period. Aggregate total return may also be shown as the increased
dollar value of the hypothetical investment over the period.
A Portfolio's performance quotations are based upon historical results and are
not necessarily representative of future performance. A Portfolio's shares are
sold at net asset value. Returns and net asset value will fluctuate. Factors
affecting a Portfolio's performance include general market conditions, operating
expenses and investment management. Any additional fees charged by a dealer or
other financial services firm would reduce the returns described in this
section. Shares of a Portfolio are redeemable at net asset value, which may be
more or less than original cost.
YIELD
Each Portfolio's 30-day yield figure described and shown below is calculated
according to a formula prescribed by the Securities and Exchange Commission. The
formula can be expressed as follows:
YIELD = 2[(a-b +1)/6/-1]
---
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends.
d = the net asset value per share on the last day of the period.
In computing the foregoing yield, each Portfolio follows certain standardized
accounting practices specified by Securities and Exchange Commission rules.
These practices are not necessarily consistent with those that a Portfolio uses
to prepare its interim and annual financial statements in accordance with
generally accepted accounting principles.
Yield information is useful in reviewing a Portfolio's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in the Portfolio's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is a function of the kind and quality of the instruments in a Portfolio's
portfolio, portfolio maturity, operating expenses and market conditions.
The annualized yield for each of the Adjustable Rate Portfolio and Government
Portfolio for the 30 days ended December 31, 1995 were 6.14%, and 6.13%,
respectively.
AVERAGE ANNUAL TOTAL RETURN
A Portfolio's "average annual total return" figures described and shown
below are computed according to a
70
<PAGE>
formula prescribed by the Securities and Exchange Commission. The formula can
be expressed as follows:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1000 payment made at the
beginning of the 1, 5, or 10 years (or other) periods at the end of
the 1, 5, or 10 years (or other) periods (or fractional portion
thereof);
The calculation is based on the further assumption that all dividends and
distributions by a Portfolio are reinvested at net asset value on the
reinvestment dates during the periods.
The average annual total return for the Adjustable Rate Portfolio, Government
Portfolio, Value Portfolio and Growth Portfolio for the twelve month period
beginning January 3, 1995 (commencement of operations) and ending December 31,
1995, was 11.5%, 16.0%, 27.7% and 33.4%, respectively.
The yield and average annual total return calculations include all recurring
expenses that are charged to all shareholder accounts. The yield and average
annual total return results do not take into account recurring and non-recurring
charges for optional services which only certain shareholders elect and which
involve nominal fees.
Yields and average annual total returns quoted for the Portfolio include the
effect of deducting the Portfolio's expenses, but may not include charges and
expenses attributable to any particular insurance product. Since shares of the
Portfolio may only be purchased through a variable annuity or variable life
contract, you should carefully review the prospectus of the insurance product
you have chosen for information on relevant charges and expenses. Excluding
these charges from quotations of the Portfolio's performance has the effect of
increasing the performance quoted. You should bear in mind the effect of these
charges when comparing the Portfolio's performance to that of other mutual
funds.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts 02109,
serves as the Trust's independent accountants, providing audit services
including (1) an audit of the annual financial statements, (2) assistance and
consultation in connection with SEC filings and (3) review of certain tax
matters filed on behalf of the Trust.
71
<PAGE>
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street
Bank and Trust Company is responsible for, among other things, safeguarding and
controlling the Portfolios' cash and securities and handling the receipt and
delivery of securities and investments. State Street Bank and Trust Company is
not an affiliate of the Adviser or its affiliates.
FINANCIAL STATEMENTS
The audited statement of assets and liabilities for each of the four
Portfolios of the Trust as of December 31, 1995, together with the related notes
thereto and report of independent accountants thereon are attached to this
Statement of Additional Information.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board
of Trustees of GNA Variable Series Trust:
We have audited the accompanying statements of assets and liabilities of each
of the series of GNA Variable Series Trust (in this report comprised of GNA
Adjustable Rate Portfolio, GNA Government Portfolio, GNA Growth Portfolio and
GNA Value Portfolio (the "Portfolios")), for the period January 3, 1995 (com-
mencement of operations) to December 31, 1995, and the related statements of
operations, the statements of changes in net assets and the financial high-
lights for the year then ended. These financial statements are the responsi-
bility of the Portfolios' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audit in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of De-
cember 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant esti-
mates made by management, as well as evaluating the overall financial state-
ment presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Portfolios enumerated above for the period January 3, 1995 (commencement of
operations) to December 31, 1995, the results of their operations, the changes
in their net assets and the financial highlights for the year then ended in
conformity with generally accepted accounting principles.
Boston, Massachusetts
February 12, 1996 [COOPERS & LYBREND LOGO APPEARS HERE]
================================================================================
72
<PAGE>
GNA VARIABLE SERIES TRUST - GNA ADJUSTABLE RATE PORTFOLIO
73 --------------------------------------------------------------------------
INVESTMENT PORTFOLIO
DECEMBER 31, 1995
<TABLE>
<CAPTION>
% OF NET PRINCIPAL MARKET
ASSETS AMOUNT ($) VALUE ($)
-------- ---------- ----------
<S> <C> <C> <C>
LONG-TERM GOVERNMENT SECURITIES 87.8
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
ADJUSTABLE RATE MORTGAGES (a)(b) - 36.4
5.000%, with various maturity dates to
October 20, 2024............................ 520,736 520,269
5.500%, with various maturity dates to August
20, 2025.................................... 859,926 867,958
6.000%, with various maturity dates to April
20, 2024.................................... 607,415 618,094
7.000%, with a maturity date of September 20,
2024........................................ 49,679 50,804
----------
Total Government National Mortgage Association
Adjustable Rate Mortgages
(Cost $1,904,041).......................... 2,057,125
----------
UNITED STATES TREASURY NOTES - 14.8
6.875%, with a maturity date of
August 31, 1999 (d)......................... 725,000 761,931
7.500%, with a maturity date of November 15,
2001........................................ 65,000 71,592
----------
Total United States Treasury Notes
(Cost $824,254)............................ 833,523
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
ADJUSTABLE RATE MORTGAGES (a)(b) - 14.7
7.009%, with a maturity date of
July 1, 2024................................ 233,661 240,561
7.497%, with a maturity date of November 1,
2024........................................ 401,045 412,575
7.654%, with a maturity date of November 1,
2024........................................ 174,830 175,534
----------
Total Federal National Mortgage Association
Adjustable Rate Mortgages
(Cost $795,688)............................ 828,670
----------
</TABLE>
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
GNA VARIABLE SERIES TRUST - GNA ADJUSTABLE RATE PORTFOLIO
- -------------------------------------------------------------------------- 74
DECEMBER 31, 1995, CONTINUED
<TABLE>
<CAPTION>
% OF NET PRINCIPAL MARKET
ASSETS AMOUNT ($) VALUE ($)
-------- ---------- ----------
<S> <C> <C> <C>
FEDERAL HOME LOAN MORTGAGE CORPORATION
ADJUSTABLE RATE MORTGAGES (a)(b) - 12.4
6.009%, with a maturity date of December 1,
1999........................................ 228,497 234,781
6.121%, with a maturity date of January 1,
2025........................................ 455,019 466,181
----------
Total Federal Home Loan Mortgage Corporation
Adjustable Rate Mortgages
(Cost $674,190)............................ 700,962
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION (a)(b) -
8.1
8.000%, with a maturity date of January 1,
2000
(Cost $453,297)............................ 453,139 456,252
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(a)(b) - 1.4
9.000%, with a maturity date of January 15,
1999 (c)
(Cost $80,180)............................. 75,000 79,453
----------
Total Long-Term Government Securities
(Cost $4,731,650).......................... 4,955,985
----------
ASSET-BACKED SECURITIES 10.9
Contimortgage Home Equity Loan, 6.860%, July
15, 2010
[Series 1995-3 Class A]..................... 225,000 228,445
EQCC Home Equity Loan Trust,
5.725%, December 15, 2008
[Series 1993-4 Class A]..................... 111,723 109,418
Equicon Loan Trust,
5.850%, November 18, 2012
[Series 1993-1]............................. 16,138 15,979
UCFC Loan Trust,
8.250%, April 10, 2016
[Series 1995-A Class 4]..................... 250,000 261,563
----------
Total Asset-Backed Securities
(Cost $611,921)............................ 615,405
----------
</TABLE>
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
GNA VARIABLE SERIES TRUST - GNA ADJUSTABLE RATE PORTFOLIO
75 -----------------------------------------------------------------------------
INVESTMENT PORTFOLIO
DECEMBER 31, 1995, CONTINUED
<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- --------- ----------
<S> <C> <C> <C>
MONEY MARKET MUTUAL FUNDS 2.5
The Seven Seas Series Money Market Fund [Class
A]........................................... 71,554 71,554
The Seven Seas Series US Government Money
Market Fund.................................. 70,521 70,521
----------
Total Money Market Mutual Funds
(Cost $142,075)............................. 142,075
----- ----------
SUMMARY
Total investment portfolio
(Cost $5,485,646) (Note 3).................. 101.2 5,713,465
Other assets and liabilities, net.............. (1.2) (65,487)
----- ----------
NET ASSETS...................................... 100.0 $5,647,978
===== ==========
</TABLE>
- ------------------------
NOTES:
(a) The investments in mortgage-backed securities are interests in separate
pools of mortgages. All such issues which have similar coupon rates have
been aggregated for financial statement presentation purposes.
(b) Effective maturities for these securities are expected to be shorter than
indicated due to prepayments.
(c) To be announced ("TBA" Forward Commitment Transactions) securities (see
Note 2).
(d) Segregated, in part, as collateral for TBA Securities (see Note 2).
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
GNA VARIABLE SERIES TRUST - GNA GOVERNMENT PORTFOLIO
- -------------------------------------------------------------------------- 76
INVESTMENT PORTFOLIO
DECEMBER 31, 1995
<TABLE>
<CAPTION>
% OF NET PRINCIPAL MARKET
ASSETS AMOUNT ($) VALUE ($)
-------- ---------- ---------
<S> <C> <C> <C>
LONG-TERM GOVERNMENT SECURITIES 96.7
FEDERAL HOME LOAN MORTGAGE CORPORATION (a)(b) -
38.6
7.000%, with various maturity dates to August
1, 2025 ..................................... 1,878,810 1,895,832
8.000%, with various maturity dates to April
1, 2017 ..................................... 489,907 505,862
8.500%, with a maturity date of
July 1, 2010 ................................ 354,878 370,897
---------
Total Federal Home Loan Mortgage Corporation
(Cost $2,661,822)........................... 2,772,591
---------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
ADJUSTABLE RATE MORTGAGES (a)(b) - 9.8
6.000%, with a maturity date of December 20,
2024......................................... 192,582 197,156
6.125%, with a maturity date of November 20,
2022......................................... 86,272 87,567
6.500%, with various maturity dates to
November 20, 2023............................ 411,775 418,415
---------
Total Government National Mortgage Association
Adjustable Rate Mortgages
(Cost $659,152)............................. 703,138
---------
UNITED STATES TREASURY BOND - 7.7
7.875%, with a maturity date of February 15,
2021
(Cost $476,235)............................. 450,000 554,134
---------
FEDERAL HOME LOAN BANK BONDS - 6.4
5.720%, with a maturity date of November 22,
2000 (d)..................................... 360,000 356,569
7.640%, with a maturity date of
May 8, 2002.................................. 100,000 104,625
---------
Total Federal Home Loan Bank Bonds
(Cost $426,681)............................. 461,194
---------
</TABLE>
================================================================================
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<PAGE>
GNA VARIABLE SERIES TRUST - GNA GOVERNMENT PORTFOLIO
77 -----------------------------------------------------------------------------
INVESTMENT PORTFOLIO
DECEMBER 31, 1995, CONTINUED
<TABLE>
<CAPTION>
% OF NET PRINCIPAL MARKET
ASSETS AMOUNT ($) VALUE ($)
-------- ---------- ---------
<S> <C> <C> <C>
FEDERAL FARM CREDIT BANK NOTE - 6.3
8.600%, with a maturity date of
May 30, 2006
(Cost $449,125).............................. 400,000 451,876
-------
FEDERAL NATIONAL MORTGAGE ASSOCIATION REAL ESTATE
MORTGAGE INVESTMENT CONDUITS [REMIC] (b)(c) - 6.1
6.000%, with a maturity date of
March 25, 2019
[Series 1993-136 Class PB].................... 86,400 85,914
6.500%, with a maturity date of September 25,
2018
[Series 1992-150 Class GA].................... 175,000 175,929
7.000%, with a maturity date of November 25,
2009
[Series 1992-14 Class D]...................... 175,000 177,898
-------
Total Federal National Mortgage Association Real
Estate Mortgage Investment Conduits [REMIC]
(Cost $431,584).............................. 439,741
-------
FEDERAL NATIONAL MORTGAGE ASSOCIATION ADJUSTABLE
RATE MORTGAGE (a)(b) - 5.2
8.607%, with a maturity date of
July 1, 2019
(Cost $356,723).............................. 357,842 368,688
-------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (a)(b) -
4.7
6.500%, with a maturity date of
January 1, 2024............................... 205,006 202,570
7.500%, with a maturity date of
June 1, 2002.................................. 64,898 66,419
8.000%, with various maturity dates to July 1,
1998.......................................... 65,332 67,129
-------
Total Federal National Mortgage Association
(Cost $332,287).............................. 336,118
-------
</TABLE>
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
<PAGE>
GNA VARIABLE SERIES TRUST - GNA GOVERNMENT PORTFOLIO
- ----------------------------------------------------------------------------- 78
INVESTMENT PORTFOLIO
DECEMBER 31, 1995, CONTINUED
<TABLE>
<CAPTION>
% OF NET PRINCIPAL MARKET
ASSETS AMOUNT ($) VALUE ($)
-------- ---------- ---------
<S> <C> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(a)(b) - 4.6
6.500%, with a maturity date of
October 15, 2010............................. 96,674 97,580
8.500%, with various maturity dates to May 15,
2003......................................... 223,262 234,425
---------
Total Government National Mortgage Association
(Cost $320,033)............................. 332,005
---------
FEDERAL HOME LOAN MORTGAGE CORPORATION
MULTICLASS MORTGAGE PARTICIPATION CERTIFICATES
(b)(c) - 2.9
5.850%, with a maturity date of February 15,
2008
[Series 1678 Class PG]....................... 110,000 108,488
6.500%, with a maturity date of February 15,
2021
[Series 128 Class I]......................... 100,000 98,937
---------
Total Federal Home Loan Mortgage Corporation
Multiclass Mortgage Participation
Certificates
(Cost $199,445)............................. 207,425
---------
TENNESSEE VALLEY AUTHORITY NOTE - 1.9
6.125%, with a maturity date of
July 15, 2003
(Cost $131,356)............................. 133,000 133,249
---------
PRIVATE EXEMPT FUNDING
CORPORATION - 1.5
9.100%, with a maturity date of
October 30, 1998
(Cost $108,625)............................. 100,000 109,256
---------
UNITED STATES TREASURY STRIPS - 1.0
Zero Coupon, with a maturity date of February
15, 2018
(Cost $66,119).............................. 275,000 69,663
---------
Total Long-Term Government Securities
(Cost $6,619,187)........................... 6,939,078
---------
</TABLE>
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<PAGE>
GNA VARIABLE SERIES TRUST - GNA GOVERNMENT PORTFOLIO
79 -----------------------------------------------------------------------------
INVESTMENT PORTFOLIO
DECEMBER 31, 1995, CONTINUED
<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- --------- ----------
<S> <C> <C> <C>
MONEY MARKET MUTUAL FUNDS 2.1
The Seven Seas Series Money Market Fund [Class
A]............................................ 75,593 75,593
The Seven Seas Series US Government Money
Market Fund................................... 75,872 75,872
----------
Total Money Market Mutual Funds
(Cost $151,465).............................. 151,465
----------
OUTSTANDING OPTIONS PURCHASED ON FUTURES
CONTRACTS 0.1
Three contracts of call options purchased on
United States Treasury Bond at $120 expiring
6/22/96
(Cost $9,962)................................ 10,360
----- ----------
SUMMARY
Total investments
(Cost $6,780,614) (Note 3)................... 98.9 7,100,903
Other assets and liabilities, net............... 1.1 75,664
----- ----------
NET ASSETS....................................... 100.0 $7,176,567
===== ==========
</TABLE>
- ------------------------
NOTES:
(a) The investments in mortgage-backed securities are interests in separate
pools of mortgages. All such issues which have similar coupon rates, have
been aggregated for financial statement presentation purposes.
(b) Effective maturities for these securities are expected to be shorter than
indicated due to prepayments.
(c) Risks associated with Collateralized Mortgage Obligations ("CMO's") - The
net asset value of the Fund is sensitive to interest rate fluctuations as-
sociated with CMO's. CMO's are obligations collateralized by a portfolio
of mortgages or mortgage-related securities. Payments of principal and in-
terest on the mortgages are passed through to the holder of the CMO's on
the same schedule as they are received, although certain classes of CMO's
have priority over others with respect to the receipt of prepayments on
the mortgages. Therefore, an investment in CMO's may be subject to a
greater or lesser risk of prepayments than other types of mortgage-related
securities.
(d) Collateral for open futures and options contracts (see Note 3).
At December 31, 1995, open futures contracts purchased were as follows:
<TABLE>
<CAPTION>
EXPIRATION FACE UNREALIZED
PURCHASED DESCRIPTION DATE AMOUNT APPRECIATION
- --------- ------------------------ ---------- ------ ------------
<S> <C> <C> <C> <C>
4 US Treasury Note Futures Mar 96 $834,931 $3,882
======== ======
</TABLE>
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
<PAGE>
GNA VARIABLE SERIES TRUST - GNA GROWTH PORTFOLIO
- ----------------------------------------------------------------------------- 80
INVESTMENT PORTFOLIO
DECEMBER 31, 1995
<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- --------- ---------
<S> <C> <C> <C>
COMMON STOCKS
BASIC INDUSTRIES 9.3
Chemicals - 7.5%
Airgas, Incorporated (a).......................... 2,600 86,450
Cabot Corporation................................. 1,000 53,875
First Mississippi Corporation..................... 2,600 68,900
Great Lakes Chemical Corporation.................. 700 50,400
IMC Global, Incorporated.......................... 1,600 65,400
Millipore Corporation............................. 1,300 53,462
Praxair, Incorporated............................. 2,400 80,700
Union Carbide Corporation......................... 1,600 60,000
---------
519,187
---------
Containers & Glass - 1.0%
Sealed Air Corporation (a)........................ 2,400 67,500
---------
Paper - 0.8%
Alco Standard Corporation......................... 1,200 54,750
---------
641,437
---------
CAPITAL GOODS 4.8
Agricultural Machinery - 0.5%
Deere & Company................................... 900 31,725
---------
Construction & Mining Equipment - 0.8%
Dover Corporation................................. 1,600 59,000
---------
Electrical Equipment - 0.5%
Novellus Systems, Incorporated (a)................ 700 37,800
---------
Industrial Machinery - 3.0%
Applied Materials, Incorporated (a)............... 1,500 59,063
IDEX Corporation.................................. 1,500 61,125
Thermo Electron Corporation (a)................... 1,650 85,800
---------
205,988
---------
334,513
---------
CONGLOMERATES 1.6
Danaher Corporation............................... 1,800 57,150
Premark International, Incorporated............... 1,000 50,625
---------
107,775
---------
</TABLE>
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<PAGE>
GNA VARIABLE SERIES TRUST - GNA GROWTH PORTFOLIO
81 -----------------------------------------------------------------------------
INVESTMENT PORTFOLIO
DECEMBER 31, 1995, CONTINUED
<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- --------- ---------
<S> <C> <C> <C>
CONSUMER BASICS 15.3
Drugs & Health Care - 13.3%
Amgen, Incorporated (a)........................... 1,000 59,375
HealthCare COMPARE Corporation (a)................ 1,700 73,950
Invacare Corporation.............................. 1,800 45,450
Johnson & Johnson................................. 800 68,500
Medtronic, Incorporated........................... 2,200 122,925
Merck & Company, Incorporated..................... 800 52,600
Omnicare, Incorporated............................ 1,400 62,650
Pfizer, Incorporated.............................. 1,600 100,800
Schering Plough Corporation....................... 1,600 87,600
St. Jude Medical, Incorporated (a)................ 1,500 64,500
Stryker Corporation (a)........................... 1,100 57,750
Summit Technology, Incorporated (a)............... 1,800 60,750
United Healthcare Corporation..................... 1,000 65,500
---------
922,350
---------
Food & Beverages - 0.9%
Coca-Cola Company................................. 800 59,400
---------
Retail Grocery - 1.1%
Casey's General Stores, Incorporated.............. 3,400 74,375
---------
1,056,125
---------
CONSUMER DURABLE GOODS 2.6
Household Appliances & Home Furnishings - 1.1%
Black & Decker Corporation........................ 2,200 77,550
---------
Mobile Homes - 1.5%
Clayton Homes, Incorporated....................... 2,000 42,750
Oakwood Homes Corporation......................... 1,600 61,400
---------
104,150
---------
181,700
---------
CONSUMER NON-DURABLE GOODS 2.4
Cosmetics & Toiletries - 1.2%
Gillette Company.................................. 1,600 83,400
---------
Retail Trade - 1.2%
Dollar General Corporation........................ 2,375 49,281
Kohl's Corporation (a)............................ 700 36,750
---------
86,031
---------
169,431
---------
</TABLE>
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
GNA VARIABLE SERIES TRUST - GNA GROWTH PORTFOLIO
- ----------------------------------------------------------------------------- 82
INVESTMENT PORTFOLIO
DECEMBER 31, 1995, CONTINUED
<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- --------- ---------
<S> <C> <C> <C>
CONSUMER SERVICES 2.7
Hotels & Restaurants - 2.2%
La Quinta Inns, Incorporated...................... 1,700 46,538
McDonald's Corporation............................ 1,400 63,175
Wendys International, Incorporated................ 2,100 44,625
---------
154,338
---------
Leisure Time - 0.5%
Disney (Walt) Company............................. 600 35,400
---------
189,738
---------
FINANCE 8.0
Banks - 2.8%
Bank of Boston Corporation........................ 1,600 74,000
Fifth Third Bancorp............................... 800 58,600
Star Banc Corporation............................. 1,000 59,500
---------
192,100
---------
Financial Services - 2.1%
American Express Company.......................... 1,000 41,375
FINOVA Group, Incorporated........................ 1,300 62,725
Green Tree Financial Corporation.................. 1,600 42,200
---------
146,300
---------
Insurance - 3.1%
AFLAC, Incorporated............................... 1,000 43,375
American International Group, Incorporated........ 700 64,750
MGIC Investment Corporation....................... 1,200 65,100
SunAmerica, Incorporated.......................... 900 42,750
---------
215,975
---------
554,375
---------
GENERAL BUSINESS 8.2
Broadcasting - 1.2%
Capital Cities ABC, Incorporated.................. 700 86,363
---------
Business Services - 5.0%
America Online, Incorporated (a).................. 1,400 52,500
CUC International, Incorporated................... 1,500 51,187
First Data Corporation............................ 1,000 66,875
FIserv, Incorporated (a).......................... 1,800 54,000
Olsten Corporation................................ 1,300 51,350
Omnicom Group..................................... 2,000 74,500
---------
350,412
---------
</TABLE>
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
GNA VARIABLE SERIES TRUST - GNA GROWTH PORTFOLIO
83 -----------------------------------------------------------------------------
INVESTMENT PORTFOLIO
DECEMBER 31, 1995, CONTINUED
<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- --------- ---------
<S> <C> <C> <C>
Communication Services - 0.7%
Andrew Corporation (a)............................ 1,200 45,900
---------
Office Furnishings & Supplies - 1.3%
Danka Business Systems............................ 1,200 44,400
Staples, Incorporated (a)......................... 1,800 43,875
---------
88,275
---------
570,950
---------
TECHNOLOGY 24.1
Aerospace - 1.6%
McDonnell Douglas Corporation..................... 600 55,200
Watkins Johnson Company........................... 1,200 52,500
---------
107,700
---------
Computers & Business Equipment - 6.6%
3Com Corporation (a).............................. 1,600 74,600
Cabletron Systems, Incorporated (a)............... 500 40,500
Ceridian Corporation (a).......................... 2,000 82,500
Cisco Systems, Incorporated (a)................... 750 55,969
Dell Computer Corporation (a)..................... 1,600 55,400
EMC Corporation (a)............................... 3,600 55,350
Hewlett Packard Company........................... 600 50,250
International Business Machines................... 500 45,875
---------
460,444
---------
Electronics - 10.5%
ADC Telecommunications, Incorporated (a).......... 2,000 73,000
Arrow Electronics, Incorporated................... 800 34,500
Avnet, Incorporated............................... 800 35,800
DSC Communications Corporation (a)................ 1,300 47,937
Integrated Device Technology (a).................. 2,000 25,750
Intel Corporation................................. 1,000 56,750
KLA Instruments Corporation (a)................... 1,500 39,094
Kulicke & Soffa Industries, Incorporated.......... 1,800 41,850
Loral Corporation................................. 1,400 49,525
Micron Technology, Incorporated................... 1,300 51,512
Motorola, Incorporated............................ 800 45,600
Tellabs, Incorporated (a)......................... 1,000 37,000
Teradyne, Incorporated (a)........................ 1,600 40,000
Texas Industries, Incorporated.................... 1,100 58,300
</TABLE>
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
GNA VARIABLE SERIES TRUST - GNA GROWTH PORTFOLIO
- ----------------------------------------------------------------------------- 84
INVESTMENT PORTFOLIO
DECEMBER 31, 1995, CONTINUED
<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- ---------- ----------
<S> <C> <C> <C>
Texas Instruments, Incorporated................ 800 41,400
Vishay Intertechnology, Incorporated (a)....... 1,680 52,920
----------
730,938
----------
Software - 5.4%
Broderbund Software, Incorporated (a).......... 1,000 60,750
Computer Associates International,
Incorporated................................. 1,200 68,250
HBO & Company.................................. 800 61,300
Microsoft Corporation (a)...................... 700 61,425
Oracle Systems Corporation (a)................. 1,650 69,919
Parametric Technology Corporation (a).......... 750 49,875
----------
371,519
----------
1,670,601
----- ----------
Total Common Stocks
(Cost $4,543,749)............................ 79.0 5,476,645
----------
<CAPTION>
PRINCIPAL
AMOUNT ($)
----------
<S> <C> <C> <C>
SHORT-TERM GOVERNMENT SECURITIES 14.4
Federal Home Loan Bank Consolidated Discount
Notes, 5.47%,
January 23, 1996 (b)
(Cost $996,675)............................... 1,000,000 996,675
----------
<CAPTION>
NUMBER
OF SHARES
----------
<S> <C> <C> <C>
MONEY MARKET MUTUAL FUNDS 4.9
The Seven Seas Series Money Market Fund [Class
A]........................................... 168,458 168,458
The Seven Seas Series US Government Money
Market Fund.................................. 170,297 170,297
----------
Total Money Market Mutual Funds
(Cost $338,755).............................. 338,755
----- ----------
SUMMARY
Total investment portfolio
(Cost $5,879,179) (Note 3)................... 98.3 6,812,075
Other assets and liabilities, net.............. 1.7 114,354
----- ----------
NET ASSETS...................................... 100.0 $6,926,429
===== ==========
</TABLE>
- ------------------------
NOTES:
(a) Non-income producing securities.
(b) Yield to maturity (unaudited).
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
GNA VARIABLE SERIES TRUST - GNA VALUE PORTFOLIO
85 -----------------------------------------------------------------------------
INVESTMENT PORTFOLIO
DECEMBER 31, 1995
<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- --------- ----------
<S> <C> <C> <C>
COMMON STOCKS
BASIC INDUSTRIES 6.7
Chemicals - 5.5%
duPont (EI) deNemours & Company.................. 800 55,900
Morton International, Incorporated............... 1,400 50,225
Nalco Chemical Company........................... 1,900 57,238
PPG Industries, Incorporated..................... 1,900 86,925
----------
250,288
----------
Plastics - 1.2%
Illinois Tool Works, Incorporated................ 900 53,100
----------
303,388
----------
CAPITAL GOODS 6.7
Construction & Mining Equipment - 1.2%
Caterpillar, Incorporated........................ 900 52,875
----------
Electrical Equipment - 4.4%
General Electric Company......................... 2,000 144,000
Premier Industrial Corporation................... 2,400 58,800
----------
202,800
----------
Pollution Control - 1.1%
Pall Corporation................................. 1,800 48,375
----------
304,050
----------
CONSUMER BASICS 15.5
Drugs & Health Care - 9.4%
Abbott Labs...................................... 1,900 79,325
American Home Products Corporation............... 1,100 106,700
Pfizer, Incorporated............................. 1,500 94,500
Schering-Plough Corporation...................... 1,800 98,550
US HealthCare, Incorporated...................... 1,000 46,500
----------
425,575
----------
Food & Beverages - 4.3%
Campbell Soup Company............................ 800 48,000
Coca-Cola Company................................ 700 51,975
CPC International, Incorporated.................. 1,400 96,075
----------
196,050
----------
</TABLE>
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
GNA VARIABLE SERIES TRUST - GNA VALUE PORTFOLIO
- ----------------------------------------------------------------------------- 86
INVESTMENT PORTFOLIO
DECEMBER 31, 1995, CONTINUED
<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- --------- ---------
<S> <C> <C> <C>
Household Products - 1.8%
Procter & Gamble Company......................... 1,000 83,000
---------
704,625
---------
CONSUMER DURABLE GOODS 3.2
Automobiles - 2.0%
Ford Motor Company............................... 3,200 92,800
---------
Household Appliances & Home Furnishings - 1.2%
Whirlpool Corporation............................ 1,000 53,250
---------
146,050
---------
CONSUMER NON-DURABLE GOODS 6.8
Cosmetics & Toiletries - 1.9%
Gillette Company................................. 900 46,913
International Flavors............................ 800 38,400
---------
85,313
---------
Photography - 1.2%
Eastman Kodak Company............................ 800 53,600
---------
Retail Trade - 3.7%
May Department Stores Company.................... 1,900 80,275
Walgreen Company................................. 3,000 89,625
---------
169,900
---------
308,813
---------
CONSUMER SERVICES 2.0
Hotels & Restaurants - 1.0%
McDonald's Corporation........................... 1,000 45,125
---------
Leisure Time - 1.0%
Disney (Walt) Company............................ 800 47,200
---------
92,325
---------
ENERGY 7.5
Domestic Oil - 2.9%
Mobil Corporation................................ 1,200 134,400
---------
International Oil - 3.6%
Exxon Corporation................................ 1,500 120,187
Royal Dutch Petroleum Company.................... 300 42,338
---------
162,525
---------
</TABLE>
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
GNA VARIABLE SERIES TRUST - GNA VALUE PORTFOLIO
87 -----------------------------------------------------------------------------
INVESTMENT PORTFOLIO
DECEMBER 31, 1995, CONTINUED
<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- --------- ---------
<S> <C> <C> <C>
Petroleum Services - 1.0%
Halliburton Company............................... 900 45,563
---------
342,488
---------
FINANCE 15.8
Banks - 8.8%
First Chicago Corporation......................... 2,100 82,950
MBNA Corporation.................................. 1,300 47,938
Morgan (J.P.) & Company, Incorporated............. 1,400 112,350
National City Corporation......................... 2,900 96,062
NationsBank Corporation........................... 900 62,662
---------
401,962
---------
Financial Services - 4.4%
American Express Company.......................... 3,000 124,125
Federal National Mortgage Association............. 600 74,475
---------
198,600
---------
Insurance - 2.6%
American International Group, Incorporated........ 1,300 120,250
---------
720,812
---------
GENERAL BUSINESS 9.4
Business Services - 6.9%
Automatic Data Processing, Incorporated........... 1,400 103,950
Donnelley (R.R.) & Sons Company................... 3,100 122,062
General Motors Corporation [Class E].............. 1,700 88,400
---------
314,412
---------
Communication Services - 1.5%
SBC Communications, Incorporated.................. 1,200 69,000
---------
Office Furnishings & Supplies - 1.0%
Alco Standard Corporation......................... 1,000 45,625
---------
429,037
---------
SHELTER 1.4
Construction Materials - 1.4%
Masco Corporation................................. 2,000 62,750
---------
</TABLE>
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
GNA VARIABLE SERIES TRUST - GNA VALUE PORTFOLIO
- ----------------------------------------------------------------------------- 88
INVESTMENT PORTFOLIO
DECEMBER 31, 1995, CONTINUED
<TABLE>
<CAPTION>
% OF NET NUMBER MARKET
ASSETS OF SHARES VALUE ($)
-------- --------- ---------
<S> <C> <C> <C>
TECHNOLOGY 11.1
Computers & Business Equipment - 4.8%
Compaq Computer Corporation (a)................... 2,200 105,600
Hewlett Packard Company........................... 600 50,250
Pitney Bowes, Incorporated........................ 1,400 65,800
---------
221,650
---------
Electronics - 5.7%
AMP, Incorporated................................. 2,000 76,750
Intel Corporation................................. 1,200 68,100
Raytheon Company.................................. 2,400 113,400
---------
258,250
---------
Software - 0.6%
Microsoft Corporation (a)......................... 300 26,325
---------
506,225
---------
TRANSPORTATION 1.6
Railroads & Equipment - 1.6%
Union Pacific Corporation......................... 1,100 72,600
---------
UTILITIES 7.7
Electric Utilities - 1.5%
Duke Power Company................................ 1,400 66,325
---------
Gas & Pipeline Utilities - 1.0%
Enron Corporation................................. 1,200 45,750
---------
Telephone - 5.2%
Ameritech Corporation............................. 2,000 118,000
AT&T Corporation.................................. 700 45,325
Bell Atlantic Corporation......................... 1,100 73,562
---------
236,887
---------
348,962
---- ---------
Total Common Stocks
(Cost $3,861,766)............................... 95.4 4,342,125
---------
</TABLE>
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
GNA VARIABLE SERIES TRUST - GNA VALUE PORTFOLIO
89 -----------------------------------------------------------------------------
INVESTMENT PORTFOLIO
DECEMBER 31, 1995, CONTINUED
<TABLE>
<CAPTION>
% OF NET PRINCIPAL MARKET
ASSETS AMOUNT ($) VALUE ($)
-------- ---------- ----------
<S> <C> <C> <C>
SHORT-TERM GOVERNMENT SECURITIES 14.3
United States Treasury Bill, 3.10%, January
18, 1996 (b)
(Cost $649,049)............................. 650,000 649,049
----------
<CAPTION>
NUMBER
OF SHARES
----------
<S> <C> <C> <C>
MONEY MARKET MUTUAL FUNDS 2.4
The Seven Seas Series Money Market Fund [Class
A].......................................... 57,763 57,763
The Seven Seas Series US Government Money
Market Fund................................. 51,242 51,242
----------
Total Money Market Mutual Funds
(Cost $109,005)............................. 109,005
----- ----------
SUMMARY
Total investment portfolio
(Cost $4,619,820) (Note 3).................. 112.1 5,100,179
Other assets and liabilities, net............. (12.1) (551,434)
----- ----------
NET ASSETS..................................... 100.0 $4,548,745
===== ==========
</TABLE>
- ------------------------
NOTES:
(a) Non-income producing securities.
(b) Yield to maturity (unaudited).
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
GNA VARIABLE SERIES TRUST
- ----------------------------------------------------------------------------- 90
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
GNA
ADJUSTABLE GNA GNA GNA
RATE GOVERNMENT GROWTH VALUE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS
Investments at market value
(identified cost $5,485,646,
$6,780,614, $5,879,179 and
$4,619,820, respectively)
(Notes 2 and 3)................. $5,713,465 $7,100,903 $6,812,075 $5,100,179
Cash.............................. 48 978 94 296
Receivables:
Fund shares sold................. 3 48,309 167,959 99,282
Dividends........................ 295 1,193 6,894 7,412
Interest......................... 45,397 60,269 -- --
Investments sold................. -- -- 25,379 --
Adviser (Note 4)................. 5,868 7,061 9,029 9,016
Daily variation margin on open
futures contracts (Notes 2 and
3)............................. -- 562 -- --
Deferred organizational costs
(Note 2)........................ 9,319 9,319 9,319 9,319
Prepaid expenses (Note 2)......... 140 146 97 66
---------- ---------- ---------- ----------
Total assets...................... 5,774,535 7,228,740 7,030,846 5,225,570
---------- ---------- ---------- ----------
LIABILITIES
Payables:
Fund shares redeemed............. 37 819 106 72
Investments purchased............ -- -- 63,425 643,954
Investments purchased--delayed
delivery....................... 80,180 -- -- --
Dividends........................ 9,957 11,856 -- --
Accrued management fee (Note 4).. 1,907 3,199 4,375 2,543
Other accrued expenses and
payables....................... 34,476 36,299 36,511 30,256
---------- ---------- ---------- ----------
Total liabilities................. 126,557 52,173 104,417 676,825
---------- ---------- ---------- ----------
NET ASSETS........................ $5,647,978 $7,176,567 $6,926,429 $4,548,745
========== ========== ========== ==========
NET ASSETS
Net assets consist of (Note 2):
Undistributed net investment
income......................... $ 13,526 $ 8,138 $ -- $ 1,391
Accumulated net realized gains... 51,845 142,894 114,376 87,100
Unrealized appreciation on
investments (Note 3)........... 227,819 320,289 932,896 480,359
Unrealized appreciation on
futures contracts (Note 3)..... -- 3,882 -- --
Shares of beneficial interest.... 5,354,788 6,701,364 5,879,157 3,979,895
---------- ---------- ---------- ----------
NET ASSETS........................ $5,647,978 $7,176,567 $6,926,429 $4,548,745
========== ========== ========== ==========
Outstanding shares of beneficial
interest of no par value........ 213,611 263,928 208,387 145,215
========== ========== ========== ==========
Net asset value, offering and
redemption price per share...... $26.44 $27.19 $33.24 $31.32
========== ========== ========== ==========
</TABLE>
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
GNA VARIABLE SERIES TRUST
91 -----------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE PERIOD JANUARY 3, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,
1995
<TABLE>
<CAPTION>
GNA
ADJUSTABLE GNA GNA GNA
RATE GOVERNMENT GROWTH VALUE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends.......................... $ 42,317 $ 21,631 $ 56,387 $ 68,891
Interest........................... 280,510 406,070 10,181 10,920
-------- -------- ---------- --------
Total income....................... 322,827 427,701 66,568 79,811
-------- -------- ---------- --------
EXPENSES:
Management fee (Note 4)........... 21,241 31,935 34,065 20,356
Transfer agent fee................ 9,168 9,169 9,168 9,169
Custodian fee..................... 27,958 27,211 35,160 32,421
Amortization for organizational
costs (Note 2).................. 2,312 2,312 2,312 2,312
Registration fees................. 152 152 152 152
Audit fee......................... 12,881 12,881 12,881 12,881
Legal fee......................... 23,396 25,107 18,332 11,975
Insurance......................... 515 524 399 329
Trustees' fees and expenses....... 4,986 5,481 4,107 2,681
Other............................. 5,984 5,985 6,013 6,253
-------- -------- ---------- --------
Total expenses before reimbursement
from Adviser..................... 108,593 120,757 122,589 98,529
Reimbursement for expenses from
Adviser (Note 4)................. (71,422) (68,821) (75,721) (70,275)
-------- -------- ---------- --------
Expenses, net...................... 37,171 51,936 46,868 28,254
-------- -------- ---------- --------
Net investment income.............. 285,656 375,765 19,700 51,557
-------- -------- ---------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain from investment
transactions (Notes 2 and 3).... 63,800 154,781 115,086 87,100
Net realized loss from futures
contracts....................... -- (3,947) -- --
Net increase in unrealized
appreciation of investments
during the year................. 227,819 320,289 932,896 480,359
Net increase in unrealized
appreciation of futures
contracts during the year....... -- 3,882 -- --
-------- -------- ---------- --------
Net realized and unrealized gain on
investments...................... 291,619 475,005 1,047,982 567,459
-------- -------- ---------- --------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS........ $577,275 $850,770 $1,067,682 $619,016
======== ======== ========== ========
</TABLE>
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
GNA VARIABLE SERIES TRUST
- ----------------------------------------------------------------------------- 92
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD JANUARY 3, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,
1995
<TABLE>
<CAPTION>
GNA
ADJUSTABLE GNA GNA GNA
RATE GOVERNMENT GROWTH VALUE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income......... $ 285,656 $ 375,765 $ 19,700 $ 51,557
Net realized gain from
investment transactions..... 63,800 154,781 115,086 87,100
Net realized loss from futures
contracts................... -- (3,947) -- --
Net increase in unrealized
appreciation of investments
during the year............. 227,819 320,289 932,896 480,359
Net increase in unrealized
appreciation of futures
contracts during the year... -- 3,882 -- --
---------- ---------- ---------- ----------
Net increase in net assets
resulting from operations... 577,275 850,770 1,067,682 619,016
Distributions to shareholders
from:
Net investment income......... (284,085) (375,567) (20,410) (50,166)
Share transactions:
Proceeds from sales of shares. 5,141,909 6,361,451 5,851,980 3,925,119
Proceeds from shares issued in
reinvestment of
distributions............... 274,129 363,712 20,411 50,166
Cost of shares redeemed....... (86,275) (48,824) (18,259) (20,415)
---------- ---------- ---------- ----------
Increase in net assets from
Portfolio share transactions. 5,329,763 6,676,339 5,854,132 3,954,870
---------- ---------- ---------- ----------
INCREASE IN NET ASSETS......... 5,622,953 7,151,542 6,901,404 4,523,720
Net assets at beginning of year
(original capital)........... 25,025 25,025 25,025 25,025
---------- ---------- ---------- ----------
NET ASSETS AT END OF YEAR...... $5,647,978 $7,176,567 $6,926,429 $4,548,745
========== ========== ========== ==========
UNDISTRIBUTED NET INVESTMENT
INCOME....................... $ 13,526 $ 8,138 $ -- $ 1,391
========== ========== ========== ==========
PORTFOLIO SHARE INFORMATION:
Shares sold................... 205,376 250,976 207,331 143,157
Shares issued in reinvestment
of distributions............ 10,523 13,782 621 1,743
Shares redeemed............... (3,289) (1,831) (566) (686)
---------- ---------- ---------- ----------
Increase in Portfolio shares
outstanding................. 212,610 262,927 207,386 144,214
========== ========== ========== ==========
</TABLE>
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
GNA VARIABLE SERIES TRUST
93 -----------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR THE PERIOD JANUARY 3, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,
1995
The financial highlights set forth below include selected data for a share
outstanding throughout the year and other performance information derived from
the financial statements.
<TABLE>
<CAPTION>
GNA
ADJUSTABLE GNA GNA GNA
RATE GOVERNMENT GROWTH VALUE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR... $25.00 $25.00 $25.00 $25.00
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)............ 1.38 1.70 0.10 0.55
Net realized and unrealized gains on
investments........................ 1.44 2.19 8.24 6.31
------ ------ ------ ------
Total from investment operations..... 2.82 3.89 8.34 6.86
------ ------ ------ ------
LESS DISTRIBUTIONS FROM
Net investment income................ (1.38) (1.70) (0.10) (0.54)
------ ------ ------ ------
NET ASSET VALUE, END OF YEAR......... $26.44 $27.19 $33.24 $31.32
====== ====== ====== ======
TOTAL RETURN (%)**................... 11.50 15.99 33.37 27.68
RATIOS/SUPPLEMENTAL DATA
Ratios (%):
Expenses, net, to average daily net
assets (a)........................ 0.70* 0.90* 1.10* 1.10*
Expenses, gross, excluding
reimbursement for expenses, to
average daily net assets.......... 2.05* 2.09* 2.89* 3.87*
Net investment income to average
daily net assets.................. 5.38* 6.51* 0.47* 2.03*
Portfolio turnover.................. 36.47 129.71 65.88 41.67
Net Assets, end of year (millions)... $5.6 $7.2 $6.9 $ 4.5
(a) Reimbursement for expenses from
Adviser.......................... $0.346 $0.311 $0.380 $0.747
</TABLE>
- ------------------------
* Annualized.
** Periods less than one year are not annualized.
================================================================================
<PAGE>
GNA VARIABLE SERIES TRUST
- ----------------------------------------------------------------------------- 94
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION OF THE PORTFOLIOS. GNA Variable Series Trust (the "Trust") is
organized as a Delaware Business Trust under a Declaration of Trust dated
March 25, 1994, amended and restated August 22, 1994 and is registered under
the Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Trust is a series of funds, currently com-
prised of four investment portfolios (the "Portfolios") that commenced invest-
ment operations as of January 3, 1995. These financial statements report on
the GNA Adjustable Rate Portfolio, GNA Government Portfolio, GNA Growth Port-
folio and GNA Value Portfolio. Shares of the Trust are offered only to a sepa-
rate account of Great Northern Insured Annuity Corporation, an affiliated in-
surance company which funds certain variable annuity contracts. As of December
31, 1995, the affiliated insurance company controlled the Portfolios by virtue
of ownership of all of the Portfolios' shares of beneficial interest.
2. SIGNIFICANT ACCOUNTING POLICIES. The Portfolios' financial statements are
prepared in accordance with generally accepted accounting principles, which
require the use of management's estimates. The following is a summary of sig-
nificant accounting policies of the Portfolios.
Securities Valuation. Long-term debt securities for which market quotations
are readily available are stated at market value. A security (including an op-
tion) listed or traded on an exchange is valued at its last sale price prior
to the time when assets are valued. Lacking any sales on that day, the secu-
rity is valued at the mean between the current closing bid and asked prices.
Other securities are, in general, valued at the last bid quotation if there
are market quotations readily available, or in the absence of such market quo-
tations, then at the fair value thereof as determined by or under authority of
the Trustees of the Trust utilizing such pricing services as may be deemed ap-
propriate. Investments in certain long-term debt securities not traded in an
organized market are valued on the basis of valuations furnished by indepen-
dent pricing services or broker/dealers which utilize information with respect
to market transactions and other information in such securities or comparable
securities. Short-term investments maturing within 60 days are valued at orig-
inal cost plus accreted discount or accrued interest which approximates market
value.
Futures Contracts. The Portfolios may purchase and sell interest rate
futures contracts ("future contracts") as a hedge against changes in interest
rates. Upon the entering of a futures contract, the Portfolios are required to
deposit with a broker an amount ("initial margin") equal to a certain percent-
age of the purchase price indicated in the futures contract. Subsequent pay-
ments ("variation margin") are made or received by the Portfolios each day,
dependent on the daily fluctuations in the value of the unrealized gains and
losses by the Portfolios. If the Portfolios enter into a closing transaction,
the Portfolios will realize, for book purposes, a gain or loss equal to the
difference between the value of the futures contract to sell and the futures
contract to buy. The Portfolios may be subject to risk upon
================================================================================
<PAGE>
GNA VARIABLE SERIES TRUST
95 -----------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, CONTINUED
entering into futures contracts resulting from the imperfect correlation of
prices between the futures and securities markets.
Options on Futures Contracts. The Portfolios may also purchase or write
call and put options on listed futures as a hedge against changes in interest
rates. Options are valued in accordance with the security valuation policies
described above. Transactions in options on futures contracts involve similar
risks to those on futures contracts.
Securities Transactions and Related Investment Income. Sales and purchases
are accounted for on trade date. Realized securities gains or losses are de-
termined using the identified cost method for both financial and tax reporting
purposes. Interest income is accrued pro rata to maturity. Original issue dis-
count is accreted for financial and tax accounting purposes.
Securities Purchased on a When-Issued Basis. The Portfolios may enter into
firm commitment agreements ("TBA" or "when-issued" purchases) for the purchase
of securities at an agreed-upon price on a specified future date. The Portfo-
lios will not enter into such agreements for the purpose of investment lever-
age.
Liability for the purchase price and all the rights and risks of ownership of
the securities accrue to the Portfolios at the time they become obligated to
purchase the securities, although delivery and payment occur at a later date,
generally within 45 days (but not to exceed 120 days) of the date of the com-
mitment to purchase. Accordingly, if the market price of the security should
decline, the effect of the agreement would be to obligate the Portfolios to
purchase the security at the price above the current market price on the date
of delivery and payment. During the time the Portfolios are obligated to pur-
chase such securities, they will maintain with the Custodian a segregated ac-
count with U.S. government securities or cash or cash equivalents (or a re-
ceivable for investment sold in connection therewith) of an aggregate current
value sufficient to make payment for the securities. At December 31, 1995, TBA
securities in the GNA Adjustable Rate Portfolio totaled to $79,453.
Repurchase Agreements. The Portfolios may enter into repurchase agreements
in order to generate additional income. Each repurchase agreement entered into
by the Portfolios will provide that the value of the collateral underlying the
repurchase agreement will always be at least 102% of the repurchase price, in-
cluding accrued interest, except for repurchase agreements entered into with a
broker/dealer or bank whose unsecured debt is rated AAA or whose commercial
paper is rated A-1 by Standard and Poor's or P-1 by Moody's, in which case the
value of the collateral will always be at least 100% of the repurchase price,
including accrued interest. The Portfolios will not enter into a repurchase
agreement having more than seven days remaining to maturity if, as a result,
such agreements, together with any other securities which are not readily mar-
ketable, would exceed 10% of the net assets of each Portfolio. In addition,
not more than
================================================================================
<PAGE>
GNA VARIABLE SERIES TRUST
- ----------------------------------------------------------------------------- 96
NOTES TO FINANCIAL STATEMENTS, CONTINUED
one-third of the current market value of each Portfolio's total assets shall
constitute secured "loans" by each Portfolio under repurchase agreements.
Federal Income Taxes. As a Delaware Business Trust, each Portfolio is a
separate corporate taxpayer and determines its net investment income and capital
gains (or losses) and the amounts to be distributed to the Portfolio's share-
holders without regard to the income and capital gains (or losses) of the other
portfolios. It is the intent of the Portfolios to comply with the requirements
of the Internal Revenue Code which are applicable to regulated investment
companies and to distribute substantially all of their taxable income and
realized gains to its shareholders. Accordingly, the Portfolios paid no federal
income taxes and no federal income tax provisions were required. For Federal
income tax purposes, any futures contracts or options on futures which remain
open at year-end are marked-to-market and the resultant net gain or loss is
included in Federal taxable income.
Distribution of Income and Gains. Net investment income for the GNA Adjust-
able Rate and GNA Government Portfolios are declared as dividend to sharehold-
ers of record as of the close of business each day and is paid to shareholders
monthly. Net investment income for the GNA Value Portfolio is declared and
paid quarterly. Net investment income for the GNA Growth Portfolio is declared
and paid annually. Distributions from net short-term gains are declared and
paid annually. Long-term realized gains, in excess of any available capital
loss carryforward, would be taxable to the Portfolios if not distributed and,
therefore, will be declared and paid to their shareholders annually.
Capital Accounts. The Portfolios report the undistributed net investment
income (accumulated net investment loss) and accumulated net realized gain
(loss) accounts on a basis approximating amounts available for future tax dis-
tributions (or to offset future taxable realized gains when a capital loss
carryforward is available). Accordingly, the Portfolios may periodically make
reclassifications among certain capital accounts without impacting the net as-
set value of the Portfolios.
Prepaid Expenses. Costs incurred for registration of shares are amortized
on a straight-line basis over the lesser of, the duration of the registration
period or 12 months. Insurance costs are amortized on a straight-line basis over
the duration of the insurance period.
Deferred Organizational Costs. Costs incurred by the Trust in connection
with its organization of the Portfolios have been deferred ratably and are be-
ing amortized over a 60 month period on a straight-line basis beginning at the
commencement of operations of the Portfolios.
Expenses. Expenses such as management fees, custodian fees, transfer agent
fees, and registration fees are charged directly to the Portfolios, while in-
direct expenses, such as audit fees, legal fees, trustee fees and expenses,
and insurance are allocated among the Portfolios principally based on their
relative net assets.
================================================================================
<PAGE>
GNA VARIABLE SERIES TRUST
97 -----------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. PURCHASES AND SALES OF SECURITIES. During the year ended December 31, 1995,
purchases, sales and paydowns of securities, excluding short-term securities
and repurchase agreements for the Portfolios were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES PAYDOWNS
----------- ---------- --------
<S> <C> <C> <C>
GNA Adjustable Rate Portfolio.................. $ 7,456,433 $1,721,888 $455,704
GNA Government Portfolio....................... 13,789,871 6,678,379 662,513
GNA Growth Portfolio........................... 6,764,973 2,336,330 --
GNA Value Portfolio............................ 4,707,492 932,828 --
</TABLE>
The aggregate cost for federal income tax purposes for each Portfolio was as
follows:
<TABLE>
<S> <C>
GNA Adjustable Rate Portfolio............................ $5,485,646
GNA Government Portfolio................................. 6,781,012
GNA Growth Portfolio..................................... 5,879,179
GNA Value Portfolio...................................... 4,619,820
</TABLE>
Aggregate gross unrealized appreciation (depreciation) of investments for
each Portfolio at December 31, 1995 was as follows:
<TABLE>
<CAPTION>
GROSS GROSS NET
UNREALIZED UNREALIZED UNREALIZED
APPRECIATION DEPRECIATION APPRECIATION
------------ ------------ ------------
<S> <C> <C> <C>
GNA Adjustable Rate Portfolio............ $ 228,898 $ 1,079 $227,819
GNA Government Portfolio................. 321,044 1,153 319,891
GNA Growth Portfolio..................... 1,037,709 104,813 932,896
GNA Value Portfolio...................... 507,469 27,110 480,359
</TABLE>
At December 31, 1995, the security pledged by the GNA Government Portfolio to
cover margin requirements for open futures contracts on United States Treasury
notes and for open option contracts on United States Treasury bond futures is
as follows:
<TABLE>
<CAPTION>
DESCRIPTION FACE VALUE MARKET VALUE
----------- ---------- ------------
<S> <C> <C>
Federal Home Loan Bank Bonds, 5.720%, 11/22/00.......... $100,000 $99,047
======== =======
</TABLE>
================================================================================
<PAGE>
GNA VARIABLE SERIES TRUST
- ----------------------------------------------------------------------------- 98
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Transactions by the GNA Government Portfolio in U.S. Treasury note futures
sold short were as follows:
<TABLE>
<CAPTION>
FACE REALIZED
CONTRACTS VALUE COST LOSS
--------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1994.... -- $ --
Sold................................ (12) (1,307,687)
Closed.............................. (12) (1,307,687) $1,322,442 $(14,755)
--- ----------- ========== ========
Outstanding at December 31, 1995.... -- $ --
=== ===========
</TABLE>
Transactions by the GNA Government Portfolio in U.S. Treasury note futures
purchased were as follows:
<TABLE>
<CAPTION>
FACE REALIZED
CONTRACTS VALUE PROCEEDS GAIN
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1994....... -- $ --
Purchased.............................. 16 3,337,875
Closed................................. (12) 2,502,944 $2,513,752 $10,808
--- ---------- ========== =======
Outstanding at December 31, 1995....... 4 $ 834,931
=== ==========
</TABLE>
Transactions by the GNA Government Portfolio in options purchased on U.S.
Treasury bond futures were as follows:
<TABLE>
<CAPTION>
FACE VALUE
COVERED BY
PURCHASED
OPTIONS COST
---------- ------
<S> <C> <C>
Outstanding at December 31, 1994............................. $ -- $ --
Purchased.................................................... 360,000 9,962
-------- ------
Outstanding at December 31, 1995............................. $360,000 $9,962
======== ======
</TABLE>
4. MANAGEMENT AND TRUSTEES' FEES.
GNA Adjustable Rate Portfolio. Under an Advisory agreement between the Port-
folio and GNA Capital Management, Inc., the Portfolio's investment adviser
(the "Adviser"), the Portfolio agrees to pay the Adviser a fee calculated at
an annual rate of 0.40% of the average daily net assets. The Adviser had
agreed to reimburse the Portfolio for expenses incurred to the extent that
such expenses exceed 0.70% of average daily net assets during the year ended
December 31, 1995. The expense reimbursement may be extended or modified by
the Adviser. The expense reimbursement is currently extended to December 31,
1996 by the Adviser. The Advisory agreement also provides that if, in any
year, the total of certain specified expenses of the Portfolio exceed the ex-
pense limitations applicable to the Portfolio imposed by the securities regu-
lations of any state in which it is then
================================================================================
<PAGE>
GNA VARIABLE SERIES TRUST
99 -----------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, CONTINUED
registered to sell shares, the Adviser will waive all or a portion of its man-
agement fee equal to such excess. The Adviser is only required to reimburse
the Portfolio for any expenses which exceed state expense limitations up to
the amount of management fee paid or payable by the Portfolio during such
year. The total management fee for the year ended December 31, 1995 was
$21,241. The expenses reimbursed for the year ended December 31, 1995 were
$71,422 ($0.346 per share). The reimbursement for expenses by the Adviser is
being offset by the payables to the Adviser monthly. Any amount due from the
Adviser in excess of the amounts due to the Adviser is settled in cash within
15 days following month end.
The Adviser retained Standish, Ayer & Wood, Inc. (the "Sub-Adviser") to act as
portfolio manager of the Portfolio. As portfolio manager, the Sub-Adviser is
responsible for the actual investment of the Portfolio's assets (including the
placement of brokerage orders), under the general supervision of the Adviser
and the Board of Trustees.
GNA Government Portfolio. Under an Advisory agreement between the Portfolio
and GNA Capital Management, Inc., the Portfolio's investment adviser (the "Ad-
viser"), the Portfolio agrees to pay the Adviser a fee calculated at an annual
rate of 0.65% of the average daily net assets of the Portfolio if the average
daily net assets of the Portfolio and the Investors Trust Government Fund, a
series of another affiliated registered investment company, ("Combined Average
Daily Net Assets") equals to $500 million or less, 0.60% of the Portfolio's
average daily net assets if the Combined Average Daily Net Assets is greater
than $500 million and is equal to or less than $750 million, 0.55% of the
Portfolio's average daily net assets if the Combined Average Daily Net Assets
is greater than $750 million and is equal to or less than $1.25 billion, 0.50%
of the Portfolio's average daily net assets if the Combined Average Daily Net
Assets is greater than $1.25 billion and is equal to or less than $1.5 billion
and 0.45% of the Portfolio's average daily net assets if the Combined Average
Daily Net Assets exceed $1.5 billion. The Adviser had agreed to reimburse the
Portfolio for expenses incurred to the extent that such expenses exceed 0.90%
of the average daily net assets during the year ended December 31, 1995. The
expense reimbursement may be extended or modified by the Adviser. The expense
reimbursement is currently extended to December 31, 1996 by the Adviser. The
Advisory agreement also provides that if, in any year, the total of certain
specified expenses of the Portfolio exceed the expense limitations applicable
to the Portfolio imposed by the securities regulations of any state in which
it is then registered to sell shares, the Adviser will waive all or a portion
of its management fee equal to such excess. The Adviser is only required to
reimburse the Portfolio for any expenses which exceed state expense limita-
tions up to the amount of management fee paid or payable by the Portfolio dur-
ing such year. The total management fee for the year ended December 31, 1995
was $31,935 which was equivalent to an annual effective rate of 0.55% of aver-
age daily net assets. The expenses reimbursed for the year ended December 31,
1995 were $68,821 ($0.311 per share). The reimbursement for expenses by the
Adviser is
================================================================================
<PAGE>
GNA VARIABLE SERIES TRUST
- ---------------------------------------------------------------------------- 100
NOTES TO FINANCIAL STATEMENTS, CONTINUED
being offset by the payables to the Adviser monthly. Any amount due from the
Adviser in excess of the amounts due to the Adviser is settled in cash within
15 days following month end.
GNA Growth Portfolio. Under an Advisory agreement between the Portfolio and
GNA Capital Management, Inc., the Portfolio's investment adviser (the "Advis-
er"), the Portfolio agrees to pay the Adviser a fee calculated at an annual
rate of 0.80% of the first $100 million of the Portfolio's average daily net
assets and 0.70% of the Portfolio's average daily net assets in excess of $100
million. The Adviser had agreed to reimburse the Portfolio for expenses in-
curred to the extent that such expenses exceed 1.10% of average daily net as-
sets during the year ended December 31, 1995. The expense reimbursement may be
extended or modified by the Adviser. The expense reimbursement is currently
extended to December 31, 1996 by the Adviser. The Advisory agreement also pro-
vides that if, in any year, the total of certain specified expenses of the
Portfolio exceed the expense limitations applicable to the Portfolio imposed
by the securities regulations of any state in which it is then registered to
sell shares, the Adviser will waive all or a portion of its management fee
equal to such excess. The Adviser is only required to reimburse the Portfolio
for any expenses which exceed state expense limitations up to the amount of
management fee paid or payable by the Portfolio during such year. The total
management fee for the year ended December 31, 1995 was $34,065. The expenses
reimbursed for the year ended December 31, 1995 were $75,721 ($0.380 per
share). The reimbursement for expenses by the Adviser is being offset by the
payables to the Adviser monthly. Any amount due from the Adviser in excess of
the amounts due to the Adviser is settled in cash within 15 days following
month end.
The Adviser retained Value Line, Inc. (the "Sub-Adviser") to act as portfolio
manager of the Portfolio. As portfolio manager, the Sub-Adviser is responsible
for the actual investment of the Portfolio's assets (including the placement
of brokerage orders), under the general supervision of the Adviser and the
Board of Trustees.
GNA Value Portfolio. Under an Advisory agreement between the Portfolio and
GNA Capital Management, Inc., the Portfolio's investment adviser (the "Advis-
er"), the Portfolio agrees to pay the Adviser a fee calculated at an annual
rate of 0.80% of the Portfolio's average daily net assets if the combined av-
erage daily net assets of the Portfolio and the Investors Trust Value Fund, a
series of another affiliated registered investment company, ("Combined Average
Daily Net Assets") equals to $100 million or less, and 0.70% of the Portfo-
lio's average daily net assets if the Combined Average Daily Net Assets ex-
ceeds $100 million. The Adviser had agreed to reimburse the Portfolio for ex-
penses incurred to the extent that such expenses exceed 1.10% of average daily
net assets during the year ended December 31, 1995. The expense reimbursement
may be extended or modified by the Adviser. The expense reimbursement is cur-
rently extended to December 31, 1996 by the Adviser. The Advisory agreement
also provides that if, in any year, the total of certain specified expenses of
the Portfolio exceed the expense limitations applicable to the Portfolio im-
posed by the securities regulations of any state
================================================================================
<PAGE>
GNA VARIABLE SERIES TRUST
101 ----------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, CONTINUED
in which it is then registered to sell shares, the Adviser will waive all or a
portion of its management fee equal to such excess. The Adviser is only re-
quired to reimburse the Portfolio for any expenses which exceed state expense
limitations up to the amount of management fee paid or payable by the Portfolio
during such year. The total management fee for the year ended December 31, 1995
was $20,356 which was equivalent to an annual effective rate of 0.80% of aver-
age daily net assets. The expenses reimbursed for the year ended December 31,
1995 were $70,275 ($0.747 per share). The reimbursement for expenses by the Ad-
viser is being offset by the payables to the Adviser monthly. Any amount due
from the Adviser in excess of the amounts due to the Adviser is settled in cash
within 15 days following month end.
The Adviser retained Duff & Phelps Investment Management Co. (the "Sub-
Adviser") to act as portfolio manager of the Portfolio. As portfolio manager,
the Sub-Adviser is responsible for the actual investment of the Portfolio's as-
sets (including the placement of brokerage orders), under the general supervi-
sion of the Adviser and the Board of Trustees.
The Trust pays each Trustee not affiliated with the Adviser its proportionate
share of a fee of: (1) an annual fee of $2,000; and (2) a fee of $250 for each
meeting of the Board of Trustees attended plus all reasonable expenses associ-
ated with attendance at such meetings. The proportionate rate is allocated
among the portfolios principally based on their relative net assets. No remu-
neration is paid by the Trust to any Trustee or officer of the Portfolios who
is affiliated with the Adviser.
================================================================================
<PAGE>
GNA VARIABLE SERIES TRUST
- ---------------------------------------------------------------------------- 102
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board
of Trustees of GNA Variable Series Trust:
We have audited the accompanying statements of assets and liabilities of each
of the series of GNA Variable Series Trust (in this report comprised of GNA
Adjustable Rate Portfolio, GNA Government Portfolio, GNA Growth Portfolio and
GNA Value Portfolio (the "Portfolios")), for the period January 3, 1995 (com-
mencement of operations) to December 31, 1995, and the related statements of
operations, the statements of changes in net assets and the financial high-
lights for the year then ended. These financial statements are the responsi-
bility of the Portfolios' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audit in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of De-
cember 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant esti-
mates made by management, as well as evaluating the overall financial state-
ment presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Portfolios enumerated above for the period January 3, 1995 (commencement of
operations) to December 31, 1995, the results of their operations, the changes
in their net assets and the financial highlights for the year then ended in
conformity with generally accepted accounting principles.
Boston, Massachusetts
February 12, 1996 [COOPERS & LYBREND LOGO APPEARS HERE]
================================================================================
<PAGE>
PART C
103
<PAGE>
PART C
------
Item 24.
- -------
Financial Statements and Exhibits.
---------------------------------
(a) Financial Statements:
(1) Financial Statements included in PART A (Prospectus) of this
Registration Statement:
Financial Highlights for each share of the GNA Adjustable Rate
Portfolio series, GNA Government Portfolio series, GNA Value
Portfolio series and GNA Growth Portfolio series of the Trust for
the period January 3, 1995 (commencement of operations) to
December 31, 1995.
(2) Financial Statements included in PART B of this Registration
Statement:
Audited financial statements for the period January 3, 1995
(commencement of operations) to December 31, 1995, together with
the related notes thereto and report of independent accountants
thereon, for each of the GNA Adjustable Rate Portfolio series, GNA
Government Portfolio series, GNA Value Portfolio series and GNA
Growth Portfolio series of the Trust, are attached to the
Statement of Additional Information.
(b) Exhibits:
Exhibit No. Description
- ----------- -----------
1(a) Master Trust Agreement (Agreement and Declaration of Trust) dated
March 25, 1994./1/
1(b) First Amended and Restated Master Trust Agreement (Agreement and
Declaration of Trust) dated August 22, 1994./2/
1(c) Certificate of Trust dated March 18, 1994./2/
1(d) Certificate of Amendment to Certificate of Trust dated August 22,
1994./2/
2 By-Laws./1/
3 None.
4 Specimen share certificates./2/
5(a) Advisory Agreement./2/
5(b) Form of Sub-Advisory Agreement for each of the GNA Adjustable
Rate Portfolio series, GNA Government Portfolio series, GNA Value
Portfolio series and GNA Growth Portfolio series./2/
6 None.
7 None.
8 Custodian Contract./2/
9 Transfer Agency Agreement./2/
10(a) Opinion of Counsel regarding shares of each of the GNA Adjustable
Rate Portfolio series, GNA Government Portfolio series, GNA Value
Portfolio series and GNA Growth Portfolio series./2/
10(b) Consent of Counsel.
11 Auditors Consent.
104
<PAGE>
12 Not Applicable.
13 Not Applicable.
14 Not Applicable.
15 Not Applicable.
16 Not Applicable.
17(a) Powers of Attorney for Patrick E. Welch, Geoffrey S. Stiff,
Pierce T. Lindberg and Edward R. McMillan./1/
17(b) Power of Attorney for Douglas H. Pedersen. /3/
- --------------
/1/ Incorporated by reference to Securities Act of 1933 Filing No. 33-77138
filed March 30, 1994.
/2/ Incorporated by reference to Pre-Effective Amendment No. 1 to Securities
Act of 1933 Filing No. 33-77138 filed September 20, 1994.
/3/ Incorporated by reference to Post-Effective Amendment No. 1 to Securities
Act of 1933 Filing No. 33-77138 filed June 30, 1995.
Item 25. Persons Controlled by or Under Common Control with Registrant.
- ------- -------------------------------------------------------------
Information regarding persons controlled by or under common control with
Registrant is hereby incorporated by reference to the section captioned "The
Trust, The Portfolio and Management" in the Prospectus, and the section
captioned "Management of the Trust" in the Statement of Additional Information.
Item 26. Number of Holders of Securities.
- ------- -------------------------------
As of December 31, 1995, the record holders of each class of Registrant's
securities were as follows:
Title of Class Number of Record Holders
-------------- ------------------------
GNA Adjustable Rate Portfolio 1
GNA Government Portfolio 1
GNA Value Portfolio 1
GNA Growth Portfolio 1
Item 27. Indemnification.
- ------- ---------------
Under Article VI of the Registrant's Master Trust Agreement each of its
Trustees and Officers or persons serving in such capacity with another entity at
the request of the Registrant ("Covered Person") shall be indemnified against
all liabilities, including, but not limited to, amounts paid in satisfaction of
judgments, in compromises or as fines or penalties, and expenses, including
reasonable legal and accounting fees, in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
before any court or administrative or legislative body, in which such Covered
Person may be or may have been involved as a party or otherwise or with which
such person may be or may have been involved as a party or otherwise or with
which such person may be or may have been threatened, while in office or
thereafter, by reason of being or having been such a Trustee or officer,
director or trustee, except with respect to any matter as to which it has been
determined that such Covered Person (i) did not act in good faith in the
reasonable belief that such Covered Person's action was in or not opposed to the
best interests of the Trust or (ii) had acted with willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office (either and both of the conduct
described in (i) and (ii) being referred to hereafter as "Disabling Conduct").
A determination that the Covered Person is entitled to indemnification may be
made by (i) a final decision on the merits by a court or other body before whom
the proceeding was brought that the person to be indemnified was not liable by
reason of Disabling Conduct, (ii) dismissal of a court action or an
administrative proceeding against a Covered Person for insufficiency of evidence
of Disabling Conduct, or (iii) a reasonable determination, based upon a review
of the
105
<PAGE>
facts, that the indemnitee was not liable by reason of Disabling Conduct by
(a) a vote of a majority of a quorum of Trustees who are neither "interested
persons" of the Trust as defined in section 2(a)(19) of the 1940 Act nor parties
to the proceeding, or (b) an independent legal counsel in a written opinion.
Item 28. Business and Other Connections of Investment Advisers.
- ------- -----------------------------------------------------
The following information is provided with respect to each director and
executive officer of the Adviser:
<TABLE>
<CAPTION>
Business and Other Positions
Name Position With Adviser Within Last Two Years
- ---- -------------------- ----------------------
<S> <C> <C>
Patrick E. Welch Director, President President and Director of
and CEO GNA Corporation and its
subsidiaries.
Geoffrey S. Stiff Director, Senior Vice Senior Vice President and
President and CFO CFO of GNA Corporation
since May 1993. Holds
similar positions with its
subsidiaries.
Victor C. Moses Director and Senior Senior Vice President of
Vice President GNA Corporation, Seattle,
WA, and holds similar
executive positions with
its subsidiaries.
Thomas W. Casey Vice President and Vice President and
Controller Controller of GNA
Corporation and its
subsidiaries since December
1993.
Jerome R. Powers Vice President Vice President of GNA
Capital Management, Inc.,
and its affiliates General
Electric Capital Assurance
Company, Great Northern
Insured Annuity Corporation
and GE Capital Life
Assurance Company of New
York since October 1995.
Previously Vice President
of Northwestern Mutual Life
Insurance Company, 1991 to
1995.
Edward J. Wiles, Jr. Vice President, Vice President, Counsel and
Counsel and Secretary Secretary of GNA
Corporation, GNA
Distributors, Inc., GNA
Mortgage Funding
Corporation and GNA
Securities, Inc. and holds
similar executive positions
with GNA Corporation's
other subsidiaries.
Charles A. Kaminski Senior Vice President Senior Vice President of
GNA Securities, Inc.,
Senior Vice President and
Director of General
Electric Capital Assurance
Company and Great Northern
Insured Annuity
Corporation.
Kenneth F. Starr Senior Vice President Senior Vice President of
GNA Securities, Inc.,
Senior Vice President and
Director of General
Electric Capital Assurance
Company and Great Northern
Insured Annuity
Corporation, and GNA
Mortgage Funding
Corporation.
</TABLE>
106
<PAGE>
<TABLE>
<CAPTION>
Business and Other Positions
Name Position With Adviser Within Last Two Years
- ---- -------------------- ----------------------
<S> <C> <C>
John W. Attey Vice President Vice President, Counsel
and Acting Secretary of GNA
Corporation and holds
similar executive positions
with its subsidiaries.
Assistant Vice President
and Associate Counsel of
GNA Corporation and its
subsidiaries June 1989 to
September 1994.
Jeff Hugunin Treasurer Treasurer of GNA
Corporation and its
subsidiaries since 1994.
Vice President and
Treasurer of Federal Hole
Life Insurance Company and
its subsidiaries since
1992.
</TABLE>
The business and other connections of the officers and directors of (i) Value
Line are listed on the Form ADV for Value Line as currently on file with the
Commission (File No. 801-625), (ii) Duff & Phelps are listed on the Form ADV
for Duff & Phelps as currently on file with the Commission (File No. 801-14813),
and (iii) Standish are listed on the Form ADV for Standish currently on file
with the Commission (File No. 801-584), the text of each of which is hereby
incorporated by reference.
Item 29. Principal Underwriters.
- ------- ----------------------
Not Applicable
Item 30. Location of Accounts and Records.
- ------- --------------------------------
The accounts and records of the Registrant are maintained at the offices of
the Registrant at Suite 5600, Two Union Square, 601 Union Street, Seattle,
Washington 98101, and the offices of the Custodian and Transfer Agent, P.O. Box
351, Boston, MA 02101.
Item 31. Management Services.
- ------- -------------------
There are no management-related service contracts other than the Advisory
Agreement and the Sub-Advisory Agreements relating to management services
described in Parts A and B.
Item 32. Undertakings.
- ------- ------------
(a) Not applicable.
(b) Not applicable.
(c) Registrant hereby undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
(d) Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to Article VI of the Registrant's Agreement and Declaration
of Trust, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registration of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
107
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 an the
Investment company Act of 1940, the Registrant certifies that it meets all of
the requirements of Securities Act Rule 485(b) for effectiveness of this
registration statement and has duly caused this amended registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Seattle,and State of Washington on this 29th day of April, 1996.
GNA VARIABLE SERIES TRUST
By: /s/ Patrick E. Welch
-------------------------
Patrick E. Welch, President
President and Chief Executive Officer
As required by the Securities Act of 1933, this amended registration
statement has been signed by the following persons in the capacities indicated
on this 29th day of April, 1996.
Signature Title Date
/s/ Patrick E. Welch Trustee and President April 29, 1996
- ------------------------------ (Principal Executive Officer)
Patrick E. Welch
* Senior Vice President and April 29, 1996
- ------------------------------ Treasurer (Principal Financial
Geoffrey S. Stiff Officer)
* Trustee April 29, 1996
- ------------------------------
Douglas H. Pedersen
* Trustee April 29, 1996
- ------------------------------
Pierce T. Lindberg
* Trustee April 29, 1996
- ------------------------------
Edward R. McMillan
By: /s/ Edward J. Wiles
--------------------------
Edward J. Wiles, Esq.
(Attorney-in-fact pursuant
to Powers of Attorneys
previously filed)
<PAGE>
1933 Act File No. 33-77138
1940 Act File No. 811-8456
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
Pre-Effective Amendment No. [_]
-----
Post-Effective Amendment No. 2
-----
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
Amendment No. 3
-----
------------------
GNA VARIABLE SERIES TRUST
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
------------------
EXHIBITS
================================================================================
<PAGE>
Index to Exhibits
-----------------
Sequential Page
Number
---------------
10(b) Consent of Counsel.
11 Auditors' Consent.
<PAGE>
EXHIBIT 23(10)(B)
<PAGE>
[LETTERHEAD OF GOODWIN, PROCTOR & HOAR]
CONSENT OF COUNSEL
To the Trustees of GNA Variable Series Trust:
We hereby consent to the incorporation in Post-Effective Amendment No. 2 to
the Registration Statement of GNA Variable Series Trust (the "Trust") on Form
N-1A of our opinion dated September 19, 1994 regarding shares of the GNA
Government Portfolio series, GNA Growth Portfolio series, GNA Value Portfolio
series, and GNA Adjustable Rate Portfolio series of the Trust, by reference to
Pre-Effective Amendment No. 1 to Securities Act of 1933 filing No. 33-77138
filed September 20, 1994. We also consent to being named in the Prospectus and
the Statement of Additional Information of the Trust.
Very truly yours,
/s/ Goodwin, Proctor & Hoar
GOODWIN, PROCTOR & HOAR
<PAGE>
EXHIBIT 23(11)
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
__________________
The Board of Trustees
of GNA Variable Series Trust:
We consent to the inclusion in Post-Effective Amendment No.2 to the
Registration Statement of GNA Variable Series Trust N-1A (File No.33-77138) of
our report dated February 12, 1996 on our audits of the financial statements and
financial highlights of GNA Variable Series Trust -GNA Adjustable Rate
Portfolio, GNA Government Portfolio, GNA Growth Portfolio and GNA Value
Portfolio, which report is included in the Registration Statement. We also
consent to the reference to our Firm under the captions "Independent
Accountants" and "Financial Highlights".
Boston, Massachusetts Coopers & Lybrand L.L.P.
April 29, 1996
