STATEMENT OF ADDITIONAL INFORMATION
May 1, 1996
This Statement of Additional Information (this "Statement") contains
information which may be of interest to investors but which is not included in
the Prospectus of WNL Series Trust (the "Trust"). This Statement is not a
prospectus and is only authorized for distribution when accompanied or
preceded by the Prospectus of the Trust dated May 1, 1996. This Statement
should be read together with the Prospectus. Investors may obtain a free copy
of the Prospectus by calling Western National Life Insurance Company ("Life
Company") at (800) 910-4455.
TABLE OF CONTENTS
PAGE
DEFINITIONS
INVESTMENT OBJECTIVES AND POLICIES OF THE TRUST
Options
Futures Contracts
Special Risks of Transactions in Futures Contracts and Related Options
Forward Commitments
Repurchase Agreements
Reverse Repurchase Agreements
When-Issued Securities
Loans of Portfolio Securities
Foreign Securities
Foreign Currency Transactions
Commercial Mortgage-Backed Securities
Zero-Coupon Securities
Variable- or Floating-Rate Securities
Lower-Grade Securities
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
Non-Fundamental Investment Restrictions
MANAGEMENT OF THE TRUST
Substantial Shareholders
Sub-Advisers
Brokerage and Research Services
Investment decisions
DETERMINATION OF NET ASSET VALUE
TAXES
DIVIDENDS AND DISTRIBUTIONS
PERFORMANCE INFORMATION
SHAREHOLDER COMMUNICATIONS
TURNOVER
CUSTODIAN
LEGAL COUNSEL
INDEPENDENT AUDITORS
SHAREHOLDER LIABILITY
DESCRIPTION OF NRSRO RATINGS
Description of Moody's Corporate Ratings
Description of S&P's Corporate Ratings
Description of Duff Corporate Ratings
Description of Fitch Corporate Ratings
Description of Thomson Bankwatch, Inc. Corporate Ratings
Description of IBCA Limited and IBCA Inc. Corporate Ratings
Description of S&P's Commercial Paper Ratings
Description of Moody's Commercial Paper Ratings
Description of Duff Commercial Paper Ratings
Description of Fitch Commercial Paper Ratings
Description of IBCA Limited and IBCA Inc. Commercial Paper Ratings
Description of Thomson Bankwatch, Inc. Commercial Paper Ratings
FINANCIAL STATEMENTS
WNL SERIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
DEFINITIONS
THE "TRUST" -- WNL Series Trust.
"ADVISER" -- WNL Investment Advisory Services, Inc., the Trust's investment
adviser.
INVESTMENT OBJECTIVES AND POLICIES OF THE TRUST
The Trust currently offers shares of beneficial interest of eight series (the
"Portfolios") with separate investment objectives and policies. The investment
objectives and policies of each of the Portfolios of the Trust are described
in the Prospectus. This Statement contains additional information concerning
certain investment practices and investment restrictions of the Trust.
Except as described below under "Investment Restrictions," the investment
objectives and policies described in the Prospectus and in this Statement are
not fundamental, and the Trustees may change the investment objectives and
policies of a Portfolio without an affirmative vote of shareholders of the
Portfolio.
Except as otherwise noted below, the following descriptions of certain
investment policies and techniques are applicable to all of the Portfolios.
OPTIONS
Each Portfolio other than the Global Advisors Money Market Portfolio may
purchase put and call options on portfolio securities in which they may invest
that are traded on a U.S. or foreign securities exchange or in the
over-the-counter market.
COVERED CALL OPTIONS. Each Portfolio other than the Global Advisors Money
Market Portfolio may write covered call options on portfolio securities to
realize a greater current return through the receipt of premiums than it would
realize on portfolio securities alone. Such option transactions may also be
used as a limited form of hedging against a decline in the price of securities
owned by the Portfolio.
A call option gives the holder the right to purchase, and obligates the writer
to sell, a security at the exercise price at any time before the expiration
date. A call option is "covered" if the writer, at all times while obligated
as a writer, either owns the underlying securities (or comparable securities
satisfying the cover requirements of the securities exchanges), or has the
right to acquire such securities through immediate conversion of portfolio
securities.
In return for the premium received when it writes a covered call option, the
Portfolio gives up some or all of the opportunity to profit from an increase
in the market price of the securities covering the call option during the life
of the option. The Portfolio retains the risk of loss should the price of such
securities decline. If the option expires unexercised, the Portfolio realizes
a gain equal to the premium, which may be offset by a decline in price of the
underlying security. If the option is exercised, the Portfolio realizes a gain
or loss equal to the difference between the Portfolio's cost for the
underlying security and the proceeds of sale (exercise price minus
commissions) plus the amount of the premium.Portfolio may terminate a call
option that it has written before it expires by entering into a closing
purchase transaction. A Portfolio may enter into closing purchase transactions
in order to free itself to sell the underlying security or to write another
call on the security, realize a profit on a previously written call option, or
protect a security from being called in an unexpected market rise. Any profits
from a closing purchase transaction may be offset by a decline in the value of
the underlying security. Conversely, because increases in the market price of
a call option will generally reflect increases in the market price of the
underlying security, any loss resulting from a closing purchase transaction is
likely to be offset in whole or in part by unrealized appreciation of the
underlying security owned by the Trust.
COVERED PUT OPTIONS. Each Portfolio other than the Global Advisors Money
Market Portfolio may write covered put options in order to enhance its current
return. Such options transactions may also be used as a limited form of
hedging against an increase in the price of securities that the Portfolio
plans to purchase. A put option gives the holder the right to sell, and
obligates the writer to buy, a security at the exercise price at any time
before the expiration date. A put option is "covered" if the writer segregates
cash and high-grade short-term debt obligations or other permissible
collateral equal to the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, the Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio assumes
the risk that it may be required to purchase the underlying security for an
exercise price higher than its then current market value, resulting in a
potential capital loss unless the security later appreciates in value.
A Portfolio may terminate a put option that it has written before it expires
by a closing purchase transaction. Any loss from this transaction may be
partially or entirely offset by the premium received on the terminated option.
PURCHASING PUT AND CALL OPTIONS. Each Portfolio other than the Global
Advisors Money Market Portfolio may also purchase put options to protect
portfolio holdings against a decline in market value. This protection lasts
for the life of the put option because the Portfolio, as a holder of the
option, may sell the underlying security at the exercise price regardless of
any decline in its market price. In order for a put option to be profitable,
the market price of the underlying security must decline sufficiently below
the exercise price to cover the premium and transaction costs that the
Portfolio must pay. These costs will reduce any profit the Portfolio might
have realized had it sold the underlying security instead of buying the put
option.
Each Portfolio other than the Global Advisors Money Market Portfolio may
purchase call options to hedge against an increase in the price of securities
that the Portfolio wants ultimately to buy. Such hedge protection is provided
during the life of the call option since the Portfolio, as holder of the call
option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying
security must rise sufficiently above the exercise price to cover the premium
and transaction costs. These costs will reduce any profit the Portfolio might
have realized had it bought the underlying security at the time it purchased
the call option.
OPTIONS ON FOREIGN SECURITIES. The Trust may, on behalf of each of the
Portfolios other than the Global Advisors Money Market Portfolio, purchase and
sell options on foreign securities if in the opinion of the Sub-Adviser of the
particular Portfolio the investment characteristics of such options, including
the risks of investing in such options, are consistent with the Portfolio's
investment objectives. It is expected that risks related to such options will
not differ materially from risks related to options on U.S. securities.
However, position limits and other rules of foreign exchanges may differ from
those in the United States. In addition, options markets in some countries,
many of which are relatively new, may be less liquid than comparable markets
in the United States.
RISKS INVOLVED IN THE SALE OF OPTIONS. Options transactions involve
certain risks, including the risks that a Portfolio's Sub-Adviser will not
forecast interest rate or market movements correctly, that a Portfolio may be
unable at times to close out such positions, or that hedging transactions may
not accomplish their purpose because of imperfect market correlations. The
successful use of these strategies depends on the ability of a Portfolio's
Sub-Adviser to forecast market and interest rate movements correctly.
An exchange-listed option may be closed out only on an exchange which provides
a secondary market for an option of the same series. There is no assurance
that a liquid secondary market on an exchange will exist for any particular
option or at any particular time. If no secondary market were to exist, it
would be impossible to enter into a closing transaction to close out an option
position. As a result, a Portfolio may be forced to continue to hold, or to
purchase at a fixed price, a security on which it has sold an option at a time
when a Portfolio's Sub-Adviser believes it is inadvisable to do so.
Higher than anticipated trading activity or order flow or other unforeseen
events might cause The Options Clearing Corporation or an exchange to
institute special trading procedures or restrictions that might restrict the
Trust's use of options. The exchanges have established limitations on the
maximum number of calls and puts of each class that may be held or written by
an investor or group of investors acting in concert. It is possible that the
Trust and other clients of a Sub-Adviser may be considered such a group. These
position limits may restrict the Trust's ability to purchase or sell options
on particular securities.
Options which are not traded on national securities exchanges may be closed
out only with the other party to the option transaction. For that
reason, it may be more difficult to close out unlisted options than listed
options. Furthermore, unlisted options are not subject to the protection
afforded purchasers of listed options by The Options Clearing Corporation.
Government regulations, particularly the requirements for qualification as a
"regulated investment company" under the Internal Revenue Code, may also
restrict the Trust's use of options.
FUTURES CONTRACTS
The Trust may, on behalf of each Portfolio that may invest in debt securities,
other than the Global Advisors Money Market Portfolio, buy and sell futures
contracts on debt securities of the type in which the Portfolio may invest and
on indexes of debt securities. In addition, the Trust may, on behalf of each
Portfolio that may invest in equity securities, purchase and sell stock index
futures for hedging and non-hedging purposes. The Trust may also, for hedging
and non-hedging purposes, purchase and write options on futures contracts of
the type which such Portfolios are authorized to buy and sell and may engage
in related closing transactions. All futures and related options which are
traded in the United States will, as may be required by applicable law, be
traded on exchanges that are licensed and regulated by the Commodities Futures
Trading Commission ("CFTC"). Trading on foreign commodity exchanges is not
regulated by the CFTC.
FUTURES ON DEBT SECURITIES AND RELATED OPTIONS. A futures contract on a
debt security is a binding contractual commitment which, if held to maturity,
will result in an obligation to make or accept delivery, during a particular
month, of securities having a standardized face value and rate of return. By
purchasing futures on debt securities -- assuming a "long" position -- the
Trust will legally obligate itself on behalf of the Portfolios to accept the
future delivery of the underlying security and pay the agreed price. By
selling futures on debt securities -- assuming a "short" position -- it will
legally obligate itself to make the future delivery of the security against
payment of the agreed price. Open futures positions on debt securities will be
valued at the most recent settlement price, unless that price does not in the
judgment of persons acting at the direction of the Trustees as to the
valuation of the Trust's assets reflect the fair value of the contract, in
which case the positions will be valued by or under the direction of the
Trustees or such persons.
Positions taken in the futures markets are not normally held to maturity, but
are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures positions taken by the Trust on behalf of a
Portfolio will usually be liquidated in this manner, the Trust may instead
make or take delivery of the underlying securities whenever it appears
economically advantageous to the Portfolio to do so. A clearing corporation
associated with the exchange on which futures are traded assumes
responsibility for such closing transactions and guarantees that the Trust's
sale and purchase obligations under closed-out positions will be performed at
the termination of the contract.
Hedging by use of futures on debt securities seeks to establish more certainly
than would otherwise be possible the effective rate of return on portfolio
securities. A Portfolio may, for example, take a "short" position in the
futures market by selling contracts for the future delivery of debt securities
held by the Portfolio (or securities having characteristics similar to those
held by the Portfolio) in order to hedge against an anticipated rise in
interest rates that would adversely affect the value of the Portfolio's
portfolio securities. When hedging of this character is successful, any
depreciation in the value of portfolio securities may substantially be offset
by appreciation in the value of the futures position.
On other occasions, the Portfolio may take a "long" position by purchasing
futures on debt securities. This would be done, for example, when the Trust
expects to purchase for the Portfolio particular securities when it has the
necessary cash, but expects the rate of return available in the securities
markets at that time to be less favorable than rates currently available in
the futures markets. If the anticipated rise in the price of the securities
should occur (with its concomitant reduction in yield), the increased cost to
the Portfolio of purchasing the securities may be offset, at least to some
extent, by the rise in the value of the futures position taken in anticipation
of the subsequent securities purchase.
Successful use by the Trust of futures contracts on debt securities is subject
to the ability of a Portfolio's Sub-Adviser to predict correctly movements in
the direction of interest rates and other factors affecting markets for debt
securities. For example, if a Portfolio has hedged against the possibility of
an increase in interest rates which would adversely affect the market prices
of debt securities held by it, and the prices of such securities increase
instead the Portfolio will lose part or all of the benefit of the increased
value of its securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the
Portfolio has insufficient cash, it may have to sell securities to meet daily
maintenance margin requirements, and thus the Portfolio may have to sell
securities at a time when it may be disadvantageous to do so.Trust may
purchase and write put and call options on certain debt futures contracts, as
they become available. Such options are similar to options on securities
except that options on futures contracts give 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 period of the
option. As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an option of the same series.
There is no guarantee that such closing transactions can be effected. The
Trust will be required to deposit initial margin and maintenance margin with
respect to put and call options on futures contracts written by it pursuant to
brokers' requirements, and, in addition, net option premiums received will be
included as initial margin deposits. See "Margin Payments" below. Compared to
the purchase or sale of futures contracts, the purchase of call or put options
on futures contracts involves less potential risk to the Trust because the
maximum amount at risk is the premium paid for the options plus transactions
costs. However, there may be circumstances when the purchase of call or put
options on a futures contract would result in a loss to the Trust when the
purchase or sale of the futures contracts would not, such as when there is no
movement in the prices of debt securities. The writing of a put or call option
on a futures contract involves risks similar to those risks relating to the
purchase or sale of futures contracts.
INDEX FUTURES CONTRACTS AND OPTIONS. The Trust may invest in debt index
futures contracts and stock index futures contracts, and in related options. A
debt index futures contract is a contract to buy or sell units of a specified
debt index at a specified future date at a price agreed upon when the contract
is made. A unit is the current value of the index. Debt index futures in which
the Trust presently expects to invest are not now available, although the
Trust expects such futures contracts to become available in the future. A
stock index futures contract is a contract to buy or sell units of a stock
index at a specified future date at a price agreed upon when the contract is
made. A unit is the current value of the stock index.
The following example illustrates generally the manner in which index futures
contracts operate. The Standard & Poor's 100 Stock Index is composed of 100
selected common stocks, most of which are listed on the New York Stock
Exchange. The S&P 100 Index assigns relative weightings to the common stocks
included in the Index, and the Index fluctuates with changes in the market
values of those common stocks. In the case of the S&P 100 Index, contracts are
to buy or sell 100 units. Thus, if the value of the S&P 100 Index were $180,
one contract would be worth $18,000 (100 units x $180). The stock index
futures contract specifies that no delivery of the actual stocks making up the
index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration
of the contract. For example, if a Portfolio enters into a futures contract to
buy 100 units of the S&P 100 Index at a specified future date at a contract
price of $180 and the S&P 100 Index is at $184 on that future date, the
Portfolio will gain $400 (100 units x gain of $4). If the Portfolio enters
into a futures contract to sell 100 units of the stock index at a specified
future date at a contract price of $180 and the S&P 100 Index is at $182 on
that future date, the Portfolio will lose $200 (100 units x loss of $2).
The Trust does not presently expect to invest in debt index futures contracts.
Stock index futures contracts are currently traded with respect to
the S&P 100 Index on the Chicago Mercantile Exchange, and with respect to
other broad stock market indexes, such as the New York Stock Exchange
Composite Stock Index, which is traded on the New York Futures Exchange, and
the Value Line Composite Stock Index, which is traded on the Kansas City Board
of Trade, as well as with respect to narrower "sub-indexes" such as the S&P
100 Energy Stock Index and the New York Stock Exchange Utilities Stock Index.
To the extent permitted under applicable law, a Portfolio may trade futures
contracts and options on futures contracts on exchanges created outside the
United States, such as the London International Financial Futures Exchange and
the Sydney Futures Exchange Limited. Foreign markets may offer advantages such
as trading in commodities that are not currently traded in the United States
or arbitrage possibilities not available in the United States. Foreign
markets, however, may have greater risk potential than domestic markets. A
Portfolio may purchase or sell futures contracts with respect to any stock.
Positions in index futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures.
In order to hedge a Portfolio's investments successfully using futures
contracts and related options, the Trust must invest in futures contracts with
respect to indexes or sub-indexes, the movements of which will, in its
judgment, have a significant correlation with movements in the prices of the
Portfolio's securities.
Options on index futures contracts are similar to options on securities except
that options on index futures contracts give the purchaser the right, in
return for the premium paid, to assume a position in an index 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 period of the
option. Upon exercise of the option, the holder would assume the underlying
futures position and would receive a variation margin payment of cash or
securities approximating the increase in the value of the holder's option
position. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
based on the difference between the exercise price of the option and the
closing level of the index on which the futures contract is based on the
expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
As an alternative to purchasing and selling call and put options on index
futures contracts, each of the Portfolios which may purchase and sell index
futures contracts may purchase and sell call and put options on the underlying
indexes themselves to the extent that such options are traded on national
securities exchanges. Index options are similar to options on individual
securities in that the purchaser of an index option acquires the right to buy
(in the case of a call) or sell (in the case of a put), and the writer
undertakes the obligation to sell or buy (as the case may be), units of an
index at a stated exercise price during the term of the option. Instead of
giving the right to take or make actual delivery of securities, the holder of
an index option has the right to receive a cash "exercise settlement amount."
This amount is equal to the amount by which the fixed exercise price of the
option exceeds (in the case of a put) or is less than (in the case of a call)
the closing value of the underlying index on the date of the exercise,
multiplied by a fixed "index multiplier."
A Portfolio may purchase or sell options on stock indexes in order to close
out its outstanding positions in options on stock indexes which it has
purchased. A Portfolio may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of call or
put options on an index involves less potential risk to the Trust because the
maximum amount at risk is the premium paid for the options plus transactions
costs. The writing of a put or call option on an index involves risks similar
to those risks relating to the purchase or sale of index futures contracts.
MARGIN PAYMENTS. When a Portfolio purchases or sells a futures contract,
it is required to deposit with the Custodian an amount of cash, U.S. Treasury
bills, or other permissible collateral equal to a small percentage of the
amount of the futures contract. This amount is known as "initial margin." The
nature of initial margin is different from that of margin in security
transactions in that it does not involve borrowing money to finance
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit that is returned to the Trust upon termination of the contract,
assuming the Trust satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a process
known as "marking to market". These payments are called "variation margin" and
are made as the value of the underlying futures contract fluctuates. For
example, when a Portfolio sells a futures contract and the price of the
underlying debt security rises above the delivery price, the Portfolio's
position declines in value. The Portfolio then pays the broker a variation
margin payment equal to the difference between the delivery price of the
futures contract and the market price of the securities underlying the futures
contract. Conversely, if the price of the underlying security falls below the
delivery price of the contract, the Portfolio's futures position increases in
value. The broker then must make a variation margin payment equal to the
difference between the delivery price of the futures contract and the market
price of the securities underlying the futures contract.
When a Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to
the Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.
SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS
LIQUIDITY RISKS. Positions in futures contracts may be closed out only on
an exchange or board of trade which provides a secondary market for such
futures. Although the Trust intends to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular contract or at any particular
time. If there is not a liquid secondary market at a particular time, it may
not be possible to close a futures position at such time and, in the event of
adverse price movements, the Trust would continue to be required to make daily
cash payments of variation margin. However, in the event financial futures are
used to hedge portfolio securities, such securities will not generally be sold
until the financial futures can be terminated. In such circumstances, an
increase in the price of the portfolio securities, if any, may partially or
completely offset losses on the financial futures.
In addition to the risks that apply to all options transactions, there are
several special risks relating to options on futures contracts. The ability to
establish and close out positions in such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain
that such a market will develop. Although the Trust generally will purchase
only those options for which there appears to be an active secondary market,
there is no assurance that a liquid secondary market on an exchange will exist
for any particular option or at any particular time. In the event that no such
market exists for particular options, it might not be possible to effect
closing transactions in such options with the result that the Trust would have
to exercise the options in order to realize any profit.
HEDGING RISKS. There are several risks in connection with the use by a
Portfolio of futures contracts and related options as a hedging device. One
risk arises because of the imperfect correlation between movements in the
prices of the futures contracts and options and movements in the underlying
securities or index or movements in the prices of the Trust's securities which
are the subject of the hedge. A Portfolio's Sub-Adviser will, however, attempt
to reduce this risk by purchasing and selling, to the extent possible, futures
contracts and related options on securities and indexes the movements of which
will, in its judgment, correlate closely with movements in the prices of the
underlying securities or index and the Trust's portfolio securities sought to
be hedged.
Successful use of futures contracts and options by a Portfolio for hedging
purposes is also subject to a Portfolio's Sub-Adviser's ability to predict
correctly movements in the direction of the market. It is possible that, where
a Portfolio has purchased puts on futures contracts to hedge its portfolio
against a decline in the market, the securities or index on which the puts are
purchased may increase in value and the value of securities held in the
portfolio may decline. If this occurred, the Portfolio would lose money on the
puts and also experience a decline in value in its portfolio securities. In
addition, the prices of futures, for a number of reasons, may not correlate
perfectly with movements in the underlying securities or index due to certain
market distortions. First, all participants in the futures market are subject
to margin deposit requirements. Such requirements may cause investors to close
futures contracts through offsetting transactions which could distort the
normal relationship between the underlying security or index and futures
markets. Second, the margin requirements in the futures markets are less
onerous than margin requirements in the securities markets in general, and as
a result the futures markets may attract more speculators than the securities
markets do. Increased participation by speculators in the futures markets may
also cause temporary price distortions. Due to the possibility of price
distortion, even a correct forecast of general market trends by a Portfolio's
Sub-Adviser may still not result in a successful hedging transaction over a
very short time period.
FOREIGN TRANSACTION RISKS. Unlike trading on domestic commodity
exchanges, trading on foreign commodity exchanges is not regulated by the CFTC
and may be subject to greater risks than trading on domestic exchanges. For
example, some foreign exchanges are principal markets so that no common
clearing facility exists and a trader may look only to the broker for
performance of the contract. In addition, unless a Portfolio hedges against
fluctuations in the exchange rate between the U.S. dollar and the currencies
in which trading is done on foreign exchanges, any profits that the Portfolio
might realize in trading could be eliminated by adverse changes in the
exchange rate, or the Portfolio could incur losses as a result of those
changes. Transactions on foreign exchanges may include both commodities which
are traded on domestic exchanges and those which are not.
OTHER RISKS. Portfolios will incur brokerage fees in connection with
their futures and options transactions. In addition, while futures contracts
and options on futures will be purchased and sold to reduce certain risks,
those transactions themselves entail certain other risks. Thus, while a
Portfolio may benefit from the use of futures and related options,
unanticipated changes in interest rates or stock price movements may result in
a poorer overall performance for the Portfolio than if it had not entered into
any futures contracts or options transactions. Moreover, in the event of an
imperfect correlation between the futures position and the portfolio position
which is intended to be protected, the desired protection may not be obtained
and the Portfolio may be exposed to risk of loss.
FORWARD COMMITMENTS
The Trust may, on behalf of each Portfolio, enter into contracts to purchase
securities for a fixed price at a future date beyond customary settlement time
("forward commitments") if the Portfolio holds, and maintains until the
settlement date in a segregated account maintained by the Custodian with
assets selected by the Custodian, cash or high-grade debt obligations in an
amount sufficient to meet the purchase price, or if the Portfolio enters into
offsetting contracts for the forward sale of other securities it owns. Forward
commitments may be considered securities in themselves, and involve a risk of
loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in the value
of the Portfolio's other assets. Where such purchases are made through
dealers, the Portfolio relies on the dealer to consummate the sale. The
dealer's failure to do so may result in the loss to the Portfolio of an
advantageous yield or price.
Although a Portfolio will generally enter into forward commitments with the
intention of acquiring securities for its portfolio or for delivery pursuant
to options contracts it has entered into, a Portfolio may dispose of a
commitment prior to settlement if a Portfolio's Sub-Adviser deems it
appropriate to do so. A Portfolio may realize short-term profits or losses
upon the sale of forward commitments.
REPURCHASE AGREEMENTS
On behalf of each Portfolio, the Trust may enter into repurchase agreements. A
repurchase agreement is a contract under which the Portfolio acquires a
security for a relatively short period (usually not more than one week)
subject to the obligation of the seller to repurchase and the Portfolio to
resell such security at a fixed time and price (representing the Portfolio's
cost plus interest). It is the Trust's present intention to enter into
repurchase agreements only with member banks of the Federal Reserve System and
securities dealers meeting certain criteria as to creditworthiness and
financial condition established by the Trustees of the Trust and only with
respect to obligations of the U.S. Government or its agencies or
instrumentalities or other high quality short term debt obligations.
Repurchase agreements may also be viewed as loans made by the Trust which are
collateralized by the securities subject to repurchase. The Sub-Advisers will
monitor such transactions to ensure that the value of the underlying
securities will be at least equal at all times to the total amount of the
repurchase obligation, including the interest factor. If the seller defaults,
the Trust could realize a loss on the sale of the underlying security to the
extent that the proceeds of sale including accrued interest are less than the
resale price provided in the agreement including interest. In addition, if the
seller should be involved in bankruptcy or insolvency proceedings, the Trust
may incur delay and costs in selling the underlying security or may suffer a
loss of principal and interest if the Trust is treated as an unsecured
creditor and required to return the underlying collateral to the seller's
estate.
REVERSE REPURCHASE AGREEMENTS
The Trust may, on behalf of each of the Portfolios, enter into reverse
repurchase agreements, which involve the sale by the Portfolio of securities
held by it with an agreement to repurchase the securities at an agreed upon
price, date, and interest payment. The Portfolios will use the proceeds of the
reverse repurchase agreements to purchase securities either maturing, or under
an agreement to resell, at a date simultaneous with or prior to the expiration
of the reverse repurchase agreement. A Portfolio will use reverse repurchase
agreements when the interest income to be earned from the investment of the
proceeds of the transaction is greater than the interest expense of the
reverse repurchase transaction. Reverse repurchase agreements into which the
Portfolios will enter require that the market value of the underlying security
and other collateral equal or exceed the repurchase price (including interest
accrued on the security), and require the Portfolios to provide additional
collateral if the market value of such security falls below the repurchase
price at any time during the term of the reverse repurchase agreement. At all
times that a reverse repurchase agreement is outstanding, the Portfolio will
maintain cash, liquid high-grade debt obligations, or U.S. Government
Securities, as the case may be, in a segregated account at its custodian with
a value at least equal to its obligations under the agreement.
WHEN-ISSUED SECURITIES
The Trust may, on behalf of each Portfolio, from time to time purchase
securities on a "when-issued" basis. Debt securities are often issued on this
basis. The price of such securities, which may be expressed in yield terms, is
fixed at the time a commitment to purchase is made, but delivery and payment
for the when-issued securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase. During the period
between purchase and settlement, no payment is made by a Portfolio and no
interest accrues to the Portfolio. To the extent that assets of a Portfolio
are held in cash pending the settlement of a purchase of securities, that
Portfolio would earn no income. While the Trust may sell its right to acquire
when-issued securities prior to the settlement date, the Trust intends
actually to acquire such securities unless a sale prior to settlement appears
desirable for investment reasons. At the time a Portfolio makes the commitment
to purchase a security on a when-issued basis, it will record the transaction
and reflect the amount due and the value of the security in determining the
Portfolio's net asset value. The market value of the when-issued securities
may be more or less than the purchase price payable at the settlement date.
Each Portfolio will establish a segregated account in which it will maintain
cash and U.S. Government Securities or other high-grade debt obligations at
least equal in value to commitments for when-issued securities. Such
segregated securities either will mature or, if necessary, be sold on or
before the settlement date.
LOANS OF PORTFOLIO SECURITIES
The Trust may lend the portfolio securities of any Portfolio, provided: (1)
the loan is secured continuously by collateral consisting of U.S. Government
Securities, cash, or cash equivalents adjusted daily to have market value at
least equal to the current market value of the securities loaned; (2) the
Trust may at any time call the loan and regain the securities loaned; (3) the
Trust will receive any interest or dividends paid on the loaned securities;
and (4) the aggregate market value of securities of any Portfolio loaned will
not at any time exceed 20% (except 10% with respect to the EliteValue
Asset Allocation Portfolio, 15% with respect to the Credit Suisse
International Equity Portfolio and 33 1/3% with respect to the Global Advisors
Money Market Portfolio and the Global Advisors Growth Equity Portfolio) of the
total assets of the Portfolio taken at value. In addition, it is anticipated
that the Portfolio may share with the borrower some of the income received on
the collateral for the loan or that it will be paid a premium for the loan.
Before the Portfolio enters into a loan, a Portfolio's Sub-Adviser considers
all relevant facts and circumstances including the creditworthiness of the
borrower. The risks in lending portfolio securities, as with other extensions
of credit, consist of possible delay in recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially.
Although voting rights, or rights to consent, with respect to the loaned
securities pass to the borrower, the Trust retains the right to call the loans
at any time on reasonable notice, and it will do so in order that the
securities may be voted by the Trust if the holders of such securities are
asked to vote upon or consent to matters materially affecting the investment.
The Trust will not lend portfolio securities to borrowers affiliated with the
Trust.
FOREIGN SECURITIES
Investments in foreign securities may involve considerations different from
investments in domestic securities due to limited publicly available
information, non-uniform accounting standards, lower trading volume and
possible consequent illiquidity, greater volatility in price, the possible
imposition of withholding or confiscatory taxes, the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest, expropriation of assets, nationalization, or other adverse political
or economic developments. Foreign companies may not be subject to auditing and
financial reporting standards and requirements comparable to those which apply
to U.S. companies. Foreign brokerage commissions and other fees are generally
higher than in the United States. It may also be more difficult to obtain and
enforce a judgment against a foreign issuer.
In addition, to the extent that any Portfolio's foreign investments are not
U.S. dollar-denominated, the Portfolio may be affected favorably or
unfavorably by changes in currency exchange rates or exchange control
regulations and may incur costs in connection with conversion between
currencies.
In determining whether to invest in securities of foreign issuers, the
Sub-Adviser of a Portfolio will consider the likely impact of foreign taxes on
the net yield available to the Portfolio and its shareholders. Income received
by a Portfolio from sources within foreign countries may be reduced by
withholding and other taxes imposed by such countries. Tax conventions between
certain countries and the United States may reduce or eliminate such taxes. It
is impossible to determine the effective rate of foreign tax in advance since
the amount of a Portfolio's assets to be invested in various countries is not
known, and tax laws and their interpretations may change from time to time and
may change without advance notice. Any such taxes paid by a Portfolio will
reduce its net income available for distribution to shareholders.
FOREIGN CURRENCY TRANSACTIONS
The Trust may engage in currency exchange transactions, on behalf of its
Portfolios which may invest in foreign securities, to protect against
uncertainty in the level of future foreign currency exchange rates and to
increase current return. The Trust may engage in both "transaction hedging"
and "position hedging."
When it engages in transaction hedging, the Trust enters into foreign currency
transactions with respect to specific receivables or payables of a Portfolio
generally arising in connection with the purchase or sale of its portfolio
securities. The Trust will engage in transaction hedging when it desires to
"lock-in" the U.S. dollar price of a security it has agreed to purchase or
sell, or the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. By transaction hedging the Trust will attempt to protect a
Portfolio against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the applicable foreign currency
during the period between the date on which the security is purchased or sold
or on which the dividend or interest payment is declared, and the date on
which such payments are made or received.
The Trust may purchase or sell a foreign currency on a spot (or cash) basis at
the prevailing spot rate in connection with transaction hedging. The Trust may
also enter into contracts to purchase or sell foreign currencies at a future
date ("forward contracts") and purchase and sell foreign currency futures
contracts.
For transaction hedging purposes the Trust may also purchase exchange-listed
and over-the-counter call and put options on foreign currency futures
contracts and on foreign currencies. A put option on a futures contract gives
the Trust the right to assume a short position in the futures contract until
expiration of the option. A put option on currency gives the Trust the right
to sell a currency at an exercise price until the expiration of the option.
A call option on a futures contract gives the Trust the right to assume a long
position in the futures contract until the expiration of the option. A call
option on currency gives the Trust the right to purchase a currency at the
exercise price until the expiration of the option. The Trust will engage in
over-the-counter transactions only when appropriate exchange-traded
transactions are unavailable and when, in the opinion of the Portfolio's
Sub-Adviser, the pricing mechanism and liquidity are satisfactory and the
participants are responsible parties likely to meet their contractual
obligations.
When it engages in position hedging, the Trust enters into foreign currency
exchange transactions to protect against a decline in the values of the
foreign currencies in which securities held by a Portfolio are denominated or
are quoted in their principle trading markets or an increase in the value of
currency for securities which a Portfolio expects to purchase. In connection
with position hedging, the Trust may purchase put or call options on foreign
currency and foreign currency futures contracts and buy or sell forward
contracts and foreign currency futures contracts. The Trust may also purchase
or sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange transactions
and the value of the portfolio securities involved will not generally be
possible since the future value of such securities in foreign currencies will
change as a consequence of market movements in the values of those securities
between the dates the currency exchange transactions are entered into and the
dates they mature.
It is impossible to forecast with precision the market value of a Portfolio's
portfolio securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for the Trust to purchase
additional foreign currency on behalf of a Portfolio on the spot market (and
bear the expense of such purchase) if the market value of the security or
securities being hedged is less than the amount of foreign currency the Trust
is obligated to deliver and if a decision is made to sell the security or
securities and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received
upon the sale of the portfolio security or securities of a Portfolio if the
market value of such security or securities exceeds the amount of foreign
currency the Trust is obligated to deliver on behalf of the Portfolio.
To offset some of the costs to a Portfolio of hedging against fluctuations in
currency exchange rates, the Trust may write covered call options on those
currencies.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can
achieve at some future point in time.
Additionally, although these techniques tend to minimize the risk of loss due
to a decline in the value of the hedged currency, they tend to limit any
potential gain which might result from the increase in the value of such
currency.
A Portfolio may also seek to increase its current return by purchasing and
selling foreign currency on a spot basis, and by purchasing and selling
options on foreign currencies and on foreign currency futures contracts, and
by purchasing and selling foreign currency forward contracts.
CURRENCY FORWARD AND FUTURES CONTRACTS. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract as agreed by the parties, at a price set at the time of the
contract. In the case of a cancelable forward contract, the holder has the
unilateral right to cancel the contract at maturity by paying a specified fee.
The contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades. A foreign currency futures contract is a
standardized contract for the future delivery of a specified amount of a
foreign currency at a future date at a price set at the time of the contract.
Foreign currency futures contracts traded in the United States are designed by
and traded on exchanges regulated by the CFTC, such as the New York Mercantile
Exchange.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the contract
agreed upon by the parties, rather than a predetermined date in a given month.
Forward contracts may be in any amounts agreed upon by the parties rather than
predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A
forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Trust may either accept
or make delivery of the currency specified in the contract, or at or prior to
maturity enter into a closing transaction involving the purchase or sale of an
offsetting contract. Closing transactions with respect to forward contracts
are usually effected with the currency trader who is a party to the original
forward contract. Closing transactions with respect to futures contracts are
effected on a commodities exchange; a clearing corporation associated with the
exchange assumes responsibility for closing out such contracts.
Positions in foreign currency futures contracts and related options may be
closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although the Trust intends to purchase or
sell foreign currency futures contracts and related options only on exchanges
or boards of trade where there appears to be an active secondary market, there
is no assurance that a secondary market on an exchange or board of trade will
exist for any particular contract or option or at any particular time. In such
event, it may not be possible to close a futures or related option position
and, in the event of adverse price movements, the Trust would continue to be
required to make daily cash payments of variation margin on its futures
positions.
FOREIGN CURRENCY OPTIONS. Options on foreign currencies operate similarly
to options on securities, and are traded primarily in the over-the-counter
market, although options on foreign currencies have recently been listed on
several exchanges. Such options will be purchased or written only when a
Portfolio's Sub-Adviser believes that a liquid secondary market exists for
such options. There can be no assurance that a liquid secondary market will
exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence exchange rates
and investments generally.
The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options,investors
may be disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively
smaller transactions (less than $1 million) where rates may be less favorable.
The interbank market in foreign currencies is a global, around-the-clock
market. To the extent that the U.S. options markets are closed while the
markets for the underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be reflected in
the U.S. options markets.
FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell various
currencies. Thus, a deal may offer to sell a foreign currency to the Trust at
one rate, while offering a lesser rate of exchange should the Trust desire to
resell that currency to the dealer.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which certain Portfolios may enter are interest rate, currency and index swaps
and other types of available swap agreements, such as caps, floors and
collars. A Portfolio will enter into these transactions primarily to preserve
a return or spread on a particular investment or portion of its portfolio, to
protect against currency fluctuations, as a duration management technique or
to protect against any increase in the price of securities a Portfolio
anticipates purchasing at a later date. A Portfolio will use these
transactions as hedges and not as speculative investments and will not sell
interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Portfolio may be obligated to pay.
Interest rate swaps involve the exchange by the Portfolio with another party
of their respective commitments to pay or receive interest, e.g., an exchange
of floating rate payments for fixed rate payments with respect to a notional
amount of principal. A currency swap is an agreement to exchange cash flows on
a notional amount of two or more currencies based on the relative value
differential among them. An index swap is an agreement to swap cash flows on a
notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase
of a floor entitles the purchaser to receive payments on a notional principal
amount from the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is a combination
of a cap and a floor that preserves a certain return within a predetermined
range of interest rates or values.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors and collars are entered into for good faith hedging
purposes, the Sub-Advisers and the Portfolios believe such obligations do not
constitute senior securities under the Investment Company Act of 1940, as
amended, and, accordingly, will not treat them as being subject to its
borrowing restrictions. If there is a default by the counterparty, the
Portfolio may have contractual remedies pursuant to the agreements related to
the transaction. The swap market has grown substantially in recent years with
a large number of banks and investment banking firms acting both as principals
and agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
With respect to swaps, the Portfolio will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on
a daily basis and will segregate with its custodian an amount of cash or
liquid high-grade securities having a value equal to the accrued excess. Caps,
floors and collars require segregation of assets with a value equal to a
Portfolio's net obligation, if any.
COMMERCIAL MORTGAGE-BACKED SECURITIES
The BlackRock Managed Bond Portfolio may invest in Commercial Mortgage-Backed
Securities. Commercial Mortgage-Backed Securities are generally multi-class
debt or pass-through securities backed by a mortgage loan or pool of mortgage
loans secured by commercial property, such as industrial and warehouse
properties, office buildings, retail space and shopping malls, multifamily
properties and cooperative apartments, hotels and motels, nursing homes,
hospitals, senior living centers and agricultural property. The commercial
mortgage loans that underlie Commercial Mortgage-Backed Securities have
certain distinct characteristics. Commercial mortgage loans are generally not
amortizing or not fully amortizing. At their maturity date, repayment of the
remaining principal balance or "balloon" is due and is repaid through the
attainment of an additional loan or sale of the property. Unlike most single
family residential mortgages, commercial real property loans often contain
provisions which substantially reduce the likelihood that such securities will
be prepaid. The provisions generally impose significant prepayment penalties
on loans and, in some cases there may be prohibitions on principal prepayments
for several years following origination. This difference in prepayment
exposure is significant due to extraordinarily high levels of refinancing of
traditional residential mortgages experienced over the past year as mortgage
rates have reached a 25-year low. Assets underlying Commercial Mortgage-Backed
Securities may relate to only a few properties or to a single property.
Commercial Mortgage-Backed Securities have been issued in public and private
transactions by a variety of public and private issuers. Non-governmental
entities that have issued or sponsored Commercial Mortgage-Backed Securities
offerings include owners of commercial properties, originators of and
investors in mortgage loans, savings and loan associations, mortgage banks,
commercial banks, insurance companies, investment banks and special purpose
subsidiaries of the foregoing. The BlackRock Managed Bond Portfolio may from
time to time purchase Commercial Mortgage-Backed Securities directly from
issuers in negotiated transactions or from a holder of such Commercial
Mortgage-Backed Securities in the secondary market.
Commercial Mortgage-Backed Securities generally are structured to protect the
senior class investors against potential losses on the underlying mortgage
loans. This is generally provided by the subordinated class investors, which
may be included in the Portfolio, by taking the first loss if there are
defaults on the underlying commercial mortgage loans. Other protection, which
may benefit all of the classes, including the subordinated classes in which
the Portfolio intends to invest, may include issuer guarantees, reserve funds,
additional subordinated securities, cross-collateralization,
over-collateralization and the equity investors in the underlying properties.
By adjusting the priority of interest and principal payments on each class of
a given Commercial Mortgage-Backed Security, issuers are able to issue senior
investment-grade securities and lower-rated or non-rated subordinated
securities tailored to meet the needs of sophisticated institutional
investors. In general, subordinated classes of Commercial Mortgage-Backed
Securities are entitled to receive repayment of principal only after all
required principal payments have been made to more senior classes and have
subordinate rights as to receipt of interest distributions. Such subordinated
classes are subject to a substantially greater risk of nonpayment than are
senior classes of Commercial Mortgage-Backed Securities. Even within a class
of subordinate securities, most Commercial Mortgage-Backed Securities are
structured with a hierarchy of levels (or "loss positions"). Loss positions
are the order in which nonrecoverable losses of principal are applied to the
securities within a given structure. For instance, a first-loss subordinate
security will absorb any principal losses before any higher-loss position
subordinate security. This type of structure allows a number of classes of
securities to be created with varying degrees of credit exposure, prepayment
exposure and potential total return.
Subordinated classes of Commercial Mortgage-Backed Securities have more
recently been structured to meet specific investor preferences and issuer
constraints and have different priorities for cash flow and loss absorption.
As previously discussed, from a credit perspective, they are structured to
absorb any credit-related losses prior to the senior class. The principal cash
flow characteristics of subordinated classes are designed to be among the most
stable in the Mortgage-Backed Securities market, the probability of prepayment
being much lower than with traditional Residential Mortgage-Backed Securities.
This characteristic is primarily due to the structural feature that directs
the application of principal payments first to the senior classes until they
are retired before the subordinated classes receive any prepayments. While
this serves to enhance the credit protection of the senior classes, it
produces subordinated classes with more stable average lives. Subject to the
applicable provisions of the 1940 Act, there are no limitations on the classes
of Commercial Mortgage-Backed Securities in which the Portfolio may invest.
Accordingly, in certain circumstances, the Portfolio may recover
proportionally less of its investment in a Commercial Mortgage-Backed Security
than the holders of more senior classes of the same Commercial Mortgage-Backed
Security.
The rating assigned to a given issue and class of Commercial Mortgage-Backed
Securities is a product of many factors, including, the structure of the
security, the level of subordination, the quality and adequacy of the
collateral, and the past performance of the originators and servicing
companies. The rating of any Commercial Mortgage-Backed Security is determined
to a substantial degree by the debt service coverage ratio (i.e., the ratio of
current net operating income from the commercial properties, in the aggregate,
to the current debt service obligations on the properties) and the LTV ratio
of the pooled properties. The amount of the securities issued in any one
rating category is determined by the rating agencies after a rigorous credit
rating process which includes analysis of the issuer, servicer and property
manager, as well as verification of the LTV and debt service coverage ratios.
LTV ratios may be particularly important in the case of commercial mortgages
because most commercial mortgage loans provide that the lender's sole remedy
in the event of a default is against the mortgaged property, and the lender is
not permitted to pursue remedies with respect to other assets of the borrower.
Accordingly, loan-to-value ratios may, in certain circumstances, determine the
amount realized by the holder of the Commercial Mortgage-Backed Security.
ZERO-COUPON SECURITIES
Zero-coupon securities in which a Portfolio may invest are debt obligations
which are generally issued at a discount and payable in full at maturity, and
which do not provide for current payments of interest prior to maturity.
Zero-coupon securities usually trade at a deep discount from their face or par
value and are subject to greater market value fluctuations from changing
interest rates than debt obligations of comparable maturities which make
current distributions of interest. As a result, the net asset value of shares
of a Portfolio investing in zero-coupon securities may fluctuate over a
greater range than shares of other Portfolios of the Trust and other mutual
funds investing in securities making current distributions of interest and
having similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly by the
U.S. Treasury or other short-term debt obligations, and longer-term bonds or
notes and their unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment brokerage firm. A number of
securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and resold
them in custodial receipt programs with a number of different names, including
Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on
Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves
are held in book-entry form at the Federal Reserve Bank or, in the case of
bearer securities (i.e., unregistered securities which are owned ostensibly by
the bearer or holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of
zero-coupon securities by accounting separately for the beneficial ownership
of particular interest coupons and corpus payments on Treasury securities
through the Federal Reserve book-entry record-keeping system. The Federal
Reserve program as established by the Treasury Department is known as "STRIPS"
or "Separate Trading of Registered Interest and Principal of Securities."
Under the STRIPS program, a Portfolio will be able to have its beneficial
ownership of U.S. Treasury zero-coupon securities recorded directly in the
book-entry record-keeping system in lieu of having to hold certificates or
other evidences of ownership of the underlying U.S. Treasury securities.
When debt obligations have been stripped of their unmatured interest coupons
by the holder, the stripped coupons are sold separately. The principal or
corpus is sold at a deep discount because the buyer receives only the right to
receive a future fixed payment on the security and does not receive any rights
to periodic cash interest payments. Once stripped or separated, the corpus and
coupons may be sold separately. Typically, the coupons are sold separately or
grouped with other coupons with like maturity dates and sold in such bundled
form. Purchasers of stripped obligations acquire, in effect, discount
obligations that are economically identical to the zero-coupon securities
issued directly by the obligor.
VARIABLE- OR FLOATING-RATE SECURITIES
Certain Portfolios may invest in securities which offer a variable or floating
rate of interest. Variable-rate securities provide for automatic establishment
of a new interest rate at fixed intervals (e.g., daily, monthly,
semi-annually, etc.). Floating-rate securities provide for automatic
adjustment of the interest rate whenever some specified interest rate index
changes. The interest rate on variable- or floating-rate securities is
ordinarily determined by reference to, or is a percentage of, a bank's prime
rate, the 90-day U.S. Treasury bill rate, the rate of return on commercial
paper or bank certificates of deposit, an index of short-term interest rates,
or some other objective measure.
Variable- or floating-rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par. In many
cases, the demand feature can be exercised at any time on seven days' notice;
in other cases, the demand feature is exercisable at any time on 30 days'
notice or on similar notice at intervals of not more than one year. Some
securities which do not have variable or floating interest rates may be
accompanied by puts producing similar results and price characteristics.
Variable-rate demand notes include master demand notes which are obligations
that permit a Portfolio to invest fluctuating amounts, which may change daily
without penalty, pursuant to direct arrangements between the Portfolio as
lender, and the borrower. The interest rates on these notes fluctuate from
time to time. The issuer of such obligations normally has a corresponding
right, after a given period, to prepay in its discretion the outstanding
principal amount of the obligations plus accrued interest upon a specified
number of days' notice to the holders of such obligations. The interest rate
on a floating-rate demand obligation is based on a known lending rate, such as
a bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable-rate demand obligation is adjusted
automatically at specified intervals. Frequently, such obligations are secured
by letters of credit or other credit support arrangements provided by banks.
Because these obligations are direct lending arrangements between the lender
and borrower, it is not contemplated that such instruments will generally be
traded, and there generally is not an established secondary market for these
obligations, although they are redeemable at face value. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, the Portfolio's right to redeem is dependent on the ability of
the borrower to pay principal and interest on demand. Such obligations
frequently are not rated by credit rating agencies. If not so rated, a
Portfolio may invest in them only if the Portfolio's Sub-Adviser determines
that, at the time of investment, the obligations are of comparable quality to
the other obligations in which the Portfolio may invest. The Sub-Adviser, on
behalf of a Portfolio, will consider on an ongoing basis the creditworthiness
of the issuers of the floating- and variable-rate demand obligations in the
Portfolio's portfolio.
LOWER-GRADE SECURITIES
Certain Portfolios may invest in lower-grade income securities. Such
lower-grade securities are commonly referred to as "junk bonds." Investment in
such securities involves special risks, as described herein. Liquidity relates
to the ability of a Portfolio to sell a security in a timely manner at a price
which reflects the value of that security. As discussed below, the market for
lower-grade securities is considered generally to be less liquid than the
market for investment-grade securities. The relative illiquidity of some of a
Portfolio's portfolio securities may adversely affect the ability of the
Portfolio to dispose of such securities in a timely manner and at a price
which reflects the value of such security in the Sub-Adviser's judgment. The
market for less liquid securities tends to be more volatile than the market
for more liquid securities and market values of relatively illiquid securities
may be more susceptible to change as a result of adverse publicity and
investor perceptions than are the market values of higher-grade, more liquid
securities.
A Portfolio's net asset value will change with changes in the value of its
portfolio securities. If a Portfolio invests in fixed-income securities, the
Portfolio's net asset value can be expected to change as general levels of
interest rates fluctuate. When interest rates decline, the value of a
portfolio invested in fixed-income securities can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in
fixed-income securities can be expected to decline. Net asset value and market
value may be volatile due to a Portfolio's investment in lower-grade and less
liquid securities. Volatility may be greater during periods of general
economic uncertainty.
A Portfolio's investments are valued pursuant to guidelines adopted and
periodically reviewed by the Board of Trustees. To the extent that there is no
established retail market for some of the securities in which a Portfolio may
invest, there may be relatively inactive trading in such securities and the
ability of the Sub-Adviser to accurately value such securities may be
adversely affected. During periods of reduced market liquidity and in the
absence of readily available market quotations for securities held in a
Portfolio's portfolio, the responsibility of the Sub-Adviser to value the
Portfolio's securities becomes more difficult and the Sub-Adviser's judgment
may play a greater role in the valuation of the Portfolio's securities due to
the reduced availability of reliable objective data. To the extent that a
Portfolio invests in illiquid securities and securities which are restricted
as to resale, the Portfolio may incur additional risks and costs.
Lower-grade securities generally involve greater credit risk than higher-grade
securities. A general economic downturn or a significant increase in interest
rates could severely disrupt the market for lower-grade securities and
adversely affect the market value of such securities. In addition, in such
circumstances, the ability of issuers of lower-grade securities to repay
principal and to pay interest, to meet projected financial goals and to obtain
additional financing may be adversely affected. Such consequences could lead
to an increased incidence of default for such securities and adversely affect
the value of the lower-grade securities in a Portfolio's portfolio and thus a
Portfolio's net asset value. The secondary market prices of lower-grade
securities are less sensitive to changes in interest rates than are those for
higher-rated securities, but are more sensitive to adverse economic changes
or individual issuer developments. Adverse publicity and investor perceptions,
whether or not based on rational analysis, may also affect the value and
liquidity of lower-grade securities.
Yields on a Portfolio's portfolio securities can be expected to fluctuate over
time. In addition, periods of economic uncertainty and changes in interest
rates can be expected to result in increased volatility of the market prices
of the lower-grade securities in a Portfolio's portfolio and thus in the net
asset value of a Portfolio. Net asset value and market value may be volatile
due to a Portfolio's investment in lower-grade and less liquid securities.
Volatility may be greater during periods of general economic uncertainty. The
Portfolios may incur additional expenses to the extent they are required to
seek recovery upon a default in the payment of interest or a repayment of
principal on their portfolio holdings, and the Portfolios may be unable to
obtain full recovery thereof. In the event that an issuer of securities held
by a Portfolio experiences difficulties in the timely payment of principal or
interest and such issuer seeks to restructure the terms of its borrowings,
such Portfolio may incur additional expenses and may determine to invest
additional capital with respect to such issuer or the project or projects to
which the Portfolio's portfolio securities relate.
The Portfolios will rely on each Sub-Adviser's judgment, analysis and
experience in evaluating the creditworthiness of an issuer. In this
evaluation, the Sub-Adviser will take into consideration, among other things,
the issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters. The Sub-Adviser also may consider, although it does not
rely primarily on, the credit ratings of S&P and Moody's in evaluating
fixed-income securities. Such ratings evaluate only the safety of principal
and interest payments, not market value risk. Additionally, because the
creditworthiness of an issuer may change more rapidly than is able to be
timely reflected in changes in credit ratings, the Sub-Adviser continuously
monitors the issuers of such securities held in the Portfolio's portfolio. A
Portfolio may, if deemed appropriate by the Sub-Adviser, retain a security
whose rating has been downgraded below B by S&P or below B by Moody's, or
whose rating has been withdrawn.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment restrictions are fundamental and may not be changed
with respect to any Portfolio without the approval of a majority of the
outstanding voting securities of that Portfolio. Under the Investment Company
Act of 1940 and the rules thereunder, "majority of the outstanding voting
securities" of a Portfolio means the lesser of (1) 67% of the shares of that
Portfolio present at a meeting if the holders of more than 50% of the
outstanding shares of that Portfolio are present in person or by proxy, and
(2) more than 50% of the outstanding shares of that Portfolio. Any investment
restrictions which involve a maximum percentage of securities or assets shall
not be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by or on behalf of, a Portfolio, as the
case may be.
The Trust may not, on behalf of a Portfolio:
(1) With respect to 75% of its total assets, purchase the securities of
any issuer if such purchase would cause more than 5% of the value of a
Portfolio's total assets to be invested in securities of any one issuer
(except securities issued or guaranteed by the U.S. Government or any agency
or instrumentality thereof), or purchase more than 10% of the outstanding
voting securities of any one issuer;
(2) invest more than 25% of the value of its net assets in the
securities (other than U.S. Government Securities), of issuers in a single
industry, except that this policy shall not limit investment by the Global
Advisors Money Market Portfolio in obligations of U.S. banks (excluding their
foreign branches);
(3) borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or, with respect to
the Global Advisors Money Market Portfolio, to facilitate redemptions, (and
not for leveraging or investment, except with respect to reverse repurchase
agreements and dollar roll transactions, to the extent such investments are
permitted under a Portfolio's investment objectives and policies), provided
that borrowings do not exceed an amount equal to 33-1/3% of the current value
of the Portfolio's assets taken at market value, less liabilities other than
borrowings. If at any time a Portfolio's borrowings exceed this limitation due
to a decline in net assets, such borrowings will within three days be reduced
to the extent necessary to comply with this limitation. A Portfolio will not
purchase investments once borrowed funds (including reverse repurchase
agreements) exceed 5% of its total assets;
(4) make loans to other persons, except loans of portfolio securities
and except to the extent that the purchase of debt obligations in accordance
with its investment objectives and policies or entry into repurchase
agreements may be deemed to be loans;
(5) purchase or sell any commodity contract, except that each Portfolio
(other than the Global Advisors Money Market Portfolio), to the extent
permitted by its investment objectives and policies, may purchase and sell
futures contracts based on debt securities, indexes of securities, and foreign
currencies and purchase and write options on securities, futures contracts
which it may purchase, securities indexes, and foreign currencies and purchase
forward contracts. (Securities denominated in gold or other precious metals or
whose value is determined by the value of gold or other precious metals are
not considered to be commodity contracts.)
(6) underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may
be deemed to be an underwriter under federal securities laws;
(7) purchase or sell real estate, although (with respect to Portfolios
other than the Global Advisors Money Market Portfolio) it may purchase and
sell securities which are secured by or represent interests in real estate,
mortgage-related securities, securities of companies principally engaged in
the real estate industry and participation interests in pools of real estate
mortgage loans, and it may liquidate real estate acquired as a result of
default on a mortgage;
(8) issue any class of securities which is senior to a Portfolio's
shares of beneficial interest except as permitted under the Investment Company
Act of 1940 or by order of the SEC.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment restrictions are non-fundamental and may be changed
by the Trustees of the Trust without shareholder approval. Although
shareholder approval is not necessary, the Trust intends to notify its
shareholders before implementing any material change in any non-fundamental
investment restriction.
The Trust may not, on behalf of a Portfolio:
(1) invest more than 15% (except 10% with respect to the Credit Suisse
International Equity Portfolio and the Global Advisors Money Market Portfolio)
of the net assets of a Portfolio (taken at market value) in illiquid
securities, including repurchase agreements maturing in more than seven days;
(2) purchase securities on margin, except (with respect to all
Portfolios other than the Global Advisors Money Market Portfolio) such
short-term credits as may be necessary for the clearance of purchases and
sales of securities, and except (with respect to all Portfolios other than the
Global Advisors Money Market Portfolio) that it may make margin payments in
connection with options, futures contracts, options on futures contracts and
forward foreign currency contracts and in connection with swap agreements;
(3) make short sales of securities unless such Portfolio (other than the
Global Advisors Money Market Portfolio) owns an equal amount of such
securities or owns securities which, without payment of any further
consideration, are convertible into or exchangeable for securities of the same
issue as, and equal in amount to, the securities sold short;
(4) make investments for the purpose of gaining control of a company's
management.
MANAGEMENT OF THE TRUST
<TABLE>
<CAPTION>
<S> <C> <C>
Principal Occupation During
Name, Address and Age Position Held with the Trust Past Five Years
- ----------------------------- ------------------------------ ---------------------------------------
Richard W. Scott* President (Principal Executive Executive Vice President, General
5555 San Felipe, Suite 900 Officer)and Trustee Counsel and Chief Investment Officer
Houston, Texas 77056 of Western National Corporation and
Age: 42 Western National Life Insurance Company
since February, 1994; prior thereto, a
partner with Vinson & Elkins L.L.P.
John A. Graf* Trustee Executive Vice President and Chief
5555 San Felipe, Suite 900 Marketing Officer of Western National
Houston, Texas 77056 Corporation since December, 1993
Age: 36 and of Western National Life Insurance
Company since March, 1993; prior
thereto, Senior, Second or Assistant
Vice President or Vice President,
Marketing of Conseco, Inc. and Western
National Corporation.
Alden W. Brosseau* Trustee Owner, Sonoma Group, Consulting
16670 Arnold Drive to Management, since March, 1993;
Sonoma, CA 95476 prior thereto, Vice President,
Age: 68 Investment Administration & Planning,
American General Corporation.
S. Tevis Grinstead Trustee Retired since 1993; prior thereto,
c/o Vinson & Elkins L.L.P. a partner with Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin
Houston, Texas 77002-6760
Age: 57
Hugh L. Hyde Trustee Owner, HLH Consulting Inc. since
12 Greenway Plaza, Suite 1350 November, 1994; from March 1, 1993 -
Houston, Texas 77046-1201 September 15, 1994, President and
Age: 53 Director of Texas Capital Bancshares,
Inc. and its subsidiary bank, Texas
Capital Bank, N.A.; prior thereto,
a partner with KPMG Peat Marwick.
Melvin C. Payne Trustee President and Chief Executive Officer
Three Riverway, Suite 1375 of Carriage Services since 1991; prior
Houston, Texas 77045 thereto, an independent consultant to
Age: 53 various companies.
Patrick F. Grady Vice President, Treasurer, Vice President, Treasurer, Principal
5555 San Felipe, Suite 900 Principal Financial Officer and Principal
Houston, Texas 77056 Accounting Officer of Western National
Age: 38 Life Insurance Company since
February, 1994; prior thereto, Vice
President, Second Vice President,
Assistant Vice President - Financial
Reporting, Conseco, Inc., Carmel,
Indiana.
Dwight L. Cramer Vice President and Secretary Senior Vice President - Law and
5555 San Felipe, Suite 900 Secretary of Western National
Houston, Texas 77056 Life and Western National Corporation
Age: 43 since February, 1996; prior thereto,
from November 1993 until February 1996,
Vice President, Secretary and Associate
General Counsel of Western National
Life; prior thereto, from January, 1993
until November, 1993, private law
practice, Houston, Texas; prior
thereto, from August, 1988 until
January, 1993, partner and shareholder,
Chamberlain, Hrdlicka, White, Williams,
Martin, a law firm, Houston, Texas.
Kurt R. Fredland Vice President and Assistant Assistant Vice President - Variable
5555 San Felipe, Suite 900 Treasurer Annuity Administration, Western
Houston, Texas 77056 National Life, since
Age: 47 April, 1994; prior thereto, from
February, 1993 to April, 1994, a
financial consultant; prior thereto,
from April, 1977 to February, 1993,
Senior Vice President (and a number of
other positions at the same employer
preceding that position), First City
Bancorporation of Texas, Inc., Houston,
Texas.
Evelyn M. Curran Assistant Secretary Staff Attorney, Western National Life,
5555 San Felipe, Suite 900 since March 1994; prior thereto,
Houston, Texas 77056 from January 1991 to March 1994,
Age: 30 law student, South Texas College of
Law, Houston, Texas; prior
thereto, from August, 1990 to August,
1992, Underwriter and Claims
Representative, Farmers Insurance
Company, Santa Ana, California.
<FN>
* Interested person of the Trust within the meaning of the 1940 Act.
</TABLE>
Each Trustee of the Trust who is not an employee, officer or director of
the Life Company, the Adviser or a Sub-Adviser receives an annual fee of
$7,500 and an additional fee of $750 for each Trustees' meeting attended.
In addition, disinterested Trustees who are members of any Board committees
will receive a separate $750 fee for attendance of any committee meeting
that is held on a day on which no Board meeting is held. None of the Trustees
or officers of the Trust own any of the oustanding shares of the Trust as of
May 1, 1996. With respect to the period ended December 31, 1995, the Trust
paid Trustees' fees aggregating $32,812.50. The following table shows the
1995 compensation by Trustee.
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Pension or Total
Aggregate Retirement Estimated Compensation
Compensation Benefits Accrued Annual From Registrant
Name of Person, From As Part of Fund Benefits Upon and Fund Complex
Position Registrant(1) Expenses Retirement Paid to Trustees
- ------------------- ------------- ----------------- -------------- -----------------
Richard W. Scott None None None None
President and
Trustee
John A. Graf None None None None
Trustee
Alden W. Brosseau $9,750.00 None None $9,750.00
Trustee
Hugh L. Hyde $9,750.00 None None $9,750.00
Trustee
Melvin C. Payne $9,750.00 None None $9,750.00
Trustee
S. Tevis Grinstead $3,562.50 None None $3,562.50
Trustee
<FN>
(1) The information provided in the Compensation Table represents the actual
payments for the period May 18, 1995 (date of organizational meeting of Trustees)
through December 31, 1995. a portion of such compensation was paid by the Life
Company as part of the organizational expenses of the Trust.
</TABLE>
SUBSTANTIAL SHAREHOLDERS
Shares of the Portfolios are issued and redeemed in connection with
investments in and payments under certain variable annuity contracts issued
through a separate account of the Life Company. As of May 1, 1996, the
separate account of the Life Company was known to the Board of Trustees
and the management of the Trust to own of record 100% of the shares of each
Portfolio of the Trust.
The Declaration of Trust provides that the Trust will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, except if it is determined in the manner specified in the Declaration
of Trust that they have not acted in good faith in the reasonable belief that
their actions were in the best interests of the Trust or that such
indemnification would relieve any officer or Trustee of any liability to the
Trust or its shareholders by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of his or her duties. The Trust, at its
expense, may provide liability insurance for the benefit of its Trustees and
officers.
Under the Investment Advisory Agreement between the Trust and the Adviser (the
"Investment Advisory Agreement"), the Adviser, at its expense, provides the
Portfolios with investment advisory services and advises and assists the
officers of the Trust in taking such steps as are necessary or appropriate to
carry out the decisions of its Trustees regarding the conduct of business of
the Trust and each Portfolio. The fees to be paid under the Investment
Advisory Agreement are set forth in the Trust's prospectus.
Under the Investment Advisory Agreement, the Adviser is obligated to formulate
a continuing program for the investment of the assets of each Portfolio of the
Trust in a manner consistent with each Portfolio's investment objectives,
policies and restrictions and to determine from time to time securities to be
purchased, sold, retained or lent by the Trust and implement those decisions,
subject always to the provisions of the Trust's Declaration of Trust and
By-laws, and of the Investment Company Act of 1940, and subject further to
such policies and instructions as the Trustees may from time to time
establish.
The Investment Advisory Agreement further provides that the Adviser shall
furnish the Trust with office space and necessary personnel, pay ordinary
office expenses, pay all executive salaries of the Trust and furnish,
without expense to the Trust, the services of such members of its organization
as may be duly elected officers or Trustees of the Trust.
Under the Investment Advisory Agreement, the Trust is responsible for all its
other expenses including, but not limited to, the following expenses: legal,
auditing or accounting expenses, Trustees' fees and expenses, insurance
premiums, brokers' commissions, taxes and governmental fees, expenses of issue
or redemption of shares, expenses of registering or qualifying shares for
sale, reports and notices to shareholders, and fees and disbursements of
custodians, transfer agents, registrars, shareholder servicing agents and
dividend disbursing agents, and certain expenses with respect to membership
fees of industry associations.
Investment Advisory Agreement provides that the Adviser may retain
sub-advisers, at Adviser's own cost and expense, for the purpose of managing
the investment of the assets of one or more Portfolios.
The Investment Advisory Agreement provides that neither the Adviser nor any
director, officer or employee of Adviser will be liable for any loss suffered
by the Trust in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations and duties. In addition, the
Agreement provides for indemnification of the Adviser by the Trust.
The Investment Advisory Agreement may be terminated without penalty by vote of
the Trustees, as to any Portfolio by the shareholders of that Portfolio, or by
Adviser on 60 days written notice. The Agreement also terminates without
payment of any penalty in the event of its assignment. In addition, the
Investment Advisory Agreement may be amended only by a vote of the
shareholders of the affected Portfolio(s), and provides that it will continue
in effect from year to year only so long as such continuance is approved at
least annually with respect to each Portfolio by vote of either the Trustees
or the shareholders of the Portfolio, and, in either case, by a majority of
the Trustees who are not "interested persons" of the Adviser. In each of the
foregoing cases, the vote of the shareholders is the affirmative vote of a
"majority of the outstanding voting securities" as defined in the Investment
Company Act of 1940.
The Adviser has agreed to waive its entire advisory fee for each of the
Portfolios for the initial six (6) months of each Portfolio's investment
operations. Additionally, the Adviser has agreed to waive that portion of its
advisory fee which is in excess of the amount payable by the Adviser to each
sub-adviser pursuant to the respective sub-advisory agreements for each
Portfolio until May 1, 1997. In addition, the Adviser has undertaken to bear
all operating expenses of each Portfolio, excluding the compensation of the
Adviser, that exceed .12% of each Portfolio's average daily net assets until
May 1, 1997. Information concerning the dollar amounts of advisory fees waived
and expenses reimbursed for the period ended December 31, 1995 is contained in
the Prospectus.
State Street Bank and Trust Company provides certain accounting, transfer
agency, and other services to the Trust.
SUB-ADVISERS
Each of the Sub-Advisers described in the Prospectus serves as Sub-Adviser to
one or more of the Portfolios of the Trust pursuant to separate written
agreements. Certain services provided by, and the fees paid to, the
Sub-Advisers are described in the Prospectus under "Management of the
Trust--Sub-Advisers."
INVESTMENT DECISIONS
Investment decisions for the Trust and for the other investment advisory
clients of the Sub-Advisers are made with a view to achieving their respective
investment objectives and after consideration of such factors as their current
holdings, availability of cash for investment, and the size of their
investments generally. Frequently, a particular security may be bought or sold
for only one client or in different amounts and at different times for more
than one but less than all clients. Likewise, a particular security may be
bought for one or more clients when one or more other clients are selling the
security. In addition, purchases or sales of the same security may be made for
two or more clients of a Sub-Adviser on the same day. In such event, such
transactions will be allocated among the clients in a manner believed by the
Sub-Adviser to be equitable to each. In some cases, this procedure could have
an adverse effect on the price or amount of the securities purchased or sold
by the Trust. Purchase and sale orders for the Trust may be combined with
those of other clients of a Sub-Adviser in the interest of achieving the most
favorable net results for the Trust.
BROKERAGE AND RESEARCH SERVICES
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Trust of negotiated brokerage commissions. Such commissions
vary among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign securities often involve the payment of
fixed brokerage commissions, which are generally higher than those in the
United States. There is generally no stated commission in the case of
securities traded in the over-the-counter markets, but the price paid by the
Trust usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Trust includes a disclosed,
fixed commission or discount retained by the underwriter or dealer.
is currently intended that the Sub-Advisers will place all orders for the
purchase and sale of portfolio securities for the Trust and buy and sell
securities for the Trust through a substantial number of brokers and dealers.
In so doing, the Sub-Advisers will use their best efforts to obtain for the
Trust the best price and execution available. In seeking the best price and
execution, the Sub-Advisers, having in mind the Trust's best interests, will
consider all factors they deem relevant, including, by way of illustration,
price, the size of the transaction, the nature of the market for the security,
the amount of the commission, the timing of the transaction taking into
account market prices and trends, the reputation, experience, and financial
stability of the broker-dealer involved, and the quality of service rendered
by the broker-dealer in other transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional
investors to receive research, statistical, and quotation services from
broker-dealers who execute portfolio transactions for the clients of such
advisers. Consistent with this practice, the Sub-Advisers may receive
research, statistical, and quotation services from any broker-dealers with
whom they place the Trust's portfolio transactions. These services, which in
some cases may also be purchased for cash, include such matters as general
economic and security market reviews, industry and company reviews,
evaluations of securities, and recommendations as to the purchase and sale of
securities. Some of these services may be of value to the Sub-Advisers and/or
their affiliates in advising various other clients (including the Trust),
although not all of these services are necessarily useful and of value in
managing the Trust. The management fees paid by the Trust are not reduced
because the Sub-Advisers and/or their affiliates may receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, a
Sub-Adviser may cause a Portfolio to pay a broker-dealer who provides
brokerage and research services to the Sub-Adviser an amount of disclosed
commission for effecting a securities transaction for the Portfolio in excess
of the commission which another broker- dealer would have charged for
effecting that transaction provided that the Sub-Adviser determines in good
faith that such commission was reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer viewed in terms
of that particular transaction or in terms of all of the accounts over which
investment discretion is so exercised. A Sub-Adviser's authority to cause a
Portfolio to pay any such greater commissions is also subject to such policies
as the Adviser or the Trustees may adopt from time to time.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Portfolio is determined daily as of 4:00
p.m. New York time on each day the New York Stock Exchange is open for
trading. The New York Stock Exchange is normally closed on the following
national holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving, and Christmas.
The value of a foreign security is determined in its national currency as of
the close of trading on the foreign exchange on which it is traded or as of
4:00 p.m. New York time, if that is earlier, and that value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined.
The valuation of the Global Advisors Money Market Portfolio's portfolio
securities is based upon their amortized cost, which does not take into
account unrealized securities gains or losses. This method involves initially
valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact
of fluctuating interest rates on the market value of the instrument. By using
amortized cost valuation, the Trust seeks to maintain a constant net asset
value of $1.00 per share for the Global Advisors Money Market Portfolio,
despite minor shifts in the market value of its portfolio securities. While
this method provides certainty in valuation, it may result in periods during
which value, as determined by amortized cost, is higher or lower than the
price the Global Advisors Money Market Portfolio would receive if it sold the
instrument. During periods of declining interest rates, the quoted yield on
shares of the Global Advisors Money Market Portfolio may tend to be higher
than a like computation made by a fund with identical investments utilizing a
method of valuation based on market prices and estimates of market prices for
all of its portfolio instruments. Thus, if the use of amortized cost by the
Portfolio resulted in a lower aggregate portfolio value on a particular day, a
prospective investor in the Global Advisors Money Market Portfolio would be
able to obtain a somewhat higher yield if he or she purchased shares of the
Global Advisors Money Market Portfolio on that day, than would result from
investment in a fund utilizing solely market values, and existing investors in
the Global Advisors Money Market Portfolio would receive less investment
income. The converse would apply on a day when the use of amortized cost by
the Portfolio resulted in a higher aggregate portfolio value. However, as a
result of certain procedures adopted by the Trust, the Trust believes any
difference will normally be minimal.
The net asset value of the shares of each of the Portfolios other than the
Global Advisors Money Market Portfolio is determined by dividing the total
assets of the Portfolio, less all liabilities, by the total number of shares
outstanding. Securities traded on a national securities exchange or quoted on
the NASDAQ National Market System are valued at their last-reported sale price
on the principal exchange or reported by NASDAQ or, if there is no reported
sale, and in the case of over-the-counter securities not included in the
NASDAQ National Market System, at a bid price estimated by a broker or dealer.
Debt securities, including zero-coupon securities, and certain foreign
securities will be valued by a pricing service. Other foreign securities will
be valued by the Trust's custodian. Securities for which current market
quotations are not readily available and all other assets are valued at fair
value as determined in good faith by the Trustees, although the actual
calculations may be made by persons acting pursuant to the direction of the
Trustees.
If any securities held by a Portfolio are restricted as to resale, their fair
value is generally determined as the amount which the Trust could reasonably
expect to realize from an orderly disposition of such securities over a
reasonable period of time. The valuation procedures applied in any specific
instance are likely to vary from case to case. However, consideration is
generally given to the financial position of the issuer and other fundamental
analytical data relating to the investment and to the nature of the
restrictions on disposition of the securities (including any registration
expenses that might be borne by the Trust in connection with such
disposition). In addition, specific factors are also generally considered,
such as the cost of the investment, the market value of any unrestricted
securities of the same class (both at the time of purchase and at the time of
valuation), the size of the holding, the prices of any recent transactions or
offers with respect to such securities, and any available analysts' reports
regarding the issuer.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the
New York Stock Exchange. The values of these securities used in determining
the net asset value of the Trust's shares are computed as of such times. Also,
because of the amount of time required to collect and process trading
information as to large numbers of securities issues, the values of certain
securities (such as convertible bonds and U.S. Government Securities) are
determined based on market quotations collected earlier in the day at the
latest practicable time prior to the close of the Exchange. Occasionally,
events affecting the value of such securities may occur between such times and
the close of the Exchange which will not be reflected in the computation of
the Trust'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, in the manner described above.
The proceeds received by each Portfolio for each issue or sale of its shares,
and all income, earnings, profits, and proceeds thereof, subject only to the
rights of creditors, will be specifically allocated to such Portfolio, and
constitute the underlying assets of that Portfolio. The underlying assets of
each Portfolio will be segregated on the Trust's books of account, and will be
charged with the liabilities in respect of such Portfolio and with a share of
the general liabilities of the Trust. Expenses with respect to any two or more
Portfolios may be allocated in proportion to the net asset values of the
respective Portfolios except where allocations of direct expenses can
otherwise be fairly made.
TAXES
Each Portfolio of the Trust intends to qualify each year and elect to be taxed
as a regulated investment company under Subchapter M of the United States
Internal Revenue Code of 1986, as amended (the "Code"). As a regulated
investment company qualifying to have its tax liability determined under
Subchapter M, a Portfolio will not be subject to federal income tax on any of
its net investment income or net realized capital gains that are distributed
to the separate account of the Life Company. As a Massachusetts business
trust, a Portfolio under present law will not be subject to any excise or
income taxes in Massachusetts.
In order to qualify as a "regulated investment company," 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, and
other income (including gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities,
or currencies; (b) derive less than 30% of its gross income from the sale or
other disposition of certain assets (including stock and securities) held less
than three months; (c) diversify its holdings so that, at the close of each
quarter of its taxable year, (i) at least 50% of the value of its total assets
consists of cash, cash items, U.S. Government Securities, and other securities
limited generally with respect to any one issuer to not more than 5% of the
total assets of the Portfolio and not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any issuer (other than U.S. Government
Securities). In order to receive the favorable tax treatment accorded
regulated investment companies and their shareholders, moreover, a Portfolio
must in general distribute at least 90% of its interest, dividends, net
short-term capital gain, and certain other income each year.
With respect to investment income and gains received by a Portfolio from
sources outside the United States, such income and gains may be subject to
foreign taxes which are withheld at the source. The effective rate of foreign
taxes in which a Portfolio will be subject depends on the specific countries
in which its assets will be invested and the extent of the assets invested in
each such country and therefore cannot be determined in advance.
A Portfolio's ability to use options, futures, and forward contracts and other
hedging techniques, and to engage in certain other transactions, may be
limited by tax considerations. A Portfolio's transactions in
foreign-currency-denominated debt instruments and its hedging activities will
likely produce a difference between its book income and its taxable income.
This difference may cause a portion of the Portfolio's distributions of book
income to constitute returns of capital for tax purposes or require the
Portfolio to make distributions exceeding book income in order to permit the
Trust to continue to qualify, and be taxed under Subchapter M of the Code, as
a regulated investment company.
Under federal income tax law, a portion of the difference between the purchase
price of zero-coupon securities in which a Portfolio has invested and their
face value ("original issue discount") is considered to be income to the
Portfolio each year, even though the Portfolio will not receive cash interest
payments from these securities. This original issue discount (imputed income)
will comprise a part of the net investment income of the Portfolio which must
be distributed to shareholders in order to maintain the qualification of the
Portfolio as a regulated investment company and to avoid federal income tax at
the level of the Portfolio.
It is the policy of each of the Portfolios to meet the requirements of the
Code to qualify as a regulated investment company that is taxed pursuant to
Subchapter M of the Code. One of these requirements is that less than 30% of a
Portfolio's gross income must be derived from gains from sale or other
disposition of securities held for less than three months (with special rules
applying to so-called designated hedges). Accordingly, a Portfolio will be
restricted in selling securities held or considered under Code rules to have
been held less than three months, and in engaging in hedging or other
activities (including entering into options, futures, or short-sale
transactions) which may cause the Trust's holding period in certain of its
assets to be less than three months.
This discussion of the federal income tax and state tax treatment of the Trust
and its shareholders is based on the law as of the date of this Statement of
Additional Information. It does not describe in any respect the tax treatment
of any insurance or other product pursuant to which investments in the Trust
may be made. For further information concerning federal income tax
consequences for the holders of the VA Contracts of the Life company,
investors should consult the prospectus used in connection with the issuance
of their VA Contracts.
DIVIDENDS AND DISTRIBUTIONS
GLOBAL ADVISORS MONEY MARKET PORTFOLIO. The net investment income of the
Global Advisors Money Market Portfolio is determined as of the close of
trading on the New York Stock Exchange (generally 4:00 p.m. New York time) on
each day on which the Exchange is open for business. All of the net investment
income so determined normally will be declared as a dividend daily to
shareholders of record as of the close of trading on the Exchange after the
purchase and redemption of shares. Unless the business day before a weekend or
holiday is the last day of an accounting period, the dividend declared on that
day will include an amount in respect of the Portfolio's income for the
subsequent non-business day or days. No daily dividend will include any amount
of net income in respect of a subsequent semi-annual accounting period.
Dividends commence on the next business day after the date of purchase.
Dividends declared during any month will be invested as of the close of
business on the last calendar day of that month (or the next business day
after the last calendar day of the month if the last calendar day of the month
is a non-business day) in additional shares of the Portfolio at the net asset
value per share, normally $1.00, determined as of the close of business on
that day, unless payment of the dividend in cash has been requested.
Net income of the Global Advisors Money Market Portfolio consists of all
interest income accrued on portfolio assets less all expenses of the Portfolio
and amortized market premium. Amortized market discount is included in
interest income. The Portfolio does not anticipate that it will normally
realize any long-term capital gains with respect to its portfolio securities.
Normally the Global Advisors Money Market Portfolio will have a positive net
income at the time of each determination thereof. Net income may be negative
if an unexpected liability must be accrued or a loss realized. If the net
income of the Portfolio determined at any time is a negative amount, the net
asset value per share will be reduced below $1.00 unless one or more of the
following steps, for which the Trustees have authority, are taken: (1) reduce
the number of shares in each shareholder's account, (2) offset each
shareholder's pro rata portion of negative net income against the
shareholder's accrued dividend account or against future dividends, or (3)
combine these methods in order to seek to maintain the net asset value per
share at $1.00. The Trust may endeavor to restore the Portfolio's net asset
value per share to $1.00 by not declaring dividends from net income on
subsequent days until restoration, with the result that the net asset value
per share will increase to the extent of positive net income which is not
declared as a dividend.
Should the Global Advisors Money Market Portfolio incur or anticipate, with
respect to its portfolio, any unusual or unexpected significant expense or
loss which would affect disproportionately the Portfolio's income for a
particular period, the Trustees would at that time consider whether to adhere
to the dividend policy described above or to revise it in light of the then
prevailing circumstances in order to ameliorate to the extent possible the
disproportionate effect of such expense or loss on then existing shareholders.
Such expenses or losses may nevertheless result in a shareholder's receiving
no dividends for the period during which the shares are held and receiving
upon redemption a price per share lower than that which was paid.
OTHER PORTFOLIOS. Each of the Portfolios other than the Global Advisors
Money Market Portfolio will declare and distribute dividends from net
investment income, if any, and will distribute its net realized capital gains,
if any, at least annually. Both dividends and capital gain distributions will
be made in shares of such Portfolios unless an election is made on behalf of a
separate account to receive dividends and capital gain distributions in cash.
PERFORMANCE INFORMATION
GLOBAL ADVISORS MONEY MARKET PORTFOLIO: The Portfolio's yield is computed
by determining the percentage net change, excluding capital changes, in the
value of an investment in one share of the Portfolio over the base period, and
multiplying the net change by 365/7 (or approximately 52 weeks). The
Portfolio's effective yield represents a compounding of the yield by adding 1
to the number representing the percentage change in value of the investment
during the base period, raising that sum to a power equal to 365/7, and
subtracting 1 from the result.
OTHER PORTFOLIOS:
(a) A Portfolio's yield is presented for a specified 30-day period (the
"base period"). Yield is based on the amount determined by (i) calculating the
aggregate of dividends and interest earned by the Portfolio during the base
period less expenses accrued for that period, and (ii) dividing that amount by
the product of (A) the average daily number of shares of the Portfolio
outstanding during the base period and entitled to receive dividends and (B)
the net asset value per share of the Portfolio on the last day of the base
period. The result is annualized on a compounding basis to determine the
Portfolio's yield. For this calculation, interest earned on debt obligations
held by a Portfolio is generally calculated using the yield to maturity (or
first expected call date) of such obligations based on their market values
(or, in the case of receivables-backed securities such as Ginnie Maes, based
on cost). Dividends on equity securities are accrued daily at their stated
dividend rates.
As required by regulations of the Securities and Exchange Commission, the
annualized total return of a Portfolio for a period is computed by assuming a
hypothetical initial payment of $1,000. It is then assumed that all of the
dividends and distributions by the Portfolio over the period are reinvested.
It is then assumed that at the end of the period, the entire amount is
redeemed. The annualized total return is then calculated by determining the
annual rate required for the initial payment to grow to the amount which
would have been received upon redemption.
Investment operations for the Portfolios depicted in the chart below commenced
on October 10, 1995 for the Money Market Portfolio and on October 20, 1995
for the BEA Growth and Income, Credit Suisse International Equity Portfolio
and Global Advisors Growth Equity Portfolio. The performance figures shown
for the Portfolios in the chart below reflect the actual fees and expenses
paid by the Portfolios.
Average Total Return for the Period ended December 31, 1995
Portfolio Performance
Portfolio Return Since Inception
BEA Growth and Income 6.57%
Credit Suisse International Equity 3.93%
Global Advisors Growth Equity 3.57%
Global Advisors Money Market 1.17%
From time to time, the Adviser may reduce its compensation or assume expenses
with respect to the operations of a Portfolio in order to reduce the
Portfolio's expenses. Any such waiver or assumption would increase a
Portfolio's yield and total return during the period of the waiver or
assumption.
SHAREHOLDER COMMUNICATIONS
Owners of Variable Annuity contracts issued by the Life Company for which
shares of one or more Portfolios are the investment vehicle are entitled to
receive from the Life Company unaudited semi-annual financial statements and
audited year-end financial statements certified by the Trust's independent
public accountants. Each report will show the investments owned by the
Portfolio and the market value thereof and will provide other information
about the Portfolio and its operations.
ORGANIZATION AND CAPITALIZATION
The Trust is an open-end investment company established under the laws of The
Commonwealth of Massachusetts by a Declaration of Trust dated December 12,
1994, as amended April 19, 1995.
Shares entitle their holders to one vote per share, with fractional shares
voting proportionally; however, a separate vote will be taken by each
Portfolio on matters affecting an individual Portfolio. For example, a change
in a fundamental investment policy for the BEA Growth and Income Portfolio
would be voted upon only by shareholders of that Portfolio. Additionally,
approval of the Investment Advisory Agreement is a matter to be determined
separately by each Portfolio. Approval by the shareholders of one Portfolio is
effective as to that Portfolio. Shares have noncumulative voting rights.
Although the Trust is not required to hold annual meetings of its
shareholders, shareholders have the right to call a meeting to elect or remove
Trustees or to take other actions as provided in the Declaration of Trust.
Shares have no preemptive or subscription rights, and are transferable. Shares
are entitled to dividends as declared by the Trustees, and if a Portfolio were
liquidated, the shares of that Portfolio would receive the net assets of that
Portfolio. The Trust may suspend the sale of shares at any time and may refuse
any order to purchase shares.
Additional Portfolios may be created from time to time with different
investment objectives or for use as funding vehicles for different variable
life insurance policies or variable annuity contracts. Any additional
Portfolios may be managed by investment advisers or sub-advisers other than
the current Adviser and Sub-Advisers. In addition, the Trustees have the
right, subject to any necessary regulatory approvals, to create more than one
class of shares in a Portfolio, with the classes being subject to different
charges and expenses and having such other different rights as the Trustees
may prescribe and to terminate any Portfolio of the Trust.
PORTFOLIO TURNOVER
The portfolio turnover rate of a Portfolio is defined by the Securities and
Exchange Commission as the ratio of the lesser of annual sales or purchases to
the monthly average value of the portfolio, excluding from both the numerator
and the denominator securities with maturities at the time of acquisition of
one year or less. Under that definition, the Global Advisors Money Market
Portfolio would not calculate portfolio turnover. Portfolio turnover generally
involves some expense to a Portfolio, including brokerage commissions or
dealer mark-ups and other transaction costs on the sale of securities and
reinvestment in other securities. The portfolio turnover rate of each of the
Portfolios for the period ended December 31, 1995 is set forth under
"Financial Highlights" in the Prospectus.
CUSTODIAN
State Street Bank and Trust Company is the custodian of the Trust's assets.
The custodian's responsibilities include safeguarding and controlling the
Trust's cash and securities, handling the receipt and delivery of securities,
and collecting interest and dividends on the Trust's investments. The Trust
may employ foreign sub-custodians that are approved by the Board of Trustees
to hold foreign assets.
LEGAL COUNSEL
Legal matters in connection with the offering are being passed upon by
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut.
INDEPENDENT AUDITORS
The Trust has selected Coopers & Lybrand L.L.P. as the independent auditors
who will audit the annual financial statements of the Trust.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations
of the Trust and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the Trust or
the Trustees. The Declaration of Trust provides for indemnification out of a
Portfolio's property for all loss and expense of any shareholder held
personally liable for the obligations of a Portfolio. Thus the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the Portfolio would be unable to meet its
obligations.
DESCRIPTION OF NRSRO RATINGS
DESCRIPTION OF MOODY'S CORPORATE RATINGS
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well-safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are the lowest-rated class of bonds. Issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
DESCRIPTION OF S&P'S CORPORATE RATINGS
AAA -- Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest-rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher-rated
categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit 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 bonds in this category than for bonds in higher-rated
categories.
BB, B, CCC, CC and C-- Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the least degree of speculation and C the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions. A C rating is typically applied to
debt subordinated to senior debt which is assigned an actual or implied CCC
rating. It may also be used to cover a situation where a bankruptcy petition
has been filed, but debt service payments are continued.
DESCRIPTION OF DUFF CORPORATE RATINGS
AAA -- Highest credit quality. The risk factors are negligible being only
slightly more than for risk-free U.S. Treasury debt.
AA -- Risk is modest but may vary slightly from time to time because of
economic conditions.
A -- Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB -- Investment-grade. Considerable variability in risk during economic
cycles.
BB -- Below investment-grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according
to industry conditions or company fortunes. Overall quality may move up or
down frequently within this category.
B -- Below investment-grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according
to economic cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in quality rating within this category or into a
higher- or lower-quality rating grade.
Substantial Risk -- Well below investment-grade securities. May be in
default or have considerable uncertainty as to timely payment of interest,
preferred dividends and/or principal. Protection factors are narrow and risk
can be substantial with unfavorable economic/industry conditions, and/or with
favorable company developments.
DESCRIPTION OF FITCH CORPORATE RATINGS
AAA -- Bonds considered to be investment-grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA-- Bonds considered to be investment-grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA. Because bonds rated
in the AAA and AA categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issues is generally rated
"[-]+."
A -- Bonds considered to be investment-grade and of high credit quality.
The obligor's ability to pay interest and to repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment-grade and of satisfactory credit
quality. The obligor's ability to pay interest and to repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment-grade is higher than for bonds with
higher ratings.
BB -- Bonds considered speculative and of low investment grade. The
obligor's ability to pay interest and repay principal is not strong and is
considered likely to be affected over time by adverse economic changes.
B -- Bonds considered highly speculative. Bonds in this class are lightly
protected as to the obligor's ability to pay interest over the life of the
issue and repay principal when due.
CCC -- Bonds which may have certain identifiable characteristics which,
if not remedied, could lead to the possibility of default in either principal
or interest payments.
CC -- Bonds which are minimally protected. Default in payment of interest
and/or principal seems probable.
C -- Bonds which are in imminent default in payment of interest or
principal.
DESCRIPTION OF THOMSON BANKWATCH, INC. CORPORATE RATINGS
AAA -- Long-term fixed-income securities that are rated AAA indicate that
the ability to repay principal and interest on a timely basis is very high.
AA -- Long-term fixed-income securities that are rated AA indicate a
superior ability to repay principal and interest on a timely basis with
limited incremental risk vs. issues rated in the highest category.
TBW may apply plus ("+") and minus ("-") modifiers in the AAA and AA
categories to indicate where within the respective category the issued is
placed.
DESCRIPTION OF IBCA LIMITED AND IBCA INC. CORPORATE RATINGS
AAA -- Obligations which are rated AAA are considered to be of the lowest
expectation of investment risk. Capacity for timely repayment of principal and
interest is substantial such that adverse changes in business, economic, or
financial conditions are unlikely to increase investment risk significantly.
AA -- Obligations which are rated AA are considered to be of a very low
expectation of investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic, or financial
conditions may increase investment risk albeit not very significantly.
DESCRIPTION OF S&P'S COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payments is either over-whelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted A-1+.
Capacity for timely payment on commercial paper rated A-2 is strong, but the
relative degree of safety is not as high as for issues designated A-1. An A-3
designation indicates an adequate capacity for timely payment. Issues with
this designation, however, are more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations. B
issues are regarded as having only speculative capacity for timely payment. C
issues have a doubtful capacity for payment. D issues are in payment default.
The D rating category is used when interest payments or principal payments are
not made on the due date, even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made during such
grace period.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated Prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics of
issuers rated Prime-1 but to a lesser degree. Earnings trend and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained. P-3 issuers have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained. Not Prime
issuers do not fall within any of the Prime rating categories.
DESCRIPTION OF DUFF COMMERCIAL PAPER RATINGS
The rating Duff-1 is the highest commercial paper rating assigned by Duff
& Phelps. Paper rated Duff-1 is regarded as having very high certainty of
timely payment with excellent liquidity factors which are supported by ample
asset protection. Risk factors are minor. Paper rated Duff-2 is regarded as
having good certainty of timely payment, good access to capital markets and
sound liquidity factors and company fundamentals. Risk factors are small.
DESCRIPTION OF FITCH COMMERCIAL PAPER RATINGS
The rating Fitch-1 (Highest Grade) is the highest commercial paper rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade)
is the second highest commercial paper rating assigned by Fitch which reflects
an assurance of timely payment only slightly less in degree than the strongest
issues.
DESCRIPTION OF IBCA LIMITED AND IBCA INC. COMMERCIAL PAPER RATINGS
A1 - Short-term obligations rated A1 are supported by a very strong
capacity for timely repayment. A plus ("+") sign is added to those issues
determined to possess the highest capacity for timely payment.
A2 - Short-term obligations rated A2 are supported by a strong capacity
for timely repayment, although such capacity may be susceptible to adverse
changes in business, economic or financial conditions.
DESCRIPTION OF THOMSON BANKWATCH, INC. COMMERCIAL PAPER RATINGS
TBW-1 - Short-term obligations rated TBW-1 indicate a very high degree of
likelihood that principal and interest will be paid on a timely basis.
TBW-2 - Short-term obligations rated TBW-2 indicate that while the degree
of safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated TBW-1.
FINANCIAL STATEMENTS
The Trust's financial statements and notes thereto for the period ended
December 31, 1995, and the report of Coopers & Lybrand L.L.P., Independent
Auditors, with respect thereto, are set forth below.
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
ELITEPLUS BONUS VARIABLE ANNUITY
TO ELITEPLUS CONTRACT OWNERS:
Thank you for choosing the Western National ElitePlus Bonus Variable
Annuity. ElitePlus offers a number of excellent features and includes a variety
of investment options managed by a group of highly-respected professional money
managers. Accordingly, ElitePlus gives you the ability to tailor a program
suited for your long-term financial plans, yet provides you the flexibility to
change investment options later, should your requirements change.
The enclosed Annual Report for WNL Series Trust contains detailed financial
information to help you understand your annuity contract's past performance.
We look forward to serving you in the future. Please contact us if you
have any questions concerning your account. Our toll-free telephone number is
(800) 910-4455.
Sincerely,
/s/ Michael J. Poulos
Michael J. Poulos
Chairman and
Chief Executive Officer
<PAGE>
WNL SERIES TRUST
ANNUAL REPORT
DECEMBER 31, 1995
<PAGE>
BEA GROWTH AND INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ --------
<S> <C> <C>
COMMON STOCKS - 47.4%
AEROSPACE - 0.7%
Lockheed Martin Corporation....................... 200 $ 15,800
--------
AIR TRAVEL - 1.7%
AMR Corporation (a)............................... 500 37,125
--------
BANKS - 2.7%
Astoria Financial Corporation..................... 700 31,938
Southern National Corporation..................... 1,000 26,250
--------
58,188
--------
BUSINESS SERVICES - 4.5%
Automatic Data Processing Incorporated............ 400 29,700
GTECH HOLDINGS CORPORATION (A).................... 1,000 26,000
HUMANA INCORPORATED (A)........................... 1,500 41,062
--------
96,762
--------
COMPUTERS & BUSINESS EQUIPMENT - 5.7%
DST Systems Incorporated (a)...................... 2,500 71,250
Seagate Technology (a)............................ 700 33,250
Western Digital Corporation (a)................... 1,000 17,875
--------
122,375
--------
CONSTRUCTION MATERIALS - 1.4%
USG Corporation (New) (a)......................... 1,000 30,000
--------
CONTAINERS & GLASS - 1.4%
Owens Illinois Incorporated (New) (a)............. 2,000 29,000
--------
COSMETICS & TOILETRIES - 3.3%
Estee Lauder Companies Incorporated, Class A (a).. 2,000 69,750
--------
DRUGS & HEALTH CARE - 4.3%
Barr Labs Incorporated (a)........................ 1,000 29,750
i-STAT Corporation (a)............................ 500 16,250
McKesson Corporation.............................. 500 25,313
Pharmacia & Upjohn Incorporated (a)............... 500 19,375
--------
90,688
--------
ELECTRICAL EQUIPMENT - 1.4%
General Electric Company.......................... 400 28,800
--------
ELECTRONICS - 2.3%
Intel Corporation................................. 400 22,700
Teledyne Incorporated............................. 1,000 25,625
--------
48,325
--------
</TABLE>
The accompanying notes are an integral part of the financial statements
2
<PAGE>
BEA GROWTH AND INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ ----------
<S> <C> <C>
COMMON STOCKS - (CONTINUED)
FINANCIAL SERVICES - 1.7%
Federal National Mortgage Association.. 300 $ 37,237
----------
INSURANCE - 1.2%
CapMAC Holdings Incorporated (a)....... 1,000 25,125
----------
INTERNATIONAL OIL - 3.1%
Exxon Corporation...................... 400 32,050
Mobil Corporation...................... 300 33,600
----------
65,650
----------
MINING - 0.6%
Phelps Dodge Corporation............... 200 12,450
----------
PUBLISHING - 1.5%
Dun & Bradstreet Corporation........... 500 32,375
----------
PHOTOGRAPHY - 1.6%
Eastman Kodak Company.................. 500 33,500
----------
PETROLEUM SERVICES - 1.0%
McDermott International Incorporated... 1,000 22,000
----------
TOYS & AMUSEMENTS - 1.4%
Mattel Incorporated.................... 1,000 30,750
----------
TOBACCO - 1.7%
Philip Morris Companies Incorporated... 400 36,200
----------
TRUCKING & FREIGHT FORWARDING - 1.5%
Tidewater Incorporated................. 1,000 31,500
----------
TELEPHONE - 2.7%
AT&T Corporation....................... 500 32,375
MCI Communications Corporation......... 1,000 26,125
----------
58,500
----------
TOTAL COMMON STOCKS - (Cost $919,339) 1,012,100
----------
PREFERRED STOCK - 0.0%
(Cost $150)
ELECTRONICS - 0.0%
Teledyne Incorporated, Series E....... 10 144
----------
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE>
BEA GROWTH AND INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL
SECURITY DESCRIPTION AMOUNT VALUE
- -------------------- --------- ----------
<S> <C> <C>
FOREIGN GOVERNMENT BOND - 0.5%
(Cost $9,171)
Republic of Italy
6.875%, 09/27/2023........................................... $ 10,000 $ 9,766
----------
U.S. GOVERNMENT AND AGENCY SECURITIES - 46.9%
U.S. GOVERNMENT - 30.7%
United States Treasury Bonds
7.125%, 02/15/2023........................................... 40,000 45,738
7.875%, 02/15/2021........................................... 80,000 98,513
10.750%, 08/15/2005.......................................... 70,000 96,174
United States Treasury Notes
5.375%, 05/31/1998........................................... 200,000 200,656
6.250%, 02/15/2003........................................... 40,000 41,731
7.750%, 11/30/1999........................................... 160,000 173,374
----------
656,186
----------
FEDERAL AGENCIES - 16.2%
Federal Home Loan PC
6.000%, 12/01/1998........................................... 29,964 30,066
7.000%, 11/01/2010........................................... 48,850 49,781
Federal National Mortgage Association
6.000%, 10/01/2025........................................... 48,738 47,108
6.500%, 11/01/2002........................................... 29,377 29,680
7.500%, 11/01/2002........................................... 29,380 30,069
8.000%, 07/01/2025........................................... 78,257 81,045
Government National Mortgage Association
7.000%, 07/15/2008........................................... 29,197 29,872
8.000%, 08/15/2025........................................... 29,972 31,227
9.000%, 10/15/2017........................................... 16,912 18,056
----------
346,904
----------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES - (Cost $982,181) 1,003,090
----------
TOTAL INVESTMENTS - (COST $1,910,841*) - 94.8%................. 2,025,100
OTHER ASSETS LESS LIABILITIES - 5.2%........................... 111,219
----------
NET ASSETS - 100.0%........................................... $2,136,319
==========
</TABLE>
(a) Non-income producing security.
*-Aggregate cost for Federal tax purposes. Aggregate gross unrealized
appreciation for all securities in which there is an excess of value over tax
cost and aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value were $119,477 and $5,218,
respectively, resulting in net unrealized appreciation of $114,259.
The accompanying notes are an integral part of the financial statements
4
<PAGE>
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ --------
<S> <C> <C>
COMMON STOCKS - 83.7%
ARGENTINA - 1.3%
Telefonica De Argentina Class B ADR (a).. 1,000 $ 27,250
--------
CZECH REPUBLIC - 1.4%
SPT Telecom AS (a)....................... 300 28,351
--------
FRANCE - 5.6%
AXA...................................... 470 31,672
BIC...................................... 290 29,492
LVMH Moet Hennessy....................... 140 29,161
Sanofi................................... 420 26,922
--------
117,247
--------
GERMANY - 6.6%
Adidas AG (a)............................ 600 31,746
Altana AG................................ 45 26,194
Bayer AG................................. 100 26,385
Mannesmann AG............................ 80 25,470
Siemens AG............................... 50 27,361
--------
137,156
--------
HONG KONG - 2.6%
HSBC Holdings Limited.................... 2,000 30,262
Hutchison Whampoa........................ 4,000 24,365
--------
54,627
--------
HUNGARY - 1.7%
Gedeon Richter GDR (a)................... 600 11,538
MOL Magyar Olarj-es Gazipari GDR (a)..... 2,900 23,490
--------
35,028
--------
INDONESIA - 1.3%
Astra International...................... 6,000 12,465
HM Sampoerna............................. 1,500 15,613
--------
28,078
--------
IRELAND - 1.2%
Bank of Ireland.......................... 3,500 25,496
--------
ISRAEL - 1.3%
Koors Industries Limited ADR (a)......... 1,300 26,325
--------
ITALY - 2.0%
Ente Nazionale Idrocarburi SPA (a)....... 3,925 13,717
Telecom Italia Mobile SPA (a)............ 15,500 27,279
--------
40,996
--------
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE>
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ --------
<S> <C> <C>
COMMON STOCKS - (CONTINUED)
JAPAN - 22.2%
Amada Company............................................ 4,000 $ 39,516
Daiwa Securities......................................... 3,000 45,908
East Japan Railway....................................... 8 38,896
Hitachi Zosen Corporation................................ 6,000 31,090
Japan Airport Terminal................................... 3,000 36,320
Japan Associates Finance Company......................... 1,000 105,569
Maeda Road Construction.................................. 2,000 36,998
NEC Corporation.......................................... 6,000 73,220
Santen Pharmaceutical Company............................ 1,000 22,663
Sumitomo Osaka Cement Company Limited.................... 7,000 32,542
--------
462,722
--------
KOREA - 1.2%
Samsung Electronics Limited 144A (a)..................... 250 24,500
--------
NETHERLANDS - 6.7%
Ahold NV................................................. 700 28,572
Heineken NV.............................................. 150 26,612
International Nederlanden................................ 450 30,062
Nutricia Verenigde Bedrijven NV.......................... 350 28,311
Verenigde Nederlandse Uitgeversbedrijven Verenigd Bezit.. 190 26,084
--------
139,641
--------
SINGAPORE - 1.2%
Development Bank of Singapore............................ 2,000 24,885
--------
SPAIN - 3.8%
Banco Popular Espana..................................... 140 25,819
Gas Natural Sociedad Distribuidora de Gas SA............. 165 25,709
Iberdrola SA............................................. 3,000 27,452
--------
78,980
--------
SWEDEN - 0.9%
Astra AB................................................. 500 19,956
--------
SWITZERLAND - 5.8%
Ciba Geigy AG............................................ 31 27,278
Roche Holdings AG........................................ 5 39,553
Schweizerische Bankverein................................ 130 26,541
Schweizerische Rueckversicherungs-Gesellschaft........... 24 27,922
--------
121,294
--------
THAILAND - 3.8%
Advanced Information Services............................ 1,500 26,558
Bangkok Bank............................................. 2,500 30,369
Finance One Public Company Limited....................... 3,500 22,092
--------
79,019
--------
</TABLE>
The accompanying notes are an integral part of the financial statements
6
<PAGE>
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- --------- ----------
<S> <C> <C>
COMMON STOCKS - (CONTINUED)
UNITED KINGDOM - 13.1%
Abbey National............................................. 3,100 $ 30,620
Asda Group................................................. 17,600 30,340
Courtaulds................................................. 4,400 27,778
De La Rue.................................................. 1,850 18,704
Dixons Group............................................... 4,300 29,651
Electrocomponents.......................................... 5,100 28,474
General Accident........................................... 2,600 26,266
GKN........................................................ 2,100 25,406
Pearson.................................................... 2,700 26,145
Wolseley................................................... 4,150 29,067
----------
272,451
----------
TOTAL COMMON STOCKS - (Cost $1,676,022) 1,744,002
----------
WARRANTS - 4.1%
UNITED KINGDOM
Fleming Japan Investor (a)................................. 40,000 65,849
Schroder Japan GWT (a)..................................... 30,000 18,869
----------
TOTAL WARRANTS - (Cost $83,489).............................. 84,718
----------
PRINCIPAL
AMOUNT
---------
REPURCHASE AGREEMENT - 14.1%
(Cost $294,000)
State Street Bank and Trust Company, 2.250% dated
12/29/95, to be repurchased at $294,074 on 01/02/96,
collateralized by $270,000 par value U.S. Treasury Notes,
8.000% due 08/15/1999, with a value of $301,312............ $294,000 294,000
----------
TOTAL INVESTMENTS - (COST $2,053,511*) - 101.9%.............. 2,122,720
OTHER ASSETS LESS LIABILITIES - (1.9)%....................... (39,696)
----------
NET ASSETS - 100.0%......................................... $2,083,024
==========
</TABLE>
(a) Non-income producing security.
ADR - American Depositary Receipts.
GDR - Global Depositary Receipts.
*-Aggregate cost for Federal tax purposes. Aggregate gross unrealized
appreciation for all securities in which there is an excess of value over tax
cost and aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value were $92,402 and $23,193,
respectively, resulting in net unrealized appreciation of $69,209.
The accompanying notes are an integral part of the financial statements
7
<PAGE>
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
ANALYSIS OF INDUSTRY CLASSIFICATION
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY NET ASSETS
- -------- -----------
<S> <C>
Auto Parts...................................... 1.2%
Banks........................................... 10.8
Chemicals....................................... 3.9
Conglomerates................................... 3.2
Construction Materials.......................... 4.7
Electric Utilities.............................. 2.6
Electrical Equipment............................ 4.8
Electronics..................................... 2.5
Financial Services.............................. 11.5
Food & Beverages................................ 1.4
Industrial Machinery............................ 4.6
Insurance....................................... 4.1
Leisure Time.................................... 1.7
Liquor.......................................... 2.7
Miscellaneous................................... 0.9
Oil & Gas....................................... 1.8
Pharmaceuticals................................. 7.0
Publishing...................................... 3.4
Railroads & Equipment........................... 1.9
Retail Grocery.................................. 1.5
Retail Trade.................................... 2.8
Shoes........................................... 1.5
Telecommunications.............................. 3.9
Telephone....................................... 2.6
Tobacco......................................... 0.8
----
TOTAL INVESTMENTS BY INDUSTRY CLASSIFICATION.. 87.8
Repurchase Agreement.......................... 14.1
------
TOTAL INVESTMENTS 101.9%
======
</TABLE>
The accompanying notes are an integral part of the financial statements
8
<PAGE>
GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ --------
<S> <C> <C>
COMMON STOCKS - 97.7%
AEROSPACE - 2.0%
General Dynamics Corporation............. 700 $ 41,388
--------
AIR TRAVEL - 0.9%
UAL Corporation (a)...................... 100 17,850
--------
BANKS - 6.7%
Chemical Banking Corporation............. 800 47,000
Nationsbank Corporation.................. 700 48,737
Wells Fargo & Company.................... 200 43,200
--------
138,937
--------
CHEMICALS - 4.6%
IMC Global Incorporated.................. 1,200 49,050
Terra Industries Incorporated............ 3,200 45,200
--------
94,250
--------
COMPUTERS & BUSINESS EQUIPMENT - 4.2%
Compaq Computer Corporation (a).......... 900 43,200
Seagate Technology (a)................... 900 42,750
--------
85,950
--------
COSMETICS & TOILETRIES - 1.0%
Alberto Culver Company, Class B (conv.).. 600 20,625
--------
DRUGS & HEALTH CARE - 11.0%
Bristol Myers Squibb Company............. 700 60,112
Eli Lilly & Company...................... 1,000 56,250
Guidant Corporation...................... 400 16,900
Medtronic Incorporated................... 800 44,700
Schering Plough Corporation.............. 900 49,275
--------
227,237
--------
DOMESTIC OIL - 1.3%
Sun Incorporated......................... 1,000 27,375
--------
ELECTRONICS - 6.9%
KLA Instruments Corporation (a).......... 1,000 26,062
LAM Research Corporation (a)............. 700 32,025
Teradyne Incorporated (a)................ 1,100 27,500
Texas Instruments Incorporated........... 700 36,225
Thomas & Betts Corporation............... 300 22,125
--------
143,937
--------
ELECTRIC UTILITIES - 4.1%
Illinova Corporation..................... 1,400 42,000
Unicom Corporation....................... 1,300 42,575
--------
84,575
--------
</TABLE>
The accompanying notes are an integral part of the financial statements
9
<PAGE>
GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ --------
<S> <C> <C>
COMMON STOCKS - (CONTINUED)
FOOD & BEVERAGES - 4.7%
IBP Incorporated.......................... 700 $ 35,350
Pepsico Incorporated...................... 1,100 61,462
--------
96,812
--------
FINANCIAL SERVICES - 6.7%
Bankers Life Holding Corporation.......... 900 18,225
Case Corporation.......................... 1,100 50,325
Paine Webber Group Incorporated........... 1,200 24,000
Student Loan Marketing Association........ 700 46,112
--------
138,662
--------
GAS EXPLORATION - 1.5%
Sonat Offshore Drilling Incorporated...... 700 31,325
--------
GAS & PIPELINE UTILITIES - 3.9%
Consolidated Natural Gas Company.......... 900 40,838
National Fuel Gas Company New Jersey...... 1,200 40,350
--------
81,188
--------
HOUSEHOLD PRODUCTS - 1.0%
Clorox Company............................ 300 21,488
--------
HOTELS & RESTAURANTS - 1.5%
Mirage Resorts Incorporated (a)........... 900 31,050
--------
INSURANCE - 4.5%
Aetna Life & Casualty Company............. 300 20,775
Conseco Incorporated...................... 100 6,262
Marsh & McLennan Companies Incorporated... 500 44,375
Old Republic International Corporation.... 600 21,300
--------
92,712
--------
INTERNATIONAL OIL - 4.0%
Exxon Corporation......................... 200 16,025
Mobil Corporation......................... 600 67,200
--------
83,225
--------
LEISURE TIME - 1.4%
Callaway Golf Company..................... 1,300 29,413
--------
NEWSPAPERS - 2.7%
Central Newspapers Incorporated, Class A.. 400 12,550
Tribune Company........................... 700 42,788
--------
55,338
--------
PAPER - 0.2%
Champion International Corporation........ 100 4,200
--------
</TABLE>
The accompanying notes are an integral part of the financial statements
10
<PAGE>
GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ ----------
<S> <C> <C>
COMMON STOCKS - (CONTINUED)
RETAIL TRADE - 3.7%
Eckerd Corporation (a)........................ 1,000 $ 44,625
Walgreen Company.............................. 1,100 32,863
----------
77,488
----------
RETAIL GROCERY - 1.7%
Safeway Incorporated (a)...................... 700 36,050
----------
RAILROADS & EQUIPMENT - 1.8%
CSX Corporation............................... 800 36,500
----------
SOFTWARE - 3.0%
Compuware Corporation (a)..................... 2,200 40,700
Read Rite Corporation (a)..................... 900 20,925
----------
61,625
----------
TOBACCO - 2.6%
Philip Morris Companies Incorporated.......... 600 54,300
----------
TRUCKING & FREIGHT FORWARDING - 0.7%
Polaris Industries Incorporated............... 500 14,688
----------
TELEPHONE - 9.4%
Ameritech Corporation......................... 600 35,400
GTE Corporation............................... 1,400 61,600
Pacific Telesis Group......................... 1,500 50,437
Sprint Corporation............................ 1,200 47,850
----------
195,287
----------
TOTAL COMMON STOCKS - (Cost $1,954,695) 2,023,475
----------
SHORT TERM INVESTMENT
(Cost $40,214)
MUTUAL FUNDS - 1.9%
Dreyfus Cash Management....................... 40,214 40,214
----------
TOTAL INVESTMENTS - (COST $1,994,909*) - 99.6%.. 2,063,689
OTHER ASSETS LESS LIABILITIES - 0.4%............ 8,950
----------
NET ASSETS - 100.0%............................ $2,072,639
==========
</TABLE>
(a) Non-income producing securities
*-Aggregate cost for Federal tax purposes. Aggregate gross unrealized
appreciation for all securities in which there is an excess of value over tax
cost and aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value were $132,504 and $63,724,
respectively, resulting in net unrealized appreciation of $68,780.
The accompanying notes are an integral part of the financial statements
11
<PAGE>
GLOBAL ADVISORS MONEY MARKET PORTFOLIO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL
SECURITY DESCRIPTION AMOUNT VALUE
- -------------------- --------- --------
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES - 86.7%
U.S. GOVERNMENT - 27.5%
United States Treasury Bills
5.100%, 03/07/1996.................................... $35,000 $ 34,673
--------
FEDERAL AGENCIES - 59.2%
Federal Farm Credit Bank Discount Notes
5.460%, 01/22/1996.................................... 25,000 24,920
Federal Home Loan Mortgage Discount Notes
5.600%, 01/09/1996.................................... 25,000 24,969
Federal National Mortgage Association Discount Notes
5.580%, 01/19/1996.................................... 25,000 24,930
--------
74,819
--------
TOTAL INVESTMENTS - (COST $109,492*) - 86.7%............ 109,492
OTHER ASSETS LESS LIABILITIES - 13.3%................... 16,787
--------
NET ASSETS - 100.0%.................................... $126,279
========
</TABLE>
*-Aggregate cost for Federal tax purposes.
The accompanying notes are an integral part of the financial statements
12
<PAGE>
WNL SERIES TRUST
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
BEA CREDIT GLOBAL GLOBAL
GROWTH SUISSE ADVISORS ADVISORS
AND INTERNATIONAL GROWTH MONEY
INCOME EQUITY EQUITY MARKET
----------- ------------- --------- ------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities,
at value.................. $2,025,100 $1,828,720 $2,063,689 $109,492
Repurchase agreements, at
value..................... -- 294,000 -- --
---------- ---------- ---------- ---------
TOTAL INVESTMENTS (A)
(NOTE 1)............... 2,025,100 2,122,720 2,063,689 109,492
Cash, including foreign
currency, at value........ 93,340 79,376 3,857 14,653
Receivable for currency
sold...................... -- 84,227 -- --
Interest receivable........ 11,486 55 -- --
Dividends receivable....... 12,259 2,358 4,447 --
Receivable for fund shares
sold...................... -- -- -- 1,094
Due from affiliate of the
Adviser (Note 2).......... 23,479 29,625 23,480 23,518
---------- ---------- ---------- ---------
TOTAL ASSETS.............. 2,165,664 2,318,361 2,095,473 148,757
LIABILITIES
Payable for securities
purchased................. 6,505 121,645 -- --
Payable for currency
purchased................. -- 84,442 -- --
Payable for fund shares
repurchased............... -- -- -- 17
Accounts payable and
accrued expenses.......... 22,840 29,250 22,834 22,461
---------- ---------- ---------- ---------
TOTAL LIABILITIES......... 29,345 235,337 22,834 22,478
---------- ---------- ---------- ---------
NET ASSETS................ $2,136,319 $2,083,024 $2,072,639 $126,279
========== ========== ========== =========
NET ASSETS CONSIST OF:
Par value (Note 4)......... $ 2,042 $ 2,016 $ 2,011 $ 1,263
Paid-in capital (Note 4)... 2,041,563 2,014,090 2,009,286 125,016
Undistributed net
investment income......... -- (278) -- --
Accumulated net realized
loss on investments and
foreign currency
transactions.............. (21,545) (835) (7,438) --
Net unrealized
appreciation
(depreciation) of:
Investments.............. 114,259 69,209 68,780 --
Foreign currency......... -- (1,178) -- --
========== ========== ========== =========
NET ASSETS................ $2,136,319 $2,083,024 $2,072,639 $126,279
========== ========== ========== =========
NET ASSET VALUE PER SHARE
Net assets................. $2,136,319 $2,083,024 $2,072,639 $126,279
Total shares outstanding 204,163 201,560 201,097 126,279
at end of period..........
Net asset value per
share (b)................. $10.46 $10.33 $10.31 $1.00
(a) Investments in
securities and repurchase $1,910,841 $2,053,511 $1,994,909 $109,492
agreements, at cost......
(b) Net assets divided by
shares outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements
13
<PAGE>
WNL SERIES TRUST
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1995*
<TABLE>
<CAPTION>
BEA CREDIT GLOBAL GLOBAL
GROWTH SUISSE ADVISORS ADVISORS
AND INTERNATIONAL GROTH MONEY
INCOME EQUITY EQUITY MARKET
-------- -------------- --------- -------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest income............ $ 13,206 $ 9,742 $ 2,215 $ 1,263
Dividend income**.......... 16,239 2,425 8,309 --
TOTAL INVESTMENT INCOME... 29,445 12,167 10,524 1,263
EXPENSES
Investment Advisory fee
(Note 2).................. 3,106 3,643 2,490 106
Sub-Administration fee..... 13,402 13,401 13,401 13,401
Audit fee.................. 10,200 10,200 10,200 10,200
Custodian fees and expenses 7,656 13,796 7,653 7,461
Trustee's fees (Note 2).... 2,625 2,625 2,625 2,625
Registration and filing
expenses.................. 56 56 57 56
Legal fees................. 3,750 3,750 3,750 3,750
Transfer Agent fees........ 415 415 415 415
------- -------- ------- -------
Total operating expenses
before waivers and
reimbursement........... 41,210 47,886 40,591 38,014
Fees waived and expenses
reimbursed (Note 2)....... (40,713) (47,400) (40,101) (37,985)
------- -------- ------- -------
NET EXPENSES.............. 497 486 490 29
------- -------- ------- -------
NET INVESTMENT INCOME..... 28,948 11,681 10,034 1,234
------- -------- ------- -------
NET REALIZED AND
UNREALIZED GAIN (LOSS)
FROM INVESTMENTS AND
FOREIGN CURRENCY
Net realized gain (loss)
on:
Investments............... (11,754) (669) (7,438) --
Foreign currency
transactions............. -- (444) -- --
Unrealized appreciation
(depreciation) of:
Investments............... 114,259 69,209 68,780 --
Foreign currency.......... -- (1,178) -- --
------- -------- ------- -------
NET REALIZED AND
UNREALIZED GAIN (LOSS).... 102,505 66,918 61,342 --
------- -------- ------- -------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.. $131,453 $ 78,599 $ 71,376 $ 1,234
------- -------- ------- -------
** Net of foreign
withholding taxes of...... -- $ 342 -- --
======= ======== ======= =======
</TABLE>
* The Money Market Portfolio commenced investment operations on October 10,
1995. The Growth and Income, International Equity, and Growth Equity
Portfolios commenced investment operations on October 20, 1995.
The accompanying notes are an integral part of the financial statements
14
<PAGE>
WNL SERIES TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 1995*
<TABLE>
<CAPTION>
BEA CREDIT GLOBAL GLOBAL
GROWTH SUISSE ADVISORS ADVISORS
AND INTERNATIONAL GROWTH MONEY
INCOME EQUITY EQUITY MARKET
---------- ------------- -------- --------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS
From operations:
Net investment income..... $ 28,948 $ 11,681 $ 10,034 $ 1,234
Net realized gain (loss)
on:
Investments............... (11,754) (669) (7,438) --
Foreign currency
transactions............. -- (444) -- --
Net unrealized
appreciation
(depreciation) of:
Investments............... 114,259 69,209 68,780 --
Foreign currency.......... -- (1,178) -- --
---------- ----------- -------- --------
Net increase in net
assets resulting from
operations............. 131,453 78,599 71,376 1,234
Distributions to
shareholders:
From net investment income (28,948) (11,681) (10,034) (1,234)
In excess of net realized
gains.................... (9,791) -- -- --
Fund share transactions
(Note 4).................. 2,043,605 2,016,106 2,011,297 126,279
---------- ----------- -------- --------
Total increase in net
assets.................... 2,136,319 2,083,024 2,072,639 126,279
NET ASSETS:
Beginning of period........ -- -- -- --
---------- ----------- ---------- --------
END OF PERIOD.............. $2,136,319 $2,083,024 $2,072,639 $126,279
========== =========== ========== ========
</TABLE>
* The Money Market Portfolio commenced investment operations on October 10,
1995. The Growth and Income, International Equity, and Growth Equity
Portfolios commenced investment operations on October 20, 1995.
The accompanying notes are an integral part of the financial statements
15
<PAGE>
WNL SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING FOR THE PERIOD ENDED
DECEMBER 31, 1995*
<TABLE>
<CAPTION>
BEA CREDIT GLOBAL GLOBAL
GROWTH SUISSE ADVISORS ADVISORS
AND INTERNATIONAL GROWTH MONEY
INCOME EQUITY EQUITY MARKET
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net asset value, beginning
of period................. $10.00 $10.00 $10.00 $ 1.00
------ ------ ------ ------
Net investment income(1)... 0.14 0.06 0.05 0.01
Net realized and
unrealized gain on
investments.............. 0.51 0.33 0.31 --
------ ------ ------ ------
Total from investment
operations................ 0.65 0.39 0.36 0.01
------ ------ ------ ------
Distributions:
From net investment
income.................. (0.14) (0.06) (0.05) (0.01)
In excess of net
realized gains.......... (0.05) -- -- --
------ ------ ------ ------
Total distributions........ (0.19) (0.06) (0.05) (0.01)
------ ------ ------ ------
Net asset value, end of
period.................... $10.46 $10.33 $10.31 $ 1.00
====== ====== ====== ======
TOTAL RETURN(2)............ 6.57% 3.93% 3.57% 1.17%
RATIOS/SUPPLEMENTAL DATA:
OPERATING EXPENSES TO
AVERAGE NET ASSETS(3)..... 0.12% 0.12% 0.12% 0.12%
NET INVESTMENT INCOME TO
AVERAGE NET ASSETS(4)..... 6.99% 2.89% 2.46% 5.25%
PORTFOLIO TURNOVER RATE(5). 75% 2% 9% N/A
NET ASSETS, AT END OF
PERIOD (000S)............. $2,136 $2,083 $2,073 $ 126
</TABLE>
* The Money Market Portfolio commenced investment operations on October 10,
1995. The Growth and Income, International Equity, and Growth Equity
Portfolios commenced investment operations on October 20, 1995.
(1) Net investment income is after waiver of fees and reimbursement of certain
expenses by the Investment Adviser, the Sub-Administrator and Western National
Life Insurance Company, an affiliate of the Adviser (see Note 2 to the financial
statements). If the Investment Adviser and the Sub-Administrator had not waived
fees and Western National Life Insurance Company had not reimbursed expenses,
net investment income (loss) per share would have been $(0.06) for the BEA
Growth and Income Portfolio, $(0.18) for the Credit Suisse International Equity
Portfolio, $(0.15) for the Global Advisors Growth Equity Portfolio, and $(0.35)
for the Global Advisors Money Market Portfolio.
(2) Total return represents aggregate total return for the period indicated.
(3) If the Investment Adviser and the Sub-Administrator had not waived fees and
Western National Life Insurance Company had not reimbursed expenses, the ratio
of operating expenses to average net assets would have been 9.95% for the BEA
Growth and Income Portfolio, 11.83% for the Credit Suisse International Equity
Portfolio, 9.94% for the Global Advisors Growth Equity Portfolio, and 161.83%
for the Global Advisors Money Market Portfolio.
(4) Annualized.
(5) Not annualized.
The accompanying notes are an integral part of the financial statements
16
<PAGE>
WNL SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
WNL Series Trust (the "Trust") is an open-end, diversified series management
investment company which currently offers shares of beneficial interest in eight
series (the "Portfolios"), each of which has a different investment objective
and represents the entire interest in a separate portfolio of investments. The
Portfolios are: American Capital Emerging Growth Portfolio (the "Emerging
Growth Portfolio"), BEA Growth and Income Portfolio (the "Growth and Income
Portfolio"), Credit Suisse International Equity Portfolio (the "International
Equity Portfolio"), BlackRock Managed Bond Portfolio (the "Managed Bond
Portfolio"), Quest for Value Asset Allocation Portfolio (the "Asset Allocation
Portfolio"), Salomon Brothers U.S. Government Securities Portfolio (the
"Government Securities Portfolio"), Global Advisors Growth Equity Portfolio (the
"Growth Equity Portfolio"), and Global Advisors Money Market Portfolio (the
"Money Market Portfolio"). These financial statements report on the Money
Market Portfolio, which commenced operations on October 10, 1995; the Growth and
Income, the International Equity and the Growth Equity Portfolios, which
commenced operations on October 20, 1995. The Emerging Growth, Managed Bond and
Asset Allocation Portfolios commenced operations on January 2, 1996, and the
Government Securities Portfolio commenced operations on February 6, 1996. The
Portfolios are currently available to the public only through variable annuity
contracts ("VA Contracts") issued by Western National Life Insurance Company, a
wholly-owned subsidiary of Western National Corporation. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could
differ from those estimates. The following is a summary of significant
accounting policies followed by each Portfolio in the preparation of its
financial statements in accordance with generally accepted accounting
principles.
(A) VALUATION OF SECURITIES - All securities are valued as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. New York
time). Securities traded on a national securities exchange or quoted on the
NASDAQ National Market System are valued at their last-reported sale price on
the principal exchange or reported by NASDAQ or, if there is no reported sale,
and in the case of over-the-counter securities not included in the NASDAQ
National Market System, at a bid price estimated by a broker or dealer. Debt
securities, including zero-coupon securities, and certain foreign securities
will be valued by a pricing service approved by the Trustees. other foreign
securities will be valued by the Trust's custodian. The value of a foreign
security is determined in its national currency as of the close of trading on
the foreign exchange on which it is traded or as of 4:00 p.m. New York time, if
that is earlier, and that value is then converted into its U.S. dollar
equivalent at the foreign exchange rate in effect at noon, New York time, on the
day the value of the foreign security is determined. Securities for which
current market quotations are not readily available and all other assets are
valued at fair value as determined in good faith by the Trustees.
The Money Market Portfolio values all securities using the amortized cost method
which approximates market value. Under this method, which does not take into
account realized securities gains or losses, an instrument is initially valued
at its cost and thereafter assumes a constant amortization or accretion to
maturity of any discount or premium.
(B) REPURCHASE AGREEMENTS - A repurchase agreement is a contract under which
the Portfolio acquires a security for a relatively short period (usually not
more than a week) subject to the obligation of the seller to repurchase and the
Portfolio to resell such security at a fixed time and price. The collateral for
such agreements will be held by the Portfolio's custodian. The Portfolio will
enter into repurchase agreements only with banks and broker-dealers that have
been determined to be creditworthy by the Trust's Board of Trustees. The seller
under a repurchase agreement would be required to maintain the value of the
obligations subject to the repurchase agreement at not less than the repurchase
price. Default by the seller would expose the Portfolio to possible loss
because of adverse market action or delay in connection with the disposition of
the underlying obligations. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the obligations, the Portfolio may be
delayed or limited in its ability to sell the collateral.
17
<PAGE>
(C) FOREIGN INVESTMENTS - Certain Portfolios may invest in securities of
foreign issuers. There are certain risks involved in investing in foreign
securities, including those resulting from fluctuations in currency exchange
rates, devaluation of currencies, future political or economic developments and
the possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions, reduced availability of public information
concerning issuers, and the fact that foreign companies are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements comparable to those applicable to
domestic companies. The Portfolios' foreign investments may be less liquid and
their prices may be more volatile than comparable investments in securities of
U.S. companies.
(D) FOREIGN CURRENCY EXCHANGE TRANSACTIONS - Certain Portfolios may engage in
foreign currency exchange transactions. Portfolios may enter into foreign
currency exchange transactions to convert to and from different foreign
currencies. A Portfolio can either enter into these transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market, or use forward contracts to purchase or sell foreign currencies.
Realized and unrealized gains and losses arising from such transactions are
included in net realized and unrealized gains and losses from foreign currency
related transactions.
A forward foreign exchange contract is an obligation by a Portfolio to purchase
or sell a specific currency at a future date. The Portfolio maintains with its
custodian, in a segregated account, high-grade liquid assets in an amount at
least equal to its obligations under each contract. Neither spot transactions
nor forward foreign currency exchange contracts eliminate fluctuations in the
prices of the Portfolio's securities or in foreign exchange rates, or prevent
loss if the prices of these securities should decline.
A Portfolio may enter into foreign currency exchange transactions for hedging
purposes as well as for non-hedging purposes. Transactions are entered into for
hedging purposes in an attempt to protect against changes in foreign currency
exchange rates that would adversely affect a portfolio position or an
anticipated portfolio position. Although these transactions tend to minimize
the risk of loss due to a decline in the value of the hedged currency, at the
same time they tend to limit any potential gain that might be realized should
the value of the hedged currency increase.
A Portfolio may enter into foreign currency exchange transactions for other than
hedging purposes which present greater profit potential but also involves
increased risk.
(E) FOREIGN CURRENCY - The books and records of the Trust are maintained in
U.S. dollars. Foreign currencies, investments and other assets and liabilities
are translated into U.S. dollars at the exchange rates prevailing at the end of
the period, and purchases and sales of investment securities, income and
expenses are translated on the respective dates of such transactions. The
eligible Portfolios do not isolate that portion of the results of operations
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with net realized and unrealized gain or loss from investments. Foreign
exchange gain (loss) is treated as ordinary income for federal income tax
purposes to the extent constituting "Section 988 Transactions" pursuant to the
Internal Revenue Code, including currency gains (losses) related to the sale of
debt securities, forward foreign currency exchange contracts, payments of
liabilities, and collections of receivables.
(F) FUTURES CONTRACTS - Certain Portfolios may enter into futures contracts.
Upon entering into a futures contract, the Portfolio is required to deposit with
the broker an amount of cash or cash equivalents equal to a certain percentage
of the contract amount. This is known as the initial margin. Subsequent
payments ("variation margin") are made or received by the Portfolio each day,
depending on the daily fluctuation of the value of the contract. The daily
changes in the contract are recorded as unrealized gains or losses. The
Portfolio recognizes a realized gain or loss when the contract is closed.
The use of futures contracts as a hedging device involves several risks. The
change in value of futures contracts primarily corresponds with the value of
their underlying instruments, which may not correlate with the change in value
of the hedged investments. In addition, the Portfolio may not be able to enter
into a closing transaction because of an illiquid secondary market.
18
<PAGE>
(G) SECURITIES TRANSACTIONS AND INVESTMENT INCOME - Securities transactions are
recorded as of the trade date. Realized gains and losses on sales of
investments are recorded on the identified cost basis. Interest income is
recorded daily on the accrual basis. Dividend income is recorded on the ex-
date.
(H) EXPENSE ALLOCATION - Expenses with respect to any two or more Portfolios
may be allocated in proportion to the net assets of the respective Portfolios
except where allocations of direct expenses can otherwise be fairly made.
(I) DIVIDENDS AND DISTRIBUTIONS - The Money Market Portfolio will declare a
dividend of its net ordinary income daily and distribute such dividend monthly.
Each of the other Portfolios will declare and distribute dividends from net
ordinary income at least annually and will distribute its net realized capital
gains, if any, at least annually.
Income dividends and capital gain distributions are determined in accordance
with Federal tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments of
income and gains on various investment securities held by the Portfolios, timing
differences and differing characterization of distributions made by the
Portfolios. As a result, net investment income (loss) and net realized gain
(loss) on investment transactions for a reporting period may differ
significantly from distributions during such period. Accordingly, each
Portfolio may periodically make reclassifications among certain of its capital
accounts without impacting the net asset value of the Portfolio.
(J) FEDERAL INCOME TAXES - Each Portfolio of the Trust intends to qualify and
elects to be treated as a regulated investment company that is taxed under the
rules of Subchapter M of the Internal Revenue Code. As an electing regulated
investment company, a Portfolio will not be subject to federal income tax on its
net ordinary income and net realized capital gains to the extent such income and
gains are distributed to the separate account of the life Company which holds
its shares.
2. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Under an Investment Advisory Agreement (the "Agreement"), WNL Investment
Advisory Services, Inc. (the "Adviser"), a subsidiary of Western National
Corporation, manages the business and affairs of the Portfolios and the Trust,
subject to the control of the Trustees. Under the Agreement, the Adviser is
obligated to formulate a continuing program for the investment of the assets of
each Portfolio of the Trust in a manner consistent with each Portfolio's
investment objectives, policies and restrictions and to determine from time to
time securities to be purchased, sold, retained or lent by the Trust and to
implement those decisions. The Agreement also provides that the Adviser shall
provide such services required for effective administration of the Trust.
As full compensation for its services under the Agreement, the Trust will pay
the Adviser a monthly fee at the following rates based on the average daily net
assets of each Portfolio:
<TABLE>
<CAPTION>
<S> <C>
BEA Growth and Income Portfolio 0.75%
Credit Suisse International Equity
Portfolio 0.90%
Global Advisors Growth Equity Portfolio 0.61%
Global Advisors Money Market Portfolio 0.45%
</TABLE>
The Adviser has agreed to waive its advisory fee for each of the Portfolios for
the initial six months of each Portfolio's investment operations. In addition,
Western National Life Insurance Company, an affiliate of the Adviser, has
undertaken to bear until May 1, 1996, all operating expenses of each Portfolio,
excluding the compensation of the Adviser, that exceed 0.12% of each Portfolio's
average daily net assets.
In accordance with each Portfolio's investment objective and policies and under
the supervision of the Adviser and the Trust's Board of Trustees, each
Portfolio's Sub-Adviser is responsible for the day-to-day investment management
of the Portfolio, to make investment decisions for the Portfolio and to place
orders on behalf of the Portfolio to effect the investment decisions made as
provided in separate Sub-Advisory Agreements. The Sub-Advisers to the
Portfolios are: Van Kampen American Capital Asset Management, Inc. for the
Emerging Growth Portfolio; BEA Associates for the Growth and Income Portfolio;
Credit Suisse Investment Management, Ltd. for the International Equity
Portfolio; BlackRock Financial Management for the Managed Bond Portfolio; Quest
for Value Advisors for the Asset Allocation Portfolio; Salomon Brothers Asset
Management Inc. for the Government
19
<PAGE>
Securities Portfolio; and State Street Global Advisors for the Growth Equity
and Money Market Portfolios. The Sub-Advisers receive their fees directly from
the Adviser, and receive no compensation from the Trust.
For the period ended December 31, 1995, the Adviser waived advisory fees, the
Sub-Administrator waived the Sub-Administration fee, and Western National Life
Insurance Company reimbursed operating expenses as follows:
<TABLE>
<CAPTION>
Advisory Sub-
Fees Administration Expenses
Waived Fees Waived Reimbursed Total
---------- ----------------- ------------- -------
<S> <C> <C> <C> <C>
BEA Growth and Income $3,106 $12,253 $25,354 $40,713
Credit Suisse International Equity 3,643 12,258 31,499 47,400
Global Advisors Growth Equity 2,490 12,256 25,355 40,101
Global Advisors Money Market 106 12,486 25,393 37,985
</TABLE>
WNL Brokerage Services, Inc., a subsidiary of Western National Corporation, is
the distributor and underwriter of the VA Contracts.
Each Trustee of the Trust who is not an interested person of the Trust or
Adviser or Sub-Adviser receives an annual fee of $7,500 and an additional fee of
$750 for each Trustees' meeting attended. In addition, disinterested Trustees
who are members of any Board committees will receive a separate $750 fee for
attendance at any committee meeting that is held on a day on which no Board
meeting is held.
The Trust's Sub-administrator, custodian, transfer and dividend-paying agent is
State Street Bank and Trust Company.
3. SECURITY TRANSACTIONS
The aggregate cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the period ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Purchases Sales
---------- ----------
<S> <C> <C>
BEA Growth and Income Portfolio (1) $3,017,692 $1,094,387
Credit Suisse International Equity
Portfolio 1,772,398 12,052
Global Advisors Growth Equity Portfolio 2,092,311 130,177
</TABLE>
(1) Includes purchases and sales of U.S. Government securities of $1,006,155 and
$23,346, respectively.
4. SHARES OF BENEFICIAL INTEREST
The Trust has an unlimited authorized number of shares of beneficial interest
with a par value of $.01. The tables below summarize transactions in Trust
shares.
<TABLE>
<CAPTION>
BEA GROWTH AND INCOME PORTFOLIO
Period Ended December 31, 1995*
Shares Amount
------------- ----------------
<S> <C> <C>
Sold................................. 200,461 $2,004,865
Issued as reinvestment of dividends
and distributions.................. 3,702 38,740
------- ----------
Net increase......................... 204,163 $2,043,605
======= ==========
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
Period Ended December 31, 1995*
Shares Amount
-------- -------
<S> <C> <C>
Sold................................. 200,429 $2,004,424
Issued as reinvestment of dividends.. 1,131 11,682
------- ----------
Net increase......................... 201,560 $2,016,106
======= ==========
GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO
Period Ended December 31, 1995*
Shares Amount
-------- -------
Sold................................. 200,124 $2,001,261
Issued as reinvestment of dividends.. 973 10,036
------- ----------
Net increase......................... 201,097 $2,011,297
======= ==========
GLOBAL ADVISORS MONEY MARKET PORTFOLIO
Period Ended December 31, 1995#
Shares Amount
-------- -------
Sold................................. 140,324 $140,324
Issued as reinvestment of dividends.. 1,233 1,233
Repurchased.......................... (15,278) (15,278)
------- --------
Net increase......................... 126,279 $126,279
======= ========
</TABLE>
* - Portfolio commenced operations on October 20, 1995.
# - Portfolio commenced operations on October 10, 1995.
21
<PAGE>
Report of Independent Auditors
To the Trustees and Shareholders
WNL Series Trust
We have audited the accompanying statements of assets and liabilities of the WNL
Series Trust which is comprised of BEA Growth and Income Portfolio, Credit
Suisse International Equity Portfolio, Global Advisors Growth Equity Portfolio
and Global Advisors Money Market Portfolio, including the schedules of
investments as of December 31, 1995 and the related statements of operations,
the statements of changes in net assets, and the financial highlights for the
period October 10, 1995 (commencement of operations) through December 31, 1995
for Global Advisors Money Market Portfolio and October 20, 1995 (commencement of
operations) through December 31, 1995 for BEA Growth and Income Portfolio,
Credit Suisse International Equity Portfolio and Global Advisors Growth Equity
Portfolio. These financial statements and financial highlights are the
responsibility of the Trusts management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
WNL Series Trust which is comprised of BEA Growth and Income Portfolio, Credit
Suisse International Equity Portfolio, Global Advisors Growth Equity Portfolio
and Global Advisors Money Market Portfolio as of December 31, 1995, the results
of its operations, the changes in its net assets and the financial highlights
for the period October 10, 1995 (commencement of operations) through December
31, 1995 for Global Advisors Money Market Portfolio and October 20, 1995
(commencement of operations) through December 31, 1995 for BEA Growth and Income
Portfolio, Credit Suisse International Equity Portfolio and Global Advisors
Growth Equity Portfolio in conformity with generally accepted accounting
principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
February 7, 1996
22
