<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 1, 1999
REGISTRATION NO. 33-87380/811-8912
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
---------------------
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 4 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [X]
Amendment No. 5 [X]
---------------------
AGA SERIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
2929 ALLEN PARKWAY, HOUSTON, TEXAS 77019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(713) 526-5251
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------------
NORI L. GABERT, ESQ.
AMERICAN GENERAL ANNUITY INSURANCE COMPANY
2929 ALLEN PARKWAY, HOUSTON, TEXAS 77019
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------------
Copy to:
RAYMOND A. O'HARA III, ESQ.
BLAZZARD, GRODD & HASENAUER, P.C.
P.O. BOX 5108
WESTPORT, CT 06881
---------------------
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on May 1, 1999 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
---------------------
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
TITLE OF SECURITIES BEING REGISTERED: Shares of Beneficial Interest.
================================================================================
<PAGE> 2
A.G. SERIES TRUST
PROSPECTUS
---------------------
GROWTH PORTFOLIOS
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
("INTERNATIONAL EQUITY PORTFOLIO")
ELITEVALUE PORTFOLIO
STATE STREET GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO
("GROWTH EQUITY PORTFOLIO")
VAN KAMPEN EMERGING GROWTH PORTFOLIO
("EMERGING GROWTH PORTFOLIO")
---------------------
GROWTH AND INCOME PORTFOLIO
CREDIT SUISSE GROWTH AND INCOME PORTFOLIO
("GROWTH AND INCOME PORTFOLIO")
---------------------
INCOME PORTFOLIOS
AMERICAN GENERAL U.S. GOVERNMENT SECURITIES PORTFOLIO
("U.S. GOVERNMENT SECURITIES PORTFOLIO")
STATE STREET GLOBAL ADVISORS MONEY MARKET PORTFOLIO
("MONEY MARKET PORTFOLIO")
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES NOR HAS IT DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE.
IT IS A CRIMINAL OFFENSE TO STATE OTHERWISE.
May 1, 1999
<PAGE> 3
A.G. SERIES TRUST
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COVER PAGE..................................................
WELCOME..................................................... 1
PORTFOLIO FACT SHEETS....................................... 2
American General U.S. Government Securities
Portfolio............................................. 2
Credit Suisse Growth and Income Portfolio.............. 4
Credit Suisse International Equity Portfolio........... 6
EliteValue Portfolio................................... 8
State Street Global Advisors Growth Equity Portfolio... 10
State Street Global Advisors Money Market Portfolio.... 12
Van Kampen Emerging Growth Portfolio................... 14
MORE ABOUT PORTFOLIO INVESTMENTS............................ 16
Equity Securities...................................... 16
Fixed Income Securities................................ 16
Money Market Instruments............................... 16
Portfolio Turnover..................................... 17
A Word about Risk...................................... 17
Managing Investment Risk............................... 19
MANAGEMENT OF THE TRUST..................................... 20
Investment Adviser..................................... 20
Investment Sub-Advisers................................ 20
Advisory Fees.......................................... 21
GENERAL INFORMATION ABOUT THE TRUST......................... 22
Portfolio Shares....................................... 22
Net Asset Value........................................ 22
Dividends and Capital Gains............................ 22
Tax Consequences....................................... 22
FINANCIAL HIGHLIGHTS........................................ 23
</TABLE>
<PAGE> 4
WELCOME
- --------------------------------------------------------------------------------
This Prospectus provides important information about the A.G. Series Trust (the
"Trust") and its seven Portfolios. A.G. Investment Advisory Services Inc. (the
"Adviser") serves as the investment adviser for all seven Portfolios and employs
sub-advisers to assist it in managing six of them.
Individuals can't invest in the shares of the Portfolios directly. Instead they
participate through variable annuity contracts ("Contracts") issued by American
General Annuity Insurance Company (the "Company"). You can participate either
through a Contract that you purchase yourself or through a Contract purchased by
your employer.
Through your participation in the Contracts, you indirectly participate in
Portfolio earnings or losses, in proportion to the amount of money you invest.
Depending on your Contract, if you withdraw your money before retirement, you
may incur charges and additional tax liabilities. However, to save for
retirement, you generally should let your investments and their earnings build.
At retirement, you may withdraw all or a portion of your money, leave it until
you need it, or start receiving annuity payments. At a certain age you may be
required to begin withdrawals. For further information about your Contract,
please refer to your Contract prospectus.
The Contracts are sold by banks. An investment in a Portfolio of the Trust
through a Contract is not a deposit of a bank and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
A WORD ABOUT THE PORTFOLIOS
The Portfolios offered in this Prospectus fall into three general investment
categories: growth, growth and income and income.
GROWTH CATEGORY
The goal of a Portfolio in the growth category is to increase the value of your
investment over the long term by investing mostly in stocks. Stocks are a type
of investment that can increase in value over a period of years. Companies sell
stock to get the money they need to grow. These companies often keep some of
their profits to reinvest in their business. As they grow, the value of their
stock may increase. This is how the value of your investment may increase.
The Trust's Growth Category includes:
EliteValue Portfolio
Emerging Growth Portfolio
Growth Equity Portfolio
International Equity Portfolio
GROWTH AND INCOME CATEGORY
The goal of a Portfolio in the growth and income category is to increase the
value of your investment over the long term and to provide income. Portfolios in
the growth and income category seek to conserve the value of your initial
investment and promote long-term growth and income by investing in equity
securities and income producing securities.
The Trust's Growth and Income Category includes:
Growth and Income Portfolio
INCOME CATEGORY
Unlike Portfolios in the growth category, where the objective is to make the
Portfolio's investments increase in value, Portfolios in the income category try
to keep the value of their investments from falling, while providing an increase
in the value of your investment through the income earned on the Portfolio's
investments. To meet this objective, a Portfolio in the income category buys
investments that are expected to pay interest to the Portfolio on a regular
basis.
The Trust's Income Category includes:
Money Market Portfolio
U.S. Government Securities Portfolio
1
<PAGE> 5
AMERICAN GENERAL -------------------------------------------------
U.S. GOVERNMENT Investment Adviser: A.G. INVESTMENT ADVISORY
SECURITIES PORTFOLIO SERVICES, INC.
-------------------------------------------------
Fact Sheet Investment Category: INCOME
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
A high level of current income.
INVESTMENT STRATEGY
The Portfolio will invest primarily in fixed income securities and
mortgage-backed securities issued or guaranteed by the U.S. Government and its
agencies or instrumentalities and collateralized mortgage obligations backed by
such securities.
The Adviser uses a quantitative relative value approach which emphasizes total
return in the selection of securities.
<TABLE>
<CAPTION>
Percent of
Primary Investments Total Assets*
- --------------------------------------------------
<S> <C>
U.S. Treasury obligations, U.S. At least 80%
Government securities,
mortgage backed securities
guaranteed by the Government
National Mortgage Association
("GNMA"), the Federal National
Mortgage Association ("FNMA"),
the Federal Home Loan Mortgage
Corporation ("FHLMC"),
collateralized mortgage
obligations for which the
underlying securities include
the above and repurchase
agreements collateralized by
any of the foregoing
- --------------------------------------------------
U.S. dollar-denominated Up to 20%
corporate debt securities of
U.S. and foreign issuers rated
"A" or better by Moody's
Investors Service, Inc.
("Moody's") or Standard &
Poor's Corporation ("S&P") or
of comparable quality
- --------------------------------------------------
</TABLE>
* At time of purchase
INVESTMENT RISKS
The principal risks of investing in the Portfolio are:
Market Risk: the risk that the value of the securities purchased by the
Portfolio will decline as a result of economic, political or market conditions
or an issuer's financial circumstances.
Credit Risk: the risk that an issuer of a fixed income security owned by the
Portfolio may be unable to make interest or principal payments.
Interest Rate Risk: the risk that fluctuations in interest rates may affect the
value of the Portfolio's interest-paying fixed income securities.
Prepayment Risk: the risk that issuers of fixed income securities will make
prepayments earlier than anticipated during periods of falling interest rates
requiring the Portfolio to invest in new securities with lower interest rates.
This will reduce the stream of cash payments that flow through to the Portfolio.
For more information
about each type of
investment, please
read the section in
this prospectus called
"MORE ABOUT PORTFOLIO
INVESTMENTS."
2
<PAGE> 6
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
The performance information presented herein is intended to help you evaluate
the potential risks and rewards of an investment in the Portfolio by showing
changes in the Portfolio's performance and comparing the Portfolio's performance
with the performance of the U.S. Treasury -- 1-10 Year Index. How the Portfolio
performed in the past is not necessarily an indication of how the Portfolio will
perform in the future.
This chart illustrates the Portfolio's annual returns for the last two years.
Charges imposed by the variable annuity contracts that invest in the U.S.
Government Securities Portfolio are not included in the calculations of return
in this bar chart, and if those charges were included, the returns would have
been less than those shown below.
[CHART]
8.89% 7.49%
----- -----
1997 1998
The highest quarterly return for the Portfolio from January 1, 1997 to December
31, 1998 was 3.72% (for the quarter ending September 30, 1998) and the lowest
quarterly return was 0.10% (for the quarter ending December 31, 1998).
This table compares the Portfolio's average annual returns to the returns of the
U.S. Treasury -- 1-10 Year Index for 1 calendar year and since inception.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(through December 31, 1998)
- --------------------------------------------------------------------------------
Since Inception
1 Year (02/06/96)
<S> <C> <C>
U.S. Government Securities Portfolio 7.49% 6.79%
U.S. Treasury -- 1-10 Year Index 8.49% 7.38%
- --------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 7
-------------------------------------------------
CREDIT SUISSE GROWTH Investment Sub-Adviser: CREDIT SUISSE ASSET
AND INCOME PORTFOLIO MANAGEMENT
-------------------------------------------------
Fact Sheet Investment Category: GROWTH AND INCOME
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
Long term growth of capital, current income and growth of income, consistent
with reasonable investment risk.
INVESTMENT STRATEGY
The Portfolio will invest primarily in equity securities, fixed income
securities and cash instruments. The amount of the Portfolio's investment in
each type of security varies, from time-to-time, depending upon how the Sub-
adviser assesses economic conditions and investment opportunities.
Top-Down/Bottom-Up. In selecting equity securities, the Sub-adviser uses a
value-oriented approach that combines "top-down" and "bottom-up" elements. This
means that the Sub-adviser identifies the "top-down" economic factors most
likely to influence the return on equity securities and the industry sectors
most likely to grow based on those factors. The "bottom-up" analysis involves
the review of individual companies in the industry sectors that the Sub-adviser
has identified to assess whether a company has quality management and strong
growth potential.
Valuation Analysis. To select fixed income securities for the Portfolio, the
Sub-adviser reviews the terms of an instrument and evaluates the
creditworthiness of an issuer. The Sub-adviser then performs a valuation
analysis to compare the value of certain debt securities to other fixed income
securities in terms of their price and yield. Generally, the fixed income
portion of the Portfolio is invested consistent with a comparable broad market
index, such as the Lehman Brothers Aggregate Bond Index. The average weighted
maturity of the fixed income securities that the Sub-adviser purchases for the
Portfolio ranges from five to fifteen years.
The Portfolio will be invested in cash and cash equivalent instruments to the
extent necessary to achieve its investment objective.
<TABLE>
<CAPTION>
Percent of
Primary Investments Total Assets*
- ----------------------------------------------------------------
<S> <C>
Equity securities, including No more than 65%
common stock, preferred stock, and no less than
rights and warrants 35%
- ----------------------------------------------------------------
Fixed income securities, No more than 65%
including bonds, debentures, and no less than
mortgage-backed securities and 35%
obligations issued or
guaranteed by the U.S.
government or its agencies or
instrumentalities ("U.S.
Government securities") and
cash equivalent instruments
- ----------------------------------------------------------------
</TABLE>
* At time of purchase
INVESTMENT RISKS
The principal risks of investing in the Portfolio are:
Market Risk: the risk that the value of the securities purchased by the
Portfolio will decline as a result of economic, political or market conditions
or an issuer's financial circumstances.
Credit Risk: the risk that an issuer of a fixed income security owned by the
Portfolio may be unable to make interest or principal payments.
Interest Rate Risk: the risk that fluctuations in interest rates may affect the
value of the Portfolio's interest-paying fixed income securities.
For more information
about each type of
investment, please
read the section in
this prospectus called
"MORE ABOUT PORTFOLIO
INVESTMENTS."
4
<PAGE> 8
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
The performance information presented herein is intended to help you evaluate
the potential risks and rewards of an investment in the Portfolio by showing
changes in the Portfolio's performance and comparing the Portfolio's performance
with the performance of the Standard & Poor's 500 Stock Index ("S&P 500 Index"),
Lehman Aggregate Bond Index ("Lehman Aggregate") and a composite 50% S&P 500
Index/50% Lehman Aggregate. How the Portfolio performed in the past is not
necessarily an indication of how the Portfolio will perform in the future.
This chart illustrates the Portfolio's annual returns for each of the last three
years. Charges imposed by the variable annuity contracts that invest in the
Growth and Income Portfolio are not included in the calculations of return in
this bar chart, and if those charges were included, the returns would have been
less than those shown below.
[CHART]
13.82% 22.33% 14.16%
------ ------ ------
1996 1997 1998
The highest quarterly return for the Portfolio from January 1, 1996 to December
31, 1998 was 11.15% (for the quarter ending June 30, 1997) and the lowest
quarterly return was -4.16% (for the quarter ending September 30, 1998).
This table compares the Portfolio's average annual returns to the returns of the
S&P 500 Index, Lehman Aggregate and a composite 50% S&P 500 Index/50% Lehman
Aggregate, for 1 calendar year and since inception.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(through December 31, 1998)
- --------------------------------------------------------------------------------
Since Inception
1 Year (10/20/95)
<S> <C> <C>
Growth and Income Portfolio 14.16% 17.89%
S&P 500 Index 28.58% 29.03%
Lehman Aggregate 8.69% 7.86%
50% S&P Index/ 50% Lehman Aggregate 18.63% 18.45%
- --------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 9
CREDIT SUISSE
INTERNATIONAL
EQUITY PORTFOLIO
Fact Sheet
<TABLE>
<S> <C>
- -------------------------------------------------
Investment Sub-Adviser: CREDIT SUISSE ASSET
MANAGEMENT LTD.
- -------------------------------------------------
Investment Category: GROWTH
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
Long term capital appreciation.
INVESTMENT STRATEGY
The Portfolio will invest primarily in equity securities of companies located in
at least five foreign countries. The Sub-adviser expects that a majority of the
Portfolio's investments will be in equity securities issued by companies located
in: Australia, Brazil, Canada, France, Germany, Hong Kong, Italy, Japan,
Malaysia, Mexico, the Netherlands, New Zealand, Singapore, Spain, Sweden,
Switzerland, the United Kingdom and the United States. The Portfolio is not
limited with respect to the foreign markets in which it may invest and will also
invest in other European, Pacific Rim, African and Latin American markets
including developing markets. Developing market countries generally include
countries in the initial stages of their industrialization with low per capita
income.
In selecting securities for the Portfolio, the Sub-adviser seeks economic and
market environments favorable for capital appreciation. The Portfolio's
investments in developing countries are made based upon the Sub-adviser's
determination that the economic, political and stock markets in those countries
are stabilizing or improving.
The Sub-adviser looks for one or more of the following characteristics in
selecting foreign companies for investment:
- earnings growth potential
- high return on invested capital
- sound financial and accounting policies
- overall financial strength
- strong competitive advantages
- effective research, product development and marketing
- strength of management
<TABLE>
<CAPTION>
Percent of
Primary Investments Total Assets*
- --------------------------------------------------
<S> <C>
Equity securities of issuers At least 65%
located in at least five
countries, other than the U.S.
including, American Depository
Receipts ("ADRs"), Global
Depository Receipts ("GDRs"),
European Depository Receipts
("EDRs"), International
Depository Receipts ("IDRs"),
common stock, preferred stock,
convertible securities,
convertible preferred stock,
rights and warrants
- --------------------------------------------------
Equity securities of issuers Up to 35%
located in the U.S.
- --------------------------------------------------
</TABLE>
* At time of purchase
INVESTMENT RISKS
The principal risks of investing in the Portfolio are:
Market Risk: the risk that the value of the securities purchased by the
Portfolio will decline as a result of economic, political or market conditions
or an issuer's financial circumstances.
Foreign Securities Risks:
Political Risk: the risk that a change in a foreign government will occur and
that the assets of a company in which the Portfolio has invested will be
affected.
Currency Risk: the risk that a foreign currency will decline in value. The
Portfolio generally will trade in currencies other than the U.S. dollar. An
increase in the value of the U.S. dollar relative to a foreign currency will
adversely affect the value of the Portfolio.
Liquidity Risk: foreign markets may be less liquid and more volatile than U.S.
markets and offer less protection to investors.
Limited Information Risk: the risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: the risks associated with investment in foreign
securities are heightened in connection with investments in the securities of
issues in developing countries, as these markets are generally more volatile
than the markets of developed countries.
Settlement and Clearance Risk: the risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
For more information
about each type of
investment, please
read the section in
this prospectus called
"MORE ABOUT PORTFOLIO
INVESTMENTS."
6
<PAGE> 10
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
The performance information presented herein is intended to help you evaluate
the potential risks and rewards of an investment in the Portfolio by showing
changes in the Portfolio's performance and comparing the Portfolio's performance
to the performance of the Morgan Stanley Composite Index -- EAFE. How the
Portfolio performed in the past is not necessarily an indication of how the
Portfolio will perform in the future.
This chart illustrates the Portfolio's annual returns for each of the last three
years. Charges imposed by the variable annuity contracts that invest in the
International Equity Portfolio are not included in the calculations of return in
this bar chart, and if those charges were included, the returns would have been
less than those shown below.
[CHART]
16.50% 4.30% -0.86%
------ ------ ------
1996 1997 1998
The highest quarterly return for the Portfolio from January 1, 1996 to December
31, 1998 was 14.25% (for the quarter ending December 31, 1998) and the lowest
quarterly return was -18.28% (for the quarter ending September 30, 1998).
This table compares the Portfolio's average annual returns to the returns of the
Morgan Stanley Composite Index -- EAFE for 1 calendar year and since inception.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
(through December 31, 1998)
- -----------------------------------------------------------------
Since Inception
1 Year (10/20/95)
<S> <C> <C>
International Equity Portfolio -0.86% 7.27%
Morgan Stanley Composite Index -- EAFE 20.00% 10.82%
- -----------------------------------------------------------------
</TABLE>
7
<PAGE> 11
-------------------------------------------------
ELITEVALUE PORTFOLIO Investment Sub-Adviser: OPCAP ADVISORS
-------------------------------------------------
Fact Sheet Investment Category: GROWTH
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
Growth of capital over time through investment in a portfolio consisting of
common stocks, bonds and cash equivalents, the percentages of which will vary
based on the Sub-adviser's assessment of the relative outlook for such
investments.
INVESTMENT STRATEGY
The Portfolio will invest primarily in the equity securities of companies that
the Sub-adviser believes are undervalued in relation to their assets or
earnings. The Sub-adviser generally intends to invest in equity securities of
companies that possess one or more of the following characteristics:
- undervalued assets
- valuable consumer or commercial franchises
- securities valuation below peer companies
- substantial and growing cash flow
- favorable book to price ratio
To a lesser extent, the Sub-adviser will invest in the securities of companies
with a market capitalization of less than $1 billion.
The Portfolio also may invest in fixed income securities and foreign securities.
The foreign markets in which the Portfolio may invest include developing
markets. Developing market countries generally include countries in the initial
stages of their industrialization with low per capita income.
There is no minimum or maximum percentage of the Portfolio's assets that may be
invested in each type of security. The Sub-adviser allocates the Portfolio's
investments among equity securities, fixed income securities and foreign
securities based upon the Sub-adviser's evaluation of economic and market trends
and its assessment of the value to be earned from each type of security at any
given time.
<TABLE>
<CAPTION>
Percent of
Primary Investments Total Assets*
- --------------------------------------------------------------------------------
<S> <C>
Equity securities, including No minimum or
common stock, preferred stock, maximum
convertible securities, rights
and warrants
- --------------------------------------------------------------------------------
Foreign securities listed on an No minimum or
exchange, represented by ADRs maximum
listed on an exchange or
traded in over-the-counter
markets
- --------------------------------------------------------------------------------
Fixed income securities, No minimum or
including intermediate to long maximum
term investment grade
corporate debt,
mortgage-backed securities and
U.S. Government securities
- --------------------------------------------------------------------------------
Cash and money market No minimum or
instruments, including U.S. maximum
Government securities,
certificates of deposit,
short-term investment grade
corporate bonds, short term
securities and repurchase
agreements
- --------------------------------------------------------------------------------
</TABLE>
* At time of purchase
INVESTMENT RISKS
The principal risks of investing in the Portfolio are:
Market Risk: the risk that the value of the securities purchased by the
Portfolio will decline as a result of economic, political or market conditions
or an issuer's financial circumstances.
Small Capitalization Company Risk: the risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
Credit Risk: the risk that an issuer of a fixed income security owned by the
Portfolio may be unable to make interest or principal payments.
Interest Rate Risk: the risk that fluctuations in interest rates may affect the
value of the Portfolio's interest-paying fixed income securities.
Prepayment Risk: the risk that issuers of fixed income securities will make
prepayments earlier than anticipated during periods of falling interest rates
requiring the Portfolio to invest in new securities with lower interest rates.
This will reduce the stream of cash payments that flow through to the Portfolio.
Foreign Securities Risks:
Political Risk: the risk that a change in a foreign government will occur and
that the assets of a company in which the Portfolio has invested will be
affected.
Currency Risk: the risk that a foreign currency will decline in value. The
Portfolio generally will trade in currencies other than the U.S. dollar. An
increase in the value of the U.S. dollar relative to a foreign currency will
adversely affect the value of the Portfolio.
Liquidity Risk: foreign markets may be less liquid and more volatile than U.S.
markets and offer less protection to investors.
Limited Information Risk: the risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: the risks associated with investment in foreign
securities are heightened in connection with investments in the securities of
issuers in developing countries, as these markets are generally more volatile
than the markets of developed countries
Settlement and Clearance Risk: the risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
For more information
about each type of
investment, please
read the section in
this prospectus called
"MORE ABOUT PORTFOLIO
INVESTMENTS."
8
<PAGE> 12
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
The performance information presented herein is intended to help you evaluate
the potential risks and rewards of an investment in the Portfolio by showing
changes in the Portfolio's performance and comparing the Portfolio's performance
with the performance of the S&P 500 Index and the Lipper Flexible Portfolio
Funds Index ("Lipper Flex"). How the Portfolio performed in the past is not
necessarily an indication of how the Portfolio will perform in the future.
This chart illustrates the Portfolio's annual return for the last three years.
Charges imposed by the variable annuity contracts that invest in the EliteValue
Portfolio are not included in the calculations of return in this bar chart, and
if those charges were included, the returns would have been less than those
shown below.
[CHART]
26.70% 21.08% 6.72%
------ ------ ------
1996 1997 1998
The highest quarterly return for the Portfolio from January 2, 1996 to December
31, 1998 was 11.70% (for the quarter ending June 30, 1997) and the lowest
quarterly return was -14.02% (for the quarter ending September 30 1998).
This table compares the Portfolio's average annual returns to the returns of the
S&P 500 Index and the Lipper Flex for 1 calendar year and since inception.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(through December 31, 1998)
- --------------------------------------------------------------------------------
Since Inception
1 Year (01/02/96)
<S> <C> <C>
EliteValue Portfolio 6.72% 17.86%
S&P 500 Index 28.58% 16.27%
Lipper Flex 16.52% 16.27%
- --------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 13
STATE STREET GLOBAL -------------------------------------------------
ADVISORS GROWTH EQUITY Investment Sub-Adviser: STATE STREET GLOBAL
PORTFOLIO ADVISORS
-------------------------------------------------
Fact Sheet Investment Category: GROWTH
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
Total returns that exceed, over time, the Standard & Poor's 500(TM) Composite
Stock Price Index ("Index") through investment in equity securities.
INVESTMENT STRATEGY
The Sub-adviser chooses securities for the Portfolio based on an analytical
model that the Sub-adviser has developed. The model measures a security by
"value" and "Wall Street sentiment." The value of a security is measured by
comparing a company's assets, the projected growth of its earnings and its cash
flow with its stock price. Wall Street sentiment measures the earnings estimates
and rankings issued by Wall Street analysts with respect to a particular
company. These measures are combined to create a single score and equity
securities are ranked by their score.
The Portfolio invests in equity securities issued by companies in a particular
industry, or economic sector, in similar proportions as the Index. The
Sub-adviser believes that maintaining these levels will protect the Portfolio
from unnecessary exposure to external factors, including the direction of the
economy, interest rates, energy prices and inflation.
<TABLE>
<CAPTION>
Percent of
Primary Investments Total Assets*
- ------------------------------------------------------------------------------
<S> <C>
Equity securities of U.S. At least 65%
issuers
- ------------------------------------------------------------------------------
Repurchase agreements, reverse Up to 25%
repurchase agreements, forward
commitments, when-issued
transactions
- ------------------------------------------------------------------------------
</TABLE>
* At time of purchase
INVESTMENT RISK
The principal risk of investing in the Portfolio is:
Market Risk: the risk that the value of the securities purchased by the
Portfolio will decline as a result of economic, political or market conditions
or an issuer's financial circumstances.
For more information
about each type of
investment, please
read the section in
this prospectus called
"MORE ABOUT PORTFOLIO
INVESTMENTS."
10
<PAGE> 14
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
The performance information presented herein is intended to help you evaluate
the potential risks and rewards on investments in the Portfolio by showing
changes in the Portfolio's performance and comparing the Portfolio's performance
with the performance of the S&P 500 Index. How the Portfolio performed in the
past is not necessarily an indication of how the Portfolio will perform in the
future.
This chart below illustrates the Portfolio's annual returns for each of the last
three years. Charges imposed by the variable annuity contracts that invest in
the Growth Equity Portfolio are not included in the calculations of return in
this bar chart, and if those charges were included, the returns would have been
less than those shown below.
[CHART]
21.36% 31.67% 21.60%
------ ------ ------
1996 1997 1998
The highest quarterly return for the Portfolio from January 1, 1996 to December
31, 1998 was 21.43% (for the quarter ending December 31, 1998) and the lowest
quarterly return was -13.55% (for the quarter ending September 30, 1998).
This table compares the Portfolio's average annual returns to the returns of the
S&P 500 Index for 1 calendar year and since inception.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
(through December 31, 1998)
- ------------------------------------------------------------------
Since
Inception
1 Year (10/20/95)
<S> <C> <C>
Growth Equity Portfolio 21.60% 24.40%
S&P 500 Index 28.58% 28.33%
- ------------------------------------------------------------------
</TABLE>
11
<PAGE> 15
STATE STREET GLOBAL
ADVISORS MONEY MARKET
PORTFOLIO
Fact Sheet
<TABLE>
<S> <C>
- -------------------------------------------------
Investment Sub-Adviser: STATE STREET GLOBAL
ADVISORS
- -------------------------------------------------
Investment Category: INCOME
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
Seeks to maximize current income, to the extent consistent with the preservation
of capital and liquidity and the maintenance of a stable $1.00 per share net
asset value, by investing in dollar-denominated securities with remaining
maturities of 13 months or less.
INVESTMENT STRATEGY
The Portfolio invests in high quality money market securities to provide you
with current income, and liquidity. The Portfolio limits its investments to
securities rated within the top two highest rating categories for short-term
fixed income obligations by at least two nationally recognized rating services
or unrated securities of comparable investment quality. These eligible
securities must mature in 13 months or less and the Portfolio must have a
dollar-weighted average portfolio maturity of 90 days or less. The Portfolio's
investment practices are designed to minimize any fluctuation in the value of
the Portfolio's investments.
The investments this Portfolio may buy include:
- Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities
- Asset-backed securities
- Certificates of deposit and other obligations of U.S. and foreign banks
- Commercial paper of U.S. and foreign companies
- Corporate debt obligations with remaining maturities of 13 months or less
INVESTMENT RISKS
The short-term money market securities the Portfolio invests in are high-quality
investments posing low credit and interest rate risk. Because the risk to the
money you invest is low, the potential for profit is also low.
The principal risks of investing in the Portfolio are:
- The rate of income varies daily depending on short-term interest rates
- A significant change in interest rates or a default on a security held by
the Portfolio could cause the value of your investment to decline
- An investment in the Portfolio is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency
- Although the Portfolio seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Portfolio
For more information
about each type of
investment, please
read the section in
this prospectus called
"MORE ABOUT PORTFOLIO
INVESTMENTS."
12
<PAGE> 16
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
The performance information presented herein is intended to help you evaluate
the potential risks and rewards of an investment in the Portfolio by showing
changes in the Portfolio's performance and comparing the Portfolio's performance
with the performance of the 91-day Treasury Bill Index. How the Portfolio
performed in the past is not necessarily an indication of how the Portfolio will
perform in the future.
This chart illustrates the Portfolio's annual returns for each of the last three
years. Charges imposed by the variable annuity contracts that invest in the
Money Market Portfolio are not included in the calculations of return in this
bar chart, and if those charges were included, the returns would have been less
than those shown below.
[CHART]
5.19% 5.50% 5.23%
------ ------ ------
1996 1997 1998
The highest quarterly return for the Portfolio from January 1, 1996 to December
31, 1998 was 1.37% (for the quarter ending September 30, 1997) and the lowest
quarterly return was 1.18% (for the quarter ending December 31, 1998).
This table compares the Portfolio's average annual returns to the returns of the
91-day Treasury Bill Index for 1 calendar year and since inception.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(through December 31, 1998)
- --------------------------------------------------------------------------------
Since Inception
1 Year (10/10/95)
<S> <C> <C>
Money Market Portfolio 5.23% 5.30%
91-day Treasury Bill Index 4.88% 5.09%
- --------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 17
-------------------------------------------------
VAN KAMPEN EMERGING Investment Sub-Adviser: VAN KAMPEN ASSET
GROWTH PORTFOLIO MANAGEMENT INC.
-------------------------------------------------
Fact Sheet Investment Category: GROWTH
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
Capital appreciation; any ordinary income received from portfolio securities is
entirely incidental. This investment objective may be changed by the Trustees
without shareholder approval.
INVESTMENT STRATEGY
The Portfolio invests in the equity securities of small and medium-sized
companies in the early stages of their life cycles that the Sub-adviser believes
have the potential to become major enterprises. These companies may be located
in the U.S. and in foreign countries.
The Portfolio also may invest in large companies in "special situations" that
may involve new management, special products, mergers or liquidations. The
Sub-adviser chooses the Portfolio's investments based on its assessment that a
company presents an unusually attractive growth prospect.
<TABLE>
<CAPTION>
Percent of
Primary Investments Total Assets*
- ------------------------------------------------------------------------------
<S> <C>
Equity securities of U.S. and At least 65%
foreign small and medium sized
companies, including common
stocks, preferred stocks,
convertible securities and
warrants
- ------------------------------------------------------------------------------
Foreign securities Up to 20%
- ------------------------------------------------------------------------------
</TABLE>
* At time of purchase
INVESTMENT RISKS
The principal risks of investing in the Portfolio are:
Market Risk: the risk that the value of the securities purchased by the
Portfolio will decline as a result of economic, political or market conditions
or an issuer's financial circumstances.
Small Capitalization Company Risk: the risk that smaller companies may be
generally subject to more abrupt or erratic market movements than securities of
larger, more established companies.
Foreign Securities Risks:
Political Risk: the risk that a change in a foreign government will occur and
that the assets of a company in which the Portfolio has invested will be
affected.
Currency Risk: the risk that a foreign currency will decline in value. An
increase in the value of the U.S. dollar relative to a foreign currency will
adversely affect the value of the Portfolio.
Liquidity Risk: foreign markets may be less liquid and more volatile than U.S.
markets and offer less protection to investors.
Limited Information Risk: the risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Settlement and Clearance Risk: the risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
For more information
about each type of
investment, please
read the section in
this prospectus called
"MORE ABOUT PORTFOLIO
INVESTMENTS."
14
<PAGE> 18
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
The performance information presented herein is intended to help you evaluate
the potential risks and rewards of an investment in the Portfolio by showing
changes in the Portfolio's performance and comparing the Portfolio's performance
with the performance of the Russell Mid Cap Growth Index and the Lipper Mid Cap
Funds Index. How the Portfolio performed in the past is not necessarily an
indication of how the Portfolio will perform in the future.
This chart illustrates the Portfolio's annual returns for the last three years.
Charges imposed by the variable annuity contracts that invest in the Emerging
Growth Portfolio are not included in the calculations of return in this bar
chart, and if those charges were included, the returns would have been less than
those shown below.
[CHART]
19.06% 20.45% 37.43%
------ ------ ------
1996 1997 1998
The highest quarterly return for the Portfolio from January 2, 1996 to December
31, 1998 was 28.40% (for the quarter ending December 31, 1998) and the lowest
quarterly return was -12.30% (for the quarter ending September 30, 1998).
This table compares the Portfolio's average annual returns to the returns of the
Russell Mid Cap Growth Index and the Lipper Mid Cap Funds Index for 1 calendar
year and since inception.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(through December 31, 1998)
- --------------------------------------------------------------------------------
Since Inception
1 Year (02/02/96)
<S> <C> <C>
Emerging Growth Portfolio 37.43% 25.38%
Russell Mid Cap Growth Index 17.86% 19.81%
Lipper Mid Cap Funds Index 13.92% 16.49%
- --------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 19
MORE ABOUT PORTFOLIO INVESTMENTS
- --------------------------------------------------------------------------------
EQUITY SECURITIES
Equity securities represent an ownership position in a company. The prices of
equity securities fluctuate based on changes in the financial condition of the
issuing company and on market and economic conditions. Companies sell equity
securities to get the money they need to grow.
Stocks are one type of equity security. Generally, there are two types of
stocks:
COMMON STOCK -- Each share of common stock represents a part of the ownership of
a company. The holder of common stock participates in the growth of a company
through increasing stock price and dividends. If a company experiences
difficulty, a stock price can decline and dividends may not be paid.
PREFERRED STOCK -- Each share of preferred stock allows the holder to receive a
dividend before the common stock shareholders received dividends on their
shares.
Other types of equity securities include, but are not limited to, convertible
securities, warrants, rights and foreign equity securities such as ADRs, GDRs,
EDRs and IDRs.
FIXED INCOME SECURITIES
Fixed income securities include a broad array of short, medium and long term
obligations, including notes and bonds. Fixed income securities may have fixed,
variable or floating rates of interest, including rates of interest that vary
inversely at a multiple of a designated or floating rate, or that vary according
to changes in relative values of currencies. Fixed income securities generally
involve an obligation of the issuer to pay interest on either a current basis or
at the maturity of the security and to repay the principal amount of the
security at maturity.
Bonds are one type of fixed income security and are sold by governments on the
local, state and federal levels and by companies. Investing in a bond is like
making a loan for a fixed period of time at a fixed interest rate. During the
fixed period, the bond pays interest on a regular basis. At the end of the fixed
period, the bond matures and the investor usually gets back the principal amount
of the bond.
Fixed periods to maturity are categorized as:
- Short-term (generally less than 12 months)
- Intermediate- or medium-term (one to ten years)
- Long-term (10 years or more)
COMMERCIAL PAPER -- is a specific type of corporate or short-term note. In fact,
it is very short-term, being paid in less than 270 days. Most commercial paper
matures in 50 days or less.
MORTGAGE-BACKED SECURITIES -- are securities representing interests in "pools"
of mortgage loans securitized by residential or commercial property.
Payments of interest and principal on these securities are generally made
monthly, in effect, "passing through" monthly payments made by individual
borrowers on the mortgage loans which underlie the securities.
U.S. GOVERNMENT SECURITIES -- are obligations of, or guaranteed by the U.S.
Government or its agencies or instrumentalities. Some U.S. Government
securities, such as Treasury bills, notes, bonds and securities issued by GNMA,
are supported by the full faith and credit of the U.S.; other such as securities
issued by the Federal Home Loan Banks, are supported by the right of the issuer
to borrow from the U.S. Treasury; others such as those of FNMA, and FHLMC are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations, while still others such as those of the Student Loan
Marketing Association, the Tennessee Valley Authority and the Small Business
Authority are supported only by the credit of the instrumentality.
Bonds, commercial paper and mortgage-backed securities are not the only types of
fixed income securities. Other fixed income securities include, but are not
limited to, convertible bonds, debentures and notes, asset-backed securities,
certificates of deposit, fixed time deposits, bankers' acceptances, repurchase
agreements and reverse repurchase agreements.
MONEY MARKET INSTRUMENTS
All of the Portfolios may invest in high quality money market instruments. A
money market instrument is high quality when it is rated in one of the two
highest rating categories by S&P or Moody's or another nationally recognized
service, or if unrated, deemed high quality by the Adviser or a Sub-adviser.
High quality money market instruments may include:
- Cash and cash equivalents
- U.S. Government securities
- Certificates of deposit or other obligations of U.S. banks with total assets
in excess of $1 billion
- Corporate debt obligations with remaining maturities of 13 months or less
For more
information about
EQUITY SECURITIES,
see the Statement
of Additional
Information.
For more information
about FIXED INCOME
SECURITIES, see the
Statement of
Additional
Information.
For more information
about MONEY MARKET
INSTRUMENTS, see the
Statement of
Additional
Information.
16
<PAGE> 20
MORE ABOUT PORTFOLIO INVESTMENTS -- (CONTINUED)
- --------------------------------------------------------------------------------
- Commercial paper sold by corporations and finance companies
- Repurchase agreements, money market securities of foreign issuers payable in
U.S. dollars, asset-backed securities, loan participation and adjustable
rate securities
- Bankers' acceptances
- Time deposits
FOREIGN SECURITIES
Foreign securities are the equity, fixed income or money market securities of
foreign issuers. Securities of foreign issuers include obligations of foreign
branches of U.S. banks and of foreign banks, common and preferred stocks, and
fixed income securities issued by foreign governments, corporations and
supranational organizations. They also include ADRs, GDRs, IDRs and EDRs.
ADRs are certificates issued by a U.S. bank or trust company and represent the
right to receive securities of a foreign issuer deposited in a domestic bank or
foreign branch of a U.S. Bank. GDRs, IDRs and EDRs are receipts evidencing an
arrangement with a non-U.S. bank.
PORTFOLIO TURNOVER
Portfolio turnover occurs when a Portfolio sells its investments and buys new
ones. In some Portfolios, high portfolio turnover occurs when they engage in
frequent trading as part of their investment strategy.
High portfolio turnover may cause a Portfolio's expenses to increase. For
example, a Portfolio may have to pay brokerage fees and other related expenses.
A portfolio turnover rate of 100% or more a year is considered high. A high rate
increases a Portfolio's transaction costs and expenses.
During the last fiscal year, the portfolio turnover rate for each of the
Portfolios, other than the Money Market Portfolio, was
<TABLE>
<CAPTION>
Portfolio
Name of Portfolio Turnover Rate
- ---------------------------------------------------
<S> <C>
EliteValue Portfolio 39%
Emerging Growth Portfolio 107%
Growth and Income Portfolio 151%
Growth Equity Portfolio 140%
International Equity Portfolio 61%
U.S. Government Securities Portfolio 24%
</TABLE>
A WORD ABOUT RISK
As described in the fact sheet for each Portfolio, participation in a Portfolio
involves risk -- even the risk that you will receive a minimal return on your
investment or the value of your investment will decline. It is important for you
to consider carefully the following risks when you allocate purchase payments to
the Portfolios.
MARKET RISK
Market risk refers to the loss of capital resulting from changes in the price of
investments. Generally, equity securities are considered to be subject to market
risk. For example, market risk occurs when the expectations of lower corporate
profits in general cause the broad market of stocks to fall in price. When this
happens, even though a company may be experiencing a growth in profits, the
price of its stock could fall.
CREDIT RISK
Credit risk refers to the risk that an issuer of a fixed income security may be
unable to pay principal or interest payments due on the securities. To help the
Portfolios' Adviser and Sub-advisers decide which corporate and foreign fixed
income securities to buy, they rely on Moody's and S&P (two nationally
recognized bond rating services), and on their own research, to lower the risk
of buying a fixed income security of a company that may not pay the interest or
principal on the fixed income security.
The credit risk of a Portfolio depends on the quality of its investments. Fixed
income securities that are rated as investment grade have ratings ranging from
AAA to BBB. These fixed income securities are considered to have adequate
ability to make interest and principal payments.
INTEREST RATE RISK
Interest rate risk refers to the risk that fluctuations in interest rates may
affect the value of interest paying securities in a Portfolio. Fixed income
securities such as U.S. Government bonds are subject to interest rate risk. If a
Portfolio sells a bond before it matures, it may lose money, even if the bond is
guaranteed by the U.S. Government. Say, for example, a Portfolio bought an
intermediate government bond last year that was paying interest at a fixed rate
of 6%. Now, intermediate government bonds are paying interest at a rate of 7%.
If the Portfolio wants to sell the bond paying an interest rate of 6%, it will
have to sell it at a discount (and realize a loss) to attract buyers because
they can buy new bonds paying an interest rate of 7%.
PREPAYMENT RISK
Many types of fixed income securities, including mortgage backed securities, are
subject to prepayment risk. Prepayment risk is the risk that issuers of fixed
income securities will make
17
<PAGE> 21
MORE ABOUT PORTFOLIO INVESTMENTS -- (CONTINUED)
- --------------------------------------------------------------------------------
prepayments earlier than anticipated during periods of falling interest rates
requiring a Portfolio to invest in new securities with lower interest rates.
This will reduce the stream of cash payments that flow through to the Portfolio.
Securities subject to prepayment risk also pose a potential for loss when
interest rates rise. Rising interest rates may cause prepayments to occur at a
slower rate than expected thereby lengthening the maturity of the security and
making it more sensitive to interest rate changes.
RISKS ASSOCIATED WITH FOREIGN SECURITIES
A foreign security is a security issued by an entity domiciled or incorporated
outside of the U.S. Among the principal risks of owning foreign securities are:
Political Risk: the risk that a change in a foreign government will occur and
that the assets of a company in which the Portfolio has invested will be
affected. In some countries there is the risk that the government may take
over the assets or operations of a company and or that the government may
impose taxes or limits on the removal of a Portfolio's assets from that
country.
Currency Risk: the risk that a foreign currency will decline in value. As long
as a Portfolio holds a security denominated in a foreign currency, its value
will be affected by the value of that currency relative to the U.S. dollar. An
increase in the value of the U.S. dollar relative to a foreign currency will
adversely affect the value of the Portfolio.
Liquidity Risk: foreign markets may be less liquid and more volatile than U.S.
markets and offer less protection to investors. Certain markets may require
payment for securities before delivery and delays may be encountered in
settling securities transactions. In some foreign markets, there may not be
protection against failure by other parties to complete transactions.
Limited Information Risk: the risk that less government supervision of foreign
markets may occur. Foreign issuers may not be subject to the uniform
accounting, auditing and financial reporting standards and practices that
apply to U.S. issuers. In addition, less public information about their
operations may exist.
Developing Country Risk: the risks associated with investment in foreign
securities are heightened in connection with investments in the securities of
issuers in developing countries. Developing countries are generally defined as
countries in the initial stages of their industrialization cycles with low per
capita income. Although the markets of developing countries offer higher rates
of return, they also pose additional risks to investors, including immature
economic structures, national policies restricting investments by foreigners
and different legal systems.
Settlement and Clearance Risk: the risks associated with the different
clearance and settlement procedures that are utilized in certain foreign
markets. In certain foreign markets, settlements may be unable to keep pace
with the volume of securities transactions, which may cause delays. If there
is a settlement delay, a Portfolio's assets may be uninvested and not earning
returns. A Portfolio also may miss investment opportunities or be unable to
dispose of a security because of these delays.
YEAR 2000 RISK
Like other mutual funds, financial and business organizations and individuals
around the world, the Trust could be adversely affected if the computer systems
of the Adviser and the sub-advisers and other service providers, over which the
Trust may have no control, do not properly process and calculate date-related
information and data from and after January 1, 2000. This is commonly referred
to as the "Year 2000 Problem." The Adviser is taking steps that it believes are
reasonably designed to address the Year 2000 Problem with respect to computer
systems that it uses. The Adviser is also seeking assurances that its
sub-advisers and other service providers are taking similar steps as well.
However, it is impossible to know exactly how the Year 2000 Problem will affect
the administration of the Trust, performance of the Trust's portfolios or
securities markets in general.
MANAGING INVESTMENT RISKS
In pursuing their investment objectives, each Portfolio assumes investment risk.
The Portfolios try to limit their investment risk by diversifying their
investment portfolios across different industry sectors.
18
<PAGE> 22
MORE ABOUT PORTFOLIO INVESTMENTS -- (CONTINUED)
- --------------------------------------------------------------------------------
INVESTMENT LIMITATIONS
The Portfolios have adopted certain investment limitations (based on total
assets) that cannot be changed without shareholder approval and are designed to
limit your investment risk and maintain investment portfolio diversification.
Each Portfolio may not:
- Invest more than 5% of its assets in any one issuer (other than U.S.
Government securities)
- Invest more than 25% of its assets in any one industry (except with respect
to obligations of U.S. banks in the case of the Money Market Portfolio)
- Borrow money, except as a temporary measure
DEFENSIVE INVESTMENT STRATEGY
Under normal market conditions, none of the Portfolios, other than the Money
Market Portfolio, intend to have a substantial portion of its assets invested in
cash or money market instruments, though the U.S. Government Securities
Portfolio will have a substantial portion of its assets in U.S. Government
securities. When the Adviser or a Sub-adviser determines that adverse market
conditions exist, a Portfolio may adopt a temporary defensive posture and invest
entirely in cash and money market securities. When a Portfolio is invested in
this manner, it may not be able to achieve its investment objective.
HEDGING STRATEGIES
Each Portfolio may use investment strategies to limit the risk of price
fluctuations and preserve capital. The strategies used by all the Portfolios,
other than the Money Market Portfolio, include financial futures contracts,
options on financial futures and options on broad market indices. The Growth
Equity Portfolio and the U.S. Government Securities Portfolio may use options on
securities as well.
The International Equity Portfolio may purchase and sell foreign currencies on a
spot basis in connection with the settlement of transactions traded in such
foreign currencies. The International Equity Portfolio may also hedge the risks
associated with its investments by entering into forward foreign currency
contracts and foreign currency futures and options contracts, generally in
anticipation of making investments in companies whose securities are denominated
in those currencies.
19
<PAGE> 23
MANAGEMENT OF THE TRUST
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
The Adviser (formerly, AGA Investment Advisory Services, Inc. and prior to that,
WNL Investment Advisory Services, Inc.), a Delaware corporation, has been in the
investment advisory business since 1994. The Adviser, as of December 31, 1998,
had over $71 million in assets under management. The Adviser has been the
Investment Adviser for the Portfolios that comprise the Trust since their
inception.
The Adviser is an indirect subsidiary of Western National Corporation, a
Delaware corporation. Effective February 25, 1998, Western National Corporation
became a wholly owned subsidiary of AGC Life Insurance Company, a Missouri
domiciled life insurer and a wholly owned subsidiary of American General
Corporation, a Texas corporation.
The Adviser is a member of the American General Corporation group of companies.
The American General Corporation group of companies is a leading provider of
retirement services, life insurance and consumer loans. Members of the American
General Corporation group of companies operate in each of the 50 states and
Canada.
The Adviser oversees the Portfolios' day-to-day operations and supervises the
purchase and sale of Portfolio investments. The Adviser employs Investment
Sub-advisers to make investment decisions for six of the Portfolios.
Leon A. Olver, C.F.A. is responsible for the day-to-day management of the U.S.
Government Securities Portfolio. Prior to joining the Adviser, Mr. Olver worked
for First Heights Bank, Houston, Texas; he was Vice President, Assistant
Treasurer 1991 to 1994; and Vice President, Treasurer from 1994 to 1995. Mr.
Olver currently is Vice President and Investment Officer for American General
Series Portfolio Company and Vice President of US LIFE Income Fund, Inc.
The Adviser serves in its capacity as Investment Adviser through an investment
advisory agreement it enters into with the Trust. The Investment Advisory
Agreement provides for the Trust to pay all expenses not specifically assumed by
the Adviser. Examples of expenses paid by the Trust include transfer agency
fees, custodial fees, the fees of outside legal and auditing firms. The Trust
allocates these expenses to each Portfolio in a manner approved by the Trustees.
The Investment Advisory Agreement is renewed each year by the Trustees.
One Investment Advisory Agreement dated April 21, 1995 covers all seven
Portfolios.
INVESTMENT SUB-ADVISERS
For six of the Portfolios, the Adviser works with Investment Sub-advisers,
financial service companies that specialize in certain types of investing.
However, the Adviser still retains ultimate responsibility for managing these
Portfolios. The Sub-advisers' role is to make investment decisions for these six
Portfolios according to the Portfolios' investment objectives and restrictions.
The Sub-Advisers are:
CREDIT SUISSE ASSET MANAGEMENT ("CSAM OF NEW YORK")
CSAM of New York is the Sub-adviser for the Growth and Income Portfolio. CSAM of
New York is a diversified asset manager, handling global equity, balanced,
fixed-income, and derivative securities accounts for private individuals, as
well as corporate pension and profit-sharing plans, state pension funds, union
funds, endowments, and other charitable institutions. CSAM of New York, together
with its predecessor firms, has been engaged in the investment advisory business
for more than 60 years. As of December 31, 1998, CSAM of New York had
approximately $39 billion in assets under management.
The CSAM of New York Domestic Equity Management Team manages the equity portion
of the Growth and Income Portfolio and the CSAM of New York Fixed-Income
Management Team manages the fixed income portion of the Growth and Income
Portfolio.
CREDIT SUISSE ASSET MANAGEMENT, LTD. ("CSAM") CSAM is the Sub-adviser for the
International Equity Portfolio. CSAM has been offering diverse global
fixed-income and equity investment strategies for institutional clients in more
than 45 countries worldwide since 1983 and, until June 1995, under the name CS
First Boston Investment Management Limited. Clients include central banks and
other government entities, insurance companies, pension funds, multinational
corporations, commercial banks, and other institutions. As of December 31, 1998,
CSAM had approximately $39 billion in assets under management.
Glenn Wellman, Managing Director and head of Global Equity Portfolio Management
for the Sub-adviser, is responsible for the day-to-day management of the
International Equity Portfolio.
THE ADVISER'S
PRINCIPAL OFFICES are
located at 2929 Allen
Parkway, Houston,
Texas 77019.
CSAM OF NEW
YORK'S PRINCIPAL
OFFICES are located at
One Citicorp Center,
153 East 53rd Street,
New York, New York
10022.
CSAM'S PRINCIPAL
OFFICES are located at
Beaufort House,
15 St. Botolph
Street,
London, England.
20
<PAGE> 24
MANAGEMENT OF THE TRUST -- (CONTINUED)
- --------------------------------------------------------------------------------
Mr. Wellman joined the Sub-adviser in 1993. Prior to joining the Sub-adviser,
Mr. Wellman spent 14 years with Alliance Capital Limited, most recently as chief
investment officer, with responsibility for developing the firm's global equity
management practice.
OPCAP ADVISORS ("OPCAP")
OpCap is the Sub-Adviser for the EliteValue Portfolio. OpCap is a majority-owned
subsidiary of Oppenheimer Capital, a registered investment adviser whose
employees perform portfolio management services for the EliteValue Portfolio.
Oppenheimer Capital has operated as an investment adviser since 1968, and as of
December 31, 1998, had approximately $62.5 billion in assets under management.
Richard J. Glasebrook II is responsible for the day-to-day management of the
EliteValue Portfolio. Mr. Glasebrook is a managing director of Oppenheimer
Capital. He joined Oppenheimer Capital in 1991.
STATE STREET GLOBAL ADVISORS
State Street Global Advisors is the Sub-adviser for the Growth Equity Portfolio
and the Money Market Portfolio. State Street Global Advisors is the investment
management division of State Street Bank and Trust Company, one of the largest
providers of securities processing and recordkeeping services for U.S. mutual
funds and pension funds. Through its offices in the United States, London,
Sydney, Hong Kong, Tokyo, Toronto, Luxembourg, Melbourne, Montreal, and Paris,
State Street Global Advisors provides complete global investment management
services. State Street Global Advisors had more than $489.7 billion in assets
under management as of December 31, 1998.
A committee of the Sub-adviser manages the Growth Equity Portfolio. No one
person is primarily responsible for making investment recommendations to that
committee.
VAN KAMPEN ASSET MANAGEMENT INC. ("VAN KAMPEN")
Van Kampen is the Sub-adviser for the Emerging Growth Portfolio. Van Kampen
advises more than 50 open-end mutual funds, 39 closed-end mutual funds and 2,500
unit investment trusts. As of December 31, 1998, Van Kampen had more than $50
billion in assets under management.
Gary M. Lewis is primarily responsible for the day-to-day management of the
Emerging Growth Portfolio. Mr. Lewis has been Senior Vice President of the
Sub-adviser since October 1995. Previously, he served as Vice
President-Portfolio Manager of the Sub-Adviser from 1989 to October 1995.
ADVISORY FEES
Each Portfolio pays the Adviser a fee based on its average daily net asset
value. A Portfolio's net asset value is the total value of the Portfolio's
assets minus any money it owes for operating expenses plus any other
liabilities, such as the fee paid to its Custodian to safeguard the Portfolio's
investments.
Here is a list of the advisory fees paid by each Portfolio during the most
recent fiscal year after expense reimbursement.
<TABLE>
<CAPTION>
Advisory Fee Paid
(as a % of
average daily net
Portfolio assets)
- ---------------------------------------------------
<S> <C>
EliteValue Portfolio .65%
Emerging Growth Portfolio .75%
Growth and Income Portfolio .75%
Growth Equity Portfolio .61%
International Equity Portfolio .90%
Money Market Portfolio .45%
U.S. Government Securities
Portfolio .475%
</TABLE>
OPCAP ADVISORS'
PRINCIPAL OFFICES are
located at One World
Financial Center,
200 Liberty Street,
New York,
New York 10281.
STATE STREET GLOBAL
ADVISORS' PRINCIPAL
OFFICES are located at
Two Internation
Place, Boston,
Massachusetts 02110.
VAN KAMPEN ASSET
MANAGEMENT'S PRINCIPAL
OFFICES are located at
One Parkview Plaza,
Oakbrook Terrace,
Illinois 60181.
21
<PAGE> 25
GENERAL INFORMATION ABOUT THE TRUST
- --------------------------------------------------------------------------------
PORTFOLIO SHARES
The Trust offers shares of the Portfolios only to the Company's separate
account. As a Contract owner or participant, you do not directly buy shares of a
Portfolio. Instead, your purchase payments are applied towards the purchase of
units in either a registered or unregistered separate account of the Company.
When you or your employer purchases a Contract, you specify which Portfolios you
want the separate account to invest your money in, and the separate account buys
shares of those Portfolios according to your instructions. Share certificates
are not available.
When the separate account buys, sells or transfers shares of the Portfolios, it
does not pay any charges related to these transactions.
For more information on how to participate, see your Contract prospectus.
NET ASSET VALUE
HOW NET ASSET VALUE IS CALCULATED
Here is how the Trust calculates the net asset value of each Portfolio's shares:
<TABLE>
<S> <C> <C>
Step 1:
Total value of the
Portfolio's assets* The Portfolio's
(including money owed to = Total Net Asset
the fund but not yet Value
collected)
- - The Portfolio's
liabilities (including
money owed by the
Portfolio but not yet
paid)
Step 2:
The Portfolio's total
net asset value (from
Step 1)
/ The total number of the NET ASSET VALUE
Portfolio's shares that = PER SHARE
are outstanding.
</TABLE>
* The Trust uses the fair market value of Portfolio's investments to calculate
the Portfolio's total value. However, it uses the amortized cost method to
determine the values of all the Money Market Portfolio's investments and of
any other Portfolio's short-term securities maturing within 60 days. The
amortized cost method approximates fair market value.
If a Portfolio owns investments that are not sold often or are not sold on any
exchange, the Trustees or their delegate will, in good faith, estimate the fair
market value of these investments.
WHEN NET ASSET VALUE IS CALCULATED
The Trust calculates the net asset value of each Portfolio's shares at
approximately 4 pm EST each day the New York Stock Exchange ("Exchange") is
open. (The Exchange is open Monday through Friday but is closed on certain
federal and other holidays.) The Trust is closed the day after Thanksgiving even
though the Exchange is open.
DIVIDENDS AND CAPITAL GAINS
Net investment income generally includes stock dividends received and bond
interest earned less expenses paid by a Portfolio. Each Portfolio pays dividends
from its net investment income occasionally. Dividends from net investment
income are automatically reinvested for you into additional shares of the
Portfolio. The Money Market Portfolio declares dividends daily and pays them
monthly.
When a Portfolio sells a security at a profit, a capital gain results. Once a
year, each Portfolio pays distributions from capital gains, as long as total
capital gains exceed total capital losses. Distributions from capital gains are
automatically reinvested for you into additional shares of the Portfolio. The
Money Market Portfolio does not anticipate that it will normally realize any
long-term capital gains with respect to its Portfolio securities.
TAX CONSEQUENCES
As the owner of a Contract or a participant under your employer's contract, you
will not be directly affected by the federal income tax consequences of
distributions, sales or redemptions of Portfolio shares. You should consult the
prospectus for your Contract for further information concerning the federal
income tax consequences to you of investing in the Portfolios.
22
<PAGE> 26
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand each of the
Portfolio's financial performance for the period shown. Certain information
reflects financial results for a single Portfolio share. The total return
figures in the table represent the rate that an investor would have earned on an
investment in the Trust (assuming reinvestment of all dividends and
distributions). For the year ended December 31, 1998, Ernst & Young LLP has
audited this information and its report and the Trust's financial statements,
are included in the Statement of Additional Information, which is available upon
request. Other auditors have audited this information for the years ended,
December 31, 1997, 1996, and 1995.
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
AMERICAN GENERAL U.S. GOVERNMENT
SECURITIES PORTFOLIO*
------------------------------------------
YEAR YEAR PERIOD
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996**
------------ ------------ ------------
<S> <C> <C> <C>
NET ASSET VALUE
Net asset value, beginning of period............. $10.07 $ 9.79 $10.00
------ ------ ------
INVESTMENT OPERATIONS
Net investment income(1)......................... 0.52 0.57 0.53
Net realized and unrealized gain (loss).......... 0.22 0.28 (0.21)
------ ------ ------
Total from investment operations................. 0.74 0.85 0.32
------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................ (0.54) (0.57) (0.53)
------ ------ ------
Net realized gains............................... (0.04) -- --
Total distributions to shareholders.............. (0.58) (0.57) (0.53)
------ ------ ------
Net asset value, end of period................... $10.23 $10.07 $ 9.79
====== ====== ======
TOTAL RETURN..................................... 7.49% 8.89% 3.40%(2)
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets(3)................ 0.53% 0.35% 0.22%(4)
Net investment income to average net assets...... 5.95% 6.25% 5.91%(4)
Portfolio turnover rate.......................... 24% 615% 297%
Net assets, end of period (000's)................ $8,679 $3,986 $2,347
</TABLE>
- ---------------
* Prior to March 8, 1999, the American General U.S. Government Securities
Portfolio was sub-advised by Salomon Brothers Asset Management, Inc. and
known as the Salomon Brothers U.S. Government Securities Portfolio.
** The American General U.S. Government Securities Portfolio commenced
operations on February 6, 1996.
(1) Net investment income is after waiver of fees and reimbursement of certain
expenses by the Investment Adviser, the Sub-administrator and American
General Annuity 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 American General Annuity Insurance
Company had not reimbursed expenses for the periods ended December 31, 1998,
December 31, 1997, and December 31, 1996, net investment income (loss) per
share would have been $0.40, $0.28 and $0.10, respectively, for the American
General U.S. Government Securities Portfolio.
(2) Total return represents aggregate total return for the period indicated and
is not annualized.
(3) If the Investment Adviser and the Sub-administrator had not waived fees and
American General Annuity Insurance Company had not reimbursed expenses for
the periods ended December 31, 1998, December 31, 1997, and December 31,
1996, the ratio of operating expenses to average net assets would have been
2.46%, 4.84% and 5.26%, respectively, for the American General U.S.
Government Securities Portfolio.
(4) Annualized.
23
<PAGE> 27
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
CREDIT SUISSE GROWTH AND INCOME PORTFOLIO
---------------------------------------------------------
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995*
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE
Net asset value, beginning of
period............................ $ 12.72 $11.04 $10.46 $10.00
------- ------ ------ ------
INVESTMENT OPERATIONS
Net investment income(1)............ 0.27 0.33 0.47 0.14
Net realized and unrealized gain
(loss)............................ 1.52 2.11 0.96 0.51
------- ------ ------ ------
Total from investment operations.... 1.79 2.44 1.43 0.65
------- ------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............... (0.28) (0.33) (0.47) (0.14)
Net realized gains.................. (0.34) (0.43) (0.38) --
In excess of net realized gains..... -- -- -- (0.05)
------- ------ ------ ------
Total distributions to
shareholders...................... (0.62) (0.76) (0.85) (0.19)
------- ------ ------ ------
Net asset value, end of period...... $ 13.89 $12.72 $11.04 $10.46
======= ====== ====== ======
TOTAL RETURN........................ 14.16% 22.33% 13.82% 6.57%(2)
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets(3)... 0.81% 0.62% 0.49% 0.12%(4)
Net investment income to average net
assets............................ 3.04% 2.87% 4.65% 6.99%(4)
Portfolio turnover rate............. 151% 191% 217% 75%
Net assets, end of period (000's)... $16,713 $7,388 $3,145 $2,136
</TABLE>
- ---------------
* The Credit Suisse Growth and Income Portfolio commenced 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 American
General Annuity 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 American General Annuity Insurance
Company had not reimbursed expenses for the periods ended December 31, 1998,
December 31, 1997, December 31, 1996, and December 31, 1995, net investment
income (loss) per share would have been $0.16, $0.10, $0.00 and $(0.06),
respectively, for the Credit Suisse Growth and Income Portfolio.
(2) Total return represents aggregate total return for the period indicated and
is not annualized.
(3) If the Investment Adviser and the Sub-administrator had not waived fees and
American General Annuity Insurance Company had not reimbursed expenses for
the periods ended December 31, 1998, December 31, 1997, December 31, 1996,
and December 31, 1995, the ratio of operating expenses to average net assets
would have been 2.01%, 3.26%, 5.15% and 9.95%, respectively, for the Credit
Suisse Growth and Income Portfolio.
(4) Annualized.
24
<PAGE> 28
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
---------------------------------------------------------
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995*
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE
Net asset value, beginning of
period.......................... $10.35 $10.67 $10.33 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net investment income(1).......... 0.06 0.08 0.15 0.06
Net realized and unrealized gain
(loss).......................... (0.15) 0.37 1.56 0.33
------ ------ ------ ------
Total from investment
operations...................... (0.09) 0.45 1.71 0.39
------ ------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net investment income............. (0.03) (0.12) (0.15) (0.06)
In excess of net investment
income.......................... -- (0.20) -- --
Net realized gains................ -- (0.45) (0.24) --
In excess of net realized gains... -- -- (0.98) --
------ ------ ------ ------
Total distributions to
shareholders.................... (0.03) (0.77) (1.37) (0.06)
------ ------ ------ ------
Net asset value, end of period.... $10.23 $10.35 $10.67 $10.33
====== ====== ====== ======
TOTAL RETURN...................... (0.86)% 4.30% 16.50% 3.93%(2)
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net
assets(3)....................... 0.94% 0.77% 0.60% 0.12%(4)
Net investment income to average
net assets...................... 0.53% 0.71% 1.09% 2.89%(4)
Portfolio turnover rate........... 61% 6% 79% 2%
Net assets, end of period
(000's)......................... $5,996 $4,310 $2,727 $2,083
</TABLE>
- ---------------
* The Credit Suisse International Equity Portfolio commenced 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 American
General Annuity 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 American General Annuity Insurance
Company had not reimbursed expenses for the periods ended December 31, 1998,
December 31, 1997, December 31, 1996, and December 31, 1995, net investment
loss per share would have been $(0.19), $(0.29), $(1.25) and $(0.18),
respectively, for the Credit Suisse International Equity Portfolio.
(2) Total return represents aggregate total return for the period indicated and
is not annualized.
(3) If the Investment Adviser and the Sub-administrator had not waived fees and
American General Annuity Insurance Company had not reimbursed expenses for
the periods ended December 31, 1998, December 31, 1997, December 31, 1996,
and December 31, 1995, the ratio of operating expenses to average net assets
would have been 3.78%, 5.06%, 6.41% and 11.83%, respectively, for the Credit
Suisse International Equity Portfolio.
(4) Annualized.
25
<PAGE> 29
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
ELITEVALUE PORTFOLIO
------------------------------------------
YEAR YEAR PERIOD
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996*
------------ ------------ ------------
<S> <C> <C> <C>
NET ASSET VALUE
Net asset value, beginning of period........... $ 14.38 $12.32 $10.00
------- ------ ------
INVESTMENT OPERATIONS
Net investment income(1)....................... 0.25 0.19 0.18
Net realized and unrealized gain............... 0.72 2.39 2.48
------- ------ ------
Total from investment operations............... 0.97 2.58 2.66
------- ------ ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.......................... (0.25) (0.19) (0.18)
Net realized gains............................. (0.15) (0.33) (0.16)
------- ------ ------
Total distributions to shareholders............ (0.40) (0.52) (0.34)
------- ------ ------
Net asset value, end of period................. $ 14.95 $14.38 $12.32
======= ====== ======
TOTAL RETURN................................... 6.72% 21.08% 26.70%(2)
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets(3).............. 0.71% 0.52% 0.36%(4)
Net investment income to average net assets.... 2.42% 1.58% 1.74%(4)
Portfolio turnover rate........................ 39% 29% 21%
Net assets, end of period (000's).............. $20,620 $9,471 $2,307
</TABLE>
- ---------------
* The EliteValue Portfolio commenced operations on January 2, 1996.
(1) Net investment income is after waiver of fees and reimbursement of certain
expenses by the Investment Adviser, the Sub-administrator and American
General Annuity 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 American General Annuity Insurance
Company had not reimbursed expenses for the periods ended December 31, 1998,
December 31, 1997 and December 31, 1996, net investment income (loss) per
share would have been $0.17, $0.00 and $(0.54), respectively, for the
EliteValue Portfolio.
(2) Total return represents aggregate total return for the period indicated and
is not annualized.
(3) If the Investment Adviser and the Sub-administrator had not waived fees and
American General Annuity Insurance Company had not reimbursed expenses for
the periods ended December 31, 1998, December 31, 1997 and December 31,
1996, the ratio of operating expenses to average net assets would have been
1.41%, 2.76% and 7.45%, respectively, for the EliteValue Portfolio.
(4) Annualized.
26
<PAGE> 30
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
STATE STREET GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO
---------------------------------------------------------
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995*
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE
Net asset value, beginning of
period............................ $ 14.07 $11.85 $10.31 $10.00
------- ------ ------ ------
INVESTMENT OPERATIONS
Net investment income(1)............ 0.13 0.17 0.20 0.05
Net realized and unrealized gain.... 2.89 3.56 1.99 0.31
------- ------ ------ ------
Total from investment operations.... 3.02 3.73 2.19 0.36
------- ------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............... (0.13) (0.17) (0.20) (0.05)
Net realized gains.................. (0.39) (1.34) (0.45) --
------- ------ ------ ------
Total distributions to
shareholders...................... (0.52) (1.51) (0.65) (0.05)
------- ------ ------ ------
Net asset value, end of period...... $ 16.57 $14.07 $11.85 $10.31
======= ====== ====== ======
TOTAL RETURN........................ 21.60% 31.67% 21.36% 3.57%(2)
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets(3)... 0.66% 0.48% 0.39% 0.12%(4)
Net investment income to average net
assets............................ 0.88% 1.34% 1.80% 2.46%(4)
Portfolio turnover rate............. 140% 111% 89% 9%
Net assets, end of period (000's)... $15,500 $7,327 $3,420 $2,073
</TABLE>
- ---------------
* The State Street Global Advisors Growth Equity Portfolio commenced
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 American
General Annuity 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 American General Annuity Insurance
Company had not reimbursed expenses for the periods ended December 31, 1998,
December 31, 1997, December 31,1996 and December 31, 1995, the net
investment loss per share would have been $(0.02), $(0.11), $(0.29) and
$(0.15), respectively, for the State Street Global Advisor Growth Equity
Portfolio.
(2) Total return represents aggregate total return for the period indicated and
is not annualized.
(3) If the Investment Adviser and the Sub-administrator had not waived fees and
American General Annuity Insurance Company had not reimbursed expenses for
the periods ended December 31, 1998, December 31, 1997, December 31, 1996
and December 31, 1995, the ratio of operating expenses to average net assets
would have been 1.96%, 3.29%, 4.83% and 9.94%, respectively, for the State
Street Global Advisor Growth Equity Portfolio.
(4) Annualized.
27
<PAGE> 31
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
STATE STREET GLOBAL ADVISORS MONEY MARKET PORTFOLIO
---------------------------------------------------------
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995*
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE
Net asset value, beginning of
period............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net investment income(1)............ 0.05 0.05 0.05 0.01
------ ------ ------ ------
Total from investment operations.... 0.05 0.05 0.05 0.01
------ ------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............... (0.05) (0.05) (0.05) (0.01)
------ ------ ------ ------
Total distributions to
shareholders...................... (0.05) (0.05) (0.05) (0.01)
------ ------ ------ ------
Net asset value, end of period...... $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ======
TOTAL RETURN........................ 5.23% 5.50% 5.19% 1.17%(2)
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets(3)... 0.49% 0.32% 0.29% 0.12%(4)
Net investment income to average net
assets............................ 5.12% 5.41% 5.23% 5.25%(4)
Net assets, end of period (000's)... $9,254 $5,100 $1,291 $ 126
</TABLE>
- ---------------
* The State Street Global Advisors Money Market Portfolio commenced operations
on October 10, 1995.
(1) Net investment income is after waiver of fees and reimbursement of certain
expenses by the Investment Adviser, the Sub-administrator and American
General Annuity 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 American General Annuity Insurance
Company had not reimbursed expenses for the periods ended December 31, 1998,
December 31, 1997, December 31, 1996, and December 31, 1995, net investment
income (loss) per share would have been $0.04, $0.03, $(0.08) and $(0.35),
respectively, for the State Street Global Advisors Money Market Portfolio.
(2) Total return represents aggregate total return for the period indicated and
is not annualized.
(3) If the Investment Adviser and the Sub-administrator had not waived fees and
American General Annuity Insurance Company had not reimbursed expenses for
the periods ended December 31, 1998, December 31, 1997, December 31, 1996,
and December 31, 1995, the ratio of operating expenses to average net assets
would have been 2.44%, 4.17%, 14.15% and 161.83%, respectively, for the
State Street Global Advisors Money Market Portfolio.
(4) Annualized.
28
<PAGE> 32
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
VAN KAMPEN EMERGING GROWTH PORTFOLIO
------------------------------------------
YEAR YEAR PERIOD
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996*
------------ ------------ ------------
<S> <C> <C> <C>
NET ASSET VALUE
Net asset value, beginning of period............. $ 13.87 $11.54 $10.00
------- ------ ------
INVESTMENT OPERATIONS
Net investment income (loss)(1).................. (0.03) 0.03 0.05
Net realized and unrealized gain................. 5.21 2.33 1.86
------- ------ ------
Total from investment operations................. 5.18 2.36 1.91
------- ------ ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................ -- (0.03) (0.05)
Net realized gains............................... -- -- (0.32)
------- ------ ------
Total distributions to shareholders.............. -- (0.03) (0.37)
------- ------ ------
Net asset value, end of period................... $ 19.05 $13.87 $11.54
======= ====== ======
TOTAL RETURN..................................... 37.43% 20.45% 19.06%(2)
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets(3)................ 0.80% 0.62% 0.46%(4)
Net investment income (loss) to average net
assets......................................... (0.57)% 0.23% 0.40%(4)
Portfolio turnover rate.......................... 107% 107% 154%
Net assets, end of period (000's)................ $11,674 $5,499 $1,882
</TABLE>
- ---------------
* The Van Kampen Emerging Growth Portfolio commenced operations on January 2,
1996.
(1) Net investment income is after waiver of fees and reimbursement of certain
expenses by the Investment Adviser, the Sub-administrator and American
General Annuity 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 American General Annuity Insurance
Company had not reimbursed expenses for the periods ended December 31, 1998,
December 31, 1997 and December 31, 1996, net investment loss per share would
have been $(0.26), $(0.42) and $(1.29), respectively, for the Van Kampen
Emerging Growth Portfolio.
(2) Total return represents aggregate total return for the period indicated and
is not annualized.
(3) If the Investment Adviser and the Sub-administrator had not waived fees and
American General Annuity Insurance Company had not reimbursed expenses for
the periods ended December 31, 1998, December 31, 1997 and December 31,
1996, the ratio of operating expenses to average net assets would have been
2.64%, 5.65% and 11.22%, respectively, for the Van Kampen Emerging Growth
Portfolio.
(4) Annualized.
29
<PAGE> 33
INTERESTED IN LEARNING MORE?
The Statement of Additional Information incorporated by reference into this
prospectus contains additional information about the Trust's operations.
Further information about the Trust's investments is available in the Trust's
annual and semi-annual reports to shareholders. The Trust's annual report
discusses market conditions and investment strategies that significantly
affected the Trust's performance results during its last fiscal year.
The Company can provide you with a free copy of these materials or other
information about the Trust. You may reach the Company by calling 1-800-424-4990
or by writing to the Company's Variable Annuity Service Center, 205 E. 10th
Avenue, Amarillo, Texas 79101.
The Securities and Exchange Commission also maintains copies of these documents:
To view information on-line: Access the SEC's web site at
http://www.sec.gov.
To review a paper filing or to request that documents be mailed to you,
contact:
SEC Public Reference Room
Washington, D.C. 20549-6009
1-800- SEC-0330
A duplicating fee will be assessed for all copies provided.
The Trust's Investment Company Act filing number is 811-8912.
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<PAGE> 34
A.G. SERIES TRUST
[FORMERLY, AGA SERIES TRUST]
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
---------------------
GROWTH PORTFOLIOS
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
("INTERNATIONAL EQUITY PORTFOLIO")
ELITEVALUE PORTFOLIO,
[FORMERLY, ELITEVALUE ASSET ALLOCATION PORTFOLIO]
STATE STREET GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO
("GROWTH EQUITY PORTFOLIO"),
[FORMERLY, GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO]
VAN KAMPEN EMERGING GROWTH PORTFOLIO
("EMERGING GROWTH PORTFOLIO")
[FORMERLY, VAN KAMPEN AMERICAN CAPITAL EMERGING GROWTH PORTFOLIO]
---------------------
GROWTH AND INCOME PORTFOLIOS
CREDIT SUISSE GROWTH AND INCOME PORTFOLIO
("GROWTH AND INCOME PORTFOLIO"),
[FORMERLY, BEA GROWTH AND INCOME PORTFOLIO]
---------------------
INCOME PORTFOLIOS
AMERICAN GENERAL U.S. GOVERNMENT SECURITIES PORTFOLIO
("U.S. GOVERNMENT SECURITIES PORTFOLIO")
[FORMERLY, SALOMON BROTHERS U.S. GOVERNMENT SECURITIES PORTFOLIO]
STATE STREET GLOBAL ADVISORS MONEY MARKET PORTFOLIO
("MONEY MARKET PORTFOLIO"),
[FORMERLY, GLOBAL ADVISORS MONEY MARKET PORTFOLIO]
This Statement of Additional Information (the "SAI") contains information which
may be of interest to investors but which is not included in the Prospectus of
A.G. Series Trust, formerly AGA Series Trust, (the "Trust"). The SAI is not a
prospectus and is only authorized for distribution when accompanied or preceded
by the Prospectus of the Trust dated May 1, 1999. The SAI should be read
together with the Prospectus. Investors may obtain a free copy of the Prospectus
by calling American General Annuity Insurance Company, formerly Western National
Life Insurance Company, (the "Company") at 1-800-424-4990.
<PAGE> 35
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................. 1
GENERAL INFORMATION......................................... 1
INVESTMENT STRATEGIES, POLICIES, AND RISKS OF THE TRUST..... 1
Asset-backed Securities.............................. 2
Bank Obligations..................................... 2
Borrowing, Reverse Repurchase Agreements and Dollar
Rolls............................................... 3
Convertible Securities............................... 4
Emerging Markets..................................... 5
Fixed Income Securities.............................. 5
Foreign Currency Exchange Transactions............... 6
Foreign Securities................................... 7
Forward Commitments.................................. 8
Interest Rate Transactions........................... 9
Illiquid Securities.................................. 10
Investment Companies................................. 10
Lease Obligation Bonds............................... 10
Lending Portfolio Securities......................... 11
Lower-Rated Fixed Income Securities.................. 11
Mortgage-Related Securities.......................... 12
Mortgage Pass-Through Securities............. 12
Collateralized Mortgage Obligations (CMOs)... 14
Commercial Mortgage-Backed Securities........ 14
Other Mortgage-Related Securities............ 15
CMO Residuals................................ 15
Stripped Mortgage-Backed Securities
("SMBS")...................................... 16
Options and Financial Futures Contracts.............. 16
Writing Covered Call and Put Options and
Purchasing Call and Put Options............... 17
Financial Futures Contracts.................. 19
Options on Financial Futures Contracts....... 20
Certain Additional Risks of Options and
Financial Futures Contracts................... 21
Limitations.................................. 22
Real Estate Securities and Real Estate Investment
Trusts ("REITs").................................... 23
Repurchase Agreements................................ 23
Temporary Defensive Position......................... 24
Variable or Floating Rate Securities................. 24
Warrants............................................. 25
When-issued Securities and Delayed-delivery
Transactions........................................ 25
Zero-Coupon Fixed Income Securities.................. 25
INVESTMENT RESTRICTIONS..................................... 26
Fundamental Investment Restrictions.................. 26
Non-Fundamental Investment Restrictions.............. 27
MANAGEMENT OF THE TRUST..................................... 28
Trustees and Officers................................ 28
Controlling Shareholder.............................. 30
Investment Adviser................................... 31
Investment Sub-Advisers.............................. 32
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Trust Administration................................. 34
Investment Decisions................................. 35
Brokerage and Research Services...................... 35
OFFERING, PURCHASE AND REDEMPTION OF FUND SHARES............ 36
DETERMINATION OF NET ASSET VALUE............................ 37
ACCOUNTING AND TAX TREATMENT................................ 37
Calls and Puts....................................... 37
Financial Futures Contracts.......................... 38
Subchapter M of the Internal Revenue Code of 1986.... 38
Section 817(h) of the Code........................... 39
DIVIDENDS AND DISTRIBUTIONS................................. 39
PERFORMANCE INFORMATION..................................... 40
Average Annual Total Return.......................... 40
Portfolio Total Return............................... 40
Index Total Return................................... 41
Seven Day Yields..................................... 41
SHAREHOLDER COMMUNICATIONS.................................. 41
ORGANIZATION AND CAPITALIZATION............................. 41
SHAREHOLDER LIABILITY....................................... 42
PORTFOLIO TURNOVER.......................................... 42
CUSTODIAN................................................... 43
INDEPENDENT ACCOUNTANTS..................................... 43
DESCRIPTION OF NRSRO RATINGS................................ 44
Description of Moody's Corporate Ratings............. 44
Description of S&P's Corporate Ratings............... 44
Description of Duff Corporate Ratings................ 45
Description of Fitch Corporate Ratings............... 45
Description of Thomson Bankwatch, Inc. Corporate
Ratings............................................. 46
Description of IBCA Limited and IBCA Inc. Corporate
Ratings............................................. 46
Description of S&P's Commercial Paper Ratings........ 47
Description of Moody's Commercial Paper Ratings...... 47
Description of Duff Commercial Paper Ratings......... 48
Description of Fitch Commercial Paper Ratings........ 48
Description of IBCA Limited and IBCA Inc. Commercial
Paper Ratings....................................... 48
Description of Thomson Bankwatch, Inc. Commercial
Paper Ratings....................................... 48
FINANCIAL STATEMENTS........................................ 48
</TABLE>
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A.G. SERIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
DEFINITIONS
"Adviser" -- A.G. Investment Advisory Services, Inc., formerly AGA
Investment Advisory Services Inc. and prior to that, WNL
Investment Advisory Services, Inc., the Trust's investment
adviser.
"Company" -- American General Annuity Insurance Company, formerly Western
National Life Insurance Company
"Sub-adviser" -- An investment adviser that makes investment decisions for a
Portfolio according to the Portfolio's investment objectives
and restrictions pursuant to a contractual arrangement with
the Adviser.
"Trust" -- A.G. Series Trust, formerly AGA Series Trust and prior to
that, WNL Series Trust.
"1940 Act" -- Investment Company Act of 1940, as amended.
GENERAL INFORMATION
The name of the Trust was changed to A.G. Series Trust on March 8, 1999. From
May 1, 1998 to March 8, 1999, the Trust was known as AGA Series Trust. Prior to
this, the Trust was known as WNL Series Trust.
Prior to March 8, 1999, the American General U.S. Government Securities
Portfolio was known as the Salomon Brothers U.S. Government Securities
Portfolio. Prior to May 1, 1998, the Credit Suisse Growth and Income Portfolio
was known as the BEA Growth and Income Portfolio. Prior to May 1, 1998, the
EliteValue Portfolio was known as the EliteValue Asset Allocation Portfolio, and
prior to May 1, 1996, the EliteValue Asset Allocation Portfolio was known as the
Quest For Value Asset Allocation Portfolio. Prior to May 1, 1998, the State
Street Global Advisors Growth Equity Portfolio was known as the Global Advisors
Growth Equity Portfolio. Prior to May 1, 1998, the State Street Global Advisors
Money Market Portfolio was known as the Global Advisors Money Market Portfolio.
Prior to October 28, 1998, the Van Kampen Emerging Growth Portfolio was known as
the Van Kampen American Capital Emerging Growth Portfolio, and prior to May 1,
1996, the Van Kampen American Capital Emerging Growth Portfolio was known as the
American Capital Emerging Growth Portfolio.
INVESTMENT STRATEGIES, POLICIES, AND RISKS OF THE TRUST
The Trust is a diversified open-end management investment company, which
currently offers shares of beneficial interest of seven series ("the
Portfolios") with separate investment objectives and policies that are described
in the Prospectus. Except as described below under "Investment Restrictions,"
the investment policies described in the Prospectus and here, in the SAI, are
not fundamental, and the Trustees may change them without an affirmative vote of
shareholders of the Portfolio.
Each Portfolio, in attempting to achieve its investment objective or policies,
employs a variety of instruments, strategies, and techniques, which are
described in greater detail below. Risks and restrictions associated with these
practices are also described. Policies and limitations are considered at the
time a security or instrument is purchased or a practice is initiated.
Generally, securities need not be sold if subsequent changes in market value
result in applicable limitations not being met.
A Portfolio might not buy all of these instruments or use all of these
techniques to the full extent permitted by its investment policies unless the
Adviser or the Sub-adviser, subject to oversight by the Adviser, believes that
doing so will help the Portfolio achieve its goal. Except where otherwise noted,
the investment policies set
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forth below may be changed at any time without shareholder consent by vote of
the Board of Trustees of the Trust.
ASSET-BACKED SECURITIES
Each Portfolio may invest in asset-backed securities (unrelated to first
mortgage loans) that represent fractional interests in pools of retail
installment loans, both secured (such as certificates for automobile
receivables) and unsecured, and leases, or revolving credit receivables both
secured and unsecured (such as credit card receivable securities). These assets
are generally held by a trust and payments of principal and interest, or
interest only are passed through monthly or quarterly to certificate holders and
may be guaranteed up to certain amounts by letters of credit issued by a
financial institution affiliated or unaffiliated with the trustee or originator
of the trust.
Underlying automobile sales contracts, leases or credit card receivables are
subject to prepayment, which may reduce the overall return to certificate
holders. Nevertheless, principal repayment rates tend not to vary much with
interest rates and the short-term nature of the underlying loans, leases, or
receivables tends to dampen the impact of any change in the prepayment level.
Certificate holders may also experience delays in payment on the certificates if
the full amounts due on underlying loans, leases or receivables are not realized
by the trust because of unanticipated legal or administrative costs of enforcing
the contracts or because of depreciation or damage to the collateral (usually
automobiles) securing certain contracts, or other factors. If consistent with
its investment objective(s) and policies, each Portfolio may invest in other
asset-backed securities that may be developed in the future.
BANK OBLIGATIONS
Each Portfolio may invest in bank obligations. Bank obligations in which the
Portfolios may invest include certificates of deposit, bankers' acceptances, and
fixed time deposits. Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite period of time and
earning a specified return. Bankers' acceptances are negotiable drafts or bills
of exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand
by the investor, but may be subject to early withdrawal penalties which vary
depending upon market conditions and the remaining maturity of the obligation.
There are no contractual restrictions on the right to transfer a beneficial
interest in a fixed time deposit to a third party, although there is no market
for such deposits. A Portfolio will not invest in fixed time deposits which (1)
are not subject to prepayment or (2) provide for withdrawal penalties upon
prepayment (other than overnight deposits) if, in the aggregate, more than 15%
of its net assets (10% in the case of the Money Market Portfolio), would be
invested in such deposits, repurchase agreements maturing in more than seven
days and other illiquid assets.
The Portfolios limit investments in United States bank obligations to
obligations of U.S. banks (including foreign branches) which have more than $1
billion in total assets at the time of investment and are members of the Federal
Reserve System or are examined by the Comptroller of the Currency or whose
deposits are insured by the Federal Deposit Insurance Corporation. A Portfolio
also may invest in certificates of deposit of savings and loan associations
(federally or state chartered and federally insured) having total assets in
excess of $1 billion. Each Portfolio also may invest in Eurodollar Certificates
of Deposit, which are U.S. dollar-denominated certificates of deposit issued by
foreign branches of U.S. banks.
The Portfolios limit investments in foreign bank obligations to U.S. dollar-or
foreign currency-denominated obligations of foreign banks (including United
States branches of foreign banks) which at the time of investment (i) have more
than $10 billion, or the equivalent in other currencies, in total assets; (ii)
in terms of assets are among the 75 largest foreign banks in the world; (iii)
have branches or agencies (limited purpose offices which do not offer all
banking services) in the United States; and (iv) in the opinion of the Adviser
or a Sub-adviser, are of an investment quality comparable to obligations of
United States banks in which the Portfolios may invest. These obligations
include, for example, Eurodollar Time Deposits, which are
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<PAGE> 39
U.S. dollar-denominated deposits in foreign branches of U.S. and foreign banks
and Yankee Certificates of Deposit, which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks. Subject to a
Portfolio's limitation on concentration in the securities of issuers in a
particular industry, there is no limitation on the amount of a Portfolio's
assets which may be invested in obligations of foreign banks which meet the
conditions set forth herein.
Obligations of foreign banks involve somewhat different investment risks than
those affecting obligations of United States banks, including the possibilities
that their liquidity could be impaired because of future political and economic
developments, that their obligations may be less marketable than comparable
obligations of United States banks, that a foreign jurisdiction might impose
withholding taxes on interest income payable on those obligations, that foreign
deposits may be seized or nationalized, that foreign governmental restrictions
such as exchange controls may be adopted which might adversely affect the
payment of principal and interest on those obligations and that the selection of
those obligations may be more difficult because there may be less publicly
available information concerning foreign banks or the accounting, auditing and
financial reporting standards, practices and requirements applicable to foreign
banks may differ from those applicable to United States banks. Foreign banks are
not generally subject to examination by any U.S. Government agency or
instrumentality.
BORROWING, REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
Each Portfolio may, subject to its investment restrictions, borrow money for
temporary emergency purposes. In addition, the Money Market Portfolio may borrow
to facilitate redemptions. This borrowing may be unsecured. Provisions of the
1940 Act require a Portfolio to maintain continuous asset coverage (that is,
total assets including borrowings, less liabilities exclusive of borrowings) of
300% of the amount borrowed, with an exception for borrowings not in excess of
5% of the Portfolio's total assets made for temporary administrative purposes.
Any borrowings for temporary administrative purposes in excess of 5% of the
Portfolio's total assets must maintain continuous asset coverage. If the 300%
asset coverage should decline as a result of market fluctuations or other
reasons, a Portfolio may be required to sell some of its portfolio holdings
within three days to reduce the debt and restore the 300% asset coverage, even
though it may be disadvantageous from an investment standpoint to sell
securities at that time. As noted below, a Portfolio also may enter into certain
transactions, including reverse repurchase agreements, dollar rolls (usually
mortgage-backed), and sale-buybacks, that can be viewed as constituting a form
of borrowing or financing transaction by the Portfolio. To the extent a
Portfolio covers its commitment under a reverse repurchase agreement (or
economically similar transaction) by the segregation of assets determined in
accordance with procedures adopted by the Trustees, equal in value to the amount
of the Portfolio's commitment to repurchase, such an agreement will not be
considered a "senior security" by the Portfolio and therefore will not be
subject to the 300% asset coverage requirement otherwise applicable to
borrowings by the Portfolios. Borrowing will tend to exaggerate the effect on
net asset value of any increase or decrease in the market value of a Portfolio's
portfolio. Money borrowed will be subject to interest costs which may or may not
be recovered by appreciation of the securities purchased. A Portfolio also may
be required to maintain minimum average balances in connection with such
borrowing or to pay a commitment or other fee to maintain a line of credit;
either of these requirements would increase the cost of borrowing over the
stated interest rate.
In addition to borrowing for temporary purposes, each Portfolio may enter into
reverse repurchase agreements, dollar rolls (usually mortgage-backed), and
economically similar transactions. A reverse repurchase agreement involves the
sale of a portfolio-eligible security by a Portfolio, coupled with its agreement
to repurchase the instrument at a specified time and price. Under a reverse
repurchase agreement, the Portfolio continues to receive any principal and
interest payments on the underlying security during the term of the agreement.
The Portfolio typically will segregate assets determined to be liquid by the
Adviser or a Sub-adviser in accordance with procedures established by the
Trustees, equal (on a daily mark-to-market basis) to its obligations under
reverse repurchase agreements. However, reverse repurchase agreements involve
the risk that the market value of securities retained by the Portfolio may
decline below the repurchase price of the securities sold by the Portfolio which
it is obligated to repurchase. To the extent that positions in reverse
repurchase agreements
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are not covered through the segregation of liquid assets at least equal to the
amount of any forward purchase commitment, such transactions would be subject to
the Portfolios' limitations on borrowings.
A "mortgage dollar roll" is similar to a reverse repurchase agreement in certain
respects. In a "dollar roll" transaction, a Portfolio sells a mortgage-related
security, such as a security issued by the Government National Mortgage
Association ("GNMA"), to a dealer and simultaneously agrees to repurchase a
similar security (but not the same security) in the future at a pre-determined
price. A "dollar roll" can be viewed, like a reverse repurchase agreement, as a
collateralized borrowing in which a Portfolio pledges a mortgage-related
security to a dealer to obtain cash. Unlike in the case of reverse repurchase
agreements, the dealer with which a Portfolio enters into a dollar roll
transaction is not obligated to return the same securities as those originally
sold by the Portfolio, but only securities which are "substantially identical."
To be considered "substantially identical," the securities returned to a
Portfolio generally must: (1) be collateralized by the same types of underlying
mortgages; (2) be issued by the same agency and be part of the same program; (3)
have a similar original stated maturity; (4) have identical net coupon rates;
(5) have similar market yields (and therefore price); and (6) satisfy "good
delivery" requirements, meaning that the aggregate principal amounts of the
securities delivered and received back must be within 1.0% of the initial amount
delivered. A "covered roll" is a specific type of dollar roll for which there is
an offsetting cash position or cash equivalent securities position that matures
on or before the forward settlement date of the dollar roll transaction. As used
herein, the term "dollar roll" refers to dollar rolls that are not "covered
rolls."
A Portfolio's obligations under a dollar roll agreement must be covered by
segregated liquid assets equal in value to the securities subject to repurchase
by the Portfolio. Covered rolls are not subject to these segregation
requirements. As with reverse repurchase agreements, to the extent that
positions in dollar roll agreements are not covered by segregated liquid assets
at least equal to the amount of any forward purchase commitment, such
transactions would be subject to the Portfolios' limitations on borrowings.
Dollar roll transactions for terms exceeding three months may be deemed
"illiquid" and subject to a Portfolio's overall limitations on investments in
illiquid securities.
As a matter of operating policy, no Portfolio will borrow more than 10% of its
total net asset value when borrowing for general purposes, and no Portfolio will
borrow an amount equal to more than 25% of its total net asset value when
borrowing as a temporary measure or to facilitate redemptions. For these
purposes, net asset value is the market value of all investments or assets, less
outstanding liabilities at the time that the new or additional borrowing is
undertaken. Also, for these purposes, securities purchased on a when-issued or
delayed delivery basis and short sales of securities are considered borrowing.
Reverse repurchase agreements and dollar rolls (including covered rolls) are not
considered borrowing for purposes of this operating policy. A Portfolio will not
purchase investments once borrowed funds (including reverse repurchase
agreements) exceed 5% of its total assets, except that dollar rolls (including
covered rolls) shall not be considered to be "borrowed funds" for purposes of
the 5% limitation.
CONVERTIBLE SECURITIES
Each Portfolio, other than the Money Market Portfolio and the U.S. Government
Securities Portfolio may invest in convertible securities of foreign or domestic
issuers. A convertible security is a security (a bond or preferred stock) which
may be converted at a stated price within a specified period of time into a
certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stocks in a corporation's capital
structure but are usually subordinated to similar nonconvertible securities.
Convertible securities provide, through their conversion feature, an opportunity
to participate in capital appreciation resulting from a market price advance in
a convertible security's underlying common stock. The price of a convertible
security is influenced by the market value of the underlying common stock and
tends to increase as the market value of the underlying stock rises, whereas it
tends to decrease as the market value of the underlying stock declines.
A Portfolio may be required to permit the issuer of a convertible security to
redeem the security, convert it into the underlying common stock, or sell it to
a third party. Thus, a Portfolio may not be able to control whether
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<PAGE> 41
the issuer of a convertible security chooses to convert that security. If the
issuer chooses to do so, this action could have an adverse effect on a
Portfolio's ability to achieve its investment objectives.
To the extent that convertible securities are intended by a Portfolio to be
equity securities, the following equity quality criteria typically are
considered: industry prospects (growth rate, competitive pressures,
supply/demand characteristics), market valuations (including price-to-book
ratios, price-earnings ratios and return on equity), company profile (suppliers,
competitors, end-users and customers), discretionary cash flow and quality of
management. To the extent that convertible securities are intended by a
Portfolio to be fixed income securities, the quality criteria typically applied
by the Portfolio to investments in fixed income securities (i.e., Moody's
Investors Service, Inc. ("Moody's") and Standard & Poors Corporation ("S&P")
ratings) are applied.
EMERGING MARKETS
The International Equity Portfolio, the Growth Equity Portfolio and the
EliteValue Portfolio may invest in companies domiciled in emerging market
countries which may be subject to additional risks. Specifically, volatile
social, political and economic conditions may expose investments in emerging or
developing markets to economic structures that are generally less diverse and
mature. Emerging market countries may have less stable political systems than
those of more developed countries. As a result, it is possible that favorable
economic developments in certain emerging market countries may be suddenly
slowed or reversed by unanticipated political or social events in such
countries. Moreover, the economies of individual emerging market countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth in gross domestic product, the rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Another risk is that the small current size of the markets for such securities
and the currently low or nonexistent volume of trading can result in a lack of
liquidity and in greater price volatility. Until recently, there has been an
absence of a capital market structure or market-oriented economy in certain
emerging market countries. If a Portfolio's securities will generally be
denominated in foreign currencies, the value of such securities to the Portfolio
will be affected by changes in currency exchange rates and in exchange control
regulations. A change in the value of a foreign currency against the U.S. dollar
will result in a corresponding change in the U.S. dollar value of a Portfolio's
securities. In addition, some emerging market countries may have fixed or
managed currencies which are not free-floating against the U.S. dollar. Further,
certain emerging market currencies may not be internationally traded. Certain of
these currencies have experienced a steady devaluation relative to the U.S.
dollar. Many emerging markets countries have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had, and may continue to have,
negative effects on the economies and securities markets of certain emerging
market countries.
A further risk is that the existence of national policies may restrict a
Portfolio's investment opportunities and may include restrictions on investment
in issuers or industries deemed sensitive to national interests. Also, some
emerging markets countries may not have developed structures governing private
or foreign investment and may not allow for judicial redress for injury to
private property.
These securities are subject to the risks of investing in foreign investments in
general, which include the risk that the value of the securities and currencies
will decline as a result of economic, political or market conditions. In
addition, the risk exists that an issuer may be unable to make interest or
principal payments. Furthermore, the extent to which supranational organizations
may guarantee such investments may be different than the guarantees provided by
the U.S. government on its obligations.
FIXED INCOME SECURITIES
Fixed income securities consist of bonds, notes, debentures, and other
interest-bearing securities that represent indebtedness.
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Fixed income securities are considered high quality if they are rated at least A
by Moody's or its equivalent by any other Nationally Recognized Statistical
Rating Organization ("NRSRO") or, if unrated, are determined to be of equivalent
investment quality. High quality fixed income securities are considered to have
a very strong capacity to pay principal and interest. Fixed income securities
are considered investment grade if they are rated, for example, at least Baa by
Moody's or BBB by S&P or their equivalents by any other NRSRO or, if not rated,
are determined to be of equivalent investment quality. Investment grade fixed
income securities are regarded as having an adequate capacity to pay principal
and interest. Lower rated securities, for example, Ba by Moody's or its
equivalent by any other NRSRO are regarded on balance as high risk and
predominantly speculative with respect to the issues continuing ability to meet
principal and interest payments. See "Lower-Rated Fixed Income Securities"
herein.
The maturity of fixed income securities may be considered long (ten plus years),
intermediate (one to ten years), or short-term (thirteen months or less). In
general, the principal values of longer-term securities fluctuate more widely in
response to changes in interest rates than those of shorter-term securities,
providing greater opportunity for capital gain or risk of capital loss. A
decline in interest rates usually produces an increase in the value of fixed
income securities, while an increase in interest rates generally reduces their
value.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Foreign currency transactions used by the EliteValue Portfolio, the Growth and
Income Portfolio and the International Equity Portfolio may be either: (i) on
the spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange
market, or (ii) conducted through the use of forward foreign currency exchange
contracts. A forward foreign currency exchange contract involves an obligation
to purchase or sell a specific currency at a future date. In general, forward
foreign currency exchange contracts are not guaranteed by a third party and,
accordingly, each party to a forward foreign currency exchange contract is
dependent upon the creditworthiness and good faith of the other party.
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 the dollar value of the Portfolio
against adverse changes in foreign currency exchange rates between the trade and
settlement dates of specific securities transactions or 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. The precise matching of the forward
contract amounts and the value of the securities involved will not generally be
possible because the future value of these securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and the date it matures.
The projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain. In addition,
when the Sub-adviser believes that the currency of a specific country may
deteriorate against another currency, it may enter into a forward contract to
sell the less attractive currency and buy the more attractive one. The amount in
question could be less than or equal to the value of the Portfolio's securities
denominated in the less attractive currency. The Portfolio may also enter into a
forward contract to sell a currency that is linked to a currency or currencies
in which some or all of the Portfolio's portfolio securities are or could be
denominated, and to buy U.S. dollars. These practices are referred to as "cross
hedging" and "proxy hedging."
A Portfolio may enter into foreign currency exchange transactions for other than
hedging purposes, which presents greater profit potential, but also involves
increased risk. For example, if the Sub-adviser believes that the value of a
particular foreign currency will increase or decrease relative to the value of
the U.S. dollar, the Portfolio may purchase or sell such currency, respectively,
through a forward foreign currency exchange contract. If the expected changes in
the value of the currency occur, the Portfolio will realize profits, which will
increase its gross income. Where exchange rates do not move in the direction or
to the extent anticipated, however, the Portfolio may sustain losses that will
reduce its gross income. Such transactions, therefore, could be considered
speculative.
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Forward currency exchange contracts are agreements to exchange one currency for
another -- for example, to exchange a certain amount of U.S. dollars for a
certain amount of Japanese yen -- at a future date and specified price.
Typically, the other party to a currency exchange contract will be a commercial
bank or other financial institution. Because there is a risk of loss to the
Portfolio if the other party does not complete the transaction, the Portfolio's
Sub-adviser will enter into foreign currency exchange contracts only with
parties approved by the Trust's Trustees.
A Portfolio may maintain "short" positions in forward currency exchange
transactions in which the Portfolio agrees to exchange currency that it
currently does not own for another currency, for example, to exchange an amount
of Japanese yen that it does not own for a certain amount of U.S. dollars, at a
future date and specified price in anticipation of a decline in the value of the
currency sold short relative to the currency that the Portfolio has contracted
to receive in the exchange.
While such actions are intended to protect the Portfolio from adverse currency
movements, there is a risk that currency movements involved will not be properly
anticipated. Use of this technique may also be limited by management's need to
protect the status of the Portfolio as a regulated investment company under the
Internal Revenue Code of 1986 ("the Code"), as amended. The projection of
currency market movements is extremely difficult, and the successful execution
of currency strategies is highly uncertain.
FOREIGN SECURITIES
Each Portfolio, other than the U.S. Government Securities Portfolio, may invest
in foreign securities. A foreign security includes equity and corporate debt
securities of foreign issuers (including preferred or preference stock), certain
foreign bank obligations (see "Bank Obligations"), commercial paper of foreign
companies, and U.S. dollar or foreign currency-denominated obligations of
foreign governments or their subdivisions, agencies and instrumentalities,
international agencies and supranational entities.
Included within the definition of foreign securities are the following
depository receipts: American Depository Receipts (ADRs), European Depositary
Receipts (EDRs), International Depository Receipts (IDRs) and Global Depository
Receipts (GDRs).
ADRs are certificates issued by a United States bank or trust company and
represent the right to receive securities of a foreign issuer deposited in a
domestic bank or foreign branch of a United States bank and traded on a United
States exchange or in an over-the-counter market. Generally, ADRs are in
registered form. Investment in ADRs has certain advantages over direct
investment in the underlying foreign securities since: (i) ADRs are U.S.
dollar-denominated investments that are easily transferable and for which market
quotations are readily available, and (ii) issuers whose securities are
represented by ADRs are generally subject to auditing, accounting and financial
reporting standards similar to those applied to domestic issuers. EDRs, IDRs and
GDRs are receipts evidencing an arrangement with a non-U.S. bank similar to that
for ADRs and are designed for use in the non-U.S. securities markets. EDRs and
GDRs are not necessarily quoted in the same currency as the underlying security.
In addition, certain Portfolios may invest in other types of depositary
securities such as international depository receipts, global depository shares,
European depository shares and international depository shares.
Each Portfolio, other than the Money Market Portfolio and the U.S. Government
Securities Portfolio, also may invest assets in debt securities issued or
guaranteed by supranational organizations. These securities include obligations
issued or guaranteed by the Asian Development Bank, InterAmerican Development
Bank, International Bank for Reconstruction and Development (World Bank),
African Development Bank, European Coal and Steel Community, European Economic
Community, European Investment Bank, and the Nordic Investment Bank. The
EliteValue Portfolio may invest in these securities provided they are listed on
a domestic or foreign securities exchange or represented by ADRs that are listed
on a domestic securities exchange or traded in domestic or foreign
over-the-counter markets. The Growth Equity Portfolio may invest in these
securities only to the extent that they are denominated in U.S. dollars.
A Portfolio may also, in accordance with its specific investment objective(s)
and investment program, policies and restrictions purchase U.S.
dollar-denominated money market securities of foreign issuers. Such money
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market securities may be registered domestically and traded on domestic
exchanges or in the over-the-counter market (e.g., Yankee securities) or may be
(1) registered abroad and traded exclusively in foreign markets or (2)
registered domestically and issued in foreign markets (e.g., Eurodollar
securities).
In addition, the International Equity Portfolio and the Emerging Growth
Portfolio and the Growth and Income Portfolio may invest in non-U.S.
dollar-denominated foreign securities, in accordance with their specific
investment objective(s), investment programs, policies, and restrictions.
Investing in foreign securities may involve advantages and disadvantages not
present in domestic investments. There may be less publicly available
information about securities not registered domestically, or their issuers, than
is available about domestic issuers or their domestically registered securities.
Stock markets outside the U.S. may not be as developed as domestic markets, and
there may also be less government supervision of foreign exchanges and brokers.
Foreign securities may be less liquid or more volatile than U.S. securities.
Trade settlements may be slower and could possibly be subject to failure. In
addition, brokerage commissions and custodial costs with respect to foreign
securities may be higher than those for domestic investments. Accounting,
auditing, financial reporting and disclosure standards for foreign issuers may
be different than those applicable to domestic issuers. Non-U.S.
dollar-denominated foreign securities may be affected favorably or unfavorably
by changes in currency exchange rates and exchange control regulations
(including currency blockage) and a Portfolio may incur costs in connection with
conversions between various currencies. Foreign securities may also involve
risks due to changes in the political or economic conditions of such foreign
countries, the possibility of expropriation of assets or nationalization, and
possible difficulty in obtaining and enforcing judgments against foreign
entities.
Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, and Spain are members of the European Economic and
Monetary Union (the "EMU"). The EMU has established a common European currency
for participating countries which will be known as the "euro." Each
participating country has supplemented its existing currency with the euro on
January 1, 1999, and will replace its existing currency with the euro on July 1,
2002. Any other European country which is a member of the EMU may elect to
participate in the EMU and may supplement its existing currency with the euro
after January 1, 1999.
The expected introduction of the euro presents unique risks and uncertainties,
including whether the payment and operational systems of banks and other
financial institutions will function properly; how outstanding financial
contracts will be treated after January 1, 1999; the establishment of exchange
rates for existing currencies and the euro; and the creation of suitable
clearing and settlement systems for the euro. These and other factors could
cause market disruptions and could adversely affect the value of securities held
by certain of the Portfolios.
FORWARD COMMITMENTS
Each Portfolio may 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.
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INTEREST RATE TRANSACTIONS
Each Portfolio, other than the Money Market Portfolio, may engage in various
interest rate transactions, such as swaps, caps, floors, and collars.
Interest rate, index and currency exchange rate swap agreements are entered into
in an attempt to obtain a particular return when it is considered desirable to
do so, possibly at a lower cost to the Portfolio than if the Portfolio had
invested directly in an instrument that yielded that desired return. Swap
agreements are two party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments, which may be adjusted for an interest factor. The
gross returns to be exchanged or "swapped" between the parties are generally
calculated with respect to a "notional amount," i.e., the return on or increase
in value of a particular dollar amount invested at a particular interest rate,
in a particular foreign currency, or in a "basket" of securities representing a
particular index. Forms of swap agreements include interest rate caps, under
which, in return for a premium, one party agrees to make payments to the other
to the extent that interest rates exceed a specified rate, or "cap"; interest
rate floors, under which, in return for a premium, one party agrees to make
payments to the other to the extent that interest rates fall below a specified
rate, or "floor"; and interest rate collars, under which a party sells a cap and
purchases a floor or vice versa in an attempt to protect itself against interest
rate movements exceeding minimum or maximum levels.
Most swap agreements entered into by the Portfolios would calculate the
obligations of the parties to the agreement on a "net basis." Consequently, a
Portfolio's current obligations (or rights) under a swap agreement will
generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). A Portfolio's current obligations under a swap
agreement will be accrued daily (offset against any amounts owing to the
Portfolio) and any accrued but unpaid net amounts owed to a swap counterparty
will be covered by the segregation of assets determined to be liquid by the
Adviser or a Sub-adviser in accordance with procedures established by the
Trustees, to avoid any potential leveraging of a Portfolio's portfolio.
Obligations under swap agreements so covered will not be construed to be "senior
securities" for purposes of the Portfolio's investment restriction concerning
senior securities. A Portfolio will not enter into a swap agreement with any
single party if the net amount owed or to be received under existing contracts
with that party would exceed 5% of the Portfolio's assets.
Whether a Portfolio's use of swap agreements will be successful in furthering
its investment objective will depend on the Adviser's or a Sub-adviser's ability
to predict correctly whether certain types of investments are likely to produce
greater returns than other investments. Because they are two party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, a Portfolio bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Portfolios will
enter into swap agreements only with counterparties that meet certain standards
of creditworthiness (generally, such counterparties would have to be eligible
counterparties under the terms of the Portfolio's repurchase agreement
guidelines). Certain restrictions imposed on the Portfolios by the Code may
limit the Portfolios' ability to use swap agreements. The swaps market is a
relatively new market and is largely unregulated. It is possible that
developments in the swaps market, including potential government regulation,
could adversely affect a Portfolio's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA, pursuant to regulations approved by the CFTC
effective February 22, 1993. To qualify for this exemption, a swap agreement
must be entered into by "eligible participants," which include the following,
provided the participants' total assets exceed established levels: a bank or
trust company, savings association or credit union, insurance company,
investment company subject to regulation under the 1940 Act, commodity pool,
corporation, partnership, proprietorship, organization, trust or other entity,
employee benefit plan, governmental entity, broker-dealer, futures commission
merchant, natural person, or regulated foreign person. To be
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eligible, natural persons and most other entities must have total assets
exceeding $10 million; commodity pools and employee benefit plans must have
assets exceeding $5 million. In addition, an eligible swap transaction must meet
three conditions. First, the swap agreement may not be part of a fungible class
of agreements that are standardized as to their material economic terms. Second,
the creditworthiness of parties with actual or potential obligations under the
swap agreement must be a material consideration in entering into or determining
the terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe harbor for swap transactions from regulation as futures
or commodity option transactions under the CEA or its regulations. The Policy
Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
ILLIQUID SECURITIES
The Portfolios will not invest more than 15% (10% in the case of the Money
Market Portfolio), of the value of their net assets in securities or other
investments that are illiquid or not readily marketable, including, where
applicable: (a) repurchase agreements with maturities exceeding seven days; (b)
time deposits maturing in more than seven calendar days; (c) to the extent a
liquid secondary market does not exist for the instruments, futures contracts,
and options thereon (except for the Money Market Portfolio); (d) certain
over-the-counter options, as described herein; (e) certain variable rate demand
notes having a demand period of more than seven days; and (f) securities, the
disposition of which is restricted under federal securities laws (excluding Rule
144A securities, described below). The Portfolios will not include, for purposes
of the restrictions on illiquid investments, securities sold pursuant to Rule
144A under the Securities Act of 1933, as amended (the "1933 Act"), so long as
such securities meet liquidity guidelines established by the Trustees of the
Trust. Under Rule 144A, securities that would otherwise be restricted may be
sold by persons other than issuers or dealers to qualified institutional buyers.
Securities received as a result of a corporate reorganization or similar
transaction affecting readily-marketable securities already held in the
portfolio of a Portfolio will not be considered securities or other investments
that are not readily marketable. However, the Portfolios will attempt, in an
orderly fashion, to dispose of any securities received under these
circumstances, to the extent that such securities are considered not readily
marketable, and together with other illiquid securities, exceed 15% (or 10% as
noted above) of the value of a Portfolio's net assets.
INVESTMENT COMPANIES
Each Portfolio may invest in the securities of other open-end or closed-end
investment companies subject to the limitations imposed by the 1940 Act. A
Portfolio will indirectly bear its proportionate share of any management fees
and other expenses paid by an investment company in which it invests.
LEASE OBLIGATION BONDS
Each Portfolio is authorized to invest in lease obligation bonds. Lease
obligation bonds are mortgages on a facility that are secured by the facility
and are paid by a lessee over a long term. The rental stream to service the
debt, as well as the mortgage, are held by a collateral trustee on behalf of the
public bondholders.
The primary risk of such instrument is the risk of default. Under the lease
indenture, the failure to pay rent is an event of default. The remedy to cure
default is to rescind the lease and sell the assets. If the lease obligation is
not readily marketable or market quotations are not readily available, such
lease obligations will be subject to a Portfolio's limit on illiquid securities.
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LENDING PORTFOLIO SECURITIES
All Portfolios have the ability to lend portfolio securities to brokers and
other financial organizations subject to certain conditions: (a) the aggregate
market value of these loans, if and when made, may not exceed 20% (except 10%
with respect to the EliteValue Portfolio, 15% with respect to the International
Equity Portfolio, and 33 1/3% with respect to the Money Market Portfolio and the
Growth Equity Portfolio) of a Portfolio's total assets taken at value; (b) loans
must be secured continuously by collateral consisting of cash, letters of
credit, or U.S. Government securities that are maintained at all times in an
amount at least equal to the current market value of the loaned securities; (c)
the Trust will receive any interest or dividends paid on the loaned securities;
and (d) the Trust may, at any time, call the loan and regain the securities
involved.
Securities loans are made to broker-dealers and other financial institutions
approved by State Street Bank and Trust Company (the "Custodian"), custodian to
the Portfolios. The Adviser will monitor the activities of the Custodian as
authorized by the Board of Trustees. The collateral received will consist of
cash, U.S. Government securities, letters of credit or such other collateral as
permitted by interpretations or rules of the Securities and Exchange Commission
("SEC"). While the securities are on loan, the Portfolios will continue to
receive the equivalent of the interest or dividends paid by the issuer on the
securities, as well as interest on the investment of the collateral or a fee
from the borrower.
Any loan of portfolio securities by any Portfolio will be callable at any time
by the lending Portfolio upon notice of five business days. When voting or
consent rights which accompany loaned securities pass to the borrower, the
lending Portfolio will call the loan, in whole or in part as appropriate, to
permit the exercise of such rights if the matters involved would have a material
effect on that Portfolio's investment in the securities being loaned. If the
borrower fails to maintain the requisite amount of collateral, the loan will
automatically terminate, and the lending Portfolio will be permitted to use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in receiving additional collateral or in the recovery
of the securities or, in some cases, even loss of rights in the collateral
should the borrower of the securities fail financially. However, these loans of
portfolio securities will be made only when the Custodian, as monitored by the
Adviser, considers the borrowing broker-dealers or financial institutions to be
creditworthy and of good standing and the interest earned from such loans to
justify the attendant risks. On termination of the loan, the borrower will be
required to return the securities to the lending Portfolio. Any gain or loss in
the market price during the loan would inure to the lending Portfolio. The
lending Portfolio may pay reasonable finders', administrative, and custodial
fees in connection with a loan of its securities.
LOWER-RATED FIXED INCOME SECURITIES
The EliteValue Portfolio and the Growth and Income Portfolio may invest in
lower-rated and non-rated fixed income securities (commonly known as "junk
bonds"). Issuers of lower rated or non-rated securities may be highly leveraged
or newly formed and may not have available to them more traditional methods of
financing. Therefore, the risks associated with acquiring the securities of such
issuers generally are greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers of high yield securities may be more likely to experience
financial stress, especially if such issuers are highly leveraged. During such
periods, such issuers may not have sufficient revenues to meet their interest
payment obligations. The issuer's ability to service its debt obligations also
may be adversely affected by specific issuer developments, or the issuer's
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by the issuer is
significantly greater for the holders of lower rated securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
Lower rated securities frequently have call or redemption features which would
permit an issuer to repurchase the security from a Portfolio. If a call were
exercised by the issuer during a period of declining interest rates, a Portfolio
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to a Portfolio and dividends
to shareholders.
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A Portfolio may have difficulty disposing of certain lower rated securities
because there may be a thin trading market for such securities. The secondary
trading market for high yield securities is generally not as liquid as the
secondary market for higher rated securities. Reduced secondary market liquidity
may have an adverse impact on market price and a Portfolio's ability to dispose
of particular issues when necessary to meet a Portfolio's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of lower rated
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of lower rated securities are likely to adversely affect a
Portfolio's net asset value. In addition, a Portfolio may incur additional
expenses to the extent it is required to seek recovery upon a default on a
portfolio holding or participate in the restructuring of the obligation.
Finally, there are risks involved in applying credit ratings as a method for
evaluating lower rated fixed income securities. For example, credit ratings
evaluate the safety of principal and interest payments, not the market risks
involved in lower rated fixed income securities. Since credit rating agencies
may fail to change the credit ratings in a timely manner to reflect subsequent
events, the Sub-adviser will monitor the issuers of lower rated fixed income
securities in a Portfolio to determine if the issuers will have sufficient cash
flow and profits to meet required principal and interest payments, and to assure
the debt securities' liquidity within the parameters of the Portfolio's
investment policies. The Sub-advisers will not necessarily dispose of a
portfolio security when its ratings have been changed.
MORTGAGE-RELATED SECURITIES
Each Portfolio, other than the International Equities Portfolio, may invest in
certain types of mortgage-related securities. Mortgage-related securities are
interests in pools of residential or commercial mortgage loans, including
mortgage loans made by savings and loan institutions, mortgage bankers,
commercial banks and others. Pools of mortgage loans are assembled as securities
for sale to investors by various governmental government-related and private
organizations. See "Mortgage Pass-Through Securities." The U.S. Government
Securities Portfolio may also invest in fixed income securities which are
secured with collateral consisting of mortgage-related securities (see
"Collateralized Mortgage Obligations"), and in other types of mortgage-related
securities.
Mortgage Pass-Through Securities
Interests in pools of mortgage-related securities differ from other forms of
fixed income securities, which normally provide for periodic payment of interest
in fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their residential or
commercial mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying property, refinancing or foreclosure,
net of fees or costs which may be incurred. Some mortgage-related securities
(such as securities issued by GNMA) are described as "modified pass-through."
These securities entitle the holder to receive all interest and principal
payments owed on the mortgage pool, net of certain fees, at the scheduled
payment dates regardless of whether or not the mortgagor actually makes the
payment.
The rate of prepayments on underlying mortgages will affect the price and
volatility of a mortgage-related security, and may have the effect of shortening
or extending the effective maturity of the security beyond what was anticipated
at the time of purchase. To the extent that unanticipated rates of prepayment on
underlying mortgages increase the effective maturity of a mortgage-related
security, the volatility of such security can be expected to increase.
Each of the Portfolios may invest in U.S. Government securities, which include
mortgage pass-through securities guaranteed by the U.S. Government or its
agencies or instrumentalities. The principal governmental guarantors of
mortgage-related securities are the Government National Mortgage Association
("GNMA"),
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the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). GNMA is a wholly owned United States Government
corporation within the Department of Housing and Urban Development. GNMA is
authorized to guarantee, with the full faith and credit of the United States
Government, the timely payment of principal and interest on securities issued by
institutions approved by GNMA, (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of mortgages insured
by the Federal Housing Administration (the "FHA"), or guaranteed by the
Department of Veterans Affairs (the "VA").
Government-related guarantors (i.e., not backed by the full faith and credit of
the United States Government) include FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) residential mortgages from a list of approved seller/servicers which
include state and federally chartered savings and loan associations, mutual
savings banks, commercial banks and credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the United States Government. FHLMC was created by Congress in 1970 for the
purpose of increasing the availability of mortgage credit for residential
housing. It is a government-sponsored corporation formerly owned by the twelve
Federal Home Loan Banks and now owned entirely by private stockholders. FHLMC
issues Participation Certificates ("PCs") which represent interests in
conventional mortgages from FHLMC's national portfolio. FHLMC guarantees the
timely payment of interest and ultimate collection of principal, but PCs are not
backed by the full faith and credit of the United States Government. Commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers also create pass-through
pools of conventional residential mortgage loans. Such issuers may, in addition,
be the originators and/or servicers of the underlying mortgage loans as well as
the guarantors of the mortgage-related securities. Pools created by such non-
governmental issuers generally offer a higher rate of interest than government
and government-related pools because there are no direct or indirect government
or agency guarantees of payments in the former pools. However, timely payment of
interest and principal of these pools may be supported by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance and letters of credit. The insurance and guarantees are issued by
governmental entities, private insurers and the mortgage poolers. Such insurance
and guarantees and the creditworthiness of the issuers thereof will be
considered in determining whether a mortgage-related security meets the Trust's
investment quality standards. There can be no assurance that the private
insurers or guarantors can meet their obligations under the insurance policies
or guarantee arrangements. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable. No Portfolio will purchase mortgage-related securities or
any other assets which in the Adviser's or a Sub-adviser's opinion are illiquid
if, as a result, more than 15% of the value of the Portfolio's net assets will
be illiquid (10% in the case of the Money Market Portfolio).
Mortgage-backed securities that are issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, are not subject to the Portfolios' industry
concentration restrictions, set forth below under "Investment Restrictions," by
virtue of the exclusion from that test available to all U.S. Government
securities. In the case of privately issued mortgage-related securities, the
Portfolios take the position that mortgage-related securities do not represent
interests in any particular "industry" or group of industries. The assets
underlying such securities may be represented by a portfolio of first lien
residential mortgages (including both whole mortgage loans and mortgage
participation interests) or portfolios of mortgage pass-through securities
issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a
mortgage-related security may in turn be insured or guaranteed by the FHA or the
Veterans' Administration. In the case of private issue mortgage-related
securities whose underlying assets are neither U.S. Government securities nor
U.S. Government-insured mortgages, to the extent that real properties securing
such assets may be located in the same geographical region, the security may be
subject to a greater risk of default than other comparable securities in the
event of adverse economic, political or business developments that may affect
such region and, ultimately, the ability of residential homeowners to make
payments of principal and interest on the underlying mortgages.
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Collateralized Mortgage Obligations (CMOs)
A CMO is a hybrid between a mortgage-backed bond and a mortgage pass-through
security. Similar to a bond, interest and prepaid principal is paid, in most
cases, monthly. CMOs may be collateralized by whole mortgage loans, but are more
typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured in multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
As an example of a CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
A Portfolio may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date, of each class, which as with other CMO
structures, must be retired by its stated maturity date or a final distribution
date, but may be retired earlier. PAC Bonds are a type of CMO tranche or series
designed to provide relatively predictable payments of principal provided that,
among other things, the actual prepayment experience on the underlying mortgage
loans falls within a predefined range. If the actual prepayment experience on
the underlying mortgage loans is at a rate faster or slower than the predefined
range, or if deviations from other assumptions occur, principal payments on the
PAC Bond may be earlier or later than predicted. The magnitude of the predefined
range varies from one PAC Bond to another, a narrower range increases the risk
that prepayments on the PAC Bond will be greater or smaller than predicted.
Because of these features, PAC Bonds generally are less subject to the risks of
prepayment than are other types of mortgage-related securities.
Commercial Mortgage-Backed Securities
Commercial mortgage-backed securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property.
Commercial mortgage-backed securities generally are multi-class debt or
pass-through certificates that are structured to provide protection to the
senior classes' investors against potential losses on the underlying commercial
mortgage loans. This protection generally is provided by having the holders of
subordinated classes of commercial mortgage-backed securities ("Subordinated
Securities") take the first loss if there are defaults on the underlying
mortgage loans. Other protection, which may benefit all of the classes or
particular classes, may include issuer guarantees, reserve funds, additional
Subordinated Securities, cross-collateralization and over-collateralization.
Subordinated Securities have no governmental guarantee and are subordinated in
some manner to the payment of principal and/or interest to the holders of more
senior commercial mortgage-backed securities arising out of the same pool of
mortgages. The holders of Subordinated Securities typically are compensated with
a higher stated yield than are the holders of more senior commercial
mortgage-backed securities. On the other hand, Subordinated Securities typically
subject the holder to greater risk than senior commercial mortgage-backed
securities and tend to be rated in a lower rating category, and frequently a
substantially lower
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rating category, than the senior commercial mortgage-backed securities issued in
respect of the same pool of mortgages. Subordinated Securities generally are
more sensitive to changes in prepayment and interest rates and the market for
such securities may be less liquid than is the case of traditional fixed income
securities and senior commercial mortgage-backed securities.
The market for commercial mortgage-backed securities developed more recently and
in terms of total outstanding principal amount of issues is relatively small
compared to the market for residential single-family mortgage-backed securities.
In addition, commercial lending generally is viewed as exposing the lender to a
greater risk of loss than one- to four-family residential lending. Commercial
lending, for example, typically involves larger loans to single borrowers or
groups of related borrowers than residential one- to four-family mortgage loans.
In addition, the repayment of loans secured by income producing properties
typically is dependent upon the successful operation of the related real estate
project and the cash flow it generates. Consequently, adverse changes in
economic conditions and circumstances are more likely to have an adverse impact
on commercial mortgage-backed securities secured by loans on commercial
properties than on those secured by loans on residential properties.
Other Mortgage-Related Securities
Other mortgage-related securities include securities other than those described
above that directly or indirectly represent a participation in, or are secured
by and payable from, mortgage loans on real property, including mortgage dollar
rolls, CMO residuals or stripped mortgage-backed securities ("SMBS"). Other
mortgage-related securities may be equity or fixed income securities issued by
agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks, partnerships,
trusts and special purpose entities of the foregoing.
CMO Residuals
CMO residuals are mortgage securities issued by agencies or instrumentalities of
the U.S. Government or by private originators of, or investors in, mortgage
loans, including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks and special purpose entities of the
foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs is
applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Stripped
Mortgage-Backed Securities." In addition, if a series of a CMO includes a class
that bears interest at an adjustable rate, the yield to maturity on the related
CMO residual will also be extremely sensitive to changes in the level of the
index upon which interest rate adjustments are based. As described below with
respect to stripped mortgage-backed securities, in certain circumstances a
Portfolio may fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and CMO residuals currently may
not have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may, or pursuant to an exemption therefrom, may not have
been registered under the 1933 Act. CMO residuals, whether or not registered
under the 1933 Act, may be subject to certain restrictions on transferability,
and may be deemed "illiquid" and subject to a Portfolio's limitations on
investment in illiquid securities.
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Stripped Mortgage-Backed Securities ("SMBS")
SMBS are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the foregoing.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions on a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the mortgage assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest (the interest-only or "IO"
class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on a Portfolio's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Portfolio may fail to recoup some or all
of its initial investment in these securities even if the security is in one of
the highest rating categories.
Although SMBS are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, these securities were
only recently developed. As a result, established trading markets have not yet
developed and, accordingly, these securities may be deemed "illiquid" and
subject to a Portfolio's limitations on investment in illiquid securities.
OPTIONS AND FINANCIAL FUTURES CONTRACTS
Each Portfolio, other than the Money Market Portfolio, may write covered call
and put options on securities and securities indices. A call option is a
contract that gives to the holder the right to buy a specified amount of the
underlying security or currency at a fixed or determinable price (called the
exercise or "strike" price) upon exercise of the option. A put option is a
contract that gives the holder the right to sell a specified amount of the
underlying security or currency at a fixed or determinable price upon exercise
of the option.
To "cover" a call option written, a Portfolio may, for example, identify and
have available for sale the specific portfolio security, group of securities, or
foreign currency to which the option relates. To cover a put option written, a
Portfolio may, for example, establish a segregated asset account with its
custodian containing cash or liquid assets that, when added to amounts deposited
with its broker or futures commission merchant ("FCM") as margin, equals the
market value of the instruments underlying the put option written.
Each Portfolio, other than the Money Market Portfolio, also may write options on
securities and securities indices. If a Portfolio writes an option which expires
unexercised or is closed out by the Portfolio at a profit, it will retain the
premium received for the option, which will increase its gross income. If the
price of the underlying security or currency moves adversely to the Portfolio's
position, the option may be exercised and the Portfolio, as the writer of the
option, will be required to sell or purchase the underlying security or currency
at a disadvantageous price, which may only be partially offset by the amount of
premium received.
Options on stock indices are similar to options on stock, except that all
settlements are made in cash rather than by delivery of stock, and gains or
losses depend on price movements in the stock market generally (or in a
particular industry or segment of the market represented by the index) rather
than price movements of individual stocks. When a Portfolio writes an option on
a securities index, and the underlying index moves adversely to the Portfolio's
position, the option may be exercised. Upon such exercise, the Portfolio, as the
writer of the option, will be required to pay in cash an amount equal to the
difference between the exercise settlement value of the underlying index and the
exercise price of the option, multiplied by a specified index "multiplier."
Call or put options on a stock index may be written at an exercise or "strike"
price which is either below or above the current value of the index. If the
exercise price at the time of writing the option is below the current value of
the index for a call option or above the current value of the index for a put
option the option is
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considered to be "in the money." In such a case, the Portfolio will cover such
options written by segregating with its custodian or pledging to its commodity
broker as collateral cash, U.S. Government or other high-grade, short-term debt
obligations equal in value to the amount by which the option written is in the
money, times the multiplier, times the number of contracts.
Examples of stock and fixed income indices for options include the S&P 500
Index, Value Line Index, National OTC Index, Major Market Index, Computer
Technology Index, Oil Index, NYSE Options Index, Technology Index, Gold/Silver
Index, Institutional Index, NYSE Beta Index, Lehman Government Corporate Bond
Index, Lehman Treasury Bond Index, Canadian Market Portfolio Index (Montreal
Stock Exchange), Financial Tower Stock Exchange 100 (London Stock Exchange) and
Toronto Stock Exchange Composite 300 (Toronto Stock Exchange). The Portfolios
may also use options on such other indices as may now or in the future be
available.
Each Portfolio, other than the Money Market Portfolio, may also purchase put or
call options on securities and securities indices in order to (i) hedge against
anticipated changes in interest rates or stock prices that may adversely affect
the prices of securities that the Portfolio intends to purchase at a later date,
(ii) hedge its investments against an anticipated decline in value, or (iii)
attempt to reduce the risk of missing a market or industry segment advance.
These Portfolios also may purchase put options on foreign currencies that
correlate with the Portfolio's portfolio securities in order to minimize or
hedge against anticipated declines in the exchange rate of the currencies in
which the Portfolio's securities are denominated and may purchase call options
on foreign currencies that correlate with its portfolio securities to take
advantage of anticipated increases in exchange rates. In the event that the
anticipated changes in interest rates, stock prices, or exchange rates occur,
the Portfolio may be able to offset the resulting adverse effect on the
Portfolio, in whole or in part, through the options purchased.
The premium paid for a put or call option plus any transaction costs will reduce
the benefit if any, realized by the Portfolio upon exercise or liquidation of
the option, and, unless the price of the underlying security, securities index,
or currency changes sufficiently, the option may expire without value to the
Portfolio. To close option positions purchased by the Portfolios, the Portfolios
may sell put or call options identical to options previously purchased, which
could result in a net gain or loss depending on whether the amount received on
the sale is more or less than the premium and other transaction costs paid on
the put or call option purchased.
Options used by the Portfolios may be traded on the national securities
exchanges or in the over-the-counter market. Each Portfolio, other than the
Money Market Portfolio, may use over-the-counter options. Options traded in the
over-the-counter market may not be as actively traded as those on an exchange.
Accordingly, it may be more difficult to value such options. In addition, it may
be more difficult to enter into closing transactions with respect to options
traded over-the-counter. In this regard, the Portfolios may enter into contracts
with the primary dealers with whom they write over-the-counter options. The
contracts will provide that each Portfolio has the absolute right to repurchase
an option it writes at any time at a repurchase price which represents the fair
market value of such option, as determined in good faith through negotiations
between the parties, but which in no event will exceed a price determined
pursuant to a formula contained in the contract. Although the specific details
of the formula may vary between contracts with different primary dealers, the
formula will generally be based on a multiple of the premium received by each
Portfolio for writing the option, plus the amount, if any, of the option's
intrinsic value (i.e., the amount the option is "in-the-money"). The formula
will also include a factor to account for the difference between the price of
the security and the strike price of the option if the option is written
"out-of-the-money." Although the specific details of the formula may vary with
different primary dealers, each contract will provide a formula to determine the
maximum price at which each Portfolio can repurchase the option at any time. The
Portfolios have established standards of creditworthiness for these primary
dealers.
Writing Covered Call and Put Options and Purchasing Call and Put Options
Each Portfolio, other than the Money Market Portfolio, may write exchange-traded
covered call and put options on or relating to specific securities in order to
earn additional income or, in the case of a call written, to
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minimize or hedge against anticipated declines in the value of the Portfolio's
securities. To "cover" an option means, for example, to identify and make
available for sale the specific portfolio security or foreign currency to which
the option relates. Through the writing of a covered call option a Portfolio
receives premium income but obligates itself to sell to the purchaser of such an
option the particular security or foreign currency underlying the option at a
specified price at any time prior to the expiration of the option period,
regardless of the market value of the security or the exchange rate for the
foreign currency during this period. Through the writing of a covered put option
a Portfolio receives premium income but obligates itself to purchase a
particular security or foreign currency underlying the option at a specified
price at any time prior to the expiration of the option period, regardless of
market value or exchange rate during the option period.
Each Portfolio, other than the Money Market Portfolio, in accordance with their
investment objective (s) and investment programs, may also write exchange-traded
covered call and put options on indices and may purchase call and put options on
indices that correlate with the Portfolio's portfolio securities. These
Portfolios may engage in such transactions for the same purposes as they may
engage in such transactions with respect to individual portfolio securities or
foreign currencies, that is, to generate additional income or as a hedging
technique to minimize anticipated declines in the value of the Portfolio's
portfolio securities or the exchange rate of the securities in which the
Portfolio invested. In economic effect, a stock index call or put option is
similar to an option on a particular security, except that the value of the
option depends on the weighted value of the group of securities comprising the
index, rather than a particular security, and settlements are made in cash
rather than by delivery of a particular security.
Each Portfolio, other than the Money Market Portfolio, may also purchase
exchange-traded call and put options with respect to securities and indices that
correlate with that Portfolio's particular portfolio securities.
A Portfolio may purchase put options for defensive purposes in order to protect
against an anticipated decline in the value of its portfolio securities or
currencies. As the holder of a put option with respect to individual securities
or currencies, the Portfolio has the right to sell the securities or currencies
underlying the options and to receive a cash payment at the exercise price at
any time during the option period. As the holder of a put option on an index, a
Portfolio has the right to receive, upon exercise of the option, a cash payment
equal to a multiple of any excess of the strike price specified by the option
over the value of the index.
A Portfolio may purchase call options on individual securities, currencies or
stock indices in order to take advantage of anticipated increases in the price
of those securities or currencies by purchasing the right to acquire the
securities or currencies underlying the option or, with respect to options on
indices, to receive income equal to the value of such index over the strike
price. As the holder of a call option with respect to individual securities or
currencies, a Portfolio obtains the right to purchase the underlying securities
or currencies at the exercise price at any time during the option period. As the
holder of a call option on a stock index, a Portfolio obtains the right to
receive, upon exercise of the option, a cash payment equal to the multiple of
any excess of the value of the index on the exercise date over the strike price
specified in the option.
Over-the-counter options are not traded on an exchange and may not be as
actively traded as listed securities, making the valuation of these securities
more difficult. In addition, an unlisted option entails a risk not found in
connection with listed options -- that the party on the other side of the option
transaction will default. This may make it impossible to close out an unlisted
option position in some cases, and profits may be lost thereby. Such
over-the-counter options, unless otherwise indicated, will be considered
illiquid securities. The Portfolios will engage in such transactions only with
firms of sufficient credit to minimize these risks. In instances in which a
Portfolio has entered into agreements with primary dealers with respect to the
over-the-counter options it has written, and such agreements would enable the
Portfolio to have an absolute right to repurchase, at a pre-established formula
price, the over-the-counter options written by it, the Portfolio will treat as
illiquid only the amount equal to the formula price described above less the
amount by which the option is "in-the-money."
Although these investment practices will be used to generate additional income
and to attempt to reduce the effect of any adverse price movement in the
securities or currencies subject to the option, they do involve certain risks
that are different in some respects from investment risks associated with
similar Portfolios which
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do not engage in such activities. These risks include the following: writing
covered call options -- the inability to effect closing transactions at
favorable prices and the inability to participate in the appreciation of the
underlying securities or currencies above the exercise price; writing covered
put options -- the inability to effect closing transactions at favorable prices
and the obligation to purchase the specified securities or currencies or to make
a cash settlement on the stock index at prices which may not reflect current
market values or exchange rates; and purchasing put and call options -- possible
loss of the entire premium paid. In addition, the effectiveness of hedging
through the purchase or sale (writing) of stock index options will depend upon
the extent to which price movements in the portion of a Portfolio's portfolio
being hedged correlate with price movements in the selected stock index. Perfect
correlation may not be possible because the securities held or to be acquired by
a Portfolio may not exactly match the composition of the stock index on which
options are purchased or written. If the forecasts of the Adviser or the
Sub-advisers regarding movements in securities prices, currencies or interest
rates are incorrect, a Portfolio's investment results may have been better
without the hedge.
Financial Futures Contracts
Each Portfolio, other than the Money Market Portfolio, in accordance with its
investment objective(s), investment program, policies, and restrictions may
purchase and sell exchange-traded financial futures contracts as a hedge to
protect against anticipated changes in prevailing interest rates, overall stock
prices or currency rates, or to efficiently and in a less costly manner
implement either increases or decreases in exposure to the equity or bond
markets. The Portfolios may also write covered call options and purchase put and
call options on financial futures contracts for the same purposes or to earn
additional income and write covered put options on stock index futures
contracts. The International Equity Portfolio may utilize currency futures
contracts and both listed and unlisted financial futures contracts and options
thereon.
Financial futures contracts consist of interest rate futures contracts, stock
index futures contracts, and currency futures contracts. An interest rate
futures contract is a contract to buy or sell specified debt securities at a
future time for a fixed price. A stock index futures contract is similar in
economic effect, except that rather than being based on specific securities, it
is based on a specified index of stocks and not the stocks themselves. A
currency futures contract is a contract to buy or sell a specific foreign
currency at a future time for a fixed price.
An interest rate futures contract binds the seller to deliver to the purchaser
on a specified future date a specified quantity of one of several listed
financial instruments, against payment of a settlement price specified in the
contract. A public market currently exists for futures contracts covering a
number of indices as well as financial instruments and foreign currencies,
including: U.S. Treasury bonds; U.S. Treasury notes; GNMA Certificates;
three-month U.S. Treasury bills; 90-day commercial paper; bank certificates of
deposit; Eurodollar certificates of deposit; the Australian dollar; the Canadian
dollar; the British pound; the German mark; the Japanese yen; the French franc;
the Swiss franc; the Mexican peso; and certain multinational currencies, such as
the European Currency Unit ("ECU"). It is expected that other futures contracts
will be developed and traded in the future.
Stock index futures contracts bind purchaser and seller to deliver, at a future
date specified in the contract, a cash amount equal to a multiple of the
difference between the value of a specified stock index on that date and the
settlement price specified by the contract. That is, the seller of the futures
contract must pay and the purchaser would receive a multiple of any excess of
the value of the index over the settlement price, and conversely, the purchaser
must pay and the seller would receive a multiple of any excess of the settlement
price over the value of the index. Stock index futures contracts are currently
traded with respect to the S&P 100 Index and other market indices such as the
S&P 500 Index, the S&P MidCap 400, the Nikkei 225, the New York Stock Exchange
Composite Index, the Value Line Stock Index, and the Major Market Index. It is
expected that financial instruments related to broad-based indices, in addition
to those for which futures contracts are currently traded, will in the future be
the subject of publicly-traded futures contracts, and the Portfolios may use any
of these, which are appropriate, in its hedging strategies.
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A financial futures contract is an agreement to buy or sell a security (or
deliver a final cash settlement price, in the case of a contract relating to an
index or otherwise not calling for physical delivery of a specified security)
for a set price in the future. Exchange-traded futures contracts are designated
by boards of trade which have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC").
Positions taken in the futures markets are not normally held until delivery or
cash settlement is required, but instead are liquidated through offsetting
transactions which may result in a gain or a loss. While futures positions taken
by a Portfolio will usually be liquidated in this manner, the Portfolio may
instead make or take delivery of underlying securities whenever it appears
economically advantageous to the Portfolio to do so. A clearing organization
associated with the relevant exchange assumes responsibility for closing out
transactions and guarantees that, as between the clearing members of an
exchange, the sale and purchase obligations will be performed with regard to all
positions that remain open at the termination of the contract.
Unlisted financial futures contracts, which may be purchased or sold by each
Portfolio, other than the Money Market Portfolio, are not traded on an exchange
and, generally, are not as actively traded as listed futures contracts or listed
securities. Such financial futures contracts generally do not have the following
elements: standardized contract terms, margin requirements relating to price
movements, clearing organizations that guarantee counter-party performance, open
and competitive trading in centralized markets, and public price dissemination.
These elements in listed instruments serve to facilitate their trading and
accurate valuation. As a result the accurate valuation of unlisted financial
futures contracts may be difficult. In addition, it may be difficult or even
impossible, in some cases, to close out an unlisted financial futures contract,
which may, in turn, result in significant losses to the Portfolio. Such unlisted
financial futures contracts will be considered by the Portfolio to be illiquid
securities and together with other illiquid securities will be subject to each
Portfolio's limitations on investments in illiquid securities. In making such
determination, the value of unlisted financial futures contracts will be based
upon the "face amount" of such contracts.
When financial futures contracts are entered into by a Portfolio, either as the
purchaser or the seller of such contracts, the Portfolio is required to deposit
with the Custodian in a segregated account in the name of the FCM an initial
margin of cash or U.S. Treasury bills equaling as much as 5% to 10% or more of
the contract settlement price. The nature of initial margin requirements in
futures transactions differs from traditional margin payments made in securities
transactions in that initial margins for financial futures contracts do not
involve the borrowing of funds by the customer to finance the transaction.
Instead, a customer's initial margin on a financial futures contract represents
a good faith deposit securing the customer's contractual obligations under the
financial futures contract. The initial margin deposit is returned, assuming
these obligations have been met, when the financial futures contract is
terminated. In addition, subsequent payments to and from the FCM, called
"variation margin," are made on a daily basis as the price of the underlying
security, stock index, or currency fluctuates, reflecting the change in value in
the long (purchase) or short (sale) positions in the financial futures contract,
a process known as "marking to market."
Each Portfolio, other than the Money Market Portfolio, may hold financial
futures contracts in accordance with its investment policies.
Financial futures contracts generally are not entered into to acquire the
underlying asset and generally are not held to term. Prior to the contract
settlement date, the Portfolios will normally close all futures positions by
entering into an offsetting transaction which operates to cancel the position
held, and which usually results in a profit or loss.
Options on Financial Futures Contracts
Each Portfolio, other than the Money Market Portfolio, may also purchase call
and put options on financial futures contracts and write call and put options on
financial futures contracts of the type which the particular Portfolio is
authorized to enter into. Options on financial futures contracts used by the
Portfolios are traded on exchanges that are licensed and regulated by the CFTC.
A call option on a financial futures contract gives the purchaser the right in
return for the premium paid, to purchase a financial futures contract (assume a
"long" position) at a specified exercise price at any time before the option
expires. A put option gives the purchaser
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the right, in return for the premium paid, to sell a financial futures contract
(assume a "short" position), for a specified exercise price, at any time before
the option expires.
Unlike entering into financial futures contracts, purchasing options on
financial futures contracts allows a Portfolio to decline to exercise the
option, thereby avoiding any loss beyond foregoing the purchase price (or
"premium") paid for the options. Therefore, the purchase of options on financial
futures contracts may be a preferable hedging strategy when a Portfolio desires
maximum flexibility. Whether, in order to achieve a particular objective, a
Portfolio enters into a financial futures contract, on the one hand, or an
option contract, on the other, will depend on all the circumstances, including
the relative costs, liquidity, availability and capital requirements of such
financial futures and options contracts. Also, the Portfolios will consider the
relative risks involved, which may be quite different. These factors, among
others, will be considered in light of market conditions and the particular
objective to be achieved.
Certain Additional Risks of Options and Financial Futures Contracts
The use of options and financial futures contracts may entail the following
risks. First, although such instruments when used by the Portfolios are intended
to correlate with the Portfolios' portfolio securities or currencies, in many
cases the options or financial futures contracts used may be based on
securities, currencies, or stock indices the components of which are not
identical to the portfolio securities owned or intended to be acquired by the
Portfolios. Second, due to supply and demand imbalances and other market
factors, the price movements of financial futures contracts, options thereon,
currency options, and stock index options may not necessarily correspond exactly
to the price movements of the securities, currencies, or stock indices on which
such instruments are based. Accordingly, there is a risk that a Portfolio's
transactions in those instruments will not in fact offset the impact on the
Portfolio of adverse market developments in the manner or to the extent
contemplated or that such transactions will result in losses to the Portfolio
which are not offset by gains with respect to corresponding portfolio securities
owned or to be purchased by that Portfolio.
To some extent, these risks can be minimized by careful management of hedging
activities. For example, where price movements in a financial futures or option
contract are expected to be less volatile than price movements in the related
portfolio securities owned or intended to be acquired by a Portfolio, it may, in
order to compensate for this difference, use an amount of financial futures or
option contracts which is greater than the amount of such portfolio securities.
Similarly, where the price movement of a financial futures or option contract is
anticipated to be more volatile, a Portfolio may use an amount of such contracts
which is smaller than the amount of portfolio securities to which such contracts
relate.
The risk that the hedging technique used will not actually or entirely offset an
adverse change in a Portfolio's portfolio securities is particularly relevant to
financial futures contracts and options written on stock indices and currencies.
A Portfolio, in entering into a futures purchase contract, potentially could
lose any or all of the contract's settlement price. In entering into a futures
sale contract, a Portfolio could potentially lose a sum equal to the excess of
the contract's value (marked to market daily) over the contract's settlement
price. In writing options on indices or currencies a Portfolio could potentially
lose a sum equal to the excess of the value of the index or currency (marked to
market daily) over the exercise price. In addition, because financial futures
contracts require delivery at a future date of either a specified security or
currency, or an amount of cash equal to a multiple of the difference between the
value of a specified stock index on that date and the settlement price, an
algebraic relationship exists between any price movement in the underlying
security or currency or index and the potential cost of settlement to a
Portfolio. A small increase or decrease in the value of the underlying security
or currency or stock index can, therefore, result in a much greater increase or
decrease in the cost to the Portfolio.
Index call options written also pose another risk as hedging tools. Because
exercises of index options are settled in cash, there is an inherent timing risk
that the value of a Portfolio's portfolio securities "covering" a stock index
call option written by it may decline during the time between exercise of the
option by the option holder and notice to the Portfolio of such exercise
(usually one day or more) thereby requiring the Portfolio to
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use additional assets to settle the transaction. This risk is not present in the
case of covered call options on individual securities, which are settled by
delivery of the actual securities.
There are also special risks in using currency options including the following:
(i) settlement of such options must occur in the country issuing the currency in
conformity with foreign regulations for such delivery, including the possible
imposition of additional costs and taxes, (ii) no systematic reporting of "last
sale" information for foreign currencies, and (iii) the need to use "odd lot"
transactions for underlying currencies at prices less favorable than those for
"round lot" transactions.
Although the Portfolios intend to establish positions in these instruments only
when there appears to be an active market, there is no assurance that a liquid
market for such instruments will exist when a Portfolio seeks to "close out"
(i.e. terminate) a particular financial futures contract or option position.
This is particularly relevant for over-the-counter options and financial futures
contracts, as previously noted. Trading in such instruments could be
interrupted, for example, because of a lack of either buyers or sellers. In
addition, the futures and options exchanges may suspend trading after the price
of such instruments has risen or fallen more than the maximum amount specified
by the exchange. Exercise of options could also be restricted or delayed because
of regulatory restrictions or other factors. A Portfolio may be able, by
adjusting investment strategy in the cash or other contract markets, to offset
to some extent any adverse effects of being unable to liquidate a hedge
position. Nevertheless, in some cases, a Portfolio may experience losses as a
result of such inability. Therefore it may have to liquidate other more
advantageous investments to meet its cash needs.
In addition, FCMs or brokers in certain circumstances will have access to a
Portfolio's assets posted as margin in connection with these transactions as
permitted under the 1940 Act. See "Custodian" in this Statement of Additional
Information. The Portfolios will use only FCMs or brokers in whose reliability
and financial soundness they have full confidence and have adopted certain other
procedures and limitations to reduce the risk of loss with respect to any assets
which brokers hold or to which they may have access. Nevertheless, in the event
of a brokers insolvency or bankruptcy, it is possible that a Portfolio could
experience a delay or incur costs in recovering such assets or might recover
less than the full amount due. Also the value of such assets could decline by
the time a Portfolio could effect such recovery.
The success of a Portfolio in using hedging techniques depends, among other
things, on the Adviser's or a Sub-adviser's ability to predict the direction and
volatility of price movements in both the futures and options markets as well as
the securities markets and on the Adviser's or the Sub-adviser's ability to
select the proper type, time, and duration of hedges. There can be no assurance
that these techniques will produce their intended results. In any event, the
Sub-adviser will use financial futures contracts, options thereon, currency
options and stock index options only when it believes the overall effect is to
reduce, rather than increase, the risks to which a Portfolio is exposed. Hedging
transactions also, of course, may be more, rather than less, favorable to a
Portfolio than originally anticipated.
Limitations
No Portfolio will enter into any financial futures contract or purchase any
option thereon if, immediately thereafter, the total amount of its assets
required to be on deposit as initial margin to secure its obligations under
financial futures contracts, plus the amount of premiums paid by it for
outstanding options to purchase futures contracts, exceeds 5% of the market
value of its total assets; provided however, that in the case of an option that
is in-the-money at the time of purchase, the in-the-money amount may be excluded
in calculating the 5% limitation.
In addition, each Portfolio has an operating policy which provides that it will
not enter into financial futures contracts or write put or call options with
respect to financial futures contracts unless such transactions are either
"covered" or subject to segregation requirements considered appropriate by the
SEC staff. Further, each Portfolio has an operating policy which provides that
it will not enter into custodial arrangements with respect to initial or
variation margin deposits or marked-to-market amounts unless the custody of such
initial and variation margin deposits and marked-to-marked amounts are in
compliance with current SEC staff interpretive positions or no-action letters or
rules adopted by the SEC.
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<PAGE> 59
REAL ESTATE SECURITIES AND REAL ESTATE INVESTMENT TRUSTS ("REITS")
Each Portfolio, other than the Money Market Portfolio and the U.S. Government
Securities Portfolio, may invest in real estate securities and REITs. Real
estate securities are equity securities consisting of (i) common stocks, (ii)
rights or warrants to purchase common stocks, (iii) securities convertible into
common stocks and (iv) preferred stocks issued by real estate companies. A real
estate company is one that derives at least 50% of its revenues from the
ownership, construction, financing, management or sale of commercial,
industrial, or residential real estate or that has at least 50% of its assets
invested in real estate.
REITs are pooled investment vehicles which invest primarily in income producing
real estate or real estate related loans or interest. REITs are generally
classified as equity REITs, mortgage REITs or a combination of equity and
mortgage REITs. Equity REITs invest the majority of their assets directly in
real property and derive income primarily from the collection of rents. Equity
REITs can also realize capital gains by selling properties that have appreciated
in value. Mortgage REITs invest the majority of their assets in real estate
mortgages and derive income from the collection of interest payments. Like
regulated investment companies such as the Portfolios, REITs are not taxed on
income distributed to shareholders provided they comply with certain
requirements under the Code. A Portfolio will indirectly bear its proportionate
share of any expenses paid by REITs in which it invests in addition to the
expenses paid by a Portfolio.
Investing in REITs involves certain unique risks. Equity REITs may be affected
by changes in the value of the underlying property owned by such REITs, while
mortgage REITs may be affected by the quality of any credit extended. REITs are
dependent upon management skills, are not diversified (except to the extent the
Code requires), and are subject to the risks of financing projects. REITs are
subject to heavy cash flow dependency, default by borrowers, self-liquidation,
and the possibilities of failing to qualify for the exemption from tax for
distributed income under the Code and failing to maintain their exemptions from
the 1940 Act. REITs (especially mortgage REITs) are also subject to interest
rate risks.
REPURCHASE AGREEMENTS
Each Portfolio may hold commercial paper, certificates of deposits, and
government obligations (including government guaranteed obligations), subject to
repurchase agreements with certain well established domestic banks and certain
broker-dealers, including primary government securities dealers, approved as
creditworthy by the Trustees. The underlying securities must be obligations of
the U.S. Government or its agencies or instrumentalities or other high quality,
short-term debt obligations. Repurchase agreements are generally for short
periods, often less than a week. Repurchase agreements typically obligate a
seller, at the time it sells securities to a Portfolio, to repurchase the
securities at a specific future time and price. The price for which the
Portfolio resells the securities is calculated to exceed the price the Portfolio
initially paid for the same securities, thereby determining the yield during the
Portfolio's holding period. This result is a fixed market rate of interest,
agreed upon by that Portfolio and the seller, which is accrued as ordinary
income. Most repurchase agreements mature within seven days although some may
have a longer duration. The underlying securities constitute collateral for
these repurchase agreements, which are considered loans under the 1940 Act.
The Portfolios do not intend to sell the underlying securities subject to a
repurchase agreement (except to the seller upon maturity of the agreement).
During the term of the repurchase agreement, the Portfolios (i) retain the
securities subject to the repurchase agreement as collateral securing the
sellers obligation to repurchase the securities, (ii) monitor on a daily basis
the market value of the securities subject to the repurchase agreement, and
(iii) require the seller to deposit with the Trust's Custodian collateral equal
to any amount by which the market value of the securities subject to the
repurchase agreement falls below the resale amount provided under the repurchase
agreement. In the event that a seller defaults on its obligation to repurchase
the securities, a Portfolio must hold the securities until they mature or may
sell them on the open market, either of which may result in a loss to the
Portfolio if, and to the extent that, the values of the securities decline.
Additionally, a Portfolio may incur disposition expenses when selling the
securities. Bankruptcy proceedings by the seller may also limit or delay
realization and liquidation of the collateral by a Portfolio and may result in a
loss to that Portfolio. The Trustees of the Trust will evaluate the
creditworthiness of all banks and broker-dealers with which the Trust proposes
to enter into repurchase agreements. A Portfolio will not invest in
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<PAGE> 60
repurchase agreements that do not mature within seven days if any such
investment, together with any illiquid assets held by the Portfolio, exceeds 15%
of the value of that Portfolio's total assets (10% in the case of the Money
Market Portfolio).
TEMPORARY DEFENSIVE POSITION
Under normal market conditions, none of the Portfolios, other than the Money
Market Portfolio, intends to have a substantial portion of its assets invested
in cash, money market instruments or U.S. Government securities, though the U.S.
Government Securities Portfolio will have a substantial portion of its assets
invested in U.S. Government securities. However, when the Adviser or a
Sub-adviser determines that adverse market conditions exist, each Portfolio may
adopt a temporary defensive posture and invest entirely in cash, money market
instruments, including domestic bank obligations, repurchase agreements and U.S.
Government securities. When a Portfolio is invested in this manner, it may not
be able to achieve its investment objective.
VARIABLE OR FLOATING RATE SECURITIES
The Money Market Portfolio, U.S. Government Securities Portfolio and the Growth
Equity Portfolio may invest in adjustable rate securities. Adjustable rate
securities (i.e., variable rate and floating rate instruments) are securities
that have interest rates that are adjusted periodically, according to a set
formula. The maturity of some adjustable rate securities may be shortened under
certain special conditions described more fully below.
Variable rate instruments are obligations (usually certificates of deposit) that
provide for the adjustment of their interest rates on predetermined dates or
whenever a specific interest rate changes. A variable rate instrument whose
principal amount is scheduled to be paid in 13 months or less is considered to
have a maturity equal to the period remaining until the next readjustment of the
interest rate. Many variable rate instruments are subject to demand features
which entitle the purchaser to resell such securities to the issuer or another
designated party, either (1) at any time upon notice of usually 30 days or less,
or (2) at specified intervals, not exceeding 13 months, and upon 30 days notice.
A variable rate instrument subject to a demand feature is considered to have a
maturity equal to the longer of the period remaining until the next readjustment
of the interest rate or the period remaining until the principal amount can be
recovered through demand.
Floating rate instruments (generally corporate notes, bank notes, or Eurodollar
certificates of deposit) have interest rate reset provisions similar to those
for variable rate instruments and may be subject to demand features like those
for variable rate instruments. The maturity of a floating rate instrument is
considered to be the period remaining until the principal amount can be
recovered through demand.
The Money Market Portfolio, the Growth Equity Portfolio and the Growth and
Income Portfolio may invest in inverse floaters, which are derivative fixed
income or municipal securities. Inverse floaters may be issued by agencies or
instrumentalities of the U.S. government or by private issuers including savings
and loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. Inverse floaters generally have
greater volatility than other types of mortgage securities in which a Portfolio
may invest. Although inverse floaters are purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers,
the market for such securities has not yet been fully developed. Accordingly,
inverse floaters are generally illiquid.
Inverse floaters are structured as a class of security that receives
distributions on a pool of mortgage assets and whose yields move in the opposite
direction of short-term interest rates and at an accelerated rate. Such
securities have the effect of providing a degree of investment leverage since
they will generally increase or decrease in value in response to changes in
market interest rates at a rate which is a multiple (typically two) of the rate
at which fixed-rate long-term debt obligations increase or decrease in response
to such changes. As a result, the market values of such securities will
generally be more volatile than the market value of fixed-rate securities.
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
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<PAGE> 61
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.
WARRANTS
The Emerging Growth Portfolio, the International Equity Portfolio, the Growth
and Income Portfolio and the EliteValue Portfolio may invest in or acquire
warrants. Warrants are instruments which entitle the holder to buy underlying
equity or fixed income securities at a specific price for a specific period of
time. A warrant tends to be more volatile than its underlying securities and
ceases to have value if it is not exercised prior to its expiration date.
Changes in the value of a warrant do not necessarily correspond to changes in
the value of its underlying securities.
Fixed income securities with warrants attached to purchase equity securities
have many characteristics of convertible fixed income securities and their
prices may, to some degree, reflect the performance of the underlying equity
securities. Fixed income securities also may be issued with warrants attached to
purchase additional fixed income securities at the same coupon rate. A decline
in interest rates would permit a Portfolio to buy additional fixed income
securities at the favorable rate or to sell the warrants at a profit.
Warrants do not entitle a holder to dividends or voting rights with respect to
the underlying securities and do not represent any rights in the assets of the
issuing company. In addition, the value of warrants does not, necessarily in all
cases change to the same extent as the value of the underlying securities to
which they relate. These factors can make warrants more speculative than other
types of investments.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS
Each Portfolio may purchase securities on a when-issued or delayed delivery
basis. When such transactions are negotiated, the price of such securities is
fixed at the time of commitment, but delivery and payment for the securities may
take place a month or more after the date of the commitment to purchase. The
securities so purchased are subject to market fluctuation, and no interest
accrues to the purchaser during this period. Forward commitments involve a risk
of loss if the value of the security to be purchased declines prior to the
settlement date. The Adviser and the Sub-advisers do not believe that a
Portfolio's net asset value or income will be adversely affected by the purchase
of securities on a when-issued basis.
ZERO-COUPON FIXED INCOME SECURITIES
The Money Market Portfolio and the Growth and Income Portfolio may invest in
zero coupon fixed income securities, which are debt obligations that do not
entitle the holder to any periodic payment of interest prior to maturity or that
specify a future date when the securities begin to pay current interest.
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<PAGE> 62
Zero coupon fixed income securities are issued and traded at a discount from
their face amount or par value. This discount varies depending on prevailing
interest rates, the time remaining until cash payments begin, the liquidity of
the security, and the perceived credit quality of the issuer.
The discount on zero coupon fixed income securities ("original issue discount")
must be taken into income ratably by a Portfolio prior to the receipt of any
actual payments. Because the Portfolio must distribute substantially all of its
net income to its shareholders each year for income and excise tax purposes, the
Portfolio may have to dispose of portfolio securities under disadvantageous
circumstances to generate cash, or may be required to borrow, to satisfy its
corresponding Portfolio's distribution requirements.
The market prices of zero coupon fixed income securities generally are more
volatile than the prices of securities that pay interest periodically. Zero
coupon fixed income securities are likely to respond to changes in interest
rates to a greater degree than other types of debt securities having a similar
maturity and credit quality.
Custodial receipts issued in connection with zero coupon fixed income
securities, such as Certificates of Accrual on Treasury Securities ("CATS") and
Treasury Investment Growth Receipts ("TIGRS"), are not issued by the U.S.
Treasury, although the underlying bond represented by such receipt is a debt
obligation of the U.S. Treasury. Other zero coupon Treasury securities such as
Separately Traded Registered Interest and Principal Securities ("STRIPS") and
Coupon Under Back Entry Safekeeping ("CUBES") are direct obligations of the U.S.
Government.
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 1940 Act and the
rules thereunder, a "majority of the outstanding voting securities" of a
Portfolio means the lesser of (a) 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 (b) 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 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 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 be reduced within three days to the extent
necessary to comply with this
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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 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 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; and
(8) Issue any class of securities which is senior to a Portfolio's shares of
beneficial interest except as permitted under the 1940 Act or by order
of the SEC.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment restrictions are non-fundamental and may be changed by
the Trustees without shareholder approval.
The Trust may not, on behalf of a Portfolio:
(1) Invest more than 15% (except 10% with respect to the 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 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 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
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; and
(4) Make investments for the purpose of gaining control of a company's
management.
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<PAGE> 64
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Board of Trustees ("Board") manages the business activities of the Trust in
accordance with Massachusetts law. The Board elects officers who are responsible
for the day-to-day operations of the Trust and who execute policies formulated
by the Board. The names and ages of the Trustees and officers of the Trust,
their addresses, present positions and principal occupations during the past
five years are set forth below.
<TABLE>
<CAPTION>
Name, Address, and Age Position(s) With The Trust Principal Occupation During Past Five Years
- ---------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Richard W. Scott* President, Principal Executive Vice President and Chief
2929 Allen Parkway Executive Officer, and Investment Officer of American General
Houston, Texas 77019 Trustee Corporation since February 1998; prior
Date of Birth: 07/08/53 thereto, Vice Chairman, General Counsel and
Chief Investment Officer or Executive Vice
President of Western National Corporation
from February 1994 to February 1998; prior
thereto, a partner with Vinson & Elkins
L.L.P.
Terry L. Swenson* Trustee and Vice President Vice President -- Variable Products,
2929 Allen Parkway American General Annuity Insurance Company
Houston, Texas 77019 (the "Company") and The Variable Annuity
Date of Birth: 04/09/62 Life Insurance Company ("VALIC")
(1997-Present); prior thereto, President of
FMB Investment Services/FMB Insurance
Agency (1996-1997); and prior thereto,
Senior Vice President -- Director of Sales
and Marketing of TCF Insurance/TCF
Securities (1994-1996).
S. Tevis Grinstead Trustee Retired since 1993; prior thereto, a
c/o Vinson & Elkins L.L.P. partner with Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin
Houston, Texas 77002-6760
Date of Birth: 09/23/38
Hugh L. Hyde Trustee Owner, HLH Consulting Inc. since November,
952 Echo Lane, Suite 322 1994; from March 1, 1993 to September 15,
Houston, Texas 77024 1994, President and Director of Texas
Date of Birth: 04/09/43 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 & Chief Executive Officer of
1300 Post Oak Blvd., Carriage Services since 1991.
Suite 1500
Houston, Texas 77045
Date of Birth: 01/06/43
</TABLE>
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<PAGE> 65
<TABLE>
<CAPTION>
Name, Address, and Age Position(s) With The Trust Principal Occupation During Past Five Years
- ---------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Brent C. Nelson Vice President Senior Vice President, Controller and
2929 Allen Parkway Director, VALIC and the Company. Formerly,
Houston, Texas 77019 Vice President and Controller, VALIC
Date of Birth: 07/24/51 (1990-1994).
Peter V. Tuters Vice President and Senior Executive Vice President, American General
2929 Allen Parkway Investment Officer Investment Management, L.P., Vice President
Houston, Texas 77019 and Investment Officer, VALIC and the
Date of Birth: 04/18/52 Company; Senior Vice President and Chief
Investment Officer, American General
Corporation (1993-1998).
Maruti D. More Vice President -- Vice President, American General
2929 Allen Parkway Investments Investment Management, L.P.; Vice
Houston, Texas 77019 President, Investments, VALIC (1998 to
Date of Birth: 02/02/44 present). Formerly, Managing Director,
Marketable Securities, Paul Revere
Investment Management Corporation (1993-
1995.
Cynthia A. Toles Vice President and Senior Vice President, General Counsel
2929 Allen Parkway Secretary and Secretary, VALIC and the Company;
Houston, Texas 77019 Secretary and Assistant Treasurer,
Date of Birth: 03/28/51 VAMCO. Formerly, Senior Associate
General Counsel and Secretary, VALIC
(1990-1998).
Nori L. Gabert Vice President and Associate General Counsel, VALIC.
2929 Allen Parkway Assistant Secretary Formerly, Of Counsel, Winstead Sechrest
Houston, Texas 77019 & Minick P.C. (1997); Vice President and
Date of Birth: 08/15/53 Associate General Counsel of Van Kampen
American Capital, Inc. (1981-1996).
Gregory R. Seward Treasurer Vice President -- Variable Product
2929 Allen Parkway Accounting, VALIC and the Company.
Houston, Texas 77019 Formerly, Director of Fund Operations
Date of Birth: 06/27/56 and Assistant Controller, VALIC and the
Company.
Cynthia A. Gibbons Assistant Vice President Senior Compliance Analyst, VALIC.
2929 Allen Parkway
Houston, Texas 77019
Date of Birth: 12/06/67
Kurt R. Fredland Vice President Vice President of AGA Investment
2929 Allen Parkway Advisory Services, Inc. since September
Houston, Texas 77019 1994; prior thereto Assistant Vice
Date of Birth: 09/19/48 President -- Variable Annuity
Administration, the Company from April
1994; prior thereto, a financial
consultant.
</TABLE>
* Interested person of the Trust within the meaning of the 1940 Act.
Each Trustee who is not an employee, officer, or director of the 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, Trustees who are not
interested persons of the Trust and who are members of any board committee will
receive a separate fee of $750 for attendance at any committee meeting that is
held on a day on which no
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<PAGE> 66
Board meeting is held. As of December 31, 1998, none of the Trustees or officers
of the Trust owned any of the outstanding shares of the Trust.
The following table provides information regarding the compensation and benefits
earned by the Trustees for the most recently completed fiscal year.
COMPENSATION TABLE
Fiscal Year Ending December 31, 1998
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Estimated Compensation
Aggregate Accrued As Annual From Registrant
Name of Compensation Part of Benefits Upon and Fund Complex
Person, Position From Trust(1) Fund Expenses Retirement Paid to Trustee
---------------- ------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Richard W. Scott None None None None
President and Trustee
John A. Graf None None None None
Trustee(2)
Alden W. Brosseau $11,114.25 None None $11,114.25
Trustee(2)
Hugh L. Hyde $11,114.25 None None $11,114.25
Trustee
Melvin C. Payne $11,114.25 None None $11,114.25
Trustee
S. Tevis Grinstead $11,114.25 None None $11,114.25
Trustee
</TABLE>
(1) For the year ended December 31, 1998, the Trust paid the Trustees' aggregate
compensation of $44,457.
(2) Messrs. Brosseau and Graf resigned their positions as Trustees of the Trust
on November 18, 1998 and February 24, 1999, respectively.
CONTROLLING SHAREHOLDER
Shares of the Portfolios are issued and redeemed in connection with investments
in and payments under variable annuity contracts issued through the Company's
separate account ("Separate Account"). As of December 31, 1998, the Separate
Account, 205 E. 10th Avenue, Amarillo, Texas 79101, owned of record 100% of the
shares of each Portfolio of the Trust. The Separate Account is organized under
the laws of Texas. When a general or special meeting of shareholders is called
and matters are to be voted upon, contract owners and participants having values
allocated to any of the Portfolios, as provided in their variable annuity
contracts, may instruct the Separate Account as to how they wish to vote, and
the Separate Account will vote Portfolio shares in accordance with contract
owners' and participants' instructions.
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INVESTMENT ADVISER
Under an Investment Advisory Agreement, dated August 23, 1995, the Adviser
manages the business and affairs of the Portfolios and the Trust, under the
supervision of the Trustees. The Adviser is an indirect subsidiary of Western
National Corporation, a Delaware corporation ("Western National"), which is a
wholly-owned subsidiary of AGC Life Insurance Company, a Missouri domiciled life
insurer that is wholly-owned by American General Corporation, a Texas
corporation.
Under the Investment Advisory Agreement (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
manage the Trust's business and affairs and provide such services as are
required for effective administration of the Trust as are now provided by
employees or other agents engaged by the Trust. 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 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.
The Agreement provides that the Adviser may retain sub-advisers, at the
Adviser's own cost and expense, for the purpose of managing the investment of
the assets of one or more Portfolios. The 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 Agreement may be terminated without penalty by vote of the Trustees, as to
any Portfolio by the shareholders of that Portfolio, or by the Adviser on 60
days' written notice. The Agreement also terminates without payment of any
penalty in the event of its assignment. In addition, the 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 1940 Act.
As full compensation for its services under the Agreement, the Trust pays the
Adviser a monthly fee at the following annual rates based on the average daily
net assets of each Portfolio: Growth and Income Portfolio, .75% of average daily
net assets; International Equity Portfolio, .90% of average daily net assets;
EliteValue Portfolio, .65% of average daily net assets; Growth Equity Portfolio,
.61% of average daily net assets; Money Market Portfolio, .45% of average daily
net assets; U.S. Government Securities Portfolio, .475% of average daily net
assets; and Emerging Growth Portfolio, .75% of average daily net assets.
The Adviser voluntarily agreed to waive that portion of its advisory fee 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, 1998. In
addition, the Company, an affiliate of 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, 2000.
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<PAGE> 68
For the years ended December 31, 1998, 1997 and 1996, respectively, the Trust
paid the Adviser advisory fees set forth in the following table.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Elite Value Portfolio $84,637 $21,970 $ 3,553
Emerging Growth Portfolio 51,549 17,886 4,290
Growth Equity Portfolio 56,941 18,763 7,072
Growth and Income Portfolio 76,665 24,528 9,659
International Equity Portfolio 42,177 23,693 11,530
Money Market Portfolio 19,782 5,909 1,248
U.S. Government Securities Portfolio 22,372 5,756 2,076
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, respectively, the Adviser
waived advisory fees as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Elite Value Portfolio $ 9,231 $13,732 $ 6,128
Emerging Growth Portfolio 5,221 8,943 5,171
Growth Equity Portfolio 6,950 13,030 9,010
Growth and Income Portfolio 6,992 12,263 9,918
International Equity Portfolio 3,842 9,113 10,342
Money Market Portfolio 4,461 7,387 1,984
U.S. Government Securities Portfolio 3,584 6,395 7,227
</TABLE>
INVESTMENT SUB-ADVISERS
Pursuant to Investment Sub-advisory Agreements (the "Sub-advisory Agreements")
with each Sub-adviser, the Adviser has engaged Credit Suisse Asset Management
("CSAM of New York") to provide sub-advisory services to the Growth and Income
Portfolio, Credit Suisse Asset Management Ltd. ("CSAM") to provide sub-advisory
services for the International Equity Portfolio, OpCap Advisors ("OpCap") to
provide sub-advisory services for the EliteValue Portfolio, State Street Global
Advisors ("State Street") to provide sub-advisory services for the Growth Equity
Portfolio and the Money Market Portfolio, and Van Kampen Asset Management ("Van
Kampen") to provide sub-advisory services for the Emerging Growth Portfolio.
CSAM of New York, Credit Suisse, OpCap, State Street and Van Kampen
(collectively, the "Sub-advisers") are subject to the control, supervision and
direction of the Adviser, which retains responsibility for the overall
management of the Portfolios.
Pursuant to the Sub-advisory Agreements and subject to the Adviser's control,
supervision and direction, the Sub-advisers manage the investment and
reinvestment of the assets of the respective Portfolio, including the evaluation
of pertinent economic, statistical, financial and other data, and the
determination of industries and companies to be represented in the Portfolios.
The Sub-advisory Agreements may be continued with respect to any of the
Portfolios if approved, after the initial two year term, at least annually by
the vote of the Trustees of the Trust who are not parties to the Investment
Sub-advisory Agreements or interested persons of any such parties, cast in
person at a meeting
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<PAGE> 69
called for the purpose of voting on such approval and by a vote of a majority of
the Trustees of the Trust or a majority of the relevant Portfolio's outstanding
voting securities.
The Sub-advisory Agreements may be terminated at any time by the Adviser, the
relevant Sub-adviser, the Trustees of the Trust, or by a vote of a majority of
the outstanding voting securities of the relevant Portfolio, on 60 days' written
notice to the other entities, without the payment of any penalty.
The Investment Sub-advisory Agreements provide that the Sub-advisers shall not
be liable to the Adviser or the Trust for any act or omission in rendering
services under the Investment Sub-advisory Agreements, so long as there has been
no wilful misfeasance, bad faith, gross negligence or reckless disregard of
obligations or duties on the part of the Sub-advisers.
CSAM of New York is the Sub-adviser for the Growth and Income Portfolio. CSAM of
New York is a wholly-owned subsidiary of Credit Suisse Group, a Swiss
Corporation. Credit Suisse Group is one of the largest global financial service
group based in Switzerland. Under the Investment Sub-advisory Agreement with
CSAM of New York, the Adviser pays CSAM of New York, for the services rendered
and expenses paid by CSAM of New York, a monthly fee computed at the annual rate
of .50% of the average daily net assets of the Growth and Income Portfolio.
CSAM is the Sub-adviser for the International Equity Portfolio. CSAM is a
wholly-owned subsidiary of Credit Suisse Group. Under the Sub-advisory Agreement
with CSAM, the Adviser pays CSAM, for the services rendered and expenses paid by
CSAM, a monthly fee computed at the annual rate of .65% of the average daily net
assets of the International Equity Portfolio.
OpCap is the Sub-adviser for the EliteValue Portfolio. OpCap is a majority-owned
subsidiary of Oppenheimer Capital, a registered investment adviser whose
employees perform all services provided to the Portfolio by OpCap. Oppenheimer
Financial Corp., a holding company, is a 1% general partner of OPCAP and holds a
one-third managing general partner interest in Oppenheimer Capital. Oppenheimer
Capital, L.P., a Delaware limited partnership whose units are traded on the New
York Stock Exchange ("NYSE") and of which Oppenheimer Financial Corp. is the
sole 1% general partner, owns the remaining two-thirds interest.
Oppenheimer Capital and its subsidiaries are owned by PIMCO Advisors L.P.
("PIMCO Advisors"), a registered investment adviser. PIMCO Partners, G.P.
("PIMCO GP") owns approximately 42.83% and 66.3% of the total outstanding Class
A and Class B units of limited partnership interest ("Units") of PIMCO Advisors
and is PIMCO Advisors' sole general partner. PIMCO GP is a California general
partnership with two general partners. The first of these is Pacific Investment
Management Company, which is a California Corporation and is wholly-owned by
Pacific Financial Asset Management Company, a direct subsidiary of Pacific Life
Insurance Company ("Pacific Life"). PIMCO Partners L.L.C. ("PPLLC"), a
California limited liability company, is the second , and managing general
partner of PIMCO GP. PPLLC's members are the Managing Directors ("PIMCO
Managers") of Pacific Investment Management Company, a subsidiary of PIMCO
Advisors (the "PIMCO Subpartnership").
PIMCO Advisors is governed by an Operating Board and an Equity Board. Governance
matters are allocated generally to the Operating Board and the Operating Board
delegates to the Operating Committee the authority to manage day-to-day
operations of PIMCO Advisors. The Operating Board is composed of twelve members,
including, the chief executive officer of PIMCO Subpartnership as Chairman and
six PIMCO Managers designated by the PIMCO Subpartnership.
The authority of PIMCO Advisors Operating Board and Operating Committee to take
certain specified actions is subject to the approval of PIMCO Advisors' Equity
Board. Equity Board approval is required for certain major transactions (e.g.,
issuance of additional PIMCO Advisors Units and appointment of PIMCO Advisors
chief executive officer). In addition, the Equity Board has jurisdiction over
matters such as actions which would have a material effect upon PIMCO Advisors
business taken as a whole and (after an appeal from an Operating Board decision)
matters likely to have a material adverse economic effect on any subpartnership
of PIMCO Advisors. The Equity Board is composed of twelve members, including the
chief executive officer of PIMCO Advisors, three members designated by a
subsidiary of Pacific Life, the chairman of the Operating Board and two members
designated by PPLLC.
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<PAGE> 70
Because of its power to appoint (directly or indirectly) seven of the twelve
members of the Operating Board, as described above, the PIMCO Subpartnership may
be deemed to control PIMCO Advisors. Because of direct or indirect power to
appoint 25% of the members of the Equity Board, (i) Pacific Life and (ii) the
PIMCO Managers and/or the PIMCO Subpartnership may each be deemed, under
applicable provisions of the 1940 Act, to control PIMCO Advisors. Pacific Life,
the PIMCO Subpartnership and the PIMCO Managers disclaim such control.
Under the Sub-advisory Agreement with OpCap, the Adviser pays OpCap, for the
services rendered and expenses paid by OpCap, a monthly fee computed at the
annual rate of .40% of the average daily net assets of the EliteValue Portfolio.
State Street is the Sub-adviser for the Growth Equity Portfolio and the Money
Market Portfolio. State Street is the investment management division of State
Street Bank and Trust Company, which is a wholly-owned subsidiary of State
Street Boston Corporation, a publicly held bank holding company. Under the
Sub-advisory Agreement with State Street, the Adviser pays State Street, for the
services rendered and expenses paid by State Street, a monthly fee computed at
the annual rate of .36% of the average daily net assets of the Growth Equity
Portfolio and .20% of the Money Market Portfolio.
Van Kampen is the Sub-adviser for the Emerging Growth Portfolio. Van Kampen is a
wholly-owned subsidiary of Van Kampen Inc., an indirect wholly-owned subsidiary
of Morgan Stanley, Dean Witter, Discover & Co., which is a holding company
engaged, through its subsidiaries, in a wide range of financial services. Under
the Sub-advisory Agreement with Van Kampen, the Adviser pays Van Kampen, for the
services rendered and expenses paid by Van Kampen, a monthly fee computed at the
annual rate of .50% of the average daily net assets of the Emerging Growth
Portfolio.
TRUST ADMINISTRATION
Under the terms of a Transfer Agency and Service Agreement ("Transfer Agency
Agreement") dated May 31, 1995, between the Trust and State Street Bank and
Trust Company (the "Transfer Agent"), the Transfer Agent serves as the Trust's
transfer agent, dividend disbursing agent and agent in connection with any
accumulation, open account and/or similar plans. Under the Transfer Agency
Agreement, the services performed by the Transfer Agent include, but are not
limited to: (i) receiving orders for the purchase of shares and delivering
payment therefor to the Trust's Custodian; (ii) issuing the appropriate number
of shares pursuant to purchase orders and holding such shares in the appropriate
accounts; (iii) receiving redemption requests and redemption directions and
delivering the appropriate documentation to the Custodian; (iv) executing the
transactions specified in (i)-(iii) directly with broker dealers authorized by
the Trust who are deemed to be acting on behalf of the Trust; (v) paying
redemption proceeds; (vi) effecting transfers of shares; (vii) preparing and
transmitting dividend and distribution payments; and (viii) preparing and
mailing confirmation forms and statements of accounts in connection with the
purchase and redemption of shares. In consideration for the services provided by
the Transfer Agent under the Transfer Agency Agreement, the Trust pays the
Transfer Agent a monthly fee equal to $250 per Portfolio plus certain additional
transaction costs, and the Transfer Agent's out-of-pocket costs incurred in
connection with the provision of services. For each of the fiscal years ended
December 31, 1998, 1997 and 1996, the Trust paid the Transfer Agent fees under
the Transfer Agency Agreement in an amount equal to $29,535, $33,093 and
$22,259, respectively.
Under the terms of a Sub-administration Agreement between the Trust, the Adviser
and State Street Bank and Trust Company dated May 31, 1995, the Adviser has
retained State Street (the "Sub-Administrator") to provide reporting and
accounting services to the Trust. Under the Sub-administration Agreement, the
services performed by the Sub-Administrator include, but are not limited to, (i)
overseeing the determination and publication of the net asset value for each
Portfolio; (ii) overseeing the maintenance of books and records required under
the 1940 Act; (iii) preparing the Trust's federal, state and local income tax
returns for review by the Trust's independent public accountants; (iv) reviewing
the appropriateness of and arranging for payment of the Trust's expenses; (v)
preparing for review and approval by officers of the Trust financial information
for the Trust's semi-annual and annual reports, proxy statements and other
communications with
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<PAGE> 71
shareholders; (vi) preparing reports related to the business and affairs of the
Trust as may be mutually agreed upon; (vii) overseeing and reviewing calculation
of fees paid to the Adviser, the custodian and the transfer agent; and (viii)
responding to or referring the Trust's officers or transfer agent inquiries
relating to the Trust. In consideration for the services provided by the
Sub-Administrator under the Sub-administration Agreement, the Trust or the
Adviser pays the Sub-Administrator an annual fee of .06% for the first $125
million in assets or the first Portfolio, .04% for the next $125 million in
assets or the next Portfolio, and .02% per Portfolio thereafter, subject to a
minimum of $50,000 per Portfolio, plus the Sub-Administrator's out-of-pocket
costs incurred in connection with the provision of services. For each of the
fiscal years ended December 31, 1998, 1997 and 1996, the Trust paid the
Sub-Administrator fees under the Sub-administration Agreement in an amount equal
to $375,200, $371,151 and $82,742, respectively.
INVESTMENT DECISIONS
Investment decisions for the Portfolios 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. 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
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<PAGE> 72
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.
During the fiscal years ended December 31, 1998, 1997 and 1996, each Portfolio
paid aggregate brokerage commissions in the amounts shown in the table below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
EliteValue Portfolio $ 4,876 $ 6,958 $ 2,448
Emerging Growth Portfolio 3,015 5,131 3,423
Growth Equity Portfolio 11,612 10,851 4,082
Growth and Income Portfolio 2,011 7,681 13,588
International Equity Portfolio 4,398 14,086 14,302
Money Market Portfolio -- -- --
U.S. Government Securities Portfolio -- -- --
</TABLE>
For the year ended December 31, 1998, State Street Global Advisors Growth Equity
Portfolio, Credit Suisse International Equity Portfolio, Van Kampen Emerging
Growth Portfolio and EliteValue Portfolio paid brokerage commissions of $2,540,
$104, $518, and $1,446, respectively, to CS First Boston Corporation, $340, $0,
$93 and $138, respectively, to Smith Barney Incorporated and $0, $145, $114 and
$0, respectively, to Salomon Brothers Inc., and State Street Global Advisors
Growth Equity Portfolio paid brokerage commission of $25, to State Street
Corporation, affiliated brokers, for portfolio transactions executed on behalf
of the Portfolios.
For the year ended December 31, 1997, Global Advisors Growth Equity Portfolio,
Credit Suisse International Equity Portfolio, Van Kampen American Capital
Emerging Growth Portfolio and EliteValue Asset Allocation Portfolio paid
brokerage commissions of $485, $126, $217 and $166, respectively, to CS First
Boston Corporation and $607, $169, $483 and $185, respectively, to Salomon
Brothers Inc., affiliated brokers, for portfolio transactions executed on behalf
of the Portfolios.
For the year ended December 31, 1996, Global Advisors Growth Equity Portfolio,
Credit Suisse International Equity Portfolio, Van Kampen American Capital
Emerging Growth Portfolio and EliteValue Asset Allocation Portfolio paid
brokerage commissions of $117, $890, $12 and $252, respectively, to CS First
Boston Corporation and $76, $262, $106 and $6, respectively, to Salomon Brothers
Inc., affiliated brokers, for portfolio transactions executed on behalf of the
Portfolios.
OFFERING, PURCHASE AND REDEMPTION OF FUND SHARES
The Trust's shares are sold exclusively to the Separate Account.
The Separate Account of the Company places orders to purchase and redeem shares
of each Portfolio based on, among other things, the amount of premium payments
to be invested and surrender and transfer requests to be effected on that day
pursuant to the Contracts issued by the Company. Orders received by the Trust
are effected on days on which the New York Stock Exchange (the "NYSE") is open
for trading, at the net asset value per share next determined after receipt of
the order, except that, in the case of the Money Market Portfolio, purchases
will not be effected until the next determination of net asset value after
federal funds have
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been made available to the Trust. For orders received before 4:00 p.m., New York
time, such purchases and redemptions of shares of each Portfolio are effected at
the respective net asset values per share determined as of 4:00 p.m., New York
time on that day (see "Determination of Net Asset Value"). Payment for
redemptions will be made within seven days after receipt of a redemption request
in good order. No fee is charged the Separate Account of the Company when it
redeems Portfolio shares. The Trust may suspend the sale of shares at any time
and may refuse any order to purchase shares.
As explained in the prospectus for the Contracts, payments of surrender values,
as well as lump sum payments available under the annuity options of the
Contracts, may be suspended or postponed at any time when the redemption of
shares is suspended. Normally, the Trust redeems Portfolio shares within seven
days of receipt of request therefor, but may postpone redemptions beyond seven
days when: (1) the NYSE is closed for other than weekends and customary
holidays, or trading on the NYSE becomes restricted; (2) an emergency exists
making disposal or valuation of a Portfolio's assets not reasonably practicable;
or (3) the SEC has so permitted by order for the protection of the Trust's
shareholders.
Net asset value per share is determined by dividing the net assets of a
Portfolio by the number of that Portfolio's outstanding shares at such 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 NYSE is open for trading. The NYSE is
normally closed on the following national holidays: New Year's Day, Martin
Luther King's Birthday, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving, and Christmas. The Trust is closed the day after
Thanksgiving even though the NYSE is open.
There may be dates when the NYSE is open for business and the Trust is not. The
day after Thanksgiving is the only such date. On such date, contract owners will
not have access to their accounts and therefore, no transactions will be
processed on such date. The Trust will be closed for business each date the NYSE
is closed for business.
Normally the 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 unless one or more of the following steps, for which the
Trustees have authority, are taken: (a) reducing the number of shares in each
shareholder's account; (b) offsetting each shareholder's pro rata portion of
negative net income against the shareholder's accrued dividend account or
against future dividends; or (c) combining these methods in order to seek to
maintain the net asset value per share at $1. The Trust may endeavor to restore
the Portfolio's net asset value per share to $1 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 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 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 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.
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ACCOUNTING AND TAX TREATMENT
CALLS AND PUTS
When a Portfolio writes a call or put option, an amount equal to the premium
received by it is included in that Portfolio's Statement of Assets and
Liabilities as an asset and as an equivalent liability. The amount of the
liability is subsequently "marked to market" to reflect the current market value
of the option written. The current market value of a written option is the last
sale price on the principal Exchange on which such option is traded. If a call
option which a Portfolio has written either expires on its stipulated expiration
date, or if a Portfolio enters into a closing purchase transaction, it realizes
a gain (or loss if the cost of the closing transaction exceeds the premium
received when the option was sold) without regard to any unrealized gain or loss
on the underlying security, and the liability related to such option is
extinguished. If a call option which a Portfolio has written is exercised, the
Portfolio realizes a capital gain or loss from the sale of the underlying
security and proceeds from such sale are increased by the premium originally
received.
The premium paid by a Portfolio for the purchase of a put option is included in
the asset section of its Statement of Assets and Liabilities as an investment
and subsequently adjusted daily to the current market value of the option. For
example, if the current market value of the option exceeds the premium paid, the
excess would be unrealized appreciation and, conversely, if the premium exceeds
the current market value, such excess would be unrealized depreciation. The
current market value of a purchased option is the last sale price on the
principal Exchange on which such option is traded. If a put option which a
Portfolio has purchased expires unexercised it realizes a capital loss equal to
the cost of the option. If a Portfolio exercises a put option, it realizes a
capital gain or loss from the sale of the underlying security and the proceeds
from such sale will be decreased by the premium originally paid.
FINANCIAL FUTURES CONTRACTS
Accounting for financial futures contracts will be in accordance with generally
accepted accounting principles. Initial margin deposits made upon entering into
financial futures contracts will be recognized as assets due from the FCM (the
Portfolio's agent in acquiring the futures position). During the period the
financial futures contract is open, changes in the value of the contract will be
recognized as unrealized gains or losses by "marking-to-market" on a daily basis
to reflect the market value of the contract at the end of each day's trading.
Variation (or maintenance) margin payments will be made or received, depending
upon whether gains or losses are incurred. Financial futures contracts held by a
Portfolio at the end of each fiscal year will be required to be "marked to
market" for federal income tax purposes (that is, treated as having been sold at
market value).
SUBCHAPTER M OF THE INTERNAL REVENUE CODE OF 1986
Each Portfolio of the Trust intends to qualify annually as a regulated
investment company under Subchapter M of the Code. A Portfolio must meet several
requirements to obtain and maintain its status as a regulated investment
company. Among these requirements are that: (i) at least 90% of a Portfolio's
gross income be derived from dividends, interest, payments with respect to
securities loans and gains from the sale or disposition of securities; and (ii)
at the close of each quarter of a Portfolio's taxable year (a) at least 50% of
the value of the Portfolio's assets consist of cash, government securities,
securities of other regulated investment companies and other securities (such
other securities of any one issuer being not greater than 5% of the value of a
Portfolio and the Portfolio holding not more than 10% of the outstanding voting
securities of any such issuer) and (b) not more than 25% of the value of a
Portfolio's assets be invested in the securities of any one issuer (other than
United States government securities or securities of other regulated investment
companies). Each Portfolio of the Trust is treated as a separate entity for
federal income tax purposes.
The Internal Revenue Service ("Service") has ruled publicly that an
exchange-traded call option is a security for purposes of the 50% of assets test
and that its issuer is the issuer of the underlying security, not the writer of
the option, for purposes of the diversification requirements. It has ruled
privately (at the request of a taxpayer other than the Trust) that income from
closing financial futures contracts is considered gain from a disposition
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<PAGE> 75
of securities for purposes of the 90% of gross income test. However, since
taxpayers other than the taxpayer requesting a particular private ruling are not
entitled to rely on such ruling, the Trust intends to keep its Portfolios'
activity in futures contracts and options at a low enough volume such that gains
from closing futures contracts will not exceed 10% of a Portfolio's gross income
until the Service rules publicly on the issues or the Trust is otherwise
satisfied that those gains are qualifying income.
If a Portfolio fails to qualify as a regulated investment company or fails to
satisfy the 90% distribution requirement in any taxable year, the Portfolio
would be taxed as an ordinary corporation on its taxable income. To qualify
again as a regulated investment company in a subsequent year, the Portfolio may
be required to pay an interest charge on 50% of its earnings and profits
attributable to non-regulated investment company years and would be required to
distribute such earnings and profits to shareholders (less any interest charge).
In addition, if the Portfolio failed to qualify as a regulated investment
company for its first taxable year or, if immediately after qualifying as a
regulated investment company for any taxable year, it failed to qualify for a
period greater than one taxable year, the Portfolio would be required to
recognize any net built-in gains (the excess of aggregate gains, including items
of income, over aggregate losses that would have been realized if it had been
liquidated) in order to qualify as a regulated investment company in a
subsequent year.
SECTION 817(H) OF THE CODE
Each of the Portfolios intends to comply with Section 817(h) of the Code and the
regulations issued thereunder. Section 817(h) of the Code and Treasury
Department regulations thereunder impose certain diversification requirements on
variable annuity contracts based upon segregated asset accounts. These
requirements are in addition to the diversification requirements of Subchapter M
and the 1940 Act and may affect the securities in which a Portfolio may invest.
Failure to meet the requirements of Section 817(h) could result in immediate
taxation of the Contract Owner to the extent of appreciation on investments
under the Contract.
The Section 817(h) diversification requirements do not apply to pension plan
contracts. "Pension plan contracts" for these purposes generally means annuity
contracts issued with respect to plans qualified under Section 401(a) or 403(a)
of the Code, Section 403(b) annuities, Individual Retirement Accounts,
Individual Retirement Annuities and annuities issued with respect to Section 457
plans.
The Secretary of the Treasury may, in the future, issue additional regulations
that will prescribe the circumstances in which a contract owner's control of the
investments of the separate accounts investing in the Trust may cause the
contract owner to be taxable with respect to assets allocated to the separate
account, before distributions are actually received under the Contract.
In order to comply with the requirements of Section 817(h) and the regulations
thereunder, the Trust may find it necessary to take action to ensure that a
contract funded by the Trust continues to qualify as such under federal tax
laws. The Trust, for example, may be required to alter the investment objectives
of a Portfolio or Portfolios, or substitute the shares of one Portfolio for
those of another. No such change of investment objectives or substitution of
securities will take place without notice to the shareholders of the affected
Portfolio and without prior approval of the SEC, to the extent legally required.
It is not feasible to comment on all of the federal income tax consequences
concerning the Portfolios. Each owner of a Contract funded by the Trust should
consult a qualified tax adviser for more complete information. The reader should
refer to the appropriate prospectus related to his or her Contracts for a more
complete description of the taxation of the separate account and of the owner of
the particular Contract.
DIVIDENDS AND DISTRIBUTIONS
The net investment income of the Money Market Portfolio is determined as of the
close of trading on the NYSE (generally 4 p.m., New York time) on each day on
which the NYSE is open for business. All of the net investment income so
determined normally will be declared daily as a dividend to shareholders of
record as of the close of trading on the NYSE 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
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<PAGE> 76
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, determined as of the close of business on that day, unless payment of the
dividend in cash has been requested.
Net income of the 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 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 unless one or more of the following steps, for which the
Trustees have authority, are taken: (a) reducing the number of shares in each
shareholder's account; (b) offsetting each shareholder's pro rata portion of
negative net income against the shareholder's accrued dividend account or
against future dividends; or (c) combining these methods in order to seek to
maintain the net asset value per share at $1. The Trust may endeavor to restore
the Portfolio's net asset value per share to $1 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 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 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.
Each of the Portfolios, other than the 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
The total return of a Portfolio is the total return of the Portfolio before
expenses ("Portfolio Total Return"). The Trust may compare Portfolio Total
Return to the total return of the Portfolio's benchmark index ("Index Total
Return"). The difference between Portfolio Total Return and Index Total Return
is referred to as "tracking difference." Tracking difference represents the
amount that the return on the investment portfolio (which results from the
Adviser or the Sub-adviser's investment selection) deviates from its benchmark's
Index Total Return. You should be aware the performance presented does not
reflect contract charges or separate account charges which will reduce Portfolio
values which are available to contract owners and participants. Information
about separate account performance is available in the applicable contract
prospectus.
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<PAGE> 77
AVERAGE ANNUAL TOTAL RETURN
Average Annual Total Return quotations for periods of 1, 5, and 10 years, or,
since inception of a Portfolio, are calculated according to the following
formula:
P(1 + T)(n) = ERV
Where:
<TABLE>
<S> <C>
P = A hypothetical initial Purchase Payment of $1,000.
T = Average annual total return.
n = Number of years.
ERV = Ending redeemable value of a hypothetical $1,000 Purchase
Payment made at the beginning of the first period.
</TABLE>
Average Annual Total Return Portfolio reflects the deduction of expenses and
assumes that all dividends and distributions are reinvested when paid.
PORTFOLIO TOTAL RETURN
Portfolio Total Return quotations for periods of 1, 5, and 10 years, or, since
inception are calculated by adding to the Average Total Annual Return (described
above) the expenses of the Portfolio. Expenses of the Portfolio are calculated
at the end of each Portfolio's fiscal year and are expressed as a percentage of
average net assets. Expenses as a percentage of average net assets are prorated
equally over the months in the fiscal year in which the ratio was calculated
when determining expenses for periods crossing over fiscal years.
INDEX TOTAL RETURN
Index Total Return quotations for periods 1, 5, and 10 years, or, since
inception, are calculated
Seven Day Effective Yield = [(Base Period Return + 1)(365/7) - 1]
SEVEN DAY YIELDS
The Money Market Portfolio may quote a Seven Day Current Yield and a Seven Day
Effective Yield. The Seven Day Current Yield is calculated by determining the
total return for the current seven day period ("base period return") an
annualizing the base period return by dividing by seven days, then multiplying
the result by 365 days. The Seven Day Effective Yield annualizes the base period
return while compounding weekly the base period return according to the
following formula:
Seven Day Effective Yield = [(Base Period Return + 1)(365/7) - 1]
Average Total Return for the Periods Indicated
<TABLE>
<CAPTION>
12 Months
Ended Inception to
Portfolio 12/31/98 12/31/98
--------- --------- ------------
<S> <C> <C>
EliteValue Portfolio 6.72% 17.86%
Emerging Growth Portfolio 37.43% 25.37%
Growth Equity Portfolio 21.60% 24.40%
Growth and Income Portfolio 14.16% 17.89%
International Equity Portfolio (0.86)% 7.27%
Money Market Portfolio 5.23% 5.29%
U.S. Government Securities Portfolio 7.49% 6.78%
</TABLE>
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.
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<PAGE> 78
SHAREHOLDER COMMUNICATIONS
Contract owners and participants are entitled to receive from the 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 Portfolios and the market value thereof
and will provide other information about the Portfolios and their operations.
ORGANIZATION AND CAPITALIZATION
The Trust is an open-end diversified management investment company, established
as a business trust under Massachusetts law by a Declaration of Trust dated
December 12, 1994, as amended (the "Declaration of Trust"). The Trust currently
offers shares of the Portfolios.
The Declaration of Trust authorizes the Trustees to create additional Portfolios
with different investment objectives from time to time. Any additional
Portfolios may be managed by investment advisers or investment sub-advisers
other than the current Adviser and Sub-advisers. The Trustees have the right,
subject to any necessary regulatory approvals, to create more than one class of
shares with respect to a Portfolio, where each class may be subject to different
charges and expenses and may have such other different rights as the Trustees
may prescribe. The Trustees also have the authority to terminate any Portfolio
of the Trust.
The Trust has authorized an unlimited number of shares of beneficial interest.
Shareholders are entitled to one vote per share, with fractional shares voting
proportionately. A separate vote will be taken by each Portfolio on matters
affecting that Portfolio. For example, a change in a fundamental investment
policy for the Growth and Income Portfolio would be voted upon only by
shareholders of that Portfolio. Approval of the Investment Advisory Agreement is
also a matter to be determined separately by each 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. If a
Portfolio is liquidated, the shareholders of that Portfolio will receive either
the net assets or the proceeds of the net assets of that Portfolio.
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.
PORTFOLIO TURNOVER
The SEC defines portfolio turnover rate 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 Money Market
Portfolio does not calculate portfolio turnover. Portfolio turnover generally
involves expense to a Portfolio, including brokerage commissions or dealer
mark-ups and other transaction costs on the sale of securities and reinvestment.
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<PAGE> 79
The portfolio turnover rate of each Portfolio, other than the Money Market
Portfolio, for the periods ended December 31, 1997 and 1998 is set forth below.
<TABLE>
<CAPTION>
Portfolio 1997 1998
--------- ---- ----
<S> <C> <C>
EliteValue Portfolio................................ 29% 39%
Emerging Growth Portfolio........................... 107% 107%
Growth Equity Portfolio............................. 111% 140%
Growth and Income Portfolio......................... 191% 151%
International Equity Portfolio...................... 6% 61%
U.S. Government Securities Portfolio................ 615% 24%
</TABLE>
A portfolio restructuring to reduce exposure in emerging markets caused the
International Equity Portfolio to have a significant variation in its portfolio
turnover rate, from 1997 to 1998. The portfolio turnover rate for the U.S.
Government Securities Portfolio also had significant variations between 1997 and
1998, caused by a change in the calculations method for dollar roll transactions
and a merger of another portfolio into the U.S. Government Securities Portfolio.
CUSTODIAN
State Street Bank and Trust Company, 222 Franklin Street, Boston, Massachusetts
02110, 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 Custodian is responsible for holding all securities and cash of each
Portfolio, receiving and paying for securities purchased, delivering against
payment securities sold, receiving and collecting income from investments,
making all payments covering expenses of the Trust, and performing other
accounting and administrative duties, all as directed by persons authorized by
the Trust. The Custodian does not exercise any supervisory function in such
matters as the purchase and sale of portfolio securities, payment of dividends,
or payment of expenses of the Portfolios or the Trust. Portfolio securities of
the Portfolios purchased domestically are maintained in the custody of the
Custodian and may be entered into the book entry systems of securities
depositories approved by the Board of Trustees. Pursuant to the Trust's
agreement with the Custodian, portfolio securities purchased outside the United
States will be maintained in the custody of various foreign branches of the
Custodian and such other custodians, including foreign banks and foreign
securities depositories, as are approved by the Trustees, in accordance with
regulations under the 1940 Act.
The Custodian holds securities of the Portfolios on which call options have been
written and certain assets of the Portfolios constituting margin deposits with
respect to financial futures contracts at the disposal of the FCMs through which
such transactions are effected. The Portfolios may also be required to post
margin deposits with respect to covered call and put options written on stock
indices and for this purpose certain assets of those Portfolios may be held by
the Custodian pursuant to similar arrangements with the brokers involved. This
arrangement regarding margin deposits essentially consists of the Custodian
creating a separate segregated account into which it transfers (upon the Trust's
instructions) assets from a Portfolio's general (regular) custodial account.
In consideration for the services provided by the Custodian, the Trust pays the
Custodian an annual fee based upon the countries in which the Portfolios' assets
are maintained, plus transaction costs. The Trust also pays the Custodian a
monthly fee for the performance of certain currency accounting services in the
amount of $1,500 for each Portfolio with U.S. holdings only and $2,500 for each
global Portfolio.
INDEPENDENT ACCOUNTANTS
The Trust has selected Ernst & Young LLP, 200 Clarendon Street, Boston,
Massachusetts 02116, as the independent auditors to audit the annual financial
statements of the Trust.
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<PAGE> 80
DESCRIPTION OF NRSRO RATINGS
DESCRIPTION OF MOODY'S CORPORATE RATINGS
<TABLE>
<S> <C> <C>
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 an exceptionally stable
margin and principal is secure. While the various protective
elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa -- Bonds which are rated "Aa" are judged to be of high quality
by all standards. Together with the "Aaa" group, they
comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in "Aaa"
securities.
A -- Bonds which are rated "A" possess many favorable investment
attributes and are to be considered as upper medium-grade
obligations. Factors giving security to principal and
interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the
future.
Baa -- Bonds which are rated "Baa" are considered as medium-grade
obligations (i.e., they are neither highly protected nor
poorly secured). Interest payments and principal security
appear adequate for the present, but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have
speculative characteristics as well.
Ba -- Bonds which are rated "Ba" are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may
be very moderate and thereby not well-safeguarded during
both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated "B" generally lack characteristics of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa -- Bonds which are rated "Caa" are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca -- Bonds which are rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C -- Bonds which are rated "C" are the lowest-rated class of
bonds. Issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment
standing.
</TABLE>
DESCRIPTION OF S&P'S CORPORATE RATINGS
<TABLE>
<S> <C> <C>
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.
</TABLE>
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<PAGE> 81
<TABLE>
<S> <C> <C>
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 in these categories 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 rating of "C" 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.
</TABLE>
DESCRIPTION OF DUFF CORPORATE RATINGS
<TABLE>
<S> <C> <C>
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.
</TABLE>
DESCRIPTION OF FITCH CORPORATE RATINGS
<TABLE>
<S> <C> <C>
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.
</TABLE>
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<PAGE> 82
<TABLE>
<S> <C> <C>
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
repay principal is considered to be adequate. Adverse
changes in economic conditions and circumstances, however,
are more likely to have an adverse effect 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.
</TABLE>
DESCRIPTION OF THOMSON BANKWATCH, INC. CORPORATE RATINGS
<TABLE>
<S> <C> <C>
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.
</TABLE>
TBW may apply plus ("+") and minus ("-") modifiers in the "AAA" and "AA"
categories to indicate where within the respective category the issued security
is placed.
DESCRIPTION OF IBCA LIMITED AND IBCA INC. CORPORATE RATINGS
<TABLE>
<S> <C> <C>
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.
</TABLE>
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<PAGE> 83
<TABLE>
<S> <C> <C>
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.
</TABLE>
DESCRIPTION OF S&P'S COMMERCIAL PAPER RATINGS
<TABLE>
<S> <C> <C>
A-1 -- Degree of safety regarding timely payments is either
overwhelming or very strong.
A-1+ -- Those issues determined to possess overwhelming safety
characteristics are denoted "A-1+."
A-2 -- Capacity for timely payment is strong, but the relative
degree of safety is not as high as for issues designated
"A-1."
A-3 -- 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 -- Regarded as having only speculative capacity for timely
payment.
C -- Have a doubtful capacity for payment.
D -- 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.
</TABLE>
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
<TABLE>
<S> <C>
Prime-1 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.
Prime-2 These issuers (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.
Prime-3 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 These issuers do not fall within any of the Prime rating
Issuers categories.
</TABLE>
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<PAGE> 84
DESCRIPTION OF DUFF COMMERCIAL PAPER RATINGS
<TABLE>
<S> <C>
Duff-1 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.
Duff-2 Regarded as having good certainty of timely payment, good
access to capital markets, and sound liquidity factors and
company fundamentals. Risk factors are small.
</TABLE>
DESCRIPTION OF FITCH COMMERCIAL PAPER RATINGS
<TABLE>
<S> <C>
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.
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.
</TABLE>
DESCRIPTION OF IBCA LIMITED AND IBCA INC. COMMERCIAL PAPER RATINGS
<TABLE>
<S> <C> <C>
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.
</TABLE>
DESCRIPTION OF THOMSON BANKWATCH, INC. COMMERCIAL PAPER RATINGS
<TABLE>
<S> <C> <C>
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."
</TABLE>
FINANCIAL STATEMENTS
The Trust's financial statements and notes thereto for the year ended December
31, 1998 are incorporated by reference to the AGA Series Trust Annual Report.
48
<PAGE> 85
AGA SERIES TRUST
ANNUAL REPORT
DECEMBER 31, 1998
The information in this report is intended for informational purposes. This
report is not authorized for distribution to prospective investors unless
preceded or accompanied by current prospectuses for AGA Series Trust and AGA
Separate Account A. The prospectuses contain important information about
American General Annuity Insurance Company and AGA Separate Account A. Please
read the prospectuses carefully before investing.
<PAGE> 86
(This page intentionally left blank)
<PAGE> 87
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of the 1998 performance of the Portfolios within
AGA Series Trust supplements the financial statements and related notes found
elsewhere in this report.
The total returns reported are net of portfolio operating expenses but do
not reflect any insurance or administrative charges that apply to the separate
account. Furthermore, the portfolios' performances reflect the absorption of
certain fund expenses by American General Annuity Insurance Company. Had these
expenses not been absorbed, the total returns would have been lower. Performance
data represent past performance and neither guarantee nor predict future
results. The investment return and accumulation value of the portfolios will
fluctuate, and the redemption value may be higher or lower than an investor's
original cost.
As with all money market funds, an investment in the State Street Global
Advisors Money Market Portfolio is neither insured nor guaranteed by the U.S.
Government. Although the Portfolio strives to maintain a stable net asset value
of $1.00 per share, there can be no assurance that this objective will be met.
CREDIT SUISSE GROWTH AND INCOME PORTFOLIO
(formerly BEA Growth & Income Portfolio)
The total return for 1998 was 14.2%, lagging the 28.6% and 8.7% of its
benchmarks, the Standard and Poor's 500 Stock Index ("S&P 500 Index") and Lehman
Aggregate Bond Index ("Lehman Aggregate"), respectively.
Nineteen ninety-eight was a difficult year for active equity managers who
seek to maintain broadly diversified portfolios because the performances of a
few of the largest stocks in the S&P 500 Index were responsible for a
disproportionate share of the overall market's gain. Notwithstanding that
large-cap bias, the manager continued to concentrate holdings in mid-cap
companies because he believes, based on long experience, that maintaining a
diversified portfolio of mid-cap equities will provide better returns in the
long run. Furthermore, the Portfolio suffered during the year because it was
underweight in two of the market's strongest sectors, technology (especially
Internet-related) and financial stocks.
The strategy in the equity portion of the Portfolio involves top-down
sector selection combined with bottom-up stock selection within sectors. The
manager believes that three factors drove the bull market in 1998: increased
corporate earnings, rising dividends, and improved P/E ratios. He does not
believe that these factors can continue to produce favorable results, so he
became more cautious in his stock selection and at mid year commenced changing
the portfolio mix from 55% equities/45% debt securities to 45% equities/40%
debt/15% cash at year end. The manager held the relatively-large cash position
because he was wary of both the debt and equity markets.
On the fixed-income side, 1998 was a very difficult year. Driven by
financial instability in many of the world's markets, investors engaged in
several classic "flight to quality" rallies that favored only the safest
securities. As a result, yield spread was far wider than normal during most of
the year, and U.S. Treasuries -- considered the world standard of
creditworthiness -- significantly outperformed all other debt sectors. During
the year, the fixed income manager maintained a slightly long average maturity
and an overweight in mortgage holdings in an effort to attain yield. That
overweight (and corresponding underweight in Treasuries) caused the fixed income
portion of the Portfolio to slightly underperform the Lehman Aggregate.
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
In 1998 the International Equity Portfolio's total return was a negative
0.9%, significantly worse than the 20.0% return of its benchmark, the Morgan
Stanley Composite Index -- Europe, Australia & Far East (EAFE).
The poor performance has offset earlier superior performance, so that the
Portfolio's inception-to-date return of 7.3% now lags the EAFE benchmark's
10.8%. The manager attributes the current disappointing performance to the same
factors that produced the earlier success; i.e., overweight investment in
emerging
1
<PAGE> 88
markets, principally Eastern and Central Europe. The performance during the year
was driven by the Portfolio's overweight position in the poor-performing
emerging markets (outside of Asia -- the manager anticipated the problems there
and was largely out of that market before the crash). The problem was compounded
by the corresponding underweight in core Europe, the strongest of the world's
markets. The manager erred early in the year when he concluded that Asia's
problems would not depress emerging markets elsewhere. He stuck to his basic
strategy of overweighting investment in emerging markets because he believed
that is where his expertise added the most value. Although the individual stocks
owned did well within their respective markets, the flight of capital out of
emerging markets everywhere was disastrous for the Portfolio. In short, the
manager severely underestimated the systematic risk of straying so far from the
EAFE weightings.
In order to deal with the problems, in the second half of the year the
Portfolio was conservatively restructured with weightings that are much closer
to the EAFE. The emerging market exposure was reduced to less than 10% of the
Portfolio, the Western European exposure was increased and the exposure in Japan
was increased slightly. At year end the Portfolio was overweight in Western
Europe but was still underweight in Japan (although by a smaller margin than
earlier in the year). The manager is not optimistic about Japan, but believes it
dangerous to be so far off the benchmark because he expects the market to move
up very rapidly when it does turn. The manager intends to stick much closer to
the EAFE weightings in the future, and so expects future performance to more
closely parallel the benchmark.
ELITEVALUE PORTFOLIO
(formerly EliteValue Asset Allocation Portfolio)
Although the EliteValue Portfolio objectives and policies permit the
manager to invest in all asset categories, the manager has consistently kept it
almost entirely invested in equities, a strategy that has generally proved very
successful. The Portfolio consists of a relatively small number of stocks of
companies the manager believes will show superior performance, and the turnover
rate is very low. The manager continues to invest in a limited number of
businesses that he feels are inherently worth more than their asking prices and
that will generate excess cash flow that will enhance long-term value for the
shareholders; i.e., the focus is on individual companies prospective long-term
potential rather than on stock market fluctuations.
The Portfolio's 1998 total return of 6.7% fell short of its benchmarks, the
S&P 500 Index and the Lipper Flexible Portfolio Funds Index, which registered
28.6% and 16.5%, respectively. However, the inception-to-date return of 17.9%
remained slightly above the marks. Performance suffered because the manager's
value style of investing was generally out of favor in 1998. Additionally, the
performance was hurt by weakness in stocks of companies doing business in
international markets, and by the fact that the Portfolio's stock selection
process lead the manager away from the technology and electric utility sectors,
two of the strongest performing sectors in 1998.
Among the Portfolio's largest holdings, McDonalds and Freddie Mac had great
success. Major disappointments were Du Pont, Wells Fargo, and Boeing. Boeing
continued to have difficulty dealing with its problems, but the manager believed
that in the long run a well-managed Boeing would be a very strong performer and
good investment. The manager sold Lockheed Martin, Tennoco and Monsanto and
bought ITT, Excel, and Phillip Morris.
The manager is disappointed in his current performance. Nevertheless, he
still strives to attain his goal of a 12-15% return in the long run. He
continues to hold a substantial cash position, as he is still wary of the market
and hasn't found new names that he feels warrant heavy investment.
SALOMON U.S. GOVERNMENT SECURITIES PORTFOLIO
The 1998 total return was 7.5%, lagging its benchmark, One-to-Ten Year
Treasury Index by 1.0%. As noted above, 1998 was a very volatile year in
fixed-income markets. The financial instability in many of the world's markets
caused investors to seek only the safest securities. As a result, the total
return on U.S. Treasuries -- considered the world standard of
creditworthiness -- significantly outperformed all other debt sectors.
2
<PAGE> 89
It is generally difficult for a government bond portfolio to significantly
outperform its index, so the manager maintained a slightly long maturity and an
overweight position in mortgage securities in order to capture yield. It was
that overweight (and corresponding underweight in Treasuries) that caused the
Portfolio to underperform its benchmark.
On January 6, 1999, Salomon Brothers Asset Management, Inc. notified the
Adviser of the termination of its Sub-Advisory relationship as of March 8, 1999.
STATE STREET GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO
(formerly Global Advisors Growth Equity Portfolio)
The Growth Equity Portfolio's 1998 return of 21.6% lagged the 28.6% of its
benchmark, the S&P 500 Index. The Portfolio is an enhanced index fund, that is,
one that tracks the S&P 500 Index by industry classification, but attempts to
pick the best individual stocks within each industry.
Performance suffered in 1998 from the fact that most of the positive
benchmark performance resulted from strong performances by the very largest
"mega-cap" stocks. The mid-cap sector, where most of the Portfolio's assets are
concentrated, was left behind. Additionally, because of the Portfolio's small
size, it held a relatively large cash position, a factor that hampered
performance in a year of rising stock prices.
State Street Global Advisors continues to try to improve performance by
enhancing its computer model. Specifically, it has revised its industry
classifications, and is now linking industries that show similar characteristics
into 24 "clusters." It has also refined its method of following "lead analysts"
for individual stocks and for entire industries. The management team believes
that the modeling process must be constantly enhanced in order to stay ahead of
the competition. That is, if all players in the market have the same analytical
capacity, nobody can have an advantage.
STATE STREET GLOBAL ADVISORS MONEY MARKET PORTFOLIO
(formerly Global Advisors Money Market Portfolio)
The Money Market Portfolio's total return of 5.2% for 1998 exceeded its
benchmark, the 91-day Treasury Auction Average Index, as it has generally done
in recent periods. The Portfolio's small size and volatility (most purchases
initially pass thorough the Portfolio during the "policy free look" period) make
it difficult for the manager to make economic trades while maintaining
sufficient diversity and liquidity.
VAN KAMPEN EMERGING GROWTH PORTFOLIO
(formerly Van Kampen American Capital Emerging Growth Portfolio)
Capped off by its manager's "best quarter ever" in the fourth quarter, the
Emerging Growth Portfolio's 1998 return of 37.4% more than doubled the Russell
Mid-Cap Growth's 17.9% and nearly tripled the Lipper Mid-Cap Fund's 13.9%.
During 1998 the performance was boosted by a heavy overweight position in
the technology sector. Technologies comprised 40% of total assets at year end.
Within that sector, Internet stocks such as AOL and Yahoo were particular
successes. Additionally, heavy positions in "Internet infrastructure" names,
such as Cisco and Network Solutions, also contributed favorably. During the year
the manager increased (already-overweight) holdings in the strong health care
and biotech sectors and bought selectively in electronic and specialty
retailing. Holding nothing in the poor-performing energy sector also proved to
be beneficial.
The Portfolio continues to be structured in a defensive position, and the
manager attributes a large part of his outperformance to the fact that the
Portfolio has avoided any disasters. He believes that his long-term strategy of
staying fully invested in stocks with positive fundamentals continues to be the
right strategy. He still expects that a "snap back" in the valuations of small
and mid-cap issues relative to the very large-cap issues that have led the
market in recent quarters will ultimately benefit future performance.
3
<PAGE> 90
PERFORMANCE GRAPHS
The following graphs illustrate the performance of $10,000 invested in each
of the portfolios in comparison to their respective benchmark returns. The
charts assume investment at each portfolio's inception date and track
performance though December 31, 1998.
4
<PAGE> 91
[GRAPH]
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
----------------------------------------------------
ONE SINCE
YEAR INCEPTION
----------------------------------------------------
<S> <C> <C>
Growth and Income Portfolio 14.16 17.89
S&P 500 Index 28.58 29.03
Lehman Aggregate 8.69 7.86
S&P 500/Lehman 18.63 18.45
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 FUND FACTS
--------------------------------------------------
<S> <C>
Date of Inception 10/20/95
Net Assets ($000) $16,713
Net Asset Value per Share $ 13.89
Manager Credit Suisse
Asset Management
</TABLE>
* The portfolio total returns reported are net of portfolio operating expenses
but do not reflect any insurance or administrative charges that apply to the
separate account. Furthermore, the portfolio's performance reflects the
absorption of certain fund expenses by American General Annuity Insurance
Company. Had these expenses not been absorbed, the total returns would have
been lower. Performance data represent past performance and neither guarantee
nor predict future results. The investment return and accumulation value of
the portfolios will fluctuate, and the redemption value may be higher or lower
than an investor's original cost. Neither the S&P 500 Index nor the Lehman
Aggregate, nor its composite include any expenses.
5
<PAGE> 92
[GRAPH]
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
----------------------------------------------------
ONE SINCE
YEAR INCEPTION
----------------------------------------------------
<S> <C> <C>
International Equity Portfolio (0.86) 7.27
Morgan Stanley -- EAFE 20.00 10.82
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 FUND FACTS
-----------------------------------------------------
<S> <C>
Date of Inception 10/20/95
Net Assets ($000) $5,996
Net Asset Value per Share $10.23
Manager Credit Suisse Asset
Management, Ltd.
</TABLE>
* The portfolio total returns reported are net of portfolio operating expenses
but do not reflect any insurance or administrative charges that apply to the
separate account. Furthermore, the portfolio's performance reflects the
absorption of certain fund expenses by American General Annuity Insurance
Company. Had these expenses not been absorbed, the total returns would have
been lower. Performance data represent past performance and neither guarantee
nor predict future results. The investment return and accumulation value of
the portfolios will fluctuate, and the redemption value may be higher or lower
than an investor's original cost. The Morgan Stanley Composite Index -- EAFE
does not include any expenses.
6
<PAGE> 93
[GRAPH]
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
----------------------------------------------------
ONE SINCE
YEAR INCEPTION
----------------------------------------------------
<S> <C> <C>
EliteValue Portfolio 6.72 17.86
S&P 500 Index 28.58 16.27
Lipper Flex 16.52 16.27
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 FUND FACTS
---------------------------------------------------
<S> <C>
Date of Inception 1/2/96
Net Assets $20,620
Net Asset Value per Share $ 14.95
Manager OpCap Advisors
</TABLE>
* The portfolio total returns reported are net of portfolio operating expenses
but do not reflect any insurance or administrative charges that apply to the
separate account. Furthermore, the portfolio's performance reflects the
absorption of certain fund expenses by American General Annuity Insurance
Company. Had these expenses not been absorbed, the total returns would have
been lower. Performance data represent past performance and neither guarantee
nor predict future results. The investment return and accumulation value of
the portfolios will fluctuate, and the redemption value may be higher or lower
than an investor's original cost. The S&P 500 Index does not include any fund
expenses.
7
<PAGE> 94
[GRAPH]
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
----------------------------------------------------
ONE SINCE
YEAR INCEPTION
----------------------------------------------------
<S> <C> <C>
U.S. Government Securities 7.49 6.79
Portfolio
Treasury 1 to 10 Yr. Index 8.49 7.38
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 FUND FACTS
----------------------------------------------------
<S> <C>
Date of Inception 2/6/96
Net Assets $8,679
Net Asset Value per Share $10.23
Manager Salomon Brothers
Asset Management, Inc.
</TABLE>
* The portfolio total returns reported are net of portfolio operating expenses
but do not reflect any insurance or administrative charges that apply to the
separate account. Furthermore, the portfolio's performance reflects the
absorption of certain fund expenses by American General Annuity Insurance
Company. Had these expenses not been absorbed, the total returns would have
been lower. Performance data represent past performance and neither guarantee
nor predict future results. The investment return and accumulation value of
the portfolios will fluctuate, and the redemption value may be higher or lower
than an investor's original cost. The Treasury 1-to-10 Year Index does not
include any fund expenses.
8
<PAGE> 95
[GRAPH]
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
----------------------------------------------------
ONE SINCE
YEAR INCEPTION
----------------------------------------------------
<S> <C> <C>
Growth Equity Portfolio 21.60 24.74
S&P 500 Index 28.58 28.33
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 FUND FACTS
----------------------------------------------------
<S> <C>
Date of Inception 10/20/95
Net Assets $15,500
Net Asset Value per Share $ 16.57
Manager State Street
Global Advisors
</TABLE>
* The portfolio total returns reported are net of portfolio operating expenses
but do not reflect any insurance or administrative charges that apply to the
separate account. Furthermore, the portfolio's performance reflects the
absorption of certain fund expenses by American General Annuity Insurance
Company. Had these expenses not been absorbed, the total returns would have
been lower. Performance data represent past performance and neither guarantee
nor predict future results. The investment return and accumulation value of
the portfolios will fluctuate, and the redemption value may be higher or lower
than an investor's original cost. The S&P 500 Stock Index does not include any
fund expenses.
9
<PAGE> 96
[GRAPH]
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
----------------------------------------------------
ONE SINCE
YEAR INCEPTION
----------------------------------------------------
<S> <C> <C>
Money Market Portfolio 5.23 5.30
91-day Treasury Index 4.88 5.09
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 FUND FACTS
----------------------------------------------------
<S> <C>
Date of Inception 10/10/95
Net Assets $9,254
Net Asset Value per Share $ 1.00
Manager State Street
Global Advisors
</TABLE>
* The portfolio total returns reported are net of portfolio operating expenses
but do not reflect any insurance or administrative charges that apply to the
separate account. Furthermore, the portfolio's performance reflects the
absorption of certain fund expenses by American General Annuity Insurance
Company. Had these expenses not been absorbed, the total returns would have
been lower. Performance data represent past performance and neither guarantee
nor predict future results. The investment return and accumulation value of
the portfolios will fluctuate, and the redemption value may be higher or lower
than an investor's original cost. The 91-day Treasury Index does not include
any expenses.
As with all money market funds, an investment in the Global Advisors The Money
Market Portfolio is neither insured nor guaranteed by the U.S. Government.
Although the Portfolio strives to maintain a stable net asset value of $1.00
per share, there can be no assurance that this objective will be met.
10
<PAGE> 97
[GRAPH]
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
----------------------------------------------------
ONE SINCE
YEAR INCEPTION
----------------------------------------------------
<S> <C> <C>
Emerging Growth Portfolio 37.43 25.38
Russell Mid Cap Growth 17.86 19.81
Lipper Mid Cap 13.92 16.49
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 FUND FACTS
----------------------------------------------------
<S> <C>
Date of Inception 1/2/96
Net Assets $11,674
Net Asset Value per Share $ 19.05
Manager Van Kampen
Asset Management Inc.
</TABLE>
* The portfolio total returns reported are net of portfolio operating expenses
but do not reflect any insurance or administrative charges that apply to the
separate account. Furthermore, the portfolio's performance reflects the
absorption of certain fund expenses by American General Annuity Insurance
Company. Had these expenses not been absorbed, the total returns would have
been lower. Performance data represent past performance and neither guarantee
nor predict future results. The investment return and accumulation value of
the portfolios will fluctuate, and the redemption value may be higher or lower
than an investor's original cost. The Russell Mid Cap Growth does not include
any expenses.
11
<PAGE> 98
AGA SERIES TRUST
FINANCIAL SCHEDULES
DECEMBER 31, 1998
<PAGE> 99
AGA SERIES TRUST
CREDIT SUISSE GROWTH & INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ---------- -----------
<S> <C> <C>
COMMON STOCKS -- 45.7%
AIR TRAVEL -- 0.9%
AMR Corporation(a)..................................... 2,500 $ 148,438
-----------
BROADCASTING -- 2.8%
Fox Entertainment Group Incorporated(a)................ 10,000 251,875
MediaOne Group Incorporated............................ 4,500 211,500
-----------
463,375
-----------
BUSINESS SERVICES -- 1.7%
Automatic Data Processing Incorporated................. 3,500 280,656
-----------
CHEMICALS -- 3.1%
Monsanto Company....................................... 6,000 285,000
Scotts Company(a)...................................... 6,000 230,625
-----------
515,625
-----------
COMMUNICATION SERVICES -- 1.3%
AirTouch Communications Incorporated(a)................ 3,000 216,375
-----------
COMPUTERS & BUSINESS EQUIPMENT -- 3.7%
DST Systems Incorporated(a)............................ 2,000 114,125
Sun Microsystems Incorporated(a)....................... 3,000 256,875
Symbol Technologies Incorporated....................... 4,000 255,750
-----------
626,750
-----------
CONTAINERS & GLASS -- 1.1%
Owens Illinois Incorporated(a)......................... 6,000 183,750
-----------
DRUGS & HEALTH CARE -- 3.3%
Pharmacia & Upjohn Incorporated........................ 3,000 169,875
SmithKline Beecham PLC ADR............................. 3,000 208,500
Warner-Lambert Company................................. 2,400 180,450
-----------
558,825
-----------
ELECTRIC UTILITIES -- 1.2%
Public Service Enterprise Group........................ 5,000 200,000
-----------
ELECTRICAL EQUIPMENT -- 1.1%
Emerson Electric Company............................... 3,000 181,500
-----------
FINANCE & BANKING -- 0.1%
Citigroup Incorporated................................. 250 13,250
-----------
FOOD & BEVERAGES -- 2.8%
Hershey Foods Corporation.............................. 2,500 155,469
Sysco Corporation...................................... 5,000 137,187
Wrigley (WM) Jr. Company............................... 2,000 179,125
-----------
471,781
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-2
<PAGE> 100
AGA SERIES TRUST
CREDIT SUISSE GROWTH & INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ---------- -----------
<S> <C> <C>
COMMON STOCKS -- (CONTINUED)
INDUSTRIAL MACHINERY -- 1.8%
Tyco International Limited............................. 4,000 $ 301,750
-----------
INSURANCE -- 2.4%
American International Group Incorporated.............. 2,500 241,563
CNA Financial Corporation(a)........................... 4,000 161,000
-----------
402,563
-----------
INTERNATIONAL OIL -- 1.3%
Exxon Corporation...................................... 3,000 219,375
-----------
MANUFACTURING -- 2.0%
General Electric Company............................... 1,600 163,300
Illinois Tool Works Incorporated....................... 3,000 174,000
-----------
337,300
-----------
MULTIMEDIA -- 2.5%
Media General Incorporated............................. 4,000 212,000
Time Warner Incorporated............................... 3,400 211,012
-----------
423,012
-----------
PUBLISHING -- 0.7%
Hollinger International Incorporated................... 8,000 111,500
-----------
REAL ESTATE -- 0.4%
TriNet Corporate Realty Trust Incorporated............. 2,500 66,875
-----------
RETAIL TRADE -- 1.2%
Costco Companies Incorporated(a)....................... 2,800 202,125
-----------
SOFTWARE -- 2.1%
Microsoft Corporation(a)............................... 2,500 346,719
-----------
TELECOMMUNICATIONS -- 6.1%
AT&T Corporation....................................... 6,000 451,500
COMSAT Corporation..................................... 5,000 180,000
MCI WorldCom Incorporated(a)........................... 3,000 215,250
Teligent Incorporated(a)............................... 6,000 172,500
-----------
1,019,250
-----------
TRANSPORTATION -- 2.1%
FDX Corporation(a)..................................... 2,500 222,500
Norfolk Southern Corporation........................... 4,000 126,750
-----------
349,250
-----------
TOTAL COMMON STOCKS -- (Cost $6,073,582).......... 7,640,044
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-3
<PAGE> 101
AGA SERIES TRUST
CREDIT SUISSE GROWTH & INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ---------- -----------
<S> <C> <C>
PREFERRED STOCK -- 0.4%
FINANCE & BANKING -- 0.3%
California Federal Preferred Capital Corporation....... 1,075 $ 27,211
NB Capital Corporation................................. 800 20,850
-----------
48,061
-----------
FINANCIAL SERVICES -- 0.1%
Lehman Brothers Holdings Incorporated.................. 310 13,640
-----------
TOTAL PREFERRED STOCK -- (Cost $64,063)........... 61,701
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
----------
<S> <C> <C>
MUNICIPALS -- 0.8%
Florida State Board of Education
4.75%, 06/01/2023.................................... $ 10,000 9,732
Illinois State
4.75%, 06/01/2023.................................... 15,000 14,474
Massachusetts Bay Transport Authority
4.75%, 03/01/2021.................................... 10,000 9,487
Massachusetts Water Resources Authority
4.75%, 08/01/2027.................................... 10,000 9,419
Metropolitan Transportation Authority
4.75%, 04/01/2028.................................... 15,000 14,337
Municipal Electric Authority
5.00%, 01/01/2026.................................... 30,000 29,563
Nevada State
4.75%, 05/15/2026.................................... 25,000 23,821
New York City Municipal Water Finance Authority
4.75%, 06/15/2025.................................... 10,000 9,578
Ohio State Turnpike Commission
4.75%, 02/15/2028.................................... 10,000 9,693
Triborough Bridge & Tunnel Authority
4.75%, 01/01/2024.................................... 10,000 9,618
-----------
TOTAL MUNICIPALS -- (Cost $137,562)............... 139,722
-----------
CORPORATE BONDS -- 7.8%
AIR TRAVEL -- 0.5%
Continental Airlines Incorporated
9.50%, 12/15/2001.................................... 20,000 20,900
Northwest Airlines Incorporated
7.63%, 03/15/2005.................................... 40,000 37,918
U. S. Air Incorporated
9.63%, 02/01/2001.................................... 25,000 25,931
-----------
84,749
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-4
<PAGE> 102
AGA SERIES TRUST
CREDIT SUISSE GROWTH & INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
SECURITY DESCRIPTION AMOUNT VALUE
- -------------------- ---------- -----------
<S> <C> <C>
CORPORATE BONDS -- (CONTINUED)
BROADCASTING -- 0.5%
Belo (A.H.) Corporation
6.88%, 06/01/2002.................................... $ 20,000 $ 20,495
Fox Liberty Networks LLC
8.88%, 08/15/2007.................................... 30,000 30,600
Tele-Communications Incorporated
6.34%, 02/01/2002.................................... 15,000 15,364
Turner Broadcasting Systems Incorporated
7.40%, 02/01/2004.................................... 25,000 26,809
-----------
93,268
-----------
COMPUTERS & BUSINESS EQUIPMENT -- 0.2%
Seagate Technology Incorporated 7.45%, 03/01/2037...... 30,000 29,066
-----------
DRUGS & HEALTH CARE -- 0.7%
Columbia/HCA Healthcare Corporation 8.36%,
04/15/2024............................................ 30,000 31,352
Merck & Company Incorporated 5.76%, 05/03/2037......... 80,000 83,407
-----------
114,759
-----------
ELECTRIC UTILITIES -- 0.7%
Beaver Valley II Funding Corporation 9.00%,
06/01/2017............................................ 30,000 34,614
Connecticut Light & Power Company 7.75%, 06/01/2002.... 10,000 10,322
7.88%, 10/01/2024.................................... 10,000 10,374
Niagara Mohawk Power Corporation 8.75%, 04/01/2022..... 20,000 21,810
North Atlantic Energy Corporation 9.05%, 06/01/2002.... 19,000 19,741
Texas Electrical Capital 8.18%, 01/30/2037............. 20,000 22,363
-----------
119,224
-----------
FINANCE & BANKING -- 1.8%
AT&T Capital Corporation 6.41%, 08/13/1999............. 10,000 10,046
6.48%, 12/03/1999.................................... 25,000 25,277
6.47%, 12/03/2099.................................... 15,000 15,107
Bay View Capital Corporation 9.13%, 08/15/2007......... 15,000 14,475
Bellsouth Capital Funding Corporation 6.04%,
11/15/2026............................................ 80,000 83,252
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE> 103
AGA SERIES TRUST
CREDIT SUISSE GROWTH & INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
SECURITY DESCRIPTION AMOUNT VALUE
- -------------------- ---------- -----------
<S> <C> <C>
CORPORATE BONDS -- (CONTINUED)
Chase Manhattan Corporation 6.38%, 04/01/2008.......... $ 20,000 $ 20,700
6.75%, 09/15/2006.................................... 20,000 21,165
Citicorp 6.38%, 11/15/2008............................. 30,000 31,122
Compagnie Financiere de Paribas 6.95%, 07/22/2013...... 30,000 29,226
First Republic Bank 7.75%, 09/15/2012.................. 10,000 9,784
National Westminster Bancorporation 9.38%,
11/15/2003............................................ 10,000 11,460
The Money Store Trust 6.04%, 08/15/2017................ 25,000 25,013
-----------
296,627
-----------
HOTELS & RESTAURANTS -- 0.1%
Hilton Hotels Corporation 7.95%, 04/15/2007............ 20,000 20,723
INDUSTRIALS -- 0.6%
CSC Holdings Incorporated 7.88%, 12/15/2007............ 20,000 20,732
Dresser Industries Incorporated
7.60%, 08/15/2096.................................... 30,000 35,379
Ford Motor Company
6.63%, 10/01/2028.................................... 40,000 41,155
-----------
97,266
-----------
LEISURE TIME -- 0.8%
Time Warner Incorporated
6.85%, 01/15/2026.................................... 55,000 56,781
8.05%, 01/15/2016.................................... 25,000 29,225
9.13%, 01/15/2013.................................... 35,000 44,308
-----------
130,314
-----------
MINING -- 0.1%
Southern Coal & Iron Corporation
6.27%, 03/25/2019.................................... 25,000 25,139
-----------
PETROLEUM SERVICES -- 0.2%
Petroleum Geo-Services
7.13%, 03/30/2028.................................... 30,000 28,032
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-6
<PAGE> 104
AGA SERIES TRUST
CREDIT SUISSE GROWTH & INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
SECURITY DESCRIPTION AMOUNT VALUE
- -------------------- ---------- -----------
<S> <C> <C>
CORPORATE BONDS -- (CONTINUED)
TELECOMMUNICATIONS -- 1.4%
Diamond Cable Communications PLC
10.75%, 02/15/2007................................... $ 10,000 $ 7,100
GTE Corporation
6.84%, 04/15/2018.................................... 25,000 26,659
6.94%, 04/15/2028.................................... 40,000 43,442
MCI Communications Corporation
6.13%, 04/15/2002.................................... 15,000 15,240
Nextel Communications Incorporated
9.75%, 08/15/2004.................................... 35,000 33,950
Paging Network Incorporated
10.13%, 08/01/2007................................... 10,000 9,650
TCI Communications Financing III
9.65%, 03/31/2027.................................... 20,000 24,697
WorldCom Incorporated
6.95%, 08/15/2028.................................... 40,000 43,011
8.88%, 01/15/2006.................................... 30,000 32,681
-----------
236,430
-----------
TRANSPORTATION -- 0.2%
Norfolk Southern Corporation
7.05%, 05/01/2037.................................... 35,000 37,864
-----------
TOTAL CORPORATE BONDS -- (Cost $1,286,095)........ 1,313,461
-----------
FOREIGN CORPORATE BONDS -- 0.9%
FINANCE & BANKING -- 0.6%
Credit Lyonnais
6.56%, 09/19/2049.................................... 40,000 33,300
Fuji Finance Caymon Limited
7.30%, 03/29/2049.................................... 20,000 13,425
6.55%, 08/29/2049.................................... 50,000 32,562
Sparbanken Sverige
7.50%, 11/29/2049.................................... 10,000 10,013
-----------
89,300
-----------
FINANCIAL SERVICES -- 0.1%
Auxiliaire Credit Foncier
5.00%, 10/18/2002.................................... 10,000 9,588
5.28%, 09/25/2002.................................... 10,000 9,484
-----------
19,072
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-7
<PAGE> 105
AGA SERIES TRUST
CREDIT SUISSE GROWTH & INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
SECURITY DESCRIPTION AMOUNT VALUE
- -------------------- ---------- -----------
<S> <C> <C>
FOREIGN CORPORATE BONDS -- (CONTINUED)
INDUSTRIALS -- 0.2%
Osuuspankkien Kesk
5.74%, 09/29/2049.................................... $ 20,000 $ 19,000
YPF SA
8.00%, 02/15/2004.................................... 20,000 19,100
-----------
38,100
-----------
TRANSPORTATION -- 0.0%
TFM, Sa De Cv
11.75%, 06/15/2009................................... 10,000 4,650
-----------
TOTAL FOREIGN CORPORATE BONDS -- (Cost
$161,811)....................................... 151,122
-----------
FOREIGN GOVERNMENT BONDS -- 1.2%
Government of Poland
5.00%, 10/27/2014.................................... 110,000 102,438
5.00%, 10/27/2014.................................... 20,000 18,626
Republic of Argentina
9.16%, 04/10/2005.................................... 25,000 22,500
Republic of Brazil
6.13%, 04/15/2006.................................... 9,600 6,204
Republic of Colombia
12.24%, 08/13/2005................................... 35,000 32,025
Republic of Venezuela
9.25%, 09/15/2027.................................... 30,000 17,732
-----------
TOTAL FOREIGN GOVERNMENT BONDS -- (Cost
$193,419)....................................... 199,525
-----------
ASSET-BACKED SECURITIES -- 2.1%
FINANCE & BANKING -- 1.5%
Contimortgage Home Equity Loan Trust
Series 1998-CF1, Class A5, 6.43%, 04/15/2016......... 15,000 15,169
Series 1996-4, Class A8, 7.22%, 01/15/2028........... 10,000 10,203
GMAC Commercial Mortgage Security Incorporated
Series 1997-C1, Class A2, 6.85%, 09/15/2006.......... 10,000 10,563
Green Tree Financial Corporation
Series 1998-4, Class A3, 5.98%, 08/01/2008........... 40,000 40,096
Series 1998-C, Class A2, 6.03%, 07/15/2029........... 75,000 75,163
Series 1997-6, Class A3, 6.32%, 01/15/2029........... 9,339 9,374
Series 1997-3, Class A3, 6.73%, 07/15/2028........... 55,000 55,446
</TABLE>
The accompanying notes are an integral part of the financial statements
F-8
<PAGE> 106
AGA SERIES TRUST
CREDIT SUISSE GROWTH & INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
SECURITY DESCRIPTION AMOUNT VALUE
- -------------------- ---------- -----------
<S> <C> <C>
ASSET-BACKED SECURITIES -- (CONTINUED)
IMC Home Equity Loan Trust
Series 1998-3, Class A3, 6.16%, 05/20/2014........... $ 15,000 $ 15,034
New Century Home Equity Loan Trust
Series 1997-6, Class A4, 6.73%, 07/25/2022........... 10,000 9,760
UCFC Loan Trust
Series 1996-B, Class A7, 8.20%, 11/15/2027........... 10,000 10,701
-----------
251,509
-----------
FINANCIAL SERVICES -- 0.6%
First USA Credit Card Master Trust
Series 1997-6, Class A, 6.42%, 03/17/2005............ 45,000 46,350
Green Tree Recreational Equipment
Series 1998-B, Class A3, 6.05%, 10/15/2010........... 20,000 20,258
K Mart Corporation
Series 1995-K, 8.54%, 01/02/2015..................... 14,746 14,987
Nationscredit Grantor Trust
Series 1996-1, Class A, 5.85%, 09/15/2011............ 10,604 10,613
Structured Asset Securities Corporation
Series 1996-CFL, Class A1C, 5.944%, 02/25/2028....... 2,728 2,725
-----------
94,933
-----------
TOTAL ASSET-BACKED SECURITIES -- (Cost
$345,700)....................................... 346,442
-----------
U.S. GOVERNMENT AND AGENCY SECURITIES -- 28.0%
FEDERAL AGENCIES -- 17.0%
Federal National Mortgage Association
0.00%, 02/25/2023.................................... 25,000 20,939
6.00%, 12/01/TBA..................................... 275,000 275,688
6.00%, 12/01/TBA..................................... 130,000 128,293
6.00%, 12/01/TBA..................................... 1,000,000 986,870
6.50%, 12/01/TBA..................................... 325,000 327,132
6.50%, 12/01/TBA..................................... 135,000 136,898
8.00%, 12/01/TBA..................................... 565,000 585,125
Government National Mortgage Association
6.50%, 12/15/TBA..................................... 345,000 348,450
Tennessee Valley Authority
5.88%, 04/01/2036.................................... 20,000 21,223
-----------
2,830,618
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-9
<PAGE> 107
AGA SERIES TRUST
CREDIT SUISSE GROWTH & INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
SECURITY DESCRIPTION AMOUNT VALUE
- -------------------- ---------- -----------
<S> <C> <C>
GOVERNMENT AND AGENCY SECURITIES -- (CONTINUED)
U.S. GOVERNMENT -- 11.0%
United States Treasury Bills
3.82%, 01/07/1999.................................... $ 10,000 $ 9,994
United States Treasury Bonds
6.88%, 08/15/2025.................................... 270,000 327,248
United States Treasury Notes
6.25%, 06/30/2002.................................... 1,310,000 1,375,094
6.25%, 02/15/2007.................................... 120,000 131,624
-----------
1,843,960
-----------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES --
(Cost $4,649,510)............................... 4,674,578
-----------
REPURCHASE AGREEMENT -- 28.6%
(Cost $4,784,000)
State Street Bank and Trust Company, 3.25% dated
12/31/1998, to be repurchased at $4,785,728 on
01/04/1999, collateralized by a $4,670,000 par value
U.S. Treasury Note, 6.625% due 06/30/2001, with a
value of $4,880,150................................... 4,784,000 4,784,000
-----------
TOTAL INVESTMENTS -- (COST $17,695,742*) -- 115.5%.......... 19,310,595
-----------
OTHER ASSETS LESS LIABILITIES -- (15.5)%.................... (2,597,469)
-----------
NET ASSETS -- 100.0%........................................ $16,713,126
===========
</TABLE>
SCHEDULE OF OPEN FUTURES CONTRACTS AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER
OF CONTRACT TOTAL CONTRACT UNREALIZED
CONTRACTS DESCRIPTION VALUE GAIN (LOSS)
- --------- ----------- -------------- -----------
<C> <S> <C> <C>
3 U.S. Treasury 5 Year Note March 1999 (long)............... $ 340,031 $(1,909)
1 U.S. Treasury Bond March 1999 (long)...................... 127,781 49
3 U.S. Treasury 10 Year Note March 1999 (short)............. (357,469) (1,237)
-------
$(3,097)
=======
</TABLE>
- ---------------
(a) Non-income producing security
ADR -- American Depository Receipt
TBA -- To Be Announced
* Aggregate cost for Federal tax purposes is $17,700,610. 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 $1,748,661
and $138,773, respectively, resulting in net unrealized appreciation of
$1,609,888.
The accompanying notes are an integral part of the financial statements
F-10
<PAGE> 108
AGA SERIES TRUST
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ ----------
<S> <C> <C>
COMMON STOCKS -- 89.2%
BRAZIL -- 1.5%
Companhia Paranaense De Energia-Copel.................. 12,300 $ 87,637
----------
CANADA -- 0.6%
Rogers Communications Incorporated(a).................. 4,000 35,721
----------
CHILE -- 1.0%
Five Arrows Chile Investment Trust Limited............. 20,000 35,680
Genesis Chile Fund..................................... 1,000 24,750
----------
60,430
----------
CROATIA -- 0.3%
Pliva D.D. GDR......................................... 1,000 16,350
----------
CZECH REPUBLIC -- 0.7%
Ateso AS............................................... 2,000 19,990
Deza Valasske Mezirici AS.............................. 1,000 17,825
Galena AS.............................................. 600 6,317
----------
44,132
----------
DENMARK -- 1.2%
ISS International Service System A/S................... 1,114 72,466
----------
FRANCE -- 10.9%
Alcatel Alsthom SA..................................... 417 51,016
AXA SA................................................. 605 87,650
Carrefour SA........................................... 105 79,234
Cofinec GDR(a)......................................... 3,000 17,850
Lafarge SA............................................. 720 68,381
Rhodia SA(a)........................................... 2,229 33,888
Rhone-Poulenc (India) Limited.......................... 1,558 80,143
Societe BIC SA......................................... 673 37,315
Total SA............................................... 544 55,071
Valeo SA............................................... 739 58,211
Vivendi................................................ 325 84,287
----------
653,046
----------
GERMANY -- 5.3%
Bayerische Motoren Werke (BMW)(a)...................... 16 11,857
Bayerische Motoren Werke AG............................ 69 53,532
Dresdner Bank AG....................................... 856 35,954
Mannesmann AG.......................................... 682 78,160
Preussag AG............................................ 181 81,779
Viag AG................................................ 100 58,622
----------
319,904
----------
HONG KONG -- 0.6%
Hong Kong Telecommunications Limited................... 5,000 8,744
</TABLE>
The accompanying notes are an integral part of the financial statements
F-11
<PAGE> 109
AGA SERIES TRUST
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ ----------
<S> <C> <C>
COMMON STOCKS -- (CONTINUED)
Hutchison Whampoa Limited.............................. 2,000 $ 14,069
Jardine Strategic Holdings Limited..................... 3,000 4,350
Wing Hang Bank Limited................................. 2,500 6,228
----------
33,391
----------
HUNGARY -- 0.5%
BorsodChem GDR......................................... 170 4,412
Matav RT............................................... 320 9,540
MOL Magyar Olaj-es Gazipari GDR........................ 600 16,500
----------
30,452
----------
INDIA -- 1.3%
India Fund............................................. 12,000 75,750
----------
ISRAEL -- 0.4%
Electric Fuel Corporation(a)........................... 2,500 6,875
Koor Industries Limited ADR............................ 1,500 26,156
----------
33,031
----------
ITALY -- 6.3%
Assicurazioni Generali SPA............................. 2,013 84,005
Banco Intesa SPA....................................... 12,425 74,507
Ente Nazionale Idrocarburi SPA......................... 9,350 61,072
Telecom Italia Mobile (TIM) SPA........................ 11,719 86,469
Telecom Italia SPA..................................... 8,650 73,764
----------
379,817
----------
JAPAN -- 17.8%
Acom Company Limited................................... 1,000 64,219
Advantest.............................................. 100 6,333
Amada Company.......................................... 3,000 14,516
Bank of Tokyo Mitsubishi Limited....................... 3,000 31,048
Banyu Pharmaceutical Company........................... 2,000 37,152
Canon Incorporated..................................... 3,000 64,087
Daiwa Securities....................................... 13,000 44,387
East Japan Railway..................................... 6 33,490
Eisai Company.......................................... 1,500 29,191
FamilyMart Company Limited............................. 1,000 49,889
Fanuc.................................................. 1,000 34,233
Honda Motor Company.................................... 1,000 32,817
Japan Airport Terminal................................. 2,000 12,295
Japan Tobacco Incorporated............................. 5 49,978
Maeda Road Construction................................ 2,000 13,428
Mitsubishi Heavy Industries............................ 5,000 19,460
NEC Corporation........................................ 4,000 36,798
Nippon Telegraph & Telephone........................... 9 69,420
</TABLE>
The accompanying notes are an integral part of the financial statements
F-12
<PAGE> 110
AGA SERIES TRUST
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ ----------
<S> <C> <C>
COMMON STOCKS -- (CONTINUED)
Nitto Denko Corporation................................ 2,000 $ 33,260
Olympus Optical Company Limited........................ 6,000 68,943
Santen Pharmaceutical Company.......................... 1,210 23,226
Sanwa Bank Limited..................................... 2,000 15,409
Sony Corporation....................................... 1,000 72,800
Sumitomo Osaka Cement Company Limited.................. 7,000 13,065
Takefuji Corporation................................... 1,200 87,572
Terumo Corporation..................................... 2,000 47,059
Toyota Motor Corporation............................... 2,000 54,312
----------
1,058,387
----------
KOREA -- 0.1%
Pohang Iron & Steel Company Limited.................... 500 8,438
----------
MALAYSIA -- 0.2%
YTL Corporation Berhad................................. 8,000 10,400
----------
NETHERLANDS -- 6.4%
ING Groep NV........................................... 1,100 67,041
Laurus NV.............................................. 2,185 55,128
Oce NV................................................. 1,610 57,846
Philips Electronics NV................................. 1,010 67,738
TNT Post Group NV...................................... 3,130 100,796
Vendex NV.............................................. 1,550 37,622
----------
386,171
----------
NEW ZEALAND -- 0.2%
Telecom Corporation of New Zealand..................... 6,000 13,829
----------
PERU -- 0.6%
Telefonica del Peru ADR................................ 3,000 38,062
----------
PHILIPPINES -- 0.2%
SM Prime Holdings...................................... 55,000 10,463
----------
POLAND -- 0.8%
Elektrim Spolka Akcyjan SA............................. 4,250 46,011
----------
PORTUGAL -- 1.0%
EDP-Electricidade de Portugal SA....................... 2,826 62,248
----------
SINGAPORE -- 0.2%
Singapore Technologies Engineering Limited............. 12,045 11,235
----------
SLOVAKIA -- 0.2%
Vychodoslovenske Zeleziarne AS......................... 2,000 9,508
----------
SPAIN -- 2.4%
Banco Bilbao Vizcaya SA................................ 4,539 71,062
</TABLE>
The accompanying notes are an integral part of the financial statements
F-13
<PAGE> 111
AGA SERIES TRUST
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ ----------
<S> <C> <C>
COMMON STOCKS -- (CONTINUED)
Telefonica de Espana................................... 1,606 $ 71,305
----------
142,367
----------
SWEDEN -- 1.7%
Atlas Copco AB......................................... 1,865 40,400
Electrolux AB.......................................... 3,595 61,725
----------
102,125
----------
SWITZERLAND -- 6.7%
Nestle SA.............................................. 34 74,004
Novartis AG............................................ 39 76,654
Roche Holdings AG...................................... 8 97,605
SchweizerischeRueckversicherungs-Gesellschaft.......... 29 75,598
Zurich Allied AG(a).................................... 106 78,476
----------
402,337
----------
THAILAND -- 0.2%
Electricity Generating Public Company Limited.......... 5,000 13,549
----------
TURKEY -- 0.5%
Turkish Investment Fund Incorporated................... 7,000 30,625
----------
UNITED KINGDOM -- 19.4%
Asda Group PLC......................................... 29,000 77,812
BAA PLC................................................ 6,400 75,175
BG PLC................................................. 10,700 68,797
Boots Company PLC...................................... 4,655 79,581
British Telecom PLC.................................... 4,880 73,861
CGU PLC................................................ 5,090 80,253
Compass Group PLC...................................... 6,520 74,418
GKN PLC................................................ 5,900 78,418
Granada Group PLC...................................... 4,650 81,504
Lloyds TSB Group PLC................................... 5,600 79,734
Pearson PLC............................................ 4,100 81,527
Shell Transport & Trading Company...................... 12,150 74,689
SmithKline Beecham PLC................................. 5,600 77,612
Unilever PLC........................................... 7,200 80,984
Vodafone Group PLC..................................... 4,850 78,806
----------
1,163,171
----------
TOTAL COMMON STOCKS -- (Cost $5,065,292).................... 5,351,053
----------
RIGHTS -- 0.0%
(Cost $990)
SPAIN -- 0.0%
Telefonica SA(a)....................................... 1,606 1,424
----------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-14
<PAGE> 112
AGA SERIES TRUST
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ ----------
<S> <C> <C>
WARRANTS -- 0.9%
AUSTRALIA -- 0.2%
BT Australian Equity Management Limited(a)............. 3,000 $ 11,048
----------
FRANCE -- 0.0%
Vivendi(a)............................................. 175 454
----------
JAPAN -- 0.7%
Fleming Japan Investor(a).............................. 60,000 748
Schroder Japan Growth Fund(a).......................... 175,000 42,158
----------
42,906
----------
TOTAL WARRANTS -- (Cost $184,325)........................... 54,408
----------
PREFERRED STOCK -- 1.4%
(Cost $57,195)
GERMANY -- 1.4%
Henkel KGaA............................................ 897 80,195
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
--------
<S> <C> <C>
REPURCHASE AGREEMENT -- 8.8%
(Cost $529,000)
State Street Bank and Trust Company, 2.00% dated
12/31/1998, to be repurchased at $529,118 on
01/04/1999, collateralized by a $370,000 par value U.S.
Treasury Note, 9.25% due 02/15/2016, with a value of
$544,420............................................... $529,000 529,000
----------
TOTAL INVESTMENTS -- (COST $5,836,802*) -- 100.3%........... 6,016,080
----------
OTHER ASSETS LESS LIABILITIES -- (0.3)%..................... (20,122)
----------
NET ASSETS -- 100.0%........................................ $5,995,958
==========
</TABLE>
(a) Non-income producing security
GDR -- Global Depository Receipt
ADR -- American Depository Receipt
* Aggregate cost for Federal tax purposes is $5,868,942. 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 $825,786
and $678,648, respectively, resulting in net unrealized appreciation of
$147,138.
The accompanying notes are an integral part of the financial statements
F-15
<PAGE> 113
AGA SERIES TRUST
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY NET ASSETS
- -------- ----------
<S> <C>
Appliances.................................................. 1.0%
Auto Parts.................................................. 0.3
Automobiles................................................. 2.5
Banks....................................................... 6.6
Broadcasting................................................ 0.6
Business Services........................................... 7.0
Chemicals................................................... 2.3
Conglomerates............................................... 2.8
Construction Materials...................................... 1.6
Construction & Mining Equipment............................. 0.7
Drugs & Health Care......................................... 8.2
Electric Utilities.......................................... 2.7
Electrical Equipment........................................ 1.4
Electronics................................................. 1.4
Financial Services.......................................... 6.0
Food & Beverages............................................ 3.3
Household Appliances & Home Furnishings..................... 2.3
Industrial Machinery........................................ 2.8
Insurance................................................... 6.8
Leisure Time................................................ 1.6
Mutual Funds................................................ 2.4
Office Furnishings & Supplies............................... 2.7
Oil & Gas................................................... 1.3
Petroleum Services.......................................... 3.3
Photography................................................. 1.1
Publishing.................................................. 1.4
Railroads & Equipment....................................... 0.6
Real Estate................................................. 0.2
Retail Trade................................................ 6.3
Steel....................................................... 0.3
Telecommunications.......................................... 10.0
-----
TOTAL INVESTMENTS BY INDUSTRY CLASSIFICATION.............. 91.5
Repurchase Agreement........................................ 8.8
-----
TOTAL INVESTMENTS......................................... 100.3%
=====
</TABLE>
The accompanying notes are an integral part of the financial statements
F-16
<PAGE> 114
AGA SERIES TRUST
ELITEVALUE PORTFOLIO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ ----------
<S> <C> <C>
COMMON STOCKS -- 76.8%
AEROSPACE -- 3.3%
Allied Signal Incorporated............................. 2,300 $ 101,919
Boeing Company......................................... 17,600 574,200
----------
676,119
----------
AIR TRAVEL -- 1.8%
UAL Corporation(a)..................................... 6,200 370,063
----------
BANKS -- 4.0%
BankBoston Corporation................................. 10,000 389,375
M & T Bank Corporation................................. 850 441,097
----------
830,472
----------
BROADCASTING & CABLE -- 1.9%
News Corporation Limited ADR........................... 16,000 395,000
----------
CHEMICALS -- 6.6%
Dow Chemical Company................................... 2,900 263,719
Du Pont (E.I.) de Nemours & Company.................... 11,600 615,525
Hercules Incorporated.................................. 2,600 71,175
Monsanto Company....................................... 5,000 237,500
Solutia Incorporated................................... 8,000 179,000
----------
1,366,919
----------
COMMERCIAL SERVICES -- 2.1%
R.R. Donnelley & Sons Company.......................... 10,000 438,125
----------
CONSTRUCTION & MINING EQUIPMENT -- 1.9%
Caterpillar Incorporated............................... 8,500 391,000
----------
DRUGS & HEALTH CARE -- 0.6%
Becton, Dickinson & Company............................ 3,000 128,063
----------
ELECTRONICS -- 3.4%
Avnet Incorporated..................................... 2,000 121,000
ITT Industries Incorporated............................ 14,500 576,375
----------
697,375
----------
FEDERAL AGENCIES -- 5.3%
Federal Home Loan Mortgage Corporation................. 17,000 1,095,437
----------
FINANCIAL SERVICES -- 8.9%
Citigroup Incorporated................................. 18,750 928,125
Wells Fargo Company.................................... 22,500 898,594
----------
1,826,719
----------
FOOD & BEVERAGES -- 3.8%
Diageo PLC ADR......................................... 16,800 777,000
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-17
<PAGE> 115
AGA SERIES TRUST
ELITEVALUE PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ ----------
<S> <C> <C>
COMMON STOCKS -- (CONTINUED)
HOTELS & RESTAURANTS -- 5.5%
McDonald's Corporation................................. 14,700 $1,126,387
----------
INSURANCE -- 5.0%
ACE Limited............................................ 10,000 344,375
Exel Limited........................................... 9,200 690,000
----------
1,034,375
----------
MANUFACTURING -- 1.4%
Tenneco Incorporated................................... 3,700 126,031
Varian Associates Incorporated......................... 4,000 151,500
----------
277,531
----------
MULTI INDUSTRY COMPANIES -- 3.4%
Minnesota Mining & Manufacturing Company............... 6,000 426,750
Textron Incorporated................................... 3,700 280,969
----------
707,719
----------
MULTIMEDIA -- 5.1%
Time Warner Incorporated............................... 17,000 1,055,062
----------
OIL & GAS -- 0.9%
Unocal Corporation..................................... 6,000 175,125
----------
PAPER -- 1.6%
Champion International Corporation..................... 8,000 324,000
----------
SOFTWARE -- 1.2%
Computer Associates International Incorporated......... 6,000 255,750
----------
TELECOMMUNICATIONS -- 4.5%
Sprint Corporation..................................... 5,500 462,688
US West Incorporated................................... 7,300 471,762
----------
934,450
----------
TOBACCO -- 3.1%
Philip Morris Companies Incorporated................... 12,000 642,000
----------
TOYS & AMUSEMENTS -- 1.5%
Mattel Incorporated.................................... 13,700 312,531
----------
TOTAL COMMON STOCKS -- (Cost $14,612,863)................... 15,837,222
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE> 116
AGA SERIES TRUST
ELITEVALUE PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
---------- -----------
<S> <C> <C>
DISCOUNT NOTES -- 23.2%
FEDERAL AGENCIES -- 23.2%
Federal Farm Credit Bank
5.00%, 01/22/1999**.................................. $1,890,000 $ 1,884,487
Federal Home Loan Bank
4.30%, 01/04/1999**.................................. 2,895,000 2,893,963
-----------
TOTAL DISCOUNT NOTES -- (Cost $4,778,450)......... 4,778,450
-----------
TOTAL INVESTMENTS -- (COST $19,391,313*) -- 100.0%.......... $20,615,672
-----------
OTHER ASSETS LESS LIABILITIES -- 0.0%....................... 4,258
-----------
NET ASSETS -- 100.0%........................................ $20,619,930
===========
</TABLE>
(a) Non-income producing security
ADR-American Depository Receipt
* Aggregate cost for Federal tax purposes is $19,430,004. 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 are $2,145,683
and $960,015, respectively, resulting in net unrealized appreciation of
$1,185,668.
** The rate shown reflects the current yield at December 31, 1998.
The accompanying notes are an integral part of the financial statements.
F-19
<PAGE> 117
AGA SERIES TRUST
SALOMON BROTHERS U.S. GOVERNMENT SECURITIES PORTFOLIO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
SECURITY DESCRIPTION AMOUNT VALUE
-------------------- --------- -----
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES -- 80.1%
FEDERAL AGENCIES -- 61.5%
Federal Home Loan Bank
5.80%, 09/02/2008.................................... $ 150,000 $ 154,738
Federal Home Loan Mortgage Corporation
5.89%, 07/24/2000.................................... 225,000 228,024
6.00%, 12/01/TBA..................................... 500,000 493,905
6.247%, 03/17/2021................................... 100,000 102,854
6.50%, 08/01/2013.................................... 474,293 481,560
7.00%, 04/15/2021.................................... 43,057 43,528
8.25%, 04/01/2017.................................... 13,620 14,269
11.75%, 07/01/2006................................... 8,336 9,130
11.75%, 07/01/2013................................... 2,694 2,894
Federal National Mortgage Association
6.00%, 12/01/TBA..................................... 600,000 592,122
6.50%, 08/01/2027.................................... 212,757 214,153
6.50%, 12/01/TBA..................................... 1,100,000 1,107,216
6.53%, 05/25/2030.................................... 150,000 155,633
6.91%, 12/28/2028.................................... 148,828 151,254
7.00%, 05/01/2026.................................... 139,520 142,354
7.00%, 12/01/TBA..................................... 450,000 459,000
9.00%, 10/01/2026.................................... 98,075 103,759
10.00%, 09/01/2020................................... 150,000 162,563
11.50%, 09/01/2019................................... 12,107 13,538
12.00%, 10/01/2015................................... 44,094 49,923
12.00%, 01/15/2016................................... 2,457 2,863
12.50%, 09/20/2015................................... 5,665 6,628
13.00%, 11/15/2015................................... 12,435 14,829
14.50%, 11/15/2014................................... 4,353 5,264
Government National Mortgage Association
7.50%, 05/15/2027.................................... 108,217 111,572
7.50%, 07/15/2027.................................... 160,024 164,984
9.00%, 10/20/2016.................................... 52,238 55,714
Student Loan Marketing Association
7.20%, 11/09/2000.................................... 225,000 233,577
United States Department of Veteran Affairs
7.25%, 10/15/2010.................................... 59,509 59,675
-----------
5,337,523
-----------
U.S. GOVERNMENT -- 18.6%
United States Treasury Bond
5.25%, 11/15/2028.................................... 50,000 51,188
</TABLE>
The accompanying notes are an integral part of the financial statements
F-20
<PAGE> 118
AGA SERIES TRUST
SALOMON BROTHERS U.S. GOVERNMENT SECURITIES PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
SECURITY DESCRIPTION AMOUNT VALUE
-------------------- --------- -----
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY SECURITIES -- (CONTINUED)
United States Treasury Notes
4.50%, 09/30/2000.................................... $ 500,000 $ 498,905
5.63%, 12/31/2002.................................... 50,000 51,664
5.63%, 05/15/2008.................................... 650,000 693,569
5.75%, 04/30/2003.................................... 100,000 104,094
5.88%, 09/30/2002.................................... 100,000 103,937
6.13%, 08/15/2007.................................... 100,000 109,219
-----------
1,612,576
-----------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES -- (Cost
$6,891,417)............................................... 6,950,099
-----------
REPURCHASE AGREEMENTS -- 50.4%
J.P. Morgan & Company, 4.68% dated 12/31/1998, to be
repurchased at $375,195 on 01/04/1999, collateralized
by a $314,000 par value U.S. Treasury Note, 6.75% due
8/15/2026, with a value of $383,001................... 375,000 375,000
State Street Bank and Trust Company, 4.85% dated
12/31/1998, to be repurchased at $2,001,078 on
01/04/1999, collateralized by a $1,890,000 par value
U.S. Treasury Note, 6.25% due 02/15/2003, with a value
of $2,043,563......................................... 2,000,000 2,000,000
Swiss Bank, 4.75% dated 12/31/1998, to be repurchased
at $2,001,056 on 01/04/1999, collateralized by a
$1,680,000 par value U.S. Treasury Note, 6.75% due
08/15/2026, with a value of $2,041,200................ 2,000,000 2,000,000
-----------
TOTAL REPURCHASE AGREEMENTS -- (Cost $4,375,000)............ 4,375,000
-----------
TOTAL INVESTMENTS -- (COST $11,266,417*) -- 130.5%.......... 11,325,099
-----------
OTHER ASSETS LESS LIABILITIES -- (30.5)%.................... (2,645,906)
-----------
NET ASSETS -- 100.0%........................................ $ 8,679,193
===========
</TABLE>
TBA -- To Be Announced
* Aggregate cost for Federal tax purposes is identical. 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 $77,670 and
$18,988, respectively, resulting in net unrealized appreciation of $58,682.
The accompanying notes are an integral part of the financial statements
F-21
<PAGE> 119
AGA SERIES TRUST
STATE STREET GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------- ----------
<S> <C> <C>
COMMON STOCKS -- 97.9%
AEROSPACE -- 2.9%
General Dynamics Corporation........................... 3,700 $ 216,912
Gulfstream Aerospace Corporation(a).................... 3,900 207,675
United Technologies Corporation........................ 300 32,625
----------
457,212
----------
ALUMINUM -- 0.7%
Aluminum Company of America............................ 1,500 111,844
----------
AUTOMOBILES -- 2.0%
Ford Motor Company..................................... 5,100 299,306
PACCAR Incorporated.................................... 300 12,338
----------
311,644
----------
BANKS -- 4.9%
BankAmerica Corporation................................ 1,805 108,526
Chase Manhattan Corporation............................ 3,800 258,637
First Union Corporation................................ 1,400 85,137
Fleet Financial Group Incorporated..................... 5,600 250,250
UnionBanCal Corporation................................ 1,500 51,094
----------
753,644
----------
BUSINESS SERVICES -- 1.0%
Computer Sciences Corporation.......................... 100 6,444
Unisys Corporation(a).................................. 4,200 144,637
----------
151,081
----------
CHEMICALS -- 1.1%
Solutia Incorporated................................... 7,400 165,575
----------
COMMERCIAL SERVICES -- 1.0%
R.R. Donnelley & Sons Company.......................... 3,400 148,963
----------
COMPUTERS & BUSINESS EQUIPMENT -- 9.8%
Dell Computer Corporation(a)........................... 800 58,550
EMC Corporation(a)..................................... 100 8,500
Gateway 2000 Incorporated(a)........................... 1,500 76,781
International Business Machines........................ 2,900 535,775
Lexmark International Group Incorporated(a)............ 2,700 271,350
Quantum Corporation(a)................................. 10,100 214,625
Sun Microsystems Incorporated(a)....................... 2,200 188,375
Tech Data Corporation(a)............................... 4,100 165,025
----------
1,518,981
----------
CONSTRUCTION MATERIALS -- 0.6%
USG Corporation........................................ 1,700 86,594
----------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-22
<PAGE> 120
AGA SERIES TRUST
STATE STREET GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------- ----------
<S> <C> <C>
COMMON STOCKS -- (CONTINUED)
DRUGS & HEALTH CARE -- 13.8%
Abbott Laboratories.................................... 700 $ 34,300
American Home Products Corporation..................... 700 39,419
Amgen Incorporated(a).................................. 2,900 303,231
Arterial Vascular Engineering Incorporated(a).......... 3,400 178,500
Becton, Dickinson & Company............................ 2,200 93,912
Bergen Brunswig Corporation............................ 6,600 230,175
Bristol Myers Squibb Company........................... 2,100 281,006
Eli Lilly & Company.................................... 700 62,213
Guidant Corporation.................................... 600 66,150
Johnson & Johnson...................................... 1,100 92,263
McKesson Corporation................................... 100 7,906
Meditrust.............................................. 2,700 40,838
Merck & Company Incorporated........................... 1,500 221,531
Pfizer Incorporated.................................... 1,400 175,612
Schering-Plough Corporation............................ 1,000 55,250
Wellpoint Health Networks Incorporated(a).............. 2,900 252,300
----------
2,134,606
----------
ELECTRIC UTILITIES -- 2.0%
Energy East Corporation................................ 1,000 56,500
GPU Incorporated....................................... 800 35,350
PP&L Resources Incorporated............................ 4,800 133,800
Public Service Enterprise Group........................ 2,200 88,000
----------
313,650
----------
ELECTRONICS -- 3.3%
Arrow Electronics Incorporated(a)...................... 200 5,337
Intel Corporation...................................... 4,300 509,819
----------
515,156
----------
FEDERAL AGENCIES -- 0.9%
Federal National Mortgage Association.................. 1,900 140,600
----------
FINANCIAL SERVICES -- 2.9%
Citigroup Incorporated................................. 2,400 118,800
Countrywide Credit Industries Incorporated............. 1,700 85,319
Lehman Brothers Holdings Incorporated.................. 5,500 242,343
----------
446,462
----------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-23
<PAGE> 121
AGA SERIES TRUST
STATE STREET GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------- ----------
<S> <C> <C>
COMMON STOCKS -- (CONTINUED)
FOOD & BEVERAGES -- 3.3%
Coca-Cola Company...................................... 3,000 $ 200,625
General Mills Incorporated............................. 1,100 85,525
IBP Incorporated....................................... 3,600 104,850
Interstate Bakeries Corporation........................ 2,100 55,519
Quaker Oats Company.................................... 1,100 65,450
----------
511,969
----------
GAS & PIPELINE UTILITIES -- 0.9%
Coastal Corporation.................................... 4,100 143,244
----------
HOTELS & RESTAURANTS -- 1.3%
Tricon Global Restaurants Incorporated(a).............. 4,100 205,513
----------
HOUSEHOLD PRODUCTS -- 2.1%
Premark International Incorporated..................... 3,900 135,038
Procter & Gamble Company............................... 2,100 191,756
----------
326,794
----------
INDUSTRIAL MACHINERY -- 0.1%
Ingersoll Rand Company................................. 100 4,694
Sundstrand Corporation................................. 100 5,187
----------
9,881
----------
INSURANCE -- 4.9%
Allstate Corporation................................... 5,600 216,300
American International Group Incorporated.............. 800 77,300
CIGNA Corporation...................................... 2,900 224,206
Everest Reinsurance Holdings Incorporated.............. 200 7,788
Loews Corporation...................................... 2,300 225,975
Old Republic International Corporation................. 150 3,375
Travelers Property Casualty Corporation................ 100 3,100
----------
758,044
----------
INTERNATIONAL OIL -- 2.4%
Exxon Corporation...................................... 3,900 285,187
Mobil Corporation...................................... 1,100 95,838
----------
381,025
----------
LEISURE TIME -- 0.8%
Anchor Gaming(a)....................................... 100 5,638
Carnival Corporation................................... 2,400 115,200
----------
120,838
----------
LIQUOR -- 0.9%
Anheuser Busch Companies Incorporated.................. 2,200 144,375
----------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-24
<PAGE> 122
AGA SERIES TRUST
STATE STREET GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------- ----------
<S> <C> <C>
COMMON STOCKS -- (CONTINUED)
MANUFACTURING -- 2.7%
General Electric Company............................... 4,100 $ 418,456
----------
PAPER -- 0.2%
Louisiana Pacific Corporation.......................... 2,000 36,625
----------
PETROLEUM SERVICES -- 0.9%
ENSCO International Incorporated....................... 100 1,069
Tidewater Incorporated................................. 5,800 134,487
----------
135,556
----------
PUBLISHING -- 1.0%
Gannett Company Incorporated........................... 100 6,450
Valassis Communications Incorporated(a)................ 2,800 144,550
----------
151,000
----------
RAILROADS & EQUIPMENT -- 0.0%
CSX Corporation........................................ 100 4,150
----------
RETAIL GROCERY -- 0.8%
Kroger Company(a)...................................... 2,000 121,000
----------
RETAIL TRADE -- 9.8%
Best Buy Company Incorporated(a)....................... 3,300 202,799
Dayton Hudson Corporation.............................. 3,600 195,300
Dillard's Incorporated................................. 5,000 141,875
Home Depot Incorporated................................ 600 36,713
KMart Corporation(a)................................... 13,300 203,656
May Department Stores Company.......................... 3,100 187,162
TJX Companies Incorporated............................. 5,900 171,100
Wal Mart Stores Incorporated........................... 4,700 382,756
----------
1,521,361
----------
SOFTWARE -- 5.9%
BMC Software Incorporated(a)........................... 100 4,456
Microsoft Corporation(a)............................... 3,200 443,800
Oracle Systems Corporation(a).......................... 7,900 340,688
Sterling Software Incorporated(a)...................... 4,800 129,900
----------
918,844
----------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-25
<PAGE> 123
AGA SERIES TRUST
STATE STREET GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------- ----------
<S> <C> <C>
COMMON STOCKS -- (CONTINUED)
TELECOMMUNICATIONS -- 10.8%
AT&T Corporation....................................... 5,800 $ 436,450
Bell Atlantic Corporation.............................. 4,920 260,760
BellSouth Corporation.................................. 4,100 204,487
Cisco Systems Incorporated(a).......................... 1,250 116,016
GTE Corporation........................................ 1,000 65,000
Lucent Technologies Incorporated....................... 1,200 132,000
MCI WorldCom Incorporated(a)........................... 1,300 93,275
SBC Communications Incorporated........................ 3,276 175,676
US West Incorporated................................... 2,900 187,412
----------
1,671,076
----------
TOBACCO -- 1.8%
Philip Morris Companies Incorporated................... 5,300 283,550
----------
TRANSPORTATION -- 0.4%
Burlington Northern Santa Fe Corporation............... 1,700 57,375
----------
TOTAL COMMON STOCKS -- (Cost $12,536,879)................... 15,176,688
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
---------
<S> <C> <C>
MUTUAL FUNDS -- 4.3%
Dreyfus Cash Management Plus Fund...................... $664,989 $ 664,989
Waddell & Reed Financial Incorporated.................. 5 118
Waddell & Reed Financial Incorporated(a)............... 24 558
-----------
TOTAL MUTUAL FUNDS -- (Cost $665,549)....................... 665,665
-----------
TOTAL INVESTMENTS -- (COST $13,202,428*) -- 102.2%.......... 15,842,353
-----------
OTHER ASSETS LESS LIABILITIES -- (2.2)%..................... (342,596)
-----------
NET ASSETS -- 100.0%........................................ $15,499,757
===========
</TABLE>
- ---------------
(a) Non-income producing security
* Aggregate cost for Federal tax purposes is $13,224,838. 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
$2,832,710 and $215,195, respectively, resulting in net unrealized
appreciation of $2,617,515.
The accompanying notes are an integral part of the financial statements
F-26
<PAGE> 124
AGA SERIES TRUST
STATE STREET GLOBAL ADVISORS MONEY MARKET PORTFOLIO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
SECURITY DESCRIPTION AMOUNT VALUE
- -------------------- ---------- ----------
<S> <C> <C>
DISCOUNT NOTES -- 47.3%
FEDERAL AGENCIES -- 47.3%
Federal Farm Credit Bank
4.83%, 02/26/1999**.................................. $ 69,000 $ 68,482
4.97%, 05/20/1999**.................................. 28,000 27,463
5.25%, 01/14/1999**.................................. 375,000 374,289
Federal Home Loan Bank
4.97%, 03/24/1999**.................................. 217,000 214,544
5.00%, 02/26/1999**.................................. 300,000 297,667
5.05%, 02/16/1999**.................................. 100,000 99,355
5.12%, 01/22/1999**.................................. 250,000 249,253
5.38%, 01/08/1999**.................................. 250,000 249,914
Federal Home Loan Mortgage
4.80%, 05/12/1999**.................................. 250,000 245,633
4.95%, 04/06/1999**.................................. 100,000 98,694
5.00%, 02/05/1999**.................................. 150,000 149,271
5.00%, 02/12/1999**.................................. 198,000 196,845
5.05%, 02/25/1999**.................................. 225,000 223,264
5.20%, 02/25/1999**.................................. 185,000 183,530
5.45%, 02/03/1999**.................................. 400,000 398,088
Federal National Mortgage Association
4.78%, 06/07/1999**.................................. 115,000 112,603
4.78%, 06/10/1999**.................................. 160,000 156,601
4.98%, 03/15/1999**.................................. 250,000 247,475
5.40%, 03/05/1999**.................................. 442,000 437,823
6.19%, 06/07/1999**.................................. 345,000 346,711
----------
TOTAL DISCOUNT NOTES -- (Cost $4,377,505)................... 4,377,505
----------
COMMERCIAL PAPER -- 21.1%
BROKERAGE -- 4.2%
Morgan Stanley Group Incorporated
5.42%, 01/20/1999.................................... 235,000 235,033
Salomon Smith Barney Holdings Incorporated
5.48%, 02/09/1999**.................................. 150,000 149,110
----------
384,143
----------
FINANCE -- 2.2%
General Electric Capital Corporation
5.03%, 01/22/1999**.................................. 200,000 199,413
----------
FINANCE & BANKING -- 1.1%
Branch Banking & Trust Company
6.20%, 09/15/1999.................................... 100,000 100,543
----------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-27
<PAGE> 125
AGA SERIES TRUST
STATE STREET GLOBAL ADVISORS MONEY MARKET PORTFOLIO -- (CONTINUED)
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
SECURITY DESCRIPTION AMOUNT VALUE
- -------------------- ---------- ----------
<S> <C> <C>
COMMERCIAL PAPER -- (CONTINUED)
FINANCE CAPTIVE -- 1.1%
General Motor Acceptance Corporation
6.00%, 01/11/1999.................................... $ 100,000 $ 100,010
----------
FINANCIAL SERVICES -- 7.5%
ABN AMRO North America
5.10%, 03/30/1999**.................................. 300,000 296,260
Ciesco LP
5.30%, 01/13/1999**.................................. 155,000 154,726
PACCAR Financial Corporation
5.05%, 03/18/1999**.................................. 250,000 247,335
----------
698,321
----------
Insurance -- 5.0%
Prudential Funding Corporation
5.07%, 01/26/1999**.................................. 200,000 199,296
USAA Capital Corporation
5.12%, 01/21/1999**.................................. 268,000 267,237
----------
466,533
----------
TOTAL COMMERCIAL PAPER -- (Cost $1,948,963)................. 1,948,963
----------
REPURCHASE AGREEMENTS -- 32.6%
Lehman Brothers Incorporated, 4.97% dated 12/31/1998 to
be repurchased at $1,518,838 on 01/04/1999,
collateralized by a $1,585,000 par value Federal
National Mortgage Association Discount Note, 0.00% due
06/16/1999, with a value of $1,548,360................ 1,518,000 1,518,000
Merrill Lynch & Company Incorporated, 5.20% dated
12/31/1998 to be repurchased at $1,500,867 on
01/04/1999, collateralized by a $1,500,000 par value
Federal Farm Mortgage Note, 5.53% due 12/03/2008, with
a value of $1,530,000................................. 1,500,000 1,500,000
----------
TOTAL REPURCHASE AGREEMENTS -- (Cost $3,018,000)............ 3,018,000
----------
TOTAL INVESTMENTS -- (COST $9,344,468*) -- 101.0%........... 9,344,468
----------
OTHER ASSETS LESS LIABILITIES -- (1.0)%..................... (90,782)
----------
NET ASSETS -- 100.0%........................................ $9,253,686
----------
</TABLE>
- ---------------
* Aggregate cost for Federal tax purposes is identical.
** The rate shown reflects the current yield at December 31, 1998.
The accompanying notes are an integral part of the financial statements
F-28
<PAGE> 126
AGA SERIES TRUST
VAN KAMPEN EMERGING GROWTH PORTFOLIO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ----------- -----------
<S> <C> <C>
COMMON STOCKS -- 95.6%
ADVERTISING -- 1.7%
Interpublic Group of Companies Incorporated............ 850 $ 67,787
Omnicom Group Incorporated............................. 1,450 84,100
Outdoor Systems Incorporated(a)........................ 1,700 51,000
-----------
202,887
-----------
AEROSPACE -- 0.7%
Gulfstream Aerospace Corporation(a).................... 1,550 82,538
-----------
AIR TRAVEL -- 0.6%
Comair Holdings Incorporated........................... 750 25,312
SouthWest Airlines Company............................. 1,750 39,266
-----------
64,578
-----------
APPAREL & TEXTILES -- 0.2%
Shaw Industries Incorporated........................... 1,000 24,250
-----------
AUTO PARTS -- 1.1%
Danaher Corporation.................................... 1,100 59,744
Federal-Mogul Corporation.............................. 850 50,575
Gentex Corporation(a).................................. 650 13,000
-----------
123,319
-----------
BANKS -- 1.8%
AmSouth Bancorporation................................. 475 21,672
Fifth Third Bancorp.................................... 475 33,873
Firstar Corporation.................................... 700 65,275
National Commerce Bancorporation....................... 250 4,703
Northern Trust Corporation............................. 650 56,753
Zions Bancorp.......................................... 500 31,188
-----------
213,464
-----------
BROADCASTING -- 5.1%
Cablevision Systems Corporation(a)..................... 1,400 70,263
Chancellor Media Corporation(a)........................ 3,850 184,319
Clear Channel Communications Incorporated(a)........... 2,400 130,800
Echostar Communications Corporation(a)................. 750 36,281
Jacor Communications Incorporated(a)................... 1,500 96,562
Tele-Communications Liberty Media Group(a)............. 1,700 78,306
-----------
596,531
-----------
BUILDING & RELATED -- 1.0%
Kaufman & Broad Home Corporation....................... 400 11,500
Lowe's Companies Incorporated.......................... 1,950 99,816
-----------
111,316
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-29
<PAGE> 127
AGA SERIES TRUST
VAN KAMPEN EMERGING GROWTH PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ----------- -----------
<S> <C> <C>
COMMON STOCKS -- (CONTINUED)
BUSINESS SERVICES -- 6.1%
Affiliated Computer Services Incorporated(a)........... 450 $ 20,250
American Management Systems Incorporated(a)............ 850 34,000
Ciber Incorporated(a).................................. 1,100 30,731
Concord EFS Incorporated(a)............................ 1,550 65,681
Consolidated Graphics Incorporated(a).................. 475 32,092
CSG Systems International Incorporated(a).............. 1,100 86,900
Education Management Corporation(a).................... 500 11,813
Fiserv Incorporated(a)................................. 650 33,434
IMRglobal Corporation(a)............................... 800 23,550
Keane Incorporated(a).................................. 1,100 43,931
Lason Incorporated(a).................................. 300 17,456
Mastech Corporation(a)................................. 750 21,469
MedQuist Incorporated(a)............................... 500 19,750
Metzler Group Incorporated(a).......................... 750 36,516
Network Solutions Incorporated(a)...................... 300 39,263
Paychex Incorporated................................... 750 38,578
Robert Half International Incorporated(a).............. 750 33,516
SEI Investments Company................................ 250 24,844
Snyder Communications Incorporated(a).................. 500 16,875
SunGuard Data Systems Incorporated(a).................. 1,500 59,531
Sykes Enterprises Incorporated(a)...................... 650 19,825
-----------
710,005
-----------
CHEMICALS -- 0.6%
Waters Corporation(a).................................. 800 69,800
-----------
COMPUTERS & BUSINESS EQUIPMENT -- 13.0%
Apple Computer Incorporated(a)......................... 800 32,750
CDW Computer Centers Incorporated(a)................... 650 62,359
Concord Communications Incorporated(a)................. 400 22,700
Dell Computer Corporation(a)........................... 6,696 490,063
EMC Corporation(a)..................................... 5,000 425,000
Insight Enterprises Incorporated(a).................... 550 27,981
International Network Services(a)...................... 950 63,175
Lexmark International Group Incorporated(a)............ 1,600 160,800
Network Appliance Incorporated(a)...................... 2,800 126,000
Symbol Technologies Incorporated....................... 1,000 63,938
Verisign Incorporated(a)............................... 300 17,738
Xircom Incorporated(a)................................. 750 25,500
-----------
1,518,004
-----------
DRUGS & HEALTH CARE -- 11.3%
Allegiance Corporation................................. 2,600 121,225
</TABLE>
The accompanying notes are an integral part of the financial statements
F-30
<PAGE> 128
AGA SERIES TRUST
VAN KAMPEN EMERGING GROWTH PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ----------- -----------
<S> <C> <C>
COMMON STOCKS -- (CONTINUED)
Allergan Incorporated.................................. 750 $ 48,563
Amgen Incorporated(a).................................. 350 36,597
Biogen Incorporated(a)................................. 2,800 232,400
Biomatrix Incorporated(a).............................. 450 26,213
Biomet Incorporated.................................... 1,000 40,250
Cardinal Health Incorporated........................... 450 34,144
Express Scripts Incorporated(a)........................ 500 33,563
Genzyme Corporation.................................... 1,200 59,700
Guidant Corporation.................................... 1,100 121,275
Henry Schein Incorporated(a)........................... 500 22,375
Immunex Corporation(a)................................. 600 75,487
Medicis Pharmaceutical Corporation(a).................. 400 23,850
MedImmune Incorporated(a).............................. 350 34,803
Medtronic Incorporated................................. 700 51,975
MiniMed Incorporated(a)................................ 550 57,612
Omnicare Incorporated.................................. 1,450 50,387
Pathogensis Corporation(a)............................. 300 17,400
Patterson Dental Company(a)............................ 400 17,400
PSS World Medical Incorporated(a)...................... 300 6,900
Quintiles Transnational Corporation(a)................. 1,300 69,387
VISX Incorporated(a)................................... 100 8,744
Watson Pharmaceuticals Incorporated(a)................. 1,600 100,600
Wellpoint Health Networks Incorporated(a).............. 300 26,100
-----------
1,316,950
-----------
ELECTRICAL EQUIPMENT -- 0.8%
American Power Conversion Corporation(a)............... 2,000 96,875
-----------
ELECTRONICS -- 6.0%
Advanced Micro Devices Incorporated(a)................. 750 21,703
Altera Corporation(a).................................. 1,150 70,006
Applied Micro Circuits Corporation(a).................. 400 13,587
Cree Research Incorporated(a).......................... 300 14,362
Eletronics For Imaging Incorporated(a)................. 650 26,000
Flextronics International Limited(a)................... 750 64,219
Gemstar Group Limited(a)............................... 1,600 91,600
Intel Corporation...................................... 650 77,066
Jabil Circuit Incorporated(a).......................... 1,150 85,819
QLogic Corporation(a).................................. 250 32,719
Sanmina Corporation(a)................................. 300 18,750
Solectron Corporation(a)............................... 700 65,056
Texas Instruments Incorporated......................... 350 29,947
Vitesse Semiconductor Corporation(a)................... 2,000 91,250
-----------
702,084
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-31
<PAGE> 129
AGA SERIES TRUST
VAN KAMPEN EMERGING GROWTH PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ----------- -----------
<S> <C> <C>
COMMON STOCKS -- (CONTINUED)
FINANCIAL SERVICES -- 3.6%
Capital One Financial Corporation...................... 1,000 $ 115,000
Finova Group Incorporated.............................. 600 32,363
Metris Companies Incorporated.......................... 100 5,031
Old Kent Financial Corporation......................... 800 37,200
Providian Financial Corporation........................ 3,100 232,500
-----------
422,094
-----------
FOOD & BEVERAGES -- 0.8%
Adolph Coors Company................................... 500 28,218
Earthgrains Company.................................... 900 27,844
Smithfield Foods Incorporated(a)....................... 400 13,550
U.S. Foodservice(a).................................... 600 29,400
-----------
99,012
-----------
HOMEBUILDERS -- 0.1%
Pulte Corporation...................................... 600 16,688
-----------
HOTELS & RESTAURANTS -- 0.6%
Brinker International Incorporated(a).................. 1,100 31,763
Tricon Global Restaurants Incorporated(a).............. 650 32,581
-----------
64,344
-----------
HOUSEHOLD APPLIANCES & HOME FURNISHINGS -- 0.2%
WestPoint Stevens Incorporated(a)...................... 600 18,938
-----------
INDUSTRIAL MACHINERY -- 1.2%
Tyco International Limited............................. 1,800 135,787
-----------
INSURANCE -- 0.5%
Fidelity National Financial Incorporated............... 220 6,710
Progressive Corporation................................ 150 25,406
Protective Life Corporation............................ 600 23,888
-----------
56,004
-----------
LEISURE TIME -- 0.1%
Hollywood Entertainment Corporation(a)................. 500 13,625
-----------
PETROLEUM SERVICES -- 0.2%
Marine Drilling Companies Incorporated(a).............. 1,250 9,609
National-Oilwell Incorporated(a)....................... 600 6,713
Veritas DGC Incorporated(a)............................ 600 7,800
-----------
24,122
-----------
POLLUTION CONTROL -- 0.6%
Allied Waste Industries Incorporated(a)................ 2,883 68,111
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-32
<PAGE> 130
AGA SERIES TRUST
VAN KAMPEN EMERGING GROWTH PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ----------- -----------
<S> <C> <C>
COMMON STOCKS -- (CONTINUED)
PUBLISHING -- 0.7%
Meredith Corporation................................... 1,050 $ 39,769
Valassis Communications Incorporated(a)................ 850 43,881
-----------
83,650
-----------
RETAIL GROCERY -- 0.9%
Safeway Incorporated(a)................................ 1,800 109,687
-----------
RETAIL TRADE -- 11.1%
Abercrombie & Fitch Company(a)......................... 1,600 113,200
American Eagle Outfitters Incorporated(a).............. 200 13,325
AnnTaylor Stores Corporation(a)........................ 1,100 43,381
Bed Bath & Beyond Incorporated(a)...................... 1,250 42,656
Best Buy Company Incorporated(a)....................... 3,800 233,225
Costco Companies Incorporated(a)....................... 500 36,094
CVS Corporation........................................ 1,300 71,500
Dollar Tree Stores Incorporated(a)..................... 1,000 43,687
Family Dollar Stores Incorporated...................... 2,900 63,800
Gap Incorporated....................................... 1,700 95,625
Home Depot Incorporated................................ 2,300 140,731
Linens 'N Things Incorporated(a)....................... 1,800 71,325
Micro Warehouse Incorporated(a)........................ 300 10,144
Staples Incorporated(a)................................ 3,250 141,984
TJX Companies Incorporated............................. 3,800 110,200
Trans World Entertainment Corporation(a)............... 650 12,391
Williams-Sonoma Incorporated(a)........................ 1,250 50,391
-----------
1,293,659
-----------
SAVINGS & LOAN -- 0.1%
Dime Bancorp Incorporated.............................. 625 16,523
-----------
SOFTWARE -- 20.6%
America Online Incorporated............................ 4,850 776,000
BMC Software Incorporated(a)........................... 2,300 102,494
Citrix Systems Incorporated(a)......................... 1,600 155,300
Compuware Corporation(a)............................... 5,500 429,687
Comverse Technology Incorporated(a).................... 850 60,350
EarthLink Network Incorporated(a)...................... 750 42,750
Legato Systems Incorporated(a)......................... 2,150 141,766
Macromedia Incorporated(a)............................. 1,500 50,531
Mercury Interactive Corporation(a)..................... 700 44,275
Microsoft Corporation(a)............................... 400 55,475
MindSpring Enterprises Incorporated(a)................. 800 48,850
Network Associates Incorporated(a)..................... 950 62,937
New Era Of Networks Incorporated(a).................... 600 26,400
Peregrine Systems Incorporated(a)...................... 200 9,275
</TABLE>
The accompanying notes are an integral part of the financial statements
F-33
<PAGE> 131
AGA SERIES TRUST
VAN KAMPEN EMERGING GROWTH PORTFOLIO
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ----------- -----------
<S> <C> <C>
COMMON STOCKS -- (CONTINUED)
Rational Software Corporation(a)....................... 1,600 $ 42,400
Sterling Software Incorporated(a)...................... 1,000 27,063
Veritas Software Company(a)............................ 1,550 92,903
Wind River Systems(a).................................. 400 18,800
Yahoo! Incorporated(a)................................. 900 213,244
-----------
2,400,500
-----------
TELECOMMUNICATIONS -- 3.7%
Cisco Systems Incorporated(a).......................... 1,450 134,578
General Instrument Corporation(a)...................... 1,200 40,725
GeoTel Communications Corporation(a)................... 600 22,350
Gilat Satellite Networks Limited(a).................... 400 22,050
Global Crossing Limited(a)............................. 500 22,563
Metromedia Fiber Network Incorporated(a)............... 2,500 83,750
Nokia Oyj.............................................. 700 84,306
Tekelec(a)............................................. 1,150 19,047
-----------
429,369
-----------
TELEPHONE -- 0.6%
Century Telephone Enterprises Incorporated............. 1,000 67,500
-----------
TOTAL COMMON STOCKS -- (Cost $7,284,563).................... 11,152,214
-----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C> <C>
REPURCHASE AGREEMENT -- 9.2%
(Cost $1,077,000)
State Street Bank and Trust Company, 4.85% dated
12/31/1998, to be repurchased at $1,077,580 on
01/04/1999, collateralized by a $1,050,000 par value
U.S. Treasury Note, 5.75% due 04/30/2003, with a value
of $1,103,158.......................................... $ 1,077,000 $ 1,077,000
-----------
TOTAL INVESTMENTS -- (COST $8,361,563*) -- 104.8%........... 12,229,214
-----------
OTHER ASSETS LESS LIABILITIES -- (4.8)%..................... (555,182)
-----------
NET ASSETS -- 100.0%........................................ $11,674,032
===========
</TABLE>
- ---------------
(a) Non-income producing security
* Aggregate cost for Federal tax purposes is $8,371,985. 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
$3,933,795 and $76,566, respectively, resulting in net unrealized
appreciation of $3,857,229.
The accompanying notes are an integral part of the financial statements
F-34
<PAGE> 132
AGA SERIES TRUST
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
CREDIT SALOMON
SUISSE CREDIT BROTHERS
GROWTH SUISSE U.S.
AND INTERNATIONAL GOVERNMENT
INCOME EQUITY ELITEVALUE SECURITIES
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at value....... $14,526,595 $5,487,080 $20,615,672 $ 6,950,099
Repurchase agreements, at value........... 4,784,000 529,000 -- 4,375,000
----------- ---------- ----------- -----------
Total Investments(a) (Note 1)............. 19,310,595 6,016,080 20,615,672 11,325,099
Cash, including foreign currency, at
value.................................. 3,467 46,222 2,089 1,086
Receivable for securities sold............ 2,861,735 -- 41,917 --
Interest receivable....................... 46,371 57 -- 40,163
Dividends receivable...................... 7,127 13,426 14,949 --
Receivable for fund shares sold........... 39,078 15,430 45,078 16,855
Receivable due from adviser (Note 2)...... 11,067 12,470 7,656 9,095
Prepaid insurance......................... 3,008 3,008 3,008 3,008
----------- ---------- ----------- -----------
TOTAL ASSETS...................... 22,282,448 6,106,693 20,730,369 11,395,306
LIABILITIES
Payable for securities purchased.......... 5,454,613 -- -- 2,651,790
Payable for fund shares repurchased....... 27,898 3,761 31,989 5,982
Payable for forward contracts (Note 5).... -- 31,761 -- --
Payable for futures variation margin...... 78 -- -- --
Accounts payable and accrued expenses..... 86,733 75,213 78,450 58,341
----------- ---------- ----------- -----------
TOTAL LIABILITIES................. 5,569,322 110,735 110,439 2,716,113
----------- ---------- ----------- -----------
NET ASSETS........................ $16,713,126 $5,995,958 $20,619,930 $ 8,679,193
=========== ========== =========== ===========
NET ASSETS CONSIST OF:
Par value (Note 4)........................ $ 12,028 $ 5,863 $ 13,792 $ 8,481
Paid-in capital (Note 4).................. 15,018,473 6,167,234 19,396,357 8,608,549
Undistributed (distributions in excess of)
net investment income.................. (632) 24,298 137 449
Accumulated net realized gain (loss) on
investments, futures, and foreign
currency translations.................. 71,501 (349,546) (14,715) 3,032
Net unrealized appreciation (depreciation)
of:
Investments............................ 1,614,853 179,278 1,224,359 58,682
Futures contracts...................... (3,097) -- -- --
Foreign currency....................... -- (31,169) -- --
----------- ---------- ----------- -----------
NET ASSETS........................ $16,713,126 $5,995,958 $20,619,930 $ 8,679,193
=========== ========== =========== ===========
Shares outstanding at end of period....... 1,202,821 586,308 1,379,156 848,130
Net asset value per share................. $ 13.89 $ 10.23 $ 14.95 $ 10.23
(a) Investments in securities and
repurchase agreements, at cost........ $17,695,742 $5,836,802 $19,391,313 $11,266,417
</TABLE>
The accompanying notes are an integral part of the financial statements
F-35
<PAGE> 133
AGA SERIES TRUST
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
STATE STATE
STREET STREET
GLOBAL GLOBAL VAN
ADVISORS ADVISORS KAMPEN
GROWTH MONEY EMERGING
EQUITY MARKET GROWTH
----------- ---------- -----------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value.................. $15,842,353 $6,326,468 $11,152,214
Repurchase agreements, at value...................... -- 3,018,000 1,077,000
----------- ---------- -----------
Total Investments(a) (Note 1)........................ 15,842,353 9,344,468 12,229,214
Cash, including foreign currency, at value........... 91,987 890 395
Receivable for securities sold....................... 218,654 -- 35,119
Interest receivable.................................. -- 8,477 145
Dividends receivable................................. 13,026 -- 1,455
Receivable for fund shares sold...................... 33,114 87,345 22,728
Receivable due from adviser (Note 2)................. 10,859 8,352 10,980
Prepaid insurance.................................... 3,008 3,008 3,008
----------- ---------- -----------
TOTAL ASSETS................................. 16,213,001 9,452,540 12,303,044
LIABILITIES
Payable for securities purchased..................... 619,478 -- 539,507
Payable for fund shares repurchased.................. 13,006 142,597 11,906
Accounts payable and accrued expenses................ 80,760 56,257 77,599
----------- ---------- -----------
TOTAL LIABILITIES............................ 713,244 198,854 629,012
----------- ---------- -----------
NET ASSETS................................... $15,499,757 $9,253,686 $11,674,032
=========== ========== ===========
NET ASSETS CONSIST OF:
Par value (Note 4)................................... $ 9,354 $ 92,537 $ 6,127
Paid-in capital (Note 4)............................. 12,664,889 9,161,149 8,149,844
Undistributed net investment income.................. 4 -- --
Accumulated net realized gain (loss) on investments
and foreign currency translations................. 185,585 -- (349,590)
Net unrealized appreciation of:
Investments....................................... 2,639,925 -- 3,867,651
----------- ---------- -----------
NET ASSETS................................... $15,499,757 $9,253,686 $11,674,032
=========== ========== ===========
Shares outstanding at end of period.................. 935,256 9,253,686 612,682
Net asset value per share............................ $ 16.57 $ 1.00 $ 19.05
(a) Investments in securities and repurchase
agreements, at cost.............................. $13,202,428 $9,344,468 $ 8,361,563
</TABLE>
The accompanying notes are an integral part of the financial statements
F-36
<PAGE> 134
AGA SERIES TRUST
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
CREDIT SALOMON
SUISSE CREDIT BROTHERS
GROWTH SUISSE U.S.
AND INTERNATIONAL GOVERNMENT
INCOME EQUITY ELITEVALUE SECURITIES
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest income............................. $ 282,660 $ 9,975 $ 151,143 $ 325,319
Dividend income**........................... 56,741 65,308 198,089 --
---------- --------- --------- ---------
TOTAL INVESTMENT INCOME............. 339,401 75,283 349,232 325,319
EXPENSES
Investment advisory fees (Note 2)........... 27,886 12,782 36,103 13,661
Investment sub-advisory fees (Note 2)....... 55,771 33,237 57,765 12,295
Sub-administration fees..................... 53,600 53,600 53,600 53,600
Audit fees.................................. 12,600 13,150 13,675 10,763
Custodian fees and expenses................. 61,720 67,358 28,783 30,818
Trustee's fees (Note 2)..................... 6,351 6,351 6,351 6,351
Transfer agent fees......................... 4,181 4,147 4,642 4,191
Insurance expense........................... 4,014 4,014 4,014 4,014
Registration and filing fees................ 3 3 3 3
Miscellaneous expenses...................... 180 180 180 234
---------- --------- --------- ---------
Total operating expenses before
waivers and reimbursements........ 226,306 194,822 205,116 135,930
Fees waived and expenses reimbursed (Note
2)....................................... (136,257) (146,508) (103,149) (107,001)
---------- --------- --------- ---------
NET EXPENSES........................ 90,049 48,314 101,967 28,929
---------- --------- --------- ---------
NET INVESTMENT INCOME............... 249,352 26,969 247,265 296,390
---------- --------- --------- ---------
NET REALIZED AND UNREALIZED GAIN (LOSS) FROM
INVESTMENTS AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments and futures contracts........ 422,709 (335,423) 198,448 65,391
Foreign currency transactions............ -- (14,341) -- --
Net change in unrealized appreciation
(depreciation) of:
Investments.............................. 868,206 319,494 293,534 21,558
Futures contracts........................ (3,097) -- -- --
Foreign currency......................... -- (41,527) -- --
---------- --------- --------- ---------
NET REALIZED AND UNREALIZED GAIN
(LOSS)............................ 1,287,818 (71,797) 491,982 86,949
---------- --------- --------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................... $1,537,170 $ (44,828) $ 739,247 $ 383,339
========== ========= ========= =========
** Net of foreign withholding taxes of...... $ 396 $ 12,429 $ 290 $ --
========== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-37
<PAGE> 135
AGA SERIES TRUST
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
STATE STATE
STREET STREET
GLOBAL GLOBAL VAN
ADVISORS ADVISORS KAMPEN
GROWTH MONEY EMERGING
EQUITY MARKET GROWTH
---------- --------- ----------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest income........................................ $ 2,454 $ 301,805 $ 29,230
Dividend income........................................ 159,043 -- 13,910
---------- --------- ----------
TOTAL INVESTMENT INCOME........................ 161,497 301,805 43,140
EXPENSES
Investment advisory fees (Note 2)...................... 26,185 13,464 18,923
Investment sub-advisory fees (Note 2).................. 37,706 10,779 37,847
Sub-administration fees................................ 53,600 53,600 53,600
Audit fees............................................. 13,675 10,394 12,100
Custodian fees and expenses............................ 61,172 30,183 63,559
Trustee's fees (Note 2)................................ 6,351 6,351 6,351
Transfer agent fees.................................... 4,132 4,143 4,099
Insurance expense...................................... 4,014 4,014 4,014
Registration and filing fee............................ 3 3 3
Miscellaneous expenses................................. 122 180 180
---------- --------- ----------
Total operating expenses before waivers and
reimbursements............................... 206,960 133,111 200,676
Fees waived and expenses reimbursed (Note 2)........... (137,450) (106,873) (140,046)
---------- --------- ----------
NET EXPENSES................................... 69,510 26,238 60,630
---------- --------- ----------
NET INVESTMENT INCOME (LOSS)................... 91,987 275,567 (17,490)
---------- --------- ----------
NET REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS
AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments......................................... 557,763 -- (187,014)
Net change in unrealized appreciation of:
Investments......................................... 1,554,162 -- 3,018,535
---------- --------- ----------
NET REALIZED AND UNREALIZED GAIN............... 2,111,925 -- 2,831,521
---------- --------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..... $2,203,912 $ 275,567 $2,814,031
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-38
<PAGE> 136
AGA SERIES TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
CREDIT SUISSE CREDIT SUISSE
GROWTH AND INCOME INTERNATIONAL EQUITY ELITEVALUE
--------------------------- --------------------------- ---------------------------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997 1998 1997
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
From operations:
Net investment income............... $ 249,352 $ 140,680 $ 26,969 $ 25,979 $ 247,265 $ 86,775
Net realized gain (loss) on:
Investments and futures
contracts....................... 422,709 295,529 (335,423) 258,493 198,448 201,702
Foreign currency transactions..... -- -- (14,341) (7,339) -- --
Net change in unrealized
appreciation (depreciation) of:
Investments....................... 868,206 522,340 319,494 (239,805) 293,534 621,441
Future contracts.................. (3,097) -- -- -- -- --
Foreign currency.................. -- -- (41,527) (11,172) -- --
----------- ---------- ---------- ---------- ----------- -----------
Net increase (decrease) in net
assets resulting from
operations.................... 1,537,170 958,549 (44,828) 26,156 739,247 909,918
Distributions to shareholders (Note
1):
From net investment income........ (251,869) (139,024) (15,131) (44,337) (247,142) (86,761)
In excess of net investment
income.......................... -- -- (1,293) (81,524) -- --
From net realized gains........... (392,447) (237,747) -- (174,639) (201,075) (213,790)
Fund share transactions (Note
4).............................. 8,432,304 3,661,091 1,746,993 1,857,579 10,858,279 6,554,216
----------- ---------- ---------- ---------- ----------- -----------
Total increase in net assets.... 9,325,158 4,242,869 1,685,741 1,583,235 11,149,309 7,163,583
NET ASSETS:
Beginning of period................... 7,387,968 3,145,099 4,310,217 2,726,982 9,470,621 2,307,038
----------- ---------- ---------- ---------- ----------- -----------
End of period(a)...................... $16,713,126 $7,387,968 $5,995,958 $4,310,217 $20,619,930 $ 9,470,621
=========== ========== ========== ========== =========== ===========
(a) Including undistributed
(distributions in excess) net
investment income................. $ (632) $ 2,697 $ 24,298 $ (11,838) $ 137 $ 14
=========== ========== ========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-39
<PAGE> 137
AGA SERIES TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
SALOMON BROTHERS U.S. STATE STREET GLOBAL STATE STREET GLOBAL
GOVERNMENT SECURITIES ADVISORS GROWTH EQUITY ADVISORS MONEY MARKET
--------------------------- --------------------------- ---------------------------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997 1998 1997
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
From operations:
Net investment income............... $ 296,390 $ 159,857 $ 91,987 $ 69,786 $ 275,567 $ 159,789
Net realized gain on:
Investments....................... 65,391 23,149 557,763 622,295 -- --
Net change in unrealized
appreciation of investments....... 21,558 38,894 1,554,162 676,633 -- --
---------- ---------- ----------- ---------- ---------- ----------
Net increase in net assets
resulting from operations..... 383,339 221,900 2,203,912 1,368,714 275,567 159,789
Distributions to shareholders (Note
1):
From net investment income........ (309,413) (160,062) (91,978) (69,791) (275,567) (159,789)
From net realized gains........... (32,231) -- (357,781) (636,692) -- --
Fund share transactions (Note
4).............................. 4,651,600 1,577,343 6,418,498 3,244,409 4,153,422 3,809,240
---------- ---------- ----------- ---------- ---------- ----------
Total increase in net assets.... 4,693,295 1,639,181 8,172,651 3,906,640 4,153,422 3,809,240
NET ASSETS:
Beginning of period................... 3,985,898 2,346,717 7,327,106 3,420,466 5,100,264 1,291,024
---------- ---------- ----------- ---------- ---------- ----------
End of period(a)...................... $8,679,193 $3,985,898 $15,499,757 $7,327,106 $9,253,686 $5,100,264
========== ========== =========== ========== ========== ==========
(a) Including undistributed net
investment income................. $ 449 $ 139 $ 4 $ -- $ -- $ --
========== ========== =========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-40
<PAGE> 138
AGA SERIES TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
VAN KAMPEN
EMERGING GROWTH
---------------------------
YEAR YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
From operations:
Net investment income (loss)............................ $ (17,490) $ 8,180
Net realized loss on:
Investments........................................... (187,014) (102,237)
Net change in unrealized appreciation of Investments.... 3,018,535 704,593
----------- -----------
Net increase in net assets resulting from
operations........................................... 2,814,031 610,536
Distributions to shareholders (Note 1):
From net investment income............................ (481) (7,882)
Fund share transactions (Note 4)...................... 3,361,948 3,014,043
----------- -----------
Total increase in net assets........................ 6,175,497 3,616,697
NET ASSETS:
Beginning of period....................................... 5,498,534 1,881,837
----------- -----------
End of period(a).......................................... $11,674,032 $ 5,498,534
=========== ===========
(a) Including undistributed net investment income......... $ -- $ 298
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-41
<PAGE> 139
AGA SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
CREDIT SUISSE GROWTH AND INCOME
---------------------------------------------------------
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995*
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE
Net asset value, beginning of period.......... $ 12.72 $11.04 $10.46 $10.00
------- ------ ------ ------
INVESTMENT OPERATIONS
Net investment income(1)...................... 0.27 0.33 0.47 0.14
Net realized and unrealized gain.............. 1.52 2.11 0.96 0.51
------- ------ ------ ------
Total from investment operations.............. 1.79 2.44 1.43 0.65
------- ------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income......................... (0.28) (0.33) (0.47) (0.14)
Net realized gains............................ (0.34) (0.43) (0.38) --
In excess of net realized gains............... -- -- -- (0.05)
------- ------ ------ ------
Total distributions to shareholders........... (0.62) (0.76) (0.85) (0.19)
------- ------ ------ ------
Net asset value, end of period................ $ 13.89 $12.72 $11.04 $10.46
======= ====== ====== ======
TOTAL RETURN.................................. 14.16% 22.33% 13.82% 6.57%(2)
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets(3)............. 0.81% 0.62% 0.49% 0.12%(4)
Net investment income to average net assets... 3.04% 2.87% 4.65% 6.99%(4)
Portfolio turnover rate....................... 151% 191% 217% 75%
Net assets, end of period (000's)............. $16,713 $7,388 $3,145 $2,136
</TABLE>
- ---------------
* The Credit Suisse Growth and Income Portfolio commenced 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 American
General Annuity 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 American General Annuity Insurance
Company had not reimbursed expenses for the periods ended December 31, 1998,
December 31, 1997, December 31, 1996, and December 31, 1995, net investment
income (loss) per share would have been $0.16, $0.10, $0.00 and $(0.06),
respectively, for the Credit Suisse Growth and Income Portfolio.
(2) Total return represents aggregate total return for the period indicated and
is not annualized.
(3) If the Investment Adviser and the Sub-administrator had not waived fees and
American General Annuity Insurance Company had not reimbursed expenses for
the periods ended December 31, 1998, December 31, 1997, December 31, 1996,
and December 31, 1995, the ratio of operating expenses to average net assets
would have been 2.01%, 3.26%, 5.15% and 9.95%, respectively, for the Credit
Suisse Growth and Income Portfolio.
(4) Annualized.
The accompanying notes are an integral part of the financial statements
F-42
<PAGE> 140
AGA SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
CREDIT SUISSE INTERNATIONAL EQUITY
---------------------------------------------------------
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995*
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE
Net asset value, beginning of period.......... $10.35 $10.67 $10.33 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net investment income(1)...................... 0.06 0.08 0.15 0.06
Net realized and unrealized gain (loss)....... (0.15) 0.37 1.56 0.33
------ ------ ------ ------
Total from investment operations.............. (0.09) 0.45 1.71 0.39
------ ------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income......................... (0.03) (0.12) (0.15) (0.06)
In excess of net investment income............ -- (0.20) -- --
Net realized gains............................ -- (0.45) (0.24) --
In excess of net realized gains............... -- -- (0.98) --
------ ------ ------ ------
Total distributions to shareholders........... (0.03) (0.77) (1.37) (0.06)
------ ------ ------ ------
Net asset value, end of period................ $10.23 $10.35 $10.67 $10.33
====== ====== ====== ======
TOTAL RETURN.................................. (0.86)% 4.30% 16.50% 3.93%(2)
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets(3)............. 0.94% 0.77% 0.60% 0.12%(4)
Net investment income to average net assets... 0.53% 0.71% 1.09% 2.89%(4)
Portfolio turnover rate....................... 61% 6% 79% 2%
Net assets, end of period (000's)............. $5,996 $4,310 $2,727 $2,083
</TABLE>
- ---------------
* The Credit Suisse International Equity Portfolio commenced 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 American
General Annuity 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 American General Annuity Insurance
Company had not reimbursed expenses for the periods ended December 31, 1998,
December 31, 1997, December 31, 1996, and December 31, 1995, net investment
loss per share would have been $(0.19), $(0.29), $(1.25) and $(0.18),
respectively, for the Credit Suisse International Equity Portfolio.
(2) Total return represents aggregate total return for the period indicated and
is not annualized.
(3) If the Investment Adviser and the Sub-administrator had not waived fees and
American General Annuity Insurance Company had not reimbursed expenses for
the periods ended December 31, 1998, December 31, 1997, December 31, 1996,
and December 31, 1995, the ratio of operating expenses to average net assets
would have been 3.78%, 5.06%, 6.41% and 11.83%, respectively, for the Credit
Suisse International Equity Portfolio.
(4) Annualized.
The accompanying notes are an integral part of the financial statements
F-43
<PAGE> 141
AGA SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
ELITEVALUE
------------------------------------------
YEAR YEAR PERIOD
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996*
------------ ------------ ------------
<S> <C> <C> <C>
NET ASSET VALUE
Net asset value, beginning of period..................... $ 14.38 $12.32 $10.00
------- ------ ------
INVESTMENT OPERATIONS
Net investment income(1)................................. 0.25 0.19 0.18
Net realized and unrealized gain......................... 0.72 2.39 2.48
------- ------ ------
Total from investment operations......................... 0.97 2.58 2.66
------- ------ ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment loss...................................... (0.25) (0.19) (0.18)
Net realized gains....................................... (0.15) (0.33) (0.16)
------- ------ ------
Total distributions to shareholders...................... (0.40) (0.52) (0.34)
------- ------ ------
Net asset value, end of period........................... $ 14.95 $14.38 $12.32
======= ====== ======
TOTAL RETURN............................................. 6.72% 21.08% 26.70%(2)
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets(3)........................ 0.71% 0.52% 0.36%(4)
Net investment income to average net assets.............. 2.42% 1.58% 1.74%(4)
Portfolio turnover rate.................................. 39% 29% 21%
Net assets, end of period (000's)........................ $20,620 $9,471 $2,307
</TABLE>
- ---------------
* The EliteValue Portfolio commenced operations on January 2, 1996.
(1) Net investment income is after waiver of fees and reimbursement of certain
expenses by the Investment Adviser, the Sub-administrator and American
General Annuity 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 American General Annuity Insurance
Company had not reimbursed expenses for the periods ended December 31, 1998,
December 31, 1997 and December 31, 1996, net investment income (loss) per
share would have been $0.17, $0.00 and $(0.54), respectively, for the
EliteValue Portfolio.
(2) Total return represents aggregate total return for the period indicated and
is not annualized.
(3) If the Investment Adviser and the Sub-administrator had not waived fees and
American General Annuity Insurance Company had not reimbursed expenses for
the periods ended December 31, 1998, December 31, 1997 and December 31,
1996, the ratio of operating expenses to average net assets would have been
1.41%, 2.76% and 7.45%, respectively, for the EliteValue Portfolio.
(4) Annualized.
The accompanying notes are an integral part of the financial statements
F-44
<PAGE> 142
AGA SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
SALOMON BROTHERS U.S. GOVERNMENT SECURITIES
---------------------------------------------
YEAR YEAR PERIOD
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996*
------------- ------------- -------------
<S> <C> <C> <C>
NET ASSET VALUE
Net asset value, beginning of period..................... $10.07 $ 9.79 $10.00
------ ------ ------
INVESTMENT OPERATIONS
Net investment income(1)................................. 0.52 0.57 0.53
Net realized and unrealized gain (loss).................. 0.22 0.28 (0.21)
------ ------ ------
Total from investment operations......................... 0.74 0.85 0.32
------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................... (0.54) (0.57) (0.53)
Net realized gains....................................... (0.04) -- --
------ ------ ------
Total distributions to shareholders...................... (0.58) (0.57) (0.53)
------ ------ ------
Net asset value, end of period........................... $10.23 $10.07 $ 9.79
====== ====== ======
TOTAL RETURN............................................. 7.49% 8.89% 3.40%(2)
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets(3)........................ 0.53% 0.35% 0.22%(4)
Net investment income to average net assets.............. 5.95% 6.25% 5.91%(4)
Portfolio turnover rate.................................. 24% 615% 297%
Net assets, end of period (000's)........................ $8,679 $3,986 $2,347
</TABLE>
* The Salomon Brothers U.S. Government Securities Portfolio commenced
operations on February 6, 1996.
(1) Net investment income is after waiver of fees and reimbursement of certain
expenses by the Investment Adviser, the Sub-administrator and American
General Annuity 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 American General Annuity Insurance
Company had not reimbursed expenses for the periods ended December 31, 1998,
December 31, 1997, and December 31, 1996, net investment income per share
would have been $0.40, $0.28 and $0.10, respectively, for the Salomon
Brothers U.S. Government Securities Portfolio.
(2) Total return represents aggregate total return for the period indicated and
is not annualized.
(3) If the Investment Adviser and the Sub-administrator had not waived fees and
American General Annuity Insurance Company had not reimbursed expenses for
the periods ended December 31, 1998, December 31, 1997, and December 31,
1996, the ratio of operating expenses to average net assets would have been
2.46%, 4.84% and 5.26%, respectively, for the Salomon Brothers U.S.
Government Securities Portfolio.
(4) Annualized.
The accompanying notes are an integral part of the financial statements
F-45
<PAGE> 143
AGA SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
STATE STREET GLOBAL ADVISORS GROWTH EQUITY
---------------------------------------------------------
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995*
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE
Net asset value, beginning of period.......... $ 14.07 $11.85 $10.31 $10.00
------- ------ ------ ------
INVESTMENT OPERATIONS
Net investment income(1)...................... 0.13 0.17 0.20 0.05
Net realized and unrealized gain.............. 2.89 3.56 1.99 0.31
------- ------ ------ ------
Total from investment operations.............. 3.02 3.73 2.19 0.36
------- ------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income......................... (0.13) (0.17) (0.20) (0.05)
Net realized gains............................ (0.39) (1.34) (0.45) --
------- ------ ------ ------
Total distributions to shareholders........... (0.52) (1.51) (0.65) (0.05)
------- ------ ------ ------
Net asset value, end of period................ $ 16.57 $14.07 $11.85 $10.31
======= ====== ====== ======
TOTAL RETURN.................................. 21.60% 31.67% 21.36% 3.57%(2)
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets(3)............. 0.66% 0.48% 0.39% 0.12%(4)
Net investment income to average net assets... 0.88% 1.34% 1.80% 2.46%(4)
Portfolio turnover rate....................... 140% 111% 89% 9%
Net assets, end of period (000's)............. $15,500 $7,327 $3,420 $2,073
</TABLE>
* The State Street Global Advisors Growth Equity Portfolio commenced
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 American
General Annuity 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 American General Annuity Insurance
Company had not reimbursed expenses for the periods ended December 31, 1998,
December 31, 1997, December 31,1996 and December 31, 1995, the net
investment loss per share would have been $(0.02), $(0.11), $(0.29) and
$(0.15), respectively, for the State Street Global Advisor Growth Equity
Portfolio.
(2) Total return represents aggregate total return for the period indicated and
is not annualized.
(3) If the Investment Adviser and the Sub-administrator had not waived fees and
American General Annuity Insurance Company had not reimbursed expenses for
the periods ended December 31, 1998, December 31, 1997, December 31, 1996
and December 31, 1995, the ratio of operating expenses to average net assets
would have been 1.96%, 3.29%, 4.83% and 9.94%, respectively, for the State
Street Global Advisor Growth Equity Portfolio.
(4) Annualized.
The accompanying notes are an integral part of the financial statements
F-46
<PAGE> 144
AGA SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
STATE STREET GLOBAL ADVISORS MONEY MARKET
---------------------------------------------------------
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995*
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE
Net asset value, beginning of period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net investment income(1)...................... 0.05 0.05 0.05 0.01
------ ------ ------ ------
Total from investment operations.............. 0.05 0.05 0.05 0.01
------ ------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income......................... (0.05) (0.05) (0.05) (0.01)
------ ------ ------ ------
Total distributions to shareholders........... (0.05) (0.05) (0.05) (0.01)
------ ------ ------ ------
Net asset value, end of period................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ======
TOTAL RETURN.................................. 5.23% 5.50% 5.19% 1.17%(2)
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets(3)............. 0.49% 0.32% 0.29% 0.12%(4)
Net investment income to average net assets... 5.12% 5.41% 5.23% 5.25%(4)
Net assets, end of period (000's)............. $9,254 $5,100 $1,291 $ 126
</TABLE>
* The State Street Global Advisors Money Market Portfolio commenced operations
on October 10, 1995.
(1) Net investment income is after waiver of fees and reimbursement of certain
expenses by the Investment Adviser, the Sub-administrator and American
General Annuity 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 American General Annuity Insurance
Company had not reimbursed expenses for the periods ended December 31, 1998,
December 31, 1997, December 31, 1996, and December 31, 1995, net investment
income (loss) per share would have been $0.04, $0.03, $(0.08) and $(0.35),
respectively, for the State Street Global Advisors Money Market Portfolio.
(2) Total return represents aggregate total return for the period indicated and
is not annualized.
(3) If the Investment Adviser and the Sub-administrator had not waived fees and
American General Annuity Insurance Company had not reimbursed expenses for
the periods ended December 31, 1998, December 31, 1997, December 31, 1996,
and December 31, 1995, the ratio of operating expenses to average net assets
would have been 2.44%, 4.17%, 14.15% and 161.83%, respectively, for the
State Street Global Advisors Money Market Portfolio.
(4) Annualized.
The accompanying notes are an integral part of the financial statements
F-47
<PAGE> 145
AGA SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
VAN KAMPEN EMERGING GROWTH
------------------------------------------
YEAR YEAR PERIOD
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996*
------------ ------------ ------------
<S> <C> <C> <C>
NET ASSET VALUE
Net asset value, beginning of period..................... $ 13.87 $11.54 $10.00
------- ------ ------
INVESTMENT OPERATIONS
Net investment income (loss)(1).......................... (0.03) 0.03 0.05
Net realized and unrealized gain......................... 5.21 2.33 1.86
------- ------ ------
Total from investment operations......................... 5.18 2.36 1.91
------- ------ ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................... -- (0.03) (0.05)
Net realized gains....................................... -- -- (0.32)
------- ------ ------
Total distributions to shareholders...................... -- (0.03) (0.37)
------- ------ ------
Net asset value, end of period........................... $ 19.05 $13.87 $11.54
======= ====== ======
TOTAL RETURN............................................. 37.43% 20.45% 19.06%(2)
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets(3)........................ 0.80% 0.62% 0.46%(4)
Net investment income (loss) to average net assets....... (0.57)% 0.23% 0.40%(4)
Portfolio turnover rate.................................. 107% 107% 154%
Net assets, end of period (000's)........................ $11,674 $5,499 $1,882
</TABLE>
* The Van Kampen Emerging Growth Portfolio commenced operations on January 2,
1996.
(1) Net investment income is after waiver of fees and reimbursement of certain
expenses by the Investment Adviser, the Sub-administrator and American
General Annuity 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 American General Annuity Insurance
Company had not reimbursed expenses for the periods ended December 31, 1998,
December 31, 1997 and December 31, 1996, net investment loss per share would
have been $(0.26), $(0.42) and $(1.29), respectively, for the Van Kampen
Emerging Growth Portfolio.
(2) Total return represents aggregate total return for the period indicated and
is not annualized.
(3) If the Investment Adviser and the Sub-administrator had not waived fees and
American General Annuity Insurance Company had not reimbursed expenses for
the periods ended December 31, 1998, December 31, 1997 and December 31,
1996, the ratio of operating expenses to average net assets would have been
2.64%, 5.65% and 11.22%, respectively, for the Van Kampen Emerging Growth
Portfolio.
(4) Annualized.
The accompanying notes are an integral part of the financial statements
F-48
<PAGE> 146
AGA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
AGA Series Trust, formerly WNL Series Trust, (the "Trust") is an open-end,
diversified series management investment company established as a Massachusetts
business trust under a Declaration of Trust dated December 12, 1994, as amended
April 19, 1995 and May 1, 1998. The Trust currently offers shares of beneficial
interest in seven 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: Credit Suisse Growth and Income Portfolio,
formerly BEA Growth and Income Portfolio, (the "Growth and Income Portfolio"),
Credit Suisse International Equity Portfolio (the "International Equity
Portfolio"), EliteValue Portfolio, Salomon Brothers U.S. Government Securities
Portfolio (the "U.S. Government Securities Portfolio"), State Street Global
Advisors Growth Equity Portfolio, formerly Global Advisors Growth Equity
Portfolio, (the "Growth Equity Portfolio"), State Street Global Advisors Money
Market Portfolio, formerly Global Advisors Money Market Portfolio, (the "Money
Market Portfolio"), and Van Kampen Emerging Growth Portfolio, formerly Van
Kampen American Capital Emerging Growth Portfolio, (the "Emerging Growth
Portfolio"). The Portfolios are currently available to the public only through
variable annuity contracts ("VA Contracts") issued by American General Annuity
Insurance Company, formerly Western National Life Insurance Company, (the "Life
Company"), an indirect wholly-owned subsidiary of American General Corporation.
1. SIGNIFICANT ACCOUNTING POLICIES
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 these estimates. The following is a
summary of significant accounting policies followed by the Trust 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 unrealized 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 collateral 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
F-49
<PAGE> 147
AGA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
underlying collateral. 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.
(c) WHEN ISSUED TRANSACTIONS -- The Portfolio may enter into a when-issued
transaction for the purpose of acquiring portfolio securities and not for the
purpose of leverage, although a Portfolio may dispose of a when-issued security
or forward commitment prior to settlement if it is deemed appropriate to do so.
In such transactions, delivery of the securities occurs beyond the normal
settlement periods, but no payment or delivery is made by, and no interest
accrues to, the Portfolio prior to the actual delivery or payment by the other
party to the transaction. Due to fluctuations in the value of securities
purchased on a when-issued or a delayed-delivery basis, the yields obtained on
such securities may be higher or lower than the yields available in the market
on the dates when the investments are actually delivered to the buyers.
(d) DOLLAR ROLL TRANSACTIONS -- Certain Portfolios seeking a high level of
current income may enter into dollar rolls in which the Portfolio sells
securities (usually Mortgage-Backed Securities) and simultaneously contracts to
purchase, typically in 30 to 60 days, substantially similar but not identical,
securities on a specified future date through a TBA purchase commitment. The
proceeds of the initial sale of securities in such transaction may be used to
purchase long-term securities which will be held during the dollar roll period.
During the roll period the Portfolio foregoes principal and interest paid on the
security sold at the beginning of the roll period. The Portfolio may be
compensated by; (a) the difference between the current sale price and the
forward price for the future purchase plus the interest earned on the cash
proceeds of the initial sale; or (b) a set fee determined at the time the
transaction is entered into; or (c) a combination of these two methods. Dollar
rolls involve the risk that the market value of the securities the Portfolio is
obligated to repurchase under the agreement may decline below the repurchase
price.
(e) TBA PURCHASE COMMITMENTS -- Certain Portfolios may enter into "TBA" (to
be announced) purchase commitments to purchase securities for a fixed unit price
at a future date beyond customary settlement time. Although the unit price has
been established, the principal value has not been finalized. The Portfolio
holds, and maintains until settlement date, cash or high-grade debt obligations
in an amount sufficient to meet the purchase price, or the Portfolio may enter
into offsetting contracts for the forward sale of other securities it owns.
Income on the securities will not be earned until settlement date. TBA purchase
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. Unsettled TBA purchase commitments are valued
at the current market value of the underlying securities, according to the
procedures described under "Valuation of Securities" above. The Portfolio may
dispose of the commitment prior to settlement if the Advisor deems it
appropriate to do so.
(f) 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 control 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.
(g) FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -- Certain Portfolios may
engage in forward foreign currency exchange contracts ("forward contracts").
Portfolios may enter into forward contracts to convert U.S. Dollars 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. Forward foreign currency contracts are valued at the
exchange rate and are marked-to-market daily. The change in the market value is
recorded by the Portfolio as an
F-50
<PAGE> 148
AGA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
unrealized gain or loss. When the contract is closed, the Portfolio records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
A forward 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
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 forward contracts 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 forward contracts for other than hedging
purposes which present greater profit potential but also involves increased
risk.
(h) FOREIGN CURRENCY TRANSLATIONS -- The books and records of the
Portfolios 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
changes and 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.
(i) 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.
(j) 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.
(k) 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.
(l) DIVIDENDS AND DISTRIBUTIONS -- The Money Market Portfolio will declare
a dividend of its net ordinary income daily and distribute such dividends
monthly. Each of the other Portfolios will declare and
F-51
<PAGE> 149
AGA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
distribute dividends from net ordinary income quarterly 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.
(m) 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"), AGA Investment
Advisory Services, Inc., formerly WNL Investment Advisory Services, Inc., (the
"Adviser"), an indirect wholly-owned subsidiary of American General 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>
<S> <C>
Credit Suisse Growth and Income............................. 0.75%
Credit Suisse International Equity.......................... 0.90%
EliteValue.................................................. 0.65%
Salomon Brothers U.S. Government Securities................. 0.475%
State Street Global Advisors Growth Equity.................. 0.61%
State Street Global Advisors Money Market................... 0.45%
Van Kampen Emerging Growth.................................. 0.75%
</TABLE>
Through April 30, 1998 the Adviser waived that portion of its advisory fee
in excess of the amount payable by the Adviser to each Sub-adviser pursuant to
the respective sub-advisory agreements for each Portfolio. Beginning on May 1,
1998 the advisory fees are being charged to each Portfolios as shown in table
above.
F-52
<PAGE> 150
AGA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
The Adviser pays each Sub-adviser the following fees:
<TABLE>
<S> <C>
Credit Suisse Growth and Income............................. 0.50%
Credit Suisse International Equity.......................... 0.65%
EliteValue.................................................. 0.40%
Salomon Brothers U.S. Government Securities................. 0.225%
State Street Global Advisors Growth Equity.................. 0.36%
State Street Global Advisors Money Market................... 0.20%
Van Kampen Emerging Growth.................................. 0.50%
</TABLE>
In addition, the Life Company, an affiliate of the Adviser, has undertaken
to bear until May 1, 1999 all operating expenses of each Portfolio, excluding
the compensation of the Adviser, that exceed 0.12% of each Portfolio's average
daily net assets. The Life Company has reserved the right to withdraw or modify
its policy of expense reimbursement for the Trust.
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: Credit Suisse Asset Management, formerly BEA Associates, for the Growth and
Income Portfolio; Credit Suisse Asset Management, Ltd. for the International
Equity Portfolio; OpCap Advisors for the EliteValue Portfolio; Salomon Brothers
Asset Management Inc. for the U.S. Government Securities Portfolio; State Street
Global Advisors for the Growth Equity and Money Market Portfolios; and Van
Kampen Asset Management Inc. for the Emerging Growth Portfolio.
The Trust's Sub-administrator, custodian, transfer and dividend-paying
agent is State Street Bank and Trust Company.
For the year ended December 31, 1998, the Adviser waived advisory fees and
the Life Company reimbursed operating expenses as follows:
<TABLE>
<CAPTION>
ADVISORY
FEES EXPENSES
WAIVED REIMBURSED TOTAL
-------- ---------- --------
<S> <C> <C> <C>
Credit Suisse Growth and Income....................... $6,992 $129,265 $136,257
Credit Suisse International Equity.................... 3,842 142,666 146,508
EliteValue............................................ 9,231 93,918 103,149
Salomon Brothers U.S. Government Securities........... 3,584 103,417 107,001
State Street Global Advisors Growth Equity............ 6,950 130,500 137,450
State Street Global Advisors Money Market............. 4,461 102,412 106,873
Van Kampen Emerging Growth............................ 5,221 134,825 140,046
</TABLE>
AGA Brokerage Services, Inc., formerly WNL Brokerage Services, Inc., an
indirect wholly-owned subsidiary of American General 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.
F-53
<PAGE> 151
AGA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
3. SECURITIES TRANSACTIONS
The aggregate cost of purchases and proceeds from sales of securities,
excluding short-term investments, for the year ended December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
U.S. PROCEEDS FROM
GOVERNMENT PROCEEDS FROM U.S. GOVERNMENT
PURCHASES PURCHASES SALES SALES
----------- ---------- ------------- ---------------
<S> <C> <C> <C> <C>
Credit Suisse Growth and Income......... $ 9,049,134 $7,948,695 $ 7,295,352 $7,570,270
Credit Suisse International Equity...... 4,381,274 -- 2,736,485 --
EliteValue.............................. 11,726,391 510,430 4,167,588 178,783
Salomon Brothers U.S. Government
Securities............................ 118,045 3,581,380 -- 1,144,543
State Street Global Advisors Growth
Equity................................ 19,283,192 138,536 13,359,264 228,203
State Street Global Advisors Money
Market................................ -- -- -- --
Van Kampen Emerging Growth.............. 10,192,545 35,218 6,849,316 32,863
</TABLE>
4. SHARES OF BENEFICIAL INTEREST
The Trust has an unlimited authorized number of shares of beneficial
interest with a par value of $0.01. The tables below summarize transactions in
Trust shares.
CREDIT SUISSE GROWTH AND INCOME PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Capital stock sold............................ 792,134 $10,722,666 364,640 $ 4,535,552
Capital stock issued upon reinvestment of
dividends and distributions................. 46,708 644,316 30,006 376,771
Capital stock redeemed........................ (216,635) (2,934,678) (98,914) (1,251,232)
-------- ----------- -------- -----------
Net increase........................ 622,207 $ 8,432,304 295,732 $ 3,661,091
======== =========== ======== ===========
</TABLE>
CREDIT SUISSE INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Capital stock sold............................ 272,097 $ 2,783,727 177,329 $ 2,089,267
Capital stock issued upon reinvestment of
dividends and distributions................. 1,499 16,424 28,680 300,498
Capital stock redeemed........................ (103,928) (1,053,158) (45,050) (532,186)
-------- ----------- -------- -----------
Net increase........................ 169,668 $ 1,746,993 160,959 $ 1,857,579
======== =========== ======== ===========
</TABLE>
F-54
<PAGE> 152
AGA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
ELITEVALUE PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Capital stock sold............................ 989,195 $14,792,557 562,538 $ 7,853,515
Capital stock issued upon reinvestment of
dividends and distributions................. 29,857 448,216 21,013 300,551
Capital stock redeemed........................ (298,572) (4,382,494) (112,176) (1,599,850)
-------- ----------- -------- -----------
Net increase........................ 720,480 $10,858,279 471,375 $ 6,554,216
======== =========== ======== ===========
</TABLE>
SALOMON BROTHERS U.S. GOVERNMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Capital stock sold............................ 589,383 $ 6,067,048 167,218 $ 1,688,562
Capital stock issued upon reinvestment of
dividends and distributions................. 33,449 341,645 16,187 160,062
Capital stock redeemed........................ (170,600) (1,757,093) (27,188) (271,281)
-------- ----------- -------- -----------
Net increase........................ 452,232 $ 4,651,600 156,217 $ 1,577,343
======== =========== ======== ===========
</TABLE>
STATE STREET GLOBAL ADVISORS GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Capital stock sold............................ 544,056 $ 8,356,169 239,753 $ 3,380,388
Capital stock issued upon reinvestment of
dividends and distributions................. 27,475 449,775 50,305 706,482
Capital stock redeemed........................ (157,065) (2,387,446) (57,888) (842,461)
-------- ----------- -------- -----------
Net increase........................ 414,466 $ 6,418,498 232,170 $ 3,244,409
======== =========== ======== ===========
</TABLE>
STATE STREET GLOBAL ADVISORS MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Capital stock sold......................... 46,307,126 $ 46,307,126 27,649,529 $ 27,649,529
Capital stock issued upon reinvestment of
dividends and distributions.............. 275,567 275,567 159,789 159,789
Capital stock redeemed..................... (42,429,271) (42,429,271) (24,000,078) (24,000,078)
----------- ------------ ----------- ------------
Net increase..................... 4,153,422 $ 4,153,422 3,809,240 $ 3,809,240
=========== ============ =========== ============
</TABLE>
F-55
<PAGE> 153
AGA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
VAN KAMPEN EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Capital stock sold............................ 357,277 $ 5,569,032 387,792 $ 4,961,448
Capital stock issued upon reinvestment of
dividends and distributions................. 30 481 617 7,882
Capital stock redeemed........................ (141,146) (2,207,565) (154,969) (1,955,287)
-------- ----------- -------- -----------
Net increase........................ 216,161 $ 3,361,948 233,440 $ 3,014,043
======== =========== ======== ===========
</TABLE>
5. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
At December 31, 1998, the outstanding forward foreign currency exchange
contracts, which contractually obligate the Trust to deliver currencies at a
specified date, were as follows:
Credit Suisse International Equity Portfolio
<TABLE>
<CAPTION>
U.S. DOLLAR
PRICE ON U.S. DOLLAR
CURRENCY SETTLEMENT ORIGINATION CURRENT UNREALIZED
SOLD DATE DATE VALUE (DEPRECIATION)
- -------- ---------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
FRF 2/25/1999 $133,655 $136,616 $ (2,961)
JPY 3/09/1999 554,135 580,199 (26,064)
NLG 2/25/1999 120,549 123,285 (2,736)
$808,339 $840,100 $(31,761)
-------- -------- --------
</TABLE>
7. TAX INFORMATION
For Federal income tax purposes capital loss carryforwards (exclusive of
certain capital losses incurred after October 31) of $84,949 and $254,219 is
available to the extent provided by regulations to offset future realized
capital gains of the Van Kampen Emerging Growth Portfolio. These losses will
expire in 2005 and 2006, respectively. In addition, $317,406 is available to the
extent provided by regulations to offset future realized capital gains of Credit
Suisse International Equity Portfolio and this loss expires in 2006.
Additionally, certain capital losses incurred after October 31, within the
taxable year, are deemed to arise on the first business day of the Portfolio's
next taxable year. During the year ended December 31, 1998, the Credit Suisse
International Equity Portfolio elected to defer a net capital loss of $4,727.
8. SUBSEQUENT EVENT
On January 6, 1999, Salomon Brothers Asset Management Inc., notified the
Adviser of the termination of their Sub-Advisory relationship as of March 8,
1999.
F-56
<PAGE> 154
AGA SERIES TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
9. YEAR 2000 RISK (UNAUDITED)
Like other mutual funds, financial and business organizations and
individuals around the world, the Trust could be adversely affected if the
computer systems of the Adviser and the sub-advisers and other service
providers, over which the Trust may have no control, do not properly process and
calculate date-related information and data from and after January 1, 2000. This
is commonly referred to as the "Year 2000 Problem." The Adviser is taking steps
that it believes are reasonably designed to address the Year 2000 Problem with
respect to computer systems that it uses. The Adviser is also seeking assurances
that its sub-advisers and other service providers are taking similar steps as
well. However, it is impossible to know exactly how the Year 2000 Problem will
affect the administration of the Trust, performance of the Trust's portfolios or
securities markets in general.
F-57
<PAGE> 155
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees and Contract Owners of
AGA Series Trust
We have audited the accompanying statement of assets and liabilities,
including the schedules of investments, of AGA Series Trust (comprising,
respectively, the Credit Suisse Growth and Income, Credit Suisse International
Equity, EliteValue, Salomon Brothers U.S. Government Securities, State Street
Global Advisors Growth Equity, State Street Global Advisors Money Market, and
Van Kampen Emerging Growth Portfolios) as of December 31, 1998, the related
statements of operations, changes in net assets and financial highlights for the
year then ended. These financial statements and financial highlights are the
responsibility of AGA Series Trust management. Our responsibility is to express
an opinion on the financial statements and financial highlights based on our
audit. The statements of changes in net assets of AGA Series Trust for the year
ended December 31, 1997 and the financial highlights for each of the three years
in the period ended December 31, 1997 were audited by other auditors whose
report dated February 13, 1998 expressed an unqualified opinion on these
financial statements and financial highlights.
We conducted our audit 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, 1998, by correspondence with the custodian and brokers or by other
appropriated auditing procedures where replies from brokers were not received.
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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the respective portfolios constituting AGA Series Trust at December 31,
1998, the results of their operations, the changes in their net assets and
financial highlights for the year then ended in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
February 5, 1999
F-58
<PAGE> 156
AGA SERIES TRUST
PROXY VOTING RESULTS (UNAUDITED)
The following proposal was voted upon at a special meeting of shareholders
on April 16, 1998. The results were as shown below.
PROPOSAL 1.
To approve a new Sub-Advisory Agreement between Salomon Brothers Asset
Management, Inc., AGA Investment Advisory Services, Inc. and AGA Series Trust.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
------- ------- -------
<S> <C> <C> <C>
Record Date Shares (429,327)
Salomon Brothers U.S. Government Securities Portfolio....... 311,976 20,209 97,142
</TABLE>
F-59
<PAGE> 157
<TABLE>
<S> <C>
AMERICAN GENERAL ANNUITY INSURANCE COMPANY ----------------
VARIABLE ANNUITY SERVICE CENTER
BULK RATE
205 E. 10TH AVENUE U.S. POSTAGE
AMARILLO, TEXAS 79101 PAID
Permit No. 6748
Houston, Texas
VALIC
----------------
</TABLE>
VER 12/31/98 Recycled Paper LOGO
<PAGE> 158
AGA SERIES TRUST
PART C. OTHER INFORMATION
ITEM 22. FINANCIAL STATEMENTS
ITEM 23. EXHIBITS
<TABLE>
<S> <C>
(a) 1. Declaration of Trust(1)
2. Amendment to Declaration of Trust
(b) By-laws of Trust(1)
(c) Not Applicable
(d) 1. Investment Advisory Agreement dated August 23, 1995, between the
Registrant and the Adviser.(1)
2. Investment Sub-Advisory Agreements between the Registrant, the Adviser
and each Sub-Adviser:
(i) Sub-Advisory Agreement dated August 23, 1995, among BEA
Associates, the Adviser and the Registrant.(1)
(ii) Sub-Advisory Agreement dated August 23, 1995, among Credit
Suisse Investment Management Limited, the Adviser and the
Registrant.(1)
(iii) Sub-Advisory Agreement dated October 31, 1996, among Van
Kampen American Capital Asset Management Inc., the Adviser and the
Registrant.
(iv) Sub-Advisory Agreement dated August 23, 1995, among State
Street Bank and Trust Company, the Adviser and the Registrant.(1)
(v) Sub-Advisory Agreement dated November 5, 1997, among OpCap
Advisors, the Adviser and the Registrant.
(e) Not Applicable
(f) Not Applicable
(g) Custodian Agreement between the Registrant and State Street Bank and
Trust Company.
(h) 1. Transfer Agency and Service Agreement between the Registrant and
State Street Bank and Trust Company.
2. Subadministration Agreement for Reporting and Accounting Services between
the Registrant and State Street Bank and Trust Company.
(i) Opinion and Consent of Counsel
(j) Consent of Independent Auditors
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Financial Data Schedule
(o) Not Applicable
(p) Power of Attorney for AGA Series Trust Trustee, Mr. Payne.
</TABLE>
C-1
<PAGE> 159
- ---------------
1 Incorporated herein by reference to Post-Effective Amendment No. 1 to the
Registrant's Form N-1A as filed electronically with the Securities and
Exchange Commission on May 1, 1996 (File No. 33-87380 and 811-8912).
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The shares of the Trust are currently sold to AGA Separate Account A,
formerly WNL Separate Account A.
ITEM 25. INDEMNIFICATION
Each officer, Trustee or agent of the Trust shall be indemnified by the
Trust to the full extent permitted under the General Laws of The Commonwealth of
Massachusetts and the Investment Company Act of 1940 ("1940 Act"), as amended,
except that such indemnity shall not protect any such person against any
liability to the Trust or any shareholder thereof to which such person would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office ("disabling conduct"). Indemnification shall be made when (i) a final
decision on the merits, by a court or other body before whom the proceeding was
brought, that the person to be indemnified was not liable by reason of disabling
conduct or, (ii) in the absence of such a decision, a reasonable determination,
based upon a review of the facts, that the person to be indemnified was not
liable by reason of disabling conduct, by (a) the vote of a majority of a quorum
of Trustees who are neither "interested persons" of the company as defined in
section 2(a)(19) of the 1940 Act, nor parties to the proceedings or (b) an
independent legal counsel in a written opinion. The Trust may, by vote of a
majority of a quorum of Trustees who are not interested persons, advance
attorneys' fees or other expenses incurred by officers, Trustees, investment
advisers or principal underwriters, in defending a proceeding upon the
undertaking by or on behalf of the person to be indemnified to repay the advance
unless it is ultimately determined that he is entitled to indemnification. Such
advance shall be subject to at least one of the following: (1) the person to be
indemnified shall provide a security for his undertaking, (2) the Trust shall be
insured against losses arising by reason of any lawful advances, or (3) a
majority of a quorum of the disinterested, non-party Trustees of the Trust, or
an independent legal counsel in a written opinion, shall determine, based on a
review of readily available facts, that there is reason to believe that the
person to be indemnified ultimately will be found entitled to indemnification.
The law of Massachusetts is superseded by the 1940 Act insofar as it conflicts
with the 1940 Act or rules published thereunder.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a trustee, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Set out below is a list of each director and officer of AGA Investment
Advisory Services, Inc. ("Adviser") indicating each other business, profession,
vocation, or employment of a substantial nature in which each such person has
been, at any time during the past two fiscal years, engaged for his or her own
account or in the capacity of director, officer, partner, or trustee. Unless
otherwise specified, the principal business address of the Adviser is 2929 Allen
Parkway, Houston, Texas 77019. See also the information set out under the
caption "Trustees and Officers" in Part B of this Registration Statement, which
is incorporated herein by reference to the extent applicable. Companies, other
than the Adviser, identified in the list below are
C-2
<PAGE> 160
The Variable Annuity Life Insurance Company ("VALIC"), American General Annuity
Insurance Company ("AGAIC") and American General Corporation ("AGC").
<TABLE>
<CAPTION>
NAME COMPANY TITLE
---- ------- -----
<S> <C> <C>
Richard W. Scott.................. Adviser, President & Chief Executive Officer
VALIC, AGAIC
Director, Vice President & Chief Investment
AGC Officer
Executive Vice President & Chief Investment
Officer
Peter Tuters...................... Adviser, Executive Vice President
VALIC, AGAIC Vice President and Investment Officer
AGC Senior Vice President -- Investments
Maruti More....................... Adviser, Vice President -- Investments
VALIC, AGAIC
Kurt Fredland..................... Adviser Vice President -- Investments
Cynthia A. Toles.................. Adviser, Secretary
VALIC, AGAIC Senior Vice President, General Counsel &
Secretary
Patrick E. Grady.................. Adviser, Treasurer
VALIC, AGAIC Senior Vice President and Treasurer
D. Lynne Walters.................. Adviser, Tax Officer
VALIC, AGAIC
Rembert R. Owen................... Adviser, Real Estate Investment Officer & Assistant
VALIC, AGAIC Secretary
Nori Gabert....................... Adviser Assistant Secretary
Cheryl G. Hemley.................. Adviser, Assistant Secretary
VALIC, AGAIC
Patricia W. Neighbors............. Adviser, Assistant Secretary
VALIC, AGAIC
Daniel R. Cricks.................. Adviser, Assistant Tax Officer
VALIC, AGAIC
Terry Festervand.................. Adviser Assistant Treasurer
James L. Gleaves.................. Adviser, Assistant Treasurer
VALIC, AGAIC
Tara S. Rock...................... Adviser, Assistant Treasurer
VALIC, AGAIC
Barbara G. Trygstad............... Adviser, Assistant Treasurer
VALIC, AGAIC
Marylyn S. Zlotnick............... Adviser, Assistant Treasurer
VALIC, AGAIC Assistant Controller
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS.
Not Applicable
C-3
<PAGE> 161
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
The books or other documents required to be maintained by Section 31(a) of
the Investment Company Act of 1940 and the Rules promulgated thereunder will be
in the physical possession of either:
THE ADVISER:
AGA Investment Advisory Services, Inc.
2929 Allen Parkway
Houston, Texas 77019
THE CUSTODIAN AND SUB-ADMINISTRATOR:
The State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
INVESTMENT SUB-ADVISERS:
Credit Suisse Asset Management
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Credit Suisse Asset Management, Ltd.
Beaufort House
15 St. Botolph St.
London, England
OneCap Advisors
One World Financial Center,
200 Liberty St.
New York, New York 10281
State Street Global Advisors
Two-International Place
Boston, MA 02110
Van Kampen Asset Management Inc.
One Parkview Plaza
Oakbrook Terrace, Il. 60181
ITEM 29. MANAGEMENT SERVICES.
There is no management-related service contract not discussed in Parts A or
B of this Form N-1A.
ITEM 30. UNDERTAKINGS.
Not Applicable.
C-4
<PAGE> 162
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 4 to its Registration Statement to be signed on its
behalf, by the undersigned, duly authorized, in the City of Houston, and State
of Texas on the 25th day of February, 1999.
AGA SERIES TRUST
By: /s/ RICHARD W. SCOTT
------------------------------------
Richard W. Scott
Chairman, President and
Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 4 has been signed below by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD W. SCOTT Chairman, President and February 25, 1999
- ----------------------------------------------------- Principal Executive
Richard W. Scott Officer
/s/ GREGORY R. SEWARD Treasurer February 25, 1999
- -----------------------------------------------------
Gregory R. Seward
/s/ TERRY L. SWENSON Trustee February 25, 1999
- -----------------------------------------------------
Terry L. Swenson
/s/ HUGH L. HYDE Trustee February 25, 1999
- -----------------------------------------------------
Hugh L. Hyde
* Trustee February 25, 1999
- -----------------------------------------------------
Melvin C. Payne
/s/ S. TEVIS GRINSTEAD Trustee February 25, 1999
- -----------------------------------------------------
S. Tevis Grinstead
</TABLE>
By: /s/ NORI L. GABERT
--------------------------------
*Nori L. Gabert
Power of Attorney
<PAGE> 163
INDEX TO EXHIBITS
<TABLE>
<S> <C>
(a) 2. Amendment to Declaration of Trust
(d) 2. (iii) Sub-Advisory Agreement dated October 31, 1996, among Van
Kampen American Capital Asset Management Inc., the Adviser
and the Registrant.
(v) Sub-Advisory Agreement dated November 5, 1997, among OpCap
Advisors, the Adviser and the Registrant.
(g) Custodian Agreement between the Registrant and State Street Bank and
Trust Company.
(h) 1. Transfer Agency and Service Agreement between the Registrant and
State Street Bank and Trust Company.
2. Subadministration Agreement for Reporting and Accounting Services
between the Registrant and State Street Bank and Trust Company.
(i) Opinion and Consent of Counsel
(j) Consent of Independent Auditors
(n) Financial Data Schedule
(p) Powers of Attorney for AGA Series Trust Trustee, Mr. Payne.
</TABLE>
<PAGE> 1
EXHIBIT(a)2.
SECRETARY'S CERTIFICATE
I, Kurt R. Fredland, Assistant Secretary of AGA Series Trust (formerly
WNL Series Trust), do hereby certify as follows:
(1) That I am Assistant Secretary of AGA Series Trust (the "Trust"),
(2) That in such capacity I have examined the records of actions taken
by the Board of Trustees of the Trust.
(3) That the Board of Trustees of the Trust adopted the following
preamble and resolutions by unanimous written consent in lieu of a meeting on
April 30, 1998:
WHEREAS, the Trustees have determined it to be advisable and in the
best interest of the Trust to change the name of the Trust to "AGA
Series Trust" effective May 1, 1998;
NOW, THEREFORE, BE IT
RESOLVED, that the Trust's Amended Declaration of Trust shall be
amended by striking out Section 1.1 of Article 1 in its entirety and inserting
in lieu thereof the following:
"1.1 Name: The name of the trust created by this Declaration of Trust
shall be AGA Series Trust (hereinafter called the "Trust") and so far as may be
practicable the Trustees shall conduct the Trust's activities, execute all
documents and sue or be sued under that name, which name (and the word "Trust"
wherever used in this Declaration of Trust, except where the context otherwise
requires) shall refer to the Trustees in their capacity as Trustees, and not
individually or personally and shall not refer to the officers, agents,
employees or Shareholders of the Trust or of such Trustees. Should the Trustees
determine that the use of such name is not practicable, legal or convenient,
they may use such other designation or they may adopt such other name for the
Trust as they deem proper and the Trust may hold property and conduct its
activities under such designation or name."
FURTHER RESOLVED, that the officers of the Trust are hereby authorized
and directed to take such actions as may be necessary or appropriate to carry
out the foregoing resolution.
AGA SERIES TRUST
By: /s/ KURT R. FREDLAND
----------------------------
Kurt R. Fredland, Assistant
Secretary
Dated: May , 1998
<PAGE> 1
EXHIBIT(d)2.(iii)
WNL SERIES TRUST
SUB-ADVISORY AGREEMENT
AGREEMENT dated as of October 31, 1996, among VAN KAMPEN AMERICAN
CAPITAL ASSET MANAGEMENT, INC., a Delaware corporation (the "Sub-Adviser"), WNL
INVESTMENT ADVISORY SERVICES, INC., a Delaware corporation (the "Adviser"), and
WNL SERIES TRUST, a Massachusetts business trust (the "Trust").
WHEREAS, Adviser has entered into an Investment Advisory Agreement
(referred to herein as the "Advisory Agreement"), dated August 23, 1995, with
the Trust, under which Adviser has agreed to act as investment adviser to the
Trust, which is registered as an open-end diversified management investment
company under the Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Advisory Agreement provides that the Adviser may engage a
sub-adviser or sub-advisers for the purpose of managing the investments of the
Portfolios of the Trust; and
WHEREAS, the Adviser desires to retain Sub-Adviser, which is engaged in
the business of rendering investment management services, to provide certain
investment management services for the Van Kampen American Capital Emerging
Growth Portfolio (the "Portfolio") of the Trust as more fully described below;
and
WHEREAS, it is the purpose of this Agreement to express the mutual
agreements of the parties hereto with respect to the services to be provided by
Sub-Adviser to Adviser with respect to the Portfolio and the terms and
conditions under which such services will be rendered,
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, the parties hereto agree as follows:
1. SERVICES OF SUB-ADVISER. The Sub-Adviser shall act as investment
counsel to the Adviser with respect to the Portfolio. In this capacity,
Sub-Adviser shall have the following responsibilities:
(a) to furnish continuous investment information, advice and
recommendations to the Adviser as to the acquisition, holding or disposition of
any or all of the securities or other assets which the Portfolio may own or
contemplate acquiring from time to time;
1
<PAGE> 2
(b) to cause its officers to attend meetings of the Adviser or
the Trust and furnish oral or written reports, as the Adviser may reasonably
require, in order to keep the Adviser and its officers and the Trustees of the
Trust and appropriate officers of the Trust fully informed as to the condition
of the investment securities of the Portfolio, the investment recommendations of
the Sub-Adviser, and the investment considerations which have given rise to
those recommendations;
(c) to furnish such statistical and analytical information and
reports as may reasonably be required by the Adviser from time to time; and
(d) to supervise and place orders for the purchase, sale,
exchange and conversion of securities as directed by the appropriate officers of
the Trust or of the Adviser.
2. OBLIGATIONS OF THE ADVISER. The Adviser shall have the following
obligations under this Agreement:
(a) to keep the Sub-Adviser continuously and fully informed as
to the composition of the Portfolio's investment securities and the nature of
the Portfolio's assets and liabilities;
(b) to keep the Sub-Adviser continually and fully advised of
the Portfolio's investment objectives, and any modifications and changes
thereto, as well as any specific investment restrictions or limitations by
sending the Sub-Adviser copies of each registration statement;
(c) to furnish the Sub-Adviser with a certified copy of any
financial statement or report prepared for the Trust with respect to the
Portfolio by certified or independent public accountants, and with copies of any
financial statements or reports made by the Trust to shareholders or to any
governmental body or securities exchange and to inform the Sub-Adviser of the
results of any audits or examinations by regulatory authorities pertaining to
the Portfolio, if these results affect the services provided by the Sub-Adviser
pursuant to this Agreement;
(d) to furnish the Sub-Adviser with any further materials or
information which the Sub-Adviser may reasonably request to enable it to perform
its functions under this Agreement; and
(e) to compensate the Sub-Adviser for its services under this
Agreement by the payment of fees as set forth in Exhibit A attached hereto.
3. PORTFOLIO TRANSACTIONS. The Sub-Adviser shall place all orders for
the purchase and sale of portfolio securities for the account of the Portfolio
with broker-dealers selected
2
<PAGE> 3
by the Sub-Adviser. In executing portfolio transactions and selecting
broker-dealers, the Sub-Adviser will use its best efforts to seek best execution
on behalf of the Portfolio. In assessing the best execution available for any
transaction, the Sub-Adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker-dealer, and the
reasonableness of the commission, if any (all for the specific transaction and
on a continuing basis). In evaluating the best execution available, and in
selecting the broker-dealer to execute a particular transaction, the Sub-Adviser
may also consider the brokerage and research services (as those terms are used
in Section 28(e) of the Securities Exchange Act of 1934) provided to the
Portfolio and/or other accounts over which the Sub-Adviser, an affiliate of the
Sub-Adviser (to the extent permitted by law) or another investment adviser of
the Portfolio exercises investment discretion. The Sub-Adviser is authorized to
cause the Portfolio to pay a broker-dealer who provides such brokerage and
research services a commission for executing a portfolio transaction for the
Portfolio which is in excess of the amount of commission another broker-dealer
would have charged for effecting that transaction if, but only if, 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.
4. MARKETING SUPPORT. The Sub-Adviser shall provide marketing support
to the Adviser in connection with the sale of Trust shares and/or the sale of
variable annuity and variable life insurance contracts issued by Western
National Life Insurance Company and its affiliates which may invest in the Trust
(collectively, the "Life Company"), as reasonably requested by the Adviser. Such
support shall include, but not necessarily be limited to, presentations by
representatives of the Sub-Adviser at investment seminars, conferences and other
industry meetings. Any materials utilized by the Adviser which contain any
information relating to the Sub-Adviser shall be submitted to the Sub-Adviser
for approval prior to use, not less than five (5) business days before such
approval is needed by the Adviser. Any materials utilized by the Sub-Adviser
which contain any information relating to the Adviser, the Life Company
(including any information relating to its separate accounts or variable annuity
or variable life insurance contracts) or the Trust shall be submitted to the
Adviser for approval prior to use, not less than five (5) business days before
such approval is needed by the Sub-Adviser.
5. GOVERNING LAW. This Agreement shall be construed in accordance with
and governed by the laws of the Commonwealth of Massachusetts.
6. EXECUTION OF AGREEMENT. This Agreement will become binding on the
parties hereto upon their execution of the attached Exhibit A to this Agreement.
3
<PAGE> 4
7. COMPLIANCE WITH LAWS. The Sub-Adviser represents that it is, and
will continue to be throughout the term of this Agreement, an investment adviser
registered under all applicable federal and state laws. In all matters relating
to the performance of this Agreement, the Sub-Adviser will act in conformity
with the Trust's Declaration of Trust, Bylaws, and current registration
statement applicable to the Portfolio and with the instructions and direction of
the Adviser and the Trust's Trustees, and will conform to and comply with the
1940 Act and all other applicable federal or state laws and regulations.
8. TERMINATION. This Agreement shall terminate automatically upon the
termination of the Advisory Agreement. This Agreement may be terminated at any
time, without penalty, by the Adviser or by the Trust by giving sixty (60) days'
written notice of such termination to the Sub-Adviser at its principal place of
business, provided that such termination is approved by the Board of Trustees of
the Trust or by vote of a majority of the Outstanding voting securities (as that
phrase is defined in Section 2(a)(42) of the 1940 Act) of the Portfolio. This
Agreement may be terminated at any time by the Sub-Adviser by giving 60 days'
written notice of such termination to the Trust and the Adviser at their
respective principal places of business.
9. ASSIGNMENT. This Agreement shall terminate automatically in the
event of any assignment (as that term is defined in Section 2(a)(4) of the 1940
Act) of this Agreement.
10. TERM. This Agreement shall begin on the date of its execution and
unless sooner terminated in accordance with its terms shall continue in effect
until April 30, 1997 and from year to year thereafter provided continuance is
specifically approved at least annually by the vote of a majority of the
Trustees of the Trust who are not parties hereto or interested persons (as the
term is defined in Section 2(a)(19) of the 1940 Act) of any such party, cast in
person at a meeting called for the purpose of voting on the approval of the
terms of such renewal, and by either the Trustees of the Trust or the
affirmative vote of a majority of the outstanding voting securities of the
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act).
11. AMENDMENTS. This Agreement may be amended only with the approval by
the affirmative vote of a majority of the outstanding voting securities of the
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act) and
the approval by the vote of a majority of the Trustees of the Trust who are not
parties hereto or interested persons (as that term is defined in Section
2(a)(19) of the 1940 Act) of any such party, cast in person at a meeting called
for the purpose of voting on the approval of such amendment, unless otherwise
permitted in accordance with the 1940 Act.
12. INDEMNIFICATION. The Adviser shall indemnify and hold harmless the
Sub-Adviser, its officers and directors and each person, if any, who controls
the Sub-Adviser within the meaning of Section 15 of the Securities Act of 1933
("1933 Act") (any and ail such persons shall be referred to as "Indemnified
Party"), against any loss, liability, claim,
4
<PAGE> 5
damage or expense (including the reasonable cost of investigating or defending
any alleged loss, liability, claim, damages or expense and reasonable counsel
fees incurred in connection therewith), arising by reason of any matter to which
this Sub-Advisory Agreement relates. However, in no case (i) is this indemnity
to be deemed to protect any particular indemnified Party against any liability
to which such Indemnified Party would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of reckless disregard of its obligations and duties under this
Sub-Advisory Agreement or (ii) is the Adviser to be liable under this indemnity
with respect to any claim made against any particular Indemnified Party unless
such Indemnified Party shall have notified the Adviser in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon the
Sub-Adviser or such controlling persons.
The Sub-Adviser shall indemnify and hold harmless the Adviser and each
of its directors and officers and each person if any who controls the adviser
within the meaning of Section 15 of the 1933 Act, against any loss, liability,
claim, damage or expense described in the foregoing indemnity, but only with
respect to the Sub-Adviser's willful misfeasance, bad faith or gross negligence
in the performance of its duties under this Sub-Advisory Agreement. In case any
action shall be brought against the Adviser or any person so indemnified, in
respect of which indemnity may be sought against the Sub-adviser, the
Sub-Adviser shall have the rights and duties given to the Adviser, and the
Adviser and each person so indemnified shall have the rights and duties given to
the Sub-Adviser by the provisions of subsections (i) and (ii) of this section.
5
<PAGE> 6
EXHIBIT A
WNL SERIES TRUST
SUB-ADVISORY COMPENSATION
For all services rendered by Sub-Adviser hereunder, Adviser shall pay
to Sub-Adviser and Sub-Adviser agrees to accept as full compensation for all
services rendered hereunder, monthly a fee of:
VAN KAMPAN AMERICAN CAPITAL EMERGING GROWTH PORTFOLIO
of 1 % on an annualized basis of net assets under management.
WNL SERIES TRUST
By: /s/ KURT R. FREDLAND
-------------------------------------
Title: Vice President Asst. Secretary
WNL INVESTMENT ADVISORY SERVICES, INC.
By: /s/ KURT R. FREDLAND
-------------------------------------
Title: Vice President CFO
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT,INC.
By: /s/ [ILLEGIBLE]
-------------------------------------
Title: President and Chief Operating Officer
A copy of the document establishing the Trust is filed with the Secretary of the
Commonwealth of Massachusetts. This Agreement is executed by officers not as
individuals and is not binding upon any of the Trustees, officers or
shareholders of the Trust individually but only upon the assets each Portfolio.
6
<PAGE> 1
EXHIBIT(d)2.(v)
SUB-ADVISORY AGREEMENT
THIS AGREEMENT, made this 5th day of November, 1997, is among OPCAP
ADVISORS, a Delaware general partnership (the "Sub-Adviser"), WNL INVESTMENT
ADVISORY SERVICES, INC., a Delaware corporation (the "Adviser"), and WNL SERIES
TRUST, a Massachusetts business trust (the "Trust").
BACKGROUND INFORMATION
(A) The Adviser has entered into an Investment Advisory Agreement
dated as of August 23, 1995, with the Trust, a copy of which
agreement is attached hereto as Exhibit A (the "Investment
Advisory Agreement"). Pursuant to the Investment Advisory
Agreement, the Adviser has agreed to render investment
advisory and certain other management services to all of the
Portfolios of the Trust, and the Trust has agreed to employ
the Adviser to render such services and to pay to the Adviser
certain fees therefore. The Investment Advisory Agreement
recognizes that the Adviser may enter into agreements with
other Investment advisers who will serve as Sub-Advisers to
the Portfolios of the Trust.
(B) The parties hereto wish to enter into an agreement whereby the
Sub-Adviser will provide to the EliteValue Asset Allocation
Portfolio (the "Portfolio") securities investment advisory
services for the Portfolio.
WITNESSETH THAT:
In consideration of the mutual covenants herein contained, the Trust,
the Adviser and the Sub-Adviser agree as follows:
(1) The Trust and Adviser hereby employ the Sub-Adviser to render
certain investment advisory services to the Portfolio as set forth herein. The
Sub-Adviser hereby accepts such employment and agrees to perform such services
on the terms herein set forth, and for the compensation herein provided.
(2) The Sub-Adviser shall furnish the Portfolio advice with respect to
the investment and reinvestment of the assets of the Portfolio in accordance
with the investment objectives, restrictions and limitations of the Portfolio,
as set forth in the Trust's most recent Registration Statement.
(3) The Sub-Adviser shall perform a monthly reconciliation of the
Portfolio to the holdings report provided by the Trust's custodian and bring any
material or significant variances regarding holding or valuation to the
attention of the Adviser.
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(4) The Sub-Adviser shall for all purposes herein be deemed to be an
independent contractor. The Sub-Adviser has no authority to act for or represent
the Trust or the Portfolio in any way except to direct securities transactions
pursuant to its investment advice hereunder. The Sub-Adviser is not an agent of
the Trust or the Portfolio.
(5) It is understood that the Sub-Adviser does not, by this Agreement,
undertake to assume or pay any costs or expenses of the Trust or the Portfolio.
(6)(a) The Adviser agrees to pay the Sub-Adviser for its services to be
furnished under this Agreement the fees set forth in Exhibit B attached hereto.
Such fees, with respect to each calendar month after the effective date of this
Agreement, shall be paid on the twentieth (20th) day after the close of each
calendar month.
(6)(b) The payment of all fees provided for hereunder shall be prorated
and reduced for sums payable for a period less than a full month in the event of
termination of this Agreement on a day that is not the end of a calendar month.
(6)(c) For the purposes of this Paragraph 6, the daily closing net
asset values of the Portfolio shall be computed in the manner specified in the
Registration Statement for the computation of the value of such net assets in
connection with the determination of the net asset value of the Portfolio's
shares.
(7) The services of the Sub-Adviser hereunder are not to be deemed to
be exclusive, and the Sub-Adviser is free to render services to others and to
engage in other activities so long as its services hereunder are not impaired
thereby. Without in any way relieving the Sub-Adviser of its responsibilities
hereunder, it is agreed that the Sub-Adviser may employ others to furnish
factual Information, economic advice and/or research, and investment
recommendations, upon which its investment advice and service is furnished
hereunder.
(8) In the absence of willful misfeasance, bad faith or gross
negligence in the performance of its duties hereunder, or reckless disregard of
its obligations and duties hereunder, the Sub-Adviser shall not be liable to the
Trust, the Portfolio or the Adviser or to any shareholder or shareholders of the
Trust, the Portfolio, or the Adviser for any mistake of judgment, act or
omission in the course of, or connected with, the services to be rendered by the
Sub-Adviser hereunder.
(9) In connection with the management of the investment and
reinvestment of the assets of the Portfolio, the Sub-Adviser is authorized to
select the brokers or dealers including any affiliated broker or dealers that
will execute purchase and sale transactions for the Portfolio, and is directed
to use its best efforts to obtain the best available price and most favorable
execution with respect to such purchases and sales of portfolio securities
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<PAGE> 3
for the Trust. Subject to this primary requirement, and maintaining as its first
consideration the benefits for the Portfolio, and its shareholders, the
Sub-Adviser shall have the right, subject to the approval of the Board of
Trustees of the Trust and of the Adviser, to follow a policy of selecting
brokers and dealers who furnish statistical research and other services to the
Portfolio, the Adviser, or the Sub-Adviser and, subject to the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., to take into
account the sale of variable contracts which are invested in Trust shares in
allocating to brokers and dealers purchase and sale orders for portfolio
securities, provided the Sub-Adviser believes that the quality of the
transaction and commission are comparable to what they would be with other
qualified firms.
The Adviser and the Trust's Portfolio recognize and intend that subject
to the foregoing provisions of this Section, CIBC Oppenheimer Corp. will act as
its regular broker so long as it is lawful for it so to act and that CIBC
Oppenheimer Corp. may be a major recipient of brokerage commissions paid by the
Trust's Portfolio.
(10) The Trust may terminate this Agreement by sixty days written
notice to the Adviser and the Sub-Adviser at any time, without the payment of
any penalty, by vote of the Trust's Board of Trustees, or by vote of a majority
of its outstanding voting securities. The Adviser may terminate this Agreement
by sixty days written notice to the Sub-Adviser and the Sub-Adviser may
terminate this Agreement by sixty days written notice to the Adviser, without
the payment of any penalty. This Agreement shall immediately terminate in the
event of its assignment, unless an order is issued by the Securities and
Exchange Commission conditionally or unconditionally exempting such assignment
from the provision of Section 15(a) of the Investment Company Act of 1940, in
which event this Agreement shall remain in full force and effect. This Agreement
will terminate automatically upon the termination of the Investment Advisory
Agreement.
(11) Subject to prior termination as provided above, this Agreement
shall continue in force for a period of two years from the date of execution and
from year to year thereafter if its continuance after said date: (1) is
specifically approved on or before said date and at least annually thereafter by
vote of the Board of Trustees of the Trust, including a majority of those
Trustees who are not parties to this Agreement or interested persons of any such
party, or by vote of a majority of the outstanding voting securities of the
Trust, and (2) is specifically approved at least annually by the vote of a
majority of Trustees of the Trust who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting called for the
purpose of voting on such approval.
(12) The Adviser shall indemnify and hold harmless the Sub-Adviser,
its officers and directors and each person, if any, who controls the Sub-Adviser
within the meaning of Section 15 of the Securities Act of 1933 ("1933 Act") (any
and all such persons shall be referred to as "Indemnified Party"), against any
loss, liability, claim, damage or expense (including the reasonable cost of
investigating or defending any alleged loss, liability,
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<PAGE> 4
claim, damages or expense and reasonable counsel fees incurred in connection
therewith), arising by reason of any matter to which this Sub-Advisory Agreement
relates. However, in no case (i) is this indemnity to be deemed to protect any
particular Indemnified Party against any liability to which such Indemnified
Party would otherwise be subject by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties or by reason of reckless
disregard of its obligations and duties under this Sub-Advisory Agreement or
(ii) is the Adviser to be liable under this indemnity with respect to any claim
made against any particular Indemnified Party unless such Indemnified Party
shall have notified the Adviser in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
claim shall have been served upon the Sub-Adviser or such controlling persons.
The Sub-Adviser shall indemnify and hold harmless the Adviser and each of
its directors and officers and each person if any who controls the Adviser
within the meaning of Section 15 of the 1933 Act, against any loss, liability,
claim, damage or expense described in the foregoing indemnity, but only with
respect to the Sub-Adviser's willful misfeasance, bad faith or gross negligence
in the performance of its duties under this Sub-Advisory Agreement. In case any
action shall be brought against the Adviser or any person so indemnified, in
respect of which indemnity may be sought against the Sub-Adviser, the
Sub-Adviser shall have the rights and duties given to the Adviser, and the
Adviser and each person so indemnified shall have the rights and duties given to
the Sub-Adviser by the provisions of subsections (i) and (ii) of this section.
(13) The Sub-Adviser shall provide marketing support to the Adviser in
connection with the sale of Trust shares and/or the sale of variable annuity and
variable life insurance contracts issued by Western National Life Insurance
Company and its affiliates which may invest in the Trust (collectively, the
"Life Company"), as reasonably requested by the Adviser. Such support shall
include, but not necessarily be limited to, presentations by representatives of
the Sub-Adviser at investment seminars, conferences and other industry meetings.
Any materials utilized by the Adviser which contain any information relating to
the Sub-Adviser shall be submitted to the Sub-Adviser for approval prior to use,
not less than five (5) business days before such approval is needed by the
Adviser. Any materials utilized by the Sub-Adviser which contain any information
relating to the Adviser, the Life Company (including any information relating to
its separate accounts or variable annuity or variable life insurance contracts)
or the Trust shall be submitted to the Adviser for approval prior to use, not
less than five (5) business days before such approval is needed by the
Sub-Adviser. No such materials shall be used if the Sub-Adviser or the Adviser
reasonably objects in writing to such use within five days after receipt of such
material.
(14) This Agreement shall be governed by the laws of the Commonwealth
of Massachusetts.
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<PAGE> 5
(15) The Sub-Adviser agrees to notify the parties within a reasonable
period of time regarding a material change in the membership of the Sub-Adviser.
(16) The terms "vote of a majority of the outstanding voting
securities," "assignment" and "interested persons," when used herein, shall have
the respective meanings specified in the Investment Company Act of 1940 as now
in effect or as hereafter amended.
(17) This Agreement is executed by the Trustees of the Trust, not
individually, but rather in their capacity as Trustees under the Declaration of
Trust dated December 12, 1994, as amended April 19, 1995. None of the
Shareholders, Trustees, officers, employees, or agents of the Trust shall be
personally bound or liable under this Agreement, nor shall resort be had to
their private property for the satisfaction of any obligation or claim hereunder
but only to the property of the Trust and, if the obligation or claim relates to
the property held by the Trust for the benefit of one or more but fewer than all
Portfolios, then only to the property held for the benefit of the affected
Portfolio.
(18) This Agreement will become binding on the parties hereto upon
their execution of the attached Exhibit B to the Agreement.
(19) Any notice hereunder shall be deemed duly given if sent by hand,
evidenced by written receipt or by certified mail, return receipt requested, to
the parties at the address set forth below:
If to the Sub-Adviser:
OpCap Advisors
One World Financial Center
200 Liberty Street
New York, NY 10281
Attn: Thomas E. Duggan, Esq.
General Counsel and Secretary
If to the Adviser:
WNL Investment Advisory Services, Inc.
5555 San Felipe, Suite 900
Houston, TX 77056
Attn: Dwight L. Cramer, Esq.
If to the Trust:
WNL Series Trust
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<PAGE> 6
5555 San Felipe, Suite 900
Houston, TX 77056
Attn: Dwight L. Cramer, Esq.
or to such other address as to which the recipient shall have informed the other
party in writing.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized, as of the date
and year first above written.
WNL SERIES TRUST
By: /s/ KURT R. FREDLAND
---------------------------------------
Title: Vice President
WNL INVESTMENT ADVISORY SERVICES, INC.
By: /s/ KURT R. FREDLAND
---------------------------------------
Title: Vice President
OPCAP ADVISORS
By: /s/ BERNARD A. [ILLEGIBLE]
---------------------------------------
Title:
6
<PAGE> 7
EXHIBIT B TO SUB-ADVISORY AGREEMENT
WNL SERIES TRUST
SUB-ADVISORY COMPENSATION
For all services rendered by Sub-Adviser hereunder, Adviser shall pay to
Sub-Adviser and Sub-Adviser agrees to accept as full compensation for all
services rendered hereunder, monthly a fee of:
ELITEVALUE ASSET ALLOCATION PORTFOLIO
of 1% on an annualized basis of net assets under management.
WNL SERIES TRUST
By: /s/ KURT R. FREDLAND
---------------------------------------
Title: Vice President
WNL INVESTMENT ADVISORY SERVICES, INC.
By: /s/ KURT R. FREDLAND
---------------------------------------
Title: Vice President
OPCAP ADVISORS
By: /s/ BERNARD A. [ILLEGIBLE]
---------------------------------------
Title:
A copy of the document establishing the Trust is filed with the Secretary of the
Commonwealth of Massachusetts. This Agreement is executed by officers not as
individuals and is not binding upon any of the Trustees, officers or
shareholders of the Trust individually but only upon the assets of the
Portfolio.
<PAGE> 1
EXHIBIT(g)
CUSTODIAN CONTRACT
Between
SERIES TRUST
and
STATE STREET BANK AND TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Employment of Custodian and Property to be Held By It.......................... 1
2. Duties of the Custodian with Respect to Property of the Fund Held by the
Custodian in the United States................................................. 2
2.1 Holding Securities........................................................ 2
2.2 Delivery of Securities.................................................... 2
2.3 Registration of Securities................................................ 5
2.4 Bank Accounts............................................................. 5
2.5 Availability of Federal Funds............................................. 5
2.6 Collection of Income...................................................... 6
2.7 Payment of Fund Monies.................................................... 6
2.8 Liability for Payment in Advance of Receipt of Securities Purchased....... 7
2.9 Appointment of Agents..................................................... 8
2.10 Deposit of Fund Assets in Securities System............................... 8
2.11 Fund Assets Held in the Custodian's Direct Paper System...................10
2.12 Segregated Account........................................................10
2.13 Ownership Certificates for Tax Purposes...................................11
2.14 Proxies...................................................................11
2.15 Communications Relating to Portfolio Securities...........................11
3. Duties of the Custodian with Respect to Property of the Fund Held Outside of
the United States..............................................................12
3.1 Appointment of Foreign Sub-Custodians.....................................12
3.2 Assets to be Held.........................................................12
3.3 Foreign Securities Depositories...........................................12
3.4 Agreements with Foreign Banking Institutions..............................12
3.5 Access of Independent Public Accountants of the Fund......................13
3.6 Reports by Custodian......................................................13
3.7 Transactions in Foreign Custody Account...................................13
3.8 Liability of Foreign Sub-Custodians.......................................14
3.9 Liability of Custodian....................................................14
3.10 Reimbursement for Advances................................................14
3.11 Monitoring Responsibilities...............................................15
3.12 Branches of U.S. Banks....................................................15
3.13 Tax Law...................................................................15
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund.........16
5. Proper Instructions............................................................16
6. Actions Permitted Without Express Authority....................................17
7. Evidence of Authority..........................................................17
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
8. Duties of Custodian with Respect to the Books of Account and Calculation of Net
Asset Value and Net Income............................................................18
9. Records ..............................................................................18
10. Opinion of Fund's Independent Public Accountants .....................................18
11. Reports to Fund by Independent Public Accountants ....................................19
12. Compensation of Custodian ............................................................19
13. Responsibility of Custodian ..........................................................19
14. Effective Period, Termination and Amendment ..........................................20
15. Successor Custodian ..................................................................21
16. Interpretive and Additional Provisions ...............................................22
17. Additional Funds .....................................................................22
18. Massachusetts Law to Apply ...........................................................23
19. Prior Contracts ......................................................................23
20. Shareholder Communications Election ..................................................23
</TABLE>
<PAGE> 4
CUSTODIAN CONTRACT
This Contract between WNL Series Trust, a business trust organized and
existing under the laws of The Commonwealth of Massachusetts, having its
principal place of business at 5555 San Felipe, Suite 900, Houston, Texas 77056,
hereinafter called the "Fund", and State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian";
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer shares in eight series,
the American Capital Emerging Growth Portfolio, the BEA Growth and income
Portfolio, the CS First Boston International Equity Portfolio, the BlackRock
Managed Bond Portfolio, the Quest for Value Asset Allocation Portfolio, the
Salomon Brothers U.S. Government Securities Portfolio, the Global Advisors
Growth Equity Portfolio and the Global Advisors Money Market Portfolio (such
series together with all other series subsequently established by the Fund and
made subject to this Contract in accordance with paragraph 17, being herein
referred to as the "Portfolio(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of the assets of
the Portfolios of the Fund, including securities which the Fund, on behalf of
the applicable Portfolio desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Declaration of
Trust. The Fund on behalf of the Portfolio(s) agrees to deliver to the Custodian
all securities and cash of the Portfolios, and all payments of income, payments
of principal or capital distributions received by it with respect to all
securities owned by the Portfolio(s) from time to time, and the cash
consideration received by it for such new or treasury shares of beneficial
interest of the Fund representing interests in the Portfolios, ("Shares") as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of a
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<PAGE> 5
Portfolio held or received by the Portfolio and not delivered to the custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall on behalf of the applicable Portfolio(s) from time to
time employ one or more sub-custodians, located in the United States but only in
accordance with an applicable vote by the Board of Trustees of the Fund on
behalf of the applicable Portfolio(s), and provided that the Custodian shall
have no more or less responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed than any such
sub-custodian has to the Custodian. The Custodian may employ as sub-custodian
for the Fund's foreign securities on behalf of the applicable Portfolio(s) the
foreign banking institutions and foreign securities depositories designated in
Schedule A hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held
by the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically
segregate for the account of each Portfolio all non-cash property,
to be held by it in the United States including all domestic
securities owned by such Portfolio, other than (a) securities
which are maintained pursuant to Section 2.10 in a clearing agency
which acts as a securities depository or in a book-entry system
authorized by the U.S. Department of the Treasury, collectively
referred to herein as "Securities System" and (b) commercial paper
of an issuer for which State Street Bank and Trust Company acts as
issuing and paying agent ("Direct Paper") which is deposited
and/or maintained in the Direct Paper System of the Custodian
pursuant to Section 2.11.
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by a Portfolio held by the Custodian or
in a Securities System account of the Custodian or in the
Custodian's Direct Paper book entry system account ("Direct Paper
System Account") only upon receipt of Proper Instructions from the
Fund on behalf of the applicable Portfolio, which may be
continuing instructions when deemed appropriate by the parties,
and only in the following cases:
1) Upon sale of such securities for the account of the
Portfolio and receipt of payment therefor;
2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities entered into
by the Portfolio;
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<PAGE> 6
3) In the case of a sale effected through a Securities System,
in accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other
similar offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Portfolio or into the name of any nominee or
nominees of the Custodian or into the name or nominee name
of any agent appointed pursuant to Section 2.9 or into the
name or nominee name of any sub-custodian appointed pursuant
to Article 1; or for exchange for a different number of
bonds, certificates or other evidence representing the same
aggregate face amount or number of units; provided that, in
any such case, the new securities are to be delivered to the
Custodian;
7) Upon the sale of such securities for the account of the
Portfolio, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street
delivery" custom; provided that in any such case, the
Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities prior to
receiving payment for such securities except as may arise
from the Custodian's own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion
contained in such securities, or pursuant to any deposit
agreement; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the
Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights
or similar securities or the surrender of interim receipts
or temporary securities for definitive securities; provided
that, in any such case, the new securities and cash, if any,
are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Portfolio, but only against receipt of
3
<PAGE> 7
adequate collateral as agreed upon from time to time by the
Custodian and the Fund on behalf of the Portfolio, which may
be in the form of cash or obligations issued by the United
States government, its agencies or instrumentalities, except
that in connection with any loans for which collateral is to
be credited to the Custodian's account in the book-entry
system authorized by the U.S. Department of the Treasury,
the Custodian will not be held liable or responsible for the
delivery of securities owned by the Portfolio prior to the
receipt of such collateral;
11) For delivery as security in connection with any borrowings
by the Fund on behalf of the Portfolio requiring a pledge of
assets by the Fund on behalf of the Portfolio, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the
Custodian and a broker-dealer registered under the
securities Exchange Act of 1934 (the "Exchange Act") and a
member of The National Association of Securities Dealers,
Inc. ("NASD"), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national
securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements in
connection with transactions by the Portfolio of the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the
Custodian, and a Futures Commission Merchant registered
under the Commodity Exchange Act, relating to compliance
with the rules of the Commodity Futures Trading Commission
and/or any Contract Market, or any similar organization or
organizations, regarding account deposits in connection with
transactions by the Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such
Transfer Agent or to the holders of shares in connection
with distributions in kind, as may be described from time to
time in the currently effective prospectus and statement of
additional information of the Fund, related to the Portfolio
("Prospectus"), in satisfaction of requests by holders of
Shares for repurchase or redemption; and
15) For any other proper corporate purpose, but only upon
receipt of, in addition to Proper Instructions from the Fund
on behalf of the applicable Portfolio, a certified
4
<PAGE> 8
copy of a resolution of the Board of Trustees or of the
Executive Committee signed by an officer of the Fund and
certified by the Secretary or an Assistant Secretary,
specifying the securities of the Portfolio to be delivered,
setting forth the purpose for which such delivery is to be
made, declaring such purpose to be a proper corporate
purpose, and naming the person or persons to whom delivery
of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the
Custodian (other than bearer securities) shall be registered in
the name of the Portfolio or in the name of any nominee of the
Fund on behalf of the Portfolio or of any nominee of the Custodian
which nominee shall be assigned exclusively to the Portfolio,
unless the Fund has authorized in writing the appointment of a
nominee to be used in common with other registered investment
companies having the same investment adviser as the Portfolio, or
in the name or nominee name of any agent appointed pursuant to
Section 2.9 or in the name or nominee name of any sub-custodian
appointed pursuant to Article 1. All securities accepted by the
Custodian on behalf of the Portfolio under the terms of this
Contract shall be in "street name" or other good delivery form.
If, however, the Fund directs the Custodian to maintain securities
in "street name", the Custodian shall utilize its best efforts
only to timely collect income due the Fund on such securities and
to notify the Fund on a best efforts basis only of relevant
corporate actions including, without limitation, pendency of
calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate
bank account or accounts in the United States in the name of each
Portfolio of the Fund, subject only to draft or order by the
Custodian acting pursuant to the terms of this Contract, and shall
hold in such account or accounts, subject to the provisions
hereof, all cash received by it from or for the account of the
Portfolio, other than cash maintained by the Portfolio in a bank
account established and used in accordance with Rule 17f-3 under
the Investment Company Act of 1940. Funds held by the Custodian
for a Portfolio may be deposited by it to its credit as Custodian
in the Banking Department of the Custodian or in such other banks
or trust companies as it may in its discretion deem necessary or
desirable; provided, however, that every such bank or trust
company shall be qualified to act as a custodian under the
Investment Company Act of 1940 and that each such bank or trust
company and the funds to be deposited with each such bank or trust
company shall on behalf of each applicable Portfolio be approved
by vote of a majority of the Board of Trustees of the Fund. Such
funds shall be deposited by the
5
<PAGE> 9
Custodian in its capacity as Custodian and shall be withdrawable
by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the
Fund on behalf of each applicable Portfolio and the Custodian, the
Custodian shall, upon the receipt of Proper Instructions from the
Fund on behalf of a Portfolio, make federal funds available to
such Portfolio as of specified times agreed upon from time to time
by the Fund and the Custodian in the amount of checks received in
payment for Shares of such Portfolio which are deposited into the
Portfolio's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3,
the Custodian shall collect on a timely basis all income and other
payments with respect to registered domestic securities held
hereunder to which each Portfolio shall be entitled either by law
or pursuant to custom in the securities business, and shall
collect on a timely basis all income and other payments with
respect to bearer domestic securities if, on the date of payment
by the issuer, such securities are held by the Custodian or its
agent thereof and shall credit such income, as collected, to such
Portfolio's custodian account. Without limiting the generality of
the foregoing, the Custodian shall detach and present for payment
all coupons and other income items requiring presentation as and
when they become due and shall collect interest when due on
securities held hereunder. Income due each Portfolio on securities
loaned pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the
Fund with such information or data as may be necessary to assist
the Fund in arranging for the timely delivery to the Custodian of
the income to which the Portfolio is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from
the Fund on behalf of the applicable Portfolio, which may be
continuing instructions when deemed appropriate by the parties,
the Custodian shall pay out monies of a Portfolio in the following
cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
the Portfolio but only (a) against the delivery of such
securities or evidence of title to such options, futures
contracts or options on futures contracts to the Custodian
(or any bank, banking firm or trust company doing business
in the United States or abroad which is qualified under the
Investment Company Act of 1940, as amended, to act as a
custodian and has been designated by the Custodian as its
agent for this
6
<PAGE> 10
purpose) registered in the name of the Portfolio or in the
name of a nominee of the Custodian referred to in Section
2.3 hereof or in proper form for transfer; (b) in the case
of a purchase effected through a Securities System, in
accordance with the conditions set forth in Section 2.10
hereof; (c) in the case of a purchase involving the Direct
Paper System, in accordance with the conditions set forth in
Section 2.11; (d) in the case of repurchase agreements
entered into between the Fund on behalf of the Portfolio and
the Custodian, or another bank, or a broker-dealer which is
a member of NASD, (i) against delivery of the securities
either in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt
evidencing purchase by the Portfolio of securities owned by
the Custodian along with written evidence of the agreement
by the Custodian to repurchase such securities from the
Portfolio or (e) for transfer to a time deposit account of
the Fund in any bank, whether domestic or foreign; such
transfer may be effected prior to receipt of a confirmation
from a broker and/or the applicable bank pursuant to Proper
Instructions from the Fund as defined in Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Portfolio as set forth in Section
2.2 hereof;
3) For the redemption or repurchase of Shares issued by the
Portfolio as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Portfolio, including but not limited to the following
payments for the account of the Portfolio: interest, taxes,
management, accounting, transfer agent and legal fees, and
operating expenses of the Fund whether or not such expenses
are to be in whole or part capitalized or treated as
deferred expenses;
5) For the payment of any dividends on Shares of the Portfolio
declared pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect
of securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund on behalf of
the Portfolio, a certified copy of a resolution of the Board
of Trustees or of the Executive Committee of the Fund signed
by an officer of the Fund and certified
7
<PAGE> 11
by its Secretary or an Assistant Secretary, specifying the
amount of such payment, setting forth the purpose for which
such payment is to be made, declaring such purpose to be a
proper purpose, and naming the person or persons to whom
such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities
Purchased. Except as specifically stated otherwise in this
Contract, in any and every case where payment for purchase of
domestic securities for the account of a Portfolio is made by the
Custodian in advance of receipt of the securities purchased in the
absence of specific written instructions from the Fund on behalf
of such Portfolio to so pay in advance, the Custodian shall be
absolutely liable to the Fund for such securities to the same
extent as if the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in
its discretion appoint (and may at any time remove) any other bank
or trust company which is itself qualified under the Investment
Company Act of 1940, as amended, to act as a custodian, as its
agent to carry out such of the provisions of this Article 2 as the
Custodian may from time to time direct; provided, however, that
the appointment of any agent shall not relieve the Custodian of
its responsibilities or liabilities hereunder.
2.10 Deposit of Fund Assets in Securities Systems. The Custodian may
deposit and/or maintain securities owned by a Portfolio in a
clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities Exchange Act of
1934, which acts as a securities depository, or in the book-entry
system authorized by the U.S. Department of the Treasury and
certain federal agencies, collectively referred to herein as
"Securities System" in accordance with applicable Federal Reserve
Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may keep securities of the Portfolio in a
Securities System provided that such securities are
represented in an account ("Account") of the Custodian in
the Securities System which shall not include any assets of
the Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
2) The records of the Custodian with respect to securities of
the Portfolio which are maintained in a Securities System
shall identify by book-entry those securities belonging to
the Portfolio;
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<PAGE> 12
3) The Custodian shall pay for securities purchased for the
account of the Portfolio upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the
records of the Custodian to reflect such payment and
transfer for the account of the Portfolio. The Custodian
shall transfer securities sold for the account of the
Portfolio upon (i) receipt of advice from the Securities
System that payment for such securities has been transferred
to the Account, and (ii) the making of an entry on the
records of the Custodian to reflect such transfer and
payment for the account of the Portfolio. Copies of all
advices from the Securities System of transfers of
securities for the account of the Portfolio shall identify
the Portfolio, be maintained for the Portfolio by the
Custodian and be provided to the Fund at its request. Upon
request, the Custodian shall furnish the Fund on behalf of
the Portfolio confirmation of each transfer to or from the
account of the Portfolio in the form of a written advice or
notice and shall furnish to the Fund an behalf of the
Portfolio copies of daily transaction sheets reflecting each
day's transactions in the Securities System for the account
of the Portfolio;
4) The Custodian shall provide the Fund for the Portfolio with
any report obtained by the Custodian on the Securities
System's accounting system, internal accounting control and
procedures for safeguarding securities deposited in the
Securities System;
5) The Custodian shall have received from the Fund on behalf of
the Portfolio the initial or annual certificate, as the case
may be, required by Article 14 hereof;
6) Anything to the contrary in this Contract notwithstanding,
the Custodian shall be liable to the Fund for the benefit of
the Portfolio for any loss or damage to the Portfolio
resulting from use of the Securities System by reason of any
negligence, misfeasance or misconduct of the Custodian or
any of its agents or of any of its or their employees or
from failure of the Custodian or any such agent to enforce
effectively such rights as it may have against the
Securities System; at the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian
with respect to any claim against the Securities System or
any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent
that the Portfolio has not been made whole for any such loss
or damage.
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<PAGE> 13
2.11 Fund Assets Held in the Custodian's Direct Paper System. The
Custodian may deposit and/or maintain securities owned by a
Portfolio in the Direct Paper System of the Custodian subject to
the following provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper
Instructions from the Fund on behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the
Direct Paper System only if such securities are represented
in an account ("Account") of the Custodian in the Direct
Paper System which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian
or otherwise for customers;
3) The records of the Custodian with respect to securities of
the Portfolio which are maintained in the Direct Paper
System shall identify by book-entry those securities
belonging to the Portfolio;
4) The Custodian shall pay for securities purchased for the
account of the Portfolio upon the making of an entry on the
records of the Custodian to reflect such payment and
transfer of securities to the account of the Portfolio. The
Custodian shall transfer securities sold for the account of
the Portfolio upon the making of an entry on the records of
the Custodian to reflect such transfer and receipt of
payment for the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the
Portfolio confirmation of each transfer to or from the
account of the Portfolio, in the form of a written advice or
notice, of Direct Paper on the next business day following
such transfer and shall furnish to the Fund on behalf of the
Portfolio copies of daily transaction sheets reflecting each
day's transaction in the Securities System for the account
of the Portfolio;
6) The custodian shall provide the Fund on behalf of the
Portfolio with any report on its system of internal
accounting control as the Fund may reasonably request from
time to time.
2.12 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund on behalf of each applicable Portfolio
establish and maintain a segregated account or accounts for and on
behalf of each such Portfolio, into which account or accounts
may be transferred cash and/or securities, including securities
maintained in an account by the Custodian pursuant to Section 2.10
hereof, (i) in accordance with the provisions of any agreement
among the Fund on behalf of the
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<PAGE> 14
Portfolio, the Custodian and a broker-dealer registered under the
Exchange Act and a member of the NASD (or any futures commission
merchant registered under the Commodity Exchange Act), relating to
compliance with the rules of The Options Clearing Corporation and
of any registered national securities exchange (or the Commodity
Futures Trading Commission or any registered contract market), or
of any similar organization or organizations, regarding escrow or
other arrangements in connection with transactions by the
Portfolio, (ii) for purposes of segregating cash or government
securities in connection with options purchased, sold or written
by the Portfolio or commodity futures contracts or options thereon
purchased or sold by the Portfolio, (iii) for the purposes of
compliance by the Portfolio with the procedures required by
Investment Company Act Release No. 10666, or any subsequent
release or releases of the Securities and Exchange Commission
relating to the maintenance of segregated accounts by registered
investment companies and (iv) for other proper corporate purposes,
but only, in the case of clause (iv), upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the
applicable Portfolio, a certified copy of a resolution of the
Board of Trustees or of the Executive Committee signed by an
officer of the Fund and certified by the Secretary or an Assistant
Secretary, setting forth the purpose or purposes of such
segregated account and declaring such purposes to be proper
corporate purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall
execute ownership and other certificates and affidavits for all
federal and state tax purposes in connection with receipt of
income or other payments with respect to domestic securities of
each Portfolio held by it and in connection with transfers of
securities.
2.14 Proxies. The Custodian shall, with respect to the domestic
securities held hereunder, cause to be promptly executed by the
registered holder of such securities, if the securities are
registered otherwise than in the name of the Portfolio or a
nominee of the Portfolio, all proxies, without indication of the
manner in which such proxies are to be voted, and shall promptly
deliver to the Portfolio such proxies, all proxy soliciting
materials and all notices relating to such securities.
2.15 Communications Relating to Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly
to the Fund for each Portfolio all written information (including,
without limitation, pendency of calls and maturities of domestic
securities and expirations of rights in connection therewith and
notices of exercise of call and put options written by the Fund on
behalf of the Portfolio and the maturity of futures contracts
purchased or sold by the
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<PAGE> 15
Portfolio) received by the Custodian from issuers of the
securities being held for the Portfolio. With respect to tender or
exchange offers, the Custodian shall transmit promptly to the
Portfolio all written information received by the Custodian from
issuers of the securities whose tender or exchange is sought and
from the party (or his agents) making the tender or exchange
offer. If the Portfolio desires to take action with respect to any
tender offer, exchange offer or any other similar transaction, the
Portfolio shall notify the Custodian at least three business days
prior to the date on which the Custodian is to take such action.
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes
and instructs the Custodian to employ as sub-custodians for the
Portfolio's securities and other assets maintained outside the
United States the foreign banking institutions and foreign
securities depositories designated on Schedule A hereto ("foreign
sub-custodians"). Upon receipt of "Proper Instructions", as
defined in Section 5 of this contract, together with a certified
resolution of the Fund's Board of Trustees, the Custodian and the
Fund may agree to amend Schedule A hereto from time to time to
designate additional foreign banking institutions and foreign
securities depositories to act as sub-custodian. Upon receipt of
Proper Instructions, the Fund may instruct the Custodian to cease
the employment of any one or more such sub-custodians for
maintaining custody of the Portfolio's assets.
3.2 Assets to be Held. The custodian shall limit the securities and
other assets maintained in the custody of the foreign
sub-custodians to; (a) "foreign securities", as defined in
paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of
1940, and (b) cash and cash equivalents in such amounts as the
Custodian or the Fund may determine to be reasonably necessary to
effect the Portfolio's foreign securities transactions. The
Custodian shall identify on its books as belonging to the Fund,
the foreign securities of the Fund held by each foreign
sub-custodian.
3.3 Foreign Securities Depositories. Except as may otherwise be
agreed upon in writing by the Custodian and the Fund, assets of
the Portfolios shall be maintained in foreign securities
depositories only through arrangements implemented by the foreign
banking institutions serving as sub-custodians pursuant to the
terms hereof. Where possible, such arrangements shall include
entry into agreements containing the provisions set forth in
Section 3.4 hereof.
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<PAGE> 16
3.4 Agreements with Foreign Banking Institutions. Each agreement with
a foreign banking institution shall provide that: (a) the assets
of each Portfolio will not be subject to any right, charge,
security interest, lien or claim of any kind in favor of the
foreign banking institution or its creditors or agent, except a
claim of payment for their safe custody or administration; (b)
beneficial ownership for the assets of each Portfolio will be
freely transferable without the payment of money or value other
than for custody or administration; (c) adequate records will be
maintained identifying the assets as belonging to each applicable
Portfolio; (d) officers of or auditors employed by, or other
representatives of the Custodian, including to the extent
permitted under applicable law the independent public accountants
for the Fund, will be given access to the books and records of the
foreign banking institution relating to its actions under its
agreement with the Custodian; and (e) assets of the Portfolios
held by the foreign sub-custodian will be subject only to the
instructions of the Custodian or its agents.
3.5 Access of Independent Public Accountants of the Fund. Upon request
of the Fund, the Custodian will use its best efforts to arrange
for the independent public accountants of the Fund to be afforded
access to the books and records of any foreign banking institution
employed as a foreign sub-custodian insofar as such books and
records relate to the performance of such foreign banking
institution under its agreement with the Custodian.
3.6 Reports by Custodian. The Custodian will supply to the Fund from
time to time, as mutually agreed upon, statements in respect of
the securities and other assets of the Portfolio(s) held by
foreign sub-custodians, including but not limited to an
identification of entities having possession of the Portfolio(s)
securities and other assets and advices or notifications of any
transfers of securities to or from each custodial account
maintained by a foreign banking institution for the Custodian on
behalf of each applicable Portfolio indicating, as to securities
acquired for a Portfolio, the identity of the entity having
physical possession of such securities.
3.7 Transactions in Foreign Custody Account. (a) Except as otherwise
provided in paragraph (b) of this Section 3.7, the provision of
Sections 2.2 and 2.7 of this Contract shall apply, mutatis
mutandis to the foreign securities of the Fund held outside the
United states by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the
contrary, settlement and payment for securities received for the
account of each applicable Portfolio and delivery of securities
maintained for the account of each applicable
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<PAGE> 17
Portfolio may be effected in accordance with the customary
established securities trading or securities processing practices
and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivering
securities to the purchaser thereof or to a dealer therefor (or an
agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from
such purchaser or dealer.
(c) Securities maintained in the custody of a foreign
sub-custodian may be maintained in the name of such entity's
nominee to the same extent as set forth in Section 2.3 of this
Contract, and the Fund agrees to hold any such nominee harmless
from any liability as a holder of record of such securities.
3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to
which the Custodian employs a foreign banking institution as a
foreign sub-custodian shall require the institution to exercise
reasonable care in the performance of its duties and to indemnify,
and hold harmless, the Custodian and the Fund from and against any
loss, damage, cost, expense, liability or claim arising out of or
in connection with the institution's performance of such
obligations. At the election of the Fund, it shall be entitled to
be subrogated to the rights of the Custodian with respect to any
claims against a foreign banking institution as a consequence of
any such loss, damage, cost, expense, liability or claim if and to
the extent that the Fund has not been made whole for any such
loss, damage, cost, expense, liability or claim.
3.9 Liability of Custodian. The Custodian shall be liable for the acts
or omissions of a foreign banking institution to the same extent
as set forth with respect to sub-custodians generally in this
Contract and, regardless of whether assets are maintained in the
custody of a foreign banking institution, a foreign securities
depository or a branch of a U.S. bank as contemplated by paragraph
3.12 hereof, the custodian shall not be liable for any loss,
damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of
war or terrorism or any loss where the sub-custodian has otherwise
exercised reasonable care. Notwithstanding the foregoing
provisions of this paragraph 3.9, in delegating custody duties to
State Street London Ltd., the Custodian shall not be relieved of
any responsibility to the Fund for any loss due to such
delegation, except such loss as may result from (a) political risk
(including, but not limited to, exchange control restrictions,
confiscation, expropriation, nationalization, insurrection, civil
strife or armed hostilities) or (b) other losses (excluding a
bankruptcy or insolvency of State Street London Ltd. not caused by
political risk) due to Acts of God, nuclear incident or other
14
<PAGE> 18
losses under circumstances where the Custodian and State Street
London Ltd. have exercised reasonable care.
3.10 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose for the benefit of a
Portfolio including the purchase or sale of foreign exchange or of
contracts for foreign exchange, or in the event that the Custodian
or its nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to
act or willful misconduct, any property at any time held for the
account of the applicable Portfolio shall be security therefor and
should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to
dispose of such Portfolio's assets to the extent necessary to
obtain reimbursement.
3.11 Monitoring Responsibilities. The Custodian shall furnish annually
to the Fund, during the month of June, information concerning the
foreign sub-custodians employed by the Custodian. Such information
shall be similar in kind and scope to that furnished to the Fund
in connection with the initial approval of this Contract. In
addition, the Custodian will promptly inform the Fund in the event
that the Custodian learns of a material adverse change in the
financial condition of a foreign sub-custodian or any material
loss of the assets of the Fund or in the case of any foreign
sub-custodian not the subject of an exemptive order from the
Securities and Exchange Commission is notified by such foreign
sub-custodian that there appears to be a substantial likelihood
that its shareholders' equity will decline below $200 million
(U.S. dollars or the equivalent thereof) or that its shareholders'
equity has declined below $200 million (in each case computed in
accordance with generally accepted U.S. accounting principles).
3.12 Branches of U.S. Banks. (a) Except as otherwise set forth in this
contract, the provisions hereof shall not apply where the custody
of the Portfolios assets are maintained in a foreign branch of a
banking institution which is a "bank" as defined by Section
2(a)(5) of the Investment Company Act of 1940 meeting the
qualification set forth in Section 26(a) of said Act. The
appointment of any such branch as a sub-custodian shall be
governed by paragraph 1 of this Contract.
(b) cash held for each Portfolio of the Fund in the United Kingdom
shall be maintained in an interest bearing account established for
the Fund with the Custodian's London branch, which account shall
be subject to the direction of the Custodian, State Street London
Ltd. or both.
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<PAGE> 19
3.13 Tax Law. The Custodian shall have no responsibility or liability
for any obligations now or hereafter imposed on the Fund or the
Custodian as custodian of the Fund by the tax law of the United
States of America or any state or political subdivision thereof.
It shall be the responsibility of the Fund to notify the Custodian
of the obligations imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of jurisdictions other than
those mentioned in the above sentence, including responsibility
for withholding and other taxes, assessments or other governmental
charges, certifications and governmental reporting. The sole
responsibility of the Custodian with regard to such tax law shall
be to use reasonable efforts to assist the Fund with respect to
any claim for exemption or refund under the tax law of
jurisdictions for which the Fund has provided such information.
4. Payments for Sales or Repurchases or Redemptions of Shares of the
Fund
The Custodian shall receive from the distributor for the Shares or from
the Transfer Agent of the Fund and deposit into the account of the appropriate
Portfolio such payments as are received for Shares of that Portfolio issued or
sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund on behalf of each such Portfolio and the Transfer Agent
of any receipt by it of payments for Shares of such Portfolio.
From such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the Board of
Trustees of the Fund pursuant thereto, the Custodian shall, upon receipt of
instructions from the Transfer Agent, make funds available for payment to
holders of shares who have delivered to the Transfer Agent a request for
redemption or repurchase of their Shares. In connection with the redemption or
repurchase of Shares of a Portfolio, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on
the Custodian by a holder of Shares, which checks have been furnished by the
Fund to the holder of Shares, when presented to the Custodian in accordance with
such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
5. Proper Instructions
Proper Instructions as used throughout this Contract means a writing
signed or initialled by one or more person or persons as
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<PAGE> 20
the Board of Trustees shall have from time to time authorized. Each such writing
shall set forth the specific transaction or type of transaction involved,
including a specific statement of the purpose for which such action is
requested. Oral instructions will be considered Proper Instructions if the
Custodian reasonably believes them to have been given by a person authorized to
give such instructions with respect to the transaction involved. The Fund shall
cause all oral instructions to be confirmed in writing. Upon receipt of a
certificate of the Secretary or an Assistant Secretary as to the authorization
by the Board of Trustees of the fund accompanied by a detailed description of
procedures approved by the Board of Trustees, Proper Instructions may include
communications effected directly between electro-mechanical or electronic
devices provided that the Board of Trustees and the Custodian, are satisfied
that such procedures afford adequate safeguards for the Portfolios' assets. For
purposes of this Section, Proper Instructions shall include instructions
received by the Custodian pursuant to any three-party agreement which requires a
segregated asset account in accordance with Section 2.12.
6. Actions Permitted Without Express Authority
The Custodian may in its discretion, without express authority from the
Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under
this Contract, provided that all such payments shall be accounted
for to the Fund on behalf of the Portfolio;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Portfolio, checks,
drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and
other dealings with the securities and property of the Portfolio
except as otherwise directed by the Board of Trustees of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the Fund.
The Custodian may
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<PAGE> 21
receive and accept a certified copy of a vote of the Board of Trustees of the
Fund as conclusive evidence (a) of the authority of any person to act in
accordance with such vote or (b) of any determination or of any action by the
Board of Trustees pursuant to the Declaration of Trust as described in such
vote, and such vote may be considered as in full force and effect until receipt
by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Trustees of the Fund to keep
the books of account of each Portfolio and/or compute the net asset value per
share of the outstanding shares of each Portfolio or, if directed in writing to
do so by the Fund on behalf of the Portfolio, shall itself keep such books of
account and/or compute such net asset value per share. If so directed, the
Custodian shall also calculate daily the net income of the Portfolio as
described in the Fund's currently effective prospectus related to such Portfolio
and shall advise the Fund and the Transfer Agent daily of the total amounts of
such net income and, if instructed in writing by an officer of the Fund to do
so, shall advise the Transfer Agent periodically of the division of such net
income among its various components. The calculations of the net asset value per
share and the daily income of each Portfolio shall be made at the time or times
described from time to time in the Fund's currently effective prospectus related
to such Portfolio.
9. Records
The Custodian shall with respect to each Portfolio create and maintain
all records relating to its activities and obligations under this Contract in
such manner as will meet the obligations of the Fund under the Investment
Company Act of 1940, with particular attention to Section 31 thereof and Rules
31a-1 and 31a-2 thereunder. All such records shall be the property of the Fund
and shall at all times during the regular business hours of the Custodian be
open for inspection by duly authorized officers, employees or agents of the Fund
and employees and agents of the Securities and Exchange Commission. The
Custodian shall, at the Fund's request, supply the Fund with a tabulation of
securities owned by each Portfolio and held by the Custodian and shall, when
requested to do so by the Fund and for such compensation as shall be agreed upon
between the Fund and the Custodian, include certificate numbers in such
tabulations.
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<PAGE> 22
10. Opinion of Fund's Independent Public Accountants
The custodian shall take all reasonable action, as the Fund on behalf
of each applicable Portfolio may from time to time request, to obtain from year
to year favorable opinions from the Fund's independent public accountants with
respect to its activities hereunder in connection with the preparation of the
Fund's Form N-1A, and Form N-SAR or other annual reports to the Securities and
Exchange Commission and with respect to any other requirements of such
Commission.
11. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, on behalf of each of the
Portfolios at such times as the Fund may reasonably require, with reports by
independent public accountants an the accounting system, internal accounting
control and procedures for safeguarding securities, futures contracts and
options on futures contracts, including securities deposited and/or maintained
in a Securities System, relating to the services provided by the Custodian under
this Contract; such reports, shall be of sufficient scope and in sufficient
detail, as may reasonably be required by the Fund to provide reasonable
assurance that any material inadequacies would be disclosed by such examination,
and, if there are no such inadequacies, the reports shall so state.
12. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund on behalf of each applicable Portfolio and the Custodian.
13. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel (who may be
19
<PAGE> 23
counsel for the Fund) on all matters, and shall be without liability for any
action reasonably taken or omitted pursuant to such advice.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States (except as specifically provided in Article 3.9)
and, regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S. bank
as contemplated by paragraph 3.12 hereof, the Custodian shall not be liable for
any loss, damage, cost, expense, liability or claim resulting from, or caused
by, the direction of or authorization by the Fund to maintain custody or any
securities or cash of the Fund in a foreign country including, but not limited
to, losses resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Fund on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, foreign exchange contracts and assumed settlement)
for the benefit of a Portfolio including the purchase or sale of foreign
exchange or of contracts for foreign exchange or in the event that the Custodian
or its nominee shall incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in connection with the performance of this
Contract, except such as may arise from its or its nominee's own negligent
action, negligent failure to act or willful misconduct, any property at any time
held for the account of the applicable Portfolio shall be security therefor and
should the Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of such Portfolio's assets to
the extent necessary to obtain reimbursement.
14. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either
20
<PAGE> 24
party by an instrument in writing delivered or mailed, postage prepaid to the
other party, such termination to take effect not sooner than sixty (60) days
after the date of such delivery or mailing; provided, however that the custodian
shall not with respect to a Portfolio act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board of Trustees of the Fund has approved the initial use of
a particular Securities System by such Portfolio, as required by Rule 17f-4
under the Investment Company Act of 1940, as amended and that the Custodian
shall not with respect to a Portfolio act under Section 2.11 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board of Trustees has approved the initial use of the Direct
Paper System by such Portfolio; provided further, however, that the Fund shall
not amend or terminate this Contract in contravention of any applicable federal
or state regulations, or any provision of the Declaration of Trust, and further
provided, that the Fund on behalf of one or more of the Portfolios may at any
time by action of its Board of Trustees (i) substitute another bank or trust
company for the Custodian by giving notice as described above to the Custodian,
or (ii) immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency or
upon the happening of a like event at the direction of an appropriate regulatory
agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund on behalf of each
applicable, Portfolio shall pay to the Custodian such compensation as may be due
as of the date of such termination and shall likewise reimburse the Custodian
for its costs, expenses and disbursements.
15. Successor Custodian
If a successor custodian for the Fund, of one or more of the Portfolios
shall be appointed by the Board of Trustees of the Fund, the Custodian shall,
upon termination, deliver to such successor custodian at the office of the
Custodian, duly endorsed and in the form for transfer, all securities of each
applicable Portfolio then held by it hereunder and shall transfer to an account
of the successor custodian all of the securities of each such Portfolio held in
a Securities System.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board of
Trustees of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Trustees
21
<PAGE> 25
shall have been delivered to the Custodian on or before the date when such
termination shall become effective, then the Custodian shall have the right to
deliver to a bank or trust company, which is a "bank" as defined in the
Investment Company Act of 1940, doing business in Boston, Massachusetts, of its
own selection, having an aggregate capital, surplus, and undivided profits, as
shown by its last published report, of not less than $25,000,000, all
securities, funds and other properties held by the Custodian on behalf of each
applicable Portfolio and all instruments held by the Custodian relative thereto
and all other property held by it under this Contract on behalf of each
applicable Portfolio and to transfer to an account of such successor custodian
all of the securities of each such Portfolio held in any Securities System.
Thereafter, such bank or trust company shall be the successor of the Custodian
under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
16. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund on behalf of each of the Portfolios, may from time to time agree on
such provisions interpretive of or in addition to the provisions of this
Contract as may in their joint opinion be consistent with the general tenor of
this Contract. Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto, provided that no
such interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provision of the Declaration of Trust of the
Fund. No interpretive or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Contract.
17. Additional Funds
In the event that the Fund establishes one or more series of Shares in
addition to the American Capital Emerging Growth Portfolio, the BEA Growth and
Income Portfolio, the CS First Boston international Equity Portfolio, the
BlackRock Managed Bond Portfolio, the Quest for Value Asset Allocation
Portfolio, the Salomon Brothers U.S. Government Securities Portfolio, the Global
22
<PAGE> 26
Advisors Growth Equity Portfolio and the Global Advisors Money Market Portfolio
with respect to which it desires to have the Custodian render services as
custodian under the terms hereof, it shall so notify the Custodian in writing,
and if the Custodian agrees in writing to provide such services, such series of
Shares shall become a Portfolio hereunder.
18. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
19. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund on behalf of each of the Portfolios and the
Custodian relating to the custody of the Fund's assets.
20. Shareholder Communications Election
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, the Rule prohibits
the requesting company from using the Fund's name and address for any purpose
other than corporate communications. Please indicate below whether the Fund
consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions.
NO [ ] The Custodian is not authorized to release the Fund's name,
address, and share positions.
23
<PAGE> 27
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the day of April, 1995.
ATTEST WNL SERIES TRUST
/s/ [ILLEGIBLE] By /s/ [ILLEGIBLE]
- -------------------------- ----------------------------------
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ [ILLEGIBLE] By /s/ [ILLEGIBLE]
- -------------------------- ----------------------------------
Executive Vice President
24
<PAGE> 28
Schedule A
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Trustees of WNL Series Trust for
use as sub-custodians for the Fund's securities and other assets:
(Insert banks and securities depositories)
Certified:
- ------------------------------------
Fund's Authorized Officer
Date:
-------------------------------
25
<PAGE> 29
AMENDMENT TO CUSTODIAN AGREEMENT
Agreement made by and between State Street Bank and Trust Company (the
"Custodian") and WNL Series Trust (the "Fund").
WHEREAS, the Custodian and the Fund are parties to a Custodian
Agreement dated April , 1995 (the "Custodian Agreement") governing the terms
and conditions under which the Custodian maintains custody of the securities and
other assets of the Fund; and
WHEREAS, the Custodian and the Fund desire to amend the terms and
conditions under which the Custodian maintains the Fund's securities and other
non-cash property in the custody of certain foreign sub-custodians in conformity
with the requirements of Rule 17f-5 under the Investment Company Act of 1940, as
amended;
NOW THEREFORE, in consideration of the premises and covenants contained
herein, the Custodian and the Fund hereby amend the Custodian Agreement by the
addition of the following terms and provisions:
1. Notwithstanding any provisions to the contrary set forth in the
Custodian Agreement, the Custodian may hold securities and other non-cash
property for all of its customers, including the Fund, with a foreign
sub-custodian in a single account that is identified as belonging to the
Custodian for the benefit of its customers, provided however, that (i) the
records of the Custodian with respect to securities and other non-cash property
of the Fund which are maintained in such account shall identify by book-entry
those securities and other non-cash property belonging to the Fund and (ii) the
Custodian shall require that securities and other non-cash property so held by
the foreign sub-custodian be held separately from any assets of the foreign
sub-custodian or of others.
2. Except as specifically superseded or modified herein, the terms and
provisions of the Custodian Agreement shall continue to apply with full force
and effect.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed as a sealed instrument in its name and behalf by its duly
authorized representative this 13th day of December 1995.
WNL SERIES TRUST
By: /s/ KURT R. FREDLAND
-------------------------------
Title: Vice President
----------------------------
STATE STREET BANK AND TRUST COMPANY
By: /s/ [ILLEGIBLE]
-------------------------------
Title: Senior Vice President
----------------------------
<PAGE> 1
EXHIBIT (h)1.
TRANSFER AGENCY AND SERVICE AGREEMENT
between
WNL SERIES TRUST
and
STATE STREET BANK AND TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Article 1 Terms of Appointment; Duties of the Bank ...........................1
Article 2 Fees and Expenses ..................................................4
Article 3 Representations and Warranties of the Bank .........................5
Article 4 Representations and Warranties of the Fund .........................5
Article 5 Data Access and Proprietary Information ............................6
Article 6 Indemnification ....................................................8
Article 7 Standard of Care ...................................................9
Article 8 Covenants of the Fund and the Bank .................................9
Article 9 Termination of Agreement ..........................................10
Article 10 Additional Funds ..................................................11
Article 11 Assignment.........................................................11
Article 12 Amendment .........................................................11
Article 13 Massachusetts Law to Apply ........................................12
Article 14 Force Majeure .....................................................12
Article 15 Consequential Damages .............................................12
Article 16 Merger of Agreement ...............................................12
Article 17 Limitations of Liability of the Trustees and the Shareholders .....12
Article 18 Counterparts ......................................................13
</TABLE>
<PAGE> 3
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the ____day of _________, 199_ ,by and between
WNL SERIES TRUST, a Massachusetts business trust, having its principal office
and place of business at 5555 San Felipe, Houston, Texas 77056 (the "Fund"), and
STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company having its
principal office and place of business at 225 Franklin Street, Boston,
Massachusetts 02110 (the "Bank").
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer shares in eight (8)
series, American Capital Emerging Growth Portfolio, BEA Growth and Income
Portfolio, CS First Boston International Equity Portfolio, BlackRock Managed
Bond Portfolio, Quest for Value Asset Allocation Portfolio, Salomon Brothers
U.S. Government Securities Portfolio, Global Advisors Growth Equity Portfolio
and Global Advisors Money Market Portfolio (each such series, together with all
other series subsequently established by the Fund and made subject to this
Agreement in accordance with Article 10, being herein referred to as a
"Portfolio", and collectively as the "Portfolios");
WHEREAS, the Fund on behalf of the Portfolios desires to appoint the
Bank as its transfer agent, dividend disbursing agent and agent in connection
with certain other activities, and the Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1 Terms of Appointment: Duties of the Bank
1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund, on behalf of the Portfolios, hereby employs and appoints
the Bank to act as, and the Bank agrees to act as its transfer agent for the
authorized and issued shares of beneficial interest of the Fund representing
interests in each of the respective Portfolios ("Shares"), dividend disbursing
agent and agent in connection with any accumulation, open-account or similar
plans provided to the
<PAGE> 4
shareholders of each of the respective Portfolios of the Fund ("Shareholders")
and set out in the currently effective prospectus and statement of additional
information ("prospectus") of the Fund on behalf of the applicable Portfolio,
including without limitation any periodic investment plan or periodic withdrawal
program.
1.02 The Bank agrees that it will perform the following
services:
(a) In accordance with procedures established from time to
time by agreement between the Fund on behalf of each of the Portfolios, as
applicable and the Bank, the Bank shall:
(i) Receive for acceptance, orders for the purchase of
Shares, and promptly deliver payment and appropriate
documentation thereof to the Custodian of the Fund
authorized pursuant to the Declaration of Trust of
the Fund (the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate
number of Shares and hold such Shares in the
appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and
redemption directions and deliver the appropriate
documentation thereof to the Custodian;
(iv) In respect to the transactions in items (i), (ii) and
(iii) above, the Bank shall execute transactions
directly with broker-dealers authorized by the Fund
who shall thereby be deemed to be acting on behalf of
the Fund;
(v) At the appropriate time as and when it receives
monies paid to it by the Custodian with respect to
any redemption, pay over or cause to be paid over in
the appropriate manner such monies as instructed by
the redeeming Shareholders;
(vi) Effect transfers of Shares by the registered owners
thereof upon receipt of appropriate instructions;
(vii) Prepare and transmit payments for dividends and
distributions declared by the Fund on behalf of the
applicable Portfolio;
2
<PAGE> 5
(viii) Issue replacement certificates for those certificates
alleged to have been lost, stolen or destroyed upon
receipt by the Bank of indemnification satisfactory
to the Bank and protecting the Bank and the Fund, and
the Bank at its option, may issue replacement
certificates in place of mutilated stock certificates
upon presentation thereof and without such indemnity;
(ix) Maintain records of account for and advise the Fund
and its Shareholders as to the foregoing; and
(x) Record the issuance of Shares of the Fund and
maintain pursuant to SEC Rule 17Ad-10(e) a record of
the total number of Shares which are authorized,
based upon data provided to it by the Fund, and
issued and outstanding. The Bank shall also provide
the Fund on a regular basis with the total number of
Shares which are authorized and issued and
outstanding and shall have no obligation, when
recording the issuance of Shares, to monitor the
issuance of such Shares or to take cognizance of any
laws relating to the issue or sale of such Shares,
which functions shall be the sole responsibility of
the Fund.
(b) In addition to and neither in lieu nor in contravention
of the services set forth in the above paragraph (a), the Bank shall: (i)
perform the customary services of a transfer agent, dividend disbursing agent
and, as relevant, agent in connection with accumulation, open-account or similar
plans (including without limitation any periodic investment plan or periodic
withdrawal program), including but not limited to: maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing proxies, mailing
Shareholder reports and prospectuses to current Shareholders, withholding taxes
on U.S. resident and non-resident alien accounts, preparing and filing U.S.
Treasury Department Forms 1099 and other appropriate forms required with respect
to dividends and distributions by federal authorities for all Shareholders,
preparing and mailing confirmation forms and statements of account to
Shareholders for all purchases and redemptions of Shares and other confirmable
transactions in Shareholder accounts, preparing and mailing activity statements
for
3
<PAGE> 6
Shareholders, and providing Shareholder account information and (ii) provide a
system which will enable the Fund to monitor the total number of Shares sold in
each State.
(c) In addition, the Fund shall (i) identify to the Bank in
writing those transactions and assets to be treated as exempt from blue sky
reporting for each State and (ii) verify the establishment of transactions for
each State on the system prior to activation and thereafter monitor the daily
activity for each State. The responsibility of the Bank for the Fund's blue sky
State registration status is solely limited to the initial establishment of
transactions subject to blue sky compliance by the Fund and the reporting of
such transactions to the Fund as provided above.
(d) Procedures as to who shall provide certain of these
services in Article 1 may be established from time to time by agreement between
the Fund on behalf of each Portfolio and the Bank per the attached service
responsibility schedule. The Bank may at times perform only a portion of these
services and the Fund or its agent may perform these services on the Fund's
behalf.
(e) The Bank shall provide additional services on behalf of
the Fund (i.e., escheatment services) which may be agreed upon in writing
between the Fund and the Bank.
Article 2 Fees and Expenses
2.01 For performance by the Bank pursuant to this Agreement,
the Fund agrees on behalf of each of the Portfolios to pay the Bank an annual
maintenance fee for each Shareholder account as set out in the initial fee
schedule attached hereto. Such fees and out-of-pocket expenses and advances
identified under Section 2.02 below may be changed from time to time subject to
mutual written agreement between the Fund and the Bank.
2.02 In addition to the fee paid under Section 2.01 above,
the Fund agrees on behalf of each of the Portfolios to reimburse the Bank for
out-of-pocket expenses, including but not limited to confirmation production,
postage, forms, telephone, microfilm, microfiche, tabulating proxies, records
storage or advances incurred by the Bank for the items set out in the fee
schedule attached hereto, In addition, any other expenses incurred by the Bank
at the request or with the consent of the Fund, will be reimbursed by the Fund
on behalf of the applicable Portfolio.
4
<PAGE> 7
2.03 The Fund agrees on behalf of each of the Portfolios to
pay all fees and reimbursable expenses within five days following the mailing of
the respective billing notice. Postage for mailing of dividends, proxies, Fund
reports and other mailings to all Shareholder accounts shall be advanced to the
Bank by the Fund at least seven (7) days prior to the mailing date of such
materials.
Article 3 Representations and Warranties of the Bank
The Bank represents and warrants to the Fund that:
3.01 It is a trust company duly organized and existing and in
good standing under the laws of the Commonwealth of Massachusetts.
3.02 It is duly qualified to carry on its business in the
Commonwealth of Massachusetts.
3.03 it is empowered under applicable laws and by its Charter
and By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 Representations and Warranties of the Fund
The Fund represents and warrants to the Bank that:
4.01 It is a business trust duly organized and existing and
in good standing under the laws of Massachusetts.
4.02 It is empowered under applicable laws and by its
Declaration of Trust and ByLaws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Declaration
of Trust and By-Laws have been taken to authorize it to enter into and perform
this Agreement.
4.04 It is an open-end diversified management investment
company registered under the Investment Company Act of 1940, as amended.
5
<PAGE> 8
4.05 A registration statement under the Securities Act of
1933, as amended on behalf of each of the Portfolios is currently effective and
will remain effective, and appropriate state securities law filings have been
made and will continue to be made, with respect to all Shares of the Fund being
offered for sale.
Article 5 Data Access and Proprietary Information
5.01 The Fund acknowledges that the data bases, computer
programs, screen format, report formats, interactive design techniques, and
documentation manuals furnished to the Fund by the Bank as part of the Fund's
ability to access certain Fund-related data ("Customer Data") maintained by the
Bank on data bases under the control and ownership of the Bank or other third
party ("Data Access Services") constitute copyrighted, trade secret, or other
proprietary information (collectively, "Proprietary Information") of substantial
value to the Bank or other third party. In no event shall Proprietary
Information be deemed Customer Data. The Fund agrees to treat all Proprietary
Information as proprietary to the Bank and further agrees that it shall not
divulge any Proprietary Information to any person or organization except as may
be provided hereunder. Without limiting the foregoing, the Fund agrees for
itself and its employees and agents:
(a) to access Customer Data solely from locations as may
be designated in writing by the Bank and solely in
accordance with the Bank's applicable user
documentation;
(b) to refrain from copying or duplicating in any way
the Proprietary Information;
(c) to refrain from obtaining unauthorized access to any
portion of the Proprietary Information, and if such
access is inadvertently obtained, to inform in a
timely manner of such fact and dispose of such
information in accordance with the Bank's
instructions;
(d) to refrain from causing or allowing third-party data
required hereunder from being retransmitted to any
other computer facility or other location, except
with the prior written consent of the Bank;
6
<PAGE> 9
(e) that the Fund shall have access only to those
authorized transactions agreed upon by the parties;
(f) to honor all reasonable written requests made by the
Bank to protect at the Bank's expense the rights of
the Bank in Proprietary Information at common law,
under federal copyright law and under other federal
or state law.
Each party shall take reasonable efforts to advise its employees of
their obligations pursuant to this Article 5. The obligations of this Article
shall survive any earlier termination of this Agreement,
5.02 If the Fund notifies the Bank that any of the Data
Access Services do not operate in material compliance with the most recently
issued user documentation for such services, the Bank shall endeavor in a timely
manner to correct such failure. Organizations from which the Bank may obtain
certain data included in the Data Access Services are solely responsible for the
contents of such data and the Fund agrees to make no claim against the Bank
arising out of the contents of such third-party data, including, but not limited
to, the accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND
SOFTWARE SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN AS IS,
AS AVAILABLE BASIS. THE BANK EXPRESSLY DISCLAIMS ALL WARRANTIES EXCEPT THOSE
EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
5.03 If the transactions available to the Fund include the
ability to originate electronic instructions to the Bank in order to (i) effect
the transfer or movement of cash of Shares or (ii) transmit Shareholder
information or other information (such transactions constituting a "COEFI"),
then in such event the Bank shall be entitled to rely on the validity and
authenticity of such instruction without undertaking any further inquiry as long
as such instruction is undertaken in conformity with security procedures
established by the Bank from time to time.
7
<PAGE> 10
Article 6 Indemnification
6.01 The Bank shall not be responsible for, and the Fund
shall on behalf of the applicable Portfolio indemnify and hold the Bank harmless
from and against, any and all losses, damages, costs, charges, counsel fees,
payments, expenses and liability arising out of or attributable to:
(a) All actions of the Bank or its agent or subcontractors
required to be taken pursuant to this Agreement, provided that such actions are
taken in good faith and without negligence or willful misconduct.
(b) The Fund's lack of good faith, negligence or willful
misconduct which arise out of the breach of any representation or warranty of
the Fund hereunder.
(c) The reasonable reliance on or reasonable use by the Bank
or its agents or subcontractors of information, records, documents or services
which (i) are received by the Bank or its agents or subcontractors, and (ii)
have been prepared, maintained or performed by the Fund or any other person or
firm on behalf of the Fund including but not limited to any previous transfer
agent or registrar.
(d) The reasonable reliance on, or the reasonable carrying
out by the Bank or its agents or subcontractors of any instructions or requests
of the Fund on behalf of the applicable Portfolio.
(e) The offer or sale of Shares in violation of any
requirement under the federal securities laws or regulations or the securities
laws or regulations of any state that such Shares be registered in such state or
in violation of any stop order or other determination or ruling by any federal
agency or any state with respect to the offer or sale of such Shares in such
state.
6.02 At any time the Bank may apply to any officer of the
Fund for instructions, and may consult with legal counsel with respect to any
matter arising in connection with the services to be performed by the Bank under
this Agreement, and the Bank and its agents or subcontractors shall not be
liable and shall be indemnified by the Fund on behalf of the applicable
Portfolio for any action taken or omitted by it in reliance upon such
instructions or upon the opinion of such counsel.
8
<PAGE> 11
The Bank, its agents and subcontractors shall be protected and indemnified in
acting upon any paper or document furnished by or on behalf of the Fund,
reasonably believed to be genuine and to have been signed by the proper person
or persons, or upon any instruction, information, data, records or documents
provided the Bank or its agents or subcontractors by machine readable input,
telex, CRT data entry or other similar means authorized by the Fund, and shall
not be held to have notice of any change of authority of any person, until
receipt of written notice thereof from the Fund. The Bank, its agents and
subcontractors shall also be protected and indemnified in recognizing stock
certificates which are reasonably believed to bear the proper manual or
facsimile signatures of the officers of the Fund, and the proper
countersignature of any former transfer agent or former registrar, or of a
co-transfer agent or co-registrar.
6.03 In order that the indemnification provisions contained
in this Article 6 shall apply, upon the assertion of a claim for which the Fund
may be required to indemnify the Bank, the Bank shall promptly notify the Fund
of such assertion, and shall keep the Fund advised with respect to all
developments concerning such claim. The Fund shall have the option to
participate with the Bank in the defense of such claim or to defend against said
claim in its own name or in the name of the Bank. The Bank shall in no case
confess any claim or make any compromise in any case in which the Fund may be
required to indemnify the Bank except with the Fund's prior written consent.
Article 7 Standard of Care
7.01 The Bank shall at all times act in good faith and agrees
to use its best efforts within reasonable limits to insure the accuracy of all
services performed under this Agreement, but assumes no responsibility and shall
not be liable for loss or damage due to errors unless said errors are caused by
its negligence, bad faith, or willful misconduct or that of its employees.
Article 8 Covenants of the Fund and the Bank
8.01 The Fund shall on behalf of each of the Portfolios
promptly furnish to the Bank the following:
(a) A certified copy of the resolution of the Trustees of the
Fund authorizing the appointment of the Bank and the execution and delivery of
this Agreement.
9
<PAGE> 12
(b) A copy of the Declaration of Trust and By-Laws of the
Fund and all amendments thereto.
8.02 The Bank hereby agrees to establish and maintain
facilities and procedures reasonably acceptable to the Fund for safekeeping of
stock certificates, check forms and facsimile signature imprinting devices, if
any; and for the preparation or use, and for keeping account of, such
certificates, forms and devices.
8.03 The Bank shall keep records relating to the services to
be performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the Investment Company Act of 1940, as amended,
and the Rules thereunder, the Bank agrees that all such records prepared or
maintained by the Bank relating to the services to be performed by the Bank
hereunder are the property of the Fund and will be preserved, maintained and
made available in accordance with such Section and Rules, and will be
surrendered promptly to the Fund on and in accordance with its request.
8.04 The Bank and the Fund agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily disclosed to
any other person, except as may be required by law.
8.05 In case of any requests or demands for the inspection
of the Shareholder records of the Fund, the Bank will endeavor to notify the
Fund and to secure instructions from an authorized officer of the Fund as to
such inspection. The Bank reserves the right, however, to exhibit the
Shareholder records to any person whenever it is advised by its counsel that it
may be held liable for the failure to exhibit the Shareholder records to such
person.
Article 9 Termination of Agreement
9.01 This Agreement may be terminated by either party upon
sixty (60) days written notice to the other.
9.02 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and material will
be borne by the Fund on behalf of the
10
<PAGE> 13
applicable Portfolio(s). Additionally, the Bank reserves the right to charge for
any other reasonable expenses associated with such termination.
Article 10 Additional Funds
10.01 In the event that the Fund establishes one or more
series of Shares in additional to American Capital Emerging Growth Portfolio,
BEA Growth and Income Portfolio, CS First Boston International Equity Portfolio,
BlackRock Managed Bond Portfolio, Quest for Value Asset Allocation Portfolio,
Salomon Brothers U.S. Government Securities Portfolio, Global Advisors Growth
Equity Portfolio and Global Advisors Money Market Portfolio with respect to
which it desires to have the Bank render services as transfer agent under the
terms hereof, it shall so notify the Bank in writing, and if the Bank agrees in
writing to provide such services, such series of Shares shall become a Portfolio
hereunder.
Article 11 Assignment
11.01 Except as provided in Section 11.03 below, neither
this Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
11.02 This Agreement shall inure to the benefit of and be
binding upon the parties and their respective permitted successors and assigns.
11.03 The Bank may, without further consent on the part of
the Fund, subcontract for the performance hereof with (i) Boston Financial Data
Services, Inc., a Massachusetts corporation ("BFDS") which is duly registered as
a transfer agent pursuant to Section 17A(c)(1) of the Securities Exchange Act of
1934, as amended ("Section 17A(c)(1)"), (ii) a BFDS subsidiary duly registered
as a transfer agent pursuant to Section 17A(c)(1) or (iii) a BFDS affiliate;
provided, however, that the Bank shall be as fully responsible to the Fund for
the acts and omissions of any subcontractor as it is for its own acts and
omissions.
Article 12 Amendment
12.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Trustees of the Fund.
11
<PAGE> 14
Article 13 Massachusetts Law to Apply
13.01 This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
Article 14 Force Majeure
14.01 in the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God, strikes,
equipment or transmission failure or damage reasonably beyond its control, or
other causes reasonably beyond its control, such party shall not be liable for
damages to the other for any damages resulting from such failure to perform or
otherwise from such causes.
Article 15 Consequential Damages
15.01 Neither party to this Agreement shall be liable to the
other party for consequential damages under any provision of this Agreement or
for any consequential damages arising out of any act or failure to act
hereunder.
Article 16 Merger of Agreement
16.01 This Agreement constitutes the entire agreement
between the parties hereto and supersedes any prior agreement with respect to
the subject matter hereof whether oral or written.
Article 17 Limitations of Liability of the Trustees and Shareholders
17.01 A copy of the Declaration of Trust of the Trust is on
file with the Secretary of the Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed on behalf of the Trustees of the
Trust as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees or Shareholders individually
but are binding only upon the assets and property of the Fund.
12
<PAGE> 15
Article 18 Counterparts
18.01 This Agreement maybe executed by the parties hereto on
any number of counterparts, and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf by and through their duly
authorized officers, as of the day and year first above written.
WNL SERIES TRUST
BY: /s/ [ILLEGIBLE]
-----------------------------------
ATTEST:
/s/ [ILLEGIBLE]
- -----------------------------
STATE STREET BANK AND TRUST COMPANY
BY: /s/ [ILLEGIBLE]
-----------------------------------
Executive Vice President
ATTEST:
/s/ [ILLEGIBLE]
- -----------------------------
13
<PAGE> 16
STATE STREET BANK & TRUST COMPANY
FUND SERVICE RESPONSIBILITIES*
<TABLE>
<CAPTION>
Service Performed Responsibility
- ----------------- --------------
Bank Fund
---- ----
<S> <C> <C> <C>
1. Receives orders for the purchase of Shares. X
2. Issue Shares and hold Shares in Shareholders accounts. X
3. Receive redemption requests. X
4. Effect transactions 1-3 above directly with
broker-dealers. N/A N/A
5. Pay over monies to redeeming Shareholders. X
6. Effect transfers of Shares. X
7. Prepare and transmit dividends and distributions. X
8. Issue Replacement Certificates. N/A N/A
9. Reporting of abandoned property. X
10. Maintain records of account. X
11. Maintain and keep a current and accurate control book
for each issue of securities. N/A N/A
12. Mail proxies. X
13. Mail Shareholder reports. X
14. Mail prospectuses to current Shareholders. X
15. Withhold taxes on U.S. resident and non-resident
alien accounts. X
</TABLE>
<PAGE> 17
<TABLE>
<CAPTION>
Service Performed Responsibility
- ----------------- --------------
Bank Fund
---- ----
<S> <C> <C> <C>
16. Prepare and file U.S. Treasury Department forms. X
17. Prepare and mail account and confirmation statements
for Shareholders. X
18. Provide Shareholder account information. X
19. Blue sky reporting. N/A N/A
</TABLE>
* Such services are more fully described in Article 1.02(a), (b) and (c) of
the Agreement.
WNL SERIES TRUST
BY: /s/ [ILLEGIBLE]
-------------------------------
ATTEST:
/s/ DWIGHT L. CRAMER
- ---------------------------------
STATE STREET BANK AND TRUST COMPANY
BY: /s/ [ILLEGIBLE]
-------------------------------
Executive Vice President
ATTEST:
/s/ JOANNE MACNEVIN
- ---------------------------------
<PAGE> 1
EXHIBIT (h)2
SUBADMINISTRATION AGREEMENT
FOR
REPORTING AND ACCOUNTING SERVICES
Agreement between WNL Investment Advisory Services, Inc. (the
"Adviser"), State Street Bank and Trust Company, a Massachusetts trust company
(the "Bank") and WNL Series Trust, a Massachusetts business trust (the "Fund").
WHEREAS, the Adviser has been appointed manager of the Fund,
including each portfolio or series thereof if applicable (the "Portfolio(s)"),
an open-end diversified management investment company registered under the
Investment Company Act of 1940, as amended (the "Investment Company Act"), and
the Adviser has accepted such appointment;
WHEREAS, the Adviser and the Fund have entered into an
investment advisory agreement (the "Advisory Agreement") pursuant to which the
Adviser will provide management, administrative and other services to the Fund
and certain of said services are commonly referred to as those performed by an
administrator;
WHEREAS, the Bank provides management, sub-administrative, and
other services to investment companies and others; and
WHEREAS, the Adviser desires to retain the Bank to render
certain sub-administrative and other services with respect to the Fund and its
Portfolios as listed on Schedule A attached hereto, together with such
additional Portfolios as may be offered by the Fund from time to time and with
respect to which it is agreed by the Adviser and the Bank this Agreement shall
apply, and the Bank is willing to render such services on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, the parties hereto agree as follows:
1. Appointment of Sub-Administrator
The Adviser with the consent of the Fund hereby appoints the
Bank to act as sub-administrator with respect to the Fund and each Portfolio for
purposes of reporting and accounting exclusively to the Adviser and the Fund for
the period and on the terms set forth in this Agreement. The Bank accepts such
appointment and agrees to render the services stated herein and to provide the
office facilities and the personnel required by it to perform such
<PAGE> 2
services. In connection with such appointment, the Adviser will deliver or cause
the Fund to deliver to the Bank copies of each of the following documents and
will deliver to it all future amendments and supplements, if any:
a. Certified copies of the Agreement and Declaration of Trust
of the Fund as presently in effect and as amended from time to time;
b. A certified copy of the Fund's By-Laws as presently in
effect and as amended from time to time;
c. The Fund's most recent registration statement on Form N-1A
as filed with, and, if applicable, declared effective by the U.S. Securities and
Exchange Commission, and all amendments thereto;
d. Each resolution of the Trustees of the Fund authorizing the
original issue of its shares;
e. Certified copies of the resolutions of the Fund's Trustees
authorizing: (1) this Agreement, (2) certain officers and employees of the
Adviser and the Fund to give instructions to the Bank pursuant to this Agreement
and (3) certain officers and employees of the Adviser or the Fund to sign checks
and pay expenses on behalf of the Adviser or the Fund, respectively;
f. A copy of the Advisory Agreement;
g. A copy of the investment advisor agreement between the Fund
and the Adviser;
h. A copy of the Custodian Agreement between the Fund and its
custodian;
i. A copy of the Transfer Agency and Services Agreement
between the Fund and its transfer agent; and
j. Such other certificates, documents or opinions which the
Bank may, in its reasonable discretion, deem necessary or appropriate in the
proper performance of its duties.
2. Representation and Warranties of the Bank
The Bank represents and warrants to the Adviser and the
Fund that:
a. It is a Massachusetts trust company, duly organized and
existing in good standing under the laws of the Commonwealth of Massachusetts;
2
<PAGE> 3
b. It is duly qualified to carry on its business in the
Commonwealth of Massachusetts;
c. It is empowered under applicable laws and by its Charter
and By-Laws to enter into and perform the services contemplated in this
Agreement;
d. All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement; and
e. It has and will continue to have and maintain the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
3. Authorized Shares
The Adviser certifies to the Bank that, as of the close of
business on the date of this Agreement, the Fund is authorized to issue shares
of beneficial interest, and that the Trustees of the Fund have the power to
classify or reclassify unissued shares, from time to time, into one or more
series, and that it presently offers shares in the authorized amounts as set
forth in Schedule A attached hereto.
4. Reporting and Accounting Service
The Bank shall discharge the responsibilities set forth in
Schedule B hereof subject to the control of the Adviser in accordance with
procedures established from time to time between the Adviser and the Bank.
It is the responsibility of the Adviser and/or its outside
legal counsel and accountants to notify the Bank in a timely manner of any
change to any rule, regulation, law or statute that will affect the services to
be provided hereunder. Without limiting the obligations or responsibilities of
any of the parties hereto, the Bank and the Adviser agree that all services
provided hereunder are subject to review and correction by the Fund's
accountants and legal counsel and the services provide by Bank shall not
constitute the practice of public accountancy or law.
5. Services to be obtained by the Adviser or the Fund
The Adviser, and/or the Fund shall provide for any of its own:
a. Organizational expenses;
b. Services of an independent accountant;
3
<PAGE> 4
c. Services of outside legal and tax counsel (including such
counsel's review of the Fund's registration statement, proxy materials, federal
and state tax qualification as a regulated investment company, and other reports
and materials prepared by the Bank under this Agreement);
d. Any services contracted for by either the Adviser or the
Fund directly from parties other than the Bank;
e. Trading operations and brokerage fees, commissions and
transfer taxes in connection with the purchase and sale of securities for the
Fund;
f. Investment advisory services;
g. Taxes, insurance premiums and other fees and expenses
applicable to its operation;
h. Costs incidental to any meetings of shareholders including,
but not limited to, legal and accounting fees, proxy filing fees and the
preparation, printing and mailing of any proxy materials;
i. Administration of and costs incidental to Trustees'
meetings, including fees and expenses of Trustees;
j. The salary and expenses of any officer or employee of the
Fund or the Adviser;
k. Costs incidental to the preparation, printing and
distribution of the Fund's registration statements and any amendments thereto,
and shareholder reports;
l. All applicable registration fees and filing fees required
under the securities laws of the United States and state regulatory authorities;
m. Final review and filing of the Fund's tax returns, Form
N-1A, Annual Report and Semi-Annual Report on Form N-SAR, and all notices,
registrations and amendments associated with applicable tax and securities laws
of the United States and state regulatory authorities; and
n. Fidelity bond and directors' and officers' liability
insurance.
6. Fees
The Bank shall receive from the Adviser or the Fund such
compensation for the Bank's services provided and the expenses incurred pursuant
to this Agreement as may be agreed to from time
4
<PAGE> 5
to time in a written fee schedule approved by the parties hereto and initially
set forth in Schedule C attached hereto. In addition, the Bank shall be
reimbursed by the Adviser for the reasonable out-of-pocket costs incurred by it
in connection with this Agreement as set forth in Schedule C.
7. Instructions
At any time the Bank may apply to any officer of the Adviser
or the Fund for instructions and may consult with legal counsel for the Fund or
the Adviser as directed by the Adviser, or its own outside legal counsel, the
outside counsel for the Fund or the outside auditors for the Fund at the expense
of the Fund, with respect to any matter arising in connection with the services
to be performed by the Bank under this Agreement. The Bank shall not be liable
and shall be indemnified by the Adviser and the Fund for any action taken or
omitted by it without negligence and in good faith in reliance upon such
instructions or upon any paper or document reasonably believed by it to be
genuine and to have been signed by the proper person or persons. The Bank shall
not be held to have notice of any change of authority of any person until
receipt of written notice thereof from the Adviser or the Fund.
8. Limitation of Liability and Indemnification
a. The Bank shall be responsible for the performance of only
such duties as are set forth herein and shall have no responsibility for the
actions or activities of any other party including other service providers not
acting upon instructions of, at the direction of, or in reliance upon the Bank.
The Bank shall have no liability for any losses, costs, damages and expenses,
including reasonable expenses for counsel, resulting from the performance or
nonperformance of its duties hereunder except to the extent caused by or
resulting from the negligence or willful misconduct of the Bank, its officers or
employees. In any event, the Bank's liability shall be limited to its total
annual compensation earned and fees paid during the preceding twelve months for
any liability suffered by the Adviser or the Fund including, but not limited to,
any liability relating to qualification of the Fund as a regulated investment
company or any liability relating to the Fund's compliance with any federal or
state tax or securities statute, regulation or ruling.
b. The Adviser and the Fund shall indemnify and hold the Bank
harmless from all loss, cost, damage and expense, including reasonable expenses
for counsel, incurred by the Bank resulting from any claim, demand, action or
suit in connection with the Bank's acceptance of this Agreement, any action or
omission by it in the performance of its duties hereunder, or as a result of
acting upon any instructions reasonably believed by it to have been executed by
a duly authorized officer of the Adviser or of the
5
<PAGE> 6
Fund, provided that this indemnification shall not apply to actions or omissions
of the Bank, its officers, employees or agents in cases of its or their own
gross negligence or willful misconduct.
c. The Adviser and the Fund will be entitled to participate at
their own expense in the defense, or, if either so elects, to assume the defense
of any suit brought to enforce any liability subject to the indemnification
provided above. In the event the Adviser or the Fund elects to assume the
defense of any such suit and retain such counsel, the Bank or any of its
affiliated persons named as defendant or defendants in the suit may retain
additional counsel but shall bear the fees and expenses of such counsel unless
the Adviser or the Fund, as the case may be, shall have specifically authorized
the retaining of such counsel.
d. The indemnification contained herein shall survive the
termination of this Agreement.
e. This Section 8 shall not apply with respect to services
covered by the Custodian Agreement or the Transfer Agency and Services
Agreement.
9. Confidentiality
The Bank agrees that, except as otherwise required by law, it
will keep confidential the terms of this Agreement, all records and information
in its possession relating to the Fund or its shareholders or shareholder
accounts and will not disclose the same to any person except at the request or
with the written consent of the Fund.
10. Compliance with Governmental Rules and Regulations
The Adviser and the Fund assume full responsibility for
complying with all applicable requirements of the Investment Company Act, the
Securities Act of 1933, the Securities Exchange Act of 1934, and the Internal
Revenue Code of 1986, all as amended, and any laws, rules and regulations issued
thereunder, provided that such assumption shall not limit the Bank's obligation
to perform all of its duties hereunder in accordance with the terms hereof.
The Bank shall maintain and preserve for the periods prescribed
such records relating to the services to be performed by the Bank under this
Agreement as are required pursuant to the Investment Company Act and such other
records as may be agreed upon by the parties. All such records shall at all
times remain the respective properties of the Adviser or the Fund, shall be
readily
6
<PAGE> 7
accessible during normal business hours to each, and shall be promptly
surrendered upon the termination of the Agreement or otherwise on written
request. Records shall be surrendered in usable machine-readable form.
11. Status of the Bank
The services of the Bank to the Adviser and the Fund are not
to be deemed exclusive, and the Bank shall be free to render similar services to
others. The Bank shall be deemed to be an independent contractor and shall,
unless otherwise expressly provided herein or authorized by the Adviser or the
Fund, as the case may be from time to time, have no authority to act or
represent either the Adviser or the Fund in any way or otherwise be deemed an
agent of either the Adviser or of the Fund.
12. Printed Matter
Neither the Adviser nor the Bank shall publish or circulate
any printed matter which contains any reference to the other party without such
party's prior written approval. The Fund or the Adviser may circulate such
printed matter as refers in accurate terms to the Bank's appointment hereunder
provided that the Bank is given a copy of such material prior to its first use.
13. Term, Amendment and Termination
This Agreement may be modified or amended from time to time by
mutual agreement between the parties hereto. The Agreement shall remain in
effect for a period of one year from the date hereof and shall automatically
continue in effect thereafter unless terminated by a party at the end of such
period or thereafter on sixty (60) days' prior written notice. Upon termination
of this Agreement entirely or with respect to a Portfolio, the Adviser or the
Fund shall pay to the Bank such compensation as may be due under the terms
hereof as of the date of such termination including reasonable out-of-pocket
expenses associated with such termination.
14. Notices
Any notice or other communication authorized or required by
this Agreement to be given to any party mentioned herein shall be sufficiently
given if addressed to such party and mailed postage prepaid or delivered to its
principal office.
15. Non-Assignability
This Agreement shall not be assigned by any of the
parties hereto without the prior consent in writing of the other parties.
7
<PAGE> 8
16. Successors
This Agreement shall be binding on and shall inure to the
benefit of the Adviser, the Fund and the Bank and their respective successors.
17. Entire Agreement
This Agreement contains the entire understanding between the
parties hereto and supersedes all previous representations, warranties or
commitments regarding the services to be performed hereunder whether oral or in
writing. This Agreement cannot be modified or terminated except in accordance
with its terms or by a writing signed by all parties.
18. Governing Law
This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
19. Limitations of Liability to the Trustees and Shareholders
A copy of the Declaration of Trust of the Fund is on file with
the Secretary of the Commonwealth of Massachusetts, and notice is hereby given
that this instrument is executed on behalf of the Trustees of the Trust as
Trustees and not individually and that the obligations of this instrument are
not binding upon any of the Trustees or Shareholders individually but are
binding only upon the assets and property of the Fund.
8
<PAGE> 9
IN WITNESS WHEREOF, each of the parties has caused this
agreement to be executed in its name and behalf by its duly authorized
representatives on the day of , 1995.
WNL INVESTMENT ADVISORY SERVICES, INC.
By: /s/ ILLEGIBLE
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
STATE STREET BANK AND TRUST COMPANY
By: /s/ RONALD L. LOGUE
---------------------------------------------
Name: /s/ Ronald L. Logue
-------------------------------------------
Title: Executive Vice President
------------------------------------------
WNL SERIES TRUST
By: /s/ ILLEGIBLE
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
9
<PAGE> 10
SCHEDULE A
TO
SUBADMINISTRATION AGREEMENT
<TABLE>
<CAPTION>
Portfolio Authorized Shares and Class
- --------- ---------------------------
<S> <C>
(Unlimited authorization and a
single class unless otherwise
noted.)
American Capital Emerging Growth
Portfolio
BEA Growth and Income Portfolio
CS First Boston International
Equity Portfolio
BlackRock Managed Bond Portfolio
Quest for Value Asset Allocation
Portfolio
Salomon Brothers U.S. Government
Securities Portfolio
Global Advisors Growth Equity
Portfolio
Global Advisors Money Market
Portfolio
</TABLE>
<PAGE> 11
SCHEDULE B
TO
SUBADMINISTRATION AGREEMENT
Reporting and Accounting Services Provided by the Bank
(a) Oversee the determination and publication of the Fund's net asset value in
accordance with the Fund's policy as instructed by the Adviser;
(b) Oversee the maintenance by the Fund's Custodian of certain books and
records of the Fund as required under Rule 3la-l(b)(4) of the Investment
Company Act of 1940, as amended (the "1940 Act");
(c) Prepare the Fund's federal, state and local income tax returns for review
by the Fund's independent accountants and filing by the Fund's treasurer;
(d) Review the calculations of and arrange for payment of the Fund's expenses;
(e) Provide periodic testing of Portfolios to assist the Fund's adviser in
complying with Internal Revenue Code mandatory qualification requirements,
the requirements of the 1940 Act and Fund Prospectus limitations as may be
mutually Agreed upon;
(f) Prepare for review and approval by officers Of the Fund financial
information for the Fund's semi-annual and annual reports, proxy statements
and other communications with shareholders;
(g) Prepare for review by an officer and legal counsel of the Fund certain
periodic financial reports required by the Securities and Exchange
Commission as may be mutually agreed upon;
(h) Prepare reports relating to the business and affairs of the Fund as may be
mutually agreed upon;
(i) Make such reports and recommendations to the Trustees concerning the
performance of the independent accountants as the Trustees may reasonably
request or deem appropriate;
(j) Make such reports and recommendations to the Trustees concerning the
performance and fees of the Fund's
<PAGE> 12
custodian and transfer and dividend disbursing agent as the Trustees may
reasonably request or deem appropriate;
(k) Oversee and review calculations of fees paid to the Adviser, the custodian,
and the transfer agent;
(1) Consult with the Fund's officers, independent accountants, legal counsel,
custodian and transfer and dividend disbursing agent in establishing the
accounting policies of the Fund;
(m) Review implementation by the Fund of any dividend reinvestment programs
authorized by the Trustees;
(n) Provide such assistance to the Adviser, the custodian, the transfer agent
and the Fund's legal counsel and independent accountants as may be mutually
agreed upon to properly carry on the business and operations of the Fund;
and
(o) Refer to the Fund's officers or transfer agent any shareholder inquiries
relating to the Fund.
Certain details of the scope of the Bank's services hereunder shall be
documented in the Compliance Manual and Fund Profile as agreed upon by the
Adviser, the Fund and the Bank from time to time.
<PAGE> 1
EXHIBIT (i)
[AMERICAN GENERAL LETTERHEAD]
February 26, 1999
Board of Trustees
AGA Series Trust
2929 Allen Parkway
Houston, TX 77019
Trustees:
I have examined the Registration Statement in connection with the filing with
the Securities and Exchange Commission of a Post-Effective Amendment on Form
N-1A with respect to AGA Series Trust.
I have made such examination of the law and have examined such records and
documents as in my judgement are necessary or appropriate to enable me to render
the opinions expressed below.
I am of the following opinions:
1. AGA Series Trust, ("Trust") is a valid and existing unincorporated
voluntary association, commonly known as a business trust.
2. The Trust is a business Trust created and validly existing pursuant to
the Massachusetts Laws.
3. All of the prescribed Trust procedures for the issuance of the shares
have been followed, and, when such shares are issued in accordance
with the Prospectus contained in the Registration Statement for such
shares, all state requirements relating to such Trust shares will have
been complied with.
4. Upon the acceptance of purchase payments made by shareholders in
accordance with the Prospectus contained in the Registration Statement
and upon compliance with applicable law, such shareholders will have
legally-issued, fully paid, nonassessable shares of the Trust.
<PAGE> 2
I consent to the filing of this opinion as an exhibit to the Post-Effective
Amendment to the Registration Statement filed on Form N-1A with respect to AGA
Series Trust.
Sincerely,
/s/ NORI L. GABERT
Nori L. Gabert
<PAGE> 1
EXHIBIT (j)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" in the Prospectus and "Independent Accountants" and "Financial
Statements" in the Statement of Additional Information included in
Post-Effective Amendment No. 4 to the Registration Statement (Form N-1A, No.
33-87380) of AGA Series Trust.
We also consent to the incorporation by reference of our report dated February
5, 1999 on the International Equity, EliteValue, Growth Equity, Emerging Growth,
Growth and Income, U.S. Government Securities, and Money Market Portfolios of
AGA Series Trust, included in the 1998 Annual Report to Contract Owners.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
February 22, 1999
<PAGE> 1
EXHIBIT (p)
AGA SERIES TRUST
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that the undersigned Trustee of AGA Series
Trust, does hereby constitute and appoint Richard W. Scott, Cynthia A. Toles and
Nori L. Gabert, or any of them, the true and lawful agents and attorneys-in-fact
of the undersigned with respect to all matters arising in connection with the
Registration Statements of AGA Series Trust and any and all amendments
(including pre-effective and/or post-effective amendments) thereto, with full
power and authority to execute said Registration Statements and any and all
amendments for and on behalf of the undersigned, in my name and in the capacity
indicated below, and to file the same, together with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission and any state securities authorities. The undersigned hereby gives to
said agents and attorneys-in-fact full power and authority to act in the
premises, including, but not limited to, the power to appoint a substitute or
substitutes to act hereunder with the same power and authority as said agents
and attorneys-in-fact would have if personally acting. The undersigned hereby
ratifies and confirms all that said agents and attorneys-in-fact, or any
substitute or substitutes, may do by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
22 day of February, 1999.
/s/ MELVIN C. PAYNE
- -----------------------------------
Melvin C. Payne, Trustee
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