As Filed With The Securities And Exchange Commission On April 30, 1998
Registration Nos. 333-15555, 811-07911
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. 2
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 4
PB SERIES TRUST
(Formerly Providian Series Trust)
(Exact Name of Registrant as Specified in Charter)
400 West Market Street
Louisville, Kentucky 40202
(Address of Principal Executive Offices) (Zip Code)
(502) 560-2000
(Registrant's Telephone Number, including Area Code)
Commonwealth General Corporation
400 West Market Street
Louisville, Kentucky 40202
(Name and Address of Agent for Service of Process)
Copies to:
Joseph J. McBrien, Esquire Michael Berenson, Esquire
State Street Bank and Trust Company Ann B. Furman, Esquire
Legal Division Jorden Burt Boros Cicchetti
1776 Heritage Drive, AFB4 Berenson & Johnson LLP
North Quincy, MA 02171 1025 Thomas Jefferson Street, N.W.
Washington, D.C. 20007
It is proposed that this filing will become effective (check appropriate box):
[X] Immediately upon filing pursuant to paragraph (b)
[ ] On , pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] On , pursuant to paragraph (a)(1)
[ ] 70 days after filing pursuant to paragraph (a)(2)
[ ] On , pursuant to paragraph (a)(2) of rule 485.
<PAGE>
PB SERIES TRUST
Contents of Registration Statement
This Registration Statement consists of the following papers and documents:
. Cover Sheet
. Contents of Registration Statement
. Cross Reference Sheet
. Part A - Prospectus for High Quality Stock Fund, Fixed Income Fund,
International Active Fund, and Money Market Fund
Prospectus for Capital Preservation Portfolio, Income Oriented
Portfolio, Growth and Income Portfolio, Capital Growth Portfolio,
Maximum Appreciation Portfolio, and Money Market Fund
. Part B - Statement of Additional Information for High Quality Stock Fund,
Fixed Income Fund, International Active Fund, and Money Market
Fund
Statement of Additional Information for Capital Preservation
Portfolio, Income Oriented Portfolio, Growth and Income
Portfolio, Capital Growth Portfolio, Maximum Appreciation
Portfolio, and Money Market Fund
. Part C - Other Information
. Signature Pages
<PAGE>
PROVIDIAN SERIES TRUST
REGISTRATION STATEMENT ON FORM N-1A
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
N-1A Location in
Item No. Registration Statement
- -------- ----------------------
Part A: Information Required In Prospectus
<S> <C>
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Summary
5. Management of the Fund Management
6. Capital Stock and Other Securities Investment Objectives and Policies of the Funds
7. Purchase of Securities Being Offered Purchase and Redemption of Shares
8. Redemption or Repurchase Purchase and Redemption of Shares
9. Pending Legal Proceedings Not Applicable
Part B: Information Required In Statement of
Additional Information
10. Cover Page Cover Page
11. Table of Contents Cover Page
12. General Information and History General Information
13. Investment Objectives and Policies Investment Policies
14. Management of the Registrant Management
15. Control Persons and Holders of Securities Principal Holders Of Securities
16. Investment Advisory and Other Services Management
17. Brokerage Allocation Portfolio Turnover and Securities Transactions
<PAGE>
<CAPTION>
CROSS REFERENCE SHEET
N-1A Location in
Item No. Registration Statement
- -------- ----------------------
<S> <C>
18. Capital Stock and Other Securities General Information
19. Purchase, Redemption and Pricing of Net Asset Values of Shares of the Funds
Securities Being Offered
20. Tax Status Taxes
21. Underwriters Not Applicable
22. Calculation of Performance Data Investment Performance
23. Financial Statements Financial Statements
Part C: Other Information
24. Financial Statements and Exhibits Financial Statements and Exhibits
25. Persons Controlled by or Under Common Control Persons Controlled by or Under Common Control
26. Number of Holders of Securities Number of Holders of Securities
27. Indemnification Indemnification
28. Business and Other Connections of Business and Other Connections of Investment Adviser
Investment Adviser
29. Principal Underwriters Not Applicable
30. Location of Accounts and Records Location of Accounts and Records
31. Management Services Management Services
32. Undertakings Undertakings
</TABLE>
<PAGE>
PROSPECTUS
PB Series Trust
(Formerly Providian Series Trust)
P.O. Box 32700
Louisville, Kentucky 40232
May 1, 1998
PB Series Trust (the "Trust") is a diversified investment company presently
consisting of nine separate series (the "Funds"), each having different
investment objectives and policies. Shares of four Funds are offered through
this prospectus.
The investment objectives of the four Funds are as follows:
The High Quality Stock Fund seeks long term growth of capital. The Fund pursues
its investment objective by investing primarily in stocks in three categories of
companies that are publicly traded in the United States: the 500 largest in
market capitalization, the 501st to the 1250th largest in market capitalization,
and the 1000th to the 3000th largest in market capitalization at the time of
purchase.
The Fixed Income Fund seeks the highest level of income as is consistent with
the preservation of capital. The Fund pursues its investment objective primarily
by investing in investment grade debt securities, which range in maturity from
one to ten years, including securities issued by the U.S. government or an
agency or instrumentality of the U.S. government, asset-backed securities and
corporate debt obligations.
The International Active Fund seeks long term growth of capital. The Fund
pursues its objective by investing primarily in a diversified portfolio of
international equity securities.
The Money Market Fund seeks to provide current income consistent with stability
of principal and liquidity. The Fund invests in money market instruments
maturing in thirteen months or less from time of investment. An investment in
the Money Market Fund is not insured or guaranteed by the U.S. Government, and
there can be no assurance that the Fund will be able to maintain a stable net
asset value of $1.00 per share.
The purpose of the Trust currently is to serve as the investment medium for
variable annuity contracts ("Contracts") offered by insurance companies (see
"Purchase and Redemption of Shares") and qualified plans. One or more of the
Funds offered through this Prospectus will be the investment medium for five
other series of the Trust whose shares are offered through another prospectus.
The Trust may offer other series of shares in the future. The Funds' shares will
not be offered directly to the public. There is no assurance that any of the
Funds will achieve their investment objectives.
This Prospectus sets forth concisely the information about the Trust that an
investor should know before investing. A Statement of Additional Information
(the "SAI") dated May 1, 1998, containing additional information about the
Trust, has been filed with the Securities and Exchange Commission and is
incorporated by reference in this Prospectus in its entirety. You may obtain a
copy of the SAI without charge by calling or writing the Trust.
INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1998.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SUMMARY............................................................. 3
FINANCIAL HIGHLIGHTS ............................................... 4
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS..................... 5
PORTFOLIO TURNOVER.................................................. 10
IMPLEMENTATION OF POLICIES AND RISKS................................ 10
MANAGEMENT.......................................................... 13
PURCHASE AND REDEMPTION OF SHARES................................... 15
NET ASSET VALUE AND PRICING......................................... 15
DIVIDENDS, DISTRIBUTIONS AND TAXES.................................. 16
PERFORMANCE AND YIELD INFORMATION................................... 17
GENERAL INFORMATION................................................. 17
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS............... 19
APPENDIX A--COMMON STOCK RANKINGS................................... A-1
APPENDIX B--CORPORATE BOND RATINGS.................................. B-1
APPENDIX C--SHORT-TERM DEBT RATINGS................................. C-1
</TABLE>
2
<PAGE>
SUMMARY
PB Series Trust (the "Trust") was organized as a Massachusetts business trust on
October 22, 1996. The Trust is a diversified, no-load, open-end management
investment company registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940 ("1940 Act"). The Trust is a
"series" type of mutual fund which issues separate classes (or series) of stock,
each of which represents a separate diversified portfolio of investments. This
Prospectus offers shares of four funds ("Funds") of the Trust, each with its own
investment objective or objectives and investment policies.
The shares of the Funds are offered to separate accounts of insurance companies
to fund various variable annuity contracts issued by Providian Life and Health
Insurance Company and First Providian Life and Health Insurance Company
(together, "Providian Life"). Shares of the Funds may be offered to qualified
plans and, in the future, in connection with variable life insurance policies.
The rights of an insurance company holding Trust shares for a separate account
are different from the rights of the owner of a Contract. The terms
"shareholder" or "shareholders" in this Prospectus shall refer to the insurance
companies and qualified plans, and not to any Contract Owner.
PB Investment Advisors, Inc. (formerly Providian Investment Advisors, Inc.) (the
"Adviser") serves as the Trust's investment adviser. Atlanta Capital Management
Company, L.L.C. ("Atlanta Capital") serves as the sub-adviser to the High
Quality Stock Fund and the Fixed Income Fund. Blairlogie Capital Management
("Blairlogie") serves as the sub-adviser to the International Active Fund.
Federated Investment Counseling ("Federated") serves as the sub-adviser to the
Money Market Fund. (Atlanta Capital, Blairlogie and Federated are referred to
collectively as the "Sub-Advisers.") The Adviser supervises the Trust's overall
management and investment program, performs a variety of administrative services
on behalf of the Trust, pays the Sub-Advisers and all fees and expenses of
officers and Trustees of the Trust who are affiliated persons of the Adviser,
the Sub-Advisers or the Trust. The Trust pays all other expenses incurred in the
operation of the Trust, including fees and expenses of Trustees who are
unaffiliated persons of the Adviser, the Sub-Advisers, or the Trust.
The Adviser has agreed to limit the operating expenses (excluding advisory fees)
of each Fund so that the ratio of expenses to net assets on an annual basis for
each Fund does not exceed 0.25%. Expenses in excess of such amount will be
assumed by the Adviser until the earlier of (a) the end of three years after
commencement of operations or (b) the termination by the Trustees or the Fund's
shareholders, but not the Adviser, of the Trust's Advisory Agreement with the
Adviser.
3
<PAGE>
PB SERIES TRUST
FINANCIAL HIGHLIGHTS
The following financial highlights for the period May 9, 1997 (commencement of
investment operations) through December 31, 1997 have been audited by Ernst &
Young LLP. Such information should be read in conjunction with the financial
statements of the Trust and the report of Ernst & Young LLP, the Trust's
independent auditors, which is included in the SAI.
For a share outstanding throughout the period May 9, 1997 (commencement of
investment operations) through December 31, 1997
<TABLE>
<CAPTION>
Fixed International Money High
Income Active Market Quality
Fund Fund Fund Stock Fund
<S> <C> <C> <C> <C>
Net asset value, beginning of period.................. $ 10.00 $ 10.00 $ 1.00 $ 10.00
---------- ---------- ----------- ----------
Income from investment operations:
Net investment income ................................ 0.34 0.07 0.03 0.08
Net realized and unrealized gain (loss) on
investments ........................................ 0.29 (0.45) -- 1.88
---------- ---------- ----------- ----------
Total from investment operations...................... 0.63 (0.38) 0.03 1.96
---------- ---------- ----------- ----------
Less distributions from:
Net investment income................................. (0.34) (0.02) (0.03) (0.08)
Net realized gains.................................... (0.03) -- -- (0.14)
---------- ---------- ----------- ----------
Total distributions.................................... (0.37) (0.02) (0.03) (0.22)
========== ========== =========== ==========
Net asset value, end of period........................ $ 10.26 $ 9.60 $ 1.00 $ 11.74
========== ========== =========== ==========
Total return (2)...................................... 6.30% (3.80%) 3.31% 19.72%
========== ========== =========== ==========
Ratios and supplemental data:
Net assets, end of period............................. $5,606,687 $9,804,265 $2,361,341 $12,515,064
Ratio of operating expenses to average net assets (3). 0.90% 1.15% 0.65% 0.90%
Ratio of operating expenses to average net assets
before voluntary expense reimbursement (1)(3)....... 1.57% 1.68% 2.67% 1.08%
Ratio of net investment income to average net
assets (3) ......................................... 5.13% 1.04% 5.03% 1.18%
Ratio of net investment income to average net assets
before voluntary expense reimbursement (1)(3) ...... 4.46% 0.51% 3.01% 1.00%
Portfolio turnover rate (4)........................... 157% 61% N/A 14%
Average commission rate paid per equity share traded.. N/A $0.0125 N/A $0.0598
</TABLE>
(1) Net investment income is after reimbursement of certain fees and expenses by
PB Investment Advisors, Inc. (See Note 3 to the financial statements). Had
PB Investment Advisors, Inc. not undertaken to reimburse expenses related to
the Portfolios and Funds, the ratios of net investment income and operating
expenses to average net assets would have been as noted above.
(2) Total return figures are not annualized. Total returns do not reflect
expenses that apply to the separate account or related variable insurance
contracts and inclusion of these charges would result in reducing the total
return figures for the period shown.
(3) Annualized for periods less than one year.
(4) Portfolio turnover rates are not annualized.
4
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
Each of the Funds has a different investment objective or objectives as
described below. The High Quality Stock Fund and the Fixed Income Fund are
managed by Atlanta Capital; the International Active Fund is managed by
Blairlogie; and the Money Market Fund is managed by Federated. There can be no
assurance that any of the Funds will achieve their investment objective or
objectives. Each Fund is subject to the risk of changing economic conditions, as
well as the risk inherent in the ability of the Sub-Advisers to make changes in
a Fund's investments in anticipation of changes in economic, business, and
financial conditions.
The different types of securities and investment techniques common to one or
more Funds all have attendant risks of varying degrees. For example, with
respect to equity securities, there can be no assurance of capital appreciation
and there is a substantial risk of decline. With respect to debt securities,
there can be no assurance that the issuer of such securities will be able to
meet its obligations on interest or principal payments in a timely manner. In
addition, the value of debt instruments generally rises and falls inversely with
changes in interest rates.
The investments and investment techniques common to one or more Funds, including
the risks of each, are described in greater detail below and in the "Description
of Securities and Investment Techniques" in the SAI.
The Funds are subject to investment restrictions that are described under
"Investment Policies" in the SAI. Each Fund's investment objective and
investment restrictions are "fundamental policies," which means that they may
not be changed without a majority vote of shareholders of the affected Funds.
Except for investment objectives and fundamental policies, all investment
policies and practices described in this Prospectus and in the SAI are not
fundamental, meaning that the Board of Trustees may change them without
shareholder approval. See "Description of Securities and Investment Techniques"
and "Investment Policies" in the SAI for further information.
High Quality Stock Fund
In seeking its objective of long term growth of capital, the High Quality Stock
Fund will attempt to achieve a high total return (i.e., price appreciation plus
potential dividend yield) primarily through investment in selected high quality
common stocks of large, medium and small size companies that are publicly traded
in the United States. The High Quality Stock Fund primarily selects stocks from
among three categories of companies: the largest 500 in market capitalization,
the 501st to the 1250th largest in market capitalization, and the 1,000th to the
3,000th largest in market capitalization at the time of purchase. Each company
must have a common stock ranking of B+ or better by Standard & Poor's Ratings
Group ("S&P") (or if not ranked by S&P, a comparable quality ranking by another
recognized ranking service, or if unranked, be of comparable quality in the
opinion of Atlanta Capital) (hereafter this standard is referred to as a "common
stock ranking of B+ or better"). From this universe of stock issues, Atlanta
Capital selects stocks based upon a favorable combination of valuation, price
volatility and earnings stability. Approximately 50 stocks of large market
capitalization companies, 60 stocks of medium market capitalization companies,
and 75 stocks of small market capitalization companies are included in the
Fund's portfolio.
5
<PAGE>
Atlanta Capital generally believes that high quality companies, that is,
companies with superior track records of consistent earnings and dividend
growth, tend to outperform the stock market over the long term. The Fund seeks
to outperform its benchmarks, the S&P 500 Composite Stock Price Index and the
Russell 3000 Index. Atlanta Capital's stock selection methods will be based
upon, among other things, the analysis of variables which it believes
significantly relate to the future market performance of a stock, such as recent
changes in earnings per share and their deviations from analysts' expectations,
past growth trends, price action of the stock itself, publicly recorded trading
transactions by corporate insiders, and relative price-earnings ratios.
By investing in securities that are subject to market risk, the High Quality
Stock Fund is also subject to greater fluctuations in its market value and a
higher degree of risk as compared to a fund seeking stability of principal, such
as a money market fund or a fund investing primarily in debt obligations issued
or guaranteed by the U.S. government or its agencies or instrumentalities (these
obligations are referred to in this Prospectus as "U.S. government securities").
The High Quality Stock Fund's investment philosophy is based on extensive
research which shows that high quality growth companies have produced
consistently increasing earnings and dividends, thereby providing attractive
returns with moderate risk over the long term. To qualify for purchase, each
company must have a common stock ranking of B+ or better. Atlanta Capital will
conduct fundamental income statement and balance sheet research on individual
companies to estimate future sustainable growth rates, evaluate current earnings
momentum, and estimate relative value of the stock. Atlanta Capital intends to
sell stocks based on such factors as deteriorating fundamentals, below B+
quality ranking, and/or poor relative valuation.
If market conditions indicate their desirability, Atlanta Capital may, for
defensive purposes, temporarily invest, without limitation, the assets of the
High Quality Stock Fund in cash or cash equivalents. See "Cash Equivalents"
below, and "Debt Securities" under "Description of Securities and Investment
Techniques" in the SAI for further information.
Fixed Income Fund
In seeking its objective of the highest level of income as is consistent with
the preservation of capital, the Fixed Income Fund will invest in securities
issued by the U.S. government or an agency or instrumentality of the U.S.
government, including mortgage-related securities. The U.S. government
securities which may be purchased by the Fixed Income Fund include direct
obligations issued by the United States Treasury, such as Treasury bills,
certificates of indebtedness, notes and bonds. The Fixed Income Fund may also
purchase instruments issued or guaranteed by agencies or instrumentalities of
the United States government, including mortgage-related securities.
The Fixed Income Fund may also purchase mortgage-related securities or
asset-backed securities not issued by the U.S. government or any agency or
instrumentality thereof. The Fixed Income Fund may also invest in investment
grade corporate debt securities rated in one of the three highest rating
categories by Moody's Investor Service, Inc. ("Moody's"), S&P, Fitch ICA, Inc.,
or another nationally recognized statistical rating organization ("NRSRO"), or
if unrated, of comparable quality in the opinion of Atlanta Capital. While
non-U.S. government securities may present greater credit risk than U.S.
government securities, they also tend to afford higher yields than U.S.
government securities. Debt
6
<PAGE>
securities purchased by the Fund may be of any maturity. It is anticipated that
the weighted average maturity of the debt portfolio generally will be between 3
and 7 years, but may be shorter or longer under unusual market circumstances.
Among the mortgage-related securities that may be purchased by the Fixed Income
Fund are "mortgage-backed securities" of the Government National Mortgage
Association ("GNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") and
the Federal National Mortgage Association ("FNMA"). These mortgage-backed
securities include "pass-through" securities and "participation certificates,"
both of which are similar, representing pools of mortgages that are assembled,
with interests sold in each pool. Payments of principal (including prepayments)
and interest by individual mortgagors are "passed through" to the holders of the
interests in each pool; thus, each payment to holders may contain varying
amounts of principal and interest. Another type of mortgage-backed security is
the collateralized mortgage obligation ("CMO"). A CMO is a security that is
backed by mortgage pass-through securities or in some cases mortgage loans. The
cash flow from the pass-throughs or loans is redirected to one or more classes
or tranches in a prescribed manner. Timely payment of principal and interest on
GNMA pass-throughs is guaranteed by the full faith and credit of the United
States. FHLMC and FNMA are both instrumentalities of the U.S. government, but
their obligations are not backed by the full faith and credit of the United
States. See "Mortgage-Backed Securities" under "Description of Securities and
Investment Techniques" in the SAI for further information.
There is minimal credit risk involved in the purchase of government or
government-guaranteed securities. However, as with any fixed income investment,
when interest rates decline, the market value of a portfolio invested at higher
yields can be expected to rise. Conversely, when interest rates rise, the market
value of a portfolio invested at lower yields can be expected to decline.
Therefore, Atlanta Capital may engage in portfolio trading to take advantage of
market developments and yield disparities, for example, shortening the average
maturity of the portfolio in anticipation of a rise in interest rates so as to
minimize depreciation of principal, or lengthening the average maturity of the
portfolio in anticipation of a decline in interest rates so as to maximize
appreciation of principal.
The Fixed Income Fund seeks to outperform the Lehman Brothers Intermediate
Aggregate Index (the "Index") over an interest rate cycle. (See the SAI for a
description of the Index). The portfolio duration will generally range from 80%
to 120% of the Index duration. Typically, this causes the weighted average
maturity of the portfolio to vary between 3 and 7 years. Atlanta Capital sets
duration strategy based on its assessment of secular and cyclical economic,
demographic and political trends.
The Fixed Income Fund may invest in asset-backed securities which represent
fractional interests in pools of leases, retail installment loans and revolving
credit receivables, both secured and unsecured. The Fixed Income Fund may also
use various other investment strategies and techniques when Atlanta Capital
determines that such use is appropriate in an effort to meet the Fund's
investment objective. Such strategies and techniques include, but are not
limited to, entering into repurchase agreements and investing in when-issued or
delayed delivery securities. See "Description of Securities and Investment
Techniques" in the SAI for further information.
7
<PAGE>
International Active Fund
The International Active Fund seeks long term growth of capital. In pursuing
this objective, the Fund invests primarily in a diversified portfolio of
international equity securities. The Morgan Stanley Capital International EAFE
(Europe, Australia, Far East) Index ("EAFE Index") is used as a basis for
choosing the countries in which the Fund invests, however, the Fund is not
limited to the countries and weightings of the EAFE Index. Blairlogie applies
two levels of screening in selecting investments for the Fund. First, an active
country selection model analyzes world markets and assigns a relative value
ranking, or "favorability weighting," to each country in the relevant universe
to determine markets which are relatively undervalued. Second, at the stock
selection level, quality analysis and value are applied to each security,
assessing variables such as balance sheet strength and earnings growth (quality
factors) and performance relative to the industry, price to earnings ratios and
price to book ratios (value factors). This two-level screening method identifies
undervalued securities for purchase as well as provides a sell discipline for
fully valued securities. While Blairlogie endeavors to apply the same variables
to all stockmarkets, the applicability of analytical tools can differ between
countries. In selecting securities, Blairlogie considers, to the extent
practicable and on the basis of information available to it for research, a
company's environmental business practices.
Most of the foreign securities in which the Fund invests will be denominated in
foreign currencies. The Fund may engage in foreign currency transactions to
protect itself against fluctuations in currency exchange rates in relation to
the U.S. dollar or to the weighting of a particular foreign currency on the EAFE
Index. Such foreign currency transactions may include forward foreign currency
contracts, currency exchange transactions on a spot (i.e., cash) basis, put and
call options on foreign currencies, and foreign exchange futures contracts. The
Fund may invest in stock index futures contracts, foreign exchange futures
contracts, and options thereon, and may sell (write) call and put options. The
Fund also may engage in equity index swap transactions.
Investing in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies which
are described below and in the SAI.
Money Market Fund
The Money Market Fund seeks to provide current income consistent with stability
of principal and liquidity. While there is no assurance that the Money Market
Fund will achieve its investment objective, it endeavors to do so by complying
with the various requirements of Rule 2a-7 under the 1940 Act which regulates
money market mutual funds and by following the investment policies described in
this prospectus.
The Money Market Fund seeks money market yields with no anticipated fluctuations
in principal. Because the Fund seeks to maintain a constant net asset value of
$1.00 per share, capital appreciation is not expected to play a role in the
Fund's returns, and dividend income alone is expected to provide its entire
investment return. All money market instruments can change in value when
interest rates or an issuer's creditworthiness changes dramatically. The Fund
cannot guarantee that it will always be able to maintain a stable net asset
value of $1.00 per share. An investment in the Fund is neither insured nor
guaranteed by the U.S. government.
8
<PAGE>
The Money Market Fund pursues its investment objective by investing exclusively
in a portfolio of money market instruments maturing in 397 days or less. The
average maturity of the money market instruments in the Money Market Fund's
portfolio, computed on a dollar-weighted basis, will be 90 days or less. Unless
indicated otherwise, the investment policies of the Money Market Fund may be
changed by the Trustees without the approval of shareholders. Shareholders will
be notified before any material change in these policies becomes effective.
The Money Market Fund invests in high-quality money market instruments that are
denominated and payable only in U.S. dollars and that are rated (or issued by an
issuer that is rated with respect to its short-term debt) in either one of the
two highest short-term rating categories by one or more NRSROs or are of
comparable quality to securities having such ratings. Examples of these
instruments include, but are not limited to:
(1) domestic issues of corporate debt obligations, including variable rate
demand notes;
(2) commercial paper (including Canadian Commercial Paper ("CCP") and
Europaper);
(3) certificates of deposit, demand and time deposits, bankers'
acceptances and other instruments of domestic and foreign banks and
other deposit institutions;
(4) short-term credit facilities, such as demand notes;
(5) asset-backed securities;
(6) obligations issued or guaranteed as to payment of principal and
interest by the U.S. government or one of its agencies or
instrumentalities;
(7) repurchase agreements; and
(8) other money market instruments.
Concentration of Investments. The Money Market Fund may invest 25% or more of
its total assets in securities issued by finance companies and banks. The
finance companies in which the Money Market Fund intends to invest can be
divided into two categories, commercial finance companies and consumer finance
companies. Commercial finance companies are principally engaged in lending to
corporations or other businesses. Consumer finance companies are primarily
engaged in lending to individuals. Captive finance companies or finance
subsidiaries which exist to facilitate the marketing and financial activities of
their parent will, for purposes of industry concentration, be classified by the
Money Market Fund in the industry of its parent corporation.
In addition, the Money Market Fund may invest more than 25% of the value of its
total assets in cash or cash items, securities issued or guaranteed by the U.S.
government, its agencies, or instrumentalities, or instruments secured by these
money market instruments, such as repurchase agreements.
9
<PAGE>
PORTFOLIO TURNOVER
Each Fund's turnover rate is not expected to exceed 50% annually. A Fund may
purchase or sell securities to accommodate purchases and sales of its shares.
The Funds' portfolio turnover rates for the period May 9, 1997 (commencement of
investment operations) through December 31, 1997 were as follows: High Quality
Stock Fund--4%, Fixed Income Fund--157% and International Active Fund--61%. A
high turnover rate, over 100%, may result in higher overall brokerage
commissions, dealer mark-ups and mark-downs, and other direct transaction costs
incurred. High turnover can also result in acceleration of the realization of
gains, which may be short-term in nature and thus taxable to shareholders at
ordinary rates.
IMPLEMENTATION OF POLICIES AND RISKS
In addition to the investment policies described above (and subject to certain
restrictions described below), the Funds may invest in some or all of the
following securities and may employ some or all of the following investment
techniques, some of which may present special risks as described below. A more
complete discussion of certain of these securities and investment techniques and
the associated risks is contained in the Funds' SAI.
Government Securities
U.S. government securities are issued or guaranteed by the U.S. government or
its agencies or instrumentalities. Securities issued by the government include
U.S. Treasury obligations, such as Treasury bills, notes and bonds. Securities
issued or guaranteed by government agencies or instrumentalities include the
following:
[bullet] the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business
Administration, and the Government National Mortgage Association,
including GNMA pass-through certificates, whose securities are
supported by the full faith and credit of the United States;
[bullet] the Federal Home Loan Banks, Federal Intermediate Credit Banks, and
the Tennessee Valley Authority, whose securities are supported by
the right of the agency to borrow from the U.S. Treasury;
[bullet] the Federal National Mortgage Association, whose securities are
supported by the discretionary authority of the U.S. government to
purchase certain obligations of the agency or instrumentality; and
[bullet] the Student Loan Marketing Association, the Interamerican
Development Bank, and International Bank for Reconstruction and
Development, whose securities are supported only by the credit of
such agencies.
10
<PAGE>
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
Cash Equivalents
Each Fund may from time to time invest in cash or cash equivalents, which
include, but are not limited to the following instruments:
(a) short term (maturing in 13 months or less) obligations issued or
guaranteed as to interest and principal by the U.S. Government or any
agency or instrumentality thereof;
(b) obligations of banks (including certificates of deposit and bankers'
acceptances) that have capital, surplus, and undivided profits (as of
the date of their most recently published financial statements) in
excess of $100,000,000; and obligations of other banks or savings and
loan associations if such obligations are federally insured, provided
that not more than 10% of the total assets of the Fund will be invested
in such other insured obligations;
(c) commercial paper rated in the top two categories by an NRSRO
(short-term unsecured promissory notes of corporations including
variable rate master demand notes) or if unrated, of comparable quality,
as determined by the Adviser or the Sub-Adviser;
(d) short term (maturing in 13 months or less) corporate obligations;
(e) obligations of U.S. and non-U.S. issuers denominated in U.S. dollars
and in securities of foreign branches of U.S. banks, such as negotiable
certificates of deposit, and including variable rate master demand notes
and floating rate notes; and
(f) debt instruments not specifically described if such instruments are
deemed by the Sub-Advisers to be of comparable high quality and
liquidity.
Each Fund may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933 (the
"1933 Act"). Section 4(2) commercial paper is restricted as to disposition under
federal securities laws and is generally sold to institutional investors, such
as the Funds, who agree that they are purchasing the paper for investment
purposes and not with a view to public distribution. Any resale by the purchaser
must be in an exempt transaction. Section 4(2) commercial paper is normally
resold to other institutional investors like the Funds through or with the
assistance of the issuer or investment dealers who make a market in Section 4(2)
commercial paper, thus providing liquidity.
For a description of the ratings referred to above, see Appendices B and C to
this Prospectus.
11
<PAGE>
Foreign Securities
The High Quality Stock Fund and the International Active Fund may invest in
foreign securities. These include dollar-denominated securities traded in the
U.S. on the New York Stock Exchange (the "NYSE"). The High Quality Stock Fund
may invest in foreign securities if the foreign securities are traded on the
NYSE.
The International Active Fund may invest directly in foreign equity securities;
U.S. dollar- or foreign currency-denominated foreign corporate debt securities;
foreign preferred securities; certificates of deposit, fixed time deposits and
bankers' acceptances issued by foreign banks; obligations of foreign governments
or their subdivisions, agencies and instrumentalities, international agencies
and supranational entities; and securities represented by European Depositary
Receipts ("EDRs"), American Depositary Receipts ("ADRs"), or Global Depositary
Receipts ("GDRs"). ADRs are dollar-denominated receipts issued generally by
domestic banks and representing the deposit with the bank of a security of a
foreign issuer, and are publicly traded on exchanges or over-the-counter in the
United States. EDRs are receipts similar to ADRs and are issued and traded in
Europe. GDRs are global receipts similar to ADRs and may be offered privately in
the United States and also trade in public or private markets in other
countries.
Investing in the securities of issuers in any foreign country involves special
risks and considerations not typically associated with investing in U.S.
companies and governments of foreign nations. These risks include: differences
in accounting, auditing and financial reporting standards; generally higher
commission rates on foreign portfolio transactions; the possibility of
nationalization, expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country); and political instability which
could affect U.S. investments in foreign countries. Additionally, foreign
securities and dividends and interest payable on those securities may be subject
to foreign taxes, including taxes withheld from payments on those securities.
Foreign securities often trade with less frequency and volume than domestic
securities and therefore may exhibit greater price volatility. Additional costs
associated with an investment in foreign securities may include higher custodial
fees than apply to domestic custodial arrangements and transaction costs of
foreign currency conversions. Changes in foreign exchange rates also will affect
the value of securities denominated or quoted in currencies other than the U.S.
dollar.
Foreign Currency Transactions
Foreign currency rates may fluctuate significantly over short periods of time.
They generally are determined by the forces of supply and demand in the foreign
exchange markets and the relative merits of investments in different countries,
actual or perceived changes in interest rates and other complex factors, as seen
from an international perspective. Currency exchange rates also can be affected
unpredictably by intervention (or the failure to intervene) by U.S. or foreign
governments or central banks, by currency controls or political developments in
the U.S. or abroad. Currencies in which the International Active Fund's assets
are denominated may be devalued against the U.S. dollar, resulting in a loss to
the Fund.
The International Active Fund may, in addition to buying and selling foreign
currency futures contracts and options on foreign currencies and foreign
currency futures, enter into forward foreign currency
12
<PAGE>
exchange contracts to reduce the risks of adverse changes in foreign exchange
rates. A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. By entering into a forward foreign
currency contract, the Fund "locks in" the exchange rate between the currency it
will deliver and the currency it will receive for the duration of the contract.
As a result, the Fund reduces its exposure to changes in the value of the
currency it will deliver and increases its exposure to changes in the value of
the currency it will exchange into. The effect on the value of the Fund is
similar to selling securities denominated in one currency and purchasing
securities denominated in another. Contracts to sell foreign currency would
limit any potential gain which might be realized by the Fund if the value of the
hedged currency increases. The Fund may enter into these contracts for the
purpose of hedging against foreign exchange risk arising from the Fund's
investment or anticipated investment in securities denominated in foreign
currencies. The Fund also may enter into these contracts for purposes of
increasing exposure to a foreign currency or to shift exposure to foreign
currency fluctuations from one country to another. The Fund may use one currency
(or a basket of currencies) to hedge against adverse changes in the value of
another currency (or a basket of currencies) when exchange rates between the two
currencies are positively correlated. The Fund will segregate liquid assets,
such as cash or high grade debt obligations, in a segregated account to cover
forward currency contracts entered into for non-hedging purposes.
MANAGEMENT
The Board of Trustees is responsible for the overall operations of the Trust,
including reviewing the actions of the Trust's Adviser and Sub-Advisers as set
forth below. The Trust's officers supervise the daily business operations of the
Trust.
PB Investment Advisors, Inc., 400 West Market Street, Louisville, Kentucky
40202, has been retained under an Investment Advisory Agreement with the Trust,
dated as of March 25, 1997, in general to supervise the management and
investment program of the Trust and each Fund. In addition, the Adviser
generally manages the affairs of the Trust, subject to the supervision of the
Board of Trustees. For information about the Board of Trustees and the Trust's
officers, see "Management" in the SAI. Under the Investment Advisory Agreement,
the Adviser receives an investment advisory fee equal to an annual rate of 0.65%
of the daily net asset value of the Fixed Income Fund, 0.65% of the daily net
asset value of the High Quality Stock Fund, 0.90% of the daily net asset value
of the International Active Fund, and 0.40% of the daily net assets of the Money
Market Fund.
The Adviser is wholly owned by Commonwealth General Corporation, a wholly owned
subsidiary of AEGON USA, Inc. AEGON USA, Inc. is an indirect wholly owned
subsidiary of AEGON n.v. Vereniging AEGON ( a Netherlands membership
association) has a 53.63% interest in AEGON n.v.
Atlanta Capital Management Company, L.L.C., Two Midtown Plaza, Suite 1600, 1360
Peachtree Street, Atlanta, Georgia 30309, has been retained by the Adviser
pursuant to a Sub-Advisory Agreement with the Adviser, dated as of March 25,
1997, to serve as the sub-adviser to the High Quality Stock Fund and the Fixed
Income Fund and in that capacity to select investments for those Funds. Atlanta
Capital, founded in 1969, performs investment management services for various
clients, including pension, profit sharing and other employee benefit plans as
well as other institutions and individuals. The firm manages approximately $2.8
billion in fixed income and equity assets. Atlanta Capital is owned and operated
by
13
<PAGE>
six partners. For these services Atlanta Capital receives a fee from the
Adviser based on the daily net assets of the High Quality Stock Fund and Fixed
Income Fund. This fee equals .50% annually on assets up to $25 million, and .40%
on assets above $25 million and up to $50 million, and .30% annually on assets
over $50 million.
Blairlogie Capital Management, 125 Princes Street, Fourth Floor, Edinburgh EH2
4AD, Scotland, has been retained by the Adviser pursuant to a Sub-Advisory
Agreement with the Adviser dated as of March 25, 1997, to serve as the
sub-adviser to the International Active Fund. Blairlogie is an investment
management firm, organized as a limited partnership under the laws of Scotland,
United Kingdom, with two general partners and one limited partner. The general
partners are PIMCO Advisors, which serves as the supervisory partner, and
Blairlogie Holdings Limited, a wholly owned corporate subsidiary of PIMCO
Advisors, which serves as the managing partner. The limited partner is
Blairlogie Partners, L.P., a limited partnership, the general partner of which
is Pacific Financial Asset Management Corporation, and the limited partners of
which are the principal executive officers of Blairlogie Capital Management.
Blairlogie Partners L.P. has agreed with PIMCO Advisors that PIMCO Advisors will
acquire its 25% interest in four annual installments beginning December 31,
1998. Blairlogie Capital Management Ltd., the predecessor investment adviser to
Blairlogie, commenced operations in 1992. Accounts managed by Blairlogie had
combined assets as of July 31, 1997 of approximately $.9 billion. Blairlogie is
registered as an investment adviser with the SEC in the United States and with
the Investment Management Regulatory Organization ("IMRO") in the United
Kingdom. As compensation for its services, the Adviser pays Blairlogie a fee
based on the daily net assets of the International Active Fund. This fee equals
0.65% annually on assets up to $50 million, and 0.50% annually on assets above
$50 million.
Federated Investment Counseling, Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779, has been retained by the Adviser pursuant to a
Sub-Advisory Agreement with the Adviser, dated as of March 25, 1997, to serve as
the sub-adviser to the Money Market Fund. Federated, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors. All
of the Class A (voting) shares of Federated Investors are owned by a trust, the
trustees of which are John F. Donahue, Chairman and Trustee of Federated
Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue,
who is President and Trustee of Federated Investors.
Federated Investment Counseling and other subsidiaries of Federated Investors
serve as investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services to a
number of investment companies. With over $140 billion invested across more than
372 funds under management and/or administration by its subsidiaries, as of
December 31, 1997, Federated Investors is one of the largest mutual fund
investment managers in the United States. With more than 2,200 employees,
Federated continues to be led by the management who founded the company in 1955.
Federated funds are presently at work in and through 4,700 financial
institutions nationwide. As compensation for its services, the Adviser pays
Federated a fee at an annual rate of 0.25% based on the daily net assets up to
$75 million and 0.20% annually on assets above $75 million of the Money Market
Fund.
14
<PAGE>
The investment professionals primarily responsible for the management of each
Fund (other than the Money Market Fund), with the respective responsibilities
and business experience for the past five years are as follows:
High Quality Stock Fund: Daniel W. Boone III, Senior Partner of Atlanta Capital.
He is responsible for the research and portfolio management of the High Quality
Stock Fund's equity portfolio and oversight of the equity investment process.
Mr. Boone joined Atlanta Capital in 1976.
Fixed Income Fund: Gregory L. Coleman, Partner of Atlanta Capital. He is
responsible for the fixed income trading, portfolio management of the Fixed
Income Fund and investment strategy. Mr. Coleman joined Atlanta Capital in 1990.
International Active Fund: James Smith, a Managing Director and Chief Investment
Officer of Blairlogie. Mr. Smith is responsible for managing an investment team
of six professionals who, in turn, specialize in selection of stocks within
Europe, Asia, the Americas and in currency and derivatives. He joined Blairlogie
as a founder in 1992 and previously served as a senior portfolio manager at
Murray Johnstone in Glasgow, Scotland, responsible for international investment
management for North American clients.
YEAR 2000
The Funds' operations depend on the seamless functioning of computer systems in
the financial service industry, including those of the Adviser, the
Administrator and the Custodian. Many computer software systems in use today
cannot properly process date-related information after December 31, 1999 because
of the method by which dates are encoded and calculated. This failure, commonly
referred to as the "Year 2000 Issue," could adversely affect the handling of
securities trades, pricing and account servicing for the Funds. The Adviser has
made compliance with the Year 2000 Issue a high priority and is taking steps
that it believes are reasonably designed to address the Year 2000 Issue with
respect to its computer systems. The Adviser has also been informed that
comparable steps are being taken by the Funds' other major service providers.
The Adviser does not currently anticipate that the Year 2000 Issue will have a
material impact on its ability to continue to fulfill its duties as investment
adviser.
PURCHASE AND REDEMPTION OF SHARES
Shares of each Fund are purchased or redeemed at their respective net asset
values next computed after receipt of an order (without a sales charge). For
information on how shares of the Funds are purchased and redeemed, read the
Contract prospectus.
NET ASSET VALUE AND PRICING
The net asset value of shares of each Fund is determined as of the close of
trading on each day the New York Stock Exchange is open for trading (currently
4:00 p.m. Eastern Time). The net asset value of shares for each Fund is
determined by adding up the value of its securities (determined as set forth
below) and other assets, subtracting the liabilities, and dividing by the number
of shares outstanding.
15
<PAGE>
Securities held by the Funds (other than the Money Market Fund) are valued based
upon readily available market quotations. Where such market quotations are not
available, securities are valued at fair value as determined by or under the
general supervision of the Board of Trustees.
The securities in the Money Market Fund are valued on an amortized-cost basis.
Under this method of valuation, a security is initially valued at its
acquisition cost, and thereafter, amortization of any discount or premium is
assumed each day, regardless of the impact of fluctuating interest rates on the
market value of the instrument. Under most conditions, Federated believes it
will be possible to maintain the net asset value of the Fund at $1.00 per share.
Calculations are periodically made to compare the value of the Fund's portfolio
valued at amortized cost with market values. If a deviation of 1/2 of 1% or more
were to occur between the net asset value calculated by reference to market
values and the Fund's $1.00 per share net asset value, or if there were any
other deviation that the Board of Trustees believed would result in a material
dilution to shareholders or purchasers, the Board of Trustees would promptly
consider what action, if any, should be initiated. See "Net Asset Values of the
Shares of the Funds" in the SAI for details.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Fund is treated as a separate taxable entity and will elect to qualify as a
"regulated investment company" under applicable provisions of the Internal
Revenue Code of 1986 (the "Code"). As such and by complying with the applicable
provisions of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, each Fund will be allowed
a deduction for amounts distributed to its shareholders from its ordinary income
and net realized capital gains and will not be subject to federal income tax on
such amounts. To qualify for treatment as a "regulated investment company," each
Fund must, among other things, derive in each taxable year at least 90 percent
of its gross income from dividends, interest and gains from the sale or other
disposition of securities.
Each Fund intends to distribute sufficient net investment income to avoid the
application of federal income tax on the Trust. Each Fund also intends to
distribute sufficient income to avoid the losses from the sale of its
investments less its estimated expenses (including fees payable to the Adviser).
In order to comply with certain potentially applicable regulations under Section
817(h) of the Code concerning variable annuity contracts and variable life
insurance policies, each Fund will diversify its investments so that on the last
day of each quarter of a calendar year, no more than 55% of the value on each
Fund is represented by any one investment, no more than 70% is represented by
any two investments, no more than 80% is represented by any three investments,
and no more than 90% is represented by any four investments. For this purpose,
securities of a single issuer are treated as one investment and each U.S.
Government agency or instrumentality is treated as a separate issuer. Any
security issued, guaranteed, or insured (to the extent so guaranteed or insured)
by the U.S. Government or an agency or instrumentality of the U.S. Government is
treated as a security issued by the U.S. Government or its agency or
instrumentality, whichever is applicable.
Dividends from the Funds (other than the Money Market Fund) will be declared and
distributed at such frequency, but at least annually, and in such amount as to
assure compliance with the Code. Dividends from the Money Market Fund will be
declared on each day its net asset value is calculated except bank
16
<PAGE>
holidays. Income earned on weekends, holidays (including bank holidays), and
days on which net asset value is not calculated is declared as a dividend on the
day on which the Fund's net asset value was most recently calculated. The
Trustees may decide to declare dividends at other intervals.
All net realized long-term capital gains of the Trust, if any, are declared and
distributed annually after the close of the Trust's fiscal year to the
shareholders of the Fund or Funds to which such gains are attributable.
PERFORMANCE AND YIELD INFORMATION
From time to time, the Trust may advertise a variety of types of performance
information including "yield," "average annual total return," "total return,"
"cumulative total return," and "effective yield." Each of these figures will be
based on historical information and is not intended to indicate future
performance of the Funds.
The yield of a Fund (other than the Money Market Fund) refers to the annualized
income generated by an investment in that Fund over a specified 30-day period.
The yield is calculated by assuming that the income generated by the investment
during that 30-day period is generated each 30-day period over a twelve-month
period and is shown as a percentage of the investment. The Money Market Fund's
yield and effective yield are measures of the net investment income per share
earned by the Fund over a specific seven-day period and are shown as a
percentage of the investment. However, effective yield will be slightly higher
than the yield because effective yield assumes that the net investment income
earned by the Fund will be reinvested.
The total return of a Fund refers to return quotations assuming an investment
has been held in the Fund for various periods of time including, but not limited
to, one year and a period measured from the date the Fund commenced operations.
When a Fund has been in operation for five and ten years, respectively, the
total return for these periods will be provided. The total return quotations
will represent the average annual compounded rates of return that would equate
an initial investment of $1,000 to the redemption value of that investment as of
the last day of each of the periods for which total return quotations are
provided.
The yield and total return calculations do not reflect the effect of the charges
that may be applicable to a particular Contract or separate account. Such
charges will reduce the net yield and total return of that Contract. Performance
figures for a Fund will only be advertised if the comparable figures for the
Contract are included in the advertisement.
GENERAL INFORMATION
Shares of Beneficial Interest
All shares of beneficial interest of the Trust are entitled to one vote, and
votes are generally on an aggregate basis. However, on matters where the
interests of the Funds differ (such as approval of an investment advisory
agreement or a change in fundamental investment policies), the voting is on a
Fund-by-Fund basis. The Trust does not hold routine annual shareholders'
meetings. The shares of each Fund
17
<PAGE>
issued are fully paid and non-assessable, have no preference, conversion,
exchange or similar rights, and are freely transferrable. In addition, each
issued and outstanding share in a Fund is entitled to participate equally in
dividends and distributions declared by such Fund. Providian Life and Health
Insurance Company Separate Account V and First Providian Life and Health
Insurance Company Separate Account C are the legal owners of the shares each
holds and as such each has the right to vote to elect the Trustees of the Trust,
to vote upon certain matters that are required by the 1940 Act to be approved or
ratified by the shareholders of a mutual fund and to vote upon any other matter
that may be voted upon at a shareholders' meeting. However, in accordance with
its view of presently applicable law, Providian Life and Health Insurance
Company Separate Account V and First Providian Life and Health Insurance Company
Separate Account C will vote the shares of the Trust at special meetings of the
shareholders of the Trust in accordance with instructions received from Contract
Owners.
Independent Auditors
Ernst & Young LLP has been selected as independent auditors for the Trust and
will audit each Fund's financial statements annually.
Legal Counsel
Legal advice regarding certain matters relating to the Federal securities laws
has been provided by Jorden Burt Boros Cicchetti Berenson & Johnson LLP,
Washington, D.C.
Custodian
Investors Fiduciary Trust Company, 801 Pennsylvania Street, Kansas City,
Missouri 64105, is the Custodian of the Trust's assets.
Reports to Shareholders
The Trust will send annual and semi-annual reports to Contract Owners showing
the financial conditions of the Funds and the investments held in each.
Other Information
Inquiries and requests for the Statement of Additional Information should be
directed to the Trust at (800) 866-0005 or P.O. Box 32700, Louisville, Kentucky
40232.
18
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information is available which contains more details
concerning the subjects discussed in this Prospectus. The following is the Table
of Contents for the SAI:
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Policies..................................... 2
Description of Securities and Investment Techniques..... 5
Portfolio Turnover and Securities Transactions.......... 24
Management.............................................. 26
Net Asset Values of the Shares of the Funds............. 28
Investment Performance.................................. 29
Taxes................................................... 33
General Information..................................... 33
Independent Auditors.................................... 35
Financial Statements.................................... 35
</TABLE>
<PAGE>
APPENDIX A--STANDARD AND POOR'S
EARNINGS AND DIVIDEND RANKINGS FOR COMMON STOCKS
In establishing Standard and Poor's quality rankings for common stocks, growth
and stability of earnings and dividends are deemed key elements. The point of
departure in arriving at these rankings is a computerized scoring system based
on per-share earnings and dividend records of the most recent ten years. Basic
scores are computed for earnings and dividends, then adjusted as indicated by a
set of predetermined modifiers for growth, stability within long-term trend, and
cyclicality.
The final score for each stock is measured against a scoring matrix determined
by analysis of the scores of a large and representative sample of stocks. The
range of scores in the array of this sample has been aligned with the following
ladder of rankings:
A+ Highest A- Above Average B- Lower
A High B+ Average C Lowest
B Below Average D in Reorganization
NR signifies no ranking because of insufficient data or because the stock is not
amenable to the ranking process.
20
<PAGE>
APPENDIX B--DESCRIPTION OF CORPORATE BOND
RATINGS
Moody's Investor Service, Inc.'s Corporate Bond Ratings:
Aaa--Bonds which are rated Aaa by Moody's Investor Service, Inc. ("Moody's") are
judged to be the best quality and carry the smallest degree of investment risk.
Interest payments are protected by a large or by an exceptionally stable margin,
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
period 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.
Standard & Poor's Ratings Group's Corporate Bond Ratings:
AAA--This is the highest rating assigned by Standard & Poor's ("S&P") to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
21
<PAGE>
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB/B/CCC/CC--Bonds rated BB, B, CCC, and CC 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 lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposure to adverse
conditions.
CI--The rating CI is reserved for income bonds on which no interest is being
paid.
D--Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): The ratings from AA to B may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
22
<PAGE>
APPENDIX C--SHORT-TERM DEBT RATINGS
MOODY'S SHORT-TERM
DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
[bullet] Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
[bullet] Leading market positions in well-established industries.
[bullet] High rates of return on funds employed.
[bullet] Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
[bullet] Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
[bullet] Well-established access to a range of financial markets and
assured sources of alternate liquidity.
[bullet] Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to
a lesser degree. Earnings trends and coverage ratios, while sound, may
be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
[bullet] Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Obligations of a branch of a bank are considered to be domiciled in the
country in which the branch is located. Unless noted as an exception, Moody's
rating on a bank's ability to repay senior obligations extends only to branches
located in countries which carry a Moody's Sovereign Rating for Bank Deposits.
Such branch obligations are rated at the lower of the bank's rating or Moody's
Sovereign Rating for Bank Deposits for the country in which the branch is
located.
When the currency in which an obligation is denominated is not the same as
the currency of the country in which the obligation is domiciled, Moody's
ratings do not incorporate an opinion as to
23
<PAGE>
whether payment of the obligation will be affected by actions of the government
controlling the currency of denomination. In addition, risks associated with
bilateral conflicts between an investor's home country and either the issuer's
home country or the country where an issuer's branch is located are not
incorporated into Moody's short-term debt ratings.
Moody's makes no representation that rated bank or insurance company
obligations are exempt from the registration under the U.S. Securities Act of
1933 or issued in conformity with any other applicable law or regulation. Nor
does Moody's represent that any specific bank or insurance company obligation is
legally enforceable or a valid senior obligation of a rated issuer.
If an issuer represents to Moody's that its short-term debt obligations are
supported by the credit of another entity or entities, then the name or names of
such supporting entity or entities are listed within the parenthesis beneath the
name of the issuer, or there is a footnote referring the reader to another page
for the name or names of the supporting entity or entities. In assigning ratings
to such issuers, Moody's evaluates the financial strength of the affiliated
corporations, commercial banks, insurance companies, foreign governments or
other entities, but only as one factor in the total rating assessment. Moody's
makes no representation and gives no opinion on the legal validity or
enforceability of any support arrangement.
Standard & Poor's Short-Term Issue Credit Ratings
'A-1' A short-term obligation rated 'A-1' is rated in the highest category
by Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
'A-2' A short-term obligation rated 'A-2' is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
'A-3' A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
'B' A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
'C' A short-term obligation rated 'C' is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.
'D' A short-term obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period.
24
<PAGE>
The 'D' rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
25
<PAGE>
PROSPECTUS
PB Series Trust
(Formerly Providian Series Trust)
P.O. Box 32700
Louisville, Kentucky 40232
May 1, 1998
PB Series Trust (the "Trust") is a diversified investment company presently
consisting of nine separate series each having different investment objectives
and policies. This prospectus describes five series of shares, each a
professionally managed investment portfolio (a "Portfolio"). These Portfolios
currently serve as the investment medium for variable annuity contracts
("Contracts") offered by insurance companies (see "Purchase and Redemption of
Shares") and qualified plans. Each Portfolio seeks to achieve its objective by
investing in a number of PB mutual funds. This prospectus also describes the
Money Market Fund, which is available only for the purpose of depositing and
holding initial purchase payments during the Free Look Period for the Contracts
issued in certain states.
The Capital Preservation Portfolio seeks high current income with low volatility
of principal.
The Income Oriented Portfolio seeks income and, secondarily, long term growth of
capital.
The Growth and Income Portfolio seeks growth of capital and income.
The Capital Growth Portfolio seeks long term growth of capital and, secondarily,
current income.
The Maximum Appreciation Portfolio seeks capital appreciation.
The Money Market Fund seeks to provide current income consistent with stability
of principal and liquidity. The Money Market Fund invests in money market
instruments maturing in thirteen months or less from the time of investment. An
investment in the Money Market Fund is not insured or guaranteed by the U.S.
government, and there can be no assurance that the Fund will be able to maintain
a stable net asset value of $1.00 per share.
The Trust may offer other series of shares in the future. The Portfolios' shares
(and the Money Market Fund's shares) will not be offered directly to the public.
There is no assurance that any of the Portfolios will achieve their investment
objectives.
This Prospectus sets forth concisely the information about the Trust, each of
the Portfolios, and the Money Market Fund that an investor should know before
investing. A Statement of Additional Information (the "SAI") dated May 1, 1998,
containing additional information about the Trust, has been filed with the
Securities and Exchange Commission and is incorporated by reference in this
Prospectus in its entirety. You may obtain a copy of the SAI without charge by
calling or writing the Trust.
INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1998.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY............................................................... 3
FINANCIAL HIGHLIGHTS ................................................. 5
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS.................. 7
RISK FACTORS AND SPECIAL CONSIDERATIONS............................... 9
PORTFOLIO TURNOVER.................................................... 10
INVESTMENT RESTRICTIONS............................................... 10
DESCRIPTION OF THE UNDERLYING FUNDS................................... 10
IMPLEMENTATION OF POLICIES AND RISKS OF THE UNDERLYING FUNDS.......... 15
MANAGEMENT............................................................ 18
PURCHASE AND REDEMPTION OF SHARES..................................... 21
NET ASSET VALUE AND PRICING........................................... 21
DIVIDENDS, DISTRIBUTIONS AND TAXES.................................... 22
PERFORMANCE AND YIELD INFORMATION..................................... 23
GENERAL INFORMATION................................................... 23
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS................. 25
APPENDIX A--COMMON STOCK RANKINGS...................................... A-1
APPENDIX B--CORPORATE BOND RATINGS..................................... B-1
APPENDIX C--SHORT-TERM DEBT RATINGS.................................... C-1
</TABLE>
2
<PAGE>
SUMMARY
PB Series Trust (the "Trust") was organized as a Massachusetts business trust on
October 22, 1996. The Trust is a diversified, no-load, open-end management
investment company registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940 ("1940 Act"). The Trust is a
"series" type of mutual fund which issues separate classes (or series) of stock,
each of which represents a separate diversified portfolio of investments. This
Prospectus offers shares of five investment portfolios ("Portfolios") of the
Trust and the Money Market Fund (for the purpose of holding initial deposits
during the free look period for Contracts issued in certain states).
Investment Objectives. Each Portfolio seeks to achieve its objective by
investing in a number of other PB mutual funds. The Capital Preservation
Portfolio seeks high current income with low volatility of principal. The Income
Oriented Portfolio seeks income and, secondarily, long-term growth of capital.
The Growth and Income Portfolio seeks growth of capital and income. The Capital
Growth Portfolio seeks long-term growth of capital and, secondarily, current
income. The Maximum Appreciation Portfolio seeks capital appreciation. Each
Portfolio seeks to achieve its investment objective by investing in a diverse
mix of "Underlying Funds," which consist of open-end management investment
companies or series thereof for which PB Investment Advisors, Inc. acts as
investment adviser. Investors may choose to invest in one of the Portfolios
based on their personal investment goals, risk tolerance and financial
circumstances. See "Investment Objectives and Policies of the Portfolios."
The shares of the Portfolios are offered to separate accounts of insurance
companies to fund variable annuity contracts issued by Providian Life and Health
Insurance Company and First Providian Life and Health Insurance Company
(together, "Providian Life"). Shares of the Portfolios may be offered to
qualified plans and, in the future, in connection with variable life insurance
policies. The rights of an insurance company holding Trust shares for a separate
account are different from the rights of the owner of a Contract ("Contract
Owner"). The terms "shareholder" or "shareholders" in this Prospectus shall
refer to the insurance companies and qualified plans, and not to any Contract
Owner.
PB Investment Advisors, Inc. (formerly Providian Investment Advisors, Inc.) (the
"Adviser") serves as each Portfolio's investment adviser. Atlanta Capital
Management Company, L.L.C. ("Atlanta Capital") serves as each Portfolio's
sub-adviser. Federated Investment Counseling ("Federated") serves as the
sub-adviser to the Money Market Fund. Atlanta Capital, Federated, and Blairlogie
Capital Management ("Blairlogie") serve as sub-advisers to the Underlying Funds
(collectively referred to as the "Sub-Advisers"). The Adviser supervises the
Trust's overall management and investment program, performs a variety of
administrative services on behalf of the Trust, pays the Sub-Advisers of the
Underlying Funds and fees and expenses of officers and Trustees of the Trust who
are affiliated persons of the Adviser, the Sub-Advisers or the Trust. The Trust
pays all other expenses incurred in the operation of the Trust, including fees
and expenses of Trustees who are unaffiliated persons of the Adviser, the
Sub-Advisers, or the Trust. Although the Portfolios do not pay an investment
management fee in connection with management of the Portfolios, the Portfolios
will indirectly bear their pro rata share of the fees and expenses incurred by
the Underlying Funds. The Adviser has agreed to waive operating expenses of each
Portfolio and to limit the operating expenses (excluding advisory fees) of each
Underlying Fund so that the ratio of expenses to net assets on an annual basis
incurred does not exceed .25%. Expenses in excess of such amounts will be
assumed by the Adviser until the earlier of (a) the end of three years after
commencement of operations or (b) the termination by the Trustees or the Funds'
or the Portfolios' shareholders, but not the Adviser, of the Trust's Advisory
Agreement with the Adviser.
3
<PAGE>
Risk Factors and Special Considerations. The assets of each Portfolio are
invested in certain Underlying Funds, so each Portfolio's investment performance
is directly related to the investment performance of the Underlying Funds held.
The ability of each Portfolio to meet its investment objective is directly
related to the ability of the Underlying Funds held to meet their objectives as
well as the allocation among those Underlying Funds by the Adviser and Atlanta
Capital. There can be no assurance that the investment objective of any
Portfolio or any Underlying Fund will be achieved.
The value of the Underlying Funds' investments, and thus the net asset value of
both those Underlying Funds' and the Portfolios' shares, will fluctuate in
response to changes in market and economic conditions, as well as the financial
condition and prospects of issuers in which the Underlying Funds invest. For a
description of the risks involved in an investment in the Portfolios, see
"Investment Objectives and Policies of the Portfolios," and "Description of the
Underlying Funds."
4
<PAGE>
PB SERIES TRUST
FINANCIAL HIGHLIGHTS
The following financial highlights for the period May 9, 1997 (commencement of
investment operations) through December 31, 1997 have been audited by Ernst &
Young LLP. Such information should be read in conjunction with the financial
statements of the Trust and the report of Ernst & Young LLP, the Trust's
independent auditors, which is included in the SAI.
For a share outstanding throughout the period May 9, 1997 (commencement of
investment operations) through December 31, 1997.
<TABLE>
<CAPTION>
Capital Income Growth &
Preservation Oriented Income
Portfolio Portfolio Portfolio
--------- --------- ---------
<S> <C> <C> <C>
Net asset value, beginning of period........................................ $10.00 $10.00 $10.00
------ ------ ------
Net investment income ...................................................... 0.24 0.20 0.18
Net realized and unrealized gain on investments............................. 0.26 0.68 0.84
------ ------ ------
Total from investment operations............................................ 0.50 0.88 1.02
------ ------ ------
Net investment income....................................................... (0.24) (0.20) (0.18)
Net realized gains.......................................................... (0.03) (0.05) (0.12)
------ ------ ------
Total distributions......................................................... (0.27) (0.25) (0.30)
------ ------ ------
Net asset value, end of period.............................................. $10.23 $10.63 $10.72
====== ====== ======
Total return (2)............................................................ 4.92% 8.84% 10.25%
====== ====== ======
Ratios and supplemental data:
Net assets, end of period................................................... $26,774 $ 8,256 $180,830
Ratio of operating expenses to average net assets (3)....................... -- -- --
Ratio of operating expenses to average net assets before voluntary
expense reimbursement (1)(3).............................................. 161.07% 1,978.36% 30.27%
Ratio of net investment income to average net assets (3).................... 8.69% 26.94% 7.93%
Ratio of net investment loss to average net assets before voluntary
expense reimbursement (1)(3).............................................. (152.38%) (1,951.42%) (22.34%)
Portfolio turnover rate (4)................................................. 32% 0% 24%
</TABLE>
(1) Net investment income is after reimbursement of certain fees and expenses
by PB Investment Advisors, Inc. (See Note 3 to the financial statements).
Had PB Investment Advisors, Inc. not undertaken to reimburse expenses
related to the Portfolios and Funds, the ratios of net investment income
and operating expenses to average net assets would have been as noted
above.
(2) Total return figures are not annualized. Total returns do not reflect
expenses that apply to the separate account or related variable insurance
contracts and inclusion of these charges would result in reducing the total
return figures for the period shown.
(3) Annualized for periods less than one year.
(4) Portfolio turnover rates are not annualized.
5
<PAGE>
PB SERIES TRUST
FINANCIAL HIGHLIGHTS (Cont.)
The following financial highlights for the period May 9, 1997 (commencement of
investment operations) through December 31, 1997 have been audited by Ernst &
Young LLP. Such information should be read in conjunction with the financial
statements of the Trust and the report of Ernst & Young LLP, the Trust's
independent auditors, which is included in the SAI.
For a share outstanding throughout the period May 9, 1997(commencement of
investment operations) through December 31, 1997.
<TABLE>
<CAPTION>
Capital Maximum Money
Growth Appreciation Market
Portfolio Portfolio Fund
--------- --------- ----
<S> <C> <C> <C>
Net asset value, beginning of period...................................... $10.00 $10.00 $1.00
Income from investment operations:
Net investment income .................................................... 0.13 0.07 0.03
Net realized and unrealized gain on investments........................... 1.13 1.41 --
-------- -------- ----------
Total from investment operations.......................................... 1.26 1.48 0.03
-------- -------- ----------
Less distributions from:
Net investment income..................................................... (0.13) (0.07) (0.03)
Net realized gains........................................................ (0.09) (0.12) --
-------- -------- ----------
Total distributions....................................................... (0.22) (0.19) (0.03)
-------- -------- ----------
Net asset value, end of period............................................ $11.04 $11.29 $1.00
======== ======== ===========
Total return (2).......................................................... 12.67% 14.82% 3.31%
======== ======== ==========
Ratios and supplemental data:
Net assets, end of period................................................. $816,349 $244,738 $2,361,341
Ratio of operating expenses to average net assets (3)..................... -- -- 0.65%
Ratio of operating expenses to average net assets before voluntary
expense reimbursement (1)(3)............................................ 20.00% 24.59% 2.67%
Ratio of net investment income to average net assets (3).................. 6.13% 3.19% 5.03%
Ratio of net investment income (loss) to average net assets before
voluntary expense reimbursement (1)(3)................................... (13.87%) (21.40%) 3.01%
Portfolio turnover rate (4)............................................... 2% 6% N/A
Average commission rate paid per equity share traded...................... N/A N/A N/A
</TABLE>
(1) Net investment income is after reimbursement of certain fees and expenses
by PB Investment Advisors, Inc. (See Note 3 to the financial statements).
Had PB Investment Advisors, Inc. not undertaken to reimburse expenses
related to the Portfolios and Funds, the ratios of net investment income
and operating expenses to average net assets would have been as noted
above.
(2) Total return figures are not annualized. Total returns do not reflect
expenses that apply to the separate account or related variable insurance
contracts and inclusion of these charges would result in reducing the total
return figures for the period shown.
(3) Annualized for periods less than one year.
(4) Portfolio turnover rates are not annualized.
6
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
The Portfolios will be managed so that each Portfolio can serve as a complete
investment program for the Contracts. Each of the Portfolios invests in a select
group of Underlying Funds suited to the Portfolio's particular investment
objective. The allocation of assets among Underlying Funds within each Portfolio
is determined by Atlanta Capital within guidelines established by the Trustees
of the Trust according to fundamental and quantitative analysis of the expected
long term return and risk characteristics for each Underlying Fund. Because the
assets will be adjusted only periodically and only within pre-determined ranges
that will attempt to ensure broad diversification, there should not be any
sudden large scale changes in the allocation of a Portfolio's investments among
Underlying Funds. The Portfolios are not designed as a tactical asset allocation
vehicle, but rather as a simple and conservative approach to helping investors
meet retirement and other long-term goals.
The Trust is an open-end, diversified, management investment company that
currently offers nine investment portfolios. The Portfolios seek to achieve
their investment objective by investing within specified ranges among Underlying
Funds. Initially, each Portfolio will invest in the Underlying Funds listed
below.
Atlanta Capital will allocate investments for each Portfolio among Underlying
Funds based on their outlook for the economy, financial markets and the relative
performance of the Underlying Funds. The allocation among the Underlying Funds
will be made within investment ranges established by the Trustees of the Trust
which designate minimum and maximum percentages for each of the Underlying
Funds.
The Capital Preservation Portfolio seeks high current income with low volatility
of principal. The Income Oriented Portfolio seeks income and, secondarily, long
term growth of capital. The Growth and Income Portfolio seeks growth of capital
and income. The Capital Growth Portfolio seeks long term growth of capital and,
secondarily, current income. The Maximum Appreciation Portfolio seeks capital
appreciation. Each Portfolio's investment objective is fundamental and may be
changed only with the approval of a majority of the Portfolio's outstanding
shares. There can be no assurance that any Portfolio's investment objective will
be achieved.
By investing in Underlying Funds, the Portfolios seek to maintain different
allocations between equity funds and fixed income funds (including the Money
Market Fund) depending on a Portfolio's investment objective. Allocating
investments between equity funds and fixed income funds permits each Portfolio
to attempt to optimize performance consistent with its investment objective. The
tables below illustrate the initial equity/fixed income/money market fund
allocation targets and ranges for each Portfolio:
7
<PAGE>
Equity/Fixed Income/Money Market Fund Range (Percent of Each Portfolio's
Net Assets)
<TABLE>
<CAPTION>
Initial Policy
Type of Fund Target Range
- ------------ ------ -----
<S> <C> <C>
Capital Preservation Portfolio
Equity.......................... 0 0
Fixed Income.................... 50% 40%-60%
Money Market.................... 50% 40%-60%
---
100%
Income Oriented Portfolio
Equity.......................... 35% 25%-40%
Fixed Income.................... 50% 40%-60%
Money Market.................... 15% 0-25%
---
100%
Growth and Income Portfolio
Equity.......................... 50% 40%-60%
Fixed Income.................... 40% 30%-50%
Money Market.................... 10% 0-25%
---
100%
Capital Growth Portfolio
Equity.......................... 75% 60%-85%
Fixed Income.................... 25% 15%-35%
Money Market.................... 0 0-25%
----
100%
Maximum Appreciation Portfolio
Equity.......................... 100% 85%-100%
Fixed Income.................... 0 0-15%
Money Market.................... 0 0-15%
----
100%
</TABLE>
The Portfolios invest their assets in the Underlying Funds listed below within
the ranges indicated.
<TABLE>
<CAPTION>
Investment Range (Percent of Each Portfolio's Net Assets)
Capital Income Growth & Capital Maximum
Preservation Oriented Income Growth Appreciation
Underlying Fund Portfolio Portfolio Portfolio Portfolio Portfolio
- --------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
High Quality Stock Fund...... 0% 15-40% 25-55% 35-75% 50-90%
International Active Fund.... 0% 0-10% 5-15% 10-25% 10-35%
Total Equity Funds........... 0% 25-40% 40-60% 60-85% 85-100%
Fixed Income Fund............ 40-60% 40-60% 30-50% 15-35% 0-15%
Money Market Fund............ 40-60% 0-25% 0-25% 0-25% 0-15%
</TABLE>
The Underlying Funds have been selected to represent a broad spectrum of
investment options for the Portfolios. The equity/fixed income/money market
ranges and the investment ranges are based on the
8
<PAGE>
degree to which the Underlying Funds selected are appropriate for a Portfolio's
particular investment objective. If, as a result of appreciation or
depreciation, the percentage of a Portfolio's assets invested in an Underlying
Fund exceeds or is less than the applicable percentage limitations set forth
above, Atlanta Capital will consider, in its discretion, whether to reallocate
the assets of the Portfolio to comply with the foregoing percentage limitations.
The particular Underlying Funds in which each Portfolio may invest, the
equity/fixed income/money market fund targets and ranges and the investment
ranges applicable to each Underlying Fund may be changed from time to time by
the Board of Trustees without the approval of the Portfolio's shareholders.
Each Portfolio can invest a certain portion of its cash reserves in money market
instruments and U.S. government securities. Each Portfolio may also invest its
cash reserves in the Money Market Fund. A reserve position provides flexibility
in meeting redemptions, expenses and the timing of new investments, and serves
as a short term defense during periods of unusual volatility.
For information about the investment objectives of each of the Underlying Funds
and the investment techniques and the risks involved in the Underlying Funds,
please refer to "Description of the Underlying Funds" and the SAI.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment Practices of the Underlying Funds. The different types of securities
and investment techniques common to one or more of the Underlying Funds all have
attendant risks of varying degrees. For example, with respect to equity
securities, there can be no assurance of capital appreciation and there is a
substantial risk of decline. With respect to debt securities, there can be no
assurance that the issuer of such securities will be able to meet its
obligations on interest or principal payments in a timely manner. In addition,
the value of debt instruments generally rises and falls inversely with changes
in interest rates.
The Portfolios differ in terms of stock market risk, interest rate risk, and
credit risk. Stock market risk is the possibility that stock prices in general
will decline over short or extended periods. Stock markets tend to be cyclical
with periods when stock prices generally rise or fall. The Maximum Appreciation,
Capital Growth, Growth and Income and Income Oriented Portfolios also may have
exposure to foreign stock markets, which are generally thought to be riskier
than domestic markets. Interest rate risk is the possibility that bond prices
will decline over short or long periods due primarily to changes in market
interest rates. Credit risk is the possibility that an issuer's ability to make
debt service payments will decline.
Three of the Portfolios, Maximum Appreciation, Capital Growth and Growth and
Income, will have a higher exposure to stock market risk because of the
significant investment these Portfolios have in equity funds. The other two
Portfolios, Capital Preservation and Income Oriented, will have higher exposure
to interest rate and credit risk because of the significant investment exposure
these Portfolios have in bond funds.
The investments and investment techniques common to one or more of the
Underlying Funds are described in greater detail, including the risks of each,
in the "Description of Securities and Investment Techniques" in the SAI.
9
<PAGE>
Affiliated Persons. The Adviser, the investment manager of the Portfolios,
Atlanta Capital, the sub-adviser of the Portfolios, and the officers and
Trustees of the Trust presently serve as investment adviser, sub-adviser, and
Trustees, respectively, of the Underlying Funds. Therefore, conflicts
theoretically may arise as these persons fulfill their fiduciary
responsibilities to the Portfolios and the Underlying Funds.
PORTFOLIO TURNOVER
Each Portfolio's turnover rate is not expected to exceed 25% annually. A
Portfolio may purchase or sell securities to (a) accommodate purchases and sales
of its shares; (b) change the percentages of its assets invested in the
Underlying Funds in response to market conditions; or (c) maintain or modify the
allocation of its assets between equity and fixed income/money market funds and
among the Underlying Funds within the percentage limits described previously.
The Portfolios' turnover rates for the period from May 9, 1997 (commencement of
investment operations) through December 31, 1997 were as follows: Capital
Preservation Portfolio--32%, Income Oriented Portfolio--0%, Growth and Income
Portfolio--24%, Capital Growth Portfolio--2% and Maximum Appreciation
Portfolio--6%.
INVESTMENT RESTRICTIONS
In addition to the investment objectives of each Portfolio, the Portfolios are
subject to investment restrictions that are described under "Investment
Policies" in the SAI. Each Portfolio's investment objective and investment
restrictions are "fundamental policies," which means that they may not be
changed without a majority vote of shareholders of the affected Portfolios.
Except for fundamental policies, all investment policies and practices described
in this Prospectus and in the SAI are not fundamental, meaning that the Board of
Trustees may change them without shareholder approval. See "Description of
Securities and Investment Techniques" and "Investment Policies" in the SAI for
further information.
The following is a concise description of the investment objectives and
practices for each of the Underlying Funds in which the Portfolios may invest.
There can be no assurance that the investment objectives of the Underlying Funds
will be met. Additional information regarding the investment practices of the
Underlying Funds is located in the SAI and in the prospectus of the Underlying
Funds. No offer is made in this Prospectus of any of the Underlying Funds except
the Money Market Fund, which is only used during the Free Look Period under the
Contracts in certain states.
DESCRIPTION OF THE UNDERLYING FUNDS
Four Underlying Funds serve as investment medium for the Portfolios. The
investment objectives of the four Underlying Funds are as follows:
o The High Quality Stock Fund seeks long-term growth of capital. The Fund
pursues its investment objective by investing primarily in stocks of three
categories of companies that are publicly traded in
10
<PAGE>
the United States: the 500 largest in market capitalization, the 501st to
the 1250th largest in market capitalization, and the 1000th to the 3000th
largest in market capitalization at the time of purchase.
o The Fixed Income Fund seeks the highest level of income as is consistent with
the preservation of capital. The Fund pursues its investment objective
primarily by investing in investment grade debt securities, which range in
maturity from one to ten years, including securities issued by the U.S.
government or an agency or instrumentality of the U.S. government,
asset-backed securities and corporate debt obligations.
o The International Active Fund seeks long term growth of capital. The Fund
pursues its objective by investing primarily in a diversified portfolio of
international equity securities.
o The Money Market Fund seeks to provide current income consistent with
stability of principal and liquidity. The Fund invests in money market
instruments maturing in thirteen months or less from the time of investment.
The Adviser serves as each Underlying Fund's investment adviser. Atlanta Capital
serves as the sub-adviser to the High Quality Stock Fund and the Fixed Income
Fund. Blairlogie serves as the sub-adviser to the International Active Fund.
Federated serves as the sub-adviser to the Money Market Fund.
High Quality Stock Fund
In seeking its objective of long term growth of capital, the High Quality Stock
Fund will attempt to achieve a high total return (i.e., price appreciation plus
potential dividend yield) primarily through investment in selected high quality
common stocks of large, medium and small size companies that are publicly traded
in the United States. The High Quality Stock Fund primarily selects stocks from
among three categories of companies: the 500 largest in market capitalization,
the 501st to the 1250th largest in market capitalization and the 1000th to the
3000th largest in market capitalization at the time of purchase. Each company
must have a common stock ranking of B+ or better by Standard & Poor's Ratings
Group ("S&P") (or if not ranked by S&P, or comparable quality ranking by another
recognized ranking service, or if unranked, be of comparable quality in the
opinion of Atlanta Capital) (this standard is referred to as a "common stock
ranking of B+ or better"). From this universe of stock issues, Atlanta Capital
selects stocks based upon a favorable combination of valuation, price volatility
and earnings stability. Approximately 50 stocks of large market capitalization
companies, 60 stocks of medium market capitalization companies, and 75 stocks of
small market capitalization companies are included in the Fund's portfolio.
Atlanta Capital, the investment sub-adviser to the High Quality Stock Fund,
generally believes that high quality companies, that is, companies with superior
track records of consistent earnings and dividend growth, tend to outperform the
stock market over the long term. The Fund seeks to outperform its benchmarks,
the S&P 500 Composite Stock Price Index and the Russell 3000 Index. Atlanta
Capital's stock selection methods will be based upon, among other things, the
analysis of variables which it believes significantly relate to the future
market performance of a stock, such as recent changes in earnings per share and
their deviations from analysts' expectations, past growth trends, price action
of the stock itself, publicly recorded trading transactions by corporate
insiders, and relative price-earnings ratios.
11
<PAGE>
By investing in securities that are subject to market risk, the High Quality
Stock Fund is also subject to greater fluctuations in its market values and a
higher degree of risk as compared to a fund seeking stability of principal, such
as a money market fund or a fund investing primarily in debt obligations issued
or guaranteed by the U.S. government or its agencies or instrumentalities (these
obligations are referred to in this Prospectus as "U.S. government securities").
The High Quality Stock Fund's investment philosophy is based on extensive
research which shows that high-quality growth companies have produced
consistently increasing earnings and dividends, thereby providing attractive
returns with moderate risk over the long term. To qualify for purchase, each
company must have a common stock ranking of B+ or better. Atlanta Capital will
conduct fundamental income statement and balance sheet research on individual
companies to estimate future sustainable growth rates, evaluate current earnings
momentum, and estimate relative value of the stock. Atlanta Capital intends to
sell stocks based on such factors as deteriorating fundamentals, below B+
quality ranking, and/or poor relative valuation.
If market conditions indicate their desirability, Atlanta Capital may, for
defensive purposes, temporarily invest, without limitation, the assets of the
High Quality Stock Fund in cash or cash equivalents. See "Cash Equivalents"
below, and "Debt Securities" under "Description of Securities and Investment
Techniques" in the SAI for further information.
Fixed Income Fund
In seeking its objective of the highest level of income as is consistent with
the preservation of capital, the Fixed Income Fund will invest in securities
issued by the U.S. government or an agency or instrumentality of the U.S.
government, including mortgage-related securities. The U.S. government
securities which may be purchased by the Fixed Income Fund include direct
obligations issued by the United States Treasury, such as Treasury bills,
certificates of indebtedness, notes and bonds. The Fixed Income Fund may also
purchase instruments issued or guaranteed by agencies or instrumentalities of
the United States government, including mortgage-related securities.
The Fixed Income Fund may also purchase mortgage-related securities and
asset-backed securities not issued by the U.S. government or any agency or
instrumentality thereof. The Fixed Income Fund may also invest in investment
grade corporate debt securities rated in one of the three highest rating
categories by Moody's Investor Service, Inc. ("Moody's"), S&P, Fitch ICA, Inc.,
or another nationally recognized statistical rating organization ("NRSRO"), or
if unrated, of comparable quality in the opinion of Atlanta Capital. While
non-U.S. government securities may present greater credit risk than U.S.
government securities, they also tend to afford higher yields than U.S.
government securities. Debt securities purchased by the Fund may be of any
maturity. It is anticipated that the weighted average maturity of the debt
portfolio generally will be between 3 and 7 years, but may be shorter or longer
under unusual market circumstances.
Among the mortgage-related securities that may be purchased by the Fixed Income
Fund are "mortgage-backed securities" of the Government National Mortgage
Association ("GNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") and
the Federal National Mortgage Association ("FNMA"). These mortgage-backed
securities include "pass-through" securities and "participation certificates,"
both
12
<PAGE>
of which are similar, representing pools of mortgages that are assembled,
with interests sold in each pool. Payments of principal (including prepayments)
and interest by individual mortgagors are "passed through" to the holders of the
interests in each pool; thus, each payment to holders may contain varying
amounts of principal and interest. Another type of mortgage-backed security is
the collateralized mortgage obligation ("CMO"). A CMO is a security that is
backed by mortgage pass-through securities or in some cases mortgage loans. The
cash flow from the pass-throughs or loans is redirected to one or more classes
or tranches in a prescribed manner. Timely payment of principal and interest on
GNMA pass-throughs is guaranteed by the full faith and credit of the United
States. FHLMC and FNMA are both instrumentalities of the U.S. government, but
their obligations are not backed by the full faith and credit of the United
States. See "Mortgage-Backed Securities" under "Description of Securities and
Investment Techniques" in the SAI for further information.
There is minimal credit risk involved in the purchase of government or
government-guaranteed securities. However, as with any fixed income investment,
when interest rates decline, the market value of a portfolio invested at higher
yields can be expected to rise. Conversely, when interest rates rise, the market
value of a portfolio invested at lower yields can be expected to decline.
Therefore, Atlanta Capital may engage in portfolio trading to take advantage of
market developments and yield disparities, for example, shortening the average
maturity of the portfolio in anticipation of a rise in interest rates so as to
minimize depreciation of principal, or lengthening the average maturity of the
portfolio in anticipation of a decline in interest rates so as to maximize
appreciation of principal.
The Fixed Income Fund seeks to outperform the Lehman Brothers Intermediate
Aggregate Index (the "Index") over an interest rate cycle. (See the SAI for a
description of the Index). The portfolio duration will generally range from 80%
to 120% of the Index duration. Typically, this causes the weighted average
maturity of the portfolio to vary between 3 and 7 years. Atlanta Capital sets
duration strategy based on its assessment of secular and cyclical economic,
demographic and political trends.
The Fixed Income Fund may invest in asset-backed securities which represent
fractional interests in pools of leases, retail installment loans and revolving
credit receivables, both secured and unsecured. The Fixed Income Fund may also
use various other investment strategies and techniques when Atlanta Capital
determines that such use is appropriate in an effort to meet the Fund's
investment objective. Such strategies and techniques include, but are not
limited to, entering into repurchase agreements and investing in when-issued or
delayed delivery securities. See "Description of Securities and Investment
Techniques" in the SAI for further information.
International Active Fund
The International Active Fund seeks long term growth of capital. In pursuing
this objective, the Fund invests primarily in a diversified portfolio of
international equity securities. The Morgan Stanley Capital International EAFE
(Europe, Australia, Far East) Index ("EAFE Index") is used as a basis for
choosing the countries in which the Fund invests. However, the Fund is not
limited to the countries and weightings of the EAFE Index. Blairlogie applies
two levels of screening in selecting investments for the Fund. First, an active
country selection model analyzes world markets and assigns a relative value
ranking, or "favorability weighting," to each country in the relevant universe
to determine markets which are relatively undervalued. Second, at the stock
selection level, quality analysis and value are applied to each security,
assessing variables such as balance sheet strength and earnings growth (quality
factors) and
13
<PAGE>
performance relative to the industry, price to earnings ratios and price to book
ratios (value factors). This two-level screening method identifies undervalued
securities for purchase as well as provides a sell discipline for fully valued
securities. While Blairlogie endeavors to apply the same variables to all stock
markets, the applicability of the analytical tools can differ between countries.
In selecting securities, Blairlogie considers, to the extent practicable and on
the basis of information available to it for research, a company's environmental
business practices.
Most of the foreign securities in which the Fund invests will be denominated in
foreign currencies. The Fund may engage in foreign currency transactions to
protect itself against fluctuations in currency exchange rates in relation to
the U.S. dollar or to the weighting of a particular foreign currency on the EAFE
Index. Such foreign currency transactions may include forward foreign currency
contracts, currency exchange transactions on a spot (i.e., cash) basis, put and
call options on foreign currencies, and foreign exchange futures contracts. The
Fund may invest in stock index futures contracts, foreign exchange futures
contracts, and options thereon, and may sell (write) call and put options. The
Fund also may engage in equity index swap transactions. Investing in the
securities of foreign entities involves special risks and considerations not
typically associated with investing in U.S. companies. For information on other
investment policies and practices, see the SAI for more details.
Money Market Fund
The Money Market Fund seeks to provide current income consistent with stability
of principal and liquidity. While there is no assurance that the Money Market
Fund will achieve its investment objective, it endeavors to do so by complying
with the various requirements of Rule 2a-7 under the 1940 Act which regulates
money market mutual funds and by following the investment policies described in
this prospectus.
The Money Market Fund will be used during the Free Look Period under the
Contracts in certain states. Because the Fund seeks to maintain a constant net
asset value of $1.00 per share, capital appreciation is not expected to play a
role in the Fund's returns, and dividend income alone is expected to provide its
entire investment return. All money market instruments can change in value when
interest rates or an issuer's creditworthiness changes dramatically. The Fund
cannot guarantee that it will always be able to maintain a stable net asset
value of $1.00 per share. An investment in the Fund is neither insured nor
guaranteed by the U.S. government.
The Money Market Fund pursues its investment objective by investing exclusively
in a portfolio of money market instruments maturing in 397 days or less. The
average maturity of the money market instruments in the Money Market Fund's
portfolio, computed on a dollar-weighted basis, will be 90 days or less. Unless
indicated otherwise, the investment policies of the Money Market Fund may be
changed by the Trustees without the approval of shareholders. Shareholders will
be notified before any material change in these policies becomes effective.
14
<PAGE>
The Money Market Fund invests in high-quality money market instruments that are
denominated and payable only in U.S. dollars and that are rated (or issued by an
issuer that is rated with respect to its short-term debt) in either one of the
two highest short-term rating categories by one or more NRSROs or are of
comparable quality to securities having such ratings. Examples of these
instruments include, but are not limited to:
(1) domestic issues of corporate debt obligations, including variable rate
demand notes;
(2) commercial paper (including Canadian Commercial Paper ("CCP") and
Europaper);
(3) certificates of deposit, demand and time deposits, bankers'
acceptances and other instruments of domestic and foreign banks and
other deposit institutions;
(4) short-term credit facilities, such as demand notes;
(5) asset-backed securities;
(6) obligations issued or guaranteed as to payment of principal and
interest by the U.S. government or one of its agencies or
instrumentalities;
(7) repurchase agreements; and
(8) other money market instruments.
Concentration of Investments. The Money Market Fund may invest 25% or more of
its total assets in securities issued by finance companies and banks. The
finance companies in which the Money Market Fund intends to invest can be
divided into two categories, commercial finance companies and consumer finance
companies. Commercial finance companies are principally engaged in lending to
corporations or other businesses. Consumer finance companies are primarily
engaged in lending to individuals. Captive finance companies or finance
subsidiaries which exist to facilitate the marketing and financial activities of
their parent will, for purposes of industry concentration, be classified by the
Money Market Fund in the industry of its parent corporation.
In addition, the Money Market Fund may invest more than 25% of the value of its
total assets in cash or cash items, securities issued or guaranteed by the U.S.
government, its agencies, or instrumentalities, or instruments secured by these
money market instruments, such as repurchase agreements.
IMPLEMENTATION OF POLICIES AND RISKS OF THE UNDERLYING FUNDS
In addition to the investment policies described above (and subject to certain
restrictions described below), the Underlying Funds may invest in some or all of
the following securities and may employ some or all of the following investment
techniques, some of which may present special risks as described below. A more
complete discussion of certain of these securities and investment techniques and
the associated risks is contained in the SAI.
15
<PAGE>
Government Securities
U.S. government securities are issued or guaranteed by the U.S. government or
its agencies or instrumentalities. Securities issued by the government include
U.S. Treasury obligations, such as Treasury bills, notes and bonds. Securities
issued or guaranteed by government agencies or instrumentalities include the
following:
[bullet] the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration,
and the Government National Mortgage Association, including GNMA
pass-through certificates, whose securities are supported by the full
faith and credit of the United States;
[bullet] the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right
of the agency to borrow from the U.S. Treasury;
[bullet] the Federal National Mortgage Association, whose securities are
supported by the discretionary authority of the U.S. government to
purchase certain obligations of the agency or instrumentality; and
[bullet] the Student Loan Marketing Association, the Interamerican Development
Bank, and International Bank for Reconstruction and Development, whose
securities are supported only by the credit of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
Cash Equivalents
Each Underlying Fund may from time to time invest in cash or cash equivalents,
which include, but are not limited to the following instruments:
(a) short term (maturing in 13 months or less) obligations issued or
guaranteed as to interest and principal by the U.S. government or any
agency or instrumentality thereof;
(b) obligations of banks (including certificates of deposit and
bankers' acceptances) that have capital, surplus, and undivided profits (as
of the date of their most recently published financial statements) in
excess of $100,000,000; and obligations of other banks or savings and loan
associations if such obligations are federally insured, provided that not
more than 10% of the total assets of the Underlying Fund will be invested
in such other insured obligations;
(c) commercial paper rated in the top two categories by an NRSRO
(short-term unsecured promissory notes of corporations including variable
rate master demand notes) or if unrated, of comparable quality, as
determined by the Adviser or the Sub-Adviser;
(d) short term (maturing in 13 months or less) corporate obligations;
16
<PAGE>
(e) obligations of U.S. and non-U.S. issuers denominated in U.S.
dollars and in securities of foreign branches of U.S. banks, such as
negotiable certificates of deposit, and including variable rate master
demand notes and floating rate notes; and
(f) debt instruments not specifically described if such instruments
are deemed by the Sub-Advisers to be of comparable high quality and
liquidity.
Each Underlying Fund may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933 (the "1933 Act"). Section 4(2) commercial paper is restricted as to
disposition under federal securities laws and is generally sold to institutional
investors, such as the Underlying Funds, who agree that they are purchasing the
paper for investment purposes and not with a view to public distribution. Any
resale by the purchaser must be in an exempt transaction. Section 4(2)
commercial paper is normally resold to other institutional investors like the
Underlying Funds through or with the assistance of the issuer or investment
dealers who make a market in Section 4(2) commercial paper, thus providing
liquidity.
For a description of the ratings referred to above, see Appendices B and C to
this Prospectus.
Foreign Securities
The High Quality Stock Fund and the International Active Fund may invest in
foreign securities. These include dollar-denominated securities traded in the
U.S. on the New York Stock Exchange (the "NYSE"). The High Quality Stock Fund
may invest in foreign securities if the foreign securities are traded on the
NYSE.
The International Active Fund may invest directly in foreign equity securities;
U.S. dollar- or foreign currency-denominated foreign corporate debt securities;
foreign preferred securities; certificates of deposit, fixed time deposits and
bankers' acceptances issued by foreign banks; obligations of foreign governments
or their subdivisions, agencies and instrumentalities, international agencies
and supranational entities; and securities represented by European Depositary
Receipts ("EDRs"), American Depositary Receipts ("ADRs"), or Global Depositary
Receipts ("GDRs"). ADRs are dollar-denominated receipts issued generally by
domestic banks and representing the deposit with the bank of a security of a
foreign issuer, and are publicly traded on exchanges or over-the-counter in the
United States. EDRs are receipts similar to ADRs and are issued and traded in
Europe. GDRs are global receipts similar to ADRs and may be offered privately in
the United States and also trade in public or private markets in other
countries.
Investing in the securities of issuers in any foreign country involves special
risks and considerations not typically associated with investing in U.S.
companies and governments of foreign nations. These risks include: differences
in accounting, auditing and financial reporting standards; generally higher
commission rates on foreign portfolio transactions; the possibility of
nationalization, expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country); and political instability which
could affect U.S. investments in foreign countries. Additionally, foreign
securities and dividends and interest payable on those securities may be subject
to foreign taxes, including taxes withheld from payments on those
17
<PAGE>
securities. Foreign securities often trade with less frequency and volume than
domestic securities and therefore may exhibit greater price volatility.
Additional costs associated with an investment in foreign securities may include
higher custodial fees than apply to domestic custodial arrangements and
transaction costs of foreign currency conversions. Changes in foreign exchange
rates also will affect the value of securities denominated or quoted in
currencies other than the U.S. dollar.
Foreign Currency Transactions
Foreign currency rates may fluctuate significantly over short periods of time.
They generally are determined by the forces of supply and demand in the foreign
exchange markets and the relative merits of investments in different countries,
actual or perceived changes in interest rates and other complex factors, as seen
from an international perspective. Currency exchange rates also can be affected
unpredictably by intervention (or the failure to intervene) by U.S. or foreign
governments or central banks, by currency controls or political developments in
the U.S. or abroad. Currencies in which the International Active Fund's assets
are denominated may be devalued against the U.S. dollar, resulting in a loss to
the Fund.
The International Active Fund may, in addition to buying and selling foreign
currency futures contracts and options on foreign currencies and foreign
currency futures, enter into forward foreign currency exchange contracts to
reduce the risks of adverse changes in foreign exchange rates. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. By entering into a forward foreign currency contract, the Fund "locks
in" the exchange rate between the currency it will deliver and the currency it
will receive for the duration of the contract. As a result, the Fund reduces its
exposure to changes in the value of the currency it will deliver and increases
its exposure to changes in the value of the currency it will exchange into. The
effect on the value of the Fund is similar to selling securities denominated in
one currency and purchasing securities denominated in another. Contracts to sell
foreign currency would limit any potential gain which might be realized by the
Fund if the value of the hedged currency increases. The Fund may enter into
these contracts for the purpose of hedging against foreign exchange risk arising
from the Fund's investment or anticipated investment in securities denominated
in foreign currencies. The Fund also may enter into these contracts for purposes
of increasing exposure to a foreign currency or to shift exposure to foreign
currency fluctuations from one country to another. The Fund may use one currency
(or a basket of currencies) to hedge against adverse changes in the value of
another currency (or a basket of currencies) when exchange rates between the two
currencies are positively correlated. The Fund will segregate liquid assets,
such as cash or high grade debt obligations, in a segregated account to cover
forward currency contracts entered into for non-hedging purposes.
MANAGEMENT
The Board of Trustees is responsible for the overall operations of the Trust,
including reviewing the actions of the Trust's Adviser and Sub-Advisers as set
forth below. The Trust's officers supervise the daily business operations of the
Trust.
18
<PAGE>
PB Investment Advisors, Inc., 400 West Market Street, Louisville, Kentucky
40202, has been retained under an Investment Advisory Agreement with the Trust,
dated as of March 25, 1997, in general to supervise the management and
investment program of the Trust and each Portfolio. In addition, the Adviser
generally manages the affairs of the Trust, subject to the supervision of the
Board of Trustees. For information about the Board of Trustees and the Trust's
officers, see "Management" in the SAI. The Adviser does not receive an
investment management fee for the advisory and asset allocation services it
provides to the Portfolios. Under an Advisory Agreement with each Portfolio, the
Adviser has agreed to waive operating expenses of each Portfolio and to limit
the operating expenses of each Underlying Fund so that the ratio of expenses
(excluding advisory fees) to net assets on an annual basis incurred does not
exceed 0.25%. Expenses in excess of such amounts will be assumed by the Adviser
until the earlier of (a) the end of three years after commencement of operations
or (b) the termination by the Trustees or the Funds' or the Portfolios'
shareholders, but not the Adviser, of the Trust's Advisory Agreement with the
Adviser.
The Adviser is wholly owned by Commonwealth General Corporation, a wholly owned
subsidiary of AEGON USA, Inc. AEGON USA, Inc. is an indirect wholly owned
subsidiary of AEGON n.v. Vereniging AEGON (a Netherlands membership association)
has a 53.63% interest in AEGON n.v.
Atlanta Capital Management Company, L.L.C., Two Midtown Plaza, Suite 1600, 1360
Peachtree Street, Atlanta, Georgia 30309, has been retained by the Adviser
pursuant to a Sub-Advisory Agreement with the Adviser, dated as of March 25,
1997, to serve as the sub-adviser to the Portfolios. Atlanta Capital, founded in
1969, performs investment management services for various clients, including
pension, profit sharing and other employee benefit plans as well as other
institutions and individuals. The firm, which is owned and operated by six
partners, manages approximately $2.8 billion in fixed income and equity assets.
Subject to the supervision and direction of the Board of Trustees, Atlanta
Capital will determine how each Portfolio's assets will be invested in the
Underlying Funds and in other securities pursuant to the investment objective
and policies of each Portfolio set forth in this Prospectus and make
recommendations to the Board of Trustees concerning changes to (a) the
Underlying Funds in which the Portfolios may invest, (b) the percentage range of
assets that may be invested by each Portfolio in any one Underlying Fund and (c)
the percentage range of assets of any Portfolio that may be invested in equity
funds and fixed income funds (including the money market fund). The Trustees of
the Trust will periodically monitor the allocations made and the basis upon
which such allocations were made or maintained. Atlanta Capital also serves as
sub-adviser of the High Quality Stock Fund and the Fixed Income Fund for which
it receives a fee equal to 0.50% annually on assets up to $25 million, 0.40%
annually on assets above $25 million and up to $50 million, and 0.30% annually
on assets above $50 million.
Blairlogie Capital Management, 125 Princes Street, Fourth Floor, Edinburgh EH2
4AD, Scotland, has been retained by the Adviser pursuant to a Sub-Advisory
Agreement with the Adviser dated as of March 25, 1997, to serve as the
sub-adviser to the International Active Fund. Blairlogie is an investment
management firm, organized as a limited partnership under the laws of Scotland,
United Kingdom, with two general partners and one limited partner. The general
partners are PIMCO Advisors, which serves as the supervisory partner, and
Blairlogie Holdings Limited, a wholly owned corporate subsidiary of PIMCO
Advisors, which serves as the managing partner. The limited partner is
Blairlogie Partners, L.P., a limited partnership, the general partner of which
is Pacific Financial Asset Management Corporation, and the limited partners of
which are the principal executive officers of Blairlogie Capital Management.
Blairlogie Partners L.P. has agreed with PIMCO Advisors that PIMCO Advisors will
acquire its 25%
19
<PAGE>
interest in four annual installments, beginning December 31, 1998. Blairlogie
Capital Management Ltd., the predecessor investment adviser to Blairlogie,
commenced operations in 1992. Accounts managed by Blairlogie had combined assets
as of July 31, 1997 of approximately $.9 billion. Blairlogie is registered as an
investment adviser with the SEC in the United States and with the Investment
Management Regulatory Organization ("IMRO") in the United Kingdom. As
compensation for its services, the Adviser pays Blairlogie a fee based on the
daily net assets of the International Active Fund. This fee equals 0.65%
annually on assets up to $50 million and 0.50% annually on assets above $50
million.
Federated Investment Counseling, Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779, has been retained by the Adviser pursuant to a
Sub-Advisory Agreement with the Adviser, dated as of March 25, 1997, to serve as
the sub-adviser to the Money Market Fund. Federated, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors. All
of the Class A (voting) shares of Federated Investors are owned by a trust, the
trustees of which are John F. Donahue, Chairman and Trustee of Federated
Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue,
who is President and Trustee of Federated Investors.
Federated Investment Counseling and other subsidiaries of Federated Investors
serve as investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services to a
number of investment companies. With over $140 billion invested across more than
372 funds under management and/or administration by its subsidiaries, as of
December 31, 1997, Federated Investors is one of the largest mutual fund
investment managers in the United States. With more than 2,200 employees,
Federated continues to be led by the management who founded the company in 1955.
Federated funds are presently at work in and through 4,700 financial
institutions nationwide. As compensation for its services, the Adviser pays
Federated a fee at an annual rate of 0.25% based on the daily net assets up to
$75 million and 0.20% annually on assets above $75 million of the Money Market
Fund.
Each Portfolio, as a shareholder in the Underlying Funds, will indirectly bear
its proportionate share of any investment management fees and other expenses
paid by the Underlying Funds. The effective management fee of each of the
Underlying Funds in which the Portfolios may invest is set forth below as a
percentage rate of the Fund's annual net assets:
<TABLE>
<CAPTION>
Management
Underlying Fund Fees
--------------- ----
<S> <C>
High Quality Stock Fund...... .65%
Fixed Income Fund............ .65%
International Active Fund.... .90%
Money Market Fund............ .40%
</TABLE>
The investment professionals primarily responsible for the management of each
Portfolio, with the respective responsibilities and business experience for the
past five years are as follows:
20
<PAGE>
Growth and Income, Capital Growth and Maximum Appreciation Portfolios: Daniel W.
Boone III, Senior Partner of Atlanta Capital. He is responsible for the research
and portfolio management of the High Quality Stock Fund's equity portfolio and
oversight of the equity investment process. Mr. Boone joined Atlanta Capital in
1976.
Capital Preservation and Income Oriented Portfolios: Gregory L. Coleman, Partner
of Atlanta Capital. He is responsible for the fixed income trading, portfolio
management of the Fixed Income Fund, and investment strategy. Mr. Coleman joined
Atlanta Capital in 1990.
PURCHASE AND REDEMPTION OF SHARES
Investment in the Portfolios currently is available to owners of variable
annuity contracts issued by insurance companies through their separate accounts
and to qualified plans. Shares of each Portfolio and the Money Market Fund are
purchased or redeemed at their respective net asset values next computed after
receipt of an order (without a sales charge).
NET ASSET VALUE AND PRICING
The net asset value of shares of each Portfolio and the Money Market Fund is
determined as of the close of trading on each day the New York Stock Exchange is
open for trading (currently 4:00 P.M. Eastern Time). The net asset value of
shares for each Portfolio and the Money Market Fund is determined by adding up
the value of its securities (determined as set forth below) and other assets,
subtracting the liabilities, and dividing by the number of shares outstanding.
The value of each Underlying Fund will be its net asset value at the time of
computation.
Securities held by the Portfolios (other than the Money Market Fund) are valued
based upon readily available market quotations. Where such market quotations are
not available, securities are valued at fair value as determined by or under the
general supervision of the Board of Trustees.
The securities in the Money Market Fund are valued on an amortized-cost basis.
Under this method of valuation, a security is initially valued at its
acquisition cost, and thereafter, amortization of any discount or premium is
assumed each day, regardless of the impact of fluctuating interest rates on the
market value of the instrument. Under most conditions, Federated believes it
will be possible to maintain the net asset value of the Portfolio at $1.00 per
share. Calculations are periodically made to compare the value of the
Portfolio's portfolio valued at amortized cost with market values. If a
deviation of 1/2 of 1% or more were to occur between the net asset value
calculated by reference to market values and the Portfolio's $1.00 per share net
asset value, or if there were any other deviation that the Board of Trustees
believed would result in a material dilution to shareholders or purchasers, the
Board of Trustees would promptly consider what action, if any, should be
initiated. See "Net Asset Values of the Shares of the Portfolios" in the SAI for
details.
21
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Portfolio and the Money Market Fund are treated as separate taxable
entities and will elect to qualify as a "regulated investment company" under
applicable provisions of the Internal Revenue Code of 1986 (the "Code"). As such
and by complying with the applicable provisions of the Code regarding the
sources of its income, the timing of its distributions, and the diversification
of its assets, each Portfolio and the Money Market Fund will be allowed a
deduction for amounts distributed to its shareholders from its ordinary income
and net realized capital gains and will not be subject to federal income tax on
such amounts. To qualify for treatment as a "regulated investment company," each
Portfolio and the Money Market Fund must, among other things, derive in each
taxable year at least 90 percent of its gross income from dividends, interest
and gains from the sale or other disposition of securities.
Each Portfolio and the Money Market Fund intends to distribute sufficient net
investment income to avoid the application of federal income tax on the Trust.
Each Portfolio and the Money Market Fund also intends to distribute sufficient
income to avoid the application of any federal excise tax. For dividend
purposes, the net investment income of each Portfolio and the Money Market Fund
will consist of all payments of dividends or interest received and any net
short-term gains or losses from the sale of its investments less its estimated
expenses (including fees payable to the Adviser and Sub-Adviser).
In order for the separate accounts to comply with regulations under Section
817(h) of the Code applicable to investment companies used as the investment
medium for variable annuity contracts, each Portfolio and the Money Market Fund
will diversify its investments so that, after a one year start-up period, on the
last day of each calendar quarter, no more than 55% of the value on each
Portfolio is represented by any one investment, no more than 70% is represented
by any two investments, no more than 80% is represented by any three
investments, and no more than 90% is represented by any four investments. For
this purpose, securities of a single issuer are treated as one investment and
each U.S. government agency or instrumentality is treated as a separate issuer.
Any security issued, guaranteed, or insured (to the extent so guaranteed or
insured) by the U.S. government or an agency or instrumentality of the U.S.
government is treated as a security issued by the U.S. government or its agency
or instrumentality, whichever is applicable.
Dividends from the Portfolios (other than the Money Market Fund) will be
declared and distributed at such frequency, but at least annually, and in such
amount as to assure compliance with the Code. Dividends from the Money Market
Fund will be declared on each day its net asset value is calculated except bank
holidays. Income earned on weekends, holidays (including bank holidays), and
days on which net asset value is not calculated is declared as a dividend on the
day on which the Portfolio's net asset value was most recently calculated. The
Trustees may decide to declare dividends at other intervals. All net realized
long-term capital gains of the Trust, if any, are declared and distributed
annually after the close of the Trust's fiscal year to the shareholders of the
Portfolio or Portfolios to which such gains are attributable.
22
<PAGE>
PERFORMANCE AND YIELD INFORMATION
From time to time, the Trust may advertise a variety of types of performance
information including "yield," "average annual total return," "total return,"
"cumulative total return," and "effective yield." Each of these figures will be
based on historical information and are not intended to indicate future
performance.
The yield of the Portfolios refers to the annualized income generated by an
investment in that Portfolio over a specified 30-day period. The yield is
calculated by assuming that the income generated by the investment during that
30-day period is generated each 30-day period over a twelve-month period and is
shown as a percentage of the investment. The Money Market Fund's yield and
effective yield are measures of the net investment income per share earned by
the Fund over a specific seven-day period and are shown as a percentage of the
investment. However, effective yield will be slightly higher than the yield
because effective yield assumes that the net investment income earned by that
Fund will be reinvested.
The total return of a Portfolio refers to return quotations assuming an
investment has been held in the Portfolio for various periods of time including,
but not limited to, one year and a period measured from the date the Portfolio
commenced operations. When a Portfolio has been in operation for five and ten
years, respectively, the total return for these periods will be provided. The
total return quotations will represent the average annual compounded rates of
return that would equate an initial investment of $1,000 to the redemption value
of that investment as of the last day of each of the periods for which total
return quotations are provided.
The yield and total return calculations do not reflect the effect of the charges
that may be applicable to a particular Contract or separate account. Such
charges will reduce the net yield and total return of that Contract. Performance
figures for a Portfolio or the Money Market Fund will only be advertised if the
comparable figures for the Contract are included in the advertisement.
GENERAL INFORMATION
Shares of Beneficial Interest
All shares of beneficial interest of the Trust are entitled to one vote, and
votes are generally on an aggregate basis. However, on matters where the
interests of the Portfolios differ (such as approval of an investment advisory
agreement or a change in fundamental investment policies), the voting is on a
Portfolio-by-Portfolio basis. The Trust does not hold routine annual
shareholders meetings. The shares of each Portfolio and the Money Market Fund
issued are fully paid and non-assessable, have no preference, conversion,
exchange or similar rights, and are freely transferable. In addition, each
issued and outstanding share in a Portfolio is entitled to participate equally
in dividends and distributions declared by such Portfolio. Providian Life and
Health Insurance Company Separate Account V and First Providian Life and Health
Insurance Company Separate Account C are the legal owners of the shares each
holds and as such each has the right to vote to elect the Trustees of the Trust,
to vote upon certain matters that are required by the 1940 Act to be approved or
ratified by the shareholders of a mutual fund and to vote upon any other matter
that may be voted upon at a shareholders meeting. However, in
23
<PAGE>
accordance with its view of presently applicable law, Providian Life and Health
Insurance Company Separate Account V and First Providian Life and Health
Insurance Company Separate Account C will vote the shares of the Trust at
special meetings of the shareholders of the Trust in accordance with
instructions received from Contract Owners.
Independent Auditors
Ernst & Young LLP has been selected as independent auditors for the Trust and
will audit each Portfolio's and the Underlying Fund's financial statements
annually.
Legal Counsel
Legal advice regarding certain matters relating to the Federal securities laws
has been provided by Jorden Burt Boros Cicchetti Berenson & Johnson LLP,
Washington, D.C.
Custodian
Investors Fiduciary Trust Company, 801 Pennsylvania Street, Kansas City,
Missouri 64105, is the Custodian of the Trust's assets.
Reports to Shareholders
The Trust will send annual and semi-annual reports to Contract Owners showing
the financial conditions of the Portfolios and the Underlying Funds, including
the Money Market Fund, and the investments held in each.
Other Information
Inquiries and requests for the Statement of Additional Information should be
directed to the Trust at (800) 866-0005 or P.O. Box 32700, Louisville, Kentucky
40232.
24
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information is available which contains more details
concerning the subjects discussed in this Prospectus. The following is the Table
of Contents for the SAI:
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Investment Policies............................................................ 2
Description of Securities and Investment Techniques............................ 4
Portfolio Turnover and Securities Transactions................................. 23
Management..................................................................... 25
Net Asset Values of the Shares of the Portfolios and the Money Market Fund..... 28
Investment Performance......................................................... 29
Taxes.......................................................................... 33
General Information............................................................ 34
Independent Auditors........................................................... 36
Financial Statements........................................................... 36
</TABLE>
25
<PAGE>
APPENDIX A--STANDARD AND POOR'S
EARNINGS AND DIVIDEND RANKINGS FOR COMMON STOCKS
In establishing Standard and Poor's quality rankings for common stocks, growth
and stability of earnings and dividends are deemed key elements. The point of
departure in arriving at these rankings is a computerized scoring system based
on per-share earnings and dividend records of the most recent ten years. Basic
scores are computed for earnings and dividends, then adjusted as indicated by a
set of predetermined modifiers for growth, stability within long-term trend, and
cyclicality.
The final score for each stock is measured against a scoring matrix determined
by analysis of the scores of a large and representative sample of stocks. The
range of scores in the array of this sample has been aligned with the following
ladder of rankings:
A+ Highest A- Above Average B- Lower
A High B+ Average C Lowest
B Below Average D in Reorganization
NR signifies no ranking because of insufficient data or because the stock is not
amenable to the ranking process.
26
<PAGE>
APPENDIX B--DESCRIPTION OF CORPORATE BOND RATINGS
Moody's Investor Service, Inc.'s Corporate Bond Ratings:
Aaa--Bonds which are rated Aaa by Moody's Investor Service, Inc. ("Moody's") are
judged to be the best quality and carry the smallest degree of investment risk.
Interest payments are protected by a large or by an exceptionally stable margin,
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
period 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.
Standard & Poor's Ratings Group Corporate Bond Ratings:
AAA--This is the highest rating assigned by Standard & Poor's ("S&P") to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
27
<PAGE>
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB/B/CCC/CC--Bonds rated BB, B, CCC, and CC 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 lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposure to adverse
conditions.
CI--The rating CI is reserved for income bonds on which no interest is being
paid.
D--Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): The ratings from AA to B may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
28
<PAGE>
APPENDIX C--SHORT-TERM DEBT RATINGS
Moody's Short-term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability to rated issuers:
[bullet] Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the
following characteristics:
[bullet] Leading market positions in well-established industries.
[bullet] High rates of return on funds employed.
[bullet] Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
[bullet] Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
[bullet] Well-established access to a range of financial markets and
assured sources of alternate liquidity.
[bullet] Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to
a lesser degree. Earnings trends and coverage ratios, while sound, may
be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
[bullet] Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
[bullet] Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Obligations of a branch of a bank are considered to be domiciled in the country
in which the branch is located. Unless noted as an exception, Moody's rating on
a bank's ability to repay senior obligations extends only to branches located in
countries which carry a Moody's Sovereign Rating for Bank Deposits. Such branch
obligations are rated at the lower of the bank's rating or Moody's Sovereign
Rating for Bank Deposits for the country in which the branch is located.
When the currency in which an obligation is denominated is not the same as the
currency of the country in which the obligation is domiciled, Moody's ratings do
not incorporate an opinion as to whether payment of the obligation will be
affected by actions of the government controlling the currency of
29
<PAGE>
denominations. In addition, risks associated with bilateral conflicts between an
investor's home country and either the issuer's home country or the country
where an issuer's branch is located are not incorporated into Moody's short-term
debt ratings.
Moody's makes no representations that rated bank or insurance company
obligations are exempt from the registration under the U.S. Securities Act of
1933 or issued in conformity with any other applicable law or regulation. Nor
does Moody's represent that any specific bank or insurance company obligations
is legally enforceable or a valid senior obligation of a rated issuer.
If an issuer represents to Moody's that its short-term debt obligations are
supported by the credit of another entity or entities, then the name or names of
such supporting entity or entities are listed within the parenthesis beneath the
name of the issuer, or there is a footnote referring the reader to another page
for the name or names of the supporting entity or entities. In assigning rating
to such issuers, Moody's evaluates the financial strength of the affiliated
corporations, commercial banks, insurance companies, foreign governments or
other entities, but only as one factor in the total rating assessment. Moody's
makes no representation and gives no opinion on the legal validity or
enforceability of any support arrangement.
Standard & Poor's Short-Term Issue Credit Ratings
'A-1' A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
'A-2' A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher ratings categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
'A-3' A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
'B' A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
'C' A short-term obligation rated 'C' is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
'D' A short-term obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The 'D'
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
30
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1998
PB SERIES TRUST
HIGH QUALITY STOCK FUND
FIXED INCOME FUND
INTERNATIONAL ACTIVE FUND
MONEY MARKET FUND
This Statement of Additional Information ("SAI") is not a prospectus. It
contains additional information about the PB Series Trust (the "Trust") and
should be read in conjunction with the Trust's Prospectus dated May 1, 1998. You
can obtain a copy by contacting the Trust's Administrative Office, P. O. Box
32700, Louisville, Kentucky 40232.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Investment Policies 2
Description of Securities and Investment Techniques 5
Portfolio Turnover and Securities Transactions 24
Management 26
Net Asset Values of the Shares of the Funds 28
Investment Performance 29
Taxes 33
General Information 33
Independent Auditors 35
Financial Statements 35
</TABLE>
B-1
<PAGE>
PB Series Trust (the "Trust") is an investment company presently consisting of
nine separate series (the "Funds") each having different investment objectives
and policies. This SAI pertains to four Funds. The investment objectives of
those Funds are as follows:
The HIGH QUALITY STOCK FUND seeks long-term growth of capital. The Fund pursues
its investment objective by investing primarily in stocks of three categories of
companies that are publicly traded in the United States: the 500 largest in
market capitalization, the 501st to the 1250th largest in market capitalization,
and the 1000th to the 3000th largest in market capitalization at the time of
purchase.
The FIXED INCOME FUND seeks the highest level of income as is consistent with
the preservation of capital. The Fund pursues its investment objective primarily
by investing in investment grade debt securities, which range in maturity from
one to ten years, including securities issued by the U.S. government or an
agency or instrumentality of the U.S. government, asset-backed securities and
corporate debt obligations.
The INTERNATIONAL ACTIVE FUND seeks long-term growth of capital. The Fund
pursues its objective by investing primarily in a diversified portfolio of
international equity securities.
The MONEY MARKET FUND seeks to provide current income consistent with stability
of principal and liquidity. The Fund invests in money market instruments
maturing in thirteen months or less from the time of investment.
INVESTMENT POLICIES
The Trust has adopted the following policies relating to the investment of
assets of the Funds and their activities. These are fundamental policies and may
not be changed without the approval of the holders of a "majority" of the
outstanding shares of each Fund affected. Under the Investment Company Act of
1940 (the "1940 Act"), the vote of such a "majority" means the vote of the
holders of the lesser of (i) 67 percent of the shares represented at a meeting
at which more than 50 percent of the outstanding shares are represented or (ii)
more than 50 percent of the outstanding shares. A change in policy affecting
only one Fund may be effected with the approval of the holders of a "majority"
of the outstanding shares of such fund.
POLICIES PERTAINING TO THE FUNDS, OTHER THAN THE MONEY MARKET FUND
Each Fund, other than the Money Market Fund, may not (except as noted):
1. With respect to 75% of a Fund's total assets, purchase the securities of any
issuer if, immediately after such purchase, (i) more than 5% of the Fund's total
assets would be invested in the securities of such issuer or (ii) the Fund would
own more than 10% of the outstanding voting securities of such issuer, except
that this restriction does not apply to purchases by the Fund of securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities;
2. Invest in the securities of issuers in any one industry if thereafter more
than 25 percent of the assets of the Fund in question would be invested in
securities of issuers in that same industry; investing in cash items (including
time and demand deposits such as certificates of deposit and obligations of
domestic banks), U.S. government securities, or repurchase agreements as to
these securities, shall not be considered investments in an industry
B-2
<PAGE>
3. Purchase securities on margin or sell securities short, except that each Fund
may make short sales against the box and that effecting short sales against the
box will not be deemed to constitute a purchase of securities on margin;
4. Purchase or sell commodities or commodity contracts (which, for the purpose
of this restriction, shall not include foreign currency futures or forward
currency contracts);
5. Borrow money except that (i) the High Quality Stock Fund and the
International Active Fund each may borrow from banks as a temporary measure for
extraordinary or emergency purposes, but only if immediately after each
borrowing and continuing thereafter it will have an asset coverage of at least
300 percent; and (ii) the Fixed Income Fund and the International Active Fund
may enter into reverse repurchase agreements as described in the Prospectus and
in this Statement of Additional Information. (The deposit of assets in escrow in
connection with the purchase of securities on a when-issued or delayed delivery
basis will not be deemed to be pledges of a Fund's assets);
6. Underwrite securities of another issuer's securities, except to the extent
that a Fund may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of portfolio
securities;
7. Invest in securities of a company for the purpose of exercising control or
management;
8. Participate on a joint or a joint and several basis in any trading account in
securities;
9. Purchase or sell real estate, except that it may purchase marketable
securities which are issued by companies which invest in real estate or
interests therein;
10. Make loans of its assets if, as a result, more than 50% of a Fund's total
assets would be lent to other persons, except (i) to purchase or hold money
market instruments permitted by a Fund's investment objective and policies, or
(ii) to enter into repurchase agreements or through lending of a Fund's
portfolio securities, or (iii) through purchases of debt securities or other
debt instruments;
11. Issue senior securities, except as permitted under the 1940 Act. For
purposes of this restriction, the purchase or sale of securities on a
when-issued or delayed delivery basis, permissible borrowings entered into in
accordance with a Fund's investment policies, and reverse repurchase agreements
for which a segregated account has been established to cover such transactions
or for which an offsetting position has been established by the Fund, are not
deemed to be issuances of senior securities.
12. Purchase securities of registered open-end investment companies or
registered unit investment trusts in reliance on Sections 12(d)(1)(F) or (G) of
the 1940 Act.
B-3
<PAGE>
POLICIES PERTAINING TO THE MONEY MARKET FUND
- --------------------------------------------
The Money Market Fund may not (except as noted):
1. sell any securities short or purchase any securities on margin, but may
obtain such short-term credits as may be necessary for clearance of purchases
and sales of portfolio securities;
2. issue senior securities except that the Fund may borrow money directly or
through reverse repurchase agreements as a temporary, extraordinary, or
emergency measure to facilitate management of the portfolio by enabling the Fund
to meet redemption requests when the liquidation of portfolio securities is
deemed to be inconvenient or disadvantageous, and then only in amounts not in
excess of one-third of the value of its total assets; provided that, while
borrowings and reverse repurchase agreements outstanding exceed 5% of the Fund's
total assets, any such borrowings will be repaid before additional investments
are made;
3. borrow money or engage in reverse repurchase agreements for investment
leverage purposes;
4. mortgage, pledge, or hypothecate any assets except to secure permitted
borrowings. In those cases, it may mortgage, pledge or hypothecate assets having
a market value not exceeding the lesser of the dollar amounts borrowed or 15% of
the value of its total assets at the time of borrowing;
5. purchase securities if, as a result of such purchase, 25% or more of its
total assets would be invested in securities of companies engaged principally in
any one industry other than finance companies and banks. However, the Fund may
at any time invest 25% or more of its total assets in cash or cash items and
securities issued and/or guaranteed by the U.S. government, its agencies or
instrumentalities;
6. purchase or sell commodities, commodity contracts, or commodity futures
contracts;
7. purchase or sell real estate, including limited partnership interests in real
estate, although it may invest in securities of companies whose business
involves the purchase or sale of real estate or in securities secured by real
estate or interests in real estate;
8. lend any of its assets, except portfolio securities up to one-third of its
total assets. This shall not prevent the Fund from purchasing or holding money
market instruments, corporate or U.S. government bonds, debentures, notes,
certificates of indebtedness or other debt securities of an issuer, entering
into repurchase agreements, or engaging in other transactions which are
permitted by the Fund's investment objective and policies or the Trust's
Declaration of Trust;
9. underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933 in connection with the sale of
securities in accordance with its investment objective, policies, and
limitations;
10. with respect to 75% of its total assets, purchase the securities of any one
issuer (other than cash, cash items, or securities issued and/or guaranteed by
the U.S. government, its agencies or instrumentalities, and repurchase
agreements collateralized by such securities) if, as a result, more than 5% of
its total assets would be invested in the securities of that issuer.
B-4
<PAGE>
11. purchase securities of registered open-end investment companies or
registered unit investment trusts in reliance on Sections 12(d)(1)(F) or (G) of
the 1940 Act.
The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material changes
in this limitation becomes effective. Unless otherwise indicated, the Money
Market Fund may not:
1. invest more than 10% of its net assets in illiquid securities, including,
among others, repurchase agreements providing for settlement more than seven
days after notice and certain restricted securities not determined by the
Trustees to be liquid.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value of total or net assets will not result in a violation
of such restriction.
The Money Market Fund has no present intention to borrow money in excess of 5%
of the value of its net assets during the coming fiscal year.
For purposes of its policies and limitations, the Money Market Fund considers
certificates of deposit and demand and time deposits issued by a U.S. branch of
a domestic bank or savings association having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment to be "cash items."
In order to limit the risks associated with entry into repurchase agreements,
the Trustees have adopted certain criteria (which are not fundamental policies)
to be followed by the Funds. These criteria provide for entering into repurchase
agreement transactions (a) only with banks or broker-dealers meeting certain
guidelines for creditworthiness, (b) that are fully collateralized as defined,
(c) on an approved standard form of agreement and (d) that meet limits on
investments in the repurchase agreements of any one bank, broker or dealer. In
accordance with regulatory requirements, the Board of Trustees has also adopted
procedures for segregating Fund assets whenever a Fund enters into reverse
repurchase agreements with institutions other than banks.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The following discussion describes in greater detail different types of
securities and investment techniques used by the individual Funds, as described
in "Investment Objectives and Policies of the Funds" in the Prospectus, as well
as the risks associated with such securities and techniques.
OTHER INVESTMENT POLICIES OF THE FIXED INCOME FUND
- --------------------------------------------------
Corporate debt securities may bear fixed, contingent, or variable rates of
interest and may involve equity features, such as conversion or exchange rights
or warrants for the acquisition of stock of the same or a different issuer,
participations based on revenues, sales or profits, or the purchase of common
stock in a unit transaction (where corporate debt securities and common stock
are offered as a unit).
B-5
<PAGE>
Under normal market conditions, not more than 10% of the value of the Fixed
Income Fund's total assets will be invested in equity securities, including
common stocks, preferred stocks, warrants and rights.
When and if available, debt securities may be purchased at a discount from face
value. However, the Fund does not intend to hold such securities to maturity for
the purpose of achieving potential capital gains, unless yields to maturity on
these securities remain attractive. From time to time the Fund may purchase
securities not paying interest or dividends at the time acquired if, in the
opinion of Atlanta Capital Management ("Atlanta Capital"), the Fund's
sub-adviser, such securities have the potential for future income (or capital
appreciation).
Since shares of the Fund represent an investment in securities with fluctuating
market prices, the value of shares of the Fund will vary as the aggregate value
of the Fund's portfolio securities increases or decreases. Lower rated fixed
income securities generally tend to reflect short-term corporate and market
developments to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates. Changes in the
value of securities subsequent to their acquisition will not affect cash income
to the Fund but will be reflected in the net asset value of the Fund's shares.
MORTGAGE-BACKED SECURITIES
The Fixed Income Fund may invest in mortgage-backed securities, and in other
asset-backed securities (unrelated to mortgage loans) see description under
heading "Investment Practices Common to Two or More Funds: Asset-Backed
Securities" that are offered to investors in the future. The value of some
mortgage-backed or asset-backed securities in which the Fund invests may be
particularly sensitive to changes in prevailing interest rates, and, like the
other investments of the Funds, the ability of the Fund to successfully utilize
these instruments may depend in part upon the ability of Atlanta Capital to
forecast interest rates and other economic factors correctly.
MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of mortgage-related
securities differ from other forms of debt 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 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 residential
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related securities (such as securities issued by the
Government National Mortgage Association ("GNMA")) are described as "modified
pass through" securities. 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 principal governmental guarantor of mortgage-related securities is the GNMA.
GNMA is a wholly-owned U.S. Government corporation within the Department of
Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. 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
B-6
<PAGE>
bankers) and backed by pools of Federal Housing Administration insured or
Veterans Administration-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and credit of
the U.S. Government) include the Federal National Mortgage Association ("FNMA")
and the Federal Home Loan Mortgage Corporation ("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 sellers/servicers which
include state and federally chartered savings and loan associations, mutual
savings banks, commercial banks, 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 U.S. 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 U.S. 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, guarantees or structures, 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 Fund'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. The Fund may
buy mortgage-related securities without insurance or guarantees if through an
examination of the structure or the loan experience and practices of the
originator/servicers and poolers, Atlanta Capital determines that the securities
meet the Fund's quality standards. Although the market for such securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable. The Fund will not purchase mortgage-related
securities or any other assets which in the opinion of the Atlanta Capital are
illiquid if, as a result, more than 15% of the value of the Fund's total assets
will be illiquid.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMO's"). 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 on a CMO, 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.
B-7
<PAGE>
CMOs are structured into 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 class receive principal only after the first call has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical 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 Bonds 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.
OTHER MORTGAGE-RELATED SECURITIES. Mortgage-related securities are interests in
pools of mortgage loans made to residential home buyers, 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," below). The Fixed Income Fund may also
invest in debt securities which are secured with collateral consisting of
mortgage-related securities (see "Collateralized Mortgage Obligations," at page
B-7), and in other types of mortgage-related securities. The Fixed Income Fund
will not purchase mortgage-related securities or any other assets which in the
opinion of Atlanta Capital are illiquid, if, as a result, more than 15% of the
value of this Fund's assets will be illiquid.
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 CMO residuals or
stripped mortgage-backed securities. Other mortgage-related securities may be
equity or debt 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 derivative 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
B-8
<PAGE>
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 ("I0") 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 the Fund 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 Securities Act of 1933, as amended. CMO residuals,
whether or not registered under such Act, may be subject to certain restrictions
on transferability, and may be deemed "illiquid" and subject to the Fund's
limitations on investment in illiquid securities.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped Mortgage-Backed securities
("SMBS") are derivative multiclass 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 "I0"
class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an I0 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 the Fund's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup 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 the Fund's limitations on investment in illiquid securities.
B-9
<PAGE>
OTHER INVESTMENT POLICIES OF THE INTERNATIONAL ACTIVE FUND
- ----------------------------------------------------------
DERIVATIVE INSTRUMENTS
The International Active Fund may purchase and write call and put options on
securities, securities indexes and foreign currencies, and enter into futures
contracts and use options on futures contracts as further described below. The
International Active Fund may engage in the purchase and writing of call and put
options on foreign currencies. The International Active Fund also may enter into
swap agreements with respect to securities indexes. The Fund may use these
techniques to hedge against changes in interest rates, foreign currency exchange
rates or securities prices; to increase exposure to a foreign currency; to shift
exposure to foreign currency fluctuations from one country to another; or as
part of its overall investment strategies. The Fund will maintain segregated
accounts consisting of liquid assets, such as cash, and U.S. Government
securities (or, as permitted by applicable regulation, enter into certain
offsetting positions) to cover its obligations under options, futures, and swaps
to avoid leveraging of the Fund.
The Fund considers derivative instruments to consist of securities or other
instruments whose value is derived from or related to the value of some other
instrument or asset, and not to include those securities whose payment of
principal and/or interest depends upon cash flows from underlying assets, such
as mortgage or asset-backed securities. The value of some derivative instruments
in which the Fund invests may be particularly sensitive to changes in prevailing
interest rates, and, like the other investments of the Fund, the ability of the
Fund to successfully utilize these instruments may depend in part upon the
ability of Blairlogie Capital Management ("Blairlogie") to forecast interest
rates and other economic factors correctly. If Blairlogie incorrectly forecasts
such factors and has taken positions in derivative instruments contrary to
prevailing market trends, the Fund could be exposed to the risk of loss.
The Fund might not employ any of the strategies described below, and no
assurance can be given that any strategy used will succeed. If Blairlogie
incorrectly forecasts interest rates, market values or other economic factors in
utilizing a derivatives strategy for the Fund, the Fund might have been in a
better position if it had not entered into the transaction at all. The use of
these strategies involves certain special risks, including a possible imperfect
correlation, or even no correlation, between price movements of derivative
instruments and price movements of related investments. While some strategies
involving derivative instruments can reduce the risk of loss, they can also
reduce the opportunity for gain or even result in losses by offsetting favorable
price movements in related investments, or due to the possible inability of the
Fund to purchase or sell a portfolio security at a time that otherwise would be
favorable for it to do so, or the possible need for the Fund to sell a portfolio
security at a disadvantageous time, because the Fund is required to maintain
asset coverage or offsetting positions in connection with transactions in
derivative instruments, and the possible inability of the Fund to close out or
to liquidate its derivatives positions.
OPTIONS ON SECURITIES, SECURITIES INDEXES, AND CURRENCIES. The International
Active Fund may purchase put options on securities. One purpose of purchasing
put options is to protect holdings in an underlying or related security against
a substantial decline in market value. The Fund may also purchase call options
on securities. One purpose of purchasing call options is to protect against
substantial increases in prices of securities the Fund intends to purchase
pending its ability to invest in such securities in an orderly manner. The Fund
may sell
B-10
<PAGE>
put or call options it has previously purchased, which could result in a net
gain or loss depending on whether the amount realized on the sale is more or
less than the premium and other transaction costs paid on the put or call option
which is sold. The Fund may write a call or put option only if the option is
"covered" by the Fund holding a position in the underlying securities or by
other means which would permit immediate satisfaction of the Fund's obligation
as a writer of the option. Prior to exercise or expiration, an option may be
closed out by an offsetting purchase or sale of an option of the same series.
The purchase and writing of options involve certain risks. During the option
period, the covered call writer has, in return for the premium on the option,
given up the opportunity to profit from a price increase in the underlying
securities above the exercise price, but, as long as its obligation as a writer
continues, has retained the risk of loss should the price of the underlying
security decline. The writer of an option has no control over the time when it
may be required to fulfill its obligation as a writer of the option. Once an
option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver the underlying securities at the exercise price. If a put or call
option purchased by the Fund is not sold when it has remaining value, and if the
market price of the underlying security remains equal to or greater than the
exercise price (in the case of a put), or remains less than or equal to the
exercise price (in the case of a call), the Fund will lose its entire investment
in the option.
Also, where a put or call option on a particular security is purchased to hedge
against price movements in a related security, the price of the put or call
option may move more or less than the price of the related security. There can
be no assurance that a liquid market will exist when the Fund seeks to close out
an option position. Furthermore, if trading restrictions or suspension are
imposed on the options markets, the Fund may be unable to close out a position.
The International Active Fund may buy or sell put and call options on foreign
currencies as a hedge against changes in the value of the U.S. dollar (or
another currency) in relation to a foreign currency in which the Fund's
securities may be denominated. Currency options traded on U.S. or other
exchanges may be subject to position limits which may limit the ability of the
Fund to reduce foreign currency risk using such options. Over-the-counter
options differ from traded options in that they are two-party contracts with
price and other terms negotiated between buyer and seller and generally do not
have as much market liquidity as exchange-traded options. The Fund may be
required to treat as illiquid over-the-counter options purchased and securities
being used to cover certain written over-the-counter options.
SWAP AGREEMENTS. The International Active Fund may enter into equity index swap
agreements for purposes of gaining exposure to the stocks making up an index of
securities in a foreign market without actually purchasing those stocks. 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,
or in a "basket" of securities representing a particular index.
B-11
<PAGE>
Most swap agreements entered into by the Fund would calculate the obligations of
the parties to the agreement on a "net basis." Consequently, the Fund's current
obligations (or rights) under a swap agreement will generally be equal 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").
The Fund's current obligations under a swap agreement will be accrued daily
(offset against amounts owed to the Fund), and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of liquid assets such as cash, U.S. Government
securities, or high grade debt obligations, to avoid any potential leveraging of
the Fund's portfolio. Obligations under swap agreements so covered will not be
construed to be "senior securities" for purposes of the Fund's investment
restriction concerning senior securities. The Fund 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 Fund's assets.
Whether the Fund's use of swap agreements will be successful in furthering its
investment objective will depend on Blairlogie'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 investments. Moreover, the Fund 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 Fund will enter into swap
agreements only with counterparties that meet certain standards for credit
worthiness (generally, such counterparties would have to be eligible
counterparties under the terms of the Fund's repurchase agreement guidelines).
Certain restrictions imposed on the Funds by the Internal Revenue Code of 1986
(the "Code") may limit the Fund's 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 the Fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The International Active
Fund may invest in exchange futures contracts and options thereon ("futures
options") that are traded on a U.S. or foreign exchange or board of trade, or
similar entity, or quoted on an automated quotation system. The Fund may engage
in such futures transactions as an adjunct to its securities activities.
There are several risks associated with the use of futures and futures options
for hedging purposes. There can be no guarantee that there will be a correlation
between price movements in the hedging vehicle and in the portfolio securities
being hedged. An incorrect correlation could result in a loss on both the hedged
securities in the Fund and the hedging vehicle so that the portfolio return
might have been greater had hedging not been attempted. There can be no
assurance that a liquid market will exist at a time when the Fund seeks to close
out a futures contract or a futures option position. Most futures exchanges or
boards of trade limit the amount of fluctuation permitted in futures contract
prices during a single day; once the daily limit has been reached on a
particular contract, no trades may be made that day at a price beyond that
limit. In addition, certain of these instruments are relatively new and without
a significant trading history. As a result, there is no assurance that an active
secondary market will develop or continue to exist. Lack of a liquid market for
any reason may prevent the Fund from liquidating an unfavorable position, and
the Fund would remain obligated to meet margin requirements until the position
is closed.
B-12
<PAGE>
The Fund will only enter into futures contracts or futures options which are
standardized and traded on a U.S. or foreign exchange or board of trade, or
similar entity, or quoted on an automated quotation system. The Fund will use
financial futures contracts and related options only for "bona fide hedging"
purposes, as such term is defined in applicable regulations of the Commodity
Futures Trading Commission ("CFTC"), or, with respect to positions in financial
futures and related options that do not qualify as "bona fide hedging"
positions, will enter such positions only to the extent that aggregate initial
margin deposits plus premium paid by it for open futures option positions, less
the amount by which any such positions are "in-the-money" would not exceed 5% of
the Fund's net assets.
OTHER INVESTMENT POLICIES OF THE MONEY MARKET FUND
- --------------------------------------------------
The Money Market Fund may follow non-fundamental operational policies that are
more restrictive than its fundamental investment limitations, as set forth in
its prospectus and this Statement of Additional Information, in order to comply
with applicable laws and regulations, including the provisions of and
regulations under the 1940 Act. In particular, the Fund will comply with the
various requirements of Rule 2a-7, which regulates money market mutual funds.
The Fund will determine the effective maturity of its investments, as well as
its ability to consider a security as having received the requisite short-term
ratings by NRSROs, according to Rule 2a-7. The Fund may change these operational
policies to reflect changes in the laws and regulations without the approval of
its shareholders.
RULE 2a-7: MATURITY QUALITY AND DIVERSIFICATION RESTRICTIONS
The Money Market Fund is subject to certain maturity restrictions pursuant to
Rule 2a-7 under the 1940 Act for money market funds that use the amortized cost
method of valuation to maintain a stable net asset value of $1.00 per share.
Accordingly, the Fund will (i) maintain a dollar weighted average portfolio
maturity of 90 days or less, and (ii) will purchase securities with a remaining
maturity of no more than 13 months (397 calendar days). Further, the Fund will
limit its investments to U.S. dollar denominated securities which present
minimal credit risks and meet certain credit quality and diversification
requirements. For purposes of calculating the maturity of portfolio instruments,
the Fund will follow the requirements of Rule 2a-7. Under Rule 2a-7, the
maturity of portfolio instruments is calculated as indicated below.
Generally, the maturity of a portfolio security shall be deemed to be the period
remaining (calculated from the trade date or such other date on which the Fund's
interest in the security is subject to market action) until the date on which,
in accordance with the terms of the security, the principal amount must
unconditionally be paid, or in the case of a security called for redemption, the
date on which the redemption payment must be made, except that:
(1) A Government Security which is a Variable Rate Security where the variable
rate of interest is readjusted no less frequently than every 762 days shall be
deemed to have a maturity equal to the period remaining until the next
readjustment of the interest rate. A Government Security which is a Floating
Rate Security shall be deemed to have a remaining maturity of one day.
(2) A Variable Rate Security, the principal amount of which, in accordance with
the terms of the security, must unconditionally be paid in 397 calendar days or
less shall be deemed to have a
B-13
<PAGE>
maturity equal to the earlier 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.
(3) A Variable Rate Security, the principal amount of which is scheduled to be
paid in more than 397 days, that is subject to a Demand Feature shall be deemed
to have a maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand.
(4) A Floating Rate Security, the principal amount of which, in accordance with
the terms of the security, must unconditionally be paid in 397 calendar days or
less shall be deemed to have a maturity of one day.
(5) A Floating Rate Security, the principal amount of which is scheduled to be
paid in more than 397 days, that is subject to a Demand Feature, shall be deemed
to have a maturity equal to the period remaining until the principal amount can
be recovered through demand.
(6) A repurchase agreement shall be deemed to have a maturity equal to the
period remaining until the date on which the repurchase of the underlying
securities is scheduled to occur, or, where the agreement is subject to demand,
the notice period applicable to a demand for the repurchase of the securities.
(7) A portfolio lending agreement shall be treated as having a maturity equal to
the period remaining until the date on which the loaned securities are scheduled
to be returned, or, where the agreement is subject to demand, the notice period
applicable to a demand for the return of the loaned securities.
(8) An investment in a money market fund shall be treated as having a maturity
equal to the period of time within which the acquired money market fund is
required to make payment upon redemption, unless the acquired money market fund
has agreed in writing to provide redemption proceeds to the investing money
market fund within a shorter time period, in which case the maturity of such
investment shall be deemed to be the shorter period.
The Money Market Fund is subject to certain credit quality restrictions pursuant
to Rule 2a-7 under the 1940 Act. The Fund will invest its assets in instruments
that are determined to present minimal credit risks. In so doing, the Fund will
invest at least 95% of its assets in instruments that are at the time of
acquisition, (i) obligations issued or guaranteed by the U.S. government, its
agencies, or instrumentalities; (ii) rated by at least two nationally recognized
rating agencies (or by one agency if only one agency has issued a rating) (the
"required rating agencies") in the highest rating category for short-term debt
obligations; (iii) unrated but whose issuer is rated in the highest category by
the required rating agencies with respect to a class of short-term debt
obligations or any security within that class that is comparable in priority and
security with the instrument; (iv) unrated (other than the type described in
(iii)) but determined by the Board of Trustees to be of comparable quality to
the foregoing (provided the unrated security has not received a short-term
rating, and with respect to a long-term security with a remaining maturity
within the Fund's maturity restrictions, has not received a long-term rating
from any agency that is other than in its highest rating category); or (v) a
security issued by a registered investment company that is a money market fund.
The foregoing are referred to as "first-tier securities."
B-14
<PAGE>
The balance of the securities in which the Fund may invest are instruments,
which do not qualify as first-tier securities, and at the time of acquisition,
are (i) rated by the required rating agencies in one of the two highest rating
categories for short-term debt obligations; (ii) unrated but whose issuer is
rated in one of the two highest categories by the required rating agencies with
respect to a class of short-term debt obligations or any security within that
class that is comparable in priority and security with the obligation; or (iii)
unrated (other than described in (ii)) but determined by the Board of Trustees
to be of comparable quality to the foregoing (provided the unrated security has
not received a short-term rating and with respect to a long-term security with a
remaining maturity within the Fund's maturity restrictions, has not received a
long-term rating from any agency that is other than in one of its highest two
rating categories). The foregoing are referred to as "second-tier securities."
In addition to the foregoing guidelines, the Fund is subject to certain
diversification restrictions pursuant to Rule 2a-7 under the 1940 Act, which
include (i) the Fund will not acquire a second-tier security of an issuer if,
after giving effect to the acquisition, the Fund would have invested more than
the greater of 1% of its total assets or one million dollars in second-tier
securities issued by that issuer, and (ii) the Fund will not invest more than 5%
of the Fund's assets in the securities (other than securities issued by the U.S.
government or any agency or instrumentality thereof) issued by a single issuer,
except for certain investments held for not more than 3 business days.
As used herein, all capitalized but undefined terms shall have the meaning such
terms have in Rule 2a-7.
Set forth below are descriptions of certain instruments in which the Money
Market Fund may invest and certain investment risks, policies and restrictions
applicable to the Money Market Fund.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term
corporate debt instruments that have variable or floating interest rates and
provide the Fund with the right to tender the security for repurchase at its
stated principal amount plus accrued interest. Such securities typically bear
interest at a rate that is intended to cause the securities to trade at par. The
interest rate may float or be adjusted at regular intervals (ranging from daily
to annually), and is normally based on a published interest rate or interest
rate index. Most variable rate demand notes allow the Fund to demand the
repurchase of the security on not more than seven days prior notice. Other notes
only permit the Fund to tender the security at the time of each interest rate
adjustment or at other fixed intervals. See "Demand Features." The Fund treats
variable rate demand notes as maturing on the later of the date of the next
interest adjustment or the date on which the Fund may next tender the security
for repurchase.
SHORT-TERM CREDIT FACILITIES. Demand notes are short-term borrowing
arrangements between a corporation and an institutional lender (such as the
Fund) payable upon demand by either party. The notice period for demand
typically ranges from one to seven days, and the party may demand full or
partial payment. The Fund may also enter into, or acquire participations in,
short-term revolving credit facilities with corporate borrowers. Demand notes
and other short-term credit arrangements usually provide for floating or
variable rates of interest.
B-15
<PAGE>
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have
been credit enhanced by a guaranty, letter of credit or insurance. Any
bankruptcy receivership or default of the party providing the credit enhancement
will adversely affect the quality and marketability of the underlying security.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts
and standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period (usually
seven days) following a demand by the Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities or by
another third party, and may not be transferred separately from the underlying
security. The Fund uses these arrangements to provide the Fund with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the demand
feature, or a default on the underlying security or other event that terminates
the demand feature before its exercise, will adversely affect the liquidity of
the underlying security. Demand features that are exercisable even after a
payment default on the underlying security may be treated as a form of credit
enhancement.
BANK INSTRUMENTS. The Fund only invests in bank instruments either issued by an
institution having capital, surplus and undivided profits over $100 million or
insured by the Bank Insurance Fund ("BIF") or the Savings Association Insurance
Fund ("SAIF"). The Fund will treat securities credit enhanced by a bank as bank
instruments. In addition to domestic bank obligations such as certificates of
deposit, demand and time deposits, savings shares, and bankers' acceptances, the
Money Market Fund may invest in:
(1) Eurodollar Certificates of Deposit ("ECDs") issued by foreign branches of
U.S. or foreign banks;
(2) Eurodollar Time Deposits ("ETDs"), which are U.S. dollar-denominated
deposits in foreign branches of U.S. or foreign banks;
(3) Canadian Time Deposits, which are U.S. dollar-denominated deposits issued by
branches of major Canadian banks located in the U.S.; and
(4) Yankee Certificates of Deposit ("Yankee CDs"), which are U.S.
dollar-denominated certificates of deposit issued by U.S. branches of foreign
banks and held in the U.S.
RATINGS. An NRSROs two highest rating categories are determined without
regard for sub-categories and gradations. For example, securities rated A-1+,
A-1 or A-2 by Standard & Poor's Ratings Group ("S&P"), Prime-1 or Prime-2 by
Moody's Investors Service, Inc. ("Moody's"), or F-1 (+ or -) or F-2 (+ or -) by
Fitch ICA, Inc. ("Fitch") are all considered rated in one of the two highest
short-term rating categories. The Money Market Fund will limit its investments
in securities rated in the second highest short-term rating category (e.g., A-2
by S&P, Prime-2 by Moody's or F-2 (+ or -) by Fitch) to not more than 5% of its
total assets, with not more than 1% invested in the securities of any one
issuer. The Fund will follow applicable regulations in determining whether a
security rated by more than one NRSRO can be treated as being in one of the two
highest short-term rating categories; currently, such securities must be rated
by two NRSROs in one of their two highest rating categories.
B-16
<PAGE>
U.S. GOVERNMENT OBLIGATIONS. The types of U.S. government obligations in
which the Money Market Fund may invest generally include direct obligations of
the U.S. Treasury (such as U.S. Treasury bills, notes, and bonds) and
obligations issued and/or guaranteed by U.S. government agencies or
instrumentalities. These securities are backed by:
(1) the full faith and credit of the U.S. Treasury;
(2) the issuer's right to borrow from the U.S. Treasury;
(3) the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
(4) the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
(1) Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks, and Banks for Cooperatives;
(2) Federal Home Loan Banks;
(3) Federal Home Loan Mortgage Corporation;
(4) Federal National Mortgage Association; and
(5) Student Loan Marketing Association.
CREDIT ENHANCEMENT. The Money Market Fund typically evaluates the credit quality
and ratings of credit-enhanced securities based upon the financial condition and
ratings of the party providing the credit enhancement (the "credit enhancer"),
rather than the issuer. However, credit-enhanced securities will not be treated
as having been issued by the credit enhancer for diversification purposes,
except in some instances when the securities will be treated as having been
issued by both the issuer and the credit enhancer. The Fund may have more than
25% of its total assets invested in securities credit enhanced or issued by
banks.
CONCENTRATION OF INVESTMENTS. The Fund may invest 25% or more of its total
assets in commercial paper issued by finance companies. The finance companies in
which the Fund intends to invest can be divided into two categories, commercial
finance companies and consumer finance companies. Commercial finance companies
are principally engaged in lending to corporations or other businesses. Consumer
finance companies are primarily engaged in lending to individuals. Captive
finance companies or finance subsidiaries which exist to facilitate the
marketing and financial activities of their parent will, for purposes of
industry concentration, be classified by the Fund in the industry of its parent
corporation.
In addition, the Fund may invest more than 25% of the value of its total assets
in cash or cash items, securities issued or guaranteed by the U.S. government,
its agencies, or instrumentalities, or instruments secured by these money market
instruments, such as repurchase agreements.
B-17
<PAGE>
CERTAIN INVESTMENT RISKS. ECDs, ETDs, Yankee CDs, Canadian commercial paper, and
Europaper are subject to somewhat different risks than domestic obligations of
domestic banks. Examples of these risks include international, economic and
political developments, foreign governmental restrictions that may adversely
affect the payment of principal or interest, foreign withholding or other taxes
on interest income, difficulties in obtaining or enforcing a judgment against
the issuing bank, and the possible impact of interruptions in the flow of
international currency transactions. Different risks may also exist for ECDs,
ETDs, and Yankee CDs because the banks issuing these instruments, or their
domestic or foreign branches, are not necessarily subject to the same regulatory
requirements that apply to domestic banks, such as reserve requirements, loan
limitations, examinations, accounting, auditing, and recordkeeping, and the
public availability of information. These factors will be carefully considered
by Federated in selecting investments for the Fund.
INVESTMENT PRACTICES COMMON TO TWO OR MORE FUNDS
- ------------------------------------------------
Except as otherwise noted below, the following description of investment
practices is applicable to all of the Funds.
BORROWING
As a temporary measure for extraordinary or emergency purposes, such as to
facilitate redemptions, the High Quality Stock Fund, the International Active
Fund and the Money Market Fund may borrow money from a bank, but only if
immediately after each such borrowing and continuing thereafter the Fund would
have asset coverage of 300 percent. Any such borrowings will exaggerate the
effect of any increase or decrease in the value of portfolio securities on a
Fund's net asset value; money borrowed will be subject to interest and other
costs (which may include commitment fees and/or the cost of maintaining minimum
average balances), which may or may not exceed the income received from the
securities purchased with borrowed funds. The use of borrowing tends to result
in a faster than average movement, up or down, in the net asset value of a
Fund's shares. A Fund 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.
FOREIGN SECURITIES
The High Quality Stock Fund and the International Active Fund may invest in
foreign securities. These include dollar-denominated securities traded in the
U.S. on the New York Stock Exchange (the "NYSE"). The High Quality Stock Fund
may invest in foreign securities in the form of American Depositary Receipts
("ADRs"), or in other similar securities convertible into securities of foreign
issuers if the foreign securities are traded on the NYSE.
The International Active Fund may invest in U.S. dollar- or foreign
currency-denominated corporate debt securities of foreign issuers; preferred
securities of foreign issuers; certain foreign bank obligations; and U.S.
dollar- or foreign currency-denominated obligations of foreign governments or
their subdivisions, agencies and instrumentalities, international agencies and
supranational entities. The International Active Fund may also invest in common
stocks issued by foreign companies or in securities represented by ADRs,
European Depositary Receipts ("EDRs"), or Global Depositary Receipts ("GDRs").
ADRs are dollar-denominated receipts
B-18
<PAGE>
issued generally by domestic banks and represent the deposit with the bank of a
security of a foreign issuer. EDRs are foreign currency-denominated receipts
similar to ADRs and are issued and traded in Europe, and are publicly traded on
exchanges or over-the-counter in the United States. GDRs may be offered
privately in the United States and also trade in public or private markets in
other countries. ADRs, EDRs and GDRs may be issued as sponsored or unsponsored
programs. In sponsored programs, an issuer has made arrangements to have its
securities trade in the form of ADRs, EDRs or GDRs. In unsponsored programs, the
issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs are
generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a sponsored
program. Investing in the securities of foreign issuers involves special risks
and considerations not typically associated with investing in U.S. companies.
These include: differences in accounting, auditing and financial reporting
standards, generally higher commission rates on foreign portfolio transactions,
the possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country), political instability which can
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. In addition, foreign securities and dividends and
interest payable on those securities may be subject to foreign taxes, including
taxes withheld from payments on those securities. Foreign securities often trade
with less frequency and volume than domestic securities and therefore may
exhibit greater price volatility. Changes in foreign exchange rates will affect
the value of those securities which are denominated or quoted in currencies
other than the U.S. dollar.
The International Active Fund may also purchase and sell foreign currency
options and foreign currency futures contracts and related options (see
"Derivative Instruments"), and enter into forward foreign currency exchange
contracts in order to protect against uncertainty in the level of future foreign
exchange rates in the purchase and sale of securities. The Fund may also use
foreign currency options and foreign currency forward contracts to increase
exposure to a foreign currency or to shift exposure to foreign currency
fluctuations from one country to another.
A forward foreign currency contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts may be bought or sold to protect the Fund
against a possible loss resulting from an adverse change in the relationship
between foreign currencies and the U.S. dollar or to increase exposure to a
particular foreign currency. Open positions in forward contracts used for non-
hedging purposes will be covered by the segregation with the Trust's custodian
of liquid assets, such as cash, U.S. Government securities and high quality
short-term investments and are marked to market daily. Although forward
contracts are intended to minimize the risk of loss due to a decline in the
value of the hedged currencies, at the same time, they tend to limit any
potential gain which might result should the value of such currencies increase.
LENDING OF PORTFOLIO SECURITIES
Each Fund may seek to increase its income by lending portfolio securities. Under
present regulatory policies, such loans may be made to institutions, such as
broker-dealers, and would be required to be secured continuously by collateral
in cash, cash equivalents or liquid assets, including equity securities and debt
securities of any grade, maintained on a current basis at an amount at least
equal to the market value of the securities loaned. A Fund would have the right
to
B-19
<PAGE>
call a loan and obtain the securities loaned at any time on three days'
notice. For the duration of a loan, a Fund would continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned and would also receive compensation from the investment of the
collateral. A Fund would not, however, have the right to vote any securities
having voting rights during the existence of the loan, but a Fund would call the
loan in anticipation of an important vote to be taken among holders of the
securities or of the giving or withholding of their consent on a material matter
affecting the investment. As with other extensions of credit, there are risks of
delay in recovery of, or even loss of rights in, the collateral should the
borrower of the securities fail financially. However, the loans would be made
only to firms deemed by the appropriate Sub-Adviser to be of good standing, and
when, in the judgment of the Sub-Adviser, the consideration which can be earned
currently from securities loans of this type justifies the attendant risk. If
the Sub-Adviser determines to make securities loans, it is intended that the
value of the securities loaned would not exceed 50% of the value of the total
assets of the lending Fund (33 1/3% in the case of the Money Market Fund).
REPURCHASE AGREEMENTS
The Funds may enter into repurchase agreements with any member bank of the
Federal Reserve System or a member firm of the National Association of
Securities Dealers, Inc. The Funds may enter into repurchase agreements with
foreign banks and broker-dealers that meet credit quality and other requirements
of the Funds' Board of Trustees. A repurchase agreement, which provides a means
for a Fund to earn income on uninvested cash for periods as short as overnight,
is an arrangement under which the purchaser (i.e., a Fund) purchases a U.S.
Government or other high quality short-term debt obligation (the "Obligation")
and the seller agrees, at the time of sale, to repurchase the Obligation at a
specified time and price. The custody of the Obligation will be maintained by
the Fund's Custodian or broker that has entered into a tri-party arrangement
with the Fund and the Custodian. The repurchase price may be higher than the
purchase price, the difference being income to the Fund, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to the
Fund together with the repurchase price upon repurchase. In either case, the
income to a Fund is unrelated to the interest rate on the Obligation subject to
the repurchase agreement.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a loan from
the Fund to the seller of the Obligation. It is not clear whether a court would
consider the Obligation purchased by a Fund subject to a repurchase agreement as
being owned by the Fund or as being collateral for a loan by the Fund to the
seller. In the event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, a Fund may encounter delays and incur costs before
being able to sell the security. Delays may involve loss of interest or decline
in price of the Obligation. If the court characterizes the transaction as a loan
and a Fund has not perfected a security interest in the Obligation, a Fund may
be required to return the Obligation to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, a Fund would be at
the risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt instrument purchased for a Fund, the
Fund's Sub-Adviser seeks to minimize the risk of loss from repurchase agreements
by analyzing the creditworthiness of the obligor, in this case the seller of the
Obligation. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the security. However,
if the market value of the Obligation subject to the repurchase agreement
becomes less than the repurchase price (including accrued interest), the Fund
will direct the seller of the Obligation to
B-20
<PAGE>
deliver additional securities so that the market value of all securities subject
to the repurchase agreement equals or exceeds the repurchase price.
REVERSE REPURCHASE AGREEMENTS
The Fixed Income Fund, International Active Fund and Money Market Fund may enter
into reverse repurchase agreements. These agreements involve the sale of debt
securities (obligations) held by a Fund, with an agreement to repurchase the
obligations at an agreed upon price, date and interest payment. The proceeds
will be used to purchase other debt securities either maturing, or under an
agreement to resell, at a date simultaneous with or prior to the expiration of
the reverse repurchase agreement. Reverse repurchase agreements will be
utilized, when permitted by law, only when the expected interest income to be
earned from the investment of the proceeds from the transaction is greater than
the interest expense of the reverse repurchase transaction. When a Fund enters
into such an agreement, it will establish a segregated account with the Fund's
Custodian in which it will maintain cash or cash equivalents or other liquid
assets, including equity securities and debt securities of any grade equal in
value to the repurchase price (which price will already include interest
charges). If the buyer of the debt securities pursuant to the reverse repurchase
agreement becomes bankrupt, realization upon the underlying securities may be
delayed and there is a risk of loss due to any decline in their value. Reverse
repurchase agreements will not extend for more than 30 days nor will such
agreements involve more than 10% of the net assets of a Fund (or, in the case of
the Money Market Fund, no more than 33 1/3% of the total assets of the Fund).
WHEN-ISSUED SECURITIES
The Fixed Income Fund, the International Active Fund, and the Money Market Fund
may from time to time purchase securities on a "when-issued" basis. Debt
securities are often issued in this manner. The price of such securities, which
may be expressed in yield terms, is fixed at the time a commitment to purchase
is made, but delivery of and payment for the when-issued securities take place
at a later date. Normally, the settlement date occurs within one month of the
purchase. During the period between purchase and settlement, no payment is made
by a Fund and no interest accrues to a Fund. Although when-issued securities may
be sold prior to the settlement date, a Fund intends to purchase such securities
with the purpose of actually acquiring them unless a sale appears desirable for
investment reasons.
At the time a Fund makes the commitment to purchase a security on a when-issued
basis, it will record the transaction and reflect the amount due and the value
of the security in determining a Fund's net asset value. The market value of the
when-issued securities may be more or less than the purchase price payable at
the settlement date. The Trustees do not believe that a Fund's net asset value
or income will be exposed to additional risk by the purchase of securities on a
when-issued basis. A Fund will establish a segregated account in which it will
maintain cash, U.S. Government securities or other liquid assets at least equal
in value to commitments for when-issued securities. Such segregated securities
either will mature or, if necessary, be sold on or before the settlement date.
The Money Market Fund does not intend to engage in when-issued transactions to
an extent that would cause the segregation of more than 20% of the total value
of its assets.
B-21
<PAGE>
VARIABLE OR FLOATING-RATE SECURITIES
The Fixed Income and Money Market Funds may invest in securities which offer a
variable or floating rate of interest. Variable-rate securities provide for
automatic establishment of a new interest rate at fixed intervals (e.g., daily,
monthly, semi-annually, etc.). Floating-rate securities generally provide for
automatic adjustment of the interest rate whenever some specified interest rate
index changes. The interest rate on variable or floating-rate securities is
ordinarily determined by reference to or is a percentage of a bank's prime rate,
the Federal Fund's target rate, the 90-day U.S. Treasury bill rate, the rate of
return on commercial paper or bank certificates of deposit, an index of
short-term interest rates, or some other objective measure.
Variable or floating-rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par. In many cases,
the demand feature can be exercised at any time on 7 days notice: in other
cases, the demand feature is exercisable at any time on 30 days notice or on
similar notice at intervals of not more than one year. Some securities which do
not have variable or floating interest rates may be accompanied by puts
producing similar results and price characteristics. When considering the
maturity of any instrument which may be sold or put to the issuer or a third
party, a Fund may consider that instrument's maturity to be shorter than its
stated maturity. Any such determination by the Money Market Fund will be made in
accordance with Rule 2a-7.
Variable-rate demand notes include master demand notes that are obligations that
permit a Fund to invest fluctuating amounts, which may change daily without
penalty, pursuant to direct arrangements between a Fund, 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 or the
Federal Fund's target 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.
Where these obligations are not secured by letters of credit or other credit
support arrangements, a Fund'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 and, if not so rated, a Fund
may invest in them only if the appropriate Sub-Adviser determines that at the
time of investment the obligations are of comparable quality to the other
obligations in which the Fund may invest. The Sub-Adviser, on behalf of a Fund,
will consider on an ongoing basis the creditworthiness of the issuers of the
floating and variable-rate demand obligations in the Fund's portfolio.
A Fund will not invest more than 10% of its net assets in variable and
floating-rate demand obligations that are not readily marketable (a variable or
floating-rate demand obligation that may be disposed of on not more than seven
days notice will be deemed readily marketable and will not be subject to this
limitation). (See "Illiquid Securities" and "Investment Objectives.") In
addition, each variable or floating-rate obligation must meet the credit quality
requirements applicable to all the Fund's investments at the time of purchase.
When determining whether such an obligation meets the Fund's credit quality
requirements, the Fund may look to the credit quality of the financial guarantor
providing a letter of credit or other credit support arrangement.
B-22
<PAGE>
In determining the Fund's weighted average portfolio maturity, the Fund will
consider a floating or variable-rate security to have a maturity equal to its
stated maturity (or redemption date if it has been called for redemption),
except that it may consider (i) variable-rate securities to have a maturity
equal to the period remaining until the next readjustment in the interest rate,
unless subject to a demand feature, (ii) variable-rate securities subject to a
demand feature to have a remaining maturity equal to the longer of (a) the next
readjustment in the interest rate or (b) the period remaining until the
principal can be recovered through demand, and (iii) floating rate securities
subject to a demand feature to have a maturity equal to the period remaining
until the principal can be recovered through demand. Variable and floating-rate
securities generally are subject to less principal fluctuation than securities
without these attributes since the securities usually trade at par following the
readjustment in the interest rate.
ASSET-BACKED SECURITIES
The Fixed Income Fund and the Money Market Fund may invest in asset-backed
securities which represent fractional interests in pools of leases, retail
installment loans and revolving credit receivables, both secured and unsecured.
These assets are generally held by a trust. Payments of principal and interest
or interest only are passed through 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 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 car loans or other 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 sales contracts 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 and policies, the Funds may invest in other
asset-backed securities that may be developed in the future.
ILLIQUID SECURITIES
The Funds may invest in illiquid securities (i.e., securities that are not
readily marketable). However, a Fund will not acquire illiquid securities if, as
a result, they would comprise more than 15%, or 10% with respect to the Money
Market Fund, of the value of the Fund's net assets (or such other amounts as may
be permitted under the 1940 Act).
The Board of Trustees, or its delegate, has the ultimate authority to determine,
to the extent permissible under the federal securities laws, which securities
are illiquid for purposes of this limitation. Certain securities exempt from
registration or issued in transactions exempt from registration under the
Securities Act of 1933 (the "Securities Act"), such as securities that may be
resold to institutional investors under Rule 144A of the Securities Act and
Section 4(2) commercial paper, may be considered liquid under guidelines adopted
by the Board of Trustees.
The Board of Trustees has delegated to the respective Sub-Advisers the
day-to-day determination of the liquidity of a security, although it has
retained oversight and ultimate responsibility for such determinations. The
Board of Trustees has directed each Sub-Adviser to look to such
B-23
<PAGE>
factors as (i) the frequency of trades or quotes for a security, (ii) the number
of dealers willing to purchase or sell the security and number of potential
buyers, (iii) the willingness of dealers to undertake to make a market in the
security, (iv) the nature of the security and nature of the marketplace trades,
such as the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer, (v) the likelihood that the security's
marketability will be maintained throughout the anticipated holding period, and
(vi) any other relevant factors. A Sub-Adviser may determine 4(2) commercial
paper to be liquid if (i) the 4(2) commercial paper is not traded flat or in
default as to principal and interest, (ii) the 4(2) commercial paper is rated in
one of the two highest rating categories by at least two NRSROs, or if only one
NRSRO rates the security, by that NRSRO, or is determined by the Sub-Adviser to
be of equivalent quality and (iii) the Sub-Adviser considers the trading market
for the specific security taking into account all relevant factors. A foreign
security may be considered liquid by a Sub-Adviser (despite its restricted
nature under the Securities Act) if the security can be freely traded in a
foreign securities market and all the facts and circumstances support a finding
of liquidity.
RESTRICTED SECURITIES
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a SEC Staff position set forth in the adopting
release for Rule 144A under the Securities Act (the "Rule"). The Rule is a
nonexclusive safe-harbor for certain secondary market transactions involving
securities subject to restrictions on resale under federal securities laws. The
Rule provides an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Trust believes that the Staff
of the SEC has left the question of determining the liquidity of all restricted
securities to the Trustees, who will consider established factors in making such
a determination.
TEMPORARY DEFENSIVE POSITION
When a Sub-Adviser determines that market conditions warrant a temporary
defensive position, a Fund may invest without limitation in cash and short-term
fixed income securities, including U.S. government securities, commercial paper,
banker's acceptances, certificates of deposit, and time deposits.
PORTFOLIO TURNOVER AND SECURITIES TRANSACTIONS
A portfolio turnover rate is, in general, the percentage computed by taking the
lesser of purchases or sales of portfolio securities (excluding certain short-
term securities) for a year and dividing it by the monthly average of the market
value of such securities during the year. The Funds do not have a predetermined
rate of portfolio turnover since such turnover will be incidental to
transactions taken with a view to achieving their respective objectives.
High turnover and short-term trading involve correspondingly greater commission
expenses and transaction costs. If a Fund derives more than 30 percent of its
gross income from the sale of securities held less than three months, the Fund
may fail to qualify under the tax laws as a regulated investment company in
particular years and thereupon would lose certain beneficial tax treatment of
its income (see "Dividends, Distributions and Taxes" in the Prospectus).
Each Sub-Adviser is responsible for decisions to buy and sell securities,
broker-dealer selection, and negotiation of its brokerage commission rates. The
Sub-Adviser's primary consideration in
B-24
<PAGE>
effecting a securities transaction will be execution at the most favorable
price. In certain instances, the Sub-Adviser may make purchases of underwritten
issues at prices which include underwriting fees, and, in selecting a
broker-dealer to execute each particular transaction, the Sub-Adviser will take
the following into consideration: the best net price available; the reliability,
integrity and financial condition of the broker-dealer; and the size of
contribution of the broker-dealer to the investment performance of the Funds on
a continuing basis. The Sub-Adviser shall not be deemed to have acted unlawfully
or to have breached any duty created by the Investment Advisory Agreements in
question or otherwise solely by reason of its having caused the Trust to pay a
broker-dealer that provides brokerage and research services to the Sub-Adviser
an amount of commission for effecting a portfolio investment transaction in
excess of the amount of commission another broker-dealer would have charged for
effecting that transaction, if the Sub-Adviser determines in good faith that
such amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in terms
of either that particular transaction or the Sub-Adviser's overall
responsibilities with respect to the Trust.
Each Sub-Adviser allocates the orders placed by it on behalf of a Fund to such
broker-dealers who also provide research or statistical material, or other
services to the Funds, the Sub-Adviser or its clients. Such allocation shall be
in such amounts and proportions as the Sub-Adviser shall determine and the
Sub-Adviser will report on said allocations regularly to the Trust indicating
the broker-dealers to whom such allocations have been made and the basis
therefor. Broker-dealers may be selected who provide brokerage and/or research
services to the Funds and/or other accounts over which the Sub-Adviser exercises
investment discretion. Such services may include advice concerning the value of
securities (including providing quotations as to securities); the advisability
of investing in, purchasing or selling securities; the availability of
securities or the purchasers or sellers of securities; furnishing analysis and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and performance of accounts; and effecting securities
transactions and performing functions incidental thereto, such as clearance and
settlement.
The receipt of research from broker-dealers may be useful to the Sub-Adviser in
rendering investment management services to the Trust and/or the Sub-Adviser's
other clients; conversely, such information provided by broker-dealers who have
executed transaction orders on behalf of other clients may be useful to the
Sub-Adviser in carrying out its obligations to the Trust. The receipt of such
research will not be substituted for the independent research of the
Sub-Adviser. It does enable the Sub-Adviser to reduce costs to less than those
which would have been required to develop comparable information through its own
staff. The use of broker-dealers who supply research may result in the payment
of higher commissions than those available from other broker-dealers who provide
only the execution of portfolio transactions. Orders on behalf of the Trust may
be bunched with orders on behalf of other clients of the Sub-Adviser.
The Board of Trustees periodically reviews each Sub-Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Trust.
B-25
<PAGE>
MANAGEMENT
PB Investment Advisors, Inc. (the "Adviser") in general supervises the Trust's
management and investment program, prepares reports for the Trust, monitors
compliance by the Trust in its investment activities and pays all compensation
of officers and Trustees of the Trust who are affiliated persons of the Adviser.
The Trust pays all other expenses incurred in the operation of the Trust,
including fees and expenses of unaffiliated Trustees of the Trust.
The Adviser is wholly owned by Commonwealth General Corporation, a wholly owned
subsidiary of AEGON USA, Inc. AEGON USA, Inc. is an indirect wholly owned
subsidiary of AEGON n.v. Vereniging AEGON ( a Netherlands membership
association) has a 53.63% interest in AEGON n.v.
Pursuant to the Sub-Advisory Agreements with the Adviser, subject to the
supervision of the Trustees of the Trust, and in conformity with the stated
policies of the Funds, Atlanta Capital manages the investment operations of the
High Quality Stock Fund and the Fixed Income Fund, Blairlogie manages the
investment operations of the International Active Fund, and Federated Investment
Counseling ("Federated") manages the investment operations of the Money Market
Fund. The Sub-Advisers also manage the composition of each respective Fund's
portfolio, including the purchase, retention, disposition and loan of
securities.
Each Investment Advisory and Sub-Advisory Agreement will remain in effect for
two years following its effective date, and will continue in effect thereafter
only if such continuance is specifically approved at least annually by the
Trustees or by vote of a majority of the outstanding voting securities of the
particular Fund (as defined in the 1940 Act and in a rule under the Act) and, in
either case, by a majority of the Trustees who are not parties to the Investment
Advisory Agreements or interested persons of any such party.
The Adviser and Sub-Advisers (collectively the "Advisers") have each authorized
any of their officers and employees who have been elected or appointed as
Trustees or officers of the Trust to serve in the capacities in which they have
been elected or appointed. In connection with the services it renders, the
Advisers each bear the salaries and expenses of all of its respective personnel.
Other than as imposed by law, the Investment Advisory and Sub-Advisory
Agreements provide that the Advisers shall not be liable to the Funds for any
error of judgment by the Advisers or for any loss sustained by the Funds except
in the case of willful misfeasance, bad faith, reckless disregard of duty or
negligence with respect to the Adviser, Atlanta Capital and Blairlogie and gross
negligence with respect to Federated. Each Agreement also provides that it shall
terminate automatically if assigned and that it may be terminated without
penalty by either party upon no more than 60 days' nor less than 30 days'
written notice.
The Investment Advisory and Sub-Advisory Agreements provide that the Advisers
shall not be liable for any error in judgment or mistake of law or for any loss
suffered by the Trust in connection with any investment policy or the purchase,
sale or redemption of any securities on the recommendations of the Advisers. The
Agreements provide that the Advisers are not protected against any liability to
the Trust or its security holders for which the Advisers shall otherwise be
subject by reason of willful misfeasance, bad faith, reckless disregard of the
duties imposed upon them by the Agreements or negligence with respect to the
Adviser, Atlanta Capital
B-26
<PAGE>
and Blairlogie and gross negligence with respect to Federated or the violation
of any applicable law.
TRUSTEES AND OFFICERS
The names of the Trustees and officers of the Trust, their affiliations, if any,
with the Advisers and their principal occupations during the past five years are
set forth below. Each Trustee who is an "interested person" of the Trust, as
defined in the 1940 Act, is indicated by an asterisk.
<TABLE>
<CAPTION>
Name and Address Age Positions(s) Held Principal Occupation(s)
With Registrant During Past Five Years
<S> <C> <C> <C>
Thomas J. Hartlage* 46 President and Director, Sales & Marketing of Diversified Financial
400 W. Market St. Trustee Products Inc. since 1997; Director, Product Management
Louisville, KY 40202 of Commonwealth General Corporation from 1995-1997;
Director, Institutional Marketing of Commonwealth
General Corporation from 1993 to 1995; Director, New
Initiatives of Commonwealth General Corporation from
1992-1993; Vice President of PB Investment Advisors, Inc.
Michael G. Herp 35 Vice President Director, Product & Market Development of Diversified
400 W. Market St. Financial Products Inc. since1997; Director, Product &
Louisville, KY 40202 Market Development of Commonwealth General Corporation
1983-1997.
Michael G. Ayers 50 Chief Financial Director, Financial of Diversified Financial Products
400 W. Market St. Officer Inc. since1997; Director, Financial of Commonwealth
Louisville, KY 40202 General Corporation from 1977-1997.
Stephen L. Zeitz 40 Treasurer Director, Investment Operations of Diversified
400 W. Market St. Financial Products Inc. since 1995; Director, Cash
Louisville, KY 40202 Management of Commonwealth General Corporation, from
1994- 1995; Manager, Cash Management of Commonwealth
General Corporation from 1988-1994; Treasurer of PB
Investment Advisors, Inc.
R. Michael Slaven 47 Secretary General Counsel of Diversified Financial Products Inc.
400 W. Market St. since 1997; Assistant General Counsel of Commonwealth
Louisville, KY 40202 General Corporation from 1992-1997; Secretary of
Commonwealth General Corporation 1992-1995 and 1997.
Kirk Buese* 37 Trustee Director, Private Placements for AEGON USA -
400 W. Market St. Investment Management since 1997; Director, Private
Louisville KY 40202 Placements/Credit of Providian Capital Management,
Inc. from 1992-1997.
Jesse A. Holshouser, III 45 Trustee Chief Financial Officer of Professional Golfers'
100 Avenue of Champions Association of America since 1988.
Palm Beach Gardens, FL 33418
David L. Eager 55 Trustee Consultant and Managing Director of Eager & Associates
100 Mallard Creek since 1984.
Louisville KY 40205
William T. Mills, III 46 Trustee Partner of Highland Associates since 1987.
P.O. Box 55469 Birmingham,
AL 35255
</TABLE>
B-27
<PAGE>
Each Trustee of the Trust who is not an interested person of the Trust or
Advisor or Sub-Advisor receives $1500 for each meeting attended. The Trust also
reimburses each such Trustee for travel and other expenses incurred in attending
such meetings.
The following table estimates the amount of compensation to be paid to the
Trustees during the fiscal year ending December 31, 1997.
<TABLE>
<CAPTION>
Name Compensation Paid
- ---- -----------------
<S> <C>
Thomas Hartlage $0
Kirk Buese $0
Jesse A. Holshouser III $3000
David Eager $3000
William T. Millis $3000
</TABLE>
As of March 31, 1998, Trustees and officers of the Trust, as a group, owned less
than 1% of the shares of each Fund.
PRINCIPAL HOLDERS OF SECURITIES
Shares of the High Quality Stock Fund, Fixed Income Fund, International Active
Fund and Money Market Fund are offered both to separate accounts of Providian
Life and Health Insurance Company, First Providian Life and Health Insurance
Company and to the Capital Preservation Portfolio, Growth and Income Portfolio,
Income Oriented Portfolio, Capital Growth Portfolio and Maximum Appreciation
Portfolio (collectively the "LifeStyle Funds"). Shares of the LifeStyle Funds
are offered exclusively to separate accounts of Providian Life and Health
Insurance Company and First Providian Life and Health Insurance Company.
Providian Life and Health Insurance Company may be deemed to be a control person
with respect to each of the Funds by virtue of its ownership of 82.70% of the
Money Market Fund, 89.78% of the Fixed Income Fund, 94.47% of the High Quality
Stock Fund and 98.38% of the International Active Fund and 100% of each of the
LifeStyle Funds' shares. Additionally, the Capital Preservation Portfolio owns
15.75% of Money Market Fund and 5.99% of the Fixed Income Fund.
NET ASSET VALUES OF THE SHARES OF THE FUNDS
As set forth in the Prospectus under the caption "Net Asset Value and Pricing,"
the net asset value of each Fund will be determined as of the close of trading
on each day the NYSE is open for trading (currently 4:00 P.M. Eastern Time). The
New York Stock Exchange is open for trading Monday through Friday except New
Year's Day, Martin Luther King, Jr.'s Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Additionally, if any of the aforementioned holidays falls on a Saturday, the
NYSE will not be open for trading on the preceding Friday, and when any such
holiday falls on a Sunday, the NYSE will not be open for trading on the
succeeding Monday, unless unusual business conditions exist, such as the ending
of a monthly or yearly accounting period.
Securities held by all Funds will be valued as follows: Fund securities which
are traded on stock exchanges are valued at the last sale price as of the close
of business on the day the securities are being valued (currently 4:00 P.M.
Eastern Time), or lacking any sales, at the last quoted bid
B-28
<PAGE>
price. Bonds and other fixed income securities (other than short-term
obligations), including listed issues, are valued using matrix pricing systems
of a major dealer in bonds which take into account factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon quoted exchange or over-the-counter
prices. Short-term debt securities with 61 days or more to maturity at time of
purchase are valued, through the 61st day prior to maturity, at market value
based on quotations obtained from market makers or other appropriate sources;
thereafter, the value on the 61st day is amortized on a straight-line basis over
the remaining number of days to maturity. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Trustees of the Trust. Debt
securities with maturities of 60 days or less are valued at amortized cost.
The Money Market Fund values its securities on the amortized cost basis and
seeks to maintain its net asset value at a constant $1.00 per share. In the
event a difference of 1/2 of 1% or more were to occur between the net asset
value calculated by reference to market values of the Money Market Fund's $1.00
per share net asset value, or if there were any other deviation which the Board
of Trustees believed would result in a material dilution to shareholders or
purchasers, the Board of Trustees would consider taking any one or more of the
following actions or any other action considered appropriate: selling portfolio
securities to shorten average portfolio maturity or to realize capital gains or
losses, reducing or suspending shareholder income accruals, redeeming shares in
kind, or utilizing a value per unit based upon available indications of market
value. Available indications of market value may include, among other things,
quotations or market value estimates of securities and/or values based on yield
data relating to money market securities that are published by reputable
sources.
INVESTMENT PERFORMANCE
YIELD CALCULATIONS
- ------------------
The Trust may from time to time disclose the current annualized yield of the
High Quality Stock, Fixed Income and International Active Funds for 30-day
periods. The annualized yield of these Funds refers to the income generated by
the Fund over a specified 30-day period. Because the yield is annualized, the
yield generated by the Fund during the 30-day period is assumed to be generated
each 30-day period. The yield is computed by dividing the net investment income
per share earned during the period by the price per share on the last day of the
period, according to the following formula:
YIELD = a-b
--------------
2[(cd+1)6 - 1]
Where: a = net investment income earned during the period by the Fund.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period.
d = the maximum offering price per share on the last day of the period.
B-29
<PAGE>
Net investment income will be determined in accordance with rules established by
the SEC. Accrued expenses will include all recurring fees that are charged to
all shareholder accounts. The yield calculations do not reflect the effect of
any charges that may be applicable to a particular Policy.
Because of the charges and deductions imposed by the separate accounts and, in
certain cases, by series of the Trust which invest in the Funds described in
this SAI, the yield realized by Contract Owners in the investment divisions of
the separate accounts will be lower than the yield for the corresponding Fund of
the Trust. The yield on amounts held in the High Quality Stock, Fixed Income and
International Active Funds normally will fluctuate over time. Therefore, the
disclosed yield for any given past period is not an indication or representation
of future yields or rates of return. Each of the High Quality Stock, Fixed
Income and International Active Funds actual yield will be affected by the types
and quality of Fund securities held by the respective Fund, and its operating
expenses.
CURRENT YIELD
- -------------
The Money Market Fund's current yield quotation is based on a seven-day period
and is computed as follows. The first calculation is net investment income per
share, which is accrued interest on portfolio securities, plus or minus
amortized premium, less accrued expenses. This number is then divided by the
price per share (expected to remain constant at $1.00) at the beginning of the
period ("based period return"). The result is then divided by 7 and multiplied
by 365 and the resulting yield figure is carried to the nearest one-hundredth of
one percent. Realized capital gains or losses and unrealized appreciation or
depreciation of investments are not included in the calculation.
EFFECTIVE YIELD
- ---------------
The Money Market Fund's effective yield is determined by taking the base period
return (computed as described above) and calculating the effect of assumed
compounding. The formula for the effective yield is: [(base period return +
1)365/7] - 1.
B-30
<PAGE>
STANDARDIZED TOTAL RETURN CALCULATIONS
- --------------------------------------
The Trust may from time to time also disclose average annual total returns for
the Funds for various periods of time. Average annual total return quotations
are computed by finding the average annual compounded rates of return over one,
five and ten year periods that would equate the initial amount invested to the
ending redeemable value, according to the following formula:
P (1 + T)(n)= ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the one, five, or ten-year period at the end of
the one, five, or ten-year period (or fractional portion thereof).
All recurring fees that are charged to all shareholder accounts are recognized
in the ending redeemable value. The average annual total return calculations for
the Fund will not reflect the effect of charges that may be applicable to a
particular policy.
NON-STANDARDIZED PERFORMANCE. In addition, in order to more completely represent
a Fund's performance or more accurately compare such performance to other
measures of investment return, a Fund also may include in advertisements, sales
literature and shareholder reports other total return performance data
("Non-Standardized Return"). Non-Standardized Return may be quoted for the same
or different periods as those for which Standardized Return is quoted; it may
consist of an aggregate or average annual percentage rate of return, actual
year-by-year rates or any combination thereof. Non-Standardized Return will be
accompanied by Standardized Return. Non-Standardized Return may or may not take
sales charges into account; performance data calculated without taking the
effect of sales charges into account will be higher than data including the
effect of such charges. All non-standardized performance will be advertised only
if the standard performance data for the same period, as well as for the
required periods, is also presented.
GENERAL INFORMATION. From time to time, the Funds may advertise their
performance compared to similar funds using certain unmanaged indices, reporting
services and publications. Descriptions of some of the indices which may be used
are listed below.
The Standard & Poor's 500 Composite Stock Price Index is a well diversified list
of 500 companies representing the U.S. stock market.
The Standard & Poor's 400 Midcap Index tracks the stock price movement of 400
companies with mid-size market capitalization of $300 million to $5 billion.
Stocks are chosen for market size, liquidity and industry group representation.
The Standard and Poor's Small Cap 600 index is designed to represent price
movements in the small cap U.S. equity market. It contains companies chosen by
the Standard & Poor's Index Committee for their size, industry, characteristics,
and liquidity. None of the companies in the
B-31
<PAGE>
S&P 600 overlap with the S&P 500 or the S&P 400 (MidCap Index). The S&P 600 is
weighted by market capitalization. REITs are not eligible for inclusion.
The NASDAQ Composite OTC Price Index is a market value-weighted and unmanaged
index showing the changes in the aggregate market value of approximately 3,500
stocks.
The Lehman Brothers Aggregate Bond Index is an index consisting of the Lehman
Brothers Government/Corporate Bond Index, the Lehman Brothers Mortgage-Backed
Securities Index, and the Lehman Brothers Assets-Backed Securities Index. The
Government/Corporate Bond Index is described below. The Mortgage-Backed
Securities Index consists of 15 and 30-year fixed rate securities backed by
mortgage pools of GNMA, FHLMC and FNMA (excluding buy downs, manufactured homes
and graduated equity mortgages). The Asset-Backed Securities Index consists of
credit card, auto and home equity loans (excluding subordinated tranches) with
an average life of one year. Each Index includes income and distributions but
does not reflect fees, brokerage commissions or other expenses of investing.
The Lehman Brothers Intermediate Aggregate Index consists of 1-10 year
government bonds, 1-10 year corporate bonds rated A or higher by an NRSRO, all
mortgages, and all asset backed securities within the Aggregate Index (i.e., the
Lehman Brothers Aggregate Index less the Long Government/Corporate Index). This
Index offers a broad based benchmark with a shorter duration than the Lehman
Brothers Aggregate Index.
The Lehman Brothers Government Bond Index is a measure of the market value of
all public obligations of the U.S. Treasury; all publicly issued debt of all
agencies of the U.S. Government and all quasi-federal corporations; and all
corporate debt guaranteed by the U.S. Government; mortgage backed securities,
bonds and foreign targeted issues are not included in the Lehman Government
Index.
The Lehman Brothers Government/Corporate Bond Index is a measure of the market
value of approximately 5,300 bonds with a face value currently in excess of $1.3
trillion. To be included in the Lehman Government/Corporate Index, an issue must
have amounts outstanding in excess of $1 million, have at least one year to
maturity and be rated "Baa" or higher ("investment grade") by a nationally
recognized rating agency.
The Russell 3000 Index is composed of the 3,000 largest U.S. companies ranked by
market capitalization representing approximately 98% of the U.S. equity market.
The Russell 2000 Index represents the bottom two thirds of the largest 3000
publicly traded companies domiciled in the U.S. Russell uses total market
capitalization to sort its universe to determine the companies that are included
in the index. Only common stocks are included in the Index. REITs are eligible
for inclusion.
The Wilshire Mid Cap 750 Index is a subset of the Wilshire 5000 Index of common
stocks. The Mid Cap 750 Index consists of those Wilshire 5000 companies ranked
between 501 and 1,250 according to market capitalization.
The Wilshire 5000 Equity Index represents the return on the market value of all
common equity securities for which daily pricing is available.
B-32
<PAGE>
In addition, from time to time in reports and promotions: (1) a Fund's
performance may be compared to other groups of mutual funds tracked by: (a)
Lipper Analytical Services, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets; (b)
Morningstar, Inc., another widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets; or (c)
other financial or business publications, such as Business Week, Money Magazine,
Forbes and Barron's which provide similar information; (2) the Consumer Price
Index (measure of inflation) may be used to assess the real rate of return from
an investment in a Fund; (3) other statistics such as GNP, and net import and
export figures derived from governmental publications, e.g., The Survey of
Current Business or other independent parties, e.g., the Investment Company
Institute, may be used to illustrate investment attributes of a Fund or the
general economic, business, investment, or financial environment in which a Fund
operates; (4) various financial economic and market statistics developed by
brokers, dealers and other persons may be used to illustrate aspects of a Fund's
performance; (5) the effect of tax-deferred compounding on a Fund's investment
returns, or on returns in general, may be illustrated by graphs, charts, etc.
where such graphs or charts would compare, at various points in time, the return
from an investment in a Fund (or returns in general) on a tax-deferred basis
(assuming reinvestment of capital gains and dividends and assuming one or more
tax rates) with the return on a taxable basis; and (6) the sectors or industries
in which the Fund invests may be compared to relevant indices or surveys (e.g.,
S&P Industry Surveys) in order to evaluate the Fund's historical performance or
current or potential value with respect to the particular industry or sector.
TAXES
Each Fund intends to elect to qualify as a "regulated investment company" under
the provisions of Subchapter M of the Internal Revenue Code of 1986 (the
"Code"). If each Fund qualifies as a "regulated investment company" and complies
with the appropriate provisions of the Code, each Fund will not be subject to
federal income tax on the amounts distributed.
In order to qualify as a regulated investment company, in each taxable year each
Fund must, among other requirements, derive at least 90% of its gross income
from dividends, interest, payments with respect to loans of securities, and
gains (without deduction for losses) from the sale or other disposition of
securities or foreign currencies (subject to the authority of the Secretary of
the Treasury to exclude certain foreign currency gains) or other income derived
with regard to its investing in such securities or currencies.
The discussion of "Taxes" in the Prospectus, in conjunction with the foregoing,
is a general summary of applicable provisions of the Code and U.S. Treasury
Regulations now in effect as currently interpreted by the courts and the
Internal Revenue Service. The Code and these Regulations, as well as the current
interpretations thereof, may be changed at any time by legislative, judicial or
administrative action.
GENERAL INFORMATION
The Trustees themselves have the power to alter the number and terms of office
of the Trustees, and they may at any time lengthen their own terms or make their
terms of unlimited duration (subject to certain removal procedures) and appoint
their own successors, provided that always at least a majority of the Trustees
have been elected by the shareholders of the Trust. The voting rights of
shareholders are not cumulative, so that holders of more than 50 percent of the
shares
B-33
<PAGE>
voting can, if they choose, elect all Trustees being selected, while the
holders of the remaining shares would be unable to elect any Trustees. The Trust
is not required to hold Annual Meetings of Shareholders for action by
shareholders' vote except as may be required by the 1940 Act or the Declaration
of Trust. The Declaration of Trust provides that shareholders can remove
Trustees by a vote of two-thirds of the vote of the outstanding shares. The
Trustees will call a meeting of shareholders to vote on the removal of a Trustee
upon the written request of the holders of 10 percent of the Trust's shares. In
addition, 10 or more shareholders meeting certain conditions and holding the
lesser of $25,000 worth or one percent of the Trust's shares may advise the
Trustees in writing that they wish to communicate with other shareholders for
the purpose of requesting a meeting to remove a Trustee. The Trustees will then
either give those shareholders access to the shareholder list or, if requested
by those shareholders, mail at the shareholders' expense the shareholders'
communication to all other shareholders. See the Contract Prospectus for
information as to the voting of shares by Contract Owners.
Each issued and outstanding share of each Fund is entitled to participate
equally in dividends and distributions of the respective Fund and in the net
assets of such Fund upon liquidation or dissolution remaining after satisfaction
of outstanding liabilities. The shares of each Fund have no preference,
preemptive, conversion, exchange or similar rights, and are freely transferable.
Under Rule 18f-2 under the 1940 Act, as to any investment company which has two
or more series (such as the Funds) outstanding and as to any matter required to
be submitted to shareholder vote, such matter is not deemed to have been
effectively acted upon unless approved by the holders of a "majority" (as
defined in that Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
Trustees or the ratification of the selection of accountants. The Rule contains
special provisions for cases in which an advisory contract is approved by one or
more, but not all, series. A change in investment policy may go into effect as
to one or more series whose holders so approve the change even though the
required vote is not obtained as to the holders of other affected series.
Under Massachusetts law, shareholders of a trust such as the Trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the Trust. The Declaration of Trust, however, contains an express disclaimer
of 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 its Trustees. The Declaration of Trust
provides for indemnification and reimbursement of expenses out of Trust property
for any shareholder held personally liable for its obligations. The Declaration
of Trust also provides that the Trust shall, upon request, assume the defense of
any claim made against any shareholder for any act or obligation of the Trust
and satisfy any judgment thereon. Thus, while Massachusetts law permits a
shareholder of a trust such as the Trust to be held personally liable as a
partner under certain circumstances, the risk of a Contract Owner incurring
financial loss on account of shareholder liability is highly unlikely and is
limited to the relatively remote circumstances in which the Trust would be
unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he 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.
B-34
<PAGE>
The Trust has Codes of Ethics governing the personal securities transactions of
officers and employees, its Adviser and Sub-Advisers.
FINANCIAL STATEMENTS
Following are the financial statements for PB Series Trust including
the Report of the Independent Auditors and the accompanying statements of assets
and liabilities, including the schedules of investments as of December 31, 1997,
and the related statements of operations, changes in net assets and financial
highlights for the period of May 9, 1997 (commencement of investment operations)
through December 31, 1997.
B-35
<PAGE>
REPORT OF THE INDEPENDENT AUDITORS
To the Contractholders and Board of Trustees
PB Series Trust
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments of PB Series Trust (formerly Providian Series
Trust) (comprised of the Capital Preservation Portfolio, Growth and Income
Portfolio, Income Oriented Portfolio, Capital Growth Portfolio, Maximum
Appreciation Portfolio, High Quality Stock Fund, Fixed Income Fund,
International Active Fund and Money Market Fund)(the Trust) as of December 31,
1997, the related statements of operations, changes in net assets and the
financial highlights for the periods indicated therein. These financial
statements and the financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
investments owned as of December 31, 1997, by correspondence with the custodian.
As to securities relating to uncompleted transactions, we performed other audit
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the portfolios and funds within the Trust at December 31, 1997, and the
results of their operations, changes in their net assets and the financial
highlights for the periods indicated therein in conformity with generally
accepted accounting principles.
Ernst & Young
Kansas City, Missouri
February 6, 1998
<PAGE>
PB SERIES TRUST
CAPITAL PRESERVATION PORTFOLIO
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
INVESTMENT COMPANIES - 100.0%
PB Series Trust
Money Market Fund 13,322 $13,322
PB Series Trust
Fixed Income Fund 1,311 13,451
-------
TOTAL INVESTMENT COMPANIES
- (Cost $26,964) 26,773
-------
TOTAL INVESTMENTS - (Cost $26,964) - 100.0% 26,773
OTHER ASSETS LESS LIABILITIES - 0.0% 1
-------
NET ASSETS - 100.0% $26,774
=======
</TABLE>
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Portfolio.
PB SERIES TRUST
INCOME ORIENTED PORTFOLIO
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
INVESTMENT COMPANIES - 100.0%
PB Series Trust
Money Market Fund 1,225 $1,225
PB Series Trust
High Quality Stock Fund 201 2,363
PB Series Trust
Fixed Income Fund 399 4,091
PB Series Trust
International Active Fund 60 577
------
TOTAL INVESTMENT COMPANIES
- (Cost $8,331) 8,256
------
TOTAL INVESTMENTS - (Cost $8,331) - 100.0% 8,256
OTHER ASSETS LESS LIABILITIES - 0.0% 0
------
NET ASSETS - 100.0% $8,256
======
</TABLE>
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Portfolio.
The notes to the financials are an integral part of this report.
B-37
<PAGE>
PB SERIES TRUST
GROWTH & INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
INVESTMENT COMPANIES - 100.0%
PB Series Trust
Money Market Fund 17,686 $ 17,686
PB Series Trust
High Quality Stock Fund 6,346 74,535
PB Series Trust
Fixed Income Fund 6,955 71,356
PB Series Trust
International Active Fund 1,796 17,250
--------
TOTAL INVESTMENT COMPANIES
- (Cost $179,915) 180,827
--------
TOTAL INVESTMENTS - (Cost $179,915) - 100.0% 180,827
OTHER ASSETS LESS LIABILITIES - 0.0% 3
--------
NET ASSETS - 100.0% $180,830
========
</TABLE>
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Portfolio.
PB SERIES TRUST
CAPITAL GROWTH PORTFOLIO
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
INVESTMENT COMPANIES - 100.0%
PB Series Trust
High Quality Stock Fund 42,018 $493,478
PB Series Trust
Fixed Income Fund 19,780 202,940
PB Series Trust
International Active Fund 12,489 119,931
--------
TOTAL INVESTMENT COMPANIES
- (Cost $812,087) 816,349
--------
TOTAL INVESTMENTS - (Cost $812,087) - 100.0% 816,349
OTHER ASSETS LESS LIABILITIES - 0.0% 0
--------
NET ASSETS - 100.0% $816,349
========
</TABLE>
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Portfolio.
The notes to the financials are an integral part of this report.
B-38
<PAGE>
PB SERIES TRUST
MAXIMUM APPRECIATION PORTFOLIO
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
INVESTMENT COMPANIES - 100.0%
PB Series Trust
High Quality Stock Fund 16,894 $198,415
PB Series Trust
International Active Fund 4,824 46,323
--------
TOTAL INVESTMENT COMPANIES
- (Cost $239,079) 244,738
--------
TOTAL INVESTMENTS - (Cost $239,079) - 100.0% 244,738
OTHER ASSETS LESS LIABILITIES - 0.0% 0
--------
NET ASSETS - 100.0% $244,738
========
</TABLE>
The percentage shown for each investment category is the total value
of that category as a percentage of the net assets of the Portfolio.
PB SERIES TRUST
HIGH QUALITY STOCK FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK -95.4%
Aerospace - 1.8%
Allied Signal Incorporated 3,300 $ 128,494
Boeing Company 2,000 97,875
---------
226,369
---------
Apparel & Textiles - 1.2%
Guilford Mills Incorporated 2,200 60,225
Nautica Enterprises Incorporated (a) 1,800 41,850
Unifi Incorporated 1,100 44,756
---------
146,831
---------
Auto Parts - 1.7%
Eaton Corporation 1,300 116,025
Modine Manufacturing Company 1,100 37,538
OEA Incorporated 1,000 28,938
Superior Industries International
Incorporated 1,300 34,856
---------
217,357
---------
Banks - 8.2%
Banc One Corporation 2,200 119,487
BancorpSouth Incorporated 1,400 66,150
CCB Financial Corporation 600 64,500
Citizens Banking Corporation 1,950 67,274
CoreStates Financial Corporation 1,800 144,113
Deposit Guaranty Corporation 1,300 73,937
First Commercial Corporation 1,050 61,556
First Virginia Banks Incorporated 900 46,518
Firstbank of Illinois Company 1,650 60,740
Old Kent Financial Corporation 1,260 49,927
Union Planters Corporation 700 47,555
U.S. Trust Corporation 900 56,363
Wachovia Corporation 1,500 121,688
Wilmington Trust Corporation 800 49,900
---------
1,029,708
---------
Broadcasting - 0.4%
TCA Cable TV Incorporated 1,200 55,200
---------
</TABLE>
The notes to the financials are an integral part of this report.
B-39
<PAGE>
PB SERIES TRUST
HIGH QUALITY STOCK FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK (CONTINUED)
Building Construction - 0.7%
Harsco Corporation 900 $ 38,813
Lawson Products Incorporated 1,700 50,575
--------
89,388
--------
Business Services - 3.0%
ABM Industries Incorporated 2,100 64,181
American Management Systems
Incorporated (a) 1,500 29,250
Automatic Data Processing Incorpora 2,100 128,888
Fair Issac & Company Incorporated 900 29,981
G & K Services Incorporated 1,200 50,400
Olsten Corporation 1,900 28,500
Sungard Data Systems Incorporated (1,400 43,400
-------
374,600
-------
Chemicals - 3.2%
Avery Dennison Corporation 2,800 125,300
Brady W. H. Company 1,600 49,600
E.I. Du Pont de Nemours & Company 1,700 102,106
Fuller H.B. Company 800 39,600
MacDermid Incorporated 600 50,925
Nalco Chemical Company 900 35,606
-------
403,137
-------
Communications Services - 1.4%
Interpublic Group of Companies
Incorporated 2,400 119,550
True North Communications
Incorporated 2,100 51,975
-------
171,525
--------
Computers & Business Equipment - 3.4%
American Business Products
Incorporated 1,800 38,925
Cabletron Systems Incorporated (a) 3,300 49,500
Electronic Data Systems Corporation 2,900 127,419
General Binding Corporation 1,400 42,000
Hewlett-Packard Company 1,900 118,750
Sci Systems Incorporated 1,000 43,563
---------
420,157
---------
</TABLE>
PB SERIES TRUST
HIGH QUALITY STOCK FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK (CONTINUED)
Conglomerates - 1.7%
Mark IV Industries Incorporated 1,500 $ 32,813
National Service Industries 800 39,650
Teleflex Incorporated 1,200 45,300
Textron Incorporated 1,600 100,000
---------
217,763
---------
Construction & Mining Equipment - 0.2%
Foster Wheeler Corporation 900 24,356
--------
Construction Materials - 0.3%
Vulcan Materials Company 400 40,850
--------
Containers & Glass - 0.7%
Bemis Company Incorporated 800 35,250
---------
Clarcor Incorporated 1,700 50,363
---------
85,613
---------
Drugs & Health Care -8.5%
Abbott Laboratories 1,700 111,455
Bard C.R. Incorporated 1,000 31,313
Biomet Incorporated 1,900 48,688
Block Drug Company Incorporated 927 40,093
Diagnostic Products Corporation 1,300 36,074
Invacare Corporation 1,600 34,800
Johnson & Johnson 1,800 118,575
Life Technologies Incorporated 1,500 49,875
Manor Care Incorporated 1,100 38,500
Mylan Laboratories Incorporated 1,700 35,593
Patterson Dental Company (a) 1,200 54,300
Pfizer Incorporated 2,000 149,125
Schering Plough Corporation 2,200 136,674
Thermedics Incorporated (a) 2,500 40,938
Warner-Lambert Company 1,100 136,400
---------
1,062,403
---------
Electric Utilities - 2.6%
Central & South West Corporation 4,900 132,606
Duke Power Company 2,600 143,975
UtiliCorp United Incorporated 1,300 50,456
---------
327,037
---------
</TABLE>
The notes to the financials are an integral part of this report.
B-40
<PAGE>
PB SERIES TRUST
HIGH QUALITY STOCK FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK (CONTINUED)
Electrical Equipment - 2.7%
Baldor Electric Company 1,866 $ 40,483
Dentsply International Incorporated 1,200 36,600
Federal Signal Corporation 1,300 28,113
General Electric Company 1,700 124,738
Hubbell Incorporated 800 39,450
Technitrol Incorporated 1,400 42,000
Thomas & Betts Corporation 600 28,350
--------
339,734
--------
Electronics - 5.0%
AMP Incorporated 2,900 121,800
Avnet Incorporated 500 33,000
Cohu Incorporated 900 27,563
Dionex Corporation 1,000 50,250
Harris Corporation 800 36,700
Intel Corporation 1,600 112,400
Kronos Incorporated 1,600 49,300
Methode Electronics 2,200 35,750
MTS Systems Corporation 1,000 37,500
Nichols Research Corporation 1,900 47,500
Varian Associates Incorporated 600 30,338
X-Rite Incorporated 2,500 45,625
--------
627,726
--------
Financial Services - 1.8%
Legg Mason Incorporated 1,066 59,629
Merrill Lynch & Company 1,700 123,994
ReliaStar Financial Corporation 1,000 41,188
--------
224,811
--------
Food & Beverages - 2.6%
CPC International Incorporated 1,200 129,300
Dean Foods Company 900 53,550
Hormel Foods Corporation 1,300 42,575
PepsiCo Incorporated 2,900 105,669
--------
331,094
--------
Food Service - 1.1%
Sysco Corporation 3,100 141,244
--------
</TABLE>
PB SERIES TRUST
HIGH QUALITY STOCK FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK (CONTINUED)
Funeral Services - 0.4%
Stewart Enterprises Incorporated 1,000 $ 46,625
--------
Gas Distribution -1.7%
Energen Corporation 1,200 47,700
Northwest Natural Gas Company 1,600 49,600
Oneok Incorporated 1,400 56,525
Piedmont Natural Gas Company
Incorporated 1,600 57,500
--------
211,325
--------
Gas Exploration - 2.7%
Coastal Corporation 2,000 123,875
Eastern Enterprises 1,200 54,000
Equitable Resources Incorporated 1,200 42,450
National Fuel Gas Company 800 38,950
Questar Corporation 900 40,163
Southwestern Energy Company 3,200 41,200
--------
340,638
--------
Home Builders - 0.7%
Lennar Corporation 1,100 23,719
Thor Industries Incorporated 1,800 61,763
--------
85,482
--------
Household Appliances - 0.8%
Interface Incorporated 1,700 49,300
La-Z-Boy Incorporated 1,200 51,750
--------
101,050
--------
Household Products - 3.1%
Colgate-Palmolive Company 1,500 110,250
Kimberly-Clark Corporation 2,600 128,213
Lancaster Colony Corporation 800 45,100
Newell Company 2,600 110,500
--------
394,063
--------
Hotels & Restaurants - 0.3%
Cracker Barrel Old Country Store
Incorporated 1,200 40,050
--------
</TABLE>
The notes to the financials are an integral part of this report.
B-41
<PAGE>
PB SERIES TRUST
HIGH QUALITY STOCK FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK (CONTINUED)
Industrial Machinery - 2.4%
Crane Company 800 $ 34,700
Deere & Company 2,200 128,288
Graco Incorporated 1,400 52,238
Pentair Incorporated 1,000 35,938
Tennant Company 1,400 50,925
--------
302,089
--------
Insurance - 6.4%
American Bankers Insurance
Group Incorporated 1,600 73,500
American Heritage Life Investment
Corporation 1,500 54,000
American International Group
Incorporated 1,250 135,937
Berkley (WR) Corporation 1,050 46,069
Chubb Corporation 1,500 113,437
Fremont General Corporation 900 49,274
Frontier Insurance Group
Incorporated 1,400 32,024
General Re Corporation .500 106,000
Liberty Corporation 1,000 46,750
NAC Re Corporation 900 43,930
Orion Capital Corporation 1,200 55,725
Protective Life Corporation 700 41,824
--------
798,470
--------
International Oil - 1.3%
Mobil Corporation 1,700 122,719
Murphy Oil Corporation 700 37,931
--------
160,650
--------
Investment Advisory Firms - 2.0%
A.G. Edwards Incorporated 1,350 53,663
Eaton Vance Corporation 1,500 56,625
T. Rowe Price & Associates
Incorporated 700 44,013
SEI Investment Company 1,600 67,200
United Asset Management
Corporation 1,200 29,325
--------
250,826
--------
</TABLE>
PB SERIES TRUST
HIGH QUALITY STOCK FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK (CONTINUED)
Newspapers - 1.8%
Lee Enterprises Incorporated 1,300 $ 38,431
Pulitzer Publishing Company 800 50,250
Tribune Company 2,100 130,725
--------
219,406
--------
Non-Ferrous Metals - 0.3%
Commercial Metals Company 1,300 41,031
--------
Paper - 1.6%
Lydall Incorporated (a) 1,800 .35,100
Sonoco Products Company 3,400 117,938
Wausau - Mosinee Paper Corporation 2,100 42,000
-------
195,038
-------
Petroleum Services - 2.4%
Dresser Industries Incorporated 2,900 121,619
MAPCO Incorporated 1,100 50,875
Unocal Corporation 3,300 128,081
-------
300,575
-------
Publishing - 0.8%
Banta Corporation 1,500 40,500
Houghton Mifflin Company 1,400 53,725
-------
94,225
-------
Railroads & Equipment - 1.3%
GATX Corporation 600 43,538
Norfolk Southern Corporation 3,900 120,169
-------
163,707
-------
Retail Grocery - 0.4%
Casey's General Stores Incorporated 2,200 55,825
-------
Retail Trade - 3.6%
Arbor Drugs Incorporated 3,000 55,500
Home Depot Incorporated 2,250 132,469
Office Depot Incorporated 2,000 47,875
Pep Boys-Manny Moe & Jack 1,400 33,425
Ruddick Corporation 3,000 52,313
Wal-Mart Stores Incorporated 3,200 126,200
-------
447,782
-------
</TABLE>
The notes to the financials are an integral part of this report.
B-42
<PAGE>
PB SERIES TRUST
HIGH QUALITY STOCK FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK (CONTINUED)
Software - 1.3%
Autodesk Incorporated 900 $ 33,300
Computer Associates International
Incorporated 2,400 126,900
----------
160,200
----------
Steel - 1.6%
Carpenter Technology Corporation 900 43,256
Nucor Corporation 2,500 120,781
Worthington Industries Incorporated 1,800 29,700
-----------
193,737
-----------
Telephone - 4.0%
Aliant Communications Incorporated 2,100 65,888
Alltel Corporation 3,100 127,294
Bell Atlantic Corporation 1,400 127,400
Century Telephone Enterprises
Incorporated 1,100 54,794
Frontier Corporation 5,100 122,719
----------
498,095
----------
Tires & Rubber - 0.4%
Carlisle Companies Incorporated 1,200 51,300
----------
Tobacco - 1.0%
Philip Morris Companies Incorporate 2,800 126,875
----------
Trucking & Freight Forwarding - 0.9%
Air Express International Corporati 1,800 54,900
Rollins Truck Leasing Corporation. 2,900 51,838
----------
106,738
TOTAL COMMON STOCK
(Cost $10,272,726) 11,942,705
----------
</TABLE>
PB SERIES TRUST
HIGH QUALITY STOCK F
SCHEDULE OF INVESTME
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
SHORT-TERM INVESTMENTS - 3.6%
Investment Company - 3.6%
SSgA U.S. Government
Money Market Fund 450,000 $ 450,000
----------
TOTAL SHORT-TERM INVESTMENTS
(Cost $450,000) 450,000
----------
TOTAL INVESTMENTS - (Cost $10,722,726) - 99.0% 12,392,705
OTHER ASSETS LESS LIABILITIES - 1.0% 122,359
----------
NET ASSETS - 100.0% $12,515,064
===========
</TABLE>
The percentage shown for each investment category is the total value
of that category as a percentage of the net assets of the Fund.
(a) Non-income producing securities.
The notes to the financials are an integral part of this report.
B-43
<PAGE>
PB SERIES TRUST
FIXED INCOME FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Principal
Security Description Amount Value
- -------------------- ------ -----
<S> <C> <C>
MORTGAGE BACKED SECURITIES - 1.8%
GE Capital Mortgage
6.500%, 01/25/18 $100,000 $ 99,812
---------
TOTAL MORTGAGE BACKED SECURITIES
- (Cost $99,503) 99,812
---------
U.S. GOVERNMENT AND AGENCY
SECURITIES - 71.9%
Government Agency - 30.7%
Federal Home Loan Mortgage Corporation
5.950%, 01/19/06 750,000 744,727
Federal National Mortgage Association
6.375%, 01/16/02 500,000 507,890
5.875%, 02/02/06 275,000 272,165
5.750%, 06/25/10 100,000 99,156
5.500%, 02/25/17 100,000 98,656
---------
1,722,594
---------
U.S. Government - 41.2%
U.S. Treasury Notes
5.875%, 08/31/99 750,000 752,340
6.125%, 12/31/01 250,000 253,320
6.500%, 08/15/05 1,250,000 1,304,300
---------
2,309,960
---------
TOTAL U.S. GOVERNMENT AND
AGENCY SECURITIES
- (Cost $3,904,871) 4,032,554
---------
SHORT TERM INVESTMENTS - 24.5% Shares
Investment Company - 4.0%
SSgA U.S. Government
Money Market Fund 225,000 225,000
---------
</TABLE>
PB SERIES TRUST
FIXED INCOME FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Principal
Security Description Amount Value
- -------------------- ------ -----
<S> <C> <C>
SHORT TERM INVESTMENTS - (Continued)
Repurchase Agreement - 2.9% Agreement
with State Street Bank and Trust
Company, dated 12/31/1997, 4.250%,
to be repurchased at $164,719 on
01/02/1998 (collateralized by
$170,000 par value U.S. Treasury
Notes, 6.125 %, due 3/31/1998,
with a value of $172,76) $164,680 $ 164,680
----------
Government Agency - 17.6%
Federal Farm Credit Bank Discount Note
5.390%, 01/09/98 500,000 499,389
Federal Home Loan Bank Discount Note
6.080%, 5/29/98 500,000 488,850
----------
988,239
----------
TOTAL SHORT TERM INVESTMENTS
- (Cost $1,377,886) 1,377,919
----------
TOTAL INVESTMENTS - (Cost $5,382,260) - 98.2% 5,510,285
OTHER ASSETS LESS LIABILITIES - 1.8% 96,402
----------
NET ASSETS - 100.0% $5,606,687
==========
</TABLE>
The percentage shown for each investment category is the total value
of that category as a percentage of the net assets of the Fund.
The notes to the financials are an integral part of this report.
B-44
<PAGE>
PB SERIES TRUST
INTERNATIONAL ACTIVE FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK AND OTHER
EQUITY INTERESTS - 91.8%
Argentina - 0.8%
Astra CIA 4,340 $ 7,597
BCO De Galicia 1,506 9,640
BCO Frances RI 518 4,808
Molions Rio PL 1,172 2,813
Perez Company ADR 1,500 20,813
Siderca S.A 4,880 13,569
Telefonica De Arg SA ADR 637 23,728
--------
82,968
--------
Australia - 0.8%
Amcor Limited 1,485 6,531
Broken Hill Proprietary Company
Limited 1,213 11,261
Comalco Limited 1,946 8,037
Leighton Holdings Limited 1,117 3,900
News Corporation Limited 2,340 12,912
Pasminco Limited 8,806 10,097
QNI Limited 2,569 1,708
TABCORP Holdings Limited 1,044 4,898
Westpac Banking Corporation
Limited 3,463 22,147
--------
81,491
--------
Belgium - 2.1%
Webs Index Fund Belgium Index 12,475 206,617
--------
Chile - 1.4%
Banco Santander Chile ADR 1,020 14,409
Chilgener SA Sponsored ADR 687 16,833
Compania Cervecerias Unidas SA
Sponsored ADR 339 9,958
Compania de Telecom De Chile
Sponsored ADR 1,015 30,324
Empresa Nacional Electricidad
Sponsored ADR 1,169 20,677
Enersis Sponsored ADR 945 27,406
Madeco SA Sponsored ADR 312 4,758
Maderas Y Sinteticos Sponsored ADR. 432 4,105
Quimica Y Minera Chile SA
Sponsored ADR 190 8,360
--------
136,830
--------
</TABLE>
PB SERIES TRUST
INTERNATIONAL ACTIVE FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK AND OTHER
EQUITY INTERESTS (CONTINUED)
Finland - 4.2%
Enso 1,600 $ 12,395
Hartwall Ab Oy 379 31,307
Metsa Serla Oy 3,231 25,207
Neste Oy 606 14,684
Nokia Ab Oy 2,710 192,517
Okobank Osuuspankk 1,652 26,201
Rautaruukki Oy 2,273 18,358
UPM Kymmene Corporation Oy 1,536 30,732
Viking Line AB 200 8,077
WSOY"B" 1,002 37,337
YIT-Yhtymaoy Oy 1,399 15,793
---------
412,608
---------
France- 12.3%
Alcatel Alsthom 632 80,360
AXA UAP 685 53,022
Banque Nationale de Paris 2,010 106,873
Compagnie De St. Gobain 330 46,896
Compagnie Generale des Eaux 521 72,740
Credit Commer France 490 33,596
Elf Aquitaine SA 626 72,833
France Telecom (a) 1,800 65,311
Groupe Danone 411 73,435
Group GTM 800 53,852
L'Oreal 220 86,113
Lafarge SA 914 59,992
Peugeot 680 85,784
Pinault-Printe 130 69,380
Schneider SA 504 27,375
Societe Generale 827 112,713
Total "B" FRF 50 500 54,433
Valeo SA 685 46,475
---------
1,201,183
---------
Germany - 9.9%
Allianz AG 355 91,589
BASF AG 1,300 46,407
Bayer AG 2,943 109,231
Commerzbank AG 1,190 46,318
Daimler-Benz AG 657 46,395
</TABLE>
The notes to the financials are an integral part of this report.
B-45
<PAGE>
PB SERIES TRUST
INTERNATIONAL ACTIVE FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK AND OTHER
EQUITY INTERESTS (CONTINUED)
Germany - (Continued)
Degussa AG 1,036 $ 51,268
Deutsche Bank 550 38,473
Dresdner Bank AG 661 30,065
MAN AG 231 52,405
Mannesmann AG 298 149,626
RWE AG 1,400 75,121
Siemens AG 985 59,424
VEBA AG 2,010 136,909
Volkswagon AG 65 36,322
---------
969,553
---------
Ireland - 3.3%
Allied Irish 11,800 114,510
CRH PLC 6,900 80,942
Irish Life PLC 7,700 44,284
Kerry Group PLC 2,100 22,506
Smurfit (Jefferson) Group 23,000 64,990
---------
327,232
---------
Israel - 1.7%
Bank Hapoalim Limited 7,900 18,957
Bezeq Israeli Telecommunication
Corporation Limited 4,500 12,427
Blue Square-Israel Limited (a) 1,100 10,508
Clal Israel Limited 40,000 11,906
ECI Telecommunication Limited 1,000 25,501
Elco Holdings Limited 1,200 9,837
Elite Industries Limited 300 8,906
Formula Systems Limited (a) 410 12,619
Industrial Buildings Corporation 7,800 13,272
Israel Chemicals Limited 12,800 17,329
Teva Pharmaceutical Industries Limite 480 22,765
---------
164,027
---------
Italy - 7.7%
Alleanza Assicurazioni 3,521 35,039
Assic Generali 2,000 49,123
Banca Commerciale Italiana 19,767 68,719
</TABLE>
PB SERIES TRUST
INTERNATIONAL ACTIVE FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK AND OTHER
EQUITY INTERESTS (CONTINUED)
Italy - (Continued)
Benetton Group SPA 2,080 $ 34,039
Danieli & Company 5,001 34,348
Edison SPA 8,000 48,388
Eni SPA 20,903 118,514
Fiat SPA 15,301 44,501
Instituto Nazionale delle Assicurazioni
Istituto 20,646 41,839
Istituto Mobiliare Italiano SPA 7,018 83,309
Italcementi SPA 5,000 34,849
Telecom Italia SPA 13,080 83,549
Telecom Italia Mobile SPA 18,000 83,078
---------
759,295
---------
Japan - 13.6 %
Aoyama Trading Company Limited 3,300 58,957
Bridgestone Company 2,000 43,399
Canon Incorporated 2,000 46,621
Fanuc 3,200 121,214
Fuji Photo Film Company 3,000 115,018
Fujisawa Pharmaceutical Company 6,000 52,448
Hitachi Limited 6,000 42,787
Ito-Yokado 1,000 50,992
Kirin Brewery Company 7,000 50,992
Matsushita Electric Works 3,000 43,937
Mitsui O.S.K. Lines Limited (a) 36,000 49,963
Murata Manufacturing Company Limited. 3,000 75,452
NEC Corporation 11,000 117,242
Nippon Telephone & Telegraph
Corporation 32 137,407
Sumitomo Bank Limited 10,000 114,250
Sumitomo Trust & Banking 12,000 62,385
Tokio Marine & Fire Insurance 5,000 56,741
Tokyo Electric 2,100 38,323
Toyota Motor 2,000 57,355
---------
1,335,483
---------
Mexico -1.7%
Webs Index Fund Mexico Free Index 10,100 166,650
---------
</TABLE>
The notes to the financials are an integral part of this report.
B-46
<PAGE>
PB SERIES TRUST
INTERNATIONAL ACTIVE FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK AND OTHER
EQUITY INTERESTS (CONTINUED)
Netherlands - 5.0%
ABN AMRO Holdings NV 1,532 $ 29,862
Akzo Nobel 203 35,021
Elsevier 1,500 24,279
ING Groep NV 569 23,979
Koninklijke PTT Nederland NV 755 31,518
Philips Electronics NV 424 25,443
Polygram NV 550 26,326
Royal Dutch Petroleum Company 2,848 156,418
Unilever NV, PLC 936 57,735
Vendex International NV 593 32,744
VNU-Verenigde Nederlandse
Uitgeversbedrijven Verenigd Be1,610 45,443
---------
488,768
---------
Portugal - 4.1%
Banco Comercia Portugues 2,200 45,017
Banco Espirito 2,200 65,504
Brisa (a) 400 14,336
Cimpor Cimento 1,700 44,582
Elec De Portugal (a) 2,500 47,364
Jeronimo Martins 1,250 39,684
Portugal Telecom 2,700 125,349
Sonae Investimento 550 22,257
---------
404,093
---------
Spain - 2.4%
Argentaria Corporation SA 450 27,381
Banco Bilbao 1,000 32,359
Banco Popular 450 31,457
Gas Natural SD 380 19,704
Gas Y Electric 300 21,659
Iberdrola SA 2,600 34,216
Repsol SA 700 29,864
Telefonica De Espana........... 1,350 38,544
---------
235,184
---------
Switzerland - 8.5%
ABB AG 30 37,654
Clariant AG 61 50,903
Credit Suisse Group 368 56,886
Holderbank Financiere Glarus AG 51 41,581
</TABLE>
PB SERIES TRUST
INTERNATIONAL ACTIVE FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK AND OTHER
EQUITY INTERESTS (CONTINUED)
Switzerland - (Continued)
Kuoni Reisen Holding AG 14 $ 52,428
Nestle SA 67 100,316
Novartis AG 126 204,254
Roche Holding AG 15 148,820
Tag Heuer International SA (a) 349 30,316
Union Bank of Switzerland 77 111,233
----------
834,391
----------
United Kingdom - 10.9%
Abbey National PLC 3,375 58,477
Boots Company PLC 3,826 55,801
British Petroleum 2,400 31,732
British Telecommunications PLC 4,474 35,453
Commercial Union PLC 3,667 54,389
EMI Group PLC 4,123 35,702
Glaxo Wellcome 1,800 42,752
HSBC Holdings 1,450 37,625
IMI PLC 5,277 35,344
Lasmo PLC 10,500 46,912
Lloyds TSB Group PLC 8,496 110,299
Prudential Corporation PLC 4,685 54,671
Scottish & Newcastle PLC 4,971 60,388
Scottish Power PLC 7,284 64,546
Shell Transport & Trading Company PLC 7,177 52,336
Smithkline Beecham PLC 6,788 70,129
Tesco 4,400 35,610
Unilever PLC 7,452 64,188
Wolseley PLC 5,159 41,157
Zeneca Group PLC 2,246 79,387
----------
1,066,898
----------
Venezuela- 1.4%
Ceramica Carabobo ADR 12,650 10,372
Cia Anonima Telef De Ven ADR 2,000 83,250
Mavesa SA ADR 1,750 11,156
Siderurgica Venez SIV ADR 4,650 18,382
Sudamtex De Venezuela ADR 1,232 10,934
----------
134,094
----------
TOTAL COMMON STOCK AND OTHER
EQUITY INTERESTS (Cost $8,722,898) 9,007,365
----------
</TABLE>
The notes to the financials are an integral part of this report.
B-47
<PAGE>
PB SERIES TRUST
INTERNATIONAL ACTIVE FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Principal
Security Description Amount Value
- -------------------- ------ -----
<S> <C> <C>
SHORT TERM INVESTMENTS - 6.8%
Time Deposit - 6.8%
State Street Bank and Trust
Company Time Deposit,
1/02/98.................... $664,000 $ 664,000
----------
TOTAL SHORT TERM INVESTMENTS
- (Cost $664,000) 664,000
----------
TOTAL INVESTMENTS - (Cost $9,386,898) - 98.6% 9,671,365
OTHER ASSETS LESS LIABILITIES - 1.4% 132,900
----------
NET ASSETS - 100.0% $9,804,265
----------
</TABLE>
The percentage shown for each investment category is the total value
of that category as a percentage of the net assets of the Fund.
(a) Non-income producing securities.
ADR- American Depositary Receipts.
PB SERIES TRUST
INTERNATIONAL ACTIVE FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Industry holdings at December 31, 1997
<S> <C>
Banking ..........................14.82%
Telecommunications ............... 9.87%
Energy Sources ................... 6.72%
Health & Personal Care ........... 6.50%
Utilities-Electrical & Gas ....... 5.13%
Insurance ........................ 4.89%
Electrical & Electronics ......... 4.02%
Building Materials & Components .. 3.89%
Investment Companies ............. 3.80%
Food & Household Products ........ 3.58%
Chemicals ........................ 2.97%
Merchandising .................... 2.90%
Automobiles ...................... 2.76%
Electronic Components, Instruments 2.61%
Recreation, Other Consumer Goods . 2.59%
Machinery & Engineering .......... 2.41%
Forest Products & Paper .......... 1.47%
Beverages & Tobacco .............. 1.46%
Broadcasting & Publishing ........ 1.22%
Financial Services ............... 1.11%
Construction & Housing ........... 1.03%
Miscellaneous Materials .......... 1.02%
Business & Public Services ....... 0.89%
Appliances & Household Durables .. 0.71%
Transportation-Shipping .......... 0.59%
Leisure & Tourism ................ 0.59%
Metals-Non Ferrous ............... 0.56%
Metals-Steel ..................... 0.52%
Textiles & Apparel ............... 0.46%
Industrial Components ............ 0.44%
Real Estate ...................... 0.14%
Multi-Industry ................... 0.12%
Energy Equipment & Services ...... 0.08%
-------
Total Investments by Industry 91.87%
Time Deposit ..................... 6.77%
-------
Total Investments ........... 98.64%
Other Assets Less Liabiliti1ies .. 1.36%
-------
Net Assets ..................... 100.00%
=======
</TABLE>
The notes to the financials are an integral part of this report.
B-48
<PAGE>
PB SERIES TRUST
MONEY MARKET FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Principal
Security Description Amount Value
- -------------------- ------ -----
<S> <C> <C>
ASSET-BACKED SECURITIES - 4.3%
Arcadia Automobile Receivables Trust
1997-C, 5.650%, 09/15/98 ...... $ 56,048 $ 56,048
Copelco Capital Funding Corp.
1997-A, 5.809%, 07/20/98 ..... 46,256 46,256
---------
TOTAL ASSET BACKED SECURITIES
- (Cost $102,304) 102,304
---------
VARIABLE RATE NOTES - 30.5% Edgefield County, SC County School District,
Series, 1997
5.719%, 12/01/04 + ..... 100,000 100,000
Grand Aire Express, Inc., Series 1997
5.700%, 07/01/12 + ..... 100,000 100,000
International Processing Corporation
5.790%, 01/02/08 + ..... 10,000 10,000
IT Spring Wire, LLC, Series 1997
5.700%, 07/01/07 + ..... 100,000 100,000
JFK Family Borrowing, LLP, Series 1997
5.706%, 10/01/22 + ..... 50,000 50,000
La-Man Corporation
5.660%, 09/01/12 + ..... 100,000 100,000
Scranton Times, LP., Series 1997
5.710%, 05/31/07 + ..... 100,000 100,000
Triangle Fund, Series 1997
5.750%, 11/16/98 + ...... 100,000 100,000
Westcourt
5.790%, 06/01/16 + ...... 60,000 60,000
--------
TOTAL VARIABLE RATE NOTES
- (Cost $720,000) 720,000
--------
SHORT TERM INVESTMENTS - 63.8%
Joint Repurchase Agreements - 63.8%
Joint agreement with Fuji Government
Securities Incorporated, dated
12/31/1997, bearing 6.600%, to be
repurchased at $520,191 on 01/02/1998
(collateral: U.S Treasury Notes/
Bonds/Bills/Tips, 3.375% - 15.75%,
04/09/98 - 11/15/18, value equal to 102%
of the repurchase agreement) 520,000 520,000
</TABLE>
PB SERIES TRUST
MONEY MARKET FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Principal
Security Description Amount Value
- -------------------- ------ -----
<S> <C> <C>
SHORT TERM INVESTMENTS - (Continued)
Joint Repurchase Agreements - (Continued)
Joint agreement with HSBC Securities
Incorporated, dated 12/31/1997, bearing
6.800%, to be repurchased at $100,038 on
01/02/1998 (collateral: U.S Treasury
Bonds/Bills, 7.250% - 12.000%, 01/02/98
- 08/15/17, value equal to 102% of the
repurchase agreement) ........................ $100,000 $100,000
Joint agreement with PaineWebber
Incorporated, dated 12/31/1997, bearing
6.600%, to be repurchased at $520,191 on
01/02/1998 (collateral: U.S Treasury
Bonds/Bills, 7.250% - 12.000%, 01/02/98
- 08/15/17, value equal to 102% of the
repurchase agreement) ........................ 520,000 520,000
Joint agreement with Societe Generale,
dated 12/31/1997, bearing 6.600%, to be
repurchased at $100,037 on 01/02/1998
(collateral: U.S Treasury Note/ Tips,
3.375% - 6.500%, 10/15/06 - 01/15/07,
value equal to 102% of the repurchase
agreement) ................................... 100,000 100,000
Joint agreement with State Street Bank
and Trust Company, dated 12/31/1997,
bearing 6.550%, to be repurchased at
$66,024 on 01/02/1998 (collateral: U.S
Treasury Note, 5.875%, 04/30/98, value
equal to 102% of the repurchase
agreement) ................................... 66,000 66,000
Joint agreement with Swiss Bank
Corporation, dated 12/31/1997, bearing
6.550%, to be repurchased at $100,036 on
01/02/1998 (collateral: U.S Treasury
Bonds, 6.500% - 12.500%, 05/15/09 -
11/15/26, value equal to 102% of the
repurchase agreement) ........................ 100,000 100,000
</TABLE>
The notes to the financials are an integral part of this report.
B-49
<PAGE>
PB SERIES TRUST
MONEY MARKET FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Principal
Security Description Amount Value
- -------------------- ------ -----
<S> <C> <C>
SHORT TERM INVESTMENTS - (Continued)
Joint Repurchase Agreements - (Continued)
Joint agreement with UBS
Securities, dated 12/31/1997,
bearing 6.800%, to be repurchased
at $100,036 on 01/02/1998
(collateral: Federal Home Loan
Mortgage Corporation,
5.500% - 9.000%, 12/15/07 -
12/30/27, value equal to 102%
of the repurchase agreement) .. $ 100,000 $ 100,000
TOTAL SHORT TERM INVESTMENTS
(Cost $1,506,000) 1,506,000
----------
TOTAL INVESTMENTS AT AMORTIZED
COST AND VALUE - 98.6% $2,328,304
OTHER ASSETS LESS LIABILITIES - 1.4% 33,037
----------
NET ASSETS - 100.0% $2,361,341
==========
</TABLE>
The percentage shown for each investment category is the total value
of that category as a percentage of the net assets of the Fund.
+ Variable rate demand notes are payable upon not more than one, seven,
or thirty day's notice. Variable rate security which may be reset
weekly. The interest rate shown reflects the rate currently in effect.
The notes to the financials are an integral part of this report.
B-50
<PAGE>
PB SERIES TRUST
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
Capital Income Growth &
Preservation Oriented Income
ASSETS Portfolio Portfolio Portfolio
------------------ ------------- -------------
<S> <C> <C> <C>
Investments in securities, at value (a)............................ $26,773 $8,256 $180,827
Repurchase agreements, at value (a)................................ -- -- --
Cash, including foreign currency, at value......................... 3,050 3,044 3,218
Receivable for forward currency contracts (Note 6)................. -- -- --
Interest receivable................................................ -- -- --
Dividends receivable............................................... -- -- --
Prepaid insurance.................................................. 1,213 1,213 1,213
Receivable from Investment Adviser (Note 3)........................ 303 286 301
Foreign income tax reclaim receivable.............................. -- -- --
-------------- --------------- --------------
TOTAL ASSETS..................................................... 31,339 12,799 185,559
LIABILITIES
Payable to Investment Adviser...................................... -- -- --
Accounts payable and accrued expenses.............................. 4,565 4,543 4,729
-------------- --------------- --------------
TOTAL LIABILITIES................................................ 4,565 4,543 4,729
-------------- --------------- --------------
NET ASSETS....................................................... $26,774 $8,256 $180,830
============== =============== ==============
NET ASSETS CONSIST OF:
Paid-in capital (Note 5)........................................... $26,963 $8,331 $179,972
Undistributed (distribution in excess of)
net investment income (Note 2)................................... 2 -- 19
Accumulated net realized gain (loss) on investments and
foreign currency transactions.................................... -- -- (73)
Net unrealized appreciation (depreciation) of:
Investments...................................................... (191) (75) 912
Translations of assets and liabilities in foreign currencies..... -- -- --
-------------- --------------- ---------------
NET ASSETS....................................................... $26,774 $8,256 $180,830
============== =============== ===============
NET ASSET VALUE PER SHARE
Offering and redemption price per share
(based on shares of beneficial interest outstanding)............. $ 10.23 $10.63 $ 10.72
Total shares outstanding at end of period (Note 5)................. 2,618 777 16,869
Capital shares authorized.......................................... Indefinite Indefinite Indefinite
(a) Investments in securities, including repurchase agreements,
at cost...................................................... $26,964 $8,331 $179,915
</TABLE>
B-51
<PAGE>
<TABLE>
<CAPTION>
Capital Maximum High Fixed Money
Growth Appreciation Quality Income International Market Fund
Portfolio Portfolio Stock Fund Fund Active Fund
---------------- ---------------- --------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$816,349 $244,738 $12,392,75 $5,345,605 $ 9,671,365 $ 822,304
-- -- -- 164,680 -- 1,506,000
3,041 3,044 128,105 24,190 131,014 40,681
-- -- -- -- 3,080 --
-- -- 74 88,129 106 4,514
-- -- 16,677 -- 5,283 --
1,213 1,213 1,213 1,213 1,213 1,213
311 337 5,885 9,237 14,311 10,487
-- -- -- -- 6,227 --
---------------- --------------- ---------------- ----------------- --------------- ----------------
820,914 249,332 12,544,659 5,633,054 9,832,599 2,385,199
-- -- 6,524 2,981 7,317 711
4,565 4,594 23,071 23,386 21,017 23,147
---------------- --------------- ----------------- ----------------- --------------- ----------------
4,565 4,594 29,595 26,367 28,334 23,858
================ =============== ================= ================= =============== ================
$816,349 $244,738 $12,515,064 $5,606,687 $ 9,804,265 $2,361,341
================ =============== ================= ================= =============== ================
$812,120 $239,094 $10,757,591 $5,478,662 $10,203,681 $2,361,341
-- 32 15 -- (12,039) --
(33) (47) 87,479 -- (673,728) --
4,262 5,659 1,669,979 128,025 284,467 --
-- -- -- -- 1,884 --
================ =============== ================= ================ ================= ================
$816,349 $244,738 $12,515,064 $5,606,687 $ 9,804,265 $2,361,341
================ =============== ================= ================ ================= ================
$11.04 $11.29 $11.74 $0.26 $9.60 $1.00
73,920 21,679 1,065,622 546,467 1,021,010 2,361,341
Indefinite Indefinite Indefinite Indefinite Indefinite Indefinite
$812,087 $239,079 $10,722,726 $5,382,260 $9,386,898 $2,328,304
</TABLE>
B-52
<PAGE>
PB SERIES TRUST
STATEMENTS OF OPERATIONS
For the period May 9, 1997* through December 31, 199
<TABLE>
<CAPTION>
Capital Income Growth &
Preservation Oriented Income
Portfolio Portfolio Portfolio
----------------- ------------- -------------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest income................................................... $180 $ 5 $ 193
Dividend income................................................... 425 147 2,799
Less foreign taxes withheld..................................... -- -- --
--------------- -------------- --------------
TOTAL INVESTMENT INCOME........................................... 605 152 2,992
EXPENSES
Investment adviser fee (Note 3)................................... -- -- --
Administrative fee................................................ 1,358 1,331 1,333
Accounting fee.................................................... 4,294 4,294 4,344
Audit fee......................................................... 1,559 1,543 1,621
Custodian fees and expenses....................................... 68 67 164
Trustee's fees (Note 3)........................................... 1,176 1,175 1,179
Printing expense.................................................. 428 428 430
Legal fee......................................................... 150 150 169
Insurance expense................................................. 2,149 2,149 2,149
Miscellaneous expense............................................. 28 26 28
--------------- -------------- --------------
Total operating expenses before reimbursement................... 11,210 11,163 11,417
Expenses reimbursed by the Investment Adviser (Note 3)............ (11,210) (11,163) (11,417)
--------------- -------------- --------------
NET EXPENSES.................................................... 0 0 0
--------------- -------------- --------------
NET INVESTMENT INCOME .......................................... 605 152 2,992
NET REALIZED AND UNREALIZED GAIN (LOSS)
FROM INVESTMENTS AND FOREIGN CURRENCY
Net realized gain (loss) from:
Investments...................................................... 33 -- 895
Distribution from underlying funds............................... 40 40 1,073
Foreign currency transactions.................................... -- -- --
-------------- --------------- --------------
73 40 1,968
Change in unrealized appreciation (depreciation) during the period on:
Investments..................................................... (191) (75) 912
Translations of assets and liabilities in foreign currencies..... -- -- --
-------------- --------------- --------------
(191) (75) 912
-------------- --------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)............................ (118) (35) 2,880
-------------- --------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................................................ $487 $117 $5,872
=============== ============== ==============
</TABLE>
* Commencement of investment operations.
B-53
<PAGE>
<TABLE>
<CAPTION>
Capital Maximum High Fixed Money
Growth Appreciation Quality Income International Market
Portfolio Portfolio Stock Fund Fund Active Fund Fund
---------------- ----------------- --------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
$ -- $ -- $ 43,591 $204,045 $ 28,297 $75,611
3,441 1,462 106,636 -- 127,691 --
-- -- -- -- (12,982) --
---------------- ---------------- --------------- ---------------- ---------------- ---------------
3,441 1,462 150,227 204,045 143,006 75,611
-- -- 46,919 21,981 58,636 5,321
1,331 1,331 8,653 8,655 8,655 8,659
4,294 4,294 8,482 8,929 8,108 8,519
1,559 1,559 7,733 7,772 7,772 7,772
110 151 2,138 1,577 22,382 1,118
1,175 1,175 1,172 1,176 1,175 1,175
428 428 535 535 535 535
150 150 121 84 121 62
2,149 2,149 2,149 2,149 2,149 2,149
26 26 180 202 203 203
---------------- ---------------- --------------- ---------------- ---------------- ---------------
11,222 11,263 78,082 53,060 109,736 35,513
(11,222) (11,263) (13,117) (22,624) (34,811) (26,866)
---------------- ---------------- --------------- ---------------- ---------------- ---------------
0 0 64,965 30,436 74,925 8,647
---------------- ---------------- --------------- ---------------- ---------------- ---------------
3,441 1,462 85,262 173,609 68,081 66,964
266 334 229,655 16,311 (673,728) --
2,193 2,300 -- -- -- --
-- -- -- -- (62,431) --
---------------- ---------------- --------------- ---------------- ---------------- ---------------
2,459 2,634 229,655 16,311 (736,159) --
4,262 5,659 1,669,979 128,025 284,467 --
-- -- -- -- 1,884 --
---------------- ---------------- --------------- ---------------- ---------------- ---------------
4,262 5,659 1,669,979 128,025 286,351 --
---------------- ---------------- --------------- ---------------- ---------------- ---------------
6,721 8,293 1,899,634 144,336 (449,808) --
---------------- ---------------- --------------- ---------------- ---------------- ---------------
$ 10,162 $ 9,755 $1,984,896 $317,945 $ (381,727) $66,964
================ ================ =============== ================ ================ ===============
</TABLE>
B-54
<PAGE>
PB SERIES TRUST
STATEMENTS OF CHANGES IN NET ASSETS
For the period May 9, 1997* through December 31, 1997
<TABLE>
<CAPTION>
Capital Income Growth &
Preservation Oriented Income
Portfolio Portfolio Portfolio
----------------- -------------- ---------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1997
Net investment income.......................................... $605 $152 $2,992
Net realized gain (loss)....................................... 73 40 1,968
Change in unrealized appreciation (depreciation)
during the period.......................................... (191) (75) 912
-------------- ---------------- ---------------
Net increase (decrease) in net assets resulting from operations 487 117 5,872
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.......................................... (603) (152) (2,989)
Net realized gain.............................................. (73) (40) (2,026)
FUND SHARE TRANSACTIONS (Note 5)............................... 26,963 8,331 179,973
--------------- --------------- ----------------
TOTAL INCREASE IN NET ASSETS................................... 26,774 8,256 180,830
NET ASSETS:
Beginning of period............................................ -- -- --
--------------- --------------- ----------------
End of period (a).............................................. $26,774 $8,256 $180,830
=============== =============== ================
(a) Including undistributed (distribution in excess of ) net
investment income.............................................. $2 $-- $ 19
================ =============== ================
</TABLE>
* Commencement of investment operations.
B-55
<PAGE>
<TABLE>
<CAPTION>
Capital Maximum High Fixed Money
Growth Appreciation Quality Income International Market
Portfolio Portfolio Stock Fund Fund Active Fund Fund
---------------- ----------------- --------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
$ 3,441 $ 1,462 $ 85,262 $ 173,609 $ 68,081 $ 66,964
2,459 2,634 229,655 16,311 (736,159) --
4,262 5,659 1,669,979 128,025 286,351 --
---------------- ---------------- --------------- ---------------- ---------------- ---------------
10,162 9,755 1,984,896 317,945 (381,727) 66,964
(3,441) (1,462) (85,247) (173,971) (17,693) (66,964)
(2,492) (2,649) (142,176) (16,311) -- --
812,120 239,094 10,757,591 5,479,024 10,203,685 2,356,341
---------------- ---------------- --------------- ---------------- ---------------- ---------------
816,349 244,738 12,515,064 5,606,687 9,804,265 2,356,341
-- -- -- -- -- 5,000
---------------- ---------------- --------------- ---------------- ---------------- ---------------
$816,349 $244,738 $12,515,064 $5,606,687 $ 9,804,265 $2,361,341
================ ================ =============== ================ ================ ===============
$ -- $ 32 $ 15 $ -- $ (12,039) $ --
================ ================ =============== ================ ================ ===============
</TABLE>
B-56
<PAGE>
PB SERIES TRUST
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the period May 9,
1997 (commencement of investment operations) through
December 31, 1997
<TABLE>
<CAPTION>
Capital Income Growth &
Preservation Oriented Income
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Net asset value, beginning of period...................................... $10.00 $10.00 $10.00
------ ------ ------
Income from investment operations:
Net investment income .................................................... 0.24 0.20 0.18
Net realized and unrealized gain on investments........................... 0.26 0.68 0.84
------ ------ ------
Total from investment operations.......................................... 0.50 0.88 1.02
------ ------ ------
Less distributions from:
Net investment income..................................................... (0.24) (0.20) (0.18)
Net realized gains........................................................ (0.03) (0.05) (0.12)
------ ------ ------
Total distributions....................................................... (0.27) (0.25) (0.30)
------ ------ ------
Net asset value, end of period............................................. $10.23 $10.63 $10.72
====== ====== ======
Total return (2)........................................................... 4.92% 8.84% 10.25%
====== ====== ======
Ratios and supplemental data:
Net assets, end of period................................................... $26,774 $8,256 $180,830
Ratio of operating expenses to average net assets (3)....................... -- -- --
Ratio of operating expenses to average net assets before voluntary
expense reimbursement (1)(3)............................................... 161.07% 1,978.36% 30.27%
Ratio of net investment income to average net assets (3).................... 8.69% 26.94% 7.93%
Ratio of net investment loss to average net assets before voluntary
expense reimbursement (1)(3)............................................... (152.38%) (1,951.42%) (22.34%)
Portfolio turnover rate (4)................................................. 32% 0% 24%
</TABLE>
(1) Net investment income is after reimbursement of certain fees and expenses
by PB Investment Advisors, Inc. (See Note 3 to the financial statements).
Had PB Investment Advisors, Inc. not undertaken to reimburse expenses
related to the Portfolios and Funds, the ratios of net investment income
and operating expenses to average net assets would have been as noted
above.
(2) Total return figures are not annualized. Total returns do not reflect
expenses that apply to the separate account or related variable insurance
contracts and inclusion of these charges would result in reducing the total
return figures for the period shown.
(3) Annualized for periods less than one year.
(4) Portfolio turnover rates are not annualized.
B-57
<PAGE>
PB SERIES TRUST
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the period May 9,
1997 (commencement of investment operations) through
December 31, 1997
<TABLE>
<CAPTION>
Capital Maximum High
Growth Appreciation Quality
Portfolio Portfolio Stock Fund
--------- --------- ----------
<S> <C> <C> <C>
Net asset value, beginning of period...................................... $10.00 $10.00 $10.00
------ ------ ------
Income from investment operations:
Net investment income .................................................... 0.13 0.07 0.08
Net realized and unrealized gain on investments........................... 1.13 1.41 1.88
------ ------ ------
Total from investment operations.......................................... 1.26 1.48 1.96
------ ------ ------
Less distributions from:
Net investment income..................................................... (0.13) (0.07) (0.08)
Net realized gains........................................................ (0.09) (0.12) (0.14)
------ ------ ------
Total distributions....................................................... (0.22) (0.19) (0.22)
------ ------ ------
Net asset value, end of period............................................ $11.04 $11.29 $ 11.74
====== ====== =======
Total return (2).......................................................... 12.67% 14.82% 19.72%
====== ====== =======
Ratios and supplemental data:
Net assets, end of period................................................. $816,349 $244,738 $12,515,064
Ratio of operating expenses to average net assets (3)..................... -- -- 0.90%
Ratio of operating expenses to average net assets before voluntary
expense reimbursement (1)(3)............................................ 20.00% 24.59% 1.08%
Ratio of net investment income to average net assets (3).................. 6.13% 3.19% 1.18%
Ratio of net investment income (loss) to average net assets before
voluntary expense reimbursement (1)(3).................................... (13.87%) (21.40%) 1.00%
Portfolio turnover rate (4)............................................... 2% 6% 14%
Average commission rate paid per equity share traded...................... N/A N/A $ 0.0598
</TABLE>
(1) Net investment income is after reimbursement of certain fees and expenses by
PB Investment Advisors, Inc. (See Note 3 to the financial statements). Had PB
Investment Advisors, Inc. not undertaken to reimburse expenses related to the
Portfolios and Funds, the ratios of net investment income and operating expenses
to average net assets would have been as noted above.
(2) Total return figures are not annualized. Total returns do not reflect
expenses that apply to the separate account or related variable insurance
contracts and inclusion of these charges would result in reducing the total
return figures for the period shown.
(3) Annualized for periods less than one year.
(4) Portfolio turnover rates are not annualized.
B-58
<PAGE>
PB SERIES TRUST
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the period May 9,
1997 (commencement of investment operations) through
December 31, 1997
<TABLE>
<CAPTION>
Fixed International Money
Income Active Market
Fund Fund Fund
<S> <C> <C> <C>
Net asset value, beginning of period.................................... $10.00 $10.00 $1.00
------ ------ -----
Income from investment operations:
Net investment income .................................................. 0.34 0.07 0.03
Net realized and unrealized gain (loss) on investments.................. 0.29 (0.45) --
------ ------ -----
Total from investment operations....................................... 0.63 (0.38) 0.03
------ ------ -----
Less distributions from:
Net investment income.................................................. (0.34) (0.02) (0.03)
Net realized gains..................................................... (0.03) -- --
------ ------ -----
Total distributions.................................................... (0.37) (0.02) (0.03)
===== ===== =====
Net asset value, end of period......................................... $10.26 $9.60 $1.00
===== ===== =====
Total return (2)....................................................... 6.30% (3.80%) 3.31%
===== ===== =====
Ratios and supplemental data:
Net assets, end of period.............................................. $5,606,687 $9,804,265 $2,361,341
Ratio of operating expenses to average net assets (3).................. 0.90% 1.15% 0.65%
Ratio of operating expenses to average net assets before voluntary
expense reimbursement (1)(3)......................................... 1.57% 1.68% 2.67%
Ratio of net investment income to average net assets (3)............... 5.13% 1.04% 5.03%
Ratio of net investment income to average net assets before voluntary
expense reimbursement (1)(3).......................................... 4.46% 0.51% 3.01%
Portfolio turnover rate (4)............................................ 157% 61% N/A
Average commission rate paid per equity share traded................... N/A $ 0.0125 N/A
</TABLE>
(1) Net investment income is after reimbursement of certain fees and expenses by
PB Investment Advisors, Inc. (See Note 3 to the financial statements). Had PB
Investment Advisors, Inc. not undertaken to reimburse expenses related to the
Portfolios and Funds, the ratios of net investment income and operating expenses
to average net assets would have been as noted above.
(2) Total return figures are not annualized. Total returns do not reflect
expenses that apply to the separate account or related variable insurance
contracts and inclusion of these charges would result in reducing the total
return figures for the period shown.
(3) Annualized for periods less than one year.
(4) Portfolio turnover rates are not annualized.
B-59
<PAGE>
PB SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
NOTE 1 - ORGANIZATION
PB Series Trust (the "Trust"), formerly Providian Series Trust, was organized as
a Massachusetts business trust on October 22, 1996 and is registered under the
Investment Company Act of 1940 and the Securities Act of 1933 as a diversified,
no-load, open-end management investment company. The Trust is a "series type" of
mutual fund which issues separate classes (or series) of stock, each of which
represents a separate diversified portfolio of investments. The Trust is
currently composed of nine series which consist of five investment portfolios
(Capital Preservation Portfolio, Income Oriented Portfolio, Growth and Income
Portfolio, Capital Growth Portfolio, and Maximum Appreciation
Portfolio-collectively, the "Portfolios") and four underlying funds (High
Quality Stock Fund, Fixed Income Fund, International Active Fund, and Money
Market Fund-collectively the "Funds").
The Portfolios seek to achieve their investment objectives by investing within
specific ranges among the Funds. Each Fund has differing investment objectives
and policies. Shares of the Portfolios are offered to separate accounts of
insurance companies to fund variable annuity contracts. The shares of the Funds
are purchased by the Portfolios. The Portfolios are offered to qualified plans
and separate accounts of insurance companies to fund variable annuity contracts.
On February 3, 1997, Providian Life and Health Separate Account V (the "Separate
Account") made an initial purchase of shares of beneficial interest in the
amount of 5,000 shares of the Money Market Fund. On May 9, 1997, the Separate
Account purchased an additional 1,995,000 shares of the Money Market Fund, and
purchased 1,000,000 shares of the High Quality Stock Fund and International
Active Fund, and 500,000 shares of the Fixed Income Fund. The Separate Account
is a separate account of Providian Life and Health Insurance Company, an
indirect, wholly owned subsidiary of Providian Corporation which, on June 10,
1997, became a direct, wholly owned subsidiary of AEGON International N.V., a
direct, wholly owned subsidiary of AEGON N.V., an international insurance
organization headquartered in The Hague, The Netherlands. Effective October 15,
1997, Providian Corporation's name was changed to Commonwealth General
Corporation ("CGC"). Effective December 31, 1997, ownership of CGC was
transferred to AEGON USA, Inc., an indirect, wholly owned subsidiary of AEGON
N.V..
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Trust in the preparation of its financial statements.
Valuation of Investments - Securities held by the Funds (other than the Money
Market Fund) that are traded on a national securities exchange are valued on the
basis of the last sale price as of the close of business on the day the
securities are being valued, or lacking any sales, at the last quoted bid price.
Bonds and other fixed income securities with maturities greater than 60 days at
the time of purchase are valued by a pricing service. Securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Trust. Short-term securities and debt securities with a remaining maturity
of 60 days or less are valued at amortized cost which approximates market value.
The Money Market Fund by the approval of the Board of Trustees utilizes the
amortized cost method for valuing securities, whereby all investments are valued
by reference to their acquisition cost as adjusted for amortization of premium
or accretion of discount.
Foreign Securities - Foreign securities traded on a recognized securities
exchange are valued at the last sale price in the principal market where they
are traded, or if closing prices are unavailable, at the last bid price
available prior to the time a Fund's net asset value is determined. Foreign
prices are furnished by quotation services expressed in the local currency's
value and translated into the U.S. dollars at the current rate of exchange.
B-60
<PAGE>
NOTE 2 (CONTINUED)
Repurchase Agreements - The Trust may enter into repurchase agreements with
institutions that the Trust's investment advisor, PB Investment Advisors, Inc.,
(formerly Providian Investment Advisors, Inc.,) has determined are creditworthy
pursuant to criteria adopted by the Board of Trustees. In connection with
transactions in repurchase agreements, the Trust's custodian takes possession of
the underlying collateral securities, the value of which is at least equal to
102 percent of the principal amount, including interest, of the repurchase
agreement. The value of the collateral is marked-to-market on a daily basis to
ensure the adequacy of the collateral. In the event of default of the obligation
to repurchase, the Trust has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and or retention of the collateral or proceeds may be subject to legal
proceedings.
The Trust may enter into a Joint Repurchase Agreement whereby its uninvested
cash balance is deposited into a joint cash account to be used to invest in one
or more repurchase agreements with government securities dealers recognized by
the Federal Reserve Board and/or member banks of the Federal Reserve System. The
value and face amount of the Joint Repurchase Agreement are allocated to the
Funds based on their pro-rata interest.
Investment Transactions - Investment security transactions are accounted for on
the date the securities are purchased or sold. Realized gains and losses from
security transactions are determined on an identified cost basis, which is also
used for tax purpose.
Investment Income - Dividend income is recorded on the ex-dividend date, except
that certain dividends from foreign securities are recorded as soon as the Fund
is informed of the ex-dividend date. Interest income is accrued as earned.
Premiums and discounts (including original issue discounts) on debt securities
are amortized. Investment income is recorded net of foreign taxes withheld if
recovery of such taxes is uncertain.
Foreign Currency Translations - The accounting records of the Trust are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S. dollars
based on current exchange rates supplied by a quotation service. The effects of
changes in foreign currency exchange rates on investments in securities are
included in net realized and unrealized gain or loss on investments in the
statement of operations.
Reported net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of forward currency
contracts, disposition of foreign currencies, currency gains and losses realized
between the trade and settlement dates on security transactions, and the
difference between the amount of net investment income accrued and the U.S.
dollar amount actually received. Net unrealized foreign currency exchange gains
and losses arise from changes in the value of receivables and payables due to
changes in exchange rates.
Forward Currency Contracts - A forward foreign currency contract ("Forward") is
an agreement between two parties to buy and sell a currency at a set price on a
future date. The market value of the Forward fluctuates with changes in currency
exchange rates. The Forward is marked-to-market daily and the change in the
market value is recorded by a Fund as an unrealized gain or loss. Realized gains
and losses are recognized when contracts are settled and are reflected in the
statement of operations. The Fund could be exposed to risk if a counter party is
unable to meet the terms of the contract (such risk is limited to the unrealized
gain, if any) or if the value of the currency changes unfavorably. The
International Active Fund may enter into these contracts for the purpose of
hedging against foreign exchange risk arising from the Fund's investment or
anticipated investment in securities denominated in foreign currencies. The Fund
also may enter into these contracts for the purpose of increasing exposure to a
foreign currency to hedge against adverse changes in the value of another
currency when exchange rates between the two currencies are positively
correlated.
B-61
<PAGE>
NOTE 2 (CONTINUED)
Expenses - Expenses directly attributable to a Portfolio or Fund are charged to
that Portfolio or Fund. Expenses not directly attributable to a Portfolio or
Fund are allocated among the affected Portfolios and Funds based on relative net
assets of each Portfolio and Fund. Costs related to the organization and
registration of the Trust have been funded by CGC and its subsidiaries. The
Trust will not reimburse CGC for these organizational costs.
Estimates - The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of these financial statements and the reported amounts
of increases and decreases in net assets from operations during the reporting
period. Actual results could differ from those estimates.
Distributions to Shareholders - Each of the Portfolios and Funds (except the
Money Market Fund) declares and distributes dividends from net investment income
and distributes its net realized capital gains, if any, at least annually. The
Money Market Fund declares dividends daily and distributes monthly. All
distributions are reinvested in the shares of the relevant Portfolio/Fund at net
asset value. Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
market discount, foreign currency transactions, losses deferred due to wash
sales and "post October 31 losses." Distributions are recorded on the
ex-dividend date.
Federal Income Taxes - Each Portfolio and Fund is treated as a separate entity
for federal tax purposes. Each Portfolio and Fund intends to qualify each year
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986. By so qualifying, each Portfolio and Fund will not be subject to
federal income taxes to the extent that they distribute all of their taxable
income, including realized capital gains, for the fiscal year. In addition, by
distributing substantially all of their net investment income, capital gains and
certain other amounts during the calendar year, the Portfolios and Funds will
not be subject to a federal excise tax. As of December 31, 1997, the
International Active Fund has a capital loss carryforward, for Federal income
tax purposes, of $232,745 expiring in December 31, 2005.
On the Statement of Assets and Liabilities, as a result of permanent book-tax
differences, reclassifications have been made between the paid in capital,
undistributed (distribution in excess of ) net investment income, and
accumulated net realized gain (loss) on investments and foreign currency
transactions accounts. These reclassifications have no impact on the net asset
value of the Portfolios and Funds.
NOTE 3 - AGREEMENTS AND FEES
PB Investment Advisors, Inc. (the "Advisor"), a wholly owned subsidiary of CGC,
which is a wholly owned indirect subsidiary of AEGON N.V., has been retained
under an Investment Advisory Agreement (the "Agreement") with the Trust, to
supervise the management and investment program of the Trust. The Advisor
manages the affairs of the Trust subject to the supervision of the Board of
Trustees. The Advisor does not receive an investment management fee for the
advisory and asset allocation services it provides to the Portfolios.
As full compensation for its services under the Agreement, each Fund will pay
the Advisor a monthly fee at the following annual rates based on the average
daily net assets of each Fund:
<TABLE>
<CAPTION>
<S> <C>
High Quality Stock Fund 0.65%
Fixed Income Fund 0.65%
International Active Fund 0.90%
Money Market Fund 0.40%
</TABLE>
NOTE 3 (CONTINUED)
B-62
<PAGE>
Under the Agreement, the Advisor has agreed to waive and absorb all operating
expenses of each Portfolio and to limit the operating expenses of each Fund so
that the ratio of expenses (excluding advisory fees) to net assets on an annual
basis does not exceed 0.25%. Expenses in excess of such amount will be assumed
by the Advisor until the earlier of the end of three years after commencement of
operations or the termination by the Trustees but not the Advisor of the
Agreement. For the period ended December 31, 1997, the Advisor agreed to
reimburse the Trust $153,693 for expenses in excess of the voluntary expense
limitations. As of December 31, 1997, $41,458 was owed to the Trust by the
Advisor.
The Advisor has entered into a Sub-Advisory Agreement with Atlanta Capital
Management Company, L.L.C. ("Atlanta Capital"), wherein Atlanta Capital will
serve as sub-advisor to the Portfolios. Subject to the supervision and direction
of the Board of Trustees, Atlanta Capital will determine how each Portfolio's
assets will be invested in the Funds. Atlanta Capital also serves as sub-advisor
of the High Quality Stock Fund and the Fixed Income Fund. As compensation for
its services, with respect to the High Quality Stock Fund and the Fixed Income
Fund, the Advisor pays Atlanta Capital a fee equal to 0.50% annually on assets
up to $25 million, 0.40% annually on assets above $25 million and up to $50
million, and 0.30% annually on assets above $50 million.
The Advisor has entered into a Sub-Advisory Agreement with Blairlogie Capital
Management ("Blairlogie"), wherein Blairlogie will serve as sub-advisor to the
International Active Fund. As compensation for its services, the Advisor pays
Blairlogie a fee equal to 0.65% annually on assets up to $50 million, and 0.50%
annually on assets above $50 million.
The Advisor has entered into a Sub-Advisory Agreement with Federated Investment
Counseling ("Federated"), wherein Federated will serve as sub-advisor to the
Money Market Fund. As compensation for its services, the Advisor pays Federated
a fee equal to 0.25% annually on assets up to $75 million, and 0.20% annually on
assets above $75 million.
Each Trustee of the Trust who is not an interested person of the Trust, Advisor
or Sub-Advisors receives $1,500 for each Trustees' meeting in which he
participates.
NOTE 4 - INVESTMENT TRANSACTIONS
Purchases and proceeds from sales and maturities of investments, excluding
short-term securities, for the period ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Non-U.S. U.S. Non-U.S. U.S.
Government Government Government Government
Purchases Purchases Sales Sales
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Capital Preservation Portfolio....... $ 15,327 $ -- $ 1,763 $ --
Income Oriented Portfolio............ 7,110 -- 4 --
Growth & Income Portfolio............ 174,364 -- 13,030 --
Capital Growth Portfolio............. 722,250 -- 3,127 --
Maximum Appreciation Portfolio....... 243,135 -- 4,389 --
High Quality Stock Fund.............. 11,346,269 -- 1,303,199 --
Fixed Income Fund.................... 99,500 9,395,764 -- 5,511,641
International Active Fund............ 14,444,121 -- 5,047,494 --
Money Market Fund.................... -- -- -- --
</TABLE>
Gross unrealized appreciation and depreciation at December 31, 1997, based on
the identified cost for income tax purposes, is as follows:
B-63
<PAGE>
NOTE 4 (CONTINUED)
<TABLE>
<CAPTION>
Net
Gross Gross Unrealized
Identified Unrealized Unrealized Appreciation
Cost Appreciation (Depreciation) (Depreciation)
----------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
Capital Preservation Portfolio....... $ 26,964 $ -- $ (191) $ (191)
Income Oriented Portfolio............ 8,331 45 (120) (75)
Growth & Income Portfolio............ 179,988 2,447 (1,608) 839
Capital Growth Portfolio............. 812,120 6,333 (2,104) 4,229
Maximum Appreciation Portfolio....... 239,126 6,373 (761) 5,612
High Quality Stock Fund.............. 10,722,726 1,907,032 (237,053) 1,669,979
Fixed Income Fund.................... 5,382,260 128,025 -- 128,025
International Active Fund............ 9,386,898 779,773 (495,306) 284,467
Money Market Fund.................... 2,328,304 -- -- --
</TABLE>
NOTE 5 - SHAREHOLDER TRANSACTIONS:
Transactions in shares and dollars were as follows for the period May 9, 1997*
through December 31, 1997:
<TABLE>
<CAPTION>
Capital Preservation Portfolio Income Oriented Portfolio
Shares Dollars Shares Dollars
------ ------- ------ -------
<S> <C> <C> <C> <C>
Shares sold................................. 2,897 $29,813 759 $8,139
Shares issued to shareholders in
reinvestment of dividends............... 66 676 18 192
Shares redeemed............................. (345) (3,526) -- --
---- ------- --- ------
Net increase................................ 2,618 $26,963 777 $8,331
===== ======= === ======
</TABLE>
<TABLE>
<CAPTION>
Growth & Income Portfolio Capital Growth Portfolio
Shares Dollars Shares Dollars
------ ------- ------ -------
<S> <C> <C> <C> <C>
Shares sold................................. 17,738 $189,436 73,664 $809,314
Shares issued to shareholders in
reinvestment of dividends............... 468 5,015 538 5,933
Shares redeemed............................. (1,337) (14,478) (282) (3,127)
------ -------- ---- --------
Net increase................................ 16,869 $179,973 73,920 $812,120
====== ======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
Maximum Appreciation Portfolio High Quality Stock Fund
Shares Dollars Shares Dollars
------ ------- ------ -------
<S> <C> <C> <C> <C>
Shares sold................................. 21,714 $239,372 1,065,710 $10,755,139
Shares issued to shareholders in
reinvestment of dividends............... 365 4,111 19,722 227,423
Shares redeemed............................. (400) (4,389) (19,810) (224,971)
---- ------ ------- -----------
Net increase................................ 21,679 $239,094 1,065,622 $10,757,591
====== ======== ========= ===========
</TABLE>
B-64
<PAGE>
<TABLE>
<CAPTION>
NOTE 5 (CONTINUED)
Fixed Income Fund International Active Fund
Shares Dollars Shares Dollars
------ ------- ------ -------
<S> <C> <C> <C> <C>
Shares sold................................. 528,711 $5,297,080 1,019,442 $10,188,787
Shares issued to shareholders in
reinvestment of dividends............... 18,554 190,282 1,860 17,693
Shares redeemed............................. (798) (8,338) (292) (2,795)
---- ------ ---- ------
Net increase................................ 546,467 $5,479,024 1,021,010 $10,203,685
======= ========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Money Market Fund
Shares Dollars
------ -------
<S> <C> <C>
Shares sold................................. 2,378,461 $2,378,461
Shares issued to shareholders in
reinvestment of dividends............... 66,964 66,964
Shares redeemed............................. (89,084) (89,084)
--------- ----------
Net increase................................ 2,356,341 $2,356,341
========= ==========
</TABLE>
* Commencement of investment operations.
NOTE 6 - FORWARD FOREIGN CURRENCY CONTRACTS
At December 31, 1997, the outstanding forward exchange currency contracts, which
contractually obligate the Trust to deliver currencies at a specified date, were
as follows:
INTERNATIONAL ACTIVE FUND
<TABLE>
<CAPTION>
U.S. Dollar
Cost on U.S. Dollar
Currency Currency Sold Settlement Origination Current Unrealized
Purchased Date Date Value Appreciation
----------------- ---------------- ----------------- ---------------- ----------------- ---------------------
<S> <S> <S> <C> <C> <C> <C>
GBP USD 1/16/1998 $654,560 $657,640 $3,080
</TABLE>
GBP - Great Britain Pound
USD - United States Dollar
B-65
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1998
PB SERIES TRUST
CAPITAL PRESERVATION PORTFOLIO
INCOME ORIENTATED PORTFOLIO
GROWTH AND INCOME PORTFOLIO
CAPITAL GROWTH PORTFOLIO
MAXIMUM APPRECIATION PORTFOLIO
MONEY MARKET FUND
This Statement of Additional Information is not a prospectus. It contains
additional information about the PB Series Trust (the "Trust") and should be
read in conjunction with the Trust's Prospectus dated May 1, 1998. You can
obtain a copy by contacting the Trust's Administrative Office, P. O. Box 32700,
Louisville, Kentucky 40232.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Investment Policies 2
Description of Securities and Investment Techniques
4
Portfolio Turnover and Securities Transactions 23
Management 25
Net Asset Values of the Shares of the Portfolios and
the Money Market Fund 28
Investment Performance 29
Taxes 33
General Information 34
Independent Auditors 36
Financial Statements 36
</TABLE>
B-66
<PAGE>
PB Series Trust (the "Trust") is an investment company presently consisting of
nine separate series (the "Funds") each having different investment objectives
and policies. This SAI pertains to six series, five of which are professionally
managed investment portfolios (each, a "Portfolio") which seek to achieve their
investment objective by investing in a diverse mix of "Underlying Funds," which
consist of open-end management investment companies or series thereof for which
PB Investment Advisors, Inc. acts as investment adviser. The investment
objectives of the Portfolios and the Money Market Fund are as follows:
The CAPITAL PRESERVATION PORTFOLIO seeks high current income with low volatility
of principal.
The INCOME ORIENTED PORTFOLIO seeks income and, secondarily, long-term growth of
capital.
The GROWTH AND INCOME PORTFOLIO seeks growth of capital and income.
The CAPITAL GROWTH PORTFOLIO seeks long-term growth of capital and, secondarily,
current income.
The MAXIMUM APPRECIATION PORTFOLIO seeks capital appreciation.
The MONEY MARKET FUND seeks to provide current income consistent with stability
of principal and liquidity. The Fund invests in money market instruments
maturing in thirteen months or less from the time of investment.
INVESTMENT POLICIES
The Trust has adopted the following policies relating to the investment of
assets of the Portfolios and the Money Market Fund and their activities. These
are fundamental policies and may not be changed without the approval of the
holders of a "majority" of the outstanding shares of each Portfolios and the
Money Market Fund affected. Under the Investment Company Act of 1940 (the "1940
Act"), the vote of such a "majority" means the vote of the holders of the lesser
of (i) 67 percent of the shares represented at a meeting at which more than 50
percent of the outstanding shares are represented or (ii) more than 50 percent
of the outstanding shares. A change in policy affecting only one Portfolio or
the Money Market Fund may be effected with the approval of the holders of a
"majority" of the outstanding shares of such Portfolio or the Money Market Fund.
B-67
<PAGE>
POLICIES PERTAINING TO THE PORTFOLIOS
Each Portfolio may not (except as noted):
1. Purchase securities on margin or sell securities short, except that each
Portfolio may make short sales against the box and that effecting short sales
against the box will not be deemed to constitute a purchase of securities on
margin;
2. Purchase or sell commodities or commodity contracts (which, for the purpose
of this restriction, shall not include foreign currency futures or forward
currency contracts);
3. Borrow money except from banks as a temporary measure for extraordinary or
emergency purposes, but only if immediately after each borrowing and continuing
thereafter it will have an asset coverage of at least 300%;
4. Underwrite securities of other issuers, except to the extent that a Portfolio
may be deemed to be an underwriter within the meaning of the Securities Act of
1933 in connection with the purchase and sale of portfolio securities;
5. Invest in securities of a company for the purpose of exercising control or
management;
6. Participate on a joint or a joint and several basis in any trading account in
securities;
7. Purchase or sell real estate, except that it may purchase marketable
securities which are issued by companies which invest in real estate or
interests therein;
8. Make loans of its assets if, as a result, more than 50% of a Portfolio's
total assets would be lent to other persons, except (i) to purchase or hold
money market instruments permitted by a Portfolio's investment objective and
policies, or (ii) to enter into repurchase agreements or through lending of a
Portfolio's portfolio securities, or (iii) through purchases of debt securities
or other debt instruments.
9. Issue senior securities, except as permitted under the 1940 Act.
The foregoing investment restrictions do not apply to the Money Market Fund.
Notwithstanding the foregoing investment restrictions, the Underlying Funds in
which the Portfolios invest have adopted certain investment restrictions which
may be more or less restrictive than those listed above, thereby permitting a
Portfolio to engage in investment strategies indirectly that are prohibited
under the investment restrictions listed above. The investment restrictions of
an Underlying Fund are located in its Statement of Additional Information.
POLICIES PERTAINING TO THE MONEY MARKET FUND
- --------------------------------------------
The Money Market Fund may not (except as noted):
1. sell any securities short or purchase any securities on margin, but may
obtain such short-term credits as may be necessary for clearance of purchases
and sales of portfolio securities;
B-68
<PAGE>
2. issue senior securities except that the Fund may borrow money directly or
through reverse repurchase agreements as a temporary, extraordinary, or
emergency measure to facilitate management of the portfolio by enabling the Fund
to meet redemption requests when the liquidation of portfolio securities is
deemed to be inconvenient or disadvantageous, and then only in amounts not in
excess of one-third of the value of its total assets; provided that, while
borrowings and reverse repurchase agreements outstanding exceed 5% of the Fund's
total assets, any such borrowings will be repaid before additional investments
are made;
3. borrow money or engage in reverse repurchase agreements for investment
leverage purposes;
4. mortgage, pledge, or hypothecate any assets except to secure permitted
borrowings. In those cases, it may mortgage, pledge or hypothecate assets having
a market value not exceeding the lesser of the dollar amounts borrowed or 15% of
the value of its total assets at the time of borrowing;
5. purchase securities if, as a result of such purchase, 25% or more of its
total assets would be invested in securities of companies engaged principally in
any one industry other than finance companies and banks. However, the Fund may
at any time invest 25% or more of its total assets in cash or cash items and
securities issued and/or guaranteed by the U.S. government, its agencies or
instrumentalities;
6. purchase or sell commodities, commodity contracts, or commodity futures
contracts;
7. purchase or sell real estate, including limited partnership interests in real
estate, although it may invest in securities of companies whose business
involves the purchase or sale of real estate or in securities secured by real
estate or interests in real estate;
8. lend any of its assets, except portfolio securities up to one-third of its
total assets. This shall not prevent the Fund from purchasing or holding money
market instruments, corporate or U.S. government bonds, debentures, notes,
certificates of indebtedness or other debt securities of an issuer, entering
into repurchase agreements, or engaging in other transactions which are
permitted by the Fund's investment objective and policies or the Trust's
Declaration of Trust;
9. underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933 in connection with the sale of
securities in accordance with its investment objective, policies, and
limitations; or
10. with respect to 75% of its total assets, purchase the securities of any one
issuer (other than cash, cash items, or securities issued and/or guaranteed by
the U.S. government, its agencies or instrumentalities, and repurchase
agreements collateralized by such securities) if, as a result, more than 5% of
its total assets would be invested in the securities of that issuer.
11. purchase securities of registered open-end investment companies or
registered unit investment trusts in reliance on Section 12(d)(1)(F) or (G) of
the 1940 Act.
The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material changes
in this limitation becomes effective. Unless otherwise indicated, the Money
Market Fund may not:
B-69
<PAGE>
1. invest more than 10% of its net assets in illiquid securities, including,
among others, repurchase agreements providing for settlement more than seven
days after notice and certain restricted securities not determined by the
Trustees to be liquid.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value of total or net assets will not result in a violation
of such restriction.
The Money Market Fund has no present intention to borrow money in excess of 5%
of the value of its net assets during the coming fiscal year.
For purposes of its policies and limitations, the Money Market Fund considers
certificates of deposit and demand and time deposits issued by a U.S. branch of
a domestic bank or savings association having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment to be "cash items."
Because of their investment objectives and policies, the Portfolios will each
concentrate more than 25% of their assets in the mutual fund industry. In
accordance with the Portfolios' investment programs set forth in the Prospectus,
each of the Portfolios may invest more than 25% of its assets in certain
Underlying Funds. However, each of the Underlying Funds in which each Fund will
invest will not concentrate more than 25% of its total assets in any one
industry; except that the Money Market Fund may invest 25% or more of its total
assets in commercial paper issued by finance companies.
In order to limit the risks associated with entry into repurchase agreements,
the Trustees have adopted certain criteria (which are not fundamental policies)
to be followed by the Portfolios and the Money Market Fund. These criteria
provide for entering into repurchase agreement transactions (a) only with banks
or broker-dealers meeting certain guidelines for creditworthiness, (b) that are
fully collateralized as defined, (a) on an approved standard form of agreement
and (d) that meet limits on investments in the repurchase agreements of any one
bank, broker or dealer. In accordance with regulatory requirements, the Board of
Trustees has also adopted procedures for segregating Portfolio or Money Market
Fund assets whenever a Portfolio or Money Market Fund enters into reverse
repurchase agreements with institutions other than banks.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The Prospectus discusses the investment objectives of the Portfolios, the Money
Market Fund and each of the Underlying Funds in which the Portfolios may invest,
as well as the policies employed to achieve those objectives. This section
contains supplemental information concerning the types of securities and other
instruments in which the Underlying Funds may invest (and repurchase agreements
in which the Portfolios and/or the Underlying Funds may invest), the investment
policies and portfolio strategies the Underlying Funds may utilize and certain
risks attendant to such investments, policies and strategies. There can be no
assurance that the respective investment objectives of the Portfolios or the
Underlying Funds will be achieved.
B-70
<PAGE>
The Declaration of Trust for the Portfolios permits the Board of Trustees to
establish additional Portfolios from time to time. The investment objectives,
policies and restrictions applicable to additional Portfolios would be
established by the Board of Trustees at the time such portfolios were
established and may differ from those set forth in the Prospectus and this SAI.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
The Fixed Income Fund may invest in mortgage-backed securities, and in other
asset-backed securities (unrelated to mortgage loans) that are offered to
investors in the future. The value of some mortgage-backed or asset-backed
securities in which the Fund invests may be particularly sensitive to changes in
prevailing interest rates, and, like the other investments of the Funds, the
ability of the Fund to successfully utilize these instruments may depend in part
upon the ability of Atlanta Capital Management Company, L.L.C. ("Atlanta
Capital"), sub-adviser of the Portfolios, to forecast interest rates and other
economic factors correctly.
MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of mortgage-related
securities differ from other forms of debt 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 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 residential
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related securities (such as securities issued by the
Government National Mortgage Association ("GNMA")) are described as "modified
pass through" securities. 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 principal governmental guarantor of mortgage-related securities is the GNMA.
GNMA is a wholly-owned U.S. Government corporation within the Department of
Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. 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 Federal Housing Administration insured or Veterans
Administration-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and credit of
the U.S. Government) include the Federal National Mortgage Association ("FNMA")
and the Federal Home Loan Mortgage Corporation ("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 sellers/servicers which
include state and federally chartered savings and loan associations, mutual
savings banks, commercial banks, 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 U.S. Government.
B-71
<PAGE>
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 U.S. 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, guarantees or structures, 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 Fund'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. The Fund may
buy mortgage-related securities without insurance or guarantees if through an
examination of the structure or the loan experience and practices of the
originator/servicers and poolers, the Atlanta Capital determines that the
securities meet the Fund's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable. The Fund will not purchase
mortgage-related securities or any other assets which in the opinion of the
Atlanta Capital are illiquid if, as a result, more than 15% of the value of the
Fund's total assets will be illiquid.
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 on a CMO, 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 into 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 class receive principal only after the first call has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical 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
B-72
<PAGE>
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 Bonds 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.
OTHER MORTGAGE-RELATED SECURITIES. Mortgage-related securities are interests in
pools of mortgage loans made to residential home buyers, 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," above). The Fixed Income Fund may also
invest in debt securities which are secured with collateral consisting of
mortgage-related securities (see "Collateralized Mortgage Obligations," at page
B-6), and in other types of mortgage-related securities. The Fixed Income Fund
will not purchase mortgage-related securities or any other assets which in the
opinion of Atlanta Capital are illiquid, if, as a result, more than 15% of the
value of this Fund's assets will be illiquid.
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 CMO residuals or
stripped mortgage-backed securities. Other mortgage-related securities may be
equity or debt 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 derivative 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 ("I0") 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
B-73
<PAGE>
below with respect to stripped mortgage-backed securities, in certain
circumstances the Fund 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 Securities Act of 1933, as amended. CMO residuals,
whether or not registered under such Act, may be subject to certain restrictions
on transferability, and may be deemed "illiquid" and subject to the Fund's
limitations on investment in illiquid securities.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped Mortgage-Backed Securities
("SMBS") are derivative multiclass 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 "I0" class), while the
other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an I0 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 the Fund's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fund may fail to fully recoup 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 the Fund's limitations on investment in illiquid securities.
ASSET-BACKED SECURITIES
The Fixed Income Fund and the Money Market Fund may invest in asset-backed
securities which represent fractional interests in pools of leases, retail
installment loans and revolving credit receivables, both secured and unsecured.
These assets are generally held by a trust. Payments of principal and interest
or interest only are passed through 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 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 car
B-74
<PAGE>
loans or other 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 sales contracts 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 and policies, the
Funds may invest in other asset-backed securities that may be developed in the
future.
DERIVATIVE INSTRUMENTS
The International Active Fund may purchase and write call and put options on
securities, securities indexes and foreign currencies, and enter into futures
contracts and use options on futures contracts as further described below. The
International Active Fund may engage in the purchase and writing of call and put
options on foreign currencies. The International Active Fund also may enter into
swap agreements with respect to securities indexes. The Fund may use these
techniques to hedge against changes in interest rates, foreign currency exchange
rates or securities prices; to increase exposure to a foreign currency; to shift
exposure to foreign currency fluctuations from one country to another; or as
part of its overall investment strategies. The Fund will maintain segregated
accounts consisting of liquid assets, such as cash, and U.S. Government
securities (or, as permitted by applicable regulation, enter into certain
offsetting positions) to cover its obligations under options, futures, and swaps
to avoid leveraging of the Fund.
The Fund considers derivative instruments to consist of securities or other
instruments whose value is derived from or related to the value of some other
instrument or asset, and not to include those securities whose payment of
principal and/or interest depend upon cash flows from underlying assets, such as
mortgage or asset-backed securities. The value of some derivative instruments in
which the Fund invests may be particularly sensitive to changes in prevailing
interest rates, and, like the other investments of the Fund, its ability to
successfully utilize these instruments may depend in part upon the ability of
Blairlogie Capital Management ("Blairlogie") to forecast interest rates and
other economic factors correctly. If Blairlogie incorrectly forecasts such
factors and has taken positions in derivative instruments contrary to prevailing
market trends, the Fund could be exposed to the risk of loss.
The Fund might not employ any of the strategies described below, and no
assurance can be given that any strategy used will succeed. If Blairlogie
incorrectly forecasts interest rates, market values or other economic factors in
utilizing a derivatives strategy for the Fund, the Fund might have been in a
better position if it had not entered into the transaction at all. The use of
these strategies involves certain special risks, including a possible imperfect
correlation, or even no correlation, between price movements of derivative
instruments and price movements of related investments. While some strategies
involving derivative instruments can reduce the risk of loss, they can also
reduce the opportunity for gain or even result in losses by offsetting favorable
price movements in related investments, or due to the possible inability of the
Fund to purchase or sell a portfolio security at a time that otherwise would be
favorable for it to do so, or the possible need for the Fund to sell a portfolio
security at a disadvantageous time, because the Fund is required to maintain
asset coverage or offsetting positions in connection with transactions in
derivative instruments, and the possible inability of the Fund to close out or
to liquidate its derivatives positions.
B-75
<PAGE>
OPTIONS ON SECURITIES, SECURITIES INDEXES, AND CURRENCIES. The International
Active Fund may purchase put options on securities. One purpose of purchasing
put options is to protect holdings in an underlying or related security against
a substantial decline in market value. The Fund may also purchase call options
on securities. One purpose of purchasing call options is to protect against
substantial increases in prices of securities the Fund intends to purchase
pending its ability to invest in such securities in an orderly manner. The Fund
may sell put or call options it has previously purchased, which could result in
a net gain or loss depending on whether the amount realized on the sale is more
or less than the premium and other transaction costs paid on the put or call
option which is sold. The Fund may write a call or put option only if the option
is "covered" by the Fund holding a position in the underlying securities or by
other means which would permit immediate satisfaction of the Fund's obligation
as a writer of the option. Prior to exercise or expiration, an option may be
closed out by an offsetting purchase or sale of an option of the same series.
The purchase and writing of options involves certain risks. During the option
period, the covered call writer has, in return for the premium on the option,
given up the opportunity to profit from a price increase in the underlying
securities above the exercise price, but, as long as its obligation as a writer
continues, has retained the risk of loss should the price of the underlying
security decline. The writer of an option has no control over the time when it
may be required to fulfill its obligation as a writer of the option. Once an
option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver the underlying securities at the exercise price. If a put or call
option purchased by the Fund is not sold when it has remaining value, and if the
market price of the underlying security remains equal to or greater than the
exercise price (in the case of a put), or remains less than or equal to the
exercise price (in the case of a call), the Fund will lose its entire investment
in the option. Also, where a put or call option on a particular security is
purchased to hedge against price movements in a related security, the price of
the put or call option may move more or less than the price of the related
security. There can be no assurance that a liquid market will exist when the
Fund seeks to close out an option position. Furthermore, if trading restrictions
or suspension are imposed on the options markets, the Fund may be unable to
close out a position.
The International Active Fund may buy or sell put and call options on foreign
currencies as a hedge against changes in the value of the U.S. dollar (or
another currency) in relation to a foreign currency in which the Fund's
securities may be denominated. Currency options traded on U.S. or other
exchanges may be subject to position limits which may limit the ability of the
Fund to reduce foreign currency risk using such options. Over-the-counter
options differ from traded options in that they are two-party contracts with
price and other terms negotiated between buyer and seller and generally do not
have as much market liquidity as exchange-traded options. The Fund may be
required to treat as illiquid over-the-counter options purchased and securities
being used to cover certain written over-the-counter options.
SWAP AGREEMENTS. The International Active Fund may enter into equity index swap
agreements for purposes of gaining exposure to the stocks making up an index of
securities in a foreign market without actually purchasing those stocks. 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
B-76
<PAGE>
"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, or in a "basket" of
securities representing a particular index.
Most swap agreements entered into by the Fund would calculate the obligations of
the parties to the agreement on a "net basis." Consequently, the Fund's current
obligations (or rights) under a swap agreement will generally be equal 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").
The Fund's current obligations under a swap agreement will be accrued daily
(offset against amounts owed to the Fund), and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of liquid assets such as cash, U.S. Government
securities, or high grade debt obligations, to avoid any potential leveraging of
the Fund's portfolio. Obligations under swap agreements so covered will not be
construed to be "senior securities" for purposes of the Funds' investment
restriction concerning senior securities. The Fund 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 Fund's assets.
Whether the Fund's use of swap agreements will be successful in furthering its
investment objective will depend on Blairlogie'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 investments. Moreover, the Fund 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 Fund will enter into swap
agreements only with counterparties that meet certain standards for
creditworthiness (generally, such counterparties would have to be eligible
counterparties under the terms of the Fund's repurchase agreement guidelines).
Certain restrictions imposed on the Funds by the Internal Revenue Code of 1986
(the "Code") may limit the Fund's 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 the Fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The International Active
Fund may invest in exchange futures contracts and options thereon ("futures
options") that are traded on a U.S. or foreign exchange or board of trade, or
similar entity, or quoted on an automated quotation system. The Fund may engage
in such futures transactions as an adjunct to their securities activities.
There are several risks associated with the use of futures and futures options
for hedging purposes. There can be no guarantee that there will be a correlation
between price movements in the hedging vehicle and in the portfolio securities
being hedged. An incorrect correlation could result in a loss on both the hedged
securities in the Fund and the hedging vehicle so that the portfolio return
might have been greater had hedging not been attempted. There can be no
assurance that a liquid market will exist at a time when the Fund seeks to close
out a futures contract or a futures option position. Most futures exchanges or
boards of trade limit the amount of fluctuation permitted in futures contact
prices during a single day; once the daily limit has been reached on a
particular contract, no trades may be made that day at a price beyond that
limit. In addition, certain of these instruments are relatively new and without
a significant trading
B-77
<PAGE>
history. As a result, there is no assurance that an active secondary market will
develop or continue to exist. Lack of a liquid market for any reason may prevent
the Fund from liquidating an unfavorable position, and the Fund would remain
obligated to meet margin requirements until the position is closed.
The Fund will only enter into futures contracts or futures options which are
standardized and traded on a U.S. or foreign exchange or board of trade, or
similar entity, or quoted on an automated quotation system. The Fund will use
financial futures contracts and related options only for "bona fide hedging"
purposes, as such term is defined in applicable regulations of the Commodity
Futures Trading Commission ("CFTC"), or, with respect to positions in financial
futures and related options that do not qualify as "bona fide hedging"
positions, will enter such positions only to the extent that aggregate initial
margin deposits plus premium paid by it for open futures option positions, less
the amount by which any such positions are "in-the-money" would not exceed 5% of
the Fund's net assets.
BORROWING
As a temporary measure for extraordinary or emergency purposes, such as to
facilitate redemptions, the High Quality Stock Fund, the International Active
Fund and the Money Market Fund may borrow money from a bank, but only if
immediately after each such borrowing and continuing thereafter the Fund would
have asset coverage of 300 percent. Any such borrowings will exaggerate the
effect of any increase or decrease in the value of portfolio securities on a
Fund's net asset value; money borrowed will be subject to interest and other
costs (which may include commitment fees and/or the cost of maintaining minimum
average balances), which may or may not exceed the income received from the
securities purchased with borrowed funds. The use of borrowing tends to result
in a faster than average movement, up or down, in the net asset value of a
Fund's shares. A Fund 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.
FOREIGN SECURITIES
The High Quality Stock Fund and the International Active Fund may invest in
foreign securities. These include dollar-denominated securities traded in the
U.S. on the New York Stock Exchange (the "NYSE"). The High Quality Stock Fund
may invest in foreign securities in the form of American Depositary Receipts
("ADRs"), or in other similar securities convertible into securities of foreign
issuers if the foreign securities are traded on the NYSE.
The International Active Fund may invest in U.S. dollar- or foreign
currency-denominated corporate debt securities of foreign issuers; preferred
securities of foreign issuers; certain foreign bank obligations; and U.S.
dollar- or foreign currency-denominated obligations of foreign governments or
their subdivisions, agencies and instrumentalities, international agencies and
supranational entities. The International Active Fund may also invest in common
stocks issued by foreign companies or in securities represented by ADRs,
European Depositary Receipts ("EDRs"), or Global Depositary Receipts ("GDRs").
ADRs are dollar-denominated receipts issued generally by domestic banks and
represent the deposit with the bank of a security of a foreign issuer. EDRs are
foreign currency-denominated receipts similar to ADRs and are issued and traded
in Europe, and are publicly traded on exchanges or over-the-counter in the
United States. GDRs may be offered privately in the United States and also trade
in public or private
B-78
<PAGE>
markets in other countries. ADRs, EDRs and GDRs may be issued as sponsored or
unsponsored programs. In sponsored programs, an issuer has made arrangements to
have its securities trade in the form of ADRs, EDRs or GDRs. In unsponsored
programs, the issuer may not be directly involved in the creation of the
program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program.
Investing in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies. These
include: differences in accounting, auditing and financial reporting standards,
generally higher commission rates on foreign portfolio transactions, the
possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country), political instability which can
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. In addition, foreign securities and dividends and
interest payable on those securities may be subject to foreign taxes, including
taxes withheld from payments on those securities. Foreign securities often trade
with less frequency and volume than domestic securities and therefore may
exhibit greater price volatility. Changes in foreign exchange rates will affect
the value of those securities which are denominated or quoted in currencies
other than the U.S. dollar.
The International Active Fund may also purchase and sell foreign currency
options and foreign currency futures contracts and related options (see
"Derivative Instruments"), and enter into forward foreign currency exchange
contracts in order to protect against uncertainty in the level of future foreign
exchange rates in the purchase and sale of securities. The Fund may also use
foreign currency options and foreign currency forward contracts to increase
exposure to a foreign currency or to shift exposure to foreign currency
fluctuations from one country to another.
A forward foreign currency contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts may be bought or sold to protect the Fund
against a possible loss resulting from an adverse change in the relationship
between foreign currencies and the U.S. dollar or to increase exposure to a
particular foreign currency. Open positions in forward contracts used for
non-hedging purposes will be covered by the segregation with the Trust's
custodian of liquid assets, such as cash, U.S. Government securities and high
quality short-term investments and are marked to market daily. Although forward
contracts are intended to minimize the risk of loss due to a decline in the
value of the hedged currencies, at the same time, they tend to limit any
potential gain which might result should the value of such currencies increase.
LENDING OF PORTFOLIO SECURITIES
Each Underlying Fund may seek to increase its income by lending portfolio
securities. Under present regulatory policies, such loans may be made to
institutions, such as broker-dealers, and would be required to be secured
continuously by collateral in cash, cash equivalents or liquid assets, including
equity securities and debt securities of any grade, maintained on a current
basis at an amount at least equal to the market value of the securities loaned.
A Fund would have the right to call a loan and obtain the securities loaned at
any time on three days' notice. For the duration of a loan, a Fund would
continue to receive the equivalent of the interest or dividends
B-79
<PAGE>
paid by the issuer on the securities loaned and would also receive compensation
from the investment of the collateral. A Fund would not, however, have the right
to vote any securities having voting rights during the existence of the loan,
but a Fund would call the loan in anticipation of an important vote to be taken
among holders of the securities or of the giving or withholding of their consent
on a material matter affecting the investment. As with other extensions of
credit, there are risks of delay in recovery of, or even loss of rights in, the
collateral should the borrower of the securities fail financially. However, the
loans would be made only to firms deemed by the appropriate Sub-Adviser to be of
good standing, and when, in the judgment of the Sub-Adviser, the consideration
which can be earned currently from securities loans of this type justifies the
attendant risk. If the Sub-Adviser determines to make securities loans, it is
intended that the value of the securities loaned would not exceed 50% of the
value of the total assets of the lending Fund (33-1/3% in the case of the Money
Market Fund).
REPURCHASE AGREEMENTS
The Underlying Funds may enter into repurchase agreements with any member bank
of the Federal Reserve System or a member firm of the National Association of
Securities Dealers, Inc. The Funds may enter into repurchase agreements with
foreign banks and broker-dealers that meet credit quality and other requirements
of the Funds' Board of Trustees. A repurchase agreement, which provides a means
for a Fund to earn income on uninvested cash for periods as short as overnight,
is an arrangement under which the purchaser (i.e., a Fund) purchases a U.S.
Government or other high quality short-term debt obligation (the "Obligation")
and the seller agrees, at the time of sale, to repurchase the Obligation at a
specified time and price. The custody of the Obligation will be maintained by
the Fund's Custodian or broker that has entered into a tri-party arrangement
with the Fund and the Custodian. The repurchase price may be higher than the
purchase price, the difference being income to the Fund, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to the
Fund together with the repurchase price upon repurchase. In either case, the
income to a Fund is unrelated to the interest rate on the Obligation subject to
the repurchase agreement.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a loan from
a Fund to the seller of the Obligation. It is not clear whether a court would
consider the Obligation purchased by a Fund subject to a repurchase agreement as
being owned by the Fund or as being collateral for a loan by the Fund to the
seller. In the event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, a Fund may encounter delays and incur costs before
being able to sell the security. Delays may involve loss of interest or decline
in price of the Obligation. If the court characterizes the transaction as a loan
and a Fund has not perfected a security interest in the Obligation, the Fund may
be required to return the Obligation to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, the Fund would be at
the risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt instrument purchased for a Fund, the
Fund's Sub-Adviser seeks to minimize the risk of loss from repurchase agreements
by analyzing the creditworthiness of the obligor, in this case the seller of the
Obligation. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the security. However,
if the market value of the Obligation subject to the repurchase agreement
becomes less than the repurchase price (including accrued interest), the Fund
will direct the seller of the Obligation to deliver additional securities so
that the market value of all securities subject to the repurchase agreement
equals or exceeds the repurchase price.
B-80
<PAGE>
REVERSE REPURCHASE AGREEMENTS
The Fixed Income Fund, International Active Fund and Money Market Fund may enter
into reverse repurchase agreements. These agreements involve the sale of debt
securities (obligations) held by a Fund, with an agreement to repurchase the
obligations at an agreed upon price, date and interest payment. The proceeds
will be used to purchase other debt securities either maturing, or under an
agreement to resell, at a date simultaneous with or prior to the expiration of
the reverse repurchase agreement. Reverse repurchase agreements will be
utilized, when permitted by law, only when the expected interest income to be
earned from the investment of the proceeds from the transaction is greater than
the interest expense of the reverse repurchase transaction. When a Fund enters
into such an agreement, it will establish a segregated account with the Fund's
Custodian in which it will maintain cash or cash equivalents or other liquid
assets, including equity securities and debt securities of any grade equal in
value to the repurchase price (which price will already include interest
charges). If the buyer of the debt securities pursuant to the reverse repurchase
agreement becomes bankrupt, realization upon the underlying securities may be
delayed and there is a risk of loss due to any decline in their value. Reverse
repurchase agreements will not extend for more than 30 days nor will such
agreements involve more than 10% of the net assets of a Fund (or, in the case of
the Money Market Fund, no more than 33 1/3% of the total assets of the Fund).
WHEN-ISSUED SECURITIES
The Fixed Income Fund, the International Active Fund, and the Money Market Fund
may from time to time purchase securities on a "when-issued" basis. Debt
securities are often issued in this manner. The price of such securities, which
may be expressed in yield terms, is fixed at the time a commitment to purchase
is made, but delivery of and payment for the when-issued securities take place
at a later date. Normally, the settlement date occurs within one month of the
purchase. During the period between purchase and settlement, no payment is made
by a Fund and no interest accrues to a Fund. Although when-issued securities may
be sold prior to the settlement date, a Fund intends to purchase such securities
with the purpose of actually acquiring them unless a sale appears desirable for
investment reasons.
At the time a Fund makes the commitment to purchase a security on a when-issued
basis, it will record the transaction and reflect the amount due and the value
of the security in determining the Fund's net asset value. The market value of
the when-issued securities may be more or less than the purchase price payable
at the settlement date. The Trustees do not believe that a Fund's net asset
value or income will be exposed to additional risk by the purchase of securities
on a when-issued basis. A Fund will establish a segregated account in which it
will maintain cash, U.S. Government securities or other liquid assets at least
equal in value to commitments for when-issued securities. Such segregated
securities either will mature or, if necessary, be sold on or before the
settlement date. The Money Market Fund does not intend to engage in when-issued
transactions to an extent that would cause the segregation of more than 20% of
the total value of its assets.
VARIABLE OR FLOATING-RATE SECURITIES
The Fixed Income and Money Market Funds may invest in securities which offer a
variable or floating rate of interest. Variable-rate securities provide for
automatic establishment of a new
B-81
<PAGE>
interest rate at fixed intervals (e.g., daily, monthly, semi-annually, etc.).
Floating-rate securities generally provide for automatic adjustment of the
interest rate whenever some specified interest rate index changes. The interest
rate on variable or floating-rate securities is ordinarily determined by
reference to or is a percentage of a bank's prime rate, the Federal Fund's
target rate, the 90-day U.S. Treasury bill rate, the rate of return on
commercial paper or bank certificates of deposit, an index of short-term
interest rates, or some other objective measure.
Variable or floating-rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par. In many cases,
the demand feature can be exercised at any time on 7 days notice: in other
cases, the demand feature is exercisable at any time on 30 days notice or on
similar notice at intervals of not more than one year. Some securities which do
not have variable or floating interest rates may be accompanied by puts
producing similar results and price characteristics. When considering the
maturity of any instrument which may be sold or put to the issuer or a third
party, a Fund may consider that instrument's maturity to be shorter than its
stated maturity. Any such determination by the Money Market Fund will be made in
accordance with Rule 2a-7.
Variable-rate demand notes include master demand notes that are obligations that
permit a Fund to invest fluctuating amounts, which may change daily without
penalty, pursuant to direct arrangements between a Fund, 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 or the
Federal Fund's target 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.
Where these obligations are not secured by letters of credit or other credit
support arrangements, a Fund'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 and, if not so rated, a Fund
may invest in them only if the appropriate Sub-Adviser determines that at the
time of investment the obligations are of comparable quality to the other
obligations in which the Fund may invest. The Sub-Adviser, on behalf of a Fund,
will consider on an ongoing basis the creditworthiness of the issuers of the
floating and variable-rate demand obligations in the Fund's portfolio.
A Fund will not invest more than 10% of its net assets in variable and
floating-rate demand obligations that are not readily marketable (a variable or
floating-rate demand obligation that may be disposed of on not more than seven
days notice will be deemed readily marketable and will not be subject to this
limitation). (See "Illiquid Securities" and "Investment Objectives.") In
addition, each variable or floating-rate obligation must meet the credit quality
requirements applicable to all the Fund's investments at the time of purchase.
When determining whether such an obligation meets the Fund's credit quality
requirements, the Fund may look to the credit quality of the financial guarantor
providing a letter of credit or other credit support arrangement.
B-82
<PAGE>
In determining the Fund's weighted average portfolio maturity, the Fund will
consider a floating or variable-rate security to have a maturity equal to its
stated maturity (or redemption date if it has been called for redemption),
except that it may consider (i) variable-rate securities to have a maturity
equal to the period remaining until the next readjustment in the interest rate,
unless subject to a demand feature, (ii) variable rate securities subject to a
demand feature to have a remaining maturity equal to the longer of (a) the next
readjustment in the interest rate or (b) the period remaining until the
principal can be recovered through demand, and (iii) floating-rate securities
subject to a demand feature to have a maturity equal to the period remaining
until the principal can be recovered through demand. Variable and floating-rate
securities generally are subject to less principal fluctuation than securities
without these attributes since the securities usually trade at par following the
readjustment in the interest rate.
ILLIQUID SECURITIES
The Underlying Funds may invest in illiquid securities (i.e., securities that
are not readily marketable). However, an Underlying Fund will not acquire
illiquid securities if, as a result, they would comprise more than 15%, or 10%
with respect to the Money Market Fund, of the value of the Fund's net assets (or
such other amounts as may be permitted under the 1940 Act).
The Board of Trustees, or its delegate, has the ultimate authority to determine,
to the extent permissible under the federal securities laws, which securities
are illiquid for purposes of this limitation. Certain securities exempt from
registration or issued in transactions exempt from registration under the
Securities Act of 1933 (the "Securities Act"), such as securities that may be
resold to institutional investors under Rule 144A of the Securities Act and
Section 4(2) commercial paper, may be considered liquid under guidelines adopted
by the Board of Trustees.
The Board of Trustees has delegated to the respective Sub-Advisers the
day-to-day determination of the liquidity of a security, although it has
retained oversight and ultimate responsibility for such determinations. The
Board of Trustees has directed each Sub-Adviser to look to such factors as (i)
the frequency of trades or quotes for a security, or (ii) the number of dealers
willing to purchase or sell the security and number of potential buyers, (iii)
the willingness of dealers to undertake to make a market in the security, (iv)
the nature of the security and nature of the marketplace trades, such as the
time needed to dispose of the security, the method of soliciting offers, and the
mechanics of transfer, (v) the likelihood that the security's marketability will
be maintained throughout the anticipated holding period, and (vi) any other
relevant factors. A Sub-Adviser may determine 4(2) commercial paper to be liquid
if (i) the 4(2) commercial paper is not traded flat or in default as to
principal and interest, (ii) the 4(2) commercial paper is rated in one of the
two highest rating categories by at least two NRSROs, or if only one NRSRO rates
the security, by that NRSRO, or is determined by the Sub-Adviser to be of
equivalent quality and (iii) the Sub-Adviser considers the trading market for
the specific security taking into account all relevant factors. A foreign
security may be considered liquid by a Sub-Adviser (despite its restricted
nature under the Securities Act) if the security can be freely traded in a
foreign securities market and all the facts and circumstances support a finding
of liquidity.
RESTRICTED SECURITIES
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a SEC Staff position set forth in the adopting
release for Rule 144A under the Securities Act (the "Rule"). The Rule is a
nonexclusive safe-harbor for certain secondary market
B-83
<PAGE>
transactions involving securities subject to restrictions on resale under
federal securities laws. The Rule provides an exemption from registration for
resales of otherwise restricted securities to qualified institutional buyers.
The Trust believes that the Staff of the SEC has left the question of
determining the liquidity of all restricted securities to the Trustees, who will
consider established factors in making such a determination.
TEMPORARY DEFENSIVE POSITION
When a Sub-Adviser determines that market conditions warrant a temporary
defensive position, a Fund may invest without limitation in cash and short-term
fixed income securities, including U.S. government securities, commercial paper,
banker's acceptances, certificates of deposit, and time deposits.
OTHER INVESTMENT POLICIES OF THE FIXED INCOME FUND
Corporate debt securities may bear fixed, contingent, or variable rates of
interest and may involve equity features, such as conversion or exchange rights
or warrants for the acquisition of stock of the same or a different issuer,
participations based on revenues, sales or profits, or the purchase of common
stock in a unit transaction (where corporate debt securities and common stock
are offered as a unit).
Under normal market conditions, not more than 10% of the value of the Fixed
Income Fund's total assets will be invested in equity securities, including
common stocks, preferred stocks, warrants and rights.
When and if available, debt securities may be purchased at a discount from face
value. However, the Fund does not intend to hold such securities to maturity for
the purpose of achieving potential capital gains, unless yields to maturity on
these securities remain attractive. From time to time the Fund may purchase
securities not paying interest or dividends at the time acquired if, in the
opinion of Atlanta Capital such securities have the potential for future income
(or capital appreciation).
Since shares of the Fund represent an investment in securities with fluctuating
market prices, the value of shares of the Fund will vary as the aggregate value
of the Fund's portfolio securities increases or decreases. Lower rated fixed
income securities generally tend to reflect short-term corporate and market
developments to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates. Changes in the
value of securities subsequent to their acquisition will not affect cash income
to the Fund but will be reflected in the net asset value of the Fund's shares.
OTHER INVESTMENT POLICIES OF THE MONEY MARKET FUND
The Money Market Fund may follow non-fundamental operational policies that are
more restrictive than its fundamental investment limitations, as set forth in
its prospectus and this Statement of Additional Information, in order to comply
with applicable laws and regulations, including the provisions of and
regulations under the 1940 Act. In particular, the Fund will comply with the
various requirements of Rule 2a-7, which regulates money market mutual funds.
The Fund will determine the effective maturity of its investments, as well as
its ability to consider a security as having received the requisite short-term
ratings by NRSROs, according to
B-84
<PAGE>
Rule 2a-7. The Fund may change these operational policies to reflect changes in
the laws and regulations without the approval of its shareholders.
RULE 2A-7: MATURITY QUALITY AND DIVERSIFICATION RESTRICTIONS
The Money Market Fund is subject to certain maturity restrictions pursuant to
Rule 2a-7 under the 1940 Act for money market funds that use the amortized cost
method of valuation to maintain a stable net asset value of $1.00 per share.
Accordingly, the Fund will (i) maintain a dollar weighted average portfolio
maturity of 90 days or less, and (ii) will purchase securities with a remaining
maturity of no more than 13 months (397 calendar days). Further, the Fund will
limit its investments to U.S. dollar-denominated securities which present
minimal credit risks and meet certain credit quality and diversification
requirements. For purposes of calculating the maturity of portfolio instruments,
the Fund will follow the requirements of Rule 2a-7. Under Rule 2a-7, the
maturity of portfolio instruments is calculated as indicated below.
Generally, the maturity of a portfolio security shall be deemed to be the period
remaining (calculated from the trade date or such other date on which the Fund's
interest in the security is subject to market action) until the date on which,
in accordance with the terms of the security, the principal amount must
unconditionally be paid, or in the case of a security called for redemption, the
date on which the redemption payment must be made, except that:
(1) A Government Security which is a Variable Rate Security where the variable
rate of interest is readjusted no less frequently than every 762 days shall be
deemed to have a maturity equal to the period remaining until the next
readjustment of the interest rate. A Government Security which is a Floating
Rate Security shall be deemed to have a remaining maturity of one day.
(2) A Variable Rate Security, the principal amount of which, in accordance with
the terms of the security, must unconditionally be paid in 397 calendar days or
less shall be deemed to have a maturity equal to the earlier 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.
(3) A Variable Rate Security, the principal amount of which is scheduled to be
paid in more than 397 days, that is subject to a Demand Feature shall be deemed
to have a maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand.
(4) A Floating Rate Security, the principal amount of which, in accordance with
the terms of the security, must unconditionally be paid in 397 calendar days or
less shall be deemed to have a maturity of one day.
(5) A Floating Rate Security, the principal amount of which is scheduled to be
paid in more than 397 days, that is subject to a Demand Feature, shall be deemed
to have a maturity equal to the period remaining until the principal amount can
be recovered through demand.
(6) A repurchase agreement shall be deemed to have a maturity equal to the
period remaining until the date on which the repurchase of the underlying
securities is scheduled to occur, or, where the agreement is subject to demand,
the notice period applicable to a demand for the repurchase of the securities.
B-85
<PAGE>
(7) A portfolio lending agreement shall be treated as having a maturity equal to
the period remaining until the date on which the loaned securities are scheduled
to be returned, or, where the agreement is subject to demand, the notice period
applicable to a demand for the return of the loaned securities.
(8) An investment in a money market fund shall be treated as having a maturity
equal to the period of time within which the acquired money market fund is
required to make payment upon redemption, unless the acquired money market fund
has agreed in writing to provide redemption proceeds to the investing money
market fund within a shorter time period, in which case the maturity of such
investment shall be deemed to be the shorter period.
The Money Market Fund is subject to certain credit quality restrictions pursuant
to Rule 2a-7 under the 1940 Act. The Fund will invest its assets in instruments
that are determined to present minimal credit risks. In so doing, the Fund will
invest at least 95% of its assets in instruments that are at the time of
acquisition, (i) obligations issued or guaranteed by the U.S. government, its
agencies, or instrumentalities; (ii) rated by at least two nationally recognized
rating agencies (or by one agency if only one agency has issued a rating) (the
"required rating agencies") in the highest rating category for short-term debt
obligations; (iii) unrated but whose issuer is rated in the highest category by
the required rating agencies with respect to a class of short-term debt
obligations or any security within that class that is comparable in priority and
security with the instrument; (iv) unrated (other than the type described in
(iii)) but determined by the Board of Trustees to be of comparable quality to
the foregoing (provided the unrated security has not received a short-term
rating, and with respect to a long-term security with a remaining maturity
within the Fund's maturity restrictions, has not received a long-term rating
from any agency that is other than in its highest rating category); or (v) a
security issued by a registered investment company that is a money market fund.
The foregoing are referred to as "first-tier securities."
The balance of the securities in which the Fund may invest are instruments,
which do not qualify as first-tier securities, and at the time of acquisition,
are (i) rated by the required rating agencies in one of the two highest rating
categories for short-term debt obligations; (ii) unrated but whose issuer is
rated in one of the two highest categories by the required rating agencies with
respect to a class of short-term debt obligations or any security within that
class that is comparable in priority and security with the obligation; or (iii)
unrated (other than described in (ii)) but determined by the Board of Trustees
to be of comparable quality to the foregoing (provided the unrated security has
not received a short-term rating and with respect to a long-term security with a
remaining maturity with the Fund's maturity restrictions, has not received a
long-term rating from any agency that is other than in one of its highest two
rating categories). The foregoing are referred to as "second-tier securities."
In addition to the foregoing guidelines, the Fund is subject to certain
diversification restrictions pursuant to Rule 2a-7 under the 1940 Act, which
include (i) the Fund will not acquire a second-tier security of an issuer if,
after giving effect to the acquisition, the Fund would have invested more than
the greater of 1% of its total assets or one million dollars in second-tier
securities issued by that issuer, and (ii) the Fund will not invest more than 5%
of the Fund's assets in the securities (other than securities issued by the U.S.
government or any agency or instrumentality thereof) issued by a single issuer,
except for certain investments held for not more than 3 business days.
B-86
<PAGE>
As used herein, all capitalized but undefined terms shall have the meaning such
terms have in Rule 2a-7.
Set forth below are descriptions of certain instruments in which the Money
Market Fund may invest and certain investment risks, policies and restrictions
applicable to the Money Market Fund.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term corporate
debt instruments that have variable or floating interest rates and provide the
Fund with the right to tender the security for repurchase at its stated
principal amount plus accrued interest. Such securities typically bear interest
at a rate that is intended to cause the securities to trade at par. The interest
rate may float or be adjusted at regular intervals (ranging from daily to
annually), and is normally based on a published interest rate or interest rate
index. Most variable rate demand notes allow the Fund to demand the repurchase
of the security on not more than seven days prior notice. Other notes only
permit the Fund to tender the security at the time of each interest rate
adjustment or at other fixed intervals. See "Demand Features." The Fund treats
variable rate demand notes as maturing on the later of the date of the next
interest adjustment or the date on which the Fund may next tender the security
for repurchase.
SHORT-TERM CREDIT FACILITIES. Demand notes are short-term borrowing arrangements
between a corporation and an institutional lender (such as the Fund) payable
upon demand by either party. The notice period for demand typically ranges from
one to seven days, and the party may demand full or partial payment. The Fund
may also enter into, or acquire participations in, short-term revolving credit
facilities with corporate borrowers. Demand notes and other short-term credit
arrangements usually provide for floating or variable rates of interest.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. Any bankruptcy
receivership or default of the party providing the credit enhancement will
adversely affect the quality and marketability of the underlying security.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period (usually
seven days) following a demand by the Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities or by
another third party, and may not be transferred separately from the underlying
security. The Fund uses these arrangements to provide the Fund with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the demand
feature, or a default on the underlying security or other event that terminates
the demand feature before its exercise, will adversely affect the liquidity of
the underlying security. Demand features that are exercisable even after a
payment default on the underlying security may be treated as a form of credit
enhancement.
BANK INSTRUMENTS. The Fund only invests in bank instruments either issued by an
institution having capital, surplus and undivided profits over $100 million or
insured by the Bank Insurance Fund ("BIF") or the Savings Association Insurance
Fund ("SAIF"). The Fund will treat securities credit enhanced by a bank as bank
instruments. In addition to domestic bank obligations such as certificates of
deposit, demand and time deposits, savings shares, and bankers' acceptances, the
Money Market Fund may invest in:
B-87
<PAGE>
(1) Eurodollar Certificates of Deposit ("ECDs") issued by foreign branches of
U.S. or foreign banks;
(2) Eurodollar Time Deposits ("ETDs"), which are U.S. dollar-denominated
deposits in foreign branches of U.S. or foreign banks;
(3) Canadian Time Deposits, which are U.S. dollar-denominated deposits issued by
branches of major Canadian banks located in the U.S.; and
(4) Yankee Certificates of Deposit ("Yankee CDs"), which are U.S.
dollar-denominated certificates of deposit issued by U.S. branches of foreign
banks and held in the U.S.
RATINGS. An NRSRO's two highest rating categories are determined without regard
for sub-categories and gradations. For example, securities rated A-1+, A-1 or
A-2 by Standard & Poor's Ratings Group ("S&P"), Prime-1 or Prime-2 by Moody's
Investors Service, Inc. ("Moody's"), or F-1 (+ or -) or F-2 (+ or -) by Fitch
ICA, Inc. ("Fitch") are all considered rated in one of the two highest
short-term rating categories. The Money Market Fund will limit its investments
in securities rated in the second highest short-term rating category (e.g., A-2
by S&P, Prime-2 by Moody's or F-2 (+ or -) by Fitch) to not more than 5% of its
total assets, with not more than 1% invested in the securities of any one
issuer. The Fund will follow applicable regulations in determining whether a
security rated by more than one NRSRO can be treated as being in one of the two
highest short-term rating categories; currently, such securities must be rated
by two NRSROs in one of their two highest rating categories.
U.S. GOVERNMENT OBLIGATIONS. The types of U.S. government obligations in which
the Money Market Fund may invest generally include direct obligations of the
U.S. Treasury (such as U.S. Treasury bills, notes, and bonds) and obligations
issued and/or guaranteed by U.S. government agencies or instrumentalities. These
securities are backed by:
(1) the full faith and credit of the U.S. Treasury;
(2) the issuer's right to borrow from the U.S. Treasury;
(3) the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
(4) the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
(1) Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks, and Banks for Cooperatives;
(2) Federal Home Loan Banks;
(3) Federal Home Loan Mortgage Corporation;
B-88
<PAGE>
(4) Federal National Mortgage Association; and
(5) Student Loan Marketing Association.
CREDIT ENHANCEMENT. The Money Market Fund typically evaluates the credit quality
and ratings of credit-enhanced securities based upon the financial condition and
ratings of the party providing the credit enhancement (the "credit enhancer"),
rather than the issuer. However, credit-enhanced securities will not be treated
as having been issued by the credit enhancer for diversification purposes,
except in some instances when the securities will be treated as having been
issued by both the issuer and the credit enhancer. The Fund may have more than
25% of its total assets invested in securities credit enhanced or issued by
banks.
CONCENTRATION OF INVESTMENTS. The Fund may invest 25% or more of its total
assets in commercial paper issued by finance companies. The finance companies in
the Fund intends to invest can be divided into two categories, commercial
finance companies and consumer finance companies. Commercial finance companies
are principally engaged in lending to corporations or other businesses. Consumer
finance companies are primarily engaged in lending to individuals. Captive
finance companies or finance subsidiaries which exist to facilitate the
marketing and financial activities of their parent will, for purposes of
industry concentration, be classified by the Fund in the industry of its parent
corporation.
In addition, the Fund may invest more than 25% of the value of its total assets
in cash or cash items, securities issued or guaranteed by the U.S. government,
its agencies, or instrumentalities, or instruments secured by these money market
instruments, such as repurchase agreements.
CERTAIN INVESTMENT RISKS. ECDs, ETDs, Yankee CDs, Canadian commercial paper, and
Europaper are subject to somewhat different risks than domestic obligations of
domestic banks. Examples of these risks include international, economic and
political developments, foreign governmental restrictions that may adversely
affect the payment of principal or interest, foreign withholding or other taxes
on interest income, difficulties in obtaining or enforcing a judgment against
the issuing bank, and the possible impact of interruptions in the flow of
international currency transactions. Different risks may also exist for ECDs,
ETDs, and Yankee CDs because the banks issuing these instruments, or their
domestic or foreign branches, are not necessarily subject to the same regulatory
requirements that apply to domestic banks, such as reserve requirements, loan
limitations, examinations, accounting, auditing, and recordkeeping, and the
public availability of information. These factors will be carefully considered
by Federated in selecting investments for the Fund.
PORTFOLIO TURNOVER AND SECURITIES TRANSACTIONS
A portfolio turnover rate is, in general, the percentage computed by taking the
lesser of purchases or sales of portfolio securities (excluding certain
short-term securities) for a year and dividing it by the monthly average of the
market value of such securities during the year. The Portfolios do not have a
predetermined rate of portfolio turnover since such turnover will be incidental
to transactions taken with a view to achieving their respective objectives.
High turnover and short-term trading involve correspondingly greater commission
expenses and transaction costs. If a Portfolio derives more than 30 percent of
its gross income from the sale of securities held less than three months, the
Portfolio may fail to qualify under the tax laws as a
B-89
<PAGE>
regulated investment company in particular years and thereupon would lose
certain beneficial tax treatment of its income (see "Dividends, Distributions
and Taxes" in the Prospectus).
Each Underlying Fund Sub-Adviser is responsible for decisions to buy and sell
securities, broker-dealer selection, and negotiation of its brokerage commission
rates. The Sub-Adviser's primary consideration in effecting a securities
transaction will be execution at the most favorable price. In certain instances,
the Sub-Adviser may make purchases of underwritten issues at prices which
include underwriting fees, and, in selecting a broker-dealer to execute each
particular transaction, the Sub-Adviser will take the following into
consideration: the best net price available; the reliability, integrity and
financial condition of the broker-dealer; and the size of contribution of the
broker-dealer to the investment performance of the Funds on a continuing basis.
The Sub-Adviser shall not be deemed to have acted unlawfully or to have breached
any duty created by the Investment Advisory Agreements in question or otherwise
solely by reason of its having caused the Trust to pay a broker-dealer that
provides brokerage and research services to the Sub-Adviser an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker-dealer would have charged for effecting that
transaction, if the Sub-Adviser determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker-dealer, viewed in terms of either that
particular transaction or the Sub-Adviser's overall responsibilities with
respect to the Trust.
Each Sub-Adviser allocates the orders placed by it on behalf of a Fund to such
broker-dealers who also provide research or statistical material, or other
services to the Funds, the Sub-Adviser or its clients. Such allocation shall be
in such amounts and proportions as the Sub-Adviser shall determine and the
Sub-Adviser will report on said allocations regularly to the Trust indicating
the broker-dealers to whom such allocations have been made and the basis
therefor. Broker-dealers may be selected who provide brokerage and/or research
services to the Funds and/or other accounts over which the Sub-Adviser exercises
investment discretion. Such services may include advice concerning the value of
securities (including providing quotations as to securities); the advisability
of investing in, purchasing or selling securities; the availability of
securities or the purchasers or sellers of securities; furnishing analysis and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and performance of accounts; and effecting securities
transactions and performing functions incidental thereto, such as clearance and
settlement.
The receipt of research from broker-dealers may be useful to the Sub-Adviser in
rendering investment management services to the Trust and/or the Sub-Adviser's
other clients; conversely, such information provided by broker-dealers who have
executed transaction orders on behalf of other clients may be useful to the
Sub-Adviser in carrying out its obligations to the Trust. The receipt of such
research will not be substituted for the independent research of the
Sub-Adviser. It does enable the Sub-Adviser to reduce costs to less than those
which would have been required to develop comparable information through its own
staff. The use of broker-dealers who supply research may result in the payment
of higher commissions than those available from other broker-dealers who provide
only the execution of portfolio transactions. Orders on behalf of the Trust may
be bunched with orders on behalf of other clients of the Sub-Adviser.
The Board of Trustees periodically reviews each Sub-Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Trust.
B-90
<PAGE>
MANAGEMENT
PB Investment Advisors, Inc. (the "Adviser") in general supervises the Trust's
management and investment program, prepares reports for the Trust, monitors
compliance by the Trust in its investment activities and pays all compensation
of officers and Trustees of the Trust who are affiliated persons of the Adviser.
The Trust pays all other expenses incurred in the operation of the Trust,
including fees and expenses of unaffiliated Trustees of the Trust. Although the
Portfolios do not pay an investment management fee in connection with management
of the Portfolios, the Portfolios will indirectly bear their pro rata share of
the fees and expenses incurred by the Underlying Funds. The Adviser has agreed
to waive operating expenses for each Portfolio and to limit the operating
expenses (excluding advisory fees) of each Underlying Fund so that the ratio of
expenses of net assets on an annual basis incurred does not exceed 0.25%.
Expenses in excess of such amounts will be assumed by the Adviser until the
earlier of (a) the end of three years after commencement of operations or (b)
the termination by the Trustees or the Funds' or the Portfolios' shareholders,
but not the Adviser, of the Trust's Advisory Agreement with the Adviser.
The Adviser is wholly owned by Commonwealth General Corporation, a wholly owned
subsidiary of AEGON USA, Inc. AEGON USA, Inc. is an indirect wholly owned
subsidiary of AEGON n.v. Vereniging AEGON ( a Netherlands membership
association) has a 53.63% interest in AEGON n.v.
Subject to the supervision and direction of the Board of Trustees, Atlanta
Capital will determine how each Portfolio's assets will be invested in the
Underlying Funds and in money market instruments and U.S. government securities
pursuant to the investment objective and policies of each Portfolio set forth in
this Prospectus and make recommendations to the Board of Trustees concerning
changes in (a) the Underlying Funds in which the Portfolios may invest, (b) the
percentage range of assets that may be invested by each Portfolio in any one
Underlying Fund and (c) the percentage range of assets of any Portfolio that may
be invested in equity funds and fixed income funds (including money market
funds). The Trustees of the Trust will periodically monitor the allocations made
and the basis upon which such allocations were made or maintained.
Pursuant to the Sub-Advisory Agreements with the Adviser, subject to the
supervision of the Trustees of the Trust, and in conformity with the stated
policies of the Funds, Atlanta Capital manages the investment operations of the
High Quality Stock Fund and the Fixed Income Fund, Blairlogie manages the
investment operations of the International Active Fund, and Federated Investment
Counseling ("Federated") manages the investment operations of the Money Market
Fund. The Sub-Advisers also manage the composition of each respective Fund's
portfolio, including the purchase, retention, disposition and loan of
securities.
Each Investment Advisory and Sub-Advisory Agreement will remain in effect for
two years following its effective date, and will continue in effect thereafter
only if such continuance is specifically approved at least annually by the
Trustees or by vote of a majority of the outstanding voting securities of the
particular Fund (as defined in the 1940 Act and in a rule under the Act) and, in
either case, by a majority of the Trustees who are not parties to the Investment
Advisory Agreements or interested persons of any such party.
B-91
<PAGE>
The Adviser and Sub-Advisers (collectively the "Advisers") have each authorized
any of their officers and employees who have been elected or appointed as
Trustees or officers of the Trust to serve in the capacities in which they have
been elected or appointed. In connection with the services it renders, the
Advisers each bear the salaries and expenses of all of its respective personnel.
Other than as imposed by law, the Investment Advisory and Sub-Advisory
Agreements provide that the Advisers shall not be liable to the Funds for any
error of judgment by the Advisers or for any loss sustained by the Funds except
in the case of willful misfeasance, bad faith, reckless disregard of duty or
negligence with respect to the Adviser, Atlanta Capital and Blairlogie and gross
negligence with respect to Federated. Each Agreement also provides that it shall
terminate automatically if assigned and that it may be terminated without
penalty by either party upon no more than 60 days' nor less than 30 days'
written notice.
The Investment Advisory and Sub-Advisory Agreements provide that the Advisers
shall not be liable for any error in judgment or mistake of law or for any loss
suffered by the Trust in connection with any investment policy or the purchase,
sale or redemption of any securities on the recommendations of the Advisers. The
Agreements provide that the Advisers are not protected against any liability to
the Trust or its security holders for which the Advisers shall otherwise be
subject by reason of willful misfeasance, bad faith, reckless disregard of the
duties imposed upon them by the Agreements or negligence with respect to the
Adviser, Atlanta Capital and Blairlogie and gross negligence with respect to
Federated or the violation of any applicable law.
TRUSTEES AND OFFICERS
The names of the Trustees and officers of the Trust, their affiliations, if any,
with the Advisers and their principal occupations during the past five years are
set forth below. Each Trustee who is an "interested person" of the Trust, as
defined in the 1940 Act, is indicated by an asterisk.
<TABLE>
<CAPTION>
Name and Address Age Positions(s) Held Principal Occupation(s)
With Registrant During Past Five Years
<S> <C> <C> <C>
Thomas J. Hartlage* 400 W. 46 President and Trustee Director, Sales & Marketing of Diversified
Market St. Louisville, KY Financial Products Inc. since 1997;
40202 Director, Product Management of Commonwealth
General Corporation from 1995-1997; Director,
Institutional Marketing of Commonwealth General
Corporation from 1993 to 1995; Director, New
Initiatives of Commonwealth General Corporation
from 1992-1993; Vice President of PB Investment
Advisors, Inc.
Michael G. Herp 35 Vice President Director, Product & Market Development of
400 W. Market St. Louisville, Diversified Financial Products Inc.
KY 40202 since 1997; Director, Product & Market
Development of
</TABLE>
B-92
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Commonwealth General Corporation 1983-1997.
Michael G. Ayers 50 Chief Financial Director, Financial of Diversified Financial
400 W. Market St. Louisville, Officer Products Inc. since1997; Director, Financial
KY 40202 of Commonwealth General Corporation from
1977-1997.
Stephen L. Zeitz 40 Treasurer Director, Investment Operations of
400 W. Market St. Louisville, Diversified Financial Products Inc. since
KY 40202 1995; Director, Cash Management of
Commonwealth General Corporation, from 1994-1995;
Manager, Cash Management of Commonwealth
General Corporation from 1988-1994; Treasurer of
PB Investment Advisors, Inc.
R. Michael Slaven 47 Secretary General Counsel of Diversified Financial
400 W. Market St. Louisville, Products Inc. since 1997; Assistant General
KY 40202 Counsel of Commonwealth General Corporation
from 1992-1997; Secretary of Commonwealth
General Corporation 1992-1995 and 1997.
Kirk Buese* 37 Trustee Director, Private Placements for AEGON USA -
400 W. Market St. Louisville Investment Management
KY 40202 since 1997; Director, Private
Placements/Credit of Providian Capital
Management, Inc. from 1992-1997.
Jesse A. Holshouser, III 45 Trustee Chief Financial Officer of Professional
100 Avenue of Champions Palm Golfers' Association of America since 1988.
Beach Gardens, FL 33418
David L. Eager 55 Trustee Consultant and Managing Director of Eager &
100 Mallard Creek Louisville Associates since 1984.
KY 40205
William T. Mills, III 46 Trustee Partner of Highland Associates since 1987.
P.O. Box 55469 Birmingham, AL
35255
</TABLE>
Each Trustee of the Trust who is not an interested person of the Trust or
Advisor or Sub-Advisor receives $1500 for each meeting attended. The Trust also
reimburses each such Trustee for travel and other expenses incurred in attending
such meetings.
B-93
<PAGE>
The following table estimates the amount of compensation to be paid to the
Trustees during the fiscal year ending December 31, 1997.
<TABLE>
<CAPTION>
Name Compensation Paid
- ---- -----------------
<S> <C>
Thomas Hartlage $0
Kirk Buese $0
Jesse A. Holshouser III $3000
David Eager $3000
William T. Millis $3000
</TABLE>
As of March 31, 1998, Trustees and officers of the Trust, as a group, owned less
than 1% of the shares of each Portfolio.
PRINCIPAL HOLDERS OF SECURITIES
Shares of the Capital Preservation Portfolio, Growth and Income Portfolio,
Income Oriented Portfolio, Capital Growth Portfolio and Maximum Appreciation
Portfolio (the Portfolios are collectively referred to as the "LifeStyle Funds")
are offered exclusively to separate accounts of Providian Life and Health
Insurance Company and First Providian Life and Health Insurance Company.
Providian Life and Health Insurance Company may be deemed to be a control person
with respect to each of the LifeStyle Funds by virtue of its ownership of 100%
of the Portfolios' shares.
NET ASSET VALUES OF THE SHARES OF THE PORTFOLIOS AND THE MONEY MARKET FUND
As set forth in the Prospectus under the caption "Net Asset Value and Pricing,"
the net asset value of each Portfolio and the Money Market Fund will be
determined as of the close of trading on each day the NYSE is open for trading
(currently 4:00 P.M. Eastern Time). The New York Stock Exchange is open for
trading Monday through Friday except New Year's Day, Martin Luther King, Jr.'s
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. Additionally, if any of the aforementioned
holidays falls on a Saturday, the NYSE will not be open for trading on the
preceding Friday, and when any such holiday falls on a Sunday, the NYSE will not
be open for trading on the succeeding Monday, unless unusual business conditions
exist, such as the ending of a monthly or yearly accounting period.
Securities held by all Portfolios will be valued as follows: Underlying Fund
shares held by Portfolios are valued at the net asset value per share determined
as of the close of business (4:00 P.M. Eastern Time) on the day the securities
are being valued. Short-term debt securities with 61 days or more to maturity at
time of purchase are valued, through the 61st day prior to maturity, at market
value based on quotations obtained from market makers or other appropriate
sources; thereafter, the value on the 61st day is amortized on a straight-line
basis over the remaining number of days to maturity. Securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Trust. Debt securities with maturities of 60 days or less are valued at
amortized cost.
B-94
<PAGE>
The Money Market Fund values its securities on the amortized cost basis and
seeks to maintain its net asset value at a constant $1.00 per share. In the
event a difference of 1/2 of 1% or more were to occur between the net asset
value calculated by reference to market values of the Money Market Fund's $1.00
per share net asset value, or if there were any other deviation which the Board
of Trustees believed would result in a material dilution to shareholders or
purchasers, the Board of Trustees would consider taking any one or more of the
following actions or any other action considered appropriate: selling portfolio
securities to shorten average portfolio maturity or to realize capital gains or
losses, reducing or suspending shareholder income accruals, redeeming shares in
kind, or utilizing a value per unit based upon available indications of market
value. Available indications of market value may include, among other things,
quotations or market value estimates of securities and/or values based on yield
data relating to money market securities that are published by reputable
sources.
INVESTMENT PERFORMANCE
YIELD CALCULATIONS
- ------------------
The Trust may from time to time disclose the current annualized yield of the
Portfolios for 30-day periods. The annualized yield of a Portfolio refers to the
income generated by the Portfolio over a specified 30-day period. Because the
yield is annualized, the yield generated by the Portfolio during the 30-day
period is assumed to be generated each 30-day period. The yield is computed by
dividing the net investment income per share earned during the period by the
price per share on the last day of the period, according to the following
formula:
YIELD = a-b
----------------
2[(cd+1)(6) - 1]
Where: a = net investment income earned during the period by the Portfolio.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period.
d = the maximum offering price per share on the last day of the
period.
Net investment income will be determined in accordance with rules established by
the SEC. Accrued expenses will include all recurring fees that are charged to
all shareholder accounts. The yield calculations do not reflect the effect of
any charges that may be applicable to a particular Policy.
Because of the charges and deductions imposed by the separate accounts and, in
certain cases, by series of the Trust which invest in the Underlying Funds
described in this SAI, the yield realized by Contract Owners in the investment
divisions of the separate accounts will be lower than the yield for the
corresponding Fund of the Trust. The yield on amounts held in the Portfolios
normally will fluctuate over time. Therefore, the disclosed yield for any given
past period is not an indication or representation of future yields or rates of
return. Each of the Portfolios yield will
B-95
<PAGE>
be affected by the types and quality of Underlying Fund securities held by the
respective Underlying Fund, and its operating expenses.
CURRENT YIELD
- -------------
The Money Market Fund's current yield quotation is based on a seven-day period
and is computed as follows. The first calculation is net investment income per
share, which is accrued interest on portfolio securities, plus or minus
amortized premium, less accrued expenses. This number is then divided by the
price per share (expected to remain constant at $1.00) at the beginning of the
period ("based period return"). The result is then divided by 7 and multiplied
by 365 and the resulting yield figure is carried to the nearest one-hundredth of
one percent. Realized capital gains or losses and unrealized appreciation or
depreciation of investments are not included in the calculation.
EFFECTIVE YIELD
- ---------------
The Money Market Fund's effective yield is determined by taking the base period
return (computed as described above) and calculating the effect of assumed
compounding. The formula for the effective yield is: [(base period return +
1)(365/7)] - 1.
STANDARDIZED TOTAL RETURN CALCULATIONS
- --------------------------------------
The Trust may from time to time also disclose average annual total returns for
the Portfolios for various periods of time. Average annual total return
quotations are computed by finding the average annual compounded rates of return
over one, five and ten year periods that would equate the initial amount
invested to the ending redeemable value, according to the following formula:
P (1 + T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the one, five, or ten-year period at the end of the
one, five, or ten-year period (or fractional portion thereof).
All recurring fees that are charged to all shareholder accounts are recognized
in the ending redeemable value. The average annual total return calculations for
the Portfolio will not reflect the effect of charges that may be applicable to a
particular policy.
NON-STANDARDIZED PERFORMANCE. In addition, in order to more completely represent
a Portfolio's performance or more accurately compare such performance to other
measures of investment return, a Portfolio also may include in advertisements,
sales literature and shareholder reports other total return performance data
("Non-Standardized Return"). Non-Standardized Return may be quoted for the same
or different periods as those for which Standardized Return is quoted; it may
consist of an aggregate or average annual percentage rate
B-96
<PAGE>
of return, actual year-by-year rates or any combination thereof.
Non-Standardized Return will be accompanied by Standardized Return.
Non-Standardized Return may or may not take sales charges into account;
performance data calculated without taking the effect of sales charges into
account will be higher than data including the effect of such charges. All
non-standardized performance will be advertised only if the standard performance
data for the same period, as well as for the required periods, is also
presented.
GENERAL INFORMATION. From time to time, the Portfolios may advertise their
performance compared to similar funds using certain unmanaged indices, reporting
services and publications. Descriptions of some of the indices which may be used
are listed below.
The Standard & Poor's 500 Composite Stock Price Index is a well diversified list
of 500 companies representing the U.S. stock market.
The Standard & Poor's 400 Mid Cap Index tracks the stock price movement of 400
companies with mid-size capitalization of $300 million to $5 billion. Stocks are
chosen for market size, liquidity and industry group representation.
The Standard and Poor's Small Cap 600 index is designed to represent price
movements in the small cap U.S. equity market. It contains companies chosen by
the Standard & Poors Index Committee for their size, industry, characteristics,
and liquidity. None of the companies in the S&P 600 overlap with the S&P 500 or
the S&P 400 (MidCap Index). The S&P 600 is weighted by market capitalization.
REITs are not eligible for inclusion. The NASDAQ Composite OTC Price Index is a
market value-weighted and unmanaged index showing the changes in the aggregate
market value of approximately 3,500 stocks.
The Lehman Brothers Aggregate Bond Index is an index consisting of the Lehman
Brothers Government/Corporate Bond Index, the Lehman Brothers Mortgage-Backed
Securities Index, and the Lehman Brothers Assets-Backed Securities Index. The
Government/Corporate Bond Index is described below. The Mortgage-Backed
Securities Index consists of 15 and 30-year fixed rate securities backed by
mortgage pools of GNMA, FHLMC and FNMA (excluding buy downs, manufactured homes
and graduated equity mortgages). The Asset-Backed Securities Index consists of
credit card, auto and home equity loans (excluding subordinated tranches) with
an average life of one year. Each Index includes income and distributions but
does not reflect fees, brokerage commissions or other expenses of investing.
The Lehman Brothers Intermediate Aggregate Index consists of 1-10 year
government bonds, 1-10 year corporate bonds rated A or higher by an NRSRO, all
mortgages, and all asset backed securities within the Aggregate Index (i.e., the
Lehman Brothers Aggregate Index less the Long Government/Corporate Index). This
Index offers a broad based benchmark with a shorter duration than the Lehman
Brothers Aggregate Index.
The Lehman Brothers Government Bond Index is a measure of the market value of
all public obligations of the U.S. Treasury; all publicly issued debt of all
agencies of the U.S. Government and all quasi-federal corporations; and all
corporate debt guaranteed by the U.S. Government; mortgage backed securities,
bonds and foreign targeted issues are not included in the Lehman Government
Index.
B-97
<PAGE>
The Lehman Brothers Government/Corporate Bond Index is a measure of the market
value of approximately 5,300 bonds with a face value currently in excess of $1.3
trillion. To be included in the Lehman Government/Corporate Index, an issue must
have amounts outstanding in excess of $1 million, have at least one year to
maturity and be rated "Baa" or higher ("investment grade") by a nationally
recognized rating agency.
The Russell 3000 Index is composed of the 3,000 largest U.S. companies ranked by
market capitalization representing approximately 98% of the U.S. equity market.
The Russell 2000 Index represents the bottom two thirds of the largest 3000
publicly traded companies domiciled in the U.S. Russell uses total market
capitalization to sort its universe to determine the companies that are included
in the index. Only common stocks are included in the Index. REITs are eligible
for inclusion.
The Wilshire Mid Cap 750 Index is a subset of the Wilshire 5000 Index of common
stocks. The Mid Cap 750 Index consists of those Wilshire 5000 companies ranked
between 501 and 1,250 according to market capitalization.
The Wilshire 5000 Equity Index represents the return on the market value of all
common equity securities for which daily pricing is available.
In addition, from time to time in reports and promotions, a Portfolio's
performance may be compared to (i) other groups of mutual funds tracked by: (a)
Lipper Analytical Services, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets; (b)
Morningstar, Inc., another widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets; or (c)
other financial or business publications, such as Business Week, Money Magazine,
Forbes and Barron's which provide similar information; (2) the Consumer Price
Index (measure of inflation) may be used to assess the real rate of return from
an investment in a Portfolio; (3) other statistics such as GNP, and net import
and export figures derived from governmental publications, e.g., The Survey of
Current Business or other independent parties, e.g., the Investment Company
Institute, may be used to illustrate investment attributes of a Fund or the
general economic, business, investment, or financial environment in which a Fund
operates; (4) various financial economic and market statistics developed by
brokers, dealers and other persons may be used to illustrate aspects of a
Portfolio's performance; (5) the effect of tax-deferred compounding on a
Portfolio's investment returns, or on returns in general, may be illustrated by
graphs, charts, etc. where such graphs or charts would compare, at various
points in time, the return from an investment in a Portfolio (or returns in
general) on a tax-deferred basis (assuming reinvestment of capital gains and
dividends and assuming one or more tax rates) with the return on a taxable
basis; and (6) the sectors or industries in which the Portfolio invests may be
compared to relevant indices or surveys (e.g., S&P Industry Surveys) in order to
evaluate the Portfolio's historical performance or current or potential value
with respect to the particular industry or sector.
B-98
<PAGE>
TAXES
The following is a summary of certain Federal income tax considerations that may
affect the Portfolios and their shareholders. The summary is not intended as a
substitute for individual tax advice, and investors are urged to consult their
tax advisors as to the tax consequences of an investment in any Portfolio.
Tax Status of the Portfolios and the Money Market Fund
- ------------------------------------------------------
Each Portfolio and the Money Market Fund will be treated as a separate taxable
entity for Federal income tax purposes.
Each Portfolio and the Money Market Fund intend to qualify separately each year
as a "regulated investment company" under the Code. A qualified Portfolio and
the Money Market Fund will not be liable for Federal income taxes to the extent
that its taxable net investment income and net realized capital gains are
distributed to its shareholders, provided that each Portfolio and the Money
Market Fund distribute at least 90% of its net investment income.
Each Portfolio and the Money Market Fund intend to accrue dividend income for
Federal income tax purposes in accordance with the rules applicable to regulated
investment companies. In some cases, these rules may have the effect of
accelerating (in comparison to other recipients of the dividend) the time at
which the dividend is taken into account by a Portfolio and the Money Market
Fund as taxable income.
Distributions of an Underlying Fund's investment company taxable income are
taxable as ordinary income to a Portfolio which invests in the Underlying Fund.
Distributions of the excess of an Underlying Fund's net long-term capital gain
over its net short-term capital loss, which are properly designated as "capital
gain dividends," are taxable as long-term capital gain to a Portfolio which
invests in the Fund, regardless of how long the Portfolio held the Fund's
shares, and are not eligible for the corporate dividends-received deduction.
Upon the sale or other disposition by a Portfolio of shares of any Underlying
Fund, the Portfolio generally will realize a capital gain or loss which will be
long-term or short-term, generally depending upon the Portfolio's holding period
for the shares.
Tax Treatment of Shareholders
- -----------------------------
The Portfolios and the Money Market Fund have been informed that the life
insurance company offering Contracts intends to qualify the Separate Account as
a "segregated asset account" within the meaning of the Code. For a Separate
Account to qualify as a segregated asset account, the underlying investment
company in which such Separate Account holds shares must meet the
diversification requirements of Section 817(h) of the Code and the regulations
promulgated thereunder. To meet those requirements, an underlying investment
company must, after a one year start-up period, on the last day of each calendar
quarter, or during a 30 day grace period thereafter, invest no more than certain
specified percentages of its assets in the securities of any one, two, three or
four issuers. For these purposes, all obligations of the United States Treasury
and each instrumentality are treated as securities of separate issuers.
B-99
<PAGE>
Income on assets of a Separate Account qualified as a segregated asset account
whose underlying investments are adequately diversified will not be taxable to
Contract Owners. However, in the event a Separate Account is not so qualified,
all annuities allocating any amount of premiums to such Separate Account will
not qualify as annuities for federal income tax purposes and the holders of such
annuities would be taxed on any income on the annuities during the period of
disqualification.
The Portfolios have undertaken to meet the diversification requirements of
Section 817(h) of the Code. This undertaking may limit the ability of a
particular Portfolio to make certain otherwise permitted investments. For
purposes of asset diversification testing, the regulations under the Code set
forth a "look through" rule. Providian Life and Health Insurance Company and
First Providian Life and Health Insurance Company believe that under this rule,
the Separate Account must be tested for compliance with the percentage
limitations by "looking through" both the shares in Portfolios that are held by
the Separate Account and the shares in the Underlying Funds that are held by the
Portfolios to the investment assets held by the Underlying Funds.
Taxation of the Underlying Funds
- --------------------------------
Each Underlying Fund intends to qualify annually and elect to be treated as a
regulated investment company under Subchapter M of the Code. In any year in
which an Underlying Fund qualifies as a regulated investment company and timely
distributes all of its taxable income, the Underlying Fund generally will not
pay any federal income or excise tax.
If more than 50% in value of an Underlying Fund's assets at the close of any
taxable year consists of stocks or securities of foreign corporations, that
Underlying Fund may elect to treat certain foreign taxes paid by it as paid by
its shareholders. The shareholders would then be required to include their
proportionate share of the electing Fund's foreign income and related foreign
taxes in income even if the shareholder does not receive the amount representing
foreign taxes. Shareholders itemizing deductions could then deduct the foreign
taxes, or, whether or not deductions are itemized but subject to certain
limitations, claim a direct dollar for dollar tax credit against their U.S.
federal income tax liability attributable to foreign income. In many cases, a
foreign tax credit will be more advantageous than a deduction for foreign taxes.
Each of the Portfolios may invest in some Underlying Funds that expect to be
eligible to make the above-described election. While a Portfolio will be able to
deduct the foreign taxes that it will be treated as receiving if the election is
made, the Portfolio will not itself be able to elect to treat its foreign taxes
as paid by its shareholders. Accordingly, the shareholders of the Portfolio will
not have an option of claiming a foreign tax credit for foreign taxes paid by
the Underlying Funds.
GENERAL INFORMATION
The Trustees themselves have the power to alter the number and terms of office
of the Trustees, and they may at any time lengthen their own terms or make their
terms of unlimited duration (subject to certain removal procedures) and appoint
their own successors, provided that always at least a majority of the Trustees
have been elected by the shareholders of the Trust. The voting rights of
shareholders are not cumulative, so that holders of more than 50 percent of the
shares voting can, if they choose, elect all Trustees being selected, while the
holders of the remaining shares would be unable to elect any Trustees. The Trust
is not required to hold Annual Meetings of Shareholders for action by
shareholders' vote except as may be required by the 1940 Act or
B-100
<PAGE>
the Declaration of Trust. The Declaration of Trust provides that shareholders
can remove Trustees by a vote of two-thirds of the vote of the outstanding
shares. The Trustees will call a meeting of shareholders to vote on the removal
of a Trustee upon the written request of the holders of 10 percent of the
Trust's shares. In addition, 10 or more shareholders meeting certain conditions
and holding the lesser of $25,000 worth or one percent of the Trust's shares may
advise the Trustees in writing that they wish to communicate with other
shareholders for the purpose of requesting a meeting to remove a Trustee. The
Trustees will then either give those shareholders access to the shareholder list
or, if requested by those shareholders, mail at the shareholders' expense the
shareholders' communication to all other shareholders. See the Contract
Prospectus for information as to the voting of shares by Contract Owners.
Each issued and outstanding share of each Fund is entitled to participate
equally in dividends and distributions of the respective Fund and in the net
assets of such Fund upon liquidation or dissolution remaining after satisfaction
of outstanding liabilities. The shares of each Fund have no preference,
preemptive, conversion, exchange or similar rights, and are freely transferable.
Under Rule 18f-2 under the 1940 Act, as to any investment company which has two
or more series (such as the Funds) outstanding and as to any matter required to
be submitted to shareholder vote, such matter is not deemed to have been
effectively acted upon unless approved by the holders of a "majority" (as
defined in that Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
Trustees or the ratification of the selection of accountants. The Rule contains
special provisions for cases in which an advisory contract is approved by one or
more, but not all, series. A change in investment policy may go into effect as
to one or more series whose holders so approve the change even though the
required vote is not obtained as to the holders of other affected series.
Under Massachusetts law, shareholders of a trust such as the Trust may, under
certain circumstances, be held personally liable as partners for the obligation
of the Trust. The Declaration of Trust, however, contains an express disclaimer
of 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 its Trustees. The Declaration of Trust
provides for indemnification and reimbursement of expenses out of Trust property
for any shareholder held personally liable for its obligations. The Declaration
of Trust also provides that the Trust shall, upon request, assume the defense of
any claim made against any shareholder for any act or obligation of the Trust
and satisfy any judgment thereon. Thus, while Massachusetts law permits a
shareholder of a trust such as the Trust to be held personally liable as a
partner under certain circumstances, the risk of a Contract Owner incurring
financial loss on account of shareholder liability is highly unlikely and is
limited to the relatively remote circumstances in which the Trust would be
unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he 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.
The Trust has Codes of Ethics governing the personal securities transactions of
officers and employees, its Adviser and Sub-Advisers.
B-101
<PAGE>
FINANCIAL STATEMENTS
Following are the financial statements for PB Series Trust including
the Report of the Independent Auditors and the accompanying statements of assets
and liabilities, including the schedules of investments as of December 31, 1997,
and the related statements of operations, changes in net assets and financial
highlights for the period of May 9, 1997 (commencement of investment operations)
through December 31, 1997.
B-102
<PAGE>
REPORT OF THE INDEPENDENT AUDITORS
To the Contractholders and Board of Trustees
PB Series Trust
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments of PB Series Trust (formerly Providian Series
Trust) (comprised of the Capital Preservation Portfolio, Growth and Income
Portfolio, Income Oriented Portfolio, Capital Growth Portfolio, Maximum
Appreciation Portfolio, High Quality Stock Fund, Fixed Income Fund,
International Active Fund and Money Market Fund)(the Trust) as of December 31,
1997, the related statements of operations, changes in net assets and the
financial highlights for the periods indicated therein. These financial
statements and the financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
investments owned as of December 31, 1997, by correspondence with the custodian.
As to securities relating to uncompleted transactions, we performed other audit
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the portfolios and funds within the Trust at December 31, 1997, and the
results of their operations, changes in their net assets and the financial
highlights for the periods indicated therein in conformity with generally
accepted accounting principles.
Ernst & Young
Kansas City, Missouri
February 6, 1998
B-103
<PAGE>
PB SERIES TRUST
CAPITAL PRESERVATION PORTFOLIO
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
INVESTMENT COMPANIES - 100.0%
PB Series Trust
Money Market Fund ............. 13,322 $13,322
PB Series Trust
Fixed Income Fund ............. 1,311 13,451
-------
TOTAL INVESTMENT COMPANIES
- (Cost $26,964) 26,773
-------
TOTAL INVESTMENTS - (Cost $26,964) - 100.0% 26,773
OTHER ASSETS LESS LIABILITIES - 0.0% 1
-------
NET ASSETS - 100.0% $26,774
=======
</TABLE>
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Portfolio.
PB SERIES TRUST
INCOME ORIENTED PORTFOLIO
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
INVESTMENT COMPANIES - 100.0%
PB Series Trust
Money Market Fund ............. 1,225 $1,225
PB Series Trust
High Quality Stock Fund 201 2,363
PB Series Trust
Fixed Income Fund ............. 399 4,091
PB Series Trust
International Active Fund ..... 60 577
------
TOTAL INVESTMENT COMPANIES
- (Cost $8,331) 8,256
------
TOTAL INVESTMENTS - (Cost $8,331) - 100.0% 8,256
OTHER ASSETS LESS LIABILITIES - 0.0% 0
------
NET ASSETS - 100.0% $8,256
======
</TABLE>
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Portfolio.
The notes to the financials are an integral part of this report.
B-104
<PAGE>
PB SERIES TRUST
GROWTH & INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
INVESTMENT COMPANIES - 100.0%
PB Series Trust
Money Market Fund ............. 17,686 $ 17,686
PB Series Trust
High Quality Stock Fund ....... 6,346 74,535
PB Series Trust
Fixed Income Fund ............. 6,955 71,356
PB Series Trust
International Active Fund ..... 1,796 17,250
--------
TOTAL INVESTMENT COMPANIES
- (Cost $179,915) 180,827
--------
TOTAL INVESTMENTS - (Cost $179,915) - 100.0% 180,827
OTHER ASSETS LESS LIABILITIES - 0.0% 3
--------
NET ASSETS - 100.0% $180,830
========
</TABLE>
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Portfolio.
PB SERIES TRUST
CAPITAL GROWTH PORTFOLIO
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
INVESTMENT COMPANIES - 100.0%
PB Series Trust
High Quality Stock Fund ....... 42,018 $493,478
PB Series Trust
Fixed Income Fund ............. 19,780 202,940
PB Series Trust
International Active Fund ..... 12,489 119,931
--------
TOTAL INVESTMENT COMPANIES
- (Cost $812,087) 816,349
--------
TOTAL INVESTMENTS - (Cost $812,087) - 100.0% 816,349
OTHER ASSETS LESS LIABILITIES - 0.0% 0
--------
NET ASSETS - 100.0% $816,349
========
</TABLE>
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Portfolio.
The notes to the financials are an integral part of this report.
B-105
<PAGE>
PB SERIES TRUST
MAXIMUM APPRECIATION PORTFOLIO
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
INVESTMENT COMPANIES - 100.0%
PB Series Trust
High Quality Stock Fund ....... 16,894 $198,415
PB Series Trust
International Active Fund ..... 4,824 46,323
--------
TOTAL INVESTMENT COMPANIES
- (Cost $239,079) 244,738
--------
TOTAL INVESTMENTS - (Cost $239,079) - 100.0% 244,738
OTHER ASSETS LESS LIABILITIES - 0.0% 0
--------
NET ASSETS - 100.0% $244,738
========
</TABLE>
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Portfolio.
PB SERIES TRUST
HIGH QUALITY STOCK FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK -95.4%
Aerospace - 1.8%
Allied Signal Incorporated .......... 3,300 $ 128,494
Boeing Company ...................... 2,000 97,875
----------
226,369
----------
Apparel & Textiles - 1.2% ...............
Guilford Mills Incorporated ......... 2,200 60,225
Nautica Enterprises Incorporated (a) 1,800 41,850
Unifi Incorporated .................. 1,100 44,756
----------
146,831
----------
Auto Parts - 1.7%
Eaton Corporation ................... 1,300 116,025
Modine Manufacturing Company ........ 1,100 37,538
OEA Incorporated .................... 1,000 28,938
Superior Industries International
Incorporated ................... 1,300 34,856
----------
217,357
----------
Banks - 8.2%
Banc One Corporation ................ 2,200 119,487
BancorpSouth Incorporated ........... 1,400 66,150
CCB Financial Corporation ........... 600 64,500
Citizens Banking Corporation ........ 1,950 67,274
CoreStates Financial Corporation .... 1,800 144,113
Deposit Guaranty Corporation ........ 1,300 73,937
First Commercial Corporation ........ 1,050 61,556
First Virginia Banks Incorporated ... 900 46,518
Firstbank of Illinois Company ....... 1,650 60,740
Old Kent Financial Corporation ...... 1,260 49,927
Union Planters Corporation .......... 700 47,555
U.S. Trust Corporation .............. 900 56,363
Wachovia Corporation ................ 1,500 121,688
Wilmington Trust Corporation ........ 800 49,900
----------
1,029,708
----------
Broadcasting - 0.4%
TCA Cable TV Incorporated ........... 1,200 55,200
----------
</TABLE>
The notes to the financials are an integral part of this report.
B-106
<PAGE>
PB SERIES TRUST
HIGH QUALITY STOCK FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK (CONTINUED)
Building Construction - 0.7%
Harsco Corporation .................. 900 $ 38,813
Lawson Products Incorporated ........ 1,700 50,575
-------
89,388
-------
Business Services - 3.0%
ABM Industries Incorporated ......... 2,100 64,181
American Management Systems
Incorporated (a) .................... 1,500 29,250
Automatic Data Processing Incorpora . 2,100 128,888
Fair Issac & Company Incorporated ... 900 29,981
G & K Services Incorporated ......... 1,200 50,400
Olsten Corporation .................. 1,900 28,500
Sungard Data Systems Incorporated (a) 1,400 43,400
-------
374,600
-------
Chemicals - 3.2%
Avery Dennison Corporation .......... 2,800 125,300
Brady W. H. Company ................. 1,600 49,600
E.I. Du Pont de Nemours & Company ... 1,700 102,106
Fuller H.B. Company ................. 800 39,600
MacDermid Incorporated .............. 600 50,925
Nalco Chemical Company .............. 900 35,606
-------
403,137
-------
Communications Services - 1.4%
Interpublic Group of Companies
Incorporated ................... 2,400 119,550
True North Communications
Incorporated ................... 2,100 51,975
-------
171,525
-------
Computers & Business Equipment - 3.4%
American Business Products
Incorporated ................... 1,800 38,925
Cabletron Systems Incorporated (a) .. 3,300 49,500
Electronic Data Systems Corporation . 2,900 127,419
General Binding Corporation ......... 1,400 42,000
Hewlett-Packard Company ............. 1,900 118,750
Sci Systems Incorporated ............ 1,000 43,563
-------
420,157
-------
</TABLE>
PB SERIES TRUST
HIGH QUALITY STOCK FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK (CONTINUED)
Conglomerates - 1.7%
Mark IV Industries Incorporated ..... 1,500 $ 32,813
National Service Industries ......... 800 39,650
Teleflex Incorporated ............... 1,200 45,300
Textron Incorporated ................ 1,600 100,000
----------
217,763
----------
Construction & Mining Equipment - 0.2%
Foster Wheeler Corporation .......... 900 24,356
----------
Construction Materials - 0.3%
Vulcan Materials Company ............ 400 40,850
----------
Containers & Glass - 0.7%
Bemis Company Incorporated .......... 800 35,250
Clarcor Incorporated ................ 1,700 50,363
----------
85,613
----------
Drugs & Health Care -8.5%
Abbott Laboratories ................. 1,700 111,455
Bard C.R. Incorporated .............. 1,000 31,313
Biomet Incorporated ................. 1,900 48,688
Block Drug Company Incorporated ..... 927 40,093
Diagnostic Products Corporation ..... 1,300 36,074
Invacare Corporation ................ 1,600 34,800
Johnson & Johnson ................... 1,800 118,575
Life Technologies Incorporated ...... 1,500 49,875
Manor Care Incorporated ............. 1,100 38,500
Mylan Laboratories Incorporated ..... 1,700 35,593
Patterson Dental Company (a) ........ 1,200 54,300
Pfizer Incorporated ................. 2,000 149,125
Schering Plough Corporation ......... 2,200 136,674
Thermedics Incorporated (a) ......... 2,500 40,938
Warner-Lambert Company .............. 1,100 136,400
----------
1,062,403
----------
Electric Utilities - 2.6%
Central & South West Corporation .... 4,900 132,606
Duke Power Company .................. 2,600 143,975
UtiliCorp United Incorporated ....... 1,300 50,456
----------
327,037
----------
</TABLE>
The notes to the financials are an integral part of this report.
B-107
<PAGE>
PB SERIES TRUST
HIGH QUALITY STOCK FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK (CONTINUED)
Electrical Equipment - 2.7%
Baldor Electric Company ............. 1,866 $ 40,483
Dentsply International Incorporated . 1,200 36,600
Federal Signal Corporation .......... 1,300 28,113
General Electric Company ............ 1,700 124,738
Hubbell Incorporated ................ 800 39,450
Technitrol Incorporated ............. 1,400 42,000
Thomas & Betts Corporation .......... 600 28,350
----------
339,734
----------
Electronics - 5.0%
AMP Incorporated .................... 2,900 121,800
Avnet Incorporated .................. 500 33,000
Cohu Incorporated ................... 900 27,563
Dionex Corporation .................. 1,000 50,250
Harris Corporation .................. 800 36,700
Intel Corporation ................... 1,600 112,400
Kronos Incorporated ................. 1,600 49,300
Methode Electronics ................. 2,200 35,750
MTS Systems Corporation ............. 1,000 37,500
Nichols Research Corporation ........ 1,900 47,500
Varian Associates Incorporated ...... 600 30,338
X-Rite Incorporated ................. 2,500 45,625
----------
627,726
----------
Financial Services - 1.8%
Legg Mason Incorporated ............. 1,066 59,629
Merrill Lynch & Company ............. 1,700 123,994
ReliaStar Financial Corporation ..... 1,000 41,188
----------
224,811
----------
Food & Beverages - 2.6%
CPC International Incorporated ...... 1,200 129,300
Dean Foods Company .................. 900 53,550
Hormel Foods Corporation ............ 1,300 42,575
PepsiCo Incorporated ................ 2,900 105,669
----------
331,094
----------
Food Service - 1.1%
Sysco Corporation .................. 3,100 141,244
----------
</TABLE>
PB SERIES TRUST
HIGH QUALITY STOCK FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK (CONTINUED)
Funeral Services - 0.4%
Stewart Enterprises Incorporated ... 1,000 $ 46,625
---------
`
Gas Distribution -1.7%
Energen Corporation ................. 1,200 47,700
Northwest Natural Gas Company ....... 1,600 49,600
Oneok Incorporated .................. 1,400 56,525
Piedmont Natural Gas Company
Incorporated ................... 1,600 57,500
---------
211,325
---------
Gas Exploration - 2.7%
Coastal Corporation ................. 2,000 123,875
Eastern Enterprises ................. 1,200 54,000
Equitable Resources Incorporated .... 1,200 42,450
National Fuel Gas Company ........... 800 38,950
Questar Corporation ................. 900 40,163
Southwestern Energy Company ......... 3,200 41,200
---------
340,638
---------
Home Builders - 0.7%
Lennar Corporation .................. 1,100 23,719
Thor Industries Incorporated ........ 1,800 61,763
---------
85,482
---------
Household Appliances - 0.8%
Interface Incorporated .............. 1,700 49,300
La-Z-Boy Incorporated ............... 1,200 51,750
---------
101,050
---------
Household Products - 3.1%
Colgate-Palmolive Company ........... 1,500 110,250
Kimberly-Clark Corporation .......... 2,600 128,213
Lancaster Colony Corporation ........ 800 45,100
Newell Company ...................... 2,600 110,500
---------
394,063
---------
Hotels & Restaurants - 0.3%
Cracker Barrel Old Country Store
Incorporated ................... 1,200 40,050
---------
</TABLE>
The notes to the financials are an integral part of this report.
B-108
<PAGE>
PB SERIES TRUST
HIGH QUALITY STOCK FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK (CONTINUED)
Industrial Machinery - 2.4%
Crane Company ....................... 800 $ 34,700
Deere & Company ..................... 2,200 128,288
Graco Incorporated .................. 1,400 52,238
Pentair Incorporated ................ 1,000 35,938
Tennant Company ..................... 1,400 50,925
--------
302,089
--------
Insurance - 6.4%
American Bankers Insurance
Group Incorporated ............. 1,600 73,500
American Heritage Life Investment
Corporation .................... 1,500 54,000
American International Group
Incorporated ................... 1,250 135,937
Berkley (WR) Corporation ............ 1,050 46,069
Chubb Corporation ................... 1,500 113,437
Fremont General Corporation ......... 900 49,274
Frontier Insurance Group
Incorporated ................... 1,400 32,024
General Re Corporation .............. 500 106,000
Liberty Corporation ................. 1,000 46,750
NAC Re Corporation .................. 900 43,930
Orion Capital Corporation ........... 1,200 55,725
Protective Life Corporation ......... 700 41,824
--------
798,470
--------
International Oil - 1.3%
Mobil Corporation ................... 1,700 122,719
Murphy Oil Corporation .............. 700 37,931
--------
160,650
--------
Investment Advisory Firms - 2.0%
A.G. Edwards Incorporated ........... 1,350 53,663
Eaton Vance Corporation ............. 1,500 56,625
T. Rowe Price & Associates
Incorporated ................... 700 44,013
SEI Investment Company .............. 1,600 67,200
United Asset Management
Corporation ......................... 1,200 29,325
--------
250,826
--------
</TABLE>
PB SERIES TRUST
HIGH QUALITY STOCK FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK (CONTINUED)
Newspapers - 1.8%
Lee Enterprises Incorporated ........ 1,300. $ 38,431
Pulitzer Publishing Company ......... 800 50,250
Tribune Company ..................... 2,100 130,725
----------
219,406
----------
Non-Ferrous Metals - 0.3%
Commercial Metals Company ........... 1,300 41,031
----------
Paper - 1.6%
Lydall Incorporated (a) ............. 1,800 35,100
Sonoco Products Company ............. 3,400 117,938
Wausau - Mosinee Paper Corporation .. 2,100 42,000
----------
195,038
----------
Petroleum Services - 2.4%
Dresser Industries Incorporated ..... 2,900 121,619
MAPCO Incorporated .................. 1,100 50,875
Unocal Corporation .................. 3,300 128,081
----------
300,575
----------
Publishing - 0.8%
Banta Corporation ................... 1,500 40,500
Houghton Mifflin Company ............ 1,400 53,725
----------
94,225
----------
Railroads & Equipment - 1.3%
GATX Corporation .................... 600 43,538
Norfolk Southern Corporation ........ 3,900 120,169
----------
163,707
----------
Retail Grocery - 0.4%
Casey's General Stores Incorporated . 2,200 55,825
----------
Retail Trade - 3.6%
Arbor Drugs Incorporated ............ 3,000 55,500
Home Depot Incorporated ............. 2,250 132,469
Office Depot Incorporated ........... 2,000 47,875
Pep Boys-Manny Moe & Jack ........... 1,400 33,425
Ruddick Corporation ................. 3,000 52,313
Wal-Mart Stores Incorporated ........ 3,200 126,200
----------
447,782
----------
</TABLE>
The notes to the financials are an integral part of this report.
B-109
<PAGE>
PB SERIES TRUST
HIGH QUALITY STOCK FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK (CONTINUED)
Software - 1.3%
Autodesk Incorporated ............... 900 $ 33,300
Computer Associates International
Incorporated ................... 2,400 126,900
----------
160,200
----------
Steel - 1.6%
Carpenter Technology Corporation .... 900 43,256
Nucor Corporation ................... 2,500 120,781
Worthington Industries Incorporated . 1,800 29,700
----------
193,737
----------
Telephone - 4.0%
Aliant Communications Incorporated .. 2,100 65,888
Alltel Corporation .................. 3,100 127,294
Bell Atlantic Corporation ........... 1,400 127,400
Century Telephone Enterprises
Incorporated ........................ 1,100 54,794
Frontier Corporation ................ 5,100 122,719
----------
498,095
----------
Tires & Rubber - 0.4%
Carlisle Companies Incorporated ..... 1,200 51,300
----------
Tobacco - 1.0%
Philip Morris Companies Incorporated. 2,800 126,875
----------
Trucking & Freight Forwarding - 0.9%
Air Express International Corporation 1,800 54,900
Rollins Truck Leasing Corporation ... 2,900 51,838
----------
106,738
TOTAL COMMON STOCK
(Cost $10,272,726) 11,942,705
----------
</TABLE>
PB SERIES TRUST
HIGH QUALITY STOCK FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
SHORT-TERM INVESTMENTS - 3.6%
Investment Company - 3.6%
SSgA U.S. Government
Money Market Fund .................. 450,000 $ 450,000
-----------
TOTAL SHORT-TERM INVESTMENTS
(Cost $450,000) 450,000
-----------
TOTAL INVESTMENTS - (Cost $10,722,726) - 99.0% 12,392,705
OTHER ASSETS LESS LIABILITIES - 1.0% 122,359
-----------
NET ASSETS - 100.0% $12,515,064
===========
</TABLE>
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
(a) Non-income producing securities.
The notes to the financials are an integral part of this report.
B-110
<PAGE>
PB SERIES TRUST
FIXED INCOME FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Principal
Security Description Amount Value
- -------------------- -------- -----
<S> <C> <C>
MORTGAGE BACKED SECURITIES - 1.8%
GE Capital Mortgage
6.500%, 01/25/18 .......... $ 100,000 $ 99,812
----------
TOTAL MORTGAGE BACKED SECURITIES
- (Cost $99,503) 99,812
----------
U.S. GOVERNMENT AND AGENCY
SECURITIES - 71.9%
Government Agency - 30.7%
Federal Home Loan Mortgage Corporation
5.950%, 01/19/06 .......... 750,000 744,727
Federal National Mortgage Association
6.375%, 01/16/02 .......... 500,000 507,890
5.875%, 02/02/06 .......... 275,000 272,165
5.750%, 06/25/10 .......... 100,000 99,156
5.500%, 02/25/17 .......... 100,000 98,656
----------
1,722,594
----------
U.S. Government - 41.2%
U.S. Treasury Notes
5.875%, 08/31/99 .......... 750,000 752,340
6.125%, 12/31/01 .......... 250,000 253,320
6.500%, 08/15/05 .......... 1,250,000 1,304,300
----------
2,309,960
----------
TOTAL U.S. GOVERNMENT AND
AGENCY SECURITIES
- (Cost $3,904,871) 4,032,554
----------
SHORT TERM INVESTMENTS - 24.5% Shares
Investment Company - 4.0%
SSgA U.S. Government
Money Market Fund .................. 225,000 225,000
----------
</TABLE>
PB SERIES TRUST
FIXED INCOME FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Principal
Security Description Amount Value
- -------------------- -------- -----
<S> <C> <C>
SHORT TERM INVESTMENTS - (Continued)
Repurchase Agreement - 2.9%
Agreement with State Street Bank
and Trust Company, dated
12/31/1997, 4.250%, to be
repurchased at $164,719 on
01/02/1998 (collateralized by
$170,000 par value U.S.
Treasury Notes, 6.125 %, due
3/31/1998, with a value of $172,763) ..$164,680 $ 164,680
----------
Government Agency - 17.6%
Federal Farm Credit Bank Discount Note
5.390%, 01/09/98 .............. 500,000 499,389
Federal Home Loan Bank Discount Note
6.080%, 5/29/98 ............... 500,000 488,850
----------
988,239
----------
TOTAL SHORT TERM INVESTMENTS
- (Cost $1,377,886) 1,377,919
----------
TOTAL INVESTMENTS - (Cost $5,382,260) - 98.2% 5,510,285
OTHER ASSETS LESS LIABILITIES - 1.8% 96,402
----------
NET ASSETS - 100.0% $5,606,687
==========
</TABLE>
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
The notes to the financials are an integral part of this report.
B-111
<PAGE>
PB SERIES TRUST
INTERNATIONAL ACTIVE FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK AND OTHER
EQUITY INTERESTS - 91.8%
Argentina - 0.8%
Astra CIA ........................... 4,340 $ 7,597
BCO De Galicia ...................... 1,506 9,640
BCO Frances RI ...................... 518 4,808
Molions Rio PL ...................... 1,172 2,813
Perez Company ADR ................... 1,500 20,813
Siderca S.A ......................... 4,880 13,569
Telefonica De Arg SA ADR ............ 637 23,728
--------
82,968
--------
Australia - 0.8%
Amcor Limited ....................... 1,485 6,531
Broken Hill Proprietary Company
Limited ........................ 1,213 11,261
Comalco Limited ..................... 1,946 8,037
Leighton Holdings Limited ........... 1,117 3,900
News Corporation Limited ............ 2,340 12,912
Pasminco Limited .................... 8,806 10,097
QNI Limited ......................... 2,569 1,708
TABCORP Holdings Limited ............ 1,044 4,898
Westpac Banking Corporation
Limited ....................... 3,463 22,147
--------
81,491
--------
Belgium - 2.1%
Webs Index Fund Belgium Index ....... 12,475 206,617
--------
Chile - 1.4%
Banco Santander Chile ADR ........... 1,020 14,409
Chilgener SA Sponsored ADR .......... 687 16,833
Compania Cervecerias Unidas SA
Sponsored ADR .................. 339 9,958
Compania de Telecom De Chile
Sponsored ADR .................. 1,015 30,324
Empresa Nacional Electricidad
Sponsored ADR .................. 1,169 20,677
Enersis Sponsored ADR ............... 945 27,406
Madeco SA Sponsored ADR ............. 312 4,758
Maderas Y Sinteticos Sponsored ADR. . 432 4,105
Quimica Y Minera Chile SA
Sponsored ADR .................. 190 8,360
--------
136,830
--------
</TABLE>
PB SERIES TRUST
INTERNATIONAL ACTIVE FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK AND OTHER
EQUITY INTERESTS (CONTINUED)
Finland - 4.2%
Enso ................................ 1,600 $ 12,395
Hartwall Ab Oy ...................... 379 31,307
Metsa Serla Oy ...................... 3,231 25,207
Neste Oy ............................ 606 14,684
Nokia Ab Oy ......................... 2,710 192,517
Okobank Osuuspankk .................. 1,652 26,201
Rautaruukki Oy ...................... 2,273 18,358
UPM Kymmene Corporation Oy .......... 1,536 30,732
Viking Line AB ...................... 200 8,077
WSOY"B" ............................. 1,002 37,337
YIT-Yhtymaoy Oy ..................... 1,399 15,793
--------
412,608
--------
France- 12.3%
Alcatel Alsthom ..................... 632 80,360
AXA UAP ............................. 685 53,022
Banque Nationale de Paris ........... 2,010 106,873
Compagnie De St. Gobain ............. 330 46,896
Compagnie Generale des Eaux ......... 521 72,740
Credit Commer France ................ 490 33,596
Elf Aquitaine SA .................... 626 72,833
France Telecom (a) .................. 1,800 65,311
Groupe Danone ....................... 411 73,435
Group GTM ........................... 800 53,852
L'Oreal ............................. 220 86,113
Lafarge SA .......................... 914 59,992
Peugeot ............................. 680 85,784
Pinault-Printe ...................... 130 69,380
Schneider SA ........................ 504 27,375
Societe Generale .................... 827 112,713
Total "B" FRF 50 .................... 500 54,433
Valeo SA ............................ 685 46,475
--------
1,201,183
--------
Germany - 9.9%
Allianz AG .......................... 355 91,589
BASF AG ............................. 1,300 46,407
Bayer AG ............................ 2,943 109,231
Commerzbank AG ...................... 1,190 46,318
Daimler-Benz AG ..................... 657 46,395
</TABLE>
The notes to the financials are an integral part of this report.
B-112
<PAGE>
PB SERIES TRUST
INTERNATIONAL ACTIVE FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK AND OTHER
EQUITY INTERESTS (CONTINUED)
Germany - (Continued)
Degussa AG .............................. 1,036 $ 51,268
Deutsche Bank ........................... 550 38,473
Dresdner Bank AG ........................ 661 30,065
MAN AG .................................. 231 52,405
Mannesmann AG ........................... 298 149,626
RWE AG .................................. 1,400 75,121
Siemens AG .............................. 985 59,424
VEBA AG ................................. 2,010 136,909
Volkswagon AG ........................... 65 36,322
--------
969,553
--------
Ireland - 3 3%
Allied Irish ............................ 11,800 114,510
CRH PLC ................................. 6,900 80,942
Irish Life PLC .......................... 7,700 44,284
Kerry Group PLC ......................... 2,100 22,506
Smurfit (Jefferson) Group ............... 23,000 64,990
--------
327,232
--------
Israel - 1 7%
Bank Hapoalim Limited ................... 7,900 18,957
Bezeq Israeli Telecommunication
Corporation Limited ................ 4,500 12,427
Blue Square-Israel Limited (a) .......... 1,100 10,508
Clal Israel Limited ..................... 40,000 11,906
ECI Telecommunication Limited ........... 1,000 25,501
Elco Holdings Limited ................... 1,200 9,837
Elite Industries Limited ................ 300 8,906
Formula Systems Limited (a) ............. 410 12,619
Industrial Buildings Corporation ........ 7,800 13,272
Israel Chemicals Limited ................ 12,800 17,329
Teva Pharmaceutical Industries Limited .. 480 22,765
--------
164,027
--------
Italy - 7 7%
Alleanza Assicurazioni 3,521 35,039
Assic Generali 2,000 49,123
Banca Commerciale Italiana 19,767 68,719
</TABLE>
PB SERIES TRUST
INTERNATIONAL ACTIVE FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK AND OTHER
EQUITY INTERESTS (CONTINUED)
Italy - (Continued)
Benetton Group SPA ..................... 2,080 $ 34,039
Danieli & Company ...................... 5,001 34,348
Edison SPA ............................. 8,000 48,388
Eni SPA ................................ 20,903 118,514
Fiat SPA ............................... 15,301 44,501
Instituto Nazionale delle Assicurazioni
Istituto ............................... 20,646 41,839
Istituto Mobiliare Italiano SPA ........ 7,018 83,309
Italcementi SPA ........................ 5,000 34,849
Telecom Italia SPA ..................... 13,080 83,549
Telecom Italia Mobile SPA .............. 18,000 83,078
--------
759,295
--------
Japan - 13 6 %
Aoyama Trading Company Limited ......... 3,300 58,957
Bridgestone Company .................... 2,000 43,399
Canon Incorporated ..................... 2,000 46,621
Fanuc .................................. 3,200 121,214
Fuji Photo Film Company ................ 3,000 115,018
Fujisawa Pharmaceutical Company ........ 6,000 52,448
Hitachi Limited ........................ 6,000 42,787
Ito-Yokado ............................. 1,000 50,992
Kirin Brewery Company .................. 7,000 50,992
Matsushita Electric Works .............. 3,000 43,937
Mitsui O S K Lines Limited (a) ........ 36,000 49,963
Murata Manufacturing Company Limited ... 3,000 75,452
NEC Corporation ........................ 11,000 117,242
Nippon Telephone & Telegraph
Corporation ....................... 32 137,407
Sumitomo Bank Limited .................. 10,000 114,250
Sumitomo Trust & Banking ............... 12,000 62,385
Tokio Marine & Fire Insurance .......... 5,000 56,741
Tokyo Electric ......................... 2,100 38,323
Toyota Motor ........................... 2,000 57,355
--------
1,335,483
--------
Mexico -1.7%
Webs Index Fund Mexico Free Index ....... 10,100 166,650
--------
</TABLE>
The notes to the financials are an integral part of this report.
B-113
<PAGE>
PB SERIES TRUST
INTERNATIONAL ACTIVE FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK AND OTHER
EQUITY INTERESTS (CONTINUED)
Netherlands - 5.0%
ABN AMRO Holdings NV ............. 1,532 $ 29,862
Akzo Nobel ....................... 203 35,021
Elsevier ......................... 1,500 24,279
ING Groep NV ..................... 569 23,979
Koninklijke PTT Nederland NV ..... 755 31,518
Philips Electronics NV ........... 424 25,443
Polygram NV ...................... 550 26,326
Royal Dutch Petroleum Company .... 2,848 156,418
Unilever NV, PLC ................. 936 57,735
Vendex International NV .......... 593 32,744
VNU-Verenigde Nederlandse
Uitgeversbedrijven Verenigd
Bezit ....................... 1,610 45,443
--------
488,768
--------
Portugal - 4 1%
Banco Comercia Portugues ......... 2,200 45,017
Banco Espirito ................... 2,200 65,504
Brisa (a) ........................ 400 14,336
Cimpor Cimento ................... 1,700 44,582
Elec De Portugal (a) ............. 2,500 47,364
Jeronimo Martins ................. 1,250 39,684
Portugal Telecom ................. 2,700 125,349
Sonae Investimento ............... 550 22,257
--------
404,093
--------
Spain - 2 4%
Argentaria Corporation SA ........ 450 27,381
Banco Bilbao ..................... 1,000 32,359
Banco Popular .................... 450 31,457
Gas Natural SD ................... 380 19,704
Gas Y Electric ................... 300 21,659
Iberdrola SA ..................... 2,600 34,216
Repsol SA ....................... 700 29,864
Telefonica De Espana ............. 1,350 38,544
-
--------
235,184
--------
Switzerland - 8 5%
ABB AG ........................... 30 37,654
Clariant AG ...................... 61 50,903
Credit Suisse Group .............. 368 56,886
Holderbank Financiere Glarus AG .. 51 41,581
</TABLE>
PB SERIES TRUST
INTERNATIONAL ACTIVE FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Description Shares Value
- -------------------- ------ -----
<S> <C> <C>
COMMON STOCK AND OTHER
EQUITY INTERESTS (CONTINUED)
Switzerland - (Continued)
Kuoni Reisen Holding AG ................ 14 $ 52,428
Nestle SA .............................. 67 100,316
Novartis AG ............................ 126 204,254
Roche Holding AG ....................... 15 148,820
Tag Heuer International SA (a) ......... 349 30,316
Union Bank of Switzerland .............. 77 111,233
-----------
834,391
-----------
United Kingdom - 10.9%
Abbey National PLC ..................... 3,375 58,477
Boots Company PLC ...................... 3,826 55,801
British Petroleum ...................... 2,400 31,732
British Telecommunications PLC ......... 4,474 35,453
Commercial Union PLC ................... 3,667 54,389
EMI Group PLC .......................... 4,123 35,702
Glaxo Wellcome ......................... 1,800 42,752
HSBC Holdings .......................... 1,450 37,625
IMI PLC ................................ 5,277 35,344
Lasmo PLC .............................. 10,500 46,912
Lloyds TSB Group PLC ................... 8,496 110,299
Prudential Corporation PLC ............. 4,685 54,671
Scottish & Newcastle PLC ............... 4,971 60,388
Scottish Power PLC ..................... 7,284 64,546
Shell Transport & Trading Company PLC .. 7,177 52,336
Smithkline Beecham PLC ................. 6,788 70,129
Tesco .................................. 4,400 35,610
Unilever PLC ........................... 7,452 64,188
Wolseley PLC ........................... 5,159 41,157
Zeneca Group PLC ....................... 2,246 79,387
-----------
1,066,898
-----------
Venezuela- 1.4%
Ceramica Carabobo ADR .................. 12,650 10,372
Cia Anonima Telef De Ven ADR ........... 2,000 83,250
Mavesa SA ADR .......................... 1,750 11,156
Siderurgica Venez SIV ADR .............. 4,650 18,382
Sudamtex De Venezuela ADR .............. 1,232 10,934
-----------
134,094
-----------
TOTAL COMMON STOCK AND OTHER
EQUITY INTERESTS (Cost $8,722,898) 9,007,365
-----------
</TABLE>
The notes to the financials are an integral part of this report.
B-114
<PAGE>
PB SERIES TRUST
INTERNATIONAL ACTIVE FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Principal
Security Description Amount Value
- -------------------- ------ -----
<S> <C> <C>
SHORT TERM INVESTMENTS - 6.8%
Time Deposit - 6.8%
State Street Bank and Trust
Company Time Deposit,
1/02/98 ..................... $664,000 $ 664,000
-----------
TOTAL SHORT TERM INVESTMENTS
- (Cost $664,000) 664,000
----------
TOTAL INVESTMENTS - (Cost $9,386,898) - 98.6% 9,671,365
OTHER ASSETS LESS LIABILITIES - 1.4% 132,900
------------
NET ASSETS - 100.0% $9,804,265
-----------
</TABLE>
The percentage shown for each investment category is the total value
of that category as a percentage of the net assets of the Fund.
(a) Non-income producing securities.
ADR- American Depositary Receipts.
PB SERIES TRUST
INTERNATIONAL ACTIVE FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Industry holdings at December 31, 1997
<S> <C>
Banking ............................... 14.82%
Telecommunications .................... 9.87%
Energy Sources ........................ 6.72%
Health & Personal Care ................ 6.50%
Utilities-Electrical & Gas ............ 5.13%
Insurance ............................. 4.89%
Electrical & Electronics .............. 4.02%
Building Materials & Components ....... 3.89%
Investment Companies .................. 3.80%
Food & Household Products ............. 3.58%
Chemicals ............................. 2.97%
Merchandising ......................... 2.90%
Automobiles ........................... 2.76%
Electronic Components, Instruments .... 2.61%
Recreation, Other Consumer Goods ...... 2.59%
Machinery & Engineering ............... 2.41%
Forest Products & Paper ............... 1.47%
Beverages & Tobacco ................... 1.46%
Broadcasting & Publishing ............. 1.22%
Financial Services .................... 1.11%
Construction & Housing ................ 1.03%
Miscellaneous Materials ............... 1.02%
Business & Public Services ............ 0.89%
Appliances & Household Durables ....... 0.71%
Transportation-Shipping ............... 0.59%
Leisure & Tourism ..................... 0.59%
Metals-Non Ferrous .................... 0.56%
Metals-Steel .......................... 0.52%
Textiles & Apparel .................... 0.46%
Industrial Components ................. 0.44%
Real Estate ........................... 0.14%
Multi-Industry ........................ 0.12%
Energy Equipment & Services ........... 0.08%
-----
Total Investments by Industry ..... 91.87%
Time Deposit .......................... 6.77%
-----
Total Investments ................. 98.64%
Other Assets Less Liabilities ......... 1.36%
-----
Net Assets ............................ 100.00%
======
</TABLE>
The notes to the financials are an integral part of this report.
B-115
<PAGE>
PB SERIES TRUST
MONEY MARKET FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Principal
Security Description Amount Value
- -------------------- ------ -----
<S> <C> <C>
ASSET-BACKED SECURITIES - 4.3%
Arcadia Automobile Receivables Trust
1997-C, 5.650%, 09/15/98 .............. $ 56,048 $ 56,048
Copelco Capital Funding Corp
1997-A, 5.809%, 07/20/98 ............. 46,256 46,256
-----------
TOTAL ASSET BACKED SECURITIES
- (Cost $102,304) 102,304
-----------
VARIABLE RATE NOTES - 30.5%
Edgefield County, SC
County School District,
Series, 1997
5.719%, 12/01/04 + ............. 100,000 100,000
Grand Aire Express, Inc , Series 1997
5.700%, 07/01/12 + ............. 100,000 100,000
International Processing Corporation
5.790%, 01/02/08 + ............. 10,000 10,000
IT Spring Wire, LLC, Series 1997
5.700%, 07/01/07 + ............. 100,000 100,000
JFK Family Borrowing, LLP, Series 1997
5.706%, 10/01/22 + ............. 50,000 50,000
La-Man Corporation
5.660%, 09/01/12 + ............. 100,000 100,000
Scranton Times, LP , Series 1997
5.710%, 05/31/07 + ............. 100,000 100,000
Triangle Fund, Series 1997
5.750%, 11/16/98 + .............. 100,000 100,000
Westcourt
5.790%, 06/01/16 + .............. 60,000 60,000
-----------
TOTAL VARIABLE RATE NOTES
- (Cost $720,000) 720,000
-----------
SHORT TERM INVESTMENTS - 63.8%
Joint Repurchase Agreements - 63.8%
Joint agreement with Fuji Government
Securities Incorporated, dated 12/31/1997,
bearing 6.600%, to be repurchased at
$520,191 on 01/02/1998 (collateral:
U.S Treasury Notes/Bonds/Bills/Tips,
3.375% - 15.75%, 04/09/98 - 11/15/18,
value equal to 102% of the repurchase
agreement) ............................... 520,000 520,000
</TABLE>
PB SERIES TRUST
MONEY MARKET FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Principal
Security Description Amount Value
- -------------------- ------ -----
<S> <C> <C>
SHORT TERM INVESTMENTS - (Continued)
JointRepurchase Agreements - (Continued)
Joint agreement with HSBC Securities
Incorporated, dated 12/31/1997, bearing
6.800%, to be repurchased at $100,038 on
01/02/1998 (collateral: U.S Treasury
Bonds/Bills, 7.250% - 12.000%,
01/02/98 - 08/15/17, value equal to 102%
of the repurchase agreement) ............ $ 100,000 $ 100,000
Joint agreement with PaineWebber
Incorporated, dated 12/31/1997, bearing
6.600%, to be repurchased at $520,191 on
01/02/1998 (collateral: U.S Treasury
Bonds/Bills, 7.250% - 12.000%, 01/02/98
- 08/15/17, value equal to 102% of the
repurchase agreement) ................... 520,000 520,000
Joint agreement with Societe Generale,
dated 12/31/1997, bearing 6.600%, to be
repurchased at $100,037 on 01/02/1998
(collateral: U.S Treasury Note/ Tips,
3.375% - 6.500%, 10/15/06 - 01/15/07,
value equal to 102% of the repurchase
agreement) .............................. 100,000 100,000
Joint agreement with State Street Bank and
Trust Company, dated 12/31/1997, bearing
6.550%, to be repurchased at $66,024 on
01/02/1998 (collateral: U.S Treasury Note,
5.875%, 04/30/98, value equal to 102% of
the repurchase agreement) ............... 66,000 66,000
Joint agreement with Swiss Bank Corporation,
dated 12/31/1997, bearing 6.550%, to be
repurchased at $100,036 on 01/02/1998
(collateral: U.S. Treasury Bonds, 6.500%
- 12.500%, 05/15/09 - 11/15/26, value
equal to 102% of the repurchase agreement) 100,000 100,000
</TABLE>
The notes to the financials are an integral part of this report.
B-116
<PAGE>
PB SERIES TRUST
MONEY MARKET FUND
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Principal
Security Description Amount Value
- -------------------- ------ -----
<S> <C> <C>
SHORT TERM INVESTMENTS - (Continued)
Joint Repurchase Agreements - (Continued)
Joint agreement with UBS Securities,
dated 12/31/1997, bearing 6.800%, to be
repurchased at $100,036 on 01/02/1998
(collateral: Federal Home Loan Mortgage
Corporation, 5.500% - 9.000%, 12/15/07
- 12/30/27, value equal to 102% of the
repurchase agreement) .................. $100,000 $ 100,000
TOTAL SHORT TERM INVESTMENTS
(Cost $1,506,000) 1,506,000
-----------
TOTAL INVESTMENTS AT AMORTIZED
COST AND VALUE - 98.6% $2,328,304
OTHER ASSETS LESS LIABILITIES - 1.4% 33,037
-----------
NET ASSETS - 100.0% $2,361,341
===========
</TABLE>
The percentage shown for each investment category is the total value
of that category as a percentage of the net assets of the Fund.
+ Variable rate demand notes are payable upon not more than one, seven,
or thirty day's notice. Variable rate security which may be reset
weekly. The interest rate shown reflects the rate currently in effect.
The notes to the financials are an integral part of this report.
B-117
<PAGE>
PB SERIES TRUST
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
Capital Income Growth &
Preservation Oriented Income
ASSETS Portfolio Portfolio Portfolio
--------------------------------------------
<S> <C> <C> <C>
Investments in securities, at value (a)............................ $26,773 $8,256 $180,827
Repurchase agreements, at value (a)................................ -- -- --
Cash, including foreign currency, at value......................... 3,050 3,044 3,218
Receivable for forward currency contracts (Note 6)................. -- -- --
Interest receivable................................................ -- -- --
Dividends receivable............................................... -- -- --
Prepaid insurance.................................................. 1,213 1,213 1,213
Receivable from Investment Adviser (Note 3)........................ 303 286 301
Foreign income tax reclaim receivable.............................. -- -- --
--------------------------------------------
TOTAL ASSETS..................................................... 31,339 12,799 185,559
LIABILITIES
Payable to Investment Adviser...................................... -- -- --
Accounts payable and accrued expenses.............................. 4,565 4,543 4,729
--------------------------------------------
TOTAL LIABILITIES................................................ 4,565 4,543 4,729
--------------------------------------------
NET ASSETS....................................................... $26,774 $8,256 $180,830
============================================
NET ASSETS CONSIST OF:
Paid-in capital (Note 5)........................................... $26,963 $8,331 $179,972
Undistributed (distribution in excess of)
net investment income (Note 2)................................... 2 -- 19
Accumulated net realized gain (loss) on investments and
foreign currency transactions.................................... -- -- (73)
Net unrealized appreciation (depreciation) of:
Investments...................................................... (191) (75) 912
Translations of assets and liabilities in foreign currencies..... -- -- --
--------------------------------------------
NET ASSETS....................................................... $26,774 $8,256 $180,830
============================================
NET ASSET VALUE PER SHARE
Offering and redemption price per share
(based on shares of beneficial interest outstanding)............. $10.23 $10.63 $10.72
Total shares outstanding at end of period (Note 5)................. 2,618 777 16,869
Capital shares authorized.......................................... Indefinite Indefinite Indefinite
(a) Investments in securities, including repurchase agreements,
at cost...................................................... $26,964 $8,331 $179,915
</TABLE>
B-118
<PAGE>
<TABLE>
<CAPTION>
Capital Maximum High Fixed Money
Growth Appreciation Quality Income International Market
Portfolio Portfolio Stock Fund Fund Active Fund Fund
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$816,349 $244,738 $12,392,705 $5,345,605 $9,671,365 $ 822,304
-- -- -- 164,680 -- 1,506,000
3,041 3,044 128,105 24,190 131,014 40,681
-- -- -- -- 3,080 --
-- -- 74 88,129 106 4,514
-- -- 16,677 -- 5,283 --
1,213 1,213 1,213 1,213 1,213 1,213
311 337 5,885 9,237 14,311 10,487
-- -- -- -- 6,227 --
--------------------------------------------------------------------------------------------------
820,914 249,332 12,544,659 5,633,054 9,832,599 2,385,199
-- -- 6,524 2,981 7,317 711
4,565 4,594 23,071 23,386 21,017 23,147
--------------------------------------------------------------------------------------------------
4,565 4,594 29,595 26,367 28,334 23,858
--------------------------------------------------------------------------------------------------
$816,349 $244,738 $12,515,064 $5,606,687 $ 9,804,265 $2,361,341
==================================================================================================
$812,120 $239,094 $10,757,591 $5,478,662 $10,203,681 $2,361,341
-- 32 15 -- (12,039) --
(33) (47) 87,479 -- (673,728) --
4,262 5,659 1,669,979 128,025 284,467 --
-- -- -- -- 1,884 --
==================================================================================================
$816,349 $244,738 $12,515,064 $5,606,687 $ 9,804,265 $2,361,341
==================================================================================================
$ 11.04 $ 11.29 $ 11.74 $ 10.26 $ 9.60 $ 1.00
73,920 21,679 1,065,622 546,467 1,021,010 2,361,341
Indefinite Indefinite Indefinite Indefinite Indefinite Indefinite
$812,087 $239,079 $10,722,726 $5,382,260 $ 9,386,898 $2,328,304
</TABLE>
B-119
<PAGE>
PB SERIES TRUST
STATEMENTS OF OPERATIONS
For the period May 9, 1997* through December 31, 1997
<TABLE>
<CAPTION>
Capital Income Growth &
Preservation Oriented Income
Portfolio Portfolio Portfolio
--------------------------------------------
INVESTMENT INCOME
<S> <C> <C> <C>
Interest income................................................... $ 180 $ 5 $ 193
Dividend income................................................... 425 147 2,799
Less foreign taxes withheld..................................... -- -- --
--------------------------------------------
TOTAL INVESTMENT INCOME........................................... 605 152 2,992
EXPENSES
Investment adviser fee (Note 3)................................... -- -- --
Administrative fee................................................ 1,358 1,331 1,333
Accounting fee.................................................... 4,294 4,294 4,344
Audit fee......................................................... 1,559 1,543 1,621
Custodian fees and expenses....................................... 68 67 164
Trustee's fees (Note 3)........................................... 1,176 1,175 1,179
Printing expense.................................................. 428 428 430
Legal fee......................................................... 150 150 169
Insurance expense................................................. 2,149 2,149 2,149
Miscellaneous expense............................................. 28 26 28
--------------------------------------------
Total operating expenses before reimbursement................... 11,210 11,163 11,417
Expenses reimbursed by the Investment Adviser (Note 3)............ (11,210) (11,163) (11,417)
--------------------------------------------
NET EXPENSES.................................................... 0 0 0
--------------------------------------------
NET INVESTMENT INCOME .......................................... 605 152 2,992
NET REALIZED AND UNREALIZED GAIN (LOSS)
FROM INVESTMENTS AND FOREIGN CURRENCY
Net realized gain (loss) from:
Investments...................................................... 33 -- 895
Distribution from underlying funds............................... 40 40 1,073
Foreign currency transactions.................................... -- -- --
--------------------------------------------
73 40 1,968
Change in unrealized appreciation (depreciation) during the period on:
Investments...................................................... (191) (75) 912
Translations of assets and liabilities in foreign currencies..... -- -- --
--------------------------------------------
(191) (75) 912
--------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)............................ (118) (35) 2,880
--------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................................................ $ 487 $ 117 $ 5,872
============================================
</TABLE>
* Commencement of investment operations.
B-120
<PAGE>
<TABLE>
<CAPTION>
Capital Maximum High Fixed Money
Growth Appreciation Quality Income International Market
Portfolio Portfolio Stock Fund Fund Active Fund Fund
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ -- $ -- $ 43,591 $204,045 $ 28,297 $75,611
3,441 1,462 106,636 -- 127,691 --
-- -- -- -- (12,982) --
--------------------------------------------------------------------------------------------------
3,441 1,462 150,227 204,045 143,006 75,611
-- -- 46,919 21,981 58,636 5,321
1,331 1,331 8,653 8,655 8,655 8,659
4,294 4,294 8,482 8,929 8,108 8,519
1,559 1,559 7,733 7,772 7,772 7,772
110 151 2,138 1,577 22,382 1,118
1,175 1,175 1,172 1,176 1,175 1,175
428 428 535 535 535 535
150 150 121 84 121 62
2,149 2,149 2,149 2,149 2,149 2,149
26 26 180 202 203 203
--------------------------------------------------------------------------------------------------
11,222 11,263 78,082 53,060 109,736 35,513
(11,222) (11,263) (13,117) (22,624) (34,811) (26,866)
--------------------------------------------------------------------------------------------------
0 0 64,965 30,436 74,925 8,647
--------------------------------------------------------------------------------------------------
3,441 1,462 85,262 173,609 68,081 66,964
266 334 229,655 16,311 (673,728) --
2,193 2,300 -- -- -- --
-- -- -- -- (62,431) --
--------------------------------------------------------------------------------------------------
2,459 2,634 229,655 16,311 (736,159) --
4,262 5,659 1,669,979 128,025 284,467 --
-- -- -- -- 1,884 --
--------------------------------------------------------------------------------------------------
4,262 5,659 1,669,979 128,025 286,351 --
--------------------------------------------------------------------------------------------------
6,721 8,293 1,899,634 144,336 (449,808) --
--------------------------------------------------------------------------------------------------
$ 10,162 $ 9,755 $1,984,896 $317,945 $(381,727) $66,964
==================================================================================================
</TABLE>
B-121
<PAGE>
PB SERIES TRUST
STATEMENTS OF CHANGES IN NET ASSETS
For the period May 9, 1997* through December 31, 1997
<TABLE>
<CAPTION>
Capital Income Growth &
Preservation Oriented Income
Portfolio Portfolio Portfolio
----------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1997
<S> <C> <C> <C>
Net investment income.......................................... $ 605 $ 152 $ 2,992
Net realized gain (loss)....................................... 73 40 1,968
Change in unrealized appreciation (depreciation)
during the period.......................................... (191) (75) 912
---------------------------------------------
Net increase (decrease) in net assets resulting from operations 487 117 5,872
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.......................................... (603) (152) (2,989)
Net realized gain.............................................. (73) (40) (2,026)
FUND SHARE TRANSACTIONS (Note 5)............................... 26,963 8,331 179,973
---------------------------------------------
TOTAL INCREASE IN NET ASSETS................................... 26,774 8,256 180,830
NET ASSETS:
Beginning of period............................................ -- -- --
---------------------------------------------
End of period (a).............................................. $26,774 $8,256 $180,830
=============================================
(a) Including undistributed (distribution in excess of) net
investment income.............................................. $ 2 $ -- $ 19
=============================================
</TABLE>
* Commencement of investment operations.
B-122
<PAGE>
<TABLE>
<CAPTION>
Capital Maximum High Fixed Money
Growth Appreciation Quality Income International Market
Portfolio Portfolio Stock Fund Fund Active Fund Fund
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3,441 $ 1,462 $ 85,262 $ 173,609 $ 68,081 $ 66,964
2,459 2,634 229,655 16,311 (736,159) --
4,262 5,659 1,669,979 128,025 286,351 --
--------------------------------------------------------------------------------------------------
10,162 9,755 1,984,896 317,945 (381,727) 66,964
(3,441) (1,462) (85,247) (173,971) (17,693) (66,964)
(2,492) (2,649) (142,176) (16,311) -- --
812,120 239,094 10,757,591 5,479,024 10,203,685 2,356,341
--------------------------------------------------------------------------------------------------
816,349 244,738 12,515,064 5,606,687 9,804,265 2,356,341
-- -- -- -- -- 5,000
--------------------------------------------------------------------------------------------------
$816,349 $244,738 $12,515,064 $5,606,687 $9,804,265 $2,361,341
==================================================================================================
$ -- $ 32 $ 15 $ -- $ (12,039) $ --
==================================================================================================
</TABLE>
B-123
<PAGE>
PB SERIES TRUST
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the period May 9, 1997
(commencement of investment operations) through December 31, 1997
<TABLE>
<CAPTION>
Capital Income Growth &
Preservation Oriented Income
Portfolio Portfolio Portfolio
----------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period..................................... $10.00 $10.00 $10.00
----------------------------------------
Income from investment operations:
Net investment income ................................................... 0.24 0.20 0.18
Net realized and unrealized gain on investments.......................... 0.26 0.68 0.84
----------------------------------------
Total from investment operations......................................... 0.50 0.88 1.02
----------------------------------------
Less distributions from:
Net investment income.................................................... (0.24) (0.20) (0.18)
Net realized gains....................................................... (0.03) (0.05) (0.12)
----------------------------------------
Total distributions...................................................... (0.27) (0.25) (0.30)
----------------------------------------
Net asset value, end of period........................................... $10.23 $10.63 $10.72
========================================
Total return (2)......................................................... 4.92% 8.84% 10.25%
========================================
Ratios and supplemental data:
Net assets, end of period................................................ $26,774 $8,256 $180,830
Ratio of operating expenses to average net assets (3).................... -- -- --
Ratio of operating expenses to average net assets before voluntary
expense reimbursement (1)(3)............................................ 161.07% 1,978.36% 30.27%
Ratio of net investment income to average net assets (3)................. 8.69% 26.94% 7.93%
Ratio of net investment loss to average net assets before voluntary
expense reimbursement (1)(3)............................................ (152.38%) (1,951.42%) (22.34%)
Portfolio turnover rate (4).............................................. 32% 0% 24%
</TABLE>
(1) Net investment income is after reimbursement of certain fees and expenses by
PB Investment Advisors, Inc. (See Note 3 to the financial statements). Had PB
Investment Advisors, Inc. not undertaken to reimburse expenses related to the
Portfolios and Funds, the ratios of net investment income and operating expenses
to average net assets would have been as noted above.
(2) Total return figures are not annualized. Total returns do not reflect
expenses that apply to the separate account or related variable insurance
contracts and inclusion of these charges would result in reducing the total
return figures for the period shown.
(3) Annualized for periods less than one year.
(4) Portfolio turnover rates are not annualized.
B-124
<PAGE>
PB SERIES TRUST
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the period May 9, 1997
(commencement of investment operations) through December 31, 1997
<TABLE>
<CAPTION>
Capital Maximum High
Growth Appreciation Quality
Portfolio Portfolio Stock Fund
<S> <C> <C> <C>
Net asset value, beginning of period.......................................... $10.00 $10.00 $10.00
---------------------------------------
Income from investment operations:
Net investment income ........................................................ 0.13 0.07 0.08
Net realized and unrealized gain on investments......................... 1.13 1.41 1.88
---------------------------------------
Total from investment operations.............................................. 1.26 1.48 1.96
---------------------------------------
Less distributions from:
Net investment income......................................................... (0.13) (0.07) (0.08)
Net realized gains............................................................ (0.09) (0.12) (0.14)
---------------------------------------
Total distributions........................................................... (0.22) (0.19) (0.22)
---------------------------------------
Net asset value, end of period................................................ $11.04 $11.29 $11.74
=======================================
Total return (2).............................................................. 12.67% 14.82% 19.72%
=======================================
Ratios and supplemental data:
Net assets, end of period..................................................... $816,349 $244,738 $12,515,064
Ratio of operating expenses to average net assets (3)........................ -- -- 0.90%
Ratio of operating expenses to average net assets before voluntary
expense reimbursement (1)(3)................................................ 20.00% 24.59% 1.08%
Ratio of net investment income to average net assets (3)...................... 6.13% 3.19% 1.18%
Ratio of net investment income (loss) to average net assets before
voluntary expense reimbursement (1)(3)........................................ (13.87%) (21.40%) 1.00%
Portfolio turnover rate (4)................................................... 2% 6% 14%
Average commission rate paid per equity share traded..................... N/A N/A $0.0598
</TABLE>
(1) Net investment income is after reimbursement of certain fees and expenses by
PB Investment Advisors, Inc. (See Note 3 to the financial statements). Had PB
Investment Advisors, Inc. not undertaken to reimburse expenses related to the
Portfolios and Funds, the ratios of net investment income and operating expenses
to average net assets would have been as noted above.
(2) Total return figures are not annualized. Total returns do not reflect
expenses that apply to the separate account or related variable insurance
contracts and inclusion of these charges would result in reducing the total
return figures for the period shown.
(3) Annualized for periods less than one year.
(4) Portfolio turnover rates are not annualized.
B-125
<PAGE>
PB SERIES TRUST
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the period May 9, 1997
(commencement of investment operations) through December 31, 1997
<TABLE>
<CAPTION>
Fixed International Money
Income Active Market
Fund Fund Fund
-------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period........................................ $ 10.00 $ 10.00 $ 1.00
-------------------------------------------
Income from investment operations:
Net investment income ...................................................... 0.34 0.07 0.03
Net realized and unrealized gain (loss) on investments...................... 0.29 (0.45) --
-------------------------------------------
Total from investment operations............................................ 0.63 (0.38) 0.03
-------------------------------------------
Less distributions from:
Net investment income....................................................... (0.34) (0.02) (0.03)
Net realized gains.......................................................... (0.03) -- --
-------------------------------------------
Total distributions......................................................... (0.37) (0.02) (0.03)
============================================
Net asset value, end of period.............................................. $ 10.26 $ 9.60 $ 1.00
============================================
Total return (2)............................................................ 6.30% (3.80%) 3.31%
============================================
Ratios and supplemental data:
Net assets, end of period................................................... $5,606,687 $9,804,265 $2,361,341
Ratio of operating expenses to average net assets (3)....................... 0.90% 1.15% 0.65%
Ratio of operating expenses to average net assets before voluntary
expense reimbursement (1)(3)............................................... 1.57% 1.68% 2.67%
Ratio of net investment income to average net assets (3).................... 5.13% 1.04% 5.03%
Ratio of net investment income to average net assets before voluntary
expense reimbursement (1)(3)............................................... 4.46% 0.51% 3.01%
Portfolio turnover rate (4)................................................. 157% 61% N/A
Average commission rate paid per equity share traded........................ N/A $0.0125 N/A
</TABLE>
(1) Net investment income is after reimbursement of certain fees and expenses by
PB Investment Advisors, Inc. (See Note 3 to the financial statements). Had PB
Investment Advisors, Inc. not undertaken to reimburse expenses related to the
Portfolios and Funds, the ratios of net investment income and operating expenses
to average net assets would have been as noted above.
(2) Total return figures are not annualized. Total returns do not reflect
expenses that apply to the separate account or related variable insurance
contracts and inclusion of these charges would result in reducing the total
return figures for the period shown.
(3) Annualized for periods less than one year.
(4) Portfolio turnover rates are not annualized.
B-126
<PAGE>
PB SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
NOTE 1 - ORGANIZATION
PB Series Trust (the "Trust"), formerly Providian Series Trust, was organized as
a Massachusetts business trust on October 22, 1996 and is registered under the
Investment Company Act of 1940 and the Securities Act of 1933 as a diversified,
no-load, open-end management investment company. The Trust is a "series type" of
mutual fund which issues separate classes (or series) of stock, each of which
represents a separate diversified portfolio of investments. The Trust is
currently composed of nine series which consist of five investment portfolios
(Capital Preservation Portfolio, Income Oriented Portfolio, Growth and Income
Portfolio, Capital Growth Portfolio, and Maximum Appreciation
Portfolio-collectively, the "Portfolios") and four underlying funds (High
Quality Stock Fund, Fixed Income Fund, International Active Fund, and Money
Market Fund-collectively the "Funds").
The Portfolios seek to achieve their investment objectives by investing within
specific ranges among the Funds. Each Fund has differing investment objectives
and policies. Shares of the Portfolios are offered to separate accounts of
insurance companies to fund variable annuity contracts. The shares of the Funds
are purchased by the Portfolios. The Portfolios are offered to qualified plans
and separate accounts of insurance companies to fund variable annuity contracts.
On February 3, 1997, Providian Life and Health Separate Account V (the "Separate
Account") made an initial purchase of shares of beneficial interest in the
amount of 5,000 shares of the Money Market Fund. On May 9, 1997, the Separate
Account purchased an additional 1,995,000 shares of the Money Market Fund, and
purchased 1,000,000 shares of the High Quality Stock Fund and International
Active Fund, and 500,000 shares of the Fixed Income Fund. The Separate Account
is a separate account of Providian Life and Health Insurance Company, an
indirect, wholly owned subsidiary of Providian Corporation which, on June 10,
1997, became a direct, wholly owned subsidiary of AEGON International N.V., a
direct, wholly owned subsidiary of AEGON N.V., an international insurance
organization headquartered in The Hague, The Netherlands. Effective October 15,
1997, Providian Corporation's name was changed to Commonwealth General
Corporation ("CGC"). Effective December 31, 1997, ownership of CGC was
transferred to AEGON USA, Inc., an indirect, wholly owned subsidiary of AEGON
N.V..
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Trust in the preparation of its financial statements.
Valuation of Investments - Securities held by the Funds (other than the Money
Market Fund) that are traded on a national securities exchange are valued on the
basis of the last sale price as of the close of business on the day the
securities are being valued, or lacking any sales, at the last quoted bid price.
Bonds and other fixed income securities with maturities greater than 60 days at
the time of purchase are valued by a pricing service. Securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Trust. Short-term securities and debt securities with a remaining maturity
of 60 days or less are valued at amortized cost which approximates market value.
The Money Market Fund by the approval of the Board of Trustees utilizes the
amortized cost method for valuing securities, whereby all investments are valued
by reference to their acquisition cost as adjusted for amortization of premium
or accretion of discount.
Foreign Securities - Foreign securities traded on a recognized securities
exchange are valued at the last sale price in the principal market where they
are traded, or if closing prices are unavailable, at the last bid price
available prior to the time a Fund's net asset value is determined. Foreign
prices are furnished by quotation services expressed in the local currency's
value and translated into the U.S. dollars at the current rate of exchange.
B-127
<PAGE>
NOTE 2 (CONTINUED)
Repurchase Agreements - The Trust may enter into repurchase agreements with
institutions that the Trust's investment advisor, PB Investment Advisors, Inc.,
(formerly Providian Investment Advisors, Inc.,) has determined are creditworthy
pursuant to criteria adopted by the Board of Trustees. In connection with
transactions in repurchase agreements, the Trust's custodian takes possession of
the underlying collateral securities, the value of which is at least equal to
102 percent of the principal amount, including interest, of the repurchase
agreement. The value of the collateral is marked-to-market on a daily basis to
ensure the adequacy of the collateral. In the event of default of the obligation
to repurchase, the Trust has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and or retention of the collateral or proceeds may be subject to legal
proceedings.
The Trust may enter into a Joint Repurchase Agreement whereby its uninvested
cash balance is deposited into a joint cash account to be used to invest in one
or more repurchase agreements with government securities dealers recognized by
the Federal Reserve Board and/or member banks of the Federal Reserve System. The
value and face amount of the Joint Repurchase Agreement are allocated to the
Funds based on their pro-rata interest.
Investment Transactions - Investment security transactions are accounted for on
the date the securities are purchased or sold. Realized gains and losses from
security transactions are determined on an identified cost basis, which is also
used for tax purpose.
Investment Income - Dividend income is recorded on the ex-dividend date, except
that certain dividends from foreign securities are recorded as soon as the Fund
is informed of the ex-dividend date. Interest income is accrued as earned.
Premiums and discounts (including original issue discounts) on debt securities
are amortized. Investment income is recorded net of foreign taxes withheld if
recovery of such taxes is uncertain.
Foreign Currency Translations - The accounting records of the Trust are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S. dollars
based on current exchange rates supplied by a quotation service. The effects of
changes in foreign currency exchange rates on investments in securities are
included in net realized and unrealized gain or loss on investments in the
statement of operations.
Reported net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of forward currency
contracts, disposition of foreign currencies, currency gains and losses realized
between the trade and settlement dates on security transactions, and the
difference between the amount of net investment income accrued and the U.S.
dollar amount actually received. Net unrealized foreign currency exchange gains
and losses arise from changes in the value of receivables and payables due to
changes in exchange rates.
Forward Currency Contracts - A forward foreign currency contract ("Forward") is
an agreement between two parties to buy and sell a currency at a set price on a
future date. The market value of the Forward fluctuates with changes in currency
exchange rates. The Forward is marked-to-market daily and the change in the
market value is recorded by a Fund as an unrealized gain or loss. Realized gains
and losses are recognized when contracts are settled and are reflected in the
statement of operations. The Fund could be exposed to risk if a counter party is
unable to meet the terms of the contract (such risk is limited to the unrealized
gain, if any) or if the value of the currency changes unfavorably. The
International Active Fund may enter into these contracts for the purpose of
hedging against foreign exchange risk arising from the Fund's investment or
anticipated investment in securities denominated in foreign currencies. The Fund
also may enter into these contracts for the purpose of increasing exposure to a
foreign currency to hedge against adverse changes in the value of another
currency when exchange rates between the two currencies are positively
correlated.
B-128
<PAGE>
NOTE 2 (CONTINUED)
Expenses - Expenses directly attributable to a Portfolio or Fund are charged to
that Portfolio or Fund. Expenses not directly attributable to a Portfolio or
Fund are allocated among the affected Portfolios and Funds based on relative net
assets of each Portfolio and Fund. Costs related to the organization and
registration of the Trust have been funded by CGC and its subsidiaries. The
Trust will not reimburse CGC for these organizational costs.
Estimates - The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of these financial statements and the reported amounts
of increases and decreases in net assets from operations during the reporting
period. Actual results could differ from those estimates.
Distributions to Shareholders - Each of the Portfolios and Funds (except the
Money Market Fund) declares and distributes dividends from net investment income
and distributes its net realized capital gains, if any, at least annually. The
Money Market Fund declares dividends daily and distributes monthly. All
distributions are reinvested in the shares of the relevant Portfolio/Fund at net
asset value. Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
market discount, foreign currency transactions, losses deferred due to wash
sales and "post October 31 losses." Distributions are recorded on the
ex-dividend date.
Federal Income Taxes - Each Portfolio and Fund is treated as a separate entity
for federal tax purposes. Each Portfolio and Fund intends to qualify each year
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986. By so qualifying, each Portfolio and Fund will not be subject to
federal income taxes to the extent that they distribute all of their taxable
income, including realized capital gains, for the fiscal year. In addition, by
distributing substantially all of their net investment income, capital gains and
certain other amounts during the calendar year, the Portfolios and Funds will
not be subject to a federal excise tax. As of December 31, 1997, the
International Active Fund has a capital loss carryforward, for Federal income
tax purposes, of $232,745 expiring in December 31, 2005.
On the Statement of Assets and Liabilities, as a result of permanent book-tax
differences, reclassifications have been made between the paid in capital,
undistributed (distribution in excess of ) net investment income, and
accumulated net realized gain (loss) on investments and foreign currency
transactions accounts. These reclassifications have no impact on the net asset
value of the Portfolios and Funds.
NOTE 3 - AGREEMENTS AND FEES
PB Investment Advisors, Inc. (the "Advisor"), a wholly owned subsidiary of CGC,
which is a wholly owned indirect subsidiary of AEGON N.V., has been retained
under an Investment Advisory Agreement (the "Agreement") with the Trust, to
supervise the management and investment program of the Trust. The Advisor
manages the affairs of the Trust subject to the supervision of the Board of
Trustees. The Advisor does not receive an investment management fee for the
advisory and asset allocation services it provides to the Portfolios.
As full compensation for its services under the Agreement, each Fund will pay
the Advisor a monthly fee at the following annual rates based on the average
daily net assets of each Fund:
<TABLE>
<CAPTION>
<S> <C>
High Quality Stock Fund 0.65%
Fixed Income Fund 0.65%
International Active Fund 0.90%
Money Market Fund 0.40%
</TABLE>
B-129
<PAGE>
NOTE 3 (CONTINUED)
Under the Agreement, the Advisor has agreed to waive and absorb all operating
expenses of each Portfolio and to limit the operating expenses of each Fund so
that the ratio of expenses (excluding advisory fees) to net assets on an annual
basis does not exceed 0.25%. Expenses in excess of such amount will be assumed
by the Advisor until the earlier of the end of three years after commencement of
operations or the termination by the Trustees but not the Advisor of the
Agreement. For the period ended December 31, 1997, the Advisor agreed to
reimburse the Trust $153,693 for expenses in excess of the voluntary expense
limitations. As of December 31, 1997, $41,458 was owed to the Trust by the
Advisor.
The Advisor has entered into a Sub-Advisory Agreement with Atlanta Capital
Management Company, L.L.C. ("Atlanta Capital"), wherein Atlanta Capital will
serve as sub-advisor to the Portfolios. Subject to the supervision and direction
of the Board of Trustees, Atlanta Capital will determine how each Portfolio's
assets will be invested in the Funds. Atlanta Capital also serves as sub-advisor
of the High Quality Stock Fund and the Fixed Income Fund. As compensation for
its services, with respect to the High Quality Stock Fund and the Fixed Income
Fund, the Advisor pays Atlanta Capital a fee equal to 0.50% annually on assets
up to $25 million, 0.40% annually on assets above $25 million and up to $50
million, and 0.30% annually on assets above $50 million.
The Advisor has entered into a Sub-Advisory Agreement with Blairlogie Capital
Management ("Blairlogie"), wherein Blairlogie will serve as sub-advisor to the
International Active Fund. As compensation for its services, the Advisor pays
Blairlogie a fee equal to 0.65% annually on assets up to $50 million, and 0.50%
annually on assets above $50 million.
The Advisor has entered into a Sub-Advisory Agreement with Federated Investment
Counseling ("Federated"), wherein Federated will serve as sub-advisor to the
Money Market Fund. As compensation for its services, the Advisor pays Federated
a fee equal to 0.25% annually on assets up to $75 million, and 0.20% annually on
assets above $75 million.
Each Trustee of the Trust who is not an interested person of the Trust, Advisor
or Sub-Advisors receives $1,500 for each Trustees' meeting in which he
participates.
NOTE 4 - INVESTMENT TRANSACTIONS
Purchases and proceeds from sales and maturities of investments, excluding
short-term securities, for the period ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Non-U.S. U.S. Non-U.S. U.S.
Government Government Government Government
Purchases Purchases Sales Sales
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital Preservation Portfolio....... $ 15,327 $ -- $ 1,763 $ --
Income Oriented Portfolio............ 7,110 -- 4 --
Growth & Income Portfolio............ 174,364 -- 13,030 --
Capital Growth Portfolio............. 722,250 -- 3,127 --
Maximum Appreciation Portfolio....... 243,135 -- 4,389 --
High Quality Stock Fund.............. 11,346,269 -- 1,303,199 --
Fixed Income Fund.................... 99,500 9,395,764 -- 5,511,641
International Active Fund............ 14,444,121 -- 5,047,494 --
Money Market Fund.................... -- -- -- --
</TABLE>
Gross unrealized appreciation and depreciation at December 31, 1997, based on
the identified cost for income tax purposes, is as follows:
B-130
<PAGE>
NOTE 4 (CONTINUED)
<TABLE>
<CAPTION>
Net
Gross Gross Unrealized
Identified Unrealized Unrealized Appreciation
Cost Appreciation (Depreciation) (Depreciation)
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital Preservation Portfolio....... $ 26,964 $ -- $ (191) $ (191)
Income Oriented Portfolio............ 8,331 45 (120) (75)
Growth & Income Portfolio............ 179,988 2,447 (1,608) 839
Capital Growth Portfolio............. 812,120 6,333 (2,104) 4,229
Maximum Appreciation Portfolio....... 239,126 6,373 (761) 5,612
High Quality Stock Fund.............. 10,722,726 1,907,032 (237,053) 1,669,979
Fixed Income Fund.................... 5,382,260 128,025 -- 128,025
International Active Fund............ 9,386,898 779,773 (495,306) 284,467
Money Market Fund.................... 2,328,304 -- -- --
</TABLE>
NOTE 5 - SHAREHOLDER TRANSACTIONS:
Transactions in shares and dollars were as follows for the period May 9, 1997*
through December 31, 1997:
<TABLE>
<CAPTION>
Capital Preservation Portfolio Income Oriented Portfolio
Shares Dollars Shares Dollars
------ ------- ------ -------
<S> <C> <C> <C> <C>
Shares sold................................. 2,897 $ 29,813 759 $ 8,139
Shares issued to shareholders in
reinvestment of dividends............... 66 676 18 192
Shares redeemed............................. (345) (3,526) -- --
------- --------- ----- ------
Net increase................................ 2,618 $ 26,963 777 $ 8,331
======= ============ ======= ===========
Growth & Income Portfolio Capital Growth Portfolio
Shares Dollars Shares Dollars
------ ------- ------ -------
Shares sold................................. 17,738 $ 189,436 73,664 $ 809,314
Shares issued to shareholders in
reinvestment of dividends............... 468 5,015 538 5,933
Shares redeemed............................. (1,337) (14,478) (282) (3,127)
------- --------- ----- ------
Net increase................................ 16,869 $ 179,973 73,920 $ 812,120
======= ============ ======= ===========
Maximum Appreciation Portfolio High Quality Stock Fund
Shares Dollars Shares Dollars
------ ------- ------ -------
Shares sold................................. 21,714 $239,372 1,065,710 $10,755,139
Shares issued to shareholders in
reinvestment of dividends............... 365 4,111 19,722 227,423
Shares redeemed............................. (400) (4,389) (19,810) (224,971)
------- --------- ----- ------
Net increase................................ 21,679 $ 239,094 1,065,622 $10,757,591
======= ============ ========= ===========
</TABLE>
B-131
<PAGE>
NOTE 5 (CONTINUED)
<TABLE>
<CAPTION>
Fixed Income Fund International Active Fund
Shares Dollars Shares Dollars
------ ------- ------ -------
<S> <C> <C> <C> <C>
Shares sold................................. 528,711 $5,297,080 1,019,442 $10,188,787
Shares issued to shareholders in
reinvestment of dividends............... 18,554 190,282 1,860 17,693
Shares redeemed............................. (798) (8,338) (292) (2,795)
--------------- --------------- --------------- ---------------
Net increase................................ 546,467 $5,479,024 1,021,010 $10,203,685
================ ================ ================ ================
Money Market Fund
Shares Dollars
------ -------
Shares sold................................. 2,378,461 $2,378,461
Shares issued to shareholders in
reinvestment of dividends............... 66,964 66,964
Shares redeemed............................. (89,084) (89,084)
--------------- ---------------
Net increase................................ 2,356,341 $2,356,341
================ ================
</TABLE>
* Commencement of investment operations.
NOTE 6 - FORWARD FOREIGN CURRENCY CONTRACTS
At December 31, 1997, the outstanding forward exchange currency contracts, which
contractually obligate the Trust to deliver currencies at a specified date, were
as follows:
INTERNATIONAL ACTIVE FUND
<TABLE>
<CAPTION>
U.S. Dollar
Cost on U.S. Dollar
Currency Currency Settlement Origination Current Unrealized
Purchased Sold Date Date Value Appreciation
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GBP USD 1/16/1998 $654,560 $657,640 $3,080
</TABLE>
GBP - Great Britain Pound
USD - United States Dollar
B-132
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) (1) Financial Statements for PB Series Trust as of
December 31, 1997, included in the Prospectus:
1. Financial Highlights
(2) Financial Statements for PB Series Trust as of
December 31, 1997, included in the Statement of
Additional Information:
1. Schedules of Investments
2. Statements of Assets and Liabilities
3. Statements of Operations
4. Statements of Changes in Net Assets
5. Financial Highlights
6. Notes to Financial Statements
(b) Exhibits:
1(a). Declaration of Trust of PB Series Trust (formerly
Providian Series Trust) (the "Trust") previously
filed in the Registration Statement on November 5,
1996, is incorporated herein by reference.
1(b). Amendment to Declaration of Trust is filed herewith.
2. By-Laws of the Trust previously filed in the
Registration Statement on November 1, 1996, are
incorporated herein by reference.
3. Not applicable.
4. Not applicable.
5(a). Form of Investment Advisory Agreement by and between
the Trust on behalf of each Fund and PB Investment
Advisors, Inc. previously filed in Post-Effective
Amendment No. 1 to the Registration Statement on
October 31, 1997 is incorporated herein by reference.
5(b). Form of Sub-Advisory Agreement between PB Investment
Advisors, Inc. and Atlanta Capital Management
Company, LLC previously filed in Post-Effective
Amendment No. 1 to the Registration Statement dated
October 31, 1997 is incorporated herein by reference.
5(c). Form of Sub-Advisory Agreement between PB Investment
Advisors, Inc. and Blairlogie Capital Management
previously filed in Post-Effective Amendment No. 1 to
the Registration Statement on October 31, 1997 is
incorporated herein by reference.
C-1
<PAGE>
5(d). Form of Sub-Advisory Agreement between PB Investment
Advisors, Inc. and Federated Investment Counseling
previously filed in Post-Effective Amendment No. 1 to
the Registration Statement dated October 31, 1997 is
incorporated herein by reference.
6. Not applicable.
7. Not applicable.
8. Form of Custodian Contract by and between the Trust
and State Street Bank and Trust Company previously
filed in Post-Effective Amendment No. 1 to the
Registration Statement dated October 31, 1997 is
incorporated herein by reference.
9. Form of Administration Agreement by and between the
Trust and State Street Bank and Trust Company
previously filed in Post-Effective Amendment No. 1 to
the Registration Statement dated October 31, 1997 is
incorporated herein by reference.
10. Opinion and Consent of Counsel as to the Legality of
the Securities being Registered previously filed in
Pre-Effective Amendment No. 2 to the Registration
Statement dated March 14, 1997, is incorporated
herein by reference.
11(a). Consent of Ernst & Young, LLP is filed herewith.
11(b). Consent of Jorden Burt Boros Cicchetti Berenson &
Johnson LLP is filed herewith.
12. Not applicable.
13. Not applicable.
14. Not applicable.
15. Not applicable.
16. Schedule for Computation of Performance Quotation is
filed herewith.
17. Financial Data Schedule is filed herewith.
18. Not applicable.
Item 25. Persons Controlled by or under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities as of December 31, 1997.
C-2
<PAGE>
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
High Quality Stock Fund 5
Fixed Income Fund 5
International Active Fund 5
Money Market Fund 4
Capital Preservation Portfolio 1
Income Oriented Portfolio 1
Growth and Income Portfolio 1
Capital Growth Portfolio 1
Maximum Appreciation Portfolio 1
</TABLE>
Item 27. Indemnification.
Reference is made to Article VI of the Registrant's
Declaration of Trust previously filed in the Registration
Statement dated, November 5, 1996, and incorporated herein by
reference.
Item 28. Business and Other Connections of the Advisor and the
Sub-Advisors.
Certain officers and directors of the Registrant's investment
adviser also serve as officers and/or directors for other
subsidiaries of the AEGON USA, Inc. For
additional information, please see Parts A and B.
Item 29. Principal Underwriters.
Not applicable.
Item 30. Location of Accounts and Records.
The accounts, books and other documents required to be
maintained by the Registrant pursuant to Section 31(a) of the
Investment Company Act of 1940 and the rules promulgated
thereunder are in the possession of the Adviser or the
Custodian.
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
(a) Not applicable.
(b) Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders, upon request and without
charge, beginning with the fiscal year ending December 31,
1998.
C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this amendment
to its Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized in the City of Louisville, and the Commonwealth of
Kentucky on the 30th day of April 1998.
PB SERIES TRUST
By: /s/ Thomas J. Hartlage
----------------------
Thomas J. Hartlage
President and Trustee
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Thomas J. Hartlage President and Trustee 4/30/98
- -----------------------------
Thomas J. Hartlage
/s/ Kirk Buese Trustee 4/30/98
- -----------------------------
Kirk Buese
/s/ Jesse A. Holshouser, III Trustee 4/30/98
- -----------------------------
Jesse A. Holshouser, III
/s/ David L. Eager Trustee 4/30/98
- -----------------------------
David L. Eager
/s/ William T. Mills, III Trustee 4/30/98
- -----------------------------
William T. Mills, III
</TABLE>
C-4
<PAGE>
POWER OF ATTORNEY
We, as officers and trustees of PB Series Trust, hereby severally
constitute and appoint Michael Berenson and R. Michael Slaven, and each of them
singly, our true and lawful attorney and full pwer to them and each of them to
sign for us, in our names in the capacities indicated below, any and all
registration statements to be filed with the Securities and Exchange Commission,
and any and all amendments thereto (including specifically, without limitation,
post-effective amendments), for the purposes of registering shares of series of
PB Series Trust for sale pursuant to the Securities Act of 1933.
Witness our hands on the date set forth below.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ David L. Eager Trustee 4/30/98
- -----------------------------
David L. Eager
/s/ Jesse A. Holshouser, III Trustee 4/30/98
- -----------------------------
Jesse A. Holshouser, III
/s/ Kirk Buese Trustee 4/30/98
- -----------------------------
Kirk Buese
/s/ William T. Mills Trustee 4/30/98
- -----------------------------
William T. Mills
/s/ Thomas J. Hartlage President and Trustee 4/30/98
- -----------------------------
Thomas J. Hartlage
/s/ Michael G. Ayers Chief Financial Officer 4/30/98
- -----------------------------
Michael G. Ayers
</TABLE>
C-5
<PAGE>
EXHIBIT LIST
Exhibit
Number Description
------ -----------
1. Amendment to Declaration of Trust.
11(a). Consent of Independent Auditors.
11(b). Consent of Jorden Burt Boros Cicchetti Berenson & Johnson.
16. Schedule for Computation of Performance Quotation.
17. Financial Data Schedule.
C-6
<PAGE>
EXHIBIT 1
Certificate of Amendment to the
Agreement and Declaration of Trust
of Providian Series Trust
The following Certificate of Amendment to the Agreement and Declaration of Trust
of Providian Series Trust ("Trust"), a Massachusetts business trust, is hereby
adopted:
FIRST: The name of the Trust is Providian Series Trust
SECOND: Section 1.1 of the Agreement and Declaration of Trust of the Trust is
amended in its entirety to be read as follows:
"1.1 Name. The name of the trust created by this Declaration of Trust
shall be PB 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 name of the
Trust as they deem proper and the Trust may hold property and conduct
its activities under such designation or name."
THIRD: The Board of Trustees approved the amendment to the Agreement and
Declaration of Trust to change the name at a regular meeting held
August 14, 1997. Said amendment shall become effective December 1,
1997.
IN WITNESS WHEREOF, said Providian Series Trust has caused this certificate to
be signed by Thomas J. Hartlage, its President, this 29th day of October, 1997.
Providian Series Trust
By: /s/Thomas J. Hartlage
---------------------------------
Thomas J. Hartlage, President
C-7
EXHIBIT 11(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" and "Independent Auditors" and to the incorporation of our report
dated February 6, 1998 in the Post-Effective Amendment No. 2 (Securities Act of
19933, Registration No. 333-15555) and in the Post-Effective Amendment No. 4
(Investment Company Act of 1940, Registration No. 811-07911) to the Registration
Statement (Form N-1A) and related Prospectus of PB Series Trust.
Ernst & Young LLP
Kansas City, Missouri
April 27, 1998
JORDENBURT
- -----------
1025 THOMAS JEFFERSON STREET, N.W. 777 BRICKELL AVENUE, SUITE 500
SUITE 400 EAST MIAMI, FLORIDA 33131-2803
WASHINGTON, D.C. 20007-0805 (305) 371-2600
(202) 965-8100 TELECOPIER: (305) 372-9928
TELECOPIER: (202) 965-8104
HTTP://WWW.JORDENUSA.COM
April 26, 1996
PB Series Trust
400 West Market Street
Louisville, Kentucky 40202
Ladies and Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Counsel" in the Prospectuses contained in Post-Effective Amendment No. 2 to the
Registration Statement on Form N-1A (Registration Nos. 333-15555 and 811-07911)
filed by PB Series Trust with the Securities and Exchange Commission under the
Securities Act of 1933 and the Investment Company Act of 1940.
Very truly yours,
/s/ Jorden Burt Boros Cicchetti Berenson & Johnson LLP
--------------------------------------------------
Jorden Burt Boros Cicchetti Berenson & Johnson LLP
Jorden Burt Boros Cicchetti Berenson & Johnson LLP
--------------------------------------------------
AFFILIATED COUNSEL:
JONES & BLOUCH LLP - WASHINGTON D.C. FLEMING & PHILLIPS - SAN FRANCISCO, CA
The PB Series Trust
Schedule of Computation of Performance Quotation
1. Average Annual Total Return:
Formula: P(1+T)n=ERV
T = average total return;
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year (or other) periods at the
end of the applicable period (or a fractional
portion thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed
in years and portion of a year
2. Aggregate Total Return:
Formula: (ERV/P)-1
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 01
<NAME> CAPITAL PRESERVATION PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAY-9-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 26,964
<INVESTMENTS-AT-VALUE> 26,773
<RECEIVABLES> 303
<ASSETS-OTHER> 4,263
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 31,339
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,565
<TOTAL-LIABILITIES> 4,565
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 26,963
<SHARES-COMMON-STOCK> 2,618
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 2
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (191)
<NET-ASSETS> 26,774
<DIVIDEND-INCOME> 425
<INTEREST-INCOME> 180
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 605
<REALIZED-GAINS-CURRENT> 73
<APPREC-INCREASE-CURRENT> (191)
<NET-CHANGE-FROM-OPS> 487
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (603)
<DISTRIBUTIONS-OF-GAINS> (73)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,897
<NUMBER-OF-SHARES-REDEEMED> (345)
<SHARES-REINVESTED> 66
<NET-CHANGE-IN-ASSETS> 26,774
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,210
<AVERAGE-NET-ASSETS> 10,719
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.24
<PER-SHARE-GAIN-APPREC> 0.26
<PER-SHARE-DIVIDEND> (0.24)
<PER-SHARE-DISTRIBUTIONS> (0.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.23
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 02
<NAME> INCOME ORIENTED PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAY-9-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 8,331
<INVESTMENTS-AT-VALUE> 8,256
<RECEIVABLES> 286
<ASSETS-OTHER> 4,257
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 12,799
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,543
<TOTAL-LIABILITIES> 4,543
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,331
<SHARES-COMMON-STOCK> 777
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (75)
<NET-ASSETS> 8,256
<DIVIDEND-INCOME> 147
<INTEREST-INCOME> 5
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 152
<REALIZED-GAINS-CURRENT> 40
<APPREC-INCREASE-CURRENT> (75)
<NET-CHANGE-FROM-OPS> 117
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (152)
<DISTRIBUTIONS-OF-GAINS> (40)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 759
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 18
<NET-CHANGE-IN-ASSETS> 8,256
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,163
<AVERAGE-NET-ASSETS> 869
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.20
<PER-SHARE-GAIN-APPREC> 0.68
<PER-SHARE-DIVIDEND> (0.20)
<PER-SHARE-DISTRIBUTIONS> (0.05)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.63
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 03
<NAME> GROWTH & INCOME PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAY-9-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 179,915
<INVESTMENTS-AT-VALUE> 180,827
<RECEIVABLES> 301
<ASSETS-OTHER> 4,431
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 185,559
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,729
<TOTAL-LIABILITIES> 4,729
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 179,972
<SHARES-COMMON-STOCK> 16,869
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 19
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (73)
<ACCUM-APPREC-OR-DEPREC> 912
<NET-ASSETS> 180,830
<DIVIDEND-INCOME> 2,799
<INTEREST-INCOME> 193
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 2,992
<REALIZED-GAINS-CURRENT> 1,968
<APPREC-INCREASE-CURRENT> 912
<NET-CHANGE-FROM-OPS> 5,872
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,989)
<DISTRIBUTIONS-OF-GAINS> (2,026)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17,738
<NUMBER-OF-SHARES-REDEEMED> (1,337)
<SHARES-REINVESTED> 468
<NET-CHANGE-IN-ASSETS> 180,830
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,417
<AVERAGE-NET-ASSETS> 58,091
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.18
<PER-SHARE-GAIN-APPREC> 0.84
<PER-SHARE-DIVIDEND> (0.18)
<PER-SHARE-DISTRIBUTIONS> (0.12)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.72
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 04
<NAME> CAPITAL GROWTH PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAY-9-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 812,087
<INVESTMENTS-AT-VALUE> 816,349
<RECEIVABLES> 311
<ASSETS-OTHER> 4,254
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 820,914
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,565
<TOTAL-LIABILITIES> 4,565
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 812,120
<SHARES-COMMON-STOCK> 73,920
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (33)
<ACCUM-APPREC-OR-DEPREC> 4,262
<NET-ASSETS> 816,349
<DIVIDEND-INCOME> 3,441
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 3,441
<REALIZED-GAINS-CURRENT> 2,459
<APPREC-INCREASE-CURRENT> 4,262
<NET-CHANGE-FROM-OPS> 10,162
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,441)
<DISTRIBUTIONS-OF-GAINS> (2,492)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 73,664
<NUMBER-OF-SHARES-REDEEMED> (282)
<SHARES-REINVESTED> 538
<NET-CHANGE-IN-ASSETS> 816,349
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,222
<AVERAGE-NET-ASSETS> 86,396
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.13
<PER-SHARE-GAIN-APPREC> 1.13
<PER-SHARE-DIVIDEND> (0.13)
<PER-SHARE-DISTRIBUTIONS> (0.09)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.04
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 05
<NAME> MAXIMUM APPRECIATION PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAY-9-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 239,079
<INVESTMENTS-AT-VALUE> 244,738
<RECEIVABLES> 337
<ASSETS-OTHER> 4,257
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 249,332
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,594
<TOTAL-LIABILITIES> 4,594
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 239,094
<SHARES-COMMON-STOCK> 21,679
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 32
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (47)
<ACCUM-APPREC-OR-DEPREC> 5,659
<NET-ASSETS> 244,738
<DIVIDEND-INCOME> 1,462
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 1,462
<REALIZED-GAINS-CURRENT> 2,634
<APPREC-INCREASE-CURRENT> 5,659
<NET-CHANGE-FROM-OPS> 9,755
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,462)
<DISTRIBUTIONS-OF-GAINS> (2,649)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 21,714
<NUMBER-OF-SHARES-REDEEMED> (400)
<SHARES-REINVESTED> 365
<NET-CHANGE-IN-ASSETS> 244,738
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,263
<AVERAGE-NET-ASSETS> 70,538
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.07
<PER-SHARE-GAIN-APPREC> 1.41
<PER-SHARE-DIVIDEND> (0.07)
<PER-SHARE-DISTRIBUTIONS> (0.12)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.29
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 06
<NAME> HIGH QUALITY STOCK FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAY-9-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 10,722,726
<INVESTMENTS-AT-VALUE> 12,392,705
<RECEIVABLES> 22,636
<ASSETS-OTHER> 129,318
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 12,544,659
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 29,595
<TOTAL-LIABILITIES> 29,595
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,757,591
<SHARES-COMMON-STOCK> 1,065,622
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 15
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 87,479
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,669,979
<NET-ASSETS> 12,515,064
<DIVIDEND-INCOME> 106,636
<INTEREST-INCOME> 43,591
<OTHER-INCOME> 0
<EXPENSES-NET> 64,965
<NET-INVESTMENT-INCOME> 85,262
<REALIZED-GAINS-CURRENT> 229,655
<APPREC-INCREASE-CURRENT> 1,669,979
<NET-CHANGE-FROM-OPS> 1,984,896
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (85,247)
<DISTRIBUTIONS-OF-GAINS> (142,176)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,065,710
<NUMBER-OF-SHARES-REDEEMED> (19,810)
<SHARES-REINVESTED> 19,722
<NET-CHANGE-IN-ASSETS> 12,515,064
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 46,919
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 78,082
<AVERAGE-NET-ASSETS> 11,116,781
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.08
<PER-SHARE-GAIN-APPREC> 1.88
<PER-SHARE-DIVIDEND> (0.08)
<PER-SHARE-DISTRIBUTIONS> (0.14)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.74
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 07
<NAME> FIXED INCOME FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAY-9-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 5,382,260
<INVESTMENTS-AT-VALUE> 5,510,285
<RECEIVABLES> 97,366
<ASSETS-OTHER> 25,403
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,633,054
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 26,367
<TOTAL-LIABILITIES> 26,367
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,478,662
<SHARES-COMMON-STOCK> 546,467
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 128,025
<NET-ASSETS> 5,606,687
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 204,045
<OTHER-INCOME> 0
<EXPENSES-NET> 30,436
<NET-INVESTMENT-INCOME> 173,609
<REALIZED-GAINS-CURRENT> 16,311
<APPREC-INCREASE-CURRENT> 128,025
<NET-CHANGE-FROM-OPS> 317,945
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (173,971)
<DISTRIBUTIONS-OF-GAINS> (16,311)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 528,711
<NUMBER-OF-SHARES-REDEEMED> (798)
<SHARES-REINVESTED> 18,554
<NET-CHANGE-IN-ASSETS> 5,606,687
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 21,981
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 53,060
<AVERAGE-NET-ASSETS> 5,208,127
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.34
<PER-SHARE-GAIN-APPREC> 0.29
<PER-SHARE-DIVIDEND> (0.34)
<PER-SHARE-DISTRIBUTIONS> (0.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.26
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 08
<NAME> INTERNATIONAL ACTIVE FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAY-9-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 9,386,898
<INVESTMENTS-AT-VALUE> 9,671,365
<RECEIVABLES> 29,007
<ASSETS-OTHER> 132,227
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,832,599
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 28,334
<TOTAL-LIABILITIES> 28,334
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,203,681
<SHARES-COMMON-STOCK> 1,021,010
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (12,039)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (673,728)
<ACCUM-APPREC-OR-DEPREC> 286,351
<NET-ASSETS> 9,804,265
<DIVIDEND-INCOME> 127,691
<INTEREST-INCOME> 28,297
<OTHER-INCOME> (12,982)
<EXPENSES-NET> 74,925
<NET-INVESTMENT-INCOME> 68,081
<REALIZED-GAINS-CURRENT> (736,159)
<APPREC-INCREASE-CURRENT> 286,351
<NET-CHANGE-FROM-OPS> (381,727)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (17,693)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,019,442
<NUMBER-OF-SHARES-REDEEMED> (292)
<SHARES-REINVESTED> 1,860
<NET-CHANGE-IN-ASSETS> 9,804,265
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 58,636
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 109,736
<AVERAGE-NET-ASSETS> 10,033,911
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.07
<PER-SHARE-GAIN-APPREC> (0.45)
<PER-SHARE-DIVIDEND> (0.02)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.60
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 09
<NAME> MONEY MARKET FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAY-9-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 2,328,304
<INVESTMENTS-AT-VALUE> 2,328,304
<RECEIVABLES> 15,001
<ASSETS-OTHER> 41,894
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,385,199
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 23,858
<TOTAL-LIABILITIES> 23,858
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,361,341
<SHARES-COMMON-STOCK> 2,361,341
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 2,361,341
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 75,611
<OTHER-INCOME> 0
<EXPENSES-NET> 8,647
<NET-INVESTMENT-INCOME> 66,964
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 66,964
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (66,964)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,378,461
<NUMBER-OF-SHARES-REDEEMED> (89,084)
<SHARES-REINVESTED> 66,964
<NET-CHANGE-IN-ASSETS> 2,356,341
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,321
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 35,513
<AVERAGE-NET-ASSETS> 2,048,737
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.03)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
