<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1997
FILE NO. 33-71592
FILE NO. 811-8674
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 7 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 8 /X/
PROTECTIVE INVESTMENT COMPANY
(Exact Name of Registrant)
2801 Highway 280 South
Birmingham, Alabama 35223
(Address of Principal Executive Offices)
Registrant's Telephone Number: 1-800-866-3555
Steve M. Callaway, Esquire
2801 Highway 280 South
Birmingham, Alabama, 35223
(Name and Address of Agent for Service of Process)
COPY TO:
Stephen E. Roth, Esquire
Sutherland, Asbill & Brennan
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
It is proposed that this filing become effective (check appropriate box):
/ / immediately upon filing pursuant to paragraph (b) of Rule 485
/X/ on May 1, 1997 pursuant to paragraph (b) of Rule 485
/ / 60 days after filing pursuant to paragraph (a)(i) of Rule 485
/ / on date pursuant to paragraph (a)(i) of Rule 485
/ / 75 days after filing pursuant to paragraph (a)(ii) of Rule 485
/ / on date pursuant to paragraph (a)(ii) of Rule 485
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
registrant has previously registered an indefinite amount of securities under
the Securities Act of 1933. The registrant filed a Rule 24f-1 Notice for the
fiscal year ended December 31, 1995, on February 1, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROTECTIVE INVESTMENT COMPANY
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A)
<TABLE>
<CAPTION>
N-1A
ITEM NO.
- -------------
PART A CAPTION
INFORMATION REQUIRED IN A PROSPECTUS ---------------------------
<C> <S> <C>
1. Cover Page........................................... Cover Page
2. Synopsis............................................. Not Applicable
3. Condensed Financial Information...................... Condensed Financial
Information
4. General Description of Registrant.................... Introduction; Investment
Objectives and Policies;
Special Investment Methods
and Risks
5. Management of the Fund............................... Management
5A Management's Discussion of Performance............... Not Applicable
6. Capital Stock and Other Securities................... Other Information
7. Purchase of Securities Being Offered................. Offering, Purchase and
Redemption of Shares
8. Redemption or Repurchase............................. Offering, Purchase and
Redemption of Shares
9. Pending Legal Proceedings............................ Not Applicable
<CAPTION>
PART B
INFORMATION REQUIRED IN A
STATEMENT OF ADDITIONAL INFORMATION
<C> <S> <C>
10. Cover Page........................................... Cover Page
11. Table of Contents.................................... Table of Contents
12. General Information and History...................... Introduction; Shares of
Stock
13. Investment Objectives and Policies................... Additional Investment
Policy Information;
Special Investment Methods
and Risks; Investment
Restrictions
14. Management of the Registrant......................... Investment Manager;
Investment Advisers;
Directors and Officers
15. Control Persons and Principal Holders of
Securities.......................................... Shares of Stock
16. Investment Advisory and Other Services............... Investment Manager;
Investment Advisers
17. Brokerage Allocation and Other Practices............. Portfolio Transactions and
Brokerage
18. Capital Stock and Other Securities................... Shares of Stock
19. Purchase, Redemption and Pricing of Securities Being
Offered............................................. Determination of Net Asset
Value
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N-1A
ITEM NO. CAPTION
- ----------- ---------------------------------
<C> <S> <C>
20. Tax Status.......................................................... Not Applicable
21. Underwriters........................................................ Not Applicable
22. Calculation of Performance Data..................................... Performance Information
23. Financial Statements................................................ Financial Statements
</TABLE>
PART C OTHER INFORMATION
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PART A
INFORMATION REQUIRED IN A PROSPECTUS
<PAGE>
PROTECTIVE INVESTMENT COMPANY
PROSPECTUS
MAY 1, 1997
Protective Investment Company (the "Company") is an investment company
consisting of seven separate investment portfolios or funds (the "Funds") each
of which has different investment objectives.
PROTECTIVE MONEY MARKET FUND seeks to maximize current income to the extent
consistent with the preservation of capital and maintenance of liquidity. This
Fund will pursue its objective by investing exclusively in high quality money
market instruments. AN INVESTMENT IN THE MONEY MARKET FUND IS NEITHER INSURED
NOR GUARANTEED BY THE U.S. GOVERNMENT AND THE COMPANY CANNOT ASSURE THAT IT WILL
BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1 PER SHARE.
PROTECTIVE CORE U.S. EQUITY FUND (formerly Select Equity Fund) seeks total
return consisting of capital appreciation plus dividend income. This Fund will
pursue its objective by investing, in a broadly diversified portfolio of
predominantly large capitalization and "blue chip" equity securities
representing all major sectors of the U.S. economy selected using both
fundamental research and a variety of quantitative techniques that seek to
maximize the Fund's reward to risk ratio.
PROTECTIVE CAPITAL GROWTH FUND seeks long-term capital growth. The Fund will
pursue its objective by investing, under normal circumstances, at least 65% of
its total assets in equity securities having long-term capital appreciation
potential.
PROTECTIVE SMALL CAP EQUITY FUND seeks long-term capital growth. This Fund
will pursue its objective by investing, under normal circumstances, at least 65%
of its total assets in equity securities of companies with public stock market
capitalizations of $1 billion or less at the time of investment.
PROTECTIVE INTERNATIONAL EQUITY FUND seeks long-term capital appreciation.
This Fund will pursue its objective by investing primarily in equity and
equity-related securities of companies that are organized outside the United
States or whose securities are primarily traded outside the United States.
PROTECTIVE GROWTH AND INCOME FUND seeks long-term growth of capital and
growth of income. This Fund will pursue its objectives by investing, under
normal circumstances, at least 65% of its total assets in equity securities
having favorable prospects for capital appreciation and/or dividend paying
ability.
PROTECTIVE GLOBAL INCOME FUND seeks high total return, emphasizing current
income and, to a lesser extent, providing opportunities for capital
appreciation. This Fund will pursue its objectives by investing primarily in
high quality fixed-income securities of U.S. and foreign issuers and through
foreign currency transactions.
These Funds are available to the public only through the purchase of certain
variable annuity and variable life insurance contracts (the "Contracts") issued
by Protective Life Insurance Company.
This Prospectus briefly describes the information that investors should know
before investing in these Funds including the risks associated with investing in
each. Investors should read and retain this prospectus for future reference. A
statement of additional information dated May 1, 1997, has been filed with the
Securities and Exchange Commission and contains further information about the
Funds. The statement of additional information is incorporated herein by
reference. A copy may be obtained without charge by calling 1-800-866-3555 or
writing the Company at P.O. Box 2606, Birmingham, Alabama 35202.
SHARES OF THE COMPANY ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY. AN INVESTMENT IN ANY OF THE FUNDS INVOLVES INVESTMENT RISK INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
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.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS FOR THE
CONTRACTS.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION.................................................................... 2
FINANCIAL HIGHLIGHTS............................................................ 3
INVESTMENT OBJECTIVES AND POLICIES.............................................. 4
Protective Money Market Fund.................................................. 4
Protective CORE U.S. Equity Fund.............................................. 6
Protective Capital Growth Fund................................................ 7
Protective Small Cap Equity Fund.............................................. 8
Protective International Equity Fund.......................................... 9
Protective Growth and Income Fund............................................. 10
Protective Global Income Fund................................................. 11
SPECIAL INVESTMENT METHODS AND RISKS............................................ 13
Convertible Securities........................................................ 13
Fixed-Income Securities....................................................... 13
Repurchase Agreements......................................................... 16
When-Issued Securities and Forward Commitments................................ 16
Lending of Portfolio Securities............................................... 16
Restricted and Illiquid Securities............................................ 17
Borrowing..................................................................... 17
Options on Securities and Securities Indices.................................. 17
Futures Contracts and Options on Futures Contracts............................ 18
Foreign Transactions.......................................................... 19
Short Sales Against-the-Box................................................... 24
Other Investment Companies.................................................... 24
Non-Diversified Status........................................................ 24
Risks of Investing in Small Capitalization Companies.......................... 24
Warrants and Rights........................................................... 24
Unseasoned Issuers............................................................ 24
INVESTMENT RESTRICTIONS......................................................... 25
PORTFOLIO TURNOVER.............................................................. 25
MANAGEMENT...................................................................... 25
Directors and Officers........................................................ 25
Investment Manager............................................................ 25
Investment Advisers........................................................... 26
PERFORMANCE INFORMATION......................................................... 29
DETERMINATION OF NET ASSET VALUE................................................ 29
OFFERING, PURCHASE AND REDEMPTION OF SHARES..................................... 30
INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS................................ 30
TAXES........................................................................... 31
OTHER INFORMATION............................................................... 32
Reports....................................................................... 32
Voting and Other Rights....................................................... 32
Custody of Assets............................................................. 33
Accounting and Administrative Services........................................ 33
Transfer Agent................................................................ 33
</TABLE>
<PAGE>
INTRODUCTION
Protective Investment Company (the "Company") is an open-end management
investment company incorporated in the State of Maryland on September 2, 1993.
The Company consists of seven separate investment portfolios or funds (the
"Funds" or a "Fund"), each of which is, in effect, a separate mutual fund. The
Company issues a separate class of stock for each Fund representing fractional
undivided interests in that Fund. An investor, by investing in a Fund, becomes
entitled to a pro-rata share of all dividends and distributions arising from the
net income and capital gains on the investments of that Fund. Likewise, an
investor shares pro-rata in any losses of that Fund.
Pursuant to an investment management agreement and subject to the authority
of the Company's board of directors, Investment Distributors Advisory Services,
Inc. ("IDASI") serves as the Company's investment manager (the "Investment
Manager") and conducts the business and affairs of the Company. IDASI has
engaged Goldman Sachs Asset Management International ("GSAMI"), an affiliate of
Goldman, Sachs & Co., as the investment adviser to provide day-to-day portfolio
management for the Protective International Equity Fund and the Protective
Global Income Fund. IDASI has engaged Goldman Sachs Asset Management ("GSAM"), a
separate operating division of Goldman, Sachs & Co., as the investment adviser
to provide day-to-day portfolio management for each of the other Funds. (GSAM
and GSAMI are each referred to herein as the "Adviser" or together as the
"Advisers," as appropriate. Goldman, Sachs & Co. is referred to herein as
"Goldman Sachs").
The Company currently offers each class of its stock to a separate account
of Protective Life Insurance Company ("Protective Life") as funding vehicles for
certain variable annuity and variable life insurance contracts (the "Contracts")
issued by Protective Life through separate accounts (the "Accounts"). The
Company does not offer its stock directly to the general public. Each Account,
like the Company, is registered as an investment company with the Securities and
Exchange Commission ("SEC") and a separate prospectus, which accompanies this
prospectus, describes the Account and the Contracts issued through that Account.
The Company may, in the future, offer its stock to other registered and
unregistered separate accounts of Protective Life and its affiliates supporting
other variable annuity contracts or variable life insurance contracts and to
qualified pension and retirement plans.
2
<PAGE>
PROTECTIVE INVESTMENT COMPANY
FINANCIAL HIGHLIGHTS
FOR A SHARE OF COMMON STOCK OUTSTANDING FOR THE PERIOD INDICATED
<TABLE>
<CAPTION>
NET ASSETS DIVIDENDS DISTRIBUTIONS
VALUE AT NET REALIZED AND TOTAL FROM FROM NET IN EXCESS OF DISTRIBUTIONS
BEGINNING IVESTMENT UNREALIZED INVESTMENT INVESTMENT NET INVESMENT FROM NET
OF PERIOD INCOME (3) GAIN (LOSS) OPERATIONS INCOME INCOME REALIZED GAINS
----------- ----------- ------------ ----------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Global Income Fund
1/1/96 - 12/31/96.......... $ 10.074 $ 0.628 $ 0.310 $ 0.938 $ (0.628) $ (0.036) $ (0.171)
1/1/95 - 12/31/95.......... 9.558 0.607 0.968 1.575 (0.553) (0.323) (0.183)
3/14/94 - 12/31/94 (1)..... 10.000 0.367 (0.442) (0.075) (0.367) 0.000 0.000
International Equity Fund
1/1/96 - 12/31/96.......... 11.045 0.140 1.955 2.095 (0.005) 0.000 (0.270)
1/1/95 - 12/31/95.......... 9.581 0.067 1.817 1.884 (0.076) (0.344) 0.000
3/14/94 - 12/31/94 (1)..... 10.000 0.048 (0.467) (0.419) 0.000 0.000 0.000
Capital Growth Fund
1/1/96 - 12/31/96.......... 10.613 0.134 2.209 2.343 (0.134) (0.002) (0.125)
6/13/95 - 12/31/95 (2)..... 10.000 0.080 0.613 0.693 (0.080) 0.000 0.000
Growth and Income Fund
1/1/96 - 12/31/96.......... 12.197 0.266 2.987 3.253 (0.266) 0.000 (1.001)
1/1/95 - 12/31/95.......... 9.661 0.246 2.854 3.100 (0.246) 0.000 (0.318)
3/14/94 - 12/31/94 (1)..... 10.000 0.114 (0.300) (0.186) (0.114) 0.000 (0.031)
CORE U.S. Equity Fund
1/1/96 - 12/31/96.......... 13.109 0.180 2.706 2.886 (0.180) 0.000 (0.378)
1/1/95 - 12/31/95.......... 9.839 0.143 3.470 3.613 (0.143) 0.000 (0.200)
3/14/94 - 12/31/94 (1)..... 10.000 0.093 (0.039) 0.054 (0.093) 0.000 (0.120)
Small Cap Equity Fund
1/1/96 - 12/31/96.......... 9.345 0.030 1.840 1.870 (0.030) 0.000 (1.163)
1/1/95 - 12/31/95.......... 8.951 0.079 0.502 0.581 (0.079) 0.000 (0.031)
3/14/94 - 12/31/94 (1)..... 10.000 0.038 (1.025) (0.987) (0.038) 0.000 (0.001)
Money Market Fund
1/1/96 - 12/31/96.......... 1.000 .047 0.000 0.047 (0.047) 0.000 0.000
1/1/95 - 12/31/95.......... 1.000 0.052 0.000 0.052 (0.052) 0.000 0.000
3/14/94 - 12/31/94 (1)..... 1.000 0.031 0.000 0.031 (0.031) 0.000 0.000
<CAPTION>
RATIO OF
RATIO OF NET
DISTRIBUTIONS NET ASSET NET ASSETS OPERATING INVESTMENT
IN EXCESS OF VALUE AT END OF EXPENSES TO INCOME TO
NET REALIZED TOTAL END OF TOTAL PERIOD AVERAGE NET AVERAGE NET
GAINS DISTRIBUTIONS PERIOD RETURN (4) (000)] ASSETS (3) ASSETS
------------- ------------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C>
Global Income Fund
1/1/96 - 12/31/96.......... $ 0.000 $ (0.835) $ 10.177 9.48% $ 37,675 1.10% 5.71%
1/1/95 - 12/31/95.......... 0.000 (1.059) 10.074 16.94 31,085 1.10 5.94
3/14/94 - 12/31/94 (1)..... 0.000 (0.367) 9.558 (0.74) 17,281 1.10(5) 5.58(5)
International Equity Fund
1/1/96 - 12/31/96.......... 0.000 (0.275) 12.865 19.00 96,736 1.10 0.52
1/1/95 - 12/31/95.......... 0.000 (0.420) 11.045 19.66 58,842 1.10 0.96
3/14/94 - 12/31/94 (1)..... 0.000 0.000 9.581 (4.18) 27,385 1.10(5) 1.25(5)
Capital Growth Fund
1/1/96 - 12/31/96.......... (0.048) (0.309) 12.647 22.05 30,299 0.80 1.54
6/13/95 - 12/31/95 (2)..... 0.000 (0.080) 10.613 6.93 10,716 0.80(5) 2.57(5)
Growth and Income Fund
1/1/96 - 12/31/96.......... 0.000 (1.267) 14.183 26.82 210,587 0.80 2.11
1/1/95 - 12/31/95.......... 0.000 (0.564) 12.197 32.29 128,076 0.80 2.36
3/14/94 - 12/31/94 (1)..... (0.008) (0.153) 9.661 (1.86) 42,305 0.80(5) 2.21(5)
CORE U.S. Equity Fund
1/1/96 - 12/31/96.......... 0.000 (0.558) 15.437 21.94 101,624 0.80 1.44
1/1/95 - 12/31/95.......... 0.000 (0.343) 13.109 36.73 56,723 0.80 1.69
3/14/94 - 12/31/94 (1)..... (0.002) (0.215) 9.839 0.53 17,717 0.80(5) 2.44(5)
Small Cap Equity Fund
1/1/96 - 12/31/96.......... 0.000 (1.193) 10.022 20.22 64,433 0.80 0.31
1/1/95 - 12/31/95.......... (0.077) (0.187) 9.345 6.46 43,830 0.80 1.09
3/14/94 - 12/31/94 (1)..... (0.023) (0.062) 8.951 (9.87) 21,813 0.80(5) 1.07(5)
Money Market Fund
1/1/96 - 12/31/96.......... 0.000 (0.047) 1.000 4.82 6,121 0.60 4.72
1/1/95 - 12/31/95.......... 0.000 (0.052) 1.000 5.32 5,070 0.60 5.19
3/14/94 - 12/31/94 (1)..... 0.000 (0.031) 1.000 3.14 3,618 0.60(5) 3.80(5)
<CAPTION>
PORTFOLIO AVERAGE
TURNOVER COMMISSION RATE
RATE (7)
----------- ---------------
Global Income Fund
1/1/96 - 12/31/96.......... 214% N/A
1/1/95 - 12/31/95.......... 295 --
3/14/94 - 12/31/94 (1)..... 210(6) --
International Equity Fund
1/1/96 - 12/31/96.......... 38 .032
1/1/95 - 12/31/95.......... 40 --
3/14/94 - 12/31/94 (1)..... 33(6) --
Capital Growth Fund
1/1/96 - 12/31/96.......... 35 .058
6/13/95 - 12/31/95 (2)..... 5(6) --
Growth and Income Fund
1/1/96 - 12/31/96.......... 49 .058
1/1/95 - 12/31/95.......... 55 --
3/14/94 - 12/31/94 (1)..... 36(6) --
CORE U.S. Equity Fund
1/1/96 - 12/31/96.......... 34 .054
1/1/95 - 12/31/95.......... 60 --
3/14/94 - 12/31/94 (1)..... 56(6) --
Small Cap Equity Fund
1/1/96 - 12/31/96.......... 100 .049
1/1/95 - 12/31/95.......... 60 --
3/14/94 - 12/31/94 (1)..... 17(6) --
Money Market Fund
1/1/96 - 12/31/96.......... N/A N/A
1/1/95 - 12/31/95.......... N/A --
3/14/94 - 12/31/94 (1)..... N/A --
</TABLE>
- ----------------------------------------
(1) Investment operations commenced on March 14, 1994.
(2) Investment operations commenced on June 13, 1995.
(3) Net Investment Income and Ratio of Operating Expenses to Average Net Assets
is after reimbursement of certain fees and expenses by Protective Life. Had
Protective Life not undertaken to reimburse expenses related to the Funds,
net investment income per share and the ratio of operating expenses to
average net assets would have been as follows: For the year ended December
31, 1996: Global Income Fund, $0.598 and 1.42%; International Equity Fund,
$0.110 and 1.38%; Capital Growth Fund, $0.115 and 1.02%; Growth and Income
Fund, $0.257 and 0.88%; CORE U.S. Equity Fund, $0.166 and 0.91%; Small Cap
Equity Fund, $0.018 and 0.94%; and Money Market Fund, 0.041 and 1.27%,
respectively. For the period ended December 31, 1995: Global Income Fund,
$0.577 and 1.50%; International Equity Fund, $0.032 and 1.55%; Capital
Growth Fund, $0.055 and 1.62%; Growth and Income Fund, $0.236 and 0.93%;
CORE U.S. Equity Fund, $0.125 and 1.01%; Small Cap Equity Fund, $0.065 and
1.00%; and Money Market Fund, $0.046 and 1.17%, respectively. For the
period ended December 31, 1994: Global Income Fund, $0.320 and 2.12%;
International Equity Fund, $0.004 and 2.24%; Growth and Income Fund, $0.097
and 1.31%; CORE U.S. Equity Fund, $0.055 and 1.81%; Small Cap Equity Fund,
$0.009 and 1.62%; and Money Market Fund, $0.018 and 2.24%, respectively.
(4) Total return is calculated assuming a purchase of shares at net asset value
per share on the first day and a sale at net asset value per share on the
last day of each period reported. Distributions are assumed, for the
purposes of this calculation, to be reinvested at the net asset value per
share on the respective payment dates of each Fund. Total return for a
period of less than one year is not annualized.
(5) Annualized.
(6) Non-Annualized.
(7) For fiscal years beginning on or after September 1, 1995, a Fund, which
invests 10% or more of its net assets in equity securities that trade with
a commission, is required to disclose its average commission rate per
share.
3
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund has one or more investment objectives and related investment
policies and uses various investment techniques to pursue these objectives and
policies. THERE CAN BE NO ASSURANCE THAT ANY OF THE FUNDS WILL ACHIEVE ITS
INVESTMENT OBJECTIVE OR OBJECTIVES. Investors should not consider any one Fund
alone to be a complete investment program. All of the Funds are subject to the
risk of changing economic conditions, as well as the risk inherent in the
ability of the Adviser to make changes in the portfolio composition of the Fund
in anticipation of changes in economic, business, and financial conditions. As
with any security, a risk of loss is inherent in an investment in the shares of
any of the Funds.
In choosing a Fund's equity securities, the Adviser utilizes first-hand
fundamental research, including visiting company facilities to assess operations
and to meet decision-makers. The Adviser also may use a macro analysis of
numerous economic and valuation variables to anticipate changes in company
earnings and the overall investment climate. The Adviser is able to draw on the
research and market expertise of the Goldman Sachs Global Investment Research
Department and other affiliates of the Adviser as well as information provided
by other securities dealers. Equity securities in a Fund's portfolio will
generally be sold when the Adviser believes that the market price fully reflects
or exceeds the securities' fundamental valuation or when other more attractive
investments are identified.
The different types of securities, investments, and investment techniques
used by each Fund 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 exists the risk that the issuer of a security may not be able to meet its
obligations on interest or principal payments at the time required by the
instrument. In addition, the value of debt instruments generally rises and falls
inversely with prevailing current interest rates. As described below, an
investment in certain of the Funds entails special additional risks as a result
of their ability to invest a substantial portion of their assets in either
foreign investments or small capitalization issuers or both. In addition, one of
the Funds is not diversified and this entails certain special risks. See
"Special Investment Methods and Risks."
Certain types of investments and investment techniques common to one or more
Funds are described in greater detail, including the risks of each, under
"Special Investment Methods and Risks" and in the statement of additional
information ("SAI"). The Funds are also subject to certain investment
restrictions that are described under the caption "Investment Restrictions" in
either this prospectus or the SAI.
The investment objective or objectives of each Fund as well as the
investment policies are not fundamental and may be changed by the Company's
board of directors without shareholder approval. Certain of the investment
restrictions of each Fund are fundamental and may not be changed without the
approval of a majority of the votes attributable to the outstanding shares of
that Fund. See "Investment Restrictions."
PROTECTIVE MONEY MARKET FUND
The investment objective of the Money Market Fund is to maximize current
income to the extent consistent with the preservation of capital and the
maintenance of liquidity. The Money Market Fund will pursue this objective by
investing in the following high quality money market instruments:
1. securities issued or guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities ("U.S.
Government Securities") and related custody receipts;
2. obligations issued or guaranteed by U.S. banks (including certificates of
deposit, loan participation interests, commercial paper, unsecured bank
promissory notes, time deposits, and bankers' acceptances) that have more
than $1 billion in total assets at the time of purchase as well as debt
obligations of U.S. subsidiaries of such banks;
4
<PAGE>
3. commercial paper (unsecured promissory notes including variable amount
master demand notes and asset-backed commercial paper) issued or
guaranteed by U.S. corporations or other entities that are, at the time
of purchase, rated in the two highest rating categories for short-term
debt obligations of at least one nationally recognized statistical rating
organization ("NRSRO");
4. other short-term obligations issued or guaranteed by U.S. corporations,
(including short-term funding agreements) state and municipal governments
or other entities;
5. unrated notes, paper, or other instruments that the Adviser determines to
be of comparable high quality; and
6. repurchase agreements with banks and government securities dealers,
provided that:
(a) at the time that the repurchase agreement is entered into, and
throughout the duration of the agreement, the collateral has a
market value at least equal to the value of the repurchase
agreement; and
(b) the collateral consists of U.S. Government Securities or
instruments that are rated in the highest rating category by the
requisite NRSROs (as defined below).
The Money Market Fund may acquire any of the above securities on a forward
commitment or when-issued basis. The Fund may also lend portfolio securities and
invest in other investment companies. See "Special Investment Methods and
Risks."
The Money Market Fund will only invest in instruments denominated in U.S.
dollars that the Adviser, under the supervision of the Company's board of
directors, determines present minimal credit risk and are, at the time of
acquisition, either:
1. rated in one of the two highest rating categories for short-term debt
obligations assigned by at least two NRSROs, or by only one NRSRO if only
one NRSRO has issued a rating with respect to the instrument ("requisite
NRSROs"); or
2. in the case of an unrated instrument, determined by the Adviser, under
the supervision of the Investment Manager and the Company's board of
directors, to be of comparable quality to the instruments described in 1
above; or
3. issued by an issuer that has received a rating of the type described in 1
above on other securities that are comparable in priority and security to
the instrument.
Except as may be permitted in the future by changes in SEC regulation, the
Money Market Fund will invest 95% of its total assets in securities that are
rated in the highest category by the requisite NRSROs or unrated securities of
comparable investment quality. Of securities not rated in the highest category
(or not of comparable quality), the Fund will not invest more than the greater
of 1% of its total assets or $1 million in the securities of any single issuer.
The Fund is diversified. Except as explained in the SAI, the Fund will not
invest more than 5% of its assets (taken at amortized cost) in securities of any
single issuer (except U.S. Government securities or repurchase agreements
collateralized by such securities).
All Money Market Fund portfolio instruments will mature within 13 months or
less of the time that they are acquired. The average maturity of the Fund's
portfolio securities based on their dollar value will not exceed 90 days at the
time of each investment. If the disposition of a portfolio security results in a
dollar-weighted average portfolio maturity in excess of 90 days, the Money
Market Fund will invest its available cash in such manner as to reduce its
dollar-weighted average portfolio maturity to 90 days or less as soon as is
reasonably practicable.
NRSROs include Standard & Poor's Ratings Group, Moody's Investors Service,
Inc., Fitch Investors Service, Inc., Duff and Phelps, Inc., IBCA Limited and its
affiliate IBCA Inc., and Thompson BankWatch. See Appendix A to the SAI for a
description of each NRSRO's rating categories.
5
<PAGE>
PROTECTIVE CORE U.S. EQUITY FUND
The investment objective of the CORE U.S. Equity Fund is to provide
investors with long-term growth of capital and dividend income.
The CORE U.S. Equity Fund seeks to achieve its investment objective by
investing in a broadly diversified portfolio of predominantly large
capitalization and "blue chip" equity securities representing all major sectors
of the U.S. economy. The Fund invests, under normal circumstances, at least 90%
of its total assets in equity securities selected using both fundamental
research and a variety of quantitative techniques that seek to maximize the
Fund's reward to risk ratio. The Fund's portfolio is designed to have risk,
capitalization and industry characteristics similar to that of the S&P 500
Index. The Fund seeks to have a broad representation in most major sectors of
the U.S. economy and be comprised of companies with above-average market
capitalizations, average growth prospects, and average dividend yields. The Fund
may invest only in those debt securities that are considered cash equivalents.
The CORE U.S. Equity Fund invests primarily in equity securities, consisting
of common stocks, preferred stocks, convertible securities and warrants. To a
limited extent, the Fund may purchase the securities of issuers with less than
three years' continuous operating history ("unseasoned issuers") and other
investment companies. See "Special Investment Methods and Risks." The CORE U.S.
Equity Fund may invest in equity securities that are issued by foreign issuers
and are traded in the United States. All such securities will be issued by
foreign companies that comply with U.S. accounting standards. The Fund may also
invest in American depository receipts ("ADRs") and global depository receipts
("GDRs"). ADRs are receipts typically issued by a U.S. bank or trust company
which evidence ownership of underlying securities of foreign corporations. GDRs
are receipts issued by non-U.S. financial institutions evidencing an arrangement
similar to ADRs. Generally, ADRs, in registered form, are designed for trading
in U.S. securities markets and GDRs, issued in either registered or bearer form,
are designed for trading on a global basis. See "Special Investment Methods and
Risks."
The CORE U.S. Equity Fund will normally maintain cash balances in the range
of 2% to 5% of the Fund's net assets. The Fund may purchase futures contracts on
the S&P 500 Index in order to keep the Fund's effective equity exposure close to
100%. For example, if cash balances are equal to 5% of the net assets, the Fund
may enter into long futures contracts covering an amount equal to 5% of the
Fund's net assets. See "Special Investment Methods and Risks." Under unusual
circumstances, the Fund may temporarily hold up to 35% of its assets in cash or
such short-term instruments of the type that the Money Market Fund may hold for
liquidity purposes. In addition to the purchase and sale of futures contracts on
the S&P 500 Index, it may purchase securities on a when-issued or forward
commitment basis and engage in securities lending. See "Special Investment
Methods and Risks."
The Adviser begins with a universe consisting primarily of blue chip and
other large capitalization equity securities and assigns each security a rating
based on the multifactor model (described below) and if the security is followed
by the Goldman Sachs Global Investment Research Department (the "research
department") a second rating is assigned based upon the research department's
evaluation. In selecting securities for the Fund, the Adviser utilizes
optimization models to evaluate the ratings assigned by the multifactor model
and the research department to build a diversified portfolio. This portfolio is
primarily comprised of securities rated highest by the multifactor model and
research analysts and has risk characteristics and industry weightings similar
to those of the S&P 500 Index. Under normal circumstances, the securities of any
one issuer will not exceed 5% of the Fund's total assets.
The multifactor model is a sophisticated computerized rating system for
evaluating equity securities according to fundamental investment
characteristics. The factors used by the multifactor model incorporate many
variables studied by traditional fundamental analysts, and cover measures of
value, growth, momentum and risk (E.G., price/earnings ratio, book/price ratio,
long and short-term growth estimates, earnings estimates, price momentum, price
volatility and liquidity). All of the factors used
6
<PAGE>
in the multifactor model have been shown to significantly impact the performance
of equity securities. The weights assigned to the factors are derived using a
statistical formulation that considers each factor's historical performance in
different market environments. As such, the multifactor model is designed to
evaluate each security using only the factors that are statistically related to
returns in the anticipated market environment. Because it includes many
disparate factors, the Adviser believes that the multifactor model is broader in
scope and provides a more thorough evaluation than most conventional,
value-oriented quantitative models. As a result, the securities ranked highest
by the multifactor model do not have one dominant investment characteristic
(such as a low price/earnings ratio); rather, such securities possess a number
of attractive investment characteristics.
If the security is followed by the research department, it is also assigned
a rating based on the department's evaluation. The research department uses a
four category rating system ranging from "recommended for purchase" to "likely
to underperform." With an annual equity research budget of more than $160
million, the research department follows over 1700 issuers.
By employing both quantitative (I.E., the multifactor model) and a
qualitative (I.E., analyst's ratings) method of selecting securities, the Fund
seeks to capitalize on the strengths of each discipline.
PROTECTIVE CAPITAL GROWTH FUND
The Capital Growth Fund's investment objective is long-term growth of
capital. The Fund seeks to achieve its investment objective by investing
primarily in a diversified portfolio of equity securities that the Adviser
considers to have long-term capital appreciation potential. Among such
investments, the Fund emphasizes common stocks, but may also purchase
convertible debt securities, convertible preferred stock, warrants,
mortgage-backed and asset-backed securities and lower-rated or unrated debt
securities that the Adviser believes offer potential for long-term capital
growth. Under normal market conditions, the Fund invests at least 65% of its
total assets in equity securities, including common stocks, preferred stocks,
convertible debt securities, convertible preferred stock, warrants and other
stock purchase rights, and interests in real estate investment trusts ("REITs").
At least 75% of the Fund's assets are invested in securities of U.S.
issuers. Up to 10% of the Fund's total assets may be invested in foreign
securities including ADRs, European depository receipts ("EDRs") and GDRs and
securities of issuers in countries with emerging economies and securities
markets and securities quoted in foreign currencies. See "Special Investment
Methods and Risks." EDRs are receipts issued by non-U.S. financial institutions
evidencing an arrangement similar to ADRs. Generally, EDRs, in bearer form, are
designed for trading in European securities markets. See "Special Investment
Methods and Risks." Up to 25% of the Fund's total assets may be invested in debt
securities, including notes, bonds, debentures, U.S. Government Securities, zero
coupon bonds, mortgage-backed and asset-backed securities, and lower-rated or
unrated debt securities.
The Fund may also invest in certain instruments or utilize investment
techniques that involve special risks. These include: convertible securities,
when-issued securities and forward commitments, options on securities and
securities indices, futures contracts and options thereon, illiquid or
restricted securities, repurchase agreements, foreign securities, forward
foreign currency exchange contracts, options on foreign currency, short sales
against-the-box, stock of other investment companies, lending portfolio
securities and small capitalization companies. These investments and techniques
and their attendant risks are also described in "Special Investment Methods and
Risks."
Notwithstanding the Capital Growth Fund's investment objective of long-term
capital growth, the Fund may, when the Adviser deems appropriate, for temporary
defensive purposes to preserve capital, hold part or all of its assets in cash,
instruments of the type in which the Money Market Fund may invest,
non-convertible preferred stocks, or, subject to tax restrictions, foreign
currencies.
GROWTH ORIENTED APPROACH. The Capital Growth Fund is managed using a growth
oriented approach. Equity securities for the Fund are selected based on their
prospects for above average growth. The Adviser selects securities of growth
companies trading, in the Adviser's opinion, at a reasonable price relative to
other industries, competitors and historical price/earnings multiples. The Fund
generally invests in companies whose earnings are believed to be in a relatively
strong growth
7
<PAGE>
trend, or, to a lesser extent, in companies in which significant further growth
is not anticipated but whose market value per share is thought to be
undervalued. In order to determine whether a security has favorable growth
prospects, the Adviser ordinarily looks for one or more of the following
characteristics in relation to the security's prevailing price: prospects for
above average sales and earnings growth per share; high return on invested
capital; free cash flow generation; sound balance sheet; financial and
accounting policies, and overall financial strength; strong competitive
advantages; effective research, product development, and marketing; pricing
flexibility; strength of management; and general operating characteristics that
will enable the company to compete successfully in its marketplace.
PROTECTIVE SMALL CAP EQUITY FUND
The Small Cap Equity Fund's investment objective is long-term capital
growth. Dividend income, if any, is an incidental consideration. The Fund seeks
to achieve its investment objective by investing, under normal circumstances, at
least 65% of its total assets in equity securities of companies with public
stock market capitalizations of $1 billion or less at the time of investment.
However, the Fund currently emphasizes investments in companies with public
stock market capitalizations of $500 million or less at the time of investment.
Under normal market conditions, the Fund's investment horizon for ownership of
stocks is two to three years. Equity securities in which the Small Cap Equity
Fund may invest include common stocks, preferred stocks, convertible securities,
warrants and interests in REITs. The Adviser believes that the companies in
which the Small Cap Equity Fund may invest offer greater potential for growth of
capital than larger, more mature, better known companies. The Fund invests in
companies that the Adviser believes are well managed niche businesses that have
the potential to achieve high or improving returns on capital and/or above
average sustainable growth. Investments may be made in companies that are in the
early stages of their life that the Adviser believes have significant growth
potential. The Fund may invest in securities of small capitalization companies
which may have experienced financial difficulties. However, investments in such
small capitalization companies may involve special risks. See "Special
Investment Methods and Risks -- Risks of Investing in Small Capitalization
Companies," below.
The Adviser expects that the Small Cap Equity Fund will typically invest in
the securities of approximately 30 to 50 companies. The number of stocks owned
is intended to provide the Fund with a moderate level of diversification while
at the same time not diluting the impact of any one investment.
The Fund may also invest in certain instruments or utilize investment
techniques that involve special risks. These include: convertible securities,
lower-rated debt securities, when-issued securities and forward commitments,
options on securities and securities indices, foreign securities, ADRs, EDRs,
GDRs, forward foreign currency exchange contracts, options on foreign currency,
futures contracts and options thereon, illiquid or restricted securities,
repurchase agreements, short sales against-the-box, stock of other investment
companies and lending portfolio securities. These investments and techniques and
their attendant risks are also described in "Special Investment Methods and
Risks."
Although the Small Cap Equity Fund will invest primarily in publicly traded
U.S. securities, it may invest up to 25% of its total assets in foreign
securities, (including securities of issuers in countries with emerging
economies or securities markets and securities quoted in foreign currencies)
ADRs EDRs and GDRs. Up to 35% of its total assets, in the aggregate, may be
invested in the equity securities of companies with public stock market
capitalizations in excess of $1 billion and in fixed-income securities, which
may include notes, bonds, debentures, U.S. Government Securities and zero coupon
bonds, including lower-rated or unrated debt securities.
Notwithstanding the Small Cap Equity Fund's investment objective of
long-term capital growth, the Fund may, when the Adviser deems appropriate, for
temporary defensive purposes to preserve capital, hold part or all of its assets
in cash, instruments of the type in which the Protective Money Market Fund may
invest, non-convertible preferred stocks, or, subject to tax restrictions,
foreign currencies.
8
<PAGE>
VALUE ORIENTED APPROACH. The Small Cap Equity Fund is managed using a value
oriented approach. The Adviser evaluates securities using fundamental analysis
and intends to purchase equity securities that are, in its view, underpriced
relative to a combination of such companies' long-term earnings prospects,
growth rate, free cash flow and/or dividend-paying ability. Consideration will
be given to the business quality of the issuer. Factors positively affecting the
Adviser's view of that quality include the competitiveness and degree of
regulation in the markets in which the company operates, the existence of a
management team with a record of success, the market position of the company in
the markets in which it operates, the level of the company's financial leverage
and the sustainable return on capital invested in the business. The Fund may
also purchase securities of companies that have experienced difficulties and
that, in the opinion of the Adviser, are available at attractive prices.
PROTECTIVE INTERNATIONAL EQUITY FUND
The International Equity Fund's investment objective is long-term capital
appreciation. The Fund seeks to achieve its objective by investment primarily in
equity and equity-related securities of companies that are organized outside the
United States or of companies whose securities are principally traded outside
the United States. Under normal market conditions, the Fund will invest
substantially all, and at least 65%, of its total assets in such securities. The
Adviser may allocate the Fund's investments among many different countries
provided that such assets are invested in at least three different countries
other than the U.S. The number of stocks in which the Fund is typically invested
is intended to provide it with a moderate level of diversification while at the
same time not diluting the impact of any one investment. The Fund does not
invest more than 20% of its total assets in the securities of issuers located in
any country other than the U.S. except that it may invest up to 35% of its total
assets in securities of issuers located in Australia, Canada, France, Japan, the
United Kingdom or Germany. As with the Capital Growth Fund, the Fund is managed
using a growth oriented approach. See "Growth Oriented Approach" in the section
describing the Capital Growth Fund.
THE INTERNATIONAL EQUITY FUND IS INTENDED FOR INVESTORS WHO CAN ACCEPT THE
RISKS INVOLVED IN INVESTMENTS IN EQUITY AND EQUITY-RELATED SECURITIES OF
NON-U.S. ISSUERS, AS WELL AS IN FOREIGN CURRENCIES AND IN THE ACTIVE MANAGEMENT
TECHNIQUES THAT THE FUND GENERALLY EMPLOYS.
The equity and equity-related securities in which the International Equity
Fund primarily invests are common stock, preferred stock, convertible debt
obligations, convertible preferred stock and warrants or other rights to acquire
stock that the Adviser believes offer the potential for long-term capital
appreciation. The Fund also may invest in securities of foreign issuers in the
form of sponsored and unsponsored ADRs, EDRs, GDRs or other similar instruments
representing securities of foreign issuers. See "Special Investment Methods and
Risks."
SUBSTANTIAL INVESTMENT IN WESTERN EUROPE AND JAPAN. The International
Equity Fund expects to invest a substantial portion of its assets in the
securities of companies located in the developed countries of Western Europe and
in Japan. Investment of a substantial portion of the Fund's assets in such
countries will subject the Fund, to a greater extent than if investment was more
limited, to the risks of adverse securities markets, exchange rates and social,
political or economic events which may occur in those countries.
INVESTMENTS IN EMERGING MARKETS. The International Equity Fund may also
invest in the securities of issuers located in countries with emerging economies
or securities markets. These countries are: Argentina, Bangladesh, Botswana,
Brazil, Chile, China, Columbia, Czech Republic, Cyprus, Egypt, Ghana, Hong Kong,
Hungary, India, Indonesia, Israel, Jordan, Kenya, Malaysia, Mexico, Morocco, New
Zealand, Pakistan, Peru, Philippines, Poland, Republic of Slovakia, Singapore,
South Korea, Sri Lanka, South Africa, Swaziland, Taiwan, Thailand, Turkey,
Uruguay, Venezuela, Zambia and Zimbabwe. Because many of these countries have,
to a greater or lesser extent, emerging economies or securities markets,
investment in such countries involves certain risks that are not present in
investments in more developed countries. See "Special Investment Methods and
Risks."
9
<PAGE>
FOREIGN CURRENCY AND CURRENCY TECHNIQUES. Investment in foreign issuers
usually involves currencies of foreign countries. Because the International
Equity Fund's exposure to fluctuation of currency values is independent of its
securities positions, the value of the assets of the Fund as measured in U.S.
dollars is affected by changes in foreign currency exchange rates. An unlimited
amount of the International Equity Fund's assets may be denominated or quoted in
one or more of the foreign currencies. Substantial investment of the Fund's
assets in a particular currency will increase its exposure to adverse
developments affecting the value of that currency.
The International Equity Fund may employ certain currency techniques to seek
to hedge against currency exchange rate fluctuations or to seek to increase
total return. When used to attempt to enhance total return, these management
techniques are considered speculative. Such currency management techniques
involve risks different from those associated with investing solely in dollar-
denominated securities of U.S. issuers. The management techniques which the Fund
may employ consist of transactions in options, futures contracts, options on
futures, forward foreign currency exchange contracts and currency swaps. To the
extent that the Fund is fully invested in foreign securities while also
maintaining currency positions, it may be exposed to greater combined risk. The
Fund's net currency positions may expose it to risks independent of its
securities positions. "Special Investment Methods and Risks."
OTHER INVESTMENTS. The International Equity Fund's investments may include
U.S. Government Securities, mortgage-backed obligations, debt obligations of
corporate and asset-backed issuers, debt obligations of foreign governments and
their respective agencies, instrumentalities, political subdivisions and
authorities and debt obligations issued or guaranteed by international or
supranational entities that, in the opinion of the Adviser, offer the potential
to enhance total return. The Fund will not, under normal conditions, invest more
than 35% of its total assets in such debt obligations. The debt obligations in
which the Fund may invest may include those that are rated BBB or lower by
Standard & Poor's Ratings Group ("S&P") or Baa or higher by Moody's Investors
Services, Inc. ("Moody's"), or if unrated by such rating organizations,
determined by the Adviser to be of comparable credit quality. See Appendix A to
the SAI for a description of the corporate bond ratings assigned by S&P and
Moody's.
The International Equity Fund may also make investments or utilize
investment techniques that involve special risks. These include: convertible
securities, when-issued securities and forward commitments, options on
securities and securities indices, futures contracts and options thereon,
illiquid or restricted securities, repurchase agreements, short sales
against-the-box, stock of other investment companies, lending portfolio
securities, small capitalization companies and unseasoned issuers. These
investments and techniques and their attendant risks are described in "Special
Investment Methods and Risks."
Notwithstanding the International Equity Fund's investment objective, the
Fund may on occasion, for temporary defensive purposes to preserve capital, hold
part or all of its assets in cash, other short-term instruments of the type in
which the Money Market Fund may invest, non-convertible preferred stocks, or,
subject to certain tax restrictions, foreign currencies.
PROTECTIVE GROWTH AND INCOME FUND
The Growth and Income Fund's investment objective is long-term growth of
capital and growth of income. The Fund seeks to achieve its investment
objectives by investing, under normal market conditions, at least 65% of its
total assets in equity securities that the Adviser considers to have favorable
prospects for capital appreciation and/or dividend paying ability. As with the
Small Cap Equity Fund, the Fund is managed using a value oriented approach. See
"Value Oriented Approach" in the section describing the Small Cap Equity Fund.
Equity securities in which the Fund may invest consist of common stocks,
preferred stocks, convertible securities, warrants and other stock purchase
rights, and interests in REITs. These securities may or may not pay a current
dividend. Securities in which the Fund may invest may include securities
acquired on a when-issued or forward commitment basis, restricted or illiquid
securities, short sales against-the-box, securities of other investment
10
<PAGE>
companies, small capitalization companies and unseasoned issuers. The Fund may
also use certain investment techniques that entail special risks. These include:
options on securities and securities indices, futures contracts and options
thereon, lending portfolio securities, lower-rated or unrated debt securities,
repurchase agreements, holding and trading foreign currency, forward foreign
currency contracts, futures contracts on foreign currency and option contracts
on foreign currencies. These securities and techniques and their attendant risks
are described in "Special Investment Methods and Risks."
OTHER INVESTMENT POLICIES AND RISKS. The Growth and Income Fund may invest
up to 35% of its total assets in investment grade mortgage-backed, asset-backed
and fixed-income securities issued by corporations or other entities or in U.S.
Government Securities if such securities, in the opinion of the Adviser, offer
the potential to further the Fund's investment objective. In addition, although
the Fund will invest primarily in publicly traded U.S. securities, it may invest
up to 25% of its assets in foreign securities, including EDRs and GDRs and ADRs
and securities of issuers in countries with emerging economies or securities
markets and securities quoted in foreign currencies.
When in the judgment of the Adviser market conditions warrant, the Growth
and Income Fund may for temporary defensive purposes to preserve capital, hold
part or all of its assets in cash, instruments of the type in which the Money
Market Fund may invest, and foreign currencies.
PROTECTIVE GLOBAL INCOME FUND
The Global Income Fund's investment objective is a high total return,
emphasizing current income and, to a lesser extent, providing opportunities for
capital appreciation. The Fund invests primarily in high quality fixed-income
securities of U.S. and foreign issuers and through transactions in foreign
currencies. High quality securities are defined as securities which have ratings
of at least AA by S&P or Aa by Moody's ("high quality ratings") or, if unrated
by such rating organizations, are determined by the Fund's Adviser to be of
comparable credit quality. The Fund also may invest in obligations of foreign
governments (or agencies or instrumentalities thereof) denominated in the
issuer's currency rated A or better by Moody's or S&P, or, if not rated by such
rating organizations, determined by the Adviser to be of comparable credit
quality. A security will be considered to have met the Fund's credit criteria if
it receives the minimum required rating from at least one such rating
organization even though it has been rated below the minimum by one or more
other rating organizations.
SELECTION OF PORTFOLIO INVESTMENTS. In selecting securities for the
portfolio, the portfolio managers consider such factors as the security's
duration, sector and credit quality rating as well as the security's yield and
prospects for capital appreciation. The Global Income Fund will, under normal
market conditions, have at least 30% of its total assets, after considering the
effect of currency positions, denominated in U.S. dollars. It is expected that
the Fund will use currency transactions both to enhance overall returns for a
given level of risk and to hedge its exposure to foreign currencies. While the
Fund will have both long and short currency positions, its net long and short
foreign currency exposure will not exceed the value of the Fund's total assets.
The Fund may, for temporary defensive purposes, invest up to 100% of its total
assets in dollar-denominated securities or securities of U.S. issuers. See
"Special Investment Methods and Risks."
PORTFOLIO DURATION. Under normal interest rate conditions, the Fund's
duration generally equals that of its benchmark, the J.P. Morgan Global
Government Bond Index (hedged), plus or minus 2.5 years. Under normal interest
rate conditions, the Global Income Fund will maintain a dollar weighted average
portfolio duration of not more than seven and one-half years. Duration
represents the weighted average maturity of expected cash flows on a debt
obligation, discounted to present value. The longer the duration of a debt
obligation, the more sensitive its value is to changes in interest rates.
Maturity measures only the time final payment is due on a bond or other debt
security; it takes no account of the pattern of a security's cash flows over
time. In computing the duration of its portfolio, the Fund will have to estimate
the duration of debt obligations that are subject to prepayment or redemption by
the issuer.
11
<PAGE>
The Global Income Fund may use various techniques to shorten or lengthen the
dollar weighted average duration of its portfolio, including the acquisition of
debt obligations at a premium or discount, transactions in structured
securities, options, futures contracts and options on futures and interest rate
swaps. The Fund is not subject to any limitation with respect to the average
maturity of its portfolio or the individual securities which it may hold.
CURRENCY AND INTEREST RATE TECHNIQUES. It is expected that the Global
Income Fund will employ certain currency and interest rate management techniques
involving risks different from those associated with investing solely in
dollar-denominated fixed-income securities of U.S. issuers. Such management
techniques include transactions in options (including yield curve options),
futures contracts, options on futures contracts, structured securities, forward
foreign currency exchange contracts, currency options and futures and currency
and interest rate swaps, and interest rate floors, caps and collars. However, to
the extent that the Fund is fully invested in foreign securities while also
maintaining currency positions, it may be exposed to greater combined risk. The
Fund's net currency positions may expose it to risks independent of its
securities positions. See "Special Investment Methods and Risks."
CONCENTRATION IN CANADA, GERMANY, JAPAN AND THE UNITED KINGDOM. The Global
Income Fund may invest up to 25% of its total assets in the securities of
corporate and government issuers located in each of Canada, Germany, Japan and
the United Kingdom as well as the securities of U.S. issuers. Concentration of
the Fund's investments in such issuers or currencies will subject the Fund, to a
greater extent than if investment was more limited, to the risks of adverse
securities markets, exchange rates and social, political or economic events
which may occur in those countries. In addition, for purposes of percentage
limitations, the term "securities" does not include foreign currencies, which
means that the Fund could have more than 25% of its total assets denominated in
any particular foreign currency.
OTHER INVESTMENT POLICIES. The Global Income Fund is "non-diversified"
under the Investment Company Act of 1940 (the "Act"). The only statutory or
regulatory diversification requirements to which it is subject arise under
federal tax law. See "Taxes" and "Special Investment Methods and Risks." Except
as described above, not more than 25% of the Fund's total assets will be
invested in the securities of any one foreign government or any other issuer
(this limitation does not apply to the U.S. Government). Under normal
circumstances, the Fund will invest in securities of issuers in at least three
countries. No more than 25% of the Fund's total assets will be invested in
securities of issuers located in any country other than Canada, Germany, Japan,
the United Kingdom and the United States.
FIXED-INCOME SECURITIES. The fixed-income securities in which the Global
Income Fund may invest include: (i) U.S. Government Securities and custody
receipts therefor; (ii) securities issued or guaranteed by a foreign government
or any of its political subdivisions, authorities, agencies or instrumentalities
or by international entities (I.E., international organizations designated or
supported by government entities to promote economic reconstruction or
development, such as the World Bank); (iii) corporate debt securities; (iv)
certificates of deposit, bankers' acceptances or time deposits of U.S. or
foreign banks (including domestic or foreign branches thereof) having total
assets of more than $1 billion; (v) commercial paper of a type that the Money
Market Fund may hold; and (vi) mortgage and asset-backed securities.
Although the Global Income Fund may invest in securities satisfying the
minimum credit quality criteria prescribed above, the Fund generally intends to
invest at least 50% of its total assets in securities having the highest
applicable credit quality rating at the time of investment and unrated
securities determined by the Adviser to be of comparable credit quality to
securities with the highest applicable credit quality rating. The debt
securities in which the Fund will invest may have fixed, variable or floating
interest rates.
RISKS OF FOREIGN INVESTMENTS AND CURRENCIES. The performance of investments
in non-dollar securities will depend on, among other things, the strength of the
foreign currency against the dollar and the interest rate environment in the
country issuing the foreign currency.
12
<PAGE>
Investing the Global Income Fund's assets in securities of issuers located
outside the United States will subject the Fund to the risks of adverse social,
political or economic events which may occur in such foreign countries. See
"Special Investment Methods and Risks."
SPECIAL INVESTMENT METHODS AND RISKS
CONVERTIBLE SECURITIES
The Core U.S. Equity Fund, Capital Growth Fund, Small Cap Equity Fund,
International Equity Fund, and Growth and Income Fund may invest in convertible
securities. Convertible securities may include corporate notes or preferred
stock but are ordinarily a long-term debt obligation of the issuer convertible
at a stated exchange rate into common stock of the issuer. As with all debt and
income-bearing securities, the market value of convertible securities tends to
decline as interest rates increase and, conversely, to increase as interest
rates decline. Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality. However, when the
market price of the common stock underlying a convertible security exceeds the
conversion price, the price of the convertible security tends to reflect the
value of the underlying common stock. As the market price of the underlying
common stock declines, the convertible security tends to trade increasingly on a
yield basis, and thus may not decline in price to the same extent as the
underlying common stock. Convertible securities rank senior to common stocks in
an issuer's capital structure and are consequently of higher quality and entail
less risk than the issuer's common stock. In evaluating a convertible security,
the Adviser gives primary emphasis to the attractiveness of the underlying
common stock. The convertible securities in which the Core U.S. Equity Fund
invests are not subject to any minimum rating criteria. The convertible debt
securities in which each of the other Funds may invest are subject to the same
rating criteria as that Fund's investments in non-convertible debt securities.
Convertible debt securities are treated as equity securities for purpose of a
Fund's investment policies or restrictions.
FIXED-INCOME SECURITIES
All of the Funds may invest in U.S. Government Securities and corporate and
certain other fixed-income securities. The Core U.S. Equity Fund may only invest
in debt securities that are considered cash equivalents. Fixed-income securities
are subject to the risk that the issuer will not be able to meet principal and
interest payments on the obligations (credit risk) and may also be subject to
price volatility due to such factors as interest rate sensitivity, market
perception of the creditworthiness of the issuer and general market liquidity
(market risk). Except to the extent that values are independently affected by
currency exchange rate fluctuations, the value of fixed-income securities
generally rises when interest rates decline. Conversely, the value of
fixed-income securities generally declines when interest rates rise. The
interest rates payable on certain securities in which a Fund may invest that are
characterized as "fixed-income" securities, are not really fixed and may
fluctuate based upon changes in market rates of interest. Fixed-income
securities include U.S. Government Securities, and debt obligations of states or
municipalities or state or municipal government agencies or instrumentalities,
as well as the following:
U.S. GOVERNMENT SECURITIES. All of the Funds may purchase U.S. Government
Securities. U.S. Government Securities are obligations issued or guaranteed by
the U.S. Government, its agencies, authorities or instrumentalities. Some U.S.
Government Securities, such as Treasury bills, notes and bonds, which differ
only in their interest rates, maturities and times of issuance, are supported by
the full faith and credit of the United States. Others, such as obligations
issued or guaranteed by U.S. Government agencies, authorities or
instrumentalities are supported either by (a) the full faith and credit of the
U.S. Government (such as securities of the Small Business Administration), (b)
the right of the issuer to borrow from the Treasury (such as securities of the
Federal Home Loan Banks), (c) the discretionary authority of the U.S. Government
to purchase the agency's obligations (such as securities of the Federal National
Mortgage Association), or (d) only the credit of the issuer. No assurance
13
<PAGE>
can be given that the U.S. Government will provide financial support to U.S.
Government agencies, authorities or instrumentalities in the future. U.S.
Government Securities may also include zero coupon bonds.
Each Fund may also invest in separately traded principal and interest
components of securities guaranteed or issued by the U.S. Treasury if such
components are traded independently under the Separate Trading of Registered
Interest and Principal of Securities program ("STRIPS").
CUSTODY RECEIPTS. All of the Funds may also acquire securities issued or
guaranteed as to principal and interest by the U.S. Government, its agencies,
authorities or instrumentalities in the form of custody receipts. Such receipts
evidence ownership of future interest payments, principal payments or both on
certain notes or bonds issued by the U.S. Government, its agencies, authorities
or instrumentalities. For certain securities law purposes, custody receipts are
not considered obligations of the U.S. Government.
CORPORATE DEBT OBLIGATIONS. Corporate debt securities are subject to credit
risk and market risk. Lower rated or unrated securities are more likely to react
to developments affecting market and credit risk than are more highly rated
securities, which react primarily to movements in the general level of interest
rates.
LOWER RATED CORPORATE DEBT OBLIGATIONS. The corporate debt obligations in
which the Capital Growth Fund, Small Cap Equity Fund, International Equity Fund
and Growth and Income Fund may invest may be rated in the lowest rating
categories by S&P or by Moody's or be unrated. The Capital Growth Fund, Small
Cap Equity Fund, International Equity Fund and Growth and Income Fund may invest
up to 25%, 35%, 35% and 10%, respectively, of their total assets in such
securities. Bonds rated BB or below by S&P or Ba or below by Moody's (or
comparable unrated securities), commonly called "junk bonds," are considered
speculative and payments of principal and interest thereon may be questionable.
In some cases, such bonds may be highly speculative, have poor prospects for
reaching investment grade standing and be in default. As a result, investment in
such bonds will entail greater speculative risks than those associated with
investment in investment-grade bonds (I.E., bonds rated BBB or higher by S&P or
Baa or higher by Moody's). No minimum rating standard is required for a purchase
of bonds by the Capital Growth Fund, Small Cap Equity Fund, International Equity
Fund or Growth and Income Fund. Each such Fund may purchase debt obligations of
issuers not currently paying interest as well as issuers who are in default. See
Appendix A to the SAI for a description of the ratings issued by investment
rating services.
ZERO COUPON, DEFERRED INTEREST, PAY-IN-KIND AND CAPITAL APPRECIATION
BONDS. The Capital Growth Fund, Small Cap Equity Fund, International Equity
Fund, Growth and Income Fund and Global Income Fund may invest in zero coupon
bonds. The Global Income Fund may also invest in deferred interest, pay-in-kind
and capital appreciation bonds. Zero coupon, deferred interest, pay-in-kind and
capital appreciation bonds are debt obligations which are issued at a
significant discount from face value. The original discount approximates the
total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest accrual date at a rate of interest
reflecting the market rate of the security at the time of issuance.
A zero coupon security pays no interest to its holder during its life and
its value (above its cost to a Fund) consists of the difference between its face
value at maturity and its cost. While zero coupon bonds do not require the
periodic payment of interest, deferred interest bonds generally provide for a
period of delay before the regular payment of interest begins. Although this
period of delay is different for each deferred interest bond, a typical period
is approximately one-third of the bond's terms to maturity. Pay-in-kind
securities are securities that have interest payable by the delivery of
additional securities. Such investments benefit the issuer by mitigating its
initial need for cash to meet debt service, but some also provide a higher rate
of return to attract investors who are willing to defer receipt of such cash.
Such investments experience greater volatility in market value due to changes in
interest rates than debt obligations which provide for regular payments of
interest. A Fund will accrue income on such investments for tax and accounting
purposes, as required, which is distributable to shareholders and which, because
no cash is received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Fund's distribution obligations.
14
<PAGE>
INVERSE FLOATING RATE SECURITIES. The Global Income Fund may invest in
inverse floating rate securities. The interest rate on such a security resets in
the opposite direction from the market rate of interest to which it is indexed.
An inverse floating rate security may be considered to be leveraged to the
extent that its interest rate varies by a magnitude that exceeds the magnitude
of the change in the index rate of interest. The higher degree of leverage
inherent in such securities generally results in greater volatility in their
market prices.
FOREIGN GOVERNMENT SECURITIES. The International Equity Fund and Global
Income Fund may invest in debt obligations of foreign governments and
governmental agencies, including those of emerging countries. Investment in
sovereign debt obligations involves special risks not present in debt
obligations of corporate issuers. The issuer of the debt or the governmental
authorities that control the repayment of the debt may be unable or unwilling to
repay principal or interest when due in accordance with the terms of such debt,
and the Funds may have limited recourse in the event of a default. Periods of
economic uncertainty may result in the volatility of market prices of sovereign
debt, and in turn the Fund's net asset value, to a greater extent than the
volatility inherent in debt obligations of U.S. issuers. A sovereign debtor's
willingness or ability to repay principal and pay interest in a timely manner
may be affected by, among other factors, its cash flow situation, the extent of
its foreign currency reserves, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of the debt service burden to
the economy as a whole, the sovereign debtor's policy toward principal
international lenders and the political constraints to which a sovereign debtor
may be subject.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. All of the Funds except the
CORE U.S. Equity Fund may invest in mortgage-backed securities, which represent
direct or indirect participation in, or are collateralized by and payable from,
mortgage loans secured by real property. These Funds may also invest in
asset-backed securities, which represent participation in, or are secured by and
payable from, assets such as motor vehicle installment sale contracts,
installment loan contracts, leases of various types of real and personal
property, receivables from revolving credit (credit card) agreements and other
categories of receivables. Such securities are generally issued by trusts and
special purpose corporations.
Mortgage-backed and asset-backed securities are often subject to more rapid
repayment than their stated maturity dates would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. This may
increase the volatility of such instruments relative to other similarly rated
debt securities. During periods of declining interest rates, prepayment of loans
underlying mortgage-backed and asset-backed securities can be expected to
accelerate, and thus impair a Fund's ability to reinvest the returns of
principal at comparable yields. During periods of rising interest rates, reduced
prepayment rates may extend the average life of mortgage-backed and asset-backed
securities and increase the risk of depreciation due to future increases in
market interest rates. Accordingly, the market values of such securities will
vary with changes in market interest rates generally and in yield differentials
among various kinds of U.S. Government Securities and other mortgage-backed and
asset-backed securities. Asset-backed securities present certain additional
risks that are not presented by mortgage-backed securities because asset-backed
securities generally do not have the benefit of a security interest in
collateral that is comparable to mortgage assets. There is the possibility that,
in some cases, recoveries on repossessed collateral may not be available to
support payments on these securities.
STRUCTURED SECURITIES. Each Fund (except the Money Market Fund) may invest
in structured securities. The value of the principal of and/or interest on such
securities is determined by reference to changes in the value of specific
currencies, interest rates, commodities, indices or other financial indicators
(the "Reference") or the relative change in two or more References. The interest
rate or the principal amount payable upon maturity or redemption may be
increased or decreased depending upon changes in the applicable Reference. The
terms of the structured securities may provide that in certain circumstances no
principal is due at maturity and, therefore, may result in the loss of the
Fund's investment. Structured securities may be positively or negatively
indexed, so that appreciation
15
<PAGE>
of the Reference may produce an increase or decrease in the interest rate or
value of the security at maturity. In addition, changes in interest rates or the
value of the security at maturity may be a multiple of changes in the value of
the Reference. Consequently, structured securities may entail a greater degree
of market risk than other types of fixed-income securities. Structured
securities may also be more volatile, less liquid and more difficult to
accurately price than less complex fixed-income investments.
REPURCHASE AGREEMENTS
All of the Funds may enter into repurchase agreements with dealers in U.S.
Government Securities and member banks of the Federal Reserve System which
furnish collateral at least equal in value or market price to the amount of
their repurchase obligation. The International Equity Fund and Global Income
Fund may also enter into repurchase agreements involving certain foreign
government securities. In a repurchase agreement, a Fund purchases a debt
security from a seller which undertakes to repurchase the security at a
specified resale price on an agreed future date (ordinarily a week or less). The
resale price generally exceeds the purchase price by an amount which reflects an
agreed-upon market interest rate for the term of the repurchase agreement. The
primary risk is that, if the seller defaults, a Fund might suffer a loss to the
extent that the proceeds from the sale of the underlying securities and other
collateral held by that Fund in connection with the related repurchase agreement
are less than the repurchase price. In addition, in the event of bankruptcy of
the seller or failure of the seller to repurchase the securities as agreed, that
Fund could suffer losses, including loss of interest on or principal of the
security and costs associated with delay and enforcement of the repurchase
agreement. The Company's board of directors have reviewed and approved certain
sellers whom they believe to be creditworthy and have authorized the Funds to
enter into repurchase agreements with such sellers.
All of the Funds, together with other registered investment companies
advised by the Advisers, may transfer uninvested cash balances into a single
joint account, the daily aggregate balance of which is invested in one or more
repurchase agreements.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
All of the Funds may purchase when-issued securities. When-issued
transactions arise when securities are purchased by a Fund with payment and
delivery taking place in the future in order to secure what is considered to be
an advantageous price and yield to the Fund at the time of entering into the
transaction. Certain of the Funds may also purchase securities on a forward
commitment basis; that is, make contracts to purchase securities for a fixed
price at a future date beyond customary three-day settlement period. A Fund is
required to hold and maintain in a segregated account with its custodian until
three days prior to the settlement date, cash or liquid assets in an amount
sufficient to meet the purchase price. Alternatively, a Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
Purchase of securities on a when-issued or forward commitment basis involves a
risk of loss if the value of the security to be purchased declines prior to the
settlement date. Although a Fund would generally purchase securities on a
when-issued or forward commitment basis with the intention of acquiring
securities for its portfolio, the Fund may dispose of a when-issued security or
forward commitment prior to settlement if the Adviser deems it advantageous to
do so.
MORTGAGE DOLLAR ROLLS
The Global Income Fund may enter into mortgage "dollar rolls" in which the
Fund sells securities for delivery in the current month and simultaneously
contracts with the same counterparty to repurchase substantially similar (same
type, coupon and maturity) but not identical securities on a specified future
date. During the roll period, the Fund loses the right to receive principal and
interest paid on the securities sold. However, the Fund would benefit to the
extent of any difference between the price received for the securities sold and
the lower forward price for the future purchase or fee income plus the interest
earned on the cash proceeds of the securities sold until the settlement date for
the forward purchase. Unless such benefits exceed the income, capital
appreciation and gain or loss due to mortgage prepayments that would have been
realized on the securities sold as part of the
16
<PAGE>
mortgage dollar roll, the use of this technique will diminish the investment
performance of the Fund. Successful use of mortgage dollar rolls depends upon
the Investment Adviser's ability to predict correctly interest rates and
mortgage prepayments. There is no assurance that mortgage dollar rolls can be
successfully employed. The Fund will hold and maintain in a segregated account
until the settlement date cash or liquid assets in an amount equal to the
forward purchase price. For financial reporting and tax purposes, each Fund
treats mortgage dollar rolls as two separate transactions; one involving the
purchase of a security and a separate transaction involving a sale. The Fund
does not currently intend to enter into mortgage dollar rolls that are accounted
for as a financing.
LENDING OF PORTFOLIO SECURITIES
All of the Funds may seek to increase their income by lending portfolio
securities. Under present regulatory policies, such loans may be made to
institutions, such as certain broker-dealers, and are required to be secured
continuously by collateral in cash, cash equivalents, or U.S. Government
Securities maintained on a current basis at an amount at least equal to the
market value of the securities loaned. Cash collateral may be invested in cash
equivalents. A Fund may experience a loss or delay in the recovery of its
securities if the institution with which it has engaged in a portfolio loan
transaction breaches its agreement with the Fund. If the Adviser determines to
make securities loans, the value of the securities loaned will not exceed
one-third of the value of the total assets of a Fund.
RESTRICTED AND ILLIQUID SECURITIES
No Fund will invest more than 15% (10% for the Money Market Fund) of its net
assets in illiquid investments, which includes most repurchase agreements
maturing in more than seven days, swap transactions, time deposits with a notice
or demand period of more than seven days, certain over-the-counter option
contracts, participation interests in loans, securities that are not readily
marketable and restricted securities, unless it is determined, based upon a
continuing review of the trading markets for the specific restricted security,
that such restricted security is eligible under Rule 144A under the Securities
Act of 1933 ("1933 Act"), and is liquid.
The board of directors of the Company has adopted guidelines and delegated
to the Adviser the daily function of determining and monitoring the liquidity of
portfolio securities. The board, however, will retain sufficient oversight and
be ultimately responsible for the determinations. Since it is not possible to
predict with assurance exactly how the market for restricted securities sold and
offered under Rule 144A will develop, the board will carefully monitor each
Fund's investments in these securities, focusing on such important factors,
among others, as valuation, liquidity and availability of information. To the
extent that qualified institutional buyers become for a time uninterested in
purchasing these restricted securities, this investment practice could have the
effect of decreasing the level of liquidity in a Fund. The purchase price and
subsequent valuation of restricted securities normally reflect a discount from
the price at which such securities would trade if they were not restricted,
since the restriction makes them less liquid.
BORROWING
All of the Funds may borrow money but only from banks and only for temporary
or short-term purposes. Temporary or short-term purposes may include: (i)
short-term (I.E., no longer than five business days) credits for clearance of
portfolio transactions; (ii) borrowing in order to meet redemption requests or
to finance failed settlements of portfolio trades without immediately
liquidating portfolio securities or other assets; and (iii) borrowing in order
to fulfill commitments or plans to purchase additional securities pending the
anticipated sale of other portfolio securities or assets in the near future. No
Fund will borrow for leveraging purposes. Each Fund will maintain continuous
asset coverage of at least 300% (as defined in the Act) with respect to all of
its borrowings. Should the value of a Fund's assets decline to below 300% of
borrowings, the Fund may be required to sell portfolio securities within three
days to reduce the Fund's debt and restore 300% asset coverage. Borrowing
involves interest costs. A Fund will not purchase additional securities while
its borrowings exceed 5% of its total assets.
17
<PAGE>
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING COVERED OPTIONS. All of the Funds except the Money Market Fund and
CORE U.S. Equity Fund may write (sell) covered call and put options on any
securities in which they may invest. All call options written by the Funds are
covered, which means that the Fund will own the securities subject to the option
so long as the option is outstanding. All put options written by the Funds are
covered, which means that the Fund would have deposited with its custodian cash,
or liquid high grade debt securities with a value at least equal to the exercise
price of the put option. Call and put options written by a Fund will also be
considered to be covered to the extent that the Fund's liabilities under such
options are wholly or partially offset by its rights under call and put options
purchased by the Fund. The Funds other than the Money Market Fund and CORE U.S.
Equity Fund may also write call and put options on any securities index composed
of securities in which they may invest.
PURCHASING OPTIONS. All of the Funds except the Money Market Fund and CORE
U.S. Equity Fund may purchase put and call options on any securities in which
they may invest or options on any securities index based on securities in which
they may invest.
YIELD CURVE OPTIONS. The Global Income Fund may enter into options,
referred to as "yield curve options," on the yield differential between two
securities.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
liquid secondary market on a domestic or foreign options exchange will exist for
any particular exchange-traded option or at any particular time. If a Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
dispose of assets held in a segregated account until the options expire or are
exercised. Similarly, if a Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it would have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of the underlying securities. In a closing purchase or sale
transaction, a Fund acquires a position that offsets and cancels an option
position then held by the Fund.
The Funds (other than the Money Market Fund and CORE U.S. Equity Fund) may
purchase and sell both options that are traded on United States and foreign
exchanges and options traded over-the-counter with broker-dealers who make
markets in these options. The ability to terminate over-the-counter options is
more limited than with exchange-traded options and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations. Until such time as the staff of the SEC changes its position, the
Funds will treat purchased over-the-counter options and all assets used to cover
written over-the-counter options as illiquid securities. However, for options
written with primary dealers in U.S. Government Securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to a formula
approved by the SEC staff.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The use of options to increase total
return involves the risk of loss if the Adviser is incorrect in its expectations
of fluctuations in securities prices or interest rates. For example, the
successful use of puts for hedging purposes depends in part on the ability of
the Adviser to predict future price fluctuations and the degree of correlation
between the options and securities markets. If the Adviser is incorrect in its
determination of the correlation between the securities indices on which options
are written or purchased and the securities in a Fund's portfolio or, with
respect to yield curve options, of the direction or the extent of the movement
of the yield differential, the investment performance of a Fund will be less
favorable than it would have been in the absence of such option transactions.
The Funds pay brokerage commissions or spreads in connection with their options
transactions. The writing of options could significantly increase a Fund's
portfolio turnover rate.
18
<PAGE>
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
To increase total return or to hedge against changes in interest rates,
securities prices or currency exchange rates or to seek to increase total
return, the Funds other than the Money Market Fund and CORE U.S. Equity Fund may
purchase and sell various kinds of futures contracts, and purchase and sell call
and put options on any futures contract that it may purchase or sell. The
futures contracts may be based on various securities (such as U.S. Government
Securities), securities indices, foreign currencies and other financial
instruments and indices. These Funds may also enter into closing purchase and
sale transactions with respect to any futures contract and options that each may
purchase or sell. To hedge against changes in securities prices or to seek to
increase total return, the CORE U.S. Equity Fund may purchase and sell futures
contracts on the S&P 500 Index. Except with regard to futures contracts on
foreign currencies, a Fund will engage in futures and related options
transactions only for bona fide hedging purposes as defined in regulations of
the Commodity Futures Trading Commission ("CFTC") or to seek to increase total
return to the extent permitted by such regulations.
The Funds may not purchase or sell futures contracts or purchase or sell
related options to seek to increase total return, except for closing purchase or
sale transactions, if immediately thereafter the sum of the amount of initial
margin deposits and premiums paid on a Fund's outstanding positions in futures
and related options entered into for the purpose of seeking to increase total
return would exceed 5% of the market value of the Fund's net assets.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require a Fund to
segregate and maintain cash or liquid high-grade debt securities with a value
equal to the amount of the Fund's obligations.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates, securities prices or currency exchange
rates may result in a poorer overall performance for the Fund than if it had not
entered into any futures contracts or options transactions. The loss incurred by
a Fund in writing options on futures is potentially unlimited and may exceed the
amount of the premium received.
Futures markets are highly volatile and the use of futures contracts may
increase the volatility of a Fund's net asset value. The profitability of a
Fund's trading in futures to increase total return will depend on the ability of
the Adviser to correctly analyze the futures markets. In addition, a relatively
small price movement in a futures contract may result in substantial losses to a
Fund. Further, futures contracts and options on futures may be illiquid, and
exchanges may limit fluctuations in futures contract prices during a single day.
In the event of an imperfect correlation between a futures position and a
portfolio position which is intended to be protected, the desired protection may
not be obtained and a Fund may be exposed to risk of loss. Perfect correlation
between a Fund's futures positions and portfolio positions will be impossible to
achieve.
A Fund's transactions in futures contracts and options thereon may be
limited by the requirements of the Internal Revenue Code of 1986, as amended
(the "Code") for qualification as a regulated investment company.
FOREIGN TRANSACTIONS
FOREIGN INVESTMENTS. Investments in the securities of companies organized
outside the United States or of companies whose securities are principally
traded outside the United States ("foreign issuers") or investments in
securities denominated or quoted in foreign currency ("non-dollar securities")
may offer potential benefits that are not available from investments exclusively
in equity securities of domestic issuers quoted in U.S. dollars. The Funds other
than the Money Market Fund and CORE U.S. Equity Fund may invest in foreign
issuers or non-dollar securities. CORE U.S. Equity Fund may invest in foreign
issuers. Such benefits may include the opportunity to invest in foreign issuers
that appear to offer better opportunity for long-term capital appreciation or
current earnings
19
<PAGE>
than investments in domestic issuers, the opportunity to invest in foreign
countries with economic policies or business cycles different from those of the
United States and the opportunity to invest in foreign securities markets that
do not necessarily move in a manner parallel to U.S. markets.
Investing in non-dollar securities or in the securities of foreign issuers
involves significant risks that are not typically associated with investing in
equity securities of domestic issuers quoted in U.S. dollars. Such investments
may be affected by changes in currency exchange rates, changes in foreign or
U.S. laws or restrictions applicable to such investments and in exchange control
regulations (E.G., currency blockage). Some foreign stock markets may have
substantially less volume than, for example, the New York Stock Exchange and
securities of some foreign issuers may be less liquid than securities of
comparable domestic issuers. Commissions and dealer mark-ups on transactions in
foreign investments may be higher than for similar transactions in the United
States. In addition, clearance and settlement procedures may be different in
foreign countries and, in certain markets, on certain occasions, such procedures
have been unable to keep pace with the volume of securities transactions, thus
making it difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to domestic
companies. There may be less publicly available information about a foreign
issuer than about a domestic one. In addition, there is generally less
government regulation of stock exchanges, brokers, and listed and unlisted
issuers in foreign countries than in the United States. Furthermore, with
respect to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, imposition of withholding taxes on dividend or interest
payments, limitations on the removal of funds or other assets of the Fund, or
political or social instability or diplomatic developments which could affect
investments in those countries.
INVESTMENTS IN ADRS, EDRS AND GDRS. Many securities of foreign issuers are
represented by ADRs, EDRs and GDRs. The Funds other than the Money Market Fund
may invest in ADRs and GDRs and, except for the CORE U.S. Equity Fund, may
invest in EDRs. ADRs represent the right to receive securities of foreign
issuers deposited in a domestic bank or a foreign correspondent bank. Prices of
ADRs are quoted in U.S. dollars, and ADRs are traded in the United States on
exchanges or over-the-counter and are sponsored and issued by domestic banks. In
general, there is a large, liquid market in the United States for ADRs quoted on
a national securities exchange or the NASD's national market system. The
information available for ADRs is subject to the accounting, auditing and
financial reporting standards of the domestic market or exchange on which they
are traded, which standards are more uniform and more exacting than those to
which many foreign issuers may be subject. EDRs and GDRs are receipts evidencing
an arrangement with a non-U.S. bank similar to that for ADRs and are designed
for use in non-U.S. securities markets. EDRs and GDRs are not necessarily quoted
in the same currency as the underlying security.
Depository receipts do not eliminate all the risk inherent in investing in
the securities of foreign issuers. To the extent that a Fund acquires depository
receipts through banks which do not have a contractual relationship with the
foreign issuer of the security underlying the receipt to issue and service such
Depository receipts, there may be an increased possibility that the Fund would
not become aware of and be able to respond to corporate actions such as stock
splits or rights offerings involving the foreign issuer in a timely manner. The
market value of depository receipts is dependent upon the market value of the
underlying securities and fluctuations in the relative value of the currencies
in which the receipts and the underlying securities are quoted. In addition, the
lack of information may result in inefficiencies in the valuation of such
instruments. However, by investing in Depository receipts rather than directly
in the stock of foreign issuers, a Fund will avoid currency risks during the
settlement period for either purchases or sales.
INVESTMENTS IN EMERGING MARKETS. The Capital Growth Fund, Small Cap Equity
Fund, International Equity Fund, Growth and Income Fund and Global Income Fund
may invest in securities of issuers located in countries with emerging economies
and or securities markets. These countries are located in the Asia-Pacific
region, Eastern Europe, Latin and South America and Africa. Political and
20
<PAGE>
economic structures in many of these countries may be undergoing significant
evolution and rapid development, and such countries may lack the social,
political and economic stability characteristic of more developed countries.
Certain of these countries may have in the past failed to recognize private
property rights and have at times nationalized or expropriated the assets of
private companies. As a result, the risks of foreign investment generally
including the risks of nationalization or expropriation of assets, may be
heightened. See "Special Investment Methods and Risks -- Foreign Securities"
above. In addition, unanticipated political or social developments may affect
the values of a Fund's investments in those countries and the availability to
the Fund of additional investments in those countries.
The small size and inexperience of the securities markets in certain of
these countries and the limited volume of trading in securities in those
countries may also make the Capital Growth Fund, Small Cap Equity Fund,
International Equity Fund, Growth and Income Fund or Global Income Fund's
investments in such countries illiquid and more volatile than investments in
Japan or most Western European countries, and these Funds may be required to
establish special custody or other arrangements before making certain
investments in those countries. There may be little financial or accounting
information available with respect to issuers located in certain of such
countries, and it may be difficult as a result to assess the value or prospects
of an investment in such issuers.
A Fund's purchase or sale of portfolio securities in certain emerging
markets may be constrained by limitations as to daily changes in the prices of
listed securities, periodic trading or settlement volume and/or limitations on
aggregate holdings of foreign investors. Such limitations may be computed based
on aggregate trading volume by or holdings of a Fund, the Adviser and its
affiliates and their respective clients and other service providers. A Fund may
not be able to sell securities in circumstances where price, trading or
settlement volume limitations have been reached.
Foreign investment in certain emerging securities markets is restricted or
controlled to varying degrees that may limit investment in such countries or
increase the administrative cost of such investments. For example, certain Asian
countries require government approval prior to investments by foreign persons or
limit investment by foreign persons to a specified percentage of an issuer's
outstanding securities or a specific class of securities which may have less
advantageous terms (including price) than securities of such company available
for purchase by nationals. In addition, certain countries may restrict or
prohibit investment opportunities in issuers or industries important to national
interests. Such restrictions may affect the market price, liquidity and rights
of securities that may be purchased by a Fund.
Settlement procedures in emerging markets are frequently less developed and
reliable than those in the U.S. and may involve a Fund's delivery of securities
before receipt of payment for their sale. In addition, significant delays are
common in certain markets in registering the transfer of securities. Settlement
or registration problems may make it more difficult for a Fund to value its
portfolio assets and could cause a Fund to miss attractive investment
opportunities, to have its assets uninvested or to incur losses due to the
failure of a counterparty to pay for securities that the Fund has delivered or
due to the Fund's inability to complete its contractual obligations.
Currently, there is no market or only a limited market for many management
techniques and instruments with respect to the currencies and securities markets
of emerging market countries. Consequently, there can be no assurance that
suitable instruments for hedging currency and market-related risks will be
available at the times when a Fund wishes to use them.
FOREIGN CURRENCY TRANSACTIONS GENERALLY. Because investment in foreign
issuers will usually involve currencies of foreign countries, and because the
Capital Growth Fund, Small Cap Equity Fund, International Equity Fund, Growth
and Income Fund and Global Income Fund may have currency exposure independent of
their securities positions, the value of the assets of these Funds as measured
in U.S. dollars will be affected by changes in foreign currency exchange rates.
21
<PAGE>
An issuer of securities purchased by a Fund may be domiciled in a country
other than the country in whose currency the instrument is denominated or
quoted. The International Equity and Global Income Funds may also invest in
securities quoted or denominated in the European Currency Unit ("ECU"), which is
a "basket" consisting of specified amounts of the currencies of certain of the
twelve member states of the European Economic Community. The specific amounts of
currencies comprising the ECU may be adjusted by the Council of Ministers of the
European Economic Community from time to time to reflect changes in relative
values of the underlying currencies. In addition, these two Funds may invest in
securities quoted or denominated in other currency "baskets."
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, a Fund's net asset value to fluctuate as
well. 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 anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates also
can be affected unpredictably by intervention by U.S. or foreign governments or
central banks, or the failure to intervene, or by currency controls or political
developments in the U.S. or abroad. The market in forward foreign currency
exchange contracts, currency swaps and other privately negotiated currency
instruments offers less protection against defaults by the other party to such
instruments than is available for currency instruments traded on an exchange. To
the extent that a substantial portion of a Fund's total assets, adjusted to
reflect the Fund's net position after giving effect to currency transactions, is
denominated or quoted in the currencies of foreign countries, the Fund will be
more susceptible to the risk of adverse economic and political developments
within those countries.
In addition to investing in securities denominated or quoted in a foreign
currency, certain of the five Funds listed above may engage in a variety of
foreign currency management techniques. These Funds may hold foreign currency
received in connection with investments in foreign securities when, in the
judgment of the Adviser, it would be beneficial to convert such currency into
U.S. dollars at a later date, based on anticipated changes in the relevant
exchange rate. The Funds will incur costs in connection with conversions between
various currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. These Funds may purchase or
sell forward foreign currency exchange contracts for hedging purposes and the
International Equity and Global Income Funds to seek to increase total return as
well when the Adviser anticipates that the foreign currency will appreciate or
depreciate in value, but securities denominated or quoted in that currency do
not present attractive investment opportunities and are not held in the Fund's
portfolio. When purchased or sold for the purpose of increasing total return,
forward foreign currency exchange contracts are considered speculative. In
addition, these five Funds may enter into forward foreign currency exchange
contracts in order to protect against anticipated changes in future foreign
currency exchange rates. The International Equity Fund and Global Income Fund
may engage in cross-hedging by using forward contracts in a currency different
from that in which the hedged security is denominated or quoted if the Adviser
determines that there is a pattern of correlation between the two currencies.
All five of these Funds may enter into contracts to purchase foreign
currencies to protect against an anticipated rise in the U.S. dollar price of
securities it intends to purchase. They may enter into contracts to sell foreign
currencies to protect against the decline in value of its foreign currency
denominated or quoted portfolio securities, or a decline in the value of
anticipated dividends from such securities, due to a decline in the value of
foreign currencies against the U.S. dollar. Contracts to sell foreign currency
could limit any potential gain which might be realized by a Fund if the value of
the hedged currency increased.
If a Fund enters into a forward foreign currency exchange contract to sell
foreign currency to increase total return or to buy foreign currency for any
purpose, the Fund will be required to place cash or liquid assets in a
segregated account with the Fund's custodian in an amount equal to the value of
the Fund's total assets committed to the consummation of the forward contract.
If the value
22
<PAGE>
of the securities placed in the segregated account declines, additional cash or
securities will be placed in the segregated account so that the value of the
account will equal the amount of the Fund's commitment with respect to the
contract.
Forward contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive a Fund of unrealized profits, transaction costs or
the benefits of a currency hedge or force the Fund to cover its purchase or sale
commitments, if any, at the current market price. A Fund will not enter into
such transactions unless the credit quality of the unsecured senior debt or the
claims-paying ability of the counterparty is considered to be investment grade
by the Adviser.
OPTIONS ON FOREIGN CURRENCIES. The Capital Growth Fund, Small Cap Equity
Fund, International Equity Fund, Growth and Income Fund and Global Income Fund
may purchase and sell (write) put and call options on foreign currencies for the
purpose of protecting against declines in the U.S. dollar value of foreign
portfolio securities and anticipated dividends on such securities and against
increases in the U.S. dollar cost of foreign securities to be acquired. The
International Equity and Global Income Funds may use options on currency to
cross-hedge, which involves writing or purchasing options on one currency to
hedge against changes in exchange rates for a different currency, if there is a
pattern of correlation between the two currencies. As with other kinds of option
transactions, however, the writing of an option on foreign currency will
constitute only a partial hedge, up to the amount of the premium received. A
Fund could be required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on foreign
currency may constitute an effective hedge against exchange rate fluctuations;
however, in the event of exchange rate movements adverse to a Fund's position,
the Fund may forfeit the entire amount of the premium plus related transaction
costs. In addition, the International Equity and Global Income Funds may
purchase call or put options on currency to seek to increase total return when
the Adviser anticipates that the currency will appreciate or depreciate in
value, but the securities quoted or denominated in that currency do not present
attractive investment opportunities and are not held in the Fund's portfolio.
When purchased or sold to increase total return, options on currencies are
considered speculative. Options on foreign currencies to be written or purchased
by these Funds will be traded on U.S. and foreign exchanges or over-the-counter.
See "Options on Securities and Securities Indices" above for a discussion of the
liquidity risks associated with options transactions.
INTEREST RATE SWAPS, CURRENCY SWAPS AND INTEREST RATE CAPS, FLOORS AND
COLLARS. The Global Income Fund may enter into interest rate and currency swaps
for both hedging purposes and to seek to increase total return. The
International Equity Fund may enter into currency swaps for these purposes. The
Global Income Fund also may enter into special interest rate swap arrangements
such as caps, floors and collars for both hedging purposes and to seek to
increase total return. The Global Income Fund will typically use interest rate
swaps to shorten the effective duration of its portfolio. Interest rate swaps
involve the exchange by the Global Income Fund with another party of their
respective commitments to pay or receive interest, such as an exchange of fixed
rate payments for floating rate payments. Currency swaps involve the exchange by
the Funds with another party of their respective rights to make or receive
payments in specified currencies. The purchase of an interest rate cap entitles
the purchaser to receive from the seller of the cap payments of interest on a
notional amount equal to the amount by which a specified index exceeds a stated
interest rate. The purchase of an interest rate floor entitles the purchaser to
receive from the seller of the floor payments of interest on a notional amount
equal to the amount by which a specified index falls below a stated interest
rate. An interest rate collar is the combination of a cap and a floor that
preserves a certain return within a stated range of interest rates. Since
interest rate swaps, currency swaps and interest rate caps, floors and collars
are individually negotiated, these Funds expect to achieve an acceptable degree
of correlation between their portfolio investments and their interest rate or
currency swap positions entered into for hedging purposes.
23
<PAGE>
The Global Income Fund will only enter into interest rate swaps on a net
basis, which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate swaps do not involve the delivery of securities, other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Fund is contractually obligated to make. If the other party to an interest rate
swap defaults, the Fund's risk of loss consists of the net amount of interest
payments that the Fund is contractually entitled to receive. In contrast,
currency swaps usually involve the delivery of the entire principal value of one
designated currency in exchange for the other designated currency. Therefore,
the entire principal value of a currency swap is subject to the risk that the
other party to the swap will default on its contractual delivery obligations.
The Company will maintain in a segregated account with its custodian cash and
liquid high-grade debt securities equal to the net amount, if any, of the excess
of each Fund's obligations over its entitlements with respect to swap
transactions. To the extent that the net amount of a swap is held in a
segregated account consisting of cash and high-grade liquid debt securities, the
Company believes that swaps do not constitute senior securities under the Act
and, accordingly, will not treat them as being subject to each Fund's borrowing
restriction.
Neither Fund will enter into swap transactions unless the unsecured
commercial paper, senior debt or claims paying ability of the other party is
considered to be investment grade by the Adviser.
The use of interest rate and currency swaps (including caps, floors and
collars) is a highly specialized activity which involves investment techniques
and risks different from those associated with ordinary portfolio securities
transactions. If the Adviser is incorrect in its forecasts of market values,
interest rates and currency exchange rates, the investment performance of the
International Equity or Global Income Fund would be less favorable than it would
have been if this investment technique were not used.
SHORT SALES AGAINST-THE-BOX
The CORE U.S. Equity Fund, Capital Growth Fund, Small Cap Equity Fund,
International Equity Fund and Growth and Income Fund may make short sales of
securities or maintain short positions in securities, provided that the Fund
owns an equal amount of the shorted securities (or of securities convertible
into or exchangeable for -- without payment of additional consideration -- an
equal amount of the securities of the same issuer) (a short sale
against-the-box). Not more than 25% of a Fund's net assets (at the time of the
short sale) may be subject to short sales. These Funds make short sales
primarily to defer realization of gain or loss for federal tax purposes; a gain
or loss in a Fund's long position will be offset by a loss or gain in its short
position.
OTHER INVESTMENT COMPANIES
All of the Funds reserve the right to invest up to 10% of their total
assets, calculated at the time of purchase, in the securities of other
investment companies including business development companies and small business
investment companies. No Fund may invest more than 5% of its total assets in the
securities of any one investment company or in more than 3% of the voting
securities of any other investment company. Pursuant to an exemptive order
obtained from the SEC, other investment companies in which a Fund may invest may
include money markets funds for which its Adviser or its Adviser's affiliates
serve as the investment adviser. A Fund will indirectly bear its proportionate
share of any management fees paid by investment companies in which it invests in
addition to the advisory fees paid by the Fund. However, to the extent that a
Fund invests in a money market fund for which its Adviser or any of its
Adviser's affiliates acts as adviser, the management fees payable by the Fund to
the Investment Manager will be reduced by an amount equal to the Fund's
proportionate share of the advisory and administration fees paid by such money
market fund to the Adviser or any of its affiliates.
24
<PAGE>
NON-DIVERSIFIED STATUS
Since the Global Income Fund is not "diversified" as defined by the Act, it
is more susceptible to adverse developments affecting any single issuer.
Nonetheless, a "non-diversified" Fund is still subject to the diversification
requirements that arise under federal tax law and the 25% limit on concentration
of investments in a single industry. See "Taxes" and "Investment Restrictions."
RISKS OF INVESTING IN SMALL CAPITALIZATION COMPANIES
Investing in securities of smaller, lesser-known companies involves greater
risks than investing in larger, more mature, better known issuers, including an
increased possibility of portfolio price volatility. Historically, small
capitalization stocks and stocks of recently organized companies, in which
certain of the Funds may also invest, have been more volatile in price than the
larger capitalization stocks included in the S&P 500 Index. Among the reasons
for the greater price volatility of these small company stocks are the less
certain growth prospects of smaller firms and the lower degree of liquidity in
the markets for such stocks.
WARRANTS AND RIGHTS
The CORE U.S. Equity Fund, Capital Growth Fund, Small Cap Equity Fund,
International Equity Fund and Growth and Income Fund each may invest up to 5% of
their total assets (calculated at the time of purchase) in certain warrants or
rights that entitle the holder to buy equity securities at a specific price for
a specific period of time.
UNSEASONED ISSUERS
The CORE U.S. Equity Fund, Capital Growth Fund, Small Cap Equity Fund,
International Equity Fund, Growth and Income Fund and Global Income Fund each
may invest up to 5% of their total assets, calculated at the time of purchase,
in the securities (excluding investment grade debt securities) of companies
(including predecessors) which have operated less than three years. The
securities of such companies may have limited liquidity which can result in
their being priced higher or lower than might otherwise be the case. In
addition, investments in unseasoned companies are more speculative and entail
greater risk than do investments in companies with an established operating
record.
INVESTMENT RESTRICTIONS
Each of the Funds is also subject to certain investment restrictions which
have been adopted by the Company for each Fund. Certain of these restrictions
are fundamental policies that cannot be changed without the approval of a
majority of the outstanding votes attributable to shares of the Fund. Other
restrictions are not fundamental policies and may be changed by the Company's
board of directors. Among other fundamental restrictions, as diversified funds,
the Money Market Fund, CORE U.S. Equity Fund, Capital Growth Fund, and Growth
and Income Fund each may not, with respect to 75% of its total assets, purchase
the securities of any one issuer (except U.S. Government Securities) if more
than 5% of the value of the Fund's assets would be invested in such issuer.
Similarly, none of the Funds may invest more than 25% of its total assets in
securities of issuers in any one industry, except that this limitation does not
apply to U.S. Government Securities or foreign currency investments. For a more
complete description of the investment restrictions to which each Fund is
subject, see the SAI.
PORTFOLIO TURNOVER
Other than the Global Income Fund, the Funds do not expect to trade in
securities for short-term gain. The Global Income Fund may engage in active
short-term trading to benefit from yield disparities among different issues of
securities or among the markets for debt securities of different countries, to
seek short-term profits during periods of fluctuating interest rates, or for
other reasons. Such trading will increase the Global Income Fund's portfolio
turnover rate. Notwithstanding the foregoing, the Adviser may, from time to
time, make short-term investments when it believes that
25
<PAGE>
such investments will benefit a Fund. A high rate of portfolio turnover (100% or
higher) involves correspondingly greater expenses which must be borne by a Fund
and its shareholders and may under certain circumstances make it more difficult
for a Fund to qualify as a regulated investment company under the Code.
The portfolio turnover rate is calculated by dividing the lesser of the
dollar amount of sales or purchases of portfolio securities by the average
monthly value of the Fund's portfolio securities, excluding securities having a
maturity at the date of purchase of one year or less. For the fiscal period
ended December 31, 1996, the Funds had the following portfolio turnover rates:
CORE U.S. Equity Fund 34%, Small Cap Equity Fund 100%, International Equity Fund
38%, Growth and Income Fund 49%, Global Income Fund 214%, and Capital Growth
Fund 35%.
MANAGEMENT
DIRECTORS AND OFFICERS
The Company's board of directors is responsible for deciding matters of
general policy and reviewing the actions of the Investment Manager and the
Advisers, the custodian, accounting and administrative services provider and
other providers of services to the Company. The officers of the Company
supervise its daily business operations. The SAI contains information as to the
identify of, and other information about, the directors and officers of the
Company.
INVESTMENT MANAGER
Investment Distributors Advisory Services, Inc. ("IDASI"), 2801 Highway 280
South, Birmingham, Alabama 35223, is the investment manager of the Company and
its Funds. IDASI is a wholly-owned subsidiary of Protective Life Corporation
("PLC"), an insurance holding company whose common stock is traded on the New
York Stock Exchange. PLC's principal operating subsidiary is Protective Life
Insurance Company, a stock life insurance company which maintains its
administrative offices in Birmingham, Alabama. Protective Life was incorporated
in Alabama in 1907 and changed its state of domicile from Alabama to Tennessee
in 1992. Protective Life's principal business is the writing of individual and
group life and health insurance contracts, annuity contracts, and guaranteed
investment contracts.
The Investment Manager has no direct previous experience in providing
management services for investment companies; however, its officers, all of whom
are officers of Protective Life, have extensive experience in the development
and distribution of investment products, particularly, guaranteed investment
contracts. In addition, the Investment Manager has retained the Advisers,
entities that have extensive experience managing the assets of investment
companies, pension plans and other clients, to manage the investment and
reinvestment of the Funds' assets.
The Investment Manager has entered into an investment management agreement,
dated March 3, 1994, with the Company under which the Investment Manager assumes
overall responsibility, subject to the supervision of the Company's board of
directors, for administering all operations of the Company and for monitoring
and evaluating the management of the assets of each of the Funds by the Advisers
on an ongoing basis. The Investment Manager provides or arranges for the
provision of the overall business management and administrative services
necessary for the Company's operations and furnishes or procures any other
services and information necessary for the proper conduct of the Company's
business. The Investment Manager also acts as liaison among, and supervisor of,
the various service providers to the Company, including the custodian, transfer
agent, and accounting services agent and to its own administration agent that
performs services for the Company on its behalf. The Investment Manager is also
responsible for overseeing the Company's compliance with the requirements of
applicable law and with each Fund's investment objective(s), policies and
restrictions, including oversight of the Advisers.
For its services to the Company, the Investment Manager receives a monthly
management fee. The fee is deducted daily from the assets of each of the Funds
and paid to the Investment Manager monthly. The fee for each Fund is based on
the average daily net assets of the Fund at the following
26
<PAGE>
annual rates: Money Market Fund .60%, CORE U.S. Equity Fund .80%, Capital Growth
Fund .80%, Small Cap Equity Fund .80%, International Equity Fund 1.10%, Growth
and Income Fund .80%, and Global Income Fund 1.10%. See "Investment Manager" in
the SAI for more detailed information about the investment management agreement.
The investment management agreement does not place limits on the operating
expenses of the Company or of any Fund. However, Protective Life has voluntarily
undertaken to pay any such expenses (but not including brokerage or other
portfolio transaction expenses or expenses of litigation, indemnification, taxes
or other extraordinary expenses) to the extent that such expenses, as accrued
for each Fund, exceed the following percentages of that Fund's estimated average
daily net assets on an annualized basis: Money Market Fund, .60%; CORE U.S.
Equity Fund, .80%; Capital Growth Fund, .80%; Small Cap Equity Fund, .80%;
International Equity Fund, 1.10%; Growth and Income Fund, .80%; and Global
Income Fund, 1.10%. This reduction of expenses will increase the yield or total
return of the Funds for any period for which it remains in effect. The
Protective Life may withdraw this undertaking to pay expenses as to any or all
of the Funds upon 120 days notice to the Company.
INVESTMENT ADVISERS
Goldman Sachs Asset Management, One New York Plaza, New York, New York
10004, a separate operating division of Goldman Sachs, acts as the investment
adviser of the Money Market Fund, CORE U.S. Equity Fund, Capital Growth Fund,
Small Cap Equity Fund and Growth and Income Fund. Goldman Sachs Asset Management
International, 133 Peterborough Court, London EC4A 2BB England, an affiliate of
Goldman Sachs, acts as the investment adviser to the International Equity Fund
and the Global Income Fund. Both Goldman Sachs and GSAMI are registered with the
SEC as investment advisers. As of March 24, 1997, the Advisers, together with
their affiliates, acted as investment adviser, administrator or distributor for
assets in excess of $104.9 billion.
The Advisers and their affiliates serve a wide range of clients including
private and public pension funds, endowments, foundations, banks, thrifts,
insurance companies, corporations, and private investors and family groups.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the U.S. Goldman Sachs is a leader in virtually every field of
investing and financing, participating in financial markets world-wide and
serving individuals, institutions, corporations and governments. Goldman Sachs
is headquartered in New York and has offices throughout the U.S. and in Bangkok,
Beijing Frankfurt, George Town, Hong Kong, London, Madrid, Milan, Montreal,
Osaka, Paris, Sao Paulo, Seoul, Shanghai, Singapore, Sydney, Taipei, Tokyo,
Toronto, Vancouver and Zurich.
GSAMI was organized in 1990. As a company with unlimited liability under the
laws of England, it is authorized to conduct investment advisory business in the
United Kingdom as a member of the Investment Management Regulatory Organisation
Limited, a U.K. self-regulatory organization.
In performing its investment advisory services each Adviser, while remaining
responsible for advising the Funds, may rely upon the asset management division
of Goldman Sachs Asia, Ltd. (its Hong Kong affiliate) and Goldman Sachs Asset
Management Japan, Limited. Each is also able to draw upon the research and
expertise of its other affiliate offices for portfolio decisions and management
with respect to certain securities.
PORTFOLIO MANAGERS. The following individuals are the portfolio managers
for the Funds:
CORE U.S. EQUITY FUND, Robert C. Jones, Managing Director, Goldman
Sachs; Kent A. Clark, Vice President, Goldman Sachs; and Victor H. Pinter,
Vice President, Goldman Sachs. Mr. Jones joined GSAM in 1989. From 1987 to
1989, Mr. Jones was a senior quantitative analyst in the research
department. Mr. Clark joined GSAM in 1992. Prior to 1992, he was studying
for a Ph.D. in finance at the University of Chicago. Mr. Pinter joined GSAM
in 1990.
27
<PAGE>
CAPITAL GROWTH FUND, Herbert E. Ehlers, Managing Director, Goldman
Sachs, George D. Alder, Vice President, Goldman Sachs; Robert G. Collins,
Vice President, Goldman Sachs; Gregory H. Ekizian, Vice President, Goldman
Sachs; David G. Shell, Vice President, Goldman Sachs; and Ernest C. Segundo,
Jr., Vice President, Goldman Sachs. Mr. Ehlers joined GSAM in 1997. Prior to
1997 he was the Chief Investment Officer of Liberty Investment Management,
Inc., and its predecessor firm ("Liberty Investment"). Messrs. Adler,
Collins, Ekizian, Shell and Segundo also joined GSAM in 1997. Prior to 1997,
they were portfolio managers at Liberty Investment.
SMALL CAP EQUITY FUND, Paul D. Farrell, Vice President, Goldman Sachs;
and Matthew B. McLennan, Associate, Goldman Sachs. Mr. Farrell joined GSAM
in 1991. Mr. McLennan joined GSAM in 1995. Prior to 1995, Mr. McLennan
worked in the Investment Banking Division of Goldman, Sachs & Co. in
Australia. Prior to that, he worked at Queensland Investment Corporation in
Australia.
INTERNATIONAL EQUITY FUND, Roderick D. Jack, Executive Director, GSAMI;
Marcel Jongen, Executive Director, GSAMI; Warwick Negus, Executive Director,
GSAMI; and Shogo Maeda, Vice President, Executive Director Goldman Sachs
Asset Management Japan Limited. Before joining GSAMI in 1992, Mr. Jack spent
five years with the advisory and financing group for S.G. Warburg in London.
Before joining GSAMI in 1992, Mr. Jongen was with Philips Pension Fund in
Eindhaven where he was head of equities. Before joining GSAMI in 1994, Mr.
Maeda spent most of the last 13 years at Nomura Securities, Inc. and a
period at Manufacturers Hanover Bank in New York. Warwick Negus is based in
Asia and joined GSAMI in 1994 after 7 years as Vice President of Bankers
Trust Australia, Ltd. where he was head of its Southeast Asian equities
group.
GROWTH AND INCOME FUND, Ronald E. Gutfleish, Vice President, Goldman
Sachs; G. Lee Anderson, Vice President, Goldman Sachs; and Eileen A. Aptman,
Vice President, Goldman Sachs. Mr. Gutfleish joined GSAM in 1993. Prior to
1993, he was a principal of Sanford C. Bernstein & Co., in its Investment
Management Research Department and a member of the Research Review
Committee. Mr. Anderson joined GSAM in 1992. Prior to 1992, he was a
research analyst in the Investment Research Department of Goldman, Sachs &
Co. Ms. Aptman joined GSAM in 1993. Prior to 1993, she was an equity analyst
at Delphi Management.
GLOBAL INCOME FUND, Stephen C. Fitzgerald, Executive Director, Chief
International Officer for international fixed income, GSAMI, and Andrew
Wilson, Executive Director and Senior Portfolio Manager for international
fixed income. Before joining GSAMI in 1992, Mr. Fitzgerald spent two years
managing multi-currency fixed-income and balanced portfolios at Invesco MIM
Limited where he was a senior member of the derivative products group. Prior
to his employment at Invesco, Mr. Fitzgerald spent three years with Foreign
and Colonial Management Limited in London managing fixed-income and
derivative funds and in the treasury department of NRMA Insurance Limited in
Sydney. Prior to joining GSAMI in 1995, Mr. Wilson spent three years as an
assistant director at Rothschild Asset Management where he managed global
and international bond portfolios. Prior to his employment at Rothschild, he
spend seven years at the Reserve Bank of New Zealand. While there, Mr.
Wilson served for two years with Bank's Foreign Investment Unit at the Bank
of England in London and also served as Trading Manager of foreign reserves
management.
INVESTMENT ADVISORY AGREEMENTS. Each Adviser has entered into an investment
advisory agreement for each Fund it advises, dated March 20, 1996, with the
Investment Manager under which the Adviser, subject to the general supervision
of the Investment Manager and the Company's board of directors, manages the
investment portfolio of the Funds of which it is the Adviser. Under the
investment advisory agreements, the Advisers are responsible for making
investment decisions for the Funds and for placing the purchase and sale orders
for the portfolio transactions of each Fund. In this capacity, the Advisers
obtain and evaluate appropriate economic, statistical, timing, and financial
28
<PAGE>
information and formulate and implement investment programs in furtherance of
each Fund's investment objective(s). The Advisers may place orders for portfolio
transactions with any broker including, to the extent and in the manner
permitted by applicable law, Goldman Sachs or its affiliates.
As compensation for its services, the Advisers receive a monthly fee from
the Investment Manager based on the average daily net assets of each Fund at the
following annual rates:
<TABLE>
<CAPTION>
0-100MM 100-200M 200MM+
----------- ------------- -----------
<S> <C> <C> <C>
Money Market .35% .25% .15%
International Equity .40% .30% .25%
Global Income .40% .30% .25%
Growth & Income .40% .30% .20%
CORE U.S. Equity .40% .30% .20%
Small Cap .40% .30% .20%
Cap Growth .40% .30% .20%
</TABLE>
See the SAI for more detailed information about the investment advisory
agreement.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS. The involvement of the Advisers, Goldman Sachs and their
affiliates in the management of, or their interests in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or limit their investment activities. Goldman Sachs and its affiliates
engage in proprietary trading and advise accounts and funds that have investment
objectives similar to those of the Funds and/or which engage in and compete for
transactions in the same types of securities, currencies and instruments as the
Funds. Goldman Sachs and its affiliates do not have any obligation to make
available any information regarding their proprietary activities or strategies,
or the activities or strategies used for other accounts managed by them for the
benefit of the management of the Funds and in general it is not anticipated that
the Advisers will have access to proprietary information for the purpose of
managing the Funds. The results of a Fund's investment activities, therefore,
may differ from those of Goldman Sachs and its affiliates and it is possible
that a Fund could sustain losses during periods in which Goldman Sachs and its
affiliates and other accounts and funds achieve significant profits on their
trading for proprietary or other accounts. From time to time, a Fund's
activities may be limited because of regulatory restrictions applicable to
Goldman Sachs and its affiliates, and/or their internal policies designed to
comply with such restrictions. See "Management Activities of Goldman Sachs and
its Affiliates and Other Accounts Managed by Goldman Sachs" in the SAI.
PERFORMANCE INFORMATION
From time to time the Company may publish average annual total return
figures for one or more of the Funds in advertisements and communications to
shareholders or sales literature. Average annual total return is determined by
computing the annual percentage change in value of $1,000 invested for specified
periods ending with the most recent calendar quarter, assuming reinvestment of
all dividends and distributions at net asset value. The average annual total
return calculation assumes a complete redemption of the investment at the end of
the relevant period.
The Company also may from time to time publish year-by-year total return,
cumulative total return and yield information for the Funds in advertisements,
communications to shareholders or sales literature. These may be provided for
various specified periods by means of quotations, charts, graphs or schedules.
Year-by-year total return and cumulative total return for a specified period are
each derived by calculating the percentage rate required to make a $1,000
investment in a Fund (assuming all distributions are reinvested) at the
beginning of such period equal to the actual total value of such investment at
the end of such period.
Yield is computed by dividing net investment income earned during a recent
30 day period by the product of the average daily number shares outstanding and
entitled to receive dividends during the
29
<PAGE>
period and the price per share on the last day of the relevant period. The
results are compounded on a bond equivalent (semi-annual) basis and then
annualized. Net investment income per share is equal to the dividends and
interest earned during the period, reduced by accrued expenses for the period.
The calculation of net investment income for these purposes may differ from the
net investment income determined for accounting purposes.
In addition, the Company may from time to time publish performance of its
Funds relative to certain performance rankings and indices.
The investment results of the Funds will fluctuate over time and any
presentation of investment results for any prior period should not be considered
a representation of what an investment may earn or what a Fund's performance may
be in any future period. In addition to information provided in shareholder
reports, the Company may, in it's discretion, from time to time make a list of
the Fund's holdings available to investors upon request.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is normally determined once daily
as of the close of regular trading on the New York Stock Exchange, currently
4:00 p.m. New York time, on each day when the New York Stock Exchange is open,
except as noted below. The New York Stock Exchange is scheduled to be open
Monday through Friday throughout the year, except for certain federal and other
holidays. The net asset value of each Fund is determined by dividing the value
of the Fund's securities, cash, and other assets (including accrued but
uncollected interest and dividends), less all liabilities (including accrued
expenses but excluding capital and surplus) by the number of shares of the Fund
outstanding.
The value of each Fund's securities and assets, except those of the Money
Market Fund and certain short-term debt securities held by any of the other
Funds, is determined on the basis of their market values. All of the securities
and assets of the Money Market Fund and short-term debt securities having
remaining maturities of sixty days or less held by any of the other Funds are
valued by the amortized cost method, which approximates market value.
Investments for which market quotations are not readily available are valued at
their fair value as determined in good faith by, or under authority delegated
by, the Company's board of directors. See "Determination of Net Asset Value" in
the SAI.
OFFERING, PURCHASE AND REDEMPTION OF SHARES
Pursuant to a distribution agreement, Investment Distributors, Inc. ("IDI")
acts without remuneration as the Company's distributor in the distribution of
the shares of each Fund. IDI is a wholly-owned subsidiary of PLC and has no
obligation to sell any stated number of shares. IDI's address is the same as
that of Protective Life and PLC.
Shares of the Funds are sold in a continuous offering and are authorized to
be offered to the Account to support the Contracts. Net purchase payments under
the Contracts are placed in one or more subaccounts of the Account and the
assets of each such subaccount are invested in the shares of the Fund
corresponding to that subaccount. The Account purchases and redeems shares of
the Funds for its subaccounts at net asset value without sales or redemption
charges.
For each day on which a Fund's net asset value is calculated, the Account
transmits to the Company any orders to purchase or redeem shares of the Fund(s)
based on the purchase payments, redemption (surrender) requests, and transfer
requests from Contract owners, annuitants and beneficiaries that have been
processed on that day. The Account purchases and redeems shares of each Fund at
the Fund's net asset value per share calculated as of that same day although
such purchases and redemptions may be executed the next morning. Money received
by the Company from the Account for the purchase of shares of the International
Equity Fund and Global Income Fund may not be invested by those Funds until the
day following the execution of such purchases.
30
<PAGE>
Please refer to the separate prospectuses for the Contract and the Accounts
for a more detailed description of the procedures whereby a Contract owner,
annuitant, or beneficiary may allocate his or her interest in an Account to a
subaccount using the shares of one of the Funds as an underlying investment
medium.
In the future, the Company may offer shares of one or more of the Funds
(including new funds that might be added to the Company) to other registered or
unregistered separate accounts of Protective Life or its life insurance company
affiliates to support variable annuity contracts or variable life insurance
contracts (other than the Contracts). Likewise, the Company may also, in the
future, offer shares of one or more of the Funds directly to qualified pension
and retirement plans.
Because shares of the Funds are offered to Accounts supporting variable
annuity Contracts and Accounts supporting variable life insurance Contracts, a
potential for certain conflicts may exist between the interests of owners of
variable annuity Contracts and owners of variable life insurance Contracts.
Likewise, in the event that shares of any Fund are offered to qualified pension
and retirement plans, a potential for certain conflicts may exist between the
interests of variable annuity contract owners, variable life insurance contract
owners and plan participants. The Company currently does not foresee any
disadvantage to owners of either variable annuity Contracts or variable life
insurance Contracts arising from the fact that shares of any Fund might be held
by such entities. The Company's board of directors, however, will monitor the
Funds in order to identify any material irreconcilable conflicts of interest
which may possibly arise, and to determine what action, if any, should be taken
in response to such conflicts.
INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Money Market Fund intends to declare dividends from its net investment
income every day. The Fund will distribute such dividends monthly by reinvesting
them in additional Fund shares at net asset value.
The Global Income Fund, Growth and Income Fund, CORE U.S. Equity Fund,
Capital Growth Fund, International Equity Fund and Small Cap Equity Fund each
intend to distribute substantially all of their net investment income annually.
Each Fund also intends to annually distribute substantially all of its net
realized capital gains. All income dividends and capital gain distributions made
by a Fund will be reinvested in shares of that Fund at that Fund's net asset
value.
TAXES
TAX STATUS. The Company believes that each Fund will qualify as a regulated
investment company under Subchapter M, Chapter 1, Subtitle A of the Code, and
each Fund intends to distribute substantially all of its net investment income
and net capital gain to its shareholders. As a result, under the provisions of
subchapter M, there should be little or no income or gains taxable to the Funds.
In addition, each Fund intends to comply with certain other distribution rules
specified in the Code so that it will not incur a 4% nondeductible federal
excise tax that otherwise would apply. Under current law, the net investment
income of the Funds, including net capital gain, is not taxed to Protective Life
to the extent that it is applied to increase the reserves held by Protective
Life in respect of the Contracts.
SOURCES OF GROSS INCOME. To qualify for treatment as a regulated investment
company, a Fund must, among other things, derive its income from certain
sources. Specifically, in each taxable year, a Fund must generally derive at
least 90% of its gross income from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, or other income (including, but not limited to, gains
from options, futures or forward contracts) derived with respect to its business
of investing in stock, securities, or currencies. A Fund must also generally
derive less than 30% of its gross income from the sale or other disposition of
any of the following which was held for less than three months: (1) stock or
securities, (2) options, futures, or
31
<PAGE>
forward contracts (other than options, futures, or forward contracts on foreign
currencies), or (3) foreign currencies (or options, futures, or forward
contracts on foreign currencies) but only if such currencies (or options,
futures, or forward contracts) are not directly related to the Fund's principal
business of investing in stock or securities (or options and futures with
respect to stock or securities). For purposes of these tests, gross income
generally is determined without regard to losses from the sale or other
disposition of stock or securities or other Fund assets.
DIVERSIFICATION OF ASSETS. To qualify for treatment as a regulated
investment company, a Fund must also satisfy certain requirements with respect
to the diversification of its assets. A Fund must have, at the close of each
quarter of the taxable year, at least 50% of the value of its total assets
represented by cash, cash items, United States Government securities, securities
of other regulated investment companies, and other securities which, in respect
of any one issuer, do not represent more than 5% of the value of the assets of
the Fund nor more than 10% of the voting securities of that issuer. In addition,
at those times not more than 25% of the value of the Fund's assets may be
invested in securities (other than U.S. Government Securities or the securities
of other regulated investment companies) of any one issuer, or of two or more
issuers which the Fund controls and which are engaged in the same or similar
trades or businesses or related trades or businesses. The foregoing
diversification requirements are in addition to those imposed by the Investment
Company Act of 1940.
Because the Company is established as an investment medium for the Accounts,
which are separate accounts of Protective Life, regulations under Subchapter L,
Chapter 1, Subtitle A of the Code impose additional diversification requirements
on each Fund. These requirements generally are that no more than 55% of the
value of the assets of a Fund may be represented by any one investment; no more
than 70% by any two investments; no more than 80% by any three investments; and
no more than 90% by any four investments. For these purposes, all securities of
the same issuer are treated as a single investment and each United States
government agency or instrumentality is treated as a separate issuer.
FOREIGN INVESTMENTS. Funds investing in foreign securities or currencies
may be required to pay withholding or other taxes to foreign governments.
Foreign tax withholding from dividends and interest, if any, is generally at a
rate between 10% and 35%. The investment yield of the Funds that invest in
foreign securities or currencies will be reduced by these foreign taxes.
Shareholders will bear the cost of any foreign tax withholding, but may not be
able to claim a foreign tax credit or deduction for these foreign taxes. Funds
investing in securities of passive foreign investment companies may be subject
to U.S. Federal income taxes and interest charges, and the investment yield of
the Funds making such investments will be reduced by these taxes and interest
charges. Shareholders will bear the cost of these taxes and interest charges,
but will not be able to claim a deduction for these amounts.
ADDITIONAL TAX CONSIDERATIONS. If a Fund failed to qualify as a regulated
investment company, (1) owners of Contracts based on the Fund might be taxed
currently on the investment earnings under their Contracts and thereby lose the
benefit of tax deferral, and (2) the Fund might incur additional taxes. In
addition, if a Fund failed to comply with the diversification requirements of
the regulations under Subchapter L of the Code, owners of Contracts based on the
Fund would be taxed on the investment earnings under their Contracts and thereby
lose the benefit of tax deferral. Accordingly, compliance with the above rules
is carefully monitored by the Advisers and it is intended that the Funds will
comply with these rules as they exist or as they may be modified from time to
time. Compliance with the tax requirements described above may result in a
reduction in the return under a Fund, since, to comply with the above rules, the
investments utilized (and the time at which such investments are entered into
and closed out) may be different from that the Adviser might otherwise believe
to be desirable.
The shareholders of the Funds are currently limited to the Accounts and
Protective Life. For more information regarding the tax implications for the
purchaser of a Contract who allocates investments to the Funds, please refer to
the prospectuses for the Contracts.
32
<PAGE>
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations currently in effect. It is not
intended to be a complete explanation or a substitute for consultation with
individual tax advisers. For the complete provisions, reference should be made
to the pertinent Code sections and the Treasury Regulations promulgated
thereunder. The Code and Regulations are subject to change.
OTHER INFORMATION
REPORTS
Annual Reports containing audited financial statements of the Company and
Semi-Annual Reports containing unaudited financial statements, as well as proxy
materials, are sent to Contract owners, annuitants or beneficiaries, as
appropriate. Inquiries may be directed to the Company at the telephone number or
address set forth on the cover page of this prospectus.
VOTING AND OTHER RIGHTS
Each share outstanding is entitled to one vote for each dollar of net asset
value on all matters submitted to a vote of shareholders (of a Fund or the
Company) and is entitled to a pro-rata share of any distributions made by a Fund
and, in the event of liquidation, of its net assets remaining after satisfaction
of outstanding liabilities. Each share (of each Fund), when-issued, is
nonassessable and has no preemptive or conversion rights. The shares have
noncumulative voting rights. Protective Life will vote shares of a Fund held by
the Accounts which are attributable to Contracts in accordance with instructions
received from Contract owners, annuitants and beneficiaries as provided in the
prospectuses for the Contracts. Fund shares held by the Accounts as to which no
instructions have been received will be voted for or against any proposition, or
in abstention, in the same proportion as the shares of the Accounts as to which
instructions have been received. Fund shares held by any registered separate
account of Protective Life or its affiliates that are not attributable to
Contracts will also be voted for or against any proposition in the same
proportion as the shares for which voting instructions are received by that
separate account. However, if Protective Life determines that it is permitted to
vote any such shares of a Fund in its own right, it may elect to do so, subject
to the then current interpretation of the Act and the rules thereunder. Fund
shares held by non-registered separate accounts or qualified plans will be voted
for or against any proposition in the same proportion as all other Fund shares
are voted unless the separate account or the plan makes other arrangements.
As a Maryland corporate entity, the Company is not required to hold regular
annual shareholder meetings. The Company is, however, required to hold
shareholder meetings for such proposes as, for example: (i) approving certain
agreements as required by the Act; (ii) changing fundamental investment
objectives, policies and restrictions of any Fund; and (iii) filling vacancies
on the board of directors in the event that less than a majority of the
directors were elected by shareholders. Directors may also be removed by
shareholders by a vote of two-thirds of the outstanding votes attributable to
shares at a meeting called at the request of holders of 10% or more of such
votes. The Company has the obligation to assist in shareholder communications.
CUSTODY OF ASSETS
Pursuant to a custody agreement with the Company, State Street Bank and
Trust Company ("State Street") serves as the custodian of the Funds' assets.
ACCOUNTING AND ADMINISTRATIVE SERVICES
Pursuant to the custody agreement, State Street also performs certain
accounting services for the Company. These services include maintaining and
keeping current the Company's books, accounts, records, journals and other
records of original entry related to the Company's business, performing certain
daily functions related thereto, including calculating each Fund's daily net
asset value. IDASI is responsible for providing certain administrative services
to the Company such as calculating each
33
<PAGE>
Fund's standardized performance information, preparing annual and semi-annual
reports to shareholders and the SEC, preparing each Fund's tax returns,
monitoring compliance and performing other administrative duties. Pursuant to a
subadministration agreement with IDASI, State Street performs many of these
administrative services.
TRANSFER AGENT
Pursuant to a Transfer Agency and Service Agreement with the Company, State
Street also acts as a transfer, redemption and dividend disbursing agent for the
Company.
34
<PAGE>
PART B
INFORMATION REQUIRED TO BE IN THE
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PROTECTIVE INVESTMENT COMPANY
PROTECTIVE MONEY MARKET FUND
PROTECTIVE CORE U.S. EQUITY FUND
PROTECTIVE CAPITAL GROWTH FUND
PROTECTIVE SMALL CAP EQUITY FUND
PROTECTIVE INTERNATIONAL EQUITY FUND
PROTECTIVE GROWTH AND INCOME FUND
PROTECTIVE GLOBAL INCOME FUND
May 1, 1997
This Statement of Additional Information is not a prospectus. Much of the
information contained in this Statement expands upon information discussed in
the prospectus for Protective Investment Company (the "Company") and should,
therefore, be read in conjunction with the prospectus for the Company. To obtain
a copy of the prospectus with the same date as this Statement of
Additional Information write to the Company at P. O. Box 2606, Birmingham,
Alabama 35202 or call 1-800-866-3555.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION.............................................................. 2
ADDITIONAL INVESTMENT POLICY INFORMATION.................................. 3
Protective Money Market Fund............................................ 3
Protective CORE U.S. Equity Fund........................................ 3
Business Value Investing -- Protective Small Cap Equity Fund and
Protective Growth and Income Fund...................................... 4
Protective International Equity Fund.................................... 4
Protective Global Income Fund........................................... 5
SPECIAL INVESTMENT METHODS AND RISKS...................................... 6
Custody Receipts........................................................ 6
Restricted and Illiquid Securities...................................... 6
Options on Securities and Securities Indices............................ 6
Futures Contracts and Options on Futures Contracts...................... 9
Foreign Investments..................................................... 11
Fixed-Income Securities................................................. 16
Warrants and Rights..................................................... 20
Real Estate Investment Trusts........................................... 20
When-Issued Securities and Forward Commitments.......................... 20
INVESTMENT RESTRICTIONS................................................... 21
Fundamental Restrictions................................................ 21
Non-fundamental Restrictions............................................ 22
Interpretive Rules...................................................... 23
INVESTMENT MANAGER........................................................ 23
Investment Management Agreement......................................... 23
Expenses of the Company................................................. 25
INVESTMENT ADVISERS....................................................... 25
Investment Advisers..................................................... 25
Investment Advisory Agreements.......................................... 26
PORTFOLIO TRANSACTIONS AND BROKERAGE...................................... 29
DETERMINATION OF NET ASSET VALUE.......................................... 31
PERFORMANCE INFORMATION................................................... 33
SHARES OF STOCK........................................................... 34
CUSTODY OF ASSETS......................................................... 35
DIRECTORS AND OFFICERS.................................................... 37
OTHER INFORMATION......................................................... 38
Independent Accountants................................................. 38
Legal Counsel........................................................... 38
Other Information....................................................... 38
APPENDIX A................................................................ 39
APPENDIX B................................................................ 43
FINANCIAL STATEMENTS...................................................... 45
</TABLE>
<PAGE>
INTRODUCTION
Protective Investment Company (the "Company") is an open-end management
investment company incorporated in the State of Maryland on September 2, 1993.
The Company consists of seven separate investment portfolios or funds (the
"Funds" or a "Fund"), each of which is, in effect, a separate mutual fund. The
Company issues a separate class of stock for each Fund representing fractional
undivided interests in that Fund. An investor, by investing in a Fund, becomes
entitled to a pro-rata share of all dividends and distributions arising from the
net income and capital gains on the investments of that Fund. Likewise, an
investor shares pro-rata in any losses of that Fund.
Pursuant to an investment management agreement and subject to the authority
of the Company's board of directors, Investment Distributors Advisory Services,
Inc. ("IDASI") serves as the Company's investment manager (the "Investment
Manager") and conducts the business and affairs of the Company. IDASI has
engaged Goldman Sachs Asset Management International ("GSAMI"), an affiliate of
Goldman, Sachs & Co., as the investment adviser to provide day-to-day portfolio
management for the Protective International Equity Fund and the Protective
Global Income Fund. IDASI also has engaged Goldman Sachs Asset Management
("GSAM"), a separate operating division of Goldman, Sachs & Co., as the
investment adviser to provide day-to-day portfolio management for each of the
other Funds. (GSAM and GSAMI are each referred to herein as the "Adviser" or
together as the "Advisers," as appropriate. Goldman, Sachs & Co. is referred to
herein as "Goldman Sachs").
The Company currently offers each class of its stock to a separate account
of Protective Life Insurance Company ("Protective Life") as funding vehicles for
certain variable annuity and variable life insurance contracts (the "Contracts")
issued by Protective Life through separate accounts (the "Accounts"). The
Company does not offer its stock directly to the general public. Each Account,
like the Company, is registered as an investment company with the Securities and
Exchange Commission ("SEC") and a separate prospectus, which accompanies the
prospectus for the Company (the "Prospectus"), describes the Account and the
Contracts issued through that Account. The prospectus for the Account and the
Contracts also has a statement of additional information similar to this
statement of additional information (the "SAI").
The Company may, in the future, offer its stock to other registered and
unregistered separate accounts of Protective Life and its affiliates supporting
other variable annuity contracts or variable life insurance contracts and to
qualified pension and retirement plans.
Terms appearing in the SAI that are defined in the Prospectus have the same
meaning herein as in the Prospectus.
2
<PAGE>
ADDITIONAL INVESTMENT POLICY INFORMATION
PROTECTIVE MONEY MARKET FUND
Pursuant to Rule 2a-7 under the Investment Company Act of 1940 (the "Act"),
securities which are rated (or that have been issued by an issuer that has been
rated with respect to a class of short-term debt obligations, or any security
within that class, comparable in priority and quality with such security) in the
highest short-term rating category by at least two NRSROs are designated "First
Tier Securities." Securities rated in the top two short-term rating categories
by at least two NRSROs, but which are not rated in the highest short-term rating
category by at least two NRSROs, are designated "Second Tier Securities." NRSROs
are listed in the Prospectus and a description of their ratings are found in
Appendix A herein.
Pursuant to Rule 2a-7, the Protective Money Market Fund may not invest more
than 5% of its assets taken at amortized cost in the securities of any one
issuer (except the U.S. Government, including repurchase agreements
collateralized by U.S. Government Securities). The Fund may, however, invest
more than 5% of its assets in the First Tier Securities of a single issuer for a
period of up to three business days after the purchase thereof, although the
Fund may not make more than one such investment at any time. Further, the Fund
will not invest more than the greater of (i) 1% of its total assets; or (ii) one
million dollars in the securities of a single issuer that were Second Tier
Securities when acquired by the Fund. In addition, the Fund may not invest more
than 5% of its total assets in securities which were Second Tier Securities when
acquired.
The foregoing operating policies are more restrictive than the fundamental
investment restriction number 12 set forth below, which would give the Fund the
ability to invest, with respect to 25% of its assets, more than 5% of its assets
in any one issuer. The Fund will operate in accordance with these operating
policies which comply with Rule 2a-7. Should Rule 2a-7 be amended in any
respect, the Money Market Fund may amend the foregoing operating policies in
conformity with the Rule.
PROTECTIVE CORE U.S. EQUITY FUND
The CORE U.S. Equity Fund's investment objective is to provide its
shareholders with a total return consisting of capital appreciation plus
dividend income. Under normal circumstances, the Fund will invest at least 90%
of its total assets in equity securities.
The investment strategy described above will be implemented to the extent it
is consistent with maintaining the CORE U.S. Equity Fund's qualification as a
regulated investment company under the Internal Revenue Code of 1986 (the
"Code"). See "Taxes" in the Prospectus. The Fund's strategy may be limited, in
particular, by the requirement for such qualification that less than 30% of the
Fund's annual gross income be derived from the sale or other disposition of
stocks or securities (including options and futures contracts) held for less
than three months.
Since normal settlement for equity securities is three trading days, the
Fund will need to hold cash balances to satisfy shareholder redemption requests.
Such cash balances normally range from 2% to 5% of the Fund's net assets. The
Fund may purchase futures contracts on the S&P 500 Index in order to keep the
Fund's effective equity exposure close to 100%. For example, if cash balances
are equal to 5% of the net assets, the Fund may enter into long futures
contracts covering an amount equal to 5% of the Fund's net assets. As cash
balances fluctuate based on new contributions or withdrawals, the Fund may enter
into additional contracts or close out existing positions.
THE MULTIFACTOR MODEL. The multifactor model is a sophisticated
computerized rating system for evaluating equity securities according to twelve
fundamental investment characteristics (or factors). The factors used by the
multifactor model incorporate many variables studied by traditional fundamental
analysts, and cover measures of value, yield, growth, momentum, risk and
liquidity (E.G., price/ earnings ratio, sustainable growth rate, earnings
momentum and market liquidity). All of these factors have been shown to
significantly impact the performance of equity securities.
Because it includes many disparate factors, the Adviser believes that the
multifactor model is broader in scope and provides a more thorough evaluation
than most conventional, value-oriented
3
<PAGE>
quantitative models. As a result, the securities ranked highest by the
multifactor model do not have one dominant investment characteristic (such as a
low price/earnings ratio); rather, such securities possess many different
investment characteristics. By using a variety of relevant factors to select
securities from the recommended list, the Adviser believes that the Select
Equity Fund will be better balanced and have more consistent performance than an
investment portfolio that uses only one or two factors to select securities.
The Adviser will monitor, and may occasionally suggest and make changes to,
the method by which securities are selected for or weighted in the Core U.S.
Equity Fund. Such changes (which may be the result of changes in the nature of
the recommended list, the multifactor model or the method of applying the
multifactor model) may include: (i) evolutionary changes to the structure of the
multifactor model (E.G., the addition of new factors or a new means of weighting
the factors); (ii) changes in trading procedures (E.G., trading frequency or the
manner in which the Fund uses futures on the S&P 500 Index); or (iii) changes in
the method by which securities are weighted in the Fund. Any such changes will
preserve the Fund's basic investment philosophy of combining qualitative and
quantitative methods of selecting securities using a disciplined investment
process.
BUSINESS VALUE INVESTING -- PROTECTIVE SMALL CAP EQUITY FUND AND PROTECTIVE
GROWTH AND INCOME FUND
Potential equity investments for Small Cap Equity Fund and Growth and Income
Fund generally are evaluated using fundamental analysis, including criteria such
as earnings, cash flow, asset values and/or dividend-paying ability. In choosing
a Fund's securities, the Adviser utilizes first-hand fundamental research,
including visiting company facilities to assess operations and meet
decision-makers. The Adviser may also use a macro analysis of numerous economic
and valuation variables to determine and anticipate changes in company earnings
and the overall investment climate. The Adviser is able to draw on the research
and market expertise of the Goldman Sachs Research Department and other
affiliates of the Adviser as well as information provided by other securities
dealers.
The Adviser intends to purchase equity securities of companies that are, in
its view, underpriced relative to a combination of such companies' long-term
earnings prospects, growth rate, free cash flow and/or dividend-paying ability.
These Funds may also purchase securities of companies that have experienced
difficulties and that, in the opinion of the Adviser, are available at
attractive prices. Consideration is given to the business quality of the issuer.
Factors positively affecting the Adviser's view of that quality include the
competitiveness and degree of regulation in the markets in which the company
operates, the existence of a management team with a record of success, the
market position of the company in the markets in which it operates, the level of
the company's financial leverage and the sustainable return on capital invested
in the business.
Equity securities in a Fund's portfolio will generally be sold when the
Adviser believes that the market price fully reflects or exceeds the securities'
fundamental valuation or when other more attractive investments are identified.
PROTECTIVE INTERNATIONAL EQUITY FUND
INVESTING ABROAD: HIGH HISTORICAL RETURNS AND UNRECOGNIZED VALUES. Because
research coverage outside the U.S. is fragmented and relatively unsophisticated,
many foreign companies that are well-positioned to grow and prosper have not
come to the attention of investors. The Adviser believes that the high
historical returns and less efficient pricing of foreign markets create
favorable conditions for the Fund's highly focused investment approach.
A RIGOROUS PROCESS OF STOCK SELECTION. Using fundamental industry and
company research, the Adviser's equity team in London, Hong Kong and Tokyo seeks
to identify companies that have a high probability of achieving superior
long-term returns. Stocks are carefully selected for the Fund's portfolio
through a three-stage investment process. Because the Fund is a long-term holder
of stocks, the portfolio managers adjust the Fund's portfolio only when expected
returns fall below acceptable levels or when the portfolio managers identify
substantially more attractive investments.
4
<PAGE>
Using the research of the Adviser and Goldman Sachs as well as information
gathered from other sources in Europe and the AsiaPacific region, the portfolio
managers first identify attractive industries around the world. Such industries
have favorable underlying economics and allow companies to generate sustainable
and predictable high returns. As a rule, they are less economically sensitive,
relatively free of regulation and favor strong franchises.
Within these industries the portfolio managers identify well-run companies
that enjoy a stable competitive advantage and are able to benefit from the
favorable dynamics of the industry. This stage includes analyzing the current
and expected financial performance of the company; contacting suppliers,
customers and competitors; and meeting with management. In particular, the
portfolio managers look for companies whose managers have a strong commitment to
both maintaining the high returns of the existing business and reinvesting the
capital generated at high rates of return. The Fund looks for companies whose
management always acts in the interests of the owners and seek to maximize
returns to all stockholders.
HEDGING AND ENHANCING RETURNS THROUGH CURRENCY MANAGEMENT TECHNIQUES. The
Adviser's currency team may manage the foreign exchange risk embedded in foreign
equities by means of a currency overlay program. The program may be utilized to
protect the value of foreign investments in sustained periods of dollar
appreciation and to add returns by seeking to take advantage of foreign exchange
fluctuations.
THE ADVISER'S INTERNATIONAL EQUITY TEAM. The members of the Adviser's
international equity team bring together years of experience in analyzing and
investing in companies in Europe and the Asia-Pacific region. Their expertise
spans a wide range of skills including investment analysis, investment
management, investment banking and business consulting. In addition, they have
access to over 200 economic, equity and currency research professionals of
Goldman Sachs in London, Frankfurt, Hong Kong, Tokyo and New York.
PROTECTIVE GLOBAL INCOME FUND
HIGH INCOME. The Fund's portfolio managers will seek out the highest
yielding bonds in the global fixed-income market that meet the Fund's credit
quality standards and certain other criteria.
CAPITAL APPRECIATION. Investing in the foreign bond markets offers the
potential for capital appreciation due to both interest rate and currency
exchange rate fluctuations. The portfolio managers also attempt to identify
investments with appreciation potential by carefully evaluating trends affecting
a country's currency as well as a country's fundamental economic strength.
However, there is a risk of capital depreciation as a result of unanticipated
interest rate and currency fluctuations.
PORTFOLIO MANAGEMENT FLEXIBILITY. The Fund is designed to be actively
managed. The Fund's portfolio managers invest in countries that, in their
judgment, meet the investment guidelines and often have strong currencies and
stable economies and in securities that they believe offer the best performance
prospects. Furthermore, because the Fund can purchase securities with various
maturities, the portfolio managers can adjust the Fund's holdings in an effort
to maximize returns in a variety of interest rate environments. In addition, the
Fund's ability to invest in securities of any maturity allows its portfolio
managers to adjust the Fund's portfolio as interest rates change to take
advantage of the most attractive segments of the yield curve.
RELATIVE STABILITY OF PRINCIPAL. The Fund may be able to reduce principal
fluctuation by investing in foreign countries with economic policies or business
cycles different from those of the United States and in foreign securities
markets that do not necessarily move in the same direction or magnitude as the
U.S. market. Investing in a broad range of U.S. and foreign fixed-income
securities and currencies reduces the dependence of the Fund's performance on
developments in any particular market to the extent that adverse events in one
market are offset by favorable events in other markets. The Fund's policy of
investing only in high credit quality securities may also reduce principal
fluctuation. However, there is no assurance that these strategies will always be
successful.
5
<PAGE>
PROFESSIONAL MANAGEMENT. Individual U.S. investors may prefer professional
management of their global bond and currency portfolios because a
well-diversified portfolio requires a large amount of capital and because the
size of the global market requires access to extensive resources and a
substantial commitment of time.
SPECIAL INVESTMENT METHODS AND RISKS
CUSTODY RECEIPTS
The Funds may acquire custody receipts in connection with securities issued
or guaranteed as to principal and interest by the U.S. Government, its agencies,
political subdivisions, authorities or instrumentalities. Such custody receipts
evidence ownership of future interest payments, principal payments or both on
certain notes or bonds issued by the U.S. Government, its agencies, political
subdivisions authorities or instrumentalities. These custody receipts are known
by various names, including "Treasury Receipts," "Treasury Investors Growth
Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury Securities"
("CATS"). For certain securities law purposes, custody receipts are not
considered U.S. Government securities.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may purchase certain restricted securities (those that are not
registered under the Securities Act of 1933 (the "1933 Act") but can be offered
and sold to "qualified institutional buyers" under Rule 144A of that Act) and
limited amounts of illiquid investments, including illiquid restricted
securities. Limitations on illiquid securities and other illiquid investments
for each Fund are described in non-fundamental investment restrictions 3(a) -
3(c) below.
Illiquid investments include many restricted securities, repurchase
agreements that mature in more than seven days, fixed time deposits that mature
in more than seven days, participation interests in loans, swap transactions,
certain over-the-counter option contracts, and securities that are not readily
marketable.
Certain repurchase agreements which provide for settlement in more than
seven days, however, can be liquidated before the nominal fixed term on seven
days or less notice. The Company will consider such repurchase agreements as
liquid. Likewise, restricted securities (including commercial paper issued
pursuant to Section 4(2) of the 1933 Act) that the board of directors of the
Company or the Advisers have determined to be liquid will be treated as such.
The SEC staff has taken the position that fixed time deposits maturing in
more than seven days that cannot be traded on a secondary market and
participation interests in loans are illiquid and not readily marketable. Until
such time (if any) as this position changes, the Company will include such
investments in the percentage limitation on illiquid investments applicable to
each Fund.
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING OPTIONS. All of the Funds except the Money Market Fund and CORE
U.S. Equity Fund may write (sell) covered call and put options on any securities
in which it may invest. A call option written by a Fund obligates such Fund to
sell specified securities to the holder of the option at a specified price if
the option is exercised at any time before the expiration date. All call options
written by a Fund are covered, which means that such Fund will own the
securities subject to the option so long as the option is outstanding. A Fund's
purpose in writing covered call options is to realize greater income than would
be realized on portfolio securities transactions alone. However, a Fund may
forgo the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by a Fund would obligate such Fund to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. All put options written by
a Fund would be covered, which means that such Fund would have deposited with
its custodian cash or liquid high grade debt securities with a value at least
equal to the exercise price of the put option. The purpose of writing such
options is to generate additional income for the Fund. However, in return for
the option premium, a Fund accepts the risk that it will be required to purchase
the underlying securities at a price in excess of the securities' market value
at the time of purchase.
6
<PAGE>
In addition, a written call option or put option may be covered by
maintaining cash or liquid, high grade debt securities (either of which may be
denominated in any currency) in a segregated account with its custodian, by
entering into an offsetting forward contract and/or or by purchasing an
offsetting option which, by virtue of its exercise price or otherwise, reduces a
Fund's net exposure on its written option position.
The Funds other than the Money Market Fund and CORE U.S. Equity Fund may
also write (sell) covered call and put options on any securities index composed
of securities in which it may invest. Options on securities indices are similar
to options on securities, except that the exercise of securities index options
requires cash payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security.
A Fund may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index,
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities in its portfolio. A Fund may cover call and put options on a
securities index by maintaining cash or liquid high grade debt securities with a
value equal to the exercise price in a segregated account with its custodian.
A Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase" transactions.
PURCHASING OPTIONS. The Funds other than Money Market Fund and CORE U.S.
Equity Fund may purchase put and call options on any securities in which it may
invest or options on any securities index based on securities in which it may
invest. A Fund would also be able to enter into closing sale transactions in
order to realize gains or minimize losses on options it had purchased.
A Fund would normally purchase call options in anticipation of an increase
in the market value of securities of the type in which it may invest. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified securities at a specified price during the option period.
A Fund would ordinarily realize a gain if, during the option period, the value
of such securities exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise such a Fund would realize a loss on the purchase of
the call option.
A Fund would normally purchase put options in anticipation of a decline in
the market value of securities in its portfolio ("protective puts") or in
securities in which it may invest. The purchase of a put option would entitle a
Fund, in exchange for the premium paid, to sell specified securities at a
specified price during the option period. The purchase of protective puts is
designed to offset or hedge against a decline in the market value of a Fund's
securities. Put options may also be purchased by a Fund for the purpose of
affirmatively benefiting from a decline in the price of securities which it does
not own. A Fund would ordinarily realize a gain if, during the option period,
the value of the underlying securities decreased below the exercise price
sufficiently to cover the premium and transaction costs; otherwise such a Fund
would realize a no gain or loss on the purchase of the put option. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of the underlying portfolio securities.
The Fund would purchase put and call options on securities indices for the
same purposes as it would purchase options on individual securities.
YIELD CURVE OPTIONS. The Global Income Fund may enter into options on the
yield "spread," or yield differential between two securities. Such transactions
are referred to as "yield curve" options. In contrast to other types of options,
a yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
7
<PAGE>
The Global Income Fund may purchase or write yield curve options for the
same purposes as other options on securities. For example, the Global Income
Fund may purchase a call option on the yield spread between two securities if it
owns one of the securities and anticipates purchasing the other security and
wants to hedge against an adverse change in the yield between the two
securities. The Global Income Fund may also purchase or write yield curve
options in an effort to increase its current income if, in the judgment of the
Adviser, the Fund will be able to profit from movements in the spread between
the yields of the underlying securities. The trading of yield curve options is
subject to all of the risks associated with the trading of other types of
options. In addition, however, such options present risk of loss even if the
yield of one of the underlying securities remains constant, if the spread moves
in a direction or to an extent which was not anticipated.
Yield curve options written by the Global Income Fund will be "covered." A
call (or put) option is covered if the Fund holds another call (or put) option
on the spread between the same two securities and maintains in a segregated
account with its custodian cash or liquid, high grade debt securities sufficient
to cover the Fund's net liability under the two options. Therefore, the Fund's
liability for such a covered option is generally limited to the difference
between the amount of the Global Income Fund's liability under the option
written by the Fund less the value of the option held by the Fund. Yield curve
options may also be covered in such other manner as may be in accordance with
the requirements of the counterparty with which the option is traded and
applicable laws and regulations. Yield curve options are traded
over-the-counter, and because they have been only recently introduced,
established trading markets for these options have not yet developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
liquid secondary market on an options exchange will exist for any particular
exchange-traded option or at any particular time. If a Fund is unable to effect
a closing purchase transaction with respect to covered options it has written,
the Fund will not be able to sell the underlying securities or dispose of assets
held in a segregated account until the options expire or are exercised.
Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it will have to exercise the options in order to
realize any profit and will incur transaction costs upon the purchase or sale of
underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist, although outstanding options on that exchange that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
The Funds other than the Money Market Fund and CORE U.S. Equity Fund may
purchase and sell both options that are traded on United States and foreign
exchanges and options traded over-the-counter with broker-dealers who make
markets in these options. The ability to terminate over-the-counter options is
more limited than with exchange-traded options and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations. Until such time as the staff of the SEC changes its position, the
Funds will treat purchased over-the-counter options and all assets used to cover
written over-the-counter options as illiquid securities, except that with
respect to options written with primary dealers in U.S. Government securities
pursuant to an agreement requiring a closing purchase transaction at a formula
price, the amount of illiquid securities may be calculated with reference to the
formula.
8
<PAGE>
Transactions by a Fund in options on securities and stock indices will be
subject to limitations established by each of the exchanges, boards of trade or
other trading facilities governing the maximum number of options in each class
which may be written or purchased by a single investor or group of investors
acting in concert. Thus, the number of options which a Fund may write or
purchase may be affected by options written or purchased by other investment
advisory clients of the Advisers. An exchange, board of trade or other trading
facility may order the liquidations of positions found to be in excess of these
limits, and it may impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of protective
puts for hedging purposes depends in part on the Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Funds other than the Money Market Fund may purchase and sell futures
contracts. Of these Funds, the Funds other than CORE U.S. Equity Fund may also
purchase and write options on futures contracts. These Funds may purchase and
sell futures contracts based on various securities (such as U.S. Government
Securities), securities indices, foreign currencies and other financial
instruments and indices. CORE U.S. Equity Fund may only purchase and sell
futures contracts on the S&P 500 Index. A Fund will engage in futures or, in the
case of Funds other than CORE U.S. Equity, related options transactions, only
for bona fide hedging purposes as defined below or for purposes of seeking to
increase total returns to the extent permitted by regulations of the Commodity
Futures Trading Commission ("CFTC"). All futures contracts entered into by a
Fund are traded on U.S. exchanges or boards of trade that are licensed and
regulated by the CFTC or on foreign exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial instruments
for an agreed price during a designated month (or to deliver the final cash
settlement price, in the case of a contract relating to an index or otherwise
not calling for physical delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, a Fund can
seek through the sale of futures contracts to offset a decline in the value of
its current portfolio securities. When rates are falling or prices are rising, a
Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market when it effects
anticipated purchases. Similarly, a Fund (other than the Money Market Fund or
CORE U.S. Equity Fund) can sell futures contracts on a specified currency to
protect against a decline in the value of such currency and its portfolio
securities which are denominated in such currency. These Funds can purchase
futures contracts on foreign currency to fix the price in U.S. dollars of a
security denominated in such currency that such Fund has acquired or expects to
acquire.
Positions taken in the futures markets are not normally held to maturity,
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While a Fund's futures contracts on securities or currency
will usually be liquidated in this manner, it may instead make or take delivery
of the underlying securities or currency whenever it appears economically
advantageous for the Fund to do so. A clearing corporation associated with the
exchange on which futures on securities or currency are traded guarantees that,
if still open, the sale or purchase will be performed on the settlement date.
HEDGING STRATEGIES. Hedging by use of futures contracts seeks to establish
more certainly than would otherwise be possible the effective price, rate of
return or currency exchange rate on portfolio securities or securities that a
Fund owns or proposes to acquire. A Fund may, for example, take a "short"
position in the futures market by selling futures contracts in order to hedge
against an anticipated rise in interest rates or a decline in market prices or
(other than CORE U.S. Equity Fund) foreign currency rates that would adversely
affect the U. S. dollar value of the Fund's portfolio securities. Such futures
contracts may (except in the case of CORE U.S. Equity Fund) include contracts
for the future delivery of securities held by the Fund or securities with
characteristics similar to those of a Fund's portfolio securities. Similarly, a
Fund (other than CORE U.S. Equity Fund)
9
<PAGE>
may sell futures contracts on a currency in which its portfolio securities are
denominated or in one currency to hedge against fluctuations in the value of
securities denominated in a different currency if there is an established
historical pattern of correlation between the two currencies.
If, in the opinion of its Adviser, there is a sufficient degree of
correlation between price trends for a Fund's portfolio securities and futures
contracts based on other financial instruments, securities indices or other
indices, the Fund may also enter into such futures contracts as part of its
hedging strategy. Although under some circumstances prices of securities in a
Fund's portfolio may be more or less volatile than prices of such futures
contracts, the Adviser will attempt to estimate the extent of this difference in
volatility based on historical patterns and to compensate for it by having the
Fund enter into a greater or lesser number of futures contracts or by attempting
to achieve only a partial hedge against price changes affecting the Fund's
securities portfolio. When hedging of this character is successful, any
depreciation in the value of portfolio securities will substantially be offset
by appreciation in the value of the futures position. On the other hand, any
unanticipated appreciation in the value of the Fund's portfolio securities would
be substantially offset by a decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing such
futures contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices or rates that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
futures contracts will give a Fund the right (but not the obligation), for a
specified price, to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which
may partially offset a decline in the value of a Fund's assets. By writing a
call option, a Fund becomes obligated, in exchange for the premium, to sell a
futures contract, which may have a value higher than the exercise price.
Conversely, the writing of a put option on a futures contract generates a
premium, which may partially offset an increase in the price of securities that
the Fund intends to purchase. However, a Fund becomes obligated to purchase a
futures contract, which may have a value lower than the exercise price. Thus,
the loss incurred by the Fund in writing options on futures is potentially
unlimited and may exceed the amount of the premium received. A Fund will incur
transaction costs in connection with the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same series. There
is no guarantee that such closing transactions can be effected. A Fund's ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid market.
OTHER CONSIDERATIONS. Where permitted, a Fund will engage in futures
transactions and (except for CORE U.S. Equity Fund) in related options
transactions only for bona fide hedging or to seek to increase total return to
the extent permitted by CFTC regulations. A Fund will determine that the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
the Fund or which it expects to purchase. Except as stated below, each Fund's
futures transactions will be entered into for traditional hedging purposes --
I.E., futures contracts will be sold to protect against a decline in the price
of securities (or the currency in which they are denominated) that the Fund
owns, or futures contracts will be purchased to protect the Fund against an
increase in the price of securities (or the currency in which they are
denominated) it intends to purchase. As evidence of this hedging intent, the
Funds expect that on 75% or more of the occasions on which they take a long
futures or option positions (involving the purchase of futures contracts), the
Fund will have purchased, or will be in the process of
10
<PAGE>
purchasing, equivalent amounts of related securities (or assets denominated in
the related currency) in the cash market at the time when the futures or option
position is closed out. However, in particular cases, when it is economically
advantageous for a Fund to do so, a long futures position may be terminated or
an option may expire without the corresponding purchase of securities or other
assets.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC regulation permits a Fund to elect to comply with a different
test, under which the aggregate initial margin and premiums required to
establish positions in futures contracts and options on futures for the purpose
seeking to increase total return, will not exceed 5 percent of the net asset
value of the Fund's portfolio, after taking into account unrealized profits and
losses on any such positions and excluding the amount by which such options were
in-the-money at the time of purchase. As permitted, each Fund will engage in
transactions in futures contracts and (except for Select Equity Fund) in related
options transactions only to the extent such transactions are consistent with
the requirements of the Internal Revenue Code of 1986, as amended (the "Code")
for maintaining its qualification as a regulated investment company for federal
income tax purposes (see "Taxes" in the Prospectus).
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
segregate with its custodian liquid high grade debt securities in an amount
equal to the underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
unanticipated changes in interest rates, securities prices or currency exchange
rates may result in a poorer overall performance for a Fund than if it had not
entered into any futures contracts or options transactions. In the event of an
imperfect correlation between a futures position and portfolio position which is
intended to be protected, the desired protection may not be obtained and a Fund
may be exposed to risk of loss.
Perfect correlation between a Fund's futures positions and portfolio
positions may be difficult to achieve because no futures contracts based on
individual equity securities are currently available. The only futures contracts
available to hedge a Fund's portfolio are various futures on U.S. Government
securities, securities indices and foreign currencies. In addition, it is not
possible for a Fund to hedge fully or perfectly against currency fluctuations
affecting the value of securities denominated in foreign currencies because the
value of such securities is likely to fluctuate as a result of independent
factors not related to currency fluctuations.
FOREIGN INVESTMENTS
Investing in the securities of companies organized outside the United States
or of companies whose securities are principally traded outside the United
States ("foreign issuers") or investments in securities denominated or quoted in
foreign currency ("non-dollar securities") involves certain special
considerations, including those set forth below, which are not typically
associated with investing in securities of domestic issuers or U.S. dollar
denominated securities. Since investments in foreign issuers may involve
currencies of foreign countries and since a Fund may temporarily hold funds in
bank deposits in foreign currencies during completion of investment programs and
since a Fund may be subject to currency exposure independent of its securities
positions, the Fund may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations and may incur costs in
connection with conversions between various currencies.
Currency exchange rates may fluctuate significantly over short periods of
time. The 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 anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates also
can be affected by intervention by U.S. or foreign governments or central banks
or the failure to intervene or by currency controls or political developments in
the U.S. or abroad.
11
<PAGE>
Since foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. issuers, there may be less publicly
available information about a foreign issuer than about a domestic issuer.
Volume and liquidity in most foreign securities markets are less than in the
United States and securities of many foreign issuers are less liquid and more
volatile than securities of comparable domestic issuers. Fixed commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S. exchanges, although the Funds endeavor to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of foreign securities exchanges, brokers, dealers and
listed and unlisted issuers than in the United States.
Foreign investment markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of a Fund are uninvested and no return is
earned on such assets. The inability of a Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio investments due to
settlement problems could result either in losses to a Fund due to subsequent
declines in value of the portfolio securities or, if the Fund has entered into a
contract to sell the securities, could result in possible liability to the
purchaser. In addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect a Fund's investments
in those countries. Moreover, individual foreign economies may differ favorably
or unfavorably from the U.S. economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource self-
sufficiency and balance of payments position.
International Equity Fund, Capital Growth Fund, Small Cap Equity Fund,
Global Income Fund and Growth and Income Fund may also invest in countries with
emerging economics or securities markets. Political and economic structures in
many of such countries may be undergoing significant evolution and rapid
development, and such countries may lack the social, political and economic
stability characteristic of more developed countries. Certain of such countries
may have in the past failed to recognize private property rights and have at
times nationalized or expropriated the assets of private companies. As a result,
the risks described above, including the risks of nationalization or
expropriation of assets, may be heightened. In addition, unanticipated political
or social developments may affect the values of a Fund's investments in those
countries and the availability to a Fund of additional investments in those
countries. The small size and inexperience of the securities markets in certain
of such countries and the limited volume of trading in securities in those
countries may make a Fund's investments in such countries illiquid and more
volatile than investments in more developed countries, and a Fund may be
required to establish special custodial or other arrangements before making
certain investments in those countries. There may be little financial or
accounting information available with respect to issuers located in certain of
such countries, and it may be difficult as a result to assess the value or
prospects of an investment in such issuers.
The International Equity Fund, Capital Growth Fund, Small Cap Equity Fund
and Growth and Income Fund may invest in securities of issuers domiciled in a
country other than the country in whose currency the instrument is denominated
or quoted. The International Equity Fund and Global Income Fund may also invest
in securities quoted or denominated in the European Currency Unit ("ECU"), which
is a "basket" consisting of specified amounts of the currencies of certain of
the member states of the European Community. The specific amounts of currencies
comprising the ECU may be adjusted by the Council of Ministers of the European
Community from time to time to reflect changes in relative values of the
underlying currencies. In addition, the Funds may invest in securities quoted or
denominated in other currency "baskets."
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Capital Growth Fund, Small
Cap Equity Fund, International Equity Fund, Growth and Income Fund and Global
Income Fund may enter into forward foreign currency exchange contracts for the
purposes described in the Prospectus. A forward
12
<PAGE>
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. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are generally charged at any stage for trades.
At the maturity of a forward contract a Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing transaction involving the purchase or sale of an offsetting
contract. Closing transactions with respect to forward contracts are usually
effected with the currency trader who is a party to the original forward
contract.
These Funds may enter into forward foreign currency exchange contracts in
several circumstances. First, when a Fund enters into a contract for the
purchase or sale of a security denominated or quoted in a foreign currency, or
when the Fund anticipates the receipt in a foreign currency of dividend or
interest payments on such a security which it holds, the Fund may desire to
"lock in" the U.S. dollar price of the security or the U.S. dollar equivalent of
such dividend or interest payment, as the case may be. By entering into a
forward contract for the purchase or sale, for a fixed amount of dollars, of the
amount of foreign currency involved in the underlying transactions, the Fund
will attempt to protect itself against an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when the Adviser of a Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the Fund's portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of a Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which a Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the dollar value of only a portion of a Fund's foreign assets.
The International Equity Fund and Global Income Fund may engage in
cross-hedging by using forward contracts in one currency to hedge against
fluctuations in the value of securities quoted or denominated in a different
currency if the Adviser determines that there is a pattern of correlation
between the two currencies. These Funds may also purchase and sell forward
contracts to seek to increase total return when the Adviser anticipates that the
foreign currency will appreciate or depreciate in value, but securities
denominated or quoted in that currency do not present attractive investment
opportunities and are not held in the Fund's portfolio.
A Fund's custodian will place cash or liquid assets into a segregated
account of the Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of forward foreign currency exchange contracts
requiring the Fund to purchase foreign currencies or forward contracts entered
into to seek to increase total return. If the value of the securities placed in
the segregated account declines, additional cash or securities will be placed in
the account on a daily basis so that the value of the account will equal the
amount of the Fund's commitments with respect to such contracts. The segregated
account will be marked-to-market on a daily basis. Although the contracts are
not presently regulated by the CFTC, the CFTC may in the future assert authority
to regulate these contracts. In such event, the Fund's ability to utilize
forward foreign currency exchange contracts may be restricted.
13
<PAGE>
While a Fund will enter into forward contracts to reduce currency exchange
rate risks, transactions in such contracts involve certain other risks. Thus,
while a Fund may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for the Fund than if
it had not engaged in any such transactions. Moreover, there may be imperfect
correlation between a Fund's portfolio holdings of securities quoted or
denominated in a particular currency and forward contracts entered into by the
Fund. Such imperfect correlation may cause the Fund to sustain losses which will
prevent the Fund from achieving a complete hedge or expose the Fund to risk of
foreign exchange loss.
Markets for trading foreign forward currency contracts offer less protection
against defaults than is available when trading in currency instruments on an
exchange. Since a forward foreign currency exchange contract is not guaranteed
by an exchange or clearinghouse, a default on the contract would deprive a Fund
of unrealized profits or force the Fund to cover its commitments for purchase or
resale, if any, at the current market price.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. The Capital Growth
Fund, Small Cap Equity Fund, International Equity Fund, Growth and Income Fund
and Global Income Fund may write covered put and call options and purchase put
and call options on foreign currencies for the purpose of protecting against
declines in the U.S. dollar value of portfolio securities and against increases
in the dollar cost of securities to be acquired. The International Equity Fund
and Global Income Fund may use options on currency to cross-hedge, which
involves writing or purchasing options on one currency to hedge against changes
in exchange rates for a different currency if a pattern of correlation exists
between the values of the currencies. In addition, the International Equity and
Global Income Funds may purchase call options on currency to seek to increase
total return when the Adviser anticipates that the currency will appreciate in
value, but the securities quoted or denominated in that currency do not present
attractive investment opportunities and are not included in the Fund's
portfolio.
A call option written by a Fund obligates the Fund to sell specified
currency to the holder of the option at a specified price at any time before the
expiration date. A put option written by a Fund would obligate the Fund to
purchase specified currency from the option holder at a specified price at any
time before the expiration date. The writing of currency options involves a risk
that a Fund will, upon exercise of the option, be required to sell currency
subject to a call at a price that is less than the currency's market value or be
required to purchase currency subject to a put at a price that exceeds the
currency's market value.
A Fund may terminate its obligations under a call or put option by
purchasing an option identical to the one it has written. Such purchases are
referred to as "closing purchase transactions." A Fund would also be able to
enter into closing sale transactions in order to realize gains or minimize
losses on options purchased by it.
A Fund would normally purchase call options in anticipation of an increase
in the U.S. dollar value of currency in which securities to be acquired by the
Fund are quoted or denominated. The purchase of a call option would entitle a
Fund, in return for the premium paid, to purchase specified currency at a
specified price during the option period. The Fund would ordinarily realize a
gain if, during the option period, the value of such currency exceeded the sum
of the exercise price, the premium paid and transaction costs; otherwise the
Fund would realize either no gain or a loss on the purchase of the call option.
A Fund would normally purchase put options in anticipation of a decline in
the dollar value of currency in which securities in its portfolio are quoted or
denominated ("protective puts"). The purchase of a put option would entitle the
Fund, in exchange for the premium paid, to sell specified currency at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the dollar value of the
Fund's portfolio securities due to currency exchange rate fluctuations. A Fund
would ordinarily realize a gain if, during the option period, the value of the
underlying currency decreased below the exercise price sufficiently to more
14
<PAGE>
than cover the premium and transaction costs; otherwise the Fund would realize
either no gain or a loss on the purchase of the put option. Gains and losses on
the purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying currency or portfolio securities.
In addition to using options for the hedging purposes described above, the
International Equity Fund and Global Income Fund may use options on currency to
seek to increase total return. These Funds may write (sell) covered put and call
options on any currency in order to realize greater income than would be
realized on portfolio securities transactions alone. However, in writing covered
call options for additional income, the Fund may forgo the opportunity to profit
from an increase in the market value of the underlying currency. Also, when
writing put options, a Fund accepts, in return for the option premium, the risk
that it may be required to purchase the underlying currency at a price in excess
of the currency's market value at the time of purchase.
These two Funds would normally purchase call options to seek to increase in
anticipation of an increase in the market value of a currency. They would
ordinarily realize a gain if, during the option period, the value of such
currency exceeded the sum of the exercise price, the premium paid and
transaction costs. Otherwise the Fund would realize either no gain or a loss on
the purchase of the call option. Put options may be purchased by these two Funds
for the purpose of benefiting from a decline in the value of currencies which it
does not own. They would ordinarily realize a gain if, during the option period,
the value of the underlying currency decreased below the exercise price
sufficiently to more than cover the premium and transaction costs. Otherwise
they would realize either no gain or a loss on the purchase of the put option.
SPECIAL RISKS ASSOCIATED WITH OPTIONS ON CURRENCY. An exchange traded
options position may be closed out only on an options exchange which provides a
secondary market for an option of the same series. Although a Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option, or at any particular time. For
some options no secondary market on an exchange may exist. In such event, it
might not be possible to effect closing transactions in particular options, with
the result that a Fund would have to exercise its options in order to realize
any profit and would incur transaction costs upon the sale of underlying
securities pursuant to the exercise of put options. If a Fund as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying currency (or security quoted
or denominated in that currency) until the option expires or it delivers the
underlying currency upon exercise.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.
The Funds may purchase and write over-the-counter options to the extent
consistent with its limitation on investments in restricted securities. See
"Investment Restrictions" in the Prospectus. Trading in over-the-counter options
is subject to the risk that the other party will be unable or unwilling to
close-out options purchased or written by the Fund.
The amount of the premiums which a Fund may pay or receive may be adversely
affected as new or existing institutions, including other investment companies,
engage in or increase their option purchasing and writing activities.
INTEREST RATE SWAPS, CURRENCY SWAPS AND INTEREST RATE CAPS, FLOORS AND
COLLARS. The Global Income Fund may enter into interest rate and currency swaps
for hedging purposes and to seek to increase total return. The International
Equity Fund may enter into currency swaps for these purposes. The Global Income
Fund may also enter into special interest rate swap arrangements such as caps,
floors and collars for both hedging purposes and to seek to increase total
return. Inasmuch as
15
<PAGE>
swaps are entered into for good faith hedging purposes or are offset by a
segregated account as described below, the Advisers believe that swaps do not
constitute senior securities as defined in the Act and, accordingly, will not
treat them as being subject to the Fund's borrowing restrictions. An amount of
cash or liquid, high grade debt securities having an aggregate net asset value
at least equal to the entire amount of the payment stream payable by the Fund
will be maintained in a segregated account by the Fund's custodian. A Fund will
not enter into any interest rate swap (including caps, floors and collars) or
currency swap unless the credit quality of the unsecured senior debt or the
claims-paying ability of the other party thereto is considered to be investment
grade by the Adviser. If there is a default by the other party to such a
transaction, the Fund will have contractual remedies pursuant to the agreement,
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid in comparison with the markets for
other similar instruments which are traded in the interbank market.
Nevertheless, the SEC staff takes the position that currency swaps are illiquid
investments subject to these Funds' 15% limitation on such investments.
FIXED-INCOME SECURITIES
SHORT-TERM BANK AND CORPORATE OBLIGATIONS. Commercial paper represents
short-term unsecured promissory notes issued in bearer form by banks or bank
holding companies, corporations, and finance companies. The commercial paper
purchased by the Funds consists of direct U.S. dollar-denominated obligations of
domestic issuers. Bank obligations in which the Funds may invest include
certificates of deposit, bankers' acceptances, fixed time deposits and bank
notes. Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally
drawn by an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect, that the bank unconditionally agrees
to pay the face value of the instrument on maturity. Fixed time deposits are
bank obligations payable at a stated maturity date and bearing interest at a
fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but
may be subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. Certain fixed time deposits maturing in more than seven days may be
deemed to be illiquid securities. Bank notes rank junior to deposit liabilities
of the bank and PARI PASSU with other senior, unsecured obligations of the bank.
Bank notes are classified as "other borrowings" on a bank's balance sheet, while
deposit notes and certificates of deposit are classified as deposits. Bank notes
are not insured by the Federal Deposit Insurance Corporation or any other
insurer. Deposit notes are insured by the Federal Deposit Insurance Corporation
only to the extent of $100,000 per depositor per bank.
VARIABLE AMOUNT MASTER DEMAND NOTES. The Funds may purchase variable amount
master demand notes. These obligations permit the investment of fluctuating
amounts at varying rates of interest pursuant to direct arrangements between the
lender and borrower and are not generally transferable nor are they ordinarily
rated. A Fund may invest in them only if the Adviser believes that the notes are
of comparable quality to the other obligations in which the Fund may invest.
VARIABLE RATE AND FLOATING RATE DEMAND INSTRUMENTS. The Funds may purchase
variable and floating rate demand instruments that are debt securities that
possess a floating or variable interest rate adjustment formula. These
instruments also permit a Fund to demand payment of the principal balance plus
unpaid accrued interest upon a specified number of days' notice to the issuer or
its agent. The demand feature may be backed by a bank letter of credit or
guarantee issued with respect to such instrument.
16
<PAGE>
The terms of the variable or floating rate demand instruments that a Fund
may purchase provide that interest rates are adjustable at intervals ranging
from daily up to six months, and the adjustments are based upon current market
levels, the prime rate of a bank or other appropriate interest rate adjustment
index as provided in the respective instruments. Some of these instruments are
payable on demand on a daily basis or on not more than seven days' notice.
Others, such as instruments with quarterly or semiannual interest rate
adjustments, may be put back to the issuer on designated days on not more than
thirty days's notice. Still others are automatically called by the issuer unless
the Fund instructs otherwise. The Funds intend to exercise the demand only (1)
upon a default under the terms of the debt security, (2) as needed to provide
liquidity to the Fund, (3) to maintain the respective quality standards of a
Fund's investment portfolio, or (4) to attain a more optimal portfolio
structure.
The Money Market Fund will determine the variable or floating rate demand
instruments that it will purchase in accordance with procedures approved by the
board of directors to minimize credit risks. Accordingly, any variable or
floating rate demand instrument must satisfy that Fund's credit criteria with
respect to both its long-term and short-term ratings except that where credit
support is provided, the Fund may rely solely upon the short-term rating of the
variable or floating rate demand instrument (I.E., the right to sell). A
variable or floating rate demand instrument that is unrated must have high
quality characteristics similar to those of other obligations rated high
quality. The Adviser may determine that an unrated variable or floating rate
demand instrument meets the Money Market Fund's quality criteria by reason of
being backed by a letter of credit or guarantee issued by a bank that meets the
quality criteria for that Fund. Thus, either the credit of the issuer of the
obligation or the guarantor bank or both will meet the quality standards of the
Fund.
The maturity of the variable or floating rate demand instruments held by any
of the Funds will ordinarily be deemed to be the longer of (1) the notice period
required before the Fund is entitled to receive payment of the principal amount
of the instrument or (2) the period remaining until the instrument's next
interest rate adjustment.
LOAN PARTICIPATION INTERESTS. The Money Market Fund may purchase
participation interests with remaining maturities of thirteen months or less in
loans of any maturity. Such loans must be to issuers in whose obligations the
Fund may otherwise invest. Any participation purchased by the Fund must be
issued by a bank in the United States with assets exceeding $1 billion. Because
the issuing bank does not guarantee the participation in any way, the
participations are subject to the credit risks generally associated with the
underlying corporate borrower. In addition, because it may be necessary under
the terms of the loan participation for the Fund to assert through the issuing
bank such rights as may exist against the underlying corporate borrower, in the
event the underlying corporate borrower fails to pay principal and interest when
due, the Fund may be subject to delays, expenses and risks that are greater than
those that would have been involved if the Fund had purchased a direct
obligation (such as commercial paper) of such borrower. Moreover, under the
terms of the loan participation the Money Market Fund may be regarded as a
creditor of the issuing bank (rather than of the underlying corporate borrower),
so that the Fund may also be subject to the risk that the issuing bank may
become insolvent. Further, in the event of the bankruptcy or insolvency of the
corporate borrower, the loan participation may be subject to certain defenses
that can be asserted by such borrower as a result of improper conduct by the
issuing bank. The secondary market, if any, for these loan participation is
limited and any such participation purchased by the Fund may be regarded as
illiquid.
The Money Market Fund does not believe that price quotations currently
obtainable from banks, dealers or pricing services consistently represent the
market values of participation interests. Therefore, the Company's accounting
servicing agent will, following guidelines established by the board of
directors, value the participation interests held by the Fund at fair value,
which approximates market value. In valuing a participation interest, the agent
will consider the following factors: (i) the characteristics of the
participation interest, including the cost, size, interest rate, period until
next interest rate reset, maturity and base lending rate of the participation
interest, the terms and conditions of the
17
<PAGE>
loan and any related agreements and the position of the loan in the borrower's
debt structure; (ii) the nature, adequacy and value of the collateral, including
the Fund's rights, remedies and interests with respect to the collateral; (iii)
the creditworthiness of the borrower, based on an evaluation of its financial
condition, financial statements and information about the borrower's business,
cash flows, capital structure and future prospects; (iv) the market for the
participation interest, including price quotations for and trading in the
participation interest and similar participation interest or instruments and the
market environment and investor attitudes towards the participation interest or
participation interests generally; (v) the quality and creditworthiness of any
intermediate participants; and (vi) general economic or market conditions.
LOWER-RATED CORPORATE DEBT OBLIGATIONS. As described in the Prospectus, the
Capital Growth Fund, International Equity Fund, Small Cap Equity Fund and Growth
and Income Fund may make certain investments including corporate debt
obligations that are unrated or rated in the lower rating categories by Standard
& Poor's Rating Group ("Standard & Poor's") or by Moody's Investors Service,
Inc. ("Moody's") (I.E., ratings of BB or lower by Standard & Poor's or Ba or
lower by Moody's). Bonds rated BB or Ba or below (or comparable unrated
securities) are commonly referred to as "lower-rated" securities or as "junk
bonds" and are considered speculative and may be questionable as to principal
and interest payments. In some cases, such bonds may be highly speculative, have
poor prospects for reaching investment standing and be in default. As a result,
investment in such bonds will entail greater speculative risks than those
associated with investment in investment-grade bonds (I.E., bonds rated AAA, AA,
A or BBB by Standard & Poor's or Aaa, Aa, A or Baa by Moody's). See Appendix A
for a description of the ratings issued by investment rating services.
An economic downturn could severely affect the ability of highly leveraged
issuers of junk bonds to service their debt obligations or to repay their
obligations upon maturity. Factors having an adverse impact on the market value
of lower rated securities will have an adverse effect on a Fund's net asset
value to the extent it invests in such securities. In addition, a Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in payment of principal or interest on its portfolio holdings.
The secondary market for junk bond securities, which is concentrated in
relatively few market makers, may not be as liquid as the secondary market for
more highly rated securities, a factor which may have an adverse effect on a
Fund's ability to dispose of a particular security when necessary to meet its
liquidity needs. Under adverse market or economic conditions, the secondary
market for junk bond securities could contract further, independent of any
specific adverse changes in the condition of a particular issuer. As a result, a
Fund's Adviser could find it more difficult to sell these securities or may be
able to sell the securities only at prices lower than if such securities were
widely traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating a Fund's net asset value.
Since investors generally perceive that there are greater risks associated
with lower-rated debt securities, the yields and prices of such securities may
tend to fluctuate more than those for higher rated securities. In the lower
quality segments of the fixed-income securities market, changes in perceptions
of issuers' creditworthiness tend to occur more frequently and in a more
pronounced manner than do changes in higher quality segments of the fixed-income
securities market resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In addition,
the prices of fixed-income securities fluctuate in response to the general level
of interest rates. Fluctuations in the prices of portfolio securities subsequent
to their acquisition will not affect cash income from such securities but will
be reflected in a Fund's net asset value.
Lower-rated (and comparable non-rated) securities tend to offer higher
yields than higher-rated securities with the same maturities because the
historical financial condition of the issuers of such securities may not have
been as strong as that of other issuers. Since lower rated securities generally
18
<PAGE>
involve greater risks of loss of income and principal than higher-rated
securities, investors should consider carefully the relative risks associated
with investment in securities which carry lower ratings and in comparable
non-rated securities. In addition to the risk of default, there are the related
costs of recovery on defaulted issues. The Advisers will attempt to reduce these
risks through diversification of these Funds' portfolios and by analysis of each
issuer and its ability to make timely payments of income and principal, as well
as broad economic trends in corporate developments.
ZERO COUPON BONDS. The Capital Growth Fund, Small Cap Equity Fund,
International Equity Fund, Growth and Income Fund and Global Income Fund may
invest in zero coupon bonds which are debt obligations that do not entitle the
holder to any periodic payments of interest prior to maturity or provide for a
specified cash payment date when the bonds begin paying current interest. As a
result, zero coupon bonds are generally issued and traded at a significant
discount from their face value. The discount approximates the present value
amount of interest the bonds would have accrued and compounded over the period
until maturity.
Zero coupon bonds benefit the issuer by mitigating its initial need for cash
to meet debt service, but generally provide a higher rate of return to
compensate investors for the deferment of cash interest or principal payments.
Such securities are often issued by companies that may not have the capacity to
pay current interest and so may be considered to have more risk than current
interest-bearing securities. In addition, the market price of zero coupon bonds
generally is more volatile than the market prices of securities that provide for
the periodic payment of interest. The market prices of zero coupon bonds are
likely to fluctuate more in response to changes in interest rates than those of
interest-bearing securities having similar maturities and credit quality.
Zero coupon bonds carry the additional risk that, unlike securities that
provide for the periodic payment of interest to maturity, the Funds will realize
no cash until a specified future payment date unless a portion of such
securities is sold. If the issuer of such securities defaults, the Funds may
obtain no return at all on their investment. In addition, a Fund's investment in
zero coupon bonds may require it to sell certain of its portfolio securities to
generate sufficient cash to satisfy certain income distribution requirements.
See "Taxation" below.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. All of the Funds except CORE
U.S. Equity Fund may invest in mortgage-backed securities, which represent
direct or indirect participation in, or are collateralized by and payable from,
mortgage loans secured by real property. These Funds may also invest in
asset-backed securities, which represent participation in, or are secured by and
payable from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property, receivables
from revolving credit (I.E., credit card) agreements and other categories of
receivables. Such assets are securitized though the use of trusts and special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the trust or corporation, or other credit enhancements may be present.
Mortgage-backed and asset-backed securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. A Fund's
ability to maintain positions in such securities will be affected by reductions
in the principal amount of such securities resulting from prepayments, and its
ability to reinvest the returns of principal at comparable yields is subject to
generally prevailing interest rates at that time. To the extent that a Fund
invests in mortgage-backed and asset-backed securities, the values of its
portfolio securities will vary with changes in market interest rates generally
and the differentials in yields among various kinds of U.S. Government
Securities and other mortgage-backed and asset-backed securities.
Asset-backed securities present certain additional risks that are not
presented by mortgage-backed securities because asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to mortgage assets. Credit card receivables are generally
19
<PAGE>
unsecured and the debtors on such receivables are entitled to the protection of
a number of state and federal consumer credit laws, many of which give such
debtors the right to set-off certain amounts owed on the credit cards, thereby
reducing the balance due. Automobile receivables generally are secured, but by
automobiles rather than residential real property. Most issuers of automobile
receivables permit the loan servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that of
the holders of the asset-backed securities. In addition, because of the large
number of vehicles involved in a typical issuance and technical requirements
under state laws, the trustee for the holders of the automobile receivables may
not have a proper security interest in the underlying automobiles. Therefore,
there is the possibility that, in some cases, recoveries on repossessed
collateral may not be available to support payments on these securities.
WARRANTS AND RIGHTS
The CORE U.S. Equity Fund, Capital Growth Fund, Small Cap Equity Fund,
International Equity Fund and Growth and Income Fund each may invest up to 5% of
its total assets, calculated at the time of purchase, in warrants or rights
(other than those acquired in units or attached to other securities) which
entitle the holder to buy equity securities at a specific price for a specific
period of time but will do so only if such equity securities are deemed
appropriate by the Adviser for investment by the Fund. The Funds will each not
invest more than 2% of their total assets, calculated at the time of purchase,
in warrants or rights which are not listed on the New York or American Stock
Exchanges. Warrants and rights have no voting rights, receive no dividends and
have no rights with respect to the assets of the issuer.
REAL ESTATE INVESTMENT TRUSTS
The Capital Growth Fund, Small Cap Equity Fund and the Growth and Income
Fund may invest in shares of real estate investment trusts ("REITs"). REITs are
pooled investment vehicles that invest primarily in income producing real estate
or real estate related loans or interest. REITs are generally classified as
equity REITs, mortgage REITs or a combination of equity and mortgage REITs.
Equity REITs invest the majority of their assets directly in real property and
derive income primarily from the collection of rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs invest the majority of their assets in real estate mortgages and
derive income from the collection of interest payments. REITs are not taxed on
income distributed to shareholders provided they comply with several
requirements of the Code. A Fund will indirectly bear its proportionate share of
any expenses paid by REITs in which it invests in addition to the expenses paid
by a Fund.
Investing in REITs involves certain unique risks. Equity REITs may be
affected by changes in the value of the underlying property owned by such REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified (except to the
extent the Code requires), and are subject to the risks of financing projects.
REITs are subject to heavy cash flow dependency, default by borrowers,
self-liquidation, and the possibilities of failing to qualify for the exemption
from tax for distributed income under the Code and failing to maintain their
exemptions from the Investment Company Act of 1940. REITs (especially mortgage
REITs) are also subject to interest rate risks.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
All of the Funds may purchase securities on a when-issued basis or purchase
or sell securities on a forward commitment basis. These transactions involve a
commitment by the Fund to purchase or sell securities at a future date. The
price of the underlying securities (usually expressed in terms of yield) and the
date when the securities will be delivered and paid for (the settlement date)
are fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges, but may be traded
over-the-counter.
20
<PAGE>
A Fund will purchase securities on a when-issued basis or purchase or sell
securities on a forward commitment basis only with the intention of completing
the transaction and actually purchasing or selling the securities. If deemed
advisable as a matter of investment strategy, however, a Fund may
dispose of or negotiate a commitment after entering into it. A Fund also may
sell securities it has committed to purchase before those securities are
delivered to it on the settlement date. The Fund may realize a capital gain or
loss in connection with these transactions. For purposes of determining a Fund's
average dollar weighted maturity, the maturity of when-issued or forward
commitment securities will be calculated from the commitment date.
A Fund is required to hold and maintain in a segregated account with the
Company's custodian until three days prior to the settlement date, cash and
liquid assets in an amount sufficient to meet the purchase price. Alternatively,
a Fund may enter into offsetting contracts for the forward sale of other
securities that it owns. Securities purchased or sold on a when-issued or
forward commitment basis involve a risk of loss of the value of the security to
be purchased declines prior to the increases prior to the settlement date.
INVESTMENT RESTRICTIONS
FUNDAMENTAL RESTRICTIONS
The following investment restrictions have been adopted by the Company as
fundamental policies for the Fund to which each applies, as shown below. A
fundamental policy is one that cannot be changed without the affirmative vote of
the holders of a majority (as defined in the Act) of the outstanding votes
attributable to the shares of a Fund. The investment objective or objectives of
each Fund and all other investment policies or practices of the Fund are
considered by the Company not to be fundamental and accordingly may be changed
by the Company's board of directors without shareholder approval. See
"Investment Objective and Policies" in the Fund's Prospectus. For purposes of
the Act, "majority" means the lesser of (a) 67% or more of the votes
attributable to shares of the Fund present at a meeting, if the holders of more
than 50% of such votes are present or represented by proxy, or (b) more than 50%
of the votes attributable to shares of the Fund.
None of the Funds may:
1. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to
the deposit of assets in escrow in connection with the writing of covered
put and call options and the purchase of securities on a forward commitment
or delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures
contracts (including those relating to indices), and options on futures
contracts or indices.
2. Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but a Fund may make
margin deposits in connection with transactions in currencies, options,
futures contracts and options on futures contracts.
3. Sell securities short or maintain a short position except for short
sales against-the-box.
4. Underwrite securities issued by others, except to the extent that the
sale of portfolio securities by a Fund may be deemed to be
underwriting.
5. Purchase, hold or deal in real estate (including real estate limited
partnerships) or oil, gas or mineral leases, although a Fund may
purchase and sell securities that are secured by real estate or interests
therein and may purchase mortgage-related securities and securities issued
by real estate investment trusts and may hold and sell real estate acquired
for the Fund as a result of the ownership of securities.
6. Invest in commodities except that a Fund may purchase and sell
futures contracts, including those relating to securities, currencies
and indices, and options on futures contracts, securities, currencies or
indices, and purchase and sell currencies or securities on a forward
commitment or delayed-delivery basis as described in the Prospectus.
21
<PAGE>
7. Lend any money or other assets except through the purchase of all or
a portion of an issue of securities or obligations of the type in
which the Fund may invest. However, a Fund may lend its portfolio securities
in an amount not to exceed one-third of the value of its total assets.
8. Issue any senior security (as such term is defined in Section 18(f)
of the Act) except as otherwise permitted under these fundamental
investment restrictions.
9. Alone or together with any other of the Funds, make investments for
the purpose of exercising control over, or management of, any issuer.
10. Borrow money except from banks for temporary or short-term purposes
and then only if each maintains asset coverage of at least 300% for
such borrowings. For purposes of this investment restriction, transactions
in currency, swaps, options, futures contracts, including those relating to
indices, forward contracts, options on futures contracts or indices and
forward commitment transactions shall not constitute borrowing. None of the
Funds will purchase securities when such borrowings exceed 5% of its total
assets.
Fund-specific restrictions:
11(a). Each of the Funds other than the Money Market Fund may not
invest more than 25% of the value of its total assets in the securities of
issuers conducting their principal business activities in the same industry.
This limitation does not apply to U.S. Government Securities.
11(b). The Money Market Fund will not purchase securities if such
purchase would cause more than 25% of its total assets to be invested in the
securities of one or more issuers having their principal business activities
in the same industry. This limitation, however, will not apply to U.S.
Government Securities, obligations (other than commercial paper) issued or
guaranteed by U.S. banks and U.S. branches of foreign banks, and repurchase
agreements and securities loans collateralized by U.S. Government Securities
or such bank obligations. (For the purposes of this restriction, telephone
companies are considered to be a separate industry from water, gas, or
electric utilities, personal credit finance companies and business credit
finance companies are considered separate industries and wholly-owned
finance companies are considered to be in the industries of their parents if
their activities are primarily related to financing the activities of their
parents.)
12. The Money Market Fund, CORE U.S. Equity Fund, Capital Growth Fund and
the Growth and Income Fund each may not, as to 75% of the total
assets of each at the time of purchase, purchase the securities of any
issuer if more than 5% of the value of the Fund's total assets would be
invested in such securities.
NON-FUNDAMENTAL RESTRICTIONS
In addition to the investment restrictions mentioned above, the directors of
the Company have adopted certain non-fundamental restrictions for each Fund as
shown below. Non-fundamental restrictions represent the current intentions of
the Company's board of directors and they differ from fundamental investment
restrictions in that they may be changed or amended by the board of directors
without prior notice to or approval of shareholders.
None of the Funds (except the Global Income Fund) may:
1. Purchase the securities of any issuer if by such purchase the Fund
would own more than 10% of the outstanding voting securities of such
issuer.
Fund specific restrictions:
2(a). The Funds other than the Money Market Fund each will not invest
more than 15% of its net assets in illiquid investments, including
repurchase agreements maturing in more than seven days, securities that are
not readily marketable and restricted securities not eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 (the "1933 Act").
22
<PAGE>
2(b). The Money Market Fund will not invest in illiquid securities,
including certain repurchase agreements or time deposits maturing in more
than seven days, if, as a result thereof, more than 10% of the value of its
total assets would be invested in assets that are either illiquid or are not
readily marketable.
3. The Small Cap Equity Fund, International Equity Fund and the Global
Income Fund each may not, as to 75% of the total assets of each at
the time of purchase, purchase the securities of any issuer if more than 10%
of the value of the Fund's total assets would be invested in such
securities.
INTERPRETIVE RULES
For purposes of the foregoing limitations, any limitation which involves a
maximum percentage will not be violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by, a Fund. In addition, with regard to
exceptions recited in a restriction, a Fund may only rely on an exception if its
investment objective(s) or policies (as disclosed in the Prospectus) otherwise
permit it to rely on the exception.
INVESTMENT MANAGER
Investment Distributors Advisory Services, Inc. ("IDASI"), 2801 Highway 280
South, Birmingham, Alabama 35223, is the investment manager of the Company and
its Funds. IDASI is a wholly-owned subsidiary of Protective Life Corporation
("PLC"), an insurance holding company whose common stock is traded on the New
York Stock Exchange. PLC's principal operating subsidiary is Protective Life
Insurance Company, a stock life insurance company which maintains its
administrative offices in Birmingham, Alabama. Protective Life was incorporated
in Alabama in 1907 and changed its state of domicile from Alabama to Tennessee
in 1992. Protective Life's principal business is the writing of individual and
group life and health insurance contracts, annuity contracts, and guaranteed
investment contracts.
The Investment Manager has no direct previous experience in providing
management services for investment companies; however, its officers, most of
whom are officers of Protective Life, have extensive experience in the
development and distribution of investment products, particularly guaranteed
investment contracts. In addition, the Investment Manager has retained the
Advisers, entities that have extensive experience managing the assets of
investment companies, pension plans and other clients, to manage the investment
and reinvestment of the Funds' assets.
INVESTMENT MANAGEMENT AGREEMENT
The Investment Manager has entered into an investment management agreement,
dated March 20, 1996, with the Company under which the Investment Manager
assumes overall responsibility, subject to the supervision of the Company's
board of directors, for administering all operations of the Company and for
monitoring and evaluating the management of the assets of each of the Funds by
the Advisers on an ongoing basis. The Investment Manager provides or arranges
for the provision of the overall business management and administrative services
necessary for the Company's operations and furnishes or procures any other
services and information necessary for the proper conduct of the Company's
business. The Investment Manager also acts as liaison among, and supervisor of,
the various service providers to the Company, including the custodian, transfer
agent, and accounting services agent and to its own administration agent that
performs services for the Company on its behalf. The Investment Manager is also
responsible for overseeing the Company's compliance with the requirements of
applicable law and in conformity with each Fund's investment objective(s),
policies and restrictions, including oversight of the Advisers.
For its services to the Company, the Investment Manager receives a monthly
management fee. The fee is deducted daily from the assets of each of the Funds
and paid to the Investment Manager monthly. The fee for each Fund is based on
the average daily net assets of the Fund at the following annual rates: Money
Market Fund .60%, CORE U.S. Equity Fund .80%, Capital Growth Fund .80%,
23
<PAGE>
Small Cap Equity Fund .80%, International Equity Fund 1.10%, Growth and Income
Fund .80%, and Global Income Fund 1.10%. For the fiscal period March 14, 1994 to
December 31, 1994, the Funds incurred the following management fees to the
Investment Manager: Money Market Fund $17,470, CORE U.S. Equity Fund $53,567,
Small Cap Equity Fund $69,074, International Equity Fund $121,187, Growth and
Income Fund $120,254, and Global Income Fund $88,896. For the fiscal year ended
December 31, 1995, the Funds incurred the following management fees to the
Investment Manager: Money Market Fund $28,954, CORE U.S. Equity Fund $282,954,
Capital Growth Fund $24,876, Small Cap Equity Fund $268,136, International
Equity Fund $448,460, Growth and Income Fund $661,953, and Global Income Fund
$262,733. For the fiscal year ended December 31, 1996, the Funds incurred the
following management fees to the Investment Manager: Money Market Fund $31,585,
CORE U.S. Equity Fund $632,296, Capital Growth Fund $161,938, Small Cap Equity
Fund $446,552, International Equity Fund $871,940, Growth and Income Fund
$1,325,914, and Global Income Fund $380,629.
The investment management agreement does not place limits on the operating
expenses of the Company or of any Fund. However, Protective Life has voluntarily
undertaken to pay any such expenses (but not including brokerage or other
portfolio transaction expenses or expenses of litigation, indemnification, taxes
or other extraordinary expenses) to the extent that such expenses, as accrued
for each Fund, exceed the following percentages of that Fund's average daily net
assets on an annualized basis: Money Market Fund, .60%; Capital Growth Fund,
.80%; CORE U.S. Equity Fund, .80%; Small Cap Equity Fund, .80%; International
Equity Fund, 1.10%; Growth and Income Fund, .80%; and Global Income Fund, 1.10%.
This reduction of expenses will increase the yield or total return of the Funds
for any period for which it remains in effect. The Investment Manager may
withdraw this undertaking to pay expenses as to any or all of the Funds upon 120
days notice to the Company.
The investment management agreement provides that the Investment Manager may
render similar services to others so long as the services that it provides
thereunder are not impaired thereby. The investment management agreement also
provides that the Investment Manager shall not be liable for any error of
judgment or mistake of law or for any loss arising out of any investment or for
any act or omission in the management of the Company, except for (i) willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of reckless disregard of its duties or obligations under the
investment management agreement, and (ii) to the extent specified in Section
36(b) of the Act concerning loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation.
The investment management agreement was approved for each Fund (other than
Capital Growth Fund) by the directors of the Company, including a majority of
the directors of the Company who are not parties to the agreement or "interested
persons" (as such term is defined in the Act) of any party thereto (the
"non-interested directors"), on February 8, 1994, and by the sole initial
shareholder of the Fund on March 2, 1994. The investment management agreement
was approved for Capital Growth Fund by the directors of the Company, including
a majority of the non-interested directors on May 3, 1995 and by the sole
initial shareholder of the Fund on June 20, 1995. The investment management
agreement will remain in effect from year to year provided such continuance is
specifically approved as to each Fund at least annually by (a) the vote of a
majority of the votes attributable to shares of the Fund or a majority of the
directors of the Company, and (b) the vote of a majority of the non-interested
directors of the Company, cast in person at a meeting called for the purpose of
voting on such approval. The investment management agreement will terminate
automatically if assigned (as defined in the Act) and is terminable as to any
Fund at any time without penalty by the directors of the Company or by vote of a
majority of the votes attributable to outstanding voting securities of the
applicable Fund on 60 days' written notice to the Investment Manager and by the
Investment Manager on 60 days' written notice to the Company.
24
<PAGE>
EXPENSES OF THE COMPANY
The company incurs certain operating and general administrative expenses in
addition to the Investment Manager's fee. These expenses, which are accrued
daily, include but are not limited to: taxes; expenses for legal and auditing
services; costs of printing; charges for custody services; transfer agent fees,
if any; expenses of redemption of shares; expense of registering shares under
federal and state securities laws; accounting costs; insurance; interest;
brokerage costs, and other expenses properly payable by the Company.
In general, each Fund is charged for the expenses incurred in its operations
as well as for a portion of the Company's general administrative expenses,
allocated on the basis of the asset size of the respective Funds, or by the
board of directors as appropriate. Expenses other than the Investment Manager's
fee that are borne directly and paid individually by a Fund include, but are not
limited to, brokerage commissions, dealer markups, taxes, custody fees, and
other costs properly payable by the Fund. Expenses which are allocated among the
Funds include, but are not limited to, directors' fees and expenses, independent
accountant fees, transfer agent fees, expenses of redemption, insurance costs,
legal fees, and all other costs of operation properly payable by the Company.
INVESTMENT ADVISERS
INVESTMENT ADVISERS
Goldman Sachs Asset Management, One New York Plaza, New York, New York
10004, a separate operating division of Goldman Sachs, acts as the investment
adviser of the Money Market Fund, CORE U.S. Equity Fund, Capital Growth Fund,
Small Cap Equity Fund and Growth and Income Fund. Goldman Sachs Asset Management
International, 133 Peterborough Court, London EC4A 2BB England, an affiliate of
Goldman Sachs, acts as the investment adviser to the International Equity Fund
and the Global Income Fund. Both Goldman Sachs and GSAMI are registered with the
SEC as investment advisers. In performing its investment advisory services to
the International Equity Fund and the Global Income Fund, GSAMI, while remaining
responsible for advising these Funds, may draw upon the research and market
expertise of its affiliates, including Goldman Sachs Asia, Ltd. (its Hong Kong
affiliate) and Goldman Sachs Asset Management Japan Limited. As of March 24,
1997, the Advisers, together with their affiliates, acted as investment adviser,
administrator or distributor for assets in excess of $104.9 billion.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is among the principal
market sources for current and thorough information on companies, industrial
sectors, markets, economies and currencies, and trades and makes markets in a
wide range of equity and debt securities 24-hours a day. The firm is
headquartered in New York and has offices throughout the United States and in
Bangkok, Beijing, Frankfurt, George Town, Hong Kong, London, Madrid, Milan,
Montreal, Osaka, Paris, Sao Paulo, Seoul, Shanghai, Singapore, Sydney, Taipei,
Tokyo, Toronto, Vancouver and Zurich. It has trading professionals throughout
the United States, as well as in London, Tokyo, Hong Kong and Singapore. The
active participation of Goldman Sachs in the world's financial markets enhances
its ability to identify attractive investments.
The Advisers are able to draw on the substantial research and market
expertise of Goldman Sachs, whose investment research effort is one of the
largest in the industry. With an annual equity research budget approaching $60
million, Goldman Sachs's Investment Research Department covers approximately
1,700 companies, including approximately 1,000 U.S. corporations in 60
industries. The in-depth information and analyses generated by Goldman Sachs's
research analysts are available to the Advisers. For more than a decade, Goldman
Sachs has been among the top-ranked firms in INSTITUTIONAL INVESTOR'S annual
"All-America Research Team" survey. In addition, many of Goldman Sachs's
economists, securities analysts, portfolio strategists and credit analysts have
consistently
25
<PAGE>
been highly ranked in respected industry surveys conducted in the U.S. and
abroad. Goldman Sachs is also among the leading investment firms using
quantitative analysis (now used by a growing number of investors) to structure
and evaluate portfolios.
In connection with the Funds' investments in foreign securities and related
transactions in foreign currencies, the Adviser has access to Goldman Sachs's
economics team, based in London, which is internationally recognized for its
skill in currency forecasting and international economics.
The fixed-income research capabilities of Goldman Sachs available to each of
the Advisers include the Goldman Sachs Fixed-Income Research Department and the
Credit Department. The Fixed-Income Research Department monitors developments in
U.S. and foreign fixed-income markets, assesses the outlooks for various sectors
of the markets and provides relative value comparisons, as well as analyzes
trading opportunities within and across market sectors. The Fixed-Income
Research Department is at the forefront in developing and using computer-based
tools for analyzing fixed-income securities and markets, developing new
fixed-income products and structuring portfolio strategies for investment policy
and tactical asset allocation decisions. The Credit Department tracks specific
governments, regions and industries and from time to time may review the credit
quality of a Fund's investments.
In addition to fixed-income research and credit research, both Advisers are
supported by Goldman Sachs's economics research. The Economics Research
Department conducts economic, financial and currency markets research which
analyzes economic trends and interest and exchange rate movements worldwide. The
Economics Research Department tracks factors such as inflation and money supply
figures, balance of trade figures, economic growth, commodity prices, monetary
and fiscal policies, and political events that can influence interest rates and
currency trends. The success of Goldman Sachs's international research team has
brought wide recognition to its members. The team has earned top rankings in the
INSTITUTIONAL INVESTOR annual "All British Research Team Survey" in the
following categories: Economics (U.K.) 1986-1993; Economics/International
1989-1993; and Currency Forecasting 1986-1993. In addition, the team has also
earned top rankings in the annual "Extel Financial Survey" of U.K. investment
managers in the following categories: U.K. Economy 1989-1995; International
Economies 1986, 1988-1995; and Currency Movements 1986-1993.
In allocating assets in a Fund's portfolio among currencies, the Advisers
will have access to the Global Asset Allocation Model. The model is based on the
observation that the prices of all financial assets, including foreign
currencies, will adjust until investors globally are comfortable holding the
pool of outstanding assets. Using the model, the Advisers will estimate the
total returns from each currency sector which are consistent with the average
investor holding a portfolio equal to the market capitalization of the financial
assets among those currency sectors. These estimated equilibrium returns are
then combined with Goldman Sachs's research professionals' expectations to
produce an optimal currency and asset allocation for the level of risk suitable
for a Fund's investment objective and criteria. In allocating a Fund's assets
among currencies, the Advisers will also have access to Goldman Sachs's
economics team, which is internationally recognized for its skill in currency
forecasting and international economics.
INVESTMENT ADVISORY AGREEMENTS
Each Adviser has entered into an investment advisory agreement, dated March
20, 1996 with the Investment Manager in connection with each Fund it advises.
Under the agreements, the Adviser, subject to the general supervision of the
Company's board of directors, manages the investment portfolio of each Fund.
Under the investment advisory agreements, the Advisers are responsible for
making investment decisions for the Funds and for placing the purchase and sale
orders for the portfolio transactions of each Fund. In this capacity, the
Advisers obtain and evaluate appropriate economic, statistical, timing, and
financial information and formulates and implements investment programs in
furtherance of each Fund's investment objective(s).
26
<PAGE>
As compensation for its services to the Funds on behalf of the Investment
Manager, the Advisers receive a monthly fee from the Investment Manager based on
the average daily net assets of each Fund at the following annual rates:
<TABLE>
<CAPTION>
0-100MM 100-200M 200MM+
----------- ------------- -----------
<S> <C> <C> <C>
Money Market .35% .25% .15%
International Equity .40% .30% .25%
Global Income .40% .30% .25%
Growth & Income .40% .30% .20%
CORE U.S. Equity .40% .30% .20%
Small Cap .40% .30% .20%
Cap Growth .40% .30% .20%
</TABLE>
For the fiscal period March 14, 1994 to December 31, 1994, the Investment
Manager incurred the following fees to the Advisers in connection with each of
the Funds: Money Market Fund $10,105, CORE U.S. Equity Fund $26,395, Small Cap
Equity Fund $34,560, International Equity Fund $44,016, Growth and Income Fund
$60,162, and Global Income Fund $32,301. For the fiscal year ended December 31,
1995, the Investment Manager paid the following fees to the Advisers in
connection with each of the Funds: Money Market Fund $16,877, CORE U.S. Equity
Fund $140,992, Capital Growth Fund $12,438, Small Cap Equity Fund $134,073,
International Equity Fund $162,253, Growth and Income Fund $297,818, and Global
Income Fund $95,539. For the fiscal year ended December 31, 1996, the Investment
Manager paid the following fees to the Advisers in connection with each of the
Funds: Money Market Fund $18,425, CORE U.S. Equity Fund $310,858, Capital Growth
Fund $80,969, Small Cap Equity Fund $223,180, International Equity Fund
$311,366, Growth and Income Fund $580,051, and Global Income Fund $138,411.
The Funds' investment advisory agreements each provide that the Advisers may
render similar services to others so long as the services that they provide
thereunder are not impaired thereby.
The investment advisory agreement for each Fund was approved by the
directors of the Company, including a majority of the directors of the Company
who are not parties to the investment advisory agreement or "interested persons"
(as such term is defined in the Act) of any party thereto (the "non-interested
directors"), on March 20, 1996, and by the shareholders of each Fund on April
30, 1996. The foregoing agreements will remain in effect until April 30, 1998
and from year to year thereafter provided such continuance is specifically
approved at least annually by (a) the vote of a majority of the votes
attributable to shares of the Fund or a majority of the directors of the
Company, and (b) the vote of a majority of the non-interested directors of the
Company, cast in person at a meeting called for the purpose of voting on such
approval. The investment advisory agreements will each terminate automatically
if assigned (as defined in the Act) and each is terminable at any time without
penalty by the directors of the Company or by vote of a majority of the votes
attributable to outstanding voting securities of the applicable Fund on 60 days'
written notice to the Adviser and by the Adviser on 60 days' written notice to
the Company.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
GOLDMAN SACHS AND ITS AFFILIATES. The involvement of the Adviser and Goldman
Sachs and their affiliates in the management of, or their interests in, other
accounts and other activities of Goldman Sachs may present conflicts of interest
with respect to the Funds or limit their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates, have proprietary interests in, and may
manage or advise with respect to funds or accounts (including insurance company
separate accounts and other collective investment vehicles), which have
investment objectives similar to those of the Funds and/or which engage in
transactions in the same types of securities, currencies and instruments as the
Funds. Goldman Sachs and its affiliates are major participants in the global
currency, equities, swap and fixed-income markets, in each case both on a
proprietary basis and for the accounts of customers. As such, Goldman Sachs and
its
27
<PAGE>
affiliates are actively engaged in transactions in the same types of securities,
currencies and instruments in which the Funds invest. Such activities could
affect the prices and availability of the securities, currencies and instruments
in which the Funds will invest, which could have an adverse impact on a Fund's
performance. Such transactions, particularly in respect of proprietary accounts
or customer accounts other than those advised or managed by the Advisers and
their advisory affiliates, will be executed independently of a Fund's
transactions and thus at prices or rates that may be more or less favorable.
When the Advisers and their advisory affiliates seek to purchase or sell the
same assets for their managed accounts, including a Fund, the assets actually
purchased or sold may be allocated among the accounts on a basis determined in
their good faith discretion to be equitable. In some cases, this system may
adversely affect the size or the price of the assets purchased or sold for a
Fund.
From time to time, a Fund's activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies, designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers will not initiate or
recommend certain types of transactions in certain securities or instruments
with respect to which the Advisers and/or their affiliates are performing
services or when position limits have been reached.
In connection with their advice to the Funds, the Advisers may have access
to certain fundamental analysis and proprietary technical models developed by
Goldman Sachs and other affiliates. The Advisers will not be under any
obligation, however, to effect transactions on behalf of a Fund in accordance
with such analysis and models. In addition, neither Goldman Sachs nor any of its
affiliates will have any obligation to make available any information regarding
their proprietary activities or strategies, or the activities or strategies used
for other accounts managed by them, for the benefit of a Fund and it is not
anticipated that the Advisers will have access to such information for the
purpose of managing the Funds. The proprietary activities or portfolio
strategies of Goldman Sachs and its affiliates or the activities or strategies
used for accounts managed by them or other customer accounts, could conflict
with the transactions and strategies employed by the Advisers in advising the
Funds.
The results of a Fund's investment activities may differ significantly from
the results achieved by the Advisers and their affiliates for the proprietary
accounts or accounts (including mutual funds, insurance company separate
accounts or other collective investment vehicles) managed or advised by them. It
is possible that Goldman Sachs and its affiliates and such other accounts will
achieve investment results which are substantially more or less favorable than
the results achieved by a Fund. Moreover, it is possible that a Fund will
sustain losses during periods in which Goldman Sachs and its affiliates achieve
significant profits on their trading for proprietary or other accounts. The
opposite result is also possible.
The investment activities of Goldman Sachs and its affiliates for their
proprietary accounts and accounts under their management may also limit the
investment opportunities for a Fund in certain emerging markets in which
limitations are imposed upon the aggregate amount of investment, in the
aggregate or in individual issuers, by affiliated foreign investors.
An investment policy committee, which may include partners of Goldman Sachs
and its affiliates, may develop general policies regarding a Fund's activities,
but will not be involved in the day-to-day management of the Funds. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any such
member of an investment policy committee will have direct or indirect interests
in the activities of Goldman Sachs and its affiliates in securities, currencies
and investments similar to those in which the Funds invest.
In addition, certain principals and certain employees of the Advisers are
also principals or employees of Goldman Sachs or its affiliated entities. As a
result, the performance by these principals and employees of their obligations
to such other entities may be a consideration of which investors in a Fund
should be aware.
28
<PAGE>
The Advisers may enter into transactions and invest in currencies or other
instruments on behalf of a Fund in which customers of Goldman Sachs serve as the
counterparty, principal or issuers. In such cases, such party's interests in the
transaction will be adverse to the interests of a Fund, and such party may have
no incentive to assure that the Funds obtain the best possible prices or terms
in connection with the transactions. Goldman Sachs and its affiliates may also
create, write or issue derivative instruments for customers of Goldman Sachs or
its affiliates, the underlying securities or instruments of which may be those
in which a Fund invests. The Funds may, subject to applicable law, purchase
investments which are the subject of an underwriting or other distribution by
Goldman Sachs or its affiliates and may also enter into transactions with other
clients of Goldman Sachs or its affiliates where such other clients have
interests adverse to those of the Funds. At times, these activites may cause
departments of the firm to give advice to clients that may cause such client to
take actions adverse to the interests of the Company to the extent that
affiliate transactions are permitted. The Funds will deal with Goldman Sachs and
its affiliates on an arm's-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
It is possible that a Fund's holdings will include securities of entities
for which Goldman Sachs performs investment banking services as well as
securities of entities in which Goldman Sachs makes a market. From time to time,
Goldman Sachs' activities may limit the Funds' flexibility in purchases and
sales of securities. When Goldman Sachs is engaged in an underwriting or other
distribution of securities of an entity, the Advisers may be prohibited from
purchasing or recommending the purchase of certain securities of that entity for
the Funds.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisers are responsible for decisions to buy and sell securities for
the Funds, the selection of brokers and dealers to effect the transactions and
the negotiation of brokerage commissions, if any. Purchases and sales of
securities on a securities exchange are effected through brokers who charge a
negotiated commission for their services. Orders may be directed to any broker
including, to the extent and in the manner permitted by applicable law, Goldman
Sachs.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of a security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid. Except to the extent that the Money Market
Fund purchases securities from Goldman Sachs consistent with the terms of an SEC
order permitting such sales, the Company will not deal with Goldman Sachs in any
transaction in which Goldman Sachs acts as principal.
In placing orders for portfolio securities of a Fund, its Adviser is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Adviser will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable in the circumstances. While the
Adviser generally seeks reasonably competitive spreads or commissions, the Funds
will not necessarily be paying the lowest spread or commission available. Within
the framework of this policy, the Advisers will consider research and investment
services provided by brokers or dealers who effect or are parties to portfolio
transactions of the Funds, the Advisers and their affiliates, or other clients
of the Advisers or their affiliates. Such research and investment services are
those which brokerage houses customarily provide to institutional investors and
include statistical and economic data and research reports on
29
<PAGE>
particular companies and industries. Such services are used by the Advisers in
connection with all of their investment activities, and some of such services
obtained in connection with the execution of transactions for the Funds may be
used in managing other investment accounts. Conversely, brokers furnishing such
services may be selected for the execution of transactions of such other
accounts, whose aggregate assets are far larger than those of the Funds, and the
services furnished by such brokers may be used by the Advisers in providing
investment advisory services for the Funds.
On occasions when the Adviser deems the purchase or sale of a security to be
in the best interest of a Fund as well as its other advisory clients (including
any other fund or other investment company or advisory account for which the
Adviser or an affiliate acts as investment adviser), the Adviser, to the extent
permitted by applicable laws and regulations, may aggregate the securities to be
sold or purchased for the Fund with those to be sold or purchased for such other
customers in order to obtain the best net price and most favorable execution. In
such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Adviser in the manner
it considers to be most equitable and consistent with its fiduciary obligations
to the Fund and such other customers. In some instances, this procedure may
adversely affect the price and size of the position obtainable for a Fund.
Commission rates are established pursuant to negotiations with the broker
based on the quality and quantity of execution services provided by the broker
in the light of generally prevailing rates. The allocation of orders among
brokers and the commission rates paid are reviewed periodically by the board of
directors of the Company.
Subject to the above considerations, the Advisers may use Goldman Sachs as a
broker for the Funds. In order for Goldman Sachs to effect any portfolio
transactions for a Fund, the commissions, fees or other remuneration received by
Goldman Sachs must be reasonable and fair compared to the commissions, fees or
other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. This standard would
allow Goldman Sachs to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arm's-length
transaction. Furthermore, the board of directors of the Company, including a
majority of the non-interested directors, have adopted procedures which are
reasonably designed to provide that any commissions, fees or other remuneration
paid to Goldman Sachs are consistent with the foregoing standard. Brokerage
transactions with Goldman Sachs are also subject to such fiduciary standards as
may be imposed upon Goldman Sachs by applicable law.
In addition, although Section 11(a) of the Securities Exchange Act of 1934
provides that member firms of a national securities exchange may not effect
transactions on such exchange for the account of an investment company of which
the member firm or its affiliate is the investment adviser, except pursuant to
the requirements of that Section. The Company's board of directors has adopted
procedures designed to insure compliance with the requirements of Section 11(a).
In this regard, Goldman Sachs will provide the Company at least annually with a
statement setting forth the total amount of all compensation retained by Goldman
Sachs in connection with effecting transactions for the accounts of each Fund.
The board of directors of the Company will review and approve all of each Fund's
portfolio transactions with Goldman Sachs and the compensation received by
Goldman Sachs in connection therewith.
For the fiscal period March 14, 1994 to December 31, 1994, the Funds paid
the following amounts in brokerage commissions: Money Market Fund $0, CORE U.S.
Equity Fund $26,188, Small Cap Equity Fund $41,556, International Equity Fund
$92,310, Growth and Income Fund $109,049, and Global Income Fund $0. During the
fiscal year ended December 31, 1995, the Funds paid the following amounts in
brokerage commissions: Money Market Fund $0, CORE U.S. Equity Fund $61,560,
Capital Growth Fund $12,219, Small Cap Equity Fund $99,151, International Equity
Fund $180,874, Growth and Income Fund $232,571, and Global Income Fund $0.
30
<PAGE>
For the fiscal period March 14, 1994 to December 31, 1994, the Funds paid
the following amounts in brokerage commissions to Goldman Sachs: Money Market
Fund $0, CORE U.S. Equity Fund $94, Small Cap Equity Fund $475, International
Equity Fund $0, Growth and Income Fund $11,105, and Global Income Fund $0.
During the fiscal year ended December 31, 1995, the Funds paid the following
amounts in brokerage commissions to Goldman Sachs: Money Market Fund $0, CORE
U.S. Equity Fund $0, Capital Growth Fund $1,833, Small Cap Equity Fund $12,010,
International Equity Fund $3,957, Growth and Income Fund $26,236, and Global
Income Fund $0. During the fiscal year ended December 31, 1996, the Funds paid
the following amounts in brokerage commissions to Goldman Sachs: Money Market
Fund $0, CORE U.S. Equity Fund $0, Capital Growth Fund $9,752, Small Cap Equity
Fund $3,955, International Equity Fund $1,778, Growth and Income Fund $21,367,
and Global Income Fund $0.
During the fiscal year ended December 31, 1996, the brokerage commissions
paid by the Funds to Goldman Sachs represented the following percentages of
aggregate brokerage commissions paid by each Fund: Money Market Fund 0%, CORE
U.S. Equity Fund 0%, Capital Growth Fund 25.52%, Small Cap Equity Fund 1.96%,
International Equity Fund .71%, Growth and Income Fund 8.21%, and Global Income
Fund 0%.
During the fiscal year ended December 31, 1996, the aggregate dollar amount
of transactions executed for each Fund by Goldman Sachs represented the
following percentages of aggregate dollar amount of transactions for such Fund:
Money Market Fund 0%, CORE U.S. Equity Fund 0%, Capital Growth Fund .87%, Small
Cap Equity Fund .08%, International Equity Fund .02%, Growth and Income Fund
.56%, and Global Income Fund 0%.
For the fiscal period ended December 31, 1996, the Funds acquired and sold
securities of their regular broker-dealers. As of December 31, 1996, the Funds
held the following amounts of securities of their regular broker-dealers: Growth
and Income Fund $7,603,650, Capital Growth Fund $530,238, and CORE U.S. Equity
Fund $2,340,838.
DETERMINATION OF NET ASSET VALUE
Under the Act, the board of directors of the Company is responsible for
determining in good faith the fair value of securities of each Fund. In
accordance with procedures adopted by the board of directors of the Company, the
net asset value per share is calculated by determining the net worth of each
Fund (assets, including securities at market value, minus liabilities) divided
by the number of that Fund's outstanding shares. All securities are valued as of
the close of regular trading on the New York Stock Exchange. Each Fund will
compute its net asset value once daily at the close of such trading (normally
4:00 p.m. New York time), on each day (as described in the Prospectus) that the
Company is open for business.
In the event that the New York Stock Exchange or the national securities
exchange on which stock options are traded adopt different trading hours on
either a permanent or temporary basis, the board of directors of the Company
will reconsider the time at which net asset value is computed. In addition, the
Funds may compute their net asset value as of any time permitted pursuant to any
exemption, order or statement of the SEC or its staff.
Portfolio assets of the Funds (other than the Money Market Fund) are valued
as follows:
(a)securities and other investments listed on any U.S. or foreign stock
exchange or the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") are valued at the last sale price on that
exchange or NASDAQ on the valuation day; if no sale occurs, securities
traded on a U.S. exchange or NASDAQ are valued at the mean between the
closing bid and closing asked prices and securities traded on a foreign
exchange will be valued at the official bid price (the last sale price
and official bid price for securities traded principally on a foreign
exchange will be determined as of the close of the London Foreign
Exchange or, for securities traded on an exchange located the
Asia-Pacific region, noon London time);
31
<PAGE>
(b)over-the-counter securities not quoted on NASDAQ are valued at the last
sale price on the valuation day or, if no sale occurs, at the mean
between the last bid and asked prices;
(c)debt securities with a remaining maturity of 61 days or more are valued
on the basis of dealer-supplied quotations or by a pricing service
selected by the Adviser and approved by the board of directors of the
Company if those prices are deemed by the Adviser to be representative of
market values at the close of business of the New York Stock Exchange;
(d)options and futures contracts are valued at the last sale price on the
market where any such option or futures contracts is principally traded;
(e)over-the-counter options are valued based upon prices provided market
makers in such securities or dealers in such currencies.
(f)forward foreign currency exchange contracts are valued using a pricing
service and then calculating the mean between the last bid and asked
quotations supplied by dealers in such contracts;
(g)all other securities and other assets, including those for which a
pricing service supplies no quotations or quotations are not deemed by
the Adviser to be representative of market values, but excluding debt
securities with remaining maturities of 60 days or less, are valued at
fair value as determined in good faith pursuant to procedures established
by the board of directors of the Company; and
(h)debt securities with a remaining maturity of 60 days or less will be
valued at their amortized cost which approximates market value.
Portfolio securities traded on more than one U.S. national securities
exchange or foreign securities exchange are valued at the last sale price on
each business day at the close of the exchange representing the principal market
for such securities. The value of all assets and liabilities expressed in
foreign currencies will be converted into U.S. dollar values at the mean between
the buying and selling rates of such currencies against U.S. dollars last quoted
by any major bank. If such quotations are not available, the rate of exchange
will be determined in good faith by or under procedures established by the board
of directors of the Company.
Trading in securities on European and Far Eastern securities exchanges and
on over-the-counter markets is normally completed well before the close of
business on each business day. In addition, European or Far Eastern securities
trading generally or in a particular country or countries may not take place on
all business days. Furthermore, trading takes place in Japanese markets on
certain Saturdays and in various foreign markets on days which are not business
days for the Company and days on which the Funds' net asset value is not
calculated. Such calculation does not take place contemporaneously with the
determination of the prices of the majority of the portfolio securities used in
such calculation. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of regular trading on
the New York Stock Exchange will not be reflected in a Fund's calculation of net
asset values unless the Adviser deems that the particular event would materially
affect net asset value, in which case an adjustment will be made.
All of the assets of the Money Market Fund are valued on the basis of
amortized cost in an effort to maintain a constant net asset value of per share
$1.00. The Company's board of directors has determined that to be in the best
interests of the Money Market Fund and its shareholders. Under the amortized
cost method of valuation, securities are valued at cost on the date of their
acquisition, and thereafter a constant accretion of any discount or amortization
of any premium to maturity is assumed, regardless of the impact of fluctuating
interest rates on the market value of the security. While this method provides
certainty in valuation, it may result in periods in which value as determined by
amortized cost is higher or lower than the price the Fund would receive if it
sold the security. During such periods, the quoted yield to investors may differ
somewhat from that obtained by a similar fund or portfolio which uses available
market quotations to value all of its portfolio securities.
32
<PAGE>
The Company's board of directors has established procedures reasonably
designed, taking into account current market conditions and the Money Market
Fund's investment objective, to stabilize the net asset value per share for
purposes of sales and redemptions at $1.00. These procedures include review by
the board, at such intervals as it deems appropriate, to determine the extent,
if any, to which the net asset value per share calculated by using available
market quotations deviates from $1.00 per share. In the event such deviation
should exceed one half of one percent, the board will promptly consider
initiating corrective action. If the board believes that the extent of any
deviation from a $1.00 amortized cost price per share may result in material
dilution or other unfair results to new or existing shareholders, it will take
such steps as it considers appropriate to eliminate or reduce these consequences
to the extent reasonably practicable. Such steps may include: selling portfolio
securities prior to maturity; shortening the average maturity of the portfolio;
withholding or reducing dividends; or utilizing a net asset value per share
determined from available market quotations. Even if these steps were taken, the
Money Market Fund's net asset value might still decline.
PERFORMANCE INFORMATION
The Company may from time to time quote or otherwise use average annual
total return information for the Funds in advertisements, shareholder reports or
sales literature. Average annual total return values are computed pursuant to
equations specified by the SEC.
Average annual total return for a specified period is derived by calculating
the actual dollar amount of the investment return on a $1,000 investment in a
Fund made at the beginning of the period, and then calculating the annual
compounded rate of return which would produce that amount, assuming a redemption
at the end of the period. This calculation assumes a complete redemption of the
investment. It also assumes that all dividends and distributions are reinvested
at net asset value on the reinvestment dates during the period.
The Company also may from time to time quote or otherwise use year-by-year
total return, cumulative total return and yield information for the Funds in
advertisements, shareholder reports or sales literature. Year-by-year total
return and cumulative total return for a specified period are each derived by
calculating the percentage rate required to make a $1,000 investment in a Fund
(assuming that all distributions are reinvested) at the beginning of such period
equal to the actual total value of such investment at the end of such period.
Yield is computed by dividing net investment income earned during a recent
30 day period by the product of the average daily number of shares outstanding
and entitled to receive dividends during the period and the price per share on
the last day of the relevant period. The results are compounded on a bond
equivalent (semi-annual) basis and then annualized. Net investment income per
share is equal to the dividends and interest earned during the period, reduced
by accrued expenses for the period. The calculation of net investment income for
these purposes may differ from the net investment income determined for
accounting purposes.
Any performance data quoted for a Fund will represent historical performance
and the investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than
original cost.
From time to time the Company may publish an indication of the Funds' past
performance as measured by independent sources such as (but not limited to)
Lipper Analytical Services, Incorporated, Weisenberger Investment Companies
Service, Donoghue's Money Fund Report, Barron's, Business Week, Changing Times,
Financial World, Forbes, Fortune, Money, Personal Investor, Sylvia Porter's
Personal Finance and The Wall Street Journal. The Company may also advertise
information which has been provided to the NASD for publication in regional and
local newspapers. In addition, the Company may from time to time advertise its
performance relative to certain indices and benchmark investments, including:
(a) the Lipper Analytical Services, Inc. Mutual Fund Performance Analysis,
Fixed-Income Analysis and Mutual Fund Indices (which measure total return and
average current yield for the mutual fund industry and rank mutual fund
performance); (b) the CDA Mutual
33
<PAGE>
Fund Report published by CDA Investment Technologies, Inc. (which analyzes
price, risk and various measures of return for the mutual fund industry); (c)
the Consumer Price Index published by the U.S. Bureau of Labor Statistics (which
measures changes in the price of goods and services); (d) Stocks, Bonds, Bills
and Inflation published by Ibbotson Associates (which provides historical
performance figures for stocks, government securities and inflation); (e) the
Hambrecht & Quist Growth Stock Index; (f) the NASDAQ OTC Composite Prime Return;
(g) the Russell Midcap Index; (h) the Russell 2000 Index -- Total Return; (i)
the ValueLine Composite-Price Return; (j) the Wilshire 4500 Index; (k) the
Salomon Brothers' World Bond Index (which measures the total return in U.S.
dollar terms of government bonds, Eurobonds and foreign bonds of ten countries,
with all such bonds having a minimum maturity of five years); (l) the Shearson
Lehman Brothers Aggregate Bond Index or its component indices (the Aggregate
Bond Index measures the performance of Treasury, U.S. Government agencies,
mortgage and Yankee bonds); (m) the S&P Bond indices (which measure yield and
price of corporate, municipal and U.S. Government bonds); (n) the J.P. Morgan
Global Government Bond Index; (o) Donoghue's Money Market Fund Report (which
provides industry averages of 7-day annualized and compounded yields of taxable,
tax-free and U.S. Government money market funds); (p) other taxable investments
including certificates of deposit, money market deposit accounts, checking
accounts, savings accounts, money market mutual funds and repurchase agreements;
(q) historical investment data supplied by the research departments of Goldman
Sachs, Lehman Brothers, First Boston Corporation, Morgan Stanley (including
EAFE), Salomon Brothers, Merrill Lynch, Donaldson Lufkin and Jenrette or other
providers of such data; (r) the FT-Actuaries Europe and Pacific Index; (s)
mutual fund performance indices published by Variable Annuity Research & Data
Service; and (t) mutual fund performance indices published by Morningstar, Inc.
The composition of the investments in such indices and the characteristics of
such benchmark investments are not identical to, and in some cases are very
different from, those of a Fund's portfolio. These indices and averages are
generally unmanaged and the items included in the calculations of such indices
and averages may be different from those of the equations used by the Company to
calculate a Fund's performance figures.
The Company may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the Advisers'
views as to markets, the rationale for a Fund's investments and discussions of
the Fund's current asset allocation.
From time to time, advertisements or information may include a discussion of
certain attributes or benefits to be derived by an investment in a particular
Fund. Such advertisements or information may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
in the communication.
Such performance data will be based on historical results and will not be
intended to indicate future performance. The total return or yield of a Fund
will vary based on market conditions, portfolio expenses, portfolio investments
and other factors. The value of a Fund's shares will fluctuate and an investor's
shares may be worth more or less than their original cost upon redemption. The
Company may also, at its discretion, from time to time make a list of a Fund's
holdings available to investors upon request.
SHARES OF STOCK
The Company was incorporated in Maryland on September 2, 1993. The
authorized capital stock of the Company consists of 1 billion (1,000,000,000)
shares, par value one-tenth of one per cent ($0.001) per share. Seven hundred
million (700,000,000) of the authorized shares have been divided into and may be
issued in seven designated classes as follows: Money Market Series, 100,000,000
shares; CORE U.S. Equity Series, 100,000,000 shares; Capital Growth Series,
100,000,000 shares; Small Cap Equity Series, 100,000,000 shares; International
Equity Series, 100,000,000 shares; Growth and Income Series 100,000,000 shares;
and, Global Income Series, 100,000,000 shares. The shares of each class
represent fractional undivided interests in an investment portfolio of the
Company corresponding to that class. The board of directors of the Company have
authority, subject to
34
<PAGE>
certain limitations, under the Company's Charter to create and classify shares
of capital stock in additional separate series and to reclassify existing series
of stock into one or more different new classes without further action by
shareholders.
Each issued and outstanding share is entitled to participate equally in
dividends and distributions declared for the respective class and, upon
liquidation or dissolution, in net assets allocated to such class remaining
after satisfaction of outstanding liabilities. The shares of each class, when
issued, will be fully paid and non-assessable and have no preemptive or
conversion rights.
Rule 18f-2 under the Act provides that any matter required to be submitted
by the provisions of the Act, applicable state law or otherwise to the holders
of the outstanding voting securities of an investment company such as the
Company shall not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each class or series
affected by such matter. Rule 18f-2 further provides that a class or series
shall be deemed to be affected by a matter unless the interests of each class or
series in the matter are substantially identical or the matter does not affect
any interest of such class or series. However, Rule 18f-2 exempts the selection
of independent public accountants, the approval of principal underwriting
contracts and the election of directors from the separate voting requirements of
Rule 18f-2.
Protective Life provided the initial capital for each of the Company's Funds
by purchasing stock of each class in the following amounts, ($10,000 per class
on March 2, 1994 and the balance on March 14, 1994): Money Market Fund,
$500,000; CORE U.S. Equity Fund, $1,000,000; Small Cap Equity Fund, $1,000,000;
International Equity Fund, $3,000,000; Growth and Income Fund, $1,000,000; and
Global Income Fund, $3,000,000. Protective Life also provided the initial
capital for Capital Growth Fund by purchasing Capital Growth Series stock in the
amount of $1,000,000 on June 14, 1995. Such shares were acquired for investment
and can only be disposed of by redemption.
Under normal circumstances, subject to the reservation of rights explained
above, the Company will redeem shares of the Funds in cash within seven days.
However, the right of a shareholder to redeem shares and the date of payment by
the Company may be suspended for more than seven days for any period during
which the New York Stock Exchange is closed, other than the customary weekends
or holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for a Fund to dispose of securities owned by it or
fairly to determine the value of its net assets; or for such other period as the
SEC may by order permit for the protection of shareholders.
CUSTODY OF ASSETS
Pursuant to a custody agreement with the Company, State Street Bank and
Trust Company ("State Street"), 225 Franklin Street, Boston, Massachusetts
02110, holds the cash and portfolio securities of the Company as custodian.
State Street is responsible for holding all securities and cash of each
Fund, receiving and paying for securities purchased, delivering against payment
securities sold, and receiving and collecting income from investments, making
all payments covering expenses of the Company, all as directed by persons
authorized by the Company. State Street does not exercise any supervisory
function in such matters as the purchase and sale of portfolio securities,
payment of dividends, or payment of expenses of the Funds or the Company.
Portfolio securities of the Funds purchased domestically are maintained in the
custody of State Street and may be entered into the Federal Reserve, Depository
Trust Company, or Participant's Trust Company book entry systems. Pursuant to
the Custody Agreement, portfolio securities purchased outside the United States
will be maintained in the custody of various foreign branches of State Street
and such other custodians or subcustodians, including foreign banks and foreign
securities depositories, as are approved by the board of directors of the
Company, in accordance with regulations under the Act.
35
<PAGE>
State Street holds securities of the Funds on which call options have been
written and certain assets of the Funds constituting margin deposits with
respect to financial futures contracts at the disposal of the futures commission
merchants ("FCMs") through which such transactions are effected. The Funds may
also be required to post margin deposits with respect to covered call and put
options written on stock indices and for this purpose certain assets of those
Funds may be held by the custodian pursuant to similar arrangements with the
brokers involved.
This arrangement regarding margin deposits essentially consists of State
Street creating a separate segregated account into which it transfers (upon the
Company's instructions) assets from a Fund's general (regular) custodial
account. The custody agreement for such arrangement provides that FCMs or
brokers will have access to the funds in the segregated accounts when and if the
FCMs or brokers represent that the Company has defaulted on its obligation to
the FCMs or brokers and that the FCMs or brokers have met all the conditions
precedent to their right to receive such funds under the agreement between the
Company and the FCMs or brokers. The Company has an agreement with each FCM or
broker which provides (1) that the assets of any Fund held by the FCM or broker
will be in the possession of State Street until released or sold or otherwise
disposed of in accordance with or under the terms of such agreement, (2) that
such assets would not otherwise be pledged or encumbered by the FCM or broker,
(3) that when requested by the Company the FCM or broker will cause State Street
to release to its general custody account any assets to which a Fund is entitled
under the terms of such agreement, and (4) that the assets in the segregated
account shall otherwise be used only to satisfy the Company's obligations to the
FCM or broker under the terms of such agreement.
If on any day a Fund experiences net realized or unrealized gains with
respect to financial futures contracts or covered options on stock indices held
through a given FCM or broker, it is entitled immediately to receive from the
FCM or broker, and usually will receive by the next business day, the net amount
of such gains. There upon, such assets will be deposited in its general or
segregated account with State Street, as appropriate.
36
<PAGE>
DIRECTORS AND OFFICERS
The directors and officers of the Company are listed below together with
their respective positions with the Company and a brief statement of their
principal occupations during the past five years.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH THE COMPANY, PRINCIPAL OCCUPATIONS AND OTHER AFFILIATIONS
- ------------------------- ---------------------------------------------------------------------------------------
<S> <C>
R. Stephen Briggs* Director. Executive Vice President, Protective Life Corporation (since October,
1993).**
D. Warren Bailey Director.
Carolyn King* Director and Chairman and President. Senior Vice President, Protective Life Corporation
(since May, 1995). Senior Vice President, Provident Life and Accident Insurance
Company (August 1994 - March 1995). Various other positions with Provident Life and
Accident Insurance Company (1980 - August 1994).
G. Ruffner Page, Jr. Director.
Cleophus Thomas, Jr. Director.
Richard J. Bielen* Vice President and Compliance Officer. Senior Vice President, Protective Life
Corporation (since August 1996). Vice President, Protective Life Corporation (July
1991-August 1996).**
John O'Sullivan* Treasurer. Vice President and Actuary, Investment Products Division Protective Life
Insurance Company
Jerry W. DeFoor* Vice President and Chief Accounting Officer. Vice President and Controller and Chief
Accounting Officer, Protective Life Corporation
</TABLE>
- ------------------------
* "Interested Person" of the Company for purposes of the Act. The address of
Interested Persons of the Company is the same as that of Protective Life
Corporation.
** These are the most current titles and positions for these persons at
Protective Life Corporation. Each has held various positions with Protective
Life Corporation over the past five years. The address of Protective Life
Corporation is 2801 Highway 280 South, Birmingham, Alabama 35223.
As of the date of this Statement, no director or officer beneficially owns
more than 1% of the outstanding stock of any class of the Company.
TABLE OF DIRECTORS COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF DIRECTOR FROM THE COMPANY
- ----------------------------------------------------------------- -----------------
<S> <C>
R. Stephen Briggs................................................ $ 0
D. Warren Bailey................................................. 10,000
Carolyn King..................................................... 0
G. Ruffner Page, Jr. ............................................ 10,000
Cleophus Thomas, Jr. ............................................ 10,000
</TABLE>
Directors and officers of the Company do not receive any benefits from the
Company upon retirement nor does the Company accrue any expense for pension or
retirement benefits. The directors and officers of the Company do not currently
serve as directors or officers of any investment company that is an affiliated
person of the Company or that is managed by the Investment Manager.
37
<PAGE>
OTHER INFORMATION
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. an international public accounting firm, has served
since inception of Protective Investment Company as its independent accountants.
Responsibility for the audit is assigned to the firm's office located at One
Post Office Square, Boston, Massachusetts 02109.
LEGAL COUNSEL
Sutherland, Asbill & Brennan, LLP, 1275 Pennsylvania Avenue, N.W.,
Washington, D.C. 20004-2404, is counsel to the Company.
OTHER INFORMATION
The Prospectus and this Statement do not contain all the information
included in the registration statement filed with the SEC under the 1933 Act
with respect to the securities offered by the Prospectus. Certain portions of
the registration statement have been omitted from the Prospectus and this
Statement pursuant to the rules and regulations of the SEC. The registration
statement including the exhibits filed therewith may be examined at the office
of the SEC in Washington, D.C.
Statements contained in the Prospectus or in this Statement as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the registration statement of which the
Prospectus and this Statement form parts, each such statement being qualified in
all respects by such reference.
38
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS (1)
MOODY'S INVESTORS SERVICE, INC.'S BOND RATINGS
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged". 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 some time in the future.
BAA: Bonds which are rated Baa are considered a medium grade obligation,
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 maybe characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements and
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safe-guarded 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 a 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 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.
UNRATED: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
- ------------------------
(1) The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. ("Moody's")
and Standard & Poor's Corporation ("S&P") at the date of this Statement for
the securities listed. Ratings are generally given to securities at the time
of issuance. While the rating agencies may from time to time revise such
ratings, they undertake no obligations to do so, and the ratings indicated
do not necessarily represent ratings which will be given to these securities
on the date of the Fund's fiscal year end.
39
<PAGE>
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A and Baa groups which Moody's believe possess
the strongest investment attributes are designated by the symbols Aa1, A1 and
Baa1.
STANDARD & POOR'S CORPORATION'S
RATINGS GROUP
AAA: Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
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. BB indicates the lowest degree of speculation. While such
bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
D: Bonds rated D are in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless 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 if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Not rated.
NOTES: Bonds which are unrated expose the investor to risks with respect to
capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative obligations. The Fund is dependent on the Adviser's
judgment, analysis and experience in the evaluation of such bonds.
DESCRIPTION OF CERTAIN COMMERCIAL PAPER RATINGS
STANDARD & POOR'S
Commercial paper rated A by S&P has the following characteristics: Liquidity
ratios are adequate to meet cash requirements. Long-term senior debt is rated
"A" or better, although in some cases
40
<PAGE>
"BBB" credits may be allowed. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry. The
reliability and quality of management are unquestioned. The rating is described
by S&P as the investment grade category, the highest rating classification.
Relative strength or weakness of the above factors determine whether the
issuer's commercial paper is rated A-1, A-2 or A-3.
MOODY'S
Among the factors considered by Moody's in assigning commercial paper
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; (8) recognitions by the management of
obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. Relative differences in
strengths and weaknesses in respect of these criteria establish a rating in one
of three classifications. The rating Prime-1 is the highest commercial paper
rating assigned by Moody's. Its other two ratings, Prime-2 and Prime-3 are
designated Higher Quality and High Quality, respectively.
FITCH INVESTORS SERVICE, INC.
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated "F-1+".
DUFF & PHELPS
Commercial Paper/Certificates of Deposits
Category 1: Top Grade
Duff 1 Highest certainty of timely payment. Short-term liquidity including
plus: internal operating factors and/or ready access to alternative
sources of funds, is clearly outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
Duff 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors.
Risk factors are minor.
Notes: Bonds which are unrated may expose the investor to risks with
respect to capacity to pay interest or repay principal which are
similar to the risks of lower-rated bonds. The Fund is dependent on
the Investment Adviser's judgment, analysis and experience in the
evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
IBCA LIMITED AND ICBA INC.
A-1: Short-term obligations rated A-1 are supported by very strong
capacity for timely repayment. A plus ("+") sign is added to those
issues determined to possess the highest capacity for timely repayment.
A-2: Short-term obligations rated A-2 are supported by a strong
capacity for timely repayment, although such capacity may be susceptible
to adverse changes in business, economic or financial conditions.
41
<PAGE>
THOMPSON BANKWATCH, INC.
The TBW short-term ratings apply only to unsecured instruments that have a
maturity of one year or less and specifically assess the likelihood of an
untimely payment of principal and interest.
TBW-1: The highest category; indicates a very high degree of likelihood
that principal and interest will be paid on a timely basis.
TBW-2: The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated TBW-1.
42
<PAGE>
APPENDIX B
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING
AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities
firm with a number of distinguishing characteristics.
Privately owned and ranked among Wall Street's best capitalized firms, with
partner capital and subordinated liabilities of over $5.3 billion as of November
29, 1996.
Thirty offices worldwide, where professionals focus on identifying financial
opportunities.
The number one lead manager of U.S. common stock offerings from 1989-1996.*
The number one underwriter of all international equity issues for 1993, 1994
and 1995.*
Premier lead manager of negotiated municipal bond offerings over the past
six years (1990-1995).
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
<TABLE>
<S> <C>
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Goldman Sachs takes Sears Roebuck public (oldest ongoing client)
Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the first talking
film
1956 Goldman Sachs co-manages Ford's public offering, the largest to date
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1991 Goldman Sachs provides advisory services for the largest privatization
in the region of Telefonos de Mexico
1995 Dow Jones Industrial Average breaks 4,000
1996 Goldman Sachs takes Deutsche Telekom public
Dow Jones Industrial Average breaks 6,000
1997 Dow Jones Industrial Average breaks 7,000
</TABLE>
* Source: Securities Data Corporation. Ranking excludes REITS, Trusts, Rights
and closed-end fund offerings.
43
<PAGE>
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide. The following are three of our 14 business principles.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we
serve our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
INTEGRITY AND HONESTY ARE THE HEART OF OUR BUSINESS. We expect our people
to maintain high ethical standards in everything they do, both in their work for
the firm and in their personal lives.
44
<PAGE>
PROTECTIVE INVESTMENT COMPANY
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND INVESTORS
OF PROTECTIVE INVESTMENT COMPANY:
We have audited the accompanying statements of assets and liabilities of
Protective Investment Company (the "Company"), consisting of Global Income Fund,
International Equity Fund, Capital Growth Fund, Growth and Income Fund, Select
Equity Fund, Small Cap Equity Fund and Money Market Fund, including the
schedules of investments, as of December 31, 1996, and the related statements of
operations, the statements of changes in net assets and the financial highlights
for each of the periods indicated therein. These financial statements and
financial highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentations. 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
Protective Investment Company as of December 31, 1996, the results of its
operations, the changes in its net assets and the financial highlights for each
of the periods indicated therein, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 10, 1997
45
<PAGE>
PROTECTIVE INVESTMENT COMPANY
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
GLOBAL INTERNATIONAL CAPITAL GROWTH AND SELECT SMALL CAP
INCOME FUND EQUITY FUND GROWTH FUND INCOME FUND EQUITY FUND EQUITY FUND
-------------- ------------ ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Investments in securities, at value
(Note B)............................... $ 36,794,136 $96,252,062 $26,960,345 $ 195,913,333 $ 98,436,731 $60,238,819
Investments in repurchase agreements
(Note B)............................... 0 0 3,397,000 13,759,000 3,071,000 4,411,000
Cash, including foreign currency at
value.................................. 76,841 31,742 691 631 323 977
Dividends receivable.................... 0 138,329 32,265 365,615 182,846 33,967
Interest receivable..................... 638,813 733 590 2,389 533 766
Receivable for securities
sold................................... 0 354,652 69,374 697,740 0 97,425
Receivable for currency sold............ 0 365,910 0 0 0 0
Unrealized appreciation on forward
currency contracts (Note G)............ 485,229 246,419 0 0 0 0
Receivable for fund shares sold......... 104,425 54,731 46,128 140,598 88,200 56,929
Foreign income tax reclaim receivable... 20,801 57,785 47 2,556 2,084 0
Receivable due from Protective Life
(Note C)............................... 26,801 60,933 17,985 38,567 24,075 23,256
-------------- ------------ ------------ ------------- ------------- -----------
TOTAL ASSETS........................ 38,147,046 97,563,296 30,524,425 210,920,429 101,805,792 64,863,139
LIABILITIES
Unrealized depreciation on forward
currency contracts (Note G)............ 266,191 289,496 0 0 0 0
Payable for securities purchased........ 0 588 158,234 70,279 0 319,058
Payable for variation margin............ 0 0 29,164 0 36,455 0
Payable for currency purchased.......... 0 366,353 0 0 0 0
Investment management fee payable (Note
C)..................................... 34,907 87,820 19,923 139,423 68,213 43,085
Accounts payable and accrued expenses... 49,519 49,888 11,813 50,500 40,619 30,117
Payable for fund shares redeemed........ 121,712 33,534 5,834 73,413 36,925 37,708
-------------- ------------ ------------ ------------- ------------- -----------
TOTAL LIABILITIES................... 472,329 827,679 224,968 333,615 182,212 429,968
-------------- ------------ ------------ ------------- ------------- -----------
NET ASSETS.......................... $ 37,674,717 $96,735,617 $30,299,457 $ 210,586,814 $ 101,623,580 $64,433,171
-------------- ------------ ------------ ------------- ------------- -----------
-------------- ------------ ------------ ------------- ------------- -----------
NET ASSETS
Paid-in capital (Note E)................ $ 36,825,417 $79,560,213 $26,477,821 $ 171,374,846 $ 80,932,057 $62,596,570
Undistributed (distributions in excess
of) net investment income (Note B)..... (57,056) 459,577 0 0 0 268
Accumulated net realized gain (loss) on
investments and foreign currency
transactions........................... 81,574 362,439 (94,407) 4,051,568 794,675 848,743
Net unrealized appreciation
(depreciation) of:
Investments............................. 604,111 16,396,157 3,889,068 35,160,400 19,881,323 987,590
Futures................................. 0 0 26,975 0 15,525 0
Foreign currency translations........... 220,671 (42,769) 0 0 0 0
-------------- ------------ ------------ ------------- ------------- -----------
NET ASSETS.......................... $ 37,674,717 $96,735,617 $30,299,457 $ 210,586,814 $ 101,623,580 $64,433,171
-------------- ------------ ------------ ------------- ------------- -----------
-------------- ------------ ------------ ------------- ------------- -----------
NET ASSET VALUE PER SHARE
Offering and redemption price per
share (based on shares of capital
stock outstanding, par value $.001
per share)........................... $ 10.177 $ 12.865 $ 12.647 $ 14.183 $ 15.437 $ 10.022
Total shares outstanding at end of
year................................. 3,701,969 7,519,283 2,395,860 14,847,879 6,583,114 6,429,304
Cost of investments................... $ 36,190,025 $79,855,905 $26,468,277 $ 174,511,933 $ 81,626,408 $63,662,229
<CAPTION>
MONEY
MARKET FUND
------------
<S> <C>
Investments in securities, at value
(Note B)............................... $6,048,340
Investments in repurchase agreements
(Note B)............................... 0
Cash, including foreign currency at
value.................................. 81,286
Dividends receivable.................... 0
Interest receivable..................... 0
Receivable for securities
sold................................... 0
Receivable for currency sold............ 0
Unrealized appreciation on forward
currency contracts (Note G)............ 0
Receivable for fund shares sold......... 0
Foreign income tax reclaim receivable... 0
Receivable due from Protective Life
(Note C)............................... 8,551
------------
TOTAL ASSETS........................ 6,138,177
Unrealized depreciation on forward
currency contracts (Note G)............ 0
Payable for securities purchased........ 0
Payable for variation margin............ 0
Payable for currency purchased.......... 0
Investment management fee payable (Note
C)..................................... 3,314
Accounts payable and accrued expenses... 13,969
Payable for fund shares redeemed........ 234
------------
TOTAL LIABILITIES................... 17,517
------------
NET ASSETS.......................... $6,120,660
------------
------------
Paid-in capital (Note E)................ $6,120,660
Undistributed (distributions in excess
of) net investment income (Note B)..... 0
Accumulated net realized gain (loss) on
investments and foreign currency
transactions........................... 0
Net unrealized appreciation
(depreciation) of:
Investments............................. 0
Futures................................. 0
Foreign currency translations........... 0
------------
NET ASSETS.......................... $6,120,660
------------
------------
NET ASSET VALUE PER SHARE
Offering and redemption price per
share (based on shares of capital
stock outstanding, par value $.001
per share)........................... $ 1.000
Total shares outstanding at end of
year................................. 6,120,660
Cost of investments................... $6,048,340
</TABLE>
The accompanying notes are an integral part of the financial statements.
46
<PAGE>
PROTECTIVE INVESTMENT COMPANY
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
GLOBAL INTERNATIONAL CAPITAL GROWTH AND SELECT SMALL CAP
INCOME FUND EQUITY FUND GROWTH FUND INCOME FUND EQUITY FUND EQUITY FUND
-------------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest income........................ $ 2,383,442 $ 185,793 $ 141,189 $ 655,247 $ 120,376 $ 361,462
Dividend income........................ 0 1,267,875 334,176 4,174,432 1,665,613 257,351
Foreign taxes withheld................. (25,788) (163,441) (1,252) (8,576) (15,935) (1,783)
-------------- ------------ ------------ ------------ ----------- -----------
TOTAL INVESTMENT INCOME.............. 2,357,654 1,290,227 474,113 4,821,103 1,770,054 617,030
EXPENSES
Investment management fee (Note C)..... 380,629 871,940 161,938 1,325,914 632,296 446,552
Custodian fees and
expenses.............................. 79,199 184,376 29,401 65,232 47,282 42,255
Audit fee.............................. 19,200 21,499 10,998 20,500 23,499 18,998
Printing expense....................... 3,960 7,027 985 15,061 6,657 5,516
Legal fee.............................. 3,299 5,856 822 12,551 5,549 4,595
Directors' fee (Note C)................ 2,375 4,216 589 9,037 3,997 3,309
Transfer agent fee..................... 2,288 2,288 2,284 2,287 2,287 2,287
Miscellaneous expense.................. 99 176 25 377 165 139
-------------- ------------ ------------ ------------ ----------- -----------
Total operating expenses before
reimbursement....................... 491,049 1,097,378 207,042 1,450,959 721,732 523,651
Expenses borne by Protective Life
(Note C)............................ (110,420) (225,438) (45,104) (125,045) (89,436) (77,099)
-------------- ------------ ------------ ------------ ----------- -----------
NET EXPENSES....................... 380,629 871,940 161,938 1,325,914 632,296 446,552
-------------- ------------ ------------ ------------ ----------- -----------
NET INVESTMENT INCOME.............. 1,977,025 418,287 312,175 3,495,189 1,137,758 170,478
-------------- ------------ ------------ ------------ ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS, FOREIGN CURRENCY, OPTIONS
AND FUTURES TRANSACTIONS
Net realized gain (loss) on:
Investments.......................... 918,561 3,727,854 243,508 16,534,076 2,937,542 7,907,243
Futures.............................. 0 0 46,353 0 (34,854) 0
Foreign currency transactions........ 481,271 154,420 0 0 0 0
Options.............................. 35,396 (110,596) 0 0 0 0
-------------- ------------ ------------ ------------ ----------- -----------
Total net realized gain............ 1,435,228 3,771,678 289,861 16,534,076 2,902,688 7,907,243
Change in unrealized appreciation
(depreciation) of:
Investments.......................... (277,482) 9,314,829 3,715,510 21,786,858 11,847,717 1,105,418
Futures.............................. 0 0 37,400 0 15,525 0
Foreign currency translations........ 67,046 (89,819) 0 0 0 0
-------------- ------------ ------------ ------------ ----------- -----------
Total change in unrealized
appreciation (depreciation)....... (210,436) 9,225,010 3,752,910 21,786,858 11,863,242 1,105,418
-------------- ------------ ------------ ------------ ----------- -----------
NET REALIZED AND UNREALIZED GAIN... 1,224,792 12,996,688 4,042,771 38,320,934 14,765,930 9,012,661
-------------- ------------ ------------ ------------ ----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS.............................. $ 3,201,817 $13,414,975 $4,354,946 $41,816,123 $15,903,688 $9,183,139
-------------- ------------ ------------ ------------ ----------- -----------
-------------- ------------ ------------ ------------ ----------- -----------
<CAPTION>
MONEY
MARKET FUND
------------
<S> <C>
INVESTMENT INCOME
Interest income........................ $ 280,005
Dividend income........................ 0
Foreign taxes withheld................. 0
------------
TOTAL INVESTMENT INCOME.............. 280,005
EXPENSES
Investment management fee (Note C)..... 31,585
Custodian fees and
expenses.............................. 26,129
Audit fee.............................. 5,000
Printing expense....................... 794
Legal fee.............................. 661
Directors' fee (Note C)................ 476
Transfer agent fee..................... 2,284
Miscellaneous expense.................. 18
------------
Total operating expenses before
reimbursement....................... 66,947
Expenses borne by Protective Life
(Note C)............................ (35,362)
------------
NET EXPENSES....................... 31,585
------------
NET INVESTMENT INCOME.............. 248,420
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS, FOREIGN CURRENCY, OPTIONS
AND FUTURES TRANSACTIONS
Net realized gain (loss) on:
Investments.......................... 0
Futures.............................. 0
Foreign currency transactions........ 0
Options.............................. 0
------------
Total net realized gain............ 0
Change in unrealized appreciation
(depreciation) of:
Investments.......................... 0
Futures.............................. 0
Foreign currency translations........ 0
------------
Total change in unrealized
appreciation (depreciation)....... 0
------------
NET REALIZED AND UNREALIZED GAIN... 0
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS.............................. $ 248,420
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
47
<PAGE>
PROTECTIVE INVESTMENT COMPANY
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH AND
GLOBAL INCOME FUND INTERNATIONAL EQUITY FUND CAPITAL GROWTH FUND INCOME FUND
-------------------------- -------------------------- ------------------------ -----------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/96 12/31/95 12/31/96 12/31/95 12/31/96 12/31/95* 12/31/96
----------- ------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS
From operations:
Net investment income..... $ 1,977,025 $ 1,419,625 $ 418,287 $ 390,106 $ 312,175 $ 80,038 $ 3,495,189
Net realized gain (loss) on:
Investments............... 918,561 890,583 3,727,854 (640,025) 243,508 (15,740) 16,534,076
Futures................... 0 0 0 0 46,353 32,639 0
Foreign currency
transactions............. 481,271 149,263 154,420 1,671,359 0 0 0
Options................... 35,396 0 (110,596) (357,171) 0 0 0
----------- ------------- ------------- ----------- ----------- ----------- -----------
Total net realized gain... 1,435,228 1,039,846 3,771,678 674,163 289,861 16,899 16,534,076
Change in unrealized
appreciation
(depreciation) of:
Investments............... (277,482) 1,128,602 9,314,829 6,588,738 3,715,510 173,558 21,786,858
Futures................... 0 0 0 0 37,400 (10,425) 0
Foreign currency
translations............. 67,046 94,458 (89,819) 161,660 0 0 0
Options................... 0 0 0 250,336 0 0 0
----------- ------------- ------------- ----------- ----------- ----------- -----------
Total change in unrealized
appreciation
(depreciation)........... (210,436) 1,223,060 9,225,010 7,000,734 3,752,910 163,133 21,786,858
----------- ------------- ------------- ----------- ----------- ----------- -----------
Net increase in net assets
resulting from
operations............... 3,201,817 3,682,531 13,414,975 8,065,003 4,354,946 260,070 41,816,123
----------- ------------- ------------- ----------- ----------- ----------- -----------
Dividends and distributions
to shareholders from: (Note
B)
Net investment income..... (1,977,025) (1,419,625) (38,556) (390,106) (312,175) (80,038) (3,495,189)
In excess of net
investment income........ (299,207) (828,216) 0 (1,766,850) (3,999) 0 0
Net realized gains........ (594,964) (537,311) (1,983,461) 0 (289,861) 0 (13,694,011)
In excess of net realized
gains.................... 0 0 0 0 (111,306) 0 0
----------- ------------- ------------- ----------- ----------- ----------- -----------
Total dividends and
distributions to
shareholders............. (2,871,196) (2,785,152) (2,022,017) (2,156,956) (717,341) (80,038) (17,189,200)
Fund share transactions
(Note E)................... 6,258,780 12,906,465 26,500,961 25,548,590 15,945,890 10,535,930 57,883,907
----------- ------------- ------------- ----------- ----------- ----------- -----------
Total increase in net
assets................... 6,589,401 13,803,844 37,893,919 31,456,637 19,583,495 10,715,962 82,510,830
Net assets
Beginning of year........... 31,085,316 17,281,472 58,841,698 27,385,061 10,715,962 0 128,075,984
----------- ------------- ------------- ----------- ----------- ----------- -----------
End of year (1)............. $37,674,717 $ 31,085,316 $ 96,735,617 $58,841,698 $30,299,457 $10,715,962 $210,586,814
----------- ------------- ------------- ----------- ----------- ----------- -----------
----------- ------------- ------------- ----------- ----------- ----------- -----------
(1) Including undistributed
(distributions in excess of)
net investment income........ $ (57,056) $ (591,214) $ 459,577 $ (398,006) $ 0 $ 0 $ 0
----------- ------------- ------------- ----------- ----------- ----------- -----------
----------- ------------- ------------- ----------- ----------- ----------- -----------
<CAPTION>
SELECT EQUITY FUND
------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
12/31/95 12/31/96 12/31/95
----------- ----------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS
From operations:
Net investment income..... $ 1,951,172 $ 1,137,758 $ 598,538
Net realized gain (loss) on:
Investments............... 4,484,478 2,937,542 1,136,257
Futures................... 0 (34,854) 0
Foreign currency
transactions............. 0 0 0
Options................... 0 0 0
----------- ----------- -----------
Total net realized gain... 4,484,478 2,902,688 1,136,257
Change in unrealized
appreciation
(depreciation) of:
Investments............... 14,188,139 11,847,717 8,369,198
Futures................... 0 15,525 0
Foreign currency
translations............. 0 0 0
Options................... 0 0 0
----------- ----------- -----------
Total change in unrealized
appreciation
(depreciation)........... 14,188,139 11,863,242 8,369,198
----------- ----------- -----------
Net increase in net assets
resulting from
operations............... 20,623,789 15,903,688 10,103,993
----------- ----------- -----------
Dividends and distributions
to shareholders from: (Note
B)
Net investment income..... (1,951,172) (1,137,758) (598,538)
In excess of net
investment income........ 0 0 0
Net realized gains........ (3,237,795) (2,401,439) (839,755)
In excess of net realized
gains.................... 0 0 0
----------- ----------- -----------
Total dividends and
distributions to
shareholders............. (5,188,967) (3,539,197) (1,438,293)
Fund share transactions
(Note E)................... 70,336,044 32,535,620 30,340,320
----------- ----------- -----------
Total increase in net
assets................... 85,770,866 44,900,111 39,006,020
Net assets
Beginning of year........... 42,305,118 56,723,469 17,717,449
----------- ----------- -----------
End of year (1)............. $128,075,984 $101,623,580 $56,723,469
----------- ----------- -----------
----------- ----------- -----------
(1) Including undistributed
(distributions in excess of)
net investment income........ $ 0 $ 0 $ 0
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------------
*For the period from June 13, 1995 (commencement of operations) through December
31, 1995.
The accompanying notes are an integral part of the financial statements.
48
<PAGE>
PROTECTIVE INVESTMENT COMPANY
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SMALL CAP EQUITY FUND MONEY MARKET FUND
--------------------------- ---------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/96 12/31/95 12/31/96 12/31/95
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
From operations:
Net investment income.......... $ 170,478 $ 363,638 $ 248,420 $ 250,290
Net realized gain (loss) on:
Investments.................... 7,907,243 140,108 0 0
Futures........................ 0 0 0 0
Foreign currency
translations.................. 0 0 0 0
Options........................ 0 0 0 0
----------- ------------- ------------- -----------
Total net realized gain........ 7,907,243 140,108 0 0
Change in unrealized appreciation
(depreciation of):
Investments.................... 1,105,418 1,484,325 0 0
Futures........................ 0 0 0 0
Foreign currency
translations.................. 0 0 0 0
Options........................ 0 0 0 0
----------- ------------- ------------- -----------
Total change in unrealized
appreciation (depreciation)... 1,105,418 1,484,325 0 0
----------- ------------- ------------- -----------
Net increase in net assets
resulting from operations..... 9,183,139 1,988,071 248,420 250,290
----------- ------------- ------------- -----------
Dividends and distributions to
shareholders from: (Note B)
Net investment income.......... (170,210) (363,638) (248,420) (250,290)
In excess of net investment
income........................ 0 0 0 (3)
Net realized gains............. (6,646,997) (140,108) 0 0
In excess of net realized
gains......................... 0 (355,217) 0 0
----------- ------------- ------------- -----------
Total dividends and
distributions to
shareholders.................. (6,817,207) (858,963) (248,420) (250,293)
Fund share transactions (Note
E).............................. 18,237,546 20,887,839 1,050,935 1,451,237
----------- ------------- ------------- -----------
Total increase in net assets... 20,603,478 22,016,947 1,050,935 1,451,234
Net Assets
Beginning of year.............. 43,829,693 21,812,746 5,069,725 3,618,491
----------- ------------- ------------- -----------
End of year(1)................. $64,433,171 $ 43,829,693 $ 6,120,660 $ 5,069,725
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
(1) Including undistributed
(distributions in excess of) net
investment income............... $ 268 $ 0 $ 0 $ 0
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
49
<PAGE>
PROTECTIVE GLOBAL INCOME FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
SECURITY DESCRIPTION (000) U.S. $ VALUE
- ---------------------------------------------------------------------------- ----------- --------------
<S> <C> <C> <C>
GOVERNMENT AND AGENCY SECURITIES -- 82.8%
AUSTRALIA -- 4.1%
Commonwealth of Australia
6.750%, 11/15/2006..................................................... AUD 2,000 $ 1,522,295
--------------
CANADA -- 2.3%
Government of Canada
7.000%, 12/01/2006..................................................... CAD 1,100 844,702
--------------
GERMANY -- 18.4%
Federal Republic of Germany
6.750%, 07/15/2004..................................................... DEM 4,500 3,138,127
6.500%, 10/14/2005..................................................... 5,300 3,616,454
--------------
6,754,581
--------------
IRELAND -- 2.5%
Republic of Ireland
8.000%, 10/18/2000..................................................... IEP 500 903,814
--------------
ITALY -- 5.7%
Republic of Italy
10.500%, 11/01/2000.................................................... ITL 2,800,000 2,081,635
--------------
JAPAN -- 8.6%
International Bank Reconstruction & Development
6.750%, 06/18/2001..................................................... JPY 70,000 737,415
Japan Development Bank
6.500%, 09/20/2001..................................................... 230,000 2,414,245
--------------
3,151,660
--------------
NETHERLANDS -- 2.2%
Dutch Government
7.000%, 06/15/2005..................................................... NLG 1,300 820,965
--------------
SPAIN -- 2.5%
Government of Spain
10.300%, 06/15/2002.................................................... ESP 100,000 914,539
--------------
SWEDEN -- 1.5%
Kingdom of Sweden
6.000%, 02/09/2005..................................................... SEK 4,000 568,442
--------------
UNITED KINGDOM -- 5.7%
U.K. Treasuries
8.500%, 12/07/2005..................................................... GBP 600 1,094,686
7.500%, 12/07/2006..................................................... 600 1,028,216
--------------
2,122,902
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
50
<PAGE>
PROTECTIVE GLOBAL INCOME FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
SECURITY DESCRIPTION (000) U.S. $ VALUE
- ---------------------------------------------------------------------------- ----------- --------------
<S> <C> <C> <C>
GOVERNMENT AND AGENCY SECURITIES (CONTINUED)
UNITED STATES -- 29.3%
United States Treasury Notes
6.875%, 07/31/1999..................................................... USD 1,250 $ 1,275,387
5.250%, 01/31/2001..................................................... 2,100 2,033,388
6.375%, 03/31/2001..................................................... 2,400 2,416,128
7.875%, 11/15/2004..................................................... 2,000 2,182,500
6.500%, 08/15/2005..................................................... 1,100 1,107,051
7.000%, 07/15/2006..................................................... 1,700 1,766,147
--------------
10,780,601
--------------
TOTAL GOVERNMENT AND AGENCY SECURITIES -- (Cost $29,862,025)............ 30,466,136
--------------
TIME DEPOSIT -- 17.2%
UNITED STATES -- 17.2%
State Street Bank and Trust Co.
Eurodollar Time Deposit 6.375%, 01/02/1997............................. USD 6,328 6,328,000
--------------
TOTAL TIME DEPOSIT -- (Cost $6,328,000)................................. 6,328,000
--------------
TOTAL INVESTMENTS -- (Cost $36,190,025) -- 100.0% $ 36,794,136
--------------
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
51
<PAGE>
PROTECTIVE INTERNATIONAL EQUITY FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES U.S. $ VALUE
- ------------------------------------------------------------ ------------ ------------
<S> <C> <C>
COMMON STOCK -- 93.4%
AUSTRALIA -- 3.5%
Australia and New Zealand Banking Group Ltd............. 272,200 $ 1,715,719
Woodside Petroleum Ltd.................................. 229,600 1,677,151
------------
3,392,870
------------
AUSTRIA -- 2.3%
Oester Elektrizita...................................... 29,075 2,176,429
------------
BELGIUM -- 1.0%
Credit Communal Holding/Dexia........................... 10,500 958,081
------------
FRANCE -- 5.1%
Comptoirs Modernes...................................... 4,106 2,215,824
Credit Local de France.................................. 7,900 688,214
Seita................................................... 9,051 378,542
SGS-Thomson Microelectronics N.V........................ 22,800 1,612,721
------------
4,895,301
------------
GERMANY -- 3.9%
Adidas AG .............................................. 24,050 2,078,665
Hoechst AG.............................................. 36,000 1,700,806
------------
3,779,471
------------
HONG KONG -- 5.9%
Asia Satellite Telecom Holdings Ltd..................... 415,500 964,280
HSBC Holdings........................................... 117,000 2,503,523
Sun Hung Kai Properties................................. 175,000 2,143,804
------------
5,611,607
------------
IRELAND -- 2.4%
Bank of Ireland......................................... 257,992 2,352,535
------------
ITALY -- 2.1%
Telecom Italia (savings shares)......................... 690,000 984,739
Telecom Italia.......................................... 419,000 1,059,239
------------
2,043,978
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
52
<PAGE>
PROTECTIVE INTERNATIONAL EQUITY FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES U.S. $ VALUE
- ------------------------------------------------------------ ------------ ------------
<S> <C> <C>
COMMON STOCK (CONTINUED)
JAPAN -- 30.5%
Aderans Co.............................................. 13,000 $ 317,675
Canon Inc............................................... 103,000 2,276,833
Circle K Japan Co....................................... 200 8,635
Hoya Corp............................................... 61,000 2,396,598
Inaba Denkisangyo Co.................................... 45,100 864,537
Kokuyo Co............................................... 69,000 1,703,998
Kyocera Corp............................................ 28,000 1,745,618
Max Co.................................................. 69,000 1,155,859
Mirai Industry Co. ..................................... 37,400 1,017,270
Mitsubishi Heavy Industries Ltd. ....................... 307,000 2,438,822
Mitsui Marine & Fire ................................... 243,000 1,307,219
Santen Pharmaceutical Co. .............................. 84,000 1,740,782
Sanyo Shinpan Finance Co. Ltd. ......................... 17,000 1,064,243
Shimachu Co. ........................................... 55,000 1,410,500
SMC Corp. .............................................. 28,000 1,883,430
Taikisha Ltd. .......................................... 77,000 1,043,865
Takeda Chemical Industries ............................. 86,000 1,804,507
TDK Corp. .............................................. 36,000 2,346,947
Tostem Corp. ........................................... 69,000 1,906,571
York Benimaru Co. ...................................... 33,000 920,387
------------
29,354,296
------------
MALAYSIA -- 2.0%
Commerce Asset Holdings................................. 210,000 1,579,885
Leader Universal Holdings............................... 181,000 379,846
------------
1,959,731
------------
NETHERLANDS -- 3.9%
Randstad Holdings N.V. ................................. 21,600 1,560,361
Wolters Kluwer N.V. .................................... 16,095 2,138,112
------------
3,698,473
------------
SINGAPORE -- 1.3%
Singapore Land ......................................... 226,000 1,251,697
------------
SPAIN -- 2.1%
Banco Popular Espana ................................... 10,460 2,054,535
------------
SWEDEN -- 8.0%
Ericsson LM Telephone................................... 62,600 1,936,972
Hoganas AB, Class B..................................... 53,400 1,871,569
Securitas AB, Class B................................... 69,600 2,025,985
Swedish Match........................................... 538,000 1,893,477
------------
7,728,003
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
53
<PAGE>
PROTECTIVE INTERNATIONAL EQUITY FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES U.S. $ VALUE
- ------------------------------------------------------------ ------------ ------------
<S> <C> <C>
COMMON STOCK (CONTINUED)
SWITZERLAND -- 6.1%
Adecco SA............................................... 6,182 $ 1,551,851
Cie Financier Richemont AG.............................. 1,175 1,650,355
Novartis AG*............................................ 2,290 2,622,764
------------
5,824,970
------------
UNITED KINGDOM -- 13.3%
British Airport Authority PLC........................... 231,081 1,915,451
Electrocomponents PLC................................... 311,612 2,460,235
Misys PLC............................................... 136,584 2,598,815
Premier Farnell......................................... 183,142 2,352,398
Rentokil Group PLC...................................... 259,000 1,951,704
Siebe PLC............................................... 83,183 1,544,278
------------
12,822,881
------------
TOTAL COMMON STOCK -- (Cost $75,120,895)................ 89,904,858
------------
PREFERRED STOCK -- 2.3%
GERMANY -- 2.3%
Fresenius AG............................................ 10,700 2,211,204
------------
TOTAL PREFERRED STOCK -- (Cost $599,010)................ 2,211,204
------------
TIME DEPOSIT -- 4.3%
UNITED STATES -- 4.3%
State Street Bank and Trust Co.
Eurodollar Time Deposit 6.375%, 01/02/1997............. USD 4,136 4,136,000
------------
TOTAL TIME DEPOSIT -- (Cost $4,136,000)................. 4,136,000
------------
TOTAL INVESTMENTS -- (Cost $79,855,905) -- 100.0% $ 96,252,062
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
54
<PAGE>
PROTECTIVE GLOBAL INCOME FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
ANALYSIS OF INDUSTRY CLASSIFICATIONS
<TABLE>
<CAPTION>
INDUSTRY % OF NET ASSETS VALUE
- --------------------------------------------------- --------------- --------------
<S> <C> <C>
Business Services.................................. 10.1% $ 9,688,716
Commercial Banks................................... 11.6 11,164,278
Computer/Office Equipment.......................... 3.8 3,640,970
Construction....................................... 2.0 1,906,571
Consumer Goods..................................... 4.2 3,997,302
Electrical Equipment............................... 2.3 2,173,129
Electronic/Office Equipment........................ 2.4 2,276,833
Electronics........................................ 11.9 11,432,107
Engineering........................................ 4.1 3,983,100
Financial Services................................. 1.8 1,752,457
Health Care........................................ 10.4 10,080,063
Insurance.......................................... 1.4 1,307,219
Machinery.......................................... 3.0 2,927,295
Media.............................................. 2.2 2,138,112
Metal Products..................................... 2.3 2,251,415
Oil................................................ 1.7 1,677,151
Real Estate........................................ 3.5 3,395,501
Retail Trade....................................... 5.1 4,873,021
Textile............................................ 2.2 2,078,665
Time Deposit....................................... 4.3 4,136,000
Tobacco............................................ 2.4 2,272,019
Transportation..................................... 2.0 1,915,451
Utility............................................ 5.3 5,184,687
----- --------------
Totals............................................. 100.0 $ 96,252,062
----- --------------
----- --------------
</TABLE>
- ------------------------
* Denotes non-income producing security.
See Glossary of Terms on page 44.
The accompanying notes are an integral part of the financial statements.
55
<PAGE>
PROTECTIVE CAPITAL GROWTH FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------------------ ------------ ------------
<S> <C> <C>
COMMON STOCK -- 88.6%
AEROSPACE/DEFENSE -- 3.2%
McDonnell Douglas Corp.................................. 8,000 $ 512,000
Northrop Grumman Corp................................... 5,600 463,400
------------
975,400
------------
AIRLINES -- 2.5%
AMR Corp. *............................................. 5,300 467,062
Southwest Airlines Co................................... 13,300 294,263
------------
761,325
------------
AUTO PARTS -- 1.3%
Lear Seating Corp. *.................................... 12,000 409,500
------------
AUTOMOBILE -- 2.1%
Ford Motor Co........................................... 19,700 627,938
------------
BROADCAST MEDIA -- 0.4%
Gaylord Entertainment Co................................ 5,200 118,950
------------
BUSINESS SERVICES -- 2.8%
Ecolab Inc.............................................. 6,900 259,612
First Data Corp......................................... 8,000 292,000
Service Corporation International....................... 11,100 310,800
------------
862,412
------------
CHEMICALS -- 1.4%
Geon Co................................................. 21,400 419,975
------------
COMMUNICATION SERVICES -- 1.1%
Tele Communications Inc. *.............................. 11,200 319,900
------------
COMPUTER SOFTWARE & SERVICES -- 2.1%
Compaq Computer Corp. *................................. 8,600 638,550
------------
DRUGS & HEALTH CARE -- 7.4%
Baxter International Inc................................ 17,500 717,500
Beverly Enterprises Inc. *.............................. 5,800 73,950
Fisher Scientific International Inc..................... 14,500 683,313
Health Systems International Inc. *..................... 3,600 89,100
Tenet Healthcare Corp. *................................ 31,000 678,125
------------
2,241,988
------------
ELECTRIC UTILITIES -- 1.0%
Long Island Lighting Co................................. 14,100 311,963
------------
ELECTRONICS -- 6.0%
Avnet Inc............................................... 6,700 390,275
Intel Corp.............................................. 7,100 929,656
Perkin Elmer Corp....................................... 8,300 488,663
------------
1,808,594
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
56
<PAGE>
PROTECTIVE CAPITAL GROWTH FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------------------ ------------ ------------
<S> <C> <C>
COMMON STOCK (CONTINUED)
FINANCIAL SERVICES -- 8.4%
Federal National Mortgage Assn.......................... 10,200 $ 379,950
First USA Inc........................................... 26,800 927,950
Fleet Financial Group Inc............................... 2,498 124,588
Lehman Brothers Holdings Inc............................ 16,900 530,238
MBNA Corp............................................... 13,800 572,700
------------
2,535,426
------------
FOODS -- 0.6%
Chiquita Brands International Inc....................... 15,000 191,250
------------
HOSPITAL MANAGEMENT -- 2.0%
Columbia/HCA Healthcare Corp............................ 14,900 607,175
------------
INDUSTRIAL MACHINERY -- 4.3%
Applied Materials Inc. *................................ 8,800 316,250
Pall Corp............................................... 23,800 606,900
Silicon Valley Group Inc. *............................. 18,600 374,325
------------
1,297,475
------------
INSURANCE -- 8.7%
Aetna Inc............................................... 16,273 1,301,840
Integon Corp............................................ 14,200 252,050
Lincoln National Corp................................... 7,500 393,750
Partner Re Holdings..................................... 20,800 707,200
------------
2,654,840
------------
MAJOR REGIONAL BANKS -- 5.1%
BankAmerica Corp........................................ 8,000 798,000
NationsBank Corp........................................ 7,800 762,450
------------
1,560,450
------------
OIL -- 6.2%
Amoco Corp.............................................. 2,100 169,050
Atlantic Richfield Co................................... 2,000 265,000
Chevron Corp............................................ 1,600 104,000
Mobil Corp.............................................. 2,700 330,075
Royal Dutch Petroleum Co................................ 1,000 170,750
Texaco Inc.............................................. 8,600 843,875
------------
1,882,750
------------
PACKAGING & CONTAINERS -- 1.4%
Owens Illinois Inc. *................................... 18,600 423,150
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
57
<PAGE>
PROTECTIVE CAPITAL GROWTH FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------------------ ------------ ------------
<S> <C> <C>
COMMON STOCK (CONTINUED)
PAPER AND FOREST PRODUCTS -- 2.3%
Georgia Pacific Corp.................................... 8,100 $ 583,200
Stone Container Corp.................................... 7,700 114,537
------------
697,737
------------
PUBLISHING -- 2.8%
Knight Ridder Inc....................................... 7,900 302,175
Valassis Communications Inc. *.......................... 26,300 555,587
------------
857,762
------------
RESTAURANTS -- 0.5%
Marriot International Inc............................... 2,800 154,700
------------
RETAIL -- 5.4%
Dillard Dept. Stores Inc................................ 19,500 602,063
Fleming Cos. Inc........................................ 8,400 144,900
J C Penny Inc........................................... 4,700 229,125
Wal-Mart Stores Inc..................................... 28,500 651,937
------------
1,628,025
------------
TELECOMMUNICATIONS -- 1.3%
Lucent Technologies Inc................................. 8,400 388,500
------------
TIRES & RUBBER -- 2.7%
Cooper Tire & Rubber Co................................. 10,600 209,350
Goodyear Tire & Rubber Co............................... 12,100 621,637
------------
830,987
------------
TOBACCO -- 2.5%
Philip Morris Cos. Inc.................................. 6,800 765,850
------------
TRANSPORTATION -- 3.1%
Canadian Pacific Ltd.................................... 16,500 437,250
Consolidated Freightways Inc............................ 9,200 81,650
Consolidated Freightways Inc............................ 18,400 409,400
------------
928,300
------------
TOTAL COMMON STOCK -- (Cost $23,011,804)................ 26,900,872
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
58
<PAGE>
PROTECTIVE CAPITAL GROWTH FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
SECURITY DESCRIPTION (000) VALUE
- ------------------------------------------------------------ ------------ ------------
SHORT TERM INVESTMENTS -- 11.4%
<S> <C> <C>
REPURCHASE AGREEMENTS -- 11.2%
State Street Bank and Trust Co.
6.250%, 01/02/1997, maturity value of $3,398,180, dated
12/31/1996, (Collateralized by $3,435,000 United States
Treasury Note, 6.000%, 05/31/1998, with a value of
$3,465,431)** $ 3,397 $ 3,397,000
------------
U.S. GOVERNMENT SECURITIES -- 0.2%
United States Treasury Bills
4.880%, 03/06/1997 **.................................. 40 39,653
5.050%, 03/06/1997 **................................. 20 19,820
------------
59,473
------------
TOTAL SHORT TERM INVESTMENTS -- (Cost $3,456,473) 3,456,473
------------
TOTAL INVESTMENTS -- (COST $26,468,277) -- 100.0% $ 30,357,345
------------
------------
OTHER INFORMATION --
At December 31, 1996, the Capital Growth Fund had open futures contracts as follows:
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
FUTURES EXPIRATION CONTRACTS MARKET VALUE GAIN
- ----------- -------------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
S&P 500 March 1997 4 $ 1,489,000 $ 26,975
</TABLE>
- ------------------------
* Denotes non-income producing security.
** Security has been pledged (in whole or in part) to cover initial margin
requirements for futures contracts.
The accompanying notes are an integral part of the financial statements.
59
<PAGE>
PROTECTIVE GROWTH AND INCOME FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- --------------------------------------------------------------------------------------- --------- ----------------
<S> <C> <C>
COMMON STOCK -- 91.3%
AEROSPACE/DEFENSE -- 4.4%
McDonnell Douglas Corp............................................................. 114,300 $ 7,315,200
Northrop Grumman Corp.............................................................. 23,600 1,952,900
----------------
9,268,100
----------------
AIRLINES -- 3.6%
AMR Corp. *........................................................................ 33,800 2,978,625
Continental Airlines Inc., Class B *............................................... 164,000 4,571,500
----------------
7,550,125
----------------
AUTO PARTS -- 2.7%
Lear Seating Corp. *............................................................... 167,700 5,722,763
----------------
AUTOMOBILE -- 2.1%
Ford Motor Co...................................................................... 137,700 4,389,188
----------------
CHEMICALS -- 1.5%
Geon Co............................................................................ 156,100 3,063,463
----------------
COMPUTER SOFTWARE & SERVICES -- 1.0%
Autodesk Inc....................................................................... 73,700 2,063,600
----------------
DRUGS & HEALTH CARE -- 4.5%
Baxter International Inc........................................................... 97,400 3,993,400
Tenet Healthcare Corp. *........................................................... 249,500 5,457,812
----------------
9,451,212
----------------
ELECTRIC UTILITIES -- 3.4%
CMS Energy Corp.................................................................... 46,500 1,563,562
Long Island Lighting Co............................................................ 198,400 4,389,600
Unicom Corp........................................................................ 46,800 1,269,450
----------------
7,222,612
----------------
ELECTRONICS -- 3.4%
Avnet Inc.......................................................................... 96,400 5,615,300
Teradyne Inc. *.................................................................... 57,500 1,401,562
----------------
7,016,862
----------------
FINANCIAL SERVICES -- 4.7%
Dean Witter Discover & Co.......................................................... 82,000 5,432,500
Lehman Brothers Holdings Inc....................................................... 69,200 2,171,150
Republic New York Corp............................................................. 26,000 2,122,250
----------------
9,725,900
----------------
FOODS -- 1.2%
Chiquita Brands International, Inc................................................. 201,600 2,570,400
----------------
HOMEBUILDING -- 3.0%
Centex Corp........................................................................ 72,700 2,735,338
Lennar Corp........................................................................ 132,100 3,599,725
----------------
6,335,063
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
60
<PAGE>
PROTECTIVE GROWTH AND INCOME FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- --------------------------------------------------------------------------------------- --------- ----------------
COMMON STOCK (CONTINUED)
<S> <C> <C>
HOUSEWARES -- 1.9%
Sunbeam Corp....................................................................... 154,300 $ 3,973,225
----------------
INSURANCE -- 9.5%
Aetna Inc.......................................................................... 84,900 6,792,000
CIGNA Corp......................................................................... 36,200 4,945,825
Lincoln National Corp.............................................................. 58,800 3,087,000
Loews Corp......................................................................... 22,400 2,111,200
Partner Re Holdings................................................................ 85,000 2,890,000
----------------
19,826,025
----------------
LEISURE TIME -- 1.9%
Brunswick Corp..................................................................... 168,700 4,048,800
----------------
MAJOR REGIONAL BANKS -- 6.1%
BankAmerica Corp................................................................... 60,100 5,994,975
Chase Manhattan Corp. New.......................................................... 22,800 2,034,900
NationsBank Corp................................................................... 49,400 4,828,850
----------------
12,858,725
----------------
OIL -- 6.4%
Ashland Inc........................................................................ 66,300 2,908,912
Atlantic Richfield Co.............................................................. 42,900 5,684,250
Texaco Inc......................................................................... 49,000 4,808,125
----------------
13,401,287
----------------
PACKAGING & CONTAINERS -- 2.8%
Owens Illinois Inc. *.............................................................. 255,600 5,814,900
----------------
PAPER AND FOREST PRODUCTS -- 3.4%
Georgia Pacific Corp............................................................... 57,700 4,154,400
Stone Container Corp............................................................... 204,500 3,041,937
----------------
7,196,337
----------------
PETROLEUM SERVICES -- 2.6%
Tosco Corp......................................................................... 69,800 5,522,925
----------------
RETAIL -- 6.7%
Fleming Cos. Inc................................................................... 257,400 4,440,150
J C Penney Inc..................................................................... 76,100 3,709,875
Sears Roebuck & Co................................................................. 75,000 3,459,375
Supervalu Inc...................................................................... 87,000 2,468,625
----------------
14,078,025
----------------
STEEL -- 1.6%
AK Steel Holding Corp.............................................................. 85,500 3,387,938
----------------
TEXTILE -- 2.3%
Fruit of the Loom Inc. *........................................................... 129,100 4,889,663
----------------
TIRES & RUBBER -- 2.7%
Goodyear Tire & Rubber Co.......................................................... 111,900 5,748,863
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
61
<PAGE>
PROTECTIVE GROWTH AND INCOME FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- --------------------------------------------------------------------------------------- --------- ----------------
COMMON STOCK (CONTINUED)
<S> <C> <C>
TOBACCO -- 4.7%
Philip Morris Cos. Inc............................................................. 51,800 $ 5,833,975
RJR Nabisco Holdings Corp.......................................................... 64,080 2,178,720
Universal Corp. Virginia........................................................... 54,600 1,754,025
----------------
9,766,720
----------------
TRANSPORTATION -- 3.2%
Canadian Pacific Ltd............................................................... 141,400 3,747,100
Consolidated Freightways Corp.*.................................................... 14,900 132,237
Consolidated Freightways Inc....................................................... 122,600 2,727,850
----------------
6,607,187
----------------
TOTAL COMMON STOCK -- (Cost $156,714,773).......................................... 191,499,908
----------------
PREFERRED STOCK -- 0.3%
FOODS -- 0.1%
Chiquita Brands International, Inc., Series A...................................... 5,800 249,400
----------------
TOBACCO -- 0.2%
RJR Nabisco Holdings Corp., Series C............................................... 50,900 343,575
----------------
TOTAL PREFERRED STOCK -- (Cost $591,286)........................................... 592,975
----------------
DEPOSITORY RECEIPTS -- 1.8%
MANUFACTURING -- 1.8%
Unilever N.V....................................................................... 21,800 3,820,450
----------------
TOTAL DEPOSITORY RECEIPTS -- (Cost $3,446,874)..................................... 3,820,450
----------------
<CAPTION>
PRINCIPAL
AMOUNT
(000)
---------
<S> <C> <C>
SHORT TERM INVESTMENT -- 6.6%
REPURCHASE AGREEMENT -- 6.6%
State Street Bank and Trust Co.
6.250%, 01/02/1997, maturity value of $13,763,777,
dated 12/31/1996, (Collateralized by $13,195,000 United States
Treasury Note, 6.000%, 5/31/1998, with a value of $14,038,273).................... $ 13,759 $ 13,759,000
----------------
TOTAL SHORT TERM INVESTMENT -- (Cost $13,759,000).................................. 13,759,000
----------------
TOTAL INVESTMENTS -- (Cost $174,511,933) -- 100.0% $ 209,672,333
----------------
----------------
</TABLE>
- ------------------------
* Denotes non-income producing security.
The accompanying notes are an integral part of the financial statements.
62
<PAGE>
PROTECTIVE SELECT EQUITY FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- --------------------------------------------------------------------------------------- ----------- ----------------
<S> <C> <C>
COMMON STOCK -- 95.1%
AEROSPACE/DEFENSE -- 2.0%
Allied Signal Inc.................................................................. 7,400 $ 495,800
Boeing Co.......................................................................... 3,900 414,862
United Technologies Corp........................................................... 16,200 1,069,200
----------------
1,979,862
----------------
AIRLINES -- 1.5%
AMR Corp. *........................................................................ 9,000 793,125
Delta Air Lines Inc................................................................ 9,900 701,663
----------------
1,494,788
----------------
AUTO PARTS -- 0.6%
TRW Inc............................................................................ 11,400 564,300
----------------
AUTOMOBILE -- 1.8%
Ford Motor Co...................................................................... 15,800 503,625
General Motors Corp................................................................ 23,300 1,298,975
----------------
1,802,600
----------------
BEVERAGES -- 1.1%
PepsiCo Inc........................................................................ 39,000 1,140,750
----------------
BUILDING MATERIALS -- 0.6%
Home Depot Inc..................................................................... 11,700 586,463
----------------
BUSINESS SERVICES -- 0.3%
First Data Corp.................................................................... 9,200 335,800
----------------
CHEMICALS -- 3.2%
B F Goodrich Co.................................................................... 13,500 546,750
Dow Chemical Co.................................................................... 16,000 1,254,000
E I Du Pont De Nemours & Co........................................................ 5,800 547,375
Monsanto Co........................................................................ 23,500 913,562
----------------
3,261,687
----------------
COMMERCIAL SERVICES -- 1.5%
Dun & Bradstreet Corp.............................................................. 64,200 1,524,750
----------------
COMPUTER SOFTWARE & SERVICES -- 5.7%
Cisco Systems Inc. *............................................................... 14,000 890,750
Compaq Computer Corp. *............................................................ 8,300 616,275
Computer Associates International Inc.............................................. 11,400 567,150
International Business Machines Inc................................................ 10,900 1,645,900
Microsoft Corp. *.................................................................. 20,800 1,718,600
Oracle System Corp. *.............................................................. 9,150 382,012
----------------
5,820,687
----------------
CONGLOMERATES -- 0.6%
Textron Inc........................................................................ 6,300 593,775
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
63
<PAGE>
PROTECTIVE SELECT EQUITY FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- --------------------------------------------------------------------------------------- ----------- ----------------
COMMON STOCK (CONTINUED)
<S> <C> <C>
CONSTRUCTION MATERIALS -- 0.4%
Fluor Corp......................................................................... 6,800 $ 426,700
----------------
COSMETICS -- 1.1%
Gillette Co........................................................................ 15,000 1,166,250
----------------
DRUGS & HEALTH CARE -- 0.6%
Abbott Laboratories................................................................ 11,700 593,775
----------------
ELECTRIC UTILITIES -- 3.5%
Duke Power Co. of New Mexico....................................................... 17,000 786,250
Edison International............................................................... 43,000 854,625
Texas Utilities Co................................................................. 13,300 541,975
Unicom Corp........................................................................ 51,400 1,394,225
----------------
3,577,075
----------------
ELECTRICAL EQUIPMENT -- 0.7%
Applied Materials Inc. *........................................................... 6,000 215,625
Harris Corp. Delaware.............................................................. 7,600 521,550
----------------
737,175
----------------
ELECTRONICS -- 6.0%
General Electric Co................................................................ 23,400 2,313,675
Hewlett Packard Co................................................................. 23,600 1,185,900
Intel Corp......................................................................... 19,700 2,579,469
----------------
6,079,044
----------------
ENTERTAINMENT -- 1.1%
Walt Disney Co..................................................................... 15,681 1,091,790
----------------
FINANCIAL SERVICES -- 5.3%
American General Corp.............................................................. 12,300 502,762
Beneficial Corp.................................................................... 11,700 741,487
Federal National Mortgage Assn..................................................... 26,700 994,575
First Bank Systems Inc............................................................. 11,600 791,700
Merrill Lynch & Co. Inc............................................................ 15,000 1,222,500
Morgan Stanley Group Inc........................................................... 12,400 708,350
Salomon Inc........................................................................ 8,700 409,988
----------------
5,371,362
----------------
FOODS -- 1.6%
ConAgra Inc........................................................................ 10,400 517,400
CPC International Inc.............................................................. 7,400 573,500
Sara Lee Corp...................................................................... 15,800 588,550
----------------
1,679,450
----------------
GAS & PIPELINE UTILITIES -- 0.5%
Williams Cos. Inc.................................................................. 12,450 466,875
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
64
<PAGE>
PROTECTIVE SELECT EQUITY FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- --------------------------------------------------------------------------------------- ----------- ----------------
COMMON STOCK (CONTINUED)
<S> <C> <C>
GAS EXPLORATION -- 0.6%
Kerr McGee Corp.................................................................... 8,300 $ 597,600
----------------
HEALTH CARE -- 1.9%
American Home Products Corp........................................................ 13,100 767,987
Columbia/HCA Healthcare Corp....................................................... 16,800 684,600
Manor Care Inc..................................................................... 18,100 488,700
----------------
1,941,287
----------------
HOUSEHOLD PRODUCTS -- 1.9%
Corning Inc........................................................................ 10,500 485,625
Procter & Gamble Co................................................................ 13,400 1,440,500
----------------
1,926,125
----------------
INDUSTRIAL MACHINERY -- 0.4%
Tecumseh Products Co............................................................... 7,600 436,050
----------------
INSURANCE -- 5.5%
Allstate Corp...................................................................... 12,405 717,939
American International Group Inc................................................... 11,300 1,223,225
CIGNA Corp......................................................................... 6,200 847,075
Loews Corp......................................................................... 4,400 414,700
Safeco Corp........................................................................ 20,800 820,300
Travelers Inc...................................................................... 34,466 1,563,895
----------------
5,587,134
----------------
MACHINERY -- 1.8%
Case Corp.......................................................................... 11,000 599,500
Caterpillar Inc.................................................................... 16,400 1,234,100
----------------
1,833,600
----------------
MAJOR REGIONAL BANKS -- 6.2%
Banc One Corp...................................................................... 15,290 657,470
Bank of New York Co. Inc........................................................... 13,200 445,500
BankAmerica Corp................................................................... 16,400 1,635,900
Citicorp .......................................................................... 9,100 937,300
First Chicago NBD Corp............................................................. 11,000 591,250
NationsBank Corp................................................................... 15,400 1,505,350
Wells Fargo & Co................................................................... 1,800 485,550
----------------
6,258,320
----------------
MANUFACTURING -- 1.3%
Dover Corp......................................................................... 9,400 472,350
Tyco International Ltd............................................................. 16,600 877,725
----------------
1,350,075
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
65
<PAGE>
PROTECTIVE SELECT EQUITY FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- --------------------------------------------------------------------------------------- ----------- ----------------
COMMON STOCK (CONTINUED)
<S> <C> <C>
MEDICAL PRODUCTS & SUPPLIES -- 0.5%
Medtronic Inc...................................................................... 7,000 $ 476,000
----------------
OFFICE EQUIPMENT & SUPPLIES -- 0.5%
Xerox Corp......................................................................... 8,800 463,100
----------------
OIL -- 11.9%
Amoco Corp......................................................................... 8,600 692,300
Atlantic Richfield Co.............................................................. 14,200 1,881,500
Columbia Gas Systems Inc........................................................... 18,100 1,151,613
Exxon Corp......................................................................... 23,900 2,342,200
Mobil Corp......................................................................... 4,700 574,575
Phillips Petroleum Co.............................................................. 9,700 429,225
Royal Dutch Petroleum Co........................................................... 9,700 1,656,275
Texaco Inc......................................................................... 21,200 2,080,250
Unocal Corp........................................................................ 30,900 1,255,312
----------------
12,063,250
----------------
PACKAGING & CONTAINERS -- 0.8%
Avery Dennison Corp................................................................ 22,600 799,475
----------------
PAPER AND FOREST PRODUCTS -- 1.9%
Champion International Corp........................................................ 14,000 605,500
Georgia Pacific Corp............................................................... 11,000 792,000
Mead Corp.......................................................................... 8,600 499,875
----------------
1,897,375
----------------
PHARMACEUTICALS -- 6.0%
Bristol Myers Squibb Co............................................................ 14,100 1,533,375
Eli Lilly & Co..................................................................... 10,600 773,800
Johnson & Johnson Co............................................................... 23,400 1,164,150
Merck & Co. Inc.................................................................... 13,800 1,093,650
Pfizer Inc......................................................................... 8,800 729,300
Schering Plough Corp............................................................... 13,200 854,700
----------------
6,148,975
----------------
PHOTOGRAPHY -- 0.6%
Eastman Kodak Co................................................................... 7,000 561,750
----------------
RESTAURANTS -- 0.5%
McDonald's Corp.................................................................... 12,200 552,050
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
66
<PAGE>
PROTECTIVE SELECT EQUITY FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- --------------------------------------------------------------------------------------- ----------- ----------------
COMMON STOCK (CONTINUED)
<S> <C> <C>
RETAIL -- 4.8%
Dayton Hudson Corp................................................................. 22,200 $ 871,350
Dillard Dept. Stores Inc........................................................... 13,100 404,463
Gap Inc............................................................................ 14,600 439,825
Mercantile Stores Inc.............................................................. 11,800 582,625
Safeway Inc. *..................................................................... 13,000 555,750
Sears Roebuck & Co................................................................. 17,300 797,962
TJX Cos. Inc....................................................................... 12,700 601,662
Wal-Mart Stores Inc................................................................ 26,800 613,050
----------------
4,866,687
----------------
TELECOMMUNICATIONS -- 3.4%
3Com Corp. *....................................................................... 8,000 587,000
GTE Corp........................................................................... 27,300 1,242,150
Lucent Technologies Inc............................................................ 8,847 409,174
Sprint Corp........................................................................ 29,800 1,188,275
----------------
3,426,599
----------------
TELEPHONE -- 1.4%
Airtouch Communications Inc. *..................................................... 19,600 494,900
Ameritech Corp..................................................................... 15,400 933,625
----------------
1,428,525
----------------
TEXTILE -- 1.3%
Liz Claiborne...................................................................... 12,500 482,813
Nike Inc........................................................................... 14,400 860,400
----------------
1,343,213
----------------
TIRES & RUBBER -- 0.5%
Goodyear Tire & Rubber Co.......................................................... 9,600 493,200
----------------
TOBACCO -- 1.7%
Philip Morris Cos. Inc............................................................. 15,700 1,768,213
----------------
TOTAL COMMON STOCK -- (Cost $77,160,237)........................................... 96,513,561
----------------
DEPOSITORY RECEIPTS -- 1.8%
ELECTRIC COMPANIES -- 0.7%
Empresa Nacional De Electric....................................................... 10,400 728,000
----------------
PETROLEUM SERVICES -- 1.1%
Norsk Hydro AS..................................................................... 20,800 1,115,400
----------------
TOTAL DEPOSITORY RECEIPTS -- (Cost $1,315,401)..................................... 1,843,400
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
67
<PAGE>
PROTECTIVE SELECT EQUITY FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
SECURITY DESCRIPTION (000) VALUE
- --------------------------------------------------------------------------------------- ----------- ----------------
SHORT TERM INVESTMENTS -- 3.1%
<S> <C> <C>
REPURCHASE AGREEMENT -- 3.0%
State Street Bank and Trust Co.
6.250%, 01/02/1997, maturity value of $3,072,066,
dated 12/31/1996, (Collateralized by $3,105,000 United States
Treasury Note, 6.00%, 5/31/1998, with a value of $3,132,507)**.................... $ 3,071 $ 3,071,000
----------------
U.S. GOVERNMENT SECURITIES -- 0.1%
United States Treasury Bills
4.660%, 01/23/1997 **.......................................................... 30 29,915
4.750%, 01/23/1997 **.......................................................... 50 49,855
----------------
79,770
----------------
TOTAL SHORT TERM INVESTMENTS -- (Cost $3,150,770).................................. 3,150,770
----------------
TOTAL INVESTMENTS -- (Cost $81,626,408) -- 100.0% $ 101,507,731
----------------
----------------
OTHER INFORMATION --
</TABLE>
At December 31, 1996, the Select Equity Fund had open futures contracts as
follows:
<TABLE>
<CAPTION>
UNREALIZED
FUTURES EXPIRATION CONTRACTS MARKET VALUE GAIN
- ------------ -------------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
S & P 500 March 1997 5 $ 1,861,250 $ 15,525
</TABLE>
- ------------------------
* Denotes non-income producing security.
** Security has been pledged (in whole or in part) to cover initial margin
requirements for futures contracts.
The accompanying notes are an integral part of the financial statements.
68
<PAGE>
PROTECTIVE SMALL CAP EQUITY FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ---------------------------------------------------------------------------------------- --------- --------------
<S> <C> <C>
COMMON STOCK -- 92.8%
AUTO PARTS -- 2.7%
APS Holding Corp. *................................................................. 114,400 $ 1,773,200
--------------
BROADCAST MEDIA -- 5.5%
Groupe AB SA *...................................................................... 118,500 1,703,437
Heritage Media Corp. *.............................................................. 162,700 1,830,375
--------------
3,533,812
--------------
BUILDING CONSTRUCTION -- 1.3%
Synthetic Industries Inc. *......................................................... 52,500 853,125
--------------
BUILDING MATERIALS -- 1.7%
Congoleum Corp. *................................................................... 81,000 1,123,875
--------------
CHEMICALS -- 1.9%
Spartech Corp....................................................................... 110,600 1,230,425
--------------
COMMERCIAL SERVICES -- 1.6%
Healthcare Services Group Inc. *.................................................... 87,100 871,000
International Post Ltd. *........................................................... 30,700 141,988
--------------
1,012,988
--------------
COMMUNICATION SERVICES -- 1.6%
Pegasus Communications Corp. *...................................................... 75,800 1,042,250
--------------
COMPUTER SOFTWARE & SERVICES -- 9.1%
Black Box Corp. *................................................................... 16,100 664,125
DecisionOne Corp. *................................................................. 230,400 3,801,600
Multiple Zones International Inc. *................................................. 141,400 1,378,650
Opinion Research Corp. *............................................................ 8,600 29,025
--------------
5,873,400
--------------
ELECTRIC UTILITIES -- 2.4%
Central Maine Power Co.............................................................. 131,100 1,524,038
--------------
ELECTRICAL EQUIPMENT -- 4.6%
Amphenol Corp. *.................................................................... 52,000 1,157,000
Carbide/Graphite Group Inc. *....................................................... 91,000 1,785,875
--------------
2,942,875
--------------
ENTERTAINMENT -- 0.6%
Platinum Entertainment Inc. *....................................................... 51,000 408,000
--------------
FINANCE & BANKING -- 0.8%
Peoples Bank Bridgeport Connecticut................................................. 18,400 531,300
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
69
<PAGE>
PROTECTIVE SMALL CAP EQUITY FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ---------------------------------------------------------------------------------------- --------- --------------
COMMON STOCK (CONTINUED)
<S> <C> <C>
FOODS -- 3.7%
Alpine Lace Brands Inc. *........................................................... 96,800 $ 508,200
Dominicks Supermarkets Inc. *....................................................... 25,500 554,625
Morningstar Group Inc. *............................................................ 68,700 1,348,238
--------------
2,411,063
--------------
HOSPITAL MANAGEMENT -- 7.7%
Mariner Health Group Inc. *......................................................... 260,500 2,181,687
Sun Healthcare Group Inc. *......................................................... 156,200 2,108,700
Theratx Inc. *...................................................................... 64,200 658,050
--------------
4,948,437
--------------
HOUSEHOLD PRODUCTS -- 5.0%
American Safety Razor Co. *......................................................... 132,800 1,859,200
AMRE Inc. *......................................................................... 238,900 388,213
Samsonite Corp. *................................................................... 24,700 947,862
--------------
3,195,275
--------------
HOUSEWARES -- 0.6%
Levitz Furniture Inc. *............................................................. 131,700 411,563
--------------
INSURANCE -- 8.4%
Horace Mann Educators Corp.......................................................... 31,000 1,251,625
IPC Holdings Ltd.................................................................... 59,300 1,326,837
Old Republic International Corp..................................................... 37,000 989,750
Symons International Group Inc. *................................................... 27,800 465,650
Terra Nova (Bermuda) Holdings Ltd................................................... 65,800 1,414,700
--------------
5,448,562
--------------
LEISURE TIME -- 1.2%
Trump Hotels & Casino Resorts Inc. *................................................ 64,100 769,200
--------------
MANUFACTURING -- 2.0%
Figgie International................................................................
Holdings Inc. Class A *........................................................... 54,100 649,200
Figgie International................................................................
Holdings Inc. Class B *........................................................... 61,900 665,425
--------------
1,314,625
--------------
PACKAGING & CONTAINER -- 1.2%
Shorewood Packaging Corp. *......................................................... 41,300 805,350
--------------
REAL ESTATE -- 0.7%
Insignia Financial Group Inc. *..................................................... 18,900 425,250
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
70
<PAGE>
PROTECTIVE SMALL CAP EQUITY FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ---------------------------------------------------------------------------------------- --------- --------------
COMMON STOCK (CONTINUED)
<S> <C> <C>
RESTAURANTS -- 8.0%
IHOP Corp. *........................................................................ 90,900 $ 2,147,513
Mortons Restaurant Group Inc. *..................................................... 128,700 2,171,812
Sonic Corp. *....................................................................... 33,750 860,625
--------------
5,179,950
--------------
RETAIL -- 18.4%
Brookstone Inc. *................................................................... 46,800 491,400
Finlay Enterprises Inc. *........................................................... 86,700 1,343,850
Friedman's Inc. *................................................................... 155,800 2,298,050
General Nutrition Cos. Inc. *....................................................... 96,300 1,625,062
J. Baker Inc........................................................................ 307,700 1,634,656
Leslie's Poolmart *................................................................. 26,300 338,613
Linens 'N Things Inc. *............................................................. 116,000 2,276,500
Movado Group Inc.................................................................... 69,600 1,896,600
--------------
11,904,731
--------------
TRANSPORTATION -- 2.1%
Landstar Systems Inc. *............................................................. 57,400 1,334,550
--------------
TOTAL COMMON STOCK -- (Cost $59,042,129)............................................ 59,997,844
--------------
DEPOSITORY RECEIPTS -- 0.4%
TELECOMMUNICATIONS -- 0.4%
Vimple-Communications *............................................................. 10,200 240,975
--------------
TOTAL DEPOSITORY RECEIPTS -- (Cost $209,100)........................................ 240,975
--------------
<CAPTION>
PRINCIPAL
AMOUNT
(000)
---------
<S> <C> <C>
SHORT TERM INVESTMENT -- 6.8%
REPURCHASE AGREEMENT -- 6.8%
State Street Bank and Trust Co.
6.250%, 01/02/1997, maturity value
of $4,412,532, dated 12/31/1996, (Collateralized by $4,460,000 United States
Treasury Note, 6.000%, 5/31/1998, with a value of $4,499,511)...................... $ 4,411 $ 4,411,000
--------------
TOTAL SHORT TERM INVESTMENT -- (Cost $4,411,000).................................... 4,411,000
--------------
TOTAL INVESTMENTS -- (Cost $63,662,229) -- 100.0% $ 64,649,819
--------------
--------------
</TABLE>
- ------------------------
* Denotes non-income producing security.
The accompanying notes are an integral part of the financial statements.
71
<PAGE>
PROTECTIVE MONEY MARKET FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
SECURITY DESCRIPTION AMOUNT VALUE
- -------------------------------------------------------------------------------------- ----------- -------------
<S> <C> <C>
GOVERNMENT AND AGENCY SECURITIES -- 100.0%
FEDERAL AGENCIES -- 100.0%
Federal Farm Credit Bank
5.380%, 01/07/1997.............................................................. $ 300,000 $ 299,731
5.270%, 01/16/1997.............................................................. 300,000 299,341
5.400%, 01/22/1997.............................................................. 500,000 498,425
Federal Home Loan Bank
5.420%, 01/06/1997.............................................................. 100,000 99,925
5.240%, 01/24/1997.............................................................. 130,000 129,565
5.240%, 01/27/1997.............................................................. 500,000 498,108
5.580%, 01/27/1997.............................................................. 300,000 298,791
5.240%, 01/30/1997.............................................................. 840,000 836,454
5.340%, 02/18/1997.............................................................. 260,000 258,149
Federal Home Loan Mortgage
5.290%, 01/21/1997.............................................................. 600,000 598,237
Federal National Mortgage Assn.
5.370%, 01/14/1997.............................................................. 300,000 299,418
5.420%, 01/14/1997.............................................................. 375,000 374,266
5.330%, 01/16/1997.............................................................. 200,000 199,556
5.210%, 02/12/1997.............................................................. 100,000 99,392
5.240%, 03/06/1997.............................................................. 250,000 247,671
5.310%, 03/06/1997.............................................................. 315,000 312,026
United States Treasury Bills
4.600%, 01/09/1997.............................................................. 700,000 699,285
-------------
TOTAL GOVERNMENT AND AGENCY SECURITIES --
(Cost $6,048,340) 6,048,340
-------------
TOTAL INVESTMENTS -- (Cost $6,048,340) -- 100.0% $ 6,048,340
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
72
<PAGE>
PROTECTIVE INVESTMENT COMPANY
FINANCIAL HIGHLIGHTS
FOR A SHARE OF COMMON STOCK OUTSTANDING FOR THE PERIOD INDICATED
<TABLE>
<CAPTION>
REALIZED AND DIVIDENDS DISTRIBUTIONS
NET ASSET UNREALIZED TOTAL DIVIDENDS IN EXCESS FROM NET
VALUE AT NET GAIN (LOSS) FROM FROM NET OF NET REALIZED
BEGINNING INVESTMENT ON INVESTMENT INVESTMENT INVESTMENT CAPITAL
OF PERIOD INCOME (3)(7) INVESTMENTS (7) OPERATIONS INCOME INCOME GAINS
--------- ------------- -------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Global Income Fund
1/1/96 - 12/31/96... $ 10.074 $ 0.628 $ 0.310 $ 0.938 $ (0.628) $ (0.036) $ (0.171)
1/1/95 - 12/31/95... 9.558 0.607 0.968 1.575 (0.553) (0.323) (0.183)
3/14/94 --
12/31/94 (1)....... 10.000 0.367 (0.442) (0.075) (0.367) 0.000 0.000
International Equity
Fund
1/1/96 - 12/31/96 11.045 0.140 1.955 2.095 (0.005) 0.000 (0.270)
1/1/95 --
12/31/95........... 9.581 0.067 1.817 1.884 (0.076) (0.344) 0.000
3/14/94 --
12/31/94 (1)....... 10.000 0.048 (0.467) (0.419) 0.000 0.000 0.000
Capital Growth Fund
1/1/96 - 12/31/96... 10.613 0.134 2.209 2.343 (0.134) (0.002) (0.125)
6/13/95 --
12/31/95 (2)....... 10.000 0.080 0.613 0.693 (0.080) 0.000 0.000
Growth and Income Fund
1/1/96 - 12/31/96... 12.197 0.266 2.987 3.253 (0.266) 0.000 (1.001)
1/1/95 --
12/31/95........... 9.661 0.246 2.854 3.100 (0.246) 0.000 (0.318)
3/14/94 --
12/31/94 (1)....... 10.000 0.114 (0.300) (0.186) (0.114) 0.000 (0.031)
Select Equity Fund
1/1/96 - 12/31/96... 13.109 0.180 2.706 2.886 (0.180) 0.000 (0.378)
1/1/95 --
12/31/95........... 9.839 0.143 3.470 3.613 (0.143) 0.000 (0.200)
3/14/94 --
12/31/94 (1)....... 10.000 0.093 (0.039) 0.054 (0.093) 0.000 (0.120)
Small Cap Equity Fund
1/1/96 - 12/31/96... 9.345 0.030 1.840 1.870 (0.030) 0.000 (1.163)
1/1/95 --
12/31/95........... 8.951 0.079 0.502 0.581 (0.079) 0.000 (0.031)
3/14/94 --
12/31/94 (1)....... 10.000 0.038 (1.025) (0.987) (0.038) 0.000 (0.001)
Money Market Fund
1/1/96 - 12/31/96... 1.000 0.047 0.000 0.047 (0.047) 0.000 0.000
1/1/95 --
12/31/95........... 1.000 0.052 0.000 0.052 (0.052) 0.000 0.000
3/14/94 --
12/31/94 (1)....... 1.000 0.031 0.000 0.031 (0.031) 0.000 0.000
<CAPTION>
RATIO
DISTRIBUTIONS OF OPERATING RATIO OF NET
IN EXCESS NET ASSET NET ASSETS EXPENSES INVESTMENT
OF VALUE AT END TO AVERAGE INCOME TO PORTFOLIO
NET REALIZED TOTAL END OF TOTAL OF PERIOD NET AVERAGE TURNOVER
GAINS DISTRIBUTIONS PERIOD RETURN (4) (000) ASSETS (3) NET ASSETS RATE
------------ ------------ --------- ------------ ---------- ------------ ------------ --------
<S> <C>
Global Income Fund
1/1/96 - 12/31/96... $ 0.000 $ (0.835) $ 10.177 9.48% $ 37,675 1.10% 5.71% 214%
1/1/95 - 12/31/95... 0.000 (1.059) 10.074 16.94 31,085 1.10 5.94 295
3/14/94 --
12/31/94 (1)....... 0.000 (0.367) 9.558 (0.74) 17,281 1.10(5) 5.58(5) 210(6)
International Equity
Fund
1/1/96 - 12/31/96 0.000 (0.275) 12.865 19.00 96,736 1.10 0.52 38
1/1/95 --
12/31/95........... 0.000 (0.420) 11.045 19.66 58,842 1.10 0.96 40
3/14/94 --
12/31/94 (1)....... 0.000 (0.000) 9.581 (4.18) 27,385 1.10(5) 1.25(5) 33(6)
Capital Growth Fund
1/1/96 - 12/31/96... (0.048) (0.309) 12.647 22.05 30,299 0.80 1.54 35
6/13/95 --
12/31/95 (2)....... 0.000 (0.080) 10.613 6.93 10,716 0.80(5) 2.57(5) 5(6)
Growth and Income Fund
1/1/96 - 12/31/96... 0.000 (1.267) 14.183 26.82 210,587 0.80 2.11 49
1/1/95 --
12/31/95........... 0.000 (0.564) 12.197 32.29 128,076 0.80 2.36 55
3/14/94 --
12/31/94 (1)....... (0.008) (0.153) 9.661 (1.86) 42,305 0.80(5) 2.21(5) 36(6)
Select Equity Fund
1/1/96 - 12/31/96... 0.000 (0.558) 15.437 21.94 101,624 0.80 1.44 34
1/1/95 --
12/31/95........... 0.000 (0.343) 13.109 36.73 56,723 0.80 1.69 60
3/14/94 --
12/31/94 (1)....... (0.002) (0.215) 9.839 0.53 17,717 0.80(5) 2.44(5) 56(6)
Small Cap Equity Fund
1/1/96 - 12/31/96... 0.000 (1.193) 10.022 20.22 64,433 0.80 0.31 100
1/1/95 --
12/31/95........... (0.077) (0.187) 9.345 6.46 43,830 0.80 1.09 60
3/14/94 --
12/31/94 (1)....... (0.023) (0.062) 8.951 (9.87) 21,813 0.80(5) 1.07(5) 17(6)
Money Market Fund
1/1/96 - 12/31/96... 0.000 (0.047) 1.000 4.82 6,121 0.60 4.72 N/A
1/1/95 --
12/31/95........... 0.000 (0.052) 1.000 5.32 5,070 0.60 5.19 N/A
3/14/94 --
12/31/94 (1)....... 0.000 (0.031) 1.000 3.14 3,618 0.60(5) 3.80(5) N/A
<CAPTION>
AVERAGE
COMMISSION
RATE (7)
--------
Global Income Fund
1/1/96 - 12/31/96... N/A
1/1/95 - 12/31/95... --
3/14/94 --
12/31/94 (1)....... --
International Equity
Fund
1/1/96 - 12/31/96 .032
1/1/95 --
12/31/95........... --
3/14/94 --
12/31/94 (1)....... --
Capital Growth Fund
1/1/96 - 12/31/96... .058
6/13/95 --
12/31/95 (2)....... --
Growth and Income Fund
1/1/96 - 12/31/96... .058
1/1/95 --
12/31/95........... --
3/14/94 --
12/31/94 (1)....... --
Select Equity Fund
1/1/96 - 12/31/96... .054
1/1/95 --
12/31/95........... --
3/14/94 --
12/31/94 (1)....... --
Small Cap Equity Fund
1/1/96 - 12/31/96... .049
1/1/95 --
12/31/95........... --
3/14/94 --
12/31/94 (1)....... --
Money Market Fund
1/1/96 - 12/31/96... N/A
1/1/95 --
12/31/95........... --
3/14/94 --
12/31/94 (1)....... --
</TABLE>
- ----------------------------------
(1) Investment operations commenced on March 14, 1994.
(2) Investment operations commenced on June 13, 1995.
(3) Net Investment Income and Ratio of Operating Expenses to Average Net Assets
is after reimbursement of certain fees and expenses by Protective Life. Had
Protective Life not undertaken to reimburse expenses related to the Funds,
net investment income per share and the ratio of operating expenses to
average net assets would have been as follows: For the year ended December
31, 1995: Global Income Fund, $0.577 and 1.50%; International Equity Fund,
$0.032 and 1.55%; Capital Growth Fund, $0.055 and 1.62%; Growth and Income
Fund, $0.236 and 0.93%; Select Equity Fund, $0.125 and 1.01%; Small Cap
Equity Fund, $.065 and 1.00%; and Money Market Fund, $0.046 and 1.17%,
respectively. For the period ended December 31, 1994: Global Income Fund,
$0.320 and 2.12%; International Equity Fund, $0.004 and 2.24%; Growth and
Income Fund, $0.097 and 1.31%; Select Equity Fund, $0.055 and 1.81%; Small
Cap Equity Fund, $0.009 and 1.62%; and Money Market Fund, $0.018 and 2.24%,
respectively.
(4) Total return is calculated assuming a purchase of shares at net asset value
per share on the first day and a sale at net asset value per share on the
last day of each period reported. Distributions are assumed, for the
purposes of this calculation, to be reinvested at the net asset value per
share on the respective payment dates of each Fund. Total return for a
period of less than one year is not annualized.
(5) Annualized.
(6) Non-Annualized.
(7) The per share computation is a mathematical computation which may appear
inconsistent with the statement of operations.
73
<PAGE>
PROTECTIVE INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE A -- ORGANIZATION
Protective Investment Company (the "Company") was incorporated in the State
of Maryland on September 2, 1993 as an open-end management investment company.
The Company offers seven separately managed pools of assets which have differing
investment objectives and policies. The Company currently issues shares in seven
funds: Global Income Fund, International Equity Fund, Capital Growth Fund,
Growth and Income Fund, Select Equity Fund, Small Cap Equity Fund and Money
Market Fund (individually a "Fund" and collectively the "Funds"). The Company
had no operations prior to March 2, 1994, other than those relating to
organizational matters. The initial capital contribution of $60,000, $10,000 per
class, resulting in 1,000 shares being issued by the Global Income Fund,
International Equity Fund, Growth and Income Fund, Select Equity Fund and Small
Cap Equity Fund and 10,000 shares being issued by the Money Market Fund, was
provided on March 2, 1994 by Protective Life Insurance Company. The Company
commenced investment operations on March 14, 1994. On June 13, 1995 the Capital
Growth Fund commenced investment operations by issuing 100,000 shares of stock
to Protective Life Insurance Company ("Protective Life") in exchange for an
initial contribution of $1,000,000.
The Company offers each class of its stock to separate accounts of
Protective Life as funding vehicles for certain variable annuity and variable
life contracts issued by Protective Life through separate accounts.
NOTE B -- SIGNIFICANT ACCOUNTING POLICIES
The accounting policies are in conformity with generally accepted accounting
principles for investment companies. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from these estimates.
The following is a summary of significant accounting policies followed by the
Company in the preparation of its financial statements.
VALUATION OF INVESTMENTS -- The Company's portfolio securities traded on a
national securities exchange are valued at the last sale price, or, if no sale
occurs, at the mean between the closing bid and closing asked prices. Portfolio
securities traded over-the-counter are valued at the last sale price, or, if no
sale occurs, at the mean between the last bid and asked prices. Debt securities
with a remaining maturity of 61 days or more are valued on the basis of
dealer-supplied quotations or by a pricing service selected by Goldman Sachs
Asset Management, investment adviser to the Company, and approved by the board
of directors of the Company. Short-term securities and debt securities with a
remaining maturity of 60 days or less are valued at their amortized cost which
approximates market value. Options and futures contracts are valued at the last
sale price on the market where any such options or futures contracts are
principally traded. Options traded over-the-counter are valued based upon prices
provided by market makers in such securities or dealers in such currencies.
Securities for which current market quotations are unavailable or for which
quotations are not deemed by the investment adviser to be representative of
market values are valued at fair value as determined in good faith pursuant to
procedures established by the board of directors.
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
portfolio securities prices are furnished by quotation services expressed in the
local currency's value and are translated into U.S. dollars at the current rate
of exchange.
74
<PAGE>
PROTECTIVE INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE B -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REPURCHASE AGREEMENTS -- In connection with transactions in repurchase
agreements, the Company's custodian takes possession of the underlying
collateral securities, the value or market price of which is at least equal to
the principal amount, including interest, of the repurchase transaction. To the
extent that any repurchase transaction exceeds one business day, 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
Fund 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 delay due to legal
proceedings.
INVESTMENT TRANSACTIONS -- Investment security transactions are recorded on
trade date. Realized gains and losses from security transactions are determined
on the basis of identified cost.
INVESTMENT INCOME -- Dividend income is recorded on the ex-dividend date, or, in
the case of dividend income on foreign securities, on the ex-dividend date or
when the Fund becomes aware of its declaration. Interest income is recorded on
the accrual basis.
FOREIGN CURRENCY TRANSLATIONS -- The records of the Funds are maintained in U.S.
dollars. Foreign currency amounts are translated into U.S. dollars at a current
rate of exchange of such currency to determine the value of investments, other
assets and liabilities on the date of any determination of net asset value of
the Funds. Purchases and sales of securities and income and expenses are
converted at the prevailing rate of exchange on the respective dates of such
transactions. Net realized gain or loss on foreign currency includes net
realized currency gains and losses recognized between accrual and payment dates.
Unrealized currency gains and losses on securities held are not segregated for
financial statement presentation.
Upon the purchase or sale of a security denominated in a foreign currency,
the Funds may enter into a foreign currency exchange contract for the purchase
or sale, for a fixed amount of U.S. dollars, of an amount of the foreign
currency required to settle the security transaction. Accordingly, the Company
would not realize currency gains or losses between the trade and settlement
dates on such security transactions.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Funds on each day and the resulting net unrealized
appreciation, depreciation and related net receivable or payable amounts are
determined by using forward currency exchange rates supplied by a quotation
service.
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 the Funds as an unrealized gain or loss. A Forward
may be closed prior to the contractual settlement date by entering into an
offsetting position in the same currency with the same settlement terms. The
unrealized gain or loss resulting from the offsetting transaction is not
realized until the contractual settlement date. On the contractual settlement
date the Fund recognizes a realized gain or loss equal to the difference between
the value of the Forward when entered into and the value of the Forward on the
contractual settlement date. The Funds could be exposed to risk if a
counterparty is unable to meet the terms of the contract or if the value of the
currency changes unfavorably. The Funds may enter into Forwards in connection
with
75
<PAGE>
PROTECTIVE INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE B -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
planned purchases and sales of securities, to hedge specific receivables or
payables against changes in future exchange rates, to hedge the U.S. dollar
value of portfolio securities denominated in a foreign currency and, in certain
circumstances, to increase the Funds' total returns.
CALL AND PUT OPTIONS -- A call option written by a Fund obligates the Fund to
sell a specified currency or security to the option holder at a specified price
at any time before the expiration date. A put option written by a Fund obligates
the Fund to purchase a specified currency or security from the option holder at
a specified price at any time before the expiration date. These transactions
involve a risk that a Fund may, upon exercise of the option, be required to sell
currency or securities at a price that is less than its market value or be
required to purchase currency or securities at a price that exceeds its market
value. A Fund may also realize gains or losses by entering into closing purchase
transactions identical to call or put options that have been written by the Fund
in order to terminate its obligation under a call or put option. In determining
the amount of gain or loss realized, the option premium paid and related
transactions costs are added to the exercise price. The Funds enter into option
transactions to hedge against the fluctuation in a security's value, an index's
value or a foreign currency's value or to seek to increase the Funds' total
returns.
FUTURES CONTRACTS -- In order to gain exposure to or protect against declines in
security values, the Funds may buy and sell futures contracts. The Funds may
also buy or write put or call options on these futures contracts. A Fund
generally sells futures contracts to hedge against declines in the value of
portfolio securities. A Fund may also purchase futures contracts to gain
exposure to market changes as it may be more efficient or cost effective than
actually buying securities. The Funds segregate assets to cover its commitments
under such futures contracts. Upon entering into a futures contract, a Fund is
required to deposit either cash or securities in an amount (initial margin)
equal to a certain percentage of the contract value. Subsequent payments
(variation margin) are made or received by the Fund each day. The variation
margin payments are equal to the daily changes in the contract value and are
recorded as unrealized gains and losses. The Funds recognize a realized gain or
loss when the contract is closed. Risks of entering into futures contracts (and
related options) include the possibility that there may be an illiquid market
and that a change in the value of the contract or option may not correlate with
changes in the value of the underlying securities.
EXPENSES -- Expenses directly attributable to a Fund are charged to that Fund.
Expenses not directly attributable to a Fund are, allocated on the basis of
relative average net assets, or otherwise allocated among the Funds as the board
of directors may direct or approve.
DISTRIBUTIONS -- Distributions from net investment income are declared and
distributed at least annually for International Equity Fund, Global Income Fund,
Growth and Income Fund, Capital Growth Fund, Select Equity Fund and Small Cap
Equity Fund; and declared daily and distributed monthly for Money Market Fund.
Distributions from net realized gains, if any, are declared and distributed at
least annually. Distributions are recorded on the ex-dividend date.
FEDERAL INCOME TAXES -- Each Fund of the Company is treated as a separate entity
for federal tax purposes. Each Fund intends to qualify each year as a regulated
investment company under Subchapter M of the Internal Revenue Code, as amended.
By so qualifying, the Funds will not be subject to federal income taxes to the
extent that they distribute all of their taxable income, including realized
capital gains. In addition, by distributing during each calendar year
substantially all of their net investment income, capital gains and certain
other amounts, if any, the Funds will not be subject to a federal excise tax.
Income distributions and capital gains distributions of a Fund are determined in
76
<PAGE>
PROTECTIVE INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE B -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for futures and options, foreign currency transactions and losses
deferred due to wash sales. Any permanent book and tax basis differences at
fiscal year-end have been reclassified to reflect the tax characterization.
NOTE C -- AGREEMENTS AND FEES
The Company has entered into an investment management agreement with
Investment Distributors Advisory Services, Inc. (the "Investment Manager"), a
wholly-owned subsidiary of Protective Life Corporation, under which the Company
agrees to pay for business management and administrative services furnished by
the Investment Manager. For its services to the Company, the Investment Manager
receives a monthly management fee based on the average daily net assets of each
Fund at the following annual rates: Global Income Fund, 1.10%; International
Equity Fund, 1.10%; Capital Growth Fund, .80%; Growth and Income Fund, .80%;
Select Equity Fund, .80%; Small Cap Equity Fund, .80%; and Money Market Fund,
.60%.
In order to limit expenses, Protective Life has voluntarily undertaken to
pay certain operating expenses of the Company or of any Fund to the extent that
such expenses (excluding brokerage or other portfolio transaction expenses or
expenses of litigation, indemnification, taxes or other extraordinary expenses,
as accrued for each Fund) exceed the following percentages of that Fund's
estimated average daily net assets on an annualized basis: Global Income Fund,
1.10%; International Equity Fund, 1.10%; Capital Growth Fund, .80%; Growth and
Income Fund, .80%; Select Equity Fund, .80%; Small Cap Equity Fund, .80%; and
Money Market Fund, .60%. Protective Life may terminate its obligations to pay
such expenses upon 120 days notice to the Company.
Goldman Sachs Asset Management acts as the investment adviser (the
"Adviser") of Capital Growth Fund, Growth and Income Fund, Money Market Fund,
Select Equity Fund and Small Cap Equity Fund. Goldman Sachs Asset
Management-International acts as the Adviser to Global Income Fund and
International Equity Fund. Each Adviser has entered into an investment advisory
agreement for each Fund with the Investment Manager under which the Adviser
manages the investment portfolios of the Funds of which it is Adviser. As
compensation for its services, the Advisers receive a monthly fee from the
Investment Manager based on the average daily net assets of each Fund at the
following annual rates: Global Income Fund and International Equity Fund, .40%
of the first $100 million, .30% of the next $100 million, and .25% of assets in
excess of $200 million; Capital Growth Fund, Growth and Income Fund, Select
Equity Fund and Small Cap Equity Fund, .40% of the first $100 million, .30% of
the next $100 million, and .20% of assets in excess of $200 million; and Money
Market Fund, .35% of the first $100 million, .25% of the next $100 million, and
.15% of assets in excess of $200 million.
Directors of the Company who are not interested persons receive an annual
fee of $2,000 and $2,000 for each meeting attended.
77
<PAGE>
PROTECTIVE INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE D -- INVESTMENT TRANSACTIONS
Purchases and proceeds from sales and maturities of investments, excluding
short-term securities, for the year ended December 31, 1996, 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>
Global Income Fund.............................. $ 49,589,651 $ 14,574,059 $ 50,702,520 $ 11,485,465
International Equity Fund....................... 50,605,453 0 28,657,447 0
Capital Growth Fund............................. 21,028,505 98,790 6,068,785 160,000
Growth and Income Fund.......................... 121,549,411 0 74,921,467 0
Select Equity Fund.............................. 54,746,265 79,568 26,153,024 0
Small Cap Equity Fund........................... 64,954,592 0 49,360,688 0
</TABLE>
Purchases and sales, including maturities, of short-term securities by the
Money Market Fund for the year ended December 31, 1996 were $51,353,764 and
$50,660,762, respectively.
The identified cost of investments in securities owned by each Fund for
federal income tax purposes and their respective gross unrealized appreciation
and depreciation at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED NET UNREALIZED
IDENTIFIED ----------------------------- APPRECIATION
COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
---------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Global Income Fund.............................. $ 36,210,222 $ 898,024 $ 314,110 $ 583,914
International Equity Fund....................... 79,882,085 19,968,226 3,598,249 16,369,977
Capital Growth Fund............................. 26,499,505 4,224,520 386,680 3,857,840
Growth and Income Fund.......................... 174,614,480 37,312,187 2,254,334 35,057,853
Select Equity Fund.............................. 81,640,681 20,719,913 852,863 19,867,050
Small Cap Equity Fund........................... 63,662,229 8,425,324 7,437,734 987,590
Money Market Fund............................... 6,048,340 0 0 0
</TABLE>
For the year ended December 31, 1996, Goldman Sachs, the Funds' Advisor,
earned approximately $2,000, $10,000, $21,000, and $4,000 of brokerage
commissions from portfolio transactions executed on behalf of the International
Equity Fund, Capital Growth Fund, Growth and Income Fund, and Small Cap Equity
Funds, respectively.
NOTE E -- SHAREHOLDER TRANSACTIONS
The authorized capital stock of the Company consists of 1 billion shares,
par value $.001 per share. 700 million of the authorized shares have been
divided into, and may be issued in, seven designated classes as follows: Global
Income Fund, 100 million shares; International Equity Fund, 100 million shares;
Capital Growth Fund, 100 million shares; Growth and Income Fund, 100 million
shares; Select Equity Fund, 100 million shares; Small Cap Equity Fund, 100
million shares; and Money Market Fund, 100 million shares.
78
<PAGE>
PROTECTIVE INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE E -- SHAREHOLDER TRANSACTIONS (CONTINUED)
Transactions in shares were as follows:
<TABLE>
<CAPTION>
GLOBAL INCOME FUND GLOBAL INCOME FUND
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------- ---------------------------
SHARES DOLLARS SHARES DOLLARS
---------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Shares sold or exchanged in................... 745,616 $ 7,605,827 1,255,603 $ 12,700,315
Shares issued to shareholders in reinvestment
of dividends................................. 283,177 2,871,192 276,359 2,785,152
Shares redeemed or exchanged out.............. (412,374) (4,218,239) (254,564) (2,579,002)
---------- -------------- ----------- --------------
Net increase.................................. 616,419 $ 6,258,780 1,277,398 $ 12,906,465
---------- -------------- ----------- --------------
---------- -------------- ----------- --------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND INTERNATIONAL EQUITY FUND
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------- ---------------------------
SHARES DOLLARS SHARES DOLLARS
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Shares sold or exchanged in................. 2,476,463 $ 29,939,941 2,601,322 $ 26,748,946
Shares issued to shareholders in
reinvestment of dividends.................. 159,256 2,022,021 195,153 2,156,956
Shares redeemed or exchanged out............ (443,758) (5,461,001) (327,344) (3,357,312)
----------- -------------- ----------- --------------
Net increase................................ 2,191,961 $ 26,500,961 2,469,131 $ 25,548,590
----------- -------------- ----------- --------------
----------- -------------- ----------- --------------
</TABLE>
<TABLE>
<CAPTION>
CAPITAL GROWTH FUND CAPITAL GROWTH FUND
YEAR ENDED JUNE 13, 1995* TO
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------- ---------------------------
SHARES DOLLARS SHARES DOLLARS
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Shares sold or exchanged in.................... 1,471,196 $ 16,890,584 1,020,331 $ 10,646,035
Shares issued to shareholders in reinvestment
of dividends.................................. 56,365 717,339 7,542 80,037
Shares redeemed or exchanged out............... (141,415) (1,662,033) (18,159) (190,142)
----------- -------------- ----------- --------------
Net increase................................... 1,386,146 $ 15,945,890 1,009,714 $ 10,535,930
----------- -------------- ----------- --------------
----------- -------------- ----------- --------------
</TABLE>
- ------------------------
* Commencement of investment operations
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND GROWTH AND INCOME FUND
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------------- ---------------------------
SHARES DOLLARS SHARES DOLLARS
------------ --------------- ----------- --------------
<S> <C> <C> <C> <C>
Shares sold or exchanged in................ 4,215,959 $ 55,439,807 6,106,217 $ 69,914,606
Shares issued to shareholders in
reinvestment of dividends................. 1,221,625 17,189,194 431,665 5,188,967
Shares redeemed or exchanged out........... (1,090,605) (14,745,094) (415,846) (4,767,529)
------------ --------------- ----------- --------------
Net increase............................... 4,346,979 $ 57,883,907 6,122,036 $ 70,336,044
------------ --------------- ----------- --------------
------------ --------------- ----------- --------------
</TABLE>
79
<PAGE>
PROTECTIVE INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE E -- SHAREHOLDER TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT EQUITY FUND SELECT EQUITY FUND
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------- ---------------------------
SHARES DOLLARS SHARES DOLLARS
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Shares sold or exchanged in................. 2,458,365 $ 35,167,409 2,599,094 $ 31,044,432
Shares issued to shareholders in
reinvestment of dividends.................. 225,190 3,539,193 109,717 1,438,293
Shares redeemed or exchanged out............ (427,469) (6,170,982) (182,611) (2,142,405)
----------- -------------- ----------- --------------
Net increase................................ 2,256,086 $ 32,535,620 2,526,200 $ 30,340,320
----------- -------------- ----------- --------------
----------- -------------- ----------- --------------
</TABLE>
<TABLE>
<CAPTION>
SMALL CAP EQUITY FUND SMALL CAP EQUITY FUND
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------- ---------------------------
SHARES DOLLARS SHARES DOLLARS
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Shares sold or exchanged in................. 1,711,568 $ 18,377,940 2,572,788 $ 23,875,696
Shares issued to shareholders in
reinvestment of dividends.................. 690,344 6,817,211 91,938 858,963
Shares redeemed or exchanged out............ (662,561) (6,957,605) (411,612) (3,846,820)
----------- -------------- ----------- --------------
Net increase................................ 1,739,351 $ 18,237,546 2,253,114 $ 20,887,839
----------- -------------- ----------- --------------
----------- -------------- ----------- --------------
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET FUND MONEY MARKET FUND
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------- ----------------------------
SHARES DOLLARS SHARES DOLLARS
-------------- --------------- ------------ --------------
<S> <C> <C> <C> <C>
Shares sold or exchanged in.............. 10,940,141 $ 10,940,141 8,282,138 $ 8,282,138
Shares issued to shareholders in
reinvestment of dividends............... 249,104 249,104 249,594 249,594
Shares redeemed or exchanged out......... (10,138,310) (10,138,310) (7,080,495) (7,080,495)
-------------- --------------- ------------ --------------
Net increase............................. 1,050,935 $ 1,050,935 1,451,237 $ 1,451,237
-------------- --------------- ------------ --------------
-------------- --------------- ------------ --------------
</TABLE>
NOTE F -- TAX INFORMATION NOTICE
For Federal income tax purposes, the following information is furnished with
respect to the distributions of the Funds for its fiscal year ended December 31,
1996; which designates long term capital gain dividends paid.
<TABLE>
<CAPTION>
LONG TERM
CAPITAL GAIN
DIVIDENDS PAID
--------------
<S> <C>
Global Income Fund................................................................................ $ 116,486
International Equity Fund......................................................................... 983,872
Capital Growth Fund............................................................................... 80,173
Growth and Income Fund............................................................................ 5,648,102
Select Equity Fund................................................................................ 1,692,447
Small Cap Equity Fund............................................................................. 595,694
</TABLE>
80
<PAGE>
PROTECTIVE INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE G -- FORWARD FOREIGN CURRENCY CONTRACTS
At December 31, 1996, outstanding forward exchange currency contracts, which
contractually obligate the Fund to deliver currencies at a specified date, were
as follows:
GLOBAL INCOME FUND
<TABLE>
<CAPTION>
U.S. $ COST
ON 12/31/96 UNREALIZED
ORIGINATION U.S. $ APPRECIATION
DATE VALUE (DEPRECIATION)
------------ ------------ ---------------
<S> <C> <C> <C>
FOREIGN CURRENCY PURCHASE CONTRACTS
AUD, expiring 01/30/1997 (1 contract)............................. $ 1,560,261 $ 1,553,687 $ 6,574
CAD, expiring 02/19/1997 (1 contract)............................. 838,786 829,227 9,559
DEM, expiring 01/29/1997-02/27/1997 (5 contracts)................. 6,883,858 6,861,294 22,564
ESP, expiring 01/16/1997 (1 contract)............................. 930,244 926,222 4,022
GBP, expiring 02/14/1997 (2 contracts)............................ 2,117,522 2,197,580 (80,058)
IEP, expiring 01/08/1997 (1 contract)............................. 854,943 906,242 (51,299)
ITL, expiring, 01/29/1997 (3 contracts)........................... 2,049,292 2,068,009 (18,717)
JPY, expiring 01/24/1997 (2 contracts)............................ 3,298,170 3,171,155 127,015
NLG, expiring 01/09/1997 (1 contract)............................. 837,575 827,822 9,753
SEK, expiring 01/28/1997 (1 contract)............................. 586,298 567,652 18,646
------------ ------------ ---------------
19,956,949 19,908,890 48,059
---------------
Offsetting forward currency contracts not yet settled
(12 contracts)................................................... 170,979
---------------
Net Unrealized Appreciation....................................... $ 219,038
---------------
---------------
</TABLE>
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
U.S. $ COST
ON 12/31/96 UNREALIZED
ORIGINATION U.S. $ APPRECIATION
DATE VALUE (DEPRECIATION)
------------ ------------ ---------------
<S> <C> <C> <C>
FOREIGN CURRENCY PURCHASE CONTRACTS
DEM, expiring 02/27/1997 (2 contracts)............................ $ 4,656,415 $ 4,514,145 $ (142,270)
FOREIGN CURRENCY SALE CONTRACTS
DEM, expiring 01/29/1997 (1 contract)............................. 5,133,204 5,173,642 (40,438)
HKD, expiring 08/08/1997 (4 contracts)............................ 5,402,975 5,408,097 (5,122)
------------ ------------ ---------------
10,536,179 10,581,739 (45,560)
------------ ------------ ---------------
Offsetting forward currency contracts not yet settled
(4 contracts).................................................... 144,753
---------------
Net Unrealized Depreciation....................................... $ (43,077)
---------------
---------------
</TABLE>
81
<PAGE>
PROTECTIVE INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE G -- FORWARD FOREIGN CURRENCY CONTRACTS (CONTINUED)
GLOSSARY OF TERMS
<TABLE>
<S> <C> <C> <C> <C> <C>
AUD -- Australian Dollar JPY -- Japanese Yen
CAD -- Canadian Dollar NLG -- Netherlands Guilder
DEM -- Deutsche Mark IEP -- Irish Punt
ESP -- Spanish Peseta ITL -- Italian Lira
GBP -- Great British Pound SEK -- Swedish Krona
HKD -- Hong Kong Dollar USD -- United States Dollar
</TABLE>
82
<PAGE>
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
The audited statements of assets and liabilities including the schedules of
investments as of December 31, 1996 and the related statements of operations for
the period ended December 31, 1996 and the changes in net assets and financial
highlights for the periods ended December 31, 1996 & 1995 are found in Part B.
The Notes to the 1996 audited financial statements and the Independent
Accountants Report on the 1996 auditied financial statements are found in Part
B.
(b) Exhibits:
<TABLE>
<S> <C> <C>
1. Articles of Incorporation of Registrant. (1)
2. By-Laws of Registrant. (2)
3. None.
4. None.
5. (a) Investment Management Agreement Between Investment Distributors
Advisory Services, Inc. and the Registrant. (3)
(b) Investment Advisory Agreements (sub-advisory agreement) Between
Investment Distributors Advisory Services, Inc. and Goldman Sachs
Asset Management. (3)
(c) Investment Advisory Agreements (sub-advisory agreement) Between
Investment Distributors Advisory Services, Inc. and Goldman Sachs
Asset Management International. (3)
6. Participation/Distribution Agreement between Registrant, Investment
Distributors, Inc. and Protective Life Insurance Company. (3)
7. None.
8. Custody Agreement between Registrant and State Street Bank and Trust
Company. (3)
9. (a) Transfer Agency and Service Agreement between Registrant and State
Street Bank and Trust Company. (3)
(b) Subadministration Agreement Between Registrant, State Street Bank
and Trust Company and Investment Distributors Advisory Services,
Inc. (3)
10. Opinion and Consent of Sutherland, Asbill & Brennan L.L.P. (2)
11. (a) Consent of Sutherland, Asbill & Brennan L.L.P.
(b) Consent of Coopers & Lybrand L.L.P.
12. None.
13. (a) Subscription Agreement. (2)
(b) Subscription Agreement. (4)
14. None.
15. None.
16. None.
17. None.
18. Copies of Powers of Attorney.
27.1 Protective Global Income Fund Financial Data Schedule
27.2 Protective International Equity Fund Financial Data Schedule
27.3 Protective Growth and Income Fund Financial Data Schedule
27.4 Protective Select Equity Fund Financial Data Schedule
27.5 Protective Small Cap Fund Financial Data Schedule
27.6 Protective Money Market Fund Financial Data Schedule
27.7 Protective Capital Growth Fund Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated herein by reference to the initial Form N-1A registration
statement filed on November 12, 1993 (file No. 33-71592).
(2) Incorporated herein by reference to the pre-effective amendment No. 1 to the
Form N-1A registration statement filed on March 4, 1994 (file No. 33-71592).
(3) Incorporated herein by reference to the post-effective amendment No. 1 to
the Form N-1A registration statement filed on September 14, 1994 (file No.
33-71592).
(4) Incorporated herein by reference to the post-effective amendment No. 5 to
the Form N-1A registration statement filed on June 13, 1995 (file No.
33-71592).
C-1
<PAGE>
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
No person is controlled by the Registrant. All of the outstanding common
stock of the Registrant is, or will be, owned by Protective Life Insurance
Company ("Protective"), a Tennessee life insurance corporation, Protective Life
Corporation 401(k) and Stock Ownership Plan, Protective Variable Annuity
Separate Account, a separate account of Protective that is registered as a unit
investment trust under the Investment Company Act of 1940 (File Nos.
811-8108/33-70984) and Protective Variable Life Separate Account, a separate
account of Protective that is registered as a unit investment trust under the
Investment Company Act of 1940 (File Nos. 811-7337/33-61599). Protective is a
wholly-owned subsidiary of Protective Life Corporation ("PLC"), an insurance
holding corporation whose common stock is traded on the New York Stock Exchange.
Various companies controlled by Protective and PLC or otherwise affiliated with
Protective may be deemed to be under common control with the Registrant. These
companies, together with the identity of the owners of their common stock, are
set forth on the diagram following.
C-2
<PAGE>
PROTECTIVE LIFE CORPORATION
ORGANIZATIONAL CHART
as of March 19, 1997
PROTECTIVE LIFE CORPORATION
(Ultimate Controlling Person)
Delaware Corporation
TIN 95-2492236
PROTECTIVE LIFE INSURANCE COMPANY (TENNESSEE)
Parent Company Owns 100% of Stock
TIN 63-0169720
NAIC CO 68136
WISCONSIN NATIONAL LIFE INSURANCE COMPANY (WISCONSIN)
PLIC Owns 100% of Stock
TIN 39-0714280
NAIC CO 70580
PROTECTIVE LIFE INSURANCE CORPORATION OF ALABAMA (ALABAMA)
PLIC Owns 100% of Stock
TIN 63-1088714
NAIC CO 62868
EMPIRE GENERAL LIFE ASSURANCE CORPORATION (formerly, National
Old Line Insurance Company) (TENNESSEE)
PLIC Owns 100% of Stock
TIN 63-1073929
NAIC CO 94285
AMERICAN FOUNDATION LIFE INSURANCE COMPANY (ALABAMA)
PLIC Owns 100% of Voting Stock; PLC Owns 100% of
Non-Voting Preferred Stock
TIN 63-0761690
NAIC CO 88536
COMMUNITY NATIONAL ASSURANCE COMPANY (OHIO)
PLICO Owns 100% of Voting Stock
TIN 31-0628424
NAIC CO 69647
PROEQUITIES OF TEXAS, INC. (formerly Protective Assigned
Benefits Company) (TEXAS)
PLIC Owns 100% of Stock
TIN 75-2366969
CAPITAL INVESTORS LIFE INSURANCE COMPANY (ARIZONA)
PLIC Owns 100% of Stock
TIN 56-1407737
NAIC CO 62456
PROTECTIVE INVESTMENT COMPANY (MARYLAND)
PLIC Separate Account Owns 100% of Stock
TIN 52-1854793
PROTECTIVE FINANCE CORPORATION (DELAWARE)
PLIC Owns 100% of Stock
TIN 51-0372969
PROTECTIVE LIFE INSURANCE COMPANY OF KENTUCKY (KENTUCKY)
PLIC Owns 100% of Stock
TIN 61-1306729
INVESTMENT DISTRIBUTORS, INC. (TENNESSEE)
Parent Company Owns 100% of Stock
TIN 63-1100710
INVESTMENT DISTRIBUTORS ADVISORY SERVICES, INC. (TENNESSEE)
Parent Company Owns 100% of Stock
TIN 63-1100711
PES OF MARYLAND, INC. (MARYLAND)
Parent Company Owns 100% of Stock
TIN 52-1841605
PES OF OHIO, INC. (OHIO)
Parent Company Owns 100% of Stock
TIN 34-1749375
FIRST PROTECTIVE INSURANCE GROUP, INC. (ALABAMA)
Parent Company Owns 100% of Stock
TIN 63-0846761
HOTEL DEVELOPMENT COMPANY, INC. (ALABAMA)
Parent Company Owns 100% of Stock
TIN 63-0938078
PROEQUITIES, INC.
(formerly Protective Equity Services, Inc.) (ALABAMA)
Parent Company Owns 100% of Stock
TIN 63-0879387
PROTECTIVE BENEFITS COMMUNICATIONS, INC. (MISSOURI)
Parent Company Owns 100% of Stock
TIN 43-1199343
PROTECTIVE BENEFITS COMMUNICATIONS OF ALABAMA, INC. (ALABAMA)
Parent Company Owns 100% of Stock
TIN 63-1178606
PROTECTIVE BENEFITS COMMUNICATIONS OF OHIO, INC. (OHIO)
Parent Company Owns 100% of Stock
TIN 31-1474499
PROTECTIVE BENEFITS COMMUNICATIONS OF TEXAS, INC. (TEXAS)
Parent Company Owns 100% of Voting Common Stock
TIN 74-2794466
FINANCIAL PROTECTION MARKETING, INC. (formerly R.L.
Herndon & Associates, Inc. (INDIANA)
Parent Company Owns 100% of Stock
TIN 35-1349213
VOLUNTARY BENEFITS INTERNATIONAL, INC. (ALABAMA)
Parent Company Owns 100% of Stock
TIN 53-0984208
PRODUCT RESOURCE GROUP, INC. (ALABAMA)
Parent Company Owns 100% of Stock
TIN 63-1087298
SPECIALTY ASSET MANAGEMENT CORPORATION (DELAWARE)
Parent Company Owns 100% of Stock
TIN 52-1836315
PROTECTIVE ASSET MANAGEMENT, L.L.C.
(Delaware Limited Liability Company)
SAMCO has 60% Interest
TIN (applied for)
PROTECTIVE LLC HOLDING, INC. (DELAWARE)
Parent Company Owns 100% of Stock
TIN 63-1114345
PLC CAPITAL L.L.C.
(Delaware Limited Liability Company)
Class A Interest Owned by PLC; Class B Interest Owned
by Protective LLC Holding, Inc.
TIN 63-1114346
LIPPO PROTECTIVE LIFE INSURANCE COMPANY LIMITED (HONG KONG)
Parent Company Owns 50% of Stock
NATIONAL HEALTH CARE SYSTEMS OF FLORIDA, INC. (FLORIDA)
Parent Company Owns 100% of Stock
TIN 59-1597007
DENTICARE OF ARKANSAS, INC (ARKANSAS)
National Health Care Systems of Florida, Inc Owns 100% of Stock
TIN 73-1274680
DENTICARE OF OKLAHOMA, INC. (OKLAHOMA)
National Health Care Systems of Florida, Inc. Owns 100% of Stock
TIN 73-1153844
DENTICARE OF ALABAMA, INC. (ALABAMA)
National Health Care Systems of Florida, Inc. Owns 100% of Stock
TIN 59-3063687
DENTICARE, INC. (FLORIDA)
National Health Care Systems of Florida, Inc. Owns 100% of Stock
TIN 59-1652450
DENTICARE, INC. (KENTUCKY)
National Health Care Systems of Florida, Inc. Owns 100% of Stock
TIN 59-2228719
WISCONSIN DENTAL SERVICE PLAN, INC. (WISCONSIN)
National Health Care Systems of Florida, Inc. Owns 100% of Stock
TIN
PROTECTIVE REAL ESTATE HOLDINGS, INC. (DELAWARE)
Parent Company Owns 100% of Stock
TIN 52-1985171
QUICK QUOTE INSURANCE AGENCY, INC. (NEVADA)
PLC Owns 34.32% of Stock (Includes Voting Convertible
Preferred & Common)
TIN 88-0340083
C-3
<PAGE>
Item 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF RECORD HOLDERS
TITLE OF CLASS AS OF MAY 1, 1997
- ------------------------------------------------ -------------------------------
<S> <C>
Money Market Series 2
CORE U.S. Equity Series 2
Capital Growth Series 2
Small Cap Equity Series 2
International Equity Series 2
Global Income Series 2
Growth and Income Series 2
</TABLE>
Item 27. INDEMNIFICATION.
See Article X of the Registrant's Articles of Incorporation, filed as
Exhibit 1 to the initial filing of this Registration Statement, which provision
is incorporated herein by reference.
The Investment Advisory Agreements between the Investment Manager and
Goldman Sachs Asset Management and Goldman Sachs Asset Management International
all provide that the Manager will indemnify the Adviser (and its affiliates) for
all claims, actions, losses, damages, liabilities, costs, charges, counsel fees
and expenses arising out of any breach by the Manager of any representation or
agreement contained in the Advisory Agreements. The Advisory Agreements also all
provide that the Adviser will indemnify the Manager for any losses arising out
of the Adviser's disabling conduct.
The Registrant has purchased a directors and officers liability insurance
policy to insure such persons (subject to the policy's coverage limits,
exclusions and deductibles) against loss resulting from claims by reason of any
act, error, omission, misstatement, misleading statement, neglect or breach of
duty.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 ("Act") may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act, and Registrant will be governed by the final
adjudication of such issue.
Item 28.BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT MANAGER AND INVESTMENT
ADVISER.
INVESTMENT MANAGER
The Registrant's investment manager is Investment Distributors Advisory
Services, Inc. ("IDASI"). The business of Protective is summarized in item 25 of
this registration statement and in the prospectus constituting Part A under the
caption "Investment Manager" and in the statement of additional information
constituting Part B under the caption "Investment Manager," which summarizations
are incorporated by reference herein. Set forth below is a list of: (a) each
director of IDASI, (b) each principal executive officer of IDASI, and (c)
certain other officers of IDASI who may be considered to be involved in IDASI's
investment management activities.
As to each director, the list indicates business, profession, vocation or
employment of a substantial nature that such director has been, at any time
during the past two fiscal years, engaged for his or her own account or in the
capacity of director, officer, partner or trustee. Unless otherwise indicated,
officers of IDASI have no other business, profession, vocation or employment of
a substantial nature than their position at IDASI. The principal business
address of each officer of IDASI is the same as that of the Registrant.
C-4
<PAGE>
<TABLE>
<CAPTION>
ORGANIZATION AND BUSINESS
NAME POSITION ADDRESS OF ORGANIZATION
- ---------------------------- --------------------------- ------------------------------------------------------
<S> <C> <C>
R. Stephen Briggs President, Director Director
ProEquities, Inc.
2801 Highway 280 South
Birmingham, Alabama 35223
Executive Vice President
Protective Life Corporation
2801 Highway 280 South
Birmingham, Alabama 35223
Carolyn King Secretary, Chief Compliance Senior Vice President
Officer, Director Protective Life Corporation
2801 Highway 280 South
Birmingham, Alabama 35223
John O'Sullivan Treasurer, Director Vice President
Protective Life Insurance Company
2801 Highway 280 South
Birmingham, Alabama 35223
Steve M. Callaway Director Senior Associate Counsel
Protective Life Corporation
2801 Highway 280 South
Birmingham, Alabama 35223
</TABLE>
INVESTMENT ADVISER
The Registrant has two investment advisers: Goldman Sachs Asset Management
("GSAM"), a separate operating division of Goldman Sachs & Company, and Goldman
Sachs Asset Management International ("GSAMI"), an affiliate of Goldman, Sachs &
Co. The business of GSAM and GSAMI is summarized in the prospectus constituting
Part A under the caption "Advisers" and in the statement of additional
information constituting Part B under the caption "Investment Advisers," which
summarizations are incorporated by reference herein.
More information about GSAM and GSAMI, including the business and other
connections of the officers and partners of Goldman, Sachs & Co. and Goldman
Sachs Funds Management, L.P., is included in the Form ADVs for Goldman, Sachs &
Co., GSAMI, and Goldman Sachs Funds Management, L.P., respectively as currently
filed with the Securities and Exchange Commission (File Nos. 801-16048,
801-38157, and 801-37591, respectively) the text of which is incorporated herein
by reference.
C-5
<PAGE>
Item 29. PRINCIPAL UNDERWRITER.
(a)Investment Distributors, Inc. ("IDI") serves as principal underwriter for
Registrant and also acts as the principal underwriter for variable
annuity contracts issued by Protective and Protective Variable Annuity
Separate Account. IDI is a wholly-owned subsidiary of PLC.
(b)The principal business address of each director and officer of IDI is the
same as that of the Registrant. Set forth below is a list of each
director and officer of IDI.
<TABLE>
<CAPTION>
NAME POSITION WITH IDI POSITION WITH REGISTRANT
------ -------------------------------------------------- -----------------------------------
<S> <C> <C>
Briggs, R. Stephen Director, President and Chief Executive Officer Director
King, Carolyn Secretary, Chief Compliance Officer Director and Chairman and President
Ballard, Michael B. Director None
Merrill, Lawrence G. Director None
Callaway, Steve M. Director None
O'Sullivan, John Director None
</TABLE>
(c)Inapplicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the rules thereunder will be
maintained at the following offices of the Registrant, Goldman Sachs Asset
Management, Goldman Sachs Asset Management International, or State Street Bank
and Trust Company.
Protective Investment Company
2801 Highway 280 South
Birmingham, Alabama 35223
Goldman Sachs Asset Management
32 Old Slip
New York, N.Y. 10005
Goldman Sachs Asset Management International
140 Fleet Street
London EC4A 2BJ
England
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Item 31.MANAGEMENT SERVICES.
Inapplicable.
Item 32. UNDERTAKINGS.
(a)Inapplicable.
(b)Inapplicable.
(c)The Registrant undertakes to furnish, upon request and without charge, to
each person to whom a prospectus is delivered a copy of the Registrant's
latest annual report to shareholders.
C-6
<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 post-
effective amendment number 7 to the registration statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Birmingham
and State of Alabama, on the 29th day of April, 1997.
PROTECTIVE INVESTMENT COMPANY
By /s/ CAROLYN KING
-----------------------------------
Carolyn King, President
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 dates indicated.
/s/ R. STEPHEN BRIGGS April
- --------------------------------- Director 29,
R. Stephen Briggs 1997
* April
- --------------------------------- Director 29,
D. Warren Bailey 1997
/s/ CAROLYN KING President and Director April
- --------------------------------- (Principal Executive Officer) 29,
Carolyn King 1997
* April
- --------------------------------- Director 29,
Cleophus Thomas, Jr. 1997
* April
- --------------------------------- Director 29,
G. Ruffner Page, Jr. 1997
/s/ JERRY W. DEFOOR Vice President, Chief April
- --------------------------------- Accounting 29,
Jerry W. DeFoor Officer 1997
By /s/ STEVE M. CALLAWAY
- ---------------------------------
*ATTORNEY-IN-FACT
*Pursuant to a power of attorney.
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
11.(a) Consent of Sutherland, Asbill & Brennan L.L.P.
11.(b) Consent of Coopers & Lybrand L.L.P.
18. Copies of Powers of Attorney
27.1 Protective Global Income Fund Financial Data Schedule
27.2 Protective International Equity Fund Financial Data Schedule
27.3 Protective Growth and Income Fund Financial Data Schedule
27.4 Protective Select Equity Fund Financial Data Schedule
27.5 Protective Small Cap Fund Financial Data Schedule
27.6 Protective Money Market Fund Financial Data Schedule
27.7 Protective Capital Growth Fund Financial Data Schedule
</TABLE>
<PAGE>
[SUTHERLAND, ASBILL & BRENNAN L.L.P. LETTERHEAD]
April 24, 1997
Board of Directors
Protective Investment Company
2801 Highway 280 South
Birmingham, Alabama 35223
Directors:
We hereby consent to the reference to our name under the caption "Legal
Counsel" in the statement of additional information filed as part of
post-effective amendment No. 7 to the Form N-1A registration statement for
Protective Investment Company (File No. 33-71592). In giving this consent, we do
not admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act of 1933.
Sincerely,
SUTHERLAND, ASBILL & BRENNAN L.L.P.
By: /s/ STEPHEN E. ROTH
--------------------------------------
Stephen E. Roth
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Investors of
Protective Investment Company:
We consent to the inclusion in Post-Effective Amendment No. 7 to the
Registration Statement of Protective Investment Company (the "Company") on Form
N-1A (File No. 33-71592) of our report dated February 10, 1997 on our audit of
the financial statements and financial highlights of the Company for the period
ended December 31, 1996, which report is included in the Registration Statement.
We also consent to the reference to our Firm under the caption "Independent
Accountants" in the Statement of Additional Information.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
April 25, 1997
<PAGE>
EXHIBIT 18
DIRECTORS'
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned Directors
of Protective Investment Company, a Maryland corporation, ("Company") by his
execution hereof or upon an identical counterpart hereof, does hereby
constitute and appoint Carolyn King, Steve M. Callaway or Jerry W. DeFoor,
and each or any of them, his true and lawful attorney-in-fact and agent, for
him and in his name, place and stead, to execute and sign the Registration
Statement on Form N1-A to be filed by the Company with the Securities and
Exchange Commission, pursuant to the provisions of the Securities Exchange
Act of 1933 and the Investment Company Act of 1940 and, further, to execute
and sign any and all pre-effective and post-effective amendments to such
Registration Statement, and to file same, with all exhibits and schedules
thereto and all other documents in connection therewith, with the Securities
and Exchange Commission and with such state securities authorities as may be
appropriate, granting unto said attorney-in-fact and agent, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes of the undersigned might or could do in person, hereby
ratifying and confirming all the acts of said attorney-in-fact and agent or
any of them which they may lawfully do in the premises or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand
and seal this 29th day of April, 1997.
<TABLE>
<S> <C>
WITNESS TO ALL SIGNATURES:
/s/ CAROLYN KING
- --------------------------------------
Carolyn King
/s/ D. WARREN BAILEY /s/ G. RUFFNER PAGE, JR.
- -------------------------------------- ------------------------------
D. Warren Bailey G. Ruffner Page, Jr.
/s/ R. STEPHEN BRIGGS /s/ CAROLYN KING
- -------------------------------------- ------------------------------
R. Stephen Briggs Carolyn King
/s/ CLEOPHUS THOMAS, JR.
- --------------------------------------
Cleophus Thomas, Jr.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> PROTECTIVE GLOBAL INCOME
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 36,190,025
<INVESTMENTS-AT-VALUE> 36,794,136
<RECEIVABLES> 790,840
<ASSETS-OTHER> 76,841
<OTHER-ITEMS-ASSETS> 485,229
<TOTAL-ASSETS> 38,147,046
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 472,329
<TOTAL-LIABILITIES> 472,329
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 36,825,417
<SHARES-COMMON-STOCK> 3,701,969
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (57,056)
<ACCUMULATED-NET-GAINS> 81,574
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 824,782
<NET-ASSETS> 37,674,717
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,383,442
<OTHER-INCOME> (25,788)
<EXPENSES-NET> 380,629
<NET-INVESTMENT-INCOME> 1,977,025
<REALIZED-GAINS-CURRENT> 1,435,228
<APPREC-INCREASE-CURRENT> (210,436)
<NET-CHANGE-FROM-OPS> 3,201,817
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,276,232
<DISTRIBUTIONS-OF-GAINS> 594,964
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 745,616
<NUMBER-OF-SHARES-REDEEMED> 412,374
<SHARES-REINVESTED> 283,177
<NET-CHANGE-IN-ASSETS> 6,589,401
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 380,629
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 491,049
<AVERAGE-NET-ASSETS> 34,602,677
<PER-SHARE-NAV-BEGIN> 10.07
<PER-SHARE-NII> 0.63
<PER-SHARE-GAIN-APPREC> 0.31
<PER-SHARE-DIVIDEND> (0.83)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.18
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> PROTECTIVE INTERNATIONAL EQUITY
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 79,855,905
<INVESTMENTS-AT-VALUE> 96,252,062
<RECEIVABLES> 667,163
<ASSETS-OTHER> 31,742
<OTHER-ITEMS-ASSETS> 612,329
<TOTAL-ASSETS> 97,563,296
<PAYABLE-FOR-SECURITIES> 588
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 827,091
<TOTAL-LIABILITIES> 827,679
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 79,560,213
<SHARES-COMMON-STOCK> 7,519,283
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 459,577
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 362,439
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,353,388
<NET-ASSETS> 96,735,617
<DIVIDEND-INCOME> 1,267,875
<INTEREST-INCOME> 185,793
<OTHER-INCOME> (163,441)
<EXPENSES-NET> 871,940
<NET-INVESTMENT-INCOME> 418,287
<REALIZED-GAINS-CURRENT> 3,771,678
<APPREC-INCREASE-CURRENT> 9,225,010
<NET-CHANGE-FROM-OPS> 13,414,975
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 38,556
<DISTRIBUTIONS-OF-GAINS> 1,983,461
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,476,463
<NUMBER-OF-SHARES-REDEEMED> 443,758
<SHARES-REINVESTED> 159,256
<NET-CHANGE-IN-ASSETS> 37,893,919
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 871,940
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,097,378
<AVERAGE-NET-ASSETS> 79,267,354
<PER-SHARE-NAV-BEGIN> 11.05
<PER-SHARE-NII> 0.14
<PER-SHARE-GAIN-APPREC> 1.96
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.28)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.87
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> PROTECTIVE GROWTH & INCOME
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 174,511,933
<INVESTMENTS-AT-VALUE> 209,672,333
<RECEIVABLES> 1,247,465
<ASSETS-OTHER> 631
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 210,920,429
<PAYABLE-FOR-SECURITIES> 70,279
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 263,336
<TOTAL-LIABILITIES> 333,615
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 171,374,846
<SHARES-COMMON-STOCK> 14,847,879
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,051,568
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 35,160,400
<NET-ASSETS> 210,586,814
<DIVIDEND-INCOME> 4,174,432
<INTEREST-INCOME> 655,247
<OTHER-INCOME> (8,576)
<EXPENSES-NET> 1,325,914
<NET-INVESTMENT-INCOME> 3,459,189
<REALIZED-GAINS-CURRENT> 16,534,076
<APPREC-INCREASE-CURRENT> 21,786,858
<NET-CHANGE-FROM-OPS> 41,816,123
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,509,247
<DISTRIBUTIONS-OF-GAINS> 13,675,953
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,215,959
<NUMBER-OF-SHARES-REDEEMED> 1,090,605
<SHARES-REINVESTED> 1,221,625
<NET-CHANGE-IN-ASSETS> 82,510,830
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,325,914
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,450,959
<AVERAGE-NET-ASSETS> 165,739,188
<PER-SHARE-NAV-BEGIN> 12.20
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> 2.98
<PER-SHARE-DIVIDEND> (1.27)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.18
<EXPENSE-RATIO> 0.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> PROTECTIVE SELECT EQUITY
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 81,626,408
<INVESTMENTS-AT-VALUE> 101,507,731
<RECEIVABLES> 297,738
<ASSETS-OTHER> 323
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 101,805,792
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 182,212
<TOTAL-LIABILITIES> 182,212
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 80,932,057
<SHARES-COMMON-STOCK> 6,583,114
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 794,675
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 19,896,848
<NET-ASSETS> 101,623,580
<DIVIDEND-INCOME> 1,665,613
<INTEREST-INCOME> 120,376
<OTHER-INCOME> (15,935)
<EXPENSES-NET> 632,296
<NET-INVESTMENT-INCOME> 1,137,758
<REALIZED-GAINS-CURRENT> 2,902,688
<APPREC-INCREASE-CURRENT> 11,863,242
<NET-CHANGE-FROM-OPS> 15,903,688
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,161,227
<DISTRIBUTIONS-OF-GAINS> 2,377,970
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,458,365
<NUMBER-OF-SHARES-REDEEMED> 427,469
<SHARES-REINVESTED> 225,190
<NET-CHANGE-IN-ASSETS> 44,900,111
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 632,296
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 721,732
<AVERAGE-NET-ASSETS> 79,037,021
<PER-SHARE-NAV-BEGIN> 13.11
<PER-SHARE-NII> 0.18
<PER-SHARE-GAIN-APPREC> 2.71
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.56)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.44
<EXPENSE-RATIO> 0.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> PROTECTIVE SMALL CAP
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 63,662,229
<INVESTMENTS-AT-VALUE> 64,649,819
<RECEIVABLES> 212,343
<ASSETS-OTHER> 977
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 64,863,139
<PAYABLE-FOR-SECURITIES> 319,058
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 110,910
<TOTAL-LIABILITIES> 429,968
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 62,596,570
<SHARES-COMMON-STOCK> 6,429,304
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 268
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 848,743
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 987,590
<NET-ASSETS> 64,433,171
<DIVIDEND-INCOME> 257,351
<INTEREST-INCOME> 361,462
<OTHER-INCOME> (1,783)
<EXPENSES-NET> 446,552
<NET-INVESTMENT-INCOME> 170,478
<REALIZED-GAINS-CURRENT> 7,907,243
<APPREC-INCREASE-CURRENT> 1,105,418
<NET-CHANGE-FROM-OPS> 9,183,139
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 170,210
<DISTRIBUTIONS-OF-GAINS> 6,646,997
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,711,568
<NUMBER-OF-SHARES-REDEEMED> 662,561
<SHARES-REINVESTED> 690,344
<NET-CHANGE-IN-ASSETS> 20,603,478
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 446,552
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 523,651
<AVERAGE-NET-ASSETS> 55,819,029
<PER-SHARE-NAV-BEGIN> 9.35
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 1.84
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.20)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.02
<EXPENSE-RATIO> 0.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> PROTECTIVE MONEY MARKET
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 6,048,340
<INVESTMENTS-AT-VALUE> 6,048,340
<RECEIVABLES> 8,551
<ASSETS-OTHER> 81,286
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,138,177
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 17,517
<TOTAL-LIABILITIES> 17,517
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,120,660
<SHARES-COMMON-STOCK> 6,120,660
<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> 6,120,660
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 280,005
<OTHER-INCOME> 0
<EXPENSES-NET> 31,585
<NET-INVESTMENT-INCOME> 248,420
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 248,420
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 248,420
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,940,141
<NUMBER-OF-SHARES-REDEEMED> 10,138,310
<SHARES-REINVESTED> 249,104
<NET-CHANGE-IN-ASSETS> 1,050,935
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 31,585
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 66,947
<AVERAGE-NET-ASSETS> 5,264,283
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.05)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> PROTECTIVE CAPITAL GROWTH
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 26,468,277
<INVESTMENTS-AT-VALUE> 30,357,345
<RECEIVABLES> 166,389
<ASSETS-OTHER> 691
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 30,524,425
<PAYABLE-FOR-SECURITIES> 158,234
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 66,734
<TOTAL-LIABILITIES> 224,968
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 26,477,821
<SHARES-COMMON-STOCK> 2,395,860
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (94,407)
<ACCUM-APPREC-OR-DEPREC> 3,916,043
<NET-ASSETS> 30,299,457
<DIVIDEND-INCOME> 334,176
<INTEREST-INCOME> 141,189
<OTHER-INCOME> (1,252)
<EXPENSES-NET> 161,938
<NET-INVESTMENT-INCOME> 312,175
<REALIZED-GAINS-CURRENT> 289,861
<APPREC-INCREASE-CURRENT> 3,752,910
<NET-CHANGE-FROM-OPS> 4,354,946
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,276,232
<DISTRIBUTIONS-OF-GAINS> 594,964
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,471,196
<NUMBER-OF-SHARES-REDEEMED> 141,415
<SHARES-REINVESTED> 56,365
<NET-CHANGE-IN-ASSETS> 19,583,495
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 161,938
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 207,042
<AVERAGE-NET-ASSETS> 20,242,319
<PER-SHARE-NAV-BEGIN> 10.61
<PER-SHARE-NII> 0.13
<PER-SHARE-GAIN-APPREC> 2.21
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.30)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.65
<EXPENSE-RATIO> 0.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
