STATEMENT OF ADDITIONAL INFORMATION
MEMBERS Mutual Funds
CUNA Mutual Group
5910 Mineral Point Road
Madison, Wisconsin 53705
This is not a prospectus. This statement of additional information should be
read in conjunction with the prospectus for the MEMBERS Mutual Funds which is
referred to herein. The prospectus concisely sets forth information that a
prospective investor should know before investing. For a copy of the prospectus,
dated November 19, 1997, call 1-800-877-6089 or write MEMBERS Mutual Funds, P.O.
Box 5175, Westborough, MA 01581.
June 1, 1998
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TABLE OF CONTENTS Page
GENERAL INFORMATION............................................................1
INVESTMENT PRACTICES...........................................................1
Practices Authorized but not Used.....................................1
Lending Portfolio Securities..........................................1
Restricted and Illiquid Securities....................................2
Options on Securities and Securities Indices..........................2
Futures Contracts and Options on Futures Contracts....................5
Foreign Transactions..................................................7
Certain Bond Fund Practices..........................................13
Lower-Rated Corporate Debt Securities................................14
Other Debt Securities................................................15
Convertible Securities...............................................16
Repurchase Agreements................................................17
Reverse Repurchase Agreements........................................17
Government Securities................................................18
Forward Commitment and When-Issued Securities........................18
Mortgage-Backed and Asset-Backed Securities..........................18
Other Securities Related to Mortgages................................19
Real Estate Investment Trusts........................................22
INVESTMENT LIMITATIONS........................................................23
PORTFOLIO TURNOVER............................................................24
MANAGEMENT OF THE TRUST.......................................................25
Trustees and Officers................................................25
Trustee Compensation.................................................26
Initial Shareholders.................................................26
PORTFOLIO MANAGEMENT..........................................................27
The Management Agreement with CIMCO Inc..............................27
CIMCO Inc............................................................28
The Management Agreements with Subadvisers...........................29
The Subadviser for the High Income Fund..............................29
The Subadvisers for the International Stock Fund.....................29
DESCRIPTION OF THE TRUST'S SHARES.............................................29
Shares of Beneficial Interest........................................29
Voting Rights........................................................30
Limitation of Shareholder Liability..................................30
Limitation of Trustee and Officer Liability..........................31
Limitation of Interseries Liability..................................31
MORE ABOUT PURCHASING AND SELLING SHARES......................................31
Offering Price.......................................................31
Initial Sales Charge on Class A Shares...............................31
Deferred Sales Charge on Class B Shares..............................32
Special Redemptions..................................................34
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ADDITIONAL INVESTOR SERVICES AND PROGRAMS.....................................34
Systematic Investment Program........................................34
Systematic Withdrawal Program........................................35
Exchange Privilege and Systematic Exchange Program...................35
Reinstatement or Reinvestment Privilege..............................36
DISTRIBUTION (12B-1) PLANS AND AGREEMENT......................................36
CUSTODIAN.....................................................................37
INDEPENDENT AUDITORS..........................................................37
BROKERAGE.....................................................................37
HOW SECURITIES ARE OFFERED....................................................38
Distributor..........................................................38
Transfer Agent.......................................................39
NET ASSET VALUE OF SHARES.....................................................39
Cash Reserves Fund...................................................39
Valuation Procedures.................................................40
DIVIDENDS, DISTRIBUTIONS AND TAXES............................................41
Options and Futures Transactions.....................................43
Straddles............................................................44
CALCULATION OF YIELDS AND TOTAL RETURNS.......................................44
Cash Reserves Fund Yields............................................44
Other Fund Yields....................................................45
Average Annual Total Returns.........................................46
Other Total Returns..................................................46
RATINGS.......................................................................47
Ratings as Investment Criteria.......................................47
Description of Bond Ratings..........................................47
Description of Commercial Paper Ratings..............................48
LEGAL COUNSEL.................................................................49
FINANCIAL STATEMENTS..........................................................50
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GENERAL INFORMATION
The MEMBERS Mutual Funds (the "Trust") is an investment company consisting of
seven separate investment portfolios or funds (each, a "fund") each of which has
a different investment objective(s). Each fund is a diversified, open-end
management investment company, commonly known as a mutual fund. The seven funds
are: Cash Reserves, Bond, Balanced, High Income, Growth and Income, Capital
Appreciation and International Stock.
The Trust was formed as a business trust under the laws of the State of Delaware
on May 21, 1997. As a Delaware business trust, the Trust's operations are
governed by its Declaration of Trust dated May 16, 1997 (the "Declaration") and
Certificate of Trust, dated May 16, 1997 (the "Certificate"). The Certificate is
on file with the Office of the Secretary of State in Delaware. Each shareholder
agrees to be bound by the Declaration, as amended from time to time, upon such
shareholder's initial purchase of shares of beneficial interest in any one of
the funds.
INVESTMENT PRACTICES
The prospectus describes the investment objective and policies of each of the
seven funds. The following information is provided for those investors wishing
to have more comprehensive information than that contained in the prospectus.
Practices Authorized but not Used
No fund (other than the International Stock Fund) has a current intention of
investing in options, financial futures, stock index futures and related options
in the foreseeable future. No fund has a current intention of engaging in the
lending of portfolio securities in the foreseeable future. If any fund uses one
of these practices in the foreseeable future, no more than 10% of the fund's
total assets will be at risk thereby.
All of the funds may invest in foreign securities, although only the
International Stock Fund and the High Income Fund are expected to do so with any
regularity. However, all of the funds may, and are expected to, invest in
American Depository Receipts ("ADRs") traded on U.S. exchanges. ADRs represent
shares of foreign issues traded on foreign exchanges and may have many of the
risks associated with foreign securities.
If a fund enters into futures contracts or call options thereon, reverse
repurchase agreements, firm commitment agreements or standby commitment
agreements, the fund will obtain approval from the Board of Trustees to
establish a segregated account with the fund's custodian. The segregated account
will hold liquid assets and the cash value of the segregated account will be not
less than the market value of the futures contracts and call options thereon,
reverse repurchase agreements, firm commitment agreements and standby commitment
agreements.
Lending Portfolio Securities
All funds, except the Cash Reserves Fund, may lend portfolio securities. Such
loans will be made only in accordance with guidelines established by the
Trustees and on the request of broker-dealers or institutional investors deemed
qualified, and only when the borrower agrees to maintain cash or other liquid
assets as collateral with the fund equal at all times to at least 100% of the
value of the securities. The fund will continue to receive interest or dividends
on the securities loaned and will, at the same time, earn an agreed-upon amount
of interest on the collateral which will be invested in readily marketable
obligations of high quality. The fund will retain the right to call the loaned
securities and intends to call loaned voting securities if important shareholder
meetings are imminent. Such security loans will not be made if, as a result, the
aggregate of such loans exceeds 30% of the value of the fund's assets. The fund
may terminate such loans at any time. The primary risk involved in lending
securities is that the borrower will fail financially and not return the loaned
securities at a time when the collateral is sufficient to replace the full
amount of the loaned securities. To mitigate this risk, loans will be made only
to firms deemed by the funds' investment adviser, CIMCO Inc. ("CIMCO"), to be
creditworthy and will not be made unless, in CIMCO's judgment, the consideration
to be earned from such loans would justify the risk.
Restricted and Illiquid Securities
Each fund may invest in illiquid securities up to the percentage limits
described in the prospectus. CIMCO or the fund's subadviser (collectively
referred to herein as the "Investment Adviser") is responsible for determining
the value and liquidity of investments held by each fund. Investments may be
illiquid because of the absence of a trading market, making it difficult to
value them or dispose of them promptly at an acceptable price.
Illiquid investments include most repurchase agreements maturing in more than
seven days, currency swaps, time deposits with a notice or demand period of more
than seven days, certain over-the-counter option contracts (and assets used to
cover such options), participation interests in loans, and restricted
securities. A restricted security is one that has a contractual restriction on
resale or cannot be resold publicly until it is registered under the Securities
Act of 1933 (the "1933 Act").
Each fund may invest in restricted securities. Restricted securities are not,
however, considered illiquid if they are eligible for sale to qualified
institutional purchasers in reliance upon Rule 144A under the 1933 Act and that
are determined to be liquid by the Trust's board of trustees or by the
Investment Adviser under board-approved procedures. Such guidelines would take
into account trading activity for such securities and the availability of
reliable pricing information, among other factors. To the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities, a fund's holdings of those securities may become
illiquid. Purchases by the International Stock Fund and the High Income Fund of
securities of foreign issuers offered and sold outside the U.S., in reliance
upon the exemption from registration provided by Regulation S under the 1933
Act, also may be liquid even though they are restricted.
Options on Securities and Securities Indices
Writing Options. All of the funds (except the Cash Reserves 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 forego 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.
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 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 Cash Reserves Fund) may also write and 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 the Cash Reserves 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 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 Bond, Balanced, and High Income Funds 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.
These three funds may purchase or write yield curve options for the same
purposes as other options on securities. For example, the 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 fund may
also purchase or write yield curve options in an effort to increase its current
income if, in the judgment of the Investment 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 Bond, Balanced or High Income Funds 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 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 Cash Reserves Fund) may purchase and sell both options
that are traded on U.S. 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 Securities and Exchange Commission (the
"Commission") 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.
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 Investment Adviser. 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 Investment 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 Cash Reserves Fund) may purchase and sell futures
contracts and 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. A fund will engage in futures or 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 Cash Reserves 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 a security or currency are traded) guarantees that,
if still open, the sale or purchase will be performed on the settlement date.
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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 foreign
currency rates that would adversely affect the U.S. dollar value of the fund's
portfolio securities. Such futures contracts may 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 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 the Investment 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 Investment 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 than 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 then 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 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 used 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, each fund expects that on 75% or more of the occasions on
which it takes a long futures or option position (involving the purchase of a
futures contract), the fund will have purchased, or will be in the process of
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 of 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 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 "Dividends,
Distributions, and Taxes" below).
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 Transactions
Foreign Securities. Each fund may invest in foreign securities (as defined
below), although the Cash Reserves Fund is limited to U.S. dollar-denominated
foreign money market securities (as defined below). The percentage limitations
on each fund's investment on foreign securities is set forth in the prospectus.
Foreign securities means securities that are: (1) issued by companies organized
outside the U.S. or whose principal operations are outside the U.S. ("foreign
issuers"), (2) issued by foreign governments or their agencies or
instrumentalities (also "foreign issuers"), (3) principally traded outside of
the U.S., or (4) quoted or denominated in a foreign currency ("non-dollar
securities"). Foreign securities include ADRs, EDRs, GDRs, and foreign money
market securities.
Foreign securities may offer potential benefits that are not available from
investments exclusively in securities of domestic issuers or dollar denominated
securities. 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 than investments in domestic issuers, the
opportunity to invest in foreign countries with economic policies or business
cycles different from those of the U.S. and the opportunity to invest in foreign
securities markets that do not necessarily move in a manner parallel to U.S.
markets.
Investing in foreign securities involves significant risks that are not
typically associated with investing in U.S. dollar denominated securities or in
securities of domestic issuers. 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 U.S. 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 U.S. 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 making
the investment, or political or social instability or diplomatic developments
which could affect investments in those countries.
Investments in short-term debt obligations issued either by foreign issuers or
foreign financial institutions or by foreign branches of U.S. financial
institutions (collectively, "foreign money market securities") present many of
the same risks as other foreign investments. In addition, foreign money market
securities present interest rate risks similar to those attendant to an
investment in domestic money market securities.
Investments in ADRs, EDRs and GDRs. Many securities of foreign issuers are
represented by American depository receipts ("ADRs"), European depository
receipts ("EDRs") and global depository receipts ("GDRs"). Each of the funds may
invest in ADRs, and each of the funds other than the Cash Reserves Fund may
invest in GDRs and EDRs.
ADRs are receipts typically issued by a U.S. financial institution or trust
company which 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 U.S. on exchanges or
over-the-counter and are sponsored and issued by domestic banks. In general,
there is a large, liquid market in the U.S. 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 are typically issued in bearer form and are designed for trading
in the European markets. GDRs, issued either in bearer or registered form, are
designed for trading on a global basis. 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 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 High Income and International Stock Funds
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, Central and South America and Africa. Political and
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. 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 High Income and International Stock Funds' 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, CIMCO and its affiliates,
a subadviser and its affiliates, and each such person's 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 the Investment Adviser of the fund wishes to use
them.
Foreign Currency Transactions Generally. Because investment in foreign issuers
will usually involve currencies of foreign countries, and because the High
Income and International Stock Funds 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.
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
High Income and International Stock 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 NAV 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 funds 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
fund's Investment 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. The High Income and International
Stock Funds may each purchase or sell forward foreign currency exchange
contracts for defensive or hedging purposes when the fund's Investment 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. In addition,
these two funds may enter into forward foreign currency exchange contracts in
order to protect against anticipated changes in future foreign currency exchange
rates and 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
fund's Investment Adviser determines that there is a pattern of correlation
between the two currencies.
These two 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 buy
foreign currency for any purpose, the fund will be required to place cash or
liquid high grade debt securities 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 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 fund's Investment Adviser.
Options on Foreign Currencies. The High Income and International Stock Funds may
also 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. These
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, these funds may
purchase call or put options on currency to seek to increase total return when
the fund's Investment 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 "Stock Index Futures and Related Options" above for a
discussion of the liquidity risks associated with options transactions.
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 see 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 High Income Fund and International Stock Fund may each purchase and write
over-the-counter options to the extent consistent with its limitation on
investments in restricted securities. See the "Higher Risk Securities and
Practices" chart in the prospectus for each fund's limitations on investments in
restricted securities. 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 High Income Fund and International Stock Fund may each enter into interest
rate and currency swaps for hedging purposes and to seek to increase total
return. The High 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. The High Income Fund typically uses interest rate
swaps to shorten the effective duration of its portfolio. Interest rate swaps
involve the exchange by the High 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 two 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.
The High Income Fund only enters into interest rate swaps on a net basis, which
means 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, or 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 Trust maintains in a
segregated account with its custodian, cash or liquid securities equal to the
net amount, if any, of the excess of each fund's obligations over its
entitlements with respect to swap transactions. Neither fund enters into swap
transactions unless the unsecured commercial paper, senior debt or claims paying
ability of the other party is considered investment grade by such fund's
Investment 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 traditional portfolio securities
activities. If the fund's Investment Adviser is incorrect in its forecasts of
market values, interest rates and currency exchange rates, the investment
performance of the High Income Fund or International Stock Fund would be less
favorable than it would have been if this investment technique were not used.
Inasmuch as swaps are entered into for good faith hedging purposes or are offset
by a segregated account as described below, neither fund's Investment Adviser
believe that swaps constitute senior securities as defined in the Act and,
accordingly, will not treat swaps as being subject to such 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 sewed 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 claim paying ability of the other party thereto is considered
to be investment grade by the fund's Investment 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 comparison with the markets for other similar instruments
which are traded in the interbank market. Nevertheless, the staff of the
Commission takes the position that currency swaps are illiquid investments
subject to these funds' 15% limitation on such investments.
Certain Bond Fund Practices
The Bond, High Income and Balanced Funds (collectively, the "Bond Funds") invest
a significant portion of their assets in debt securities. As stated in the
prospectus, the Bond Fund and Balanced Fund will emphasize investment grade,
primarily intermediate term securities. If an investment grade security is
downgraded by the rating agencies or otherwise falls below the investment
quality standards stated in the prospectus, management will retain that
instrument only if management believes it is in the best interest of the fund.
Management does not currently intend to invest more than ten percent (10%) of
the total assets of either the Bond Fund or Balanced Fund in corporate debt
securities which are not in the four highest ratings by Standard & Poor's Rating
Group ("Standard & Poor's") or by Moody's Investors Service, Inc. ("Moody's")
("non-investment grade" or "junk" securities), but, on occasion, each fund may
do so. The High Income Fund may invest all of its assets in non-investment grade
securities. See "Non-Investment Grade Securities" below for a description of
these securities and their attendant risks and "Ratings" below for a description
of the rating categories.
All three Bond Funds may also invest in debt options, interest rate futures
contracts, and options on interest rate futures contracts, and may utilize
interest rate futures and options to manage the risk of fluctuating interest
rates. These instruments will be used to control risk or obtain additional
income and not with a view toward speculation. The Bond Fund and Balanced Fund
will invest only in futures and options which are traded on U.S. exchanges or
boards of trade. The High Income Fund may invest in non-U.S. futures and
options.
In the debt securities market, purchases of some issues are occasionally made
under firm (forward) commitment agreements. Purchases of securities under such
agreements can involve risk of loss due to changes in the market rate of
interest between the commitment date and the settlement date. As a matter of
operating policy, no Bond Fund will commit itself to forward commitment
agreements in an amount in excess of 25% of total assets and will not engage in
such agreements for leveraging purposes. For purposes of this limitation,
forward commitment agreements are defined as those agreements involving more
than five business days between the commitment date and the settlement date.
Lower-Rated Corporate Debt Securities
As described in the prospectus, each fund, other than the Cash Reserves Fund,
may make certain investments including corporate debt obligations that are
unrated or rated in the lower rating categories (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 by
Standard & Poors or Moody's (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 "Ratings" below for a
description of the rating categories.)
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,
the Investment 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 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 Investment Adviser 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.
Other Debt Securities
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 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.
Zero Coupon, Deferred Interest, Pay-in-Kind and Capital Appreciation Bonds. The
High Income Fund may invest in zero coupon bonds as well as 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.
Zero coupon bonds 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 matured.
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 High Income Fund 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 fund may
obtain no return at all on their investment. In addition, the 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.
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. The 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.
Foreign Government Securities. All of the funds 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.
Structured Securities. The High Income 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 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.
Convertible Securities
The Balanced, High Income, Growth and Income, Capital Appreciation and
International Stock Funds may each 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 conversion 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 fund's
Investment Adviser gives primary emphasis to the attractiveness of the
underlying common stock. The convertible securities in which the High Income
Fund invests are not subject to any minimum rating criteria. The convertible
debt securities in which 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, the market yields of which are substantially below
prevailing yields on non-convertible debt securities of comparable quality and
maturity, are treated as equity securities for the purposes of a fund's
investment policies or restrictions.
Repurchase Agreements
Each fund may enter into repurchase agreements. In a repurchase agreement, a
security is purchased for a relatively short period (usually not more than 7
days) subject to the obligation to sell it back to the issuer at a fixed time
and price plus accrued interest. The funds will enter into repurchase agreements
only with member banks of the Federal Reserve System and with "primary dealers"
in U.S. Government securities. The Investment Adviser will continuously monitor
the creditworthiness of the parties with whom the funds enter into repurchase
agreements.
The Trust has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Trust's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, a fund could experience delays in liquidating
the underlying securities during the period in which the fund seeks to enforce
its rights thereto, possible subnormal levels of income, declines in value of
the underlying securities or lack of access to income during this period and the
expense of enforcing its rights.
Reverse Repurchase Agreements
Each fund may also enter into reverse repurchase agreements which involve the
sale of U.S. Government securities held in its portfolio to a bank with an
agreement that the fund will buy back the securities at a fixed future date at a
fixed price plus an agreed amount of "interest" which may be reflected in the
repurchase price. Reverse repurchase agreements are considered to be borrowings
by the fund entering into them. Reverse repurchase agreements involve the risk
that the market value of securities purchased by the fund with proceeds of the
transaction may decline below the repurchase price of the securities sold by the
fund which it is obligated to repurchase. A fund that has entered into a reverse
repurchase agreement will also continue to be subject to the risk of a decline
in the market value of the securities sold under the agreements because it will
reacquire those securities upon effecting their repurchase. To minimize various
risks associated with reverse repurchase agreements, each fund will establish
and maintain with the Trust's custodian a separate account consisting of liquid
securities, of any type or maturity, in an amount at least equal to the
repurchase prices of the securities (plus any accrued interest thereon) under
such agreements. No fund will enter into reverse repurchase agreements and other
borrowings (except from banks as a temporary measure for extraordinary emergency
purposes) in amounts in excess of 30% of the fund's total assets (including the
amount borrowed) taken at market value. No fund will use leverage to attempt to
increase income. No fund will purchase securities while outstanding borrowings
exceed 5% of the fund's total assets. Each fund will enter into reverse
repurchase agreements only with federally insured banks which are approved in
advance as being creditworthy by the Trustees. Under procedures established by
the Trustees, the Investment Adviser will monitor the creditworthiness of the
banks involved.
<PAGE>
Government Securities
Certain U.S. Government securities, including U.S. Treasury bills, notes and
bonds, and Government National Mortgage Association certificates ("Ginnie
Maes"), are supported by the full faith and credit of the U.S. Certain other
U.S. Government securities, issued or guaranteed by Federal agencies or
government sponsored enterprises, are not supported by the full faith and credit
of the U.S., but may be supported by the right of the issuer to borrow from the
U.S. Treasury. These securities include obligations of the Federal Home Loan
Mortgage Corporation ("Freddie Macs"), and obligations supported by the credit
of the instrumentality, such as Federal National Mortgage Association Bonds
("Fannie Maes"). No assurance can be given that the U.S. Government will provide
financial support to such Federal agencies, authorities, instrumentalities and
government sponsored enterprises in the future.
Ginnie Maes, Freddie Macs and Fannie Maes are mortgage-backed securities which
provide monthly payments which are, in effect, a "pass-through" of the monthly
interest and principal payments (including any prepayments) made by individual
borrowers on the pooled mortgage loans. Collateralized mortgage obligations
("CMOs") in which the fund may invest are securities issued by a corporation or
a U.S. Government instrumentality that are collateralized by a portfolio of
mortgages or mortgage-backed securities. Mortgage-backed securities may be less
effective than traditional debt obligations of similar maturity at maintaining
yields during periods of declining interest rates. (See "Mortgage-Backed and
Asset-Backed Securities.")
Forward Commitment and When-Issued Securities
Each fund may purchase securities on a when-issued or forward commitment basis.
"When-issued" refers to securities whose terms are available and for which a
market exists, but which have not been issued. Each fund will engage in
when-issued transactions with respect to securities purchased for its portfolio
in order to obtain what is considered to be an advantageous price and yield at
the time of the transaction. For when-issued transactions, no payment is made
until delivery is due, often a month or more after the purchase. In a forward
commitment transaction, a fund contracts to purchase securities for a fixed
price at a future date beyond customary settlement time.
When a fund engages in forward commitment and when-issued transactions, it
relies on the seller to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in the fund's losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when-issued or forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date a fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the fund will segregate in a separate
account cash or liquid securities, of any type or maturity, equal in value to
the fund's commitment. These assets will be valued daily at market, and
additional cash or securities will be segregated in a separate account to the
extent that the total value of the assets in the account declines below the
amount of the when-issued commitments. Alternatively, a fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
Mortgage-Backed and Asset-Backed Securities
The Bond, Balanced, High Income and Growth and Income Funds 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 credit union or other financial institution unaffiliated with
the Trust, 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 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 secure 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.
The Cash Reserves Fund and Bond Fund may invest in mortgage-backed and
asset-backed securities that represent mortgage, commercial or consumer loans
originated by credit unions or other financial institutions. To the extent
permitted by law and available in the market, such investments may constitute a
significant portion of each fund's investments. Subject to the appropriate
regulatory approvals, the Cash Reserves Fund and Bond Fund may purchase
securities issued by pools that are structured, serviced, or otherwise supported
by CIMCO or its affiliates.
Other Securities Related to Mortgages
Mortgage Pass-Through Securities. The High Income Fund may invest in mortgage
pass-through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issue or
guarantor of the securities) as the mortgages in the underlying mortgage pools
are paid off. The average lives of mortgage pass-through securities are variable
when issued because their average lives depend on prepayment rates. The average
life of these securities is likely to be substantially shorter than their stated
final maturity as a result of unscheduled principal prepayment. Prepayments on
underlying mortgages result in a loss of anticipated interest, and all or part
of a premium if any has been paid, and the actual yield (or total return) to the
holder of a pass-through security may be different than the quoted yield on such
security. Mortgage prepayments generally increase with falling interest rates
and decrease with rising interest rates. Like other fixed income securities,
when interest rates rise the value of a mortgage pass-though security generally
will decline; however, when interest rates are declining, the value of mortgage
pass-through securities with prepayment features may not increase as much as
that of other fixed income securities. Interests in pools or mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the individual
borrowers on their mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by prepayments of
principal resulting from the sale, refinancing or foreclosure of the underlying
property, net of fees or costs which may be incurred. Some mortgage pass-through
securities (such as securities issued by the Government National Mortgage
Association ("GNMA"), are described as "modified pass-through." These securities
entitle the holder to receive all interests and principal payments owned on the
mortgages in the mortgage pool, net of certain fees, at the scheduled payment
dates regardless of whether the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities is
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of Federal Housing Administration-insured or Veteran's Administration
("VA")-guaranteed mortgages. These guarantees, however, do not apply to the
market value or yield of mortgage pass-through securities. GNMA securities are
often purchased at a premium over the maturity value of the underlying
mortgages. This premium is not guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by the full
faith and credit of the U.S. Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional residential mortgages (i.e.,
mortgages not insured or guaranteed by any governmental agency) from a list of
approved seller/services which include state and federally-chartered savings and
loan associations, mutual savings banks, commercial banks, credit unions and
mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment by FNMA of principal and interest.
FHLMC was created by Congress in 1970 as a corporate instrumentality of the U.S.
Government for the purpose of increasing the availability of mortgage credit for
residential housing. FHLMC issues Participation Certificates ("PCS") which
represent interest in conventional mortgages (i.e., not federally insured or
guaranteed) from FHLMC's national portfolio. FHLMC guarantees timely payment of
interest and ultimate collection of principal regardless of the status of the
underlying mortgage loans.
Credit unions, commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of mortgage loans. Such issuers may also be the
originators and/or servicers of the underlying mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of mortgage loans in
these pools may be supported by various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance and letters of
credit. The insurance and guarantees are issued by governmental entities,
private insurers and the mortgage poolers. There can be no assurance that the
private insurers or guarantors can meet their obligations under the insurance
policies or guarantee arrangements. The High Income Fund may also buy
mortgage-related securities without insurance or guarantees.
Collateralized Mortgage Obligations and Multiclass Pass-Through Securities. The
High Income Fund may invest a portion of its assets in collateralized mortgage
obligations or "CMOs", which are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Typically, CMOs are collateralized by
certificates issued by GNMA, FNMA or FHLMC, but also may be collateralized by
whole loans or private mortgage pass-through securities (such collateral
collectively hereinafter referred to as "Mortgage Assets"). The High Income Fund
may also invest a portion of its assets in multiclass pass-through securities
which are equity interests in a trust composed of Mortgage Assets. Unless the
context indicates otherwise, all references herein to CMOs include multiclass
pass-through securities. Payments of principal of and interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the United States government or by private originators of, or investors in,
mortgage loans, including credit unions, savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. The issuer of a series of CMOs may elect to be treated as a Real
Estate Mortgage Investment Conduit (a "REMIC").
In a CMO, a series of bonds or certificates are usually issued in multiple
classes with different maturities. Each class of CMOs, often referred to as a
"tranch", is issued at a specific fixed or floating coupon rate and has a stated
maturity or final distribution date. Principal prepayments on the Mortgage
Assets may cause the CMOs to be retired substantially earlier than their stated
maturities or final distribution dates, resulting in a loss of all or a part of
the premium if any has been paid. Interest is paid or accrues on all classes of
the CMOs on a monthly, quarterly or semiannual basis. The principal of and
interest on the Mortgage Assets may be allocated among the several classes of a
series of a CMO in innumerable ways. In a common structure, payments of
principal, including any principal pre-payments, on the Mortgage Assets are
applied to the classes of the series of a CMO in the order of their respective
stated maturities or final distribution dates, so that no payment of principal
will be made on any class of CMOs until all other classes having an earlier
stated maturity or final distribution date have been paid in full. Certain CMOs
may be stripped (securities which provide only the principal or interest factor
of the underlying security). See "Stripped Mortgage-Backed Securities" below for
a discussion of the risks of investing in these stripped securities and of
investing in classes consisting primarily of interest payments or principal
payments.
The High Income Fund may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date, but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds are always
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
Stripped Mortgage-Backed Securities. The High Income Fund may invest a portion
of its assets in stripped mortgage-backed securities ("SMBS") which are
derivative multiclass mortgage securities issued by agencies or
instrumentalities of the United States government or by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks and investment banks.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of Mortgage Assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the Mortgage Assets, while another class receives most of
the interest and the remainder of the principal. In the most extreme case, one
class will receive an "IO" (the right to receive all of the interest) while the
other class will receive a "PO" (the right to receive all of the principal). The
yield to maturity on an IO is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying Mortgage Assets, and
a rapid rate of principal payments may have a material adverse effect on such
security's yield to maturity. If the underlying Mortgage Assets experience
greater than anticipated prepayments of principal, the High Income Fund may fail
to fully recoup its initial investment in these securities. The market value of
the class consisting primarily or entirely of principal payments generally is
unusually volatile in response to changes in interest rates. Because SMBS were
only recently introduced, established trading markets for these securities have
not yet developed, although the securities are traded among institutional
investors and investment banking firms.
Mortgage Dollar Rolls. The High 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 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.
Real Estate Investment Trusts
The Bond, Balanced, High Income and Growth and Income Funds 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 interests. 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, as amended (the "1940 Act"). REITs
(especially mortgage REITS) are also subject to interest rate risks.
<PAGE>
INVESTMENT LIMITATIONS
The Trust has adopted the following restrictions and policies relating to the
investment of assets and the activities of each fund. The following restrictions
are fundamental and may not be changed for a fund without the approval of the
holders of a majority of the outstanding votes of that fund (which for this
purpose and under the 1940 Act means the lesser of (i) sixty-seven percent (67%)
of the outstanding votes attributable to shares represented at a meeting at
which more than fifty percent (50%) of the outstanding votes attributable to
shares are represented or (ii) more than fifty percent (50%) of the outstanding
votes attributable to shares). No fund may:
(1) with respect to 75% of the fund's total assets, purchase securities of
an issuer (other than the U.S. Government, its agencies or
instrumentalities), if (i) such purchase would cause more than 5% of
the fund's total assets taken at market value to be invested in the
securities of such issuer, or (ii) such purchase would at the time
result in more than 10% of the outstanding voting securities of such
issuer being held by the fund;
(2) invest 25% or more of its total assets in the securities of one or more
issuers conducting their principal business activities in the same
industry (excluding the U.S. Government or any of its agencies or
instrumentalities);
(3) borrow money, except (a) the fund may borrow from banks (as defined in
the 1940 Act) as through reverse repurchase agreements in amounts up to
30% of its total assets (including the amount borrowed), (b) the fund
may, to the extent permitted by applicable law, borrow up to an
additional 5% of its total assets for temporary purposes, (c) the fund
may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of portfolio securities, (d) the fund
may purchase securities on margin to the extent permitted by applicable
law and (e) the fund may engage in transactions in mortgage dollar
rolls which are accounted for as financings;
(4) make loans, except through (a) the purchase of debt obligations in
accordance with the fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other financial
institutions, and (c) loans of securities as permitted by applicable
law;
(5) underwrite securities issued by others, except to the extent that the
sale of portfolio securities by the fund may be deemed to be an
underwriting;
(6) purchase, hold or deal in real estate, although a fund may purchase and
sell securities that are secured by real estate or interests therein,
securities of real estate investment trusts and mortgage-related
securities and may hold and sell real estate acquired by a fund as a
result of the ownership of securities;
(7) invest in commodities or commodity contracts, except that the fund may
invest in currency and financial instruments and contracts that are
commodities or commodity contracts; or
(8) issue senior securities to the extent such issuance would violate
applicable law.
<PAGE>
The following restrictions are not fundamental policies and may be changed
without the approval of the shareholders in the affected fund. No fund will:
(1) sell securities short or maintain a short position except for short
sales against the box; or
(2) invest in foreign securities in excess of the following percentages of
the value of its total assets:
Cash Reserves Fund 25%, but limited to U.S. dollar denominated
foreign money market securities
Bond Fund 20%
Balanced Fund 25%
High Income Fund 50%
Growth and Income Fund 25%
Capital Appreciation Fund 25%
International Stock Fund 100%
(3) purchase any security which is not readily marketable if more than 15%
(10% for the Cash Reserves, Growth and Income, and Capital Appreciation
Funds) of the net assets of the fund taken at market value, would be
invested in such securities.
Except for the limitations on borrowing from banks, if the above percentage
restrictions are adhered to at the time of investment, a later increase or
decrease in such percentage resulting from a change in values of securities or
amount of net assets will not be considered a violation of any of the foregoing
restrictions.
PORTFOLIO TURNOVER
While the Cash Reserves Fund is not subject to specific restrictions on
portfolio turnover, it generally does not seek profits by short-term trading.
However, it may dispose of a portfolio security prior to its maturity where
disposition seems advisable because of a revised credit evaluation of the issuer
or other considerations. Because money market instruments have short maturities,
the Cash Reserves Fund expects to have a high portfolio turnover, but since
brokerage commissions are not customarily charged on money market instruments, a
high turnover should not affect the fund's NAV or net investment income.
Each fund (other than the Cash Reserves Fund) will trade securities held by it
whenever, in the Investment Adviser's view, changes are appropriate to achieve
the stated investment objectives. The Investment Adviser does not anticipate
that unusual portfolio turnover will be required and intends to keep such
turnover to moderate levels consistent with the objectives of each fund.
Although the Investment Adviser makes no assurances, it is expected that the
annual portfolio turnover rate for each fund will be generally less than 100%.
This would mean that normally less than 100% of the securities held by the fund
would be replaced in any one year (excluding turnover of securities having a
maturity of one year or less).
<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT OF THE TRUST
Trustees and Officers
- ---------------------------------- -------------------------- ----------------------------------------------------
Name, Address Position(s) Held Principal Occupation
and Age with the Trust During Past Five Years
- ---------------------------------- -------------------------- ----------------------------------------------------
<S> <C> <C>
Michael S. Daubs* Trustee (Chairman) CIMCO Inc.
5910 Mineral Point Road 1997 - Present President, 1982 - Present
Madison, WI 53705
Age - 54 CUNA Mutual Insurance Society
Chief Investment Officer
1990 - Present
CUNA Mutual Life Insurance Company
Chief Investment Officer
1973 - Present
- ---------------------------------- -------------------------- ----------------------------------------------------
Lawrence R. Halverson* Trustee and President CIMCO Inc.
5910 Mineral Point Road 1997 - Present Senior Vice President, 1996 - Present
Madison, WI 53705 Vice President, 1987 - 1996
Age - 51 Secretary, 1992 - Present
CUNA Brokerage Services, Inc.
President, 1996 - Present
- ---------------------------------- -------------------------- ----------------------------------------------------
Scott R. Powell* Secretary and Treasurer CIMCO Inc.
5910 Mineral Point Road 1997 - Present Investment Officer - Mutual Funds, 1997 - Present
Madison, WI 53705 Investment Officer - Marketing, 1993 - 1996
Age - 35
T. Rowe Price
Vice President, 1996 - 1997
Century Life of America
Area Sales Manager, 1992 - 1993
- ---------------------------------- -------------------------- ----------------------------------------------------
Gwendolyn M. Boeke Trustee Evangelical Lutheran Church in America (Chicago,
2000 Heritage Way 1997 - Present Illinois)
Waverly, IA 50677 Regional Director, ECLA Foundation
Age - 62 1990 - Present
- ---------------------------------- -------------------------- ----------------------------------------------------
Alfred L. Disrud Trustee Planned Giving Services (Waverly, Iowa)
2000 Heritage Way 1997 - Present Owner
Waverly, IA 50677 1986 - Present
Age - 76
- ---------------------------------- -------------------------- ----------------------------------------------------
Keith S. Noah Trustee Noah, Smith, & Schuknecht, L.L.C. (Charles
2000 Heritage Way 1997 - Present City, Iowa)
Waverly, IA 50677 Partner
Age - 77 1948 - Present
- ---------------------------------- -------------------------- ----------------------------------------------------
Trustees and Officers (continued on next page)
* "Interested person" as defined in the 1940 Act.
<PAGE>
- ---------------------------------- -------------------------- ----------------------------------------------------
Name, Address Position(s) Held Principal Occupation
and Age with the Trust During Past Five Years
<PAGE>
- ---------------------------------- -------------------------- ----------------------------------------------------
Thomas C. Watt Trustee MidAmerica Energy Company (Waterloo, Iowa)
2000 Heritage Way 1997 - Present Manager, Business Initiatives
Waverly, IA 50677 1987 - Present
Age - 61
Midwest Power Systems, Inc. (Waterloo, Iowa)
District Manager
1992 - 1997
Iowa Public Service Company (Waterloo, Iowa)
Vice President - East District
1962 - 1992
- ---------------------------------- -------------------------- ----------------------------------------------------
</TABLE>
Trustee Compensation
- -------------------------- ----------------------------- -----------------------
Total Compensation from
Aggregate Compensation from Trust and Fund
Name of Person, Position Trust(1) Complex(1)(2)
- -------------------------- ----------------------------- -----------------------
Michael S. Daubs(3) None None
- -------------------------- ----------------------------- -----------------------
Lawrence R. Halverson(3) None None
- -------------------------- ----------------------------- -----------------------
Gwendolyn M. Boeke $4,000 $8,000
- -------------------------- ----------------------------- -----------------------
Alfred L. Disrud $4,000 $8,000
- -------------------------- ----------------------------- -----------------------
Keith S. Noah $4,000 $8,000
- -------------------------- ----------------------------- -----------------------
Thomas C. Watt $4,000 $8,000
- -------------------------- ----------------------------- -----------------------
(1) Amounts estimated for the fiscal year ending October 31, 1998.
(2) "Fund Complex" includes the Trust and the Ultra Series Fund.
(3) Non-compensated interested trustee.
Initial Shareholders
As of November 19, 1997, CUNA Mutual Insurance Society, based upon its $50,000
seed money investment in each fund other than the High Income Fund, owns 100% of
the shares of each such fund. Also as of November 19, 1997, CUNA Mutual Life
Insurance Company, based upon its $50,000 seed money investment in the High
Income Fund, owns 100% of the shares of such fund.
Based upon seed money and other subsequent investments, it is anticipated that,
individually or combined, CUNA Mutual Insurance Society, CUNA Mutual Life
Insurance Company and CUMIS Insurance Society, Inc. will own more than 25% of
the shares of each fund and may be deemed to control each fund. The following
table sets forth each such company's anticipated approximate ownership of each
fund shortly after the commencement of the public offering of the funds' shares
(the figures following represent both seed money and anticipated subsequent
investments):
<TABLE>
<CAPTION>
- ----------------------- ------------- ------------ ------------ ------------ ------------ ------------ -------------
Growth Capital
Cash High Income and Appre-ciation Int'l
Shareholder Reserves Bond Balanced Income Stock
- ----------------------- ------------- ------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
CUNA Mutual Insurance $1,500,000 $1,500,000 $3,000,000 $1,500,000 $1,500,000 $5,000,000
Society (50%) (50%) (100%) (50%) (50%) (25%)
- ----------------------- ------------- ------------ ------------ ------------ ------------ ------------ -------------
CUNA Mutual Life $1,500,000 $1,500,000 $5,000,000 $3,000,000
Insurance Company (50%) (50%) (100%) (15%)
- ----------------------- ------------- ------------ ------------ ------------ ------------ ------------ -------------
CUMIS Insurance $1,500,000 $1,500,000 $12,000,000
Society, Inc. (50%) (50%) (60%)
- ----------------------- ------------- ------------ ------------ ------------ ------------ ------------ -------------
</TABLE>
Until their ownership is diluted by the sale of shares to other shareholders or
the redemption of their seed money and initial investments, CUNA Mutual
Insurance Society, CUNA Mutual Life Insurance Company and CUMIS Insurance
Society, Inc. may each be able to significantly influence the outcome of any
shareholder vote.
PORTFOLIO MANAGEMENT
The Management Agreement with CIMCO Inc.
The Management Agreement ("Agreement") requires that CIMCO Inc. ("CIMCO")
provide continuous professional investment management of the investments of the
Trust, including establishing an investment program complying with the
investment objectives, policies and restrictions of each fund. As compensation
for its services, the Trust pays CIMCO a fee computed at an annualized
percentage rate of the average daily value of the net assets of each fund as
follows:
Fund Management Fee
---- --------------
Cash Reserves 0.40%
Bond 0.50%*
Balanced 0.65%
High Income 0.55%
Growth and Income 0.55%
Capital Appreciation 0.75%
International Stock 1.05%
*Effective June 1, 1998, and until October 31, 1998, the Funds' Investment
Adviser, CIMCO Inc. as agreed to waive the .50% management fee applicable
to the MEMBERS Bond Fund.
CIMCO has voluntarily agreed to absorb all ordinary business expenses, other
than management, 12b-1, and service fees, of each fund in excess of the
following percentages of the average daily net assets of the funds (excluding
taxes, interest and other extraordinary items):
Fund Expense "Cap"
---- -------------
Cash Reserves 0.15%
Bond 0.15%
Balanced 0.20%
High Income 0.20%
Growth and Income 0.20%
Capital Appreciation 0.20%
International Stock 0.30%
CIMCO makes the investment decisions and is responsible for the investment and
reinvestment of assets; performs research, statistical analysis, and continuous
supervision of the funds' investment portfolios; furnishes office space for the
Trust; provides the Trust with such accounting data concerning the investment
activities of the Trust as is required to be prepared and files all periodic
financial reports and returns required to be filed with the Commission and any
other regulatory agency; continuously monitors compliance by the Trust in its
investment activities with the requirements of the 1940 Act and the rules
promulgated pursuant thereto; and renders such periodic and special reports to
the Trust as may be reasonably requested with respect to matters relating to
CIMCO's duties.
On September 4, 1997, the Management Agreement was approved by the sole initial
shareholder of the Trust after approval and recommendation by the Trustees of
the Trust, including a majority of Trustees who are not parties to the
Management Agreement or interested persons to any such party as defined in the
1940 Act, on September 4, 1997. The Management Agreement, unless sooner
terminated, shall continue until two years from its effective date and
thereafter shall continue automatically for periods of one calendar year so long
as such continuance is specifically approved at least annually: (a) by the
Trustees or by a vote of a majority of the outstanding votes attributable to the
shares of the class representing an interest in the fund; and (b) by a vote of a
majority of those Trustees who are not parties to the Management Agreement or
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval, provided the Management Agreement may be
terminated as to any fund or to all funds by the Trust at any time, without the
payment of any penalty, by vote of a majority of the Trustees or by a majority
vote of the outstanding votes attributable to the shares of the applicable fund
or by CIMCO on sixty (60) days written notice to the other party. The Management
Agreement will terminate automatically in the event of its assignment.
The Management Agreement provides that CIMCO shall not be liable to the Trust or
any shareholder for anything done or omitted by it, or for any losses that may
be sustained in the purchase, holding or sale of any security, except for an act
or omission involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by the Management Agreement.
CIMCO Inc.
CUNA Mutual Life Insurance Company and CUNA Mutual Investment Corporation each
own a one-half interest in CIMCO. CUNA Mutual Insurance Society is the sole
owner of CUNA Mutual Investment Corporation. CUNA Mutual Investment Corporation
is the sole owner of CUNA Brokerage Services, Inc. ("CUNA Brokerage"), the
Trust's principal underwriter. CIMCO has servicing agreements with CUNA Mutual
Insurance Society and with CUNA Mutual Life Insurance Company. CUNA Mutual
Insurance Society and CUNA Mutual Life Insurance Company entered into a
permanent affiliation July 1, 1990. At the current time, all of the directors of
CUNA Mutual Insurance Society are also directors of CUNA Mutual Life Insurance
Company and the two companies are managed by the same group of senior executive
officers.
CIMCO's directors and principal officers are as follows:
Joyce A. Harris Director and Chair
James C. Hickman Director
Michael B. Kitchen Director
Michael S. Daubs Director and President
George A. Nelson Director and Vice Chair
Lawrence R. Halverson Senior Vice President and Secretary
Daniel J. Larson Vice President
Thomas J. Merfeld Vice President
The Management Agreements with Subadvisers
As described in the prospectus, CIMCO manages the assets of the High Income and
International Stock Funds using a "manager of managers" approach under which
CIMCO allocates each fund's assets among one or more "specialist" subadvisers
(each, a "Subadviser"). The Trust and CIMCO have requested an order from the
Commission that would permit the hiring of Subadvisers without shareholder
approval. If the Trust and CIMCO receive such an order, shareholders will
receive an "information statement" within 90 days of a change in Subadvisers
that will provide relevant information about the reasons for the change and any
new Subadviser(s).
Even though Subadvisers have day-to-day responsibility over the management of
the High Income and International Stock Funds, CIMCO retains the ultimate
responsibility for the performance of these funds and will oversee the
Subadvisers and recommend their hiring, termination, and replacement.
CIMCO may, at some future time, employ a subadvisory or "manager of managers"
approach to other new or existing funds in addition to the High Income and
International Stock Funds.
The Subadviser for the High Income Fund
As of the date of the prospectus, Massachusetts Financial Services Company (MFS)
is the only subadviser managing the assets of the High Income Fund. The
prospectus contains a description of MFS and its fee for managing the assets of
the High Income Fund.
The Subadvisers for the International Stock Fund
As of the date of the prospectus, the assets of the International Stock Fund are
managed in part by IAI International Limited ("IAI") and in part by Lazard Asset
Management ("Lazard"). The prospectus contains descriptions of IAI and Lazard
and their fees for managing portions of the assets of the International Stock
Fund.
DESCRIPTION OF THE TRUST'S SHARES
Shares of Beneficial Interest
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest of the Trust without par
value. Under the Declaration of Trust, the Trustees have the authority to create
and classify shares of beneficial interest in separate series, without further
action by shareholders. As of the date of this SAI, the Trustees have authorized
shares of the seven funds described in the prospectus. Additional series may be
added in the future. The Declaration of Trust also authorizes the Trustees to
classify and reclassify the shares of the Trust, or new series of the Trust,
into one or more classes. As of the date of this SAI, the Trustees have
authorized the issuance of two classes of shares of the fund, designated as
Class A and Class B.
The shares of each class of each fund represent an equal proportionate interest
in the aggregate net assets attributable to that class of that fund. Holders of
Class A shares and Class B shares have certain exclusive voting rights on
matters relating to their respective distribution plans. The different classes
of a fund may bear different expenses relating to the cost of holding
shareholder meetings necessitated by the exclusive voting rights of any class of
shares.
Dividends paid by each fund, if any, with respect to each class of shares will
be calculated in the same manner, at the same time and on the same day and will
be in the same amount, except for differences resulting from the fact that: (i)
the distribution and service fees relating to Class A and Class B shares will be
borne exclusively by that class; (ii) Class B shares will pay higher
distribution and service fees than Class A shares; and (iii) each of Class A
shares and Class B shares will bear any other class expenses properly allocable
to such class of shares, subject to the requirements imposed by the Internal
Revenue Service on funds having a multiple-class structure. Similarly, the NAV
per share may vary depending on whether Class A shares or Class B shares are
purchased.
In the event of liquidation, shareholders of each class of each fund are
entitled to share pro rata in the net assets of the class of the fund available
for distribution to these shareholders. Shares entitle their holders to one vote
per dollar value of shares, are freely transferable and have no preemptive,
subscription or conversion rights. When issued, shares are fully paid and
non-assessable, except as set forth below.
Share certificates will not be issued.
Voting Rights
Unless otherwise required by the 1940 Act or the Declaration of Trust, the Trust
has no intention of holding annual meetings of shareholders. Fund shareholders
may remove a Trustee by the affirmative vote of at least two-thirds of the
Trust's votes attributable to the outstanding shares and the Trustees shall
promptly call a meeting for such purpose when requested to do so in writing by
the record holders of not less than 10% of the votes attributable to the
outstanding shares of the Trust. Shareholders may, under certain circumstances,
communicate with other shareholders in connection with requesting a special
meeting of shareholders. However, at any time that less than a majority of the
Trustees holding office were elected by the shareholders, the Trustees will call
a special meeting of shareholders for the purpose of electing Trustees.
Limitation of Shareholder Liability
Generally, Delaware business trust shareholders are not personally liable for
obligations of the Delaware business trust under Delaware law. The Delaware
Business Trust Act ("DBTA") provides that a shareholder of a Delaware business
trust shall be entitled to the same limitation of liability extended to
shareholders of private for-profit corporations. The Declaration expressly
provides that the Trust has been organized under the DBTA and that the
Declaration is to be governed by and interpreted in accordance with Delaware
law. It is nevertheless possible that a Delaware business trust, such as the
Trust, might become a party to an action in another state whose courts refuse to
apply Delaware law, in which case the Trust's shareholders could possibly be
subject to personal liability.
To guard against this risk, the Declaration: (i) contains an express disclaimer
of shareholder liability for acts or obligations of the Trust and provides that
notice of such disclaimer may be given in each agreement, obligation and
instrument entered into or executed by the Trust or its Trustees, (ii) provides
for the indemnification out of Trust property of any shareholders held
personally liable for any obligations of the Trust or any fund, and (iii)
provides that the Trust shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Trust and satisfy
any judgment thereon. Thus, the risk of a shareholder incurring financial loss
beyond his or her investment because of shareholder liability is limited to
circumstances in which all of the following factors are present: (1) a court
refuses to apply Delaware law; (2) the liability arose under tort law or, if
not, no contractual limitation of liability was in effect; and (3) the Trust
itself would be unable to meet its obligations. In the light of DBTA, the nature
of the Trust's business, and the nature of its assets, the risk of personal
liability to a shareholder is remote.
Limitation of Trustee and Officer Liability
The Declaration further provides that the Trust shall indemnify each of its
Trustees and officers against liabilities and expenses reasonably incurred by
them, in connection with, or arising out of, any action, suit or proceeding,
threatened against or otherwise involving such Trustee or officer, directly or
indirectly, by reason of being or having been a Trustee or officer of the Trust.
The Declaration does not authorize the Trust to indemnify any Trustee or officer
against any liability to which he or she would otherwise be subject by reason of
or for willful misfeasance, bad faith, gross negligence or reckless disregard of
such person's duties.
Limitation of Interseries Liability
All persons dealing with a fund must look solely to the property of that
particular fund for the enforcement of any claims against that fund, as neither
the Trustees, officers, agents or shareholders assume any personal liability for
obligations entered into on behalf of a fund or the Trust. No fund is liable for
the obligations of any other fund. Since the funds use a combined prospectus,
however, it is possible that one fund might become liable for a misstatement or
omission in the prospectus regarding another fund with which its disclosure is
combined. The Trustees have considered this factor in approving the use of the
combined prospectus.
MORE ABOUT PURCHASING AND SELLING SHARES
The following discussion expands upon the section entitled "Your Account" in the
prospectus.
Offering Price
Shares of each fund are offered at a price equal to their NAV next determined
after receipt of the purchase order for such shares (see "Net Asset Value of
Shares" below) plus a sales charge which, depending upon the class of shares
purchased, may be imposed either at the time of purchase (Class A shares) or on
a contingent deferred basis (Class B shares). The Trustees reserve the right to
change or waive the fund's minimum investment requirements and to reject any
order to purchase shares (including purchase by exchange) when in the judgment
of the Investment Adviser such rejection is in the fund's best interest.
Initial Sales Charge on Class A Shares
The sales charges applicable to purchases of Class A shares of the Trust are
described in the prospectus. In calculating the sales charge applicable to
current purchases of Class A shares of the Trust, the investor is entitled to
accumulate current purchases with the greater of the current value (at offering
price) of the Class A shares of the Trust, or if CUNA Brokerage is notified by
the investor's dealer or the investor at the time of the purchase, the cost of
the Class A shares owned.
In addition to the methods of obtaining a reduced Class A sales charge described
in the prospectus, Class A shares of a fund may also be purchased without an
initial sales charge in connection with certain liquidation, merger or
acquisition transactions involving other investment companies or personal
holding companies.
Rights of Combination. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by: (a) an individual, his or her spouse and their
children under the age of 21, purchasing securities for his or their own
account; (b) a trustee or other fiduciary purchasing for a single trust, estate
or fiduciary account; and (c) groups which qualify for the Group Investment
Program (see below). Further information about combined purchases, including
certain restrictions on combined group purchases, is available from CUNA
Brokerage. Rights of Accumulation. Investors (including investors combining
purchases) who are already Class A shareholders may also obtain the benefit of
the reduced sales charge by taking into account not only the amount then being
invested but also the purchase price or current value of the Class A shares of
all funds which carry a sales charge already held by such person.
Letter of Intention. The reduced sales charges are also applicable to
investments made pursuant to a Letter of Intention (the "LOI"), which should be
read carefully prior to its execution by an investor, pursuant to which
investors make their investment over a specified period of thirteen (13) months.
Such an investment (including accumulations and combinations) must aggregate
$50,000 or more invested during the 13-month period from the date of the LOI or
from a date within ninety (90) days prior thereto, upon written request to CUNA
Brokerage. The sales charge applicable to all amounts invested under the LOI is
computed as if the aggregate amount intended to be invested had been invested
immediately. If such aggregate amount is not actually invested, the difference
in the sales charge actually paid and the sales charge payable had the LOI not
been in effect is due from the investor. However, for the purchases actually
made within the 13-month period, the sales charge applicable will not be higher
than that which would have applied (including accumulations and combinations)
had the LOI been for the amount actually invested.
The LOI authorizes CUNA Brokerage to hold in escrow sufficient Class A shares
(approximately 5% of the aggregate) to make up any difference in sales charges
on the amount intended to be invested and the amount actually invested, until
such investment is completed within the specified period, at which time the
escrow shares will be released. If the total investment specified in the LOI is
not completed, the Class A shares held in escrow may be redeemed and the
proceeds used as required to pay such sales charge as may be due. By signing the
LOI, the investor authorizes CUNA Brokerage to act as the investor's
attorney-in-fact to redeem any escrowed shares and adjust the sales charge, if
necessary. A LOI does not constitute a binding commitment by an investor to
purchase, or by the Trust to sell, any additional shares and may be terminated
at any time.
Deferred Sales Charge on Class B Shares
Investments in Class B shares are purchased at NAV per share without the
imposition of an initial sales charge so the fund will receive the full amount
of the purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed within five
years of purchase will be subject to a contingent deferred sales charge ("CDSC")
at the rates set forth in the prospectus as a percentage of the dollar amount
subject to the CDSC. The charge will be assessed on an amount equal to the
lesser of the current market value or the original purchase cost of the Class B
shares being redeemed. No CDSC will be imposed on increases in account value
above the initial purchase prices, including Class B shares derived from
reinvestment of dividends or capital gains distributions.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that a redemption comes first from any increases in the
redeeming shareholder's shares' value above their initial purchase prices, then
from shares the shareholder acquired through dividend and capital gain
reinvestment, then from shares the shareholder has held beyond the five-year
CDSC redemption period ("aged shares"). Such aged shares will be redeemed in
order from the shares which have been held the longest during the five-year
period.
Unless otherwise requested, redemption requests will be "grossed up" by the
amount of any applicable CDSC charge and/or transaction charges such that the
investor will receive the net amount requested.
Proceeds from the CDSC are paid to CUNA Brokerage and are used in whole or in
part by CUNA Brokerage to defray its expenses related to providing
distribution-related services to the Trust in connection with the sale of the
Class B shares, such as the payment of compensation to select Selling Brokers
for selling Class B shares. The combination of the CDSC and the distribution and
service fees facilitates the ability of the Trust to sell the Class B shares
without a sales charge being deducted at the time of the purchase.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares, unless indicated otherwise, in these
circumstances:
For all account types:
Redemptions made pursuant to the Trust's right to liquidate small
accounts (see "Dividends and Account Policies -- Small Accounts" in the
prospectus).
Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
Redemptions due to death or disability.
Redemptions made under the Reinstatement Privilege, as described in
"Reinstatement or Reinvestment Privilege" below.
Redemptions of Class B shares made under the Systematic Withdrawal
Program, as long as annual redemptions do not exceed (on an annualized
basis) 12% of the redeeming shareholder's account value at the time of
the withdrawal.
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b), 401(k)
plans) and other qualified plans as described in the Internal Revenue Code of
1986, as amended (the "Code"), unless otherwise noted.
Redemptions made to effect mandatory or life expectancy distributions
under the Code.
Returns of excess contributions made to these plans.
Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement under section 401(a)
of the Code (such as 401(k) plans).
Please see the chart following for more information on Class B CDSC waivers.
<PAGE>
Class B CDSC Waiver Chart
<TABLE>
<CAPTION>
ERISA Plans Non-ERISA Plans
401(a) Plan,
Type of Distribution 401(k) Plan or Supplemental IRA or Non-Retirement
403(b) Plan 403(b) Plan 457 Plan IRA Rollover Plan
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Death or Disability Waived Waived Waived Waived Waived
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Over 70 1/2 Waived Waived Waived Waived for Waived for up to
mandatory 12% of account
distributions or value annually
up to 12% of in periodic
account value payments
annually in
periodic payments
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Between Waived Waived Waived Waived for Life Waived for up to
59 1/2and 70 1/2 Expectancy or up 12% of account
to 12% of value annually
account value in periodic
annually in payments
periodic payments
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Under 59 1/2 Waived Waived for Waived for Waived for Waived for up to
annuity payments annuity payments annuity payments 12% of account
(72t) or up to (72t) or up to (72t) or up to value annually
12% of account 12% of account 12% of account in periodic
value annually value annually value annually payments
in periodic in periodic in periodic
payments payments payments
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Loans Waived Waived N/A N/A N/A
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Termination of Plan Not Waived Not Waived Not Waived Not Waived N/A
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Hardships Waived Waived Waived N/A N/A
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Return of Excess Waived Waived Waived Waived N/A
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
</TABLE>
Any shareholder who qualifies for a CDSC waiver under one of these situations
must notify the funds' transfer agent, First Data Investor Services Group, Inc.
("First Data"), at the time such shareholder requests a redemption. (See
"Contacting the Funds' Transfer Agent" in the prospectus.) The waiver will be
granted once First Data has confirmed that the shareholder is entitled to the
waiver.
Special Redemptions
Although no fund would normally do so, each fund has the right to pay the
redemption price of shares of the fund in whole or in part in portfolio
securities held by the fund as prescribed by the Trustees. When the shareholder
were to sell portfolio securities received in this fashion the shareholder would
incur a brokerage charge. Any such securities would be valued for the purposes
of making such payment at the same value as used in determining NAV. The Trust
has, however, elected to be governed by Rule 18f-1 under the 1940 Act. Under
that rule, each fund must redeem its shares for cash except to the extent that
the redemption payments to any shareholder during any 90-day period would exceed
the lesser of $250,000 or 1% of the fund's NAV at the beginning of such period.
ADDITIONAL INVESTOR SERVICES AND PROGRAMS
The following discussion expands upon the section entitled "Additional Investor
Services" in the prospectus.
<PAGE>
Systematic Investment Program
As explained in the prospectus, the Trust has established a Systematic
Investment Program. The program is subject to the following conditions:
The investments will be drawn on or about the day of the month
indicated.
Any shareholder's privilege of making investments through the
Systematic Investment Program may be revoked by the Trust without prior
notice if any investment by the shareholder is not honored by the
shareholder's credit union or other financial institution.
The program may be discontinued by the shareholder either by calling
MEMBERS Mutual Funds or upon written notice to MEMBERS Mutual Funds
which is received at least five (5) business days prior to the due date
of any investment.
Systematic Withdrawal Program
As explained in the prospectus, the Trust has established a Systematic
Withdrawal Program. Payments under this program represent proceeds arising from
the redemption of fund shares. The maintenance of a Systematic Withdrawal
Program concurrently with purchases of additional shares of the fund could be
disadvantageous to a shareholder because of the sales charges that may be
imposed on new purchases. Therefore, a shareholder should not purchase shares of
a fund at the same time as a Systematic Withdrawal Program is in effect for such
shareholder with respect to that fund. The Trust reserves the right to modify or
discontinue the Systematic Withdrawal Program for any shareholder on 30 days'
prior written notice to such shareholder, or to discontinue the availability of
such plan to all shareholders in the future. Any shareholder may terminate the
program at any time by giving proper notice.
Exchange Privilege and Systematic Exchange Program
Shares of a fund which are subject to a CDSC may be exchanged into shares of any
of other fund that are subject to a CDSC without incurring the CDSC; however,
the shares acquired in the exchange will be subject to the CDSC schedule of the
shares acquired if and when such shares are redeemed. For purposes of computing
the CDSC payable upon redemption of shares acquired in an exchange, the holding
period of the original shares is added to the holding period of the shares
acquired in an exchange.
The Trust reserves the right to require that previously exchanged shares (and
reinvested dividends) be in a fund for 90 days before a shareholder is permitted
a new exchange. The Trust may refuse any exchange order. The Trust may change or
cancel its exchange policies at any time, upon 60 days' notice to its
shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for federal income tax purposes. An exchange may
result in a taxable gain or loss. (See "Dividends, Distributions and Taxes.")
As explained in the prospectus, the Trust has established a Systematic Exchange
Program. The Trust reserves the right to modify or discontinue the Systematic
Exchange Program for any shareholder on 30 days' prior written notice to such
shareholder, or to discontinue the availability of such plan to all shareholders
in the future. Any shareholder may terminate the program at any time by giving
proper notice to First Data.
Reinstatement or Reinvestment Privilege
If First Data is notified prior to reinvestment, a shareholder who has redeemed
fund shares may, within 90 days after the date of redemption, reinvest without
payment of a sales charge any part of the redemption proceeds in shares of the
same class of the same or another fund, subject to the minimum investment limit
of that fund. The proceeds from the redemption of Class A shares may be
reinvested at NAV without paying a sales charge in Class A shares of the same or
any other fund. If a CDSC was paid upon a redemption, a shareholder may reinvest
the proceeds from the redemption at NAV in additional shares of the class and
fund from which the redemption was made. The new shares will not be subject to
any CDSC.
To protect the interests of other investors in the funds, the Trust may cancel
the reinvestment privilege of any parties that, in the opinion of the Trust, are
using market timing strategies or making more than four exchanges per owner or
controlling party per calendar year above and beyond any systematic or automated
exchanges. Also, the Trust may refuse any reinvestment request.
The fund may change or cancel its reinvestment policies at any time.
A redemption or exchange of fund shares is a taxable transaction for federal
income tax purposes even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
fund shares will be treated for tax purposes as described under the caption
"Dividends, Distributions and Taxes."
DISTRIBUTION (12b-1) PLANS AND AGREEMENT
The Trust has entered into a Distribution Agreement with CUNA Brokerage. Under
the Distribution Agreement, CUNA Brokerage is obligated to use its best efforts
to sell shares of the Trust. Shares of the Trust may be sold by selected
broker-dealers (the "Selling Brokers") which have entered into selling agency
agreements with CUNA Brokerage. CUNA Brokerage accepts orders for the purchase
of the shares of the Trust at NAV next determined plus any applicable sales
charge. In connection with the sale of Class A or Class B shares of the Trust,
CUNA Brokerage and Selling Brokers receive compensation from a sales charge
imposed, in the case of Class A shares, at the time of sale or, in the case of
Class B shares, on a deferred basis. The sales charges are discussed further in
the prospectus.
The Trust's Board of Trustees also adopted Distribution Plans with respect to
the Trust's Class A and Class B shares (the "Plans") pursuant to Rule 12b-1
under the 1940 Act. Under the Plans, the Trust will pay service fees for Class A
and Class B shares at an aggregate annual rate of 0.25% of each fund's daily net
assets attributable to the respective class of shares. The Trust will also pay
distribution fees for Class B shares at an aggregate annual rate of 0.75% of
each fund's daily net assets attributable to Class B. The distribution fees will
be used to reimburse CUNA Brokerage for its distribution expenses with respect
to Class B shares only, including but not limited to: (i) initial and ongoing
sales compensation to Selling Brokers and others engaged in the sale of fund
shares, (ii) marketing, promotional and overhead expenses incurred in connection
with the distribution of fund shares, and (iii) interest expenses on
unreimbursed distribution expenses. The service fees will be used to compensate
Selling Brokers and others for providing personal and account maintenance
services to shareholders. In the event that CUNA Brokerage is not fully
reimbursed for expenses it incurs under the Class B Plan in any fiscal year,
CUNA Brokerage may carry these expenses forward, provided, however, that the
Trustees may terminate the Class B Plan and thus the Trust's obligation to make
further payments at any time. Accordingly, the Trust does not treat unreimbursed
expenses relating to the Class B shares as a liability.
The Plans were approved by the initial shareholder of the Trust. The Plans have
also been approved by a majority of the Trustees, including a majority of the
Trustees who are not interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the "Independent
Trustees"), by votes cast in person at meetings called for the purpose of voting
on such Plans.
Pursuant to the Plans, at least quarterly, CUNA Brokerage provides the Trust
with a written report of the amounts expended under the Plans and the purpose
for which these expenditures were made. The Trustees review these reports on a
quarterly basis to determine their continued appropriateness.
The Plans provide that they continue in effect only so long as their continuance
is approved at least annually by a majority of both the Trustees and the
Independent Trustees. Each Plan provides that it may be terminated without
penalty: (a) by vote of a majority of the Independent Trustees; (b) by a vote of
a majority of the votes attributable to the fund's outstanding shares of the
applicable class in each case upon 60 days' written notice to CUNA Brokerage;
and (c) automatically in the event of assignment. Each of the Plans further
provides that it may not be amended to increase the maximum amount of the fees
for the services described therein without the approval of a majority of the
votes attributable to the outstanding shares of the class of the Trust which has
voting rights with respect to the Plan. And finally, each of the Plans provides
that no material amendment to the Plan will, in any event, be effective unless
it is approved by a majority vote of both the Trustees and the Independent
Trustees of the Trust. The holders of Class A shares and Class B shares have
exclusive voting rights with respect to the Plan applicable to their respective
class of shares. In adopting the Plans, the Trustees concluded that, in their
judgment, there is a reasonable likelihood that each Plan will benefit the
holders of the applicable class of shares of the fund.
Amounts paid to CUNA Brokerage by any class of shares of the Trust will not be
used to pay the expenses incurred with respect to any other class of shares of
the Trust; provided, however, that expenses attributable to the Trust as a whole
will be allocated, to the extent permitted by law, according to a formula based
upon gross sales dollars and/or average daily net assets of each such class, as
may be approved from time to time.
CUSTODIAN
State Street Bank and Trust Company is the current custodian for the securities
and cash of each fund. The custodian holds all securities and cash owned by each
fund and receives all payments of income, payments of principal or capital
distributions with respect to such securities for each fund. Also, the custodian
receives payment for the shares issued by the Trust. The custodian releases and
delivers securities and cash upon proper instructions from the Trust. Pursuant
to and in furtherance of a Custody Agreement with the custodian, the custodian
uses automated instructions and a cash data entry system to transfer monies to
and from each fund's account at the custodian.
INDEPENDENT AUDITORS
The financial statements have been included herein and elsewhere in the
Registration Statement in reliance upon the reports of KPMG Peat Marwick, 4200
Norwest Center, 90 S. Seventh Street, Minneapolis, MN 55402, independent
auditors, and upon the authority of said firm as experts in accounting and
auditing.
BROKERAGE
It is the Trust's policy, in effecting transactions in portfolio securities, to
seek best execution of orders at the most favorable prices. The determination of
what may constitute best execution and price in the execution of a securities
transaction by a broker involves a number of considerations, including without
limitation, the overall direct net economic result (involving both price paid or
received and any commissions and other costs paid), the efficiency with which
the transaction is effected, the ability to effect the transaction at all where
a large block is involved, the availability of the broker to stand ready to
execute potentially difficult transactions in the future and the financial
strength and stability of the broker. Such considerations are judgmental and are
weighed by the Investment Adviser in determining the overall reasonableness of
brokerage commissions paid.
Subject to the foregoing, a factor in the selection of brokers is the receipt of
research services, analyses and reports concerning issuers, industries,
securities, economic factors and trends and other statistical and factual
information. Any such research and other statistical and factual information
provided by brokers to the Trust or CIMCO is considered to be in addition to and
not in lieu of services required to be performed by CIMCO under its contract
with the Trust. Research obtained on behalf of the Trust may be used by CIMCO in
connection with CIMCO's other clients. Conversely, research received from
placement of brokerage for other accounts may be used by CIMCO in managing
investments of the Trust. Therefore, the correlation of the cost of research to
CIMCO's individual clients, including the Trust, is indeterminable and cannot
practically be allocated among the Trust and CIMCO's other clients. Consistent
with the above, the Trust may effect principal transactions with a broker-dealer
that furnishes brokerage and/or research services, or designate any such
broker-dealer to receive selling commissions, discounts or other allowances, or
otherwise deal with any broker-dealer, in connection with the acquisition of
securities in underwritings. Accordingly, the net prices or commission rates
charged by any such broker-dealer may be greater than the amount another firm
might charge if the Investment Adviser determines in good faith that the amount
of such net prices and commissions is reasonable in relation to the value of the
services and research information provided by such broker-dealer to the Trust.
The Trust expects that purchases and sales of money market instruments usually
will be principal transactions. Money market instruments are normally purchased
directly from the issuer or from an underwriter or market maker for the
securities. There usually will be no brokerage commissions paid for such
purchases. Purchases from underwriters will include the underwriting commission
or concession and purchases from dealers serving as market makers will include
the spread between the bid and asked price. Where transactions are made in the
over-the-counter market, the Trust will deal with the primary market makers
unless equal or more favorable prices are otherwise obtainable.
Where advantageous, the Trust may participate with CIMCO's other clients in
"bunching of trades" wherein one purchase or sale transaction representing
several different client accounts is placed with a broker. CIMCO has established
various policies and procedures that assure equitable treatment of all accounts.
The policy with respect to brokerage is and will be reviewed by the Trustees
from time to time. Because of the possibility of further regulatory developments
affecting the securities exchanges and brokerage practices generally, the
foregoing practices may be changed, modified or eliminated.
HOW SECURITIES ARE OFFERED
Distributor
Shares of the Trust are currently issued and redeemed through the distributor,
CUNA Brokerage, pursuant to a Distribution Agreement between the Trust and CUNA
Brokerage. The principal place of business of CUNA Brokerage is 5910 Mineral
Point Road, Madison, Wisconsin 53705. CUNA Brokerage is owned by CUNA Mutual
Investment Corporation which in turn is owned by CUNA Mutual Insurance Society.
Shares of the Trust are purchased and redeemed at NAV (see "Net Asset Value of
Shares" below). The Distribution Agreement provides that CUNA Brokerage will use
its best efforts to render services to the Trust, but in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations, it will not be liable to the Trust or any shareholder for any error
of judgment or mistake of law or any act or omission or for any losses sustained
by the Trust or its shareholders.
<PAGE>
Transfer Agent
First Data Investor Services Group, Inc. ("First Data"), 4400 Computer Drive,
Westborough, Massachusetts 01581-5120, is the funds' transfer agent.
Shareholders can reach a MEMBERS Mutual Funds representative at First Data at
1-800-877-6089. Shareholder inquiries and transaction requests should be sent
to:
MEMBERS Mutual Funds
P.O. Box 5175
Westborough, Massachusetts 01581
Certain overnight delivery services do not deliver to post office boxes.
Shareholders using such a service should send inquiries and transaction requests
to:
First Data Investor Services Group, Inc.
MEMBERS Mutual Funds
Attn: Work Management 1CE25
4400 Computer Drive
Westborough, Massachusetts 01581-5120
NET ASSET VALUE OF SHARES
The NAV per share is calculated as of 3:00 p.m. Central time on each day on
which the New York Stock Exchange is open for business. NAV per share is
determined by dividing each fund's total net assets by the number of shares of
such fund outstanding at the time of calculation. Total net assets are
determined by adding the total current value of portfolio securities, cash,
receivables, and other assets and subtracting liabilities. Shares will be sold
and redeemed at the NAV per share next determined after receipt of the purchase
order or request for redemption.
The NAV per share was initially set at $10.00 per share for each fund other than
the Cash Reserves Fund.
The NAV per share was initially set at $1.00 per share for the Cash Reserves
Fund (see below).
Cash Reserves Fund
The Trustees have determined that the best method currently available for
determining the NAV for the Cash Reserves Fund is the amortized cost method. The
Trustees will utilize this method pursuant to Rule 2a-7 of the 1940 Act. The use
of this valuation method will be continuously reviewed and the Trustees will
make such changes as may be necessary to assure that assets are valued fairly as
determined by the Trustees in good faith. Rule 2a-7 obligates the Trustees, as
part of their responsibility within the overall duty of care owed to the
shareholders, to establish procedures reasonably designed, taking into account
current market conditions and the investment objectives, to stabilize the NAV
per share as computed for the purpose of distribution and redemption at $1.00
per share. The Trustees' procedures include periodically monitoring, as they
deem appropriate and at such intervals as are reasonable in light of current
market conditions, the relationship between the amortized cost value per share
and the NAV per share based upon available market quotations. The Trustees will
consider what steps should be taken, if any, in the event of a difference of
more than 1/2 of one percent (0.5%) between the two. The Trustees will take such
steps as they consider appropriate, (e.g., redemption in kind or shortening the
average portfolio maturity) to minimize any material dilution or other unfair
results which might arise from differences between the two. The Rule requires
that the Cash Reserves Fund limit its investments to instruments which the
Trustees determine will present minimal credit risks and which are of high
quality as determined by a major rating agency, or, in the case of any
instrument that is not so rated, of comparable quality as determined by the
Trustees. It also calls for the Cash Reserves Fund to maintain a dollar weighted
average portfolio maturity (not more than 90 days) appropriate to its objective
of maintaining a stable NAV of $1.00 per share and precludes the purchase of any
instrument with a remaining maturity of more than 397 days. Should the
disposition of a portfolio security result in a dollar weighted average
portfolio maturity of more than 90 days, the Cash Reserves Fund will invest its
available cash in such manner as to reduce such maturity to 90 days or less as
soon as reasonably practicable.
It is the normal practice of the Cash Reserves Fund to hold portfolio securities
to maturity. Therefore, unless a sale or other disposition of a security is
mandated by redemption requirements or other extraordinary circumstances, the
Cash Reserves Fund will realize the par value of the security. Under the
amortized cost method of valuation traditionally employed by institutions for
valuation of money market instruments, neither the amount of daily income nor
the NAV is affected by any unrealized appreciation or depreciation. In periods
of declining interest rates, the indicated daily yield on shares the Cash
Reserves Fund has computed by dividing the annualized daily income by the NAV
will tend to be higher than if the valuation were based upon market prices and
estimates. In periods of rising interest rates, the indicated daily yield on
shares the Cash Reserves Fund has computed by dividing the annualized daily
income by the NAV will tend to be lower than if the valuation were based upon
market prices and estimates.
Valuation Procedures
Common stocks that are traded on an established exchange or over-the-counter are
valued on the basis of market price as of the end of the valuation period,
provided that a market quotation is readily available. Otherwise, they are
valued at fair value as determined in good faith by or at the direction of the
Trustees.
Stripped treasury securities, long-term straight debt obligations, and
non-convertible preferred stocks are valued using readily available market
quotations, if available. When exchange quotations are used, the latest quoted
sale price is used. If an over-the-counter quotation is used, the last bid price
will normally be used. If readily available market quotations are not available,
these securities are valued at market value as determined in good faith by or at
the direction of the Trustees. Readily available market quotations will not be
deemed available if an exchange quotation exists for a debt security, preferred
stock, or security convertible into common stock, but it does not reflect the
true value of the fund's holdings because sales have occurred infrequently, the
market for the security is thin, or the size of the reported trade is considered
not comparable to the fund's institutional size holdings. When readily available
market quotations are not available, the fund will use an independent pricing
service which provides valuations for normal institutional size trading units of
such securities. Such a service may utilize a matrix system which takes into
account appropriate factors such as institutional size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data in determining valuations. These
valuations are reviewed by CIMCO. If CIMCO believes that a valuation still does
not represent a fair value, it will present for approval of the Trustees such
other valuation as CIMCO considers to represent a fair value. The specific
pricing service or services to be used will be presented for approval of the
Trustees.
Short-term instruments having maturities of sixty (60) days or less will be
valued at amortized cost. Short-term instruments having maturities of more than
sixty (60) days will be valued at market values or values based on current
interest rates.
Options, stock index futures, interest rate futures, and related options which
are traded on U.S. exchanges or boards of trade are valued at the closing price
as of the close of the New York Stock Exchange.
<PAGE>
CIMCO, at the direction of the Trustees, values the following at prices it deems
in good faith to be fair:
1. Securities (including restricted securities) for which complete
quotations are not readily available;
2. Listed securities if, in CIMCO's opinion, the last sale price does not
reflect the current market value or if no sale occurred; and
3. Other assets.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each fund has qualified, and intends to continue to qualify, for treatment as a
regulated investment company ("RIC") under the Code. In order to qualify for
that treatment, each fund must distribute to its shareholders for each taxable
year at least 90% of its investment company taxable income (consisting generally
of taxable net investment income and net short-term capital gain) and must meet
several additional requirements. With respect to each fund, these requirements
include the following: (1) the fund must derive at least 90% of its gross income
each taxable year from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of securities, or other
income (including gains from futures contracts) derived with respect to its
business of investing in securities; (2) at the close of each quarter of the
fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. Government securities, securities of
other RICs and other securities, with these other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the value of the
fund's total assets and that does not represent more than 10% of the outstanding
voting securities of the issuer; and (3) at the close of each quarter of the
fund's taxable year, not more than 25% of the value of its total assets may be
invested in securities (other than U.S. government securities or the securities
of other RICs) of any one issuer.
A fund will be subject to a nondeductible 4% excise tax to the extent it fails
to distribute by the end of any calendar year substantially all of its ordinary
income for that year and capital gain net income for the one-year period ending
on October 31 of that year, plus certain other amounts. Each fund intends to
distribute annually a sufficient amount of any taxable income and capital gains
so as to avoid liability for this excise tax.
Dividends and interest received by a fund may be subject to income, withholding
or other taxes imposed by foreign countries and U.S. possessions that would
reduce the yield on its securities. Tax conventions between certain countries
and the U.S. may reduce or eliminate these foreign taxes, however, and foreign
countries generally do not impose taxes on capital gains in respect of
investments by foreign investors. If more than 50% of the value of the
International Stock Fund's total assets at the close of its taxable year
consists of securities of foreign corporations, it will be eligible to, and may,
file an election with the Internal Revenue Service that will enable its
shareholders, in effect, to receive the benefit of the foreign tax credit with
respect to any foreign and U.S. possessions income taxes paid by it. Pursuant to
the election, a fund will treat those taxes as dividends paid to its
shareholders and each shareholder will be required to (1) include in gross
income, and treat as paid by him, his proportionate share of those taxes, (2)
treat his share of those taxes and of any dividend paid by the fund that
represents income from foreign or U.S. possessions sources as his own income
from those sources, and (3) either deduct the taxes deemed paid by him in
computing his taxable income or, alternatively, use the foregoing information in
calculating the foreign tax credit against his federal income tax. The
International Stock Fund will report to its shareholders shortly after each
taxable year their respective shares of the income from sources within, and
taxes paid to, foreign countries and U.S. possessions if it makes this election.
Each fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, a fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock of a PFIC or of any gain on disposition of that stock (collectively "PFIC
income"), plus interest thereon, even if the fund distributes the PFIC income as
a taxable dividend to its shareholders. The balance of the PFIC income will be
included in the fund's investment company taxable income and, accordingly, will
not be taxable to it to the extent that income is distributed to its
shareholders. If a fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the fund will be required to include in income each year its pro
rata share of the qualified electing fund's annual ordinary earnings and net
capital gain (the excess of net long-term capital gain over net short-term
capital loss), even if they are not distributed to the fund; those amounts would
be subject to the distribution requirements described above. In most instances
it will be very difficult, if not impossible, to make this election because of
certain requirements thereof.
The use of hedging strategies, such as writing (selling) and purchasing options
and futures contracts and entering into forward contracts, involves complex
rules that will determine for income tax purposes the character and timing of
recognition of the income received in connection therewith by a fund. Income
from foreign currencies (except certain gains therefrom that may be excluded by
future regulations), and income from transactions in options, futures and
forward contracts derived by a fund with respect to its business of investing in
securities or foreign currencies, will qualify as permissible income under the
income requirement. However, income from the disposition of foreign currencies
that are not directly related to the fund's principal business of investing in
securities (or options and futures with respect thereto) also will be subject to
the Short-Short Limitation if the securities are held for less than three
months.
If a fund satisfies certain requirements, any increase in value on a position
that is part of a "designated hedge" will be offset by any decrease in value
(whether realized or not) of the offsetting hedging position during the period
of the hedge for purposes of determining whether the fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. Each
fund intends that, when it engages in hedging transactions, they will qualify
for this treatment, but at the present time it is not clear whether this
treatment will be available for all of the fund's hedging transactions. To the
extent this treatment is not available, a fund may be forced to defer the
closing out of certain options and futures contracts beyond the time when it
otherwise would be advantageous to do so, in order for the fund to continue to
qualify as a RIC.
The treatment of income dividends and capital gain distributions by a fund to
shareholders under the various state income tax laws may not parallel that under
the federal law. Qualification as a regulated investment company does not
involve supervision of a fund's Investment Adviser or of its investment policies
and practices by any governmental authority.
Shareholders are urged to consult their own tax advisers with specific reference
to their own tax situations, including their state and local tax liabilities.
It is the intention of the Trust to distribute substantially all of the net
investment income, if any, of each fund thereby avoiding the imposition of any
fund-level income or excise tax as follows:
(i) Dividends on the Cash Reserves, Bond, and High Income Funds will be
declared daily and reinvested monthly in additional full and fractional
shares of the respective fund;
(ii)Dividends of ordinary income from the Balanced Fund will be declared
and reinvested monthly in additional full and fractional shares of the
Balanced Fund;
(iii)Dividends of ordinary income, if any, from the Growth and Income Fund
will be declared and reinvested quarterly in additional full and
fractional shares of the Growth and Income Fund;
(iv) Dividends of ordinary income, if any, from the Capital Appreciation and
International Stock Funds will be declared and reinvested annually in
additional full and fractional shares of the respective fund; and
(v) All net realized short-term and long-term capital gains of each fund,
if any, will be declared and distributed at least annually, but in any
event, no more frequently than allowed under Commission rules, to the
shareholders of each fund to which such gains are attributable.
Options and Futures Transactions
The tax consequences of options transactions entered into by a fund will vary
depending on the nature of the underlying security, whether the option is
written or purchased and finally, whether the "straddle" rules, discussed
separately below, apply to the transaction. When a fund writes a call or a put
option on an equity or convertible debt security, the treatment for federal
income tax purposes of the premium that it receives will, subject to the
straddle rules, depend on whether the option is exercised. If the option expires
unexercised, or if the fund enters into a closing purchase transaction, the fund
will realize a gain (or loss if the cost of the closing purchase transaction
exceeds the amount of the premium) without regard to any unrealized gain or loss
on the underlying security. Any such gain or loss will be short-term capital
gain or loss, except that any loss on a "qualified" covered call stock option
that is not treated as part of a straddle may be treated as long-term capital
loss. If a call option written by a fund is exercised, the fund will recognize a
capital gain or loss from the sale of the underlying security, and will treat
the premium as additional sales proceeds. Whether the gain or loss will be
long-term or short-term will depend on the holding period of the underlying
security. If a put option written by a fund is exercised, the amount of the
premium will reduce the tax basis of the security that the fund then purchases.
If a put or call option that a fund has purchased on an equity or convertible
debt security expires unexercised, the fund will realize a capital loss equal to
the cost of the option. If the fund enters into a closing sale transaction with
respect to the option, it will realize a capital gain or loss (depending on
whether the proceeds from the closing transaction are greater or less than the
cost of the option). The gain or loss will be short-term or long-term depending
on the fund's holding period in the option. If the fund exercises such a put
option, it will realize a short-term gain or loss (long-term if the fund holds
the underlying security for more than one year before it purchases the put) from
the sale of the underlying security measured by the sales proceeds decreased by
the premium paid. If the fund exercises such a call option, the premium paid for
the option will be added to the tax basis of the security purchased.
One or more funds may invest in Section 1256 contracts. Section 1256 contracts
generally include options on nonconvertible debt securities (including
securities of U.S. Government agencies or instrumentalities), options on stock
indexes, futures contracts, options on futures contracts and certain foreign
currency contracts. Options on foreign currency, futures contracts on foreign
currency, and options on foreign currency futures will qualify as Section 1256
contracts if the options or futures are traded on or subject to the rules of a
qualified board or exchange. In general, gain or loss on Section 1256 contracts
will be treated as 60% long-term and 40% short-term capital gain or loss
("60/40"), regardless of the period of time particular positions are actually
held by a fund. In addition, any Section 1256 contracts held at the end of each
taxable year (and on October 31 of each year for purposes of determining the
amount of capital gain net income that a fund must distribute to avoid liability
for the 4% excise tax) are "marked to market" with the result that unrealized
gains or losses are treated as though they were realized and the resulting gain
or loss is treated as 60/40 gain or loss. This deemed realization does not cause
a disposition for purposes of the "short-short" rule.
Straddles
Hedging transactions undertaken by a fund may result in "straddles" for federal
income tax purposes. Straddles are defined to include "offsetting positions" in
actively-traded personal property. Under current law, it is not clear under what
circumstances one investment made by a fund, such as an option or futures
contract, would be treated as "offsetting" another investment also held by the
fund, such as the underlying security (or vice versa) and, therefore, whether
the fund would be treated as having entered into a straddle. In general,
investment positions may be "offsetting" if there is a substantial diminution in
the risk of loss from holding one position by reason of holding one or more
other positions (although certain "qualified" covered call stock options written
by a fund may be treated as not creating a straddle).
To the extent that the straddle rules apply to positions established by a fund,
losses realized by the fund may be either deferred or recharacterized as
long-term losses, and long-term gains realized by the fund may be converted to
short-term gains.
Each fund may make one or more of the elections available under the Code which
are applicable to straddles. If a fund makes any of the elections, the amount,
character, and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections operate to
accelerate the recognition of gains or losses from the affected straddle
positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not engage in such hedging transactions.
CALCULATION OF YIELDS AND TOTAL RETURNS
From time to time, the Trust may disclose yields, total returns, and other
performance data. Such performance data will be computed, or accompanied by
performance data computed in accordance with the standards defined by the
Commission.
Cash Reserves Fund Yields
From time to time, sales literature may quote the current annualized yield of
the Cash Reserves Fund for a seven-day period in a manner which does not take
into consideration any realized or unrealized gains or losses on portfolio
securities.
This current annualized yield is computed by determining the net change
(exclusive of realized gains and losses on the sale of securities and unrealized
appreciation and depreciation) at the end of the seven-day period in the value
of a hypothetical account having a balance of one share at the beginning of the
period, dividing such net change in account value by the value of the
hypothetical account at the beginning of the period to determine the base period
return, and annualizing this quotient on a 365-day basis. The net change in
value reflects net income from the fund attributable to the hypothetical
account. Current yield is calculated according to the following formula:
Current Yield = ((NCS - ES)/UV) x (365/7)
<PAGE>
Where:
NCS = the net change in the value of the Cash Reserves Fund
(exclusive of realized gains or losses on the sale of
securities and unrealized appreciation and depreciation) for
the seven-day period attributable to a hypothetical account
having a balance of one share.
ES = per share expenses attributable to the hypothetical account
for the seven-day period.
UV = the share value for the first day of the seven-day period.
Effective yield is calculated according to the following formula:
Effective yield = (1 + ((NCS-ES)/UV))365/7 - 1
Where:
NCS = the net change in the value of the Cash Reserves Fund
(exclusive of realized gains or losses on the sale of
securities and unrealized appreciation and depreciation) for
the seven-day period attributable to a hypothetical account
having a balance of one share.
ES = per share expenses attributable to the hypothetical account
for the seven-day period.
UV = the share value for the first day of the seven-day period.
The current and effective yields on amounts held in the Cash Reserves Fund
normally fluctuate on a daily basis. Therefore, the disclosed yield for any
given past period is not an indication or representation of future yields or
rates of return. The Cash Reserves Fund's actual yield is affected by changes in
interest rates on money market securities, average portfolio maturity, the types
and quality of portfolio securities held and operating expenses. Yields on
amounts held in the Cash Reserves Fund may also be presented for periods other
than a seven-day period.
Other Fund Yields
From time to time, sales literature may quote the current annualized yield of
one or more of the funds (other than the Cash Reserves Fund) for 30-day or
one-month periods. The annualized yield of a fund refers to income generated by
the fund during a 30-day or one-month period and is assumed to be generated each
period over a 12-month period.
The yield is computed by: 1) dividing the net investment income of the fund for
the period; by 2) the maximum offering price per share on the last day of the
period times the daily average number of shares outstanding for the period; by
3) compounding that yield for a six-month period; and by 4) multiplying that
result by 2. The 30-day or one-month yield is calculated according to the
following formula:
Yield = 2 x (((NI - ES)/(U x UV)) + 1)6 - 1)
Where:
NI = net income of the fund for the 30-day or one-month period
attributable to the fund's shares.
ES = expenses of the fund for the 30-day or one-month period.
U = the average number of shares outstanding.
UV = the share value at the close (highest) of the last day in the
30-day or one-month period.
The yield normally fluctuates over time. Therefore, the disclosed yield for any
given past period is not an indication or representation of future yields or
rates of return. A fund's actual yield is affected by the types and quality of
portfolio securities held and operating expenses.
Average Annual Total Returns
From time to time, sales literature may also quote average annual total returns
for one or more of the funds for various periods of time.
When a fund has been in operation for 1, 5, and 10 years, respectively, the
average annual total returns for these periods will be provided. Average annual
total returns for other periods of time may, from time to time, also be
disclosed.
Standard average annual total returns represent the average annual compounded
rates of return that would equate an initial investment of $1,000 to the
redemption value of that investment as of the last day of each of the periods.
The ending date for each period for which total return quotations are provided
will be for the most recent month or calendar quarter-end practicable,
considering the type of the communication and the media through which it is
communicated.
The total return is calculated according to the following formula:
TR = ((ERV/P)1/N) - 1
Where:
TR = the average annual total return net of any fund recurring
charges.
ERV = the ending redeemable value of the hypothetical account at the
end of the period.
P = a hypothetical initial payment of $1,000.
N = the number of years in the period.
Other Total Returns
From time to time, sales literature may also disclose cumulative total returns
in conjunction with the standard formats described above. The cumulative total
returns will be calculated using the following formula:
CTR = (ERV/P) - 1
Where:
CTR = The cumulative total return net of any fund recurring charges
for the period.
ERV = The ending redeemable value of the hypothetical investment at
the end of the period.
P = A hypothetical single payment of $1,000.
<PAGE>
RATINGS
Ratings as Investment Criteria
In general, the ratings of Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Ratings Group ("S&P") represent the opinions of these agencies
as to the quality of the securities which they rate. It should be emphasized,
however, that such ratings are relative and subjective and are not absolute
standards of quality. These ratings will be used by certain funds as initial
criteria for the selection of portfolio securities. Among the factors which will
be considered are the long-term ability of the issuer to pay principal and
interest and general economic trends.
Description of Bond Ratings (As Published by the Rating Services)
Moody's Investors Service, Inc.
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in
the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics, and in fact, have speculative
characteristics as well.
Ba Bonds which are rated Ba and below are judged to have speculative
elements; their future cannot be considered as well secured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are a poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of
this generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
Standard & Poor's Corporation
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher rated categories.
BB Bonds rated BB, B, CCC and CC are regarded, on balance, as
B predominantly speculative with respect to the issuer's capacity to pay
CCC interest and repay principal in accordance with the terms of the
CC obligation. BB indicates the lowest degree of speculation and CC the
highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Note: Standard & Poor's applies the modifiers of (+) or (-) in each generic
rating classification from "AA" through "B" in its corporate bond rating
system. The plus sign indicates that the security ranks in the higher
end of this generic rating category; the lack of a modifier indicates a
mid-range ranking; and the minus sign indicates that the issue ranks in
the lower end of its generic rating category.
Description of Commercial Paper Ratings (As Published by the Rating Services)
Moody's Investors Service, Inc.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its commercial paper obligations are
supported by the credit of another entity or entities, Moody's, in assigning
ratings to such issuers, evaluates the financial strength of the indicated
affiliated corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the total rating
assessment.
<PAGE>
Standard & Poor's Corporation
A brief description of the applicable Standard & Poor's rating symbols for
investment grade commercial paper and their meanings follows:
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with
the numbers 1, 2, and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics will be denoted with a
plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
LEGAL COUNSEL
Sutherland, Asbill & Brennan LLP, 1275 Pennsylvania Avenue, N.W., Washington,
D.C. 20004, serves as counsel to the Trust and certain of its affiliates.
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MEMBERS Mutual Funds
Statements of Assets and Liabilities
November 10, 1997
Cash High Growth and Capital International
Reserves Bond Balanced Income Income Appreciation Stock
Fund Fund Fund Fund Fund Fund Fund
---- ---- ---- ---- ---- ---- ----
ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C>
Cash..................... $50,000 $50,000 $50,000 $50,000 $50,000 $50,000 $50,000
Deferred organization
expenses
and offering costs (Note 66,951 66,951 66,951 66,951 66,951 66,951 66,951
------ ------ ------ ------ ------ ------ ------
1)
Total Assets......... 116,951 116,951 116,951 116,951 116,951 116,951 116,951
LIABILITIES:
Payable due to
Investment Adviser for
reimbursement of 66,951 66,951 66,951 66,951 66,951 66,951 66,951
------ ------ ------ ------ ------ ------ ------
organization expenses
and offering costs (Note
1)
NET ASSETS:................... $50,000 $50,000 $50,000 $50,000 $50,000 $50,000 $50,000
------- ------- ------- ------- ------- ------- -------
NET ASSETS:
Class A Shares........... $49,000 $49,000 $49,000 $49,000 $49,000 $49,000 $49,000
------- ------- ------- ------- ------- ------- -------
Class B Shares........... $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000
------ ------ ------ ------ ------ ------ ------
SHARES OF BENEFICIAL
INTEREST OUTSTANDING
Class A Shares........... $49,000 $49,000 $49,000 $49,000 $49,000 $49,000 $49,000
Class B Shares........... $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000
NET ASSETS:................... $50,000 $50,000 $50,000 $50,000 $50,000 $50,000 $50,000
------- ------- ------- ------- ------- ------- -------
CLASS A SHARES:
Net asset value per share of
beneficial interest $1.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
----- ------ ------ ------ ------ ------ ------
outstanding*..................
CLASS A SHARES:
Net asset value per share of
beneficial interest $1.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
----- ------ ------ ------ ------ ------ ------
outstanding*..................
- -----------------
<FN>
* Redemption price is equal to NAV less any applicable CDSC.
</FN>
</TABLE>
NOTES TO STATEMENTS OF ASSETS AND LIABILITIES DATED NOVEMBER 10, 1997
1. Organization
MEMBERS Mutual Funds, a Delaware Business Trust (the "Trust"), is registered
under the Investment Company Act of 1940, as amended (the "1940 Act") as an
open-end, diversified management investment company. As of the date of this
report, the Trust offers seven Portfolios (individually, a "Portfolio",
collectively, the "Portfolios") each with two classes of shares: Class A and
Class B. Each class of shares represents interests in the assets of the
Portfolio and have identical voting, dividend, liquidation and other rights on
the same terms and conditions, except that each class of shares bears its own
distribution fees and its proportional share of fund level expenses, is subject
to its own sales charges, if any, and has exclusive voting rights on matters
pertaining to the Rule 12b-1 plan as it relates to that class. The accompanying
financial statements include the Cash Reserves Fund, Bond Fund, Balanced Fund,
High Income Fund, Growth and Income Fund, Capital Appreciation Fund and
International Stock Fund. The Trust has had no operations other than
organizational matters and the issuance of 4,900 Class A and 100 Class B Shares
of each of the Portfolios except for the Cash Reserve Fund which issued 49,000
Class A and 1,000 Class B Shares.
Costs incurred by the Portfolios in connection with its organization and the
initial offering of its shares are estimated to be $66,951 for each Portfolio.
The organizational costs will be deferred and amortized on a straight-line basis
over the period of benefit not to exceed sixty months from the date upon which
each Portfolio commences its investment operations. If any of the initial shares
are redeemed during the amortization period by any holder thereof, the
redemption proceeds will be reduced by a pro rata portion of the then
unamortized organization costs.
2. Agreements and Transactions with Affiliates
The Trust has entered into an Investment Advisory Agreement with CIMCO (the
"Investment Advisor"). For its investment advisory services to the Portfolios,
CIMCO is entitled to receive a fee, which is calculated daily and paid monthly,
at an annual rate based upon the following percentages of average daily net
asset value: 0.40% for the Cash Reserves Fund; 0.50% for the Bond Fund; 0.65%
for the Balanced Fund; 0.55% for the High Income Fund and Growth and Income
Fund; 0.75% for the Capital Appreciation Fund and 1.05% for the International
Stock Fund. The Manager has entered into Subadvisor Agreements for the
management of the investments of the High Income Fund and the International
Stock Fund. The Manager is solely responsible for the payment of all fees to the
Sub Advisors. The Subadvisors for these funds are Massachusetts Financial
Services Company for the High Income Fund and Lazard Asset Management and IAI
International Limited for the International Stock Fund.
The Investment Advisor voluntarily agrees to waive a portion of its fees and to
reimburse the Funds for certain expenses so that total expenses will not exceed
certain expense limitations. The Investment Advisor at its discretion, may
revise or discontinue the voluntary fee waivers and expense reimbursements at
any time. The Investment Advisor has agreed to waive fees and /or reimburse
expenses with respect to the Funds in order that total expenses will not exceed
the following amounts:
Fund Class A Class B
---- ------- -------
Cash Reserves Fund 0.55% 1.30%
Bond Fund 0.90% 1.65%
Balanced Fund 1.10% 1.85%
High Income Fund 1.00% 1.75%
Growth and Income Fund 1.00% 1.75%
Capital Appreciation Fund 1.20% 1.95%
International Stock Fund 1.60% 2.35%
Any reimbursements made by the Investment Advisor to a fund are subject to
repayment by the fund within the subsequent eighteen months, to the extent that
the fund is able to make the repayment within its expense cap.
The Trust and First Data Investor Services Group, Inc. ("Investor Services
Group"), which is a wholly-owned subsidiary of First Data Corporation, are
parties to an administration agreement under which First Data Investor Services
Group provides services for a fee, calculated daily and paid monthly, at the
annual rate of 0.15% of the first $500 million of the combined daily net assets
of the Portfolios, 0.12% of the next $500 million of combined average daily net
assets and 0.09% of combined average daily net assets over $1 billion. In
addition, Investor Services Group also provides certain fund accounting and
transfer agency services. CUNA Brokerage serves as distributor of the Funds. The
Trust adopted Distribution Plans with respect to the Trust's Class A and Class B
shares pursuant to Rule 12b-1 under the 1940 Act (the "Plans"). Under the Plans,
the Trust will pay service fees for Class A and Class B shares at an aggregate
annual rate of 0.25% of each Fund's daily net assets attributable to the
respective class of shares. The Trust will also pay distribution fees for Class
B shares at an aggregate annual rate of 0.75% of each Fund's daily net assets
attributable to Class B. The distribution fees will be used to reimburse CUNA
Brokerage for its distribution expenses with respect to Class B shares only,
including but not limited to: (i) initial and ongoing sales compensation to
Selling Brokers and others engaged in the sale of Fund shares, (ii) marketing,
promotional and overhead expenses incurred in connection with the distribution
of Fund shares, and (iii) interest expenses on unreimbursed distribution
expenses. The service fees will be used to compensate Selling Brokers and others
for providing personal and account maintenance services to shareholders.
3. Use of Estimates in the preparation of the Statement of Assets and
Liabilities
The preparation of the Statement of Assets and Liabilities in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements. Actual results differ from those
estimates.
Independent Auditors' Report
The Shareholder and Board of Directors of MEMBERS Mutual Funds:
We have audited the accompanying statements of assets and liabilities of Cash
Reserves Fund, Bond Fund, Balanced Fund, High Income Fund, Growth and Income
Fund, Capital Appreciation Fund and International Stock Fund, series within
MEMBERS Mutual Funds, as of November 10, 1997. These financial statements are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements 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 are free of material
misstatement. An audit of a financial statement includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statement. Our procedures included confirmation of cash owned with the
custodian. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the statements of assets and liabilities referred to above
present fairly, in all material respects, the financial position of Cash
Reserves Fund, Bond Fund, Balanced Fund, High Income Fund, Growth and Income
Fund, Capital Appreciation Fund and International Stock Fund as of November 10,
1997, in conformity with generally accepted principles.
Minneapolis, Minnesota
November 10, 1997
4460-P1009A (0698)
