MEMBERS Mutual Funds
CASH RESERVES FUND
BOND FUND
BALANCED FUND
HIGH INCOME FUND
GROWTH AND INCOME FUND
CAPITAL APPRECIATION FUND
INTERNATIONAL STOCK FUND
PROSPECTUS
November 19, 1997
This prospectus provides essential information about these funds. For your own
benefit and protection, please read it before you invest, and keep it for future
reference.
Please note that an investment in any of these funds is not a deposit in a
credit union or other financial institution and is neither insured nor endorsed
in any way by any credit union, other financial institution, or government
agency. Such an investment involves certain risks, including loss of principal,
and is not guaranteed to result in positive investment gains. These funds may
not achieve their objectives.
An investment in the Cash Reserves Fund is neither insured nor guaranteed by the
U.S. Government. Although the Cash Reserves Fund attempts to maintain a stable
price of $1.00 per share, there is no assurance that it will be able to do so.
More detailed information on each of the funds described in this prospectus is
contained in the statement of additional information ("SAI"). A current SAI has
been filed with the Securities and Exchange Commission ("Commission") and is
incorporated into this prospectus by reference, making it legally a part of this
document. The SAI is available either from us or on the Commission's web site on
the Internet (http://www.sec.gov). To request it or any other information from
us, please write us at P.O. Box 5175, Westborough, MA 01581 or call
1-800-877-6089.
Shares in these funds have not been approved or disapproved by the Securities
and Exchange Commission, nor has the Commission passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
MEMBERS Mutual Funds
CUNA Mutual Group
5910 Mineral Point Road
Madison, WI 53705
TABLE OF CONTENTS
INTRODUCTION
A summary of the various expenses that you will bear, either directly or
indirectly, by investing in MEMBERS Mutual Funds.
EXPENSES
The fund pages describe each portfolio (or "fund") of MEMBERS Mutual Funds.
THE FUND PAGES
Cash Reserves Fund
Bond Fund
Balanced Fund
High Income Fund
Growth and Income Fund
Capital Appreciation Fund
International Stock Fund
Strategies used by more than one of the funds.
INVESTMENT STRATEGIES COMMON TO MULTIPLE FUNDS
Any investment entails risk. Please read this section carefully.
RISKS
Types of Investment Risk
Higher-Risk Securities and Practices
This section explains how to open, maintain, or close an account with MEMBERS
Mutual Funds.
YOUR ACCOUNT
Choosing a Share Class
How Sales Charges Are Calculated
Other Expenses
Sales Charge Reductions and Waivers
Shareholders With Brokerage Accounts
Opening or Adding to an Account
Contacting MEMBERS Mutual Funds
Buying Shares
Selling Shares
Selling Shares in Writing
Transaction Policies
Dividends and Account Policies
Additional Investor Services
This section will give you some additional information about MEMBERS Mutual
Funds.
MORE ABOUT MEMBERS MUTUAL FUNDS
Organization
Portfolio Management
Use of Certain Brokers
Compensation of Brokers and their Representatives
INTRODUCTION
Welcome to the MEMBERS Mutual Funds, a group of open-end investment companies,
typically called mutual funds. Each fund is a separate investment portfolio with
its own investment objective, investment policies, restrictions, and attendant
risks. This prospectus describes each fund in significant detail -- please read
it and retain it for future reference.
The risk/return curve below demonstrates that for diversified portfolios of
securities of the various types, as short-term risk increases the potential for
long-term gains also increases. "Short-term risk" refers to the likely
volatility of a fund's total return and its potential for gain or loss over a
relatively short time period. "Long-term potential gains" means the expected
average annual total return over a relatively long time period, such as 20
years.
[GRAPHIC: funds and other types of investments placed on a curve; x-axis
labelled "Long Term Potential for Gains"; y-axis labelled "Short Term Risk
(Volatility of Returns)." A footnote indicates that "`Junk' bonds, including
those of the type in which the High Income Fund will invest, are relatively new
types of investments. Over time, these investments may prove to have higher
short term risk than is indicated above."]
This curve is not intended to indicate future volatility or performance. It is
merely intended to demonstrate the relationship between the on-going short-term
risk and the long-term potential for gain of each of the MEMBERS Mutual Funds
relative to the other funds and other types of investments.
EXPENSES
Fund investors pay various expenses, either directly or indirectly. Since the
funds are new, and have no operating history, we have estimated the expenses
each fund will incur in the coming year. These estimates are shown in the
following table. Actual expenses may be greater or less than those shown.
Shareholder Transaction Expenses
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
Cash Bond Balanced High Growth and Capital Int'l All
Reserves Income Income Appreciation Stock Funds
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Maximum sales charge on 5.3% 4.3% 5.3% 4.3% 5.3% 5.3% 5.3% None
purchases
Maximum sales charge on None None None None None None None None
dividends
Maximum deferred sales None(1) None(1) None(1) None(1) None(1) None(1) None(1) 4.5%
charge
Redemption fee None None None None None None None None
Exchange fee None None None None None None None None
Annual account fee None None None None None None None None
Annual Fund Operating Expenses (as a percentage of average net assets)
Growth and Capital
Class or Cash Bond Balanced High Income Income Appre- Int'l Stock
Classes Reserves ciation
- --------------------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management fee A&B .40% .50% .65% .55% .55% .75% 1.05%
- --------------------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ ----------
12b-1 fee(2) A None None None None None None None
------------ ------------- ------------ ------------- ------------ ------------- ------------ ----------
B .75% .75% .75% .75% .75% .75% .75%
- --------------------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ ----------
Service fee A&B None .25% .25% .25% .25% .25% .25%
- --------------------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ ----------
Other expenses(3) A&B .15% .15% .20% .20% .20% .20% .30%
- --------------------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ ----------
Total fund operating A .55% .90% 1.10% 1.00% 1.00% 1.20% 1.60%
------------ ------------- ------------ ------------- ------------ ------------- ------------ ----------
expenses B 1.30% 1.65% 1.85% 1.75% 1.75% 1.95% 2.35%
- --------------------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ ----------
<FN>
(1) Except for investments of $1,000,000 or more. (See "How Sales Charges Are
Calculated.")
(2) Because of the 12b-1 fee, long-term Class B shareholders may indirectly pay
more than the equivalent of the maximum permitted front-end sales charge.
(3) The funds' investment adviser, CIMCO Inc. (CIMCO), has placed a "cap" on the
funds' expenses by voluntarily agreeing to reimburse each fund's expenses, other
than its management, 12b-1, and service fees, that exceed a certain amount
(excluding taxes, interest, and other extraordinary items). Any reimbursements
made by CIMCO to a fund are subject to repayment by the fund within the
subsequent 18 months, to the extent that the fund is able to make the repayment
while remaining within its expense cap. The amounts shown represent the maximum
amounts that you could bear while this expense cap arrangement is in place.
Although CIMCO intends to continue to reimburse the funds in this way for the
foreseeable future, there is no guarantee that it will do so. Absent the expense
cap, the funds' estimated expenses in the coming year, for Class A and Class B
shares respectively, are 4.07% and 4.82% for the Cash Reserves Fund, 4.42% and
5.17% for the Bond Fund, 3.35% and 4.10% for the Balanced Fund, 2.55% and 3.30%
for the High Income Fund, 2.28% and 3.03% for the Growth and Income Fund, 2.85%
and 3.60% for the Capital Appreciation Fund, and 2.40% and 3.15% for the
International Stock Fund.
</FN>
</TABLE>
Examples
The tables below show what expenses you would pay if you invested $1,000 in each
fund over the various time periods indicated. The examples assume you reinvested
all dividends and that the average annual return for each fund was 5%.
Assuming that you redeemed your entire investment at the end of each period:
Class A Class B
Year 1 Year 3 Year 1 Year 3
Cash Reserves 58 70 58 76
Bond 52 70 61 87
Balanced 64 86 64 93
High Income 53 73 63 90
Growth and Income 63 83 63 90
Capital Appreciation 65 89 65 96
International Stock 68 101 69 108
Assuming that you did not redeem:
Class A Class B
Year 1 Year 3 Year 1 Year 3
Cash Reserves 58 70 13 41
Bond 52 70 17 52
Balanced 64 86 19 58
High Income 53 73 18 55
Growth and Income 63 83 18 55
Capital Appreciation 65 89 20 61
International Stock 68 101 24 73
These examples are for comparison purposes only and are not a representation of
the funds' actual expenses and returns, either past or future. Actual expenses
may be greater or less than those shown above.
THE FUND PAGES
The following pages present information about each fund in a concise, easy to
read format. The format is explained below. Of course, these fund pages do not
contain all of the relevant information about the funds and should be read in
the context of the entire prospectus.
[GRAPHIC: minaturized Growth and Income Fund page with arrows pointing at the
appropriate headings]
The fund's NAME appears at the top of each page.
You may want to invest more or less of your total investment assets in a
particular fund based upon your individual goals, preferences, and risk
tolerances. We highlight some of the reasons why you may want to consider
investing in a particular fund in the INVESTOR PROFILE section of the fund page.
Each fund has a distinct INVESTMENT OBJECTIVE or goal. These objectives are
"fundamental," meaning that they cannot be changed without shareholder approval.
Each fund page contains a short section describing the PRINCIPAL RISKS of an
investment in that fund. These risks, and the risks associated with other
higher-risk investments and investment practices that the funds may utilize, are
described in more detail later in this prospectus in a section entitled "Risks."
Every investment carries with it some degree of risk, and it is possible to lose
money by investing in any mutual fund. Before you invest, please carefully read
the fund page risk summary and the section later in the prospectus on "Risks."
Some funds are managed by a team of managers and some funds by one or more
subadvisers. The PORTFOLIO MANAGEMENT section of the fund page will provide
information about who makes the day-to-day investment decisions for the fund.
More information about our portfolio management styles and the individual
managers and subadvisers is contained later in this prospectus under the caption
"Portfolio Management."
The PRIMARY INVESTMENT STRATEGIES section of the fund page describes the type or
types of securities and investments in which the fund principally invests and
the main strategies used in attempting to achieve the fund's investment
objective. You should use this section in conjunction with the table and chart
on pages 19-24 that describe the funds' higher-risk investment practices. When
we describe a fund's investment policies, "assets" refers to the fund's total
assets unless stated otherwise.
Additional information about each fund's investments is available in the funds'
annual and semi-annual reports to shareholders. In particular, the funds' annual
reports will discuss the relevant market conditions and investment strategies
used by the funds' portfolio manager(s) that materially affected the funds'
performance during the prior fiscal year. You may obtain a copy of any of these
reports at 1-800-877-6089.ing
Cash Reserves Fund
Investor Profile
Who should consider investing in this fund?
You may want to invest more of your assets in this fund if you:
[bullet] require stability of principal
[bullet] are seeking a mutual fund for the cash portion of an asset
allocation program
[bullet] need to "park" your money temporarily
[bullet] consider yourself a saver rather than an investor
or
[bullet] are investing emergency reserves
You may want to invest fewer of your assets in this fund if you:
[bullet] want federal deposit insurance
[bullet] are seeking an investment that is likely to outpace inflation
[bullet] are investing for retirement or other goals that are many years
in the future
or
[bullet] are investing for growth or maximum current income
Investment Objective
What is this fund's goal?
The Cash Reserves Fund seeks high current income from money market instruments
consistent with the preservation of capital and liquidity. The fund intends to
maintain a stable value of $1.00 per share.
Principal Risks
What are the main risks of investing in this fund?
As with any money market fund, the yield paid by the fund will vary with changes
in interest rates. Also, there is a remote possibility that the fund's share
value could fall below $1.00, which could reduce the value of your account.
To the extent that it invests in certain securities, the fund may be affected by
additional risks relating to repurchase agreements (credit risk), short-term
trading (market risk, as well as potentially higher transaction costs),
when-issued securities (market, opportunity, and leverage risks), and foreign
money market securities (information, natural event and political risks).
However, these risks are lessened by the high quality of the securities in which
the fund invests.
These risks, and the risks associated with other higher-risk securities and
practices that the fund may utilize, are described in more detail later in this
prospectus. This fund is not a credit union or other financial institution
account and is not insured or guaranteed by any financial institution or
government body. Before you invest, please carefully read the section on
"Risks."
Portfolio Management
Who makes the investment decisions for this fund?
The fund is managed by a team of CIMCO's portfolio managers. More information
about each portfolio manager is provided later in this prospectus.
Primary Investment Strategies
How does this fund pursue its objective?
The Cash Reserves Fund invests exclusively in U.S. dollar-denominated money
market securities maturing in thirteen months or less from the date of purchase,
including those issued by U.S. and foreign financial institutions, corporate
issuers, the U.S. Government and its agencies and instrumentalities,
municipalities, foreign governments, and multi-national organizations, such as
the World Bank. At least 95% of the fund's assets must be rated in the highest
short-term category (or its unrated equivalent), and 100% of the fund's assets
must be invested in securities rated in the two highest rating categories. A
more detailed description of the rating categories and the types of permissible
issuers is contained in the SAI. The fund maintains a dollar-weighted average
portfolio maturity of 90 days or less. The fund may also:
[bullet] Lend securities to financial institutions, enter into repurchase
agreements, engage in short-term trading and purchase securities
on a when-issued or forward commitment basis;
[bullet] Invest up to 10% of its assets in illiquid securities, although
it will not generally invest in such securities;
[bullet] Invest in U.S. dollar-denominated foreign money market
securities, although no more than 25% of the fund's assets may
be invested in foreign money market securities unless such
securities are backed by a U.S. parent financial institution;
and
[bullet] To the extent permitted by law and available in the market,
invest in mortgage-backed and asset-backed securities, including
those representing pools of mortgage, commercial or consumer
loans originated by credit unions.
Bond Fund
Investor Profile
Who should consider investing in this fund?
You may want to invest more of your assets in this fund if you:
[bullet] are seeking a regular stream of income
[bullet] are seeking higher potential returns than money market funds
and are willing to accept moderate risk of volatility
[bullet] want to diversify your investments
[bullet] are seeking a mutual fund for the income portion of an asset
allocation program
or
[bullet] are retired or nearing retirement
You may want to invest fewer of your assets in this fund if you:
[bullet] are investing for maximum return over a long time horizon
or
[bullet] require absolute stability of your principal
Investment Objective
What is this fund's goal?
The Bond Fund seeks to generate a high level of current income, consistent with
the prudent limitation of investment risk, primarily through investment in a
diversified portfolio of income bearing debt securities.
Principal Risks
What are the main risks of investing in this fund?
As with most income funds, the Bond Fund is subject to interest rate risk, the
risk that the value of your investment will fluctuate with changes in interest
rates. Typically, a rise in interest rates causes a decline in the market value
of income bearing securities. Other factors may affect the market price and
yield of the fund's securities, including investor demand and domestic and
worldwide economic conditions. In addition, the fund is subject to credit risk,
the risk that issuers of debt securities may not be able to meet their interest
or principal payment obligations when due. The ability of the fund to realize
interest under repurchase agreements and pursuant to loans of the fund's
securities is dependent on the ability of the seller or borrower, as the case
may be, to perform its obligation to the fund. To the extent that the fund
invests in non-investment grade securities, the fund is also subject to
above-average credit, market and other risks.
These risks, and the risks associated with other higher-risk securities and
practices that the fund may utilize, are described in more detail later in this
prospectus. Before you invest, please carefully read the section on "Risks."
Portfolio Management
Who makes the investment decisions for this fund?
The fund is managed by a team of CIMCO's portfolio managers. More information
about each portfolio manager is provided later in this prospectus.
Primary Investment Strategies
How does this fund pursue its objective?
To keep current income relatively stable and to limit share price volatility,
the Bond Fund emphasizes investment grade securities and maintains an
intermediate (typically 3-6 year) average portfolio duration. Under normal
circumstances, the fund invests at least 80% of its assets in such securities.
The Fund may invest in the following instruments:
[bullet] Corporate debt securities: securities issued by domestic and
foreign corporations which have a rating within the four highest
categories and, to a limited extent (up to 20% of its assets),
in securities not rated within the four highest categories;
[bullet] U.S. Government debt securities: securities issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities;
[bullet] Foreign government debt securities: securities issued or
guaranteed by a foreign government or its agencies or
instrumentalities, payable in U.S. dollars, which have a rating
within the four highest categories; and
[bullet] Other issuer debt securities: securities issued or guaranteed
by corporations, financial institutions, and others which,
although not rated by a national rating service, are considered
by the fund's investment adviser to have an investment quality
equivalent to the four highest categories.
A detailed description of the rating categories is contained in the SAI. To the
extent permitted by law and available in the market, the fund may also invest in
asset-backed and mortgage-backed securities, including those representing
mortgage, commercial or consumer loans originated by credit unions.
Investment Adviser Performance Record
In the future, the prospectus will show how the MEMBERS Bond Fund has performed,
but because the fund was new when this prospectus was printed, its performance
could not be presented. However, performance data is set forth below relating to
the historic performance of the similarly managed Bond Fund of the Ultra Series
Fund (the "USF Bond Fund") for the periods indicated. The USF Bond Fund is a
variable insurance products fund that has investment objectives, policies,
strategies and risks substantially similar to those of the MEMBERS Bond Fund and
has been managed by members of CIMCO's portfolio management team who will be
managing the MEMBERS Bond Fund.
Performance of the Ultra Series Fund's Bond Fund
Average Annual Total Return One Year Five Years Ten Years
(as of December 31, 1996) 2.58% 6.10% 7.51%
[GRAPHIC: bar chart showing average annual total returns from 1987 through 1996
for the Ultra Series Fund's Bond Fund and the Lehman Brothers Intermediate
Corporate and Government Bond Index]
[GRAPHIC: line chart showing the ten year cumulative total return of a
hypothetical $10,000 investment made on January 1, 1987 for the Ultra Series
Fund's Bond Fund and the Lehman Brothers Intermediate Corporate and Government
Bond Index]
The data is provided to illustrate the past performance of CIMCO's investment
team in managing a substantially similar investment portfolio and does not
represent the performance of the MEMBERS Bond Fund. Investors should not
consider this performance data as an indication of future performance of the
MEMBERS Bond Fund.
The performance data was calculated after deducting all fees and charges
actually incurred by the USF Bond Fund. During the periods shown, CUNA Mutual
Life Insurance Company and its affiliates absorbed certain expenses for the USF
Bond Fund. If these expenses had been paid by the USF Bond Fund, the performance
shown would have been less favorable. The MEMBERS Bond Fund will likely have
different fees and expenses that would result in different performance data.
The investment results presented are not intended to predict or suggest the
returns that might be experienced by the MEMBERS Bond Fund or an individual
investing in the MEMBERS Bond Fund. Investors should also be aware that the use
of a methodology different from that used to calculate the performance presented
on this page would result in different performance data.
Balanced Fund
Investor Profile
Who should consider investing in this fund?
You may want to invest more of your assets in this fund if you:
[bullet] are looking for a more conservative alternative to a
growth-oriented fund
[bullet] want a well-diversified and relatively stable investment
allocation
[bullet] need a core investment
[bullet] seek above-average total return over the long term irrespective
of its form (i.e., capital gains or ordinary income)
or
[bullet] are retired or nearing retirement
You may want to invest fewer of your assets in this fund if you:
[bullet] are investing for maximum return over a long time horizon
[bullet] want your return to be either ordinary income or capital gains,
but not both
or
[bullet] require a high degree of stability of your principal
Investment Objective
What is this fund's goal?
The Balanced Fund seeks a high total return through the combination of income
and capital appreciation.
Principal Risks
What are the main risks of investing in this fund?
As with any fund that invests in stocks and bonds, the fund is subject to market
and interest rate risks, the risks that the value of your investment will
fluctuate in response to stock and bond market movements and changes in interest
rates. Loss of money is a risk of investing in this fund.
To the extent that it invests in certain securities, the fund may be affected by
additional risks relating to non-investment grade securities (above-average
credit, market and other risks), foreign securities (currency, information,
natural event and political risks), and mortgage-backed securities (credit,
extension, prepayment and interest rate risks). These risks, and the risks
associated with other higher-risk securities and practices that the fund may
utilize, are described in more detail later in this prospectus. Before you
invest, please carefully read the section on "Risks."
Portfolio Management Who makes the investment decisions for this fund?
The fund is managed by a team of CIMCO's portfolio managers. More information
about each portfolio manager is provided later in this prospectus.
Primary Investment Strategies
How does this fund pursue its objective?
The Balanced Fund invests in a broadly diversified array of securities including
common stocks, bonds and money market instruments. The percentage of the fund's
assets invested in equity securities, income bearing securities and money market
instruments may vary somewhat depending upon management's judgment of the
relative attractiveness of each sector and anticipated cash needs of the fund.
Generally, however, common stocks will constitute 60% to 40% of the fund's
assets, bonds will constitute 40% to 60% of the fund's assets and money market
instruments may constitute up to 20% of the fund's assets. The Balanced Fund
will invest in the same types of equity securities in which the Capital
Appreciation Fund and Growth and Income Fund invest, the same type of bonds in
which the Bond Fund invests, and the same types of money market instruments in
which the Cash Reserves Fund invests.
The fund may invest up to 25% of its assets in foreign securities.
Investment Adviser Performance Record
In the future, the prospectus will show how the MEMBERS Balanced Fund has
performed over time, but because the fund was new when this prospectus was
printed, its performance could not be presented. However, performance data is
set forth below relating to the historic performance of the similarly managed
Balanced Fund of the Ultra Series Fund (the "USF Balanced Fund") for the periods
indicated. The USF Balanced Fund is a variable insurance products fund that has
investment objectives, policies, strategies and risks substantially similar to
those of the MEMBERS Balanced Fund and has been managed by members of CIMCO's
portfolio management team who will be managing the MEMBERS Balanced Fund.
Performance of the Ultra Series Fund's Balanced Fund
Average Annual TotalReturn One Year FiveYears Ten Years
(as of December 31, 1996) 10.80% 9.72% 10.45%
[GRAPHIC: bar chart showing average annual total returns from 1987 through 1996
for the Ultra Series Fund's Balanced Fund and a blended comparative index]
[GRAPHIC: line chart showing the ten year cumulative total return of a
hypothetical $10,000 investment made on January 1, 1987 for the Ultra Series
Fund's Balanced Fund and a blended comparative index]
The data is provided to illustrate the past performance of CIMCO's investment
team in managing a substantially similar investment portfolio and does not
represent the performance of the MEMBERS Balanced Fund. Investors should not
consider this performance data as an indication of future performance of the
MEMBERS Balanced Fund.
The performance data was calculated after deducting all fees and charges
actually incurred by the USF Balanced Fund. During the periods shown, CUNA
Mutual Life Insurance Company and its affiliates absorbed certain expenses for
the USF Balanced Fund. If these expenses had been paid by the USF Balanced Fund,
the performance shown would have been less favorable. The MEMBERS Balanced Fund
will likely have different fees and expenses that would result in different
performance data.
The investment results presented are not intended to predict or suggest the
returns that might be experienced by the MEMBERS Balanced Fund or an individual
investing in the MEMBERS Balanced Fund. Investors should also be aware that the
use of a methodology different from that used to calculate the performance
presented on this page would result in different performance data.
High Income Fund
Investor Profile
Who should consider investing in this fund?
You may want to invest more of your assets in this fund if you:
[bullet] are seeking a regular stream of income
[bullet] are seeking higher potential returns than most bond funds and
are willing to accept significant risk of volatility
[bullet] want to diversify your investments
[bullet] are seeking a mutual fund for the income portion of an asset
allocation program
or
[bullet] are retired or nearing retirement
You may want to invest fewer of your assets in this fund if you:
[bullet] desire relative stability of your principal
or
[bullet] are investing for maximum return over a long time horizon
Investment Objective
What is this fund's goal?
The High Income Fund seeks high current income by investing primarily in a
diversified portfolio of lower-rated, higher-yielding income bearing securities.
The fund also seeks capital appreciation, but only when consistent with its
primary goal.
Principal Risks
What are the main risks of investing in this fund?
This fund is subject to above-average interest rate and credit risks. Investors
should expect greater fluctuations in share price, yield and total return
compared to bond funds holding bonds and other income bearing securities with
higher credit ratings and/or shorter maturities. These fluctuations, whether
positive or negative, may be sharp and unanticipated. Loss of money is a
significant risk of investing in this fund.
Issuers of non-investment grade securities (i.e., "junk" bonds) are typically in
weak financial health and their ability to pay interest and principal is
uncertain. Compared to issuers of investment-grade bonds, they are more likely
to encounter financial difficulties and to be materially affected by these
difficulties when they do encounter them. "Junk" bond markets may react strongly
to adverse news about an issuer or the economy, or to the perception or
expectation of adverse news.
The fund may also invest in mortgage-backed securities that are subject to
extension and prepayment risks.
These risks, and the risks associated with other higher-risk securities and
practices that the fund may utilize, are described in more detail later in this
prospectus. Before you invest, please carefully read the section on "Risks."
Portfolio Management
Who makes the investment decisions for this fund?
CIMCO uses one or more subadvisers under a "manager of managers" approach to
make investment decisions for this fund. More information about these
subadvisers, their investment styles and the "manager of managers" approach is
provided later in this prospectus. Massachusetts Financial Services Company
("MFS") is the only subadviser currently used by CIMCO to manage the assets of
the fund.
Primary Investment Strategies
How does this fund pursue its objective?
The High Income Fund invests primarily in lower-rated, higher-yielding income
bearing securities, such as "junk" bonds. Because the performance of these
securities has historically been strongly influenced by economic conditions, the
fund may rotate securities selection by business sector according to the
economic outlook. Under normal market conditions, the fund invests at least 80%
of its assets in bonds rated lower than investment grade (BBB/Baa) and their
unrated equivalents or other high-yielding securities. Up to 10% of its assets
may be invested in bonds rated CC/Ca. Types of bonds and other securities
include, but are not limited to, domestic and foreign corporate bonds,
debentures, notes, convertible securities, preferred stocks, municipal
obligations and government obligations. The fund may invest in mortgage-backed
securities.
Up to 25% of its assets may be invested in the securities of issuers in any one
industry.
The fund may also invest up to 50% of its assets in high-yielding foreign
securities, including up to 25% of its assets in emerging market securities.
Subadviser Performance Record
In the future, the prospectus will show how the MEMBERS High Income Fund has
performed over time, but because the fund was new when this prospectus was
printed, its performance could not be presented. However, performance data is
set forth below relating to the historic performance of the similarly managed
MFS [trademark symbol] High Income Fund (Class A shares) for the periods
indicated. The MFS [trademark symbol] High Income Fund has investment
objectives, policies, strategies and risks substantially similar to those of the
MEMBERS High Income Fund and has been managed for more than the last ten years
by MFS, the subadviser currently responsible for the day-to-day investment
decisions for the MEMBERS High Income Fund.
Performance of the MFS [trademark symbol] High Income Fund
Average Annual Total Return One Year Five Years Ten Years
(as of December 31, 1996) 12.56% 12.40% 9.32%
[GRAPHIC: bar chart showing average annual total returns from 1987 through 1996
for the MFS [registered trademark] High Income Fund and the Lehman Brothers High
Yield Index]
[GRAPHIC: line chart showing the ten year cumulative total return of a
hypothetical $10,000 investment made on January 1, 1987 for the MFS [registered
trademark] High Income Fund and the Lehman Brothers High Yield Index]
The data is provided to illustrate MFS's past performance in managing a
substantially similar investment portfolio and does not represent the
performance of the MEMBERS High Income Fund. Investors should not consider this
performance data as an indication of future performance of the MEMBERS High
Income Fund.
The performance data was calculated after deducting all fees and charges
actually incurred by the MFS [trademark symbol] High Income Fund. The MEMBERS
High Income Fund will likely have different fees and expenses that would result
in different performance data. In addition, the performance data shown is based
upon the calendar year, while the MFS [trademark symbol] High Income Fund's
fiscal year ends January 31st each year. Thus, the annual total return figures
will likely differ from those presented in the MFS [trademark symbol] High
Income Fund's prospectus.
The investment results presented are not intended to predict or suggest the
returns that might be experienced by the MEMBERS High Income Fund or an
individual investing in the MEMBERS High Income Fund. Investors should also be
aware that the use of a methodology different from that used to calculate the
performance presented on this page would result in different performance data.
Growth and Income Fund
Investor Profile
Who should consider investing in this fund?
You may want to invest more of your assets in this fund if you:
[bullet] are looking for a stock fund that has both growth and income
components
[bullet] are looking for a more conservative alternative to a
growth-oriented fund
[bullet] need a core investment
[bullet] seek above-average long-term total return through a combination
of capital gains and ordinary income
or
[bullet] are retired or nearing retirement
You may want to invest fewer of your assets in this fund if you:
[bullet] are investing for maximum return over a long time horizon
[bullet] desire your return to be either ordinary income or capital
gains, but not both
or
[bullet] require a high degree of stability of your principal
Investment Objective
What is this fund's goal?
The Growth and Income Fund seeks long-term capital growth, with income as a
secondary consideration.
Principal Risks
What are the main risks of investing in this fund?
As with any fund that invests in stocks and also seeks income, this fund is
subject to market and interest rate risks, and the value of your investment will
fluctuate in response to stock market and interest rate movements. Loss of money
is a risk of investing in this fund.
To the extent that it invests in certain securities, the fund may be affected by
additional risks relating to foreign securities (currency, information, natural
event and political risks) and non-investment grade securities (credit, market,
interest rate, liquidity, valuation, and information risks).
These risks, and the risks associated with other higher-risk securities and
practices that the fund may utilize, are described in more detail later in this
prospectus. Before you invest, please carefully read the section on "Risks."
Portfolio Management
Who makes the investment decisions for this fund?
The fund is managed by a team of CIMCO's portfolio managers. More information
about each portfolio manager is provided later in this prospectus.
Primary Investment Strategies
How does this fund pursue its objective?
The Growth and Income Fund will focus on stocks of companies with financial and
market strength and a long-term record of financial performance, and will, under
normal market conditions, maintain at least 80% of its assets in such stocks.
Primarily through ownership of a diversified portfolio of common stocks and
securities convertible into common stocks, the fund will seek a rate of return
in excess of returns typically available from less variable investment
alternatives.
The fund will typically invest in securities representing every sector of the
S&P 500 in approximately (+/-50%) the same weightings as such sector has in the
S&P 500. (See "Investment Strategies Common to Multiple Funds -- S&P 500" for
more information on the S&P 500.) For example, if technology companies represent
10% of the S&P 500, the fund will typically have between 5% and 15% of its
assets invested in securities issued by technology companies.
The fund may also invest in warrants, preferred stocks and debt securities
(including non-investment grade debt securities).
The fund may invest up to 25% of its assets in foreign securities.
Investment Adviser Performance Record
In the future, the prospectus will show how the MEMBERS Growth and Income Fund
has performed over time, but because the fund was new when this prospectus was
printed, its performance could not be presented. However, performance data is
set forth below relating to the historic performance of the similarly managed
Growth and Income Stock Fund of the Ultra Series Fund (the "USF Growth and
Income Stock Fund") for the periods indicated. The USF Growth and Income Stock
Fund is a variable insurance products fund that has investment objectives,
policies, strategies and risks substantially similar to those of the MEMBERS
Growth and Income Fund and has been managed by members of CIMCO's portfolio
management team who will be managing the MEMBERS Growth and Income Fund.
Performance of the Ultra Series Fund's Growth and Income Fund
Average Annual Total Return One Year Five Years Ten Years
(as of December 31, 1996) 22.01% 14.83% 13.71%
[GRAPHIC: bar chart showing average annual total returns from 1987 through 1996
for the Ultra Series Fund's Growth and Income Stock Fund and the S&P 500]
[GRAPHIC: line chart showing the ten year cumulative total return of a
hypothetical $10,000 investment made on January 1, 1987 for the Ultra Series
Fund's Growth and Income Stock Fund and the S&P 500]
The data is provided to illustrate the past performance of CIMCO's investment
team in managing a substantially similar investment portfolio and does not
represent the performance of the MEMBERS Growth and Income Fund. Investors
should not consider this performance data as an indication of future performance
of the MEMBERS Growth and Income Fund.
The performance data was calculated after deducting all fees and charges
actually incurred by the USF Growth and Income Stock Fund. During the periods
shown, CUNA Mutual Life Insurance Company and its affiliates absorbed certain
expenses for the USF Growth and Income Stock Fund. If these expenses had been
paid by the USF Growth and Income Stock Fund, the performance shown would have
been less favorable. The MEMBERS Growth and Income Fund will likely have
different fees and expenses that would result in different performance data.
The investment results presented are not intended to predict or suggest the
returns that might be experienced by the MEMBERS Growth and Income Fund or an
individual investing in the MEMBERS Growth and Income Fund. Investors should
also be aware that the use of a methodology different from that used to
calculate the performance presented on this page would result in different
performance data.
Capital Appreciation Fund
Investor Profile
Who should consider investing in this fund?
You may want to invest more of your assets in this fund if you:
[bullet] have longer investment time horizons
[bullet] are willing to accept higher on-going short-term risk for the
potential of higher long-term returns
[bullet] want to diversify your investments
[bullet] are seeking funds for the growth portion of an asset allocation
program
or
[bullet] are investing for retirement or other goals that are many years
in the future
You may want to invest fewer of your assets in this fund if you:
[bullet] are investing with a shorter investment time horizon in mind
[bullet] are seeking income rather than capital gains
or
[bullet] are uncomfortable with an investment whose value may vary
substantially
Investment Objective
What is this fund's goal?
The Capital Appreication Fund seeks long-term capital appreciation.
Principal Risks
What are the main risks of investing in this fund?
As with any fund that invests in equity securities, this fund is subject to
market risk, the risk that the value of your investment will fluctuate in
response to stock market movements. Loss of money is a significant risk of
investing in this fund. Due to its focus on stocks that may appreciate in value
and lack of emphasis on those that provide current income, this fund will
typically experience greater volatility over time than the Growth and Income
Fund.
To the extent that the fund invests in higher-risk securities, it takes on
additional risks that could adversely affect its performance. For example, to
the extent that the fund invests in foreign securities, it will be subject to
the risks related to such securities.
These risks, and the risks associated with other higher-risk securities and
practices that the fund may utilize, are described in more detail later in this
prospectus. Before you invest, please carefully read the section on "Risks."
Portfolio Management Who makes the investment decisions for this fund?
The fund is managed by a team of CIMCO's portfolio managers. More information
about each portfolio manager is provided later in this prospectus.
Primary Investment Strategies
How does this fund pursue its objective?
The Capital Appreciation Fund invests primarily in common stocks, and will,
under normal market conditions, maintain at least 80% of its assets in such
securities. The fund seeks stocks that have a low market price relative to the
portfolio managers' expected level and certainty of the issuing company's future
earnings. Relative to the Growth and Income Fund, the Capital Appreciation Fund
will include some smaller, less developed issuers and some companies undergoing
more significant changes in their operations or experiencing significant changes
in their markets. The fund will diversify its holdings among various industries
and among companies within those industries but will often be less diversified
than the Growth and Income Stock Fund. The combination of these factors
introduces greater investment risk than the Growth and Income Fund, but can also
provide higher long-term returns than are typically available from less risky
investments.
The fund will typically invest in securities representing every sector of the
S&P 500 in approximately (+/-100%) the same weightings as such sector has in the
S&P 500. (See "Investment Strategies Common to Multiple Funds -- S&P 500" for
more information on the S&P 500.) For example, if technology companies represent
10% of the S&P 500, the fund will typically have between 0% and 20% of its
assets invested in securities issued by technology companies.
The fund may also invest in warrants, preferred stocks and convertible debt
securities, and may invest up to 25% of its assets in foreign securities.
Investment Adviser Performance Record
In the future, the prospectus will show how the MEMBERS Capital Appreciation
Fund has performed over time, but because the fund was new when this prospectus
was printed, its performance could not be presented. However, performance data
is set forth below relating to the historic performance of the similarly managed
Capital Appreciation Stock Fund of the Ultra Series Fund (the "USF Capital
Appreciation Stock Fund") since its inception on January 3, 1994. The USF
Capital Appreciation Stock Fund is a variable insurance products fund that has
investment objectives, policies, strategies and risks substantially similar to
those of the MEMBERS Capital Appreciation Fund and has been managed by members
of CIMCO's portfolio management team who will be managing the MEMBERS Capital
Appreciation Fund.
Performance of the Ultra Series Fund's Capital Appreciation Stock Fund
Average Annual Total Return One Year Since Inception*
(as of December 31, 1996) 21.44% 18.74%
[GRAPHIC: bar chart showing average annual total returns from 1987 through 1996
for the Ultra Series Fund's Capital Appreciation Stock Fund and the S&P 400]
[GRAPHIC: line chart showing the ten year cumulative total return of a
hypothetical $10,000 investment made on January 1, 1987 for the Ultra Series
Fund's Capital Appreciation Stock Fund and the S&P 400]
The data is provided to illustrate the past performance of CIMCO's investment
team in managing a substantially similar investment portfolio and does not
represent the performance of the MEMBERS Capital Appreciation Fund. Investors
should not consider this performance data as an indication of future performance
of the MEMBERS Capital Appreciation Fund.
The performance data was calculated after deducting all fees and charges
actually incurred by the USF Capital Appreciation Stock Fund. During the periods
shown, CUNA Mutual Life Insurance Company and its affiliates absorbed certain
expenses for the USF Capital Appreciation Stock Fund. If these expenses had been
paid by the USF Capital Appreciation Stock Fund, the performance shown would
have been less favorable. The MEMBERS Capital Appreciation Fund will likely have
different fees and expenses that would result in different performance data.
The investment results presented are not intended to predict or suggest the
returns that might be experienced by the MEMBERS Capital Appreciation Fund or an
individual investing in the MEMBERS Capital Appreciation Fund. Investors should
also be aware that the use of a methodology different from that used to
calculate the performance presented on this page would result in different
performance data.
International Stock Fund
Investor Profile
Who should consider investing in this fund?
You may want to invest more of your assets in this fund if you:
[bullet] are seeking to diversify your domestic investments
[bullet] are seeking access to markets that can be less accessible to
individual investors in the U.S.
[bullet] are willing to accept high risk to achieve higher long-term
growth
[bullet] are seeking funds for the growth portion of an asset allocation
program
or
[bullet] are investing for goals that are many years in the future
You may want to invest fewer of your assets in this fund if you:
[bullet] are investing with a shorter investment time horizon in mind
[bullet] are uncomfortable with an investment whose value may vary
substantially
[bullet] are seeking income rather than capital gains
or
[bullet] want to limit your exposure to foreign markets or currencies or
income from foreign sources
Investment Objective
What is this fund's goal?
The International Stock Fund seeks long-term growth of capital by investing
primarily in foreign equity securities (defined below).
Principal Risks
What are the main risks of investing in this fund?
As with any fund investing in stocks, the value of your investment will
fluctuate in response to stock market movements. Loss of money is a significant
risk of investing in this fund.
Because it invests in foreign securities, the fund carries additional risks,
including currency, information, natural event and political risks. These risks,
which may make the fund more volatile than a comparable domestic growth fund,
are described in more detail later in this prospectus. The risks of
international investing are higher in emerging markets such as those of Latin
America, Africa, Asia and Eastern Europe. To the extent that the fund invests in
smaller capitalization companies or utilizes higher-risk securities and
practices, it takes on further risks that could adversely affect its
performance.
<PAGE>
These risks, and the risks associated with other higher-risk securities and
practices that the fund may utilize, are described in more detail later in this
prospectus. Before you invest, please carefully read the section on "Risks."
Portfolio Management
Who makes the investment decisions for this fund?
CIMCO uses one or more subadvisers under a "manager of managers" approach to
make investment decisions for this fund. More information about these
subadvisers, their investment styles and the "manager of managers" approach is
provided later in this prospectus.
Primary Investment Strategies
How does this fund pursue its objective?
Under normal market conditions, the International Stock Fund invests at least
80% of its assets in foreign equity securities. Foreign securities are
securities that are issued by companies organized or whose principal operations
are outside the U.S., are issued by a foreign government, are principally traded
outside of the U.S., or are quoted or denominated in a foreign currency. Equity
securities include common stocks, securities convertible into common stocks,
preferred stocks, and other securities representing equity interests such as
American depository receipts ("ADRs"), European depository receipts ("EDRs") and
global depository receipts ("GDRs"). The fund may also invest in debt
securities, foreign money market instruments, and other income bearing
securities as well as forward foreign currency exchange contracts and other
derivative securities and contracts. The fund always holds securities of issuers
located in at least three countries other than the U.S.
The description of the International Stock Fund's primary investment strategies
is continued on the next page.
Primary Investment Strategies (International Stock Fund continued from the
previous page)
The fund allocates portions of its assets to one or more subadvisers to achieve
a blend of suitable investments. At the current time, at least two-thirds
(66.67%) of the fund's assets are managed by a subadviser that focuses on
acquiring relatively large capitalization stocks of issuers principally located
or operating in developed countries. Such securities are those generally
representative of the securities comprising the Morgan Stanley Capital
International, Europe, Australia, Far East ("EAFE") Index (an unmanaged index of
foreign common stocks). This subadviser typically maintains this segment of the
fund's portfolio in 30 to 45 such stocks which it believes have above average
potential for capital appreciation, but may also invest in foreign debt and
other income bearing securities at times when it believes that income bearing
securities have greater capital appreciation potential than equity securities.
At the current time, the fund's remaining assets are managed by a subadviser
that focuses on acquiring small capitalization stocks and stocks principally
traded in emerging securities markets or of issuers located in or having
substantial business operations in emerging economies. In selecting both small
capitalization stocks and emerging market stocks, the subadviser seeks
securities that are undervalued in the markets in which the securities
principally trade based on its analysis of the issuer's future prospects. Such
an analysis includes both quantitative (screening for high financial returns)
and qualitative (fundamental analysis of the business prospects of the issuer)
elements. The percentage of assets allocated to any subadviser will vary
depending upon CIMCO's perception of the relative attractiveness of the type of
securities that the subadviser specializes in under current market conditions.
INVESTMENT STRATEGIES COMMON TO MULTIPLE FUNDS
The following section provides you with more information about certain
investment strategies used by more than one of the MEMBERS Mutual Funds. Please
read this section in conjunction with the fund pages and the next section on
"Risks."
Money Market Securities. For liquidity and flexibility, each fund (other than
the Cash Reserves Fund) may invest up to 20% of its assets in investment-grade
short-term securities of the type in which the Cash Reserves Fund invests. (The
Cash Reserves Fund invests 100% of its assets in such securities.) Although each
fund expects to pursue its investment objective utilizing its primary investment
strategies regardless of market conditions, each fund may invest up to 100% in
money market securities as a defensive tactic in abnormal market conditions.
Foreign Securities. Each fund may invest in foreign securities (as defined
below), although only the International Stock Fund and High Income Fund
anticipate having significant investments in such securities. As described
above, the International Stock Fund may invest all and the High Income Fund may
invest half of its assets in foreign securities. No fund will concentrate its
investments in any particular foreign country.
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.
Investments in foreign securities and ADRs may offer potential benefits not
available from investments solely in securities of domestic issuers or U.S.
dollar denominated securities. Investing in foreign securities involves
significant risks that are not typically associated with investing in domestic
securities. Such investments may be affected by changes in currency rates,
changes in foreign or U.S. laws or restrictions applicable to such investments
and in exchange control regulations. Some foreign stock markets (and other
securities markets) may have substantially less volume than, for example, the
New York Stock Exchange (or other domestic markets) 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. The inability of a fund to make intended investments due to
settlement problems could cause it to miss attractive investment opportunities.
Inability to dispose of portfolio securities or other investment due to
settlement problems could result either in losses to a fund due to subsequent
declines in value of the portfolio investment or, if the fund has entered into a
contract to sell the investment, could result in possible liability to the
purchaser.
Foreign issuers are not generally subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies, and 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 cash or other assets of the fund, or
political or social instability or diplomatic developments which could affect
investments in those countries. Individual foreign economies also may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. The High Income Fund and
International Stock Fund may invest in securities principally traded in
countries with emerging securities markets or issued by issuers located in or
having substantial business operations in countries with emerging economies.
These countries are located primarily the Asia-Pacific region, Eastern Europe,
Central and South America, and Africa. Political and economic structures and
institutions in many of these countries are 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 have in the past failed to recognize private property rights and have
at times nationalized or expropriated assets of private companies. In addition,
unanticipated political or social developments may affect the values of
investments in these countries and the ability of a fund to make additional
investments in these countries. The small size, inexperience and limited trading
volume of the securities markets in certain of these countries may also make
investments in such countries more volatile and less liquid than investments in
securities traded in markets in Japan and Western European countries. As a
result, the High Income Fund and International Stock Fund may be required to
establish special custody or other arrangements before making certain
investments in these countries. There may be little financial or accounting
information available with respect to issuers located in certain of these
countries, and it may be difficult as a result to assess the value or prospects
of an investment in such issuers. The laws of some foreign countries may limit
the ability of these funds to invest in securities of certain issuers located or
doing business in these countries.
Other Practices. Each fund (other than the Cash Reserves Fund) may also invest
in certain higher-risk investments, including derivative and leveraged
investments, and may engage in other investment practices. These investments and
practices are described in the following pages. The chart on page 24 provides
information as to the extent to which each fund may invest in higher risk
securities or engage in higher risk practices.
The S&P 500. As stated above, the Growth and Income Fund and Capital
Appreciation Fund base part of their investment strategies on the S&P 500
Composite Stock Price Index, commonly known as the S&P 500. The S&P 500 tracks
the common stock performance of large U.S. companies in the manufacturing,
utilities, transportation, and financial industries. It also tracks the
performance of common stocks issued by foreign and smaller U.S. companies in
similar industries. In total, the S&P 500 is comprised of 500 common stocks that
are traded on the New York Stock Exchange, American Stock Exchange, or the
Nasdaq National Market. "Standard & Poor's," "S&P," and "S&P 500" are trademarks
of Standard & Poor's ("S&P"). The S&P 500 is determined, composed and calculated
independently by S&P without regard to the either the Growth and Income Fund or
the Capital Appreciation Fund.
RISKS
A fund's risk profile is largely defined by the fund's primary securities and
investment practices. You will find the most concise description of each fund's
risk profile in the fund pages.
The funds are permitted to use, within limits established by the trustees,
certain other securities and investment practices that have higher risks and
opportunities associated with them. On the following pages are brief
descriptions of these securities and practices, along with their associated
risks. The funds follow certain policies that may reduce these risks.
There is no guarantee that the performance of any of the funds, or any other
mutual fund, will be positive over any period of time.
Types of Investment Risk
Correlation Risk. The risk that changes in the value of a hedging instrument or
hedging technique will not match those of the asset being hedged (hedging is the
use of one investment to offset the possible adverse effects of another
investment).
Credit Risk. The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise not honor a financial obligation.
Currency Risk. The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect the U.S. dollar value of an
investment.
Extension Risk. The risk that an unexpected rise in prevailing interest rates
will extend the life of an outstanding mortgage-backed security by reducing the
expected number of mortgage prepayments, typically reducing the security's
value.
Hedging Risk. When a fund hedges an asset it holds (typically by using a
derivative contract or derivative security), any gain or loss generated by the
hedge should be substantially offset by losses or gains on the hedged asset.
Hedging is a useful way to reduce or eliminate risk of loss, but it will also
reduce or eliminate the potential for investment gains.
Information Risk. The risk that key information about a security or market is
inaccurate or unavailable.
Interest Rate Risk. The risk of declines in market value of an income bearing
investment due to changes in prevailing interest rates. With fixed-rate
securities, a rise in interest rates typically causes a decline in market
values, while a fall in interest rates typically causes an increase in market
values.
Leverage Risk. The risks associated with securities or investment practices that
enhance return (or loss) without increasing the amount of investment, such as
buying securities on margin or using certain derivative contracts or derivative
securities. A fund's gain or loss on a leveraged position may be greater than
the actual market gain or loss in the underlying security or instrument. A fund
may also incur additional costs in taking a leveraged position (such as interest
on borrowings) that may not be incurred in taking a non-leveraged position.
Liquidity Risk. The risk that certain securities or other investments may be
difficult or impossible to sell at the time the fund would like to sell them or
at the price the fund values them.
Management Risk. The risk that a strategy used by a fund's investment adviser or
subadviser may fail to produce the intended result. This risk is common to all
mutual funds.
Market Risk. The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably, due to factors that have nothing to do with
the issuer. This risk is common to all stocks and bonds and the mutual funds
that invest in them.
Natural Event Risk. The risk of losses attributable to natural disasters, crop
failures and similar events.
Opportunity Risk. The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.
Political Risk. The risk of losses directly attributable to government actions
or political events of any sort.
Prepayment Risk. The risk that an unexpected fall in prevailing interest rates
will shorten the life of an outstanding mortgage-backed security by increasing
the expected number of mortgage prepayments, thereby reducing the security's
return.
Speculation Risk. Speculation is the assumption of risk in anticipation of gain
but recognizing a higher than average possibility of loss. To the extent that a
derivative contract or derivative security is used speculatively (i.e., not used
as a hedge), the fund is directly exposed to the risks of that derivative
contract or security. Gains or losses from speculative positions in a derivative
contract or security may be substantially greater than the derivative contract
or security's original cost.
Valuation Risk. The risk that the market value of an investment falls
substantially below the fund's valuation of the investment.
Higher-Risk Securities
and Practices
<TABLE>
<CAPTION>
Security or Practice Description Related Risks
- -------------------------------- ---------------------------------------------------- ------------------------------
<S> <C> <C>
American Depository Receipts ADRs are receipts typically issued by a U.S. Market, currency,
(ADRs) financial institution which evidence ownership of information, natural event,
underlying securities of foreign corporate and political risks (i.e.,
issuers. Generally, ADRs are in registered form the risks of foreign
and are designed for trading in U.S. markets. securities).
- -------------------------------- ---------------------------------------------------- ------------------------------
Asset-Backed Securities Securities backed by pools of commercial and/or Credit, extension,
consumer loans such as motor vehicle installment prepayment, and interest
sales, installment loan contracts, leases of rate risks.
various types of real and personal property,
receivables from revolving credit (i.e., credit
card) agreements and other categories of
receivables.
- -------------------------------- ---------------------------------------------------- ------------------------------
Borrowing The borrowing of money from financial institutions Leverage and credit risks.
or through reverse repurchase agreements.
- -------------------------------- ---------------------------------------------------- ------------------------------
Emerging Market Securities Any foreign securities primarily traded on Credit, market, currency,
exchanges located in or issued by companies information, liquidity,
organized or primarily operating in countries that interest rate, valuation,
are considered lesser developed than countries natural event, and political
like the U.S., Australia, Japan, or those of risks.
Western Europe.
- -------------------------------- ---------------------------------------------------- ------------------------------
European and Global Depository EDRs and GDRs are receipts evidencing an Market, currency,
Receipts (EDRs and GDRs) arrangement with a non-U.S. financial institution information, natural event,
similar to that for ADRs and are designed for use and political risks (i.e.,
in non-U.S. securities markets. EDRs and GDRs are the risks of foreign
not necessarily quoted in the same currency as the securities).
underlying security.
- -------------------------------- ---------------------------------------------------- ------------------------------
Foreign Money Market Securities Short-term debt obligations issued either by Market, currency,
foreign financial institutions or by foreign information, interest rate,
branches of U.S. financial institutions or foreign natural event, and political
issuers. risks.
- -------------------------------- ---------------------------------------------------- ------------------------------
Foreign Securities Securities issued by companies organized or whose Market, currency,
principal operations are outside the U.S., information, natural event,
securities issued by companies whose securities and political risks.
are principally traded outside the U.S., or
securities denominated or quoted in foreign
currency. The term "foreign securities" includes
ADRs, EDRs, GDRs, and foreign money market
securities.
- -------------------------------- ---------------------------------------------------- ------------------------------
Forward Foreign Currency Contracts involving the right or obligation to buy Currency, liquidity, and
Exchange Contracts or sell a given amount of foreign currency at a leverage risks. When used
specified price and future date. for hedging, also has
hedging, correlation, and
opportunity risks. When
used speculatively, also has
speculation risks.
- -------------------------------- ---------------------------------------------------- ------------------------------
Futures Contracts In general, an agreement to buy or sell a specific Interest rate, currency,
(including financial future amount of a commodity, financial instrument, or market, hedging or
contracts) index at a particular price on a stipulated future speculation, leverage,
date. Financial futures contracts include interest correlation, liquidity,
rate futures contracts, securities index futures credit, and opportunity
contracts and currency futures contracts. Unlike risks.
an option, a futures contract obligates the buyer
to buy and the seller to sell the underlying
commodity or financial instrument at the agreed-upon
price and date or to pay or receive money in an
amount equal to such price.
- -------------------------------- ---------------------------------------------------- ------------------------------
Illiquid Securities Any investment that may be difficult or impossible Liquidity, valuation and
to sell at the time the fund would like to sell it market risks.
for the price at which the fund values it.
- -------------------------------- ---------------------------------------------------- ------------------------------
Mortgage-Backed Securities Securities backed by pools of mortgages, including Credit, extension,
passthrough certificates, Planned Amoritization prepayment, and interest
Classes (PACs), Targeted Amoritization Classes rate risks.
(TACs), collateralized mortgage obligations (CMOs),
and when available, pools of mortgage loans
generated by credit unions.
- -------------------------------- ---------------------------------------------------- ------------------------------
Non-Investment Grade Securities Investing in debt securities rated below BBB/Baa Credit, market, interest
(i.e., "junk" bonds). rate, liquidity, valuation,
and information risks.
- -------------------------------- ---------------------------------------------------- ------------------------------
Options (including options In general, an option is the right to buy (called Interest rate, currency,
on financial futures contracts) a "call") or sell (called a "put") property for an market, hedging or
agreed-upon price at any time prior to an speculation, leverage,
expiration date. Both call and put options may be correlation, liquidity,
either written (i.e., sold) or purchased on credit, and opportunity
securities, indices, interest rate futures risks.
contracts, index futures contracts, or currency
futures contracts.
- -------------------------------- ---------------------------------------------------- ------------------------------
Repurchase Agreements The purchase of a security that the issuer agrees Credit risk.
to buy back later at the same price plus interest.
- -------------------------------- ---------------------------------------------------- ------------------------------
Restricted Securities Securities originally issued in a private Liquidity, valuation, and
placement rather than a public offering. These market risks.
securities often cannot be freely traded on the
open market.
- -------------------------------- ---------------------------------------------------- ------------------------------
Reverse Repurchase Agreements The lending of short-term debt securities; often Leverage and credit risks.
used to facilitate borrowing.
- -------------------------------- ---------------------------------------------------- ------------------------------
Securities Lending The lending of securities to financial Credit risk.
institutions, which provide cash or government
securities as collateral.
- -------------------------------- ---------------------------------------------------- ------------------------------
Shares of Other Investment The purchase of shares issued by other investment Market risks and the
Companies companies. These investments are subject to the layering of fees and
fees and expenses of both the MEMBERS Mutual Funds expenses.
and the other investment company.
- -------------------------------- ---------------------------------------------------- ------------------------------
Short-Term Trading Selling a security soon after purchase or Market risk.
purchasing it soon after it was sold (a fund
engaging in short-term trading will have
higher turnover and transaction expenses).
- -------------------------------- ---------------------------------------------------- ------------------------------
Smaller Capitalization The purchase of securities issued by a company Market risk.
Companies with a market capitalization (i.e., the price per
share of its common stock multiplied by the number
of shares of common stock outstanding) of less
than $1 billion.
- -------------------------------- ---------------------------------------------------- ------------------------------
When-Issued Securities and The purchase or sale of securities for delivery at Market, opportunity, and
Forward Commitments a future date; market value may change before leverage risks.
delivery.
- -------------------------------- ---------------------------------------------------- ------------------------------
</TABLE>
<PAGE>
Higher Risk Securities and Practices Table. The following table shows each
fund's investment limitations with respect to certain higher risk securities and
practices as a percentage of portfolio assets.
<TABLE>
<CAPTION>
Growth and Capital
Cash High Income Income Appre-ciation Int'l
Reserves Bond Balanced Stock
- ------------------------------------------ ------------ ------------ -------------- ------------ ------------ ------------ ---------
Investment Practices
- ------------------------------------------ ------------ ------------ -------------- ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Borrowing; Reverse Repurchase Agreements 30 30 30 30 30 30 30
- ------------------------------------------ ------------ ------------ -------------- ------------ ------------ ------------ ---------
Repurchase Agreement solid solid solid solid solid solid solid
- ------------------------------------------ ------------ ------------ -------------- ------------ ------------ ------------ ---------
Securities Lending X 30 30 30 30 30 30
- ------------------------------------------ ------------ ------------ -------------- ------------ ------------ ------------ ---------
Short-term Trading solid solid solid solid solid solid solid
- ------------------------------------------ ------------ ------------ -------------- ------------ ------------ ------------ ---------
When-Issued Securities; Forward 25 25 25 25 25 25 25
Commitments
- ------------------------------------------ ------------ ------------ -------------- ------------ ------------ ------------ ---------
Conventional Securities
- ------------------------------------------ ------------ ------------ -------------- ------------ ------------ ------------ ---------
Shares of Other Investment Companies X 10 hollow 10 hollow 10 hollow 10 hollow 10 hollow 10 hollow
- ------------------------------------------ ------------ ------------ -------------- ------------ ------------ ------------ ---------
Non-Investment Grade Securities X 20 10 solid 5 5 5
- ------------------------------------------ ------------ ------------ -------------- ------------ ------------ ------------ ---------
Foreign Securities 25(1) 20 25 50 25 25 solid
- ------------------------------------------ ------------ ------------ -------------- ------------ ------------ ------------ ---------
Emerging Market Securities X 10 10 25 X X 25
- ------------------------------------------ ------------ ------------ -------------- ------------ ------------ ------------ ---------
Illiquid Securities(2) 10 15 15 15 10 10 15
- ------------------------------------------ ------------ ------------ -------------- ------------ ------------ ------------ ---------
Restricted Securities 25 hollow 15 15 30 hollow 10 10 15
- ------------------------------------------ ------------ ------------ -------------- ------------ ------------ ------------ ---------
Mortgage-backed Securities; REITs X 30 15 30 10 X X
- ------------------------------------------ ------------ ------------ -------------- ------------ ------------ ------------ ---------
Derivative Securities and Contracts
- ------------------------------------------ ------------ ------------ -------------- ------------ ------------ ------------ ---------
Options and Futures Contracts
[bullet] Options on Securities or Indices X 10 hollow 10 hollow 10 hollow 10 hollow 10 hollow 10
[bullet] Futures Contracts(3) X 5 hollow 5 hollow 5 hollow 5 hollow 5 hollow 5
[bullet] Options on Futures Contract(3) X 10 hollow 10 hollow 10 hollow 10 hollow 10 hollow 10
- ------------------------------------------ ------------ ------------ -------------- ------------ ------------ ------------ ---------
Forward Foreign Currency Exchange X X X 10 X X 10
Contracts
- ------------------------------------------ ------------ ------------ -------------- ------------ ------------ ------------ ---------
(1) U.S. Dollar-denominated foreign money market securities only.
(2) Numbers in this row refer to net, rather than total, assets.
(3) Financial futures contracts and related options only.
Legend
30 A number indicates the maximum percentage of total assets (but see
note 2) that the fund is permitted to invest in that practice or type
of security. Numbers in this table show allowable usage only; for
actual usage, consult the fund's annual and semi-annual reports.
[solid] A solid check mark means that there is no policy limitation on the
fund's usage of that practice or type of security, and that the fund
may be currently using that practice or investing in that type of
security.
[hollow] A hollow check mark means that the fund is permitted to use that
practice or invest in that type of security, but is not expected to do
so on a regular basis.
[x] An "x" mark means that the fund is not permitted to use that practice
or invest in that type of security.
</TABLE>
<PAGE>
YOUR ACCOUNT
Choosing a Share Class
Two classes of shares are currently available, Class A and Class B. Each class
has its own cost structure, allowing you to choose the one that best meets your
needs. Your financial representative can help you decide between the share
classes. For estimated expenses of Class A and B shares, see the expense table
earlier in this prospectus.
<TABLE>
<CAPTION>
- ------------------------------------------------- ------------------------------------------------------------------
Class A Class B
- ------------------------------------------------- ------------------------------------------------------------------
<S> <C>
[bullet] Front-end sales charges, as described [bullet] No front-end sales charge: all your money goes to work for you right away
below. There are several ways to reduce
these charges, also described below.
[bullet] Higher annual expenses than Class A shares.
[bullet] Lower annual expenses than Class B
shares. [bullet] A deferred sales charge on shares you sell within five
years of purchase, as described below.
[bullet] Automatic conversion to Class A shares after seven
years, thus reducing annual expenses in subsequent years.
(Class B shares purchased by reinvesting Class B dividends
convert to Class A shares proportionately.)
- ------------------------------------------------- ------------------------------------------------------------------
</TABLE>
[GRAPHIC: rectangle divided into three parts labelled "Consider Class A",
"Consider Class B" and "Consult your financial representative"; x-axis labelled
"Investment Time Horizon"; y-axis labelled "Size of Investment"]
The decision as to which class of shares is better suited to your needs depends
on a number of factors which you should discuss with your financial
representative. The two most important factors are the size of your investment
and the length of time that you plan to hold your investment. The following
graphic focuses on these two factors and is intended only to provide you and
your financial representative with a framework to assist you in making your
decision. It is not intended to provide rigid guidelines, to be investment
advice, or to make specific investment recommendations. Your considerations and
circumstances will differ from those of other investors. When to consider Class
A. The combination of a lower Class A sales charge on larger purchases and lower
annual expenses make Class A shares more attractive as the size of your
investment increases. For this reason, we will not normally accept purchase
orders of $500,000 or more for Class B shares from a single investor.
When to consult your financial representative. The specific combination of the
size of your investment, your expected investment timeframe, and other factors
will help you and your financial representative decide which class is right for
you.
When to consider Class B. The combination of higher annual Class B expenses and
the Class B contingent deferred sales charge (CDSC) will not typically exceed
the Class A sales charge on smaller purchases (with the exception of income
funds), regardless of your investment timeframe. As the size of your investment
increases, your investment time horizon becomes more important to your decision
because the Class B CDSC decreases over time.
<PAGE>
How Sales Charges Are Calculated
Class A Sales Charges
<TABLE>
<CAPTION>
- ---------------------------- ------------------------------------------- -------------------------------------------
Cash Reserves Fund
Balanced Fund
Growth and Income Fund
Purchase Payment Capital Appreciation Fund Bond Fund
International Stock Fund High Income Fund
- ---------------------------- --------------------- --------------------- --------------------- ---------------------
As a % of Purchase As a % of Net As a % of Purchase As a % of Net
Payment Amount Invested Payment Amount Invested
- ---------------------------- --------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Under $50,000 5.3% 5.6% 4.3% 4.5%
- ---------------------------- --------------------- --------------------- --------------------- ---------------------
$50,000 to $99,999 4.3% 4.5% 3.8% 4.0%
- ---------------------------- --------------------- --------------------- --------------------- ---------------------
$100,000 to $249,999 3.3% 3.4% 3.3% 3.4%
- ---------------------------- --------------------- --------------------- --------------------- ---------------------
$250,000 to $499,999 2.3% 2.4% 2.3% 2.4%
- ---------------------------- --------------------- --------------------- --------------------- ---------------------
$500,000 to $999,999 1.9% 2.0% 1.9% 2.0%
- ---------------------------- --------------------- --------------------- --------------------- ---------------------
$1,000,000 and over(1) None None None None
- ---------------------------- --------------------- --------------------- --------------------- ---------------------
<FN>
(1) There is a contingent deferred sales charge (CDSC) assessed on
purchases of Class A shares of over $1,000,000. The CDSC will be calculated as
described below relating to the CDSC for Class B shares, except at a rate of 1%
in the first year and 0.5% in the second year following the purchase.
</FN>
</TABLE>
Class B Sales Charges
Class B Shares are offered at their net asset value per share, without any
initial sales charge. However, there is a contingent deferred sales charge
(CDSC) on shares you sell within five years of buying them. There is no CDSC on
shares acquired through reinvestment of dividends. The CDSC is based on the
original purchase cost or the current market value of the shares being sold,
whichever is less. The longer the time between the purchase and the sale of
shares, the lower the rate of the CDSC:
Years After Purchase 1 2 3 4 5 6
CDSC 4.5% 4.0% 3.5% 3.0% 2.0% None
For purposes of computing this CDSC, all purchases made during a calendar month
are counted as having been made on the first day of that month.
To minimize your CDSC, each time you place a request to sell shares we will
first sell any shares in your account that carry no CDSC. If there are not
enough of these to meet your request, we will sell those shares that have the
lowest CDSC. Specifically, we will sell shares that represent share price
increases (if any) first, then dividends, then the oldest-aged shares.
For example, assume that you purchased 100 shares of a fund on January 1, Year 1
for $10 per share, another 100 shares on January 1, Year 2 for $15 per share,
and another 100 shares on January 1, Year 3 for $20 per share. Also assume that
dividends of $1.50 and $2.00 per share were paid on December 31, Year 1 and Year
2, respectively, and reinvested. Your account can be summarized as:
<TABLE>
<CAPTION>
- --------------------------- --------------------------- ---------------- -------------- ------------ ---------------
Price Per Share Shares Total Account Value
Date Action Purchased Shares
- --------------------------- --------------------------- ---------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
January 1, Year 1 Purchased shares $10 100 100 $1,000
- --------------------------- --------------------------- ---------------- -------------- ------------ ---------------
December 31, Year 1 Reinvested dividends $15 10 110 $1,650
- --------------------------- --------------------------- ---------------- -------------- ------------ ---------------
January 1, Year 2 Purchased shares $15 100 210 $3,150
- --------------------------- --------------------------- ---------------- -------------- ------------ ---------------
December 31, Year 2 Reinvested dividends $20 21 231 $4,620
- --------------------------- --------------------------- ---------------- -------------- ------------ ---------------
January 1, Year 3 Purchased shares $20 100 331 $6,620
- --------------------------- --------------------------- ---------------- -------------- ------------ ---------------
</TABLE>
Assume further that you sell 200 shares in Year 3 and that the share price as of
the end of the day you sell your shares is $20. The $6,620 in your account can
be broken down into share price increases of $1,550 (100 shares appreciated from
$10 to $20 per share; 110 shares appreciated from $15 to $20 per share; and 121
shares have not appreciated), dividends of $570 ($150 on 12/31 in Year 1 and
$420 on 12/31 in Year 2), and purchase payments of $4,500 ($1,000 in Year 1,
$1,500 in Year 2, and $2,000 in Year 3). You would incur the following CDSC
charges:
<TABLE>
<CAPTION>
Type of Shares Sold (in order) Amount CDSC (%) CDSC ($)
- --------------------------------------------- ------------------------- ---------------------- --------------------
<S> <C> <C> <C>
Share price increases $1,550 None None
- --------------------------------------------- ------------------------- ---------------------- --------------------
Dividends $570 None None
- --------------------------------------------- ------------------------- ---------------------- --------------------
Aged Shares (oldest sold first):
- --------------------------------------------- ------------------------- ---------------------- --------------------
Purchased 1/1/95 $1,000 3.5%(1) $35
- --------------------------------------------- ------------------------- ---------------------- --------------------
Purchased 1/1/96 $880(2) 4.0%(1) $35
- --------------------------------------------- ------------------------- ---------------------- --------------------
Total $4,000 1.75%(3) $70
- --------------------------------------------- ------------------------- ---------------------- --------------------
<FN>
(1) As a percentage of original purchase payment.
(2) $620 of the original $1,500 purchase payment would remain available for redemption.
(3) As a percentage of the amount redeemed.
</FN>
</TABLE>
Certain withdrawals made through a Systematic Withdrawal Program are not subject
to a CDSC. See "Additional Investor Services."
Other Expenses
Service Fees. Each fund, other than the Cash Reserves Fund, pays its principal
underwriter, CUNA Brokerage Services, Inc. (CUNA Brokerage), a service fee equal
to 0.25% of the average daily net assets attributable to each class of shares of
that fund. The service fee is used by CUNA Brokerage to cover its costs of
servicing shareholder accounts or to compensate other dealers who sell shares of
the funds pursuant to agreements with CUNA Brokerage for their costs of
servicing shareholder accounts. CUNA Brokerage may retain any portion of the
service fee for which there is no dealer of record as partial consideration for
its services with respect to shareholder accounts.
Distribution or "12b-1" Fees (Class B only). Each fund pays CUNA Brokerage a fee
equal to 0.75% of the average daily net assets attributable to Class B shares of
that fund. This fee may be used by CUNA Brokerage to cover its
distribution-related expenses (including commissions paid to dealers) or
distribution-related expenses of dealers.
Sales Charge Reductions and Waivers
Class A shares may be offered without front-end sales charges to various
individuals and institutions, including:
[bullet] Trustees/directors, officers and employees of CUNA Mutual
Group or any of its affiliated companies (each, a "CUNA Mutual
Group employee"), any immediate family member of a CUNA Mutual
Group employee residing in the CUNA Mutual Group employee's
household, and any Uniform Gift to Minors Act (UGMA)/Uniform
Transfer to Minors Act (UTMA) custodial account sponsored by a
CUNA Mutual Group employee.
[bullet] Registered representatives of CUNA Brokerage.
[bullet] Financial representatives utilizing fund shares in fee-based
managed accounts under agreement with the MEMBERS Mutual Funds
(wrap fee investors).
[bullet] Certain credit union system-affiliated institutional investors.
There are several ways shareholders (including certain qualified pension plans)
can combine multiple purchases of Class A shares to take advantage of the
breakpoints in the sales charge schedule.
[bullet] Rights of Combination-- you may combine certain Class A shares,
such as those held in multiple accounts or those owned by
members of your immediate family, for purposes of calculating
the sales charge. See the SAI for information on rights of
combination.
[bullet] Rights of Accumulation-- you may add the value of any Class A
shares you already own to the amount of your next purchase of
Class A shares for purposes of calculating the sales charge.
[bullet] Letter of Intention -- you may purchase Class A shares of a
fund over a 13-month period and receive the same sales charge
as if all shares had been purchased at once.
In addition, Class A shares issued/purchased in the following transactions are
not subject to sales charges:
[bullet] Shares purchased by the reinvestment of dividends or other
gains reinvested from one of the MEMBERS Mutual Funds or shares
exchanged from one MEMBERS fund to another.
[bullet] Shares purchased and paid for from the proceeds of shares of a
mutual fund (other than one of the MEMBERS Mutual Funds) on
which an initial sales charge or contingent deferred sales
charge was paid, subject to the following conditions:
1. You must request this waiver when you place your purchase ; order
2. You must have redeemed the shares of the other mutual fund ; within the past
60 days
3. If you purchased the shares of the other mutual fund in a lump sum purchase,
you must have purchased such shares within the past 3 ; and years
4. If you purchased the shares of the other mutual fund in a systematic
investment program, you must have begun such program within the past 5 years.
CUNA Brokerage may require evidence of your qualification for this waiver.
If you think you may be eligible for a sales charge waiver, contact your
financial representative or the MEMBERS Mutual Funds, or consult the SAI.
<PAGE>
Shareholders With Brokerage Accounts
The following pages describe how to open or add to an account and how to
purchase or sell shares, whether by check, exchange, wire or phone. However, a
large part of this information will not be relevant to you if you have a
brokerage account. If you have such an account, simply contact your brokerage
representative whenever you wish to buy, sell or transfer shares for your
account.
Opening or Adding to an Account (applicable to all shareholders)
1. Carefully read this prospectus.
2. Determine how much you want to invest. The minimum initial investments
are as follows:
-------------------------------- ---------------------------------------------
Type of Account Initial Minimum Subsequent Minimum
-------------------------------- ---------------------------------------------
Non-retirement account $2,000 per account $150 per account
($500 per fund) ($75 per fund)
-------------------------------- ---------------------------------------------
Retirement account $1,000 per account $150 per account
($500 per fund) ($75 per fund)
-------------------------------- ---------------------------------------------
Systematic investment programs $150 per account $150 per account(1)
($75 per fund) ($75 per fund)
------------------------------------------------------------------------------
(1) Systematic Investment programs may be conducted on a semi-monthly, monthly,
bi-monthly or quarterly basis.
------------------------------------------------------------------------------
3. Complete the appropriate parts of the account application, carefully
following the instructions. If you have questions, please contact your
financial representative or contact First Data Investor Services Group
Inc. ("First Data"), the transfer agent for the MEMBERS Mutual Funds, at
1-800-877-6089.
4. Complete the appropriate parts of the account privileges section of the
application. By applying for privileges now, you can avoid the delay and
inconvenience of having to file an additional application if you want to
add privileges later.
Contacting MEMBERS Mutual Funds
You can reach MEMBERS Mutual Funds by calling 1-800-877-6089 on weekdays between
the hours of 8:00 a.m. and 4:00 p.m. (CST).
All shareholder inquiries and transaction requests should be mailed to:
MEMBERS Mutual Funds
P.O. Box 5175
Westborough, MA 01581
When are using an overnight delivery service, mail inquiries and requests to:
First Data Investors Services Group, Inc.
MEMBERS Mutual Funds
Attn: Work Management 1CE25
4400 Computer Drive
Westborough, MA 01581-5120
Buying Shares (not applicable to shareholders who have a brokerage account)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
OPENING AND ACCOUNT ADDING TO AN ACCOUNT
- ----------------------------------------------------------------------------------------------------------------------------
BY CHECK
- ------------------------------------------------------ ---------------------------------------------------------------------
<S> <C>
Make out a check for the investment amount, payable Make out a check for the investment amount, payable to MEMBERS
to MEMBERS Mutual Funds. Mutual Funds.
- ------------------------------------------------------ ---------------------------------------------------------------------
Deliver the check and your completed application to Fill out the detachable investment slip from an account statement.
your financial representative, or mail them to: If no slip is available, include a note specifying the fund name,
CUNA Brokerage Services, Inc your share class, your account number and the name(s) in
which the 2000 Heritage Way account is registered.
Waverly, IA 50677
Attn: MEMBERS Mutual Funds
- ------------------------------------------------------ ---------------------------------------------------------------------
Mail the check and your investment slip as
instructed on the slip. If no investment slip is
available, mail your check and note to MEMBERS
Mutual Funds using the addresses shown above
under "Contacting MEMBERS Mutual Funds."
- ----------------------------------------------------------------------------------------------------------------------------
BY WIRE
- ------------------------------------------------------ ---------------------------------------------------------------------
Deliver your completed application to your financial Instruct your credit union or other financial institution to wire
representative, or mail it to: the amount of your investment to Boston Safe Deposit & Trust (see
CUNA Brokerage Services Inc "Transaction Policies -- Wiring Funds" for details).
2000 Heritage Way
Waverly, IA 50677
Attn: MEMBERS Mutual Funds
- ------------------------------------------------------ ---------------------------------------------------------------------
Obtain your account number by calling your financial Specify the fund name(s), your share class(es), your account
representative or MEMBERS Mutual Funds at number(s), the name(s) in which the account(s) is (are) registered,
1-800-877-6089. and the amount(s) of your investment in each fund. Your credit
union or other financial institution may charge a fee to wire funds.
- ------------------------------------------------------ ---------------------------------------------------------------------
Instruct your credit union or other financial
institution to wire the amount of your investment
to Boston Safe Deposit & Trust (see "Transaction
Policies -- Wiring Funds" for details). Your credit
union or other financial institution may charge a
fee to wire funds.
- ----------------------------------------------------------------------------------------------------------------------------
BY PHONE
For automated service 24 hours a day using your touch-tone phone, call 1-800-877-6089
- ------------------------------------------------------ ---------------------------------------------------------------------
Not currently available. Verify that your credit union or other financial
institution is a member of the Automated Clearing
House (ACH) system.
- ------------------------------------------------------ ---------------------------------------------------------------------
You are automatically eligible to purchase shares by phone, upon
set-up of ACH electronic funds transfer, unless you indicate in the
account options section of your application.
- ------------------------------------------------------ ---------------------------------------------------------------------
Call MEMBERS Mutual Funds at 1-800-877-6089 to
verify that these features are in place on your account.
- ------------------------------------------------------ ---------------------------------------------------------------------
Tell the MEMBERS Mutual Funds representative the
fund name(s), your share class(es), your account
number(s), the name(s) in which the account(s) is (are)
registered and the amount(s) of your investment in each fund.
- ------------------------------------------------------ ---------------------------------------------------------------------
Purchase orders received after 3:00 p.m. Central time will be processed
using the next day's net asset value.
Selling Shares (not applicable to shareholders who have a brokerage account)
- --------------------------------------------------------------------------------
BY LETTER (available for accounts of any type and sales of any amount)
- --------------------------------------------------------------------------------
Write a letter of instruction indicating your account number(s), the fund
name(s), your share class(es), the name(s) in which the account(s) is (are)
registered and the dollar value or number of shares you wish sell to with
respect to each fund.
- --------------------------------------------------------------------------------
Include all signatures and any additional documents that may be required (see
next page).
- --------------------------------------------------------------------------------
Mail the materials to MEMBERS Mutual Funds using the addresses shown above under
"Contacting MEMBERS Mutual Funds."
- --------------------------------------------------------------------------------
A check will be mailed to the name(s) and address in which the account is
registered.
- --------------------------------------------------------------------------------
BY PHONE (available for most accounts and sales of up to $50,000) For automated
service 24 hours a day using your touch-tone phone, call 1-800-877-6089
- --------------------------------------------------------------------------------
If you want to be able to make redemptions by phone, you must either fill out
the "Telephone Redemption" section of your new account application or complete
additional forms to add it to an existing account. To verify that the telephone
redemption privilege is in place on an account, or to request the forms to add
it to an existing account, call MEMBERS Mutual Funds at 1-800-877-6089.
- --------------------------------------------------------------------------------
To place your redemption order, call MEMBERS Mutual Funds between 8 a.m. and 4
p.m. Central time. Redemption requests may be placed on all business days
(excluding market holidays). Checks will be mailed the next business day after
the redemption request is effected.
- --------------------------------------------------------------------------------
Amounts of $1,000 or more can be wired on the next business day, provided that
you have preauthorized the wiring of funds and the necessary information is on
file with MEMBERS Mutual Funds. See "Transaction Policies -- Wiring Funds" for
more information.
- --------------------------------------------------------------------------------
Amounts of less than $1,000 may be sent by Electronic Funds Transfer (EFT) or by
check. Funds from EFT transactions are generally available by the second
business day. Your credit union or other financial institution may charge a fee
for this service.
- --------------------------------------------------------------------------------
BY EXCHANGE (available for accounts of any type and sales of any amount)
- --------------------------------------------------------------------------------
Make sure that you have a current prospectus for the MEMBERS Mutual Funds, which
can be obtained by calling your financial representative or MEMBERS Mutual Funds
at 1-800-877-6089.
- --------------------------------------------------------------------------------
Call your financial representative or MEMBERS Mutual Funds at 1-800-877-6089 to
request an exchange.
- --------------------------------------------------------------------------------
Redemption requests received after 3:00 p.m. Central time will be processed
using the next day's net asset value.
</TABLE>
<PAGE>
Selling Shares in Writing (not applicable to shareholders who have a brokerage
account)
In certain circumstances, you will need to make your request to sell shares in
writing which may require additional documents with your request. In addition,
you will need to obtain a "signature guarantee" if your address of record has
changed within the past 30 days, you are selling more than $50,000 worth of
shares, or you are requesting payment other than by a check mailed to the
address of record and payable to the registered owner(s). You can generally
obtain a signature guarantee from a credit union or other financial institution,
a broker or securities dealer, or a securities exchange or clearing agency. A
notary public CANNOT provide a signature guarantee.
<TABLE>
<CAPTION>
- ------------------------------ -------------------------------------------------------------------------------------
If you are: To make a written request to sell shares, you must include:
- ------------------------------ -------------------------------------------------------------------------------------
<S> <C>
An owner of an individual, [bullet] Letter of instruction
joint, sole proprietorship, [bullet] On the letter, the signatures and titles of all persons authorized to sign
UGMA/UTMA (custodial for the account, exactly as the account is registered
accounts for minors) or a [bullet] Signature guarantee if applicable (see above)
general partner account
- ------------------------------ -------------------------------------------------------------------------------------
An owner of a corporate or [bullet] Letter of instruction
association account [bullet] Corporate resolution, certified within the past two years, specifying the
individual(s) authorized to sell securities
[bullet] On the letter and the resolution, the signature of the person(s)
authorized to sign for the account
[bullet] Signature guarantee if applicable (see above)
- ------------------------------ -------------------------------------------------------------------------------------
An owner or trustee of a [bullet] Letter of instruction containing the signature(s) of the trustee(s)
trust account [bullet] If the names of all trustees are not registered on the account, please
also provide a copy of the trust document certified within the past six months, specifying
the individual(s) authorized to sell securities
[bullet] Signature guarantee if applicable (see above)
- ------------------------------ -------------------------------------------------------------------------------------
A joint tenancy shareholder [bullet] Letter of instruction signed by the surviving tenant
whose co-tenant(s) are [bullet] Certified copy of death certificate(s) of the deceased co-tenant(s)
deceased [bullet] Signature guarantee if applicable (see above)
- ------------------------------ -------------------------------------------------------------------------------------
An executor of a [bullet] Letter of instruction signed by the executor
shareholder's estate [bullet] Copy of the order appointing the executor, certified within 60 days of
receipt by MEMBERS Mutual Funds
[bullet] Signature guarantee if applicable (see above)
- ------------------------------ -------------------------------------------------------------------------------------
An administrator, [bullet] Call MEMBERS Mutual Funds at 1-800-877-6089 for instructions
conservator, guardian or
other seller or the owner
of an account type not
listed above
- ------------------------------ -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Transaction Policies
Limitation on Purchases. If you purchase shares by check and your check does not
clear, your purchase will be canceled and you could be liable for any losses or
fees incurred. We do not accept third-party checks, money orders, credit cards,
credit card checks or cash to purchase shares. All purchase payments must be
denominated in U.S. dollars and drawn on or from U.S. credit unions or other
financial institutions.
Valuation of Shares. The net asset value per share (NAV) for each fund and class
is determined each business day at the close of regular trading on the New York
Stock Exchange (typically 3 p.m. Central time) by dividing the net assets of
each fund and class by the number of shares outstanding of that fund and class.
Transaction requests received after 3:00 p.m. Central time will be processed
using the next day's net asset value.
Buy and Sell Prices. When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. When you sell shares, you receive the NAV
minus any applicable CDSC. Purchase orders and redemption requests will be
executed at the price next determined after the order or request is received in
good order by MEMBERS Mutual Funds.
Execution of Requests. Each fund is open on those days when the New York Stock
Exchange is open, typically Monday through Friday. Buy and sell requests are
executed at the next NAV to be calculated after your request is accepted by
MEMBERS Mutual Funds. In unusual circumstances, any fund may temporarily suspend
the processing of sell requests, or may postpone payment of proceeds for up to
three business days or longer, as allowed by federal securities laws.
Telephone Transactions. For your protection, telephone requests may be recorded
in order to verify their accuracy. In addition, MEMBERS Mutual Funds will take
measures to verify the identity of the caller, such as asking for name, account
number, Social Security or other taxpayer ID number and other relevant
information. MEMBERS Mutual Funds is not responsible for any losses that may
occur to any account due to an unauthorized telephone call. You will be able to
conduct telephone transactions on accounts whose names or addresses have changed
within the past 30 days, however, for your protection, the following
restrictions will apply: (1) Proceeds may be sent by wire or ACH to the
shareholder's preauthorized financial institution account, assuming no changes
have been made to the account in the past 30 days, or (2) Proceeds by check can
be sent to the new address only upon receipt of a letter signed by all
shareholders with appropriate signature guarantees.
Wiring Funds. If you are purchasing shares, you may wire funds directly to
MEMBERS Mutual Funds at:
Boston Safe Deposit & Trust
ABA #011001234
FOR: MEMBERS Mutual Funds
A/C 143286
FBO [shareholder name and account number]
The instructions for wiring funds must specify the fund name(s), your choice of
share class(es), your account number(s), the name(s) in which the account(s) is
(are) registered, and the amount of your investment with respect to each fund.
Your credit union or other financial institution may charge a fee to wire the
funds.
If you are selling shares, you may request that the proceeds of the sale are
wired to you, provided that you have preauthorized the wiring of funds and the
necessary information is on file with MEMBERS Mutual Funds. Boston Safe Deposit
& Trust will deduct a $10 fee from your account to send the wire; your credit
union or other financial institution may charge an additional fee to accept the
wired funds.
Exchanges. The Trust permits exchanges of shares of any class of any fund for
shares of the same class in any other fund. Exchanges of Class A shares of a
fund for Class A shares of another fund are based on the respective NAVs of the
shares being exchanged, unless the exchanging shareholder paid an initial sales
charge for the shares being exchanged lower than that which such shareholder
would have paid for the shares received in the exchange if such shareholder had
purchased such shares directly. In such a case, a sales charge equal to the
difference between the initial sales charge actually paid and the initial sales
charge that would have been imposed will be assessed. No sales charge or
transactions charge is otherwise imposed. Class B shares will continue to "age"
from the date of purchase of the original fund and will retain the same CDSC
rate as they had before the exchange.
To protect the interests of other investors in the fund, a fund may refuse any
exchange order and may cancel the exchange privileges of any parties that, in
the opinion of the fund, are using market timing strategies or making more than
four exchanges per owner or controlling party per calendar year. A fund may
change or cancel its exchange policies at any time, upon 60 days' notice to its
shareholders.
You will be automatically eligible for telephone exchange privileges unless you
indicate otherwise in your application.
Certificated Shares. We do not issue share certificates. Instead, ownership of
all shares is electronically recorded. Sales in Advance of Purchase Payments.
When you place a request to sell shares for which the purchase payment has not
yet been collected, the request will be executed in a timely fashion, but the
fund will not release the proceeds to you until your purchase payment clears.
This may take up to ten business days after the purchase.
Eligibility by State. You may only invest in, or exchange into, fund shares
legally available in your state.
Dividends and Account Policies
Account Statements. In general, you will receive account statements every
quarter, as well as after every transaction (except for any systematic
reinvestment or transaction) that affects your account balance and after any
changes of name or address of the registered owner(s).
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
Dividends. The funds generally distribute most or all of their net earnings in
the form of dividends.
- ------------------------------- ------------------------ ----------------------
Timing of Dividend Payments
- ------------------------------- ------------------------ ----------------------
Fund Dividends Declared Dividends Paid
- ------------------------------- ------------------------ ----------------------
Cash Reserves Daily Monthly
- ------------------------------- ------------------------ ----------------------
Bond Daily Monthly
- ------------------------------- ------------------------ ----------------------
Balanced Monthly Monthly
- ------------------------------- ------------------------ ----------------------
High Income Daily Monthly
- ------------------------------- ------------------------ ----------------------
Growth and Income Quarterly Quarterly
- ------------------------------- ------------------------ ----------------------
Capital Appreciation Annually Annually
- ------------------------------- ------------------------ ----------------------
International Stock Annually Annually
Dividend Reinvestments. Many investors have their dividends reinvested in
additional shares of the same fund and class. If you choose this option, or if
you do not indicate any choice, your dividends will be reinvested on the
dividend record date. Alternatively, you can choose to have a check for your
dividends mailed to you. However, if, for any reason, the check is not
deliverable, your dividends will be reinvested and no interest will be paid on
amounts represented by the check.
Additionally, you may be able to invest the dividends from one of the MEMBERS
Mutual Funds in shares of another one of the MEMBERS Mutual Funds, subject to
certain minimum requirements. Call MEMBERS Mutual Funds at 1-800-877-6089 for
details about cross-fund dividend reinvestment.
Taxability of Dividends. As long as a fund meets the requirements for being a
tax-qualified regulated investment company, which each fund intends to do, it
pays no federal income tax on the earnings it distributes to shareholders.
Consequently, dividends you receive from a fund, whether reinvested or taken as
cash, are generally considered taxable. A fund's long-term capital gains
distributions are taxable as capital gains; dividends from other sources are
generally taxable as ordinary income. Some dividends paid in January may be
taxable as if they had been paid the previous December. Corporations may be
entitled to take a dividends-received deduction for a portion of certain
dividends they receive. The Form 1099 that is mailed to you every January
details your dividends and their federal tax category, although you should
verify your tax liability with your tax professional.
Taxability of Transactions. Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions.
Small Accounts (Non-retirement Only). We reserve the right, and currently
intend, to close any account (excluding systematic investment program accounts)
that has had a balance of less than $1,000 for 18 consecutive months. Your
account will not be closed if its drop in value is due to fund performance or
the effects of sales charges. We will mail you the proceeds if your account is
closed.
Additional Investor Services
Systematic Investment Program. You can set up regular investments from your
credit union or other financial institution account to the fund(s) of your
choice. You determine the frequency and amount of your investments, and you can
terminate the program at any time. Investments must be made at least once each
quarter and must each be at least $150 per transaction ($75 minimum per fund).
Systematic investments may be transacted semi-monthly, monthly, bi-monthly or
quarterly. To take advantage of the systematic investment program, simply
complete the appropriate parts of your account application or work with your
financial representative.
Systematic Withdrawal Program. If your account balance is at least $5,000, you
can make systematic withdrawals from your account. You must fill out the
relevant portion of your account application, specifying the payee(s) (which may
be yourself and/or any other party or parties) and the payment schedule
(semi-monthly, monthly, bi-monthly, quarterly, semi-annually or in selected
months). All payees must be on the same payment schedule. To begin taking
advantage of the systematic withdrawal program with an existing account, contact
your financial representative or CUNA Brokerage. No CDSC will be charged on
systematic withdrawals that are limited annually to no more than 12% of your
account's value.
Systematic Exchange Program. If your account balance is at least $5,000, you can
exchange your shares for the same class of shares of other MEMBERS Mutual Funds
under the systematic exchange program. You determine the frequency (no less than
monthly), day of the month, and amount of your exchanges, and you can terminate
the program at any time. Each systematic exchange must be at least $150 per
fund. To take advantage of the systematic exchange program, simply complete the
appropriate parts of your account application or work with your financial
representative.
You should not use the systematic withdrawal or exchange
programs to sell shares of a fund that you are also planning to
buy. Buying shares during a period when you are also selling
shares of the same fund is not advantageous to you because of
sales charges.
Retirement Plans. Shares of MEMBERS Mutual Funds can be used to fund a variety
of retirement plans, including IRAs, SEPs, 401(k) plans, 403(b)(7) arrangements,
SIMPLE plans and other pension and profit-sharing plans. Using these plans, you
can open an account with either a minimum initial investment of $1,000 or by
setting up a systematic investment program. To find out more, call your MEMBERS
Mutual Funds representative at 1-800-877-6089.
MORE ABOUT MEMBERS MUTUAL FUNDS
Organization
Each fund is a separate investment portfolio of the MEMBERS Mutual Funds, an
open-end management investment company that is organized as a Delaware business
trust and governed by a board of trustees. Each fund is classified as
"diversified" under applicable federal securities laws. The board retains
various service providers to carry out each fund's operations, including the
investment adviser and any subadvisers, custodian, transfer agent and others.
The diagram on page 37 is intended to give you a sense of the relationships
among a fund and its various service providers. The board has the right (and the
obligation) to terminate a fund's relationship with a service provider and to
retain a different service provider if the board believes it is in the
shareholders' best interests to do so.
The board may include individuals who are affiliated with CIMCO, the funds'
investment adviser. However, the majority of board members are not affiliated
with CIMCO.
The funds do not hold annual shareholder meetings, but may hold special meetings
for such purposes as electing or removing board members, changing fundamental
policies, approving a management contract or approving a 12b-1 plan (12b-1 fees
are explained in "Sales Compensation").
The MEMBERS Mutual Funds issue a separate series of shares of beneficial
interest for each fund, subdivided into class A shares and class B shares. Each
series of shares represents a fractional undivided interest in its fund.
MEMBERS Mutual Funds
Organizational Chart
[GRAPHIC: an organizational chart with the following circles connected by either
solid, dotted or dashed lines and arrows. In the center, there is a circle (the
"fund circle") containing the words "MEMBERS Mutual Funds, Cash Reserves Fund,
Bond Fund, Balanced Fund, High Income Fund, Growth and Income Fund, Capital
Appreciation Fund, and International Stock Fund." Clockwise from the top, there
is a circle containing the words "You (a shareholder) - along with the other
shareholders, you own the fund and have the right to elect trustees" connected
to the fund circle by a solid arrow and connected to a circle (the "board
circle") containing the words "Board of Trustees - have overall management
responsibility over the funds" by a dotted arrow. The board circle is connected
to the fund circle by a dotted arrow. A circle containing the words "Custodian
State Street Bank and Trust Company - holds the assets of each fund separate
from any other account" is connected to the fund circle with a dashed arrow. A
circle containing the words "Independent Public Accountant KPMG Peat Marwick LLP
audits the funds' financial statements, books and reports" is connected to the
fund circle with a dashed arrow. A circle containing the words "Distributor
(also call ed the `Principal Underwriter') CUNA Brokerage Services, Inc. - buys
shares from the funds and sells them to you through its registered
representatives or to other broker-dealers" is connected to the fund circle with
a dashed arrow. A circle containing the words "Transfer Agent First Data
Investor Services Group, Inc. - performs shareholder servicing functions, such
as processing purchase and redemption requests, electronic recordkeeping and
paying dividends" is connected to the fund circle with a dashed arrow. A circle
(the "assets circle") containing the words "Portfolio Securities - the
investments held by each fund" is connected to the fund circle with a solid
arrow. A circle (the "subadviser circle") containing the words "Subadvisers
Massachusetts Financial Services Company IAI International Limited Lazard Asset
Management - manage certain portions of the assets of certain funds" is
connected to the asset circle with a dotted arrow. The subadviser circle is also
connected with a dashed arrow to a circle (the "adviser circle") containing the
words "Investment Adviser CIMCO Inc. - manages the assets of each of the funds."
The adviser circle is connected to the fund circle with a dashed arrow and
connected to the assets circle with a dotted arrow. A circle containing the
words "Fund Administrator First Data Investor Services Group, Inc. - conducts
daily fund accounting and SEC compliance reporting" is connected to the fund
circle with a dashed arrow. A legend at the bottom of the page states that a
dashed arrow indicates a contractual relationship, a solid arrow indicates an
ownership relationship, and a dotted arrow indicates a management relationship.]
Portfolio Management
CIMCO was established on July 6, 1982. It provides investment advice to the
investment portfolios of the CUNA Mutual Group (CUNA Mutual Insurance Society,
its "permanent affiliate" CUNA Mutual Life Insurance Company and their
subsidiaries and affiliates). The majority of CIMCO's board of directors are
independent of the MEMBERS Mutual Funds and the CUNA Mutual Group. CIMCO's
principal place of business is 5910 Mineral Point Road, Madison, WI 53705.
CIMCO employs a team approach in the management of all the funds. The Cash
Reserves, Bond, Balanced, Growth and Income, and Capital Appreciation funds are
managed by portfolio managers employed by CIMCO. As of the date of this
prospectus, CIMCO's team consisted of the following portfolio managers:
Lawrence R. Halverson, CFA (Chartered Financial Analyst), is co-manager of the
Cash Reserves, Bond, Balanced, Growth and Income and Capital Appreciation funds.
Since December 1, 1987, he has been employed with CIMCO and is now Senior Vice
President and Secretary of CIMCO.
Joseph L. Gogola, CFA, is co-manager of the Cash Reserves, Bond and Balanced
funds. He has been employed by CIMCO since January 1, 1992, and had been
employed in the Investment Department of CUNA Mutual Insurance Society for 13
years prior to that date.
Annette E. Hellmer, CFA, is co-manager of the Balanced, Growth and Income and
Capital Appreciation funds. She has been employed by CIMCO since August 1, 1996.
Daniel E. Julie, CFA, CPA, is co-manager of the Balanced, Growth and Income and
Capital Appreciation funds. He has been employed by CIMCO since June 1, 1993.
In addition to work on behalf of the MEMBERS Mutual Funds, each manager performs
advisory services for CIMCO's other clients. CIMCO may add or remove members of
their portfolio management team without gaining your approval.
CIMCO manages the assets of the High Income Fund and International Stock Fund
using a "manager of managers" approach under which CIMCO allocates each fund's
assets among one or more "specialist" subadvisers. CIMCO selects subadvisers
based on a continuing quantitative and qualitative evaluation of their skills
and proven abilities in managing assets pursuant to a particular investment
style. While superior performance is the ultimate goal, short-term performance
by itself will not be a significant factor in selecting or terminating
subadvisers, and CIMCO does not anticipate frequent changes in subadvisers.
Criteria for employment of subadvisers will include, but will not be limited to,
proven discipline and thoroughness in pursuit of stated investment objectives,
consistently above-average performance and an ability to conserve values in down
markets, and a high level of service and responsibility to clients (i.e., the
overall competence of the subadviser's staff and organization). The various
subadvisers may (but do not have to) have different investment styles and
security selection disciplines.
CIMCO monitors the performance of each subadviser and of each fund's portfolio
and, to the extent that it deems it appropriate to achieve a fund's investment
objective, reallocates fund assets among individual subadvisers or recommends to
the MEMBERS Mutual Funds board that a fund employ or terminate particular
subadvisers. For example, CIMCO may recommend a reallocation if, under its
strategic analysis, a subadviser's allocation has become overweighted as a
result of extended appreciation and CIMCO wants to allocate additional assets to
what it perceives to be more undervalued securities and management styles. CIMCO
might also reallocate a fund's assets based upon poor performance of the assets
under the management of a particular subadviser, concerns about the manner in
which a particular subadviser is conducting its business, or a change in a
subadviser's portfolio management team. MEMBERS Mutual Funds and CIMCO have
requested (and anticipate receiving) an order of the Commission that would
permit the MEMBERS Mutual Funds board to employ particular subadvisers without
shareholder approval. The MEMBERS Mutual Funds board will not employ any
subadviser, other than those described below, without shareholder approval
unless and until such an order is granted.
As of the date of this prospectus, Massachusetts Financial Services Company
("MFS") is the only subadviser managing the assets of the High Income Fund. MFS
also serves as investment adviser to each of the funds in the MFS family of
funds, America's oldest mutual fund organization. Net assets under the
management of the MFS organization were approximately $64.3 billion on behalf of
approximately 2.6 million investor accounts as of July 31, 1997. As of such
date, the MFS organization managed approximately $20.3 billion of assets in
fixed-income funds advised by MFS and fixed income portfolios advised by MFS's
wholly-owned subsidiary, MFS Institutional Advisors, Inc. MFS is a subsidiary of
Sun Life of Canada (U.S.) which in turn is an indirect wholly owned subsidiary
of Sun Life Assurance Company of Canada.
For its services to the fund, MFS receives a management fee from CIMCO, computed
and accrued daily and paid monthly, at the following annual rates:
Percentage Net Assets Managed by MFS
0.400% First $10,000,000
0.375% Next $90,000,000
0.350% Next $150,000,000
0.325% Next $250,000,000
0.300% Over $500,000,000
As of the date of this 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").
In addition to the International Stock Fund, IAI furnishes investment advice to
other concerns, including other investment companies, pension and profit sharing
plans, portfolios of foundations, religious, educational and charitable
institutions, trusts, municipalities and individuals, and has total assets under
management in excess of $16 billion. The ultimate corporate parent of IAI is
Lloyds TSB Group plc, a publicly held financial services organization
headquartered in London, England. Lloyds TSB Group plc is one of the largest
personal and corporate financial services groups in the United Kingdom and is
engaged in a wide range of activities including commercial and retail banking.
For its services to the fund, IAI receives a management fee from CIMCO, computed
and accrued daily and paid monthly, at the following annual rates:
Percentage Net Assets Managed by IAI
0.75% First $25,000,000
0.60% Next $25,000,000
0.50% Over $50,000,000
Lazard began managing separate account international equity portfolios in 1985.
Lazard has 73 global investment professionals, with smaller teams responsible
for portfolio construction. Lazard is a division of LF&Co. which, based in New
York, provides financial advisory services to both institutional and private
clients regarding investment banking, corporate finance, and real estate
finance. LF&Co. established Lazard as its investment management division and
registered it with the Commission as an investment adviser on May 1, 1970.
Investment management services are also provided by Lazard Asset Management
Limited, based in London, Lazard Japan Asset Management KK, based in Tokyo, and
Lazard Asset Management Pacific Co., based in Sydney, Australia, all of which
are controlled by Lazard. Lazard also works closely with Lazard Freres - Gestion
Banque, based in Paris, which is affiliated with Lazard. Investment research is
undertaken on a global basis utilizing the global investment team members
worldwide. Lazard also has affiliates in Milan, Frankfurt, Singapore, Bombay,
and Beijing.
For its services to the fund, Lazard receives a management fee from CIMCO,
computed and accrued daily and paid monthly, equal on an annual basis to 1.05%
of net assets managed by Lazard and invested in emerging markets securities and
0.75% of net assets managed by Lazard and invested in international small
capitalization securities.
As noted above, MEMBERS Mutual Funds and CIMCO have requested an order from the
Commission that would permit the hiring of subadvisers without shareholder
approval. If the order is granted, you will receive an "information statement"
within 90 days of a change in subadvisers that will provide you with 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 Fund and International Stock Fund, 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 Fund and
International Stock Fund.
Use of Certain Brokers
CIMCO may use brokerage firms that market the funds' shares or are affiliated
with companies in the CUNA Mutual Group to execute portfolio trades for the
funds, but only when CIMCO believes that no other firm offers a better
combination of quality execution (i.e., timeliness and completeness), favorable
price and value of research services.
Compensation of Brokers and their Representatives
The MEMBERS Mutual Funds pay compensation to CUNA Brokerage for selling the
funds' shares. CUNA Brokerage passes along a portion of this compensation to
your financial representative.
Compensation payments originate from two sources: from sales charges (front-end
sales charges for Class A shares and CDSCs for Class B shares) and from 12b-1
fees (for Class B shares) that are paid by you, the investor, out of the funds'
assets ("12b-1" refers to the federal securities regulation authorizing annual
fees of this type). The sales charges and 12b-1 fees paid by investors are
detailed in the section "Your Account -- How Sales Charges Are Calculated"
earlier in this prospectus. The portions of these expenses that are reallowed to
CUNA Brokerage are shown in the table below.
Distribution fees may be used to pay for sales compensation to financial
services firms, marketing and overhead expenses and interest expenses.
$0 to $49,999 Equity funds(1) 5.3% 5.0%
------------------------------------------------------
Income funds(2) 4.3% 4.0%
- --------------------------------------------------------------------------------
$50,000 to $99,999 Equity funds(1) 4.3% 4.0%
------------------------------------------------------
Income funds(2) 3.8% 3.5%
- --------------------------------------------------------------------------------
$100,000 to $249,999 All funds 3.3% 3.0%
- --------------------------------------------------------------------------------
$250,000 to $499,999 All funds 2.3% 2.0%
- --------------------------------------------------------------------------------
$500,000 to $999,999 All funds 1.9% 1.7%
- --------------------------------------------------------------------------------
More than $1,000,000 All funds 1.0%(3) 0.8(4)%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
All amounts All funds 4.5%(5) 4.0%
- --------------------------------------------------------------------------------
(1) Cash Reserves Fund, Balanced Fund, Growth and Income Fund,
Capital Appreciation Fund, and International Stock Fund.
(2) Bond Fund and High Income Fund.
(3) Maximum CDSC on A shares sold without payment of sales charges.
(4) The maximum reallowance or commission on A share purchases over
$3,000,000 is 0.5%.
(5) Maximum CDSC on B shares.
<PAGE>
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.
November 19, 1997
<PAGE>
TABLE OF CONTENTS Page
GENERAL INFORMATION
INVESTMENT PRACTICES
Practices Authorized but not Used
Lending Portfolio Securities
Restricted and Illiquid Securities
Options on Securities and Securities Indices
Futures Contracts and Options on Futures Contracts
Foreign Transactions
Certain Bond Fund Practices
Lower-Rated Corporate Debt Securities
Other Debt Securities
Convertible Securities
Repurchase Agreements
Reverse Repurchase Agreements
Government Securities
Forward Commitment and When-Issued Securities
Mortgage-Backed and Asset-Backed Securities
Other Securities Related to Mortgages
Real Estate Investment Trusts
INVESTMENT LIMITATIONS
PORTFOLIO TURNOVER
MANAGEMENT OF THE TRUST
Trustees and Officers
Trustee Compensation
Initial Shareholders
PORTFOLIO MANAGEMENT
The Management Agreement with CIMCO Inc.
CIMCO Inc.
The Management Agreements with Subadvisers
The Subadviser for the High Income Fund
The Subadvisers for the International Stock Fund
DESCRIPTION OF THE TRUST'S SHARES
Shares of Beneficial Interest
Voting Rights
Limitation of Shareholder Liability
Limitation of Trustee and Officer Liability
Limitation of Interseries Liability
MORE ABOUT PURCHASING AND SELLING SHARES
Offering Price
Initial Sales Charge on Class A Shares
Deferred Sales Charge on Class B Shares
Special Redemptions
ADDITIONAL INVESTOR SERVICES AND PROGRAMS
Systematic Investment Program
Systematic Withdrawal Program
Exchange Privilege and Systematic Exchange Program
Reinstatement or Reinvestment Privilege
DISTRIBUTION (12b-1) PLANS AND AGREEMENT
CUSTODIAN
INDEPENDENT AUDITORS
BROKERAGE
HOW SECURITIES ARE OFFERED
Distributor
Transfer Agent
NET ASSET VALUE OF SHARES
Cash Reserves Fund
Valuation Procedures
DIVIDENDS, DISTRIBUTIONS AND TAXES
Options and Futures Transactions
Straddles
CALCULATION OF YIELDS AND TOTAL RETURNS
Cash Reserves Fund Yields
Other Fund Yields
Average Annual Total Returns
Other Total Returns
RATINGS
Ratings as Investment Criteria
Description of Bond Ratings
Description of Commercial Paper Ratings
LEGAL COUNSEL
FINANCIAL STATEMENTS
<PAGE>
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.
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.
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.
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.
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).
MANAGEMENT OF THE TRUST
Trustees and Officers
<TABLE>
<CAPTION>
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
Michael S. Daubs* Trustee (Chairman) CIMCO Inc.
5910 Mineral Point Road 1997 - Present President, 1982 - Present
Madison, WI 53705
Age - 54 CUNA Mutual Life Insurance Company
Chief Investment Officer
1973 - Present
CUNA Mutual Insurance Society
Chief Investment Officer
1990 - 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 Principal CIMCO Inc.
5910 Mineral Point Road Financial and Accounting Investment Officer - Mutual Funds, 1997 - Present
Madison, WI 53705 Officer Investment Officer - Marketing, 1993 - 1996
Age - 35 1997 - Present
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
Kieth S. Noah Trustee Noah, Smith, & Schuknecht, L.L.C. (Charles City,
2000 Heritage Way 1997 - Present Iowa)
Waverly, IA 50677 Partner
Age - 77 1948 - Present
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
- ---------------------------------- --------------------------- -----------------------------------------------------
<FN>
* "Interested person" as defined in the 1940 Act.
</FN>
</TABLE>
Trustee Compensation
Total Compensation from
Aggregate Compensation Trust and Fund
Name of Person, Position from 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
Kieth 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 the date of this SAI, 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 the date of this SAI, 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 below 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%
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
Donald E. Heltner Vice President and Treasurer
Charles A. Knudsen Vice President
Daniel J. Larson Vice President
Thomas J. Merfeld Vice President
Lois A. O'Rourke 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.
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:
[bullet] Redemptions made pursuant to the Trust's right to liquidate
small accounts (see "Dividends and Account Policies -- Small
Accounts" in the prospectus).
[bullet] Redemptions made under certain liquidation, merger or
acquisition transactions involving other investment companies
or personal holding companies.
[bullet] Redemptions due to death or disability.
[bullet] Redemptions made under the Reinstatement Privilege, as
described in "Reinstatement or Reinvestment Privilege" below.
[bullet] 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.
[bullet] Redemptions made to effect mandatory or life expectancy
distributions under the Code.
[bullet] Returns of excess contributions made to these plans.
[bullet] 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 following chart for more information on Class B CDSC waivers.
Class B CDSC Waiver Chart
<TABLE>
<CAPTION>
ERISA Plans NON-ERISA Plans
Type of Distribution 401(a) Plan Supplemental IRA or Non-Retirement
401(k) Plan or 403(b) Plan 457 Plan IRA Rollover Plan
403(b) 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.
Systematic Investment Program
As explained in the prospectus, the Trust has established a Systematic
Investment Program. The program is subject to the following conditions:
[bullet] The investments will be drawn on or about the day of the month
indicated.
[bullet] 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.
[bullet] 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 in reliance upon the report
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.
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 "Cash Reserves Fund" 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.
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 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)
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.
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 predominantly
B speculative with respect to the issuer's capacity to pay interest and
CCC repay principal in accordance with the terms CCC of the obligation. BB
CC 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.
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.
FINANCIAL STATEMENTS
MEMBERS Mutual Funds
Statements of Assets and Liabilities
November 10, 1997
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Cash High Growth and Capital Inter-
Reserves Bond Balanced Income Income Appreciation national
Fund Fund Fund Fund Fund Fund Stock 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 organizational expenses
and offering costs (Note 1).... 66,951 66,951 66,951 66,951 66,951 66,951 66,951
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
organization expenses
and offering costs (Note 1).... 66,951 66,951 66,951 66,951 66,951 66,951 66,951
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
NET ASSETS : ....................... $50,000 $50,000 $50,000 $50,000 $50,000 $50,000 $50,000
SHARES OF BENEFICIAL
INTEREST OUTSTANDING:
Class A Shares ................ 49,000 4,900 4,900 4,900 4,900 4,900 4,900
Class B Shares ................ 1,000 100 100 100 100 100 100
CLASS A SHARES:
Net asset value per share of
beneficial interest outstanding* ... $1.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
CLASS B SHARES:
Net asset value and offering price
per share of beneficial interest* .. $1.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
- ----------------------
<FN>
* Redemption price is equal to NAV less any applicable CDSC.
</FN>
</TABLE>
NOTES TO STATEMENTS OF ASSETS AND LIABILITIES
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 Adviser"). 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 Sub-Adviser 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 Advisers. The Sub-Advisers 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 Adviser 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 Adviser at its discretion, may
revise or discontinue the voluntary fee waivers and expense reimbursements at
any time. The Investment Adviser 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 Adviser 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
