<PAGE>
As filed with the Securities and Exchange Commission on July 21, 2000
Securities Act Registration No. 333-
Investment Company Act File No. 811-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. __
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. __
State Farm Mutual Fund Trust
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(Exact name of Registrant as Specified in Charter)
One State Farm Plaza, Bloomington, Illinois 61710-0001
------------------------------------------------------- --------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (309) 766-2029
Janet D. Olsen or Alan Goldberg
Bell Boyd & Lloyd LLC
Roger S. Joslin Three First National Plaza
One State Farm Plaza 70 West Madison St., Suite 3300
Bloomington, Illinois 61710-0001 Chicago, Illinois 60602
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(Names and addresses of agents for service)
------------------
Approximate Date of Proposed Public Offering: As soon as possible after the
effectiveness of the Registration Statement.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED _____________, 2000
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALES OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
================================================================================
PROSPECTUS
================================================================================
STATE FARM MUTUAL FUND TRUST
================================================================================
[DECEMBER 1, 2000]
STATE FARM LARGE CAP EQUITIES FUND
STATE FARM SMALL CAP EQUITIES FUND
STATE FARM INTERNATIONAL EQUITIES FUND
STATE FARM INDEX 500 FUND
STATE FARM SMALL CAP INDEX FUND
STATE FARM INTERNATIONAL INDEX FUND
STATE FARM EQUITY AND BOND FUND
STATE FARM BOND FUND
STATE FARM TAX-ADVANTAGED BOND FUND
STATE FARM MONEY MARKET FUND
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
SHARES OF THE FUNDS OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INTRODUCTION..................................................................1
FUNDS AT A GLANCE.............................................................3
STATE FARM LARGE CAP EQUITIES FUND.......................................3
STATE FARM SMALL CAP EQUITIES FUND.......................................5
STATE FARM INTERNATIONAL EQUITIES FUND...................................7
STATE FARM INDEX 500 FUND................................................8
STATE FARM SMALL CAP INDEX FUND.........................................10
STATE FARM INTERNATIONAL INDEX FUND.....................................12
STATE FARM EQUITY AND BOND FUND.........................................14
STATE FARM BOND FUND....................................................16
STATE FARM TAX-ADVANTAGED BOND FUND.....................................18
STATE FARM MONEY MARKET FUND............................................20
EXPENSE INFORMATION..........................................................22
ANNUAL INVESTMENT RETURNS....................................................24
HOW THE FUNDS INVEST.........................................................25
GENERAL POLICIES APPLICABLE TO ALL FUNDS................................25
FUND SUMMARIES..........................................................25
OTHER RISKS OF INVESTING IN THE FUNDS...................................30
MANAGING THE INVESTMENTS OF THE FUNDS........................................31
SHAREHOLDER INFORMATION......................................................34
WHAT TYPE OF ACCOUNT WOULD YOU LIKE.....................................34
MINIMUM INVESTMENTS.....................................................35
FLEXIBLE SALES CHARGE OPTIONS...........................................35
CALCULATING NET ASSET VALUE.............................................39
HOW TO BUY SHARES.......................................................40
HOW TO EXCHANGE SHARES..................................................42
HOW TO REDEEM FUND SHARES...............................................43
DIVIDENDS, DISTRIBUTIONS AND TAXES...........................................45
SHARED DELIVERY..............................................................47
APPENDIX A...................................................................48
APPENDIX B...................................................................54
ADDITIONAL INFORMATION ABOUT THE FUNDS.......................................56
</TABLE>
i
<PAGE>
INTRODUCTION
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The State Farm Mutual Fund Trust (the "Trust") has ten separate Funds, each
of which is a separate investment portfolio with its own investment objective,
investment policies, restrictions, and risks. State Farm Investment Management
Corp. (the "Manager") is the investment adviser to each Fund, other than State
Farm Index 500 Fund, State Farm Small Cap Index Fund, and State Farm
International Index Fund (the "Equity Index Funds"). Each Equity Index Fund
invests all of its assets into a separate series of an unaffiliated mutual fund
called Master Investment Portfolio ("MIP"). Barclays Global Fund Advisors
("Barclays") serves as the investment adviser to MIP, each series of which is
referred to in this prospectus as a "Master Portfolio." This prospectus
describes each Fund -- please read it and retain it for future reference.
The Funds offer investment opportunities to a wide range of investors, from
investors with short-term goals, who wish to take little investment risk, to
investors with long-term goals willing to bear the risks of the stock and bond
markets for potentially greater rewards.
To provide you with flexibility, each Fund has adopted a purchase program
that offers you two alternative ways to purchase shares, Class A or Class B,
each with a different combination of sales charges, ongoing fees, eligibility
requirements and other features. This program is designed to permit you to
choose the method of purchasing shares that you believe is most beneficial given
the amount of your investment, the length of time you expect to hold your
investment and other relevant circumstances.
RISK/RETURN SUMMARY
The risk/return summary below is intended to help you compare the Funds against
each other and against other mutual funds. It does not indicate the future
volatility or performance of any of the Funds.
[GRAPHIC]
------------------
Stock Funds
------------------
Balanced Funds
POTENTIAL RETURN ------------------ POTENTIAL RISK
Bond Funds
------------------
Money Market Funds
------------------
<TABLE>
<CAPTION>
STOCK FUNDS BALANCED FUNDS BOND FUNDS MONEY MARKET FUND
<S> <C> <C> <C>
State Farm Large Cap Equities Fund State Farm Equity and State Farm Bond Fund State Farm Money Market Fund
State Farm Small Cap Equities Fund Bond Fund State Farm Tax-advantaged
State Farm International Equities Bond Fund
Fund
State Farm Index 500 Fund
State Farm Small Cap Index Fund
State Farm International Index Fund
</TABLE>
1
<PAGE>
ALL RISK IS NOT THE SAME.
Different types of mutual funds (for example, stock funds compared to bond
funds) are subject to different types of risk. Each Fund, to varying degrees, is
subject to several types of risk, including the following:
CREDIT RISK -- The risk that the issuer of a security, or a party to a contract,
will default or otherwise not honor a financial obligation.
INTEREST RATE RISK -- The risk of a decline in market value of an
interest-bearing instrument due to changes in interest rates. For example, a
rise in interest rates typically will cause the value of a fixed rate security
to fall. On the other hand, a decrease in interest rates will cause the value of
a fixed rate security to increase. Another risk associated with interest rate
changes is call risk. Call risk is the risk that, during periods of falling
interest rates, a bond issuer will "call" or repay a higher yielding bond
before the maturity date of the bond. Under these circumstances, the Fund may
have to reinvest the proceeds in an investment that provides a lower yield than
the called bond.
INCOME RISK - The risk that the income from a Fund's investments will decline
because of falling market interest rates. This risk is related to interest rate
risk.
LIQUIDITY RISK -- The risk that a security or other investment may be difficult
to sell at the time the Fund would like to sell, and at the value the Fund has
placed on those securities.
MANAGEMENT RISK -- The risk that a strategy used by a Fund's investment adviser
may fail to produce the desired result. This risk is common to all mutual funds.
MARKET RISK -- The risk that the market value of a security may increase or
decrease, sometimes rapidly and unpredictably. This risk is common to all stocks
and bonds and the mutual funds that invest in them.
VALUATION RISK -- The risk that a Fund has valued certain securities at a higher
price than it can sell them for. This risk is common where the security is from
a relatively new issuer with little or no previous market history and a mutual
fund's management is called upon to assign a value to the security.
FOREIGN INVESTING RISK - The risk associated with investing in countries other
than the U.S., including changes in exchange rates, different securities laws
and political issues of foreign countries.
INFLATION RISK - The risk that the value of assets or income from investments
will be less in the future as inflation decreases the value of money. As
inflation increases, the value of a Fund's assets, and the value of its
distributions, can decline.
INDEXING RISK. There is no guarantee that an Equity Index Fund will be able to
track the performance of its benchmark index. Even when stock prices are
falling, an Equity Index Fund will stay fully invested and may decline more than
its benchmark index.
2
<PAGE>
FUNDS AT A GLANCE
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This section discusses each Fund's investment objectives, strategies and risks.
Each Fund summary also describes who should consider investing in the Fund in
the "Investor Profile" section. Please refer to the detailed description of the
Funds' policies in "How the Funds Invest" (beginning on p. ___) for those Funds
you wish to purchase.
STATE FARM LARGE CAP EQUITIES FUND
INVESTMENT OBJECTIVE -- The State Farm Large Cap Equities Fund (the "Large Cap
Equities Fund") seeks long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGIES
HOW DOES THIS FUND PURSUE ITS INVESTMENT
OBJECTIVE?
The Large Cap Equities Fund invests most of its assets in common stocks and
other equity securities of larger U.S. companies. The Manager chooses stocks for
the Fund's portfolio for their long-term potential to generate capital gains.
In making investment decisions on specific securities, the Manager analyzes
long-term industry conditions, management capabilities, and financial solvency.
The Manager may sell securities the Fund holds for a variety of reasons, such as
to secure gains, limit losses, or redeploy assets into more promising
opportunities.
The Fund may invest up to 25% of its assets in securities of foreign companies.
INVESTOR PROFILE
Who should consider investing in the Large Cap Equities Fund?
YOU MAY WANT TO INVEST IN THE LARGE CAP EQUITIES FUND IF YOU:
- can tolerate the price fluctuations and volatility that are inherent in
investing in a broad based large cap stock mutual fund
- want to diversify your investments
- are seeking a growth investment as part of an asset allocation program
OR
- are investing for retirement or other goals that are many years in the
future
YOU MAY NOT WANT TO INVEST IN THE LARGE CAP EQUITIES FUND IF YOU:
- are investing with a shorter investment time horizon in mind
- are seeking income rather than capital appreciation
OR
- are uncomfortable with an investment whose value is likely to vary
substantially
--------------------------------------------------------------------------------
3
<PAGE>
RISKS
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS FUND?
[GRAPHIC]
Lower Moderate Higher
------------------------------------------------------
RISK
------------------------------------------------------
Money Bond Balanced Stock
Market Funds Funds Funds
Funds
------------------------------------------------------
-------------
Large Cap
Equities Fund
-------------
--------------------------------------------------------------------------------
- MARKET RISK. The Fund invests mostly in common stocks, which represent an
equity interest (ownership) in a business. Stock prices may fluctuate
widely over short or even extended periods in response to company, market,
or economic news. Stock markets also tend to move in cycles, with periods
of rising stock prices and periods of falling stock prices.
- FOREIGN INVESTING RISK. Investing in foreign securities involves higher
trading and custody costs than investing in U.S. companies. Accounting,
legal and reporting practices are different than in the U.S. and regulation
is often less stringent. Potential political or economical instability
presents risks, as does the fluctuation in currency exchange rates.
- MANAGEMENT RISK. The Manager's assessment of companies held in the Fund may
prove incorrect, resulting in losses or poor performance, even in a rising
market. Also, the Fund's investment approach could fall out of favor with
the investing public, resulting in lagging performance versus other types
of stock funds.
AN INVESTMENT IN THE LARGE CAP EQUITIES FUND IS NOT A DEPOSIT OF ANY
BANK OR OTHER INSURED DEPOSITORY INSTITUTION AND IS NOT INSURED OR
GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. YOU CAN LOSE
MONEY BY INVESTING IN THE FUND.
4
<PAGE>
STATE FARM SMALL CAP EQUITIES FUND
INVESTMENT OBJECTIVE -- The State Farm Small Cap Equities Fund (the "Small Cap
Equities Fund") seeks long-term growth of capital.
INVESTMENT SUB-ADVISER - Capital Guardian Trust Company ("CGTC").
PRINCIPAL INVESTMENT STRATEGIES
HOW DOES THIS FUND PURSUE ITS INVESTMENT OBJECTIVE?
The Small Cap Equities Fund invests most of its assets in equity securities of
companies with relatively small market capitalizations located in the U.S. The
companies in which Small Cap Equities Fund invests typically have market
capitalizations of $50 million to $1.5 billion at the time the Fund purchases
the securities.
The Fund invests in securities that CGTC thinks are undervalued and represent
good long-term investment opportunities. CGTC may sell securities when it
believes they no longer represent good long-term value.
The Fund may invest up to 25% of its assets in securities of foreign companies.
INVESTOR PROFILE
Who should consider investing in the Small Cap Equities Fund?
YOU MAY WANT TO INVEST IN THE SMALL CAP EQUITIES FUND IF YOU:
- can tolerate the price fluctuations and volatility that are inherent in
investing in a broad based small cap stock mutual fund
- want to diversify your investments
- are seeking a growth investment as part of an asset allocation program
OR
- are investing for retirement or other goals that are many years in the
future
YOU MAY NOT WANT TO INVEST IN THE SMALL CAP EQUITIES FUND IF YOU:
- are investing with a shorter investment time horizon in mind
- are seeking income rather than capital appreciation
OR
- are uncomfortable with an investment whose value is likely to vary
substantially
--------------------------------------------------------------------------------
RISKS
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS FUND?
[GRAPHIC]
Lower Moderate Higher
------------------------------------------------------
RISK
------------------------------------------------------
Money Bond Balanced Stock
Market Funds Funds Funds
Funds
------------------------------------------------------
-------------
Small Cap
Equities Fund
-------------
--------------------------------------------------------------------------------
- MARKET RISK. The Fund invests mostly in common stocks, which represent an
equity interest (ownership) in a business. Stock prices may fluctuate
widely over short or even extended periods in response to company, market,
or economic news. Stock markets also tend to move in cycles, with periods
of rising stock prices and periods of falling stock prices.
5
<PAGE>
- SMALLER COMPANY SIZE. The Small Cap Equities Fund invests a large portion
of its assets in smaller capitalization companies. The securities of small
capitalization companies are often more difficult to value or dispose of,
more difficult to obtain information about, and more volatile than stocks
of larger, more established companies. In addition, the markets for the
Fund's investments may not be actively traded, which increases the risk
that CGTC may have difficulty selling securities the Fund holds.
- FOREIGN INVESTING RISK. Investing in foreign securities involves higher
trading and custody costs than investing in U.S. companies. Accounting,
legal and reporting practices are different than in the U.S. and regulation
is often less stringent. Potential political or economical instability
presents risks, as does the fluctuation in currency exchange rates.
- MANAGEMENT RISK. CGTC's assessment of companies held in the Fund may prove
incorrect, resulting in losses or poor performance, even in a rising
market. Also, the Fund's investment approach could fall out of favor with
the investing public, resulting in lagging performance versus other types
of small cap stock funds.
AN INVESTMENT IN THE SMALL CAP EQUITIES FUND IS NOT A DEPOSIT OF ANY
BANK OR OTHER INSURED DEPOSITORY INSTITUTION AND IS NOT INSURED OR
GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. YOU CAN LOSE
MONEY BY INVESTING IN THE FUND.
6
<PAGE>
STATE FARM INTERNATIONAL EQUITIES FUND
INVESTMENT OBJECTIVE --The State Farm International Equities Fund (the
"International Equities Fund") seeks long-term growth of capital.
INVESTMENT SUB-ADVISER -- Capital Guardian Trust Company ("CGTC")
PRINCIPAL INVESTMENT STRATEGIES
HOW DOES THIS FUND PURSUE ITS INVESTMENT OBJECTIVE?
The International Equities Fund invests its assets primarily in common stocks of
companies located in Europe or the Pacific Basin. The Fund may also invest in
companies located in emerging markets. There is no restriction on the size of
the companies in which the Fund invests.
The Fund invests in securities that CGTC thinks are undervalued and represent
good long-term investment opportunities. CGTC may sell securities when it
believes they no longer represent good long-term value.
INVESTOR PROFILE
Who should consider investing in the International Equities Fund?
YOU MAY WANT TO INVEST IN THE INTERNATIONAL EQUITIES FUND IF YOU:
- can tolerate the price fluctuations and volatility that are inherent in
investing in an international stock mutual fund
- want to diversify your investments
- are seeking a growth investment as part of an asset allocation program
OR
- are investing for retirement or other goals that are many years in the
future
YOU MAY NOT WANT TO INVEST IN THE INTERNATIONAL EQUITIES FUND IF YOU:
- are investing with a shorter investment time horizon in mind
- are seeking income rather than capital appreciation
- are uncomfortable investing in companies that are not located in the United
States
OR
- are uncomfortable with an investment whose value is likely to vary
substantially
-------------------------------------------------------------------------------
RISKS
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS FUND?
[GRAPHIC]
Lower Moderate Higher
------------------------------------------------------
RISK
------------------------------------------------------
Money Bond Balanced Stock
Market Funds Funds Funds
Funds
------------------------------------------------------
-------------
International
Equities Fund
-------------
--------------------------------------------------------------------------------
- MARKET RISK. The Fund invests mostly in common stocks, which represent an
equity interest (ownership) in a business. Stock prices may fluctuate
widely over short or even extended periods in response to company, market,
or economic news. Stock markets also tend to move in cycles, with periods
of rising stock prices and periods of falling stock price.
- FOREIGN INVESTING RISK. Investing in foreign securities involves higher
trading and custody costs than investing in U.S. companies. Accounting,
legal and reporting practices are different than in the U.S. and regulation
is often less stringent. Potential political or economical instability
presents risks, as does the fluctuation in currency exchange rates.
- MANAGEMENT RISK. CGTC's assessment of companies held in the Fund may prove
incorrect, resulting in losses or poor performance, even in a rising
market. Also, the Fund's investment approach could fall out of favor with
the investing public, resulting in lagging performance versus other types
of stock funds.
AN INVESTMENT IN THE INTERNATIONAL EQUITIES FUND IS NOT A DEPOSIT OF
ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION AND IS NOT INSURED OR
GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. YOU CAN LOSE
MONEY BY INVESTING IN THE FUND.
7
<PAGE>
STATE FARM INDEX 500 FUND
INVESTMENT OBJECTIVE -- The State Farm Index 500 Fund (the "Index 500 Fund")
seeks to replicate as closely as practicable, before fees and expenses, the
performance of the Standard & Poor's 500 composite stock price index (the "S&P
500 Index")-Registered Trademark-*
PRINCIPAL INVESTMENT STRATEGIES
HOW DOES THIS FUND PURSUE ITS INVESTMENT OBJECTIVES?
The Index 500 Fund invests all of its assets in a separate series of MIP,
called the S&P 500 Index Master Portfolio, which holds each of the stocks
that make up the S&P 500 Index. The S&P 500 Index Master Portfolio and the
Index 500 Fund have substantially similar investment objectives. Barclays
Global Fund Advisors ("Barclays") is the investment adviser to the S&P 500
Index Master Portfolio.
The S&P 500 Index is a widely used measure of large U.S.-company stock
performance. It consists of the common stocks of 500 major corporations selected
according to:
- their size
- the frequency and ease by which their stocks trade
- the range and diversity of the American economy.
The S&P 500 Index Master Portfolio pursues its investment objective by:
- investing in all of the securities that make up the S&P 500 Index
- investing in these securities in proportions that match the weightings of
the S&P 500 Index
Under normal operating conditions, the S&P 500 Index Master Portfolio seeks to
invest at least 90% of its total assets in stocks that are represented in the
S&P 500 Index and will at all times invest a substantial portion of its total
assets in such stocks.
INVESTOR PROFILE
Who should consider investing in the Index 500 Fund?
YOU MAY WANT TO INVEST IN THE INDEX 500 FUND IF YOU:
- can tolerate the price fluctuations and volatility that are inherent in
investing in a broad based stock mutual fund
- want to invest in stocks, but with an indexing approach
- want to diversify your investments
- are seeking a growth investment as part of an asset allocation program
OR
- are investing for retirement or other goals that are many years in the
future
YOU MAY NOT WANT TO INVEST IN THE INDEX 500 FUND IF YOU:
- are investing with a shorter investment time horizon in mind
- are seeking income rather than capital appreciation
OR
- are uncomfortable with an investment whose value is likely to vary
substantially
--------------------------------------------------------------------------------
--------------------
* "Standard & Poor's," "S&P," "S&P 500" and "Standard & Poor's 500" are
trademarks of The McGraw-Hill Companies, Inc. that the Index 500 Fund has
licensed for use. The Index 500 Fund is not sponsored, endorsed, sold or
promoted by Standard & Poor's, and Standard & Poor's makes no
representations regarding the advisability of investing in the Index 500
Fund. For more information regarding the S&P 500 Index, see the Trust's
Statement of Additional Information.
8
<PAGE>
RISKS
THE MAIN RISKS OF INVESTING IN THE INDEX 500 FUND ARE THE SAME AS THE MAIN RISKS
OF INVESTING IN S&P 500 INDEX MASTER PORTFOLIO. WHAT ARE THE MAIN RISKS OF
INVESTING IN THE S&P 500 INDEX MASTER PORTFOLIO?
[GRAPHIC]
Lower Moderate Higher
------------------------------------------------------
RISK
------------------------------------------------------
Money Bond Balanced Stock
Market Funds Funds Funds
Funds
------------------------------------------------------
-------------
Index 500
Fund
-------------
- MARKET RISK. The S&P 500 Index Master Portfolio invests mostly in common
stocks, which represent an equity interest (ownership) in a business. Stock
prices may fluctuate widely over short or even extended periods in response
to company, market, or economic news. Stock markets also tend to move in
cycles, with periods of rising stock prices and periods of falling stock
prices.
- INDEXING RISK. The S&P 500 Index Master Portfolio attempts to match the
performance of the S&P 500, but there is no guarantee that it will be able
to do so. The S&P 500 Index Master Portfolio tries to stay fully invested
at all times in assets that will help it achieve its investment objective.
Even when stock prices are falling, the S&P 500 Index Master Portfolio will
stay fully invested and may decline more than its benchmark index. An index
is not a mutual fund and you cannot invest in an index. The composition and
weighting of securities in an index can, and often do, change.
- MANAGEMENT RISK. Barclays' assessment of companies and their relative
weightings held in the S&P 500 Index Master Portfolio may prove incorrect,
resulting in losses or poor performance, even in a rising market. Also, the
S&P 500 Index Master Portfolio's investment approach could fall out of
favor with the investing public, resulting in lagging performance versus
other types of stock funds.
AN INVESTMENT IN THE INDEX 500 FUND IS NOT A DEPOSIT OF ANY BANK OR
OTHER INSURED DEPOSITORY INSTITUTION AND IS NOT INSURED OR GUARANTEED
BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. YOU CAN LOSE MONEY BY
INVESTING IN THE FUND.
9
<PAGE>
STATE FARM SMALL CAP INDEX FUND
INVESTMENT OBJECTIVE -- The State Farm Small Cap Index Fund (the "Small Cap
Index Fund") seeks to match the performance of the Russell 2000 Small Stock
Index-Registered Trademark-* (the "Russell 2000 Index") as closely as
practicable and before fees and expenses.
PRINCIPAL INVESTMENT STRATEGIES
HOW DOES THIS FUND PURSUE ITS INVESTMENT OBJECTIVES?
The Small Cap Index Fund invests all of its assets in a separate series of MIP,
called the Small Cap Index Master Portfolio. The Small Cap Index Master
Portfolio and the Small Cap Index Fund have substantially similar investment
objectives. Barclays is the investment adviser to the Small Cap Index Master
Portfolio.
The Small Cap Index Fund and the Small Cap Index Master Portfolio seek to
achieve investment performance that is similar to the Russell 2000 Index (the
Small Cap Index Fund's target benchmark). The Russell 2000 Index tracks the
common stock performance of about 2,000 small U.S. companies.
The Small Cap Index Master Portfolio pursues its investment objective by
investing in a representative sample of the securities contained in the Russell
2000 Index based upon sampling and modeling techniques.
Under normal operating conditions, the Small Cap Index Master Portfolio seeks to
invest at least 90% of its total assets in stocks that are represented in the
Russell 2000 Index and will at all times invest a substantial portion of its
total assets in such stocks.
--------------------------------------------------------------------------------
INVESTOR PROFILE
Who should consider investing in the Small Cap Index Fund?
YOU MAY WANT TO INVEST IN THE SMALL CAP INDEX FUND IF YOU:
- can tolerate the price fluctuations and volatility that are inherent in
investing in a broad based small cap stock mutual fund
- want to invest in stocks, but with an indexing approach
- want to diversify your investments
- are seeking a growth investment as part of an asset allocation program
OR
- are investing for retirement or other goals that are many years in the
future
YOU MAY NOT WANT TO INVEST IN THE SMALL CAP INDEX FUND IF YOU:
- are investing with a shorter investment time horizon in mind
- are seeking income rather than capital appreciation
OR
- are uncomfortable with an investment whose value is likely to vary
substantially
--------------------------------------------------------------------------------
--------------------
* The Russell 2000-Registered Trademark- Index is a trademark/service
mark, and Russell(TM) is a trademark, of the Frank Russell Company. The
Small Cap Index Fund is not sponsored, endorsed, sold or promoted by the
Frank Russell Company, and the Frank Russell Company makes no
representation regarding the advisability of investing in the Small Cap
Index Fund. For more information regarding the Russell 2000 Index, see
the Trust's Statement of Additional Information.
10
<PAGE>
RISKS
THE MAIN RISKS OF INVESTING IN THE SMALL CAP INDEX FUND ARE THE SAME AS THE MAIN
RISKS OF INVESTING IN THE SMALL CAP INDEX MASTER PORTFOLIO. WHAT ARE THE MAIN
RISKS OF INVESTING IN THE SMALL CAP INDEX MASTER PORTFOLIO?
[GRAPHIC]
Lower Moderate Higher
------------------------------------------------------
RISK
------------------------------------------------------
Money Bond Balanced Stock
Market Funds Funds Funds
Funds
------------------------------------------------------
-------------
Small Cap
Index Fund
-------------
- MARKET RISK. The Small Cap Index Master Portfolio invests mostly in common
stocks, which represent an equity interest (ownership) in a business. Stock
prices may fluctuate widely over short or even extended periods in response
to company, market, or economic news. Stock markets also tend to move in
cycles, with periods of rising stock prices and periods of falling stock
prices.
- SMALLER COMPANY SIZE. The Small Cap Index Master Portfolio invests a large
portion of its assets in smaller capitalization companies. The securities
of small capitalization companies are often more difficult to value or
dispose of, more difficult to obtain information about, and more volatile
than stocks of larger, more established companies. In addition, the markets
for the Small Cap Index Master Portfolio's investments may not be actively
traded, which increases the risk that Barclays may have difficulty selling
securities the Small Cap Index Master Portfolio holds.
- INDEXING RISK. The Small Cap Index Master Portfolio attempts to match the
performance of the Russell 2000 Index, but there is no guarantee that it
will be able to do so. The Small Cap Index Master Portfolio tries to stay
fully invested at all times in assets that will help it achieve its
investment objective. Even when stock prices are falling, the Small Cap
Index Master Portfolio will stay fully invested and may decline more than
its benchmark index. An index is not a mutual fund and you cannot invest in
an index. The composition and weighting of securities in an index can, and
often do, change.
- MANAGEMENT RISK. Barclays' assessment of companies held in the Small Cap
Index Master Portfolio may prove incorrect, resulting in losses or poor
performance, even in a rising market. Also, the Small Cap Index Master
Portfolio's investment approach could fall out of favor with the investing
public, resulting in lagging performance versus other types of stock funds.
AN INVESTMENT IN THE SMALL CAP INDEX FUND IS NOT A DEPOSIT OF ANY BANK
OR OTHER INSURED DEPOSITORY INSTITUTION AND IS NOT INSURED OR
GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. YOU CAN LOSE
MONEY BY INVESTING IN THE FUND.
11
<PAGE>
STATE FARM INTERNATIONAL INDEX FUND
INVESTMENT OBJECTIVE -- The State Farm International Index Fund (the
"International Index Fund") seeks to match as closely as practicable, before
fees and expenses, the performance of the Morgan Stanley Capital International
Europe, Australia, and Far East Free ("EAFE-Registered Trademark- Free Index").*
PRINCIPAL INVESTMENT STRATEGIES
HOW DOES THIS FUND PURSUE ITS INVESTMENT OBJECTIVES?
The International Index Fund invests all of its assets in a separate series of
MIP, called the International Index Master Portfolio. The International Index
Master Portfolio and the International Index Fund have substantially similar
investment objectives. Barclays is the investment adviser to the International
Index Master Portfolio.
The International Index Fund and International Index Master Portfolio seek to
achieve investment performance that is similar to the EAFE Free Index (the
target benchmark). The EAFE Free Index tracks the common stock (or equivalent)
performance of companies in which U.S. investors can invest in Europe,
Australia, New Zealand and the Far East. The International Index Master
Portfolio selects a representative sample of the securities contained in the
EAFE Free Index based upon sampling and modeling techniques.
The International Index Master Portfolio attempts to remain as fully invested as
practicable in a pool of stocks and other equity securities that are found in
the EAFE Free Index in a manner that is expected to approximate the performance
of the EAFE Free Index. Under normal operating conditions, the International
Index Master Portfolio seeks to invest at least 90% of its total assets in
stocks that are represented in the EAFE Free Index and will at all times invest
a substantial portion of its total assets in such stocks.
--------------------------------------------------------------------------------
INVESTOR PROFILE
Who should consider investing in the International Index Fund?
YOU MAY WANT TO INVEST IN THE INTERNATIONAL INDEX FUND IF YOU:
- can tolerate the price fluctuations and volatility that are inherent in
investing in a broad based international stock mutual fund
- want to invest in stocks, but with an indexing approach
- want to diversify your investments
- are seeking a growth investment as part of an asset allocation program
OR
- are investing for retirement or other goals that are many years in the
future
YOU MAY NOT WANT TO INVEST IN THE INTERNATIONAL INDEX FUND IF YOU:
- are investing with a shorter investment time horizon in mind
- are seeking income rather than capital appreciation
- are uncomfortable investing in companies that are not located in the
United States
OR
- are uncomfortable with an investment whose value is likely to vary
substantially
--------------------------------------------------------------------------------
--------------------
* The EAFE-Registered Trademark- Free Index is the exclusive property of
Morgan Stanley & Co. Incorporated ("Morgan Stanley"). Morgan Stanley
Capital International is a service mark of Morgan Stanley and has been
licensed for use by the International Index Fund. The International
Index Fund is not sponsored, endorsed, sold or promoted by Morgan
Stanley. Morgan Stanley makes no representation or warranty regarding
the advisability of investing in the International Index Fund. For more
information regarding the EAFE-Registered Trademark- Free Index, see the
Trust's Statement of Additional Information.
12
<PAGE>
RISKS
THE MAIN RISKS OF INVESTING IN THE INTERNATIONAL INDEX FUND ARE THE SAME AS THE
MAIN RISKS OF INVESTING IN THE INTERNATIONAL INDEX MASTER PORTFOLIO. WHAT ARE
THE MAIN RISKS OF INVESTING IN THE INTERNATIONAL INDEX MASTER PORTFOLIO?
[GRAPHIC]
Lower Moderate Higher
------------------------------------------------------
RISK
------------------------------------------------------
Money Bond Balanced Stock
Market Funds Funds Funds
Funds
------------------------------------------------------
-------------
International
Index Fund
-------------
- MARKET RISK. The International Index Master Portfolio invests mostly in
common stocks, which represent an equity interest (ownership) in a
business. Stock prices may fluctuate widely over short or even extended
periods in response to company, market, or economic news. Stock markets
also tend to move in cycles, with periods of rising stock prices and
periods of falling stock prices.
- FOREIGN INVESTING RISK. Investing in foreign securities involves higher
trading and custody costs than investing in U.S. companies. Accounting,
legal and reporting practices are different than in the U.S. and
regulation is often less stringent. Potential political or economical
instability presents risks as does the fluctuation in currency exchange
rates.
- INDEXING RISK. The International Index Master Portfolio attempts to match
the performance of the EAFE Free Index, but there is no guarantee that it
will be able to do so. The International Index Master Portfolio tries to
stay fully invested at all times in assets that will help it achieve its
investment objective. Even when stock prices are falling, the International
Index Master Portfolio will stay fully invested and may decline more than
the Fund's benchmark index. An index is not a mutual fund and you cannot
invest in an index. The composition and weighting of securities in an index
can, and often do, change.
- MANAGEMENT RISK. Barclays' assessment of companies held in the
International Index Master Portfolio may prove incorrect, resulting in
losses or poor performance, even in a rising market. Also, the
International Index Master Portfolio's investment approach could fall out
of favor with the investing public, resulting in lagging performance versus
other types of stock funds.
AN INVESTMENT IN THE INTERNATIONAL INDEX FUND IS NOT A DEPOSIT OF ANY
BANK OR OTHER INSURED DEPOSITORY INSTITUTION AND IS NOT INSURED OR
GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. YOU CAN LOSE
MONEY BY INVESTING IN THE FUND.
13
<PAGE>
STATE FARM EQUITY AND BOND FUND
INVESTMENT OBJECTIVE -- The State Farm Equity and Bond Fund (the "Equity and
Bond Fund") seeks long-term growth of principal while providing some current
income.
PRINCIPAL INVESTMENT STRATEGIES
HOW DOES THIS FUND PURSUE ITS INVESTMENT OBJECTIVE?
The Equity and Bond Fund invests all of its assets in shares of the State Farm
Large Cap Equities Fund and the State Farm Bond Fund. Generally, the Equity and
Bond Fund attempts to maintain approximately 60% of its net assets in shares of
the State Farm Large Cap Equities Fund and approximately 40% of its net assets
in shares of the State Farm Bond Fund. The Equity and Bond Fund never invests
more than 75% of its net assets in either underlying Fund. Though the Equity and
Bond Fund is not an asset allocation or market timing mutual fund, it does, from
time to time, adjust the amount of its assets invested in each underlying Fund
as economic, market and financial conditions warrant. Please refer to the
descriptions of the investments of the State Farm Large Cap Equities Fund and
the State Farm Bond Fund for a discussion of the portfolio securities of these
Funds and the risks associated with each.
--------------------------------------------------------------------------------
INVESTOR PROFILE
Who should consider investing in the Equity and Bond Fund?
YOU MAY WANT TO INVEST IN THIS FUND IF YOU ARE SEEKING:
- long-term growth potential;
- some current income;
OR
- the convenience of a balanced portfolio of stocks and bonds in a single
investment.
YOU MAY NOT WANT TO INVEST IN THE EQUITY AND BOND FUND IF YOU:
- have a short-term investment horizon
- want the greater growth potential of an investment entirely in equity
securities
OR
- are unwilling to accept share price fluctuations
RISKS
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS FUND?
[GRAPHIC]
Lower Moderate Higher
------------------------------------------------------
RISK
------------------------------------------------------
Money Bond Balanced Stock
Market Funds Funds Funds
Funds
------------------------------------------------------
-------------
Equity and
Bond Fund
-------------
- IN GENERAL. Because the Equity and Bond Fund invests all of its assets in
the State Farm Large Cap Equities Fund and the State Farm Bond Fund, the
risks of investing in the Equity and Bond Fund are the same as investing in
those underlying Funds. The Equity and Bond Fund is non-diversified because
it invests entirely in shares of the State Farm Large Cap Equities Fund and
the State Farm Bond Fund. A non-diversified mutual fund is generally more
sensitive to changes in the value of individual investments than a fund
that
14
<PAGE>
invests in securities from a large number of different issuers. However,
both the State Farm Large Cap Equities Fund and the State Farm Bond Fund
are diversified.
- MARKET RISK. The Fund invests all of its assets in the State Farm Large
Cap Equities Fund and the State Farm Bond Fund. The prices of shares of
these underlying funds may fluctuate widely over short or even extended
periods in response to company, market, or economic news. The markets in
which the underlying funds invest also tend to move in cycles, with
periods of rising prices and periods of falling prices.
- FOREIGN INVESTING RISK. The underlying Funds permit investments in foreign
securities. Investing in foreign securities involves higher trading and
custody costs than investing in U.S. companies. Accounting, legal and
reporting practices are different than in the U.S. and regulation is often
less stringent. Potential political or economical instability presents
risks, as does the fluctuation in currency exchange rates.
- RISK ASSOCIATED WITH INVESTING IN BONDS. The Equity and Bond Fund may
invest up to 75% of its assets in the State Farm Bond Fund. An investment
in the State Farm Bond Fund is subject to risks associated with investing
in fixed income securities, such as bonds, which include:
- INTEREST RATE RISK. The risk that the bonds that the State Farm Bond
Fund holds may decline in market value due to an increase in interest
rates. Another risk associated with interest rate changes is call
risk. Call risk is the risk that during periods of falling interest
rates, a bond issuer will "call" or repay a higher yielding bond
before the maturity date of the bond. Under these circumstances, the
State Farm Bond Fund may have to reinvest the proceeds in an
investment that provides a lower yield than the called bond.
- INCOME RISK. The risk that the income from the bonds the State Farm
Bond Fund holds will decline due to falling interest rates.
- CREDIT RISK. The risk that a bond issuer fails to make principal or
interest payments when due to the State Farm Bond Fund, or that the
credit quality of the issuer falls.
- MANAGEMENT RISK. The Manager's assessment of investments and companies held
in the underlying Funds may prove incorrect, resulting in losses or poor
performance, even in a rising market. Also, the Fund's investment approach
could fall out of favor with the investing public, resulting in lagging
performance versus other types of balanced funds.
AN INVESTMENT IN THE EQUITY AND BOND FUND IS NOT A DEPOSIT OF ANY BANK
OR OTHER INSURED DEPOSITORY INSTITUTION AND IS NOT INSURED OR
GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. YOU CAN LOSE
MONEY BY INVESTING IN THE FUND.
15
<PAGE>
STATE FARM BOND FUND
INVESTMENT OBJECTIVE -- The State Farm Bond Fund (the "Bond Fund") seeks to
realize over a period of years the highest yield consistent with investing in
investment grade bonds.
PRINCIPAL INVESTMENT STRATEGIES
HOW DOES THIS FUND PURSUE ITS INVESTMENT OBJECTIVE?
The Bond Fund invests primarily in investment grade bonds issued by U.S.
companies. Under normal circumstances, the Bond Fund invests at least 80% of its
assets in investment grade bonds or in bonds that are not rated, but that the
Manager has determined to be of comparable quality. A bond is investment grade
if Moody's Investors Service, Inc. ("Moody's") or S&P have rated the bond in one
of their respective four highest rating categories. The Bond Fund emphasizes
investment grade bonds and usually maintains an average portfolio duration of
less than 7 years. The Bond Fund may invest in the following instruments:
- CORPORATE DEBT SECURITIES: investment grade securities issued by domestic
and foreign corporations and to a limited extent (up to 20% of its assets),
in lower rated securities;
- U.S. GOVERNMENT DEBT SECURITIES: securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities;
- FOREIGN GOVERNMENT DEBT SECURITIES: investment grade securities issued or
guaranteed by a foreign government or its agencies or instrumentalities,
payable in U.S. dollars;
- ASSET BACKED AND MORTGAGE BACKED SECURITIES: investment grade securities
backed by mortgages, consumer loans and other assets; or
- OTHER ISSUER DEBT SECURITIES: the Fund may invest up to 20% of its assets
in debt securities and preferred stocks that are convertible into common
stocks as well as nonconvertible preferred stocks or securities.
--------------------------------------------------------------------------------
INVESTOR PROFILE
Who should consider investing in the Bond Fund?
YOU MAY WANT TO INVEST IN THE BOND FUND IF YOU:
- are seeking higher potential returns than money market funds and are
willing to accept the price volatility of bonds with longer maturities
- want to diversify your investments
- are seeking an income mutual fund for an asset allocation program
OR
- are retired or nearing retirement
YOU MAY NOT WANT TO INVEST IN THE BOND FUND IF YOU:
- are investing for maximum return over a long time horizon
- want the greater growth potential of an investment in equity securities
OR
- require stability of your principal
--------------------------------------------------------------------------------
RISKS
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS FUND?
[GRAPHIC]
Lower Moderate Higher
------------------------------------------------------
RISK
------------------------------------------------------
Money Bond Balanced Stock
Market Funds Funds Funds
Funds
------------------------------------------------------
-------------
Bond Fund
-------------
16
<PAGE>
- RISKS ASSOCIATED WITH INVESTING IN BONDS. The Fund invests primarily in
investment grade bonds. An investment in the Fund is subject to risks
associated with investing in bonds, which include:
- INTEREST RATE RISK - The risks that the bonds the Fund holds may
decline in value due to an increase in interest rates. Another risk
associated with interest rate changes is call risk. Call risk is the
risk that during periods of falling interest rates, a bond issuer will
"call" or repay a higher yielding bond before the maturity date of the
bond. Under these circumstances, the Fund may have to reinvest the
proceeds in an investment that provides a lower yield than the called
bond.
- INCOME RISK - The risk that the income from the bonds the Fund holds
will decline due to falling interest rates.
- CREDIT RISK - The risk that a bond issuer fails to make principal or
interest payments when due to the Fund, or that the credit quality of
the issuer fails.
- MANAGEMENT RISK. The Manager's assessment of the bonds held in the
Fund may prove incorrect, resulting in losses or poor performance,
even in a rising market. Also, the Fund's investment approach could
fall out of favor with the investing public, resulting in lagging
performance versus other types of bond funds.
- LIQUIDITY RISK - The Manager may have difficulty selling securities
the Fund holds at the time it would like to sell, and at the value the
Fund has placed on those securities.
AN INVESTMENT IN THE BOND FUND IS NOT A DEPOSIT IN ANY BANK OR OTHER
INSURED DEPOSITORY INSTITUTION AND IS NOT INSURED OR GUARANTEED BY THE FDIC
OR ANY OTHER GOVERNMENT AGENCY. YOU CAN LOSE MONEY BY INVESTING IN THE
FUND.
17
<PAGE>
STATE FARM TAX-ADVANTAGED BOND FUND
INVESTMENT OBJECTIVE - The State Farm Tax-advantaged Bond Fund (the
"Tax-advantaged Bond Fund") seeks as high a rate of income exempt from federal
income taxes as is consistent with prudent investment management.
PRINCIPAL INVESTMENT STRATEGIES
HOW DOES THIS FUND PURSUE ITS INVESTMENT OBJECTIVE?
The Tax-advantaged Bond Fund normally invests so that either (1) 80% or more of
the Fund's net investment income is exempt from regular federal income tax or
(2) 80% or more of the Fund's net assets is invested in securities that produce
income exempt from regular federal income tax.
The Tax-advantaged Bond Fund invests primarily in a diversified selection of
municipal bonds with maturities of one to thirty years. A majority of the Fund's
investments are in bonds with maturities longer than five years.
--------------------------------------------------------------------------------
INVESTOR PROFILE
Who should consider investing in the Tax-advantaged Bond Fund?
YOU MAY WANT TO INVEST IN THE TAX-ADVANTAGED BOND FUND IF YOU WANT:
- regular tax-free dividends
OR
- to reduce taxes on your investment income
YOU MAY NOT WANT TO INVEST IN THE TAX-ADVANTAGED BOND FUND IF YOU:
- are seeking long term capital growth
- want the greater growth potential of an investment in equity
securities
- require stability of your principal
OR
- if you are investing through an IRA, 401(k) plan or some other kind of
tax-deferred account.
--------------------------------------------------------------------------------
The Fund normally invests at least 80% of its total assets in municipal bonds
within the highest four rating categories of Moody's or S&P, meaning that the
Fund may invest up to 20% of the Fund's total assets in medium and lower-quality
bonds.
The Fund tends to hold most municipal bonds until they mature or are called. The
Fund may sell a bond when the proportion of bonds with longer maturities is
reduced in anticipation of a bond market decline (a result of rising interest
rates), or increased in anticipation of a bond market rise (resulting from a
decline in interest rates), or to meet cash flow needs. The Manager may also
sell a bond if its credit risk increases significantly or if market conditions
have changed so that more attractive investment opportunities are available.
RISKS
WHAT ARE THE MAIN RISKS OF INVESTING IN THE TAX-ADVANTAGED BOND FUND?
[GRAPHIC]
Lower Moderate Higher
------------------------------------------------------
RISK
------------------------------------------------------
Money Bond Balanced Stock
Market Funds Funds Funds
Funds
------------------------------------------------------
-------------
Tax-
advantaged
Bond Fund
-------------
18
<PAGE>
- RISKS ASSOCIATED WITH INVESTING IN BONDS. The Fund usually invests
exclusively in municipal bonds. The risks associated with municipal bond
investments include:
- INTEREST RATE RISK - The risk that the municipal bonds the Fund holds
may decline in market value due to an increase in interest rates.
Another risk associated with interest rate changes is call risk. Call
risk is the risk that during periods of falling interest rates, a bond
issuer will "call" or repay a higher yielding bond before the maturity
date of the bond. Under these circumstances, the Fund may have to
reinvest the proceeds in an investment that provides a lower yield
than the called bond.
- INCOME RISK - The risk that the income from the bonds the Fund holds
will decline in value due to falling interest rates.
- CREDIT RISK - The risk that the issuer of the municipal bond fails to
make principal or interest payments when due to the Fund, or that the
credit quality of the issuer falls.
- MANAGEMENT RISK. The Manager's assessment of the municipal bonds held in
the Fund may prove incorrect, resulting in losses or poor performance, even
in a rising market. Also, the Fund's investment approach could fall out of
favor with the investing public, resulting in lagging performance versus
other types of tax-advantaged bond funds.
- LIQUIDITY RISK - The Manager may have difficulty selling securities the
Fund holds at the time it would like to sell, and at the value the Fund has
placed on those securities.
AN INVESTMENT IN THE TAX-ADVANTAGED BOND FUND IS NOT A DEPOSIT OF ANY
BANK OR OTHER INSURED DEPOSITORY INSTITUTION AND IS NOT INSURED OR
GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. YOU CAN LOSE
MONEY BY INVESTING IN THE FUND.
19
<PAGE>
STATE FARM MONEY MARKET FUND
INVESTMENT OBJECTIVE -- The State Farm Money Market Fund (the "Money Market
Fund") seeks to maximize current income to the extent consistent with the
preservation of capital and maintenance of liquidity.
PRINCIPAL INVESTMENT STRATEGIES
HOW DOES THIS FUND PURSUE ITS INVESTMENT OBJECTIVE?
Unlike the other Funds, the Money Market Fund seeks to maintain a stable net
asset value of $1.00 per share. The Fund invests exclusively in short-term, U.S.
dollar-denominated money market securities, 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.
INVESTOR PROFILE
Who should consider investing in the Money Market Fund?
YOU MAY WANT TO INVEST IN THE MONEY MARKET FUND IF YOU:
- require stability of principal
- are seeking an investment for the cash portion of an asset allocation
program
- are looking for an investment with a lower degree of risk during
uncertain economic times or periods of stock market volatility
OR
- consider yourself a saver rather than an investor
YOU MAY NOT WANT TO INVEST IN THE MONEY MARKET FUND IF YOU:
- are seeking an investment that is likely to outpace inflation
- are investing for retirement or other longer term goals
OR
- are investing for growth or maximum current income
--------------------------------------------------------------------------------
RISKS
WHAT ARE THE MAIN RISKS OF INVESTING IN THE MONEY MARKET FUND?
[GRAPHIC]
Lower Moderate Higher
------------------------------------------------------
RISK
------------------------------------------------------
Money Bond Balanced Stock
Market Funds Funds Funds
Funds
------------------------------------------------------
--------------
Money Market
Fund
--------------
--------------------------------------------------------------------------------
Because of the types of securities that the Money Market Fund invests in and
their short-term nature, the level of risk associated with the Money Market Fund
is lower than most other types of mutual funds. However, an investment in the
Fund involves the following risks:
- INTEREST RATE RISK - As with any investment whose yield reflects current
interest rates, the Fund's yield will change over time. The value of the
securities the Fund holds may decline in value due to an increase in
interest rates.
- INCOME RISK - The risk that the income from the securities the Fund holds
will decline in value due to falling interest rates.
- CREDIT RISK - The risk that an issuer, or a party to a repurchase agreement
that the Fund has entered into, defaults on its obligations.
- INFLATION RISK - The risk that the value of the assets or income from an
investment will be worth less in the future as inflation decreases the
value of money.
20
<PAGE>
- MANAGEMENT RISK. The Manager's assessment of investments held in the Fund
may prove incorrect, resulting in losses or poor performance, even in a
rising market. Also, the Fund's investment approach could fall out of favor
with the investing public, resulting in lagging performance versus other
types of money market funds.
AN INVESTMENT IN THE MONEY MARKET FUND IS NOT A DEPOSIT OF ANY BANK OR
OTHER INSURED DEPOSITORY INSTITUTION AND IS NOT INSURED OR GUARANTEED
BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE MONEY MARKET
FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT BY MAINTAINING A
STABLE NET ASSET VALUE OF $1.00 PER SHARE, THE FUND MAY NOT SUCCEED
AND YOU MAY STILL LOSE MONEY BY INVESTING IN THE FUND.
21
<PAGE>
EXPENSE INFORMATION
--------------------------------------------------------------------------------
The expense tables and the Examples on the following pages are intended to help
you understand the direct and indirect costs and expenses that you will bear as
an investor in a Fund. Shareholder transaction expenses are charged to your
account directly when you buy or sell shares. Fund Operating Expenses are paid
out of a Fund's assets and include fees for advisory services, administrative
services, distribution services and expenses relating to the maintenance of
shareholder accounts.
SHAREHOLDER TRANSACTION EXPENSES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
Class A Class B
------- -------
<S> <C> <C>
Maximum sales charge (load) imposed on purchases [3.0%] None
Maximum deferred sales charge (load) None [3.00%]
Maximum sales charge (load) imposed on
Reinvested dividends None None
Redemption Fee None None
Exchange Fee None None
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED FUND ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
------------------------------------------------------------------------------------------------------------------------
LARGE CAP SMALL CAP INTERNATIONAL
EQUITIES FUND EQUITIES FUND EQUITIES FUND
------------------------------------------------------------------------------------------------------------------------
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Management fees ___% ___% ___% ___% ___% ___%
12b-1 Distribution and Service Fees(1) ___% ___% ___% ___% ___% ___%
Other expenses(2) ___% ___% ___% ___% ___% ___%
Total Annual Fund Operating Expenses without
Reimbursement ___% ___% ___% ___% ___% ___%
Expense Reimbursement(3) ___% ___% ___% ___% ___% ___%
Total Annual Fund Operating Expenses,
with Expense Reimbursement ___% ___% ___% ___% ___% ___%
------------------------------------------------------------------------------------------------------------------------
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
SMALL CAP INTERNATIONAL INDEX
INDEX 500 FUND(4) INDEX FUND(4) FUND(4)
------------------------------------------------------------------------------------------------------------------------
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Management fees ___% ___% ___% ___% ___% ___%
12b-1 Distribution and Service Fees(1) ___% ___% ___% ___% ___% ___%
Other expenses(2) ___% ___% ___% ___% ___% ___%
Total Annual Fund Operating Expenses without
Reimbursement ___% ___% ___% ___% ___% ___%
Expense Reimbursement(3) ___% ___% ___% ___% ___% ___%
Total Annual Fund Operating Expenses,
with Expense Reimbursement ___% ___% ___% ___% ___% ___%
------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
EQUITY AND BOND FUND BOND FUND TAX-ADVANTAGED BOND
FUND
------------------------------------------------------------------------------------------------------------------------
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Management fees None None ___% ___% ___% ___%
12b-1 Distribution and Service Fees(1) None None ___% ___% ___% ___%
Other expenses(2) ___% ___% ___% ___% ___% ___%
Total Annual Fund Operating Expenses without
Reimbursement ___% ___% ___% ___% ___% ___%
Expense Reimbursement(3) ___% ___% ___% ___% ___% ___%
Total Annual Fund Operating Expenses,
with Expense Reimbursement ___% ___% ___% ___% ___% ___%
------------------------------------------------------------------------------------------------------------------------
<CAPTION>
------------------------------------------------------------------------
MONEY MARKET FUND
------------------------------------------------------------------------
Class A Class B
------- -------
<S> <C> <C>
Management fees ___% ___%
12b-1 Distribution and Service Fees(1) ___% ___%
Other expenses(2) ___% ___%
Total Annual Fund Operating Expenses without
Reimbursement ___% ___%
Expense Reimbursement(3) ___% ___%
Total Annual Fund Operating Expenses,
with Expense Reimbursement ___% ___%
------------------------------------------------------------------------
</TABLE>
--------------------
(1) The 12b-1 Distribution and Service Fees include a ___% shareholder
servicing fee with a 0.20% distribution fee on Class A shares and a 0.60%
distribution fee on Class B shares.
(2) Based on estimated amounts for the current fiscal year.
(3) The Manager has agreed to reimburse each Fund if, and to the extent, the
Fund's total annual operating expenses exceed the following percentages of
the Funds' average net assets: ___%. This reimbursement arrangement is
expected to continue through __________, _____.
(4) For the Equity Index Funds, total annual operating expenses include the
Fund's and the Master Portfolio's expenses.
EXPENSE EXAMPLES
These examples are intended to help you compare the cost of investing in a Fund
with the cost of investing in other mutual funds. The examples assume you invest
$10,000 for the time periods indicated, earn a 5% return each year, redeem your
shares at the end of the period and that operating expenses remain constant at
the level above for "Total Annual Fund Operating Expenses, without
Reimbursement."* Your actual returns and costs may be higher or lower than those
shown, but based on these assumptions, your expenses will be:
--------------------
* The Manager has agreed to reimburse each Fund if and to the extent the
Fund's total annual operating expenses exceed ___%. Part 2 of Appendix A to
this prospectus indicates what the expenses of investing in the Funds would
be after the expense reimbursement.
23
<PAGE>
<TABLE>
<CAPTION>
Fund 1 Year 3 Years
---- ------ -------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Large Cap Equities Fund $_____ $_____ $_____ $_____
Small Cap Equities Fund $_____ $_____ $_____ $_____
International Equities Fund $_____ $_____ $_____ $_____
Index 500 Fund $_____ $_____ $_____ $_____
Small Cap Index Fund $_____ $_____ $_____ $_____
International Index Fund $_____ $_____ $_____ $_____
Equity and Bond Fund $_____ $_____ $_____ $_____
Bond Fund $_____ $_____ $_____ $_____
Tax advantaged Bond Fund $_____ $_____ $_____ $_____
Money Market Fund $_____ $_____ $_____ $_____
</TABLE>
Using the same assumptions as for the first table, but assuming that you did not
redeem your shares at the end of each period, you would bear the following
expenses for Class B shares:
<TABLE>
<CAPTION>
Fund 1 Year 3 Years
---- ------ -------
<S> <C> <C>
Large Cap Equities Fund $_____ $_____
Small Cap Equities Fund $_____ $_____
International Equities Fund $_____ $_____
Index 500 Fund $_____ $_____
Small Cap Index Fund $_____ $_____
International Index Fund $_____ $_____
Equity and Bond Fund $_____ $_____
Bond Fund $_____ $_____
Tax-advantaged Bond Fund $_____ $_____
Money Market Fund $_____ $_____
</TABLE>
ANNUAL INVESTMENT RETURNS
--------------------------------------------------------------------------------
After the Funds have been in operation for a full calendar year, the Funds will
provide performance information to investors to assist them in understanding
that the Funds' returns may vary and that there are possible risks associated
with investing in the Funds. However, past performance will not necessarily
indicate how the Funds will perform in the future.
The Funds are newly organized, and most were modeled after either another mutual
fund that the Manager or Barclays manage, or a composite of accounts that CGTC
manages, as shown below:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
FUND CORRESPONDING FUND
----------------------------------------------------------------------------------------------------------------------
<S> <C>
Large Cap Equities Fund State Farm Growth Fund, Inc.
----------------------------------------------------------------------------------------------------------------------
Small Cap Equities Fund CGTC U.S. Small Cap Equity Composite
----------------------------------------------------------------------------------------------------------------------
International Equities Fund CGTC Non-U.S. Equity Composite
----------------------------------------------------------------------------------------------------------------------
Index 500 Fund S&P 500 Index Master Portfolio
----------------------------------------------------------------------------------------------------------------------
Small Cap Index Fund Small Cap Equity Index Fund portfolio of the State Farm
Variable Product Trust
----------------------------------------------------------------------------------------------------------------------
International Index Fund International Index Master Portfolio
----------------------------------------------------------------------------------------------------------------------
Equity and Bond Fund No comparable fund
----------------------------------------------------------------------------------------------------------------------
24
<PAGE>
----------------------------------------------------------------------------------------------------------------------
Bond Fund No comparable fund
----------------------------------------------------------------------------------------------------------------------
Tax-advantaged Bond Fund State Farm Municipal Bond Fund, Inc.
----------------------------------------------------------------------------------------------------------------------
Money Market Fund Money Market Fund portfolio of the State Farm Variable
Product Trust
----------------------------------------------------------------------------------------------------------------------
</TABLE>
The investment policy of each Fund is substantially similar to its corresponding
Fund. Attached as Appendix A to this Prospectus is the investment performance
for each corresponding fund or composite. The data provided in Appendix A is
provided to illustrate the past performance of the Manager, Barclays and CGTC in
managing similar types of investment mandates.
HOW THE FUNDS INVEST
--------------------------------------------------------------------------------
GENERAL POLICIES APPLICABLE TO ALL FUNDS
Under ordinary circumstances, each Fund is substantially fully invested. Except
for the Equity Index Funds and the Money Market Fund, each Fund may take a
temporary defensive position in attempting to respond to adverse market,
economic, political or other conditions. If the Manager or CGTC determine that
market or economic conditions warrant a temporary defensive position, the Funds
each manage may hold up to 100% of their assets in cash, cash equivalents or
other temporary investments such as short-term government or corporate
obligations. During those periods, a Fund's assets may not be invested in
accordance with its strategy and the Fund may not achieve its investment
objective.
Each Fund may also:
- Lend securities to financial institutions, enter into repurchase
agreements and purchase securities on a when-issued or forward
commitment basis; and
- Invest in U.S. dollar-denominated foreign money market
securities, although no more than 25% of a Fund's assets may be
invested in foreign money market securities unless such
securities are backed by a U.S. parent financial institution.
From time to time, each Fund may borrow money in amounts up to 33 1/3% of its
total assets (including the amount borrowed). Each Fund may also borrow up to an
additional 5% of its total assets (including the amount borrowed), but only for
temporary purposes (for example, to facilitate distributions to shareholders or
to meet redemption requests).
FUND SUMMARIES
Each Fund has its own investment objective. The types of securities and
investment techniques and practices in which each Fund may engage to achieve its
objective, including the principal investment techniques and practices described
for each Fund as described below, are identified in Appendix B to this
Prospectus, and are discussed, together with their risks, in the Trust's
Statement of Additional Information.
LARGE CAP EQUITIES FUND
In managing the Large Cap Equities Fund, the Manager seeks to purchase the
common stocks of large U.S. companies that the Manager considers well run and
able to generate long term capital appreciation. Common stocks, in general,
offer a way to invest for long-term growth of capital. The Manager looks for
companies with one or more of the following characteristics:
- Strong cash flows and a recurring revenue stream.
- A strong industry position.
25
<PAGE>
- A strong financial position.
- Strong management with a clearly defined strategy.
- Capability to develop new or superior products or services.
The Fund may invest up to 25% of its assets in foreign securities not
publicly traded in the U.S. Foreign investing provides opportunities different
from those available in the U.S. and risks that in some ways may be greater than
in U.S. investments.
SMALL CAP EQUITIES FUND
The Small Cap Equities Fund invests its assets primarily in equity
securities of companies with relatively small market capitalizations located in
the U.S. These companies typically will have market capitalizations of $50
million to $1.5 billion at the time the Fund purchases these securities. The
basic investment philosophy of CGTC is to seek undervalued securities that
represent good long-term investment opportunities. CGTC generally will sell
securities when it believes they no longer represent good long-term value. The
Fund may invest up to 25% of its assets in the securities of foreign companies
with relatively small market capitalizations.
INTERNATIONAL EQUITIES FUND
The International Equities Fund invests primarily in common stocks of
companies located in Europe or the Pacific Basin. The Fund may also invest in
companies located in emerging markets. The basic investment philosophy of CGTC
is to seek undervalued securities that represent good long-term investment
opportunities. CGTC generally will sell securities when it believes they no
longer represent good long-term value. Foreign investing provides opportunities
different from those available in the U.S. and risks which in some ways may be
greater than in U.S. investments.
The Fund may also buy and sell foreign currencies (either for current or
future delivery) to facilitate settlements in local markets and to protect
against currency exposure in connection with its distributions to shareholders,
but may not enter into such contracts for speculative purposes.
INDEX 500 FUND, SMALL CAP INDEX FUND AND INTERNATIONAL INDEX FUND
Each Equity Index Fund invests all of its assets in a separate Master
Portfolio of MIP. Each Master Portfolio has substantially similar investment
objectives, strategies, and policies as the corresponding individual Equity
Index Fund. Barclays serves as investment adviser to each Master Portfolio. The
Master Portfolios may accept investments from other feeder funds. Certain
actions involving other feeder funds, such as a substantial withdrawal, could
affect the Master Portfolio. Barclays and its affiliates invest for their own
accounts in the types of securities in which a Master Portfolio may also invest.
Each Master Portfolio invests mostly in stocks, although each may also
invest in stock index futures contracts and options on futures contracts. By
investing in stocks within its benchmark index, each Master Portfolio avoids the
risks of individual stock selection and, instead, tries to match the performance
of its respective benchmark index, whether that index goes up or down.
Each Master Portfolio attempts to remain as fully invested as practicable
in the stocks that are represented in its benchmark index. Under normal
operating conditions, a Master Portfolio seeks to invest at least 90% of its
total assets in stocks that are represented in its benchmark index.
Barclays does not manage the Master Portfolios according to traditional
methods of "active" investment management, which involves the buying and selling
of securities based on economic, financial and market analysis and investment
judgment. Instead, Barclays utilizes a "passive" or indexing investment approach
for each Master Portfolio, attempting to approximate the investment performance
of the appropriate benchmark index. Barclays selects stocks for each Master
Portfolio so that the overall investment characteristics of each Master
Portfolio (based
26
<PAGE>
on market capitalization and industry weightings), fundamental characteristics
(such as return variability, earnings valuation and yield) and liquidity
measures are similar to those of its respective benchmark index.
Each Master Portfolio may invest any assets not invested in stocks that are
represented in its benchmark index in:
- the same type of short-term high quality debt securities in which
the Money Market Fund invests (described below);
- other equity securities that are similar to the stocks making up
its benchmark index or that are awaiting disposition after a
change in composition of the benchmark index or a rebalancing of
the portfolio;
- stock index futures contracts, options on such futures contracts;
and/or
- cash.
Each Master Portfolio may invest in those financial instruments to find a
short-term investment for uninvested cash balances or to provide liquid assets
for anticipated redemptions by shareholders.
The International Index Master Portfolio may also buy and sell foreign
currencies (either for current or future delivery) to facilitate settlements in
local markets, in connection with stock index futures positions, and to protect
against currency exposure in connection with its distributions to shareholders,
but may not enter into such contracts for speculative purposes or to avoid the
effects of anticipated adverse changes in exchange rates between foreign
currencies and the U.S. dollar.
The S&P 500 Index Master Portfolio invests in all of the securities that
make up the S&P 500 Index. However, neither the Small Cap Index Master Portfolio
nor the International Index Master Portfolio generally hold all of the issues
that comprise their respective benchmark index, due in part to the costs
involved and, in certain instances, the potential illiquidity of certain
securities. Instead, both the Small Cap Index Master Portfolio and the
International Index Master Portfolio attempt to hold a representative sample of
the securities in the appropriate benchmark index, which Barclays will select
utilizing certain sampling and modeling techniques. Please refer to the Trust's
Statement of Additional Information for a more detailed discussion of the
techniques that Barclays employs in selecting the portfolio securities for each
of these Master Portfolios.
From time to time, the portfolio composition of the Master Portfolios may
be altered (or "rebalanced") to reflect changes in the characteristics of its
benchmark index or, for the Small Cap Index Master Portfolio or International
Index Master Portfolio, with a view to bringing the performance and
characteristics of each Master Portfolio more closely in line with that of its
benchmark index.
Barclays attempts to track the performance of each Master Portfolio's
benchmark index, but there is no assurance that Barclays will be successful. The
degree to which a Master Portfolio fails to track the performance of its
benchmark index is referred to as the "tracking error." Barclays expects that,
over time, the tracking error of each Master Portfolio will be less than 5%.
Barclays monitors the tracking error of each Master Portfolio on an ongoing
basis and seeks to minimize tracking error to the extent possible. There can be
no assurance that a Master Portfolio will achieve any particular level of
tracking error. For an explanation of "expected tracking error" and more
information on this subject, see the Trust's Statement of Additional
Information.
Another reason why the performance of the Master Portfolios (and the Equity
Index Funds) may not always equal the performance of their benchmark index is
because the performance of each benchmark index does not take into account
management fees or the other expenses that each Master Portfolio and each Equity
Index Fund incurs.
Each Master Portfolio may purchase stock index futures contracts on its
benchmark index or a comparable stock index to simulate investment in its
benchmark index. This may be done to rapidly gain exposure to the securities
comprising its benchmark index in anticipation of purchasing such securities
over time, to reduce
27
<PAGE>
transaction costs, or to gain exposure to such securities at a lower cost than
by making direct investments in the cash market. If a Master Portfolio cannot
sell a futures contract that it holds, it may write call and buy put options on
the contract to effectively close out or offset the contract. No Master
Portfolio will use futures contracts or options on futures contracts for
speculation.
EQUITY AND BOND FUND
The Equity and Bond Fund invests in shares of the Large Cap Equities Fund
and the Bond Fund. The Equity and Bond Fund may hold a portion of its assets in
U.S. Government securities, short-term paper, or may invest in the Money Market
Fund or another investment company to provide flexibility in meeting
redemptions, expenses, and the timing of new investments, and to serve as a
short-term defense during periods of unusual volatility.
BOND FUND
The Bond Fund invests primarily in investment grade bonds (e.g., those
bonds that S&P or Moody's have rated within their respective four highest rating
categories), and in the same types of securities as the Money Market Fund. Under
normal circumstances, at least 80% of the Fund's total assets will be invested
in investment grade bonds or unrated debt securities that the Manager determines
to be of equivalent quality. The Bond Fund may also invest in mortgage-backed
and asset-backed securities, including those representing pools of mortgage,
commercial or consumer loans originated by credit unions.
In selecting bonds for the Fund, the Manager seeks to maximize current
income while minimizing risk and volatility through prudent investment
management. Accordingly, the Fund seeks to limit its exposure to very risky or
speculative investments by investing primarily in investment grade bonds that
offer the potential for attractive returns.
The Fund generally seeks to maintain a dollar weighted average portfolio
duration of typically less than seven years. Duration represents the weighted
average maturity of expected cash flows on a debt obligation, discounted to
present value. The longer the duration of a debt obligation, the more sensitive
its value is to changes in interest rates.
The Fund may also invest up to 20% of its assets in the following
securities:
- Debt securities that S&P or Moody's have rated lower than the four
highest rating categories or comparable unrated debt securities. Bonds
that are rated lower than BBB by S&P or Baa by Moody's are often
referred to as "junk bonds." Rating agencies consider junk bonds to
have varying degrees of speculative characteristics. Consequently,
although they can be expected to provide higher yields, such
securities may be subject to greater market value fluctuations and
greater risk of loss of income and principal than lower-yielding,
higher-rated fixed-income securities. For more information, see
"Description of Bond Ratings" in the Statement of Additional
Information.
- Convertible debt securities, convertible preferred stocks and
nonconvertible preferred stocks. To the extent that the Fund invests
in such securities, the Fund's investment portfolio will be subject to
relatively greater risk of loss of income and principal.
TAX-ADVANTAGED BOND FUND
Tax-advantaged Bond Fund invests primarily in a diversified selection of
municipal bonds. States, territories, local governments and municipalities issue
municipal bonds to raise money for various purposes (for example, to pay for a
road construction project, or to build an airport). Municipal securities may be
fully or partially backed by the local government, by the credit of a private
issuer, by the current or anticipated revenues from a specific project or
specific assets, or by domestic or foreign entities providing credit support
such as letters of credit, guarantees, or insurance. The interest on a municipal
bond is generally exempt from federal income tax, but may be subject to the
federal alternative minimum tax and state income taxes. The Fund currently does
not intend to purchase municipal obligations, the interest on which would be
subject to the alternative minimum tax.
28
<PAGE>
The Fund normally invests so that either (1) at least 80% of the Fund's net
investment income is exempt from regular federal income tax or (2) at least 80%
of the Fund's net assets are invested in securities that produce income exempt
from regular federal income tax.
The Fund tends to hold its municipal bonds until they mature or are called.
The Fund may sell a bond when the proportion of bonds with longer maturities is
reduced in anticipation of a bond market decline (a result of rising interest
rates) or increased in anticipation of a bond market rise (resulting from a
decline in interest rates). The Fund may sell a bond if its credit risk
increases significantly.
Under ordinary circumstances at least 80% of the Fund's total assets will
consist of investment grade municipal bonds (e.g., municipal bonds rated within
the four highest rating categories of Moody's or S&P), and money market
securities and cash. Up to 20% of the Fund's total assets may be invested in
municipal bonds that are unrated or rated below investment grade by Moody's or
by S&P.
Lower-rated municipal bonds and fixed income securities generally carry a
greater degree of risk than higher-rated municipal bonds. Bonds rated below BBB
by S&P and below Baa by Moody's have speculative characteristics, and are
commonly referred to as "junk bonds" and present a higher degree of credit risk.
In addition, the Fund may purchase municipal bonds that represent lease
obligations. These carry special risks because the issuer of the bonds may not
be obligated to appropriate money annually to make payments under the lease. To
reduce this risk, the Fund will only purchase these bonds if the Manager
believes the issuer has a strong incentive to continue making appropriations
until maturity.
The Fund invests primarily in a diversified selection of municipal bonds
with maturities of one to thirty years. A majority of the Fund's investments are
in issues with maturities longer than five years.
The Fund will hold assets not invested in municipal bonds in
interest-bearing demand notes, bank savings accounts and high-grade money market
securities or U.S. Treasury securities.
MONEY MARKET FUND
In selecting securities for the Money Market Fund, the Manager seeks highly
liquid investments that present minimal credit risk. The Fund primarily invests
in high quality short-term money market instruments. At least 95% of the Fund's
assets must be rated in the highest short-term category by at least two
nationally recognized statistical rating organizations ("NRSROs") (or one NRSRO,
if only one has issued a rating), and 100% of the Fund's assets must be invested
in securities rated in the two highest rating categories.
WHAT IS A NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO)?
An NRSRO, such as Moody's or S&P, assigns ratings to securities based on its
assessment of the creditworthiness of the issuers. The Statement of Additional
Information has a detailed description of the various rating categories.
The Fund may invest in securities that are not rated by an NRSRO if the
Manager determines that such securities are of comparable quality to, and
present a comparable amount of risk as, similar securities that have received a
rating from an NRSRO.
Among the securities that the Money Market Fund may invest in are the
following:
- Securities issued or guaranteed by the U.S. Government or its
agencies, including Treasury Bills, notes, and securities issued
by U.S. government agencies such as the Federal National Mortgage
Association.
- Commercial paper issued or guaranteed by U.S. corporations and
certain other entities that are rated in the two highest rating
categories of a NRSRO.
- Repurchase agreements with certain parties.
29
<PAGE>
- Certain obligations of large (more than $1 billion in total
assets) U.S. banks and their subsidiaries (including, certain
Canadian affiliates), including, but not limited to, bank notes,
commercial paper, and certificates of deposit.
- Other short-term obligations issued by or guaranteed by U.S.
corporations, state and municipal governments, or other entities.
- Securities backed by mortgages, consumer loans and other assets.
Given the types of securities that the Fund invests in, the level of risk
associated with the Fund is lower than most other types of mutual funds. However
every investment involves some kind of risk. To the extent that the Fund invests
in certain securities (for example, repurchase agreements, when-issued
securities or foreign money market securities), the Fund may be affected by
additional risks.
OTHER RISKS OF INVESTING IN THE FUNDS
FOREIGN SECURITIES
Investments in foreign securities, including those of foreign governments,
involve additional risks not normally present when investing in comparable
domestic securities.
Some securities of foreign companies and governments may be traded in the U.S.,
such as ADRs, but most are traded primarily in foreign markets. The risks of
investing in foreign securities include:
CURRENCY RISK. For securities that are based in value on foreign currencies
(including ADRs), a Fund must buy the local currency to buy a foreign security
and sell the same local currency after it sells the security. Therefore, the
value of that security to a Fund is affected by the value of the local currency
relative to the U.S. currency. As a result, if the value of the local currency
falls relative to U.S. currency, the value of that security falls, even if the
security has not decreased in value in its home country.
POLITICAL AND ECONOMIC RISK. Foreign investments can be subject to greater
political and economic risks. In some countries, there is the risk that the
government may take over assets or operations of the company or impose taxes or
place limits on the removal of assets that would adversely affect the value of
the security. The possibility of default in foreign government securities,
political or social instability or diplomatic developments generally are more of
a concern in developing countries, where the possibility of political
instability (including revolution) and dependence on foreign economic assistance
may be greater than in developed countries.
REGULATORY RISK. In many countries there is less publicly available information
about issuers than is available for companies in the U.S. Foreign companies may
not be subject to uniform accounting, auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to the U.S. companies. In many foreign countries there is less
government supervision and regulation of business and industry practices, and it
may be more difficult to obtain or enforce judgments against foreign entities.
MARKET RISKS. Foreign securities often trade with less frequency and volume than
domestic securities and are therefore less liquid and more volatile than
securities of comparable domestic issuers. Further, the settlement period of
securities transactions in foreign markets may be longer than in domestic
markets.
TRANSACTION COSTS. Commission rates in foreign countries, which are generally
fixed rather than subject to negotiation as in the U.S., are likely to be
higher. In addition, other costs, such as tax and custody costs, are generally
higher than for domestic transactions.
PARTICULAR RISKS FOR DEVELOPING COUNTRIES. In general, the risks noted above are
heightened for developing countries. In addition, certain developing countries
have experienced substantial, and in some cases, rapidly fluctuating rates of
inflation for a number of years. Inflation has, and may continue to have, a
debilitating effect on the underlying economies of these countries. Many
developing countries are heavily dependent on international
30
<PAGE>
trade and can be adversely affected by trade barriers and protectionist
measures, as well as the depreciation or devaluation of their currencies.
HIGH YIELD/HIGH RISK SECURITIES (JUNK BONDS)
These securities tend to offer higher yields than higher-rated securities of
comparable maturities because the historical financial condition of the issuers
of these securities is usually not as strong as that of other issuers.
High yield fixed-income securities usually present greater risk of loss of
income and principal than higher-rated securities. For example, because
investors generally perceive that there are greater risks associated with
investing in medium- or lower-rated securities, the yields and price of such
securities may tend to fluctuate more than those of higher-rated securities.
Moreover, in the lower-quality segments of the fixed income securities market,
changes in perception of the creditworthiness of individual issuers tend to
occur more frequently and in a more pronounced manner than do changes in
higher-quality segments of the fixed-income securities market. The yield and
price of medium-to lower-rated securities therefore may experience greater
volatility than is the case with higher-rated securities.
Under adverse market or economic conditions, the secondary market for high
yield/high risk securities could contract further, independent of any specific
adverse changes in the condition of a particular issuer. As a result, the Funds
could find it more difficult to sell such 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 securities therefore may be
less than the prices used in calculating the Fund's net asset value.
MANAGING THE INVESTMENTS OF THE FUNDS
--------------------------------------------------------------------------------
INVESTMENT ADVISER
State Farm Investment Management Corp. (the "Manager") serves as the
investment adviser to each Fund other than the Equity Index Funds, which do not
have an investment adviser. Each Equity Index Fund invests all of its assets in
Master Portfolios that have substantially similar investment objectives,
strategies and risks. Subject to the supervision of the Board of Trustees of the
Trust, the Manager is responsible for overseeing the day to day operations and
business affairs of the Trust. The Manager's principal office is located at One
State Farm Plaza, Bloomington, Illinois 61710-0001. The Manager is wholly-owned
by State Farm Mutual Automobile Insurance Company. The Manager acts as
investment adviser to a variety of other registered investment companies, and as
of ___, 2000 was responsible for the management of in excess of $__ billion in
assets.
The Manager also provides all executive, administrative, clerical and other
personnel necessary to operate the Trust and pays the salaries and other costs
of employing all these persons. The Manager furnishes the Trust with office
space, facilities, and equipment and pays the day-to-day expenses related to the
operating and maintenance of such office space, facilities and equipment. Except
for those expenses the Manager expressly assumes, including those noted above,
each Fund otherwise pays for all of its own expenses.
The Large Cap Equities Fund, Equity and Bond Fund, Bond Fund,
Tax-advantaged Bond Fund and the Money Market Fund are each managed by a team of
the Manager's employees (each an "Advisory Team"). Each Advisory Team makes the
investment decisions for these Funds, subject to the oversight of the Board of
Trustees of the Trust.
INVESTMENT MANAGEMENT OF THE EQUITY INDEX FUNDS
The Equity Index Funds do not have an investment adviser. Each Equity Index
Fund invests all of its assets in a Master Portfolio, each of which has
substantially similar investment objectives, strategies and risks to the
corresponding Equity Index Fund. Barclays is the investment adviser to the
Master Portfolios. Barclays and its predecessors have been managing index mutual
funds since 1973. Barclays is an indirect subsidiary of Barclays Bank PLC and is
located at 45 Fremont Street, San Francisco, California 94105. As of _______,
Barclays and its affiliates provided investment advisory services for over $___
billion of assets. For more information regarding
31
<PAGE>
Barclays, please read the section entitled "Investment Advisory Agreements -
Between Barclays and the Master Portfolios" in the Trust's Statement of
Additional Information.
INVESTMENT SUB-ADVISER FOR THE SMALL CAP EQUITIES FUND AND INTERNATIONAL
EQUITIES FUND
The Manager has engaged CGTC as the investment sub-adviser to provide
day-to-day portfolio management for the Small Cap Equities Fund and the
International Equities Fund. As of ____, CGTC provided investment advisory
services for over $___ billion of assets. CGTC, an experienced investment
management organization founded in 1931, serves as investment adviser to these
funds and other funds. CGTC, a wholly owned subsidiary of The Capital Group
Companies, Inc., is headquartered at 333 South Hope Street, Los Angeles,
California 90071. For more information regarding CGTC, please read the section
entitled "Investment Advisory Agreements - Between the Manager and CGTC" in the
Trust's Statement of Additional Information.
The Small Cap Equities Fund and International Equities Fund are managed by
CGTC using a system of multiple portfolio managers for each fund. Under this
approach, the portfolio of each Fund is divided into segments, each of which is
managed by an individual manager. Managers decide how their respective segments
will be invested, within the limits provided by a Fund's objective(s) and
policies and by CGTC's investment committee. In addition, CGTC's research
professionals may make investment decisions for a portion of a Fund's portfolio.
The investment decisions for the Small Cap Equities Fund and the International
Equities Fund are made by CGTC, subject to the oversight of the Board of
Trustees of the Trust.
COMPENSATING THE MANAGER FOR ITS SERVICES
Each Fund, other than the Equity Index Funds, pays the Manager an
investment advisory fee based upon that Fund's average daily net assets. The fee
is accrued daily and paid to the Manager quarterly at the following annual
rates:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
FUND RATE OF
ADVISORY FEE
-----------------------------------------------------------------------
<S> <C>
Large Cap Equities Fund ___% of average daily net assets
-----------------------------------------------------------------------
Small Cap Equities Fund ___% of average daily net assets
-----------------------------------------------------------------------
International Equities Fund ___% of average daily net assets
-----------------------------------------------------------------------
Equity and Bond Fund None
-----------------------------------------------------------------------
Bond Fund ___% of average daily net assets
-----------------------------------------------------------------------
Tax-advantaged Bond Fund ___% of average daily net assets
-----------------------------------------------------------------------
Money Market Fund ___% of average daily net assets
-----------------------------------------------------------------------
</TABLE>
The Manager also receives an administrative services fee from each Fund at
the annual rate of ___% of that Fund's average daily net assets.
COMPENSATING CGTC FOR ITS SERVICES
The Manager pays CGTC to provide sub-advisory services to the Small Cap
Equities Fund and the International Equities Fund. CGTC's compensation for
providing these services is determined according to the following schedules:
32
<PAGE>
<TABLE>
Small Cap Equities Fund:
<S> <C>
----------------------------------------------------------------------------------------------------
On the first $25 million................................ 0.75% of average daily net assets
----------------------------------------------------------------------------------------------------
$25 million to $50 million.............................. 0.60% of average daily net assets
----------------------------------------------------------------------------------------------------
$50 million to $100 million............................. 0.425% of average daily net assets
----------------------------------------------------------------------------------------------------
Over $100 million....................................... 0.375% of average daily net assets
----------------------------------------------------------------------------------------------------
<CAPTION>
International Equities Fund:
<S> <C>
----------------------------------------------------------------------------------------------------
On the first $25 million................................ 0.75% of average daily net assets
----------------------------------------------------------------------------------------------------
$25 million to $50 million.............................. 0.60% of average daily net assets
----------------------------------------------------------------------------------------------------
$50 million to $250 million............................. 0.425% of average daily net assets
----------------------------------------------------------------------------------------------------
Over $250 million....................................... 0.375% of average daily net assets
----------------------------------------------------------------------------------------------------
</TABLE>
For purposes of calculating the fees under the above schedules, other assets
managed by CGTC for companies associated with the Manager are taken into
consideration according to CGTC's fee aggregation and discount policies.
EQUITY INDEX FUNDS - COMPENSATION IN THE MASTER/FEEDER MUTUAL FUND STRUCTURE
The Equity Index Funds are feeder funds that invest all of their assets in
Master Portfolios with substantially similar investment objectives, strategies
and risks. Barclays provides investment guidance and policy direction for each
Master Portfolio. For its services to the Master Portfolios, Barclays receives
annual fees based on the following annual rates:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Fund Annual Management Fee
-------------------------------------------------------------------------------------------------------------
<S> <C>
S&P 500 Index Master Portfolio 0.05% of average daily net assets
-------------------------------------------------------------------------------------------------------------
Small Cap Index Master Portfolio 0.15% of the first $1 billion of average daily net
assets, 0.10% of average daily net assets thereafter
-------------------------------------------------------------------------------------------------------------
International Index Master Portfolio 0.15% of the first $1 billion of average daily net
assets, 0.10% of average daily net assets thereafter
-------------------------------------------------------------------------------------------------------------
</TABLE>
Unlike many traditional actively managed investment funds, there is no single
portfolio manager who makes investment decisions for the Master Portfolios.
Instead, the Master Portfolios track their respective indexes.
FEEDER FUND EXPENSES. Each Equity Index Fund bears its corresponding Master
Portfolio's expenses in proportion to the amount of assets it invests in the
corresponding Master Portfolio. Each Equity Index Fund can set its own
transaction minimums, fund-specific expenses and conditions.
FEEDER FUND RIGHTS. Under the master/feeder structure, the Trust's Board of
Trustees retains the right to withdraw the assets of an Equity Index Fund from a
Master Portfolio if it believes doing so is in the best interests of the Equity
Index Fund and its shareholders. If the Board of Trustees withdraw assets of any
Equity Index Fund, they would then consider whether that Fund should hire its
own investment adviser, invest in another master portfolio or take other action.
33
<PAGE>
SHAREHOLDER INFORMATION
--------------------------------------------------------------------------------
You may buy shares of any of the Funds by contacting your State Farm VP
Management Corp. registered representative, by submitting a written order
directly to State Farm VP Management Corp. at the address listed below, by
contacting a State Farm VP Management Corp. shareholder servicing representative
at 1-800-447-4930 from 8:00 a.m. through 4:15 p.m. (Central Time) Monday through
Friday (except holidays), or via the internet.
We will employ reasonable procedures to confirm that telephone and internet
instructions are genuine. If the Manager and the Funds fail to employ such
procedures, they may be liable for any losses due to unauthorized or fraudulent
instructions. However, the Funds, the Manager and their respective officers,
directors, employees and agents will not be liable for acting upon instructions
given, when reasonably believed to be genuine.
WHAT TYPE OF ACCOUNT WOULD YOU LIKE?
INDIVIDUAL OR JOINT OWNERSHIP. These are intended for your general
investment needs. A single person owns an individual account. Joint accounts can
have two or more owners.
GIFT OR TRANSFER TO A MINOR (UGMA, UTMA). These custodial accounts let you
give money to a minor for any purpose. This gift is irrevocable, and the minor
gains control of the account once he/she reaches the age of majority, or, in the
case of UTMA, age 21. Your application should include the minor's social
security number.
TRUST FOR ESTABLISHED EMPLOYEE BENEFIT OR PROFIT-SHARING PLAN. The trust or
plan must be established before you can open an account. Please include the date
of the trust or plan on the application.
BUSINESS OR ORGANIZATION. This account is for a corporation, association,
partnership or similar institution. Along with your application, please enclose
a certified corporate resolution that indicates which officers are authorized to
act.
TAX-QUALIFIED ACCOUNTS. A tax-qualified account enables you to defer taxes
on investment income and capital appreciation. Your contributions may be
tax-deductible. Tax-qualified accounts require a special application. Please
contact your State Farm VP Management Corp. registered representative or call us
at 1-800-447-4930.
- Traditional Individual Retirement Account (IRA). You may invest up to
$2,000 per tax year in an IRA if you are of legal age, under 70 1/2
and have "earned" (non-investment) income. If your spouse has less
than $2,000 in earned income, he or she may still contribute up to
$2,000 in an IRA, so long as your combined earned income is at least
$4,000 and you file a joint return.
- Roth IRA. Compared to the traditional IRA, the Roth IRA has different
eligibility requirements and tax treatment. If you're a single
taxpayer with adjusted gross income up to $95,000, you may contribute
up to $2,000 per year - or up to $4,000 per year if you're married
with adjusted gross income up to $150,000 per year and you file a
joint return. You also must have earned income at least equal to your
contributions, as with a traditional IRA, but you can contribute to a
Roth IRA even if you are over 70 1/2. Your contributions to a Roth IRA
are not tax-deductible, but your withdrawals are not taxable if you've
held your Roth IRA for at least five years and are at least 59 1/2,
disabled, or use the proceeds (up to $10,000) to purchase a first home
(subject to certain conditions). The amount you can contribute to a
Roth IRA in any year is reduced by the amount you contribute to a
traditional IRA, and vice-versa.
- Rollover IRA. This plan offers you special tax advantages for certain
distributions from employer-sponsored retirement plans.
- Education IRAs. Allow individuals, subject to certain income
limitations, to contribute up to $500 annually for a child under the
age of 18. Although contributions to an Education IRA are not
deductible for federal income tax purposes, the proceeds are generally
not taxable provided
34
<PAGE>
withdrawals are used to pay for qualified higher education expenses.
If contributions are made to a qualified state tuition program for a
child, contributions may not be made to an Education IRA during that
tax year.
- Simplified Employee Pension Plan (SEP-IRA). If you have a small
business or self-employment income, this plan lets you make annual
tax-deductible contributions of up to 15% of the first $170,000 of
compensation for you and any eligible employees.
- Other retirement plans. You may also use a Fund for corporate or
self-employed retirement plans. The plan trustee must establish the
appropriate account; the Funds do not offer prototypes of these plans.
The above is just a summary of the types of retirement accounts available.
When we send your retirement-account application, we will include an IRA
Disclosure Statement. It contains more detailed information about the
requirements for specific IRA accounts, including a summary of the custodian
fees which you may incur for account set-up and maintenance.
For more information about the tax advantages and consequences of these
various IRAs and retirement plan accounts, please contact your tax advisor.
MINIMUM INVESTMENTS
Your initial and subsequent investment in each of the Funds has to meet
these minimum requirements.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
INVESTMENT MINIMUMS
--------------------------------------------------------------------------------------------------
TYPE OF ACCOUNT INITIAL INVESTMENT SUBSEQUENT INVESTMENT
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Regular Accounts $250 $50
--------------------------------------------------------------------------------------------------
Individual Retirement Accounts $250 $50
--------------------------------------------------------------------------------------------------
Other Tax Qualified Retirement Plans $250 $50
--------------------------------------------------------------------------------------------------
Automatic Investment Plans $250 $50
--------------------------------------------------------------------------------------------------
</TABLE>
If you purchase shares of a Fund by automatic investing, you may qualify
for a lower minimum investment. See "Opening and Adding to an Account - By
Automatic Investing" on page ___. The Funds may change the minimum investment
amounts.
FLEXIBLE SALES CHARGE OPTIONS
Each Fund offers its shares in two classes to allow you to choose the
method of purchasing shares that is most beneficial to you in light of such
factors as the amount of your investment, your holdings of Fund shares, how long
you expect to hold your investment and other such circumstances.
Class A shares are available for investors choosing an initial sales charge
and Class B shares are for investors who prefer a deferred sales charge. Shares
of each class represent interests in the same Fund, have the same rights and,
except for the differences in sales charges and distribution charges, are
identical in all respects. The two classes have different exchange privileges,
as described below.
The net income attributable to Class A or Class B shares and the dividends
payable on shares of each class will be reduced by the amount of the shareholder
servicing and distribution fees attributable to those shares and incremental
expenses associated with the class. Shareholders of each class of a Fund have
exclusive voting rights on the distribution (12b-1) plan as it applies to that
class. Sales personnel will receive equal compensation for selling Class A and
Class B shares.
CLASS A SHARES
INITIAL SALES CHARGE
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<PAGE>
You can buy shares of each of the Funds at the offering price, which is the
net asset value per share plus a sales load (commission). You may qualify for a
reduced sales charge, or the sales charge may be waived, as described below
under "When Will the Initial Sales Charge be Reduced or Waived?" The sales
charge on shares of all the Funds is:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
SALES CHARGE AS A PERCENTAGE OF
--------------------------------------------------------------------------------------------------
AMOUNT OF PURCHASE OFFERING PRICE NET AMOUNT INVESTED
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Less than $50,000 [3.00%] [3.09%]
--------------------------------------------------------------------------------------------------
$50,000 to $99,999 [2.5%] [2.56%]
--------------------------------------------------------------------------------------------------
$100,000 to $199,999 [2.0%] [2.04%]
--------------------------------------------------------------------------------------------------
$200,000 to $299,999 [1.5%] [1.52%]
--------------------------------------------------------------------------------------------------
$400,000 to $499,999 [0.5%] [0.503%]
--------------------------------------------------------------------------------------------------
$500,000 or more [0%]* [0%]
--------------------------------------------------------------------------------------------------
</TABLE>
* No sales charge is imposed at the time of purchase on amounts of $500,000
or more. However a contingent deferred sales charge will be charged if shares
are redeemed within 12 months following their purchase at the rate of 0.5%
on the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gains distributions) or the cost of such shares. The
contingent deferred sales charge may be waived in certain circumstances. See
"When will the Contingent Deferred Sales Charge be Waived?" on p. .
WHEN WILL THE INITIAL SALES CHARGE BE REDUCED OR WAIVED?
There are several ways to reduce the initial sales charge:
- Combined Purchases
- Cumulative Discount
- Special Waivers for Certain Categories of Investors
- Reinvestment Privilege
Your State Farm VP Management Corp. registered representative or call
center shareholder services representative can explain these programs to you and
help you determine if you qualify for a sales charge waiver. The sales charge
waiver programs may be changed or discontinued at any time.
COMBINED PURCHASES. Purchases made at the same time for any of the Funds in
related accounts may be aggregated for the purpose of receiving a discounted
sales charge. Investments in related accounts in both Class A and Class B shares
(in certain circumstances) which may be aggregated to qualify for a reduced
sales charge include purchases made for you, your spouse and children under the
age of 21, as well as those made in a tax-qualified plan such as a personal IRA
for those individuals or by a company solely controlled by those individuals or
in a trust established exclusively for the benefit of those individuals.
Purchases by a trustee or other fiduciary account including pension,
profit-sharing or other employee benefit trusts created pursuant to a qualified
plan may be combined to qualify for a reduction of the sales charge. Reduced
sales charges may also be applied to purchases by qualified employee benefit
plans of a single corporation or of corporations affiliated with each other.
Purchases made for a customer in nominee or street name accounts (accounts which
hold the customer's shares in the name of a broker or another nominee such as a
bank trust department) may not be aggregated with those made for other accounts
and may not be aggregated with other nominee or street name accounts unless
otherwise qualified as noted above. You must tell us or your State Farm VP
Management Corp. registered representative at the time your orders are placed
that there are multiple orders which qualify for a reduced sales charge.
CUMULATIVE DISCOUNT. Purchases may also qualify for a reduced sales charge
based on the current total net asset value of your account and any related
accounts in any of the Funds. You must tell us or your State Farm VP Management
Corp. registered representative at the time your order is placed that it
qualifies for a reduced sales charge based on related holdings in existing Fund
accounts.
36
<PAGE>
SPECIAL WAIVERS. You may purchase shares without an initial sales charge
if:
- You are purchasing shares of the Money Market Fund; or
- You are a current or retired agent or employee of the State Farm
Insurance Companies or a family member of such a person. A
"family member" includes:
- legally married spouse
- lineal ascendants (e.g., parents, grandparents, etc.)
and spousal lineal ascendants
- lineal descendants (e.g., children, grandchildren,
etc.) including stepchildren, court appointed foster
children, and legally adopted children.
Some State Farm agents purchase shares of the Funds as an
investment for their SEP-IRA plan. When this occurs, each
participating employee establishes a State Farm Funds IRA
account to which the agent makes SEP contributions. If you
have a Fund IRA account to which SEP contributions are
made, you may also make traditional or rollover IRA
contributions to that account without the payment of an
initial sales charge. Such purchases may be made directly
from the Funds.
- You are purchasing shares by reinvesting the proceeds of the
redemption of shares of one or more of the Funds. You must
provide appropriate documentation that the redemption occurred
not more than 90 days prior to the reinvestment of the proceeds
in Class A shares, and that the shares were at one time subject
to an initial sales charge or contingent deferred sales charge.
- You are reinvesting dividends or other distributions from a Fund.
- You are a participant in a retirement plan reinvesting loan
repayments.
- You are acquiring Fund shares issued in connection with the
acquisition by a Fund of another investment company.
Class A shares may also be purchased without an initial sales charge in the
following situations. However, redemption of such shares within 12 months of
purchase are subject to a contingent deferred sales charge of 0.5% of the lesser
of the value of the shares redeemed or the total cost of the shares:
- You purchase $500,000 or more of the Funds' shares.
- You are a qualified retirement plan, nonqualified deferred
compensation plan or SIMPLE IRA which meets at least one of the
following four criteria: (1) the plan has at least 50 eligible
participants; (2) the plan makes an initial investment of
$250,000 or more; (3) the plan sponsor demonstrates to the
satisfaction of the Trust that the aggregate purchases by the
plan will be equal to at least $250,000 within a reasonable
period of time, as determined by the Trust in its sole
discretion; or (4) the sum of the current market value of the
plan assets invested in any of the Funds or the current purchase
amount is at least $250,000; and
- You are a bank trust department investing funds over which you
exercise exclusive discretionary investment authority and that
are held in a fiduciary, agency, advisory, custodial or similar
capacity.
REINVESTMENT PRIVILEGE. If you redeem some or all of your Fund shares, you
have up to 90 days to reinvest all or part of the redemption proceeds in shares
of one or more of the Funds without paying a sales charge.
37
<PAGE>
This privilege applies only to redemptions of Fund shares on which an initial
sales charge or contingent deferred sales charge was paid or to redemptions of
shares of the Fund that you purchased by reinvesting dividends or distributions.
You must ask your State Farm VP Management Corp. registered representative or
call center shareholder services representative to apply this privilege when you
send your payment.
DISTRIBUTION AND SERVICE FEES
Each Fund has adopted a plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (the "1940 Act"), which provides that the Funds
will pay a distribution fee. Because these fees are paid out of the Funds'
assets on an ongoing basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges. Class
A shares are subject to a distribution fee of up to 0.20% per year of the
average daily net assets of Class A shares. The distribution fee is payable to
State Farm VP Management Corp. to reimburse it for services and expenses
incurred in connection with the distribution of Fund shares, including
unreimbursed expenses incurred in years prior to the year of payment. These
expenses include payments to State Farm VP Management Corp. registered
representatives, expenses of printing and distributing prospectuses to persons
other than Fund shareholders, and expenses of preparing, printing and
distributing advertising and sales literature.
In addition, Class A shares of each Fund pay a shareholder servicing
fee of up to _________% per year of the average daily net assets of that Class,
which may be paid to provide ongoing account services to shareholders. These
services may include establishing and maintaining shareholder accounts,
answering shareholder inquiries and providing other personal services to
shareholders. State Farm VP Management Corp. may profit from these fees.
CLASS B SHARES
CONTINGENT DEFERRED SALES CHARGE
Unlike an initial sales charge, which is paid when you purchase
shares, a contingent deferred sales charge is only paid if you sell your
shares during a certain period of time. Class B shares are offered at net
asset value without an initial sales charge, but subject to a contingent
deferred sales charge as set forth in the table below. The schedule shows the
contingent deferred sales charges applicable for the first through sixth
years of redemption after purchase for different purchase amounts. The
schedule applicable to a specific purchase varies by the amount of that
purchase and is determined at the time the purchase is made. The contingent
deferred sales charge is imposed on the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gains distributions)
or the cost of such shares.
CONTINGENT DEFERRED SALES CHARGE APPLICABLE IN THE YEAR OF REDEMPTION AFTER
PURCHASE*
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FIFTH SIXTH
----- ------ ----- ------ ----- -----
<S> <C> <C> <C> <C> <C>
3.00% 2.75 % 2.50% 2.00% 1.50% 1.00%
</TABLE>
* NO CONTINGENT DEFERRED SALES CHARGE IS PAID ON AN EXCHANGE OF SHARES, NOR IS
ONE PAID ON THE SALE OF SHARES RECEIVED AS A REINVESTMENT OF DIVIDENDS OR
CAPITAL GAINS DISTRIBUTION. CLASS B SHARES WILL CONVERT TO CLASS A SHARES TWO
YEARS AFTER THE EXPIRATION OF THE CONTINGENT DEFERRED SALES CHARGE FOR THAT
PURCHASE. SHARES RECEIVED AS A REINVESTMENT OF DIVIDENDS OR CAPITAL GAINS
DISTRIBUTIONS WILL BE CONVERTED TO CLASS A SHARES IN THE SAME PROPORTION AS
PURCHASED SHARES ARE CONVERTED.
Purchases of $500,000 or more are not accepted in Class B shares. Class A shares
will be issued in these cases.
In determining whether a contingent deferred sales charge is applicable
to a redemption of Class B shares, the calculation will be made in a manner that
results in the lowest possible charge. It will be assumed that the redemption is
made first from shares acquired through the reinvestment of dividends and
distributions; then from amounts representing the increase in net asset value of
your holdings of Class B shares above the total amount of payments for the
purchase of Class B shares during the preceding six years; then from shares held
beyond the
38
<PAGE>
applicable contingent deferred sales charge period; and finally, from shares
subject to the lowest contingent deferred sales charge.
AUTOMATIC CONVERSION OF CLASS B SHARES
Class B shares are automatically converted to Class A shares two years
after the expiration of any contingent deferred sales charge. This conversion
feature relieves Class B shareholders of the higher asset-based sales charge
that otherwise applies to Class B shares under the Class B distribution plan
described below. The conversion is based on the relative net asset value of the
two Classes, and no charge is imposed in connection with the conversion.
WHEN WILL THE CONTINGENT DEFERRED SALES CHARGE SCHEDULE BE WAIVED?
A contingent deferred sales charge will not be assessed on Class A
shares (for purchases of $500,000 or more) or Class B shares for:
- exchanges of Class A or Class B shares of one Fund for the same
Class of shares of another Fund;
- redemptions from tax-deferred retirement plans and Individual
Retirement Accounts for required minimum distributions due to
attainment of age 70-1/2;
- redemptions from tax-deferred retirement plans for returns of
excess contributions to the plan, termination of employment,
participant loans and hardship withdrawals;
- redemptions as a result of death of the registered shareholder or
in the case of joint accounts, of all registered shareholders;
- redemptions as a result of the disability of the registered
shareholder (as determined in writing by the Social Security
Administration) which occurs after the account was established; and
- redemptions for failure to meet minimum account balances.
DISTRIBUTION AND SHAREHOLDER SERVICING FEES
Class B shares are charged fees at an annual rate of _________% of the
average daily net assets of Class B shares to compensate State Farm VP
Management Corp. for certain distribution and shareholder servicing expenses.
These fees consist of a fee at an annual rate of 0.60% for distribution expenses
pursuant to a plan adopted under Rule 12b-1 under the 1940 Act and a fee at an
annual rate of _________% for shareholder servicing expenses. State Farm VP
Management Corp. may profit from these fees.
CALCULATING NET ASSET VALUE
The offering price of the shares of each Fund is its Net Asset Value
(NAV), plus an initial sales charge on the Class A shares. NAV is calculated
by adding all of the assets of a Fund, subtracting the Fund's liabilities,
then dividing by the number of outstanding shares. A separate NAV is
calculated for each class of each Fund. We calculate the NAV of the Equity
Index Funds based on the NAVs of each corresponding Master Portfolio. Each
are calculated on the same day.
39
<PAGE>
The NAV for each Fund is determined as of the time of the close of
regular session trading on the New York Stock Exchange ("NYSE") (currently at
4:00 p.m., Eastern Time), on each day when the NYSE is open for business. Shares
of the Funds will not be priced on days when the NYSE is closed. Each Fund
values its assets at their current market value when market quotations are
readily available. If a market value cannot be established, the Board of
Trustees of the Trust values assets in accordance with procedures approved by
the Board of Trustees. Money market securities, other than U.S.Treasury
securities, that mature within 60 days or less are valued using the amortized
cost method, unless the Board of Trustees determines that this does not
represent fair value.
All investments by the International Equities Fund and International
Index Fund are valued in U.S. dollars based on the then prevailing exchange
rate. Because each of these international funds invest in securities that are
listed on foreign exchanges that trade on days when the Fund does not price its
shares, the value of the foreign securities owned by these Funds may change on
days when you will not be able to purchase or redeem the shares. Specific
information about how the Funds value certain assets is set forth in the
Statement of Additional Information.
The Master Portfolios calculate their share price in accordance with
the standard formula for valuing mutual fund shares at the close of regular
trading (currently at 4:00 p.m., Eastern Time) every day the NYSE is open. Under
that formula, the Master Portfolios deduct their liabilities from the total
value of their assets and divide the result by the number of shares outstanding.
Most of the securities in the Master Portfolios are valued at their current
market prices. If such prices are not readily available, the securities fair
value is estimated in accordance with guidelines approved by the Board of
Trustees of MIP. Bonds and notes with remaining maturities of 60 days or less
are valued according to the amortized cost method.
HOW TO BUY SHARES
GENERAL
You must indicate at the time of investment whether you are purchasing
Class A shares or Class B shares. You also are required by federal regulations
to certify your Taxpayer Identification or Social Security Number when opening
your account. Failure to provide an identification number could subject you to
back-up withholding on any distributions, redemptions or disbursements from your
account.
Purchase orders are effected at the net asset value per share next
determined after receipt of the order in proper form by the Manager, the
transfer agent to the Trust, plus the applicable sales charge for Class A
shares.
If your check used for investment does not clear, the Manager may
impose a fee. All payments should be in U.S. dollars and should be drawn only on
U.S. banks. The Funds reserve the right to reject any purchase order.
All checks should be made payable to the Fund, the shares of which you
are purchasing. Third-party checks will not be accepted.
OPENING AND ADDING TO AN ACCOUNT
THROUGH YOUR STATE FARM VP MANAGEMENT CORP. REGISTERED REPRESENTATIVE.
Contact your registered representative directly for instructions.
BY WRITING TO THE MANAGER. To open a new account in writing, complete
and sign the Application and mail it to the Manager, together with a check made
payable to the Fund that you are purchasing. You may obtain an Application by
calling the State Farm VP Management Corp. call center at 1-800-447-4930. You
may make subsequent investments at any time by mailing a check to the Manager
along with the detachable investment slip found at the top of your confirmation
statement. You may also send a letter of instruction indicating your account
registration, account number and the Fund name. The manager's address is State
Farm Investment Management Corp., P.O. Box XXX, Kansas City, MO XXXXX.
40
<PAGE>
BY TELEPHONE. This service allows you to purchase additional shares
quickly and conveniently through an electronic transfer of money. Your
predesignated bank account will be debited for the desired amount. You can
establish this privilege by completing an Authorization Form when you open your
account or, if your account is already established, contact a call center
shareholder services representative to request the Authorization Form. This
option will become effective 10 days after the form is received. Your signature
on the Authorization Form must be guaranteed (see "Signature Guarantee").
BY THE INTERNET. Visit our web site at www.______________ and follow
the instructions presented on the screen
During periods of volatile economic and market conditions, you may have
difficulty making a purchase request by telephone or by the internet, in which
case purchase requests would have to be made in writing or through your State
Farm VP Management Corp. registered representative.
The Funds may suspend, limit, modify or terminate the telephone or
internet purchase privileges, but will not do so without giving shareowners at
least 30 days' prior written notice.
BY WIRE. Initial and subsequent purchase payments can also be made by
Federal Funds wire, transferred along with proper instructions directly from
your account. Before an initial wire transfer can be accepted, an account must
be established for you. See your State Farm VP Management Corp. registered
representative or call 1-800-447-4930 for further instructions. To add to your
existing account by wire, ask your bank to wire funds to: [wire instructions].
Your financial institution may charge a fee for wiring funds to your account.
Consult your bank for information on remitting funds by wire and any associated
bank charges.
BY AUTOMATIC INVESTING. The automatic investment plan allows you to
make regular investments in a Fund through automatic transfers from your bank
account. To sign up, complete the appropriate section of the account application
form or get an enrollment form by calling the call center at 1-800-447-4930.
Automatic investing may qualify you for a lower minimum initial investment. You
can make monthly investments of $50 or more by authorizing us to draw
pre-authorized checks on your bank or credit union account. There is no charge
to participate in the automatic investment plan. You can stop the withdrawals at
any time by notifying your State Farm VP Management Corp. registered
representative, by writing the Manager, or by contacting a call center
shareholder services representative at 1-800-447-4930.
GENERAL POLICIES ON BUYING SHARES
- Your purchase order must be received by the Fund, by 4:00 p.m.,
Eastern Time to get that day's NAV. It is the responsibility of
your State Farm VP Management Corp. registered representative to
promptly submit purchase orders to the Funds. Orders placed through
your State Farm VP Management Corp. registered representative are
considered received when the Manager receives the purchase order
and your payment.
- All purchases are subject to the sales charge, unless they qualify
for a sales charge reduction or waiver programs.
- All checks must be payable in U.S. dollars and drawn on a U.S.
bank. Money orders and third-party checks will not be accepted.
- Unless you instruct otherwise, all of your income dividends and
capital gain distributions will be reinvested in your account. You
may, however, request in writing at any time to have your income
dividends and capital gain distributions paid to you in cash.
- Stock certificates will not be issued.
- The Manager will send to you by mail a confirmation of each
transaction.
41
<PAGE>
- Each Fund reserves the right, in its sole discretion, to reject
purchases when, in the judgment of the Manager, the purchase would
not be in the best interest of the Fund.
- You are required by federal regulations to certify your taxpayer
identification or Social Security number when opening your
account. Failure to provide an identification number could subject
you to backup withholding on any distributions, redemptions, or
disbursements from your account. Further, you must reside in a
jurisdiction where Fund shares may lawfully be offered for sale.
HOW TO EXCHANGE SHARES
Except for exchanges from Class A shares of the Money Market Fund upon
which no initial sales charge has been paid (see below), you may exchange your
shares for shares of the same Class of another Fund without charge. The
registration of the Fund account to which an exchange is made must be exactly
the same as that of the Fund account from which an exchange is made.
If you are exchanging Class A shares of the Money Market Fund upon
which an initial sales charge has not been paid, an initial sales charge will
apply.
Fund shares may be exchanged as follows:
THROUGH YOUR STATE FARM VP MANAGEMENT REGISTERED REPRESENTATIVE.
Contact your State Farm VP Management Corp. representative directly for
instructions.
IN WRITING. A written exchange request must be signed by all of the
owners of the account, must be sent to the Manager, and must clearly indicate
your account number, account registration and the Fund names and the number of
shares or the dollar amount you wish to exchange. The Manager's address is State
Farm Investment Management Corp., P.O. Box XXX, Kansas City, MO XXXXX.
BY TELEPHONE. Before you can make an exchange by telephone through our
call center at 1-800-447-4930, you must sign up for the Telephone Exchange
Privilege. To sign up, choose the Telephone Exchange Privilege option on the
account application or call us for a separate Authorization Form for Telephone
Redemption and Exchange Privileges. Your signature on the Authorization Form
must be guaranteed (see "Signature Guarantee").
BY THE INTERNET. For accounts other than qualified plans, you can
exchange shares of one Fund for another through our web site at
www.______________. Just click on ___ or the home page and follow the
instructions presented on the screen.
The Telephone Exchange Privilege is not available if good payment for
shares being redeemed has not been received.
During periods of volatile economic and market conditions, you may have
difficulty making an exchange request by telephone or by the internet, in which
case you would have to make your exchange requests in writing or through your
State Farm VP Management Corp. registered representative.
Each Fund reserves the right at any time to suspend, limit, modify or
terminate the telephone exchange privilege, but will not do so without giving
shareowners at least 30 days' prior written notice.
GENERAL POLICIES ON EXCHANGING SHARES
- An exchange will be effective on the day your request is received,
if it is received before the Funds calculate their NAVs on that
day; a request received after the time the NAV is calculated will
be effective at the next calculated NAV. All Funds calculate their
NAVs as of the close of regular session trading on the NYSE
(currently at 4:00 p.m., Eastern Time) or each day the NYSE is
open for business.
42
<PAGE>
- You may make 4 exchanges out of each Fund during a calendar year.
There is no charge for exchanges, provided that you exchange your
shares for shares of the same class of another Fund.
- Exchanges between accounts will only be accepted if the
registrations are identical.
- Because excessive trading can hurt Fund performance and
shareholders, the Funds may refuse any exchange purchase if: (1)
the Manager believes the Fund would be harmed or unable to invest
effectively; or (2) the Fund receives or anticipates simultaneous
orders that may significantly affect the Fund.
- An exchange is a sale of shares from one Fund and the purchase of
shares of another Fund for federal income tax purposes, which may
produce a taxable gain or loss in a taxable account.
- General exchange policies apply to exchanges to the Money Market
Fund.
- Before making an exchange please read the description of the Fund
to be purchased in this prospectus.
HOW TO REDEEM FUND SHARES
You may redeem shares of any of the Funds by contacting your State Farm
VP Management Corp. registered representative, by sending a written request, by
telephone, by using our systematic withdrawal program, or by exchanging into
another Fund.
THROUGH YOUR STATE FARM VP MANAGEMENT CORP. REPRESENTATIVE. Contact
your State Farm VP Management Corp. registered representative directly for
instructions.
IN WRITING. You may redeem all or any portion of your shares by sending
a written request to the Manager:
State Farm Investment Management Corp.
P.O. Box XXX
Kansas City, MO XXXXX
Your redemption request must clearly identify the exact name(s) in
which your account is registered, your account number, the Fund name and the
number of shares or dollar amount you wish to redeem.
All shareowners of record must sign the redemption request, including
each joint holder of a joint account. The Fund reserves the right to require
further documentation in order to verify the authority of the person seeking to
redeem.
Redemption proceeds you request in writing normally will be sent by
check to your address of record the next business day following the day on which
your request and all other necessary documents have been received by the
Manager. If you give specific instructions in your redemption request, however,
you may have the proceeds sent to another payee or to an address other than the
address of record.
BY TELEPHONE. You can redeem shares by telephone by calling our call
center at 1-800-447-4930. You may redeem shares by telephone up to and including
$100,000 if the proceeds are to be sent to the address of record, or you may
redeem up to the entire value of your account if the proceeds are to be
electronically transferred to a pre-designated bank account.
You generally may not use telephone redemption unless you have elected
this option on your account application or until you have completed an
Authorization Form for Telephone Redemption and Exchange Privileges. Your
signature on the Authorization Form must be guaranteed (see "Signature
Guarantee"). Further documentation may be required from corporations,
partnerships, trusts and other entities. Telephone redemption is not available
for IRA or qualified plan accounts.
43
<PAGE>
You may elect to have the proceeds of telephone redemptions
electronically transferred to a pre-designated bank account. Your bank may
charge you a fee for this service. To change the bank or account designated to
receive your redemption proceeds, send a written request to State Farm
Investment Management Corp., P.O. Box XXX, Kansas City, MO XXXXX. Any such
requests must be signed by each shareowner, with each signature guaranteed as
described under "Signature Guarantee."
During periods of volatile economic and market conditions, you may have
difficulty making a redemption request by telephone or by the internet, in which
case you should consider sending in your request by letter, or through your
State Farm VP Management Corp. registered representative.
SYSTEMATIC WITHDRAWAL PROGRAM. If you own $ 5,000 or more of a Fund's
shares at the current net asset value, you may have a specified dollar amount
withdrawn from your account, payable to you or to another designated payee on a
monthly, quarterly or annual basis. Because withdrawals are sales, they may
produce a gain or loss. You should not purchase additional shares at the same
time that you are participating in the systematic withdrawal plan, because your
purchase will likely be subject to a sales charge and the withdrawal will be a
taxable redemption and may produce a taxable gain or loss.
The Funds reserve the right to amend the systematic withdrawal program
on 30 days' notice. The program may be terminated at any time by a shareowner or
by a Fund. For more information contact your State Farm VP Management Corp.
registered representative or the Manager at the address shown above.
GENERAL REDEMPTION POLICIES
- Each Fund will redeem shares at the Fund's net asset value next
determined after receipt by the Fund of a proper request for
redemption. Any applicable contingent deferred sales charge on
Class B shares redeemed will be deducted from the redemption
proceeds. It is the responsibility of your State Farm VP
Management Corp. registered representative to submit to the Fund a
redemption request promptly after you deliver your request to the
State Farm VP Management Corp. registered representative.
- If you request a redemption of more than $100,000, your signature
and the signatures of any joint owners of your account, must be
guaranteed as described under "Signature Guarantees."
- The Fund generally will pay for redeemed shares by check or
electronic transfer. Redemptions of more than $500,000 of a Fund's
assets during any 90-day period by one shareowner will normally be
paid in cash, but may be paid wholly or partly by a distribution
in-kind of securities. If a redemption is paid in-kind, the
redeeming shareowner may incur brokerage fees in selling the
securities received.
- Payment for shares redeemed will be mailed within seven days after
the Fund receives a redemption request, either in writing, or by
telephone, in proper form. We usually pay wire redemption or
electronic transfer proceeds the next business day. If you request
payment by electronic transfer, your bank may charge you a fee for
the incoming transfer.
- If you try to redeem shares paid for by check or electronic
transfer within 15 days after they have been purchased, the Fund
may delay sending the redemption proceeds until it can verify that
payment of the purchase price for the shares has been, or will be,
collected.
- Each Fund may suspend the right of redemption or postpone a
redemption payment more than seven days during any period when (a)
the NYSE is closed for other than customary weekend and holiday
closings, (b) trading on the NYSE is restricted, (c) an emergency
exists making disposal of securities owned by the Fund or
valuation of its assets not reasonably practicable, or (d) the
Securities and Exchange Commission has by order permitted such
suspension for the protection of shareowners of the Fund; provided
that applicable rules and regulations of the Securities and
Exchange Commission shall govern as to whether any condition
prescribed in (b) through (d) exists.
44
<PAGE>
- Once the Manager has received and accepted your redemption
request, you may not cancel or revoke it. We cannot accept a
redemption request that specifies a particular date or price or
any other conditions.
- If your account value falls below the minimum investment amount
(see p.___) and you are not participating in the automatic
investment program, the Fund may redeem your shares and send the
proceeds to you at your registered address. You will receive
notice that we intend to do this at least 30 days in advance so
that you may increase the balance in your account if you choose.
If your account falls below $10, we may redeem your shares and
send you the proceeds, without notice to you.
- Because maintaining smaller accounts is very expensive, if your
account balance falls below $500 on the last day of the calendar
quarter, your account will be charged a low balance fee of $2.50
per quarter. The low balance fee does apply (1) if your accounts
in all the State Farm Funds have a combined value of $500 or more,
(2) to IRAs or other prototype retirement plans, (3) accounts
participating in the automatic investment plan or (4) omnibus or
nominee accounts. The Funds may waive the fee, in their
discretion, in the event of a significant market correction.
- If you request that a redemption check be made payable to anyone
other than the shareholder(s) of record, that request must be
signed and accompanied by a signature guarantee of each registered
owner.
- If you request that a redemption check be mailed to an address
other than the address of record, that request must be signed and
accompanied by a signature guarantee of each registered owner.
SIGNATURE GUARANTEE
A signature guarantee is a written representation, signed by an officer
or authorized employee of the guarantor, that the signature of the shareowner is
genuine. The guarantor must be an institution authorized to guarantee signatures
by applicable state law. Such institutions include banks, broker-dealers,
savings and loan associations and credit unions. A notary public cannot provide
a signature guarantee.
The signature guarantee must appear, together with the signature of
each registered owner, either
- on the applicable written request, which clearly identifies the
exact name(s) in which the account is registered, the account
number, the Fund name and the number of shares or the dollar
amount to be purchased, exchanged or redeemed;
- on a separate "stock power," an instrument of assignment which
should specify the total number of shares to be exchanged or
redeemed (this stock power may be obtained from most banks and
stock brokers); or
- on the Authorization Form for reinstatement telephone purchase,
redemption and exchange privileges.
The Funds will waive the requirement for a signature guarantee if your
State Farm VP Management Corp. registered representative certifies in writing
that your signature is genuine.
DIVIDENDS, DISTRIBUTIONS AND TAXES
--------------------------------------------------------------------------------
Each Fund intends to distribute substantially all of its net investment
income and any net capital gain realized from sales of its portfolio securities.
The Large Cap Equities Fund, Equity Index Funds, Small Cap Equities
Fund, Equity and Bond Fund and International Equities Fund declare and pay
dividends and capital gain distributions, if any, at least annually.
45
<PAGE>
The Bond Fund, the Money Market Fund, and the Tax-advantaged Bond Fund
declare dividends daily and pay dividends monthly on the 15th day of the month,
or if the 15th is not a regular business day, on the next regular business day.
Capital gain distributions on these Funds, if any, are generally paid annually.
All dividends and capital gain distributions from a Fund are
automatically reinvested in shares of that Fund on the reinvestment date, unless
you previously have elected to receive dividends and distributions in cash. If
the total dividend is less than $10 for an account owner of a Fund, the dividend
will automatically be reinvested in additional shares of the Fund.
If you elect to receive distributions by check and a distribution check
is returned to the Fund as undeliverable, or is not presented for payment within
6 months, we will change the distribution option on your account and invest the
proceeds of the check in additional shares of the paying Fund at the current
NAV. You will not receive any interest on amounts represented by uncashed
distribution or redemption checks.
TAXES ON DISTRIBUTIONS. Distributions from each Fund, other than the
Tax-advantaged Bond Fund, are generally subject to federal income tax, and may
be subject to state or local taxes. If you are a U.S. citizen residing outside
the United States, your distributions may also be taxed by the country in which
you reside. Your distributions are taxable when they are paid, whether you take
them in cash or reinvest them in additional shares.
The dividends from the Tax-advantaged Bond Fund will largely be exempt
from regular federal income tax, because the Tax-advantaged Bond Fund invests
primarily in municipal bonds. A potion of the Tax-advantaged Bond Fund's
dividends may be subject to the federal alternative minimum tax (AMT), although
the Tax-advantaged Bond Fund currently does not expect that to be the case.
Tax-advantaged Bond Fund dividends may be subject to state and local taxes.
Tax-advantaged Bond Fund will provide you annually with the state-by-state
sources of its income.
For federal tax purposes, a Fund's income and short-term capital gain
distributions are taxed as dividends; long-term capital gain distributions are
taxed as long-term capital gains, no matter how long you have held your Fund
shares.
Every January, the Funds will send you and the IRS a statement called
Form 1099 showing the sources and amounts of taxable distributions you received
in the previous calendar year.
FOREIGN INCOME TAXES. A Fund may receive income from sources in foreign
countries, and that income may be subject to foreign income taxes at its source.
If a Fund pays non-refundable taxes to foreign governments during the year,
those taxes will reduce the Fund's dividends but will still be included in your
taxable income.
TAXES ON TRANSACTIONS. A redemption is a sale for federal income tax
purposes. Your redemption proceeds may be more or less than your cost depending
upon the net asset value at the time of the redemption and, as a result, you may
realize a capital gain or loss. Gain or loss is computed on the difference
between the fair market value of the shares redeemed and their basis.
An exchange of any Fund's shares for shares of another Fund will be
treated as a sale of the Fund's shares and any gain on the transaction may be
subject to federal income tax.
Whenever you sell shares of a Fund, you will receive a confirmation
statement showing how many shares you sold and at what price. You also will
receive a year-end statement every January. This will allow you or your tax
preparer to determine the tax consequences of each redemption. However, be sure
to keep your regular account statements; their information will be essential in
calculating the amount of your capital gains or losses.
To invest in any of the Funds, you must be a U.S. resident with a
social security or taxpayer identification number. When you sign your account
application, you must certify that your social security or taxpayer
identification number is correct and that you are not subject to backup
withholding for failing to report income to the IRS. If you fail to comply with
this procedure, the IRS can require the Fund to withhold 31% of your taxable
distributions and redemptions.
46
<PAGE>
SHARED DELIVERY
--------------------------------------------------------------------------------
SHARED DELIVERY OF PROSPECTUS AND FUND REPORTS. The rules governing
mutual funds require each of the Funds semiannually to furnish to its
shareowners a report containing that Fund's financial statements and the Funds
generally send each new prospectus to all shareowners. Each Fund intends to send
one copy of each prospectus and report to an address shared by more than one
shareowner (commonly referred to as "householding" delivery). By signing the
Account Application, you consent to the "householded" delivery of the prospectus
and reports unless and until you revoke your consent by notifying the Fund as
set forth below.
REVOCATION OF SHARED DELIVERY. If you want to receive an individual
copy (rather than a shared or "householded" copy) of a Fund's prospectus or
report you may contact the Manager to request individual delivery in writing at
State Farm Investment Management Corp., P.O. Box XXX, Kansas City, MO XXXXX or
by telephone at 1-800-447-4930. You may revoke your consent at any time. The
Fund will commence sending individual copies within 30 days after it receives
notice that you have revoked your consent.
47
<PAGE>
APPENDIX A
PAST PERFORMANCE OF THE MANAGER, CGTC AND BARCLAYS
The investment performance for each of the funds or composite below is shown to
indicate the performance of the Manager, CGTC and Barclays. The performance
below is shown for the one-, three-, five- and ten-year periods (or since
inception) ending __________________. The performance data set forth below
relates to the historic performance of the corresponding funds or composites
for the periods indicated. The corresponding funds or composites have investment
objectives, policies, strategies and risks substantially similar to those of
most of the Funds. The performance data is provided to illustrate and does not
represent the performance of the Funds.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
CORRESPONDING FUND OR COMPOSITTE
FUND (INCEPTION DATE AND ASSET SIZE)
----------------------------------------------------------------------------------------------------------
<S> <C>
Large Cap Equities Fund State Farm Growth Fund, Inc.
(date)
$
--------------------------------
Average Annual Total Returns
----------------------------
(For Periods ended _______, 2000)
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
----------------------------------------------------------------------------------------------------------
Small Cap Equities Fund CGTC U.S. Small Cap Equity Composite
------------------------------------
(date)
$
--------------------------------
Average Annual Total Returns
----------------------------
(For periods ended _______, 2000)
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
----------------------------------------------------------------------------------------------------------
International Equities Fund CGTC Non-U.S. Equity Composite
(date)
$
--------------------------------
Average Annual Total Returns
----------------------------
(For periods ended _______, 2000)
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
----------------------------------------------------------------------------------------------------------
Index 500 Fund S&P 500 Index Master Portfolio (date)
$
--------------------------------
Average Annual Total Returns
----------------------------
(For periods ended _______, 2000)
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
----------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
<S> <C>
Small Cap Equity Index Fund Small Cap Index Fund portfolio of the State Farm Variable
Product Trust
(date)
$
--------------------------------
Average Annual Total Returns
----------------------------
(For periods ended _______, 2000)
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
----------------------------------------------------------------------------------------------------------
International Index Fund International Index Master Portfolio
(date)
$
--------------------------------
Average Annual Total Returns
----------------------------
(For periods ended _______, 2000)
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
----------------------------------------------------------------------------------------------------------
Equity and Bond Fund No comparable fund.
----------------------------------------------------------------------------------------------------------
Bond Fund No comparable Fund
----------------------------------------------------------------------------------------------------------
Tax-advantaged Bond Fund State Farm Municipal Bond Fund, Inc.
(date)
$
--------------------------------
Average Annual Total Returns
----------------------------
(For periods ended _______, 2000)
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
----------------------------------------------------------------------------------------------------------
Money Market Fund Money Market Fund portfolio of the State Farm
Variable Product Trust
(January 22, 1998)
$
--------------------------------
Average Annual Total Returns
----------------------------
(For periods ended _______, 2000)
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
----------------------------------------------------------------------------------------------------------
</TABLE>
The investment performance indicated in the following four tables shows the
average annual total returns for the one-, three-, five- and ten-year periods
(or since inception) for each of the corresponding funds or composites indicated
above, adjusted to reflect the expenses of the Funds, including sales charges
where indicated, for the periods ended __________, 2000. THE PERFORMANCE
DISCLOSED BELOW IS NOT THE PERFORMANCE OF THE FUNDS BUT RATHER OF THE
CORRESPONDING FUND OR COMPOSITE. Although the Fund has substantially similar
investment
<PAGE>
objectives and policies and the same portfolio managers as the corresponding
fund or composite, you should not assume that the Funds will have the same
future performance as the corresponding fund or composite. For example, any
Fund's future performance may be greater or less than the performance of the
corresponding fund or composite due to, among other things, differences in
expenses, asset sizes and cash flows between a Fund and the corresponding fund
or composite. THE PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE
NOT INTENDED TO INDICATE FUTURE PERFORMANCE. INVESTMENT RETURNS AND NET ASSET
VALUE WILL FLUCTUATE SO THAT YOUR SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST.
The following four tables show the average annualized total returns for the
corresponding funds or composites for the one-, three-, five-and ten-year (or
life of the corresponding fund or composite, if shorter) periods ended
__________________. These figures are based on the actual gross investment
performance of the corresponding funds or composites. From the gross investment
performance figures, the maximum Net Total Fund Operating Expenses shown in the
fee table on p.____ are deducted to arrive at the net return. The first table
for each Class reflects a deduction for the maximum applicable sales charge,
while the second table for each Class reflects no deduction for sales charge.
Performance figures will be lower when sales charges are taken into effect.
ASSUMING CLASS A SHARES NET TOTAL FUND OPERATING EXPENSES AND
THE MAXIMUM INITIAL SALES CHARGE APPLICABLE TO CLASS A SHARES
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
CORRESPONDING FUND OR COMPOSITE (INCEPTION DATE) 1 YEAR 3 YEARS 5 YEARS 10 YEARS OR SINCE
INCEPTION
(CORRESPONDS TO.....)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
State Farm Growth Fund, Inc. (date)
(Large Cap Equities Fund)
---------------------------------------------------------------------------------------------------------------------------------
CGTC U.S. Small Cap Equity Composite
(Small Cap Equities Fund)
---------------------------------------------------------------------------------------------------------------------------------
CGTC Non-U.S. Equity Composite
(International Equities Fund)
---------------------------------------------------------------------------------------------------------------------------------
S&P 500 Index Master Portfolio
(Index 500 Fund)
---------------------------------------------------------------------------------------------------------------------------------
Small Cap Equity Index Fund portfolio of the State Farm
Variable Product Trust (date)
(Small Cap Index Fund)
---------------------------------------------------------------------------------------------------------------------------------
International Index Master Portfolio (date)
(International Index Fund)
---------------------------------------------------------------------------------------------------------------------------------
State Farm Municipal Bond Fund, Inc. (date)
(Tax-advantaged Bond Fund)
---------------------------------------------------------------------------------------------------------------------------------
Money Market Fund portfolio of the State Farm Variable
Product Trust (date)
(Money Market Fund)
---------------------------------------------------------------------------------------------------------------------------------
ASSUMING CLASS A SHARES NET TOTAL FUND OPERATING EXPENSES AND
WITH NO INITIAL SALES CHARGE
<PAGE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
CORRESPONDING FUND OR COMPOSITE (INCEPTION DATE) 1 YEAR 3 YEARS 5 YEARS 10 YEARS OR SINCE
INCEPTION
(CORRESPONDS TO.....)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
State Farm Growth Fund, Inc. (date)
(Large Cap Equities Fund)
---------------------------------------------------------------------------------------------------------------------------------
CGTC U.S. Small Cap Equity Composite
(Small Cap Equities Fund)
---------------------------------------------------------------------------------------------------------------------------------
CGTC Non-U.S. Equity Composite
(International Equities Fund)
---------------------------------------------------------------------------------------------------------------------------------
S&P 500 Index Master Portfolio (date)
(Index 500 Fund)
---------------------------------------------------------------------------------------------------------------------------------
Small Cap Equity Index Fund portfolio of the State Farm
Variable Product Test (date)
(Small Cap Index Fund)
---------------------------------------------------------------------------------------------------------------------------------
International Index Master Portfolio (date)
(International Index Fund)
---------------------------------------------------------------------------------------------------------------------------------
State Farm Municipal Bond Fund, Inc. (date)
(Tax-advantaged Bond Fund)
---------------------------------------------------------------------------------------------------------------------------------
Money Market Fund portfolio of the State Farm Variable
Product Trust (date)
(Money Market Fund)
---------------------------------------------------------------------------------------------------------------------------------
ASSUMING CLASS B SHARES NET TOTAL FUND OPERATING EXPENSES AND
THE REDEMPTION AT THE END OF THE APPLICABLE TIME PERIOD
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
CORRESPONDING FUND OR COMPOSITE (INCEPTION DATE) 1 YEAR 3 YEARS 5 YEARS 10 YEARS OR SINCE
INCEPTION
(CORRESPONDS TO.....)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
State Farm Growth Fund, Inc. (date)
(Large Cap Equities Fund)
---------------------------------------------------------------------------------------------------------------------------------
CGTC U.S. Small Cap Equity Composite
(Small Cap Equities Fund)
---------------------------------------------------------------------------------------------------------------------------------
CGTC Non-U.S. Equity Composite
(International Equities Fund)
---------------------------------------------------------------------------------------------------------------------------------
S&P 500 Index Master Portfolio (date)
(Index 500 Fund)
---------------------------------------------------------------------------------------------------------------------------------
Small Cap Equity Index Fund portfolio of the State Farm
Variable Product Trust (date)
<PAGE>
<CAPTION>
<S><C>
---------------------------------------------------------------------------------------------------------------------------------
(Small Cap Index Fund)
---------------------------------------------------------------------------------------------------------------------------------
International Index Master Portfolio (date)
(International Index Fund)
---------------------------------------------------------------------------------------------------------------------------------
State Farm Municipal Bond Fund, Inc. (date)
(Tax-advantaged Bond Fund)
---------------------------------------------------------------------------------------------------------------------------------
Money Market Fund portfolio of the State Farm Variable
Product Trust (date)
(Money Market Fund)
---------------------------------------------------------------------------------------------------------------------------------
ASSUMING CLASS B SHARES NET TOTAL FUND OPERATING EXPENSES AND
NO REDEMPTION AT THE END OF THE APPLICABLE TIME PERIOD
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
CORRESPONDING FUND OR COMPOSITE (INCEPTION DATE) 1 YEAR 3 YEARS 5 YEARS 10 YEARS OR SINCE
INCEPTION
(CORRESPONDS TO.....)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
State Farm Growth Fund, Inc. (date)
(Large Cap Equities Fund)
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
CGTC Small Cap Equities Composite
(Small Cap Equities Fund)
---------------------------------------------------------------------------------------------------------------------------------
CGTC Non-U.S. Equity Composite
(International Equity Fund)
---------------------------------------------------------------------------------------------------------------------------------
S&P 500 Index Master Portfolio (date)
(Index 500 Fund)
---------------------------------------------------------------------------------------------------------------------------------
Small Cap Equity Index Fund portfolio of the State Farm
Variable Product Trust (date)
(Small Cap Index Fund)
---------------------------------------------------------------------------------------------------------------------------------
International Index Master Portfolio (date)
(International Index Fund)
---------------------------------------------------------------------------------------------------------------------------------
State Farm Municipal Bond Fund, Inc. (date)
(Tax-advantaged Bond Fund)
---------------------------------------------------------------------------------------------------------------------------------
Money Market Fund portfolio of the State Farm Variable
Product Trust (date)
(Money Market Fund)
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXPENSES AFTER REIMBURSEMENTS
These examples are intended to help you compare the costs of investing in a Fund
with the cost of investing in other mutual funds. The assumptions indicated on
page ___ of the Prospectus are the same, except the operating expenses remain
constant at the level indicated for "Total Annual Fund Operating Expenses with
Expense Reimbursement."
<TABLE>
<CAPTION>
With Expense Waiver
Fund 1 year 3 years
---- ------ -------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Large Cap Equities Fund $______ $______ $______ $______
Small Cap Equities Fund $______ $______ $______ $______
International Equities Fund $______ $______ $______ $______
Index 500 Fund $______ $______ $______ $______
Small Cap Index Fund $______ $______ $______ $______
International Index Fund $______ $______ $______ $______
Equity and Bond Fund $______ $______ $______ $______
Bond Fund $______ $______ $______ $______
Tax-advantaged Bond Fund $______ $______ $______ $______
Money Market Fund $______ $______ $______ $______
</TABLE>
Assuming operating expenses after reimbursements and that you did not redeem
your shares at the end of each period, you would bear the following expenses for
Class B shares:
<TABLE>
<CAPTION>
Fund 1 year 3 years
---- ------ -------
<S> <C> <C>
Large Cap Equities Fund $_____ $______
Small Cap Equities Fund $_____ $______
International Equities Fund $_____ $______
Index 500 Fund $_____ $______
Small Cap Index Fund $_____ $______
International Index Fund $_____ $______
Equity and Bond Fund $_____ $______
Bond Fund $_____ $______
Tax-advantaged Bond Fund $_____ $______
Money Market Fund $_____ $______
</TABLE>
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Large Cap Small Cap International Index 500 Small Cap
Equities Fund Equities Fund Equities Fund Fund Index Fund
-----------------------------------------------------------------------------------------------------------------------------------
SYMBOLS y - PERMITTED n - NOT PERMITTED
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------------
Debt Securities
-----------------------------------------------------------------------------------------------------------------------------------
Asset-Backed Securities
-----------------------------------------------------------------------------------------------------------------------------------
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities
-----------------------------------------------------------------------------------------------------------------------------------
Corporate Asset-Backed Securities
-----------------------------------------------------------------------------------------------------------------------------------
Mortgage Pass-Through Securities
-----------------------------------------------------------------------------------------------------------------------------------
Stripped Mortgage-Backed Securities
-----------------------------------------------------------------------------------------------------------------------------------
Corporate Securities
-----------------------------------------------------------------------------------------------------------------------------------
Loans and Other Direct Indebtedness
-----------------------------------------------------------------------------------------------------------------------------------
Lower Rated Bonds
-----------------------------------------------------------------------------------------------------------------------------------
Municipal Bonds
-----------------------------------------------------------------------------------------------------------------------------------
Speculative Bonds
-----------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities
-----------------------------------------------------------------------------------------------------------------------------------
Variable and Floating Rate Obligations
-----------------------------------------------------------------------------------------------------------------------------------
Zero Coupon Bonds, Deferred Interest Bonds and PIK
Bonds
-----------------------------------------------------------------------------------------------------------------------------------
Equity Securities
-----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities Exposure
-----------------------------------------------------------------------------------------------------------------------------------
Brady Bonds
-----------------------------------------------------------------------------------------------------------------------------------
Depositary Receipts
-----------------------------------------------------------------------------------------------------------------------------------
Dollar-Denominated Foreign Debt Securities
-----------------------------------------------------------------------------------------------------------------------------------
Emerging Markets
-----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities
-----------------------------------------------------------------------------------------------------------------------------------
Forward Contracts
-----------------------------------------------------------------------------------------------------------------------------------
Futures Contracts
-----------------------------------------------------------------------------------------------------------------------------------
Indexed Securities/Structured Products
-----------------------------------------------------------------------------------------------------------------------------------
Inverse Floating Rate Obligations
-----------------------------------------------------------------------------------------------------------------------------------
Investment in Other Investment Companies
-----------------------------------------------------------------------------------------------------------------------------------
Open-End
-----------------------------------------------------------------------------------------------------------------------------------
Closed-End
-----------------------------------------------------------------------------------------------------------------------------------
Lending of Portfolio Securities
-----------------------------------------------------------------------------------------------------------------------------------
Leveraging Transactions
-----------------------------------------------------------------------------------------------------------------------------------
Bank Borrowings
-----------------------------------------------------------------------------------------------------------------------------------
Mortgage "Dollar-Roll" Transactions
-----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
International Equity and Bond Tax-advantaged Money Market
Index Fund Bond Fund Fund Bond Fund Fund
-----------------------------------------------------------------------------------------------------------------------------------
SYMBOLS y - PERMITTED n - NOT PERMITTED
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------------
Debt Securities
-----------------------------------------------------------------------------------------------------------------------------------
Asset-Backed Securities
-----------------------------------------------------------------------------------------------------------------------------------
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities
-----------------------------------------------------------------------------------------------------------------------------------
Corporate Asset-Backed Securities
-----------------------------------------------------------------------------------------------------------------------------------
Mortgage Pass-Through Securities
-----------------------------------------------------------------------------------------------------------------------------------
Stripped Mortgage-Backed Securities
-----------------------------------------------------------------------------------------------------------------------------------
Corporate Securities
-----------------------------------------------------------------------------------------------------------------------------------
Loans and Other Direct Indebtedness
-----------------------------------------------------------------------------------------------------------------------------------
Lower Rated Bonds
-----------------------------------------------------------------------------------------------------------------------------------
Municipal Bonds
-----------------------------------------------------------------------------------------------------------------------------------
Speculative Bonds
-----------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities
-----------------------------------------------------------------------------------------------------------------------------------
Variable and Floating Rate Obligations
-----------------------------------------------------------------------------------------------------------------------------------
Zero Coupon Bonds, Deferred Interest Bonds and PIK
Bonds
-----------------------------------------------------------------------------------------------------------------------------------
Equity Securities
-----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities Exposure
-----------------------------------------------------------------------------------------------------------------------------------
Brady Bonds
-----------------------------------------------------------------------------------------------------------------------------------
Depositary Receipts
-----------------------------------------------------------------------------------------------------------------------------------
Dollar-Denominated Foreign Debt Securities
-----------------------------------------------------------------------------------------------------------------------------------
Emerging Markets
-----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities
-----------------------------------------------------------------------------------------------------------------------------------
Forward Contracts
-----------------------------------------------------------------------------------------------------------------------------------
Futures Contracts
-----------------------------------------------------------------------------------------------------------------------------------
Indexed Securities/Structured Products
-----------------------------------------------------------------------------------------------------------------------------------
Inverse Floating Rate Obligations
-----------------------------------------------------------------------------------------------------------------------------------
Investment in Other Investment Companies
-----------------------------------------------------------------------------------------------------------------------------------
Open-End
-----------------------------------------------------------------------------------------------------------------------------------
Closed-End
-----------------------------------------------------------------------------------------------------------------------------------
Lending of Portfolio Securities
-----------------------------------------------------------------------------------------------------------------------------------
Leveraging Transactions
-----------------------------------------------------------------------------------------------------------------------------------
Bank Borrowings
-----------------------------------------------------------------------------------------------------------------------------------
Mortgage "Dollar-Roll" Transactions
-----------------------------------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Large Cap Small Cap International Index 500 Small Cap
Equities Fund Equities Fund Equities Fund Fund Index Fund
-----------------------------------------------------------------------------------------------------------------------------------
SYMBOLS y - PERMITTED n - NOT PERMITTED
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------------
Reverse Repurchase Agreements
-----------------------------------------------------------------------------------------------------------------------------------
Options
-----------------------------------------------------------------------------------------------------------------------------------
Options on Foreign Currencies
-----------------------------------------------------------------------------------------------------------------------------------
Options on Futures Contracts
-----------------------------------------------------------------------------------------------------------------------------------
Options on Securities
-----------------------------------------------------------------------------------------------------------------------------------
Options on Stock Indices
-----------------------------------------------------------------------------------------------------------------------------------
Reset Options
-----------------------------------------------------------------------------------------------------------------------------------
"Yield Curve" Options
-----------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements
-----------------------------------------------------------------------------------------------------------------------------------
Restricted Securities
-----------------------------------------------------------------------------------------------------------------------------------
Short Sales
-----------------------------------------------------------------------------------------------------------------------------------
Short Sales Against the Box
-----------------------------------------------------------------------------------------------------------------------------------
Short Term Instruments
-----------------------------------------------------------------------------------------------------------------------------------
Swaps and Related Derivative Instruments
-----------------------------------------------------------------------------------------------------------------------------------
Temporary Borrowings
-----------------------------------------------------------------------------------------------------------------------------------
Temporary Defensive Positions
-----------------------------------------------------------------------------------------------------------------------------------
Warrants
-----------------------------------------------------------------------------------------------------------------------------------
"When-issued" Securities
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
International Equity and Bond Tax-advantaged Money Market
Index Fund Bond Fund Fund Bond Fund Fund
-----------------------------------------------------------------------------------------------------------------------------------
SYMBOLS y - PERMITTED n - NOT PERMITTED
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------------
Reverse Repurchase Agreements
-----------------------------------------------------------------------------------------------------------------------------------
Options
-----------------------------------------------------------------------------------------------------------------------------------
Options on Foreign Currencies
-----------------------------------------------------------------------------------------------------------------------------------
Options on Futures Contracts
-----------------------------------------------------------------------------------------------------------------------------------
Options on Securities
-----------------------------------------------------------------------------------------------------------------------------------
Options on Stock Indices
-----------------------------------------------------------------------------------------------------------------------------------
Reset Options
-----------------------------------------------------------------------------------------------------------------------------------
"Yield Curve" Options
-----------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements
-----------------------------------------------------------------------------------------------------------------------------------
Restricted Securities
-----------------------------------------------------------------------------------------------------------------------------------
Short Sales
-----------------------------------------------------------------------------------------------------------------------------------
Short Sales Against the Box
-----------------------------------------------------------------------------------------------------------------------------------
Short Term Instruments
-----------------------------------------------------------------------------------------------------------------------------------
Swaps and Related Derivative Instruments
-----------------------------------------------------------------------------------------------------------------------------------
Temporary Borrowings
-----------------------------------------------------------------------------------------------------------------------------------
Temporary Defensive Positions
-----------------------------------------------------------------------------------------------------------------------------------
Warrants
-----------------------------------------------------------------------------------------------------------------------------------
"When-issued" Securities
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ADDITIONAL INFORMATION ABOUT THE FUNDS
--------------------------------------------------------------------------------
For investors who would like more information about the Funds, the
following documents are available free upon request.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI contains additional
information about all aspects of the Funds. A current SAI has been filed with
the Securities and Exchange Commission and is incorporated in this prospectus by
reference.
--------------------------------------------------
TO OBTAIN THE SAI WITHOUT CHARGE, YOU MAY WRITE
TO STATE FARM INVESTMENT MANAGEMENT CORP. AT ONE
STATE FARM PLAZA, BLOOMINGTON, IL 61710-0001 OR
CALL US AT (309) 766-2029.
--------------------------------------------------
PUBLIC INFORMATION. You can review and copy information about the Trust
and each Fund, including the SAI, at the Securities and Exchange Commission's
Public Reference Room in Washington D.C. You may obtain information on the
operation of the public reference room by calling the Commission at
1-202-942-8090. Reports and other information about the Trust and the Funds also
are available on the EDGAR Database on the Commission's Internet site at
http://www.sec.gov. You may obtain copies of this information, upon payment of a
duplicating fee, by electronic request at the following e-mail address:
[email protected], or by writing the Public Reference Section of the Securities
and Exchange Commission, Washington, D.C. 20549-6009.
Investment Co. Act File No. 811-
<PAGE>
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED _______, 2000
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. INFORMATION
CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALES OF
THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
================================================================================
STATE FARM MUTUAL FUND TRUST
STATE FARM LARGE CAP EQUITIES FUND
STATE FARM SMALL CAP EQUITIES FUND
STATE FARM INTERNATIONAL EQUITIES FUND
STATE FARM INDEX 500 FUND
STATE FARM SMALL CAP INDEX FUND
STATE FARM INTERNATIONAL INDEX FUND
STATE FARM EQUITY AND BOND FUND
STATE FARM BOND FUND
STATE FARM TAX-ADVANTAGED BOND FUND
STATE FARM MONEY MARKET FUND
One State Farm Plaza
Bloomington, Illinois 61710-0001
(309) 766-2029
STATEMENT OF ADDITIONAL INFORMATION
[December 1, 2000]
This Statement of Additional Information is not a prospectus but provides
information that you should read in conjunction with the State Farm Mutual Fund
Trust prospectus (the "Prospectus") dated the same date as this Statement of
Additional Information. You may obtain a copy of the Prospectus at no charge by
writing or telephoning State Farm Mutual Fund Trust at the address or telephone
number shown above.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
INFORMATION ABOUT THE FUNDS.......................................................................................1
INVESTMENT OBJECTIVES.............................................................................................1
INVESTMENT TECHNIQUES AND RISKS...................................................................................2
Equity Securities........................................................................................2
Debt Securities..........................................................................................3
Convertible Securities...................................................................................4
U.S. Government Securities...............................................................................4
Floating- and Variable-Rate Obligations..................................................................5
Letters of Credit........................................................................................5
Foreign Securities.......................................................................................6
Stock Index Futures and Options On Stock Index Futures Contracts........................................12
Warrants................................................................................................14
Municipal Bonds.........................................................................................14
Mortgage-Backed Securities..............................................................................15
Asset-Backed Securities.................................................................................16
Money Market Fund.......................................................................................17
Foreign Money Market Instruments........................................................................18
Cash and Cash Equivalents...............................................................................18
Repurchase Agreements...................................................................................19
Privately Issued Securities.............................................................................19
Forward Commitments, When-Issued And Delayed Delivery Securities........................................20
Loans Of Portfolio Securities...........................................................................20
Defensive Investments...................................................................................21
INVESTMENT POLICIES AND RESTRICTIONS.............................................................................21
Fundamental Restrictions................................................................................21
Non-Fundamental Restrictions............................................................................23
Fundamental Operating Policies of the Master Portfolios.................................................24
Non-Fundamental Operating Policies of the Master Portfolios.............................................26
MORE ABOUT THE EQUITY INDEX FUNDS................................................................................26
Master/Feeder Structure.................................................................................26
Industry Concentrations.................................................................................27
Selection of Investments for the Master Portfolio.......................................................28
Tracking Error..........................................................................................29
Relationship With the Index Providers...................................................................29
Standard & Poor's.......................................................................................29
Russell 2000............................................................................................30
EAFE Index..............................................................................................30
TRUSTEES AND OFFICERS............................................................................................31
INVESTMENT ADVISORY AGREEMENTS...................................................................................39
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<PAGE>
Between The Trust And The Manager.......................................................................39
Between Barclays and the Master Portfolios..............................................................42
Between The Manager And CGTC............................................................................42
SECURITIES ACTIVITIES OF THE MANAGER AND CGTC....................................................................43
PORTFOLIO TRANSACTIONS AND BROKERAGE.............................................................................44
The Large Cap Equities Fund, Equity and Bond Fund, Bond Fund, Tax-advantaged Bond
Fund and Money Market Fund ...........................................................................44
Equity Index Funds......................................................................................45
Small Cap Equities Fund and International Equities Fund.................................................47
PORTFOLIO TURNOVER...............................................................................................47
DETERMINATION OF NET ASSET VALUE.................................................................................48
PERFORMANCE INFORMATION..........................................................................................50
PURCHASE AND REDEMPTION OF FUND SHARES...........................................................................52
DISTRIBUTION EXPENSES............................................................................................54
DISTRIBUTION PLANS...............................................................................................54
Class A Shares..........................................................................................54
Class B Shares..........................................................................................55
General.................................................................................................55
OTHER SERVICE PROVIDERS..........................................................................................56
Custodians..............................................................................................56
Transfer Agent..........................................................................................56
Independent Auditors....................................................................................56
TAXES............................................................................................................57
General Tax Information.................................................................................57
CODE OF ETHICS...................................................................................................62
SHARES...........................................................................................................62
Voting Rights...........................................................................................63
FINANCIAL STATEMENTS.............................................................................................64
APPENDIX A: DESCRIPTION OF BOND RATINGS..........................................................................1
</TABLE>
iii
<PAGE>
INFORMATION ABOUT THE FUNDS
State Farm Mutual Fund Trust ("the "Trust") is an open-end management
investment company organized as a business trust under the laws of the State of
Delaware on June 8, 2000. The Trust consists of ten separate funds, each of
which has its own investment objective, investment policies, restrictions and
risks (each a "Fund," and collectively, the "Funds").
The Trust issues a separate series of shares of beneficial interest for
each Fund representing fractional undivided interests in that Fund. By investing
in a Fund, you become entitled to a pro-rata share of all dividends and
distributions arising from the net income and capital gains on the investments
of that Fund. Likewise, you share pro-rata in any losses of that Fund
Three of the Funds - State Farm Index 500 Fund, State Farm Small Cap
Index Fund and State Farm International Index Fund (together, the "Equity Index
Funds") - seek to achieve their respective investment objectives by investing
all of their assets in the S&P 500 Index Master Portfolio, International Index
Master Portfolio and Small Cap Index Master Portfolio (each a Master
Portfolio"), respectively, each of which is a series of Master Investment
Portfolio ("MIP"), an open-end, management investment company. Each Master
Portfolio has substantially the same investment objective as the corresponding
Equity Index Fund. Any Equity Index Fund may withdraw its investment in a
corresponding Master Portfolio at any time if the Board of Trustees of the Trust
determines that such action is in the best interests of the respective Equity
Index Fund and its shareholders. Upon such withdrawal, the Board of Trustees
would consider alternative investments, including investing all of an Equity
Index Fund's assets in another investment company with the same investment
objective as the Equity Index Fund or hiring an investment adviser to manage the
Equity Index Fund's assets in accordance with the investment policies and
restrictions described in the Trust's prospectus and this Statement of
Additional Information.
Each Fund, other than the Equity Index Funds and the Equity and Bond
Fund, is "diversified" as that term is defined in the Investment Company Act of
1940, as amended (the "1940 Act"). State Farm Investment Management Corp. (the
"Manager") is the investment adviser to each of the non-Equity Index Funds.
INVESTMENT OBJECTIVES
The investment objective of each Fund is set forth and described in the
Prospectus. The investment objective of each Fund may be changed by the Board of
Trustees of the Trust without the approval of a "majority of the outstanding
voting securities" (as defined in the 1940 Act) of each Fund. Should the
investment objective of any Fund change, the Trust will provide investors with
thirty days' prior notice of the change.
<PAGE>
INVESTMENT TECHNIQUES AND RISKS
In addition to the investment objective of each Fund, the policies and
certain techniques by which the Funds pursue their objectives are generally set
forth in the Prospectus. This section is intended to augment the explanation set
forth in the Prospectus.
To the extent set forth in this Statement of Additional Information,
each Equity Index Fund through its investment in a corresponding Master
Portfolio may invest in the securities described below. To avoid the need to
refer to both the Equity Index Funds and the Master Portfolio in every instance,
the following sections generally refer to the Funds or Equity Index Funds only.
EQUITY SECURITIES
Each of the Large Cap Equities Fund, Small Cap Equities Fund,
International Equities Fund, Equity and Bond Fund (through the Large Cap
Equities Fund) and Equity Index Funds invest in common stocks, which represent
an equity interest (ownership) in a business. This ownership interest often
gives these Funds the right to vote on measures affecting the company's
organization and operations. These Funds also invest in other types of equity
securities, including preferred stocks and securities convertible into common
stocks (discussed below). Over time, common stocks historically have provided
superior long-term capital growth potential. However, stock prices may decline
over short or even extended periods. Stock markets tend to move in cycles, with
periods of rising stock prices and periods of falling stock prices. As a result,
these Funds should be considered long-term investments, designed to provide the
best results when held for several years or more. These Funds may not be
suitable investments if you have a short-term investment horizon or are
uncomfortable with an investment whose value is likely to vary substantially.
The Small Cap Equities Fund's and the Small Cap Index Fund's
investments in smaller capitalization stocks can involve greater risk than is
customarily associated with investing in stocks of larger, more established
companies. For example, smaller companies often have limited product lines,
markets, or financial resources, may be dependent for management on one or a few
key persons, and can be more susceptible to losses. Also, their securities may
be thinly traded (and therefore have to be sold at a discount from current
prices or sold in small lots over an extended period of time), may be followed
by fewer investment research analysts, and may be subject to wider price swings,
thus creating a greater chance of loss than securities of larger capitalization
companies. In addition, transaction costs in stocks of smaller capitalization
companies may be higher than those of larger capitalization companies.
Because the Small Cap Equities Fund and Small Cap Index Fund emphasize
the stocks of issuers with smaller market capitalizations, each can be expected
to have more difficulty obtaining information about the issuers or valuing or
disposing of its securities than it would if it were to concentrate on more
widely held stocks.
2
<PAGE>
DEBT SECURITIES
Under normal circumstances, the Bond Fund, Equity and Bond Fund
(through its investment in the Bond Fund) and Tax-advantaged Bond Fund may
invest in debt securities of corporate and governmental issuers, including
"investment grade" securities (securities within the four highest grades
(AAA/Aaa to BBB/Baa) assigned by Moody's Investor Services, Inc. ("Moody's") or
Standard and Poor's Corporation ("S&P")) and lower-rated securities (securities
rated BB or lower by S&P or Ba or lower by Moody's, commonly called "junk
bonds"), and securities that are not rated, but are of comparable quality. See
APPENDIX A for a Description of Bond Ratings.
The risks inherent in debt securities depend primarily on the term and
quality of the obligations in a Fund's portfolio as well as on market
conditions. In general, a decline in the prevailing levels of interest rates
generally increases the value of debt securities, while an increase in rates
usually reduces the value of those securities.
Investment in lower grade securities involves greater investment risk,
including the possibility of issuer default or bankruptcy. An economic downturn
could severely disrupt the market for such securities and adversely affect the
value of such securities. In addition, such securities are less sensitive to
interest rate changes than higher-quality instruments and generally are more
sensitive to adverse economic changes or individual corporate developments.
During a period of adverse economic changes, including a period of rising
interest rates, issuers of such bonds may experience difficulty in making their
principal and interest payments.
In addition, lower grade securities may be less marketable than
higher-quality debt securities because the market for them is less broad. The
market for unrated debt securities is even narrower. During periods of thin
trading in these markets, the spread between bid and ask prices is likely to
increase significantly, and a Fund may have greater difficulty selling its
portfolio securities. The market value of those securities and their liquidity
may be affected by adverse publicity and investor perceptions.
The Index 500 Fund may purchase instruments that are not rated if,
in the opinion of Barclays Global Fund Advisors ("Barclays"), the investment
adviser for the Master Portfolio, such obligation is of investment quality
comparable to other rated investments that are permitted to be purchased by
the Index 500 Fund. After purchase by the Index 500 Fund, a security may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Index 500 Fund. Neither event will require a sale of such
security by the Index 500 Fund, provided that the amount of such securities
held by the Index 500 Fund does not exceed 5% of the Index 500 Fund's net
assets. To the extent the ratings given by Moody's or S&P may change as a
result of changes in such organizations or their rating systems, the Index
500 Fund will attempt to use comparable ratings as standards for investments
in accordance with the investment policies contained in the Prospectus and in
this Statement of Additional Information.
3
<PAGE>
The Index 500 Fund is not required to sell downgraded securities,
and it could hold up to 5% of its net assets in debt securities rated below
"Baa" by Moody's or below "BBB" by S&P or if unrated, low quality (below
investment grade) securities.
CONVERTIBLE SECURITIES
The Bond Fund may invest up to 20% of its total assets in
convertible securities. Convertible securities may include corporate notes or
preferred stock, but are ordinarily a long-term debt obligation of the issuer
convertible at a stated exchange rate into common stock of the issuer. As
with all debt 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 depreciate to the same extent
as the underlying common stock.
Convertible securities generally rank senior to common stocks in an
issuer's capital structure and are consequently of higher quality and entail
less risk of declines in market value than the issuer's common stock. However,
the extent to which such risk is reduced depends in large measure upon the
degree to which the convertible security sells above its value as a fixed-income
security. In evaluating a convertible security, the Manager usually gives
primary emphasis to the attractiveness of the underlying common stock.
U.S. GOVERNMENT SECURITIES
Each of the Funds may purchase securities issued or guaranteed as to
principal and interest by the U.S. Government, its agencies, authorities or
instrumentalities ("U.S. Government Securities"). 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.
Securities guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities are considered to
include (a) securities for which the payment of principal and interest is backed
by a guarantee of, or an irrevocable letter of credit issued by, the U.S.
Government, its agencies, authorities or instrumentalities and (b) participation
in loans
4
<PAGE>
made to foreign governments or their agencies that are so guaranteed. The
secondary market for certain of these participations is limited. Such
participations may therefore be regarded as illiquid.
FLOATING- AND VARIABLE-RATE OBLIGATIONS
Each Equity Index Fund may purchase floating- and variable-rate demand
notes and bonds, which are obligations ordinarily having stated maturities in
excess of thirteen months, but which permit the holder to demand payment of
principal at any time, or at specified intervals not exceeding thirteen months.
Variable rate demand notes include master demand notes that are obligations that
permit an Equity Index Fund to invest fluctuating amounts, which may change
daily without penalty, pursuant to direct arrangements between the Master
Portfolio, as lender, and the borrower. The interest rates on these notes
fluctuate from time to time. The issuer of such obligations ordinarily has a
corresponding right, after a given period, to prepay in its discretion the
outstanding principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders of such obligations. The
interest rate on a floating-rate demand obligation is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable-rate demand obligation is
adjusted automatically at specified intervals. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided by
banks. Because these obligations are direct lending arrangements between the
lender and borrower, it is not contemplated that such instruments generally will
be traded, and there generally is no established secondary market for these
obligations, although they are redeemable at face value. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, an Equity Index Fund's right to redeem is dependent on the ability
of the borrower to pay principal and interest on demand. Such obligations
frequently are not rated by credit rating agencies and the Equity Index Fund may
invest in obligations which are not so rated only if Barclays determines that,
at the time of investment, the obligations are of comparable quality to the
other obligations in which the Equity Index Fund may invest. Barclays, on behalf
of each Equity Index Fund considers on an ongoing basis the creditworthiness of
the issuers of the floating- and variable-rate demand obligations in each Equity
Index Fund's portfolio. The Equity Index Fund will not invest more than 10% of
the value of its total net assets in floating- or variable-rate demand
obligations whose demand feature is not exercisable within seven days. Such
obligations may be treated as liquid, provided that an active secondary market
exists.
LETTERS OF CREDIT
Certain of the debt obligations (including municipal securities,
certificates of participation, commercial paper and other short-term
obligations) which the Index 500 Fund may purchase may be backed by an
unconditional and irrevocable letter of credit of a bank, savings and loan
association or insurance company which assumes the obligation for payment of
principal and interest in the event of default by the issuer. Only banks,
savings and loan associations and insurance companies which, in the opinion
of Barclays, are of comparable quality to issuers of other permitted
investments of the Index 500 Fund may be used for letter of credit-backed
investments.
5
<PAGE>
FOREIGN SECURITIES
Each of Large Cap Equities Fund, Small Cap Equities Fund, Equity and
Bond Fund (through its investment in the Large Cap Equities Fund), International
Equities Fund and International Index Fund invest in foreign securities not
publicly traded in the United States. Each of these may invest in foreign
securities directly or in the form of American Depositary Receipts ("ADRs"),
Canadian Depositary Receipts ("CDRs"), European Depositary Receipts ("EDRs"),
International Depositary Receipts ("IDRs") and Global Depositary Receipts
("GDRs") or other similar securities convertible into securities of foreign
issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs (sponsored or
unsponsored) are receipts typically issued by a U.S. Bank or trust company and
traded on a U.S. stock exchange, and CDRs are receipts typically issued by a
Canadian bank or trust company that evidence ownership of underlying foreign
securities. Issuers of unsponsored ADRs are not contractually obligated to
disclose material information in the U.S. and, therefore, such information may
not correlate to the market value of the unsponsored ADR. EDRs and IDRs are
receipts typically issued by European banks and trust companies, and GDRs are
receipts issued by either a U.S. or non-U.S. banking institution, that evidence
ownership of the underlying foreign securities. Generally, ADRs in registered
form are designed for use in U.S. securities markets and EDRs and IDRs in bearer
form are designed primarily for use in Europe.
With respect to portfolio securities that are issued by foreign issuers
or denominated in foreign currencies, the investment performance of a Fund is
affected by the strength or weakness of the U.S. dollar against those
currencies. For example, if the dollar falls in value relative to the Japanese
yen, the dollar value of a yen-denominated stock held in the portfolio will rise
even though the price of the stock remains unchanged. Conversely, if the dollar
rises in value relative to the yen, the dollar value of the yen-denominated
stock will fall.
Shareowners should understand and consider carefully the risks involved
in foreign investing. Investments in foreign securities are generally
denominated in foreign currencies and involve certain considerations comprising
both risk and opportunity not typically associated with investing in U.S.
securities. These considerations include: fluctuations in exchange rates of
foreign currencies; possible imposition of exchange control regulation or
currency restrictions that would prevent cash from being brought back into the
United States; less public information with respect to issuers of securities;
less governmental supervision of stock exchanges, securities brokers, and
issuers of securities; lack of uniform accounting, auditing, and financial
reporting standards; lack of uniform settlement periods and trading practices;
less liquidity and frequently greater price volatility; possible imposition of
foreign taxes; possible investment in securities of companies in developing as
well as developed countries; and sometimes less advantageous legal, operational,
and financial protections applicable to foreign sub-custodial arrangements.
Although the Funds try to invest in companies of countries having
stable political environments, there is the possibility of expropriation or
confiscatory taxation, seizure or nationalization of foreign bank deposits or
other assets, establishment of exchange controls, the
6
<PAGE>
adoption of foreign government restrictions, or other political, social or
diplomatic developments that could adversely affect investment in these
countries.
EMERGING MARKETS. Investments in emerging markets securities include
special risks in addition to those generally associated with foreign investing.
Many investments in emerging markets can be considered speculative, and the
value of those investments can be more volatile than in more developed foreign
markets. This difference reflects the greater uncertainties of investing in less
established markets and economies. Emerging markets also have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have not kept pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of a Fund's assets
is uninvested and no return is earned thereon. The inability to make intended
security purchases due to settlement problems could cause a Fund to miss
attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to a Fund
due to subsequent declines in the value of those securities or, if a Fund has
entered into a contract to sell a security, in possible liability to the
purchaser. Costs associated with transactions in emerging markets securities are
typically higher than costs associated with transactions in U.S. securities.
Such transactions also involve additional costs for the purchase or sale of
foreign currency.
Certain foreign markets (including emerging markets) may require
governmental approval for the repatriation of investment income, capital or the
proceeds of sales of securities by foreign investors. In addition, if
deterioration occurs in an emerging market's balance of payments or for other
reasons, a country could impose temporary restrictions on foreign capital
remittances. A Fund could be adversely affected by delays in, or a refusal to
grant, required governmental approval for repatriation of capital, as well as by
the application to the Fund of any restrictions on investments.
The risk also exists that an emergency situation may arise in one or
more emerging markets. As a result, trading of securities may cease or may be
substantially curtailed and prices for a Fund's securities in such markets may
not be readily available. A Fund may suspend redemption of its shares for any
period during which an emergency exists, as determined by the U.S. Securities
and Exchange Commission (the "Commission"). Accordingly, if a Fund believes that
appropriate circumstances exist, it will promptly apply to the Commission for a
determination that such an emergency is present. During the period commencing
from a Fund's identification of such condition until the date of Commission
action, that Fund's securities in the affected markets will be valued at fair
value determined in good faith by or under the direction of the Board of
Trustees of the Trust or the Board of Trustees of MIP.
Income from securities held by a Fund could be reduced by taxes
withheld from that income, or other taxes that may be imposed by the emerging
market countries in which the Fund invests. Net asset value of a Fund may also
be affected by changes in the rates or methods of taxation applicable to the
Fund or to entities in which the Fund has invested. Many emerging markets have
experienced substantial rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had, and may continue to have, adverse
effects on the
7
<PAGE>
economies and securities markets of certain emerging market countries. In an
attempt to control inflation, certain emerging market countries have imposed
wage and price controls. Of these countries, some, in recent years, have begun
to control inflation through prudent economic policies.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial organizations and
other financial institutions. Certain emerging market governmental issuers have
not been able to make payments of interest or principal on debt obligations as
those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
Governments of many emerging market countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector through ownership or control of many companies. The future actions of
those governments could have a significant effect on economic conditions in
emerging markets, which, in turn, may adversely affect companies in the private
sector, general market conditions and prices and yields of certain of the
securities in a Fund's portfolio. Expropriation, confiscatory taxation,
nationalization, political, economic and social instability have occurred
throughout the history of certain emerging market countries and could adversely
affect Fund assets should any of those conditions recur.
CURRENCY EXCHANGE TRANSACTIONS. The Funds may enter into currency
exchange transactions either on a spot (i.e., cash) basis at the spot rate for
purchasing or selling currency prevailing in the foreign exchange market,
through a forward currency exchange contract ("forward contract") or through
foreign currency futures contracts.
FORWARD CONTRACTS. A forward contract is an agreement to purchase or
sell a specified currency at a specified future date (or within a specified time
period) and price set at the time of the contract. Forward contracts are usually
entered into with banks, foreign dealers or broker-dealers, are not traded on an
exchange and are usually for less than one year, but may be longer or renewed.
Forward currency transactions may involve currencies of the different
countries in which a Fund may invest, and serve as hedges against possible
variations in the exchange rate between these currencies. A currency transaction
for a Fund is limited to transaction hedging and portfolio hedging involving
either specific transactions or actual or anticipated portfolio positions.
Transaction hedging is the purchase or sale of a forward contract with respect
to specific receivables or payables of a Fund accruing in connection with the
purchase or sale of portfolio securities. Portfolio hedging is the use of a
forward contract with respect to an actual or anticipated portfolio security
position denominated or quoted in a particular currency. When a Fund owns or
anticipates owning securities in countries whose currencies are linked, the Fund
may aggregate such positions as to the currency hedged.
If a Fund enters into a forward contract hedging an anticipated or
actual holding of portfolio securities, liquid assets of the Fund, having a
value at least as great as the amount of the excess, if any, of the Fund's
commitment under the forward contract over the value of the
8
<PAGE>
portfolio position being hedged, will be segregated on the books of the Fund and
held by the Fund's custodian and marked to market daily, while the contract is
outstanding.
At the maturity of a forward contract to deliver a particular currency,
a Fund may sell the portfolio security related to such contract and make
delivery of the currency received from the sale, or it may retain the security
and either purchase the currency on the spot market or terminate its contractual
obligation to deliver the currency by entering into an offsetting contract with
the same currency trader for the purchase on the same maturity date of the same
amount of the currency.
It is impossible to forecast precisely the market value of a portfolio
security being hedged with a forward currency contract. Accordingly, at the
maturity of a contract it may be necessary for a Fund to purchase additional
currency on the spot market (and bear the expense of such purchase) if the
market value of the security is less than the amount of currency the Fund is
obligated to deliver under the forward contract and if a decision is made to
sell the security and make delivery of the currency. Conversely, it may be
necessary to sell on the spot market some of the currency received upon the sale
of the portfolio security if the sale proceeds exceed the amount of currency the
Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
currency. If forward prices decline during the period between entering into a
forward contract for the sale of a currency and the date it enters into an
offsetting contract for the purchase of the currency, the Fund will realize a
gain to the extent the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. If forward prices increase, the
Fund will suffer a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell. A default on
the contract would deprive the Fund of unrealized profits or force it to cover
its commitments for purchase or sale of currency, if any, at the current market
price.
FOREIGN CURRENCY FUTURES CONTRACTS. A foreign currency futures contract
is an agreement between two parties for the future delivery of a specified
currency at a specified time and at a specified price. The International Index
Fund will engage in foreign currency futures contracts. A "sale" of a futures
contract means the contractual obligation to deliver the currency at a specified
price on a specified date, or to make the cash settlement called for by the
contract. Futures contracts have been designed by exchanges which have been
designated "contract markets" by the Commodity Futures Trading Commission
("CFTC") and must be executed through a brokerage firm, known as a futures
commission merchant (an "FCM"), which is a member of the relevant contract
market. Futures contracts trade on these markets, and the exchanges, through
their clearing organizations, guarantee that the contracts will be performed as
between the clearing members of the exchange.
While futures contracts based on currencies do provide for the delivery
and acceptance of a particular currency, such deliveries and acceptances are
very seldom made. Generally, a
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futures contract is terminated by entering into an offsetting transaction. The
International Index Fund will incur brokerage fees when it purchases and sells
futures contracts. At the time such a purchase or sale is made, the
International Index Fund must provide cash or money market securities as a
deposit known as "margin." The initial deposit required will vary, but may be as
low as 2% or less of a contract's face value. Daily thereafter, the futures
contract is valued through a process known as "marking to market," and the
International Index Fund may receive or be required to pay "variation margin" as
the futures contract becomes more or less valuable.
To hedge its portfolio and to protect it against possible variations in
foreign exchange rates pending the settlement of securities transactions, the
International Index Fund may buy or sell currency futures contracts. If a fall
in exchange rates for a particular currency is anticipated, the International
Index Fund may sell a currency futures contract as a hedge. If it is anticipated
that exchange rates will rise, the International Index Fund may purchase a
currency futures contract to protect against an increase in the price of
securities denominated in a particular currency the International Index Fund
intends to purchase. These futures contracts will be used only as a hedge
against anticipated currency rate changes.
The effective use of futures strategies depends on, among other things,
the International Index Fund's ability to terminate futures positions at times
when Barclays deems it desirable to do so. Although the International Index Fund
will not enter into a futures position unless Barclays believes that a liquid
secondary market exists for such future, there is no assurance that the
International Index Fund will be able to effect closing transactions at any
particular time or at an acceptable price. The International Index Fund
generally expects that its futures transactions will be conducted on recognized
U.S. and foreign securities and commodity exchanges.
Futures markets can be highly volatile and transactions of this type
carry a high risk of loss. Moreover, a relatively small adverse market movement
with respect to these transactions may result not only in loss of the original
investment but also in unquantifiable further loss exceeding any margin
deposited.
The use of futures involves the risk of imperfect correlation between
movements in futures prices and movements in the price of currencies which are
the subject of the hedge. The successful use of futures strategies also depends
on the ability of Barclays to correctly forecast interest rate movements,
currency rate movements and general stock market price movements.
The International Index Fund's ability effectively to hedge currency
risk through transactions in foreign currency futures depends on the degree to
which movements in the value of the currency underlying such hedging instrument
correlate with movements in the value of the relevant securities held by the
International Index Fund. If the values of the securities being hedged do not
move in the same amount or direction as the underlying currency, the hedging
strategy for the International Index Fund might not be successful and the
International Index Fund could sustain losses on its hedging transactions which
would not be offset by gains on its portfolio. It is also possible that there
may be a negative correlation between the currency underlying a futures contract
and the portfolio securities being hedged, which could result in losses both on
the hedging transaction and the portfolio securities. In such instances, the
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International Index Fund's overall return could be less than if the hedging
transactions had not been undertaken.
Under certain extreme market conditions, it is possible that the
International Index Fund will not be able to establish hedging positions, or
that any hedging strategy adopted will be insufficient to completely protect the
International Index Fund.
The International Index Fund will purchase or sell futures contracts
only if, in Barclays' judgment, there is expected to be a sufficient degree of
correlation between movements in the value of such instruments and changes in
the value of the relevant portion of the International Index Fund's portfolio
for the hedge to be effective. There can be no assurance that Barclays' judgment
will be accurate.
The ordinary spreads between prices in the cash and futures markets,
due to differences in the natures of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit and
variation margin requirements. This could require the International Index Fund
to post additional cash or cash equivalents as the value of the position
fluctuates. Further, rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market may be lacking.
Prior to exercise or expiration, a futures position may be terminated only by
entering into a closing purchase or sale transaction, which requires a secondary
market on the exchange on which the position was originally established. While
the International Index Fund will establish a futures position only if there
appears to be a liquid secondary market therefor, there can be no assurance that
such a market will exist for any particular futures contract at any specific
time. In such event, it may not be possible to close out a position held by the
International Index Fund, which could require the International Index Fund to
purchase or sell the instrument underlying the position, make or receive a cash
settlement, or meet ongoing variation margin requirements. The inability to
close out futures positions also could have an adverse impact on the
International Index Fund's ability effectively to hedge its securities, or the
relevant portion thereof.
The liquidity of a secondary market in a futures contract may be
adversely affected by "daily price fluctuation limits" established by the
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. The trading of futures contracts also is subject to the risk
of trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of the brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Each contract market on which futures contracts are traded has
established a number of limitations governing the maximum number of positions
which may be held by a trader, whether acting alone or in concert with others.
Barclays does not believe that these trading and position
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limits will have an adverse impact on the hedging strategies regarding the
International Index Fund's investments.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Hedging transactions preclude the opportunity
for gain if the value of the hedged currency should rise. Moreover, it may not
be possible for a Fund to hedge against a devaluation that is so generally
anticipated that it is not able to contract to sell the currency at a price
above the devaluation level it anticipates.
The cost to the International Index Fund engaging in currency exchange
transactions varies with such factors as the currency involved, the length of
the contract period and prevailing market conditions. Since currency exchange
transactions are usually conducted on a principal basis, no fees or commissions
are involved.
EUROPEAN CURRENCY UNIFICATION. Effective January 1, 1999, eleven of the
fifteen member countries of the European Union adopted a single European
currency, the Euro. The countries participating in the Economic and Monetary
Union ("EMU") are Austria, Belgium, Finland, France, Germany, Ireland, Italy,
Luxembourg, the Netherlands, Portugal and Spain. The four European Union
countries not currently participating in the EMU are Great Britain, Denmark,
Sweden and Greece. A new European Central Bank manages the monetary policy of
the new unified region, and the exchange rates among the EMU member countries
are permanently fixed. National currencies will continue to circulate until they
are replaced by Euro coins and bank notes by the middle of 2002.
STOCK INDEX FUTURES AND OPTIONS ON STOCK INDEX FUTURES CONTRACTS
The Equity Index Funds may invest in stock index futures and options on
stock index futures as a substitute for a comparable market position in the
underlying securities. A stock index future obligates the seller to deliver (and
the purchaser to take), effectively, an amount of cash equal to a specific
dollar amount times the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
agreement is made. For stock indexes that are permitted investments, the Equity
Index Funds intend to purchase and sell futures contracts on the index for which
it can obtain the best price with consideration also given to liquidity. The
Equity Index Funds may purchase call and put options and write covered call and
put options on stock index futures contracts of the type which the particular
Equity Index Fund is authorized to enter into. Covered put and call options on
futures contracts will be covered in the same manner as covered options on
securities and securities indices. Each Equity Index Fund may invest in such
options for the purpose of closing out a futures position that has become
illiquid.
Options on futures contracts are traded on exchanges that are licensed
and regulated by the CFTC. A call option on a futures contract gives the
purchaser the right in return for the premium paid, to purchase a futures
contract (assume a "long" position) at a specified exercise price at any time
before the option expires. A put option gives the purchaser the right, in return
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for the premium paid, to sell a futures contract (assume a "short" position),
for a specified exercise price, at any time before the option expires.
Unlike entering into a futures contract itself, purchasing options on
futures contracts allows a buyer to decline to exercise the option, thereby
avoiding any loss beyond forgoing the purchase price (or "premium") paid for the
options. Whether an Equity Index Fund enters into a stock index futures
contract, on the one hand, or an option contract on a stock index futures
contract, on the other, will depend on all the circumstances, including the
particular objective to be achieved and the relative costs, liquidity,
availability and capital requirements of such futures and options contracts.
Each Equity Index Fund will consider the relative risks involved, which may be
quite different. These factors, among others, will be considered in light of
market conditions.
The use of stock index futures contracts and options on such futures
contracts may entail the following risks. First, although such instruments when
used by a Equity Index Fund are intended to correlate with portfolio securities,
in many cases the futures contracts or options on futures contracts used may be
based on stock indices, the components of which are not identical to the
portfolio securities owned or intended to be acquired by the Equity Index Fund.
Second, due to supply and demand imbalances and other market factors, the price
movements of stock index futures contracts and options thereon may not
necessarily correspond exactly to the price movements of the stock indices on
which such instruments are based. Accordingly, there is a risk that transactions
in those instruments will not in fact offset the impact on the Equity Index Fund
of adverse market developments in the manner or to the extent contemplated or
that such transactions will result in losses which are not offset by gains with
respect to corresponding portfolio securities owned or to be purchased by that
Equity Index Fund.
To some extent, these risks can be minimized by careful management of
these strategies. For example, where price movements in a futures contract are
expected to be less volatile than price movements in the related portfolio
securities owned or intended to be acquired by an Equity Index Fund, the Equity
Index Fund may compensate for this difference by using an amount of futures
contracts which is greater than the amount of such portfolio securities.
Similarly, where the price movement of a futures contract is anticipated to be
more volatile, an Equity Index Fund may use an amount of such contracts which is
smaller than the amount of portfolio securities to which such contracts relate.
The risk that the hedging technique used will not actually or entirely
offset an adverse change in the value of an Equity Index Fund's securities is
particularly relevant to futures contracts. An Equity Index Fund, in entering
into a futures purchase contract, potentially could lose any or all of the
contract's settlement price. In addition, because stock index futures contracts
require delivery at a future date of an amount of cash equal to a multiple of
the difference between the value of a specified stock index on that date and the
settlement price, an algebraic relationship exists between any price movement in
the underlying index and the potential cost of settlement to an Equity Index
Fund. A small increase or decrease in the value of the underlying index can,
therefore, result in a much greater increase or decrease in the cost to the
Equity Index Fund.
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Although the Equity Index Funds intend to establish positions in these
instruments only when there appears to be an active market, there is no
assurance that a liquid market for such instruments will exist when it seeks to
"close out" (I.E., terminate) a particular stock index futures contract
position. Trading in such instruments could be interrupted, for example, because
of a lack of either buyers or sellers. In addition, the futures exchanges may
suspend trading after the price of such instruments has risen or fallen more
than the maximum amount specified by the exchange.
An Equity Index Fund may be able, by adjusting investment strategy in
the cash or other contract markets, to offset to some extent any adverse effects
of being unable to liquidate a futures position. Nevertheless, in some cases, an
Equity Index Fund may experience losses as a result of such inability. Therefore
it may have to liquidate other more advantageous investments to meet its cash
needs.
FCMs or brokers in certain circumstances will have access to an Equity
Index Fund assets posted as margin in connection with transactions in stock
index futures contracts and options, as permitted under the 1940 Act. An Equity
Index Fund will use only FCMs or brokers in whom it has full confidence.
Barclays will adopt certain procedures and limitations to reduce the risk of
loss of any Master Portfolio assets which such FCM's or brokers hold or have
access. Nevertheless, in the event of a FCM's or broker's insolvency or
bankruptcy, it is possible that a Fund could experience a delay or incur costs
in recovering such assets or might recover less than the full amount due. Also
the value of such assets could decline by the time the Equity Index Fund could
effect such recovery.
The success of any Equity Index Fund in using these techniques depends,
among other things, on the ability of Barclays to predict the direction and
volatility of price movements in the futures markets as well as the securities
markets and on its ability to select the proper type, time, and duration of
futures contracts. There can be no assurance that these techniques will produce
their intended results. In any event, Barclays will use stock index futures
contracts and options thereon only when it believes the overall effect is to
reduce, rather than increase, the risks to which the Equity Index Fund is
exposed.
WARRANTS
The Small Cap Equities Fund, International Equities Fund, Bond Fund,
Equity and Bond Fund (through its investment in the Bond Fund) and Equity Index
Funds may invest in warrants or rights (other than those acquired in units or
attached to other securities), which entitle the purchaser to buy equity
securities at a specific price for a specific period of time. Warrants and
rights have no voting rights, receive no dividends and have no rights with
respect to the assets of the issuer. The Bond Fund may retain up to 10% of the
value of its total assets in common stocks acquired by the exercise of warrants
attached to debt securities.
MUNICIPAL BONDS
The obligations of municipal bond issuers are subject to the laws of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors. In addition, the
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obligations of such issuers may become subject to the laws enacted in the future
by Congress, state legislatures or referenda extending the time of payment of
principal and/or interest, or imposing other constraints upon enforcement of
such obligations or upon municipalities to levy taxes. There is also the
possibility that, as a result of legislation or other conditions, the power or
ability of any issuer to pay, when due, the principal and interest on its
municipal obligations may be materially affected.
The Tax-advantaged Bond Fund will invest the assets not invested in
municipal bonds in interest-bearing demand notes, bank savings accounts, high
grade money market securities, or U.S. treasury securities. Money market
securities include short-term obligations of the U.S. government and its
agencies and instrumentalities and other money market instruments such as
domestic bank certificates of deposit, bankers' acceptances and corporate
commercial paper rated in the highest grade. From time to time, the Fund may
invest more than [20%] of its assets in money market securities. In the
alternative, the Fund may hold such assets as cash for defensive reasons in
anticipation of a decline in the market values of debt securities, or pending
the investment of proceeds from the sale of Fund shares or from the sale of
portfolio securities, or in order to have highly liquid securities available to
meet possible redemptions.
MORTGAGE-BACKED SECURITIES
The Bond Fund and Equity and Bond Fund (through its investment in the
Bond Fund) may purchase mortgage-backed securities. Mortgage-backed SECURITIES
represent interests in pools of mortgages. The underlying mortgages normally
have similar interest rates, maturities and other terms. Mortgages may have
fixed or adjustable interest rates. Interests in pools of adjustable rate
mortgages are known as ARMs. Mortgage-backed securities come in a variety of
forms. Many have extremely complicated terms. The simplest form of
mortgage-backed securities is a "pass-through certificate." Holders of
pass-through certificates receive a pro rata share of the payments from the
underlying mortgages. Holders also receive a pro rata share of any prepayments,
so they assume all the prepayment risk of the underlying mortgages.
Collateralized mortgage obligations (CMOs) are complicated instruments
that allocate payments and prepayments from an underlying pass-through
certificate among holders of different classes of mortgage-backed securities.
This creates different prepayment and market risks for each CMO class.
In addition, CMOs may allocate interest payments to one class (IOs) and
principal payments to another class (POs). POs increase in value when prepayment
rates increase. In contrast, IOs decrease in value when prepayments increase,
because the underlying mortgages generate less interest payments. However, IOs
prices tend to increase when interest rates rise (and prepayments fall), making
IOs a useful hedge against market risk.
Generally, homeowners have the option to prepay their mortgages at any
time without penalty. Homeowners frequently refinance high rate mortgages when
mortgage rates fall. This results in the prepayment of mortgage-backed
securities, which deprives holders of the securities of the higher yields.
Conversely, when mortgage rates increase, prepayments due to refinancings
decline. This extends the life of mortgage-backed securities with lower yields.
As a result,
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increases in prepayments of premium mortgage-backed securities, or decreases in
prepayments of discount mortgage-backed securities, may reduce their yield and
price.
This relationship between interest rates and mortgage prepayments makes
the price of mortgage-backed securities more volatile than most other types of
fixed income securities with comparable credit risks. Mortgage-backed securities
tend to pay higher yields to compensate for this volatility.
CMOs may include planned amortization classes (PACs) and targeted
amortization classes (TACs). PACs and TACs are issued with companion classes.
PACs and TACs receive principal payments and prepayments at a specified rate.
The companion classes receive principal payments and any prepayments in excess
of this rate. In addition, PACs will receive the companion classes' share of
principal payments if necessary to cover a shortfall in the prepayment rate.
This helps PACs and TACs to control prepayment risk by increasing the risk to
their companion classes.
Another variant allocates interest payments between two classes of
CMOs. One class (Floaters) receives a share of interest payments based upon a
market index such as London-Inter Bank Offering Rate ("LIBOR"). The other class
(Inverse Floaters) receives any remaining interest payments from the underlying
mortgages. Floater classes receive more interest (and Inverse Floater classes
receive correspondingly less interest) as interest rates rise. This shifts
prepayment and market risks from the Floater to the Inverse Floater class,
reducing the price volatility of Floater class and increasing the price
volatility of the Inverse Floater class.
CMOs must allocate all payments received from the underlying mortgages
to some class. To capture any unallocated payments, CMOs generally have an
accrual (Z) class. Z classes do not receive any payments from the underlying
mortgages until all other CMO classes have been paid off. Once this happens,
holders of Z class CMOs receive all payments and prepayments. Similarly, real
estate mortgage investment conduits (REMICs) (offerings of multiple class
mortgage backed securities which qualify and elect treatment as such under
provisions of the Internal Revenue Code) have residual interests that receive
any mortgage payments not allocated to another REMIC class.
The degree of increased or decreased prepayment risk depends upon the
structure of the CMOs. Z classes, IOs, POs, and Inverse Floaters are among the
most volatile investment grade fixed income securities currently traded in the
United States. However, the actual returns on any type of mortgage backed
security depends upon the performance of the underlying pool of mortgages, which
no one can predict and will vary among pools.
ASSET-BACKED SECURITIES
The Bond Fund and Equity and Bond Fund (through its investment in the
Bond Fund) may purchase asset-backed securities, which represent direct or
indirect participations in, or are secured by and payable from, assets other
than mortgage-backed assets such as installment loan contracts, leases of
various types of real and personal property, motor vehicle installment sales
contracts and receivables from revolving credit (credit card) agreements. In
accordance with
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guidelines established by the Board of Trustees, asset-backed securities may be
considered illiquid securities and, therefore, may be subject to a Fund's 15%
(10% with respect to the Money Market Fund) limitation on such investments.
Asset-backed securities, including adjustable rate asset-backed securities, have
yield characteristics similar to those of mortgage-backed securities and,
accordingly, are subject to many of the same risks, including prepayment risk.
Assets are securitized through the use of trusts and special purpose
corporations that issue securities that are often backed by a pool of assets
representing the obligations of a number of different parties. Payments of
principal and interest may be guaranteed up to certain amounts and for a certain
time period by a letter of credit issued by a financial institution.
Asset-backed securities do not always have the benefit of a security interest in
collateral comparable to the security interests associated with mortgage-backed
securities. As a result, the risk that recovery on repossessed collateral might
be unavailable or inadequate to support payments on asset-backed securities is
greater for asset-backed securities than for mortgage-backed securities. In
addition, because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of an interest rate or economic cycle has not been
tested.
MONEY MARKET FUND
The Money Market Fund invests only in instruments denominated in U.S.
dollars that the Manager, under the supervision of the Trust's Board of
Trustees, determines present minimal credit risk and are, at the time of
acquisition, either:
1 rated in one of the two highest rating categories for
short-term debt obligations assigned by at least two nationally recognized
statistical rating organizations (NRSROs) (i.e., S&P and Moody's), or by only
one NRSRO if only one NRSRO has issued a rating with respect to the instrument
(requisite NRSROs); or
2 in the case of an unrated instrument, determined by the
Manager, under the supervision of the Trust's Board of Trustees, to be of
comparable quality to the instruments described in paragraph 1 above; or
3 issued by an issuer that has received a rating of the type
described in paragraph 1 above on other securities that are comparable in
priority and security to the instrument.
Pursuant to Rule 2a-7 under the 1940 Act, securities which are rated
(or that have been issued by an issuer that has been rated with respect to a
class of short-term debt obligations, or any security within that class,
comparable in priority and quality with such security) in the highest short-term
rating category by at least two NRSROs are designated "First Tier Securities."
Securities rated in the top two short-term rating categories by at least two
NRSROs, but which are not rated in the highest short-term category by at least
two NRSROs, are designated "Second Tier Securities." See APPENDIX A for a
description of the ratings used by NRSROs.
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Pursuant to Rule 2a-7 under the 1940 Act, the Money Market Fund may not
invest more than 5% of its assets taken at amortized cost in the securities of
any one issuer (except the U.S. Government, including repurchase agreements
collateralized by U.S. Government Securities (discussed above)). The Fund may,
however, invest more than 5% of its assets in the First Tier Securities of a
single issuer for a period of up to three business days after the purchase
thereof, although the Fund may not make more than one such investment at any
time.
Further, the Money Market Fund will not invest more than the greater of
(i) 1% of its total assets; or (ii) one million dollars in the securities of a
single issuer that were Second Tier Securities when acquired by the Fund. In
addition, the Fund may not invest more than 5% of its total assets in securities
which were Second Tier Securities when acquired.
The foregoing policies are more restrictive than the fundamental
investment restriction number 2b (set forth below) applicable to the Money
Market Fund, which would give the Fund the ability to invest, with respect to
25% of its assets, more than 5% of its assets in any one issuer. The Fund will
operate in accordance with these policies to comply with Rule 2a-7.
FOREIGN MONEY MARKET INSTRUMENTS
Each of the Funds that invest in foreign securities may also invest up
to 25% of its assets in foreign money market instruments. Foreign money market
instruments include Eurodollar Certificates of Deposit (ECDs), Yankee dollar
Certificates of Deposit (YCDs) and Eurodollar Time Deposits (ETDs), which are
all U.S. dollar denominated certificates of deposit. ECDs are issued by, and
ETDs are deposits of, foreign banks or foreign branches of U.S. banks. YCDs are
issued in the U.S. by branches and agencies of foreign banks. Europaper is
dollar-denominated commercial paper and other short-term notes issued in the
U.S. by foreign issuers.
ECDs, ETDs, YCDs, and Europaper have many of the same risks as other
foreign securities. Examples of these risks include economic and political
developments, that may adversely affect the payment of principal or interest,
foreign withholding or other taxes on interest income, difficulties in obtaining
or enforcing a judgment against the issuing bank and the possible impact of
interruptions in the flow of international currency transactions. Also, the
issuing banks or their branches are not necessarily subject to the same
regulatory requirements that apply to domestic banks, such as reserve
requirements, loan limitations, examinations, accounting, auditing,
recordkeeping and the public availability of information.
CASH AND CASH EQUIVALENTS
Each of the Funds may invest in cash and cash equivalents. These
securities include (1) commercial paper (short-term notes issued by corporations
or governmental bodies), (2) commercial bank obligations (e.g. certificates of
deposit (interest-bearing time deposits) and bankers' acceptances (time drafts
on a commercial bank where the bank accepts an irrevocable obligation to pay at
maturity), (3) savings association and bank obligations (e.g. certificates of
deposit issued by savings banks or savings associations), (4) U.S. Government
Securities that mature, or may be redeemed, in one year or less, (5) corporate
bonds and notes that mature, or
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that may be redeemed, in one year or less, and (6) short-term investment funds
maintained by the Fund's custodian.
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which a Fund purchases a
security from a bank or recognized securities dealer and simultaneously commits
to resell that security to the bank or dealer at an agreed-upon price, date, and
market rate of interest unrelated to the coupon rate or maturity of the
purchased security. Although repurchase agreements carry certain risks not
associated with direct investments in securities, a Fund will enter into
repurchase agreements only with banks and dealers that either the Manager,
Barclays or Capital Guardian Trust Company ("CGTC"), the sub-adviser to Small
Cap Equities Fund and International Equities Fund, believe present minimum
credit risks in accordance with guidelines approved by the Board of Trustees.
The Manager, Barclays or CGTC will review and monitor the creditworthiness of
such institutions, and will consider the capitalization of the institution,
their prior dealings with the institution, any rating of the institution's
senior long-term debt by independent rating agencies, and other relevant
factors. Any of the Manager, Barclays or CGTC may cause a Fund to participate in
pooled repurchase agreement transactions with other funds advised by them.
A Fund will invest only in repurchase agreements collateralized at all
times in an amount at least equal to the repurchase price plus accrued interest.
To the extent that the proceeds from any sale of such collateral upon a default
in the obligation to repurchase were less than the repurchase price, the Fund
would suffer a loss. If the financial institution which is party to the
repurchase agreement petitions for bankruptcy or otherwise becomes subject to
bankruptcy or other liquidation proceedings there may be restrictions on the
ability to sell the collateral and the Fund could suffer a loss. However, with
respect to financial institutions whose bankruptcy or liquidation proceedings
are subject to the U.S. Bankruptcy Code, each Fund intends to comply with
provisions under such Code that would allow it immediately to resell such
collateral. None intend to invest more than 5% of its total assets in repurchase
agreements.
PRIVATELY ISSUED SECURITIES
A Fund may invest in privately issued securities, including those that
may be resold only in accordance with Rule 144A under the Securities Act of 1933
("Rule 144A Securities"). Rule 144A Securities are restricted securities that
are not publicly traded. Accordingly, the liquidity of the market for specific
Rule 144A Securities may vary. Delay or difficulty in selling such securities
may result in a loss to the Fund. Privately issued or Rule 144A securities that
are determined by the Manager, CGTC or Barclays to be "illiquid" are subject to
the Trust's policy of not investing more than 15% (10% in the case of the Money
Market Fund) of its net assets in illiquid securities. The Manager, CGTC or
Barclays will evaluate the liquidity characteristics of each Rule 144A Security
proposed for purchase by a Fund on a case-by-case basis and will consider the
following factors, among others, in their evaluation: (1) the frequency of
trades and quotes for the Rule 144A Security; (2) the number of dealers willing
to purchase or sell the Rule 144A Security and the number of other potential
purchasers; (3) dealer undertakings to make a market in the Rule 144A Security;
and (4) the nature of the Rule 144A Security and the nature of
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the marketplace trades (e.g., the time needed to dispose of the Rule 144A
Security, the method of soliciting offers and the mechanics of transfer).
FORWARD COMMITMENTS, WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
A Fund may purchase securities on a when-issued or delayed delivery
basis and make contracts to purchase or sell securities for a fixed price at a
future date beyond customary settlement time. Although the payment and interest
terms of these securities are established at the time the Fund enters into the
commitment, the securities may be delivered and paid for a month or more after
the date of purchase, when their value may have changed. A Fund makes such
commitments only with the intention of actually acquiring the securities, but
may sell the securities before the settlement date if the Manager, Barclays or
CGTC deem it advisable for investment reasons.
A Fund may enter into reverse repurchase agreements with banks and
securities dealers. A reverse repurchase agreement is a repurchase agreement in
which the Fund is the seller of, rather than the investor in, securities and
agrees to repurchase them at an agreed-upon time and price. Use of a reverse
repurchase agreement, may be preferable to a regular sale and later repurchase
of securities because it avoids certain market risks and transaction costs.
At the time a Fund enters into a binding obligation to purchase
securities on a when-issued basis or enters into a reverse repurchase agreement,
assets of the Fund having a value at least as great as the purchase price of the
securities to be purchased will be segregated on the books of the fund and held
by the custodian throughout the period of the obligation. The use of these
investment strategies, as well as any borrowing by a Fund, may increase net
asset value fluctuation. None of the Funds has any present intention of
investing more than 5% of its total assets in reverse repurchase agreements.
LOANS OF PORTFOLIO SECURITIES
Each Fund may from time to time lend securities that it holds to
brokers, dealers and financial institutions, up to a maximum of 33% of the total
value of each Fund's assets. This percentage may not be increased without
approval of a majority of the outstanding voting securities of the respective
Fund. Such loans will be secured by collateral in the form of cash or United
States Treasury securities, or other liquid securities as permitted by the
Commission, which at all times while the loan is outstanding, will be maintained
in an amount at least equal to the current market value of the loaned
securities. The Fund making the loan will continue to receive interest and
dividends on the loaned securities during the term of the loan, and, in
addition, will receive a fee from the borrower or interest earned from the
investment of cash collateral in short-term securities. The Fund also will
receive any gain or loss in the market value of loaned securities and of
securities in which cash collateral is invested during the term of the loan.
The right to terminate a loan of securities, subject to appropriate
notice, will be given to either party. When a loan is terminated, the borrower
will return the loaned securities to the appropriate Fund. No Fund will have the
right to vote securities on loan, but each would
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terminate a loan and regain the right to vote if the Board of Trustees deems it
to be necessary in a particular instance.
For tax purposes, the dividends, interest and other distributions which
a Fund receives on loaned securities may be treated as other than qualified
income for the 90% test. (See TAXES--GENERAL TAX INFORMATION.) Each Fund intends
to lend portfolio securities only to the extent that this activity does not
jeopardize its status as a regulated investment company under the Internal
Revenue Code of 1986.
The primary risk involved in lending securities is that the borrower
will fail financially and return the loaned securities at a time when the
collateral is insufficient to replace the full amount of the loan. The borrower
would be liable for the shortage, but the Fund making the loan would be an
unsecured creditor with respect to such shortage and might not be able to
recover all or any of it. In order to minimize this risk, each Fund will make
loans of securities only to firms the Manager, CGTC or Barclays (under the
supervision of the Board of Trustees) deems creditworthy.
DEFENSIVE INVESTMENTS
Under ordinary circumstances, each Fund is substantially fully
invested. However, except for the Money Market Fund and the Equity Index Funds,
each Fund may also hold cash, cash equivalents, or money market instruments if
the Manager or CGTC determine that a temporary defensive position is advisable.
During those periods, a Fund's assets may not be invested in accordance with its
strategy and the Fund may not achieve its investment objective.
INVESTMENT POLICIES AND RESTRICTIONS
FUNDAMENTAL RESTRICTIONS
The Funds are subject to certain fundamental restrictions on their
investments. These restrictions may not be changed without the approval of the
holders of a majority of the outstanding voting shares of the Funds affected by
the change.
1. DIVERSIFICATION. No Fund will make any investment inconsistent with the
Fund's classification as a diversified company under the 1940 Act. This
restriction does not apply to any Fund classified as a non-diversified
company under the 1940 Act.
2a. INDUSTRY CONCENTRATION - LARGE CAP EQUITIES FUND, SMALL CAP EQUITIES
FUND, INTERNATIONAL EQUITIES FUND, EQUITY AND BOND FUND AND BOND FUND.
The Large Cap Equities Fund, Small Cap Equities Fund, International
Equities Fund, Equity and Bond Fund and Bond Fund will not invest more
than 25% of their total assets (taken at market value at the time of
each investment) in the securities of issuers primarily engaged in the
same industry (excluding the U.S. Government or any of its agencies or
instrumentalities).
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2b. INDUSTRY CONCENTRATION -- MONEY MARKET FUND. The Money Market Fund will
not invest more than 25% of its assets (taken at market value at the
time of each investment), other than U.S. Government securities,
obligations (other than commercial paper) issued or guaranteed by U.S.
banks and U.S. branches of foreign banks, and repurchase agreements and
securities loans collateralized by U.S. Government securities or such
bank obligations, in the securities of issuers primarily engaged in the
same industry.
3. INTERESTS IN REAL ESTATE. No Fund will purchase real estate or any
interest therein, except through the purchase of corporate or certain
government securities (including securities secured by a mortgage or a
leasehold interest or other interest in real estate). A security issued
by a real estate or mortgage investment trust is not treated as an
interest in real estate.
4. UNDERWRITING. No Fund will underwrite securities of other issuers
except insofar as the Trust may be deemed an underwriter under the
Securities Act of 1933 in selling portfolio securities.
5. BORROWING. No Fund will borrow money, except that: (a) a Fund may
borrow from banks (as defined in the 1940 Act) or through reverse
repurchase agreements in amounts up to 33 1/3% of its total assets
(including the amount borrowed), taken at market value at the time of
the borrowing; (b) a Fund may, to the extent permitted by applicable
law, borrow up to an additional 5% of its total assets (including the
amount borrowed), taken at market value at the time of the borrowing,
for temporary purposes; and (c) a Fund may obtain such short-term
credits as may be necessary for clearance of purchases and sales of
portfolio securities.
6. LENDING. No Fund will lend any security or make any other loan, except
through: (a) the purchase of debt obligations in accordance with the
Fund's investment objective or objectives and policies; (b) repurchase
agreements with banks, brokers, dealers, and other financial
institutions; and (c) loans of securities as permitted by applicable
law.
7. COMMODITIES. No Fund will purchase or sell commodities or commodity
contracts, except that a Fund may invest in currency and financial
instruments and contracts that are commodities or commodities
contracts.
8. SENIOR SECURITIES. No Fund will issue senior securities to the extent
such issuance would violate applicable law.
9a. INVESTMENTS - TAX-ADVANTAGED BOND FUND. The Tax-advantaged Bond Fund
will (i) invest at least 80% of its assets in tax-exempt securities;
or (ii) invest its assets so that at least 80% of the income will be
tax-exempt.
9b. EQUITY INDEX FUNDS. Each of the Equity Index Funds may, notwithstanding
any other fundamental policy or restriction, invest all of its assets
in the securities of a single open-end management investment company
with substantially the same fundamental investment objective, policies
and restrictions of such Equity Index Fund.
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9c. INVESTMENTS - EQUITY AND BOND FUND. The Equity and Bond Fund will not
invest in securities other than securities of other registered
investment companies or registered unit investment trusts that are part
of the State Farm group of investment companies, U.S. Government
securities, or short-term paper.
For the purposes of the restrictions relating to industry
concentration, the restrictions noted above in Item 2 do not apply to
securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities. The Equity and Bond Fund and the Equity Index Funds,
because of their investment objective and policies, will concentrate more
than 25% of their total assets in the mutual fund industry.
NON-FUNDAMENTAL RESTRICTIONS
The Trust also has adopted the following additional investment
restrictions applicable (except as noted) to all Funds. These are not
fundamental and may be changed by the Board of Trustees without shareholder
approval.
1. FINANCIAL FUTURES CONTRACTS. No Fund may enter into a financial futures
contract (by exercise of any option or otherwise) or acquire any
options thereon, if, immediately thereafter, the total of the initial
margin deposits required with respect to all open futures positions, at
the time such positions were established, plus the sum of the premiums
paid for all unexpired options on futures contracts would exceed 5% of
the value of its total assets.
2. MARGIN PURCHASES. No Fund may purchase any securities on margin except
in connection with investments of certain Funds in futures contracts or
options on futures contracts.
3. PLEDGING ASSETS. No Fund may mortgage, pledge, hypothecate or in any
manner transfer, as security for indebtedness, any securities owned or
held by such Fund except: (a) as may be necessary in connection with
borrowings mentioned in fundamental restriction number 5 above, and
then such mortgaging, pledging or hypothecating may not exceed 10% of
the Fund's total assets, taken at market value at the time thereof, or
(b) in connection with investments of certain Funds in futures
contracts or options on futures contracts.
4a. ILLIQUID SECURITIES AND REPURCHASE AGREEMENTS. No Fund may purchase
securities or enter into a repurchase agreement if, as a result, more
than 15% of its net assets would be invested in any combination of:
(i) repurchase agreements not entitling the holder to payment of
principal and interest within seven days, and
(ii) securities that are illiquid by virtue of legal or contractual
restrictions on resale or the absence of a readily available
market.
4b. ILLIQUID SECURITIES AND REPURCHASE AGREEMENTS - MONEY MARKET FUND. In
addition to the non-fundamental restriction in 4a above, the Money
Market Fund will not invest in
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illiquid securities, including certain repurchase agreements or time
deposits maturing in more than seven days, if, as a result thereof,
more than 10% of the value of its total assets would be invested in
assets that are either illiquid or are not readily marketable.
5. INVESTMENTS IN OTHER INVESTMENT COMPANIES. No Fund may invest more than
5% of its total assets in the securities of any single investment
company or more than 10% of its total assets in the securities of other
investment companies in the aggregate, or hold more than 3% of the
total outstanding voting stock of any single investment company. These
restrictions do not apply to the Equity and Bond Fund.
Non-fundamental restriction #5 does not apply to the Equity Index Funds
because each Equity Index Fund seeks to achieve its investment objective by
investing substantially all of its assets in a Master Portfolio.
FUNDAMENTAL OPERATING POLICIES OF THE MASTER PORTFOLIOS
Each Master Portfolio is subject to the following fundamental
investment limitations which cannot be changed without approval by the holders
of a majority (as defined in the 1940 Act) of the Master Portfolio's outstanding
voting securities. To obtain approval, a majority of the Master Portfolio's
outstanding voting securities means the vote of the lesser of: (1) 67% or more
of the voting securities present, if more than 50% of the outstanding voting
securities are present or represented, or (2) more than 50% of the outstanding
voting shares.
No Master Portfolio may:
1. invest more than 5% of its assets in the obligations
of any single issuer, except that up to 25% of the
value of its total assets may be invested, and
securities issued or guaranteed by the U.S.
government, or its agencies or instrumentalities may
be purchased, without regard to any such limitation.
2. hold more than 10% of the outstanding voting
securities of any single issuer. This investment
restriction applies only with respect to 75% of its
total assets.
3. invest in commodities, except that a Master Portfolio
may purchase and sell (i.e., write) options, forward
contracts, futures contracts, including those
relating to indexes, and options on futures contracts
or indexes.
4. purchase, hold or deal in real estate, or oil, gas or
other mineral leases or exploration or development
programs, but a Master Portfolio may purchase and
sell securities that are secured by real estate or
issued by companies that invest or deal in real
estate.
5. borrow money, except to the extent permitted under
the 1940 Act, provided that the Master Portfolio may
borrow up to 20% of the current value of its net
assets for temporary purposes only to meet
redemptions,
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and these borrowings may be secured by the pledge of
up to 20% of the current value of its net assets (but
investment may not be purchased while any such
outstanding borrowing in excess of 5% of its net
assets exists). For purposes of this investment
restriction, a Master Portfolio's entry into options,
forward contracts, futures contracts, including those
relating to indexes, and options on futures contracts
or indexes shall not constitute borrowing to the
extent certain segregated accounts are established
and maintained by such Master Portfolio.
6. make loans to others, except through the purchase of
debt obligations and the entry into repurchase
agreements. However, a Master Portfolio may lend its
portfolio securities in an amount not to exceed
one-third of the value of its total assets. Any loans
of portfolio securities will be made according to
guidelines established by the Commission and MIP's
Board of Trustees.
7. act as an underwriter of securities or other issuers,
except to the extent that a Master Portfolio may be
deemed an underwriter under the Securities Act of
1933, as amended, by virtue of disposing of portfolio
securities.
8. invest 25% of more of its total assets in the
securities of issuers in any particular industry or
group of closely related industries except that, in
the case of a Master Portfolio, there shall be no
limitation with respect to investments in (i)
obligations of the U.S. government, its agencies or
instrumentalities; or (ii) in the case of the S&P 500
Index Master Portfolio, any industry in which the S&P
500 Index becomes concentrated to the same degree
during the same period, the Master Portfolio will be
concentrated as specified above only to the extent
the percentage of its assets invested in those
categories of investments is sufficiently large that
25% or more of its total assets would be invested in
a single industry (iii) in the case of International
Index Master Portfolio any industry in which EAFE
Free Index becomes concentrated to the same degree
during the same period, the Master Portfolio will be
concentrated as specified above only to the extent
the percentage of assets invested in those categories
of investments is sufficiently large that 25% or more
of its total assets would be invested in a single
industry; and (iv) in the case of the Small Cap Index
Master Portfolio [ ].
9. issue any senior security (as such term is defined in
Section 18(f) of the 1940 Act), except to the extent
the activities permitted in the Master Portfolio's
fundamental policies (3) and (5) may be deemed to
give rise to a senior security.
10. purchase securities on margin, but the Master
Portfolio may make margin deposits in connection with
transactions in options, forward contracts,
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futures contracts, including those related to
indexes, and options on futures contracts or indexes.
NON-FUNDAMENTAL OPERATING POLICIES OF THE MASTER PORTFOLIOS
The Master Portfolios are subject to the following non-fundamental
operation policies which may be changed by the Board of Trustees of MIP without
the approval of the holders of the Master Portfolio's outstanding securities.
The Master Portfolios may:
1. invest in shares of other open-end management
investment companies, subject to the limitations of
Section 12(d)(1) of the 1940 Act. Under the 1940 Act,
a Master Portfolio's investment in such securities
currently is limited, subject to certain exceptions,
to (i) 3% of the total voting stock of any one
investment company, (ii) 5% of such Master
Portfolio's net assets with respect to any one
investment company, and (iii) 10% of such Master
Portfolio's net assets in the aggregate. Other
investment companies in which a Master Portfolio
invests can be expected to charge fees for operating
expenses, such as investment advisory and
administration fees, that would be in addition to
those charged by the Master Portfolio.
2. not invest more than 15% of its net assets in
illiquid securities. For this purpose, illiquid
securities include, among others, (i) securities that
are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions
on resale, (ii) fixed time deposits that are subject
to withdrawal penalties and that have maturities of
more than seven days, and (iii) repurchase agreements
not terminable within seven days.
3. lend securities from its portfolio to brokers,
dealers and financial institutions, in amounts not to
exceed (in the aggregate) one-third of the Master
Portfolio's total assets. Any such loans of portfolio
securities will be fully collateralized based on
values that are marked to market daily. The Master
Portfolio will not enter into any portfolio security
lending arrangement having a duration of longer than
one year.
If a percentage restriction is adhered to at the time of investment, a
later change in percentage resulting from a change in values or assets will not
constitute a violation of such restriction.
MORE ABOUT THE EQUITY INDEX FUNDS
MASTER/FEEDER STRUCTURE
The Equity Index Funds seek to achieve their investment objective by
investing all of their assets into Master Portfolios of MIP. The Equity Index
Funds and other entities investing in Master Portfolios are each liable for all
obligations of the Master Portfolio. However, the risk of the Equity Index Funds
incurring financial loss on account of such liability is limited to
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circumstances in which both inadequate insurance existed and MIP itself is
unable to meet its obligations. Accordingly, the Trust's Board of Trustees
believes that neither the Equity Index Funds nor their respective shareholders
will be adversely affected by investing assets in the Master Portfolios.
However, if a mutual fund or other investor withdraws its investment from a
Master Portfolio, the economic efficiencies (e.g., spreading fixed expenses
among a larger asset base) that the Trust's Board believes may be available
through investment in a Master Portfolio may not be fully achieved. In addition,
given the relative novelty of the master/feeder structure, accounting or
operational difficulties, although unlikely, could arise.
An Equity Index Fund may withdraw its investment in the Master
Portfolios only if the Trust's Board of Trustees determines that such action is
in the best interests of the Equity Index Fund and its shareholders. Upon any
such withdrawal, the Trust's Board would consider alternative investments,
including investing all of the Fund's assets in another investment company with
the same investment objective as the Fund or hiring an investment adviser to
manage the Fund's assets in accordance with the investment policies described
below with respect to a Master Portfolio.
The investment objective and other fundamental policies of a Master
Portfolio cannot be changed without approval by the holders of a majority (as
defined in the 1940 Act) of the Master Portfolio's outstanding interests.
Whenever an Equity Index Fund, as an interestholder of a Master Portfolio, is
requested to vote on any matter submitted to interestholders of the Master
Portfolio, the Equity Index Fund will either (1) hold a meeting of its
shareholders to consider such matters, and cast its votes in proportion to the
votes received from its shareholders (shares for which the Equity Index Fund
receives no voting instructions will be voted in the same proportion as the
votes received from the other Equity Index Fund shareholders); or (2) cast its
votes, as an interestholder of the Master Portfolio, in proportion to the votes
received by the Master Portfolio from all other interestholders of the Master
Portfolio.
Certain policies of the Master Portfolios which are non-fundamental may
be changed by vote of a majority of MIP's Trustees without interestholder
approval. If the Master Portfolio's investment objective or fundamental or
non-fundamental policies are changed, the Equity Index Fund may elect to change
its objective or policies to correspond to those of the Master Portfolio. The
Equity Index Fund also may elect to redeem its interests in the Master Portfolio
and either seek a new investment company with a matching objective in which to
invest or retain its own investment adviser to manage the Equity Index Fund's
portfolio in accordance with its objective. In the latter case, the Equity Index
Fund's inability to find a substitute investment company in which to invest or
equivalent management services could adversely affect shareholders' investments
in the Equity Index Fund. The Equity Index Fund will provide shareholders with
30 days' written notice prior to the implementation of any change in the
investment objective of the Equity Index Fund or the Master Portfolio, to the
extent possible.
INDUSTRY CONCENTRATIONS
Each Master Portfolio will maintain at least 25% of the value of its
total assets in securities of issuers in each industry if, and to the extent,
its benchmark index has a concentration
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of more than 25% (except where the concentration of the index is the result of a
single stock). No Master Portfolio will concentrate its investments otherwise.
If the benchmark index for a Master Portfolio has a concentration of more than
25% because of a single stock (I.E., if one stock in the benchmark index
accounts for more than 25% of the index and it is the only stock in the index in
its industry), the Master Portfolio will invest less than 25% of its total
assets in such stock and will reallocate the excess to stocks in other
industries. Changes in a Master Portfolio's concentration (if any) and
non-concentration would be made "passively" -- that is, any such changes would
be made solely as a result of changes in the concentrations of the benchmark
index's constituents.
SELECTION OF INVESTMENTS FOR THE MASTER PORTFOLIO
The manner in which stocks are chosen for each of the Master Portfolio
differs from the way securities are chosen in most other mutual funds. Unlike
other mutual funds where the portfolio securities are chosen by an investment
adviser based upon the adviser's research and evaluations, stocks are selected
for inclusion in a Master Portfolio's portfolio to have aggregate investment
characteristics (based on market capitalization and industry weightings),
fundamental characteristics (such as return variability, earnings valuation and
yield) and liquidity measures similar to those of the benchmark index taken in
its entirety.
As briefly discussed in the Prospectus, the S&P 500 Index Master
Portfolio generally holds every stock in the S&P 500. However, each of the
Small Cap Index Master Portfolio and International Index Master Portfolio
generally do not hold all of the issues that comprise their respective
benchmark index, due in part to the costs involved and, in certain instances,
the potential illiquidity of certain securities. Instead, the Small Cap Index
Master Portfolio attempts to hold a representative sample of the securities
in its benchmark index, which are selected by Barclays utilizing quantitative
analytical models in a technique known as "portfolio sampling." Under this
technique, each stock is considered for inclusion in the Master Portfolio
based on its contribution to certain capitalization, industry and fundamental
investment characteristics. The International Index Master Portfolio holds
securities selected by Barclays utilizing a quantitative model known as
minimum variance optimization. Under this technique, stocks are selected for
inclusion if the fundamental investment characteristics of the security
reduce the portfolio's predicted tracking error against the benchmark index.
Barclays seeks to construct the portfolio of each of the Small Cap Index
Master Portfolio and International Index Master Portfolio so that, in the
aggregate, their capitalization, industry and fundamental investment
characteristics perform like those of their benchmark index.
Over time, the portfolio composition of each Master Portfolio may be
altered (or "rebalanced") to reflect changes in the characteristics of its
benchmark index or, for the Small Cap Index Master Portfolio and the
International Index Master Portfolio, with a view to bringing the performance
and characteristics more in line with that of their benchmark index. Such
rebalancings will require the Master Portfolios to incur transaction costs and
other expenses. Each of the Small Cap Index Master Portfolio and International
Index Master Portfolio reserve the right to invest in all of the securities in
their benchmark index.
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TRACKING ERROR
Barclays uses the "expected tracking error" of a Master Portfolio as a
way to measure the Master Portfolios' performance relative to the performance of
its benchmark index. An expected tracking error of 5% means that there is a 68%
probability that the net asset value of the Master Portfolio will be between 95%
and 105% of the subject index level after one year, without rebalancing the
portfolio composition. A tracking error of 0% would indicate perfect tracking,
which would be achieved when the net asset value of the Master Portfolio
increases or decreases in exact proportion to changes in its benchmark index.
Factors such as expenses of the Master Portfolio, taxes, the need to comply with
the diversification and other requirements of the Code and other requirements
may adversely impact the tracking of the performance of a Master Portfolio to
that of its benchmark index. In the event that tracking error exceeds 5%, the
Board of Trustees of the Trust will consider what action might be appropriate to
reduce the tracking error.
RELATIONSHIP WITH THE INDEX PROVIDERS
STANDARD & POOR'S
The Index 500 Fund and the S&P 500 Index Master Portfolio seek to match
the performance of the Standard & Poor's Composite Index of 500 Stocks ("S&P
500"). "Standard & Poor's," "S&P," "S&P 500" and "Standard and Poor's 500" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by
the Trust. Neither the Index 500 Fund nor the S&P 500 Index Master Portfolio is
sponsored, endorsed sold or promoted by Standard & Poor's, a division of the
McGraw-Hill Companies, Inc. ("S&P").
S&P makes no representation or warranty, express or implied, to the
owners of the Index 500 Fund, the S&P 500 Index Master Portfolio or any member
of the public regarding the advisability of investing in securities generally or
in the Index 500 Fund particularly or the ability of the S&P 500 Index to track
general stock market performance. S&P's only relationship to the Trust is the
licensing of certain trademarks and trade names of S&P and of the S&P 500 Index
which is determined, composed and calculated by S&P without regard to the Trust
or the Index 500 Fund. S&P has no obligation to take the needs of the Trust or
the owners of the Index 500 Fund into consideration in determining, composing or
calculating the S&P 500 Index. S&P is not responsible for and has not
participated in the determination of the prices and amount of the Index 500 Fund
or the timing of the issuance or sale of the Index 500 Fund or in the
determination or calculation of the equation by which the Index 500 Fund is to
be converted into cash. S&P has no obligation or liability in connection with
the administration, marketing or trading of the Index 500 Fund.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P
500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE TRUST, OWNERS OF THE FUND, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES
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<PAGE>
NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE
FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF
THE POSSIBILITY OF SUCH DAMAGES.
RUSSELL 2000
The Small Cap Index Fund and the Small Cap Index Master Portfolio seek
to match the performance of the Russell 2000 Small Stock Index (the "Russell
2000"). The Russell 2000 tracks the common stock performance of the 2000
smallest U.S. companies in the Russell 3000 Index, representing about 10% in the
aggregate of the capitalization of the Russell 3000 Index. The Russell 2000 and
the Russell 3000 are trademarks/service marks, and "Russell" is a trademark, of
Frank Russell Company. Neither the Small Cap Index Fund nor the Small Cap Index
Master Portfolio is promoted, sponsored or endorsed by, nor in any way
affiliated with Frank Russell Company. Frank Russell Company is not responsible
for and has not reviewed the Small Cap Index Fund nor any associated literature
or publications and makes no representation or warranty, express or implied, as
to their accuracy or completeness, or otherwise.
Frank Russell Company reserves the right, at any time and without
notice, to alter, amend, terminate or in any way change the Russell 2000. Frank
Russell Company has no obligation to take the needs of any particular fund or
its participants or any other product or person into consideration in
determining, composing or calculating the Russell 2000.
Frank Russell Company's publication of the Russell 2000 in no way
suggests or implies an opinion by Frank Russell Company as to the attractiveness
or appropriateness of investment in any or all securities upon which the index
is based. FRANK RUSSELL COMPANY MAKES NO REPRESENTATION, WARRANTY, OR GUARANTEE
AS TO THE ACCURACY, COMPLETENESS, RELIABILITY, OR OTHERWISE OF THE RUSSELL 2000
OR ANY DATA INCLUDED IN THE RUSSELL 2000. FRANK RUSSELL COMPANY MAKES NO
REPRESENTATION OR WARRANTY REGARDING THE USE, OR THE RESULTS OF USE, OF THE
RUSSELL 2000 OR ANY DATA INCLUDED THEREIN, OR ANY SECURITY (OR COMBINATION
THEREOF) COMPRISING THE RUSSELL 2000. FRANK RUSSELL COMPANY MAKES NO OTHER
EXPRESS OR IMPLIED WARRANTY, AND EXPRESSLY DISCLAIMS ANY WARRANTY, OF ANY KIND,
INCLUDING, WITHOUT MEANS OF LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE RUSSELL 2000 OR ANY DATA OR
ANY SECURITY (OR COMBINATION THEREOF) INCLUDED THEREIN.
EAFE INDEX
The International Index Fund and the International Index Master
Portfolio seek to match the performance of the Morgan Stanley Capital
International Europe, Australia, and Far East Free Index ("EAFE Free"). EAFE
Free is the property of Morgan Stanley & Co. Incorporated
30
<PAGE>
("Morgan Stanley"). Morgan Stanley Capital International is a service mark of
Morgan Stanley and has been licensed for use by the Trust. Neither the
International Index Master Portfolio nor the International Index Fund is
sponsored, endorsed, sold or promoted by Morgan Stanley. Morgan Stanley makes no
representation or warranty, express or implied, to the owners of shares of the
International Index Fund, the International Index Master Portfolio or any member
of the public regarding the advisability of investing in securities generally or
in the shares of the International Index Fund or International Index Master
Portfolio particularly or the ability of EAFE Free to track general stock market
performance. Morgan Stanley is the licensor of certain trademarks, service marks
and trade names of Morgan Stanley and of the EAFE Free, which is determined,
composed and calculated by Morgan Stanley without regard to the International
Index Fund. Morgan Stanley has no obligation to take the needs of the
International Index Fund or International Index Master Portfolio or the owners
of the International Index Fund into consideration in determining, composing or
calculating the EAFE Free. Morgan Stanley is not responsible for and has not
participated in the determination of the timing of, prices at, or quantities of
the International Index Fund to be issued or in the determination or calculation
of the equation by which the International Index Fund is redeemable for cash.
Morgan Stanley has no obligation or liability to owners of the International
Index Fund in connection with the administration, marketing or trading of the
International Index Fund.
ALTHOUGH MORGAN STANLEY SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN
THE CALCULATION OF THE INDEX FROM SOURCES WHICH MORGAN STANLEY CONSIDERS
RELIABLE, NEITHER MORGAN STANLEY NOR ANY OTHER PARTY GUARANTEES THE ACCURACY
AND/OR THE COMPLETENESS OF THE EAFE FREE OR ANY DATA INCLUDED THEREIN. NEITHER
MORGAN STANLEY NOR ANY OTHER PARTY MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY THE TRUST, THE TRUST'S CUSTOMERS AND COUNTERPARTIES,
OWNERS OF THE INTERNATIONAL INDEX FUND, OR ANY OTHER PERSON OR ENTITY FROM THE
USE OF THE EAFE FREE OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS
LICENSED HEREUNDER OR FOR ANY OTHER USE. NEITHER MORGAN STANLEY NOR ANY OTHER
PARTY MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND MORGAN STANLEY HEREBY
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE WITH RESPECT TO THE EAFE FREE OR ANY DATA INCLUDED THEREIN.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL MORGAN STANLEY OR ANY
OTHER PARTY HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL PUNITIVE,
CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF
THE POSSIBILITY OF SUCH DAMAGES.
TRUSTEES AND OFFICERS
The Board of Trustees has overall responsibility for the conduct of the Trust's
affairs. It is possible that the interests of the Equity and Bond Fund could
diverge from the interests of one or more of the underlying Funds in which it
invests. If such interests were ever to become divergent, it is possible that a
conflict of interest could arise and affect how the Trustees and
31
<PAGE>
officers fulfill their fiduciary duties to each Fund. The Trustees believe they
have structured each Fund to avoid these concerns. However, conceivably, a
situation could occur where proper action for the Equity and Bond Fund could be
adverse to the interests of an underlying Fund, or the reverse could occur. If
such a possibility arises, the Manager and the Trustees and officers of the
Trust will carefully analyze the situation and take all steps they believe
reasonable to minimize and, where possible, eliminate the potential conflict.
Moreover, close and continuous monitoring will be exercised to avoid, insofar as
possible, these concerns.
The Trustees and officers of the Trust, their ages at December 1, 2000,
their principal occupations for the last five years and their affiliations, if
any, with the Manager and State Farm VP Management Corp., the Trust's principal
underwriter, are listed below. Unless otherwise noted, the address of each is
One State Farm Plaza, Bloomington, Illinois 61710-0001.
<TABLE>
<CAPTION>
NAME, AGE AND POSITION(S) HELD PRINCIPAL OCCUPATION(S) DURING PAST FIVE
ADDRESS WITH THE FUNDS YEARS
------- -------------- -----
<S> <C> <C>
Edward B. Rust, Jr.*, Trustee and President CHAIRMAN OF THE BOARD, PRESIDENT, CEO, AND DIRECTOR
Age 50 - State Farm Mutual Automobile Insurance Company;
PRESIDENT, CEO, AND DIRECTOR - State Farm Life Insurance
Company, State Farm Life and Accident Assurance Company,
State Farm Annuity and Life Insurance Company, State Farm
General Insurance Company, State Farm Fire and Casualty
Company, State Farm Investment Management Corp.; TRUSTEE,
CHAIRMAN OF THE BOARD AND PRESIDENT (SINCE 1997) - State
Farm Variable Product Trust; CHAIRMAN OF THE BOARD AND
DIRECTOR (since 1999) - State Farm Federal Savings Bank;
PRESIDENT, CEO, AND DIRECTOR (SINCE 1997) - State Farm VP
Management Corp.; PRESIDENT - State Farm County Mutual
Insurance Company of Texas; DIRECTOR - State Farm Lloyds,
Inc., State Farm International Services, Inc.; CHAIRMAN OF
THE BOARD, PRESIDENT, AND TREASURER - State Farm Companies
Foundation; PRESIDENT AND DIRECTOR - State Farm Interim
Fund, Inc., State Farm Municipal Bond Fund, Inc., State
Farm Balanced Fund Inc., State Farm Growth Fund, Inc.
32
<PAGE>
<CAPTION>
NAME, AGE AND POSITION(S) HELD PRINCIPAL OCCUPATION(S) DURING PAST FIVE
ADDRESS WITH THE FUNDS YEARS
------- -------------- -----
<S> <C> <C>
Roger S. Joslin*, Trustee, Senior Vice President VICE CHAIRMAN, CHIEF FINANCIAL OFFICER, SENIOR
Age 64 and Treasurer VICE PRESIDENT, TREASURER, AND DIRECTOR - State Farm Mutual
Automobile Insurance Company; DIRECTOR - State Farm Life
Insurance Company, State Farm Life and Accident Assurance
Company, State Farm Annuity and Life Insurance Company;
DIRECTOR, SENIOR VICE PRESIDENT, AND TREASURER - State Farm
General Insurance Company, State Farm Lloyds, Inc., State
Farm International Services, Inc.; SENIOR VICE PRESIDENT
AND TREASURER - State Farm Investment Management Corp.;
TRUSTEE, VICE PRESIDENT AND TREASURER (SINCE 1997) - State
Farm Variable Product Trust; DIRECTOR, SENIOR VICE
PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER
(SINCE 1997) - State Farm VP Management Corp.; DIRECTOR,
VICE PRESIDENT AND TREASURER (since 1999) - State Farm
Federal Savings Bank; CHAIRMAN OF THE BOARD, TREASURER,
AND DIRECTOR - State Farm Fire and Casualty Company;
TREASURER - State Farm County Mutual Insurance Company of
Texas; ASSISTANT TREASURER - State Farm Companies
Foundation; SENIOR VICE PRESIDENT, TREASURER AND DIRECTOR -
State Farm Interim Fund, Inc., State Farm Municipal Bond
Fund, Inc., State Farm Balanced Fund, Inc., State Farm
Growth Fund, Inc.
Thomas M. Mengler, Trustee DEAN, UNIVERSITY OF ILLINOIS COLLEGE OF LAW (SINCE 1993);
Age 47 TRUSTEE - State Farm Variable Product Trust (since 1997);
Swanland Building DIRECTOR - State Farm Interim Fund, Inc., State Farm
601 E. John St. Municipal Bond Fund, Inc., State Farm Balanced Fund, Inc.,
Champaign, IL 61820 State Farm Growth Fund, Inc.
James A. Shirk, Trustee DIRECTOR AND PRESIDENT - Beer Nuts, Inc.; TRUSTEE - State
Age 56 Farm Variable Product Trust (since 1997); DIRECTOR - State
103 North Robinson Farm Interim Fund, Inc., State Farm Municipal Bond Fund,
Bloomington, IL 61701 Inc., State Farm Balanced Fund, Inc., State Farm Growth
Fund, Inc.
33
<PAGE>
<CAPTION>
NAME, AGE AND POSITION(S) HELD PRINCIPAL OCCUPATION(S) DURING PAST FIVE
ADDRESS WITH THE FUNDS YEARS
------- -------------- -----
<S> <C> <C>
Kurt G. Moser, Age 55 Senior Vice President SENIOR VICE PRESIDENT - INVESTMENTS (SINCE 1998) VICE
PRESIDENT - INVESTMENTS - State Farm Mutual Automobile
Insurance Company, State Farm County Mutual Insurance
Company of Texas, State Farm Lloyds, Inc.; SENIOR VICE
PRESIDENT - INVESTMENTS (SINCE 1998), VICE PRESIDENT -
INVESTMENTS, AND DIRECTOR - State Farm Life Insurance
Company, State Farm Life and Accident Assurance Company,
State Farm Annuity and Life Insurance Company, State Farm
Fire and Casualty Company, State Farm General Insurance
Company; SENIOR VICE PRESIDENT - INVESTMENTS (SINCE 1998),
INVESTMENT OFFICER - State Farm Indemnity Company; VICE
PRESIDENT - INVESTMENTS (since 1998) - State Farm Florida
Insurance Company; VICE PRESIDENT (SINCE 1997), VICE
PRESIDENT, AND DIRECTOR (PRIOR TO 1997) - State Farm
Investment Management Corp.; VICE PRESIDENT (SINCE
1997) - State Farm Variable Product Trust; DIRECTOR (SINCE
1997) - State Farm VP Management Corp.; VICE PRESIDENT -
INVESTMENTS - State Farm International Services, Inc.;
UNDERWRITER - State Farm Lloyds, Inc.; SENIOR VICE
PRESIDENT - State Farm Interim Fund, Inc., State Farm
Municipal Bond Fund, Inc., State Farm Balanced Fund,
Inc., State Farm Growth Fund, Inc.
34
<PAGE>
<CAPTION>
NAME, AGE AND POSITION(S) HELD PRINCIPAL OCCUPATION(S) DURING PAST FIVE
ADDRESS WITH THE FUNDS YEARS
------- -------------- -----
<S> <C> <C>
Paul N. Eckley, Senior Vice President SENIOR VICE PRESIDENT - INVESTMENTS AND ASSISTANT
Age 46 SECRETARY-TREASURER (SINCE 1998), VICE PRESIDENT - COMMON
STOCKS - State Farm Mutual Automobile Insurance Company,
State Farm Fire and Casualty Company; SENIOR VICE PRESIDENT
- INVESTMENTS AND ASSISTANT SECRETARY-TREASURER
(SINCE 1998) - State Farm General Insurance Company, State
Farm Life Insurance Company, State Farm Life and Accident
Assurance Company, State Farm Annuity and Life Insurance
Company, State Farm Indemnity Company, State Farm County
Mutual Insurance Company of Texas, State Farm Lloyds, Inc.;
SENIOR VICE PRESIDENT (SINCE 1997), AND INVESTMENT OFFICER
(PRIOR TO 1997) - State Farm Investment Management Corp.;
VICE PRESIDENT (SINCE 1997) - State Farm Variable Product
Trust; SENIOR VICE PRESIDENT - State Farm Balanced Fund,
Inc., State Farm Growth Fund, Inc.
Donald E. Heltner, Vice President VICE PRESIDENT (SINCE 1998) - State Farm Variable Product
Age 53 Trust; State Farm Balanced Fund, Inc. and State Farm
Interim Fund, Inc., VICE PRESIDENT - FIXED INCOME AND
ASSISTANT SECRETARY-TREASURER (SINCE 1998), State Farm Life
Insurance Company, State Farm Life and Accident Assurance
Company, and State Farm Annuity and Life Insurance Company
(SINCE 1998); VICE PRESIDENT - FIXED INCOME, State Farm
Mutual Automobile Insurance Company, State Farm Fire and
Casualty Company, State Farm General Insurance Company,
State Farm Indemnity Company, and State Farm Lloyds, Inc.
(SINCE 1998); prior to 1998, VICE PRESIDENT, Century
Investment Management Co.
35
<PAGE>
<CAPTION>
NAME, AGE AND POSITION(S) HELD PRINCIPAL OCCUPATION(S) DURING PAST FIVE
ADDRESS WITH THE FUNDS YEARS
------- -------------- -----
<S> <C> <C>
Julian R. Bucher, Vice President VICE PRESIDENT State Farm Municipal Bond Fund, Inc.; VICE
Age 58 PRESIDENT - MUNICIPAL SECURITIES AND ASSISTANT
SECRETARY-TREASURER (SINCE 1997), State Farm Mutual
Automobile Insurance Company, State Farm Fire and Casualty
Company, State Farm Life Insurance Company, State Farm Life
and Accident Assurance Company, and State Farm General
Insurance Company; VICE PRESIDENT - MUNICIPAL SECURITIES
(SINCE 1997), State Farm Indemnity Company and State Farm
Lloyds, Inc. (SINCE 1997); prior to 1997, INVESTMENT
OFFICER, State Farm Investment Management Corp.
Duncan Funk Assistant Vice President INVESTMENT OFFICER AND ASSISTANT SECRETARY - TREASURER
Age 39 (SINCE 1997) - State Farm Life Insurance Company, State
Farm Life and Accident Assurance Company, and State Farm
Annuity and Life Insurance Company; INVESTMENT OFFICER
(SINCE 1997) - State Farm Mutual Automobile Insurance
Company, State Farm Fire and Casualty Company, State Farm
General Insurance Company, State Farm Indemnity Company, and
State Farm Lloyds, Inc.; PRIOR TO 1997, INVESTMENT ANALYST;
ASSISTANT VICE PRESIDENT - State Farm Variable Product Trust
David R. Grimes, Assistant Vice President and ASSISTANT VICE PRESIDENT OF ACCOUNTING - State Farm Mutual
Age 58 Secretary Automobile Insurance Company; VICE PRESIDENT AND SECRETARY
- State Farm Investment Management Corp.; VICE PRESIDENT
AND SECRETARY (SINCE 1997) - State Farm Variable
Product Trust; VICE PRESIDENT AND SECRETARY (SINCE 1997)
- State Farm VP Management Corp.; VICE PRESIDENT AND
SECRETARY - State Farm Municipal Bond Fund, Inc., State
Farm Balanced Fund, Inc., State Farm Growth Fund, Inc.,
State Farm Interim Fund, Inc.
36
<PAGE>
<CAPTION>
NAME, AGE AND POSITION(S) HELD PRINCIPAL OCCUPATION(S) DURING PAST FIVE
ADDRESS WITH THE FUNDS YEARS
------- -------------- -----
<S> <C> <C>
Jerel S. Chevalier, Assistant Secretary - DIRECTOR OF MUTUAL FUNDS - State Farm Mutual Automobile
Age 62 Treasurer Insurance ; ASSISTANT SECRETARY - TREASURER - State Farm
Investment Management Corp.; ASSISTANT SECRETARY-TREASURER
(SINCE 1997) - State Farm Variable Product Trust; ASSISTANT
SECRETARY - TREASURER - State Farm Interim Fund, Inc.,
State Farm Municipal Bond Fund, Inc., State Farm Balanced
Fund, Inc., State Farm Growth Fund, Inc.
Howard A. Thomas, Assistant Secretary-Treasurer DIRECTOR OF MUTUAL FUNDS (SINCE 1998) - State Farm Mutual
Age 52 Automobile Insurance Company; MANAGER OF ACCOUNTING
BENEFITS (1988 - 1998) State Farm Mutual Automobile
Insurance Company; ASSISTANT SECRETARY - TREASURER (SINCE
1998) - State Farm Investment Management Corp., State Farm
Variable Product Trust; ASSISTANT SECRETARY - TREASURER -
State Farm Interim Fund, Inc., State Farm Municipal Bond
Fund, Inc., State Farm Balanced Fund, Inc., State Farm
Growth Fund, Inc.
Donald O. Jaynes, Assistant Secretary ASSOCIATE GENERAL COUNSEL - State Farm Mutual Automobile
Age 52 Insurance Company; ASSISTANT SECRETARY (SINCE 1998) - State
Farm Investment Management Corp., State Farm Variable
Product Trust; ASSISTANT SECRETARY - State Farm Interim
Fund, Inc., State Farm Municipal Bond Fund, Inc., State
Farm Balanced Fund, Inc., State Farm Growth Fund, Inc.
Stephen L. Horton, Assistant Secretary COUNSEL - State Farm Mutual Automobile Insurance Company;
Age 43 COUNSEL AND ASSISTANT SECRETARY (SINCE 1999) - State Farm
VP Management Corp; ASSISTANT SECRETARY (SINCE 2000) -
State Farm Interim Fund, Inc., Municipal Bond Fund, Inc.,
State Farm Balanced Fund, Inc., State Farm Growth Fund,
Inc., State Farm Variable Product Trust and State Farm
Investment Management Corp.
37
<PAGE>
<CAPTION>
NAME, AGE AND POSITION(S) HELD PRINCIPAL OCCUPATION(S) DURING PAST FIVE
ADDRESS WITH THE FUNDS YEARS
------- -------------- -----
<S> <C> <C>
David M. Moore, Assistant Secretary COUNSEL (SINCE 1997), ASSISTANT TAX COUNSEL
Age 38 (1995-1997) - State Farm Mutual Automobile
Insurance Company; ASSISTANT SECRETARY
(SINCE 2000)- State Farm Investment Management
Corp., State Farm Interim Fund, Inc., Municipal
Bond Fund, Inc., State Farm Balanced Fund, Inc.,
State Farm Growth Fund, Inc., State Farm Variable
Product Trust
Michael L. Tipsord, Assistant Secretary VICE PRESIDENT AND ASSISTANT TREASURER (SINCE 1998),
Age 42 EXECUTIVE ASSISTANT - OPERATIONS (SINCE 1997), ASSISTANT
CONTROLLER (1996-1997), DIRECTOR OF ACCOUNTING (1995-1996)
- State Farm Mutual Automobile Insurance Company; ASSISTANT
SECRETARY - State Farm Investment Management Corp.,
ASSISTANT SECRETARY (SINCE 1997) - State Farm Variable
Product Trust; TREASURER (SINCE 1996) - Insurance Placement
Services, Inc.; ASSISTANT SECRETARY - State Farm Municipal
Bond Fund, Inc., State Farm Balanced Fund, Inc., State Farm
Growth Fund, Inc., State Farm Interim Fund, Inc.
</TABLE>
*Trustee who is an "interested person" of the Trust or of the Manager, as
defined in the 1940 Act.
Trustees or officers who are interested persons do not receive any
compensation from any Fund for their services to the Fund. The Trustees who are
not interested persons of any Fund will receive a meeting fee for each meeting
of the Board of Trustees at a rate of $____ per meeting, per Fund. In addition,
Trustees who are not interested persons of the Funds will be reimbursed for any
out-of-pocket expenses incurred in connection with the affairs of the Trust.
Trustees and officers of the Trust do not receive any benefits from the
Trust upon retirement nor does the Trust accrue any expenses for pension or
retirement benefits.
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM THE TRUST AND OTHER STATE FARM
NAME FROM THE TRUST (1) MUTUAL FUNDS
---- ------------------ (1)(2)
------
38
<PAGE>
<S> <C> <C>
Edward B. Rust, Jr. None (3) None (3)
Roger S. Joslin None (3) None (3)
Thomas M. Mengler $ $
James A. Shirk $ $
----------------- $ $
----------------- $ $
----------------- $ $
</TABLE>
(1) For the fiscal year ended December 31, 2000.
(2) The "other State Farm Mutual Funds" are State Farm Growth Fund, Inc.,
State Farm Balanced Fund, Inc., State Farm Interim Fund, Inc., State
Farm Municipal Bond Fund, Inc. and State Farm Variable Product Trust
(3) Non-compensated interested trustee.
INVESTMENT ADVISORY AGREEMENTS
BETWEEN THE TRUST AND THE MANAGER
The Manager is a wholly-owned subsidiary of State Farm Mutual
Automobile Insurance Company ("Auto Company"). The duties and responsibilities
of the Manager are specified in the Investment Advisory Agreement between the
Trust and the Manager, the Administrative Services Agreement between the Trust
and the Manager and the separate Service Agreement among the Trust, the Manager
and Auto Company (collectively, the "Management Agreements"). The Management
Agreements were approved for each Fund (other than the Equity Index Funds) by
the Board of Trustees of the Trust (including a majority of Trustees who are not
parties to the Management Agreements or interested persons, as defined by the
1940 Act, of any such party) at a meeting held for that purpose on
______________ , 2000 and subsequently were approved by the sole shareholder of
each Fund. The Management Agreements are not assignable and each may be
terminated without penalty upon 60 days written notice at the option of the
Trust, the Manager or Auto Company, as appropriate, or by a vote of
shareholders. Each Management Agreement provides that it shall continue in
effect for two years and can thereafter be continued for each applicable Fund
from year to year so long as such continuance is specifically approved annually
(a) by the Board of Trustees of the Trust or by a majority of the outstanding
voting shares of the Fund and (b) by a majority vote of the Trustees who are not
parties to the Agreement, or interested persons of any such party, cast in
person at a meeting held for that purpose.
The Manager (under the supervision of the Board of Trustees)
continuously furnishes an investment program for the Funds (other than the Small
Cap Equities Fund, International Equities Fund and the Equity Index Funds), is
responsible for managing the investments of such Funds and has responsibility
for making decisions governing whether to buy, sell or hold any
39
<PAGE>
particular security. In carrying out its obligations to manage the investment
and reinvestment of the assets of these Funds, the Manager performs research and
obtains and evaluates pertinent economic, statistical and financial data
relevant to the investment policies of these Funds.
The Trust pays the Manager monthly compensation in the form of an
investment advisory fee. The fee is based upon average daily net assets and is
accrued daily and paid to the Manager quarterly at the following annual rates
for each of the Funds:
Large Cap Equities Fund ___% of net assets
Small Cap Equities Fund ___% of net assets
International Equities Fund ___% of net assets
Equity and Bond Fund None
Bond Fund ___% of net assets
Tax-advantaged Bond Fund ___% of net assets
Money Market Fund ___% of net assets
The Manager has agreed not to be paid an investment advisory fee for
performing its services for the Equity and Bond Fund. However, the Manager will
receive fees from managing the underlying Funds in which the Equity and Bond
Fund invests. The Manager will reimburse each Fund, if and to the extent, the
Fund's total annual operating expenses exceed the following percentages of the
Fund's average net assets.
Large Cap Equities Fund _____%
Small Cap Equities Fund _____%
International Equities Fund _____%
Equity and Bond Fund _____%
Bond Fund _____%
Tax-advantaged Bond Fund _____%
Money Market Fund _____%
This reimbursement arrangement is expected to continue through
____________________.
The Manager also receives an administration fee from the Funds for
performing administrative services at the annual rate of __ of each Fund's daily
average net assets.
As described below, the Manager has engaged CGTC as the investment
sub-adviser to provide day-to-day portfolio management for the Small Cap
Equities Fund and International Equities Fund
The Manager is responsible for payment of all expenses it may incur in
performing the services described. These expenses include costs incurred in
providing investment advisory services, compensating and furnishing office space
for officers and employees of the Manager connected with investment and economic
research, trading and investment management of the Trust and the payment of any
fees to interested Trustees of the Trust. The Manager provides all executive,
administrative, clerical and other personnel necessary to operate the Trust and
pays the salaries and other employment related costs of employing those persons.
The Manager furnishes
40
<PAGE>
the Trust with office space, facilities and equipment and pays the day-to-day
expenses related to the operation and maintenance of such office space
facilities and equipment. All other expenses incurred in the organization of the
Trust or of new Funds of the Trust, including legal and accounting expenses and
costs of the initial registration of securities of the Trust under federal and
state securities laws, are also paid by the Manager.
Pursuant to the Service Agreement, Auto Company provides the Manager
with certain personnel, services and facilities to enable the Manager to perform
its obligations to the Trust. The Manager reimburses Auto Company for such
costs, direct and indirect, as are fairly attributable to the services performed
and the facilities provided by Auto Company under the separate service
agreement. Accordingly, the Trust makes no payment to Auto Company under the
Service Agreement.
The Trust is responsible for payment of all expenses it may incur in
its operation and all of its general administrative expenses except those
expressly assumed by the Manager as described in the preceding paragraphs. These
include (by way of description and not of limitation), any share redemption
expenses, expenses of portfolio transactions, shareholder servicing costs,
pricing costs (including the daily calculation of net asset value), interest on
borrowings by the Trust, charges of the custodian and transfer agent, cost of
auditing services, non-interested Trustees' fees, legal expenses, all taxes and
fees, investment advisory fees, certain insurance premiums, cost of maintenance
of corporate existence, investor services (including allocable personnel and
telephone expenses), costs of printing and mailing updated Trust prospectuses to
shareholders, costs of preparing, printing, and mailing proxy statements and
shareholder reports to shareholders, the cost of paying dividends, capital gains
distribution, costs of Trustee and shareholder meetings, dues to trade
organizations, and any extraordinary expenses, including litigation costs in
legal actions involving the Trust, or costs related to indemnification of
Trustees, officers and employees of the Trust.
The Board of Trustees of the Trust determines the manner in which
expenses are allocated among the Funds of the Trust.
The Management Agreements also provide that the Manager shall not be
liable to the Trust or to any shareholder or contract owner for any error of
judgment or mistake of law or for any loss suffered by the Trust or by any
shareholder in connection with matters to which the such Agreements relate,
except for a breach of fiduciary duty or a loss resulting from willful
misfeasance, bad faith, gross negligence, or reckless disregard on the part of
the Manager in the performance of its duties thereunder.
BETWEEN BARCLAYS AND THE MASTER PORTFOLIOS
Barclay is investment adviser to the Master Portfolios. Barclays is an
indirect subsidiary of Barclays Bank PLC. Pursuant to an Investment Advisory
Contract ("Master Portfolio Advisory Contract") with the Master Portfolios,
Barclays provides investment guidance and policy direction in connection with
the management of the Master Portfolios' assets. Pursuant to the Master
Portfolio Advisory Contract, Barclays furnishes to MIP's Boards of Trustees
periodic reports on the investment strategy and performance of the Master
Portfolios. The Master
41
<PAGE>
Portfolio Advisory Contract is required to be approved annually (i) by the
holders of a majority of the Master Portfolios' outstanding voting securities or
by the Master Portfolios' Boards of Trustees and (ii) by a majority of the
Trustees of the Master Portfolios who are not parties to the Master Portfolio
Advisory Contract or "interested persons" (as defined in the 1940 Act) of any
such party. The Master Portfolio Advisory Contract may be terminated on 60 days'
written notice by either party and will terminate automatically if assigned.
Barclays is entitled to receive monthly fees as compensation for its
advisory services to each Master Portfolio as described below:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
FUND ANNUAL MANAGEMENT FEE
---------------------------------------------------------------------------------------------------------------------
<S> <C>
S&P 500 Index Master Portfolio 0.05% of average daily net assets
---------------------------------------------------------------------------------------------------------------------
Small Cap Index Master Portfolio 0.15% of average daily net assets of the first $1 billion, and
0.10% of the average daily net assets thereafter
---------------------------------------------------------------------------------------------------------------------
International Index Master Portfolio 0.15% of average daily net assets of the first $1 billion, and
0.10% of the average daily net assets thereafter
---------------------------------------------------------------------------------------------------------------------
</TABLE>
The Master Portfolio Advisory Contract provides that the advisory fee is accrued
daily and paid monthly. This advisory fee is an expense of the Master Portfolios
borne proportionately by its interestholders, such as the Equity Index Funds. In
addition, Barclays also receives co-administration fees equal to 0.25% of the
first $1 billion of average daily net assets of each of the Small Cap Index
Master Portfolio and International Index Master Portfolio, and 0.17% of the
average daily net assets thereafter. The co-administration fee is designed to
compensate Barclays for custody costs and administration expenses.
Barclays has agreed to provide to the Master Portfolios, among other
things, money market security and fixed-income research, analysis and
statistical and economic data and information concerning interest rate and
security market trends, portfolio composition, credit conditions and average
maturities of the Master Portfolio's investment portfolio.
BETWEEN THE MANAGER AND CGTC
Pursuant to the separate sub-advisory agreement described below, the
Manager has engaged CGTC as the investment sub-adviser to provide day-to-day
portfolio management for the Small Cap Equities Fund and the International
Equities Fund. CGTC manages the investments of the Small Cap Equities Fund and
the International Equities Fund, determining which securities or other
investments to buy and sell for each, selecting the brokers and dealers to
effect the transactions, and negotiating commissions. In placing orders for
securities transactions, CGTC follows the Manager's policy of seeking to obtain
the most favorable price and efficient execution available.
For its services, the Manager pays CGTC an investment sub-advisory fee
equal to a percentage of the average daily net assets of each of Small Cap
Equities Fund and International
42
<PAGE>
Fund at the rates set forth below. The fee is accrued daily and paid to CGTC
quarterly. The rates upon which the fee is based are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
ANNUAL MANAGEMENT FEE, BASED ON AVERAGE
FUND DAILY NET ASSEST
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Small Cap Equities Fund On the first $25 million - 0.75%
$25 million to $50 million - 0.60%
$150 million to $100 million - 0.425%
Over $100 million - 0.375%
-------------------------------------------------------------------------------------------------
International Equities Fund On the first $25 million - 0.75%
$25 million to $50 million - 0.60%
$150 million to $100 million - 0.425%
Over $100 million - 0.375%
-------------------------------------------------------------------------------------------------
</TABLE>
The sub-advisory agreement was approved for each of Small Cap Equities
Fund and International Equities Fund by the Board of Trustees of the Trust
(including a majority of Trustees who are not parties to such agreements or
interested persons, as defined by the 1940 Act, of any such party) at a meeting
held for that purpose on ____, 2000 and subsequently was approved by the sole
shareholder of each of those Funds. The sub-advisory agreement is not assignable
and may be terminated without penalty upon 60 days written notice at the option
of the Manager or CGTC, or by the Board of Trustees of the Trust or by a vote of
a majority of the outstanding shares of the class of stock representing an
interest in the appropriate Fund. The sub-advisory agreement provides that it
shall continue in effect for two years and can thereafter be continued for each
Fund from year to year so long as such continuance is specifically approved
annually (a) by the Board of Trustees of the Trust or by a majority of the
outstanding shares of the Fund and (b) by a majority vote of the Trustees who
are not parties to the agreement, or interested persons of any such party, cast
in person at a meeting held for that purpose.
SECURITIES ACTIVITIES OF THE MANAGER AND CGTC
Securities held by the Trust may also be held by separate accounts or
mutual funds for which the Manager or CGTC acts as an adviser, some of which may
be affiliated with them. Because of different investment objectives, cash flows
or other factors, a particular security may be bought by the Manager or CGTC for
one or more of its clients, when one or more other clients are selling the same
security. Pursuant to procedures adopted by the Board of Trustees, the Manager
or CGTC may cause a Fund to buy or sell a security from another Fund or another
account. Any such transaction would be executed at a price determined in
accordance with those procedures and without sales commissions. Transactions
executed pursuant to such procedures are reviewed by the Board of Trustees
quarterly.
If purchases or sales of securities for a Fund or other client of the
Manager or CGTC arise for consideration at or about the same time, transactions
in such securities will be allocated as to
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amount and price, insofar as feasible, for the Fund and other clients in a
manner deemed equitable to all. To the extent that transactions on behalf of
more than one client of the Manager or CGTC during the same period may increase
the demand for securities being purchased or the supply of securities being
sold, there may be an adverse effect on price. It is the opinion of the Board of
Trustees of the Trust, however, that the benefits available to the Trust
outweigh any possible disadvantages that may arise from such concurrent
transactions.
On occasions when the Manager or CGTC (under the supervision of the
Board of Trustees) deem the purchase or sale of a security to be in the best
interests of the Trust as well as other accounts or companies, it may, to the
extent permitted by applicable laws and regulations, but will not be obligated
to, aggregate the securities to be sold or purchased for the Trust with those to
be sold or purchased for other accounts or companies in order to obtain
favorable execution and low brokerage commissions. In that event, allocation of
the securities purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Manager or CGTC in the manner each considers to
be most equitable and consistent with its fiduciary obligations to the Trust and
to such other accounts or companies. In some cases this procedure may adversely
affect the size of the position obtainable for a Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
THE LARGE CAP EQUITIES FUND, EQUITY AND BOND FUND, BOND FUND, TAX-ADVANTAGED
BOND FUND AND MONEY MARKET FUND.
As described above, the Manager determines which securities to buy and
sell for these Funds, selects brokers and dealers to effect the transactions,
and negotiates commissions. Transactions in equity securities will usually be
executed through brokers who will receive a commission paid by the Fund. Fixed
income securities are generally traded with dealers acting as principals for
their own accounts without a stated commission. The dealer's margin is reflected
in the price of the security. Money market obligations may be traded directly
with the issuer. Underwritten offerings of stock may be purchased at a fixed
price including an amount of compensation to the underwriter. Upon commencement
of operations, the Trust will disclose brokerage commissions paid.
In placing orders for securities transactions, the Manager's policy is
to attempt to obtain the most favorable price and efficient execution available.
These entities, subject to the review of the Trust's Board of Trustees, may pay
higher than the lowest possible commission to obtain better than average
execution of transactions and/or valuable investment research information
described below, if, in their opinion, improved execution and investment
research information will benefit the performance of each of the Funds.
When selecting broker-dealers to execute portfolio transactions, the
Manger considers factors including the rate of commission or size of the
broker-dealer's "spread", the size and difficulty of the order, the nature of
the market for the security, the willingness of the broker-dealer to position,
the reliability, financial condition and general execution and operational
capabilities of the broker-dealer, and the research, statistical and economic
data furnished by the broker-dealer to the Manager. In some cases, the Manager
may use such
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information to advise other investment accounts that it advises. Brokers or
dealers which supply research may be selected for execution of transactions for
such other accounts, while the data may be used by the Manager in providing
investment advisory services to the Fund. In addition, the Manager may select
broker-dealers to execute portfolio transactions who are affiliated with the
Fund or the Manager. However, all such directed brokerage will be subject to the
Manager's policy to attempt to obtain the most favorable price and efficient
execution possible.
EQUITY INDEX FUNDS
Purchases and sales of equity securities on a securities exchange
usually are effected through brokers who charge a negotiated commission for
their services. Commission rates are established pursuant to negotiations with
the broker based on the quality and quantity of execution services provided by
the broker in light of generally prevailing rates. Orders may be directed to any
broker including, to the extent and in the manner permitted by applicable law,
Stephens Inc. ("Stephens") or Barclays Global Investors, N.A. ("BGI"). In the
over-the-counter market, securities are generally traded on a "net" basis with
dealers acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price that includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount.
Purchases of debt securities generally are principal transactions. Debt
securities normally are purchased or sold from or to dealers serving as market
makers for the securities at a net price. Debt securities also may be purchased
in underwritten offerings or directly from an issuer. Generally debt obligations
are traded on a net basis and do not involve brokerage commissions. The cost of
executing transactions in debt securities consists primarily of dealer spreads
and underwriting commissions.
Under the 1940 Act, persons affiliated with a Master Portfolio are
prohibited from dealing with the Master Portfolio as a principal in the purchase
and sale of portfolio securities unless an exemptive order allowing such
transactions is obtained from the Commission or an exemption is otherwise
available. A Master Portfolio may purchase securities from underwriting
syndicates of which Stephens is a member under certain conditions in accordance
with the provisions of a rule adopted under the 1940 Act and in compliance with
procedures adopted by MIP's Board of Trustees.
A Master Portfolio has no obligation to deal with any dealer or group
of dealers in the execution of transactions in portfolio securities. Subject to
policies established by MIP's Board of Trustees, Barclays is responsible for the
Master Portfolios' investment decisions and the placing of portfolio
transactions. In placing orders, it is the policy of the Master Portfolios to
obtain the best overall terms taking into account the dealer's general execution
and operational facilities, the type of transaction involved and other factors
such as the dealer's risk in positioning the securities involved.
Barclays generally seeks reasonably competitive spreads or commissions.
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In assessing the best overall terms available for any transaction,
Barclays considers factors deemed relevant, including the breadth of the market
in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing basis.
Certain of the brokers or dealers with whom a Master Portfolio may transact
business offer commission rebates to the Master Portfolio. Barclays considers
such rebates in assessing the best overall terms available for any transaction.
Barclays may cause a Master Portfolio to pay a broker/dealer that furnishes
brokerage and research services a higher commission than that which might be
charged by another broker/dealer for effecting the same transaction, provided
that Barclays determines in good faith that such commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker/dealer, viewed in terms of either the particular transaction or the
overall responsibilities of Barclays. Such brokerage and research services might
consist of reports and statistics relating to specific companies or industries,
general summaries of groups of stocks or bonds and their comparative earnings
and yields, or broad overviews of the stock, bond, and government securities
markets and the economy.
Supplementary research information so received is in addition to, and
not in lieu of, services required to be performed by Barclays and does not
reduce the advisory fees payable by a Master Portfolio. MIP's Board of Trustees
periodically will review the commissions paid by the Master Portfolios to
consider whether the commissions paid over representative periods of time appear
to be reasonable in relation to the benefits inuring to the Master Portfolios.
It is possible that certain of the supplementary research or other services
received will primarily benefit one or more other investment companies or other
accounts for which Barclays exercises investment discretion. Conversely, the
Master Portfolios may be the primary beneficiary of the research or services
received as a result of portfolio transactions effected for such other account
or investment company.
Under Section 28(e) of the Securities Exchange Act of 1934, an adviser
shall not be "deemed to have acted unlawfully or to have breached its fiduciary
duty" solely because under certain circumstances it has caused the account to
pay a higher commission than the lowest available. To obtain the benefit of
Section 28(e), an adviser must make a good faith determination that the
commissions paid are "reasonable in relation to the value of the brokerage and
research services provided . . . viewed in terms of either that particular
transaction or its overall responsibilities with respect to the accounts as to
which it exercises investment discretion and that the services provided by a
broker provide an adviser with lawful and appropriate assistance in the
performance of its investment decision-making responsibilities." Accordingly,
the price to the Master Portfolios in any transaction may be less favorable than
that available from another broker/dealer if the difference is reasonably
justified by other aspects of the portfolio execution services offered.
SMALL CAP EQUITIES FUND AND INTERNATIONAL EQUITIES FUND
CGTC strives to obtain the best available prices in its portfolio
transactions taking into account the costs and quality of executions. When, in
the opinion of CGTC, two or more brokers (either directly or through their
correspondent clearing agents) are in a position to obtain the best
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price and execution, preference may be given to brokers who have provided
investment research, statistical, or other related services to CGTC. The Funds
do not consider that they have an obligation to obtain the lowest available
commission rate to the exclusion of price, service and qualitative
considerations.
PORTFOLIO TURNOVER
Because of the Large Cap Equities Fund's, Small Cap Equities Fund's and
International Equities Fund's flexibility of investment and emphasis on growth
of capital, these Funds may have greater portfolio turnover than that of mutual
funds that have primary objectives of income or maintenance of a balanced
investment position. The Equity and Bond Fund's portfolio turnover is expected
to be low. The Equity and Bond Fund will purchase or sell securities to: (i)
accommodate purchases and sales of its shares; (ii) change the percentages of
its assets invested in each of the underlying Funds in response to market
conditions; and (iii) maintain or modify the allocation of its assets among the
underlying Funds within the percentage limits described in the Prospectus.
Consistent with the Equity Index Funds' investment objectives, the
Master Portfolios will attempt to minimize portfolio turnover. There are no
fixed limitations regarding the portfolio turnover rate for the Bond Fund, and
securities initially satisfying the objectives and policies of this Fund may be
disposed of when they are no longer deemed suitable.
In periods of relatively stable interest rate levels, Tax-advantaged
Bond Fund does not expect its annual portfolio turnover rate to exceed 50% for
issues with maturities longer than one year at the time of purchase. In years of
sharp fluctuations in interest rates, however, the annual portfolio turnover
rate may exceed 50%. Most of the sales in the Fund's portfolio will occur when
the proportion of securities owned with longer term maturities is reduced in
anticipation of a bond market decline (rise in interest rates), or increased in
anticipation of a bond market rise (decline in interest rates). The rate of
portfolio turnover will not be a limiting factor and, accordingly, will always
be incidental to transactions undertaken with the view of achieving the Fund's
investment objective.
Since short term instruments are excluded from the calculation of a
portfolio turnover rate, no meaningful portfolio turnover rate can be estimated
or calculated for the Money Market Fund. Turnover rates may vary greatly from
year to year as well as within a particular year and may also be affected by
cash requirements for redemptions of a Fund's shares and by requirements, the
satisfaction of which enable the Trust to receive certain favorable tax
treatment.
DETERMINATION OF NET ASSET VALUE
The Net Asset Value (NAV) for each Fund is determined as of the time of
the close of regular session trading on the New York Stock Exchange ("NYSE")
(currently at 4:00 p.m., Eastern Time), on each day when the NYSE is open for
business. Shares of the Funds will not be priced on days when the NYSE is
closed.
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ALL FUNDS EXCEPT MONEY MARKET FUND
Equity securities (including common stocks, preferred stocks,
convertible securities and warrants) and call options written on all portfolio
securities, listed or traded on a national exchange are valued at their last
sale price on that exchange prior to the time when assets are valued. In the
absence of any exchange sales on that day, such securities are valued at the
last sale price on the exchange on which it is traded.
Debt securities traded on a national exchange are valued at their last
sale price on that exchange prior to the time when assets are valued, or,
lacking any sales, at the last reported bid price. Debt securities other than
money market instruments traded in the over-the-counter market are valued at the
last reported bid price or at yield equivalent as obtained from one or more
dealers that make markets in the securities. If the market quotations described
above are not available, debt securities, other than short-term debt securities,
may be valued at a fair value as determined by one or more independent pricing
services (each, a "Service"). The Service may use available market quotations
and employ electronic data processing techniques and/or a matrix system to
determine valuations. Each Service's procedures are reviewed by the officers of
the Trust under the general supervision of the Boards of Trustees of the Trust
and MIP.
Money market instruments held with a remaining maturity of 60 days or
less (other than U.S. Treasury bills) are generally valued on an amortized cost
basis. Under the amortized cost basis method of valuation, the security is
initially valued at its purchase price (or in the case of securities purchased
with more than 60 days remaining to maturity, the market value on the 61st day
prior to maturity), and thereafter by amortizing any premium or discount
uniformly to maturity. If for any reason the amortized cost method of valuation
does not appear to fairly reflect the fair value of any security, a fair value
will be determined in good faith by or under the direction of the Boards of
Trustees of the Trust or MIP, as the case may be, as in the case of securities
having a maturity of more than 60 days.
Securities that are primarily traded on foreign securities exchanges
are generally valued at the last sale price on the exchange where they are
primarily traded. All foreign securities traded on the over-the-counter market
are valued at the last sale quote, if market quotes are available, or the last
reported bid price if there is no active trading in a particular security on a
given day. Quotations of foreign securities in foreign currencies are converted,
at current exchange rates, to their U.S. dollar equivalents in order to
determine their current value. Forward currency contracts are valued at the
current cost of offsetting the contract. Because foreign securities (other than
American Depositary Receipts) are valued as of the close of trading on various
exchanges and over-the-counter markets throughout the world, the net asset value
of Funds investing in foreign securities generally includes values of foreign
securities held by those Funds that were effectively determined several hours or
more before the time NAV is calculated. In addition, foreign securities held by
Funds may be traded actively in securities markets which are open for trading on
days when the Funds do not calculate their net asset value. Accordingly, there
may be occasions when a Fund holding foreign securities does not calculate its
net asset value but when the value of such Fund's portfolio securities is
affected by such trading activity.
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Exchange listed options that are written or purchased by a Fund are
valued on the primary exchange on which they are traded. Over-the-counter
options written or purchased by a Fund are valued based upon prices provided by
market-makers in such securities. Exchange-traded financial futures contracts
are valued at their settlement price established each day by the board of trade
or exchange on which they are traded.
Securities for which market quotations are not readily available, or
for which the procedures described above do not produce a fair value, are valued
at a fair value as determined in good faith in accordance with procedures
approved by the Boards of Trustees of the Trust or MIP, as the case may be. The
effect of this will be that NAV will not be based on the last quoted price on
the security, but on a price with the Board of Trustees or its delegate believes
reflects the current and true price of the security.
MONEY MARKET FUND
All of the assets of the Money Market Fund are valued on the basis of
amortized cost in an effort to maintain a constant net asset value of $1.00 per
share. The Board of Trustees of the Trust has determined this to be in the best
interests of the Money Market Fund and its shareholders. Under the amortized
cost method of valuation, securities are valued at cost on the date of their
acquisition, and thereafter as adjusted for amortization of premium or accretion
of discount, regardless of the impact of fluctuating interest rates on the
market value of the security. While this method provides certainty in valuation,
it may result in periods in which value as determined by amortized cost is
higher or lower than the price the Fund would receive if it sold the security.
During such periods, the quoted yield to investors may differ somewhat from that
obtained by a similar fund or portfolio which uses available market quotations
to value all of its portfolio securities.
The Board has established procedures reasonably designed, taking into
account current market conditions and the Money Market Fund's investment
objectives, to stabilize the net asset value per share for purposes of sales and
redemptions at $1.00. These procedures include review by the Board, at such
intervals as it deems appropriate, to determine the extent, if any, to which the
net asset value per share calculated by using available market quotations
deviates from $1.00 per share. In the event such deviation should exceed one
half of one percent, the Board will promptly consider initiating corrective
action. If the Board believes that the extent of any deviation from a $1.00
amortized cost price per share may result in material dilution or other unfair
results to new or existing shareholders, it will take such steps as it considers
appropriate to eliminate or reduce these consequences to the extent reasonably
practicable. Such steps may include: selling portfolio securities prior to
maturity; shortening the average maturity of the portfolio; withholding or
reducing dividends; or utilizing a net asset value per share determined from
available market quotations. Even if these steps were taken, the Money Market
Fund's net asset value might still decline.
GENERAL
Computation of NAV (and the sale and redemption of fund shares) may be
suspended or postponed during any period when (a) trading on the NYSE is
restricted, as determined by the
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Commission, or the NYSE is closed for other than customary weekend and holiday
closings, (b) the Commission has by order permitted such suspension, or (c) an
emergency, as determined by the Commission, exists making disposal of portfolio
securities or valuation of the net assets of the funds not reasonably
practicable.
PERFORMANCE INFORMATION
The Trust may from time to time quote or otherwise use average annual
total return information for the Funds in advertisements, shareholder reports or
sales literature. Average annual total return values are computed pursuant to
equations specified by the Commission.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment in a Fund made at the beginning of the period, and then calculating
the annual compounded rate of return which would produce that amount, assuming a
redemption at the end of the period. This calculation assumes a complete
redemption of the investment. It also assumes that all dividends and
distributions are reinvested at net asset value on the reinvestment dates during
the period. The Trust also may from time to time quote or otherwise use
year-by-year total return, cumulative total return and yield information for the
Funds in advertisements, shareholder reports or sales literature. Year-by-year
total return and cumulative total return for a specified period are each derived
by calculating the percentage rate required to make a $1,000 investment in a
Fund (assuming that all distributions are reinvested) at the beginning of such
period equal to the actual total value of such investment at the end of such
period.
Yield is computed by dividing net investment income earned during a
recent 30 day period by the product of the average daily number of shares
outstanding and entitled to receive dividends during the period and the price
per share on the last day of the relevant period. The results are compounded on
a bond equivalent (semi-annual) basis and then annualized. Net investment income
is equal to the dividends and interest earned during the period, reduced by
accrued expenses for the period. The calculation of net investment income for
these purposes may differ from the net investment income determined for
accounting purposes.
The Money Market Fund may also quote its current yield and effective
yield. Current yield is an annualized yield based on the actual total return for
a seven-day period. Effective yield is an annualized yield based on a daily
compounding of the current yield.
The Funds may also quote after tax total returns and tax efficiency.
After-tax returns show the Funds' annualized after-tax total returns for the
time period specified. After-tax returns with redemptions show the Funds'
annualized after-tax total return for the time period specified plus the tax
effects of selling your shares of the Funds at the end of the period. To
determine these figures, all income, short-term capital gain distributions, and
long-term capital gain distributions are assumed to have been taxed at the
actual historical maximum tax rate. Those maximum tax rates are applied to
distributions prior to reinvestment and the after-tax portion is assumed to have
been reinvested in the Funds. State and local taxes are ignored.
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Tax Efficiency is derived by dividing after-tax returns by pretax
returns. The highest possible score would be 100%, which would apply to a Fund
that had no taxable distributions. Because many interrelated factors affect tax
efficiency, it is difficult to predict tax efficiency.
Actual after-tax returns depend on a shareholder's tax situation and
may differ from those shown. After-tax returns reflect past tax-effects and are
not predictive of future tax effects.
Any performance data quoted for a Fund will represent historical
performance and the investment return and principal value of an investment will
fluctuate so that shares, when redeemed, may be worth more or less than original
cost.
From time to time the Trust may publish an indication of the Funds'
past performance as measured by independent sources such as (but not limited to)
Lipper, Inc., Weisenberger Investment Companies Service, Donoghue's Money Fund
Report, Barron's, Business Week, Changing Times, Financial World, Forbes,
Fortune, Money, Personal Investor, Sylvia Porter's Personal Finance and The Wall
Street Journal. The Trust may also advertise information which has been provided
to the NASD for publication in regional and local newspapers. In addition, the
Trust may from time to time advertise its performance relative to certain
indices and benchmark investments, including (a) the Lipper, Inc. Mutual Fund
Performance Analysis, Fixed-Income Analysis and Mutual Fund Indices (which
measure total return and average current yield for the mutual fund industry and
rank mutual fund performance); (b) the CDA Mutual Fund Report published by CDA
Investment Technologies, Inc. (which analyzes price, risk and various measures
of return for the mutual fund industry); (c) the Consumer Price Index published
by the U.S. Bureau of Labor Statistics (which measures changes in the price of
goods and services); (d) Stocks, Bonds, Bills and Inflation published by
Ibbotson Associates (which provides historical performance figures for stocks,
government securities and inflation); (e) the Hambrecht & Quist Growth Stock
Index; (f) the NASDAQ OTC Composite Prime Return; (g) the Russell Midcap Index;
(h) the Russell 2000 Index-Total Return; (i) the ValueLine Composite-Price
Return; (j) the Wilshire 4600 Index; (k) the Salomon Brothers' World Bond Index
(which measures the total return in U.S. dollar terms of government bonds,
Eurobonds and foreign bonds of ten countries, with all such bonds having a
minimum maturity of five years); (1) the Shearson Lehman Brothers Aggregate Bond
Index or its component indices (the Aggregate Bond Index measures the
performance of Treasury, U.S. Government agencies, mortgage and Yankee bonds);
(m) the S&P Bond indices (which measure yield and price of corporate, municipal
and U.S. Government bonds); (n) the J.P. Morgan Global Government Bond Index;
(o) Donoghue's Money Market Fund Report (which provides industry averages of
7-day annualized and compounded yields of taxable, tax-free and U.S. Government
money market funds); (p) other taxable investments including certificates of
deposit, money market deposit accounts, checking accounts, savings accounts,
money market mutual funds and repurchase agreements; (q) historical investment
data supplied by the research departments of Goldman Sachs, Lehman Brothers,
First Boston Corporation, Morgan Stanley (including EAFE "Free"), Salomon
Brothers, Merrill Lynch, Donaldson Lufkin and Jenrette or other providers of
such data; (r) the FT-Actuaries Europe and Pacific Index; (s) mutual fund
performance indices published by Variable Annuity Research & Data Service; and
(t) mutual fund performance indices published by Morningstar, Inc. The
composition of the investments in such indices and the characteristics of such
benchmark
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investments are not identical to, and in some cases are very different from,
those of a Fund's portfolio. These indices and averages are generally unmanaged
and the items included in the calculations of such indices and averages may be
different from those of the equations used by the Trust to calculate a Fund's
performance figures.
The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the views as to
markets of the Manager, Barclays or CGTC, the rationale for a Fund's investments
and discussions of the Fund's current asset allocation.
From time to time, advertisements or information may include a
discussion of certain attributes or benefits to be derived by an investment in a
particular Fund. Such advertisements or information may include symbols,
headlines or other material which highlight or summarize the information
discussed in more detail in the communication.
Such performance data will be based on historical results and will not
be intended to indicate future performance. The total return or yield of a Fund
will vary based on market conditions, portfolio expenses, portfolio investments
and other factors. The value of a Fund's shares will fluctuate and your shares
may be worth more or less than their original cost upon redemption.
PURCHASE AND REDEMPTION OF FUND SHARES
Purchases of Fund shares are discussed fully in the Prospectus under
the heading "Shareholder Information - How to Buy Shares." Redemptions of Fund
Shares are discussed fully in the Prospectus under the heading "Shareholder
Information - How to Redeem Fund Shares."
SPECIAL WAIVERS. Class A shares are purchased without a sales charge in
the situations specified in the Prospectus. However, in certain specific
situations, redemptions of such shares within 12 months of purchase are subject
to a contingent deferred sales charge of 0.50% of the lesser of the value of the
shares redeemed or the total cost of the shares.
CUMULATIVE DISCOUNT. Each Fund offers to all qualifying investors a
cumulative discount under which investors are permitted to purchase Class A
shares of any Fund at the price applicable to the total of (a) the dollar amount
then being purchased plus (b) an amount equal to the then current net asset
value of the purchaser's holdings of shares of any Fund. Acceptance of the
purchase order is subject to confirmation of qualification. The cumulative
discount may be amended or terminated at any time as to subsequent purchases.
SYSTEMATIC WITHDRAWAL PLAN. The Systematic Withdrawal Plan ("SWP") is
designed to provide a convenient method of receiving fixed payments at regular
intervals from shares deposited by the applicant under the SWP. The applicant
must deposit or purchase for deposit shares of the Fund having a total value of
not less than $5,000. Periodic checks of $100 or more will be sent to the
applicant, or any person designated by him, monthly or quarterly. SWPs
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without a surrender charge for Class B shares of a Fund are permitted only for
redemptions limited to no more than 10% of the original value of the account per
year.
Any income dividends or capital gains distributions on shares under the
SWP will be credited to the SWP account on the payment date in full and
fractional shares at the net asset value per share in effect on the record date.
SWP payments are made from the proceeds of the redemption of shares
deposited in a SWP account. Redemptions are potentially taxable transactions to
shareholders. To the extent that such redemptions for periodic withdrawals
exceed dividend income reinvested in the SWP account, such redemptions will
reduce and ultimately may exhaust the number of shares deposited in the SWP
account. In addition, the amounts received by a shareholder cannot be considered
as an actual yield or income on his or her investment because part of such
payments may be a return of his or her capital.
The SWP may be terminated at any time (1) by written notice to the Fund
or from the Fund to the shareholder; (2) upon receipt by the Fund of appropriate
evidence of the shareholder's death; or (3) when all shares under the SWP have
been redeemed. The fees of the Fund for maintaining SWPs are paid by the Fund.
SPECIAL REDEMPTIONS. Although it would not 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 as prescribed by the Board of Trustees of the
Trust. When the shareholder sells portfolio securities received in this fashion,
he 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 net
asset value. The Funds have elected to be governed by Rule 18f-1 under the 1940
Act, pursuant to which each Fund is obligated to redeem shares solely in cash up
to the lesser of $250,000 or 1% of the net asset value of the applicable Fund
during any 90 day period for any one account.
SUSPENSION OF REDEMPTIONS. A Fund may not suspend a shareholder's right
of redemption, or postpone payment for a redemption for more than seven days,
unless the NYSE is closed for other than customary weekends or holidays, or
trading on the NYSE is restricted, or for any period during which an emergency
exists as a result of which (1) disposal by a Fund of securities owned by it is
not reasonably practicable, or (2) it is not reasonably practicable for a Fund
to fairly determine the value of its assets, or for such other periods as the
Commission may permit for the protection of investors.
DISTRIBUTION EXPENSES
State Farm VP Management Corp. ("Management Corp.") serves as the
principal underwriter for the Trust pursuant to an Underwriting Agreement
initially approved by the Board of Trustees of the Trust. Management Corp. is a
registered broker-dealer and a member of the National Association of Securities
Dealers, Inc. ("NASD"). Shares of each Fund will be continuously offered and
will be sold by registered representatives of Management Corp. which receives
sales charges and distribution plan fees from each Fund under the Underwriting
Agreement.
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Management Corp. bears all the expenses of providing services pursuant
to the Underwriting Agreement, including the payment of the expenses relating to
the distribution of Prospectuses for sales purposes as well as any advertising
or sales literature. The Trust bears the expenses of registering its shares with
the Commission and paying the fees required to be paid by state regulatory
authorities. The Underwriting Agreement continues in effect for two years from
initial approval and for successive one-year periods thereafter, provided that
each such continuance is specifically approved (i) by vote of a majority of the
Board of Trustees of the Trust, including a majority of the Trustees who are not
parties to the Underwriting Agreement or interested persons of any such party,
(as the term interested person is defined in the 1940 Act); or (ii) by the vote
of a majority of the outstanding voting securities of a Fund. Management Corp.
is not obligated to sell any specific amount of shares of any Fund.
Management Corp.'s business and mailing address is One State Farm
Plaza, Bloomington, Illinois 61710. Management Corp. was organized as a Delaware
corporation on ____________ and is a wholly-owned subsidiary of Auto Company.
DISTRIBUTION PLANS
State Farm Mutual Fund Trust has adopted separate distribution plans
(the "Plans") for Class A and Class B shares of each Fund, in accordance with
the requirements of Rule 12b-1 under the 1940 Act and the requirements of the
applicable rule of the NASD regarding asset based sales charges. The Trust has
also entered into a Shareholder Services Agreement with Management Corp. for
both Class A and Class B shares of each Fund.
CLASS A SHARES
Pursuant to the Class A Plan, each Fund will pay Management Corp. 0.20%
of the Fund's average daily net assets attributable to Class A shares for its
expenditures in financing any activity primarily intended to result in the sale
of Fund shares. The expenses of a Fund pursuant to the Class A Plan are accrued
on a fiscal year basis. The purpose of the fee is to compensate Management Corp.
for its distribution services to the Funds. Management Corp. pays commissions to
registered representatives as well as reimbursement of expenses of printing
prospectuses and reports used for sales purposes, expenses with respect tot he
preparation and printing of sales literature and other distribution related
expenses, including without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
The Funds also will compensate Management Corp. under the Shareholder
Services Agreement for maintenance and personal service provided to existing
Class A shareholders. The expenses of a Fund under the Shareholder Services
Agreement are accrued on a fiscal year basis and will equal ___% of the Fund's
average daily net assets attributable to Class A shares.
CLASS B SHARES
Pursuant to the Class B Plan, each Fund will pay Management Corp. a fee
of 0.60% of the average daily net assets attributable to Class B shares for
distribution financing activities.
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The purpose of the fee is to compensate Management Corp. for its
distribution services to the Funds. Management Corp. pays commissions to
registered representatives as well as reimbursement of expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
The Funds will compensate Management Corp. under the Shareholder
Services Agreement for shareholder account services at the rate of ___% of the
average daily net assets of the Fund attributable to Class B shares.
GENERAL
In accordance with the terms of the Plans, Management Corp. will
provide to each Fund, for review by the Board of Trustees, a quarterly written
report of the amounts expended under the respective Plans and the purpose for
which such expenditures were made. Each quarter, the Board of Trustees will
review the level of compensation the Plans provide in considering the continued
appropriateness of the Plans.
The Plans were adopted by a majority vote of the Board of Trustees,
including at least a majority of Trustees who are not, and were not at the time
they voted, interested persons of the Fund as defined in the 1940 Act and do not
and did not have any direct or indirect financial interest in the operation of
the Plans, cast in person at a meeting called for the purpose of voting on the
Plans. In approving the Plans, the Trustees identified and considered a number
of potential benefits which the Plans may provide. The Board of Trustees
believes that there is a reasonable likelihood that the Plans will benefit each
Fund and its current and future shareholders. Under their terms, the Plans
remain in effect from year to year, provided such continuance is approved
annually by vote of the Board of Trustees in the manner described above. The
Plans may not be amended to increase materially the amount to be spent for
distribution without approval of the shareholders of the Fund affected thereby,
and material amendments to the Plans must also be approved by the Board of
Trustees in the manner described above. A Plan may be terminated at any time,
without payment of any penalty, by vote of the majority of the Board of Trustees
who are not interested persons of the Fund and have no direct or indirect
financial interest in the operations of the Plan, or by a vote of a "majority of
the outstanding voting securities" (as defined in the 1940 Act) of the Fund
affected thereby. A Plan will automatically terminate in the event of its
assignment (as defined in the 1940 Act).
The anticipated benefits to the Funds and their shareholders that may
result from the Plans are as follows. First, the Plans allow more flexibility to
the prospective shareholder in choosing how to pay sales loads, either through
Class A or Class B shares. Second, they provide an attractive compensation
package for the sales force to sell the Funds which is necessary to attract
assets. Third, they provide an incentive for the sales force to provide a higher
level of service and compensate them accordingly. This in turn should lead to
improved retention and a higher amount of assets, which in turn will benefit all
shareholders by lowering costs per share in the future.
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OTHER SERVICE PROVIDERS
CUSTODIANS
Chase Manhattan Trust Company of Illinois, c/o Chase Manhattan Bank,
North American Insurance Securities Services, 3 Chase MetroTech Center, 6th
Floor, Brooklyn, New York 11245 ("Chase Manhattan"), acts as custodian of the
assets of each Fund, except the Equity Index Funds and the International
Equities Fund. Investors Bank and Trust Company, 200 Clarendon Street, Boston,
Massachusetts 02116 ("IBT"), is the Trust's custodian for the Equity Index Funds
and the International Equities Fund.
Chase Manhattan and IBT (the "custodians") may hold securities of the
Funds in amounts sufficient to cover put and call options written on futures
contracts in a segregated account by transferring (upon the Trust's
instructions) assets from a Fund's general (regular) custody account. The
custodians also will hold certain assets of certain of the Funds or Master
Portfolios constituting margin deposits with respect to financial futures
contracts at the disposal of FCMs through which such transactions are effected.
The Manager performs fund accounting services, including the valuation of
portfolio securities and the calculation of net asset value, for each Fund other
than the International Equities Fund and the International Index Fund. IBT
performs fund accounting services for these Funds.
TRANSFER AGENT
The Transfer Agent Agreements between the Trust and the Manager
appoints the Manager as the Funds' transfer agent and dividend disbursing agent.
Under the terms of the agreement, the Manager: (1) maintains all shareowner
account records; (2) prepares and mails transaction confirmations, annual
records of investments and tax information statements; (3) effects transfers of
Fund shares; (4) arranges for the issuance and cancellation of stock
certificates; (5) prepares annual shareowner meeting lists; (6) prepares, mails
and tabulates proxies; (7) mails shareowner reports; and (8) disburses dividend
and capital gains distributions. These services are performed by the Manager at
a fee determined by the Board of Trustees to be reasonable in relation to the
services provided and no less favorable to the Funds than would have been
available from a third party.
IBT acts as transfer agent and dividend disbursing agent for the Master
Portfolios.
INDEPENDENT AUDITORS
The Funds' independent auditors are Ernst & Young LLP, 233 South Wacker
Drive, Chicago, Illinois 60606. The firm audits each Fund's annual financial
statements, reviews certain regulatory reports and each Fund's federal income
tax returns, and performs other professional accounting, auditing, tax and
advisory services when engaged to do so by the Funds.
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TAXES
GENERAL TAX INFORMATION
The Trust intends for each Fund to qualify as a regulated investment
company under the Subchapter M of Chapter 1 of the Internal Revenue Code, as
amended (the "Code"). If a Fund qualifies as a regulated investment company and
distributes substantially all of its net income and gains to its shareholders
(which the Funds intend to do), then under the provisions of Subchapter M, that
Fund should have little or no income taxable to it under the Code.
Each Fund must meet several requirements to maintain its status as a
regulated investment company. These requirements include the following: (1) at
least 90% of the Fund's gross income must be derived from dividends, interest,
payments with respect to securities loans and gains from the sale or disposition
of securities of foreign currencies; and (2) at the close of each quarter of the
Trust taxable year, (a) at least 50% of the value of the Fund's total assets
must consist of cash, U.S. Government securities and other securities, such that
no more than 5% of the value of the Fund consists of such other securities of
any one issuer and the Fund must not hold more than 10% of the outstanding
voting stock of any such issuer, and (b) the Fund must not invest more than 25%
of the value of its total assets in the securities of any one issuer (other than
U.S. Government securities).
In order to maintain the qualification of a Fund's status as a
regulated investment company, the Trust may, in its business judgment, restrict
a Fund's ability to invest in certain financial instruments. For the same
reason, the Trust may, in its business judgment, require a Fund to maintain or
dispose of an investment in certain types of financial instruments beyond the
time when it might otherwise be advantageous to do so.
Each Fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirement. The
Funds intend under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
If a Fund acquires stock in certain non-U.S. corporations that receive
at least 75% of their annual gross income from passive sources (such as
interest, dividends, rents, royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies"), that Fund could be subject to federal income tax and
additional interest charges on "excess distributions" received from such
companies or gain from the sale of stock in such companies, even if all income
or gain actually received by the Fund is timely distributed to its shareholders.
The Fund would not be able to pass through to its shareholders any credit or
deduction for such a tax. Certain elections may, if available, ameliorate these
adverse tax consequences, but any such election would require the applicable
Fund to recognize taxable income or gain without the concurrent receipt of cash.
Any Fund that is permitted to acquire stock in foreign corporations may limit
and/or manage its holdings in passive foreign investment companies to minimize
its tax liability or maximize its return from these investments.
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Foreign exchange gains and losses realized by a Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain foreign currency futures and options, foreign currency forward
contracts, foreign currencies, or payables or receivables denominated in a
foreign currency are subject to Section 988 of the Code, which generally causes
such gains and losses to be treated as ordinary income and losses and may affect
the amount, timing and character of distributions to shareholders. Any such
transactions that are not directly related to a Fund's investment in stock or
securities, possibly including speculative currency positions or currency
derivatives not used for hedging purposes, could under future Treasury
regulations produce income not among the types of "qualifying income" from which
the Fund must derive at least 90% of its annual gross income.
Some Funds may be subject to withholding and other taxes imposed by
foreign countries with respect to their investments in foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. For the International Equities Fund and International Index Fund, if more
than 50% of the Fund's assets at year-end consists of the debt and equity
securities of foreign corporations, the Fund may elect to permit shareholders to
claim a credit or deduction on their income tax returns for their pro rata
portion of qualified taxes paid by the Fund to foreign countries. In such a
case, shareholders will include in gross income from foreign sources their pro
rata shares of such taxes. A shareholder's ability to claim a foreign tax credit
or deduction in respect of foreign taxes paid by the Fund may be subject to
certain limitations imposed by the Code, as a result of which a shareholder may
not receive a full credit or deduction for the amount of such taxes.
Shareholders who do not itemize on their federal income tax returns may claim a
credit (but no deduction) for such foreign taxes. The Funds, other than the
International Equities Fund and the International Index Fund, anticipate that
they generally will not qualify to pass such foreign taxes and any associated
tax deductions or credits through to their shareholders, who therefore generally
will not report such amounts on their tax returns.
For Federal income tax purposes, each Fund is permitted to carry
forward a net capital loss in any year to offset its own capital gains, if any,
during the eight years following the year of the loss. To the extent subsequent
capital gains are offset by such losses, they would not result in federal income
tax liability to the applicable Fund and would not be distributed as such to
shareholders.
Investment in debt obligations that are at risk or in default presents
special tax issues for any Fund that may hold such obligations. Tax rules are
not entirely clear about issues such as when the Fund may cease to accrue
interest, original issue discount, or market discount, when and to what extent
deductions may be taken for bad debts or worthless securities, how payments
received on obligations in default should be allocated between principal and
income, and whether exchanges of debt obligations in a workout context are
taxable. These and other issues will be addressed by any Fund that may hold such
obligations in order to reduce the risk of distributing insufficient income to
preserve its status as a regulated investment company and avoid becoming subject
to federal income or excise tax.
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Limitations imposed by the Code on regulated investment companies like
the Funds may restrict a Fund's ability to enter into futures, options, and
forward transactions.
Certain options, futures and forward foreign currency transactions
undertaken by a Fund may cause the Fund to recognize gains or losses from
marking to market even though its positions have not been sold or terminated and
affect the character as long-term or short-term (or, in the case of certain
currency forwards, options and futures, as ordinary income or loss) and timing
of some capital gains and losses realized by the Fund. Also, certain of a Fund's
losses on its transactions involving options, futures or forward contracts
and/or offsetting portfolio positions may be deferred rather than being taken
into account currently in calculating the Fund's taxable income. Certain of the
applicable tax rules may be modified if a Fund is eligible and chooses to make
one or more of certain tax elections that may be available. These transactions
may therefore affect the amount, timing and character of a Fund's distributions
to shareholders. The Funds will take into account the special tax rules
(including consideration of available elections) applicable to options, futures
or forward contracts in order to minimize any potential adverse tax
consequences.
Distributions from a Fund's current or accumulated earnings and profits
("E&P"), as computed for federal income tax purposes, will be taxable as
described in the Fund's prospectus whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of capital,
which will first reduce an investor's tax basis in a Fund's shares and
thereafter (after such basis is reduced to zero) will generally give rise to
capital gains. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the amount of cash they would have received had they
elected to receive the distributions in cash, divided by the number of shares
received.
At the time of an investor's purchase of shares of a Fund, a portion of
the purchase price is often attributable to realized or unrealized appreciation
in the Fund's portfolio or undistributed taxable income of the Fund.
Consequently, subsequent distributions from such appreciation or income may be
taxable to such investor even if the net asset value of the investor's shares
is, as a result of the distributions, reduced below the investor's cost for such
shares, and the distributions in reality represent a return of a portion of the
purchase price.
Upon a redemption of shares of a Fund (including by exercise of the
exchange privilege), a shareholder may realize a taxable gain or loss depending
upon his basis in his shares. Such gain or loss will be treated as capital gain
or loss if the shares are capital assets in the shareholder's hands and will be
long-term or short-term, depending upon that shareholder's tax holding period
for the shares. A sales charge paid in purchasing shares of a Fund cannot be
taken into account for purposes of determining gain or loss on the redemption or
exchange of such shares within 90 days after their purchase to the extent shares
of the Fund are subsequently acquired without payment of a sales charge pursuant
to the increase in the shareholder's tax basis in the shares subsequently
acquired. Also, any loss realized on a redemption or exchange will be disallowed
to the extent the shares disposed of are replaced with shares of the same Fund
within a period of 61 days beginning 30 days before and ending 30 days after the
shares are disposed of, such as pursuant to an election to reinvest dividends of
capital gain distributions automatically.
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In such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized upon redemption of shares with a tax holding
period of six months or less will be treated as a long-term capital loss to the
extent of any amounts treated as distributions of long-term capital gain with
respect to such shares.
For purposes of the dividends received deduction available to
corporations, dividends received by a Fund, if any, from U.S. domestic
corporations in respect of the stock of such corporations held by the Fund, for
federal income tax purposes, for at least 46 days (91 days in the case of
certain preferred stock) and distributed and designated by the Fund may be
treated as qualifying dividends. Corporate shareholders must meet the minimum
holding period requirement stated above (46 or 91 days) with respect to their
shares of the applicable Fund in order to qualify for the deduction and, if they
borrow to acquire such shares, may be denied a portion of the dividends received
deduction. The entire qualifying dividend, including the otherwise deductible
amount, will be included in determining the excess (if any) of a corporate
shareholder's adjusted current earnings over its alternative minimum taxable
income, which may increase its alternative minimum tax liability. Additionally,
any corporate shareholder should consult its tax adviser regarding the
possibility that its basis in its shares may be reduced, for federal income tax
purposes, by reason of "extraordinary dividends" received with respect to the
shares, for the purpose of computing its gain or loss on redemption or other
disposition of the shares.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to shareholder
accounts maintained as qualified retirement plans. Shareholders should consult
their tax advisers for more information.
The foregoing discussion relates solely to U.S. Federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens or residents and U.S.
domestic corporations, partnerships, trusts or estates) subject to tax under
such law. The discussion does not address special tax rules applicable to
certain classes of investors, such as tax-exempt entities, insurance companies,
and financial institutions. Dividends, capital gain distributions, and ownership
of or gains realized on the redemption (including an exchange) of the shares of
a Fund may also be subject to state and local taxes. Shareholders should consult
their own tax advisers as to the federal, state or local tax consequences of
ownership of shares of, and receipt of distributions from, the Funds in their
particular circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which
their investment in a Fund is effectively connected will be subject to U.S.
Federal income tax treatment that is different from that described above. These
investors may be subject to non-resident alien withholding tax at the rate of
30% (or a lower rate under an applicable tax treaty) on amounts treated as
ordinary dividends from a Fund and, unless an effective IRS Form W-8 or
authorized substitute is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in any Fund. The Funds do not generally accept investments by non-U.S.
investors.
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TAX-ADVANTAGED BOND FUND. The Tax-advantaged Bond Fund will be
qualified to pay exempt-interest dividends to its shareholders only if, at the
close of each quarter of the Fund's taxable year, at least 50% of the total
value of the Fund's assets consists of obligations the interest on which is
exempt from federal income tax. Distributions that the Fund properly designates
as exempt-interest dividends are treated by shareholders as interest excludable
from their gross income for federal income tax purposes but may be taxable for
federal alternative minimum tax purposes and for state and local purposes.
Because the Fund intends to be qualified to pay exempt-interest dividends, the
Fund may be limited in its ability to enter into taxable transactions involving
forward commitments, repurchase agreements, financial futures, and options
contracts on financial futures, tax-exempt bond indices, and other assets.
The Fund uses the "average annual" method to determine the designated
percentage of dividends that qualifies as tax-exempt income. This designation is
made annually in January. The percentage of a particular dividend that is
designated as tax-exempt income may be substantially different from the
percentage of the Fund's income that was tax-exempt during the period from which
the distribution was made.
Exempt-interest dividends are exempt from regular federal income tax,
but they may affect the tax liabilities of taxpayers who are subject to the AMT.
Exempt-interest dividends are also includible in the modified income of
shareholders who receive Social Security benefits for purposes of determining
the extent to which such benefits may be taxable.
Part or all of the interest on indebtedness, if any, incurred or
continued by a shareholder to purchase or carry shares of the Tax-advantaged
Bond Fund is not deductible. The portion of interest that is not deductible is
equal to the total interest paid or accrued on the indebtedness, multiplied by
the percentage of the Fund's total distributions (not including distributions
from net long-term capital gains) paid to the shareholder that are
exempt-interest dividends. Under rules used by the Internal Revenue Service for
determining when borrowed funds are considered used for the purpose of
purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though such funds are not
directly traceable to the purchase of the shares.
In general, exempt-interest dividends, if any, attributable to interest
received on certain private activity obligations and certain industrial
development bonds will not be tax-exempt to any shareholders who are
"substantial users" of the facilities financed by such obligations or bonds or
who are "related persons" of such substantial users.
If a shareholder sells shares at a loss within six months of purchase,
any loss will be disallowed for Federal income tax purposes to the extent of any
exempt-interest dividends received on such shares.
STATE AND LOCAL. Each Fund may be subject to state or local taxes in
jurisdictions in which such Fund may be deemed to be doing business. In
addition, in those states or localities which have income tax laws, the
treatment of such Fund and its shareholders under such laws may differ from
their treatment under federal income tax laws, and investment in such Fund may
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have different tax consequences for shareholders than would direct investment in
such Fund's portfolio securities. Shareholders should consult their own tax
advisers concerning these matters.
CODES OF ETHICS
The Manager intends that: all of its activities function exclusively
for the benefit of the owners or beneficiaries of the assets it manages; assets
under management or knowledge as to current or prospective transactions in
managed assets are not utilized for personal advantage or for the advantage of
anyone other than the owners or beneficiaries of those assets; persons
associated with the Manager and the Trust avoid situations involving actual or
potential conflicts of interest with the owners or beneficiaries of managed
assets; and situations appearing to involve actual or potential conflicts of
interest or impairment of objectivity are avoided whenever doing so does not run
counter to the interests of the owners or beneficiaries of the managed assets.
The Board of Trustees of the Trust has adopted a Code of Ethics which imposes
certain prohibitions, restrictions, preclearance requirements and reporting
rules on the personal securities transactions of subscribers to the Code, who
include the Trust's officers and Trustees and the employees of the Manager.
Barclays and CGTC have adopted similar Codes of Ethics relating to their
employees, and the Board of Trustees of the Trust has adopted Barclays and
CGTC's Code of Ethics insofar as it relates to their respective employees'
activities in connection with the Trust. The Board of Trustees believes that the
provisions of its Code of Ethics and Barclays' and CGTC's Code of Ethics are
reasonably designed to prevent subscribers from engaging in conduct that
violates these principles.
SHARES
The Trust was organized as a business trust pursuant to the laws of the
State of Delaware on June 8, 2000. The Trust is authorized to issue an unlimited
number of shares of beneficial interest in the Trust, all without par value.
Shares are divided into and may be issued in a designated series representing
beneficial interests in one of the Trust's Funds. There are currently ten series
of shares.
Each share of a series issued and outstanding is entitled to
participate equally in dividends and distributions declared by such series and,
upon liquidation or dissolution, in net assets allocated to such series
remaining after satisfaction of outstanding liabilities. The shares of each
series, when issued, will be fully paid and non-assessable and have no
preemptive or conversion rights.
Auto Company provided the initial capital for the Trust by purchasing
$___ of shares in the ____, respectively. Such shares were acquired for
investment.
As of the date of this Statement of Additional Information, Auto
Company owned 100% of each Fund's outstanding shares.
The Master Portfolios are series of MIP, an open-end, series management
investment company organized as Delaware business trust. MIP was organized on
October 21, 1993. MIP currently consists of twelve series, including the Master
Portfolios.
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VOTING RIGHTS
Each share (including fractional shares) is entitled to one vote for
each dollar of net asset value represented by that share on all matters to which
the holder of that share is entitled to vote. Only shares representing interests
in a particular Fund will be entitled to vote on matters affecting only that
Fund. The shares do not have cumulative voting rights. Accordingly, owners
having shares representing more than 50% of the assets of the Trust voting for
the election of Trustees could elect all of the Trustees of the Trust if they
choose to do so, and in such event, shareowners having voting interests in the
remaining shares would not be able to elect any Trustees.
Matters requiring separate shareholder voting by Fund shall have been
effectively acted upon with respect to any Fund if a majority of the outstanding
voting interests of that Fund vote for approval of the matter, notwithstanding
that: (1) the matter has not been approved by a majority of the outstanding
voting interests of any other Fund; or (2) the matter has not been approved by a
majority of the outstanding voting interests of the Trust.
In a situation where an Equity Index Fund does not receive
instruction from certain of its shareholders on how to vote the corresponding
shares of a Master Portfolio, such Equity Index Fund will vote such shares in
the same proportion as the shares of which the Equity Index Fund does receive
voting instructions.
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FINANCIAL STATEMENTS
[To be filed by amendment.]
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APPENDIX A
DESCRIPTION OF BOND RATINGS
A rating of a rating service represents the service's opinion as to the
credit quality of the security being rated. However, the ratings are general and
are not absolute standards of quality or guarantees as to the creditworthiness
of an issuer. Consequently, the Manager and CGTC believe that the quality of
debt securities in which a Fund invests should be continuously reviewed and that
individual analysts give different weightings to the various factors involved in
credit analysis. A rating is not a recommendation to purchase, sell or hold a
security, because it does not take into account market value or suitability for
a particular investor. When a security has received a rating from more than one
service, each rating should be evaluated independently. Ratings are based on
current information furnished by the issuer or obtained by the ratings services
from other sources which they consider reliable. Ratings may be changed,
suspended or withdrawn as a result of changes in or unavailability of such
information, or for other reasons.
The following is a description of the characteristics of ratings used
by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation
("S&P").
RATINGS BY MOODY'S
Aaa--Bonds rated Aaa are judged to be 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. Although the various protective elements are likely to
change, such changes are not likely to impair the fundamentally strong position
of such bonds.
Aa--Bonds rated Aa are judged to be 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 bonds or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the long
term risk appear somewhat larger than in Aaa bonds.
A--Bonds rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds 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 rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very
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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 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 rated Caa are of poor standing. Such bonds may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds rated Ca represent obligations which are speculative in a
high degree. Such bonds are often in default or have other marked shortcomings.
C--Bonds rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Conditional Ratings. The designation "Con." followed by a rating
indicated bonds for which the security depends upon the completion of some act
or the fulfillment of some condition. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects unseasoned in operating
experience, (c) rentals which begin when facilities are completed, or (d)
payments to which some other limiting condition attaches. Parenthetical rating
denotes probable credit stature upon completion of construction or elimination
of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa 1, A 1, Baa 1, Ba 1, and B 1.
MUNICIPAL NOTES:
MIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less established.
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COMMERCIAL PAPER:
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.
S&P RATINGS
AAA--Bonds rated AAA have the highest rating. Capacity to pay principal
and interest is extremely strong.
AA--Bonds rated AA have a very strong capacity to pay principal and
interest and differ from AAA bonds only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this capacity
than for bonds in higher rated categories.
BB--B--CCC--CC--Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation among such bonds and CC the highest
degree of speculation. Although such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
C- -The rating C is reserved for income bonds on which no interest is
being paid.
In order to provide more detailed indications of credit quality, S&P's
bond letter ratings described above (except for AAA category) may be modified by
the addition of a plus or a minus sign to show relative standing within the
rating category.
3
<PAGE>
Provisional Ratings. The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, although addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon the failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
MUNICIPAL NOTES:
SP-1. Notes rated SP-1 have very strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety characteristics
are designated SP-1+.
SP-2. Notes rated SP-2 have satisfactory capacity to pay principal and
interest.
Notes due in three years or less normally receive a note rating. Notes
maturing beyond three years normally receive a bond rating, although the
following criteria are used in making that assessment:
- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely the issue will be rated as a
note).
- Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be rated as a note).
COMMERCIAL PAPER:
A. Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are further
refined with the designations 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 are designated A-1+.
4
<PAGE>
STATE FARM MUTUAL FUND TRUST
PART C OF THE REGISTRATION STATEMENT
ITEM 23. EXHIBITS
(a) Declaration of Trust
(b) Bylaws
(c) N/A
(d)(1) Investment Advisory and Management Services Contract between
Registrant and State Farm Management Investment Corp.*
(d)(2) Investment Sub-Advisory Agreement among Registrant, State
Farm Investment Management Corp., and Capital Guardian Trust
Company*
(e)(1) Underwriting Agreement between Registrant and State Farm VP
Management Corp.*
(e)(2) Shareholders Services Agreement*
(f) N/A
(g)(1) Custodial Agreement between Registrant and The Chase
Manhattan Bank*
(g)(2) Custodial Agreement between Registrant and Investors Bank
and Trust Company*
(g)(3) Delegation Agreement between Investors Bank & Trust Company
and Registrant*
(h)(1) Service Agreement among Registrant, State Farm Investment
Management Corp., and State Farm Mutual Automobile Insurance
Company*
(h)(2) Transfer Agent Agreement (excluding Equity Index Funds)*
(h)(3) Administration Services Agreement between Registrant and
State Farm Investment Management Corp.*
(i)(1) Consent of Bell, Boyd & Lloyd LLC*
(i)(2) Consent of Sutherland, Asbill & Brennan, L.L.P.*
(j) Consent of Ernst & Young LLP*
(k) N/A
<PAGE>
(l) N/A
(m)(1) State Farm Mutual Fund Trust Distribution Plan for Class A
shares*
(m)(2) State Farm Mutual Fund Trust Distribution Plan for Class B
shares*
(n) State Farm Mutual Fund Trust Multiple Class Plan Pursuant to
Rule 18f-3*
(o)(1) Code of Ethics of State Farm Growth Fund, Inc., State Farm
Interim Fund, Inc., State Farm Balanced Fund, Inc., State
Farm Municipal Bond Fund, Inc., State Farm Investment
Management Corp., State Farm Variable Product Trust and
State Farm Mutual Fund Trust*
(o)(2) Code of Ethics of Capital Guardian Trust Company*
(o)(3) Code of Ethics of Master Investment Portfolio*
-----------
* To be filed by amendment.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The Registrant does not consider that there are any persons directly or
indirectly controlling, controlled by, or under common control with, the
registrant within the meaning of this item.
ITEM 25. INDEMNIFICATION
As a Delaware business trust, Registrant's operations are governed by its
Declaration of Trust dated June 8, 2000 (the Declaration of Trust). Generally,
Delaware business trust shareholders are not personally liable for obligations
of the Delaware business trust under Delaware law. The Delaware Business Trust
Act (the DBTA) provides that a shareholder of a trust shall be entitled to the
same limitation of liability extended to shareholders of private for-profit
Delaware corporations. Registrant's Declaration of Trust expressly provides that
it has been organized under the DBTA and that the Declaration of Trust is to be
governed by Delaware law. It is nevertheless possible that a Delaware business
trust, such as Registrant, might become a party to an action in another state
whose courts refuse to apply Delaware law, in which case Registrant's
shareholders could be subject to personal liability.
To protect Registrant's shareholders against the risk of personal
liability, the Declaration of Trust: (i) contains an express disclaimer of
shareholder liability for acts or obligations of Registrant and provides that
notice of such disclaimer may be given in each agreement, obligation and
instrument entered into or executed by Registrant or its Trustees; (ii) provides
for the indemnification out of Trust property of any shareholders held
personally liable for any obligations of Registrant or any series of Registrant;
and (iii) provides that Registrant shall, upon
<PAGE>
request, assume the defense of any claim made against any shareholder for any
act or obligation of Registrant 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: (i) a court refuses to apply Delaware law; (ii)
the liability arose under tort law or, if not, no contractual limitation of
liability was in effect; and (iii) Registrant itself would be unable to meet its
obligations. In the light of Delaware law, the nature of Registrant's business
and the nature of its assets, the risk of personal liability to a shareholder is
remote.
The Declaration of Trust further provides that Registrant 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 Registrant. The Declaration of Trust does not authorize Registrant 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.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to Trustees, officers and controlling persons, or
otherwise, Registrant has been advised that in the opinion of the Commission
such indemnification may be against public policy as expressed in the Act and
may be, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of expenses
incurred or paid by a Trustee, officer or controlling person of Registrant in
the successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 26 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The information in the statement of additional information under the
caption "Trustees and Officers and Investment Advisory Agreements" is
incorporated herein by reference. Other than its status as investment adviser
and principal underwriter to other State Farm mutual funds (see item 27 below),
neither State Farm Investment Management Corp., nor any of its directors or
officers, has at any time during the past two fiscal years engaged in any other
business, profession, vocation or employment of a substantial nature either for
their own account or in the capacity of director, officer, employee, partner or
trustee.
Directors and Officers of State Farm Investment Management Corp.:
Edward B. Rust, Jr., Director and President*
Roger S. Joslin, Director, Senior Vice President and Treasurer*
John J. Killian, Director, Financial Vice President - State Farm Mutual
Automobile Insurance Company, State Farm Fire and Casualty Company,
State Farm General
<PAGE>
Insurance Company and State Farm Indemnity Company; Underwriter - State
Farm Lloyds; Controller - State Farm Lloyds, Inc.; Vice President and
Controller - State Farm County Mutual Insurance Company of Texas; Vice
President and Treasurer - State Farm Florida Insurance Company; Secretary
and Assistant Treasurer - State Farm International Services, Inc.;
Assistant Treasuer - State Farm Companies Foundation.
Kurt G. Moser, Director and Senior Vice President*
Vincent J. Trosino, Director, Vice Chairman of the Board, President and
Chief Operating Officer - State Farm Mutual Automobile Insurance
Company; Director and Vice Chairman of the Board - State Farm Fire and
Casualty Company and State Farm Life Insurance Company; Director,
Assistant Secretary, Treasurer - State Farm General Insurance Company;
Director - State Farm Lloyds, Inc., State Farm International Services,
Inc., State Farm Annuity and Life Insurance Company, and State Farm
Life and Accident Assurance Company; Assistant Secretary - State Farm
Companies Foundation.
Paul N. Eckley, Senior Vice President*
Susan D. Waring, Vice President
David R. Grimes, Vice President and Secretary *
Michael L. Tipsord, Assistant Secretary *
Jerel S. Chevalier, Assistant Secretary-Treasurer *
Howard Thomas, Assistant Secretary - Treasurer *
Donald O. Jaynes, Assistant Secretary *
Stephen L. Horton, Assistant Secretary *
David M. Moore, Assistant Secretary *
* See the information contained in the statement of additional information
under the caption "Trustees and Officers," incorporated herein by reference.
ITEM 27. PRINCIPAL UNDERWRITERS
State Farm VP Management Corp. serves as the principal underwriter to the
Registrant. The following table contains information concerning each director
and officer of State Farm VP Management Corp. (unless otherwise indicated, the
principal business address for each person shown is One State Farm Plaza,
Bloomington, IL 61710-0001):
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Edward B. Rust Jr. Director and President Trustee and President
Roger S. Joslin Director, Senior Vice President and Trustee, Senior Vice President and
Treasurer Treasurer
Charles R. Wright Director and Senior Vice President None
Roger B. Tompkins Director and Senior Vice President None
Susan D. Waring Vice President None
Kurt G. Moser Director and Senior Vice President Senior Vice President
Paul N. Eckley Senior Vice President Senior Vice President
David R. Grimes Vice President and Secretary Vice President and Secretary
Michael L. Tipsord Assistant Secretary Assistant Secretary
Jerel S. Chevalier Assistant Secretary-Treasurer Assistant Secretary-Treasurer
Max E. McPeek Vice President None
Ralph O. Bolt Vice President None
Terry L. Huff Vice President None
Stephen L. Horton Counsel and Assistant Secretary Assistant Secretary
</TABLE>
<TABLE>
<CAPTION>
Net
Name of Underwriting Compensation on
Principal Discounts and Redemption and Brokerage Other
Underwriter Commissions Repurchase Commissions Compensation
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
State Farm VP N/A N/A N/A N/A
Management
Corp.
</TABLE>
1
<PAGE>
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
(a) Registrant
(b) State Farm Investment Management Corp.
One State Farm Plaza
Bloomington, Illinois 61710-0001
(c) Barclays Global Investors
45 Fremont Street
San Francisco, California 94105
(d) Investors Bank and Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
(e) Capital Guardian Trust Company
333 South Hope Street
Los Angeles, California 90071
ITEM 29. MANAGEMENT SERVICES
All the management-related service contracts under which services are provided
to the Registrant are discussed in Parts A and B of this Registration Statement.
ITEM 30. UNDERTAKINGS
The Registrant hereby undertakes to furnish, upon request and without
charge, to each person to whom a prospectus for any Fund (other than the Money
Market Fund) is delivered a copy of the Registrant's latest annual report to
shareholders.
The Registrant hereby undertakes, if requested to do so by the holders of
at least 10% of the Registrant's outstanding shares, to call a meeting of
shareholders for the purpose of voting upon any question of removal of a trustee
or trustees, and to assist in communications with other shareholders as required
by Section 16(c) of the Investment Company Act of 1940, as amended.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, State Farm Mutual Fund Trust,
has duly caused this registration statement to be saved on its behalf by the
undersigned, thereunto duly authorized, in the City of Bloomington, and state of
Illinois on the 20th day of July 2000.
STATE FARM MUTUAL FUND TRUST
By: /s/ David R. Grimes
----------------------------------
David R. Grimes
Sole Trustee
Pursuant to the Securities Act of 1933, this Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ David R. Grimes Sole Trustee July 20, 2000
---------------------
David R. Grimes
---------------
<PAGE>
EXHIBIT INDEX
N-1A ITEM 23 EXHIBIT LETTER DESCRIPTION
(a) Declaration of Trust
(b) Bylaws
